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WTM/PS/82/CFD-DCR/FEB/2014
SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
In the matter of proposed acquisition of equity shares of Blue Coast Hotels and Resorts
Limited - Application filed under regulation 4(2) of the Securities and Exchange Board of
India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (since
repealed) read with regulation 11(3) of the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011
1. Blue Coast Hotels and Resorts Limited (hereinafter referred to as "the Target Company")
is a company incorporated under the Companies Act, 1956. The registered office of the Target
Company is situated at 263C, Arossim Beach, Cansaulim, Goa-403712. The shares of the Target
Company are listed on the Bombay Stock Exchange Limited (“BSE”) and the National Stock
Exchange of India Limited ("NSE").
2. Securities and Exchange Board of India (hereinafter referred to as "SEBI") received an
application dated October 10, 2009 from Square Investments & Financial Services Private
Limited (hereinafter referred to as "the acquirer" or "the applicant"), represented by its director
Mr. Sushil Suri, and the Persons Acting in Concert ("PACs"), namely,
(i) Brook Investment & Financial Services Private Limited,
(ii) Epitome Holdings Private Limited,
(iii) Liquid Holdings Private Limited,
(iv) Mid-Med Financial Services Private Limited,
(v) React Investment & Financial Services Private Limited,
(vi) Scope Credit & Financial Services Private Limited,
(vii) Solace Investment & Financial Services Private Limited,
(viii) Solitary Investment & Financial Services Private Limited,
(ix) Seed Securities & Services Private Limited,
(x) Mrs. Sunita Suri,
(xi) Mrs. Mamta Suri and
(xii) Sanjay Suri HUF,
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seeking exemption from complying with the provisions of regulations 11(1) of the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as
"the Takeover Regulations") for the proposed acquisition of 1,00,00,000 equity shares of ₹10/-
each of the Target Company by conversion of 40,00,000 fully paid-up 1% Cumulative
Redeemable Preference Shares ("CRPS") of ₹100/- each (30,00,000 CRPS allotted on October
28, 2004 and 10,00,000 CRPS allotted on March 29, 2005).
3. In terms of the application, the acquirer and its PACs are members of the promoter
group of the Target Company. On conversion of the CRPS, the shareholding of the
promoter/promoter group in the Target Company would increase from 44.48% to 73.91%, in
excess of 5% acquisition in a financial year, thereby attracting the obligations under regulation
11(1) of the Takeover Regulations. Therefore, the application was filed under regulation 4(2) of
the Takeover Regulations, seeking exemption from complying with the said obligation on the
following grounds :
(a) The Target Company was incorporated in the year 1992 under the Companies Act, 1956
and having its registered office in Goa. The Target Company is primarily engaged in running a
hotel in the name and style of "Park Hyatt Goa Resort and Spa".
(b) In the course of the implementation of the ‘Park Hyatt Goa’ Project, the Target
Company met with cost overrun due to the product upgradation (from ‘Hyatt Regency’ to ‘Park
Hyatt’) and consequent time overrun as some facilities were to be added or upgraded. This led to
the requirement of additional term loans and interest funding from the lenders of the project.
(c) To fund the Project and the upgradation process and also to meet the Debt-Equity Ratio,
as stipulated by lender Banks, the Promoters of the Company, brought in funds into the Target
Company, in the form of Advanced Subscription. The said advanced subscription of ₹ 40 Crore
was brought in by the Promoters as their contribution to the means of finance to fund the cost of
project i.e. Park Hyatt Goa.
(d) The delay in the commissioning of the Project led to delay in meeting the financial
obligations due to the lender banks and consequent delay in the repayment of loan obligation. In
view of the same, the Target Company had to approach the lender Banks for rescheduling the re-
payment of the loan facilities availed by the Company and eventually the matter was referred to
the Corporate Debt Restructuring ("CDR") Cell constituted under the mechanism set-up under
the aegis of the Reserve Bank of India ("RBI").
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(e) The CDR scheme was sanctioned by the CDR Cell vide their letter No. 946 dated
October 4, 2004 and the State Bank of India (SBI) was appointed as the Monitoring Institution to
oversee the due implementation of the Scheme.
(f) As per the approved CDR Scheme, the Target Company was mandated inter alia for the
following:
(i) The Promoters shall pledge 51% of their shareholding with voting rights to the
lenders.
(ii) The Promoters shall arrange to convert the Advance Subscription of ₹ 40 crore.
(g) However, the said conversion of Advance Subscription Money into Equity Shares could
not be done in view of the subsisting order of the Hon’ble High Court of Delhi, passed in an
Execution Petition filed by a lender against a Group Company of the Target Company, which
restrained the Target Company from increasing or changing its paid-up equity capital from the
level of 65,52,800 equity shares, in any manner . Therefore in view of the said Court Order, as a
temporary measure, the advanced subscription of ₹ 40 Crore was converted into 40,00,000 1%
Cumulative Redeemable Preference Shares (CRPS) of ₹ 100/- each (30,00,000 CRPS allotted on
October 28, 2004 and 10,00,000 CRPS allotted on March 29, 2005).
(h) As the said advanced subscription of ₹ 40 Crore was converted into CRPS as a temporary
measure, the Banks kept on reminding the Company for converting the said CRPS into Equity
shares and after conversion, for pledging the 51% of the resultant equity shares with them, which
the Company could not comply with as the said restraint on the Company was consistently in
force in one form or the other.
(i) The said restraint was finally vacated in totality in October 2008 and the Target Company
decided to go ahead with implementation of the CDR Scheme, approved vide CDR letter no. 946
dated October 4, 2004, after due compliance of all the legal and statutory provisions and
accordingly intended to go for the approval of the Shareholders, for conversion of such CRPS
into Equity Shares, in the first general meeting of the Shareholders after such vacation of
restraint.
(j) While the Target Company was preparing for the due implementation of the CDR
Scheme of October 2004, the Target Company’s revenues suffered setbacks due to the global
recessionary trend and the Mumbai Terrorist Attack. This badly jolted the Company’s position to
repay the instalments and the interest payments under the CDR Scheme. The Target Company,
thus, once again had to approach the CDR Cell for re-phasing of the payment schedule of the
loan instalments and the interest payments. The CDR-EG Cell, while approving the Company’s
request, vide its letter no. BY.CDR/(SB)/No.349/2009-10 dated June 30, 2009, made following
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modifications in the payment schedule of the previous restructuring scheme as approved vide
letter no. 946 dated 4th October 2004:
(i) Deferment of the term loan instalments due for quarter ending March 2009 to
December 2009, along with extension in repayment period. Term Loan to be fully
repaid in March 2014 instead of June 2012.
(ii) Rate of interest was increased from 9% pa to 10.75% pa.
(k) While approving the above said Modifications, the CDR Cell directed the Target
Company inter alia that the terms and conditions of the previous restructuring scheme, as
approved vide letter no. 946 dated October 04, 2004, to remain unchanged and immediate steps
shall be taken for conversion of ₹40 Crore CRPS into Equity Shares apart from the following
terms and conditions. The directions are reiterated below:
(i) The terms and conditions of the previous restructuring scheme will remain
unchanged.
(ii) To take immediate steps for conversion of ₹40 Crore Preference Shares into
Equity Shares by 31st December 2009.
(l) Accordingly, at the Target Company’s Board Meeting held on 28th August 2009, it was
decided that subject to the shareholders’ approval, the Company shall convert the said ₹ 40 Crore
CRPS into Equity Shares. The Target Company has accordingly, at its Annual General Meeting
held on 30th September 2009 obtained the approval of its shareholders for fully implementing
the CDR Scheme by conversion of the said CRPS into equity shares.
(m) As already stated the said amount of Advance Subscription of ₹ 40 Crore was brought in
by the Promoters as part of their contribution to the Project Cost which was intended to be only
equity capital without any preferential rights. This is why the Banks while sanctioning the CDR
Scheme placed a condition that the said advance subscription shall be converted into Equity and
after conversion, the Target Company shall pledge 51% of resultant equity shares with the
lending banks. It may be noted that the said conversion of CRPS into Equity Shares does not
lead to change in the ownership and control of the Target Company as the acquirer and PACs
forms a part of the promoter group and are already in control over the Target Company.
(n) The Target Company has complied with the Regulations for Preferential Allotment
including pricing as prescribed under Chapter VII of the Securities and Exchange Board of India
(Issue of Capital and Disclosure Requirements) Regulations, 2009 ("ICDR Regulations").
Accordingly, the proposed new equity shares shall be locked in as per the Preferential Issue
Regulations.
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(o) After the proposed acquisition of Equity Shares, the minimum public shareholding as
prescribed under clause 40A of the Listing Agreement will be maintained.
(p) In case the said conversion is not allowed it would amount to the default on the part of
the Company and may lead to the recall of the financial assistance given by the Banks/ Lenders
to the Company pursuant to the said CDR Scheme grossly jeopardizing the functioning of the
Company.
