Allowed

Modipon v. SEBI & Others

SAT31 Jul 2001

Case brief

AI extract

What is this about?

The Securities Appellate Tribunal allowed an appeal challenging SEBI's order that disqualified the Appellant from a public buyout of Modi Rubber Ltd. The Tribunal held that while the Appellant was a promoter, it was not an acquirer or acting in concert with the acquirers as it intended to sell shares, thereby entitling it to participate in the public offer.

What did the court decide?

The appeal is allowed; the SEBI direction holding the Appellant ineligible to participate in the public offer is set aside.

Modipon Vs. SEBI & Others — Securities and Capital Markets | SAT (2001)

Allowed

Modipon v. SEBI & Others

SAT31 Jul 2001

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Case brief

AI extract

What is this about?

What did the court decide?

The appeal is allowed; the SEBI direction holding the Appellant ineligible to participate in the public offer is set aside.

¶18

Memorandum of Understanding on 24.1.1989 (MOU), where under the control and management of all the Modi Group of Companies was agreed to be distributed amongst two groups–say Group‘A’ and Group ‘B’.Group‘A’ comprised Shri K.N.Modi and his sons–S/Shri M.K.Modi, Y.K.Modi and D.K.Modi. Group ‘B’ comprised ShriK.K.Modi (Respondent No.7) and brothers namely, S/Shri V.K.Modi (Respondent No.4), B.K.Modi (Respondent No.3), U.K.Modi and S.K.Modi. The Appellant has two business divisions, the fibres division initially owned by it, and a chemicals division acquired in 1985 as a result of merger of another company namely Indofil Chemicals Ltd. Thus since 1985, it has two business divisions known as – Modipon Fibres Company (Fibres Division) and Indofil Chemicals Company (Chemicals Division). As per the scheme under the MOU Group ‘A’ was to manage own and/or control of "Modipon (minus Indofil + selling agency)" and few other companies and Group ‘B’ was to manage own and or control "Modipon Ltd (Minus Modipon Fibre) and few other companies. As per the scheme, MRL was put under Group ‘B’. As per the MOU the scheme of arrangement of splitting up of the Appellant into two divisions, namely Fibres and Chemicals Divisions was to be prepared by M/s. Bensi Mehta and Co., Chartered Accountants, after taking into consideration the valuation done by another Chartered Accountant’s firm M/s. Billimoria & Company. In terms of the MOU, the management of units of Modipon was required to be shifted to/restored, as agreed to under the MOU, to respective managements of each group, simultaneously with the appointment of an independent Chairman as provided for in the MOU. The MOU provided that the common activities of the company relating to the Board etc., will be co-ordinated by the independent Chairman of the company, assisted by the Managing Directors, and all matters which are to be dealt with by the company not to be related to individual unit on day today basis shall also be dealt by the Chairman assisted by the Managing Directors. It has been stated that pending the split of the Appellant company a corporate office was set up to look after the secretarial and other laison work of the company, where as the Fibres Division and Chemicals Division operated as two independent units under the control and management of Shri M.K.Modi and Shri K.K.Modi, respectively. M/s. B.S.Billimoria and Company prepared the requisite valuation report for the purpose of preparing the scheme of arrangement. But M/s., Bansi Mehta & Co while preparing the scheme of arrangement suggested certain changes inter alia affecting the investments in the group companies. In the process, it has been stated, that M/s. Bansi Mehta changed the valuation of both Fibres Division and Chemicals Division, and as a result disputes arose. These disputes were referred to the Chairman, IFCI for decision as provided for in the MOU. The Chairman, IFCI gave his report recording his findings. It has been stated that in the report, the Chairman, had directed Group B to pay a sum of Rs. 2, 135.55 lakhs to Group ‘A’ on account of short fall in valuation of assets of companies allocated to Group ‘A’, and that it was also held that shares of Group B companies held by Fibre Division and its subsidiaries could be transferred to Group B as per extant law as per market price prevailing at the time of actual transfer. Since the said decision was not acceptable, Shri K K Modi filed a suit bearing No. 1394/96 in the Hon’ble Delhi High Court challenging the decision. The said suit is still pending.

