[Opinion] The SEBI Verdict | Redefining ‘Persons Acting in Concert’ in Corporate Takeovers

CS Vallabh M Joshi & Rutuja Umadikar – [2023] 156 taxmann.com 260 (Article)

Introduction

Securities and Exchange Board of India Substantial Acquisition Shares and Takeover regulations (‘SAST Regulations’) were introduced by the Securities and Exchange Board of India (‘SEBI’) to safeguard companies and investors from hostile takeovers. SAST Regulations are built upon several fundamental concepts, including acquisition, takeover, and inter-se transfer. One such pivotal concept, which serves as a cornerstone of SAST Regulations, is the concept of ‘Persons Acting in Concert.’ SEBI has thoughtfully provided a well-defined description of this term within the SAST Regulations. However, despite the clear definition and numerous legal pronouncements, it remains apparent that the term is still susceptible to varying interpretations by the various courts. This ambiguity was recently underscored in a SEBI in its adjudication order dt: May 31, 2023, concerning the case of Abhishek Infraventures Ltd.1.

Brief Facts of the case

SEBI upon receipt of a complaint, conducted an investigation into the trading activities of certain entities in the scrip of Abhishek Infraventures Limited (‘AIL‘/ ‘Company‘) for the time period January 01, 2017, to March 31, 2017 (hereinafter referred to as the “Investigation Period“). On investigation SEBI noted that the Company was listed on Ahmedabad Stock Exchange (‘ASE’) on January 27, 2015, with paid up share capital of INR 24,90,000, comprised of 2,49,000 equity shares of face value of INR 10 each. Immediately after its listing on ASE, the Company made a preferential allotment of 30,00,000 shares to 11 allottees [viz. Omprakash Kovuri (hereinafter referred to as ‘Noticee no. 1‘) and Mr. Ramachandra Murthy Adiraju (hereinafter referred to as ‘Noticee no. 2‘, Shiva Kumar Komaravelli (hereinafter referred to as ‘Noticee no. 3‘), Srikanth Burugu (hereinafter referred to as ‘Noticee no. 4‘),

Lata Bejgam (hereinafter referred to as ‘Noticee no. 5‘), Perraju Pericharla (hereinafter referred to as ‘Noticee no. 6‘), Joseph Polisetty (hereinafter referred to as ‘Noticee no. 7‘), Balram Aerrolla (hereinafter referred to as ‘Noticee no. 8‘) and Swaroopa Pasupula (hereinafter referred to as ‘Noticee no. 9‘)] on January 29, 2015, at the price of INR 10 per share. During its investigation, SEBI uncovered a crucial revelation that, the funds used for subscribing to this preferential allotment had originated from and circulated through AIL itself, via another entity known as Vishwanath Projects Limited [‘VPL’]. SEBI further observed that funds utilized by Noticee no. 9 to subscribe to the shares of AIL in preferential issue was originated from Vertex Venture Healthcare, an entity alleged to be connected with Noticee no. 1. In view of this, it has been alleged that all these are connected with Noticees no. 1 and 2 and have actually acted in concert with these two promoter entities to acquire shares of AIL in its preferential issue.

SEBI vide its adjudication order dated May 31, 2023, stated that,

“It is interesting to observe that even the promoters of the Company had used an amount of INR 14.10 lakh received by them from Vertex Ventures Healthcare for paying consideration against the allotment of shares made to Noticees no. 1 and 9 by the Company. In this regard, Noticee no. 9 had used INR 9.20 lakh to pay for consideration of allotment of shares and an amount of INR 5 lakh was used by Noticee no. 1 to partly pay the consideration for allotment of shares of AIL through layered transactions. Subsequent to allotment of shares and receipt of consideration for such shares by the Company, an amount of INR 23 lakh was withdrawn as cash from the bank account of AIL. Around the same time, an amount of INR 17.42 lakhs was deposited in the bank account of Vertex Ventures Healthcare by way of cash deposit for which no explanation has been submitted by any of the involved parties. In the light of the aforesaid factual revelations in the present matter, it leads to an unassailable inference that the said funds were withdrawn in cash from the account of AIL and deposited in the account of Vertex Ventures Healthcare to avoid detection of such transfer of funds. All these facts and inferences as deliberated above, lead to a compelling conclusion that the Noticees no. 3 to 9 have acted in concert with Noticees no. 1 & 2, the promoters of AIL, while subscribing to the shares of AIL in preferential allotment done on by AIL January 29, 2015. For the said purpose, these Noticees were funded with money arranged by Noticees no. 1 & 2 through their associates and connected entities and the said money was returned back to these associates and connected entities from the account of the Company through one way or the other, soon after the preferential issue was completed. As Noticees no. 1 & 2 had also invested in the preferential allotment of shares, the aforementioned fund transfers from VPL to Noticees no. 2 to 8 and return of the said funds by AIL to VPL within one and a half months of completion of preferential allotment, without proper justification, strengthened the allegation of concert, pertaining to these fund transferred to Noticees no 2 to 8 to enable them to subscribe to the shares of AIL. Similarly, the funds were arranged by Noticee no. 1 and 2, through their friend Yadaiah Pasupula, to enable the wife of Yadaiah Pasupula i.e., Noticee no. 9, to enable her to subscribe to the shares of AIL in the preferential allotment. Considering the above, I reiterate my above discussed findings that all these persons/allottees/Noticees were acting with same common objective and were apparently falling within the definition of PACs, as defined under Regulation 2(1)(q) of SAST Regulations”.

Based on the observed connection between the Company and the allottees, SEBI determined that the allottees had indeed acted in concert to gain control of the company. SEBI vide its order dt: May 31, 2023, also debarred Noticee no. 1 to 9 for five years and further penalised them for not failure to make necessary discourse as a group, as required under the provision of Regulation 29(2) read with 29(3) of the SAST Regulations.

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