(q) As the promoter group of the Target Company holds 39,43,040 equity shares
representing 44.48% of the equity share capital of the target company, they can acquire the above
mentioned 1,00,00,000 equity shares constituting 53.01% of the fully expanded capital of the
Target Company (after the conversion of CRPS) by making a public announcement in terms of
Takeover Regulations. Therefore, the acquirer and its PACs have filed the application seeking an
exemption from the applicability of regulation 11(1) of the Takeover Regulations and other
provisions relating thereto.
4. Pursuant to queries from SEBI, the applicant vide letters dated November 24, 2009,
December 21, 2009, January 18, 2010 and February 09, 2010 inter alia stated that :
(i) As per the CDR Scheme dated October 04, 2004, the promoters were required to convert
the advance subscription of ₹40 crores into equity by September 30, 2004. The said date
of September 30, 2004 was the outcome of the Flash Report based upon which the CDR
Scheme was sanctioned.
(ii) CDR Scheme was approved by the CDR Empowered Group (CDR EG) on September
13, 2004 and conveyed to the Company vide letter dated October 04, 2004.
(iii) The Target Company had a considered view supported by a legal opinion that as per
regulation 3(1)(j) of the Takeover Regulations, if shares are allotted pursuant to a scheme
of arrangement or reconstruction including amalgamation or merger or de-merger under
law or regulation, Indian or Foreign, would be exempt from the provisions of regulation
10, 11 and 12. As an abundant caution and despite having a view that the case falls under
the CDR Scheme, applied to SEBI seeking exemption from the Takeover Regulations.
(iv) However, the applicant had confirmed that its application is made under regulation 3(1)(l)
of the Takeover Regulations.
(v) The equity shares are yet to be allotted on conversion of the CRPS. Details of the
allotment of CRPS and compliance status with the Takeover Regulations were provided.
(vi) One of the associate companies of the Target Company, namely Morepen Laboratories
Limited had availed an Inter Corporate Deposit of ₹ 5 Crore from Morgan Securities &
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Credits Private Limited and that the said entity who advanced such ICDs filed an
execution petition in the Hon’ble High Court of Delhi against Morepen Laboratories
Limited. The Hon’ble High Court of Delhi, vide order dated April 05, 2004, restrained
the Target Company from increasing or changing its paid-up equity capital.
5. The application preferred by the applicant and its PACs was referred to the Takeover
Panel (hereinafter referred to as the "Panel"), in terms of the regulation 4(4) read with 4(5) of the
Takeover Regulations, for making recommendation on the application. The Panel, while
considering the aforesaid proposal in its meeting held on March 15, 2010, observed in its Report
dated March 27, 2010, that the applicants have not provided certain essential information and
hence, advised SEBI to procure the said information and thereafter place the case before the
Panel.
6. Thereafter, SEBI, vide e-mail dated March 15, 2010 and letter dated March 17, 2010,
advised the applicant to confirm and furnish the following :
(a) Details of issue of preference shares to promoters/acquirers/others in the past.
(b) Details of voting rights accrued, if any, to the preference shareholders on account of non-
payment of dividend in terms of Section 87 of the Companies Act, 1956. In the event of
accrual of voting rights as mentioned above, the applicant was asked to furnish the
shareholding pattern of the Target Company prior and after the acquisition of voting
rights along with the details of compliance with relevant provisions of Takeover
Regulations.
(c) To calculate and confirm the price as per regulation 20(4)/(5) of the Takeover
Regulations.
(d) To confirm and furnish the details of all the actions/proceedings against the
promoters/acquirers and PACs along with the status thereof.
(e) To explain as to why they have not disclosed aforesaid details in the instant application.
7. The applicant, in its response dated March 16, 2010 and March 25, 2010, submitted the
following :
(a) The Target Company has issued 41,50,000 10% CRPS of ₹100/- each to the
promoters on October 30, 2002 in addition to the issuances on October 28, 2004 and
March 29, 2005.
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(b) The Target Company, due to non-availability of the surplus funds and the restrictive
covenants contained in the CDR Scheme, did not declare the dividend on the said
preference shares.
(c) Consequent to the above and pursuant to the provisions of Section 87(2)(b)(i) of the
Companies Act, 1956, the holders of 41,50,000 10% CRPS of ₹100/- each became
entitled to vote at all the General Meetings of the Target Company after the date of
the Annual General Meeting held relevant to the financial year ending on September
30, 2004.
(d) The holders of 40,00,000 1% CRPS became entitled to vote at all the General
Meetings of the Target Company after the date of the Annual General Meeting held
relevant to the financial year ending on March 31, 2007.
(e) The fact of entitlement of voting rights is highlighted in the relevant Annual Reports.
(f) The shareholding pattern of the Target Company with and without considering the
voting rights on preference shares as on March 31, 2008 and March 31, 2009.
(g) The calculation of offer price in terms of explanation (i) to regulation 20(5) of the
Takeover Regulations.
(h) On March 10, 2010, SEBI has passed an adjudication order imposing monetary
penalty of ₹3 lacs on certain promoter entities consequent to the increase in their
shareholding on the transfer of shares by the banks on the repayment of loan amount
due to the banks. As the adjudication proceedings were initiated on November 10,
2009, i.e. after the submission of exemption application, no details of the adjudication
proceedings were available with the applicant as on the date of the said exemption
application.
8. SEBI, vide letter dated April 07, 2010, sought further information/details from the
applicant as below :
(a) the details regarding actions (including show cause notices issued) pending against each
acquirer and PACs separately and the status thereof (monetary penalty, if any, imposed by
Adjudicating officer and whether the same was paid or not etc.,) along with brief on each
action.
(b) the complete details regarding the transactions made by the acquirer(s), if any, in the
shares of the Target Company (date of transactions (purchase or sale), price for the
transaction etc.,) from the date of instant exemption application i.e., October 10, 2009
onwards.
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9. The applicant, in its response dated April 16, 2010, submitted that adjudication orders
were passed against React Investment & Financial Services Private Limited, Scope Credit &
Financial Services Private Limited, Seed Securities & Services Private Limited, Epitome Holdings
Private Limited and Liquid Holdings Private Limited by SEBI on March 10, 2010. A penalty of
₹2,00,000/- under Section 15H(ii) and ₹1,00,000/- under Section 15A(b) of the SEBI Act, 1992
was imposed on each of the entities. The penalty was to be paid by April 25, 2010 and the same
was not paid by the entities. Further, from the date of the exemption application, there have
been no transactions in the shares of the Target Company by any of the acquirer and its PACs.
Further, vide e-mail dated May 05, 2010 and a letter of even date, the applicant informed SEBI
that the aforesaid entities have filed an appeal against the adjudication orders before the Hon’ble
SAT on April 28, 2010.
10. SEBI, vide letter dated May 19, 2010 also advised the acquirer to provide the details of
date wise capital build-up, as and when it happened, of the promoters/acquirers collectively as
well as separately in the Target Company from the date of listing onwards as per the enclosed
formats. The applicant was also advised to provide the details regarding pledge/invoke of shares
or preferential issue of shares to other corporate bodies/Banks/financial institutions, if any,
separately. The applicant, in its response dated June 07, 2010, submitted the Date-wise Capital
build-up of the promoters collectively and individually, details of invocation/release of pledged
shares and details of preferential allotment of equity shares.
11. As the acquirer had submitted that appeals were filed and pending before the Hon’ble
SAT, SEBI advised the applicant to submit the final outcome of the appeal(s) and other pending
adjudication/enquiry matters, if any. Pursuant to the same, vide letter dated June 06, 2011, the
acquirer informed SEBI that the Hon’ble SAT, vide its order dated March 11, 2011, upheld the
adjudication orders and dismissed the appeals. The penalty, as imposed by SEBI, was paid in
May 2011.
12. As considerable time had elapsed since the filing of the original exemption application
(which was filed on October 10, 2009) and the latest communication updating the final outcome
of the adjudication proceedings on June 06, 2011, financials and other vital details required to
make a decision in the said matter appeared to be obsolete. Therefore, SEBI vide letter dated July
07, 2011 advised the applicant to file a fresh application seeking exemption.
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13. The applicant and PACs filed their revised application vide letter dated August 26, 2011,
with updated facts/financials and requisite enclosures. The applicant inter alia submitted further
information/documents vide letter dated September 20, 2011, as follows :
(a) Copy of the annual report of the Target Company for the year ended March 31, 2011.
(b) Details of Board of Directors of the Target Company.
(c) Certified true copy of the provisional balance sheet for the year ended March 31,
2011.
