Case: Pramod Jain  Vs. Sebi

2. Golden Tobacco Limited (the target company) is a company having its registered office at Tobacco House, S.V. Road, Vile Parle (West), Mumbai – 400 056. The equity shares of the target company are listed on the Bombay Stock Exchange Limited (BSE) and the National Stock Exchange of India Limited (NSE).3. On November 12, 2009, Mr. Pramod Jain and Pranidhi Holdings Private Limited (the acquirers) along with J.P. Financial Services Private Limited (the person acting in concert (PAC) made PA through VC Corporate Advisors Private Limited (the merchant banker) in accordance with regulations 10 and 12 read with regulation 14. As on the date of the PA, the acquirers and PAC collectively held 11, 39, 002 equity shares (6.47%) of the target company. The PA was voluntarily made by the acquirers and the PAC to acquire 44, 02, 201 equity shares (25%) of the target company from its equity shareholders at a price of Rs.101/- (the offer price) per equity share. At that time, market price of the target company shares was Rs.109/- per share. Networth of the target company as on 31st March, 2009 was Rs.42.44 crores. Net current assets were Rs.134.4 crores and gross sales were Rs.173.68 crores. The offer was for hostile takeover of the target company. The PA mentioned that the prime object of the offer was to acquire substantial shares/voting rights accompanied with the change and control of the management of the target company. The acquisition was in the nature of strategic investment for diversification and growth and to reap the benefit of corporate opportunities. The draft letter of offer also mentioned that the PAC had advanced loan against shares of the target company and on account of default, it acquired the said shares representing 5.05% of the equity share capital. The acquirers and the PAC had also acquired 71034 equity shares at highest and average price of Rs.100.15 and Rs.89.13 respectively. Thus, the acquirers and the PAC had 6.47 % of the issue of equity share capital as on the date of PA. The background of the acquirers mentioned in the DLO was that Mr. Pramod Jain was prime Director of PHPL and had experience in financial and consultancy services.4. The acquirers and PAC, through the merchant banker, filed the draft letter of offer (DLO) with SEBI on November, 26, 2009. During examination of the DLO, certain complaints were received by SEBI against the acquirers and PAC as well as against the target company and its promoters. The appellants (the acquirer) in their complaints to SEBI and other proceedings including petition under Section 397/398 of the Companies Act before the Company Law Board and a suit before the Civil Court inter alia questioned the transaction for joint development of Vile Parle Property in terms of Memorandum of Understanding (MoU) dated 26th September, 2009 with Sheth Developers and Suraksha Realty Ltd. Various correspondences were exchanged between SEBI and the merchant banker, acquirers, PAC, the target company and certain other entities in respect of such complaints.5. The appellants vide application dated 8th October, 2011 sought permission to withdraw the offer under Regulation 27(1)(d). The stand of the appellants in the said letter was that the SEBI had not taken any decision on the DLO in two years during which period the management of the target company had systematically siphoned off its coffers, depleted its valuable fixed assets and eroded its net worth substantially with the intention of making it a shell company. This has defeated the very object of the offer, without any fault on the part of the acquirers. The management had availed huge high cost borrowing from banks and financial institutions against its property, including 18.7 per cent shares out of theshareholdings. Disputes were pending before the arbitrator arising out of default in payments. Most valuable assets of the target company had been encumbered in violation of SEBI regulations and against the interest of minority shareholders and the acquirers. Since the date of PA, financial position of the target company had deteriorated substantially.The SEBI vide order dated 13th April, 2012 declined to permit withdrawal of the PA but observed that alleged violation of Regulation 23 by the target company shall be investigated. It was held that as per Regulation 23(1), the target company was entitled to dispose of its assets with the approval of the shareholders even after the PA. Correspondence which the SEBI had with the acquirers was referred to, with a view to explain the delay in deciding the DLO. It was observed that the SEBI had informed the merchant banker of the appellants on 3rd February, 2010 that it was not competent to administer the authenticity of the process of Resolution in the General Body Meeting (GBM) dated 18th January, 2010. The merchant banker vide letter dated 5th May, 2010 informed the SEBI that the acquirers had reached a settlement with the target company and withdrawn their petition before the Company Law Board (CLB) against the Resolution dated 18th January, 2010. SEBI had also advised the merchant banker that it had not been provided any material in support of the allegation of violation of Regulation 23 by the target company in selling its assets. The merchant banker informed the SEBI vide letter dated 19th May, 2011 that the acquirers had filed a suit for restraining the