BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 69 of 2011
Date of decision : 16.11.2011 M/s. Helios and Matheson Information
Technology Limited
C/o. Corporate Law Chambers India,
44A, Nariman Bhavan,
Nariman Point,
Mumbai – 400 021. …… Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C-4A, ‘G’ Block,
Bandra Kurla Complex, Bandra (East),
Mumbai. …… Respondent
Mr. P.N. Modi, Advocate with Mr. Vinay Chauhan and Mr. Anant Upadhyay, Advocates
for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Mihir Mody and Mr. Mobin Shaikh, 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
Whether the appellant made a misleading announcement or failed to disclose
price sensitive information to the investors when it sought to acquire three companies to
expand its business operations is the short quest ion that arises for our consideration in
this appeal filed under Section 15T of the Securities and Exchange Board of
India Act, 1992. Facts giving rise to this a ppeal which lie in a narrow compass may first
be stated.
- The appellant, a public limited company whose shares are listed on the Bombay
Stock Exchange Ltd. (BSE) and National Stock Exchange of India Ltd. is in the business
of information technology serv ices with its corporate head quarters at Chennai and
subsidiaries and offices in USA, Singapore and Bangalore. The appellant was looking for
expanding its operations and on a proposal received from M/s. Pricewaterhouse 2
Coopers Pvt. Ltd. in or around February 2005 , it agreed to acquire three companies
namely, vMoksha Technologies Inc USA, vMoksha Technologies Pte Singapore and
vMoksha Technologies Pvt. Ltd., Bangalore (c ollectively referred to hereinafter as
vMoksha entities). A preliminary term-sheet setting out the terms of acquisition was
signed in April, 2005 between the appellant on the one hand and vMoksha entities along
with Mr. Tapan Garg, Mrs. Madhuri Garg, Mr. Rajeev Sawhney, Mrs. Poonam Sawhney
and Mr. Pawan Kumar on the other and they sha ll collectively be referred to hereinafter
as the sellers. The appellant made a disclosu re to the stock exchanges on April 12, 2005
stating that it had signed an agreement to acquire 100 per cent of vMoksha entities
subject to standard closing conditions. Subsequently, on May 2, 2005 the appellant
informed the stock exchanges that a meeting of its board of directors would be held on
May 9, 2005 to consider the signing of share purchase agreement (for short SPA) for
acquiring vMoksha entities and for fixing a da te for holding an extra-ordinary general
meeting of its shareholders to give eff ect to the same. Ther eafter on May 9, 2005 the
appellant informed the stock exchanges that its board of directors in their meeting held on
that very day had authorised its managing director to sign the SPA and to do all other acts
necessary for the acquisition and that he had also been authorised to convene an extra-
ordinary general meeting of the sharehol ders for obtaining their approval. These
disclosures were made to the stock excha nges as per the requirement of the listing
agreement. On May 11, 2005, the SPA was signed between the appellant and the
vMoksha entities and the former issued a press release on the same day and the stock
exchanges were informed on May 12, 2005 regard ing the same. The relevant part of the
press release is reproduced hereunder for facility of reference:
“Chennai, May 11, 2005; Helios & Matheson Information
Technology Ltd. today announced that it has completed the
acquisition of all three vMoksha companies, vMoksha Technologies
Inc, USA, vMoksha Technologies Pte Limited, Singapure and
vMoksha Technologies Private Limited, Bangalore.
“The acquisition of the 3 vMoksha companies is complete and we
are working towards a seamless integration,” said Mr. V.
Ramachandiran, Chairman, Helios & Matheson. “By this
transaction, we are investing cash-19 mn dollars, and therefore it is a
big statement about our commitment and seriousness to build scale,
capabilities and international presence.” 3
The Share Purchase Agreement was signed today by Helios &
Matheson and vMoksha’s officials after completion of all procedural
formalities. The all-cash deal was closed at USD 19 million and
includes earn-out for achieving ta rgeted financial milestones over a
two-year period. vMoksha is a business that has 510 employees and
global presence with offices in USA, Europe, Singapore and India.
