Securities Appellate Tribunal
Sebi vs The Kadri Mills (Cbe) Ltd. on 18 January, 2003
ORDER
G.N. Bajpai, Chairman
1. BACKGROUND 1.1 Shri G Kannappan, Shri K Gov Ramaswamy, Shri G Vijayakumar (hereinafter collectively referred to as "the Acquirers") are holding 74.88% (20,81,731 equity shares) of the equity capital of the The Kadri Mills (CBE) Ltd. (hereinafter referred to as "the Target company").
1.2 The shares of the Target company are listed at Madras Stock Exchange (MSE), Coimbatore Stock Exchange(CSE) and Interconnected Stock Exchange of India Ltd.(ICSE).
1.3 Shri G Kannappan entered into Agreements on 14.11.2001 with Shri D Ramakrishnan for acquisition of 19,000 equity shares of the Target company and with Shri V Palaniswamy for acquisition of 46,135 equity shares of the Target company at a negotiated price of Rs. 5.45/- per share.
1.4 Pursuant to the execution of the aforesaid agreements, the Acquirers made a public announcement on 19.11.2001 for acquisition of 22.77% shares of the equity share capital of the Target company under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as "the Regulations") through Indbank Merchant Banking Services Ltd. (hereinafter referred to as "the merchant banker") to the public offer.
1.5 On 19.11.2001 the merchant banker filed the Draft Letter of Offer on behalf of the Acquirer, - to be sent to the shareholders of the Target company, with SEBI.
1.6 On perusal of the draft letter of offer, by SEBI, it was observed that the shares of the Target company were infrequently traded on CSE and MSE and frequently traded on ICSE in terms of explanation (i) to Regulation 20(3) [prior to the amendment dated 9.9.2002 to the Regulations]. Accordingly, preliminary comments on the draft letter of offer were conveyed by SEBI to the merchant banker on 10.12.2001 and it was inter alia advised to justify the offer price in terms of regulation 20, sub-regulation (3) of the Regulations 1.7 On 24.12.2001, the merchant banker submitted that changes as advised by SEBI vide letter dated 10.12.2001 have been incorporated in the Letter of Offer and the price offered in the public offer, of Rs.5.50 is justified on the basis of the financials of the Target company and the price of shares of the Target company traded in the Stock Exchanges.
1.8 On 14.03.2002, SEBI issued a reminder advising the merchant banker to the offer to determine the offer price in terms of the provisions of the regulations taking into consideration the parameters suggested in SEBI's letter dated 10/12/01. The merchant banker was also advised by SEBI to submit a revised draft offer document on or before 21/3/02 failing which SEBI will be constrained to take action against them in terms of the Regulations and/or SEBI Act, 1992.
1.9 The merchant banker vide letter dated 01.04.02 inter alia requested permission to withdraw the offer under regulation 27(1)(d). In response SEBI vide letter dated 19/4/02 advised the merchant banker that the offer made by the Acquirers was obligatory in terms of regulation 11(1) {wrongly referred as regulation 11(2) in the draft offer document} of the Regulations and cannot be withdrawn under the circumstances stated in their letter dated 01.04.02. The merchant banker was further advised to ensure the implementation of the offer and comply with the Regulations.
1.10 The merchant banker vide letter dated 17/5/02 reproduced and concurred with the submissions of the Acquirers and submitted inter alia that they are willing to go ahead with the offer at an offer price of Rs 5.50 per share which has been arrived at in accordance with the Regulations and are not withdrawing the original offer made but are showing their inability to make a revised offer at a price higher than the offer price of Rs 5.50 per share.
1.11 The merchant banker vide letter dated 08/07/02 reiterated its submissions made earlier and claimed that the offer price of Rs 5.50 per share is justified in terms of the Regulations.
2. SHOW CAUSE NOTICE 2.1 Since the offer price in terms of the Regulations could not be justified, a show cause notice was issued to the Acquirers on 05.08.02, inter alia stating -
2.2 that in the draft offer document the offer price was Rs.5.50 whereas the book value per share as per the audited financial results as on 31.03.2001 was Rs.86.04. (book value almost 16 times the offer price) 2.3 the shares were stated to be frequently traded in terms of explanation to Regulation 20(3) [prior to the amendment dated 9.9.2002 to the Regulations] as the annualised trading turnover is 3.12% in ICSE and infrequently traded in CSE and MSE. Therefore, offer price is required to be justified under regulation 20(2) & 20(3) [prior to the amendment dated 9.9.2002 to the Regulations] but the same is justified only under regulation 20(2).
2.4 Therefore there is, prima facie, violation of regulations 20(3), 26 and 22 by the Acquirers. Thus, the Acquirers were called upon to show cause as to why one or more or all action(s) under Regulation 22(15), 28(11), 44, and 45(6) of the Regulations and Section 11 of Securities and Exchange Board of India Act 1992 (hereinafter referred to as "SEBI Act" ) should not be initiated against them.
