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ORDER
UNDER RULE 5 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR
HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN
THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST
PRATHA INVESTMENT AND SMT. SHARMILA GANG 1.
Securities and
Exchange Board of India (hereinafter referred to as ‘SEBI’) vide order dated 2.
It is alleged
that subsequent to the public issue of RPL in 1995, the promoters of RPL namely,
Ritesh Exports Ltd, Shri. Surender Kumar Agarwal, Smt. Roop Rekha
Agarwal, Shri. Ritesh Agarwal and Shri. Deepak Agarwal along with
persons acting in concert, namely Smt. Sharmila Gang/ Pratha Investment
and Ritesh Capital had acquired 20.86% of shares of
RPL from Shri Pawan Kumar Agarwal and family without making mandatory public
announcement and open offer and thereby violated the provisions of Regulation 10(2)
of SEBI Takeover Regulations 1994. FACTS OF THE CASE3.
RPL came out with a public issue of 30,00,000 shares of Rs.10/- each at a premium of Rs.5/- per
share. The issue opened on 4.
Investigation
conducted by SEBI found that, the issue did not receive the minimum
subscription even after the closure of the issue. Moreover, it was found that
the promoters of RPL committed irregularities including misrepresenting that
the issue received the minimum subscription by arranging for finance (in the
garb of subscription) from Shri Pawan
Kumar Agarwal and family (financiers). In this
regard, SEBI vide its order dated 5.
It is also
alleged that subsequent to the public issue, the promoters of the target
company RPL, purchased the shares back from Pawan
Kumar Agarwal and family through Ritesh
Capital which is stated to be a group company and also through Pratha Investments which is a proprietary concern of Smt.Sharmila Gang, wife of Shri Mukesh Gang, Auditor of Ritesh
Polyester Limited. 6.
In view of the
above factual scenario, it is alleged that the promoters of RPL along with
persons acting in concert such as Pratha Investments/
Smt, Sharmila Gang and Ritesh Capital had acquired 20.86% of post issue capital of
RPL from Shri. Pawan Kumar
and family without making public announcement and open offer in terms of the
provisions of Regulation 10(2) of SEBI Takeover Regulations. Subsequently, the
Takeover Regulations 1994 has been repealed by SEBI (Substantial Acquisition of shares and
Takeovers) Regulations 1997 however, by virtue of the provisions of Regulation
47 of the Takeover Regulations 1997, the said violation is also a violation in
terms of the provisions of Regulation
11 (1) of the Takeover Regulations 1997 as the substantive mandate of the said
provisions are identical.
NOTICE AND REPLY 7.
A Show Cause Notice dated June 8, 2005 was issued to Pratha
Investment and Smt. Sharmila
Gang in terms of the provisions of Rule 4 of SEBI (Procedure for Holding
Inquiry and Imposing penalties by Adjudicating Officers) Rules, 1995
(hereinafter referred to as the Rules), requiring them to show cause as to why
an inquiry should not be held for the violation alleged to have been committed
by them. 8.
No reply was received from Pratha Investment or
from Smt. Sharmila Gang in
response to the show cause notice. However, considering the facts and
circumstances of the case, it was felt that an inquiry may be held in the
matter. In view of the same, the entities
were advised to attend the inquiry on ·
I had acquired some partly paid shares from Pawan
Kumar Agarwal. The details of the same shall be submitted.
This was our first and individual transaction and we are in no way connected
with others. The shares were partly paid and have no voting rights. ·
The said shares have been sold and I am not holding any shares in the company now. 9.
Subsequently,
the noticee vide letter dated CONSIDERATION OF EVIDENCE AND FINDINGS 10. The issue for consideration in the mater is whether Pratha Investment/ Smt. Sharmila Gang along with the promoter group and other
persons acting in concert, acquired the shares of RPL
in violation of the provisions of the Takeover Regulations. It is noted that individuals
in the promoter group who are alleged to be involved in the acquisition namely Shri.
