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Judgment
Tarun Agarwala, Presiding Officer
The present appeal has been filed against an order dated 15th January, 2021 passed by the respondent no.1, Securities and Exchange Board of India (hereinafter referred to as "SEBI"). The appellant has prayed not only for the quashing of the order but has also prayed for variety of reliefs some of which are that respondent no.3 Credit Suisse A.G. should be restrained from selling the shares which have been pledged in their favour and, further direct SEBI to appoint an independent valuer under Regulation 8(16) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as "SAST Regulations") and, further, initiate proceedings against respondent no.3 for violation of the SAST Regulations.
The facts leading to the filing of the present appeal is, that appellant nos.1 and 2 are companies incorporated under the Companies Act, 2013 and 1956 respectively. Respondent no.1 SEBI is a statutory body exercising powers and performing its functions under the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as "SEBI Act") and is a regulator of the securities market. Respondent no.2 IDBI Trusteeship Services Ltd. is registered as a debenture trustee with SEBI under the relevant provisions of Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993 (hereinafter referred to as "Debenture Trustee Regulations"). Respondent no.3 Credit Suisse A.G. is the Mumbai branch of Credit Suisse A.G. of Switzerland and has obtained approval from the Reserve Bank of India for setting up a bank branch in India. Respondent no.4 Keynote Financial Services Ltd. is the Manager to the open offer issue. Respondent no.5 A2R Holdings is a Mauritius based entity and is controlled by respondent no.7 Mr. Namit Malhotra who in turn is a promoter of Prime Focus Ltd., respondent no.8. Respondent no.6 ARR Studio Private Ltd. is a private entity and is controlled by Mr. Namit Malhotra. Respondent no.7 is a promoter of Prime Focus Ltd., respondent no.8 and respondent no.8 Prime Focus Ltd. is the target company whose shares are sought to be sold by respondent nos.2 and 3 to respondent nos.5, 6 and 7.
The background leading to the selling of the shares of the target company Prime Focus Ltd by respondent nos.2 and 3 to respondent nos.5, 6 and 7 are as follows:
On 28th March, 2018, appellant no.1 issued redeemable non-convertible debentures aggregating to Rs.650 crores vide a debenture trust deed executed between appellant no.1 and respondent no.2 IDBI Trusteeship Services Ltd. Respondent no.2 was appointed as a debenture trustee on behalf of and for the benefit of respondent no.3 Credit Suisse A.G. Appellant no.2 Reliance Capital Limited was a corporate guarantor and security provider to the aforesaid issuance of non-convertible debentures by appellant no.1 and, in furtherance of being a security provider, a share pledge agreement between respondent nos.2 and appellant no.1 was executed on 27th March, 2018. In this pledge agreement, appellant no.1 pledged 10.49 crores of Prime Focus Ltd. shares held by appellant no.1 for the benefit of respondent no.3 Credit Suisse A.G.
The appellants defaulted in the payment of the loan and, accordingly, respondent no.2 on behalf of respondent no.3 invoked the pledge on 28th November, 2019 on 7.33 crores out of 10.49 crores shares of Prime Focus Ltd. which were held by appellant no.1.
On 24th December, 2020, a share pledge agreement was executed between respondent no.2 IDBI Trusteeship Services Ltd. and respondent no.5 A2R Holdings wherein respondent no.5 agreed to acquire 10,49,39,361 equity shares of the target company Prime Focus Ltd. respondent no.8, based on which, respondent no.4 Manager to the open offer issued a public announcement on 24th December, 2020 on behalf of the acquirer respondent nos.5, 6 and 7 for open offer for acquisition of 8,23,71,046 shares having a face value of Rs.1/ each of the target company Prime Focus Ltd. from the public shareholders.
