Securities Appellate Tribunal
In Re: Flex International Pvt. Ltd. And ... vs Unknown on 25 August, 2004
ORDER
T.M. Nagarajan, Member
1. BACKGROUND 1.1 Flex International Pvt. Ltd. (promoter company of Flex Industries Ltd) submitted to SEBI a report dated June 19, 2003 under Regulation 3(4) of SEBI (Substantial Acquisition of shares and Takeovers) Regulations 1997 (hereinafter referred to as "Takeover Regulations") claiming exemption for acquisition of 80,00,000 equity shares representing 16.30% of the enhanced voting capital of the Flex Industries Ltd. (hereinafter called the Target Company) on June 2, 2003, pursuant to conversion of warrants allotted on November 29, 2001 on preferential basis. It was then observed that Apoorva Extrusion Pvt. Ltd. (also belonging to promoter group) had also similarly acquired 20,00,000 equity shares representing 4.07% of the enhanced voting capital of the Target Company on June 2, 2003. As a result of the said acquisition the collective shareholding of Flex International Pvt. Ltd. and Apoorva Extrusion Pvt. Ltd. (hereinafter collectively referred to as the "Acquirers") was found to have increased by 20.37% (from 0.03% to 20.40%) of the voting share capital of the Target Company i.e. more than the threshold limit of 15% envisaged in Regulation 10 of the Takeover Regulations. Further, it was also observed that the collective share holdings of the Acquirers along with other persons acting in concert with them increased by 14.28% (from 29.9% to 44.18%) which was more than the permissible annual creeping limit of acquisition of 5% specified in Regulation 11(1) of the Takeover Regulations.
1.2 The Target Company is a listed company, with its shares listed at the National Stock Exchange, The Stock Exchange, Mumbai, and The Ahmedabad Stock Exchange, The Delhi Stock Exchange and the U.P. Stock Exchange. The GDRs issued by the company are listed at Societe de la Bourse de Luxemburg.
2. SHOW CAUSE NOTICE 2.1 The Acquirers did not make a public announcement to acquire 20% of the voting capital of the company from the public as envisaged in the Takeover Regulations. A show cause notice was, therefore, issued on October 9, 2003 to the Acquirers to show cause as to why regulatory action should not be taken against them for the said prima facie violation.
3. REPLY TO THE SHOW CAUSE NOTICE 3.1 The Acquirers submitted their reply to the abovesaid Show Cause Notice vide their letter dated October 21, 2003 and December 10, 2003, stating, interalia, to the effect that :
A. The issue of warrants (carrying a right to apply for and allotment of one equity share for every warrant held on or before the expiry of eighteen months from the date of allotment) was not in the ordinary course of issue of warrants to the Promoters/ Associates, but issued by the target company under Negotiated Settlement Scheme approved by the Financial Institutions.
B. The issue of warrants was exempt pursuant to the provisions of the then Regulation 3(1)(c) of the Takeover Regulations C. The term 'shares' defined in Regulation 2(1)(k) covered the warrants also.
D. Requisite intimations of the allotment were sent to the stock exchanges.
E. The allotment of warrants was not reported to SEBI, for, on allotment of the warrants, the acquirers did not get any voting rights. The reporting is required when the equity shares with voting rights are allotted on conversion of warrants. Accordingly, after allotment of equity shares, the report was sent.
F. The exemption was available to the allotment of shares under the pre-amended Takeover Regulations.
G. A person cannot be deprived of his vested right by a subsequent amendment in the Regulations. If such a deprivement takes place, it would amount to giving retrospective effect to the amendments to the Regulations, which cannot be made.
H. The provisions of Regulation 3(1)(c) of the said Regulations have been amended by SEBI vide its notification dated 9.9.2002 after the allotment of preferential issue of warrants on 29th November, 2001, to the promoters / associates. Accordingly, Regulation 10, 11(1) and 14(1) of the said Regulations do not apply to the conversion of warrants into equity shares.
I. The subsequent conversion of warrants into shares is merely a legal consequence, and not a fresh acquisition, in terms of the right vested with the Promoters to convert the warrants into shares under the terms and conditions of the warrants issued earlier.
J. The shares are locked in at present and are not transferable/ hypothecable/ saleable as per SEBI guidelines.
K. The acquisition of aforesaid shares did not result in the change of control or of management.
4. HEARING 4.1 An opportunity of personal hearing was granted to the Acquirers. The hearing took place as scheduled on December 19, 2003 and was attended by Shri Subhash Khatua, Executive Manager, (Secretarial), Target Company and Shri N. Sitaraman, Advisor, Flex Group of companies. They reiterated the submissions made by acquirers in their letters dated October 21, 2003 and December 10, 2003.