14. SEBI, vide letter dated October 04, 2011, had advised the applicant to provide details of
all the allotments of preference shares to the acquirers/promoters as per the given formats,
clearly specifying the status of compliance with the applicable provisions of the Takeover
Regulations under the SEBI Act, 1992 and other statutory requirements, as applicable. The
applicant vide letter dated November 03, 2011, submitted the details of allotments of preference
shares. It was further submitted that the advance subscription brought in by the promoters to
fund the ‘Park Hyatt Goa’ Project was towards the equity contribution and the same was also
reflected in the CDR Scheme dated October 04, 2004 which provided for the conversion of
Advance subscription into equity shares and pledge of 51% promoters’ stake with the lending
banks. However, due to the constraint imposed by the Hon’ble High Court of Delhi on the
Target Company, the Advance Subscription money could not be converted into equity shares and
as an interim measure, the same was converted into CRPS. The exemption application has been
filed for the proposed conversion of the same preference shares into equity shares, after
obtaining due approvals of the preference shareholders as well as equity shareholders of the
Target Company. Copies of the resolutions approved by the preference shareholders at their
meeting held on September 29, 2009 and equity shareholders at the AGM held on September 30,
2009 were also submitted.
15. Thereafter, SEBI, vide letter dated January 16, 2012, advised the applicant to provide
compliance status of the provisions of regulation 71 of SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009 ("the ICDR Regulations"), which was submitted to SEBI on
February 04, 2012.
16. On receipt of the above said information from the applicant, the application was referred
to the Panel for its consideration. The Panel, while considering the aforesaid application in their
meeting held on March 19, 2012, observed that the exemption application referred to the
repealed SEBI (SAST) Regulations, 1997 and returned the same to SEBI with the instruction that
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the applicant may be advised to make the application under the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011 ("the Takeover Regulations, 2011"). SEBI was also
advised to examine if the applicant is entitled to an automatic exemption under regulation 10(2)
of the Takeover Regulations, 2011, as the proposed conversion of preference shares into equity
shares is stated to be pursuant to a CDR Scheme.
17. Thereafter, vide letter dated July 19, 2012, the applicant submitted a chronology of events
from the date of approval of the CDR Scheme till date (of this letter) and inter alia made the
following submissions :
(a) The promoters of the Target Company made several endeavours to expand the business
of the Target Company and arrange additional funds in the form of equity and debt. In those
efforts, they got success in roping in two strategic investors - Ferry Holdings Limited and Jetty
Capital Limited, who had agreed to acquire around 13% equity stake respectively and infused
₹42.77 Crores into the Target Company in October 2008.
(b) Further, during January 2010, the Delhi International Airport Private Limited (DIAL)
invited bids for developing a hotel for which the Target Company had also submitted its bid. In
this course, the Target Company approached IFCI for a loan. Subsequently, in March 2010, IFCI
agreed to step into the shoes of the consortium of lenders and took over the entire outstanding
loans of the banks with the existing securities and other terms including the stipulation of
converting the preference shares of ₹ 40 Crores into equity shares and pledge them with IFCI. In
this manner, IFCI infused a total of ₹ 150 crores into the Target Company, including the
swapping of existing loans of ₹ 70 crores from the Consortium of lenders.
(c) The Debt-Equity ratio of the Target Company has reached an incredibly high level of
3.62 and in case the CRPS get converted into equity shares, the ratio will come down to 2.37.
(d) There are sufficient grounds for considering the exemption application as stated below :
(i) The applicant had fulfilled their part of obligation under the CDR by infusing ₹40
crores into the Target Company. In fact, they had infused a total of ₹ 81.50 crores in the
form of advance subscription money. But the money is still lying with the Target
Company in the form of CRPS, which is neither improving the Debt-Equity Ratio nor
fulfilling the obligation pursuant to CDR Scheme and the new loan agreement.
(ii) The funds infused as advance subscription money by the applicants had enabled the
Target Company to get the CDR package approved from lenders which helped it in
improving cash flows, thus reviving the business. These fund infusions by the applicant
proves the dedication and long-term commitment of the applicant towards the Target
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Company and all its stakeholders. It has also allowed creation of confidence in the
foreign investors and additional lending by IFCI, which in turn, has helped in expansion
of business, improved financials and aided the Target Company and all its stakeholders.
(iii) The applicant had invested into the Target Company with the legitimate expectation
that they would get additional equity in the Target Company. However, keeping in view,
the ongoing litigations and restraint orders, they acceded to take CRPS for intermittent
(sic) period that too with a very nominal coupon rate of 1%. Later, during 2008 as the
restraint orders were revoked, the Target Company assured the applicant that their
preference shares would be converted into equity shares and necessary approval of
shareholders was obtained. The applicant made sacrifice by accepting the price of ₹40/-
per share instead of ₹18.92/- as calculated in terms of the pricing formula under the
ICDR Regulations. Even after the shareholders approval and the elapse of around three
years, the applicant was neither getting the equity shares nor any interest/dividend on
the amount so invested for last 8 years and the money is blocked for over eight years.
(iv) The conversion of CRPS into equity shares shall substantially improve the Debt-Equity
ratio of the Target Company (from 3.62 to 2.37). This will help the Target Company to
raise additional funds for expansion and growth.
(v) Unless the preference shares are converted into equity capital and the obligation
towards lender is fulfilled, it will not be in a position to raise further funds.
(vi) In terms of the ICDR Regulations, the shares to be allotted to the promoters shall
remain under lock-in for the period as prescribed under regulation 78 of the said
regulations. Besides this, in terms of the CDR Scheme and terms of lending by IFCI,
the equity shares to be allotted on conversion of the preference shares shall be pledged
with the lender till the whole of the loan of the Target Company is paid-off. Thus, the
conversion of preference shares into equity could not have any adverse impact on the
market and the float will remain the same.
(vii) There will be no change in control or management of the Target Company due to the
said conversion.
(viii) After the proposed allotment, of equity on conversion, the Target Company will
continue to be a Clause 40A compliant company i.e. the Public shareholding would
continue to be higher than the minimum prescribed 25%.
(e) In case the preference shares are not converted into equity shares:-
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(i) The Target Company and promoters’ commitment towards the lender would get
violated and all routes of further financing would get closed. The lender may also invoke
the securities which will jeopardize the business.
(ii) The foreign investors, who invested into the company at the strength of the promoters
and commitment of conversion, might create legal hassles for the Target Company.
(iii) The applicant would have to use the put option as per their entitlement next year and
the Target Company would be bound to redeem the preference shares which could be
suicidal for the Target Company.
(iv) The financial position of the Target Company does not permit any cash outflows on
account of any redemption of preference shares. Furthermore, the lender/banker
would not accede to any proposal for redemption of preference shares. Any such step
would trigger a spate of litigations between the Target Company, the applicant, the
lenders/bankers, and may nullify all the recovery efforts done till now.
The applicant requested SEBI to consider its application and pass necessary order granting
exemption from the applicability of the erstwhile regulation 11(1) of the Takeover Regulations
read with regulation 3(2) and 3(3) of the Takeover Regulations, 2011.
18. Subsequently, the applicant vide letter dated August 20, 2012, submitted the following
documents :
(a) Certified true copy of the Annual Results of the Target Company for the year ended
March 31, 2012.
(b) Target Company’s latest available Annual Report for the year ended March 31, 2011.
(c) Certified true copy of the minutes of the last AGM held on September 30, 2011.
(d) Certified true copy of the minutes of the AGM held on September 30, 2009
approving the proposed conversion of preference shares into equity shares.
19. The application was referred to the Panel for its consideration. The Panel, while
considering the submissions of the applicant, observed the following in the Report dated August
31, 2012 :
“Panel deliberated at length on the matter and observed that in February, 2010 the Company has come
out of CDR and as such the said condition for conversion of 40,00,000 CRPS held by promoters into
equity shares of the Target Company cannot be viewed as a condition of CDR at this stage. Further,
IFCI has also not stipulated this condition though it has vide its letter dated August 2, 2011 granted its
approval to the Company’s request for conversion of the said CRPS into equity subject to the pledging of
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resultant equity shares in favour of IFCI. However, considering the fact that the said condition was
originally a part of CDR package and two strategic Foreign Investors have also acquired 13% equity
stake respectively by infusing Rs.44.77 Crores into the Target Company on expectation of probable
conversion of CRPS into equity, the Panel were inclined to take a liberal view in the matter.
The proposal for conversion of CRPS into equity shares was approved by the Company’s shareholders
way back on 30th September, 2009 in the light of CDR scheme which is no more valid after February
2010. Panel members were of the opinion that in view CDR scheme having expired it would be necessary
for the Company to seek fresh approval of the shareholders to the proposal for conversion of the said
CRPS in equity shares in compliance with the provisions of ICDR including the pricing formula for such
shares. Further, such conversion shall be permissible only for increasing the promoters’ voting power upto
75% of the total paid up equity capital of the Company.
In the aforesaid circumstances, it is recommended that SEBI may consider giving liberty to the Acquirers
for approaching SEBI for exemption afresh if –
(a) fresh approval of the shareholders to the proposal for conversion of CRPS into equity shares as
per the pricing formula under ICDR is procured;
(b) the condition for conversion of CRPS into equity is stipulated by IFCI;
(c) conversion does not result into acquisition of voting power by the promoters beyond 75% of the
company’s total paid up equity capital; and
(d) Conversion is effected in compliance with the provisions of the Companies Act, 1956 and
SEBI regulations.”
