No Acts & Articles mentioned in this case
Page 1 REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.9103 OF 2014
PRAMOD JAIN AND OTHERS …APPELLANT(S)
VERSUS
SECURITIES AND EXCHANGE BOARD OF INDIA ...RESPONDENT(S)
J U D G M E N T
ADARSH KUMAR GOEL, J.
1.This appeal has been preferred under Section 15 Z
of the Securities and Exchange Board of India Act, 1992
(the Act) against order dated 6
th
August, 2014 passed by
the Securities Appellate Tribunal, Mumbai (the SAT) in
Appeal No.111 of 2012. The SAT upheld the order of
Securities and Exchange Board of India (SEBI) dated 13
th
April, 2012 rejecting the application of the appellants for
withdrawal of the public offer to acquire shares of the
Golden Tobacco Ltd. in terms of public announcement (PA)
dated November 12, 2009 under the provisions of SEBI
(Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (the Takeover Regulations).
Page 2 C.A. No.9103 of 2014
FACTS :
2.Golden Tobacco Limited (the target company) is a
company having its registered office at Tobacco House,
S.V. Road, Vile Parle (West), Mumbai – 400 056. The equity
shares of the target company are listed on the Bombay
Stock Exchange Limited (BSE) and the National Stock
Exchange of India Limited (NSE).
3.On November 12, 2009, Mr. Pramod Jain and Pranidhi
Holdings Private Limited (the acquirers) along with J.P.
Financial Services Private Limited (the person acting in
concert (PAC) made PA through VC Corporate Advisors
Private Limited (the merchant banker) in accordance with
regulations 10 and 12 read with regulation 14. As on the
date of the PA, the acquirers and PAC collectively held 11,
39, 002 equity shares (6.47%) of the target company. The
PA was voluntarily made by the acquirers and the PAC to
acquire 44, 02, 201 equity shares (25%) of the target
company from its equity shareholders at a price of
Rs.101/- (the offer price) per equity share. At that time,
market price of the target company shares was Rs.109/-
per share. Networth of the target company as on 31
st
March, 2009 was Rs.42.44 crores. Net current assets were
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Page 3 C.A. No.9103 of 2014
Rs.134.4 crores and gross sales were Rs.173.68 crores.
The offer was for hostile takeover of the target company.
The PA mentioned that the prime object of the offer was to
acquire substantial shares/voting rights accompanied with
the change and control of the management of the target
company. The acquisition was in the nature of strategic
investment for diversification and growth and to reap the
benefit of corporate opportunities. The draft letter of offer
also mentioned that the PAC had advanced loan against
shares of the target company and on account of default, it
acquired the said shares representing 5.05% of the equity
share capital. The acquirers and the PAC had also
acquired 71034 equity shares at highest and average price
of Rs.100.15 and Rs.89.13 respectively. Thus, the
acquirers and the PAC had 6.47 % of the issue of equity
share capital as on the date of PA. The background of the
acquirers mentioned in the DLO was that Mr. Pramod Jain
was prime Director of PHPL and had experience in financial
and consultancy services.
4.The acquirers and PAC, through the merchant banker,
filed the draft letter of offer (DLO) with SEBI on November,
26, 2009. During examination of the DLO, certain
complaints were received by SEBI against the acquirers
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Page 4 C.A. No.9103 of 2014
and PAC as well as against the target company and its
promoters. The appellants (the acquirer) in their
complaints to SEBI and other proceedings including
petition under Section 397/398 of the Companies Act
before the Company Law Board and a suit before the Civil
Court inter alia questioned the transaction for joint
development of Vile Parle Property in terms of
Memorandum of Understanding (MoU) dated 26
th
September, 2009 with Sheth Developers and Suraksha
Realty Ltd. Various correspondences were exchanged
between SEBI and the merchant banker, acquirers, PAC,
the target company and certain other entities in respect of
such complaints.
5.The appellants vide application dated 8
th
October,
2011 sought permission to withdraw the offer under
Regulation 27(1)(d). The stand of the appellants in the
said letter was that the SEBI had not taken any decision on
the DLO in two years during which period the management
of the target company had systematically siphoned off its
coffers, depleted its valuable fixed assets and eroded its
net worth substantially with the intention of making it a
shell company. This has defeated the very object of the
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Page 5 C.A. No.9103 of 2014
offer, without any fault on the part of the acquirers. The
management had availed huge high cost borrowing from
banks and financial institutions against its property,
including 18.7 per cent shares out of the promoters’
shareholdings. Disputes were pending before the
arbitrator arising out of default in payments. Most
valuable assets of the target company had been
encumbered in violation of SEBI regulations and against
the interest of minority shareholders and the acquirers.
Since the date of PA, financial position of the target
company had deteriorated substantially.
ORDER OF SEBI
6.The SEBI vide order dated 13
th
April, 2012 declined to
permit withdrawal of the PA but observed that alleged
violation of Regulation 23 by the target company shall be
investigated. It was held that as per Regulation 23(1), the
target company was entitled to dispose of its assets with
the approval of the shareholders even after the PA.
Correspondence which the SEBI had with the acquirers was
referred to, with a view to explain the delay in deciding the
DLO. It was observed that the SEBI had informed the
merchant banker of the appellants on 3
rd
February, 2010
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Page 6 C.A. No.9103 of 2014
that it was not competent to administer the authenticity of
the process of Resolution in the General Body Meeting
(GBM) dated 18
th
January, 2010. The merchant banker
vide letter dated 5
th
May, 2010 informed the SEBI that the
acquirers had reached a settlement with the target
company and withdrawn their petition before the Company
Law Board (CLB) against the Resolution dated 18
th
January,
2010. SEBI had also advised the merchant banker that it
had not been provided any material in support of the
allegation of violation of Regulation 23 by the target
company in selling its assets. The merchant banker
informed the SEBI vide letter dated 19
th
May, 2011 that the
acquirers had filed a suit for restraining the target
company from creating any third party interest in the
assets of the target company. The SEBI had also received
complaints against the acquirers and the PAC which were
being looked into when the PAC vide letter dated 2
nd
August, 2011 sought permission to withdraw the PA. Vide
letter dated 9
th
August, 2011, the acquirers requested that
the process of open offer be kept in abeyance. SEBI vide
e-mail dated 9
th
September, 2011 responded to the
merchant banker, seeking tabulated list of the allegations
of the acquirers and the PAC but instead of doing so, the
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Page 7 C.A. No.9103 of 2014
merchant banker forwarded request for withdrawal of the
PA. It was observed that in the circumstances there was
no delay on the part of the SEBI. It was further observed
that the acquirers had challenged the Resolution of the
Extra Ordinary General Meeting (EGM) and had also filed a
suit. The acquirers entered into an amicable settlement
before the CLB. SEBI had no jurisdiction in the matter.
