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TMI Blog2001 (8) TMI 1446X X X X Extracts X X X X X X X X Extracts X X X X ..... es (18.82 per cent) on preferential basis. As a result of the said allotment promoters' holding in the company's capital increased to 71.77 per cent. The company's shares are listed on stock exchanges at Hyderabad, Chennai and Mumbai. In the context of the said preferential allotment and consequential rise in the promoter holding in the company's capital, the SEBI appointed an Adjudicating Officer to enquire into the alleged contravention of section 15A of the Act, read with regulations 3(3), 3(4) and 3(5) of the Regulations and adjudge monetary penalty, if so considered necessary. The Adjudicating Officer, after enquiry, viewed that though the requirements of regulation 3(3) have been substantially complied with, the appellants had failed to comply with the requirements of the provisions of regulations 3(4) and 3(5) and imposed a sum of Rs. 1,25,000 as monetary penalty. 3. Shri Prabhakar Govind Kinikar, authorised representative of the appellants explained briefly the background of the case and stated that the Regulations are not applicable to the case and as such imposition of monetary penalty was untenable. According to Shri Kinikar, the appellants are the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of time, is a question of facts and circumstances of each case. The learned representative submitted that an acquirer ceases to beso, on his acquiring control over the company and on acquiring control he assumes the status of a promoter and acquisition of shares by such a promoter is not subject to the provisions of regulations 10, 11 and 12 of the Regulations. 6. With reference to the respondent's observation that the intention of acquisition does not have any relevance to the act of acquisition per se. Shri Kinikar submitted that the Regulations need be interpreted taking into consideration the objective proposed to be achieved by it. In this context he referred to the following observations in Justice Bhagwati Committee report (para 2.22) : 'Person acting in concert' have particular relevance to public offers, for often an acquirer can acquire shares or voting rights in a company 'in concert' with any other person in a manner that the acquisitions made by him remain below the threshold limit, though taken together with the voting rights of persons in concert, ihe threshold may well be exceeded. It is therefore, important to define 'persons acting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Justice Bhagwati Committee report that not only acquisition of shares but also voting rights in a company or control over a company, however, such control be exercised - directly or indirectly - must be covered under the regulations and the present definition of 'acquirer' expanded to include these situations . Shri Kinikar stated that the Adjudicating Officer has not addressed the issues raised by the appellants, as quoted in paras 6.2 and 6.21 in the order, and the finding is deficient in this regard. 8. Shri Kinikar's another submission is that regulations 11 (2), 3(4) and 3(5) are applicable to acquirers and not to promoters, that the Adjudicating Officer has failed to put forward any reasons justifying his finding that the instant acquisition attracted the provisions of regulation 11(2). Shri Kinikar submitted that the said regulations have to take into account (i) the acquisition of shares/voting rights, (ii) the existing entitlement and (iii) the threshold, that it is the way the provisions of the regulations are structured that makes the difference as to whether or not the regulations would be applicable to the cases of existing entitlement exceeding the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is applicable to acquisition and the acquisition together with the existing holding must entitle the acquirer to exercise more than 51 per cent of the voting rights. According to the learned representative in order to make the regulation 11 (2) applicable, in the first instance there has to be acquisition, the acquisition together with the entitlement has to cross the threshold of 51 per cent, that in the instant case, the said 51 per cent benchmark had crossed before 15-9-1997. He submitted that as a result of further acquisition of 18.82 per cent shares on 15-9-1997 the appellants have not become entitled to voting rights 'more than 51 per cent' as the acquisition of 18.82 per cent has resulted only in augmenting the existing voting rights from 52.95 per cent (i.e., more than 51 percent) to 71.77 percent, that the status of 'holding more than 51 per cent' can come only once, when the threshold of 51 per cent is crossed for the first time. According to the learned representative in a case if the existing entitlement is 'more than 51 per cent', further acquisitions will not attract regulation 11 (2) as in such a situation any acquisition together with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Raja Satyendra Narayan Singh v. State of Bihar AIR 1987 SC 1390 to emphasise the need for giving plain meaning to the statutory provisions while interpreting the same. According to the learned representative, no person is a person acting in concert, bereft of the common objective or purpose as stipulated in the regulation. He submitted that in the instant case, the purpose of acquiring shares was to infuse funds, which purpose is not stipulated in the definition of 'person acting in concert', that none of the appellants, therefore, can be considered as person acting in concert and their collective shareholding cannot be accounted for the purpose. He further submitted that since none of them has acquired 10 per cent or more shares or voting rights individually, the provisions of regulation 3(4) are not attracted as the same applies only to acquisition which taken together with shares or voting rights, if any held by the acquirer or person acting in concert with him would entitle the acquirer to exercise 10 per cent or more of the voting rights in a company. In the absence of specific provisions with regard to the applicability of regulation 3(4) to an acquirer already hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbay AIR 1952 SC 14 and Modi Ram v. State of MP AIR 1972 SC 2438. 