IMPORTANT POINT
Regulation 44 of Securities and Exchange Board of India Regulations confers a power upon the Board to issue directions also in the interest of the investors which would include a direction to pay interest.

Headnote:Securities and Exchange Board of India Act, 1992-Sections 11, 11B and 157-Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 1997-Regulation 44-Interest payable to shareholders-Discretionary jurisdiction of Securities and Exchange Board of India-Agreement entered into by and between German and appellant company, a Swiss company-In Ebito company, a Swiss company appellant held 49 and Germany company 51 shares-Colour Chem Ltd. is a target company-Its shares are listed on Bombay Stock Exchange and National Stock Exchange-German Speciality Chemicals business was transferred to appellant company by transferring 583708 equity shares of Rs. 100/- each of the target company-Appellant sought for an exemption from compliance of requirements of making open offer to shareholders of target company-Exemption not granted-German company decided to sell off shares held by it in target company to a Swiss company which was floated as a special purpose vehicle-Ebito by reason of such transfer became a 100 subsidiary of appellant company-Complaint filed alleging violation of Regulations-Upon an enquiry it was revealed that acquirer had actually acquired control over the target company-Dispute regarding rate of interest for delay involved in making payment to shareholders.
       Held : Section 11 of the Act provides that it shall be the duty of the Board to protect the interest of investors in securities. Regulation 44 of 1997, however, empowered the Board to issue directions only in the interest of the securities market. The expression "in the interest of the investors" did not occur therein. Regulation 44 of 2002 Regulations, thus, confers a wider power upon the Board. The said power is without prejudice to its right to initiate action under Chapter VIA and Section 24 of the Act which deals with offences. Regulation 44 of 2002 Regulations, furthermore, empowers the Board to issue directions both in the interest of the securities market as well as for protection of interest of investors. Such directions may be issued in its discretion. It, however, in its discretion may or may not issue such directions. Regulation 44(i) of Regulations, therefore, confers a power upon the Board to issue directions also in the interest of the investors which would include a direction to pay interest. A direction in terms of Regulation 44 which was in the interest of securities market indisputably would have caused civil or evil consequences on the defaulters. Clause (i) of Regulation 44, however, does not provide for any penal consequence. It provides for only a civil consequence. By reason of the said provision, the power of the Board to issue directions is sought to be restricted to pay the amount consideration together with interest at the rate not less than the interest payable by banks on fixed deposits. Both the Board and the Tribunal have proceeded on the basis that the interest is to be paid with a view to recompense the shareholders are not by way of penalty or damages. Such a direction, therefore, was for the purpose of protecting the interest of investors and not "in the interest of the securities market". The transactions in the market are not thereby affected one way or the other. The Board, as noticed hereinbefore, has a discretion in the matter and, thus, it may or may not issue such a direction. The shareholders do not have any say in the matter. As a necessary concomitant, they have no legal right. The Board further having a discretionary jurisdiction must exercise the same strictly in accordance with law and judiciously. Such discretion must be a sound exercise in law. The discretionary jurisdiction, it is well-known, although may be of wide amplitude as the expression "as it deems fit" has been used but in view of the fact that civil consequence would ensue by reason thereof, the same must be exercised fairly and bona fide. The discretion so exercised is subject to appeal as also judicial review, and, thus, must also answer the test of reasonableness. (Paras 24 to 26)
       By reason of Regulation 44, as substituted in 2002, the discretionary jurisdiction of the Board is curtailed. It in terms of Regulations 1997 could award interest by way of damages but by reason of Regulation 2002, its power is limited to grant interest to compensate the shareholders for the loss suffered by them arising out of the delay in making the public offer. The courts of law can take judicial notice of both inflation as also fall in bank rate of interest. The bank rate of interest both for commercial purpose and other purposes had been the subject-matter of statutory provisions as also the judge-made laws. (Para 36)
       While awarding interest, it is required to bear in mind that interest would be payable on the maximum price of the share which was Rs. 318/- and not on Rs. 220/- which was not the prevailing price in 1998, as a result whereof not only a shareholder would be getting a higher price but would also be getting interest thereupon. (Para 46)
       While calculating the amount of interest, the amount of dividend paid to the shareholders should be excluded. The shareholders who by reason of default on the part of acquirer have been deprived of interest payable on the difference of the offer price and market price would be entitled to interest as direction to pay interest being not penal in nature, they cannot make double gains. The Tribunal, in our opinion, has committed an error in holding that the dividend being a participatory benefit available to a shareholder and being distinct from interest, the same should not be taken into consideration. The regulation fixes a benchmark as regard rate of interest. If any amount has been received by the shareholders by keeping the shares till a public offer was made, the amounts so received by him by way of dividend should be set off. We would reiterate that the shareholders did not have any right to get interest and in effect and substance they were only to be compensated for the loss of interest and nothing more. On the same analogy, if they had received some gains by holding the shares fairly for a long period of five years, the amount of dividend cannot be permitted to be retained by them. The amount of dividend should, thus, be adjusted towards the interest payable to them. We, therefore, direct, having regard to the peculiar facts and circumstances of the case, that the interest of justice would be sub-served, if the rate of interest is directed to be paid @ 10 per annum from March 1998 till 2003. The interest at the rate of 10 per annum is directed in stead and place of normal 9 having regard to the fact that the Appellants themselves in their Memorandum of Appeal filed before the Tribunal had contended that the Board should have granted interest at the rate of 10 per annum instead of 15 . If any dividend was paid during the said period, the same shall be adjusted with the amount of interest. (Paras 84 to 87)

