Order in the matter of proposed acquisition of equity shares of Blue Coast Hotels and Resorts Limited

WTM/PS/82/CFD-DCR/FEB/2014

SECURITIES AND EXCHANGE BOARD OF INDIA ORDER In the matter of proposed acquisition of equity shares of Blue Coast Hotels and Resorts Limited - Application filed under regulation 4(2) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (since repealed) read with regulation 11(3) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

1. Blue Coast Hotels and Resorts Limited (hereinafter referred to as "the Target Company") is a company incorporated under the Companies Act, 1956. The registered office of the Target Company is situated at 263C, Arossim Beach, Cansaulim, Goa-403712. The shares of the Target Company are listed on the Bombay Stock Exchange Limited (“BSE”) and the National Stock Exchange of India Limited ("NSE").

2. Securities and Exchange Board of India (hereinafter referred to as "SEBI") received an application dated October 10, 2009 from Square Investments & Financial Services Private Limited (hereinafter referred to as "the acquirer" or "the applicant"), represented by its director Mr. Sushil Suri, and the Persons Acting in Concert ("PACs"), namely, (i) Brook Investment & Financial Services Private Limited, (ii) Epitome Holdings Private Limited, (iii) Liquid Holdings Private Limited, (iv) Mid-Med Financial Services Private Limited, (v) React Investment & Financial Services Private Limited, (vi) Scope Credit & Financial Services Private Limited, (vii) Solace Investment & Financial Services Private Limited, (viii) Solitary Investment & Financial Services Private Limited, (ix) Seed Securities & Services Private Limited, (x) Mrs. Sunita Suri, (xi) Mrs. Mamta Suri and (xii) Sanjay Suri HUF, seeking exemption from complying with the provisions of regulations 11(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as "the Takeover Regulations") for the proposed acquisition of 1,00,00,000 equity shares of ₹10/-each of the Target Company by conversion of 40,00,000 fully paid-up 1% Cumulative Redeemable Preference Shares ("CRPS") of ₹100/- each (30,00,000 CRPS allotted on October 28, 2004 and 10,00,000 CRPS allotted on March 29, 2005).

3. In terms of the application, the acquirer and its PACs are members of the promoter group of the Target Company. On conversion of the CRPS, the shareholding of the promoter/promoter group in the Target Company would increase from 44.48% to 73.91%, in excess of 5% acquisition in a financial year, thereby attracting the obligations under regulation 11(1) of the Takeover Regulations. Therefore, the application was filed under regulation 4(2) of the Takeover Regulations, seeking exemption from complying with the said obligation on the following grounds :

(a) The Target Company was incorporated in the year 1992 under the Companies Act, 1956 and having its registered office in Goa. The Target Company is primarily engaged in running a hotel in the name and style of "Park Hyatt Goa Resort and Spa". (b) In the course of the implementation of the ‘Park Hyatt Goa’ Project, the Target Company met with cost overrun due to the product upgradation (from ‘Hyatt Regency’ to ‘Park Hyatt’) and consequent time overrun as some facilities were to be added or upgraded. This led to the requirement of additional term loans and interest funding from the lenders of the project. (c) To fund the Project and the upgradation process and also to meet the Debt-Equity Ratio, as stipulated by lender Banks, the Promoters of the Company, brought in funds into the Target Company, in the form of Advanced Subscription. The said advanced subscription of ₹ 40 Crore was brought in by the Promoters as their contribution to the means of finance to fund the cost of project i.e. Park Hyatt Goa. (d) The delay in the commissioning of the Project led to delay in meeting the financial obligations due to the lender banks and consequent delay in the repayment of loan obligation. In view of the same, the Target Company had to approach the lender Banks for rescheduling the re-payment of the loan facilities availed by the Company and eventually the matter was referred to the Corporate Debt Restructuring ("CDR") Cell constituted under the mechanism set-up under the aegis of the Reserve Bank of India ("RBI").

(e) The CDR scheme was sanctioned by the CDR Cell vide their letter No. 946 dated October 4, 2004 and the State Bank of India (SBI) was appointed as the Monitoring Institution to oversee the due implementation of the Scheme. (f) As per the approved CDR Scheme, the Target Company was mandated inter alia for the following: (i) The Promoters shall pledge 51% of their shareholding with voting rights to the lenders. (ii) The Promoters shall arrange to convert the Advance Subscription of ₹ 40 crore. (g) However, the said conversion of Advance Subscription Money into Equity Shares could not be done in view of the subsisting order of the Hon’ble High Court of Delhi, passed in an Execution Petition filed by a lender against a Group Company of the Target Company, which restrained the Target Company from increasing or changing its paid-up equity capital from the level of 65,52,800 equity shares, in any manner. Therefore in view of the said Court Order, as a temporary measure, the advanced subscription of ₹ 40 Crore was converted into 40,00,000 1% Cumulative Redeemable Preference Shares (CRPS) of ₹ 100/- each (30,00,000 CRPS allotted on October 28, 2004 and 10,00,000 CRPS allotted on March 29, 2005).

(h) As the said advanced subscription of ₹ 40 Crore was converted into CRPS as a temporary measure, the Banks kept on reminding the Company for converting the said CRPS into Equity shares and after conversion, for pledging the 51% of the resultant equity shares with them, which the Company could not comply with as the said restraint on the Company was consistently in force in one form or the other. (i) The said restraint was finally vacated in totality in October 2008 and the Target Company decided to go ahead with implementation of the CDR Scheme, approved vide CDR letter no. 946 dated October 4, 2004, after due compliance of all the legal and statutory provisions and accordingly intended to go for the approval of the Shareholders, for conversion of such CRPS into Equity Shares, in the first general meeting of the Shareholders after such vacation of restraint. (j) While the Target Company was preparing for the due implementation of the CDR Scheme of October 2004, the Target Company’s revenues suffered setbacks due to the global recessionary trend and the Mumbai Terrorist Attack. This badly jolted the Company’s position to repay the instalments and the interest payments under the CDR Scheme.

The Target Company, thus, once again had to approach the CDR Cell for re-phasing of the payment schedule of the loan instalments and the interest payments. The CDR-EG Cell, while approving the Company’s request, vide its letter no. BY.CDR/(SB)/No.349/2009-10 dated June 30, 2009, made following modifications in the payment schedule of the previous restructuring scheme as approved vide letter no. 946 dated 4th October 2004: (i) Deferment of the term loan instalments due for quarter ending March 2009 to December 2009, along with extension in repayment period. Term Loan to be fully repaid in March 2014 instead of June 2012. (ii) Rate of interest was increased from 9% pa to 10.75% pa. (k) While approving the above said Modifications, the CDR Cell directed the Target Company inter alia that the terms and conditions of the previous restructuring scheme, as approved vide letter no. 946 dated October 04, 2004, to remain unchanged and immediate steps shall be taken for conversion of ₹40 Crore CRPS into Equity Shares apart from the following terms and conditions. The directions are reiterated below: (i) The terms and conditions of the previous restructuring scheme will remain unchanged.

(ii) To take immediate steps for conversion of ₹40 Crore Preference Shares into Equity Shares by 31st December 2009. (l) Accordingly, at the Target Company’s Board Meeting held on 28th August 2009, it was decided that subject to the shareholders’ approval, the Company shall convert the said ₹ 40 Crore CRPS into Equity Shares. The Target Company has accordingly, at its Annual General Meeting held on 30th September 2009 obtained the approval of its shareholders for fully implementing the CDR Scheme by conversion of the said CRPS into equity shares. (m) As already stated the said amount of Advance Subscription of ₹ 40 Crore was brought in by the Promoters as part of their contribution to the Project Cost which was intended to be only equity capital without any preferential rights. This is why the Banks while sanctioning the CDR Scheme placed a condition that the said advance subscription shall be converted into Equity and after conversion, the Target Company shall pledge 51% of resultant equity shares with the lending banks. It may be noted that the said conversion of CRPS into Equity Shares does not lead to change in the ownership and control of the Target Company as the acquirer and PACs forms a part of the promoter group and are already in control over the Target Company.

(n) The Target Company has complied with the Regulations for Preferential Allotment including pricing as prescribed under Chapter VII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 ("ICDR Regulations"). Accordingly, the proposed new equity shares shall be locked in as per the Preferential Issue Regulations.

