9911796707
TMI Blog2002 (5) TMI 727X X X X Extracts X X X X X X X X Extracts X X X X ..... hile petitioner No. 2 is a private limited company. The precise relationship between these two companies has not been spelt out in the writ petition, nor was it orally explained to us. However, for all practical purposes it is only the role of petitioner No. 1 which came up for scrutiny and consideration before us. Nothing was ascribed to petitioner No. 2 which seems to have acted in concert with and tacitly accepted everything done by petitioner No. 1. The liabilities and responsibilities, if any, are said to be of petitioner No. 1 which has virtually played the role of a 'big brother'. Reference to the petitioners, therefore, means reference to petitioner No. 1. 4. Respondent Nos. 1 and 3 did not contest the writ petition before us, as indeed they were not required to Respondent No. 2 is the SEBI constituted under the provisions of the SEBI Act. As per its preamble, the SEBI Act provides for "the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regu- late, the securities market and for matters connected therewith or incidental thereto." 5. Respondent No. 4, Enam Financial Consultants (P.) Ltd. (Enam) is the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may commence from 4-5-1998, it should remain open for a period of thirty days in terms of regulation 22(5), that is, till 2-6-1998. SEBI also informed Enam that in terms of regulation 26 of the Takeover Regulations, they (Enam) may upwardly revise the offer price and number of shares to be acquired at any time upto seven working days prior to the date of closure of the offer which, in the circumstances, would be upto and including 25-5-1998. 10. Pursuant to these developments, on 27-4-1998 a letter of offer was sent by the petitioners to each shareholder of INDAL indicating the terms of the offer and also stating that the offer opens on 4-5-1998 and closes on 2-6-1998. All formalities pertaining to the shares, including despatch of consideration were expected to be completed within 30 days of the date of closure, that is, by 2-7-1998. 11. In a related development, on 15-5-1998, the petitioners gave a notice to its shareholders for convening an extraordinary general meeting (EGM) on 12-6-1998. In terms of this notice along with the explanatory statement attached thereto, the shareholders were told that the petitioners proposed to raise finance to meet their capital expenditure, st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngements by depositing marketable securities with Enam. (b)The shareholders approval for issuing and allotting OCPS: It was explained that by an earlier resolution dated 9-12-1994, the shareholders had authorized the board of the petitioners to issue securities to persons other than their existing shareholders. In any event, fresh approval of the shareholders was being sought in the EGM to be held on 12-6-1998. (c)The clearances required by the petitioners for implementing the open offer: It was explained that an EGM was to be convened on 12-6-1998 to obtain the shareholders approval to purchase equity shares of INDAL in excess of the limit prescribed by section. 14. SEBI, however, continued to harbour some doubts about the open offer and, accordingly, addressed a detailed letter dated 27-5-1998 seeking the views of Enam on several issues including the fact that the 'strategic alliance' had now changed to a takeover of INDAL, the mode of payment for the acquisition of shares and the approvals required under the provisions of sections 81(1A) and 372 expected Enam to reply by 2.00 p.m. on 28-5-1998 which it did. Amongst other things, it was stated by Enam that allotment of OCPS in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... announced on 1-6-1998 that as per the legal advice received, the Guidelines relating to preferential issue of shares did not apply to the proposed issue of OCPS. However, what the Guidelines did entail was, inter alia, obtaining the approval of the petitioners lenders as well as the passing of a fresh resolution at an EGM to be convened for the purpose. It was, consequently, pointed out that the petitioners. ". . . may not be able to accept the shares received under their open offer. The offer continues to remain open subject to all other conditions mentioned in the letter of offer and other public announcements made by the acquirers." 18. The open offer made by the petitioners for the acquisition of the shares of INDAL closed, as scheduled, on 2-6-1998. We are told that in all 981,733 shares were tendered in the open offer. The break-up of this, as given to us, is : Number of shares upto 1-6-1998 on 2-6-1998 Total tendered : 69,890 911,843 981,733 Events after the closure of the offer 19. After the close of the offer on 2-6-1998, Enam made a representation to SEBI on 3-6-1998 stating, inter alia, that their (SEBI's) decision regarding the applicability of its Guideli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he open offer publicly announced by the petitioners. This was confirmed by the petitioners by a letter to SEBI dated 30-6-1998. In the meanwhile, the petitioners were also advised by their solicitors to comply with the Guidelines and to convene an EGM to pass a specific resolution approving the OCPS issue. 