Delhi High Court
Sterlite Industries (India) Ltd. ... vs The Union Of India (Uoi) Through The ... on 31 May, 2002
Equivalent citations: [2003]117COMPCAS161(DELHI), 98(2002)DLT807
Author: Madan B. Lokur
Bench: Madan B. Lokur
JUDGMENT Madan B. Lokur, J.
1. The Petitioners have prayed for a writ of certiorari and for setting aside the order dated 19th February, 1999 passed by the Central Government designated as the appellate authority under the provisions of Section 20 of the Securities and Exchange Board of India Act, 1992 (for short the SEBI Act).
2. The Petitioners have also prayed for the striking down of Regulations 22(13), 44 and 45 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short the Takeover Regulations). However, no submissions were made in this regard and so we assume that this challenge was given up.
The parties
3. Petitioner No.1 is a public limited company incorporated under the Companies Act, 1956 (for short the Companies Act) while Petitioner No.2 is a private limited company. The precise relationship between these two companies has not been spelt out in the writ petition, nor was it orally explained to us. However, for all practical purposes it is only the role of Petitioner No.1 which came up for scrutiny and consideration before us. Nothing was ascribed to Petitioner No. 2 which seems to have acted in concert with and tacitly accepted everything done by Petitioner No. 1. The liabilities and responsibilities, if any, are said to be of Petitioner No. 1 which has virtually played the role of a "big brother". Reference to the Petitioners, therefore means reference to Petitioner No. 1.
4. Respondents No. 1 and 3 did not contest the writ petition before us, as indeed they were not required to. Respondent No. 2 is the SEBI constituted under the provisions of the SEBI Act. As per its preamble, the SEBI Act provides for "the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto."
5. Respondent No. 4 Enam Financial Consultants Pvt. Ltd. (for short Enam) is the merchant banker of the Petitioners in respect of the open offer made by them and which is the subject matter of discussion in this case. Enam has no stakes in the mater and chose not to appear. Enam, however, entered into considerable correspondence with SEBI in respect of the open offer. This was for and on behalf of the Petitioners. Consequently, when we refer to such letters, it is as if the correspondence was between the Petitioners and SEBI.
The facts
6. Sometime in February, 1998, the Petitioners announced their intention to acquire 10% of the equity shares of a company called the Indian Aluminium Co. Ltd. (INDAL). We were told that initially the intention was to have a strategic alliance with INDAL but somewhere along the line the intention changed to a takeover of INDAL.
7. Accordingly, in terms of Regulation 25(4) of the Takeover Regulations, the Petitioners made a public announcement on 20th February, 1998. Although this document is not on the record before us, reference is made to it in another public announcement made by the Petitioners on 22nd March, 1998. The sum and substance of the two public announcements was that an open offer was made for the acquisition of 20% of the equity shares of INDAL at a price initially of Rs. 90/- per share (as per the offer dated 20th February, 1998) subsequently revised to Rs. 115/- per share (as per the offer dated 22nd March, 1998). In the first offer, the minium level of acceptance was 10% of the shares but the revise doffer did not lay down a condition for any minimum level of acceptance. On the contrary, it was stated that all responses would be accepted. The second public announcement also indicated that firm financial arrangements through an escrow account had been made as per the Takeover Regulations. This financial arrangement was, apparently, pursuant to Regulation 28(2)(a) of the Takeover Regulations.
8. Around this time, a Canadian company called Alcan Aluminum Company Limited (for short Alcan) made a public announcement on 9th March, 1998 of a competitive bid for acquiring the equity shares of INDAL. The offer price of Alcan was Rs. 105/- per share. Eventually, as it so happens, the Petitioners and Alcan upwardly revised their offer price.
9. It appears that during this period some correspondence was going on between SEBI and Enam in regard to the public offer made by the Petitioners. By a letter dated 24th April, 1998, SEBI informed Enam that while the open offer may commence from 4th May, 1998, it should remain open for a period of thirty days in terms of Regulation 22(5) of the Takeover Regulations, that is, till 2nd June, 1998. SEBI also informed Enam that in terms of Regulation 26 of the Takeover Regulations, they (Enam) may upwardly revise the offer price and number of shares to be acquired at any time up to seven working days prior to the date of closure of the offer which, in the circumstances, would be up to and including 25th May, 1998.
10. Pursuant to these developments, on 27th April, 1998 a letter of offer was sent by the Petitioners to each shareholder of INDAL indicating the terms of the offer and also stating that the offer opens on 4th May, 1998 and closes on 2nd June, 1998. All formalities pertaining to the shares, including dispatch of consideration were expected to be completed within 30 days of the date of closure, that is, by 2nd July, 1998.
11. In a related development, on 15th May, 1998, the Petitioners gave a notice to its shareholders for convening an extraordinary general meeting (EGM) on 12th June, 1998. In terms of this notice Along with the explanatory statement attached thereto, the shareholders were told that the Petitioners proposed to raise finance to meet their capital expenditure, strategic investments, general corporate purposes etc. For this, the Petitioners intend to issue shares and other securities. Consequently, the consent of the shareholders was sought in terms of Section 81(1A) of the Companies Act to issue share and/or allot shares on conversion of securities to be issued up to a maximum of Rs. 2,000 crores. It was also stated that an open offer for the acquisition of equity shares of INDAL had been made. It was stated that the investments in INDAL may exceed the limits of intercorporate investments specified in Section 372 of the Companies Act. Considering the provisions of law, it had become necessary for the Board of Directors of the Petitioners to obtain a resolution to invest in and/or acquire the shares of INDAL in excess of the specified limits. Accordingly, a resolution was proposed for acquisition of the shares of INDAL provided the investment did not exceed Rs. 1,000 crores.
The final open offer
12. Apparently in anticipation of the resolutions being passed, the Petitioners made a third and final offer on 25th May, 1998 for acquisition of the shares of INDAL. In terms of this public announcement, it was proposed to acquire 52% of the paid up equity capital of INDAL at a revised price of Rs. 221/- per share. The revised price was to be discharged by paying Rs. 131/- in cash and the balance of Rs. 90/- by allotment of nine Optionally Convertible Redeemable Preference Share (short OCPS) of the face value of Rs. 10/- each for every INDAL share accepted under the offer. The principal terms of the OCPS were stated in the public announcement. Similar intimation was given by the Petitioners to the individual shareholders of INDAL. Financial arrangements, by increasing he value of the escrow account, were separately made by the Petitioners in accordance with Regulation 26(c) of the Takeover Regulations.
13. SEBI seems to have had some questions to ask of the Petitioners about their latest offer. From a letter dated 27th May, 1998 sent by Enam to SEBI, it seems that a meeting was held between SEBI and Enam on that day in which three issues had arisen. Through the letter dated 27th May, 1998 Enam indicated the issue and gave the requisite information to SEBI. The issues,with the clarifications were concerning:-
(a) The financial arrangements made by the Petitioners for implementing the open offer: It was explained that the Petitioners had made appropriate escrow arrangements by depositing marketable securities with Enam.
(b) The shareholders approval for issuing and allotting OCPS: It was explained that by a earlier resolution dated 9th December, 1994, the shareholders had authorized the Board of the Petitioners to issue securities to persons other than their existing shareholders. In any event, fresh approval of the shareholders was being sought in the EGM to be held on 12th June, 1998.
(c) The clearances required by the Petitioners for implementing the open offer: It was explained that an EGM was to be convened on 12th June, 1998 to obtain the shareholders approval to purchase equity shares of INDAL in excess of the limit prescribed by Section 372 of the Companies Act.
