9911796707
TMI Blog2001 (8) TMI 1244X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellants at the time of the hearing of the appeals which list is directed to be made a part of the record. 4. The admitted facts are that between 23-04-1997 and 11-02-1998, GMM acquired 1,48,100 equity shares of the respondent company, viz., NILE Ltd. Admittedly, the said quantum constituted 4.96 per cent of the paid up share capital of the respondent company. Subsequently GMM acquired another lot of 1,38,100 equity shares of the respondent company. There is dispute about the actual date of acquisition of the said shares; to which I shall advert to later. But the fact remains that, the total number of shares thus, acquired by GMM constituted 9.58 per cent of the total paid up capital of the respondent company. 4A. On 15-4-1998, the Board of Directors of the appellant in Appeal No. 4 of 2001, i.e., Karamsad Holdings Ltd. ( KHL ) resolved to acquire up to 6,00,380 shares of the respondent company which would constitute 20 per cent of the subscribed equity share capital of the respondent company. In view of the fact that KHL decided to acquire up to 20 per cent of the shares of the respondent company and in view of the stipulation contained in Regulation 10 of the Sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Department of Company Affairs, Government of India, that there was violation of section 108A of the Companies Act by the GMM and requested the Government to take appropriate action in that regard. By another letter on the same day, the respondent company also complained to the SEBI regarding the violation of section 108A and the regulations framed under the SEBI Act. 10. On receipt of intimation from the respondent company refusing to register the transfer of shares in favour of GMM, GMM by letter dated 12-9-1998 called upon the respondent company to furnish a copy of the minutes of the meeting where the decision to reject registration was taken. 11. On 22-5-1998 the respondent company filed a writ petition, W.P. No. 14014 of 1998 in this Court seeking a declaration that the public offer made by KHL (referred to earlier) was illegal and inoperative. On 28-5-1998, this Court directed to the department of Company Affairs to consider various representations made by the respondent company herein and to pass appropriate orders. Eventually the writ petition came to be disposed by order dated 30-6-1998 by this Court on the ground that nothing survived in the writ petition since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellants is valid and held to be for sufficient cause , as contemplated under sub-section 2 of section 111A. 15. On behalf of the appellants Shri Chagala, the learned counsel made the following submissions, that the order of the CLB rejecting the petitions of the appellants herein is illegal for the reason, 1.that the respondent company in its decisions to reject the registration of the ownership of the shares of the appellants herein never mentioned anything about the contravention of Regulation 7 of the takeover regulations of 1997 referred to earlier. 2.that the expression "sufficient cause" occurring under section 111(2) proviso takes within its sweep only those contingencies contemplated under sub-section (3) of section 111A. Therefore, the rejection by the respondent to register the shares, for the reasons, which are not covered by sub-section 3, are not sufficient reasons for refusing. 3.that the decision of the CLB insofar as it held that the acquisition of the shares held by GMM and its subsidiaries is in contravention of Regulation 7 of the takeover Regulations for the reason that the requisite intimation contemplated under the said regulation is not made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a private company, which is a subsidiary of a public company except with the previous approval of the Central Government. A more closer analysis of section 108A is required to be made, but at a later stage. Section 108B mandates that whenever shares of some company are held by a body corporate or bodies corporates under the same management to the extent of 10 per cent or more, they shall intimate to the Central Government if they propose to transfer any portion of their holding to any other person. In this regard, the transferring company is required to furnish certain particulars mentioned in the section to the Central Government and this section also contemplates certain action to be taken by the Central Government wherever felt necessary, the details of which may not be necessary for the present purpose. 20. The point then required to be emphasized in this regard is that section 108B, in substance, restricts or regulates the right of the holder of the shares to transfer such shares where such holder happens to be body corporate and also happens to hold more than 10 per cent of the total equity share capital of a company. 21. Section 108C on the other hand imposes ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. Section 108H defined certain expressions like dominant undertaking etc., employed in the preceding sections. Section 108-I provides for the penalties for the contravention of the preceding sections. The analysis of other sections in the group other than the sections 111 and 111A, in my view is not required for the purpose of present case. 26. Section 111 recognizes certain contingencies under which a company is entitled to refuse the registration of the transfer of its shares and the procedure for such refusal and the remedy of the person seeking the transfer. But in view of language of sub-section (14) of section 111, the content of section 111 is applicable only to private companies and private companies, which have become public companies by virtue of operation of section 43A. 27. Section 111A deals with companies other than those covered under section 111 subject of course to the clarification wherever the context required, it also applies to the companies covered under section 111 also. Sub-section 2 of section 111A declares that the shares or debentures and any interest