Anil Kumar Poddar & Anr. vs Sebi

Date of Hearing: 23.03.2023 Date of Decision: 11.04.2023

Appeal No.552 of 2021

Anil Kumar Poddar 9/12 Lal Bazaar Street, 3rd Floor, E-Block, Kolkata-700 001, West Bengal. ...Appellant

Versus

1.

Securities and Exchange Board of India SEBI Bhawan, Bandra Kurla Complex, Mumbai - 400 051.

2. Mr. R.V. Ravi Kumar No.2, Villa Balaji 1st Cross Extension Rainbow Nagar, Puducherry - 605 011.

3. Ravi Kumar Properties Pvt. Ltd. Ameen Manors, S1 & S2, 2nd Floor, „B‟ Block No.138, Nungambakkam, Chennai-600 034.

4. R. Amrithavalli No.2, Villa Balaji, 2

1st Cross Extension Rainbow Nagar, Puducherry - 605 011.

5. S. Rajendran No.2, Villa Balaji, 1st Cross Extension Rainbow Nagar, Puducherry - 605 011.

6. V. Sivashankar No.2, Villa Balaji, 1st Cross Extension Rainbow Nagar, Puducherry - 605 011.

7. BPJ Holdings Pvt. Ltd.

Flat No.9, 4th Floor, Sri Chakra Apartments, Door No.9, Poes Road, 1st Street Teynampet, Chennai-600 018.

8. Chiraag Suppliers Pvt. Ltd.

a) No.2, Garstin Place Hare Street, Kolkata-700 001.

b) No.55, Patchavazi Amman Koli Street (PAK) Vaithikuppam Puducherry - 605 013.

9. NandlalVyapaar Pvt. Ltd.

a) No.2, Garstin Place Hare Street, Kolkata-700 001.

b) No.13, Vidyutlal Nagar 3

Mudaliarpet Main Area Puducherry - 605 004. ...Respondents

Ms. Rinku Valanju, Advocate with Ms. Akshita Sharma, Advocate i/b. R V Legal for the Appellant.

Mr. Sumit Rai, Advocate with Mr. Mihir Mody, Mr. Arnav Misra, Mr. Mayur Jaisingh, Advocates i/b. K. Ashar & Co. for the Respondent No.1.

Mr. Rahul Lakhiani, Advocate with Mr. Durgesh Khanapurkar, Mr. Huzan Bhumgara, Advocates i/b. Desai & Diwanji for the Respondent Nos.2 to 9.

With Misc. Application No.1434 of 2021 And Misc. Application No.1481 of 2022 And Appeal No.7 of 2022

First Financial Services Ltd.

No.27, Anna Sagar Street, (Near Raj Theater), Saidapet, Chennai, Tamil Nadu - 600015. ...Appellant

Versus

1. Securities and Exchange Board of India SEBI Bhavan, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051.

2. Mr. R.V. Ravi Kumar No.2, Villa Balaji First Cross extension 4

Rainbow Nagar, Puducherry - 605 011.

3. Ravi Kumar Properties Pvt. Ltd. Ameen Manors, S1 & S2, Second Floor, „B‟ Block No.138, Nungambakkam, Chennai-600 034.

4. R. Amrithavalli No.2, Villa Balaji, First Cross Extension Rainbow Nagar, Puducherry - 605 011.

5. S. Rajendran No.2, Villa Balaji, First Cross Extension Rainbow Nagar, Puducherry - 605 011.

6. V. Sivashankar No.2, Villa Balaji, First Cross Extension Rainbow Nagar, Puducherry - 605 011.

7. BPJ Holdings Pvt. Ltd.

Flat No.9, 4th Floor, Sri Chakra Apartments, Door No.9, Poes Road, 1st Street Teynampet, Chennai-600 018.

8. Chiraag Suppliers Pvt. Ltd.

a) No.2, Garstin Place Hare Street, Kolkata-700 001.

5 b) No.55, Patchavazi Amman Koli Street (PAK) Vaithikuppam Puducherry - 605 013, PY.

9. Nandlal Vyapaar Pvt. Ltd.

a) No.2, Garstin Place Hare Street, Kolkata-700 001.

b) No.13, Vidyutlal Nagar Mudaliarpet Main Area Puducherry - 605 004, PY.