Referring to Regulation 22, it was observed that the
acquirers could make PA only after most careful
consideration and must ensure that it is able to implement
the offer. Referring to Regulation 27, it was observed that
public offer once made could not be withdrawn except in
the circumstances provided in the said Regulation which
had to be construed strictly. Unchecked automatic
withdrawal of offer was capable of being misused. It was
also observed that the acquirers should have used due
diligence with regard to the allegation in FIR dated 25
th
July, 2009 about personal borrowings by promoters of the
target company by sale of prime properties as the PA was
much after the FIR. The acquirers and the PAC had already
purchased substantial shares of the target company and
thus, could not make PA without exercising due diligence
regarding the financial condition and quality of
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Page 8 C.A. No.9103 of 2014
management of the target company. The acquirers were
not strangers to the target company. They had 6.47 per
cent shares. Discovery of adverse effects pertaining to
financial health subsequent to the PA could not be a
ground to withdraw the PA. Doing so will jeopardize the
interests of the shareholders. The takeover regulations
laid down a self-contained code and withdrawal of public
offer was not governed by principles of withdrawal of an
offer under the Contract Act, 1872.
ORDER OF SAT
7.The above view has been affirmed by the SAT in its
impugned order (by majority). As regards the timeline
stipulated in Regulation 18, it was observed that under the
second proviso thereto, the SEBI could take time in making
inquiry on a complaint and thereafter could call for a
revised letter of offer with or without re-scheduling the
date of opening or closing the offer. However, it was
observed that in the present case, SEBI was wholly
unjustified in taking more than two years for offering its
comments on the letter of offer submitted by the
appellants. This, however, did not constitute a ground to
permit withdrawal of the PA. As regards the contention
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Page 9 C.A. No.9103 of 2014
that the public offer was frustrated and became impossible
of implementation on account of encumbering of the most
valuable property of the target company in violation of
Regulation 23 and other steps of the promoters making
the target company a shell company, it was observed that
the target company had taken decision to develop its Vile
Parle property even before the PA. Appellant No.1 had
given his offer for joint development of the said property
on 29
th
September, 2008 but the said offer was rejected
and Sheth Developers were shortlisted for the purpose. It
was thereafter that the appellants decided to make hostile
takeover public offer to frustrate the decision of the target
company to develop the property with Sheth Developers.
It will be appropriate to refer to the findings of the SAT in
this regard:
“14. We see no merit in the above contentions.
Admittedly, GTL had decided to develop the
Vile-Parle property even before public offer was
made by appellants on November 12, 2009. In fact
Appellant No. 1 had made an offer to GTL on
September 29, 2008 for joint development of
Vile-Parle property by offering ` 150 crores as non
refundable amount and had suggested profit sharing
in the joint venture at a ratio 50:50. However, GTL
rejected the offer made by appellants and on
recommendation of Ernst & Young shortlisted Sheth
Developers as best 20 bidder for joint development
of Vile-Parle property. Thereupon appellants decided
to make hostile public offer on November 12, 2009
with a view to frustrate decision of GTL to develop
the Vile-Parle property jointly with Sheth
9
Page 10 C.A. No.9103 of 2014
Developers. Although object of the proposal to
acquire 25% shares of GTL at Rs. 101/- per share as
against the market price of Rs.109/- per share, as
stated in the public offer was to obtain substantial
stake/voting rights of GTL, it is not in dispute that
appellants were basically interested in developing
the Vile-Parle property. Thus, it is evident that
appellants being frustrated in their endeavour to
develop the Vile-Parle property, had resorted to the
mechanism of public offer with a view to frustrate
the decision of GTL in jointly developing the
Vile-Parle property with Sheth Developers.
Therefore, appellants having made public offer out
of frustration on account of not being able to
develop the Vile-Parle property, are not justified in
alleging that entrusting the development of
Vile-Parle property to Sheth Developers has
frustrated the public offer made by appellants.
15. Admittedly, after making public offer, appellants
had filed Company Petition No. 3 of 2010, wherein
specific grievance was made to the effect that GTL
had entered into MOU with Sheth Developers
without disclosing all material facts to the
shareholders and without the approval of
shareholders which was in gross violation of
regulation 23 of SAST Regulations, 1997. It was also
alleged in the Company Petition that the promoters
of GTL have been mismanaging the affairs of the
company and have siphoned of huge amounts from
the company, as a result whereof, there has been
deep decline in the performance and profitability of
the company. Appellants had also sought an order
restraining GTL from holding EGM which was
scheduled to be held on January 18, 2010.
16. Company Law Board in its order dated January
19, 2010, recorded statement made by counsel for
GTL that in the EGM held on January 18, 2010
requisite resolutions have been passed in relation to
development of Vile-Parle property and in
implementation of the said resolution third party
rights have been created. By that order Company
Law Board directed that during the pendency of
Company Petition No. 3 of 2010 GTL shall not act
upon resolution dated January 18, 2010 any further.
From aforesaid order passed by Company Law Board
it is clear that in view of resolution passed in the
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Page 11 C.A. No.9103 of 2014
EGM held on January 18, 2010, violation of
regulation 23 committed by GTL in relation to
development of Vile-Parle property stood rectified.
