Scm Solifert Limited & Anr. v. Competition Commission of India
ARUN MISHRA, J. 1. The appellants SCM Solifert Limited
and another are in appeal under section 53T of the Competiti on Act,
2002 (hereinafter referred to as “the Act”) as against the final judgment
and order dated 30.08.2016 passed in Appeal No.59 of 2015 by the
Competition Appellate Tribunal thereby affirming the order passed by
the Competition Commission of India under section 43A of the Act.
2. The Competition Commission of India initiated the proceedings
against the appellants on whom due to the failure to notify a pro posed
combination as required under section 6(2) of the Act, the penalty of
Rupees Two crores was imposed under section 43A of the Act. O n
3.07.2013, the appellants had purchased 2,89,91,150 shares of Mangalore
Chemicals and Fertilisers Limited (in short referred to as “the MCFL”)
constituting 24.46 paid up share capital of the MCFL on the Bom bay
Stock Exchange.
3. The first transaction of the acquisition of the shares was by
way of the purchase of shares conducted through bulk and block deals.
It was followed by press release dated 3.7.2013 by Deepak F ertiliser
and Petrochemicals Corporation Limited filed with the Stock Exchanges,
in compliance with the requirements of the Listing Agreement.
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4. On the second acquisition of the shares on 23.04.2014 the
appellants made a purchase order in the open market for the purchase
of up to 20 lacs equity shares representing 1.7 percent shar es of the
MCFL. Subsequently, an open offer in terms of the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 (for short, “the
Regulations, 2011”) was made for acquiring up to 26 percent of shares
of the MCFL.
5. The appellants filed a notice disclosing details of the first
acquisition and notifying the second acquisition under Section 6(2) of the
Act with the Commission on 22.04.2014 within thirty days of the public
announcement pursuant to the Regulations, 2011 for the acquisition of
1.7 percent of the MCFL. The Competition Commission vide its order
dated 30.07.2014 under section 31(1) of the Act approved the proposed
combination, however, directed to initiate penalty proceedings against
the appellants under section 43A of the Act. Pursuant to tha t, a show
cause notice was issued on the ground of failure to notify in accordance
to section 6(2) of the Act, in regard to first and second acqui sitions of
shares.
6. It was the case on behalf of the appellants that first acquisition
was made solely for the purpose of investment under Entry I of Schedule
I of the CCI (Procedure in regard to the Transaction of Business Relating
to Combinations) Regulations, 2011, (hereinafter referred to a s “the
Competition Regulations”). Thereby, it assumed exemption fr om the
notification. It was also urged that the second acquisition was notified to
the Commission within the stipulated time of 30 days as sp ecified in
section 6(2) of the Act. The purchase was not consummated because
as per the Escrow Agreement dated 28.04.2014, the shares purchased
in the second acquisition were credited to a specifically de signated
Escrow account of J.M. Financial Services Limited. The sole p urpose
of entering into an escrow agreement was that the transacti on was not
consummated prior to approval of the Commission. The Commission
has imposed the penalty of 2 crores; the appellate tribunal has affirmed
the order. The Commission has held that the appellants have violated
section 6(2) of the Act by failing to notify the proposed combination.
7. It was urged by learned counsel on behalf of the appellants that
first acquisition did not fall within the purview of Entry 1 Schedule 1.
SCM SOLIFERT LIMITED & ANR. v. COMPETITION
COMMISSION OF INDIA [ARUN MISHRA, J.]
The interpretation made by the Commission of the Entry 1 of Schedule
1 is incorrect. With respect to the second acquisition of shares, it was
urged that the sole purpose of creation of Escrow Account was to ensure
that the appellants could not exercise the legal and beneficia l rights
accruing through the shares, as the account was operatable sol ely on
the basis of instructions of the Manager and to the exclusi on of the
appellants. After approval of the proposed combination, penalty ought
not to have been imposed. Violation, if any, was technical, not willful,
deliberate or mala fide.
8. Per contra , the Commission has rightly imposed the penalty.
There was a breach of provisions contained in section 6(2). The penalty
imposed is meager. The first acquisition of shares was notifiable. It could
not have been termed solely as an investment. Reliance has been placed
on Press Release issued on 3.7.2013, which referred investment b eing
“very strategic”, and the appellant also notified to the p ublic that they
“look forward to working closely with MCFL in the futur e”. The
knowledge of acquisition by the Zuari group of 9.72% shares in MCFL
on 2.4.2013 was admitted in the reply filed by the appellants. There was
the acquisition of a large number of shares on the same day through the
block and bulk deals. MCFL was not very profitable. Therefore, purchase
of shares could not be said to be a sound investment by a prudent investor.