...Respondents

Mr. Prakash Shah, Senior Advocate for the Appellant.

Mr. Sumit Rai, Advocate with Mr. Mihir Mody, Mr. Arnav Misra, Mr. Mayur Jaisingh, Advocates i/b. K. Ashar & Co. for the Respondent No.1.

Mr. Rahul Lakhiani, Advocate with Mr. Durgesh Khanapurkar, Mr. Huzan Bhumgara, Advocates i/b. Desai & Diwanji for the Respondent Nos.2 to 9.

CORAM: Justice Tarun Agarwala, Presiding Officer Ms. Meera Swarup, Technical Member

Per: Justice Tarun Agarwala, Presiding Officer

1. There is a delay of 286 days in the filing of Appeal

no.7 of 2022. For the reason stated in the application, 6

the delay in the filing of the appeal is condoned. The

application is allowed.

2. The appellants are shareholders of Ravi Kumar

Distilleries Ltd. and are aggrieved by the order dated

2nd February, 2021 passed by the Whole Time Member

(„WTM‟ for short) refusing to exercise its powers under

the Securities and Exchange Board of India (Substantial

Acquisition of Shares and Takeovers) Regulations,

2011 (hereinafter referred to as the „SAST Regulations)

for making an open offer, etc.

3. The facts leading to the filing of the present appeal

is, that pursuant to an investigation conducted by

Securities and Exchange Board of India (hereinafter

referred to as „SEBI‟) in the scrip of Ravi Kumar

Distilleries Ltd. a show cause notice dated was issued

to R. V. Ravikumar along with PACs, namely

Ravikumar Properties Pvt. Ltd., Ravikumar

Amrithavalli, S Rajendran, R Ramanujam, V

Sivasankar, V Chitra, G Ramaraja, BPJ, Chiraag and 7

Nandlal (together referred to as the Noticees), asking

them to show cause as to why appropriate directions

under Sections 11(1), 11(4) and 11B of the SEBI Act

should not be issued against them for the aforesaid

alleged violations under SAST Regulations, 2011.

4. The show cause notice alleged that Ravi Kumar

Distilleries Ltd. (hereinafter referred to as RKDL/the

Company) along with persons acting in concert (PACs)

had acquired more than 5% of the shareholding in

RKDL.

5. It was alleged that R. V. Ravikumar along with

PACs have acquired more than 5% shareholding in

RKDL on October 3, 2012 (shareholding went up

from 42.17% to 47.25%) and further on December 7,

2012 (shareholding went up from 47.25% to

52.29%). Therefore, R V Ravikumar (Noticee no. 1),

along with PACs (Noticee nos. 2 to 11), namely

Ravikumar Properties Pvt. Ltd., Ravikumar

Amrithavalli, S Rajendran, R Ramanujam, V 8

Sivasankar, V Chitra, G Ramaraja, BPJ, Chiraag and

Nandlal, are alleged to have violated Regulation 3(2) of

SAST Regulations, 2011.

6. The WTM after considering the replies and material

evidence on record found that the transactions cited in

the show cause notice have not been disputed by R. V.

Ravikumar and the PACs but found that these

transactions were executed to reverse the illegal

transfer of shares made by Anil Agarwal which were

based on fraudulent executed pledges and the same

could not be taken as triggering an open offer

obligation. The WTM further came to the conclusion

that even though the transactions made by R. V.

Ravikumar and the PACs were acquisition for the

purpose of SAST Regulations, 2011 thereby triggering

an open offer obligations, nonetheless, in the light of

the fact that the validity of the pledge transactions and

the alleged memo of undertaking dated 10th September,

2012 were subject to various civil and criminal 9

proceedings between R. V. Ravikumar group and

various group of law and authorities and, consequently,

in such a situation it would not be proper to exercise the

discretion given under Regulation 32 of the SAST

Regulations, 2011 directing the acquirer to make an

open offer under Section 32 of the SAST Regulations.

