TMI Blog2001 (7) TMI 1318X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon ble High Court disposed of the said writ petition vide its order dated 23-7-2001 with the following observation/direction. In our view, since an appeal has been provided before the appellate authority, the proper course for the petitioner is to prefer an appeal. Mr. Doctor for the petitioners states that an appeal will be filed on or before 25th July, 2001. Inasmuch as the date by which the acceptance/rejection was to be intimated under the letter of offer was 2nd August, 2001., the Appellate Authority will decide the appeal and, in any case, the stay application of the petitioners, on or before 31st July, 2001. . . . . . . . . . All parties will co-operate with the appellate authority for the disposal of the proceedings within the time limit as specified in the order . 2. The appellant field the appeal in the Tribunal on 24-7-2001. Briefly put, the facts leading to present appeal are as under : The appellant is a public limited company stated to be in the group of companies of the Modi family. Modi family owned and controller several companies. Members of the said Modi family entered into a memorandum of understanding on 24-1-1989 (MOU), where under the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring the scheme of arrangement. But Bansi Mehta Co. while preparing the scheme of arrangement suggested certain changes inter alia affecting the investments in the group companies. In the process, it has been stated, that M/s. Bansi Mehta changed the valuation of both Fibres Division and Chemicals Division, and as a result disputes arose. These disputes were referred to the Chairman, IFCI for decision as provided for in the MOU. The Chairman, IFCI gave his report recording his findings. It has been stated that in the report, the Chairman, had directed Group B to pay a sum of ₹ 2,135.55 lakhs to Group A on account of shortfall in valuation of assets of companies allocated to Group A , and that it was also held that shares of Group B companies held by Fibre Division and its subsidiaries could be transferred to Group B as per extant law as per market price prevailing at the time of actual transfer. Since the said decision was not acceptable, Shri K.K. Modi filed a suit bearing No. 1394/96 in the Hon ble Delhi High Court challenging the decision. The said suit is still pending. 3. The present management of MRL decided to consolidate their holding in the company by acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was listed to consider the appellant s prayer for interim order, the learned counsel for the parties present, expressed their willingness and readiness to argue the appeal itself, without filing any written reply. Accordingly, the appeal itself was taken up for final disposal. 5. Shri S.H. Doctor, the learned senior counsel appearing for the appellant explained briefly the background leading to the appeal and also stated the chronology of events. The learned senior counsel stated that the appellant is neither a promoter nor a person acting or deemed to be acting, in concert with the acquirers that it is not connected or associated with the acquirers in any manner, and the appellant or its directors are not concerned in any manner with the management or control of MRL. According to him the appellant is keenly interested in selling the shares of MRL. Referring to the decision taken in the BOD meeting of the appellant regarding participation in the public offer, Shri Doctor stated that Shri K.K. Modi had not objected to the same but only dissented to the decision without getting prior written approval from the Financial Institutions and banks. Since the consent has already been o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant is a promoter of MRL or that it is a person deemed to be acting in concert with the acquirers. 7. With reference to the SEBI s conclusion that the appellant is a promoter of MRL, the learned senior counsel referred to paras 8.3 to 8.7 of the impugned order and stated that none of the grounds referred to therein supports the said conclusion. He submitted that the MOU dated 24-1-1989 clearly establishes the bifurcation of the companies belonging to each group and that the MOU has been substantially acted upon to the extent the same relates to change in management/ownership and control of the companies are concerned. There is no dispute about the fact that Fibre Division of the Appellant is owned by group A and the Chemical Division is owned by Group B , that it is the Fire Division which is holding investment in MRL. According to Shri Doctor, the existing dispute is on the valuation and the apportionment of the value of the assets between the groups, there is no dispute on the ownership of the units. The fact that the name of the appellant has been shown as a promoter group company of MRL alongwith the acquirers in an offer document dated 27-2-1992 and that the appellant ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acting in concert, and more pertinently even in the final offer document, the Appellant was not shown as a promoter of MRL. 8. The learned senior counsel submitted that even assuming that the Appellant is a promoter of MRL, still the acquirers are bound to issue the letter of offer to the appellant as the appellant is entitled to participate in the public offer because public offer is open to all the shareholders of the target company and there is no bar against a promoter selling its shares to the acquirers in response to a public offer and the SEBI has no power to disqualify a shareholder from participating in the public offer. Shri Doctor stated that the object of the 1997 Regulations is to ensure that, a shareholder of the target company, who does not wish to remain with the company upon a substantial acquisition of shares is effected, is entitled to dispose of his shares in the public offer and exit, that this opportunity is available to all the shareholders of the target company be it a promoter or not. He further submitted that in the definition public share holding as defined in the regulation 2(1)(j) means shareholding in the hands of the persons other than the acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the acquirers for acquiring or agreeing to acquire shares or voting rights in, or control over MRL. He pointed out that the appellant is a seller in the instant case and not a purchaser. 