In Re: Hitachi Home And Life … vs Unknown on 17 April, 2004

ORDER

T.M. Nagarajan, Member

1. BACKGROUND

1.1 Asman Investments Ltd, Kelvin Metalkrafts Pvt. Limited, Equinox Brands Pvt. Limited, Krupa Holdings Pvt. Limited, Abundance Investments Limited, Amtrex Ambience Limited & Shri Naishadh I. Parikh, Relatives & Associates {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 (hereinafter called as Hitachi Group) 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/Acquirers”} 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 loan, 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 bein g 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 Lalbhai Group’s shareholding would have gone up from 9.42% to 35.73%,(i.e. more than 15%) thereby attracting the provisions of regulation 10 of the 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 pledges. 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 sub-regulation (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 and not regulation 11(1) of the Regulations. Further it was observed from the disclosures made subregulation (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 subregulation (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 Regulations.

1.8 It was observed that 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.”

1.9. Meanwhile, 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 intended 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 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 13.06.2003 issued a Show Cause notice to Hitachi Group/Acquirers stating inter alia, as under:

2.1.1 As per the report dated 24.01.2003 submitted under subregulation (4) of regulation 3 of the Regulations, Hitachi Group collectively acquired 28,41,062 shares (19.37%) of of Target company from Lalbhai Group on 18.01.2003 through inter se transfer of shares amongst promoters and foreign collaborators.

2.1.2 It is stated in the aforementioned report that Hitachi Group acted in concert with Lalbhai Group, which acquired 9.94% shares of Target Company from ICICI Bank Limited on 26.09.02 at a price of Rs.33.53 per share. Further, the acquisition price of Rs.41.63 per share for the acquisition of 19.37% shares from Lalbhai Group does not exceed 25% of Rs.33.53 per share, i.e. the price at which 9.94% shares were acquired by Lalbhai Group on 26.09.2002 from ICICI Bank Limited. Further, that the shares of Target Company are frequently traded and the said inter se transfer of shares at the acquisition price of Rs.41.63 per share is within 25% of the price determined in terms of sub-regulation (4) of regulation 20 of Regulations.

2.1.3 Based on the material available on record, SEBI is of the view that the claim of Lalbhai Group that it acquired 9.94% from ICICI Bank Limited at the rate of Rs.33.53 per share on 26.09.2002 along with Hitachi Group as persons acting in concert and that the same was within the then creeping acquisition limit of 10% under regulation 11(1) of the Regulations, is not in order. Further, SEBI is of the view that for the said acquisition, Hitachi Group cannot be considered as “persons acting in concert” with Lalbhai Group. Therefore, SEBI is of the view that with the aforesaid acquisition, Lalbhai Group had violated the provisions of the Regulations. In this regard, SEBI issued a Show Cause Notice on 08.04.2003 to Asman Investments Limited along with other constituents of Lalbhai Group.

2.1.4 In light of the aforesaid Show Cause Notice, Hitachi Group cannot be considered as persons acting in concert with Lalbhai Group in respect of the acquisition of shares from ICICI Bank Limited at a price of Rs.33.53 per share and therefore, the said price of Rs.33.53 per share cannot be considered as one of the parameters under regulations 20(4)/20(5) of the Regulations as claimed by Hitachi Group as the floor price for arriving at the 25% price in terms of Explanation 1 to regulation 3(1)(e)(iv).

2.1.5 As the Hitachi Group / Acquirers acquired 28,41,062 shares (19.37%) of the share capital of Target Company on 18.01.2003 resulting in their collective share holding increasing from 35.22% (pre-acquisition) to 54.59% (post-acquisition), they prima-facie, violated the provisions of regulations 2(1)(c), 11(1), 12 read with regulations 14(1) and 14(3) of the Regulations and therefore, were liable for penal action under the Regulations and SEBI Act, 1992.

3. REPLY TO SHOW CAUSE NOTICE

In response to the Show cause Notice dated 13.06.03, the Acquirers submitted their reply vide letter dated 28.7.2003.

4. PERSONAL HEARING

4.1 Pursuant to the above, an opportunity of hearing was granted to the Acquirers on 28.11.2003. The Acquirers appeared for the said hearing on that day along with its counsels and made the submissions, on the lines of its reply furnished vide letter dated 28.07.2003, followed by written submissions dated 15.12.2003.

5. SUBMISSIONS

The Acquirers inter alia made following submissions vide its letters dated 28.07.2003 and during the hearing dated 28.11.2003:

5.1 Some time in early 1998 Amtrex, an Indian company, desired foreign collaboration with investment in the equity capital of the company. Accordingly, on 13th February, 1998 Amtrex applied to the SIA, Ministry of Industry, FIPB for approval of the said proposal. It may be mentioned that Amtrex and Hitachi were already under Technical Collaboration for certain air-conditioners with effect from 12th July, 1990.

5.2 On 2nd March, 1998 FIPB granted its approval to Amtrex for upto 74% of the equity capital being invested by the foreign collaborator.

5.3 Pursuant to the above approval, a Management Agreement was entered into on 22nd January, 1999 between Hitachi Limited Japan and the Lalbhai Group through Arvind Mills Ltd. and Amtrex Appliances Ltd. (as it was then known) for equal equity participation between Lalbhai Group and Hitachi Group and joint management of Target Company. The object of the Agreement was to form a joint venture to strengthen the relationship between the two groups and to jointly exercise management and control in Target Company. A number of provisions of the Management Agreement reflect this joint exercise of control. Clause 7 provides for equal representation of both the groups in the board of directors of Target Company. Certain matters are listed as “Reserved Matters” as per Clause 9 and resolutions regarding these matters can be passed only with the affirmative vote of at least one Lalbhai Group Director and one Hitachi Director.

5.4 Since the Hitachi Group made a joint disclosure, Hitachi Japan and Hitachi India were shown as persons acting-in-concert in the said disclosure under Regulation 8(2). It was aware that each of the Lalbhai Group Companies were making their individual disclosures as promoters and therefore, it was not required by the Hitachi Group to show the Lalbhai Group as persons acting-in-concert in the said disclosure made by the Hitachi Group. Similarly, each of the constituents of the Lalbhai Group made individual disclosures as promoters and therefore were not required to and did not disclose the other constituents of the Lalbhai Group as persons acting-in-concert. Nor did they disclose the Hitachi Group, since obviously, being together in the Company, Target Company they were also aware of the separate disclosures by Hitachi Group. It is submitted that in terms of Regulation 8(2) it is only if the others acting-in-concert are not filing separate disclosures under Regulation 8(2) then it is required to show all the persons acting-in-concert in one disclosure. However, when each promoter or promoter group is filing a separate disclosure with the knowledge of the other, there is no need to specifically mentio n the other as persons acting in concert since the co-promoters of the Company are aware that as co-promoters under the management agreement they were persons acting-in-concert and the material necessary disclosures by the company under Regulation 8(3) would necessarily disclose all of them together as persons acting-in-concert and holding more than 15% shares. The Regulation 8(2) disclosures are only to enable the Company to correctly disclose to the public through the Stock Exchanges, the names of those in control and acting in concert.

5.5 It is noteworthy that Target Company was in the joint management and control of the two groups and therefore the said disclosures under Regulation 8(3) disclosed the two groups own understanding i.e. the fact that they were both (“Hitachi & Lalbhai”) ‘persons acting in concert’ within the meaning of Regulation 2(1)(e)(i) of the Takeovers Regulations. It is also noteworthy that these Regulation 8(3) disclosures were based on information received by the Company under Regulation 8(2).

