Case: I.P. Holding Asia Singapore P. Ltd. &amp; Another Vs. Securities &amp; Exchange Board of India

of the shares was not in conformity with Regulation 20(5) of the Takeover Code. (5) Where the shares of the target company are infrequently traded, the offer price shall be determined by the acquirer and the merchant banker taking into account the following factors:(a) the negotiated price under the agreement referred to in sub-regulation (1) of regulation 14;(b) the highest price paid by the acquirer or persons acting in concert with him for acquisitions, if any, including by way of allotment in a public or rights or preferential issue during the twenty-six week period prior to the date of public announcement;(c) other parameters including return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis-a-vis the industry average :Provided that where considered necessary, the Board may require valuation of such infrequently traded shares by an independent merchant banker (other than the manager to the offer) or an independent chartered accountant of minimum ten years` standing or a public financial institution.Explanation.--(i) For the purpose of sub-regulation (5), shares shall be deemed to be infrequently traded if on the stock exchange, the annualised trading turnover in that share during the preceding six calendar months prior to the month in which the public announcement is made is less than five per cent (by number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the said six months period may be taken.(ii) In case of disinvestment of a Public Sector Undertaking, the shares of such an undertaking shall be deemed to be infrequently traded, if on the stock exchange, the annualised trading turnover in the shares during the preceding six calendar months prior to the month, in which the Central Government or the State Government as the case may be opens the financial bid, is less than five per cent (by the number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the six months period may be taken.(iii) In case of shares which have been listed within six months preceding the public announcement, the trading turnover may be annualised with reference to the actual number of days for which the shares have been listed. 42. The second fundamental error by SEBI was in splitting the non-compete agreement between the appellants and 5 members of the Bangur group on the one hand and 15 members of the Bangur group on the other. If the non-compete agreement was a sham as held by the Tribunal, then the entire agreement would have to be held as a sham and the entire transaction would require to be held as a sham transaction. It cannot be, on a reading of the non-compete agreement as a whole, that a part of it is a sham in respect of some of the contracting parties and it is a genuine agreement in respect of the other contracting parties. There is absolutely no indication given in the non-compete agreement that it is severable or that there was any intention to split it into two or more distinct parts.43. The absurdity resulting in splitting-up the non-compete agreement can be better appreciated from a hypothetical example. What if the Tribunal had partially agreed with the appellants and held that the non-compete agreement was valid in respect of say ten or twelve of the promoter entities instead of five? This could happen if the genuineness of the non-compete agreement is examined in relation to each promoter entity, as has been done by SEBI. Does it not, therefore, mean that the non-compete agreement has to be split in twenty ways to decide whether it is genuine or sham in respect of five or ten or twelve of the promoter entities? Can this be said to be a reasonable construction of the non-compete agreement? We are afraid that this surely cannot be the correct way of reading the non-compete agreement and that is why we are of the view that the Tribunal committed a fundamental flaw in holding only a part of the non-compete agreement as a sham. The Tribunal should have either held the entire non-compete agreement as a sham or it ought to have held the entire non-compete agreement as a genuine agreement. The question of a half-way house simply does not arise.44. One other minor issue was raised by SEBI, namely, that the non-individual entities did not have the business objectives of manufacturing, sale and trading of pulp and paper in their main object clause. This is only stated to be rejected since the memorandum of association of a corporate entity can always be altered in accordance with the procedure under the Companies Act, 1956.45. For completeness, we may mention two events that have occurred since the non-compete agreement was entered into on 29th March, 2011. Firstly, the non-compete period of three years has expired, in a sense rendering this exercise academic. Secondly, the Takeover Code has been repealed with effect from 23rd October, 2011 and substituted by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The new Takeover Code does away with the concept of a separate non-compete fee, the amount being included in the offer price in terms of Regulation 8 thereof. Offer Price: 8.(1) The open offer for acquiring shares under regulation 3, regulation 4, regulation 5 or regulation 6 shall be made at a price not lower than the price determined in accordance with sub-regulation (2) or sub-regulation (3), as the case may be.(2) to (6) xxx xxx xxx(7) For the purposes of sub-regulation (2) and sub-regulation (3), the price paid for shares of the target company shall include any price paid or agreed to be paid for the shares or voting rights in, or control over the target company, in any form whatsoever, whether stated in the agreement for acquisition of shares or in any incidental, contemporaneous or collateral agreement, whether termed as control premium or as non-compete fees or otherwise. Conclusion