20. Pursuant to the recommendation of the Panel, the applicant was granted an opportunity
of personal hearing on November 09, 2012, which was re-scheduled on the applicant’s request,
and fixed on December 19, 2012. On the said date, the applicant was represented by
Mr. U.K. Chaudhary, Senior Advocate, Mr. Pavan Kumar Vijay from Corporate Professionals
Capital Private Limited, Mr. Suresh Gupta, AVP of the Target Company, Mr. Prakash Prusty,
Company Secretary of the Target Company and others. Mr. U.K. Chaudhary, Senior Advocate
made oral submissions and inter alia submitted that the Target Company availed additional loans
in order to implement the Park Hyatt Goa Project and the delay in the implementation of the
project caused delays in loan repayment. He submitted that the Target Company had to
approach the lender Banks for rescheduling the re-payment of the loan facilities availed by the
Company and eventually the matter was referred to CDR. One of the conditions of the CDR
Scheme was the conversion of ₹40 crore loan into equity. The senior advocate further submitted
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that the conversion could not happen as there were restraint orders on the Target Company from
increasing its equity capital. After the restraint orders were vacated, shareholders approval was
obtained for the conversion and application was submitted with SEBI for seeking exemption
from the open offer obligations with respect to the proposed increase in the promoters'
shareholding. In the meantime, the Target Company roped in two foreign investors who infused
₹42.77 crores during October 2008. During the period January-March 2010, the Target
Company, on finding a viable business opportunity in the development of the hotel submitted
bids invited by the Delhi International Airport Limited. The Target Company was not able to
avail funds from the consortium of bankers as it had failed to comply with its commitment under
the CDR. It then approached IFCI, who stepped in and took over the entire outstanding loans
of the banks and retained the CDR stipulation of converting the preference shares of ₹40 crores
into equity and to pledge them with IFCI. The IFCI had infused a total of ₹150 crore including
swapping of loans with the bankers. The learned senior advocate stressed the fact that in the
loan approval by IFCI, the conversion of preference shares into equity was one of the conditions
as laid down earlier by the CDR-EG.
21. In the personal hearing, the applicant was granted liberty to file written submissions,
which was submitted vide letter dated December 26, 2012, wherein the following submission
were inter alia made :
(a) The Target Company has complied with all the regulatory provisions at the time of
applying for exemption and even as of now.
(b) At the time of applying for the exemption, the CDR Scheme existed, the terms of which
were later on, retained by IFCI as well in its loan sanctions to the Target Company for not just
the amounts extended by the Consortium Bankers, but for double the sums, only because they
had the faith and trust in the Target Company, its management and the projects.
(c) Though, during this intervening period, the Target Company came out of CDR, the CDR
conditions are subsisting in IFCI’s loan sanction/agreement.
(d) IFCI’s condition for conversion of CRPS into equity is the pre-condition for loan
sanction. (IFCI loan sanction letter dated February 17, 2010 and loan agreement dated February 26, 2010)
(e) Fresh approval of shareholders is not required. On the contrary, it would lead to inflicting
unnecessary hardship on the promoters, who have always stood by the Target Company and put
in funds from time to time, to avoid it from going sick and taking care of its various stakeholders.
(f) Even after the proposed allotment, the promoter’s shareholding shall be less than 75%.
Page 15 of 34
(g) It is reconfirmed that the proposed allotment shall be in compliance of all the provisions
of the Companies Act and SEBI Regulations.
(h) A positive consideration would lead to the following benefits to one and all:-
(i) Preference shareholders will get the equity shares at the price applied in the
exemption application.
(ii) This would not lead to any financial burden on the Target Company.
(iii) The conversion would instil and re-affirm the confidence of the lenders and
foreign shareholders in the Target Company.
(iv) Further raising of funds in the Target Company will be smoother and easier,
thus leading to smooth continuation of the concurrent projects of the Target
Company.
(v) All the stakeholders will have the confidence on the integrity of the
management.
(i) The applicant also submitted that a negative consideration of the application may lead to
following severe repercussions :
(i) Preference shareholders may seek redemption of their preference shares of ₹40
crores as they may not be interested for conversion at new pricing formula.
(ii) The Target Company will not be able to convert the shares at the new pricing
formula.
(iii) The lender may withdraw the financial support and may take legal recourse for
loan recall. As a cascading effect, concurrent projects may be stalled. Any such
action would be highly detrimental to the overall interest of the 57% public
shareholders of the Target Company.
(iv) The foreign investors, who invested into the Target Company on the assurance
of the conversion of the said preference shares into equity, may also initiate
legal actions against the Target Company for not fulfilling the assurances for
conversion and thereby increase the liabilities of the Target Company.
(v) Any adverse impact on the financial position of the Target Company would be
a further blow and Target Company might just collapse.
22. In the light of the aforesaid submissions made by the applicant, the case was again
forwarded to the Panel for consideration and to make suitable recommendation. The Panel
advised SEBI to seek further clarifications/submissions from the applicant, which were sought
by SEBI vide its letter dated February 11, 2013 :
Page 16 of 34
(a) Whether the special resolution/shareholder approvals of September 2009 are still
valid as per Companies Act, 1956 and the ICDR Regulations?
(b) Whether any shareholders’ approval was obtained before the loan agreement with
IFCI ? If so, details thereof.
(c) Whether shareholders were informed of the loan agreement with IFCI and the
conditions therein? If so, details thereof.
(d) The present situation of the loan granted by IFCI including whether the debt of ₹70
crore has been repaid, status of balance ₹80 crore, whether the pre-conditions in the
loan agreement have been met.
(e) The details of capital infusion in the company since March 2010, if any.
(f) The price details at which the equity was allotted to the two foreign investors in
October 2008.
23. In response, the applicant vide letter dated March 01, 2013, inter alia submitted the
following :
(a) The shareholders' approval was obtained by the Target Company in September 2009,
which was subject to various regulatory approvals and ever since then extensive
actions are being undertaken to obtain the requisite approvals.
(b) Companies Act, 1956, per se, does not stipulate any time period or validity of any
resolutions. Section 81(1)(a) of the Companies Act is the main section that governs
the provisions relating to further allotments of shares, on preferential basis. Neither
the said section nor any other provisions of the Act limit the validity of any resolution
passed under the Act.
(c) Proviso to regulation 74 of the ICDR Regulations mandates that if an exemption
application has been filed seeking exemption from the applicability of SEBI Takeover
Regulations, the specified period for allotment shall be counted from the date of the
Order on that application.
(d) The requisite shareholders approvals under 293(1)(a) & 293(1)(d) of the Companies
Act, 1956, were obtained by the Target Company at its shareholder’s meeting held on
September 30, 1998, whereby the shareholders empowered the Board of the Target
Company to avail borrowings not exceeding ₹200 crores. Within the shareholders’
sanctioned limit of ₹200 crores, there was no requirement of seeking any specific
approval of shareholders each time it avails loan.
Page 17 of 34
(e) The shareholders were duly informed of the loan from IFCI, vide the Directors’
Report dated August 28, 2010 and also by way of Notes to Accounts for the year
ended March 31, 2010.
(f) The aggregate amount of IFCI loan is ₹150 crores, out of which an amount of ₹70
crores was directly paid off by IFCI to the Consortium of Bankers, in February 2010
itself. The balance ₹80 crores was actually received by the Target Company. In
respect of ₹70 crores, ₹49 crores is outstanding for repayment. The loan of ₹80
crores is due to be repaid by September 2013. As regards the pre-conditions of the
loan agreement, all the conditions have been complied with except the conversion of
preference shares into equity shares.
(g) There has been no capital infusion in the Target Company since March 2010.
(h) The allotment of shares to the two foreign investors was made at a price of ₹ 185 per
share as per SEBI (Disclosure and Investor Protection) Guidelines, 2000 ("the DIP
Guidelines").
24. In response to SEBI’s e-mail dated March 22, 2013 seeking further clarification, the
applicant, vide its letter dated March 29, 2013 submitted the following :
(a) Some of the promoters’ shares were pledged with Morgan Securities & Credits Pvt.
Ltd., for funds lend by it to one of the associate companies of the Target Company.
However, Morgan group, along with its various entities invoked the pledge in a
malafide manner and became a shareholder in the Target Company, thus triggering a
spate of litigations. Morgan group wrongfully accused that as per the agreement, the
Target Company could not have altered its capital without Morgan’s submissions.
Further, Morgan was apprehensive that if Target Company would increase its equity
capital, its voting capital therein would reduce and thus, during the litigation
proceedings, it filed a Petition dated March 17, 2004 with Hon’ble High Court of
Delhi and sought an injunction on the capital structure of the Target Company. The
same was mandated by the Hon’ble Court, vide its order dated April 05, 2004.
(b) Details of shareholders’ approval for allotment of preference shares in 2004 and 2005
were submitted.
