TMI Blog2003 (8) TMI 565X X X X Extracts X X X X X X X X Extracts X X X X ..... ting Agreement and the 1994 Regulations (i.e. beyond the then existing threshold limit of 10%) through an offer for sale to public in terms of an offer document, subject to the following: a that for the purpose the Appellants appoint a registered merchant banker b that the offer price shall be at the face value of the shares as on the date of the impugned order or the lowest price at which these shares were acquired, whichever is lower c that the offer for sale shall be for a minimum number of shares so as to reduce the shareholding of KRC and MDC and persons acted in concert with them in the Target Company, to less than 10% d that the offer document for the purpose shall be filed with SEBI within 3 months from the date of the impugned order. Ordered to initiate adjudication against KRC and MDC and persons acted in concert with them, under section 15A and 15H of the SEBI Act. 2. The acquisition of shares by the Appellants and persons stated to have acted in concert with them covered by the impugned order can be broadly grouped in relation to the period of acquisition as follows: 1 acquisition prior to the notification of the 1994 Regulations 2 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree lots of shares purchased are not specifically stated in the show cause notice. As per the impugned order approximately 47.48% of the paid up capital of the Target Company were acquired by the Appellants during the period 1993-1997. The said 47.48% shares consisted of 27.21% acquired prior to the notification of the 1994 Regulations, 19.71% during the currency of the 1994 Regulations and 0.56% during the currency of the 1997 Regulations. Acquisition of 1.31% by Beethoven Traders and 0.27% by Darrel Traders seem to be not included in the total acquisition of shares, worked out by SEBI. 6. The 1994 Regulations was notified on 7.11.1994. The 1997 Regulations was notified on 20.2.1997. It repealed the 1994 Regulations. The acquisition of shares of the Target Company (excluding acquisition of shares made prior to the notification of the 1994 Regulations) was subject matter of a suit (Suit No.3910 of 1997- M. Sreenivasulu Reddy V Kishore R. Chhabria) in the Hon'ble Bombay High Court. In the said suit few shareholders of the Target Company (the Plaintiffs) had challenged the substantial acquisition of the Company's shares by certain entities including the Appellants (the Def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question as to whether, the defendants should be permitted to make a post facto public offer or not. SEBI adjudicated the show cause notice and passed the impugned order inter alia directing the Appellants and the persons acted in concert with them to disinvest the shares held by them in the Target Company acquired allegedly in violation of the provisions of the Listing Agreement/the provisions of the 1994 Regulations, at the price specified in the order. 7. The appeals were agrued at length by the Senior Counsel appearing for the parties. They have also filed written submissions The submissions having a bearing on the issues involved are summarised as follows: Submissions on behalf of KRC Shri Kapil Sibal, learned Senior Counsel appearing for KRC briefly stated the factual matrix of the case, and made the submissions as follows: On 14.12.93 six subsidiary companies of Galan Finvest Pvt. Ltd. (Galan) purchased shares aggregating to 26% in the capital of the Target Company from the companies owned and controlled by Shri Mallya, that in addition, one of the Galan subsidiaries also purchased 75,000 Fully Convertible Debentures (FCDs), which were subsequently converted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wines. It has been suggested by SEBI that inasmuch as MDC is the uncle of KRC, was a director of some of the Galan subsidiaries, and further, inasmuch as MDC can be deemed to have acted in concert with IMFA or its directors in the acquisition of the said 10.91% shares, such acquisition was hit by the provisions of the 1994 Regulations as even the acquisition of a single share would have required a public announcement to be made under the said Regulations. The third lot of acquisition was made by Mahameru of 4.97% of the Target Company's equity shares from the market between 14.11.95 and 10.8.96. Again, the challenge by SEBI to such acquisition is on two grounds. First, that such acquisition could not have been made as the holding of the KRC/MDC combined by then exceeded 38% (and, thereby, well above the threshold limit). Second, that MDC actually funded such acquisition and in so doing, such acquisition was violative of the provisions of the 1994 Regulations as MDC acting in concert with IMFA had already crossed the threshold limit contemplated in the said Regulations. The fourth lot of shares, the acquisitions whereof has been challenged, is a bunch of 3.83% shares purchased b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the SCRA, that for the first time on 25.1.95, Section 23(2) prescribed such penalty, that the Listing Agreement itself was referred to in the SCRA for the first time, by an amendment to Section 21 made on 25.1.95. The acquisitions by the Galan subsidiaries made on 14.12.93 are not and cannot be covered by such amendments, which came into force much later i.e. on 25.1.95 Even after the aforesaid amendments, the Listing Agreement has not been made legally binding on any person other than the listed company, that Clauses 40A and 40B would apply to an acquirer if such acquirer was itself a listed company, not otherwise. Therefore, at the time of acquisition there was no law prescribing any penalty of the nature inflicted by SEBI in the impugned order. SEBI cannot invoke the general provisions of section 11 and 11 B of the SEBI Act since any breach of Listing Agreement could be actionable only under the SCRA and not under the SEBI Act. The Securities Contract Regulation Rules which has statutory force, having been prescribed under the SCRA does not contain any provisions akin to clause 40A and 40B of the Listing Agreement. Even if SEBI exercised any powers as a delegatee of the Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support to another holder cannot render the acquisition bad, that as a matter of fact, even acting in concert is permissible provided the provisions of Regulation 10 are complied with. The deeming provision contained in the inclusive definition of person acting in concert may raise a rebut table presumption that by virtue of the position of one or more person vis-a-vis the acquirer (such person or persons were acting in concert with the acquirer). Even assuming that MDC funded the acquisition of the said 10.91% shares by IMFA , only MDC alone can be said to have acted in concert with IMFA or its directors or vice versa and no more. If persons who are said to have acted in concert with the acquirer do not fall within the inclusive definition of Regulation 2(d), it has to be established that such person acted in concert with the acquirer i.e. acquired shares for a common objective. Mere conjecture and surmise cannot replace the legal requirement of proof. In respect of the acquisition of the 10.91% shares by IMFA, there is no charge in the Show Cause Notice, far less any established ground, that any person other than MDC and the directors of IMFA acted in concert with IMFA in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was improper on the part of SEBI to have relied on an allegation of fact appearing in the reported judgment without such charge being either investigated or made part of the Show Cause Notice. On the basis of a factually incorrect allegation of MDC allegedly holding 20% shares in Galan even at the time of Galan acquiring the 27.21% shares in the Target Company it has been insinuated that such holding shows some link between Galan and the IMFA's acquisition of these shares. At the time of Galan's acquisition of the 26% shares and 75,000 debentures, MDC was not a shareholder of Galan. The Show Cause Notice of 8.1.1999 alleged in paragraph 1 thereof that at the time of acquisition of the 27.21% shares by Galan, MDC held 20% of the paid up capital of the Galan, that such erroneous fact was refuted by MDC in his reply to the Show Cause Notice and also by KRC. In the impugned order, it has been recorded that at the time of acquisition of the Target Company's shares by Galan, MDC did not hold any share in Galan. Notwithstanding such factual assertion and without dealing with it in any part of the impugned order, the impugned order proceeded to record that at the time that Ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997 Regulations. The IMFA creeping acquisition of 0.56% was made between 27.2.97 and 1.8.97. The Beethoven purchase of 1.31% by way of creeping acquisition was made between 10.8.98 and 16.12.98. The Darrel purchase of 0.27% was made on 16.12.98. It is thus evident from the aforesaid dates that during no continuous period of 12 months did the creeping acquisition exceeded the then permissible limit of 2%, that the only requirement for a creeping acquisition to be permissible was the making of a declaration in terms of the 1997 Regulations, that once the declarations were made as aforesaid pursuant to the 1997 Regulations, the creeping acquisition could not be challenged. In fact, there is no challenge to the creeping acquisitions in the Show Cause Notice. However, inasmuch as the impugned order has directed KRC/MDC and all companies under their control to reduce their combined shareholding to 10%, the share acquired under the creeping acquisitions also get affected, although there is no legal or factual basis for making any order in respect of such acquisitions. 12. With reference to the direction that KRC and MDC disinvest their share holding in the Target Company at the face ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15H of the SEBI Act, 1992. It was submitted that by way of an order under a subordinate legislation (the takeover Regulations) a punitive measure of greater pecuniary value cannot be imposed. 13. It was submitted that the jurisdictional pre-condition for making an order under Regulation 44 of the 1997 Regulations was not complied with. The sustainability of an order under Regulation 44 would depend on whether such order is in the interest of the Securities market. In the instant case, the direction is clearly not in the interest of the Securities market, as such direction would really result in the market capitalization of the Target Company being reduced, the value of the shares in the hands of small investors dwindling, and only entrenched management in the Target Company benefiting. Primarily the takeover Regulations are aimed at protecting the rights of the small investors and to ensure that due declarations are made to the target company so that the management is not taken by surprise and, further, to ensure that in the course of substantial acquisition, there is no manipulation or distortion in the Securities market, that the protection to the small investors is ensured b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FA and even the 4.97% shares acquired by Mahameru. The defendants alleged that the Plaintiffs had no locus standi to maintain the suit inter alia as the Plaintiffs were not interested in any of the impugned shares as transferors or transferees thereof. 15. Though the suit was filed in 1997 and the initial Interlocutory application moved therein contemporaneously, the Plaintiffs really pressed for interim orders upon a notice being issued on behalf of some of the defendants for removal of directors of the Board of Companies and for the appointment of directors supported by such defendants. Such interlocutory application was disposed off by the Court by directing the voting rights in respect of Imfa, Mahameru, Shrirish, Beethoven and Darrel shares to remain frozen, pending disposal of the suit. The prayer regarding the freezing of voting rights in respect of the 3,75,000 shares which had been allotted upon the conversion of the debentures purchased by the Galan subsidiaries was, however, rejected on the ground that such acquisition had been made on 14.12.93, prior to the 1994 Regulations coming into effect. The defendants preferred appeals from that part of the interlocutory order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit and proper, and nothing said in this order should be construed as expression of our opinion on the question as to whether, the defendants should be permitted to make a post-facto public offer or not.(emphasis supplied) 17. The Appellant submitted that the directions contained in the impugned order must only be sustained by the reasons contained in the impugned order itself. The reply by SEBI in the present proceedings to justify the impugned order or the directions contained therein which are contrary to the reasons set out in the order cannot be taken into account. Cited Mohinder Singh Gill V Chief Election Commissioner (AIR 1978 SC 851) for the proposition that quasi judicial orders have only to be supported by the reasons contained therein and the reasons cannot be subsequently introduced or added. The Appellant relied on the decisions of this Tribunal in Sterlite Industries V SEBI (2001 (34) SCL 485) and Mega Resources Ltd. V SEBI (2002 (36) SCL 569) for the propositions that Section 11B does not provide for any penalties and submitted that Regulation 44 of the 1997 Regulations is not penal in nature and, therefore, no penalty can be validly imposed either under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngh (1979 (4) SCC 19) Para 2 at Pg 20 .... The order must be communicated either directly or constructively in the sense of making it known, which may make it possible for the Authority to say that the party affected must be deemed to have known the order. In a given case, the date of putting the order in communication under certain circumstances may be taken to be the date of the communication of the order or the date of the order but ordinarily and generally speaking, the order would be effective against the person affected by it only when it comes to his knowledge either directly or constructively, otherwise not. (ii) Collector of Central Excise, Madras V M. M. Rubber and Co. (1992 (1) SCC 471) Para 12 at Pg 477 ...... The date of such order or decision is a date on which the order or decisions was passed or made; that is to say when he ceased to have any authority to tear it off and draft a different order and when he ceased to have any locus patentee. Normally that happens when the order or decision is made public or notified in some form or when it can be said to have left his hand............... Para 13 Pg 477 So far as the party who is affected by the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir play and natural justice, the expression the date of the award used for the proviso must mean the date when the award is either communicated to the party or is known to him either actually or constructively. 