(o) After the proposed acquisition of Equity Shares, the minimum public shareholding as prescribed under clause 40A of the Listing Agreement will be maintained. (p) In case the said conversion is not allowed it would amount to the default on the part of the Company and may lead to the recall of the financial assistance given by the Banks/ Lenders to the Company pursuant to the said CDR Scheme grossly jeopardizing the functioning of the Company. (q) As the promoter group of the Target Company holds 39,43,040 equity shares representing 44.48% of the equity share capital of the target company, they can acquire the above mentioned 1,00,00,000 equity shares constituting 53.01% of the fully expanded capital of the Target Company (after the conversion of CRPS) by making a public announcement in terms of Takeover Regulations. Therefore, the acquirer and its PACs have filed the application seeking an exemption from the applicability of regulation 11(1) of the Takeover Regulations and other provisions relating thereto.

4. Pursuant to queries from SEBI, the applicant vide letters dated November 24, 2009, December 21, 2009, January 18, 2010 and February 09, 2010 inter alia stated that : (i) As per the CDR Scheme dated October 04, 2004, the promoters were required to convert the advance subscription of ₹40 crores into equity by September 30, 2004. The said date of September 30, 2004 was the outcome of the Flash Report based upon which the CDR Scheme was sanctioned. (ii) CDR Scheme was approved by the CDR Empowered Group (CDR EG) on September 13, 2004 and conveyed to the Company vide letter dated October 04, 2004. (iii) The Target Company had a considered view supported by a legal opinion that as per regulation 3(1)(j) of the Takeover Regulations, if shares are allotted pursuant to a scheme of arrangement or reconstruction including amalgamation or merger or de-merger under law or regulation, Indian or Foreign, would be exempt from the provisions of regulation 10, 11 and 12. As an abundant caution and despite having a view that the case falls under the CDR Scheme, applied to SEBI seeking exemption from the Takeover Regulations. (iv) However, the applicant had confirmed that its application is made under regulation 3(1)(l) of the Takeover Regulations. (v) The equity shares are yet to be allotted on conversion of the CRPS. Details of the allotment of CRPS and compliance status with the Takeover Regulations were provided. (vi) One of the associate companies of the Target Company, namely Morepen Laboratories Limited had availed an Inter Corporate Deposit of ₹ 5 Crore from Morgan Securities &

Credits Private Limited and that the said entity who advanced such ICDs filed an execution petition in the Hon’ble High Court of Delhi against Morepen Laboratories Limited. The Hon’ble High Court of Delhi, vide order dated April 05, 2004, restrained the Target Company from increasing or changing its paid-up equity capital.

5. The application preferred by the applicant and its PACs was referred to the Takeover Panel (hereinafter referred to as the "Panel"), in terms of the regulation 4(4) read with 4(5) of the Takeover Regulations, for making recommendation on the application. The Panel, while considering the aforesaid proposal in its meeting held on March 15, 2010, observed in its Report dated March 27, 2010, that the applicants have not provided certain essential information and hence, advised SEBI to procure the said information and thereafter place the case before the Panel.

6. Thereafter, SEBI, vide e-mail dated March 15, 2010 and letter dated March 17, 2010, advised the applicant to confirm and furnish the following : (a) Details of issue of preference shares to promoters/acquirers/others in the past. (b) Details of voting rights accrued, if any, to the preference shareholders on account of non-payment of dividend in terms of Section 87 of the Companies Act, 1956. In the event of accrual of voting rights as mentioned above, the applicant was asked to furnish the shareholding pattern of the Target Company prior and after the acquisition of voting rights along with the details of compliance with relevant provisions of Takeover Regulations. (c) To calculate and confirm the price as per regulation 20(4)/(5) of the Takeover Regulations. (d) To confirm and furnish the details of all the actions/proceedings against the promoters/acquirers and PACs along with the status thereof. (e) To explain as to why they have not disclosed aforesaid details in the instant application.

7. The applicant, in its response dated March 16, 2010 and March 25, 2010, submitted the following : (a) The Target Company has issued 41,50,000 10% CRPS of ₹100/- each to the promoters on October 30, 2002 in addition to the issuances on October 28, 2004 and March 29, 2005.

(b) The Target Company, due to non-availability of the surplus funds and the restrictive covenants contained in the CDR Scheme, did not declare the dividend on the said preference shares. (c) Consequent to the above and pursuant to the provisions of Section 87(2)(b)(i) of the Companies Act, 1956, the holders of 41,50,000 10% CRPS of ₹100/- each became entitled to vote at all the General Meetings of the Target Company after the date of the Annual General Meeting held relevant to the financial year ending on September 30, 2004. (d) The holders of 40,00,000 1% CRPS became entitled to vote at all the General Meetings of the Target Company after the date of the Annual General Meeting held relevant to the financial year ending on March 31, 2007. (e) The fact of entitlement of voting rights is highlighted in the relevant Annual Reports. (f) The shareholding pattern of the Target Company with and without considering the voting rights on preference shares as on March 31, 2008 and March 31, 2009. (g) The calculation of offer price in terms of explanation (i) to regulation 20(5) of the Takeover Regulations. (h) On March 10, 2010, SEBI has passed an adjudication order imposing monetary penalty of ₹3 lacs on certain promoter entities consequent to the increase in their shareholding on the transfer of shares by the banks on the repayment of loan amount due to the banks. As the adjudication proceedings were initiated on November 10, 2009, i.e. after the submission of exemption application, no details of the adjudication proceedings were available with the applicant as on the date of the said exemption application.

8. SEBI, vide letter dated April 07, 2010, sought further information/details from the applicant as below : (a) the details regarding actions (including show cause notices issued) pending against each acquirer and PACs separately and the status thereof (monetary penalty, if any, imposed by Adjudicating officer and whether the same was paid or not etc.,) along with brief on each action. (b) the complete details regarding the transactions made by the acquirer(s), if any, in the shares of the Target Company (date of transactions (purchase or sale), price for the transaction etc.,) from the date of instant exemption application i.e., October 10, 2009 onwards.

9. The applicant, in its response dated April 16, 2010, submitted that adjudication orders were passed against React Investment & Financial Services Private Limited, Scope Credit & Financial Services Private Limited, Seed Securities & Services Private Limited, Epitome Holdings Private Limited and Liquid Holdings Private Limited by SEBI on March 10, 2010. A penalty of ₹2,00,000/- under Section 15H(ii) and ₹1,00,000/- under Section 15A(b) of the SEBI Act, 1992 was imposed on each of the entities. The penalty was to be paid by April 25, 2010 and the same was not paid by the entities. Further, from the date of the exemption application, there have been no transactions in the shares of the Target Company by any of the acquirer and its PACs. Further, vide e-mail dated May 05, 2010 and a letter of even date, the applicant informed SEBI that the aforesaid entities have filed an appeal against the adjudication orders before the Hon’ble SAT on April 28, 2010.

10. SEBI, vide letter dated May 19, 2010 also advised the acquirer to provide the details of date wise capital build-up, as and when it happened, of the promoters/acquirers collectively as well as separately in the Target Company from the date of listing onwards as per the enclosed formats. The applicant was also advised to provide the details regarding pledge/invoke of shares or preferential issue of shares to other corporate bodies/Banks/financial institutions, if any, separately. The applicant, in its response dated June 07, 2010, submitted the Date-wise Capital build-up of the promoters collectively and individually, details of invocation/release of pledged shares and details of preferential allotment of equity shares.

11. As the acquirer had submitted that appeals were filed and pending before the Hon’ble SAT, SEBI advised the applicant to submit the final outcome of the appeal(s) and other pending adjudication/enquiry matters, if any. Pursuant to the same, vide letter dated June 06, 2011, the acquirer informed SEBI that the Hon’ble SAT, vide its order dated March 11, 2011, upheld the adjudication orders and dismissed the appeals. The penalty, as imposed by SEBI, was paid in May 2011.

12. As considerable time had elapsed since the filing of the original exemption application (which was filed on October 10, 2009) and the latest communication updating the final outcome of the adjudication proceedings on June 06, 2011, financials and other vital details required to make a decision in the said matter appeared to be obsolete. Therefore, SEBI vide letter dated July 07, 2011 advised the applicant to file a fresh application seeking exemption.

13. The applicant and PACs filed their revised application vide letter dated August 26, 2011, with updated facts/financials and requisite enclosures. The applicant inter alia submitted further information/documents vide letter dated September 20, 2011, as follows : (a) Copy of the annual report of the Target Company for the year ended March 31, 2011. (b) Details of Board of Directors of the Target Company. (c) Certified true copy of the provisional balance sheet for the year ended March 31, 2011.