5.6 On or around 28th September 2000, in order to secure certain loan arrangements, Asman 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 Limited under a Pledge Agreement dated September 28, 2000 (“Pledge Agreement”).

5.7 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 Limited and Asman (“Buy Back Agreement”).

5.8 Under the Buy Back Agreement, ICICI Bank Limited inter alia, had a put option to call upon Asman to purchase the shares acquired by ICICI Bank Limited pursuant to the Pledge Agreement (Clause 1 of the Buy Back Agreement) for a period of three years following the acquisition of the pledged shares by ICICI Bank Limited, and in the event that Asman did not purchase the shares, within the stipulated time, ICICI Bank Limited had a put option against the Hitachi Group (Clause 2 of the Buy Back Agreement). In other words, Hitachi Group had a first right of refusal on the said shares in such an event. This provision was consistent with the Management Agreement.

5.9 Pursuant to a default under the relevant Facility/Loan Agreements, on September 29, 2000, ICICI Bank Limited intimated Asman of its intention to purchase the pledged shares in accordance with the terms of the Pledge Agreement. Accordingly, sometime thereafter, ICICI Bank Limited, took steps to get the pledged shares transferred to itself. Pursuant to the said transfer to ICICI Bank Limited, the shareholding of the Lalbhai Group was reduced to about 9.2% of the paid up share capital of Target Company from the previous 35.2%, and the joint holding of the Lalbhai and Hitachi Groups, the co-promoters of Target Company, was reduced to approximately 44.62%.

5.10 Notwithstanding the said pledge and consequent transfer to ICICI Bank Limited, the Management Agreement including joint management and control of Target Company by the two groups as “persons acting in concert” continued as concurrence of Hitachi Group to this arrangement was obtained and a five party Agreement dated 12th October, 2001 between ICICI Bank Limited, Arvind Mills Ltd., Hiatchi Group, Target Company, and Asman (“Five Party Agreement”) was executed. 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 Limited and Asman respectively. This Five Party Agreement was effective retrospectively from September 29, 2000.

5.11 Due to the deteriorating financial position of Target Company i.e. it was already potentially sick with more than 50% of its net worth eroded and the requirement to take appropriate steps for the benefit of the Company through, inter alia, a possible rights issue, 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 so that the two co-promoters could infuse equal funds into the Company. Following discussions between the two groups, it was decided that one of the alternatives to be pursued was the exercise by Asman of the call option available to it under the Buy Back Agreement. It was believed that Asman could redeem the shares as the Buyback Agreement and Arrangement was pursuant to a pledge of the shares with ICICI Bank Limited.

5.12 Accordingly, to give effect to the above discussions Asman proposed to “redeem” the 26.2% shares of Target Company that it had pledged with ICICI Bank Limited and which had been transferred in ICICI Bank Limited’s name. Asman on 5th August, 2002, by abundant caution, applied for exemption under Regulation 3 (1)(f)(iv) & Regulation 3(1)(l) of the Takeover Regulations on account of their contention that it was, in effect, a redemption of the pledged shares of Target Company from ICICI Bank Limited (“Exemption Application”). 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, the buy back of the said shares qualified for the exemption.

5.13 On 4th September, 2002, Asman was informed by SEBI that the Takeover Panel in its recommendation of 14th/19th August, 2002 had not recommended the exemption sought for by Asman. The letter also communicated a date for personal hearing of Asman’s application i.e. 20th September, 2002. Soon after this, it was also known that the 1st Takeover Regulations were to be amended with effect from October, 2002 bringing the creeping acquisition limit down from 10% to 5%. Faced with the recommendation of the Takeover Panel the parties contemplated that two different possibilities could arise – (a) that notwithstanding the recommendation, Asman’s application for exemption would be allowed by the Chairman and (b) the Chairman rejects the exemption application.

5.14 In the event of application being disallowed and the decision not coming before 30th September, 2002, subsequent thereto Asman could under the creeping acquisition limit, have acquired only 5% of the equity shares from ICICI Bank Limited. It was felt by Lalbhai and Hitachi Groups that this additional limit existing prior to 30th September, 2002 would have allowed the Lalbhai Group to increase its stake substantially to at least over 19% of the company which would have benefited the company in terms of requirement for infusing funds. Accordingly, Asman in consultation with and cooperation of Hitachi decided to buyback 9.95% of the equity from ICICI Bank Limited.

5.15 A further eventuality was considered between the parties. In the event of Asman’s Exemption Application being disallowed and the Lalbhai Group then not being willing to infuse equal amount of funds as Hitachi Group would under the proposed Rights Issue due to the shareholding difference, the Company, Target Company would suffer and the purpose of the proposed rights issue, i.e. saving it from being declared sick, would not be served. Thus discussions took place between the parties that in such an eventuality and subject to reaching an agreement on such essential terms as price etc., Hitachi could consider buying out the entire stake of the Lalbhai Group, including 9.9% shares if acquired. These discussions did not mean that there was a decision to sell. Mutual agreement had not even been reached on terms and conditions including price as was clearly mentioned even by the constituents of the Lalbhai Group.

5.16 On 25th September, 2002 due to certain news article which had appeared, the Target Company informed the Bombay Stock Exchange, inter alia, as follows:

“…… the promoters are at an advanced stage of discussions 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 two and necessary regulatory approvals.”

5.17 By a letter dated September 26, 2002, Asman and Hitachi als o jointly 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. This letter was duly received by SEBI. Despite knowledge of all disclosures under Regulation 8(2) and 8(3), and the Exemption Application SEBI did not immediately respond negating the fact that Asman and Hitachi were ‘acting in concert’ simply because there was no basis to negate the factual position.

5.18 Further to the above, on September 27, 2002, Asman acquired the said Shares from ICICI Bank Limited. Thus, on September 27, 2002 when Asman acquired a part of the shares of Target Company there was no order from SEBI either confirming or rejecting Asman’s request for exemption. It may be noted that this acquisition was made before SEBI’s order dated October 16, 2002, rejecting the Exemption Application made by Asman. The acquisition was perfectly legitimate and in accordance with law. The pendency of an exemption application in respect of a proposed transaction of redemption which the Takeover Panel was not mindful to recommend, could not in any manner detract or take away Asman’s right to acquire part of the shares.

5.19 On 28th September, 2002 a letter was issued from Asman to (a) Stock Exchange -Ahmedabad; (b) Stock Exchange – Mumbai; (c) National Stock Exchange and (d) Delhi Stock Exchange being an intim ation under Regulation 7(1A) of the Code as follows:

By letters dated October 1, 2002 Target Company informed the Ahmedabad, Mumbai, National and Delhi Stock Exchanges of the acquisition of the said Shares by Asman from ICICI Bank Limited under the provisions of Regulation 7(3) of the Regulations. These letters clearly mentioned the Hitachi Group as “persons acting in concert” with the Lalbhai Group. Notwithstanding the above disclosures, SEBI did not seek to contest the fact that Asman and Hitachi were persons acting in concert for the subject transaction but, on the contrary by remaining silent beyond a reasonable time, thereby clearly conveyed their acceptance/ acquiescence thereto.

By an order dated October 16, 2002 (“Rejection Order”), Asman’s Exemption Application of August 5, 2002 was rejected by SEBI. The order clearly and categorically held that the exemption which was sought on the basis of a redemption of shares could not be permitted because there would be an acquisition of shares by Asman from ICICI Bank Limited and not redemption. Thus, it is clear that even as per the holding of SEBI, the application for exemption was based on a redemption of the pledge and was not for acquisition of shares. Such an application for redemption of a party who pledges its own shares cannot have any relevance in respect of acquisition done by persons acting-in-concert with another party.