(c) Financial statements of the Target Company for the years 2004-05 and 2005-06 were
also submitted.
Page 18 of 34
(d) Prior to the allotment of said preference shares, the Debt-Equity ratio was
abnormally too high. It was one of the reasons why CDR Cell mandated the
conversion of the advance subscription money of ₹ 40 crores into equity.
(e) However, in view of the High Court's restraint order, the Target Company could not
proceed with the allotment of equity shares, so, after discussions with CDR Cell, it
deliberated upon conversion of said advance subscription into other forms either as
loan or preference shares. But the CDR Cell did not agree for conversion into loans,
as it would have further aggravated the Debt-Equity ratio of the Target Company.
Furthermore, they stressed upon long term capital into the Target Company, which
cannot be withdrawn.
(f) In order to resolve the matter, it was deliberated that the most suited option was to
convert the advance subscription into preference shares.
(g) Herein again, the allotment of convertible preference shares seemed infeasible as it
could have been treated as a breach of Court order and there seemed no surety that
the ongoing litigations would be concluded within the stipulated tenure of the
convertible preference shares of merely 18 months.
(h) As a last resort, the said advance subscription was ultimately converted into CRPS,
with a clear understanding between the banks and the Target Company that whenever
the Court restraint would be vacated, the class rights of the said preference shares
would be altered under Section 106 of the Companies Act, 1956 to make them
convertible preference shares and the same shall be converted into equity shares.
(i) By virtue of the allotment of preference shares, the Debt Equity ratio came down to
manageable levels. If the said allotment of CRPS would not have been done, the
entire CDR would have become infructuous and all the waivers and relaxations granted
by the bankers would have been withdrawn, thus taking the Target Company to the
doorstep of winding up, thus adversely affecting all the stakeholders thereof.
25. The Panel re-examined the exemption application and after detailed deliberations
observed and recommended, vide its Report dated April 02, 2013, that exemption be given to the
applicant and the PACs and that 'June 30, 2009' be considered as the 'Relevant Date' for the
purpose of determining price of equity shares and that the Target Company be advised to take all
necessary steps in accordance with the provisions of the Companies Act, 1956 and SEBI
Regulations for conversion of preference shares of ₹40 Crores into equity shares of the Target
Page 19 of 34
Company. The detailed observations of the Panel and its reasons for fixing June 30, 2009 as the
'relevant date' are mentioned in a subsequent paragraph where the issue is dealt with.
26. Pursuant to the recommendation of the Panel, the applicant and PACs were granted an
opportunity of personal hearing on May 09, 2013, which was communicated to the applicant,
vide letter dated April 23, 2013. In the said letter, the applicant was informed that no
documentary proof was submitted to corroborate CDR Cell’s approval of the allotment of
preference shares on October 28, 2004 and March 29, 2005. The applicant was, thus, advised to
provide documentary evidence to confirm when the CDR Cell has approved the conversion of
advance subscription money into redeemable preference shares. The applicant made submissions
vide letter dated June 08, 2013.
27. The personal hearing was adjourned to June 13, 2013 on the request of the applicant. On
the said date, the applicant and its PACs were represented by Mr. Somasekhar Sundaresan,
Advocate, Mr. Ravichandra S. Hegde, Advocate, Mr. Pavan Kumar Vijay, Ms. Anjali Aggarwal
and Mr. Mahipal Gupta from Corporate Professionals Capital Private Limited and Mr. Pramod
Singh, Advocate. Mr. Somasekhar Sundaresan, Advocate made oral submissions on the lines of
the submissions made by the applicant and PACs. The applicant was also granted liberty to file
written submissions. The applicant submitted its written submissions vide letter dated June 29,
2013, and inter alia made the following submissions with respect to why October 04, 2004 and
not June 30, 2009 should be taken as the ‘Relevant Date’ for the conversion of CRPS into equity
shares :
(a) On October 04, 2004, the CDR Cell specifically approved the proposal of the Target
Company for restructuring the debts, setting out the approved restructuring package
in Annexure I of that letter. Item (xi) of the terms and conditions set out in the said
annexure explicitly recorded the condition of converting the advance subscription of
₹ 40 crore from the promoters into equity by September 20, 2004.
(b) The Company could not alter its equity share capital owing to restraints imposed in
various legal proceedings.
(c) The CDR-EG was kept informed about those proceedings and the difficulties faced
by the Target Company. Therefore, the CDR-EG approved the proposal for
conversion of the advance subscription of ₹40 crores into CRPS instead of equity,
vide its letter dated June 23, 2006. This is evidenced by the letter dated June 23, 2006
from the CDR Cell to the Target Company. CDR had issued multifarious letters to
Page 20 of 34
the Target Company and in all of them, the conversion of preference shares into
equity shares has been a contentious agenda. A gist of various mandates was given.
(d) The CDR Cell has, from time to time, emphasized on the conversion of preference
shares into equity and this was not a new condition under the letter dated June 29,
2009 and June 30, 2009 but only a restatement of the previous condition. Thus, all the
correspondence and deliberations are in respect of the Scheme No. 946 as approved
on October 04, 2004 and no new scheme.
(e) Further, the condition of conversion was reiterated by IFCI as well, in its loan
sanction letter and the agreement. Attention was drawn to the word 'shall' used in
para 6.2 (iv) at page 18 of the IFCI loan agreement dated February 26, 2010 which
reads as follows "The borrower shall convert the preference capital of the promoters amounting to
Rs.40 Crore into Equity". On August 02, 2011, the IFCI once again mandated for
conversion of the redeemable preference shares into equity at a price of ₹40 per share
and took into account the fact that such conversion would result in 1 crore equity
shares which would have to be immediately pledged with it.
(f) Further, the floor price taking October 04, 2004 as the Relevant Date works out to
₹18.92/- per share. However, to keep the equity base at reasonable level, the
applicant offered to take equity shares at ₹ 40/- per share. Adopting June 30, 2009 as
the Relevant Date, apart from being untenable, would result in issuance of shares at
an unrealistic floor price of ₹ 103/- per share.
(g) The CDR package entailing conversion of the advance subscription of Rs.40 crores
into equity shares was approved on October 04, 2004. The modification, as observed
by the Panel, was merely to the limited extent of deferment of term loan instalments
and there were no further modifications to the scheme.
(h) The indebtedness along with all attendant terms and conditions was taken over by
IFCI and the requirement to convert the redeemable preference shares into equity
was adopted by IFCI as is evident from the correspondence being exchanges with
IFCI.
(i) The promoters had invested into the Target Company in the form of advance
subscription money in 2003-04 to be subsequently converted into equity shares.
However, considering the financial position of the Target Company and owing to the
court restraint, acceded to take CRPS for intermittent period with a very nominal
coupon rate of 1%. This low coupon rate has benefited the Target Company by
Page 21 of 34
saving the cash flow which in turn was invested for the growth of the Target
Company resulting in the benefit of its shareholders.
(j) SEBI vide order dated September 24, 2012 had granted exemption from making an
open offer to the Government with respect to facts similar to the present case.
(k) Further, by changing the relevant date, even IFCI’s interest would be gravely
jeopardized, since it would get much lesser security (78,26,535 shares representing
61.29% of expanded capital) as against the committed numbers/percentages
(1,39,43,040 shares representing 73.91% of expanded capital) that were envisaged by
them, at the time of entering into the loan agreement. Therefore, such a
misapplication of the relevant date would be detrimental to the interests of IFCI,
which has meticulously worked with the Target Company to effect a turnaround.
(l) The lender could then demand even more security, which the Target Company and
its promoters would not be able to provide, thereby jeopardizing the prospects of a
revival and improved future of the Target Company.
(m) Furthermore, any further demands for augmenting the security could result in IFCI
accelerating the loan facility, which would in turn negate and destroy all the carefully
conceptualized and implemented efforts of the last several years, thereby harming the
interests of investors of the Target Company.
(n) Due to continued non-compliance of the IFCI stipulation, the Target Company’s
terms with the banker have highly deteriorated. The banker is not willing to grant any
additional financing facility to the Target Company for any of its future projects, nor
is it agreeing to issue an undertaking for BSE or NSE so as not to lock in shares
under pledge as needed by the exchanges to comply with the requirements of
regulation 78 of the ICDR Regulations.
(o) The continued non-compliance is leading to blocking all the future funding options
for the Target Company, thereby stalking not just its growth process but even its day
to day working capital expenditure, which form quite a substantial amount especially
in the Hotel industry.
(p) Relevant Date is a duly defined concept under regulation 71 of the ICDR Regulations
and accordingly the same should be adhered to.
In view of the submissions, the applicant requested SEBI to grant exemption considering
October 04, 2004 as the relevant date. Thereafter, vide letter dated September 16, 2013, the
applicant has informed that IFCI has issued a public notice on September 05, 2013 for sale of
Page 22 of 34
assets of the Target Company at Goa and requested that a favourable consideration of the
application would pave way in arranging funds from investors and resolving the matter with
IFCI.