11. Shri Ananta Barua, representing the respondent, in his attempt to defend the impugned order, made the following submissions. Since the appellants acquired 18.82 per cent equity, over and above their holding of 52.95 per cent in a preferential allotment made on 15-9-1997, they were required to submit a report to the SEBI within 21 days from the date of such regulation under regulation 3(4) alongwith the fee prescribed in regulation 3(5), that having failed to do so, the penal provisions contained in section 15A, are applicable to them. Shri Barua explained the requirements of regulations 3(3), 3(4) and 3(5). He submitted that the regulation 10 requires any acquirer who acquires shares or voting rights which entitles him to exercise more than 10 per cent (as it was then) of voting rights in the target company to make a public announcement, unless the acquisition passes through any one or more of the categories exempted vide regulation 3. Regulation 11 (2) requires the acquirer to make a public offer when such acquisition entitle him to exercise more than 51 per cent of the voting rights in a company. Here again, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the definitions, the two terms are mutually exclusive to the extent, that it is possible that a promoter can also be an acquirer. He further submitted that the act of acquisition of shares or control of the target company or entering into an agreement for the purpose would be the sole criterion for identifying the acquirer, that a promoter could also be deemed to be an acquirer in the event of acquiring shares or voting rights or control of a company in excess of the specified limits by him. He submitted that objective or intention of acquisition does not have any relevance and what matters is the act of the acquisition. Therefore, the appellants' contention that it was not their intention to acquire the shares as an investing proposition and ultimately to gain control, but to infuse funds in the company, cannot be a ground to take them out of the scope of regulation 11(2). Shri Barua submitted that regulation 11(2) brings within its ambit any further acquisition by an acquirer who holds 51 per cent or more of the voting rights in the target company and, therefore, acquisition of 18.82 per cent shares in addition to the 52.95 per cent already held by the appellants would a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the event of a prima facie case of a violation is made out for levy of monetary penalty, an order is issued for adjudication. The Adjudicating Officer in turn initiates proceedings again by issuing a SCN to the persons concerned to explain their view point in the matter, that in the instant case also the same procedure was followed. Shri Barua staled that the appellants were given enough opportunities to make written and oral submissions in the proceedings and the Adjudicating Officer has dealt with their submissions in detail in the impugned order and a reasoned order based on the findings has been passed, that it cannot be said that the Adjudicating Officer passed the order without following the principles of natural justice. Shri Barua, referring to the appellants statement that there was gain to the investing public due to acquisition and loss to the appellants, stated that increase in the stake of promoter in the company means lesser role for the public shareholders, and non-disclosure of material facts virtually amounts to denial of information to the public shareholders to take appropriate decision as to continue in the company as a shareholder or exit from it, in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place. It would therefore be impracticable to devise regulations in such detail as to cover the entire range of situations, which could arise in the process of substantial acquisition of shares and takeovers. Instead there should be a set of General Principles which should guide the interpretation and operation of the Regulations, especially in circumstances which are not explicitly covered by the Regulations. These principles are : (i) Equality of treatment and opportunity to all the shareholders (ii) Protection of interests of shareholders The Committee further stated that in the event of any ambiguity or doubt as to the interpretation of the regulation, the concerned authority shall pay adequate attention to and be guided by any one or more of the aforesaid general principles having a bearing on the matter . 17. After taking into consideration the recommendations of the Committee a new set of regulations, namely, Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 was brought in position with effect from 20-2-1997 repealing the 1994 Regulations. The Regulation was amended again thereafter based on the recommen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellants stand. It was really enlightening. However, for the limited purpose of deciding the present appeal, the basic question that need be answered is as to whether the acquisition under consideration is beyond the purview of the Regulation. 