After the said order of rejection, the discussion between the two groups for exit of Asman/ Lalbhai Group assumed urgency in view of the Company’s financial position and requirement of fund infusion as without equality of shareholding Asman was not then willing to infuse funds required by it and Hitachi was not prepared to infuse additional funds.

5.20 In view of the urgency, on 22nd October, 2002, Target Company wrote to FIPB seeking decision on its pending application. The said letter with reference to the pending Application categorically stated that the proposed purchase of shares from the Lalbhai Group was “subject to mutual agreement being reached on price and terms”. Thus, this letter also shows that even as of 22nd October, 2002, there was no agreement or understanding for sale or purchase of shares but merely that discussions had progressed in the matter.

5.21 On 24th October, 2002 Target Company received the approval of the FIPB. Hitachi Group’s budget for such a proposed acquisition could not accommodate a public offer. It was made clear to Asman that Hitachi Group would not agree to a price which would trigger a public offe r in view of the recent amendments to the Takeover Regulations.

5.22 On 29th October, 2002, officials of Hitachi Group alongwith their legal advisor met with an official of the Takeover Division of SEBI. The proposal to purchase the Lalbhai Group Shares was explained and clarification was sought whether the exempted price would be upto 25% higher than the price paid by Asman in acquiring the shares from ICICI Bank Limited as the same was done acting in concert with Hitachi Group. This was followed by a telephone conversation by Hitachi Group through its legal advisors. Hitachi Group understood the clarification to be in the affirmative.

5.23 In order to avoid any misunderstanding, Hitachi Group wrote to SEBI on 7th November, 2002 setting out the clarification sought and the answer. Vide letter dated 29th November, 2002, SEBI responded.

5.24 SEBI did not at all refute the fact that in the Asman Transaction, Asman/ Lalbhai Group had acted in concert with Hitachi group. This led Hitachi Group to rely on SEBI for the purpose of ultimately agreeing a price within 25% of Rs. 33.53 per share. Hitachi Group acted to its detriment based on SEBI’s representations by silence, acquiescence and conduct, that Hitachi’s and Asman’s communications as to the two groups being ‘persons acting in concert’ for the Asman Transaction had been accepted (as it should have) and would not be called in question.

5.25 Subsequently, after substantial deliberations and negotiations Asman/Lalbhai Group and Hitachi reached an agreement only on 24th December, 2002 when a Share Purchase Agreement was executed. Pursuant thereto, on 18th January, 2003, Asman and the Lalbhai Group transferred shares aggregating to 19.37% of the paid up share capital of Target Company, including the shares acquired from ICIC I Bank Limited, to Hitachi Group. Hitachi Group’s shareholding in Target Company thereby increased from 35.2% of its paid up share capital to 54.6% of its paid up share capital.

5.26 Soon after the Transaction, necessary steps were taken and the Company then announced a rights issue for infusion of funds which was put on hold by SEBI vide its letter dated 25th March, 2003. Subsequently, appreciating the requirement for fund infusion due to deteriorating financial condition pursuant to representations made by Target Company to SEBI,, on 12th September, 2003 SEBI cleared the letter of offer for Rights Issue with certain observations. Accordingly, on 16th October, 2003 a revised letter of offer was filed with SEBI and the Stock Exchanges. The main grounds raised by the Acquirer inter alia are:

5.27 SEBI relies on the press release issued to BSE by Target Company on 25/26.9.2002 for its allegation that there was a decision by Asman to sell to Hitachi at a future date. No other document in fact has been relied on by SEBI in the Show Cause Notice or during the oral argument in support of this alleged decision.

5.28 A perusal of the disclosure to the Bombay Stock Exchange by Target Company, in its material part, reads as follows:-

” ……Promoters are at an advanced stage of discussion for the transfer of Lalbhai Group stake to Hitachi but the details are yet to be finalised. The transaction, if worked out would be subject to eventual agreement between two and necessary Regulatory approvals.”

5.29 The above statement itself shows that there was no decision, but matters were at the stage of discussion. This is also evident from the fact that details of the proposal were yet to be finalised and the possibility that the transaction may not have worked out at all, which is evident in the words “the transaction, if worked out” and that in any event it would be contingent upon an eventual agreement between the two and necessary Regulatory approvals. There cannot be any decision to sell by a party unless price and other material terms are agreed. There is no evidence even suggested by SEBI that as of 26th September, 2002 any price was agreed between Asman and Hitachi for sale/purchase of the Shares. Further as on 26th September, 2002, the subject shares i.e. 9.95 % had not even been acquired by Asman.

5.30 Even otherwise, the parties have submitted sufficient evidence to show that there could not have been a decision on 26.9.2002 by Asman to sell the shares to Hitachi as indeed, further material discussions proceeded only on the Rejection Order dated 16th October, 2002 being passed by the Chairman SEBI on Asman’s Exemption Application.

5.31 Given the above documentary evidence it is clearly established that there could have been no decision by Asman to sell, as there was no question of Hitachi, buying unless the price was agreed and such agreed price would not attract public offer in respect of an inter-se Promoter transfer. The acquisition by Asman from ICICI Bank Limited on 27th September, 2002 was therefore, much prior to any agreement/ decision being reached as at best, as on 27th September, 2002, only discussions or negotiations had taken place between the parties and nothing had been finalised.

5.32 The decision to sell as alleged by SEBI must necessarily imply a binding and enforceable decision/agreement. It would be absurd to suggest that there could be an unilateral decision by one party, without agreement of the other, to sell at a future date and that too at a higher price when no price had been agreed to. Thus, it is obvious that Asman’s decision to acquire shares from ICICI Bank Limited was not based on any decision to sell but was in furtherance of the Management Agreement between Asman and Hitachi and one which clearly falls within the definition of acquisition by “person acting in concert” as defined in Regulation 2(1)(e)(i) of the Takeover Regulations.

5.33 It is indisputable that, (a) given the Management Agreement which continued to be in force until 18th January, 2004; (b) the fact that the Managing Director of the Company remained Mr. N. Parikh, a Lalbhai nominee, until the said date (18th January, 2004) and the Joint Managing Director being Hiatchi nominee until the said date; (c) the fact that there was a common objective and purpose for the acquisition by Asman from ICICI Bank Limited: (d) that the common objective was for the substantial acquisition of shares; (e) this objective was pursuant to the written agreement i.e. the Management Agreement read with the Buy Back Agreement and the Five Party Agreement and (f) the indisputable co-operation between the two, it is evident that the acquisition was one done by Asman acting in concert with Hitachi.

