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

The Facts2. Appellant no. 1 is a company incorporated under the laws of Singapore. Appellant no. 2 is the holding company of appellant no. 1 through a subsidiary.Digitally signed by3. The outgoing promoters of the target company (the Andhra Pradesh Paper Mills Ltd.) are referred to hereinafter as the Bangur group. The Bangur group consists of 20 entities, both individuals and others.4. On 29th March, 2011 the appellants entered into two agreements with the Bangur group. In terms of the first agreement, a share purchase agreement, the appellants and the Bangur group agreed that the appellants would acquire the shares of the target company held by the Bangur group by purchasing 2,12,60,008 fully paid up equity shares of Rs.10/each forming 53.46 % of the share capital of the target company. The agreed price per share was Rs. 523/and the aggregate amount payable to the Bangur group was about Rs. 1111.9 crores.5. In addition to the price of Rs. 523/The second agreement entered into between the appellants and the Bangur group was aand business waiver agreement. In terms of this agreement the appellants agreed to pay to the Bangur group an amount of about Rs. 277.95 crores, inter alia, for refraining from competing with the business of the target company either on their own or through their affiliates for a period of three years, the business of the target company being manufacturing, sale and trading of pulp and paper.7. In terms of Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short the Takeover Code) Acquisition of fifteen per cent or more of the shares or voting rights of anyNo acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise fifteen per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with theappellants gave an open offer through publication in newspapers on 1st April, 2011 for the acquisition of up to 85,67,521 fully paid up equity shares of the target company from the existing shareholders representing 21.54% of the voting capital. As per the public announcement, the appellants fixed the price of each fully paid up equity share at Rs. 544.20 (Rs.523/+ Rs.21.20). We were told that the public announcement received an overwhelming response.8. On completing these formalities, the merchant banker of the appellants filed a draft letter of offer dated 15th April, 2011 with the Securities and Exchange Board of India (for short SEBI) in accordance with the Takeover Code.9. Thereafter, some correspondence ensued between the merchant banker of the appellants and SEBI. The sum and substance of this correspondence related (as far as we are concerned) to three issues connected with thefee: (1) The merchant banker was requested to provide the current business and object clause of thepromoters of the target company; (2) The merchant banker was requested to provide details of the experience of Yogesh Bangur and Ms. Surbhi Bangur to whom afee was being paid; (3) The merchant banker was requested to provide the shareholding pattern of thepromoters of the target company.10. The merchant banker of the appellants provided the information as requested for by SEBI.On a consideration of the information provided, SEBI issued a letter on 3rd August, 2011 to the merchant banker of the appellants in which it gave its comments on the draft letter of offer. What bothered the appellants were the comments made by SEBI with regard to thefee paid to the Bangur group. The merchant banker of the appellants was advised to incorporate certain points in the letter ofappeal was filed with the Securities Appellate Tribunal at Mumbai and was registered as Appeal No. 130 of 2011.The appeal was heard by the Tribunal and came to be dismissed by an order dated 12th September, 2012 (impugned).While dismissing the appeal filed by the appellants, the Tribunal extensively referred to and relied upon orders passed by it in three earlier appeals. Tata Tea Ltd. v. SEBI (Appeal No. 136 of 2008); Cementrum IB v. SEBI (Appeal No. 28 of 2008);Fashion China Holdings Ltd. v. SEBI (Appeal No. 27 of 2011) After considering the view expressed in those appeals, the Tribunal held that it had the jurisdiction to decide whether an excessive amount offee was paid to the promoter entities and that some of them were not capable of providing any competition to the business of the target company after its takeover by the appellants.17. The Tribunal then found that in so far as the two individuals that is Yogesh Bangur and Ms. Surbhi Bangur are concerned, they had no experience in the business of the target company and they were paidfee only because they happened to be shareholders in the target company. It was held that these two individuals were not involved in the day to day business of the target company and were not capable of providing any threat to the business of the target company. The Tribunal held that in contrast, Ms. Sheetal Bangur was a director in the target company and involved in its day to day business but she was not given anyfee only because she was not a shareholder. It was concluded, on this basis, that thefee was directly linked to the shareholding of the promoter entities and had nothing to do with the possibility of their being in competition with the target company.The appellants, being aggrieved by the order passed by the Tribunal preferred an appeal in this Court under the provisions of Sectionof the SEBI Act.Appeal to Supremeperson aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order:Provided that the Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.As regards the 13who also formed a part of the Bangur group, the Tribunal held that none of them had anything to do with the business of the target company and therefore they were not in a position to offer any competition to it. In this context, the Tribunal referred to one of the promoter entities namely Mugneeram Ramcoowar Bangur Charitable and Religious Trust which had nothing to do with the business activities of the target company. Reference was also made to another promoter entity called Samay Books Ltd. (Samay) which was in the business of printing and publishing. A third promoter entity referred to by the Tribunal was the Maharaja Shree Umaid Mills Ltd. (MSUML) which was carrying on business as a composite textile mill and did not have the necessary knowledge or experience relating to the pulp and paper business and therefore was not capable of offering any competition to the target company.19. On these findings, the Tribunal concluded that theagreement was a sham which resulted in depriving other shareholders of the target company of their rightful claim to get a just price for their shares. Consequently, the Tribunal dismissed the appeal preferred by the appellants.

Reasoning: 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.