REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.5675 OF 2017

LAUREL ENERGETICS PVT. LTD.                   APPELLANT                                 VERSUS

SECURITIES AND EXCHANGE BOARD  OF INDIA                                      RESPONDENT

WITH CIVIL APPEAL NO.5694 OF 2017

  J U D G M E N T R.F.NARIMAN, J.

The present appeals relate to an interesting question regarding the interpretation of Regulation 10 of the SEBI Takeover Regulations of 2011.

The factual backdrop in which the present controversy arises is that Indiabulls Real Estate Ltd. (hereinafter referred  to  as  “IBREL”)  was  incorporated  as  a  Public Limited Company on 4th April, 2006, which  carried on the business  of  real  estate.  It  was  later  listed  on  the National  Stock  Exchange  as  well  as  the  Bombay  Stock Exchange  in  2007.   We  are  further  informed  that  the aforesaid company entered into the business of generating power thereafter, in the year 2009.  The appellant herein

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was  incorporated  as  a  private  Ltd.  Company,  being  a wholly owned subsidiary of Nettle Construction Pvt. Ltd., some  time  in  2010.   This  Company  in  turn,  was  wholly owned by Mr. Rajiv Rattan.  Both the Appellant and Rajiv Rattan were listed as  promoters of the said company in IBREL  in  the  Annual  Report  for  the  Financial  Year 2009-2010.

For the purpose of disposing of the present appeals, the “Target Company” is Rattan India Infrastructure Ltd. It  was  originally  incorporated   as  a  wholly  owned subsidiary of IBREL on 9th November, 2010 with a different name  which  is  not  material  for  the  purpose  of  these appeals.   

In 2011, the Board of Directors of IBREL framed a demerger scheme by which the power business of the company would be demerged and would vest in the Target Company. The High Court of Delhi sanctioned the aforesaid demerger by its judgment and order dated 17th October, 2011.  What is important for the purpose of this appeal is that on 19th

July,  2012,  an  information  Memorandum  in  terms  of  the listing  agreement  was  filed  by  the  Target  Company, pursuant to which it was actually listed on the Bombay Stock  Exchange  and  the  National  Stock  Exchange  on  20th

July,  2012.   The  appellant  acquired  18%  of  the  equity share holding of the target company at a price of Rs.6.30 per share some time in July, 2014.  It made certain other

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purchases with which we are not concerned, because the price paid for those acquisitions was less than Rs.6.30 per share.   

On 20th October, 2015 Laurel and Arbutus Consultancy LLP along with various other entities, who were persons acting  in   concert,  made  a  public  announcement  under Regulation 15(1) of the SEBI Substantial Acquisition of Shares and Takeover Regulations, 2011 when an open offer was made for acquisition of 35,93,90,094 equity shares of the  Target  Company  from  the  equity  shareholders  of  the Target  Company  at  the  price  of  Rs.3.20  per  share. Necessary formalities were observed thereafter, but by a letter dated 4th December, 2015, SEBI observed that the exemption provisions contained in Regulation 10 would not apply to the 2014 acquisition, as a result of which the price of Rs.3.20 per share was not accepted and the higher price of Rs.6.30 was stated to be an amount that would have to be paid to  the equity shareholders of the Target Company. By a letter dated 5th May, 2016, containing SEBI's Order, SEBI stated:

“It  has  been  observed  that  the acquisitions  made  through  inter  se transfers  amongst  promoters  on  July  9, July  10,  2014  September  5,  2014,  and October 20, 2014, were not exempted from open offer obligations.  You are advised to  revise  the  Offer  Price  accordingly. Further,  along  with  the  consideration amount, you are advised to pay a simple interest  of  10%  per  annum  from  the scheduled   date  of  payment  of consideration  based  on  these  triggering

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dates  to  the  actual  date  of  payment  of consideration to the shareholders who were holding  shares  in  the  Target  Company  on the date of violation and whose shares are accepted  in  the  Open  Offer,  after adjustment of dividend paid, if any.  You are also advised to enhance the financial arrangements and the amount maintained in the escrow account in terms of the revised Offer Price and the revised Offer Size, if any.”

