Securities Appellate Tribunal
Baader Bank Aktiengesellschaft vs Sebi on 10 October, 2019
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved on: 27.06.2019
Date of Decision : 10.10.2019
Appeal No. 88 of 2016
Baader Bank Aktiengesellschaft
Weihenstephaner Strasse,
4, 85716,
Unterschleissheim,
Germany ..... Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai - 400 051. ... Respondent
Mr. Somasekhar Sundaresan, Advocate with Mr. Pulkit
Sukhramani and Ms. Stuti Shah, Advocate i/b J. Sagar
Associates for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Chirag Bhavsar and
Mr. Kunal Shah, Advocates i/b MDP & Partners for the
Respondent.
WITH
Appeal No. 89 of 2016
Gulf Investment Services Holding Co.
P.O. Box 974, Ruwi, P.C. 112,
Sultanate of Oman ..... Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai - 400 051. .... Respondent
2
Mr. Somasekhar Sundaresan, Advocate with Mr. Pulkit
Sukhramani and Ms. Stuti Shah, Advocate i/b J. Sagar
Associates for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Chirag Bhavsar and
Mr. Kunal Shah, Advocates i/b MDP & Partners for the
Respondent.
CORAM : Justice Tarun Agarwala, Presiding Officer
Dr. C.K.G. Nair, Member
Justice M.T. Joshi, Judicial Member
Per : Justice Tarun Agarwala, Presiding Officer
1.Two appeals have been filed against a common order which have been clubbed together and are being decided by a common order. For facility, the facts stated in Appeal No. 88 of 2016 are being taken into consideration.
2. The appellants are aggrieved against the order dated March 2, 2016 passed by the Whole Time Member ('WTM' for short) of the Securities and Exchange Board of India ('SEBI' for short) under Section 11 and 11B of the Securities and Exchange Board of India Act, 1992 and Regulations 44 and 45 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ('Takeover Regulations 1997' for short) read with Regulation 32 and 35 of the SEBI (Substantial Acquisition of Shares and Takeovers) 3 Regulations, 2011 ('Takeover Regulations 2011' for short) in the matter of acquisition of shares of Parsoli Corporation Ltd. (hereinafter referred to as the 'Target Company') by the appellants Baader Bank Aktiengesellschaft (hereinafter referred to as 'Baader') and Gulf Investment Services Holding Co.(hereinafter referred to as 'GIS').
3. By the said order, the WTM directed the appellants to make a public announcement to acquire shares of the target Company in accordance with the provisions of Takeover Regulations 1997 within a period of 45 days from the date of the order. Further, the appellants were directed to pay the consideration amount along with interest @ 10% per annum with effect from October 30, 2006 to the date of payment to the shareholders who were holding shares in the Target Company after adjustment of dividend paid, if any.
4. The facts leading to the filing of the present appeals are that the appellant Baader is a licensed Bank regulated by the Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin) in Germany and is one of the leading financial service providers in Germany. Baader Bank is a member of all the German regional stock exchanges, Xetra Frankfurt and Xetra Vienna, 4 EUREX Frankfurt, SIX Swiss Exchange, SWX Europe, London NYSE Euronext. The shares of the Baader are listed on the Frankfurt Stock Exchange. Baader made its foray into the Indian market in 2006 by investing more than Rs. 40 crore in the Target Company which was a stock broker registered with SEBI.
5. The appellant GIS is an Oman based Company listed at the Muscat Securities Market. At the time of investment in the Target Company, GIS was engaged in investments and financial services. Since then it has restricted its operations and is now an investment holding Company while the financial services business are owned by its subsidiary, Gulf Baader Capital Markets SAOC (GBM), a joint venture between GIS and Baader.
6. The Sareshwala family are the promoters of the Target Company. Mr. Zafar Sareshwala is the Chairman and Mr. Uves Sareshwala is the Managing Director of the Target Company. The promoters group as on September 30, 2009 held 41.19% of the paid-up share capital of the Target Company.
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7. In April 2006, Baader subscribed to and was issued 10,00,139 shares of the Target Company @ Rs. 26/- per share and 3,50,000 shares of the Target Company on consideration other than cash basis comprising 9.08% of the share capital of the Target Company. On July 24, 2006, Baader further subscribed to and was issued 53,54,861 shares at the price of Rs. 22/- per share on a preferential basis. Upon acquisition, Baader came to hold 24.90% of the paid-up capital of the Target Company.
8. Similarly, GIS subscribed to and was issued 53,84,980 shares of the Target Company @ Rs. 22/- per share and upon acquisition came to hold 20% of the enhanced paid-up capital of the Target Company.
