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REPORTABLE

    IN THE SUPREME COURT OF INDIA   CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.6082 OF 2008

Nirma Industries Ltd. & Anr.                               ...Appellants  

VERSUS

Securities & Exchange Board of India               ...Respondent

J U D G M E N T

SURINDER SINGH NIJJAR,J.

1. This statutory appeal is filed under Section 15Z of the Securities  

and Exchange Board of India Act, 1992 (hereinafter referred to as  

the ‘SEBI Act’)  against the order dated 5th June, 2008 (impugned  

order) passed by the Security Appellate Tribunal  (SAT) whereby  

SAT has dismissed the appeal filed by the appellants impugning  

the direction contained in the communication dated 30th April, 2007  

of SEBI (SEBI order).  By the aforesaid order, the request of the  

appellants for withdrawal of an offer to acquire the equity shares of

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Shree  Ram  Multi  Tech  Limited  (SRMTL)  under  the  SEBI  (Substantial  

Acquisition  of  Shares  and  Takeovers)  Regulations,  1997  (Takeover  

Code/Takeover Regulation) has been rejected.

Facts :

2. On 22nd March,  2002,  the Promoters (including friends,  relatives  

and associates) of SRMTL – a listed company – borrowed a sum  

of Rs.48.94 crores from the appellants and pledged equity shares  

of  SRMTL worth  Rs.1,42,88,700/-  (24.25% of  equity  capital)  as  

security. The debt was in form of issue of Secured Optionally Fully  

Convertible  Premium  Notes  by  three  closely  held  unlisted  

companies (Issuer Companies) for an issue price of Rs.1,00,000/-  

each having nominal value of Rs.1,35,000/- each. The issue was  

made by the Issuer Companies by way of subscription agreements  

and the individual premium notes issued by each are as under :

(i) Shree Rama Polysynth Pvt. Ltd. - 1664

(ii) East-West Polyart Ltd. - 1500

(iii) Ideal Petroproducts Ltd. - 1730

--------

Total - 4894

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3. The  Issuer  Companies  pledged  equity  shares  in  the  capital  of  

SRMTL and other closely held companies as security in favour of  

the appellants till the redemption of the Premium Notes by way of  

pledge  agreements  (Pledged  Shares).  The  equity  shares  of  

SRMTL pledged by each of the Issuer Companies are as under :

(i) Shree Rama Polysynth Pvt. Ltd. - 52,49,786

(ii) East-West Polyart Ltd. - 28,74,800

(iii) Ideal Petroproducts Ltd. - 62,64,114

     --------------- Total -     1,42,88,700

4. In  May-June,  2002,  the  pledge  over  the  shares,  which  were  in  

dematerialized  form,  was  carried  out  in  the  form  prescribed  by  

National  Securities  Depository  Limited  and was recorded  in  the  

records of  the respective depositories  of  the appellants  and the  

Issuer Companies. On June 10, 2005, the appellants, in terms of  

the  enforcement  provisions  contained  in  the  subscription  

agreements  and  the  pledge  agreements  issued  notices  to  the  

Issuer  Companies calling upon them to redeem the outstanding  

Premium  Notes  within  a  period  of  30  days,  failing  which  the  

appellants  would be constrained to invoke the pledge.  Premium  

notes were not redeemed (i.e. debt was not repaid). Upon default,  

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under the provisions of the Notes, the appellants called upon each  

of the Issuer Companies to redeem the outstanding Notes within  

30  days.  Since the  Notes  were  not  redeemed within  the  notice  

period, the pledge was invoked on July 22, 2005.  

5. The  invocation  of  the  pledge  triggered  Regulation  10  of  the  

Takeover Code.

6. On 26th July, 2005, in accordance with the Regulation 10 of the  

Takeover Code, the appellants made a Public Announcement (PA)  

for proposed open offer to acquire upto 20% of the shares of the  

existing shareholders. The Public Announcement was published in  

the  Financial  Express,  Mumbai  Edition.  According  to  the  

appellants, the price offered in the PA, being Rs.18.60/- per share,  

was  arrived  at  as  per  Regulation  20(4)  of  the  Takeover  Code  

(applicable  to  frequently  traded  shares).  The  PA  stated  that  

SRMTL has suffered business losses and its net worth has been  

eroded. The PA also clearly stated that the offer may be withdrawn  

as per Regulation 27 of the Takeover Code.

7. The appellants  further  claimed that  as per Regulation 18 of  the  

Takeover  Code,  draft  letter  of  offer  was  submitted  to  SEBI  on  

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August 8, 2005. According to the appellants in the aforesaid letter,  

it was specifically stated that details were given of the composition  

of  Board  of  Directors  and  audited  balance  sheets  of  last  three  

years, share holding pattern PRE-OFFER and POST-OFFER and  

justification of offer price.  The letter further stated that “Acquirers  

reserve the right to withdraw the offer pursuant to Regulation 27 of  

the  Regulation”.  In  the  meanwhile,  the  concurrent  auditor  

appointed by the Lenders of SRMTL, M/s Ernst & Young and the  

internal  auditor  of  SRMTL,    M/s.  R.  C.  Sharma & Co.  in  their  

respective audit reports for the quarter July-September, 2005, had  

noted  certain  irregularities  in  the  operations  and  systems  of  

SRMTL. The Audit Committee, therefore, recommended a special  

investigative  audit  to  look  into  the  irregularities.  In  view  of  the  

above, a change in management was effected on the insistence of  

the  Lender  Banks.  All  Promoter  Directors  tendered  their  

resignations in their place independent Directors were appointed.  

The Board of Directors of SRMTL, after considering the respective  

audit  report  of  the  aforesaid  two  accountants,  accepted  the  

recommendations of the Audit Committee and on January 28, 2006  

directed a special investigative audit into the financial affairs of the  

company.  The  Board  appointed  M/s.  R.  C.  Sharma  &  Co.,  to  

conduct the special investigative audit and submit its report. After  

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investigation, M/s. R. C. Sharma & Co. submitted its report in three  

parts,  comprising  of  two interim reports  and one final  report  on  

January  30,  2006.  In  March-April,  2006,  the  aforesaid  report  of  

M/s. R.C. Sharma came in the public domain,  resulting in sharp  

decline  in  prices  of  shares  of  SRMTL.  It  is  claimed  by  the  

appellants  that  M/s.  R.C.  Sharma’s  report  enclosed  two  earlier  

inspection reports  of 2002 by Kalyaniwala & Mistry (Kalyaniwala  

Report)  and  by  Sharp  and  Tannan  Associates  (Sharp  Report),  

respectively.  These  reports  were  not  made  available  to  public.  

Their  existence was disclosed for the first  time when they were  

filed in the Gujarat High Court as part of proceeding in Company  

Petition No.111 of 2005. The appellants further claimed that under  

Regulation 18 of the Takeover Code, SEBI was expected to revert  

with its comments and observations in about 21 days, i.e. by 29th  

August,  2005.  However,  letter  of  offer  submitted  to  SEBI  was  

issued after more than 249 days on 26th April, 2006.  

8. The appellants further claim that pursuant to the fraud perpetrated  

by the Promoter Directors of SRMTL and fraudulent embezzlement  

of funds in SRMTL in excess of Rs.350 crores being unearthed, an  

application was made on 4th May, 2006 to either exempt them from  

making the open offer or to permit them to withdraw the open offer  

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under Regulation 27 of the Takeover Code or to re-fix the price of  

the Open Offer. The appellants further claimed that the aforesaid  

request was justified on the basis of special circumstances cited by  

the appellants in the aforesaid letter of May 4, 2006. It had been  

pointed out that an investigation into the affairs of SRMTL by M/s  

Ramesh C. Sharma and Co. Chartered Accountants revealed that  

a cumulative amount of Rs.326.48 Crores had been siphoned out  

of/embezzled from the coffers of SRMTL by its erstwhile Promoter  

Directors. This conclusion was based on the reports submitted by  

M/s.  R.C.  Sharma  &  Co.  It  was  pointed  out  that  the  financial  

accounts of SRMTL revealed that it had lost its net worth. Asset  

Reconstruction Company (India) Limited (ARCIL) had acquired the  

debts  and  underlying  rights  and  obligations  from  the  secured  

creditors of SRMTL. ARCIL had also issued a notice dated January  

25,  2006  under  Section  13(2)  of  the  Securitization  and  

Reconstruction  of  Financial  Assets and Enforcement  of  Security  

Interest  Act,  2002 (SARFAESI) threatening action under Section  

13(4)  thereof.  In  the  meantime,  the  High  Court  of  Gujarat  had  

disposed of the winding up petition filed against SRMTL by the UTI  

Bank and Karnataka Bank Ltd. on February 27, 2006. It had also  

come to the knowledge of the appellants that though the balance  

sheets of SRMTL disclosed a contingent liability of only Rs.15.28  

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Crores  as  on  March  31,  2005,  the  actual  value  was  about  

Rs.263.65  Crores  (out  of  which  Rs.30.65  Crores  had  already  

crystallized).  The final  reason given was share  price of  SRMTL  

shares had fallen substantially from the date of making the Public  

Announcement.   

9. Since  the  appellants  did  not  receive  any  response  from  the  

respondent, a request was made on July 1, 2006 to the Merchant  

Bankers requesting them to forward an application for withdrawal  

of the open offer to the respondent. It appears that the Merchant  

Bankers vide letter dated 27th June, 2006  inter alia informed the  

appellants that the grounds mentioned in the letter dated 4th May,  

2006 are not valid grounds, in terms of the provisions of Regulation  

27  of  the  Takeover  Code.  On  July  1,  2006,  the  appellants  

requested  the  Merchant  Bankers  to  convey  its  request  in  a  

renewed form to SEBI for its consideration. The renewed request  

was contained in a letter dated July 01, 2006 which was sent to the  

Merchant Bankers as an annexure to the letter which was also sent  

on July 01, 2006,  in reply to the letter of the Merchant  Bankers  

dated 27th June, 2006. In the aforesaid reply, the appellants had  

also informed the Merchant Bankers that it did not agree with the  

views  expressed  by  the  Merchant  Bankers  even  prior  to  the  

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consideration  of  the  facts  presented  by  the  appellants  to  SEBI.  

Regulation 27(1) (c) does not provide for specific approval of SEBI  

for withdrawal of the open offer, which is what they were seeking.  

On July 8,  2006,  the Merchant  Bankers informed the appellants  

that the relevant regulation is 27(1)(d) and not 27(1)(c). The letter  

also refers to a telephonic conversation with one Mr. Deepak Shah  

on 8th July, 2006 informing him about certain particulars required by  

the Merchant Bankers. A complete list of details, required by the  

Merchant  Bankers,  was  listed  in  the  aforesaid  letter.  The  

appellants were requested to send the same at the earliest. The  

appellant sent a reply to the aforesaid request on 8th July, 2006.  

Thereafter, on 1st September, 2006, the appellant was informed by  

the Merchant Bankers that based on the information supplied on  

July 1, 2006 and August 28, 2006, an application had been drafted  

by them for being filed with SEBI, seeking withdrawal of the open  

offer. The aforesaid draft application was sent to the appellant for  

verification of the factual position stated therein. From a perusal of  

the letter dated 21st September, 2006, the appellants informed the  

Merchant Bankers that the clarifications sought on September 1,  

2006 had been sent to them  on 7th September, 2006. Therefore, a  

request was made to include the clarifications in the original draft  

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letter and include the same in the paragraph in contingent liability  

under special circumstances for withdrawal of the open offer.        