Dispute, if any in relation to passing of resolution on
January 18, 2010 was to be considered at the
hearing of Company Petition No. 3 of 2010.
17. However, on February 8, 2010, appellants
withdrew Company Petition No.3 of 2010 by merely
recording that the parties have amiably settled the
matter without any further claims against each
other. Having settled the dispute relating to
development of Vile-Parle property with the
promoters/management of GTL on the basis of
undisclosed reasons and having withdrawn
Company Petition No. 3 of 2010 unconditionally, it is
not open to appellants to allege that their public
offer is frustrated on account of GTL entering into
MOU with Sheth Developers for development of
Vile-Parle property.
18. Similarly, having settled the dispute relating to
siphoning of funds by GTL during 2009-2010 which
plea was specifically raised in Company Petition No.
3 of 2010, appellants are not justified in agitating
the very same issue before SEBI on ground that GTL
has siphoned of its funds during the year 2009-2010
and 2010-2011. In other words, since the plea of
siphoning of funds by GTL during the year
2009-2010 and prior thereto having been
specifically raised in Company Petition No. 3 of 2010
and that issue having been settled by appellants
with the promoters/ management of GTL for
undisclosed reasons, the appellants are not justified
in reagitating the very same issue before SEBI in
relation to siphoning of funds either during
2009-2010 or during 2010-2011.
21. It is relevant to note that appellants, subsequent
to withdrawal of Company Petition No. 3 of 2010 in
February 2010, have filed S. C. Suit No. 817 of 2011
in April 2011 before the City Civil Court at Mumbai,
alleging for the first time that the Company Petition
No. 3 of 2010 was withdrawn on account of oral
assurance given by promoters of GTL that Vile-Parle
property would be developed only after holding
public auction and that the promoters of GTL have
committed breach of that oral assurance.
11
Page 12 C.A. No.9103 of 2014
22. Admittedly, City Civil Court at Mumbai has
granted ad- interim relief in favour of appellants on
April 26, 2011 and that ad- interim order continues
to be in operation till date. Therefore, irrespective of
the fact that SEBI was not justified in taking more
than two years for approving the draft letter of offer,
in the facts of present case, grievance of appellants
that the public offer is frustrated and has become
impossible of performance cannot be accepted,
because, both grounds based on which appellants
had sought withdrawal of public offer, were in fact
settled by appellants on the basis of oral assurance
given by promoters of GTL and further, for the
alleged breach of oral assurance, appellants have
filed Suit in the Bombay City Civil Court and
obtained stay of development of Vile-Parle property
and that stay is admitted operating till date.
23. Strong reliance was placed by counsel for
appellants on decision of SEBI dated February 14,
2014 wherein penalty of ` 1 crore has been levied
against the promoters of GTL interalia for violating
regulation 23 of SAST Regulations, 1997. No doubt
that entering into an MOU by GTL with Sheth
Developers on November 26, 2009 without obtaining
approval of general body of shareholders was in
violation of regulation 23 of SAST Regulations, 1997.
However, admittedly on January 18, 2010 the
general body of shareholders has authorized GTL to
enter into Joint Development Agreement is in
respect of Vile-Parle property. In view of approval
granted by the general body of shareholders on
January 18, 2010, grievance of appellants that
Vile-Parle property has been encumbered in
violation of regulation 23 does not survive at least
from January 18, 2010.
26. Apart from above, as late as on August 9, 2011
appellants had addressed a letter to SEBI requesting
them to keep the process of open offer in abeyance,
because, in the proceedings pending before the City
Civil Court at Mumbai, GTL had filed an affidavit
stating that in the board resolution dated May 25,
2011 company has decided not to proceed further
with the MOU dated November 26, 2009 (wrongly
stated therein as December 26, 2009) entered with
Sheth Developers and instead take necessary steps
to develop the Vile-Parle property by the company
of its own. By the said letter dated August 9, 2011
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Page 13 C.A. No.9103 of 2014
appellants called upon SEBI to investigate about the
exact legal status of the Vile-Parle property,
investigate regarding possession of the original title
deeds of Vile-Parle property and investigate
regarding possession of the original title deeds of
Vile-Parle property, investigate regarding usage of
funds etc. It was further stated in the said letter until
appellants are assured of their concern on the above
issues, SEBI should keep the process of open offer in
abeyance.
27. Aforesaid letter dated August 9, 2011, clearly
falsifies the case of appellants that the actions taken
by promoters of GTL during the course of two years
has frustrated the public offer, because, if public
offer was frustrated, appellants would not have
asked SEBI to keep the process of public offer in
abeyance. Having asked SEBI on August 9, 2011 to
keep the process of public offer in abeyance,
appellants were not justified in filing application on
October 11, 2011 seeking permission to withdraw
the open offer on ground that inordinate delay has
frustrated the open offer.”
8.We have heard learned counsel for the parties.
CONTENTIONS OF THE APPELLANTS
9.Main contention raised on behalf of the appellants is
that there is no justification for long delay on the part of
the SEBI in granting approval to the offer of the appellant
and situation having changed to the prejudice of the
appellant, the appellants are entitled to withdraw their
offer. Since under the scheme of the regulations, the
appellants could not withdraw the offer once made except
in circumstances mentioned in Regulation 27, the
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Page 14 C.A. No.9103 of 2014
regulation should be read as creating an obligation on the
part of the SEBI to take speedy decision and if there was
unexplained delay resulting in prejudice to the
appellants-acquirers, the appellants are entitled to be
absolved of the liability to honour the offer. GTL had
become a BIFR company on account of siphoning off funds
by the promoters. It was submitted that in absence of
obligation to approve the offer within reasonable time, the
promoters could take steps to siphon the funds or dispose
of the assets which could prejudice the interests of the
acquirer. Thus, it could not be held that the acquirer was
indefinitely bound by the offer. Reference was also made
to the timeline provided in Regulation 22
and the
provisions of Regulation 23. It was submitted that while
normal ups and downs in the market may not be a ground
to permit withdrawal of offer, unilateral action of the
promoters resulting in transfer of assets could certainly be
the ground to permit withdrawal of offer. The object of
binding an acquirer to the offer is to protect the interest of
the shareholders but this was required to be balanced with
the interest of the acquirer. If the assets are unduly
transferred by the promoters after the PA, the acquirer was
entitled to be relieved from the offer. SEBI in its capacity
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Page 15 C.A. No.9103 of 2014
as regulator has to adopt an approach which is fair to all.