9. The aforesaid investments made the appellants individually and collectively cross the limit of 15% under Regulation 10 of the Takeover Regulations 1997 and therefore triggered the obligation on the part of the appellants to make separate public announcements of open offer under Regulation 10 read with Regulation 14(1) for acquiring the shares of the Target Company within four working days from July 24, 2006.
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10. Since no open offer was made, SEBI issued a show cause notice dated December 14, 2010 to the appellants calling upon them to show cause as to why suitable directions under Section 11 and 11B of the SEBI Act read with Regulation 44 and 45(6) of the Takeover Regulations 1997 should not be issued against them.
11. Initially, the appellants did not file any reply to the show cause notice and instead filed an application for settlement under Section 15JB of the SEBI Act which application was rejected on May 6, 2011. Thereafter replies were filed. The WTM, after considering their replies and, after giving an opportunity of hearing, passed the impugned order.
12. We have heard Shri Somasekhar Sundaresan, the learned counsel for the appellant and Shri Kumar Desai, the learned counsel for the respondent.
13. It was urged that the promoters of the Company had wrongly misrepresented to the appellants that the application seeking exemption from making an open offer was to be made to the BSE Limited ('BSE' for short) where the shares of the Target Company were listed. It was contended that the 7 promoters represented to the appellants that BSE after seeking appropriate clearances from SEBI would issue the exemption and thereafter would list the shares. The promoters also represented that they would obtain the necessary exemption from BSE. It was urged that on account of the aforesaid belief, the appellants did not make the open offer.
14. It was contended that the promoters were running a successful stock broking business in Mumbai and Ahmedabad and believed that the Target Company were well versed with SEBI laws and the Takeover Regulations 1997. On the other hand, it was urged that the appellants, being foreign investors, were not acquainted with the Indian laws and therefore relied upon the promoters to take the exemptions from the appropriate authorities. It was further contended that when the shares of the appellants were not listed on the Stock Exchange after more than one year of its acquisition, and in view of the audit report issued by the statutory auditors for the FY 2007- 08, the appellants decided to have a legal due diligence carried out in relation to the operations of the Target Company. This due diligence was carried out in February 2009 which pointed out serious violations of fraud by the promoters and the Target Company. The appellants then 8 realized that the appropriate authority to grant exemption was SEBI and not BSE. Based on the due diligence report, the appellants addressed a letter to SEBI pointing the fraud played upon them by the promoters and consequently filed a settlement application. It was thus urged that on account of the fraud played by the promoters, no direction should be issued against the appellants for the alleged violations.
15. The aforesaid assertions though attractive are not tenable and unacceptable. The record indicates that the appellants had taken an opinion from KPMG, a reputed audit firm which advised the appellants to make an open offer under Regulation 10 of the Takeover Regulations 1997. The relevant portions of the auditors opinion is extracted hereunder:-
"The SEBI Takeover Code restricts an acquirer from acquiring shares that entitle the acquirer to exercise 15% or more of the voting rights in a company unless such acquirer makes an open offer to the public. The minimum number of shares to be acquired shall be 20% of the voting capital of the company.
Since, the shares to be allotted to Baader Bank and GIS / GIS Group Company will give each of them voting rights in exercise of the prescribed limit of 15% both Baader Bank and GIS will have to make an open offer in compliance with the Takeover Code regulations.9
Baader Bank and GIS could consider an application under Regulation 4 of the Take Over Code for exemption from making an open offer to the public on the grounds that post acquisition of shares by Baader Bank and GIS, the public shareholding (excluding the shares to be held by Baader Bank and GIS) in the Company will be 6.92% which is much below the prescribed minimum shares to be acquired under the Take Over Code."
16. Inspite of the aforesaid opinion, the appellants neither made any attempt to make an open offer nor applied for exemption before the relevant authority. The appellants were informed by their legal team that the application for exemption was required to be made directly to SEBI. Inspite of this information, the appellants failed to make any application for exemption.
17. The defense that the promoters of the Target Company had misrepresented the appellants that they would obtain exemption from making an open offer from BSE cannot be believed. The appellants had a legal opinion with them and knew fully well that the application for exemption was required to be filed before SEBI and not before BSE. The appellants for reasons best known to them failed to file any application seeking exemption from making an open offer. 10 Further, there is nothing on record to indicate that the appellants have filed any criminal or civil case against the promoters in respect of the alleged fraud, breach of trust, or misrepresentation.
18. In this regard it may be stated here that from a bare reading of Regulation 3 and 4 it is clear that an application seeking exemption from making an open offer has to be made before making the acquisition and not after making the acquisition.
