Case: A.R. Dahiya Vs. Securities &amp; Exchange Board Of India&amp;Ors

1. This Appeal assails the Judgment dated 19.4.2006 of the Securities Appellate Tribunal which upheld the order of the Securities and Exchange Board of India dated 1.8.2003. The factual matrix is that one Mr. V.P. Garg (hereinafter referred to asentered into an ‘Assisted Sectorwith the Haryana State Industrial Development Corporation Limited (hereinafter referred to ason 4.1.1993, for the purpose of setting up a modern resort hotel complex at Village Chowky, Tehsil Kalka, Haryana. The parties agreed to collaborate for the profitable implementation and operation of the project in the assisted sector through a company already incorporated by Garg under the name and style of Polo Hotels Ltd. (hereinafter referred to as the ‘TargetHSIDC extended a term loan to Garg and also subscribed to 3,00,000 shares of Rs. 10/- each of the Target Company. Clause 24 of the Agreement provided for buyback of the shares of HSIDC.Garg defaulted in repayment of loan as well as in buying back the shares of HSIDC in the Target Company. In March 1999, Garg entered into an agreement with Mr. A.R. Dahiya (thefor the sale ofentire shareholding of 28.09% in the Target Company. This agreement was subject to the approval of HSIDC and contained a clause that Garg would be absolved of fulfilling the buyback obligation, provided HSIDC agreed to accept the Appellant in place of Garg. Garg wrote a letter to HSIDC dated 31.3.1999 stating that on account of his deteriorating financial condition, he had decided to transfer his equity shareholding in the Target Company to the Appellant and that the Appellant had agreed to furnish his personal guarantee for buy-back of the three lac equity shares held by HSIDC. In the letter Garg requested HSIDC to accept the personal guarantee of the Appellant in lieu of his buy-back guarantee and to absolve him from the obligation.3. The Appellant also wrote a letter to HSIDC dated 15.4.1999, informing it that he and Garg had entered into an agreement for purchase of equity shareholding of Garg and for complete takeover of the management of the Target Company. The Appellant confirmed that he was prepared to buy-back the equity holding of HSIDC as provided for in the assisted sector agreement instead of Garg, under similar terms and conditions. The Appellant also requested that since he was facing a stringent liquidity problem, the payment for the buy-back which was due in April 1999 be instead made in monthly instalments of Rs.20 lacs each with effect from September 1999. Enclosed with the letter were four post-dated cheques in respect of the said buy-back obligations, amounting to a total of Rs.71,25,466/-. HSIDC, vide its letter dated 19.4.1999 to Garg, accepted the joint request made by him and the Appellant. Subsequently, the Appellant, Garg and HSIDC entered into a tripartite financial collaboration agreement, whereby HSIDC consented to the Appellant stepping into the shoes of Garg.4. On 20.4.1999, Garg and the Appellant entered into an agreement whereby the Appellant agreed to purchase the entire share capital of 28.09% held by Garg at the rate of Rs. 8.50 per fully paid up equity share. Since this acquisition was in excess of 15% of the total shareholding of the Target Company, the Regulations under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, were attracted. In order to comply with the Regulations, the Appellant made a public announcement on 24.4.1999 making an offer to the remaining shareholders of the Target Company to purchase a minimum of 20% shares of the said company at an offer price of Rs. 8.75 per equity share.5. On 5.5.1999, a draft letter of offer was sent by the merchant banker of the Appellant to SEBI for its approval. Neither in the public announcement nor in the letter did the Appellant disclose the fact that he and his associates had already bought back the shares of HSIDC. SEBI reverted with a letter dated 26.5.1999 seeking clarifications from the merchant banker of the Appellant. The letter stated that the price at which the Appellant proposed to acquire the shares from HSIDC as per the agreement dated 19.4.1999, had to be calculated and specified upfront in the offer document. Further, if the price payable to HSIDC as per the said agreement was higher than the present offer price of Rs. 8.75 per share, then the offer price must be justified as required under Regulation 20(6). The draft letter of offer dated 5.5.1999 was approved by the SEBI subject to certain changes vide its communication dated 30.9.1999. As it transpired in response to the public announcement, the Appellant could acquire only 2.42% of the shares of the Target Company, as the shareholders were not willing to offer their shares at Rs.8.75 when their face value was Rs.10/-.6. SEBI received a complaint from Mr. Komlam Sardana alleging that the Appellant had acquired three lac equity shares from HSIDC for Rs. 71,25,466/- at the rate of Rs. 23.75 per share, whereas the shares were not offered at the same price to the existing shareholders. The complainant alleged that the Appellant was suffering from a liquidity crunch and had requested HSIDC to receive the consideration amount with respect to the transfer of shares in monthly instalments. The complainant also brought to the notice of SEBI that the post-dated cheques through which the Appellant had tendered consideration had subsequently beendishonoured and criminal proceedings had