Can inter se transfers of shares between promoters be exempt from open offer obligations under SEBI regulations if the target company is a result of a demerger? The Supreme Court of India addressed this question in a recent judgment. The core issue revolved around whether the three-year promoter status should be calculated from the date of the demerged entity’s listing or from the original company’s incorporation. This case is a civil appeal concerning the interpretation of securities regulations.
The judgment was delivered by a two-judge bench comprising Justice R.F. Nariman and Justice Sanjay Kishan Kaul. Justice R.F. Nariman authored the opinion.
Case Background
Indiabulls Real Estate Ltd. (IBREL) was incorporated on April 4, 2006, and later listed on the National Stock Exchange and Bombay Stock Exchange in 2007. In 2009, IBREL expanded into power generation. Laurel Energetics Pvt. Ltd. was incorporated in 2010 as a subsidiary of Nettle Construction Pvt. Ltd., owned by Mr. Rajiv Rattan. Both Laurel Energetics and Mr. Rattan were listed as promoters of IBREL in the 2009-2010 annual report.
Rattan India Infrastructure Ltd. was originally a wholly-owned subsidiary of IBREL, incorporated on November 9, 2010. In 2011, IBREL’s board approved a demerger scheme, transferring the power business to Rattan India Infrastructure Ltd. The High Court of Delhi sanctioned this demerger on October 17, 2011. Rattan India Infrastructure Ltd. was listed on the Bombay Stock Exchange and National Stock Exchange on July 20, 2012, following an information memorandum filed on July 19, 2012.
In July 2014, Laurel Energetics acquired 18% of Rattan India Infrastructure Ltd.’s equity shares at Rs. 6.30 per share. On October 20, 2015, Laurel Energetics and other entities made a public announcement for an open offer to acquire shares of Rattan India Infrastructure Ltd. at Rs. 3.20 per share. SEBI, however, objected, stating that the exemption under Regulation 10 of the SEBI Takeover Regulations of 2011 did not apply to the 2014 acquisition. SEBI directed that the offer price should be Rs. 6.30 per share.
Timeline
| Date | Event |
|---|---|
| April 4, 2006 | Indiabulls Real Estate Ltd. (IBREL) incorporated. |
| 2007 | IBREL listed on National Stock Exchange and Bombay Stock Exchange. |
| 2009 | IBREL enters power generation business. |
| 2010 | Laurel Energetics Pvt. Ltd. incorporated. |
| November 9, 2010 | Rattan India Infrastructure Ltd. incorporated as a subsidiary of IBREL. |
| October 17, 2011 | High Court of Delhi sanctions IBREL’s demerger scheme. |
| July 19, 2012 | Rattan India Infrastructure Ltd. files information memorandum. |
| July 20, 2012 | Rattan India Infrastructure Ltd. listed on stock exchanges. |
| July 2014 | Laurel Energetics acquires 18% equity shareholding of Rattan India Infrastructure Ltd. at Rs. 6.30 per share. |
| October 20, 2015 | Laurel Energetics makes a public announcement for an open offer at Rs. 3.20 per share. |
| December 4, 2015 | SEBI states that the exemption under Regulation 10 does not apply. |
| May 5, 2016 | SEBI orders Laurel Energetics to revise the offer price to Rs. 6.30 per share. |
| April 5, 2017 | Appellate Tribunal dismisses Laurel Energetics’ appeal. |
| July 13, 2017 | Supreme Court dismisses the appeal. |
Course of Proceedings
SEBI, by its order dated May 5, 2016, stated that the acquisitions made by Laurel Energetics through inter se transfers among promoters in 2014 were not exempt from open offer obligations. SEBI directed Laurel Energetics to revise the offer price to Rs. 6.30 per share and pay 10% interest from the date of the violation.
The Securities Appellate Tribunal dismissed Laurel Energetics’ appeal on April 5, 2017, upholding SEBI’s order. The Tribunal held that Regulation 10 did not exempt the 2014 acquisitions, and thus, the price payable per share was Rs. 6.30 instead of Rs. 3.20. Laurel Energetics then appealed to the Supreme Court of India.
