# PRAMOD JAIN AND OTHERS v. SECURITIES AND EXCHANGE BOARD OF INDIA

- **Citation:** [2016] 9 S.C.R. 178
- **Court:** Supreme Court of India
- **Decided:** 2016-11-07
- **Case number:** CivilAppealNo.9103 of2014
- **Bench:** Anil R. Dave, Adarsh Kumar Goel
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/pramod-jain-and-others-v-securities-and-exchange-board-of-india-31457
- **Pages:** 27

## Headnote

Securities Exchange Board of India (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997 - s.27 - Hostile
takeover of shares - Public Offer - Withdrawal of - On the ground
that due to delay on the part of SEBI in taking decision on the draft
C letter of offer (DLO), the target company siphoned off its coffers,
depleted its valuable fixed assets and eroded its net worth
substantially and thereby the very object of the offer got defeated -
SEBI rejected the application for withdrawal - Securities Appellate
Tribunal upheld the order of SEBI - On appeal, held: There was
D
undue delay on the part of SEBI in dealing with DLO - But the
delay by itself is not enough to justify withdrawal of the offer unless
the case falls under regn.27 - The present case, does not fall under
regn. 27 - Under the scheme of the Regulations there is no bar on
the target company to take decision about its assets, if the statutory
procedure has been complied with and if the decision is otherwise
E
valid - Thus there is no justification for automatic withdrawal from
public offer without clearprejudice to the acquirer to the extent of
rendering the carrying out of public offer impossible - In the facts
of the present case, the request for withdrawal from public offer
was not justified.
F
Dismissing the appeal, the Court
HELD: 1. There was undue delay on the part of the
Securities Exchange Board of India (SEBI) in dealing with the
draft letter of offer (DLO). No doubt, in a given case timeline
prescribed under the Securities Exchange Board of India
G (Substantial Acquisition of shares and take over) Regulations,
1997 may not be adhered to when the SEBI justifiably takes time
in dealing with the complaints. However, mere upholding of finding
of Securities Appellate Tribunal (SAT) on the aspect of delay on
the part of SEBI is not enough to hold that the appellants are
entitled to withdrawal of the public offer. The withdrawal has to
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PRAMOD JAIN AND OTHERS v. SECURITIES AND
EXCHANGE BOARD OF INDIA
be dealt with under Regulation 27 of Securities and Exchange
Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997. The general principle is that public offer once
made cannot be withdrawn. Exception to the rule is the specifit:d
situations under the Regulation. In the present case, though
SEBI was not justified in causing delay in giving its comments on
public offer, this by itself is not enough to justify withdrawal from
public offer so long as the case does not fall under Regulation 27.
[Para 26] (203-A-D)
2. Under the scheme of the Regulations of 1997, public offer
has to be made after due diligence (Regulation 22). Obligation of
the board of directors under Regulation 23 against alienation of
assets, issuance of unissued securities carrying voting rights or
entering into material contracts is applicable only if approval of
general body of shareholders is not obtained. It is clear from the
scheme of the regulations that there is no absolute bar for the
target company to take decision about its assets, subject to
compliance with statutory procedure and subject to the decision
being otherwise valid. There is no doubt that against any ma/a
fide, illegal or unjustified decision of the target company, remedies
at appropriate fora are available to the aggrieved parties. Thus,
there is no justification for automatic withdrawal from public offer
without clear prejudice to the acquirer to the extent of rendering
the carrying out of public offer impossible. In the present case,
ex post facto approval of the general body has since been obtained.
Moreover, SEBI had observed that this aspect of the matter will
be separately enquired into. SEBI as well as the SAT have
concurrently held that public offer is capable of being carried out
and has not become impossible. The assets are available with
the target company. Finding has also been recorded about the
circumstances preceding the public offer and the conduct of the
acquirer whi

## Text

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[2016] 9 S.C.R. 178
PRAMOD JAIN AND OTHERS
v.
SECURITIES AND EXCHANGE BOARD OF INDIA
(CivilAppealNo.9103 of2014)
NOVEMBER 07, 2016
[ANIL R. DAVE AND ADARSH KUMAR GOEL, JJ.)
Securities Exchange Board of India (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997 - s.27 - Hostile
takeover of shares - Public Offer - Withdrawal of - On the ground
that due to delay on the part of SEBI in taking decision on the draft
C letter of offer (DLO), the target company siphoned off its coffers,
depleted its valuable fixed assets and eroded its net worth
substantially and thereby the very object of the offer got defeated -
SEBI rejected the application for withdrawal - Securities Appellate
Tribunal upheld the order of SEBI - On appeal, held: There was
D
undue delay on the part of SEBI in dealing with DLO - But the
delay by itself is not enough to justify withdrawal of the offer unless
the case falls under regn.27 - The present case, does not fall under
regn. 27 - Under the scheme of the Regulations there is no bar on
the target company to take decision about its assets, if the statutory
procedure has been complied with and if the decision is otherwise
E
valid - Thus there is no justification for automatic withdrawal from
public offer without clearprejudice to the acquirer to the extent of
rendering the carrying out of public offer impossible - In the facts
of the present case, the request for withdrawal from public offer
was not justified.
