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*Karvy Financial Services Limited v/s Securities & Exchange Board of India, SEBI Bhavan

    Appeal No. 479 of 2016, 349 of 2017 with Misc. Application No. 317 of 2017

    Decided On, 26 April 2018

    At, SEBI Securities Exchange Board of India Securities Appellate Tribunal

    By, THE HONOURABLE MR. JUSTICE J.P. DEVADHAR
    By, PRESIDING OFFICER & THE HONOURABLE DR. C.K.G. NAIR
    By, MEMBER

    For the Appellant: Mayur Khandeparkar, Pankaj Uttaradhi, i/b M/s. Vishesha Law Services Advocates. For the Respondent: Pradeep Sancheti, Senior Advocate with Vibhor Kapoor, Advocate i/b Legasis Partners.



Judgment Text

J.P. Devadhar, Presiding Officer

Misc. Application No. 317 of 2017 In Appeal No. 349 of 2017

There is delay of 409 days in filing the appeal. By this Miscellaneous Application, applicant seeks condonation of the said delay. For the reasons stated in the application, delay is condoned. Miscellaneous Application is disposed of accordingly.

Appeal Nos. 479 of 2016 & 349 of 2017

1. These two appeals are filed by the appellant to challenge the order passed by the Whole Time Member ('WTM' for short) of Securities and Exchange Board of India ('SEBI' for short) on 27.10.2016 and the decision of SEBI contained in the communication dated 06.09.2016 respectively.

2. By order dated 27.10.2016 the WTM of SEBI has inter alia directed the appellant to acquire in open offer the shares of Regaliaa Realty Limited ('Target Company' for convenience) in accordance with the provisions of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 2011 ('SAST Regulations, 2011' for short). By communication dated 06.09.2016 application filed by the appellant on 21.07.2016 seeking exemption from making open offer under regulation 11(1) of SAST Regulations, 2011 in relation to the shares acquired by invoking pledge on 16.02.2012 has been rejected.

3. Since dispute in these two appeals arise from facts which are substantially common, both these appeals are heard together and disposed of by this common decision.

4. Facts relevant for disposal of these two appeals are as follows:-

a) In the year 2011 appellant had extended credit facility aggregating to Rs.7 crore to the target company, inter alia, by taking pledge of 20,00,100 shares of the target company (constituting 55.56% of the paid up share capital of the company) held by the directors of the target company as collateral security for the aforesaid credit facility.

b) As the target company (borrower) defaulted in repaying the loan, appellant invoked the pledge on 16.02.2012 and got 20,00,100 pledged shares of the target company transferred to the demat account of the appellant. As a result of such acquisition, the shareholding of the appellant in the target company rose from 0% to 55.56%.

c) On SEBI seeking explanation as to why open offer obligation arising on acquisition of above shares has not been discharged, appellant by its letter dated 08.10.2014 informed SEBI that it is an RBI registered Non-Banking Finance Company ('NBFC') and hence the appellant was exempted under regulation 10(1)(b)(viii) of SAST Regulations, 2011 from making open offer on acquisition of shares by invoking the pledge.

d) Thereupon, a show cause notice was issued on 23.02.2016 calling upon the appellant to show cause as to why action should not be taken against the appellant who had neither obtained exemption from making open offer under regulation 11 of SAST Regulations, 2011 prior to invocation of pledge nor the appellant had made public announcement of open offer on acquiring the shares by invoking the pledge.

e) In its reply dated 17.03.2016 appellant reiterated that under regulation 10(1)(b)(viii) the appellant was exempted from making open offer. It was further, inter alia, contended that the borrower had willfully defaulted in repaying the loan and therefore the pledge was invoked as a risk mitigating measure and not with a view to acquire control over the target company and hence no action need be taken against the appellant.

f) Before the above reply to the show cause notice could be considered by the WTM of SEBI, appellant on 21.07.2016 made an application seeking exemption under regulation 11(1) of SAST Regulations, 2011from making open offer in relation to shares of the target company acquired on 16.02.2012 by invoking the pledge.

g) By a communication dated 06.09.2016 SEBI returned the application filed by the appellant on ground that the application was made post facto, that is, after the shares were acquired by invoking the pledge. Challenging the said communication dated 06.09.2016, Appeal No. 349 of 2017 is filed.

h) Thereafter, the WTM of SEBI gave personal hearing to the appellant and by the impugned order dated 27.10.2016 rejected the contentions raised by the appellant and, inter alia, directed the appellant to make a public announcement of open offer in accordance with the provisions of SAST Regulations, 2011. Challenging the said order of WTM of SEBI dated 27.10.2016 appellant has filed Appeal No. 479 of 2016.

