REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.9103 OF 2014
PRAMOD JAIN AND OTHERS
…APPELLANT(S)
VERSUS
SECURITIES AND EXCHANGE BOARD OF INDIA ...RESPONDENT(S)
J U D G M E N T
ADARSH KUMAR GOEL, J.
1. This appeal has been preferred under Section 15 Z of the Securities
and Exchange Board of India Act, 1992 (the Act) against order dated 6th
August, 2014 passed by the Securities Appellate Tribunal, Mumbai (the SAT)
in Appeal No.111 of 2012. The SAT upheld the order of Securities and
Exchange Board of India (SEBI) dated 13th April, 2012 rejecting the
application of the appellants for withdrawal of the public offer to acquire
shares of the Golden Tobacco Ltd. in terms of public announcement (PA)
dated November 12, 2009 under the provisions of SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 (the Takeover
Regulations).
Facts :
2. Golden Tobacco Limited (the target company) is a company having its
registered office at Tobacco House, S.V. Road, Vile Parle (West), Mumbai –
400 056. The equity shares of the target company are listed on the Bombay
Stock Exchange Limited (BSE) and the National Stock Exchange of India
Limited (NSE).
3. On November 12, 2009, Mr. Pramod Jain and Pranidhi Holdings Private
Limited (the acquirers) along with J.P. Financial Services Private Limited
(the person acting in concert (PAC) made PA through VC Corporate Advisors
Private Limited (the merchant banker) in accordance with regulations 10 and
12 read with regulation 14. As on the date of the PA, the acquirers and
PAC collectively held 11, 39, 002 equity shares (6.47%) of the target
company. The PA was voluntarily made by the acquirers and the PAC to
acquire 44, 02, 201 equity shares (25%) of the target company from its
equity shareholders at a price of Rs.101/- (the offer price) per equity
share. At that time, market price of the target company shares was Rs.109/-
per share. Networth of the target company as on 31st March, 2009 was
Rs.42.44 crores. Net current assets were Rs.134.4 crores and gross sales
were Rs.173.68 crores. The offer was for hostile takeover of the target
company. The PA mentioned that the prime object of the offer was to
acquire substantial shares/voting rights accompanied with the change and
control of the management of the target company. The acquisition was in
the nature of strategic investment for diversification and growth and to
reap the benefit of corporate opportunities. The draft letter of offer
also mentioned that the PAC had advanced loan against shares of the target
company and on account of default, it acquired the said shares representing
5.05% of the equity share capital. The acquirers and the PAC had also
acquired 71034 equity shares at highest and average price of Rs.100.15 and
Rs.89.13 respectively. Thus, the acquirers and the PAC had 6.47 % of the
issue of equity share capital as on the date of PA. The background of the
acquirers mentioned in the DLO was that Mr. Pramod Jain was prime Director
of PHPL and had experience in financial and consultancy services.
4. The acquirers and PAC, through the merchant banker, filed the draft
letter of offer (DLO) with SEBI on November, 26, 2009. During examination
of the DLO, certain complaints were received by SEBI against the acquirers
and PAC as well as against the target company and its promoters. The
appellants (the acquirer) in their complaints to SEBI and other proceedings
including petition under Section 397/398 of the Companies Act before the
Company Law Board and a suit before the Civil Court inter alia questioned
the transaction for joint development of Vile Parle Property in terms of
Memorandum of Understanding (MoU) dated 26th September, 2009 with Sheth
Developers and Suraksha Realty Ltd. Various correspondences were exchanged
between SEBI and the merchant banker, acquirers, PAC, the target company
and certain other entities in respect of such complaints.
5. The appellants vide application dated 8th October, 2011 sought
permission to withdraw the offer under Regulation 27(1)(d). The stand of
the appellants in the said letter was that the SEBI had not taken any
decision on the DLO in two years during which period the management of the
target company had systematically siphoned off its coffers, depleted its
valuable fixed assets and eroded its net worth substantially with the
intention of making it a shell company. This has defeated the very object
of the offer, without any fault on the part of the acquirers. The
management had availed huge high cost borrowing from banks and financial
institutions against its property, including 18.7 per cent shares out of
the promoters’ shareholdings. Disputes were pending before the arbitrator
arising out of default in payments. Most valuable assets of the target
company had been encumbered in violation of SEBI regulations and against
the interest of minority shareholders and the acquirers. Since the date of
PA, financial position of the target company had deteriorated
substantially.
Order of SEBI
6. The SEBI vide order dated 13th April, 2012 declined to permit
withdrawal of the PA but observed that alleged violation of Regulation 23
by the target company shall be investigated. It was held that as per
Regulation 23(1), the target company was entitled to dispose of its assets
with the approval of the shareholders even after the PA. Correspondence
which the SEBI had with the acquirers was referred to, with a view to
explain the delay in deciding the DLO. It was observed that the SEBI had
informed the merchant banker of the appellants on 3rd February, 2010 that
it was not competent to administer the authenticity of the process of
Resolution in the General Body Meeting (GBM) dated 18th January, 2010. The
merchant banker vide letter dated 5th May, 2010 informed the SEBI that the
acquirers had reached a settlement with the target company and withdrawn
their petition before the Company Law Board (CLB) against the Resolution
dated 18th January, 2010. SEBI had also advised the merchant banker that
it had not been provided any material in support of the allegation of
violation of Regulation 23 by the target company in selling its assets.
The merchant banker informed the SEBI vide letter dated 19th May, 2011 that
the acquirers had filed a suit for restraining the target company from
creating any third party interest in the assets of the target company. The
SEBI had also received complaints against the acquirers and the PAC which
were being looked into when the PAC vide letter dated 2nd August, 2011
sought permission to withdraw the PA. Vide letter dated 9th August, 2011,
the acquirers requested that the process of open offer be kept in abeyance.
SEBI vide e-mail dated 9th September, 2011 responded to the merchant
banker, seeking tabulated list of the allegations of the acquirers and the
PAC but instead of doing so, the merchant banker forwarded request for
withdrawal of the PA. It was observed that in the circumstances there was
no delay on the part of the SEBI. It was further observed that the
acquirers had challenged the Resolution of the Extra Ordinary General
Meeting (EGM) and had also filed a suit. The acquirers entered into an
amicable settlement before the CLB. SEBI had no jurisdiction in the
matter. Referring to Regulation 22, it was observed that the acquirers
could make PA only after most careful consideration and must ensure that it
is able to implement the offer. Referring to Regulation 27, it was observed
that public offer once made could not be withdrawn except in the
circumstances provided in the said Regulation which had to be construed
strictly. Unchecked automatic withdrawal of offer was capable of being
misused. It was also observed that the acquirers should have used due
diligence with regard to the allegation in FIR dated 25th July, 2009 about
personal borrowings by promoters of the target company by sale of prime
properties as the PA was much after the FIR. The acquirers and the PAC
had already purchased substantial shares of the target company and thus,
could not make PA without exercising due diligence regarding the financial
condition and quality of management of the target company. The acquirers
were not strangers to the target company. They had 6.47 per cent shares.
Discovery of adverse effects pertaining to financial health subsequent to
the PA could not be a ground to withdraw the PA. Doing so will jeopardize
the interests of the shareholders. The takeover regulations laid down a
self-contained code and withdrawal of public offer was not governed by
principles of withdrawal of an offer under the Contract Act, 1872.
Order of Sat
7. The above view has been affirmed by the SAT in its impugned order (by
majority). As regards the timeline stipulated in Regulation 18, it was
observed that under the second proviso thereto, the SEBI could take time in
making inquiry on a complaint and thereafter could call for a revised
letter of offer with or without re-scheduling the date of opening or
closing the offer. However, it was observed that in the present case, SEBI
was wholly unjustified in taking more than two years for offering its
comments on the letter of offer submitted by the appellants. This,
however, did not constitute a ground to permit withdrawal of the PA. As
regards the contention that the public offer was frustrated and became
impossible of implementation on account of encumbering of the most valuable
property of the target company in violation of Regulation 23 and other
steps of the promoters making the target company a shell company, it was
observed that the target company had taken decision to develop its Vile
Parle property even before the PA. Appellant No.1 had given his offer for
joint development of the said property on 29th September, 2008 but the said
offer was rejected and Sheth Developers were shortlisted for the purpose.
It was thereafter that the appellants decided to make hostile takeover
public offer to frustrate the decision of the target company to develop the
property with Sheth Developers. It will be appropriate to refer to the
findings of the SAT in this regard:
“14. We see no merit in the above contentions. Admittedly, GTL had decided
to develop the Vile-Parle property even before public offer was made by
appellants on November 12, 2009. In fact Appellant No. 1 had made an offer
to GTL on September 29, 2008 for joint development of Vile-Parle property
by offering ` 150 crores as non refundable amount and had suggested profit
sharing in the joint venture at a ratio 50:50. However, GTL rejected the
offer made by appellants and on recommendation of Ernst & Young shortlisted
Sheth Developers as best 20 bidder for joint development of Vile-Parle
property. Thereupon appellants decided to make hostile public offer on
November 12, 2009 with a view to frustrate decision of GTL to develop the
Vile-Parle property jointly with Sheth Developers. Although object of the
proposal to acquire 25% shares of GTL at Rs. 101/- per share as against the
market price of Rs.109/- per share, as stated in the public offer was to
obtain substantial stake/voting rights of GTL, it is not in dispute that
appellants were basically interested in developing the Vile-Parle property.
Thus, it is evident that appellants being frustrated in their endeavour to
develop the Vile-Parle property, had resorted to the mechanism of public
offer with a view to frustrate the decision of GTL in jointly developing
the Vile-Parle property with Sheth Developers. Therefore, appellants having
made public offer out of frustration on account of not being able to
develop the Vile-Parle property, are not justified in alleging that
entrusting the development of Vile-Parle property to Sheth Developers has
frustrated the public offer made by appellants.
15. Admittedly, after making public offer, appellants had filed Company
Petition No. 3 of 2010, wherein specific grievance was made to the effect
that GTL had entered into MOU with Sheth Developers without disclosing all
material facts to the shareholders and without the approval of shareholders
which was in gross violation of regulation 23 of SAST Regulations, 1997. It
was also alleged in the Company Petition that the promoters of GTL have
been mismanaging the affairs of the company and have siphoned of huge
amounts from the company, as a result whereof, there has been deep decline
in the performance and profitability of the company. Appellants had also
sought an order restraining GTL from holding EGM which was scheduled to be
held on January 18, 2010.
16. Company Law Board in its order dated January 19, 2010, recorded
statement made by counsel for GTL that in the EGM held on January 18, 2010
requisite resolutions have been passed in relation to development of Vile-
Parle property and in implementation of the said resolution third party
rights have been created. By that order Company Law Board directed that
during the pendency of Company Petition No. 3 of 2010 GTL shall not act
upon resolution dated January 18, 2010 any further. From aforesaid order
passed by Company Law Board it is clear that in view of resolution passed
in the EGM held on January 18, 2010, violation of regulation 23 committed
by GTL in relation to development of Vile-Parle property stood rectified.
