ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
READ WITH REGULATIONS 3(3), 3(4) AND 3(5) OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES & TAKEOVERS) REGULATIONS, 1997 AND SECTION 15A OF THE SEBI ACT, 1992
AGAINST
BHAVESH THAKKAR AND BIMAL THAKKAR
BACKGROUND:
1. The Securities and Exchange Board of India (hereinafter referred to as the SEBI) received a report dated September 20, 2003 along with a demand draft for Rs.10,000/-from the Mr Bhavesh Thakkar and Mr Bimal Thakkar (collectively referred to as the “acquirers”) stated to have been filed by them in terms of Regulations 3(4) & 3(5) of the SEBI (Substantial Acquisition Of Shares & Takeovers) Regulations, 1997 (for brevity’s sake referred to as the Takeover Regulations), as regards their acquiring along with the persons acting in concert (PAC) 7,76,000 shares of ADF Foods Limited (hereinafter referred to as ADF) constituting 7.74% of the total share capital of ADF, by way of inter se transfer of shares amongst the promoters of ADF on June 12, 2003.
2. Upon examining the said report, it was observed that although in terms of Regulation 3(3) of the Takeover Regulations, the acquirers were required to notify the details of the proposed transactions, at least four working days in advance to the stock exchanges where the shares of the company are listed, that is, Ahmedabad Stock Exchange, Vadodara Stock Exchange and the Mumbai stock exchange (for brevity’s sake, hereinafter referred to as the ASE, VSE and the BSE respectively), the acquirers had failed to file the said information with the said stock exchanges thereby violating the provisions of the Regulation 3(3) of the said Regulations.
3. Further more, in terms of Regulations 3(4) & 3(5) of the Takeover Regulations, the acquirers were required to file a report along with supporting documents and the filing fee of Rs.10000/- with SEBI, within 21 days of the date of acquisition. However, the requirement therein was not fulfilled within the stipulated period, but after a delay of 88 days and hence the acquirers were found to have also contravened the above mentioned provisions of the said Regulations.
4. In view of the same, adjudicating proceedings were initiated against the said acquirers by the appointment of Mr S.V Krishnamohan as the adjudicating officer, to enquire into and adjudge the alleged contravention of sub-Regulations (3), (4) & (5) of Regulation 3 of the Takeover Regulations read with sub-sections (a) and (b) of Section 15A, of the SEBI Act, 1992 (hereinafter referred to as the Act) by the acquirers in the matter of their non disclosing/non reporting the acquisition of the shares of ADF Foods Limited, in the manner prescribed in terms of the provisions of the Takeover Regulations. Subsequently the case was transferred to me and I was appointed as the Adjudicating Officer by the Chairman, SEBI, vide order dated September 30, 2004.
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
5. Thereafter I issued a show cause notice dated December 09, 2004 to the acquirers in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 (Rules) where under they were asked to show cause as to why enquiry proceedings should not be held against them for the alleged violation of the provisions of sub regulations (3) (4) and (5) of Regulation 3 of the of the Takeover Regulations. Further, the acquirers were advised to make their submissions, if any, along with supporting documents that they wished to rely upon, within 14 days from the date of the receipt of the notice, and also indicate whether they were desirous of a personal hearing.
6. In reply to the same, both the acquirers vide their identically worded letters, both dated December 22, 2004 made the following submissions which have been summarized as under:
a. Their holding in ADF along with the PACs prior to the acquisition was 35.95% constituting 36,02,738 shares.
b. However, in their report dated September 30, 2003 sent to SEBI, they had mentioned that the share holding along with the PACs was 43.69% which represented 43,78,738 shares (copy of the relevant page was enclosed for reference).
c. After the aforesaid acquisition, their share holding along with the PACs in ADF increased nearly by 0.03% aggregating to 43.72%.
d. As the increment in the aggregating holding was less than the stipulated 5%, the acquisition did not trigger the open offer in terms of Regulation 11(1) of the Takeover Regulations. This was categorically mentioned in the report filed under point 5 in the statement giving “Acquirers Details” (copy of the relevant page was enclosed for reference).
e. Hence it was presumed that they need not seek exemption under Regulation 3 of the Takeover Regulations and hence filing of the report under Regulation 3(4) was considered unnecessary.
f. As such, there was no violation of any of the provisions of the said Regulations and the report filed on September 30, 2003 with SEBI, was not for seeking exemption but with an intention to provide information only.