Appeal No. 479 of 2016

5. Mr. Khandeparker, learned counsel appearing on behalf of the appellant fairly stated that the general exemption from making open offer granted to the acquisitions covered under regulation 10(1) and particularly regulation 10(1)(b)(viii) relating to acquisition of shares on invocation of pledge, would not be applicable to the appellant, because, the appellant is neither a Scheduled Commercial Bank nor a Public Financial Institution.

6. However, counsel for the appellant submitted that in the facts of present case, since the pledge was invoked only as a risk mitigating measure and not with a view to acquire control over the target company, the appellant ought not to have been saddled with the open offer obligation. Counsel for the appellant further submitted that in fact, neither the appellant has exercised control over the target company nor sold the shares acquired on invocation of pledge. Therefore, SEBI is not justified in directing the appellant to make open offer for acquisition of shares.

7. Admittedly, on invocation of pledge, appellant acquired 55.56% shares of the target company. Regulation 3(1) of the SAST Regulations, 2011 provides that no person shall acquire shares in a target company which entitles him to exercise 25% or more of the voting rights in such target company, unless that person makes a public announcement of an open offer for acquiring shares of such target company in accordance with SAST Regulations, 2011. It is not in dispute that on acquisition of 55.56% shares of the target company appellant was entitled to exercise more than 25% of the voting rights in the target company. Very fact that the appellant was entitled to exercise more than 25% of the voting rights of the target company was sufficient to trigger open offer obligation under regulation 3(1) of the SAST Regulations, 2011. Therefore, whether the voting rights were exercised or not, appellant was obliged to make open offer on being entitled to exercise more than 25% voting rights of the target company.

8. Accordingly, no fault can be found with the decision of the WTM of SEBI that in the facts of present case, appellant was obliged to make open offer under regulation 3(1) of the SAST Regulations, 2011.

Appeal No. 349 of 2017

9. Arguments advanced by counsel for the appellant in relation to the communication of SEBI dated 06.09.2016 whereby the application made by the appellant seeking exemption from making open offer under regulation 11(1) of the SAST Regulations, 2011 was returned, may be summarized thus:-

a) Under regulation 11(5) of SAST Regulations, 2011 an application made under regulation 11(1) seeking exemption from the obligation to make an open offer for acquisition of shares under the said regulations can be granted or rejected only after giving an opportunity of hearing. In the present case, the application made by the appellant under regulation 11(1) has been returned without giving an opportunity of hearing to the appellant and hence the impugned order which is in gross violation of regulation 11(5) is liable to be quashed and set aside.

b) Under the SAST Regulations, 2011 SEBI was obliged either to grant or reject the application made by the appellant seeking exemption from making open offer. There being no provision for returning the application made for seeking exemption, SEBI, could not have returned the application of the appellant by the impugned communication dated 06.09.2016.

c) Mere fact that the application seeking exemption from open offer was made by the appellant subsequent to acquisition of shares could not be a ground to return the application, because, firstly, regulation 11(1) does not contemplate that application seeking exemption from making open offer has to be made before acquisition of shares. Secondly, SEBI itself has in the past granted post facto exemption in several cases. In support of the above contentions reliance is placed on a decision of this Tribunal in case of S.R.B. Ramesh Chandra & Ors. (Appeal No. 85 of 2012 decided on 28.06.2013) and a decision of the Apex Court in case of LIC of India v/s Excorts Ltd. reported in AIR 1986 SC 1370.

d) From the date of acquisition of shares till date appellant has neither exercised control over the target company nor exercised voting rights in the target company nor received any dividend from the target company. Appellant had acquired the shares only as and by way of risk mitigating measure and not with a view to exercise powers attached to the shares is evident from the fact that on 08.02.2016 a Memorandum of Understanding (MoU) has been arrived at between the appellant and borrower under which the outstanding debt payable by the borrower has been settled and the appellant is now required to return the shares to the borrower. In these circumstances, it is submitted that failure on part of SEBI to grant exemption from making open offer is illegal and wholly unjustified. Accordingly, it is submitted that the impugned communication of SEBI dated 06.09.2016 deserves to be quashed and set aside and SEBI be directed to grant post-facto exemption from making open offer.

