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C.A.No.3219/06  etc.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3219 OF 2006

Kosha Investments Ltd.        …..Appellant

Versus

Securities & Exchange Board of India & Anr. …..Respondents

WITH

CIVIL APPEAL NO. 2132 OF 2007

J U D G M E N T

SHIVA KIRTI SINGH, J.

1. Both  the  appeals  have  been  preferred  by  the  same

appellant under Section 15Z of the Securities & Exchange Board

of India Act, 1992 (for short, ‘SEBI Act’).  The main appeal is of

2006 and requires detailed consideration.  It is directed against

order dated 08th August 2005 passed by the Securities Appellate

Tribunal  upholding  and  confirming  the  order  of  Securities  &

Exchange  Board  of  India  (SEBI)  dated  27th January  2004

directing the appellant to make public announcement in terms of

Regulation 11(1)  of  the Securities  & Exchange Board of  India

(Substantial  Acquisition  of  Shares  &  Takeovers)  Regulations,

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C.A.No.3219/06  etc.

1997 (hereinafter referred to as ‘the Regulations of 1997).  The

other  appeal  is  directed  against  orders  passed  by  SEBI  and

confirmed by the Tribunal to impose penalty upon the appellant

for non-compliance with the order which is subject matter of the

earlier appeal.  It goes without saying that the latter appeal will

follow the fate of the main appeal.

2. Before adverting to the issues of law raised on behalf of the

appellant, the essential facts may be noticed only in brief.  The

appellant,  Kosha Investments Ltd., acquired shares of another

company Snowcem India  Ltd.  (hereinafter  referred to  as  ‘SIL’)

from one of the original promoters of SIL and thus itself became

one  of  the  promoters.   An  investigation  by  SEBI  covered  the

period  June  1999 to  August  1999  when there  was  an  initial

upward  movement  in  the  price  of  shares  of  SIL  and  also

substantial increase in the volume of their trade.  As a result of

such  investigation  the  appellant  faced  charges  in  another

proceeding  under  SEBI  (Prohibition  of  Fraudulent  and  Unfair

Trade Practices relating to Securities Market) Regulations, 2003

and was also served with a show cause notice dated 14.11.2002

for alleged breach of provisions of Regulation 44 and 45(6) of the

Regulations of 1997 read with provisions of Section 11 and 11B

of the SEBI Act.  The proposed action under Regulations of 1997

was based upon report of investigation showing that appellant

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C.A.No.3219/06  etc.

had consistently bought and sold shares of  SIL prior to June

1999 and also after August 1999.  As per record it was holding

21,32,900 shares  of  SIL constituting  20.29% of  total  paid  up

capital of SIL.  The appellant made additional purchase of shares

amounting to 10.81% of the paid up capital of SIL in violation of

Regulation 11(1) of the Regulations of 1997 as it failed to make

the  required  public  announcement  in  terms  of  the  said

Regulation.  After granting personal hearing and considering the

appellant’s  reply  to  the  show cause  notice,  in  the  final  order

SEBI came to a finding that as on 31st March 1999 appellant was

actually holding only 21,32,900 shares as shown by SEBI and

not 31,84,228 shares which was claimed by the appellant on the

ground that it had already pledged its shares to lenders who had

lent money to SIL.  The plea of pledge raised by the appellant

was  found  without  any  substance  and  only  an  attempt  to

conceal  subsequent  purchase.   Hence,  SEBI  came  to  a

conclusion that the appellant was already holding between 15%

to 75% shares of the target company SIL and it could acquire

additional shares of this company through creeping acquisition

mode, that is, without public announcement only upto 5% of its

paid up capital during the period of 12 months ending on 31st

March 2000.   However,  by acquiring  11,36,700 shares of  SIL

during  June  1999  to  August  1999  it  acquired  shares

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C.A.No.3219/06  etc.

