The present appeals relate to an interesting question
regarding the interpretation of Regulation 10 of the SEBI
Takeover Regulations of 2011.
The factual backdrop in which the present controversy
arises is that Indiabulls Real Estate Ltd. (hereinafter
referred to as “IBREL”) was incorporated as a Public
Limited Company on 4th April, 2006, which carried on the
business of real estate. It was later listed on the
National Stock Exchange as well as the Bombay Stock
power thereafter, in the year 2009. The appellant herein
was incorporated as a private Ltd. Company, being a
wholly owned subsidiary of Nettle Construction Pvt. Ltd.,
some time in 2010. This Company in turn, was wholly
owned by Mr. Rajiv Rattan. Both the Appellant and Rajiv
Rattan were listed as promoters of the said company in
IBREL in the Annual Report for the Financial Year
2009-2010.
For the purpose of disposing of the present appeals,
the “Target Company” is Rattan India Infrastructure Ltd.
It was originally incorporated as a wholly owned
subsidiary of IBREL on 9th November, 2010 with a different
name which is not material for the purpose of these
appeals.
In 2011, the Board of Directors of IBREL framed a
demerger scheme by which the power business of the company
would be demerged and would vest in the Target Company.
The High Court of Delhi sanctioned the aforesaid demerger
by its judgment and order dated 17th October, 2011. What
is important for the purpose of this appeal is that on 19th
July, 2012, an information Memorandum in terms of the
listing agreement was filed by the Target Company,
pursuant to which it was actually listed on the Bombay
Stock Exchange and the National Stock Exchange on 20th
July, 2012. The appellant acquired 18% of the equity
share holding of the target company at a price of Rs.6.30
per share some time in July, 2014. It made certain other
purchases with which we are not concerned, because the
price paid for those acquisitions was less than Rs.6.30
per share.
On 20th October, 2015 Laurel and Arbutus Consultancy
LLP along with various other entities, who were persons
acting in concert, made a public announcement under
Regulation 15(1) of the SEBI Substantial Acquisition of
Shares and Takeover Regulations, 2011 when an open offer
was made for acquisition of 35,93,90,094 equity shares of
the Target Company from the equity shareholders of the
Target Company at the price of Rs.3.20 per share.
Necessary formalities were observed thereafter, but by a
letter dated 4th December, 2015, SEBI observed that the
exemption provisions contained in Regulation 10 would not
apply to the 2014 acquisition, as a result of which the
price of Rs.3.20 per share was not accepted and the higher
price of Rs.6.30 was stated to be an amount that would
have to be paid to the equity shareholders of the Target
Company. By a letter dated 5th May, 2016, containing SEBI's
Order, SEBI stated:
“It has been observed that the
acquisitions made through inter se
transfers amongst promoters on July 9,
July 10, 2014 September 5, 2014, and
October 20, 2014, were not exempted from
open offer obligations. You are advised
to revise the Offer Price accordingly.
Further, along with the consideration
amount, you are advised to pay a simple
interest of 10% per annum from the
scheduled date of payment of
consideration based on these triggering
dates to the actual date of payment of
consideration to the shareholders who were
holding shares in the Target Company on
the date of violation and whose shares are
accepted in the Open Offer, after
adjustment of dividend paid, if any. You
are also advised to enhance the financial
arrangements and the amount maintained in
the escrow account in terms of the revised
Offer Price and the revised Offer Size, if
any.”
From the aforesaid order, the Appellate Tribunal
dismissed an appeal on 5th April, 2017, holding that
Regulation 10 did not exempt the acquisitions of 2014, as
a result of which the price payable per share necessarily
became Rs.6.30 instead of Rs.3.20 per share. The
correctness of the aforesaid order is now before us.
Shri K.V. Vishwanathan, learned senior counsel
appearing on behalf of the appellant, has taken us
through the Appellate Tribunal judgment as well as various
other documents. It is his submission that Regulation 10
must be construed taking into account its object, and when
this is done, it is clear that the promoters for IBREL,
being the same right from the date of its incorporation,
and by continuing as such even after the demerger into the
present Target Company, the Regulation should be read in
accordance with the object sought to be achieved, which is
that where there is stability in the Company and the
promoters in that Company do not change for a period of
three years or more, inter se transfers between them at
prices agreed to between them should be exempt from the
aforesaid 2011 Regulations. For this purpose, he referred
us to the earlier Regulations which are in pari materia
with the 2011 Regulations and also took us through the
Achuthan Committee Report dated 19th July, 2010. He also
placed great emphasis on the Bhagwati Committee Report
which shows that the object of Regulation 10 is not to
penalise persons who had remained in control of a
particular business entity, notwithstanding that it may
ultimately change form. His argument was that had no
demerger taken place, it would be clear that the
promoters of IBREL, having been promoters for over three
years, would be exempt from the Takeover Regulations, in
which case the 2014 purchases could not be taken into
account for the purpose of the present open offer. He has
also taken us through the various judgments of this Court
dealing with analogous situations in which a mere change
in form from a partnership firm into a limited company
would not necessarily lead to the conclusion that, under
various State Rent Acts, a sub-tenancy had taken place.
