TMI Blog1998 (7) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the Securities and Exchange Board of India. The Adjudicating Officer, after enquiry came to the conclusion that the appellants had violated regulation 10 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 (hereinafter referred to as the Takeover Regulations) and section 15H of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act) and imposed a sum of rupees five lakh as penalty against the appellants vide his order dated September 26, 1997. The said order is under challenge in the present appeal. APPLICATION 3 OF 1998 In terms of rule 9 of the Securities Appellate Tribunal (Procedure) Rules, 1995 in the normal course an appellant is required to deposit the penalty amount along with the appeal as a pre-condition for entertaining the appeal. However, the rule empowers the Tribunal to waive the said requirement, for sufficient reasons. The appellants had accordingly filed application 2 of 1998 along with the appeal, seeking waiver of the requiring of depositing the penalty amount. When the said application was called, despite notice, the appellants did not turn up. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roblem. However, he also consented to take up the appeal for disposal. I have carefully the submissions by the parties. In the light of the facts and circumstances of the case I am of the view that this is a fit case to waive the requirement of depositing the penalty amount especially in view of the fact that the parties have consented to take up the appeal itself for disposal. The requirement of depositing the penalty amount under rule 9 is waived and the appeal taken up for disposal as consented by the parties. APPEAL 2 OF 1998 Shri Desai gave a brief account of the background relating to the acquisition of shares in question. He submitted that the appellants were inclined to subscribe in the public issue of shares made by HFL. However, since the appellants were short of funds, they entered into separate Memorandum of Understanding with four members of one Khandwala family on April 15, 1995. Under the MOUs it was agreed that each of the Khandwala family members would apply for shares in the public issue of HFL and that on allotment of shares the appellants would buy over those shares from the said Khandwalas at the rate of ₹ 10.50 against the issue price of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns is a mortgage or in the alternative a pledge, the Id. Counsel was found anxious to canvass in its letter and spirit, going beyond the literary meaning of the clauses. He cited the Supreme Court s observations in Sundaram Finance Ltd. Vs. The State of Kerala (AIR 1966 SC 1178) in support. The Counsel further contended that the appellants acquired the shares in a public issue and as such there was no violation of regulation 10, as the said acquisition is outside the ambit of Chapter III of the Takeover Regulations, in terms of regulation 3(a). Other grounds which he adduced to substantiate his contention were that the transaction is beyond the purview of regulation 10 and section 15H as the appellants were not holding any share in HFL at the time of acquisition or entering into the MOUs, that at the relevant point of time the shares were not listed on any stock exchange and hat the shares were not purchased from the open market. Shri Desai further submitted that the shares acquired by the appellants did not carry voting rights, in as much as the shares are yet to be registered in their name in the company s register. According to him, on no count the appellants can be consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the regulation was framed would be defeated. According to him, the expression less would also mean nil , thereby suggesting that acquisition of shares by even a non existing shareholder would come under the purview of regulation 10. The sum and substance of his submission was that acquisition of shares beyond 10% of the share capital by any person, irrespective of the fact that he is an exiting shareholder or not in the target company, would attract compliance of the statutory requirements. He further stated that compliance of the requirements of regulation 10 and section 15H is not contingent upon the registration of shares in acquirer s name in the target company s books. According to him the moment an agreement is entered into to acquire shares or in the absence of such an agreement, the share certificates along with transfer form signed by the seller are received by the acquirer, the acquisition is complete. Elaborating on the rights and obligations of a bonafide purchaser of shares, pending entry of his name in the register of members of the company, Shri Baru acted the Supreme Court s decision in Life Insurance Corporation of India Vs. Escorts Ltd. (AIR 1986 SC 1370) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rupees. He urged that in view of the gravity of the offence, the penalty of rupees five lakh cannot be considered unjust or unreasonable, warranting any remission. I have carefully considered the various rival contentions in this appeal. The facts remain undisputed. Only the perception of the parties on the scope of the statutory provisions differs. One of the contentions of the appellants is that the shares were purchased by them from out of the public issue made by HFL as the Khandwalas had made application on behalf of the appellants and that the said Khandwalas were holding the shares as mortgagees with the appellants having the right of redemption, that in reality the transaction with Khandwalas was in the nature of a mortgage / pledge of shares. To appreciate the nature of the transaction it is necessary to have a look at the MOUs dated April 15, 1995 entered into by the appellants with the four members of the Khandwala family viz. (1) Shri Paramanand G. Khandwala (2) Smt. Kinnari J. Khandwala (3) Shri Vimal P. Khandwala (4) Smt. Sonal R. Khandwala. The terms and conditions of all these MOUs are substantially identical. The standard clauses, from one of the MOUs, consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the date of allotment. 6. That the broker shall arrange to deliver to the investor company, the shares so allotted to the financier within a period of one month from the date of allotment. 