On the basis of the above submissions, it was requested that a fair view may be taken and a personal hearing be granted to them.
7. Thereafter, I issued a notice of hearing dated December 27, 2004 under Rule 5(1) of the Rules to the acquirers advising them to be present at the personal hearing to be held on February 07, 2005.
8. On the said date, Shri Mahendra C Bhuta, practicing company secretary, representing ADF and Ms. Shalaka S Ovelkar, company secretary, ADF appeared before me and made their submissions, on behalf of the acquirers. They also presented written arguments which have been summarized as under:
· The said acquisition was by way of inter se transfer amongst promoters; namely Luster Investment Pvt Ltd. (Transferor) and the acquirers (Transferees) in terms of Regulation 3(1) (e) of the Takeover Regulations.
· The acquisition involved a transfer amongst the promoters i.e., the transfer of 7,76,000 equity shares of Rs.10/- each of ADF on June 12, 2003 from the transferor to the transferees.
· By way of the said transfer, the transferor transferred its entire share holding of 7,76,000 equity shares to the transferees i.e., also the promoters and the said shares were held by both the transferor and the transferees for more than 3 years, thereby satisfying the condition under Regulation 3(1)(e)(iii) of the said Regulations.
· The inter se transfer of shares involved a net increase of 0.03% in the share holding of the promoters which was on account of market purchases of 2696 shares of ADF.
· Therefore, the acquirers were under the genuine impression that the compliance under Regulation 3(3) of the Takeover Regulations was not required.
· The acquirers believed that only if the proposed transaction of shares of the target company exceeds 5% of the voting share capital of the company, the intimation to the stock exchanges where the shares of the company are listed is required to be given, 4 working days in advance under Regulation 3(3) of the Takeover Regulations.
· As increase in the holding was only 0.03%, the intimation under Regulation 3(3) of the Takeover Regulations was not given.
· Due to ignorance /over sight, the intimation as required under Regulation 3(3) of the Takeover Regulations could not be visualized, if applicable at all.
· As for the filing of report along with fees of Rs.10000/- in terms of Regulations 3(4) and 3(5) of the Takeover Regulations, the acquirers were under the genuine impression that as the said
transaction resulted in the net increase of only 0.03% in the share holding of the promoters which is less than 15% being the ceiling laid down under Regulation 3(4) of the Takeover Regulations, the filing of the report with fees of Rs.10000/- was not required, but as a matter of abundant precaution, filed the same with SEBI with the marginal delay of 88 days.
· This clearly shows there was no malafide intention and the transaction did not lack transparency.
· The acquirers are not legally qualified and thus are not well versed with the technical/procedural requirement of the SEBI Rules/Regulations and had no intention to violate any provision of the said law.
· Hence, any inadvertent and technical procedural non compliance may be considered with a lenient view as there is no mens rea involved and no intention of not disclosing any information especially considering that the report was filed with the marginal delay.
· There was no price fluctuation at the relevant time and hence no undue profit made/derived or unfair advantage made.
· There was no loss caused to the investors nor was the default repetitive in nature as prescribed under Section 15J of the Act.
9. On the basis of the above, Mr Bhuta stated that a lenient view be taken and further requested that the judgment rendered by the Securities Appellate Tribunal in the cases of Cabot International Capital Corp, Godrej & Boyce Mfg. Co. Ltd, HDFC and Reliance be taken into account before passing of any order.
CONSIDERATION OF ISSUES:
10. I have taken into consideration the facts and circumstances of the case, the submissions made on behalf of the acquirers, the material available on record as well as the case laws cited in support of their contentions.
11. In the present case, the acquirers have admittedly failed to comply with Regulation 3(3) of the Takeover Regulations. Further they have filed the report along with the filing fees with SEBI, not within a period of 21 days from the date of acquisition, as required in terms of Regulation 3(4) and Regulation 3(5) of the Takeover Regulations but with a delay of 88 days.
12. In their defense, the acquirers have contended that as the said acquisition had resulted in the net increase of only 0.03% in the share holding of the promoters, they believed that the said intimation to the stock exchanges in terms of Regulation 3(3) of the Takeover Regulations was not required. It is their contention that the intimation to the exchanges was necessary only in case where the proposed transactions exceeded 5% of the voting share capital.