19. The contention that the appellants were ignorant of the SEBI laws or the Takeover Regulations 1997 is unacceptable and cannot be believed. The appellants Baader is a leading financial services provider in Germany and GIS offers comprehensive range of investment services in Oman. Both the appellants have a financial and securities market background and are professional investors who knowingly invested over Rs. 40 crore. Thus it is difficult to believe that the appellants were misrepresented or defrauded by the promoters of the Target Company without doing due diligence. The contention raised thus has no merit and is rejected.
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20. We further find that the appellants actively participated in the Board's meeting of the Target Company and were fully aware of the dealings, strategies made by the Target Company and its promoters. Thus the stand of the appellants that they were taken for a ride by the promoters cannot be believed.
21. The appellants contended that the promoters not only played a fraud upon them but also played a fraud on the shareholders of the Target Company. It was contended that the shares of Mr. Habibullah Ebrahim Akudi was fraudulently transferred by the Sareshwala's group. The said shareholder filed a suit before the Bombay High Court in which an order was passed restraining the Sareshwala's from transferring the shares of the Target Company. It was contended that failure on the part of the Target Company to make necessary disclosures regarding transfer of shares, not honouring the Board's decision to pay dividends to its shareholders and for not cooperating in the investigation led to the passing of an order dated June 28, 2010 by SEBI restraining the Target Company from accessing the securities market in any manner for a period of one year. In addition to the above, SEBI passed another order dated July 27, 2010 against the Target 12 Company and Sareshwalas restraining them from accessing the securities market in any manner for a period of 7 years for transferring 80,800 fake shares to the promoters and to the front entities. The promoters were further restrained from holding any position of a director in any listed Company for a period of 7 years. Further, the promoters / Shareshwala's group were directed to make a public offer through a merchant banker to acquire shares from the public shareholders and if after acquisition, if the public shares comes below the minimum requirement, in which case the Target Company would be compulsorily delisted. The said directions were subsequently affirmed by this Tribunal as well as by the Supreme Court. It was further contended that since the aforesaid order was not complied by the Target Company and its promoters, SEBI passed another order dated June 22, 2018 imposing a penalty of Rs. 25 lakh.
22. The learned counsel, thus, contended that when the promoters of the Target Company had played such a serious fraud manipulating the register of members with its integrity being foundationally undermined, the direction of SEBI to make an open offer would only benefit the Sareshwalas as 13 they have been found to transfer fake shares to itself or its front entities. It was contended that if the appellants were to make an open offer the promoters of the Target Company would participate and would thus benefit from the wrongdoings done by them.
23. We find that the said submission is untenable. The WTM has factored this aspect into consideration while passing the impugned order. The WTM while directing the appellants to make an open offer have restrained the promoters, their associates and family members from tendering their shares. We have further been informed by the respondent that the fraudulently transferred 80,800 shares of 252 shareholders to the promoters have been cancelled and the said shares have been returned to the 252 shareholders.
24. Thus, the grievance of the appellants that the open offer would only benefit the Sareshwalas / promoters is thus misconceived. The contention that the front entities of the Sareshwalas would be benefitted is based on surmises and conjectures. Apart from 80,800 shares, no other fraudulent transfer of shares has come to light. Thus based on preponderance of probability that the register of members 14 have been compromised / tampered, the appellants should not be allowed to make an open offer as it would benefit the promoters and its front entities cannot be accepted. In the first place we find that there is no evidence of tampering of the register of members. Thus the integrity of the register of members was never compromised. The transfer of 80,800 shares was made without providing the specimen signature to the Share Transfer Agent.
25. The contention that there cannot be an open offer of a Company whose shares have been directed to be compulsorily delisted appears to be attractive in the first blush, but on a closer scrutiny we find this stand of the appellants to be untenable and baseless.
26. The WTM in its order dated July 27, 2010 while directing the Sareshwalas to make a public offer also directed BSE to compulsorily delist the Target Company if the public shareholding goes below the minimum level in view of the aforesaid purchase of share from the public. The relevant portion of the order of the WTM dated July 27, 2010 is extracted hereunder:-
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"(c) direct Mr. Zafar Yunus Sareshwala and Mr. Uves Yunus Sareshwala to make a public offer through a merchant banker to acquire shares from public shareholders by paying them the value determined by the valuer in the manner prescribed in Regulation 23 of the SEBI (Delisting of Equity Shares) Regulations, 2009 and acquire the shares offered in response to the public offer, within three months from the date of this Order;
(d) direct BSE to facilitate valuation of shares to be purchased as at (c) above, and compulsorily delist Parsoli Corporation Ltd., if the public shareholding reduces below the minimum level in view of aforesaid purchase."