10. We see no merit in the above contentions.

11. Regulation 3(1) provides that no acquirer shall acquire shares in the target company which entitles him to exercise 25% or more of the voting rights in the target company unless he makes a public announcement of on open offer for acquiring shares of the target company in accordance with SAST Regulations. Thus, regulation 3(1) contemplates making a public announcement of an open offer for acquiring shares of the target company.

12. Similarly regulation 11(1) provides that SEBI may for reasons recorded in writing grant exemption from the obligation to make an open offer ‘for acquiring shares’. The words ‘for acquiring shares’ in regulation 11(1) clearly postulates that grant of exemption is in relation to shares to be acquired and not already acquired. Thus, reading regulation 3(1) together with regulation 11(1) it becomes evident that application seeking exemption from making public announcement of open offer has to be made before acquiring the shares and not after acquiring the shares. Therefore, decision of SEBI in returning the application on ground that the appellant ought to have sought exemption from making open offer before acquiring the shares cannot be faulted.

13. Reliance placed by the appellant on the decision of the Apex Court in case of LIC of India (Supra) is misplaced. In that case, since the principle/ ultimate object of Foreign Exchange Regulation Act (FERA) was to attract and regulate the flow of Foreign Exchange in to India it was held that the requirement contained in Section 29(1) of FERA that a person resident outside India shall not establish a branch office in India except with the ‘general or special permission’ of RBI would not necessarily mean obtaining prior permission from RBI and it would include obtaining post-facto permission from RBI subject to conditions as RBI may impose. Object of SAST Regulations, 2011, on the other hand, is to ensure that before any person acquires shares of a target company which entitles him to exercise 25% or more voting rights in the target company, opportunity must be given to the existing shareholders to exit the company by offering their shares in the open offer. Thus, the object of open offer obligation is to protect the interest of the existing shareholders when an acquirer seeks to acquire 25% or more voting rights in the target company. In such a case, power conferred on SEBI to grant exemption under regulation 11(1) would obviously before the acquirer acquires shares entitling 25% or more voting rights of the target company. Therefore, decision of the Apex Court in case of LIC of India (Supra) has no relevance to the facts of present case.

14. Assuming that in exceptional circumstances application seeking exemption from making open offer could be entertained after acquisition of shares, in the facts of present case, appellant does not deserve exemption for the following reasons:-

a) Obligation to make open offer on account of acquiring 20,00,100 shares of the target company on invocation of pledge arose on 16.02.2012, whereas, application seeking exemption from making open offer has been made belatedly after four years on 21.07.2016. Having failed to comply with the open offer obligation for more than four years, appellant is not justified in making application seeking exemption on 21.07.2016.

b) When SEBI by its letter dated 26.09.2014 sought explanation from the appellant for not making the public announcement of open offer, appellant erroneously contended that under regulation 10(1)(b)(viii) of SAST Regulations appellant is exempted from making open offer.

c) Thereafter, when show cause notice dated 23.03.2016 was issued, appellant filed reply on 17.03.2016 wherein it was once again contended erroneously, that under regulation 10(1)(b)(viii) of SAS

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T Regulations, 2011 the appellant was exempted from making open offer. d) It is only when the show cause notice was about to be taken for consideration, appellant chose to make the application on 21.07.2016 under regulation 11(1) seeking exemption from making open offer. Thus, in the facts of present case, appellant who is guilty of violating the SAST Regulations, 2011 by not making open offer during the period from 16.02.2012 till 20.07.2016 is not justified in making application on 21.07.2016 seeking exemption from making open offer. e) Entertaining application for grant of exemption from making open offer after four years from the date on which the open offer obligation got triggered would defeat the object with which open offer obligations are imposed under the SAST Regulations, 2011. f) Fact that SEBI in the past in some cases had granted post facto exemption from making offer cannot be a ground to entertain the application seeking exemption filed after lapse of four years. g) Fact that the appellant after acquiring the shares has not exercised controlled over the target company, has not exercised the voting rights in the target company and has not received any dividend cannot be ground either for not making the open offer or seeking exemption from making open offer after lapse of four years. 15. For all the aforesaid reasons, we see no merit in Appeal No. 349 of 2017. 16. In the result, both appeals are dismissed with no order as to costs.
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