13. Regulation 3(3) of the Takeover Regulations inter alia provides that in respect of acquisitions under clauses (e) (h) and (i) of sub-regulation (1), the stock exchanges where the shares of the company are listed shall, for information of the public, be notified of the details of the proposed transactions at least 4 working days in advance of the date of the proposed acquisition, in case of acquisition exceeding 5% of the voting share capital of the company.
14. The present case admittedly involved the acquisition of 7,76,000 shares constituting 7.74% of the paid up capital of ADF held by Luster Investments Pvt Ltd, who transferred their entire stake in ADF in favour of the acquirers. The share holding of the transferor and the transferees, both of whom were promoters of ADF were held by them respectively for more than 3 years, there by satisfying the conditions specified under Regulation 3(1) (e) (iii) of the Takeover Regulations. Thus the same amounted to an inter se transfer amongst promoters in terms of Regulation 3(1) (e) (iii) of the Takeover Regulations. The break up of the share holding held by the acquirers and the transferor is as follows:
|
Name of the Entity
|
Share Holding prior to the acquisition
|
Share Holding, post acquisition
|
|
Bhavesh Thakker (Transferee)
|
3,56,838 shares rep.
3.56%
|
5,59,534 shares rep.
5.58%
|
|
Bimal Thakker (Transferee)
|
1,44,000 shares rep.
1.44%
|
7,20,000 shares rep.
7.18%
|
|
Luster Investments Pvt Ltd. (Transferor)
|
7,76,000 shares rep.
7.74%
|
0%
|
15. Thus the said acquisition resulted in the increase of the total share holding held by the acquirers from 5,00,838 shares constituting 5% to 12,76,838 shares representing 12.74% of the voting capital of ADF accompanied by a decrease in the share holding of the transferor from 7,76,000 shares representing 7.74% to 0% representing Nil shares of ADF. Further, the total shareholding of the acquirers along with the PACs increased from 35.95% representing 36,02,738 shares to 43.69% representing 43,78,738 shares of ADF i.e., the said acquisition resulted in an increase of 7.74% voting share capital of ADF. As such, the details of the present acquisition in terms of 3(1) (e) of the Takeover Regulations ought to have been made to BSE, VSE and the ASE i.e., the exchanges where the shares of ADF are listed, for information of the public, at least 4 working days in advance of the date of the proposed acquisition, i.e. by 8th June 2003, since the present acquisition involved an increase of more than 5% of the voting share capital of ADF although incidentally, there was as stated by the acquirers, an increase of only 0.03% in the total share holding of the promoters, which for the purpose of Regulation 3(3) of the Regulations cannot be taken in to account.
16. The essence of making such disclosure becomes even more relevant considering that the acquirers had not only claimed the benefit of exemption available to them under 3(1)(e)(iii)(b) of the Takeover Regulations from the making of an open offer under the said Regulations, consequent to the said acquisition but had even sought the inapplicability of Regulation 20 (5) of the Takeover Regulations, as the shares were frequently traded in at least one of the stock exchanges where the shares are listed i.e., BSE which fact has been brought out by them in their letter dated December 23, 2003 to SEBI.
17. The acquirers had also questioned the applicability of Regulation 3(4) and 3(5) of the Takeover Regulations for the reasons elaborated above, but allegedly as a measure of caution filed the relevant report and the filing fees with SEBI in terms thereof, albeit with a delay of 88 days instead of filing the same within a period of 21 days from the date of acquisition.
18. The contention of the acquirers is devoid of any merit considering that the acquirers claimed the benefit of exemption from the making of an open offer under the said Regulations, that was available to them under 3(1)(e)(iii)(b) of the Takeover Regulations and hence were required, after availing the said exemption, to make the necessary disclosures to the stock exchanges where the company shares are listed under Regulation 3(3) of the Takeover Regulations and also file a report along with the listing fee with SEBI under Regulations 3(4) and 3(5) respectively of the Takeover Regulations, within the specified period, all of which they admittedly failed to do. Without making the said disclosures, the acquirers would not have been eligible for the said exemption, considering that their acquisition exceeded 5% of the total share holding of ADF. This issue assumes significance considering that it was a case of inter se transfer of shares exceeding 5% of the total share holding of a company amongst the promoter group and was bound to result in a perceptible change in control in ADF.
