According to Sterlite sources, the appellate authority has held that at the time of the offer, foreign institutional investors were not allowed to directly furnish shares in an open offer. This clause had been subsequently withdrawn by the Sebi.

The move is seen as a major victory for Sterlite Industries, which has been directed by Sebi on Thursday to go ahead with the offer, despite having decided to abort it midway. Sterlite has, however, decided to go in appeal against the Sebi order. They are expected to question the Sebi decision to ask them to make the payment in cash, when their offer had a split option of cash and shares.

For Templeton, it means that the FII will not be able to receive cash of Rs 221 per share for its 9 lakh-odd shares deposited with Sterlite. Karvy, the share registrar to the open offer,had rejected the Templeton shares on the grounds that they had been furnished after the expiry of the deadline and also that the guidelines in place at that time did not permit it to accept the shares directly from an FII.

Sterlite had made an open offer for Indal at Rs 221 a share. Templeton had asked its custodian, HongkongBank, to furnish 9-lakh shares under the offer. This was rejected by Sterlite's registrar, Karvy, on the grounds that the shares were submitted after the deadline. This, according to the bank, was not true. It maintained that the shares had been submitted ahead of the deadline.

Sebi had, in its order on July 9, directed Karvy to accept the shares. "Given the evidence on record by HongkongBank, we deemed it fit to give them the benefit of the doubt. The evidence of having submitted the shares on time was not 100 per cent, but was reasonable enough to merit acceptance of the shares," Sebi chairman DR Mehta had maintained in his order.

Sterlite went in appeal to the appellateauthority. The appellate authority first issued a notice to Sebi. Sebi, however, pointed out that being the regulator, it had given a decision on the basis of facts present before it and that since the issue of interpreting whether the shares were furnished on time was between HongkongBank and the company, the custodian should be asked to explain its position.

Taking note of Sebi's plea, the appellate authority issued a notice to HongkongBank. The next hearing in the case is scheduled later this month.

The issue had snowballed into a major controversy, with the head of Templeton's emerging market funds and investment "guru", Mark Mobius, taking up the matter with Sebi chairman.

He had expressed dismay at the development, and this had prompted Sebi to come out with a quick decision.

Sterlite had offered Rs 221 a share as against Rs 200 by Alcan. However, it decided to withdraw its offer, after Sebi asked it to prescribe with the preferential shares allotment guidelines, since a major part of the offerwas in the form of optionally convertible preference shares.