Nirma Industries Ltd. & Anr vs Securities & Exchange Board Of India

3. The Issuer Companies pledged equity shares in the capital of SRMTL and other closely held companies as security in favour of the appellants till the redemption of the Premium Notes by way of pledge agreements (Pledged Shares). The equity shares of SRMTL pledged by each of the Issuer Companies are as under :

4. In May-June, 2002, the pledge over the shares, which were in dematerialized form, was carried out in the form prescribed by National Securities Depository Limited and was recorded in the records of the respective depositories of the appellants and the Issuer Companies. On June 10, 2005, the appellants, in terms of the enforcement provisions contained in the subscription agreements and the pledge agreements issued notices to the Issuer Companies calling upon them to redeem the outstanding Premium Notes within a period of 30 days, failing which the appellants would be constrained to invoke the pledge. Premium notes were not redeemed (i.e. debt was not repaid). Upon default, under the provisions of the Notes, the appellants called upon each of the Issuer Companies to redeem the outstanding Notes within 30 days. Since the Notes were not redeemed within the notice period, the pledge was invoked on July 22, 2005.

6. On 26th July, 2005, in accordance with the Regulation 10 of the Takeover Code, the appellants made a Public Announcement (PA) for proposed open offer to acquire upto 20% of the shares of the existing shareholders. The Public Announcement was published in the Financial Express, Mumbai Edition. According to the appellants, the price offered in the PA, being Rs.18.60/- per share, was arrived at as per Regulation 20(4) of the Takeover Code (applicable to frequently traded shares). The PA stated that SRMTL has suffered business losses and its net worth has been eroded. The PA also clearly stated that the offer may be withdrawn as per Regulation 27 of the Takeover Code.

7. The appellants further claimed that as per Regulation 18 of the Takeover Code, draft letter of offer was submitted to SEBI on August 8, 2005. According to the appellants in the aforesaid letter, it was specifically stated that details were given of the composition of Board of Directors and audited balance sheets of last three years, share holding pattern PRE-OFFER and POST-OFFER and justification of offer price. The letter further stated that “Acquirers reserve the right to withdraw the offer pursuant to Regulation 27 of the Regulation”. In the meanwhile, the concurrent auditor appointed by the Lenders of SRMTL, M/s Ernst & Young and the internal auditor of SRMTL, M/s. R. C. Sharma & Co. in their respective audit reports for the quarter July-September, 2005, had noted certain irregularities in the operations and systems of SRMTL. The Audit Committee, therefore, recommended a special investigative audit to look into the irregularities. In view of the above, a change in management was effected on the insistence of the Lender Banks. All Promoter Directors tendered their resignations in their place independent Directors were appointed. The Board of Directors of SRMTL, after considering the respective audit report of the aforesaid two accountants, accepted the recommendations of the Audit Committee and on January 28, 2006 directed a special investigative audit into the financial affairs of the company. The Board appointed M/s. R. C. Sharma & Co., to conduct the special investigative audit and submit its report. After investigation, M/s. R. C. Sharma & Co. submitted its report in three parts, comprising of two interim reports and one final report on January 30, 2006. In March-April, 2006, the aforesaid report of M/s. R.C. Sharma came in the public domain, resulting in sharp decline in prices of shares of SRMTL. It is claimed by the appellants that M/s. R.C. Sharma’s report enclosed two earlier inspection reports of 2002 by Kalyaniwala & Mistry (Kalyaniwala Report) and by Sharp and Tannan Associates (Sharp Report), respectively. These reports were not made available to public. Their existence was disclosed for the first time when they were filed in the Gujarat High Court as part of proceeding in Company Petition No.111 of 2005. The appellants further claimed that under Regulation 18 of the Takeover Code, SEBI was expected to revert with its comments and observations in about 21 days, i.e. by 29th August, 2005. However, letter of offer submitted to SEBI was issued after more than 249 days on 26th April, 2006.

