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TMI Blog2019 (10) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal, in view of the directions of Respondent no.1 SEBI in the impugned order, Respondent Company had issued fresh PB Notice adding the explanatory note further explaining the additional transactions. We were told at the Bar that the process of voting is complete and the date of declaration of the result was scheduled as 18th September, 2019. Therefore, vide order dated 13th September, 2019 we directed Respondent no.2 Company not to declare the results of the postal ballot in question till we deliver the judgement. In view of the dismissal of Appeal no.357 of 2019 the interim order will have to be vacated. Hence the following order. In the result, Appeal filed by ITC Ltd. fails while Appeal filed by JMF ARC is allowed. The interim order dated is hereby vacated. - Appeal No.357 of 2019 With Appeal Lodging No.460 of 2019 - - - Dated:- 26-9-2019 - Mr Tarun Agarwala, Presiding Officer, Dr. C.K.G. Nair, Member And Mr M.T. Joshi, Judicial Member For The Appellant : Mr. Darius Khambatta, Senior Advocate with Mr. Pesi Modi, Senior Advocate, Mr. Somasekhar Sundaresan, Ms. Kalpana Desai, Ms. Sneha Jaisingh and Ms. Shreya Gupta and Mr. Tushar Hathiramani, Advoca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial Asset Reconstruction Co. Ltd. ought to have been barred from voting by the Respondent no.1 SEBI under Regulation 32 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as Takeover Regulations ) as it has obtained 26% equity in Respondent no.2 Company in breach of the Takeover Regulations. Respondent no.1 SEBI after hearing all the sides and after calling for necessary explanations held that the acquisition of shares by Respondent no.17 J.M. Financial Asset Reconstruction Co. Ltd. (hereinafter referred to as JMF ARC ) is only a technical violation of the Takeover Regulations and is fit for exemption. It further held that out of the additional transaction only one transaction relating to intellectual property assignment of trademark Jamavar between the Company, identified promoters their affiliates with Brookfield would be a related party transaction. It therefore directed to exclude only the said transaction from putting to vote by Respondent no.2 Leelaventures before shareholders in case the transaction is material in terms of relevant Regulation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and issued security receipt worth ₹ 3200 crores. Eventually, Respondent no. 17 JMF ARC proposed to Respondent no.2 Company to allot 16.39 crore equity shares pursuant to conversion of part-debt amounting to ₹ 275 crore into equity. Necessary approvals from the Board of Directors and thereafter from the shareholders were obtained and equity shares converting the debt were issued to Respondent no.17 JMF ARC on 24th October, 2017. It filed disclosures under Regulation 29(2) of the Takeover Regulations on 25th October, 2017. Thereafter, Respondent no.17 JMF ARC had filed a corporate insolvency resolution process before the National Company Law Tribunal Mumbai Bench (NCLT) in view of the default in payment of dues. The said proceeding is pending. In the meantime, various proposals and counter proposals were received for resolution of the assets of Respondent no.2 Company by sale etc. It is the case of Respondent no.2 Company that thought a public announcement was made in this regard and various proposals were received the entities thereafter did not revert or did not show any follow up interest. 4. In the circumstances, due to initiative of the Respondent no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itional agreements with Directors, Promoters are proposed to be entered into which are in the following terms:- ( i) An Agreement for assignment will be entered into by Leela Lace Holdings Private Limited ( LLHPL ) (Respondent no.8-an entity of group of promoters of the Company) and a Purchaser Entity (Brookfield), for assignment of the intellectual property owned by LLHPL used in, held for use in or related to the hospitality, hotels and resorts and business, as may be mutually agreed between the Purchaser Entity and LLHPL, for a total consideration of ₹ 150 Crore. ( ii) An Agreement for the license of the right to use the name The Leela with respect to the hotel operated by the Company in Mumbai and related matters and also an agreement for use of centralized services to be provided by Brookfield in this respect. ( iii) An Agreement to be entered into between Brookfield and certain Promoters/members of the Promoter Group (or their affiliates) with respect to business expansion services to be provided to Brookfield, whereby the said Promoters/members of the Promoter Group (or their affiliates) would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alling for material from the respondent no.2 Company, held that the transactions in question cannot be called as related party transactions. It is further found that in acquiring 26% of the equity shares of the Respondent no.2 Company by Respondent