ORDER
T.M. Nagarajan, Member
1. BACKGROUND
1.1 Asman Investments Ltd (hereinafter referred to as “Acquirers”), alongwith Kelvin Metalkrafts Pvt. Limited, Equinox Brands Pvt. Limited, Krupa Holdings Pvt. Limited, Abundance Investments Limited, Amtrex Ambience Limited & Shri Naishadh I. Parikh {hereinafter collectively referred to as “Lalbhai Group”} were holding 54.4% shares in and had effective control of Hitachi Home & Life Solutions (India) Limited – (hereinafter referred to as “Target company”). The name of the company was changed from “Amtrex Hitachi Appliances Limited” to Hitachi Home & Life Solutions (India) Limited on 12.03.2003.
1.2 The shares of the Target company are listed at Ahmedabad Stock Exchange, Mumbai Stock Exchange, Delhi Stock Exchange and National Stock Exchange.
1.3 By a Management Agreement dated 22.01.1999, (“hereinafter referred to as Management Agreement”), Lalbhai Group and Hitachi India Pvt Ltd & Hitachi Ltd agreed to come together to form a joint venture to enable the Lalbhai Group and Target company to strengthen their relationship with the Hitachi Group of Companies and to enable Target company to have better access to latest air-conditioning technology. Pursuant to the execution of the Management Agreement, a preferential allotment was made, as a result of which the Lalbhai Group held 35.2% and Hitachi India Pvt Ltd & Hitachi Ltd together held 35.2% in the paid up share capital of Target company, with the remaining 29.6% held by the public. Subsequently, Hitachi Ltd transferred its entire shareholding in the Target company to its 100% owned subsidiary, Hitachi Home and Life Solutions Inc on 01.04.2002. As a result, the collective shareholding of Hitachi Home and Life Solutions Inc. and Hitachi India Pvt. Ltd. {hereinafter collectively referred to as “Hitachi Group”} became 35.2% in the Target Company.
1.4 ICICI Bank Ltd had, under several agreements, during the years 1996, 1997 and 1998, extended loans to Arvind Products Ltd and Asman Investments Ltd respectively, both constituents of the Lalbhai Group. In order to secure payment of the loans, the Lalbhai group pledged its shareholding of 38,58,565 shares (26.31%) in Target company with ICICI Bank Ltd. Subsequently, due to the default of the repayment of the loans, the pledge was invoked by ICICI Bank Ltd and the pledged shares were transferred in the name of ICICI Bank Ltd. As a result, Lalbhai Group’s equity stake in the target company stood reduced to 9.42%.
1.5 An application dated 05.08.2002 (hereinafter referred to as exemption application) was submitted by the Asman Investments Limited on behalf of Lalbhai group to Securities and Exchange Board of India (hereinafter referred to as SEBI) in terms of sub-regulation (2) of regulation 4 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997(hereinafter referred to as “the Takeover Regulations”) in respect of the proposed repurchase of the pledged 26.31% shares of Target company from ICICI Bank Ltd. The said exemption was sought, inter alia, on the ground that said pledge of the shares being made to ICICI Bank Limited, a Public Financial Institution was exempt from the applicability of regulation 10, 11 and 12 of the Takeover Regulations and therefore, the redemption of such pledge by the Lalbhai Group should be equally exempt from the applicability of the Takeover Regulations. In the event of the repurchase, the Acquirers’ shareholding would have gone up from 9.42% to 35.73% (i.e. more than 15%), thereby attracting the provisions of reg. 10 of the Takeover Regulations. The said application for exemption was forwarded to and considered by the Takeover panel and the panel did not find merit in recommending grant of exemption. The panel observed as under:-
“On the facts stated in the application, the exemption is sought under Regulations 3(1)(f)(iv) and 3(1)(l) of the Takeover Code. Regulation 3(1)(f)(iv) of the Takeover Code has no application since it applies to acquisition of shares in the ordinary course of business by banks and financial institutions as pledge. No case is made out to recommend grant of exemption under Regulation 3(1)(l) of the Takeover Code. Hence, grant of exemption as sought is not recommended.”
A copy of the said recommendation was forwarded to the Lalbhai Group vide letter dated 04.09.2002.
1.6 It was observed from the application dated 05.08.2002 under subregulation (2) of regulation 4 of the Regulations was made by Lalbhai group alone and not with Hitachi Group as Persons acting in concert (hereinafter referred to as “PACs”) with them. In the exemption application it was stated that the shareholding of the Lalbhai group at the time of making the said application was 13,81,500 shares (9.42%) in Target company and that the exemption was sought from the applicability of regulation 10 (relating to acquisition of 15% or more of the shares of the target company) and not regulation 11(1) (relating to the then available “creeping acquisition” of 10% or more of the voting powers in the target company) of the Takeover Regulations. Further it was observed from the disclosures made under sub-regula tion (2) of regulation 8 by Lalbhai group, that they made the requisite disclosures for the financial years 1998, 1999, 2000, 2001 and 2002. However, Hitachi Group was not disclosed as PACs in any of the aforesaid disclosures. Similarly, the Hitachi Group made separate disclosures under sub-regulation (2) of regulation 8 of the Regulations and they also did not disclose Lalbhai group as a PAC.
