Securities Appellate Tribunal
In Re: Acquisition Of Shares/ Voting ... vs Unknown on 30 April, 2003
ORDER
G.N. Bajpai, Chairman
1. BACKGROUND 1.1 Mr. C V Kamani, Mr. R C Kamani, Mr. D C Kamani, Unicorn Holdings Pvt. Ltd- a holding and investment company for the Kamani family and Troupe International Ltd-Overseas Corporate Body owned by Kamani Family (hereinafter collectively referred to as Acquirer) collectively hold 65.57% shares in Rajath Finance Limited (hereinafter referred to as Target company). The Target company has been promoted by Kamani family. The shares of the Target company are listed at the Saurashtra Kutch Stock Exchange, Ahmedabad Stock Exchange and The Stock Exchange, Mumbai.
1.2 The Acquirer proposes to acquire 20.11% shares of the Target company from public shareholders and 14.31% shares from other directors/promoters/ relatives holding shares in the Target company. Pursuant to the aforesaid proposed acquisition of 34.42% shares of the Target company, the Acquirer will hold 100% shares in the Target company.
2. APPLICATION FOR EXEMPTION 2.1 The Acquirer made an application dated 30.11.2002 to the Securities and Exchange Board of India (hereinafter referred to as SEBI) under sub-regulation (2) of regulation 4 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as "the Regulations") seeking exemption from the provisions of Regulation 11(1) for making public announcement by making an advertisement and to appoint Merchant Banker / Registrar in terms of the Regulations.
3. SUBMISSIONS IN THE EXEMPTION APPLICATION 3.1 In the aforesaid application dated 30.11.2002 and subsequent correspondence dated 12/12/2002 the Acquirer inter-alia, submitted as under:
3.2 The Target Company is a medium scale finance company operating since last 17 years. The Company is listed since 1986. Since last few years the business prospects of finance Companies are not encouraging. The business and the profitability of the Target company was also affected and the company is not in a position to declare dividend.
3.3 The shares of the Target company which are listed at Stock Exchanges are also not quoted since last more than six years due to lack of liquidity and not encouraging future prospects of Finance Companies.
3.4 The funds of individual investors who are shareholders in the Target company are blocked due to lack of liquidity, and they have no exit opportunity available to them. Further the Target company considering the size and profitability is finding difficult to comply with the various provisions of listing agreement.
3.5 In the best interest of the investors at large the promoters propose to acquire all the shares of the Target company held by public and other promoters/ directors and their relatives etc. to make the Target company as closely held company.
3.6 As the number of shareholders are small and concentrated mostly at Rajkot and Mumbai and to make minimum expenditure in the best interests of the investors and to complete the acquisition in the shortest period possible exemption is sought from the long procedure for making public offer and ready to comply with the condition, if any, imposed by SEBI.
4. RECOMMENDATION OF THE PANEL The said application was forwarded to the Takeover Panel in terms of sub-regulation (4) of regulation 4 of the Regulations. The Takeover Panel vide its report dated 20.12.2002 has recommended, inter alia, as under:
"Since the acquirer propose to acquire all the shares held by public and other promoters / directors and their relatives, in the facts stated, grant of exemption as sought is recommended subject to the acquirer -
(i) making individual offers to each of the remaining shareholders by directly addressing offer letters offering to buy the shares;
(ii) sending such letters to each of such shareholders at the recorded addresses by Registered Acknowledgement Due Post;
(iii) Submitting of Certificate of auditor / independent Chartered Accountant to the effect that the offer letters were so posted; and
(iv) Offering price determined as per Regulation 20(2) of the Takeover Code but not less than Rs.10/- per share;
(v) Opening separate account with Nationalized / Scheduled Commercial Bank and depositing therein full amount payable for acquisition of at least 20.11% equity shares of the target company held by public at large (excluding 14.31% shares held by other Directors / Promoters relatives)and retaining such amount therein until paid to such shareholders;
(vi) Submitting certificate from auditors / independent Chartered Accountant Certifying that such separate Bank Account has been opened and the full amount payable as aforesaid has been deposited therein before dispatch of offer letters;
(vii) Submitting certificate from the auditors / independent Chartered Accountant certifying that such separate Bank account was operated and money therein was utilized only for purpose of making payments to the said public shareholders."