10. In  response  to  the  aforesaid  request  of  the  appellants,  the  

Merchant Bank applied to SEBI on September 22, 2006 requesting  

that the appellants be permitted to withdraw the offer. The letter  

also mentioned the special reasons for the withdrawal as given by  

the appellants in the letter dated 4th May, 2006.  It is important to  

notice here that no request for personal hearing was made in any   

of the aforesaid communications.     

11. The  appellants  further  claimed  that  on  30th April,  2007,  the  

application of the Merchant Bankers/appellants was rejected on the  

ground that the appellants ought to have conducted due diligence.  

The appellants pointed out that the aforesaid decision was taken  

by SEBI without affording any personal hearing to the appellants  

and  without  application  of  mind.  The  appellants  claim  that  the  

respondent  did  not  appreciate  that  the  fraudulent  transactions,  

systematic embezzlement and siphoning of funds was unearthed  

by special investigative audit and could not have been found by an  

outside third party like appellants before invoking the pledge. Even  

any due diligence that could be conducted could only have been  

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done on published financial information in the public domain, which  

has now been found to be fraudulent in character. The appellants  

have  in  the  Public  Announcement  and Letter  of  Offer  relied  on  

books of accounts for last three financial years i.e. 2002-03, 2003-

04  and  2004-05  of  SRMTL.  Even  SEBI  with  all  its  compliance  

requirements  and  investigative  powers  was  unable  to  unearth  

these instances of fraud perpetrated by promoters of SRMTL.  

12. Being aggrieved by the SEBI order, the appellants filed Appeal  

No.74 of 2007 before the SAT. By the impugned order dated 5th  

June, 2008, the SAT rejected the appeal filed by the appellants. It  

has been held by SAT that :

“a) Regulation 27(1)(d) of the Takeover Code is to be  given  a  strict  interpretation  and  the  words  “such  circumstances  as  in  the  opinion  of  the  Board  merit   withdrawal”  is to be read ejusdem generis to be limited  to only circumstances where it is impossible to make a  public offer.

b) Appellants ought to have conducted due diligence.  

C) Appellants knew about (i) poor financial condition of  SRMTL; (ii) filing of winding up petitions by UTI Bank  against  SRMTL;  (iii)  net  worth  of  SRMTL  being  negative;  (iv)  several  cases  of  recovery  being  filed  against SRMTL.”      

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13. The aforesaid  order  of  SAT is  challenged before us by Nirma  

Industries Ltd.  in this  statutory appeal  under  Section 15Z of  the  

SEBI Act.   

14. We have heard very elaborate submissions made by Mr. Shyam  

Divan,  learned  senior  counsel  on  behalf  of  the  appellants  and  

Mr. Pratap Venugopal for SEBI.  Mr. Divan submits that the main  

issue involved in this appeal is whether under Regulation 27(1)(d),  

SEBI  has  power  to  grant  exemption  to  the  appellants  from the  

requirement  of  making a public offer  under Regulation 10.   The  

alternative  issue  framed  by  Mr.  Divan  is  as  to  whether  dehors  

Regulation 27(1) (d), SEBI would still have the residual power to  

grant exemption.  Apart from the aforesaid two legal issues, Mr.  

Divan’s primary submission is based on breach of rules of natural  

justice.  He  submits  that  the  order  passed  by  SEBI  has  been  

passed  without  granting  any  opportunity  of  hearing  to  the  

appellants.  Even if the regulations do not specifically provide for  

the grant of an opportunity of hearing, it ought to be read into the  

regulations  in  view of  the drastic  civil  consequences,  which  the  

appellants would suffer under the impugned order passed by the  

SEBI upheld by SAT. Mr. Divan has straightaway pointed out to the  

order  passed  by  SEBI  on  30th April,  2007  rejecting  the  request  

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made in letter dated 22nd September, 2006 for withdrawal of the  

public  offer.   He  has  pointed  out  the  observations  made  in  

Paragraph 4 of the aforesaid order, which are as under:-

“We are of the view that the acquirer should have done  due diligence before invocation of pledge, and refrained  themselves from invoking their pledge if circumstances  so  warranted.   Such  circumstances,  arising  out  of  omission on the part of the acquirers to have taken due  precaution or business misfortunes, in our opinion, are  not reasons sufficient enough to merit withdrawal of the  open offer.”

15. The  aforesaid  conclusions,  according  to  Mr.  Divan,  are  not  

supported by any reasons let alone sufficient reasons.  The order  

passed by SEBI, according to him, is non-speaking and, therefore,  

ought to have been quashed on that ground alone.  

16.  The same submission was also made before the SAT.  It has  

been rejected by the SAT by giving detailed reasons. Taking into  

consideration the facts and circumstances of this case, it cannot be  

said that Rules of Natural Justice have been violated. The special  

circumstances which had been elaborately set out in the two letters  

written by the appellants on May 4, 2006  and July 1, 2006 and the  

application made by the Merchant Bankers on September 22, 2006  

have  been  summarized  by  Mr.  Shyam  Divan  in  the  written  

submission which are as follows :  

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“a. An  investigation  into  the  affairs  of  SRMTL  by  Ramesh  C.  Sharma  &  Co.,  Chartered  Accountants, revealed that a cumulative amount  of  Rs.  326.48  Crores  had  been  siphoned  out  of/embezzled  from the coffers  of  SRMTL by its  erstwhile  Promoter  Directors.   Ramesh  C.  Sharma & Co. submitted two interim reports  [in  February and March 2006] and a final report (in  March 2006) to arrive at its aforesaid conclusions.

b. Further the financial accounts of SRMTL revealed  that it had lost its net worth.

c. Asset  Reconstruction  Company  (India)  Limited  (“ARCIL”) had acquired the debts and underlying  rights and obligations from the secured creditors  of SRMTL.  ARCIL issued a notice dated January  25, 2006 under Section 13(2) of the Securitization  and  Reconstruction  of  Financial  Assets  and  Enforcement  of  Security  Interest  Act,  2002  (“SARFAESI”)  threatening  action  under  Section  13(4) thereof.

d. The High Court  of  Gujarat  had disposed of  the  winding  up  petition  filed against  SRMTL by the  UTI  Bank  and  Karnataka  Bank  Ltd.  vide  order  dated February 27, 2006.

e. It  had  come  to  the  Appellant’s  knowledge  that  though the Balance Sheets of SRMTL disclosed a  contingent liability of only Rs. 15.28 Crores as on  March  31,  2005,  the  actual  value  was  about  Rs. 263.65 Crores (out of which Rs.30.65 Crores  had already crystallized).

f. The  share  price  of  SRMTL  shares  had  fallen  substantially from the date of making the Public  Announcement.”

17. In  the  letter  dated  May  4,  2006,  it  was  pointed  out  that  

subsequent to the Public Announcement dated 26th July, 2005 and  

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filing of the draft  letter of offer, the circumstances leading to the  

requirement of making of Public Announcement by the appellants  

(pledgee  acquirers)  or  requirements  of  the  regulation  has  

substantially  changed  to  the  prejudice  of  the  appellants  and,  

therefore, it was constrained to seek exemption from requirement  

of the Regulations and/or permission to withdraw the draft letter of  

offer.   The letter sets out the sequence of events leading to the  

acquisition, which triggered the provisions of Regulation 10.  It sets  

out the reasons for fixing the offer price at Rs. 18.60 per share.  

The price had been determined at deriving the average of weekly  

high  and  low  closing  prices  of  shares  of  SRMTL  (the  target  

company)  at  Bombay  Stock  Exchange  (BSE)  during  26  weeks  

preceding the date of Public Announcement.  In Paragraph 4 of the  

letter, it is mentioned as under:-

“Subsequent to the Public Announcement and filing of  the  draft  Letter  of  Offer,  the  price  of  the  shares  of  SRMTL has  fallen  substantially  due to  circumstances  beyond the control of the Acquirers.  It has come to the  knowledge  of  the  Acquirers  that  subsequent  to  the  Public  Announcement  and filing  of  the  draft  Letter  of  Offer, the financial condition of SRMTL has substantially  deteriorated on account of gross mismanagement and  embezzlement by the promoter directors of SRMTL.  It  is apparent that SRMTL has lost its substratum and that  chances of its revival are negligible.”

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18. In  Paragraph  5  of  the  letter,  a  prayer  is  made  for  permission  

either to exempt the Regulation 3(1) (1) read with Regulation 4(2)  

of  the  Takeover  Regulations  or  withdrawal  of  offer  under  

Regulation 27, on the basis of the justification given for seeking  

withdrawal.                         The complete justification is given  

thereafter in Paragraph 6, which consists of sub-paragraphs 6.1 to  

6.8.   The  ultimate  reason  for  seeking  withdrawal  is  given  in  

Paragraphs 7 and 8, which are as under:-

"7. Under the aforesaid circumstances, it is apparent  that  SRMTL  has  lost  its  substratum  and  that  chances of its revival are negligible.  The Pledgee  Acquirers while enforcing the security created by  pledging the shares of SRMTL, are being saddled  with an additional  burden of  Rs.21,91,54,314 to  the undue advantage of the other shareholders of  SRMTL.  The purpose sought to be achieved by  operation of the Regulations is lost in view of the  subsequent  developments  and  the  Regulations  are  operating  harshly  against  the  Pledgee  Acquirers.   In  view  of  the  changed  scenario,  it  would  be  inequitable  and  unfair  to  compel  the  Pledgee Acquirers to offer to purchase the shares  of SRMTL from the other shareholders of SRMTL  in accordance with the draft Letter of Offer.  

8. In light of the change in circumstances as stated  hereinabove,  considering  the  present  state  of  affairs,  it  would be just,  fair  and equitable (i)  to  exempt the Pledgee Acquirers from operation of  Regulation 10 of  the Regulations in exercise of  powers conferred by Regulation 3(1)(1) read with  Regulation 4(2) of the Regulations or (ii) to permit  withdrawal of the Public Announcement and the  draft Letter of Offer in terms of Regulation 27 of  the  Regulations  or  (iii)  permit  the  Pledgee  

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Acquirers to re-fix the offer price on the basis of  the current market price of the shares of SRMTL.”  

19. It  is  an admitted fact  that  the aforesaid letter  was sent  by the  

appellants to its Merchant Bankers.  In its letter dated 27th June,  

2006,  the  Merchant  Bankers  informed  the  appellants  that  the  

grounds mentioned in the letter dated 4th May, 2006 are not valid  

grounds in terms of provisions of Regulation 27 of the Takeover  

Code.   Therefore,  clearly  the  Merchant  Banker  was also of  the  

opinion  that  the  specific  circumstances  relied  upon  by  the  

appellants  were  of  no  relevance  in  seeking  withdrawal  under  

Regulation 27.  However, on the insistence of the appellants, the  

Merchant  Bankers  by  its  letter  dated  22nd September,  2006  

requested SEBI to exempt the appellants from the open offer or  

withdraw the open offer under Regulation 27 or re-fix the price of  

the  open  offer.   It  appears  that  the  Merchant  Bankers  had  

discussions  with  the  officers  of  the  SEBI  before  giving  the  

aforesaid opinion in its letter dated 27th June, 2006.  it was only  

thereafter the appellants were informed as under:-

“We  have  perused  the  various  grounds  you  have  mentioned in your above letter to SEBI and are unable  to find any of  these as valid grounds in terms of  the  provisions  of  Regulation  27  of  the  SEBI  (Substantial  Acquisition of Shares & Takeovers) Regulations, 1997.  The fact that the market price of the target company is  far below the offer price cannot be a reason for seeking  

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withdrawal  of  the  offer.   Regulation  27(1)  of  the  Takeover  code  is  the  only  regulation  permitting  withdrawal of public offers and the same is reproduced  below: …………………………………………………”

20. Still not satisfied, the appellants wrote to its Merchant Bankers on  

1st July, 2006 requesting it to forward the letter dated 4th May, 2006  

to SEBI for its consideration.   In the letter,  it  was mentioned as  

follows:-

“Meanwhile, we do not agree with your views even prior  to  SEBI’s  consideration  of  the facts  presented by us.  Please do note that Regulation 27(1)(c) does provide for  specific  approval  of  SEBI  for  withdrawal  of  the  open  offer,  which  is  what  we  are  seeking.   Unless  SEBI  considers our letter and informs us of a decision not to  approve  the  application  for  withdrawal,  it  would  be  premature to foreclose the options available to us by a  fair  application  of  the  law.   Consequently,  you  are  requested to forward our enclosed application formally  to SEBI so that SEBI can consider the same and take a  decision in the matter.   Once the decision of  SEBI is  communicated, we can take further steps in the matter.”

