Anda di halaman 1dari 24

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016

TEAM CODE: 101

IN THE HONBLE SUPREME COURT OF INDIA


AT NEW DELHI
(FILED UNDER SECTION 15Z OF THE SEBI ACT 1992)

IN THE MATTER OF:

DREAMSELLERS
(APPELLANTS)

V.
SEBI
(RESPONDENT)

Memorial filed on behalf of the Appellant

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


TABLE OF CONTENTS

LIST OFABBREVIATIONS....................................................................... 3
INDEX OF AUTHORITIES ....................................................................... 4
STATEMENT OF JURISDICTION............................................................. 5
STATEMENT OF FACTS............................................................................ 6
ISSUES PRESENTED ................................................................................. 8
SUMMARY OF ARGUMENTS................................................................... 9
ARGUMENTS ADVANCED ...................................................................... 11
-

THAT THE PROVISIONS OF THE NEW TAKEOVER CODE COULD BE


APPLIED TO AN OFFER MADE UNDER THE 1997 TAKEOVER CODE.

THAT DREAMSELLERS HAD EXCERSIZED PROPER DUE DILIGENCE

THAT SEBI HAS VIOLATED THE PRINCIPLES OF NATURAL JUSTICE WHILE


PASSING THE PREVIOUS ORDER

THAT REGULATION 27(1)(d) CANNOT BE READ EJUSDEM GENERIS WITH


OTHER PROVISIONS OF THE SAID REGULATION

PRAYER.................................................................................................. 23

LIST OF ABBREVIATIONS

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


&

And

Honble

Honourable

Ed.

Edition

Co.

Company

UOI

Union of India

Ltd.

Limited

SEBI

Securities and Exchange Board of India

v./vs.

Versus

AIR

All India Reporter

SAT

Securities Appelate Tribunal

BCLC

Buttersworth Company Law Cases

SC

Supreme Court

SCC

Supreme Court Cases

INDEX OF AUTHORITIES

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


Statutes Referred:
Companies Act 2013, Act No.14 of 2013
The SEBI Act, 1992
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011
SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulation
2002.
The Constitution of India, 1949

Cases Cited:
Re djan of London ltd. 1993 B.C.C. 646
Peoples Departmental Stores Case, Canada [2004] 3 SCR 461
Chandrakala v Adjudicating Officer
UOI v. Tulsiram Patel, AIR 1985 SC 1416
Automative Tyre Manufacturers Association v. Designated Authority, (2011) 2 SCC 258
Basudeo Tiwari v. Sidha Kanhu University, AIR 1988 SC 3261
Grasim Industries Ltd v Collector of Customs, (2004) 4 SCC 297.
Maharashtra Health Services v Sutchikisa Prasarak Mandal, (2010) 3 SCC 786.
Amar Chandra Chakraborty v Collector of Exercise, (1972) 2 SCC 442.
State of Karnataka v. Mangalore University Non Teaching Employees Association (2002) 3
SCC 302
Cant. Board v. Taramani Devi, 1992 Supp 2 SCC 502
Hari Pada Khan v. UOI, AIR 1996 SC 1065
State of U.P v. Maharaja Dharmendra Prasad Singh, (1989) 2 SCC 505

Books Referred:
M.P. Jain, Constitution of India, Lexis Nexis, 7th Edition, 2014
D.D. Basu Commentary on Const. of India, Justice S.S. Subramani, Vol. 2, Lexis Nexis, 9th
Edition, 2014
Gower And Davies, Principles of Modern Company Law, 9th Edition, 2012
Reinier H Kraakman, Anatomy of Corporate Law: A Comparative and Functional Approach,
2004

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016

Dictionaries Referred:
Blacks Law Dictionary, Thompson Reuters, 9th Edition.
Websters Comprehensive Dictionary, Deluxe Encyclopedic Edition, Typhoon International,
2004.

STATEMENT OF JURISDICTION

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


It is humbly submitted that the Appellant has approached the Honble Supreme Court of India
invoking its jurisdiction under Section 15Z of the SEBI Act, 1992.

STATEMENT OF FACTS
Artemis Ltd. borrowed a sum of 100 Crore from Dreamsellers Ltd. and pledged equity
shares as security. The debt was not repaid within the prescribed time. Upon default of
6

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


payment, the pledge was invoked by the Dreamsellers Ltd. which entitles them to 12.5%
equity shares in Artemis. Along with the invocation of pledge, Dreamsellers Ltd. decided
to make a voluntary open offer under Regulation 10 of the SEBI 1997 Takeover
Regulations, which would help them acquire 37.6% equity shares in Artemis, this would
take up their holding upto 50.1% in Artemis.

