On September 17, 2018, the Securities and Exchange Board of India (“SEBI”) passed an order directing the promoter group of SBEC Sugar Ltd. (“Target Company”) viz. Umesh Kumar Modi, Kumkum Modi, Jayesh Modi, Longwell Investments Pvt. Ltd., A to Z Holding Pvt. Ltd., Moderate Leasing & Capital Services Ltd. and SBEC Systems (India) Ltd. (collectively referred to as the “Promoter Group”) to make a public announcement of an open offer for acquisition of shares in the Target Company in accordance with provisions of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (“Takeover Regulations”).  

The primary issue in this case was whether the Promoter Group was required to make an open offer before it acquired 9.4% (nine point four percent) voting rights in the Target Company during the quarter ending on September 30, 2014. 

Regulations:  

Regulation 3(2) of the Takeover Regulations provides that no acquirer who together with persons acting in concert with him, has acquired and holds shares or voting rights in a target company entitling them to exercise 25% (twenty five  percent) or more of the voting rights in the target company but less than the maximum permissible non-public shareholding, shall acquire within any financial year additional shares or voting rights in such target company entitling them to exercise more than 5% of the voting rights, unless the acquirer makes a public announcement of an open offer for acquisition of shares of such target company.

Regulation 10(1)(d)(i) of the Takeover Regulations provides a general exemption to any acquisition pursuant to a scheme made under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) or any statutory modifications or enactment thereto, from the obligation of making an open offer inter alia under regulation 3 of the Takeover Regulations. 

Facts:  

In the instant case, SEBI observed from the shareholding pattern of the Target Company, filed with the BSE, that the shareholding/voting rights of the Promoter Group has increased from 54.46% (fifty four point four six percent) as on June 30, 2014 to 63.86% (sixty three point eight six percent) as on September 30, 2014. Thus, the Promoter Group had acquired together 9.4% (nine point four percent) voting rights in the Target Company during the quarter ending on September 30, 2014. 

Upon SEBI seeking clarifications from the Target Company on compliance of the Takeover Regulations, the Target Company inter alia submitted that the increase in shareholding of two of its promoters, viz. A to Z Holding Pvt. Ltd. and Kumabhi Investment Pvt. Ltd. was on account of adjustments against outstanding loans of two of the borrowers who failed to return the loan amount to the two promoters. Hence, the increase in shareholding was not on account of purchase of shares.  

Further, the Target Company also submitted that it has been declared a sick company by the BIFR vide order dated February 4, 2014 and that the adjustment of loans given by the promoters in lieu of the shares of the Target Company was within the scheme framed under section 18 of the SICA and thus falls under the exemption provided under regulation 10(1)(d)(i) of the Takeover Regulations. 

Upon SEBI seeking the copy of scheme of rehabilitation prepared under section 18 of SICA, SEBI was informed that till date BIFR has not sanctioned any scheme of rehabilitation of the Target Company.

One of the contentions raised by the Target Company to get relief from the obligation of making an open offer was that the said acquisition of shares was made only by two promoters of the Promoter Group and the open offer obligation would thus jeopardise the future prospects of the Target Company.  

However, SEBI rejected the contention, relying upon the deeming provision under regulation 2(1)(q)(2) of the Takeover Regulations which brings within the ambit of the definition of ‘persons acting in concert’ certain categories of person depending on the relationship they share. ‘Promoters and members of the promoter group’ is one such category of persons deemed to be acting in concert as per regulation 2(1)(q)(2) of the Takeover Regulations. Thus, SEBI held that all persons belonging to the Promoter Group are prima facie regarded as ‘persons acting in concert’ in respect of any acquisition of shares or voting rights in the Target Company by any member of the Promoter Group, unless the contrary is established.  

The Promoter Group had further contended that the obligation of open offer would result in financial liability on the Promoter Group who are trying to arrange funds for the Target Company which has been declared sick and is in desperate need of funds.  

SEBI rejected the said contention and noted that the provisions of the Takeover Regulations do not provide for any exemption to acquisition of shares from obligation of open offer merely on the ground that the shares were received by the acquirer in lieu of settlement of loans given by him. Further, SEBI held that under the Takeover Regulations, interest of investors and their protection is paramount and not that of the promoters. The shareholders’ interest cannot be sacrificed at the altar of company’s interest or that of its promoters. 

Therefore, SEBI held that the Promoter Group had an obligation to make an open offer for shares of the Target Company in accordance with the provisions of the Takeover Regulations.   

Order:  

SEBI in exercise of its powers, issued the following directions to the Promoter Group of Target Company:

a) to jointly or severally make a public announcement to acquire shares of the Target Company in accordance with the provisions of the Takeover Regulations within a period of 45 (forty five) days from the date of the order; and

b) to pay interest at the rate of 10% (ten percent) per annum from the date when they incurred the liability to make the public announcement till the 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, if any.