14. SEBI, however, continued to harbour some doubts about the open offer and accordingly addressed a detailed letter dated 27th May, 1998 seeking the views of Enam on several issues including the fact that the "strategic alliance" had now changed to a takeover of INDAL, the mode of payment for the acquisition of shares and the approvals required under the provisions of Sections 81(1A) and 372 of the Companies Act. SEBI expected Enam to reply by 2.00 pm on 28th May, 1998 which it did. Amongst other things, it was stated by Enam that allotment of OCPS in part discharge of the offer price was 'good payment.'
15. On 29th May, 1998 Enam made a public announcement for the attention of the shareholders of INDAL. This public announcement was purportedly made to clarify certain aspects of the open offer contained in the public announcement of 25th May, 1998. Our concern is with the following clarifications:-
(i) The open offer made by the Petitioners was for acquisition of 52.03% of the paid up equity shares of INDAL.
(ii) The purchase price of the shares continued to be Rs. 221/- per share to be distributed as already mentioned above.
(iii) The Petitioners would accept all shares tendered up to the limit of 52.03% of the equity capital of INDAL.
(iv) The OCPS were being issued as per the resolution passed in the Annual General Meeting held on 9th December, 1994. In any event, an EGM of the Petitioners was scheduled for 12th June, 1998 to, inter alia, increase the authorized share capital of the Petitioners by making consequential changes in the Memorandum and Articles of Association of the Petitioner to enable the issue of OCPS. The said EGM was also called for obtaining the approval of the shareholders under Section 372 of the Companies Act to enable investment in the shares of INDAL beyond the prescribed limits.
(v) All statutory formalities with respect to the amendments to the Memorandum and Articles of Association were expected to be completed by 20th June, 1998, that is, well before the last date (of 2nd July, 1998) for completion of all formalities under the open offer.
(vi) Firm financial arrangements aggregating Rs. 708 crores together with Rs. 115 crores in he escrow account had been made, which arrangements were adequate to implement the open offer, including allotment of OCPS.
16. On 1st June, 1998, SEBI came out with a Press Release stating that there was no ground to intervene in the offer made by the Petitioners and by alcan and "n the interest of the investors it would be appropriate that the investors themselves may be allowed to take their own decisions in respect of the two offers. " It was also stated that the Petitioners' offer involved the issue of OCPS and that their offer would be subject to compliance of the SEBI Guidelines for Disclosure and Investor Protection dated 4th August, 1994 on preferential issue of capital by a listed company. These are hereinafter referred to as the Guidelines.
17. Reacting to this Press Release, Enam publicly announced on 1st June, 1998 that as per the legal advice received, the Guidelines relating to preferential issue of shares did not apply to the proposed issue of OCPS. However, what the Guidelines did entail was, inter alia, obtaining the approval of the Petitioners lenders as well as the passing of a fresh resolution at an EGM to be convened for the purpose. It was, consequently, pointed out that the Petitioners.
"...may not be able to accept the shares received under their Open Offer. The Offer continues to remain open subject to all other conditions mentioned in the Letter of Offer and other Public Announcements made by the Acquires."
18. The open offer made by the Petitioners for the acquisition of the shares of INDAL closed, as scheduled, on 2nd June, 1998. We are told that in all 981, 733 shares were tendered in the open offer. The break-up of this, as given to us, is:-
Number of shares up to 1.6.1998 on 2.6.1998 Total tendered:
69,890, 911,843 981,733 Events after the closure of the offer
19. After the close of the offer on 2nd June, 1998, Enam made a representation to SEBI on 3rd June, 1998 stating, inter alia, that their (SEBI's) decision regarding the applicability of its Guidelines was incorrect and since it was given less than 24 hours before the closing of the offer, it had "created tremendous confusion and uncertainty amongst prospective offerors." It was explained that the Guidelines did not govern the proposed issue of OCPS and, in any case, there were practical difficulties in applying the Guidelines to the OCPS. SEBI was asked to reconsider their decision and confirm that the Guidelines did not apply to the issue of OCPS by them.
20. On 8th June, 1998, Enam made a further representation to SEBI that the legal advisers and solicitors of he Petitioners had opined that the Guidelines did not apply to the proposed issue of OCPS. Pending a decision on the debate, it was suggested that the interests of the shareholders may be protected to the extent possible. Some solution was given by Enam and it was also pointed out that if the Petitioners do not abide by the Guidelines or are prevented from doing so, then it will do the shareholders of INDAL no good because the final offer through the OCPS route may be held invalid. It was also pointed out that since payments were required to be made by 2nd July, 1998, an early response was expected.
21. It is not clear whether SEBI agreed or did not agree with the inapplicability of its Guidelines to the proposed OCPS. In any case, by a letter dated 11th June, 1998 SEBI gave its no objection to the structure of the proposed instrument.
22. The EGM convened by the Petitioners for 12th June, 1998 was held as scheduled. The proposed resolutions were unanimously accepted. This included the resolution whereby the Board was authorized under the provisions of Section 81(1A) of the Companies Act to issue various financial instruments, including equity shares and convertible preference shares provided their aggregate nominal value did not exceed Rs. 2,000 crores. Another resolution with regard to Section 372 of the Companies Act was also unanimously passed. This was to the effect that the Board was authorized to purchase the shares of INDAL provided the cost of acquisition of such investment did not exceed Rs. 1,000 crores.
23. On their part, the Petitioners still maintained that the Guidelines were not applicable to the issue of OCPS. However, since SEBI did not alter its decision in this regard, the Petitioners convened another EGM to be held on 25th July, 1998 for the purpose of passing a Special Resolution specifically for approving the issue of OCPS pursuant to the open publicly announced by the Petitioners. This was confirmed by the Petitioners by a letter to SEBI dated 30th June, 1998. In the meanwhile, the Petitioners were also advised by their solicitors to comply with the Guidelines and to convene an EGM to pass a specific resolution approving the OCPS issue.
24. By a letter dated 3rd July, 1998, SEBI pointed out to Enam that in view of the resolutions passed in the EGM held on 12th June,1998, there did not appear to be any necessity of convening another EGM on 25th July, 1998 for the same purpose thereby entailing a delay in the completion of the offer formalities.
25. In response, Enam wrote to SEBI on 6th July, 1998 that there was nothing to suggest that the EGM convened on 12th June, 1998 was for the purpose of obtaining the shareholders' approval for the issue of OCPS. It was clarified that in fact when the notice for the EGM was given, the issue of OCPS had not even announced or contemplated. It was stated that SEBI had been requested to reconsider its decision regarding the applicability of the Guidelines but since it did not do so, the Petitioners had no alternative but to comply with the Guidelines and call an EGM for 25th July, 1998 to pass a specific special resolution approving the issue of OCPS.
26. SEBI wrote back to Enam on 9th July, 1998 that it appeared that a fresh EGM for the purpose of approving the issue of OCPS may not be required but that the matter was being examined separately.
27. Enam responded on 17th July, 1998 by reiterating its earlier contentions and re-affirming that the resolutions passed on 9th December, 1994 and on 12th June, 1998 were "blanket" resolutions, not in compliance with the Guidelines. The suggestion made by Enam was that the Petitioners had no option but to have a special resolution passed for the issue and allotment of the OCPS so as to comply with the Guidelines.
28. Eventually, on 24th July, 1998, SEBI wrote to Enam that SEBI had been informed by the Petitioners that the proposed issue of OCPS had sufficient authority from the shareholders of the Petitioners through the resolution dated 9th December, 1994 and, in any case, fresh approval of the shareholders was being sought in the EGM to be held on 12th June, 1998. These facts were taken into consideration by SEBI while deciding that the proposed issue should conform to the Guidelines. SEBI reiterated its view that the Board of Directors of the Petitioners had been sufficiently empowered through a resolution passed on 12th June, 1998 to make a preferential issue of capital and no fresh resolution was called for to give effect to the proposal. SEBI also intimated Enam that the necessary steps to complete the offer formalities be taken without any further delay failing which SEBI would be constrained to take remedial steps including forfeiture of the escrow amounts.
