TMI Blog2001 (8) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... e into the matter, mainly with a view to ascertain the extent of compliance of the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Regulations) by the appellant. 3. As per further details collected by the SEBI, it was noticed that as on 20-1-1997 the appellant acquired 3,87,540 shares by way of pledge from the borrower. 3,87,540 shares constitute 8.2 per cent of the paid up capital of APL. Subsequently on 14-5-1997 the appellant acquired 3,80,040 shares more, again by way of pledge. As a result thereof total holding of the appellant rose to 7,67,580 shares in APL (16.24 per cent of the paid up capital). In this context the SEBI prima facie felt that the said acquisition of shares attracted the provisions of regulation 10 and decided to appoint an Adjudicating Officer to enquire into the alleged contravention of the regulation read with section 15H of the Securities and Exchange Board of India Act, 1992 ('the Act') and impose monetary penalty if considered necessary. 4. The Adjudicating Officer so appointed, after enquiry viewed that there was failure on the part of the Appellant to compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Rs. 90.25 lakhs repaid in full on 25-9-1998 7I2580 (332540+ 380040) NA 25-9-1998 9-12- 1993 22,700 shares of APL taken as delivery as a result of market by Matgadarsi Financiers N.A. NA N,A. N.A. 0.48 6. The appellant's main submission is that as the shares were received by way of pledge the same cannot be considered as an acquisition for the purpose of the regulation for the reason that the concept of pledge as per section 172 of the Indian Contract Act does not provide for vesting the legal ownership of the property in the pledgee, it is considered only as a security for payment of debt and the ownership of the goods pledged continue to remain with the debtor and the loan agreements in the instant case provide only for the acquisition of shares for recovery of loan in the event of the borrower committing default. According to him acquisition of shares is therefore, contingent upon default and this contingency is entirely outside the control of the appellant. For a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame appears in the members register of a company is entitled to voting rights and in that view of the matter only a part of appellant's holding was entered in the register and that part holding was less than 10 per cent. He said that the legal right to vote in a company vests in a member and the concept of member has been defined in section 41 of the Act, and that in terms of the definition the appellant is not a member. 9. As an alternate submission Shri Cidambi stated that even if it is admitted that the 3,32,540 shares transferred in the name of the appellant are to be taken into account, its holding did not exceed the benchmark provided in the regulation requiring compliance of the requirements stipulated therein. 10. Shri Cidambi countered the respondent's version that all those pledges which are not exempted vide regulation 3(1)(f)(iv) are covered under regulation 10, stating that in view of section 172 of the Indian Contract Act, the same being the substantive law governing pledge, no specific exemption is required to keep pledge of shares out of the purview of regulation 10 etc. He said in certain cases even in a pledge the shares held by the pledgee may be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld attach provisions, that the only requirement is that the subject-matter of the acquisition should be 'shares' or 'voting rights' or 'control' over the company. He also referred to the definition of the expression 'shares' in regulation 3(1)(k) and stated that shares for the purpose means shares in the share capital a company carrying voting right and includes any security which would entitle the holder to receive shares with voting rights. According to him in the instant case the appellant had acquired APL's equity shares carrying voting rights and these shares though held as security entitled the appellant to exercise voting rights at a later date. 15. The learned representative stated that as per the clear provisions of the regulation it can be safely concluded that the instant transaction was an acquisition. He stated that regulation 3(1)(f) expressly excludes acquisition of shares in the ordinary course by banks and public financial institutions as pledgees, that this limited exclusion clearly confirms that acquisition of shares by way of pledge by persons other than banks and public financial institutions is to be considered as acquis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the appellant as pledgee by means of an agreement, and that out of the said acquisition 3,32,540 shares were transferred in the name of the pledgee and in respect of the remaining 4,35,040 shares the borrower directors of APL had submitted duly discharged transfer deeds alongwith the share certificates, that the acquisition therefore is complete in all respects and the appellant became an acquirer in terms of regulation 2(b), the acquisition having crossed the benchmark attracted regulation 10. He stated that it is not necessary that shares need be transferred in the name of the acquirer to attract the regulation. 18. Shri Barua submitted that Rs. 3 lakhs levied as penalty is against the maximum penalty of Rs. 5 lakhs provided in section 15H(ii) that the Adjudicating Officer has viewed the matter leniently and arrived at a lesser amount, after taking into consideration all the relevant factors. He submitted that therefore, there was no need to reduce the quantum of penalty. 19. I find that the facts are not in dispute in this case. The appellant had received 7,67,580 shares of APL (16.24 per cent) by pledge against loan given by it to the directors of the said company. Out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means any person who directly or indirectly acquirers or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer'. In terms of regulation 10 'no acquirer shall acquire shares or voting rights which (taken together with shares or voting rights if any held by him or by persons acting in concert with him) entitle such acquirer to exercise ten per cent (15% with effect from 28-10-1998) or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations'. [Emphasis supplied] 23. On a perusal of regulation 2(1)(6) it is clear that a person is an acquirer who acquires or agrees to acquire shares or voting rights/control in the target company. The mode of acquisition of shares or the purpose of acquisition is of not much significance to identify the acquirer. As has been held in the case of Joshi Jayantilal v. State of Gujarat AIR 1962 Guj, 297 and as per the Blacks Law Dictionary acquisition is the act of becoming the owner of cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is pledged, vests with the pledger and does not pass automatically to the pledgee. What passes is merely the possession of the property. It is well settled that if blank transfer forms alongwith share certificates are delivered with the intention of sale, then the transferee gets a right to fill in his name and to get his name transposed in the records of the company. However, in all cases where blank transfer forms alongwith share certificates are handed over to the transferee, the same position will not apply. Thus for example if a pledger hands over to the pledgee share certificates alongwith blank transfer forms as and by way of pledge, the transaction still remains a transaction of pledge. Mere receipt of share certificates alongwith blank transfer forms will not give to the pledgee any right, title or interest in the shares. The right, title and interest and ownership of the shares will continue in the pledger. The only right which the pledgee will have will be on non-payment to have the shares sold after notice. Such sale can only take place after a notice to the pledger. This is one instance where, even though blank transfer forms have been handed over alongwith share c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide the benchmark provided in regulation 10. Once the said holding is not taken into consideration, the appellant's holding remains at 7.04 per cent which is well below the threshold limit provided in regulation 10 and therefore it was not required to make any public announcement to acquire shares in accordance with the regulations. 29. The respondent's argument that since pledge has been specifically excluded from the scope of the regulation in the case of banks and financial institutions and not in other cases and therefore the instant case is covered by the regulation is not acceptable. If the acquisition entitles an acquirer to exercise ten percent or more of the voting rights in a company, then only the regulation would be attracted. It is not the manner in which the shares are acquired. It is the effect that triggers action. If the acquisition has no impact on the voting rights, regulation is not attracted. In the light of the factual position discussed above, the appellant had not become entitled to exercise voting rights in the company over and above the said limit for the reason that its holding of 4,35,040 shares was not registered in the company's register ..... X X X X Extracts X X X X X X X X Extracts X X X X
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