F
Dismissing the appeal, the Court
HELD: 1. There was undue delay on the part of the
Securities Exchange Board of India (SEBI) in dealing with the
draft letter of offer (DLO). No doubt, in a given case timeline
prescribed under the Securities Exchange Board of India
G (Substantial Acquisition of shares and take over) Regulations,
1997 may not be adhered to when the SEBI justifiably takes time
in dealing with the complaints. However, mere upholding of finding
of Securities Appellate Tribunal (SAT) on the aspect of delay on
the part of SEBI is not enough to hold that the appellants are
entitled to withdrawal of the public offer. The withdrawal has to
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PRAMOD JAIN AND OTHERS v. SECURITIES AND
EXCHANGE BOARD OF INDIA
be dealt with under Regulation 27 of Securities and Exchange
Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997. The general principle is that public offer once
made cannot be withdrawn. Exception to the rule is the specifit:d
situations under the Regulation. In the present case, though
SEBI was not justified in causing delay in giving its comments on
public offer, this by itself is not enough to justify withdrawal from
public offer so long as the case does not fall under Regulation 27.
[Para 26] (203-A-D)
2. Under the scheme of the Regulations of 1997, public offer
has to be made after due diligence (Regulation 22). Obligation of
the board of directors under Regulation 23 against alienation of
assets, issuance of unissued securities carrying voting rights or
entering into material contracts is applicable only if approval of
general body of shareholders is not obtained. It is clear from the
scheme of the regulations that there is no absolute bar for the
target company to take decision about its assets, subject to
compliance with statutory procedure and subject to the decision
being otherwise valid. There is no doubt that against any ma/a
fide, illegal or unjustified decision of the target company, remedies
at appropriate fora are available to the aggrieved parties. Thus,
there is no justification for automatic withdrawal from public offer
without clear prejudice to the acquirer to the extent of rendering
the carrying out of public offer impossible. In the present case,
ex post facto approval of the general body has since been obtained.
Moreover, SEBI had observed that this aspect of the matter will
be separately enquired into. SEBI as well as the SAT have
concurrently held that public offer is capable of being carried out
and has not become impossible. The assets are available with
the target company. Finding has also been recorded about the
circumstances preceding the public offer and the conduct of the
acquirer which is based on record. T!te steps for development of
the property had already been initiated and the acquirer had taken
remedies before the Company Law Board against the decision of
the target company and had settled the matter with the target
company. Thus, in the facts of the present case, there is no ground
to interfere with the concurrent finding of the SEBI and the SAT
that request for withdrawal from public offer was not justified.
[Para 27) (203-E-H; 204-A-D]
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[2016] 9 S.C.R.
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Nirma Industries Limited v. Securities and Exchange
Board of India 2013 (3) SCR 662 : (2013) 8 SCC 20;
Securities and Exchange Board of India vs. Mis. Akshya
Infrastructure Pvt. Ltd. (2014) 11 SCC 112 - relied on.
B
29~3 (3) SCR 662
(7014) 11 sec 112
Case Law Reference
relied on
relied on
Para9
Para9
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 9103
of2014.
C
From the Judgment and Order dated 06.08.2014 of the Securities
Appellate Tribunal, Mumbai in Appeal No. 111 of2012.
C. A. Sundaram, Gopal Jain, Sr. Advs., Ms. Rohini Musa, Raj
Panchmatia, Peshwan Jehangir, Prateek Kumar, Aditya Gan ju, (for Ml
s. Khaitan & Co.), Advs., for the Appellants.
D
Ms. Surekha Raman, Anuj Sarma, Ms. Niharika, Ms. Titisha
Mukherjee, (For Mis. K. J. John & Co.), Advs., for the Respondents.
The Judgment of the Court was delivered by
ADARSH KUMAR GOEL, J. I. This appeal has been
preferred under Section 15 Z of the Securities and Exchange Board of
E
India Act, 1992 (the Act) against order dated 61h August, 2014 passed
by the Securities Appellate Tribunal, Mumbai (the SAT) in Appeal
No.I I I of2012. The SAT upheld the order of Securities and Exchange
Board oflndia (SEBI) dated l3 1h April, 2012 rejecting the application of
the appellants for withdrawal of the public offer to acquire shares of the
Golden Tobacco Ltd. in terms of public announcement (PA) dated
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November 12, 2009 under the provisions ofSEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997 (the Takeover Regulations).