1.7 Before taking a decision on the exemption application, the Lalbhai Group was given an opportunity of hearing before Chairman, SEBI on 16.09.2002. SEBI vide Order dated 16.10.2002 directed the Lalbhai Group that in the event of repurchase of the aforementioned shares from ICICI Bank Ltd, the Lalbhai Group would be required to comply with the provisions of regulation 10 of the Takeover Regulations i.e to make a public announcement to acquire shares of the Target company
1.8 It was observed that in the meanwhile, Target company intimated to Bombay Stock Exchange (BSE) on 25.09.2002 inter alia that “The company has earlier obtained approval of Foreign Equity Participation up to 74%. Company has made an application to FIPB to revalidate and reinstate the earlier approval to facilitate increase in stake of the foreign partner. The promoters are at an advanced stage of discussion for the transfer of Lalbhai Group stake to Hitachi but the details are yet to be finalized. The transaction, if worked out, would be subject to eventual agreement between the two promoters and necessary regulatory approvals.”
1.9 Further, vide letter dated 26.09.2002, Lalbhai group along with the Hitachi group [stated to be persons acting in concert (PACs)] informed SEBI that they intend to acquire 14,59,562 shares (9.94%) from ICICI Bank Ltd. It was stated that the acquisition of the aforesaid shares was under the then existing “creeping acquisition” limit of 10% in terms of sub-regulation (1) of regulation 11 of the Regulations. The Lalbhai group acquired these 9.94% shares from ICICI Bank Ltd at a price of Rs.33.53 per share.
1.10 The entire shareholding of 19.37% (inclusive of the 9.94% shares bought from ICICI Bank Ltd.) held by Lalbhai Group was acquired by Hitachi Group on 18.01.2003.
1.11 A report dated 24.01.2003 under sub-regulation (4) of regulation 3 of the Regulations was filed by the Hitachi Group regarding the acquisition of 28,41,062 shares (19.37%) from the Lalbhai Group under Regulation 3(1)(e)(iii)(a) on 18.01.2003. It was stated that the acquisition took place at a price of Rs.41.63 per share and the said price was in accordance with Explanation 1 to regulation 3(1)(e), as it was within 25% of the highest price in terms of regulation 20 of the Regulations i.e, the price of Rs.33.53 per share paid by the Lalbhai Group to ICICI Bank Ltd for acquisition of 9.94% shares on 26.09.2002.
1.12 SEBI received a number of complaints dated 17.1.2003, 6.02.2003, 10.02.2003 and 20.04.2003 from various shareholders of the Target company inter alia alleging that :
Inter se transfer price between the Lalbhai Group and Hitachi Group was not in conformity with Explanation 1 to regulation 3(1)(e)(iv).
Lalbhai Group and Hitachi Group cannot be considered as persons acting in concert
The Lalbhai Group should be directed to make open offer in terms of regulation 10 consequent to acquisition of 9.94% shares on 26.09.2002.
2. SHOW CAUSE NOTICE
2.1 In view of the complaints and on examination of the facts of the case, SEBI vide letter dated 08.04.2003 issued a Show Cause notice to Asman Investments Ltd., stating interalia, that:
i. SEBI vide order dated 16.10.2002 while, inter alia, rejecting the request for exemption, directed that in the event of repurchase of the 26.31% shares from ICICI Bank Ltd, the Acquirers would be required to comply with the provisions of regulation 10 of the Takeover Regulations.
ii. Target company made a disclosure to Bombay Stock Exchange (BSE) on 25.09.2002 stating inter alia that “The company has earlier obtained approval of Foreign Equity Participation up to 74%. Company has made an application to FIPB to revalidate and reinstate the earlier approval to facilitate increase in stake of the foreign partner. The promoters are at an advanced stage of discussion for the transfer of Lalbhai Group stake to Hitachi but the details are yet to be finalized. The transaction, if worked out, would be subject to eventual agreement between the two promoters and necessary regulatory approvals.”
iii. The Acquirers along with Hitachi Group, vide letter dated 26.09.2002, informed SEBI that the Hitachi Group and the Lalbhai Group of Companies jointly held approximately 44.62% shares in Target company and were ‘persons acting in concert’ as defined in regulation 2(1)(e) of the Regulations. It was also stated that Acquirers intended to increase their shareholding in Target company by way of “creeping acquisition” as per sub-regulation (1) of regulation 11 of the Regulations.
iv. A report dated 24.01.2003 was submitted by Hitachi Group in terms of sub-regulation (4) of regulation 3 read with sub-regulation (5) of regulation 3 of the Regulations in respect of acquisition of 28,41,062 shares (19.37%) of Target company from Acquirers on 18.01.2003 at a price of Rs.41.639 per share. It was stated in the said report that Acquirers along with Hitachi Group as person acting in concert acquired 14,59,562 shares (9.94%) of shares from ICICI Bank Limited at a price of Rs.33.53 per share on 26.09.2002 resulting in an increase in Acquirers’ shareholding from 9.42% to 19.37% in Target company.
v. From the disclosures made under sub-regulation (2) of regulation 8 of the Regulations by the Acquirer and the other constituents of the Lalbhai group for the years ending 1997, 1998, 1999, 2000, 2001 & 2002, it is observed that Hitachi Group was not disclosed as person acting in concert.
vi. Similarly, the Hitachi Group made separate disclosures under Regulation 8(2) of the Regulations for the years ending 1999, 2000, 2001 & 2002 and they also did not disclose the Lalbhai Group as person acting in concert.
vii. The application dated 05.08.2002 in terms of sub-regulation (2) of regulation 4 of the Regulations was made by the Lalbhai Group individually and not with Hitachi Group as person acting in concert. Further the exemption was sought from the applicability of regulation 10 of the Regulations, inter alia, stating that as a result of the proposed acquisition from ICICI Bank Limited, Acquirers’ shareholding would have increased from 9.42% to 35.73%. Had the Acquirers been acting in concert with Hitachi Group, they would have sought exemption from the provisions of regulation 11(1) and not regulation 10 of the Regulations.
