Liquid Holdings Private Limited vs sebi appeal no 83 0f 2010 sat order dated 11 march 2011

BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.83 of 2010
Date of decision: 11.03.2011

Liquid Holdings Private Limited
217, IInd Floor, Antriksh Bhawan,
22, K.G. Marg, New Delhi.

                       ….. Appellant

Versus

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

                   …...Respondent

Mr. U.K. Chaudhary, Senior Advocate with Mr . Rahul Srivastava and Ms. Hina Sharif,
Advocates for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Karan Vyas and Mr. Mihir Mody, Advocates 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

This order can conveniently dispose of a group of five Appeals no.81 to 85 of
2010 which were heard together as they aris e out of similar sets of facts and raise
identical questions. All these appeals are di rected against identical orders of the
adjudicating officer holding the appellants guilty of violating Regulations 7 and 11(1) of
the Securities and Exchange Board of Indi a (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 (h ereinafter called the take over code) and imposing a
monetary penalty of ` 3 lacs on each of them.

The appellants in this group of appeal s alongwith some others are the promoters
of Blue Coasts Hotels Limited (formerly known as Blue Coasts Hotels and Resorts

Limited and hereinafter referred to as th e target company). Morepen Laboratories
Limited is a group company of the appellants a nd it shall be referred to hereinafter as
Morepen. It took a loan of 325 lacs from Dombivli Nagari Sahakari Bank Limited and another sum of10 crores from Lakshmi Vilas Bank Limited (for short Dombivli Bank
and Lakshmi Bank respectively) in the year 2002. It hypothecated its plant and
machinery to secure the loans and in additi on thereto, the appellan ts who were holding
large number of shares of the target comp any had pledged those shares by way of
collateral security. The pledge was crea ted in favour of both the banks. Morepen
defaulted in the repayment of the loans as a result whereof both the banks invoked on
March 10, 2004 the pledges created in their favour. The pledged shares were then
transferred from the demat accounts of the appellants to the demat accounts of the banks.
Upon the shares being so transferred, the name s of the banks came to be recorded as the
beneficial owners of those shares in the reco rds of the depository. In the records of the
target company as well, the names of the two banks as members of that company were
reflected. After acquiring the shares by i nvoking the pledge, Lakshmi Bank disclosed to
all the stock exchanges where the shares of the target company were listed, the aggregate
of its shareholding/voting right s in the target company. Th is is the requirement of
Regulation 7 of the takeover co de. It appears that after the two banks had become the
beneficial owners of the ple dged shares when those were tr ansferred in their names, the
parties agreed that upon settle ment of the loan account, the shares would be transferred
back to the appellants and other pledgor s. Lakshmi Bank addr essed a communication
dated December 13, 2004 to Morepen informi ng the latter that th e shares had been
transferred in the name of the former and that the shares shall continue to be the collateral
security for the term loan. This is what Lakshmi Bank stated in its letter:
“With regard to 8,07,000 shares of M/s. Blue Coast Hotels & Resorts
offered as collateral security under pledge for the term Loan limit of
Rs.1000.00 lakhs availed by you, we would like to inform you that we
have transferred the above shar e in our Bank’s name on 10.03.2004 and
the same is continued to be the collateral security of the above term loan
and the dues thereon.”
It is not in dispute that subsequently th e loan accounts were sett led and all the debts
liquidated. Lakshmi Bank as per its letter dated December 19, 2007 informed Morepen,

the principal borrower and the a ppellants that it had instruct ed its depository participant
to transfer the equity shares of the target co mpany to the appellants. It will be useful to
reproduce this communication which reads as under:
“Pursuant to the liquidation of all debts due to us by M/s. Doctor Morepen
Limited, we have instructed our Depository participan t i.e.,
M/s. Integrated Enterprises Ltd, Mumbai , to transfer the equity shares of
Blue Coast Hotels & Resorts Limite d, and which were held by us as
security for the due repayment of loan. The details of shares pledged to us
and held by us are as follows:-
Pledger Cos.
1.) M/s. Seeds Securities & Services (P) Ltd. 167,000 shares
2.) M/s. Epitome Holdings (P) Ltd. 250000 shares
3.) M/s. React Investments & Financial
Services (P) Ltd. 190000 shares