3. REPLY / HEARING 3.1 The Acquirers replied to the show cause notice vide their letter dated 29.08.02. Since the submissions of Acquirer were not found to be satisfactory an opportunity of personal hearing before the Chairman was given to the Acquirers on 20.11.2002, wherein the Acquirers reiterated their submissions made by them vide their letter dated 29.08.02.
4. SUBMISSIONS OF THE ACQUIRERS 4.1 The Acquirers made following submissions vide their letter dated 29.08.02 and during the hearing, before Chairman, dated 20.11.02 :-
4.2 The Acquirers hold 20,81,731 equity shares in the Target company, constituting 74.88% of the paid-up capital of the Target company.
4.3 The Acquirers together with persons acting in concert had entered into agreements with Mr. D Ramakrishnan and Mr. Palaniswamy on 14.11.2001 to acquire 65,135 equity shares representing 2.34% of the paid-up capital of Target company.
4.4 As per the Clauses 4,5 and 6 of the aforesaid Agreements dated 14.11.01, the agreements for acquisition of shares were themselves entered into subject to the provisions of and compliance with the Regulations and that while the duration of the agreements was stipulated as the period of 30 days after compliance with the regulations, it was specifically stipulated that the agreement shall not be acted upon by either of the parties in case of non-compliance with the regulations.
4.5 In the context and circumstances when the Offer Price proposed by the Acquirers was not acceptable to SEBI and SEBI had, as per its communications dated 10th Dec, 2001 to the merchant banker stated that we are not to proceed further with the Offer, the Agreements entered into by the Acquirers with Mr. D Ramakrishnan and Mr. V Palaniswamy became unenforceable, infructuous and had lapsed and it does not subsist now.
4.6 In the public announcement and also in the Letter of Offer (Draft filed with SEBI) they had proceeded on the basis that the offer is made by them under Regulation 11(2). In the Draft Letter of Offer in para 2.1, it was stated that "this offer is made by the Acquirers under regulation 11(2) for consolidating their holding in KML".
4.7 If regulation 11(2) was a mistake and is wrong, the draft offer document was itself defective. It is note-worthy that they have not made any offer under regulation 11(1) which as per SEBI's notice under reply is the provision that is triggered.
4.8 It is submitted that they had not made any offer under regulation 11(1) and secondly, that the proposed acquisition of 2.34% pursuant to the agreements is well within the permissible 10% limit in regulation 11(1). If it is construed that the permissible 10% limit in a period of 12 months is available only upto 75%, it follows that above 75%, it is only regulation 11(2), which , if at all can apply, which SEBI have held is not however applicable.
4.9 The negotiated price under the agreements entered into by them is Rs 5.45 per share. The annualized trading turnover of the shares in ICSE being 3.12% (which is not less than 2%) the shares were frequently traded in ICSE. Accordingly, the weekly high and low of the closing price of the shares during the 26 weeks preceding the date of public announcement is Rs 5.41 per share. In this context where the price under regulation 20(2)(a) is Rs 5.41 per share and regulation 20(2)(b) and regulation 20(2)(c) are inapplicable, the Acquirer had adopted the offer price of Rs 5.50 per share, which in their submission is in accordance with regulation 20(2).
4.10 In SEBI communication dated 10th Dec 2001 to the merchant banker, the view has been taken that the offer price is required to be justified under regulation 20(2) and also under regulation 20(3). The only reason stated for this view in the said communication is that the shares are infrequently traded in CSE and MSE.
4.11 The expression "Infrequently Traded" is defined in the explanation given in regulation 20(3). As per that definition, shares will be deemed to be "infrequently traded" if on the Stock Exchange the annualized trading turnover in the preceding six calendar months prior to the month in which the public announcement is made is less than 2% by number of shares of the Listed Shares. The definition contemplates trading, but trading in volume which is infrequent by being less than 2%. The definition does not contemplate `Nil Trading' or `No Trading'. Therefore, a situation where there is no trading at all, cannot be categorized as "infrequently traded". In CSE and MSE, the Target company's shares have no trading in the relevant period. It was a case of `Nil' trading and has been so declared to SEBI. Therefore, it is submitted that this was not a case of infrequent trading as defined in the explanation to attract applicability of regulation 20(3).
4.12 The expression "frequently traded" or the expression "most frequently traded" are not defined in the Regulations. It has to be assumed that trading in volumes not less than 2% is deemed to be frequently traded. There are no words used in Regulation 20(2)(d) to suggest that the shares should be frequently traded in all the Stock Exchanges where the shares are listed and that out of them the "most frequently traded" should be adopted as the basis. Even in a situation where the shares satisfy the test of frequent trading in one stock exchange that would be the most frequently traded, irrespective of "Infrequent Trading" or "No Trading" in other Stock Exchanges.
