1. What is the starting point of the "offer period" as defined in clause (f) of Regulation 2(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the Regulations) is the short question that arises for our consideration in this appeal filed under section 15T of the Securities and Exchange Board of India Act, 1992 (for brevity the Act) which is directed against the order of the adjudicating officer dated 25.8.2006 imposing a penalty of Rs.25 lacs each on the appellants for violating Regulation 22(7) of the Regulations. Facts giving rise to this appeal lie in a narrow compass and these may first be noticed.
2. Burren Energy India Ltd. (hereinafter called Burren) was incorporated in December 2004 as a private limited company under the Companies Act, 1985 of England and Wales with its registered office in London. This company was formed to acquire the entire equity share capital of Unocal Bharat Limited (for short UBL). UBL was incorporated in Mauritius in July, 1996 according to the law prevalent in that country and its entire issued share capital was acquired in September, 1996 by Unocal International Corporation (for short UIC). UIC is a company incorporated in California in USA. UBL has no activities but holds 26.01% of the issued share capital of Hindustan Oil Exploration Co. Ltd.(hereinafter called the target company)which is a company incorporated in India under the Companies Act, 1956. On February 14, 2005 Burren entered into a share purchase agreement with UIC to acquire the entire equity share capital of UBL which owns and holds 1,52,81,633 equity shares of Rs.10/- each representing 26.01% in the paid up share capital of the target company. This agreement was entered into in England and the shares of UBL were registered in the name of Burren on the same day. The net result of this transaction is that UBL which was earlier owned by UIC is now owned by Burren and it continues to hold 26.01% of the share capital in the target company. Since Burren indirectly acquired 26.01% equity share capital of the target company, the Regulations got triggered and it was obligatory on its part to make a public announcement to acquire shares of the target company in accordance with the Regulations. It is common case of the parties that Burren made a public announcement on February 15, 2005. Article 113 of the Articles of Association of the target company provides that it shall be entitled to agree with any Government, person, firm or body corporate that he or it shall have the right to appoint his or its nominee on the board of directors of the company upon such terms and conditions as the company may deem fit. In pursuance to this power the target company had entered into a shareholders agreement dated 14th October, 1998 wherein it was agreed as under: (f) Unocal Bharat Limited will have the right to nominate two (2) directors for appointment to the Board (and to require the removal of any such nominees and the nomination of another). The Shareholders will take all necessary steps to ensure that Unocal's nominees are promptly appointed upon such nomination being made.
3. It is not in dispute that in terms of the aforesaid clause of the agreement UBL had the right to nominate two directors on the board of directors of the target company and that it had nominated two of its nominees much prior to the share purchase agreement executed on 14.2.2005 referred to hereinabove. On 14th February, 2005 Burren appointed two of its directors (Mr. Finian O'Sullivan and Mr. Atul Gupta) on the board of UBL and on the same date UBL, which is a person acting in concert with Burren, appointed the same persons on the board of directors of the target company. The appellants claim that this appointment was made on 14th February, 2005 prior to the execution of the share purchase agreement referred to hereinabove which was also executed on that day. This fact is disputed by the Board. It is not necessary for us to go into this controversy in the view that we are taking on the question posed in the opening part of this order.
4. The Board alleged that since the appellants appointed two of their directors on the board of directors of the target company during the "offer period", they violated Regulation 22(7) of the Regulations.
Consequently, adjudication proceedings were initiated against them and an adjudicating officer was appointed to enquire into the alleged violation. The said officer held a detailed enquiry and came to the conclusion that the share purchase agreement had been executed between Burren and UIC on 14th February, 2005 on which date the appellants inducted two of their directors on the board of directors of the target company and thereby violated Regulation 22(7) of the Regulations. A penalty of Rs.25 lacs on each of the two appellants was imposed by order dated August 25, 2006. It is against this order that the present appeal has been filed.
5. We have heard the learned Counsel for the parties and they are agreed that Burren on indirectly acquiring 26.01% shares of the target company had come out with a public announcement on 15th February, 2005.