viii. As per the provisions of sub-regulation (2) of regulation 8 of the Regulations, promoters/persons in control of the Target company are required to disclose their shareholdings along with the shareholdings of the person(s) acting in concert with them, on a yearly basis to the Target company. In this regard, it is observed that both Lalbhai Group and the Hitachi Group have made separate disclosures under subregulation (2) of regulation 8 to the Target company and neither of them had disclosed the other as person acting in concert as per the requirements of the Regulations.
ix. Further, it appears from the act of sale of the Lalbhai Group entire shareholding of 19.37% (inclusive of the 9.94% shares bought from ICICI Bank Ltd) that they had acted in furtherance of decision taken on 26.09.2002 of first purchasing the shares from ICICI Bank Ltd. and then selling off the same to the Hitachi Group at a higher price, as they wanted to retain the latter as a foreign collaborator in Target company. Therefore, it appears that on 26.09.2002, i.e, the date of acquisition of shares from ICICI Bank Limited, Lalbhai Group had taken a decision in pursuance of discussions with Hitachi Group, of selling the shares at a future date to Hitachi Group.
x. As SEBI vide Order dated 16.10.2002 rejected the application dated 05.08.2002 seeking exemption from the applicability of regulation 10 of the Regulations, Lalbhai Group would have been required to make an open offer in compliance of the Regulations in the event of acquisition of the aforementioned 26.31% shares from ICICI Bank Limited. Therefore, they could not have purchased the aforesaid shares without making the public announcement in terms of regulation 10 read with regulation 14(1). Thus , it appeared that the Lalbhai Group devised a scheme to circumvent the provisions of the Regulations and included Hitachi Group as person acting in concert in order to take advantage of the then existing creeping acquisition limit of 10% in terms of regulation 11(1) of the Regulations, which was otherwise not available to them.
xi. Considering the facts of the case and specifically the chronology of events viz. disclosure to BSE on 26.09.2002 of transfer of Lalbhai Groups’ stake to Hitachi group, letter informing SEBI that Lalbhai Group and Hitachi group are persons acting in concert, purchase of 9.94% shares from ICICI Bank Limited by the Lalbhai Group on 27.09.2002 and subsequent sale of entire shareholding of 19.37% by Lalbhai Group, it is apparent that the inclusion of Hitachi group as person acting in concert was a device/ artifice which was created/adopted by Lalbhai Group to defeat the provisions of the Regulations and to avoid the obligation of making an open offer to the shareholders of Target company which would have arisen as a result of triggering of regulation 10 of the Regulations on 26.09.2002.
xii. In view of the aforesaid, the Lalbhai Group’s contention that Hitachi group was “person acting in concert” with them for the acquisition of 9.94% of shares from ICICI Bank Limited on 26.09.2002, is not acceptable.
xiii. As the Lalbhai Group acquired 9.94% shares of Target company from ICICI Bank Limited resulting in an increase in your shareholding from 9.42% to 19.37% in the aforesaid manner, without complying with the requirements of the provisions of the Regulations, they, prima-facie, violated the provisions of regulation 10 read with regulation 14(1) of the Regulations and were liable for penal action under the Regulations and SEBI Act, 1992.
3. REPLY TO THE SHOW CAUSE NOTICE
3.1 In response to the said Show Cause Notice, the Acquirers vide their letter dated 16.05.2003 replied inter alia as under:
(i) By a Management Agreement dated 22nd January, 1999, the Acquirers (of which Asman is a member) represented by Arvind Mills together with Target company on one hand and Hitachi Group on the other hand agreed to come together to form a joint venture to enable the Lalbhai Group and Target company to strengthen their relationship with the Hitachi Group and to enable Target company to have better access to latest airconditioning technology. At the time of the execution of this Agreement, the Lalbhai Group already held 54.4% of the paid up share capital in Target company, out of which Asman (constituent of Lalbhai group) held 1.17%. Pursuant to the execution of the Management Agreement a preferential allotment was made after which the Hitachi Group held 35.2% of the paid up share capital of Target company and the Lalbhai Group also held 35.2% of the paid up share capital of Target company. The Management Agreement was a 50:50 joint venture agreement where the object of the Hitachi Group and the Lalbhai Group was to jointly exercise control in Target company.
(ii) It is relevant to note that although Asman and other constituents of the Lalbhai Group did not disclose the Hitachi Group as a person acting in concert in the said disclosures and the Hitachi Group did not disclose the Lalbhai Group as a person acting in concert, the Lalbhai Group constituents did not also disclose each other as persons acting in concert. It is submitted that this was due to an understanding that since each of the constituents of the Lalbhai Group and the Hitachi Group had made individual disclosures under Regulation 8(2), none of them was required to make any references to the others in their respective disclosures under Regulation 8(2). In other words, disclosure in the declaration under Regulation 8 (2) of persons acting in concert with the declarant was required only if the other person himself was not also a declarant under the Regulation.
(iii) Target company as required of it, consolidated and disclosed to the stock exchanges, that the Lalbhai Group and the Hitachi Group were persons acting in concert. Accordingly, in the very first disclosure under Regulations 8(3) of the Takeover Regulations made by Target company after the execution of the Management Agreement, by a letter dated June 3, 1999 to the Ahmedabad, Mumbai and Delhi Stock Exchanges, the Acquirers were shown along with the Hitachi Group as persons acting in concert.
(iv) A similar pattern was followed in respect of all the disclosures under Regulation 8 for all the following years.
(v) Some time prior to 20th September, 2000, as a result of mergers of certain companies represented by Arvind Mills Ltd in the Management Agreement, Asman’s (constituent of Lalbhai group) shareholding in Target company increased to 28.63% as on record date of 20th September, 2000.