On 28th December, 2020, the appellant no.1 made a representation before SEBI alleging that since respondent no.3 Credit Suisse A.G. had acquired the shares of the target company Prime Focus Ltd. and was in control of 33.12% of the shareholding of the target company, respondent no.3 is required to make an open offer under the SAST Regulations which they have failed to make and, therefore, SEBI should initiate proceedings against respondent no.3. It was further contended that the shares of the target company are infrequently traded and the value declared in the open offer by the Manager to the issue is drastically undervalued. It was contended that the value should not be less than Rs.150/ per share and, therefore prayed that SEBI should investigate the matter to ensure that the interest of the investors and shareholders are protected. The appellant no.1 in its representation prayed that pending investigation SEBI should restrain Credit Suisse A.G. from selling the shares of the target company and appoint an independent valuer to carry out the fair value of the shares of the company and further direct Credit Suisse A.G. to make an open offer under the SAST Regulations.
On 1st January, 2021 a detailed public statement in terms of Regulation 3(2) read with Regulation 13(4), 14(3) and 15(2) of the SAST Regulations was issued and on 8th January, 2021, respondent no.4 on behalf of respondent nos.5.6 and 7 filed a draft letter of offer of the target company before SEBI as per Regulations 16(1) of the SAST Regulations.
In the meanwhile, SEBI on receipt of the representation of appellant no.1 had forwarded the representation to respondent nos.3, 4 and 5 and sought their comments. Respondent no.3 submitted its response on 11th January, 2021, respondent no.4 submitted its response on 13th January, 2021 and respondent no.5 submitted its response on 12th January, 2021. All the three respondents denied any kind of violation of the SAST Regulations and contended that the open offer was in accordance with the provisions of the regulations. These three responses was forwarded by SEBI to the appellant vide letter dated 15th January, 2021 which is impugned in the present appeal. Subsequently, the appellants replied vide letter dated 29th January, 2021 against the responses given by respondent nos.2, 4 and 5 and again reiterated that a detailed investigation should be made by SEBI and that an independent valuer should be appointed and respondent no.3 should be booked for violation of the SAST Regulations.
Notwithstanding the aforesaid, SEBI submitted its final comments on 4th February, 2021 agreeing to the draft open offer made by the Manger to the issue on behalf of respondent nos.5, 6 and 7. It was contended that the comments of SEBI was uploaded on its website.
Based on the comments submitted by SEBI, respondent no.4 had on 12th February, 2021 informed BSE that the letter of offer has been sent to all the shareholders indicating therein that 23rd February, 2021 is the date when the offer would be opened and that the offer would close on 3rd March, 2021. In this letter it was also indicated that the price of the open offer was Rs.44.15 per shares.
On 15th February, 2021, a valuation report was submitted by the appellant no.1 to SEBI. This valuation report was obtained at the instance of appellant no.1. In this valuation report it was indicated that the price of the shares of the target company is Rs.115.21 per share. Based on this valuation report, the appellant again requested SEBI to consider the valuation report and take appropriate measures on the valuation of the shares of the target company. It is contended that since no response was received the present appeal was filed.
We have heard Mr. Ravi Kadam, Senior Advocate assisted by Mr. Zerick Dastur, Ms. Smriti Singh, Ms. Palak Agrawal, Mr. Khushil Shah, Mr. Malhar Zatakia and Mr. Kunal Kothary, Advocates and Mr. Ashish Deshmukh, Authorized Representative for the appellant and Mr. Pradeep Sancheti, Senior Advocate assisted by Mr. Mihir Mody and Mr. Arnav Misra, Advocates for the respondent no.1, Mr. Janak Dwarkadas, Senior Advocate for the Respondent No.2, Mr. Somasekhar Sundaresan, Advocate assisted by Mr. Jayesh H., Mr. Shubhabrata Chakraborti, Mr. Avikshit Moral, Ms. Smriti Jha, Ms. Jui Masurekar and Mr. Hafeez Patanwala, Advocates for the Respondent No.3, Mr. Zal Andhyarujina, Advocate assisted by Ms. Akanksha Agrawal, Mr. Chetan Thakkar and Ms. Tejal Patankar, Advocates for the Respondent No.4, Mr. Gaurav Joshi, Senior Advocate assisted by Mr. Aditya Sikka, Mr. Ravi Kumar, Ms. Manita Doshi, Mr. Rohan Banerjee and Mr. Varun Srinivasan, Advocates for the Respondent Nos.5 to 7, Mr. Aditya Sikka, Advocate assisted by Mr. Ravi Kumar, Ms. Manita Doshi, Mr. Rohan Banerjee and Mr. Varun Srinivasan, Advocates for the Respondent No.8 in appeal no.95 of 2021 and Mr. P.N. Modi, Senior Advocate assisted by Mr. Kunal Katariya and Ms. Dhwani Mehta, Advocates for the appellant and Mr. Pradeep Sancheti, Senior Advocate assisted by Mr. Mihir Mody and Mr. Sushant Yadav, Advocates for the Respondent No.1 in appeal no.105 of 2021.
