2013 (12) TMI 704 - AT - Companies Law

Consolidation of holding as per Regulation 11 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 - Appellants applied to SEBI for post-facto exemption from making a public offer under Takeover Code with respect to warrants converted into shares - SEBI denied exemption and directed appellants to disinvest shares converted from warrants Held that - The order to divest would not be in anyone s interest and that no benefit would accrue to other investors in the scrip of the Company, its employees or its promoters by such divestment - On the contrary, this proposed action of divestment might sent the Company back into sickness after all the attempts made by the Appellants to bring it out of dire straits gradually over a significantly long period of time - Sale of huge number of shares, as required under orders of the Respondent, will bring down the share price, leading to under evaluation of security, in the form of shares, with banks/financial institutions for loan - this in turn shall lead to demand for higher security by financial institutions/ loanee and thereby triggering a chain reaction, leading to financial difficulties, making/continuing operation difficult/ impossible - company may fall back into sickness again - Case remanded back to SEBI for reconsideration given the fact that post-facto exemption is not an unprecedented action on part of the Respondent Decided in favour of Appellant.

Issues Involved:
1. Violation of Regulation 11(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
2. Exemption from the obligation of making a public offer under Regulation 11(1).
3. Conversion of warrants into equity shares and its implications.
4. Impact of the disinvestment order on the company's financial stability.
5. Parallel adjudication proceedings under the SEBI Act, 1992.

Issue-wise Detailed Analysis:

1. Violation of Regulation 11(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997:
The Appellants were directed to disinvest 41,96,760 shares for violating Regulation 11(2) of the Takeover Regulations while acquiring shares of Bheema Cements Limited. The Appellants converted 41,96,790 warrants into equity shares on December 15, 2008, increasing their shareholding from 69.11% to 74.01% without making a public announcement as required under Regulations 11(2) and 14(2).

2. Exemption from the obligation of making a public offer under Regulation 11(1):
Initially, the Appellants applied for and received an exemption from the obligation of making a public offer under Regulation 11(1) for acquiring 30,00,000 shares. This exemption was granted by SEBI on September 23, 2005. However, the exemption did not extend to the 41,96,790 warrants, which were subsequently converted into shares.

3. Conversion of warrants into equity shares and its implications:
The Appellants infused capital into the Company by subscribing to 41,96,790 warrants, which were later converted into equity shares. Despite warnings from SEBI, the Appellants proceeded with the conversion, believing they were eligible for exemptions similar to those granted in other cases (Jaiswal Neco Limited and Seahorse Hospitals Limited). They argued that the conversion was done with shareholder approval and for the Company's benefit, not for any undue advantage.

4. Impact of the disinvestment order on the company's financial stability:
The Tribunal noted that disinvesting 41,96,790 shares would not be in anyone's interest and could potentially send the Company back into financial distress. The Appellants had significantly improved the Company's performance by infusing capital, resulting in increased sales, profitability, and production. The disinvestment order could lead to a drastic fall in share prices, undermining the value of shares held by the public and banks, and triggering a chain reaction of financial difficulties.

5. Parallel adjudication proceedings under the SEBI Act, 1992:
The Tribunal acknowledged that parallel adjudication proceedings under the SEBI Act, 1992, were ongoing. It clarified that if the Appellants were found guilty of violating the regulations, SEBI could impose suitable monetary penalties. The Tribunal remanded the case back to SEBI for reconsideration, emphasizing that post-facto exemption is not unprecedented and urging SEBI to maintain objectivity and fairness.

Conclusion:
The Tribunal disposed of the appeal by remanding the case back to SEBI for reconsideration within three months, ensuring a reasonable opportunity of hearing for the Appellants. It highlighted the significant improvements in the Company's performance post-capital infusion and urged SEBI to consider these factors to prevent the Company from falling back into distress. The Tribunal also noted that the adjudication proceedings should continue independently, with SEBI retaining the liberty to impose penalties if violations are confirmed. No costs were awarded.

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