5.34 The allegation to the effect that there was a device adopted by Asman is obviously unfounded and baseless. This allegation is based on an assumption that Asman had decided to acquire the shares to sell to Hitachi and at the same time wanted to avoid the rigors of a public offer and had, therefore, disclosed that this acquisition was one done acting in concert with Hitachi. If there was already a decision to sell i.e. Asman decided that Hitachi should take the shares, then in view of Clause 3(3) of the Five Party Agreement, which permitted Hitachi to get the shares directly from ICICI Bank Limited if As man did not wish to acquire shares, Hitachi could have acquired the shares directly as Asman’s nominee and if any price had been agreed with Asman as a higher price than what ICICI Bank Limited was to get (it had not as of that date), Hitachi could have easily paid the difference directly to Asman not for transfer of or acquisition of any shares but in consideration of Asman releasing their right to acquire the shares from ICICI Bank Limited. An acquisition by Hitachi prior to 27th September, 2002 i.e. prior to the 1st October, 2002 amendment would have been within the creeping acquisition limit, fully legitimate and without any limitation as to price and would not have attracted a public offer at all as Hitachi was holding more than 15% shares by itself. Such an acquisition could have been done subject to regulatory approvals. Even otherwise, had there been a decision to sell by Asman to Hitachi as of 26th September, 2002, then on acquisition by Asman on 27th September, 2002, they could have sold it to Hitachi on the same day or the next day or any time before the 30th September, 2002 i.e. before Takeover Regulations were amended again without any price limitation.

5.35 The subsequent decision to sell on December 24, 2002 cannot at all be the basis for an allegation that when the Management Agreement was very much being acted upon, as it was in September 2002, there was a prior decision to sell by Asman on 26th September, 2002. The reasoning is erroneous. It is thus clear that the entire basis and foundation for the Show Cause Notices alleging that the acquisition by Asman from ICICI Bank Limited was not one done acting in concert with Hitachi is totally unfounded and untenable.

5.36 Assuming for the sake of argument that as of 26th September, 2002, a decision indeed had been taken by Asman to sell the shares to be acquired from ICICI Bank Limited to Hitachi then it would be a classic instance of an acquisition by persons acting in concert. It is clear that the purpose and objective of such an acquisition by Asman would have been with an understanding and agreement with Hitachi to increase Hitachi’s holding in the Company and to hold it on their behalf until it was transferred to Hitachi. In other words, it was an indirect acquisition of shares by Hitachi itself through Asman. However, at the same time, at the time of the acquisition of shares from ICICI Bank Limited, the position of Hitachi and Asman were not that of a buyer and seller but only that Asman had acquired the shares at the instance of Hitachi or with the agreement of Hitachi for their ultimate ownership. This fully satisfies all the criteria required by Regulation 2(1)(e)(i) which defines “persons acting in concert” in respect of a particular acquisition i.e. the common objective or purpose being the ultimate acquisition of shares by Hitachi, this objective being pursuant to an agreement or understanding with Hitachi that they would buy the shares from Asman, and for this objective and with this understanding/ agreement, Asman acquired the shares in the target company with the direct cooperation of Hitachi. Thus, assuming a decision as alleged by SEBI, the question of the Asman Transaction not being one in which Hitachi was acting in concert with Asman, cannot arise.

5.37 In essence, it was held that where shares were purchased by a company ‘A’ with the intention that ultimately those shares would be held by company ‘B’ taking over the company ‘A’ or by direct transfer, then the acquisition by ‘A’ would be one acting in concert with ‘B’. Assuming, without admitting, that as contended by SEBI, at the time of acquisition of shares by Asman from ICICI Bank Limited, Asman had decided to sell and Hitachi had decided by buy the said shares, then clearly that acquisition was with the ultimate common objective of the shares being held by Hitachi and therefore was an acquisition acting in concert with Hitachi and is fully covered by the rationale in the above referred case decided by the Bombay High Court.

5.38 It is the settled law that whether or not parties are acting in concert in respect of a particular acquisition has to be determined in respect of that acquisition and prior conduct is not relevant. In K.K. Modi Vs. SAT reported in (2002) 35 SCL 230 (Tab 4), the Hon’ble Bombay High Court, inter alia, held as follows:-

“……What is relevant is not whether the promoters have acted in concert with each other in managing the target company, but whether they are acting in concert for the purpose of substantial acquisition of shares or voting rights or gaining control over the target company. The fact, therefore, that the target company, MRL, has been managed in the past by the promoters acting in co-operation and concert with each other is hardly relevant for the determining the question whether the promoters are acting in concert in the matter of substantial acquisition of shares or voting rights in the target company.”

Thus evidently, 8(2) disclosure by the Lalbhai Group Companies and Hitachi Group have absolutely no relevance in determination of whether the two were acting in concert in respect of the Asman Transaction.

5.39 Assuming however, that Regulation 8 disclosures can have relevance in respect of such acquisition, then all the more, all disclosures under 8(3) show that Lalbhai Group and Hitachi Group were all throughout persons acting-in-concert and were necessarily acting in concert in respect of the Asman Transaction. As has been submitted above, in the statement of facts, each of the disclosures under Regulation 8(3) of the Takeover Regulation being the disclosures dated June 3, 1999 , August 14, 1999, April 26, 2000, 17th October, 2000, 28th April, 2001 and two disclosures dated 16th April, 2002 show that, based on the information submitted under Regulation 8(2), the Company had disclosed to the Stock Exchange that the Lalbhai Group and Hitachi Group were persons acting in concert and having control over the company and holding more than 15% of shares and voting rights. This was despite the fact that as of 16th April, 2002, the entire Lalbhai Group held altogether only approximately 9.3% shares. It was only because the Lalbhai Group was acting in concert with the Hitachi that they were stated to be holding more than 15% shares and the said total is shown as 44.63 %. It is common knowledge, and in fact SEBI’s own position which is also evident from the Bhagwati Committee Report that Regulation 8(2) disclosures are made to the Company by the shareholders to enable the Company to make a correct disclosure as to persons acting in concert/person in control and holding more than 15% of shares of the company, to the relevant stock exchanges. Thus clearly Regulation 8(3) disclosure was the material disclosure to be taken into consideration by SEBI and not those under the Regulation 8(2) which are being misinterpreted. Even otherwise, since each of the 8(2) disclosures are in respect of Promoters and each of the Promoters who were admittedly acting in concert, had made separate disclosures, it was not necessary for each Promoter to give a list of other Promoters acting in concert with them as they would be unnecessary duplication in so far as Target Company was concerned, being in the joint management of the two Groups. It was not required for each of them to state separately, the shares held by other co-promote rs as persons acting-in-concert, since that was the obvious position under the Management Agreement. It is also clear from Regulation 8(3) disclosures that the company had itself understood the Regulation 8(2) disclosures by each Promoter to mean that the other promoters were acting-in-concert with each other.

5.40 The above submissions on the Regulation 8(2) disclosures is, in fact, covered by the decision of the SAT in Luxury Foams Ltd. v. Adjudicating Officer SEBI (2002) 36 SCL 552, wherein in respect of the acquisition by 10 Appellants acting-in-concert, it was held that “in this context, the object of Regulation should be remembered. It is meant for “information disclosure” to the investors. Had one of the appellants complied with the requirement of disclosing the acquisition of shares made by him and the remaining 10 appellants, it would have been considered sufficient, as such an action would have met with the object for which the Regulation is to be in place.”

5.41 Thus SEBI’s reliance on the Regulation 8(2) disclosures is (i) not a correct interpretation of the disclosures made as each disclosure shows each party as a Promoters of the company and therefore, necessarily the co-promoters as persons acting-in-concert; (ii) Regulation 8(2) disclosure are not relevant in respect of the subject transaction which has to be tested alone to see whether the criteria specified in Regulation 2(1) (e)(i) are satisfied or not and (iii) if at all there was any relevance in the disclosures then the Regulation 8(3) disclosures alone would be relevant.

5.42 In the instant case, the Regulation 8(3) disclosures to the BSE have been set out in detail above, each of which show that Asman and Hitachi Group were shown together as promoters and persons acting in concert from the inception to the last disclosure prior to the Asman Transaction. There can be no reason therefore to depart from that fact. It is also noteworthy that in the said case, the admission of the acquirer during arguments that they were acting in concert was held against the acquirer.