12. According to the learned senior counsel the appellant is also not a person deemed to be acting in concert with the acquirers within the meaning of the regulation 2(1)(e)(2), as the appellant does not fall under any of the categories mentioned in regulation 2(1)(e)(2) so as to make it a person acting in concert with the acquirers. The appellant is not the holding company or subsidiary of Modi Fashions and Securities (P.) Ltd. or of Modikem Ltd. (the two acquirer companies), the appellant and the two acquirer companies are not under the same management, the appellant is not a director of either of Modi Fashions and Securities (P.) Ltd. or Modikem Ltd., nor is it entrusted with the management of their funds, the appellant is not a director of the acquirer companies nor an associate of Shri B.K. Modi and/or Shri V.K. Modi who are the directors of the said two acquirer companies. The rest of the categories at (iv) to (x) have no relevance in the present case and the same are inapplicable. The app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel appearing for respondents 4 and 5 raised certain preliminary objections on the maintainability of the appeal. Referring to the provisions of section 15T of the Securities and Exchange Board of India Act, 1992 Shri Pandya stated that the appellant is not an aggrieved person and as such not entitled to prefer the appeal. According to him, the shares under sale belong to Modipon Ltd. and not to the Fibre Division. He further submitted that the resolution dated 24-3-1998, based on which Shri P.K. Sinha has filed the appeal, does not empower Shri Sinha to file an appeal on behalf of Modipon Ltd. In this context he cited the Board resolution of Modipon Ltd. dated 13-5-1989 and 25-2-1989 filed with the appeal. According to him since the appeal is filed without proper authority the same should not be entertained. The learned counsel raised another preliminary objection that the appellant no longer holds the shares in question in view of the order dated 28-6-2001 made by the Debt Recovery Tribunal, Delhi, appointing a Receiver to sell the assets of the appellant. According to the learned counsel, since the receiver has stepped in, for the purpose of section 15T of the Act, the receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed to participate in the offer, the read out para 8.9 and 8.10 of the SEBI s order. H emphasised the observation in para 8.9 in the order that when an offer is made by existing promoters to further consolidate its holding it is obvious that the persons belonging to the promoter group cannot participate in the public offer. Otherwise there will be no meaning of consolidation by persons in control or promoter group. If the persons belonging to the promoter group are allowed to participate in the public offer made by the promoters to consolidate their holding, the same will not be in consonance with regulation 11, which was enacted to provide for consolidation of holdings by existing promoters or persons in control or persons holding more than 15 per cent . Shri Tulzapurkar also supported the observation in para 8.10 of the order that if persons belonging to promoter group are allowed to participate in a public offer made by a promoter group to consolidate their existing holding, the same will be detrimental to the interests of the public shareholders as proportion of shares held by public being accepted in the offer would be reduced to the extent of shares offered by the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legality and validity of the order dated 16-7-2001 made by the SEBI s Chairman. The dispute relating to title to the ownership of the shares involved or the claim of banks and financial institutions are pending before the Hon ble Delhi High Court and the Debt Recovery Tribunal, Delhi. These issues are not under adjudication before me in the present appeal. I do not consider that the temporary prohibition on the transfer of the title of the shares offered in the public offer, made by the Hon ble Delhi High Court has resulted the appeal proceedings becoming redundant. It is made clear that this Tribunal is not considering in the appeal the post offer developments, but only the question of the threshold entry to the public offer. By the impugned order, the appellant has been made ineligible to participate in the public offer made by the acquirers, on the ground that the appellant is a promoter of the target company (MRL) and that the appellant is deemed to be acting in concert with the acquirers. The participation of the appellant is also viewed against the interest of the public shareholders. 23. Before going into the merits of the appeal, I would like first to deal with the prel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the reasons stated above, the preliminary objections do not hold good. Therefore, the objections are over ruled. 24. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, made under the SEBI Act, is the governing regime for takeovers. The regulation was framed basically taking into consideration the recommendations of a committee chaired by Justice P.N. Bhagvati. It is necessary to go behind the regulatory requirements to discover their raison de etre and the fundamental principles on which these regulations are predicated. The Committee s report is helpful in this regard. Therefore, before we go into the scope of certain specific regulations applicable to the issues raised in the appeal it is considered necessary to note the basic principles underlying the regulation, as stated in the committee s report. The cardinal principle of the regulation is to provide equality of opportunity to all shareholders, protection of minority interests, transparency and fairness. It has been observed in the report that : Committee also recognised that the process of takeovers is complex and is inter-related to the dynamics of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said observation it is necessary to find out (i) whether the appellant is a part of the promoter group; (ii) and a person deemed to be acting in concert with the acquirers; (iii) and whether the appellant is ineligible to participate in the instant open offer. The expression promoter has been defined in regulation 2(1)(h) as under: Promoter means : (1) (i) the person or persons who are in control of the company, or (ii) person or persons named in any offer document as promoters; (2) a relative of the promoter within the meaning of section 6 of the Companies Act, 1956 (1 of 1956); and (3) in case of a corporate body, (i)a subsidiary or holding company of that body, or (ii)any company in which the Promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter, or (iii)any corporate body in which a group of individuals or corporate bodies or combinations thereof who hold 20% or more of the equity capital in that company also hold 20% or more of the equity capital of the Promoter ; and (4) in case of an individual, (i)any company in which 10% or more of the share capital is held by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means 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 . This definition led us to identify as to who is considered as a person acting in concert with the acquirer. Answer to this search is available in regulation 2(1)(g) which states that a person acting in concert comprises: (1)persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company. (2)Without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established : (i)a company, its holding company, or subsidiary of such company or company under the same management either individually or toge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks. The conclusion that the appellant is an investment company is erroneous. 