(vi) On or around September 2000, in order to secure certain loan arrangements, Asman (constituent of Lalbhai group) was required to pledge and pledged 38,58,565 equity shares of Target company (aggregating to 26.30 %of the paid up share capital of Target company) (“pledged shares”) to ICICI Bank Ltd. under a Pledge Agreement dated September 28, 2000 (“Pledge Agreement”).
(vii) One of the conditions of the Pledge Agreement, was a contemporaneous execution of a Buy Back Agreement, which was executed on September 29, 2000 between ICICI Bank Ltd. and Asman (constituent of Lalbhai group) (“Buy Back Agreement”). The Buy Back Agreement was one of the conditions of the aforesaid pledge of shares by Asman (constituent of Lalbhai group) to ICICI Bank Ltd. and was inextricably linked to the pledge of shares.
(viii) Under the Buy Back Agreement ICICI Bank Ltd.inter alia had a put option to call upon Asman (constituent of Lalbhai group) to purchase the shares acquired by ICICI Bank Ltd. pursuant to the Pledge Agreement for a period of three years following the acquisition of the pledged shares by ICICI Bank Ltd., and in the event that Asman (constituent of Lalbhai group) did not purchase the shares, within the stipulated time, ICICI Bank Ltd. had a put option against the Hitachi Group. Further, Asman (constituent of Lalbhai group) had a call option to require ICICI Bank Ltd. to sell the shares acquired by ICICI Bank Ltd. pursuant to the pledge agreement for aforesaid period of three years from the date of transfer of the pledged shares to ICICI Bank Ltd.
(ix) Hitachi Home and Life Solutions Inc’s concurrence to this arrangement was obtained by way of a letter dated June 7, 2000 of Hitachi Home and Life Solutions Inc., and a five party Agreement dated 12th October, 2001 between ICICI Bank Ltd., Arvind Mills Ltd., Hitachi Home and Life Solutions Inc, Target company, and the Acquirer (“Five Party Agreement”). In the Five Party Agreement, all the parties affirmed the terms of the buy back arrangement, including the manner in which the put and call option were to be exercised by ICICI Bank Ltd. and Asman (constituent of Lalbhai group) respectively. This Five Party Agreement was effective retrospectively from September 29, 2000.
(x) Pursuant to a default under the relevant Facility/ Loan Agreements, on September 29, 2000, ICICI Bank Ltd. intimated As man (constituent of Lalbhai group) of its intention to purchase the pledged shares in accordance with the terms of the Pledge Agreement. Accordingly, sometime thereafter, ICICI Bank Ltd. took steps to get the pledged share transferred to itself. Pursuant to the said transfer to ICICI Bank Ltd., the shareholding of the Lalbhai Group was reduced to 9.2% of the paid up share capital of Target company from the previous 35.2%, and the joint holding of the Lalbhai Group and Hitachi Groups, the co-promoters of Target company was reduced to 44.62%. However, the Management Agreement continued to operate and the parties continued to be in joint control of Target company. It is also relevant to note that ICICI Bank Ltd. was also required to use its voting rights to further the joint control by the Lalbhai Group and Hitachi Groups (except in respect of matters that directly affected ICICI’s interest). This is evident from the terms of the Five Party Agreement referred to above.
(xi) Further, the fact that notwithstanding the above pledge of shares, and consequent transfer to the name of ICICI Bank Ltd., Lalbhai Group and Hitachi continued to be persons acting in concert is also evident from the disclosure made on 28th April, 2001 by AHAL (Target Company) to the various stock exchanges in relation to shareholding as of March 31, 2001 which clearly discloses Hitachi and Lalbhai Group including Asman (constituent of Lalbhai group) as promoters and also persons acting in concert and therefore holding more than 15% shares or voting rights in the Company.
(xii) Although Asman (constituent of Lalbhai group) was then individually holding only 2.27% of the shares of the Target company and various other constituents of Lalbhai group were each individually holding less than 15% shares of Target company and even collectively holding less than 15% shares of Target company (the total Lalbhai Group holding alongwith Parikh family was 9.37%), they were all shown under the heading “Names of persons holding more than 15% shares or voting rights”. This could only be as “persons acting in concert” and the collective shareholding of Hitachi and Lalbhai Group was therefore shown as 44.58%. As mentioned earlier, even immediately prior to the impugned transaction, two separate disclosures made by the Company dated 16th April, 2002 in respect of the shareholding as on 22nd March, 2002 being the date of book closure for the relevant period and for the shares held as on 31st March, 2002 also disclosed Asman (constituent of Lalbhai group) and Hitachi as persons acting in concert similar to the above referred one.
(xiii) On or about June 2002, due to the deteriorating financial position of Target company and the requirement to take appropriate steps for the benefit of the Company both the Hitachi Group and the Lalbhai Group consulted each other to explore the possibilities of fortifying their combined shareholding in Target company and increasing their shareholding once again to the original level of 70.4% of the paid up share capital of Target company. Following discussions between the two groups, it was decided that one of the alternatives to be pursued was the exercise by Asman (constituent of Lalbhai group) of the call option available to it under the Buy Back Agreement and redemption of the pledged shares.
