BEFORE THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

APPEAL NO.21/2001

In the matter of:

Shri Ch.Kiron

Margadarsi Financiers Appellant

Vs.

Adjudicating Officer

Securities & Exchange Board of India Respondent

APPEARANCE:

Mr. Raghu Cidambi

Authorised Representative for Appellant

Mr. Ananta Barua

Division Chief, SEBI

Mr. Vinay Chauhan

Legal Officer, SEBI for Respondent

(Appeal arising out of the order dated 3.4.2001 made by the Adjudicating Officer, Securities and
Exchange Board of India)

ORDER

Margadarsi Financiers, the Appellant herein, is a HUF of which Shri Ch.Kiron is Power of
Attorney holder and the main contact person. The Appellant is, interalia engaged in the business
of financing, bill discounting etc. Aurobindo Pharma Ltd (APL) whose shares are subjected to
acquisition is a company registered under the Companies Act. It is one of the leading
manufacturers of life saving antibiotic bulk drugs in India. APL’s issued capital is Rs. 4. 72
crores.

Securities and Exchange Board of India (SEBI) came to know from the APL’s Distribution
Schedule drawn as on 29.8.1997 that the Appellant was holding 3, 32, 540 shares (7.037% of the
paid up capital) and the acquisition was made for the first time in the year 1997. In the light of
the said information, SEBI decided to inquire in to the matter, mainly with a view to ascertain
the extent of compliance of the provisions of the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations 1997 (the Regulations) by the
Appellant.

As per further details collected by SEBI, it was noticed that as on 20.1.1997 the Appellant
acquired 3, 87, 540 shares by way of pledge from the borrower. 3, 87, 540 shares constitute 8.2%
of the paid up capital of APL. Subsequently on 14.5.1997 the Appellant acquired 3,80, 040
shares more, again by way of pledge. As a result thereof-total holding of the Appellant rose to 7,
67, 580 shares in APL (16.24% of the paid up capital). In this context SEBI prima facie felt that
the said acquisition of shares attracted the provisions of regulation 10 and decided to appoint an
Adjudicating Officer to inquire into the alleged contravention of the regulation read with section
15H of the Securities and Exchange Board of India Act, 1992 (the Act) and impose monetary
penalty if considered necessary.

The Adjudicating Officer so appointed, after enquiry viewed that there was failure on the part of
the Appellant to comply with the requirements of the regulation and consequentially levied a
penalty of Rs. 3 lakhs on the Appellant vide order dated 3.4.2001.

Shri Raghu Cidambi, learned representative appearing for the Appellant submitted that the
Appellant had not violated the provisions of regulation 10 as its holding never crossed the bench
mark of 10% specified in the regulation. Shri Cidambi explained the circumstances and sequence
of events involved in the acquisition. The position is summarised in the following chart,

Date Particulars Amount of loan

Sanctd. by Margadarsi Financiers (Ch. Kiron) (In Rs.) No. of shares of APL pledged as
collateral security Whether shares transfd. If yes, name Details of shares returned on
repayment of loan Percentage of holdings to paid up capital

22.8.96 Loan sanctioned to P.Ramana Reddy, Director, APL 30, 00, 000 55, 000
No. NIL 1.164

20.1.97 Loan sanctd. to P.V.Ramaprasad

Reddy, MD,APL 1, 15, 00, 000 3, 32, 540 Yes. Transfd. in the name of CH. Kiron,

Power of Attorney holder NIL 7.037

14.5.97 Loan sanctioned to P.Ramaprasad Reddy, MD, APL94, 25, 000 3, 80, 040
No. NIL 8.043

14.5.97 Loan of Rs.30 lakhs sanctd. to P.Ramana Reddy repaid -30, 00, 000
 -55, 000 1.16

1.7.98 Part payment of Rs.65 lakhs made by P.V.Ramaprasad Reddy -65, 00, 000
The entire 3, 32, 540 shares continued to be in the name of Ch.Kiron, as it was
only a part payment of loan N.A