21. As noticed earlier, the Merchant Bankers were still not satisfied  

with the information provided by the appellants  in support  of  its  

request for withdrawal of the open offer. Therefore, the appellants  

had given further clarifications to the Merchant Bankers. It was only  

on receipt of the clarifications that the Merchant Bankers forwarded  

the request to SEBI for consideration.  

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22. From the above, it is apparent that all the necessary information  

was available before SEBI for taking a decision as to whether the  

claim  of  the  appellants  seeking  exemption  from  the  Takeover  

Code,  or  withdrawal  of  the  Letter  of  Offer  would  fall  within  the  

purview  of  Regulation  27(1)  (d).   The  purpose  of  granting  an  

opportunity of hearing is to ensure fair treatment of the person or  

entity against whom an order is likely to be passed.  In the present  

case, we are unable to accept the submission of Mr. Shyam Divan  

that  the  impugned  order  passed  by  SEBI  on  30th April,  2007,  

rejecting the application of the appellants for exemption/withdrawal  

by  SEBI  caused  any  “adverse civil  consequences”.   Having  

acquired  the  shares  of  the  target  company  to  the  extent  which  

triggered the Regulation 10 of the Takeover Code, the appellants  

published in the Financial Express, Mumbai Edition the proposed  

open  offer  to  acquire  upto  20%  of  the  shares  of  the  existing  

shareholders.   The  price  offered  in  the  Public  Announcement,  

being Rs. 18.60 per share was arrived at as per Regulation 20(4)  

of  the  Takeover  code,  which  is  applicable  to  frequently  traded  

shares.  It is undisputable that normally the public offer once made  

can only be withdrawn in exceptional circumstances as indicated in  

Regulation 27(1) (b), (c) and (d).  In their letter dated 4th May, 2006,  

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the appellants  had given detailed  reasons giving justification for  

seeking exemption/withdrawal/price fixation.  Not being given the  

opportunity of oral hearing cannot always be equated to a situation,  

where no opportunity is given to a party to submit an explanation at  

all, before an order is passed causing civil consequences to it.  Mr.  

Shyam Divan has been at pains to point out that rules of natural  

justice  require  that  an  opportunity  of  hearing  should  have been  

given to the appellants.  We see no reason to read into Regulation  

27 - the provision that the party seeking to withdraw from the public  

offer  is  required  to be given an oral  hearing  before  an order  is  

passed on the request for withdrawal.  We also see no merit in the  

submission that an oral hearing was particularly necessary in the  

light of the fraud, which has been perpetrated by the promoters of  

the target company on the innocent shareholders, which will also  

include the appellants.  Such a submission can not  be accepted  

either  on facts or in law.  The appellants had made a business  

decision  in  deliberately  purchasing  the  shares  of  the  target  

company to such an extent that it had to, under the law; make the  

Public Announcement for purchase of other shares at the price of  

Rs.18.60 per share.  

23. In  support  of  his  submissions  on  breach  of  Rules  of  Natural  

Justice, in his written submission, Mr. Shyam Divan has relied on  

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Canara Bank & Ors.  Vs. Debasis Das & Ors.  1    In this case, this  

Court reiterated the well known Rules of Natural Justice. Otherwise  

the particular  case relied upon has no relevance to the present  

proceedings. In the  Canara Bank’s case  (supra),  this Court was  

considering the case of an employee subjected to the disciplinary  

proceedings.  Again this Court reiterated the well known principle  

that  natural  justice  is  the  administration  of  justice  in  a  

commonsense  liberal  way.   Further  that  the  rules  have  been  

enforced by the Courts to ensure that substantial justice is done to  

the party proceeded against. In the present case, it is a matter of  

record that all material had been placed by the appellants before  

the SEBI in its letter dated 4th May, 2006 and the same material  

was  also  placed  before  the  Merchant  Bankers.  Necessary  

clarifications, as required by the Merchant Bankers, had also been  

given in the subsequent correspondences, as noticed by us in the  

earlier  part  of  the  judgment.  Therefore,  it  cannot  be  said  that  

substantial justice has not been done in the case of the appellants.  

This Court in Canara Bank’s case (supra) reiterated the principle  

laid down in Managing Director, ECIL, Hyderabad & Ors. Vs. B.  

Karunakar  & Ors.  2     Here again,  this  Court  has reiterated that  

1 (2003) 4 SCC 557 2 (1993) 4 SCC 727

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even an administrative order, which involved civil consequences,  

must be consistent with the rules of natural justice.  The expression  

“civil  consequences”  encompasses  infraction  of  not  merely  

property  or  personal  rights  but  of  civil  liberties,  material  

deprivations  and  non-pecuniary  damages.   In  other  words,  

anything which affects the rights of the citizen in ordinary civil life.  

24. In  our  opinion,  the  appellants  cannot  justifiably  claim that  any  

order  had been passed by SEBI that  would cause adverse civil  

consequences, as envisaged by this Court in B. Karunakar & Ors.  

(Supra).  The  appellants  after  making  a  market  assessment  

decided to invoke the pledge on July 22, 2005. Since the shares  

which  came  to  the  appellants  were  more  than  15%,  statutorily  

Regulation 10 was triggered. The rejection of the request made by  

the appellants  for  withdrawal  from the public  offer  or  exemption  

under Regulation 27(1)(d) cannot be said to be an order causing  

adverse  civil  consequences.  The  appellants  had  made  and  

informed business decision which unfortunately for them, instead  

of  generating  profits  was  likely  to  cause  loses.  In  such  

circumstances, they wanted to pull out and throw the burden on to  

the other shareholders.  We, therefore, fail to see what prejudice  

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has been caused to  the appellants  by  the order  passed by the  

SEBI rejecting the request of the appellants.

25. In B. Karunakar & Ors. (supra), having defined the meaning of  

“civil  consequences”,  this  Court  reiterated  the  principle  that  the  

Court/Tribunal  should  not  mechanically  set  aside  the  order  of  

punishment on the ground that the report was not furnished to the  

employee.  It is only if the Court or Tribunal finds that the furnishing  

of the report would have made a difference to the result in the case  

that it should set aside the order of punishment.  In other words,  

the Court reiterated that the person challenging the order on the  

basis that it is causing civil consequences would have to prove the  

prejudice that has been caused by the non-grant of opportunity of  

hearing.  In the present case, we must hasten to add that, in the  

letter dated 4th May, 2006, the appellants have not made a request  

for  being granted an opportunity  of  personal  hearing.  Therefore,  

the  ground with  regard  to  the  breach  of  rules  of  natural  justice  

clearly seems to be an after thought.  

26. Mr.  Shyam  Divan  had  also  relied  on  Automotive  Tyre  

Manufacturers Association Vs.  Designated Authority  & Ors.  3    

3 (2011) 2 SCC 258

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The aforesaid  judgment  is again of  no relevance in the present  

case.  The scope and ambit of the Anti-Dumping Regulations, the  

Customs  Tariff  (Identification,  Assessment  &  Collection  of  Anti-

Dumping Duty on Dumped Articles & for Determination of Injury)  

Rules,  1995  was  under  consideration  of  this  Court.   Upon  

consideration of the entire matter, the Court reiterated the principle  

of law, which is stated as follows:-

“80. It  is  thus,  well  settled  that  unless  a  statutory  provision, either specifically or by necessary implication  excludes the application of principles of natural justice,  because in that  event  the court  would not  ignore  the  legislative  mandate,  the  requirement  of  giving  reasonable opportunity of being heard before an order  is  made,  is  generally  read  into  the  provisions  of  a  statute,  particularly  when  the  order  has  adverse  civil  consequences  which  obviously  cover  infraction  of  property,  personal  rights and material  deprivations for  the party affected. The principle holds good irrespective  of whether the power conferred on a statutory body or  Tribunal is administrative or quasi-judicial. It  is equally  trite that the concept of natural justice can neither be put  in  a  straitjacket  nor  is  it  a  general  rule  of  universal  application.”

27. Considering the 1995 Rules, it was held as follows:-

“83. The  procedure  prescribed  in  the  1995  Rules  imposes a duty on the DA to afford to all  the parties,  who  have  filed  objections  and  adduced  evidence,  a  personal  hearing  before  taking  a final  decision  in the  matter. Even written arguments are no substitute for an  oral hearing. A personal hearing enables the authority  concerned to watch the demeanour  of  the witnesses,  

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etc. and also clear up his doubts during the course of  the  arguments.  Moreover,  it  was  also  observed  in  Gullapalli, if one person hears and other decides, then  personal hearing becomes an empty formality.”

28. It was noticed by the Court that in the matter under consideration,  

the entire material had been collected by the predecessor of the  

DA.   He  had  allowed  the  interested  parties  and/or  their  

representatives to present the relevant information before him in  

terms of Rule 6(6) but the final findings in the form of an order were  

recorded by the successor DA, who had no occasion to hear the  

appellants. Therefore, it was held that the final order passed by the  

new DA offends the basic principle of natural justice. In the present  

case, the appellants did not make a formal request before SEBI for  

being given an opportunity of personal hearing. Thus, the reliance  

on the aforesaid case is misplaced.

29. Mr. Shyam Divan then relied on Darshan Lal Nagpal (Dead) by  

LRs.  Vs. Government of NCT of Delhi & Ors.  4    The Court in this  

case was considering whether  the Government  of  NCT of Delhi  

could invoke Section 17(1) and (4) of the Land Acquisition Act and  

dispense with the rule of hearing embodied in Section 5A (2) for  

4 (2012) 2 SCC 327

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the purpose of acquiring certain land.  In this context,  the Court  

observed  that  the  reasons  given  by  NCT  for  invoking  the  

emergency provision were not justified.  It was observed that the  

documents produced by the parties including the notings recorded  

in the concerned file and the approval accorded by the Lieutenant  

Governor do not contain anything from which it can be inferred that  

a conscious decision was taken to dispense with the application of  

Section 5A which represents two facets of the rule of hearing that  

is the right of the land owner to file objection against the proposed  

acquisition of land and of being heard in the inquiry required to be  

conducted by the Collector.  There is no such duty caused on SEBI  

under the Regulations, which would make it incumbent upon it to  

grant  an  opportunity  of  hearing  before  rejecting  the  application  

made by the appellants or its Merchant Bankers.  This apart,  we  

again reiterate that the appellants in its letter of 4th May, 2006 did  

not  make  any  request  for  a  personal  hearing.   In  such  

circumstances, in our opinion, SAT has correctly concluded that:

“Having  acquired  the  shares  of  the  target  company  which  breached  the  threshold  limit  prescribed  by  the  takeover code, the appellants were required to make a  public officer to acquire further shares of that company  for  which  a  public  announcement  was  made.   The  normal rule being that the public offer once made could  not  be  withdrawn,  it  was  only  in  the  exceptional  circumstances referred to in the earlier part of our order  that such an offer could be withdrawn.  The appellants  

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were invoking those exceptional circumstances and the  Board having considered the matter took a decision.  It  is not that they had no opportunity to place their point of  view before the Board.  In these circumstances, it was  not necessary for them to be given a personal hearing.”

