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Friday, September 25, 2015

Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations, 2003 =Appellate Tribunal upholding and confirming the order of Securities & Exchange Board of India (SEBI) dated 27th January 2004 directing the appellant to make public announcement in terms of Regulation 11(1) of the Securities & Exchange Board of India (Substantial Acquisition of Shares & Takeovers) Regulations, 1997 (hereinafter referred to as ‘the Regulations of 1997). = Hence, SEBI came to a conclusion that the appellant was already holding between 15% to 75% shares of the target company SIL and it could acquire additional shares of this company through creeping acquisition mode, that is, without public announcement only upto 5% of its paid up capital during the period of 12 months ending on 31st March 2000. However, by acquiring 11,36,700 shares of SIL during June 1999 to August 1999 it acquired shares constituting more than 5% of the paid up capital of SIL. For making such acquisition, the appellant was liable to make public announcement as required by Regulation 11(1) of the Regulations of 1997. Since the appellant failed to do so, the Whole Time Member of SEBI held it guilty and issued the following directions on 27th January 2004 : We are in agreement with the finding of the Tribunal on this issue and find no merit in the contentions of the appellant. A careful reading of the aforesaid Regulations discloses that the public announcement should not be delayed beyond four working days of the agreement or decision to acquire the requisite number of shares or voting rights.in case of acquisition of shares or voting rights the appropriate applicable provision is Regulation 14(1) and not Regulation 14(2) which applies only when the acquisition is of other securities including Global Depository Receipts, American Depository Receipts. It is only such securities which require conversion or exercise of option which is contemplated by Regulation 14(2). only Regulation 14(1) is applicable as it covers acquisition of either the shares or the voting rights or both which are the subject matter of Regulation 11(1). - Regulations 10, 11 and 12 of the Regulations of 1997 and in paragraph 102 held them to be mandatory statutory provisions. However this judgment needs no elaborate consideration because no plea has been raised on behalf of appellant that the Regulations are directory or do not require compliance.We find that the plea that the matter at hand relates to Regulation 14(2) was not raised before the original authority or the Tribunal. We also find that it is a plea of desperation and undeserving of acceptance. In the final analysis we find no merit in these appeals and hence they are dismissed with consolidated cost of Rs. 50,000/- to be paid by the appellant to SEBI within eight weeks.

                                                                  REPORTABLE

                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 3219 OF 2006

Kosha Investments Ltd.                         …..Appellant

      Versus

Securities & Exchange Board of India & Anr. …..Respondents

                                    WITH

                        CIVIL APPEAL NO. 2132 OF 2007



                               J U D G M E N T



SHIVA KIRTI SINGH, J.

