Securities Appellate Tribunal
Hitachi Home And Life Solutions Inc. And ... vs Securities And Exchange Board Of India on 6 July, 2005
Equivalent citations: [2006]65SCL339(SAT)
JUDGMENT
Kumar Rajaratnam, J. (Presiding Officer)
1. Appeals are taken up for final disposal with consent of parties.
2. The appellants are Hitachi Home & Life Solutions Inc. and Hitachi India Pvt. Ltd. (hereinafter referred to as "Hitachi Group"). The appellants, being aggrieved by the order of the Whole Time Member of SEBI dated 17.4.2004 directing the appellant under Section 11B to make a public announcement as required under Chapter 3 of the SEBI (Substantial Acquisition of Shares and Takeover) Regulation, 1997 (hereinafter referred to as the "Takeover Regulation"), have preferred this appeal.
3. By the impugned order, SEBI has directed the appellants to make a public announcement taking the reference date for calculation of the offer price as 24.12.2002. The respondent has held that the appellants triggered the Takeover Regulation on 24.12.2002.
4. SEBI has further held that this is a fit case to initiate adjudication proceedings under Section 15H of the SEBI Act, 1992 for not making a public offer with reference date as 24.12.2002.
5. Aggrieved by SEBI's order, Hitachi group has preferred this appeal.
6. The only question that arises for consideration in this appeal is when do two persons acting in concert cease to act in concert? Is it on a mere declaration of intention that they wish to sever their relationship at a later point of time or is at the time of actual severance.
7. It is common ground that the answer to this vexed question depends on the facts and circumstances of each case.
8. In the light of the above proposition, we may briefly deal with the facts of this case.
9. The target company was known as Amtrex Hitachi Appliances Limited (hereinafter referred to as the "target company" or "AHAL").
10. By a management agreement dated 22.1.1999 (hereinafter referred to as the "Joint Management Agreement") the group, known as the Lalbhai group, and the Hitachi group agreed to come together as a joint venture to strengthen the relationship with the Hitachi group for better access to the latest air-conditioning technology. Pursuant to the execution of the agreement between Lalbhai group and Hitachi group, preferential allotment of shares in the target company was made by which Lalbhai group and the Hitachi group had a paid-up share capital of 35.2% each which totals 70.4%. The balance of 29.6% was held by the public. The shares of the target company were listed at various stock exchanges including the Bombay Stock Exchange and the National Stock Exchange. The Lalbhai group was in need of money and in order to secure payment of the loan, the Lalbhai group pledged 26.31% of the shares in the target company out of their total holding of 35.2% with ICICI Bank Ltd. Since the Lalbhai group committed default of repayment of loans, the ICICI Bank Ltd. invoked the pledge and the pledged shares were transferred in the name of ICICI Bank Ltd. As a result, Lalbhai group equity was reduced to 9.42%. On 5.8.2002, the target company on behalf of the Lalbhai group submitted an application to SEBI for permission to repurchase the pledged 26.31% shares of the target company and for exemption to Lalbhai group under the Takeover Regulations. The exemption was sought on the ground that the pledge was with a public institution and was exempt from the application of Regulation 10, 11, and 12 of the Regulation.
11. In the event of repurchase, the Lalbhai group whose shareholding had come down to 9.42% would have gone up to 35.73% i.e. more than 15% and thereby attracted the provisions of Regulation 10. The application for exemption was forwarded to the takeover panel of SEBI and the panel did not find merit in recommending the grant of exemption. The copy of the recommendation of the takeover panel was forwarded to the Lalbhai group by letter dated 4.9.2002.
12. It is the case of SEBI that in the application made by the Lalbhai group under sub-regulation (2) of Regulation 4, the Lalbhai group was shown to have been acting on its own and not as persons acting in concert with the Hitachi group. The exemption was also sought under Regulation 10 and not under Regulation 11 (which deals with persons acting in concert). The Lalbhai group not being very sure about the outcome of the exemption application, informed SEBI by letter dated 26.9.2002 that they along with persons acting in concert namely, Hitachi group, intended to acquire 9.94% from the ICICI Bank. It was stated that the position of the aforesaid shares was under the then existing creeping limit of 10% in terms of sub-regulation (1) of Regulation 11 of the Regulation.
13. Since there was no reply from SEBI on this aspect of the matter, Lalbhai group acquired 9.94% of shares from ICICI Bank at a price of Rs. 33.53 on 27.9.2002. This brought the holding of the Lalbhai group to 19.37%.
14. Subsequently, a share purchase agreement was entered into between Lalbhai group and Hitachi group dated 24.12.2002 and pursuant to that agreement, the entire shareholding of 19.37% inclusive of 9.94% shares bought from ICICI Bank, which was held by Lalbhai group, was acquired by Hitachi group on 18.1.2003 at a price of Rs. 41.63 per share. In other words, the whole transaction was completed on 18.1.2003 and Lalbhai group exited from the target company.