Dreamsellers Ltd. made a public announcement on October 1, 2010 for the proposed open
offer, a draft letter of the same was filed with SEBI. In the mean time, lenders of Artemis
had been pushing the board to review their operations. An internal audit was called for,
which revealed certain irregularities in the financials of Artemis. They directed a special
audit into the financial affairs of the company. Through the report it has come to light that
a sum of 300 Crore was siphoned off and embezzled by the promoters of Artemis, which
resulted in a sharp decline in the prices of their shares.

On October 30,2011, Dreamsellers Ltd. wrote through its merchant bankers to SEBI
seeking top withdraw the open offer As an alternative and without-prejudice argument,
Dreamsellers Ltd. sought that SEBI should pass an order permitting re-pricing of the open
offer price in view of the new facts that have become known, which the market did not
know earlier, and because of which the market price had been much higher than what it
would have been had the price become known.

SEBI stated that acquirers should conduct their due diligence before deciding on whether
to make an open offer and ignored the re-pricing proposition. SEBI also stated that
Regulation 23 of the New Takeover Regulations would not be applicable at all since the
open offer had been made under the provisions of the 1997 Takeover Regulations. The
Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 (New Takeover Regulations) had been notified on
September 23, 2011 and the same came into force with effect from October 22, 2011.

Aggrieved by the SEBI Order, Dreamsellers Ltd. filed an appeal before the Securities

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


Appellate Tribunal (SAT) under Section 15T of the SEBI Act, 1992, challenging the
same. The SAT after hearing the parties passed an order dismissing the appeal filed by
Dreamsellers Ltd.. Being aggrieved by the Order of the SAT, Dreamsellers Ltd. filed an
appeal before the Honble Supreme Court under Section 15Z of the SEBI Act, 1992.

ISSUES PRESENTED

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


1. WHETHER THE PROVISIONS OF REGULATION 23 OF THE NEW
TAKEOVER REGULATIONS RELATING TO WITHDRAWAL OF OPEN
OFFER COULD BE APPLIED TO AN OPEN OFFER MADE UNDER THE
1997 TAKEOVER REGULATIONS ?
2. WHETHER DREAMSELLERS HAD FAILED TO EXCERSISE DUE
DILIGENCE AND THE FACTS RELATING TO FRAUD WERE KNOWN
OR COULD HAVE BEEN KNOWN IF THEY EXCERCISED PROPER
DUE DILIGENCE ?
3. WHETHER SEBI HAS VIOLATED THE PRINCIPLES OF NATURAL
JUSTICE IN THE PRESENT CASE WHILE PASSING ITS ORDER
WITHOUT HEARING DREAMSELLERS ?
4. WHETHER REGULATION 27(1)(d) OF THE 1997 CODE IS TO BE GIVEN
AN INTERPRETATION WHEREBY, THE WORDS such circumstances as
in the opinion of the Board merit withdrawal ARE TO BE READ EJUSDEM
GENERIS WITH THE OTHER PROVISIONS OF REGULATION 27(1)(d)
OF THE SAID CODE ?

SUMMARY OF ARGUMENTS
1.WHETHER THE PROVISIONS OF REGULATION 23 OF THE NEW TAKEOVER
REGULATIONS RELATING TO WITHDRAWAL OF OPEN OFFER COULD BE
APPLIED TO AN OPEN OFFER MADE UNDER THE 1997 TAKEOVER
REGULATIONS?

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016

It is humbly submitted that an open offer was made by the Appellants under Regulation 10 of
the 1997 Takeover Regulations to acquire 37.6% of Artemis Ltd. Based on the audit report it
has come to notice that an amount to the tune of 300 Crore was siphoned and embezzled by
the directors of Artemis. Due to such extraordinary facts coming to light, the Appellants
chose to withdraw their open offer. As they had no option but to withdraw it under Regulation
23 of the New Takeover Regulations 2011 as the 1997 Code does not have provisions relating
to

the

same.