20. It was submitted that all the above citations/decisions were brushed aside by the Counsel of SEBI on the ground that all the said decisions pertain to the question of limitation and that the decision set out at item (iii) above pertains to an award which is only an offer, that whether or not these cases relate to limitation is not relevant for the instant case, that these authorities indeed support the case of the Appellant that the SEBI Chairman had not only passed his order but had also communicated the same to MDC's representative. 21. On the concept of person acting in concert it was submitted that: According to (Clause 2 (d) of 1994 Regulations) Persons Acting in Concert comprises persons who pursuant to an agreement or understanding acquire (shares) OR agree to acquire shares for a common objective or purpose of substantial acquisition of shares and includes: ??? ???? (i)(ii)(iii)(iv) i)a company ii)its holding company iii)subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablished. 24. This aspect of co-operation was noticed by the Bhagwati Committee prior to the 1997 Regulations. The inclusive definition in 2(d) of the 1994 regulations was altered in the 1997 Regulations. A sub-clause was introduced to indicate which persons would be deemed to have acted in concert. 25. The cooperation that is necessary to be established to satisfy the expression agreement or understanding has to be a co-operation in course or in aid of the substantial acquisition, that a subsequent getting together or a subsequent co-operation for some further acquisition would not be material for the previous acquisition, if the previous acquisition is impugned. 26. The position of each of the entities viz. IMFA, Mahameru and Shirish in terms of the aforesaid definition, was submitted as follows: In the case of IMFA, Shri Ram Raheja and others were the directors and shareholders at the time of acquisition. IMFA did not have any holding company or subsidiary company at the time of acquisition of 10.91% shares in the Target Company. It was only on 27.9.1996, (when Seven star acquired the entire capital of IMFA), that IMFA had a holding company for the first time. By ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Mahameru it was submittesd that Mahameru did not have either any holding company or any subsidiary. The directors and shareholders of Mahameru at the time of acquisition of 4.97% were either Mr. H.S.R. Sharma and Mrs. Sophia Sawant (upto December 5, 1995) or Mr. R. M. Sanghvi and Mr. Abid Ali (upto September 4, 1996). Thereafter the directors and shareholders in the ratio of 50 : 50 were Mrs. A. A. Kakade and Mr. S. Masand. It was only on February 13, 1997, that Sevenstar took over the entire capital of Mahameru and MDC became a director on the board. Therefore, until this date neither KRC nor MDC can be said to have been a person deemed to have been acting in concert with Mahameru. Neither MRC nor MDC are relatives of any of the directors of Mahameru within the meaning of the Companies Act, 1956. Neither KRC nor MDC held any shares in Mahameru for any of them to be considered to be persons deemed to be acting in concert with Mahameru. 28. In respect of Shirish it was submitted that Shirish did not have any holding company or subsidiary company either during the acquisition of 3.83% shares in the Target Company or thereafter. The directors and shareholders or Shirish during a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used by the Supreme Court as an English expression. In the instant case persons acting in concert is a defined term in the Regulations and there is no scope for relying on the expression as it is ordinarily used in ordinary parlance. 3. Delhi Development Authority V Skipper Construction Co. P. Ltd. (AIR 1996 SC 2005) Proposition: Lifting of corporate veil ; Court's power to remedy wrongs. The question of lifting of corporate veil is irrelevant in this case as no person has ever hidden behind any corporate veil. KRC has come forward (by letter dated 9.1.1996) to own up the shares that he controlled; MDC has volunteered information (by his note dated 22.7.1997) of the shares over which he exercises control. The principle of lifting of corporate veil arises to see human faces lurking beyond the corporate fa ade. This principle is irrelevant in this case. As far the power of Courts to remedy wrongs, the reported case can not be relied upon because the Supreme Court was exercising powers under Article 129 and 142 to impose penalties on admitted contemnors. 4. Motichand V Ikram Ullah (AIR 1916 PC 56); Proposition: Device to defeat law should be discouraged There i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enquiry was completed upon the Target Company replied to the letter dated 9.6.1995. It may also be borne in mind that even the show cause notice issued to Shri Ram Raheja has been rightly dropped by SEBI. 7. Public Prosecutor V R. Raju (AIR 1972 SC 2504): Proposition: Anything done includes omission The expression anything done or any action taken in the present case is to be read in the light of the repeal and the savings provisions contained in Regulation 47 of the 1997 Regulations. In the reported judgement, the Hon'ble Supreme Court was not dealing with any repeal or savings provisions. The Court judgement on anything done is as the expression appeared in the then existing version of Section 40(2) of the Central Excise and Salt Act. Section 40 of the said Act, as was then being considered by the Court, reads as follows: 1 No suit lie against the Central Government or against any officer of the (Government) in respect of any order passed in good faith or any act in good faith done or ordered to be done under this Act. 2 No suit, prosecution or other legal proceeding shall be instituted for anything done or ordered to be done under this Act af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssoorie (1985 (2) SCC 16); Surinder Singh V Central Government (1986 (4) SCC 667): Proposition : When Regulations not framed, the act is applicable. In both the cases, Regulations under the relevant Acts had not been framed, therefore, the provisions of the Act were resorted to. There is no quarrel with the proposition. It is however, irrelevant in the facts of the instant case. The cases have been cited in the context that prior to the 1994 Regulations action could have been taken directly under the Act despite there being no Takeover Regulations. However, the allegation is that in acquiring 27.21% by the Galan subsidiaries, the Listing Agreement had been breached. The Listing agreement being a subject matter of the Securities Contract (Regulations) Act and SEBI having only been delegated Central Government's powers under the said Act, SEBI could not resort to direction or penalties under the subsequent regulations in respect of alleged violation of the Listing Agreement. The Appellant had submitted that SEBI's decision was influenced by certain extraneous consideration and referred to the following, with reference to the documents filed in the appeals, in supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act her on the following day. 32. Bachubhai Munim Co., vide letter dated 10.2.98 to the Chairman SEBI forwarded a copy of the written opinion of the eminent jurist dated 10.2.1998 SEBI forwarded MDC's letter dated 20.1.1998 as Investor's complaint to Herbertsons Ltd.. Hariani Co. Solicitors for Herbertsons Ltd. sent a letter to SEBI in reply to SEBI's letter 3.2.1998 requesting for copies of correspondence exchanged with regard to letter dated 20.1.1998 and requested SEBI not to direct MDC to take any steps for making public offer. MDC was not forwarded a copy of this letter either by Herbertstons Ltd or SEBI. 33. Hariani Co. Solicitors for Herbertsons Ltd. sent letter dated 29.2.98 to SEBI in furtherance to their letter dated 16.2.1998 once again requesting SEBI to direct MDC not to take any steps towards making of a public offer. MDC was not forwarded a copy of this letter either by Herbertstons Ltd, or SEBI. 34. Vijay Mallya. (Chairman, Herbertstons) sent letter dated 24.7.98 to the Chairman SEBI referring to SBEI's letter dated 3.2.1998 inter alia dealing with MDC's letter to SEBI dated 20.1.1998 wherein serious allegations are made against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the conduct of any enquiry (as distinguished from an investigation) and therefore it is impossible for SEBI to have held any enquiry under the 1994 regulations. The said word 'enquiry' has crept in only because the language used in Regulation 47(2)(a) is picked up form a standard repeal clause from other legislations. The only anything done or action taken by SEBI in the instant case prior to the repeal of 1994 Regulations was issuance of a show cause notice u/s 24 of the SEBI Act to Ram Raheja on 9.10.1996. SEBI has in the last sentence of paragraph 15 of its affidavit in reply to MDC's appeal stated that SEBI rightly did not pursue the same. 41. The actions taken by SBEI after the repeal of the 1994 Regulations are therefore of no consequence are as under:- a On 31.3.1997 SEBI issued a show cause notice addressed to the Managing Director of IMFA. The notice calls upon the Managing director of IMFA to show cause as to why criminal prosecution should not be initiated u/s 24 of the Act for violation of Regulation 6 10 of the 1994 Regulations, failing which SEBI would be constrained to initiate criminal prosecution and/or take any action as it thinks fit i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 1994 Regulations pertaining to acquisition of 4.97% shares by Mahameru and 3.83% shares by Shirish, which acquisitions had all been done before 20.2.1997, the date on which the 1994 Regulations were repealed. 46. According to the Appellant the impugned order is erroneous both on facts and in law, exposes non application of mind, is without jurisdiction, unsustainable and traverses well beyond the scope of the authority conferred on the Respondent under the Act and the Regulations, that the directions contained in the impugned order will result in an absurd situation which was neither concerned by the Regulations nor intended to be brought about under the SEBI Act, that the order is severely biased and is contrary to the principles of natural justice, that unless the findings are reversed, the Appellant, the Target Company and the investors would face irreparable harm and injury. Submissions on behalf of MDC: Shri C. A. Sundaram, learned Senior Counsel appearing for MDC made the following submissions: By the impugned order the Appellant, who does not personally hold any shares in his name in the Target Company, has been directed to disinvest shares along with persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Target Company's paid up capital were acquired by Galan subsidiaries from Vijay Mallya's Companies i.e. the party in control and management of the Target Company, which was, therefore, fully aware of the acquisition of such shares. The 10.91% shares acquired by IMFA, which according to SEBI was allegedly part of the same group, were registered by the Target Company on 31.5.1996, to the knowledge of the Target Company and its management, despite reservations expressed earlier by the Target Company that such acquisitions were in breach of the 1994 Regulations. Even the 4.97% shares lodged by Mahameru for registration, were registered. Neither the management nor any party in control ever made any complaint of not being aware of such acquisition or of the persons connected therewith. In fact, it is not even SEBI's case that the acquisitions were made through subterfuge or in a clandestine manner, so as to surprise the management of the Target Company, nor is there any allegation made by SEBI of any violation of the Takeover Regulations on this score. SEBI has also not charged the Appellant with any market manipulation or distortion. In fact, the 27.21% shares were pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no authority to impose penalties, but only to direct remedial and regulatory measures so as to prevent/correct a breach or to prevent or stop a distortion of the market. SEBI's own understanding of its powers and duties has always been not to straightaway penalize a person for acting in breach of the Takeover Regulations but to seek to correct or remedy the situation. The consistent practice of SEBI has been to direct remedial measures to be taken (like post facto public offers) rather than directing disinvestment of the acquired shares or such other measures. In fact even as on 06.08.2002, in the case of acquisition of shares in Ray Ban Sun Optics (formerly Bausch and Lomb, India) SEBI has directed a post facto public offer to be made, despite having come to a definite finding of the acquirer having created an artificial device with the clear purpose of circumventing the Takeover Regulations. In fact, neither the Impugned Order nor the Affidavit in Reply in this case filed before the Tribunal by SEBI claims that the directions were remedial or regulatory in nature, but instead are avowedly professed to be deterrent. Ipsi dixit of Counsel in course of arguments before the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of the 1994 Regulations (or Regulation 42(2) of the 1997 Regulations) or by taking recourse to Regulation 39 of the 1994 Regulations (or Regulation 44 of the 1997 Regulations), which would only be taken for the purpose of regulation or remedy. The two courses of action are mutually exclusive, i.e., if the due compliance direction under Regulation 37(2) is issued, then ipso facto directions under Regulation 39 would not be necessary. Again, the precondition to exercise of powers under Regulation 39 is that such exercise has to be in the interest of the securities market and has also to be demonstrably in such interest. 