Sbec Systems (India) Ltd. vs Sebi

Order Reserved on: 21.11.2019 Date of Decision: 29.1.2020

Appeal No.443 of 2018

SBEC Systems (India) Ltd. 1400, Modi Tower, 98, Nehru Place, New Delhi - 110012. ... Appellant

Versus

Securities & Exchange Board of India SEBI Bhavan, Plot No.C4-A, G Block, Bandra-Kurla Complex, Bandra (East), Mumbai 400051. ... Respondent

Mr. P.N. Modi, Senior Advocate with Ms. Kalpana Desai and Mr. Rajesh Khandelwal, Advocates i/b. Juris Link for the Appellant.

Mr. Pradeep Sancheti, Senior Advocate with Mr. Vivek Shah, Advocate i/b. ELP for the Respondent.

With Appeal No.444 of 2018

1.

Umesh Kumar Modi 36, Amrita Shregill Marg, New Delhi - 110 003.

2. Kumkum Modi 36, Amrita Shregill Marg, New Delhi - 110 003.

3. Jayesh Modi 36, Amrita Shregill Marg, New Delhi - 110 003.

4. Longwell Investments Pvt. Ltd.

2

Modi Bhawan, Modi Nagar, Uttar Pradesh - 201204.

5. A to Z Holdings Pvt. Ltd.

1400, Modi Tower, 98 Nehru Place, New Delhi - 110012.

6. Moderate Leasing & Capital Services Ltd. 415, Modi Tower, 98 Nehru Place, New Delhi - 110012. ...Appellants

Versus

Securities & Exchange Board of India SEBI Bhavan, Plot No.C4-A, G Block, Bandra-Kurla Complex, Bandra (East), Mumbai 400051. ... Respondent

Mr. Ankit Lohia, Advocate with Mr. Kanishk V. Shahi and Mr. Neeraj Malik, Advocates i/b. Khaitan & Khaitan for the Appellants.

Mr. Pradeep Sancheti, Senior Advocate with Mr. Vivek Shah, Advocate i/b. ELP for the Respondent.

CORAM: Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Justice M.T. Joshi

1. Aggrieved by the direction of the Whole Time Member

of respondent Securities and Exchange Board of India

(hereinafter referred to as 'SEBI') dated 17 th September,

2018 vide the impugned order directing all the present

appellants in both the appeals to jointly and severally make a

public announcement to acquire the shares of SBEC Sugar 3

Ltd. (hereinafter referred to as 'target Company') in

accordance with the provisions of Securities and Exchange

Board of India (Substantial Acquisition of Shares and

Takeovers) Regulations, 2011 (hereinafter referred to as

'SAST Regulations') within a period of 45 days alongwith

payment of interest at the rate of 10% p.a. on the offer price

the present appeals are filed.

2. The facts of the case would reveal that all the present

appellants are promoters of the target Company. They were

holding 54.46% of the share capital of the target Company in

the year 2014. Additionally, appellant Moderate Leasing &

Capital Services Ltd. and appellant A to Z Holding Pvt. Ltd.

acquired additional shares during August 25, 2014 to

September 16, 2014 increasing their shareholding from

54.46% to 63.86%. As the acquisition was of additional

9.4% of the voting rights it was claimed by the Respondent to

be in breach of the SAST Regulations, 2011 and, therefore,

the proceedings were launched. Notices were issued to all

the appellants. The appellants while admitting all the

transactions also additionally submitted that appellant

Moderate Leasing & Capital Services Ltd. had also

additionally acquired 1.31% shares of the target Company 4

during March 18, 2015 to March 23, 2015 which additionally

increased the shareholding of the promoter group.

Regulation 3 of the SAST Regulations, 2011 provides

as under:-

Substantial acquisition of shares or voting rights.

3. (1) No acquirer shall acquire shares or voting rights

in a target company which taken together with shares or

voting rights, if any, held by him and by persons acting

in concert with him in such target company, entitle

them to exercise twenty-five per cent or more of the

voting rights in such target company unless the acquirer

makes a public announcement of an open offer for

acquiring shares of such target company in accordance

with these regulations.

(2) No acquirer, who together with persons acting in

concert with him, has acquired and holds in accordance

with these regulations shares or voting rights in a target

company entitling them to exercise twenty-five per cent

or more of the voting rights in the target company but

less than the maximum permissible non-public

shareholding, shall acquire within any financial year

additional shares or voting rights in such target 5

company entitling them to exercise more than five per

cent of the voting rights, unless the acquirer makes a

public announcement of an open offer for acquiring

shares of such target company in accordance with these

regulations:

Provided that such acquirer shall not be entitled to

acquire or enter into any agreement to acquire shares or

voting rights exceeding such number of shares as would

take the aggregate shareholding pursuant to the

acquisition above the maximum permissible non-public

shareholding.