9. To appreciate the rival submissions, it is necessary to refer to
certain provisions contained in the Act. Section 6 of the Act deals with
regulation of combinations and the same is extracted hereunder:
“Section 6: Regulation of combinations
(1) No person or enterprise shall enter into a combination, which
causes or is likely to cause an appreciable adverse ef fect on
competition within the relevant market in India and such a
combination shall be void.
(2) Subject to the provisions contained in sub-section (1), any person
or enterprise, who or which proposes to enter into a combination,
13 [shall] give notice to the Commission, in the form as may be
specified, and the fee which may be determined, by regulations,
disclosing the details of the proposed combination, within thirty
days of—
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(a) approval of the proposal relating to merger or amalgamation,
referred to in clause (c) of section 5, by the board of directors of
the enterprises concerned with such merger or amalgamation, as
the case may be;
(b) execution of any agreement or other document for acquisition
referred to in clause (a) of section 5 or acquiring of control referred
to in clause (b) of that section.
(2A) No combination shall come into effect until two hundred and
ten days have passed from the day on which the notice has been
given to the Commission under sub-section (2) or the Commission
has passed orders under section 31, whichever is earlier.”
10. Any person or enterprise before entering into a combination,
has to give notice to the Commission disclosing the detail s within 30
days of (a) approval of the proposal relating to merger or amalgamation
as provided in the Act; (b) execution of any agreement or other document
for acquisition referred to in section 5(a) of the Act or acquiring of control
under section 5(b). No combination shall come into effect as provided in
section 6(2A) until 210 days have passed from the day when notice has
been given to the Commission.
11. Section 42 of the Act deals with contravention of the orders of
the Commission. Section 43A deals with the power to impose a penalty
for non-furnishing of information on combinations. Any p erson or
enterprise who fails to give notice under section 6(2) of the A ct to the
Commission, the Commission, in such an event, is authorized to impose
the penalty which may extend to 1% of the total turnover or the assets,
whichever is higher.
12. Section 43A is extracted hereunder:
“Section 43A: Power to impose the penalty for non-
furnishing of information on combinations
If any person or enterprise who fails to give notice to
the Commission under sub-section (2) of section 6, the Commission
shall impose on such person or enterprise a penalty which may
extend to one percent, of the total turnover or the assets, whichever
is higher, of such a combination.”
SCM SOLIFERT LIMITED & ANR. v. COMPETITION
COMMISSION OF INDIA [ARUN MISHRA, J.]
13. Regulation 4 of the Combination Regulations deals wi th
categories of transactions not likely to have an appreciable adverse effect
on competition in India. Regulation 5 deals with the form of notice for
the proposed combination. Regulation 5(8) provides that “other
document” in section 6(2)(b) to mean any binding document by whatever
name called, conveying an agreement or decision to acquire contr ol,
shares, voting rights or assets. Rule 5(8) is extracted hereunder :
“5. Form of notice for the proposed combination -
(1) ……
(8) The reference to the “other document” in clause (b) of sub-
section (2) of section 6 of the Act shall mean any binding document,
by whatever name called, conveying an agreement or decision to
acquire control, shares, voting rights or assets:
Provided that if the acquisition is without the consent of the
enterprise being acquired, any document executed by the acquiring
enterprise by whatever name called, conveying a decision t o
acquire control, shares or voting rights shall be t he “other
document”.
Provided further that where a public announcement has bee n
made in terms of the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations,
2011, for the acquisition of shares, voting rights or control, such
public announcement shall be deemed to be the
“other document”.”
14. Schedule 1 to the Combination Regulations provides that
acquisition of shares or voting rights referred to in section 5(a )(i) or
Section 5(a)(ii) of the Act does not entitle the acquirer to hold 25% or
more of the total shares or voting rights of the company, dire ctly or
indirectly. The Explanation makes it clear that the acquis ition of less
than 10% of the total shares or voting rights of an ente rprise shall be
treated solely as an investment. Schedule 1 to the Combination
Regulations is extracted hereunder:
“(1) An acquisition of shares or voting rights, referred to in sub-
clause (i) or sub-clause (ii) of clause (a) of section 5 of t he Act,
solely as an investment or in the ordinary course of business in so
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far as the total shares or voting rights held by the acquirer directly
or indirectly, does not entitle the acquirer to hold twenty five per
cent (25%) or more of the total shares or voting rights of the
company, of which shares or voting rights are being acquired,
directly or indirectly or in accordance with the execution of any
document including a share holders” agreement or articles of
association, not leading to acquisition of control of the enterprise
whose shares or voting rights are being acquired.