In the facts of present case, the decisions of this Court in
Nirma Industries Limited vs. Securities and
Exchange Board of India
1
and Securities and
Exchange Board of India vs. M/s. Akshya
Infrastructure Pvt. Ltd.
2
relied upon in the impugned
order are not applicable. Even if clause (d) of regulation
27 is read ejusdem generis so as to apply only in situations
where it is impossible for the acquirer to perform the
public offer, it cannot exclude situations where SEBI itself
is satisfied that serious prejudice was caused to the
acquirer by intervening actions of the promoters in
alienating or encumbering the assets of the company,
rendering it inequitable to require the acquirer to be bound
by its offer. Thus, the obligation of the acquirer cannot be
divorced from the conduct of the promoters in the
intervening period. Apart from distinguishing the
judgment in Nirma Industries Limited (supra) which
has been followed in the impugned order, the judgment in
M/s. Akshya Infrastructure Pvt. Ltd (supra) was also
sought to be distinguished as being limited to cases where
1
(2013) 8 SCC 20
2
(2014) 11 SCC 112
15
Page 16 C.A. No.9103 of 2014
delay by SEBI does not cause any serious prejudice to the
acquirer.
10.Thus, the submissions of the appellants are two fold :
(i)The SEBI failed to adhere to the timeline
prescribed under the Takeover Code which
rendered it impossible for the appellants to
conclude their open offer. Adherence to
timeline prescribed under Regulations 18(2),
22(2), (3) and (4) are critical under the
Takeover Code, the Bhagwati Committee Report
and the International Practice. The time is of
essence in cases of hostile takeover.
(ii)The existing promoters should not be given an
opportunity to administer a poison pill to defeat
the offer of the potential acquirers. This
principle is recognized under Regulation 23.
11.Adverting to the facts it was submitted that first
complaint against the appellants was received on 8
th
January, 2010 i.e. 21 days after the PA. Complaints
against the appellants were frivolous. The appellants duly
responded to the complaints in timely manner. The
complaints were made at the behest of the promoters.
The appellants pointed out various illegal acts of the
promoters but the SEBI failed to take any action. The
appellants requested the SEBI to keep the open offer in
abeyance till action was taken against the promoters. This
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Page 17 C.A. No.9103 of 2014
justifies the prayer of the appellants to withdraw the open
offer.
12.Shri C.A. Sundaram, learned senior counsel for the
appellants submitted that all the members of the SAT
(majority as well as minority) have held the delay by SEBI
to be unjustified but still, on erroneous interpretation, right
of the appellants to withdraw the public offer has not been
upheld. Reference was made to the complaint about
transfer of valuable property of the Company which was
un-encumbered at the time of PA. The funds raised from
the transaction have been siphoned off. One of the key
promoters was arrested by the Economic Offences Wing of
the Police and remained in jail for one and a half years.
Chargesheet was filed against him. The financial ratio of
the target company reflects manner in which financial
position quickly deteriorated after the PA. The petition
filed by the acquirers before the Company Law Board was
withdrawn on the assurance of the promoters that the
assets will not be encumbered without the public auction.
Thereafter, the matter was pending in the civil suit. Thus,
there was a breach of Regulation 23.
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Page 18 C.A. No.9103 of 2014
13.Shri Sundaram submitted that open offer was not a
concluded contract but mere invitation to the public to
offer their shares. The result of not allowing the offer to be
withdrawn will be that the promoters will be able to sell
their shares at the price specified in open offer even when
the value of the shares was far lower. This will be against
the policy of law underlying the Takeover Regulations.
Moreover, the action of the SEBI was required to be fair,
reasonable and consistent with Article 14 of the
Constitution.
14.Shri Sundaram sought to distinguish the judgments
of this Court in Nirma Industries Limited (supra) and
M/s. Akshya Infrastructure Pvt. Ltd. (supra) by
submitting that unlike the said cases, in the present case,
there was undue delay on the part of the SEBI and
prejudice was caused to the acquirers for reasons not
attributable to them. He submitted that doctrine of
frustration under Section 56 of the Contract Act will clearly
apply. As a regulator, the SEBI is duty bound to protect
the interest of the acquirer and also to ensure that a
genuine attempt by an acquirer is not defeated by the
promoters by their unilateral action.
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RESPONSE BY THE SEBI
15.Shri Arvind P. Datar, learned senior counsel for the
SEBI opposed the above submissions, he submitted that
adverse finding against SEBI on the issue of delay was
unjustified, but even if the said finding was upheld, the
withdrawal of open offer was not permissible under
Regulation 27(1)(d) of the Takeover Regulations. The
acquirers held 6.47% share and had lent Rs.8.5 crores to
the target company. They had purchased shares worth
Rs.63.33 lakhs before making the PA. The first appellant
was aware of the acts of mismanagement by the
promoters of the target company. The PA was made with
the intention of curbing fraudulent and the illegal practices
of the promoters and for the target company’s benefit.
The appellants approached SEBI to investigate the
illegalities knowing fully well that SEBI’s role was only to
regulate the security market. For mismanagement or
other illegalities, remedy was under Section 397/398 of the
Companies Act which remedy the appellants had taken.
The appellants reached an amicable settlement with the
target company and thereafter approached the civil court.
It was wrong to state that the target company had become
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Page 20 C.A. No.9103 of 2014
defunct. The target company continued to own the Vile
Parle property worth Rs.2000 crores.
16.Shri Datar submitted that more than 43
complaints/letters were received which were to be dealt
with by SEBI. In such circumstances, it could not be held
that there was undue delay on the part of the SEBI in
dealing with the DLO.