Dispute, if any in relation to passing of resolution on January 18, 2010
was to be considered at the hearing of Company Petition No. 3 of 2010.
17. However, on February 8, 2010, appellants withdrew Company Petition No.3
of 2010 by merely recording that the parties have amiably settled the
matter without any further claims against each other. Having settled the
dispute relating to development of Vile-Parle property with the
promoters/management of GTL on the basis of undisclosed reasons and having
withdrawn Company Petition No. 3 of 2010 unconditionally, it is not open to
appellants to allege that their public offer is frustrated on account of
GTL entering into MOU with Sheth Developers for development of Vile-Parle
property.
18. Similarly, having settled the dispute relating to siphoning of funds by
GTL during 2009-2010 which plea was specifically raised in Company Petition
No. 3 of 2010, appellants are not justified in agitating the very same
issue before SEBI on ground that GTL has siphoned of its funds during the
year 2009-2010 and 2010-2011. In other words, since the plea of siphoning
of funds by GTL during the year 2009-2010 and prior thereto having been
specifically raised in Company Petition No. 3 of 2010 and that issue having
been settled by appellants with the promoters/ management of GTL for
undisclosed reasons, the appellants are not justified in reagitating the
very same issue before SEBI in relation to siphoning of funds either during
2009-2010 or during 2010-2011.
21. It is relevant to note that appellants, subsequent to withdrawal of
Company Petition No. 3 of 2010 in February 2010, have filed S. C. Suit No.
817 of 2011 in April 2011 before the City Civil Court at Mumbai, alleging
for the first time that the Company Petition No. 3 of 2010 was withdrawn on
account of oral assurance given by promoters of GTL that Vile-Parle
property would be developed only after holding public auction and that the
promoters of GTL have committed breach of that oral assurance.
22. Admittedly, City Civil Court at Mumbai has granted ad- interim relief
in favour of appellants on April 26, 2011 and that ad- interim order
continues to be in operation till date. Therefore, irrespective of the fact
that SEBI was not justified in taking more than two years for approving the
draft letter of offer, in the facts of present case, grievance of
appellants that the public offer is frustrated and has become impossible of
performance cannot be accepted, because, both grounds based on which
appellants had sought withdrawal of public offer, were in fact settled by
appellants on the basis of oral assurance given by promoters of GTL and
further, for the alleged breach of oral assurance, appellants have filed
Suit in the Bombay City Civil Court and obtained stay of development of
Vile-Parle property and that stay is admitted operating till date.
23. Strong reliance was placed by counsel for appellants on decision of
SEBI dated February 14, 2014 wherein penalty of ` 1 crore has been levied
against the promoters of GTL interalia for violating regulation 23 of SAST
Regulations, 1997. No doubt that entering into an MOU by GTL with Sheth
Developers on November 26, 2009 without obtaining approval of general body
of shareholders was in violation of regulation 23 of SAST Regulations,
1997. However, admittedly on January 18, 2010 the general body of
shareholders has authorized GTL to enter into Joint Development Agreement
is in respect of Vile-Parle property. In view of approval granted by the
general body of shareholders on January 18, 2010, grievance of appellants
that Vile-Parle property has been encumbered in violation of regulation 23
does not survive at least from January 18, 2010.
26. Apart from above, as late as on August 9, 2011 appellants had addressed
a letter to SEBI requesting them to keep the process of open offer in
abeyance, because, in the proceedings pending before the City Civil Court
at Mumbai, GTL had filed an affidavit stating that in the board resolution
dated May 25, 2011 company has decided not to proceed further with the MOU
dated November 26, 2009 (wrongly stated therein as December 26, 2009)
entered with Sheth Developers and instead take necessary steps to develop
the Vile-Parle property by the company of its own. By the said letter dated
August 9, 2011 appellants called upon SEBI to investigate about the exact
legal status of the Vile-Parle property, investigate regarding possession
of the original title deeds of Vile-Parle property and investigate
regarding possession of the original title deeds of Vile-Parle property,
investigate regarding usage of funds etc. It was further stated in the said
letter until appellants are assured of their concern on the above issues,
SEBI should keep the process of open offer in abeyance.
27. Aforesaid letter dated August 9, 2011, clearly falsifies the case of
appellants that the actions taken by promoters of GTL during the course of
two years has frustrated the public offer, because, if public offer was
frustrated, appellants would not have asked SEBI to keep the process of
public offer in abeyance. Having asked SEBI on August 9, 2011 to keep the
process of public offer in abeyance, appellants were not justified in
filing application on October 11, 2011 seeking permission to withdraw the
open offer on ground that inordinate delay has frustrated the open offer.”
8. We have heard learned counsel for the parties.
contentions of the appellants
9. Main contention raised on behalf of the appellants is that there is
no justification for long delay on the part of the SEBI in granting
approval to the offer of the appellant and situation having changed to the
prejudice of the appellant, the appellants are entitled to withdraw their
offer. Since under the scheme of the regulations, the appellants could not
withdraw the offer once made except in circumstances mentioned in
Regulation 27, the regulation should be read as creating an obligation on
the part of the SEBI to take speedy decision and if there was unexplained
delay resulting in prejudice to the appellants-acquirers, the appellants
are entitled to be absolved of the liability to honour the offer. GTL had
become a BIFR company on account of siphoning off funds by the promoters.
It was submitted that in absence of obligation to approve the offer within
reasonable time, the promoters could take steps to siphon the funds or
dispose of the assets which could prejudice the interests of the acquirer.
Thus, it could not be held that the acquirer was indefinitely bound by the
offer. Reference was also made to the timeline provided in Regulation 22
and the provisions of Regulation 23. It was submitted that while normal
ups and downs in the market may not be a ground to permit withdrawal of
offer, unilateral action of the promoters resulting in transfer of assets
could certainly be the ground to permit withdrawal of offer. The object of
binding an acquirer to the offer is to protect the interest of the
shareholders but this was required to be balanced with the interest of the
acquirer. If the assets are unduly transferred by the promoters after the
PA, the acquirer was entitled to be relieved from the offer. SEBI in its
capacity as regulator has to adopt an approach which is fair to all. In
the facts of present case, the decisions of this Court in Nirma Industries
Limited vs. Securities and Exchange Board of India[1] and Securities and
Exchange Board of India vs. M/s. Akshya Infrastructure Pvt. Ltd.[2] relied
upon in the impugned order are not applicable. Even if clause (d) of
regulation 27 is read ejusdem generis so as to apply only in situations
where it is impossible for the acquirer to perform the public offer, it
cannot exclude situations where SEBI itself is satisfied that serious
prejudice was caused to the acquirer by intervening actions of the
promoters in alienating or encumbering the assets of the company, rendering
it inequitable to require the acquirer to be bound by its offer. Thus,
the obligation of the acquirer cannot be divorced from the conduct of the
promoters in the intervening period. Apart from distinguishing the
judgment in Nirma Industries Limited (supra) which has been followed in the
impugned order, the judgment in M/s. Akshya Infrastructure Pvt. Ltd (supra)
was also sought to be distinguished as being limited to cases where delay
by SEBI does not cause any serious prejudice to the acquirer.
10. Thus, the submissions of the appellants are two fold :
(i) The SEBI failed to adhere to the timeline prescribed under the
Takeover Code which rendered it impossible for the appellants to conclude
their open offer. Adherence to timeline prescribed under Regulations
18(2), 22(2), (3) and (4) are critical under the Takeover Code, the
Bhagwati Committee Report and the International Practice. The time is of
essence in cases of hostile takeover.
(ii) The existing promoters should not be given an opportunity to
administer a poison pill to defeat the offer of the potential acquirers.
This principle is recognized under Regulation 23.
11. Adverting to the facts it was submitted that first complaint against
the appellants was received on 8th January, 2010 i.e. 21 days after the PA.
Complaints against the appellants were frivolous. The appellants duly
responded to the complaints in timely manner. The complaints were made at
the behest of the promoters. The appellants pointed out various illegal
acts of the promoters but the SEBI failed to take any action. The
appellants requested the SEBI to keep the open offer in abeyance till
action was taken against the promoters. This justifies the prayer of the
appellants to withdraw the open offer.
12. Shri C.A. Sundaram, learned senior counsel for the appellants
submitted that all the members of the SAT (majority as well as minority)
have held the delay by SEBI to be unjustified but still, on erroneous
interpretation, right of the appellants to withdraw the public offer has
not been upheld. Reference was made to the complaint about transfer of
valuable property of the Company which was un-encumbered at the time of PA.
The funds raised from the transaction have been siphoned off. One of the
key promoters was arrested by the Economic Offences Wing of the Police and
remained in jail for one and a half years. Chargesheet was filed against
him. The financial ratio of the target company reflects manner in which
financial position quickly deteriorated after the PA. The petition filed
by the acquirers before the Company Law Board was withdrawn on the
assurance of the promoters that the assets will not be encumbered without
the public auction. Thereafter, the matter was pending in the civil suit.
Thus, there was a breach of Regulation 23.
13. Shri Sundaram submitted that open offer was not a concluded contract
but mere invitation to the public to offer their shares. The result of not
allowing the offer to be withdrawn will be that the promoters will be able
to sell their shares at the price specified in open offer even when the
value of the shares was far lower. This will be against the policy of law
underlying the Takeover Regulations. Moreover, the action of the SEBI was
required to be fair, reasonable and consistent with Article 14 of the
Constitution.
14. Shri Sundaram sought to distinguish the judgments of this Court in
Nirma Industries Limited (supra) and M/s. Akshya Infrastructure Pvt. Ltd.
(supra) by submitting that unlike the said cases, in the present case,
there was undue delay on the part of the SEBI and prejudice was caused to
the acquirers for reasons not attributable to them. He submitted that
doctrine of frustration under Section 56 of the Contract Act will clearly
apply. As a regulator, the SEBI is duty bound to protect the interest of
the acquirer and also to ensure that a genuine attempt by an acquirer is
not defeated by the promoters by their unilateral action.
response by the sebi
15. Shri Arvind P. Datar, learned senior counsel for the SEBI opposed the
above submissions, he submitted that adverse finding against SEBI on the
issue of delay was unjustified, but even if the said finding was upheld,
the withdrawal of open offer was not permissible under Regulation 27(1)(d)
of the Takeover Regulations. The acquirers held 6.47% share and had lent
Rs.8.5 crores to the target company. They had purchased shares worth
Rs.63.33 lakhs before making the PA. The first appellant was aware of the
acts of mismanagement by the promoters of the target company. The PA was
made with the intention of curbing fraudulent and the illegal practices of
the promoters and for the target company’s benefit. The appellants
approached SEBI to investigate the illegalities knowing fully well that
SEBI’s role was only to regulate the security market. For mismanagement or
other illegalities, remedy was under Section 397/398 of the Companies Act
which remedy the appellants had taken. The appellants reached an amicable
settlement with the target company and thereafter approached the civil
court. It was wrong to state that the target company had become defunct.
The target company continued to own the Vile Parle property worth Rs.2000
crores.
16. Shri Datar submitted that more than 43 complaints/letters were
received which were to be dealt with by SEBI. In such circumstances, it
could not be held that there was undue delay on the part of the SEBI in
dealing with the DLO.
