TakeoverCode ZOOM LENS: M/s Golden Tobacco Limited

Case Details:             ZOOM LENS of SEBI order in the matter of M/s Golden Tobacco   Limited
Target Company:      M/s Golden Tobacco Limited
Acquirers:                 Mr. Pramod Jain and M/s Pranidhi Holdings Private Limited along with the 
                                 J.P. Financial Services Private Limited (PAC)
Industry:                   Tobacco, Cigarettes, Biris      
Merchant Banker:    VC Corporate Advisors Private Limited         


Target Company:
Established in the year 1930 by late Shri. Narsee Monjee, Golden Tobacco is the first wholly owned indigenous company in the country, taken over by Dalmia Group in the year 1979. The group is headed by Mr. Sanjay Dalmia as Chairman & Mr. Anurag Dalmia as Vice Chairman. The Target Company is engaged in the manufacturing and marketing of cigarettes and processed tobacco. The Equity Shares of the Target Company are listed at BSE and NSE.
  1. Mr. Pramod Jain is one of the Director and Promoter of Pranidhi Holdings Private Limited, having more than 25 years of experience in Financial and Consultancy Services. 
  2. Pranidhi Holdings Private Limited (PHPL) is engaged in the activities of investment in shares and securities and real estate projects. The shares of PHPL are not listed on any stock exchange. 
  3. J.P. Financial Services Private Limited (JPFSPL) is presently engaged in the activities of Investments in shares & securities and providing Loans & Advances. JPFSPL is registered with Reserve Bank of India as Non-Banking Financial Company having Registration No. 05.01828. 
  4. PHPL and JPFSPL are Business Associates.
Sellers: N.A

Triggering event:
1. On November 12, 2009, Pramod Jain and Pranidhi Holdings Private Limited (Acquires) along with the J.P. Financial Services private Limited (PAC) made a Voluntary Public Announcement (PA) under Regulation 10 and 12 of SEBI (SAST) Regulations, 1997 to acquire 44,02,201 (25%) Equity shares of the Golden Tobacco Limited (Target Company) at a price of Rs. 101 per share. As on the date of PA, the Acquirers and PAC collectively held 6.47% equity shares of Target Company.

2. The Acquirers and PAC filled the Draft Letter of Offer (DLO) with SEBI on November 26, 2009. During the examination of DLO, SEBI received certain complaints against the Acquirers and PAC as well as against Target Company and its promoters. On October 11, 2011, the Acquirers along with the PAC through VC Corporate Advisors Private Limited (Manager to the offer) requested SEBI for the permission to withdraw the open offer under Regulation 27(1)(d) and to grant an opportunity of personal hearing in the matter.The submissions are made under the following heads :-

1. Delay in issuing observations:
The open offer is delayed for no default of Acquirer since all the information required by SEBI was furnished on time. SEBI has given importance only to frivolous complaints made with intention to delay the open offer and has not considered the complaints made by acquirers against the Target Company.

2. Malafide intention of management of the Target Company:
  • During the delay in the open offer, management of the Target Company had availed huge high cost borrowing from the Banks and Financial Institutions against the mortgage of property of Target Company and pledging of 18.7% shares of the Target Company, which includes 26.57% of promoter’s shareholding. The promoters further resorted to settle their personal borrowings by sale of prime properties of Target Company as evident from FIR dated July 25, 2009. 
  • A Memorandum of Understanding (MOU) was executed between Sheth Developers Private Limited & Suraksha realty Limited and Target Company for development of the property and advanced amount of Rs. 125 Crore was already received but the same was not disclosed to the shareholders of the Target Company and to the Stock Exchange. The shareholders approval for the said agreement was not obtained in the following AGM and was obtained through postal ballot under section 293(1)(c) of the companies act on February 12, 2011. Later, the Target Company decided not to proceed with the MOU but the company did not return the advanced amount resulting which the original title deeds of the Property are still in possession of Developers. 
  • Siphoning of funds- The Target Company has advanced a sum of Rs. 172 crores to its Subsidiary Company for the creation of Development rights and then diverted the money to the entities controlled by the promoters of the Company. This is evidence by the fact that the Subsidiary company has no operation income.
3. Deteriorating financial health of the Target Company
The Acquirers have taken into account the Book Value and EPS of the Target   Company before fixing the price of Rs. 101. The EPS has now substantially reduced to Rs. (19.27) due to huge losses in last one and half year. Moreover the Target Company has made an application for extension of the BIFR scheme and the appeal is pending before AAIFR.