30. Mr.  Venugopal  has  further  pointed  out  that  apart  from  the  

appellants, even the Merchant Bankers did not make a request for  

a personal hearing. He submitted that grant of an opportunity for a  

personal hearing can not be insisted upon in all circumstances.  In  

support of this submission, he relied on judgment of this Court in  

the case of Union of India & Anr. Vs. Jesus Sales Corporation  5  .  

The  submission  can  not  be  brushed  aside  in  view  of  the  

observations made by this Court in the aforesaid judgment, which  

are as under:-

“5. The  High  Court  has  primarily  considered  the  question as to whether  denying an opportunity  to the  appellant to be heard before his prayer to dispense with  the  deposit  of  the  penalty  is  rejected,  violates  and  contravenes  the  principles  of  natural  justice.  In  that  connection, several judgments of this Court have been  referred  to.  It  need  not  be  pointed  out  that  under  different  situations  and  conditions  the  requirement  of  compliance of the principle of natural justice vary. The  courts  cannot  insist  that  under  all  circumstances  and  under  different  statutory  provisions  personal  hearings  have to be afforded to the persons concerned.  If  this  principle  of  affording  personal  hearing  is  extended  whenever  statutory  authorities  are  vested  with  the  power to exercise discretion in connection with statutory  appeals,  it  shall  lead  to  chaotic  conditions.  Many  

5 (1996) 4 SCC 69

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statutory appeals and applications are disposed of  by  the competent  authorities who have been vested with  powers to dispose of the same. Such authorities which  shall  be  deemed  to  be  quasi-judicial  authorities  are  expected to apply their judicial mind over the grievances  made by the appellants or applicants concerned, but it  cannot be held that before dismissing such appeals or  applications  in  all  events  the  quasi-judicial  authorities  must hear the appellants or the applicants, as the case  may be. When principles  of  natural  justice require an  opportunity  to  be  heard  before  an  adverse  order  is  passed on any appeal or application, it does not in all  circumstances  mean  a  personal  hearing.  The  requirement is complied with by affording an opportunity  to  the  person  concerned  to  present  his  case  before  such quasi-judicial  authority  who is expected to apply  his judicial mind to the issues involved. Of course, if in  his  own discretion  if  he requires  the appellant  or  the  applicant  to  be  heard  because  of  special  facts  and  circumstances of  the case,  then certainly  it  is  always  open  to  such  authority  to  decide  the  appeal  or  the  application only after affording a personal hearing. But  any  order  passed  after  taking  into  consideration  the  points raised in the appeal or the application shall not  be  held  to  be  invalid  merely  on  the  ground  that  no  personal  hearing  had  been  afforded.  ………………………………………….……..”  

31. Taking  into  consideration  the  facts  and  circumstances  of  this  

case, we are unable to accept the submission of Mr. Shyam Divan  

with regard to the breach of rules of natural justice, in this case,  

merely because the appellants were not given a personal hearing.

32. Mr. Shyam Divan had also submitted that grant of opportunity of  

hearing ought to be read into Regulation 27(1) (d), which enables  

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SEBI  to  grant  exemption  or  permit  withdrawal  in  “such  

circumstances as in the opinion of the Board merit withdrawal”.  He  

submits that an informed opinion could only be taken by the Board  

under  the  aforesaid  Regulation  by  permitting  the  concerned  

applicant an opportunity of personal hearing.  The learned senior  

counsel  also  sought  support  for  the  aforesaid  submission  that  

Regulation 32(1) which permits the Board to issue directions as it  

deem fit in the interests of investors in the securities and securities  

market  under  Section  11  or  11(b)  or  11(d).   Regulation  32(2)  

specifically provides that in any proceedings initiated by the Board,  

it shall comply with the principle of natural justice, before issuing  

directions to any person.  In our opinion, the aforesaid provisions  

are  of  no  assistance  to  the  appellants.   Firstly,  neither  the  

appellants nor their Merchant Bankers requested for an opportunity  

for a personal hearing.  Secondly, in the present case, SEBI has  

not issued any instructions or directions under Section 11, which  

requires that the rules of natural justice be complied with.  Thirdly,  

it cannot be said that the appellants had been condemned unheard  

as the entire material  on which the appellants  were relying was  

placed before SEBI.  It is upon consideration of the entire matter  

that the offer of the appellants was rejected.  This is evident from  

the detailed order passed by SEBI on 30th April, 2007.  The letter  

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indicates  precisely  the  exceptional  circumstances  mentioned  by  

the  appellants  seeking  to  withdraw  the  public  announcement.  

Each and every circumstance mentioned was considered by SEBI.  

Therefore, it can not be said that the appellants have been in any  

manner prejudiced by the non-grant of the opportunity of personal  

hearing.   Therefore,  the submission  made by Mr.  Shyam Divan  

with regard to the breach of rules of natural justice is rejected.  

33. Mr. Shyam Divan then submitted that the interpretation placed on  

Regulation  27(1)  (d)  by  SEBI  as  well  as  the  SAT  results  in  

restriction  on  the  wide  powers  given  to  SEBI  to  regulate  the  

securities market to further the object of the SEBI Act. He submits  

that  the  appellants  are  equally  “an  investor”  in  the  market;  

therefore,  the  regulator  also  has  to  keep  the  interest  of  the  

appellants in mind. He makes a reference to Regulation 3(1) (f)  

which provides that nothing contained in Regulations 10, 11 and 12  

shall  apply  to  acquisition  of  shares  in  the  ordinary  course  of  

business  by  banks  and  financial  institutions  as  pledgees.  This,  

according to Mr. Shyam Divan, is an indicator that, for a certain  

class of institutional investor there is a carve out. He submits that  

similar  carve out  is also provided for the small  investors.  In the  

present case, the appellants have lost out only because there was  

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an  inordinate  delay  in  taking  action  by  SEBI.  Specifying  the  

changes that would be required in the letter of offer, the necessary  

decision was to be taken by SEBI within 21 days under Regulation  

18. But it was not taken by SEBI for a period of 8 months or 239  

days, to be precise. Thus, there was a delay of 221 days. During  

this  period,  the  entire  scenario  had  changed.  In  such  

circumstances, the appellants would be entitled to exit option like  

any  other  ordinary  investor.  He  submits  that  by  giving  a  very  

narrow  and  restrictive  interpretation  to  Regulation  27,  SAT  has  

actually curtailed the wide powers vested in SEBI to regulate the  

securities market to further the object of the Regulations.

34. He  submits  that  Regulation  27(1)  (d)  should  be  construed  to  

confer wide powers on SEBI to allow withdrawal of an open offer in  

cases where although it is not impossible to complete open offer,  

but such an offer, in its opinion, merits withdrawal. It is submitted  

that the words “such circumstances as in the opinion of the Board  

merit withdrawal”, appearing in Regulation 27(1)(d) of the Takeover  

Regulations must mean –

“a. The formation of an opinion by Respondent – which though  

subjective in nature – must be based on the existence of  

objective facts;

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b. The opinion  must  be one that  is  formed by Respondent  

based upon, circumstances which merit withdrawal of the  

public offer;  

c. Circumstances which go into the formation of the opinion,  

must be circumstances that are relevant to the question of  

withdrawal of the public offer;       

d. The  circumstances  must  be  such  that  no  reasonable  

person, who comes into possession or knowledge thereof,  

can  be  compelled  to  (ignore  such  circumstances  and)  

proceed with the public offer.”

35. Therefore,  the  discretion  conferred  on  respondent  under  

Regulation 27(1)  (d),  entailed the duty of  respondent  to form its  

opinion based on relevant facts and the circumstances prevailing  

at the time when the application for withdrawal of open offer was  

made.  Admittedly, the respondent failed to do so.  

36. Learned  senior  counsel  further  submitted  that  the  SAT  in  

interpreting Regulation 27 has wrongly relied upon the principle of  

Ejusdem Generis.  He submits  that  the  rule  of  ejusdem generis  

applies only if the statutory provision – (i) contains an enumeration  

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of specific words; (ii) the subjects of enumeration constitute a class  

or  category;  (iii)  that  class  of  category  is  not  exhausted  by the  

enumeration; (iv) the general terms follow the enumeration; and (v)  

there is no indication of a different legislative intent.  

37. Learned senior counsel submits that in the present case none of  

the  said  requirements  are  met.  The  rule  of  ejusdem generis is  

restricted to cases where the specific words precede the general  

words in the language of the statute, and in totality from a singular  

genus  along  with  the  general  words.  The  sub-clauses  of  

Regulation 27 do not form a common genus of cases where it is  

impossible to do an open offer. Learned senior counsel submitted  

that the provisions contained in the Takeover Code are regulatory  

in  nature  and,  therefore,  have  to  be  construed  widely.  The  

Takeover Code provisions do not apply to pledgees. The text of the  

Takeover Code indicates a different legislative intent so far as the  

pledgees are concerned. He submits that the court  is entitled to  

look at the legislative history for interpretation of any provision in  

the Act, Rule or Regulation. He submits that the legislative history  

of Regulation 27(1) would clearly show that  ejusdem generis was  

not  the  appropriate  rule  of  interpretation  to  be  implied  while  

construing  the  aforesaid  provisions.  He  pointed  out  that  sub-

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regulation (a) of Regulation 27(1), as originally enacted, dealt with  

a  case  of  a  competing  acquirer  which  would  entitle  the  first  

acquirer to be exempted from making the open offer. However, to  

ensure  that  shareholders  of  Target  Company  should  have  an  

option to decide from both offers, sub-regulation (a) was omitted on  

September  9,  2002.  Sub-Regulation  (b)  deals  with  a  situation  

where requisite statutory approvals are not granted to make the  

open offer; and Sub-Regulation (c) deals with a situation where the  

sole acquirer dies and although it is possible that the legal heirs  

could make the open offer, nonetheless grants an exemption to the  

deceased  acquirer  and  his  heirs.  Regulation  27(1)  (d),  is  not  

confined to a particular  situation,  but  grants  a general  power  to  

SEBI  to  permit  withdrawal  of  open  offer  where  the  facts  and  

circumstances  in  its  opinion  may  merit  withdrawal,  taking  into  

account  the  facts  and  circumstances  of  that  particular  case.  

Therefore, according to the learned senior counsel, the SAT erred  

in  law  in  construing  Regulation  27(1)  (d)  on  the  principle  of  

ejusdem generis.  According to Mr. Shyam Divan, Regulation 27(1)  

(d) provides an exception for withdrawal of open offer not limited to  

the narrow confines of  Clauses (b)  and (c)  of  Regulation 27(1).  

