Partly allowed

Mega Resources v. SEBI

SAT19 Mar 2002

Case brief

AI extract

What is this about?

The SAT held that an acquirer and persons acting in concert must jointly disclose aggregate holdings exceeding 5%. Mere posting under certificate of posting does not suffice for disclosure. A blanket ban on dealing in securities exceeds statutory powers under Regulation 44(a) and Section 11B.

What did the court decide?

Part of the direction debarring the appellant from accessing the capital market and dealing in securities was set aside as beyond the powers of the Board.

¶1

BEFORE THE SECURITIES APPELLATE TRIBUNAL

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MUMBAI

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APPEAL NO. 49/2001

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In the matter of:

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Mega Resources Limited Appellant

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Securities & Exchange Board of India Respondent

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APPEARANCE:

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Mr. Ratnoko Banerjee Bar at Law Mr.K.A.Kharade Advocate I/b. M/s. Hariani & Co. for Appellant Mr. Kumar Desai Advocate Ms Uma Dalal Advocate I/b. Maneksha & Sethna Mr. Vinay Chauhan Legal Officer, SEBI for Respondent

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(Appeal arising out of the order dated August 29, 2001 made by the Chairman, Securities & Exchange Board of India).

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ORDER

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The Chairman, Securities and Exchange Board of India, made an order on August 29, 2001 debarring Shri Arun Kumar Bajoria (Shri Bajoria) and certain other persons viz. Mega Resources Ltd (the Appellant), Mega Stock Ltd, The Hooghly Mills Ltd, Pooja Bajoria, Mohini Devi Bajoria, Lata Devi Bajoria and Meenakshi Jatia, stated to be persons acting in concert with Shri Bajoria, from accessing the capital market, and dealing directly or indirectly in securities, for a period of one year. It was also directed that an adjudicating officer be appointed to inquire into violations, if any, of section 15A (b) of the Securities and Exchange Board of India Act, 1992 (the Act) in respect of failure by Shri Bajoria and others to comply with the disclosure requirements under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (the 1997 Regulations). The order further stated that as Shri Bajoria and the persons acting in concert have already reduced their holding to below 5% of the paid up capital of Bombay Dyeing and Manufacturing Co. Ltd. (Bombay Dyeing) no specific directions are being issued to sell the shares acquired in violation of the 1997 Regulations. The said order is under challenge in the present appeal. Even though the impugned order is directed to Shri Bajoria and others, till now, except the present appeal no other appeal has been filed against the order.

Mega Resources Vs. SEBI — Securities and Capital Markets | SAT (2002)

Partly allowed

Mega Resources v. SEBI

SAT19 Mar 2002

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Case brief

AI extract

What is this about?

What did the court decide?

Part of the direction debarring the appellant from accessing the capital market and dealing in securities was set aside as beyond the powers of the Board.

¶1

BEFORE THE SECURITIES APPELLATE TRIBUNAL

¶2

MUMBAI

¶3

APPEAL NO. 49/2001

¶4

In the matter of:

¶5

Mega Resources Limited Appellant

¶6

¶7

Securities & Exchange Board of India Respondent

¶8

APPEARANCE:

¶9

¶10

(Appeal arising out of the order dated August 29, 2001 made by the Chairman, Securities & Exchange Board of India).