FACTS:
2. Golden Tobacco Limited (the target company) is a company
G having its registered office at Tobacco House, S.V. Road, Vile Parle
(West), Mumbai - 400 056. The equity shares of the target company
are listed on the Bombay Stock Exchange Limited (BSE) and the National
Stock Exchange of India Limited (NSE).
3. On November 12, 2009, Mr. Pramod Jain and Pranidhi Holdings
H Private Limited (the acquirers) along with J.P. Financial Services Private
PRAMOD JAIN AND OTHERS v. SECURITIES AND
EXCHANGE BOARD OF INDIA [ADARSH KUMAR GOEL, J.]
Limited (the person acting in concert (PAC) made PA through VC
Corporate Advisors Private Limited (the merchant banker) in accordance
with regulations 10 and 12 read with regulation 14. As on the date of the
PA, the acquirers and PAC collectively held 11, 39, 002 equity shares
(6.47%) of the target company. The PA was voluntarily made by the
acquirers and the PAC to acquire 44, 02, 201 equity shares (25%) of the
target company from its equity shareholders at a price ofRs.101/-(the
offer price) per equity share. At that time, market price of the target
company shares was Rs. l 09/-per share. Networth of the target company
as on 31" March, 2009 was Rs.42.44 crores. Net current assets were
Rs. I 34.4 crores and gross sales were Rs.173.68 crores. The offer was
for hostile takeover of the target company. The PA mentioned that the
prime object of the offer was to acquire substantial shares/voting rights
accompanied with the change and control of the management of the
target company. The acquisition was in the nature of strategic investment
for diversification and growth and to reap the benefit of corporate
opportunities. The draft letter of offer also mentioned that.the PAC had
advanced loan against shares of the target company and on account of
default, it acquire·:~ the said shares representing 5.05% of the equity
share capital. The acquirers and the PAC had also acquired 71034
equity shares at highest and average price of Rs. I 00.15 and Rs.89.13
respectively. Thus, the acquirers and the PAC had 6.47 % of the issue
of equity share capital as on the date of PA. The background of the
acquirers mentioned in the DLO was that Mr. Pramod Jain was prime
Director of PHPL and had experience in financial and consultancy
services.
4. The acquirers and PAC, through the merchant banker, filed the
draft letter of offer (DLO) with SEBI on November, 26, 2009. During
examination of the DLO, certain complaints were received by SEBI
against the acquirers and PAC as well as against the target company
and its promoters. The appellants (the acquirer) in their complaints to
SEBI and other proceedings including petition under Section 397/398 of
the Companies Act before the Company Law Board and a suit before
the Civil Court inter alia questioned the transaction for joint development
ofVile Parle Property in terms of Memorandum ofUnderstanding(MoU)
dated 26
1h September, 2009 with Sheth Developers and Suraksha Realty
Ltd. Various correspondences were exchanged between SEBI and the
merchant banker, acquirers, PAC, the target company and certain other
entities in respect of such complaints.
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[2016] 9 S.C.R.
5. The appellants vide application dated 8th October, 2011 sought
permission to withdraw the offer undef°Regulation 27( 1 )( d). The stand
of the appellants in the said letter was that the SEBI had not taken any
decision on the DLO in two years during which period the management
of the target company had systematically siphoned off its coffers, depleted
its valuable fixed assets and eroded its net worth substantially with the
intention of making it a shell company. This has defeated the very object
of the offer, without any fault on the part of the acquirers. The
management had availed huge high cost borrowing from banks and
financial institutions against its property, including 18. 7 per cent shares
out of the promoters' shareholdings. Disputes were pending before the
arbitrator arising out of default in payments. Most valuable assets of the
target company had been encumbered in violation of SEBI regulations
and against the interest of minority shareholders and the acquirers. Since
the date of PA, financial position of the target company had deteriorated
substantially.
D ORDER OF SEBI
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6. The SEBI vide order dated JJth April, 2012 declined to permit
withdrawal of the PA but observed that alleged violation of Regulation
23 by the target company shall be investigated. It was held that as per
Regulation 23(1 ), the target company was entitled to dispose of its assets
with the approval of the shareholders even after the PA. Correspondence
which the SEBI had with the acquirers was-referred to, with a view to
explain the delay in deciding the DLO. It was observed that the SEBI
had informed the merchant banker of the appellants on 3'd February,
20 I 0 that it was not competent to administer the authenticity of the process
of Resolution in the General Body Meeting (GBM) dated 18th January,·
20 I 0. The merchant banker vide letter dated 5th May, 20 I 0 informed
the SEBI that the acquirers had reached a settlement with the target
company and withdrawn their petition before the Company Law Board
(CLB) against the Resolution dated 18th January, 2010. SEBI had also
advised the merchant banker that it had not been provided any material
in support of the allegation of violation ofRegulation 23 by the target
company in selling its assets. The merchant banker informed the SEBI
vide letter dated J 9th May, 2011 that the acquirers had filed a suit for
restraining the target company from creating any third party interest in
the assets of the target company. The SEBI had also received complaints
against the acquirers and the PAC which were being looked into when
PRAMOD JAIN AND OTHERS v. SECURITIES AND
EXCHANGE BOARD OF INDIA [ADARSH KUMAR GOEL, J.)