2.WHETHER DREAMSELLERS HAD FAILED TO EXCERSISE DUE DILIGENCE AND


THE FACTS RELATING TO FRAUD WERE KNOWN OR COULD HAVE BEEN
KNOWN IF THEY EXCERCISED PROPER DUE DILIGENCE ?
It is humbly submitted that appellants have exercised due diligence as they have not merely
relied on the information which was available to them, there was reliance on the information
which was available to them only after thorough investigation. The scope of due diligence is
limited to the extent of a reasonable individual and not perfectness, appellants in the present
case have exercised reasonable and informed decision. The scope of due diligence is limited
in case of listed companies, due to stricter norms which they have to adhere of SEBI. If the
appellants have exercised due diligence beyond the information which was available in public
realm, they would be in violation of insider trading regulation as it would result in possessing
unpublished price sensitive information.

3.WHETHER SEBI HAS VIOLATED THE PRINCIPLES OF NATURAL JUSTICE IN THE


PRESENT

CASE

WHILE

PASSING

ITS

ORDER

WITHOUT

HEARING

DREAMSELLERS?
It is humbly submitted that the order passed by SEBI goes against the principles of natural
justice. None of the ingredients of principles of natural justice have been followed in the
present case ranging from opportunity of being heard not granted, non compliance of fair and
due procedure by SEBI, non speaking orders: prejudice caused to parties due to non exercise
of audi alteram partem, non communication of reasons.

10

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016

4.WHETHER REGULATION 27(1)(d) OF THE 1997 CODE IS TO BE GIVEN AN


INTERPRETATION WHEREBY, THE WORDS such circumstances as in the opinion of the
Board merit withdrawal ARE TO BE READ EJUSDEM GENERIS WITH THE OTHER
PROVISIONS OF REGULATION 27(1)(d) OF THE SAID CODE ?

It is humbly submitted that Regulation 27(1)(d) of the 1997 Takeover Code cannot be read
Ejusdem Generis with other provisions of the said regulation as the sub clauses do not belong
to the same genus. The SAT without considering the legislative history of the regulation erred
in concluding that the rule would be applicable. Applying the rule to Clause (d) and confining
the discretion given to SEBI to the realm of impossibility to perform the open offer would
have adverse effects and would defeat the purpose of the Takeover Code.

ARGUMENTS ADVANCED
1.WHETHER THE PROVISIONS OF REGULATION 23 OF THE NEW TAKEOVER
REGULATIONS RELATING TO WITHDRAWAL OF OPEN OFFER COULD BE
APPLIED

TO

AN

OPEN

OFFER

MADE

UNDER

THE

1997

TAKEOVER

11

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


REGULATIONS?
It is humbly submitted that an open offer was made by the Appellants under Regulation 10 of
the 1997 Takeover Regulations. Based on an audit report, it has come to the notice of the
Appellants that, the company they have invested in has siphoned off an amount of Rs.300
Crores. Based on this report, the target companys share price declined drastically. Due to
such extraordinary facts coming to light the Appellants wrote to SEBI to withdraw their offer
through their merchant bankers. The Appellants put forth their contention that it was a
voluntary open offer and not something which was triggered by the invocation of the pledge,
hence they should be allowed to withdraw the offer. Withdrawal of an offer can be done only
through Section 271 of the 1997 Takeover Regulations, which states three circumstances:
1. The statutory approvals have been refused.
2. The sole acquirer being a natural person, has died.
3. Such circumstances as in the opinion of the Board merit withdrawal.
None of these circumstances fit the Appellants case, and moreover by the time the Appellants
decided to withdraw the offer, the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (also The 2011 Regulations) have come into force repealing the old
regulations. The 2011 Takeover Regulations talk about withdrawal of offer under Section 23 2,
which contains a new clause (c) which states that any condition stipulated in the agreement
for acquisition attracting the obligation to make the open offer is not met for reasons outside
the reasonable control of the acquirer, and such agreement is rescinded subject to such
conditions having been specifically disclosed in the detailed public statement and the letter of
offer; this new clause fits the Appellants case perfectly and the reasons for applying the
regulations of the New Takeover Code while the open offer being made under the Old
Takeover

Regulations

is

multi-fold.