target company from creating any third party interest in the assets of the target company. The SEBI had also received complaints against the acquirers and the PAC which were being looked into when the PAC vide letter dated 2nd August, 2011 sought permission to withdraw the PA. Vide letter dated 9th August, 2011, the acquirers requested that the process of open offer be kept in abeyance. SEBI vide e-mail dated 9th September, 2011 responded to the merchant banker, seeking tabulated list of the allegations of the acquirers and the PAC but instead of doing so, the merchant banker forwarded request for withdrawal of the PA. It was observed that in the circumstances there was no delay on the part of the SEBI. It was further observed that the acquirers had challenged the Resolution of the Extra Ordinary General Meeting (EGM) and had also filed a suit. The acquirers entered into an amicable settlement before the CLB. SEBI had no jurisdiction in the matter. Referring to Regulation 22, it was observed that the acquirers could make PA only after most careful consideration and must ensure that it is able to implement the offer. Referring to Regulation 27, it was observed that public offer once made could not be withdrawn except in the circumstances provided in the said Regulation which had to be construed strictly. Unchecked automatic withdrawal of offer was capable of being misused. It was also observed that the acquirers should have used due diligence with regard to the allegation in FIR dated 25th July, 2009 about personal borrowings by promoters of the target company by sale of prime properties as the PA was much after the FIR. The acquirers and the PAC had already purchased substantial shares of the target company and thus, could not make PA without exercising due diligence regarding the financial condition and quality of management of the target company. The acquirers were not strangers to the target company. They had 6.47 per cent shares. Discovery of adverse effects pertaining to financial health subsequent to the PA could not be a ground to withdraw the PA. Doing so will jeopardize the interests of the shareholders. The takeover regulations laid down a self-contained code and withdrawal of public offer was not governed by principles of withdrawal of an offer under the Contract Act, 1872.The above view has been affirmed by the SAT in its impugned order (by majority). As regards the timeline stipulated in Regulation 18, it was observed that under the second proviso thereto, the SEBI could take time in making inquiry on a complaint and thereafter could call for a revised letter of offer with or without re-scheduling the date of opening or closing the offer. However, it was observed that in the present case, SEBI was wholly unjustified in taking more than two years for offering its comments on the letter of offer submitted by the appellants. This, however, did not constitute a ground to permit withdrawal of the PA. As regards the contention that the public offer was frustrated and became impossible of implementation on account of encumbering of the most valuable property of the target company in violation of Regulation 23 and other steps of the promoters making the target company a shell company, it was observed that the target company had taken decision to develop its Vile Parle property even before the PA. Appellant No.1 had given his offer for joint development of the said property on 29th September, 2008 but the said offer was rejected and Sheth Developers were shortlisted for the purpose. It was thereafter that the appellants decided to make hostile takeover public offer to frustrate the decision of the target company to develop the property with Sheth Developers. It will be appropriate to refer to the findings of the SAT in thisWe see no merit in the above contentions. Admittedly, GTL had decided to develop the Vile-Parle property even before public offer was made by appellants on November 12, 2009. In fact Appellant No. 1 had made an offer to GTL on September 29, 2008 for joint development of Vile-Parle property by offering ` 150 crores as non refundable amount and had suggested profit sharing in the joint venture at a ratio 50:50. However, GTL rejected the offer made by appellants and on recommendation of Ernst & Young shortlisted Sheth Developers as best 20 bidder for joint development of Vile-Parle property. Thereupon appellants decided to make hostile public offer on November 12, 2009 with a view to frustrate decision of GTL to develop the Vile-Parle property jointly with Sheth Developers. Although object of the proposal to acquire 25% shares of GTL at Rs. 101/- per share as against the market price of Rs.109/- per share, as stated in the public offer was to obtain substantial stake/voting rights of GTL, it is not in dispute that appellants were basically interested in developing the Vile-Parle property. Thus, it is evident that appellants being frustrated in their endeavour to develop the Vile-Parle property, had resorted to the mechanism of public offer with a view to frustrate the decision of GTL in jointly developing the Vile-Parle property with Sheth Developers. Therefore, appellants having made public offer out of frustration on account of not being able to develop the Vile-Parle property, are not justified in alleging that entrusting the development of Vile-Parle property to Sheth Developers has frustrated the