Partly allowed

Clariant International Ltd.

SAT21 Feb 2003

Case brief

AI extract

What is this about?

SAT allowed a limited appeal challenging SEBI's order imposing a 15% interest liability on appellants for a delayed takeover offer. The Tribunal upheld the interest rate but restricted eligibility to shareholders holding stock on the projected closure date and rejected arguments for dividend deduction.

What did the court decide?

Interest rate upheld at 15%; liability restricted to holders on cut-off date; dividend deduction rejected.

Clariant International Ltd. — Securities and Capital Markets | SAT (2003)

Partly allowed

Clariant International Ltd.

SAT21 Feb 2003

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Case brief

AI extract

What is this about?

What did the court decide?

Interest rate upheld at 15%; liability restricted to holders on cut-off date; dividend deduction rejected.

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Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Takeover Regulations). The exemption as sought for was not granted by the Respondent. Since Hoechst had exited from the specialty chemicals business, it was decided by Hoechst to sell off the shares of the target company held by it to Ebito, a company floated on 19..5.2000 as a special purpose vehicle. On 13.10.2000 Hoechst sold and transferred the shares to Ebito. It has been stated that as a consequence of the scheme of financial reorganisation/reconstruction effected, Ebito which held 50.1% of the share capital of the target company, became a 100% subsidiary of Clariant. It was in the said context the Respondent received a complaint alleging that the Appellants had violated the provisions of the Takeover Regulations as they acquired 50.1% shares/voting rights and control in the target company without making public announcement in accordance with the regulations. The Respondent responded to the complaint and conducted an enquiry into the matter. After the enquiry, the Respondent came to the conclusion that the Appellants had actually acquired the control over the target company on 21.11.1997. The impugned order dated 16.10.2002 was made in the light of said findings. After discussing the factual position and the relevant provisions of the Takeover Regulations it has been recorded in the order that "Thus, when the Acquirer, in the instant case, expressed its intention to acquire the 50.1% shares of the target company by way of entering into Purchase Agreement with Hoechst on 21.11.1997 it constituted an intention to acquire indirectly the control over the target company and thus triggered the Regulations and therefore, the obligation to make Public Announcement arose on that day which was to be made within four working days of 21.11.97, i.e. the date of entering into the said agreement." It has been further observed in the order that the "Acquirer (the Appellants) has violated regulations 10 and 12 read with sub regulations (1) and (3) of regulation 14 as the Acquirer had acquired 50.1% shares/voting rights and control in the target company, without making public announcement to acquire shares/voting rights or control of the target company in accordance with the said regulations." Having come to the said conclusion the Respondent vide its order dated 16.10.2002 directed the Appellants to make public announcement as required in terms of regulations 10 and 12 of the Takeover Regulations, taking 21.11.1997

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Shri Aspi Chinoy, learned Senior Counsel, appearing for the Appellants briefly explained the factual position considered relevant to the issues raised in the appeal. He referred to the impugned order in particular the summary of the findings and the direction to the Appellants to pay interest at the rate of 15% per annum on the offer price to the shareholders of the target company for the loss of interest caused to them from 22.3.1998 till the date of actual payment of consideration. Shri Chinoy submitted that as per the order it was on "just and equitable" grounds the Respondent wanted the Appellants to pay interest @ 15% to the shareholders to compensate the loss of interest due to delay involved in making public offer and the delay in making the payment. He submitted that as the Respondent has admitted that the direction to make payment of interest is on "just and equitable" grounds and the payment is intended to compensate the loss of interest suffered by the shareholders as a result of delay involved in receiving monetary consideration for the shares, from the Appellants. In this context Shri Chinoy submitted that thus it is clear from the order that the direction to pay interest is to compensate those who suffered and, therefore, those persons who were holding shares on 21.11.1997 and who were in a position to tender the shares held by them in case the Appellants had made a public offer, alone are entitled to be compensated for the loss of interest caused due to the delay. He submitted that a person who purchased the target company’s shares in the year 2002, has not lost anything to be compensated due to delayed public offer which according to the Respondent was to be made on 21.11.1997. He submitted that those who held shares on the reference date alone are eligible to receive interest. In this context learned Senior Counsel referred to this Tribunal’s decision in Rhodia SA V Securities and Exchange Board of India (2001) 34 SCL 597) and stated that wherein the Tribunal had observed that interest is to be paid by way of compensation and that "a person who was not holding shares and as a result not in a position to tender shares in a public offer which was