Explanation:- The acquisition of less than ten percent of the total
shares or voting rights of an enterprise shall be treated as solely
as an investment. Provided that in relation to the said acquisition
– (A) the Acquirer has ability to exercise only such rights that the
exercisable by the ordinary shareholders of the enterprise whose
shares or voting rights are being acquired to the extent of t heir
respective shareholding; and (B) the Acquirer is not a member of
the board of directors of the enterprise whose shares or v oting
rights are being acquired and does not have a right or intention to
nominate a director on the board of directors of the enterprise
whose shares or voting rights are being acquired and does not
intend to participate in the affairs or management of the enterprise
whose shares or voting rights are being acquired.”
15. The procedure for imposition of penalty is provided under
Regulation 48 of the new Regulations. A show cause notice has to be
given and thereafter if an oral hearing is granted, then the Commission is
empowered to impose the penalty considering the facts and circumstances
of the case.
16. First, we deal with the acquisition of the shares of MCFL by
the appellants on 3.11.2013. There was the acquisition of 24.46% equity
share capital of MCFL on a single day of which 19.9% were ac quired
through the block and bulk deals. The contemporaneous Press Release
dated 3.7.2013 issued by the appellants filed with the stock exchanges,
in compliance with the requirement of the Listing Agreement indicated
that the objective was not to make an investment in MCFL. The Press
Release referred “investment is very strategic and a g ood fit with the
company’s business”. There was a pointer in the Press Rele ase of its
intent when it stated that DFPCL looks forward to working closely with
MCFL to “enhance long-term value for the shareholde r of both
SCM SOLIFERT LIMITED & ANR. v. COMPETITION
COMMISSION OF INDIA [ARUN MISHRA, J.]
companies”. Not only the appellants but another player Zuari group also
made a significant purchase of shares of MCFL i.e. 9.72% on 2.4.2013
is also not in dispute. Thus, it is apparent that the a ppellant’s first
acquisition was a part of the long-term plan to try and take over MCFL,
which was simply not an investment. The purchase of 24.46% equity
stake, vested power to exercise influence as was reflec ted in Press
Release-II also. The acquisition of less than 10% of the total shares or
voting rights of an enterprise is solely an investment. It also indicates
that beyond this threshold, the transaction is required to be looked carefully.
Thus, there was a failure to comply with the provisions of section 6(2) of
the Act in regard to the acquisition of 24.46% of the shareholding. The
provisions of section 6(2) were not at all complied with.
17. Coming to the second acquisition of shares of 0.8% equity
shares of MCFL, the dispute is as to whether the notifyi ng within 30
days of the purchase was compliance of the provision as per provisions
of section 6(2) it should have been notified before the acquisition. As a
corollary, it was also argued that the equity shares purchased second
time were placed in the Escrow Account. The appellants could not have
exercised the beneficial rights until the Commission made the approval
of the proposed combination. What was essential under secti on 2(e)
was the voting rights and the appellants could not have exercised voting
rights by placing shares in the escrow account.
18. We find no merits in the submissions raised. It is app arent
from section 6(2) of the Act that the proposal to enter into combination
is required to be notified to the Commission. The legislative mandate is
apparent that the notification has to be made before enterin g into the
combination. The Preamble of the Act contains that the Commiss ion
has been established to prevent practices having an adverse effect on
the competition. The combination cannot be entered into and shall come
into effect before order is passed by Commission or lapse of certain
time from date of notice is also apparent from the terminology used i n
section 6(2A) which provides that no combination shall come into effect
until 210 days have passed from the date of notice or passing of orders
under section 31 by the Commission, whichever is earlier. The provisions
made in Regulation 5(8) also buttresses the aforesaid conclusion. Notice
of Section 6(2) is to be given prior to consummation of the acquisition.
Ex post facto notice is not contemplated under the provisions of section
6(2). Same would be in violation of the provisions of the Act.