The question that arises for our consideration is whether the appellants had contravened Regulation 22(7) of the Regulations. Before we answer this question it is necessary to refer to clause (f) of Regulation 2 (1) and clause (7) of Regulation 22 of the Regulations with which we are concerned. These are reproduced hereunder for facility of reference: (f) "offer period" means the period between the date of entering into Memorandum of Understanding or the public announcement, as the case may be and the date of completion of offer formalities relating to the offer made under these regulations; (7) During the offer period, the acquirer or persons acting in concert with him shall not be entitled to be appointed on the board of directors of the target company: 6. A reading of the aforesaid provisions makes it clear that during the offer period the acquirer or any person acting in concert with him shall not be appointed on the board of directors of the target company.
If the acquirer or any person acting in concert with it is a body corporate then such body corporate shall not appoint any of its nominees on the board of directors of the target company. This prohibition applies only during the offer period. As already observed in the earlier part of the order, the question that arises for consideration is as to when this offer period commences. Sub clause (f) of clause (1) of Regulation 2 defines the "offer period" to mean the period between the date of entering into Memorandum of Understanding or the public announcement, as the case may be and the date of completion of offer formalities. It is abundantly clear that where a Memorandum of Understanding has been signed between the acquirer and the seller, then that date would be the starting point of the offer period and where no Memorandum of Understanding is arrived at and the parties straightaway enter into an agreement for the purchase of shares which trigger the Regulations, then the offer period shall commence from the date on which the acquirer makes a public announcement in accordance with the Regulations. In the case before us it is common ground between the parties that there was no Memorandum of Understanding executed before the share purchase agreement was executed on 14th February, 2005 between Burren and UIC whereby the entire equity share capital of UBL was purchased. This being so, the offer period in the instant case would commence from the date of public announcement made by Burren -- the acquirer. It is not in dispute that the public announcement was made on February 15, 2005. The prohibition contained in clause 7 of Regulation 22 of the Regulations would then commence from this date i.e. February 15, 2005 and admittedly neither of the appellants appointed any director on the board of the target company on or after February 15, 2005. The share purchase agreement was executed on February 14, 2005 and Burren appointed two of its directors on the board of UBL on the same day and UBL in turn appointed the same two directors on the board of the target company on that day. In other words, the directors were appointed on the board of directors of the target company prior to the commencement of the offer period.
Regulation 22 (7) was amended in the year 2002 and until then the date of public announcement was the only starting point for the offer period. In 2002 while amending the Regulations, the Securities and Exchange Board of India (hereinafter called the Board) thought it fit to continue with the date of public announcement as the starting point and it added thereto another starting point viz. the date on which the Memorandum of Understanding is arrived at between the acquirer and the seller. The object of Regulation 22(7) and the amendment made therein in the year 2002 is quite obvious. If a person nominated by the acquirer or by any person acting in concert with him is allowed to be on the Board of the target company during the pendency of the public offer, then he will be more concerned with the interest of the acquirer or the person acting in concert with him rather than keeping in view and protecting the interests of the existing shareholders particularly the minority shareholders of the target company. The Board in its wisdom, therefore, imposed a restriction that during the offer period the acquirer or any person acting in concert with him shall not be on the board of directors of the target company. When the Regulation was amended in the year 2002 the Board added another starting point because in quite a few cases the acquirer and the seller first enter into a Memorandum of Understanding before the shares are actually acquired and the Board thought that even during the period when such negotiations are going on and the acquirer is aware that he is going to acquire the shares of the target company, he should not be allowed to be on the board of that company. Since Regulation 22(7) read with Regulation 2(1)(f) imposes a restriction on the acquirer and on the person(s) acting in concert with him, it has to be interpreted strictly in accordance with the meaning of the words used therein. The expression "Memorandum of Understanding" has not been defined in the Act or in the Regulations and not even in the Contract Act. Memorandum means an informal written note or record outlining the terms of a transaction or contract. According to Black's Law Dictionary (Eighth Edition) the term memorandum of understanding is equivalent to "Letter of Intent". A Letter of intent in the same dictionary has been defined to mean "a written statement detailing the preliminary understanding of parties who plan to enter into a contract or some other agreement; A letter of intent is not meant to be binding and does not hinder the parties from bargaining with a third party. Businesspeople typically mean not to be bound by a letter of intent, and courts ordinarily do not enforce one; but courts occasionally find that a commitment has been made". The word agreement is a broad term and can be of various types. An agreement may only be to agree on something in future or an agreement to enter into a further transaction. As is clear from the definition given in the Black's Law Dictionary a Memorandum of Understanding is not a binding agreement and cannot be described as a concluded contract between the parties. It is in the nature of an inchoate agreement or an agreement which has not crystallized the rights of the parties. It is clearly distinct from a concluded agreement like the share purchase agreement entered into between Burren and UIC whereunder the rights of the parties had crystallized and shares transferred and the transaction fully consummated. When sub clause (f) of Regulation 2(1) of the Regulations as amended specifically refers to the date of entering into Memorandum of Understanding as the starting point of the offer period it clearly means that where such a memorandum is executed the offer period will commence from that date but not in those cases where no such memorandum is signed. In this view of the matter it cannot be said that the appellants had violated Regulation 22(7) read with Regulation 2(1)(f) of the Regulations.