Explanation.--For purposes of determining the

quantum of acquisition of additional voting rights under

this sub-regulation,--

(i) gross acquisitions alone shall be taken into

account regardless of any intermittent fall in

shareholding or voting rights whether owing to

disposal of shares held or dilution of voting rights

owing to fresh issue of shares by the target

company.

(ii) in the case of acquisition of shares by way of

issue of new shares by the target company or 6

where the target company has made an issue of

new shares in any given financial year, the

difference between the pre-allotment and the post-

allotment percentage voting rights shall be

regarded as the quantum of additional acquisition.

(3) For the purposes of sub-regulation (1) and sub-

regulation (2), acquisition of shares by any person,such

that the individual shareholding of such person

acquiring shares exceeds the stipulated thresholds, shall

also be attracting the obligation to make an open offer

for acquiring shares of the target company irrespective

of whether there is a change in the aggregate

shareholding with persons acting in concert.

7 (4) Nothing contained in this regulation shall apply to

acquisition of shares or voting rights of a company by

the promoters or shareholders in control, in terms of the

provisions of Chapter VI-A of Securities and Exchange

Board of India (Issue of Capital and Disclosure

Requirements) Regulations, 2009.

3. It is an admitted fact that the shares were acquired

without making any public announcement of an offer for

acquiring shares of the target Company as provided by 7

Sub-Regulation (2) above. The appellants however explained

that due to continued losses the net worth of the Company

was completely eroded. The target Company was therefore

compelled to file a reference with Board of Industrial and

Financial Reconstruction ("BIFR"). The Board vide order

dated February 4, 2014 declared the target Company as sick.

IDBI was appointed as operating agency for the preparation

of Rehabilitation Scheme for revamping the position of the

Company to normal. The two appellants who had acquired

the disputed shares had lent some funds to one ABC

Holdings Pvt. Ltd. and another Kumabhi Investments Pvt.

Ltd. These two Companies failed to repay the funds.

Therefore these promoters had to acquire the shares held by

these borrower companies. It led to an increase in the

shareholding. Thus, the increase in the shareholding was not

due to purchase of shares but due to adjustment against loans

outstanding. It was further pleaded that for any acquisition of

shares pursuant to the scheme framed under Section 8A of

the Sick Industrial Companies (Special Provisions) Act,

1985(SICA), general exemption is provided from the

provisions of SAST Regulations vide Regulation 10(1)(d)(i)

and, thus, the acquisition of the shares would not attract the 8

provisions of Takeover Regulations. During personal

hearing however the appellant submitted that rehabilitation

scheme was not finalized but only draft rehabilitation scheme

was prepared though in fact the Company was declared sick

by BIFR during the relevant period.

4. The WTM held that in view of the fact that no

rehabilitation scheme was formulated there cannot be any

exemption from the SAST Regulations as claimed by the

appellant. It was therefore held that the acquisition of the

shares were against Regulation 3(2) of the SAST

Regulations.

5. As regards the liability of all the appellants, the WTM

held that other appellants being promoters of the target

Company would be persons acting in concert with appellant

nos.5 and 6 as explained in Regulation 2(1)(q) as defined in

the SAST Regulations, 2011. The relevant provision is as

under:-

(q) "persons acting in concert" means,--

(1) persons who, with a common objective or purpose of acquisition of shares or voting rights in, or exercising control over a target company, pursuant to an agreement or understanding, formal or informal, directly or indirectly co-operate for acquisition of shares or voting rights in, or exercise of control over the target company.

9 (2) Without prejudice to the generality of the foregoing, the persons falling within the following categories shall be deemed to be persons acting in concert with other persons within the same category, unless the contrary is established,--

(i) a company, its holding company, subsidiary company and any company under the same management or control;

(ii) a company, its directors, and any person entrusted with the management of the company;

(iii) directors of companies referred to in item (i) and (ii) of this sub-clause and associates of such directors;

(iv) promoters and members of the promoter group;

(v) immediate relatives;

(vi) a mutual fund, its sponsor, trustees, trustee company, and asset management company;

(vii) a collective investment scheme and its collective investment management company, trustees and trustee company;

(viii) a venture capital fund and its sponsor, trustees, trustee company and asset management company;

(ix) 5 [***]

(x) a merchant banker and its client, who is an acquirer;

(xi) a portfolio manager and its client, who is an acquirer;

(xii) banks, financial advisors and stock brokers of the acquirer, or of any company which is a 10

holding company or subsidiary of the acquirer, and where the acquirer is an individual, of the immediate relative of such individual:

Provided that this sub-clause shall not apply to a bank whose sole role is that of providing normal commercial banking services or activities in relation to an open offer under these regulations;

(xiii) an investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unit holder having not less than 10 per cent of the paid-up capital of the investment company or unit capital of the fund, and any other investment company or fund in which such person or his associate holds not less than 10 per cent of the paid-up capital of that investment company or unit capital of that fund:

Provided that nothing contained in this sub-clause shall apply to holding of units of mutual funds registered with the Board;

Explanation.--For the purposes of this clause "associate" of a person means,--

(a) any immediate relative of such person;

(b) trusts of which such person or his immediate relative is a trustee;

(c) partnership firm in which such person or his immediate relative is a partner; and

(d) members of Hindu undivided families of which such person is a coparcener;

6. Relying on sub-Regulation 2(iv) the WTM held that

since all promoters and members of the promoter group are

deemed to be persons acting in concert, all the present 11

appellants would be liable to make offer as detailed supra. It

was observed that these provisions would raise rebuttable

presumption. However, as the appellant failed to place any

evidence that they were acting independent of each other

except taking a plea, the presumption does not stand rebutted.

Hence the WTM eventually concluded that all the appellants

were acting in concert and, therefore, all of them would be

liable.

7. In Appeal no.443 of 2018 the learned counsel for the

appellant SBEC Systems (India) Ltd. i.e one of the promoter

of the target Company submitted that the WTM failed to take

note of the fact that the appellant is a Company. The

intention of the Company of acting in concert with some of

the appellants in Appeal no.444 of 2018 in acquiring

additional shares could have been gathered only through the

resolution or through the act of Board of Directors of the

present appellant Company. He further submitted that to

rebut the presumption, the appellant Company cannot place

any material except claiming that it has not taken part in

acquisition of additional shares as thought process of the

appellant Company could be visible only through resolution

etc. He therefore submitted that the conclusion of the WTM 12

that the present appellant failed to rebut the presumption is

wrong.

8. The learned counsel additionally referred to the para

3(f) of the rejoinder affidavit and submitted that the

Appellant Company had not acquired a single additional

share. It was never consulted in the acquisition of the shares.

There is not a single letter/communication between the

lending promoters and the appellant in relation to the loan

given by lending promoters for acquisition of shares by the

appellant. He submits that if this positive evidence is

considered in right spirit then the order of the WTM cannot

be sustained so far as the present appellant is concerned. The

learned counsel further submitted that since the present

appellant Company was not able to pay the listing fee it was

delisted from the stock exchanges and, therefore, relying on

the ratio of Supreme Court's decision in the case of

M/s. Daichii Sankyo Company Ltd. v. N. Narayanan and

Anr. AIR (2010) SC 3089, this Tribunal's decisions in the

cases of Modipon Ltd. v. SEBI, Appeal No.34 of 2001

decided on 31st July, 2001 and Mr. Raghu Hari Dalmia &

Ors. vs SEBI, Appeal no.134 of 2011 decided on 21.11.2011

he submitted that the appeal be allowed.

13

9. In reply learned counsel for the respondent SEBI

submitted that very fact that common reply was filed by

SEBI by all the appellants and in the reply they made the

common plea regarding acquisition of shares by two

appellants would show that all the appellants were acting in

concert. The reply would show that no statements are made

by the present appellant Company that it was not aware of the

acquisition of additional shares. The present appellant was

admittedly one of the promoters. Therefore appellant cannot

escape the liability.

10. Upon hearing both the sides in our view Appeal no.443

of 2018 requires to be allowed for the following reasons. It is

to be noted that before the WTM all the appellant including

the present appellant Company had taken a plea that they

were not acting in concert so far as the acquisition of

additional shares is concerned. Admittedly, the present

appellant is a public limited Company. The fact as to

whether it was acting in concert with the other appellant

would be discernable only by the resolution of the Board of

Directors of the Company and any correspondent between

the acquiring appellant and the present appellant Company.

Merely because the present appellant is a promoter of the 14

target Company of which additional shares were acquired by

two other appellants, would not mean that the present

appellant would be a person acting in concert with them. The

learned WTM had rightly held that the presumption raised

vide different provision is rebuttable, but failed to take into

consideration the above facts. In the case of Diachi cited

supra in para 47 the Supreme Court observed as under:-

47. Then what does the deeming provision do? The deeming provision simply says that in case of nine specified kinds of relationships, in each category, the person paired with the other would be deemed to be acting in concert with him/it. What it means is that if one partner in the pair makes or agrees to make substantial acquisition of shares etc. in a company it would be presumed that he/it was acting in pursuance of a common objective or purpose shared with the other partner of the pair. For example, if a company or its holding company makes or agrees to make a move for substantial acquisition of shares etc. of a certain target company then it would be presumed that the move is in pursuance of a common objective and purpose jointly shared by the holding company and the subsidiary company. But the mere fact that two companies are in the relationship of a holding company and a subsidiary company, without anything else, is not sufficient to comprise "persons acting in concert". The Attorney General is quite right in his submission that something more is required to comprise "persons acting in concert" than the mere relationship of a holding company and a subsidiary company. There may be hundreds of instances of a company having a subsidiary company but to dub them as "persons acting in concert"

would be quite ridiculous unless another company is identified as the target company and either the holding company or the subsidiary make some positive move or show some definite inclination for substantial acquisition of shares etc. of the target company.