constituting more than 5% of the paid up capital of SIL.  For

making such acquisition, the appellant was liable to make public

announcement  as  required  by  Regulation  11(1)  of  the

Regulations of  1997.  Since the appellant failed to do so,  the

Whole  Time  Member  of  SEBI  held  it  guilty  and  issued  the

following directions on 27th January 2004 :

“15.  In  view  of  the  findings  above  and  in exercise  of  the  powers  conferred  upon  me  under Section 19 read with Section 11B of SEBI Act read with regulations,  I  hereby direct the acquirer viz., Kosha  Investments  Ltd.  to  make  public announcement in terms of  regulation 11(1)  of  the said  Regulations  taking  June  29,  1999  as  the reference  date  for  calculation  of  offer  price.   The public announcement shall be made within 45 days of passing of this order.

16.  ……..  The  Acquirers  are  hereby accordingly  directed  to  pay  interest  @  15%  per annum to the share holders for the loss of interest caused to the shareholders from October 28, 1999 till the date of actual payment of consideration for the shares to be tendered and accepted in the offer directed to be made by the Acquirers.

17.  It  is  also  noted  that  an  order  dated 3.12.03  was  passed  by  me restraining  the  Kosha Investments Ltd. from buying, selling or dealing in securities in any manner, directly or indirectly, for a period of  two years  for  violating  the provisions of SEBI  (Prohibition of  Fraudulent  and Unfair  Trade Practices Relating to Securities Market) Regulations, 1995.   However,  I  direct  the  said  order  dated 3.12.2003 shall not hamper the implementation of this order.”

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C.A.No.3219/06  etc.

3. The  appellant  preferred  an  appeal  before  the  Securities

Appellate  Tribunal  to  challenge  the  order  dated  27th January

2004  passed  by  Whole  Time  Member  of  SEBI.   The  main

contention of  the appellant  before the Tribunal is  recorded in

paragraph 7 of the impugned judgment and is as follows :

“Learned counsel for the appellant argued that KIL had been regularly purchasing and selling shares of SIL.  He also argued that KIL had not acquired 5% or more than 5% shares or voting rights in respect of shares of SIL at any point of time in the period of 12 months.  He submitted that out of 11,36,700 shares which were purchased during June, 1999 to August, 1999 during the same period KIL also sold number of shares  of  SIL.   He  pointed  out  that  KIL  was  not holding  more  than  5% shares  of  SIL  at  any  point during  the  year  and  therefore  the  provisions  of Takeover  Code  did  not  trigger.   He  further  argued that  even  if  SEBI  did  not  take  into  account  the repurchases of  pledged shares as return of  shares, SEBI should accept that KIL did not acquire 5% or more  shares  at  any  point  of  time  since  sale  and purchase of  shares was being done simultaneously and did not trigger the Takeover Code.  He argued that SEBI ought to have taken into account that KIL also sold shares during the relevant period.  He went on to argue that it was erroneous to determine the total share holding of KIL at any given point of time during the  investigation  by completely  ignoring the sale of shares made by it during the relevant period. He  said  that  such  a  lopsided  interpretation  of Takeover  Code  would  be  erroneous  and  not maintainable.   He  said  that  determining  the shareholding of  a  person without  netting off  would give a distorted picture.  He therefore concluded that for  the  reason  mentioned  above,  the  provisions  of Takeover Code were not applicable in this case and no violation of SEBI Regulations has taken place.”

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C.A.No.3219/06  etc.

4. The Tribunal accepted the counter arguments advanced on

behalf of the SEBI to the effect that even during the period June

1999  to  August  1999  the  appellant  had  acquired  6,61,800

shares which constituted 6.29% of  the paid up capital  of  SIL

which was beyond the permissible limit  of  5% and hence the

requirement  of  making  public  announcement  in  terms  of

Regulation  11(1)  had  to  be  met  by  the  appellant  which  the

appellant failed to do.

