Kavry Financial Services Limited vs Sebi

Order Reserved On: 16.04.2018 Date of Decision : 26.04.2018

Appeal No. 479 of 2016

Kavry Financial Services Limited 762, Building No. 7, 6th Floor, Solitaire Corporate Park, Andheri (E), Mumbai- 400 098 ...Appellant

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051 ...Respondent

Mr. Mayur Khandeparkar, Advocate with Mr. Pankaj Uttaradhi, Advocate i/b M/s Vishesha Law Services Advocate for the Appellant.

Mr. Pradeep Sancheti, Senior Advocate with Mr. Vibhor Kapoor, Advocate i/b Legasis Partners for the Respondent.

WITH Misc. Application No. 317 of 2017 And Appeal No. 349 of 2017

Kavry Financial Services Limited 762, Building No. 7, 6th Floor, Solitaire Corporate Park, Andheri (E), Mumbai- 400 098 ...Appellant

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051 ...Respondent 2

Mr. Mayur Khandeparkar, Advocate with Mr. Pankaj Uttaradhi, Advocate i/b M/s Vishesha Law Services Advocate for the Appellant.

Mr. Pradeep Sancheti, Senior Advocate with Mr. Vibhor Kapoor, Advocate i/b Legasis Partners for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per: Justice J.P. Devadhar

Misc. Application No. 317 of 2017 In Appeal No. 349 of 2017

There is delay of 409 days in filing the appeal. By this

Miscellaneous Application, applicant seeks condonation of the said

delay. For the reasons stated in the application, delay is condoned.

Miscellaneous Application is disposed of accordingly.

Appeal Nos. 479 of 2016 & 349 of 2017

1.

These two appeals are filed by the appellant to challenge the order

passed by the Whole Time Member ("WTM" for short) of Securities and

Exchange Board of India ("SEBI" for short) on 27.10.2016 and the

decision of SEBI contained in the communication dated 06.09.2016

respectively.

2. By order dated 27.10.2016 the WTM of SEBI has inter alia

directed the appellant to acquire in open offer the shares of Regaliaa

Realty Limited ("Target Company" for convenience) in accordance with

the provisions of Securities and Exchange Board of India (Substantial

Acquisition of Shares and Takeover) Regulations, 2011 ("SAST 3

Regulations, 2011" for short). By communication dated 06.09.2016

application filed by the appellant on 21.07.2016 seeking exemption from

making open offer under regulation 11(1) of SAST Regulations, 2011 in

relation to the shares acquired by invoking pledge on 16.02.2012 has

been rejected.

3. Since dispute in these two appeals arise from facts which are

substantially common, both these appeals are heard together and disposed

of by this common decision.

4. Facts relevant for disposal of these two appeals are as follows:-

a) In the year 2011 appellant had extended credit facility

aggregating to ` 7 crore to the target company, inter

alia, by taking pledge of 20,00,100 shares of the target

company (constituting 55.56% of the paid up share

capital of the company) held by the directors of the

target company as collateral security for the aforesaid

credit facility.

b) As the target company (borrower) defaulted in

repaying the loan, appellant invoked the pledge on

16.02.2012 and got 20,00,100 pledged shares of the

target company transferred to the demat account of

the appellant. As a result of such acquisition, the

shareholding of the appellant in the target company

rose from 0% to 55.56%.

4

c) On SEBI seeking explanation as to why open offer

obligation arising on acquisition of above shares has

not been discharged, appellant by its letter dated

08.10.2014 informed SEBI that it is an RBI registered

Non-Banking Finance Company ("NBFC") and hence

the appellant was exempted under regulation

10(1)(b)(viii) of SAST Regulations, 2011 from

making open offer on acquisition of shares by

invoking the pledge.

d) Thereupon, a show cause notice was issued on

23.02.2016 calling upon the appellant to show cause

as to why action should not be taken against the

appellant who had neither obtained exemption from

making open offer under regulation 11 of SAST

Regulations, 2011 prior to invocation of pledge nor

the appellant had made public announcement of open

offer on acquiring the shares by invoking the pledge.

e) In its reply dated 17.03.2016 appellant reiterated that

under regulation 10(1)(b)(viii) the appellant was

exempted from making open offer. It was further,

inter alia, contended that the borrower had willfully

defaulted in repaying the loan and therefore the

pledge was invoked as a risk mitigating measure and

not with a view to acquire control over the target 5

company and hence no action need be taken against

the appellant.

f) Before the above reply to the show cause notice could

be considered by the WTM of SEBI, appellant on

21.07.2016 made an application seeking exemption

under regulation 11(1) of SAST Regulations,

2011from making open offer in relation to shares of

the target company acquired on 16.02.2012 by

invoking the pledge.

g) By a communication dated 06.09.2016 SEBI returned

the application filed by the appellant on ground that

the application was made post facto, that is, after the

shares were acquired by invoking the pledge.