56. Although Regulation 44 of the 1997 Regulations does not expressly require the investigation culminating in a report to be a pre-condition for the exercise of powers thereunder, such pre-condition amounts to an inbuilt safeguard in favour of a person against whom directions are proposed to be issued for alleged violation of the Takeover Regulations. This amounts to a substantive right in such person and, therefore, while the savings clause in 47(2) of the 1997 Regulations may permit directions that would have been issued under Regulation 39 of the 1994 Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly relevant at the time of acquisition or at the time immediately prior to the acquisition. 60. In the instant case, the allegation that the Appellant acted in concert is primarily based on the post-acquisition declaration of 17.4.1997. It would appear from such declaration made under Regulation 6(3) and 8(2) of the 1997 Regulations, that MDC was supporting KRC in being vice-chairman of the Target Company with his control over the 47.48% shares, which could not have been made the basis of the SEBI proceedings. In both, the show cause notice dated 8.1.1999 and the Impugned Order, the IMFA acquisition of 10.91% is attacked on the basis of such acquisition being in addition to the shareholding aggregating to 27.21% shares already held by the Galan subsidiaries. The subsequent acquisition of 4.97% by Mahameru and 3.83% by Shirish are also clubbed together. In respect of IMFA shares, IMFA was the acquirer within the meaning of Regulation 2(1)(b) of the 1994 Regulations. In the matter of such acquisition the directors of IMFA could be said to be acting in concert with IMFA within the inclusive definition of Regulation 2(1)(d). Neither MDC nor Galan nor KRC fall within the inclusive d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncert in Mahameru and Shirish. However, such charge in respect of Mahameru and Shirish is irrelevant as nothing was done nor any action taken in respect of the acquisitions by Mahameru and Shirish, within the meaning of Regulation 47(2) of the 1997 Regulations. That is to say even if the Mahameru and Shirish acquisitions were in violation of the 1994 Regulations, by virtue of the repeal provision, such violation ceased to be actionable. Further, such acquisition which had been declared to SEBI by the Appellant's note dated 22.7.1997 were dealt with together with the acquisitions by IMFA and the directions dated 21.1.1998 took into account such acquisitions, amongst others. 64. On the question as to whether Chapter V of the 1994 Regulations was dispensable, the Appellant has submitted: There is no whisper either in the show cause notice or in the impugned order or even in the Respondent's Affidavit in Reply before the Tribunal that the provisions of chapter V were resorted to or complied with. Chapter V provides a protective mechanism. Chapter V of the 1994 Regulations was a substantive protection conferred on the person alleged to have violated the said provisions. SE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulation 47(2) of the 1997 Regulations and has no meaning since a study of the 1994 Regulations would not disclose any form of enquiry or any reference to an enquiry contemplated therein. This aspect was not placed before or considered by the Hon'ble High Court and in fact the Court made it clear that matters relating to SEBI's jurisdiction and power ought to be decided by SEBI and cannot be decided in the absence of SEBI. 67. Regulation 47(2) is a standard savings clause incorporated in the 1997 Regulations without realizing that no enquiry was contemplated under the 1994 Regulations. However, assuming that an enquiry had been initiated by the letter dated 9.6.1995 by SEBI to the Target Company, such enquiry culminated in the show cause notice dated 9.10.1996 to Mr. Ram Raheja, director of IMFA, when the acquisitions by IMFA has been made. Such notice, according to SEBI's admission in its Affidavit in Reply, was rightly not acted upon. 68. It was submitted, at the highest, that the enquiry was limited to the 38% shares referred to in the letter dated 9.6.1995. These 38% shares included the aggregate shareholding of 27.21% held by Galan subsidiaries and the 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or proceeded against, were in respect of administrative notings and not quasi-judicial notings. In any event, they were with regard to issues of contract being concluded where communication was of the essence; and of contempt of court as to whether a noting in a file disagreeing with a court order would amount to contempt. 71. The extraneous factors as stated in the submissions made for KRC came into play upon the Chairman passing the order of 21.1.1998 and directing the Appellant to make a public offer. The letter of the Appellant dated 20.1.1998 confirming his without prejudice agreement to make a public announcement was forwarded to the management of the Target Company under cover of SEBI's letter dated 3.2.1998 in the garb of an investor's complaint classifying the same as a complaint relating to non-receipt of rights forms/interest on delayed receipt of refund order. 72. In a flurry of activities, an eminent jurist sent a personal note to the Executive Director (Legal) of SEBI and interested persons forwarded legal opinion / views with an intention to materially alter the course of action that would flow pursuant to Chairman, SEBI's order dated 21.1.1998. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI in dealing with cases of contravention of the Takeover Regulations, to show that prior to the impugned order and even subsequent thereto, post facto public offers have been directed. In fact post facto public offers had been directed on the same day as the Impugned Order was passed, that for reasons beyond comprehension an exception was made in the case of the Appellant. 75. On the question whether the Creeping Acquisitions can be set aside as is the consequences of the impugned order the Appellant has submitted: Neither the show cause notice dated 8.1.1999 nor the impugned order in any manner alleged or found any violation of the 1997 Regulations in respect of the Creeping Acquisitions. All these acquisitions were made after the notification of the 1997 Regulations. Regulation 11 of the 1997 Regulations permitted the Creeping Acquisitions expressly within the ceiling prescribed. The prevailing ceiling on such acquisitions at the relevant time was initially two per cent of the Target Company's capital and was thereafter hiked to five per cent in any block of twelve calendar months. The Creeping Acquisitions were always within this limit. 76. However, since the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd documents that were before the Hon'ble Bombay High Court were the same facts and documents which were relied upon in the proceedings in the Tribunal. Therefore, even the findings of facts rendered by the Hon'ble High Court with respect of the said High Court Proceedings can be relied upon by SEBI and the Tribunal. 79. In terms of section 11(1) of the SEBI Act, subject to the provisions of the Act the Respondent is mandated to protect the interests of investors in securities and to promote the development of and to regulate the securities market by such measures as it thinks fit, that the provisions of section 11(1) are not restricted. Further, under section 11(2)(h) SEBI is required to take all necessary measures for regulating substantial acquisition of shares and takeover of companies, that under clause (i) of section 11(2) SEBI is empowered to call for information from, undertake inspections, conduct inquiries and audits of the stock exchanges, mutual funds, other persons associated with securities market, intermediaries and self regulatory organisations in the securities market. 80. Further, under section 11(B) of the SEBI Act SEBI is empowered to issue directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of such evidence to collect material from the parties such enquiry must be deemed to have commenced. SEBI had commenced inquiry when it issued the letter dated 9.6.95 to the Target Company seeking certain details. The inquiry was within the knowledge of KRC. Vide their letter dated 9.1.96 Advocates of KRC stated that Our client has come to know of an enquiry being made by you to HL relating to the shareholding of our client in HL by certain of his companies....... . Admittedly, In order to facilitate the said inquiry further submissions were made in the said letter. As no strict procedure is prescribed for inquiry under the SEBI Act or the Regulations in respect of substantial acquisition of shares and takeover of companies, the principles of natural justice is followed and the date of commencement of the inquiry would be the date on which SEBI took cognizance of the violations and proceeded in the matter to gather further information and evidence. The Hon'ble High Court of Bombay(DB) in Shirish has held the same. 84. On the interpretation of SEBI's 1994 Regulations, following submissions were made: As title to the said Regulations itself suggest the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which any person has an interest as director, fund manager, trustee, or as a shareholder having not less than 2% of the paid-up capital of that company. 88. For the purposes of this clause meaning of the expression associate has been explained to mean (A)Any relative of that person within the meaning of section 6 of the Companies Act, 1956;(1 of 1956) (B)The director or his relative whether individually or in aggregate holding more than 2% of the paid-up equity capital of such company. 89. First part of the definition appears to be an exclusive definition but the 2nd part i.e. after the word includes is an inclusive definition . The first part of the definition does not control the second part of the definition. So far as definition of associate is concerned, the word relative in cl. (B) is not restricted to relative as defined under Section 6 of the Companies Act, 1956 and as set out in cl. (A). By the Hon'ble Bombay High Court Judgment (DB) in Shirish it was inter alia held that the definition of acquirer includes persons acting in concert with him and the acquisitions by persons acting in concert with the acquirer will have to be considered as acquisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (iv) Beethoven Traders Pvt. Ltd, (v) Darrel Traders Pvt. Ltd and (vi) Stingray Traders Pvt. Ltd purchased 22,15,800 equity shares of HL representing 26% of the total equity share capital from four companies owned and controlled by Shri Vijay Mallya namely (i) M/s Enterprise Investment Ltd. (ii) M/s Endeavour investment Ltd, (iii) M/s United Breweries Ltd, (iv) M/s Vittal Investment Ltd. Airedale Investment and Trading Pvt. Ltd had also purchased 75,000 Fully Convertible Debentures from Vittal Investment Ltd, which were converted into 3,75,000 equity shares on 11.8.1995. Consequently the aggregate shareholding by the six companies in the Target Company increased from 26% to 27.21% with effect from 11.8.1995. It was sought to be contended that, in December 1993, Galan was a company fully owned and or controlled by KRC and that MDC had nothing to do with Galan and that a mistake had been made in letters addressed by KRC and MDC to SEBI and in the affidavit filed in the said High Court proceedings wherein it was wrongly stated that at the relevant time, KRC and his wife and daughters held 80% of the share capital of Galan and 20% of the share capital was held by MDC and his wife, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether its purchases were in violation of SEBI Regulations. On 21.5.1996, SEBI had intimated IMFA that IMFA had breached the Regulations and had called upon them to comply with the said Regulations. There were internal deliberations between IMFA and the Target Company relating to the reply that was to be given to SEBI's said letter dated 21..5.1996. Finally by letter dated 19.8.1996 IMFA replied to SEBI's aforesaid letter dated 21.5.1996 whereby IMFA had contended that 1994 Regulations did not apply to the said acquisition of shares by IMFA. It was further contended that assuming without admitting that IMFA was required to make any public offer to acquire 20% of the shares of the Target Company looking to the share holding of the Target Company, it would not be possible to acquire the said percentage and even if acquisition was made, the same would result in the public shareholding of the Target Company falling below the requisite minimum resulting in de-listing of the Target Company. On or about 22.11.1996, KRC sold 30% shares held by him in Galan to MDC'S wife as a result of which KRC through his wife and daughter held 50% shares in Galan whereas MDC and his wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Target Company. Funds for the aforesaid purchase were made available by MDC from his proprietary firm of M/s. Royal Wines. The said loans were supposed to be secured by issue of zero rated Fully Convertible Debentures. The said debentures were in fact never issued. The Appellants had claimed that the said loans were advanced on the evaluation of the capacity of the directors to repay the said loan and not on the basis of share capital or net worth of Mahameru. Promissory notes were also executed to secure the said loans. Though shares of the Target Company were purchased over a period of time they were lodged for registration at one time on 10.9.1996 and were registered on 26.9.1996. Mahameru had a share capital of ₹ 200/- only. The Appellants had claimed that since Mahameru could not repay the loans taken for purchase of the said shares, Mahameru sold its entire share capital of ₹ 200/- to MDC through his investment company Seven Star Investment Trading Company on 13.2.1997 and after Mahameru was taken over by MDC, the said Promissory notes were returned duly cancelled. From the aforesaid facts, it is clear that purchase of shares through Mahameru through loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided by KRC/MDC through their concerns and companies. The alleged FCDs were never issued and even the promissory notes were cancelled and returned after the takeover of IMFA, Mahameru and Shirish. 