M/S. Therm Flow Engineers Pvt. Ltd. vs Sebi

Order Reserved on: 29.3.2019 Date of Decision : 1.5.2019

Appeal No.349 of 2018

M/s. Therm Flow Engineers Pvt. Ltd. 5th Floor, Kalpana Complex, Near Memnagar Fire Station, Navrangpura, Ahmedabad-380 009. ..... Appellant

Versus

Securities and Exchange Board of India SEBI Bhawan, Plot C4-A, G Block, Bandra-Kurla Complex, Bandra (E), Mumbai - 400 051. ...... Respondent

Mr. Somasekhar Sundaresan, Advocate with Mr. Abishek Venkataraman, Mr. Joby Mathew, Mr. Nikhil Shah, Advocates i/b. Joby Mathew & Associates for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Mihir Mody and Mr. Sushant Yadav, Advocates i/b. K. Ashar & Co. for the Respondent.

CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Justice M.T. Joshi

1.

The appellant is aggrieved by the order of the Whole Time

Member (referred to hereinafter as 'WTM') in

WTM/GM/EFD/442/ 2018-19 passed under Section 11 and 11B 2

of the Securities and Exchange Board of India Act, 1992

(referred to hereinafter as 'SEBI Act') and Regulation 32 of the

Securities and Exchange Board of India (Substantial Acquisition

of Shares and Takeovers) Regulation, 2011 (referred to

hereinafter as the 'Takeover Regulations') dated July 25, 2018

whereunder the present appellant was directed to make public

announcement to acquire shares of M/s. Patel Airtemp (India)

Limited (hereinafter referred to as "Target Company") within a

period of 45 days from the date of the order and to pay interest

at the rate of ten percent per annum as detailed in the order. The

appellant is promoter of the Target Company consisting of a

consortium of individual promoters.

The Target Company in the disclosure made on 4th

December, 2014 under Regulation 29(2) of the Takeover

Regulations disclosed to SEBI that the appellant's holding in the

Target Company increased from 24.74 percent to 25.04 percent

as on December 3, 2014. This has occasioned due to acquisition

of 15,000 shares (0.30%) from one promoter Prakash Patel

through an inter se transfer between promoters made in the open

market. The total promoter holding, however remained the

same. However, since the shares were purchased for a price

exceeding the exempted limit, in view of Regulation 3(1) read 3

with Regulation 3(3) of the Takeover Regulations the

acquisition has allegedly triggered an open offer.

2. In view of the aforesaid fact, a show cause notice was

issued on 29th July, 2016. The appellant pleaded that since the

total holding of the promoters as collective unit remained the

same, the provisions would not be applicable.

3. It is further claimed that under Regulation 3(1), the

obligation to make a public announcement to acquire shares in

accordance with the Takeover Regulations arises only when

shareholding/voting rights of the acquirer to be clubbed with

that of all persons acting in concert with the acquirer exceeds

25% or more of the voting rights of the target company.

Therefore it wanted that the proceedings be dropped.

4. In the show cause notice, it was mentioned that the

acquisition of 15,000 shares by inter se transfer on 26th

November, 2014 was for Rs.180.15 per share. The volume-

weighted average market price ("VWAMP") for the sixty

trading days preceding the date of issuance of notice for the

proposed inter se transfer i.e. preceding November 26, 2014 was

Rs.141.40/- per share. As the acquisition price was more than

125 percent of the VWAMP it was not exempt under Regulation 4 10(1)(a)(ii) of the Takeover Regulations from the open offer

obligation.

The appellant submitted that the actual price is higher

beyond permissible limit of 125 percent of VWAMP by just

Rs.3.40 per share. By implication the total consideration paid is

higher by only Rs.51,000/- and, therefore, the appellant showed,

his willingness to pay the said amount to the Investor

Protection and Education Fund if so directed by SEBI.

5. The WTM took into consideration the provisions of the

Takeover Regulations as detailed in the order. He came to the

conclusion that in view of the provisions of the Takeover

Regulations as the acquisition in question was inter se transfer

of shares from one promoter entity to another promoter entity it

could not be termed promoter entities having a common

objective or purpose of acquisition but were rather acting in

opposite directions. In the circumstances, it was found that

there would be no exemption and the obligation of making an

open offer of shares of the target company had triggered.

6. The next question remained regarding the action to be

taken. WTM relied on the decision of this Tribunal in Appeal

No.31 of 2011, Nirvana Holdings Pvt. Ltd. vs. Securities and

Exchange Board of India decided on 8th September, 2011. It 5

was observed in this case that in case of violation of the

Takeover Regulations, the normal rule would be to direct the

entity to make public offer, and deviation from this rule can be

made only on recorded findings that it would not be in the

interest of the securities market.

7. In view of this ratio the WTM directed the appellant to

make a public announcement to acquire the shares of the target

company in accordance with the regulations within a period of

45 days.

8. The appellant was directed that alongwith the offer price,

it shall pay interest at the rate of 10 percent from the date when

it incurred liability to make the public announcement till the

payment to the shareholders who were holding the shares in the

target company on the date of violation after adjustment of

dividend paid, if any. Hence the appeal.