25.5.98 to

21.9.98 77,400 shares of APL taken as delivery as a result of market purchases made by
Margadarsi FinanciersN.A N.A Transferred in the name of Shri C.H.Kiron N.A 1.638

25.9.98 Loan taken by P.R.Ramaprasad Reddy to the tune of Rs. 1. 15 crores & Rs.94.25
lakhs repaid in full on 25. 9. 1998 712580

(332540+

380040)

Returned N.A

28.9.98 to

9.12.98 22,700 shares of APL taken as delivery as a result of market purchases made by
Margadarsi FinanciersN.A N.A N.A N.A 0.48

The Appellant’s main submission is that as the shares were received by way of pledge the same
cannot be considered as an acquisition for the purpose of the Regulation for the reason that the
concept of pledge as per section 172 of the Indian Contract Act does not provide for vesting the
legal ownership of the property in the pledgee, it is considered only as a security for payment of
debt and the ownership of the goods pledged continue to remain with the debtor and the loan
agreements in the instant case provide only for the acquisition of shares for recovery of loan in
the event of the borrower committing default. According to him acquisition of shares is
therefore, contingent upon default and this contingency is entirely outside the control of the
Appellant. For an agreement to acquire shares to fall within the meaning of regulation 2(1) (b) it
is necessary for the acquirer to have the unfettered right to acquire the shares and such right
exercisable at his option. In a pledge, as in the instant case, the acquisition, if any, can only occur
if the Appellant chooses to exercise its option to acquire shares on the happening of default and
takes necessary steps for such acquisition. In this context the learned representative cited the
following cases: (1) Balakrishna Gupta and Ors.V. Swadeshi Polytex and Others (1985) 58
Comp.Cases 563 (SC), therein the Supreme Court had held that the pledgee cannot be treated as
the holder of the shares pledged in his favour and the holder continues to be the member in
respect of the shares and can exercise his voting rights. (2) A.K.Menon vs. Fair Growth Financial
Services Ltd & Anr. and Bank of India v. The Custodian and Anr. (1994) 81 Com.cases 508.
(Spl.Court). Shri Cidambi had also cited two Andhra Pradesh High Court decisions (1)
Md.Sultan & Others v. Firm of Ramprasad Kannayalal (1963 ALT 452) and (2) Narasayamma v.
Andhra Bank Ltd (1960 ALT 66) in this regard.

Shri Cidambi submitted that regulation 10 is attracted only in cases where the acquirer
consequent to such acquisition of shares gets entitled to exercise 10% or more voting rights in
the company, that in the instant case the voting right pertaining to the shares involved were never
transferred to the Appellant but remained with the borrowers. In this context he further submitted
that the pledged shares were all returned to the owners, when the loan amount was repaid, and
till then the shares were held as security for repayment of the loan. This is indicative of the true
nature of the transaction. He submitted that the shares in the instant case were held only in trust
for borrowers and as security for repayment of debt.

Learned representative submitted that every person who comes within the definition of
"acquirer" under regulation 2(1)(b), cannot be considered to have violated the regulation on
acquisition of shares, and every acquisition of shares which is more than 10% of the paid up
capital of the target company does not amount to violation of regulation 10, unless such
acquisition entitles the acquirer to exercise 10% or more voting rights in the target company.
According to him in terms of section 87 of the Companies Act only a person whose name
appears in the members register of a company is entitled to voting right and in that view of the
matter only a part of Appellant’s holding was entered in the register and that part holding was
less than 10%. He said that the legal right to vote in a company vests in a member and the
concept of member has been defined in section 41 of the Companies Act, and that in terms of the
definition the Appellant is not a member.

As an alternate submission Shri Cidambi stated that even if it is admitted that the 3, 32, 540
shares transferred in the name of the Appellant are to be taken into account, its holding did not
exceed the bench mark provided in the regulation requiring compliance of the requirements
stipulated therein.