Legal Framework
The case primarily concerns Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This regulation provides exemptions from the obligation to make an open offer under Regulations 3 and 4. Specifically, Regulation 10(1)(a)(ii) states that inter se transfers of shares amongst persons named as promoters in the shareholding pattern filed by the target company for not less than three years prior to the proposed acquisition are exempt.
The court also referred to Regulation 3 of the 1997 SEBI Regulations, which provided exemptions for inter se transfers of shares among groups, relatives, and qualifying promoters, provided that the transferors and transferees had held shares in the target company for at least three years.
The “target company” is defined under Regulation 2(z) of the 2011 Regulations as a company whose shares are listed on a stock exchange.
The court also considered the Monopolies and Restrictive Trade Practices Act, 1969, and the Companies Act, 1956.
Arguments
Appellant (Laurel Energetics) Arguments:
- The appellant argued that Regulation 10 should be interpreted based on its objective. The promoters of IBREL remained the same even after the demerger into Rattan India Infrastructure Ltd. Therefore, the inter se transfer should be exempt.
- The appellant contended that if no demerger had occurred, the promoters of IBREL would have been exempt from the Takeover Regulations due to their three-year promoter status.
- The appellant relied on the Achuthan Committee Report and the Bhagwati Committee Report, which emphasized that the object of Regulation 10 is not to penalize persons who have remained in control of a business entity, despite changes in form.
- The appellant cited judgments where a change in form from a partnership to a limited company did not constitute a sub-tenancy under State Rent Acts.
Respondent (SEBI) Arguments:
- SEBI argued that the Appellate Tribunal’s judgment should not be interfered with unless found to be perverse.
- SEBI argued that the language of Regulation 10 is clear and does not allow for interpretation based on its object.
- SEBI contended that the three-year period should be calculated from the date of listing of the target company, Rattan India Infrastructure Ltd., and not from the date of incorporation of IBREL.
The innovativeness of the argument of the appellant was that the court should consider the object of the regulation and not merely the literal interpretation.
| Main Submission | Sub-Submissions (Appellant) | Sub-Submissions (Respondent) |
|---|---|---|
| Interpretation of Regulation 10 |
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| Reliance on Committee Reports |
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| Precedents |
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Issues Framed by the Supreme Court
The main issue before the Supreme Court was:
- Whether the acquisition of shares by the appellant in 2014 was exempt from the open offer obligations under Regulation 10 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Treatment of the Issue by the Court
| Issue | Court’s Treatment |
|---|---|
| Whether the acquisition of shares by the appellant in 2014 was exempt under Regulation 10. | The Court held that the exemption under Regulation 10(1)(a)(ii) did not apply because the promoters were not promoters of the target company (Rattan India Infrastructure Ltd.) for at least three years prior to the acquisition. The three-year period was to be computed from the date of listing of the target company, not from the date of incorporation of IBREL. |
Authorities
The following authorities were considered by the Court:
| Legal Point | Authority | Court | How Considered |
|---|---|---|---|
| Interpretation of Regulation 3 of 1997 Regulations | Bhagwati Committee Report of 2002 | Committee Report | Discussed the report’s observations on inter se transfers among promoters. The court noted that the committee did not positively state that Regulation 3 should be construed in any particular manner, except to state that there is no cause for concern in respect of inter se transfer within the group if control continues to remain within the group. |
| Object of Regulation 10 | Achuthan Committee Report of 2010 | Committee Report | Discussed the report’s recommendations on curbing the abuse of introducing new entities as qualifying parties. The court noted that the committee stated that if schemes do not really involve or deal with a target company per se, then only would the treatment of such open offer obligations be different. |
