BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 31 of 2011
Date of decision: 8.9.2011 M/s Nirvana Holdings Private Limited
Plot No.36-3-541/C, 4th Floor,
Irrum Manzil Colony, Panjagutta,
Hyderabad – 500 082.
……Appellant Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
…… Respondent
Mr. Janak Dwarkadas, Senior Advocate with Mr. Vinay Chauhan, Advocate for
the Appellant.
Dr. Poornima Advani, Advocate with Ms. Amrita Joshi, Advocate for the
Respondent.
CORAM : Justice N. K. Sodhi, Presiding Officer
P. K. Malhotra, Member
S. S. N. Moorthy, Member
Per : Justice N. K. Sodhi, Presiding Officer
Whether Nirvana Holdings Pvt. Lt d., the appellant herein violated
Regulation 11(1) of the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Re gulations, 1997 (hereinafter referred to
as the takeover code) when it acquired 6.17 per cent of the e quity capital of
Heritage Foods (India) Limited (hereinaft er called the target company) and did
not make a public announcement to acquire further shares in accordance with the
takeover code. Facts giving rise to this appeal lie in a narrow compass and these
may first be noticed.
- The appellant is a private lim ited company incorporated under the
provisions of the Companie s Act, 1956 having only two
promoters/directors/shareholders name ly, Mr. Nara Lokesh and Ms. Nara
Bhuvaneshwari who shall collectively be re ferred to hereinafter as the Naras.
There is no other sharehol der in this company and th e Naras have 50 per cent 2
shareholding each. This is an investment company whose main object is to invest
in shares/debentures of other companies. The two Naras in their individual
capacity are also promoters of the target company and they together hold
33.38 per cent of the voting rights/share capital in the target company. The
remaining 15 promoters of the target co mpany as shown in the statement filed
with the stock exchanges hold 12.32 per cent of the voting rights in that company.
Thus, the total holding of the promoter group in the target company comes to
45.70 per cent including that of the two Naras. The appellant company acquired
9,161 shares of the target company on November 13, 2008 and another 7,02,260
shares on November 17, 2008 which together constitute 6.17 per cent of the total
equity capital of the target company. Since the two Naras in their individual
capacity are promoters of the target comp any and they are also promoters of the
appellant company holding 100 per cent of its share capita l, the appellant
company automatically becomes a part of the promoter group of the target
company as per Explanation I to the definition of ‘promoter’ contained in
Regulation 2(h) of the takeover code, the relevant part of which reads as under:
“Promoter means –
(a) any person who is in control of the target company;
(b) any person named as promoter in any offer document of the
target company or any shareh olding pattern filed by the
target company with the stock exchanges pursuant to the
Listing Agreement, whichever is later;
and includes any person belonging to the promoter
group as mentioned in Explanation I:
Provided that ………………………………………………
Explanation I : For the purpose of this clause, “promoter
group” shall include:
(a) in case promoter is a body corporate –
(i) to (iii) …………………………..
(b) In case the promoter is an individual –
(i) ………………………………….
(ii) any company in which 10 per cent or more of the share
capital is held by the promoter or an immediate
relative of the promoter or a firm or HUF in which the
promoter or any one or more of his immediate relative
is a member;
(iii) and (iv) …………………………………………………”
Regulation 11(1) of the take over code provides that no acquirer who, together
with persons acting in concert with him, has acquired 15 per cent or more but less
than 55 per cent of the shares or voting ri ghts in a company, shall acquire either
3
by himself or through or with persons act ing in concert with him, additional
shares or voting rights entitling him to exercise more than 5 per cent of the voting
rights with post acquisition shareholding or voting rights not exceeding 55 per
cent in any financial year on March 31, unless such acquirer makes a public
announcement to acquire further shares in accordance with the takeover code. As
noticed above, the appellant company acqui red shares/voting rights in the target
company which entitled it to exercise mo re than 5 per cent (6.17 per cent) of the
voting rights therein thereby increasing the collective shareholding of the two
Naras and the appellant in the target company from 33.38 per cent to 39.55 per
cent triggering Regulation 11(1) of the takeover code. Since the appellant did not
come out with a public announcement to acquire further shares of the takeover
code, the Securities and Exchange Board of India (for short the Board) issued a
notice dated November 25, 2009 calling upon the appellant to show cause why
appropriate directions be not issued to it under Regulation 44 of the takeover code
for violating Regulation 11( 1). The appellant filed its detailed reply dated
December 30 2009 stating that it had not vi olated the provisions of Regulation
11(1) when it acquired 6.17 per cent equity shares of the target company without
making a public announcement. It also di sputed that the collective shareholding
of the promoters of the target compa ny increased from 45.7 per cent to 51.87 per
cent in the financial year 2008-09 as alleged. The case of the appellant is that the
Board erroneously clubbed its shareholding of 6.17 per cent with the shareholding
of the ‘promoter group’. In para 10 of its reply this is what the appellant
pleaded:-
“It appears that simply because our promoters/directors are also the
promoters of Target Compa ny and are holding around 33.38%
shares in the Target Company, it has been concluded that our
promoters/directors are acting in co ncert with the other persons in
the “promoter group” of the Target company and further that the
“promoters group” of the Target Company (including our
promoters) were acting in concer t with us when we acquired 6.17
% shares of the Target Compa ny through the stock exchange in
November 2008. Same is legally untenable. There is no
justification for equating us w ith the “promoter group” of the
Target company and treating us as their part. We reiterate that, at
the relevant time, when we acqui red the shares of the Target
Company, we were not acting in concert with either Mrs Nara
Bhuvaneshwari & Mr N. Lokesh or the entities/persons
constituting the “promoter group” of the Target Company.
