NRB BEARINGS INDIA LIMITED; IN RE: SNL BEARINGS LTD Vs. STATE
LAWS(SB)-2003-5-3
SECURITIES APPELLATE TRIBUNAL
Decided on May 29,2003

Appellant
VERSUS
Respondents

JUDGEMENT

G.N.Bajpai, - (1.) BACKGROUND 1.1 The Timken company (hereinafter referred to as "the Acquirer") is stated to be a corporation organised under the laws of the State of Ohio, U.S.A. 1.2 Ingersoll-Rand Company Limited, is stated to be a company organized under the laws of Bermuda (hereinafter referred to as "IR") 1.3 Nadella S.A. (hereinafter referred to as Nadella) is stated to be a company organised and existing under the laws of France and a direct wholly owned subsidiary of IR. Nadella holds 26% shares/ voting rights in the equity share capital of NRB Bearings Ltd. (hereinafter referred to as "Target company"). 1.4 The shares of the Target company are listed at the Stock Exchange Mumbai, the National Stock Exchange of India Ltd., the Delhi Stock Exchange Association Ltd., and the Chennai Stock Exchange Ltd. 1.5 The Target company is holding 63.98% shares/voting rights in SNL Bearings Limited (hereinafter referred to as SNL). The shares of SNL are listed at The Stock Exchange Mumbai. 1.6 The Acquirer and IR are parties to Stock and Asset Purchase Agreement dated October 16, 2002 pursuant to which the Acquirer has , as a part of and subject to the terms and conditions, agreed to acquire from IR the engineered solutions business segment of IR and also the voting securities of Nadella held by IR.
(2.) APPLICATION FOR EXEMPTION 2.1 The Acquirer made an application dated December 20, 2002 to the Securities and Exchange Board of India (hereinafter referred to as SEBI) under sub-regulation (2) of regulation 4 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as "the Regulations") seeking exemption from the provisions of Chapter III of the Regulations in respect of indirect acquisition of the Target company and SNL. Submissions IN THE EXEMPTION APPLICATION In the aforesaid application dated December 20, 2002 the Acquirer inter-alia, submitted as under: 3.1 The Acquirer and IR, are parties to a Stock and Asset Purchase Agreement, dated October 16, 2002, pursuant to which the Acquirer has, subject to the terms and conditions therein, agreed to acquire from IR the engineered solutions business segment of IR . 3.2 As a part of and subject to the terms and conditions of the Worldwide Acquisition, the Acquirer has agreed to purchase from IR, and IR has agreed to sell to the Acquirer, the voting securities of Nadella ( hereinafter referred to as "proposed acquisition"). The consummation of the Worldwide Acquisition, including the proposed acquisition is subject to, among others, antitrust clearance, regulatory approvals and successful completion of debt and equity financing for the Worldwide Acquisition. The Acquirer expects the proposed acquisition to be consummated during the first quarter of 2003. 3.3 Nadella owns 26% minority interest in the equity share capital of the Target company. Nadella and the Sahney family (the majority shareholder of Target company) are parties to the Shareholders Agreement dated 23.03.95 regarding the Target company. 3.4 Pursuant to the Shareholders Agreement, the parties are under an obligation to amend the Articles of Association of the Target company to provide, among other things, that (a) so long as Nadella together with its subsidiaries holds at least 25% of the issued capital of the Target company , Nadella shall be entitled to appoint one ex-officio director on the board, (b) the board shall appoint a person chosen by Nadella as the Vice-Chairman of the Target company , and (c) the presence of a director appointed by Nadella shall be necessary to constitute a valid quorum for a meeting of the board. The Shareholders Agreement also provides that at all times the board of directors of the Target company shall comprise of 2 directors chosen by Nadella and 4 directors chosen by certain numbers of the Sahney family and its associates. 3.5 Under the Shareholders Agreement, the parties have agreed to ensure that board resolutions regarding certain specified matters, including, amendments to the organizational documents, declaration of dividends, alteration in the share capital of the Target company , and entry into any joint venture, technology transfer or technical collaboration shall be passed with the consent of and as agreed between the parties. The Shareholders Agreement further provides that if any such matter arises at a shareholders meeting, the parties must vote against the resolution, unless all the parties agree to such resolution. 3.6 The Sahney family "controls the Target company and conducts the day to day management and operations of the Target company . The Acquirer believes that Nadella does not control the Target company , within the meaning of such expression as defined in the Regulations. The Acquirer believes that the proposed Acquisition will not result in the Acquirer acquiring control over the Target company . 3.7 The expression "shares" is defined in Regulation 2(1)(k) of the Regulations to mean shares in the share capital of a company. The expression "company" is not defined in the Regulations. Pursuant to Regulation 2(2) of the Takeover Regulations, the expressions not defined in the Regulations have the same meaning as have been assigned to such expressions under the Securities and Exchange Board of India Act, 1992, or the Securities Contracts (Regulation) Act, 1956, or the Companies Act, as the case may be. The expression "company" is defined in the Companies act to mean a company formed and registered under the Companies Act or an existing company as defined in clause (ii) of Section 3 of the Companies Act. It is important to note that the Companies Act uses the expression "body corporate" for a corporation or a company incorporated outside India. 3.8 The Acquirer believes that Regulation 10 only applies to the acquisition of shares or voting rights in a company and not to the acquisition of voting securities of a body corporate. The Acquirer also believes that pursuant to the Explanation, Regulation 10 only applies to a direct acquisition of shares, or an indirect acquisition by virtue of the acquisition of a "company". 