28. I have considered the application dated October 10, 2009 (which was revised on August
26, 2011) of the applicants and PACs, the Reports of the Panel, and the other submissions and
documents filed by the applicant and its PACs.
29. The applicant and the PACs have requested exemption from the open offer obligations
stipulated in regulations 3(2) and (3) of the Takeover Regulations, 2011 with respect to their
proposed acquisition of 1,00,00,000 equity shares of ₹ 10/- each of the Target Company by
conversion of 40,00,000 fully paid-up 1% CRPS of ₹100/- each (30,00,000 CRPS allotted on
October 28, 2004 and 10,00,000 CRPS allotted on March 29, 2005).
30. It is the case of the applicants and PACs (who are part of the promoter group in the Target
Company), that the promoters infused funds when the Target Company required funding for its
project. The funds provided by the promoters, called as the Advance Subscription, was to the
tune of ₹40 crores. Subsequently, on being referred to the CDR for restructuring the
loans/liabilities, it was inter alia stipulated vide a scheme approved on October 04, 2004 that the
Target Company should convert the advance subscription brought in by the promoters into
equity shares. However, according to the applicants and PACs, the same could not be done in
view of the restraint imposed by the Hon'ble Courts against the Target Company from altering its
equity capital. Subsequently, CDR modified the stipulation vide letter dated June 30, 2009,
whereby the Target Company was advised to take steps for conversion of the CRPS into equity
shares. It is the case of the applicant and PACs that if such conversion takes place, they would
be obligated to make a public offer in terms of regulation 3(2) and 3(3) of the Takeover
Regulations unless SEBI exempts such obligation and have accordingly filed the application read
with the revised application.
31. The Panel has, vide Report dated April 02, 2013, recommended that exemption be
granted to the applicant and its PACs with "June 30, 2009" to be taken as the "relevant date" for
determining the price of the equity shares to be allotted on conversion of preference shares. In
terms of the Panel's Report, 'June 30, 2009' should be taken as the relevant date as this was the
date when the CDR Cell stipulated the revised condition which allowed for conversion of
Page 23 of 34
preference shares into equity. There were other observations also given by the Panel to treat
June 30, 2009 as the Relevant Date and not October 04, 2004 (the date of approval of the scheme by
CDR-Cell).
32. In view of the above, the following questions arise for my consideration in this decision :
(a) Whether this is a fit case for grant of exemption to the applicant and PACs from the applicability of
regulations 3(2) and 3(3) of the Takeover Regulations, 2011, with respect to their proposed acquisition ?
(b) If so, then what should reasonably be taken as the "Relevant Date" for calculating the price of conversion
in the proposed transaction ?
33. It is stated in the application that during the course of implementation of the Park Hyatt
Goa Project, the Target Company had met with a cost overrun and the same led to the
requirement of additional term loans and interest funding from the lenders of the project. It is
also stated that in order to fund the project and its up-gradation process and also to meet the
debt-equity ratio, as stipulated by the lender banks, the promoters of the Target Company had
brought in funds to the tune of ₹40 crores as Advance Subscription. It can therefore be noticed
that the promoters of the Target Company had infused funds in the Target Company only with
respect to the Target Company's development and expansion related project, as stated in the
application.
34. In this regard, the following observations of the Hon'ble SAT made in the matter of Dr.
Arvind B. Shah (HUF) and another vs. SEBI (Appeal no. 107 of 2010 ; date of order – 19.11.2010) are
relevant to be noted :
"6. … …. On the contrary, timely contribution of equity by the promoters through preferential allotment for the
new project of the company enhanced their share value.
7. There has been no change of management or control over the target company consequent upon the preferential
allotment as notified to the shareholders. This is also not a case where a rank outsider had acquired a large chunk
of shares in the company and was seeking exemption from the takeover code. Such an acquisition or change in
management or control over the target company brings with it an element of uncertainty and the takeover code
provides that in such an eventuality the existing shareholders be provided with an exit route by requiring the
acquirer to make a public offer. In the case before us, there was no element of uncertainty and there was no change
Page 24 of 34
of management or control and we are satisfied that the shareholders of the target company did not get affected in any
manner by the acquisition. …………… Besides this, we cannot forget that the primary object of the acquisition
was to provide additional financial assistance to the target company for its new project.
…………………" [Emphasis supplied]
35. I also note that the conversion of CRPS into equity shares would not result in change of
control in the Target Company as the applicant and the PACs form part of the promoter group
which is already in control of the Target Company. As opined by the Hon'ble SAT in the above
referred case, the proposed acquisition in this case does not involve any outsider to acquire
substantial shares/voting rights in the Target Company and therefore there would be no change
in the control (as the promoters will continue to exercise control) in the Target Company pursuant to the
proposed acquisition. Further, there would be no uncertainty in the minds of the public
shareholders of the Target Company with respect to the 'control ' in the Target Company pursuant
to the proposed acquisition and therefore the shareholders could not be affected by such
proposal for seeking exemption. Considering the factors such as -
(a) the infusion of funds by the promoters in order to fund the project of the Target
Company and that such funds, which are now in the nature of preference shares, are
sought to be converted into equity shares ;
(b) there is no change in the management control of the Target Company ;
(c) shareholders not being affected by the proposed acquisition ;
(d) the public shareholding would be maintained as per the desired levels stipulated under the
Securities Contracts (Regulation) Rules, 1957 ; and
(e) The Panel also recommended exemption,
I am of the considered view that in this case, exemption could be afforded to the applicant and
its PACs with respect to the increase in their shareholding/voting rights in respect of the
conversion of preference shares into equity shares. However, the correctness of the Relevant
Date as proposed as October 04, 2004 by the applicants and PACs has been questioned by the
Panel, for the reasons set forth in their Report. The Panel has rejected the said date and instead
has suggested that June 30, 2009 (which is the date when the CDR-Cell has approved a revised proposal for
the Target Company wherein it was inter alia stipulated to take steps for conversion of 40 crore preference shares
into equity shares was made) be taken as the Relevant Date. Therefore, before proceeding further, the
following observations and views of the Panel as mentioned in their Report dated April 02, 2013
needs to be noted :
Page 25 of 34
(a) Copies of the sanction letter dated February 17, 2010 of IFCI and the loan agreement
dated February 26, 2012 were provided to SEBI / Takeover Panel for the first time by
the acquirers vide their letter dated December 26, 2012. Further, copy of the order dated
April 05, 2004 passed by the Hon'ble Delhi High Court in Execution Petition No. 13 of
2004 was also provided to the Panel for the first time at the meeting held on March 22,
2013, when the present application was re-examined.
(b) The acquirers have been wrongly stating that 'IFCI's condition for conversion of
redeemable preference shares into equity is the pre-condition for loan sanction'. The said
condition is only a part of the General Conditions and it is neither 'Condition Precedent'
nor 'Condition Subsequent' to Disbursement. According to the Panel, the condition is not
such a material condition as is being made out by the acquirers. Further, IFCI has not
stated as to at what price equity shares should be issued to the acquirers, whereas pricing
is the most vital issue in this matter.
(c) The Hon'ble Delhi High Court's Order dated April 05, 2004 was passed prior to the
approval of CDR package on October 04, 2004 and therefore the Target Company and
the acquirers were fully aware about the said order before the consideration of
restructuring by the CDR. The Target Company/acquirers appear to have procured
CDR package without any intention to comply with the same in near future.
(d) The Target Company/acquirers were aware that the Target Company had given an
understanding (being one of the judgment debtors) to the Hon'ble Court that it will not
increase or change its paid up equity capital in any manner whatsoever till the decree in
favour of the Decree Holder is satisfied. If the Target Company/acquirers had disclosed
to the CDR Cell that the Target Company has given an undertaking to the Court for not
increasing its paid up equity capital, the CDR Cell in all probability would not have
stipulated any such condition in the CDR package. The Target Company/acquirers
appear to have misled the CDR Cell by active concealment of the fact of the
aforementioned undertaking given to the Court.
(e) The condition for conversion of advance subscription money of Rs.40 crores into equity
of the Target Company was never complied with by the Target Company/acquirers and
the said amount was converted into redeemable preference shares without any approval
of CDR Cell. After about 5 years in June 2009, CDR Cell appears to have reviewed the
implementation of the package when it advised the Target Company vide letter dated
June 30, 2009 for taking immediate steps for conversion of Rs.40 crore preference shares
into equity shares by December 31, 2009. In the light of the said letter of CDR Cell, the
Page 26 of 34
Target Company convened AGM on September 30, 2009, wherein the shareholders of
the Company approved the special resolution for conversion of preference shares into 1
crore equity shares of face value of Rs.10/- each and allotment thereof on preferential
allotment basis to the acquirers at a conversion price of not less than Rs.40/- per share as
determined in accordance with the ICDR Regulations. For the purpose of determination
of price, CDR package approval date i.e. October 04, 2004 was considered as relevant
date.