(xiv) Accordingly, Asman (constituent of Lalbhai group) decided to approach ICICI Bank Ltd. to get back the shares pledged/mortgaged with it. In truth and substance, the proposed transaction between ICICI Bank Ltd. and Asman (constituent of Lalbhai group) was only one of redemption, and therefore did not involve any transfer. Just as a pledge/mortgage of shares does not give rise to a transfer of shares, since the pledgor/mortgagor does not cease to be the owner of the shares, a redemption does not also attract the pro visions of Regulations 10, 11, and 12 of the Takeover Regulations. However, Asman (constituent of Lalbhai group) applied for exemption under Regulation 3 (1)(f)(iv) & Regulation 3(1)(l) of the Takeover Regulations on account of redemption of the pledged shares of Target company from ICICI Bank Ltd . This application was made purely as a measure of abundant caution. It was contended in that application that if pledge of shares by a shareholder in favour of a public financial institution is exempt from the applicability of the Takeover Regulations, under Regulation 3 (1)(f)(iv) of the Takeover Regulations, the same principal must follow for redemption of pledged shares and therefore, redemption of the pledged shares qualified for the exemption. It is relevant to note that due to the circumstances under which this application was made, namely by Asman (constituent of Lalbhai group) individually, under the Buy Back Agreement, to which Hitachi was not a party, and in exercise of the call option / redemption available to it, independently of Hitachi, in the application, Hitachi was not mentioned as a person acting in concert with Asman (constituent of Lalbhai group). This does not however mean that Hitachi and Asman (constituent of Lalbhai group) were not acting in concert at that time. The Management Agreement by virtue of which the Hitachi and the Lalbhai Group were acting in concert, was very much in existence, and at all times, the relevant disclosures made by Target company under Regulation 8 (3), mentioned the fact that the two groups were persons acting in concert. That Asman (constituent of Lalbhai group) and Hitachi were persons acting in concert in respect of the said application is fortified by facts already stated above leading to the application being made, and in connection with which officials from Hitachi Japan had met with officials of SEBI pointing out the financial situation of the Company and therefore the need for Asman (constituent of Lalbhai group) to get back the shares in furtherance of the Management Agreement. Also, it would not be correct to state that the application was made merely for an exemption under Regulation 10 of the Takeover Regulations. The applicant made out two grounds for seeking exemption, i.e., on grounds of the applicability of Regulation 3(1)(f)(iv) and 3(1)(l) and on the ground that there was no change in “control” of Target company. Hence, clearly, the exemption sought was from Chapter III (i.e. Regulations 10, 11 and 12) of the Takeover Regulations generally, and not from Regulation 10 in particular. The application clearly stated that the buy back by way of redemption of the pledge would be exempt from the applicability of Regulations 10, 11 & 12. The Application was clearly not limited to exemption from Regulation 10 but included exemption under Regulation 11.
(xv) Asman (constituent of Lalbhai group) and Hitachi were aware that the existing “creeping acquisition” limit of 10% under Regulations 11(1) of the Regulations would be reduced with effect from October 1, 2002, by the SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002, which were notified on September 9, 2002. As per the then existing Regulation 11(1), an acquirer who, together with persons acting in concert with him, had acquired 15% or more, but less than 75% of the shares or voting rights in a company, could acquire further shares entitling him to exercise more than 10% of the voting rights in any year, without being required to make a public announcement to acquire shares in accordance with the Regulations. Therefore, on or about September 16, 2002, Asman (constituent of Lalbhai group) and Hitachi decided to avail of the aforesaid 10% “creeping acquisition” limit and arrived at an understanding that they would act in concert to acquire 9.94% shares of Target company from ICICI Bank Ltd. by exercising Asman’s (constituent of Lalbhai group) option to call under clause 5 of the Buy Back Agreement read together with the Five Party Agreement. Thus, Asman (constituent of Lalbhai group) decided that on or before September 30, 2002, it would exercise its right to redeem the pledged/mortgaged shares only in respect of 9.94% shares so that the “creeping acquisition” route could be utilized and there would be no doubt at all about the non-applicability of chapter III of the Takeover Regulations. This would therefore, reinforce the joint control of the Lalbhai and Hitachi Groups by raising their joint holding from 44.62% to 54.60%.
(xvi) The intention of Asman (constituent of Lalbhai group) to exercise its call option was intimated to ICIC Bank Ltd. by a letter dated September 24, 2002, which was accepted by ICICI Bank Ltd. by a letter dated September 26, 2002.
(xvii) By a letter dated September 26, 2002, Asman (constituent of Lalbhai group) also intimated SEBI of the intention of Lalbhai Group and Hitachi Group to act in concert and increase their mutual shareholding in Target company, which then stood at 44.62% of the share capital of Target company, by way of “creeping acquisition” under Regulation 11 (1) of the Takeover Regulations.
(xviii) Further to the above, on September 27, 2002, Asman (constituent of Lalbhai group) acquired the said Shares from ICICI Bank Ltd. It may be noted that this acquisition was made before SEBI’s order dated October 16, 2002, rejecting the exemption application made by Asman (constituent of Lalbhai group). Hence, it would not be correct to state that the said acquisition was in furtherance of a “scheme” devised by Asman (constituent of Lalbhai group) in light of the said SEBI order dated October 16, 2002, to circumvent the provisions of the Takeover Regulations as is alleged in the captioned show cause notice.
(xix) Subsequently, Asman (constituent of Lalbhai group) and the Acquirers transferred shares aggregating to 19.37% of the paid up share capital of Target company, including the shares acquired from ICICI Bank Ltd. to Hitachi under a Share Purchase Agreement dated December 24, 2002. Pursuant to this, Hitachi’s shareholding in Target company increased from 35.2% of its paid up share capital to 54.6% of its paid up share capital.