96. On Creeping Acquisitions the Respondent has submitted that certain further acquisitions of shares of the Target Company were made by KRC and MDC in concert with each other through their investment companies under the guise that these were Creeping Acquisitions permitted under the provisions of the Companies Act and SEBI Regulations and was therefore valid and unimpeachable and that no order could be passed by SEBI calling for disinvestment of those shares. Under regulation 11(1) of the 1997 Regulations (as applicable prior to 28.10.1998) an acquirer who together with persons acting in concert with him, has acquired, in accordance with the provisions of law,10% or more but less then 51% of the shares or voting rights in a company could acquire, through Creeping Acquisition, upto 2% of the voting rights in any period of 12 months. Since the entire purchase of KRC and MDC i.e. initial 27.21% by the six companies owned and controlled by KRC/MDC and 10.91% by IMFA and 4.97% by Mahameru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it is sufficient after having regard to the relation, conduct and common intention to infer that persons must be acting together. Evidence of actual concerted acting is normally difficult to obtain and is not insisted upon. In M/s McDowell Co. V/s Commercial Tax Officer (AIR 1986 S.C. 649) the Hon'ble Supreme Court has inter alia, held that the proper way to construe a statute while considering a device is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the Statute, but whether the transaction is a device to avoid the provisions contained in the Statute and whether the transaction is such that the judicial process may accord its approval to it. The Hon'ble Court also held that colourable devices cannot form part of avoidance of the provisions of a statute. 99. On the repeal saving/regulation 47 of 1997 Regulations the Respondent made the following submissions: Regulation 47(2) provides that notwithstanding such repeal anything done or any action taken or purported to have been done or taken including approval or letter of offer, exemption granted, fees collected any a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the 1997 Regulation. 102. On the contention that SEBI could not have exercised powers under Regulation 44 of the 1997 Regulations without complying with the provisions of Regulations 33 to 37 of the 1994 Regulations, the Respondent submitted that since the facts relating to acquisition were not disputed either by KRC or MDC the question of SEBI initiating investigation under regulations 33 and 34 and then acting on the basis of any such investigation report under Regulation 35 to 37 does not arise. 103. The Tribunal has in Rhodia's case held, that exercise of powers under regulation 44 are not relatable or confined to evidence of any investigation under provisions of Regulation 33 to 37 of 1997 Regulations. SEBI is empowered to exercise powers under Regulation 44 read with section 11B of the SEBI Act to pass the impugned directions. 104. The contentions of the Learned Counsel of Appellants that the Appellants' case was covered under regulation 42(2) of the 1997 Regulations are not correct. The provisions of 42(2) apply in case of investigations under regulation 38 of the 1997 Regulations. In the instant case the action has been initiated and taken under sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d been communicated by KRC to MDC who was present at the said meeting there was no need to seek any confirmation from SEBI. This itself clearly shows that at the relevant time, neither KRC nor MDC considered the discussions held with Chairman on 31.12.1997 by KRC on behalf of MDC. In the meantime, SEBI by its letter dated 24.3.1998 had called upon MDC to furnish various details as set out therein. MDC by its letter dated 2.4.1998 referred to its earlier letter dated 20.1.1998 and 16.3.1998 and complained that inspite of having agreed to make an open offer, he had received letter dated 24.3.1998 from SEBI asking him to furnish various details as set out therein. In the said letter he had further stated that he hoped that he would be asked to make open offer. From the said letter it is clear that MDC as late as on 2.4.1998 did not believe that any order has been passed by the Chairman at the meeting held on 31.12.1997 or that the file noting made by the Chairman on 21.1.1998 was an order passed by SEBI. The stand now being taken by KRC and MDC to the effect that there was an order passed by SEBI's Chairman on 31.12.1997 and the same was recorded on the file on 21.1.1998 and which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to SEBI on 22.11.98. Thus, the unilateral offer made by him on 20.01.98 was withdrawn by him on 22.11.98, alleged on the basis of non-confirmation by SEBI...... . MDC was required to comply with the provisions of the Regulations which do not require SEBI to give any alleged confirmation. The notation was not an order of SEBI. In any event, without prejudice to the aforesaid, notation on the file is not an order. In State of Bihar V/s Kripula Shankar ( 1987 (3) S.C.C 34) the Hon'ble Supreme Court inter alia, held that notings in a note file, not only of officers but even of a minister will not constitute an order to affect others unless it is done in accordance with Article 166(1) (2) and communicated to the persons concerned. In Sultan Singh V/s State of Haryana (1996 (2) S.C C 66) the Hon'ble Supreme Court has inter alia held that an administrative order is not a quasi Judicial order and is based on subjective satisfaction of the Government and there is no list involved. Thereby there is no need to issue any notice before making a reference or refusing to make a reference. 107. The Respondent submitted that the directions issued under Regulation 39 of 1994 Regulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el. In these cases the facts are different. The Appellants' case is not that of change in control or international restructuring or non applicability of exemption provisions. Further, the orders in all the cases are based on the facts and circumstances of individual cases and directions suitable to the facts of each case are passed. In certain cases, of violations of 1997 Regulations, the Respondent has ruled that the open offer was not in the public interest e.g. Bharat Gears Ltd. and Shakti Sugars Ltd. In these cases none of the rights of the shareholders was prejudiced in any manner and it was felt that the interest of the shareholders would not be served by directing the acquirers to make public offer. 110. Countering the Appellants' submission that the impugned orders are 'penal' as the word 'deterrence' has been used in para 10.1 thereof it was submitted that the word 'deter' does not suggest penalty, that the word 'deter' means 'discourage' or 'prevent' (reference Oxford Dictionary). Deterrence would accordingly mean 'prevention' or 'discouragement', that 'deterrence' means the act or process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en rupees per share are required to be sold in the open market in one go. The Respondent has also directed to initiate adjudication proceedings against the Appellants under section 15A of the SEBI Act for violation of regulation 6 and 8 of the 1997 Regulations and also under section 15H for violation of regulation 10 of the 1994 Regulations. 111. The quantum of shares acquired, and the period in which the acquisitions were made are not under dispute. These acquisitions can be safely grouped broadly under three heads, with reference to the date of acquisitions i.e. (i) prior to notification of the 1994 Regulations (ii) during the currency of the 1994 Regulations and (iii) after the repeal of the 1994 Regulations - i.e. during the currency of the 1997 Regulations. Pre 1994 Regulation acquisitions: Admittedly, on 14.12.1993 six subsidiaries of Galan purchased 26% shares (22,15,800 shares) of the Target Company through negotiations from the entities stated to be belonging to Shri Vijay Mallya, who is stated to be the principal promoter of the Target Company. It is noticed that none of these six companies individually purchased shares accounting 5% or more of the Tar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arget Company between 10.9.98 and 19.9.98. iii Darrel Traders P. Ltd. purchased 25,800 shares representing 0.27% of the paid up capital of the Target Company on 16.12.1998. 113. Thus it is noticed that 27.21% shares were acquired prior to the notification of the 1994 Regulations, 19.71% shares during the currency of the 1994 Regulations and 2.14% shares during the currency of the 1997 Regulations. 114. As stated earlier acquisition of subject shares made during the currency of the 1994 Regulations and the 1997 Regulations was challenged in suit No.3910 of 1997 in the Hon'ble Bombay High Court by some shareholders of the Target Company. It is noted that acquisition of 27.21% shares made prior to the coming into force of the 1994 Regulations was not the subject matter of the said suit. 115. Having noticed the brief background of the case, it is considered necessary to refer to the regulatory provisions relevant to the case, before proceeding further. 116. Clauses 40A and 40B stated to have been violated by the Appellants are as follows: 40A. Substantial acquisition of securities. -- The company agrees that the following shall also be the conditions for continued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r other members who, by virtue of their shareholdings together with the shareholding of their relatives, nominees, family interest and group, control or manage the company, or (3) If the offer is made by a person other than the ultimate offeror, the identity of such other person shall be disclosed at the outset in the public announcement as also in the notification to the stock exchange. (4) The offer shall be placed, in the first instance, before the board of directors of the offeree company and shall contain the following particulars, namely:-- a detailed term of offer, b identity of the offeror, c details of offeror's existing holding in the offeree company, d all conditions to which the offer is subject, and e confirmation by the auditors of the offeror that resources available to the offeror are sufficient to satisfy full acceptance of the offer. (5) All the above information shall be made equally available to all the shareholders (both of the offeror company and the offeree company) at the same time and in the same manner, along with copies of all documents and announcements bearing in offer which shall simultaneously be lodged with SEBI. (6) (a) The offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bscription for securities, or c sell, dispose of or acquire or agree to sell, dispose of or acquire, assets of a substantial amount. (13) Notwithstanding anything contained in clause 40A and clause 40B above, nothing shall apply to acquisition of securities in the company by - 1 Unit Trust of India 2 SBI Capital Market Ltd. 3 Canbank Financial Services Ltd., 4 LIC mutual funds 5 Such other agencies or mutual funds as may be specified by SEBI from time to time. 6 In pursuance to orders of amalgamations, mergers and acquisitions passed by the court under sections 391 and 394 of the Companies Act. 7 In pursuance to orders passed by the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985. (14) The provisions contained in this clause will be without prejudice to the approval required to be obtained under the Companies Act, the Monopolies and Restrictive Trade Practices Act and the Foreign Exchange (Regulation) Act, 1973. 117. It was in April, 1984, for the first time certain restrictions were imposed on the transfer of shares involving substantial quantum of shares through the Listing Agreement by inserting therein a new clause number 40. In Apr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty not exceeding one lakh and fifty thousand rupees for each such failure b to file any return or furnish any information, books or other documents, within the time specified therefore in the regulations, fails to file return or furnish the same within the time specified therefore in the regulations, he shall be liable to a penalty not exceeding five thousand rupees for every day during which such failure continues. c to maintain books of account or records, fails to maintain the same, he shall be liable to a penalty not exceeding ten thousand rupees for every day during which the failure continues. 120. 15H. If any person, who is required under this Act or any rules or regulations made thereunder, fails to, - i disclose the aggregate of his share holding in the body corporate before he acquires any shares of that body corporate; or ii make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakh rupees. 121. Section 15K provides for establishment of one or more Appellate Tribunals to exercise the jurisdic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and takeovers. The committee viewed that instead there should be a set of General Principles which should guide the interpretation and operation of the Regulations especially in circumstances which are not explicitly covered by the Regulations. Equality of treatment and opportunity to all the shareholders and Protection of interests of shareholders are two such principles amongst others set out by the committee. According to the committee in the event of any ambiguity or doubt as to the interpretation of the regulation, the concerned authority shall pay adequate attention to and be guided by any one or more of the aforesaid general principles having a bearing on the matter. 125. After taking into consideration the recommendations of the committee the 1997 Regulations was brought in position with effect from 20.2.1997, repealing the then existing 1994 Regulations. 