¶19

The present management of MRL decided to consolidate their holding in the company by acquiring about 35% capital, through a public offer. On 31.3.2001 the Respondent No.8 issued a public announcement for the purpose, as per the requirements of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997 (the 1997 Regulations), on behalf of Shri V.K.Modi, Dr.B.K.Modi, Modi Fashions and Securities P. Ltd and Modiken Ltd (Respondents 4, 3, 5 & 6 respectively) (collectively called the acquirers), for acquisition of 87, 64, 186 shares at the rate of Rs. 80/- per share from the shareholders of MRL. The acquirers thereafter submitted draft letter of offer to SEBI, therein inter alia stating that the offer to the shareholders of MRL is made in accordance with regulation 11 (1) – i.e. to consolidate the holdings of present management of MRL, that certain companies specifically stated, including the Appellant, are persons deemed to be acting in concert with the acquirers/ promoters and the response is expected in the open offer from the total share holding of 76% held by financial institutions/mutual funds/public etc. As a result of holding the Appellant as a person deemed to be acting in concert with the acquirer, the Appellant was disqualified from participating in the public offer. The Appellant represented to SEBI in this regard. However, SEBI vide its letter dated 25.5.2001 stated inter alia that as per the 1997 Regulations, the Appellant being part of the promoter group of MRL and a person deemed to be acting in concert with the acquirers is not eligible to participate in the open offer made by the acquirers. On 19^th June, 2001 the Appellant filed a Writ Petition bearing No. 1536/2001 in the Hon’ble Bombay High Court inter alia challenging SEBI’s letter dated 25.5.2001. The Division Bench of the Hon’ble High Court vide its order dated 2^nd /3^rd July, 2001 disposed of the petition directing SEBI to grant personal hearing to the petitioners (the Appellant herein) and the concerned Respondents and their merchant bankers and pass a fresh order in accordance with the law by 16^th July 2001. The impugned order is in compliance with the said direction of the Hon’ble High Court.

¶22

Shri S.H.Doctor, learned Senior Counsel appearing for the Appellant explained briefly the background leading to the appeal and also stated the chronology of events. Learned Senior Counsel stated that the Appellant is neither a promoter nor a person acting or deemed to be acting, in concert with the acquirers that it is not connected or associated with the acquirers in any manner, and the Appellant or its directors are not concerned in any manner with the management or control of MRL. According to him the Appellant is keenly interested in selling the shares of MRL. Referring to the decision taken in the BOD meeting of the Appellant regarding participation in the public offer, Shri Doctor stated that Shri K.K. Modi had not objected to the same but only dissented to the decision without getting prior written approval from Financial Institutions and Banks. Since the consent has already been obtained from the Financial Institutions and the Banks the objection no longer remains. In this context the learned Senior Counsel also referred to the statement recorded by the Hon’ble Delhi High Court in its order dated 2.7.2001 in the OS 277/2001 filed by Shri K.K. Modi that "learned Counsel of the parties are agreed that they will have no objection if the title of these shares is not transferred till the question is decided by the learned judge". Learned Senior Counsel also referred to a letter dated 18.5.2001 from Respondent No.8 to SEBI, wherein it has been stated that "the Deemed PACs are, as per the requirements of section G of your (SEBI) letter, governed by the provisions of Regulation 20 (4) of the Takeover Regulations i.e. if any one of them purchases any shares of MRL from the market at a price higher than the offer price, the said purchase price would be applicable to the entire offer. This would consequently rule out the participation of the Deemed PAC in the open offer". In this context the learned Senior Counsel read out the following extract from a letter dated 21.5.2001 from the acquirers to Respondent 8 that " we are hereby pointing out to you and in turn would require that this should be communicated to SEBI that the acquirers have no Board or Management or Shareholding control over the three companies referred to above (i.e. Modipon Ltd, Modi Spg.& Wvg. Mills Ltd and Modi Industries Ltd). Consequently any action taken by them would be independent of the acquirers and the acquirers should not be bound by their actions, and required on that basis to comply with the consequences of Regulation 20 (4). "Shri Doctor submitted that in view of the clear admission of the acquirers that the Appellant can participate in the public offer, they are now precluded from taking a different stand objecting the Appellant’s participation. Learned Senior Counsel submitted that the pending litigation in the Delhi High Court and Debt Recovery Tribunal has no bearing on the decision of SEBI disqualifying the Appellant from participating in the public offer.

¶24

With reference to the SEBI’s conclusion that the Appellant is a promoter of MRL, learned Senior Counsel referred to paras 8.3 to 8.7 of the impugned order and stated that none of the grounds referred to therein supports the said conclusion. He submitted that the MOU dated 24.1.1989 clearly establishes the bifurcation of the companies belonging to each group and that the MOU has been substantially acted upon to the extent the same relates to change in management/ownership and control of the companies are concerned. There is no dispute about the fact that Fibre Division of the Appellant is owned by Group ‘A’ and the. Chemical Division is owned by Group ‘B’, that it is the Fibre Division, which is holding investment in MRL. According to Shri Doctor the existing dispute is on the valuation and the apportionment of the value of the assets between the groups, there is no dispute on the ownership of the units. The fact that the name of the Appellant has been shows as a promoter group company of MRL along with the acquirers in an offer document dated February 27, 1992 and that the Appellant has not disputed the said statement should not be construed as a factor to treat the Appellant as a promoter of MRL. Referring to SEBI’s observation that MRL has been regularly filing declarations with Stock Exchanges in terms of regulation 8 (3) of the 1997 Regulations, showing the Appellant as a promoter, the learned Senior Counsel submitted that these declarations are filed in a routine way by the corporate office without properly examining the factual position. He also took the same stand with reference to SEBI’s observation that the Appellant has been shown as a co-promoter in the statements furnished to the financial institutions. Referring to the observation in the order that there was an informal understanding between the Groups that the Appellant will always support the promoters of MRL, the learned Senior Counsel stated that there was no such understanding as alleged and no such informal

