Holding

The acquirer is not liable to pay the non‑compete fee to public shareholders as the fee is below the 25% threshold and the tribunal erred in treating part of the agreement as a sham.

Summary

P. Holding Asia Singapore Ltd. and its holding company acquired 53.46% of Andhra Pradesh Paper Mills Ltd. from the Bangur group for Rs. 523 per share, also paying an exclusivity fee and a non‑compete fee of about Rs. 277.95 crore. SEBI directed the acquirers to increase the public offer price by adding the non‑compete fee on a per‑share basis, arguing that the fee should be treated as part of the consideration payable to all shareholders. The Securities Appellate Tribunal held that the non‑compete agreement was a sham and that the acquirers were liable to pay the fee to public shareholders, splitting the agreement between five and fifteen promoter entities. The Supreme Court held that Regulation 20(8) of the Takeover Code only triggers SEBI’s jurisdiction when the non‑compete fee exceeds 25% of the offer price, which it did not in this case, and that the tribunal erred in treating only part of the agreement as a sham. Consequently, the Court set aside SEBI’s and the Tribunal’s orders and allowed the appeal, finding no liability on the part of the acquirers to pay the non‑compete fee to public shareholders.

Issues considered

The applicability of Regulation 20(8) of the SEBI Takeover Code to a non‑compete fee that is less than 25% of the offer price.
Whether SEBI has jurisdiction to direct the addition of the non‑compete fee to the public offer price in such circumstances.
Whether the non‑compete agreement can be deemed a sham in part, or must be treated as a whole.
Whether the acquirer is liable to pay the non‑compete fee to public shareholders.
The effect of the 2011 amendment to the Takeover Code on the concept of a separate non‑compete fee.

Legislation cited

Companies Act, 1956
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997s. Regulation 10, s. Regulation 20(8)
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
Securities and Exchange Board of India Act, 1995s. Section 15‑T, s. Section 15‑Z

Subjects

non‑compete feeSEBITakeover CodeRegulation 20(8)public offer priceshare acquisitionjurisdictionsham agreementexclusivity fee

Judgment

[2014] 8 S.C.R. 399

1.P. HOLDING ASIA SINGAPORE P. LTD. & ANR. A
V.
SECURITIES & EXCHANGE BOARD OF INDIA
(Civil Appeal No. 7390 of 2012)
AUGUST 20, 2014
B
[MADAN B. LOKUR AND KURIAN JOSEPH, JJ.]

SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 - Regulations 10, 20(8), 8- Non-compete
fee - Liability of the acquirer company to pay, to the public C
shareholders of the target company - Held: Acquirer
company not liable to pay non-compete fee to the public
shareholders of the target company as it was being paid to
the outgoing promoters of the target company which is being
taken over by the acquirers - Ordinarily when there is a gap D
of 25% between the consideration paid to the outgoing
promoters and the non-compete fee, SEBI ought not to
conduct any inquiry - However, if it appears to SEBI that the
difference between the offer price and the non-compete fee
is less than 25% but that is nevertheless a disguise or a E
camouflage for reducing the cost of acquisition through a
public offer, then SEBI can certainly delve further into the
matter - On facts, SEBI erred in splitting the non-compete
agreement between the acquirers and 5 members of the
outgoing promoters on the one hand and 15 members on the
F
other - It cannot be, on a reading of the non-compete
agreement as a whole, that a part of it is a sham in respect of
some of the contracting parties and it is a genuine agreement
in respect of the other contracting parties - No indication that
non-compete agreement is severable - Thus, tribunal erred
in holding only a part of the non-compete agreement as a G
sham - However, pursuant to the entering of non-compete
agreement, non-compete period of three years has expired
and Takeover Code has been substituted by the SEBI
399 H
400 SUPREME COURT REPORTS [2014] 8 S.C.R.

A (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 which does away with the concept of a
separate non-compete fee, the amount being included in the
offer price - Directions and orders passed by SEB/ and the
tribunal aside - Subsequent events.
B Appellant Company entered into a Share Purchase
Agreement with the outgoing promoters of the target
company to acquire 53.46% of the share capital of the
target company held by outgoing promoters at a price of
Rs. 5231- per share. In addition, the appellants agreed to
C pay Rs. 21.20 per share to the outgoing promoters
towards exclusivity fee, making it to Rs. 544.20 per share.
The parties entered into another agreement whereby the
appellants agreed to pay the outgoing promoters around
Rs. 277 .95 crores, for refraining from competing with the
D business of the target company for a period of three
years. In terms of Regulation 10 of the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997,
the appellants made a public announcement f_or the
acquisition of 21.54% of the voting capital of the target
E company, from the existing shareholders. Thereafter,
SEBI directed the appellants to ~evise the offer price to
the public shareholders from Rs. 544.20 to Rs.674.93, by
adding Rs. 130.73 per share, arrived at on the basis that
the non-compete fee paid to the outgoing promoters,
F because of the 20 promoter entities comprising the
outgoing promoters group, only 5 of them were eligible
to get the non-compete fee. Aggrieved, the appellants
filed an appeal. The tribunal dismissed the appeal holding
that the non-compete agreement was a sham which
G resulted in depriving other shareholders of the target
company of their rightful claim to get a just price for their
shares. Hence, the instant appeals.

The question which arose for consideration was
whether the appellants-acquired company are liable to
H
l.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 401
& EXCHANGE BOARD OF INDIA

pay a non-compete fee to the public shareholders of the A
target company as it was bein,g paid to the outgoing
promoters of the target company which is being taken
over by the appellants .