4.13 In response, to SEBI's communication dated 10.12.01, the Acquirer have provided the clarifications and had also offered the justification for the offer price. While SEBI had interdicted them from proceeding with the offer, and they were therefore unable to proceed further by dispatching the letter of offer to the shareholders, SEBI did not issue any communication subsequently either lifting the prohibition OR specifying any change under the proviso to regulation 18(2) or even indicating what in their opinion should be the offer price (except for reference to book value in the communication dated 10th December 2001 which is not the sole criteria even as per SEBI Regulations).
4.14 Therefore, viewed in proper perspective, this is not a case where the Acquirer have withdrawn the offer. There is no provision in the Regulation for adjudication of this issue OR as to the weightage to be given to each of the factors under Regulation 20(2) Or regulation 20(3). Therefore, the Acquirer cannot be faulted for not proceeding with the offer.
4.15 Moreover, the Acquirer never pleaded inability to implement the offer. They were always ready and willing to implement the offer at the Offer Price that they had proposed in the Public Announcement and Draft Letter of Offer. They pleaded inability only to pay an enhanced price per share, which was not in contemplation when they made the offer, and which in their view based on the circumstances of the Target company Or even the applicable regulations will not be justifiable.
4.16 The Acquirer requested, therefore, no further action may be taken under Regulation 22(15), 28(11), 44, 45(6) and /or Section 11 of SEBI Act.
5. ISSUES
5.1 I have taken into consideration the facts of the case, the submissions written as well as oral made by the Acquirers during the hearing dated 20.11.02 and also the documents submitted by them in support of their submissions.
5.2 From the facts of the case, the submissions written as well oral as made by the Acquirers during the hearing and also the documents submitted by them in support of their submissions, the following issues arise which need consideration:-
(i) If the shares of a Target company are listed in more than one stock exchange and if the shares are infrequently traded in two stock exchanges and stated to be frequently traded in one stock exchange, whether the offer price is required to be justified under regulation 20(2) or regulation 20(3) or both the regulations.
(ii) If the Acquirer has made a public announcement and the offer price as stated in the public announcement is not justified in terms of regulation 20, can the Acquirer retract back from completing the open offer obligations.
6. CONSIDERATION OF ISSUES 6.1 First Issue 6.1.1 It is observed from the Draft Letter of Offer submitted by the merchant banker on 19.11.01 that shares of the Target company are infrequently traded in CSE and MSE and stated to be frequently traded on ICSE. The annualized trading turnover of the shares of the Target company on ICSE was stated to be 3.12%. The weekly high and low of the closing price of the shares of the Target company during the 26 weeks preceding the date of public announcement dated 19.11.2001 is Rs 5.41 per share. It is also observed that the Acquirers have agreed to acquire shares from D Ramakrishnan and V Palaniswamy at Rs 5.45 per share. It is also observed that SEBI had communicated its preliminary observations to the merchant banker on 10th December 2001. Pursuant to the aforesaid letter of SEBI, the merchant banker had vide letter dated 24.12.01 and 08.07.02 submitted the comments in respect of justification for the offer price of Rs 5.45 per share.
6.1.2 Before dealing with the issue it will be pertinent to advert to the relevant regulations:-
Regulation 20. Minimum Offer Price 20(2) For purposes of sub-regulation (1), the minimum offer price shall be the highest of -
(a) the negotiated price under the agreement referred to in sub-regulation (1) of regulation 14;
(b) the highest price paid by the acquirer or persons acting in concert with him for any acquisitions, including by way of allotment in a public or rights issue, if any, during the 26 week period prior to the date of public announcement;
(c) the price paid by the acquirer under a preferential allotment made to him or to persons acting in concert with him at any time during the twelve months period up to the date of closure of the offer;
(d) the average of the weekly high and low of the closing prices of the shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during the 26 weeks preceding the date of public announcement.
20(3) Where the shares of the target company are infrequently traded, the offer price shall be determined by the issuer and the merchant banker taking into account the following factors :
(a) the negotiated price under the agreement referred to in sub-regulation (1) of regulation 14.
(b) the highest price paid by the acquirer or persons acting in concert with him for acquisitions including by way of allotment in a public or rights issue, if any, during the twenty-six week period prior to the date of public announcement;
(c) the price paid by the acquirer under a preferential allotment made to him or to persons acting in concert with him at any time during the twelve month period up to the date of closure of the offer ; and
(d) other parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis--vis the industry average.
Explanation :
(i) For the purpose of this clause, shares will be deemed to be infrequently traded if on the stock exchange, the annualized trading turnover in that share during the preceding six calendar months prior to the month in which the public announcement is made is less than two per cent (by number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the said six months period may be taken.