According to him, the exception under Regulation 27(1) (d) deals  

with a separate and distinct class of cases i.e. where respondent  

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has been conferred discretion to allow withdrawal of open offers in  

“such  circumstances,”  which  “in  the  opinion  of  the  Board  merit  

withdrawal”.  Therefore,  for  this  reason  also  Regulation  27(1)(d)  

cannot  be  read  ejusdem generis with  the  preceding  clauses  to  

restrict  the  scope.  According  to  him,  the  word  “such”  used  in  

Regulation 27(1)(d) is used in the context of circumstances that in  

the opinion  of  the Board merit  withdrawal.  According to  learned  

counsel, the same does not take colour from Regulations 27(1) (b)  

or 27(1)(c). This apart, he submits that the interpretation given to  

Regulation  27  by  the  SAT is  so  narrow  that  it  leads  to  absurd  

consequences.  The  narrow  construction  of  Regulation  27(1)  (d)  

would  permit  withdrawal  only  on  the  same  footing  as  the  

circumstances enumerated under Regulation 27(1)(b) and (c). This  

would  leave  no  discretion  with  SEBI  to  approve  withdrawal,  “in  

such  circumstances”,  which  in  the  opinion  of  the  Board  “merit   

withdrawal.” Finally, it is submitted that it is an accepted principle  

that  where  two  interpretations  are  possible  then  such  an  

interpretation ought to be taken which will not render any provision  

of a statute otiose. According to him, Regulation 27(1) (d) would be  

rendered meaningless if it is read ejusdem generis with Regulation  

27(1)  (b)  and Regulation 27(1)  (c).  Learned senior  counsel  also  

relied on Regulation 3 of Takeover Regulations which empowers  

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the respondent to grant a complete exemption to an acquirer from  

Regulations  10,  11  and  12  in  certain  cases.  He  submits  that  

residuary power under Regulation 3(1) in addition to the specific  

scenario mentioned therein is strongly indicative of the intention of  

the legislature. In the facts of the present case, it is submitted by  

Mr. Shyam Divan that had the appellants realized that there was a  

fraud before making public announcement, it could have gone to  

the Takeover Panel after it exercised the pledge on July 22, 2005  

and  applied  for  exemption  from Regulations  10,  11  and  12.  In  

those  circumstances,  the  plea  of  the  appellants  for  exemption  

would  have  been  considered  before  the  making  of  the  public  

announcement.  It  is  only because the fraud was detected much  

after the making of the public announcement that the appellants  

had made an application for withdrawal of the open offer. In such  

circumstances,  the  respondent  can  certainly  exercise  its  power  

under  Regulation 27(1)(d)  after  granting a hearing.  In short,  the  

submission  of  Mr.  Shyam  Divan  is  that  the  regulations  permit  

exercise  of  discretion  before  and  after  public  announcement.  

Therefore, SEBI as well as SAT had erred in giving a very narrow  

interpretation to regulation 27(1)(d).  Learned senior counsel  also  

referred to Regulation 22(14) of the Takeover Regulations which  

provides that an acquirer who has withdrawn an open offer shall  

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not be permitted to make an open offer for a period of six months  

from the date of withdrawal of the offer. Applying this to Regulation  

27, he submits that it is amply clear that impossibility as sought to  

be  interpreted  in  Regulation  27  cannot  vanish  in  six  months.  

Therefore, according to him, it is clear that withdrawal of an open  

offer need not be on account  of impossibility  only.  In support  of  

these  submissions,  he  relied  on  Municipal  Corporation  of  

Greater  Bombay Vs.  Bharat  Petroleum  Corporation  Ltd.  6    

Maharashtra  University  of  Health  Sciences  &  Ors. Vs.  

Satchikitsa Prasarak Mandal & Ors. 7 and Union of India & Ors.  

Vs. Alok Kumar   8  .    

38. We are unable to accept the submission of Mr. Shyam Divan that  

the rule of  ejusdem generis has been wrongly applied by SAT in  

interpreting the provisions of Regulations 27(1) (b) (c) and (d).  

39. In our opinion, the SAT has correctly come to the conclusion that  

under  the  SEBI  Act,  Board  has  been  entrusted  with  the  

6 (2002) 4 SCC 219, 7 (2010) 3 SCC 786

8 2010) 5 SCC 349.                         

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fundamental  duties  of  ensuring  orderly  development  of  the  

securities  market  as  a  whole  and to  protect  the  integrity  of  the  

securities market. It is precisely for this purpose that the provision  

is made in Regulation 7 that any acquirer, who acquires shares or  

voting rights which would entitle him to more than 5% or 10% or  

14% shares or voting rights in a company, shall disclose at every  

stage  the  aggregate  of  share  holding  or  voting  rights  in  that  

company  to  the  company  and  to  the  stock  exchanges  where  

shares  of  the  target  company  are  listed.  Under  Regulation  (8),  

such an acquirer shall within 21 days from the financial year ending  

March 31, make yearly disclosures to the company, in respect of  

his  holdings  as  on  31st March.  Regulation  8A  provides  for  

disclosure of information with regard to pledged shares. The Board  

has power under Regulation 9, to call for information with regard to  

the disclosures made under Regulations 6, 7, and 8 as and when  

required by the Board. Regulation 10 mandates that no acquirer  

shall acquire shares or voting rights which entitle such acquirer to  

exercise 15% 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. The Takeover  

Code  then  prescribed  a  detailed  procedure  for  making  a  public  

announcement  and  the  manner  in  which  the  offer  price  is  

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determined at which the shares are offered to public shareholders.  

Regulation 11 provides that no acquirer who, together with persons  

acting in concert  with him, has acquired, in accordance with the  

provisions of law, 15% or more but less than 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% of  

the  voting  rights  unless  such  acquirer  makes  a  public  

announcement  to  acquire  shares  in  accordance  with  the  

Regulations.  Again,  Regulation  12  provides  that  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.  Under  Regulation  13,  before  

making any public announcement of offer referred to in Regulation  

10 or Regulation 11 or Regulation 12, the acquirer is duty bound to  

appoint  a  Merchant  Banker  holding  a  certificate  of  registration  

granted by the Board. Such Merchant Banker is required to be not  

associates of or group of the acquirer or the target company. In  

other  words,  it  has  to  be  a  totally  independent  entity.  Under  

Regulation  14,  the  Merchant  Banker  is  required  to  make public  

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announcement under Regulation 10 or Regulation 11 within four  

working  days  of  entering  into  an  agreement  for  acquisition  of  

shares  or  voting  rights  exceeding  the  respective  percentage  

specified in Regulations 10 and 11. Regulation 15 provided that  

public announcement to be made under Regulations 10, 11 or 12  

shall be made in all editions of one English national daily with wide  

circulation,  one  Hindi  national  daily  with  wide  circulation  and  a  

regional language daily with wide circulation at the place where the  

registered office of the target company is situated and at the place  

of the stock exchange where the shares of the target company are  

most  frequently  traded.  Simultaneously,  a  copy  of  the  public  

announcement  has  to  be  submitted  to  the  Board  through  the  

Merchant  Banker;  sent to all  the stock exchanges on which the  

shares of the company are listed for being notified on the notice  

board; and sent to the target company at its registered office for  

being  placed  before  the  Board  of  Directors  of  the  company.  

Regulation 16 sets out in detail the particulars which are required  

to be expressly stated and the public announcement is made under  

Regulations 10, 11 or 12. Regulation 17 provides that the public  

announcement  or any advertisement,  circular,  brochure,  publicity  

material  or  letter  of  offer  issued in relation  to  the acquisition  of  

shares  must  not  contain  any  misleading  information.  Under  

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Regulation  18,  within  14  days  from  the  date  of  public  

announcement made under Regulations 10, 11 or 12, as the case  

may be, the acquirer, through its Merchant Banker, is mandated to  

file with SEBI the draft of the letter of offer, containing disclosures  

as specified by the Board. This letter of offer is to be dispatched to  

the shareholders not earlier than 21 days from its submission to  

the Board. However, the Board has the power to specify changes,  

if  any,  in  the letter  of  offer  which the merchant  banker  and the  

acquirer is required to carry out such changes before the letter of  

offer is dispatched to the shareholders. Regulation 20 provides that  

the offer to acquire share under Regulations 10, 11 or 12 shall be  

made at a price not lower than the price determined as per sub-

regulations  (4)  and  (5).Sub-Regulations  (4)  and  (5)  provides  a  

complete  procedure  for  determination  of  the  price.  Under  

Regulation  21,  it  is  provided  that  the  public  offer  made  by  the  

acquirer to the shareholders of the target company shall be for a  

minimum 20% of the voting capital of the company. Regulation 24  

imposes certain general obligations of the merchant banker. Before  

the public announcement of the offer is made, the merchant banker  

is required to ensure that - (a) the acquirer is able to implement the  

offer;  (b)  the provision relating to Escrow account  referred to in  

Regulation 28 has been made; (c) firm arrangements for funds and  

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money for payment through verifiable means to fulfil the obligations  

under the offer are in place; (d) the public announcement of offer is  

made in terms of  the Regulations.  Under Regulation 24(2),  it  is  

provided that the merchant banker shall furnish to the Board a due  

diligence certificate which shall accompany the draft letter of offer.  

Under Regulation 24(4), the merchant banker is required to ensure  

that the contents of the public announcement of offer as well as the  

letter  of  offer  are true,  fair  and adequate and based on reliable  

sources,  quoting the source wherever necessary.  To ensure the  

independence of  the merchant  banker  under  Regulation 24(5A),  

the merchant banker is not permitted to deal in the shares of the  

target  company during the period commencing from the date of  

appointment in terms of regulation 13 till the expiry of 15 days from  

the date of  closure  of  the offer.  It  is  only  upon fulfillment  of  all  

obligations  by  the  acquirers  under  the  Regulations,  that  the  

merchant  banker  is  permitted to cause the bank with which the  

escrow amount has been deposited to release the balance amount  

to the acquirers.  (Regulation 24(6)).  Under Regulation 24(7),  the  

merchant banker is called to send a final report to the Board within  

45 days from the date of closure of the offer.     

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40. A conspectus of the aforesaid Regulations would show that the  

scheme of the Takeover Code is – (a) to ensure that the target  

company is aware of the substantial acquisition ; (b) to ensure that  

in  the  process  of  the  substantial  acquisition  or  takeover,  the  

security market is not distorted or manipulated and (c) to ensure  

that the small investors are given an option to exit, that is, they are  

offered  a  choice  to  either  offload  their  shares  at  a  price  as  

determined in accordance with the takeover code or to continue as  

shareholders  under  the  new  dispensation.  In  other  words,  the  

takeover code is meant to ensure fair and equal treatment of all  

shareholders  in  relation  to  substantial  acquisition  of  shares  and  

takeovers  and  that  the  process  does  not  take  place  in  a  

clandestine  manner  without  protecting  the  interest  of  the  

shareholders. It is keeping in view the aforesaid aims and objects  

of the takeover code that we shall  have to interpret  Regulations  

27(1).

Regulation 27 reads as under:

“Withdrawal of offer – (1) No public offer, once made,  shall  be  withdrawn  except  under  the  following  circumstances:-

(a)……………’

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(b)  the  statutory  approval(s)  required  have  been refused;

(c) the sole acquirer, being a natural person,  has died;

(d) such  circumstances  as  in  the  opinion  o  the Board merits withdrawal.