14. SEBI, vide letter dated October 04, 2011, had advised the applicant to provide details of all the allotments of preference shares to the acquirers/promoters as per the given formats, clearly specifying the status of compliance with the applicable provisions of the Takeover Regulations under the SEBI Act, 1992 and other statutory requirements, as applicable. The applicant vide letter dated November 03, 2011, submitted the details of allotments of preference shares. It was further submitted that the advance subscription brought in by the promoters to fund the ‘Park Hyatt Goa’ Project was towards the equity contribution and the same was also reflected in the CDR Scheme dated October 04, 2004 which provided for the conversion of Advance subscription into equity shares and pledge of 51% promoters’ stake with the lending banks. However, due to the constraint imposed by the Hon’ble High Court of Delhi on the Target Company, the Advance Subscription money could not be converted into equity shares and as an interim measure, the same was converted into CRPS. The exemption application has been filed for the proposed conversion of the same preference shares into equity shares, after obtaining due approvals of the preference shareholders as well as equity shareholders of the Target Company. Copies of the resolutions approved by the preference shareholders at their meeting held on September 29, 2009 and equity shareholders at the AGM held on September 30, 2009 were also submitted.

15. Thereafter, SEBI, vide letter dated January 16, 2012, advised the applicant to provide compliance status of the provisions of regulation 71 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ("the ICDR Regulations"), which was submitted to SEBI on February 04, 2012.

16. On receipt of the above said information from the applicant, the application was referred to the Panel for its consideration. The Panel, while considering the aforesaid application in their meeting held on March 19, 2012, observed that the exemption application referred to the repealed SEBI (SAST) Regulations, 1997 and returned the same to SEBI with the instruction that the applicant may be advised to make the application under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("the Takeover Regulations, 2011"). SEBI was also advised to examine if the applicant is entitled to an automatic exemption under regulation 10(2) of the Takeover Regulations, 2011, as the proposed conversion of preference shares into equity shares is stated to be pursuant to a CDR Scheme.

17. Thereafter, vide letter dated July 19, 2012, the applicant submitted a chronology of events from the date of approval of the CDR Scheme till date (of this letter) and inter alia made the following submissions : (a) The promoters of the Target Company made several endeavours to expand the business of the Target Company and arrange additional funds in the form of equity and debt. In those efforts, they got success in roping in two strategic investors - Ferry Holdings Limited and Jetty Capital Limited, who had agreed to acquire around 13% equity stake respectively and infused ₹42.77 Crores into the Target Company in October 2008. (b) Further, during January 2010, the Delhi International Airport Private Limited (DIAL) invited bids for developing a hotel for which the Target Company had also submitted its bid. In this course, the Target Company approached IFCI for a loan. Subsequently, in March 2010, IFCI agreed to step into the shoes of the consortium of lenders and took over the entire outstanding loans of the banks with the existing securities and other terms including the stipulation of converting the preference shares of ₹ 40 Crores into equity shares and pledge them with IFCI. In this manner, IFCI infused a total of ₹ 150 crores into the Target Company, including the swapping of existing loans of ₹ 70 crores from the Consortium of lenders. (c) The Debt-Equity ratio of the Target Company has reached an incredibly high level of 3.62 and in case the CRPS get converted into equity shares, the ratio will come down to 2.37. (d) There are sufficient grounds for considering the exemption application as stated below : (i) The applicant had fulfilled their part of obligation under the CDR by infusing ₹40 crores into the Target Company. In fact, they had infused a total of ₹ 81.50 crores in the form of advance subscription money. But the money is still lying with the Target Company in the form of CRPS, which is neither improving the Debt-Equity Ratio nor fulfilling the obligation pursuant to CDR Scheme and the new loan agreement. (ii) The funds infused as advance subscription money by the applicants had enabled the Target Company to get the CDR package approved from lenders which helped it in improving cash flows, thus reviving the business. These fund infusions by the applicant proves the dedication and long-term commitment of the applicant towards the Target

Company and all its stakeholders. It has also allowed creation of confidence in the foreign investors and additional lending by IFCI, which in turn, has helped in expansion of business, improved financials and aided the Target Company and all its stakeholders. (iii) The applicant had invested into the Target Company with the legitimate expectation that they would get additional equity in the Target Company. However, keeping in view, the ongoing litigations and restraint orders, they acceded to take CRPS for intermittent (sic) period that too with a very nominal coupon rate of 1%. Later, during 2008 as the restraint orders were revoked, the Target Company assured the applicant that their preference shares would be converted into equity shares and necessary approval of shareholders was obtained. The applicant made sacrifice by accepting the price of ₹40/-per share instead of ₹18.92/- as calculated in terms of the pricing formula under the ICDR Regulations. Even after the shareholders approval and the elapse of around three years, the applicant was neither getting the equity shares nor any interest/dividend on the amount so invested for last 8 years and the money is blocked for over eight years.

(iv) The conversion of CRPS into equity shares shall substantially improve the Debt-Equity ratio of the Target Company (from 3.62 to 2.37). This will help the Target Company to raise additional funds for expansion and growth. (v) Unless the preference shares are converted into equity capital and the obligation towards lender is fulfilled, it will not be in a position to raise further funds. (vi) In terms of the ICDR Regulations, the shares to be allotted to the promoters shall remain under lock-in for the period as prescribed under regulation 78 of the said regulations. Besides this, in terms of the CDR Scheme and terms of lending by IFCI, the equity shares to be allotted on conversion of the preference shares shall be pledged with the lender till the whole of the loan of the Target Company is paid-off. Thus, the conversion of preference shares into equity could not have any adverse impact on the market and the float will remain the same. (vii) There will be no change in control or management of the Target Company due to the said conversion. (viii) After the proposed allotment, of equity on conversion, the Target Company will continue to be a Clause 40A compliant company i.e. the Public shareholding would continue to be higher than the minimum prescribed 25%.

(e) In case the preference shares are not converted into equity shares:- (i) The Target Company and promoters’ commitment towards the lender would get violated and all routes of further financing would get closed. The lender may also invoke the securities which will jeopardize the business. (ii) The foreign investors, who invested into the company at the strength of the promoters and commitment of conversion, might create legal hassles for the Target Company. (iii) The applicant would have to use the put option as per their entitlement next year and the Target Company would be bound to redeem the preference shares which could be suicidal for the Target Company. (iv) The financial position of the Target Company does not permit any cash outflows on account of any redemption of preference shares. Furthermore, the lender/banker would not accede to any proposal for redemption of preference shares. Any such step would trigger a spate of litigations between the Target Company, the applicant, the lenders/bankers, and may nullify all the recovery efforts done till now.

The applicant requested SEBI to consider its application and pass necessary order granting exemption from the applicability of the erstwhile regulation 11(1) of the Takeover Regulations read with regulation 3(2) and 3(3) of the Takeover Regulations, 2011.

18. Subsequently, the applicant vide letter dated August 20, 2012, submitted the following documents : (a) Certified true copy of the Annual Results of the Target Company for the year ended March 31, 2012. (b) Target Company’s latest available Annual Report for the year ended March 31, 2011. (c) Certified true copy of the minutes of the last AGM held on September 30, 2011. (d) Certified true copy of the minutes of the AGM held on September 30, 2009 approving the proposed conversion of preference shares into equity shares.

19. The application was referred to the Panel for its consideration. The Panel, while considering the submissions of the applicant, observed the following in the Report dated August 31, 2012 : “Panel deliberated at length on the matter and observed that in February, 2010 the Company has come out of CDR and as such the said condition for conversion of 40,00,000 CRPS held by promoters into equity shares of the Target Company cannot be viewed as a condition of CDR at this stage. Further, IFCI has also not stipulated this condition though it has vide its letter dated August 2, 2011 granted its approval to the Company’s request for conversion of the said CRPS into equity subject to the pledging of resultant equity shares in favour of IFCI. However, considering the fact that the said condition was originally a part of CDR package and two strategic Foreign Investors have also acquired 13% equity stake respectively by infusing Rs.44.77 Crores into the Target Company on expectation of probable conversion of CRPS into equity, the Panel were inclined to take a liberal view in the matter.

The proposal for conversion of CRPS into equity shares was approved by the Company’s shareholders way back on 30th September, 2009 in the light of CDR scheme which is no more valid after February 2010. Panel members were of the opinion that in view CDR scheme having expired it would be necessary for the Company to seek fresh approval of the shareholders to the proposal for conversion of the said CRPS in equity shares in compliance with the provisions of ICDR including the pricing formula for such shares. Further, such conversion shall be permissible only for increasing the promoters’ voting power upto 75% of the total paid up equity capital of the Company.

