On August 9, 2018, the Securities and Exchange Board of India (“SEBI”) passed an order under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Regulations”) against Vakrangee Holdings Private Limited, in relation to the shares held by it in Vakrangee Limited. 

During the period March 28, 2014 - June 06, 2014, it was observed that price of the scrip of Vakrangee Limited (“Target Company”) rose from Rs 92.95 (Rupees ninety two point nine five) to Rs 131.40 (Rupees one hundred thirty one point four zero) (41.36% (forty one point three six percent)) and from Rs 93.30 (Rupees ninety three point three zero) to high of Rs 131.90 (one hundred thirty one point nine zero) (41.37% (forty one point three seven percent)) on BSE and NSE respectively in 46 (forty six) trading days. Similar volume pattern was observed on BSE and NSE in 2013. There were no corresponding major corporate announcements on these dates. Disclosures were filed by Target Company related entities on June 08, 12, and 14, 2013 under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 and SEBI (Prohibition of Insider Trading) Regulations, 1992. Hence, it was observed that Target Company’s related entities have traded on above mentioned dates of volume spurts. Upon investigation, it was observed that during the quarter ending June 2013 the shareholding of one of the promoter entity of the Target Company namely, Vakrangee Holdings Pvt Ltd., (‘Noticee/VHPL’) increased from 11,54,35,194 (eleven crore fifty four lacs thirty five thousand one hundred ninety four) shares (22.97% (twenty two point nine seven percent) of share capital) to 12,53,75,194 (twelve crore fifty three lacs seventy five thousand one hundred ninety four) shares (24.93% (twenty four point nine three percent) of share capital). Subsequently, pursuant to a transaction dated May 27, 2013, the shareholding of the Noticee was 25.50% (twenty five point five zero percent), i.e., exceeding the threshold limit of 25% (twenty five percent) of total share capital of the company. However, public announcement for open offer for acquisition of shares was not made by the Noticee as mandated under regulation 3(1) read with regulation 3(3) of the Takeover Regulations. Therefore, show cause notice was issued by SEBI. 

It was submitted that there was no change in control as the same promoters were in control of the company before and after acquisition. The breach was minor, technical and insignificant and only for a few days. It was further submitted that the promoter should be viewed along with PACs and not individually, in which case the Promoter holding is at 38.88% (thirty eight point eight eight percent) which is in excess of 25% (twenty five percent) and there is no violation of Regulation 3(1) read with regulation 3(3). Mr. Dinesh Nandwana, one of the promoters of the notice, by holding 31.72% (thirty one point seven two percent) stake in target company was controlling entire promoter holding under the names of various entities, i.e. in his individual name, in the name of HUF or other promoter companies and thus is the ultimate beneficiary, the decision maker and the controller of all the promoter entities. It was submitted that the corporate veil be lifted to see who the ultimate person in control of VHPL is and appreciate that the threshold of 25% (twenty five percent) would not apply to VHPL. 

The allegation in the show cause notice was that VHPL has individually breached the threshold of 25% (twenty five percent) stipulated in 3(1) and therefore liable to make an open offer. The defense of the Noticee is that VHPL is a PAC with the Promoters and Dinesh Nandwana had the ultimate control over the target company, if the corporate veil is lifted as he was having more than 25% (twenty five percent) shares (i.e. 38.88% (thirty eight point eight eight percent)) of the company and therefore the breach against another promoter company, namely VHPL independently will not lie. In the light of the allegation in the SCN and the defence adopted by the Noticee, the questions to be considered would be – (i) whether VHPL’s acquisition can be treated as an independent acquisition that would trigger an open offer obligation under regulation 3(1) and 3(3) as it was a PAC with others, (by virtue of the deeming provision in the definition of PAC, and the relationship between them being that of promoter and promoter group entity) and (ii) whether VHPL, being ultimately in the control of Dinesh Nandwana (who owned 31.72% (thirty one point seven two percent) shares in the target company at the relevant time), can be held to have triggered the open offer obligation by the alleged acquisition, if the corporate veil is lifted.   

Such contention was rejected in light of regulation 3(3) of the takeover Regulations, which unambiguously provides that acquisition of shares or voting rights beyond the threshold of 25% (twenty five percent), even by a single entity amongst the PACs would attract the obligation to make an open offer. The second issue for consideration was whether VHPL, being controlled by Dinesh Nandwana, can be held to have triggered the open offer obligation by the alleged acquisition, if the corporate veil is lifted. Regulation 3 of the Takeover Regulations deals with the obligation to make an open offer, when an acquirer acquires ‘shares or voting rights’ entitling him to exercise voting rights, in the target company, beyond stipulated threshold limit, whereas Regulation 4 deals with such obligation arising out of acquisition of ‘control’ by an acquirer in the target company. The contention raised by the noticee that VHPL is controlled by Dinesh Nandwana at the relevant time, would at best be a defence to counter an allegation levelled under Regulation 4, but the same is not a valid defence for an allegation under Regulation 3, where specific threshold is stipulated without contemplating or considering, who exercises control over the target company. Once the threshold limit is breached, Regulation 3 of the Takeover Regulations is violated and for the purpose of this regulation, it is immaterial who is having the actual control. Hence, an order was passed by SEBI directing the Noticee to, inter alia, make a public announcement to acquire shares of the target company, in accordance with the provisions of the Takeover Regulations, 2011.