126. From the scheme of the Regulations and the background of the same it is clear that it is a piece of beneficial legislation directed to protect the interests of shareholders in the context of substantial acquisition of shares and takeovers. It is noted that SEBI, the enforcement authority is also mandate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which, when taken together with his existing shareholdings would carry more than ten per cent of the voting rights, unless, the acquirer makes a public announcement to acquire shares at a minimum offer price from the other shareholders of the company in accordance with these regulations, or (2) Any acquirer who on the date of commencement of these regulations, holds shares in a company which carry more than ten per cent of the voting rights in the capital of the company, shall not acquire any further shares through negotiations unless, the acquirer makes a public announcement to acquire shares at a minimum offer price from the other shareholders of the company in accordance with these regulations (3) Where an acquirer acquires securities which would entitle him more than ten per cent of the voting rights together with voting rights on shares already held by him, then, such person shall make a public announcement referred to in sub-regulation (1) at the time immediately before his entitlement to obtain voting rights on such securities. Regulation 10. Acquisition of 10% or more of the shares of any company through open market purchases.- (1) An acquirer, who holds share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority shall, as soon as may be possible submit an investigation report to the Board. Regulation 37. Communication of findings, etc - (1) The Board shall after consideration of the investigation report communicate the findings to the person concerned to give him an opportunity of being heard before any action is taken by the Board on the findings of the investigating authority. (2) On receipt of the explanation, if any, from the person concerned, the Board may call upon the person concerned to take such measures as the Board may deem fit in the interest of the securities market and for due compliance with the provisions of the Act, rules and regulations. Regulation 39. Directions by the Board. - On receipt of the report under regulation 36, the Board may without prejudice to its right to initiate criminal prosecution under section 24 of the Act give such directions as it deems fit for all or any of the purposes namely:- a directing the person concerned not to further deal in securities b prohibiting the person concerned from disposing of any of the securities acquired in violation of these regulations. c directing the person concerned to sell the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under regulation 38, the Board shall give not less than 10 days notice to the acquirer, the seller, the target company, the merchant banker, as the case may be. (2) Notwithstanding anything contained in sub-regulation (1), where the Board is satisfied that in the interest of the investors no such notice should be given, it may, by an order in writing direct that such investigation be taken up without such notice. (3) During the course of an investigation, the acquirer, the seller, the target company, the merchant banker, against whom the investigation is being carried out shall be bound to discharge his obligation as provided in regulation 40. Regulation 41. Submission of report to the Board: The investigating officer shall, as soon as possible, on completion of the investigation submit a report to the Board: Provided that if directed to do so by the Board, he may submit interim reports. Regulation 42. Communication of findings: (1) The Board shall, after consideration of the investigation report referred to in regulation 41, communicate the findings of the investigating officer to the acquirer, the seller, the target company, the merchant banker, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ublic offer and the merchant banker engaged by the target company for independent advice would be liable for action in terms of the regulations and the Act. (6)The penalties referred to in sub-regulations (1) to (5) may include:- (a) criminal prosecution under section 24 of the Act; (b) monetary penalties under section 15H of the Act; (c) directions under the provisions of section 11B of the Act. Regulation 47. Repeal and saving : (1) The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 are hereby repealed. (2)Notwithstanding such repeal - (a) anything done or any action taken or purported to have been done or taken including approval of letter of offer, exemption granted, fees collected, any adjudication, enquiry or investigation commenced or show-cause notice issued under the said regulations shall be deemed to have been done or taken under the corresponding provisions of these regulations; (b) any application made to the Board under the said regulations and pending before it shall be deemed to have been made under the corresponding provisions of these regulations; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was also pointed out that even if it is assumed that in December 1993, KRC owned and controlled Galan, MDC and Shri Ram Raheja both related to KRC, along with KRC were directors of Galan in December 1993 and at all relevant times and thus KRC and MDC were aware that the purchase of shares and debentures made by Galan would trigger the requirement of clauses 40A and 40B of the Listing Agreement. 130. Countering the Appellants' contention that SEBI has no authority to issue any such direction under the Act or the Regulations to the Appellants to divest the shares acquired prior to the notification of the 1994 Regulations, the Respondent had submitted that Section 11 and 11B vest in SEBI the requisite authority and jurisdiction to deal with acquisition of shares made in contravention of the provisions of the 1994 Regulations even if the acquisition was made before the notification of the said Regulations, violating clauses 40A and 40B of the Listing Agreement, that these clauses have recognised SEBI's role in regulating substantial acquisition of shares. According to the Respondent since section 11(2) (h) empowers SEBI to take measures to regulate substantial acquisitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquirer itself is also a listed company. According to them there was no law prescribing any penalty of the nature inflicted by SEBI vide the impugned order, that SEBI cannot purport to invoke the general provisions of section 11 and 11B of the SEBI Act since any breach of Listing Agreement could be actionable only under SCRA and not under SEBI Act, that there is no quarrel on the proposition that when Regulations are not framed, the Act is applicable, that the said proposition relying on the decision in 1985 (2) SCC 16 and 1986 (4) SCC is not relevant as the Listing Agreement being a subject matter of the SCRA and SEBI having been a delegatee to exercise the powers of the Central Government under the said Act cannot resort to directions or penalties for the alleged violation of the Agreement. 133. It is an admitted fact that Galan subsidiaries acquired 27.21% shares of the Target Company before the notification of the 1994 Regulations. Though the Appellants claimed that Galan was wholly owned and controlled by KRC even if one goes by the shareholding pattern of the said company as per the Respondent's version it is difficult to come to a conclusion that Galan was owned and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading in securities in the stock exchanges. According to the preamble of the said Act, it is an act to prevent undesirable transactions in securities by regulating the business of dealing therein by providing for certain other matters connected therewith. SEBI Act has no overriding effect on the SCRA, as is clear from section 32 of the SEBI Act. Section 32 makes it clear that the provisions of the Act are in addition to and not in derogation of, the provisions of any other law. Till January 25, 1995 the SCRA did not contain any provision in relation to Listing Agreement. By the Securities Laws (Amendment) Ordinance 1995, Section 21 was amended providing that Where securities are listed on the application of any person in any recognised stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange . The object of the said provision as stated in the Statement of objects and Reasons is to make violation of the listing agreement an offence . In terms of section 23(2) of SCRA any person who fails to comply with the provisions of section 21 is liable to prosecution and shall be punishable with fine upto one thousand rupees. It is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst such a person who fails to fulfill the obligation. Because any person other than listed companies is out of reach for the purpose of enforcing the requirement of the clauses. It is in the said context the scope and reach of clauses 40A and 40B need be interpreted. On a purposive interpretation of the said clauses, it is difficult to subscribe to the Respondent's version that the clauses are applicable not only to listed companies but also to other persons. There is no scope for providing such an obligation in clause B, without a corresponding provision to enforce the same. As I stated earlier, for the failure to fulfill the obligation to make a public offer, consequences have been provided that would visit only listed companies. It can not be that for failure to fulfill the obligation by listed companies they can be punished but for such failure others can not be punished. It is also noted that it was for continued listing the company had agreed to the conditions put in the clauses A B. Therefore, in my view, obligation to comply with the requirements of Clauses 40A and 40B is fastened only on listed companies and on none else. In the instant case it is not SEBI's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oming under the purview of SCRA. The allegation is that in acquiring 27.21% Galan subsidiaries breached the Listing Agreement. Listing Agreement is in the domain of SCRA, for breach of the same, applicable provisions of SCRA are to be resorted to and not the provisions of SEBI Act. It is also noted that section 11B was brought on the Statute Book only with effect from 25.1.1995. It has no retrospective application. It is seen that the 1994 Regulation was put in position on 7.11.94. Powers under the said regulation have no retrospective application. Further in terms of regulation 39(c) direction can be issued to sell the shares acquired in violation of the 1994 Regulations. Regulation specifically says directing the persons concerned to sell the shares acquired in violation of these regulations. Reference to these regulations is to 1994 Regulations. In fact the said regulation was not even in existence at the time when Galan subsidiaries acquired the shares. It is also not SEBI's case that 27.21% shares of the Target Company was acquired in violation of the 1994 Regulations. 136. In para 12.9 of the impugned order there is an affirmative finding that MDC and KRC have con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. 137. In the light of the factual and legal position as discussed above I am of the view that the Respondent has no jurisdiction or authority to direct the Appellants to disinvest 27.21% shares of the Target Company acquired by KRC in December, 1993. 138. SEBI's order is not confined only to the acquisition of 27.21% shares by Galan subsidiaries. In the impugned order it has been alleged that the Appellants through IMFA, Mahameru and Shirish had acquired 10.91%, 4.97% and 3.83% of the shares in the equity capital of the Target Company during the currency of the 1994 Regulations without complying with the provisions of regulation 10. In this context the detailed factual position relating to the said acquisition, based on which SEBI has reached the conclusion need be considered, as the same has a bearing on the alleged concerted action. IMFA acquired 10,39,341 (10.91%) shares of the Target Company in separate lots at different times from the open market between 27.10.1994 to 22.11.1994. IMFA's paid up capital was ₹ 4,00,200/-. 99.95% of the paid up capital of IMFA at that point of time was held by Shri Ram Raheja. Shri Imtiaz Kheyrolla a close associate of KRC a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wines) to the tune of ₹ 1.12 crores. Mrs. A. M. Kakade and Shri Sanjay Masand became directors of Mahameru on 2.9.96 Mrs. Kakade is the wife of M. G. Kakade, who was director of Darrel and Stingray, the subsidiaries of Galan. Since Mahameru was stated to be not in a position to repay the loan, its entire share capital with its holding of 4,73,100 shares of the Target Company were sold to Seven Star on 13.2.1997. In this case also zero rated unsecured fully convertible debentures were purported to have been issued by Mahameru. But there is nothing on record to show that the debentures were ever issued. 140. Shirish acquired 3,64,750 shares (3.83%) of the Target Company between 27.8.1996 to 13.2.1997. This company was incorporated on 19.8.1996. Shirish's paid up capital was also just two hundred rupees. The entire share capital was held by Shri S. J. Chhabria and his wife. Shri S. J. Chhabria, was a director of Shirish, Airedale, Beethoven, Veneer and Algid. He is also stated to be related to KRC being his cousin and related to MDC being his nephew. A sum of ₹ 1.35 crores was borrowed by promoters of Shirish as interest free loan through Seven Star. On 13.2.1997 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulations was attracted, and as regards acquisition of 4,73,100 (4.97%) shares through Mahameru which was made during 14.11.1995 to 28.10.1996 and 3,64,750 (3.83%) shares through Shirish during 27.8.1996 to 13.2.1997 was clearly in violation of regulation 10(2) of the 1994 Regulations. 143. Details of ownership and control of Galan companies through which KRC acquired 27.21% shares of the Target company on 14.12.1993 have already been stated in the earlier part of this order and interconnection of some of the Galan subsidiaries with the management of IMFA, Mahameru and Shirish is also available from the facts stated earlier. It is in the light of the factual background as explained, one has to see as to whether the acquisition of shares through IMFA, Mahameru and Shirish attracted the provisions of regulation 10(2). 144. Regulation 10(2)prohibited any acquirer who on the date of commencement of the regulations, held shares in a company which carried more than ten per cent of the voting rights in the capital of the company, from acquiring any further shares from open market unless, the acquirer makes a public announcement to acquire shares in accordance with the regulations. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statute-maker, provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With those glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place . 