Helios & Matheson earlier signed an agreement in April 2005 with
vMoksha to acquire all the three companies. With the completion of
the acquisition, all 3 vMoksha enti ties now become wholly owned
subsidiaries of Helios & Math eson. Pawan Kumar, founder of
vMoksha and former head of IBM in India, will continue as CEO
post acquisition.”
On receipt of information regarding executi on of the SPA, BSE as per its usual practice
flashed the information on its website on May 12, 2005 itself for the benefit of the
investors and this is how it reads:
“ Corporate Announcement
Scrip Code:532347 Company: Helios & Matheson-$
May 12, 2005
Subject : Helios & Matheson companies acquisition of
3 vMoksha companies
Helios & Matheson Information Technology Ltd. has announced that it
has completed that the acquisition of all three vMoksha Companies,
vMoksha technologies Inc., USA, vMoksha Technologies Pte Ltd,
Singapore and vMoksha Technologies Pvt. Ltd. Bangalore.
“The acquisition of the 3 vMoksha Companies is complete and we are
working towards a seamless integration,” said Mr. V. Ramachandiran,
Chairman of the company. ‘By this transaction, we are investing cash – 19
mn dollars, and therefore it is a big statement about our commitment and
seriousness to build scale, capabilities and international presence”.
Announcement: The Share Purchase Agreement was signed on May 11,
2005 by Company’s and vMoksha’s offi cials after completion of all
procedural formalities. The all-cash deal was closed at USD 19 million
and includes earn-out for achieving targeted financial milestones over a
two-year period, vMoksha is a business that has 510 employees and global
presence with offices in USA, Europe, Singapore and India.
“We are looking at an aggressive gr owth to USD 100 mn revenue in the
next 24 months and also at attaining a critical mass of 2000 employees by
- We plan to enhance our international competitive position through
both organic growth and strategic acquisitions. With the completion of the
vMoksha deal, we are well positioned to achieve our strategic goals.” said
Mr. G.K. Muralikrishna, Managing Director of the Company.”
As per the SPA, the appellant wa s to pay a consideration of ` 1877.77 per share to the
sellers for acquiring the vMoksha entities. - Apart from executing the SPA on Ma y 11, 2005, the parties executed two other
agreements as well on the same day. A sh are subscription agreement (SSA) and an 4
Escrow agreement were also executed between them. As per the SSA, the sellers were to
subscribe to redeemable preference shares of the appellant company to be redeemed for
cash at the expiry of eighteen months from th e date of the subscription agreement. The
subscription price was to be paid by the sellers to the appellant company simultaneously
on receipt of funds from the latter to the former under the SPA. According to the Escrow
agreement, M/s. Pricewaterhouse Coopers Pvt. Ltd. and Khaitan & Co. were to be the
escrow agents and were to keep in their custody, inter alia, vari ous documents like the
share transfer deeds, share certificates of vMoksha companies held by the sellers. It is not
in dispute that pursuant to the execution of these agreements, the sellers had deposited the
share certificates along with the signed tr ansfer deeds and resignation letters of the
directors of vMoksha entities. Since the approval of Foreign Investment Promotion Board
(FIPB) was required by the sellers for subscr ibing to the redeemable preference shares,
the appellant made an application on Ma y 20, 2005 seeking that approval which was
received only on June 30, 2005. Immediately on receipt of the approval from FIPB, the
appellant received on June 30, 2005 an amount of63,04,14,007.00 from the sellers towards application money for issuing redeem able preference shares and the appellant also paid the consideration amount of63,04,14,007.00 to the sellers as contemplated
under the SPA. After the appe llant had paid the considera tion to the sellers and the
sellers too had invested in the appellant-company and de posited the application money
for subscribing to the redeemable preference shares, the only thing that remained was the
convening of a meeting of the board of dir ectors of the vMoksha entities for the purpose
of approving the transfer of shares in favour of the appell ant that were lying with the
escrow agents, acceptance of the resignations tendered by the directors of vMoksha
entities and induction of the representatives of the appellant on the board of directors of
vMoksha entities. It appears that inter se disputes had by then arisen between Pawan
Kumar and Rajeev Sawhaney, the two sellers as a result whereof the board meetings of
the vMoksha entities could not be convened. It is the case of the appellant that the sellers
kept promising to complete the formalities bu t there was considerable delay resulting in
value erosion and ultimately the sellers by their letter dated January 28, 2006 wrote to the
escrow agents requesting them for the releas e of documents deposited with them so that 5
the disputes between Pawan Kumar and Rajeev Sawhney could be settled. It was then
that the escrow agents emailed the request of the sellers to the appellant seeking
permission from the appellant whether to re lease the documents lying with them. The
appellant by its letter dated February 6, 2006 communicated its objection to the release of
the documents to the sellers and specifically in structed the escrow ag ents not to release
the documents. According to the appell ant, the sellers had gone back on their
commitment as per the SPA and, therefore, it invoked the arbitrat ion clause and the
dispute between them is pending before the arbitrator(s). The appellant then informed the
stock exchanges on February 13, 2006 as under:
“Dear Sir,
We wish to inform you that Helios & Matheson has initiated arbitration
proceedings and has appointed its arbi trator viz Hon. Justice Shri N. V.