17. It was submitted that the appellants ought to have exercised due
diligence before making the PA. The appellants were not strangers and had
6.47% shares. They had advanced loan of Rs.8.5 crores and acquired shares
worth Rs.66.33 lakhs before the PA. They were aware of the FIR and alleged
acts of mismanagement they had resorted to public offer out of frustration
against the decision of the target company developing the Vile Parle
property with Sheth Developers. They settled the matter before the Company
Law Board with the target company and also approached the civil court for
alleged breach of settlement and obtained stay of development of the Vile
Parle property. In these circumstances, the plea of frustration could not
be allowed to be raised by the appellants. The PA could not be allowed to
be withdrawn merely on the ground that the acquirers find it not to be a
prudent decision. Moreover, the company still owns assets and was not a
shell company and no prejudice was suffered by the acquirers. Referring to
the penalty levied by SEBI on the target company for entering into a MoU
without approval of the General Body, it was submitted that this could not
furnish a ground for withdrawal of the PA. Appellants had raised the
issue before the CLB and settled the matter.
questions
18. The rival submissions require us to determine the following questions
:
(i) To what extent is the timeline laid down under the Takeover
Regulations required to be adhered to and effect of delay by SEBI in the
present case?
(ii) To what extent unilateral action of the target company in dealing
with the property of the company after a hostile public offer is made
furnish cause of action to the acquirers to withdraw the public offer and
whether in the present case, decision not permitting withdrawal of public
offer is justified?
the takeover regulations
19. Needless to mention that mergers and takeovers are well known
processes in the corporate world. Acquisition of controlling interest of a
company can be friendly or hostile. In a friendly acquisition, management
of the target company sells its controlling shares to the acquirer. Where
management of the target company is unwilling to negotiate with an
acquirer, the acquirer can directly approach the shareholders by making an
open offer which is called Hostile takeover. A Hostile takeover helps to
unlock the hidden value of the shares and puts pressure on the management
to work efficiently. On the other hand, it has potential of unduly
upsetting the normal functioning of a target company. Thus, there is an
undoubted need to regulate the process of acquisition and takeovers in post-
liberalisation era after 1991. It is well known that takeover attempt
being unpleasant for the target company is normally met with defence
strategies such as ‘Poison Pills’ (making takeover unviable for the
acquirer by making the cost of acquisition unattractive), ‘Shark
Repellents’ (measures to repel an unwanted takeover) sale of valuable
assets, etc.
20. Justice P.N. Bhagwati Committee was appointed in November, 1995 to
review the existing framework of regulations and to suggest amendments in
the interest of investors and all parties concerned in the acquisition
process. The Committee kept in mind the following principles :
“i. Equality of treatment and opportunity to all shareholders.
ii. Protection of interests of shareholders.
iii. Fair and truthful disclosure of all material information
by the acquirer in all public announcements and offer documents.
iv. No information to be furnished by the acquirer and other
parties to an offer exclusively to any one group of shareholders.
v. Availability of sufficient time to shareholders for making informed
decisions.
vi. An offer to be announced only after most careful and
responsible consideration.
vii. The acquirer and all other intermediaries professionally involved in
the offer, to exercise highest standards of care and accuracy in preparing
offer documents.
viii. Recognition by all persons connected with the process of substantial
acquisition of shares that there are bound to be limitations on their
freedom of action and on the manner in which the pursuit of their interests
can be carried out during the offer period.
ix. All parties to an offer to refrain from creating a false market
in securities of the target company.
x. No action to be taken by the target company to frustrate an
offer without the approval of the shareholders.” [3]
The Committee made various recommendations including requirement of
disclosure by the acquirers, procedure for public announcements,
obligations of the acquirers and the target company. This led to the
adoption of the 1997 Takeover Regulations.
21. We may reproduce some of the Regulations which are necessary for the
decision of controversy in the case before us :
“ Acquisition of fifteen per cent or more of the shares or voting rights of
any company.
10. No acquirer shall acquire shares or voting rights which (taken
together with shares or voting rights, if any, held by him or by persons
acting in concert with him), entitle such acquirer to exercise fifteen per
cent or more of the voting rights in a company, unless such acquirer makes
a public announcement to acquire shares of such company in accordance with
the regulations.
Acquisition of control over a company.
12. Irrespective of whether or not there has been any acquisition of
shares or voting rights in a company, no acquirer shall acquire control
over the target company, unless such person makes a public announcement to
acquire shares and acquires such shares in accordance with the
regulations.…
Timing of the public announcement of offer.
14. (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 .…
Submission of letter of offer to the Board.
18. (1) Within fourteen days from the date of public announcement made
under regulation 10, 11 or 12 as the case may be, the acquirer shall,
through its merchant banker, file with the Board, the draft of the letter
of offer containing disclosures as specified by the Board.
(2) The letter of offer shall be despatched to the shareholders not
earlier than 21 days from its submission to the Board under sub-regulation
(1):
Provided that if, within 21 days from the date of submission of the letter
of offer, the Board specifies changes, if any, in the letter of offer
(without being Page 35 of 75 under any obligation to do so), the merchant
banker and the acquirer shall carry out such changes before the letter of
offer is despatched to the shareholders :
[Provided further that if the disclosures in the draft letter of offer are
inadequate or the Board has received any complaint or has initiated any
enquiry or investigation in respect of the public offer, the Board may call
for revised letter of offer with or without rescheduling the date of
opening or closing of the offer and may offer its comments to the revised
letter of offer within seven working days of filing of such revised letter
of offer.
(3) The acquirer shall, while filing the draft letter of offer with the
Board under sub-regulation (1), pay a fee as mentioned in the following
table, by bankers‘ cheque or demand draft drawn in favour of the
‘Securities and Exchange Board of India’….
General Objections of the acquirer.
22. (1) The public announcement of an offer to acquire the shares of the
target company shall be made only when the acquirer is able to implement
the offer.
(2) Within 14 days of the public announcement of the offer, the acquirer
shall send a copy of the draft letter of offer to the target company at its
registered office address, for being placed before the board of directors
and to all the stock exchanges where the shares of the company are listed.
(3) The acquirer shall ensure that the letter of offer is sent to all the
shareholders (including non-resident Indians) of the target company, whose
names appear on the register of members of the company as on the specified
date mentioned in 1 Inserted by the SEBI (Substantial Acquisition of Shares
and Takeovers) (Second Amendment) Regulations, 2002, w.e.f. 9-9-2002. Page
47 of 75 the public announcement, so as to reach them within 45 days from
the date of public announcement.…
General obligations of the board of directors of the target company.
23. (1) Unless the approval of the general body of shareholders is
obtained after the date of the public announcement of offer, the board of
directors of the target company shall not, during the offer period,—
(a) sell, transfer, encumber or otherwise dispose of or enter into an
agreement for sale, transfer, encumbrance or for disposal of assets
otherwise, not being sale or disposal of assets in the ordinary course of
business, of the company or its subsidiaries; or
(b) issue 2 [or allot] any authorised but unissued securities carrying
voting rights during the offer period; or
(c) enter into any material contracts.
Withdrawal of offer.
27. (1) No public offer, once made, shall be withdrawn except under the
following circumstances:—
(a) [***]
(b) the statutory approval(s) required have been refused;
(c) the sole acquirer, being a natural person, has died;
(d) such circumstances as in the opinion of the Board merit withdrawal.
Board’s right to investigate.
38. The Board may appoint one or more persons as investigating officer to
undertake investigation for any of the following purposes, namely:—
(a) to investigate into the complaints received from the investors, the
intermediaries or any other person on any matter having a bearing on the
allegations of substantial acquisition of shares and takeovers ;
(b) to investigate suo motu upon its own knowledge or information, in the
interest of the securities market or investors‘ interest, for any breach of
the regulations;
(c) to ascertain whether the provisions of the Act and the regulations are
being complied with for any breach of the regulations.”
22. In Nirma Industries Limited (Supra), the acquirer after making PA
sought withdrawal therefrom on the ground of embezzlement of funds by the
target company. SEBI rejected the application with the observation that
the acquirer ought to have used due diligence prior to making the public
offer. Rejecting the plea that the embezzlement and siphoning off of funds
by the target company could not have been found by third party even after
exercising diligence, this Court held under the scheme of the takeover code
public offer once made could not be withdrawn so as to deprive the
shareholders of their valuable right to have exit option and also to ensure
that public announcement is not made by way of speculation. The scheme of
takeover code was held to be as follows:
“ 59. A conspectus of the aforesaid Regulations would show that the scheme
of the Takeover Code is: (a) to ensure that the target company is aware of
the substantial acquisition; (b) to ensure that in the process of the
substantial acquisition or takeover, the security market is not distorted
or manipulated; and (c) to ensure that the small investors are given an
option to exit, that is, they are offered a choice to either offload their
shares at a price as determined in accordance with the Takeover Code or to
continue as shareholders under the new dispensation. In other words, the
Takeover Code is meant to ensure fair and equal treatment of all
shareholders in relation to substantial acquisition of shares and takeovers
and that the process does not take place in a clandestine manner without
protecting the interest of the shareholders. It is keeping in view the
aforesaid aims and objects of the Takeover Code that we shall have to
interpret Regulation 27(1).”
23. As regards the scheme of Regulation 27, it was further observed :
“62. A bare perusal of the aforesaid Regulations shows that Regulation
27(1) states the general rule in negative terms. It provides that no public
offer, once made, shall be withdrawn. Since clause (a) has been omitted, we
are required to interpret only the scope and ambit of clauses (b), (c) and
(d). The three sub-clauses are exceptions to the general rule and,
therefore, have to be construed very strictly. The exceptions cannot be
construed in such a manner that would destroy the general rule that no
public offer shall be permitted to be withdrawn after the public
announcement has been made. Clause (b) would permit a public offer to be
withdrawn in case of legal impossibility when the statutory approval
required has been refused. Clause (c) again provides for impossibility when
the sole acquirer, being a natural person, has died. Clause (b) deals with
a legal impossibility whereas clause (c) deals with a natural disaster.
Clearly clauses (b) and (c) are within the same genus of impossibility.
Clause (d) also being an exception to the general rule would have to be
naturally construed in terms of clauses (b) and (c). Mr. Divan has placed a
great deal of emphasis on the expression “such circumstances” and “in the
opinion” to indicate that the Board would have a wide discretion to permit
withdrawal of an offer even though it is not impossible to perform. We are
unable to accept such an interpretation.
67. Applying the aforesaid tests, we have no hesitation in accepting the
conclusions reached by SAT that clauses (b) and (c) referred to
circumstances which pertain to a class, category or genus, that the common
thread which runs through them is the impossibility in carrying out the
public offer. Therefore, the term “such circumstances” in clause (d) would
also be restricted to a situation which would make it impossible for the
acquirer to perform the public offer. The discretion has been left to the
Board by the legislature realising that it is impossible to anticipate all
the circumstances that may arise making it impossible to complete a public
offer. Therefore, certain amount of discretion has been left with the Board
to determine as to whether the circumstances fall within the realm of
impossibility as visualised under clauses (b) and (c). In the present case,
we are not satisfied that circumstances are such which would make it
impossible for the acquirer to perform the public offer. The possibility
that the acquirer would end-up making losses instead of generating a huge
profit would not bring the situation within the realm of impossibility.
