[Case Brief] M/s. Discovery Wealth Management Services Pvt. Ltd. & Ors. vs. M/s. Padmini Engineering Pvt. Ltd.

Case name M/s. Discovery Wealth Management Services Pvt. Ltd. & Ors. v/s M/s. Padmini Engineering Pvt. Ltd.
Case number Appeal No. 5027 of 2008
Court Supreme Court of India 
Bench Justice Dipak Mishra and Justice U.U. Lalit
Decided on  December 10, 2014
Relevant Act/Sections Securities Contract (Regulation) Act, 1956 [SCRA] – Section 30

Securities Contract (Regulation) Rules, 1957 [SCRR] – Rule 19(2)(b)

SEBI (Delisting of Securities) Guidelines, 2003

Author of the case sumary Ayush Gupta

BACKGROUND

M/s Hella India Lighting Ltd. (“Hella India”) is a public company whose shares are listed on Bombay Stock Exchange (“BSE”) and Delhi Stock Exchange (“DSE”) pursuant to the listing agreement executed on 17.10.1986. Reinhold Poersch Gmbh (“Promoter”) holds 51% in Hella India.

Hella India decided to have its shares delisted from both exchanges and thus it proceeded with its proposal of delisting by taking necessary steps and applying to the exchange in this regard. BSE declined the proposal for such delisting citing violation of rules. Padmini Engineering (Respondent-1) challenged BSE’s decision before SAT where the BSE’s order was reversed. The present appeal is filed against the judgment passed by SAT setting aside the order passed by BSE which declined to grant the benefit of delisting of Hella India from its trading platform.

BRIEF FACTS OF THE CASE

In July, 2005, Hella India decided to have its shares delisted from both the Stock Exchanges in accordance with the provisions contained in the SEBI (Delisting of Securities) Guidelines, 2003 (“the guidelines”). In January 2006, a voluntary offer was made to the public shareholders to acquire their shares.  The offer was made by a public announcement through Respondent-1, an affiliated entity of the promoter, at an exit price of Rs. 52.39/share for delisting of securities in accordance with the book building process as prescribed by the guidelines.

Respondent-1 had accepted the shares and approached BSE requesting it the completion of settlement of transaction, and delist the shares of Hella India from its trading platform. BSE declined to proceed with the request citing that the threshold limit for delisting on the Exchange would be triggered only when the acquirer’s holding, together with promoters, exceed 90% which is not the case in the matter at hand.

In other words, BSE was of the view that the level of the public shareholding in Hella India had not gone below 10% and, therefore, delisting could not be allowed.

Appeal against decision of BSE

Aggrieved by the decision of BSE declining to delist the shares of Hella India, Padmini Engineering appealed against such decision before SAT.

Observations made by SAT

SAT relied on Section 30 of SCRA, 1956 r.w. Rule 19 (2) (b) SCRR 1957 which lays down the requirements for listing of securities on a recognized stock exchange. Companies which fulfill the conditions of clause (b) have to maintain at least 10 % of public shareholding out of their total voting capital, and others who do not fulfill those conditions have to maintain a minimum of 25%. Now, since Hella India does not fulfil the conditions laid down in Rules 19(2)(b) of the Rules, it has to maintain a minimum level of 25% of public holding for continuous listing.

This condition which forms part of the listing agreement when read with clauses (4), 8(8) and 12 of the guidelines would make it clear that if the public shareholding of Hella India was ever to fall below 25%, it would become eligible to get delisted. In the present case, the acceptance by the acquirer of the shares offered by the public would bring the public shareholding of Hella down to 18.63% of its total equity share capital.  This level of public shareholding entitles Hella India to get its securities delisted on BSE in terms of Rule 19(2) of the Rules read with the guidelines. Thus, BSE was not justified in holding that the limit for delisting would get triggered only when the public holding would fall below 10 per cent or, to put it the other way, the acquirers’ holding together with promoters’ holding exceed 90 per cent.  We have, therefore, no hesitation in setting aside the impugned decision of BSE.”

ISSUE INVOLVED

Whether listing agreement can provide for a more onerous requirement than what is created under law?

ARGUMENTS FOR THE APPELLANT [Mr. A.J. Bhambhani, Ld. Sr. counsel, Mr. Arvind Datar, Ld. Sr. Counsel appearing for SEBI]

The appellant contended that even if the condition incorporated in the agreement is accepted delisting could not have been allowed. He relied on a Circular dated 02.05.2001 issued by the SEBI by virtue of which the Respondent-4 (Hella India) was required to maintain benchmark of 10% and not 20%.

Further, attention of the court was drawn to Rule 19(2)(b) of the SCRR, which has been brought in by way of amendment.  The said Rule deals with requirements with respect to the listing of securities on a recognized stock exchange.  The relevant portion of Rule 19(2)(b) reads as under:

“19(1) **** **** ***

(2) Apart from complying with such other terms and conditions as may be laid down by a recognised stock exchange, an applicant company shall satisfy the stock exchange that”

(a) *** *** ***

(b) At least 10 per cent of each class or kind of securities issued by a company was offered to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer were allotted subject to the following conditions:

(a) minimum 20 lakh securities (excluding reservations, firm allotment and promoters’ contribution) was offered to the public;

(b) the size of the offer to the public, i.e., the offer price multiplied by the number of securities offered to the public was minimum Rs.100 crores; and

(c) the issue was made only through book building method with allocation of 60 per cent of the issue size to the qualified institutional buyers as specified by the Securities and Exchange Board of India:

Provided that if a company does not fulfil the conditions, it shall offer at least 25 per cent of each class or kind of securities to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer were allotted.”