5.43 Lalbhai Group and Hitachi Group were co-promoters acting in concert since January 22, 1999 and in particular, have acted in concert in respect of the Asman Investments Limited (“Asman”) Transaction to acquire the Shares from ICICI Bank Limited. In order to test this contention, it is important to examine the definition of “persons acting in concert” under the Takeover Regulations, the relevant portion of which is reproduced hereinbelow:

“Persons who, for a common objective or purpose of substantial acquisition of shares 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. ………………………………”

As such the necessary ingredients to meet the test of “persons acting in concert” are:

5.44 For the said acquisition, the common objective was to purchase the said Shares from ICICI Bank Limited by Asman exercising its option under the Buy Back Agreement so as to consolidate and increase the joint holding and control to more than 50% (which was likely to become difficult after 1 st October, 2002 on account of the proposed reduction in the “creeping acquisition” limit from 10% to 5%) and to continue the joint management and control under the Management Agreement.

5.45 The common objective was to purchase the said Shares (i.e., 14,59,582 equity shares amounting to 9.94% of the share capital of the target company) so as to enable the co-promoters to jointly cross the 50% holding. The common objective for the said substantial acquisition is borne out by Asman’s letter dated September 26, 2002, to SEBI (Annexure 11 hereto) duly cosigned by Hitachi Group.

5.46 There was a clear understanding between the Lalbhai Group and Hitachi as is evident, inter alia, from:

i. The Management Agreement which continued to be in force as on the relevant date .

ii. The clear understanding as then existed between Asman and Hitachi to increase their joint holding to more than 50% and to jointly infuse funds through rights issue or otherwise.

iii. The intimation to SEBI on September 26, 2002.

iv. The disclosures made to the stock exchanges on September 28, 2002, and October 1, 2002.

5.47 This is borne out by the letter aforesaid dated September 26, 2002 informing SEBI of the intention of Lalbhai Group and Hitachi Group to act in concert and consolidate their mutual shareholding in Target Company. Pursuant to this, Asman repurchased 9.94% of the said shares from ICICI Bank Limited by exercising its call option under clause 5 of the Buy Back Agreement.

It is therefore submitted that the show cause notice proceeds on the erroneous basis that the Acquirer of the said Shares was only Lalbhai Group, when in fact the said Shares had been acquired by Lalbhai Group with the Hitachi Group, as persons acting in concert for the reasons more particularly set out hereinabove.

5.48 As already submitted above, for the reason that it is the particular acquisition which is to be taken into consideration, the Exemption Application made by Asman was of no relevance in respect of determination whether the Asman Transaction was one acting in concert with Hitachi or not. Even otherwise, the said Exemption Application cannot be held against Asman or Hitachi as there was no acquisition under consideration in the said application. The entire application was founded on Asman’s statement that it was redemption of a pledge, that the shares continued to be in their ownership and therefore, that neither Regulation 10, 11 or 12 applied as they applied only to cases of acquisition of shares and/or a voting rights which had no applicability whatsoever.

5.49 Even otherwise, the re ference to a wrong provision of the law in the application cannot in any manner change the factual position that in fact Asman and Hitachi were throughout persons acting-in-concert. It is submitted that the fact that Asman approached SEBI for an exemption does not and cannot change the legal position in respect of the applicability of Regulation 11 in view of the fact that they were copromoters acting in concert and jointly holding the shares in Target Company constituting about 44.63% at the time of the subject acquisition. It is noteworthy that in Eaton Corporation Vs. Chairman, SEBI, [2001] 33 SCL 326 at pg. 338 , the SAT held as follows :

“………….The fact that the companies mentioned therein had approached the respondent seeking exemption in no way changes the legal position…………………”

5.50 The two transactions are completely distinct and cannot have bearing on each other. The Exemption Application was in respect of 26.2% shares pledged in favour of ICICI Bank Limited and a redemption of that pledge founded on the basis that no acquisition was taking place. The Asman Transaction was clearly different in that Asman sought to acquire from ICICI Bank Limited only 9.95% shares. Indeed the Rejection Order of the Chairman SEBI was passed on the basis that the application seeks exemption claiming redemption of shares but that on the facts there would be no redemption as the shares were in the ownership of ICICI Bank Limited. Thus the order of SEBI itself distinguishes between a redemption of shares and acquisition of shares. These were therefore two separate and distinct nature of transactions.

5.51 Thus the mere fact that Asman referred to Regulation 10 in a format for an Exemption Application instead of referring to the column as “Inapplicable” or Regulation 11, cannot be used against Asman and /or Hitachi to allege that for the Asman Transaction, Hitachi and Asman were not persons acting in concert. It is a settled position of law that the substance of the transaction has to be seen and not the form. The application which relied on Annexure III thereto for its grounds for exemption referred to in detail the arrangements between Hitachi and Asman i.e. the Management Agreement and joint control.

5.52 To hold that in respect of Asman’s transaction, Asman and Hitachi were not persons acting in concert, although they were then admittedly co-promoters and the Management Agreement continued to be in force, would be to render the provisions of the Takeover Regulations redundant and to defeat the very purpose. If they were not persons acting in concert for the said acquisition because of the Regulation 8(2) disclosures and the Exemption Application, then any acquisition by each of the parties would be independent of each other and not acting in concert. In such a circum stance, each party could have continued to acquire upto the creeping acquisition limit in each financial year and thereby to ultimately cross 75% holding together while each individually holding less than 75% but more than 15%. In fact, if 8(2) disclosures and the Exemption Application were to be read in the manner as SEBI is purporting to do for the sake of these Show Cause Notices, then if the Exemption Application had been allowed, Asman’s holding would have increased to 35.2% and with Hitachi already holding 35.2%, that would have brought their total holding to 70.4%. Each party could then have acquired upto 5% even after 30th September 2002 in the creeping acquisition route bringing each parties’ holding to 40.2%.

5.53 It is submitted that SEBI is estopped from taking a view that the Lalbhai Group and Hitachi Group were not “persons acting in concert” with respect to the Asman Transaction. Whether or not, in a particular transaction, persons were acting in concert, is a question of fact and fact alone. The fact that Asman and Hitachi were acting in concert in respect of the acquisition of 9.94% share from ICICI was specifically intimated to SEBI jointly by the parties vide letter dated 26th September, 2002. At that time all disclosures made by Asman and Hitachi under Regulations 8(2) as also by the Company under Regulation 8(3) to the Stock Exchange were already in the knowledge of SEBI. So was the Exemption Application as was the Company’s letter dated 25th September, 2002 . Yet, SEBI did not inform either Asman or Hitachi that they would not accept the intimation of the fact that the two were acting in concert as communicated vide letter dated 26th September, 2002 nor did it seek to proceed against Asman for any alleged violation of the Takeover Regulations. On the contrary, by remaining silent to the said letter SEBI held out a representation to both Asman and Hitachi that their communication had been accepted.

5.54 Subsequent disclosures were made by ICICI to SEBI on 30th September, 2002 informing of the sale of the concerned shares at Rs. 33.53 per share. Disclosures were made to the Stock Exchanges by the Company under Regulation 7(1A) and 7(3) on 30th September, 2002 and 1st October, 2002 clearly disclosing that the acquisition was one in which Asman and Hitachi were “persons acting in concert”. Once again despite this being in the knowledge of SEBI, SEBI did not seek to contend that the said disclosures were incorrect or that the two could not be stated to be acting in concert.

