ORDER OF THE ADJUDICATING OFFICER UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 READ WITH SECTION 15H(ii) OF SEBI ACT, 1992

 

AGAINST

 

 

 

FOR FAILURE TO MAKE PUBLIC ANNOUNCEMENT IN TERMS OF REGULATION 11(2) OF SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997

 

I was appointed as Adjudicating Officer to inquire into and adjudge under Section 15H of SEBI Act, 1992 the alleged acquisition of shares of Krishna Filaments Ltd. (KFL) by the aforesaid entities without making public announcement in terms of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

 

THE ALLEGATIONS:

 

The allegations against the noticees were set out through identical show cause notices dated �09.08.02 and 26.11.02 and explanation of the charges in terms of Rule 4(4) of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 to the noticees in the inquiry proceedings.

 

The allegations are as follows:

 

�        The aggregate holding of promoter directors of KFL (noticees 1-4) and their relatives was 2,586,100 shares constituting 56.23% of KFL�s equity. It is alleged that noticees 5-11 are persons acting in concert (PACs) with noticees 1-4 and they acquired 5,86,900 shares of KFL on March 31, 1998 through off market transactions. Through subsequent acquisition in the secondary market, the holding of the PACs in KFL moved upto 1,220,500 shares constituting 26.54% of its equity as on August 28, 1998. Subsequently, the holding of PACs moved up to 1,348,000 shares. As the acquirers (noticees 1-4) held more than 51% of KFL�s equity, they are prohibited from acquiring any shares of KFL, either directly or through PACs, without making a public announcement in terms of Regulation 11(2) of SEBI (SAST) Regulation, 1997.� �The shareholding details are as under :

 

 

�        It was, therefore, alleged that the acquisition of shares of KFL as aforesaid without making a public announcement to acquire shares of KFL from other shareholders in terms of SEBI (Substantial Acquisition of Shares and Takeovers Regulations, 1997 is liable for a penalty under Section 15H of SEBI Act, 1992. The notice also states the link between the acquirers (noticees 1-4) and PACs, in support of the charges.

 

�        Letters dated 31.12.02 and 06.06.04 were sent to Dhebar & Shah, Advocates, enclosing relied upon documents including copy of SEBI investigation report on KFL and copies of statements recorded in course of investigation

�        Letter dated 26.10.04 �was sent to Ravikumar Varanasi, Advocate enclosing copies of Annexures I to IX of the investigation report and also statement of persons recorded.

 

 

REPLY AND PROCEEDINGS :

 

M/s. Ravikumar Varanasi, Advocate filed a vakalatnama on behalf of noticees 1-4 vide letters dated July 27, 2004 replacing Dhebar & Shah, Advocates and also participated in the proceedings.

 

The show cause notices dated August 09, 2002 sent to noticees 5-11 by Registered Post Acknowledgement Due were returned undelivered. Copies of the show cause notices sent vide local courier were also returned undelivered. Present addresses of noticees 5-11 were obtained from ROC, Mumbai and an identical show cause notice dated November 26, 2002 was issued. These show cause notices sent by Registered Post Acknowledgement Due were also returned undelivered, except for noticee 9. �Opportunity of personal hearing was afforded to noticees 5-11 vide letter dated 29 January, 2003 advising to appear on February 17, 2003 before the Adjudicating Officer. Copy of show cause notice �dated November 28, 2002 was also enclosed. This notice was sent by Registered Post Acknowledgement Due and was received by all the noticees, except noticees 8 & 9. None of the noticees 5-11 appeared before the Adjudicating Officer on the said date and availed the opportunity. Another notice dated June 07, 2004 giving further opportunity of personal hearing was also not responded.

 

Shri Ravikumar Varanasi, learned counsel appearing for noticees no.1 - 4 denied the allegations and made the following submissions.