It is submitted that, a large amount of money has been siphoned off and embezzled by the
promoters of Artemis, due to which the Appellants would have to face a huge loss, and this
entire situation of withdrawing the offer or the alternative request of re-pricing the offer arose
due to the mis-conduct of the promoters of Artemis but the loss is borne by the Appellants as
the 1997 Takeover Regulations do not talk about any clause by which the Appellants can
withdraw their voluntary open offer.
1 SEBI (Substantial Acquisition Of Shares And Takeovers), 1997
2 SEBI (Substantial Acquisition of Shares and Takeovers), 2011

12

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


In this situation the vehicle of fraud are the promoters of Artemis and the victim of fraud are
the Appellants, and also not only have the 1997 Regulations been repealed, the New Takeover
Code3 which is currently in force has new provisions with regards to withdrawal of open offer
under which the Appellants should be allowed to proceed as this is the only mode through
which the Appellants can avoid the loss caused by Artemis.
SEBI has also stated that proper due diligence has not been conducted by the Appellants
which has put them in this situation. But it is submitted that, the Appellants had absolutely no
means to know the internal state of affairs of Artemis, as it is a public listed company. In the
event of extraordinary circumstances such as fraud, entitles them to withdraw their open
offer.
Moreover, it is also submitted that, the Appellants have put forth another option of re-pricing
the offer which was also not favored by SEBI. The only party which is at loss due to this
entire scenario are the Appellants and this offer being a voluntary open offer, no other party
apart from the Appellants would lose or gain if it is withdrawn. Hence, in the interest of
justice the Appellants should be allowed to proceed under the existing Regulations 4 and
should be allowed to withdraw their offer.
2.WHETHER DREAMSELLERS HAD FAILED TO EXCERSISE DUE DILIGENCE AND
THE FACTS RELATING TO FRAUD WERE KNOWN OR COULD HAVE BEEN
KNOWN IF THEY EXCERCISED PROPER DUE DILIGENCE ?
It is humbly submitted that the appellants have exercised due diligence and the facts relating
to fraud could not be known even after conducting such due diligence. Section 166 of
Companies Act, 2013 states that: A director of a company shall exercise his duties with due
and reasonable care, skill and diligence and shall exercise independent judgment.
Due diligence is defined as the diligence reasonably expected from, and ordinarily exercised
by, a person who seeks to satisfy a legal requirement or to discharge an obligation. 5 Duty of
care, skill and diligence requires the director to take steps that would be taken by a reasonable
diligent person having the general knowledge, skill and experience that may reasonably be
3 Id @ 2
4 Id
5 Blacks Law Dictionary 10th ed., Pg 553

13

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


expected of a person carrying out the same functions, as well as the general knowledge, skill
and experience which the director in fact possesses.6

Thus, there is certain objective

standard laid down to determine the diligence of a director which can be achieved through
lens of an ordinary prudent individual. The standard is that of reasonably competent director
carrying out those functions in that company and the Court does not look to impose
unrealistically high levels of skill.7 Directors are not liable for errors of judgment or for
mistakes while acting with reasonable skill and prudence. The term Due diligence is relative
in nature is gauged upon the facts and the circumstances of each case.
1. Independent verification of the information:
The main aim of due diligence is to ensure that there is independent verification of the
information stated. Due diligence requires directors to independently verify the information
given. Courts require that independent verification is a critical step in due diligence process. 8
In the present case there has been thorough evaluation of the information possessed by the
appellants. The information which could be obtained was only public information which
included information pertaining to Articles of Incorporation, AOA, MOA, Directors
meetings, finance, management, risk management, projections, debt, key performance
indicators, the targets audited financial accounts, internal audit, quarterly income statements,
a certificate from the targets chartered accountant certifying the financial soundness of the
target, certification by merchant bankers, annual reports,

capital structure,

expenses,

compliance with listing agreement, companys books and records, annual returns, compliance
certificate. There has been assessment of all such information which was available to them.
Audit report of a company represents the true and fair picture of the financial affairs of the
company. It is not possible for appellants to get access to financial statements which has not
been published or released by the company. Even after due verification as nothing fraudulent
could be deduced from the information available and it was not possible to have access to any
greater information, as such information was not available in the public realm. Though there
has been detailed inquiry into the affairs of the company, the embezzlement could not have
been discovered as it was not a single embezzlement which took place over a particular
6 Re djan of London ltd. 1993 B.C.C. 646
7 Com. Law, 4th ed., Brenda Hannigan, Oup
8 128, Corp. Governance, Jonathan R Macey, Princeton up, 2008