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ORDER

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¶22

Shri Banerjee submitted that as per regulation 7(1) any acquirer who acquires shares or voting rights which taken together with shares or voting rights, if any, held by him would entitle him to more than five percent shares or voting rights in a company, is required to disclose the aggregate of his share holding or voting rights in the target company to that company within four working days of the acquisition of shares or voting rights. In this context he also referred to the definition of the expressions "acquirer" and "persons acting in concert" as provided in clauses (a) and (e) of sub regulation (1) of regulation 2 of the 1997 Regulations. Shri Banerjee stated that acquirer means any person who directly or indirectly, acquirers or agrees to acquire shares or voting rights in the target company or acquirers or agrees to acquire control over the company either by himself or with any person acting in concert with the acquirer. Shri Banerjee read out the components of the definition person acting in concert and stated that as per the definition persons acting in concert are not acquirers by themselves, but they are the persons who co-operate with the acquirer in acquisition. He submitted that in terms of regulation 7(1) the duty to disclose the share holding to the target company is cast on the acquirer and not on the persons acting in concert. In support, he stated that regulation 7(1) refers to "acquirer" in singular and requires the acquirer to disclose "his" shareholding to the target company, that the acquisition of shares or voting rights required to be disclosed in terms of regulation 7(2)(b) is cast on the acquirer and not on anyone else and the legislative intent is clear in this regard. He stated that wherever it was felt that the persons acting in concert also should act, the regulation has made specific provisions and referred to the provisions of regulations 10 and 11. According to him if the acquirer is to include persons acting in concert as well, then there would not have been specific reference to them in regulation 10 and 11. He submitted that compliance regulation 7(1) is required only when the acquirer acquires shares beyond the specified limit, that since the Appellant had not acquired more than 5% share capital of Bombay Dyeing, the Appellant was not required to make the disclosure in terms of regulation 7(1). In this context Shri Banerjee submitted that the regulations are required to be read harmoniously. In support, he cited Poppatlal Shah v. The State of Madras AIR 1953 SC 274 wherein the Hon’ble Supreme Court had observed that "it is a settled rule of construction that to ascertain the legislative intent all the constituent parts of a statute are to be taken together as each word, phrase or sentence, is to be considered in the light of the general purpose and objective of the Act itself". He also cited Punjab Beverages P. Ltd v. Suresh Chand (AIR 1978 SC 995) therein the Hon’ble Supreme Court had held that "it is a well settled rule of construction that not one section of a statute should be read in isolation, but it should be construed with reference to the context and other provisions of the statute, so as far as possible, to make a consistent enactment of the whole statute, Lord Herschell stated the rule in the following words in Colguhoun v Brooks (1889) 14 AC 493 at p 506, it is beyond dispute, too, that we are entitled and indeed bound, when constructing the terms of any provisions found in a statute, to consider any other parts of the Act which throw light on the intention of the legislature, and which may serve to show that the particular ought not to be construed as it would be alone and apart from the rest of the Act. We must therefore have regard, not only to the language of S.33 (2) (b) but also to the object and purpose of that provisions, the context in which it occurs and other provisions of the Act in order to determine what the legislature intended should be effect of contravention of S.33 (2) (b), in the order of dismissal". The Hon’ble Court made the above observation while interpreting Ss.33 (2)(b) and 33 (2)(c) of the Industrial Disputes Act, 1947. Shri Banerjee submitted that the purpose of furnishing information to the target company is to forward the same to the concerned stock exchange to make the stock exchange know about the acquisition and that the said requirement has been met with by the Appellant directly furnishing information to CSE, vide its letter dated March 29, 2000 that thus there is substantial compliance of the requirement of Regulation 7

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Learned Counsel submitted that the Appellant was denied of the right to give effective reply to the show cause notice and make effective representation before the Respondent, that the Appellant was also denied access to and inspection of documents which were material to enable the Appellant to make effective representation, that the right to test the veracity of statements made by persons concerned by cross examination was also denied. He stated that even the evidence produced by the Appellant was not considered as could be seen from the facts and in particular that the three affidavits filed by Jyoti Sharma, Subir Santra and Krishan Sharma confirming the posting of the letter dated March 16, 2000 and delivery of letter dated March 29, 2000 to CSE. Learned Counsel stated that providing an opportunity of being heard is not an empty ritual. He cited Khemchand v Union of India (AIR 1958 SC 300) to show that "the noticee must not only be given an opportunity but such opportunity must be a reasonable one. …………. If the opportunity to show cause is to be a reasonable one it is clear that he should be informed about the charge or charges levelled against him and the evidence by which it is sought to be established, for it is only then that he will be able to put forward his defense. If the purpose of this provision is to give an opportunity to exonerate himself from the charges and if this opportunity is to be a reasonable one he should be allowed to show that the evidence against him is not worthy of credence or consideration". Learned Counsel also cited Meenglas Tea Estate v. The Workmen (AIR 1963 SC 1719) wherein the Hon’ble Supreme Court had observed that "it is an elementary principle that a person who is required to answer a charge must know not only the accusation but also the testimony by which the accusation is supported. He must be given a fair chance to hear the evidence in support of the charge and to put such relevant questions by way of cross-examination as he desires. Then he must be given a chance to rebut the evidence led against him. This is the barest requirement of an enquiry of this character and this requirement must be substantially fulfilled before the result of the enquiry can be accepted". Shri Banerjee submitted that the Respondent has not followed in Appellant’s case the above principles laid down by the Hon’ble Supreme Court.

