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2015 (11) TMI 1426 - SUPREME COURT

2015 (11) TMI 1426 - SUPREME COURT - TMI - Buy back arrangement - collaboration for profitable implementation - Appellant contended that as his buy-back from HSIDC, was a transfer of shares from a State level financial institution to a co-promoter of the Target Company, it was exempt under Regulation 10 - Tribunal dismissed the contention stating that the exemption under Regulation 10 was only with respect to making a public announcement and does not permit the Appellant from not disclosing the .....

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of the entire share capital of Garg by the Appellant attracted Regulation 10 as the acquisition was in excess of 15%. Further, as this transaction was between two promoters, it did not have the protection of Regulation 3. As required under Regulation 10, the Appellant did make a public announcement, but did not disclose its buy-back transaction with HSIDC. The Appellant has vainly and incorrectly attempted to justify his act of non-disclosure by stating that the transaction with HSIDC was prote .....

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ansaction between the Appellant and HSIDC will have to be subject to Regulations 16 and 20, and the rate at which the Appellant bought back the shares from HSIDC had to be disclosed in the public announcement.

Find no force whatsoever in the contention of the Learned Counsel for the Appellant that the post-dated cheques forwarded to HSIDC enclosed with letter dated 15.4.1999 were given by way of a guarantee, especially in light of the fact that the same was denied by HSIDC in its lett .....

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nch. In our view, the post-dated cheques amounted to a promise to pay and that promise would be fulfilled on the date mentioned on the cheque. Thus, this promise to pay amounted to a sale of shares/equity. The subsequent dishonouring of the post-dated cheque would have no bearing on the case. At the time of making the public announcement the Appellant had bought back the shares of HSIDC by making payment via the said post-dated cheques. Further, as the buy-back was in pursuance of an agreement, .....

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uisition takes place the moment the acquirer decides or agrees to acquire, irrespective of the time when the transfer stands completed in all respects. The definition explicates that the actual transfer need not be contemporaneous with the intended transfer and can be in futuro.

Also the letter on which the Counsel for the Appellant had placed reliance to prove that there was no acquisition, is dated 9.12.1999, which was well after the public announcement dated 24.4.1999 where the App .....

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d of India dated 1.8.2003. The factual matrix is that one Mr. V.P. Garg (hereinafter referred to as Garg ) entered into an Assisted Sector Agreement with the Haryana State Industrial Development Corporation Limited (hereinafter referred to as HSIDC ) on 4.1.1993, for the purpose of setting up a modern resort hotel complex at Village Chowky, Tehsil Kalka, Haryana. The parties agreed to collaborate for the profitable implementation and operation of the project in the assisted sector through a comp .....

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onsent of the Collaborator offload its shareholding in the Company partially or fully in such manner as it may deem fit. The Collaborator will however have the pre-emptive right to buy the shareholding of the Corporation. Similarly, after the shares of the Company are duly listed on the Stock Exchange/DTCET, and with the consent of the Corporation, the Collaborator may buy its shareholding at a mutually agreed price which shall be equal to or higher than that provided under sub clause (c). (b) A .....

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tor under sub clause (b), the price to be paid shall be highest of the: i) Issue price of the share plus simple interest for the period at the lowest normal lending rate of interest on term loans under refinance scheme of IDBI prevailing at the time of first issue of shares to the Corporation under its agreement. OR ii) The highest price of the shares ruling on any Indian Stock Exchanges for a period of two months preceding the date on which the Collaborator ought to purchase the shares held by .....

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ct to the approval of HSIDC and contained a clause that Garg would be absolved of fulfilling the buyback obligation, provided HSIDC agreed to accept the Appellant in place of Garg. Garg wrote a letter to HSIDC dated 31.3.1999 stating that on account of his deteriorating financial condition, he had decided to transfer his equity shareholding in the Target Company to the Appellant and that the Appellant had agreed to furnish his personal guarantee for buy-back of the three lac equity shares held b .....

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or in the assisted sector agreement instead of Garg, under similar terms and conditions. The Appellant also requested that since he was facing a stringent liquidity problem, the payment for the buy-back which was due in April 1999 be instead made in monthly instalments of ₹ 20 lacs each with effect from September 1999. Enclosed with the letter were four post-dated cheques in respect of the said buy-back obligations, amounting to a total of ₹ 71,25,466/-. HSIDC, vide its letter dated .....