Shri Cidambi countered the Respondent’s version that all those pledges which are not exempted
vide regulation 3 (1) (f) (iv) are covered under regulation 10, sating that in view of section 172 of
the Indian Contract Act, the same being the substantive law governing pledge, no specific
exemption is required to keep pledge of shares out of the purview of regulation 10 etc. He said in
certain cases even in a pledge the shares held by the pledgee may be registered in its name if the
agreement between the parties provides for the same and regulation 3 (1) (f) (iv) is meant to take
care of such extraordinary cases.

Referring to the Respondent’s version that the Appellant had not filed any statement in terms of
187 C of the Companies Act, in respect of the shares held by it, Shri Cidambi submitted that the
said section is applicable to benami holding and the Appellant being not a benamidar there was
no need to file any returns under the said section.

Learned representative submitted that the Appellant has not violated the provisions of regulation
10 and that in any case imposition of penalty was not warranted in this case, as none of the
factors referred to in section 15J existed, that the Adjudicating Officer had also endorsed the
same as could be seen from his finding in the impugned order that "Acquisition, by way of
pledge of shares by the promoters of APL, would not have resulted in any loss to any other
shareholders as there is no material impact on the price of the scrip there is a change in the
control of the company. The gain to MF (the Appellant) was only the interest they would have
earned for the loan they have given. This is in the normal course of their business". The learned
representative submitted that having recorded such a clear finding, the Adjudicating Officer
should not have imposed Rs. 3 lakhs as penalty.

Shri Ananta Barua appearing for the Respondent explained the factual position leading to the
conclusion that the Appellant had acquired shares beyond the bench mark provided in regulation
10 and failed to comply with the requirements of the said regulation. He stated that on 20.1.1997
the Appellant acquired 3, 87, 540 shares by way of pledge which constituted 8.20% of the paid
up capital of APL. Subsequently on 14.5.1997 the Appellant acquired additional 3,80,040 shares
of APL, also by way of pledge. The same day 55, 000 shares were returned to APL. As a result
thereof the total share holding by the Appellant accounted for 15.08% of the paid up capital of
APL

Shri Barua submitted that to constitute ‘acquisition’ in terms of the regulation delivery of shares
along with duly signed transfer deeds would be enough. In this context, he referred to the
definition of the expression ‘acquirer’ in regulation 2 (1) (b) that any acquisition would attract
the provisions, that the only requirement is that the subject matter of the acquisition should be
‘shares’ or ‘voting rights’ or ‘control’ over the company. He also referred to the definition of the
expression ‘shares’ in regulation 3 (1) (k) and stated that shares for the purpose means shares in
the share capital a company carrying voting right and includes any security which would entitle
the holder to receive shares with voting rights. According to him in the instant case the Appellant
had acquired APL’s equity shares carrying voting rights and these shares though held as security
entitled the Appellant to exercise voting rights at a later date.

Learned representative stated that as per the clear provisions of the Regulation it can be safely
concluded that the instant transaction was an acquisition. He stated that regulation 3 (1) (f)
expressly excludes acquisition of shares in the ordinary course by banks and public financial
institutions as pledgees, that this limited exclusion clearly confirms that acquisition of shares by
way of pledge by persons other than banks and public financial institutions is to be considered as
acquisition for the purpose of the Regulation, that if transfer of pledged shares, as a class was to
be excluded or exempt from the purview of the Regulations, no exemption would have been
specifically carved out for banks and public financial institutions. According to him the limited
exclusion in regulation 3 (1) (f) therefore clearly confirms that acquisition of shares by way of
pledge by persons other than banks and public financial institutions will come under the purview
of the Regulation. Shri Barua submitted that if the Appellant’s version that transfer of shares
during the subsistence of pledge should not be treated as acquisition for the purpose of the
Regulation is accepted, the same would totally nullify the Regulation and render it powerless as
parties would subvert the Regulation with impunity by resorting to the simple device of
acquiring shares in the garb of pledge. In this context Shri Barua referred to the decision of the
Supreme Court in Bhavesh D Parikh & Ors.v. Union of India (2000) 5 SCC 471) and stated that
the takeover regulation being an economic legislation, its provisions need be interpreted in such
a way so as to meet the mischiefs rather than for providing loopholes. He also cited the decision
of the Tribunal’s decision in the VLS Finance v.SEBI (2000) 39 CLA 257).