29. On 25th July, 1998 at the EGM the resolution regarding issue of OCPS was put to vote but was defeated because only 17th members voted for the resolution while 32 voted against the resolution. On the same day, the Petitioners made a public announcement withdrawing from the open offer for the acquisition of the equity shares of INDAL on the ground that the statutory approval of the shareholders of the Petitioners under Section 81(1A) of the Companies Act had been refused. The shareholders of INDAL were informed that the shares lodged by them are being returned.
30. Pursuant to these developments, on 3rd August, 1998 SEBI issued a show cause notice to the Petitioners calling upon them to show cause why action should not be taken under Regulations 44 and 45 of the Takeover Regulations as well as Sections 11 and 11B of the SEBI Act and also to show cause why the entire sum lying in the escrow account should not be forfeited, more particularly for violation of Regulations 22(1) and 22(13) of the Takeover Regulations. The Petitioners were given seven days time to reply to the show cause notice.
31. On 11th August, 1998, the Petitioners submitted a detailed reply to the show cause notice. SEBI gave a hearing to the Petitioners as well as their learned counsel and passed an order dated 28th October, 1998 concluding that the shares tendered by the shareholders of INDAL have to be accepted by the Petitioners and that the Petitioners have to make necessary payment of Rs. 221/- per share in cash to such of the shareholders who have accepted the offer and tendered their shares up to 2nd June, 1998. The Petitioners were also asked to pay interest @ 15% per annum from 2nd July, 1998, that is, the date by which the payment ought to have been made in the first instance in terms of the Takeover Regulations. Upon payment of the consideration, Enam could approach SEBI for release of the balance amount/securities lying in the escrow account. It was held that in case the Petitioners failed to make the payment within 15 days of the order, the escrow amount was liable to be forfeited.
32. Feeling aggrieved, the Petitioners preferred an appeal before the Central Government under the provisions of Section 20 of the SEBI Act. The Central Government heard the Petitioners as well as their learned counsel and by a detailed order dated 19th February, 1999 concluded that the Petitioners had failed to meet their obligations in terms of Regulation 22(13) of the Takeover regulations and that SEBI was justified in asking the Petitioners to pay Rs.221/- per share to the shareholders of INDAL who had accepted the open offer and tendered their shares. The appeal was, accordingly, dismissed by the Central Government.
Decision of the Central Government
33. A perusal of the order passed by the Central Government on 19th February, 1999 shows that the Central Government was of the opinion that six issues had arisen before it for consideration.
34. The first issue related to whether the Guidelines were applicable to the OCPS proposed to be issued by the Petitioners. It was submitted on behalf of SEBI that the Guidelines were applicable because the OCPS were financial instruments for allotment to a select group of persons. According to the Petitioners, the offer was open to all the equity shareholders of INDAL and not to any select group of persons. The Central Government upheld the contention of SEBI and concluded that the Guidelines were applicable to \the facts of he present case sine the allotment of the OCPS was clearly a preferential basis allotment meant for a select group of persons.
35. The second issue before the Central Government was whether the price of Rs. 221/- per share offered by the Petitioners was a legal and valid offer. This question was answered int he affirmative and it was held that the final offer of 25th May, 1998 made by the Petitioners was validly made.
36. The third issue before the Central Government was whether the Petitioners had the approval of the shareholders for the allotment of OCPS either in terms of the Special Resolution of 9th December, 1994 or of 12th June, 1998. The Central Government was of the view that the Guidelines stipulated that action on any resolution granting consent for preferential issue of any financial instrument should be completed within three months from the date of the resolution. clearly, therefore, the proposed allotment in 1998 was well beyond a period of three months from 1994 and, therefore, the resolution of 9th December, 1994 was not applicable.
37. As regards the resolution of 12th June, 1998, the Central Government was of the view that the notice for the EGM to be held on 12th June, 1998 was issued on 15th May, 1998 while the offer of allotment of OCPS was made for the first time on 25th May, 1998. As such, the EGM had not been convened for the purpose of considering the issue of OCPS. It was also held that the meeting of 12th June, 1998 did not conform to the Guidelines in as much as an auditor's certificate which was required by Clause 11 of the Guidelines was not laid before the EGM. It was held that the auditor's certificate was not a mere formality but was a major safeguard to enable the shareholders to take an informed decision. As such, it was held that both the resolutions dated 9th December, 1994 and 12th June, 1998 were not adequate authority for he issue of OCPS.
38. The fourth issue before the Central Government was whether the withdrawal of the offer by the Petitioners due to the special resolution having been rejected in the meeting of the shareholders on 25th July, 1998 constituted a refusal of a statutory approval which entitled the Petitioners to withdraw from the open offer in accordance with Regulation 27(1)(a) of the Takeover Regulations.
39. According to the Petitioners, by virtue of Section 81(1A) of the Companies Act read with the various guidelines issued by SEBI under Sections 11 and 20 of the SEBI Act, the passage of the special resolution constituted a statutory approval. Since the same had been refused by he shareholders, the Petitioners did not have the necessary statutory approval and could, therefore, withdraw from the offer in terms of Regulation 27 of the Takeover Regulations. On the other hand, it was argued by SEBI before the Central Government that the approval of he EGM cannot be considered as a statutory requirement. SEBI sought to make a distinction between approvals which can be and are within the power of the company to obtain (called internal approvals) and those which were required to be obtained from the Government organizations. It was also contended that the special resolution was an internal matter. Since the Petitioners had not approved the special resolution, it amounted to a willful default or neglect or inaction or non-action within the scope of Regulation 22(13) of the Takeover Regulations and this disentitled the Petitioners from taking the benefit of Regulation 27 of the Takeover Regulations and withdrawing from the offer.
40. The Central Government did not accept the contentions of SEBI. It was the view of the Cental Government, inter alia, that there was no distinction between an external approval by a Government agency or an internal approval which could be obtained by a company. The Central Government harmoniously construed the provisions of Regulations 22(13) and 27(1) of the Takeover Regulations and concluded that each has to be decided on its own facts. It was held that while the Petitioners could withdraw from the offer under Regulation 27 of the Takeover Regulations for want of statutory approvals, they were nevertheless obliged to meet their obligations under Regulation 22 thereof.
41. In the light of this, the Central Government took up for consideration the fifth issue, namely, whether the Petitioners had fulfillled their obligations under Regulation 22 of the Takeover Regulations. This was answered by the Central Government in the negative.
42. According to the Central Government, the Petitioners did not make arrangements prior to the offer of 25th May, 1998 to ensure compliance with the Guidelines. It was not for SEBI to ask the Petitioners to comply with the legal requirements; the Petitioners themselves had the responsibility of following the Takeover Regulations. It was held that the Petitioners ought to have taken reasonable precautions to ensure that the EGM approved the offer, if nothing else, by at least asking for a poll to be taken. According to the Central Government, this amounted to a willful default within the meaning of Regulation 22(13) of the Takeover Regulations. The Central Government rejected the contention of the Petitioners that the rights and duties of the promoters were not co-terminus with their rights and duties as shareholders. Consequently, it was held that the Petitioners did not meet their obligations under Regulation 22 of the Takeover Regulations.