15 11. The learned counsel for the respondent submitted that

the above referred appeal was decided not on this issue but

on another issue that the deeming fiction under Sub-

Regulation (2) was not at all applicable in the said case.

However, the observation of the Apex Court in para 47 are

based on the similar facts as raised in the present case as

detailed supra.

In the case of Mr. Raghu Hari Dalmia cited supra inter

alia it was held that an increase in the percentage of shares

held by the promoters, due to reduction of share capital upon

buy back, would not amount to an acquisition. In the case of

Modipon Ltd. this Tribunal highlighted in para no.33 that the

promoters need not be an acquirer automatically. The

conduct of the parties will have to be taken into

consideration.

Thus, though a presumption that the promoters would

be persons acting in concert can be raised the same can be

rebutted either by positive evidence or by negative facts

discernable through the conduct of the parties. The fact that

the appellant Company did not participate in acquisition of

additional shares by two of the other appellants, the fact that

there is no resolution passed by the present appellant and fact 16

that there is no communication on record from the appellant

Company would show that present appellant Company

cannot be termed as person acting in concert. The present

appeal will have to be allowed.

12. So far as Appeal no.444 of 2018 is concerned it can be

seen that the Appellant nos.5 and 6 had acquired the shares.

It is their case that since their borrower failed to repay the

amount of loan lent to them, these appellants were required to

accept the shares of the Company in lieu of the repayment.

Their further case is that for infusion of funds into the

Company for the purpose of keeping it operational the

repayment of loans was demanded. The letters dated

15th July, 2014 and 16th July, 2014 from the borrowers in this

regard were filed on record. In the circumstances according

to all the appellants there was no meeting of minds or acting

in concert with each other in acquisition of shares.

13. The impugned order however would show that as all

the present appellants are the promoters of the appellant

Company, by invoking the principle of presumption the order

came to be passed against all the present appellants also. The

above fact however would clearly show that acquisition of

the shares by Appellant nos.5 & 6 was their individual action 17

forced by the circumstances and as such Appellant nos.1 to 4

in Appeal no.444 of 2018 cannot be called as persons acting

in concert with the rest of the appellants.

It is however an admitted fact that the Appellant nos.5

and 6 had acquired the additional shares without following

the provisions of the SAST Regulations, 2011 as detailed

supra. The issue is as to whether these Appellant nos.5 and 6

can be directed to make public announcement to acquire

shares of the target Company in accordance with the

provisions of the Takeover Regulations, 2011. The WTM

relying on the ratio of Nirvana Holdings Pvt. Ltd. vs. SEBI

Appeal no.31 of 2011 decided on 8th September, 2011 held

that such a direction would be a normal rule and having

deviation from the same can be permitted only if issuance of

such a direction is not for protection of the securities market

or is not for the protection of interest of investors. The

learned counsel for the appellant however pointed out that the

effect and operation of the order in Nirvana is stayed by the

Supreme Court. It was submitted by the appellant that even

Nirvana does not declare that a sole available mode would be

a direction to make a public announcement ignoring other 18

alternatives provided by Regulation 32 of the SAST

Regulations, 2011.

14. In the present case, what we find is that Appellant nos.5

and 6 had not deliberately acquired the shares of the target

Company but they were willy nilly required to accept the

shares due to inability of the borrowers to repay the loan

amount. Besides this the target Company was declared as

sick Company under the BIFR and draft rehabilitation

scheme was also under consideration. Thus, the act of the

Appellant nos. 5 and 6 cannot be equated with corporate

raiders trying to circumvent the provision of Regulation in

order to seek control of the target Company. They were

already promoters of the target Company and they had

acquired the shares beyond the limits permitted by the

creeping acquisition method. In the circumstances, the

direction of the WTM cannot be sustained.

15. In the result the following order:-

Appeal no.443 of 2018 is hereby allowed. The

direction of the WTM to the appellant therein is hereby

quashed and set aside. Appeal no.444 of 2018 is partly

allowed. The direction of the WTM so far as Appellant

nod.1, 2 to 4 are concerned is hereby set aside.

19 16. As regards the appellant nos.5 and 6 the direction of the

WTM is modified. In terms of Regulation 32(1)(b) the

Appellant nos.5 and 6 are directed to sell the shares acquired

in violation of the Regulation and to transfer the proceeds of

the same to the Investor Protection Fund established under

the Securities and Exchange Board of India (Investor

Protection and Education Fund) 2009 within a period of six

months from the date of this order.

Sd/-

Dr. C. K. G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member

29.1.2020 Prepared and compared by RHN