17.It was submitted that the appellants ought to have
exercised due diligence before making the PA. The
appellants were not strangers and had 6.47% shares.
They had advanced loan of Rs.8.5 crores and acquired
shares worth Rs.66.33 lakhs before the PA. They were
aware of the FIR and alleged acts of mismanagement they
had resorted to public offer out of frustration against the
decision of the target company developing the Vile Parle
property with Sheth Developers. They settled the matter
before the Company Law Board with the target company
and also approached the civil court for alleged breach of
settlement and obtained stay of development of the Vile
Parle property. In these circumstances, the plea of
frustration could not be allowed to be raised by the
appellants. The PA could not be allowed to be withdrawn
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Page 21 C.A. No.9103 of 2014
merely on the ground that the acquirers find it not to be a
prudent decision. Moreover, the company still owns assets
and was not a shell company and no prejudice was
suffered by the acquirers. Referring to the penalty levied
by SEBI on the target company for entering into a MoU
without approval of the General Body, it was submitted
that this could not furnish a ground for withdrawal of the
PA. Appellants had raised the issue before the CLB and
settled the matter.
QUESTIONS
18.The rival submissions require us to determine the
following questions :
(i)To what extent is the timeline laid down under
the Takeover Regulations required to be
adhered to and effect of delay by SEBI in the
present case?
(ii)To what extent unilateral action of the target
company in dealing with the property of the
company after a hostile public offer is made
furnish cause of action to the acquirers to
withdraw the public offer and whether in the
present case, decision not permitting
withdrawal of public offer is justified?
THE TAKEOVER REGULATIONS
19.Needless to mention that mergers and takeovers are
well known processes in the corporate world. Acquisition
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Page 22 C.A. No.9103 of 2014
of controlling interest of a company can be friendly or
hostile. In a friendly acquisition, management of the
target company sells its controlling shares to the acquirer.
Where management of the target company is unwilling to
negotiate with an acquirer, the acquirer can directly
approach the shareholders by making an open offer which
is called Hostile takeover. A Hostile takeover helps to
unlock the hidden value of the shares and puts pressure
on the management to work efficiently. On the other
hand, it has potential of unduly upsetting the normal
functioning of a target company. Thus, there is an
undoubted need to regulate the process of acquisition and
takeovers in post- liberalisation era after 1991. It is well
known that takeover attempt being unpleasant for the
target company is normally met with defence strategies
such as ‘Poison Pills’ (making takeover unviable for the
acquirer by making the cost of acquisition unattractive),
‘Shark Repellents’ (measures to repel an unwanted
takeover) sale of valuable assets, etc.
20.Justice P.N. Bhagwati Committee was appointed in
November, 1995 to review the existing framework of
regulations and to suggest amendments in the interest of
investors and all parties concerned in the acquisition
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Page 23 C.A. No.9103 of 2014
process. The Committee kept in mind the following
principles :
“i.Equality of treatment and opportunity to all
shareholders.
ii.Protection of interests of shareholders.
iii.Fair and truthful disclosure of all material
information by the acquirer in all public
announcements and offer documents.
iv.No information to be furnished by the
acquirer and other parties to an offer
exclusively to any one group of
shareholders.
v. Availability of sufficient time to
shareholders for making informed
decisions.
vi.An offer to be announced only after most
careful and responsible consideration.
vii.The acquirer and all other intermediaries
professionally involved in the offer, to
exercise highest standards of care and
accuracy in preparing offer documents.
viii.Recognition by all persons connected with
the process of substantial acquisition of
shares that there are bound to be limitations
on their freedom of action and on the
manner in which the pursuit of their
interests can be carried out during the offer
period.
ix.All parties to an offer to refrain from creating
a false market in securities of the target
company.
x.No action to be taken by the target company
to frustrate an offer without the approval of
the shareholders.”
3
3
Justice P.N. Bhagwati Committee Report on Takeovers
23
Page 24 C.A. No.9103 of 2014
The Committee made various recommendations
including requirement of disclosure by the acquirers,
procedure for public announcements, obligations of the
acquirers and the target company. This led to the
adoption of the 1997 Takeover Regulations.
21.We may reproduce some of the Regulations which
are necessary for the decision of controversy in the case
before us :
“ Acquisition of fifteen per cent or more of
the shares or voting rights of any company.
10. No acquirer shall acquire shares or voting rights
which (taken together with shares or voting rights,
if any, held by him or by persons acting in concert
with him), entitle such acquirer to exercise fifteen
per cent or more of the voting rights in a company,
unless such acquirer makes a public announcement
to acquire shares of such company in accordance
with the regulations.
Acquisition of control over a company.
12. Irrespective of whether or not there has been any
acquisition of shares or voting rights in a company,
no acquirer shall acquire control over the target
company, unless such person makes a public
announcement to acquire shares and acquires such
shares in accordance with the regulations.…
Timing of the public announcement of offer.
14. (1) The public announcement referred to in
regulation 10 or regulation 11 shall be made by the
merchant banker not later than four working days
of entering into an agreement for acquisition of
shares or voting rights or deciding to acquire
shares or voting rights exceeding the respective
percentage specified therein .…
24
Page 25 C.A. No.9103 of 2014
Submission of letter of offer to the Board.
18. (1) Within fourteen days from the date of public
announcement made under regulation 10, 11 or 12
as the case may be, the acquirer shall, through its
merchant banker, file with the Board, the draft of
the letter of offer containing disclosures as
specified by the Board.
(2) The letter of offer shall be despatched to the
shareholders not earlier than 21 days from its
submission to the Board under sub-regulation (1):
Provided that if, within 21 days from the date of
submission of the letter of offer, the Board specifies
changes, if any, in the letter of offer (without being
Page 35 of 75 under any obligation to do so), the
merchant banker and the acquirer shall carry out
such changes before the letter of offer is
despatched to the shareholders :
[Provided further that if the disclosures in the draft
letter of offer are inadequate or the Board has
received any complaint or has initiated any enquiry
or investigation in respect of the public offer, the
Board may call for revised letter of offer with or
without rescheduling the date of opening or closing
of the offer and may offer its comments to the
revised letter of offer within seven working days of
filing of such revised letter of offer.
