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TMI Blog2015 (4) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... construed on the basis of the language used in the said proviso and not on the basis of the treatment given by Scheduled Commercial Banks/ PFI‟s to the shares acquired by them on invocation of pledge. Similarly, fact that regulation 31(3) specifically requires promoters of every Target Company to make disclosures within seven days from the creation or invocation or release of encumbrance does not support the case of appellants. On the contrary, very fact that the expression “invocation of pledge” is specifically used in regulation 31(3) and the said expression is conspicuously absent in regulation 29(4) clearly shows that neither regulation 29(4) nor the proviso to regulation 29(4) are intended to apply acquisition of shares on invocation of pledge. Similarly, in the absence of any exemption, under PIT Regulations, 1992 SEBI is justified in holding that on acquisition of shares by invocation of pledge, appellants were required to make disclosures under regulation 13 of PIT Regulations, 1992. Since regulation 13(1) of PIT Regulations, 1992 requires “any person” holding shares in excess of the limits prescribed therein to make disclosures, and admittedly appellants had ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is restricted to the deemed acquisition of shares specified under regulation 29(4) and the said exemption cannot be extended to Scheduled Commercial Banks/PFI‟s when shares are actually acquired by them on invocation of pledge. According to the appellants exemption under the proviso to regulation 29(4) is available to a PFI even when shares are acquired by the PFI on invocation of pledge in the ordinary course of business. 4. For convenience, facts in Appeal No. 190 of 2014 are set out herein. Counsel on both sides state that decision in Appeal No. 190 of 2014 would equally apply to Appeal No. 242 of 2014. 5. Facts relevant to Appeal No. 190 of 2014 are as follows:- a) Appellant is a public financial institution duly notified by the Government of India. b) In December 2010, appellant, during the course of its regular business provided financial assistance to Raj Oil Mills by way of bill accounting facility up to a limit of ₹ 15 crore for which the promoter/director of that company had pledged 55,50,000 equity shares of Raj Oil Mills as and by way of security towards the financial facility granted by the appellant. c) As Raj Oil Mills failed to repay the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 relating to disclosure of acquisition and disposal of shares in a target company as it stood at the material time reads thus:- 29.(1) Any acquirer who acquires shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, aggregating to five per cent or more of the shares of such target company, shall disclose their aggregate shareholding and voting rights in such target company in such form as may be specified. (2) Any acquirer, who together with persons acting in concert with him, holds shares or voting rights entitling them to five per cent or more of the shares or voting rights in a target company, shall disclose every acquisition or disposal of shares of such target company representing two per cent or more of the shares or voting rights in such target company in such form as may be specified. (3) The disclosures required under sub-regulation (1) and sub-regulation (2) shall be made within two working days of the receipt of intimation of allotment of shares, or the acquisition of shares or voting rights in the target company to,- (a) every sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that case, shares were pledged in favour of two banks. The banks invoked the pledge and took the shares. Thereafter, on repayment of loan, shares invoked by the bank were returned to the borrower. Parties therein argued that the shares were pledged to the bank with a view to secure loan and on repayment of loan, banks were obliged to return the pledged shares and in such a case, provisions relating to open offer are not triggered. Rejecting the contention of the borrower this Tribunal held that where a pledge is invoked and shares are actually taken by the banks on invocation of pledge and thereafter returned to be borrower, the open offer provisions are triggered. In view of the above decision, it is provided in the proviso to regulation 29(4) that when shares are taken to secure indebtedness by Scheduled Commercial Banks and PFI‟s they are exempted from making disclosures under regulation 29 of the Takeover Regulations, 2011. c) When a pledge is created, the shares are not taken by the pledgee, and the pledged shares continue to be in the account of the borrower. On creation of pledge shares are simply marked as pledged by the Depository Participant ( DP‟), wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholding pattern disclosure/filing made by the Target Company includes disclosure of parties holding more than 1%, and such disclosure is already within the public domain. Thus, the objective of ensuring that the public is informed about the acquisition of shares over 5% is automatically accomplished in view of the Target Company filing the shareholding pattern disclosures. Therefore, SEBI is not justified in holding that failure on part of appellant to make disclosures under regulation 29 has deprived investors important information regarding acquisition of shares by the appellants on invocation of pledge. h) The purpose and object of PIT Regulations, 1992 is to prevent an insider from trading while in possession of Unpublished Price Sensitive Information ( UPSI ), as stipulated in Regulation 3. Regulation 2(e) defines an insider as being any person who is connected or deemed to be connected with the company and reasonably expected to have UPSI or a person who has actually received UPSI. Regulation 2(c) defines connected persons as being a director, officer or employee of a company or a person having a professional or business relationship with the company and