15. A report was filed on 24.1.2003 under Regulation 3(4) of the Takeover Regulation by the Hitachi group regarding the acquisition of 19.37% of shares from the Lalbhai group under Regulation 3(1)(e)(iii)(a) on 18.1.2003. It was stated in the report that the price at which Lalbhai group acquired the shares from ICICI was at Rs. 33.53, and since the shares of the target company were frequently traded the inter se transfer of shares at the acquisition price of Rs. 41.63 per share was within 25% of Rs. 33.53 and the said price was in accordance with the Explanation 1 to Regulation 3(1)(e) r/w Regulation 20(4).
16. SEBI, it is stated, received number of complaints dated 17.1.2003, 6.2.2003, 10.2.2003 and 20.4.2003 from various shareholders inter alia alleging that:
1. Inter se transfer price between the Lalbhai group and Hitachi group was not in conformity with Explanation 1 to Regulation 3(1)(e).
2. Lalbhai group and Hitachi group cannot be considered as persons acting in concert
3. The Lalbhai group should be directed to make an open offer in terms of Regulation 10 consequent to acquisition of 9.94% shares on 26.9.2002.
17. It cannot be forgotten that one complaint according to SEBI was even before the acquisition of shares by Hitachi group.
18. On the basis of the complaints and on the examination of the facts, SEBI on 13.6.2003 issued a show cause notice to Hitachi group. The show cause notice inter alia stated that based on materials, the acquisition of 9.94% of shares from ICICI Bank at the rate of Rs. 33.53 per share on 26.9.2002 along with Hitachi group as persons acting in concert and that the same was within the creeping acquisition limit of 10% under Regulation 11(1) cannot be accepted. SEBI further stated in the show cause notice that the acquisition of shares by Lalbhai group from ICICI bank at the price of Rs. 33.53 per share cannot be considered as one of the parameters of Regulation 20(4) and 20(5). SEBI further in the show cause notice stated that as per Explanation 1 to Regulation 3(1)(e), the price to be determined was the prevailing market price of the target company and not the price at which Lalbhai group acquired the shares from ICICI. Show cause notice was issued as to why penal action should not be taken against Hitachi group under Takeover Regulation triggering the code 2(1)(c), 11(1), 12 with Regulation 14(1) and 14(3). The operative portion of the show cause notice is extracted below:
"8. In view of the aforesaid and since you along with the PAC have acquired 28,41,062 shared (19.37%) of the share capital of AHAL on 18.01.2003 and with the result, your collective share holding has gone up from 35.22% (pre-acquisition) to 54.59% (post-acquisition), you along with PAC have, prima facie, violated the provisions of Regulation 2(1)(c), 11(1), 12 read with Regulation 14(1) and 14(3) of the captioned Regulations and therefore, are liable for penal action under the Regulations and SEBI Act, 1992.
9. In view of the above, you along with PAC are called upon to show cause as to why one or more or all action(s) under Regulation 44 and Regulation 45(6) of the Regulations and SEBI 11 and 11B of the SEBI Act, 1992 should not be initiated against you and PAC for violation specified above."
19. After observing the principles of natural justice and after hearing the appellant, the impugned order was passed. In the impugned order, two issues arose for consideration with regard to the appellant.
(i) Whether the acquisition of 19.37% equity in the target company by the Hitachi group from the Lalbhai group on 18.1.2003, was eligible for exemption as in terms of Regulation 3(1)(e)(iii)(a) and (b) of the Takeover Regulations.
or Whether the said acquisition was in violation of Regulation 11(1) and/or 12 of the Takeover Regulation.
(ii) Action/direction, if any, warranted.
20. Both issues were held against the appellant. Paragraph 7.23 and 7.24 reads as follows:
"7.23 In view of the aforesaid, I find that the Hitachi group, the Acquirers have violated Regulations 11(1) and 12 read with sub-regulations (1) and (3) of Regulations 14, as the Acquirers have acquired additional 19.37% shares/voting rights in the target company, and also acquired sole control of the company without making public announcement to acquire shares from the public in accordance with the said Regulations.
7.24 In terms of sub regulation (12) of Regulation 22, the payment of consideration to the shareholders of the Target Company should have been 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 24.12.2002 as reference date i.e. when the Acquirers entered into an agreement with the Lalbhai group to acquire 19.37% shares/voting rights of the Target company and thus the entire offer process would have been completed latest by 30.4.2003. Since no public announcement for acquisition of shares of the Target Company has been made by the Acquirers when the Regulations were triggered i.e. on 24.12.2002 the acquirers (Hitachi group) has also incurred an obligation to pay interest, as may be directed by SEBI, to the shareholders."
21. The order finally reads as follows:
9.1 In view of the findings made above, and in there interest of securities market and for protection of interest of investors, I , in exercise of the powers conferred upon me under Section 19 of the SEBI Act, 1992 read with Section 11B further read with Regulations 44 and 24 of the Takeover Regulations, hereby direct Hitachi Home & Life Solutions Inc. and Hitachi India Pvt. Ltd., the Acquirers to make public announcement as required under Chapter III of the said Regulations in terms of Regulation 11(1) and 12 and subject to the relevant guidelines relating to foreign direct investment, taking 24.12.2002 as the reference date for calculation of offer price. The public announcement shall be made within 45 days of the date of this order.