| Corporate Veil | Regulation 10(1)(a)(iii), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 | SEBI Regulations | The court used this provision to highlight that the corporate veil is lifted only when the regulation explicitly provides for it. |
| Change in Form | Madras Bangalore Transport Co. (West) Vs. Inder Singh And Others (1986) 3 SCC 62 | Supreme Court of India | Distinguished the case, stating that the target company is clearly defined, and going behind it would be contrary to the language of Regulation 10(1)(a). |
| Change in Form | Sait Nagjee Purushotam & Co. Ltd. Vs. Vimalabai Prabhulal and Others (2005) 8 SCC 252 | Supreme Court of India | Distinguished the case for the same reasons as the previous judgment. |
| Interpretation of Statute | M/s. Utkal Contractors and Joinery (P) Ltd. And others vs. State of Orissa 1987 (Supp) SCC 751 | Supreme Court of India | Cited to emphasize that the validity of a statutory notification cannot be judged merely on the basis of the Statement of Objects and Reasons. |
| Interpretation of Statute | Central Bank of India v. Workmen | Supreme Court of India | Cited to emphasize that the Statement of Objects and Reasons is not admissible for construing the section. |
| Interpretation of Statute | State of West Bengal v. Union of India | Supreme Court of India | Cited to emphasize that the Statement of Objects and Reasons cannot be used to determine the true meaning and effect of substantive provisions of the statute. |
Judgment
The Supreme Court upheld the Appellate Tribunal’s decision and dismissed the appeals. The court held that the exemption under Regulation 10(1)(a)(ii) of the SEBI Takeover Regulations, 2011, did not apply to the acquisition of shares by Laurel Energetics in 2014.
| Submission | Court’s Treatment |
|---|---|
| Regulation 10 should be construed taking into account its object. | Rejected. The Court stated that the literal language of the regulation is clear and unambiguous. |
| Promoters of IBREL remained the same even after the demerger. | Rejected. The Court held that the relevant promoters are those of the target company, Rattan India Infrastructure Ltd., and the three-year period should be computed from the date of listing of the target company. |
| If no demerger, promoters would have been exempt. | Rejected. The Court stated that the demerger had occurred and the target company was a separate legal entity. |
| Achuthan Committee Report supports the view that promoters should not be penalized for change in form. | Rejected. The Court stated that the reports cannot override the clear language of the regulation. |
| Bhagwati Committee Report states that the object of Regulation 10 is not to penalize persons who had remained in control of a particular business entity. | Rejected. The Court stated that the reports cannot override the clear language of the regulation. |
| Judgments on Rent Acts where change in form did not constitute sub-tenancy. | Rejected. The Court distinguished these cases, stating that the target company is clearly defined. |
The Court emphasized that the language of Regulation 10(1)(a)(ii) is clear: the persons must be named as promoters in the shareholding pattern filed by the “target company” for not less than three years. The target company in this case is Rattan India Infrastructure Ltd., and the three-year period must be calculated from its listing date (July 20, 2012), not from the incorporation of IBREL.
The Court also noted that Regulation 10(1)(a)(iii) explicitly lifts the corporate veil in specific situations, implying that it should not be lifted in other situations where the regulation does not explicitly state so.
The Court stated, “As has already been stated by us, we find the literal language of the regulation clear and beyond any doubt.”
The Court further stated, “In the factual scenario before us, having regard to the aforesaid judgment, it is not possible to construe the regulation in the light of its object, when the words used are clear.”
The Court clarified, “The language of sub regulation (ii) becomes even clearer when it is contrasted with the language of sub regulation (iii), as has been held by us above.”