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The question as to whether the Respondent has the power to award interest in a case like this has been considered by the Hon’ble Bombay High Court in BP Plc (supra). A little light on the facts of the said case would help us to understand the relevance of the said decision to the present case. Two companies viz. BP Plc and Castrol Ltd. registered in United Kingdom had filed the appeal challenging this Tribunal’s order dated 5.9.2001. It was in the said appeal the cited order was passed. Now the facts. Burma Petrol Plc. a company incorporated in United Kingdom became a wholly owned subsidiary of BP Plc. Burma Castrol Plc has a subsidiary company viz. Burma Castrol Holdings Ltd. which in turn has a subsidiary viz. Castrol Ltd. The said Castrol Ltd. has a subsidiary company in India viz. Castrol India Ltd, with 51% shareholding therein. In the light of the facts relating to the change in ownership of the companies as aforesaid Securities and Exchange Board of India (SEBI) viewed that as a result of Burmah Castrol Plc becoming a subsidiary of BP Plc there was a change in control over the Indian company i.e. Castrol India, and the said change in control warranted BP Plc to make a public offer to purchase atleast 20% of the shares held by the shareholders in the said company, as per the requirements of the Takeover Regulations. In that context SEBI had directed BP Plc to make a public offer taking 14.3.2000 as the relevant date for fixing the offer price and to pay interest at the rate of 15 per cent per annum on the open offer price for the period from 14.3.2000 till the actual date of payment of consideration to the target company’s shareholders, under the public offer. The said order was challenged in an appeal before this Tribunal. The Tribunal upheld the order, with slight modification. The matter went in appeal to the Hon’ble Bombay High Court. The Hon’ble High Court vide its order dated 2.5.2002 dismissed the appeal. The main challenge to the Tribunal’s order in the said appeal was on three grounds that ( i) the SEBI has no express statutory power to award interest; (ii) the interest if at all justified, could not have been awarded from 14.7.2000 but only from 7.11.2000 (iii) the award of interest at the rate of 15% p.a. is exorbitant and ought

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linked to the shares which one would have offered in the public offer made by the acquirers closed on 22.2.1998. Therefore, it is difficult to accept a proposition that anybody who purchased shares after the said due date, say on 22.2.2002, and tendered the shares so purchased in the public offer to be made by the Appellants as per the directions of the Respondent, should be paid interest from 22.2.1998 though there was no payment due to him. He has not suffered any loss to be compensated. A person who has not suffered any loss, but is still found entitled to receive interest by way of compensation, that would be a case of giving him undue benefit The Respondent’s submission in this regard in its written reply (para 4) that "the issue here is not ‘who should receive the interest" but "what must be liability of the defaulter for having the delayed offer" goes contrary to the principle laid down by the Hon’ble Bombay High Court in BP Plc. It appears that the Respondent in its reply filed is harping more on the liability of the person making offer than on the right of offeree to be compensated . It is to be noted that the interest is proposed to be paid as a compensatory measure to benefit the shareholders and not as a measure of penalty to penalise the acquirer for the default committed by him. There are penal provisions in the SEBI Act to take care of such defaults. If a view is taken that interest is required to be paid as a penal consequence for the delay involved in making the payment, the direction to pay interest on that ground would partake the nature of penalty and in that case the direction will be ultravires the law. In any case the written reply filed by the Respondent can not change the impugned order. In the impugned order it has been clearly stated that the Appellants are directed to pay interest to the shareholders for the loss of interest caused to them. In this context it is to be noted that acquisition referred to in the impugned order relates November 1997, the due date for closing the public offer was 22.2.1998 and still to hold that a person who was nowhere in the picture, at that point of time and has not suffered any loss as a result of the default on the part of the acquirer to make a public announcement making public offer on 21.11.1997, should be compensated, defies logic. The absurdity of such argument in support to pay interest can be shown by an illustration. A company registered on 1.1.2002 purchases shares on 22.2.2002 and tenders those shares in a public offer subsequently made by an acquirer. If one is to go by the Respondent’s submission, that company who tendered shares

