SEBI Vs. KADRI MILLS CBE LTD
LAWS(SB)-2003-1-16
SECURITIES APPELLATE TRIBUNAL
Decided on January 18,2003

Appellant
VERSUS
Respondents

JUDGEMENT

G.N.Bajpai, - (1.) BACKGROUND 1.1 Shri G Kannappan, Shri K Gov Ramaswamy, Shri G Vijayakumar (hereinafter collectively referred to as "the Acquirers") are holding 74.88% (20,81,731 equity shares) of the equity capital of the The Kadri Mills (CBE) Ltd. (hereinafter referred to as "the Target company"). 1.2 The shares of the Target company are listed at Madras Stock Exchange (MSE), Coimbatore Stock Exchange(CSE) and Interconnected Stock Exchange of India Ltd.(ICSE). 1.3 Shri G Kannappan entered into Agreements on 14.11.2001 with Shri D Ramakrishnan for acquisition of 19,000 equity shares of the Target company and with Shri V Palaniswamy for acquisition of 46,135 equity shares of the Target company at a negotiated price of Rs. 5.45/- per share. 1.4 Pursuant to the execution of the aforesaid agreements, the Acquirers made a public announcement on 19.11.2001 for acquisition of 22.77% shares of the equity share capital of the Target company under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as "the Regulations") through Indbank Merchant Banking Services Ltd. (hereinafter referred to as "the merchant banker") to the public offer. 1.5 On 19.11.2001 the merchant banker filed the Draft Letter of Offer on behalf of the Acquirer, - to be sent to the shareholders of the Target company, with SEBI. 1.6 On perusal of the draft letter of offer, by SEBI, it was observed that the shares of the Target company were infrequently traded on CSE and MSE and frequently traded on ICSE in terms of explanation (i) to Regulation 20(3) [prior to the amendment dated 9.9.2002 to the Regulations]. Accordingly, preliminary comments on the draft letter of offer were conveyed by SEBI to the merchant banker on 10.12.2001 and it was inter alia advised to justify the offer price in terms of regulation 20, sub-regulation (3) of the Regulations 1.7 On 24.12.2001, the merchant banker submitted that changes as advised by SEBI vide letter dated 10.12.2001 have been incorporated in the Letter of Offer and the price offered in the public offer, of Rs.5.50 is justified on the basis of the financials of the Target company and the price of shares of the Target company traded in the Stock Exchanges. 1.8 On 14.03.2002, SEBI issued a reminder advising the merchant banker to the offer to determine the offer price in terms of the provisions of the regulations taking into consideration the parameters suggested in SEBI's letter dated 10/12/01. The merchant banker was also advised by SEBI to submit a revised draft offer document on or before 21/3/02 failing which SEBI will be constrained to take action against them in terms of the Regulations and/or SEBI Act, 1992. 1.9 The merchant banker vide letter dated 01.04.02 inter alia requested permission to withdraw the offer under regulation 27(1)(d). In response SEBI vide letter dated 19/4/02 advised the merchant banker that the offer made by the Acquirers was obligatory in terms of regulation 11(1) {wrongly referred as regulation 11(2) in the draft offer document} of the Regulations and cannot be withdrawn under the circumstances stated in their letter dated 01.04.02. The merchant banker was further advised to ensure the implementation of the offer and comply with the Regulations. 1.10 The merchant banker vide letter dated 17/5/02 reproduced and concurred with the submissions of the Acquirers and submitted inter alia that they are willing to go ahead with the offer at an offer price of Rs 5.50 per share which has been arrived at in accordance with the Regulations and are not withdrawing the original offer made but are showing their inability to make a revised offer at a price higher than the offer price of Rs 5.50 per share. 1.11 The merchant banker vide letter dated 08/07/02 reiterated its submissions made earlier and claimed that the offer price of Rs 5.50 per share is justified in terms of the Regulations.
(2.) SHOW CAUSE NOTICE 2.1 Since the offer price in terms of the Regulations could not be justified, a show cause notice was issued to the Acquirers on 05.08.02, inter alia stating - 2.2 that in the draft offer document the offer price was Rs.5.50 whereas the book value per share as per the audited financial results as on 31.03.2001 was Rs.86.04. (book value almost 16 times the offer price) 2.3 the shares were stated to be frequently traded in terms of explanation to Regulation 20(3) [prior to the amendment dated 9.9.2002 to the Regulations] as the annualised trading turnover is 3.12% in ICSE and infrequently traded in CSE and MSE. Therefore, offer price is required to be justified under regulation 20(2) & 20(3) [prior to the amendment dated 9.9.2002 to the Regulations] but the same is justified only under regulation 20(2). 2.4 Therefore there is, prima facie, violation of regulations 20(3), 26 and 22 by the Acquirers. Thus, the Acquirers were called upon to show cause as to why one or more or all action(s) under Regulation 22(15), 28(11), 44, and 45(6) of the Regulations and Section 11 of Securities and Exchange Board of India Act 1992 (hereinafter referred to as "SEBI Act" ) should not be initiated against them. Reply / HEARING 3.1 The Acquirers replied to the show cause notice vide their letter dated 29.08.02. Since the submissions of Acquirer were not found to be satisfactory an opportunity of personal hearing before the Chairman was given to the Acquirers on 20.11.2002, wherein the Acquirers reiterated their submissions made by them vide their letter dated 29.08.02.