70. Mr. Venugopal, in our opinion, has rightly submitted that the Takeover
Regulations, which is a special law to regulate “substantial acquisition of
shares and takeovers” in a target company lays down a self-contained code
for open offer; and also that interest of investors in the present case
required that they should be given an exit route when the appellants have
acquired substantial chunk of shares in the target company. He has
correctly emphasized in his submissions that the orderly development of the
securities market as a whole requires that public offers once made ought
not to be allowed to be withdrawn on the ground of fall in share price of
the target company, which is essentially a business misfortune or a
financial decision of the acquirer having gone wrong. SEBI as well as SAT
have correctly concluded that withdrawal of the open offer in the given set
of circumstances is neither in the interest of investors nor development of
the securities market.
90. We are inclined to agree with the submission made by Mr Venugopal that
the appellants cannot be permitted to wriggle out of the obligation of a
public offer under the Takeover Regulation. Permitting them to do so would
deprive the ordinary shareholders of their valuable right to have an exit
option under the aforesaid Regulations. The SEBI Regulations are designed
to ensure that public announcement is not made by way of speculation and to
protect the interest of the other shareholders. Very solemn obligations are
cast on the Merchant Banker under Regulation 24(1) to ensure that—
“24. (1)(a) the acquirer is able to implement the offer;
(b) the provision relating to escrow account referred to in Regulation 28
has been made;
(c) firm arrangements for funds and money for payment through verifiable
means to fulfil the obligations under the offer are in place;
(d) the public announcement of offer is made in terms of the Regulations;
(e) his shareholding, if any in the target company is disclosed in the
public announcement and the letter of offer.”
91. Regulation 24(2) mandates that the Merchant Banker shall furnish to the
Board a due diligence certificate which shall accompany the draft letter of
offer. The aforesaid Regulation clearly indicates that any enquiries and
any due diligence that has to be made by the acquirer have to be made prior
to the public announcement. It is, therefore, not possible to accept the
submission of Mr Shyam Divan that the appellants are to be permitted to
withdraw the public announcement based on the discovery of certain facts
subsequent to the making of the public announcement. In such circumstances,
in our opinion, the judgments cited by Mr Shyam Divan are of no relevance.
”
24. As regards the effect of delay on the part of SEBI, it was observed:
“94. A perusal of the aforesaid Regulation clearly shows that the acquirer
is required to file the draft letter of offer containing disclosures as
specified by the Board within a period of 14 days from the date of public
announcement. Thereafter, letter of offer has to be dispatched to the
shareholders not earlier than 21 days from its submission to the Board.
Within 21 days, the Board is required to specify changes if any, that ought
to be made in the letter of offer. The merchant banker and the acquirer
have then to carry out such changes before the letter of offer is
dispatched to the shareholders. But there is no obligation to do so. Under
the second proviso, the Board may call for revised letter of offer in case
it finds that the disclosures in the draft letter of offer are inadequate
or the Board has received any complaint or has initiated any enquiry or
investigation in respect of the public offer. It is important to notice
that in the first proviso the Board does not have any obligation to specify
any change in the draft letter of offer within a period of 21 days. In the
present case, in fact, the Board had not specified any changes within 21
days. We have already noticed earlier that the letter of offer was lacking
and deficient in detail. The appellants themselves were taking time to
submit details called for, by their merchant bankers through various
letters between 8-8-2005 to 20-3-2006. We have already noticed the repeated
advice given by the Merchant Banker to enhance the issue size of the open
offer and to comply with other requirements of the Takeover Regulations.
The appellants, in fact, were prevaricating and did not agree with the
interpretation placed on Regulation 27(1)(d) by the Merchant Banker. We,
therefore, reject the submission of Mr Shyam Divan that there was delay on
the part of SEBI in approving the draft letter of offer. ”
25. In M/s. Akshya Infrastructure Pvt. Ltd. (supra), this Court held that
SEBI is not justified in causing delay in dealing with the issuance of its
comments on a letter of offer as delay can lead to controversy as to
whether the belated action was bona fide exercise of statutory power.
However, delay by itself may not vitiate action of the SEBI. The SEBI has
to be guided by the overall interest of the shareholders in dealing with
the prayer for withdrawal from the public offer. The economic unviability
is no ground to justify prayer for such withdrawal. The relevant
observations are:
“30. With regard to delay, we do not find much substance in the submission
of Mr C.U. Singh. Mr Singh has sought to explain the delay on the ground
that information sought by the appellant was not given by the respondent.
In our opinion, this was no ground for the appellant to delay the issuance
of comments on the letter of offer, especially not for a period of 13
months. In the event the information was not forthcoming, the appellant had
the power to refuse the approval of the public offer. It is true that under
Regulation 18(2), SEBI was required to dispatch the necessary letters to
the shareholders within a reasonable period. It is a matter of record that
the comments were not offered for 13 months. Such kind of delay is wholly
inexcusable and needs to be avoided. It can lead to avoidable controversy
with regard to whether such belated action is bona fide exercise of
statutory power by SEBI. By adopting such a lackadaisical, if not callous
attitude, the very object for which the Regulations have been framed is
diluted, if not frustrated. It must be remembered that SEBI is the watchdog
of the securities market. It is the guardian of the interest of the
shareholders. It is the protective shield against unscrupulous practices in
the securities market. Therefore, SEBI like any other body, which is
established as a watchdog, ought not to act in a lackadaisical manner in
the performance of its duties. The time-frame stipulated by the Act and the
Takeover Regulations for performing certain functions is required to be
maintained to establish the transparency in the functioning of SEBI.
31. Having said this, we are afraid such delay is of no assistance to the
respondent. It will not result in nullifying the action taken by SEBI, even
though belated. Ultimately, SEBI is charged with the duty of ensuring that
every public offer made is bona fide for the benefit of the shareholders as
well as acquirers. In the present case, SEBI has found that permitting the
respondent to withdraw the public offer would be detrimental to the overall
interest of the shareholders. The only reason put forward by the respondent
for withdrawal of the offer is that it is no longer economically viable to
continue with the offer. Mr Nariman has referred to a tabular statement and
data to show that there is no substantial variation in the share prices
that ensued making of the public offer. Having seen the Table, we find
substance in the submission of Mr Nariman that there is hardly any
variation in the shares of the target company from 20-10-2011 till 30-11-
2011. The variation seems to have been between Rs 78.10 (on 24-11-2011) and
Rs 87.60 (on 20-10-2011). Such a variation cannot be said to be the result
of the public offer. But this will not detract from the well-known
phenomena that public announcement of the public offering affects the
securities market and the shares of the target company. The impact is
immediate.
35. We are also not impressed by the submission of Mr Nariman that it has
now become economically impossible to give effect to the public offer. This
very submission has been rejected in Nirma Industries Ltd. We reiterate our
opinion in Nirma Industries Ltd. that under Regulations 27(1)(b), (c) and
(d), a public offer, once made, can only be permitted to be withdrawn in
circumstances which make it virtually impossible to perform the public
offer. In fact, the very purpose for deleting Regulation 27(1)(a) was to
remove any misapprehension that an offer once made can be withdrawn if it
becomes economically not viable. We are of the considered opinion that the
distinction sought to be made by Mr Nariman between a voluntary public
offer and a triggered public offer is wholly misconceived. Accepting such a
submission would defeat the very purpose for which the Takeover Code has
been enacted.”
Our Findings
Re. Question (i)
26. Applying the decisions of this Court to the facts of the present
case, we are in agreement with the finding recorded by the SAT that there
was undue delay on the part of the SEBI in dealing with the DLO. No doubt,
in a given case timeline prescribed under the Regulations may not be
adhered to when the SEBI justifiably takes time in dealing with the
complaints, as rightly submitted by Shri Datar, in the present case, the
stand of the SEBI itself is that it could not go into the complaints for
which the right forum was CLB. As regards the time taken in dealing with
the complaints against the acquirers, the SEBI could have promptly
proceeded with the matter. However, mere upholding of finding of SAT on
the aspect of delay by SEBI is not enough to hold that the appellants are
entitled to withdrawal of the public offer. The withdrawal has to be dealt
with under Regulation 27, as held by this Court. The general principle is
that public offer once made cannot be withdrawn. Exception to the rule is
the specified situations under the Regulation as laid down by this Court in
above decisions particularly in Nirma Industries Limited (Supra)[4]. In
the present case, though SEBI was not justified in causing delay in giving
its comments on public offer, this by itself is not enough to justify
withdrawal from public offer so long as the case does not fall under
Regulation 27. First question is answered accordingly.
Re. Question (ii)
27. As already observed above, under the scheme of the regulations public
offer has to be made after due diligence (Regulation 22). Obligation of the
board of directors under Regulation 23 against alienation of assets,
issuance of unissued securities carrying voting rights or entering into
material contracts is applicable only if approval of general body of
shareholders is not obtained. We are not dealing with validity of
imposition of fine on the target company for its decision in dealing with
Vile Parle property, without approval of the general body as this issue is
not before us. The fact remains that ex post facto approval of the general
body has since been obtained. Moreover, SEBI had observed that this aspect
of the matter will be separately enquired into. It is clear that under
the scheme of Regulation 23, there is no bar to a decision with the
approval of the general body of shareholders, if otherwise valid. The
question whether unilateral decisions of the target company have rendered
the carrying out of the public offer possible, is a question to be decided
on facts of each case. In the present case, the SEBI as well as the SAT
have concurrently held that public offer is capable of being carried out
and has not become impossible. The assets are available with the target
company. Finding has also been recorded about the circumstances preceding
the public offer and the conduct of the acquirer which is based on record.
The steps for development of the Vile Parle property had already been
initiated and the acquirer had taken remedies before the CLB against the
decision of the target company and had settled the matter with the target
company. It is clear from the scheme of the regulations that there is no
absolute bar for the target company to take decision about its assets,
subject to compliance with statutory procedure and subject to the decision
being otherwise valid. There is no doubt that against any mala fide,
illegal or unjustified decision of the target company, remedies at
appropriate fora are available to the aggrieved parties. Thus, there is no
justification for automatic withdrawal from public offer without clear
prejudice to the acquirer to the extent of rendering the carrying out of
public offer impossible. In the facts of the present case, we do not find
any ground to interfere with the concurrent finding of the SEBI and the SAT
that request for withdrawal from public offer was not justified. Question
(ii) is answered accordingly.
28. In view of the above, we do not find any merit in this appeal and the
same is accordingly dismissed. There shall be no order as to costs.
………………………………………………..J.
[ ANIL R. DAVE ]
………………………………………………..J.
[ ADARSH KUMAR GOEL ]
NEW DELHI
NOVEMBER 07, 2016
-----------------------
[1]
[2] (2013) 8 SCC 20
[3]
[4] (2014) 11 SCC 112
[5]
[6] Justice P.N. Bhagwati Committee Report on Takeovers
[7]
[8] (2013) 8 SCC 20 para 67
-----------------------
37
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.9103 OF 2014
PRAMOD JAIN AND OTHERS
…APPELLANT(S)
VERSUS
SECURITIES AND EXCHANGE BOARD OF INDIA ...RESPONDENT(S)
J U D G M E N T
ADARSH KUMAR GOEL, J.