20. The appellants' version that they are only promoters and not acquirers need be examined first. In this context it is also pertinent to mention that according to the Adjudicating Officer, the provisions of regulation 11(2) are attracted to the case. There cannot be two opinion on the issue that regulation 3 has no application to an acquisition not covered under regulation 10 or 11 or 12. Exemption provided under regulation 3 is from the applicability of the provisions of the said regulation. To be more precise exemption is from the compliance of the requirements of making public offer required thereunder. It is to be noted that regulation 11(2) was drastically amended in 1998 (with effect from 28-10-1998). Since the preferential allotment was made on 15-9-1997, the applicable provision to the instant case is the one which was in force on 15-9-1997 and not as amended subsequently. Regulation 11 (2) as it stood on 15-9-1997 read as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company, (2) without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established : (i) a company, its holding company, or subsidiary of such company or company under the same management either individually or together with each other; (ii) a company with any of its directors, or any persons entrusted with the management of the funds of the company; (iii) directors of companies referred to in sub-clause (i) of clause (2) and their associates; (iv) mutual fund with sponsor or trustee or asset management company; (v) foreign institution investors with sub account(s); (vi) merchant bankers with their client(s) as acquirer; (vii) portfolio managers with their client(s) as acquirer; (viii) venture capital funds with sponsors; (ix) banks with financial advisers, stock brokers of the acquirer, or any company which is a holding company, subsidiary or relative of the acquirer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Target company' as per regulation 2(1)(o) means (o) ... a listed company whose shares or voting rights or control is directly or indirectly acquired or is being acquired . 23. On a perusal of the definition of the expression 'acquirer' extracted above it is clear that any person who acquires or agrees to acquire shares or voting rights/control of the target company is an acquirer. The expression 'any person' is of wide amplitude. A person becomes an acquirer by virtue of his action - who acquires or agrees to acquire shares etc. Therefore, it is difficult to agree with the appellants' contention that a promoter can never be an acquirer. A promoter could be considered as an acquirer or not would depend on the question as to whether he is a person who acquires or agrees to acquire shares etc. Identification is thus action related. In the instant case there is no doubt as to the acquisition of shares by promoters. By the appellants own admission they had acquired 18.82 per cent equity capital on 15-9-1997 and the said additional acquisition raised their holding in the company's capital from 52.95 per cent to 71.77 per cent. However, as per the inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 2.22 of the report). In the instant case there is no dispute as to whether there was an element of co-operation among the appellants to acquire shares of the company. It is also evident that they had a commonality of objectives' and community of interest in as much as they had decided to subscribe to the preferential allotment made by the company. The object of subscribing to the preferential allotment may not be to acquire control but to infuse funds. But the fact remains that the appellants had acquired shares following the common objective of acquiring shares. Therefore, in the light of the undisputed facts before me, I have no hesitation to hold that the appellants are acquirers in terms of regulation 2(1)(b), read with regulation 2(1)(e). Now comes the question raised by the appellants that since they are promoters and in control of the company how can they be treated as acquirers? The appellants contention that a person who is in control of the company cannot be an acquirer but only a promoter is not born out of any legal authority. The fact that in the regulation 2(1)(h) a promoter also includes the person or persons who are in control of the company' does not me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a promoter acquires or agrees to acquire shares or voting rights or gains -control over the target company he can be safely considered as an acquirer who in turn would be subject to the provisions of regulation 11. Likewise a promoter can be a person acting in concert provided he is found to cover within the scope of the definition under regulation 2(1)(e). Whether a promoter is also an acquirer or person acting in concert would depend on the facts of each case. It is to be noted that there is no blanket prohibition on the promoters acquiring shares etc. in the company. I find no reason to take a different view in this case. 26. In the light of the factual and the legal position discussed above, I am of the view that the appellants are acquirers. In this context the next question to be considered is as to whether the acquisition of additional shares forming 18.82 per cent of the company's capital attracted the regulations. 