5. PERSONAL HEARING As the Panel did not recommend grant of exemption as sought by the Acquirer, the Acquirer was given a hearing before Chairman, SEBI in terms of sub regulation (6) of regulation 4 of the Regulations, on 25.03.2003. During the course of hearing, the Acquirer reiterated the submissions made in the exemption application and inter-alia, submitted during the hearing and vide its letters dated 6.1.2003, 11.2.2003, 27.02.2003, and 27.03.2003 that :
5.1 They would acquire shares from public shareholders @ Rs.11.69/- i.e. the Book Value of Target Company shares as on 31/3/2002.
5.2 Considering the future additional liabilities and meager profits in the current year the Book value of the Target Company will be reduced to below Rs.10/- per share, hence acquisition from public shareholders may be approved @ Rs.10/-.
5.3 During the year the Acquirer has acquired 2,06,760 shares from the public representing 5.17% of the share capital of the Target company. Additionally 12,500 shares were acquired by the Acquirer by virtue of inter se transfer of shares among promoters. The transfer of these shares took place on December 15, 2002 and January 31, 2003.
5.4 In making the said application to SEBI, the object of the Acquirer is to acquire the shares from the public at the minimum cost in the best interests of the small investors subject to the conditions as imposed by SEBI.
5.5 In case exemption is not granted by SEBI, the end result will be the same to acquire shares from the public who have no exit opportunity available but with an additional burden to incur expenditure on merchant banker/ public advertisement etc.
6. ISSUES
6.1 I have taken into account the submissions made by the Acquirer in the exemption application and during the hearing and vide letters dated 6.1.2003, 11.2.2003, 27.2.2003 and 27.3.2003, the material available on record and the recommendations of the Panel. The issue which arises for consideration is :
Whether the Acquirer is entitled for exemption from complying with the provisions of Chapter III for the proposed acquisition of 34.42 % shares of the Target company.
Before proceeding to deal with the issue it would be relevant to advert to the relevant provisions of the Regulations.
Regulation - 11 (Consolidation of holdings).
11 (1) " No Acquirer who together with persons acting in concert with him has acquired in accordance with the provisions of law 15 per cent or more but less than 75 per cent 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 in any period of 12 months unless such Acquirer makes a public announcement to acquire shares in accordance with the Regulations."
Regulation 14 (Timing of the public announcement of offer) Regulation 14(1) : "The public announcement referred to in Regulation 10 or Regulation 11 shall be made by the merchant banker not later than four working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the respective percentage specified therein".
From the combined reading of the aforesaid Regulations, it is clear that no Acquirer along with persons acting in concert, (who are holding 15% or more and less than 75% shares/voting rights in the company) can acquire more than 5% shares/voting rights in any period of twelve months unless he makes a public announcement to acquire such further shares. Further, it is clear that there is a prohibition on the Acquirer, not to acquire shares or voting rights or control of the Target company unless the Acquirer makes a public announcement within four working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the respective percentage specified therein, to acquire shares in accordance with the regulations and acquires such shares in accordance with the regulations. Thus the regulations not only mandates issuance of public announcement by the Acquirer but also requires the Acquirer to acquire such shares in accordance with the regulations. It is clear that issuance of public announcement is a pre acquisition requirement.
I have noted the submission of the Acquirer that the Target Company is a medium scale finance company operating since last 17 years and since last few years the business prospects of finance Companies are not encouraging.
I have noted that the shares of the Target company which are listed at Stock Exchanges are also not quoted since last more than six years due to lack of liquidity and not encouraging future prospects of Finance Companies.
I have noted that the funds of individual investors who are shareholders in the company are blocked due to lack of liquidity, and they have no exit opportunity available to them. Further, the target company considering the size and profitability is finding difficult to comply with the various provisions of listing agreement.
I have noted the submission of the Acquirer that in the best interest of the investors at large the promoters/Acquirer proposes to acquire all the shares held by public and other promoters/ directors and their relatives etc. to make the Target company as closely held company.
I have noted submission of the Acquirer that as the number of shareholders of the Target company are small and concentrated mostly at Rajkot and Mumbai and to make minimum expenditure in the best interests of the investors and to complete the acquisition in the shortest period possible the Acquirer proposes to seek exemption from the long procedure for making public offer.
I find that the acquirer along with other promoters (members of Kamani family) was holding 26,23,060 shares representing 65.58% in the Target company as on 30.11.2002. In terms of regulation 11(1) the acquirer/ promoter group could have acquired 10% shares or voting rights of the Target company in any period of 12 months - the creeping limit that existed upto 8.9.2002. With effect from 9.9.2002 the creeping limit was changed to 5% in the Financial Year ending 31st March.