5.55 Pursuant to the order of rejection passed by SEBI on 16th October, 2002 on Asman’s application for exemption, serious discussions had commenced between Hitachi and Asman as to steps which could be taken to infuse funds into the Company to save the Company from being declared a sick industrial company as it finances were such that it would inevitably lead to it being declared sick unless funds were infused. These discussions included possible acquisition of shares by Hitachi from Asman only in order that the said objective be achieved by one or the other co-promoters stepping in to do so.

5.56 Thus on 29th October, 2002 officials of Hitachi met with Takeover Division of SEBI. During this discussion, SEBI was asked to confirm that in accordance with the provisions of Regulation 20(4) of the Takeover Regulations, the inter se transfer between the Co-promoters i.e. Hitachi and Lalbhai Group would be exempted, if the price paid by Hitachi to Lalbhai Group was within 125% of Rs. 33.53% per share i.e. the price paid by Lalbhai Group/ Asman acting in concert with Hitachi while acquiring shares from ICICI Bank Limited. The understanding as to the result of the meeting was conveyed vide Hitachi’s letter dated 7th November, 2002. Subsequently, vide letter dated 29th November, 2002, SEBI specifically clarified with regard to queries raised in para 1 of Hitachi’s letter dated 7th November, 2002 that the exempted price would be upto 25% more than the price based on the parameters in terms of Regulation 20(4) and /or 20(5) of the Take over Regulation.

5.57 In this letter also despite clear knowledge of a possible sale of shares by Asman, SEBI did not reserve any position with regard to the transaction between Asman/Lalbhai Group and ICICI Bank Limited not being one in which Hitachi and Asman were acting in concert. This was despite the fact that SEBI was fully aware of the facts and circumstances which are now cited in the notices issued to Asman as well as Hitachi. Had SEBI so informed or even cautioned in that regard, Hitachi would not have agreed to any price which would have resulted in an obligation to make a public offer as Hitachi did not have the budget to do so even if it meant that the Company was declared a sick industrial company and all shareholders of the Company therefore suffered as a consequence. SEBI therefore has, based on its representation that it had accepted that the transaction between Lalbhai Group and ICICI Bank Limited was one in which Hitachi and Lalbhai Group were “persons acting in concert” and therefore could be taken into consideration for the 25% price margin for inter se promoter transfer to be exempted, led Hitachi to rely on the said representation and act to its detriment in negotiating and finally agreeing with Asman to pay the price of Rs.41.63 per share, as finally concluded in its agreement with Asman executed on 24th December, 2002 which it would not have done, but for the conduct of SEBI.

5.58 The above facts may be looked at from another perspective. Had SEBI immediately proceeded to issue a show cause notice to Asman after the acquisition of shares from ICICI Bank Limited i.e. Asman Transaction, until that issue was decided the question of Hitachi proceeding to discuss or negotiate and finally enter into a transaction with Asman would not have arisen. The fact that Asman was subsequently considering to sell off its shares was evident to SEBI when Hitachi officials met with SEBI on 29th October, 2002 and officially wrote on 7th November, 2002. Yet SEBI did not choose to issue a show cause notic e to Asman based on any alleged prior decision to sell existing as of 26th September, 2002. Had they done so, the question of any acquisition by Hitachi from Asman at that stage would not have arisen even if it meant that the Company became a sick industrial company under SICA as Hitachi’s budget did not allow for a public offer.

5.59 Thus, having acquiesced in the Asman Transaction by silence and conduct in failing to seek to prevent an act being done despite being in full notice of the acts, firstly having been done in relation to Asman Transaction and likelihood of it being done in respect of Hitachi Transaction, induced a reasonable belief in Hitachi that it could proceed to purchase the Shares at a price within 25% of the price paid by Asman to ICICI Bank Limited without having to make a public offer and Hitachi altered its position by relying on the acquiescence, inducement and conduct of SEBI, it is no longer open for SEBI to seek to challenge the Hitachi Transaction as being in violation of the Take over Regulations. Indeed, if at all that Hitachi Transaction was otherwise to attract a public offer which it did not, the conduct of SEBI amounts to deemed exemption under Regulation 3(1)(l) of the Takeover Regulations. This is particularly so as the Hitachi Transaction was for the benefit of the Company i.e. to save the Company from becoming a sick industrial company under SICA and thereby in the interest of its minority shareholders. It is common knowledge that had the Company gone into BIFR its stock value would have gone under par and the small investors would have also suffered. Indeed at the relevant time the stock market price of its shares was hardly Rs.13/- or so but only due to Hitachi’s commitment to the company to infuse funds by subscribing to unsubscribed shares in the rights issue, the current market rate is above Rs.25/-per share, an appreciation from which only the small investors have gained.

5.60 In view of the above facts, it is submitted that SEBI is estopped from contending that, as a matter of fact Hitachi and Lalbhai Group/ Asman were not “persons acting in concert” with respect to the Asman Transaction or from resiling from the representation held out to Hitachi, by keeping silent over several months, despite knowledge of all facts , that Hitachi and Asman’s disclosure of having acted in concert in the subject transaction had been accepted (and not contested) by SEBI.

5.61 Regulations 44 seeks to authorise the imposition of penalties as is even referred to by SEBI in the Show Cause Notice issued to Asman and Hitachi. In the Asman Notice in para 9, SEBI has contended that Asman is “liable for penal action under Regulations and SEBI Act, 1992”. A similar statement is there in the Hitachi Show Cause Notice in para 8. These regulations under which the actions are contemplated are stated to be Regulations 44 and 45(6). A mere perusal of Regulation 44, particularly Regulations 44(b), (c), (d), (e), (f), (g) and (i) would show that they are penal i.e. they impose penalties.

5.62 Section 15(H) specifically deals with penalties in regard to failure to make public announcement to acquire shares. Regulation 15(F) provides the factors to be taken into account by the Adjudicating Officer while adjudging the quantum of penalty which includes fac tors such as any disproportionate gain to the party concerned and the amount of loss to the investors.

5.63 Without prejudice to the submissions that Regulation 44 is ultra vires the Act, an issue which is not being dealt with in detail before SEBI as SEBI has no authority to declare its own Regulations ultra vires, it is submitted that the Show Cause Notice is vague as it does not specify which of the penalties under Regulation 44 and what penalties under Regulation 45(6) or Section 15(H) of the Act are proposed to be taken against Hitachi. It is assumed that any such action can only be taken if there is a determination to the effect that Hitachi has indeed violated the Takeover Regulations and therefore that it is only after deciding whether the show Cause Notice is to be withdrawn or not that an opportunity would be given to deal with the actions to be considered under Regulations 44/45(6) of the Takeover Regulations and Section 15(H) of the Act. It is submitted that, at this stage, in view of the vagueness in the Show Cause Notice it is not possible for Hitachi to demonstrate as to why any of the penal actions proposed to be taken cannot be resorted to. It is only if the proposed action is intimated that a suitable response with factual basis in support thereof can be given. All rights in this regard are therefore reserved.

6. Consideration of Issues

6.1 I have considered the facts and circumstances of the case, show cause notice issued to Hitachi group, the acquirers, their written and oral submissions and also the relevant documents.

6.2 The following issues arise for consideration, in so far as the acquisition of 19.37% equity in the Target Company by Hitachi Group is concerned.

i) Whether the acquisition of 19.37% equity in the target company by the ac quirers (Hitachi group) from the Lalbhai group on 18th January 2003, was eligible for exemption as in terms of Regulation 3(1)(e)(iii)(a) and (b) of the Takeover Regulations or whether the said acquisition was in violation of Regulation 11(1) and/ or 12 o f the Takeover Regulation.

ii) Action/ direction, if any, warranted.