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Learned Counsel submitted that it is impractical and against principles of statutory interpretation to suggest that communication under regulation 7 by any acquirer on his holding exceeding 5% of the paid up capital must reach the target company within 4 days, as the acquirer cannot have any control over any communication after the same has been dispatched and the duty alleged to be cast upon acquirer under regulation 7, of the 1997 Regulations is onerous. Shri Banerjee also refuted the Respondent’s contention that the letters sent by under certificate of posting are on the same footing as the letters sent through letterbox. According to him there is sufficient compliance of regulation 7 by any acquirer, if the letter is posted by ordinary post under certificate of posting. He further stated that there is no requirement in the regulation for an acquirer to send the letter to the target company through registered post or by any other means of communication such as speed post, fax, etc; that there is no statutory obligation on the Appellant to check up over phone with Bombay Dyeing subsequent to dispatch of the letter as to the receipt of the letter, as stated by the Respondent, that it is not correct to hold that only if the letter of disclosure was sent through Registered post or Speed Post, it could be presumed that the letter has been delivered. He refuted the Respondent’s version that the information sent by the Appellant under certificate of posting was not sufficient compliance of the requirements of regulation 7. He further stated that Bombay Dyeing had in any event information about the acquisition of shares by the Appellant from the National Stock Depository Ltd., as the shares are put in de-mat form and the said Depository furnishes promptly and regularly the details to the companies whose shares are traded in de-mat form. He submitted that denial of receipt of the letter by Bombay Dyeing is irrelevant in the circumstances and no reliance should be placed on the company’s statement.

¶39

Shri Desai submitted that the 1997 Regulations provides for transparency and dissemination of information to the investors and also to the management of the target company, in matters of substantial acquisition of shares or control, that regulation 7 is one of the devices designed for the purpose, requiring the acquirer to report to the target company his holding on exceeding 5% of the company’s share capital and the target company thereafter to report the position to the concerned stock exchange. He submitted that the very object of putting regulation 7 in the 1997 Regulations would be defeated, if the Appellant’s view that the requirement of reporting arises only in the event of individual acquirer’s holding exceeds 5% share holding and the holding of those persons acting in concert with him to be discarded. He submitted that regulation 7 is meant to protect the interests of the investors and the management of the target company as the reporting under regulation 7(1) enables the target company to know of any attempt by any person to corner shares of the company and to take measures to safe guard its interests, that requiring the target company to report the matter to the stock exchange under regulation 7(2), is to provide information to the investors about the dominant holdings in the company so as to enable them to decide on their investments. Shri Desai submitted that the provisions of regulation 7 are substantive provisions and mandatory, that there is no escape but to comply with the same. According to him the expression "shall" used in regulation 7(1) is indicative of the mandatory nature of the requirement. Shri Desai submitted that the requirement of regulation 7(1) is to make disclosure, which means the information should be brought to the notice of the company, that a routine posting of information, with no certainty of the same reaching the target company by itself is not sufficient compliance of the regulation. He pointed out that the Appellant has not produced any evidence to show that the information required to be furnished in terms of regulation 7(1) was furnished to Bombay Dyeing, that it is not the evidence of routine posting of the letter that is relevant for the purpose of the regulation. He further stated that in any case ‘under certificate of posting’ cannot be accepted even to prove that the letter was dispatched as it is well known that evidence of posting can be fabricated. He further submitted that even the information said to have been sent by the letter itself is not complete and exhaustive as required by the format devised for the purpose, and made known to all concerned by the Respondent. The argument that Bombay Dyeing’s shares are traded in de-mat form and as such the information even otherwise would be available to the company, is not an excuse to not to comply with the requirement of regulation 7(1), that it has to be noted while the 1997 Regulation was notified in 1997, the Depositories Act, 1996 which provide for de-mat trading of shares was already in position. He refuted the Appellant’s contention that regulation 7 has no nexus with the object of the 1997 Regulations and that regulation 7 is not aimed at protecting the interests of the investors in securities or for promoting the development or regulating the securities market and that the regulation is vague, unworkable and does not prescribe any guidelines as to the manner and method of disclosures to be made thereunder.