30. It could be seen that in terms of regulation 2(1)(e)(i) persons acting in concert comprises persons who, for a common objective or the purpose of substantial acquisition of shares or voting rights or gaining control over the target company pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company. In the present case, it is no ones case that the Appellant is in any manner interested or involved in the acquisition of shares or voting rights or in gaining control over MRL. 31. Shri Doctor had stated that since the provisions of regulation 2(1)(e)(2) defining person acting in concert being a deeming provision, must be read in conjunction of regulation 2(1)(e)(i) which states that persons acting in concert comprises of persons who for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal) directly or indirectly, co-operate by acquiring or agreeing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 2(e). It is the conduct of the party that decides the identity. A dormant promoter or a promoter simpliciter who neither acquires or agrees to acquire shares or voting rights or control over the target company is not an acquirer and his shareholding in the target company cannot be considered as the shareholding of the acquirer warranting exclusion from the public shareholding. Similarly, if the characteristics of a person acting in concert stated in the definition are found missing in the case of a person, it may not be proper to consider him as a person acting in concert with the acquirer. 34. The argument put forth by the learned senior counsel for the appellant that the requirements of regulation 11(1) are not applicable to a promoter is not correct. On a perusal of the said regulation it could be seen that the regulation requires the acquirer or person acting in concert with him to make an offer to the public to purchase their shares as required under the regulation. The expressions acquirer and the person acting in concert with the acquirer have been defind in the regulation. There is no hard and fast rule that a promoter can never be an acquirer or person acting in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otu or in the event of building defences against take- over threats. Thus, when an offer is made by exiting promoters to further consolidate its holding, it is obvious that the persons belonging to the promoter group cannot participate in the public offer. Otherwise, there will be no meaning of consolidation by persons in control or promoter-group. If the persons belonging to the promoter group are allowed to participate in the public offer made by the promoters to consolidate their holding, the same will not be in consonance with Regulation 11, which was enacted to provide for consolidation of holdings by existing promoters or persons in control or persons holding more than 15 per cent. What is stated in the above para as a general proposition is flawless. But it cannot have a universal application as the facts and circumstances of all the cases need not be common. The facts and circumstances specific to certain cases may not support application of the said general proposition to those cases. In this conext one has to go by Justice Bhagwati Committee s views (supra) that the circumstances which are not explicitly covered by the regulation should be dealt with following the gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. Regulation 3(1)(e)(iii) is an exemption provision from procedures and not a beneficial substantive provision as provided in regulation 11. Further the provisions of regulation 3(1)(e)(iii) is contractual in nature and subject to certain other conditions. It is not a substitute or an alternative to participate in the public offer providing certain attendant benefits to the shareholders. 38. In para 8.10 of the impugned order it has been further stated as under : 8.10 I find that under Reg. 21(1) of the Regulations, an acquirer has to make a minimum public offer of 20 per cent. Further, in terms of regulation 21(6) if the number of shares offered for sale by the shareholders are more than the shares agreed to be acquired by the person making the offer, such person shall accept the offers received from the shareholders on a proportional basis in consultation with merchant bankers taking care to ensure that basis of acceptance is decided in a fair and equitable manner and does not result in non-marketable lot. If person belonging to promoter group are allowed to participate in a public offer made by a promoter group to consolidate their existing holding, the same will be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to their participation in the public offer on the ground that since they are large investors their participation in the public offer would be against the interest of the small investors and therefore they should not be allowed to participate so as to protect the interests of small investors? Obviously one cannot. 41. The reasons put forth in the order justifying exclusion of the appellant from the public offer are found legally unsound and untenable. 42. For the reasons stated above, though the SEBI s finding that the appellant is a promoter of MRL is tenable it cannot be held that the appellant is an acquirer or a person acting or deemed to be acting in concert with the acquirers and thereby ineligible to participate in the public offer. I am of the view that there is no legal backing flowing from the Act, or the Regulations to uphold the SEBI s decision holding the appellant ineligible to participate in the public offer made vide letter dated 30-5-2001. 43. For the reasons stated above the appeal is allowed and the SEBI s direction in the impugned order that the appellant shall not be eligible to participate in the public offer made by the acquirers vide letter dated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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