7. First Issue
Whether the acquisition of 19.37% equity in the target company by the acquirers (Hitachi group) from the Lalbhai group on 18th January 2003, was eligible for exemption as in terms of Regulation 3(1)(e)(iii)(a) and (b) of the Takeover Regulations or whether the said acquisition was in violation of Regulation 11(1) and/ or 12 of the Takeover Regulation.

7.1 It is observed that the Hitachi group had acquired 28,41,062 shares (19.3 7%) in the target company from the Lalbhai group on 18th January 2003. The acquisition had been made @ Rs.41.63 per share. 34

7.2 In terms of Regulation 11(1) as it existed at the time of acquisition in question, no acquirer, who, together with person actin g in concert with him, has acquired, in accordance with the provisions of law, 15% or more but less than 75% of the shares or voting rights in a company shall acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him to exercise more than 5% of the voting rights in any financial year ending 31 March unless such acquirer makes a public announcement to acquire shares in accordance with the Regulations.

7.3 It is observed that, as on the date of the said acquisition of 28,41,062 shares in the company from the Lalbhai group, the Hitachi group was holding 35.2% (i.e. more than 15%) of the shares in the company. As the acquisition of 19.37% in the company from Lalbhai Group was higher than the permitted annual creeping acquisition limit of 5% specified in the Takeover Regulations, the acquirer attracted the provision of Regulation 11(1) relating to consolidation of holdings and as the said acquisition had taken the shareholding of Hitachi gro up in the Target company beyond the simple majority of 51% and, with the exit of Lalbhai Group, Hitachi group had gained the sole control of the Company, the provisions of Regulation 12 ibid relating to acquisition of control had also been attracted. It is , however, relevant to examine whether the acquisition would be eligible for exemption in terms of regulation 3 of the Takeover Regulations.

7.4 According to the Regulation 3(1)(e)(iii) (a)/ (b) ibid, any interse transfer of shares among Indian promoters and foreign collaborators who are shareholders or among promoters would be exempt, from the provisions of Regulations 10, 11 and 12 of the Takeover Regulations subject to certain conditions.

7.5 As the Hitachi group was holding more than 15% equity stake in the Target Company at the time of the incremental acquisition, provisions of regulation 10 ibid are not relevant here.

7.6 The exemption from regulation 11(1) is, however, subject to the following:

Transferors and transferees should have been holding shares in the target company for a period of 3 years prior to the proposed acquisition.

The transferors and transferees should have complied with Regulations 6, 7 and 8 (relating to disclosures) of the Takeover Regulations.

The inter se transfer of shares should have been at a price not exceeding 25% of the price as determined in terms of sub regulation (4) and (5) of Regulation 20.

7.7 It is clear from the facts of the case that Lalbhai group was the Indian promoter and Hitachi group, were foreign collaborators, having shareholding in the target company. It is also noted that both the groups had become co-promoters of the target company, exercising joint control over its affairs. It is also seen that both Lalbhai group and Hitachi group had been holding shares in the target company for a period of more than 3 years prior to the said transfer and had made disclosure of the acquisition and generally complied with the regulation 6, 7 and 8 ibid, albeit with some lapses in disclosing clearly “persons acting in concert”, what is relevant to be examined, therefore, is whether the price paid by the Hitachi group to the Lalbhai group was within 25% of the price determined in terms of sub regulation 20(4) and (5) ibid.

7.8 Regulation 20 of the Takeover Regulations relates to “offer price”, it specifies the minimum price at which the acquirer shall offer to buy shares from public through public announcement. While Regulation 20(5) is applicable in cases where shares of target company are infrequently traded, Regulation 20(4) applies to frequently traded cases. As the shares of the target company have been frequently traded, the provisions of Regulations 20(4) are relevant in the instant case.

7.9 In terms of Regulation 20(4) of the Takeover Regulations, the offer price shall be the highest of:

i) Negotiated price under the agreement, for acquisition of shares beyond the specified percentage.

ii) The price paid by acquirer or persons acting in concert with him, for acquisition, if any, including by way of allotment in a public or rights or preferential issue of the company during the 26 week period prior to the date of public announcement whichever is higher.

iii) The average of the weekly high and low of the closing price of the shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during 26 weeks or the average of daily high and low of the closing price of the shares as quoted on the stock exchange where the shares of the company are most frequently traded in the 2 weeks preceding the date of public announcement whichever is higher.

7.10 As per regulation 3(i) & (iii) quoted earlier, to qualify for exemption from provisions of Regulation 11(1) and 12 ibid, the interse transfer of shares among the Indian promoters (Lalbhai group) and the foreign collaborators who are shareholders (Hitachi group) should not have been at a price exceeding 25% of the price as determined as above under regulation 20(4) ibid.

7.11 Looked, through the drafting haziness, at the provisions of explanation (1) to regulation 3(1)(e) and regulation 20(4), it is clear that the price determined in accordance with (ii) and (iii) of paragraph 7.9 above are relevant for the purpose of the said explanation (1).

7.12 It is observed that the acquirers (Hitachi group) had not acquired any shares in the target company or had been allotted in a public or rights or preferential issue of the shares of the company during the 26 weeks prior to the date of the impugned transaction. It, therefore, needs to be examined whether any “person ac ting in concert” with Hitachi group for acquisition had acquired any shares in the company or had been allotted any shares in the company’s public or rights or preferential issue during the 26 weeks period. In this context, it is contended that the earlier acquisition of 9.94% equity in the target company by the Lalbhai group from ICICI bank in September 2002 was an acquisition by the Lalbhai group with Hitachi group as persons acting in concert.

7.13 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 74% 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 aforesaid 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 ICI CI Bank Ltd was only with the intent to transfer the same along with its existing holdings to Hitachi group.

7.14 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”. While the Lalbhai group’s restriction of its acquisition to below 10%, though indisputably 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 purpose of the acquisition.

7.15 In terms of Regulation 2(1)(e)(i) of the Take over Regulations, person acting in concert comprises “persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or info rmal) 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, 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 Target company and Hitachi group’s acquiring the Lalbhai group’s stake in the Target 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 transferring their entire stake in the Target Company to the Hitachi Group and gaining a 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.

7.16 In defence of Hitachi Group’s argument that Hitachi and Lalbhai Groups were persons acting in conc ert for the acquisition of 9.94% equity in the Target Company by the Lalbhai Group from ICICI Bank Ltd., observations of SAT in the case of Modi vs. SEBI have been quoted vide para 5.38 above. It appears that the SAT’s observations have been either probably misread or quoted possibly to mislead. In fact, the SAT’s observations run counter to the Hitachi Group’s stand. As observed by the SAT, the facts and circumstances of the case would be relevant to determine whether persons are persons acting in concert for the common objective of substantial acquisition. There is no denying the fact that Lalbhai & Hitachi Groups had become copromoters of the Target Company and they were acting as persons in concert – notwithstanding their lapse in reporting/ disclosing that fact clearly to the Target Company 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. In my view, in the matter of acquisition of the said 9.94% equity in the target company by Lalbhai group, the Lalbhai group cannot be deemed to have acted as person in concert with Hitachi Group or vice-versa, as contemplated by the Takeover Regulations. Thus, the price (Rs.33.59) at which Lalbhai group acquired 9.94% equity stake in the Target Company in September 2002 would be irrelevant for the purpose of the said explanation (1).