Long drawn arguments were made by the counsels for the parties. The learned senior counsel Mr. Ravi Kadam for the appellants contended that the impugned order dated 15th January, 2021 is violative of the principles of natural justice. It was contended that no opportunity of hearing was provided. It was further contended that the representation of the appellants was rejected summarily without applying its mind and without giving any reason and such mechanical order, being violative of article 14 of the Constitution of India, was liable to be quashed. It was urged that SEBI had failed to protect the interest of the investors and the shareholders by accepting the undervalued price of Rs.44.15 whereas substantial evidence was filed to show that the valuation of the scrip of the target company was far more than Rs.44.15. In this regard, the valuation report submitted by the appellant was duly referred to. The learned senior counsel contended that the perusal of the valuation report submitted by respondents and compared with the valuation reports submitted by the appellants would show that the price fixed by the respondents was in gross violation of Regulations 8, 8(1) and 8(2) of the SAST Regulations. It was contended that since the shares were infrequently traded, the best way to find out the value of the shares was for SEBI to appoint an independent Merchant Banker under Regulation 8(16) which they have miserably failed to do so and, in any case, SEBI has overall powers under section 11 and 11 B of the SEBI Act to take measures to protect the interest of the investors and the shareholders. It was also contended that the appellants are still the shareholders to the extent of 9% as these shares have not been invoked by the respondent and, therefore, they are an aggrieved person and have a right to file an appeal under section 15T of the SEBI Act. On the valuation report, it was urged that various parameters indicated in the regulations were not considered which have been considered and a comparison has been made in the valuation report submitted by the appellants. It was contended that SEBI should be directed to consider the valuation report submitted by the appellant and/or take steps to appoint an independent Merchant Banker under section 8(16) so as to arrive at the correct valuation of the shares of the target company.
The learned senior counsel further urged that under the regulations it is obligatory for the Manager to the issue to place relevant documents for inspection so that the investors/shareholders can arrive at an informed decision. It was contended that in the instant case the valuation report was not placed for inspection. It was contended that valuation report is germane to the issue for an investor to take a call as to whether he would like to accept the open offer of not. In the absence of the valuation report not being provided for inspection no informed decision could be taken by an investor and, therefore, non-submission of the valuation report was in gross violation of the SAST Regulations and, consequently, the open offer process becomes vitiated.
It was further contended that the comments of the SEBI dated 4th February, 2021 was not placed on the website of SEBI. Only information was placed that SEBI has given its comments but the contents of the comments was not displayed on the website and, therefore, one was not aware as to what exactly were the comments given by SEBI on the draft letter of offer submitted by respondent no.4. It was contended that on account of lack of transparency and the cloak and dagger game being played by the regulator shows that there is something amiss which requires a detailed investigation into the matter and such conduct and the manner in which the exercise was carried out by SEBI shows not only lack of transparency but also shows disinterest in the protection of the interest of the shareholders/investors. Learned counsel contended that in the event the price of the shares of the target company are revised it will benefit everyone including the pledgee respondent no.3 who would stand to gain more as they would receive a higher price. In the end, it was urged that the SEBI having not exercised its authority and discretion has failed to protect the interest of the shareholders/investors. In support of his submissions the learned counsel placed reliance upon a decision of the Supreme Court in G.L. Sultania & Ors. vs. SEBI & Ors. (2007) 5 SCC 133. It was also contended that since no reasons were provided the order cannot be sustained and, in support of this submission, the learned counsel placed reliance upon the two decisions of this Tribunal in Teneco Inc. vs. SEBI (2019) SCC Oline SAT 235 & Arora UK Bidco Ltd. vs. SEBI (2020) SCC Oline SAT 92.
