9911796707
TMI Blog2002 (3) TMI 936X X X X Extracts X X X X X X X X Extracts X X X X ..... 997 ('the 1997 Regulations'). The order further stated that as Shri Bajoria and the persons acting in concert have already reduced their holding to below 5 per cent of the paid-up capital of Bombay Dyeing & Mfg. Co. Ltd. (Bombay Dyeing) no specific directions are being issued to sell the shares acquired in violation of the 1997 Regulations. The said order is under challenge in the present appeal. Even though the impugned order is directed to Shri Bajoria and others, till now, except the present appeal no other appeal has been filed against the order. 2. The respondent, on receipt of certain information that Shri Bajoria with some other persons acting in concert, had failed to comply with the requirements of regulation 7(1) of the 1997 Regulations in the context of acquisition of more than 5 per cent of the shares of Bombay Dyeing, decided to investigate the matter. According to the respondent, the investigation revealed non-compliance of the requirements of regulation 7(1) by the concerned persons and in that context, the respondent issued show-cause notice to the alleged defaulters informing them of the findings of the investigation and also asking them to explain their conduct. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the Hon'ble High Court at Calcutta. Bombay Dyeing had made an application under section 111A of the Companies Act, 1956 before the CLB wherein the appellant amongst others was arrayed as a respondent. The said proceedings were disposed of by the CLB by an order dated 4-7-2001 that the said order has been challenged against by the concerned respondents therein including the appellant hereinbefore the Hon'ble High Court at Bombay, and it is pending. He also stated that Shri Bajoria had filed a writ petition before the Hon'ble High Court at Calcutta challenging the show-cause notice issued by the respondent to him, in respect of the self-same matter and the said writ petition was disposed of by the Court on 27-3-2001, that an appeal has been preferred from the said order, that the said appeal was admitted on 16-5-2001 and directions were given for filing of paper books. The said appeal is still pending. Shri Banerjee stated that the pending litigations are in no way concerned with the order under appeal. On the strength of the learned counsel's submission, that there are no Court proceedings against the Tribunal deciding the present appeal, the matter was taken up for disposal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the requirements of regulation 7(1) in the context of acquisition of Bombay Dyeing's shares and, thus, prima facie violated the Act and the Regulations and was, therefore, liable to directions and penalties enumerated in sections 11B and 15A read with section 15-I of the Act and regulations 44 and 45 of the 1997 Regulations. 7. Shri Banerjee submitted that as per regulation 7(1) any acquirer who acquires shares or voting rights which taken together with shares or voting rights, if any, held by him would entitle him to more than 5 per cent shares or voting rights in a company, is required to disclose the aggregate of his shareholding or voting rights in the target company to that company within four working days of the acquisition of shares or voting rights. In this context he also referred to the definition of the expressions 'acquirer' and 'persons acting in concert' as provided in clauses (a) and (e ) of sub-regulation (1) of regulation 2 of the 1997 Regulations. Shri Banerjee stated that acquirer means any person who directly or indi- rectly, acquires or agrees to acquire shares or voting rights in the target company or acquires or agrees to acquire control over the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consistent enactment of the whole statute. Lord Herschell stated the rule in the following words in Colguhoun v. Brooks [1889] 14 AC 493 at p. 506 'it is beyond dispute, too, that we are entitled, and indeed bound, when construing the terms of any provisions found in a statute, to consider any other parts of the Act which throw light on the intention of the Legislature, and which may serve to show that the particular provision ought not to be construed as it would be alone and apart from the rest of the Act'. We must, therefore, have regard not only to the language of section 33(2)(b), but also to the object and purpose of that provisions, the context in which it occurs and other provisions of the Act in order to determine what the Legislature intended should be the effect of the contravention of section 33(2)(b) in the order of dismissal". The Hon'ble Court made the above observation while interpreting sections 33(2)(b) and 33(2)(c) of the Industrial Disputes Act, 1947. Shri Banerjee submitted that the purpose of furnishing information to the target company is to forward the same to the concerned stock exchange to make the stock exchange know about the acquisition and that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, it is very clear that the respondent had already decided and arrived at a conclusion and the procedure was only farce. The learned counsel stated that the respondent issued show-cause notice on 6-9-2000 despite receipt of the appellant's letter of 29-8-2000 giving all the clarifications the respondent had asked for, that this itself is indicative of the mala fide of the respondent, that the personal hearing offered to the appellant was only a formality and an eye wash in pretended compliance with the provisions of the Act and Regulations. 