From  the  aforesaid  order,  the  Appellate  Tribunal dismissed  an  appeal  on  5th April,  2017,  holding  that Regulation 10 did not exempt the acquisitions of 2014, as a result of which the price payable per share necessarily became  Rs.6.30  instead  of  Rs.3.20  per  share.  The correctness of the aforesaid order is now before us.

Shri  K.V.  Vishwanathan,  learned  senior  counsel appearing  on  behalf  of  the  appellant,  has   taken  us through the Appellate Tribunal judgment as well as various other documents.  It is his submission that Regulation 10 must be construed taking into account its object, and when this is done,  it is clear that the promoters for IBREL, being the same right  from the date of its incorporation, and by continuing as such even after the demerger into the present Target Company, the Regulation should be read in accordance with the object sought to be achieved, which is that  where  there  is  stability  in  the  Company  and  the promoters in that Company do not change for a period of three years or more, inter se transfers between them at prices agreed to between them should be exempt from the

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aforesaid 2011 Regulations.  For this purpose, he referred us to the earlier Regulations which are in  pari materia with the 2011 Regulations and also took us through the Achuthan Committee Report dated 19th July, 2010.  He also placed  great  emphasis  on  the  Bhagwati  Committee  Report which shows that the object of Regulation 10 is not to penalise  persons  who  had  remained  in  control  of  a particular  business  entity,  notwithstanding  that  it  may ultimately  change  form.   His  argument  was  that  had  no demerger   taken  place,  it  would  be  clear  that  the promoters of IBREL, having been promoters for over three years, would be exempt from the Takeover Regulations, in which  case the 2014 purchases could not be taken into account for the purpose of the present open offer.  He has also taken us through the various judgments of this Court dealing with analogous situations in which a mere change in form from a partnership firm into a limited company would not necessarily lead to the conclusion that, under various State Rent Acts, a sub-tenancy had taken place. According to him, these judgments would apply on the facts of the present case inasmuch as, at no point of time, have the promoters of the power business of IBREL and now of Rajiv Rattan ever changed.

As against the said arguments, Shri Arvind P. Datar, learned  senior  counsel  appearing  on  behalf  of  the respondent SEBI, has argued before us that there is no

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necessity to interfere with the well reasoned Appellate Tribunal judgment,  which according to him ought not to be interfered with unless found to be perverse under 15-Z of the SEBI Act.  Also, according to him, it is not possible to go to the object of a provision when the language of the  said  provision  admits  of  no  doubt.   Therefore, according to him, the Tribunal judgment ought not to be interfered with.

Having heard learned counsel for both parties, it is necessary to first set out the relevant Regulation of the 1997 predecessor Regulations. Regulation 3 states:

“3.  (1)  Nothing  contained  in regulations  10,  11  and  12  of  these regulations shall apply to:

(e)  inter se transfer of shares amongst- [(i)   group coming within the definition of group  as  defined  in  the  Monopolies  and Restrictive Trade Practices Act, 1969 (54 of 1969)  where persons  constituting such  group have been shown as group in the last published Annual Report of the target company;] (ii)  relatives within the meaning of section 6 of the Companies Act, 1956(1 of 1956); (iii)  (a)  [Qualifying Indian promoters] and foreign collaborators who are shareholders; (b)  [qualifying promoters]:

Provided that the transferor(s) as well as the transferee(s) have been holding shares in the target company for a period of at least three  years  prior  to  the  proposed acquisition.]

[Explanation-  For  the  purpose  of  the exemption  under  sub-clause  (iii)  the  term

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[“qualifying promoter”] means- (i)   any person who is directly or indirectly in control of the company; or  (ii)   any person named as promoter in any document  for  offer  of  securities  to  the public  or  existing  shareholders  or  in  the shareholding pattern disclosed by the company under  the  provisions  of  the  Listing Agreement, whichever is later;”

The  present  Regulation  with  which  we  are  directly concerned is Regulation 10, the relevant part of which is set out hereunder: GENERAL EXEMPTIONS