14

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


financial year. It has to be taken into consideration that it was embezzled over a period of 10
years. It would be difficult to discover fraud due to longevity of the period over which it was
committed which could not leave any substantial inconsistencies in the statement of accounts.
They have not merely relied on the information which was available to them, reliance was
placed on the information after there was due investigation on such information.
2. Diligence need to be reasonable but not perfect:
In Peoples Department Stores9, the Supreme Court of Canada stated as follows: Directors
and officers will not be held to be in breach of the duty of care if they act prudently and on
a reasonably informed basis. The decisions they make must be reasonable business decisions
in light of all the circumstances about which the directors or officers knew or ought to have
known. In determining whether directors have acted in a manner that breached the duty of
care, it is worth repeating that perfection is not demanded. Taking into consideration the
facts and the circumstances of the case, it is not possible to conduct due diligence on the
information which is not available to them. Since the diligence has to reasonable and not
perfect, reasonableness has to be limited to the extent of the information which is available to
them i.e., accessible information. Diligence has to be due i.e., suitable, lawful, sufficient,
regular10, though it might not be certain it should be appropriate.
In the same case, Supreme Court of Canada said Courts are ill-suited and should be
reluctant to second-guess the application of business expertise to the considerations that are
involved in corporate decision making, but they are capable, on the facts of any case, of
determining whether an appropriate degree of prudence and diligence was brought to bear in
reaching what is claimed to be a reasonable business decision at the time it was made. Courts
hence while dealing with the diligence of the directors should determine the decision with
regard to the facts at the time when the decision was taken rather than to second guess the
same in the light of circumstances which have arisen after the decision has been taken. It
must be considered that diligence of a director is based on the approach of a reasonable
individual and not that of economic individual. Director cannot be held liable merely due to
an economic loss, it has to be proved that the director has been negligent or has not acted

9 [2004] 3 SCR 461


10 Webster, Trident Press Intl., Pg. 390

15

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


reasonably. However, informed decision has been taken by the director with respect to the
information available in the circumstances.
It is humbly submitted that in the present case the appellants are victims of fraud rather than a
vehicle. It is not plausible for them to expect to detect fraud. Wisdom developed after an
event and having it and its consequences as a source, is a standard no reasonable person can
expect to be followed while determining due diligence.
3. Due diligence for listed companies:
If the target is a listed company, the scope of due diligence is limited . As such a company, is
subject to strict disclosure norms imposed by securities regulation that require it to keep the
market informed of all material developments, hence the acquirer could make the decision
based simply on publicly available information. 11 Thus, there were reasonable grounds to rely
on the information which was available to them.
4. Insider trading regulations:
A person in possession of inside information is presumed to have traded on the basis of
such information, unless proved to the contrary.12 Information obtained by the acquirer
through
inside information which is received during due diligence, may make an acquirer to be in
violation of the legislation if it acquires shares in the takeover offer, as it will be committing
the trading offence. There is no recognition that companies may often require nonpublic
information about a company in order to assess the merits of a particular transaction. The due
diligence therefore should not include review of unpublished information.
The decision taken has been prudent and informed. Law recognizes that no director is
infallible, director is immune through law of diligence if he acted in a diligent manner as
expected from a reasonable individual. Thus, in the present case where director acted in a
diligent manner he would not be liable for failure to exercise due diligence duty.

11 https://www.law.ox.ac.uk/business-law-blog/blog/2016/05/due-diligence-acquisition-transactions-andinsider-trading-concerns

12 Chandrakala v Adjudicating Officer, Securities and Exchange Board of India, Securities Appellate
Tribunal (31 January 2012)

16

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


3.WHETHER SEBI HAS VIOLATED THE PRINCIPLES OF NATURAL JUSTICE IN THE
PRESENT

CASE

WHILE

PASSING

ITS

ORDER

WITHOUT

HEARING

DREAMSELLERS ?
It is humbly submitted that there has been violation of principles of natural justice. The term
natural justice is used interchangeably with natural law or jus naturale, which means certain
rules of conduct supposed to be so just that are binding on all mankind 13. The purpose of
principles of natural justice is prevention of miscarriage of justice and hence observance
thereof is the pragmatic requirement of fair play in action. 14 In India principles of natural
justice are not embodied in the constitution. Under article 14, requirement of natural justice
has been regarded as an integral part of the guarantee of equality of article 14, because
violation of rule of natural justice results in arbitrariness, which is same as discrimination. 15
Article 14 guarantees equality before law. According to Supreme Court in some situations,
denial of hearing to an effected person may amount to denial of equality before law which
may amount to infringement of article 14. The SC has observed: audi alteram partem is a
part of article 14 of the constitution. 16 The rules of natural justice have assumed so much
significance that the Supreme Court characterized them as foundational and fundamental
concepts which are part of legal and judicial procedures. Principles of natural justice do
not supplant, but supplement the rules and regulations.17 Natural justice consists of two
components. One is hearing, or the doctrine of Audi alteram partem, which means listen to
the other side.18
AUDI ALTERAM PARTEM
Audi alteram partem is applicable not only to quasi judicial orders, but also to administrative
orders affecting prejudicially unless the said rule is expressly excluded 19. Doctrine of Audi
alteram partem has three essential ingredients. Firstly, a person against whom an order an
13
UOI v. Tulsiram Patel, AIR 1985 SC 1416

