A.R. DAHIYA Vs. SECURITIES & EXCHANGE BOARD OF INDIA&ORS
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 2727 of 2006, Judgment Date: Nov 26, 2015
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2727 OF 2006
A.R. Dahiya … Appellant
Versus
SEBI … Respondent
J U D G M E N T
VIKRAMAJIT SEN, J.
1 This Appeal assails the Judgment dated 19.4.2006 of the
Securities Appellate Tribunal which upheld the order of the Securities and
Exchange Board of India dated 1.8.2003. The factual matrix is that one Mr.
V.P. Garg (hereinafter referred to as ‘Garg’) entered into an ‘Assisted
Sector Agreement’ with the Haryana State Industrial Development Corporation
Limited (hereinafter referred to as ‘HSIDC’) on 4.1.1993, for the purpose
of setting up a modern resort hotel complex at Village Chowky, Tehsil
Kalka, Haryana. The parties agreed to collaborate for the profitable
implementation and operation of the project in the assisted sector through
a company already incorporated by Garg under the name and style of Polo
Hotels Ltd. (hereinafter referred to as the ‘Target Company’). HSIDC
extended a term loan to Garg and also subscribed to 3,00,000 shares of Rs.
10/- each of the Target Company. Clause 24 of the Agreement provided for
buy-back of the shares of HSIDC. The said clause is reproduced for facility
of reference:
BUY BACK ARRANGEMENT:-
24 (a) At any time after the Company goes in for commercial production, the
Corporation may with the consent of the Collaborator offload its
shareholding in the Company partially or fully in such manner as it may
deem fit. The Collaborator will however have the pre-emptive right to buy
the shareholding of the Corporation. Similarly, after the shares of the
Company are duly listed on the Stock Exchange/DTCET, and with the consent
of the Corporation, the Collaborator may buy its shareholding at a mutually
agreed price which shall be equal to or higher than that provided under sub
clause (c).
(b) After expiry of five years from the date of commencement of commercial
production by the Company or at the expiry of seven years from the date of
its incorporation whichever is earlier, the Collaborator shall be bound to
purchase the Equity share holding of the Corporation in the Company.
Provided that the Corporation may at its discretion retain the shares
acquired by it through over subscription or rights issue or bonus shares.
(c) On buy back of shareholding of the Corporation by the Collaborator
under sub clause (b), the price to be paid shall be highest of the:
i) Issue price of the share plus simple interest for the period at the
lowest normal lending rate of interest on term loans under refinance scheme
of IDBI prevailing at the time of first issue of shares to the Corporation
under its agreement. OR
ii) The highest price of the shares ruling on any Indian Stock Exchanges
for a period of two months preceding the date on which the Collaborator
ought to purchase the shares held by the Corporation as provided in Clause
(b) above. OR
iii) Assessed value of the shares as determined by the Auditors of the
Company on the basis of net worth, of the Company on the date of sale of
the shares.
2 Garg defaulted in repayment of loan as well as in buying back the
shares of HSIDC in the Target Company. In March 1999, Garg entered into an
agreement with Mr. A.R. Dahiya (the ‘Appellant’) for the sale of Garg’s
entire shareholding of 28.09% in the Target Company. This agreement was
subject to the approval of HSIDC and contained a clause that Garg would be
absolved of fulfilling the buy-back obligation, provided HSIDC agreed to
accept the Appellant in place of Garg. Garg wrote a letter to HSIDC dated
31.3.1999 stating that on account of his deteriorating financial condition,
he had decided to transfer his equity shareholding in the Target Company to
the Appellant and that the Appellant had agreed to furnish his personal
guarantee for buy-back of the three lac equity shares held by HSIDC. In the
letter Garg requested HSIDC to accept the personal guarantee of the
Appellant in lieu of his buy-back guarantee and to absolve him from the
obligation.