Mr. Pradeep Sancheti, the learned senior counsel for SEBI contended the procedure as per the SAST Regulations have been duly followed and that the respondent has not only considered the valuation reports but has duly applied its mind and came to the conclusion that the draft letter of offer was in order, based on which the comments were uploaded on the website on 4th February, 2021. The learned counsel contended that the fact that the respondent has applied its mind can be culled out from the file which the respondents were willing to produce before the Tribunal for its perusal. It was contended that no detailed reasons were required to be recorded while giving comments to the draft letter of offer and this aspect has been duly proved by the Supreme Court in G.L. Sultania"s case (supra). The learned senior counsel contended that no final decision was taken by the respondent on 15th January, 2021 on the question of draft letter of offer or on the representation of the appellants and that a final decision was taken when the comments were uploaded on the website on 4th February, 2021. The learned senior counsel contended that the letter of the respondent dated 15th January, 2021 was only a communication to the appellants forwarding the responses of respondent nos.3, 4 and 5 for their consumption and that no decision on the draft letter of offer or on the representation of the appellants was taken on 15th January, 2021. It was, thus, urged that the appeal should be dismissed on this short ground itself. The learned senior counsel further contended that in any case the appeal is not maintainable in as much as the appellant has no share to offer since the shares were pledged in favour of respondent no.3. It was contended that until and unless the shares were redeemed by the appellant they can have no grievance on the offer price. The learned senior counsel has also placed reliance on certain paras of G.L. Sultania & Ors. and Teneco Inc. (supra).
Mr. Janak Dwarkadas, learned senior counsel appearing for respondent no.2 contended that the appellants are pledgors and have no right to question the draft open offer or the valuation report as they have no shares to offer. The pledge given by them was invoked. In support of his contention, the learned senior counsel has placed reliance upon the rights of a pledgee under section 176 of the Contract Act and, further, placed reliance on a decision of the Bombay High Court in Prime Broking Company (India) Ltd. vs. National Securities Clearing Corporation Ltd. (2017) SCC Online Bom 43 wherein it was held as under:
"16. The legal position as to relationship between a pledgor and the pledgee arising out of section 176 of the Contract Act has been the subject matter of several decisions including, but not restricted to S. L. Ramaswamy Chetty (supra) and State Bank of India v. Neela A. Naik (supra) etc.. All these decisions hold that the pledgor cannot compel the pledgee to exercise power of sale of the pledged goods in order to discharge any debt or liability which may have crystalised. The pledgor's right, in such circumstances extends only to the following:
"(i) in case the Pledgee exercises the power of sale, to insist that it should be honestly and properly done and the sale proceeds applied to the debt;
(ii) in case the pledgee does not exercise the power of sale, then the Pledgor can redeem the pledge on payment of the debt or such part of it that has remained unpaid; and
(iii) in case the sale was improperly exercised, to get damages caused thereby."
Mr. Somashekhar Sundaresan, learned counsel appearing for respondent no.3 Credit Suisse A.G. contended that the valuation report submitted by the appellant was misleading and is not as per the parameters laid down under the regulations. The learned counsel contended that the comparison of the entities made in the valuation report is per se incorrect in as much as the said entities do not conduct the business which the target company does and, therefore, there cannot be any comparison with such entities. It was, thus, contended that the basis of the fixation of the price of the scrip of the target company with these companies is patently erroneous and, therefore, the valuation report fails on this ground itself.
Mr. Zal Andhyarujina, the learned senior counsel appearing for respondent no.4 contended that the valuation report submitted by the appellants were correct and in accordance with the parameters laid down under the regulations. It was further contended that due process was followed as per the regulations and that the basis of the valuation done by the appellant was erroneous and cannot be accepted.
Mr. Gaurav Joshi, learned senior counsel appearing for respondent nos.5, 6 and 7 contended that the appellant has no locus standi to file the appeal as they are not aggrieved persons and that they have no remedy under the SAST Regulations and the remedy, if any, is under the civil law.