9.2 I also hereby direct the Acquirers to pay interest @ 10% per annum on the offer price, from 01.05.2003 till the actual date of payment of consideration by the Acquirers to all the shareholders who tender the shares in the open offer to be made by the Acquirers in terms of the Order and whose shares are accepted by the Acquirers."
22. The learned counsel for SEBI Mr. Kapadia relied heavily on a document which he said, was clinching proof of severance. This document was a letter in the form of an application to the Foreign Investment Promotion Board (FIPB) dated 16.9.2002.
23. Mr. Kapadia took us through the contents of the FIPB application dated 16.9.2002 in detail and vehemently submitted that there was severance on 16.9.2002 itself. Since a lot of emphasis has been laid by Kapadia on this letter, it would be appropriate to extract the contents of the application. The relevant portion of the application reads as follows:
"This application is being filed by Amtrex in relation to permission for the purchase by Hitachi, Japan approximately 19.37% of the paid-up share capital of Amtrex, comprising 28,41,062 equity shares (the "Shares") from the Lalbhai group at present and such further shares as may be agreed from time to time but in such a manner as not to exceed 74% of the equity holding of the Company.
Background of Amtrex Incorporation: Amtrex is a listed public limited company incorporated under the laws of India and having its registered office in Naroda Road, Ahmedabad, India.
Activities: The Company manufactures room air conditioners, packaged air conditioners and packaged chillers in their manufacturing facilities at Tal. Kadi Dist. Mahsana, Gujarat and Silvassa Union Territory of Dadra and Nagar Haveli.
Shareholding: Amtrex currently has a paid-up share capital of Rs. 146689650 divided into 14668965 shares of Rs. 10/- each. The Company (then known as Amtrex Application Ltd.) sought and obtained the approval of the FIPB vide approval letter no. FCII (not legible) dated 2/03/1998 amended later by letter dated 28/1/99 and 9/3/1999, for foreign equity participation upto 74% (however, initially 35.2% in the first stage). A copy of the above mentioned approval is attached hereto as Annexure 1. Pursuant to the said approval it issued 5165490 shares to Hitachi Japan. The shareholding pattern of the Company as on September 10,2002 is as follows:
Shareholder Percentage Holding Number of Shares
(Rounded off to two
(2)decimal places)
Lalbhai group 35.21 (including certain
shares pledged with ICICI) 5185490
Parikh family 0.51 74575
Hitachi Japan 35.21 5185490
Public 26.23 3882180
FII/NRIs/OCBs 0.12 17649
Financial
Institutions/Banks 2.61 383601
Total 100 14668965"
(Emphasis by Court)
This application according to Mr. Kapadia, the learned counsel for SEBI shows the intention of the Hitachi group to buy out the Lalbhai groups and sever relationships.
24. It would not be out of place to mention that there is no reference to this application in the impugned order. However, a broad statement has been made in the impugned order at paragraph 7.16 wherein it is stated that the Lalbhai group and the Hitachi group were acting in concert till the moment of their reaching an understanding for Lalbhai group to exit and Hitachi group to gain exclusive control. Paragraph 7.16 reads as follows:
7.16 In defence of Hitachi group's argument that Hitachi & Lalbhai groups were persons acting in concert for the acquisition of 9.94% equity in the Target company by the Lalbhai group from ICICI Bank Ltd., observations of SAT in the case of Modi vs. SEBI have been quoted vide para 5.38 above. It appears that the SAT's observations have been either probably misread or quoted possibly to mislead. In fact, the SAT's observations run counter to the Hitachi group's stand. As observed by the SAT, the facts and circumstances of the case would be relevant to determine whether persons are persons acting in concert for the common objective of substantial acquisition. There is no denying the fact that Lalbhai & Hitachi groups had become co-promoters of the Target company and they were acting as persons in concert - notwithstanding their lapses in reporting/disclosing that fact clearly to the Target company in terms of Regulation 8(2) of the Takeover Regulations - till the moment of their reaching an understanding for Lalbhai group to exit from, and Hitachi group to gain exclusive control of the company. It was at that point, their commonality of objective or purpose gave way to diametrically opposite objective or purpose, of course, for mutual benefit. In my view, in the matter of acquisition of the said 9.94% equity in the target company by Lalbhai group, the Lalbhai group cannot be deemed to have acted as person in concert with Hitachi group or vice-versa, as contemplated by the Takeover Regulations. Thus, the price (33.59) at which Lalbhai group acquired 9.94% equity stake in the target company in September, 2002 would be irrelevant for the purpose of the said explanation (1)."
25. Apart from this, we are not able to determine from the impugned order as to when intention to exit was reached between the two parties, although from the impugned order the reference date is mentioned as 24/12/2002.