Balasubramanian, Retd Judge, high Court, Madras on Friday, February 10, - This is in response to certain information received from the Escrow
Agents, PricewaterhouseCoopers Privat e Ltd and Khaitan & Co., to the
Share Purchase Agreement, which we had entered into with the Sellers,
vMoksha Mauritius, on May 11, 2005 for 100% acquisition of the 3
vMoksha entities in India, Singapor e and USA. We believe that the
current proceedings will in no way impact our investment, or revenue and
profit guidance for Financial year 2005-2006.
Yours faithfully
For Helios & Matheson information Technology Ltd.,
Sd/-
K.M. Kumar
Company Secretary” - The Securities and Exchange Board of India (for short SEBI) felt that the
disclosures made by the appellant in it s press release dated May 11, 2005 and the
disclosures made to the stock exchange s on May 12, 2005 regarding the acquisition of
vMoksha entities by the appellant contained misstatements and it withheld price sensitive
information from the investors who were thereby misled. According to SEBI, the
appellant had violated regulati ons 3(a), 3(d) and 4(2)(k) of the Securities and Exchange
Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003 read with clause 2.1 of the Code of Corporate
Disclosure Practices for Prevention of Insider Trading in Schedule II to the Securities and
Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992. These
regulations shall be referred to hereinafter as FUTP and PIT regulations respectively.
SEBI decided to initiate adjudication proceed ings against the appellant and appointed an 6
adjudicating officer who served a show cause notice dated March 18, 2008 on the
appellant levelling three charges against it. Since one of the charges was not established
during the course of the enquiry , it is not necessary for us to refer to the same. The two
charges which have been held established read as under:
“It is alleged that you had failed to make announcements/disclosure with
regard to the following price sensitive information:
i. The complete terms and conditions of the deal to acquire vMoksha.
You had not stated the entire fact s in the press release dated May
11, 2005 and disclosure dated May 12, 2005, that the sellers would
subscribe to preference shares as subsequent leg of the deal. It
appears from the announcements of your company that you were
purchasing a company by paying cash from your general reserves.
However, the deal was structured in such a way that sellers would
subscribe to redeemable preference shares of your company for an
equivalent amount of the sale pric e and the sellers would in turn
wire back the same amount to you towards subscription to
preference shares. The issue of preference shares, which is
allegedly willfully withheld from shareholders, for the specific
purpose of buying the company fr om the sellers negates all
connotations of a “cash deal.
ii. It has been alleged in the disclosure dated May 12, 2005 you had
informed that all the procedural formalities for acquisition of the 3
vMoksha companies were completed. However as per Clause 4 the
SPA, it has been observed that the completion shall take place on a
date to be mutually agreed upon by both the parties on compliance
of certain other clause s in the agreement but such date would not
be later than 120 days from the signing of the SPA. It has been
alleged that you had prima facie, misled investors by stating that
the deal was complete whereas the deal was not complete in
entirety and was still subject to compliance of certain conditions.”