(xx) Asman (constituent of Lalbhai group) and Hitachi were copromoters acting in concert since January 22, 1999 and in particular, have acted in concert to acquire the said Shares. For the said acquisitio n, the common objective was to redeem the said Shares (i.e., 14,59,582 equity shares amounting to 9.94% of the share capital of the Target company) by Asman (constituent of Lalbhai group) exercising its option under the Buy Back Agreement so as to increase the joint holding to more than 50% (which was likely to become difficult on account of the proposed reduction in the “creeping” limit from 10% to 5%). Further, there was a clear understanding between the Acquirers including Asman (constituent of Lalbhai group) and Hitachi as is evident from:
i. The Management Agreement which continued to be in force as on the relevant date and the clear understanding as then existed between Asman and Hitachi to increase their joint holding to more than 50%.
ii. The intimation to SEBI on September 26, 2002
iii. The disclosures made to the stock exchanges on September 28, 2002, and October 1, 2002
(xxi) It is therefore submitted that the show cause notice proceeds on the erroneous basis that the Acquirer of the said Shares was only Asman (constituent of Lalbhai group), when in fact the said Shares had been acquired by Asman (constituent of Lalbhai group) and the Hitachi Group, as persons acting in concert for the reasons more particularly set out hereinabove. Hence, in view of the fact that the collective shareholding of the Lalbhai and the Hitachi Group was 44.62% of the share capital of Target company prior to the acquisition of the said Shares, the acquisition of the said Shares would not attract the provisions relating to public offer under the Takeover Regulations, since the same was within the 10% “creeping acquisition” limit (as it then was) under Regulation 11 (1).
(xxii) It is submitted that SEBI has erroneously proceeded on the basis that on 26th September, 2002 there was already a decision by Asman to transfer the shares to Hitachi after purchase from ICICI Bank Ltd. The allegation is on the face of it incorrect. There was no decision as on 26th September, 2002 as material terms and conditions had not been agreed and in fact it was not even certain whether Hitachi would acquire the Shares at the end of the day. The letter dated 25th September, 2002 states “The transaction, if worked out,………”. Thus, it is clear that there was no decision on that date but mere discussions which were proceeding with a common objective between Asman (constituent of Lalbhai group) and Hitachi in respect of the control of the Target company.
(xxiii) Further it is submitted that although the promoters were then discussing a possible acquisition of shares and Target company had made a disclosure to the Bombay Stock Exchange, as on the said date there was no decision or agreement to transfer the shares. Indeed, no decision could be reached until 24th December, 2002 i.e. nearly 3 months later for the said transfer which c learly reinforces the fact that as of 26th September, 2002 there could not have been a decision. At that time, it was not even clear whether at all an agreement would be reached finally or not. Even assuming that an agreement were to be reached finally, it further reinforces that Asman and Hitachi were persons acting in concert in respect of the acquisition of the said shares as is evident from the submissions already made above.
(xxiv) Undoubtedly, the discussion between the two parties in no way dilutes or negates the fact that at the relevant time Asman (constituent of Lalbhai group) and Hitachi were acting in concert pursuant to the Management Agreement. Without prejudice to the above, it is submitted that even if it is assumed for the sake of argument (without admitting in any manner) that there was a decision by Asman (constituent of Lalbhai group) to sell the shares to Hitachi at a future date, it all the more reinforces the fact that the two were acting in concert as in such an event Asman (constituent of Lalbhai group) was clearly acting as an agent of the Hitachi Group in order to acquire the pledged shares from ICICI Bank Ltd. and then in turn transfer the same to Hitachi. It is more than clear that the parties would then have been acting for a common objective or purpose with respect to the acquisition of the shares pursuant to their understanding.
(xxv) Assuming without admitting that Asman (constituent of Lalbhai group) was the acquirer and was not acting in concert with the Hitachi Group, then the fact is that, prior to the acquisition of the said Shares, Asman (constituent of Lalbhai group) was individually holding only 3,41,175 shares of Target company, aggregating to 2.33% of the paid up share capital of Target company, and following the acquisition, As man’s holding in Target company was increased to 18,00,737 shares of Target company, aggregating to 12.28% of the paid up share capital of Target company, which in any event is below 15%, the prescribed threshold limit for making the public announcement under Regulation 10 of the Takeover Regulations. Hence in these circumstances also, the question of complying with Regulation 10 does not arise, as is alleged.
(xxvi) Without prejudice to the above grounds, it is submitted that the transfer of 26% shares from Asm an (constituent of Lalbhai group) to ICICI Bank Ltd. was merely a mortgage by Conditional Sale and upon redemption of the same, the said Shares came back to Asman (constituent of Lalbhai group) and as such there was no fresh acquisition of shares by Asman (constituent of Lalbhai group) as Asman was the legal owner of the said Shares at all times.
(xxvii) It is denied that we devised a scheme to circumvent the provisions of Takeover Regulations as alleged in the paragraph under reference. In fact the question of devising a scheme does not arise at all, as at this point of time the order on the exemption application had not yet been passed.
4. PERSONAL HEARING
4.1 Pursuant to the above, an opportunity of hearing was granted to the Acquirer on 28.11.2003. The Acquirer appeared for the said hearing on that day along with its counsels and made the submissions, on the lines of its aforesaid written reply furnished vide letter dated 16.05.2003.
5. CONSIDERATION OF ISSUES
5.1 I have taken into consideration th e facts of the case, the submissions Written as well as oral made by the Acquirers during the hearing and also the documents submitted by them in support of their submissions.
5.2 The following issues arise for consideration :
(i) Whether the acquisition of 9.94% of equity of the target company from ICICI Bank Ltd by Lalbhai Group can be treated as “creeping acquisition” within the meaning of Regulation 11(1) of the Takeover Regulations.
(ii) If not, whether the said acquisition by Lalbhai Group attracted the provision of Regulation 10 of the said Regulations.
(iii) Action for the breach of Regulations, if any.