14
Automative Tyre Manufacturers Association v. Designated Authority, (2011) 2 SCC 258 (para 80, 77)

15
Basudeo Tiwari v. Sidha Kanhu University, AIR 1988 SC 3261

16
Cant. Board v. Taramani Devi, 1992 Supp 2 SCC 502

17
Hari Pada Khan v. UOI, AIR 1996 SC 1065

18
M.P. Jain and S.N. Jain Principles of Admin Law, 7th ed. 334

19
Style Dress Land v. Union Territory, Chandigarh, AIR 1999 SC 3638

17

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


order is required to be passed or whose rights are likely to be affected adversely must be
granted must be granted an opportunity of being heard. Secondly, the authority concerned
should provide a fair and transparent procedure and thirdly, the authority concerned must
apply its mind and dispose of the matter by a reasoned or speaking order.20
1. Opportunity of being heard not granted:
Lord Moris held in Ridge v. Baldwin21, the essential requirements of natural justice at least
include that before someone is condemned he is to be given an opportunity to defend
himself. In the present case, SEBI passed an order refusing withdrawal of open offer against
dreamsellers without granting an opportunity to hear the dreamsellers.22 In cases where the
stakes are high and the affected persons have made large investments on the project and a
finding is required on a number of factual matters of some complexity, personal hearing was
directed to be given.23 The more serious the consequences for the individual, higher the
standard of hearing is required.24 Thus, it is clear that right to be heard depends upon the
facts and the circumstances of the case, ranging from the amount of investment to the
consequences suffered. In the present case, significant investment is involved which is
acquisition of 37.6% of equity shares in Artemis. Since the transaction cost is immense, the
consequences of such investment are also huge. Due to such special circumstances, appellants
are bound to be heard before SEBI.
2. Non compliance of fair and due procedure by SEBI:
Fair hearing consists of two justiciable elements. The first is that opportunity of hearing
must be given and the second is that it should be reasonable 25. Where a statute is silent
about the procedure to be followed by the authority, the very nature of the quasi judicial
function requires that proper hearing should be given 26. Fairness includes notice, oral
20
Aast. Comm.. Commercial Tax Dept., Works, Contract and leasing, Kota v. Shukla and Bros. (2010) 4 SCC
785, 790-91 (para 10)

21
1964 AC 40

22
Facts Sheet, Page 3, Para 14 (f)

23
State of U.P v. Maharaja Dharmendra Prasad Singh, (1989) 2 SCC 505

24
D.D. Basu Commentary on Const. of India, Justice S.S. Subramani, Vol. 2, Lexis Nexis, 9th ed. , 2014

25
W.B. Electricity Regulatory Comm. v. CESE Ltd., AIR 2002 SC 3588

26
Chaturbhai. M. Patel v. UOI, AIR 1960 SC 424

18

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


hearing, representation, discovery, cross examination and reasoned decisions. 27 However, in
the present case there has been no hearing or representation at all which is highly unfair.
3. Non Speaking Orders:
Another important element of the principles of natural justice is the requirement to state
reason, as it avoids non arbitrariness. Speaking order is one which speaks the mind of the
authority which has passed the order.28
Recording of reasons is a principle of natural justice and every judicial order must be
supported by reasons recorded in writing. It ensures transparency and fairness in decision
making.29 In S.N. Mukherjee v. UOI30 it was held that, What is necessary is that the reasons
are clear and explicit so as to indicate that the authority has given due consideration to the
points in controversy. Supreme Court held that at least outline of process of reasoning
must be given.31 However, SEBI merely stated that acquirers should conduct due diligence
before the offer and it cannot be withdrawn lightly.32 However, in the present case no reasons
stated for passing such an order. The reasons could not be considered as no opportunity was
given to state the appellants reasons. In Siemens33, it was held that In cases where
adjudicatory bodies are arranged in hierarchal order, each authority should make a speaking
order. Thus, even if there are appellate bodies it is necessary for each body to state its
reasons

for

reaching

the

decision.