.Allowing the appeal, the Court B
HELD: 1.1. The tribunal committed a jurisdictional
error by misunderstanding the scope of Regulation 20(8)
of the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997. This Regulation provides
that any payment made to persons other than the target C
company in respect of a non-compete agreement in
excess of 25% of the offer price arrived at under sub-
Regulation (4) or (5) or (6) shall be added to the offer price.
A bare reading of Regulation 20(8) of the Takeover Code
makes it quite clear that the jurisdiction of the tribunal gets D
triggered only when the non-compete fee is in excess of
25% of the offer price. If the non-compete fee is less than
25% of the offer price (as in the instant case), the
jurisdiction of SEBI would be exercisable only in an
extremely rare case and only if SEBI was in a position to E
ex facie conclude that the transaction involving the
takeover of the target company was not bona fide. This is
said because it is imperative to give sufficient elbow room
, to commercial entities for entering into a business
transaction. There are a host of considerations that go F
into business relations and transactions between different
entities. This applies, perhaps more equally, to the
takeover of a target company by another corporate body.
The decision must be respected unless there are good
reasons not to do so. [Para 21, 22] [413-F; 414-A, E]
G
G. L. Sultania v. Securities and Exchange Board (2007)
5 sec 133 - referred to.

1.2. On the recommendations of the Reconvened
Bhagwati Committee, the Takeover Code was amended H
402 SUPREME COURT REPORTS [2014) 8 S.C.R.

A in September, 2002 providing inter alia, for a regulatory
framework for payment of non-compete fee. It is quite
clear that ordinarily when there is a gap of 25% between
the consideration paid to the outgoing promoters and the
non-compete fee, SEBI ought not to conduct any inquiry.
B However, this cannot be treated as an absolute
proposition and that if it appears ex facie, without any
searching questions being asked or any intricate
reasoning, that it appears to SEBI that the difference
between the bffer price and the non-compete fee is less
c than. 25% but that is nevertheless a disguise or a
camouflage for reducing the cost of acquisition through
a public offer, then SEBI can certainly delve further into
the matter. In the instant case, on an ex facie reading of
the share purchase agreement and the non-compete
agreement between the appellants and the promoter
0
entities, no such conclusion is apparent, nor was it
canvassed or pointed out. Therefore, there was no
occasion for SEBI to carry out a searching enquiry into
the payment of non-compete fee to the 'B' group. [Para
E 23, 26, 27] [414-F-G; 415-H; 416-A-D]

1.3. The appellants perceived a threat from 'YB' and
'S', son and daughter-in-law of the founder of the target
company to their business activities. It is not the case of
SEBI that the threat perception was irrational - it may
F arguably be unfounded or minimal but is certainly not
beyond the imagination of a reasonable person. The
threat perception cannot be decided on the basis of the
hindsight of SEBI (unless the perception is found to be
perverse) but must be left to the commercial wisdom of
G the players on the field. [Para 32} [417-D-E]

1.4. Although the 'SB' director of the company did not
directly hold any shares in the target company, she did
so indirectly. The cross-holding of shares between the
various members of the 'B' group and through them in
H
1.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 403
& EXCHANGE BOARD OF INDIA

the target company is being mentioned only to point out A
that the shareholding pattern was not as simple. Looking
to the intricacies and complexities involved, it is possible
that the shareholding pattern was considered by the
appellants and the 'B' group while indirectly giving a non-
compete fee to 'SB'. It could have been in the mind of the B
appellants that 'SB' was indirectly getting an adequate
amount of non-compete fee, and therefore it was not
advisable to also directly give her any non-compete fee.
[Para 36, 37] [418-C-E]

1.5. The facts suggest that there could be a plausible C
reason for the appellants not paying any non-compete
fee to the director of the target company. This may be
relatable to her not being a shareholder in the target
company. It is not appropriate to substitute the view for
that of the regulator or permit a new dimension to be D
added to the case in an appeal only on the basis of oral
arguments, without any analysis of facts. Under these
circumstances, nothing much turns on the non-payment
of non-compete fee directly to 'SB'. All that need be said
on this subject is that in this regard, SEBI acted prudently E
(as it is expected to) while the tribunal hypothesized.
[Para 39] [419-E, F]

1.6. It is nobody's case that the valuation of the
shares by the appellants was detrimental to the interests F
of the shareholders, except to the extent that the
shareholders in the public offer were denied the benefit
of the non-compete fee paid to 'B' group. There was no
allegation that the valuation of the shares were not in
conformity with Regulation 20(5) of the Takeover Code. G
[Para 41] [420-E-F]

1. 7. The SEBI erred in splitting the non-compete
agreement between the appellants and 5 members of the
OP - 'B' group on the one hand and 15 members of the
H
404 SUPREME COURT REPORTS [2014] 8 S.C.R.

A '8' group on the other. If the non-compete agreement was
a sham as held by the tribunal, then the entire agreement
would have to be held as a sham and the entire
transaction would require to be held as a sham
transaction. It cannot be, on a reading of the non-
B compete agreement as a whole, that a part of it is a sham
in respect of some of the contracting parties and it is a
genuine agreement in respect of the other contracting
parties. There is absolutely no indication given in the non-
compete agreement that it is severable or that there was
c any intention to split it into two or more distinct parts. The,
absurdity results in splitting-up the non-compete
agreement. Splitting up of the non-compete agreement in
twenty ways to decide whether it is genuine or sham in
respect of five or ten or twelve of the promoter entities,
D cannot be the correct way of reading the non-compete
agreement. Thus, the tribunal committed a fundamental
flaw in holding only a part of the non-compete agreement
as a sham. The tribunal should have either held the entire
non-compete agreement as a sham or it ought to have
held the entire non-compete agreement as a genuine
E agreement. The question of a half-way house simply does
notarise. (Para 4'2, 43] [421-A-C; 422-A-E]