3 The Appellant also wrote a letter to HSIDC dated 15.4.1999, informing
it that he and Garg had entered into an agreement for purchase of equity
shareholding of Garg and for complete takeover of the management of the
Target Company. The Appellant confirmed that he was prepared to buy-back
the equity holding of HSIDC as provided for in the assisted sector
agreement instead of Garg, under similar terms and conditions. The
Appellant also requested that since he was facing a stringent liquidity
problem, the payment for the buy-back which was due in April 1999 be
instead made in monthly instalments of Rs.20 lacs each with effect from
September 1999. Enclosed with the letter were four post-dated cheques in
respect of the said buy-back obligations, amounting to a total of
Rs.71,25,466/-. HSIDC, vide its letter dated 19.4.1999 to Garg, accepted
the joint request made by him and the Appellant. Subsequently, the
Appellant, Garg and HSIDC entered into a tripartite financial collaboration
agreement, whereby HSIDC consented to the Appellant stepping into the shoes
of Garg.
4 On 20.4.1999, Garg and the Appellant entered into an agreement
whereby the Appellant agreed to purchase the entire share capital of 28.09%
held by Garg at the rate of Rs. 8.50 per fully paid up equity share. Since
this acquisition was in excess of 15% of the total shareholding of the
Target Company, the Regulations under the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997, were attracted. In order to comply
with the Regulations, the Appellant made a public announcement on 24.4.1999
making an offer to the remaining shareholders of the Target Company to
purchase a minimum of 20% shares of the said company at an offer price of
Rs. 8.75 per equity share.
5 On 5.5.1999, a draft letter of offer was sent by the merchant banker
of the Appellant to SEBI for its approval. Neither in the public
announcement nor in the letter did the Appellant disclose the fact that he
and his associates had already bought back the shares of HSIDC. SEBI
reverted with a letter dated 26.5.1999 seeking clarifications from the
merchant banker of the Appellant. The letter stated that the price at which
the Appellant proposed to acquire the shares from HSIDC as per the
agreement dated 19.4.1999, had to be calculated and specified upfront in
the offer document. Further, if the price payable to HSIDC as per the said
agreement was higher than the present offer price of Rs. 8.75 per share,
then the offer price must be justified as required under Regulation 20(6).
The draft letter of offer dated 5.5.1999 was approved by the SEBI subject
to certain changes vide its communication dated 30.9.1999. As it
transpired in response to the public announcement, the Appellant could
acquire only 2.42% of the shares of the Target Company, as the shareholders
were not willing to offer their shares at Rs.8.75 when their face value was
Rs.10/-.
6 SEBI received a complaint from Mr. Komlam Sardana alleging that the
Appellant had acquired three lac equity shares from HSIDC for Rs.
71,25,466/- at the rate of Rs. 23.75 per share, whereas the shares were not
offered at the same price to the existing shareholders. The complainant
alleged that the Appellant was suffering from a liquidity crunch and had
requested HSIDC to receive the consideration amount with respect to the
transfer of shares in monthly instalments. The complainant also brought to
the notice of SEBI that the post-dated cheques through which the Appellant
had tendered consideration had subsequently been dishonoured and criminal
proceedings had been initiated against him. A copy of the said complaint
was forwarded to the Appellant through his merchant banker.
7 The Appellant moved an application on 2.12.1999 stating that he was
covered under the ambit of Regulation 3(1)(i), and as a result was immune
to the provisions under Regulations 10, 11 and 12. The relevant provisions
have been reproduced as under:
3. Applicability of the Regulation.- (1) Nothing contained in the
Regulations 10, 11 and 12 of these Regulations shall apply to:
xxx xxx xxx
(i) transfer of shares from state level financial institutions, including
their subsidiaries to co-promoter(s) of the company pursuant to an
agreement between such financial institution and such co-promoter(s);
xxx xxx xxx
xxx xxx xxx
CHAPTER III
SUBSTANTIAL ACQUISITION OF SHARES OR VOTING RIGHTS IN AND ACQUISITION OF
CONTROL OVER A LISTED COMPANY
10. Acquisition of 15% or more of the shares or voting rights of any
company.- 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.