In the aforesaid circumstances, it is recommended that SEBI may consider giving liberty to the Acquirers for approaching SEBI for exemption afresh if – (a) fresh approval of the shareholders to the proposal for conversion of CRPS into equity shares as per the pricing formula under ICDR is procured; (b) the condition for conversion of CRPS into equity is stipulated by IFCI; (c) conversion does not result into acquisition of voting power by the promoters beyond 75% of the company’s total paid up equity capital; and (d) Conversion is effected in compliance with the provisions of the Companies Act, 1956 and SEBI regulations.”

20. Pursuant to the recommendation of the Panel, the applicant was granted an opportunity of personal hearing on November 09, 2012, which was re-scheduled on the applicant’s request, and fixed on December 19, 2012. On the said date, the applicant was represented by Mr. U.K. Chaudhary, Senior Advocate, Mr. Pavan Kumar Vijay from Corporate Professionals Capital Private Limited, Mr. Suresh Gupta, AVP of the Target Company, Mr. Prakash Prusty, Company Secretary of the Target Company and others. Mr. U.K. Chaudhary, Senior Advocate made oral submissions and inter alia submitted that the Target Company availed additional loans in order to implement the Park Hyatt Goa Project and the delay in the implementation of the project caused delays in loan repayment. He submitted that the Target Company had to approach the lender Banks for rescheduling the re-payment of the loan facilities availed by the Company and eventually the matter was referred to CDR. One of the conditions of the CDR Scheme was the conversion of ₹40 crore loan into equity. The senior advocate further submitted that the conversion could not happen as there were restraint orders on the Target Company from increasing its equity capital.

After the restraint orders were vacated, shareholders approval was obtained for the conversion and application was submitted with SEBI for seeking exemption from the open offer obligations with respect to the proposed increase in the promoters' shareholding. In the meantime, the Target Company roped in two foreign investors who infused ₹42.77 crores during October 2008. During the period January-March 2010, the Target Company, on finding a viable business opportunity in the development of the hotel submitted bids invited by the Delhi International Airport Limited. The Target Company was not able to avail funds from the consortium of bankers as it had failed to comply with its commitment under the CDR. It then approached IFCI, who stepped in and took over the entire outstanding loans of the banks and retained the CDR stipulation of converting the preference shares of ₹40 crores into equity and to pledge them with IFCI. The IFCI had infused a total of ₹150 crore including swapping of loans with the bankers. The learned senior advocate stressed the fact that in the loan approval by IFCI, the conversion of preference shares into equity was one of the conditions as laid down earlier by the CDR-EG.

21. In the personal hearing, the applicant was granted liberty to file written submissions, which was submitted vide letter dated December 26, 2012, wherein the following submission were inter alia made :

(a) The Target Company has complied with all the regulatory provisions at the time of applying for exemption and even as of now. (b) At the time of applying for the exemption, the CDR Scheme existed, the terms of which were later on, retained by IFCI as well in its loan sanctions to the Target Company for not just the amounts extended by the Consortium Bankers, but for double the sums, only because they had the faith and trust in the Target Company, its management and the projects. (c) Though, during this intervening period, the Target Company came out of CDR, the CDR conditions are subsisting in IFCI’s loan sanction/agreement. (d) IFCI’s condition for conversion of CRPS into equity is the pre-condition for loan sanction. (IFCI loan sanction letter dated February 17, 2010 and loan agreement dated February 26, 2010) (e) Fresh approval of shareholders is not required. On the contrary, it would lead to inflicting unnecessary hardship on the promoters, who have always stood by the Target Company and put in funds from time to time, to avoid it from going sick and taking care of its various stakeholders. (f) Even after the proposed allotment, the promoter’s shareholding shall be less than 75%.

(g) It is reconfirmed that the proposed allotment shall be in compliance of all the provisions of the Companies Act and SEBI Regulations. (h) A positive consideration would lead to the following benefits to one and all:- (i) Preference shareholders will get the equity shares at the price applied in the exemption application. (ii) This would not lead to any financial burden on the Target Company. (iii) The conversion would instil and re-affirm the confidence of the lenders and foreign shareholders in the Target Company. (iv) Further raising of funds in the Target Company will be smoother and easier, thus leading to smooth continuation of the concurrent projects of the Target Company. (v) All the stakeholders will have the confidence on the integrity of the management. (i) The applicant also submitted that a negative consideration of the application may lead to following severe repercussions : (i) Preference shareholders may seek redemption of their preference shares of ₹40 crores as they may not be interested for conversion at new pricing formula. (ii) The Target Company will not be able to convert the shares at the new pricing formula. (iii) The lender may withdraw the financial support and may take legal recourse for loan recall. As a cascading effect, concurrent projects may be stalled. Any such action would be highly detrimental to the overall interest of the 57% public shareholders of the Target Company. (iv) The foreign investors, who invested into the Target Company on the assurance of the conversion of the said preference shares into equity, may also initiate legal actions against the Target Company for not fulfilling the assurances for conversion and thereby increase the liabilities of the Target Company. (v) Any adverse impact on the financial position of the Target Company would be a further blow and Target Company might just collapse.

22. In the light of the aforesaid submissions made by the applicant, the case was again forwarded to the Panel for consideration and to make suitable recommendation. The Panel advised SEBI to seek further clarifications/submissions from the applicant, which were sought by SEBI vide its letter dated February 11, 2013 :

(a) Whether the special resolution/shareholder approvals of September 2009 are still valid as per Companies Act, 1956 and the ICDR Regulations? (b) Whether any shareholders’ approval was obtained before the loan agreement with IFCI ? If so, details thereof. (c) Whether shareholders were informed of the loan agreement with IFCI and the conditions therein? If so, details thereof. (d) The present situation of the loan granted by IFCI including whether the debt of ₹70 crore has been repaid, status of balance ₹80 crore, whether the pre-conditions in the loan agreement have been met. (e) The details of capital infusion in the company since March 2010, if any. (f) The price details at which the equity was allotted to the two foreign investors in October 2008.

23. In response, the applicant vide letter dated March 01, 2013, inter alia submitted the following : (a) The shareholders' approval was obtained by the Target Company in September 2009, which was subject to various regulatory approvals and ever since then extensive actions are being undertaken to obtain the requisite approvals. (b) Companies Act, 1956, per se, does not stipulate any time period or validity of any resolutions. Section 81(1)(a) of the Companies Act is the main section that governs the provisions relating to further allotments of shares, on preferential basis. Neither the said section nor any other provisions of the Act limit the validity of any resolution passed under the Act. (c) Proviso to regulation 74 of the ICDR Regulations mandates that if an exemption application has been filed seeking exemption from the applicability of SEBI Takeover Regulations, the specified period for allotment shall be counted from the date of the Order on that application. (d) The requisite shareholders approvals under 293(1)(a) & 293(1)(d) of the Companies Act, 1956, were obtained by the Target Company at its shareholder’s meeting held on September 30, 1998, whereby the shareholders empowered the Board of the Target Company to avail borrowings not exceeding ₹200 crores. Within the shareholders’ sanctioned limit of ₹200 crores, there was no requirement of seeking any specific approval of shareholders each time it avails loan.

(e) The shareholders were duly informed of the loan from IFCI, vide the Directors’ Report dated August 28, 2010 and also by way of Notes to Accounts for the year ended March 31, 2010. (f) The aggregate amount of IFCI loan is ₹150 crores, out of which an amount of ₹70 crores was directly paid off by IFCI to the Consortium of Bankers, in February 2010 itself. The balance ₹80 crores was actually received by the Target Company. In respect of ₹70 crores, ₹49 crores is outstanding for repayment. The loan of ₹80 crores is due to be repaid by September 2013. As regards the pre-conditions of the loan agreement, all the conditions have been complied with except the conversion of preference shares into equity shares. (g) There has been no capital infusion in the Target Company since March 2010. (h) The allotment of shares to the two foreign investors was made at a price of ₹ 185 per share as per SEBI (Disclosure and Investor Protection) Guidelines, 2000 ("the DIP Guidelines").

24. In response to SEBI’s e-mail dated March 22, 2013 seeking further clarification, the applicant, vide its letter dated March 29, 2013 submitted the following : (a) Some of the promoters’ shares were pledged with Morgan Securities & Credits Pvt. Ltd., for funds lend by it to one of the associate companies of the Target Company. However, Morgan group, along with its various entities invoked the pledge in a malafide manner and became a shareholder in the Target Company, thus triggering a spate of litigations. Morgan group wrongfully accused that as per the agreement, the Target Company could not have altered its capital without Morgan’s submissions. Further, Morgan was apprehensive that if Target Company would increase its equity capital, its voting capital therein would reduce and thus, during the litigation proceedings, it filed a Petition dated March 17, 2004 with Hon’ble High Court of Delhi and sought an injunction on the capital structure of the Target Company. The same was mandated by the Hon’ble Court, vide its order dated April 05, 2004. (b) Details of shareholders’ approval for allotment of preference shares in 2004 and 2005 were submitted. (c) Financial statements of the Target Company for the years 2004-05 and 2005-06 were also submitted.