For facility, the WTM held:

―46. Having considered all the above points, I note that the above transactions as cited in the SCN have not been disputed by the Noticees and the motive for these transactions are sought to be explained in a context which ought not to attract the provisions of SAST Regulations, 2011. I am of the opinion that the issue of legality/validity or otherwise of the said pledge transaction and the said MoU dated September 05, 2012, which the Noticees claim to be the genesis of the subject acquisitions by them, is a crucial preliminary issue which needs to be decided before deciding whether the said acquisitions by the Noticees would trigger open offer obligations or not. I note that the said preliminary issue is intricately linked to the subject matter of various proceedings, both civil and criminal, between Ravikumar group and Anil Agrawal group which are pending before different authorities/courts, as mentioned in the Table under the preceding paragraph. In such a situation, where the facts and circumstances 10

leading to the alleged violation of the provisions of SAST Regulations, 2011 are themselves in dispute, it does not appear appropriate to adjudicate such alleged violations. Since the facts of this case and the transactions in question are intertwined with the allegations and counter-allegations of fraud and forgery which are yet to be conclusively determined, this matter cannot be treated in the same way as any other matter involving the question trigger of open offer obligations under the SAST Regulations, 2011. The provisions of the SAST Regulations, 2011 do not operate in vacuum and must be interpreted and enforced keeping in mind the attendant circumstances and the peculiar facts and circumstances of each case. Considering all these factors in totality, I dispose of the present proceedings against the Noticees, initiated vide the SCN dated January 31, 2019, without any direction.‖

7. The appellants are shareholders in RKDL holding

532 shares and 785301 shares respectively. The short

contention of the appellants is, that admittedly as a

result of acquisition by R. V. Ravikumar alongwith its

promoters and PACs, the shareholding went up from

23.04% to 36.94% and, therefore crossed the threshold

limit of 25% and, consequently, as per Regulation 3(1) 11

of the SAST Regulation an acquirer who acquires more

than 25% of the shareholding is required to make an

public announcement of an open offer which in the

instant case was not done and that the WTM committed

an error in refusing the acquirers to make an open offer.

It was, thus, contended that since the provision is

mandatory and admittedly the acquirers have triggered

Regulation 3(1) by acquiring more than 25% of the

shares of RKDL it became essential for them to make

an open offer.

8. We have heard Ms. Rinku Valanju, Advocate

assisted by Ms. Akshita Sharma, Advocate for the

appellant in Appeal no.552 of 2021 and Mr. Prakash

Shah, Advocate for the appellant in appeal no.7 of 2022

and Mr. Sumit Rai, Advocate assisted by Mr. Mihir

Mody, Mr. Arnav Misra and Mr. Mayur Jaisingh,

Advocates for the respondent no.1 and Mr. Rahul

Lakhiani, Advocate assisted by Mr. Durgesh 12

Khanapurkar and Mr. Huzan Bhumgara, Advocates for

the respondent nos.2 to 9.

9. The main thrust of the violation as contended by the

appellants is that the respondent have failed to make an

open offer as mandated by the SAST Regulations,

2011. For facility, the relevant provisions of the SAST

Regulations, 2011 which are extracted hereunder:

―Power to issue directions.

32.(1) Without prejudice to its powers under Chapter VIA and section 24 of the Act, the Board may, in the interest of investors in securities and the securities market, issue such directions [or any other order] as it deems fit under section 11 or section 11B or section 11D of the Act, including,--

(a) directing divestment of shares acquired in violation of these regulations, whether through public auction or in the open market, or through an offer for sale under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, and directing the appointment of a merchant banker for such divestiture;

(b) directing transfer of the shares, or any proceeds of a directed sale of shares acquired in violation of these regulations to 13

the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009;

(c) directing the target company or any depository not to give effect to any transfer of shares acquired in violation of these regulations;

(d) directing the acquirer or any person acting in concert, or any nominee or proxy not to exercise any voting or other rights attached to shares acquired in violation of these regulations;

(e) debarring any person who has violated these regulations from accessing the capital market or dealing in securities for such period as may be directed, having regard to the nature and gravity of the violation;

(f) directing the acquirer to make an open offer for acquiring shares of the target company at such offer price as determined by the Board in accordance with these regulations;