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excess of 15% of the total shareholding of the Target Company, the Regulations under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, were attracted. In order to comply with the Regulations, the Appellant made a public announcement on 24.4.1999 making an offer to the remaining shareholders of the Target Company to purchase a minimum of 20% shares of the said company at an offer price of ₹ 8.75 per equity share. 5. On 5.5.1999, a draft letter of offer was sent .....

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ecified upfront in the offer document. Further, if the price payable to HSIDC as per the said agreement was higher than the present offer price of ₹ 8.75 per share, then the offer price must be justified as required under Regulation 20(6). The draft letter of offer dated 5.5.1999 was approved by the SEBI subject to certain changes vide its communication dated 30.9.1999. As it transpired in response to the public announcement, the Appellant could acquire only 2.42% of the shares of the Targ .....

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ed HSIDC to receive the consideration amount with respect to the transfer of shares in monthly instalments. The complainant also brought to the notice of SEBI that the post-dated cheques through which the Appellant had tendered consideration had subsequently been dishonoured and criminal proceedings had been initiated against him. A copy of the said complaint was forwarded to the Appellant through his merchant banker. 7. The Appellant moved an application on 2.12.1999 stating that he was covered .....

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and such co-promoter(s); xxx xxx xxx xxx xxx xxx CHAPTER III SUBSTANTIAL ACQUISITION OF SHARES OR VOTING RIGHTS IN AND ACQUISITION OF CONTROL OVER A LISTED COMPANY 10. Acquisition of 15% or more of the shares or voting rights of any company.- 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 fifteen per cent or more of the voting rights in a company .....

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o exercise more than 5% of the voting rights, in any period of 12 months, unless such acquirer makes a public announcement to acquire shares in accordance with the Regulations. (2) No acquirer who, together with persons acting in concert with him has acquired, in accordance with the provisions of law, 75% of the shares or voting rights in a company, shall acquire either by himself or through persons acting in concert with him any additional shares or voting rights, unless such acquirer makes a p .....

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akes place in pursuance to a resolution passed by the shareholders in a general meeting. SEBI sought a clarification from the merchant banker on 29.2.2000, regarding the non-disclosure of the payment of ₹ 71,25,466/- by the Appellant through postdated cheques. The merchant banker in its letter dated 13.4.2000 informed SEBI that the Appellant had not informed him about the payment made through post- dated cheques. Subsequently, SEBI wrote a letter to HSIDC dated 2.6.2000 asking whether the .....

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ation of Regulations exists, issued a show cause notice to the Appellant. The Appellant filed his reply to the show cause notice after which SEBI by its order dated 1.8.2003 issued directions to the Appellant under Section 4(3) read with Section 11B of the Act and Regulations 44 and 45 of the Regulations. The Appellant was directed to make a fresh public announcement for 20% shares as required under Chapter 11 of the Regulations in accordance with Regulation 10 and offer to the shareholders of t .....

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the Appellant contended that the amount deposited with HSIDC via post-dated cheques was not in consideration for the buy-back of shares. Instead it was deposited by way of comfort/security for the buy-back obligation so as to demonstrate to HSIDC that the Appellant was a man of means who could buy-back the shares subsequently (an assertion which in any case stood belied by the dishonour of the cheques). The Tribunal rejected this contention by placing reliance on two letters. The first letter, .....

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mount had been deposited by way of comfort or security was being contended by the Appellant, then it would have been a lump sum figure and not an amount as precise as ₹ 71,25,466/-. In light of the above stated facts, it was held to be beyond doubt that the Appellant had paid the said sum as a consideration for the buy-back of shares at a rate of ₹ 23.75 per share. Thus as a necessary corollary, the said transaction had to be disclosed at the time of public announcement as provided u .....

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d be said to have been made in respect of the buy-back of shares. Furthermore, the shares held by HSIDC had not been transferred in the name of the Appellant or his associates, so the acquisition had not reached its stage of fruition. Resultantly, the price offered to HSIDC could not be taken into consideration as provided under Regulation 20(2) (b) of the Regulations to determine the minimum offer price. 20. Minimum offer price.-(1) The offer to acquire the shares under regulation 10, 11 or 12 .....

