BIG STAR FILMS LIMITED Vs. SECURITIES AND EXCHANGE BOARD OF INDIA AND SRG INFOTEC INDIA LIMITED
SECURITIES APPELLATE TRIBUNAL
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Achuthan, Presiding Officer -
(1.) THE Respondent No. 1 (SEBI) passed an order on 4.6.2002 holding the Appellants guilty of non compliance of the requirements of regulation 10 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the 1997 Regulations) with reference to the acquisition of shares representing 64.38% of the share capital of SRG (Infotec) India Ltd., the Respondent No. 2 herein (the Company). By the said order the Appellants were directed to make a public announcement in terms of Chapter III of the 1997 Regulations within 45 days from the date of the order, taking 21.9.98 as the referal date for determining price of the shares, and to pay interest to the shareholders at the rate of 15% per annum on the price from 31.3.1999 till the actual date of payment of consideration to the shareholders participating in the open offer directed to be made by the said order. Claiming to be aggrieved by the said order the Appellants preferred the present appeal seeking to set aside the impugned order. THEy had also prayed for interim order staying the operation of the impugned order till the disposal of the appeal. After hearing the concerned parties, the prayer for interim order was allowed by the Tribunal on 16/08/2002.
(2.) The main issue in the appeal is that whether or not the acquisition of 64.38% shares of the company by the Appellants is an acquisition covered under regulation 3(1)(c) enjoying exemption from the purview of regulation 10. Regulation 3 of the 1997 Regulations exempts certain acquisitions from the purview of regulation 10, 11 and 12. Regulation 10, 11 and 12 requires the acquirer to make a public announcement to acquire shares from the other shareholders of the target company on the acquisition of shares or voting rights in a company crossing certain limits/or acquiring control over the company, as per the Regulations. But the acquirers are not obliged to make such public announcement to acquire shares if the acquisition is one falling under the exempted categories provided under regulation 3. One of such exempted categories of acquisition is acquisition of shares pursuant to preferential allotment made by a company in pursuance of a resolution passed under section 81 (1A) of the Companies Act. Section 81 of the Companies Act provides inter alia that "Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares then (a) such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit to the capital paid up on those shares at that date........" However, not with standing the requirements of section 81, section 81(1A) enables the company to offer further shares to any persons whether or not those persons are holders of the company's shares on the date of offer, provided that a special resolution to that effect is passed by the company in general meeting. Regulation 3(1)(c) in the 1997 Regulations provides exemption to acquisition pursuant to preferential allotment made in terms of section 81(1A) of the Companies Act. But the exemption is not automatic. It is subject to fulfilment of the conditions provided in clause (i) and (ii) of regulation 3 (1) (c). These conditions are:
(i) Board Resolution in respect of the proposed preferential allotment is sent to all the stock exchanges on which the shares of the company are listed for being notified on the notice board;
(ii) Full disclosures of the identity of the class of the proposed allottee(s) is made, and if any of the proposed allottee(s) is to be allotted such number of shares as would increase his holding to 5% or more of the post issued capital, then in such cases the price at which the allotment is proposed, the identity of such persons, the purpose of and the reason for such allotment, consequential changes if any, in the board of directors of the company and in voting rights, the share holding pattern of the company, and whether such allotment would result in change in control over the company are all disclosed in the notice of the General Meeting called for the purpose of consideration of the preferential allotment.
There is no dispute about the number of shares acquired by the Appellants and that the acquisition crossed the threshold limit provided in regulation 10. It is also admitted that the shares were acquired pursuant to the preferential allotment made in pursuance of section 81(1A) of the Companies Act. Compliance of the requirements of clause (ii) of regulation 3(1)(c) is also not in dispute. The fact that Appellants are persons acting in concert has also been admitted. In the report dated 29.10.99 under regulation 3(4) filed by Appellant No. 5 this factual position has been admitted by the Appellants. According to the impugned order the Appellants had failed to comply with requirements of clause (i) of regulation 3(1)(c). SEBI after citing the text of certain regulations and the factual position as per the material in its possession, has stated in para 8.4 of its order that:
"In view of the above legal provisions and facts on record, it is clear that the acquisition of shares pursuant to a preferential allotment under section 81(1A) of the Companies Act per se, is not eligible for exemption unless the conditions stipulated in the proviso to regulation 3(1)( c) are complied with. It may be mentioned that the regulations specifically provide that exemption is available subject to the compliance of the conditions. For availing the exemption, the acquirer must comply with the stipulated conditions. In this regard, I observe from the report dated 29.10.99 that in respect of the acquisition in the instant case, the condition as laid down in clause (i) of proviso to regulation 3(1)(c) of the said regulations has not been complied with as the copy of the Board of Resolution in respect of the preferential allotment passed on 21.09.98 was sent to the stock exchanges only on 22.9.99 i.e. subsequent to allotment of shares by way of preferential issue."
(3.) THIS is the only ground based on which SEBI has come to the conclusion that the Appellants had failed to fulfil the requirements of clause (i)of regulation 3(1)(c) and because of the failure to fulfil the said precondition the acquisition pursuant to preferential allotment was not considered as an exempted one.;
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