Shri Barua submitted that a loan agreement between the parties combined with physical delivery
of shares alongwith duly signed transfer deeds clearly amounted to an agreement to acquire
shares within the meaning of regulation 2 (1) (b). According to him the agreement referred to in
the regulation will also cover any agreement including pledge agreement whereby shares are
acquired. He stated that any persons who acquires or agrees to acquire shares or voting rights or
control in a company is an acquirer and the conduct of such an acquirer attracts regulation 10 on
holding 10% or more of the shares.

Referring to section 172 of the Indian Contract Act, Shri Barua submitted that, the actual
delivery of goods referred to therein encompasses delivery of shares and as such even if the
shares are given as security, by virtue of the fact that the possession is transferred to the lender,
delivery of shares could be construed as acquisition. Shri Barua pointed out that a total of 7, 67,
580 shares were acquired by the Appellant as pledgee by means of an agreement, and that out of
the said acquisition 3, 32, 540 shares were transferred in the name of the pledgee and in respect
of the remaining 4, 35, 040 shares the borrower directors of APL had submitted duly discharged
transfer deeds along with the share certificates, that the acquisition therefore is complete in all
respects and the Appellant became an acquirer in terms of regulation 2 (b), the acquisition having
crossed the bench mark attracted regulation 10. He stated that it is not necessary that shares need
be transferred in the name of the acquirer to attract the regulation.
Shri Barua submitted that Rs. 3 lakhs levied as penalty is against the maximum penalty of Rs. 5
lakhs provided in section 15H (ii) that the Adjudicating Officer has viewed the matter leniently
and arrived at a lesser amount, after taking into consideration all the relevant factors. He
submitted that therefore, there was no need to reduce the quantum of penalty.

I find that the facts are not in dispute in this case. The Appellant had received 7, 67, 580 shares
of APL (16.24%) by pledge against loan given by it to the Directors of the said company. Out of
the said shares, 3, 32, 540 (7.037%) shares were transferred in the name of the Appellant and the
remaining 4, 35, 040 (9.207%) shares though handed over to the Appellant, continued to remain
in the name of the borrowers on the register of members of APL. It is also seen that the entire
shares so received as security against the loan were returned to the borrowers by 25.9.1998 on
repayment of the loan amount.

In the context of the admitted fact that the acquisition was in the context of shares pledged with
the Appellant and that total shares involved constituted 16.24% of the paid up capital of APL, the
only question that is to be considered is that as to whether the shares so held by the Appellant
amounted to acquisition in terms of regulation10, requiring to make a public offer.

Before we proceed further in the matter it is felt that the concept of pledge need be clearly
understood as the parties herein have viewed the scope of the same differently. There is no
dearth of authorities in this regard. According to section 172 of the Indian Contract Act "The
bailment of goods as security for payment of a debt or performance of a promise is called pledge.
The bailor is in this case called the ‘pawner’ and the bailee is the ‘pawnee’". It is seen from the
definition that there are three essential ingredients of a pledge (1) there must be a bailment of
goods as defined in section 148 of the Contract Act, that is, delivery of goods (2) the bailment
must be by way of security (3) the security must be for payment of a debt or performance of a
promise. It is thus clear that a pledge is the delivery of goods by the pledger to the pledgee by
way of security upon a contract that they shall, when the debt is paid or the promise is
performed, be returned or otherwise disposed of according to the directions of the pledger. A
pledge would, therefore create an estate, which vests in the pledgee, which is distinguishable
from ownership. The title of ownership of the pledged property remains with the pledger.