no.17 JMF ARC, only a technical breach has occurred which could be exempted. It further declared that Respondent no.17 also cannot be termed as related party or impugned transaction as a related party transaction qua Respondent no.17 JMF ARC. However in view of the fact that vide additional transaction the promoters or group of promoters are also entering into transaction with Brookfield Respondent no.1 SEBI directed that in the interest of the shareholders a fresh PB Notice should be issued providing following additional disclosures in the same. A. The Company shall provide the following additional disclosures in the Postal Ballot Notice: i. All relevant details of each of the sale transactions including Asset Sale Transaction and Additional IP Transaction with specific information identifying the transactions between the Company and Brookfield and the Promoters and Brookfield ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 crores through additional transaction and certain intangible benefits as well. The appellant further submitted that the Respondent no.17 JMF ARC would pocket remuneration for the transaction and also would gain in the nature of repayment of debt assigned to it, eventually causing Respondent no.2 Company with negative networth. Both the sides made submissions and counter submissions before us about the viability or otherwise of the transactions in relation to the interest of the investors. Learned Senior Counsel Mr. Seervai added another angle of continuation of large number of employees in case the assets of the Company are transferred as a going concern, which otherwise is facing threat of closure of operations due to continuous losses. 11. Ultimately, however Mr. Khambata and Mr. P.N. Modi, the learned Senior counsels appearing for the appellant ITC Ltd agreed that since the transactions are to be put before the shareholders, the only question that would remain is as to whether the disputed transactions are related party transactions limiting the voting rights of the directors, promoters of the Company and of Respondent no.17 JMF ARC and as to whether Responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Regulation 32 of the Takeover Regulations. The provisions of Regulation 32 as are relevant to decide the present issue are extracted as under: Power to issue directions. 32.(1) Without prejudice to its powers under Chapter VIA and section 24 of the Act, the Board may, in the interest of investors in securities and the securities market, issue such directions [or any other order] as it deems fit under section 11 or section 11B or section 11D of the Act, including,- ( a) directing divestment of shares acquired in violation of these regulations, whether through public auction or in the open market, or through an offer for sale under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, and directing the appointment of a merchant banker for such divestiture; ( b) directing transfer of the shares, or any proceeds of a directed sale of shares acquired in violation of these regulations to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Reserve Bank of India from time to time 14 out of 17 lenders of the Company agreed to restructure the debt of the appellant Company of approximately ₹ 4112 crore being 96% of the total CDR debt. The Debt Restructuring Mechanism was termed as Corporate Debt Restructuring Package which was lateron reframed as Strategic Debt Restructuring Scheme. Master Restructuring Agreement was entered between the lenders and the Company dated 20th September, 2012 annexed to affidavit in reply of Respondent no.1 SEBI. The Empowered Group of CDR had approved the CDR package. The Company however could not adhere to the plan of restructuring therefore the CDR scheme was declared as failed. Trust was already created under the CDR scheme. In the circumstances, in terms of clause 7.2(e) of the Master Restructuring Agreement Respondent no.17 issued notice on 10th April, 2017 to the Company seeking conversion of part of debts approximately amount to ₹ 275 crores representing approximately 25.999% of the paid up share capital of the Company. The Company s AGM sought approval of the shareholders of the same and in the month of September, 2017 the said proposal was accepted. The appellant ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain sufficient un-issued equity shares for the above purpose and obtain all requisite corporate approvals and authorizations as may be required in this regard. ( iv) The CDR Lenders may exercise the above conversion right on one or more occasions in the manner specified above till the Final Settlement Date. ( v) On receipt of a conversion notice, the Borrower shall allot and issue the requisite number of fully paid-up equity shares (such shares referred to as the conversion shares ) to the CDR Lenders and upon such issuance of the conversion shares, the CDR Lenders shall accept the same in satisfaction of the part of the facilities so converted on and from the date of conversion .. g. We find that the corporate debt restructuring scheme