According to him, these judgments would apply on the facts
of the present case inasmuch as, at no point of time, have
the promoters of the power business of IBREL and now of
Rajiv Rattan ever changed.
As against the said arguments, Shri Arvind P. Datar,
learned senior counsel appearing on behalf of the
respondent SEBI, has argued before us that there is no
necessity to interfere with the well reasoned Appellate
Tribunal judgment, which according to him ought not to be
interfered with unless found to be perverse under 15-Z of
the SEBI Act. Also, according to him, it is not possible
to go to the object of a provision when the language of
the said provision admits of no doubt. Therefore,
according to him, the Tribunal judgment ought not to be
interfered with.
Having heard learned counsel for both parties, it is
necessary to first set out the relevant Regulation of the
1997 predecessor Regulations. Regulation 3 states:
“3. (1) Nothing contained in
regulations 10, 11 and 12 of these
regulations shall apply to:
(e) inter se transfer of shares amongst-
[(i) group coming within the definition of
group as defined in the Monopolies and
Restrictive Trade Practices Act, 1969 (54 of
1969) where persons constituting such group
have been shown as group in the last published
Annual Report of the target company;]
(ii) relatives within the meaning of section
6 of the Companies Act, 1956(1 of 1956);
(iii) (a) [Qualifying Indian promoters] and
foreign collaborators who are shareholders;
(b) [qualifying promoters]:
Provided that the transferor(s) as well
as the transferee(s) have been holding shares
in the target company for a period of at least
three years prior to the proposed
acquisition.]
[Explanation- For the purpose of the
exemption under sub-clause (iii) the term
[“qualifying promoter”] means-
(i) any person who is directly or indirectly
in control of the company; or
(ii) any person named as promoter in any
document for offer of securities to the
public or existing shareholders or in the
shareholding pattern disclosed by the company
under the provisions of the Listing
Agreement, whichever is later;”
The present Regulation with which we are directly
concerned is Regulation 10, the relevant part of which is
set out hereunder:
10.(1) The following acquisitions shall be
exempt from the obligation to make an open
offer under regulation 3 and regulation 4
subject to fulfillment of the conditions
stipulated therefor,-
(a) acquisition pursuant to inter se
transfer of shares amongst qualifying
persons being,-
(i) immediate relatives;
(ii) persons named as promoters in the
shareholding pattern filed by the target
company in terms of the listing agreement or
these regulations for not less than three
years prior to the proposed acquisition;”
It is important to first read the general exemption
provision by itself. What has been stressed by Shri K.V.
Vishwanathan, learned senior counsel for the appellant, is
that the acquisition must be pursuant to inter se transfer
of shares amongst qualifying persons who, for our
purposes, are persons who are promoters of a particular
entity. On a plain reading of the provision, it is clear that persons must be named as promoters in the
shareholding pattern filed by the “Target Company”. The
Target Company is separately defined by the 2011
Regulations in paragraph 2(z) thereof as follows:
2(z) “target company” means a company and
includes a body corporate or corporation
established under a Central legislation, State
legislation or Provincial legislation for the
time being in force, whose shares are listed
on a stock exchange;”
In so far as the facts of the present case are
concerned, the definition that we are concerned with is
that of a company, and not any other corporate entity.
For the purpose of the present case, the Target Company,
therefore, means a company whose shares are listed on a
Stock Exchange. This would mean, on the facts of the
present case, the Rattan Company, whose shares are listed
on the two Stock Exchanges as mentioned above. Coming
back to Regulation 10, it is thus clear that persons named
as promoters in the shareholding pattern filed by the
Rattan Company in terms of the listing agreement between
the two Stock Exchanges is what is to be looked at. And
for this purpose persons must be promoters of the Rattan
Company for not less than three years prior to the
proposed acquisition in order that the exemption under
paragraph 10 would apply. On the facts of this case,
therefore, the information memorandum having been filed on
19th July, 2012 pursuant to which listing took place one
day later, is the relevant date from which this period is
computed. This being the case, three years had not
elapsed on 9/10th July, 2014, which was the date on which
the earlier purchase of shares had taken place.