who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholding and voting rights in such Target Company in such form as may be specified. Expression acquirer is defined under regulation 2(1)(a) of Takeover Regulations, 2011 to mean any person, who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over, a Target Company. Therefore, when Scheduled Commercial Banks/ PFI‟s invoke pledge and acquire shares or voting rights in excess of the limits prescribed under regulation 29(1)/29(2) then, as an acquirer, those Scheduled Commercial Banks/ PFI‟s would be required to make disclosures in the manner specified under regulation 29(1)/29(2) of the Takeover Regulations, 2011. In other words, expression any acquirer in regulation 29(1)/29(2) read with regulation 2(1)(a) of Takeover Regulations, 2011 is wide enough to cover Scheduled Commercial Banks/ PFI‟s and when they acquire shares/voting rights of the Target Company on invocation of pledge in excess of the limits prescribed under regulation 29(1)/29(2), then, they would be required to make disclosures in such manner as are specified. 10. Regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulation 29(4) deals with the deemed acquisitions, it is just and proper to hold that the proviso to regulation 29(4) applies only to the deemed acquisitions specified under regulation 29(4). 15. Moreover, the language used in the proviso to regulation 29(4) does not even remotely suggest that the exemption contained therein is intended to cover categories other than those specified under regulation 29(4). Very fact that the proviso to regulation 29(4) uses the expression such requirement .as pledgee in connection with a pledge of shares for securing indebtedness in the ordinary course of business‟ instead of using the expression such requirement arising on acquisition of shares by invocation of pledge clearly shows that the proviso to regulation 29(4) is obviously referable to disclosure requirements which the Scheduled Commercial Banks/ PFI‟s are required to discharge as pledgee when shares are taken by way of pledge for securing indebtedness in the ordinary course of business. It is relevant to note that the liability to make disclosures under regulation 29(4) is with reference to deemed acquisitions and therefore, in the absence of any contrary indication, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvocation of pledge is without any merit, because, firstly, object of regulation 29(4) is to introduce a deeming fiction and to treat shares taken by way of encumbrance to be deemed acquisition, even though taking shares by way of encumbrance does not involve actual acquisition of shares by a pledgee and the borrower continues to be registered as well as beneficial owner of the encumbered shares. To illustrate, where shares are encumbered by creation of pledge, pledgee does not acquire the shares till the pledge is invoked. However, under regulation 29(4), by a deeming fiction, the pledgee is treated to have acquired shares and is required to make disclosures. Where the shares are acquired on invocation of pledge, question of introducing deemed fiction would not arise because, in such a case, shares are actually acquired on invocation of pledge. Thus it is evident that the expression taken used in regulation 29(4) is used in the context of deemed acquisition of shares on creation of pledge and not actual acquisition of shares on invocation of pledge. Secondly, if the contention of the appellant that the expression taken in regulation 29(4) applies to taking shares into the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which were subject matter of those proceedings held that the expression in connection with has to be construed widely, it cannot be said that in each and every case the expression in connection with has to be construed widely. Expression in connection with in regulation 29(4) is followed by the expression a pledge of shares for securing indebtedness . Since, indebtedness is secured by Scheduled Commercial Banks/ PFI‟s by encumbering the shares under a pledge and by a deeming fiction such encumbrance is treated to be acquisition of shares for the purposes of regulation 29(4), it is obvious that the expression in connection with in the proviso to regulation 29(4) would apply to the obligation which the Scheduled Commercial Banks/ PFI‟s are required to follow on account of the deemed acquisition under regulation 29(4). 20. Fact that Scheduled Commercial Banks/ PFI‟s even after acquiring the pledged shares on invocation of pledge do not show such shares in their audited accounts as their own investments, would have no bearing while construing the scope and ambit of the proviso to regulation 29(4). Once it is seen that the exemption under the proviso to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97 banks would have been required to comply with the public announcement requirements. It was further held that after the shares were acquired by the bank on invocation of pledge, it was open to the bank to transfer shares to other parties. Fact that the bank has returned the shares to the borrower on repayment of loan would not absolve the borrower from complying with the public announcement requirements. It is relevant to note that under explanation to regulation 7 of Takeover Regulations, 1997, every acquirer other than Banks/PFI‟s were required to make disclosures within two days of creation of pledge. In other words even under explanation to regulation 7 of the Takeover Regulations, 1997 exemption to Banks/PFI‟s from making disclosures was restricted to the obligation arising within two days of creation of pledge. Thus, the decision of this Tribunal in case of Liquid Holdings (Supra) does not support the case of the appellants. 23. Similarly, in the absence of any exemption, under PIT Regulations, 1992 SEBI is justified in holding that on acquisition of shares by invocation of pledge, appellants were required to make disclosures under regulation 13 of PIT Regula ..... X X X X Extracts X X X X X X X X Extracts X X X X
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