8. The appellants further claim that pursuant to the fraud perpetrated by the Promoter Directors of SRMTL and fraudulent embezzlement of funds in SRMTL in excess of Rs.350 crores being unearthed, an application was made on 4th May, 2006 to either exempt them from making the open offer or to permit them to withdraw the open offer under Regulation 27 of the Takeover Code or to re-fix the price of the Open Offer. The appellants further claimed that the aforesaid request was justified on the basis of special circumstances cited by the appellants in the aforesaid letter of May 4, 2006. It had been pointed out that an investigation into the affairs of SRMTL by M/s Ramesh C. Sharma and Co. Chartered Accountants revealed that a cumulative amount of Rs.326.48 Crores had been siphoned out of/embezzled from the coffers of SRMTL by its erstwhile Promoter Directors. This conclusion was based on the reports submitted by M/s. R.C. Sharma & Co. It was pointed out that the financial accounts of SRMTL revealed that it had lost its net worth. Asset Reconstruction Company (India) Limited (ARCIL) had acquired the debts and underlying rights and obligations from the secured creditors of SRMTL. ARCIL had also issued a notice dated January 25, 2006 under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) threatening action under Section 13(4) thereof. In the meantime, the High Court of Gujarat had disposed of the winding up petition filed against SRMTL by the UTI Bank and Karnataka Bank Ltd. on February 27, 2006. It had also come to the knowledge of the appellants that though the balance sheets of SRMTL disclosed a contingent liability of only Rs.15.28 Crores as on March 31, 2005, the actual value was about Rs.263.65 Crores (out of which Rs.30.65 Crores had already crystallized). The final reason given was share price of SRMTL shares had fallen substantially from the date of making the Public Announcement.

12. Being aggrieved by the SEBI order, the appellants filed Appeal No.74 of 2007 before the SAT. By the impugned order dated 5th June, 2008, the SAT rejected the appeal filed by the appellants. It has been held by SAT that :

15. The aforesaid conclusions, according to Mr. Divan, are not supported by any reasons let alone sufficient reasons. The order passed by SEBI, according to him, is non-speaking and, therefore, ought to have been quashed on that ground alone.

"7. Under the aforesaid circumstances, it is apparent that SRMTL has lost its substratum and that chances of its revival are negligible. The Pledgee Acquirers while enforcing the security created by pledging the shares of SRMTL, are being saddled with an additional burden of Rs.21,91,54,314 to the undue advantage of the other shareholders of SRMTL. The purpose sought to be achieved by operation of the Regulations is lost in view of the subsequent developments and the Regulations are operating harshly against the Pledgee Acquirers. In view of the changed scenario, it would be inequitable and unfair to compel the Pledgee Acquirers to offer to purchase the shares of SRMTL from the other shareholders of SRMTL in accordance with the draft Letter of Offer.

51. In view of the foregoing reasons, we are not inclined to accept the submissions of Mr. Divan that the principle of ejusdem generis is not applicable for interpreting Regulation 27(1) (d) of the Takeover Code.

Object of Takeover Code qua the Lenders

Powers of Respondent under SEBI Act:

Fraud:

63. On the basis of the aforesaid, Mr. Shyam Divan submitted that the conclusion recorded by the SEBI which has been upheld and approved by SAT is without any factual basis.

65. We are not much impressed by any of the submissions made by Mr. Shyam Divan on this issue. Admittedly, the appellants were aware of the litigation against Shree Ram Multi Tech Limited and its Directors. The litigation commenced in the year 2003 i.e. before the public announcement made by the appellants. In fact, the letter of offer itself refers to the pending litigation by and against the target company and its directors.

68. The aforesaid conclusion reached by SAT, in our opinion, does not call for any interference. ]

(a) the acquirer is able to implement the offer;

(b) the provision relating to Escrow account referred to in Regulation 28 has been made;

(c) firm arrangements for funds and money for payment through verifiable means to fulfil the obligations under the offer are in place;

(d) the public announcement of offer is made in terms of the Regulations;

(e) his shareholding, if any in the target company is disclosed in the public announcement and the letter of offer.

70. Regulation 24(2) mandates that the merchant banker shall furnish to the Board a due diligence certificate which shall accompany the draft letter of offer. The aforesaid regulation clearly indicates that any enquiries and any due diligence that has to be made by the acquirer have to be made prior to the public announcement. It is, therefore, not possible to accept the submission of Mr. Shyam Divan that the appellants are to be permitted to withdraw the public announcement based on the discovery of certain facts subsequent to the making of the public announcement. In such circumstances, in our opinion, the judgments cited by Mr. Shyam Divan are of no relevance.

Delay:

Court may direct fresh valuation:

73. Lastly, Mr. Shyam Divan has submitted that even if the appellants were not to be permitted to withdraw the public offer, the Court ought to appoint an independent valuer and direct a fresh valuation to be made on the basis of principles contained in Regulation 20(5) of the Takeover Regulations. Such a valuation, according to Mr. Shyam Divan, would be justified in the light of the foregoing submissions. We are not at all impressed by the aforesaid submission. The formula given in Regulation 20 would have no applicability in the facts and circumstances of this case. The determination of the lowest price under Regulation 20 would be at a stage prior to the making of the public announcement and not thereafter.

74. In view of the aforesaid, we find no merit in the appeal and it is accordingly dismissed.

May 09, 2013.