7.17 The foregoing analysis leaves the price to be determined as per (iii) of para 7.9 above as relevant base price for the purpose of the said explanation (1). It is ascertained that the average of weekly high and low of closing price of the target company as quoted on National Stock Exchange during 26 weeks period works out to approximately Rs.18/- per share. According to the letter of explanation (i) of regulation 3(i)(e), the price paid by the acquirer should not have exceeded 25% of the price as determined above. Going by the spirit of the explanation, however, one can presume that the explanation means “at a price exceeding 25% over and above the price as determined in terms of sub-regulation (4) and (5) of regulation 20.” The price actually paid by Hitachi group to the Lalbhai group @ Rs.41.63 per share far exceeded the limit specified in the said explanation, in whatever way it is interpreted i.e. either according to the patent letter or as per the presumed intent of the explanation. In view of the above, it is clear that Hitachi group was not entitled to have the benefit of exemption from the provision of Regulation 11(1) of the Takeover Regulation for their acquisition of 19.37% stake in the equity of target company by way of interse transfer from the Indian promoters.

7.18 Apriori, the Hitachi Group did not qualify for the exemption from the provisions of Regulation 12 of the Takeover Regulation relating to acquisition of control, read with regulation explanation (i) of regulation 3(i)(e) (iii) either.

7.19 For corroboration of its contention about non-refutation by SEBI of the claim that Lalbhai group and Hitachi group were “persons acting in concert” for the acquisition of 9.94% stake in the Target Company from ICICI Bank Ltd., by Lalbhai group, Hitachi group has quoted its letter of 7th November 2002 to SEBI and SEBI’s reply of 29th November 2002. Significantly, I find, Hitachi group has failed to refer to SEBI’s letter of 12th November 2002, which reads as under:

“Please refer to your letter dated November 7, 2002 on the captioned subject.

This is to place on record that while seeking clarifications over telephone, certain facts which you have stated in your aforesaid letter have not been brought to our knowledge. Further, even during the meeting no specific facts were mentioned and only a general clarification was given. Therefore, we are not in a position to confirm whether your understanding as stated in your aforesaid letter is accurate and complete. You are, therefore, advised to await our written clarification in this regard.”

It is seen that SEBI has not given any confirmation whatsoever about the contended issue. Even the letter of 29th November 2002 from SEBI merely states the regulatory provisions. The chain of events and the laboured arguments of the Hitachi group, if looked at holistically, indicate that Hitachi Group’s letter of November 7, 2002 to SEBI was probably an anticipatory action.

7.20 In the absence of any specific and direct reference to SEBI on whether the Lalbhai group and Hitachi group could be deemed to be “persons acting in concert” for the said acquisition of 9.94% stake in the target company by Lalbhai group and in the absence of any specific confrmation from SEBI in this regard, the Hitachi Group’s imputation of “acquiescence” on the part of the Regulator and invocation of estoppel is, in my considered view, nothing but chicanery. In any case noncognizance or non-prevention or delayed action if any, on the part of enforcement authority or Regulator, for any reason will not alter the legal or regulatory position; nor will it absolve one’s responsibility or obligation to abide by law or regulation.

7.21 It is noted from the submissions of the Hitachi Group (vide para 5.57 above) that the Hitachi Group’s declared objective was to acquire the entire stake of the Indian promoters in the Target company at a price which would not result in an obligation to make a public offer, “even if it meant that the company was declared as a sick unit and all shareholders of the company therefore suffered as a consequence”. While the purpose of the said acquisition of the Hitachi group from the Lalbhai group at a price substantially higher than the then ruling market price was to gain the majority equity stake in and sole control and management of the target company, the avowed reason for seeking avoidance of a public offer was budgetary constraint. It is also noted that by taking up unsubscribed portion of the subsequent Rights issue, the Hitachi group has since jacked up its equity stake in the target company to around 70%, without making a public offer, for the stated purpose of infusion of funds into the company. Whatever be the constraint or motive, the acquisition should have been in conformity with the Takeover Regulations.

7.22 As Hitachi group had made creeping acquisition of 19.37% of the equity stake in the Target Company in financial year ended March 2003, beyond the permitted level of 5% and by which Hitachi group gained sole control of the Target Company and the price paid for the acquisition exceeded the ceiling prescribed under explanation (1) to regulation 3(i)(e), the acquisition attracted the provisions of 11(1) and 12 of the Takeover Regulations and therefore, the acquirers, the Hitachi group incurred an obligation to make a public announcement for acquiring shares from the public in accordance with the takeover regulations. The acquirers, however, did not meet the obligations.

7.23 In view of the aforesaid, I find that the Hitachi Group, the Acquirers have violated regulations 11(1) and 12 read with sub-regulations (1) and (3) of regulations 14, as the Acquirers have acquired additional 19.37% shares/ voting rights in the Target company, and also acquired sole control of the company without making public announcement to acquire shares from the public in accordance with the said Regulations.

7.24 In terms of sub regulation (12) of regulation 22, the payment of consideration to the shareholders of the Target Company should have been paid within 30 days of the closure of the offer. The maximum time period provided in the said Regulations for completing the offer formalities in respect of an open offer is 120 days from the date of public announcement. The public announcement in the instant case ought to have been made taking 24.12.2002 as reference date i.e. when the Acquirers entered into an agreement with the Lalbhai group to acquire 19.37% shares/ voting rights of the Target Company and thus the entire offer process would have been completed latest by 30.04.2003. Since no public announcement for acquisition of shares of the Target Company has been made by the Acquirers when the Regulations were triggered i.e. on 24.12.2002 the acquirers (Hitachi group) has also incurred an obligation to pay interest, as may be directed by SEBI, to the shareholders.

7.25 It is noted that Hitachi group has taken up unsubscribed portion of the recent rights issue of the target company and consequently its equity stake in the target company stands hiked at around 70%. It is also noted that for hiking its stake in the target company further, the Hitachi group, would need to abide by the relevant guidelines relating to Foreign Direct Investment.

8. Second Issue Action/ direction, if any, warranted

8.1 In view of the findings made above I find this as a fit case to direct the acquirers to make a public announcement as required under chapter III of the said Regulations.

8.2 I also find that it is an appropriate case to initiate adjudication proceedings under Section 15H of the SEBI Act, 1992 against Hitachi Group for their failure to make public announcement when they triggered the Regulations on 24/12/2002. Order appointing Adjudication Officer in this regard will be issued separately.

9. ORDER

9.1 In view of the findings made above, and in the interest of securities market and for protection of interest of investors, I, in exercise of the powers conferred upon me under Section 19 of the SEBI Act, 1992 read with Section 11 B further read with regulations 44 and 45 of the Takeover Regulations, hereby direct Hitachi Home and Life Solutions Inc. and Hitachi India Pvt. Ltd., the Acquirers to make public announcement as required under Chapter III of the said Regulations in terms of regulation 11(1) and 12 and subject to the relevant guidelines relating to foreign direct investment, taking 24.12.2002 as the reference date for calculation of offer price. The public announcement shall be made within 45 days of the date of this order.

9.2 I also hereby direct the Acquirers to pay interest @ 10% per annum on the offer price, from 01.05.2003 till the actual date of payment of consideration by the Acquirers to all the shareholders who tender the shares in the open offer to be made by the Acquirers in terms of this Order and whose shares are accepted by the Acquirers.

9.3 This order shall come into force with immediate effect.