1. This appeal has been preferred under Section 15 Z of the Securities
and Exchange Board of India Act, 1992 (the Act) against order dated 6th
August, 2014 passed by the Securities Appellate Tribunal, Mumbai (the SAT)
in Appeal No.111 of 2012. The SAT upheld the order of Securities and
Exchange Board of India (SEBI) dated 13th April, 2012 rejecting the
application of the appellants for withdrawal of the public offer to acquire
shares of the Golden Tobacco Ltd. in terms of public announcement (PA)
dated November 12, 2009 under the provisions of SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 (the Takeover
Regulations).
Facts :
2. Golden Tobacco Limited (the target company) is a company having its
registered office at Tobacco House, S.V. Road, Vile Parle (West), Mumbai –
400 056. The equity shares of the target company are listed on the Bombay
Stock Exchange Limited (BSE) and the National Stock Exchange of India
Limited (NSE).
3. On November 12, 2009, Mr. Pramod Jain and Pranidhi Holdings Private
Limited (the acquirers) along with J.P. Financial Services Private Limited
(the person acting in concert (PAC) made PA through VC Corporate Advisors
Private Limited (the merchant banker) in accordance with regulations 10 and
12 read with regulation 14. As on the date of the PA, the acquirers and
PAC collectively held 11, 39, 002 equity shares (6.47%) of the target
company. The PA was voluntarily made by the acquirers and the PAC to
acquire 44, 02, 201 equity shares (25%) of the target company from its
equity shareholders at a price of Rs.101/- (the offer price) per equity
share. At that time, market price of the target company shares was Rs.109/-
per share. Networth of the target company as on 31st March, 2009 was
Rs.42.44 crores. Net current assets were Rs.134.4 crores and gross sales
were Rs.173.68 crores. The offer was for hostile takeover of the target
company. The PA mentioned that the prime object of the offer was to
acquire substantial shares/voting rights accompanied with the change and
control of the management of the target company. The acquisition was in
the nature of strategic investment for diversification and growth and to
reap the benefit of corporate opportunities. The draft letter of offer
also mentioned that the PAC had advanced loan against shares of the target
company and on account of default, it acquired the said shares representing
5.05% of the equity share capital. The acquirers and the PAC had also
acquired 71034 equity shares at highest and average price of Rs.100.15 and
Rs.89.13 respectively. Thus, the acquirers and the PAC had 6.47 % of the
issue of equity share capital as on the date of PA. The background of the
acquirers mentioned in the DLO was that Mr. Pramod Jain was prime Director
of PHPL and had experience in financial and consultancy services.
4. The acquirers and PAC, through the merchant banker, filed the draft
letter of offer (DLO) with SEBI on November, 26, 2009. During examination
of the DLO, certain complaints were received by SEBI against the acquirers
and PAC as well as against the target company and its promoters. The
appellants (the acquirer) in their complaints to SEBI and other proceedings
including petition under Section 397/398 of the Companies Act before the
Company Law Board and a suit before the Civil Court inter alia questioned
the transaction for joint development of Vile Parle Property in terms of
Memorandum of Understanding (MoU) dated 26th September, 2009 with Sheth
Developers and Suraksha Realty Ltd. Various correspondences were exchanged
between SEBI and the merchant banker, acquirers, PAC, the target company
and certain other entities in respect of such complaints.
5. The appellants vide application dated 8th October, 2011 sought
permission to withdraw the offer under Regulation 27(1)(d). The stand of
the appellants in the said letter was that the SEBI had not taken any
decision on the DLO in two years during which period the management of the
target company had systematically siphoned off its coffers, depleted its
valuable fixed assets and eroded its net worth substantially with the
intention of making it a shell company. This has defeated the very object
of the offer, without any fault on the part of the acquirers. The
management had availed huge high cost borrowing from banks and financial
institutions against its property, including 18.7 per cent shares out of
the promoters’ shareholdings. Disputes were pending before the arbitrator
arising out of default in payments. Most valuable assets of the target
company had been encumbered in violation of SEBI regulations and against
the interest of minority shareholders and the acquirers. Since the date of
PA, financial position of the target company had deteriorated
substantially.
Order of SEBI
6. The SEBI vide order dated 13th April, 2012 declined to permit
withdrawal of the PA but observed that alleged violation of Regulation 23
by the target company shall be investigated. It was held that as per
Regulation 23(1), the target company was entitled to dispose of its assets
with the approval of the shareholders even after the PA. Correspondence
which the SEBI had with the acquirers was referred to, with a view to
explain the delay in deciding the DLO. It was observed that the SEBI had
informed the merchant banker of the appellants on 3rd February, 2010 that
it was not competent to administer the authenticity of the process of
Resolution in the General Body Meeting (GBM) dated 18th January, 2010. The
merchant banker vide letter dated 5th May, 2010 informed the SEBI that the
acquirers had reached a settlement with the target company and withdrawn
their petition before the Company Law Board (CLB) against the Resolution
dated 18th January, 2010. SEBI had also advised the merchant banker that
it had not been provided any material in support of the allegation of
violation of Regulation 23 by the target company in selling its assets.
The merchant banker informed the SEBI vide letter dated 19th May, 2011 that
the acquirers had filed a suit for restraining the target company from
creating any third party interest in the assets of the target company. The
SEBI had also received complaints against the acquirers and the PAC which
were being looked into when the PAC vide letter dated 2nd August, 2011
sought permission to withdraw the PA. Vide letter dated 9th August, 2011,
the acquirers requested that the process of open offer be kept in abeyance.
SEBI vide e-mail dated 9th September, 2011 responded to the merchant
banker, seeking tabulated list of the allegations of the acquirers and the
PAC but instead of doing so, the merchant banker forwarded request for
withdrawal of the PA. It was observed that in the circumstances there was
no delay on the part of the SEBI. It was further observed that the
acquirers had challenged the Resolution of the Extra Ordinary General
Meeting (EGM) and had also filed a suit. The acquirers entered into an
amicable settlement before the CLB. SEBI had no jurisdiction in the
matter. Referring to Regulation 22, it was observed that the acquirers
could make PA only after most careful consideration and must ensure that it
is able to implement the offer. Referring to Regulation 27, it was observed
that public offer once made could not be withdrawn except in the
circumstances provided in the said Regulation which had to be construed
strictly. Unchecked automatic withdrawal of offer was capable of being
misused. It was also observed that the acquirers should have used due
diligence with regard to the allegation in FIR dated 25th July, 2009 about
personal borrowings by promoters of the target company by sale of prime
properties as the PA was much after the FIR. The acquirers and the PAC
had already purchased substantial shares of the target company and thus,
could not make PA without exercising due diligence regarding the financial
condition and quality of management of the target company. The acquirers
were not strangers to the target company. They had 6.47 per cent shares.
Discovery of adverse effects pertaining to financial health subsequent to
the PA could not be a ground to withdraw the PA. Doing so will jeopardize
the interests of the shareholders. The takeover regulations laid down a
self-contained code and withdrawal of public offer was not governed by
principles of withdrawal of an offer under the Contract Act, 1872.
Order of Sat
7. The above view has been affirmed by the SAT in its impugned order (by
majority). As regards the timeline stipulated in Regulation 18, it was
observed that under the second proviso thereto, the SEBI could take time in
making inquiry on a complaint and thereafter could call for a revised
letter of offer with or without re-scheduling the date of opening or
closing the offer. However, it was observed that in the present case, SEBI
was wholly unjustified in taking more than two years for offering its
comments on the letter of offer submitted by the appellants. This,
however, did not constitute a ground to permit withdrawal of the PA. As
regards the contention that the public offer was frustrated and became
impossible of implementation on account of encumbering of the most valuable
property of the target company in violation of Regulation 23 and other
steps of the promoters making the target company a shell company, it was
observed that the target company had taken decision to develop its Vile
Parle property even before the PA. Appellant No.1 had given his offer for
joint development of the said property on 29th September, 2008 but the said
offer was rejected and Sheth Developers were shortlisted for the purpose.
It was thereafter that the appellants decided to make hostile takeover
public offer to frustrate the decision of the target company to develop the
property with Sheth Developers. It will be appropriate to refer to the
findings of the SAT in this regard:
“14. We see no merit in the above contentions. Admittedly, GTL had decided
to develop the Vile-Parle property even before public offer was made by
appellants on November 12, 2009. In fact Appellant No. 1 had made an offer
to GTL on September 29, 2008 for joint development of Vile-Parle property
by offering ` 150 crores as non refundable amount and had suggested profit
sharing in the joint venture at a ratio 50:50. However, GTL rejected the
offer made by appellants and on recommendation of Ernst & Young shortlisted
Sheth Developers as best 20 bidder for joint development of Vile-Parle
property. Thereupon appellants decided to make hostile public offer on
November 12, 2009 with a view to frustrate decision of GTL to develop the
Vile-Parle property jointly with Sheth Developers. Although object of the
proposal to acquire 25% shares of GTL at Rs. 101/- per share as against the
market price of Rs.109/- per share, as stated in the public offer was to
obtain substantial stake/voting rights of GTL, it is not in dispute that
appellants were basically interested in developing the Vile-Parle property.
Thus, it is evident that appellants being frustrated in their endeavour to
develop the Vile-Parle property, had resorted to the mechanism of public
offer with a view to frustrate the decision of GTL in jointly developing
the Vile-Parle property with Sheth Developers. Therefore, appellants having
made public offer out of frustration on account of not being able to
develop the Vile-Parle property, are not justified in alleging that
entrusting the development of Vile-Parle property to Sheth Developers has
frustrated the public offer made by appellants.
15. Admittedly, after making public offer, appellants had filed Company
Petition No. 3 of 2010, wherein specific grievance was made to the effect
that GTL had entered into MOU with Sheth Developers without disclosing all
material facts to the shareholders and without the approval of shareholders
which was in gross violation of regulation 23 of SAST Regulations, 1997. It
was also alleged in the Company Petition that the promoters of GTL have
been mismanaging the affairs of the company and have siphoned of huge
amounts from the company, as a result whereof, there has been deep decline
in the performance and profitability of the company. Appellants had also
sought an order restraining GTL from holding EGM which was scheduled to be
held on January 18, 2010.
16. Company Law Board in its order dated January 19, 2010, recorded
statement made by counsel for GTL that in the EGM held on January 18, 2010
requisite resolutions have been passed in relation to development of Vile-
Parle property and in implementation of the said resolution third party
rights have been created. By that order Company Law Board directed that
during the pendency of Company Petition No. 3 of 2010 GTL shall not act
upon resolution dated January 18, 2010 any further. From aforesaid order
passed by Company Law Board it is clear that in view of resolution passed
in the EGM held on January 18, 2010, violation of regulation 23 committed
by GTL in relation to development of Vile-Parle property stood rectified.