10. The learned counsel submitted that the appellant was denied of the right to give effective reply to the show-cause notice and make effective representation before the respondent, that the appellant was also denied access to and inspection of documents which were material to enable the appellant to make effective representation, that the right to test the veracity of statements made by persons concerned by cross examination was also denied. He stated that even the evidence produced by the appellant was not considered as could be seen from the facts and in particular that the three affidavits filed by Jyoti Sharma, Subir Santra and Krishan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of making any substantial acquisition of Bombay Dyeing's shares, that this was made clear to the respondent by the appellant in several of its letters including the one dated 4-8-2000. The learned counsel stated that the despatch of the letter dated 16-3-2000 by UCP intimating the shareholding in Bombay Dyeing was substantial compliance of the requirement under regulation 7 and there was little justification to pass the impugned order. 12. The learned counsel submitted that regulation 7 does not cast any strict statutory duty on an acquirer to disclose acquisition over 5 per cent of the paid-up capital of the target company, that the word 'shall' used in regulation 7 cannot be construed as to imply that it is mandatory on the part of the acquirer to disclose to the target company, that the acquirer is not at all duty-bound to ensure that his communication reaches the target company. He refuted the respondent's contention that disclosures under regulation 7 are mandatory in nature or that in the absence of proper communication, the shareholders of the target company and the company's management are deprived of their right of information. He submitted that since the shares of Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Depository furnishes promptly and regularly the detail to the companies whose shares are traded in demat form. He submitted that denial of receipt of the letter by Bombay Dyeing is irrelevant in the circumstances and no reliance should be placed on the company's statement. 14. The learned counsel submitted that the respondent had even gone to the extent of questioning the need for posting the letter from Dharmatolla Post Office. He submitted the fact that the said letter was posted from Dharmatolla Post Office under certificate of posting, cannot be a reason to come to a conclusion that the letter was not sent. He stated that the letter was posted under instructions from the appellant by one of its employees and he had chosen a post office of his convenience. In this connection he referred to the affidavits filed by Mr. Jyoti Sharma, Mr. Subir Santra, Mr. Krishan Sharma, confirming the posting of the letter of 16-3-2000 and also delivery of the letter of 29-3-2000 to CSE. The learned counsel stated that the allegation by the respondent that the appellant was attempting to create evidence of sending letter to Bombay Dyeing and CSE is baseless. 15. With reference to the letter se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent is required to protect the interest of investors and the securities market, and to achieve the said goal, the impugned directions were issued. He submitted that the 1997 Regulations provide for transparency in share acquisitions and takeovers through periodic disclosures, to benefit the investors, market and also the target companies. 19. Shri Desai refuted the appellant's contention that the respondent had not followed the procedural requirements of the investigation as prescribed in the Regulations and the principles of natural justice while passing the impugned order. He stated that investigation was conducted by the respondent as required in terms of regulation 38, and on receipt of the investigation report, show-cause notice incorporating the finding of investigation was issued to the appellant on 18-12-2000, thereby giving the appellant adequate opportunity to present its case, that the documents relied upon in support of the charges were also made available and inspection of these documents was also given. In this context the relied on the copies of the correspondence exchanged in this regard between the parties, filed in the proceedings. Shri Desai submitted that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the Regulation cast on the acquirer to fulfil. 22. Shri Desai submitted that the 1997 Regulation provides for transpar-ency and dissemination of information to the investors and also to the management of the target company, in matters of substantial acquisition of shares or control, that regulation 7 is one of the devices designed for the purpose, requiring the acquirer to report to the target company his holding on exceeding 5 per cent of the company's share capital and the target company thereafter to report the position to the concerned stock exchange. He submitted that the very object of putting regulation 7 would be defeated, if the appellant's view that the requirement of reporting arises only in the event of individual acquirer's holding exceeds 5 per cent shareholding and the holding of those persons acting in concert with him to be discarded. He submitted that regulation 7 is meant to protect the interests of the investors and the management of the target company as the reporting under regulation 7(1) enables the target company to know of any attempt by any person to corner shares of the company and to take measures to safeguard its interests, that requiring the tar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng direction and penalty as one and the same. He referred to the show-cause notice dated 18-12-2000 issued to the appellant and stated that the notice required the appellant to show cause as to "why suitable directions including directions prohibiting it to further deal in securities, prohibiting it from disposing of any of the securities acquired in violation of these Regulations, directing it to sell the shares acquired, should not be issued to it under section 11B of the SEBI Act read with