1998 (7) TMI 701 - Board - Companies Law

Issues Involved:

1. Whether the appellants violated regulation 10 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1994.
2. Whether the appellants contravened section 15H of the Securities and Exchange Board of India Act, 1992.
3. Whether the appellants' acquisition of shares was through mortgage/pledge or purchase.
4. Applicability of regulation 3(a) and 3(d) exemptions.
5. Whether the penalty of rupees five lakh was justified.
6. Jurisdiction of the Tribunal to substitute the offence under regulation 9.

Issue-wise Detailed Analysis:

1. Violation of Regulation 10:
The appellants were accused of acquiring about 67% of the equity share capital of Hindustan Finstock Ltd. (HFL) without making a public announcement as required under regulation 10. However, it was established that the appellants were not holding any shares in HFL at the time of acquisition. Regulation 10(1) applies to an acquirer who holds shares carrying ten percent or less of voting rights in the company and intends to acquire further shares from the open market. The Tribunal concluded that since the appellants were not existing shareholders at the time of acquisition, regulation 10(1) did not apply.

2. Contravention of Section 15H:
Section 15H mandates penalties for failing to disclose shareholding or make a public announcement. Given that the acquisition did not fall under the purview of regulation 10, section 15H was deemed inapplicable. The Tribunal held that the appellants did not violate section 15H since the acquisition itself was beyond the scope of the Takeover Regulations.

3. Nature of Acquisition (Mortgage/Pledge vs. Purchase):
The appellants contended that the shares were acquired through mortgage/pledge agreements with the Khandwala family. However, the Memoranda of Understanding (MOUs) clearly indicated that the appellants intended to purchase the shares at a premium after allotment. The Tribunal found no evidence supporting the claim of mortgage or pledge and concluded that the shares were purchased from the Khandwalas.

4. Applicability of Regulation 3(a) and 3(d) Exemptions:
Regulation 3(a) exempts acquisitions by allotment in a public issue, and regulation 3(d) exempts acquisitions in companies whose shares are not listed on any stock exchange. The shares were allotted to the Khandwalas on May 26, 1995, and listed on the stock exchanges on June 14 and 15, 1995. Since the shares were not listed at the time of acquisition, the Tribunal held that the transaction was exempt under regulation 3(d) and did not fall under regulation 10.

5. Justification of Penalty:
The Adjudicating Officer had imposed a penalty of rupees five lakh, the maximum penalty under section 15H. However, since the Tribunal found no contravention of regulation 10 or section 15H, the penalty was deemed unjustified and was set aside.

6. Jurisdiction to Substitute Offence under Regulation 9:
The respondents suggested that if the transaction did not fall under regulation 10, it should be considered under regulation 9, which deals with negotiated acquisitions. The Tribunal rejected this suggestion, stating that it had no jurisdiction to investigate and decide afresh the applicability of regulation 9, as it was an appellate forum limited to reviewing the Adjudicating Officer's order.

Conclusion:
The Tribunal concluded that the appellants did not violate regulation 10 or section 15H. The acquisition was exempt under regulation 3(d) as the shares were not listed at the time of acquisition and were not purchased from the open market. Consequently, the appeal was allowed, and the adjudication order dated September 26, 1997, was set aside.

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