11. Consolidation of holdings.- (1) No acquirer who, together with persons
acting in concert with him, has acquired, in accordance with the provisions
of law, 15 per cent or more but less than 75% of the shares or voting
rights in a company, shall acquire, either by himself or through or with
persons acting in concert with him additional shares or voting rights
entitling him to exercise more than 5% of the voting rights, in any period
of 12 months, unless such acquirer makes a public announcement to acquire
shares in accordance with the Regulations.
(2) No acquirer who, together with persons acting in concert with him has
acquired, in accordance with the provisions of law, 75% of the shares or
voting rights in a company, shall acquire either by himself or through
persons acting in concert with him any additional shares or voting rights,
unless such acquirer makes a public announcement to acquire shares in
accordance with the regulations.
xxx xxx xxx
12. Acquisition of control over a company.- 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:
Provided that nothing contained herein shall apply to any change in control
which takes place in pursuance to a resolution passed by the shareholders
in a general meeting.
SEBI sought a clarification from the merchant banker on 29.2.2000,
regarding the non-disclosure of the payment of Rs.71,25,466/- by the
Appellant through post-dated cheques. The merchant banker in its letter
dated 13.4.2000 informed SEBI that the Appellant had not informed him about
the payment made through post-dated cheques. Subsequently, SEBI wrote a
letter to HSIDC dated 2.6.2000 asking whether the letter dated 15.4.1999
pertained to the buy-back of shares and whether the post-dated cheques were
deposited with HSIDC as security for the buy-back obligations. The HSIDC in
its reply via letter dated 1.8.2000, stated that the post-dated cheques had
been issued towards the purchase consideration for the buy-back of three
lac equity shares held by HSIDC in the Target Company. SEBI, on being
satisfied that a prima facie case of non-disclosure of material facts in
the public announcement and a violation of Regulations exists, issued a
show cause notice to the Appellant. The Appellant filed his reply to the
show cause notice after which SEBI by its order dated 1.8.2003 issued
directions to the Appellant under Section 4(3) read with Section 11B of the
Act and Regulations 44 and 45 of the Regulations. The Appellant was
directed to make a fresh public announcement for 20% shares as required
under Chapter 11 of the Regulations in accordance with Regulation 10 and
offer to the shareholders of the Target Company the price of Rs. 23.75 per
share along with interest at the rate of 15% per annum for the period from
16.11.1999 to the actual date of payment of consideration. SEBI further
directed the Appellant to pay the balance amount at the aforesaid rate to
all the shareholders who had offered their shares in pursuance to the
public announcement dated 24.4.1999 along with interest. Aggrieved by this
order, the Appellant preferred an appeal.
8 Before the Securities Appellate Tribunal the Appellant contended that
the amount deposited with HSIDC via post-dated cheques was not in
consideration for the buy-back of shares. Instead it was deposited by way
of comfort/security for the buy-back obligation so as to demonstrate to
HSIDC that the Appellant was a man of means who could buy-back the shares
subsequently (an assertion which in any case stood belied by the dishonour
of the cheques). The Tribunal rejected this contention by placing
reliance on two letters. The first letter, issued by the Appellant on
15.4.1999, was addressed to HSIDC, where in no uncertain terms the
Appellant had stated that the payment by means of post-dated cheques was in
consideration for the buy-back of shares. The second letter referred to by
the Tribunal was issued by HSIDC on 11.1.2001, where in its reply to SEBI’s
clarificatory letter, HSIDC categorically stated that the payment by the
Appellant was consideration for the buy-back of the shares. The Tribunal
also indicated that if the said amount had been deposited by way of comfort
or security was being contended by the Appellant, then it would have been a
lump sum figure and not an amount as precise as Rs. 71,25,466/-. In light
of the above stated facts, it was held to be beyond doubt that the
Appellant had paid the said sum as a consideration for the buy-back of
shares at a rate of Rs. 23.75 per share. Thus as a necessary corollary, the
said transaction had to be disclosed at the time of public announcement as
provided under Regulation 16(viii). The Tribunal observed that as the said
transaction and its details were neither disclosed in the public offer nor
in the letter of offer made to the other shareholders, SEBI was correct in
directing the Appellant to go in for a fresh public announcement and offer
to the remaining shareholders of the Target Company the rate of Rs. 23.75
per share.