regulation 44 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, for the above mentioned violations. Mega Resources Ltd., is also required to show-cause as to why adjudication proceedings under section 15A read with 15-I of SEBI Act, 1992 read with regulation 45 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 should not be initiated against it" for the violations stated in the notice. Shri Desai submitted that direction and penalty are not one and the same and the appellant cannot be unaware of the same as could be seen from the show-cause notice. Shri Desai submitted that regulation 44(a) is in no way violative of article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns acting in concert had acquired more than 5 per cent of the share capital of Bombay Dyeing, attracting the provisions of regulation 7(1). Clarification was sought by the respondent on 26-7-2000 from Shri Bajoria in this regard. Shri Bajoria informed the respondent that his holding along with persons acting in concert with him in the company was 49,64,014 shares on 19-6-2000 which reached 50,39,014 on 20-6-2000, 51,95,133 on 27-6-2000 and 52,53,826 on 29-8-2000. Shri Bajoria also stated that Mega resources (the appellant) acted in concert with him. Investigation followed. The investigations revealed that Shri Bajoria acting in concert with the appellant had acquired 20,69,732 shares of Bombay Dyeing on 15-3-2000 which exceeded the 5 per cent benchmark provided in regulation 7(1) for the purpose of disclosure. Thereafter the respondent issued a show-cause notice to the appellant also. The appellant denied violation of the regulation, as alleged in the notice. Shri Bajoria in his reply dated 6-6-2001 to the respondent (page 8) had stated that "I would also like to point out that even when shares were acquired by Mega Resources Ltd. and its associate Mega Stocks Ltd. on 15th Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are communicated to Mega Resources Ltd. as required under regulation 42(1) of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997 for giving it an opportunity of being heard before initiating any further action under the SEBI Act, 1992 and the SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997. This communication is being sent to Mega Resources Ltd. with approval from the Competent Authority. Mega Resources Ltd. is therefore, required to show cause as to why suitable directions including directions prohibiting it to further deal in securities; prohibiting it from disposing of any of the securities acquired in violation of these Regulations; directing it to sell the shares acquired, should not be issued to you under section 11B of the SEBI Act read with regulation 44 of the SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997, for the abovementioned violations. Mega Resources Ltd. is also required to show cause as to why adjudication proceedings under section 15A read with section 15-I of SEBI Act, 1992 read with regulation 45 of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997 should not be initiated aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istent with the Act and the Rules made thereunder to carry out the purposes of the Act. In terms of section 31 every Regulations made under the Act is required to be laid, as soon as may be after it is made, before each House of Parliament, for a period of thirty days and in case the Parliament modifies the Regulations so laid, the modified version will prevail or if the Parliament agrees that the Regulations should not be made, the Regulations thereafter will have no effect. The respondent has in exercise of the powers vested in it notified the 1997 Regulations, and laid the same before the Parliament. The Parliament has neither modified nor vetoed the Regulation, therefore, the Regulation is considered to have the approval of the Parliament and have equal force as if it is made by the Parliament. The 1997 Regulations provides the requisite measures to regulate substantial acquisition of shares and takeovers of companies. The legal position regarding the respondent's powers to provide measures to regulate substantial acquisition of shares and takeovers is, thus, clear. 31. The Regulations notified in 1997, which replaced the 1994 Regulations, is the one in force regulating substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding exceeding 5 per cent independent of the shares holding of persons acting in concert with him. In this context he had referred to the provisions of regulations 10 and 11 to show that whereever the holding of the persons acting in concert is to be taken into consideration the same has been so specifically mentioned, that in the absence of any such requirement in regulation 7(1) it has to be viewed that it is the absolute shareholding of the acquirer that alone be taken into consideration for deciding the bench-mark percentage of 5 provided therein and that since the appellant's holding was less than 5 per cent it was not incumbent on it to make the disclosure. The expression 'acquirer' as per regulation 2(1)(b) means : "(b)'acquirer' means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer;" The expression 'person acting in concert' has been defined in regulation 2(1)(e) as under : "(e)'person acting in concert' comprises,- (1) persons who, for a common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividual holding does not exceed 5 per cent, from complying with the requirement of the Regulation. In the light of the definition of the expression 'acquirer' and the 'persons acting in concert' and also taking into consideration the purpose of regulation 7, I am of the view that the acquisition of shares by persons acting in league, is very relevant and the disclosure of such concerted acquisition to the target company and the company in turn to the concerned stock exchange is in tune with the