(g) directing the acquirer not to cause, and the target company not to effect, any disposal of assets of the target company or any of its subsidiaries contrary to the contents of the letter of offer, where the conditions set out in the proviso to sub-

regulation (2) of regulation 25 are not met; 14

(h) directing the acquirer who has failed to make an open offer or has delayed the making of an open offer, to make the open offer and to pay interest at such rate as considered appropriate by the Board along with the offer price;

(i) directing the acquirer who has failed to make payment of the open offer consideration to shareholders, not to make any open offer or enter into any transaction that would attract the obligation to make an open offer in respect of shares of any target company for such period as the Board may deem fit;

(j) directing the acquirer who has made an open offer but has delayed making payment of the open offer consideration to shareholders, to pay interest at such rate as considered appropriate by the Board for the delayed period;

(k) directing any person to cease and desist from exercising control acquired over any target company without complying with the requirements under these regulations;

(l) directing divestiture of such number of shares as would result in the shareholding of an acquirer and persons acting in concert with him being limited to the maximum permissible non-public shareholding or below.

15

(2) In any proceedings initiated by the Board, the Board shall comply with principles of natural justice before issuing directions to any person.

(3) The Board may, for failure to carry out the requirements of these regulations by any intermediary registered with the Board, initiate appropriate proceedings in accordance with applicable regulations.‖

10. A perusal of Regulation 3 indicates that if an

acquirer acquires more than 25% of the voting rights,

then the acquirer is required to make an open offer.

Regulation 32 prescribes various directions that can be

issued if there is contravention of Regulation 3 and one

such direction is to make an open offer.

11. Regulation 32 of the SAST Regulations, 2011 is

pari materia to Regulation 44 of the SAST

Regulations, 1997. The aforesaid provision gives

discretion to the authority to issue directions under

Regulation 32(1) instead of taking action under Chapter

VIA and Section 24 of the Securities and Exchange

Board of India Act, 1992 in the interest of investors in 16

securities and securities market. The word used is

"may". The word "may" is not mandatory and is not

"shall" and, therefore, discretion is given to the

authority to issue or not to issue any directions under

Section 32 of the SAST Regulations depending on the

circumstances of the case and the situation that may

arise.

12. Regulation 44 of the SAST Regulation, 1997 came

up for consideration before the Supreme Court in SEBI

vs. Sunil Krishna Khaitan & Ors. in Civil Appeal

No.1762 of 2014 decided on 11th July, 2022. The

Supreme Court interpreted the word "may" in

Regulation 44 to mean that it confers discretion upon

the authority. The Supreme Court held that the word

"may" and not "shall" in Regulation 44 indicates that

the provision is not mandatory and that in each and

every case of violation and breach of Regulations 10,

11 and 12, a direction is issued under Regulation 44.

The Supreme Court held that discretion is given to the 17

authority which is of wide amplitude and that the

authority has the power to make a choice between

different course of action or inaction in the context of

Regulations 44 and 45. The Supreme Court held that

the underlined rationale of giving discretion is to ensure

that the Board exercises its discretion in consonance

with legitimate values for public law. For facility,

paragraphs 69, 70, 71 and 72 of the aforesaid decision

is extracted hereunder:

―69. The use of the word ‗may' in Regulation 44 and the wording of Sections 11(1), 11B and 11(2)(h) reflect that the Board has been conferred a discretion, which in turn also means and should be interpreted as imposing a duty, an aspect which we will elucidate in the subsequent paragraphs. Use of the word ‗may' over the years is normally construed as permissive and not imperative. The words ‗may' or ‗shall' by their very etymological foundation denote discretion and mandatory nature of an act respectively. This Court has, therefore, held that the courts should not readily interpret the word ‗may' as ‗shall' unless such interpretation is necessary to avoid absurdity, inconvenient consequences or as mandated by the intent of the legislature which is gathered from the other parts of the statute.