26. Therefore in the absence of any finding as to when any agreement was reached in the impugned order, Mr. Kapadia the learned counsel for SEBI steered clear of the impugned order and referred to the FIPB application dated 16.9.2002. He submitted that if proof is needed for establishing severance, there could not have been a better proof than the FIPB application made on 16.9.2002 wherein Hitachi group has clearly said that they intend to purchase 19.37% of holdings of the paid-up capital of the Lalbhai group. Mr. Kapadia further submitted that this application was made to the FIPB even before Lalbhai group had repurchased the pledged shares with ICICI.
27. Mr. Chagla, the learned counsel for the appellant objected to Mr. Kapadia making a reference to this document which was not part of the impugned order and submitted that this letter cannot be admitted as part of the records of the Tribunal without the appellant being given an opportunity to rebut the same. He relied on Section 15U and said the proceedings before the Tribunal shall always be guided by the principles of natural justice.
28. We have given our anxious thought as to whether this document should be looked into since no application has been taken out by SEBI to mark this letter as part of the evidence before the Tribunal. Be that as it may, Mr. Chagla fairly submitted that the application was in fact made by the appellant for clearing the decks for the ultimate exit of the Lalbhai group. In that view of the matter, we are of the opinion that when an application is made by the appellant, it can be looked into in a statutory appeal provided the appellant is given an opportunity to rebut the same.
29. Since the appellant has not denied the authenticity of the application made by the appellant, we are of the view that in the interest of complete justice this application can be looked into by the Court.
30. We accordingly overrule the objections of Mr. Chagla, the learned counsel for the appellant.
31. However, the question still looms large for consideration as to whether the application for approval would itself constitute the act of severance.
32. Mr. Chagla, the learned counsel for the appellant submitted that the FIPB approval was obtained only on 24.10.2002 and till the approval was obtained uncertainty prevailed and in the teeth of uncertainty, the joint management agreement continued to be in force right up to 24.12.2002 when the share purchase agreement was entered into. He further submitted that by no stretch of imagination can it be said that merely seeking approval from the FIPB can be considered as an act of severance. Even the application contemplates that Lalbhai group has to redeem the shares pledged to ICICI and only after that there can be negotiation with Lalbhai group as to the terms and conditions for Lalbhai group to exit.
33. No document has been produced by the respondent SEBI to establish that there was any negotiation with regard to the price. At best there were only negotiations between the parties till it finally concluded on 24.12.2002.
34. Mere intention to acquire shares without a definitive concluded contract cannot be the basis for triggering the code. The joint management agreement dated 27.1.1999 continues to be in force till the share purchase agreement between the parties entered into on 24.12.2002. Some reference was also made by Mr. Kapadia to the resolutions passed by Lalbhai group agreeing to sell the shares in favour of Hitachi group. One such resolution reads as follows:
"CERTIFIED COPY OF THE BOARD RESOLUTION PASSED IN THE BOARD MEETING OF ASMAN INVESTMENTS LIMITED HELD ON 14TH SEPTEMBER, 2002 RESOLVED THAT the Board hereby authorise and grants its No Objection for the sale of 18000737 Equity Shares held by the Company in Amtrex Hitachi Appliances Limited to Hitachi Home and Life Solutions Inc., upon terms and conditions to be agreed and at a sale price which is in compliance with RBI/SEBI Guidelines.
By Order of the Board"
35. By this also it was submitted that there was consensus ad idem between the parties with one party wanting to acquire and another party wanting to exit and therefore both parties could not have been acting in concert.
36. Mr. Chagla and Mrs. Nalini Chidambaram, the learned senior counsel for the appellants, submitted that the concept of acting in concert was a progressive and beneficial legislation which in effect mulcts liability on two or more persons although only one person may have violated the code. Therefore, when persons are admittedly acting in concert there is a presumption in law that they continue to act in concert. This presumption can only be rebutted by a strong cogent evidence of actual severance. It was submitted vehemently by Mrs. Chidambaram that as long as the joint management agreement is in force, the parties are deemed to be acting in concert and mere intention to sever cannot be the basis for holding that the parties are not acting in concert.
37. Mrs. Chidambaram also submitted that an incognate situation will arise if a person is held to be not acting in concert merely because an application is made to the FIPB and subsequently the persons resumed acting in concert if the FIPB rejects the application. Therefore, the fact that an application is made by Hitachi group for getting approval cannot be a ground for presuming that parties are not acting in concert.