¶37

Shri Virag Tulzapurkar, learned Counsel appearing for Respondent 7 submitted that the present exercise is a futile one as the Hon’ble Delhi High Court vide its order dated 2.7.2001 had already barred transfer of title of the shares held by the Appellant pursuant to the offer to the acquirers, that since the title cannot be transferred to the acquirers, no purpose would be served by allowing the Appellant to participate in the public offer. Shri Tulzapurkar reiterated the basis on which SEBI had concluded that the Appellant is a promoter and also justified SEBI’s decision disqualifying the Appellant from participating in the offer reiterating the viewpoint of SEBI in the order. He stated that the promoter concept is applicable not only to chapter II but also to Chapter III. In support of his contention that the promoters should not be allowed to participate in the offer, he read out para 8. 9 and 8.10 of the SEBI’s order. He emphasised the observation in para 8. 9 in the order that "when an offer is made by existing promoters to further consolidate its holding it is obvious that the persons belonging to the promoter group cannot participate in the public offer. Otherwise there will be no meaning of consolidation by persons in control or promoter group. If the persons belonging to the promoter group are allowed to participate in the public offer made by the promoters to consolidate their holding, the same will not be in consonance with regulation 11, which was enacted to provide for consolidation of holdings by existing promoters or persons in control or persons holding more than 15%". Shri Tulzapurkar also supported the observation in para 8.10 of the order that "if persons belonging to promoter group are allowed to participate in a public offer made by a promoter group to consolidate their existing holding, the same will be detrimental to the interests of the public shareholders as proportion of shares held by public being accepted in the offer would be reduced to the extent of shares offered by the promoters". He also supported SEBI’s version that the availability of alternate exit route to relatives, promotes etc., under regulation 3 (1) (e) (iii), without triggering public offer, justifies exclusion of persons belonging to the promoter group from the public offer. According to the learned Counsel, if a different view is taken, the public shareholders would suffer.

¶44

Before going into the merits of the appeal, I would like first to deal with the preliminary objections raised by Shri Pandya. The argument that the Appellant is not an aggrieved person by the order of SEBI is not correct. On a perusal of the impugned order it is seen that the Appellant had represented to SEBI against its direction to the acquirers to state in the offer document that the Appellant, being a part of the promoter group of MRL and also person deemed to be acting in concert with the acquirers is not eligible to participate in the instant open offer. The acquirers are ready to purchase the shares in the public offer at a price, which is higher than the prevailing market price. In this context it is to be noted that the 11, 33, 333 shares in question are held by the Appellant, though its ownership is under dispute. These shares if sold at the price quoted by the acquirers would fetch a big amount. Therefore it cannot be said that the Appellant as on date has no role and that it is not aggrieved by SEBI’s order, denying it to fetch a high price for those shares held by it. Further, it is also to be remembered that it was in the Writ Petition filed by the Appellant in the Hon’ble Bombay High Court, the Court held that the proper course for the petitioners is to prefer an appeal before the Appellate Authority and the appellate authority was directed to decide the appeal early and in any case the stay application of the petitioners on or before 31^st July 2001. There is no force in the learned Counsel’s argument that the Appellant has no locus standi to file the present appeal. On the alleged deficiency of the Board Resolution, it is seen that it was the Modipon’s Board of Directors who had in their resolution authorised Shri Sinha to file the petition etc. The resolution is dated 24.3.1998 and is specific on the subject. Therefore it cannot be said that the appeal has been filed without authority. The argument that since the Debt Recovery Tribunal, Delhi has appointed a Receiver, to take care of the assets, the Receiver so appointed is the aggrieved person to file the appeal is also of no force. Receiver is not an interested person concerned about the generation of funds etc., In nay case we are not dealing in the present appeal the disposal of the assets of the Appellant, the question as to whether the Appellant, being the holder of the shares of MRL is entitled to participate in the public offer is under consideration. For the reasons stated above, the preliminary objections do not hold good. Therefore the objections are over ruled.

Modipon v. SEBI & Others

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Modipon v. SEBI & Others

Case brief

What is this about?

What did the court decide?

Issues for consideration

Cases cited

Statutes considered

Parties & counsel

Case details

Similar cases

What the court decided

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