SECURITIES APPELLATE TRIBUNAL MUMBAI

Phiroze Sethna (P) Ltd.

v.

Adjudicating Officer, Securities and Exchange Board of India

N.K. SODHI, PRESIDING OFFICER,

ARUN BHARGAVA AND UTPAL BHATTACHARYA, JJ

APPEAL NO. 64 OF 2006

NOVEMBER 15, 2007

Regulation 11 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers), Regulations, 1997, read with section 15H of Securities and Exchange Board of India Act, 1992 - Consideration of holdings - Appellant No. 1 was (for short, PSPL) a family owned private company promoted by appellant No. 3 his wife appellant No. 4 and their daughter ‘B’ appellant No. 2 was a public limited-listed company in which appellant No. 3 was chairman and together with other member of his family held majority stake in it - KJEL, target company had paid up capital of Rs. 20 lakhs comprised of Rs. 2 lakhs fully paid up equity shares of Rs. 10 each - Appellant Nos. 2 to 4, ‘B’ and her two children with other promoters were holding 1,33,400 shares in it - Appellant Nos. 3 and 4 purchased 16,000 shares of KJEL from their daughter ‘B’ in name of appellant No. 1 which constituted 8 percent paid up capital of KJEL - Charge against appellants was that said acquisition of 16,000 shares by PSPL was in violation of Regulation 11(1) because no public announcement, as mandated was made - Adjudicating Officer treated appellant No. 1 as acquirer and appellant Nos. 2 to 4 as person acting in concert with appellant No. 1 - Accordingly, appellants were jointly and severally penalized for violation of regulation 11(1) under section 15-H(ii) - On instant appeal, it was noticed that appellant No. 1 had not acquired any share of KJEL earlier - Besides, there was no discussion in impugned order about earlier acquisition of shares by appellants Nos. 2 to 4 and, thus, it could not be assumed that earlier acquisition of KJEL shares by them was in concert with appellant No. 1 - Whether in aforesaid circumstances order of Adjudicating Officer holding that appellants violated regulation 11(1) on acquisition of 16,000 shares of target company, on 12-12-2002 could not be sustained as pre-conditions for attracting Regulation 11, as laid down by Supreme Court in Swedish Match AB v. SEBI [2004] 54 SCL 549 were not satisfied in instant case - Held, yes - Whether, therefore, impugned order levying penalty was to be set aside - Held, yes

FACTS

Appellant No. 1 was (PSPL) family owned private company promoted by appellant No. 3 his wife appellant No. 4 and their daughter ‘B’.

Appellant No. 2 was a public limited-listed company in which appellant No. 3 was chairman and together with other member of his family held majority stake in it.

KJEL, the target company, was incorporated in 1962. Its paid up capital of Rs. 20 lakh comprised of 2 lakhs full paid up equity shares of Rs. 10 each. KJEL stopped its business of manufacturing of machine tools, dryers etc. from the year 1999 and incurred losses thereafter. Shares of KJEL were thinly traded. Admittedly appellant Nos. 2 to 4, ‘B’ and her two children with the other promoters were holding 1,33,440 shares for the last several years.

‘B’ and her two children owned 16,000 shares of KJEL. They were in need of funds. ‘B’ approached her parents to buy the shares of KJEL as it was difficult for her to find a buyer for the thinly traded shares of KJEL. They agreed to purchase the shares of ‘B’ in the name of their family owned company PSPL at a price of Rs. 64.25 per share, being the last quoted price on the BSE. Thus, PSPL acquired 16,000 shares constituting 8 per cent of the total paid up capital of KJEL from ‘B’. Prior to this acquisitions of 16,000 shares, PSPL did not own any share of KJEL. The charge against the appellant was that the said acquisition of 16,000 shares by PSPL was in violation of Regulation 11(1) because no public announcement, as mandated was made.

The appellant were jointly and severally penalized for the violation of Regulation 11(1) under section 15-H (ii) of the 1992 Act.