(d) Prior to the allotment of said preference shares, the Debt-Equity ratio was abnormally too high. It was one of the reasons why CDR Cell mandated the conversion of the advance subscription money of ₹ 40 crores into equity. (e) However, in view of the High Court's restraint order, the Target Company could not proceed with the allotment of equity shares, so, after discussions with CDR Cell, it deliberated upon conversion of said advance subscription into other forms either as loan or preference shares. But the CDR Cell did not agree for conversion into loans, as it would have further aggravated the Debt-Equity ratio of the Target Company. Furthermore, they stressed upon long term capital into the Target Company, which cannot be withdrawn. (f) In order to resolve the matter, it was deliberated that the most suited option was to convert the advance subscription into preference shares. (g) Herein again, the allotment of convertible preference shares seemed infeasible as it could have been treated as a breach of Court order and there seemed no surety that the ongoing litigations would be concluded within the stipulated tenure of the convertible preference shares of merely 18 months. (h) As a last resort, the said advance subscription was ultimately converted into CRPS, with a clear understanding between the banks and the Target Company that whenever the Court restraint would be vacated, the class rights of the said preference shares would be altered under Section 106 of the Companies Act, 1956 to make them convertible preference shares and the same shall be converted into equity shares. (i) By virtue of the allotment of preference shares, the Debt Equity ratio came down to manageable levels. If the said allotment of CRPS would not have been done, the entire CDR would have become infructuous and all the waivers and relaxations granted by the bankers would have been withdrawn, thus taking the Target Company to the doorstep of winding up, thus adversely affecting all the stakeholders thereof.

25. The Panel re-examined the exemption application and after detailed deliberations observed and recommended, vide its Report dated April 02, 2013, that exemption be given to the applicant and the PACs and that 'June 30, 2009' be considered as the 'Relevant Date' for the purpose of determining price of equity shares and that the Target Company be advised to take all necessary steps in accordance with the provisions of the Companies Act, 1956 and SEBI Regulations for conversion of preference shares of ₹40 Crores into equity shares of the Target

Company. The detailed observations of the Panel and its reasons for fixing June 30, 2009 as the 'relevant date' are mentioned in a subsequent paragraph where the issue is dealt with.

26. Pursuant to the recommendation of the Panel, the applicant and PACs were granted an opportunity of personal hearing on May 09, 2013, which was communicated to the applicant, vide letter dated April 23, 2013. In the said letter, the applicant was informed that no documentary proof was submitted to corroborate CDR Cell’s approval of the allotment of preference shares on October 28, 2004 and March 29, 2005. The applicant was, thus, advised to provide documentary evidence to confirm when the CDR Cell has approved the conversion of advance subscription money into redeemable preference shares. The applicant made submissions vide letter dated June 08, 2013.

27. The personal hearing was adjourned to June 13, 2013 on the request of the applicant. On the said date, the applicant and its PACs were represented by Mr. Somasekhar Sundaresan, Advocate, Mr. Ravichandra S. Hegde, Advocate, Mr. Pavan Kumar Vijay, Ms. Anjali Aggarwal and Mr. Mahipal Gupta from Corporate Professionals Capital Private Limited and Mr. Pramod Singh, Advocate. Mr. Somasekhar Sundaresan, Advocate made oral submissions on the lines of the submissions made by the applicant and PACs. The applicant was also granted liberty to file written submissions. The applicant submitted its written submissions vide letter dated June 29, 2013, and inter alia made the following submissions with respect to why October 04, 2004 and not June 30, 2009 should be taken as the ‘Relevant Date’ for the conversion of CRPS into equity shares : (a) On October 04, 2004, the CDR Cell specifically approved the proposal of the Target Company for restructuring the debts, setting out the approved restructuring package in Annexure I of that letter. Item (xi) of the terms and conditions set out in the said annexure explicitly recorded the condition of converting the advance subscription of ₹ 40 crore from the promoters into equity by September 20, 2004. (b) The Company could not alter its equity share capital owing to restraints imposed in various legal proceedings.

(c) The CDR-EG was kept informed about those proceedings and the difficulties faced by the Target Company. Therefore, the CDR-EG approved the proposal for conversion of the advance subscription of ₹40 crores into CRPS instead of equity, vide its letter dated June 23, 2006. This is evidenced by the letter dated June 23, 2006 from the CDR Cell to the Target Company. CDR had issued multifarious letters to the Target Company and in all of them, the conversion of preference shares into equity shares has been a contentious agenda. A gist of various mandates was given. (d) The CDR Cell has, from time to time, emphasized on the conversion of preference shares into equity and this was not a new condition under the letter dated June 29, 2009 and June 30, 2009 but only a restatement of the previous condition. Thus, all the correspondence and deliberations are in respect of the Scheme No. 946 as approved on October 04, 2004 and no new scheme. (e) Further, the condition of conversion was reiterated by IFCI as well, in its loan sanction letter and the agreement. Attention was drawn to the word 'shall' used in para 6.2 (iv) at page 18 of the IFCI loan agreement dated February 26, 2010 which reads as follows "The borrower shall convert the preference capital of the promoters amounting to Rs.40 Crore into Equity".

On August 02, 2011, the IFCI once again mandated for conversion of the redeemable preference shares into equity at a price of ₹40 per share and took into account the fact that such conversion would result in 1 crore equity shares which would have to be immediately pledged with it. (f) Further, the floor price taking October 04, 2004 as the Relevant Date works out to ₹18.92/- per share. However, to keep the equity base at reasonable level, the applicant offered to take equity shares at ₹ 40/- per share. Adopting June 30, 2009 as the Relevant Date, apart from being untenable, would result in issuance of shares at an unrealistic floor price of ₹ 103/- per share. (g) The CDR package entailing conversion of the advance subscription of Rs.40 crores into equity shares was approved on October 04, 2004. The modification, as observed by the Panel, was merely to the limited extent of deferment of term loan instalments and there were no further modifications to the scheme. (h) The indebtedness along with all attendant terms and conditions was taken over by IFCI and the requirement to convert the redeemable preference shares into equity was adopted by IFCI as is evident from the correspondence being exchanges with IFCI.

(i) The promoters had invested into the Target Company in the form of advance subscription money in 2003-04 to be subsequently converted into equity shares. However, considering the financial position of the Target Company and owing to the court restraint, acceded to take CRPS for intermittent period with a very nominal coupon rate of 1%. This low coupon rate has benefited the Target Company by saving the cash flow which in turn was invested for the growth of the Target Company resulting in the benefit of its shareholders. (j) SEBI vide order dated September 24, 2012 had granted exemption from making an open offer to the Government with respect to facts similar to the present case. (k) Further, by changing the relevant date, even IFCI’s interest would be gravely jeopardized, since it would get much lesser security (78,26,535 shares representing 61.29% of expanded capital) as against the committed numbers/percentages (1,39,43,040 shares representing 73.91% of expanded capital) that were envisaged by them, at the time of entering into the loan agreement. Therefore, such a misapplication of the relevant date would be detrimental to the interests of IFCI, which has meticulously worked with the Target Company to effect a turnaround.

(l) The lender could then demand even more security, which the Target Company and its promoters would not be able to provide, thereby jeopardizing the prospects of a revival and improved future of the Target Company. (m) Furthermore, any further demands for augmenting the security could result in IFCI accelerating the loan facility, which would in turn negate and destroy all the carefully conceptualized and implemented efforts of the last several years, thereby harming the interests of investors of the Target Company. (n) Due to continued non-compliance of the IFCI stipulation, the Target Company’s terms with the banker have highly deteriorated. The banker is not willing to grant any additional financing facility to the Target Company for any of its future projects, nor is it agreeing to issue an undertaking for BSE or NSE so as not to lock in shares under pledge as needed by the exchanges to comply with the requirements of regulation 78 of the ICDR Regulations. (o) The continued non-compliance is leading to blocking all the future funding options for the Target Company, thereby stalking not just its growth process but even its day to day working capital expenditure, which form quite a substantial amount especially in the Hotel industry.

(p) Relevant Date is a duly defined concept under regulation 71 of the ICDR Regulations and accordingly the same should be adhered to.

In view of the submissions, the applicant requested SEBI to grant exemption considering October 04, 2004 as the relevant date. Thereafter, vide letter dated September 16, 2013, the applicant has informed that IFCI has issued a public notice on September 05, 2013 for sale of assets of the Target Company at Goa and requested that a favourable consideration of the application would pave way in arranging funds from investors and resolving the matter with IFCI.

