Order in the matter of adjudication proceedings against Shri Mukesh Mansukhlal Kothari

Jun 01, 2007

Orders That Could Not be Served

ADJUDICATION ORDER NO. - BS/AO-16/2007

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 SHRI MUKESH MANSUKHLAL KOTHARI

Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) vide order dated May 14, 2004 appointed Shri. S.V. Krishna Mohan as the Adjudicating Officer to inquire into and adjudge under Section 15I read with Section 15 H of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), violation of the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 (hereinafter referred as Takeover Regulations, 1994) alleged to have been committed by Shri Mukesh Mansukhlal Kothari (hereinafter referred to as the noticee) by acquiring the shares of Solid Carbide Tools Ltd. (hereinafter referred to as SCTL) without making mandatory public announcement and public offer in terms of the provisions of Regulation 10(2) of the Takeover Regulations, 1994 and the corresponding provisions of Regulation 11(1) of SEBI (Substantial Acquisition of shares and Takeovers) Regulations 1997 (hereinafter referred to as Takeover Regulations, 1997). Subsequently, I was appointed as the Adjudicating Officer in place of Shri. S. V. Krishnamohan.

FACTS OF THE CASE
It is alleged that the noticee who was holding more than 10% shares of SCTL, further acquired 4.52 lac shares from the secondary market during January to June 1996 without making mandatory public announcement and open offer and thereby violated the provisions of Regulation 10(2) of SEBI Takeover Regulations 1994.
Subsequently, the Takeover Regulations 1994 has been repealed by Takeover Regulations, 1997; however, by virtue of the provisions of Regulation 47 of the Takeover Regulations 1997, the actions initiated in respect of the said violations can be continued. 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
A Show Cause Notice dated October 24, 2005 was issued to the noticee 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 the noticee to show cause as to why an inquiry should not be held for the violation alleged to have been committed by the noticee.
It is noted that the said notice sent by registered post returned undelivered with the remarks “left” and in view of the same, substituted service of the notice was effected on February 16, 2007 in terms of Rule 7(c) of the Rules.
It is noted that the noticee did not reply to the show cause notice, however considering the facts and circumstances of the case, it was decided to conduct an inquiry in the matter. The noticee was advised to attend the inquiry on March 29, 2007. However, the noticee failed to attend the inquiry on the said date.
As the noticee failed to reply to the show cause notice and further as he failed to attend the hearing, the inquiry is proceeded further on the basis of the material and evidence available on record.

CONSIDERATION OF EVIDENCE AND FINDINGS
The issue for consideration in the mater is whether the noticee, acquired the shares of SCTL in violation of the provisions of the Takeover Regulations. It is noted from the facts of the case that the noticee was holding more than 10% shares of SCTL and further acquired 4.52 lac shares from the secondary market during the period January 1996 to June 1996. It is noted from the annual report of SCTL (1995-1996) that its issued, subscribed and paid up share capital was 33,10,000 equity shares of Rs.10 each fully paid up. Considering the same, acquisition of 4.52 lakh shares by the noticee amounts to 13.66% of the share capital of SCTL.
In this regard, Regulation 10 (2) of the repealed regulations (Takeover Regulations, 1994) provided 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 Takeover 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 31^st 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 13.66% of shares, it has crossed the threshold limit prescribed under the regulations.
In view of the above provisions, it is concluded that the noticee 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, actions initiated in respect of violation of Regulation 10(2) of the repealed regulations can be continued. Further, the said acquisition 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 noticee in accordance with the mandate of the said regulations. In this regard, Section 15 H of the SEBI Act as it stood on the period of acquisition, i.e. January to June 1996 provided the following.

“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.
It is pertinent to refer to the order of the Hon’ble Securities Appellate Tribunal in Appeal No.151/2004 in the matter of Rameshchandra Mansukhani NRI vs SEBI wherein the Honourable Tribunal held that the penalty existing on the date of commission of the violation should be imposed and not enhanced penalty which came into being by way of subsequent amendment. The order passed by the Honourable Tribunal is relied upon in this case.
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:

a.      The amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of default

b.      The amount of loss caused to an investor or group of investors as a result of the default

c.      The repetitive nature of default
With regard to above factors to be considered while determining the quantum of penalty, it is noted that Takeover Regulations provides for various requirements of reporting, disclosure, offer to shareholders etc to protect the interest of investors and enable them to take an informed decision to continue their investment with the company in the event of change in control in the company. Though, gain made to the noticee or loss caused to the others can not be quantified on the basis of the facts available on record, it is noted that violations of the provisions of the Takeover Regulations as in the present case are highly prejudicial to the investor’s interests as no public announcement and offer was made by the noticee as per the mandate of the Takeover Regulations. It is also pertinent to note in this context that, the noticee failed to respond to the show cause notice and failed to attend the inquiry despite being given sufficient time and opportunities to do so. This indicates that the noticee deliberately wants to avoid any inquiry into the matter. In view of the facts as stated above, the violation of the provisions of the Takeover Regulation warrants maximum penalty prescribed by the Regulations.

ORDER
In view of the contravention of the provisions of Regulation 10(2) of the Takeover Regulations 1994, by Shri Mukesh Mansukhlal Kothari 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, impose a penalty of Rupees Five Lakh (Rs.500,000) on Shri Mukesh Mansukhlal Kothari.
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 Investigation Department (ID3), Securities and Exchange Board of India, Plot No. C4-A, ‘G’ Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.
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 Shri Mukesh Mansukhlal Kothari and to Securities and Exchange Board of India.

PLACE: Mumbai Biju. S

DATE : June 1, 2007 Adjudicating Officer