43. The sixth and final issue considered by the Central Government was whether the SEBI could have issued the directions that it did, including directing the Petitioners to acquire the shares of INDAL by paying Rs. 221/- per share to the shareholders along with interest thereon. This was answered in the affirmative. It was held that if the Petitioners did not fulfill their obligations,the amount lying in the escrow account could be forfeited under Regulation 18(12)(e) of the Takeover Regulations. Additionally, SEBI could issue appropriate directing under Regulation 44 thereof as it deems fit. Even otherwise, SEBI was conferred with wide powers under Section 11B of the SEBI Act to issue directions. Looking to the facts of the case, it was held that SEBI was justified in directing t he Petitioners to pay to the shareholders of INDAL Rs. 221/- per share Along with interest thereon.
44. It was under these circumstances that the Petitioners filed the present writ petition challenging the decision of the Central Government.
The controversy
45. During the pendency of the writ petition, an intervention application being CM No. 5769/1999 under Order I Rule 10 of the Code of Civil Procedure, 19058 was moved by an individual claiming to be the owner of 300 shares of INDAL. He claims to have accepted the offer made by the Petitioners and had tendered the shares to them. According to the Intervenor, he has suffered doubly due to the ulterior motives of the Petitioners in as much as he has not only lost the liquidity in the shares but possession of the shares is still with the Petitioners.
46. Learned counsel for the parties including the Intervenor were heard on 11th and 13th March, 2002, 1st, 8th, 9th, 15th, 17th, and 22nd April, 2002 and 15th May, 2002 when judgment was reserved.
47. On the basis of the facts disclosed and the submissions of learned counsel, we are of the view that only two principal issues arise. Firstly, whether the Petitioners have, in any manner, failed or neglected to carry out their commitments publicly announced on 25th May, 1998 so as to attract the provisions of Regulation 22(13) of the Takeover Regulations and secondly, whether SEBI was empowered to issue the directions that it did and if so, whether the directions were justified in the facts of the present case.
48. It must be said at the outset that we were not addressed on the scope and extent of permissible judicial review. Learned counsel for the parties took us through the facts of the case in great detail perhaps because of the high financial stakes for the Petitioners and the large number of investor involved in the open offer. On our part, we felt that since under the provisions of Section 15Z of the SEBI Act (as amended) an appeal lines to the High Court from an appellate order or decision of the Securities Appellate Tribunal on any question of fact or law arising out of such order, no prejudice would be cause to either of the parties if the writ petition is heard and decided on the facts of the case. Moreover, the facts were not disputed by either of the learned counsel. Accordingly, we heard the matter in detail and considered the factual and legal aspects that arise.
Discussion and analysis
49. We were told that the Takeover Regulations have their origin in the City Code on Takeovers and Mergers, a document brought out in England which represents a code of business ethics not a code of law. Our attention was drawn to paragraph 1197 in Volume 7(2) of Halsbury's Law of England, 4th Edition, 1996 Reissue. The general principles of the above-mentioned Code have been reproduced in the said paragraph 1197. Our attention was drawn to principle No.3, 4, 5 and 6 which are as follows:-
"1197. General principles of the Code, It is intended that the spirit, as well as the precise wording, of the following general principles should be observed:
(1) & (2) XXX XXX XXX (3) An offeror should only announce an offer after the most careful and responsible consideration; such an announcement should be made only when the offeror has every reason to believe that it can and will continue to be able to implement the offer; responsibility in this connection also rests on the financial adviser to the offeror;
(4) shareholders must be given sufficient information and advice to enable them to reach a properly informed decision and must have sufficient time to do so; no relevant information should be withheld from them;
(5) any document or advertisement addressed to shareholders containing information or advice from an offeror or the board of the offeree company or their respective advisers must, as is the case with a prospectus, be prepared with the highest standards of care and accuracy;
(6) all parties to an offer must use every endeavor to prevent the creation of a false market in the securities of an offeror or offeree company; parties involved in offers must take care that statements are not made which may mislead shareholders or the market;
(7) to (10) XXX XXX XXX"
50. It was said that these and other principles are incorporated in some form or the other in the Takeover Regulations with which we are concerned. The relevant regulations which require our consideration are Regulations 22(1), 22(11), 22(12) and 22(13) of the Takeover Regulations. These read as follows:-
22. General Obligations of the acquires.
(1) The public announcement of offer to acquire the shares of the target company shall be made only when the acquires is able to implement the offer.
(2) to (10) XXX XXX XXX (11) The acquires shall ensure that firm financial arrangements has been made for fulfillling the obligations under the public offer and suitable disclosure in this regard shall be made in the public announcement of offer.
(12) The acquires shall, within a period of 30 days from the date of the closure of the offer, complete all procedure relating to the offer including payment of consideration to the shareholders who have accepted the offer and for the purpose open a special account as provided under Regulation 29.
Provided that where the acquires is unable to make the payment to the shareholders who have accepted the offer before the said period of 30 days due to non-receipt o requisite statutory approvals, the Board may, if satisfied that non-receipt of requisite statutory approvals was not due to any willful default or neglect of the acquires or failure of the acquires to diligently pursue the applications for such approvals, grant extension of time for the purpose, subject to the acquires agreeing to pay interest to the shareholders for delay beyond 30 days, as may be specified by the Board from time to time.
(13) Where the acquires fails to obtain the requisite statutory approvals in time on account of willful default or neglect or inaction on noaction on his part, the amount lying in the escrow account shall be liable to be forfeited and dealt with in the manner provided in Clause (e) of sub regulation 12 of Regulation 28, apart from the acquires being liable for penalty as provided in the Regulations.
(14) to (18) XXX XXX XXX"
The "target company" in this case in quite clearly INDAL, while the "acquires" is the Petitioners.
51. When the Petitioners made the final public announcement on 25th May, 1998, the most significant change they made from their earlier offers was the introduction of part payment for the acquired shares through the issue of OCPS. In fact, this issue is really the nub of the controversy between the parties.
The resolution dated 9th December, 1994
52. If, on 25th May, 1998 a shareholder of INDAL were to ask the Petitioner (after reading the open offer) whether they had the authority to issue the OCPS, the Petitioners would probably have answered in the affirmative and would have relied upon the regulation passed on 9th December, 1994 to support their reply. Indeed, this is the question the SEBI asked when it enquired of the Petitioners in the meeting held on 27th May, 1998 about the shareholders approval for issuing and allotting the OCPS. Even though Enam replied to SEBI on the same day, SEBI was not satisfied by the reply and addressed a detailed letter dated 27th May, 1998 to Enam seeking their views on the mode of payment for the acquisition of shares and approvals required under the Companies Act. This was replied to by Enam on 28th May, 1998.
53. On both occasions, the Petitioners relied upon the resolution dated 9th December, 1994 as the shareholders authority for issuing and allotting the OCPS. Reliance was also placed by the Petitioners, by way of abundant precaution, on the resolution proposed to be passed on 12th June, 1998.
54. In the letter dated 27th May, 1998, it was stated as follows:-
"As regards the shareholders' authority for issuing and allotting the OCPS, please note that shareholders of SIIL had by their resolution dated 9th December, 1994, authorised the Board of SIIL to issue securities to persons other than the existing shareholders of the Company. A certified true copy of this resolution is enclosed. In any event, fresh shareholders approval is also being sought in the Extra-ordinary General Meeting of SIIL to be held on 12th June, 1998."
55. In the subsequent letter dated 28th May, 1998, it was stated by Enam as under :-
"SEBI Guidelines for preferential allotment of shares apply of cases clearly listed in the preamble to those guidelines and the present issue of OCPS by SIIL is not covered by the same."
Later on in the same letter, it was said:-
"In the present case, the shareholders' resolution passed in the annual general meeting held on 9th December, 1994 is still valid and can be legally acted upon by the Company.