28. I have considered the application dated October 10, 2009 (which was revised on August 26, 2011) of the applicants and PACs, the Reports of the Panel, and the other submissions and documents filed by the applicant and its PACs.

29. The applicant and the PACs have requested exemption from the open offer obligations stipulated in regulations 3(2) and (3) of the Takeover Regulations, 2011 with respect to their proposed acquisition of 1,00,00,000 equity shares of ₹ 10/- each of the Target Company by conversion of 40,00,000 fully paid-up 1% CRPS of ₹100/- each (30,00,000 CRPS allotted on October 28, 2004 and 10,00,000 CRPS allotted on March 29, 2005).

30. It is the case of the applicants and PACs (who are part of the promoter group in the Target Company), that the promoters infused funds when the Target Company required funding for its project. The funds provided by the promoters, called as the Advance Subscription, was to the tune of ₹40 crores. Subsequently, on being referred to the CDR for restructuring the loans/liabilities, it was inter alia stipulated vide a scheme approved on October 04, 2004 that the Target Company should convert the advance subscription brought in by the promoters into equity shares. However, according to the applicants and PACs, the same could not be done in view of the restraint imposed by the Hon'ble Courts against the Target Company from altering its equity capital. Subsequently, CDR modified the stipulation vide letter dated June 30, 2009, whereby the Target Company was advised to take steps for conversion of the CRPS into equity shares. It is the case of the applicant and PACs that if such conversion takes place, they would be obligated to make a public offer in terms of regulation 3(2) and 3(3) of the Takeover Regulations unless SEBI exempts such obligation and have accordingly filed the application read with the revised application.

31. The Panel has, vide Report dated April 02, 2013, recommended that exemption be granted to the applicant and its PACs with "June 30, 2009" to be taken as the "relevant date" for determining the price of the equity shares to be allotted on conversion of preference shares. In terms of the Panel's Report, 'June 30, 2009' should be taken as the relevant date as this was the date when the CDR Cell stipulated the revised condition which allowed for conversion of preference shares into equity. There were other observations also given by the Panel to treat June 30, 2009 as the Relevant Date and not October 04, 2004 (the date of approval of the scheme by CDR-Cell).

32. In view of the above, the following questions arise for my consideration in this decision :

(a) Whether this is a fit case for grant of exemption to the applicant and PACs from the applicability of regulations 3(2) and 3(3) of the Takeover Regulations, 2011, with respect to their proposed acquisition ?

(b) If so, then what should reasonably be taken as the "Relevant Date" for calculating the price of conversion in the proposed transaction ?

33. It is stated in the application that during the course of implementation of the Park Hyatt Goa Project, the Target Company had met with a cost overrun and the same led to the requirement of additional term loans and interest funding from the lenders of the project. It is also stated that in order to fund the project and its up-gradation process and also to meet the debt-equity ratio, as stipulated by the lender banks, the promoters of the Target Company had brought in funds to the tune of ₹40 crores as Advance Subscription. It can therefore be noticed that the promoters of the Target Company had infused funds in the Target Company only with respect to the Target Company's development and expansion related project, as stated in the application.

34. In this regard, the following observations of the Hon'ble SAT made in the matter of Dr. Arvind B. Shah (HUF) and another vs. SEBI (Appeal no. 107 of 2010; date of order – 19.11.2010) are relevant to be noted :

"6. … …. On the contrary, timely contribution of equity by the promoters through preferential allotment for the new project of the company enhanced their share value.

7. There has been no change of management or control over the target company consequent upon the preferential allotment as notified to the shareholders. This is also not a case where a rank outsider had acquired a large chunk of shares in the company and was seeking exemption from the takeover code. Such an acquisition or change in management or control over the target company brings with it an element of uncertainty and the takeover code provides that in such an eventuality the existing shareholders be provided with an exit route by requiring the acquirer to make a public offer. In the case before us, there was no element of uncertainty and there was no change of management or control and we are satisfied that the shareholders of the target company did not get affected in any manner by the acquisition. …………… Besides this, we cannot forget that the primary object of the acquisition was to provide additional financial assistance to the target company for its new project. …………………" [Emphasis supplied]

35. I also note that the conversion of CRPS into equity shares would not result in change of control in the Target Company as the applicant and the PACs form part of the promoter group which is already in control of the Target Company. As opined by the Hon'ble SAT in the above referred case, the proposed acquisition in this case does not involve any outsider to acquire substantial shares/voting rights in the Target Company and therefore there would be no change in the control (as the promoters will continue to exercise control) in the Target Company pursuant to the proposed acquisition. Further, there would be no uncertainty in the minds of the public shareholders of the Target Company with respect to the 'control ' in the Target Company pursuant to the proposed acquisition and therefore the shareholders could not be affected by such proposal for seeking exemption. Considering the factors such as - (a) the infusion of funds by the promoters in order to fund the project of the Target Company and that such funds, which are now in the nature of preference shares, are sought to be converted into equity shares; (b) there is no change in the management control of the Target Company; (c) shareholders not being affected by the proposed acquisition; (d) the public shareholding would be maintained as per the desired levels stipulated under the Securities Contracts (Regulation) Rules, 1957; and (e) The Panel also recommended exemption, I am of the considered view that in this case, exemption could be afforded to the applicant and its PACs with respect to the increase in their shareholding/voting rights in respect of the conversion of preference shares into equity shares. However, the correctness of the Relevant Date as proposed as October 04, 2004 by the applicants and PACs has been questioned by the Panel, for the reasons set forth in their Report. The Panel has rejected the said date and instead has suggested that June 30, 2009 (which is the date when the CDR-Cell has approved a revised proposal for the Target Company wherein it was inter alia stipulated to take steps for conversion of 40 crore preference shares into equity shares was made) be taken as the Relevant Date. Therefore, before proceeding further, the following observations and views of the Panel as mentioned in their Report dated April 02, 2013 needs to be noted :

(a) Copies of the sanction letter dated February 17, 2010 of IFCI and the loan agreement dated February 26, 2012 were provided to SEBI / Takeover Panel for the first time by the acquirers vide their letter dated December 26, 2012. Further, copy of the order dated April 05, 2004 passed by the Hon'ble Delhi High Court in Execution Petition No. 13 of 2004 was also provided to the Panel for the first time at the meeting held on March 22, 2013, when the present application was re-examined. (b) The acquirers have been wrongly stating that 'IFCI's condition for conversion of redeemable preference shares into equity is the pre-condition for loan sanction'. The said condition is only a part of the General Conditions and it is neither 'Condition Precedent' nor 'Condition Subsequent' to Disbursement. According to the Panel, the condition is not such a material condition as is being made out by the acquirers. Further, IFCI has not stated as to at what price equity shares should be issued to the acquirers, whereas pricing is the most vital issue in this matter. (c) The Hon'ble Delhi High Court's Order dated April 05, 2004 was passed prior to the approval of CDR package on October 04, 2004 and therefore the Target Company and the acquirers were fully aware about the said order before the consideration of restructuring by the CDR.

The Target Company/acquirers appear to have procured CDR package without any intention to comply with the same in near future. (d) The Target Company/acquirers were aware that the Target Company had given an understanding (being one of the judgment debtors) to the Hon'ble Court that it will not increase or change its paid up equity capital in any manner whatsoever till the decree in favour of the Decree Holder is satisfied. If the Target Company/acquirers had disclosed to the CDR Cell that the Target Company has given an undertaking to the Court for not increasing its paid up equity capital, the CDR Cell in all probability would not have stipulated any such condition in the CDR package. The Target Company/acquirers appear to have misled the CDR Cell by active concealment of the fact of the aforementioned undertaking given to the Court. (e) The condition for conversion of advance subscription money of Rs.40 crores into equity of the Target Company was never complied with by the Target Company/acquirers and the said amount was converted into redeemable preference shares without any approval of CDR Cell.

After about 5 years in June 2009, CDR Cell appears to have reviewed the implementation of the package when it advised the Target Company vide letter dated June 30, 2009 for taking immediate steps for conversion of Rs.40 crore preference shares into equity shares by December 31, 2009. In the light of the said letter of CDR Cell, the Target Company convened AGM on September 30, 2009, wherein the shareholders of the Company approved the special resolution for conversion of preference shares into 1 crore equity shares of face value of Rs.10/- each and allotment thereof on preferential allotment basis to the acquirers at a conversion price of not less than Rs.40/- per share as determined in accordance with the ICDR Regulations. For the purpose of determination of price, CDR package approval date i.e. October 04, 2004 was considered as relevant date.