public offer made by appellants.15. Admittedly, after making public offer, appellants had filed Company Petition No. 3 of 2010, wherein specific grievance was made to the effect that GTL had entered into MOU with Sheth Developers without disclosing all material facts to the shareholders and without the approval of shareholders which was in gross violation of regulation 23 of SAST Regulations, 1997. It was also alleged in the Company Petition that the promoters of GTL have been mismanaging the affairs of the company and have siphoned of huge amounts from the company, as a result whereof, there has been deep decline in the performance and profitability of the company. Appellants had also sought an order restraining GTL from holding EGM which was scheduled to be held on January 18, 2010.16. Company Law Board in its order dated January 19, 2010, recorded statement made by counsel for GTL that in the EGM held on January 18, 2010 requisite resolutions have been passed in relation to development of Vile-Parle property and in implementation of the said resolution third party rights have been created. By that order Company Law Board directed that during the pendency of Company Petition No. 3 of 2010 GTL shall not act upon resolution dated January 18, 2010 any further. From aforesaid order passed by Company Law Board it is clear that in view of resolution passed in the EGM held on January 18, 2010, violation of regulation 23 committed by GTL in relation to development of Vile-Parle property stood rectified. Dispute, if any in relation to passing of resolution on January 18, 2010 was to be considered at the hearing of Company Petition No. 3 of 2010.17. However, on February 8, 2010, appellants withdrew Company Petition No.3 of 2010 by merely recording that the parties have amiably settled the matter without any further claims against each other. Having settled the dispute relating to development of Vile-Parle property with the promoters/management of GTL on the basis of undisclosed reasons and having withdrawn Company Petition No. 3 of 2010 unconditionally, it is not open to appellants to allege that their public offer is frustrated on account of GTL entering into MOU with Sheth Developers for development of Vile-Parle property.18. Similarly, having settled the dispute relating to siphoning of funds by GTL during 2009-2010 which plea was specifically raised in Company Petition No. 3 of 2010, appellants are not justified in agitating the very same issue before SEBI on ground that GTL has siphoned of its funds during the year 2009-2010 and 2010-2011. In other words, since the plea of siphoning of funds by GTL during the year 2009-2010 and prior thereto having been specifically raised in Company Petition No. 3 of 2010 and that issue having been settled by appellants with the promoters/ management of GTL for undisclosed reasons, the appellants are not justified in reagitating the very same issue before SEBI in relation to siphoning of funds either during 2009-2010 or during 2010-2011.21. It is relevant to note that appellants, subsequent to withdrawal of Company Petition No. 3 of 2010 in February 2010, have filed S. C. Suit No. 817 of 2011 in April 2011 before the City Civil Court at Mumbai, alleging for the first time that the Company Petition No. 3 of 2010 was withdrawn on account of oral assurance given by promoters of GTL that Vile-Parle property would be developed only after holding public auction and that the promoters of GTL have committed breach of that oral assurance.22. Admittedly, City Civil Court at Mumbai has granted ad- interim relief in favour of appellants on April 26, 2011 and that ad- interim order continues to be in operation till date. Therefore, irrespective of the fact that SEBI was not justified in taking more than two years for approving the draft letter of offer, in the facts of present case, grievance of appellants that the public offer is frustrated and has become impossible of performance cannot be accepted, because, both grounds based on which appellants had sought withdrawal of public offer, were in fact settled by appellants on the basis of oral assurance given by promoters of GTL and further, for the alleged breach of oral assurance, appellants have filed Suit in the Bombay City Civil Court and obtained stay of development of Vile-Parle property and that stay is admitted operating till date.23. Strong reliance was placed by counsel for appellants on decision of SEBI dated February 14, 2014 wherein penalty of ` 1 crore has been levied against the promoters of GTL interalia for violating regulation 23 of SAST Regulations, 1997. No doubt that entering into an MOU by GTL with Sheth Developers on November 26, 2009 without obtaining approval of general body of shareholders was in violation of regulation 23 of SAST Regulations, 1997. However, admittedly on January 18, 2010 the general body of shareholders has authorized GTL to enter into Joint Development Agreement is in respect of Vile-Parle property. In view of approval granted by the general body of shareholders on January 18, 2010, grievance of appellants that Vile-Parle property has been encumbered in violation of regulation 23 does not survive at least from January 18, 2010.26. Apart from above, as late as on August 9, 2011 appellants had addressed a letter to SEBI requesting them to keep the process of open offer in abeyance, because, in the proceedings