27. The said direction was challenged and dealt with by the Tribunal in its order dated August 12, 2011 wherein the Tribunal held:-
"The learned senior counsel for the appellants has raised three contentions. Firstly, he has very strenuously challenged the directions issued by the whole time member in paragraph 12(c) and
(d) of the impugned order by which the two directors of Parsoli namely, Zafar Yunus Sareshwala and Uves Yunus Sareshwala have been directed to make a public offer through a merchant banker to acquire shares from public shareholders by paying them the price as determined in the manner prescribed in regulation 23 of the delisting regulations framed by the Board. The direction in para 12(d) is only consequential and if, on the implementation of the direction in para 12(c), the public shareholding of Parsoli falls below the minimum required to be maintained, then it has to be delisted compulsorily."16
28. Thus the said direction of compulsorily delisting was only consequential and contingent upon the happening of certain events as stated in the order of WTM. The contention that the delisting has been ordered since the register of members of the Target Company was compromised is baseless. As held earlier, there is no evidence of tampering with the register of members. The open offer was directed because the promoters were fraudulently trying to transfer shares in their names or its entities. Thus the contention raised by the appellants has no merit and is rejected.
29. It was lastly contended that the remedial measures / direction given by the WTM under Section 11 B(2) of SEBI Act was harsh as well as inappropriate as a direction to make an open offer had already been issued against the promoters / Sareshwalas. It was contended that other directions as stipulated under Regulation 44 of the Takeover Regulations 1997 could be issued. This submission cannot be accepted and the directions given by the WTM does not require any modification in the peculiar facts and circumstances of the case. In the instant case, we are of the opinion that there is no bar under the SEBI Act and the Takeover Regulations 1997 in 17 directing two different persons / entities to make an open offer at different moment of time. The promoters violated the listing regulations and were involved in fraudulent transfer of shares to itself. They were asked to make an open offer. The appellants, on the other hand, violated Regulation 10, 11 and 12 of the Takeover Regulations 1997 and were thus required to make a public announcement. We find that the direction to make an open offer was pursuant to violation of different provisions of law and violation at different point of time.
30. No doubt Regulation 44 of the Takeover Regulation 1997 provides consequences of the breach and gives flexibility to the WTM to enforce Regulation 11 by way of several directions and, one such direction is, to make an open offer for acquiring the shares of the Target Company. The guiding principle for issuance of a direction under Regulation 44 is the interest of the investors and securities market. Had the appellants made the open offer within a period of 4 days from the date of acquisition in accordance with the Takeover Regulations 1997 and complied with the time line specified therein, the formalities could have been complied by October 2006, i.e. from the date of making the public announcement. But alas, the same has not been done till date. In Nirvana 18 Holdings Private Limited vs. SEBI (Appeal No. 31 of 2011 dated September 8, 2011), this Tribunal held:-
"It must be remembered that whenever an acquirer violates Regulation 10, 11 or 12 of the takeover code by not making a public announcement, he should be directed to comply with the provision by making a public offer. The words "unless such acquirer makes a public announcement" appearing in Regulations 10 and 11(1) make these provisions mandatory and a public announcement has to be made. Similar words appear in Regulation 12 as well. These provisions make the acquisition conditional upon a public announcement being made. The primary object of the takeover code is to provide an exit route to the public shareholders when there is substantial acquisition of shares or a takeover. This right to exit is an invaluable right and the shareholders cannot be deprived of this right lightly. It is only when larger interest of investor protection or that of the securities market demands that this right could be taken away. Therefore, as a normal rule, a direction to make a public announcement to acquire shares of the target company should issue to an acquirer who fails to do that. The Board need not give reasons as to why such a direction is being issued because that is the mandate of Regulations 10, 11 and 12. However, if the issuance of such a direction is not in the interest of the securities market or for the protection of interest of investors, the Board may deviate from the normal rule and issue any other direction as envisaged in Regulation 44 of the takeover code. In that event, the Board should record reasons for deviation."19
31. We are in agreement with the decision of the Tribunal in Nirvana's case (supra) and in the peculiar facts and circumstances of the case, we do not find any reason to interfere or modify the directions given by the WTM.
32. In the result, the appeals fail and are dismissed. Parties shall bear their own costs.
Sd/-
Justice Tarun Agarwala Presiding Officer Sd/-
Dr. C.K.G. Nair Member Sd/-
Justice M.T. Joshi Judicial Member 10.10.2019 Prepared and compared by:msb