7. What is urged by the learned Counsel for the Board is that when Regulation 2(1)(f) was amended with effect from 9.9.2002, the intention of the Board was to ensure that the acquirer does not take control of the target company till all the offer formalities are completed and that the restriction imposed by Regulation 22(7) regarding induction of directors would apply even to the period prior to the date of the share purchase agreement because it could be safely presumed that the parties must have negotiated the terms for some time before arriving at the concluded agreement. She went on to contend that the intention of adding the words "Memorandum of Understanding" in the definition of "offer period" was to prevent the circumvention of the restriction imposed by Regulation 22(7) during the period of negotiations and, therefore, the Regulations should be given a wider meaning to achieve the intention of the Board. She referred to the Bhagawati Committee report and in particular to paragraph 19.2 of that report in support of her plea. The argument is that no doubt the agreement to acquire shares of the target company was entered into by Burren one day prior to the date of public announcement, it could be presumed that negotiations for the said agreement must have started some time prior thereto and, therefore, the restriction contained in Regulation 22(7) would apply from the date of preliminary understanding between the parties. We are unable to accept this contention. It is by now well settled that when the words of a statute are clear, plain or unambiguous and are reasonably susceptible to only one meaning, the courts are bound to give effect to that meaning irrespective of consequences. Tindal C.J.in Sussex Peerage case (1844) 11 Cl & F 85 stated the rule in the following words: If the words of the statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense. The words themselves do alone in such cases best declare the intent of the lawgiver.
8. VISCOUNT SIMONDS, L.C., in Emperor v. Benoarilal Sarma AIR 1945 P.C.48, observed thus: Again and again this Board has insisted that in construing enacted words we are not concerned with the policy involved or with the results, injurious or otherwise, which may follow from giving effect to the language used.
9. This rule of interpretation was accepted by the Apex court way back in 1957 when Justice P. B. Gajendragadkar (as he then was) in Kanailal Sur v. Paramnidhi Sadhu Khan If the words used are capable of one construction only then it would not be open to the court to adopt any other hypothetical construction on the ground that suchconstruction is more consistent with the alleged object and policy of the Act.
10. In view of the established rule of interpretation as referred to above, we cannot look to the intention of the framers of the Regulations because the language used in sub clause (f) of Regulation 2(1) is clear and unambiguous. This being so, we cannot even refer to the Bhagawati Committee Report to give a different meaning to the plain language used in the Regulations. If the framers of the Regulations had intended that some period prior to the date of public announcement is also to be taken into account for the purpose of the restriction imposed by Regulation 22(7) they would have said so in clear terms. We cannot read words in the Regulation which are not there. As already observed, the language of sub clause (f) of Regulation 2(1) is clear and unequivocal and where no Memorandum of Understanding is arrived at between the parties prior to acquiring the shares, the starting point of the offer period would be the date of the public announcement. In the instant case that date is February 15, 2005. Since no director was appointed on the Board of the target company on or after the date of public announcement we have no hesitation in holding that the appellants did not violate Regulation 22(7) read with Regulation 2(1)(f) of the Regulations. In this view of the matter the impugned order cannot be sustained.
11. In the result, the appeal is allowed, the impugned order dated August 25, 2006 passed by the adjudicating officer set side leaving the parties to bear their own costs.