 

1.                  While it is true that the Agarwals are the promoters of KFL, it is not true to suggest that the acquisition made by M/s.Competent Trading Ltd and Others for 1,348,000 shares as alleged in the show cause notice is nothing but the acquisition by the Agarwals themselves.�

 

2.                  The material supplied including the investigation report and other documents does not furnish copies of the alleged fictitious bills raised by the suppliers of the company namely M/s. Competent Trading & others. It is not shown as to how the promoters or the company have made the payments for the alleged fictitious bills.�� No details of date of payments etc have been disclosed in the material supplied.��

 

3.                  Merely because Shri Lunkaran Kayal, the brother-in-law of Shri O P Agarwal, Chairman of KFL is in control of Competent Trading & Others ( noticees 5-11), it is not correct to allege that the acquisition by these companies is nothing but acquisition by the Agarwals themselves.

 

4.                  Agarwals do not hold any share or controlling interest in noticees no. 5-11.

 

5.                  The off market transactions for the acquisition of shares of KFL (in one case it is Krishna Vinyl Ltd) is between the parties concerned and Agarwals have nothing to do in this.��

 

6.                  It was submitted that the shareholding of Agarwals have been disclosed to the stock exchanges periodically which remain more or less the same and therefore it is not correct to allege and also include acquisition of shares of KFL by Competent and others amounting to 13,48,000 shares as that of acquisition of shares by the Agarwals.

 

In view of the above, it is submitted that there is no violation of Regulation 11(2) of SEBI (SAST) Regulations, 1997 by the parties or any other violation.

 

It was also submitted that none of the factors contained in Section 15J of the Act are present so as to impose a penalty on the noticees.�

 

APPRECIATION OF EVIDENCE AND FINDINGS:

 

The gravamen of charges against noticees no.1 to 4 are that as promoter / directors of KFL, a listed company, they held over 50% of the paid up capital of �KFL, but nevertheless acquired 5,86,900 shares of KFL on March 31, 1998 through noticees 5 to 11, who are persons acting in concert with noticees 1 � 4. Through further acquisition by noticees 5 � 11, their holding went up to 1,220,500 shares constituting 26.54% of KFL�s equity. The aggregate holding of noticees 1-4 and the PACs was 82.76% of KFL�s equity as on August 28, 1998. Subsequently, as on March 31, 1999 the holding of PACs moved up to 1,348,000. Prior to the acquisition of KFL shares on March 31, 1998 or any time thereafter, neither the noticees 1 - 4 nor the PACs made a public announcement to acquire further shares of KFL from the other shareholders.� As per Regulation 11(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, no acquirer who together with PACs has acquired 51% of the shares or voting rights in a company shall acquire further shares either directly or indirectly unless such acquisition is preceded by a public announcement to acquire further shares from the public in accordance with the Regulations.

�

I have carefully considered the material on record including the submissions made and record my findings as follows. ��Before proceeding further, it is relevant to set out the definition of �acquirer� and �Persons acting in concert� in terms of SEBI (Substantial Acquisition of Shares and Takeovers Regulations, 1997 as under :

 

Acquirer: �acquirer� means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer;

 

�Person acting in concert � comprises �

 

(1)   persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company,

 

(2)   without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established :

(i)                 a company, its holding company, or subsidiary or such company or company under the same management either individually or together with each other;

(ii)               a company with any of its directors, or any person entrusted with the management of the funds of the company;

(iii)             directors of companies referred to in sub clause (i) of clause (2) and their associates;

(iv)             ��

(v)               ���..

(vi)             ����.

(vii)           ����

(viii)         ����.

(ix)             ���.

(x)               any investment company with any person who has an interest as director, fund manager, trustee, or as a shareholder having not less than 2 per cent of the paid-up capital of that company or with any other investment company in which such person or his associate holds not less than 2 per cent of the paid up capital of the latter company.