The Counsel argued that as per the new guidelines the benchmark has to be 10%. For the aforesaid purpose, he has highlighted Clause 40A (infra) of the Circular, i.e., conditions for continued listing.

ARGUMENTS FOR THE RESPONDENTS [Mr. Shyam Divan, Ld. Sr. Counsel (Respondent-1 and 4)]

It was contended that Clause 40A of the agreement has to be read in conjunction with the delisting guidelines. That apart, it is contended that Clause 40A(i) and Clause 40A(ii) govern two different situations, and hence, the order of delisting cannot be found fault with.

“Clause 40A – Conditions for continued listing –

(i) The company agrees that in the event of the application for listing being granted by the Exchange, the company shall maintain on a continuous basis, the minimum level of non-promoter holding at the level of public shareholding as required at the time of listing.

(ii) Where the non-promoter holding of an existing listed company as on April 01, 2001 is less than the limit of public shareholding as required at the time of initial listing, the company shall within one year raise the level of non-promoter holding to at least 10%.  In case the company fails to do so, it shall buy-back the public shareholding in the manner provided in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.”

APEX COURT’S OBSERVATION

After carefully scrutinizing Clause 40A of the Circular, the Court remarked that sub-clause (i) to such clause, as the language would suggest, provides that the listing company agrees to maintain, on a continuous basis, a minimum level of public shareholding at the level of public shareholding as required at the time of listing.  It clearly conveys the meaning that if there is a benchmark in the agreement, the same has to be maintained.

Appellant would emphasize on Clause 40A(ii) to contend that the company has to maintain the benchmark at 10% and it can only conceive of delisting if it goes below that. 

Respondent, per contra, would submit that before the Circular was issued, certain listed companies had less than 10% of non-promoter holding and, therefore, the Circular was issued that they should, within one year, bring it to 10%.  The submissions are to be appreciated in the context of the language employed in the Rule 19(1)(b), 2003 Guidelines and the agreement with the BSE.

JUDGEMENT

  1. The Court observed that the procedure prescribed by 2003 guidelines requires a promoter who proposes to delist the shares of the listed company to make an offer for purchase of shares in terms of clauses 8.1 to 8.3. The said exercise has to be completed within a period specified in clauses 8.1 and 8.5. The whole process has to be monitored by the Stock Exchange and the Registrar and transfer agency has to ascertain the genuineness of the physical securities tendered, etc.

    Clause 8.8 of 2003 guidelines stipulate that required level of public shareholding must fall below the level of continuous listing for entitling a listed company to be delisted from the exchange.
    Clause 12.1 of 2003 guidelines, states that the offer of delisting would fail if the public shareholding does not fall below the minimum limit specified by  the listing conditions or the listing agreement.
    It is quite vivid that the 2003 guidelines do not prescribe or fix the required level of public shareholding of continuous listing though the said limit must be breached for an offer of delisting to succeed.  It is condign to note that clause 12.1 refers to minimum limit specified by the listing condition or the listing agreement.

  1. As is evincible, Rule 19(2)(b) provides that at least 10% of each class or kind of securities must be offered to public for subscription through advertisement in newspaper during the time specified and the applications received pursuant to such offer should be allotted as per the conditions postulated. The proviso engrafts states that in case the company does not fulfill the conditions, it shall offer at least 25% of each of the securities to the public for subscription though advertisement in newspaper, etc. within the time stipulated. The opening words of sub-rule (2) of Rule 19 read as –

    “apart from complying with such other terms and conditions as may be laid down by a recognized stock exchange, an applicant company shall satisfy the stock exchange”.

    These words have their own importance.  It is clear that sub-rule (2) gives primacy to the terms and conditions as may be laid down by the recognized stock exchange and the company in question must satisfy the condition imposed by the stock exchange in that regard.  As we find, in the instant case, as per the agreement between the company Hella India and BSE, the level of public shareholding fixed for continuous listing was 20%.  The said limit of 20% is a higher limit.  On failure of “Hella India” to maintain the level of 20%, the condition for continuous listing would be violated and breached.  Public holding of 10% would not have satisfied the requirement of Rule 19(2).

    Therefore, when the listing requirement (i.e. the agreement with BSE) is harmoniously read with Rule 19(2) along with 2003 Guidelines, it is apparent and limpid that the condition for continuous listing would not have been followed by “Hella India”, if the public shareholding had fallen below 20%.  Thus, it has to be held that offer of delisting would be successful and would not fail, if the public shareholding falls below 20%.  The 10% limit would not apply in view of Rule 19(2) as the said Rule recognizes the terms and conditions laid down by recognized stock exchange and stipulates that the same must be satisfied for the company to claim continuous listing.

    It was thus held that the order passed by SAT was held to be valid.

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