the PAC vide letter dated 2nd August, 2011 sought permission to withdraw
the PA. Vide letter dated 91h August, 2011, the acquirers requested that
the process of open offer be kept in abeyance. SEBI vide e-mail dated
9'h September, 2011 responded to the merchant banker, seeking tabulated
list of the allegations of the acquirers and the PAC but instead of doing
so, the merchant banker forwarded request for withdrawal ofthe PA.
It was observed that in the circumstances there was no delay on the
part of the SEBI. It was further observed that the acquirers had
challenged the Resolution of the Extra Ordinal)' General Meeting (EGM)
and had also filed a suit. The acquirers entered into an amicable settlement
before the CLB. SEBI had no jurisdiction in the matter. Referring to
Regulation 22, it was observed that the acquirers could make PA only
after most careful consideration and must ensure that it is able to
implement the offer. Referring to Regulation 27, it was observed that
public offer once made could not be withdrawn except in the
circumstances provided in the said Regulation which had to be construed
strictly. Unchecked automatic withdrawal of offer was capable of being
misused. It was also observed that the acquirers should have used due
diligence with regard to the allegation in FIR dated 251h July, 2009 about
personal borrowings by promoters of the target company by sale of
prime properties as the PA was much after the FIR. The acquirers and
the PAC had already purchased substantial shares of the target company
and thus, could not make PA without exercising due diligence regarding
the financial condition and quality of management of the target company.
The acquirers were not strangers to the target company. They had 6.47
per cent shares. Discoveiy of adverse effects pertaining to financial
health subsequent to the PA could not be a ground to withdraw the PA.
Doing so will jeopardize the interests of the shareholders. The takeover
regulations laid down a self-contained code and withdrawal of public
offer was not governed by principles of withdrawal of an offer under
the Contract Act, 1872.
ORDER OF SAT
7. The above view has been affirmed by the SAT in its impugned
order (by majority). As regards the time line stipulated in Regulation 18,
it was observed that under the second proviso thereto, the SEBI could
take time in making inquiiy on a complaint and thereafter could call for
a revised letter of offer with or with.out re-scheduling the date of opening
or closing the offer. However, it was observed that in the present case,
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SEBI was wholly unjustified in taking more than two years for offering
its comments on the letter of offer submitted by the appellants. This,
however, did not constitute a ground to permit withdrawal of the PA. As
regards the contention that the public offer was frustrated and became
impossible of implementation on account of encumbering of the most
valuable property of the target company in violation of Regulation 23
and other steps of the promoters making the target company a shell
company, it was observed that the target company had taken decision to
develop its Vile Parle property even before the PA. Appellant No. I had
given his offer for joint development of the said property on 291h
September, 2008 but the said offer was rejected and Sheth Developers
were short! isted for the purpose. It was thereafter that the appellants
decided to make hostile takeover public offer to frustrate the decision of
the target company to develop the property with Sheth Developers. It
will be appropriate to refer to the findings of the SAT in this regard:
"14. We see 110 merit in the above contentions. Admittedly,
GTL had decided to develop the Vile-Parle property even
before public offer was made by appellants on Nove111ber I 2,
2009. In fact Appellant No. I had 111ade an offer to GTL on
September 29, 2008 for joint development of Vile-Parle
property by offering · 150 crores as non refundable a111ount
and had suggested profit sharing in the joint venture at a
ratio 50:50. However, GTL rejected the offer 111ade by
appellants and on recommendation of Ernst & Young
shortlisted Sheth Developers as best 20 bidder for joint
development of Vile-Parle property. Thereupon appellants
decided to 111ake hostile public offer on November I 2, 2009
with a v.iew to frustrate decision of GTL to develop the VileParle proper~y jointly with Sheth Developers. Although object
of the proposal to acquire 25% shares of GTL at Rs. 1011per share as against the market price of Rs.1091- per share,
as stated in the public offer was to obtain substantial stake/
voting rights of GTL, it is not in di5pute that appellants were
basically interested in developing the Vile-Parle property. Thus,
it is evident that appellants beingfi'ustrated in their endeavour
to develop the Vile-Parle property, had resorted to the
mechanism of public offer with a view to frustrate the decision
of GTL in jointly developing the Vile-Parle property with Sheth
Developers. Therefore, appellants having made public offer
PRAMOD JAIN AND OTHERS v. SECURITIES AND
EXCHANGE BOARD OF INDIA [ADARSH KUMAR GOEL, J.]
out of .frustration on account of not being able to develop the
Vile-Parle property, are not justified in alleging that entrusting
the development of Vile-Parle property to Sheth Developers
has frustrated the public offer made by appellants.