been initiated against him. A copy of the said complaint was forwarded to the Appellant through his merchant banker.The Tribunal observed that from a perusal of Regulation 20(2)(b) it was clear that the highest price paid by an acquirer for any acquisition would be taken into consideration for determining the minimum offer price. As the Appellant had paid Rs.23.75 per share to HSIDC within the period of 26 weeks prior to the date of public announcement, this transaction had to be taken into consideration for determining the minimum offer price. The Tribunal negated the specific contention of the Appellant, finding that irrespective of whether acquisition took place or not, Regulation 20(2)(b) stood attracted as the amount was paid for the purpose of the acquisition. The Appellant contended that as his buy-back from HSIDC, was a transfer of shares from a State level financial institution to a co-promoter of the Target Company, it was exempt under Regulation 10. Thus in turn, the same transaction need not be taken into consideration to determine the minimum offer price. The Tribunal dismissed this contention by stating that the exemption under Regulation 10 was only with respect to making a public announcement. The said exemption does not permit the Appellant from not disclosing the transaction for the purpose of calculating the minimum offer price.11. Aggrieved by the decision of the Tribunal, the Appellant has now filed this Appeal. Counsel for the Appellant contends that Regulation 20(2)(b) uses the expressionand submits that as the said acquisition was to happen in the future, the Regulation was not applicable to him. Further, the post-dated cheques that had been deposited were given in the form of a guarantee to HSIDC. Counsel submits that the buy-back was initially due in April 1999, but was subsequently postponed till November 1999, and thus as the buy-back was to take place in November, it is then that the rate would have been calculated and determined. Reliance has been placed on a letter issued by HSIDC dated 1.6.1999 addressed to the Appellant stating that the purchase consideration of the shares under buy-back agreement could not be determined as on date, and the equity had to be bought back by the promoters at a purchase consideration which would be calculated as per the terms contained in Clause 15 of the Tripartite agreement. Counsel relies on a letter issued by HSIDC dated 9.12.1999 wherein it was communicated to the Appellant that the post-dated cheques which he had deposited were dishonoured on presentation due to non-availability of sufficient funds with the accounts, and thus as there had been no payment no acquisition had taken place. To further buttress this contention Learned Counsel relied on a letter issued by HSIDCaddressed to SEBI, wherein it was averred that the transfer of shares to the incoming collaborators would be effected only on the deposit of the entire amount of purchase consideration.

Court's reasoning:
is evident from a reading of the above Regulations that the buy-back transaction between the Appellant and HSIDC was incapable of triggering Regulation 10, as the said transaction was protected by Regulation 3. However, the acquisition of the entire share capital of Garg by the Appellant attracted Regulation 10 as the acquisition was in excess of 15%. Further, as this transaction was between two promoters, it did not have the protection of Regulation 3. As required under Regulation 10, the Appellant did make a public announcement, but did not disclose its buy-back transaction with HSIDC. The Appellant has vainly and incorrectly attempted to justify his act of non-disclosure by stating that the transaction with HSIDC was protected by Regulation 3, which placed it beyond the ambit of Regulation 10, 11 and 12. In our view, Regulation 3 only protects a transaction between a co-promoter and a State financial institution to the extent that, as a consequence of such transaction a public announcement will not be required to be made as provided under Regulations 10, 11 and 12. However, it does not imply that the said transaction is to be protected from the rigours of other Regulations provided for under the Act. Thus, the transaction between the Appellant and HSIDC will have to be subject to Regulations 16 and 20, and the rate at which the Appellant bought back the shares from HSIDC had to be disclosed in the public announcement.In order to dispel doubts regarding the termthe same was subsequently defined in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Under Regulation 2 Clause (1) Sub-clause (a)-means directly or indirectly acquiring or agreeing to acquire shares or voting rights in, or control over, a Target Company. This definition clarifies that an acquisition takes place the moment the acquirer decides or agrees to acquire, irrespective of the time when the transfer stands completed in all respects. The definition explicates that the actual transfer need not be contemporaneous with the intended transfer and can be in futuro.17. Further, the letter on which the Counsel for the Appellant had placed reliance to prove that there was no acquisition, is dated 9.12.1999, which was well after the public announcement dated 24.4.1999 where the Appellant was required to make disclosures in compliance with the Regulations. This clearly indicates, that at the date of making the public announcement the Appellant was under the impression that the acquisition has taken place.