However, I find during the Current Financial year ended 31/3/2003 the Acquirer acquired 2,06,760 shares from the public representing 5.17% of the share capital of the Target company. Additionally 12,500 shares were acquired by virtue of inter se transfer among promoters.
The transfer of these shares took place as under:
Sr. Shares Date of % (share capital No. transferred transfer of 40,00,000) 1 1,85,910 * 15.12.2002 4.65% 2 20,850 31.1.2003 0.52% Total 2,06,760 5.17% *(excluding 12,500 shares of promoters) The said shares (acquired from public) representing more than 5% of the share capital of the Target company were transferred to Acquirer on 31.1.2003, during the pendency of exemption application with SEBI, with the result the Acquirer has violated provisions of Regulation 11(1).
I find that the Acquirer ought to have made a public announcement/ open offer in terms of Regulations 11(1) read with 14(1) of the Regulations but no such public announcement has been made by the Acquirer.
It is observed that the number of public shareholders in the Target company as on date of application were 1384 who held 20.11% shares of the Target company. From the facts of the case I find that neither the number nor the percentage of public shareholding can be considered small to warrant exemption from the procedure laid down under the Regulations.
Here, it may be pertinent to mention that Securities Appellate Tribunal in its order dated 7/9/01 in the matter of B.P. Plc (formerly B.P. Amoco) & Foseco Plc Vs. SEBI has, inter alia , held that, "It may be noted that it is not incumbent on the Respondent to grant exemption just for asking. The decision normally depends on several factors including the interests of investors..........The exemption is to be granted depending on the facts and circumstances of each case."
I have noted that the Takeover Panel has recommended grant of exemption subject to fulfillment of certain conditions. I find that the Takeover Panel gave its recommendation vide Report dated 20.12.2002 and the Acquirer acquired 4.65% shares on 15.12.2002 and 0.52% shares on 31.01.2003 and thus violated Regulation 11(1) on 31.01.2003, while the exemption application of the Acquirer was still pending consideration with SEBI.
In view of the aforesaid, I find that the Acquirer has violated regulation 11(1) read with sub-regulations (1) of regulation 14, as the Acquirer has acquired 5.17% shares/voting rights in the Target company in the financial year ended March 2003 exceeding the creeping acquisition limit of 5% as permitted under regulation 11(1), without making public announcement to acquire shares/voting rights of the Target company in accordance with the said Regulations
7. DIRECTIONS/ORDERS 7.1 Taking into consideration the above, the recommendations of the Takeover Panel and the interest of the public shareholders of the Target company, in exercise of the powers conferred upon me under sub section (3) of Section 4 of the Securities and Exchange Board of India Act 1992 read with sub regulation (6) of regulation 4 of the Regulations for the reasons recorded hereinabove, I hereby reject the application of the Acquirer seeking exemption from the provisions of Regulation 11(1) from making the public announcement for open offer to the shareholders of the Target company by making an advertisement and to appoint Merchant Banker / Registrar pursuant to the proposed acquisition of 34.42% equity shares of the Target company by the Acquirer.
7.2 Further, in view of the findings made above, in exercise of the powers conferred upon me under sub-section (3) of Section 4 read with Section 11B SEBI Act 1992 read with regulations 44 and 45 of the said Regulations, I hereby direct the Acquirer to make public announcement as required under Chapter III of the said Regulations in terms of regulation 11(1) read with Regulation 14(1), taking January 31, 2003 as the reference date for calculation of offer price. The public announcement shall be made within 45 days of passing of this order.
7.3 Further, in terms of sub regulation (12) of regulation 22, the payment of consideration to the shareholders of the Target Company has to be paid within 30 days of the closure of the offer. The maximum time period provided in the said Regulations for completing the offer formalities in respect of an open offer is 120 days from the date of public announcement. The public announcement in the instant case ought to have been made taking January 31, 2003 as a reference date and thus the entire offer process would have been completed latest by May 31, 2003 Since no public announcement for acquisition of shares of the Target Company has been made by the Acquirer when the Regulations were triggered i.e. on January 31, 2003, it would be just and equitable to direct the Acquirer to pay interest @ 10 % per annum on the offer price, from June 1, 2003 till the actual date of payment of consideration by the Acquirer, to all the shareholders who tender the shares in the open offer to be made by the Acquirer in terms of this Order and whose shares are accepted by the Acquirer.
7.4 This order shall come into force with immediate effect.