146. In Kanwar Singh V Delhi Administration (1965) 1 SCR 7 Hon'ble Supreme Court had held that It is the duty of the Court in construing a statute to give effect to the intention of the Legislature. If, therefore, giving a literal meaning to a word used by the draftsman, particularly in a penal statute woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting shareholder of the target company and that in support of the said proposition, this Tribunal's decision in Fascinating Leasing Finance Private Ltd. V SEBI [(1998) 17 SCL 204)] was cited. An argument was advanced that in terms of regulation 3(d) acquisition of shares in companies whose shares are not listed on any stock exchange did not attract the provisions of regulation 10, that if a person acquired shares of an unlisted company, which was already holding more than 10% shares in a listed company, then such person is not required to comply with regulation in view of the specific exemption provided in regulation 3(d). In support, the Appellants had cited the view held by SEBI in its order in the case of Sesa Goa that indirect acquisition does not attract the requirements of public offer as provided in regulation 10, 11 etc. 149. Hon'ble Bombay High Court (DB) while deciding the appeal filed by Shirish (supra) had interpreted the scope of and reach the said concepts and the sections, as follows: 68. From the authorities cited at the bar, it is quite apparent that under the Companies Act, the words member shareholder and holder of a share are used as syno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and one who is not. The object of the Regulations is to bring about transparency in the dealing of securities and also to enable the existing shareholders to take informed decision to accept or not to accept the public offer that may be made by a person who seeks to acquire substantial shares in the company. There appears no rational basis for distinction between an acquirer who is an existing shareholder and an acquirer who is not, since the regulatory measures are designed primarily to regulate substantial acquisition of shares by any acquirer, not necessarily a member of the company. We, therefore, hold that the words an acquirer who holds shares carrying 10 per cent or less of voting rights must include an acquirer whose holding in a company may be NIL. Less than 10 per cent of the voting rights must include NIL shareholding in the context of regulations 9 and 10 of the Regulations. Any other interpretation would completely defeat the provisions of the regulations as it would permit a person who does not hold shares in the company to acquire substantial shares in a company without having to give a public notice, and without making an offer as contemplated by the regulations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same set of facts, therefore is in equal force are applicable to the instant case. 154. It is felt that for a better understanding of the decision of the Hon'ble Court in this regard the arguments advanced by the parties need also be noted. A gist of the arguments made for the parties has been stated in the order itself preceding the decision, as follows: 74 It is true that in view of regulation 3(d), Chapter III of the regulations does not apply to acquisition of shares in companies whose shares are not listed on any stock exchange. Defendant Nos.3 to 5 companies(IMFA, Mahameru and Shirish) undoubtedly, are companies whose shares were not listed on any stock exchange. It would, therefore, follow that, if without anything else, the shares of these companies were acquired by the defendant No.11, (MDC) the acquisition of these companies by him may not come within the purview of regulation 10. But the facts of the case give a different picture altogether. It was not as if defendant Nos. 3 to 5 had acquired the shares of Herbertsons Ltd., on their own. These companies were controlled by persons known to defendant Nos. 1(KRC) and 11, and in fact, related to them though not w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stui, Early Guard and Finco are persons acting in concert under the Regulations, the fact remains that no shares of Sesa Goa have been acquired either by Finco, Mitsui, or Early Guard. Sesa Goa is the company which is said to have been taken over. However, this change in control, if at all, has taken place without acquiring any shares. Even if interpretation of the petitioner is accepted, the provisions of the Regulations dealing with substantial acquisition of shares could not be applicable in the facts of the case. It is worth mentioning that the Regulation does not have any concept of change in control of management requiring public offer. Therefore the question of violation of Regulations does not arise. It may be mentioned that these Regulations have now been repealed by SEBI and new Regulations have been notified on February 20, 1997. Only in the new Regulations, the concept of control triggering off public offer been introduced. 155. So far as the instant case is concerned, the acquisition of shares of Herbertsons Ltd., defendant No.12, took place while the 1994 Regulations were in force. The decision of the SEBI and the appellate authority in Sesa Goa must, therefore, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of this case, if it is held that the Defendants were acting in concert with each other, each one of them must be deemed to be an acquirer, and the question of direct or indirect acquisition doest not arise. 159. Relying upon the judgment of the Supreme Court in Md. Quasim Larry v. Muhammad Samsuddin AIR 1964 SC 1699, Mr. Nariman submitted that in the 1997 Regulations, there are at least three matters in regard to which the regulations are merely clarificatory and declaratory. In this regard, he referred to - (i) definition of 'acquirer' which has been defined to mean any person who directly or indirectly acquires 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; (ii) regulation 3 (1) (k) makes it explicit what was implicit in regulation 3 of 1994 Regulations by providing that the exemption under clause (k) (acquisition of shares in unlisted companies) shall not be applicable if, by virtue of acquisition or change of control of any unlisted company, the acquirer acquires shares or voting rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective to pruchase shares in a company, they can not be said to have acted in concert with each other unless the shares are acquired in their joint names or by each of them during the period in question. Such an intepretation would completely defeat the very purpose of the regulations as it would amount to saying that unless the name of a person appears as a member, he cannot be said to have acted in concert with the other. In our view, concerted action must relate to their action to acquire shares. If one provides the fund and the other acquires the shares in his name, it must be held that they have acted in concert to acquire the shares and in view of the definition of acquirer in the 1994 Regulations, both are considered to be acquirers. It does not matter who is shown as the purchaser of the shares. In the light of the said view, one has to be see that whether in the light of the facts and circumsmtances of the case, KRC and MDC can be considered to have acted in concert and acquired the shares. (emphasis supplied) 163. It is not in dispute that on 14.12.1993 KRC through Galan subsidiaries had acquired 27.21% shares of the Target Company. However, MDC's role in this acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that change it is not possible to make any inference and hold MDC an acquirer or as a person acted in concert with KRC with reference to acquisition of 27.21% shares of the Target Company on 14.12.1993. But in the light of the subsequent development whether KRC can be considered to have acted in concert with MDC in the acquisition of the shares of the Target Company, made during the currency of the 1994 Regulations is a matter to be considered in the light of the facts then prevailed. In this context, it is felt that it is also necessary to have a look at the ownership and controlling pattern of the companies including Galan, in whose name the shares were purchased. 164. On 14.12.1993, i.e. on the date of acquisition of shares by Galan subsidiaries, Galan's paid up capital was ₹ 200/- comprising two shares of ₹ 100/- each of which one share each was held by KRC and his wife Mrs. B. K. Chhabria. On 29.3.1995 Galan further issued 498 shares. Thes shares were allotted as under: Sr.No. Name of the Allottee No. of Percentage Shares of paid up capital 1. Ms. Resham K. Chhabria 50 10% (d/o. KRC) (2) Mrs. Nisha K. Chhabria 50 10% (d/o KRC) (3) MDC 50 10% (4) Mrs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eer and Airdale holding one share each, Algid has two shareholders viz. Mozzarat and Veneer holding one share each and Airdale has two shareholders viz. Yadeer and Beethoven holding one share each. It all Appears to be a consciously structured set up. As I stated earlier, since the extent of compliance of clauses 40A and 40B of the Listing Agreement is not taken up for scrutiny by me in this appeal proceedings, for the reasons already stated, I do not propose to go further into the matters which are extraneous to the issues under consideration. 166. IMFA acquired 10,39,341 shares (10.91%) of the Target Company in separate lots at different times from the open market between 27.12.1994 and 21.11.1995. 99.95% share of IMFA during the said period was held in the name of Shri Ram Raheja. Shri Ram Raheja as noted earlier is KRC's wife's sister's husband. It is to be noted that the same Raheja was also a director of Galan, the ultimate holding company of six subsidiaries who purchased 27.21% shares of the Target Company on 14.12.1993. Shri Imtiaz Kheyrolla, stated to be a close associate of KRC (KRC has not disputed this association) and his wife held 10 shares each. Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible inference in that context is that it did not matter for KRC, as MDC his uncle was the acquirer and their interest was common. In my view, IMFA was only a front company, a name lender, that the real acquirer was MDC and KRC. In this context the following observation made by the Hon'ble Bombay High Court in Shirish need be noted that - Concerted action must relate to their effort to acquire shares. If one provides the funds and the other acquires the shares in his name, it must be held that they have acted in concert to acquire the shares. In my view in the light of the facts and circumstances, acquisition of 10.91% shares, through the name of IMFA, was a concerted action of MDC and KRC. 167. Identical pattern of strategy is noticed in the acquisition of shares of the Target Company by Mahameru and Shirish and their takeover by MDC. Mahameru is a private limited company with a paid up capital of two hundred rupees with two shareholders. 4,73,100 shares (4.97%) were purchased in the name of Mahameru during the period 14.11.1995 to 10.8.1996. In this case also MDC through its proprietary concern Royal Wines advanced 1.12 crores to Mahameru. On 13.2.1997 MDC through Seve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry reason to believe that IMFA, Mahameru and Shirish were only front companies put up by the Appellants to acquire shares of the Target Company, perhaps hoping that acquisition of shares separately by these three companies would not attract the provisions of the 1994 Regulations. Otherwise, there seems to be no other reason to resort to such a strategy. The capital size of these companies and their standing, in the normal course would not have encouraged any person to advance such huge amounts, that too without obtaining sufficient tangible securities as back up. It is also noted that these three companies were takeover shortly after the acquisition of the shares of the Target Company by them. It is also noted that these companies did not make any attempt to dispose of the 'their holding ' in the target company and meet their liabilities, as the Target Company's shares, at that point of time were stated to be traded at a very good price. It is also noted that the purchase of shares by Mahameru and Shirish was capped below 5%, obviously to avoid certain reporting requirements under the Regulations. The speed with which these 3 companies were taken over by MDC appears to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. Explanation: For the purposes of this clause associate , means,-- A any relative of that person within the meaning of section 6 of the Companies Act, B the director or his relative whether individually or in aggregate holding more than 2% of the paid up equity capital of such company; 172. As Bhagwati Committee stated persons acting in concert have particular relevance to public offers, for often an acquirer can acquire shares or voting rights in a company 'in concert' with any other person in a manner that the acquisitions made by him remain below the threshhold limit, though taken together with the voting rights of persons acting in concert, the threshhold limit may well be exceeded. To be acting in concert with an acquirer, persons must fulfil certain tests. They must have commonality of objectives and a community of interests which could be acquisition of shares or voting rights beyond the threshhold limit, and their act of acquiring the shares or voting rights in a company must serve this common objective. Implicit in the concert action of these persons must be an element of co-operation. This co-operation could be extended in several ways, directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sum of ₹ 4.13 crores was made available to Imfa Holdings P. Ltd by M.D. Chhabria, the defendant No.11 through his proprietary concern, Royal Wines, and the said amount was utilised for the acquisition of the shares. Mr. Nariman referred to the note of the defendant No.11 to the SEBI dated 22-7-1997 and affidavit of the defendant No.11 dated 21-12-1998. In this manner, a sum of ₹ 1.31 crores coming from the companies under the control of K.R. Chhabria, the defendant No.1 and a sum of ₹ 4.13 crores coming through the proprietary concern or defendant No.11 were advanced by way of interest-free loans to Imfa Holdings P. Ltd., without any