Having heard the learned counsel for the parties at length, it is necessary to deal with the question of the locus standi of the appellant in preferring the present appeal under section 15T of the SEBI Act. For facility the said provision is extracted hereunder.
"Appeal to the Securities Appellate Tribunal.
15T. (1) Save as provided in sub-section (2), any person aggrieved,-
(a) by an order of the Board made, on and after the commencement of the Securities Laws (Second Amendment) Act, 1999, under this Act, or the rules or regulations made thereunder; or
(b) ....................
(c) ...................
may prefer an appeal to Securities Appellate Tribunal having jurisdiction in the matter."
From a perusal of the aforesaid provision, it is clear that any person aggrieved can file an appeal against an order of SEBI before the Securities Appellate Tribunal. The question is, whether the appellant is an aggrieved person under the SEBI Act qua the SAST Regulations. A perusal of the SAST Regulations indicates that the parties to the lis are the acquirer, the target company and its shareholders. A shareholder has a right under the SAST Regulations to accept the open offer given by the acquirer or reject the same. The choice is his. A shareholder if aggrieved by the pricing of the shares made by the acquirer is entitled to raise his grievance before SEBI to the effect that the said pricing is not as per the regulations and, in any case, not in the interest of the shareholders. The reason for a shareholder to be interested in the offer price is that if the shareholder accepts the offer given by the acquirer then he off loads his shares that he has in the target company and exits upon receiving payments as per the offer price. Thus, in order to be aggrieved, you are required to hold the shares of the target company. The mere fact that you may be a shareholder in the register of members maintained by the company under the Companies Act does not entitle you to challenge the offer price given by the acquirer under the SAST Regulations unless you have the shares to offer to the acquirer. In the absence of shares, in our opinion, does not entitle the person to question the offer price under the SAST Regulations.
In view of the aforesaid, we find that the appellant no.1 had pledged 10.49 crore shares of the target company for the benefit of respondent no.3. The moment the shares are pledged the appellant no.1 cannot offer those shares for sale to the acquirer until and unless the pledged shares are redeemed by the appellant itself. The option to redeem the shares is always open to the appellants till the end but so long as it is not redeemed, the pledgee gets a right to sell those shares under section 176 of the Contract Act.
In the instant case, we find that the pledged shares have not been redeemed as yet and, therefore, the appellant no.1 has no share to offer to the acquirer. Since he has no share to acquire he cannot be aggrieved by the offer price nor can he challenge the offer price in the present appeal. In our opinion, he is not an aggrieved person and, therefore, the appeal at the instance of the appellants is not maintainable. The appellants have no locus standi at the present moment to file an appeal questioning the offer price given by the acquirer under the SAST Regulations. The remedy, if any, available to the appellant is under the civil law.
In this regard, section 176 of the Contract act may also be considered which provides as under:-
Pawnee's right where pawnor makes default.-If the pawnor makes default in payment of the debt, or performance; at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.
A contract of pledge carries with it the obligation that the security may be made available to satisfy the obligation and enable the pawnee in possession to sell on default in payment although the pawn may redeem on any moment upto sale. Once the pawn under section 176 of the Contract Act sell the goods the pawnor"s right of redelivery is extinguished though his right to redeem continues until sale. The power to sell is conferred for the benefit of the pawnee and can be exercised at his discretion.
In this regard, we must know what a pledge is. A pledge or pawn is a "bailment of goods" by the debtor to his creditor to be kept by him till the debt is discharged. The bailment is intended to be a security for some debt or engagement. A simple example of a bailment is a contract for hire of goods. Possession of goods is handed over to someone who is not their owner and that person, namely, the bailee is subject to certain obligations in relation to the goods which obligations are owed to the owner, namely, the bailor. Thus, the general property in the goods pledged remains in the pledgor but a special property in them passes to the pledgee in order that he may be able to sell the goods if his right to sell arises. This special property is based on the right to possession of goods together with the power to sell upon default.