Grounds for Withdrawal of Open Offer:
  1. The voluntary offer made by Acquirers does not give any vested rights to the shareholders as in case of triggered offer. Therefore withdrawal of offer should be granted by giving the reference of SC decision on the case of Deena v/s Union of India where it was decided that decision has to be looked at in the light of facts before the court deciding the matter. 
  2. The inability of the Acquirers to go ahead with the open offer has defeated the primary objective of taking over the management and control over the Target Company, which was identified as an asset-rich company and whose performance has been deteriorated due to poor management. The drastic changes in the key financial parameters have made the offer difficult.
  3. Judgment of Hon’ble SAT in the case of Nirma’s Industries Limited should not be applied in the above case because in Nirma case it was a triggered offer and by conducting proper due diligence the acquirer could have discovered the alleged fraud. However in the present case, the fraudulent activities of promoters were not within the knowledge the Acquirers. 
  4. In the matter of BP Amco Plc and Castrol Limited vs SEBI, Hon’ble SAT held that if for any reason the acquisition did not materialize, the Acquirer is entitled to withdraw offer under Regulation 27. 
  5. Changes in the book value, EPS,current assets and liabilities, loans and advances extended, having regard to the significant time gap since the date of making Public Announcement have made the basis of arriving at offer price unrealistic and infructuous.
SEBI Decision:
On the submission made by the Acquirers against the promoters regarding creation of third party interest on properties of Target Company and violation of Regulation 23(1), SEBI noted that it has no scope to interfere in this matter and that the Acquirer has already filled the petition before Company Law Board which has already been settled between the Acquirer and Target Company and petition has been withdrawn. Further SEBI clarified that it has been corresponding with the manager to the offer/ Acquirer/ PACs from time to time in the subject matter and therefore allegation that there was delay on the part of SEBI is incorrect.

Further upon the issue of withdrawal of offer, SEBI considered that while determining the merit of the case under Regulation 27(1)(d), the interest of shareholders should be kept in mind to ensure the fair and equal treatment. In this matter, SEBI held that Regulation 27(1)(d) are exceptional to the general rule of the withdrawal and does not provide the automatically approval of withdrawal instead require the SEBI approval. Further it was considered that Regulation 27(1) equally applicable on all type of offers whether it is voluntary offer or mandatory offer. Therefore contention of Acquirer as to give the different treatment to them in relation to the Voluntary offer being made is not sustainable.

Moreover SEBI stated that Judgment of the SAT in the Nirma’s case is not a fact specific and has given ruling on the interpretation and scope of law enumerated in Regulation 27(1). In this case, SAT has given more stress on the word ‘such circumstances’ mentioned in clause (d) explaining the impossibility of the acquirer to go through with the public offer. Therefore the Judgment of the case is relevant in this case.

SEBI further held that the Acquirers and PAC holds significant stake (6.47%) in the Target Company, therefore they should have exercised due diligence before making Public Announcement and only after most careful considerations, they must have ensured that they are able to implement the offer.

Therefore after considering all the facts and circumstances, submission made by the Acquirer SEBI held that the fall in market price or devaluation of EPS etc cannot be reasons to permit withdrawal of open offer under Regulation 27(1) (d) accordingly SEBI do not permit the withdrawal and further held that the SEBI shall investigate to find out violations of Takeover Regulations, Listing Agreement and SCRA by the Target Company as alleged in the matter.

Offer Details:  N.A

Distinguishing Feature:
Regulation 27 of SEBI (SAST) Regulations, 1997 dealing with Withdrawal of Offer is equally applicable on all type of offers whether it is voluntary offer or mandatory offer.

Prepared by: Ms. Ruchi Hans
For any professional query, please contact:
Ms. Divya Vijay

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