(3) The acquirer shall, while filing the draft letter of
offer with the Board under sub-regulation (1), pay a
fee as mentioned in the following table, by bankers‘
cheque or demand draft drawn in favour of the
‘Securities and Exchange Board of India’….
General Objections of the acquirer.
22. (1) The public announcement of an offer to acquire
the shares of the target company shall be made
only when the acquirer is able to implement the
offer.
(2) Within 14 days of the public announcement of
the offer, the acquirer shall send a copy of the draft
letter of offer to the target company at its
registered office address, for being placed before
the board of directors and to all the stock
25
Page 26 C.A. No.9103 of 2014
exchanges where the shares of the company are
listed.
(3) The acquirer shall ensure that the letter of offer
is sent to all the shareholders (including
non-resident Indians) of the target company, whose
names appear on the register of members of the
company as on the specified date mentioned in 1
Inserted by the SEBI (Substantial Acquisition of
Shares and Takeovers) (Second Amendment)
Regulations, 2002, w.e.f. 9-9-2002. Page 47 of 75
the public announcement, so as to reach them
within 45 days from the date of public
announcement.…
General obligations of the board of directors of
the target company.
23. (1) Unless the approval of the general body of
shareholders is obtained after the date of the public
announcement of offer, the board of directors of
the target company shall not, during the offer
period,—
(a) sell, transfer, encumber or otherwise dispose of
or enter into an agreement for sale, transfer,
encumbrance or for disposal of assets otherwise,
not being sale or disposal of assets in the ordinary
course of business, of the company or its
subsidiaries; or
(b) issue 2 [or allot] any authorised but unissued
securities carrying voting rights during the offer
period; or
(c) enter into any material contracts.
Withdrawal of offer.
27. (1) No public offer, once made, shall be withdrawn
except under the following circumstances:—
(a) [***]
(b) the statutory approval(s) required have been
refused;
(c) the sole acquirer, being a natural person, has
died;
26
Page 27 C.A. No.9103 of 2014
(d) such circumstances as in the opinion of the
Board merit withdrawal.
Board’s right to investigate.
38. The Board may appoint one or more persons as
investigating officer to undertake investigation for
any of the following purposes, namely:—
(a) to investigate into the complaints received from
the investors, the intermediaries or any other
person on any matter having a bearing on the
allegations of substantial acquisition of shares and
takeovers ;
(b) to investigate suo motu upon its own knowledge
or information, in the interest of the securities
market or investors‘ interest, for any breach of the
regulations;
(c) to ascertain whether the provisions of the Act
and the regulations are being complied with for any
breach of the regulations.”
22.In Nirma Industries Limited (Supra), the acquirer
after making PA sought withdrawal therefrom on the
ground of embezzlement of funds by the target company.
SEBI rejected the application with the observation that the
acquirer ought to have used due diligence prior to making
the public offer. Rejecting the plea that the embezzlement
and siphoning off of funds by the target company could
not have been found by third party even after exercising
diligence, this Court held under the scheme of the
takeover code public offer once made could not be
withdrawn so as to deprive the shareholders of their
27
Page 28 C.A. No.9103 of 2014
valuable right to have exit option and also to ensure that
public announcement is not made by way of speculation.
The scheme of takeover code was held to be as follows:
“ 59. A conspectus of the aforesaid Regulations
would show that the scheme of the Takeover Code
is: (a) to ensure that the target company is aware
of the substantial acquisition; (b) to ensure that in
the process of the substantial acquisition or
takeover, the security market is not distorted or
manipulated; and (c) to ensure that the small
investors are given an option to exit, that is, they
are offered a choice to either offload their shares at
a price as determined in accordance with the
Takeover Code or to continue as shareholders under
the new dispensation. In other words, the Takeover
Code is meant to ensure fair and equal treatment of
all shareholders in relation to substantial acquisition
of shares and takeovers and that the process does
not take place in a clandestine manner without
protecting the interest of the shareholders. It is
keeping in view the aforesaid aims and objects of
the Takeover Code that we shall have to interpret
Regulation 27(1).”
23.As regards the scheme of Regulation 27, it was
further observed :
“62. A bare perusal of the aforesaid Regulations
shows that Regulation 27(1) states the general rule
in negative terms. It provides that no public offer,
once made, shall be withdrawn. Since clause (a) has
been omitted, we are required to interpret only the
scope and ambit of clauses (b), (c) and (d). The three
sub-clauses are exceptions to the general rule and,
therefore, have to be construed very strictly. The
exceptions cannot be construed in such a manner
that would destroy the general rule that no public
offer shall be permitted to be withdrawn after the
public announcement has been made. Clause (b)
28
Page 29 C.A. No.9103 of 2014
would permit a public offer to be withdrawn in case
of legal impossibility when the statutory approval
required has been refused. Clause (c) again provides
for impossibility when the sole acquirer, being a
natural person, has died. Clause (b) deals with a
legal impossibility whereas clause (c) deals with a
natural disaster. Clearly clauses (b) and (c) are within
the same genus of impossibility. Clause (d) also
being an exception to the general rule would have to
be naturally construed in terms of clauses (b) and
(c). Mr. Divan has placed a great deal of emphasis on
the expression “such circumstances” and “in the
opinion” to indicate that the Board would have a
wide discretion to permit withdrawal of an offer even
though it is not impossible to perform. We are unable
to accept such an interpretation.
67. Applying the aforesaid tests, we have no
hesitation in accepting the conclusions reached by
SAT that clauses (b) and (c) referred to
circumstances which pertain to a class, category or
genus, that the common thread which runs through
them is the impossibility in carrying out the public
offer. Therefore, the term “such circumstances” in
clause (d) would also be restricted to a situation
which would make it impossible for the acquirer to
perform the public offer. The discretion has been left
to the Board by the legislature realising that it is
impossible to anticipate all the circumstances that
may arise making it impossible to complete a public
offer. Therefore, certain amount of discretion has
been left with the Board to determine as to whether
the circumstances fall within the realm of
impossibility as visualised under clauses (b) and (c).