As resolved by the shareholders by virtue of the aforesaid resolutions, the Board of Directors of Sterlite have been authorised and fully empowered to issue shares and/or securities entitling the holders thereof to shares of the Company on such terms and on such manner and towards such purpose as deemed fit by the Board of Directors.
As the Board of Directors of SIIL have by a resolution dated 15th May, 1998 duly convened an extra ordinary general meeting of its shareholders to increase the authorised capital and the consequential amendments in the MoA/AoA. The proposed issue is in accordance with the procedure provided in law and hence the same has legal sanctity."
56. Not only this, a public announcement was made on 29th May, 1998 for the attention of the shareholders of INDAL that the OCPS were being issued pursuant to the resolution passed in the Annual General Meeting held on 9th December, 1994. It was also publicly announced that an EGM was to held on 12th June, 1998 to increase the authorised share capital of the Petitioners to enable the issue of OCPS. It was said in the public announcement :-
"The shareholders of SIIL have passed a special resolution under Section 81(1A) of the Companies Act, 1956 authorising the Board to issue securities from time to time up to Rs.1000 crore. The proposed OCPS are being issued pursuant to this resolution passed in the Annual General Meeting held on 12th December, 1994.
The Board of Directors by their resolution dated 15th May, 1998 have convened and Extra Ordinary General Meeting of the Company to be held on 12th June, 1998 (EGM), inter-alia, for the purpose of
i) Increasing the authorised share capital of SIIL to Rs. 410,00,00,000 and consequential changes in the Share Capital clause of the Memorandum & Articles of Association of the Company to enable the issue of OCPS.
ii)XXX XXX XXX"
57. Given this factual background, any shareholder of INDAL would have thought that the Petitioners had made assurance doubly sure and would have believed that the Petitioners could and would implement their open offer. No shareholder of INDAL would have had reason to suspect that the Petitioners were leading him up the garden path. After all, a public announcement was made any anyone reading it would expect it to represent the truth. If any shareholder of INDAL had, on this basis, decided to act upon the offer made by the Petitioners, he certainly cannot be faulted for it.
58. In so far as the Petitioners themselves are concerned, Regulation 22(1) of the Takeover Regulations clearly required them to make an announcement of a public offer only if they were able to implement it. Similarly, Regulation 22(11) of the takeover Regulations required the Petitioners to ensure that "firm financial arrangements" are made for fulfillling the obligations under the public offer. To put it differently, as has been done in principle No.3 of the City Code on Takeovers and Mergers, the Petitioners should have been certain while making the offer that they could and will continue to be able to implement the offer.
59. But, the truth of the matter is that on 25th May, 1998 when the Petitioners made the final offer, which included the issue of OCPS, they did not have the sanction of the shareholders to issue the OCPS. All that the Petitioners could rely upon was the resolution of 9th December, 1994 which resolution was hit by paragraph 10 of Guidelines. This paragraph did not permit the said resolution to be operated after three months from the date of its passing. Paragraph 10 of the Guidelines reads as follows:-
"10. Currency of shareholders resolutions Action on any resolution passed at a meeting of shareholders of a company granting consent for preferential issues of any financial instrument shall be completed within a period of three months from the date of passing of the resolution. If such a resolution is not acted upon with the said period, a fresh consent of the shareholders will have to be obtained and the relevant date referred to in explanation (a) in para 4 above will relate to the new resolution."
60. The petitioner were aware of, or at least should have been aware of, the restriction imposed by paragraph 10 of the Guidelines.
61. Assuming that the Petitioners genuinely believed, while publicly stating (as they did while reacting on 1st June, 1998 to the Press Release given by SEBI) that the Guidelines did not apply to the issue of the OCPS, would the position have been any different? We think not.
62. There are two reasons why we say so. Firstly, if the Petitioner had wanted to act upon the resolution of 9th December, 1994 they would have done so, well in time and possibly before making the public announcement on 25th May, 1998. That they did not do so leads us to believe that the Petitioners did not intend to act on the resolution of 9th December, 1994. Secondly, if the 9th December, 1994 resolution was intended to be acted upon, there was no reason to duplicate the effort by passing another similar resolution on 12th June, 1998. Consequently, we are of the view that regardless of what the Petitioners really believed, they had no intention to act upon the resolution of 9th December, 1994 for issuing and allotting the OCPS.
63. The Petitioners were expected, like any prudent organization, to keep in mind the provisions of the Takeover Regulations and be absolutely sure of the answer to the question whether the Guidelines were applicable to the issue of OCPS or not. There should not have been any doubt in the "mind" of the Petitioners about the utility of the resolution dated 9th December, 1994 when they made the public announcement on 25th May, 1998.
64. Instead, the Petitioner maintained, for some inexplicable reason, that the Guidelines were not applicable and yet chose not to act on the basis of the resolution of 9th December, 1994. The Petitioners thereby jeopardised not only their interests but also compromised the interests of a large number of shareholders of INDAL who acted on the basis of the representation made to them by the Petitioners.
65. The contention of the Petitioners that it was the duty of SEBI to explain the correct position is not acceptable to us. We can understand such an argument being made if the Petitioners had specifically asked SEBI to give a clarification and SEBI failed to do so, but no such occasion arose in the present case. It was the bounden duty and primary responsibility of the Petitioners to be aware of their obligation under the Takeover Regulations before taking any step of making a public announcement regarding the issue of the OCPS without being in a position of fulfill that commitment. To try to pass on the blame to SEBI, in the circumstances, is neither fair nor proper. We also feel that it is wholly irrelevant whether SEBI ought to have given its opinion on the subject (as contended by learned counsel for the Petitioners) immediately after 25th May, 1998 or in any case well before 1st June, 1998 which was only a day before the closure of the offer, by which time it was, in any case, too late for the Petitioners to withdraw from the offer. We are of the view that all requisite steps should have been taken by the Petitioners themselves well before 25th May, 1998 and without depending on SEBI in any manner whatsoever.
66. We may clarify here that the issue is not whether SEBI defaulted - the issue is whether the Petitioners defaulted or not.
67. It may be mentioned, en passant, that the Central Government in the impugned order dated 19th February, 2001 concluded in response to the first and third issues that the Guidelines were applicable to the issue of OCPS and, therefore, the resolution passed by the Petitioners on 9th December, 1994 could not be acted upon. This conclusion of the Central Government was not challenged before us. We must, therefore, proceed on the basis that the Guidelines were fully applicable to the issue of OCPS and the Petitioners accepted this position. They cannot, therefore, be heard to say that the resolution of 9th December, 1994 was nevertheless an authority to issue and allot the OCPS.
The resolution dated 12th June, 1998
68. In so far as the resolution to be taken up on 12th June, 1998 is concerned, the Petitioners could not have relied on it on 25th May, 1998 to say that they intended to fulfill their financial commitment to the shareholders of INDAL. There was no certainly which way the shareholders would go and the Petitioners could not have successfully predicated the passage of the resolution. The Petitioners cannot be permitted to rely upon a future event, the happening of which was, in any case, uncertain. In fact, relying on the defeat of a more specific resolution in the meeting held on 25th June, 1998, the submission of the Petitioners before us was that the events were beyond their control and that they could not compel the shareholders to decide or vote in a particular manner. The same reasoning applies with equal vigour to the resolution that the petitioners proposed on 12th June, 1998 -- the resolution may or may not have been passed. The Petitioner, therefore, could not validly claim on 25th May, 1998 when they made the public offer that they would be in a position to implement the same on the basis of a resolution proposed to be passed on 12th June, 1998.