(ii) In the case of shares which have been listed within six months preceding the public announcement, the trading turnover may be annualized with reference to the actual number of days for which the share has been listed.
6.1.3 From the reading of the aforesaid regulations, 20(2) and 20(3), it is clear that for the purposes of the said regulations the shares of a Target company shall be deemed to be infrequently traded if on the stock exchanges the annualized trading turnover in that share during the preceding six calendar months prior to the month in which the public announcement is made is less than 2% (by number of shares) of the listed shares. Further, it is also clear that for a infrequently traded share, the annualized trading turnover has to be below 2% and it can be nil also. Further, if the annualized trading turnover in that share during the preceding six calendar months prior to the months in which the public announcement is made is 2% or more (by number of shares) of the listed shares then the shares will be deemed to be frequently traded shares.
6.1.4 I have noted the contention of the Acquirer that regulation 20(3), which pertains to infrequently traded shares, contemplates trading but trading in volume which is infrequent by being less than 2% and the definition does not contemplate nil trading or no trading. It was submitted that where there is no trading at all cannot be categorized as infrequently traded. Further, the shares of the Target company have not been traded at all in CSE and MSE. Therefore, it was contended that the instant case is not a case of infrequent trading as defined in the explanation to attract applicability of regulation 20(3) but a case of `nil' trading. The aforesaid contention of the Acquirer is not tenable. The term `infrequently traded' in regulation 20(3) contemplates not only the annualized trading turnover of less than 2% but also nil or no trading in the shares of the Target company on the Stock Exchange. Any turnover which is below 2%, including nil will be infrequently traded. The submission that turnover upto 2% can only be treated as infrequently and whereas nil turnover which is even less than 2% cannot be treated as such does not stand to logic / reason.
6.1.5 I have noted the contention of the Acquirer that there are no words used in regulation 20(2)(d) to suggest that the shares should be frequently traded in all the stock exchanges where the shares are listed and that out of them the most frequently traded should be adopted as a basis. Further, even in a situation where the shares satisfy the test of frequent trading in one stock exchange that would be the most frequently traded, irrespective of "infrequent trading" or "no trading" in other stock exchanges. The aforesaid contention of the Acquirer is not tenable. In a situation where the shares of the Target company listed on various stock exchanges are stated to be frequently traded in one and infrequently traded then the Acquirer will have to justify the offer price in terms of regulation 20(6) according to both regulation 20(2) and 20(3), pertaining to frequently traded shares and infrequently traded shares. After calculating the offer price as per both the applicable regulations, i.e, regulation 20(2) and regulation 20(3), the Acquirer will offer the highest price to the shareholders of the Target company. Therefore the contention of the Acquirer that in a given situation only either 20(2) or 20(3) will be applicable and that both the aforesaid regulations cannot apply simultaneously is not tenable.
6.1.6 It is not for the first time that SEBI is taking this interpretation of the said Regulations with regard to determination of offer price. In the past SEBI has advised the acquirers/merchant bankers to determine the offer price in terms of regulations 20(2) and 20(3) in cases where the shares of the Target company were frequently traded in one stock exchange but infrequently traded in another. The offer documents submitted by such acquirers/merchant bankers have contained justification of offer price based on the parameters under regulations 20(2) and 20(3). The acquirers/merchant bankers have agreed with such interpretation of SEBI and submitted the offer documents by justifying the offer price suitably. These offer documents have been put on the web page of SEBI. Thus, the interpretation of SEBI is well known to the public, acquirers and merchant bankers. It is not that the Merchant banker in the instant case was not aware of such interpretation. The contention of the Acquirer, therefore, in this regard is not only untenable but also surprising.
6.1.7 It is also observed that CSE is a regional stock exchange and MSE is another stock exchange where application for listing was made by the Target company, where the shares of the Target company are traded since May 1993 and whereas these securities are traded as "permitted securities" in ICSE since 09.12.99. It is also observed that the figures which are relied on for treating the securities as frequently traded are for a short period , i.e., 19.06.2001 to 27.09.2002, where for most of the days only a single, i.e., one trade was put and in most of the cases delivery was outstanding.
