2011 (9) TMI 1169 - Board - Companies Law

Shares acquired without making any public announcement - Violation Of the Regulation 11(1) of the Securities and Exchange Board of India Regulations, 1997 (the takeover code) - acquired 6.17 per cent of the equity capital - Appellant crossed the permissible creeping acquisition limit of 5 per cent in a financial year - HELD THAT - The shares acquired by the Appellant company and the holding of the two Naras has to be clubbed for the purposes of Regulation 11(1) of the takeover code as they were acting in concert. When we do this, it becomes clear that the Appellant crossed the permissible creeping acquisition limit of 5 per cent thereby triggering Regulation 11(1) of the takeover code and not having made a public announcement, violated the said provision. The learned senior counsel for the Appellant is right only to the extent that the Appellant company did not act in concert with any promoter of the target company other than the Naras and that is of No. consequence. Even if the shareholding of the other promoters is excluded, the shareholding of the Naras and the Appellant together is enough to trigger Regulation 11(1). In this view of the matter, No fault can be found with the conclusion arrived at by the whole time member that Regulation 11(1) got triggered and the Appellant by not making a public announcement violated the said provision. The question posed in the opening part of the order is answered in the affirmative. Direction issued - The Board need not give reasons as to why such a direction is being issued because that is the mandate of Regulations 10, 11 and 12. However, if the issuance of such a direction is not in the interest of the securities market or for the protection of interest of investors, the Board may deviate from the normal rule and issue any other direction as envisaged in Regulation 44 of the takeover code. In that event, the Board should record reasons for deviation. In the case before us No reasons have been recorded for deviating from the normal rule and we find No ground for deviation. Thus, we modify the direction issued by the whole time member and direct the Appellant to make a public announcement to acquire the shares of the target company in accordance with the provisions of the takeover code. For this limited purpose, the Appellant shall now approach the Board within one week to comply with the procedural requirements in this regard. In the result, the appeal is dismissed and the direction issued by the whole time member modified as stated. There is No order as to costs.

Summary

Issues Involved:
1. Violation of Regulation 11(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
2. Whether the appellant acted in concert with the promoter group of the target company.
3. Appropriate directions for the appellant after finding a violation of Regulation 11(1).

Detailed Analysis:

1. Violation of Regulation 11(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997:
The core issue was whether Nirvana Holdings Pvt. Ltd. (the appellant) violated Regulation 11(1) of the SEBI Takeover Code by acquiring 6.17% of the equity capital of Heritage Foods (India) Limited (the target company) without making a public announcement. Regulation 11(1) stipulates that an acquirer who, along with persons acting in concert, holds 15% or more but less than 55% of the shares or voting rights in a company, must make a public announcement to acquire further shares if the acquisition exceeds 5% in any financial year. The appellant acquired shares that increased its collective shareholding with the promoters from 33.38% to 39.55%, thus triggering Regulation 11(1).

2. Whether the appellant acted in concert with the promoter group of the target company:
The appellant argued that its shareholding should not be clubbed with that of the promoter group of the target company. The appellant asserted that its acquisitions were independent and not in concert with the promoters of the target company. However, the judgment clarified that the appellant, being wholly owned by the two Naras (who were also promoters of the target company), automatically became part of the promoter group as per Regulation 2(h) of the takeover code. The judgment emphasized that the appellant acted in concert with the two Naras, who controlled the appellant company. Therefore, the acquisition of shares by the appellant was considered in concert with the promoters, triggering Regulation 11(1).

3. Appropriate directions for the appellant after finding a violation of Regulation 11(1):
The whole-time member initially directed the appellant to disinvest 1.17% of the shares (exceeding the 5% limit) and transfer the profits to the Investor Protection Fund(s). However, the judgment modified this direction, emphasizing that the primary objective of the takeover code is to provide an exit route to public shareholders. The judgment stated that a public announcement should be made unless it is against the interest of investor protection or the securities market, which was not justified in this case. Thus, the appellant was directed to make a public announcement to acquire shares of the target company in accordance with the takeover code. The appellant was given one week to approach the Board to comply with procedural requirements.

Conclusion:
The appeal was dismissed, and the appellant was directed to make a public announcement for acquiring shares of the target company as per the takeover code. The operation of the order was stayed for four weeks to allow the appellant to appeal to the Supreme Court.