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TMI Blog2014 (8) TMI 1255X X X X Extracts X X X X X X X X Extracts X X X X ..... or more distinct parts. The absurdity resulting in splitting-up the non-compete agreement can be better appreciated from a hypothetical example. What if the Tribunal had partially agreed with the appellants and held that the non-compete agreement was valid in respect of say ten or twelve of the promoter entities instead of five. This could happen if the genuineness of the non-compete agreement is examined in relation to each promoter entity, as has been done by SEBI. Does it not, therefore, mean that the non-compete agreement has to be split in twenty ways to decide whether it is genuine or sham in respect of five or ten or twelve of the promoter entities. Can this be said to be a reasonable construction of the non-compete agreement? - We are afraid that this surely cannot be the correct way of reading the non-compete agreement and that is why we are of the view that the Tribunal committed a fundamental flaw in holding only a part of the non-compete agreement as a sham. Tribunal should have either held the entire non-compete agreement as a sham or it ought to have held the entire non-compete agreement as a genuine agreement. The question of a half-way house simply does not arise. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r group, pursuant to an exclusivity agreement of 11th November, 2010 whereby the parties concluded that it would be in their mutual interest to maintain exclusive negotiations with one another during the period the appellants considered the proposed acquisition of shares of the target company. Consequently, the price agreed to be paid by the appellants to the Bangur group was Rs. 544.20 per fully paid up equity share having a face value of Rs. 10/-. 6. The second agreement entered into between the appellants and the Bangur group was a non-compete and business waiver agreement. In terms of this agreement the appellants agreed to pay to the Bangur group an amount of about Rs. 277.95 crores, inter alia, for refraining from competing with the business of the target company either on their own or through their affiliates for a period of three years, the business of the target company being manufacturing, sale and trading of pulp and paper.7. In terms of Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short the Takeover Code)1 the appellants gave an open offer through publication in newspapers on 1st April, 2011 for the acquisition of u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le by the appellants to the Bangur group. That being so, SEBI required that amount be added to the offer price of Rs. 544.20 per share to all public shareholders. 13. The reasons given by SEBI for adding the non-compete fee calculated on a per share basis to the offer price were as follows:- (1) Of the 20 promoter entities comprising the Bangur group, only 5 of them were eligible to get the non-compete fee. (2) Of the remaining 15 promoter entities, 2 individuals Yogesh Bangur and Ms. Surbhi Bangur were not eligible to the non-compete fee since they did not have any experience or expertise in the area of operation of the target company and hence they were not capable of offering any competition. They were being given a non-compete fee only because they were shareholders of the target company. As regards the 13 companies who were promoter entities of the Bangur group, SEBI was of the opinion that none was eligible for getting a non-compete fee since they were not in the business of the target company. Furthermore, according to SEBI these 13 promoter entities did not even have, in their object clause, the business of pulp and paper manufacturing. (3) The merchant banker was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other than the acquirer in relation to the sale of shares held by them in target company) to all the public shareholders. The acquirer/Merchant Banker has failed to justify why the same logic has not been used while paying a different price per share (without the non-compete fee) to all the public shareholders." 15. Feeling aggrieved by the communication sent by SEBI to the merchant banker on 3rd August, 2011, the appellants preferred an appeal under Section 15-T of the Securities and Exchange Board of India Act, 1995.2 The appeal was filed with the Securities Appellate Tribunal at Mumbai and was registered as Appeal No. 130 of 2011. The appeal was heard by the Tribunal and came to be dismissed by an order dated 12th September, 2012 (impugned). View of the Tribunal 16. While dismissing the appeal filed by the appellants, the Tribunal extensively referred to and relied upon orders passed by it in three earlier appeals.3 After considering the view expressed in those appeals, the Tribunal held that it had the jurisdiction to decide whether an excessive amount of non-complete fee was paid to the promoter entities and that some of them were not capable of providing any competition t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our view, the Tribunal has made two fundamental errors. In the first place, the Tribunal committed a jurisdictional error by misunderstanding the scope of Regulation 20(8) of the Takeover Code.5 This Regulation provides that any payment made to persons other than the target company in respect of a non-compete agreement in excess of 25% of the offer price arrived at under sub-Regulation (4) or (5) or (6) shall be added to the offer price. A bare reading of Regulation 20(8) of the Takeover Code makes it quite clear that the jurisdiction of the Tribunal gets triggered only when the non-compete fee is in excess of 25% of the offer price. If the non-compete fee is less than 25% of the offer price (as in the present case), the jurisdiction of SEBI would be exercisable only in an extremely rare case and only if SEBI was in a position to ex facie conclude that the transaction involving the takeover of the target company was not bona fide. 22. We say this because it is imperative to give sufficient elbow room to commercial entities for entering into a business transaction. There are a host of considerations that go into business relations and transactions between different entities. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion paid for acquisition of shares and should be factored in for the purpose of reckoning offer price." 