However, Mr. Vishwanathan has argued that Regulation
10 should be read in the light of its object and has made
three distinct submissions in this behalf. He argued, based
on the Reports of two committees and further on the basis
of Regulation 10 itself, that it would be permissible for
us to get to the real state of affairs, which is that the
promoters, having been the same since the inception of
IBREL, we should read this provision so as to confer a
benefit that was sought to be conferred by the framers of
the Regulation.
First, the two Reports:
When we turn to the Bhagwati Committee Report of
2002, so far as inter se transfers were concerned,
commenting on Regulation 3 of the 1997 Regulations, it was
noted as under :
“The Committee noted that the Regulation
3 exempt acquisitions through inter se
transfers among group companies, relatives
and promoters. There may not be any cause
for concern in respect of inter se transfers
amongst group and relatives as in such
cases, the control continues to remain with
the group. However the issue assumes
significance when it involves interse
transfers amongst promoter groups such as
between a foreign collaborator and an Indian
promoter or between two groups of Indian
promoters. In such cases, there is bound to
be perceptible change in control. The
Committee noted that the arguments raised in
such cases are that while the shareholder
with substantial holding gets an exit,
sometimes at very high prices, the other
shareholders are denied such benefit. It is
also possible that in such cases, the
investment was made by the shareholder on
the strength of the existing shareholder
with substantial holding. There was a strong
feeling that in such cases of transfers,
there should be a requirement of compulsory
open offer.”
Finally, the Committee recommended that as regards inter
se transfers amongst promoters, the existing provisions may
continue. Indeed, therefore, there is no difference in the
Regulations of 1997, and the Regulations of 2011 so far as
transfers among promoters is concerned, especially after the
explanation that was added to Regulation 3 in 2005. It is
significant to notice that the Committee did not positively
state that Regulation 3 should be construed in any particular
manner, except to state that there is no cause for concern in
respect of inter se transfer within the group if control
continues to remain within the group.
Coming to the Achuthan Committee Report of 2010, this
Committee noted :
“In respect of inter-se transfers amongst
certain “qualifying parties” as listed and
defined under the Takeover Regulations, the
Committee recommends that, in order to curb
the abuse of introduction of new entities
as qualifying parties, in most cases a
requirement of pre-existing relationship of
at least three years has been prescribed.
In particular, the current exemption on
Group Companies which does not have this
three year requirement has been restricted
to transfers between co-subsidiaries and
their parents where there is no change in
control”
In a significant sentence, however it stated that :
“However, if the schemes do not really
involve or deal with the target company per
se, and an acquisition of shares or voting
rights in, or control over the target
company were to take place beyond the
thresholds specified for the open offer
obligations, as a consequence of the main
scheme, the treatment should be different.”
Although, it is true that this Committee's recommendations
do disclose that the object of the regulation is to curb the
abuse of introduction of new entities as qualifying parties,
this again is tempered with a later sentence which states that
if schemes do not really involve or deal with a target company
per se, then only would the treatment of such open offer
obligations be different.
When we come to Regulation 10 itself, and we see some of
the other clauses contained in the regulation, with which we
are not directly concerned, the corporate veil is lifted in
certain specified circumstances. Sub regulation (iii) is set
out hereinunder :
“(iii) a company, its subsidiaries, its
holding company, other subsidiaries of such
holding company, persons holding not less
that fifty per cent of the equity shares of
such company, other companies in which such
persons hold not less than fifty per cent
of the equity shares, and their
subsidiaries subject to control over such
qualifying persons being exclusively held
by the same persons;”
A reading of this sub regulation would show that holding
companies and their subsidiaries are treated as one group
subject to control over such companies being exclusively held
by the same persons. This shows that it has been statutorily
recognized in sub regulation (iii) that in a given situation
viz holding subsidiary relationship, the corporate veil would
be lifted.
When we come to sub regulations (iv) and (v), it is clear
that these two sub regulations follow the pattern contained in
sub regulation (ii) in as much as when it comes to persons
acting in concert, the period should be not less than three
years prior to the proposed acquisition, and disclosed as such
pursuant to filings under the listing agreement. Also, when it
comes to shareholders of a target company who have been persons
acting in concert for a period of not less than three years
prior to the proposed acquisition and are disclosed as such
pursuant to filings under the listing agreement, the corporate
veil is not lifted. The difference between sub regulations
(ii), (iv) and (v) on the one hand, and sub regulation (iii) on
the other, again shows us that it is impermissible for the
court to lift the corporate veil, either partially or
otherwise, in a manner that would distort the plain language of
the regulation. Where the corporate veil is to be lifted, the
regulation itself specifically so states. For this reason also,
it is a little difficult to accept Mr. Vishwanathan's argument
that a reading of the other sub regulations contained within
regulation 10 (1) (a) would further his argument in this case.