Challenging the said communication dated

06.09.2016, Appeal No. 349 of 2017 is filed.

h) Thereafter, the WTM of SEBI gave personal hearing

to the appellant and by the impugned order dated

27.10.2016 rejected the contentions raised by the

appellant and, inter alia, directed the appellant to

make a public announcement of open offer in

accordance with the provisions of SAST Regulations,

2011. Challenging the said order of WTM of SEBI

dated 27.10.2016 appellant has filed Appeal No. 479

of 2016.

6 Appeal No. 479 of 2016

5. Mr. Khandeparker, learned counsel appearing on behalf of the

appellant fairly stated that the general exemption from making open offer

granted to the acquisitions covered under regulation 10(1) and

particularly regulation 10(1)(b)(viii) relating to acquisition of shares on

invocation of pledge, would not be applicable to the appellant, because,

the appellant is neither a Scheduled Commercial Bank nor a Public

Financial Institution.

6. However, counsel for the appellant submitted that in the facts of

present case, since the pledge was invoked only as a risk mitigating

measure and not with a view to acquire control over the target company,

the appellant ought not to have been saddled with the open offer

obligation. Counsel for the appellant further submitted that in fact,

neither the appellant has exercised control over the target company nor

sold the shares acquired on invocation of pledge. Therefore, SEBI is not

justified in directing the appellant to make open offer for acquisition of

shares.

7. Admittedly, on invocation of pledge, appellant acquired 55.56%

shares of the target company. Regulation 3(1) of the SAST Regulations,

2011 provides that no person shall acquire shares in a target company

which entitles him to exercise 25% or more of the voting rights in such

target company, unless that person makes a public announcement of an

open offer for acquiring shares of such target company in accordance

with SAST Regulations, 2011. It is not in dispute that on acquisition of

55.56% shares of the target company appellant was entitled to exercise 7

more than 25% of the voting rights in the target company. Very fact that

the appellant was entitled to exercise more than 25% of the voting rights

of the target company was sufficient to trigger open offer obligation

under regulation 3(1) of the SAST Regulations, 2011. Therefore,

whether the voting rights were exercised or not, appellant was obliged to

make open offer on being entitled to exercise more than 25% voting

rights of the target company.

8. Accordingly, no fault can be found with the decision of the WTM

of SEBI that in the facts of present case, appellant was obliged to make

open offer under regulation 3(1) of the SAST Regulations, 2011.

Appeal No. 349 of 2017

9. Arguments advanced by counsel for the appellant in relation to the

communication of SEBI dated 06.09.2016 whereby the application made

by the appellant seeking exemption from making open offer under

regulation 11(1) of the SAST Regulations, 2011 was returned, may be

summarized thus:-

a) Under regulation 11(5) of SAST Regulations, 2011 an

application made under regulation 11(1) seeking

exemption from the obligation to make an open offer

for acquisition of shares under the said regulations can

be granted or rejected only after giving an opportunity

of hearing. In the present case, the application made

by the appellant under regulation 11(1) has been

returned without giving an opportunity of hearing to 8

the appellant and hence the impugned order which is

in gross violation of regulation 11(5) is liable to be

quashed and set aside.

b) Under the SAST Regulations, 2011 SEBI was obliged

either to grant or reject the application made by the

appellant seeking exemption from making open offer.

There being no provision for returning the application

made for seeking exemption, SEBI, could not have

returned the application of the appellant by the

impugned communication dated 06.09.2016.

c) Mere fact that the application seeking exemption from

open offer was made by the appellant subsequent to

acquisition of shares could not be a ground to return

the application, because, firstly, regulation 11(1) does

not contemplate that application seeking exemption

from making open offer has to be made before

acquisition of shares. Secondly, SEBI itself has in the

past granted post facto exemption in several cases. In

support of the above contentions reliance is placed on

a decision of this Tribunal in case of S.R.B. Ramesh

Chandra & Ors. (Appeal No. 85 of 2012 decided on

28.06.2013) and a decision of the Apex Court in case

of LIC of India v/s Excorts Ltd. reported in AIR 1986

SC 1370.

9

d) From the date of acquisition of shares till date

appellant has neither exercised control over the target

company nor exercised voting rights in the target

company nor received any dividend from the target

company. Appellant had acquired the shares only as

and by way of risk mitigating measure and not with a

view to exercise powers attached to the shares is

evident from the fact that on 08.02.2016 a

Memorandum of Understanding (MoU) has been

arrived at between the appellant and borrower under

which the outstanding debt payable by the borrower

has been settled and the appellant is now required to

return the shares to the borrower. In these

circumstances, it is submitted that failure on part of

SEBI to grant exemption from making open offer is

illegal and wholly unjustified. Accordingly, it is

submitted that the impugned communication of SEBI

dated 06.09.2016 deserves to be quashed and set aside

and SEBI be directed to grant post-facto exemption

from making open offer.