The Respondent while defending the order had attempted to analyse the provisions of regulations
2 (1) (b) and 10, to bring home the point that the Appellant is an acquirer and the acquisition
attracted the requirement of making public offer, as provided in the regulation. According to
regulation 2 (1) (b) ‘acquirer means any person who directly or indirectly acquirers or agrees to
acquire shares or voting rights in the target company, or acquires or agrees to acquire control
over the target company, either by himself or with any person acting in concert with the acquirer’

In terms of regulation 10 "no acquirer shall acquire shares or voting rights which (taken together
with shares or voting rights if any held by him or by persons acting in concert with him) entitle
such acquirer to exercise ten percent (15% with effect from 28.10.1998) or more of the voting
rights in a company, unless such acquirer makes a public announcement to acquire shares of such
company in accordance with the Regulations’. (emphasis supplied)

On a perusal of regulation 2 (1) (b) it is clear that a person is an acquirer who acquires or agrees
to acquire shares or voting rights/control in the target company. The mode of acquisition of
shares or the purpose of acquisition is of not much significance to identify the acquirer. As has
been held in the case of Joshi Jayantilal v. State of Gujarat (AIR 1962 Gujarat 297) and as per
the Blacks Law Dictionary acquisition is the act of becoming the owner of certain property, the
act by which one acquires or procures the property in any thing. In this context it is to be noted
that the act of acquisition of shares or voting rights by itself will not attract the provisions of
regulation 10, though the person who acquired the shares or voting rights may fall within the
definition of the expression ‘acquirer’. Each and every acquisition by an acquirer need not
necessarily attract the provisions of regulation 10. What attracts the regulation is the acquisition
of shares/voting rights which will entitle the person acquiring the shares to exercise voting rights
beyond certain limits specifically provided in the regulation, say ten percent in regulation10.
Thus it is clear that a plain acquisition even if it exceeds 10% of the paid up capital of the
company will not attract regulation10, unless the acquisition entitle the acquirer to exercise ten
percent or more of the voting rights in the company.
In this context it is considered necessary to look at the legal provisions, which entitles a person to
exercise voting rights in a company. Section 87 (1) of the Companies Act, inter alia states that
every member of a company limited by shares and holding any equity share capital therein shall
have a right to vote, in respect of such capital on every resolution placed before the company.
The expression ‘member’ has been defined in section 41 as follows:

"41 (1) The subscribers of the memorandum of a company shall be deemed to have agreed to
become members of the company, and on its registration, shall be entered as members in its
register of members

(2) Every other person who agrees in writing to become a member of a company and whose
name is entered in its register of members, shall be a member of the company.

(3) Every person holding equity share capital of company and whose name is entered as
beneficial owner in the records of the depository shall be deemed to be a member of the
concerned company".

Thus it is clear that the voting right is vested in members and a person can be considered as a
member only if he falls in one of the categories referred to in section 41 of the Companies Act.
No doubt it is open to a member to become bound by contract to exercise voting power as
directed by another person

As discussed earlier, the legal ownership in the property, which is pledged, vests with the pledger
and does not pass automatically to the pledgee. What passes is merely the possession of the
property. It is well settled that if blank transfer forms along with share certificates are delivered
with the intention of sale, then the transferee gets a right to fill in his name and to get his name
transposed in the records of the company. However, in all cases where blank transfer forms
along with share certificates are handed over to the transferee, the same position will not apply.
Thus for example if a pledger hands over to the pledgee share certificates along with blank
transfer forms as and by way of pledge, the transaction still remains a transaction of pledge.
Mere receipt of share certificates along with blank transfer forms will not give to the pledgee any
right, title or interest in the shares. The right, title and interest and ownership of the shares will
continue in the pledger. The only right, which the pledgee will have, will be on non-payment to
have the shares sold after notice. Such sale can only take place after a notice to the pledger. This
is one instance where, even though blank transfer forms have been handed over along with share
certificates, there is still no transfer of ownership. Another instance may be where the shares
along with blank transfer forms are kept as security towards repayment of a debt. If they are
merely kept as security, then again by such deposit no right is created in favour of the creditor. It
is only after the agreed time of repayment is over that the security can be enforced and it is only
at that stage that the creditor gets a right to fill in his name in the transfer forms and get his name
transposed in the records of the company.