10.(1)  The following acquisitions shall be exempt from the obligation to make an open offer  under  regulation  3  and  regulation  4 subject  to  fulfillment  of  the  conditions stipulated therefor,-

(a)   acquisition  pursuant  to  inter  se transfer  of  shares  amongst  qualifying persons being,- (i)  immediate relatives; (ii)  persons  named  as  promoters  in  the shareholding  pattern  filed  by  the  target company in terms of the listing agreement or these  regulations  for  not  less  than  three years prior to the proposed acquisition;” It is important to first read the general exemption

provision by itself.  What has been stressed by Shri K.V. Vishwanathan, learned senior counsel for the appellant, is that the acquisition must be pursuant to inter se transfer of  shares  amongst  qualifying  persons  who,  for  our purposes, are persons who are promoters of a particular entity.  On a plain reading  of the provision, it is clear

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that  persons  must  be  named  as  promoters  in  the shareholding pattern filed by the “Target Company”.  The Target  Company  is  separately  defined  by  the  2011 Regulations in paragraph 2(z) thereof as follows:

2(z)  “target  company”  means  a  company  and includes  a  body  corporate  or  corporation established under a Central legislation, State legislation or Provincial legislation for the time being in force, whose shares are listed on a stock exchange;”

In  so  far  as  the  facts  of  the  present  case  are concerned, the definition that  we are concerned with is that of a company, and not any other corporate entity. For the purpose of the present case, the Target Company, therefore, means a company whose shares are listed on a Stock Exchange.  This would mean, on the facts of the present case, the Rattan Company, whose shares are listed on the two Stock Exchanges as mentioned above.  Coming back to Regulation 10, it is thus clear that persons named as  promoters  in  the  shareholding  pattern  filed  by  the Rattan Company in terms of the listing agreement between the two Stock Exchanges is what is to be looked at.  And for this purpose persons must be promoters of the Rattan Company  for  not  less  than  three  years  prior  to  the proposed  acquisition  in  order  that  the  exemption  under paragraph 10 would apply.  On the facts of this case, therefore, the information memorandum having been filed on 19th July, 2012 pursuant to which listing took place one

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day later, is the relevant date from which this period is computed.   This  being  the  case,  three  years  had  not elapsed on 9/10th July, 2014, which was the date on which the earlier purchase of shares had taken place.

However, Mr. Vishwanathan has argued that Regulation 10 should be read in the light of its object and has made three distinct submissions in this behalf. He argued, based on the Reports of two committees and further on the basis of Regulation 10 itself, that it would be permissible for us to get to the real state of affairs, which is that the promoters,  having  been  the  same  since  the  inception  of IBREL, we should read this provision so as to confer a benefit that was sought to be conferred by the framers of the Regulation.

First, the two Reports: When  we  turn  to  the  Bhagwati  Committee  Report  of

2002,   so  far  as  inter  se transfers   were  concerned, commenting on Regulation 3 of the 1997 Regulations,  it was noted as under :

“The Committee noted that the Regulation 3  exempt  acquisitions  through  inter  se transfers among group companies, relatives and promoters. There may not be any cause for concern in respect of inter se transfers amongst  group  and  relatives  as  in  such cases, the control continues to remain with the  group.  However  the  issue  assumes significance  when  it  involves  interse transfers  amongst  promoter  groups  such  as between a foreign collaborator and an Indian promoter  or  between  two  groups  of  Indian promoters. In such cases, there is bound to be  perceptible  change  in  control.  The

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Committee noted that the arguments raised in such cases are that while the shareholder with  substantial  holding  gets  an  exit, sometimes  at  very  high  prices,  the  other shareholders are denied such benefit. It is also  possible  that  in  such  cases,  the investment was made by the shareholder on the  strength  of  the  existing  shareholder with substantial holding. There was a strong feeling  that  in  such  cases  of  transfers, there should be a requirement of compulsory open offer.”

Finally, the Committee recommended that as regards  inter se  transfers  amongst  promoters,  the  existing  provisions  may continue.  Indeed,  therefore,  there  is  no  difference  in  the Regulations of 1997, and the Regulations of 2011 so far as transfers among promoters is concerned, especially after the explanation  that  was  added  to  Regulation  3  in  2005.  It  is significant to notice that the Committee did not positively state that Regulation 3 should be construed in any particular manner, except to state that there is no cause for concern in respect  of  inter  se  transfer  within  the  group  if  control continues to remain within the group.  

