IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No: 30 of 2003
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Date of Hearing
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16/07/2004
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Date of Decision
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13/08/2004
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In the matter of
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Gupta International Investment Co. Ltd.
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Appellant – Represented by:
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Hong Kong
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I.C.Jain, Chartered Accountant
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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New Delhi
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Mihir Mody, Advocate
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CORAM
Justice Shri Kumar Rajaratnam, Presiding Officer
Dr. B. Samal, Member
Shri N.L. Lakhanpal, Member
Per: Dr. B. Samal, Member
1. The appeal was taken up with the consent of both the parties.
2. The appeal is against the order passed by the Adjudicating Officer under Section 15-I of the Securities and Exchange Board of India (SEBI) Act, 1992, imposing a penalty under Section 15H of the SEBI Act for alleged violation of the disclosures required under Regulation 3(1)(c) of the SEBI (Substantial Acquisition and Takeovers) Regulations, 1997 and alleged consequential violation of Regulation 11(1) of the SEBI (SAST) Regulations.
3. Gupta International Investment Company Limited (GIICL) an overseas corporate body incorporated in Hong Kong is the promoter of IST Limited. IST Limited was suffering from losses and was unable to make repayment of institutional due during the year 1996-97. GIICL extended a loan amount of Rs. 1,81,75,740/- to IST Limited between 24/12/1996 to 14/01/2000 for the purpose of repayment of Company’s dues to the financial institutions. The company IST Limited continued to suffer losses and reached a situation of lack of resources to meet its various commitments. Under the circumstances, GIICL agreed to forego the repayment of the loan amount and allowed the company IST Limited to issue such number of shares as may be appropriate. GIICL being an overseas corporate body, resident outside India, relied upon the company IST Limited and its officials to comply with various disclosure norms and other mandatory requirements in India. The company IST Limited, undertook the necessary legal formalities including obtaining requisite approvals through the passing of Board resolutions and Special General Body Meeting Resolutions and such other steps to allot and issue to GIICL 12,11,716 new equity shares on a price of Rs. 15/- amounting to Rs. 1,81,75,740/- the consideration to be adjusted against the loan repayable to GIICL by the company. The company IST Limited was in a poor state of financial affairs. Hence according to the appellant there was no need, desire nor possible financial objectives for GIICL to increase its ownership status in the company at this stage.
4. The respondents issued a show cause notice dated 20/05/2002 as to why action will not be initiated under Section 11B of the SEBI Act, read with Regulation 44 and 45(6) of the SEBI (SAST) Regulations. Subsequently adjudicating officer was appointed who conducted the enquiry. A personal hearing was also given to the appellant on December 3, 2002. Finally adjudicating officer imposed a penalty of Rs. 2 lakhs on GIICL under Rule 5(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalties for Adjudication Officer) Rules, 1995 on 31st December, 2002. The appellant being aggrieved has filed the present appeal.
5. Heard the learned counsels of both parties. The learned counsel for appellant submitted that the order of penalty of Rs. 2 lakhs is too harsh and the penalty is excessive under the facts and circumstances of the case. It was also submitted by him that the lapse is of technical nature as the appellant has not done anything bad in law to achieve the objectives of scrip acquisition.
6. According to the Appellant it was only on the basis of preferential issue being exempted from the requirement of an open offer that GIICL extended this crucial assistance to the company IS`T Limited. Were any further outflow of money required from GIICL, there would have been no question of extending this cooperation to the company IST Limited. There has been no consequential change in the Board of Directors or in the control of the company IST Limited and the change in voting and shareholding pattern was only to the extent of shares issued. According to the appellant, given the facts and circumstances of the case there was constructive disclosure of the requirement of Regulations of 3(1)(c) of the SEBI (SAST) Regulations. The company had already filed the report on the preferential allotment with SEBI on April 3, 2002.