In the present case, we are not satisfied that
circumstances are such which would make it
impossible for the acquirer to perform the public
offer. The possibility that the acquirer would end-up
making losses instead of generating a huge profit
would not bring the situation within the realm of
impossibility.
70. Mr. Venugopal, in our opinion, has rightly
submitted that the Takeover Regulations, which is a
special law to regulate “substantial acquisition of
shares and takeovers” in a target company lays
down a self-contained code for open offer; and also
that interest of investors in the present case required
that they should be given an exit route when the
29
Page 30 C.A. No.9103 of 2014
appellants have acquired substantial chunk of shares
in the target company. He has correctly emphasized
in his submissions that the orderly development of
the securities market as a whole requires that public
offers once made ought not to be allowed to be
withdrawn on the ground of fall in share price of the
target company, which is essentially a business
misfortune or a financial decision of the acquirer
having gone wrong. SEBI as well as SAT have
correctly concluded that withdrawal of the open offer
in the given set of circumstances is neither in the
interest of investors nor development of the
securities market.
90. We are inclined to agree with the submission
made by Mr Venugopal that the appellants cannot be
permitted to wriggle out of the obligation of a public
offer under the Takeover Regulation. Permitting them
to do so would deprive the ordinary shareholders of
their valuable right to have an exit option under the
aforesaid Regulations. The SEBI Regulations are
designed to ensure that public announcement is not
made by way of speculation and to protect the
interest of the other shareholders. Very solemn
obligations are cast on the Merchant Banker under
Regulation 24(1) to ensure that—
“24. (1)(a) the acquirer is able to implement the
offer;
(b) the provision relating to escrow account
referred to in Regulation 28 has been made;
(c) firm arrangements for funds and money for
payment through verifiable means to fulfil the
obligations under the offer are in place;
(d) the public announcement of offer is made in
terms of the Regulations;
(e) his shareholding, if any in the target company
is disclosed in the public announcement and the
letter of offer.”
91. Regulation 24(2) mandates that the Merchant
Banker shall furnish to the Board a due diligence
certificate which shall accompany the draft letter of
offer. The aforesaid Regulation clearly indicates that
any enquiries and any due diligence that has to be
made by the acquirer have to be made prior to the
public announcement. It is, therefore, not possible to
accept the submission of Mr Shyam Divan that the
appellants are to be permitted to withdraw the public
30
Page 31 C.A. No.9103 of 2014
announcement based on the discovery of certain
facts subsequent to the making of the public
announcement. In such circumstances, in our
opinion, the judgments cited by Mr Shyam Divan are
of no relevance. ”
24.As regards the effect of delay on the part of SEBI, it
was observed:
“94. A perusal of the aforesaid Regulation clearly
shows that the acquirer is required to file the draft
letter of offer containing disclosures as specified by
the Board within a period of 14 days from the date of
public announcement. Thereafter, letter of offer has
to be dispatched to the shareholders not earlier than
21 days from its submission to the Board. Within 21
days, the Board is required to specify changes if any,
that ought to be made in the letter of offer. The
merchant banker and the acquirer have then to carry
out such changes before the letter of offer is
dispatched to the shareholders. But there is no
obligation to do so. Under the second proviso, the
Board may call for revised letter of offer in case it
finds that the disclosures in the draft letter of offer
are inadequate or the Board has received any
complaint or has initiated any enquiry or investigation
in respect of the public offer. It is important to notice
that in the first proviso the Board does not have any
obligation to specify any change in the draft letter of
offer within a period of 21 days. In the present case,
in fact, the Board had not specified any changes
within 21 days. We have already noticed earlier that
the letter of offer was lacking and deficient in detail.
The appellants themselves were taking time to
submit details called for, by their merchant bankers
through various letters between 8-8-2005 to
20-3-2006. We have already noticed the repeated
advice given by the Merchant Banker to enhance the
issue size of the open offer and to comply with other
requirements of the Takeover Regulations. The
appellants, in fact, were prevaricating and did not
agree with the interpretation placed on Regulation
27(1)(d) by the Merchant Banker. We, therefore,
reject the submission of Mr Shyam Divan that there
31
Page 32 C.A. No.9103 of 2014
was delay on the part of SEBI in approving the draft
letter of offer. ”
25.In M/s. Akshya Infrastructure Pvt. Ltd. (supra),
this Court held that SEBI is not justified in causing delay in
dealing with the issuance of its comments on a letter of
offer as delay can lead to controversy as to whether the
belated action was bona fide exercise of statutory power.
However, delay by itself may not vitiate action of the SEBI.
The SEBI has to be guided by the overall interest of the
shareholders in dealing with the prayer for withdrawal
from the public offer. The economic unviability is no
ground to justify prayer for such withdrawal. The relevant
observations are:
“30. With regard to delay, we do not find much
substance in the submission of Mr C.U. Singh. Mr
Singh has sought to explain the delay on the ground
that information sought by the appellant was not
given by the respondent. In our opinion, this was no
ground for the appellant to delay the issuance of
comments on the letter of offer, especially not for a
period of 13 months. In the event the information
was not forthcoming, the appellant had the power to
refuse the approval of the public offer. It is true that
under Regulation 18(2), SEBI was required to
dispatch the necessary letters to the shareholders
within a reasonable period. It is a matter of record
that the comments were not offered for 13 months.