pending before the City Civil Court at Mumbai, GTL had filed an affidavit stating that in the board resolution dated May 25, 2011 company has decided not to proceed further with the MOU dated November 26, 2009 (wrongly stated therein as December 26, 2009) entered with Sheth Developers and instead take necessary steps to develop the Vile-Parle property by the company of its own. By the said letter dated August 9, 2011 appellants called upon SEBI to investigate about the exact legal status of the Vile-Parle property, investigate regarding possession of the original title deeds of Vile-Parle property and investigate regarding possession of the original title deeds of Vile-Parle property, investigate regarding usage of funds etc. It was further stated in the said letter until appellants are assured of their concern on the above issues, SEBI should keep the process of open offer in abeyance.27. Aforesaid letter dated August 9, 2011, clearly falsifies the case of appellants that the actions taken by promoters of GTL during the course of two years has frustrated the public offer, because, if public offer was frustrated, appellants would not have asked SEBI to keep the process of public offer in abeyance. Having asked SEBI on August 9, 2011 to keep the process of public offer in abeyance, appellants were not justified in filing application on October 11, 2011 seeking permission to withdraw the open offer on ground that inordinate delay has frustrated the open

Reasoning: 26. Applying the decisions of this Court to the facts of the present case, we are in agreement with the finding recorded by the SAT that there was undue delay on the part of the SEBI in dealing with the DLO. No doubt, in a given case timeline prescribed under the Regulations may not be adhered to when the SEBI justifiably takes time in dealing with the complaints, as rightly submitted by Shri Datar, in the present case, the stand of the SEBI itself is that it could not go into the complaints for which the right forum was CLB. As regards the time taken in dealing with the complaints against the acquirers, the SEBI could have promptly proceeded with the matter. However, mere upholding of finding of SAT on the aspect of delay by SEBI is not enough to hold that the appellants are entitled to withdrawal of the public offer. The withdrawal has to be dealt with under Regulation 27, as held by this Court. The general principle is that public offer once made cannot be withdrawn. Exception to the rule is the specified situations under the Regulation as laid down by this Court in above decisions particularly in Nirma Industries Limited (Supra) (2013) 8 SCC 20  para 67). In the present case, though SEBI was not justified in causing delay in giving its comments on public offer, this by itself is not enough to justify withdrawal from public offer so long as the case does not fall under Regulation 27. First question is answered accordingly.As already observed above, under the scheme of the regulations public offer has to be made after due diligence (Regulation 22). Obligation of the board of directors under Regulation 23 against alienation of assets, issuance of unissued securities carrying voting rights or entering into material contracts is applicable only if approval of general body of shareholders is not obtained. We are not dealing with validity of imposition of fine on the target company for its decision in dealing with Vile Parle property, without approval of the general body as this issue is not before us. The fact remains that ex post facto approval of the general body has since been obtained. Moreover, SEBI had observed that this aspect of the matter will be separately enquired into. It is clear that under the scheme of Regulation 23, there is no bar to a decision with the approval of the general body of shareholders, if otherwise valid. The question whether unilateral decisions of the target company have rendered the carrying out of the public offer possible, is a question to be decided on facts of each case. In the present case, the SEBI as well as the SAT have concurrently held that public offer is capable of being carried out and has not become impossible. The assets are available with the target company. Finding has also been recorded about the circumstances preceding the public offer and the conduct of the acquirer which is based on record. The steps for development of the Vile Parle property had already been initiated and the acquirer had taken remedies before the CLB against the decision of the target company and had settled the matter with the target company. It is clear from the scheme of the regulations that there is no absolute bar for the target company to take decision about its assets, subject to compliance with statutory procedure and subject to the decision being otherwise valid. There is no doubt that against any mala fide, illegal or unjustified decision of the target company, remedies at appropriate fora are available to the aggrieved parties. Thus, there is no justification for automatic withdrawal from public offer without clear prejudice to the acquirer to the extent of rendering the carrying out of public offer impossible. In the facts of the present case, we do not find any ground to interfere with the concurrent finding of the SEBI and the SAT that request for withdrawal from public offer was not justified. Question (ii) is answered accordingly.