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TMI Blog2011 (3) TMI 1796X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in this group of appeals alongwith some others are the promoters of Blue Coasts Hotels Limited (formerly known as Blue Coasts Hotels and Resorts Limited and hereinafter referred to as the target company). Morepen Laboratories Limited is a group company of the appellants and it shall be referred to hereinafter as Morepen. It took a loan of ₹ 325 lacs from Dombivli Nagari Sahakari Bank Limited and another sum of ₹ 10 crores from Lakshmi Vilas Bank Limited (for short Dombivli Bank and Lakshmi Bank respectively) in the year 2002. It hypothecated its plant and machinery to secure the loans and in addition thereto, the appellants who were holding large number of shares of the target company had pledged those shares by way of collateral security. The pledge was created in favour of both the banks. Morepen defaulted in the repayment of the loans as a result whereof both the banks invoked on March 10, 2004 the pledges created in their favour. The pledged shares were then transferred from the demat accounts of the appellants to the demat accounts of the banks. Upon the shares being so transferred, the names of the banks came to be recorded as the beneficial owners of those sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) M/s. Liquid Holdings (P) Ltd. 200000 shares ------------------- 807000 shares " ------------------ We have on record copies of the delivery instruction slips (DIS) duly executed by the banks in favour of the appellants transferring the shares from their demat account to those of the appellants. Since the shares that were transferred back to the appellants were in excess of the limit(s) prescribed by Regulation 11(1) of the takeover code, the Securities and Exchange Board of India (for short the Board) was of the view that the appellants on acquiring the shares from the two banks ought to have complied with this regulation by making a public announcement to acquire shares of the target company in accordance with the takeover code and not having done so, had violated this provision. The Board also felt that the appellants as acquirers should have made the necessary disclosures as required by Regulation 7 of the takeover code. Adjudication proceedings were initiated against the appellants for these lapses. A common show cause notice dated November 10, 2009 was issued to all the appellants alleging violation of Regulations 7 & 11(1) of the takeover code and they were call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... framed thereunder. This Act makes a distinction between a registered owner and a beneficial owner of a security. As per section 10 of this Act, a depository is deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner. "Beneficial owner" is defined to mean a person whose name is recorded as such with a depository. A beneficial owner is entitled to all the rights and benefits and is subjected to all the liabilities in respect of his securities held by a depository. Section 12 of the Depositories Act deals with pledge or hypothecation of securities held in a depository. A beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository. The manner in which a pledge or hypothecation is created is contained in Regulation 58 of the Securities and Exchange Board of India (Depositories and Participants) Regulations 1996 (for short the Regulations). Since we are concerned with the manner in which a pledge is created, it is necessary to reproduce Regulation 58 which reads as under: "Regulation 58 Manner of creating pledge or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the hypothecator. (11) No transfer of security in respect of which a notice or entry of pledge or hypothecation is in force shall be effected by a participant without the concurrence of the pledgee or the hypothecatee as the case may be." We may also notice that section 150 of the Companies Act requires every company to keep a register of its members and enter therein their particulars as referred to in the section. The word "member" has been defined in Section 41 of the Companies Act and sub-section (3) thereof provides that every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company. We may also notice the relevant provisions of the takeover code the violation of which has been alleged in the present case. Sub regulations (1) and (2) of Regulation 7 and Regulation 11(1) concern us and they are reproduced hereunder for facility of reference: "Regulation 7 Acquisition of 5 per cent and more shares or voting rights of a company 7(1) Any acquirer, who acquires shares or voting rights which (taken together with shares or voting rights, if any, hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so as to attract the provisions of Regulations 7 and 11 of the takeover code. The learned senior counsel very strenuously argued that the relationship between the appellants and the banks even after the transfer of shares to the latter continued to be that of pledgor and pledgee and that the banks were throughout holding the shares as collateral security which were released on repayment/settlement of the loan. In support of his argument Shri Chaudhary relied upon the two letters dated December 13, 2004 and December 19, 2007 which have been reproduced hereinabove. He also placed reliance on a tripartite agreement dated August 9, 2006 between the appellants, Morepen and Lakshmi bank titled as extension of pledge. He referred to the contents of this agreement and clause 8 in particular which reads as under: "8. That the Company also hereby upholds/recognizes the rights of the Bank as pledgee, as conferred under the relevant provisions of law and that the Bank can enforce its rights at any time at its discretion against any or all the shares secured." He wants us to infer from these documents that the banks were holding the shares as collateral security and that the transfer of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of Regulation 11(1) by making a public announcement to acquire further shares of the target company as envisaged therein. The shares acquired by the banks ceased to be the security for the loans as the banks had become the beneficial owners thereof. In December 2007, Morpen paid the entire loan amounts to the banks and settled the loan accounts. It was then that the banks issued a 'no dues certificate' to Morepen, the principal borrower and simultaneously executed DIS requiring their participants to debit their accounts and transfer the shares in the names of the appellants. Accordingly, the shares got transferred from the demat accounts of the banks to the demat accounts of the appellants in the records of the depository. On this transfer being made by the banks, the appellants acquired the shares and became their beneficial owners as their names were entered in the records of the depository. Admittedly, the shares which the appellants acquired in December 2007 were in excess of the threshold limit(s) prescribed by Regulation 11(1) of the takeover code and, therefore, the said regulation got triggered. The appellants were required to come out with a public announcement to acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it in this contention at all. The Depositories Act, 1996 provides for only two category of owners viz. 'registered owner' who has necessarily to be a depository and a 'beneficial owner' in whom all the rights vest. Once the beneficial ownership stands transferred to the banks the parties cannot circumvent the legal provisions by entering into an agreement to make a declaration otherwise. The law also prescribes a mode for the creation and revocation of a pledge. The parties cannot agree to create a pledge contrary to the provisions of Regulation 58. The present is, indeed, a case where the shares had been pledged to secure the loan and on default being made in its repayment, the pledge was invoked. Even the Contract Act entitles the pledgee to invoke the pledge when a default occurs. In the case of shares held in demat form, the Depositories Act and the Regulations framed thereunder provide the manner in which the pledge is to be created and invoked and that procedure was duly followed in the present case. As already noticed, when the pledge was invoked, the banks became the beneficial owners of the shares and thereafter on repayment of the loan the shares were transferred back t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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