JUDGMENT

S.B. Sinha, J.-These appeals under Section 157 of the Securities and Exchange Board of India Act, 1992 (for short, the said Act ) arise out of a judgment and order dated 21.02.2003 passed by the Securities Appellate Tribunal, Mumbai (for short, the Tribunal ) in Appeal No. 114 of 2002.

BACKGROUND FACTS :

2. Colour Chem Ltd. is a target company. Its shares are listed on the Bombay Stock Exchange and National Stock Exchange. Appellant No.1 (Clariant) in Civil Appeal No. 3183 of 2003 is a Swiss company being subsidiary of another Swiss company, Clariant AG. Hoechst is a German company whereas Ebito Chemiebeteiligungen AG (Ebito) is a Swiss company. In Ebito Clariant held 49 and Hoechst 51 shares. An agreement was entered into by and between Hoechst and Clariant pursuant whereto and in furtherance whereof German Specialty Chemicals business was transferred to the latter by transferring 583708 equity shares of Rs. 100/- each of the target company. On or about 21.11.1997, with a view to give effect to the said agreement, Clariant sought for an exemption from compliance of the requirements of making open offer to the shareholders of the target company in terms of the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short, the Regulations). Such exemption, however, was not granted. Hoechst in the aforementioned situation decided to sell off the shares held by it in the target company to Ebito, a company which was floated on 19.5.2000 as a special purpose vehicle. Actual transfer took place on 13.10.2000. Ebito by reason of the aforementioned transfer became a 100 subsidiary of Clariant.

3. A complaint was received by the Securities and Exchange Board of India (for short, the Board ) to the effect that as by reason of the aforementioned arrangement as 50.1 shares/voting rights and control in the target company had been made without any public announcement, the provisions of the Regulations had been violated. Upon an inquiry made in this behalf, the Board came to the conclusion that the acquirer had actually acquired the control over the target company on 21.11.1997. By reason of an order dated 16.10.2002, the Board directed:

"13.1 In view of the findings made above, in exercise of the powers conferred upon me under sub-section (3) of Section 4 read with Section 11B SEBI Act 1992 read with regulations 44 and 45 of the said Regulations, I hereby direct the Acquirer to make public announcement as required under Chapter III of the said Regulations in terms of regulations 10 & 12 taking 21.11.97 as the reference date for calculation of offer price. The public announcement shall be made within 45 days of passing of this order.

13.2. Further, in terms of sub regulation (12) of regulation 22, the payment of consideration to the shareholders of the Target company has to be made within 30 days of the closure of the offer. The maximum time period provided in the said Regulations for completing the offer formalities in respect of an open offer, is 120 days from the date of public announcement. The public announcement in the instant case ought to have been made taking 21.11.97 as a reference date and thus the entire offer process would have been completed latest by 21.3.98. Since no public announcement for acquisition of shares of the Target company has been made, which has adversely affected interest of shareholders of Target Company, it would be just and equitable to direct the Acquirer to pay interest @ 15 per annum on the offer price, the Acquirer is hereby accordingly directed to pay interest @ 15 per annum to the shareholders for the loss of interest caused to the shareholders from 22.3.98 till the date of actual payment of consideration for the shares to be tendered in the offer directed to be made by the Acquirer."

4. An appeal was preferred thereagainst by the acquirer wherein the primal question raised was the rate of interest for the delay involve

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2004 Supreme(SC) 956

IMPORTANT POINTRegulation 44 of Securities and Exchange Board of India Regulations confers a power upon the Board to issue directions also in the interest of the investors which would include a direction to pay interest.

Cases Referred (25)

IMPORTANT POINT
Regulation 44 of Securities and Exchange Board of India Regulations confers a power upon the Board to issue directions also in the interest of the investors which would include a direction to pay interest.