(i) First Issue
* Whether the acquisition of 9.94% of equity of the target company from ICICI Bank Ltd by Lalbhai Group can be treated as “creeping acquisition” within the meaning of Regulation 11(1) of the Takeover Regulations.
6.1 I find that the Acquirers purchased 9.94% equity shares of the target company from ICICI Bank and the application of the Acquirers for exemption of the acquisition from the Takeover Regulations was based on the presumptive ground that if the acquisition of shares by banks and financial institutions as pledgees is exempt from the applicability of the Takeover Regulations, the same principle should be applicable for “redemption” of pledged shares as well.
6.2 It is seen that the shares pledged by Lalbhai group as security for certain loans had actually been transferred in the name of ICICI Bank Ltd., consequent on default committed and that a part of the shares were purchased thereafter by Lalbhai Group from ICICI Bank Ltd. Thus, the impugned transaction was not by way of “redemption” of the pledged shares but it was, in fact, acquisition of the shares by Lalbhai group from ICICI Bank Ltd. It needs to be recognised that ‘reacquisition’ of shares (pledged and later actually transferred in the name of the banks/ financial institutions) by the original pledger from the banks / financial institutions on payment of consideration for the shares is different from ‘redemption’ of ‘pledged’ shares on repayment of the loan. In any case, the Takeover Regulations do not envisage exemption of such reacquisition of shares by any acquirer from banks/financial institutions from the applicability of the Takeover Regulations. The Lalbhai Group’s application for exemption of the acquisition from the provisions of Takeover Regulation had been appropriately rejected by SEBI.
6.3 I observe that Lalbhai group had originally proposed to acquire the entire 26.31% shares (pledged in favour of ICICI Bank Ltd and later transferred in its name) in target company from ICICI Bank Ltd., while seeking exemption for the proposed acquisition from the provisions of Takeover Regulations vide its application dated 5th August 2002. The Lalbhai group had been informed by SEBI of the Takeover Panel’s non-recommendation of the exemption, by letter of 4th September 2002. Although the relevant order rejecting the application for exemption was passed by SEBI on 6th October 2002 after completing the due quasi-judicial process, the Lalbhai group was aware of the impending rejection of its application, on receipt of SEBI’s letter of 4th September 2002 itself. It has been admitted that the Lalbhai group was aware that the then existing creeping acquisition limit of 10% would stand reduced to 5% w.e.f. October 1, 2002 in terms of notification of September 9, 2002 regarding amendment to the Regulations. It is seen that on 27th September 2002, the Lalbhai group had acquired 9.94% shares in the target company from ICICI Bank Ltd. Obviously, this was done to take the chance of claiming benefit of the then existing Regulation 11(1) whereby an acquirer together with the person “acting in concert with him” could make creeping acquisition upto 10% of voting rights in a financial year without incurring an obligation to make a public announcement to acquire shares from the public. It is relevant to note that a day before Lalbhai group’s intimation to SEBI of its intention to make the proposed creeping acquisition, the target company had intimated to the Bombay Stock Exchange on 25th September 2002, that it had applied to FIPB for revalidation of its approval for foreign equity participation upto 75% so as to facilitate increase in the stake of the foreign partner (Hitachi group). The company had also intimated to the Stock Exchange that the promoters were at an advanced stage of discussion for the transfer of Lalbhai’s group stake to Hitachi and the transaction, if worked out, would be subject to eventual agreement between the two promoters and necessary regulatory approvals. The said intimation by the target company under the joint control of the two promoters had been made to the stock exchange in terms of clause 36 of the Listing Agreement, though following certain press reports. The intimation, though hedged to take care of any unforeseen contingency, would not have been made unless there had been a definite intention to act according to the intimation, for, otherwise, it would have been liable to be considered as a misleading intimation of manipulative intent. In fact, the subsequent event corroborated the intimated intention. The entire shareholding of 19.37% (inclusive of the abovesaid 9.94% shares bought from ICICI Bank Ltd.) held by the Lalbhai group was indeed acquired by Hitachi Group in January 2003 after completing necessary formalities. It would not therefore be unreasonable to conclude that the acquisition by the Lalbhai group of the 9.94% shares from ICICI Bank Ltd was only with the intent to transfer the same along with its existing holdings to Hitachi group.
6.4 The intention of Lalbhai Group behind restricting its acquisition at 9.94% equity in the target company from ICICI Bank Ltd (as against 26.31% proposed earlier) was clearly to keep it within the permitted creeping acquisition limit of 10% and to claim coverage of the acquisition under Regulation 11(1) on the ground that both Lalbhai and Hitachi groups were “persons acting in concert”. The Lalbhai group’s restriction of its acquisition to below 10%, though indisputa bly aimed at side-stepping the then existing provisions of, and escaping from the mischief of the impending amendment to the Takeover Regulations, may not be deemed as a regulatory violation, the material issue that needs to be examined, however, is whether Lalbhai group could be deemed to be “a person acting in concert” with Hitachi group, given the circumstances and the intent of the acquisition.
6.5 In terms of Regulation 2(1)(e)(1) of the Takeover Regulations, person acting in concert comprises “persons who, for a common objective or purpose of substantial acquisition of share or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal) directly or indirectly, co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company.” The litmus test for deciding whether a person is a “person acting in concert” with another person is the commonality of objective or purpose for substantial acquisition of shares/ voting rights or for gaining control over the target company. As seen from the sequence of events narrated earlier, the objective or purpose of acquisition of 9.94% shares by the Lalbhai group from ICICI Bank Ltd. was to transfer the same along with its existing holding to Hitachi group and to exit from the ownership, control and management of the target company altogether. Discernibly, there had been mutual understanding and co-operation between the two groups to facilitate Lalbhai group’s exit from the company and Hitachi group’s acquiring the Lalbhai group’s stake in the Company. Thus, at best, there was a mutuality of interest and not commonality of interest. One could draw an obvious and reasonable inference that Lalbhai group first consolidated its shareholding by acquiring 9.94% shares from ICICI Bank with a view to gaining bargaining edge at the time of offloading it’s entire stake in target company in favour of Hitachi group. The acquisition of 9.94% stake in target company from ICICI Bank Ltd by Lalbhai group was thus guided by commercial interest and similarly, acquisition of the entire share holding of Lalbhai group in the target company in turn by the Hitachi group was for strategic purpose of gaining sole control of the target company.