6.1.8 The datewise turnover details of the Target company in ICSE, as submitted by ICSE, are as under -
DATEWISE TURNOVER STATISTICS OF KADRI MILLS LTD FROM APRIL 01, 2001 TO SEPT 30, 2001 Date Closing price Trades No. of shares traded Value in Rs. (single side) 19-Jun-01 4.4 1 500 2200 20-Jun-01 4.05 1 500 2025 21-Jun-01 4.1 1 700 2870 22-Jun-01 4 1 700 2800 26-Jun-01 4.3 6 900 3870 27-Jun-01 4.3 1 100 430 29-Jun-01 4.35 2 600 2610 2-Jul-01 5.3 1 100 530 3-Jul-01 6.55 1 100 655 4-Jul-01 8 1 100 800 6-Jul-01 9.9 1 100 990 10-Jul-01 7.55 4 12000 90600 11-Jul-01 9.35 1 100 935 12-Jul-01 11.5 2 200 2300 20-Aug-01 9 1 100 900 23-Aug-01 7.25 1 100 725 24-Aug-01 5.85 1 200 1170 28-Aug-01 4.7 1 300 1410 29-Aug-01 4.05 1 500 2025 30-Aug-01 4.1 1 800 3280 3-Sep-01 4 1 500 2000 4-Sep-01 4.05 1 500 2025 5-Sep-01 4.15 1 1000 4150 6-Sep-01 4.05 1 1000 4050 7-Sep-01 4.1 1 2000 8200 10-Sep-01 4 1 1000 4000 11-Sep-01 4.1 1 1000 4100 12-Sep-01 4.05 1 1000 4050 13-Sep-01 4.1 1 1000 4100 14-Sep-01 4.15 1 2000 8300 17-Sep-01 4.05 1 2000 8200 18-Sep-01 4.1 1 2000 8100 19-Sep-01 4.15 1 2000 8300 21-Sep-01 4.05 1 2000 8100 24-Sep-01 4.15 1 1000 4150 25-Sep-01 4.1 1 1600 6560 26-Sep-01 4.2 1 900 3780 27-Sep-01 4 1 2000 8000 6.1.9 The price behaviour, associated volumes and the price range as submitted by ICSE is provided as under :
No. of shares traded No. of shares traded Total No. of shares traded Number of trading days and period the Price Range From Dec 9, 1999 to From April 1, 2001 to price was revalent Mar 31, 2001 Sept 30, 2001 Rs.4 to Rs.5.85 482400 28200 510600 27 days Jun 19, 2001 to Sept 27, 2001 Rs.5.85 to Rs.7.55 Nil 400 400 7 days June 26, 2001 to Aug 24, 2001 Rs.7.55 to Rs.11.55 Nil 12600 12600 6 days July 4, 01 to Aug 20, 2001 Total No. of Shares traded 482400 41200 523600 6.1.10 It is also observed that a very few stock brokers traded in the shares of the Target company during the period between 19.06.01 to 27.09.01 in ICSE as under :-
Name of the trades / Dealer Trader / Dealer Code Buy Quantity Sale Quantity Outstanding Quantity R Sriram T21014 14200 15900 -1700 M Manikandan T21015 14100 12400 +1700 Silverstone Securities T21019 1800 1900 -100 Micro Sec Securities Ltd D24096 13100 13000 +100 Total 43200 43200 6.1.11 It is also pertinent to note that these shares were traded only in ICSE for a period between 19.06.01 to 27.09.01 and the agreement for the said acquisition of shares was entered into on 14.11.2001.
6.1.12 From the tables as given in paras 6.1.7 to 6.1.9, it is clear that the shares of the Target company was traded on very few days by a handful of brokers for very limited number of shares, mostly one trade per day and net quantity delivery was negligible. Taking into consideration the above facts in the light of regulation 20(6), the parameters laid down under both regulations 20(2) and 20(3) have to be taken into consideration to justify the price.
6.1.13 I have also noted the contention of the Acquirers that they had submitted the comments as justification for the offer price vide their letters dated 17.01.2002 and 08.07.2002 pursuant to SEBI's letter dated 10th December 2001. In this regard it will be pertinent to refer to the contents of SEBI's letter dated 10th December 2001 which inter alia stated -
"It is observed that the offer price is stated to be Rs 5.50 per share as against the book value per share of Rs 86.04 based on the financials as of March 31, 2001 which does not appear to be justified."
"5. Justification Of Offer Price
i) The shares of KML are stated to be frequently traded in terms of explanation (i) to Regulation 20(3) as the annualised trading turnover is 3.12% in ICSE and infrequently traded in Coimbatore Stock Exchange Ltd and Madras Stock Exchange Ltd. Therefore, the offer price is required to be justified under regulation 20(2) & 20(3) but the same is justified only under regulation 20(2).
ii) You are advised to justify the offer price and further substantiate by making the following disclosures -
i. The highest price to book value per share and P-E ratio of the company in the same industry to which the target company belongs. For this purpose take the market price as on the date of public announcement for the captioned offer.
ii. The book value and the market price of such companies in the same industry and comparable with the target company.
iii. Calculate all the parameters mentioned u/r 20(3)(d) based on the latest audited financial data and subsequent financial data for the period ended June 30, 2001.
iv. As there is a huge variance between the offer price and book value, the determination of offer price does not appear to be justified in terms of the Regulations. You are advised to calculate the realisable book value and furnish details on the basis of calculation of realisable book value including complete breakup, name and address of the parties to whom advances, if any have been made, their relationship/ association with the acquirers and / or promoters of KML, type of items to be supplied by them, etc., and accordingly, justify the offer price.
v. Further, the basis of calculation of realizable book value shall be certified by a Chartered Accountant.
vi. Consequently, if there is upward revision in offer price, confirm compliance with Reg.26. "
"You are advised to offer your comments on the issues stated above and submit a revised draft letter of offer incorporating suitable clarifications on the aforesaid observations. Only on receipt and examination of the same, we may convey our comments in terms of proviso to Reg. 18(2). You are, therefore, advised not to proceed further with the offer, till then."