Our acquisitions of shares of the Target Company were
4
independent of acquisitions/hold ings of “promoter group” of
the Target Company. Therefore, our sh areholding of 6.17%
cannot be added to the “promo ter groups” shareholding of 45.7%
in order to allege that promot er’s shareholding increased from
45.7% to 51.87% in the financial year 2008-2009.”
(emphasis supplied)
The appellant was called for a personal hearing before the whole time member on
May 25, 2010 and instead of appearing on that date, it filed a supplementary
reply/submissions stating as under:-
“Without prejudice to the aforesaid, we submit that if you are not
satisfied with our submissions, that at the relevant time we
were not acting in concert with ot hers as alleged and feel that
we have violated the provisions of Regulation 11(1), then we
submit that we are open to disinvesting the shareholding of
1.17% which is allegedly in excess of 5% permissible creeping
acquisition limit available to us for the Financial year 2008-09.
The proposed disinvestment by us of the 1.17% shares would
be in consonance with the provisions of Regulation 44 of
Takeover Regulations, under which, as stated in the Notice,
you propose to issue directions against us for the alleged
violation of Regulations 11(1) of Takeover Regulations.”
(emphasis supplied)
The appellant also pleaded that the vi olation by acquiring 1.17 per cent equity
shares in excess of the permissible limit of five per cent was too insignificant and
miniscule and that by this acquisition it did not acquire control over the target
company since the two Naras were alrea dy in control. The appellant further
pleaded that the violation was technical, procedural and a venial breach which did
not cause any adverse consequences. It claims that it did not make any
disproportionate gain nor did the acquisition cause a ny loss to anyone including
the public shareholders of the target company.
- On a consideration of the material on the record including the replies filed
by the appellant and taking note of the facts which are not in dispute, the whole
time member by his order dated November 9, 2010 held that the appellant had
violated Regulation 11(1) of the takeove r code when it acquired 6.17 per cent
shares of the target company without making a public announcement. He directed
the appellant to disinvest within a period of two months from the date of the order
1,34,905 shares constituting 1.17 per cent of the equity capital of the target
company which was in excess of the 5 per cent limit. The appellant was further 5
directed to transfer the pr ofits, if any, arising out of such disinvestment to the
Investor Protection Fund(s) of the concerne d stock exchanges. It is against this
order that the present appeal has been filed. - We have heard the learned senior c ounsel for the appellant and Dr. Mrs.
Poornima Advani Advocate on behalf of the Board who have taken us through the
record and the impugned order. The whole time member has clubbed the
acquisition of the appellant company ( 6.17 per cent) with the holding of the
promoter group which was 45.70 per cent including that of the two Naras. It is on
this basis that he concl uded that Regulation 11(1) of the takeover code got
triggered because the appellant crossed the permissible creeping acquisition limit
of 5 per cent in a financial year and not having come out with a public
announcement, it violated the said provisi on. We have on record the statement
showing the shareholding of persons belonging to the promoter group of the target
company. A copy of this statement was fu rnished to the appellant alongwith the
show cause notice. A perusal of this st atement shows that there were in fact 17
promoters including the two Naras and not 18 because the name of Ms. Nara
Bhuvaneshwari appears twice in the list. It is common ground between the parties
that the total shareholding of these promoters (as shown in the statement) is 45.70
per cent out of which the two Naras hol d 33.38 per cent and all the others hold
12.32 per cent. The statement showing the shareholding pattern of the promoter
group of the target company as on September 30, 2008 was furnished by this
company to the stock exchange(s) where it s shares are listed. This statement
erroneously omits the name of the appellant company. We have already noticed
the definition of promoter on the basis of which the appellant automatically
became a part of the promoter group by virtue of the shareholding of the two
Naras in the target company. The definition makes it clear that if a promoter of a
target company who is an individual holds 10 per cent or more shares in any other
company, then that company also becomes a part of the prom oter group of the
target company. In the present case each of the two Naras hold 50 per cent shares
in the appellant company. The appellant company is, therefore, a part of the
promoter group of the target company even without holding a single share. It is, 6
thus, clear that the two Naras and the appellant are promoters of the target
company. The learned senior counsel ve ry strenuously challenged the findings
recorded by the whole time member and contended that he grossly erred in
clubbing the acquisition of th e appellant with that of the promoter group of the
target company. The argument is that the appellant was not a ‘person acting in
concert’ with any promoter of the target company. He pointed out that there was
no such allegation in the show cause notice nor is there any material on the record
to show that there was a meeting of th e minds between the a ppellant on the one
hand and any of the promoters on the ot her. We have given our thoughtful
consideration to the argument of the l earned senior counsel and are unable to
accept the same. It is true that ‘person acting in concert’ comprises two or more
persons who share a common objective or purpose of substantial acquisition of
shares or voting rights in a company. In other words, there has to be a meeting of
their minds when the acquisition takes plac e and it is only then that it could be
said that they acted in concert. In th e present case it cannot even be suggested
that the appellant while acquiring 6.17 per cent shares of the target company did
not act in concert with the two Naras w ho, as already observed, are promoters of
the target company in their individual capacity and also hold 100 per cent shares
of the appellant company. The two Naras control the appellant company and they
are also its directing mind. No investme nt decision on behalf of the appellant
company could be taken without thei r authority, knowledge, consent and
approval. The appellant being a body corpor ate is distinct from the two Naras.