69. Even otherwise, going by the requirement of Regulations 22(1) and 22(11) of the Takeover Regulations, the Petitioners could not have possibly said on 25th May, 1998 (by relying on the resolution proposed to be passed on 12th June, 1998) that they are able to implement the open offer and that they have made firm financial arrangements for fulfillling their obligations under the open offer.
70. In this regard, it is worth recalling that it was only in February, 1999 that the Central Government held that the resolution passed on 12th June, 1998 did not authorize the Petitioners to issue the OCPS. Prior to this, it was generally believed by the Petitioners as well as by SEBI that the Petitioners could issue and allot the OCPS on the basis of the resolution passed on 12th June, 1998.
71. If we take it that the Petitioner believed that the 12th June, 1998 (like the resolution of 9th December, 1994) permitted them to issue and allot the OCPS, then what prevented them from putting their belief into action and going ahead with the issue and allotment of the OCPS, as promised? No answer, let alone any plausible answer, has been offered to this question. Therefore, any which way we look at it, it is quite clear that the Petitioners had no serious intention of issuing and allotting the OCPS even on the basis of the resolution of 12th Jut, 1998. The Petitioners clearly infringed the Takeover Regulations and invited action under Regulation 22(13) thereof.
72. In this context, Regulation 22(12) of the Takeover Regulations is also of seminal importance. This regulation requires the Petitioners to complete all procedure relating to the open offer including payment of consideration to the shareholders who have accepted the offer. It is one thing for the petitioners to say that they could not implement the open offer because of their inability to issue the OCPS and quite another for them to say the despite their inability, they are prepared to make good their financial commitment by giving the full purchase price to the shareholders of INDAL. Consequently, even if we assume that the Petitioners were unable to issue the OCPS for whatever reason, they could, at the very least, have offered to pay the amounts covered by the OCPS, that is, Rs.90/- per share in case through the escrow account. Such an offer was not forthcoming at any point of time after 25th July, 1998 or even during the hearing of the writ petition. On the other hand, the facts reveal that no sooner was the proposed resolution defeated in the meeting held on 25th July, 1998, the Petitioners made a public announcement withdrawing from the offer, giving the impression that they were waiting for opportunity to knock.
The resolution dated 25th July, 1998
73. Learned counsel for the petitioners relied upon North-West Transportation Company Ltd. v. Henry Beatty, [1887] 12 App. Cas. 589 and Northern Counties Securities Ltd. v. Jackson & Steeple Ltd. , [1974] 2 All ER 625 to contend that the Petitioners could not be expected to exercise control over the voting rights of the shareholders. The submission of learned counsel is this: the Petitioners believed they had the authority to issue the OCPS under the resolution dated 9th December, 1994. Even if this belief was not well-founded, the Petitioners had the authority to issue the OCPS in terms of the resolution dated 12th June, 1998. Finally, even if this were not so, the Petitioners made an attempt to obtain the requisite authority to issue and allot the OCPS by introducing a specific resolution for this purpose in the meeting of shareholders held on 25th July, 1998. Unfortunately, according to the Petitioners, the shareholders did not agree to pass the resolution on 25th June, 1998 and this latter even was entirely beyond their control.
74. We have already discussed why the Petitioners cannot successfully fall back on the resolutions passed on. 9th December, 1994 and 12th June, 1998, especially in the light of their inaction to give effect to these two resolutions.
75. In so far as the resolution of 25th July, 1998 is concerned, it will be worth recalling that as far back as on 11th June, 1998, SEBI had already given its no objection to the structure of the OCPS instrument. Later, on 3rd July, 1998, SEBI had expressed its reservation about the necessity of calling another EGM on 25th July, 1998 particularly when the Petitioners had themselves stated in their letters of 27th May, 1998 that the shareholders approval was being sought to issue the OCPS through a resolution intended to be passed on 12th June, 1998.
76. In response to the letter of SEBI, the Petitioners did a complete volte face through the letter dated 6th July, 1998 sent by Enam. The position now taken by the Petitioners was that the issue of OCPS was not even in contemplation when the meeting of 12th June, 1998 was convened! It was said that the resolution passed on 12th June, 1998 was in totally general terms and both the resolutions, of 9th December, 1994 and 12th June, 1998 would not suffice. Therefore, it was said that there was a need to pass a specific special resolution for which a meeting was convened on 25th July, 1998.
77. The relevant statements made in the letter dated 6th July, 1998 are as follows:-
"At the outset, may we clarify that neither in our letter dated 27/05/98 or any other letter, have we indicated that the shareholder's approval for the specific issue of Optionally Convertible preferential Shares (OCPS) was being sought at the Extra-Ordinary General Meeting (EGM) to be held on 12/06/98. The resolution passed at the EGM on 12/06/98 was in totally general terms. As a matter of fact, at the time when the notice convening this EGM was issued, issue of OCPS had not even been announced or contemplated.
The Guidelines categorically require that each such issue (preferential allotment) must be specifically approved a special general body passing a special resolution. In other words, a resolution passed in general terms, like the 9th December, 1994 resolution or the 12th June, 1998 resolution, would not suffice.
In the above circumstances, Sterlite had to convene and EGM to pass such a specific special resolution, which it has so convened on 25th instead. Sterlite's Legal Advisors & Solicitors, M/s. Udwadia, Udeshi, Desai, Berjis & Chinoy, have by their letter dated 20th June, 1998, categorically opined that Sterlite is bound in law to call another EGM for the purpose of passing such a specific special resolution."
78. On 9th July, 1998, SEBI informed Enam that prima facie "a fresh EGM for the purpose of approving the OCRPS issue may not be required" and that the points raised in the latter of 6th July, 1998 are being examined separately.
79. Even thereafter, the Petitioners continued to insist through their letter of 17th July, 1998 that "(I)n any view of the matter, a blanket resolution sanctioning the issue of a universe of securities to a universe of persons upon any terms and conditions, like the resolutions passed on both of 9th December, 1994 and 12th June, 1998 are not sufficient compliance with the said Guidelines (of 4th August, 1994)."
80. Eventually, on 24th July, 1998, SEBI unequivocally told the Petitioners that "We reiterate our earlier view that the Board of Directors of Sterlite have been sufficiently empowered through resolution passed at the EGM held on 12th June, 1998 to make a preferential issue of capital and no fresh resolution is called for to give effect to the proposal.
You are therefore advised to ensure that steps are taken to complete the offer formalities without any further delay..."
81. The Petitioners cannot, therefore, be heard to say, with any degree of seriousness, that they were helpless in the situation due of the decision of the shareholders.
82. It is true that in North-West Transportation Company Ltd. , the Privy Council said in page 593 that:-
"Unless some provision to the contrary is to be found in the charter or other instrument by which the company is incorporated, the resolution of a majority of the shareholder, duly convened, upon any question with which the company is legally competent to deal, is binding upon the minority, and consequently upon the company, and every shareholder has a perfect right to vote upon any such question, although he may have a personal interest in the subject-matter opposed to, or different from, the general or particular interests of the company."
83. Similarly, in Northern Counties Securities Ltd., it was said in page 635 that :-
"When a director votes as a director for or against any particular resolution in a directors' meeting, he is voting as a person under a fiduciary duty to the company for the proposition that the company should take a certain course of action. When a shareholder is voting for or against a particular resolution he is voting as a person owing no fiduciary duty to the company who is exercising his own right of property to vote as the thinks fit. The fact that the result of the voting at the meeting (or a subsequent poll) will bind the company cannot affect the position that in voting he is voting simply as an exercise of his own property rights.