5. CONSIDERATION OF ISSUES 5.1 I have carefully considered the facts of the case, the written and oral submissions made by and on behalf of the acquirers and also documents submitted by them in support of their submission. The issues that arise for consideration are: Whether the acquisition made by the Acquirers in the Target Company qualified for exemption from the applicability of Regulation 10 and 11 of the Takeover Regulations and whether the Acquirers had committed any violation of the Takeover Regulations, and, if so, the regulatory action, if any, called for.
5.2 Recapitulation of relevant facts of the case will facilitate consideration of the issues in proper perspective: It was as far back as 19th March 2001 that the shareholders of Flex Industries Ltd. i.e. the Target Company had, at its Extra-ordinary General meeting, passed a resolution authorising the Board of Directors of the company to issue, on preferential basis, pursuant to the provisions of Section 81(1A) of the Companies Act 1956 and in accordance with the guidelines for preferential issues contained in SEBI (Disclosure and Investor Protection) Guidelines 2000, one crore equity shares of Rs.10/- each to financial institutions towards part settlement of the loans and one crore warrants to promoters and associates, mainly to finance part repayment of the loans and other dues of financial institutions. As the resolution could not be acted upon within the stipulated period of 3 months, fresh consent of the shareholders of the Target company had been obtained at its Annual General Meeting held on August 30, 2001. In terms of the fresh resolution passed, the shareholders had approved the proposal to issue, on preferential basis, one crore equity shares of Rs.10/- each to financial institutions and one crore warrants to promoters and associates. The warrants carried a right to apply for and allotment of one equity shares for every warrant held on or before the expiry of 18 months from the date of allotment, the price to be determined as per SEBI guidelines for preferential issue. The warrants had been allotted on November 29, 2001 to the promoter group entities and after interse transfers, the two promoter group companies came to hold the warrants, when the right of conversion was exercised on May 28, 2003. Thereupon, the allotment of equity shares have been made to these promoter-entities i.e. the "Acquirers" on June 2, 2003 i.e. 4 days after expiry of the 18 month perod.
5.3 I find that the acquirers have ultimately on June 02, 2003, acquired shares in the Target Company which (taken together with the share or voting rights already held by them) entitled them to exercise more than 15% of the voting rights of the company. Further, the acquirers, together with the persons acting in concert with them, who collectively held 29.9% of the equity capital of the Target Company have acquired 14.28% i.e. more than the permissible annual creeping acquisition limit of 5% of voting rights in the Target Company.
5.4 In terms of Regulation 10 of the Takeover Regulations, "No acquirer shall acquire shares or voting rights which (taken together with share or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise fifteen per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations."
5.5 As per Regulation 11(1) of the Takeover Regulations, "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 financial year ending on 31st March unless such acquirer makes a public announcement to acquire shares in accordance with the regulations."
5.6 The applicability of Regulations 10 and 11 of the Takeover Regulations is dealt with in Regulation 3 ibid. The Regulations 3(1) and 3(1)(c) ibid as it stood at the relevant point of time read as under:-
3(1) "Nothing contained in regulation 10, 11 and 12 of these regulations shall apply to:
(a) .............
(b) .............
"(c) preferential allotment, made in pursuance of a resolution passed under section 81 (1A) of the Companies Act, 1956 (1 of 1956):
Provided that, -
(i) board resolution in respect of the proposed preferential allotment is sent to all the stock exchanges on which the shares of the company are listed for being notified on the notice board;
(ii) full disclosures of the identity of the class of the proposed allottee(s) is made, and if any of the proposed allottee(s) is to be allotted such number of shares as would increase his holding to 5 per cent or more of the post issued capital, then in such cases, the price at which the allotment is proposed, the identity of such person(s), the purpose of and reason for such allotment, consequential changes, if any, in the board of directors of the company and in voting rights, the shareholding pattern of the company, and whether such allotment would result in change in control over the company are all disclosed in the notice of the general meeting called for the purpose of consideration of the preferential allotment;"
5.7 Briefly stated, the Regulations 10 and 11 of the Takeover Regulations prohibits any acquirer from acquiring shares or voting rights exceeding the threshold limit of 15% or the permissible annual creeping limit of 5% in a Target Company without making a public announcement to acquire shares from the public in accordance with the Regulations. The inclusive definition of "shares" given in Regulation 2(k) covers "any security which would entitle the holder to receive shares with voting rights". The warrants issued by the Target Company on preferential basis to the acquirers entitled the holders to apply for and allotment of shares on or before expiry of 18 months from the date of allotment of warrants. The preferential allotment of the warrants had been made pursuant to a Resolution passed by the shareholders of the company at Annual General Meeting held on August 30, 2001. The resolution had been passed in terms of the provisions of section 81(1A) of the Companies Act 1956 and the allotment had been made in accordance with the guidelines for preferential issues contained in SEBI (Disclosure and Investor Protection) Guidelines 2000. It is also observed that the relevant Board resolution had been sent to the stock exchanges for notification. The explanatory statement appended to the notice had given details regarding the purpose of the proposed preferential allotment, the pattern of shareholding before and after the preferential issue of shares to the Financial Institutions as well as before and after conversion of the warrants allocated on preferential basis to the "Acquirers". The statement had also stated that lock in period and the number of shares/ warrants subjected to such lock in, would be as per SEBI guidelines. It had also been mentioned that the issue of warrants would not result in any change in the management control of the company. The warrants were allotted on November 29, 2001, viewed in the light of the then existing provisions of regulation 3(1)(c) of the Takeover Regulations, the preferential allotment of warrants had been made to the "acquirers" by the Target Company', pursuant to the provisions of Section 81(1A) of the Companies Act, 1956; the relevant board resolution has been sent to the Stock Exchanges' disclosures had been made of the particulars specified except for the specific name of the allottee.