Surender Kumar Agarwal, Smt. Rooprekha Agarwal, Shri. Ritesh Agarwal
and Shri. Deepak Agarwal are close relatives. Further
it is also noted that Ritesh Exports is stated to be
a group company of RPL and Shri. Surender
Kumar Agarwal was the Managing Director of the
company at the relevant point of time. The said entities are promoters in terms
of the provisions of SEBI Disclosure and Investor Protection Guidelines as
their shareholding was taken into account for the purpose of meeting the
promoters contribution as per the terms of the public issue and was also
subject to lockin in the manner specified in the
prospectus. 11. With regard to the persons who alleged to have acted in concert
with the promoter group it is noted that
admittedly, Smt. Sharmila
Gang is the sole proprietor of M/s. Pratha
Investment. It is also noted that Shri. Mukesh Gang , husband of Smt. Shamila Gang was the Auditor of the company RPL at the time
of the public issue. With regard to Ritesh Capital,
it is stated to be a group company of RPL. In view of the above, the connection
or nexus between the promoter group and the persons acting in concert is
evident from the facts and circumstances of the case. 12. With regard to the question whether the entities
mentioned above, acquired the shares of the target company in violation of the
provisions of the Takeover Regulations, it is pertinent to note that regulation
2(b) of the Takeover Regulations 1994 defines an acquirer in the following
manner “Acquirer means any person who acquires or agrees to acquire shares in a
company either by himself or with any person acting in concert with the
acquirer”. Regulation 2(d) defines a person acting concert in the following
words “ Persons acting in concert” comprises persons who, pursuant to an
agreement or understanding acquires or agrees to acquire shares in a company
for a common objective or purpose of substantial acquisition of shares….” 13. The Honourable Securities Appellate Tribunal in Appeal No: 12
of 2001 Naagraj Ganeshmal
Jain Vs. P. Sri. Sai. Ram Adjudicating
Officer, observed that a person becomes an acquirer by virtue of his action -
who acquires or agrees to acquire shares etc. The identification is thus action
related. Further the above definition of acquirer, read along with the
definition of persons acting in concert as contained in regulation 2(1)(d)
implies that the commonality of objective between the acquirer and the persons
acting in concert mandate that their actions should not be viewed in isolation.
Hence in cases where shares have been acquired pursuant to a common objective,
the aggregate share holding of the acquirers and the persons acting in concert
have to be taken into account to determine any contravention of the threshold
limit prescribed in the regulations. 14. In this context, it is noted from the facts of the
case that subsequent to the public issue, large amount of money was withdrawn
from the public issue proceeds which is stated to be
given as short term loans by RPL to the persons acting in concert including Pratha Investment and Smt. Sharmila Gang. It is noted from the facts of the case that
soon after receipt of the loans, same were utilized for the purpose of
purchasing shares of RPL from Shri. Pawan Kumar Aggarwal and family
in the following manner.