(2) In the event of withdrawal of the offer under any  of the circumstances specified under sub-regulation  (1), the acquirer or the merchant banker shall:

(a) make a public announcement in the same  newspapers  in  which  the  public  announcement  of  offer  was  published,  indicating  reasons  for  withdrawal  of  the  offer;

(b) simultaneously  with  the  issue  of  such  public  announcement,  inform  –  (i)  the  Board;  (ii)  all  the  stock  exchanges  on  which  the  shares  of  the  company  are  listed; and (iii)  the target  company at its  registered office.”      

41. We may notice here that  Regulation 27(1)  (a)  was omitted by  

SEBI (Substantial Acquisition of Shares and Takeovers) (Second  

Amendment), Regulations, 2002 w.e.f. 9.9.2002. Prior to omission,  

it read as under :-

“(a) the withdrawal is consequent upon any competitive bid.”

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42. A  bare  perusal  of  the  aforesaid  Regulations  shows  that  

Regulation  27(1)  states  the  general  rule  in  negative  terms.   It  

provides that no public offer, once made, shall be withdrawn. Since  

Clause (a) has been omitted, we are required to interpret only the  

scope and ambit of clause (b), (c) and (d). The three sub-clauses  

are  exceptions  to  the  general  rule  and,  therefore,  have  to  be  

construed  very  strictly.  The  exceptions  cannot  be  construed  in  

such a manner that would destroy the general rule that no public  

offer  shall  be  permitted  to  be  withdrawn  after  the  public  

announcement has been made.   Clause (b) would permit a public  

offer  to  be  withdrawn  in  case  of  legal  impossibility  when  the  

statutory  approval  required  has  been  refused.  Clause  (c)  again  

provides for impossibility when the sole acquirer, being a natural  

person,  has  died.  Clause  (b)  deals  with  a  legal  impossibility  

whereas clause (c) deals with a natural disaster. Clearly clauses  

(b) and (c) are within the same genus of  impossibility. Clause (d)  

also  being  an  exception  to  the  general  rule  would  have  to  be  

naturally construed in terms of clauses (b) and (c). Mr. Divan has  

placed  a  great  deal  of  emphasis  on  the  expression  “such  

circumstances”  and  “in  the  opinion”  to  indicate  that  the  Board  

would have a wide discretion to permit withdrawal of an offer even  

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though it  is not impossible to perform. We are unable to accept  

such an interpretation.  

43. The  term “ejusdem generis”  has  been  defined  in  Black’s  Law  

Dictionary, 9th Edn. as follows :

“A canon of  construction holding that when a general  word or  phrase follows a list  of  specifics,  the general  word or phrase will be interpreted to include only items  of the same class as those listed.”  

44. The meaning of the expression ejusdem generis was considered  

by this Court on a number of occasions and has been reiterated in  

Maharashtra  University  of  Health  Sciences  and  Ors. Vs.  

Satchikitsa Prasarak Mandal & Ors.  9  The principle is defined  

thus :   

“The Latin expression “ejusdem generis” which means  “of  the  same  kind  or  nature”  is  a  principle  of  construction, meaning thereby when general words in a  statutory  text  are  flanked  by  restricted  words,  the  meaning of the general words are taken to be restricted  by implication with the meaning of the restricted words.  This  is  a  principle  which  arises  “from  the  linguistic  implication  by  which  words  having  literally  a  wide  meaning  (when  taken  in  isolation)  are  treated  as  reduced  in  scope  by  the  verbal  context”.  It  may  be  regarded  as  an  instance  of  ellipsis,  or  reliance  on  implication. This principle is presumed to apply unless  there  is  some  contrary  indication  [see  Glanville  

9 (2010) 3 SCC 786.

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Williams,  The Origins  and Logical  Implications  of  the   Ejusdem Generis Rule, 7 Conv (NS) 119].”

45. Earlier also a Constitution Bench of this Court  in  Kavalappara  

Kottarathil Kochuni vs. State of Madras10 construed the principle  

of ejusdem generis wherein it was observed as follows :

“  ……..  The  rule  is  that  when  general  words  follow  particular  and specific  words of  the same nature,  the  general  words  must  be  confined  to  the  things  of  the  same kind as those specified. But it is clearly laid down  by decided cases that the specific words must form a  distinct genus or category. It is not an inviolable rule of  law, but is only permissible inference in the absence of   an indication to the contrary.”

46. Again this Court  in  another  Constitution Bench decision in the  

case of  Amar Chandra Chakraborty Vs.  Collector of  Excise11  

observed as follows :

“. … The ejusdem generis rule strives to reconcile the  incompatibility between specific and general words. This  doctrine  applies  when  (i)  the  statute  contains  an  enumeration of  specific words;  (ii)  the subjects of  the  enumeration  constitute  a  class  or  category;  (iii)  that  class or category is not exhausted by the enumeration;  (iv) the general term follows the enumeration; and (v)  there is no indication of a different legislative intent.”

47. Applying the aforesaid tests, we have no hesitation in accepting  

the conclusions reached by SAT that clause (b) and (c) referred to  

10 AIR 1960 SC 1080

11 (1972 (2) SCC 444)

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circumstances which pertain to a class, category or genus, that the  

common  thread  which  runs  through  them is  the  impossibility in  

carrying  out  the  public  offer.  Therefore,  the  term  “such  

circumstances” in clause (d) would also be restricted to situation  

which  would  make it  impossible  for  the  acquirer  to  perform the  

public  offer.  The  discretion  has  been  left  to  the  Board  by  the  

legislature  realizing  that  it  is  impossible  to  anticipate  all  the  

circumstances that may arise making it impossible to complete a  

public offer. Therefore, certain amount of discretion has been left  

with the Board to determine as to whether the circumstances fall  

within the realm of impossibility as visualized under sub-clause (b)  

and  (c).  In  the  present  case,  we  are  not  satisfied  that  

circumstances are such which would make it  impossible  for  the  

acquirer to perform the public offer. The possibility that the acquirer  

would  end-up making  loses  instead  of  generating  a  huge  profit  

would not bring the situation within the realm of impossibility.  

48. We are unable to accept the submission of Mr. Shyam Divan that  

clause (d) would permit SEBI to accept the offer of withdrawal even  

in  circumstances  when  it  has  become  uneconomical  for  the  

acquirer to perform the public offer. The rule of ejusdem generis as  

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defined by this Court in Commissioner of Income Tax, Udaipur,  

Rajasthan Vs. McDowell and Co. Ltd.12 is as follows :  

“The principle of  statutory interpretation is well  known  and well settled that when particular words pertaining to  a  class,  category  or  genus  are  followed  by  general  words,  the general  words are construed as limited to  things of the same kind as those specified. This rule is  known as the rule of ejusdem generis. It applies when:

(1) the  statute  contains  an  enumeration  of  specific words;

(2) the  subjects  of  enumeration  constitute  a  class or category;

(3) that class or category is not exhausted by the  enumeration;

(4) the  general  terms  follow  the  enumeration;  and

(5) here is no indication of a different legislative  intent.”

49. Mr.  Divan  has  sought  to  persuade  us  that  clause  (d)  in  fact  

carves out an exception out of the exceptions provided in clauses  

(b) and (c). We see no justification in moving away from the Latin  

maxim “noscitur a sociis”, which contemplates that a statutory term  

is  recognized  by  its  associated  words.  The  Latin  word  “sociis”  

means society. It was pointed out by Viscount Simonds in Attorney  

General  vs. Prince Ernest Augustus of Hanover,  (1957) AC 436  

that  when  general  words  are  juxtaposed  with  specific  words,  

general words cannot be read in isolation. Their colour and their  

12 (2009 10 SCC 755)

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contents  are  to  be  derived  from  their  context.  Applying  the  

aforesaid principle, we are unable to stretch the meaning of terms  

“such circumstances” from the realm of impossibility to the realm of  

economic undesirability.              In essence, the submission made  

by Mr. Divan is that unless they are allowed to walk away from the  

public offer they would have to bear losses which would otherwise  

have  been  shared  by  the  erstwhile  shareholders  of  the  target  

company. Accepting such a proposition would be contrary to the  

aims  and  objectives  of  the  Takeover  Code  which  is  to  ensure  

transparency in acquisition of a large percentage of shares in the  

target  company.  It  would  also  encourage  undesirable  and  

speculative practices in the stock market. Therefore, we are unable  

to accept the submission of Mr. Shyam Divan. Regulation 27(1) (d)  

would empower the SEBI to permit withdrawal of an offer merely  

because it has become uneconomical to perform the public offer.  

50. Mr.  Venugopal,  in  our  opinion,  has  rightly  submitted  that  the  

Takeover  Regulations,  which  is  a  special  law  to  regulate  

“substantial  acquisition  of  shares  and  takeovers”  in  a  target  

company lays down a self contained code for open offer; and also  

that  interest  of  investors  in  the  present  case required  that  they  

should be given an exit route when the appellants have acquired  

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substantial  chunk  of  shares  in  the  target  company.   He  has  

correctly  emphasised  in  his  submissions  that  the  orderly  

development  of  the  securities  market  as  a  whole  requires  that  

public offers once made ought not to be allowed to be withdrawn  

on the ground of fall in share price of the target company, which is  

essentially  a  business  misfortune  or  a  financial  decision  of  the  

acquirer  having  gone  wrong.   SEBI  as  well  as  the  SAT  have  

correctly concluded that withdrawal of the open offer in the given  

set  of  circumstances  is  neither  in  the  interest  of  investors  nor  

development of the securities market.  Mr. Venugopal is correct in  

voicing the apprehension that if on ground of fall in prices, public  

offer is allowed to be withdrawn, it could lead to frivolous offers,  

being  made  and  withdrawn.  This  would  adversely  affect  the  

interests  of  the  shareholders  of  the  target  company  and  the  

integrity of the securities market,  which is wholly contrary to the  

intent  and  purpose  of  the  takeover  regulations.  In  such  

circumstances, we are unable to agree with the submission of Mr.  

Shyam Divan that the order passed by SEBI on 30th April, 2007 can  

be said to be an order causing civil consequences.  The appellants  

wanting to withdraw the public offer merely wishes to cut its losses  

at  the  expense  of  the  innocent  shareholders,  who  are  entitled  

under the Regulations to the exit option.  In such circumstances,  

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the appellants would have to buy the shares at the quoted prices of  

Rs.18.60 per share, placing a financial burden on the appellants.  

The aim of  the  appellants  was merely  to  avoid  such an  added  

burden.  This  is  patent  from  the  plea  made  by  the  Merchant  

Bankers on 22nd September, 2006 on behalf of the appellants. In  

the aforesaid application, it is clearly mentioned as under:

“Under  the  aforesaid  circumstances,  it  is  apparent  that  SRMTL  has  lost  is  substratum,  has  become  a  “sick  company”  and  that  chances  of  lis  (sic)  survival  are  negligible.  The  pledgee  Acquirers  while  enforcing  the  security created earlier (invoking the pledge on the shares  of SRMTL) had triggered Regulation 10 of the Regulations  requiring the Pledgee Acquirers  to  make the open offer.  However,  on  account  of  subsequent  knowledge  of  development at SRMTL, it is apparent that if this offer is not  withdrawn, the Pledgee Acquirers  will be saddled with an  additional  burden of  over  Rs.25 crores.  In  our  view,  the  purpose  sought  to  be  achieved  by  operation  of  the  Regulations is lost in view of the subsequent developments  and hence the Regulations will operate harshly again the  Pledgee  acquirers.  In  view  of  the  changed  scenario,  it  would  be  inequitable  and  unfair  to  compel  the  Pledgee  Acquires to proceed with the offer to purchase the shares  of SRMTL from the shareholders of SRMTL in accordance  with the draft Letter of Offer.  

