SEBI’s Takeover Regulations and Public Offer Withdrawal: Supreme Court’s Verdict on Pramod Jain vs. SEBI
The Supreme Court of India, in the case of Pramod Jain & Others vs. Securities and Exchange Board of India (SEBI), dealt with a crucial issue concerning the withdrawal of a public offer to acquire shares of a company under SEBI’s Takeover Regulations, 1997. The key question was whether an acquirer, after making a public offer, could withdraw the offer due to changes in the target company’s financial condition and SEBI’s delay in approving the offer.
The appeal was filed against the order of the Securities Appellate Tribunal (SAT), which upheld SEBI’s decision rejecting the appellants’ request to withdraw the public offer. SEBI held that once a public offer is made, it cannot be withdrawn except under exceptional circumstances outlined in Regulation 27 of the Takeover Regulations.
Background of the Case
The dispute arose when Pramod Jain and Pranidhi Holdings Pvt. Ltd. (the acquirers), along with J.P. Financial Services Pvt. Ltd. (Person Acting in Concert or PAC), made a public announcement (PA) on November 12, 2009, to acquire 25% shares of Golden Tobacco Ltd. The offer was made at Rs. 101 per share when the market price was Rs. 109 per share.
The acquirers claimed that during the two years SEBI took to approve the offer, the financial position of the target company deteriorated significantly. They argued that the promoters of Golden Tobacco Ltd. engaged in financial misconduct, depleted company assets, and encumbered valuable properties, making the acquisition unviable.
Key Legal Issues
The Supreme Court considered the following legal questions:
- Whether SEBI’s delay in approving the public offer justified its withdrawal.
- Whether actions taken by the target company after the public offer, such as encumbering assets, constituted valid grounds for withdrawal under Regulation 27.
- Whether the acquirers had exercised due diligence before making the public offer.
Petitioner’s Arguments
The acquirers, represented by Pramod Jain and others, contended:
- SEBI took an unreasonable amount of time (over two years) to approve the offer, during which the financial condition of Golden Tobacco Ltd. deteriorated.
- The promoters engaged in mismanagement, including siphoning funds, encumbering assets, and entering into disadvantageous agreements, which made the acquisition unfeasible.
- The delay and changes in the target company amounted to a “frustration of contract” under the Indian Contract Act, making it impossible for the acquirers to fulfill the offer.
- Regulation 27(1)(d) allowed SEBI to permit withdrawal in cases where circumstances made it impossible to complete the public offer.
Respondent’s Arguments
SEBI, defending its decision, argued:
- The Takeover Regulations are designed to protect shareholder interests and ensure that public offers, once made, are honored.
- The acquirers were not new to the company; they already held 6.47% shares and had been financially involved with Golden Tobacco Ltd.
- The deterioration in financial condition was partly due to pre-existing issues, and the acquirers should have conducted proper due diligence before making the public offer.
- Even if the target company engaged in financial misconduct, remedies were available through company law and regulatory proceedings, but not through withdrawal of the offer.
Supreme Court’s Observations
The Supreme Court examined whether SEBI’s delay and the target company’s financial changes justified the withdrawal of the public offer. The key observations were:
1. SEBI’s Delay and its Impact
- The Court acknowledged that SEBI took an unreasonable amount of time to approve the offer, which was against the prescribed timelines in the Takeover Regulations.
- However, SEBI’s delay alone did not justify withdrawal unless it made the completion of the public offer impossible.
2. Impact of Target Company’s Financial Changes
- The Court noted that the alleged financial misconduct by Golden Tobacco Ltd. occurred before and after the public announcement, but the acquirers had remedies available under company law to challenge these actions.
- Regulation 23(1) required the target company to obtain shareholder approval before selling or encumbering assets. Since such approval was obtained, the acquirers could not claim that the actions were illegal.
- The acquirers had initially challenged these transactions before the Company Law Board but later withdrew their objections.
3. Due Diligence by the Acquirers
- The Court held that acquirers must conduct thorough due diligence before making a public offer.
- Since they already held shares and had financial dealings with the target company, they should have been aware of its financial condition before making the offer.
Final Judgment
The Supreme Court ruled against the appellants, holding that:
- SEBI’s delay was unjustified but did not automatically entitle the acquirers to withdraw the offer.
- The target company’s actions did not make it impossible for the acquirers to complete the offer.
- Public offers cannot be withdrawn based on business misfortunes or changes in financial viability, as this would defeat the purpose of the Takeover Regulations.
Thus, the Court upheld SEBI’s decision and dismissed the appeal.
Judgment Outcome: Appeal dismissed.
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