V.T. SOMASUNDARAM Vs. MADRAS STOCK EXCHANGE LIMITED
SECURITIES APPELLATE TRIBUNAL
V.T. Somasundaram No. 25, Vasantha Avenue, MRC Nagar, R A Puram, Chennai - 600028 and M/s. Trichy Distilleries and Chemicals Limited "Mahalakshmi Mansion", First Floor, No. 14, First Main Road, Gandhi Nagar, Adyar, Chennai - 600020
Madras Stock Exchange Limited "Exchange Building", Post Box No.183, No.30, Second Line Beach, Chennai - 600001 and Securities and Exchange Board of India Plot No. C4 -A, 'G' Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400051
N. K. Sodhi -
(1.) WHETHER ninety per cent of the public shareholders in number or shareholders holding ninety per cent of the public shareholding in value irrespective of their numbers should consent to the proposal to delist a small company under regulation 27(3)(d) of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 (hereinafter referred to as the regulations) is the sole question that arises for our consideration in this appeal filed under section 23L of the Securities Contracts (Regulation) Act, 1956. The dispute herein pertains to the delisting of equity shares of M/s. Trichy Distilleries and Chemicals Limited, the second appellant herein (for short the company). Shri V.T. Somasundaram, the first appellant is one of the promoters of the company. The appeal is directed against the communication dated December 27, 2010 issued by the Madras Stock Exchange Ltd. (for short MSE) by which it has refused to delist the equity shares of the company. During the course of the proceedings the Securities and Exchange Board of India (for short the Board) was impleaded as the second respondent in the appeal.
(2.) WE may briefly state why the company went in for delisting. The company is a public limited company whose shares are listed on MSE and these are not listed in any other stock exchange. With the advent of the National Stock Exchange of India Limited, regional stock exchanges like MSE have become defunct. The shares of companies which were exclusively listed on MSE cannot be traded and consequently there is no exit opportunity for the public shareholders of such companies. In short, the sine qua non of listing, namely, a trading platform for shareholders to transact in shares of a listed company is non existent on MSE. Equally, in the absence of any price discovery in the shares of such companies, it is impossible for any company which is listed on the defunct MSE to raise money or engage in securities transactions. The regulations provide for a simplified procedure for delisting which, in turn, would provide an exit route to the public shareholders. Since the shareholders of the company have remained stuck for the last few years as there has been no trading on the platform of MSE, the promoters decided to offer an exit opportunity to the public shareholders by getting the equity shares of the company delisted. The regulations deal with compulsory delisting of equity shares by a recognized stock exchange and also with voluntary delisting on application of a company. Special provisions are contained in Chapter VII of the regulations which deal with delisting of small companies. Regulation 27 is a part of this chapter and the relevant parts thereof which concern us are reproduced hereunder for facility of reference:
Special Provisions in case of small companies.
27. (1) Where a company has paid up capital upto one crore rupees and its equity shares were not traded in any recognized stock exchange in the one year immediately preceding the date of decision, such equity shares may be delisted from all the recognised stock exchanges where they are listed, without following the procedure in Chapter IV.
(2) Where a company has three hundred or fewer public shareholders and where the paid up value of the shares held by such public shareholders in such company is not more than one crore rupees, its equity shares may be delisted from all the recognised stock exchanges where they are listed, without following the procedure in Chapter IV.
(3) A delisting of equity shares may be made under subregulation (1) or sub -regulation (2) only if, in addition to fulfillment of the requirements of regulation 8, the following conditions are fulfilled: -
(c) the promoter writes individually to all public shareholders in the company informing them of his intention to get the equity shares delisted, indicating the exit price together with the justification therefor and seeking their consent for the proposal for delisting;
(d) at least ninety per cent of such public shareholders give their positive consent in writing to the proposal for delisting, and have consented either to sell their equity shares at the price offered by the promoter or to remain holders of the equity shares even if they are delisted;
Two types of companies qualify for delisting under Regulation 27, namely:
(i) listed companies that have a paid up capital upto rupees one crore and no trading in the shares has taken place for one year preceding the date of decision to delist.
(ii) listed companies whose paid up capital held by all the public shareholders put together is rupees one crore or less and such shareholders are three hundred or less in number.