Coming  to  the  Achuthan  Committee  Report  of  2010,  this Committee noted :

“In respect of inter-se transfers amongst certain “qualifying parties” as listed and defined under the Takeover Regulations, the Committee recommends that, in order to curb the abuse of introduction of new entities as  qualifying  parties,  in  most  cases  a requirement of pre-existing relationship of at least three years has been prescribed. In  particular,  the  current  exemption  on Group  Companies  which  does  not  have  this three year requirement has been restricted to  transfers  between  co-subsidiaries  and their parents where there is no change in

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control” In a significant sentence, however it stated that :

“However, if the schemes do not really involve or deal with the target company per se, and an acquisition of shares or voting rights  in,  or  control  over  the  target company  were  to  take  place  beyond  the thresholds  specified  for  the  open  offer obligations, as a consequence of the main scheme, the treatment should be different.”

Although, it is true that this Committee's recommendations do disclose that the object of the regulation is to curb the abuse of introduction of new entities as qualifying parties, this again is tempered with a later sentence which states that if schemes do not really involve or deal with a target company per  se,  then  only  would  the  treatment  of  such  open  offer obligations be different.

When we come to Regulation 10 itself, and we see some of the other clauses contained in the regulation,  with which we are not directly concerned, the corporate veil is lifted in certain specified circumstances. Sub regulation (iii) is set out hereinunder :

“(iii) a company, its subsidiaries, its holding company, other subsidiaries of such holding company, persons holding not less that fifty per cent of the equity shares of such company, other companies in which such persons hold not less than fifty per cent of  the  equity  shares,  and  their subsidiaries subject to control over such qualifying persons being exclusively held by the same persons;”

A reading of this sub regulation would show that holding companies  and  their  subsidiaries  are  treated  as  one  group

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subject to control over such companies being exclusively held by the same persons. This shows that it has been statutorily recognized in sub regulation (iii) that in a given situation viz holding subsidiary relationship, the corporate veil would be lifted.  

When we come to sub regulations (iv) and (v), it is clear that these two sub regulations follow the pattern contained in sub regulation (ii) in as much as when it comes to persons acting in concert, the period should be not less than three years prior to the proposed acquisition, and disclosed as such pursuant to filings under the listing agreement. Also, when it comes to shareholders of a target company who have been persons acting in concert for a period of not less than three years prior to the proposed acquisition and are disclosed as such pursuant to filings under the listing agreement, the corporate veil  is  not  lifted.  The  difference  between  sub  regulations (ii), (iv) and (v) on the one hand, and sub regulation (iii) on the other, again shows us that it is impermissible for the court  to  lift  the  corporate  veil,  either  partially  or otherwise, in a manner that would distort the plain language of the regulation. Where the corporate veil is to be lifted, the regulation itself specifically so states. For this reason also, it is a little difficult to accept Mr. Vishwanathan's argument that a reading of the other sub regulations contained within regulation 10 (1) (a) would further his argument in this case.

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We now come to the two judgments of this Court which were cited before us in the context of Rent Acts. Chronologically, the first of these judgments is “Madras Bangalore Transport Co. (West) Vs. Inder Singh And Others” reported in (1986) 3 SCC 62. In this case, the paragraph relied upon by Mr. Vishwanathan is paragraph 8, which is as under:

“As  mentioned  by  us  earlier,  the Madras-Bangalore  Transport  Company  (West) continued  to  be  in  occupation  of  the premises  even  after  the  Caravan  Goods Carrier Private Limited came in. They never effaced  themselves.  The  firm  allowed Caravan  Goods  Carrier  Private  Limited Company, to function from the same premises but Caravan Goods Carrier Private Limited though a separate legal entity, was in fact a  creature  of  the  partners  of Madras-Banglore  Transport  Company  (West) and  was the  very image  of the  firm. The limited  company  and  the  partnership  firm were two only in name but one for practical purposes.  There  was  substantial  identity between  the  limited  company  and  the partnership  firm.  We  do  not  think  that there  was  any  sub-letting,  assignment  or parting with possession of the premises by Madras-Banglore Transport Company (West) to Caravan Goods Carrier Private Limited so as to attract Section 14(1) (b) of the Delhi Rent Control Act. In the result the appeal is allowed with costs.”  