24. By a letter dated 3-7-1998, SEBI pointed out to Enam that in view of the resolution passed in the EGM held on 12-6-1998, there did not appear to be any necessity of convening another EGM on 25-7-1998 for the same purpose thereby entailing a delay in the completion of the offer formalities. 25. In response, Enam wrote to SEBI on 6-7-1998 that there was nothing to suggest that the EGM convened on 12-6-1998 was for the purpose of obtaining the shareholder's approval for the issue of OCPS. It was clarified that in fact when the notice for the EGM was given, the issue of OCPS had not even been announced or contemplated. It was stated that SEBI had been requested to reconsider its decision regarding the applicability of the Guidelines but since it did not do so, the petitioners had no alternative but to comply with the Guidelines and call an EGM for 25-7-1998 to pass a specific s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to show-cause why the entire sum lying in the escrow account should not be forfeited, more particularly for violation of regulations 22(1) and 22(13) of the Takeover Regulations. The petitioners were given seven days time to reply to the show-cause notice. 31. On 11-8-1998, the petitioners submitted a detailed reply to the show-cause notice. SEBI gave a hearing to the petitioners as well as their learned counsel and passed an order dated 28-10-1998, concluding that the shares tendered by the shareholders of INDAL have to be accepted by the petitioners and that the petitioners have to make necessary payment of Rs. 221 per share in cash to such of the shareholders who have accepted the offer and tendered their shares upto 2-6-1998. The petitioners were also asked to pay interest at the rate of 15 per cent per annum from 2-7-1998, that is, the date by which the payment ought to have been made in the first instance in terms of the Takeover Regulations. Upon payment of the consideration, Enam could approach SEBI for release of the balance amount/securities lying in the escrow account. It was held that in case the petitioners failed to make the payment within 15 days of the order, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable. 37. As regards the resolution of 12-6-1998, the Central Government was of the view that the notice for the EGM to be held on 12-6-1998 was issued on 15-5-1998 while the offer of allotment of OCPS was made for the first time on 25-5-1998. As such, the EGM had not been convened for the purpose of considering the issue of OCPS. It was also held that the meeting of 12-6-1998 did not conform to the Guidelines in as much as an auditor's certificate which was required by clause 11 of the Guidelines was not laid before the EGM. It was held that the auditor's certificate was not a mere formality but was a major safeguard to enable the shareholders to take an informed decision. As such, it was held that both the resolutions dated 9-12-1994 and 12-6-1998 were not adequate authority for the issue of OCPS. 38. The fourth issue before the Central Government was whether the withdrawal of the offer by the petitioners due to the special resolution having been rejected in the meeting of the shareholders on 25-7-1998 constituted a refusal of a statutory approval which entitled the petitioners to withdraw from the open offer in accordance with regulation 27(1)(a) of the Takeover Regulations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the petitioners ought to have taken reasonable precautions to ensure that the EGM approved the offer, if nothing else, by at least asking for a poll to be taken. According to the Central Government, this amounted to a wilful default within the meaning of regulation 22(13). The Central Government rejected the contention of the petitioners that the rights and duties of the promoters were not coterminus with their rights and duties as shareholders. Consequently, it was held that the petitioners did not meet their obligations under regulation 22. 