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he minimum offer price shall be the highest of- (a) the negotiated price under the agreement referred to in subregulation (1) of regulation 14; (b) the highest price paid by the acquirer or persons acting in concert with him for any acquisitions, including by way of allotment in a public or rights issue, if any, during the 26 week period prior to the date of public announcement; (c) the price paid by the acquirer under a preferential allotment made to him or to persons acting in concert with him .....

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d by an acquirer for any acquisition would be taken into consideration for determining the minimum offer price. As the Appellant had paid ₹ 23.75 per share to HSIDC within the period of 26 weeks prior to the date of public announcement, this transaction had to be taken into consideration for determining the minimum offer price. The Tribunal negated the specific contention of the Appellant, finding that irrespective of whether acquisition took place or not, Regulation 20(2)(b) stood attract .....

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announcement. The said exemption does not permit the Appellant from not disclosing the transaction for the purpose of calculating the minimum offer price. 11. Aggrieved by the decision of the Tribunal, the Appellant has now filed this Appeal. Counsel for the Appellant contends that Regulation 20(2)(b) uses the expression acquisition and submits that as the said acquisition was to happen in the future, the Regulation was not applicable to him. Further, the post-dated cheques that had been deposit .....

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e, and the equity had to be bought back by the promoters at a purchase consideration which would be calculated as per the terms contained in Clause 15 of the Tripartite agreement. Counsel relies on a letter issued by HSIDC dated 9.12.1999 wherein it was communicated to the Appellant that the post-dated cheques which he had deposited were dishonoured on presentation due to non-availability of sufficient funds with the accounts, and thus as there had been no payment no acquisition had taken place. .....

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by the Appellant from HSIDC. Evidence was placed on record to prove that the Appellant was still carrying on business of the Target Company. Counsel contended that on 31.3.1999, the Appellant agreed to step into the shoes of Garg. On 15.4.1999 HSIDC received intimation from the Appellant regarding the agreement and also received four postdated cheques amounting to ₹ 71,25,466 as consideration for the purchase of three lac equity shares in the Target Company, thus taking his share in the Ta .....

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shareholding of the Target Company. In order to comply with Regulation 10, the Appellant made a public announcement within four working days as prescribed in Regulation 14(1) on 24.4.1999. The rate that was being offered by the Appellant at which he would acquire shares from the public was ₹ 8.75. In response to the public announcement, the Appellant could only acquire 2.42% of the shares of the Target Company, which was not surprising as the rate at which the shares were being offered to .....

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make is to state the highest and the average price paid by the acquirer or persons acting in concert with him for acquisition, if any, of shares of the Target Company made by him during the twelve month period prior to the date of public announcement. 13. The first issue that has to be addressed before us is whether the transaction of buy-back of shares which transpired between the Appellant and HSIDC was required to be disclosed in the public announcement dated 24.4.1999. In order to determine .....

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fied. Regulation 16 provides the contents and essential disclosures that are to be made at the time of making a public announcement. Regulation 20 establishes the method of computation to be employed in order to determine the minimum offer price which the acquirer must offer to purchase shares in a public announcement under Regulation 10, 11 or 12. It is evident from a reading of the above Regulations that the buy-back transaction between the Appellant and HSIDC was incapable of triggering Regul .....

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to justify his act of non-disclosure by stating that the transaction with HSIDC was protected by Regulation 3, which placed it beyond the ambit of Regulation 10, 11 and 12. In our view, Regulation 3 only protects a transaction between a copromoter and a State financial institution to the extent that, as a consequence of such transaction a public announcement will not be required to be made as provided under Regulations 10, 11 and 12. However, it does not imply that the said transaction is to be .....

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guarantee, especially in light of the fact that the same was denied by HSIDC in its letter to SEBI dated 11.1.2001, wherein HSIDC stated that the post-dated cheques had been issued in consideration of the buy-back of shares. 15. The next contention that was raised by the Counsel for the Appellant was that as the cheques presented had been dishonoured on presentation, the said transaction did not culminate in an acquisition. It has already been held beyond doubt that the post-dated cheques issue .....

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ve no bearing on the case. At the time of making the public announcement the Appellant had bought back the shares of HSIDC by making payment via the said post-dated cheques. Further, as the buy-back was in pursuance of an agreement, there was consensus ad idem. The Appellant has subsequently shirked his responsibility and has tried to slither away from honouring the agreement, which he cannot be allowed to gain from, as is established by the legal maxim commodum ex injuri su non habere debet. Wh .....

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