Perhaps another (and similar) way of putting the matter is that a director is an agent, who casts his vote to decide in what manner his principal shall act through the collective agency of the board of directors; a shareholder who casts his vote in general meeting is not casting it as an agent of the company in any shape or form. His act, therefore, in voting as he pleases cannot in any way be regarded as an act of the company."
84. The Petitioners may, therefore, be right in contending (and the Central Government wrong in holding to the contrary) that the decision taken by the shareholders on 25th July, 1998 was not within their control. But this really begs the question, in the existing state of knowledge as in June-July, 1998, whether it was at all necessary to hold an EGM on 25th July, 1998. The answer to this has to be in the negative. Consequently, the Petitioners cannot use the events of 25th July, 1998 as an escape hatch to get out of their liability.
85. The sum and substance of the submissions of the Petitioners is this; the resolution of 9th December, 1994 could not be operated; the resolution of 12th June, 1998 was ineffective and the resolution of 25th July, 1998 was defeated and so, the Petitioners were helpless. The fact of the matter is that this is knowledge gained in hindsight. At the relevant time, the Petitioners believed that by virtue of the resolutions passed on 9th December, 1994 and 12th June, 1998 they had the requisite authority to issue and allot the OCPS. Yet, they chose not to exercise this authority. If the Petitioners were satisfied with the authority conferred by the two aforesaid resolutions, there was no need to call a meeting of the shareholders on 25th July, 1998. If the Petitioners were not satisfied with the validity of the authority said to have been conferred by the two aforesaid resolutions, how is it that this knowledge dawned on them only after the closure of the issue and not before. We have no answer to this conundrum.
86. We are also not impressed with the contention that the dissatisfied shareholders of INDAL could sue the Petitioners by filing proceedings for specific performance of the open offer. Commercial transactions of this nature fall in the different genre altogether. Hundreds, if not thousands, of shareholders of INDAL responded to the open offer. The quantities of shares tendered by them could be as little as 300 (as in the case of the Intervenor before us) or could run into thousands of shades. Surely, these innumerable persons cannot be said to have entered into contracts of the classic nature which can be specifically enforced. The whole idea seems highly impractical and appears to have been suggested to further exhaust the shareholders of INDAL.
87. Quite apart from this, we are of the view that a suit for specific performance is not the most appropriate or efficacious remedy for the mass of dissatisfied shareholders of INDAL. In a situation such as a present, SEBI has the jurisdiction, indeed an obligation to issue appropriate directions, taking into consideration the state of affairs prevailing at the time.
88. SEBI has been statutorily created to take care of these kinds of situations. SEBI is in the nature of a watch-dog for and on behalf of the investor and it is the bounden duty of SEBI to protect and safeguard their interests which it has done in the present case.
89. We also reject the contention that the offer made by the Petitioners on 25th May, 1998 got converted into a conditional offer when a public announcement was made on 1st June, 1998 that the Petitioners may not be able to accept the shares received under the open offer in view of the applicability of the Guidelines. A firm offer made by the Petitioners, one which was publicly announced cannot cease to be so merely because the Petitioners themselves chose to wantonly ignore their duties and responsibilities. None of these submissions were made by the Petitioners before the statutory authorities and cannot be seriously entertained at this stage. Even otherwise, this submission was confined only to the 911,843 shares tendered on 2nd June, 1998 and not the 69,890 shares tendered prior to that date.
Directions given by SEBI
90. There was some, though not much debate on the powers of SEBI to issue the directions that it did. One of the objections raised was with regard to the deep involvement of SEBI in the entire affair with the result that it has lost all objectivity. SEBI is said to be the investigator, prosecutor and judge leaving no scope to the Petitioner to expect a fair hearing. This situation is not something novel or unknown.
91. In R. v. Panel or Take-overs and Mergers, ex parte Datafin plc, [1987] 1 All ER 564, the status of the Panel on Take-overs and Mergers (for short the Panel) was being considered. It was said that the Panel is an unincorporated association without legal personality. It has no statutory, prerogative or common law powers and it is not in contractual relationship with the financial market or with those who deal in that market. It lacks any authority de jure yet exercise immense power de facto by devising, promulgating, amending and interpreting the City Code on Take-overs and Mergers, by waiving or modifying the application of the Code in particular circumstances, by investigating and reporting on alleged breaches of the Code and by the application or threat of sanction. Its respectability is said to be beyond question as also its bona fides. It is intended to and does operate in the public interest and the enormously wide discretion which it arrogates to itself is necessary if it is to function efficiently and effectively. The Panel was said to have the character of a legislator which lays down general principles. It is like a court interpreting its own legislation. It acts as a consultant and investigator and a court which imposes penalties for the alleged breaches of the Code.
92. In R. v. Panel on Take-overs and Mergers, ex parte Guinness plc, [1989] 1 All ER 509, the Panel was also described as a whistle-blowing referee ordering the party concerned to stop and, where it considers appropriate, requiring that party to take action designed to nullify any advantage which it has obtained and to redress any disadvantage to other parties. It was said to act as the conscience of the markets and was described as a body whose constitution, function and powers are suit generis.
93. From a reading of the two decisions aforementioned, it appears that the Penal, despite its undefined status (or perhaps because of it) carries on its duties and responsibilities as a market regulator quite effectively -- but subject to judicial review.
94. SEBI has similar functions but is on a far better wicket than the Panel on Take-overs and Mergers. SEBI has a statutory origin. Its role is defined in the SEBI Act. It has been statutorily empowered to take measures to protect the interests of investors in securities and promote the development of, and to regulate the securities market, by such measure as it thinks fit (Section 11 of the SEBI Act). It is in exercise of these powers that the Takeover Regulations have been issued (Section 11(2)(h) of the SEBI Act).
95. We may, in this context, also make a mention of Regulations 44 and 45 of the Takeover Regulations which read as follows:-
"44. Directions by the Board.
The Board may, in the interests of the securities market, without prejudice to its right to initiate action including criminal prosecution under Section 24 of the Act give such directions as it deems fit including:
(a) directing the person concerned no to further deal in securities;
(b) prohibiting the person concerned from disposing of any of the securities acquired in violation of these Regulations;
(c) directing the person concerned to sell the shares acquired in violation of the provisions of these Regulations;
(d) taking action against the person concerned.
45. Penalties for non-compliance (1) Any person violating any provisions of the Regulations shall be liable for action in terms of the Regulations and the Act.
(2) If the acquirer or any person acting in concert with him, fails to carry out the obligations under the Regulations, the entire or part of the sum in the escrow amount shall be liable to be forfeited and the acquirer or such a person shall also be liable for action in terms of the Regulations and the Act.
(3) The board of directors of the target company failing to carry out the obligations under the Regulations shall be liable for action in terms of the Regulations and Act.
(4) The Board may, for failure to carry out the requirements of the Regulations by an intermediary, initiate action for suspension or cancellation of registration of an intermediary holding a certificate of registration under Section 12 of the Act.
Provided that no such certificate of registration shall be suspended or cancelled unless the procedure specified in the Regulations applicable to such intermediary is complied with.
(5) For any mis-statement to the shareholders or for concealment of material information required to be disclosed to the shareholders, the acquirers or the directors where the acquirer is a body corporate, the directors of the target company, the merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for action in terms of the Regulations and the Act.
(6) The penalties referred to in sub-regulation (1) to (5) may include -
(a) criminal prosecution under Section 24 of the Act;
(b) monetary penalties under Section 15H of the Act;
(c) directions under the provisions of Section 11B of the Act."
96. In the light of this, we can hardly deny to SEBI its wide discretionary powers to regulate the financial markets and protect the interests of the investors. Measures that SEBI may take in this regard cannot, in the very nature of things, be precisely spelt out. SEBI has necessarily to be given considerable latitude to enable it to effectively and efficiently carry out its obligations under the SEBI Act.