43. The sixth and final issue considered by the Central Government was whether the SEBI could have issued the directions that it did, including directing the petitioners to acquire the shares of INDAL by paying Rs. 221 per share to the shareholders along with interest thereon. This was answered in the affirmative. It was held that if the petitioners did not fulfil their obligations, the amount lying in the escrow account could be forfeited under regulation 18(12)(e) of the Takeover Regulations. Additionally, SEBI could issue appropriate directions under Regulation 44 thereof as it deems fit. Even otherwise, SEBI was conferred with wide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the learned counsel. Accordingly, we heard the matter in detail and considered the factual and legal aspects that arise. Discussion and analysis 49. We were told that the Takeover Regulations have their origin in the City Code on Takeovers and Mergers, a document brought out in England which represents a code of business ethics not a code of law. Our attention was drawn to paragraph 1197 in Vol. 7(2) of Halsbury's Law of England, 4th ed. 1996 Reissue. The general principles of the above-mentioned Code have been reproduced in the said paragraph 1197. Our attention was drawn to principle No. 3, 4, 5 and 6 which are as follows : "1197. General principles of the Code.-It is intended that the spirit, as well as the precise wording, of the following general principles should be observed : (1)and (2)******* (3)an offeror should only announce an offer after the most careful and responsible consideration; such an announcement should be made only when the offeror has every reason to believe that it can and will continue to be able to implement the offer; responsibility in this connection also rests on the financial adviser to the offeror; (4)shareholders must be given sufficient i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y approvals in time on account of wilful default or neglect or inaction or non-action on his part, the amount lying in the escrow account shall be liable to be forfeited and dealt with in the manner provided in clause (e ) of sub-regulation (12) of regulation 28, apart from the acquirer being liable for penalty as provided in the regulations." The 'target company' in this case is quite clearly INDAL, while the 'acquirer' is the petitioners. 51. When the petitioners made the final public announcement on 25-5-1998, the most significant change they made from their earlier offers was the introduction of part payment for the acquired shares through the issue of OCPS. In fact, this issue is really the nub of the controversy between the parties. The resolution dated 9-12-1994 52. If, on 25-5-1998 a shareholder of INDAL were to ask the petitioners (after reading the open offer) whether they had the authority to issue the OCPS, the petitioners would probably have answered in the affirmative and would have relied upon the resolution passed on 9-12-1994 to support their reply. Indeed, this is the question that SEBI asked when it enquired of the petitioners in the meeting held on 27-5-1998 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade on 29-5-1998 for the attention of the shareholders of INDAL that the OCPS were being issued pursuant to the resolution passed in the annual general meeting held on 9-12-1994. It was also publicly announced that an EGM was to be held on 12-6-1998 to increase the authorised share capital of the petitioners to enable the issue of OCPS. It was said in the public announcement : "The shareholders of SIIL have passed a special resolution under section 81(1A) of the Companies Act, 1956 authorising the Board to issue securities from time to time upto Rs. 1,000 crore. The proposed OCPS are being issued pursuant to this resolution passed in the annual general meeting held on 12th December, 1994. The board of directors by their resolution dated 15th May, 1998 have convened an extraordinary general meeting of the company to be held on 12th June, 1998 (EGM), inter alia, for the purpose of (i )Increasing the authorised share capital of SIIL to Rs. 410,00,00,000 and consequential changes in the share capital clause of the memorandum and articles of association of the company to enable the issue of OCPS." 57. Given this factual background, any shareholder of INDAL would have thought that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the issue of the OCPS, would the position have been any different ? We think not. 62. There are two reasons why we say so. Firstly, if the petitioners had wanted to act upon the resolution of 9-12-1994 they would have done so, well in time and possibly before making the public announcement on 25-5-1998. That they did not do so leads us to believe that the petitioners did not intend to act on the resolution of 9-12-1994. Secondly, if 9-12-1994 resolution was intended to be acted upon, there was no reason to duplicate the effort by passing another similar resolution on 12-6-1998. Consequently, we are of the view that regardless of what the petitioners really believed, they had no intention to act upon the resolution of 9-12-1994 for issuing and allotting the OCPS. 63. The petitioners were expected, like any prudent organization, to keep in mind the provisions of the Takeover Regulations and be absolutely sure of the answer to the question whether the Guidelines were applicable to the issue of OCPS or not. There should not have been any doubt in the 'mind' of the petitioners about the utility of the resolution dated 9-12-1994 when they made the public announcement on 25-5-1998. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he OCPS. The resolution dated 12-6-1998 68. In so far as the resolution to be taken up on 12-6-1998 is concerned, the petitioners could not have relied on it on 25-5-1998 to say that they intended to fulfil their financial commitment to the shareholders of INDAL. There was no certainty which way the shareholders would go and the petitioners could not have successfully predicted the passage of the resolution. The petitioners cannot be permitted to rely upon a future event, the happening of which was, in any case, uncertain. In fact, relying on the defeat of a more specific resolution in the meeting held on 25-7-1998, the submission of the petitioners before us was that the events were beyond their control and that they could not compel the shareholders to decide or vote in a particular manner. The same reasoning applies with equal vigour to the resolution that the petitioners proposed on 12-6-1998 - the resolution may or may not have been passed. The petitioners, therefore, could not validly claim on 25-5-1998 when they made the public offer that they would be in a position to implement the same on the basis of a resolution proposed to be passed on 12-6-1998. 69. Even otherwise, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the meeting held on 25-7-1998, the petitioners made a public announcement withdrawing from the offer, giving the impression that they were waiting for opportunity to knock. The resolution dated 25-7-1998 73. The learned counsel for the petitioners relied upon North-west Transportation Co. Ltd. v. Henry Beatty [1887] 12 App. Cas. 589 and Northern Counties Securities Ltd. v. Jackson & Steeple Ltd. [1974] 2 All ER 625 to contend that the petitioners could not be expected to exercise control over the voting rights of the shareholders. The submission of the learned counsel is this : the petitioners believed they had the authority to issue the OCPS under the resolution dated 9-12-1994. Even if this belief was not well-founded, the petitioners had the authority to issue the OCPS in terms of the resolution dated 12-6-1998. Finally, even if this were not so, the petitioners made an attempt to obtain the requisite authority to issue and allot the OCPS by introducing a specific resolution for this purpose in the meeting of shareholders held on 25-7-1998. Unfortunately, according to the petitioners, the shareholders did not agree to pass the resolution on 25-7-1998 and this latter even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's Legal Advisors & Solicitors, Udwadia, Udeshi, Desai, Berjis & Chinoy, have by their letter dated 29th June, 1998, categorically opined that Sterlite is bound in law to call another EGM for the purpose of passing such a specific special resolution." 78. On 9-7-1998, SEBI informed Enam that prima facie "a fresh EGM for the purpose of approving the OCRPS issue may not be required" and that the points raised in the letter of 6-7-1998 are being examined separately. 79. Even thereafter, the petitioners continued to insist through their letter of 17-7-1998 that : "In any view of the matter, a blanket resolution sanctioning the issue of a universe of securities to a universe of persons upon any terms and conditions, like the resolutions passed on both of 9-12-1994 and 12-6-1998 are not sufficient compliance with the said Guidelines (of 4-8-1994)" 80. Eventually, on 24-7-1998, SEBI unequivocally told the petitioners that : "We reiterate our earlier view that board of directors of Sterlite have been sufficiently empowered through resolution passed at the EGM held on 12-6-1998 to make a preferential issue of capital and no fresh resolution is called for to give effect to the proposal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate of knowledge as in June-July, 1998, whether it was at all necessary to hold an EGM on 25-7-1998. The answer to this has to be in the negative. Consequently, the petitioners cannot use the events of 25-7-1998 as an escape hatch to get out of their liability. 85. The sum and substance of the submissions of the petitioners is this: the resolution of 9-12-1994 could not be operated; the resolution of 12-6-1998 was ineffective and the resolution of 25-7-1998 was defeated and so, the petitioners were helpless. The fact of the matter is that this is knowledge gained in hindsight. At the relevant time, the petitioners believed that by virtue of the resolutions passed on 9-12-1994 and 12-6-1998 they had the requisite authority to issue and allot the OCPS. Yet, they chose not to exercise this authority. If the petitioners were satisfied with the authority conferred by the two aforesaid resolutions, there was no need to call a meeting of the shareholders on 25-7-1998. If the petitioners were not satisfied with the validity of the authority said to have been conferred by the two aforesaid resolutions, how is it that this knowledge dawned on them only after the closure of the issue and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with regard to the deep involvement of SEBI in the entire affairs with the result that it has lost all objectivity. SEBI is said to be the investigator, prosecutor and judge leaving no scope to the petitioners to expect a fair hearing. This situation is not something novel or unknown. 