ORDER OF THE ADJUDICATING OFFICER

BACKGROUND:

1.             I was appointed as the Adjudicating Officer by the Chairman, Securities and Exchange Board of India (hereinafter referred to as SEBI) vide Order dated September 23, 2004 to inquire into and adjudge under Section 15A of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the �SEBI Act�), the alleged violation of Regulation 7 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the �Takeover Regulations�) by M/s Laffan Software Limited (hereinafter referred to as �Laffan�) pursuant to its acquisition up to 10,00,000 shares representing 5.71% of the paid up share capital of ETP Corporation Ltd. (hereinafter referred to as �ETP�) as on June 18, 2002. It was alleged that pursuant to the said acquisition, Laffan failed to comply with the provisions of Regulation 7(1) & (2) of the Takeover Regulations on account of its failure to make necessary disclosures with regard to its share holding as required under the Regulations.�

NOTICE AND REPLY

2.              I had issued a show cause notice dated November 4, 2004 under Rule 4 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the �Rules�) to Laffan seeking its reply, if any, within 14 days from the date of receipt of the notice on the alleged contravention of Regulation 7(1) & (2) of the Takeover Regulations. The notice was served by way of Registered post � acknowledgement due.

3.             The notice was acknowledged on November 10, 2004 but Laffan had failed to respond within 14 days from the date of receipt of the notice. A reminder dated December 2, 2004 was issued to Laffan by way of Speed post asking the company to reply within 7 days from the receipt of the same. It is observed that although the reminder letter was acknowledged on December 10, 2004, no reply has been received till date from Laffan. Thus, in the absence of any replies, I was forced to proceed with the case under the presumption that Laffan had no submissions to make.

CONSIDERATION OF EVIDENCE AND FINDINGS:

4.             It is noted from the demat statement of Laffan�s beneficiary account (Client ID: 10001552, DP: H Nyalchand Financial Services Limited ID: IN302488) for the transactions during the period between April 1, 2002 to September 1, 2002, that Laffan had acquired up to 10,00,000 shares amounting to 5.71% of ETP as on June 18, 2002. In this regard Regulation 7(1) of Takeover Regulations as it stood on June 18, 2002 provided that;

�Any acquirer who acquires the shares or voting rights which (taken together with shares or voting rights, if any held by him) would entitle him to more than five percent shares or voting rights in a company, in any manner whatsoever shall disclose the aggregate of his share holding or voting rights in that company, to the company.�

Regulation 7(2) of Takeover Regulations as it stood on June 18, 2002 provided that;

�The disclosures mentioned in sub-regulations (1) and (1A), shall be made within four worked days of,-

(a) the receipt of intimation of allotment of shares; or

(b) the acquisition of shares or voting rights as the case may be.�

5.             In this regard, it is pertinent to note that the mandate of Regulation 7(1) of the Takeover Regulations is to require any acquirer to report his holdings exceeding five percent of the shares and voting rights in a company to that company. The object of the provision is to ensure timely disclosures regarding the dominant holdings in a company. The provision also requires the acquirers to disclose their identity to the company indicating the aggregate of the shares or voting rights held by them. Further, the provisions of Regulation 7(3) require the company to disclose the same to the Stock Exchanges on which the shares of the company are listed so that the investors of the company are aware of the identity of the acquirers. Hence the provisions of Regulation 7 provide for dissemination of information to the company and to the investors. From the Transaction statement, it can be seen that Laffan had acquired up to 5.71% of the shares in ETP which was in excess of 5% of ETP�s paid up capital as on June 18, 2002. Thus, in view of the holding in excess of 5% on June 18, 2002, Laffan was required to comply with the disclosure requirements provided under Regulation 7(1) of the Takeover Regulations when its holdings in ETP crossed five percent on June 18, 2002. The SEBI Investigation report in the matter of ETP refers to BSE�s letter to SEBI dated July 18, 2004 wherein ETP had made the disclosures as per Regulation 7(3) of Takeover Regulations. Also, the report refers to the distribution schedule submitted by Shri Vinod Uniyal, Director, ETP during his deposition on oath, before SEBI, on November 29, 2002. On examination of the first reference as mentioned above, I observed that the disclosures as per Regulation 7(3) were made only up to a period of March 2002. On examination of the second reference, I observed that the distribution pattern submitted by the Director, ETP showed Laffan�s holdings constant at 3.71% between the periods May 31, 2002 and July 31, 2002. From the above evidences, I am of the opinion that the acquirer, Laffan had not informed ETP about the acquisition in terms of the requirements of Regulation 7(1) when its holdings in ETP crossed five percent by June 18, 2002. As per the provisions of Regulation 7(2), Laffan had to inform about the acquisition beyond 5% of the paid up capital of ETP to ETP within four working days of the receipt of intimation of allotment of shares or the acquisition of shares or voting rights as the case may be. From the distribution schedule submitted by Shri Vinod Uniyal, Director, ETP, I have noted that ETP was not informed about the acquisition even on July 31, 2002 as required under Regulation 7(2). Thus, Laffan has violated the provisions of Regulation 7(1) and 7(2) of the Takeover Regulations and hence is liable to the penalty prescribed under the provisions of Section 15A(b) of the SEBI Act, 1992.���

6.            Section 15A(b) of the SEBI Act as it stood on June 18, 2002 provided that if any person who is required under the Act, Rules or Regulations made thereunder to file any return or furnish any information, books or other documents within the time specified in the regulations, fails to file return or furnish the same within the specified time, he shall be liable to a penalty not exceeding five thousand rupees for everyday during which such failure continues.�

7.          � The provisions of Section 15J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, the Adjudicating Officer shall take into account the following factors namely, the amount of disproportionate gain or unfair advantage made as a result of default, loss caused to the investors and the repetitive nature of the default. In this regard, it may be noted that as per the Investigation conducted by SEBI on the shares of ETP Corporation, it was concluded that the scrip was subject to a manipulation in price during June-July 2002. Page 30-31 of the investigation report states the following: �the foregoing findings of investigation � huge sales in similar pattern, same depository participant, dates of demat, other common linkages such as directors, shareholding, bank accounts, etc., suggests that the 5 entities (Conrad Telefilms Limited, Laffan Software Limited, NE Electronics Limited, Online Information Tech and Ispat Sheets Limited) offloaded their shareholding as a part of a scheme orchestrated to mislead investors by issuing unsubstantiated appealing advertisements and induce investors to trade in the such and enable sales of shares of the company by these 5 entities�. However, I find that the investigating officer has not made any charges against Laffan with respect to any manipulation in the price of shares of ETP, in all probability due to the lack of documentary evidence in this regard.

8.          � It is noted that the Hon�ble Securities Appellate Tribunal vide Order dated August 31, 2004 in the matter of Reliance Industries Limited Versus Securities and Exchange Board of India, Mumbai held that the Adjudicating Officer would be justified in not imposing penalty where the breach of provisions of law is only technical or venial.

����������� The disclosure required under the Regulation 7 serves two purposes. Firstly, it provides the company with the necessary information to take pre-emptive action to prevent any hostile takeover. Secondly, as the said information is made available to the investors through the Stock Exchanges, it would enable the investing public to take informed decisions to remain invested with the company or to exit out of the company based on their perception about possible change in management in case of a takeover. Hence, the non-disclosure by Laffan has deprived both ETP and the investing public of valuable information which could have affected the investing decision of the investors and any violation of said requirement can not be construed as merely technical or venial in nature.

9. ������� From the above, I am of the view that Laffan had acquired 10,00,000 shares by June 18, 2002 constituting a holding of� 5.71% of ETP and has failed to inform the company as required under the provisions of Regulation 7(1) and (2) of the Takeover Regulations. However, considering the factors u/s 15J of the SEBI Act, 1992, I have taken a moderate view.

ORDER

In view of the violation of Regulation 7(1) & (2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 committed by M/s Laffan Software Limited by acquiring up to 10,00,000 shares representing 5.71% of ETP Corporation Limited by June 18, 2002, I hereby impose a penalty of Rs.1,00,000/- (Rupees One Lakh only) on M/s Laffan Software Limited.

The penalty shall be paid by way of Demand Draft / Pay Order drawn in favour of �SEBI- Penalties remittable to the Government of India� Mumbai within 45 days of receipt of this order and the same shall be sent to Shri R. Ravichandran, Division Chief, Securities and Exchange Board of India, Mittal Court, �B� Wing, 224, Nariman Point, Mumbai � 400 021.

 

����������������������������������������������������������������������������������� Parag Basu

Adjudicating� Officer

Date: December 30, 2004

Place: Mumbai

 

Cc: ���� 1) M/s Laffan Software Limited

����������� 2) Securities and Exchange Board of India