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in the public offer is entitled to be compensated even though it was not in existence at the relevant point of time. The purpose to pay compensation to a shareholder is not to unjustly enrich him but to compensate his genuine loss. The Appellants’ argument that there is no "record date" and as such any one acquiring shares is entitled to tender the same is extraneous to the issue. We are not now on the question of the eligibility of a person to participate in a public offer. The issue is on the entitlement to receive interest by way of compensation. The Respondent had argued that in BP Plc no such qualification was put to receive interest, that all the shareholders were recognised. It is to be understood that in the BP Plc, the said issue was not raised and therefore, the Tribunal did not consider the same. BP Plc case was decided by the Tribunal on 5.9.2001. The question as to the person ‘who is entitled to receive’ interest in delayed public offer was raised for the first time before the Tribunal in Rhodia and the question was decided by the Tribunal on 7.11.2001. Therefore, the Respondent’s submission that based on the decision in BP Plc, the Respondent’s direction to pay interest to all those shareholders offering shares in the public offer should be upheld is not tenable. The Respondent had advanced an argument that those who purchased shares after 22.3.1998 might have factored in interest component in the purchase price and as such those who purchased shares even after the closure date of the public offer should be considered eligible to receive interest is also untenable for the reason that, it was on 16.10.2002 the Respondent for the first time directed the Appellants to make a public offer and pay interest @ 15% for the delay involved. It is impossible to believe that anyone would have though of such an order and factored in the interest when he purchased shares before the said date. Further the said order was challenged by filing an appeal on 6.12.2002 and in the appeal relief was sought against the direction to pay interest and also on the eligibility of the shareholders entitled to be compensated. Since the matter was under dispute in a litigation no prudent person would factor in such an uncertain factor to the purchase price of the shares. The Respondent’s submission that the right to participate in a public offer is not restricted to the registered shareholder is not an issue under consideration in this appeal. In the Rhodia case this Tribunal had not held that only registered shareholders are entitled to tender shares and not others, in a public offer. The Tribunal had held in its order in

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pay the interest at the rate of 15% p.a." (emphasis supplied) In this connection it is to be noted that the Hon’ble Court has come to the conclusion that the rate of interest at 15% is not "unjust exorbitant or arbitrary" in the facts and circumstances of the case. This Tribunal while holding SEBI’s decision directing BP Plc to pay interest had noted the submissions of the Counsel for both the parties. Their submissions have been recorded in the order which was before the Hon’ble High Court. BP Plc’s Counsel’s submission as recorded in the Tribunal’s order was that – "Shri Setalvad, referring to the rate of interest of 15 percent levied, stated that it is unjustified as the alleged rationale for directing payment of interest is that the Appellants have used the amount payable under the open offer and deprived the shareholders the use thereof. He submitted that the interest rates prevalent in the United Kingdom are in the region of 5-6 per annum; - that even in India interest rates over a one year period range between 9 10 per cent." In reply to the said submission, learned Advocate General of Maharashtra, who appeared for SEBI had submitted that "the rate of interest @ 15% per annum has been arrived at by the Respondent taking into consideration the Indian scenario. He had submitted that the interest rates prevalent in UK are of no relevance in the context as the matter relates to the interests of the minority shareholders in India and the 15 per cent interest rate is not high or unreasonable." It is noted that the Respondent’s Counsel had also submitted before the Hon’ble High Court in the said appeal that "What one has to see is the conditions in India and not UK and the award of interest at the rate of 15% p.a. is not at all exorbitant and nothing penal about the same." In this context it is noted that in the said case, BP Plc was referring to the interest rate in United Kingdom and therefore, there is every reason to believe that the reference to Indian conditions made by the Respondent’s Counsel covered the prevailing interest rate in India and the Hon’ble Court had taken cognizance of the prevailing rate of interest in India while upholding the direction to pay interest @ 15%. It is noted that in BP Plc the Respondent had passed the order on 23.7.2001 directing the acquirer to pay interest at the rate of 15% p.a. with effect from 14.3.2000 as against the then prevailing bank interest on fixed deposit, which was around 9%. But the Hon’ble Court felt that "in the facts and circumstances of the case" rate of interest fixed at 15% by the Respondent as reasonable.

Clariant International Ltd.

Case brief

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Clariant International Ltd.

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