In the instant case, there is no dispute to this special power being given to respondent nos.2 and 3 on the basis of a pledge agreement executed by the appellants. Once the pledge has been invoked the right to sell the shares can be exercised by the respondent under section 176 of the Contract Act which right has been validly exercised. There is nothing to indicate that the exercise done is dishonest or that it was not done properly.
In view of the aforesaid, we are of the opinion that the appellants have no locus standi to file the present appeal as they are not an aggrieved person. In any case, the impugned order dated 15th January, 2021 is only a communication enclosing the comments submitted the respondent no. 2,3 &4 and is not a disposal of the representation of the appellants.
Before parting, we may point out that the SAST Regulation is basically between the acquirer, the target company and the Regulator. When the acquisition of a company takes place beyond the threshold of a certain percentage, the procedure in the SAST Regulation is required to be followed. There is a time prescribed for carrying out various actions under the regulations within the prescribed period as time is the essence of the entire process. An open offer made by the acquirer is required to considered by SEBI as to whether the offer price is correct or not and whether it is in the interest of the shareholders and whether the interest of the shareholders are adequately protected under the regulations. SEBI is required to ensure that their interests are protected but it does not mean that a shareholder cannot approach SEBI and intimate them either with regard to the procedure not being followed in accordance with the regulations or can intimate SEBI about the pricing of the shares or can state that the offer price is drastically low. In such a situation, SEBI is required to consider the objection/representation of such shareholders and decide the same objectively and in accordance with the provisions of the regulations. SEBI is required to pass an appropriate order and intimate the shareholders of its decision howsoever brief it may be but the order must show that the regulator has applied its mind on the issues that has been raised by the shareholders.
We further find that in the instant case, the Manger was required to allow the shareholders to inspect the documents. Unfortunately, the valuation reports was not placed for inspection. According to SEBI, the regulations does not require placing the valuation report for inspection and, therefore, nothing wrong was found by SEBI in the non-production of the valuation report to the shareholders. We beg to differ. The provisions of the SAST Regulations are wide enough to include the valuation report for inspection. This is essential to enable the shareholders to take an informed decision as to whether the price offered is fair and reasonable under regulation 15(2) & 15(3) of the SAST Regulations. The shareholder can only arrive at an informed decision only when he has an access to the valuation report. We also find that in many cases the valuation report was given by the acquirer for inspection to the shareholders. We, therefore, direct SEBI that in future SEBI will ensure that the valuation report is one of the essential document which is required to be displayed for inspection under clause 9 and especially 9.1.12of The Format Of The Standard Letter Of Offer provided under the Standard Letter Of Offer For An Open Offer In Terms Of The SEBI (Substantial Acquisition Of Shares And Takeovers) Regulations 2011 read with 15(2) & 15(3) of the SAST Regulations.
Further, merely by stating on the website that SEBI has given its comments to the draft letter of offer is by itself insufficient to comply with the provisions of the regulations. SEBI as a regulator is required to show its transparency and the contents of the comments must be displayed on the website. This comments is required to be supplied to the acquirer and the same is required to be part of the letter of offer and is an essential document to be displayed for inspection under clause 9.1.9 of the Regulations of 2011. This should be strictly adhered to by SEBI in future.
For the reasons stated aforesaid, the appeal is dismissed with no order as to costs. Misc. Applications nos.139 and 140 of 2021 are also disposed of accordingly.
In appeal no.105 of 2021, the appellant has challenged the offer price given by the acquirer contending that the price is drastically low. We find that the appellant has filed a representation before SEBI and immediately thereafter has filed the appeal without waiting for its disposal.
We have already held in appeal no.95 of 2021 Reliance Mediaworks Financial Services P. Ltd. that if a shareholder is aggrieved by the valuation given by the acquirer the shareholder can always represent to SEBI and that SEBI is required to consider and pass an appropriate order and communicate the same to the complainant/ shareholders.
In view of the aforesaid, we dispose of the appeal directing SEBI to consider and pass appropriate orders in accordance with law on the representation made by the appellant within two weeks from today.
The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the registry. In these circumstances, this order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally signed copy sent by fax and/or email.