18 70. Use of the word ‗may' and not ‗shall' in Regulation 44 is significant. It is not mandatory that in case of every violation and breach of Regulations 10, 11 and 12, direction under Regulation 44 shall be issued. The interpretation gets fortified in view of the words and object of the Regulation 44 which empowers the Board to issue directions as it deems fit. Section 11(1), while broadly defining the functions of the Board, states that it is the duty of the Board to protect interest of investors in securities and to promote the development of, and regulate the securities market by such measures as it thinks fit. Section 11B, which deals with the power of the Board to give directions, states that the Board, after making or causing an inquiry, may issue directions if it is satisfied that it is necessary in the interest of the investors, or orderly development of the securities market; to prevent the affairs of any intermediary or other persons referred to in Section 12 from conducting affairs in a manner detrimental to the interest of the investors or to secure proper management of such intermediary or persons. Section 11(2)(h) provides that the Board is entitled to take measures for regulating substantial acquisition of shares and takeover of companies. Regulation 44 states that the Board while issuing directions, has to keep in mind the interest of the securities market and its role as a protector of interest of investors. We will read the word ‗or' between the expression ‗in the interest of securities market or protection of investors' as ‗and'. The Board, therefore, when it decides to exercise its power under Regulation 44 and issues directions under the said Regulation has to keep the two facets in mind, namely, (i) interest of the securities market;

19 and (ii) protection of interest of the investors. The exercise of discretion of the Board, in fact, would not be restricted to the two facets mentioned above as the power and functions of the Board are far broader as they include promotion, development and regulation of securities market as a whole and regulating substantial acquisition of shares and takeover of companies.

71. Discretion is an effective and an important tool which the legislature confers and vests with the executive for effective and good governance, administration, and in the present case- regulation, of the securities market which has complex commercial and economic facets. Therefore, the law provides an option to the Board and the authorities to adopt one or the other alternatives. However, this does not mean that the Board or the authorities enjoy unfettered and unchecked discretionary jurisdiction to act according to private or personal opinion in a vague and fanciful manner. Discretion, when of wide amplitude, and when it can have civil and penal consequences, must be exercised in a legal and regular manner. Exercise of discretion is always governed by rules, which means that the exercise of discretion should be fair and reasonable as the legislature while conferring discretion never intends that the authorities would not act whimsically, arbitrarily, but on the precept that they shall act only when it appears to be necessary in public interest. Legal exercise of discretion is one, where the authority examines and ascertains the facts, is aware of the law, and then decides objectively and rationally what serves the interest better. This is true even when 20

the statutes are silent and only the power is conferred to act in one way or the other. Reasonableness as a standard is tested by reference to the community standards at the time of exercise of discretion. This means that discretion should be exercised within the limit to which an honest man competent to discharge his office ought to confine himself. It will be also true to state that the greater the harm or penal consequences, greater is the duty and obligation of the public authority to ensure that discretion is used as an effective tool in regulation or administration but does not cause confusion, chaos and instability.

72. In the context of Regulations 44 and 45, it implies that the Board has the power to make a choice between different courses of action or inaction. This choice is not unfettered but is always held subject to implied limitations inherent in every statute, limitations set by the common law and the constitutional mandate of rule of law. The underlying rationale of giving discretion is to ensure that the Board exercises the discretion in consonance with legitimate values of public law, which include need to maintain legal certainty and consistency which are at the heart of the principle of rule of law. These have to be balanced with other equally legitimate public law value, which is the object and purpose of the enactment. The need for the said flexibility is given and is necessary to meet unusual and practical situations and to do justice in a particular case. The remedial order passed by the Board as the regulator must also meet the 21

said parameters in addition to meeting the requirements of the enactment.‖

13. The principles involved in the aforesaid decision is

squarely applicable to the provisions of Regulation 32

of the SAST Regulations, 2011. We we find from a

perusal of the findings given by the WTM in the

impugned order and in particular, having regard to

paragraph 46 of the impugned order, we find that in the

given peculiar facts and circumstances of the case, the

WTM has validly exercised its discretion under SAST

Regulation, 2011. We, accordingly, do not find any

error in the impugned order. The appeals fail and is

dismissed. Misc. application no.1481 of 2022 is

disposed of accordingly.

14. This order will be digitally signed by the Private

Secretary on behalf of the bench and all concerned

parties are directed to act on the digitally signed copy

of this order. Certified copy of this order is also 22

available from the Registry on payment of usual

charges.

Justice Tarun Agarwala Presiding Officer

Ms. Meera Swarup Technical Member RAJALAK Digitally by signed

SHMI RAJALAKSHMI HARISH NAIR HARISH Date:

11.4.2023 NAIR 2023.04.13 10:13:13 +05'30'

RHN