A reading of the aforesaid two charges make s it clear that these are based on the press
release issued by the appellant on May 11, 2005 a copy of which was sent to the stock
exchanges on the following day. A copy of th e press release is Exhibit E on the record
and the corporate announcement that was fl ashed by BSE on its website is Exhibit F
before us. What has been flashed on the webs ite is the relevant extract from the press
release and the two are almost the same except that a few other matters not relevant to the
present controversy were omitted by BSE. - The appellant claims that it did not r eceive the aforesaid show cause notice from
the adjudicating officer and that it came to know of the proceedings only when it received
the letter dated April 23, 2009 providing the appellant an opportunity of personal hearing
in the matter. The appellant then informed the adjudicating officer that it had not received 7
the show cause notice and asked for copy of the same. A copy of th e show cause notice
was then furnished to the appellant which filed its comprehensive reply on July 3, 2009
denying the allegations. It also filed its wr itten submissions on June 28, 2010 at the time
of personal hearing. On a considera tion of the material collected by the
adjudicating officer during the course of the enquiry conducted by him and taking note of
the submissions made by the appellant, he f ound that the two charges referred to above
stood established. In paragraph 39 of his order, he recorded a finding in the following
words holding that the information furnished by the appellant was inaccurate and
incomplete:
“From the above discussion, I find that the information given by the
Noticee is not accurate and is in complete. The payment may be
made by Noticee in cash and the preference shares may be redeemed
in cash but at the time of making the announcement, the deal was
not an all cash deal because callin g it a cash deal would make the
investors presume that no other conditions stand attached to the deal.
However, that is not the situation in the present case. Even if the
subscription to the preference shares was insisted to protect the
interest of investors, it does not render the incomplete and inaccurate
disclosures complete and correct.”
He further found that the deal was yet to be completed after complying with clauses 2.2.1
and 2.2.2 of SPA and that the appellant had wr ongly stated in the press release that the
deal was complete. This is what he has said in this regard:
“In view of the above, it is very clear that the deal was to be
completed after complying with Clauses 2.2.1 & 2.2.2 of the
agreement. The clause 2.2.1 provides about payment of
consideration, which happened on June 30, 2005 only as per the own
submission of the Noticee. I find that the clause 4 of the SPA clearly
states that the completion of the Agreement would be on a date
mutually agreed between the parties and shall not be later than 120
days from the date of signing of SPA. Moreover a deal can not be
termed as completed without exchange of consideration.”
The adjudicating officer while rejecting the c ontention of the appellant that the deal was
complete and that very few obligations were left by the parties to be carried out, he
observed in paragraph 50 of the order as under:
“From the above, I find that the Noticee has claimed that very few
obligations were left only for the parties to perform, which is not
correct. The biggest obligation to be completed was on the part of
the Noticee i.e. the payment of consideration which happened only
on June 30, 2005. In such a case, how could the deal be said to be
completed when the SPA in clause 4 gives conditions precedent to
the completion which includes payment by the Noticee to the sellers.
Hence I find that the Noticee had made a incorrect disclosure on 8
May 12, 2005 by calling that the deal of acquisition of vMoksha was
complete.”
Again, while observing that wrong and inco mplete disclosures had been made by the
appellant in the press release, the adjudicating officer held that this act operated as fraud
and deceit upon persons connected with the securities market a nd he recorded his
findings in the following words:
“In view of the aforesaid, I find that by making wrongful and
incomplete disclosures the Noticee has engaged in such an act,
practice, course of business which would operate as fraud or deceit
upon any person in connection with any dealing in or issue of
securities of the Noticee which are listed on the stock exchange. The
announcements by the Noticee in ques tion is definitely misleading
and contains information in a distorted manner and which may
influence the decision of the investors and hence is in contravention
of the law. The Code of Corporate Disclosure Practices for
Prevention of Insider Trading as stated in schedul e II read with
Regulation 12(2) of PIT Regulations requires that price sensitive
information should be given by listed companies to stock exchanges
and disseminated on a continuous a nd immediate basis. The Listing
Agreement also requires the compan ies to immediately inform the
Exchange of all the events, which will have bearing on the
performance/operations of the comp any as well as price sensitive
information.