Both the appeals have been preferred by the  same  appellant  under  Section
15Z of the Securities & Exchange Board of India Act, 1992 (for short,  ‘SEBI
Act’).  The main appeal is of 2006 and requires detailed consideration.   It
is directed against order dated 08th August 2005 passed  by  the  Securities
Appellate Tribunal upholding  and  confirming  the  order  of  Securities  &
Exchange Board of  India  (SEBI)  dated  27th  January  2004  directing  the
appellant to make public announcement in terms of Regulation  11(1)  of  the
Securities & Exchange Board of India (Substantial Acquisition  of  Shares  &
Takeovers) Regulations, 1997 (hereinafter referred to  as  ‘the  Regulations
of 1997).  The other appeal is directed against orders passed  by  SEBI  and
confirmed by the Tribunal to impose penalty  upon  the  appellant  for  non-
compliance with the order which is subject matter  of  the  earlier  appeal.
It goes without saying that the latter appeal will follow the  fate  of  the
main appeal.
Before adverting to the issues of law raised on  behalf  of  the  appellant,
the essential facts may be noticed only  in  brief.   The  appellant,  Kosha
Investments Ltd., acquired shares of  another  company  Snowcem  India  Ltd.
(hereinafter referred to as ‘SIL’) from one of  the  original  promoters  of
SIL and thus itself became one of the promoters.  An investigation  by  SEBI
covered the period June 1999 to  August  1999  when  there  was  an  initial
upward movement in the price of shares of SIL and also substantial  increase
in the volume of their  trade.   As  a  result  of  such  investigation  the
appellant faced charges in another proceeding  under  SEBI  (Prohibition  of
Fraudulent  and  Unfair  Trade  Practices  relating  to  Securities  Market)
Regulations, 2003 and was  also  served  with  a  show  cause  notice  dated
14.11.2002 for alleged breach of provisions of Regulation 44  and  45(6)  of
the Regulations of 1997 read with provisions of Section 11 and  11B  of  the
SEBI Act.  The proposed action under Regulations  of  1997  was  based  upon
report of investigation showing that appellant had consistently  bought  and
sold shares of SIL prior to June 1999 and also after August  1999.   As  per
record it was holding 21,32,900 shares of SIL constituting 20.29%  of  total
paid up capital of SIL.  The appellant made additional  purchase  of  shares
amounting to  10.81%  of  the  paid  up  capital  of  SIL  in  violation  of
Regulation 11(1) of the Regulations  of  1997  as  it  failed  to  make  the
required public  announcement  in  terms  of  the  said  Regulation.   After
granting personal hearing and considering the appellant’s reply to the  show
cause notice, in the final order SEBI came to a  finding  that  as  on  31st
March 1999 appellant was actually holding only 21,32,900 shares as shown  by
SEBI and not 31,84,228 shares which was claimed  by  the  appellant  on  the
ground that it had already pledged its shares to lenders who had lent  money
to SIL.  The plea of pledge raised by the appellant was  found  without  any
substance and only an attempt to conceal subsequent purchase.   Hence,  SEBI
came to a conclusion that the appellant was already holding between  15%  to
75% shares of the target company SIL and it could acquire additional  shares
of this company through creeping acquisition mode, that is,  without  public
announcement only upto 5% of its paid up capital during  the  period  of  12
months ending on 31st March 2000.  However, by  acquiring  11,36,700  shares
of SIL during June 1999 to August 1999 it acquired shares constituting  more
than 5% of the paid up capital of SIL.  For  making  such  acquisition,  the
appellant was liable to make public announcement as required  by  Regulation
11(1) of the Regulations of 1997.  Since the appellant failed to do so,  the
Whole  Time  Member  of  SEBI  held  it  guilty  and  issued  the  following
directions on 27th January 2004 :

      “15. In view of the findings above  and  in  exercise  of  the  powers
conferred upon me under Section 19 read with Section 11B of  SEBI  Act  read
with regulations, I hereby direct the acquirer viz., Kosha Investments  Ltd.
to make public announcement  in  terms  of  regulation  11(1)  of  the  said
Regulations taking June 29, 1999 as the reference date  for  calculation  of
offer price.  The public announcement  shall  be  made  within  45  days  of
passing of this order.

      16.  ……..  The  Acquirers  are  hereby  accordingly  directed  to  pay
interest @ 15% per annum to the share  holders  for  the  loss  of  interest
caused to the shareholders from October 28, 1999 till  the  date  of  actual
payment of consideration for the shares to be tendered and accepted  in  the
offer directed to be made by the Acquirers.

      17. It is also noted that an order dated  3.12.03  was  passed  by  me
restraining the Kosha Investments Ltd. from buying, selling  or  dealing  in
securities in any manner, directly or indirectly, for a period of two  years
for violating the provisions of SEBI (Prohibition of Fraudulent  and  Unfair
Trade Practices Relating to Securities Market) Regulations, 1995.   However,
I direct the said order dated 3.12.2003 shall not hamper the  implementation
of this order.”


The appellant preferred an appeal before the Securities  Appellate  Tribunal
to challenge the order dated 27th January 2004 passed by Whole  Time  Member
of SEBI.  The main contention  of  the  appellant  before  the  Tribunal  is
recorded in paragraph 7 of the impugned judgment and is as follows :

      “Learned counsel for the appellant argued that KIL had been  regularly
purchasing and selling shares of SIL.  He  also  argued  that  KIL  had  not
acquired 5% or more than 5% shares or voting rights in respect of shares  of
SIL at any point of time in the period of 12 months.  He submitted that  out
of 11,36,700 shares which were purchased during June, 1999 to  August,  1999
during the same period KIL also sold number of shares of  SIL.   He  pointed
out that KIL was not holding more than 5% shares of SIL at any point  during
the year and therefore the provisions of Takeover Code did not trigger.   He
further argued that even if SEBI did not take into account  the  repurchases
of pledged shares as return of shares, SEBI should accept that KIL  did  not
acquire 5% or more shares at any point of time since sale  and  purchase  of
shares was being done simultaneously and did not trigger the Takeover  Code.
 He argued that SEBI ought to have taken into account  that  KIL  also  sold
shares during the relevant  period.   He  went  on  to  argue  that  it  was
erroneous to determine the total share holding of KIL at any given point  of
time during the investigation by completely  ignoring  the  sale  of  shares
made by it during the  relevant  period.   He  said  that  such  a  lopsided
interpretation of Takeover Code would be  erroneous  and  not  maintainable.
He said that determining the shareholding of a person  without  netting  off
would give a distorted picture.  He therefore concluded that for the  reason
mentioned above, the provisions of Takeover  Code  were  not  applicable  in
this case and no violation of SEBI Regulations has taken place.”