Dispute, if any in relation to passing of resolution on January 18, 2010
was to be considered at the hearing of Company Petition No. 3 of 2010.
17. However, on February 8, 2010, appellants withdrew Company Petition No.3
of 2010 by merely recording that the parties have amiably settled the
matter without any further claims against each other. Having settled the
dispute relating to development of Vile-Parle property with the
promoters/management of GTL on the basis of undisclosed reasons and having
withdrawn Company Petition No. 3 of 2010 unconditionally, it is not open to
appellants to allege that their public offer is frustrated on account of
GTL entering into MOU with Sheth Developers for development of Vile-Parle
property.
18. Similarly, having settled the dispute relating to siphoning of funds by
GTL during 2009-2010 which plea was specifically raised in Company Petition
No. 3 of 2010, appellants are not justified in agitating the very same
issue before SEBI on ground that GTL has siphoned of its funds during the
year 2009-2010 and 2010-2011. In other words, since the plea of siphoning
of funds by GTL during the year 2009-2010 and prior thereto having been
specifically raised in Company Petition No. 3 of 2010 and that issue having
been settled by appellants with the promoters/ management of GTL for
undisclosed reasons, the appellants are not justified in reagitating the
very same issue before SEBI in relation to siphoning of funds either during
2009-2010 or during 2010-2011.
21. It is relevant to note that appellants, subsequent to withdrawal of
Company Petition No. 3 of 2010 in February 2010, have filed S. C. Suit No.
817 of 2011 in April 2011 before the City Civil Court at Mumbai, alleging
for the first time that the Company Petition No. 3 of 2010 was withdrawn on
account of oral assurance given by promoters of GTL that Vile-Parle
property would be developed only after holding public auction and that the
promoters of GTL have committed breach of that oral assurance.
22. Admittedly, City Civil Court at Mumbai has granted ad- interim relief
in favour of appellants on April 26, 2011 and that ad- interim order
continues to be in operation till date. Therefore, irrespective of the fact
that SEBI was not justified in taking more than two years for approving the
draft letter of offer, in the facts of present case, grievance of
appellants that the public offer is frustrated and has become impossible of
performance cannot be accepted, because, both grounds based on which
appellants had sought withdrawal of public offer, were in fact settled by
appellants on the basis of oral assurance given by promoters of GTL and
further, for the alleged breach of oral assurance, appellants have filed
Suit in the Bombay City Civil Court and obtained stay of development of
Vile-Parle property and that stay is admitted operating till date.
23. Strong reliance was placed by counsel for appellants on decision of
SEBI dated February 14, 2014 wherein penalty of ` 1 crore has been levied
against the promoters of GTL interalia for violating regulation 23 of SAST
Regulations, 1997. No doubt that entering into an MOU by GTL with Sheth
Developers on November 26, 2009 without obtaining approval of general body
of shareholders was in violation of regulation 23 of SAST Regulations,
1997. However, admittedly on January 18, 2010 the general body of
shareholders has authorized GTL to enter into Joint Development Agreement
is in respect of Vile-Parle property. In view of approval granted by the
general body of shareholders on January 18, 2010, grievance of appellants
that Vile-Parle property has been encumbered in violation of regulation 23
does not survive at least from January 18, 2010.
26. Apart from above, as late as on August 9, 2011 appellants had addressed
a letter to SEBI requesting them to keep the process of open offer in
abeyance, because, in the proceedings pending before the City Civil Court
at Mumbai, GTL had filed an affidavit stating that in the board resolution
dated May 25, 2011 company has decided not to proceed further with the MOU
dated November 26, 2009 (wrongly stated therein as December 26, 2009)
entered with Sheth Developers and instead take necessary steps to develop
the Vile-Parle property by the company of its own. By the said letter dated
August 9, 2011 appellants called upon SEBI to investigate about the exact
legal status of the Vile-Parle property, investigate regarding possession
of the original title deeds of Vile-Parle property and investigate
regarding possession of the original title deeds of Vile-Parle property,
investigate regarding usage of funds etc. It was further stated in the said
letter until appellants are assured of their concern on the above issues,
SEBI should keep the process of open offer in abeyance.
27. Aforesaid letter dated August 9, 2011, clearly falsifies the case of
appellants that the actions taken by promoters of GTL during the course of
two years has frustrated the public offer, because, if public offer was
frustrated, appellants would not have asked SEBI to keep the process of
public offer in abeyance. Having asked SEBI on August 9, 2011 to keep the
process of public offer in abeyance, appellants were not justified in
filing application on October 11, 2011 seeking permission to withdraw the
open offer on ground that inordinate delay has frustrated the open offer.”
8. We have heard learned counsel for the parties.
contentions of the appellants
9. Main contention raised on behalf of the appellants is that there is
no justification for long delay on the part of the SEBI in granting
approval to the offer of the appellant and situation having changed to the
prejudice of the appellant, the appellants are entitled to withdraw their
offer. Since under the scheme of the regulations, the appellants could not
withdraw the offer once made except in circumstances mentioned in
Regulation 27, the regulation should be read as creating an obligation on
the part of the SEBI to take speedy decision and if there was unexplained
delay resulting in prejudice to the appellants-acquirers, the appellants
are entitled to be absolved of the liability to honour the offer. GTL had
become a BIFR company on account of siphoning off funds by the promoters.
It was submitted that in absence of obligation to approve the offer within
reasonable time, the promoters could take steps to siphon the funds or
dispose of the assets which could prejudice the interests of the acquirer.
Thus, it could not be held that the acquirer was indefinitely bound by the
offer. Reference was also made to the timeline provided in Regulation 22
and the provisions of Regulation 23. It was submitted that while normal
ups and downs in the market may not be a ground to permit withdrawal of
offer, unilateral action of the promoters resulting in transfer of assets
could certainly be the ground to permit withdrawal of offer. The object of
binding an acquirer to the offer is to protect the interest of the
shareholders but this was required to be balanced with the interest of the
acquirer. If the assets are unduly transferred by the promoters after the
PA, the acquirer was entitled to be relieved from the offer. SEBI in its
capacity as regulator has to adopt an approach which is fair to all. In
the facts of present case, the decisions of this Court in Nirma Industries
Limited vs. Securities and Exchange Board of India[1] and Securities and
Exchange Board of India vs. M/s. Akshya Infrastructure Pvt. Ltd.[2] relied
upon in the impugned order are not applicable. Even if clause (d) of
regulation 27 is read ejusdem generis so as to apply only in situations
where it is impossible for the acquirer to perform the public offer, it
cannot exclude situations where SEBI itself is satisfied that serious
prejudice was caused to the acquirer by intervening actions of the
promoters in alienating or encumbering the assets of the company, rendering
it inequitable to require the acquirer to be bound by its offer. Thus,
the obligation of the acquirer cannot be divorced from the conduct of the
promoters in the intervening period. Apart from distinguishing the
judgment in Nirma Industries Limited (supra) which has been followed in the
impugned order, the judgment in M/s. Akshya Infrastructure Pvt. Ltd (supra)
was also sought to be distinguished as being limited to cases where delay
by SEBI does not cause any serious prejudice to the acquirer.
10. Thus, the submissions of the appellants are two fold :
(i) The SEBI failed to adhere to the timeline prescribed under the
Takeover Code which rendered it impossible for the appellants to conclude
their open offer. Adherence to timeline prescribed under Regulations
18(2), 22(2), (3) and (4) are critical under the Takeover Code, the
Bhagwati Committee Report and the International Practice. The time is of
essence in cases of hostile takeover.
(ii) The existing promoters should not be given an opportunity to
administer a poison pill to defeat the offer of the potential acquirers.
This principle is recognized under Regulation 23.
11. Adverting to the facts it was submitted that first complaint against
the appellants was received on 8th January, 2010 i.e. 21 days after the PA.
Complaints against the appellants were frivolous. The appellants duly
responded to the complaints in timely manner. The complaints were made at
the behest of the promoters. The appellants pointed out various illegal
acts of the promoters but the SEBI failed to take any action. The
appellants requested the SEBI to keep the open offer in abeyance till
action was taken against the promoters. This justifies the prayer of the
appellants to withdraw the open offer.
12. Shri C.A. Sundaram, learned senior counsel for the appellants
submitted that all the members of the SAT (majority as well as minority)
have held the delay by SEBI to be unjustified but still, on erroneous
interpretation, right of the appellants to withdraw the public offer has
not been upheld. Reference was made to the complaint about transfer of
valuable property of the Company which was un-encumbered at the time of PA.
The funds raised from the transaction have been siphoned off. One of the
key promoters was arrested by the Economic Offences Wing of the Police and
remained in jail for one and a half years. Chargesheet was filed against
him. The financial ratio of the target company reflects manner in which
financial position quickly deteriorated after the PA. The petition filed
by the acquirers before the Company Law Board was withdrawn on the
assurance of the promoters that the assets will not be encumbered without
the public auction. Thereafter, the matter was pending in the civil suit.
Thus, there was a breach of Regulation 23.
13. Shri Sundaram submitted that open offer was not a concluded contract
but mere invitation to the public to offer their shares. The result of not
allowing the offer to be withdrawn will be that the promoters will be able
to sell their shares at the price specified in open offer even when the
value of the shares was far lower. This will be against the policy of law
underlying the Takeover Regulations. Moreover, the action of the SEBI was
required to be fair, reasonable and consistent with Article 14 of the
Constitution.
14. Shri Sundaram sought to distinguish the judgments of this Court in
Nirma Industries Limited (supra) and M/s. Akshya Infrastructure Pvt. Ltd.
(supra) by submitting that unlike the said cases, in the present case,
there was undue delay on the part of the SEBI and prejudice was caused to
the acquirers for reasons not attributable to them. He submitted that
doctrine of frustration under Section 56 of the Contract Act will clearly
apply. As a regulator, the SEBI is duty bound to protect the interest of
the acquirer and also to ensure that a genuine attempt by an acquirer is
not defeated by the promoters by their unilateral action.
response by the sebi
15. Shri Arvind P. Datar, learned senior counsel for the SEBI opposed the
above submissions, he submitted that adverse finding against SEBI on the
issue of delay was unjustified, but even if the said finding was upheld,
the withdrawal of open offer was not permissible under Regulation 27(1)(d)
of the Takeover Regulations. The acquirers held 6.47% share and had lent
Rs.8.5 crores to the target company. They had purchased shares worth
Rs.63.33 lakhs before making the PA. The first appellant was aware of the
acts of mismanagement by the promoters of the target company. The PA was
made with the intention of curbing fraudulent and the illegal practices of
the promoters and for the target company’s benefit. The appellants
approached SEBI to investigate the illegalities knowing fully well that
SEBI’s role was only to regulate the security market. For mismanagement or
other illegalities, remedy was under Section 397/398 of the Companies Act
which remedy the appellants had taken. The appellants reached an amicable
settlement with the target company and thereafter approached the civil
court. It was wrong to state that the target company had become defunct.
The target company continued to own the Vile Parle property worth Rs.2000
crores.
16. Shri Datar submitted that more than 43 complaints/letters were
received which were to be dealt with by SEBI. In such circumstances, it
could not be held that there was undue delay on the part of the SEBI in
dealing with the DLO.