6.1.14 From the reading of the aforesaid letter it is clear that SEBI had advised the merchant banker to submit justification of offer price in terms of regulation 20(3) also, apart from regulation 20(2), based on the parameters stated therein in view of the huge variance between the offer price and the book value of the share of the Target company.
6.1.15 Pursuant to the aforesaid letter dated 10th December 2001 of SEBI, the merchant banker had vide letters dated 24th December 2001 and 8th July 2002 had inter alia stated that -
"The shares are frequently traded in ICSE within the meaning of explanation in regulation 20(2) and the average of the weekly high and low of the closing prices of the shares of the company during the 26 weeks preceding the date of public announcement is Rs 5.41 per share and the offer price is Rs 5.50 which is more than the traded price."
"Whereas the earning per share is only Rs 0.12, the Acquirers offer Rs 5.50 per share which is more than 45 times of the EPS."
"The book value per share of the company as per the audited financial statements as on 31.03.2002 is Rs. 73.14."
"The Acquirers have fixed the offer price of Rs 5.50 based on the frequent trading quotations on ICSE as provided under regulation 20(2) of the regulations."
6.1.16 From the reading of the aforesaid letters of the merchant banker it is observed that the justification for offer price has not been provided at all, specifically with regard to the huge variance between the book value of the shares of the Target company and the offer price offered to the shareholders and simply data has been produced in the aforesaid letters. The same was not in consonance with regulation 20(6) on the part of the Acquirer as no proper justification has been provided by the Acquirer in the Letter of offer for the offer price proposed to be given to the shareholders of the Target company.
6.1.17 I have noted the contention of the Acquirer that under regulation 20(3) there are a number of factors for determination of offer price but it is not clarified as to what weightage or point has to be given to each of the factors. Further, it is clear that all the factors are required to be considered cumulatively and not the book value of the share only as has been indicated by SEBI vide its letter dated 10th December 2001 and no offer price has been suggested or indicated with due regard to other factors which are relevant under regulation 20(3). All the factors as stated in regulation 20(3) have to be taken into account cumulatively for the purposes of ascertaining the offer price. But in the instant case it is observed that the merchant banker has not paid due regard to the book value of the shares. Further, from the material available on record it is observed that the target company is in the manufacturing sector and has considerable value of fixed assets as is evident from the disclosures made in the draft letter of offer. If the offer price is not justified in terms of the regulations taking into account the book value and/or the net realizable book value, it would deprive the shareholders of the Target company from getting a fair value for their shares. Further, it is also observed that post offer if the public shareholding of the target company falls to 10% or less, the acquirers have opted for delisting of the shares of the target company. The issue of offering a fair price to the shareholders of the Target company assumes all the more importance in the instant case as post offer, the target company may be delisted from the stock exchanges and the shareholders may not have any other alternate exit route. In such a situation and considering the fact that the shares of the Target company are not frequently traded on the stock exchanges, the shareholders of the Target company may have no option but to tender their shares in the offer made by the Acquirers. Therefore, the open offer made by the Acquirers indirectly compels the shareholders to tender their shares in the open offer.
6.2 Second Issue 6.2.1 If the Acquirer has made a public announcement and the offer price as the second issue for consideration is stated in the public announcement is not justified in terms of regulation 20, can the Acquirer retract back from completing the open offer obligations.