Such kind of delay is wholly inexcusable and needs
to be avoided. It can lead to avoidable controversy
with regard to whether such belated action is bona
fide exercise of statutory power by SEBI. By
adopting such a lackadaisical, if not callous attitude,
the very object for which the Regulations have been
32
Page 33 C.A. No.9103 of 2014
framed is diluted, if not frustrated. It must be
remembered that SEBI is the watchdog of the
securities market. It is the guardian of the interest
of the shareholders. It is the protective shield
against unscrupulous practices in the securities
market. Therefore, SEBI like any other body, which
is established as a watchdog, ought not to act in a
lackadaisical manner in the performance of its
duties. The time-frame stipulated by the Act and the
Takeover Regulations for performing certain
functions is required to be maintained to establish
the transparency in the functioning of SEBI.
31. Having said this, we are afraid such delay is of
no assistance to the respondent. It will not result in
nullifying the action taken by SEBI, even though
belated. Ultimately, SEBI is charged with the duty of
ensuring that every public offer made is bona fide
for the benefit of the shareholders as well as
acquirers. In the present case, SEBI has found that
permitting the respondent to withdraw the public
offer would be detrimental to the overall interest of
the shareholders. The only reason put forward by
the respondent for withdrawal of the offer is that it
is no longer economically viable to continue with the
offer. Mr Nariman has referred to a tabular
statement and data to show that there is no
substantial variation in the share prices that ensued
making of the public offer. Having seen the Table,
we find substance in the submission of Mr Nariman
that there is hardly any variation in the shares of
the target company from 20-10-2011 till
30-11-2011. The variation seems to have been
between Rs 78.10 (on 24-11-2011) and Rs 87.60 (on
20-10-2011). Such a variation cannot be said to be
the result of the public offer. But this will not detract
from the well-known phenomena that public
announcement of the public offering affects the
securities market and the shares of the target
company. The impact is immediate.
35. We are also not impressed by the submission of
Mr Nariman that it has now become economically
impossible to give effect to the public offer. This very
submission has been rejected in Nirma Industries Ltd.
We reiterate our opinion in Nirma Industries Ltd. that
under Regulations 27(1)(b), (c) and (d), a public offer,
once made, can only be permitted to be withdrawn in
circumstances which make it virtually impossible to
33
Page 34 C.A. No.9103 of 2014
perform the public offer. In fact, the very purpose for
deleting Regulation 27(1)(a) was to remove any
misapprehension that an offer once made can be
withdrawn if it becomes economically not viable. We
are of the considered opinion that the distinction
sought to be made by Mr Nariman between a
voluntary public offer and a triggered public offer is
wholly misconceived. Accepting such a submission
would defeat the very purpose for which the Takeover
Code has been enacted.”
OUR FINDINGS
Re. Question (i)
26.Applying the decisions of this Court to the facts of
the present case, we are in agreement with the finding
recorded by the SAT that there was undue delay on the
part of the SEBI in dealing with the DLO. No doubt, in a
given case timeline prescribed under the Regulations may
not be adhered to when the SEBI justifiably takes time in
dealing with the complaints, as rightly submitted by Shri
Datar, in the present case, the stand of the SEBI itself is
that it could not go into the complaints for which the right
forum was CLB. As regards the time taken in dealing with
the complaints against the acquirers, the SEBI could have
promptly proceeded with the matter. However, mere
upholding of finding of SAT on the aspect of delay by SEBI
is not enough to hold that the appellants are entitled to
withdrawal of the public offer. The withdrawal has to be
dealt with under Regulation 27, as held by this Court. The
34
Page 35 C.A. No.9103 of 2014
general principle is that public offer once made cannot be
withdrawn. Exception to the rule is the specified situations
under the Regulation as laid down by this Court in above
decisions particularly in Nirma Industries Limited
(Supra)
4
. In the present case, though SEBI was not
justified in causing delay in giving its comments on public
offer, this by itself is not enough to justify withdrawal from
public offer so long as the case does not fall under
Regulation 27. First question is answered accordingly.
Re. Question (ii)
27.As already observed above, under the scheme of the
regulations public offer has to be made after due diligence
(Regulation 22). Obligation of the board of directors under
Regulation 23 against alienation of assets, issuance of
unissued securities carrying voting rights or entering into
material contracts is applicable only if approval of general
body of shareholders is not obtained. We are not dealing
with validity of imposition of fine on the target company
for its decision in dealing with Vile Parle property, without
approval of the general body as this issue is not before us.
The fact remains that ex post facto approval of the general
body has since been obtained. Moreover, SEBI had
4
(2013) 8 SCC 20 para 67
35
Page 36 C.A. No.9103 of 2014
observed that this aspect of the matter will be separately
enquired into. It is clear that under the scheme of
Regulation 23, there is no bar to a decision with the
approval of the general body of shareholders, if otherwise
valid. The question whether unilateral decisions of the
target company have rendered the carrying out of the
public offer possible, is a question to be decided on facts
of each case. In the present case, the SEBI as well as the
SAT have concurrently held that public offer is capable of
being carried out and has not become impossible. The
assets are available with the target company. Finding has
also been recorded about the circumstances preceding the
public offer and the conduct of the acquirer which is based
on record. The steps for development of the Vile Parle
property had already been initiated and the acquirer had
taken remedies before the CLB against the decision of the
target company and had settled the matter with the target
company. It is clear from the scheme of the regulations
that there is no absolute bar for the target company to
take decision about its assets, subject to compliance with
statutory procedure and subject to the decision being
otherwise valid. There is no doubt that against any mala
fide, illegal or unjustified decision of the target company,
36
Page 37 C.A. No.9103 of 2014
remedies at appropriate fora are available to the
aggrieved parties. Thus, there is no justification for
automatic withdrawal from public offer without clear
prejudice to the acquirer to the extent of rendering the
carrying out of public offer impossible. In the facts of the
present case, we do not find any ground to interfere with
the concurrent finding of the SEBI and the SAT that request
for withdrawal from public offer was not justified. Question
(ii) is answered accordingly.
28.In view of the above, we do not find any merit in this
appeal and the same is accordingly dismissed. There shall
be no order as to costs.
……………………………………………… ..J.
[ ANIL R. DAVE ]
……………………………………………… ..J.
[ ADARSH KUMAR GOEL ]
NEW DELHI
NOVEMBER 07, 2016
37
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