(3.) SUBMISSIONS OF THE ACQUIRERS 4.1 The Acquirers made following submissions vide their letter dated 29.08.02 and during the hearing, before Chairman, dated 20.11.02 :- 4.2 The Acquirers hold 20,81,731 equity shares in the Target company, constituting 74.88% of the paid-up capital of the Target company. 4.3 The Acquirers together with persons acting in concert had entered into agreements with Mr. D Ramakrishnan and Mr. Palaniswamy on 14.11.2001 to acquire 65,135 equity shares representing 2.34% of the paid-up capital of Target company. 4.4 As per the Clauses 4,5 and 6 of the aforesaid Agreements dated 14.11.01, the agreements for acquisition of shares were themselves entered into subject to the provisions of and compliance with the Regulations and that while the duration of the agreements was stipulated as the period of 30 days after compliance with the regulations, it was specifically stipulated that the agreement shall not be acted upon by either of the parties in case of non-compliance with the regulations. 4.5 In the context and circumstances when the Offer Price proposed by the Acquirers was not acceptable to SEBI and SEBI had, as per its communications dated 10th Dec, 2001 to the merchant banker stated that we are not to proceed further with the Offer, the Agreements entered into by the Acquirers with Mr. D Ramakrishnan and Mr. V Palaniswamy became unenforceable, infructuous and had lapsed and it does not subsist now. 4.6 In the public announcement and also in the Letter of Offer (Draft filed with SEBI) they had proceeded on the basis that the offer is made by them under Regulation 11(2). In the Draft Letter of Offer in para 2.1, it was stated that "this offer is made by the Acquirers under regulation 11(2) for consolidating their holding in KML". 4.7 If regulation 11(2) was a mistake and is wrong, the draft offer document was itself defective. It is note-worthy that they have not made any offer under regulation 11(1) which as per SEBI's notice under reply is the provision that is triggered. 4.8 It is submitted that they had not made any offer under regulation 11(1) and secondly, that the proposed acquisition of 2.34% pursuant to the agreements is well within the permissible 10% limit in regulation 11(1). If it is construed that the permissible 10% limit in a period of 12 months is available only upto 75%, it follows that above 75%, it is only regulation 11(2), which , if at all can apply, which SEBI have held is not however applicable. 4.9 The negotiated price under the agreements entered into by them is Rs 5.45 per share. The annualized trading turnover of the shares in ICSE being 3.12% (which is not less than 2%) the shares were frequently traded in ICSE. Accordingly, the weekly high and low of the closing price of the shares during the 26 weeks preceding the date of public announcement is Rs 5.41 per share. In this context where the price under regulation 20(2)(a) is Rs 5.41 per share and regulation 20(2)(b) and regulation 20(2)(c) are inapplicable, the Acquirer had adopted the offer price of Rs 5.50 per share, which in their submission is in accordance with regulation 20(2). 4.10 In SEBI communication dated 10th Dec 2001 to the merchant banker, the view has been taken that the offer price is required to be justified under regulation 20(2) and also under regulation 20(3). The only reason stated for this view in the said communication is that the shares are infrequently traded in CSE and MSE. 4.11 The expression "Infrequently Traded" is defined in the explanation given in regulation 20(3). As per that definition, shares will be deemed to be "infrequently traded" if on the Stock Exchange the annualized trading turnover in the preceding six calendar months prior to the month in which the public announcement is made is less than 2% by number of shares of the Listed Shares. The definition contemplates trading, but trading in volume which is infrequent by being less than 2%. The definition does not contemplate `Nil Trading' or `No Trading'. Therefore, a situation where there is no trading at all, cannot be categorized as "infrequently traded". In CSE and MSE, the Target company's shares have no trading in the relevant period. It was a case of `Nil' trading and has been so declared to SEBI. Therefore, it is submitted that this was not a case of infrequent trading as defined in the explanation to attract applicability of regulation 20(3). 4.12 The expression "frequently traded" or the expression "most frequently traded" are not defined in the Regulations. It has to be assumed that trading in volumes not less than 2% is deemed to be frequently traded. There are no words used in Regulation 20(2)(d) to suggest that the shares should be frequently traded in all the Stock Exchanges where the shares are listed and that out of them the "most frequently traded" should be adopted as the basis. Even in a situation where the shares satisfy the test of frequent trading in one stock exchange that would be the most frequently traded, irrespective of "Infrequent Trading" or "No Trading" in other Stock Exchanges. 4.13 In response, to SEBI's communication dated 10.12.01, the Acquirer have provided the clarifications and had also offered the justification for the offer price. While SEBI had interdicted them from proceeding with the offer, and they were therefore unable to proceed further by dispatching the letter of offer to the shareholders, SEBI did not issue any communication subsequently either lifting the prohibition OR specifying any change under the proviso to regulation 18(2) or even indicating what in their opinion should be the offer price (except for reference to book value in the communication dated 10th December 2001 which is not the sole criteria even as per SEBI Regulations). 4.14 Therefore, viewed in proper perspective, this is not a case where the Acquirer have withdrawn the offer. There is no provision in the Regulation for adjudication of this issue OR as to the weightage to be given to each of the factors under Regulation 20(2) Or regulation 20(3). Therefore, the Acquirer cannot be faulted for not proceeding with the offer. 4.15 Moreover, the Acquirer never pleaded inability to implement the offer. They were always ready and willing to implement the offer at the Offer Price that they had proposed in the Public Announcement and Draft Letter of Offer. They pleaded inability only to pay an enhanced price per share, which was not in contemplation when they made the offer, and which in their view based on the circumstances of the Target company Or even the applicable regulations will not be justifiable. 4.16 The Acquirer requested, therefore, no further action may be taken under Regulation 22(15), 28(11), 44, 45(6) and /or Section 11 of SEBI Act.;


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