 

I find that 586,900 shares were acquired by the PACs �through off market transactions from the following entities on March 31, 1998 as detailed in table below:

 

 

As per the investigation report, the sellers in the above table were acting as proxies for the acquirers.� The statements of N R Dalal and Anantaraman Iyer who are in� control of the aforesaid proxy companies (sellers) , the dealing in shares and arrangement of funds, etc. were looked after by Shri KK Agarwal, MD of KFL either directly or through his trusted employee or close confidant,� Shri Jiten Mehta or Shri Deepak Thattee.� Copies of these statements were made available to the parties.�

 

Between 1.1.97 and 31.12.98 KFL transferred funds to Competent Trading, Dominance Trade and Precise Exports Ltd which in turn transferred these funds to a set of other four companies, who are PACs of KFL viz. Responsive Plastics, Marvellous Trading Pvt Ltd, Gainful Exports P Ltd and Lyric Investment &Trading P Ltd.� These funds were used to purchase the shares of KFL.� As per the investigation report, the companies controlled by Dalal and Iyer i.e. Alankar Finance & Ors were used as a medium for transfer of funds.� Alankar Finance & Ors which were used as a facade to purchase the shares of KFL, later on transferred the shares to the PACs of KFL viz. Competent & Ors (noticees 5 to 11).� Competent & Ors as on March 31, 1999 were holding 1,348,000 equity shares of KFL as given in the table subsequently.

 

Funds amounting to Rs.65.35 lakhs were transferred to Precise Exports from Aug 1997 to March 20, 1998. Each time the shares were transferred to Competent, Dominance, Precise etc. the same amount was paid by these companies to the brokers for purchase of shares.� Substantial payment for purchase of KFL shares by Competent Trading was made to the sub broker Dharamshi Capital Services.� Dharmashi Capital Services had purchased 42,200 shares of KFL for Rs.108.71 lakhs for Competent Trading, payment of which was received by it from KFL.� Dharamshi Capital Services received Rs. 70 lakhs through 10 cheques from KFL for the aforesaid purchases by noticee 5.�

 

KFL and KVL subscribed to the preference shares of noticees 5 to 11 i.e.Competent Trading & Ors to the extent of Rs.27.03 crores which is quite disproportionate to the equity capital of these companies.� KFL did not receive any dividend in respect of these investments. The details are as under :

�����������������������������������������������������������

 

It may be seen from the above table that Gainful Exports and Marvellous Trading which had a paltry sum of Rs.200/- as share capital received Rs.3.2 crores and 5.39 crores from KFL towards subscription for preferential shares.� Similarly, Responsive Plastics & Lyric Investments which had a paltry sum of Rs. 2000/- as capital had received a sum of Rs.67 lakhs and Rs.3.07 crores towards preferential share capital from KFL.

 

Precise Exports Pvt Ltd has held 310,100 shares of Krishna Vinyl Limited (KVL), an unlisted associate concern of KFL.� Similarly, Dominance Trade and Investments Pvt Ltd had held 68,100 shares of KVL.� These shares were received by transfer from Renold Finance & Alankar Finance.

 

Further, there are common directors in noticees no.5 - 11 as can be seen from the table below :

 

 

Further, there is common shareholding in Competent Trading & Ors as can be seen from the table below:

 

 

It is also seen that most of the shareholders and directors of the noticees 5 � 11 are either relatives of the acquirers or employees of KFL. The brother-in-law of CMD of KFL, O.P. Agarwal (noticee-2), Mr. Lunkaran Kayal, is the director of all the PACs.� Details of his shareholding in the PACs can also be seen from the above table. More importantly, Mr. Kayal was also the authorized signatory of all the PACs i.e. noticees no.5 - 11 and the resolution in this regard was passed by noticees 5-11.

 

The noticees no.5 - 11 delivered the KFL shares purchased for transfer to the Registrar through KFL. The duly endorsed certificates were handed over by the Registrar - Intime Spectrum Registry (P) Ltd. �to KFL and not to the noticees no.5 - 11. Moreover, the dividend warrants of noticees no.5 - 11 for KFL shares were hand delivered by the Registrar to KFL. Further, objection memo for transfer of shares in the name of the noticees no.5 -11 were given to KFL by the Registrar, rather than sending it to the transferees.