97. Even so, the power given to SEBI is not untrammelled or unlimited. There is a check on the powers of SEBI by the Central Government (and now by the Securities Appellate Tribunal). There is a check by the Central Government on the executive power of SEBI as spelt out in Sections 17 and 18 of the SEBI Act. In so far as the disciplinary powers of SEBI or its powers to impose sanctions or punish a defaulter are concerned, the Central Government acts as an appellate authority under Section 20 of the Act. The Central Government can set aside an order of SEBI passed under the provisions of the SEBI Act and thereby rectify an error committed by SEBI.
98. During the hearing of this case, the attention of learned counsel for the parties was drawn to a recent decision being Porter v. Magill, [2002] 1 ALL ER 465. In this case, an auditor was appointed by the Audit Commission under the Local Government Finance Act, 1982 to audit the accounts of Westminster City Council. It was noted in paragraph 89 of the Report that one of the issues which arose in the case is the multiplicity or roles performed by the auditor inasmuch as he acted as an investigator, prosecutor and judge in the investigation which he carried out. He conducted the investigation, took the decision whether there was a case to answer, tried the case, assessed the loss and then appeared in the Divisional Court to defend his decision and his conduct. The House of Lords noted in paragraph 93 of the Report that the Divisional Court had the power to quash the decision taken by the auditor and to re-hear the case and taken a fresh decision itself. Learned counsel for the Petitioners in the present case stated that this was the key to the decision of the House of Lords and that because of this, the multiplicity of roles of the auditor would not be fatal to his decision.
99. After going through the decision rendered in Porter, learned counsel for the Petitioners very frankly and fairly did not further argue about any difficulty that may arise in the kaleidoscopic functions of SEBI of its jurisdiction to issue appropriate directions, which can be considered and set aside by the Central Government in appeal (now by the Securities Appellate Tribunal).
100. No doubt, the wisdom of the directions that SEBI may issue in exercise of its statutory or regulatory powers is a different issue. But, this is also subject to the appellate powers of the Central Government. In the present case, what were the directions issued by SEBI? In paragraphs 10 and 12 of its order 28th October, 1998, SEBI said as under:-
"10. From the facts and circumstances of the case, I conclude that shares tendered by Indal shareholders have to be accepted by the acquirers and they have to make payment to those shareholders of Indal who had tendered shares up to the 2nd June, 1998. I, therefore, direct the acquirers i.e. SIIL and EGPL to make payment of Rs. 221/- in cash to the shareholders of Indal who had accepted the offer and tendered the shares up to the 2nd June, 1998. This has to be done within 15 days of receipt of this order. The said payment should be made at the offer price of Rs. 221/- Along with interest @ 15% from the 2nd July, 1998 that is the date by which the payment ought to have been made in terms of the Regulations. Upon payment of the consideration, Enam could approach SEBI for release of balance amount/securities lying in the escrow account.
11. xxx xxx xxx
12. If\however, the acquirers fail to pay the said amount within 15 days of the order, the escrow amount shall be liable to be forfeited. Enam shall then proceed to realise proceeds of the securities lying in the escrow account and make payment of consideration ad interest amount to the shareholders of Indal who had accepted the offer of the acquirers. Thereafter, for release of balance amount/securities. Enam may approach SEBI. The copy of the order be forwarded to SIIL/EGPL and Enam for immediate compliance."
This direction was upheld by the Central Government in appeal.
101. Learned counsel for SEBI made it clear during the hearing of the case that no penalty was sought to be imposed on the Petitioners. The contention of learned counsel for the Petitioners that there was an absence of means rea, therefore, does not require to be considered. According to learned counsel for SEBI, action was being taken against the Petitioners only for the forfeiture of the escrow account.
102. We are of the view that the ultimate direction given by SEBI to the Petitioners to pay to the shareholders of INDAl @ Rs. 221/- per share and 15% per annum interest thereon after 2nd July, 1998 is quite just and fair. After all, the shareholders of INDAL who had offered their shares to the Petitioners had done so on the representation of the Petitioners. This representation was made not once but three times on 20th February, 22nd March and 25th May, 1998. So far as the shareholders of INDAL are concerned, the main difference between the three offers was the price offered by the Petitioners. These shareholders are entitled to get the best price offered by the Petitioners. We cannot forget that Alcan had also made an offer to the shareholders of INDAL who may well have accepted Alcans offer but for a perhaps more attractive offer made by the Petitioners. The offer made by Alcan, if accepted, may perhaps have been hassle-free, who can say. Whatever be the position, the shareholders of INDAL have to be given what they bargained for and we see nothing wrong in the direction given by SEBI and upheld by the Central Government.
103. We were told during the hearing of the case that a large number of the shareholders of INDAL who had tendered their shares, had subsequently withdrawn their shares. This may be for a variety of reasons, including the possibility of some of these persons being speculators. In any case, these persons having withdrawn their shares will not be entitled to the benefit of the direction given by SEBI. We say this for two reasons. Firstly, it may be well nigh impossible to say who all had tendered their shares to the Petitioners. Even if it is possible to identify such persons, it will be after a considerable effort which may not be worth it after the passage of over four years. Some of these shareholders may have sold off their shares by now and the shares may have changed hands several times during this period. Secondly, we feel that those shareholders of INDAL who have withdrawn their shares will have little more than an academic interest in these proceedings. They had tendered their shares for money which they expected to get in 1998. During the course of the last four years they withdrew their shares for whatever reason. The presumption is that they lost interest in the public offer and withdrew thier shares. It will be inequitable to the Petitioners if such shareholders are also allowed to take advantage of the direction given be SEBI.
104. We are conscious of the fact that the Petitioners had offered to issue and allot OCPS of the value of Rs. 90/- for each share on INDAL that was purchased. If the Petitioners had issued the OCPS, the present problem would not have arisen. It is because they have failed to do so that some other alternative has to be found to give to the shareholders of INDAL their just desserts. When a Court has to grant a relief, it has to grant an effective relief and not a nominal one. The Court is entitled to fashion an appropriate relief considering the facts of each case. In view of this, it is not correct for learned counsel for the Petitioners to contend that the open offer cannot be split up. The facts of the case disclose that it is not possible to direct the Petitioners to issue and allot the OCPS to the shareholders on INDAL. The only proper and pragmatic course of action is to give to these shareholders a sum of Rs. 90/- per share in lieu of the OCPS.
105. In the view that we have taken, we do not think it necessary to deal with the contention of learned counsel for SEBI that the Central Government was in error in holding that the failure of the Petitioners to pass the resolution for issue of OCPS was a failure to obtain an "internal approval" and not a failure to get a statutory approval.
Conclusion
106. Having considered all aspects of the case, we consider it appropriate to direct the dismissal of this writ petition. We uphold the direction given by SEBI which was in turn upheld by the Central Government. This will, however, be subject to the modification that the benefit of the direction will only go to those shareholders of INDAL whose shares are still with the Petitioners, either on their own or through their merchant banker or anyone else on their behalf.
107. SEBI has conducted the proceedings before the Central Government as well as before this Court not for itself but for the shareholders of INDAl as investors. For this reason, we are of the view that SEBI should be entitled to litigation expenses from the Petitioners for the proceedings before the Central Government and this Court. We order accordingly. We quantify the litigation expenses at Rs. 25,000/-. We would expect SEBI to utilise this amount in some sort of an investor protection fund. Since SEBI will have to incur expenses for carrying out our orders, it will be entitled to costs in this regard from the Petitioners. We order accordingly. We quantify this amount at Rs. 25,000/-.