9 The Appellant also contended that the said post-dated cheques had
subsequently been dishonoured, hence no payment could be said to have been
made in respect of the buy-back of shares. Furthermore, the shares held by
HSIDC had not been transferred in the name of the Appellant or his
associates, so the acquisition had not reached its stage of fruition.
Resultantly, the price offered to HSIDC could not be taken into
consideration as provided under Regulation 20(2)(b) of the Regulations to
determine the minimum offer price.
20. Minimum offer price.—(1) The offer to acquire the shares under
regulation 10, 11 or 12 shall be made at a minimum offer price which shall
be payable—
(a) in cash; or
(b) by exchange and/or transfer of shares of the acquirer company, if the
person seeking to acquire the shares is a listed body corporate; or
(c) by exchange and/or transfer of secured instruments with a minimum of
“A” grade rating from a credit rating agency;
(d) a combination of clause (a), (b) or (c) :
Provided that …………………
(2) For the purposes of sub-regulation (1), the minimum offer price shall
be the highest of—
(a) the negotiated price under the agreement referred to in sub-regulation
(1) of regulation 14;
(b) the highest price paid by the acquirer or persons acting in concert
with him for any acquisitions, including by way of allotment in a public or
rights issue, if any, during the 26 week period prior to the date of public
announcement;
(c) the price paid by the acquirer under a preferential allotment made to
him or to persons acting in concert with him at any time during the twelve
months period up to the date of closure of the offer;
(d) the average of the weekly high and low of the closing prices of the
shares of the Target Company as quoted on the stock exchange where the
shares of the company are most frequently traded during the 26 weeks
preceding the date of public announcement.
Explanation……………
10 The Tribunal observed that from a perusal of Regulation 20(2)(b) it
was clear that the highest price paid by an acquirer for any acquisition
would be taken into consideration for determining the minimum offer price.
As the Appellant had paid Rs.23.75 per share to HSIDC within the period of
26 weeks prior to the date of public announcement, this transaction had to
be taken into consideration for determining the minimum offer price. The
Tribunal negated the specific contention of the Appellant, finding that
irrespective of whether acquisition took place or not, Regulation 20(2)(b)
stood attracted as the amount was paid for the purpose of the acquisition.
The Appellant contended that as his buy-back from HSIDC, was a transfer of
shares from a State level financial institution to a co-promoter of the
Target Company, it was exempt under Regulation 10. Thus in turn, the same
transaction need not be taken into consideration to determine the minimum
offer price. The Tribunal dismissed this contention by stating that the
exemption under Regulation 10 was only with respect to making a public
announcement. The said exemption does not permit the Appellant from not
disclosing the transaction for the purpose of calculating the minimum offer
price.
11 Aggrieved by the decision of the Tribunal, the Appellant has now
filed this Appeal. Counsel for the Appellant contends that Regulation
20(2)(b) uses the expression “acquisition” and submits that as the said
acquisition was to happen in the future, the Regulation was not applicable
to him. Further, the post-dated cheques that had been deposited were given
in the form of a guarantee to HSIDC. Counsel submits that the buy-back
was initially due in April 1999, but was subsequently postponed till
November 1999, and thus as the buy-back was to take place in November, it
is then that the rate would have been calculated and determined. Reliance
has been placed on a letter issued by HSIDC dated 1.6.1999 addressed to the
Appellant stating that the purchase consideration of the shares under buy-
back agreement could not be determined as on date, and the equity had to be
bought back by the promoters at a purchase consideration which would be
calculated as per the terms contained in Clause 15 of the Tripartite
agreement. Counsel relies on a letter issued by HSIDC dated 9.12.1999
wherein it was communicated to the Appellant that the post-dated cheques
which he had deposited were dishonoured on presentation due to non-
availability of sufficient funds with the accounts, and thus as there had
been no payment no acquisition had taken place. To further buttress this
contention Learned Counsel relied on a letter issued by HSIDC dated
11.1.2001 addressed to SEBI, wherein it was averred that the transfer of
shares to the incoming collaborators would be effected only on the deposit
of the entire amount of purchase consideration.