(f) Regarding the appropriateness of October 04, 2004 as the 'Relevant Date', the Panel made the following observations : (i) CDR package was procured by the Target Company/acquirers by active concealment of the undertaking given by the Target Company to Delhi High Court that it would not increase or change its paid up equity capital in any manner till the decree in favour of the Decree Holder is satisfied. (ii) Advance subscription money of Rs.40 crore was converted by the Target Company into redeemable preference shares without the consent/approval of CDR Cell and such preference shares were not convertible into equity as per the terms of the issue. Consequent upon such conversion, the condition stipulated by CDR vide its letter dated October 04, 2004 became irrelevant. In the circumstances, the conversion of preference shares into equity cannot be viewed in compliance with CDR's letter dated October 04, 2004 as the same was in compliance with CDR Cell's revised condition communicated vide its letter dated June 30, 2009. Resultantly, the Relevant Date for the purpose of pricing could be CDR Cell's subsequent letter dated June 30, 2009 stipulating the revised condition for conversion of advance subscription money into equity and not letter dated October 4, 2004 stipulating conversion of advance subscription money into equity capital. (iii) The Target Company came out of CDR way back in February 2010 when the consortium banks were repaid their dues of the loan sanctioned by IFCI. In fact, when the exemption application was considered by the Panel at the earlier occasion, the Target Company was already out of CDR. However, considering the fact that as on 30th September, 2009 the Target Company was not out of CDR and had been advised by CDR vide its letter dated 30th June 2009 about the revised condition of restructuring in terms of which the Company was required to convert preference shares of ₹40 crore into equity capital, the Panel was of the considered view that 30th June 2009 (CDR's letter approving the said condition) could be taken as the Relevant date for the purpose of determining the price of equity shares to be allotted to the acquirers on conversion of preference shares.

(g) In view of such observations, the Panel recommended that June 30, 2009 be considered as Relevant Date for the purpose of determining price of equity shares and the Target Company be advised to take all necessary steps in accordance with the provisions of the Companies Act, 1956 and SEBI Regulations for conversion of preference shares of Rs.40 crore into equity shares of the Target Company.

36. I have considered the observations made by the Panel and the submissions made by the applicant and PACs in this regard. The applicants and PACs have submitted that the promoters of the Target Company had infused funds into the Target Company to the tune of ₹40 crores as advance subscription. This loan extended by the promoters were converted into preference shares and not equity, as there was a bar in altering the equity capital of the Target Company during the relevant period. It is the case of the applicants and PACs that the price, if October 04, 2004 (date when the CDR approved the Target Company's proposal for restructuring its debts) is taken as the Relevant Date, comes to ₹18.92/- and that in order to keep the equity base at a reasonable level, the promoters/applicants have offered to take equity shares at ₹40/-per equity share on conversion.

37. The Panel has mentioned that the Hon'ble Delhi High Court's Order dated April 05, 2004 was much prior to the approval of the CDR package on October 04, 2004 and that if the Target Company/acquirers had disclosed to the CDR Cell that the Target Company has given an undertaking to the Court for not increasing its paid up equity capital, the CDR Cell in all probability would not have stipulated any such condition in the CDR package. According to the Panel, the Target Company/acquirers appear to have misled the CDR Cell by active concealment of the fact of the aforementioned undertaking given to the Court. I have perused the order dated April 05, 2004 passed by the Hon'ble Delhi High Court, wherein it has been observed/directed as follows :

"It is stated that the Judgment Debtors including Judgment Debtor No.4 undertake that Judgment Debtor No.4 will not increase or change its paid-up equity capital from the present level of 65,52,800 equity shares of Rs.10/- each in any manner whatsoever till the decree in favour of the Decree Holder is satisfied. It is also prayed that EA No.129/2004 be dismissed as withdrawn. In view of the aforesaid submissions and the undertakings by which the Judgment Debtors shall remain bound, the attachment orders dated 28th January, 2004 as well as 26.3.2004 stand withdrawn. The undertakings of the Judgment Debtors are taken on record………."

The judgement debtor no.4 mentioned in the above order is the Target Company. Therefore, it becomes very clear that the Target Company, by its own undertaking which has been taken on record by the Hon'ble Delhi High Court and which is binding on the Target Company, cannot alter its increase or change its paid-up equity capital till the decree of the Decree Holder is satisfied. Therefore, as on October 4, 2004 (the date when CDR-EG approved the original scheme for the Target Company), the Target Company cannot alter its paid-up equity capital. From the records and submissions made by the applicant and PACs, it appears that the undertaking made before the Hon'ble Court was not brought to the notice of the CDR-EG as soon as the said undertaking was made. Further, I find that, the acquirers and the Target Company have not submitted any document to show that such court order and their undertaking was informed to the CDR before the package was approved on October 04, 2004. The applicant and the PACs have made a submission that 'Meanwhile, the Empowered Group of the CDR was kept posted about these proceedings and these difficulties faced by the Company. Therefore, the CDR-EG approved the proposal for conversion of the advance subscription of Rs.40 crores into redeemable preference shares instead of equity. This is evidenced by letter dated June 23, 2006 from CDR Cell to the Company'. From the above submission, one could infer that the restraint imposed by the Hon'ble Court and the difficulty in converting the advance subscription into equity, could have been informed only subsequent to the CDR scheme approved on October 4, 2004. Therefore, I tend to agree with the observation of the Takeover Panel that that if the Company/its promoters had disclosed the undertaking given before the Hon'ble Court, the CDR would not have specified the condition to convert the debt (the loan of ₹40 crores given by the promoters to the Target Company) into equity and that the said fact seems to have been concealed from the notice of CDR-EG. The Target Company has obtained a scheme which inter alia stipulated the conversion of the advance subscription into equity, which the Company/promoters could not have complied with.

38. In the application, a statement was made that, in view of the Court Order, as a temporary measure, the advanced subscription of ₹ 40 Crore was converted into 40,00,000 1% Cumulative Redeemable Preference Shares (CRPS) of ₹ 100/- each (30,00,000 CRPS allotted on October 28,

2004 and 10,00,000 CRPS allotted on March 29, 2005). This conversion of the advance subscription into CRPS was done without the permission or consent of the CDR Cell which is in contravention of the stipulation (i.e., the conversion of the advance subscription into equity) of October 4, 2004 scheme. The Panel has observed that the conversion of preference shares into equity cannot be viewed to be in compliance with CDR Cell's letter dated October 04, 2004. The same, according to the Panel, was in compliance with the CDR Cell's revised condition communicated vide letter dated June 30, 2009, wherein it had advised the Company to take steps for the conversion of CRPS into equity. Pursuant to the same, the Company had convened a shareholders' meeting on September 30, 2009, wherein the shareholders had approved such conversion.

39. In this regard, I have perused the letter dated October 04, 2004 of the CDR Cell which had approved the restructuring proposal, and Annexure I (stipulating the terms and conditions) to the said letter. As per clause (xi) of the said Annexure, the promoters shall arrange to convert the advance subscription of ₹ 40 crore into equity by September 30, 2004. Therefore, as per records, the CDR Scheme had inter alia mandated that the promoters shall convert the Advance Subscription of ₹ 40 Crore into equity by September 30, 2004. As per the applicant and PACs, the said conversion could not be undertaken owing to restraint orders imposed on the Target Company by the Hon'ble Courts from altering its equity share capital. According to them, as a temporary measure, the CDR Cell vide letter dated June 23, 2006 had approved the proposal for conversion of the advance subscription of ₹ 40 crores into CRPS instead of equity.

40. Further, the applicant and its PACs, in their admission, have stated that 'the floor price taking October 04, 2004 as the Relevant Date works out to ₹18.92/- per share. However, to keep the equity base at reasonable level, the applicant offered to take equity shares at ₹ 40/- per share. Adopting June 30, 2009 as the Relevant Date, apart from being untenable, would result in issuance of shares at an unrealistic floor price of ₹ 103/- per share'. It appears clear that the applicants are themselves convinced that there is no economic logic to continue with October 04, 2004 as the relevant date and ₹ 18.92/- as per that relevant date will lead to unreasonable level of equity base. They have agreed for ₹ 40/- as the conversion price. There seems to be no justification for this price and it appears to be arbitrary. It is not possible for me to agree to any arbitrary number suggested by the applicant and I would prefer to peg it to a relevant date.

41. In view of the above and the reasons and observations of the Panel, it may not be proper to consider October 04, 2004 as the Relevant Date for determining the price for conversion of preference shares into equity shares. I am therefore in agreement with the views of the Panel in this regard.