17. It was submitted that the appellants ought to have exercised due
diligence before making the PA. The appellants were not strangers and had
6.47% shares. They had advanced loan of Rs.8.5 crores and acquired shares
worth Rs.66.33 lakhs before the PA. They were aware of the FIR and alleged
acts of mismanagement they had resorted to public offer out of frustration
against the decision of the target company developing the Vile Parle
property with Sheth Developers. They settled the matter before the Company
Law Board with the target company and also approached the civil court for
alleged breach of settlement and obtained stay of development of the Vile
Parle property. In these circumstances, the plea of frustration could not
be allowed to be raised by the appellants. The PA could not be allowed to
be withdrawn merely on the ground that the acquirers find it not to be a
prudent decision. Moreover, the company still owns assets and was not a
shell company and no prejudice was suffered by the acquirers. Referring to
the penalty levied by SEBI on the target company for entering into a MoU
without approval of the General Body, it was submitted that this could not
furnish a ground for withdrawal of the PA. Appellants had raised the
issue before the CLB and settled the matter.
questions
18. The rival submissions require us to determine the following questions
:
(i) To what extent is the timeline laid down under the Takeover
Regulations required to be adhered to and effect of delay by SEBI in the
present case?
(ii) To what extent unilateral action of the target company in dealing
with the property of the company after a hostile public offer is made
furnish cause of action to the acquirers to withdraw the public offer and
whether in the present case, decision not permitting withdrawal of public
offer is justified?
the takeover regulations
19. Needless to mention that mergers and takeovers are well known
processes in the corporate world. Acquisition of controlling interest of a
company can be friendly or hostile. In a friendly acquisition, management
of the target company sells its controlling shares to the acquirer. Where
management of the target company is unwilling to negotiate with an
acquirer, the acquirer can directly approach the shareholders by making an
open offer which is called Hostile takeover. A Hostile takeover helps to
unlock the hidden value of the shares and puts pressure on the management
to work efficiently. On the other hand, it has potential of unduly
upsetting the normal functioning of a target company. Thus, there is an
undoubted need to regulate the process of acquisition and takeovers in post-
liberalisation era after 1991. It is well known that takeover attempt
being unpleasant for the target company is normally met with defence
strategies such as ‘Poison Pills’ (making takeover unviable for the
acquirer by making the cost of acquisition unattractive), ‘Shark
Repellents’ (measures to repel an unwanted takeover) sale of valuable
assets, etc.
20. Justice P.N. Bhagwati Committee was appointed in November, 1995 to
review the existing framework of regulations and to suggest amendments in
the interest of investors and all parties concerned in the acquisition
process. The Committee kept in mind the following principles :
“i. Equality of treatment and opportunity to all shareholders.
ii. Protection of interests of shareholders.
iii. Fair and truthful disclosure of all material information
by the acquirer in all public announcements and offer documents.
iv. No information to be furnished by the acquirer and other
parties to an offer exclusively to any one group of shareholders.
v. Availability of sufficient time to shareholders for making informed
decisions.
vi. An offer to be announced only after most careful and
responsible consideration.
vii. The acquirer and all other intermediaries professionally involved in
the offer, to exercise highest standards of care and accuracy in preparing
offer documents.
viii. Recognition by all persons connected with the process of substantial
acquisition of shares that there are bound to be limitations on their
freedom of action and on the manner in which the pursuit of their interests
can be carried out during the offer period.
ix. All parties to an offer to refrain from creating a false market
in securities of the target company.
x. No action to be taken by the target company to frustrate an
offer without the approval of the shareholders.” [3]
The Committee made various recommendations including requirement of
disclosure by the acquirers, procedure for public announcements,
obligations of the acquirers and the target company. This led to the
adoption of the 1997 Takeover Regulations.
21. We may reproduce some of the Regulations which are necessary for the
decision of controversy in the case before us :
“ Acquisition of fifteen per cent or more of the shares or voting rights of
any company.
10. No acquirer shall acquire shares or voting rights which (taken
together with shares or voting rights, if any, held by him or by persons
acting in concert with him), entitle such acquirer to exercise fifteen per
cent or more of the voting rights in a company, unless such acquirer makes
a public announcement to acquire shares of such company in accordance with
the regulations.
Acquisition of control over a company.
12. Irrespective of whether or not there has been any acquisition of
shares or voting rights in a company, no acquirer shall acquire control
over the target company, unless such person makes a public announcement to
acquire shares and acquires such shares in accordance with the
regulations.…
Timing of the public announcement of offer.
14. (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 .…
Submission of letter of offer to the Board.
18. (1) Within fourteen days from the date of public announcement made
under regulation 10, 11 or 12 as the case may be, the acquirer shall,
through its merchant banker, file with the Board, the draft of the letter
of offer containing disclosures as specified by the Board.
(2) The letter of offer shall be despatched to the shareholders not
earlier than 21 days from its submission to the Board under sub-regulation
(1):
Provided that if, within 21 days from the date of submission of the letter
of offer, the Board specifies changes, if any, in the letter of offer
(without being Page 35 of 75 under any obligation to do so), the merchant
banker and the acquirer shall carry out such changes before the letter of
offer is despatched to the shareholders :
[Provided further that if the disclosures in the draft letter of offer are
inadequate or the Board has received any complaint or has initiated any
enquiry or investigation in respect of the public offer, the Board may call
for revised letter of offer with or without rescheduling the date of
opening or closing of the offer and may offer its comments to the revised
letter of offer within seven working days of filing of such revised letter
of offer.
(3) The acquirer shall, while filing the draft letter of offer with the
Board under sub-regulation (1), pay a fee as mentioned in the following
table, by bankers‘ cheque or demand draft drawn in favour of the
‘Securities and Exchange Board of India’….
General Objections of the acquirer.
22. (1) The public announcement of an offer to acquire the shares of the
target company shall be made only when the acquirer is able to implement
the offer.
(2) Within 14 days of the public announcement of the offer, the acquirer
shall send a copy of the draft letter of offer to the target company at its
registered office address, for being placed before the board of directors
and to all the stock exchanges where the shares of the company are listed.
(3) The acquirer shall ensure that the letter of offer is sent to all the
shareholders (including non-resident Indians) of the target company, whose
names appear on the register of members of the company as on the specified
date mentioned in 1 Inserted by the SEBI (Substantial Acquisition of Shares
and Takeovers) (Second Amendment) Regulations, 2002, w.e.f. 9-9-2002. Page
47 of 75 the public announcement, so as to reach them within 45 days from
the date of public announcement.…
General obligations of the board of directors of the target company.
23. (1) Unless the approval of the general body of shareholders is
obtained after the date of the public announcement of offer, the board of
directors of the target company shall not, during the offer period,—
(a) sell, transfer, encumber or otherwise dispose of or enter into an
agreement for sale, transfer, encumbrance or for disposal of assets
otherwise, not being sale or disposal of assets in the ordinary course of
business, of the company or its subsidiaries; or
(b) issue 2 [or allot] any authorised but unissued securities carrying
voting rights during the offer period; or
(c) enter into any material contracts.
Withdrawal of offer.
27. (1) No public offer, once made, shall be withdrawn except under the
following circumstances:—
(a) [***]
(b) the statutory approval(s) required have been refused;
(c) the sole acquirer, being a natural person, has died;
(d) such circumstances as in the opinion of the Board merit withdrawal.
Board’s right to investigate.
38. The Board may appoint one or more persons as investigating officer to
undertake investigation for any of the following purposes, namely:—
(a) to investigate into the complaints received from the investors, the
intermediaries or any other person on any matter having a bearing on the
allegations of substantial acquisition of shares and takeovers ;
(b) to investigate suo motu upon its own knowledge or information, in the
interest of the securities market or investors‘ interest, for any breach of
the regulations;
(c) to ascertain whether the provisions of the Act and the regulations are
being complied with for any breach of the regulations.”
22. In Nirma Industries Limited (Supra), the acquirer after making PA
sought withdrawal therefrom on the ground of embezzlement of funds by the
target company. SEBI rejected the application with the observation that
the acquirer ought to have used due diligence prior to making the public
offer. Rejecting the plea that the embezzlement and siphoning off of funds
by the target company could not have been found by third party even after
exercising diligence, this Court held under the scheme of the takeover code
public offer once made could not be withdrawn so as to deprive the
shareholders of their valuable right to have exit option and also to ensure
that public announcement is not made by way of speculation. The scheme of
takeover code was held to be as follows:
“ 59. A conspectus of the aforesaid Regulations would show that the scheme
of the Takeover Code is: (a) to ensure that the target company is aware of
the substantial acquisition; (b) to ensure that in the process of the
substantial acquisition or takeover, the security market is not distorted
or manipulated; and (c) to ensure that the small investors are given an
option to exit, that is, they are offered a choice to either offload their
shares at a price as determined in accordance with the Takeover Code or to
continue as shareholders under the new dispensation. In other words, the
Takeover Code is meant to ensure fair and equal treatment of all
shareholders in relation to substantial acquisition of shares and takeovers
and that the process does not take place in a clandestine manner without
protecting the interest of the shareholders. It is keeping in view the
aforesaid aims and objects of the Takeover Code that we shall have to
interpret Regulation 27(1).”
23. As regards the scheme of Regulation 27, it was further observed :
“62. A bare perusal of the aforesaid Regulations shows that Regulation
27(1) states the general rule in negative terms. It provides that no public
offer, once made, shall be withdrawn. Since clause (a) has been omitted, we
are required to interpret only the scope and ambit of clauses (b), (c) and
(d). The three sub-clauses are exceptions to the general rule and,
therefore, have to be construed very strictly. The exceptions cannot be
construed in such a manner that would destroy the general rule that no
public offer shall be permitted to be withdrawn after the public
announcement has been made. Clause (b) would permit a public offer to be
withdrawn in case of legal impossibility when the statutory approval
required has been refused. Clause (c) again provides for impossibility when
the sole acquirer, being a natural person, has died. Clause (b) deals with
a legal impossibility whereas clause (c) deals with a natural disaster.
Clearly clauses (b) and (c) are within the same genus of impossibility.
Clause (d) also being an exception to the general rule would have to be
naturally construed in terms of clauses (b) and (c). Mr. Divan has placed a
great deal of emphasis on the expression “such circumstances” and “in the
opinion” to indicate that the Board would have a wide discretion to permit
withdrawal of an offer even though it is not impossible to perform. We are
unable to accept such an interpretation.
67. Applying the aforesaid tests, we have no hesitation in accepting the
conclusions reached by SAT that clauses (b) and (c) referred to
circumstances which pertain to a class, category or genus, that the common
thread which runs through them is the impossibility in carrying out the
public offer. Therefore, the term “such circumstances” in clause (d) would
also be restricted to a situation which would make it impossible for the
acquirer to perform the public offer. The discretion has been left to the
Board by the legislature realising that it is impossible to anticipate all
the circumstances that may arise making it impossible to complete a public
offer. Therefore, certain amount of discretion has been left with the Board
to determine as to whether the circumstances fall within the realm of
impossibility as visualised under clauses (b) and (c). In the present case,
we are not satisfied that circumstances are such which would make it
impossible for the acquirer to perform the public offer. The possibility
that the acquirer would end-up making losses instead of generating a huge
profit would not bring the situation within the realm of impossibility.
