In Liquid Holdings Private Limited v. SEBI the Securities Appellate Tribunal considered the question of whether transfer of shares pursuant to an invocation of pledge and subsequent retransfer to the pledgors triggers the SEBU Takeover Regulations.
The Appellant in this case Liquid Holdings Private Limited (“Appellant”) was one of the promoters of Blue Coasts Hotels Limited (“Target Company”). Morepen Laboratories Limited (“Morepen”) a group company of the Appellant acquired loans from Dombivili Bank and Lakshmi Vilas Bank (“Banks”) in the year 2002. Against such loans the Appellant who held a large number of shares in the Target Company pledged those shares by way of collateral security in favor of the Banks. Morepen defaulted in the repayment of the loans as a result of which the Banks in 2004 invoked the pledges created in their favor. The pledged shares were transferred from the demat account of the Appellant to the demat account of the Bank and the names of the Banks came to be recorded as the beneficial owners of the shares in the records of the depositary. However in 2007 the debtors repaid the loans to the Banks and as per mutual agreement the Banks re-transferred the shares to the Appellant.
The issue which arose before the SEBI was whether upon the re-transfer of shares form the Banks to the Appellant, the Appellant were required to make public announcements as per Regulation 11(1) and necessary disclosures as per Regulation 7 of the SEBI Takeover regulations.
The Appellant argues that subsequent to the re-transfer of shares by the Bank to the Appellant the shares still remained under pledge and the relationship between the Appellant and the Banks continued to be that of pledgor and pledgee. The Banks did not acquire voting rights nor did they become members of the Target Company. The Banks throughout held the shares as collateral security which was released upon repayment/settlement of the loan by the Target Company. The Appellant at all times retained the beneficial ownership of the shares and upon the re-transfer of shares form Bank to the Appellant there was no acquisition of shares by the Appellant as per the Takeover regulations and thus the provisions of the Takeover regulations were not triggered.
Upon the Banks being recorded as beneficial owners of the shares in the records of the depositary they became members of the Target Company and they acquired not only the shares but also the voting rights attached thereto. The shares acquired by the Banks ceased to be security for the loans as the Banks had become the beneficial owners of the shares. When the shares were re-transferred to the Appellant they were required to comply with Regulations 7 and 11(1) of the Takeover regulations. The SAT was therefore satisfied that the provisions of Regulation 7 and 11(1) stood violated and upheld the findings of the adjudicating officer.
The SAT order has made it clear that upon the invocation of pledge and subsequent transfer of shares from the pledgor to the pledgee the pledgee acquires the beneficial ownership in the shares. Further where after invocation of pledge the loan is settled and the pledgee re-transfers the shares to the pledgor, the pledgor must follow the requirements under the Takeover regulations. Thus no agreement between the pledgor and the pledgee can obviate the statutory requirements to be followed by the pledgor upon such re-transfer of shares.