1.8., Two events have occurred since the non-
compete agreement was entered into on 29th March,
F 2011, firstly, the non-compete period of three years has
expired, in a sense rendering this exercise academic and
secondly, the Takeover Code has been repealed with
effect from 23rd October, 2011 and substituted by the
SEBI (Substantial Aequisition of Shares and Takeovers)
G Regulations, 2011. The new Takeover Code does away
with the concept of a separate non-compete fee, the
amount ~eing included in the offer price in terms of
Regulation 8 thereof. [Para 45) (422-G-H; 423-A]

1.9. The directions and orders passed by SEBI and
H
l.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 405
& EXCHANGE BOARD OF INDll\

the Securities Appellate Tribunal are set aside. [Para 46] A
[423-B-C]

Swedish Match AB v. Securities and Exchange Board of
India 2004 (3) Suppl. SCR 745 : (2004) 11 sec 641 -
referred to.
B
Case Law Reference :
(2001) s sec 133 Referred to Para 22
2004 (3) Suppl. SCR 745 Referred to Para 38
c
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
7390 of 2012.

From the Judgment and Order dated 12.09.2012 ofthe
Securities Appelllate Tribunal Mumbai if'!. Appeal. No. 130 of D
2011 .
•
Shyam Divan, Chander Uday Singh, Kunal Doshi, N.
Ganpathy, Manpreet Lamba, Pratap Venugopal, Surekha
Raman, Gaurav Nair (For K.J. John & Co.), Gagan Gupta,
Ashish Aggarwal, Tatini Basu for the appearing parties. E

The Judgment of the Court was delivered by

MADAN B. LOKUR, J. 1. The question for consideration
is whether the appellants in this appeal are liable to pay a non-
compete fee to the public shareholders of the target company F
as is being to be paid to the outgoing promoters of the target
company which is being taken over by the appellants. In our
opinion, the answer to this question must be in the negative.

The Facts G
2. Appellant no. 1 is a company incorporated under the
laws of Singapore. Appellant no. 2 is the holding company of
appellant no. 1 through a subsidiary.

3. The outgoing promoters of the target company (the H
406 SUPREME COURT REPORTS [2014] 8 S.C.R.

A Andhra Pradesh Paper Mills Ltd.) are referred to hereinafter
as the Bangur group. The Eiangur group consists of 20 entities,
both individuals and others.

4. On 29th March, 2011 the appellants entered into two
agreements with the Bangur group. In terms of the first
8
agreement, a share purchase agreement, the appellants and
the Bangur group agreed that the appellants would acquire the
shares of the target company held by the Bangur group by
purchasing 2, 12,60,008 fully paid up equity shares of Rs.10/-
each forming 53.46 % of the share capital of the target
C company. The agreed price per share was Rs. 523/- and the
aggregate amount payable to the Bangur group was about Rs.
1111.9 crores.

5. In addition to the price of Rs. 523/- per share, the
D appellants agreed to pay an exclusivity fee of Rs. 21.20 per
share to the Bangur group, pursuant to an exclusivity agreement
of 11th November, 2010 whereby the parties concluded that it
would be in their mutual interest to maintain exclusive
negotiations with one another during the period the appellants
E considered the proposed acquisition of shares of the target
company. Consequently, the price agreed to be paid by the
appellants to the Bangur group was Rs. 544.20 per fully paid
up equity share having a face value of Rs. 10/-.

6. The second agreement entered into between the
F appellants and the Bangur group was a non-compete and
business waiver agreement. In terms of this agreement the
appellants agreed to pay to the Bangur group an amount of
about Rs. 277.95 crores, inter alia, for refraining from
competing with the business of the target company either on
G their own or through their affiliates for a period of three years,
the business of the target company being manufacturing, sale
and trading of pulp and paper.

7. In terms of Regulation 10 of the SEBI (Substantial
H Acquisition of Shares and Takeovers) Regulations, 1997 (for
1.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 407
& EXCHANGE BOARD OF INDIA [MADAN B: LOKUR, J.J

short the Takeover Code) 1 the appellants gave an open offer A
through publication in newspapers on 1st April, 2011 for the
acquisition of up to 85,67,521 fully paid up equity shares of the
target company from the existing shareholders representing
21.54% of the voting capital. As per the public announcement,
the appellants fixed the price of each fully paid up equity share B
at Rs. 544.20 (Rs.523/- + Rs.21.20). We were told that the
public announcement received an overwhelming response.

8. On completing these formalities, the merchant banker
of the appellants filed a draft letter of offer dated 15th April, C
2011 with the Securities and Exchange Board of India (for short
SEBI) in accordance with the Takeover Code.

9. Thereafter, some correspondence ensued between the
merchant banker of the appellants and SEBI. The sum and
substance of this correspondence related (as far as we are D
concerned) to three issues connected with the non-compete
fee: (1) The merchant banker was requested to provide the
current business and object clause of the non-individual
promoters of the target company; (2) The merchant banker was
requested to provide details of the experience of Yogesh E
Bangur and Ms. Surbhi Bangur to whom a non-compete fee was
being paid; (3) The merchant banker was requested to provide
the shareholding pattern of the non-individual promoters of the
target company.

10. The merchant banker of the appellants provided the F
information as requested for by SEBI.

1. (Acquisition of fifteen per cent or more of the shares or voting rights of any
company: G
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 fifteen per cent 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. H
408 SUPREME COURT REPORTS [2014] 8 S.C.R.