38. We have carefully considered the submissions of the counsel on both sides.
39. Regulation 2(1)(e) defines the words "person acting in concert" which reads as follows.
"person acting in concert" comprises,-
(1) persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company, (2) without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established:
(i) a company, its holding company, or subsidiary or such company or company under the same management either individually or together with each other;
(ii) a company with any of its directors, or any person entrusted with the management of the funds of the company;
(iii) directors of companies referred to in sub-clause (i) of clause (2) and their associates;
(iv) mutual fund with sponsor or trustee or asset management company;
(v) foreign institutional investors with sub-account(s);
(vi) merchant bankers with their client(s) as acquirer;
(vii) portfolio managers with their client(s) as acquirer;
(viii)venture capital funds with sponsors;
(ix) banks with financial advisers, stock brokers of the acquirer, or any company which is a holding company, subsidiary or relative of the acquirer :
Provided that sub-clause (ix) shall not apply to a bank whose sole relationship with the acquirer or with any company, which is a holding company or a subsidiary of the acquirer or with a relative of the acquirer, is by way of providing normal commercial banking services or such activities in connection with the offer such as confirming availability of funds, handling acceptances and other registration work;
(x) any investment company with any person who has an interest as director, fund manager, trustee, or as a shareholder having not less than 2 per cent of the paid-up capital of that company or with any other investment company in which such person or his associate holds not less than 2 per cent of the paid-up capital of the latter company.
Note : For the purposes of this clause "associate" means,-
(a) any relative of that person within the meaning of section 6 of the Companies Act, 1956 (1 of 1956); and
(b) family trusts and Hindu undivided families;"
The word "acquirer" is defined in Regulation 2(1)(b) which reads as follows:
"acquirer" means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer"
40. Mr. Kapadia, the learned counsel for the respondent relied on a judgement of the High Court of Bombay in the matter of K.K. Modi v. SAT reported in (2002) 35 SCL 230 (BOM.) and submitted that whether a person is acting in concert is a question of fact. He further submitted that promoters may have acted in concert for the purpose of promotion of the company but for the purpose of the Takeover Regulation it has to be seen whether they are acting in concert for a common objective or for purpose of acquisition of shares in a company. He further relied on a division bench judgment for the proposition of law that a person who is a promoter, may have at one point of time acted in concert with the other promoter, but may have parted ways. In that case, the person who has caused the severance may continue to be a promoter, but may not have acted in concert with the other promoter. Reliance was placed on the proposition of law as set out by the Bombay High Court at paragraph 26 which reads as follows:
"26. We are, therefore, of the considered opinion that a co-promoter of the target company, merely by reason of his being a co-promoter, cannot be said to be a person acting in concert with the acquirer who also happens to be one of the promoters of the target company, unless the evidence on record clearly establishes that the promoter shares the common objective or purpose of substantial acquisition of shares or voting rights for gaining control over the target company, with the acquirer. The question of whether a promoter is acting in concert with the acquirer is a question of fact, and the answer, therefore, must depend on the facts of each case."
(Emphasis by Court)
41. Reliance was also placed on the division bench judgment of the Bombay High Court in Shirish Finance & Investment (P) Ltd. vs. M. Sreenivasulu Reddy reported in (2002) 35 SCL 27, for the proposition that where a person is acting in concert or not depends on the facts of each case. Mr. Chagla, the learned counsel for the appellant relied on this judgment in Shirish Finance and submitted that the acquisition of shares by one person acting in concert must be considered to be the acquisition of all acting in concert with him. He relied on the proposition of law set out in paragraph 97. The relevant portion of paragraph 97 is extracted below:-
"97. We are not satisfied that the circumstances established on record prima facie do lead to the inference that the defendant Nos. 1 and 11, acting in concert with the defendant Nos. 2 to 10, acquired the shares of Herbertsons Ltd., over a period of time. Since they were acting in concert, the acquisition by each one of them must be considered to be the acquisition of the others as well. The funds for the acquisition of the shares, whether through the defendant Nos. 2 and 6 to 10 or through defendant nos. 3 to 5, originated from the companies controlled either by the defendant Nos. 3, 4 and 5 cannot be said to be by way of investment because the facts disclose that the amounts were advanced free of interest and without any security, and for acquiring the shares of Herbertsons ltd., the defendant security, and for acquiring the shares of Herbertsons ltd., the defendant Nos. 3,4 and 5 were also managed by persons known to be the defendant Nos. 1 and 11 and associated with them in their various companies. It is not necessary that persons acting in concert must be related to each other within the meaning of section 6. Even two strangers can act in concert, provided they act pursuant to a common plan and to achieve a common objective."
(Emphasis by Court)
42. Ultimately it depends on the facts of each case for the Court to come to the conclusion that whether persons acted in concert or did not act in concert.
43. Mr. Kapadia, the learned counsel for the respondent, relied on 4 pieces of what he called 'clinching evidence' to submit that there was severance or intention to sever on all these occasions
1. An application by the target company for exemption for Lalbhai group under Regulation 10 dated 5.8.2002
2. Press Note dated 27.11.2002
3. Resolution passed by Lalbhai group wishing to exit dated 14.9.2002.
4. Letter to FIPB dated 16.9.2002.
44. Mr. Chagla, the learned counsel for appellant vehemently submitted that none of these events can ever rebut the presumption that parties acted in concert till the time of severance in December 2002.