19. More specifically in the instant case, the transferor holding a substantial stake in ADF i.e., 7.74% exited totally from the company in favour of the acquirers who together prior to the said acquisition held 5% and post the said acquisition held 12.74% of the total capital of ADF. It cannot be ruled out that the investment in ADF by various share holders could have been made on the strength of the exiting share holder. Thus, the reporting of the said disclosures regarding such substantial changes in the share holding within the company, upon seeking exemption from the applicability of the Takeover Regulations was very significant and hence the failure to have reported the said information to all the stock exchanges where the shares of ADF are listed was bound to have affected the interest of such share holders.
20. Similarly as regards the filing of the report and fees with SEBI, the requirement of reporting to SEBI in terms of sub regulation (4) is also consequential to availing the exemption and not a requirement to avail exemption under regulation 3 of the Takeover Regulations. This concept was made very clear by the Hon’ble Securities Appellate Tribunal in the case of J.M.Financial & Investment Consultancy Services Ltd Vs. Shri Ananta Barua A. O, SEBI.
21. Hence in respect of certain acquisitions, which include acquisition by way of inter se transfers, for which exemption has been availed, it is mandatory on the part of the acquirers, within 21 days of the date of acquisition, to file a report with SEBI containing the details of the acquisitions and the purpose would not be served by a delay compliance of the said Regulations. This issue has also been aptly dealt with by the Hon’ble Securities Appellate Tribunal in Appeal No:12/2001 in the case of Naagraj Ganeshmal Jain Vs SEBI.
22. What is envisaged in Regulation 3(3), 3(4) and 3(5) of the Takeover Regulations is not a onetime reporting. One of the objectives of the said Regulations is to protect the rights of the investors through prompt disclosures. The purpose of making these prompt disclosures to the exchanges is meant to ensure transparency in transactions. These disclosures made to the stock exchanges in turn provide inputs to them to monitor the transactions and ensure frequent dissemination of the information relevant to the company, for the benefit of the shareholders of the company who may have a stake in the company and the public at large.
23. The fact is that all these provisions of Regulation i.e. 3(3), 3(4) and 3(5) were incorporated in the Takeover Regulations to ensure transparency in the various transactions and assist the stock exchanges and the regulator in monitoring all the exempted transactions under the provisions enumerated under Regulation 3(1) in advance of the proposed acquisition and thus these provisions of the Takeover Regulations which emphasizes upon disclosures that are also timely in nature, has a nexus with the object of the Takeover Regulations.
24. From the facts earlier stated, there is clearly a lapse on the part of the acquirers in adhering strictly to the provisions of Regulation 3(3), 3(4) and 3(5) of the Takeover Regulations and it appears that they have as a last resort raised the plea of technicality and the issue of their bonafides and in this regard have presented before me a plethora of orders of the Securities Appellate Tribunal relied upon by them to show their bonafides, primarily on the basis of the dictum laid down by the Hon’ble Tribunal in the case of Cabot International Capital.
25. I have studied the said orders and have noted that the principles laid down in the said cases according to the facts and circumstances of the cases, stress upon the issue of non levy of penalty especially in cases where there was a technical breach, coupled with a lack of intention to commit the said breach.
26. However I have given a careful consideration to the dictum laid down by the Bombay High Court vide its order dated March 3, 2004 when the case of Cabot, came before them in appeal in Appeal No.24/2000. The Hon’ble Court while endorsing the principle brought out above, have also stated as follows-
“The SEBI Act and the Regulations made there under are intended to regulate the securities market. The related aspects i.e. the imposition of penalty in the given facts and circumstances of the case, cannot be tested on the ground of ‘no mens rea, no penalty’. For breaches of provision of SEBI Act and Regulations, according to us, which are civil in nature, mens rea is not essential……. .”
27. Incidentally the said dictum has also been endorsed by the Supreme Court in the case of Swedish Match A B & another Vs SEBI & another in Civil Appeal No. 2361/2003 vide their order dated 25.08.2004.
28. It would also be relevant to note that the observation of the issue of non levy of penalty especially in cases where there was a technical breach was made in the case of Cabot by the Bombay High Court, since this was a case where the disclosures under Regulation 3(3) of the Takeover Regulations were made but the disclosures under Regulations 3(4) and 3(5) of the Takeover Regulations were not made. Keeping the same in mind, the Hon’ble Court observed that the respondent company had no intention to suppress any material/ information from the appellants or the share holders as “….the Company had informed the Stock Exchange, Registrar of Companies and complied with all other provisions of other laws, well in time.”