A View of SEBI
11. On a consideration of the information provided, SEBI
issued a letter on 3rd August, 2011 to the merchant banker of
the appellants in which it gave its comments on the draft letter
of offer. What bothered the appellants were the comments
8 made by SEBI with regard to the non-compete fee paid to the
Bangur group. The merchant banker of the appellants was
advised to incorporate certain points in the letter of offer. These
are mentioned below.
C 12. SEBI informed the appellants through their merchant
banker to revise the offer price to the public shareholders from
Rs. 544.20 to Rs. 674.93. This figure was arrived at by adding
to the original offer price of Rs. 554.20 a sum of Rs. 130.73
per share. The figure of Rs. 130. 73 per share was arrived at
0 on the basis that the non-compete fee paid to the Bangur group
being about Rs. 277.95 crores would work out to Rs.130.73
per share held by the Bangur group. The veiled insinuation was
that the non-compete fee of Rs.130. 73 per share was in fact a·
part of the negotiated price per share payable by the appellants
E to the Bangur group. That being so, SEBI required that amount
be added to the offer price of Rs. 544.20 per share to all public
shareholders.
13. The reasons given by SEBI for adding the non-
compete fee calculated on a per share basis to the offer price
F were as follows:-
(1) Of the 20 promoter entities comprising the Bangur
group, only 5 of them were eligible to get the non-compete fee.
(2) Of the remaining 15 promoter entities, 2 individuals
G Yogesh Bangur and Ms. Surbhi Bangur were not eligible to the
non-compete fee since they did not have any experience or
expertise in the area of operation of the target company and
hence they were not capable of offering any competition. They
were being given a non-compete fee only because they were
H shareholders of the target company.
1.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 409
& EXCHANGE BOARD OF INDIA [MADAN 8. LOKUR, J.]

As regards the 13 companies who were promoter entities A
of the Bangur group, SEBI was of the opinion that none was
eligible for getting a non-compete fee since they were not in
the business of the target company. FurthermorEi, according to
SEBI these 13 promoter entities did not even have" in their
object clause, the business of pulp and paper manufacturing. B

(3) The merchant banker was not able to give sufficient
justification for the payment of non-compete fee to the 15
promoter entities mentioned above.

(4) Since the exclusivity fee was being paid to the Bangur C
group and also to the public shareholders, there was no reason
why the public shareholders were not given the non-compete
fee also.

14. The reasons given by SEBI read as follows:- o
"Non-Compete fees

Revise the offer price from Rs. 554.20/- to Rs. 674.93 (i.e.
Rs. 544.2 + Rs. 130. 73/- lis non-compete fees to the sellers
in excess of the price which is to be paid to all public E
shareholders. Also ensure compliance with the relevant
regulations including escrow account and other
requirements. The reasons for the same are as follows:-

i. Out of the twenty promoter entities only five entities
F
(i.e. Mr. L.N. Bangur, Ms. Alka Bangur. Mr.
Shreeyas Bangur and two HUFs whose Kartas are
Mr. LN Bangur ant'! Mr. Shreeyash Bangur) are
eligible to get the non-compete fees.

ii. From the details furnished by MB, we have noted G
that apart from the aforesaid entitles, the other
promoter sellers i.e. 13 companies and two
individuals (Mr. Yogesh Bangur) and Ms. Surbhi
Bangur) are not eligible to get the non-compete fee
H
410 SUPREME COURT REPORTS [2014] 8 S.C.R.

A for not competing with the acquirerffarget company
as they do not have any experiences/expertise in
the area of operation of the Target Company and
are therefore not capable of offering any
competition. They are mere shareholders of the
B target company. As regards the 13 companies none
of them are in the business of pulp and paper
manufacturing which is the product line of the Target
Company.

Furthermore, they do not even have such business
c objectives in their main object clause. Further, the
two individuals (i.e. Mr. Yogesh Bangur and Ms.
Surbhi Bangur) are getting the non-compete fee
merely for being the relatives of the Mr. L.N. Bangur
who is a director of the target company, which does
D not seem to be logical.

iii. Further, the MB has failed to furnish sufficient
justification as to why the aforesaid 15 members of
the promoter group are getting the non-compete
E fees.

iv. It has been submitted by the acquirer/Merchant
Banker that the acquirer on the ground of prudence
and good corporate practice has decided to pay
the exclusivity fees (i.e. the fees paid to the
F promoter group sellers for not to solicit acquisition
proposals from, or enter into any negotiations with,
any party other than the acquirer in relation to the
sale of shares held by them in target company) to
all the public shareholders. The acquirer/Merchant
G Banker has failed to justify why the same logic has
not been used while paying a different price per
share (without the non-compete fee) to all the public
shareholders."

H
1.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 411
& EXCHANGE BOARD OF INDIA [MADAN B. LOKUR, J.]

15. Feeling aggrieved by the communication sent by SEBI A
to the merchant banker on 3rd August, 2011, the appellants
preferred an appeal under Section 15-T of the Securities and
Exchange Board of India Act, 1995. 2 The appeal was filed with
the Securities Appellate Tribunal at Mumbai and was registered_
as Appeal No. 130 of 2011. The appeal was heard by the B
Tribunal and came to be dismissed by an order dated 12th
September, 2012 (impugned).

