NIRMA INDUSTRIES LTD. & ANR. v. SECURITIES & EXCHANGE BOARD OF INDIA

A SRMTL Company was recently faced with poor financial performance;

Stated reasons for the aforesaid poor performance and negative net worth was: 8 (i) Low volume of sales and products;

(ii) Reduced price and lower realization;

(iii) Working capital constraints; c (iv) Higher unabsorbed fixed costs.

Certain Litigations as stated in the Letter of Offer were pending."

0 62. The facts which could not have been known even after due diligence are stated to be as under: "Finding of special investigative audit by M/s. RC.Sharma & Co., Chartered Accountants as contained in the three reports; E Unexplained shortfall of cash - cash being siphoned by those in management.

Issuance of warrants to Pan Emami Cosmed Ltd in concert with Emami's promoters with a view to fraudulently siphon F Rs.2.74 Crores.

Promoters fraudulently appropriating money by sale of goods to Emami Ltd by creating charge on trade receivables. G Siphoning of Rs.SO Crores by promoters/directors of SRMTL through related party transactions "by creating a fictitious asset procurement case and subsequently creating false grounds of writing off the same amount in the books of the Company".

NIRMA INDUSTRIES LTD. v. SECURITIES & EXCHANGE 713 BOARD OF INDIA [SURINDER SINGH NIJJAR, J.] Rs. 143 Crores of "huge contingent liability is not disclosed in Balance Sheet as on 31.03.2005.

Systematic embezzlement and siphoning of funds by promoters director of more than 326 Crores by fraudulent transactions." · B

63Copy pinpoint63. On the basis of the aforesaid, Mr. Shyam Divan submitted that the conclusion recorded by the SEBI which has been upheld and approved by SAT is without any factual basis.

64Copy pinpoint64. Mr. Shyam Divan, relyi·1g on Regulation 3A which c prohibits dealing in securities of a target company if a person has access to price sensitive information, submitted that if the appellants were privy to the contents of the Kalyaniwala and Sharp Reports it would have been precluded from invoking the pledges, as such action would constitute "dealing in securities". D It is also submitted by Mr. Shy~m Divan that the expression "due diligence" does not mean that the party has to assume the role of amateur detective, nor is the party obliged to make any enquiries unless it can be established that there existed any circumstances which should have aroused any suspicion. It is E also submitted that the law laid down in Marfani and Co. Ltd. vs. Midland Bank Ltd. 15 and Indian Overseas Bank vs. Industrial Chain Concem 16 which enumerates the benchmark or standards accepted from a party while performing the due diligence should be taken into account. F

65Copy pinpoint65. We are not much impressed by any of the submissions made by Mr. Shyam Divan on this issue. Admittedly, the appellants were aware of the litigation against Shree Ram Multi Tech Limited and its Directors. The litigation commenced in the year 2003 i.e. before the public announcement made by the G appellants. In fact, the letter of offer itself refers to the pending litigation by and against the target company and its directors.

15. 1968 (2) All E.R. 573.

16. 1990 1 sec 484. H

714 SUPREME COURT REPORTS [2013] 3 S.C.R.

66Copy pinpoint66. In Paragraph 4.17 of the said letter, the appellants mentioned the cases filed by Banks and Financial Institutions; Cases/Appeals filed by SRMTL against Banks and financial Institutions; Cases filed by the Registrar of Companies in the Court of Additional Chief Metropolitan Magistrate, Ahmedabad s in the matter of non payment of dividend under Section 205 of the Companies Act, 1956 and the application filed by the company against Registrar of Companies, Gujarat in Gujarat High Court in this matter under Section 482 of the Criminal Procedure Code. The list also mentions a case filed in the City c Civil Court, Ahmedabad by two commercial entities involving a sum of Rs.14275.47 lacs in the matter of recovery of dues and alleged claim for damages. The litany of cases also includes an appeal of SRMTL and its directors before the SAT against an order of SEBI dated 6th September, 2004 restraining the company and few of its directors from accessing 0 the securities market and prohibiting from buying, selling and dealing in securities, directly or indirectly, for a period of five years on the charge of having violated sections 11 and 13 of the SEBI Regulations, 2003. There were six cases pending against the target company in the Labour Court, Kaloi, (Gujarat) by ex-employees of the Company in the matter of their dues and compensation. There were cases pending in relation to Central Excise. In one case, CEGAT had passed an order on 25th February, 2004 claiming duty of Rs.101.81 lacs, fine of Rs.2 lacs and penalty of Rs.0.20 lacs. Excise duty authorities have in various cases raised a demand on target company for an aggregate sum of Rs.145.90 lacs towards excise duty and Rs.97.02 lacs towards penalty for various offences. Similarly, excise duty of Rs.1317.65 lacs was demanded as a result of a raid by the Intelligence Officer, Central Excise, Ahmedabad G for non-accounted raw materials. Undoubtedly, the appeals were pending in the higher fora in a number of cases. Nonetheless any reasonable investor/group of investors/ consortium would have come to a conclusion that investing in this entity would not be a prudent decision. H