15. Ad111ittedly, after making public offe1; appellants had filed
Company Petition No. 3 of 2010, wherein specific grievance
was made to the effect that GTL had entered into MOU with
Sheth Developers without disclosing all material facts to the
shareholders and without the approval of shareholders which
was in gross violation of regulation 23 of SAST Regulatio71s,
1997. It was also alleged in the Company Petition that the
promoters of GTL have been mismanaging the affairs of the
company and have siphoned of huge amounts fro111 the
company. as a result whereof. there has been deep decline in
the pe1formance and profitability of the company. Appellants
had also sought an order restraining GTL from holding EGM
which was scheduled to be held on Januaiy 18, 2010.
16. Company Law Board in its order dated January 19, 2010,
recorded statement made by counsel for GTL that in the EGM
held on January 18, 2010 requisite resolutions have been
passed in relation to development of Vile-Parle property and
in implementation of the said resolution third party rights have
been created. By that order Company Lmv Board directed that
during the pendency of Company Petition No. 3 of 20 JO GTL
shall not act upon resolution dated .January 18, 2010 any
furthe1: From aforesaid order passed by Company Lmv Board
it is clear that in view of resolution passed in the EGM held
on .Januaiy 18, 2010, violation of regulation 23 commilted
by GTL in relation to development of Vile-Parle property stood
rectified. Dispute, if any in relation to passing of resolution
on .January 18, 2010 was to be considered at the hearing of
Company Petition No. 3 of 2010.
17. However, on February 8, 2010, appellants withdrew
Company Petition No.3 of 2010 by merely recording that the
parties have amiably settled the matter without any further
claims against each other. Having settled the dispute relating
to development of Vile-Parle property with the promoters/
management of GTL on the basis of undisclosed reasons and
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having withdrawn Company Petition No. 3 of 2010
unconditionally, it is not open to appellants to allege that
their public offer is frustrated on account of GTL entering
into MOU with Sheth Developers for development of VilePar/e property.
18. Similarly, having settled the dispute relating to siphoning
of funds by GTL during 2009-2010 which plea was
specifically raised in Company Petition No. 3 of 2010,
appellants are not justified in agitating the very same issue
before SEBJ on ground that GTL has siphoned of its funds
during the year 2009-2010 and 2010-2011. In other words,
since the plea of siphoning of funds by GTL during the year
2009-2010 and prior thereto having been specifically raised
in Company Petition No. 3 of 2010 and that issue having
~een settled by appellants with the promoters/ management
of GTL for undisclosed reasons, the appellants are not
iustified in reagitating the very same issue before SEBI in
relation to siphoning of f1,mds either during 2009-2010 ot
during 2010-2011.
21. It is relevant to note that appellants, subsequent to
withdrawal of Company Petition No. 3 of 2010 in February
2010, have filed S. C. Suit No. 817 of 2011 in April 2011
before the City Civil Court at Mumbai, alleging for the first
time that the Company Petition No. 3 of 2010 was withdrawn
011 account of oral assurance given by promoters of GTL that
Vile-Parle property would be developed dnly after holding
public auction and that the promoters of GTL have committed
breach of that oral assurance.
·
22. Admittedly, City Civil Court at Mumbai has. granted adinterim relief in favour of appellants on April 26, 2011 and
that ad- interim order continues to be in operation till date . .
Therefore, irrespective of the fact that SEBJ was not justified
in taking more than two. years for approving the draft letter
of offer, in the facts of present case, grievance of appellwits
that the public offer is frustrated and has become impossible
of performance cannot be accepted, because, both grounds
based on which appellants had sought withdrawal of public
offe1; were in fact settled by appellants on .the basis of oral
PRAMOD JAIN AND OTHERS v. SECURITIES AND
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EXCHANGE BOARD OF INDIA [ADARSH KUMAR GOEL, J.]
assurance given by promoters of GTL and further, for the
A
alleged breach of oral assurance, appellants have filed Suit
in the Bombay City Civil Court and obtained stay of
development of Vile-Parle property and that stay is admitted
operating till date.