15. The fact of acquisition of shares of RPL is admitted by
Pratha Investment during the hearing on 16. The source of funds for purchase of shares of RPL was
the short term loans extended by RPL to the said entities. The manner in
which shares were purchased from Shri Pawan Kumar Aggarwal and family by the said entities utilizing the
funds given to them as loans by RPL immediately after the public issue, clearly
indicate the preconceived plan the on the part of the said entities and
the promoter group. In this regard, it
is pertinent to note that out of the money collected in the public issue, Rs. 147 lakhs which amount to 67
% of the issue proceeds were disbursed as temporary loans to the persons acting
in concert. 17. It is noted from the facts of the case that Pratha Investments received 60 lakhs,
Smt. Sharmila Gang received
10 lakhs and Ritesh
Capital received 77.30 lakhs. It is also noted that
the purchase of shares from Shri. Pawan
Kumar Agarwal and family were made on the dates
mentioned above, soon after the said entities received the funds from RPL. It
is noted that funds were received from RPL on the dates 1.9.95 and 4.9.95 were
utilized by Pratha Investment for purchasing shares
from the sellers on 3.9.95 and 5.9.95 respectively. Hence it is evident that the
entities acting in concert have utilized the loans received from RPL for purchasing shares of
RPL from Shri Pawan Kumar Agarwal and family . Hence, commonality of objective among
the promoter group and the persons acting in concert is evident from the facts
relating to acquisition of shares. Hence as it is seen that common intention to
acquire the said shares by the promoter group and the persons acting concert is
established from the facts and circumstances of the case including the source
of funds for the acquisition, it is concluded that the promoters along with the
persons acting in concert had acquired the shares of the target company on the
dates mentioned above. In view of the same, the aggregate shareholding of the
promoters and the persons acting in concert have to be taken into account to determine
breach of the threshold limit prescribed under the regulations. 18. The
shareholding of the promoters prior to acquisition of shares through the
persons acting in concert is stated to be the following. Ritesh
Exports Ltd held 6,00,000 shares which amount to
8.71%, Shri.Ritesh Agarwal
held 4,01,200 shares amounting to 5.82%, Shri. Deepak
Agarwal held 2,24,000 shares amounting to 3.25%, Shri Surender Kumar Agarwal held 13,81,300 shares amounting to 20.04%.and Smt. Rop Rekha
Agarwal holding 6,16,500 shares amounting to 8.95%.
The aggregate shareholding of the said persons amounts to 46.77 % of the share
capital of RPL. 19. As stated before, 20.86% of the shares were purchased
from Shri. Pawan Kumar and
family by the promoter group and the persons acting in concert with them.
Consequent to the said acquisition of 20.86% from the sellers, the aggregate
share holding of the acquirers and the persons acting in concert have increased
from 46.77 % to 67.63% of the share capital of RPL. As the promoters were
holding 46.77% shares in the company, acquisition of further shares was in
effect further consolidation of their share holding in the company. In this
regard, Regulation 10 (2) of the repealed regulations states the following “An
acquirer who on the date of commencement of these regulations holds shares
which carry more than ten percent of the voting rights in the capital of the
company, shall not acquire any further shares in the company from the open
market unless such acquirer makes a public announcement of the intention to
acquire shares in the open market in accordance with the regulations. In this
regard, it is also pertinent to note that though consolidation of holdings is
permitted to a certain extent under Regulation 11(1) of the Take over
Regulations 1997, the same also prescribe a similar mandate in the following
words “ No acquirer who together with persons
acting in concert with him has acquired in accordance with the provisions of
law 15 per cent or more but less than 55% of the shares or voting rights in a
company , shall acquire, either by himself or through or with persons acting in
concert with him, additional shares or voting rights entitling him to exercise
more than 5% of the voting rights in any financial year ending on 31st
March unless such acquirer makes a public announcement to acquire shares in
accordance with the regulations. Hence even if benefit of 5% of consolidation
of holdings as permitted under Regulation 11(1) of the Takeover Regulations
1997 is accorded to the acquisition, however as the acquisition was of 20.86%
of shares, it has crossed the threshold limit prescribed under the regulations.
20. In view of the above provisions, it is concluded that
the promoters of RPL along with the persons acting in concert had violated the
provisions of Regulation 10(2) of the Takeover Regulations 1994. As stated
before, though the Takeover Regulations 1994 has been repealed by the Takeover
Regulations 1997, however, by virtue of the provisions of Regulation 47 of the
regulations, the said violation 10(2) of the repealed regulations is also a
violation in terms of Regulation 11(1) of the Takeover Regulations 1997. It is noted from the facts of the case that no
public announcement and offer has been made by the acquirers and the persons
acting in concert in accordance with the mandate of the said regulations. In
this regard, Section 15 H of the SEBI Act as it stood on the date of
acquisition on “If any person who is required under this
Act or rules or regulations made thereunder, fails to
make a public announcement to acquire shares at a minimum price, he shall be
liable to a penalty of an amount not exceeding five lakh
rupees. Hence the violation committed by the
acquirers and persons acting in concert attract the above penalty. 21. The provisions of Section 15J of the SEBI Act, 1992
and Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalty by
Adjudicating Officer) Rules, 1995 require that while adjudging the quantum of
penalty, the adjudicating officer shall have due regard to the following
factors namely: 1.