4. Prejudice caused to parties due to non exercise of AUDI ALTERAM PARTEM:


Supreme Court observed: In our view the principles of natural justice know of no
exclusionary rule dependent on whether it would have made any difference if the natural
justice had been observed. The non observance of natural justice is itself prejudice to any
27
Ibid @ 24, 2018

28
Jain Admin Law 536

29
Id @518

30
(1990) 4 SCC 594

31
Sri Rama Vilas Service v. Chandrasekaran, AIR 1965 SC 107

32
Facts sheet, Page 2, Para 11, Line 6

33
Siemens Engg. & Mfg. Co. v. UOI, AIR 1976 SC 1785

19

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


man and proof of prejudice independently of proof of denial of natural justice is unnecessary.
It ill comes from a person who has denied justice that the person who has been denied justice
is not prejudiced.34 Court thus held that non compliance of principles of natural justice itself
results in prejudice to the parties, however it the present case the scope or extent of prejudice
done is extended due to loss suffered by the appellants due to fall in share price for no fault of
theirs. In CATA35, Supreme Court held that there is also a general principle that justice
should also seem to be done. In the present case justice has not been done to the parties as
they suffered losses being victims of fraud and not vehicles of fraud.
5. Non Communication of Reasons:
In Ajanta Industries V. CBDT36, Supreme Court held that the reasons for the order ought to
be communicated to the affected person. Court held that the order is bad on account of non
communication of reasons and it would not be saved by showing that the reasons existed in
the file. Thus mere recording of reasons is not enough the same has to be communicated to
the party. In the present case reasons were not even stated, thus communication of reasons is
impossibility in the present case.
Oral argument is perhaps the most important powerful force in our legal process, to promote
a change of mind by the judge. The judges in fact change their minds under the influence of
oral arguments is not an arcane feature of the system; it is at the centre of it.37 However, in
the present case no such opportunity was granted to the appellants by SEBI. Order passed by
SEBI is inequitable, unfair and caused injustice to appellants. Thus, it is humbly submitted
that there has been clear violation of principles of natural justice.
4.WHETHER REGULATION 27(1)(d) OF THE 1997 CODE IS TO BE GIVEN AN
INTERPRETATION WHEREBY, THE WORDS such circumstances as in the opinion of the
Board merit withdrawal ARE TO BE READ EJUSDEM GENERIS WITH THE OTHER
PROVISIONS OF REGULATION 27(1)(d) OF THE SAID CODE ?
34
State of Karnataka v. Mangalore University Non Teaching Employees Association (2002) 3 SCC 302, 313 (Para
11)

35
CATA Sales Co-op Society v. A.P. Govt, AIR 1977 SC 2313

36
AIR 1976 SC 437

37
Sen Gupta v. Holmes 2002 ECWA (Civil) 1104

20

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016

It is humbly submitted that regulation 27 (1) (d) of the 1997 takeover code cannot be read
Ejusdem Generis with other provisions of the said regulation as the other sub clauses do not
belong to the same genus. Interpreting clause (d) in the light of clause (b) and (c) of
regulation 27 (1) would curtail the wide powers conferred on SEBI to regulate the securities
market.
The principle of Ejusdem Generis means when particular words pertaining to a class or genus
are followed by the general words, the general words are to be constructed as limited to the
things of the same kind as those specified in other words, the general terms must be
constructed in the light of the specific words. This Honble court in CIT v M.C. Dowell and
Co. Ltd38 the while applying the rule of Ejusdem Generis laid down the following conditions,
a)
b)
c)
d)
e)

The statute contains an enumeration of specific words


The subjects of enumeration constitute a class or category
The class or category is not exhausted by the enumeration
The general terms follow the enumeration
There is no indication of a different legislative intent

All the above mentioned conditions must be fulfilled to apply the rule of Ejusdem Generis.
Clauses under regulation 27 (1) do not belong to the same genus
It is humbly submitted that from the above decision it is clear that for the applicability of the
rule of ejusdem generis the specific words must belong to the same class or genus. The SAT
and SEBI without taking in to account all the considerations, erred in concluding that the
provisions of regulation 27 (1) can be read ejusdem generis.
It is a well settled principle that the legislative history of the enactment is to be looked into to
derive the intention of the legislature. Regulation 27 (1) originally read as follows.
27 (1) No public offer, once made, shall be withdrawn except under the following
circumstances:
a)
b)
c)
d)

the withdrawal is consequent upon any competitive bid;


the statutory approval(s) required have been refused;
the sole acquirer, being a natural person, has died;
such circumstances as in the opinion of the Board merit withdrawal.39

38
(2009) 10 SCC 755.