23. Strong reliance was placed by counsel for appellants on
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decision of SEEi dated February 14, 2014 wherein penalty
of '1 crore has been levied against the promoters of GTL
interalia for violating regulation 23 of SAST Regulations,
1997. No doubt that entering into an MOU by GTL with Sheth
Developers on November 26, 2009 without obtaining approval
of general body of shareholders was in violation of regulation · C
23 of SAST Regulations, 1997. However, admittedly on
January 18, 2010 the general body of shareholders has
authorized GTL to enter into Joint Development Agreement is
in respect of Vile-Parle property. In view of approval granted
by the general body of shareholders on January 18, 2010,
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grievance of appellants that Vile-Parle property has been
encumbered in violation of regulation 23 does not survive at
least from January 18, 2010.
26. Apart from above, as late as on August 9, 2011 appellants
had addressed a letter to SEEi requesting them to keep the
process of open offer in abeyance, because, in the
proceedings pending before the City Civil Court at Mumbai,
GTL had filed an affidavit stating that in the board resolution
dated May 25, 2011 company has decided not to proceed
further with the MOU dated November 26, 2009 (wrongly
stated therein as December 26, 2009) entered with Sheth
Developers and instead take necessary steps to develop the
Vile-Parle property by the company of its own. By the said
letter dated August 9, 2011 appellants called upon SEBI to
investigate about the exact legal status of the Vile-Parle
property, investigate regarding possession of the original title
deeds of Vile-Parle property and investigate regarding
possession of the original title deeds of Vile-Parle property,
investigate regarding usage of funds etc. It was further stated
i11 the said letter until appellants are assured of their concern
on the above issues, SEBI should keep the process of open
offer in abeyance.
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27. Aforesaid letter dated August 9, 2011, clearly falsifies
the case of appellants that the actions taken by promoters of
GTL during the course of two years has frustrated the public
offer, because, if public offer was frustrated, appellants would
not have asked SEBI to keep the process of public offer in
abeyance. Having asked SEBI on August 9; 201.1 to keep the
process of public offer in abeyance, appellants were not
;ustified in filing application on October 11, 2011 seeking
permission to withdraw the open offer on ground that
inordinate. delay has frustrated the open offer. "
8. We have heard learned counsel for the parties.
CONTENTIONS OF THE APPELLANTS
9. Main contention raised on behalfofthe appellants is that there
is no justification for long delay on the part of the SEBI in granting
approval to the offer of the appellant and situation having changed to the
prejudice of the appellant, the appellants are entitled to withdraw their
offer. Since under the scheme of the regulations, the appellants could
not withdraw the offer once made except in circumstances mentioned
in Regulation 27, the reg\!!ation should be read as creating an obligation
on the part of the SEBI to take speedy decision and if there was
unexplained delay resulting in prejudice to the appellants-acquirers, the
appellants are entitled to be absolved of the liability to honour the offer.
GTL had become a BIFR company on account of siphoning off funds by
the pronioters. It was submitted that in absence of obligation to approve
the offer within reasonable time, the promoters could take steps to siphon
the funds or dispose of the assets which could prejudice the interests of
the acquirer. Thus, it could not be held that the acquirer was indefinitely
bound by the offer. Reference was also made to the timeline provided
in Regulation 22and the provisions of Regulation 23. It was submitted
that while normal ups and downs in the market may not be a ground to
permit withdrawal of offer, unilaterai action of the promoters resulting in
transfer of assets could certainly be the ground to permit withdrawal of
G offer. The object of binding an acquirer to the offer is to protect the
interest of the shareholders but this was required to be balanced with
the interest of the acquirer. If the assets arc unduly transferred by the
promoters after the PA, the acquirer was entitled to be relieved from the
offer. SEBI in its capacity as regulator has to adopt an approach which
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is fair to all. In the facts of present case, the decisions of this Court ih
PRAMOD JAIN AND OTHERS v. SECURITIES AND
EXCHANGE BOARD OF INDIA [ADARSH KUMAR GOEL, J.]
Nirma Industries Limited vs. Securities and Exchange Board of
India' and Securities and Exchange Board of India vs. Mis. Aksltya
Infrastructure Pvt. Ltd. 1 relied upon in the impugned order are not
applicable. Even if clause (d) ofregulation 27 is read ejusdem generis
so as to apply only in situations where it is impossible forthe acquirerto
perform the public offer, it cannot exclude situations where SEBI itself
is satisfied that serious prejudice was caused to the acquirer by
intervening actions of the promoters in alienating or encumbering the
assets of the company, rendering it inequitable to require the acquirerto
be bound by its offer. Thus, the obligation of the acquirer cannot be
divorced from the conduct of the promoters in the intervening period.
Apart from distinguishing the judgment in Nirnut Industries Limited
(supra) which has been followed in the impugned order, the judgment in
Mis. Aksltya Infrastructure Pvt. Ltd (supra) was also sought to be
distinguished as being limited to cases where delay by SEBI does not
cause any serious prejudice to the acquirer.