9. Heard learned counsel Mr. Somasekhar Sundaresan

assisted by Mr. Abishek Venkataraman, Mr. Joby Mathew, and

Mr. Nikhil Shah for the Appellant and Mr. Gaurav Joshi, Senior

Advocate assisted by Mr. Mihir Mody and Mr. Sushant Yadav,

for the Respondent.

Mr. Somasekhar Sundaresan, learned counsel for the

appellant submitted before us that the appellant now does not 6

dispute that the acquisition of 0.30 percent of the shares had

triggered Regulation 3(1) read with Regulation 3(3) of the

Takeover Regulations though the sale and purchase of shares

was between the promoters through open market. He however

submitted that the considering the nature and extent of the

transaction that the same was between the promoters and only to

the extent of 0.30 percent, the WTM ought to have taken route

of directing to deposit the amount of Rs.51,000/- to the Investor

Protection and Education Fund as established by SEBI as per

the provisions of Rule 32(1)(b) instead of issuing directions to

make public announcement to acquire shares or to pay interest

as detailed above. He submitted while the WTM has placed

reliance on the decision Nirvana (supra), this decision in the

said case is already stayed by the Hon'ble Supreme Court.

10. He points out that subsequent to the impugned order the

WTM in another case i.e. WTM/RKA/CFD-DCR/01/2015 dated

5th January, 2015 did not direct for public announcement to

acquire shares or to pay interest as directed in the present case

but directed to disinvest the shares through sale to different

parties and to transfer of the entire proceeds of such sale of

shares to the Investor Protection and Education Fund. He 7

therefore submitted that the appeal may be allowed on the above

terms.

11. Learned senior counsel for the respondent Mr. Gaurav

Joshi however relying on the decision in SEBI vs. Kishore R.

Ajmera [(2016) 6 SCC 368] and Nirma Industries Ltd and Anr

vs. SEBI [(2013) 8 SCC 20] submitted that the order of the

WTM cannot be faulted with.

12. In our considered opinion the direction of the WTM needs

to be varied for the following reasons.

Reasons

13. Rule 32 of the Securities and Exchange Board of India

(Substantial Acquisition of Shares and Takeovers) Regulations,

2011 provides as under:

"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 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 the Investor Protection and 8

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

14. As regard the decision in Nirvana, relied in the impugned

order, it is to be noted that 1.17 percent of the shares in excess

of prescribed limit of the target company were acquired by the

promoters from other shareholder as against the Regulation

11(1) of the Takeover Regulations. In those circumstances, it

was observed by this Tribunal that when substantive shares are

acquired in violation of the Takeover Regulations normal rule

would be to direct the acquirer to make public announcement.

15. Besides, in the matter of acquisition of shares of Kaycee

Industries Limited in WTM/RKA/CFD-DCR/01/2015 dated

January 5, 2015, finding that there was acquisition of only 0.23

percent between the promoters of the target company the WTM

directed for disinvestment of those shares through sale in small

lot and transfer the entire proceeds of the sale of such shares to

the Investor Protection and Education Fund.

16. In the present case, we have found that the acquisition is

of miniscule proportion above the permitted limit, that too

between the promoters. In the case of Nirma (supra) the

Hon'ble Supreme Court in para 17 observed that in the given set

of circumstances of that case the withdrawal of the open offer to 9

acquire 20 percent of shared of the Company was neither in the

interest of the investor nor in the development of the securities

market. Thus, the case of Nirma was decided in its own

circumstances.

17. In the case of Kishore Ajmera (supra), the Hon'ble

Supreme Court found that the manipulative and fraudulent

market practices are required to be curbed by brining a

comparative legislative to bring about some clarity and certainty

which cannot be disputed.

Considering all the aspects of the case that violation of the

Takeover Regulation is only to the extent of 0.04 percent and

that too due to transfer of shares between the promoters via

open market, in our view the direction of the WTM to make

public announcement to acquire shares would be

disproportionate. In the circumstance, the directions as

provided by Rule 32(1)(b) of the Takeover Regulations as cited

supra would meet the ends of justice. The appellant can be

directed to transfer 0.04 percent shares i.e. 2000 shares through

open market and to direct to deposit an amount of Rs.3,60,300/-

(2000 shares x Rs.180.15 : purchase price) in the Investor

Protection and Education Fund would meet the ends of justice.

Hence the following order:

10

Order

1. The appeal is hereby partly allowed. The order of

the WTM directing the appellant to make public

announcement to acquire shares of the target company and

to pay interest at the rate of 10 percent as detailed in the

order is hereby set aside.

2. Instead it is hereby directed that the appellant shall

transfer 2000 shares in open market within a period of 4

weeks and shall deposit an amount of Rs.3,60,300 in the

Investor Protection and Education Fund established by

SEBI within a period of six weeks from the date of this

order.

3. In default, the amount shall carry interest at the rate

of 12 percent p.a. from the date of this order till the date of

deposit.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member

1.5.2019 Prepared and compared by RHN