specified period of repayment and without any security. As noticed earlier, the fully secured debentures were in fact never issued. The shares so acquired were registered in the name of Imfa Holdings P. Ltd. The share capital of Imfa Holdings P. Ltd., was only ₹ 4,00,200. The defendant No.11, M.D. Chhabria, acquired the entire shareholding of Imfa Holdings P. Ltd., through Seven Star Investments Trading P. Ltd., on 29-7-1996, and thereby he got control over 10.91 per cent shareholding of Herbertsons Ltd. This was ostensibly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t company. Mr. Nariman is, therefore, right submitting that in the facts of this case, regulation 10(2) was attracted. The course adopted by the defendant Nos. 1 and 11 leaves no room for doubt that they were acting in concert, and through unlisted companies, who hardly had a share capital base, and which were managed by persons related to known to them. They provided funds to those companies to acquire the shares of Herbertsons Ltd., and in all three cases, the companies were unable to repay the loans and, therefore, the defendant No.11 took over those companies. The identical nature of transactions and the events that followed, prima facie established that the defendant Nos. 1 and 11 along with the defendant Nos. 3, 4 and 5 were acting pursuant to a plan and that the similarity of events was not accidental. Funds were advanced to all the three companies for the purchase of shares of Herbertsons Ltd., and all the three companies failed to repay with the result that they were taken over by the defendant No.11. In all the three cases, there is hardly anything to suggest that apart from major investments in the shares of Herbertsons Ltd., those companies invested any sizeable amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the books of account and the balance sheets of the respective companies. As advised by the experts, the funds had been secured by execution of promissory notes and FCDs. If the three companies, the defendant Nos. 3, 4 and 5 i.e. IMFA, Mahameru, and Shirish, were used by the defendant No.11, M.D. Chhabria, as instruments to acquire the shares of Herbertsons Ltd., there was no reason for him to take over control of these three unlisted companies because, it would have been wiser for him to leave those three companies in the hands of the erstwhile management who would have acted on his directions. The extent of the share capital of these three companies was irrelevant because in the case of an investment company, the strength of the company lies in the persons behind the company and their solvency. Obviously, an investment company may not have substantial assets. He, therefore, submitted that the transaction was transparent, and there was no evidence on record to conclude or suspect even remotely that the acquisition of the defendant Nos. 3 to 5 companies were not real, or not on their own behalf that they were actually acting in concert with anyone when the acquisition of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal of the Notices of Motion. The material on record does establish a prima facie case of defendant Nos. 1 to 11 having acted in concert with each other in the acquisition of substantial shares of Herbertsons Ltd., (defendant No.12) in breach of the Regulation of 1994. 179. The Appellants had argued at length to establish that MDC, KRC etc. are not relatives in terms of section 6 of the Companies Act and as such their share holding can not be taken together. As stated earlier, I do not consider that it is the relationship that decides as to whether the persons acted in concert. KRC's interest in MDC has been admitted by KRC himself as could be seen from the Board Resolution dated 30.5.96 of the Target Company in which the Board decided to transfer certain quantum of shares in the name of IMFA. It is seen from the extract of the minutes of the Target Company's Board meeting that Mr. K. R. Chhabria did not participate in the discussion and voting in respect of this item in accordance with his letter dated 28.5.1996 . What was the reason ? It was stated that at the meeting since Mr. Ram Raheja a director of IMFA Holdings Pvt. Ltd., was his brother in law (wife's sis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial based on which I can take a view different from what the Hon'ble High Court had taken. Based on the facts and circumstances of the case brought to my notice, I am of the view that KRC and MDC acted in concert with each other in the acquisition of substantial shares in the Target Company, through IMFA, Mahameru and Shirish. But it is made clear that there is no evidence to hold that for acquisition of 27.21% shares of the Target Company on 14.12.1993 KRC and MDC had acted in concert. In my view it was an acquisition made by KRC not with MDC. But the evidence shows that in subsequent acquisition KRC had co-operated with MDC and as such both of them can be considered to have acted in concert with each other in the subsequent acquisition of shares of the Target company. In that context the shares acquired by KRC has also to be taken into consideration for the purpose of deciding the threshold limit for the purpose of compliance of the requirements of regulation 10. Since KRC was holding 27.21% already and as he is considered as a person acted in concert with MDC in the acquisition of shares during the currency of the 1994 Regulations, he can be considered as an acquirer wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rish under the regime of the 1994 Regulations was not in accordance with the Regulation, still the acquisition of 27.21% shares being not hit by any provisions of law, and that KRC and MDC having acted in concert subsequently the benefit of creeping acquisition is available to the acquisition made by the said entities after the notification of the 1997 Regulations. 182. The Appellants have challenged the impugned order on several other grounds also. 183. In their pleadings the Appellants had alleged failure on the part of SEBI to follow the principles of natural justice, and fair play. But the issue was not pressed at the time of argument, and as such I do not consider it necessary to deal with the same, in this order. 184. The Appellants had cited the Respondent's order and stated that the order is based only on the basis of prima facie findings. The portion in support of this contention relied on is from para 12.19 of the impugned order that The circumstances established on record prima facie do lead to the conclusion that KRC and MDC acted in concert with..........to acquire the shares of the target company, over a period of time I am not inclined to agree with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. In this context learned Counsel for the Appellants had referred to certain developments and action by SEBI, allegedly contrary to the practice which SEBI was following consistently in similar cases. In this context the Appellant had referred to the following averments in para G of the appeal )filed by KRC): (i) The appellant, on behalf of MDC and in relation to shares of the Target company, owned and controlled by companies under control of MDC (i.e. IMFA, Mahameru and Shirish) had met the Chairman, SEBI on 31.12.1997 about the various newspaper articles speculating about SEBI's views regarding acquisition of such shares. During the meeting and after discussions the Chairman ordered MDC to make a public offer in compliance with the 1997 Regulations and also directed MDC to confirm in writing his agreement to comply with such order. Pursuant to such order, MDC, personally and on behalf of the Companies owned/controlled by him, confirmed vide his letter dated 20.1.1998 his agreement to make a public offer without prejudice to his stand that there was no violation of the 1994 Regulations. On 20.1.1998 L. K. Singhvi, Sr. Executive Director (Investigation) recorded the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the same as a purported investor grievance, and called upon the Target Company to answer the same. MDC had complained of this conduct on the part of SEBI by his Advocates letter dated 18.9.1998 addressed to SEBI. (v)The opinion of the said eminent jurist was forwarded to SEBI on behalf of the Balaji/Reddy Group only on 10.2.1998 through their advocates. SEBI appears to have followed what the said eminent jurist has in the said opinion strongly recommended viz. to order disinvestment of the said shares in the Target Company by the companies now controlled by MDC. (vi)Thereafter, SEBI for the first time wrote to the Appellant on 24.3.1998 seeking information about the Appellant's shareholding in the Target Company. (vii)All the required information was duly provided by the Appellant on 2.4.1998. It is pertinent to note that the show cause notices, which have been issued on 8.1.1999, were predicted in an affidavit filed on behalf of the Target Company by their Dy. Company Secretary, Bharat Raghavan before the Company Law Board on 15.9.1998. The attention of SEBI was invited to this fact by MDC's Advocate's letter dated 18.9.1998 addressed to SEBI, to which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d public offer to be made in terms of regulation 10(2). But then SEBI suddenly took an about turn, and started enquiries and came to a different decision vide its order dated 19.2.2002 directing the Appellants to divest the shares held by them. To me it remains clueless as to based on what additional information SEBI decided to direct the Appellants to divest their holdings in the target company instead of insisting them to make the public offer as was decided earlier. I have perused the material on record and also considered the submissions made by SEBI. But I do not find anything, in the given set of facts, justifying issuance of a divestment order at variance with its earlier decision requiring the Appellants to make public offer. SEBI no doubt has the power to further investigate and issue further show cause notices and based on the material so collected to pass a different order. But in this case all along SEBI was holding that the Appellants have violated the provisions of clause 40A and 40B and regulation 10(2) of the 1994 Regulations. Even after adjudication of the show cause notice issued on 8.1.1999, SEBI has not arrived at any additional violations or new violations by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut then SEBI cannot escape its obligation to explain reason for having taken a different view, as the earlier stand was reportedly made known to the Appellants orally. Transparency is the hallmark of credibility. Credibility brings acceptability. Acceptability also provides strength to the Regulator. If SEBI had reasons to take a different view, SEBI should have stated the reasons. 190. The effect of the repeal of the 1994 Regulations by the 1997 Regulations was also raised. According to the Appellants even if it is assumed that the Regulations of 1994 was breached, the Regulations having been repealed, it must be treated as if it never existed, and the saving clause in regulation 47 of the 1997 Regulation do not apply to the present case. It was submitted that the repealing regulations did not keep alive anything done or any action taken under the repealed Regulations, that in fact no action had been initiated under the repealed Regulations According to the Appellants, the Respondent is not entitled to proceed against them under the 1997 Regulations for the omissions and commissions, if any, committed with reference to the 1994 Regulations. The Respondent on the other hand had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulations. 193. It is an admitted fact that in the wake of an article published in one of the newspapers on 29.4.1995 alleging substantial acquisition of shares by KRC in the Target Company, SEBI by its letter dated 9.6.1995 addressed to the Target Company called for certain details pertaining to the acquisition of the Target Company's shares by KRC. It is noted that the impugned order also inter alia deals with the said acquisition. Since the reply received from the Target Company was found incomplete, SEBI wrote again to the Target Company on 29.6.1995 for details, and again on 13.7.1995 and thereafter on 30.8.1995. Target Company furnished certain details vide its letter dated 6.9.95. SEBI found the same inadequate and sought details again on 22.9.95. According to the Appellants' (KRC)averments in the Memo of appeal while the target company for some reason was avoiding to give the required details about the acquisition of 27.21% by the said companies it was KRC who suo motu provided SEBI all the relevant details including his control over the said six companies on 9.1.1996. By the said letter it was also explained by KRC as to why the provisions of clause 40A 40B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se it is seen that the Respondent collected information pertaining to the acquisition of shares by initiating an enquiry as far back as on 9.6.1995 by writing to the Target Company and pursued the matter and on coming to the conclusion in the light of the material so collect, that the Appellants had violated certain statutory requirements, asked them to show cause as to why action should not be taken for the said violations. The Show cause notice dated 8.1.1999 to the Appellants is thus the one issued to enable the Appellants to explain their version in the light of the charges referred to in the notice and those charges are the outcome of the enquiry initiated by the Respondents by writing to the Target Company on 9.6.1995. By issuing the show cause notice on 8.1.1999 no fresh enquiry was initiated. It was a part of the ongoing enquiry in the matter. The Appellants' submission that no action had been initiated by SEBI or was pending under the 1994 Regulations against the Appellant on the date of repeal of the said Regulations for the reasons stated above is not correct. The repeal and saving clause under Regulation 47(2) saves the action initiated by the Respondents under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no investigating authority was appointed, no report could have been submitted and in any case no finding of the Board was communicated to the Appellants, though these are requirements of the 1994 Regulations, the 1997 Regulations. In this context decision of the Hon'ble Supreme Court in A K Roy V State of Punjab (AIR 1986 SC 2160) was cited in support of the proposition that where a power is given to do a certain thing in a certain way, the thing must be done in that way or not all. The Hon'ble Supreme Court had referred to the observation made by Craies on Statute Law, 96th edn. P 263) and noted in the said order that: If the requirements of a statute which prescribe the manner in which something is to be done are expressed in negative language, that is to say, if the statute enacts that it shall be done in such a manner and in no other manner, it has been laid down that those requirements are in all cases absolute, and that neglect to attend to them will invalidate the whole proceeding. 