2. 15-T. Appeal to the Securities Appellate Tribunal - (1) Save as provided
in sub-section (2), any person aggrieved-
c
(a) by an order of the Board made, on and after the commencement of the
Securities Laws (Second Amendment) Act, 1g99, under this Act, or the rules
or regulations made thereunder; or
(b) by an order made by an adjudicating officer under this Act,
may prefer an appeal to a Securities Appellate Tribunal having jurisdiction
in the matter. D
(2) No appeal shall lie to the Securities Appellate Tribunal from an order made-
(a) by the Board on and after the commencement of the Securities Laws
(Second Amendment) Act, 1999;
(b) by an adjudicating officer,
with the consent of the parties. E
(3) Every appeal under sub-section (1) shall be filed within a period of forty-
five days from the date on which a copy of the order made by the Board or
the Adjudicating Officer, as the case may be, is received by him and it shall
be in such form and be accompanied by such fee as may be prescribed:
Provided that the Securities Appellate Tribunal may entertain an appeal
after the expiry of the said period of forty-five days if it is satisfied that there F
was sufficient cause for not filing it within that period.
(4) On receipt of an appeal under !\I.lb-section (1 ), the Securities Appellate
Tribunal may, after giving the parties to the appeal an opportunity of being
heard, pass such orders thereon as it thinks fit, confirming, modifying or
setting aside the order appealed against.
(5) The Securities Appellate Tribunal shall send a copy of every order made G
by it to the Board, the parties to the appeal and to the Adjudicating Officer
concerned.
(6) The appeal filed before the Securities Appellate Tribunal under sub-section
(1) ;;;hall be dealt with by it as expeditiously as possible and endeavour
shall be made by it to dispose of the appeal finally within six months from
the date of receipt of the appeal.
H
412 SUPREME COURT REPORTS [2014] 8 S.C.R.

A View of the Tribunal

16. While dismissing the appeal filed by the appellants, the
Tribunal extensively referred to and relied upon orders passed
by it in three earlier appeals. After considering the view
expressed in those appeals 3 , the Tribunal held that it had the
8
jurisdiction to decide whether an excessive amount of non-
complete fee was paid to the promoter entities and that some
of them were not capable of providing any competition to the
business of the target company after its takeover by the
appellants. ·
c
17. The Tribunal then found that in so far as the two
individuals that is Yogesh Bangur and Ms. Surbhi Bangur are
co~rned, they had no experience in the business of the target
· company and they were paid non-compete fee only because
D they happened to be shareholders in the target company. It was
held that these two individuals were not involved in the day to
day business of the target company and were not capable of
providing any threat to the business of the target company. The
Tribunal held that in contrast, Ms. Sheetal Bangur was a director
E in the target company and involved in its day to day business
but she was not given any non-compete fee only because she
was not a shareholder. It was concluded, on this basis, that the
non-compete fee was directly linked to the shareholding of the
promoter entities and had nothing to do With the possibility of
F their being in competition with the target company.

18. As regards the 13 non-individuals who also formed a
part of the Bangur group, the Tribunal held that none of them
had anything to do with the business of the target company and
therefore they were not in a position to offer any competition
G to it. In this context, the Tribunal referred to one of the promoter
entities namely Mugneeram Ramcoowar Bangur Charitable and

3. Tata•Tea Ltd. v. SEBI (Appeal No. 136 of 2008); Cementrum IB v. SEBI
(Appeal No. 28 of 2008); E-Land Fashion China Holdings Ltd: v. SEBI
H (Appeal No. 27 of 2011)
1.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 413
& EXCHANGE BOARD OF INDIA [MADAN B. LOKUR, J.]

Religious Trust which had nothing to do with the business A
activities of the target company. Reference was also made to
another promoter entity called Samay Books Ltd. (Samay)
which was in the business of printing and publishing. A third
promoter entity referred to by the Tribunal was the Maharaja
Shree Umaid Mills Ltd. (MSUML) which ·was carrying on B
business as a composite textile mill and did not have the
necessary knowledge or experience relating to the pulp and
paper business and therefore was not capable of offering any
competition to the target company.

19. On these findings, the Tribunal concluded that the non-
c
compete agreement was a sham which resulted in depriving
other shareholders of the target company of their rightful claim
to get a just price for their shares. Consequently, the Tribunal
dismissed the appeal preferred by the appellants.
D
20. The appellants, being aggrieved by the order passed
by the Tribunal preferred an appeal in this Court under the
provisions of Section 15-Z of the SEBI Act4 •

Discussion
E
21. In our view, the Tribunal has made two fundamental
errors. In the first place, the Tribunal committed a jurisdictional
error by misunderstanding the scope of Regulation 20(8) of the
Takeover Code 5 . This Regulation provides that any payment
4. 15-Z. Appeal to Supreme Court-Any person aggrieved by any decision or F
order of the Securities Appellate Tribunal may file an appeal to the Supreme
Court within sixty days from the date of communication of the decision or
order of the Securities Appellate Tribunal to him on any question of law
arising out of such order:
Provided that the Supreme Court may. if it is satisfied that the appellant
was prevented by sufficient cause from filing the appeal within the said G
period, allow it to be filed within a further period not exceeding sixty days.
5. 20. Offer price - (1) to (7) xxx xxx xxx
(8) Any payment made to the persons other than the target company in
respect of non- compete agreement in excess of twenty-five per cent of the
offer price arrived at under sub-regulation (4) or (5) or (6) shall be added
to the offer price. H
414 SUPREME COURT REPORTS [2014] 8 S.C.R.

A made to persons other than the target company in respect of
a non-compete agreement in excess of 25% of the offer price
arrived at"under sub-Regulation (4) or (5) or (6) shall be added
to the offer price. A bare reading of Regulation 20(8) of the
Takeover Code makes lt quite clear that the jurisdiction of the
B Tribunal gets triggered only when the non-compete fee is in
excess of 25% of the offer price. If the non-compete fee is less
th::in 25% of the offer price (as in the present case), the
jurisdiction of SEBI would be exercisable only in an extremely
rare case and only if SEBI was in a position to ex facie conclude
c that the transaction involving the takeover of the target company
was not bona fide.