I 0. Thus, the submissions of the appellants are two fold:
(i) The SEBI failed to adhere to ihe timeline prescribed under the
Takeover Code which rendered it impossible for the appellants
to conclude their open offer. Adherence to time line prescribed
under Regulations.18(2), 22(2), (3) and (4) are critical und.er
the Takeover Code, the Bhagwati Committee Report and the
International Practice. The time is of essence in cases of
hostile takeover.
(ii) The existing promoters should not be given an opportunity to
administer a poison pill to defeat the offer of the potential
acquirers. This principle is recognized under Regulation 23.
11. Adverting to the facts it was submitted that first complaint
against the appellants was received on 8'" January, 20 I 0 i.e. 2 I days
after the PA. Complaints against the appellants were frivolous. The
appellants duly responded to the complaints in timely ma1111er. The
complaints were made at the behest of the promoters. The appellants
pointed out various illegal acts of the promoters but the SEBI failed to
take any action. The appellants requested the SEBI to keep the open
offer in abeyance till action was taken against the promoters. This justifies
the prayer of the appellants to withdraw the open offer.
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12. Shri C.A. Sundaram, learned senior counsel for the appellants
submitted that all the members of the SAT (majority as well as minority)
have held the delay by SEBI to be unjustified but still, on erroneous
interpretation, right of the appellants to withdraw the public offer has not
been upheld. Reference was made to the complaint about transfer of
valuable property of the Company which was un-encumbered at the
time of PA. The funds raised from the transaction have been siphoned
off. One of the key promoters was arrested by the Economic Offences
Wing of the Police and remained in jail for one and a half years.
Chargesheet was filed against him. The financial ratio of the target
company reflects manner in which financial position quickly deteriorated
after the PA. The petition filed by the acquirers before the Company
Law Board was withdrawn on the assurance of the promoters that the
assets will not be encumbered without the public auction. Thereafter,
the matter was pending in the civil suit. Thus, there was a breach of
Regulation 23.
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13. Shri Sundaram submitted that open offer was not a concluded
contract but mere invitation to the public to offer their shares. The result
ofnot allowing the offer to be withdrawn will be that the promoters will
be able to sell their shares at the price specified in open offer even when
the value of the shares was far lower. This will be against the policy of
law underlying the Takeover Regulations. Moreover, the 11ction of the
SEBI was required to be fair, reasonable and consistent with Article 14
of the Constitution.
14. Shri Sundaram sought to distinguish the judgments of this Court
in Nimw Industries Limited (supra) and Mis. Aksltya Infrastructure
Pvt. Ltd. (supra) by submitting that unlike the said cases, in the present
case, there was undue delay on the part of the SEBI and prejudice was
caused to the acquirers for reasons not attributable to them. He submitted
that doctrine of frustration under Section 56 of the Contract Act will
clearly apply. As a regulator, th_e SEBI is duty bound to protect the
interest of the acquirer and also to ensure that a genuine attempt by an
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acquirer is not defeated by the promoters by their unilateral action.
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RESPONSE BY THE SEBI
15. Shri Arvind P. Datar, learned senior counsel for the SEBI
opposed the above submissions, he submitted that adverse finding against
SEBI on the issue of delay wa,.s unjustified, but even if the said finding
PRAMOD JAIN AND OTHERS v. SECURITIES AND
EXCHANGE BOARD OF INDIA [ADARSH KUMAR GOEL, J.]
was upheld, the withdrawal of open offer was not permissible under
Regulation 27(1)(d) of the Takeover Regulations. The acquirers held
6.47% share and had lent Rs.8.5 crores to the target company. They.
had purchased shares worth Rs.63.33 lakhs before making the PA. The
first appellant was aware of the acts of mismanagement by the promoters
of the target company. The PA was made with the intention of curbing
fraudulent and the illegal practices of the promoters and for the target
company's benefit. The appellants approached SEBI tO investigate the
illegalities knowing fully well that SEBI's role was only to regulate the
security market. For mismanagement or other ill~galities, remedy was
under Section 397 /398 of the Companies Act which remedy the appellants
had taken. The appellants reached an amicable settlement with the target
company and thereafter approached the civil court. It was wrong to
state that the target company had become defunct. The target company
continued to own the Vile Parle property worth Rs.2000 crores.
16. Shri Datar submitted that more than 43 complaints/letters were
received which were to be dealt with by SEBI. In such circumstances,
it could not be held that there was undue delay on the part of the SEBI
in dealing with the DLO.