39
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

21

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


It is submitted that clause (a) was subsequently deleted in the year 2002 40. The SAT applied
the ejusdem generis rule to the remaining entries. It concluded that entries (b) and (c)
constituted a class of cases where consummating an open offer has become impossible. On
this basis, it held that even under (d), SEBI could permit a withdrawal of an open offer only if
it had become impossible to continue with the offer. The flaw with such interpretation is that
the prior amendment that deleted entry (a) had not touched up on entry (d) and it could
therefore not have affected the meaning of entry (d). Hence clause (a) cannot be ignored
while interpreting regulation 27 (1) and the same must be considered to interpret regulation
27 (1) in its true sense.
Entry (a) under regulation 27(1) permits the revocation of offer as a consequence of
competitive bid, Entry (b) and (c) permits revocation of offer when it is impossible to
perform the contract, entry (b) dealing with legal impossibility as a consequence of refusal of
statutory approvals and entry (c) permitting revocation where the sole acquirer being a
natural person has died. The relevant sub clauses do not belong to the same genus, clause (b)
and (c) permitting revocation only in case of impossibility and clause (a) permitting
withdrawal even when it is possible to perform the contract taking in to account the economic
considerations. As the three clauses do not belong to the same genus the rule of ejusdem
generis cannot be applied and sub clause (d) cannot be interpreted in the light of sub clauses
(b) and (c) alone.
Applying the rule of ejusdem generis would curtail the powers of SEBI
It is humbly submitted that regulation 27 (1) (d) confers wide powers on SEBI to control the
securities market and to further the objectives of SEBI Act. The words such circumstances in
the opinion of the board clearly confer wide powers on SEBI to deal with the circumstances
that could not have been foreseen by the legislature and the same cannot be confined to the
realm of impossibility. The intention of the legislature if clear according to the literal
wordings of the statute cannot be defeated by giving it a narrow interpretation. Giving a
narrow interpretation to regulation 27 (1) (d) in the light of sub clause (b) and (c) would leave
no discretion with SEBI and curtail its powers.
The rule of Ejusdem Generis has to be applied with care and caution. This is not a inviolable
rule of law, but is only a permissible inference, in the absence of indication to contrary 41. This
40
See, SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002.

41
Grasim Industries Ltd v Collector of Customs, (2004) 4 SCC 297.

22

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


Honble court on a number of occasions held that the rule of ejusdem generis is applicable
only in the absence of a different legislative intent 42, when an alternative interpretation to sub
clause (d) conferring wide powers on SEBI is possible, the interpretation that confines such
power to the realm of impossibility cannot be adopted.
In the light of the above arguments it is humbly submitted that the rule of ejusdem generis
cannot be applied to regulation 27 (1) of the 1997 takeover code and confining the powers
given to SEBI under clause (d) of the said regulation to the realm of impossibility by
interpreting it in the light of clause (b) and (d) would have adverse consequences and would
also defeat the intent and purpose of the takeover code.

PRAYER
WHEREFORE, in the lights of the facts used, issues raised, arguments advanced and
authorities cited, it is most humbly and respectfully prayed that this Hon'ble court may be
pleased to adjudge and declare that:
1. Regulation 23 of the New Takeover Code is applicable in the present case.
2. Proper due diligence has been conducted by the Appellants.
3. Principles of Natural Justice have been violated by the Respondents.
4. Regulation 27(1)(d) cannot be read Ejusdem Generis with other provisions of the said
regulations.
The court may also be please to pass any other order, which this Hon'ble Court may deem fit
in the light of justice, equity and good conscience.

42
See, Maharashtra Health Services v Sutchikisa Prasarak Mandal, (2010) 3 SCC 786. See also, Amar Chandra
Chakraborty v Collector of Exercise, (1972) 2 SCC 442.

23

GNLU SECURITIES AND INVESTMENT LAW MOOT 2016


All of which is most humbly prayed Counsel for the Appellants.

24