22. We say this because it is imperative to give sufficient
elbow room to commercial entities for entering into a business
transaction. There are a host of considerations that go into
D business relations and transactions between different entities.
This applies, perhaps more equally, to the takeover of a target
company by another corporate body. It was observed in G. L.
Sultania v. Securities and Exchange Board6 that "For the
acquirer the decision to acquire shares is a commercial
E decision" and in our opinion, that decision must be respected
unless there are good reasons not to do so.

23. It is for this reason that the Takeover Code as originally
framed in 1997 did not contain any provision relating to the
F payment of non-compete fee. The issue was reconsidered by
the Reconvened Committee of Substantial Acquisitions of
Shares and Takeovers with Justice Bhagwati as the Chair. On
the recommendation of the Reconvened Bhagwati Committee,
the Takeover Code was amended in September, 2002
G providing, inter alia, for a regulatory framework for payment of
non-compete fee. That regulatory framework is to be found in
clause (8) of Regulation 20 which was introduced in the
Takeover Code with effect from 9th September, 2002.

H a. c2001) 5 sec 133.
1.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 415
& EXCHANGE BOARD OF INDIA [MADAN B. LOKUR, J.]

24. While looking into this issue, the Reconvened A
Bhagwati Committee felt that it is possible that in some cases
the offer price per share does not truly reflect the actual
consideration paid and this could be used as a ploy for reducing
the cost of acquisition through a public offer.
B
25. The Reconvened Bhagwati Committee, while being
fully aware of the possibility of a misuse of the non-compete
fee, nevertheless recommended an elbow room of up to 25%
of the consideration which would not be included or factored
in for the purpose of reckoning the offer price. This is what the C
Reconvened Bhagwati Committee had to say:-

"Parameters for determining offer price

On non-compete payment the Committee noted
that there is a need to address the situation D
specially where the acquirer passes on a
significantly large portion of the consideration to the
outgoing promoter in the form of non-compete fee
and only a token amount is shown as negotiated
price for acquisition of shares under the agreement. E
The Committee felt that in such cases the offer price
does not truly reflect the actual consideration paid
and this could be used as a ploy for reducing the
cost of acquisition through public offer.

The Committee recommends that F

Any payment in respect of non-compete agreement
in excess of 25 per cent of consideration paid to
persons other than the target company shall be
deemed to form part of the consideration paid for G
acquisition of shares and should be factored in for
the purpose of reckoning offer price."

26. From this it is quite clear that ordinarily when there is
a gap of 25% between the consideration paid to the outgoing
H
416 SUPREME COURT REPORTS [2014] 8 S.C.R.

A promoters and the non-compete fee, SEBI ought not to conduct
any inquiry. However, this cannot be treated an absolute
proposition and we are quite willing to say that if it appears ex
facie, without any searching questions being asked or any
intricate.reasoning, that it appears to SEBI that the difference
B between the offer price and the non-compete fee is less than
25% .but- that is nevertheless a disguise or a camouflage for
reducing the. cost of acquisition through a public offer, then
SEBI can certainly delve furtherinto the matter.
27. In so faras the present case is concerned, on an ex
C facie reading of the share purchase agreement and the·non-
compete agreement between the appellants and the promoter
entities, no such conclusion is apparent, nor was it canvassed
or pointed out. In our opinion therefore, there was no occasion
for SEBI to carry out a searching enquiry into the payment of
D non.:compete fee to the Bangur group.
28. A~uming for the sake of argument that an inquiry into
the payment of non-compete fee is permissible, where does it
lead us in this appeal? ./
E
29. AecQrding to SEBI, Yogesh Bangur and Ms. Surbhi
Bangur had ho "experience/expertise in the area of operation
of the target company and are therefore not capable of offering
any competition". During the course of submissions, it was
suggested that what was actually paid to them (and perhaps
F others) was not a non-compete fee but control premium. We
cannot agree. ·
30. Yogesh Bangur, apart from being the son of L.N.
Bangu.r (the· founder of the target company and one of the
G persons 'eligible' for payment of the non-compete fee), has a
specialized post-graduate degree in programme and project
management and had been involved in the business of the
target company for more than 4 years. Given this unique position
and also his position of a whole time director of MSUML which
H had over 21% of the shareholding of the target company, it is
1.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 417
& EXCHANGE BOARD OF INDIA [MADAN B. LOKUR, J.]

odd that SEBI and the Tribunal concluded that he did not have A
sufficient information, access or ability to be in a position to
compete with the business of the target company.
31. Similarly, Ms. Surbhi Bangur, daughter-in-law of l. N.
Bangur and wife of Shreeyash Bangur (both of whom were also
B
found 'eligible' to receive the non-compete fee) had completed
her bachelors and masters degree in business administration.
More importantly, she was also a director on the Board of
Samay (along with L. N. Bangur), which is one of the members
of the Bangur group. Therefore, it cannot be said with certainty,
as has been canvassed on behalf of SEBI, that she lacked C
experience or expertise in the busine;;s of providing any
competition to the target company.
32. But what is more important is the perception of the
appellants. On these facts, the appellants l'erceived a threat o
from these individuals to their business activities. It is not the
case of SEBI that the threat perception was irrational - it may
arguably be unfounded or minimal but is certainly not beyond
the imagination of a reasonable person. The threat perception
cannot be decided on the basis of the hindsight of SEBI (unless E
the perception is found to be perverse) but must be left to the
commercial wisdom of the players on the field.
33. In support of its contention that the threat perception
from Yogesh Bangur and Ms. Surbhi Bangur was entirely
imaginary, it was (negatively) submitted that Ms. Sheetal F
Bangur was a director in the target company and was actually
involved in its day to day activities, and yet a non-compete fee
was not paid to her. Was it because she was not a shareholder
in the target holder (as suggested) or was it because she really
posed no competitive threat? Or, was there some other valid G
reason?
34. At this stage, it is necessary to appreciate the
shareholding pattern of the Bangur group in the target company.
35. Of the 53.46% fully paid up shares held by the Bangur H
418 SUPREME COURT REPORTS [2014] 8 S.C.R.