45. While going through the Regulations we notice that there was an amendment in Regulation 2C. An Explanation was inserted. The amendment came into force on 9.9.2002 and was very much in force at the relevant time. The Explanation clearly spells out that even if one of the parties acting in concert exits he will continue to be in control until he actually exits in the manner prescribed under regulation 3(1)(e). We feel that this Regulation underlines the proposition that unless there is strong convincing evidence of severance, a party who acted in concert cannot be let off the hook merely because he has agreed to sever relations with the other party. The Regulation 2C reads as follows:
2. (c)"control" shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
[Explanation.-(i) Where there are two or more persons in control over the target company, the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management :
Provided that the transfer from joint control to sole control is effected in accordance with clause (e) of sub-regulation (1) of regulation 3.
(ii) If consequent upon change in control of the target company in accordance with regulation 3, the control acquired is equal to or less than the control exercised by person(s) prior to such acquisition of control, such control shall not be deemed to be a change in control;] (Emphasis by Court)
46. If this explanation is to be read along with the pronouncement of the High Court of Bombay in K.K. Modi's case, then on the facts and circumstances of the present case, it cannot be stated by any stretch of imagination that parties acting in concert have caused severance of each other just because one of the parties has declared their intention to exit at a later point of time. Even if both parties make such a declaration to exit at a later point of time, it is only at the time of exit that the severance actually takes place and not earlier since till then, the joint management agreement and joint control continues to be in force. The respondent does not deny that the joint management agreement continued in force till 24.12.2002 since undoubtedly it cannot be denied that there was a joint control till Lalbhai group actually exited from the target company. It was only after the agreement was signed and the shares were ultimately transferred to the appellant that the actual severance of both the parties took place. Till such time, the parties continued to act in concert.
47. We are not able to appreciate the logic in the impugned order which records at three places the reference date as 24.12.2002. This itself is an admission that the severance took place only in December and not sometime in September, as is claimed by Mr. Kapadia. This is yet another factor to hold that the SEBI itself took a reference date in triggering the code as 24.12.2002 and not earlier.
48. As was rightly pointed out by Mr. Chagla, that though the documents referred to by Mr. Kapadia do not find a place in the impugned order, they do not advance the case of SEBI since there was at no specific trigger date for the price of shares to be determined since no amount of declaration or intention without reference to the price factor can be termed as an act of severance.. It is perfectly possible, according to Mr. Chagla, that any one of the parties could have got second thoughts and resiled from their declaration to separate until there is a concluded agreement or contract.
49. On a careful perusal of the Takeover Regulation, the price factor is the most important factor in a situation where the code is triggered since any public offer will be based on that price if it was the highest price. It also cannot be forgotten as pointed out by Mr. Chagla that the appellants have rescued the target company from financial doldrums by infusing huge amounts of funds in the rehabilitation and welfare of the target company.
50. It was submitted by Mr. Chagla that the shares are quoted in the market today at much higher rate than the price at which the appellant purchased the Lalbhai group shares. By this it was submitted that the company has been doing well because of the infusion of the fund and expertise provided by Hitachi group.
51. It is submitted by Mr. Kapadia that even if this Court held that the parties acted in concert, the price at which the appellant purchased his shares under the management agreement should not exceed 25% of the prevailing price quoted in the stock exchange as per Regulation 20(4)(c).
52. We are unable to agree with this submission for the reason that Regulation 20(4)(b) will be the Regulation that will apply to the facts of the present case and not (c) as submitted by Mr. Kapadia. Regulation 20(4)(b) will be the highest price with respect to the offer price under Regulation 20(1). 20(1) also says that the offer to acquire shares under Regulation 10,11 or 12 shall be made at a price not lower than the price determined under sub-Regulation (4) and (5). Lalbhai acquired shares form ICICI bank at Rs. 33.53 per share. As per Regulation 20(4), it is the cost of acquisition of a person acting in concert with the acquirer or the cost of acquisition for the acquirer that is to be taken into account and hence, Rs. 33.53 per share is the highest price in terms of Regulation 20(4). Rs. 41.63 is admittedly not exceeding 25% of Rs.33.53. It is also admitted that this is within 26 weeks preceding 18.1.2003.
53. In the view of the matter, we have no hesitation to hold that both groups acted in concert. Consequently, the price being within the prescribed limit would give the Hitachi group an exemption from making a public offer.
54. If we may add in parting with the case, that this was the opinion of SEBI at the highest level and in our view rightly so for the reason stated herein.
55. The appellants strongly relied on a letter written to SEBI asking for clarification just before the appellants purchased the shares of Lalbhai group. This assumes significance in view of the fact that this letter was answered by SEBI in favour of the appellant and only on the basis of that letter, it was submitted, that the appellant purchased the shares of Lalbhai group.
56. We have examined the correspondence and the documents prior to SEBI giving its opinion. A detailed letter was written by the appellants asking whether they will be violating the Takeover Regulation if they purchased the Lalbhai group shares. The letter dated 7.11.2002 written by the appellant reads as follows:
"We take this opportunity to convey our sincere thanks and regards to Ms. Asha Shetty for taking out the time to meet with us on October 29, 2002 in your offices and to you for having the telephonic discussion with our legal advisors on November 06, 2002. It has been of great help to us that your office has been able to clarify our doubts arising from the recent amendments to the provisions of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997.