therein of a company shall be freely transferable; this freedom is subject to the other parts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch individual, firm, group constituent of a group, body corporate or bodies corporate under the same management, exceed twenty-five per cent of the paid-up equity share capital of such company. (2) Where any individual, firm, group, constituent of a group, body corporate or bodies corporate under the same management (hereafter in this Act referred to as the acquirer), is prohibited, by sub-section (1), from acquiring or agreeing to acquire except with the previous approval of the Central Government, any share of a public company or a private company which is subsidiary of a public company, no ( a )company in which not less than fifty-one per cent of the share capital is held by the Central Government; or ( b )corporation (not being a company) established by or under any Central Act; or ( c )financial institution, shall transfer or agree to transfer any share to such acquirer unless such acquirer has obtained the previous approval of the Central Government for the acquisition, or agreement for the acquisition, of such share." Sub-section (1) prohibits the acquisition of the equity shares in public company or a private company, which is a subsidiary of a public compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equence of such acquisition or transfer by the owners of dominant undertakings. To understand the exact purport of section 108G, it requires a more closer scrutiny of the same, I do not propose to go into the same as it is not required for the present case. 32. The next question is as to the meaning to be given to the expression agree to acquire occurring under section 108A(1). The expression agree or agreement presupposes the existence of more than one person to the transaction. In the context of transfer of shares according to the learned counsel for the appellants, such person could be only the intending purchaser and the prospective seller of the shares and only when both the persons reach an agreement, the transfer of shares is possible. The learned counsel for the appellants argued, that to interpret section 108A in such a way as requiring the intending acquirer to seek the approval of the Central Government even before an agreement with the prospective sellers is entered into would be highly unreasonable and impracticable. According to the learned counsel, a decision by any acquirer may be taken to acquire more than 25 per cent of the shares of any company, but he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquire the shares of a company, but not to an agreement between the intending purchaser and the prospective seller. The expression agree to acquire which immediately follows the clause ... shall jointly or severally acquire...... in my view, makes the intention of the Legislature clear that the agreement to acquire contemplated therein is an agreement in the context of a joint acquisition by some of the enumerated categories of persons in the said section. This view of mine gains further strength from the language of the later part of the same section which says ".......if the total nominal value of the equity shares intended to be so acquired...". The expression "intended" is significant in this context. Obviously, the Legislature in its wisdom thought that the Union of India must have the information regarding the acquisition of shares in any company beyond 25 per cent the moment a prospective acquirer either severally or jointly with some other person takes such a decision. The reason for such a stipulation, to me, appears to be that not only the actual acquisition of the shares of a company but even a decision to acquire in bulk, depending on the person taking such a decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he previous approval of the Central Government. In view of the fact that the holding company of KHL ( i.e., GMM) already held 9.58 per cent of the share capital of the respondent company making the intention of both the bodies to acquire 25 per cent of the shares, it is only the KHL which is required to obtain the previous approval of the Central Government. Then the second question is as to what should happen to the shares acquired by the GMM? In view of the conclusion reached above by me that there is no violation of the provisions of section 108A insofar as GMM s acquisition of 9.58 per cent of the respondent s company share capital is concerned, the same is required to be registered by the respondent if the acquisition is otherwise in accordance with law. On the other hand, the acquisition of 18,300 shares by the KHL as already discussed above is in contravention of the provisions of section 108A. The respondent-company is justified in refusing to register the same. 37. Coming to acquisition of 3,15,595 shares acquired by KIL - another subsidiary company of GMM, the resolution to make such an acquisition was admittedly made on 13-5-1998. To decide whether such a decision w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal of KSPL, i.e., Company Appeal No. 5 of 2001 is required to be remanded to the CLB for recording evidence in this regard. 39. The next issue that is required to be dealt in these appeals is - whether the acquisition of the shares by the appellant companies herein or any one of them is in contravention of regulations of the substantial acquisition of shares and take over regulations, 1997 framed by the SEBI. Before such an enquiry is embarked upon a brief survey of the scheme of the regulations is necessary. The regulations are divided into 5 chapters. Chapter I deals with the definitions of various expressions used in the regulations and the applicability of the regulations etc., Three expressions acquirer , person acting in concert and target company defined therein are relevant for the purpose of the present case. 40. Chapter II deals with the obligations of the acquirer and the target company to make disclosure as stipulated therein in all cases where the shares are held or acquired by any person in excess of 5 per cent. Chapter III deals with the acquisition of shares by any acquirer beyond 15 per cent and consequential obligations of such an acquirer. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stipulated under sub-regulation (2); whereas regulation 10 occurring in Chapter III reads as follows : "10. Acquisition of 15 per cent or more of the shares or voting rights of any company. 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), entitled 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." Regulation 10 mandates that no acquirer shall either acquire 15 per cent or more of the shares of any particular company, or such number of shares coupled with the existing share holding of such an acquirer in the same company would make him the holder of more than 15 per cent of the shares unless such an acquirer makes a public announcement contemplated under the Chapter. The details of public announcement and the procedure thereof may not be relevant for the purpose of this case. 42. It is sufficient to notice that there is a clear difference in the scheme of regulation 7 and regulation 10; while regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence as to the date of the actual acquisition of the second lot of 1,38,100 shares by GMM and if the entire lot is not acquired on the same day on what date did GMM s acquisition exceed the limit of 5 per cent shares contemplated under regulation 7, but I do not propose to remand the appeal on this count, for the reason, that the violation, if any, on the part of the GMM, in my view, does not affect the legality of the acquisition by the GMM, but the failure on its part if any to comply with an obligation created under the regulation 7 after the acquisition is validly made, might expose GMM to penalties contemplated under regulation 45 and nothing more in the facts of the present case. 45. Coming to the issue of KSPL, I have already indicated that the appeal is required to be remanded for recording the evidence as to the actual date of acquisition by the said appellant of the 10,000 shares of the respondent-company in the context of the alleged violation of section 108A. But even in the context of the violation of regulation 7 assuming for the sake of arguments that the acquisition of the said 10,000 shares is made either simultaneously with the dates of the acquisition of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares in contravention of law, but violation of statutory law is not the only infirmity in the matter of acquisition of shares. In a given case, shares could be acquired or transferred by a person in contravention of some existing contractual obligations of the transferor or some other obligation attached to those shares. The legal position in the case of such contravention of contractual obligations is discussed in Palmer s Company Law, 24th Edition, at page 637 at para 40-34 : "If the shares have been acquired by means of a loan which requires payment of the debt out of specific property including those shares, such a contract is enforceable by a grant of specific performance and creates an equitable interest in the shares in favour of the lender. A subsequent equitable mortgagee of the shares, who proposes to deal with the shares in such a way as to cause a breach of that contract will be restrained by injunction if he acquired them with actual knowledge of the contract." This position of law stated by the Palmer is based on a decision of the Courts of Appeal reported in Swiss Bank Corpn. v. Lloyd Bank Ltd. [1982] (2) All ER 419. 50. The principle of law was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the authority under the said section is obviously required to keep in mind both the above mentioned factors, i.e., interests of the company and public.The language and the scheme of section 108D makes the above clear. 52. Therefore, if the interest of the company is one of the factors to be considered by the Central Government while granting or declining to grant the approval under section 108A or 108D, necessarily the Government is required to examine various factors like the impact of the acquisition on the management of the company, whether such an impact is desirable, etc. In my view, the existing legal obligations of the company should also be one of the factors. If that is the true import of the scheme of sections 108A to 108G, the company (target) would be equally entitled to at least make an assessment of the probable impact of the registration of the acquisition of the bulk shares by any acquirer, on the interests of the company. If in the process the company comes to the conclusion that registering such a transfer would be detrimental to the interests of the company, in my view the company could certainly avail the benefit of section 108D and seek an appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or indirectly to any other individual or organization without Hakko s permission. If GMM were to acquire 30% stake in Nile, it would be difficult for Nile to honour the confidentiality commitments given to Hakko Sangyo. Also, at the time of termination of the technical collaboration between Nile and Hakko Sangyo it was agreed by both parties that Hakko would transfer new technologies to Nile as and when developed on a case to case basis. This access to continue technological upgradation is vital to Nile s survival and growth. One such technology relates to the manufacture of glasslined shell and tube heat exchangers. Hakko is widely acknowledged as having by far the best technology for their product. Hakko indicated that they would transfer their technology only if Nile can give an unconditional guarantee that this technology would not be directly or indirectly passed on to any other individual/organization, who is a competitor. If GMM were to acquire a 30% stake in Nile now there is every likelihood of Hakko backing out on the fears that GMM may one day be able to get access to this critical technology and may ultimately let it fall into the hands of their competitor in the w ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