For the purposes of this appeal, public shareholders mean the holders of equity shares other than the promoters. The company before us has a paid up capital of Rs. 1.2 crore with 12 lakh shares of Rs. 10 each. Of these, the promoter shareholding represents a paid up share capital of Rs. 69,67,500 being 58.06 per cent of the total capital of the company and the paid up capital held by public shareholders is Rs. 50,32,500 representing 41.94 percent. It is, thus, clear that the paid up value of shares held by the public shareholders is less than Rs. 1 crore. It is not in dispute that the total number of public shareholders of the company is 196. In view of this factual position the company for delisting would attract the provisions of regulation 27(2) reproduced above. Delisting of equity shares under regulation 27(2) could be done only after fulfilling the requirements of regulation 8 of the regulations which falls in chapter III. Under regulation 8, the company is required to obtain the approval of its shareholders by way of a special resolution passed through postal ballot. It is the requirement of regulation 8(1)(b) that the votes cast by "public shareholders" in favour of the proposal to delist should be atleast two times the votes cast against such proposal. The company carried out this exercise through postal ballot. The result of the postal ballot is as under:
No. of Postal Ballot Forms No. of Shares Vote% Total Postal Ballot Forms received : 51 423960 Less: invalid Postal Ballot Forms : 1 100 Net Valid Postal Ballot Forms : 50 423860 Postal Ballot Forms with assent for the Resolution : 48 423850 99.9976% Postal Ballot Forms with dissent for the resolution : 2 10 0.0024%
It is clear from the aforesaid results that the votes cast in favour of the resolution are more than ninety nine per cent of the total valid votes and the votes cast against the resolution are less than one per cent of the total valid votes polled and consequently the special resolution in terms of regulation 8(1)(b) had been passed with the requisite majority. Thereafter, the company sought in -principle approval of MSE as per its letter dated May 3, 2010 under regulation 8. MSE gave its in -principle approval for delisting as per its letter of May 18, 2010. It is pertinent to mention that MSE did not, at this stage, raise any controversy about whether the votes of the public shareholders should be counted on the basis of the value of share capital held by them or on the basis of the number of public shareholders. Regulation 27(3)(c) which deals with delisting of small companies requires that one of the promoters of the company should write individually to all public shareholders informing them of its intention to get the shares delisted and seek their consent for the proposal to delist. Clause (d) of regulation 27(3) further requires that "at least ninety per cent of such public shareholders" are required to give their positive consent for the proposal to delist and may consent either to sell their shares at the price offered or continue to hold their shares in the delisted company. Accordingly, the company sent to each public shareholder a letter dated March 18, 2010 offering to purchase their shares at Rs. 367 per share and sought their consent for delisting. It is not in dispute before us that the public shareholders tendered their shares and some of them agreed to the proposal to delist but decided to hold on to their shares. As on the date of the letter, there were 196 public shareholders of the company holding 5,03,250 shares out of which the promoters acquired 3,51,005 shares held by 123 shareholders. Two shareholders holding 1,20,200 shares consented for delisting but decided to hold on to their shares. It is, thus, clear that 125 public shareholders holding 4,71,205 shares had given their positive consent. Two shareholders holding 14000 shares have since given their consent. The promoters of the company had also confirmed that they would keep the exit option available to the public shareholders for a further period of one year from the date of final delisting. It is, thus, clear that there are in all 204 shareholders of the company 8 of whom are promoters. When we exclude them, the total public shareholders are 196 in number. Out of the public shareholders, 125 have given their positive consent for delisting. Two shareholders holding 14000 shares constituting 1.17 per cent of the total paid up capital of the company are yet to give their consent/shares to the promoters. These could be excluded. The remaining 69 shareholders holding 18,045 shares constituting 1.5 per cent of the total share capital of the company and 3.58 per cent of public shareholding have not given their consent either way. In other words, they have not given their positive consent. In brief, the factual position boils down to this. There are in all 196 public shareholders who hold 5,03,250 shares. Out of these, only 125 shareholders holding 4,71,205 shares have given their positive consent. The remaining 71 shareholders holding 32,045 shares have not given their consent. Has the requirement of regulation 27(3)(d) been met is the question.
(3.) ON December 22, 2010, the company informed MSE that consent had been received from 125 out of 196 public shareholders either by sale of their shares or by consenting to the proposal for delisting. MSE was also informed that 2 public shareholders holding 1.17 per cent (14000 shares) of the total share capital of the company were in the process of giving consent and the balance 69 public shareholders who held 1.5 per cent (18045 shares) of the total share capital had not given their positive consent. On receipt of this letter, MSE by the impugned communication declined to delist the equity shares of the company on the ground that "it is mandatory to obtain the consent from 90% of the public shareholders i.e. 176". Hence this appeal.;