12 Learned Senior Counsel for the Respondent contends that the
Regulations were triggered when the purchase was made by one promoter from
another, that is by the Appellant from Garg, and not from the purchase by
the Appellant from HSIDC. Evidence was placed on record to prove that the
Appellant was still carrying on business of the Target Company. Counsel
contended that on 31.3.1999, the Appellant agreed to step into the shoes of
Garg. On 15.4.1999 HSIDC received intimation from the Appellant regarding
the agreement and also received four post-dated cheques amounting to
Rs.71,25,466 as consideration for the purchase of three lac equity shares
in the Target Company, thus taking his share in the Target Company to
8.83%. On 19.4.1999, the Tripartite agreement between the Appellant, Garg
and HSIDC was entered into. Subsequently, on 20.4.1999, the Appellant and
Garg entered into an agreement as per which the Appellant purchased Garg’s
entire share capital of 9,54,450 shares amounting to 28.09% share in the
Target Company at the rate of Rs. 8.50 per fully paid up equity share. It
was this transaction which triggered Regulation 10, as there was an
acquisition of more than 15% of the total shareholding of the Target
Company. In order to comply with Regulation 10, the Appellant made a public
announcement within four working days as prescribed in Regulation 14(1) on
24.4.1999. The rate that was being offered by the Appellant at which he
would acquire shares from the public was Rs. 8.75. In response to the
public announcement, the Appellant could only acquire 2.42% of the shares
of the Target Company, which was not surprising as the rate at which the
shares were being offered to be purchased by the Appellant was lower than
the face value of the shares. Counsel relied on a letter issued by HSIDC to
SEBI dated 11.1.2001, wherein it was categorically mentioned that the
cheques issued by the Appellant to HSIDC were consideration for the buy-
back of the shareholding held by HSIDC in the Target Company. Finally,
Learned Senior Counsel places reliance on Regulation 16 which provides the
contents of the public announcement, of which one of the disclosures that a
company had to make is to state the highest and the average price paid by
the acquirer or persons acting in concert with him for acquisition, if any,
of shares of the Target Company made by him during the twelve month period
prior to the date of public announcement.
13 The first issue that has to be addressed before us is whether the
transaction of buy-back of shares which transpired between the Appellant
and HSIDC was required to be disclosed in the public announcement dated
24.4.1999. In order to determine this requirement, we must examine the
operative clauses of the relevant Regulations. Regulation 3 states that
Regulations 10, 11 and 12 shall have no applicability to any transfer of
shares from state level financial institutions, including their
subsidiaries, to co-promoter(s) of the company pursuant to an agreement
between such financial institution and such co-promoter(s). Regulations 10,
11 and 12 mandate the making of a public announcement, if any of the
criteria mentioned therein are satisfied. Regulation 16 provides the
contents and essential disclosures that are to be made at the time of
making a public announcement. Regulation 20 establishes the method of
computation to be employed in order to determine the minimum offer price
which the acquirer must offer to purchase shares in a public announcement
under Regulation 10, 11 or 12. It is evident from a reading of the above
Regulations that the buy-back transaction between the Appellant and HSIDC
was incapable of triggering Regulation 10, as the said transaction was
protected by Regulation 3. However, the acquisition of the entire share
capital of Garg by the Appellant attracted Regulation 10 as the acquisition
was in excess of 15%. Further, as this transaction was between two
promoters, it did not have the protection of Regulation 3. As required
under Regulation 10, the Appellant did make a public announcement, but did
not disclose its buy-back transaction with HSIDC. The Appellant has vainly
and incorrectly attempted to justify his act of non-disclosure by stating
that the transaction with HSIDC was protected by Regulation 3, which placed
it beyond the ambit of Regulation 10, 11 and 12. In our view, Regulation
3 only protects a transaction between a co-promoter and a State financial
institution to the extent that, as a consequence of such transaction a
public announcement will not be required to be made as provided under
Regulations 10, 11 and 12. However, it does not imply that the said
transaction is to be protected from the rigours of other Regulations
provided for under the Act. Thus, the transaction between the Appellant and
HSIDC will have to be subject to Regulations 16 and 20, and the rate at
which the Appellant bought back the shares from HSIDC had to be disclosed
in the public announcement.