4.) M/s. Liquid Holdings (P) Ltd. 200000 shares

807000 shares ”

We have on record copies of the deliver y instruction slips (DIS) duly executed by the
banks in favour of the appellants transferring the shares from their demat account to those
of the appellants. Since the shares that were transferred back to the appellants were in
excess of the limit(s) prescribed by Regulatio n 11(1) of the takeover code, the Securities
and Exchange Board of India (for short the Board) was of the view that the appellants on
acquiring the shares from the two banks ought to have complied with this regulation by
making a public announcement to acquire shar es of the target co mpany in accordance
with the takeover code and not having done s o, had violated this provision. The Board
also felt that the appellants as acquirers s hould have made the necessary disclosures as
required by Regulation 7 of th e takeover code. Adjudication proceedings were initiated
against the appellants for these lapses. A common show cause notice dated
November 10, 2009 was issued to all the appellants alleging violation of Regulations 7 &
11(1) of the takeover code and they were called upon to show cause why monetary
penalty be not imposed on them. The appe llants filed their comm on reply denying the
allegations. On a consideration of the materi al collected by the adjudicating officer and
having regard to the undisputed facts as th ey emerge from the record, the adjudicating
officer concluded as under:-
“21. Therefore, I am of the strong op inion that the said acquisition by the
promoters would definitely attract the provisions of the SAST Regulations

and would not be exempted from th e applicability of Regulation 10, 11
and 12 as provided vide Regulati on 3(1)(f)(iv) of the Takeover
Regulations. In my view, the proper course of action for the Promoters, in
the given circumstances, would have b een to make an application before
the Takeover Panel under Regulation 4(2), before acquiring the shares
retransferred by the banks. The Promoters having failed to do so have
thus, violated Regulation 11(1) of the SAST Regulations by failing to
make a public announcement to acquire shares in accordance with the said
Regulations.

In view of the foregoing, I am also of the opinion that for the
aforesaid increase in share holding/voting rights, the Noticee as one of the
Promoters of BCHRL and as a recipient of 1,67,000 shares out of 9,57,000
shares under reference, which were received by the promoters during
December 2007, was under obligation to make required disclosures to the
Company as well as to the Stock Exch anges as specified under regulation
7(1) read with regulation 7(2) of SAST Regulations. The Noticee has
failed to do so, therefore, I hold him responsible for
violation/contravention of the provisions of regulation 7(1) read with 7(2)
of the SAST Regulations”
Accordingly by his separate but identical orders dated March 11, 2010, the adjudicating
officer imposed a monetary penalty of 3 lacs on each of the appellants. Penalty of 2 lacs has been levied for the violation of Regulation 11(1) of the takeover code and
another sum of ` 1 lac has been imposed for violating Regulation 7. Hence these appeals.
We have heard the learned senior counsel on behalf of the appellants and
Shri Kumar Desai learned counsel for the Board. Before we deal with their contentions,
it is necessary to refer to the relevant statut ory provisions. Shares in demateralised form
are regulated by the Depositories Act, 1996 and the regulations framed thereunder. This
Act makes a distinction between a registered ow ner and a beneficial owner of a security.
As per section 10 of this Act, a depository is deemed to be the registered owner for the
purposes of effecting transfer of ownership of security on beha lf of a beneficial owner.
“Beneficial owner” is defined to mean a pers on whose name is reco rded as such with a
depository. A beneficial owner is entitled to all the rights and benefits and is subjected to
all the liabilities in respect of his securities held by a depository. Section 12 of the
Depositories Act deals with pledge or hypothecation of securities held in a depository. A
beneficial owner may with the previous appr oval of the depository create a pledge or
hypothecation in respect of a security ow ned by him through a depository. The manner
in which a pledge or hypothecation is create d is contained in Regulation 58 of the

Securities and Exchange Board of India (Depositories and Participants) Regulations 1996
(for short the Regulations). Since we are concerned with the manner in which a pledge is
created, it is necessary to reproduce Regulation 58 which reads as under:
“ Regulation 58
Manner of creating pledge or hypothecation.