6.2.2. I have noted the contention of the Acquirers, that SEBI had interdicted them from proceeding with the offer and therefore they were unable to proceed further by dispatching the Letter of Offer to the shareholders. Further, it was submitted that SEBI did not issue any communication subsequently either lifting the prohibition or specifying any change under the proviso to regulations 18(2) or even indicating what in their opinion should be the offer price. The aforesaid contention of the Acquirer is not tenable. From the chronology of events, it would be clear that the Acquirer has been advised to make the offer taking into consideration the highest price under regulation 20(6) but the Acquirer has failed to do so. It would be gathered that SEBI communicated its preliminary observations on the Draft Letter of Offer on 10th December, 2001 wherein the merchant banker to the offer was, inter alia, advised to justify the offer price in terms of regulation 20(3) along with the other changes in view of the huge variance between the offer price and the book value of the shares of the Target company, the merchant banker vide letter dated 24.12.2001 inter alia submitted that the offer price of Rs. 5.50 per share is justified on the basis of the financials of the Target company and the price of the shares of the Target company traded in the stock exchange, SEBI issued a reminder on 14.03.2002 advising the merchant banker to the offer to determine the offer price in terms of the regulations and the merchant banker was also advised to submit a revised draft offer document, the merchant banker vide letter dated 01.04.2002 informed SEBI that the Acquirers are unable to raise additional funds to increase the offer price and expressed their intention to withdraw the offer, SEBI vide letter dated 19.04.2002 advised merchant banker that the offer made by the Acquirer was obligatory in terms of regulation 11(1) and the same cannot be withdrawn and the merchant banker was advised to ensure the implementation of the offer and compliance with the regulations, the merchant banker vide letter dated 17.05.02 reiterated that the offer price of Rs 5.50 per share is in accordance with the regulations and the Acquirers are not withdrawing their original offer but are showing their inability to make a revised offer at a price higher than the offer price of Rs 5.50, the merchant banker vide letter dated 08.07.02 reiterated their submissions and submitted that the offer price of Rs 5.50 is justified, it is observed that the merchant banker did not justify the offer price in terms of the provisions of the regulations taking into consideration the parameters suggested by SEBI vide its letter dated 10th December, 2001 despite several reminders. As per the regulation 20(6), the letter of offer shall contain justification on the basis of which the price has been determined. Therefore, there has been non-compliance of the provisions of the Regulations by the Acquirers since no proper justification for the offer price has been given. Therefore, the contention of the Acquirers that it cannot be faulted for not proceeding with the offer is not tenable since the Acquirer has failed to comply with the direction of SEBI to justify the offer price in terms of the provisions of the Regulations.
6.2.3. I have noted the contention of the Acquirer that they have never pleaded inability to implement the offer at the offer price they had proposed in the Public Announcement and Draft Letter of Offer. Further, they had pleaded inability only to pay an enhanced price per share, which was not in contemplation when they made the offer, and which in their view based on the circumstances of the Target company Or even the applicable regulations will not be justifiable. The aforesaid contention of the Acquirer is not tenable. It may be pertinent to mention here that in terms of regulation 22(1) the public announcement of an offer to acquire the shares of the Target company shall be made only when the Acquirer is able to implement the offer. Further, as per the Regulations the Acquirer may withdraw public offer only under the circumstances mentioned in regulation 27 and not otherwise. Therefore if a public announcement is made by an Acquirer then the Acquirer has to fulfill the obligations as stipulated in the Regulations. In the instant case, it is observed that the Acquirer has failed to carry out the obligation of justifying the offer price in terms of the Regulations despite several reminders from SEBI. The Acquirer has pleaded inability to pay the enhanced price as per the book value as advised by SEBI. I find that there are also no circumstances which might merit withdrawal of the offer in terms of regulation 27. Therefore, after making the public announcement, now the Acquirer cannot take the stand that the enhanced offer price as suggested by SEBI was not within its contemplation when the public offer was made since it was obligatory on the part of the Acquirer to take into account the correct offer price and to make a public announcement of an offer to acquire the shares of the Target company only when it is in a position to implement the offer and pay the offer price to the shareholders in terms of the Regulations.
6.2.4. I have noted the contention of the Acquirers that the agreements dated 14.11.2001 specifically stated the agreement shall not be acted upon by either of the parties to the agreement in case of non compliance with the regulations. Further, it was submitted that the occasion to trigger public offer consequent to proposed acquisition of additional shares in excess of 75% does not exist and has ceased to exist because the proposed public offer was not pursued in compliance with SEBI communication dated 10th December 2001, advising not to proceed with the offer. Further it was submitted that, if regulation 11(2) was a mistake and is wrong, then the Draft Offer Document was itself defective and therefore they have not made any offer under regulation 11(1) which as per the show cause notice is the provision which has triggered the public offer. Further, they had not made any offer under regulation 11(1) and the proposed acquisition of 2.34% pursuant to the Agreements is well within the permissible 10% limit in regulation 11(1). If it is construed that the permissible 10% limit in a period of 12 months is available only up to 75%, it follows that above 75%, it is only regulation 11(2) which, at all can apply, which you have held is not however applicable. The aforesaid contention of the Acquirers is not tenable. In this regard, it is observed that in the public announcement dated 19.11.2001, it was ,inter alia, stated that the offer was being made by the Acquirers pursuant to the agreements dated 14.11.2001 with Shri D Ramakrishnan and Shri V Palaniswamy for acquisition of 2.34% shares of the Target company and the same was being issued in compliance with the provisions of the Regulations. Further, no specific mention of any of the regulations 10, 11 or 12 was made in the public announcement. Further, when the Draft Letter of Offer was submitted to SEBI, then it was stated that the Letter of Offer is being sent to the shareholders under regulation 11(2). The wrongful quoting of the aforesaid provision by the merchant banker in the Draft Letter of Offer was pointed out by SEBI in the show case notice dated 5.08.02. In view of the foregoing, the Acquirers cannot take the stand that since they had wrongly mentioned regulation 11(2) in the Draft Letter of Offer, therefore the Letter of Offer became defective and thus there was no public offer made to the shareholders of the Target company because the offer in terms of regulation 2(1)(f) commenced from the date of making of public announcement and the same was stated to have been made in pursuance of the Regulations generally and no specific mention of any of the regulations, i.e, 10, 11 or 12 was made. Further , the subsequent wrongful mentioning of regulation 11(2) by the Acquirers in the draft letter of offer, which was submitted to SEBI and was yet to be cleared by SEBI before sending the same to the shareholders of the Target company cannot vitiate the offer validly made on 19.11.2001. Further, it is well settled that no wrong mention of a provision of regulation does not vitiate an action if such action can be validated if there is provision of the regulation where such action can be traced. Further, one cannot take advantage of such wrong mentioning of regulations. Therefore, for the aforesaid reasons, I do not find any merit in these submissions.