198. It was, therefore, contended that since the order was made by the Respondent without following the specific procedures to be followed as per Chapter V of the Regulations, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rotection available to the concerned person as provided in the 1994 Regulations before passing orders under regulation 39. In this context it is noted that in terms of regulation 33 of the 1994 Regulations SEBI is empowered to appoint investigating authorities to investigate and undertake inspection of the books of accounts of any person who had acquired or sold securities. This investigation is possible on the basis of any complaints received relating to substantial acquisition of shares or suo motu upon SEBI's own knowledge or information, in the interest of securities business or investors' interest for any breach of regulation. (Regulation 33) It is also seen that normally notice of investigation is required to be given to the person concerned, but this requirement can be dispensed with for sufficient reasons. (Regulation 34) The investigating authority is required to submit an investigation report to SEBI as soon as possible (Regulation 36) In terms of Regulation 37, SEBI after consideration of the investigation report is required to communicate the findings to the person concerned to give him an opportunity of being heard before any action is taken on the findings of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest of the securities market, without prejudice to its rights to initiate action including criminal prosecution under section 24 of the Act give such directions as it deems fit including - a directing the person concerned not to further deal in securities; b prohibiting the person concerned from disposing of any of the securities acquired in violation of these regulations; c directing the person concerned to sell the shares acquired in violation of the provisions of these regulations; d taking action against the person concerned. 204. Regulation 45 provides penalties for non compliance. Since under challenge in the appeals are the directions issued by the Respondent, it is not felt necessary to go into the details of the provisions of regulation 45 of the 1997 Regulations. 205. On a comparison of the provisions of regulation 37 of the 1994 Regulations and 42 of the 1997 Regulations it is clear that person concerned is required to be communicated the findings of the investigating authority and also give him an opportunity of being heard. Regulation 44 of 1997 Regulations does not specifically provide for an opportunity of being heard to the person concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... light of the legal position stated above, it is clear that SEBI is empowered to order adjudication and SEBI exercising its power has directed to initiate adjudication proceeding against the Appellants. If any person feels aggrieved by the order of the adjudicating officer he has a remedy by way of appeal. This Tribunal cannot interfere at this stage in any manner with SEBI's direction to initiate the adjudication proceedings against the Appellants under section 15A and 15H of the Act. If they, for any reason feel aggrieved by the order passed by the adjudicating officer they are at liberty to avail of the appeal remedy available under section 15T of the Act. Therefore, I leave SEBI's direction to initiate adjudication undisturbed. 209. Next question to be considered is the validity of the Respondent's direction requiring the Appellants and persons acted in concert with them to disinvest shares of the Target Company acquired in violation of the Listing Agreement and 1994 Regulations (i.e. beyond the then existed threshold limit of 10%) through an offer for sale to public in terms of an offer document on an offer price at the face value of the shares as on the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; charge that the Respondent's direction was intended to protect the interest of Shri Mallya and also stated that the impugned order was issued in the light of the facts specific to the case and therefore, not comparable to the directions issued in other cases. Learned Counsel had submitted that the orders issued by SEBI in earlier cases directing post facto public announcement referred to by the Appellants and the order in the present case, are not comparable as facts are different. The learned Counsel had also submitted that if the directions were to make public offer, in the present case that would amount to facilitate further consolidation of illegal acquisition by the Appellants. 212. The Appellants' contention is that since they have not violated any of the provisions of the Regulations the impugned direction asking them to disinvest the shares held by them is uncalled for. They had alleged that the direction is penal and SEBI has no power to issue such a penal order, as was made clear by the Tribunal in Sterlite (supra) case. The Tribunal's observation therein that Section 11B does not even remotely empower the Respondent to impose penalty was cited, after re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e already stated that 27.21% shares of the Target Company acquired by KRC on 14.12.1993 and the creeping acquisition made by IMFA, Beethoven and Darrel under the 1997 Regulations can not be considered as illegal. Therefore, even if it is held that the impugned direction survives the validity test, 27.21% shares acquired on 14.12.1993 and the shares acquired by way of creeping acquisition can not be directed to be disinvested. What is to be considered therefore is the applicability of regulation to the acquisition of shares made in the name of IMFA (10.91%) Mahameru (4.97%) and Shirish (3.83%) during the currency of the 1994 Regulations. I have already held, based on the material on record, that these acquisitions were made by the Appellants acting in concert with each other and the acquisition attracted the provisions of regulation 10(2) of the 1994 Regulations. Having come to the conclusion that the said acquisition was in violation of the requirements of regulation 10(2), the next question to be considered is as to whether the direction to disinvest the shares so acquired at the stipulated price is tenable. 215. It is noted that SEBI has invoked section 11 and section 11B of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. Section 11B of the Act vests in SEBI power to issue certain directions to certain persons. According to the said section, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary (i) in the interest of investors or orderly development of securities market, or(ii) to prevent the affairs of any intermediary or other persons referred to in section 12, being conducted in a manner detrimental to the interest of invedstors or securities market or (iii) to secure the proper management of any such intermediary or person appropriate direction can be issued. The section has also identified the persons to whom such directions can be issued viz.(i) any person or class of persons referred to in section 12, or associated with the securities market; or (ii)any company in respect of matters specified in section 11A. Section 11A is on matters relating to issue of capital to be disclosed by the companies. We are not concerned with the requirements of section 11A in the present appeals. It is, therefore, clear that SEBI's primary duty is to protect the interests of investors and regulate the securities market. Any direction by SEBI should be for the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he benefit of the illegal transactions. The take over bids instead of being open and transparent will be clandestine anhd secretive. The ordinary shareholder will have no participation in the public offer or announcement which are designed primarily to protect his interest, causing him grave injustice. Such being the consequences, and having regard to the negative form of the language, the mandatory character of the prohibition is strengthened. We are, therefore, of the view that the intentment of the Act and the regulations is to prohibit completely the acquisition of shares in breach of the Regulations, particularly regulations 9 and 10 thereof, and not merely to punish an acquirer who acted in breach thereof. The words 'shall not acquire' in Regulation 9 and 10 are mandatory in character, and any breach thereof must render the transaction void. Such acquisition oor transrer of shares must be considered to be void under section 6(h) of the Transfer of Property Act as being forbidden by law and opposed to public policy within the meaning of section 23 of the Contract Act. The fact that under the Regulations, the Board may direct the acquirer to sell the shares so acquired ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a (1979) 4 SCC 5730) the Hon'ble Supreme court had held that A bare mechanical interpretation of the words devoid of concept or purpose will reduce most of legislation to futility. It is a statutory rule, well established that the intention of the legislature, must be found by reading the statute as a whole 222. As stated earlier section 11 inter alia mandates SEBI to take appropriate measures to protect the interests of investors in securities. For the purpose section 11(2)(h) empowers SEBI to take measures to provide for regulating substantial acquisition of shares and takeover of companies. SEBI Regulations on substantial acquisition of shares and takeovers is framed with the said avowed objective - i.e. to afford protection to investors in securities. In this context the observation made by the Hon'ble Supreme Court in Kunj Biharilal V State of Himachal Pradesh (JT 2000(2) SC 307) need be noted. The Hon'ble Court had held that: We are also of the opinion that a delegated power to legislate by making rules for carrying out the purposes of the Act is a general delegation without laying down any guideline, it can not be exercised as to bring into existence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court's order, but for the practical and functional difficulties involved in case the transaction is treated as void and acted upon accordingly. If the transaction is treated void in the strict sense, the Respondent's direction to the Appellants to sell the shares can not hold good, as the Appellants will not have the title of the property (shares) to sell the same and collect the consideration. It was also not practically possible to restore the shares purchased in the 'void' contract to all the original title holders. In such case SEBI can not fix the sale price of the shares as well. It is in the said context the Hon'ble Court left it to SEBI to pass such orders as it may deem fit and proper including direction to make a post facto public offer. The observation whether the Defendants should be permitted to make a post facto public offer or not in the order is significant. Learned Counsel for the Respondent had admitted that it is impractical to restore the shares to the original owners and therefore, the Respondent chose to direct the Appellants to disinvest the shares. Thus SEBI itself has admitted that even though the transaction was void, since it was d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to direct the acquirers to make post facto public offer in those cases if found that the acquisition was made without complying with requirements of the governing regulation. SEBI has not stated any reason to treat the instant case on an entirely different footing. If SEBI's direction to sell such huge quantity of shares @ ₹ 10/- is effected, it would considerably bring down the price of the shares which is at present around ₹ 40/-. This undoubtedly would adversely affect the interests of the existing shareholders. It is to be noted that the provisions to make the public offer provided in the Regulation is meant to benefit the shareholders of the target company and not the public at large, at the cost of the shareholders of the Target Company. The Regulation also ensures that best price is paid to the shareholders of the Target Company participating in the public offer. In the event of disinvestment of shares in the open market, anybody is entitled to buy the shares. Taking into consideration all the relevant facts and in particular the interest of the shareholders of the Target company, the appropriate course, as SEBI has been following consistently, was to direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offer were denied the benefit of receiving the amount due to them on 24.2.1995. Since they had not received their legitimate dues on the due date, they are entitled to be compensated by the Appellants for the loss they so suffered till such time they receive the payment from the Appellants for the shares which they tender in the public offer, as directed to be made by this order. The order is modified for the purpose stated above as follows: That part in para 14.3.1 of the impugned order is modified as follows. 14.3.1 i The Appellants are directed to make public announcement to acquire the shares of the Target company as per the regulations within 3 months from the date of this order. ii The referral date for the purpose of calculation of offer price shall be 27.10.1994. iii The Appellants are directed to pay interest @ 15% per annum from 24.2.1995 till the date of actual payment of consideration for shares to be tendered in the offer directed to be made as per this order. iv The interest is directed to be paid only to those persons who were holding shares of the Target company as on 25.1.1995 and continue to be shareholders and eligible to participate in the public ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