(1) If a beneficial owner intends to create a pledge on a security owned
by him, he shall make an applic ation to the depository through the
participant who has his account in respect of such securities.

(2) The participant after satisfaction that the securities are available for
pledge shall make a note in its records of the notice of pledge and forward
the application to the depository.

(3) The depository after confirmation fr om the pledgee that the securities
are available for pledge with the ple dger shall within fifteen days of the
receipt of the application create and record the pledge and send an
intimation of the same to the participants of the pledger and the pledgee.
(4) On receipt of the intimation under sub-regulation (3) the participants of
both the pledger and the pledgee shall inform the pledger and the pledgee
respectively of the entry of creation of the pledge.
(5) If the depository does not create the pledge, it shall send along with the
reasons an intimation to the participants of the pledger and the pledgee.
(6) The entry of pledge made under sub-regulation (3) may be cancelled
by the depository if the pledger or the pledgee makes an application to the
depository through its participant:
Provided that no entry of pledge shall be cancelled by the depository with
the prior concurrence of the pledgee.
(7) The depository on the cancellation of the entry of pledge shall inform
the participant of the pledger.
(8) Subject to the provisions of th e plegde document, the pledgee may
invoke the pledge and on such invocation, the depository shall register the
pledgee as beneficial owner of su ch securities and amend its records
accordingly.
(9) After amending its records unde r sub-regulation (8 ) the depository
shall immediately inform the participants of the pledger and pledgee of the
change who in turn shall make the n ecessary changes in their records and
inform the pledger and pledgee respectively.
(10) (a) If a beneficial owner in tends to create a hypothecation on a
security owned by him he may do so in accordance with the provisions of
sub-regulations (1) to (9).
(b) The provisions of sub–regulations (1) to (9) sha ll mutatis mutandis
apply in such cases of hypothecation:
Provided that the depos itory before registerin g the hypothecatee as a
beneficial owner shall obtain the prior concurrence of the hypothecator.

(11) No transfer of security in respect of which a notice or entry of pledge
or hypothecation is in force shall be e ffected by a participant without the
concurrence of the pledgee or the hypothecatee as the case may be.”
We may also notice that sect ion 150 of the Companies Act requires every company to
keep a register of its members and enter therein their particulars as referred to in the
section. The word “member” has been define d in Section 41 of the Companies Act and
sub-section (3) thereof provides that ever y person holding equity share capital of a
company and whose name is entered as benefi cial owner in the records of the depository
shall be deemed to be a member of the concerned company. We may also notice the
relevant provisions of the takeover code the violation of which has been alleged in the
present case. Sub regulations (1) and (2) of Regulation 7 and Regulation 11(1) concern
us and they are reproduced hereunder for facility of reference:
“Regulation 7
Acquisition of 5 per cent and more shares or voting rights of a
company
7(1) Any acquirer, who acquires shar es or voting rights which (taken
together with shares or voting rights, if any, held by him) would entitle
him to more than five per cent or ten per cent or fourteen per cent or fifty
four per cent or seventy four per cent shares or voting rights in a company,
in any manner whatsoever, shall disclose at every stage the aggregate of
his shareholding or voting rights in that company to the company and to
the stock exchanges where shares of the target company are listed.
(1A) ………….
(2) The disclosures mentioned in sub -regulations (1) a nd (1A) shall be
made within two days of
(a) the receipt of intimation of allotment of shares; or
(b) the acquisition of shares or voting rights, as the case may be.
………………. .”
“Regulation 11
11(1) No acquirer who, toge ther with persons acting in concert with him,
has acquired, in accordance with the provisions of law, 15 per cent or
more but less than fifty five per cen t (55%) of the shares or voting rights
in a company, shall acquire, either by himself or through or with persons
acting 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 ex ceeding fifty five per cent in any
financial year ending on 31 st March unless such acquirer makes a public
announcement to acquire shares in accordance with the regulations.”
As already noticed above, the appellants had pledged their shares with the two banks as
collateral security when Morepen availed the loan facilities. It is not in dispute that when