The Tribunal accepted the counter arguments advanced on behalf of  the  SEBI
to the effect that even during the period  June  1999  to  August  1999  the
appellant had acquired 6,61,800 shares which constituted 6.29% of  the  paid
up capital of SIL which was beyond the permissible limit  of  5%  and  hence
the requirement of making public announcement in terms of  Regulation  11(1)
had to be met by the appellant which the appellant failed to do.
Before the Tribunal as  well  as  before  us  the  main  contention  of  the
appellant is that SEBI failed to consider that the appellant was not only  a
promoter having more than 15% shares of SIL but it was also in the  business
of sale and purchase of shares  which  was  being  done  simultaneously  and
hence exceeding the limit of 5% at any one  point  of  time  was  immaterial
unless on a net accounting it could be found that such  ceiling  of  5%  had
been violated by appellant on account of its retaining more than  5%  shares
of SIL at the end of  a  financial  year.   On  the  other  hand  SEBI  have
reiterated their stand before  the  Tribunal  that  the  ceiling  of  making
acquisition of only up to 5% of the paid up capital of  target  company  was
no doubt to be reckoned during a period of 12 months, that is,  a  financial
year but the requirement of Regulation 11(1) of the Regulations of  1997  of
making a public announcement was triggered not only  on  actual  acquisition
beyond the 5% limit  but  even  on  entering  into  an  agreement  for  such
acquisition or deciding to acquire such volume of shares or  voting  rights,
in view of provisions of Regulation 14(1) of the  Regulations  of  1997.   A
strong emphasis was laid on  Regulation  14(1)  which  requires  the  public
announcement referred to in Regulation 10 or Regulation 11  to  be  made  by
the acquiring company (through its merchant banker),  not  later  than  four
working days of the agreement or decision to acquire  the  requisite  number
of shares or voting rights which  by  itself  triggers  the  requirement  of
Regulation 11. (emphasis added)  Let us conceptualize the case of an  entity
holding 20 per cent of shareholding in a target company on 1st  April  of  a
given year.  If it were to increase its  holding  by  say  3  per  cent  and
subsequently reduce it to 2 per cent.  It  at  that  point  it  intended  to
purchase 4 per cent shares again, whether by way of fractions or  otherwise,
it would cross the threshold of 5 per cent.  It  would  then  have  to  make
compliance with Regulation 11.  We hasten to clarify that if  the  aggregate
percentage of acquisitions at any point of time during  the  financial  year
exceeds 5 per cent, the provision would get triggered. In other  words,  the
provision of Regulation 11 mandating a public announcement will kick  in  at
any stage whence the shareholding of the said entity in the  target  company
would exceed 25 per cent.
It will be relevant at this stage to extract Regulations  11(1),  13,  14(1)
and 14(2) in order to appreciate the submissions.  These read as follows :

“11. (1) No acquirer who, together with persons acting in concert with  him,
has acquired, in accordance with the provisions of law, 15 per cent or  more
but less than fifty five per cent (55%) of the shares or voting rights in  a
company, shall acquire, either by himself or through or with persons  acting
in concert with him, additional shares or voting  rights  entitling  him  to
exercise more than 5 per cent of the voting rights, in  any  financial  year
ending on 31st March unless such acquirer makes  a  public  announcement  to
acquire shares in accordance with the regulations.

…. …. …. ….

Before making any public announcement of offer referred to in regulation  10
or regulation 11 or regulation 12, the acquirer  shall  appoint  a  merchant
banker in Category I holding a certificate of registration  granted  by  the
Board, who is not an associate of or group of the  acquirer  or  the  target
company.

(1) The public announcement referred to in regulation 10  or  regulation  11
shall be made by the merchant banker not later than  four  working  days  of
entering into an agreement for acquisition of shares  or  voting  rights  or
deciding to  acquire  shares  or  voting  rights  exceeding  the  respective
percentage specified therein:

Provided that in case of disinvestment of a Public Sector  Undertaking,  the
public announcement shall be made by the merchant banker not  later  than  4
working days of the acquirer  executing  the  Share  Purchase  Agreement  or
Shareholders Agreement with the Central Government or the  State  Government
as the case  may  be,  for  the  acquisition  of  shares  or  voting  rights
exceeding the percentage of shareholding referred to  in  regulation  10  or
regulation 11 or the  transfer  of  control  over  a  target  Public  Sector
Undertaking.