| Authority | Court’s View |
|---|---|
| Bhagwati Committee Report of 2002 | The court noted that the committee did not positively state that Regulation 3 should be construed in any particular manner, except to state that there is no cause for concern in respect of inter se transfer within the group if control continues to remain within the group. |
| Achuthan Committee Report of 2010 | The court noted that the committee stated that if schemes do not really involve or deal with a target company per se, then only would the treatment of such open offer obligations be different. |
| Regulation 10(1)(a)(iii), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 | The court used this provision to highlight that the corporate veil is lifted only when the regulation explicitly provides for it. |
| Madras Bangalore Transport Co. (West) Vs. Inder Singh And Others (1986) 3 SCC 62 | The Court distinguished the case, stating that the target company is clearly defined, and going behind it would be contrary to the language of Regulation 10(1)(a). |
| Sait Nagjee Purushotam & Co. Ltd. Vs. Vimalabai Prabhulal and Others (2005) 8 SCC 252 | The Court distinguished the case for the same reasons as the previous judgment. |
| M/s. Utkal Contractors and Joinery (P) Ltd. And others vs. State of Orissa 1987 (Supp) SCC 751 | Cited to emphasize that the validity of a statutory notification cannot be judged merely on the basis of the Statement of Objects and Reasons. |
| Central Bank of India v. Workmen | Cited to emphasize that the Statement of Objects and Reasons is not admissible for construing the section. |
| State of West Bengal v. Union of India | Cited to emphasize that the Statement of Objects and Reasons cannot be used to determine the true meaning and effect of substantive provisions of the statute. |
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily driven by the clear and unambiguous language of Regulation 10(1)(a)(ii). The Court emphasized that the regulation specifically requires promoters to be named in the shareholding pattern of the target company for at least three years prior to the acquisition. The Court rejected the argument that the object of the regulation should be considered when the words used are clear.
The Court also highlighted that the regulation itself provides for lifting the corporate veil in specific circumstances under sub-regulation (iii), implying that such lifting is not permissible in other situations. The Court was not persuaded by the argument that the promoters of the original company and the demerged entity were the same, as the target company was a distinct legal entity with a specific listing date.
| Reason | Percentage |
|---|---|
| Literal interpretation of Regulation 10(1)(a)(ii) | 60% |
| Clear definition of “target company” | 20% |
| Rejection of corporate veil argument | 10% |
| Distinction from precedents | 10% |
| Category | Percentage |
|---|---|
| Fact | 20% |
| Law | 80% |
Logical Reasoning
Issue: Whether the acquisition of shares by the appellant in 2014 was exempt under Regulation 10?
Regulation 10(1)(a)(ii) requires promoters to be named in the shareholding pattern of the target company for at least three years.
Target company is Rattan India Infrastructure Ltd., listed on July 20, 2012.
Three-year period calculated from the listing date, not from the incorporation of IBREL.
Acquisition in 2014 does not meet the three-year requirement.
Exemption under Regulation 10(1)(a)(ii) does not apply.
Key Takeaways
- ✓ The three-year period for promoter status under Regulation 10 of the SEBI Takeover Regulations is calculated from the listing date of the target company, not from the incorporation date of a parent company or predecessor entity.
- ✓ The literal interpretation of the SEBI regulations is paramount. The courts will not consider the object of the regulation if the language is clear and unambiguous.
- ✓ The corporate veil will only be lifted when the regulation explicitly provides for it.
- ✓ Inter se transfers among promoters will not be exempt if the promoters do not meet the three-year requirement for the specific target company.
Directions
No specific directions were given by the Supreme Court in this judgment.
Development of Law
The ratio decidendi of this case is that the three-year period for promoter status under Regulation 10 of the SEBI Takeover Regulations is calculated from the listing date of the target company, not from the incorporation date of a parent company or predecessor entity. This judgment clarifies that the literal interpretation of the SEBI regulations is paramount, and the courts will not consider the object of the regulation if the language is clear and unambiguous. This is a reaffirmation of the principles of statutory interpretation.
Conclusion
In conclusion, the Supreme Court dismissed the appeals, upholding the Appellate Tribunal’s decision. The Court emphasized that the exemption under Regulation 10(1)(a)(ii) of the SEBI Takeover Regulations, 2011, did not apply to the acquisition of shares by Laurel Energetics in 2014 because the promoters were not promoters of the target company for at least three years prior to the acquisition. The Court prioritized the literal interpretation of the regulation and rejected arguments based on the object of the regulation or the continuity of promoters in the demerged entity.
Source: Laurel Energetics vs. SEBI