ORDER
A.K. Batra, Member
1. BACKGROUND
1.1 Lotus Chocolate Company Ltd. (hereinafter referred to as ‘the target company’) is a public limited company incorporated under the Companies Act, 1956 and having its registered office at 403, Fourth Floor, Diamond House, Panjagutta, Hyderabad – 500 082.
1.2 The equity shares of the target company are listed on The Stock Exchange, Mumbai and Hyderabad Stock Exchange Ltd.
1.3 Shri Devabhaktuni Durga Prasad, presently the promoter director of the target company (hereinafter referred to as ‘the acquirer’), acting in concert with one Shri Alapati Ramakrishna, had in November 2003, acquired 54,18,838 (42.21%) shares of the target company by entering into a Sale and Purchase Agreement with M/s Network Foods International Ltd. (NFIL), foreign promoters of the target company. Consequent to the said acquisition, Shri Devabhaktuni Durga Prasad and Shri Alapati Ramakrishna had made a public announcement on August 27, 2003, under regulation 10 and 12 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (hereinafter referred to as the ‘Takeover Regulations’) and had acquired 16,201 (0.13%) equity shares of the target company in the public offer which closed on November 13, 2003. Consequent to the said acquisition of 16,201 shares of the target company, the shareholding of Shri Devabhaktuni Durga Prasad and Shri Alapati Ramakrishna increased to 54,35,039 shares (representing approximately 42.35% of the voting rights ) of the target company.
1.4 The acquirer now proposes to acquire the total residual holding of 12,84,020 equity shares (approximately 9.99% of the voting rights) of the target company, remaining with the erstwhile foreign promoter, NFIL. After the proposed acquisition, the voting rights of the acquirer in the target company will increase from 27.03% to 37.02%. As a result of the proposed acquisition the shareholding (voting rights) of acquirer, along with Shri Alapati Ramakrishna (together being Indian Promoters) collectively would increase from 37.63% to 47.62%.
2. APPLICATION FOR EXEMPTION
2.1 The acquirer made an application dated August 23, 2004 under clause (l) of sub-regulation (1) of regulation 3 of the Takeover Regulations, seeking exemption from the applicability of regulation 11(1) of the Takeover Regulations, in respect of the proposed acquisition of equity shares by him. As per the said application, the shareholding pattern of the target company before and after the proposed acquisition, is as follows:
—————————————————————————————
Shareholders Number of Before the proposed After the proposed
category registered acquisition (as on 13-08 acquisition
shareholders 2004)
as on date of
application
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Number of % of shares/ Number of % of
shares/total total voting shares/voting shares/
voting rights capital held rights voting
held rights
-----------------------------------------------------------------------------------------
Promoter group 2 2647040 20.61 1363020 10.61
including foreign
promoter (NFIL)
and Shri Alapati
Ramakrishna
Acquirer 1 3471519 27.03 4755539 37.03
FIs/Banks 4 592900 4.62 592900 4.62
FIIs/NRIs/OCBs 3 2801 0.02 2801 0.02
Private Corporate 142 229991 1.80 229991 1.80
bodies
Indian Public 16274 5896798 45.92 5896798 45.92
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Total 16426 12841049 100 12841049 100
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3. SUBMISSIONS IN THE EXEMPTION APPLICATION
In the application dated August 23, 2004, the acquirer has interalia submitted that:
i) in the public offer made in the year 2003 to acquire 25,68,210 shares from the public, only 16,201 shares were tendered. The expenses incurred for the said offer was more than Rs. 6 lakhs, as against which only Rs. 16,200 was paid as consideration, which constituted only 2.64 % of the expenses incurred for the public offer;
ii) in the proposed acquisition, the equity shares remaining with the foreign promoters, NFIL, will be purchased at the rate of Rs. 0.45 per share ;
iii) the proposed offer comprises inter-se transfer amongst promoters of the target company, in which the foreign promoter, NFIL, proposes to transfer its entire residual share holding in favour of the Indian promoter i.e. the acquirer. Since the acquirer has not held the shares acquired earlier for 3 years period prior to the said acquisition, the exemption provided under regulation 3(1)(e)(iii) of the Takeover Regulations cannot be availed.