was announced by the Reserve Bank of India vide various circulars from time to time for the purpose of restructuring the debt of financially distressed Companies in an attempt to revive such Companies. The circulars provided basic framework. Specific plans were to be worked out for a Company inter alia regarding interest moratorium, plans of payment etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terse transfer of shares between promoters of a Company and their immediate relatives. The ratio is that plain language of a statue normally needs no interpretation. There cannot be any dispute to the proposition LODR Regulations: Related Party Transactions a. The appellant had objected the exercise of PB Notice asking all the shareholders including the respondents who are the promoters/directors of the Company as well as Respondent no.17 JMF ARC, in view of the fact that the proposed Asset Sale Transaction of the Company with Brookfield is a composite transaction to be consummated only when additional transactions with the promoters personally are also agreed. It was submitted that as the nature of the transaction is composite in which the promoters would get ₹ 300 crores definitely from two tangible additional transactions and certain intangible profits from other additional transactions as described above, the same would be a related party transaction attracting the provisions of Regulation 23 of the LODR Regulations. It is also submitted that Respondent no.17 JMF ARC would obtain ₹ 70 crores as its remuneration for working out t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dited financial statements of the listed entity. ( 2) All related party transactions shall require prior approval of the audit committee. ( 3) Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions, namely- ( a) the audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature; ( b) the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity; ( c) the omnibus approval shall specify: ( i) the name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into, ( ii) the indicative base price / current contracted price and the formula for variation in the price if any; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards: Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party: Provided further that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s); g. Thus, Regulation 2(zb) adopts provision of subsection (76) of Section 2 of the Companies Act, 2013 or of the applicable accounting standard alongwith an addition that the promoter or promoter group of the listed entity holding 20% or more of the shareholding in the listed entity shall be deemed to be a related party. h. The definition as provided by sub-section (76) of section 2 of the Companies Act reads as under:- ( 76) related party , with reference to a company, means- ( i) a director or his relative; ( ii) a key managerial personnel or his relative; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a related party, regardless of whether a price is charged and a transaction with a related party shall be construed to include a single transaction or a group of transactions in a contract: Provided that this definition shall not be applicable for the units issued by mutual funds which are listed on a recognised stock exchange(s); k. In this connection, it would be beneficial to advert attention to the similar definition found in Section 188 of the Companies Act, 2013. The relevant provisions is as under: 188. Related party transactions. ( 1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to ( a) sale, purchase or supply of any goods or materials; ( b) selling or otherwise disposing of, or buying, property of any kind; ( c) leasing of property of any kind; ( d) availing or rendering of any services; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p. Mr. Khambatta and thereafter Mr. P.N. Modi in rejoinder strenuously submitted that the additional transfer is nothing but benefits to be derived by promoter in composite agreement and Respondent no.17 would also gain from the entire transaction. Therefore they submitted that narrow interpretation could infact stifle the purpose of the provisions. q. Upon hearing both sides, in our view, the language of the provisions needs no interpretation as the language of the same is plain. While SEBI as a regulator define related party transaction as a transaction between a listed entity (Company) and a related party the Parliament define the term as per Section 188 of the Companies Act, 2013 as a transaction of a Company with a related party . None of the provisions leave any scope for interpretation of the same as suggested by Mr. Khambatta and Mr. Modi. Through the interpretation, the scope of the definition cannot be widened to bring in it s scope any transaction in which the directors etc would have some real or perceived interest. The Parliament as well as the regulator SEBI did not intend to bring such transactions within the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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