We now come to the two judgments of this Court which were
cited before us in the context of Rent Acts. Chronologically,
the first of these judgments is “Madras Bangalore Transport Co.
(West) Vs. Inder Singh And Others” reported in (1986) 3 SCC 62.
In this case, the paragraph relied upon by Mr. Vishwanathan is
paragraph 8, which is as under:
“As mentioned by us earlier, the
Madras-Bangalore Transport Company (West)
continued to be in occupation of the
premises even after the Caravan Goods
Carrier Private Limited came in. They never
effaced themselves. The firm allowed
Caravan Goods Carrier Private Limited
Company, to function from the same premises
but Caravan Goods Carrier Private Limited
though a separate legal entity, was in fact
a creature of the partners of
Madras-Banglore Transport Company (West)
and was the very image of the firm. The
limited company and the partnership firm
were two only in name but one for practical
purposes. There was substantial identity
between the limited company and the
partnership firm. We do not think that
there was any sub-letting, assignment or
parting with possession of the premises by
Madras-Banglore Transport Company (West) to
Caravan Goods Carrier Private Limited so as
to attract Section 14(1) (b) of the Delhi
Rent Control Act. In the result the appeal
is allowed with costs.”
It can be seen that a partnership firm became a limited
company but, on facts it was found that since there was
substantial identity between the limited company and the
partnership firm, there was no subletting, assignment or
parting with possession of the premises so as to contradict
Section 14(1)(b) of the Delhi Rent Control Act.
This case is wholly distinguishable from the present case
as in the facts of the present case, the target company is
clearly defined and “means” only Rattan Limited. To go behind
Rattan Limited would not only be contrary to the clear language
of Regulation 10(1)(a) but would also introduce a concept viz
lifting the corporate veil by the Court contrary to the
Regulation itself, which, as has been pointed out above, also
contains sub regulation (iii) which, in the circumstances
specified, lifts the corporate veil.
The second judgment cited before us “Sait Nagjee
Purushotam & Co. Ltd. Vs. Vimalabai Prabhulal and Others”
reported in (2005) 8 SCC 252 also does not take us further for
the same reasons.
In fact, even if we were to accept Mr. Vishwanathan's
argument that the object of the regulation being that promoters
should not keep changing, and if on facts it is found that the
same set of promoters continue, we should exempt such cases,
this would not be possible for another good reason.
In the case of “M/s. Utkal Contractors and Joinery (P)
Ltd. And others vs. State of Orissa” reported in 1987 (Supp)
SCC 751, a similar argument was turned down in the following
terms :
“11.Secondly, the validity of the
statutory notification cannot be judged
merely on the basis of Statement of Objects
and Reasons accompanying the Bill. Nor it
could be tested by the government policy
taken from time to time. The executive
policy of the government, or the Statement
of Objects and Reasons of the Act or
Ordinance cannot control the actual words
used in the legislation. In Central Bank of
India v. Workmen, S.K. Das, J. said :
“...The Statement of Objects and Reasons is
not admissible, however, for construing the
section; far less can it control the actual
words used.”
12. In State of West Bengal v. Union of
India, Sinha, C.J. observed :
“...It is however, well settled that the
Statement of Objects and Reasons
accompanying a Bill, when introduced in
Parliament, cannot be used to determine the
true meaning and effect of substantive
provisions of the statute. They cannot be
used except for the limited purpose of
understanding the background and the
antecedent state of affairs leading up to
the legislation. But we cannot use this
statement as an aid to the construction of
the enactment or to show that the
legislature did not intend to acquire the
proprietary rights vested in the State or
in any way to affect the State Governments'
rights as owner of minerals. A statute, as
passed by Parliament, is the expression of
the collective intention of the legislature
as a whole, and any statement made by an
individual, albeit a Minister, of the
intention and objects of the Act cannot be
used to cut down the generality of the
words used in the statute.”
In the factual scenario before us, having regard to the
aforesaid judgment, it is not possible to construe the
regulation in the light of its object, when the words used are
clear. This statement of the law is of course with the well
known caveat that the object of a provision can certainly be
used as an extrinsic aid to the interpretation of statutes and
subordinate legislation where there is ambiguity in the words
used.
As has already been stated by us, we find the literal
language of the regulation clear and beyond any doubt. The
language of sub regulation (ii) becomes even clearer when it is
contrasted with the language of sub regulation (iii), as has
been held by us above.
Having gone through the appellate tribunal's judgment, we
find that, for the reasons stated by us, we cannot fault its
conclusion and accordingly the appeals stand dismissed.
New Delhi July 13, 2017