In this view of the matter, it is obvious that when the appellant company which is
a body corporate acquired shares of the ta rget company, it acted in concert with
the two Naras in their individual capacity who are also the promoters of the target
company. The shares acquired by the ap pellant company and the holding of the
two Naras has to be clubbed for the purpos es of Regulation 11(1) of the takeover
code as they were acting in concert. Wh en we do this, it becomes clear that the
appellant crossed the permissible creeping acquisition limit of 5 per cent thereby
triggering Regulation 11(1) of the take over code and not having made a public
announcement, violated the said provisi on. The learned seni or counsel for the 7
appellant is right only to the extent th at the appellant comp any did not act in
concert with any promoter of the target company other than the Naras and that is
of no consequence. Even if the shareholding of the ot her promoters is excluded,
the shareholding of the Naras and the ap pellant together is enough to trigger
Regulation 11(1). In this view of th e matter, no fault can be found with the
conclusion arrived at by the whole tim e member that Regulation 11(1) got
triggered and the appellant by not maki ng a public announcement violated the
said provision. The question posed in the opening part of the order is answered in
the affirmative. - Having upheld the finding that the appe llant violated Regulation 11(1) of
the takeover code by not making a public announcement, the question that next
arises is what direction should be issued to it. The whole time member has
directed the appellant to disinvest 1,34,905 shares constituting 1.17 per cent of the
equity capital of the target company which was in excess of the permissible limit
of 5 per cent and transfer th e profits, if any, to the I nvestor Protection Fund(s) of
the concerned stock exchanges. He app ears to have blindly accepted the plea of
the appellant in this regard that was ma de in the supplementary reply dated May
25, 2010 as noticed above. Since the plea of the appellant is covered by the
provisions of Regulation 44(a) of the ta keover code, the whole time member has
without recording any reasons directed th e appellant to disinvest the shares in
excess of the permissible limit. It must be remembered that whenever an acquirer
violates Regulation 10, 11 or 12 of th e takeover code by not making a public
announcement, he should be directed to comply with the provision by making a
public offer. The words “unless such acquirer makes a public announcement”
appearing in Regulations 10 and 11(1) ma ke these provisions mandatory and a
public announcement has to be made. Si milar words appear in Regulation 12 as
well. These provisions make the acquisition conditional upon a public
announcement being made. The primary object of the takeover code is to provide
an exit route to the public shareholders when there is substantial acquisition of
shares or a take over. This right to exit is an invaluable right and the
shareholders cannot be deprived of this right lightly. It is only when larger 8
interest of investor protection or that of the securities market demands that this
right could be taken away. Therefore, as a normal rule, a direction to make a
public announcement to acquire shares of the target company should issue to an
acquirer who fails to do that . The Board need not give reasons as to why such a
direction is being issued because that is the mandate of Regulations 10, 11 and 12.
However, if the issuance of such a direction is not in th e interest of the securities
market or for the protection of interest of investors, the Board may deviate from
the normal rule and issue any other direction as envisaged in Regulation 44 of the
takeover code. In that even t, the Board should record reasons for deviation. In
the case before us no reasons have been recorded for deviating from the normal
rule and we find no ground fo r deviation. In these circumstances, we modify the
direction issued by the whole time member and direct the appellant to make a
public announcement to acquire the shares of the target company in accordance
with the provisions of the takeover code . For this limited purpose, the appellant
shall now approach the Board within one week to comply with the procedural
requirements in this regard.
In the result, the appeal is dismissed and the direction issued by the whole
time member modified as stated above. There is no order as to costs.
Sd/-
Justice N. K. Sodhi
Presiding OfficerSd/- P. K. Malhotra Member Sd/- S. S. N. Moorthy Member
After we pronounced the order in C ourt, the learned counsel for the
appellant has made an oral prayer that the operation of the direction issued by us
9
be stayed for a period of four weeks to enable the appellant to file an appeal in the
Supreme Court. The prayer appears to be reasonable. We, therefore, direct that
the operation of our order sh all remain stayed for a pe riod of four weeks from
today.
Sd/-
Justice N. K. Sodhi
Presiding Officer
Sd/-
P. K. Malhotra
Member Sd/-
S. S. N. Moorthy
Member
8.9.2011
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