29. In the instant case, it is clear that notwithstanding the contentions of the acquirers having acted in good faith, the fact of the acquisition not being brought to the knowledge of the stock exchanges where the shares of the ADF are listed would have put all the shareholders of the company at a disadvantage. Moreover pleading ignorance as an excuse for non compliance of the provisions above stated does not weigh much in support of the acquirers cause.
30. In view of the above, the case laws cited by them have no relevance to the present case and no case has been made out by the acquirers for not imposing any penalty whatsoever and dropping the present proceedings altogether especially considering the total non compliance of Regulation 3(3) of the Takeover Regulations. To my mind, this case definitely calls for the imposition of at least a token penalty.
31. Sections 15(A)(a) and (b) of the SEBI Act, 1992 read as under:
“If any person who is required under this Act, or any rules or Regulations made there under –
(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty not exceeding one lakh rupees for each day during which the failure continues or one crore rupees whichever is less.
(b) to file any return or furnish any information, books or other documents within the time specified therefore in the Regulations, fails to file return or furnish the same within the time specified there of, in the Regulations, he shall be liable to a penalty not exceeding one lakh rupees for each day during which the failure continues or one crore rupees whichever is less.
32. Thus, in case of contravention of either Sections 15A(a) or 15A(b) of the SEBI Act, 1992, the acquirer would be liable for a penalty not exceeding one lakh rupees for each day during which the failure continues or one crore rupees whichever is less.
33. The Hon’ble Securities Appellate Tribunal In Appeal No. 21 of 2000, (Housing Development Finance Corporation Ltd Vs SEBI) has held that the penalty prescribed under Section 15A(a) of the SEBI Act is attracted in respect of violation of Regulation 3(4) of the Takeover Regulations i.e. reporting to the Board(SEBI). On the basis of the information filed by the acquirers with SEBI, the penalty that can be levied for the non-compliance of Regulations 3(4) & 3(5) of the Takeover Regulations works out to an amount beyond the maximum amount of Rupees one crore just as in the case of non-compliance of Regulations 3(3) of the Takeover Regulations.
34. Without prejudice to the above, Parliament in its wisdom has directed certain factors to be taken into account by the adjudicating officer, before imposing a penalty as is evident from the provisions of Section 15J of the Act which also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995, i.e., the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; the amount of loss caused to an investor or group of investors as a result of the default and the repetitive nature of the default.
35. Upon perusal of the provisions of Section 15J, it is clear that the adjudicating officer is required to have due regard to the factors stated in the section. The same is a direction and not an option, which is however to be exercised with due regard to his discretion. This discretion is to be exercised judiciously, depending upon the facts and circumstances of each case as well as after analysing of all the relevant material available on record especially in the case of failure to perform statutory obligations.
36. The shares acquired in the instant case are 7,76,000 in number and constitute 7.74% of the shareholding of ADF which involved the total exit of one promoter from the company (by the transfer of their stake in the said company in favour on another promoter). Hence the failure on the part of the acquirers to have brought the said fact to the shareholders of the company and also file the report with SEBI within the stipulated time, was in my opinion a lapse that would have, considerably affected the interests of the shareholders of the company. However there is no information on record detailing any disproportionate gain or unfair advantage made as a result of the default as also the loss likely to have been caused to any investor or group of investors as a result of the default. However, the non compliance of Regulation 3(3) is continuing till date although Regulation 3(4) and 3(5) was complied belatedly.
37. Hence on a judicious exercise of the discretion conferred upon me, bearing in mind the factors enumerated in Section 15 J of the Act and the rationale behind the requirement of making these disclosures as well as after analysing the nature of the violations in the context of the maximum penalty to be levied, I am inclined to arrive at a equitable resolution of the issue on hand and in the interest of justice, equity and good conscience, in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 think it appropriate to impose a token penalty amount of Rs 50,000/- as penalty upon the acquirers for the total non compliance of Regulation 3(3) and the belated compliance of Regulation 3(4) and 3(4) of the said Regulations.
38. The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India’ and payable at Mumbai which may be sent to Shri.S.V.Muralidhar Rao, General Manager, Securities and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai – 400021.
PLACE : MUMBAI G BABITA RAYUDU
DATE : APRIL 12, 2005 AJUDICATING OFFICER