The clarifications were sought in light of the proposal by Hitachi to purchase 19.37% shareholdings of AHAL from LGC as an inter-se transfer of shares (the 'Transaction'). We are not repeating here the details of the Transaction. The clarification we sought and their answers given to us are :
1. For exemption from the public offer to apply, whether the transfer between LGC and Hitachi needs to be within 125% of 33.53/share: Rs. 33.53/share being the price at which shares were purchased by LGC (acting in concert with Hitachi Home & Life Solutions Inc.) from ICICI (being highest of the price under Regulation 20(4(b))?
It was confirmed that for the transfer to be an exempt inter-promoter transfer, the maximum price at which Hitachi may purchase from LGC was 125% of Rs. 33.53/share.
2. Hitachi Home & Life Solutions Inc., which is a 100% subsidiary of Hitachi Ltd., Japan, acquired the 35.2% shares from Hitachi Ltd., Japan by way of succession (akin to demerger) under Japanese Law in April 2002. Hitachi Ltd., Japan had held the shares since January 1999 and thus for a period exceeding 3 years.
In the circumstances, whether holding of shares by Hitachi Home & Life Solutions Inc., be deemed to be for a period exceeding 3 years?
It was confirmed that holding of shares by Hitachi Home & Life Solutions Inc., would be deemed to be for a period exceeding 3 years, notwithstanding that prior to April 2002, the said shares were held by Hitachi Ltd., Japan, so long as Hitachi Home & Life Solutions Inc. was 100% subsidiary of Hitachi Ltd., Japan.
Since Hitachi Ltd. and Hitachi Home & Life Solutions Inc. have throughout been reported as co-promoters along with LGC with AHAL, it was confirmed that the proposed transfer of AHAL shares from LGC to Hitachi would fall within the category of inter-promoter transfer under Regulation 3(1)(e).
3. It was pointed out that certain LGC may be perceived as competitive threat to AHAL, and therefore, to give AHAL some time to recoup, Hitachi may consider entering into a non-compete agreement with the relevant LGC entities. Whether any non-compete fee, if paid to LGC pursuant to any non-compete agreement would be taken into account by SEBI and added to the transfer price by virtue of Regulation 20(8).
It was confirmed that for the purpose of calculating the transfer price exemption limit, only Regulation 20(4) and (5), had to be looked at, and no other provision including Regulation 20(8) needs to be taken into account.
We trust that our understanding of the clarifications is accurate and complete and we have not misunderstood the same on account of our language limitations. In the event you have any comments in respect of the above, we would be grateful if you could revert to us as soon as possible."
57. SEBI wrote a letter dated 12.11.2002 seeking more information and their letter reads as follows:
"Please refer to your letter dated November 7, 2002 on the captioned subject.
This is to place on record that while seeking clarifications over telephone, certain facts which you have stated in your aforesaid letter have not been brought to our knowledge. Further, even during the meeting no specific facts were mentioned and only a general clarification was given. Therefore, we are not in a position to confirm whether your understanding as stated in your aforesaid letter is accurate and complete.
You are, therefore, advised to await our written clarification in this regard."
58. After that it appears that senior officials of SEBI sat together and came to the conclusion that the appellants would not violate the Takeover Regulation in the facts of the case. The note indicates that specific questions were answered with regard to the price. The note dated 27.11.2002 reads as follows:
"Reference Correspondence Letter of Hitachi Home & Life Solutions Inc. (Hitachi) dated November 07, 2002 regarding clarifications on amendments to the SEBI Regulations and in light of their proposal to purchase 19.37% of Amtrex Hitachi Appliances Ltd. (AHAL) from LGC.
Their queries along with their understanding of the Regulations and our comments on the same are as follows:
1. Query For exemption from the public offer to apply, whether the transfer between LGC and Hitachi needs to be within 125% of 33.53/share: Rs. 33.53/share being the price at which shares were purchased by LGC (acting in concert with Hitachi Home & Life Solutions Inc.) from ICICI (being highest of the price under Regulation 20(4)(b)?
It was confirmed that for the transfer to be an exempt inter-promoter transfer, the maximum price at which Hitachi may purchase from LGC was 125% of Rs. 33.53/share.
(Emphasis by Court)
2. Query Hitachi Home & Life Solutions Inc., which is a 100% subsidiary of Hitachi Ltd., Japan, acquired the 35.2% shares from Hitachi Ltd., Japan by way of succession (akin to demerger) under Japanese Law in April 2002. Hitachi Ltd., Japan had held the shares since January 1999 and thus for a period exceeding 3 years.
In the circumstances, whether holding of shares by Hitachi Home & Life Solutions Inc., be deemed to be for a period exceeding 3 years?
It was confirmed that holding of shares by Hitachi Home & Life Solutions Inc., would be deemed to be for a period exceeding 3 years, notwithstanding that prior to April 2002, the said shares were held by Hitachi Ltd., Japan, so long as Hitachi Home & Life Solutions Inc. was 100% subsidiary of Hitachi Ltd., Japan.