 

The noticees no.5-10 have given the same address in the DP account opening form with Action Financial Services (India) Ltd; address of that of KFL. Also all the PACs i.e. noticees no. 5 -11 have common phone numbers (2020163-65, 287 2794/95) and fax number (204 2737). Besides, all the PACs have given the first share holder�s address as that of KFL in the DP opening form. Further, noticees no.5 -11 intimated the DP about the change of their respective addresses to S.V. Road office at Malad vide their letters dated October 28, 1998. The changed address was the residential address of Mr. Kayal. Finally, it is also seen that all the noticees no.5 - 11 had no other activity except transacting in the shares of KFL.

 

It is seen that noticees 5, 6, 7 and 11 have bank account with Canara Bank, Colaba branch. The introducer of noticee 5 is KFL and noticee 11 is Efficient Builders, which has the same address of KFL�s Director. Further, noticees 10, 9 and 8 have Bank accounts with Bank of Baroda, Colaba branch with serial account number 21455, 6 & 7 respectively. The introducer for these companies is Jupiter Chemicals, proprietary firm of noticee no.2 (OP Agarwal).

 

From the aforesaid material and the surrounding facts and circumstances, it can be reasonably concluded that noticees 5-11 were acting in concert with noticees no.1 � 4 in the matter of acquisition of shares of KFL as aforesaid.

 

Acting in concert is something about which actual evidence is normally difficult to come. The Hon�ble Supreme Court in the case of CIT vs East Coast Commercial Co.Ltd. AIR (1967) SC 768 (Kedia Family case) had dealt with the question in the context of Section 23A of the Indian Income Tax Act, 1922 wherein the question was whether Kedia family had acted in concert to control the affairs of the concerned company.� In the facts of that case, there was no evidence of any overt act showing that they were acting in concert and thereby constituted and acted as a block.

 

In para 14 of the judgement, the Hon�ble Supreme Court observed as follows:

��.. if the members of the Kedia family form a block and had more than 75 per cent of the voting power, it was not necessary to prove that they� actually exercised controlling interest. It is the holding in aggregate of a majority of the shares issued by a person or persons acting in concert in relation to the affairs of the company which establishes the existence of a block.� It is sufficient, if having regard to their relation, etc., their conduct and their common interest, that it may be inferred that they must be acting together, evidence of actual concerted acting is normally difficult to obtain, and is not insisted upon.� (p.772)

 

In this context, the Hon�ble Supreme Court decision in Delhi Development Authority vs Skipper Construction Co. Pvt Ltd. (1996) 4 Comp LJ 233 (SC) � AIR 1996 SC 2005 that (para 27 at page 247 of COMP LJ ) may be referred to.

 

�The concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for the purpose of committing illegality or defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned.� The fact that an individual and members of his family have created several corporate bodies would not prevent the court from treating all of them as one entity belonging to and controlled by that individual and family. If it is found that these corporate bodies are merely cloaks behind which lurks the individual and /or members of his family and that the device of incorporation was really a ploy adopted for committing illegalities and /or to defraud people�� (underlining supplied).

 

Regulation 11 (2) of SEBI (SAST) Regulations, 1997 reads as under at the relevant time� :

 

No acquirer who, together with persons acting in concert with him has acquired, in accordance with the provisions of law, 51% of the shares or voting rights in a company, shall acquire either by himself or through persons acting in concert with him any additional shares or voting rights, unless such acquirer makes a public announcement to acquire shares in accordance with the regulations.

 

From the filing made by M/s.Ravikumar Varanasi & Co., Advocate vide letter dated November 17, 2004, wherein the copies of Distribution Schedule of KFL was enclosed, I find that the paid up capital and the holding of promoters and directors of KFL as on September 12, 1997 and August 28, 1998� is 2,586,100 constituting 56.23% of KFL�s equity. It is also established from the reasons recorded earlier that noticees 5-11 are persons acting in concert (PACs) with noticees 1-4 and they acquired 5,86,900 shares of KFL on March 31, 1998.� It is undisputed that the aforesaid acquisition was not preceded by a public announcement by any of the noticees as required under Regulation 11(2) of SEBI (Substantial Acquisition of Shares and Takeovers Regulations, 1997. �Therefore, it is established that the aforesaid acquisition is prohibited under the cited Regulations.