10. We see no merit in the above contentions.

11. Regulation 3(1) provides that no acquirer shall acquire shares in

the target company which entitles him to exercise 25% or more of the

voting rights in the target company unless he makes a public

announcement of on open offer for acquiring shares of the target 10

company in accordance with SAST Regulations. Thus, regulation 3(1)

contemplates making a public announcement of an open offer for

acquiring shares of the target company.

12. Similarly regulation 11(1) provides that SEBI may for reasons

recorded in writing grant exemption from the obligation to make an open

offer 'for acquiring shares'. The words 'for acquiring shares' in

regulation 11(1) clearly postulates that grant of exemption is in relation

to shares to be acquired and not already acquired. Thus, reading

regulation 3(1) together with regulation 11(1) it becomes evident that

application seeking exemption from making public announcement of

open offer has to be made before acquiring the shares and not after

acquiring the shares. Therefore, decision of SEBI in returning the

application on ground that the appellant ought to have sought exemption

from making open offer before acquiring the shares cannot be faulted.

13. Reliance placed by the appellant on the decision of the Apex Court

in case of LIC of India (Supra) is misplaced. In that case, since the

principle/ ultimate object of Foreign Exchange Regulation Act (FERA)

was to attract and regulate the flow of Foreign Exchange in to India it

was held that the requirement contained in Section 29(1) of FERA that a

person resident outside India shall not establish a branch office in India

except with the 'general or special permission' of RBI would not

necessarily mean obtaining prior permission from RBI and it would

include obtaining post-facto permission from RBI subject to conditions

as RBI may impose. Object of SAST Regulations, 2011, on the other

hand, is to ensure that before any person acquires shares of a target 11

company which entitles him to exercise 25% or more voting rights in the

target company, opportunity must be given to the existing shareholders to

exit the company by offering their shares in the open offer. Thus, the

object of open offer obligation is to protect the interest of the existing

shareholders when an acquirer seeks to acquire 25% or more voting

rights in the target company. In such a case, power conferred on SEBI to

grant exemption under regulation 11(1) would obviously before the

acquirer acquires shares entitling 25% or more voting rights of the target

company. Therefore, decision of the Apex Court in case of LIC of India

(Supra) has no relevance to the facts of present case.

14. Assuming that in exceptional circumstances application seeking

exemption from making open offer could be entertained after acquisition

of shares, in the facts of present case, appellant does not deserve

exemption for the following reasons:-

a) Obligation to make open offer on account of acquiring

20,00,100 shares of the target company on invocation

of pledge arose on 16.02.2012, whereas, application

seeking exemption from making open offer has been

made belatedly after four years on 21.07.2016.

Having failed to comply with the open offer

obligation for more than four years, appellant is not

justified in making application seeking exemption on

21.07.2016.

12

b) When SEBI by its letter dated 26.09.2014 sought

explanation from the appellant for not making the

public announcement of open offer, appellant

erroneously contended that under regulation

10(1)(b)(viii) of SAST Regulations appellant is

exempted from making open offer.

c) Thereafter, when show cause notice dated 23.03.2016

was issued, appellant filed reply on 17.03.2016

wherein it was once again contended erroneously, that

under regulation 10(1)(b)(viii) of SAST Regulations,

2011 the appellant was exempted from making open

offer.

d) It is only when the show cause notice was about to be

taken for consideration, appellant chose to make the

application on 21.07.2016 under regulation 11(1)

seeking exemption from making open offer. Thus, in

the facts of present case, appellant who is guilty of

violating the SAST Regulations, 2011 by not making

open offer during the period from 16.02.2012 till

20.07.2016 is not justified in making application on

21.07.2016 seeking exemption from making open

offer.

e) Entertaining application for grant of exemption from

making open offer after four years from the date on 13

which the open offer obligation got triggered would

defeat the object with which open offer obligations

are imposed under the SAST Regulations, 2011.

f) Fact that SEBI in the past in some cases had granted

post facto exemption from making offer cannot be a

ground to entertain the application seeking exemption

filed after lapse of four years.

g) Fact that the appellant after acquiring the shares has

not exercised controlled over the target company, has

not exercised the voting rights in the target company

and has not received any dividend cannot be ground

either for not making the open offer or seeking

exemption from making open offer after lapse of four

years.

15. For all the aforesaid reasons, we see no merit in Appeal No. 349 of

2017.

16. In the result, both appeals are dismissed with no order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member 26.04.2018 Prepared & Compared By: PK