2001 (8) TMI 1447 - AT - SEBI

Summary

Issues Involved:
1. Whether the acquisition of shares by way of pledge constitutes an acquisition under regulation 10 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
2. Whether the appellant was required to make a public announcement under regulation 10.
3. Whether the imposition of a penalty of Rs. 3 lakhs by the Adjudicating Officer was justified.

Issue-wise Detailed Analysis:

1. Whether the acquisition of shares by way of pledge constitutes an acquisition under regulation 10 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997:

The appellant, Margadarsi Financiers, received 7,67,580 shares of Aurobindo Pharma Ltd. (APL) by way of pledge against loans given to APL's directors. Out of these, 3,32,540 shares (7.037% of the paid-up capital) were transferred in the name of the appellant, while the remaining 4,35,040 shares (9.207%) remained in the name of the borrowers. The appellant argued that the shares received by way of pledge should not be considered as an acquisition because the legal ownership of the pledged shares remains with the pledger, as per section 172 of the Indian Contract Act. The appellant cited several cases, including Balkrishan Gupta v. Swadeshi Polytex Ltd., to support the argument that a pledgee cannot be treated as the holder of the shares pledged in his favor.

2. Whether the appellant was required to make a public announcement under regulation 10:

Regulation 10 states that no acquirer shall acquire shares or voting rights which entitle them to exercise 10% or more of the voting rights in a company unless a public announcement is made. The appellant contended that since only 3,32,540 shares were transferred in its name, it did not cross the 10% threshold requiring a public announcement. The respondent, SEBI, argued that the acquisition of shares by way of pledge should be considered an acquisition under regulation 10, as the shares were delivered along with duly signed transfer deeds, which would entitle the appellant to exercise voting rights at a later date. SEBI also pointed out that regulation 3(1)(f) excludes acquisition of shares by banks and public financial institutions as pledgees, implying that other entities like the appellant are not exempt.

3. Whether the imposition of a penalty of Rs. 3 lakhs by the Adjudicating Officer was justified:

The Adjudicating Officer imposed a penalty of Rs. 3 lakhs on the appellant for failing to comply with regulation 10. The appellant argued that the penalty was unwarranted, as the acquisition did not exceed the 10% threshold, and that the shares were held only as security for the repayment of loans. The appellant further argued that the imposition of the penalty was not justified as none of the factors referred to in section 15J of the SEBI Act existed. The Adjudicating Officer had also noted that the acquisition by way of pledge did not result in any loss to other shareholders or a material impact on the price of the scrip.

Conclusion:

The Tribunal found that the facts were not in dispute and that the appellant had received 7,67,580 shares of APL by way of pledge. However, only 3,32,540 shares were transferred in the name of the appellant, entitling it to exercise voting rights. The remaining shares were held as security and did not entitle the appellant to exercise voting rights. The Tribunal concluded that the acquisition of shares by way of pledge did not amount to an acquisition under regulation 10, as the appellant was not entitled to exercise voting rights for the shares not registered in its name. Therefore, the appellant's holding remained below the 10% threshold, and there was no requirement to make a public announcement. Consequently, the imposition of the penalty was not justified, and the appeal was allowed, setting aside the impugned order.