Morepen made default in repayment of the lo ans, the pledges were invoked by the banks
and the shares were transferred from the demat accounts of the a ppellants to the demat
accounts of the banks and they were registered as beneficial owners in the records of the
depository. When the loan acc ount was settled, the banks tran sferred back the shares to
the appellants by executing DIS. It is ar gued by the learned se nior counsel for the
appellants that the shares throughout rema ined under pledge even when they were
transferred in the name of the banks on the invocation of the pledge and that the banks
did not acquire those shares. The argument is that the appellants throughout remained the
beneficial owners of the shares and that when they were tr ansferred back to them by the
banks there was no acquisition by them so as to attract the provisions of Regulations 7
and 11 of the takeover code. The learned senior counsel very strenuously argued that the
relationship between the appellants and the banks even after the transfer of shares to the
latter continued to be that of pledgor a nd pledgee and that the banks were throughout
holding the shares as collateral security which were released on repayment/settlement of
the loan. In support of his argument Shri Chaudhary relied upon the two letters dated
December 13, 2004 and December 19, 2007 which have been reproduced hereinabove.
He also placed reliance on a tripartite agreement dated Augus t 9, 2006 between the
appellants, Morepen and Lakshmi bank titled as extension of pledge. He referred to the
contents of this agreement and clause 8 in particular which reads as under:
“8. That the Company also hereby upholds/recognizes the rights of the
Bank as pledgee, as conferred under the relevant provisions of law and
that the Bank can enforce its rights at any time at its discretion against any
or all the shares secured.”
He wants us to infer from these documents that the banks were holding the shares as
collateral security and that the transfer of the shares in their names did not mean that they
acquired voting rights in the target compa ny or that they became members of that
company. According to the learned senior counsel, the object of transferring the shares in
the names of the banks was only to provide a ce rtain comfort level to them so that they
feel confident that they would be able to recover the amount without going back to the
pledgors if and when a default in payment occurs. We are unable to agree with the
learned senior counsel.

To begin with, the shares were pledged with the two banks as collateral security
for the loans taken by Morpen. Admittedly, the pledges were created as per the
provisions of Regulation 58 of the Regulatio ns reproduced hereinabove. The pledges
were created and recorded in the records of the depository and the pledgors and the
pledgees were informed of the entry of crea tion of the pledges through their participants.
As long as the shares remained under pledge, the peldgors (the appellants) were their
beneficial owners and the only effect of the pledge was that the shares under pledge could
not be transferred any further or dealt with in the market without the concurrence of the
pledgees i.e. the banks. The pledge by itse lf did not bring about any change in the
beneficial ownership of the shares pledged and there was no question of the provisions of
the takeover code being attracted. It was somewhere in the year 2004 that default was
committed in the repayment of the loans as a result whereof the banks invoked the
pledges and got the shares transferred from the demat accounts of the appellants
(pledgors) to their own demat accounts. On such invocation, the depository cancelled the
entry of pledge in its records and registered the banks as bene ficial owners of the shares
in its records and made the necessary amendments therein. The depository then
immediately informed the participants of the pledgors and the pledgees of the change and
the participants also recorded the necessary changes in their records. Upon the banks
being recorded as beneficial owners of the sh ares in the records of the depository, they
became members of the target company and they acquired not only the shares but also the
voting rights attached thereto. But for th e exemption granted to them under Regulation
3(1)(f)(iv) of the takeover code, they woul d have been required to comply with the
provisions of Regulation 11(1) by making a public announcement to acquire further
shares of the target company as envisage d therein. The shares acquired by the banks
ceased to be the security for the loans as the banks had become the beneficial owners
thereof. In December 2007, Morpen paid the entire loan amounts to the banks and settled
the loan accounts. It was then that the ba nks issued a ‘no dues certificate’ to Morepen,
the principal borrower and simultaneously exec uted DIS requiring their participants to
debit their accounts and transfer the shares in the names of the appellants. Accordingly,
the shares got transferred from the demat accounts of the banks to the demat accounts of
the appellants in the records of the depository. On this transfer being made by the banks,

the appellants acquired the shares and becam e their beneficial owners as their names
were entered in the records of the depository. Admittedly, the shares which the
appellants acquired in December 2007 were in excess of the threshold limit(s) prescribed
by Regulation 11(1) of the takeover code and, therefore, the said regulation got triggered.
The appellants were required to come out with a public announcement to acquire further
shares of the target company as envisaged in this Re gulation. This was not done. Not
only this, the appellants having acquired the shar es from the banks were also required to
make the necessary disclosures in terms of Regulation 7 of the takeover code to the target
company and the stock exchanges where the shar es were listed. This, too, was not done.
We are, therefore, satisfied that the provisi ons of Regulations 7 and 11(1) stood violated
and the adjudicating officer was right in record ing a finding to this effect. No fault can,
thus, be found with the impugned order, in this regard.

