Supreme Court on creeping acquisition under Takeover Code

The judgement of the Hon’ble Supreme Court in Kosha Investments Ltd (delivered on 18 September 2015 summarised below) is of importance for several reasons, like:

  1. Wrong deed can creep up any time (in this case after 3 years by SEBI); and
  2. For SEBI takeover regulations, netting off in creeping acquisition is not allowed.

The appellant, Kosha Investments Ltd., acquired shares of another company Snowcem India Ltd. (hereinafter referred to as ‘SIL’) from one of the original promoters of SIL and thus itself became one of the promoters. An investigation by SEBI covered the period June 1999 to August 1999 when there was an initial upward movement in the price of shares of SIL and also substantial increase in the volume of their trade. As a result of such investigation the appellant faced charges in another proceeding under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and was also served with a show cause notice dated 14.11.2002 for alleged breach of provisions of Regulation 44 and 45(6) of the SEBI Takeover Regulations of 1997 read with provisions of Section 11 and 11B of the SEBI Act.

The proposed action under SEBI Takeover Regulations of 1997 was based upon report of investigation showing that appellant had consistently bought and sold shares of SIL prior to June 1999 and also after August 1999.

The plea of pledge raised by the appellant was found without any substance and only an attempt to conceal subsequent purchase. Hence, SEBI came to a conclusion that the appellant was already holding between 15% to 75% shares of the target company SIL and it could acquire additional shares of this company through creeping acquisition mode, that is, without public announcement only upto 5% of its paid up capital during the period of 12 months ending on 31st March 2000. However, by acquiring 11,36,700 shares of SIL during June 1999 to August 1999 it acquired shares constituting more than 5% of the paid up capital of SIL. For making such acquisition, the appellant was liable to make public announcement as required by Regulation 11(1) of the Regulations of 1997.

Since the appellant failed to do so, the Whole Time Member of SEBI held it guilty and on 27th January 2004 directed the appellant to make open offer and pay interest @15% p.a. from October 28, 1999 till the date of actual payment of consideration.

In appeal before Securities Appellate Tribunal (SAT) it was argued that KIL had not acquired 5% or more than 5% shares or voting rights in respect of shares of SIL at any point of time in the period of 12 months. He submitted that out of 11,36,700 shares which were purchased during June, 1999 to August, 1999 during the same period KIL also sold number of shares of SIL. And determining the shareholding of a person without netting off would give a distorted picture. And therefore the provisions of Takeover Code did not trigger. However, SAT disagreed.

In appeal from SAT, before Supreme Court also it was contended that SEBI failed to consider that the appellant was not only a promoter having more than 15% shares of SIL but it was also in the business of sale and purchase of shares which was being done simultaneously and hence exceeding the limit of 5% at any one point of time was immaterial unless on a net accounting it could be found that such ceiling of 5% had been violated by appellant on account of its retaining more than 5% shares of SIL at the end of a financial year.

Hon’ble Supreme Court observed “If the plea of appellant will be accepted then an acquirer can keep on violating Regulation 11(1) with impunity on as many occasions as he/it wants and avoid letting the public have the required knowledge through public announcements by simply making subsequent sale or transfer to another entity so as to reduce the so-called net acquisition in a financial year to within 5%. This interpretation will defeat the purpose of Regulation 11(1) and shall also render Regulation 14(1) otiose.”

The concept of permitting creeping acquisitions by permitting not more than 5% of the shares or voting rights in a company limits the period for such acquisition to a financial year ending by 31st March. But such concept does not dilute the requirement of making a public announcement within the time mentioned in Regulation 14(1) if the acquisition even if only once made and divested, is of more than 5% of shares or voting rights in the target company.

Appeal before Supreme Court of KIL failed and directed to pay Rs.50,000/- towards cost to SEBI.