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TMI Blog2015 (11) TMI 1426X X X X Extracts X X X X X X X X Extracts X X X X ..... two promoters, it did not have the protection of Regulation 3. As required under Regulation 10, the Appellant did make a public announcement, but did not disclose its buy-back transaction with HSIDC. The Appellant has vainly and incorrectly attempted to justify his act of non-disclosure by stating that the transaction with HSIDC was protected by Regulation 3, which placed it beyond the ambit of Regulation 10, 11 and 12. In our view, Regulation 3 only protects a transaction between a co-promoter and a State financial institution to the extent that, as a consequence of such transaction a public announcement will not be required to be made as provided under Regulations 10, 11 and 12. However, it does not imply that the said transaction is to be protected from the rigours of other Regulations provided for under the Act. Thus, the transaction between the Appellant and HSIDC will have to be subject to Regulations 16 and 20, and the rate at which the Appellant bought back the shares from HSIDC had to be disclosed in the public announcement. Find no force whatsoever in the contention of the Learned Counsel for the Appellant that the post-dated cheques forwarded to HSIDC enclosed with le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ikramajit Sen And Shiva Kirti Singh, JJ. JUDGMENT Vikramajit Sen, J. 1. This Appeal assails the Judgment dated 19.4.2006 of the Securities Appellate Tribunal which upheld the order of the Securities and Exchange Board of India dated 1.8.2003. The factual matrix is that one Mr. V.P. Garg (hereinafter referred to as Garg ) entered into an Assisted Sector Agreement with the Haryana State Industrial Development Corporation Limited (hereinafter referred to as HSIDC ) on 4.1.1993, for the purpose of setting up a modern resort hotel complex at Village Chowky, Tehsil Kalka, Haryana. The parties agreed to collaborate for the profitable implementation and operation of the project in the assisted sector through a company already incorporated by Garg under the name and style of Polo Hotels Ltd. (hereinafter referred to as the Target Company ). HSIDC extended a term loan to Garg and also subscribed to 3,00,000 shares of ₹ 10/- each of the Target Company. Clause 24 of the Agreement provided for buyback of the shares of HSIDC. The said clause is reproduced for facility of reference: BUY BACK ARRANGEMENT:- 24 (a) At any time after the Company goes in for commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his equity shareholding in the Target Company to the Appellant and that the Appellant had agreed to furnish his personal guarantee for buy-back of the three lac equity shares held by HSIDC. In the letter Garg requested HSIDC to accept the personal guarantee of the Appellant in lieu of his buy-back guarantee and to absolve him from the obligation. 3. The Appellant also wrote a letter to HSIDC dated 15.4.1999, informing it that he and Garg had entered into an agreement for purchase of equity shareholding of Garg and for complete takeover of the management of the Target Company. The Appellant confirmed that he was prepared to buy-back the equity holding of HSIDC as provided for in the assisted sector agreement instead of Garg, under similar terms and conditions. The Appellant also requested that since he was facing a stringent liquidity problem, the payment for the buy-back which was due in April 1999 be instead made in monthly instalments of ₹ 20 lacs each with effect from September 1999. Enclosed with the letter were four post-dated cheques in respect of the said buy-back obligations, amounting to a total of ₹ 71,25,466/-. HSIDC, vide its letter dated 19.4.1999 to Gar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complainant alleged that the Appellant was suffering from a liquidity crunch and had requested HSIDC to receive the consideration amount with respect to the transfer of shares in monthly instalments. The complainant also brought to the notice of SEBI that the post-dated cheques through which the Appellant had tendered consideration had subsequently been dishonoured and criminal proceedings had been initiated against him. A copy of the said complaint was forwarded to the Appellant through his merchant banker. 7. The Appellant moved an application on 2.12.1999 stating that he was covered under the ambit of Regulation 3(1)(i), and as a result was immune to the provisions under Regulations 10, 11 and 12. The relevant provisions have been reproduced as under: 3. Applicability of the Regulation.- (1) Nothing contained in the Regulations 10, 11 and 12 of these Regulations shall apply to: xxx xxx xxx (i) transfer of shares from state level financial institutions, including their subsidiaries to co-promoter(s) of the company pursuant to an agreement between such financial institution and such co-promoter(s); xxx xxx xxx xxx xxx xxx CHAPTER III SUB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Subsequently, SEBI wrote a letter to HSIDC dated 2.6.2000 asking whether the letter dated 15.4.1999 pertained to the buy-back of shares and whether the post-dated cheques were deposited with HSIDC as security for the buy-back obligations. The HSIDC in its reply via letter dated 1.8.2000, stated that the postdated cheques had been issued towards the purchase consideration for the buy-back of three lac equity shares held by HSIDC in the Target Company. SEBI, on being satisfied that a prima facie case of non-disclosure of material facts in the public announcement and a violation of