14 We also find no force whatsoever in the contention of the Learned
Counsel for the Appellant that the post-dated cheques forwarded to HSIDC
enclosed with letter dated 15.4.1999 were given by way of a guarantee,
especially in light of the fact that the same was denied by HSIDC in its
letter to SEBI dated 11.1.2001, wherein HSIDC stated that the post-dated
cheques had been issued in consideration of the buy-back of shares.
15 The next contention that was raised by the Counsel for the Appellant
was that as the cheques presented had been dishonoured on presentation, the
said transaction did not culminate in an acquisition. It has already been
held beyond doubt that the post-dated cheques issued by the Appellant in
favour of HSIDC were in consideration of the buy-back of the shares held by
HSIDC in the Target Company. The Appellant had submitted that the cheques
were post-dated because he was suffering from a liquidity crunch. In our
view, the post-dated cheques amounted to a promise to pay and that promise
would be fulfilled on the date mentioned on the cheque. Thus, this promise
to pay amounted to a sale of shares/equity. The subsequent dishonouring
of the post-dated cheque would have no bearing on the case. At the time
of making the public announcement the Appellant had bought back the shares
of HSIDC by making payment via the said post-dated cheques. Further, as the
buy-back was in pursuance of an agreement, there was consensus ad idem. The
Appellant has subsequently shirked his responsibility and has tried to
slither away from honouring the agreement, which he cannot be allowed to
gain from, as is established by the legal maxim commodum ex injuri su non
habere debet. While interpreting the term acquisition, we must
conceptualize the intention behind these Regulations which, it seems to us,
is to safeguard the shareholders from adverse consequences of acquisitions
and takeovers as far as the value of the shares is concerned. Not
infrequently, the new management’s endeavour is to manipulate the market
price of the shares in a manner calculated to induce the existing
shareholders to off load their holdings at a low price. This is achieved
by portraying a false picture of their value. In the background of such
an intention it would fallacious to suggest that the said transaction did
not tantamount to an acquisition.
16 In order to dispel doubts regarding the term ‘acquisition’, the same
was subsequently defined in the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Under
Regulation 2 Clause (1) Sub-clause (a)- ‘acquisition’ means directly or
indirectly acquiring or agreeing to acquire shares or voting rights in, or
control over, a Target Company. This definition clarifies that an
acquisition takes place the moment the acquirer decides or agrees to
acquire, irrespective of the time when the transfer stands completed in all
respects. The definition explicates that the actual transfer need not be
contemporaneous with the intended transfer and can be in futuro.
17 Further, the letter on which the Counsel for the Appellant had placed
reliance to prove that there was no acquisition, is dated 9.12.1999, which
was well after the public announcement dated 24.4.1999 where the Appellant
was required to make disclosures in compliance with the Regulations. This
clearly indicates, that at the date of making the public announcement the
Appellant was under the impression that the acquisition has taken place.
18 We neither find any merit in the appeal, nor any infirmity in the
order of SEBI dated 1.3.2003. Thus Appeal is dismissed.
...................................................J.
[VIKRAMAJIT SEN]
...................................................J.
[SHIVA KIRTI SINGH]
New Delhi,
November 26, 2015
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