A group in the target company, Digvijay Investments Ltd. (OIL)
held 24.70% while the Maharaja Shree Umaid Mills Limited
(MSUML) held 21.65%. The remaining about 7% shares were
held by the other members of the Bangur group. This included
Samay Books Ltd. (Samay - 0.10%), the General Investment
B Company Ltd. (GICL - 0.01 %) and Apurva Export Pvt. Ltd.
(Apurva - 0.57%).

36. Ms. Sheetal Bangur held 78.96% of the shares in
Apurva, 2.60% of the shares in GICL and 92.19% of the shares
C in Samay. Through these entities, she held shares in OIL and
MSUML. Therefore, although she did not directly hold any
shares in the target company, she did so indirectly. The cross-
holding of shares between the various members of the Bangur
group and through them in the target company is being
mentioned only to point out that the shareholding pattern was
D not as simple as made out during the course of oral
submissions by learned counsels. Looking to the intricacies
and complexities involved, it is possible that the shareholding
pattern was considered by the appellants and the Bangur group
while indirectly giving a non-compete fee to Ms. Sheetal Bangur.
E It could have been in the mind of the appellants that Ms. Sheetal
Bangur was indirectly getting an adequate amount of non-
compete fee, and therefore it was not advisable to also directly
give her any non-compete fee.

F 37. This possibility cannot be straightaway ruled out since
even SEBI did not raise any issue in this regard in its comments
given on 3rd August, 2011. The regulatory authority not having
raised this issue, it is quite clear that it was raised for the first
time only as a legal argument when the matter was taken up
G by the Tribunal. The justification for this, it is submitted before
us, is based on the provisions of Order XU Rule 33 of the Code
of Civil Procedure as well as two judgments referred to by
learned counsel for SEBl. 7

7. G.L. Sultania and Swedish Match AB v. Securities and Exchange Board of
H India, (2004) 11 sec 641.
l.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 419
& EXCHANGE BOARD OF INDIA [MADAN 8. LOKUR, J.]

38. In Swedish Match AB v. Securities and Exchange A
Board of lndia 8 this Court observed that "The Tribunal was
entitled to take a different view of the matter from that of the
[Securities and Exchange) Board with a view to sustain the
ultimate result in the appeal in exercise of its appellate power.
Such a power in the appellate court/tribunal is akin to or B
analogous to the principles contained in Order XLI Rule 33 of
the Code of Civil Procedure." But for the purposes of the
present case, it is not necessary for us to go into the question
whether SEBI could have supported its view by adding reasons
at the appellate stage. This is because it is quite clear from c
the protracted correspondence between SEBI and the
merchant banker of the appellants, that the relevant facts were
taken into consideration by SEBI when it issued the letter dated
3rd August, 2011. If the facts justify denial of direct payment of
non-compete fee to Ms. Sheetal Bangur, no amount of
0
arguments in law can replace the facts at an appellate stage
or before us.

39. The facts suggest that there could be a plausible
reason for the appellants not paying any non-compete fee to
Ms. Sheetal Bangur. This may be relatable to her not being a E
shareholder in the target company. Even if we could, we do not
think it appropriate to substitute our view for that of the regulator
or permit a new dimension to be added to the case in an
appeal only on the basis of oral arguments, without any analysis
of facts. Under these circumstances, we are of the view that F
nothing much turns on the non-payment of non-compete fee
directly to Ms. Sheetal Bangur. All that need be said on this
subject is that in this regard, SEBI acted prudently (as it is
expected to) while the Tribunal hypothesized.
G
40. G.L. Su/tania also does not advance the case of SEBI.
The purpose of the Takeover Code was explained therein in
the following words:

a. (2004) 11 sec 641. H
420 SUPREME COURT REPORTS [2014) 8 S.C.R.

A "It cannot be denied that the [Securities and Exchange)
Board under the Act is a regulatory authority charged with
the duty to protect the interest of investors in securities and
to promote the development of, and to regulate the
securities market, by such measures as it thinks fit. The
B Takeover Regulations have been framed with a view to
provide transparency in transfers arising out of substantial
acquisition of shares and takeovers. The object is to bring
about fairness in such transactions as also. to protect the
interests of the investors in securities. In the Takeover
c Code there are provisions Which are intended to protect
the interests of small shareholders so that in any substantial
acquisition of shares they get a fair price for the shares
transferred by them. The entire scheme designed for this
purpose, including the making of a public offer as also a
counter-offer, is to protect the interests of the investors,·
D
particularly the smaller ones who run the risk of getting an
unfair deal in such transactions. Ultimately, the entire
exercise is undertaken under the regulatory eye of the
Board with a view to ensure fairness to the shareholders
of the company."
E
41. It is nobody's case that the valuation of the shares by
the appellants was detrimental to the interests of the
shareholders, except to the extent that the shareholders in the
public offer were denied the benefit of the non-compete fee
F paid to the Bangur group. There is no allegation that the
valuation of the shares was not in conformity with Regulation
20(5) of the Takeover Code 9 .