91. In R. v. Panel on Take-overs and Mergers, ex parte Datafin plc [1987] 1 All ER 564, the status of the Panel on Take-overs and Mergers ('the Panel') was being considered. It was said that the Panel is an unincorporated association without legal personality. It has no statutory, prerogative or common law powers and it is not in contractual relationship with the financial market or with those who deal in that market. It lacks any authority de jure yet exercises immense power de facto by devising, promulgating, amending and interpreting the City Code on Take-overs and Mergers, by waiving or modifying the application of the Code in particular circumstances by investigating and reporting on alleged breaches of the Code and by the application or threat of sanctions. Its respect- ability is said to be beyond question as also its bona fides. It is inten- ded to and does operate in the public interest and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-compliance.-(1) Any person violating any provisions of the Regulations shall be liable for action in terms of the Regulations and the Act. (2) If the acquirer or any person acting in concert with him, fails to carry out the obligations under the Regulations, the entire or part of the sum in the escrow account shall be liable to be forfeited and the acquirer or such a person shall also be liable for action in terms of the regulations and the Act. (3) The board of directors of the target company failing to carry out the obligations under the regulations shall be liable for action in terms of the regulations and Act. (4) The Board may, for failure to carry out the requirements of the regulations by an intermediary, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration under section 12 of the Act : Provided that no such certificate of registration shall be suspended or cancelled unless the procedure specified in the regulations applicable to such intermediary is complied with. (5) For any mis-statement to the shareholders or for concealment of material information required to be disclosed to the shareholders, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Divisional Court had the power to quash the decision taken by the auditor and to re-hear the case and take a fresh decision itself. The learned counsel for the petitioners in the present case stated that this was the key to the decision of the House of Lords and that because of this, the multiplicity of roles of the auditor would not be fatal to his decision. 99. After going through the decision rendered in Porter's case (supra) the learned counsel for the petitioners very frankly and fairly did not further argue about any difficulty that may arise in the kaleidoscopic functions of SEBI or its jurisdiction to issue appropriate directions, which can be considered and set aside by the Central Government in appeal (now by the Securities Appellate Tribunal). 100. No doubt, the wisdom of the directions that SEBI may issue in exercise of its statutory or regulatory powers is a different issue. But, this is also subject to the appellate powers of the Central Government. In the present case what were the directions issued by SEBI? In paragraphs 10 and 12 of its order dated 28-10-1998, SEBI said as under : "10. From the facts and circumstances of the case, I conclude that shares te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners. These shareholders are entitled to get the best price offered by the petitioners. We cannot forget that Alcan had also made an offer to the shareholders of INDAL who may well have accepted Alcans offer but for a perhaps more attractive offer made by the petitioners. The offer made by Alcan, if accepted, may perhaps have been hassle-free, who can say. Whatever be the position, the shareholders of INDAL have to be given what they bargained for and we see nothing wrong in the direction given by SEBI and upheld by the Central Government. 103. We were told during the hearing of the case that a large number of the shareholders of INDAL who had tendered their shares, had subsequently withdrawn their shares. This may be for a variety of reasons, including the possibility of some of these persons being speculators. In any case, these persons having withdrawn their shares will not be entitled to the benefit of the direction given by SEBI. We say this for two reasons. Firstly, it may be well nigh impossible to say who all had tendered their shares to the petitioners. Even if it is possible to identify such persons, it will be after a considerable effort which may not be worth i ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