In light of the change in circumstances as stated above and  considering the present state of affairs, we now appeal to you  to kindly permit the acquirers to withdraw the offer by using  the powers vested in you in terms of Regulation 27(4) of the  Regulations.”

51. In view of the foregoing reasons, we are not inclined to accept the  

submissions of Mr. Divan that the principle of  ejusdem generis is  

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not applicable for interpreting Regulation 27(1) (d) of the Takeover  

Code.

Object of Takeover Code   qua   the Lenders   

52. The  next  submission  of  Mr.  Shyam  Divan  is  based  on  

Regulation 3(1)(f) of the Takeover Code, which exempts the banks  

and  financial  institutions  from  making  a  public  offer  where  an  

acquisition of shares is made in the ordinary course of business, in  

pursuance  of  the  pledge  of  shares  made  in  its  favour.  It  is  

submitted that the objective underlying the said provision appears  

to be to give an exemption to the creditors who acquire shares to  

secure the loan/credit and then invoke the pledge to recover such  

credit  from  the  defaulting  parties,  but  not  to  take  over  the  

management of the target  companies.  On similar reasoning,  the  

said  objective,  as  put  forward  by  the  learned  senior,  would  be  

taken to apply in the case of a private company which gives credit  

and acquires shares as pledged in course of the business, since  

the object of such private companies is also not to takeover the  

management  but  to  secure  their  loan.  It  is  also  submitted  that  

Regulation 27(1) (d) of the Takeover Code ought to be interpreted  

with  such  latitude  to  further  the  said  objective  of  the  Takeover  

Code.

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53. We are unable to accept the aforesaid submission of Mr. Shyam  

Divan. Rather we find merit  in the submission of Mr.  Venugopal  

that  Regulation  3(1)  (f)  (iv)  (which  exempts  the  acquisition  of  

shares by banks and  public financial institutions as pledgees, from  

the provisions of the Takeover Regulations), does not advance the  

case of the appellants any further. Under this regulation, exemption  

is provided to certain entities that acquire shares in the ordinary  

course  of  business.  The  regulation  provides  exemption  from  

Regulation  10,  11  and  12  to  Scheduled  Commercial  Banks  or  

Public  Financial  Institutions  acting  as  pledgees  in  the  ordinary   

course of business, in order to facilitate their business operations.  

Such acquisition of shares in normal circumstances is not with the  

intention  of  taking  over  the  target  company.  The  shares  are  

acquired to protect the economic interest of the banks and public  

financial  institutions  by  securing  repayment  of  the  loan.  Such  

acquisitions of shares have nothing in common with acquisition of  

shares by an acquirer company such as the appellants seeking to  

gain control in the affairs of the target company.  

Powers of Respondent under SEBI Act:  

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54.Mr. Shyam Divan has further submitted that de hors the Takeover  

Regulations/Code, SEBI has wide powers to allow withdrawal of  

offer under Sections 11 & 11B of the SEBI Act. To safeguard the  

interest  of  the  investors  in  securities,  and  also,  to  regulate  the  

securities market,  SEBI has the power to take whatever steps it  

considers appropriate. In this context, the learned senior counsel  

relied upon the case of  Sahara India Real Estate Corporation  

Limited & Ors v.  Securities and Exchange Board of India &  

Anr.  13   

55. We are not inclined to accept the aforesaid submission. In the  

aforesaid  judgment  in  Sahara  India  Real  Estate  Corporation  

Limited (supra) this Court observed as under:

“From a collective perusal of Sections 11, 11A, 11B and  

11C of the SEBI Act, the conclusions drawn by the SAT,  

that on the subject  of regulating the securities market  

and  protecting  interest  of  investors  in  securities,  the  

SEBI Act is a stand alone enactment, and the SEBI’s  

powers  thereunder  are  not  fettered  by  any  other  law  

including the Companies Act, is fully justified.       

13 (2012) 8 SCALE 101

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56. These observations have been made by this Court to emphasise  

that SEBI has all the powers to protect the interests of investors in  

securities and also to ensure orderly,  regulated, and transparent  

functioning of the stock markets. The aforesaid observations would  

be of no assistance to the appellants herein who is seeking to walk  

away from public offer merely to avoid economic loses. Rather we  

agree with the submission of Mr. Venugopal that permitting such a  

withdrawal  would  lead  to  encouragement  of  unscrupulous  

elements  to speculate  in the stock market.  Encouraging such a  

practice  of  an  offer  being  withdrawn  which  has  become  

uneconomical  would have a destabilizing effect  in  the securities  

market.   This would be destructive of the purpose for which the  

Takeover Code was enacted.        

Fraud:

57. It  is  submitted  that  since  fraud  vitiates  every  solemn  act,  the  

withdrawal of the public offer by the appellants ought to have been  

allowed. In this regard, reliance is placed upon  Ram Chandra v.  

Savitri Devi (2003) 8 SCC 319   (Paras     15-30  ).   

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58. This submission of Mr. Shyam Divan is wholly misconceived in  

the  facts  and  circumstances  of  this  case.  In  the  case  of  Ram  

Chandra (supra), this Court has reiterated the principle laid down  

in  the  case  of  S.P.Chengalvaraya  Naidu  (dead)  by  LRs.  vs.  

Jagannath  (Dead)  by  LRs.  and  Ors.  14  The  principle  was  

explained by Kuldip Singh, J. in the following words:

“Fraud  avoids  all  judicial  acts,  ecclesiastical  or  temporal”  observed  Chief  Justice  Edward  Coke  of  England  about  three  centuries  ago.  It  is  the  settled  proposition of law that a judgment or decree obtained by  playing fraud on the court is a nullity and non est in the  eyes  of  law.  Such  a  judgment/decree  — by  the  first  court or by the highest court — has to be treated as a  nullity by every court, whether superior or inferior. It can  be  challenged  in  any  court  even  in  collateral  proceedings.”

59. It was further held in paragraph 5, as follows:-

“5. The High Court,  in our view, fell  into patent error.  The short question before the High Court was whether  in the facts and circumstances of this case, Jagannath  obtained the preliminary decree by playing fraud on the  court.  The  High  Court,  however,  went  haywire  and  made observations which are wholly perverse. We do  not agree with the High Court that “there is no legal duty  cast upon the plaintiff to come to court with a true case  and prove it by true evidence”. The principle of “finality  of litigation” cannot be pressed to the extent of such an  absurdity  that  it  becomes  an  engine  of  fraud  in  the  hands  of  dishonest  litigants.  The  courts  of  law  are  meant  for  imparting  justice  between  the  parties.  One  who comes to the court, must come with clean hands.  We are  constrained  to  say  that  more  often  than not,  

14 (1994) 1 SCC 1

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process  of  the  court  is  being  abused.  Property- grabbers,  tax-evaders,  bank-loan-dodgers  and  other  unscrupulous  persons  from  all  walks  of  life  find  the  court-process  a  convenient  lever  to  retain  the  illegal  gains indefinitely. We have no hesitation to say that a  person, who's case is based on falsehood, has no right  to approach the court. He can be summarily thrown out  at any stage of the litigation.”

60. In the present case, no fraud has been played on the appellants  

as such. The shares were acquired by the appellants on the basis  

of  an  informed  business  decision.  The  appellants  cannot  be  

permitted  to  take  advantage  of  its  own  laxity  to  justify  seeking  

withdrawal of the public offer.

61. Mr.  Shyam Divan submitted  that  SEBI  has wrongly  concluded  

that  the  fact  of  the  large  scale  embezzlement  in  the  target  

company were existent prior to the exercise of the pledge by the  

appellants  and,  therefore,  were  “known”  or  “could  have  been  

known” by the appellants, if the appellants had exercised proper  

“due  diligence”.  He  points  out  that  the  entire  basis  and/or  the  

special circumstances in which the appellants made an application  

for  permission  to  withdraw the public  offer  was on the basis  of  

certain  facts  which  came  to  light  subsequently  i.e.  facts  which  

came in the public domain and/or the knowledge of the appellants,  

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only after the appellants exercised its right of pledge and after the  

appellants made consequential public announcement. According to  

the  learned  senior  counsel,  the  Sharma Report,  which  came in  

public  domain  after  the  public  announcement,  for  the  first  time  

informed the  public  that  through fraudulent  transactions,  Rs.326  

Crores  were  siphoned  off/embezzled  by  erstwhile  promoters  of  

SRMTL.  As soon as the Sharma Report  was made public,  the  

market price of the shares of the target company fell from Rs.18.60  

to  Rs.8.56.  He  also  emphasised  that  the  Sharma  Report  also  

brought to public notice the Kalyaniwala Report and Sharp Report.  

These reports were submitted to the erstwhile Board of Directors of  

the  target  company  in  2002.  However,  these  reports  were  not  

made public and in fact were deliberately withheld from the public  

in spite of the same being price sensitive. Therefore, according to  

Mr.  Shyam Divan, the appellants,  or for that matter,  any person  

exercising due diligence and care, could not have and did not know  

the existence and nature of the fraud and embezzlements by the  

erstwhile promoters of the target company. If the SEBI, the capital  

market regulator, with all its infrastructure did not become aware of  

the  damning  indictment  of  a  listed  company  permitting  its  

controlling  promoters  to  abuse,  misuse  and  embezzle funds  

belonging to investors in the securities market, it cannot rationally  

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be accepted that the appellants would have discovered the same  

by exercise of due diligence.  Mr. Shyam Divan further brought to  

our  notice  the  facts  which  were  known  at  the  time  of  public  

announcement  and the facts which could not  have been known  

even  after  due  diligence  since  the  same  did  not  reflect  in  the  

balance sheet  and/or  financial  statement  of  the target  company.  

The known facts at the time of public announcement are listed as  

under:

“SRMTL had negative net worth;  SRMTL  Company  was  recently  faced  with  poor  

financial performance;  Stated  reasons  for  the  aforesaid  poor  performance  

and negative net worth was: (i) Low volume of sales and products; (ii) Reduced price and lower realization; (iii) Working capital constraints; (iv) Higher unabsorbed fixed costs.  Certain Litigations as stated in the Letter of Offer were  

pending.”            

62. The  facts  which  could  not  have  been  known  even  after  due  

diligence are stated to be as under:

“Finding  of  special  investigative  audit  by  M/s.  R.C.Sharma  &  Co.,  Chartered  Accountants  as  contained in the three reports;

Unexplained shortfall of cash – cash being siphoned by  those in management.

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Issuance  of  warrants  to  Pan  Emami  Cosmed  Ltd  in  concert  with  Emami’s  promoters  with  a  view  to  fraudulently siphon Rs.2.74 Crores.

Promoters fraudulently appropriating money by sale of  goods  to  Emami  Ltd  by  creating  charge  on  trade  receivables.

Siphoning  of  Rs.50  Crores  by  promoters/directors  of  SRMTL through related party transactions “by creating a  fictitious  asset  procurement  case  and  subsequently  creating false grounds of writing off the same amount in  the books of the Company”.

Rs.  143  Crores  of  “huge  contingent  liability  is  not  disclosed in Balance Sheet as on 31.03.2005.

Systematic  embezzlement  and  siphoning  of  funds  by  promoters  director  of  more  than  326  Crores  by  fraudulent transactions.”

63. On the basis of the aforesaid, Mr. Shyam Divan submitted that  

the conclusion recorded by the SEBI which has been upheld and  

approved by SAT is without any factual basis.