Since Hitachi Ltd. and Hitachi Home & Life Solutions Inc. have throughout been reported as co-promoters along with LGC with AHAL, it was confirmed that the proposed transfer of AHAL shares from LGC to Hitachi would fall within the category of inter-promoter transfer under Regulation 3(1)(e).
3. Query It was pointed out that certain LGC may be perceived as competitive threat to AHAL, and therefore, to give AHAL some time to recoup, Hitachi may consider entering into a non-compete agreement with the relevant LGC entities. Whether any non-compete fee, if paid to LGC pursuant to any non-compete agreement would be taken into account by SEBI and added to the transfer price by virtue of Regulation 20(8).
It was confirmed that for the purpose of calculating the transfer price exemption limit, only Regulation 20(4) and (5), had to be looked at, and no other provision including Regulation 20(8) needs to be taken into account.
Our Comments:
For Queries at 1 and 3 above:
As per Reg. 3(1)(e)(iii)(a)/(b) of the captioned Regulations, transfer of shares amongst co-promoters/foreign promoters is eligible for exemption from the applicability of the Regulations 10, 11 and 12 of the Regulations subject to the condition that the transfer is at a price not exceeding 25% of the price as determined in terms of Regulation 20(4) and 20(5). The price referred to in the aforesaid Regulation would be calculated on the price arrived at in terms of Regulation 20(4) and/or 20(5), as may be applicable.
For Query at 2 above:
In the matter of proposed acquisition of 29,95,810 shares representing 23.89% of the voting capital of Otis India Ltd. (OIL) by Otis Elevator Company (s) Pte. Ltd., where the acquirer was not fulfilling the proviso to Reg. 3(1)(e)(iii)(b) of the Regulations, it was stated that since the acquirer was wholly owned subsidiary of the existing and continuing promoter of OIL, such acquisition would not attract any element of 'Takeover'. Similar stand was also taken in Gayatri Starchkem Limited (GSL) case where promoter of the company transferred his individual holding to a 100% company promoted by him. The company to which transfer was made was not complying with the requirement of 5% for three years. However, going by the facts of the case, inspirit, that was considered to be inter-se transfer of promoters and accordingly the submissions were taken on record.
In the instant case, Hitachi is a 100% subsidiary of Hitachi ltd., Japan and has acquired the 35.2% from Hitachi Japan in April 2002. Further Hitachi Japan has been holding the shares since January 1999. In view of the earlier cases mentioned above, we may clarify that their understanding as stated above is correct.
If the aforesaid comments are in order, we may suitably inform Hitachi as per the draft placed in the file."
59. The reply finally by SEBI is dated 29.11.2002 and reads as follows:
"Please refer to your letter dated November 7, 2002 and other correspondence exchanged on the captioned subject.
2. We clarify as under:
a. As regards queries at Paras 1 and 3 of your aforesaid letter regarding the pricing, we advise that as per Reg. 3(1)(e)(iii)(a)/(b) of the captioned Regulations, transfer of shares amongst co-promoters/foreign promoters is eligible for exemption from the applicability of the Regulations, 10, 11 and 12 of the Regulations subject to the condition that the transfer is at a price not exceeding 25% of the price as determined in terms of Regulation 20(4) and 20(5). The price referred to in the aforesaid Regulation would be calculated based on the parameters in terms of Regulations 20(4) and/or 2095), as may be applicable.
b. As regards query at Para 2 of your aforesaid letter, we advise that as the shares were stated to have been held by your holding company, Hitachi Ltd., Japan, since January 1999, the same could be deemed to have been held by you (transferees) for meeting the requirement of holding the shares for 3 years as stated in proviso to Reg. 3(1)(e)(iii).
3. You are, therefore, advised to be guided accordingly."
60. This note was vetted by the ED in charge of capital markets and after deliberations, SEBI wrote a letter to the appellants dated 29.11.2002 and on the basis of that letter it appears that the appellants had decided to enter into a share purchase agreement which ultimately culminated in the Lalbhai group's exit. These letters may or may not be binding but certainly the view taken by the ED is in conformity with the law.
61. The only thing that is a little disturbing is the fact that although SEBI had decided rightly that there was no violation of the Takeover Regulations, it was perhaps tempted to take action on the basis of certain complaints sent by some people with vested interests. The complaints are welcome in the interest of the securities market but complaints by itself cannot influence SEBI from retracting from its own considered view in any matter.
62. SEBI must be insulated and be independent in its decision making process and should not be influenced by any extraneous materials. We say this because a decision was taken at a very high level with due deliberation and after considerable thought that on the facts of this case, the officials of SEBI in their noting, which we have perused and reproduced above, have held that parties were acting in concert and the price was not more than 25% of the acquisition price.
63. Consequently and for the reasons stated herein, the impugned order is set aside. The appeals are disposed of accordingly. No order as to costs.