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The Respondent is a statutory body established under the Act. The object of the Act has been stated in its preamble that it is "an Act for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto". Government has established a Board namely the Securities and Exchange Board of India (the Respondent) under section 3 of the Act for the purpose. It’s powers, duties and functions have been provided in the Act. Chapter IV of the Act enumerates the powers and functions of the Respondent. As per sub section (1) of section 11 thereunder, subject to the provisions of the Act, it shall be the duty of the Respondent to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks. Sub section (2) enumerates certain specific measures, without prejudice to the generality of the provisions of sub section (1). One of the measures provided therein is to provide measures for "regulating substantial acquisition of shares and take over of companies (section 11 (2) (h). Section 30(1) empowers the Board to make Regulations consistent with the Act and the rules made thereunder to carry out the purposes of the Act. In terms of section 31 every Regulations made under the Act is required to be laid, as soon as may be after it is made, before each House of Parliament, for a period of thirty days and in case the Parliament modifies the Regulations so laid, the modified version will prevail or if the Parliament agrees that the Regulations should not be made, the Regulations thereafter will have no effect. The Respondent has in exercise of the powers vested in it notified the 1997 Regulations, and laid the same before the Parliament. The Parliament has neither modified nor vetoed the Regulation, therefore the Regulation is considered to have the approval of the Parliament and have equal force as if it is made by the Parliament. The 1997 Regulations provides the requisite measures to regulate substantial acquisition of shares and takeovers of companies. The legal position regarding the Respondent’s powers to provide measures to regulate substantial acquisition of shares and takeovers is thus clear.

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For the purpose of determining the disputed version of compliance of regulation 7(1) by the Appellant, I do not consider it necessary for me to embark on any investigation to find out whether actually the Appellant posted the letter under certificate of posting or not. It is a well-accepted fact that all the letters posted need not necessarily in every case reach the addressee, though every one would like to see that his letter reaches the addressee. There is no way to ensure the reach of the letter sent by ordinary post. That is why the postal authorities have devised several modes of postage such as registered post, etc. to meet the requirements of postal users. Those who want to ensure service of the postal article on the addressee they are at liberty to use one of these methods. In the absence of any evidence otherwise, one cannot ignore the addressee’s version of not getting the letter. In the instant case that is the position. The Appellant claims it posted the letter. Bombay Dyeing, the addressee claims that the letter did not reach it. It is in this context we have to look at the provisions of regulation 7(1) to see that by simply posting the letter to Bombay Dyeing the Appellant’s obligation is over. Shri Banerjee had argued that by posting the letter the Appellant’s obligation under regulation 7(1) is over in the absence of any specific requirement under the said regulation to sent the information by registered post / speed post / fax etc. He had also stated that no duty is cast on the Appellant to check up with the Target Company to ensure receipt of the communication. Shri Banerjee’s contention is not acceptable for the simple reason that regulation is not simply on sending the information, it requires disclosure. Mere dispatch of the information is short of the said requirement. If the requirement was only "to send", on sufficient proof of posting the letter would have in the normal course to some extent met with such a requirement. But Regulation 7(1) requires the acquirer to disclose the aggregate of his holding in the Target Company to the company. Sub regulation (2) prescribes the time limit within which the disclosure is required to be made. Therefore the crucial question is whether the requisite disclosure has been made by the Appellant. For the purpose it is necessary to know what is meant by "disclosure" in the sense in which it is used in the regulation. Disclosure is required to be made to the Target Company. "Disclose to the company" is the clue. "Disclose" according to Websters Encyclopedic Dictionary means - to make known, reveal or uncover – to cause to appear, allow to be seen, lay open to view. According to Blacks Law Dictionary "Disclosure" means – act of disclosing, revelation, the impartation of that which is secret or not fully understood. Disclose is to expose to review or knowledge anything, which before was secret, hidden or concealed. Thus the requirement is that the information should reach the person to whom it is meant. The obligation does not end by simply posting the information in a letterbox. The fact that the information should reach the target company is also evident from the provisions of regulation 7(2) which casts an obligation on the company to disclose to the concerned stock exchange the shareholding of persons covered under regulation 7(1) within seven days of receipt of the information from the acquirer. In view of the above I am not inclined to view that by posting a letter under certificate of posting, stating the shareholding by itself is sufficient compliance of regulation 7(1). In my view the Appellant has failed to comply with the requirement of regulation 7(1), for the reason that it has failed to make the disclosure of the requisite information to Bombay Dyeing.