42. The Panel, has observed that as on September 30, 2009 the Target Company was not out of CDR and had been advised by CDR vide its letter dated June 30, 2009 about the revised condition, and therefore the Panel is of the view that 'June 30, 2009' (CDR’s letter which stipulated that the conversion of Rs.40 crore preference shares into equity be completed by December 31, 2009) could be taken as the Relevant Date for the purpose of determining the price of equity shares to be allotted to the acquirers on conversion of preference shares. According to me, the principle on which the Panel has based its views for considering June 30, 2009 as the Relevant Date is the fact that the undertaking given before the Hon'ble Court for not altering the equity capital of the Target Company and the condition imposed by the CDR-Cell, in the revised scheme, to the Company for conversion of the ₹40 crore preference shares into equity and also the fact that the Company was still under purview of the CDR-Cell.

43. In this regard, I have perused the letters dated June 30, 2009 read with letter dated June 29, 2009 of the CDR-Cell. As per the aforesaid letters, the CDR-EG, had advised the Target Company to ensure the conversion of ₹ 40 Crore preference shares into equity by December 31, 2009. As per the Target Company, it had obtained the shareholders approval for fully implementing the CDR Scheme on September 30, 2009. I have perused the copy of the resolutions passed by the shareholders of the Target Company at the AGM held on September 30, 2009 at the Target Company's registered office. From the resolutions, I inter alia note that – (i) The shareholders have consented and authorised the board of directors of the Target Company to convert the 40,00,000 1% CRPS of ₹ 100/- held by the promoters into equity shares of ₹ 10/- each fully paid up and issue and allot such number of equity shares to the holders of the CRPS on the price to be determined in accordance with the ICDR Regulations; and (ii) The relevant date for the purpose of calculating the price at which the equity shares are proposed to be issued to the holders of the CRPS under the ICDR Regulations is October 04, 2004.

44. However, the applicant and PACs have referred to another letter of the CDR-Cell dated June 23, 2006, whereby the CDR had given its consent for conversion of advance subscription into redeemable preference shares. I note from the records that the June 23, 2006 letter of the CDR-Cell whereby the Target Company's proposal to convert the advance subscription of ₹40 crore into redeemable preference shares instead of equity was approved, seems to have not been submitted by the applicant and PACs before the Panel and has been referred for the first time in the letters/written submissions dated June 08, 2013 and June 29, 2013 of the applicant and PACs. Therefore, the Panel did not have the benefit of considering the same before making the recommendation. I have perused the said letter of CDR-Cell and note that CDR-Cell has approved the conversion of ₹40 crore advance subscription into preference shares. This is the first communication pursuant to the approval of the proposal for restructuring the debts of the Target Company communicated vide its letter dated October 04, 2004, which, as observed above, seems to have been obtained without disclosing the restraint on the Company in altering its equity capital. From the above details, the following re-construction of events is made :

April 05, 2004 : The Hon'ble High Court of Delhi passes order restraining the Company to make any changes in its equity structure.

October 04, 2004 : CDR Cell approves the restructuring package with a condition that the Advance Subscription of ₹40 crore be converted into equity shares by September 30, 2004. (Obviously, the CDR Cell was not aware of the restraint placed by the Hon'ble Delhi High Court; otherwise it would not have stipulated such a condition.)

June 23, 2006 : CDR Cell approves Company's proposal to convert the Advance Subscription of ₹40 crore into Redeemable Preference Shares (Apparently, by this time CDR Cell became aware of the restraint imposed by the Hon'ble Delhi High Court and approved the conversion of Advance Subscription into Preference Shares).

October 2008 : As stated by the applicant, the restraint (in altering the equity capital) imposed against the Company by the Hon'ble High Court Delhi is revoked.

June 30, 2009 : CDR Cell issues revised condition that stipulates that the 40,00,000 preference shares be converted into equity. [Apparently, the CDR Cell revised its condition in the light of vacation of the Hon'ble Delhi High Court's Order during October 2008]

The question before me is what should be the relevant date. This could have been October 04, 2004, had it not been tainted with the fact that the CDR Cell's condition was un-implementable in the light of the Hon'ble Delhi High Court's Order. The next date when the CDR Cell appears to have taken a conscious decision keeping in view the restraint placed by the Hon'ble High Court is June 23, 2006. I am of the opinion that this should be the Relevant Date instead of June 30, 2009 which is only taking into cognizance that equity shares can be issued instead of preference shares as the restraint has been removed. Therefore, according to me, this date of June 23, 2006 should ideally be taken as the Relevant Date, for the purposes of determining the price at which conversion should be effected.

45. I note that the applicant has submitted that IFCI has infused a total of ₹ 150 Crore in February 2010 that included taking over existing loans of ₹70 Crore from the Consortium of lenders and thereby coming out of CDR. I have perused the copies of (i) the loan agreement between IFCI and the Target Company dated February 26, 2010 and (ii) letter from IFCI dated August 02, 2011, which are on record. In terms of paragraph 6.2(iv) of the loan agreement, the Target Company was to convert the preference capital of the promoters amounting to Rs.40 Crore into Equity, as a general condition. Further, IFCI vide letter dated August 02, 2011 had allowed conversion of the 40,00,000 1% CRPS into equity shares and to take requisite steps to pledge the shares immediately after issuance of the same.

46. It is a fact that the Target Company has come out of the purview of the CDR-Cell during February 2010. If a very strict interpretation and view is taken considering the fact that the Company is out of CDR, the dates of approval of the original scheme (i.e., October 4, 2004) and the revised/modified scheme on June 30, 2009 and the provisions of regulation 71 of the ICDR Regulations, would not be relevant to be considered for fixing the 'relevant date'. However, considering the fact that IFCI (the lender who has taken over the liabilities of the Target Company) has also stipulated the condition to convert the preference capital of ₹40 crore into equity which is a condition akin to the one stipulated by the CDR-EG (vide letters dated June 23, 2006 and June

29, 2009), and the reasons stated above in this Order while deciding whether this case is a fit one for grant of exemption, I am of the view that while agreeing with the views of the Takeover Panel in granting exemption to the applicants and PACs, the Relevant Date should be taken as June 23, 2006.

47. For the above reasons, I agree with the observations and recommendation of the Panel that the applicant and the PACs may be allowed exemption from the obligations stipulated under regulation 3(2) & (3) of the Takeover Regulations, 2011 that may arise with respect to the proposed increase in the shareholding/voting rights of the acquirer and PACs/promoter group of the Target Company pursuant to the conversion of 40,00,000 fully paid-up 1% CRPS of ₹100/- each, and that June 23, 2006 be considered as the Relevant Date for arriving at the price with respect to the conversion of the CRPS into equity shares.

48. In view of the foregoing, I, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 and regulation 4(6) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (since repealed) read with regulations 11(5) and 35 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, hereby exempt the applicant, Square Investments & Financial Services Private Limited and its PACs, namely, Brook Investment & Financial Services Private Limited, Epitome Holdings Private Limited, Liquid Holdings Private Limited, Mid-Med Financial Services Private Limited, React Investment & Financial Services Private Limited, Scope Credit & Financial Services Private Limited, Solace Investment & Financial Services Private Limited, Solitary Investment & Financial Services Private Limited, Seed Securities & Services Private Limited, Mrs. Sunita Suri, Mrs. Mamta Suri and Sanjay Suri HUF, from the applicability of regulation 3(2) and (3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, with respect to their proposed conversion of 40,00,000 fully paid-up 1% Cumulative Redeemable Preference Shares of ₹100/- each into equity shares with June 23, 2006 being the 'Relevant Date' for computation of price.

49. The above exemption is granted subject to the following conditions : (i) The proposed acquisition shall be in accordance with the provisions of the Companies Act, 1956, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, the Listing Agreement and other applicable laws;

(ii) The applicant and its PACs shall ensure compliance with their statements, disclosures and undertakings made in the application and in their subsequent correspondences; and (iii) The proposed acquisition shall be completed within 45 days from the date of this Order and the applicant and its PACs shall file a report with SEBI in the manner provided in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 within 21 days from the date of the acquisition.

50. The exemption granted above shall not be construed as an exemption from the requirements of disclosures under Chapter V of the Takeover Regulations, 2011 and compliance with the SEBI (Prohibition of Insider Trading) Regulations, 1992, the Listing Agreement or other applicable Acts, Rules and Regulations.

51. The application dated October 10, 2009 (as revised on August 26, 2011) made by the applicant and its PACs is accordingly disposed off.

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Date : February 25th, 2014 Place : Mumbai