 

It may also be mentioned that through subsequent acquisition in the secondary market, the holding of the PACs in KFL moved upto 1,220,500 shares of KFL constituting 26.54% of its equity as on August 28, 1998. The shareholding details are as under:

 

 

Subsequently, the holding of PACs moved up to 1,348,000 shares. In that sense, the violation is repetitive in nature in terms of Section 15J(c) of SEBI Act, 1992.��

 

Had the noticees made a public announcement in accordance with the provisions of Regulation 11(2) of SEBI (Substantial Acquisition of Shares and Takeovers Regulations, 1997, other shareholders would have got an opportunity to tender their shares and exit receiving a price as determined under the Regulations.� In as much as the noticees have not made any such public announcement, the interest of investors is prejudicially affected. It is seen from the investigation report that the scrip of KFL was quoting @ of about Rs.150/- in March 1998.� Therefore, the loss caused to the investor in terms of an opportunity to offload their shares, or the unfair gain to the acquirers (including the PACs) who are required to make the public announcement under the Regulations, would have to take into account @ Rs.150/- per share at the relevant time, besides the other parameters for determination of the price of open offer under the Regulations.

ORDER

It is pertinent to refer to the order of the SAT in Appeal No.151/2004 dated 7.2.2005 in the matter of Man Industries.� It has been held by the Hon�ble Tribunal that for irregularities that were committed prior to the amendment of the SEBI Act on 29.10.2002, penalty as existing at the relevant period only is to be imposed and not the new penalties under the amended Act.�� The SAT held that at the relevant period the maximum penalty was Rs.5 lacs.� The amendment enhancing the penalty to Rs.25 crores came into force with effect from 29^th October, 2002.� The Hon�ble SAT at page 16 of the order held as under:�

�Penalties unless specifically made retrospective must inevitably be only with effect from the date of amendment.� Accordingly, we hold that at the relevant time, the maximum penalty was Rs.5.00 lakhs�.�

For the aforesaid reasons, the penalty imposed is limited to Rs 5.00 lakhs (Rupees five lakhs only) for failure to make public announcement in accordance with the Regulations in term of Section 15 H (ii) of SEBI Act, 1992.

Having regard to the submissions made, the factors contained in section 15J of SEBI Act,1992 as already discussed, the gravity of the charges established, the facts and circumstances and following the order of the Hon�ble SAT in Man Industries Ltd. cited above, I hereby impose a consolidated penalty of Rs.5.00 lakhs (Rupees Five Lakhs only) on Shri K K Agarwal, Shri O P Agarwal, Shri R K Agarwal, Shri S K Agarwal, Competent Trading (P) Ltd, Dominance Trade and Investment (P) Ltd, Precise Exports (P) Ltd, Gainful Exports (P) Ltd, Marvellous Trading (P) Ltd, Responsive Plastics (P) Ltd, Lyric Investments & Trading (P) Ltd, who contravened the provisions of Regulation 11(2) of SEBI (SAST) Regulations, 1997 read with Section 15H(ii) of SEBI Act, 1992 in the matter of acquisition of shares of Krishna Filaments Ltd.� They are jointly and severally liable to pay the penalty.� It shall be remitted by way of a crossed Demand Draft drawn in favour of �SEBI � PENALTIES REMITABLE TO GOVERNMENT OF INDIA� and forwarded immediately to Shri R.S. Loona, Executive Director, Law, Securities and Exchange Board of India, B Wing, Mittal Court, 1^st Floor, Nariman Point, Mumbai 400 021.

 

 

 

Date:� �June 20, 2005�������� ��������� ������������� ����������������������� S. V. Krishna Mohan

Place : Mumbai������������������������������������������ ����������� Adjudicating & Enquiry Officer

 

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