The Adjudicating Officer had treated PSPL as ‘acquirer’ because it acquired the said 16,000 shares on 12.12.2002. Her decision in treating Appellants No. 2 to 4 as persons acting in concert with the PSPL (Appellant No. 1) was based on the ground that they were deemed to be acting in concert with PSPL in view of the provision of Regulation 2(1)(e)(2) of the Takeover Regulations, unless the contrary was established by them; that the facts showed that ‘these entities had more than a commonality of purpose or objective, i.e., acquiring the share of KJEL and, hence, acted in concert at that particular juncture’; and that apart from the intent and action of the persons, relationship among these parties could be considered to safely conclude that appellants Nos. 2 to 4 were persons of the same group, who acted in concert with PSPL.

On appeal:

HELD

An ‘acquirer’ is a person who directly or indirectly acquires or agrees to acquire shares or voting rights or control of the target company by himself or with any person acting in concert. The term ‘acquirer’ covers not only completed acquisition but also agreement to acquire. Persons acting in concert are those who co-operate in different ways with the acquirer so that he achieves his objective of acquiring shares or voting rights or control of the target company. The facts of each case determine whether a person is or is not acting in concert with the acquirer. Their actions are the determining factor. It must be shown that they are acting in concert with the acquirer. [Para 6]

It is clear from a perusal of Regulation 11(1) and the judgment of the Supreme Court in the case of Swedish Match AB v. SEBI (2004) 54 SCL 549 that for this clause to be triggered:

(a) the acquirer should have made acquisition of shares or voting rights in the target company during earlier financial years to the extent of more than 15 per cent but less than 75 per cent.

(b) the acquisition of additional shares or voting rights that triggers Regulation 11(1) during the relevant financial year should provide the acquirer more than 5 per cent of voting rights.

(c) the same acquirer should be involved, in the acquisitions of both the initial shares as well as additional shares; and

(d) such acquisitions should be either by the acquirer himself or with the persons acting in concert with him.

It is important that the identity of the acquirer and the persons acting in concert with him is clear to all. There should not be any ambiguity about the identity of such persons as they carry, certain duties and obligations. [Para 8]

An acquirer includes within its definition ‘person acting in concert for the purposes of Takeover Regulations. The definitions of the two terms ‘acquirer’ and ‘person acting in concert’ are separately given in the Takeover Regulations. It is clear that they are different persons and not the same. Unless they are different persons, they cannot act in concert. [Para 14]

The Supreme Court in the case of Swedish Match (supra) has laid down the four pre-conditions attracting regulation 11. The first condition is that ‘an acquirer had acquired shares in concert with another’. As PSPL had not acquired any share of’ KJEL earlier, the very first pre-condition, laid down by the Supreme Court was not satisfied in the instant case. The fourth pre-condition as per the judgment of the Supreme Court is that the additional shares should be acquired by the acquirer himself or through or ‘with the persons with whom they had acquired shares earlier in concert with each other’. There was no discussion in the impugned order about the ‘earlier’ acquisition of shares by the appellants. It could not be assumed that the earlier acquisitions of KJEL shares by the appellant Nos. 2 to 4 were in concert with PSPL.

Thus, it was clear from record that:

(i) PSPL had not acquired any share of target company before 12.12.2002; and

(ii) no evidence was on record to show that appellants Nos. 2 to 4 or any other person had acted in concert with the acquirer-PSPL when they acquired the shares of target company in earlier financial years.

It was therefore, clear from the above discussion that even the fourth pre-condition, attracting regulation 11(1) as laid down by the Supreme Court in Swedish Match’s case (supra) was also not satisfied in the instant case. [Para 15]

The order of the adjudicating officer holding that the appellants violated Regulation 11(1) on the acquisition of 16,000 Shares of Target Company, on 12.12.2000 could not be sustained as the pre-conditions for attracting Regulation 11, as laid down by the Supreme Court in Swedish Match AB (supra) were not satisfied in the instant case. The Adjudicating Officer had erred in this regard consequently, the impugned order levying penalty was to be set aside. [Para 16]