iv) there will be no change in control and management of the target company consequent to the proposed acquisition.
v) the acquirer had made considerable investment in the capital of the target company, besides increasing funds to meet working capital requirement with the aim to revive the target company.
vi) the board of directors of the target company made reference to the Board for Industrial and Financial Reconstruction on April 19, 2004 and the target company has become a sick industry company within the meaning of section 3(1) (o) of Sick Industrial Companies (Special Provisions) Act, 1985;
vii) the acquirer intends to consolidate his holding in the target company and he may not be put to further financial hardships by requiring him to make public offer in terms of regulation 11( 1) of the Takeover Regulations.
4. RECOMMENDATION OF THE TAKEOVER PANEL
4.1 The aforesaid application dated August 23, 2004 was forwarded to the Takeover Panel in terms of sub-regulation (4) of regulation 4 of the Takeover Regulations. The Takeover Panel vide its report dated September 09, 2004 has recommended as under –
“On the facts stated, it appears that on 19th April 2004, the Board of Directors of the target Company has already made a reference to BIFR under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985. The response from the public shareholders of the target company in the previous public offer made by the Acquirer was lukewarm and the cost incurred in that connection was exorbitant and disproportionate. The intended acquisition of equity shares by the Acquirer is from a foreign promoter of the target company but within three years of the foreign promoter holding the said shares. In the circumstances, the grant of exemption as sought is recommended.”
5.0 FINDINGS
5.1 I have carefully gone through the application dated August 23, 2004 and taken into consideration the relevant material available on record and the above mentioned recommendation of the Takeover Panel. I find that the proposed acquisition would be pursuant to inter se transfer of shares amongst promoters of the target company, wherein the foreign promoter, NFIL, will transfer its entire share holding (approx. 10%) to the Indian promoter i.e. the acquirer. I have also noted that in terms of regulation 3(1)(e)(iii) of the Takeover Regulations, provisions of regulation 10, 11 and 12 of the Takeover Regulations do not apply in case of acquisition of shares pursuant to inter se transfer of shares amongst Indian promoters and Foreign collaborators who are shareholders, subject inter alia to the condition that the transferor and transferee have been holding the shares in the target company for a period of 3 years prior to the proposed acquisition. However, in the present case, the acquirer has not held shares of the target company for a period of 3 years prior to the proposed acquisition and therefore, the acquirer is not entitled for the automatic exemption as provided under regulation 3(1)(e)(iii) of the Takeover Regulations.
5.2 I further observe that in the public offer made by the acquirer and Shri Alapati Ramakrishna (acting in concert with the acquirer) in August 2003, as mentioned herein above, only 16,201 shares (0.13%) were tendered. The acquirer had to incur an expense of more than Rs. 6 lakhs for the public offer, while only Rs. 16,200 was paid as consideration. I have also noted that the acquirer had already acquired the control over the target company in 2003 and an exit opportunity was given to the public shareholders of the target company at the time of change in control. Therefore, the proposed acquisition would not result in any change in control and the proposed transaction is to consolidate the shareholding of the Indian Promoter by acquiring the balance shareholding of the foreign promoter. I have also taken into consideration that the Board of Directors of the target company has already made a reference to BIFR under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985.
5.3 In view of the above facts and circumstances, I agree with the recommendations of the Takeover Panel and consider the present case as a fit case for granting exemption from making a public announcement as required under regulation 11 (1) of the Takeover Regulations.
6. ORDER
6.1 In view of the above findings, I, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992, read with sub – regulation (6) of regulation 4 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, hereby grant exemption to the acquirer, namely Shri Devabhaktuni Durga Prasad from complying with provisions of Regulation 11(1) of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 with regard to the proposed acquisition of 12,84,020 equity shares of the target company.
6.2 The acquirer shall complete the proposed transaction within 30 days from the date of the order and shall file a report as required under regulation 3(4) read with regulation 3(5) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 with SEBI.