Regulations exists, issued a show cause notice to the Appellant. The Appellant filed his reply to the show cause notice after which SEBI by its order dated 1.8.2003 issued directions to the Appellant under Section 4(3) read with Section 11B of the Act and Regulations 44 and 45 of the Regulations. The Appellant was directed to make a fresh public announcement for 20% shares as required under Chapter 11 of the Regulations in accordance with Regulation 10 and offer to the shareholders of the Target Company the price of ₹ 23.75 per share along with interest at the rate of 15% per annum for the period from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made in respect of the buy-back of shares. Furthermore, the shares held by HSIDC had not been transferred in the name of the Appellant or his associates, so the acquisition had not reached its stage of fruition. Resultantly, the price offered to HSIDC could not be taken into consideration as provided under Regulation 20(2) (b) of the Regulations to determine the minimum offer price. 20. Minimum offer price.-(1) The offer to acquire the shares under regulation 10, 11 or 12 shall be made at a minimum offer price which shall be payable- (a) in cash; or (b) by exchange and/or transfer of shares of the acquirer company, if the person seeking to acquire the shares is a listed body corporate; or (c) by exchange and/or transfer of secured instruments with a minimum of A grade rating from a credit rating agency; (d) a combination of clause (a), (b) or (c) : Provided that (2) For the purposes of sub-regulation (1), the minimum offer price shall be the highest of- (a) the negotiated price under the agreement referred to in subregulation (1) of regulation 14; (b) the highest price paid by the acquirer or persons acting in conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut was subsequently postponed till November 1999, and thus as the buy-back was to take place in November, it is then that the rate would have been calculated and determined. Reliance has been placed on a letter issued by HSIDC dated 1.6.1999 addressed to the Appellant stating that the purchase consideration of the shares under buy-back agreement could not be determined as on date, and the equity had to be bought back by the promoters at a purchase consideration which would be calculated as per the terms contained in Clause 15 of the Tripartite agreement. Counsel relies on a letter issued by HSIDC dated 9.12.1999 wherein it was communicated to the Appellant that the post-dated cheques which he had deposited were dishonoured on presentation due to non-availability of sufficient funds with the accounts, and thus as there had been no payment no acquisition had taken place. To further buttress this contention Learned Counsel relied on a letter issued by HSIDC dated 11.1.2001 addressed to SEBI, wherein it was averred that the transfer of shares to the incoming collaborators would be effected only on the deposit of the entire amount of purchase consideration. 12. Learned Senior Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the date of public announcement. 13. The first issue that has to be addressed before us is whether the transaction of buy-back of shares which transpired between the Appellant and HSIDC was required to be disclosed in the public announcement dated 24.4.1999. In order to determine this requirement, we must examine the operative clauses of the relevant Regulations. Regulation 3 states that Regulations 10, 11 and 12 shall have no applicability to any transfer of shares from state level financial institutions, including their subsidiaries, to co-promoter(s) of the company pursuant to an agreement between such financial institution and such co-promoter(s). Regulations 10, 11 and 12 mandate the making of a public announcement, if any of the criteria mentioned therein are satisfied. Regulation 16 provides the contents and essential disclosures that are to be made at the time of making a public announcement. Regulation 20 establishes the method of computation to be employed in order to determine the minimum offer price which the acquirer must offer to purchase shares in a public announcement under Regulation 10, 11 or 12. It is evident from a reading of the above Regulations that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that promise would be fulfilled on the date mentioned on the cheque. Thus, this promise to pay amounted to a sale of shares/equity. The subsequent dishonouring of the post-dated cheque would have no bearing on the case. At the time of making the public announcement the Appellant had bought back the shares of HSIDC by making payment via the said post-dated cheques. Further, as the buy-back was in pursuance of an agreement, there was consensus ad idem. The Appellant has subsequently shirked his responsibility and has tried to slither away from honouring the agreement, which he cannot be allowed to gain from, as is established by the legal maxim commodum ex injuri su non habere debet. While interpreting the term acquisition, we must conceptualize the intention behind these Regulations which, it seems to us, is to safeguard the shareholders from adverse consequences of acquisitions and takeovers as far as the value of the shares is concerned. Not infrequently, the new management s endeavour is to manipulate the market price of the shares in a manner calculated to induce the existing shareholders to off load their holdings at a low price. This is achieved by portraying a false picture o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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