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]21. In our view, the Tribunal has made two fundamental errors. In the first place, the Tribunal committed a jurisdictional error by misunderstanding the scope of Regulation 20(8) of the Takeover Code.According to SEBI, Yogesh Bangur and Ms. Surbhi Bangur had no "experience/expertise in the area of operation of the target company and are therefore not capable of offering any competition". During the course of submissions, it was suggested that what was actually paid to them (and perhaps others) was not afee but control premium. We cannot agree.The second fundamental error by SEBI was in splitting theagreement between the appellants and 5 members of the Bangur group on the one hand and 15 members of the Bangur group on the other. If theagreement was a sham as held by the Tribunal, then the entire agreement would have to be held as a sham and the entire transaction would require to be held as a sham transaction. It cannot be, on a reading of theagreement as a whole, that a part of it is a sham in respect of some of the contracting parties and it is a genuine agreement in respect of the other contracting parties. There is absolutely no indication given in theagreement that it is severable or that there was any intention to split it into two or more distinct parts.43. The absurdity resulting inte agreement can be better appreciated from a hypothetical example. What if the Tribunal had partially agreed with the appellants and held that theagreement was valid in respect of say ten or twelve of the promoter entities instead of five? This could happen if the genuineness of theagreement is examined in relation to each promoter entity, as has been done by SEBI. Does it not, therefore, mean that theagreement has to be split in twenty ways to decide whether it is genuine or sham in respect of five or ten or twelve of the promoter entities? Can this be said to be a reasonable construction of theagreement? We are afraid that this surely cannot be the correct way of reading theagreement and that is why we are of the view that the Tribunal committed a fundamental flaw in holding only a part of theagreement as a sham. The Tribunal should have either held the entireagreement as a sham or it ought to have held the entireagreement as a genuine agreement. The question of ahouse simply does not arise.44. One other minor issue was raised by SEBI, namely, that theentities did not have the business objectives of manufacturing, sale and trading of pulp and paper in their main object clause. This is only stated to be rejected since the memorandum of association of a corporate entity can always be altered in accordance with the procedure under the Companies Act, 1956.45. For completeness, we may mention two events that have occurred since theagreement was entered into on 29th March, 2011. Firstly, theperiod of three years has expired, in a sense rendering this exercise academic. Secondly, the Takeover Code has been repealed with effect from 23rd October, 2011 and substituted by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,We say this because it is imperative to give sufficient elbow room to commercial entities for entering into a business transaction. There are a host of considerations that go into business relations and transactions between different entities. This applies, perhaps more equally, to the takeover of a target company by another corporate body.From this it is quite clear that ordinarily when there is a gap of 25% between the consideration paid to the outgoing promoters and thefee, SEBI ought not to conduct any inquiry. However, this cannot be treated an absolute proposition and we are quite willing to say that if it appears ex facie, without any searching questions being asked or any intricate reasoning, that it appears to SEBI that the difference between the offer price and thefee is less than 25% but that is nevertheless a disguise or a camouflage for reducing the cost of acquisition through a public offer, then SEBI can certainly delve further into the matter.27. In so far as the present case is concerned, on an ex facie reading of the share purchase agreement and theagreement between the appellants and the promoter entities, no such conclusion is apparent, nor was it canvassed or pointed out. In our opinion therefore, there was no occasion for SEBI to carry out a searching enquiry into the payment offee to the Bangur group.28. Assuming for the sake of argument that an inquiry into the payment offee is permissible, where does it lead us in this appeal?29.According to SEBI, Yogesh Bangur and Ms. Surbhi Bangur had no "experience/expertise in the area of operation of the target company and are therefore not capable of offering any competition". During the course of submissions, it was suggested that what was actually paid to them (and perhaps others) was not ae but control premium. We cannot agree.But what is more important is the perception of the appellants. On these facts, the appellants perceived a threat from these individuals to their business activities. It is not the case of SEBI that the threat perception was irrationalit may arguably be unfounded or minimal but is certainly not beyond the imagination of a reasonable person. The threat perception cannot be decided on the basis of the hindsight of SEBI (unless the perception is found to be perverse) but must be left to the commercial wisdom of the players on the field.33. In support of its contention that the threat perception from Yogesh Bangur and Ms. Surbhi Bangur was entirely imaginary, it was (negatively) submitted that Ms. Sheetal Bangur was a director in the target company and was actually involved in its day to day activities, and yet afee was not paid to her. Was it because she was not a shareholder in the target holder (as suggested) or was it because she really posed no competitive threat? Or, was there some other valid reason?34. At this stage, it is necessary to appreciate the shareholding pattern of the Bangur group in the target company.35. Of the 53.46% fully paid up shares held by the Bangur group in the target company, Digvijay Investments Ltd. (DIL) held 24.70% while the Maharaja Shree Umaid Mills Limited (MSUML) held 21.65%. The remaining about 7% shares were held by the other members of the Bangur group. This included Samay Books Ltd. (Samay0.10%), the General Investment Company Ltd. (GICL0.57%).36. Ms. Sheetal Bangur held 78.96% of the shares in Apurva, 2.60% of the shares in GICL and 92.19% of the shares in Samay. Through these entities, she held shares in DIL and MSUML. Therefore, although she did not directly hold any shares in the target company, she did so indirectly. Theof shares between the various members of the Bangur group and through them in the target company is being mentioned only to point out that the shareholding pattern was not as simple as made out during the course of oral submissions by learned counsels. Looking to the intricacies and complexities involved, it is possible that the shareholding pattern was considered by the appellants and the Bangur group while indirectly giving afee to Ms. Sheetal Bangur. It could have been in the mind of the appellants that Ms. Sheetal Bangur was indirectly getting an adequate amount offee, and therefore it was not advisable to also directly give her anyfee.37. This possibility cannot be straightaway ruled out since even SEBI did not raise any issue in this regard in its comments given on 3rd August, 2011. The regulatory authority not having raised this issue, it is quite clear that it was raised for the first time only as a legal argument when the matter was taken up by the Tribunal. The justification for this, it is submitted before us, is based on the provisions of Order XLI Rule 33 of the Code of Civil Procedure as well as two judgments referred to by learned counsel for SEBI.