Therefore, I find that the Noticee stands in violation of provisions of
Regulations 3(a), 3(d) and 4(2)(k) of PFUTP Regulations and clause
2.1 of the Code of Corporate Disclo sure Practices for Prevention of
Insider Trading of Schedule II read with Regulation 12(2) of PIT
Regulations.”
Accordingly, by his order dated January 31, 2011 he imposed a monetary penalty of25 lacs on the appellant for violating regulat ions 3(1), 3(d) and 4(2)(k) of the FUTP regulations. He further imposed a penalty of25 lacs for violating clause 2.1 of the Code
of Corporate Disclosure Practices for Preven tion of Insider Tradi ng of Schedule II read
with regulation 12(2) of PIT regulations. It is against this order that the present appeal
has been filed. - We have heard the learned counsel for the parties who have taken us through the
record and the impugned order. As already noticed above, the charge regarding violation
of the FUTP regulations is primarily base d on the findings recorded by the adjudicating
officer that the disclosures made by the appellant in the press release dated May 11, 2005
were inaccurate and incomplete. The adjudicating officer has found that the appellant had
not disclosed that the sellers would be subscribing to the preference shares as subsequent 9
leg of the deal and that this information had been “willfully withheld”. He has also found
that the appellant had misled the investors by stating that the deal was complete whereas
the deal was not complete in entirety and that it was a cash deal when in fact it was not.
Let us now examine whether the adjudicatin g officer was right in recording these
findings. The fact that the sellers would be subscribing to the preference shares and that
the appellant company would be issuing those shares to them had not been mentioned in
the press release. The requirement of making necessary disclosures to the stock
exchanges and through them to the investors is contained in clause 36 of the listing
agreement that is executed between the stock exchange(s) and the issuer company. This
agreement is executed by every listed compan y with the stock exchange(s) where its
securities are listed and it has a statutory force. There is a format prescribed by SEBI
which is contained in its manuals and every li sting agreement has to be in that format.
The relevant part of clause 36 requiring the necessary disclosures to be made from time
to time reads thus:
“Listing Agreement
Clause 36 – “……….. The Company will also immediately inform
the Exchange of all the events , which will have bearing on the
performance/operations of the company as well as price sensitive
information. The material events may be events such as:
(1) to (6) ……………………..………………….
(7) Any other information having bearing on the
operation/performance of the company as well as price sensitive
information, which includes but not restricted to,
(i) Issue of any class of securities.
(ii) Acquisition, merger, de-merge r, amalgamation, restructuring,
scheme of arrangement, spin o ff or selling divisions of the
company, etc.
(iii) to (viii) …………………….……………….
The above information should be made public immediately.”
A reading of the aforesaid clause makes it clear that a company has to immediately
inform the stock exchange(s) of the ev ents which would have a bearing on its
performance/operations as well as price sensitive in formation. Sub-clause 7(i) of
clause 36 requires the issuer company to inform the stock exchange(s) regarding issue of
any class of securities. Since the appellant wa s to issue redeemable preference shares to
the sellers, it was necessary for it to disclose this info rmation. Not having done so, it
10
clearly violated this clause of the listing ag reement. Moreover, we are of the view that
information regarding issue of securities by a company is “price sensitive information” as
defined in regulation 2(ha) of the PIT regulations and it was necessary for the appellant to
inform the stock exchange(s ) about it so that it becomes public. Price sensitive
information when published is likely to material ly affect the price of the securities of a
company and it is for this reason that clause 36 of the listing agreement mandates that
such information should be made public at the earliest. This is al so the requirement of
clause 2.1 of the Code of Corporate Disclo sure Practices for Prevention of Insider
Trading in schedule II to the PIT regulations which provides that “price sensitive
information shall be given by listed companies to stock exchanges and disseminated on a
continuous and immediate basis”. Disclosure of such information prevents insider
trading. It is pertin ent to mention that PIT regulations prohibit a person from trading
when he is in possession of unpublished price sensitive information. Non-disclosure of
price sensitive information is, thus, viewed seriously. Since the information regarding
issue of preference shares by the appellant to the sellers, being price sensitive, had not
been disclosed in the pre ss release on May 11, 2005, we ar e in agreement with the
adjudicating officer that the appellant violated clause 36 of the listing agreement and also
the aforesaid clause 2.1 of Schedule II to the PIT regulations. However we are unable to
agree with the adjudicating officer that th e deal was not a cash deal. We have gone
through the press release issu ed by the appellant on May 11, 2005 and we do not think
that it creates an impression that the ac quisition was being made by the appellant by
paying cash from its general reserves as is al leged in the show cause notice. The deal
was a cash deal and we say so because the consideration that was paid by the appellant to