5. Before  the  Tribunal  as  well  as  before  us  the  main

contention of the appellant is that SEBI failed to consider that

the appellant was not only a promoter having more than 15%

shares  of  SIL  but  it  was  also  in  the  business  of  sale  and

purchase of shares which was being done simultaneously and

hence exceeding the limit of 5% at any one point of time was

immaterial  unless on a net accounting it  could be found that

such ceiling of 5% had been violated by appellant on account of

its retaining more than 5% shares of SIL at the end of a financial

year.  On the other hand SEBI have reiterated their stand before

the Tribunal that the ceiling of making acquisition of only up to

5% of the paid up capital of target company was no doubt to be

reckoned during a period of 12 months, that is, a financial year

but the requirement  of  Regulation 11(1)  of  the Regulations of

1997 of making a public announcement was triggered not only

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C.A.No.3219/06  etc.

on actual acquisition beyond the 5% limit but even on entering

into an agreement for such acquisition or deciding to acquire

such volume of shares or voting rights, in view of provisions of

Regulation 14(1) of the Regulations of 1997.  A strong emphasis

was  laid  on  Regulation  14(1)  which  requires  the  public

announcement referred to in Regulation 10 or Regulation 11 to

be  made  by  the  acquiring  company  (through  its  merchant

banker),  not later than four working days of the  agreement or

decision  to  acquire  the  requisite  number  of  shares  or  voting

rights which by itself triggers the requirement of Regulation 11.

(emphasis  added)   Let  us  conceptualize  the  case of  an entity

holding 20 per cent of shareholding in a target company on 1st

April of a given year.  If it were to increase its holding by say 3

per cent and subsequently reduce it to 2 per cent.  It at that

point it intended to purchase 4 per cent shares again, whether

by way of fractions or otherwise, it would cross the threshold of

5  per  cent.   It  would  then  have  to  make  compliance  with

Regulation  11.   We  hasten  to  clarify  that  if  the  aggregate

percentage  of  acquisitions  at  any  point  of  time  during  the

financial  year  exceeds  5  per  cent,  the  provision  would  get

triggered.  In  other  words,  the  provision  of  Regulation  11

mandating  a  public  announcement  will  kick  in  at  any  stage

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C.A.No.3219/06  etc.

whence the shareholding of the said entity in the target company

would exceed 25 per cent.  

6. It will be relevant at this stage to extract Regulations 11(1),

13,  14(1)  and  14(2)  in  order  to  appreciate  the  submissions.

These read as follows :

“11.  (1)  No  acquirer  who,  together  with  persons acting  in  concert  with  him,  has  acquired,  in accordance with the provisions of law, 15 per cent or more  but  less  than fifty  five  per  cent  (55%) of  the shares or voting rights in a company, shall acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him to exercise more than 5 per cent of the voting  rights,  in  any  financial  year  ending  on  31st March  unless  such  acquirer  makes  a  public announcement to acquire shares in accordance with the regulations.  

12. …. …. …. ….

13. Before  making  any  public  announcement  of offer referred to in regulation 10 or regulation 11 or regulation 12, the acquirer shall appoint a merchant banker  in  Category  I  holding  a  certificate  of registration  granted  by  the  Board,  who  is  not  an associate  of  or  group  of  the  acquirer  or  the  target company.

14. (1)  The  public  announcement  referred  to  in regulation 10 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:

Provided  that  in  case  of  disinvestment  of  a  Public Sector Undertaking, the public announcement shall be made by the merchant  banker not  later  than 4

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C.A.No.3219/06  etc.

working  days  of  the  acquirer  executing  the  Share Purchase Agreement or Shareholders Agreement with the Central Government or the State Government as the  case  may  be,  for  the  acquisition  of  shares  or voting  rights  exceeding  the  percentage  of shareholding  referred  to  in  regulation  10  or regulation 11 or the transfer of control over a target Public Sector Undertaking.