The argument of the learned senior counsel that the letters dated
December 13, 2004 and December 19, 2007 and the tripartite agreement executed on
August 9, 2006 clearly indicate the intention of the partie s that the shares were
throughout held by the banks as collateral secu rity notwithstanding th e fact that they
stood transferred in their names is not accep table. Such an argument would mean
circumventing the statutory provisions of the takeover code and Regulation 58 of the
Regulations which cannot be permitted. The wa y we read these documents is that after
the shares were transferred in the names of the banks on the invocation of the pledge, the
parties agreed that the banks will transfer the shares back to th e pledgors (appellants)
upon the loan being repaid. It was open to the banks to transfer the shares to other parties
and instead of doing that, they ag reed to transfer the shares b ack to the appellants. This
agreement will not override or circumvent the statutory provisions already referred to
above and would only result in tr ansfer of shares from the ba nks to the appellants. This
transfer is altogether different from the tr ansfer by which the shares came to the banks
upon invocation of pledge and by no process of reasoning can it be said that the banks
continued to hold the shares as collateral security which was returned to the appellants on
the repayment of the loan.

We may now take note of another submission made by the learned senior counsel
for the appellants. He contends that the banks may have become beneficial owners of the
shares when they were transferred in thei r demat account but they had not become the
real owners of the shares and they could not have gained title to the said shares in the
absence of any consideration. There is no merit in this contention at all. The
Depositories Act, 1996 provides for only two cate gory of owners viz. ‘registered owner’
who has necessarily to be a depository and a ‘beneficial owner’ in whom all the rights
vest. Once the beneficial ow nership stands transferred to the banks the parties cannot
circumvent the legal provisions by entering into an agreement to make a declaration
otherwise. The law also prescribes a mode for the creation and revocation of a pledge.
The parties cannot agree to create a pledge contrary to the provisions of Regulation 58.
The present is, indeed, a case where the shares had been pledged to secure the loan and
on default being made in its repayment, the pledge was invoked. Even the Contract Act
entitles the pledgee to invoke the pledge when a default occurs. In the case of shares held
in demat form, the Depositories Act and the Regulations framed thereunder provide the
manner in which the pledge is to be crea ted and invoked and that procedure was duly
followed in the present case. As alrea dy noticed, when the pledge was invoked, the
banks became the beneficial owners of the shares and thereafter on repayment of the loan
the shares were transferred back to the appe llants on the basis of an agreement between
the parties. The appellants did not get back the shares by redeeming the pledge. If that
had been the case, the matter would have b een different. We fail to understand how a
question of consideration arises in such cases. The learned senior counsel also referred to
the provisions of Section 28 of the Depositories Act and Section 32 of the Securities and
Exchange Board of India Act, 1992 and conte nded that the provisions of these statutes
are in addition to and not in derogation of a ny other law in force relating to the holding
and transfer of securities. He submitted that securitization under these statutes was only
procedural in nature and could not override the substantial law contained in the Contract
Act and The Sale of Goods Act. In our view the argument is fallacious and
misconceived. There is no sale of shares invol ved in the present case and, therefore, the
Sale of Goods Act would not apply. As re gards the Contract Act, we have already
noticed above that it entitles a pledgee to invo ke the pledge in case of default which is

what the banks did. We see no conflict in the provisions of the statutes referred to by the
learned senior counsel.
For the reasons recorded above, we find no merit in these appeals and the same
stand dismissed. There is no order as to costs.
Sd/-
Justice N.K.Sodhi
Presiding Officer

Sd/-
P.K. Malhotra
Member

         Sd/- 
         S.S.N. Moorthy 
                      Member

11.3.2011
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