Monday, November 30, 2015

Buy-back price to be disclosed even if promoter is exempt from public announcement under takeover code

SEBI: Where appellant-promotor bought back its shares from State Financial Institution, no public announcement was required as same is being protected under regulation 3 of the SEBI (SAST) Regulations, 1997, however, rate at which shares were bought back had to be disclosed.


a)    In respect of an acquisition which was in excess of 15% of the total shareholding of the Target Company, the appellant neither in the public announcement nor in the letter had disclosed the fact that he and his associates had already bought back the shares of the Haryana State Industrial Development Corporation Limited (‘HSIDC’).

b)   The appellant had vainly and incorrectly attempted to justify his act of non-disclosure by stating that the transaction with HSIDC was protected by Regulation 3, which placed it beyond the ambit of Regulations 10, 11 and 12.

c)   Appellant had also issued post dated cheques towards the purchase consideration for the buy-back of equity of shares held by HSIDC in the Target company which were later on dishonoured.

d)    The appellant contended that the amount deposited with HSIDC via post-dated cheque was not in consideration for the buy-back of shares but were deposited by way of security for the buy-back obligation. Further, the appellant contented that cheques presented had been dishonoured on presentation, the transaction did not culminate in an acquisition.

The Supreme Court rules as under:

1)    Regulation 3 only protects a transaction between a co-promoter and a State financial institution to the extent that for such transaction a public announcement would not be required to be made as provided under Regulations 10, 11 and 12. However, it does not imply that the said transaction is to be protected from the rigours of other Regulations provided for under the Act.

2)    Thus, the transaction between the Appellant and HSIDC would have to be subject to Regulations 16 and 20, and the rate at which the Appellant bought back the shares from HSIDC had to be disclosed in the public announcement.

3)   With regard to appellant’s contention on post-dated cheque, the Apex Court said the post-dated cheques amounted to a promise to pay and that promise would be fulfilled on the date mentioned on the cheque. Thus, this promise to pay amounted to a sale of shares/equity. The subsequent dishonouring of the post-dated cheque would have no bearing on the case.

4)   At the time of making the public announcement the Appellant had bought back the shares of HSIDC by making payment via the said post-dated cheques. Further, as the buy-back was in pursuance of an agreement, there was consensus ad idem. The Appellant had subsequently shirked his responsibility and had tried to slither away from honouring the agreement, which he could not be allowed to gain from, as is established by the legal maxim commodum ex injuri su non habere debet.

5)    Under Regulation 2 clause (1) Sub-clause (a)- ‘acquisition’ means directly or indirectly acquiring or agreeing to acquire shares or voting rights in, or control over, a Target Company. This definition clarifies that an acquisition takes place the moment the acquirer decides or agrees to acquire, irrespective of the time when the transfer stands completed in all respects. The definition clarifies that the actual transfer need not be contemporaneous with the intended transfer and can be in future. - A.R. DAHIYA v. Securities Exchange Board of India [2015] 63 332 (SC) 

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