(f) Regarding the appropriateness of October 04, 2004 as the 'Relevant Date', the Panel
made the following observations :
(i) CDR package was procured by the Target Company/acquirers by active
concealment of the undertaking given by the Target Company to Delhi High
Court that it would not increase or change its paid up equity capital in any manner
till the decree in favour of the Decree Holder is satisfied.
(ii) Advance subscription money of Rs.40 crore was converted by the Target
Company into redeemable preference shares without the consent/approval of
CDR Cell and such preference shares were not convertible into equity as per the
terms of the issue. Consequent upon such conversion, the condition stipulated by
CDR vide its letter dated October 04, 2004 became irrelevant. In the
circumstances, the conversion of preference shares into equity cannot be viewed
in compliance with CDR's letter dated October 04, 2004 as the same was in
compliance with CDR Cell's revised condition communicated vide its letter dated
June 30, 2009. Resultantly, the Relevant Date for the purpose of pricing could be
CDR Cell's subsequent letter dated June 30, 2009 stipulating the revised condition
for conversion of advance subscription money into equity and not letter dated
October 4, 2004 stipulating conversion of advance subscription money into equity
capital.
(iii) The Target Company came out of CDR way back in February 2010 when the
consortium banks were repaid their dues of the loan sanctioned by IFCI. In fact,
when the exemption application was considered by the Panel at the earlier
occasion, the Target Company was already out of CDR. However, considering
the fact that as on 30th September, 2009 the Target Company was not out of
CDR and had been advised by CDR vide its letter dated 30th June 2009 about the
revised condition of restructuring in terms of which the Company was required to
Page 27 of 34
convert preference shares of ₹40 crore into equity capital, the Panel was of the
considered view that 30th June 2009 (CDR's letter approving the said condition)
could be taken as the Relevant date for the purpose of determining the price of
equity shares to be allotted to the acquirers on conversion of preference shares.
(g) In view of such observations, the Panel recommended that June 30, 2009 be considered
as Relevant Date for the purpose of determining price of equity shares and the Target
Company be advised to take all necessary steps in accordance with the provisions of the
Companies Act, 1956 and SEBI Regulations for conversion of preference shares of Rs.40
crore into equity shares of the Target Company.
36. I have considered the observations made by the Panel and the submissions made by the
applicant and PACs in this regard. The applicants and PACs have submitted that the promoters
of the Target Company had infused funds into the Target Company to the tune of ₹40 crores as
advance subscription. This loan extended by the promoters were converted into preference
shares and not equity, as there was a bar in altering the equity capital of the Target Company
during the relevant period. It is the case of the applicants and PACs that the price, if October 04,
2004 (date when the CDR approved the Target Company's proposal for restructuring its debts) is taken as the
Relevant Date, comes to ₹18.92/- and that in order to keep the equity base at a reasonable level,
the promoters/applicants have offered to take equity shares at ₹40/-per equity share on
conversion.
37. The Panel has mentioned that the Hon'ble Delhi High Court's Order dated April 05,
2004 was much prior to the approval of the CDR package on October 04, 2004 and that if the
Target Company/acquirers had disclosed to the CDR Cell that the Target Company has given an
undertaking to the Court for not increasing its paid up equity capital, the CDR Cell in all
probability would not have stipulated any such condition in the CDR package. According to the
Panel, the Target Company/acquirers appear to have misled the CDR Cell by active concealment
of the fact of the aforementioned undertaking given to the Court. I have perused the order dated
April 05, 2004 passed by the Hon'ble Delhi High Court, wherein it has been observed/directed
as follows :
"It is stated that the Judgment Debtors including Judgment Debtor No.4 undertake that Judgment Debtor No.4
will not increase or change its paid-up equity capital from the present level of 65,52,800 equity shares of Rs.10/-
Page 28 of 34
each in any manner whatsoever till the decree in favour of the Decree Holder is satisfied. It is also prayed that EA
No.129/2004 be dismissed as withdrawn.
In view of the aforesaid submissions and the undertakings by which the Judgment Debtors shall remain bound, the
attachment orders dated 28th January, 2004 as well as 26.3.2004 stand withdrawn. The undertakings of the
Judgment Debtors are taken on record………."
The judgement debtor no.4 mentioned in the above order is the Target Company.
Therefore, it becomes very clear that the Target Company, by its own undertaking which has
been taken on record by the Hon'ble Delhi High Court and which is binding on the Target
Company, cannot alter its increase or change its paid-up equity capital till the decree of the
Decree Holder is satisfied. Therefore, as on October 4, 2004 (the date when CDR-EG approved the
original scheme for the Target Company), the Target Company cannot alter its paid-up equity capital.
From the records and submissions made by the applicant and PACs, it appears that the
undertaking made before the Hon'ble Court was not brought to the notice of the CDR-EG as
soon as the said undertaking was made. Further, I find that, the acquirers and the Target
Company have not submitted any document to show that such court order and their undertaking
was informed to the CDR before the package was approved on October 04, 2004. The applicant
and the PACs have made a submission that 'Meanwhile, the Empowered Group of the CDR was kept
posted about these proceedings and these difficulties faced by the Company. Therefore, the CDR-EG approved the
proposal for conversion of the advance subscription of Rs.40 crores into redeemable preference shares instead of
equity. This is evidenced by letter dated June 23, 2006 from CDR Cell to the Company'. From the above
submission, one could infer that the restraint imposed by the Hon'ble Court and the difficulty in
converting the advance subscription into equity, could have been informed only subsequent to
the CDR scheme approved on October 4, 2004. Therefore, I tend to agree with the observation
of the Takeover Panel that that if the Company/its promoters had disclosed the undertaking
given before the Hon'ble Court, the CDR would not have specified the condition to convert the
debt (the loan of ₹40 crores given by the promoters to the Target Company) into equity and that the said
fact seems to have been concealed from the notice of CDR-EG. The Target Company has
obtained a scheme which inter alia stipulated the conversion of the advance subscription into
equity, which the Company/promoters could not have complied with.
38. In the application, a statement was made that, in view of the Court Order, as a temporary
measure, the advanced subscription of ₹ 40 Crore was converted into 40,00,000 1% Cumulative
Redeemable Preference Shares (CRPS) of ₹ 100/- each (30,00,000 CRPS allotted on October 28,
Page 29 of 34
2004 and 10,00,000 CRPS allotted on March 29, 2005). This conversion of the advance
subscription into CRPS was done without the permission or consent of the CDR Cell which is in
contravention of the stipulation (i.e., the conversion of the advance subscription into equity) of October 4,
2004 scheme. The Panel has observed that the conversion of preference shares into equity
cannot be viewed to be in compliance with CDR Cell's letter dated October 04, 2004. The same,
according to the Panel, was in compliance with the CDR Cell's revised condition communicated
vide letter dated June 30, 2009, wherein it had advised the Company to take steps for the
conversion of CRPS into equity. Pursuant to the same, the Company had convened a
shareholders' meeting on September 30, 2009, wherein the shareholders had approved such
conversion.
39. In this regard, I have perused the letter dated October 04, 2004 of the CDR Cell which
had approved the restructuring proposal, and Annexure I (stipulating the terms and conditions)
to the said letter. As per clause (xi) of the said Annexure, the promoters shall arrange to convert
the advance subscription of ₹ 40 crore into equity by September 30, 2004. Therefore, as per
records, the CDR Scheme had inter alia mandated that the promoters shall convert the Advance
Subscription of ₹ 40 Crore into equity by September 30, 2004. As per the applicant and PACs,
the said conversion could not be undertaken owing to restraint orders imposed on the Target
Company by the Hon'ble Courts from altering its equity share capital. According to them, as a
temporary measure, the CDR Cell vide letter dated June 23, 2006 had approved the proposal for
conversion of the advance subscription of ₹ 40 crores into CRPS instead of equity.
40. Further, the applicant and its PACs, in their admission, have stated that 'the floor price
taking October 04, 2004 as the Relevant Date works out to ₹18.92/- per share. However, to keep the equity
base at reasonable level, the applicant offered to take equity shares at ₹ 40/- per share. Adopting June 30, 2009
as the Relevant Date, apart from being untenable, would result in issuance of shares at an unrealistic floor price of
₹ 103/- per share'. It appears clear that the applicants are themselves convinced that there is no
economic logic to continue with October 04, 2004 as the relevant date and ₹ 18.92/- as per that
relevant date will lead to unreasonable level of equity base. They have agreed for ₹ 40/- as the
conversion price. There seems to be no justification for this price and it appears to be arbitrary.
It is not possible for me to agree to any arbitrary number suggested by the applicant and I would
prefer to peg it to a relevant date.
Page 30 of 34
41. In view of the above and the reasons and observations of the Panel, it may not be proper
to consider October 04, 2004 as the Relevant Date for determining the price for conversion of
preference shares into equity shares. I am therefore in agreement with the views of the Panel in
this regard.