(2)   In the case of an  acquirer  acquiring  securities,  including  Global
Depository Receipts  or  American  Depository  Receipts  which,  when  taken
together with the voting rights, if any  already  held  by  him  or  persons
acting in concert with him, would entitle him to  voting  rights,  exceeding
the percentage specified in regulation  10  or  regulation  11,  the  public
announcement referred to in sub-regulation (1) shall be made not later  than
four working days before he acquires voting rights on such  securities  upon
conversion, or exercise of option, as the case may be.”

A careful reading of the aforesaid Regulations  discloses  that  the  public
announcement  should  not  be  delayed  beyond  four  working  days  of  the
agreement or decision to acquire the requisite number of  shares  or  voting
rights. We are in agreement with the finding of the Tribunal on  this  issue
and find no merit in the contentions  of  the  appellant.  If  the  plea  of
appellant  will  be  accepted  then  an  acquirer  can  keep  on   violating
Regulation 11(1) with impunity on as  many  occasions  as  he/it  wants  and
avoid  letting  the  public  have  the  required  knowledge  through  public
announcements by simply  making  subsequent  sale  or  transfer  to  another
entity so as to reduce the so-called net acquisition in a financial year  to
within 5%. This interpretation will defeat the purpose of  Regulation  11(1)
and shall also render Regulation 14(1) otiose.  The  concept  of  permitting
creeping acquisitions by permitting not  more  than  5%  of  the  shares  or
voting rights in a company limits the  period  for  such  acquisition  to  a
financial year ending by 31st March. But such concept does  not  dilute  the
requirement of making a public announcement within  the  time  mentioned  in
Regulation 14(1) if the acquisition even if only once made and divested,  is
of more than 5% of shares or voting rights in the target company.  In  other
words, even if such acquisition is followed by sale in  the  same  financial
year,  the  liability  of  making  the  public  announcement  would   remain
unaffected and shall attract action, as in this case.
Hence, the main contention advanced on behalf of the appellant is  found  to
be without any merit. The other contention is that Regulation 14(2)  of  the
Regulations of 1997 postpones the time for required public  announcement  to
acquisition  of  voting  rights  when  purchased  securities  are   actually
converted. According to the contention, only when securities or  shares  are
converted by the acquirer into voting rights by  getting  it  registered  or
upon exercise of option to acquire voting rights, the  liability  of  making
public announcement can be fastened.
Aforesaid plea has been rightly countered by  learned  Senior  Advocate  for
SEBI, Mr. C.U. Singh by pointing out that in case of acquisition  of  shares
or voting rights the appropriate applicable provision  is  Regulation  14(1)
and not Regulation 14(2) which applies  only  when  the  acquisition  is  of
other securities including Global Depository Receipts,  American  Depository
Receipts. It is only such securities which require  conversion  or  exercise
of option which is contemplated by Regulation 14(2).  He  also  pointed  out
that no such plea was raised before the SEBI or  the  Tribunal  and  rightly
because in the present case  only  Regulation  14(1)  is  applicable  as  it
covers acquisition of either the shares or the voting rights or  both  which
are the subject matter of Regulation 11(1). Mr. Singh has also  referred  to
a judgment of this Court in the case of Swedish Match  AB  and  Another  vs.
Securities & Exchange Board of India and Another, (2004) 11  SCC  641.  This
judgment in paragraphs 90 onwards  considered  the  purpose  and  effect  of
Regulations 10, 11 and 12 of the Regulations of 1997 and  in  paragraph  102
held them to be mandatory statutory provisions. However this judgment  needs
no elaborate consideration because no plea has  been  raised  on  behalf  of
appellant that the Regulations are directory or do not require compliance.
We find that the plea that the matter at hand relates  to  Regulation  14(2)
was not raised before the original authority or the Tribunal. We  also  find
that it is a plea of desperation and undeserving of acceptance.
In the final analysis we find no merit in these appeals and hence  they  are
dismissed with  consolidated  cost  of  Rs.  50,000/-  to  be  paid  by  the
appellant to SEBI within eight weeks.


                       …………………………………….J.
                       [VIKRAMAJIT SEN]



                                      …………………………………..J.
                             [SHIVA KIRTI SINGH]
New Delhi.
September 18, 2015.


















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