The amount of
disproportionate gain or unfair advantage wherever quantifiable, made as a
result of default 2.
The amount of
loss caused to an investor or group of investors as a result of the default 3.
The repetitive
nature of default 22. With regard to above factors to be considered while
determining the quantum of penalty, it is noted that the acquisition of the
shares from sellers was pursuant to a preplanned arrangement between the
acquirers and the persons acting in concert. It is evident from the facts of
the case that the sellers were advised to apply for the public issue of RPL and
as per the arrangement, the said shares were to be
purchased back in the manner stated above as soon as money was received in the
public issue. As the promoters purchased the said shares through the persons acting
in concert, the same had exceeded the threshold limit under Regulation 10(2) of
the Takeover Regulations. In this regard, it is noted that with regard to the
irregularities and violations of law found in the public issue of RPL, SEBI
vide order dated 9.2.2004 issued directions to the promoters (acquirers) and
also the persons acting in concert with them. 23. In the present adjudication proceedings, with regard
to the loss caused to the investors, the same has to be assessed in terms of
the requirement of public announcement and the offer to be made to the public
to acquire shares in terms of the provisions of the regulations when the
prescribed threshold limit was crossed by way of the acquisition. However, no
quantifiable figures are available to assess the exact loss caused to the
investors. In this regard, it is noted from the submissions of Smt. Sharmila Gang that out of
the 8,87,700 shares purchased by her, she had sold
4,04,200 shares to Four Wind Finance Limited Mumbai. It is further noted from
the submissions of Ms. Gang that Four Winds Finance cheated her and she had
incurred a loss of Rs. 16, 37, 800. The said fact
cannot be regarded as a mitigating factor considering the manner in which the
shares were acquired by
Pratha Investment the proprietory concern of Smt. Sharmila Gang pursuant to the arrangement between the
acquirers and the persons acting in concert. It is noted from the facts of the
case that no shares have been acquired by Smt. Sharmila Gang in her name, and the shares were acquired in
the name of her proprietory concern Pratha Investment. 24.
Hence taking into account the mandate of
Section 15H of the SEBI Act as it stood at the time of the violation committed
by Pratha Investment, and considering the facts and
circumstances of the case, I am of the view that the violation committed by the
Pratha Investment has to be viewed seriously. However,
considering the fact that the
acquisition of shares was a
concerted action on the part of the promoters and the persons acting in concert
with them and the maximum penalty prescribed for the violation was rupees five lakh, I am of the view that
penalty of rupees one lakh may be imposed on Pratha Investment. ORDER 25. In view of the violation of Regulation 10(2) of the
Takeover Regulations 1994, committed by Pratha
Investment as stated above, in exercise of the powers conferred under
Section15 I and Section 15 H of the SEBI Act, 1992, read with Rule 5 of SEBI (Procedure for Holding Inquiry
and Imposing Penalties by Adjudicating Officer) Rules, 1995 I, hereby impose a penalty of Rupees One Lakh (Rs.100,000) on Pratha
Investment. No separate order is passed against Smt. Sharmila Gang as it is noted that the shares were acquired
in the name of Pratha Investment. Considering the
fact that Pratha Investment was a sole proprietory concern of Smt. Sharmila Gang, the said penalty shall be paid by Smt. Sharmila Gang. The penalty
shall be paid by way of demand draft drawn in favour of “SEBI – Penalties
Remittable to Government of India” payable at Mumbai within 45 days of receipt
of this order. The said demand draft shall be forwarded to the General Manager,
Corporation Finance Department, Securities and Exchange Board of India, Mittal Court B Wing 224 Nariman
Point Mumbai 400021. 26. In terms of the provisions of Rule 6 of the SEBI
(Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer)
Rules, 1995 copies of this order are sent to Pratha
Investment and to Securities and Exchange Board of India. PLACE: Mumbai
S. Biju DATE : |
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