42. The Panel, has observed that as on September 30, 2009 the Target Company was not out
of CDR and had been advised by CDR vide its letter dated June 30, 2009 about the revised
condition, and therefore the Panel is of the view that 'June 30, 2009' (CDR’s letter which stipulated
that the conversion of Rs.40 crore preference shares into equity be completed by December 31, 2009) could be
taken as the Relevant Date for the purpose of determining the price of equity shares to be
allotted to the acquirers on conversion of preference shares. According to me, the principle on
which the Panel has based its views for considering June 30, 2009 as the Relevant Date is the fact
that the undertaking given before the Hon'ble Court for not altering the equity capital of the
Target Company and the condition imposed by the CDR-Cell, in the revised scheme, to the
Company for conversion of the ₹40 crore preference shares into equity and also the fact that the
Company was still under purview of the CDR-Cell.
43. In this regard, I have perused the letters dated June 30, 2009 read with letter dated June
29, 2009 of the CDR-Cell. As per the aforesaid letters, the CDR-EG, had advised the Target
Company to ensure the conversion of ₹ 40 Crore preference shares into equity by December 31,
2009. As per the Target Company, it had obtained the shareholders approval for fully
implementing the CDR Scheme on September 30, 2009. I have perused the copy of the
resolutions passed by the shareholders of the Target Company at the AGM held on September
30, 2009 at the Target Company's registered office. From the resolutions, I inter alia note that –
(i) The shareholders have consented and authorised the board of directors of the Target
Company to convert the 40,00,000 1% CRPS of ₹ 100/- held by the promoters into
equity shares of ₹ 10/- each fully paid up and issue and allot such number of equity
shares to the holders of the CRPS on the price to be determined in accordance with the
ICDR Regulations ; and
(ii) The relevant date for the purpose of calculating the price at which the equity shares are
proposed to be issued to the holders of the CRPS under the ICDR Regulations is
October 04, 2004.
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44. However, the applicant and PACs have referred to another letter of the CDR-Cell dated
June 23, 2006, whereby the CDR had given its consent for conversion of advance subscription
into redeemable preference shares. I note from the records that the June 23, 2006 letter of the
CDR-Cell whereby the Target Company's proposal to convert the advance subscription of ₹40
crore into redeemable preference shares instead of equity was approved, seems to have not been
submitted by the applicant and PACs before the Panel and has been referred for the first time in
the letters/written submissions dated June 08, 2013 and June 29, 2013 of the applicant and PACs.
Therefore, the Panel did not have the benefit of considering the same before making the
recommendation. I have perused the said letter of CDR-Cell and note that CDR-Cell has
approved the conversion of ₹40 crore advance subscription into preference shares. This is the
first communication pursuant to the approval of the proposal for restructuring the debts of the
Target Company communicated vide its letter dated October 04, 2004, which, as observed above,
seems to have been obtained without disclosing the restraint on the Company in altering its
equity capital. From the above details, the following re-construction of events is made :
April 05, 2004 : The Hon'ble High Court of Delhi passes order restraining the
Company to make any changes in its equity structure.
October 04, 2004 : CDR Cell approves the restructuring package with a condition
that the Advance Subscription of ₹40 crore be converted into
equity shares by September 30, 2004. (Obviously, the CDR Cell
was not aware of the restraint placed by the Hon'ble Delhi High
Court ; otherwise it would not have stipulated such a condition.)
June 23, 2006 : CDR Cell approves Company's proposal to convert the Advance
Subscription of ₹40 crore into Redeemable Preference Shares
(Apparently, by this time CDR Cell became aware of the restraint
imposed by the Hon'ble Delhi High Court and approved the
conversion of Advance Subscription into Preference Shares).
October 2008 : As stated by the applicant, the restraint (in altering the equity capital)
imposed against the Company by the Hon'ble High Court Delhi is
revoked.
Page 32 of 34
June 30, 2009 : CDR Cell issues revised condition that stipulates that the
40,00,000 preference shares be converted into equity. [Apparently,
the CDR Cell revised its condition in the light of vacation of the
Hon'ble Delhi High Court's Order during October 2008]
The question before me is what should be the relevant date. This could have been October 04,
2004, had it not been tainted with the fact that the CDR Cell's condition was un-implementable
in the light of the Hon'ble Delhi High Court's Order. The next date when the CDR Cell appears
to have taken a conscious decision keeping in view the restraint placed by the Hon'ble High
Court is June 23, 2006. I am of the opinion that this should be the Relevant Date instead of June
30, 2009 which is only taking into cognizance that equity shares can be issued instead of
preference shares as the restraint has been removed. Therefore, according to me, this date of
June 23, 2006 should ideally be taken as the Relevant Date, for the purposes of determining the
price at which conversion should be effected.
45. I note that the applicant has submitted that IFCI has infused a total of ₹ 150 Crore in
February 2010 that included taking over existing loans of ₹70 Crore from the Consortium of
lenders and thereby coming out of CDR. I have perused the copies of (i) the loan agreement
between IFCI and the Target Company dated February 26, 2010 and (ii) letter from IFCI dated
August 02, 2011, which are on record. In terms of paragraph 6.2(iv) of the loan agreement, the
Target Company was to convert the preference capital of the promoters amounting to Rs.40 Crore into Equity,
as a general condition. Further, IFCI vide letter dated August 02, 2011 had allowed conversion
of the 40,00,000 1% CRPS into equity shares and to take requisite steps to pledge the shares
immediately after issuance of the same.
46. It is a fact that the Target Company has come out of the purview of the CDR-Cell during
February 2010. If a very strict interpretation and view is taken considering the fact that the
Company is out of CDR, the dates of approval of the original scheme (i.e., October 4, 2004) and
the revised/modified scheme on June 30, 2009 and the provisions of regulation 71 of the ICDR
Regulations, would not be relevant to be considered for fixing the 'relevant date'. However,
considering the fact that IFCI (the lender who has taken over the liabilities of the Target Company) has also
stipulated the condition to convert the preference capital of ₹40 crore into equity which is a
condition akin to the one stipulated by the CDR-EG (vide letters dated June 23, 2006 and June
Page 33 of 34
29, 2009), and the reasons stated above in this Order while deciding whether this case is a fit one
for grant of exemption, I am of the view that while agreeing with the views of the Takeover
Panel in granting exemption to the applicants and PACs, the Relevant Date should be taken as
June 23, 2006.
47. For the above reasons, I agree with the observations and recommendation of the Panel
that the applicant and the PACs may be allowed exemption from the obligations stipulated under
regulation 3(2) & (3) of the Takeover Regulations, 2011 that may arise with respect to the
proposed increase in the shareholding/voting rights of the acquirer and PACs/promoter group
of the Target Company pursuant to the conversion of 40,00,000 fully paid-up 1% CRPS of
₹100/- each, and that June 23, 2006 be considered as the Relevant Date for arriving at the price
with respect to the conversion of the CRPS into equity shares.
48. In view of the foregoing, I, in exercise of the powers conferred upon me under section 19
of the Securities and Exchange Board of India Act, 1992 and regulation 4(6) of the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (since repealed) read with
regulations 11(5) and 35 of the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011, hereby exempt the applicant, Square Investments & Financial Services Private
Limited and its PACs, namely, Brook Investment & Financial Services Private Limited, Epitome
Holdings Private Limited, Liquid Holdings Private Limited, Mid-Med Financial Services Private
Limited, React Investment & Financial Services Private Limited, Scope Credit & Financial
Services Private Limited, Solace Investment & Financial Services Private Limited, Solitary
Investment & Financial Services Private Limited, Seed Securities & Services Private Limited, Mrs.
Sunita Suri, Mrs. Mamta Suri and Sanjay Suri HUF, from the applicability of regulation 3(2) and
(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, with respect
to their proposed conversion of 40,00,000 fully paid-up 1% Cumulative Redeemable Preference
Shares of ₹100/- each into equity shares with June 23, 2006 being the 'Relevant Date' for
computation of price.
49. The above exemption is granted subject to the following conditions :
(i) The proposed acquisition shall be in accordance with the provisions of the Companies
Act, 1956, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009,
the Listing Agreement and other applicable laws ;
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(ii) The applicant and its PACs shall ensure compliance with their statements, disclosures and
undertakings made in the application and in their subsequent correspondences ; and
(iii) The proposed acquisition shall be completed within 45 days from the date of this Order
and the applicant and its PACs shall file a report with SEBI in the manner provided in the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 within 21 days
from the date of the acquisition.
50. The exemption granted above shall not be construed as an exemption from the
requirements of disclosures under Chapter V of the Takeover Regulations, 2011 and compliance
with the SEBI (Prohibition of Insider Trading) Regulations, 1992, the Listing Agreement or other
applicable Acts, Rules and Regulations.
51. The application dated October 10, 2009 (as revised on August 26, 2011) made by the
applicant and its PACs is accordingly disposed off.
PRASHANT SARAN
WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA
Date : February 25th, 2014
Place : Mumbai