9. (5) Where the shares of the target company are infrequently traded, the
offer price shall be determined by the acquirer and the merchant banker
G taking into account the following factors:
(a) the negotiated price under the agreement referred to in sub-regulation (1)
of regulation 14;
(b} the highest price paid by the acquirer or persons acting in concert with
him for acquisitions, if any, including by way of allotment in a public or rights
or preferential issue during the twenty-six week period prior to the date of
H
i.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 421
& EXCHANGE BOARD OF INDIA [MADAN B. LOKUR, J.]

42. The second fundamental error by SEBI was in splitting A
the non-compete agreement between the appellants and 5
members of the Bangur group on the one hand- and 15
members of the Bangur group on the other. If the non-compete
agreement was a sham as held by the Tribunal, then the entire
agreement would have to be held as a sham and the entire B
transaction would require to be held as a sham transaction. It
cannot be, on a reading of the non-compete agreement as a
whole, that a part of it is a sham in respect of some of the
contracting parties and it is a genuine agreement in res~ect of
the other contracting parties. There is absolutely no indication c

public announcement;
(c) other parameters including return on net worth," book value of the sh11res
of the target company, earning per share, pri~ earning multiple vis-a-vis D
the industry average :
Provided that where considered necessary, the Board may require valuation
of such infrequently traded shares by an independent merchant banker
(other than the manager to the offer) or an independent chartered
accountant of minimum ten years' standing or a public financial institution.
Explanation.- E
(i) For the purpose of sub-regulation (5), shares shall be deemed to be
infrequently traded if on th!! stock exchange, the annualised trading turnover
in that share during the preceding six calendar months prior to the month
in which the public announcement is made is less than five per cent (by
number of shares) of the listed shares. For this purpose, the weighted
average number of shares listed during the said six months period may
be taken. F
(ii) In case of disinvestment of a Public Sector Undertaking, the.shares of such
an undertaking shall be deemed to be infrequently traded, if on the stock
exchange, the annualised trading turnover in the shares during the
preceding six calendar months prior to the month, in which the Central
Government or the State Government as the case may be opens the
financial bid, is less than five per cent (by the number of shares) of the G
listed shares. For this purpose, the weighted average number of shares
listed during the six· months period may be taken.
(iii) In case of shares which have been listed within six months preceding the
O public announcement, the trading turnover may be annualised with
reference to the actual number of days for which the shares have been
listed.
H
422 SUPREME COURT REPORTS [2014] 8 S.C.R.

A given in the non-compete agreement that it is severable or that
there was any intention to split it into two or more distinct parts.

43. The absurdity resulting in splitting-up the non-compete
agreement can be better appreciated from a hypothetical
example. What if the Tribunal had partially agreed with the
8
appellants and held that the non-compete agreement was valid
in respect of say ten or twelve of the promoter entities instead
of five? This could happen if the genuineness of the non-
compete agreement is examined in relation to each promoter
C entity, as has been done by SEBI. Does it not, therefore, mean
that the non-compete agreement has to be split in twenty ways
to decide whether it is genuine or sham in respect of five or
ten or twelve of the promoter entities? Can this be said to be
. a reasonable construction of the non-compete agreement? We
are afraid that this surely cannot be the correct way of reading
D the non-compete agreement and that is why we are of the view
that the Tribunal committed a fundamental flaw in holding only
a part of the non-compete agreement as a sham. The Tribunal
should have either held the entire non-compete agreement as
a sham or it ought to have held the entire non-compete
E agreement as a genuine agreement. The question of a half-way
house simply does not arise.

44. One other minor issue was raised by SEBI, namely,
that the non-individual entities did not have the business
F objectives of manufacturing, sale and trading of pulp and paper
in their main object clause. This is only stated to be rejected
since the memorandum of association of a corporate entity can
always be altered in accordance with the procedure under the
Companies Act, :1956.

G 45. For completeness, we may mention two events that
have occurred since the non-compete agreement was entered
into on 29th March, 2011. Firstly, the non-compete period of
three years has e·xpired, in a sense rendering this exercise
academic. Secondly, the Takeover Code has been repealed
H with effect from 23rd October, 2011 and substituted by the SEBI
l.P. HOLDING ASIA SINGAPORE P. LTD. v. SECURITIES 423
& EXCHANGE BOARD OF INDIA [MADAN B. LOKUR, J.]

(Substantial Acquisition of Shares and Takeovers) Regulations, A
2011. The new Takeover Code does away with the concept of
a separate non-compete fee, the amount being included in the
offer price in terms of Regulation 8 thereof. 10

Conclusion
B
46. On a consideration of the entire facts of the case, we
are of the view that the appeal deserves to be allowed and
accordingly it is allowed. The directions and orders passed by
SEBI and the Securities Appellate Tribunal are set aside.
However, there will be no order as to costs. c
Nidhi Jain Appeal allowed.

10. Offer Price:
8. (1) The open offer for acquiring shares under regulation 3, regulation 4,
regulation 5 or regulation 6 shall be made at a price not lower than the
price determined in accordance with sub-regulation (2) or sub-regulation
(3), as the case may be.
(2) to (6) xxx xxx xxx
(7) For the purposes of sub-regulation (2) and sub-regulation (3), the price
paid for shares of the target company shall include any price paid or agreed
to be paid for the shares or voting rights in, or control over the target
company, in any form whatsoever, whether stated in the agreement for
acquisition of shares or in any incidental, contemporaneous or collateral
agreement, whether termed as control premium or as non-compete fees
or otherwise.