7. That the investor company shall not pay any commission / brokerage, etc. to the broker and the broker may recover his service charges from the financier only. 8. That the financier shall be liable only to sell and deliver the shares if allotted and does not guarantee any allotment . On a perusal of the MOU it is difficult to appreciate the appellants contention that the shares were actually purchased by them and the allottees were holding the same as mortgagees or pledgers. Clause 3 of the MOU stipulates the financier to sell the shares to the appellants and the appellants to buy the same. Clause 4 states about the price fixed for purchase by the appellants and clause 5 stipulates the time from the date of allotment within which the shares are to be purchased. Further, in terms of clause 7 the service charges of the broker are required to be paid by the financier and not by the appellants. There is no indication or suggestion to hold the view propounded by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us in the instant case is not as to whether the transaction is a mortgage or pledge. Here, we are considering the question as to whether the instant transaction was an allotment by HFL to the appellants or purchase from the Khandwalas. In the light of the clear cut provisions of the MOUs, as discussed and subsequent conduct of the parties, it is not possible to hold that the MOUs envisaged mortgage or pledge of the shares in the hands of the Khandwala family members. In view of the crystal clear terms in the MOUs, the true purport of the transaction is evident and as such Sundaram Finance Company s case cited by the Id. Counsel, is of little assistance. Before we proceed further, let us have a look at the following statutory provisions relied on by the parties. Regulation 3 Nothing contained in Chapter III of these regulations shall apply to acquisition of shares: a) by allotment in pursuance of an application made under a public issue; b) in the pursuance of any underwriting arrangement; c) in the ordinary course of business by a registered stock-broker of a stock exchange on behalf of clients; d) in companies whose shares are not listed on any stock exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further shares from the open market by an existing share holder, beyond the prescribed ten percent limit. It is on record that the appellants were not holding any share in the capital of HFL at the time of entering into MOUs or on the date on which the shares were taken possession from the Khandwalas. Shri Barua s contention that the definition of the expression acquirer in the Takeover Regulations does not suggest that the person should be an existing shareholder, is not contentious. In terms of regulation 2(b) of the Takeover Regulations acquirer means any person who acquires or agrees to acquire shares in a company either by himself or with any person acting in concert with the acquirer. But regulation 10(1) is not confined to an acquirer simplicitor, but to an acquirer who holds shares carrying ten percent or less of voting rights in the capital of the company . The said qualification to the acquirer does not appear to be an inadvertent addition in the regulation as is evident from the various other provisions of the Takeover Regulations. Regulation 10(1) refers to acquisition of further shares. The word further means additional or extra. So, when we refer to furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the literal meaning. Regulations 9, 14, etc. lend support for taking such a view. It is, therefore, difficult to read the regulation in the manner suggested by the Id.representative to give an altogether different meaning which does not flow from the words used. The spirit of law as the Supreme Court observed may well be an elusive and unsafe guide and the supposed spirit can certainly not be given effect to in opposition to the plain language of the sections of the Act (Rananjaya Singh Vs. Baijnath Singh (AIR 1954 SC 749). One cannot over look the fact that the Takeover Regulations are meant for compliance by persons acquiring shares. Their understanding of the statutory requirements would normally be based on a plain reading of the provisions giving plain meaning to the words used therein as is commonly understood. Interpretation of regulation 10(1) on the lines suggested by the Id. Representative cannot sustain. The appellants contention that the shares acquired by them have not been registered in their name in the company s register and as such the shares did not carry voting rights is unfounded. The Companies Act, 1956 recognises two kinds of shares - Equity or Ordinary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts contention that the shares of public limited companies, by the very nature are marketable and since they are marketable, the moment the shares are issued an open market automatically springs up and listing on the stock exchange is not necessary to attract regulation 10, is not legally tenable. What is required to be looked into in this case is the statutory provisions relating to the transaction. As mentioned earlier, the legal provisions are very clear and one need be guided by the same. Regulation 3(d) is very clear in as much as, it specifically excludes the unlisted shares of companies from the purview of the Takeover Regulations. The observations of the Special Court in AK Menon s case cited is not of any help to the respondents in this case in view of the distinct set of facts. In AK Menon s case the Court was considering the legality of the ready forward transactions with reference to two notifications issued by Central Government under sections 13 and 16 of the Securities Contract (Regulation) Act, 1956. Shri Barua had relied on the observations made by the Court . that these two notifications relate not only to securities which are listed but also to securities which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidering a case where the Commissioner of Income-Tax, when transferring an assessment case from Patiala to Ambala had acted under sections 5(5) and (7A) of the Indian Act, while he should have acted under section 5(5) of the Patiala Act. In that context the Apex Court had observed that the fact that reference to the Indian Act in the order does not make the action of the Commissioner without jurisdiction under which it will be nugatory. The facts of the said case are clearly distinguishable and as such the ratio is not applicable to the instant case. It may be remembered that this Tribunal is an appellate forum and that is jurisdiction is confined to deciding appeals arising out of the orders made by the Adjudicating officer as is being made out by the Id. Representative of the respondents. Regulation 9 and regulation 10 are distinct from the point of view of their application and meant for compliance in different situations. Regulation 9 is on the acquisition of shares through negotiation, whereas regulation 10 is on the acquisition from the open market. This Tribunal has no jurisdiction to investigate the transaction and decide afresh the applicability of regulation 9 as suggest ..... 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