6.2.5. I have also noted the submission of the Acquirer that they did not embark on steps for open offer with any intention to eliminate public shareholding in the Target company and they did so on account of pressure from the public shareholders, and there is no necessity for the Acquirers to acquire any shares of the Target company. Further, I have also noted the submission of the Acquirer that the textile shares have no buyers, but only sellers and the special factor caused by prolonged recessionary conditions and very gloomy prospects for future cannot be ignored and an artificial value unrelated to market conditions cannot be placed on the shares. I do not find any merit in the aforesaid submissions and they are not a ground for non-justification of offer price in terms of the Regulations by the Acquirers on withdrawal of offer under regulation 27.
6.2.6. I have noted the contention of the Acquirers that under SEBI (Substantial Acquisitions of Shares and Takeovers 2nd Amendment) Regulations 2002} there was no opportunity or scope for a revised Letter of Offer at the initiative of SEBI or an independent valuation of shares. Further, what survived was therefore only our Letter of Offer at the reasonable and affordable price that we had proposed and since this did not meet with the approval of SEBI, the Chairman may be pleased to allow matters to rest there and drop any further action against us in the matter. I don't find any merit in this submission because once a public announcement has been made and the offer has been given to the shareholders of the Target company, the same cannot be withdrawn by the Acquirers except for under the circumstances as specified under regulation 27. Further, the matter cannot be put to rest as suggested by the Acquirer since the offer price proposed by the Acquirer was not as per the regulations since the Acquirer is duty bound to justify the offer price in terms of the Regulations and cannot retract merely because the Acquirer was not able to justify the price on pleading inability to pay the enhanced price as per the regulations.
7. CONCLUSION In view of the aforesaid, I find that after making the public announcement dated 19.11.2001 for the acquisition of 22.77% shares of the Target company from the public shareholders, the Acquirers failed to justify the offer price in terms of the Regulations as advised by SEBI by various communications and has thus not complied with regulations 20(3) read with Regulation 20(6) and regulation 22 of the Regulations.
8. ORDER / DIRECTION 8.1 Taking into consideration the above and the interest of the public shareholders of the Target company and the inability of the Acquirer to revise the offer price to confirm to the provisions of the regulation 20(3) read with regulation 20(6) (prior to the amendment to the Regulations dated 09.09.02) and to proceed with the offer, in exercise of the powers conferred upon me under Sections 4(3), 11,11(4), 11B of the SEBI Act read with regulations 44 & 45 of the Regulations, for the reasons recorded hereinabove, I hereby direct the Acquirer to justify the offer price in terms of regulation 20(6) taking into consideration the parameters laid down under regulation 20(2) and regulation 20(3) and take necessary steps to open the offer within 45 days of passing of this order.
8.2 In case of failure of the Acquirer to comply with the aforesaid direction, I hereby direct :-
(a) the forfeiture of the escrow account in full, maintained by the Acquirer in terms of regulation 28(11) and direct that the proceeds be transferred to Investor Protection Fund as provided in regulation 28(13).
(b) the Acquirers not to further deal in the securities of the Target company for a period of one year commencing from the date of expiry of the 45 days period specified under para 8.1 of this Order in terms of regulation 44(a).
(c) that the agreement pursuant to which the public announcement was made on 19.11.01 by the Acquirers shall not be acted upon and status quo ante should be restored as regards the shareholding of the Acquirers in the Target company.
(d) that the Acquirer will be liable for action in terms of Chapter VIA and/or Section 24 of SEBI Act.
8.3 The order shall come into force with immediate effect.