(2) In the case of an acquirer acquiring securities, including  Global  Depository  Receipts  or  American Depository Receipts which, when taken together with the  voting  rights,  if  any  already  held  by  him  or persons acting in concert with him, would entitle him to voting rights, exceeding the percentage specified in regulation  10  or  regulation  11,  the  public announcement referred to in sub-regulation (1) shall be made not later than four working days before he acquires  voting  rights  on  such  securities  upon conversion, or exercise of option, as the case may be.”

7. A careful reading of  the aforesaid Regulations discloses

that  the  public  announcement  should  not  be  delayed beyond

four working days of the agreement or decision to acquire the

requisite number of shares or voting rights. We are in agreement

with the finding of the Tribunal on this issue and find no merit

in the contentions of the appellant. If the plea of appellant will be

accepted then an acquirer can keep on violating Regulation 11(1)

with impunity on as many occasions as he/it wants and avoid

letting the public have the required knowledge through public

announcements by simply making subsequent sale or transfer to

another entity so as to reduce the so-called net acquisition in a

financial year to within 5%. This interpretation will  defeat the

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C.A.No.3219/06  etc.

purpose  of  Regulation  11(1)  and  shall  also  render  Regulation

14(1) otiose. The concept of permitting creeping acquisitions by

permitting not more than 5% of the shares or voting rights in a

company limits the period for such acquisition to a financial year

ending  by  31st March.  But  such  concept  does  not  dilute  the

requirement of making a public announcement within the time

mentioned in Regulation 14(1) if the acquisition even if only once

made and divested, is of more than 5% of shares or voting rights

in the target company. In other words, even if such acquisition is

followed  by  sale  in  the  same  financial  year,  the  liability  of

making the public announcement would remain unaffected and

shall attract action, as in this case.

8. Hence,  the  main contention advanced on behalf  of  the

appellant is found to be without any merit. The other contention

is that Regulation 14(2) of the Regulations of 1997 postpones the

time for required public announcement to acquisition of voting

rights  when  purchased  securities  are  actually  converted.

According to the contention, only when securities or shares are

converted  by  the  acquirer  into  voting  rights  by  getting  it

registered or upon exercise of option to acquire voting rights, the

liability of making public announcement can be fastened.  

9. Aforesaid  plea  has  been  rightly  countered  by  learned

Senior Advocate for SEBI, Mr. C.U. Singh by pointing out that in

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C.A.No.3219/06  etc.

case  of  acquisition  of  shares  or  voting  rights  the  appropriate

applicable provision is Regulation 14(1) and not Regulation 14(2)

which applies only  when the acquisition is  of  other securities

including  Global  Depository  Receipts,  American  Depository

Receipts. It is only such securities which require conversion or

exercise of option which is contemplated by Regulation 14(2). He

also pointed out that no such plea was raised before the SEBI or

the  Tribunal  and  rightly  because  in  the  present  case  only

Regulation 14(1) is applicable as it covers acquisition of either

the shares or the voting rights or both which are the subject

matter  of  Regulation  11(1).  Mr.  Singh  has  also  referred  to  a

judgment of this Court in the case of  Swedish Match AB and

Another  vs.  Securities  &  Exchange  Board  of  India  and

Another, (2004) 11 SCC 641. This judgment in paragraphs 90

onwards considered the purpose and effect of Regulations 10, 11

and 12 of the Regulations of 1997 and in paragraph 102 held

them  to  be  mandatory  statutory  provisions.  However  this

judgment needs no elaborate consideration because no plea has

been  raised  on  behalf  of  appellant  that  the  Regulations  are

directory or do not require compliance.  

10. We find that the plea that the matter at hand relates to

Regulation 14(2) was not raised before the original authority or

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the Tribunal. We also find that it is a plea of desperation and

undeserving of acceptance.  

11. In the final analysis we find no merit in these appeals and

hence they are dismissed with consolidated cost of Rs. 50,000/-

to be paid by the appellant to SEBI within eight weeks.

     …………………………………….J.       [VIKRAMAJIT SEN]

              …………………………………..J.                  [SHIVA KIRTI SINGH]

New Delhi. September 18, 2015.

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