NIRMA INDUSTRIES LTD. v. SECURITIES & EXCHANGE 715 BOARD OF INDIA [SURINDER SINGH NIJJAR, J.]

67Copy pinpoint67. Taking into account the aforesaid state of affairs, SAT A has concluded as follows:-

''The above facts would seem to be enough to provide the appellants a correct prognosis regarding the financial health and prospects of the target company. Clearly, the 8 appellants decided on invoking the pledge on the shares of the target company with open eyes and sufficient knowledge about the affairs of the target company. It is not as if the appellants were innocent and were caught napping in an unexpected turn of events. We are not, therefore, inclined to accept at its face value the argument of the appellants that they had no prior clue about the adverse financial information relating to the target company and were contained in the later reports of the Chartered Accountants. In this view of the matter, the Board was justified in characterizing the situation that the appellants are faced with as the result of lack of due diligence and/or sheer business misfortune. They are only trying to wriggle out of a bad bargain which is not permissible under Regulation 27(1) (d) of the takeover code." E

68Copy pinpoint68. The aforesaid conclusion reached by SAT, in our opinion, does not call for any interference.

69Copy pinpoint69. We are inclined to agree with the submission made by Mr. Venugopal that the appellants can.not be permitted to wriggle out of the obligation of a public offer under the Takeover Regulation. Permitting them to do so would deprive the ordinary shareholders of their valuable right to have an exit option under the aforesaid regulations. The SEBI Regulations are designed to ensure that public announcement is not made by way of speculation and to protect the interest of the other shareholders. Very solemn obligations are cast on the merchant banker under Regulation 24(1) to ensure that -

(a) the acquirer is able to implement the offer; H

716 SUPREME COURT REPORTS [2013] 3 S.C.R.

A (b) the provision relating to Escrow account referred to in Regulation 28 has been made;

(c) firm arrangements for funds and money for payment through verifiable means to fulfil the obligations under the offer are in place;

(d) the public announcement of offer is made in terms of the Regulations;

(e) his shareholding, if any in the target company is c disclosed in the public announcement and the letter of offer.

70Copy pinpoint70. Regulation 24(2) mandates that the merchant banker shall furnish to the Board a due diligence certificate which shall accompany the draft letter of offer. The aforesaid regulation clearly indicates that any enquiries and any due diligence that has to be made by the acquirer have to be made prior to the public announcement. It is, therefore, not possible to accept the $Ubmission of Mr. Shyam Divan that the appellants are to be permitted to withdraw the public announcement based on the discovery of certain facts subsequent to the making of the public announcement. In such circumstances, in our opinion, the judgments cited by Mr. Shyam Divan are of no relevance.