64. Mr.  Shyam  Divan,  relying  on  Regulation  3A  which  prohibits  

dealing in securities of a target company if a person has access to  

price sensitive information,  submitted that  if  the appellants  were  

privy to the contents of the Kalyaniwala and Sharp Reports it would  

have been precluded from invoking the pledges,  as such action  

would constitute “dealing in securities”. It is also submitted by Mr.  

Shyam Divan that the expression “due diligence” does not mean  

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that the party has to assume the role of amateur detective, nor is  

the  party  obliged  to  make  any  enquiries  unless  it  can  be  

established  that  there  existed  any  circumstances  which  should  

have aroused any suspicion. It is also submitted that the law laid  

down in Marfani and Co. Ltd. vs. Midland Bank Ltd.  15   and Indian  

Overseas  Bank  vs.  Industrial  Chain  Concern  16   which  

enumerates  the benchmark  or  standards  accepted  from a party  

while performing the due diligence should be taken into account.

65. We are not much impressed by any of the submissions made by  

Mr.  Shyam Divan on this  issue. Admittedly,  the appellants were  

aware of the litigation against Shree Ram Multi Tech Limited and  

its Directors. The litigation commenced in the year 2003 i.e. before  

the public announcement made by the appellants. In fact, the letter  

of  offer  itself  refers  to  the  pending  litigation  by and against  the  

target company and its directors.  

66. In Paragraph 4.17 of the said letter, the appellants mentioned the  

cases  filed  by  Banks  and  Financial  Institutions;  Cases/Appeals  

filed  by  SRMTL  against  Banks  and  financial  Institutions;  Cases  

15 1968 (2) All E.R. 573] 16 1990 1 SCC 484

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filed by the Registrar of Companies in the Court of Additional Chief  

Metropolitan Magistrate, Ahmedabad in the matter of non payment  

of dividend under Section 205 of the Companies Act, 1956 and the  

application filed by the company against Registrar of Companies,  

Gujarat in Gujarat High Court in this matter under Section 482 of  

the Criminal Procedure Code. The list also mentions a case filed in  

the  City  Civil  Court,  Ahmedabad  by  two  commercial  entities  

involving a sum of Rs.14275.47 lacs in the matter of recovery of  

dues  and  alleged  claim  for  damages.  The  litany  of  cases  also  

includes  an appeal  of  SRMTL and its  directors  before  the  SAT  

against an order of SEBI                  dated 6 th September, 2004  

restraining the company and few of its directors from accessing the  

securities market and prohibiting from buying, selling and dealing  

in securities, directly or indirectly, for a period of five years on the  

charge  of  having  violated  sections  11  and  13  of  the  SEBI  

Regulations,  2003.  There  were  six  cases  pending  against  the  

target  company  in  the  Labour  Court,  Kalol,  (Gujarat)  by  ex-

employees  of  the  Company  in  the  matter  of  their  dues  and  

compensation.  There  were  cases  pending  in  relation  to  Central  

Excise.  In  one  case,  CEGAT  had  passed  an  order  on  25th  

February, 2004 claiming duty of Rs.101.81 lacs, fine of Rs.2 lacs  

and penalty of Rs.0.20 lacs. Excise duty authorities have in various  

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cases raised a demand on target company for an aggregate sum  

of Rs.145.90 lacs towards excise duty and Rs.97.02 lacs towards  

penalty for various offences. Similarly, excise duty of Rs.1317.65  

lacs was demanded as a result of a raid by the Intelligence Officer,  

Central  Excise,  Ahmedabad  for  non-accounted  raw  materials.  

Undoubtedly,  the  appeals  were  pending  in  the  higher  fora  in  a  

number of cases.  Nonetheless any reasonable investor/group of  

investors/consortium  would  have  come  to  a  conclusion  that  

investing in this entity would not be a prudent decision.   

67. Taking  into  account  the  aforesaid  state  of  affairs,  SAT  has  

concluded as follows:-

“The above facts would seem to be enough to provide  the  appellants  a  correct  prognosis  regarding  the  financial  health and prospects  of  the target  company.  Clearly, the appellants decided on invoking the pledge  on the shares of the target company with open eyes and  sufficient  knowledge  about  the  affairs  of  the  target  company. It is not as if the appellants were innocent and  were caught napping in an unexpected turn of events.  We  are  not,  therefore,  inclined  to  accept  at  its  face  value the argument of the appellants that they had no  prior  clue  about  the  adverse  financial  information  relating to the target  company and were contained in  the later reports of the Chartered Accountants. In this  view  of  the  matter,  the  Board  was  justified  in  characterizing the situation that the appellants are faced  with as the result of lack of due diligence and/or sheer  business misfortune. They are only trying to wriggle out  of  a  bad  bargain  which  is  not  permissible  under  Regulation 27(1) (d) of the takeover code.”        

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68. The aforesaid conclusion reached by SAT, in our opinion, does  

not call for any interference. ]

69. We  are  inclined  to  agree  with  the  submission  made  by  Mr.  

Venugopal that the appellants cannot be permitted to wriggle out of  

the  obligation  of  a  public  offer  under  the  Takeover  Regulation.  

Permitting them to do so would deprive the ordinary shareholders  

of their valuable right to have an exit option under the aforesaid  

regulations.  The  SEBI  Regulations  are  designed  to  ensure  that  

public announcement is not made by way of  speculation and to  

protect  the  interest  of  the  other  shareholders.  Very  solemn  

obligations  are  cast  on  the  merchant  banker under  Regulation  

24(1) to ensure that –

(a) the acquirer is able to implement the offer;

(b)  the  provision  relating  to  Escrow  account  referred  to  in  

Regulation 28 has been made;

(c)  firm  arrangements  for  funds  and  money  for  payment  

through verifiable means to fulfil the obligations under the offer  

are in place;

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(d) the public announcement of offer is made in terms of the  

Regulations;

(e) his shareholding, if any in the target company is disclosed  

in the public announcement and the letter of offer.  

70. Regulation  24(2)  mandates  that  the  merchant  banker  shall  

furnish  to  the  Board  a  due  diligence  certificate which  shall  

accompany the draft letter of offer. The aforesaid regulation clearly  

indicates that any enquiries and any due diligence that has to be  

made  by  the  acquirer  have  to  be  made  prior  to  the  public  

announcement.  It  is,  therefore,  not  possible  to  accept  the  

submission  of  Mr.  Shyam  Divan  that  the  appellants  are  to  be  

permitted  to  withdraw  the  public  announcement  based  on  the  

discovery of certain facts subsequent to the making of the public  

announcement.  In  such  circumstances,  in  our  opinion,  the  

judgments cited by Mr. Shyam Divan are of no relevance.     

Delay:

71. Mr. Shyam Divan has also indicated that it was because of the  

unexplained delay of 8 months on the part of SEBI to process the  

Letter of Offer of the appellants that the prices for the shares of the  

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target company went down from Rs. 18.60 to Rs. 8.56, during this  

period. This would impose huge financial liability on the appellants.  

This submission is also wholly misconceived. The submission was  

not made before SAT and it has been raised for the first time, in  

the submissions made by Mr. Shyam Divan.  In fact, the ground is  

not  even  pleaded  in  the  grounds  of  appeal.  The  submission  is  

mentioned only in the list  of dates.  Since, we are considering a  

statutory  appeal  under  Section  15Z  of  the  SEBI  Act,  the  same  

cannot  be permitted to be raised in this Court  for the first  time,  

unless the submission goes to the very root  of  the matter.  This  

apart, even on merit, we find that the submission is misconceived.  

Regulation 18(1) and (2) of the SEBI Takeover Code reads thus:-

18. Submission of letter of offer to the Board -

(1)  Within  fourteen  days  from  the  date  of  public  announcement made under regulation 10, 11 or 12 as the  case  may  be,  the  acquirer  shall,  through  its  merchant  banker, file with the Board, the draft of the letter of offer  containing disclosures as specified by the Board.

(2)  The  letter  of  offer  shall  be  dispatched  to  the  shareholders not earlier than 21 days from its submission  to the Board under sub-regulation (1):

Provided  that  if,  within  21  days  from  the  date  of  submission  of  the  letter  of  offer,  the  Board  specifies  changes, if any, in the letter of offer (without being under  any obligation to do so),  the merchant  banker  and the  acquirer shall carry out such changes before the letter of  offer is dispatched to the shareholders :

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[Provided further that if the disclosures in the draft letter  of  offer  are inadequate or  the Board has received any  complaint or has initiated any enquiry or investigation in  respect of the public offer, the Board may call for revised  letter  of  offer  with  or  without  rescheduling  the  date  of  opening  or  closing  of  the  offer  and  may  offer  its  comments  to  the  revised  letter  of  offer  within  seven  working days of filing of such revised letter of offer.]”

72. A  perusal  of  the  aforesaid  regulation  clearly  shows  that  the  

acquirer  is  required  to  file  the  draft  letter  of  offer  containing  

disclosures as specified by the Board within a period of 14 days  

from the date of public announcement.  Thereafter,  letter of offer  

has to be dispatched to the shareholders not earlier than 21 days  

from its  submission  to  the Board.  Within  21 days,  the Board  is  

required to specify changes if any, that ought to be made in the  

letter of offer.  The merchant banker and the acquirer have then to  

carry out such changes before the letter of offer is dispatched to  

the shareholders. But there is no obligation to do so.  Under the  

second proviso,  the Board may call  for  revised letter  of  offer  in  

case  it  finds  that  the  disclosures  in  the  draft  letter  of  offer  are  

inadequate  or  the  Board  has  received  any  complaint  or  has  

initiated any enquiry or investigation in respect of the public offer. It  

is important to notice that in the first proviso the Board does not  

have any obligation to specify any change in the draft letter of offer  

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within a period of 21 days. In the present case, in fact, the Board  

had not specified any changes within 21 days. We have already  

noticed earlier that the letter of offer was lacking and deficient in  

detail.   The  appellants  themselves  were  taking  time  to  submit  

details called for, by their merchant bankers through various letters  

between 08.08.2005 to 20.3.2006.  We have already noticed the  

repeated  advice  given  by  the  merchant  banker  to  enhance  the  

issue size of the open offer and to comply with other requirements  

of  the  Takeover  Regulations.  The  appellants,  in  fact,  were  

prevaricating and did not agree with the interpretation placed on  

Regulation 27(1) (d) by the Merchant Banker. We, therefore, reject  

the submission of Mr. Shyam Divan that there was delay on the  

part of SEBI in approving the draft letter of offer.     

Court may direct fresh valuation:

73. Lastly, Mr. Shyam Divan has submitted that even if the appellants  

were not  to be permitted to withdraw the public offer,  the Court  

ought to appoint an independent valuer and direct a fresh valuation  

to be made on the basis of principles contained in Regulation 20(5)  

of the Takeover Regulations. Such a valuation, according to Mr.  

Shyam  Divan,  would  be  justified  in  the  light  of  the  foregoing  

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submissions.   We  are  not  at  all  impressed  by  the  aforesaid  

submission.  The formula  given in Regulation 20 would have no  

applicability  in  the  facts  and  circumstances  of  this  case.  The  

determination of the lowest price under Regulation 20 would be at  

a stage prior to the making of the public announcement and not  

thereafter.  

74. In view of the aforesaid, we find no merit in the appeal and it is  

accordingly dismissed.  

……..….…………………J.       [Surinder Singh Nijjar]

       ………………………….J.          [Anil R. Dave]

New Delhi; May 09, 2013.

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