objective of the said disclosure. If one is to accept Shri Banerjee's contention, that would mean that each person acting in concert could acquire upto 5 per cent shares without making the disclosure and continue to do so upto 15 per cent, without attracting the requirements of public offer in terms of regulation 10. Such an interpretation would defeat the very purpose of the Regulations. As already stated one of the objects of the Regulations is to protect the interests of the investors through prompt disclosures. In my view, the shares acquired by all those persons acting in league has to be taken as a whole for the purpose of regulation 7. Since the appellant itself having admitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losure to the company is to inform it about the cornering/concentration of shares by others so as to enable it to take preventive measures, if it so desires, to ward off the entry of potential raiders and strengthen the management's position. The argument that making disclosure by the acquirer of its holding in Bombay Dyeing directly to CSE, is to be treated as the substantial compliance of requirement of the regulation, is not tenable. Therefore, in my view it is not at all necessary to go into the facts to ascertain whether the appellant had really submitted the letter making 'such disclosure' to the CSE or it was only a story to prove its bona fides. The so-called compliance of regulation by informing the shareholding of the appellant in Bombay Dyeing to CSE is of no help to absolve the appellant from the charge of non-compliance of regulation 7(1). 36. The appellant claims that it had posted a letter dated 16-3-2000 to Bombay Dyeing, a copy of which is available at Annexure AI to the appeal. The said letter reads as under : "To, The Company Secretary Bombay Dyeing & Mfg. Co. Ltd., Nevile House, J.N. Heredia Marg, Ballard Estate, Bombay 400 038 Dear Sir, Sub : Our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that by simply posting the letter to Bombay Dyeing the appellant's obligation is over. Shri Banerjee had argued that by posting the letter the appellant's obligation under regulation 7(1) is over in the absence of any specific requirement under the said regulation to sent the information by registered post/speed post/fax, etc. He had also stated that no duty is cast on the appellant to check up with the target company to ensure receipt of the communication. Shri Banerjee's contention is not acceptable for the simple reason that regulation is not simply on sending the information, it requires disclosure. Mere despatch of the information is short of the said requirement. If the requirement was only 'to send', on sufficient proof of posting the letter would have in the normal course to some extent met with such a requirement. But regulation 7(1) requires the acquirer to disclose the aggregate of his holding in the target company to the company. Sub-regulation (2) prescribes the time limit within which the disclosure is required to be made. Therefore, the crucial question is whether the requisite disclosure has been made by the appellant. For the purpose it is necessary to know what i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a penalty not exceeding five thousand rupees for every day during which such failure continues". Thus, the consequences of default are provided in the Act itself. The argument that regulation 7(1) has no nexus with the object of the Regulation and that it is arbitrary and impractical is unfounded. Timely disclosure of requisite information is the best investor protection measure. Regulation 7 provides for such timely disclosure. I do not find anything to support the appellant's version that the disclosure requirement in the regulation is arbitrary and impractical. 40. The appellant's contention that the investigation was not conducted in the manner provided in the Regulations and that the respondent had failed to adhere to the rules of natural justice is unfounded as is evident from the facts on record. 41. Chapter V of the 1997 Regulations provides for "investigation and action by the Board" the Board's right to investigate has been stated in regulation 38, which is as under: "Board's right to investigate.-The Board may appoint one or more persons as investigating officer to undertake investigation for any of the following purposes, namely :- (a )to inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such other person and also provide copies of documents or other materials which, in the opinion of the investigating officer are relevant for the purposes of the investigation. (3) The investigating officer, in the course of investigation, shall be entitled to examine or to record the statements of any director, officer or employee of the acquirer, the seller, the target company, the merchant banker. (4) It shall be the duty of every director, officer or employee of the acquirer, the seller, the target company, the merchant banker to give to the investigating officer all assistance in connection with investigation, which the investigating officer may reasonably require." Submission of report to the Board is required under regulation 41 as under: "Submission of report to the Board. - The investigating officer shall, as soon as possible, on completion of the investigation, submit a report to the Board: Provided that if directed to do so by the Board, he may submit interim reports." Requirement of communication of findings have been provided in regulation 42 as under: "Communication of findings. - (1) The Board shall, after consideration of the investi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... target company failing to carry out the obligations under the regulations shall be liable for action in terms of the regulations and the Act. (4) The Board may, for failure to carry out the requirements of the regulations