27. Shri Kinikar had advanced an argument that since the appellant's holding in the company's share capital having been crossed the benchmark prescribed in the regulation well before the acquisition of 18.82 per cent shares on 15-9-1997, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of regulation 10 that a case to which regulation 10 is not attracted regulation 11(2) also would not attract. In this context it is necessary to find out the object of incorporating these two regulations. It is not proper or possible to jump to the conclusion that framers of the regulation had inadvertently put a regulation over looking the scope of another regulation. Attempt should be to find out the reason to incorporate those regulations rather than holding them redundant or superfluous. It is a settled principle of interpretations that the Court should adopt a construction which advances the policy of the legislation to extend the benefit rather than one which curtails the benefit--Union of India v. Pradeep Kumari [1995] 2 SCC 736. It is no body's case that the provision for making public offer in the cases of substantial acquisition and takeovers is not meant for the benefit of the public shareholders. In this context the observation made by Supreme Court in Keshoram Co. v. Union of India [1989] 3 SCC 151 is to be noted. In the said case the Apex Court while considering the validity of section 3 of the East Punjab Urban Rent Restriction Act, 1949 and the notification d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Regulation 10 is on acquisition of shares beyond the benchmark of 10 per cent stated therein. Said regulation 10 provides the threshold limit for public offer. Justice Bhagwati Committee has discussed at length the background in which the said regulation 10 was considered necessary to be put in the Regulations. The Committee has stated that it was felt that under Indian conditions hardly any person as investor would invest in more than 10 per cent in any company unless he has an intention of taking over the company at some point of time and the committee therefore decided to retain the existing threshold limit of 10 per cent . Thus regulation 10 is on the beginning of the beginning'. Regulation 11 is for a different purpose. It is on consolidation of holdings. In this context the clarification given by SEBI vide its press release dated 30-1-1997 while adopting the Bhagwati Committee report is considered relevant. According to the said press report for the purpose of consolidation of holdings, acquirers holding not less than 10 per cent but not more than 51 per cent are allowed creeping acquisition up to 2 per cent in any period of 12 months. Any purchase by a person holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The question which arose in this regard is upto what point of time substantial acquisitions not involving takeovers need to be regulated. The committee decided that substantial acquisition till an acquirer gains absolute control lever of 75 per cent may be brought within the scope of the Regulations. 30. As already stated, the promoters were holding 52.95 per cent shares in the company. Acquisition of further shares was in effect consolidation of their holding. If financing the business activities of the company was their sole objective, the appellants would not have provided funds against the issue of shares in a preferential allotment. It would have been possible through other least risky and more remunerative modes. The argument that since the appellants were already entitled to exercise more than 51 per cent of the voting rights, further acquisition of shares did not attract the requirements of making public offer as provided in regulation 11 (2) is not supported by the regulation. Any further addition to the voting right beyond 51 per cent would attract regulation 11(2) as is clear from the wording of the regulation that 'no acquirer shall acquire shares.... which en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of acquisitions exempted from the compliance of the requirement of regulations 10, 11 and 12. One of such exempted categories is acquisition of shares in a preferential, allotment made in pursuance of a resolution passed under section 81A of the Companies Act, 1956. The exemption is not automatic. It is subject to compliance of certain requirements. In any case it is an admitted fact that the instant acquisition was in a preferential allotment and the same enjoyed exemption under regulation 3. In this context it is to be noted that the acquisition enjoys exemption only from the compliance requirements of regulations 10, 11 and 12. They are not exempted from complying with the reporting requirements in terms of sub-regulations (3), (4) and (5) of regulation 3. The said sub-regulations require the acquirer to comply with certain reporting requirements with Stock Exchange and the SEBI 33. These sub-regulations are extracted below : (3) In respect of acquisitions under clauses (c), (e), (h) and (i) of sub-regulation (1), the stock exchanges where the shares of the company are listed shall, for information of the public, be notified of the details of the proposed transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said argument is devoid of any merit. What is envisaged in regulation 3(4) is not a one time reporting, as is evident from the reason stated by the committee necessitating such reporting. Thus the contention that regulation 3(4) is not required to be complied with by the appellants who had crossed the benchmark before 15-9-1997 is of no sound fooling and I reject the same. 37. The appellants allegations that the respondent had issued two SCNs and that they were not given opportunity to explain their view point in the proceedings before the authorities, are baseless. The learned representative of the respondent has explained the procedure followed by the SEBI in the investigations/enquiries and the circumstances in which the said two SCNs were issued. The explanations are found satisfactory. It is evident from the order itself that the appellants were given sufficient opportunities to make written and oral submissions before the adjudicat- ing officer and they had availed of the opportunity. Therefore, attack of the impugned order on the ground of failure to comply with the rules of natural justice does not sustain. The impugned order runs to 37 closely typed pages, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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