the sellers for the acquisition was by way of cash which had been remitted by wire
transfer through normal banking channels and simultaneously the amount which the
sellers gave to the appellants as application money for the redeemable preference shares
had also been transferred in a similar manner. It is in this context that the deal is said to
be a cash deal. It is nobody’s case that the acquisition was on swap basis. Acquisitions
and mergers of companies do take place where instead of paying cash, the shares of the
companies are swapped among the shareholders. That is not the case here. The learned
11
counsel for the respondent Board brought to our notice clause 2.2.3 of the SPA which
provides that if prior approval from FIPB coul d not be obtained the parties had agreed to
mutually amend the SPA for acquiring the vMoksha entities on a stock swap basis. It is
with reference to this clause that the learned counsel fo r the Board strenuously argued
that the deal in the present case was not a cash deal. We are unable to agree with him. It
is common ground between the parties that FIPB approval had been obtained on
June 30, 2005 where upon on the same day sale consideration was remitted to the sellers
and simultaneously the sellers remitted the application money for the issue of redeemable
preference shares through wire transfer a nd it was cash that was transferred through
normal banking channels.
- In view of our discussion above, we hol d that the first charge regarding the
appellant not disclosing the second leg of the deal in the pr ess release regarding issue of
redeemable preference shares to the sellers stands established and the other part of the
charge that the deal in question was not a cash deal fails. - This brings us to the second charge levelled against the appellant. It is alleged that
it misled the investors by stating that the deal was complete when it was not complete in
its entirety. The adjudicating officer has found that the appellant had misled the investors
in this regard thereby violating the provisions of regulations 3(a), 3(d) and 4(2)(k) of the
FUTP regulations. We are clearly of the view that the adjudicating officer was wrong in
holding that this charge stood establis hed. It is common case of the parties that on
May 11, 2005 three agreements had been execute d between the appellant and the sellers
namely, SPA, SSA and the Escrow agreement. It is also not in dispute that the sellers had
executed share transfer deeds in favour of the appellant and those transfer deeds
along with the share certificates held by them with regard to vMoksha entities were
delivered to the Escrow agents. The resi gnation letters of the directors of vMoksha
entities had also been handed over to these agents. Clause 2.2.1 of the SPA required the
appellant to pay to the sellers considera tion for the acquisition of vMoksha entities
computed at the rate of ` 1887.77 per share and this was to be remitted by wire transfer
through normal banking channels and payment to the other individual sellers was to be
made by bank draft. It was also provide d in this clause that on obtaining the 12
FIPB approval the sellers woul d subscribe to redeemable preference shares on their
making payment of the application money. A ll this had been done by the sellers and the
appellant on June 30, 2005. In other words, the sellers and the appellant had performed
their respective parts of the contract and the only thing that remained was that sellers had
to formally accept the resignation letters of their directors which had already been
submitted and they were also to formally approve the transfer of shares in the name of the
appellant for which all the relevant and n ecessary documents had been executed. The
SPA specifically provides that sellers “cannot rescind this agreement … and shall only
take all steps to honor the terms and condi tions agreed in this Share Purchase
Agreement.” However, the appellant could at its option waive or postpone any condition
precedent mentioned in SPA. The adjudicating officer holds that the deal was incomplete
as between the appellant and the sellers because by then (date of executing SPA) the
consideration for acquiring the vMoksha entities had not been paid to the sellers. He has
referred to clause 2.2.1. of the SPA in this rega rd. We cannot agree with him. We have
already noticed that both clauses 2.2.1 and 2.2.2 had been complied with by the parties
and, therefore, the deal was complete. Merely because the consideration was not paid by
the appellant on May 11, 2005 when the SPA was executed did not make the deal
incomplete. In our view the adjudicating offi cer has totally misdirected himself in this
regard. Section 20 of the Sale of Goods Act provides that where there is an unconditional
contract for the sale of specific goods in a deliverable state, the property in the goods
passes to the buyer when the contract is made and it is immaterial whether the time of
payment of price or the time of delivery of the goods or both is postponed. In the present
case, the deal was that the sale consideration by the appellant was to be paid
simultaneously when the sellers invested an equal amount towards redeemable preference
shares of the appellant company. Sin ce FIPB approval came on June 30, 2005, the
consideration was paid on that day. As already noticed, the sellers had committed
themselves for the transfer of the shares of vMoksha entitie s in favour of the appellant
when they deposited with th e Escrow agent not only the sh are certificates but also the
transfer deeds duly executed in favour of the appellant alongwith their resignation letters.