26. From this it is quite clear that ordinarily when there is a gap of 25% between the consideration paid to the outgoing promoters and the non-compete fee, SEBI ought not to conduct any inquiry. However, this cannot be treated an absolute proposition and we are quite willing to say that if it appears ex facie, without any searching questions being asked or any intricate reasoning, that it appears to SEBI that the difference between the offer price and the non-compete fee is less than 25% but that is nevertheless a disguise or a camouflage for reducing the cost of acquisition through a public offer, then SEBI can certainly delve further into the matter. 27. In so far as the present case is concerned, on an ex facie reading of the share purchase agreement and the non-compete agreement between the appellants and the promoter entities, no such conclusion is apparent, nor was it canvassed or pointed out. In our opinion therefore, there was no occasion for SEBI to carry out a searching enquiry into the payment of non-compete fee to the Bangur group. 28. Assuming for the sake of arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y) submitted that Ms. Sheetal Bangur was a director in the target company and was actually involved in its day to day activities, and yet a non-compete fee was not paid to her. Was it because she was not a shareholder in the target holder (as suggested) or was it because she really posed no competitive threat? Or, was there some other valid reason? 34. At this stage, it is necessary to appreciate the shareholding pattern of the Bangur group in the target company. 35. Of the 53.46% fully paid up shares held by the Bangur group in the target company, Digvijay Investments Ltd. (DIL) held 24.70% while the Maharaja Shree Umaid Mills Limited (MSUML) held 21.65%. The remaining about 7% shares were held by the other members of the Bangur group. This included Samay Books Ltd. (Samay - 0.10%), the General Investment Company Ltd. (GICL - 0.01%) and Apurva Export Pvt. Ltd. (Apurva - 0.57%). 36. Ms. Sheetal Bangur held 78.96% of the shares in Apurva, 2.60% of the shares in GICL and 92.19% of the shares in Samay. Through these entities, she held shares in DIL and MSUML. Therefore, although she did not directly hold any shares in the target company, she did so indirectly. The cross-holding of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his may be relatable to her not being a shareholder in the target company. Even if we could, we do not think it appropriate to substitute our view for that of the regulator or permit a new dimension to be added to the case in an appeal only on the basis of oral arguments, without any analysis of facts. Under these circumstances, we are of the view that nothing much turns on the non-payment of non-compete fee directly to Ms. Sheetal Bangur. All that need be said on this subject is that in this regard, SEBI acted prudently (as it is expected to) while the Tribunal hypothesized. 40. G.L. Sultania also does not advance the case of SEBI. The purpose of the Takeover Code was explained therein in the following words: "It cannot be denied that the [Securities and Exchange] Board under the Act is a regulatory authority charged with the duty to protect the interest of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. The Takeover Regulations have been framed with a view to provide transparency in transfers arising out of substantial acquisition of shares and takeovers. The object is to bring about fairness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be split in twenty ways to decide whether it is genuine or sham in respect of five or ten or twelve of the promoter entities? Can this be said to be a reasonable construction of the non-compete agreement? We are afraid that this surely cannot be the correct way of reading the non-compete agreement and that is why we are of the view that the Tribunal committed a fundamental flaw in holding only a part of the non-compete agreement as a sham. The Tribunal should have either held the entire non-compete agreement as a sham or it ought to have held the entire non-compete agreement as a genuine agreement. The question of a half-way house simply does not arise. 44. One other minor issue was raised by SEBI, namely, that the non-individual entities did not have the business objectives of manufacturing, sale and trading of pulp and paper in their main object clause. This is only stated to be rejected since the memorandum of association of a corporate entity can always be altered in accordance with the procedure under the Companies Act, 23 1956.45. For completeness, we may mention two events that have occurred since the non-compete agreement was entered into on 29th March, 2011. Firstly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for not filing it within that period. (4) On receipt of an appeal under sub-section (1), the Securities Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against. (5) The Securities Appellate Tribunal shall send a copy of every order made by it to the Board, the parties to the appeal and to the Adjudicating Officer concerned. (6) The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal. 3Tata Tea Ltd. v. SEBI (Appeal No. 136 of 2008); Cementrum IB v. SEBI (Appeal No. 28 of 2008); E-Land Fashion China Holdings Ltd. v. SEBI (Appeal No. 27 of 2011) 415-Z. Appeal to Supreme Court.--Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onths prior to the month, in which the Central Government or the State Government as the case may be opens the financial bid, is less than five per cent (by the number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the six months period may be taken. (iii) In case of shares which have been listed within six months preceding the public announcement, the trading turnover may be annualised with reference to the actual number of days for which the shares have been listed. 10Offer Price: 8. (1) The open offer for acquiring shares under regulation 3, regulation 4, regulation 5 or regulation 6 shall be made at a price not lower than the price determined in accordance with sub-regulation (2) or sub-regulation (3), as the case may be. (2) to (6) xxx xxx xxx (7) For the purposes of sub-regulation (2) and sub-regulation (3), the price paid for shares of the target company shall include any price paid or agreed to be paid for the shares or voting rights in, or control over the target company, in any form whatsoever, whether stated in the agreement for acquisition of shares or in any incidental, contemporaneous or collateral agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X
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