¶147

Shri Banerjee’s submission that the Respondent did not comply with the requirement of the rules of natural justice for the reason that the Appellant was denied of the right to give an effective reply to the show cause notice by refusing access to and inspection of the relevant documents, that cross examination of the persons whose statements have been relied upon was denied and a copy of the investigation report was not provided etc., are unfounded. It is seen from the documents on record that the Respondent on December 18, 2000 had issued a detailed show cause notice to the Appellant stating the charges and the data relied upon, and the legal provisions attracted, and the consequences that would attract in case satisfactory reply is not given. There is no provision in the regulation to furnish the full text of the investigation report to the noticee. But the law has taken care of the requirement of natural justice by providing in regulation 42(1) to communicate the findings of the investigating officer to the acquirer etc., and give him an opportunity of being heard. It is not the Appellant’s contention that the findings of the investigating officer were not communicated to it or that it was not given opportunity of being heard. Grievance is on not giving the investigation report as a whole, which is not a requirement under the regulation. By furnishing the findings of the Investigating Officer the Appellant was given sufficient opportunity to putforth its defense. The Appellant is asking for some thing, which he is not entitled to under the law. With reference to the requirement of inspection of documents it is seen from the documents filed by the Respondent that it had offered inspection of the documents relied on by it. It is on record that the Appellant had inspected the documents and also it is evident that the Appellant had made written and oral submission availing of the opportunity provided by the Respondent. I agree with the learned Counsel for the Respondent that cross-examination of a witness is required only if his statement is made use of in the proceedings. Since the statements of those persons are not relied on, those persons need not be made available for cross-examination. In any case in the light of the factual and legal position with reference to compliance of regulation 7(1) stated by me above, I do not find any justification to insist for cross examination of the persons, as sought by the Appellant. In the light of the factual

¶152

Regulation 44(a) does not empower the Respondent to debar the Appellant from accessing the capital market or putting a total ban on dealing in securities. Regulation 44(a) enables the Respondent direct the "persons concerned not to further deal in securities". On a combined reading of sub regulation (b) and (c) the securities referred to in sub regulation (a) could be the securities of the Target Company which is the subject matter of acquisition. The sub regulation (a) does not appear to be meant to stop further dealing in any security held by the acquirer. By debarring the person concerned from further dealing in securities, how the interests of the securities market is taken care of, need be explained. In the instant case the Respondent has not stated as to how debarring the Appellant from further dealing in securities would be in the interest of the securities market in the light of the facts and circumstances of the instant case. According to the Appellant it is an investment company dealing in securities. It is not dealing exclusively in the shares of Bombay Dyeing. According to the information furnished by the Appellant, it was holding shares worth Rs. 40 crores on the date of the impugned order. The implication of the impugned order should not be ignored in the said context. Blocking dealing in the securities held by the Appellant as a whole, for unexplainable reason would in my view be more against the interest of the investors and the securities market, than protecting their interest. There should be sufficient reason, justifying such a direction. Nothing of that sort is available in the impugned order. This part of the order in my view is also untenable for the reason that it is beyond the powers of the Respondent under regulation 44(a). The provisions of Section 11B are of no help to the Respondent in this regard as the direction does not come under any of the purposes for which direction can be issued under the said sections as could be seen from the facts of the case. In this connection the observation made by the Hon’ble Supreme Court in Peerless General Finance & Investment Co. Ltd., v. Reserve Bank (1992) 2 SCL 343 at pg. 375) is to be remembered. The Hon’ble Court had observed that:

Mega Resources v. SEBI

Case brief

What is this about?

What did the court decide?

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Coram

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Mega Resources v. SEBI

Case brief

What is this about?

What did the court decide?

Issues for consideration

Cases cited

Parties & counsel

Coram

Case details

Similar cases

What the court decided

A compact analysis

Statutes considered