It is by now well settled that in the case of transfer of shares held in the physical form, the 13
transfer is complete the moment blank tran sfer deeds are executed by the sellers and
delivered to the purchaser. Reference in this regard be made to a Division Bench
judgment of the Madras High Court in Comm issioner of Income-tax vs. M. Ramaswamy
(1985) 151 ITR 122 wherein it ha s been held that as betw een the transferor and the
transferee, the transaction of sale of shares is complete when the blank share transfer
forms are executed by the transferor and merely because the company has not recognised
the transfer and made entries in the share registers, the tr ansfer cannot be said to be
incomplete. The learned Judges of the Madras High Court relied upon a judgment of the
Supreme Court in Vasudev Ramchandra Shelat vs. Pranlal Jayanand Thakkar and Ors.
AIR 1974 SC 1728 wherein it was held that ow nership of shares stood transferred from
the assessee to the purchaser upon the executio n of blank transfer deeds notwithstanding
the fact that the transfer of shares had not been registered in the company’s books. It was
held that if a transferor has transferred the right to get the share certificates from the
company in the name of the transferee, then, as between the transferor and the transferee,
the transfer is complete though the transferee cannot exercise his rights as a shareholder
vis-a-vis the company until th e transfer of shares is r ecorded in the register of
shareholders in the company. In the presen t case, when the share certificates along with
the transfer deeds were execute d by the sellers, the deal re garding the transfer of the
shares as between the sellers and the appella nt was complete and the adjudicating officer
in our view was in error in holding otherwise. It is true that the sellers did not formally
accept the resignations of the directors of vMoksha entities and did not approve the
transfer of shares but this, in our view, did not make the deal incomplete but only gave a
right to the appellant to have the shares transferred in terms of the SPA. - The matter can be looked at from anothe r angle as well. Th e word sale in its
popular sense or in common parlance has a wide r import that what it has in its legal
sense. In its popular sense, sale is said to take place when the bargain is settled between
the parties though property in the goods may not pass at that stage. Similarly, when the
appellant said in the press release that “T he acquisition of the 3 vMoksha companies is
complete…….” it meant that the bargain had been struck and in that sense the acquisition
was complete because the sellers do not have an exit route except by committing breach 14
of the contract. The word “complete” in the press release has to be understood in this
sense. When persons doing commerce use th ese terms in their popular sense, their
statements cannot be said to be misleadi ng warranting penal action. For these reasons,
we hold that the second charge is not established.
In the result, the appeal is partly allowed a nd the findings of the
adjudicating officer on the second charge are set aside so al so the penalty of25 lacs imposed on this count. The findings on the first charge in so far as they relate to the deal in question not being a cash deal are also set aside. The ot her finding on the first charge relating to non-disclosure of price sensitive information by the appellant is upheld. Consequently, the penalty imposed for the violation is reduced to15 lacs. 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 </code></pre>16.11.11
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