In the instant case it is seen that 3, 32, 540 shares (7.04%) were transferred in the name of the
Appellant and its name was entered in the members register maintained by APL, thereby
entitling the Appellant to exercise voting rights attached to those shares. For computing the
entitlement for exercising voting rights in APL, for the purpose of regulations, the said holding
has to be taken into consideration in view of the legal position that a member is entitled to
exercise voting rights. In view of the clear words in the regulation regarding entitlement to
exercise voting rights, the shares standing in the name of pledgee, though acquired by way of
security need be taken into account. However, it is not so in the case of the remaining shares
which were only held by the Appellant, but not registered in its name. The voting rights in
respect of the said shares remained with the pledgers. Even the loan agreement in the instant case
does not authorise the Appellant to exercise the voting rights attached to the said shares, on their
behalf. Shareholding, irrespective of the quantum, which does not entitle the person concerned to
exercise voting rights in the company, is to be discarded for computing the 10% benchmark in
regulation 10.

The Appellant’s submission that the entire quantum of shares received by it by way of pledge
need be excluded for the purpose of regulation 10 is untenable for the reason that in respect of
7.04% of the share capital it had become entitled to exercise voting rights. However that is not
the case with regard to the remaining portion of the shares held by it since these shares were only
"held" by it and the Appellant was not entitled to exercise voting rights attached to those shares,
it cannot be said that holding those shares amounted to acquisition to decide the bench mark
provided in regulation 10. Once the said holding is not taken into consideration, the Appellant’s
holding remains at 7.04% which is well below the threshold limit provided in regulation 10 and
therefore it was not required to make any public announcement to acquire shares in accordance
with the regulations.
The Respondent’s argument that since pledge has been specifically excluded from the scope of
the regulation in the case of banks and financial institutions and not in other cases and therefore
the instant case is covered by the Regulation is not acceptable. If the acquisition entitles an
acquirer to exercise ten percent or more of the voting rights in a company, then only the
regulation would be attracted. It is not the manner in which the shares are acquired. It is the
effect that triggers action. If the acquisition has no impact on the voting rights, regulation is not
attracted. In the light of the factual position discussed above, the Appellant had not become
entitled to exercise voting rights in the company over and above the said limit for the reason that
its holding of 435040 shares was not registered in the company’s register of members in its
name. Therefore, the regulation cannot be said to attract in this case. The Respondent's
apprehension that if "pledge" is not treated as acquisition, it would negate the purpose of the
Regulation is baseless as a ‘mere pledge' as such does not affect the management or control of
the company. It will not even affect the market quotation as the pledged shares are kept on hold
and not traded in the market. Change in possession of share certificates by itself, without
transferring attendant rights, will not affect the ownership or management control of a company.
The moment those shares are registered in the company’s register automatically the acquirer will
become entitled to voting rights and depending on the quantum of shares involved and its
attendant voting rights acquired regulation 10 also would attract.

Shri Barua had cited the case of Bhavesh Parekh and VLS Finance (Supra). Bhavesh Parekh’s
case was relied to show that in matters of economic policy Court should not interfere with the
decision of the expert bodies which have examined the matter VLS Finance case was relied to
show that simple shareholding would attract the regulation. But in VLS’s case the applicable
regulation was the one under the 1994 Regulations, which was replaced by the 1997 Regulations.
These two cases are therefore of no relevance to the matter under consideration.

Section 15H (ii), which the Adjudicating Officer has invoked for the purpose of imposing
penalty, is applicable only if a person, who is required under the Act, rules or regulations made
thereunder, fails to make a public announcement to acquire shares at a minimum price. The
Adjudicating Officer has imposed monetary penalty on the ground that the Appellant had
violated the provisions of regulation10, based on his finding that it acquired 15.04% shares of
APL without making an open offer. The said finding does not sustain for the reason that the
Appellant’s acquisition entitling it to exercise voting rights was below the 10% benchmark
provided in regulation10. Therefore imposition of penalty cannot be sustained.

For the reasons stated above the appeal is allowed and the impugned order is set aside.

(C.ACHUTHAN)

PRESIDING OFFICER

Place: Mumbai

Date: August 28, 2001