17. It was submitted that the appellants ought to have exercised
due diligence before making the PA. The appellants were not strangi;irs
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and had 6.47% shares. They had advanced loan of Rs.8.5 crores and
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acquired shares worth Rs.66.33 lakhs before the PA. They were awart"'-
of the FIR and alleged acts of mismanagement they had resorted to
public offer out of frustration against the decision of the target company
developing the Vile Parle property with Sheth Developers. They settled
the matter before the Company Law Board with the target company
and also approached the civil court for alleged breach of settlement and
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obtained stay of development of the Vile Parle property. In these
circumstances, the plea of frustration could not be allowed to be raised
by the appellants. The PA could not be allowed to be withdrawn merely
on the ground that the acquirers find it not to be a prudent decision.
Moreover, the company still owns assets and was not a shell company
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and no prejudice was suffered by the acquirers. Referring to the penalty
levied by SEBI on the target company for entering into a MoU without
approval of the General Body, it was submitted that this could not furnish
a ground for withdrawal of the PA. Appellants had raised the issue before
the CLB and settled the matter.
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A QUESTIONS
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18. The rival submissions require us to determine the following
questions:
(i) To what extent is the timeline laid down under the Takeover
Regulations required to be adhered to and effect of delay by
SEBI in the present case?
(ii) To what extent unilateral action of the target company in
dealing with the property of the company after a hostile public
offer is made furnish cause of action to the acquirers to
withdraw the public offer and whether in the present case,
decision not permitting withdrawal of public offer is justified?
THE TAKEOVER REGULATIONS
19. Needless to mention that mergers and takeovers are well known
processes in the corporate world. Acquisition of controlling interest ofa
company can be friendly or hostile. In a friendly acquisition, management
D of the target company sells its controlling shares to the acquirer. Where
management of the target company is unwilling to negotiate with an
acquirer, the acquirer can directly approach the shareholders by making
an open offer which is called Hostile takeover. A Hostile takeover helps
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to unlock the hidden value of the shares and puts pressure on the
management to work efficiently. On the other hand, it has potential of
unduly upsetting the nonnal functioning of a target company. Thus, there
is an undoubted need to regulate the process of acquisition and takeovers
in post- liberalisation era after 1991. It is well known that takeover attempt
being unpleasant for the target company is normally met with defence
strategies such as 'Poison Pills' (makingtakeoverunviable fortheacquirer
by making the cost of acquisition unattractive), 'Shark Repellents'
(measures to repel an unwanted takeover) sale of valuable assets, etc.
20. Justice P.N. Bhagwati Committee was appointed in November,
1995 to review the existing framework of regulations and to suggest
amendments in the interest of investors and all parties concerned in the
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acquisition process. The Committee kept in mind the following principles:
"i. Equality of treatment and opportunity to all shareholders.
ii. Protection of interests of shareholders.
iii. Fair and truthful disclosure of all material information by the .
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acquirer in all public announcements and offer documents.
PRAMOD JAIN AND OTHERS v. SECURITIES AND
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iv. No information to be furnished by the acquirer and other parties
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to an offer exclusively to any one group of shareholders.
v. Availability of sufficient time to shareholders for making
informed decisions.
vi. An offer to be announced only after most careful and
responsible consideration.
vii. The acquirer and all other intermediaries professionally involved
in the offer, to exercise highest standards of care and accuracy
in preparing offer documents.
viii.Recognition by all persons connected with the process of
substantial acquisition of shares that there are bound to be
limitations on their freedom of action and on the manner in
which the pursuit of their interests can be carried out during
the offer period.
ix. All parties to an offer to refrain from creating a false market
in securities of the target company.
x. No action to be taken by the target company to frustrate an
offer without the approval of the shareholders." 3
The Committee made various recommendations including
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requirement of disclosure by the acquirers, procedure for public
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announcements, obligations of the acquirers and the target company.
This led to the adoption of the 1997 Takeover Regulations.
21. We may reproduce some of the Regulations which are
necessary for the decision of controversy in the case before us :
" Acquisition of fifteen per cent or more of tile shares or
voti11g rig/its of any compa11y.
JO.No acquirer shall acquire shares or voting rights which
(taken together V.1ith shares or voting rights, if any, held
by him or by persons acting in concert with him), entitle
such acquirer to exercise fifteen per cent or more of the
voting rights in a company, unless such acquirer makes a
public announcement to acquire shares of such company
. in accordance with the regulations.
'Justice P.N. Bhagwati Committee Report on Takeovers
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Acquisition of control over a company.
12.Irrespective of whether or not there has been any
acquisition of shares or voting rights in a company, no
acquirer shall acquire control over the target company,
unless such person makes a public announcement to
acquire shares and acquires such shares in accordance
with the regulations ....
Timing of the public announcement of offer.
14.(1) The public announcement referred ta in regulation JO
or regulation 11 shall be made by the merchant banker
not later than four working days of entering into an
agreement for acquisition of shares or voting rights or
deciding to acquire shares or voting rights exceeding the
respective percentage specified therein ....
Submission of letter of offer to the Board.
18.