Delay: F

71Copy pinpoint71. Mr. Shyam Divan has also indicated that it was because of the unexplained delay of 8 months on the part of SEBI to process the Letter of Offer of the appellants that the prices for the shares of the target company went down from Rs. 18.60 to Rs. 8.56, during this period. This would impose huge financial liability on the appellants. This submission is also wholly misconceived. The submission was not made before SAT and it has been raised for the first time, in the submissions made by Mr. Shyam Divan. In fact, the ground is not even pleaded in the grounds of appeal. The submission is mentioned only in the list of dates. Since, we are considering a statutory

NIRMA INDUSTRIES LTD. v. SECURITIES & EXCHANGE 717 BOARD OF INDIA [SURINDER SINGH NIJJAF<, J.] appeal under Section 15Z of the SEBI Act, the same cannot be permitted to be raised in this Court for the first time, unless · the submission goes to the very root ofthe matter. This apart, even on merit, we find that the submission is misconceived. Regulation 18(1) and (2) of the SEBI Takeover Code reads thus:- B

18. Submission of letter of offer to the Board -

(1) Within fourteen days from the date of public announcement made under regulation 10, 11 or 12 as the case may be, the acquirer shall, through its merchant C banker, file with the Board, the draft of the letter of offer containing disclosures as specified by the Board.

(2) The letter of offer shall be dispatched to the shareholders not earlier than 21 days from its submission 0 to the Board under sub-regulation (1):

Provided that if, within 21 days from the date of submission of the letter of offer, the Board specifies changes, if any, in the letter of offer (without being under any obligation to do so), the merchant banker and the acquirer shall carry out such changes before the letter of offer is dispatched to the shareholders :

[Provided further that if the disclosures in the draft letter of offer are inadequate or the Board has received any complaint or has initiated any enquiry or investigation in respect of the public offer, the Board may ca1I for revised letter of offer with or without rescheduling the date of opening or closing 9f the offer and may offer its comments to the revised letter of offer within seven working days of filing of such revised letter of offer.]"

72Copy pinpoint72. A perusal of the aforesaid regulation clearly shows that the acquirer is required to file the draft letter of offer containing disclosures as specified by the Board within a period of 14 H

718 SUPREME COURT REPORTS [2013] 3 S.C.R.

A days from the date of public announcement. Thereafter, letter of offer has to be dispatched to the shareholders not earlier than 21 days from its submission to the Board. Within 21 days, the Board is :equired to specify changes if any, that ought to be made in the letter of offer. The merchant banker and the B acquirer have then to carry out such changes before the letter of offer is dispatched to the shareholders. But there is no o.bligation to do so. Under the second proviso, the Board may call for revised letter of offer in case it finds that the disclosures in the draft letter of offer are inadequate or the Board has c received any complaint or has initiated any enquiry or investigation in respect of the public offer. It is important to notice that in the first proviso the Board does not have any obligation to specify any change in thf:l draft letter of offer within a period of 21 days. In the present case, in fact, the Board had not specified any changes within 21 days. We have already noticed earlier that the lett~r of offer was lacking and deficient in detail. The appellants themselves were taking time to submit details called for, by their merchant bankers through various letters between 08.08.2005 to 20.3.2006. We have already noticed the repeated advice given by the merchant banker to enhance the issue size of the open offer and to comply with other requirements of the Takeover Regulations. The appellants, in fact, were prevaricating and did not agree with the interpretation placed on Regulation 27(1) (d) by the Merchant Banker. We, therefore, reject the submission of Mr. Shyam F Divan that there was delay on the part of SEBI in approving the draft letter of offer.

Court mav direct fresh valuation:

73Copy pinpoint73. Lastly, Mr. Shyam Divan has submitted that even if the G appellants were not to be permitted to withdraw the public offer, the Court ought to appoint an independent valuer and direct a fresh valuation to be made on the basis of principles contained in Regulation 20(5) of the Takeover Regulations. Such a valuation, according to Mr. Shyam Divan, would be justified in H

NIRMA INDUSTRIES LTD. v. SECURITIES & EXCHANGE 719 BOARD OF INDIA [SURINDER SINGH NIJJAR, J.] the light of the foregoing submissions. We are not at all A impressed by the aforesaid submission. The formula given in Regulation 20 would have no applicability in the facts and circumstances of this case. The determination of the lowest price under Regulation 20 would be at a stage prior to the making of the public announcement and not thereafter. B

74Copy pinpoint74. In view of the aforesaid, we find no merit in the appeal and it is accordingly dismissed.

R.P. Appeal dismissed.