3.9 As Nadella is not a "company" because it is not incorporated under the Companies Act, the voting securities of Nadella cannot be considered as "shares". Therefore, the proposed acquisition is neither a direct nor an indirect acquisition of "shares". 3.10 The Acquirer believes that the phrase "means and includes" used in the Explanation indicates an exhaustive definition of the expression "acquisition" for the purposes of Regulation 10, with the result that Regulation 10 only applies to the acquisitions described in clause (a) or clause (b) of the Explanation. In this regard, The Acquirer submits that in the case of P Kasilingam vs. P.S.G. College of Technology (AIR 1995 SC 1395), the Supreme Court has also held that "words 'means and includes', on the other hand, indicate an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions". 3.11 The Acquirer believes that the proposed acquisition will not result in the Acquirer acquiring "control" over the Target company . 3.12 Nadella neither has a right to appoint the majority of the directors on the board of the Target company , nor a right to control the management or the policy decisions of the Target company . Under the Shareholders Agreement, Nadella has restricted voting rights in respect of limited matters, and these restricted rights can only be exercised with the consent of the Sahney family. Moreover, the rights granted to Nadella pursuant to the Shareholders Agreement are in any event available under the Companies Act to a financial investor holding 26% shares in a listed company. As such, the voting rights conferred in favour of Nadella pursuant to the Shareholders Agreement do not constitute control over the management or policy decisions of the Target company . 3.13 The Sahney family holds the controlling majority stake (around 59%) in the equity share capital of the Target company . The Sahney family appoints the majority of the board of directors on the Target company and also controls the management and the policy decisions of the Target company. 3.14 The Acquirer believes that neither Regulation 10 nor Regulation 12 applies to the proposed acquisition. However, in the event that SEBI believes that any of Regulation 10 or Regulation 12 applies to the proposed acquisition, The Acquirer requests SEBI to exempt the proposed acquisition from the applicability of such Regulation and other provisions of Chapter III of the Regulations. 3.15 Pursuant to the Shareholders Agreement, Nadella has only limited voting rights in the Target company . These rights do not enable Nadella to influence or control the manner in which the Target company votes its shareholding in SNL. Nadella has absolutely no right or ability to influence or control any business or policy decision or the management of SNL. Nadella exercises absolutely no control over SNL and the Proposed Acquisition is not an acquisition of control over SNL. 3.16 The Acquirer believes that for the reasons set forth above, the proposed acquisition will not result in an acquisition of shares or voting rights in, or control over, the Target company or SNL. 3.17 The proposed acquisition is a part of the Worldwide Acquisition. The Acquirer's real intent and desire in entering into the agreement for the proposed acquisition was to acquire the engineered solutions business segment of IR. The Acquirer had no specific intention of acquiring the shares or voting rights in, or control over, the Target company or SNL. Any indirect acquisition of an interest or a right in the Target company is incidental to, and an unintended consequence of, the Worldwide Acquisition. 3.18 Nadella's shareholding in the Target company represents around 3.1% of the total assets of Nadella. Nadella's shareholding in the Target company is an inconsequential part of its total assets. Nadella is merely a financial investor in the Target company and does not, in any manner, control the business, operations or policy decisions of the Target company . 3.19 The Proposed Acquisition will have no impact whatsoever on the management or the conduct of the business and operations of the Target company. The Proposed Acquisition will not result in, or lead to, any change in the management of the Target company . 3.20 The Proposed Acquisition will also not have any impact whatsoever on the management or the conduct of the business and operations of SNL. According to the Annual Report of SNL for the financial year ended March 31, 2002, SNL has been declared to be a sick industrial company within the meaning of clause (o) of the sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985, as amended, ("SICA") and a reference has been made to the Board for Industrial and Financial Reconstruction for the financial reconstruction of SNL. The Acquirer submits that it has no intention whatsoever of acquiring the shares or voting rights in, or control over, a sick industrial company.
(3.) RECOMMENDATION OF THE PANEL The said application dated December 20, 2002 was forwarded to the Takeover Panel in terms of sub-regulation(4) of regulation 4 of the Regulations. The Takeover Panel vide its report dated January 23, 2003 has recommended, inter alia, as under : "Considering the pith and substance of Regulations 10 and 11 of the Takeover Code as also the spirit under lying the Takeover Code, even though Nadella is not incorporated under the Companies Act, 1956, in our view, on facts stated, Regulation 10 of the Takeover Code applies to the proposed acquisition. Nadella has voting rights in NRB Bearings Ltd. With a view to protect the interest of the investing public, the grant of exemption as sought is recommended subject to the shareholders of NRB Bearings Ltd : i. Passing a Special Resolution ratifying the change at its meeting whereat voting through postal ballot is to be permitted; ii. Serving notice of such meeting to the shareholders of NRB Bearings Ltd accompanying an envelope for postal ballot with prepaid postage stamps affixed. Grant of exemption is recommended also subject to Nadella, being interested party to the resolution, abstaining from voting in respect thereof. It is further recommended that the Acquirer Company be directed to make fresh application for grant of exemption in relation to SNL Bearings depending upon outcome of the Special Resolution .";


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