70. Mr. Venugopal, in our opinion, has rightly submitted that the Takeover
Regulations, which is a special law to regulate “substantial acquisition of
shares and takeovers” in a target company lays down a self-contained code
for open offer; and also that interest of investors in the present case
required that they should be given an exit route when the appellants have
acquired substantial chunk of shares in the target company. He has
correctly emphasized in his submissions that the orderly development of the
securities market as a whole requires that public offers once made ought
not to be allowed to be withdrawn on the ground of fall in share price of
the target company, which is essentially a business misfortune or a
financial decision of the acquirer having gone wrong. SEBI as well as SAT
have correctly concluded that withdrawal of the open offer in the given set
of circumstances is neither in the interest of investors nor development of
the securities market.
90. We are inclined to agree with the submission made by Mr Venugopal that
the appellants cannot be permitted to wriggle out of the obligation of a
public offer under the Takeover Regulation. Permitting them to do so would
deprive the ordinary shareholders of their valuable right to have an exit
option under the aforesaid Regulations. The SEBI Regulations are designed
to ensure that public announcement is not made by way of speculation and to
protect the interest of the other shareholders. Very solemn obligations are
cast on the Merchant Banker under Regulation 24(1) to ensure that—
“24. (1)(a) the acquirer is able to implement the offer;
(b) the provision relating to escrow account referred to in Regulation 28
has been made;
(c) firm arrangements for funds and money for payment through verifiable
means to fulfil the obligations under the offer are in place;
(d) the public announcement of offer is made in terms of the Regulations;
(e) his shareholding, if any in the target company is disclosed in the
public announcement and the letter of offer.”
91. Regulation 24(2) mandates that the Merchant Banker shall furnish to the
Board a due diligence certificate which shall accompany the draft letter of
offer. The aforesaid Regulation clearly indicates that any enquiries and
any due diligence that has to be made by the acquirer have to be made prior
to the public announcement. It is, therefore, not possible to accept the
submission of Mr Shyam Divan that the appellants are to be permitted to
withdraw the public announcement based on the discovery of certain facts
subsequent to the making of the public announcement. In such circumstances,
in our opinion, the judgments cited by Mr Shyam Divan are of no relevance.
”
24. As regards the effect of delay on the part of SEBI, it was observed:
“94. A perusal of the aforesaid Regulation clearly shows that the acquirer
is required to file the draft letter of offer containing disclosures as
specified by the Board within a period of 14 days from the date of public
announcement. Thereafter, letter of offer has to be dispatched to the
shareholders not earlier than 21 days from its submission to the Board.
Within 21 days, the Board is required to specify changes if any, that ought
to be made in the letter of offer. The merchant banker and the acquirer
have then to carry out such changes before the letter of offer is
dispatched to the shareholders. But there is no obligation to do so. Under
the second proviso, the Board may call for revised letter of offer in case
it finds that the disclosures in the draft letter of offer are inadequate
or the Board has received any complaint or has initiated any enquiry or
investigation in respect of the public offer. It is important to notice
that in the first proviso the Board does not have any obligation to specify
any change in the draft letter of offer within a period of 21 days. In the
present case, in fact, the Board had not specified any changes within 21
days. We have already noticed earlier that the letter of offer was lacking
and deficient in detail. The appellants themselves were taking time to
submit details called for, by their merchant bankers through various
letters between 8-8-2005 to 20-3-2006. We have already noticed the repeated
advice given by the Merchant Banker to enhance the issue size of the open
offer and to comply with other requirements of the Takeover Regulations.
The appellants, in fact, were prevaricating and did not agree with the
interpretation placed on Regulation 27(1)(d) by the Merchant Banker. We,
therefore, reject the submission of Mr Shyam Divan that there was delay on
the part of SEBI in approving the draft letter of offer. ”
25. In M/s. Akshya Infrastructure Pvt. Ltd. (supra), this Court held that
SEBI is not justified in causing delay in dealing with the issuance of its
comments on a letter of offer as delay can lead to controversy as to
whether the belated action was bona fide exercise of statutory power.
However, delay by itself may not vitiate action of the SEBI. The SEBI has
to be guided by the overall interest of the shareholders in dealing with
the prayer for withdrawal from the public offer. The economic unviability
is no ground to justify prayer for such withdrawal. The relevant
observations are:
“30. With regard to delay, we do not find much substance in the submission
of Mr C.U. Singh. Mr Singh has sought to explain the delay on the ground
that information sought by the appellant was not given by the respondent.
In our opinion, this was no ground for the appellant to delay the issuance
of comments on the letter of offer, especially not for a period of 13
months. In the event the information was not forthcoming, the appellant had
the power to refuse the approval of the public offer. It is true that under
Regulation 18(2), SEBI was required to dispatch the necessary letters to
the shareholders within a reasonable period. It is a matter of record that
the comments were not offered for 13 months. Such kind of delay is wholly
inexcusable and needs to be avoided. It can lead to avoidable controversy
with regard to whether such belated action is bona fide exercise of
statutory power by SEBI. By adopting such a lackadaisical, if not callous
attitude, the very object for which the Regulations have been framed is
diluted, if not frustrated. It must be remembered that SEBI is the watchdog
of the securities market. It is the guardian of the interest of the
shareholders. It is the protective shield against unscrupulous practices in
the securities market. Therefore, SEBI like any other body, which is
established as a watchdog, ought not to act in a lackadaisical manner in
the performance of its duties. The time-frame stipulated by the Act and the
Takeover Regulations for performing certain functions is required to be
maintained to establish the transparency in the functioning of SEBI.
31. Having said this, we are afraid such delay is of no assistance to the
respondent. It will not result in nullifying the action taken by SEBI, even
though belated. Ultimately, SEBI is charged with the duty of ensuring that
every public offer made is bona fide for the benefit of the shareholders as
well as acquirers. In the present case, SEBI has found that permitting the
respondent to withdraw the public offer would be detrimental to the overall
interest of the shareholders. The only reason put forward by the respondent
for withdrawal of the offer is that it is no longer economically viable to
continue with the offer. Mr Nariman has referred to a tabular statement and
data to show that there is no substantial variation in the share prices
that ensued making of the public offer. Having seen the Table, we find
substance in the submission of Mr Nariman that there is hardly any
variation in the shares of the target company from 20-10-2011 till 30-11-
2011. The variation seems to have been between Rs 78.10 (on 24-11-2011) and
Rs 87.60 (on 20-10-2011). Such a variation cannot be said to be the result
of the public offer. But this will not detract from the well-known
phenomena that public announcement of the public offering affects the
securities market and the shares of the target company. The impact is
immediate.
35. We are also not impressed by the submission of Mr Nariman that it has
now become economically impossible to give effect to the public offer. This
very submission has been rejected in Nirma Industries Ltd. We reiterate our
opinion in Nirma Industries Ltd. that under Regulations 27(1)(b), (c) and
(d), a public offer, once made, can only be permitted to be withdrawn in
circumstances which make it virtually impossible to perform the public
offer. In fact, the very purpose for deleting Regulation 27(1)(a) was to
remove any misapprehension that an offer once made can be withdrawn if it
becomes economically not viable. We are of the considered opinion that the
distinction sought to be made by Mr Nariman between a voluntary public
offer and a triggered public offer is wholly misconceived. Accepting such a
submission would defeat the very purpose for which the Takeover Code has
been enacted.”
Our Findings
Re. Question (i)
26. Applying the decisions of this Court to the facts of the present
case, we are in agreement with the finding recorded by the SAT that there
was undue delay on the part of the SEBI in dealing with the DLO. No doubt,
in a given case timeline prescribed under the Regulations may not be
adhered to when the SEBI justifiably takes time in dealing with the
complaints, as rightly submitted by Shri Datar, in the present case, the
stand of the SEBI itself is that it could not go into the complaints for
which the right forum was CLB. As regards the time taken in dealing with
the complaints against the acquirers, the SEBI could have promptly
proceeded with the matter. However, mere upholding of finding of SAT on
the aspect of delay by SEBI is not enough to hold that the appellants are
entitled to withdrawal of the public offer. The withdrawal has to be dealt
with under Regulation 27, as held by this Court. The general principle is
that public offer once made cannot be withdrawn. Exception to the rule is
the specified situations under the Regulation as laid down by this Court in
above decisions particularly in Nirma Industries Limited (Supra)[4]. In
the present case, though SEBI was not justified in causing delay in giving
its comments on public offer, this by itself is not enough to justify
withdrawal from public offer so long as the case does not fall under
Regulation 27. First question is answered accordingly.
Re. Question (ii)
27. As already observed above, under the scheme of the regulations public
offer has to be made after due diligence (Regulation 22). Obligation of the
board of directors under Regulation 23 against alienation of assets,
issuance of unissued securities carrying voting rights or entering into
material contracts is applicable only if approval of general body of
shareholders is not obtained. We are not dealing with validity of
imposition of fine on the target company for its decision in dealing with
Vile Parle property, without approval of the general body as this issue is
not before us. The fact remains that ex post facto approval of the general
body has since been obtained. Moreover, SEBI had observed that this aspect
of the matter will be separately enquired into. It is clear that under
the scheme of Regulation 23, there is no bar to a decision with the
approval of the general body of shareholders, if otherwise valid. The
question whether unilateral decisions of the target company have rendered
the carrying out of the public offer possible, is a question to be decided
on facts of each case. In the present case, the SEBI as well as the SAT
have concurrently held that public offer is capable of being carried out
and has not become impossible. The assets are available with the target
company. Finding has also been recorded about the circumstances preceding
the public offer and the conduct of the acquirer which is based on record.
The steps for development of the Vile Parle property had already been
initiated and the acquirer had taken remedies before the CLB against the
decision of the target company and had settled the matter with the target
company. It is clear from the scheme of the regulations that there is no
absolute bar for the target company to take decision about its assets,
subject to compliance with statutory procedure and subject to the decision
being otherwise valid. There is no doubt that against any mala fide,
illegal or unjustified decision of the target company, remedies at
appropriate fora are available to the aggrieved parties. Thus, there is no
justification for automatic withdrawal from public offer without clear
prejudice to the acquirer to the extent of rendering the carrying out of
public offer impossible. In the facts of the present case, we do not find
any ground to interfere with the concurrent finding of the SEBI and the SAT
that request for withdrawal from public offer was not justified. Question
(ii) is answered accordingly.
28. In view of the above, we do not find any merit in this appeal and the
same is accordingly dismissed. There shall be no order as to costs.
………………………………………………..J.
[ ANIL R. DAVE ]
………………………………………………..J.
[ ADARSH KUMAR GOEL ]
NEW DELHI
NOVEMBER 07, 2016
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[1]
[2] (2013) 8 SCC 20
[3]
[4] (2014) 11 SCC 112
[5]
[6] Justice P.N. Bhagwati Committee Report on Takeovers
[7]
[8] (2013) 8 SCC 20 para 67
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