6.6 It is observed that the original promoters viz. Lalbhai group who were in sole control of the company till 1998 and who had thereafter shared control with the Hitachi group, had exited from the Target company by off loading its entire share holding at a higher than the market price to Hitachi group at a time when the company was falling into sickness, leaving the public shareholders aggrieved.
6.7 No doubt Lalbhai & Hitachi Groups had become co-promoters of the Target Company and they were acting as persons in concert – notwithstanding their lapse in reporting/ disclosing that fact clearly to the stock exchanges in terms of regulation 8(2) of the Takeover Regulations – till the moment of their reaching an understanding for Lalbhai group to exit from, and Hitachi Group to gain exclusive control of, the Company. It was at that point, their commonality of objective or purpose gave way to diametrically opposite objective or purpose, of course, for mutual benefit.
6.8 In view of the foregoing, the Lalbhai group cannot be deemed to have acted as “persons in concert” with Hitachi Group or vice-versa, as contemplated by the Takeover Regulations in the matter of acquisition of the said 9.94% equity in the target company by Lalbhai group. Accordingly, the acquisition of 9.94% of equity of the Target company from ICICI Bank Ltd., by Lalbhai group can not be treated as “creeping acquisition” with in the meaning of regulation 11(1) of the Takeover Regulations.
(ii) Second Issue
* Whether the acquisition by Lalbhai group triggered the provisions of Regulation 10 of the Takeover Regulations.
6.9 According to the Regulation 10 of the Takeover Regulations, as it then existed, “no acquirer shall acquire shares or voting rights, which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him) entitle such acquirer to exercise 15% or more of the voting rights in a company unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations.”
6.10 The acquisition of 9.94% of equity stake in the target company by Lalbhai group had taken its shareholding to more than 15% i.e. 19.37% in the company. As has been observed earlier, the Hitachi group cannot be cons idered as persons acting in concert with the Lalbhai group. It therefore follows that the Lalbhai group’s acquisition of 9.94% shares in the Target Company from ICICI Bank Ltd. triggered the provisions of Regulation 10 of the Takeover Regulations.
6.11 In terms of Regulation 14(1) of the said Regulations, public announcement should have been made by the acquirer within the 4 working days of entering into agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the percentage specified in regulation 10. In the instant case, the Lalbhai group had triggered the said Regulations and the obligation on their part to make the public announcement arose on 26 September 2002 when it acquired 9.94% shares in the target company. The public announcement should therefore have been made within 4 working days from 26 September 2002. I find that no such public announcement had been made by the Lalbhai group. Therefore, the Lalbhai group has violated Regulation 10 read with Regulation 14 of the Takeover Regulations.
(iii) Third Issue
* Action for the breach of Takeover Regulations
6.12 In view of the findings, in the normal course Lalbhai group should be held liable to be directed to make an open offer as they had acquired 9.94% of the equity shares from ICICI Bank in violation of the Regulation 10 of Takeover Regulations. It is however, to be noted that the Lalbhai group has totally exited from ownership and control of the target company. At present, the majority ownership, management and control of the target company is in the sole hands of the Hitachi group. Any Regulatory direction shall be guided by consideration of practicality and the larger interests of the shareholders. Consideration of all relevant factors dictates that direction to Lalbhai group to make public announcement for acquiring shares from the public at this stage would not sub serve the best interests of the target company or its shareholders.
6.13 It is noted that the performance of the target company, when it was under the sole control of the Lalbhai group and even under the joint control of the Lalbhai and Hitachi Groups had been far from satisfactory. But, when the company was on the brink of sickness, Lalbhai group, acquired 9.94% equity stake from ICICI Bank Ltd. with a view to transferring the same along with its then existing stake to Hitachi Group at a higher than market price, without fulfilling its obligations to make public announcement to acquire shares from the public in terms of Takeover Regulations and exited totally from the ownership, control and management of the Company. This is not only in violation of the provisions of the Takeover Regulations but also reflects a tendency on the part of the promoters to exit, at an opportune time, leaving the public shareholders, particularly small ones in the lurch. Such a tendency, if not discouraged, would go to undermine the confidence of the investing public in the capital market. In due consideration of all relevant factors, therefore, I cannot but conclude that Asman Investments Ltd., of Lalbhai group deserves to be debarred from accessing the capital market or dealing in securities for a specified period.
6.14 I also find that it is an appropriate case to initiate adjudication proceedings under Section 15H of the SEBI Act, 1992 against Acquirers for their failure to make public announcement when they triggered the Regulations on 26.09.2002 respectively. Order appointing Adjudication Officer in this regard will be issued separately.
7. ORDER
7.1 I, in exercise of the powers conferred upon me under Section 19 of the SEBI Act, 1992 read with Section 11 and 11 B of SEBI Act further read with regulations 44 and 45 of the Takeover Regulations, hereby debar the Asman Investments Ltd., from accessing the capital market or dealing in securities for a period of two years.
7.2 This order shall come into force with immediate effect.