Case: Nirma Industries Ltd.  Vs. Securities &amp; Exchange Board Of India

2. On 22nd March, 2002, the Promoters (including friends, relatives and associates) of SRMTL – a listed company – borrowed a sum of Rs.48.94 crores from the appellants and pledged equity shares of SRMTL worth Rs.1,42,88,700/- (24.25% of equity capital) as security. The debt was in form of issue of Secured Optionally Fully Convertible Premium Notes by three closely held unlisted companies (Issuer Companies) for an issue price of Rs.1,00,000/- each having nominal value of Rs.1,35,000/- each. The issue was made by the Issuer Companies by way of subscription agreements and the individual premium notes issued by each are as underRama Polysynth Pvt. Ltd.1664(ii)East-West Polyart Ltd.1500(iii)Ideal Petroproducts48943. 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 underRama Polysynth Pvt. Ltd52,49,786(ii)East-West Polyart Ltd.28,74,800(iii)Ideal Petroproducts1,42,88,7004. 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, 2005.5. The invocation of the pledge triggered Regulation 10 of the Takeover Code.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 thatreserve the right to withdraw the offer pursuant to Regulation 27 of theIn 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.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.9. Since the appellants did not receive any response from the respondent, a request was made on July 1, 2006 to the Merchant Bankers requesting them to forward an application for withdrawal of the open offer to the respondent. It appears that the Merchant Bankers vide letter dated 27th June, 2006 inter alia informed the appellants that the grounds mentioned in the letter dated 4th May, 2006 are not valid grounds, in terms of the provisions of Regulation 27 of the Takeover Code. On July 1, 2006, the appellants requested the Merchant Bankers to convey its request in a renewed form to SEBI for its consideration. The renewed request was contained in a letter dated July 01, 2006 which was sent to the Merchant Bankers as an annexure to the letter which was also sent on July 01, 2006, in reply to the letter of the Merchant Bankers dated 27th June, 2006. In the aforesaid reply, the appellants had also informed the Merchant Bankers that it did not agree with the views expressed by the Merchant Bankers even prior to the consideration of the facts presented by the appellants to SEBI. Regulation 27(1) (c) does not provide for specific approval of SEBI for withdrawal of the open offer, which is what they were seeking. On July 8, 2006, the Merchant Bankers informed the appellants that the relevant regulation is 27(1)(d) and not 27(1)(c). The letter also refers to a telephonic conversation with one Mr. Deepak Shah on 8th July, 2006 informing him about certain particulars required by the Merchant Bankers. A complete list of details, required by the Merchant Bankers, was listed in the aforesaid letter. The appellants were requested to send the same at the earliest. The appellant sent a reply to the aforesaid request on 8th July, 2006. Thereafter, on 1st September, 2006, the appellant was informed by the Merchant Bankers that based on the information supplied on July 1, 2006 and August 28, 2006, an application had been drafted by them for being filed with SEBI, seeking withdrawal of the open offer. The aforesaid draft application was sent to the appellant for verification of the factual position stated therein. From a perusal of the letter dated 21st September, 2006, the appellants informed the Merchant Bankers that the clarifications sought on September 1, 2006 had been sent to them on 7th September, 2006. Therefore, a request was made to include the clarifications in the original draft letter and include the same in the paragraph in contingent liability under special circumstances for withdrawal of the open offer.10. In response to the aforesaid request of the appellants, the Merchant Bank applied to SEBI on September 22, 2006 requesting that the appellants be permitted to withdraw the offer. The letter also mentioned the special reasons for the withdrawal as given by the appellants in the letter dated 4th May, 2006. It is important to notice here that no request for personal hearing was made in any of the aforesaid communications.11. The appellants further claimed that on 30th April, 2007, the application of the Merchant Bankers/appellants was rejected on the ground that the appellants ought to have conducted due diligence. The appellants pointed out that the aforesaid decision was taken by SEBI without affording any personal hearing to the appellants and without application of mind. The appellants claim that the respondent did not appreciate that the fraudulent transactions, systematic embezzlement and siphoning of funds was unearthed by special investigative audit and could not have been found by an outside third party like appellants before invoking the pledge. Even any due diligence that could be conducted could only have been done on published financial information in the public domain, which has now been found to be fraudulent in character. The appellants have in the Public Announcement and Letter of Offer relied on books of accounts for last three financial years i.e. 2002-03, 2003-04 and 2004-05 of SRMTL. Even SEBI with all its compliance requirements and investigative powers was unable to unearth these instances of fraud perpetrated by promoters of SRMTL.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 thatRegulation 27(1)(d) of the Takeover Code is to be given a strict interpretation and the wordscircumstances as in the opinion of the Board meritis to be read ejusdem generis to be limited to only circumstances where it is impossible to make a public offer.b) Appellants ought to have conducted due diligence.C) Appellants knew about (i) poor financial condition of SRMTL;(ii) filing of winding up petitions by UTI Bank against SRMTL;(iii) net worth of SRMTL being negative; (iv) several cases of recovery being filed against SRMTL.The aforesaid order of SAT is challenged before us by Nirma Industries Ltd. in this statutory appeal under Section 15Z of the SEBI Act.

Court's reasoning:
We are inclined to agree with the submission made by Mr. Venugopal that the appellants cannot be permitted to wriggle out of the obligation of a public offer under the Takeover Regulation. Permitting them to do so would deprive the ordinary shareholders of their valuable right to have an exit option under the aforesaid regulations. The SEBI Regulations are designed to ensure that public announcement is not made by way of speculation and to protect the interest of the other shareholders. Very solemn obligations are cast on the merchant banker under Regulation 24(1) to ensure thatthe 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 ofperusal of the aforesaid regulation clearly shows that the acquirer is required to file the draft letter of offer containing disclosures as specified by the Board within a period of 14 days from the date of public announcement. Thereafter, letter of offer has to be dispatched to the shareholders not earlier than 21 days from its submission to the Board. Within 21 days, the Board is required to specify changes if any, that ought to be made in the letter of offer. The merchant banker and the acquirer have then to carry out such changes before the letter of offer is dispatched to the shareholders. But there is no obligation to do so. Under the second proviso, the Board may call for revised letter of offer in case it finds that the disclosures in the draft letter of offer are inadequate or the Board has received any complaint or has initiated any enquiry or investigation in respect of the public offer. It is important to notice that in the first proviso the Board does not have any obligation to specify any change in the draft letter of offer within a period of 21 days. In the present case, in fact, the Board had not specified any changes within 21 days. We have already noticed earlier that the letter of offer was lacking and deficient in detail. The appellants themselves were taking time to submit details called for, by their merchant bankers through various letters between 08.08.2005 to 20.3.2006. We have already noticed the repeated advice given by the merchant banker to enhance the issue size of the open offer and to comply with other requirements of the Takeover Regulations. The appellants, in fact, were prevaricating and did not agree with the interpretation placed on Regulation 27(1) (d) by the Merchant Banker. We, therefore, reject the submission of Mr. Shyam Divan that there was delay on the part of SEBI in approving the draft letter of offer