Decided on November 19,2010

Dr. Arvind Kumar B Shah (HUF) and Narit Tradecom Private Limited Appellant
The Securities and Exchange Board of India Respondents


N.K. Sodhi, J. - (1.) WHETHER , in the facts and circumstances of the case, the appellants should be granted exemption from complying with the provisions of Regulations 10 and 11(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter called the takeover code) is the short question that arises for our consideration. Facts giving rise to this appeal are not in dispute and these may first be noticed.
(2.) ARVIND Remedies Ltd. is a company incorporated under the provisions of the Companies Act, 1956 with its registered office at Chennai and its shares are listed on the Bombay Stock Exchange Ltd. and National Stock Exchange of India Ltd. It shall be referred to hereinafter as the target company. It is operating in the pharmaceutical sector and its main business activity is the manufacture and marketing of allopathic and ayurvedic formulations. The promoter shareholding in the target company was 25.32 per cent including 1.51 per cent of the first appellant and the remaining 74.68 per cent of the shares were held by the public. The target company has a plant at Kakallur in the state of Tamilnadu which, according to it, is running in its full capacity with no scope for further expansion. Due to heavy competition in the pharmaceutical sector coupled with the escalation of the cost of raw materials and operating costs, the target company decided to expand its business in the year 2006 by setting up a plant at Haridwar in the state of Uttarakhand because of some fiscal benefits offered in the form of zero excise duty etc. by the state government. This plant in Haridwar was wound up in the year 2009 and the target company decided to set up a new project for the manufacture of value added products in the district of Kanchipuram (Tamilnadu). This project was appraised by ITCOT Consultancy and Services Ltd. This agency in its techno feasibility report observed that the project was technically feasible, commercially viable and merited consideration for the sanction of financial assistance. The cost of the project was worked out at Rs. 250.08 crores. With this appraisal report, the target company approached various banks for financial assistance and after discussions, three banks namely, United Bank of India, Karur Vysya Bank and Punjab National Bank agreed to sanction a term loan of Rs. 184 crores for the project. The consortium of these three banks imposed some pre -disbursement conditions, one of which was that the target company should raise upfront equity of Rs. 50 crores. This is what the United Bank of India by its letter of October 12, 2009 informed the target company. In this connection, you are advised to apprise us on the steps being taken by you for raising of upfront equity of Rs. 50 Crores, supported by a Chartered Accountant certificate before seeking disbursement of term loan. Identical communications were received by the target company from the other two members of the consortium as well.
(3.) SINCE the banks had put a condition of bringing in a margin amount of Rs. 50 crores in the form of equity, the target company approached its promoter group to contribute to the extent of Rs. 50 crores to meet the requirement for financing the project. The appellants who are the promoters of the target company consented for contributing the necessary finance for the project. Accordingly, the Board of Directors of the target company in their meeting held on September 7, 2009 decided to issue shares on preferential basis to the appellants in order to meet the condition imposed by the banks for releasing the term loan. It is the requirement of Section 81(1A) of the Companies Act that if further share capital is to be offered to persons other than all the existing shareholders of a company, then approval of the shareholders of that company has to be obtained by way of a special resolution. The Board of Directors of the target company resolved in their aforesaid meeting to seek the approval of the shareholders by way of special resolution through postal ballot. In pursuance to this resolution, a notice dated September 12, 2009 was issued by the target company to all its shareholders proposing to issue 22,22,50,000 equity shares of Rs. 1 each at a premium of Rs. 1.25 each to the following three entities. (1) Dr. Arvind Kumar B. Shah (HUF), the first appellant - 3,11,46,650 shares (7.27%). (2) M/s. Narit Tradecom Pvt. Ltd., the second appellant and an associate of the first appellant - 12,44,43,350 shares (25.80%). (3) M/s. Aryaman Commerce Pvt. Ltd. - 6,66,60,000 shares (13.82%). In the explanatory statement attached to the notice, every minute detail in regard to the preferential allotment was furnished to the shareholders and the object of the preferential issue was brought to the notice of the shareholders in the following words: The Banks have sanctioned the Term Loans with the condition that margin shall be brought in only by way of equity. The Balance of Rs. 50.00 crores which is required to be brought by way of equity as per the stipulation of the Banks, has to be mobilized on urgent basis as margin, without which the advance towards civil construction work, machinery, etc, which is aggregating to Rs. 214 crores in the whole project will not be released by the Banks as Term Loan. At this juncture, Rights issue if proposed may not only delay the process due to lengthy procedure involved in such issues. Further the Company since now operating, with such low margins, the capital taken by rights cannot be properly serviced and such capital had to stay invested for atleast two to three years without returns. Hence after commissioning of the project, full justification will be given on the project and intrinsic value and return will become automatically added to shareholder's wealth. Moreover since plant in Haridwar is sold due to change in fiscal policy, the impact will be very heavy on the Company and hence there is no other option except to go in for new project, for expanded capital and new product line to match with industry competition and growth. Thus the promoter group and associates identified have given consent to contribute Rs. 35 crores on call basis on one time by cash payment basis to enable the company to borrow for this cause envisaged above. The company had also identified new investors who will be benefited form (sic) their new project and who have consented to invest upto Rs. 15 crores as equity in the company. The provisions of Section 372 A of the Companies Act, 1956 will not be applicable to both the companies as they are Private Limited companies. Preferential allotment to the promoters / persons acting in concert group will increase their holding from 25.32% to 45.91%. Hence the proposed acquirers are making an application to the Securities and Exchange Board of India under Regulation 4 of SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997 seeking exemption from the applicability of the provisions of Regulation 10, 11(1) and 12 of the SEBI(SAST) Regulations, as the proposed acquisition exceeds the limits laid down in the said regulations. The shareholders were specifically informed that "There will be no change in the Management or control of the Company consequent to the Preferential issue". The fact that the appellants would be seeking exemption from complying with the provisions of Regulations 10 and 11(1) of the takeover code was also brought to their notice.;

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