It can be seen that a partnership firm became a limited company  but,  on  facts  it  was  found  that  since  there  was substantial  identity  between  the  limited  company  and  the partnership  firm,  there  was  no  subletting,  assignment  or parting with possession of the premises so as to contradict Section 14(1)(b) of the Delhi Rent Control Act.

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This case is wholly distinguishable from the present case as in the facts of the present case, the target company is clearly defined and “means” only Rattan Limited. To go behind Rattan Limited would not only be contrary to the clear language of Regulation 10(1)(a) but would also introduce a concept viz lifting  the  corporate  veil  by  the  Court  contrary  to  the Regulation itself, which, as has been pointed out above, also contains  sub  regulation  (iii)  which,  in  the  circumstances specified, lifts the corporate veil.

The  second  judgment  cited  before  us  “Sait  Nagjee Purushotam  &  Co.  Ltd.  Vs.  Vimalabai  Prabhulal  and  Others” reported in (2005) 8 SCC 252 also does not take us further for the same reasons.  

In  fact,  even  if  we  were  to  accept  Mr.  Vishwanathan's argument that the object of the regulation being that promoters should not keep changing, and if on facts it is found that the same set of promoters continue, we should exempt such cases, this would not be possible for another good reason.  

In the case of “M/s. Utkal Contractors and Joinery (P) Ltd. And others vs. State of Orissa” reported in 1987 (Supp) SCC 751, a similar argument was turned down in the following terms :

“11.Secondly,  the  validity  of  the statutory  notification  cannot  be  judged merely on the basis of Statement of Objects and Reasons accompanying the Bill. Nor it could be tested by the government policy taken  from  time  to  time.  The  executive policy of the government, or the Statement of  Objects  and  Reasons  of  the  Act  or

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Ordinance cannot control the actual words used in the legislation. In Central Bank of India v. Workmen, S.K. Das, J. said : “...The Statement of Objects and Reasons is not admissible, however, for construing the section; far less can it control the actual words used.”

12. In State of West Bengal v. Union of India, Sinha, C.J. observed :

“...It is however, well settled that the Statement  of  Objects  and  Reasons accompanying  a  Bill,  when  introduced  in Parliament, cannot be used to determine the true  meaning  and  effect  of  substantive provisions of the statute. They cannot be used  except  for  the  limited  purpose  of understanding  the  background  and  the antecedent state of affairs leading up to the  legislation.  But  we  cannot  use  this statement as an aid to the construction of the  enactment  or  to  show  that  the legislature did not intend to acquire the proprietary rights vested in the State or in any way to affect the State Governments' rights as owner of minerals. A statute, as passed by Parliament, is the expression of the collective intention of the legislature as a whole, and any statement made by an individual,  albeit  a  Minister,  of  the intention and objects of the Act cannot be used  to  cut  down  the  generality  of  the words used in the statute.”

In the factual scenario before us, having regard to the aforesaid  judgment,  it  is  not  possible  to  construe  the regulation in the light of its object, when the words used are clear. This statement of the law is of course with the well known caveat that the object of a provision can certainly be used as an extrinsic aid to the interpretation of statutes and subordinate legislation where there is ambiguity in the words used.  

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As has already been stated by us, we find the literal language  of  the  regulation  clear  and  beyond  any  doubt.  The language of sub regulation (ii) becomes even clearer when it is contrasted with the language of sub regulation (iii), as has been held by us above.

Having gone through the appellate tribunal's judgment, we find that, for the reasons stated by us, we cannot fault its conclusion and accordingly the appeals stand dismissed.  

…....................J. [ROHINTON FALI NARIMAN]

...................J. [SANJAY KISHAN KAUL]

New Delhi July 13, 2017

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