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19. The expression “proposes to enter into a combination” in
section 6(2) and further details to be disclosed in the not ice to the
Commission are of the ‘proposed combination’ and the specific provisions
contained in section 6(2A) of the Act provides that no combination shall
come into effect until 210 days have passed from the date on whi ch
notice has been given or passing of orders under section 3 1 by the
Commission, whichever is earlier. The intent of the Act is that the
Commission has to permit combination to be formed, a nd has an
opportunity to assess whether the proposed combination would c ause
an appreciable adverse effect on competition. In case combination is to
be notified ex-post facto for approval, it would defeat the very intendment
of the provisions of the Act.
20. When the transaction has been completed and acquisition has
been made and the latter transaction has exceeded holding more t han
25% by the second purchase, obviously prior permission was required,
as discussed hereinabove, as its total shareholding increased to 25.3%.
Thus, we have no hesitation to hold that the notification under sec tion
6(2) of the Act has to be ex-ante.
21. The factum of the approval of the combination subsequently
by the Commission is not going to provide an insulation w hen the
provisions of the Act have been violated and prior notice had not been
given under section 6(2). It was open to impose a penalty under section
43A. Merely by grant of approval by the Commission violati on of
provisions does not become condonable ipso facto.
22. The provisions contained in section 43A make it clear that the
Commission shall impose the penalty which may in its discretion extend
to 1% of the total turnover or the assets, whichever is highe r, of the
combination. It has been found on facts that the tu rnover of the
combination was Rs.3322 crores per annum, 1% of which would be
Rs.33.22 crores. The Commission had imposed a nominal penalty of
Rs.2 crores which amounts to only 0.06% of the total turnover. In the
facts of the case, information was disclosed belatedly. The imposition of
penalty was warranted due to the violation of the provision and it was
rightly imposed.
23. There was no requirement of mens rea under section 43A or
an intentional breach as an essential element for levy of pe nalty. The
Act does not use the expression “the failure has to be w illful or mala
SCM SOLIFERT LIMITED & ANR. v. COMPETITION
COMMISSION OF INDIA [ARUN MISHRA, J.]
fide” for the purpose of imposition of penalty. The breach of the provisions
of the Act is punishable and considering the nature of the breac h, it is
discretionary to impose the extent of penalty. Mens rea is important to
adjudge criminal or quasi-criminal liability, not in case of violation of the
civil statutory provision. In Hindustan Steel Ltd. v. State of Orissa AIR
1970 SC 253, with respect to the failure to comply with the civil obligation
this Court has laid down thus:
“In our opinion, mens rea is not an essential ingredien t for
contravention of the provision of a civil Act. In our view, the penalty
is attracted as soon as a contravention of the statutory obligations
as contemplated by the Act is established and, therefore, the
intention of the parties committing such violation becomes
immaterial. In other words, the breach of a civil obligation which
attracts penalty under the provisions of an Act would immediately
attract the levy of penalty irrespective of the fact whe ther the
contravention was made by the defaulter with any guilty intention
or not. This apart that unless the language of the statute indicates
the need to establish the element of mens rea . It is generally
sufficient to prove that a default in complying with the statute has
occurred. The penalty has to follow and only the quantum of penalty
is discretionary “
In our considered opinion, the penalty is attracted as soon as the
contravention of the statutory obligation as contemplated by the
Act and the Regulation is established and hence intention of the
parties committing such violation becomes wholly irrelevant.
We also further hold that unless the language of the statute
indicates the need to establish the presence of men’s re a, it is
wholly unnecessary to ascertain whether such a violation was
intentional or not. On a careful perusal of Section 15(D) (b) and
Section 15-E of the Act, there is nothing which requires that men’s
rea must be proved before a penalty can be imposed under these
provisions. Hence once the contravention is established then the
penalty is to follow.”
24. The imposition of penalty under section 43A is on account of
breach of a civil obligation, and the proceedings are neither criminal nor
quasi-criminal. Thus, a penalty has to follow. Discretion in the provision
under section 43A is with respect to quantum. Thus, we find that in view
of the submissions made by learned counsel for the appellants no cas e
for our interference is made out.
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25. The judgment and order passed by the Commission as affirmed
by the appellate tribunal are in accordance with law. The appeal being
devoid of merit, deserves dismissal and is hereby dismissed. No costs.
Divya Pandey Appeal dismissed.
SCM SOLIFERT LIMITED & ANR. v. COMPETITION
COMMISSION OF INDIA [ARUN MISHRA, J.]