Delhi High Court
Kds Corporation Pvt. Ltd. And Anr. vs The Securities And Exchange Board ... on 7 April, 2015
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on : 07.04.2015
+ W.P.(C) 3300/2015
KDS CORPORATION PVT. LTD. AND ANR .........Petitioners
Through: Sh. Arun Kathpalia, Sh. Saurabh Seth, Ms.
Sonia Dula, Ms. Ankita Singh and Sh. Anurag Singh,
Advocates.
Versus
THE SECURITIES AND EXCHANGE BOARD OF INDIA AND
ORS. ...........Respondents
Through: Sh. Sudhanshu Batra, Sr. Advocate with Sh.
Shailesh Rana, Advocate.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE R.K. GAUBA
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
%
1. In these proceedings under Article 226 of the Constitution of India, a
writ, order or direction in the nature of mandamus directing the Securities
and Exchange Board of India (SEBI), the first respondent herein, to order an
investigation under Regulation 5 of the SEBI (Prohibition of Fraudulent and
Unfair Practice Relating to Securities Market) Regulations, 2003 ("the
Regulations") into the proposed delisting of the equity shares of M/s. Spice
Mobility (Respondent No.4, hereafter "Spice") from the Bombay Stock
Exchange (BSE) and National Stock Exchange (NSE) (Respondent Nos. 2
and 3), not to grant any approval to the proposed delisting of the equity
W.P.(C) 3300/2015 Page 1
shares of Spice from the BSE and NSE pending such investigation and also
to direct stay of the process of delisting till pendency of such investigation
by the SEBI is sought.
2. The petitioners contend that they became aware, on 24.01.2015, of a
postal ballot notice dated 09.01.2015 uploaded on the website of the second
and third respondents seeking approval through postal ballot for voluntary
delisting of the equity shares of Spice, from BSE and NSE. They sent a
protest letter dated 27.01.2015 demanding that the postal ballot notice be
recalled, which Spice refused by letter dated 06.02.2015. Thereafter on
18.02.2015, the petitioners represented to SEBI, claiming an investigation
under Regulation 5 of the Regulations, into the proposed delisting of the
equity shares of Spice from the BSE and NSE and to direct the latter
respondents not to grant any approval to the proposed delisting of Spice‟s
equity shares from the BSE and NSE pending such investigation by SEBI.
SEBI omitted to take action or respond to the petitioners. On 23.02.2015,
Spice passed a resolution approving the delisting.
3. The petitioners are aggrieved by the inaction of SEBI in initiating an
investigation into the proposed delisting of the equity shares of Spice from
the NSE and BSE. The petitioners allege that the said delisting would cause
huge financial loss to them as the current market price of the said shares is `
28/- while they had, during the financial year 2009-2010, acquired
15,34,487 equity shares at a price ranging from ` 105/- to ` 140/- each. It is
also alleged by the petitioners that two trusts namely "Mahesh Prasad-
Independent Non Promoter Trust" and "Mahesh Prasad-Independent Non
Promoter (Spice Employee Benefit) Trust" (hereinafter referred to as "the
W.P.(C) 3300/2015 Page 2
trusts"), holding 15.49% and 5.22% of the issued and paid up equity share
capital, are listed as public shareholders, but in reality the trusts are under
the control of the promoter (the seventh respondent, holding 74.36% of the
issued and paid up capital of the company) of Spice, which is allegedly
using the votes cast by these trusts to delist the shares from BSE and NSE. It
is also argued that such trusts cannot be characterised as public shareholders
as that would be in violation of Regulation 3(9) of the SEBI (Share Based
Employee Benefits) Regulations, 2014. The petitioners also submit that
during the period July 1, 2014 to December 31, 2014, 10,20,617 shares have
been traded in 8952 trades and that 10,20,617 shares in a period of six
months cannot be considered as limited volume ("there is limited liquidity in
the scrip of the Company", as stated by the Spice) and thus the proposal of
delisting is against the interest of shareholders.
4. Regulation 3(9) of the said regulations is reproduced below for ease
of reference:
"Regulation 3(9): For the purpose of disclosures to the stock
exchange, the shareholding of the trust shall be shown as „non-
promoter and non-public‟ shareholding.
Explanation: For the removal of doubts, it is clarified that shares
held by the trust shall not form part of the public shareholding
which needs to be maintained at a minimum twenty-five percent as
prescribed under Securities Contracts (Regulation) Rules, 1957."
5. Reliance has been placed by the petitioners on the order dated
08.10.2014 of the High Court of Bombay in Pankaj Bhatt & Anr. Vs. Union
of India & Ors.(WP(C) No. 2157 of 2014), which according to the
petitioners is similar to the case in hand. In the above case, the petitioners
were aggrieved by the order of the SEBI, which permitted the delisting of
W.P.(C) 3300/2015 Page 3
companies to be proceeded with even after prima facie finding that a
particular company holding majority public shares was possibly under the
control of the respondent company‟s promoter and that it was acting in
concert with the respondent company‟s promoter. The court found that SEBI
had erred in permitting the respondents to proceed with the delisting and
injuncted the respondents from delisting.
6. In reply to the protest letter dated 27.01.2015 of the petitioners, Spice
issued a letter dated 06.02.2015 answering the claims and allegations of the
petitioners. Spice contended that the offer price would be determined
through book building process after determination of floor price by the
promoters and the Merchant Banker, in accordance with the SEBI (Delisting
of Equity Shares) Regulations, 2009 and hence, all public shareholders of
the equity shares, sought to be delisted shall be entitled to participate in the
book building process in adherence to Schedule II of the SEBI (Delisting of
Equity Shares) Regulations, 2009. The shareholders so participating may
place their bids at a price which may be at or above the floor price. The
shareholder also has the option to stay invested in the company and not to
tender shares. It is also urged by Spice that the equity shares are
„infrequently traded‟ and the proposed delisting is in the interest of the
public shareholders from the perspective of providing an exit opportunity, in
the circumstances, as per the parameters specified in SEBI (Delisting of
Equity Shares) Regulations, 2009.