5.8 Thus, there is sustainable force in the argument that the provisions of regulations 10 and 11 of the Takeover Regulations did not apply to the preferential allotment of the warrants made by the Target Company to the Acquirers on November 29, 2001, in terms of exemption available under the then existing provisions of regulation 3(1)(c) ibid.
5.9 The issue for consideration, however, got complicated due to deletion of the regulation 3(1)(c) effective 9 September 2002 - subsequent to the said preferential allotment of the warrants on 29 November 2001 and prior to the conversion of the warrants into shares on 2 June 2003.
5.10 It is noted that the deletion of the provisions for exemption of preferential allotment from the Takeover Regulations was intended to avoid possible misuse of the exemption for the purpose of effecting a change of the hands of control over the company, without incurring an obligation to make a public offer as envisaged in the Takeover Regulations. The facts of the case do not indicate any such intentions on the part of the company/ the Acquirers.
5.11 In terms of Regulation 12 read with Regulation 2(c), 'control' includes 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.
5.12 It is seen from the particulars furnished in the explanatory statement to the notice for the AGM that the promoters and associates as a class were holding 41.57% of the share capital of the target company (significant percentage by itself) before the preferential allotment of shares to the FIs and consequent on the preferential allotment of shares to FIs and the conversion of warrants allotted to the promoters and associates into shares, their shareholding in the Target Company stood increased only to 45%, still less than simple majority. The controlling interest of the promoters and associates in the Target Company had not been altered significantly. Further, consequent to the acquisition of additional shareholding, there was no change in the control of the company.
5.13 The preferential allotment had been made pursuant to a negotiated settlement with the institutions or for financial restructuring of the company or in other words, the preferential allotment of warrants, which were eventually converted into shares, had been made in the larger interest of the company, and with the approval of the shareholders.
5.14 In view of the foregoing, I am inclined to agree that the said acquisition on June 2, 2003 of shares in the Flex Industries Ltd. by its promoter companies, viz. Flex International Pvt. Ltd., and Apoorva Extrusion Pvt. Ltd., through conversion of warrants allotted on preferential basis on November 29, 2001 falling under Regulation 11(1) can be deemed to have been covered under the exempted category in terms of the then regulation 3(1)(c) of the Takeover Regulations. However, the shares acquired would need to be subjected to an appropriate lock-in requirement. Further, since, technically, full disclosures had not been made as envisaged in the provision to the then existing regulation 3(1)(c) ibid, and the shares, on conversion of the preferentially allotted warrants, had been allotted four days after expiry of the 18 month period. While these technical lapses should not go to negate the validity of the allotment, the lapses need to be dealt with in separate adjudication proceedings.
6. ORDER 6.1 In view of the findings made above and in exercise of the powers conferred upon me under Section 19 of SEBI Act 1992 read with regulation 44 and 45 of the Takeover Regulations, I direct that adjudication proceedings be initiated in terms of the SEBI Act 1992, against the Acquirers for not having made full disclosures as envisaged under the proviso to the then existing provisions of Regulation 3(1)(c) of the Takeover Regulations. The Acquirer may make their submissions before the Adjudicating Officer, who shall consider the same on merits and pass appropriate order in accordance with law. Order appointing the Adjudicating Officer will be issued separately.
6.2 I also hereby direct that the equity shares allotted by Flex Industries Ltd. on June 2, 2003 to Flex International Pvt. Ltd. and Apoorva Extrusion Pvt. Ltd. through conversion of warrants be subjected to lock-in of three years from the date of allotment of shares.
6.3 This order shall come into force with immediate effect.