by an intermediary, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration under section 12 of the Act : Provided that no such certificate of registration shall be suspended or cancelled unless the procedure specified in the regulations applicable to such intermediary is complied with. (5) For any mis-statement to the shareholders or for concealment of material information required to be disclosed to the shareholders, the acquirers or the directors where the acquirer is a body corporate, the directors of the target company, the merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for action in terms of the regulations and the Act. (6) The penalties referred to sub-regulations (1) to (5) may include:- (a )criminal prosecution under section 24 of the Act; (b)monetary penalties under section 15H of the Act; (c )dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. It is seen from the documents on record that the respondent on 18-12-2000 had issued a detailed show-cause notice to the appellant stating the charges and the data relied upon, and the legal provisions attracted, and the consequences that would attract in case satisfactory reply is not given. There is no provision in the regulation to furnish the full text of the investigation report to the noticee. But the law has taken care of the requirement of natural justice by providing in regulation 42(1) to communicate the findings of the investigating officer to the acquirer, etc., and give him an opportunity of being heard. It is not the appellant's contention that the findings of the Investigating Officer were not communicated to it or that it was not given opportunity of being heard. Grievance is on not giving the investigation report as a whole which is not a requirement under the regulation. By furnishing the findings of the Investigating Officer the appellant was given sufficient opportunity to putforth its defence. The appellant is asking for something which he is not entitled to under the law. With reference to the requirement of inspection of documents it is seen from the docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 47. In this context it is to be remembered that the charge against the appellant is that it had failed to comply with the post acquisition disclosure requirement, in terms of regulation 7(1). It is not that there is no specific penalty for the said omission in the Act. Under section 24 of the Act, for such a default the acquirer can be prosecuted. The acquirer can also be proceeded against under Chapter VIA and monetary penalty can be imposed. It is not that the default would go unpunished, if established. 48. Regulation 44(a ) does not empower the respondent to debar the appellant from accessing the capital market or putting a total ban on dealing in securities. Regulation 44(a) enables the respondent direct the "persons concerned not to further deal in securities". On a combined reading of sub-regulations (b) and (c) the securities referred to in clause (a) could be the securities of the target company which is the subject matter of acquisition. Clause (a) does not appear to be meant to stop further dealing in any security held by the acquirer. By debarring the person concerned from further dealing in securities, how the interests of the securities market is taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns (1) to (5) of regulation 45. Sub-regulations (2) to (5) specify the compliance requirements to attract the Regulation. These Regulations do not cover the requirement of regulation 7(1). Further sub-regulation (1) is also not attracted as it states that "any person violating any provisions of the Regulations shall be liable for action in terms of Regulations and the Act". This sub-regulation by itself is of no relevance as it is a restatement of the legal position. It is not a penal provision by itself. The said provision in effect is of no effect, as it goes without saying that the Act and Regulations will take care of the violations under its provisions ! It goes without saying. Then what is the specific provision empowering the respondent to issue such a direction which is penal in effect ? Coming to sections 11 and 11B, it is to be noted that section 11 is on the functions of the respondent. In exercise of the powers specifically provided under section 11(2)(h) the respondent has already provided the measures to be taken to regulate substantial acquisition of shares and takeovers of companies and, consequences, that would visit the persons not complying with those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that direction debarring the appellant from accessing the capital market and dealing directly or indirectly in securities for a period of one year for the reason that the appellant had failed to make the requisite disclosure of its holding in Bombay Dyeing in terms of regulation 7(1), tantamounts to penalty which cannot be imposed under section 11 or 11B. 52. In para 11.2 of the order it has been stated that as Shri Bajoria and the persons acting in concert have already reduced their holding to less than 5 per cent of the paid-up capital of BDMCL, no specific directions are being issued to sell the shares acquired in violation of the 1997 Regulations. It appears that the respondent has wrongly concluded that the acquisition of shares by the appellant is in violation of the 1997 Regulations, little realising that compliance of the requirement of regulation 7(1) is only a post acquisition requirement and failure to comply with such a requirement by itself will not make the acquisition of the shares violative of the Regulations. If the respondent's views are to be accepted, that would lead to absurd situations. For example, section 75 of the Companies Act, requires companies m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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