7. Spice denied the Petitioners‟ allegations that the trusts are under the
control of the seventh respondent. The petitioners urge that the shares which
were held by Spice Televentures Private Limited, the transferor company,
W.P.(C) 3300/2015 Page 4
were transferred to the trusts pursuant to the scheme of amalgamation under
Sections 391/394 of the Companies Act, 1956, duly approved by this court
and the Allahabad High Court, whereby Spice Televentures Private limited
merged with Spice, the fourth respondent. The said respondent further
responded that the trusts were and would continue to remain independent
bodies under the control of their respective trustees and that there is no
interference from other external bodies. The newspaper report dated
04.02.2011 sets out that the trusts were created for the benefit of employees
of the fourth respondent, its subsidiaries and associate companies and one
Mahesh Prasad, is the managing trustee who reportedly stated that the gains
derived from selling the shares will be distributed among the top 300
employees.
8. This court has carefully considered the submissions. The allegation of
the petitioners that the proposed delisting would cause heavy financial loss
cannot be accepted for the reason that in the instant case, acquiring shares or
divesting their holding from a company is a voluntary act which is carried
out at the option of a shareholder. Neither Spice nor the seventh respondent,
have not concededly, forced the petitioners to divest from the company.
Spice in its letter dated 06.02.2015, has stated that the delisting and the
consequent determination of the offer price, floor price and the final offer
price would be in accordance with the extant SEBI regulations, i.e. through
book building process and that the shareholders including the petitioners
have a right to participate in the same (Regulation 14(1), SEBI (Delisting of
Equity Shares) Regulations, 2009).
9. Regulation 15 (2) provides as follows:
W.P.(C) 3300/2015 Page 5
"15. (1)....
(2)...
(a)...
(b)...
(c)...
Explanation: For the purposes of this sub-section, equity shares
shall be deemed to be infrequently traded, if on the recognised
stock exchange, the annualised trading turnover in such shares
during the preceding six calendar months prior to month in which
the recognised stock exchanges were notified of the board meeting
in which the delisting proposal was considered, is less than five
percent (by number of equity shares) of the total listed equity
shares of that class and the term „frequently traded‟ shall be
construed accordingly.
(3)..."
10. In these writ proceedings, this court cannot on the basis of assertions,
facially hold that the shares or scrip of the company is adequately traded or
otherwise. Likewise, the allegation that the trusts are under the control of
seventh respondent and are acting in concert with that respondent is a
factual dispute for which this court, in judicial review is hardly equipped to
deal with. Prima facie, it appears that the petitioners appear to have raised
this allegation on an apprehension that Spice would influence the trusts and
use the votes cast by the trusts to delist from the BSE and NSE. Under
Regulation 3(9) of the SEBI (Share Based Employee Benefits) Regulations
2014, shares held by trusts such as the trusts in question would not form part
of public shareholding under the minimum 25% rule provided for in the
Securities Contracts (Regulation) Rules, 1957. The petitioners allege that
characterisation of the trusts as public shareholders is in violation of the
above mentioned provision. The petitioners‟ case is that the order of the
Bombay High Court in Pankaj Bhatt (supra) is similar to the case at hand. In
W.P.(C) 3300/2015 Page 6
that decision the Court while allowing the claim for injunction against
delisting, had sufficient reasons to believe that injury might be or may
already have been caused. Here, we note that the power of the SEBI to order
for an investigation as envisaged in Regulation 5 of the Regulations is
discretionary power. Regulation 5 of the said regulations is reproduced
below for ease of reference:
"5.Where the Board, the Chairman, the member or the Executive
Director (hereinafter referred to as "appointing authority") has
reasonable ground to believe that--
(a) the transactions in securities are being dealt with in a manner
detrimental to the investors or the securities market in violation of
these regulations;
(b) any intermediary or any person associated with the securities
market has violated any of the provisions of the Act or the rules or
the regulations,
it may, at any time by order in writing, direct any officer not
below the rank of Division Chief (hereinafter referred to as the
"Investigating Authority") specified in the order to investigate the
affairs of such intermediary or persons associated with the
securities market or any other person and to report thereon to the
Board in the manner provided in section 11C of the Act."
11. The language of the above regulation shows that the SEBI has
discretionary powers of investigation. This power may be exercised upon
satisfaction as to existence of reasonable ground to believe that violation in
terms of Regulation 5 (a) or (b) has occurred. The power is not compulsive
in the sense that depending on the facts shown the SEBI may chose either to
investigate the matter or not to pursue it furhter. Since the Petitioners have
represented to the SEBI, which has not made any order in that regard, it
would be inappropriate for this court to assume that the said body would not
W.P.(C) 3300/2015 Page 7
act, act improperly or act in a manner contrary to the Regulations. Any
direction in exercise of judicial review at this stage would be based on the
assumption of objective facts. All that this court can do is to require the
SEBI to deal with the Petitioners‟ representation, in accordance with law
within a reasonable time, having regard to the facts presented to it. It is
open to the petitioners to seek appropriate remedies in accordance with law.
12. The writ petition is accordingly disposed off in the above terms.
S. RAVINDRA BHAT
(JUDGE)
R.K. GAUBA
(JUDGE)
APRIL 07, 2015
W.P.(C) 3300/2015 Page 8