7. The learned counsel for the respondent submitted that the grant of loan extended by GIICL to IST Limited is irrelevant. It was further submitted that pursuant to the acquisition of 12,11,716 shares by GIICL representing 20.78% of voting capital of IST Limited on preferential basis, the total shareholding of GIICL in IST Limited went up from 36.83% (pro-preferential) to 49.95% (post-preferential). The EGM notice of IST Limited dated 27/01/2000 issued for considering the preferential allotment did not disclose the changes in the Board of Directors, voting rights, shareholding pattern of the company and whether such allotment would result in change in control of the company. As a result of the said non-disclosure and non-submission, the exemption under Regulation 3(1)(c) from applicability of Regulation 11(1) of SEBI (SAST) Regulations, 1997 would not be available to IST Limited which provides as follows:
“3.(1) Nothing contained in regulations 10, 11, and 12 of these regulations shall apply to:
(c) preferential allotment, made in pursuance of a resolution passed under section 81(1A) of the Companies Act, 1956 (1 of 1956):
Provided that:
(i) board resolution in respect of the proposed preferential allotment is sent to all the stock exchanges on which the shares of the company are listed for being notified on the notice board;
(ii) full disclosures of the identity of the class of the proposed allottee(s) is made, and if any of the proposed allottee(s) is to be allotted such number of shares as would increase his holding to 5 per cent or more of the post issued capital, then in such cases, the price at which the allotment is proposed, the identity of such person(s), the purpose of and reason for such allotment, consequential changes, if any, in the board of directors of the company and in voting rights, the shareholding pattern of the company, and whether such allotment would result in change in control over the company are all disclosed in the notice of the general meeting called for the purpose of consideration of the preferential allotment.”
8. Regarding the submission of the appellant that in the notice of EGM issued by IST Limited certain details were not given due to oversight, it is submitted by the respondent that the provisions of the law have to be complied with strictly and any lapse in this regard would result in appropriate penalties / actions. It is further submitted that the submissions of the appellant that the penalties imposed on a person other than the person that was responsible for the required compliance also does not hold good in view of settled legal position that it is for the appellant who wish to avail the benefit of the Regulation 3(1)(c) of the said Regulations, to ensure that the necessary compliance is made in order to avail of the exemption of Regulation 3.
9. The learned counsel for the respondent also submitted that as per their record even the report under Regulation 3(4) read with Regulation 3(5) which was to be filed with the Board within 21 days of the date of acquisition was filed with a delay of 653 days i.e. on 05/04/2002. According to him though this violation is extraneous to the scope of present adjudication proceedings it is being referred to only to reflect the careless conduct of the acquirers. Since the acquirers have acquired the shares without complying with the requirements of the provisions of the said Regulations, the appellants have violated the provisions of Regulation 11(1) and are liable for penalty under Section 15H(ii).
10. The appellant submitted a case appeal No. 37/2003 in the matter of Sundaram Finance Ltd., Wills India Ltd. And Spicer Heavy Axle Inc. Vs. SEBI where the Tribunal has observed that imposition of monetary penalty on the appellant is unwarranted. This case is pertaining to violation of Regulation 3(4) of the Act. This Tribunal in Cabot International Corporation Vs. SEBI held that where the violation is technical nature and due to a bonafide error, the Tribunal should not consider imposing any penalty and should help in pointing out the defect to the appellant so that it does not recur again. The Tribunal declined to impose any penalty in that case as there was substantial compliance. The order of this Tribunal was confirmed by the Bombay High Court.
11. Taking all the relevant documents and facts into account and the admission of the appellant that the mistake is of a technical nature, we uphold the order of the respondent. However, taking into account Section 15J of the said Act, we are inclined to reduce the penalty from Rs. 2 lakhs to Rs. 5,000/- (Rupees Five Thousand only) to be paid within six weeks from the receipt of the order. The impugned order stands modified to the above extent.
12. No order as to costs.
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(Justice Kumar Rajaratnam)
Presiding Officer
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(Dr. B. Samal)
Member
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(N.L. Lakhanpal)
Member
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Place: Mumbai
Date:13.8.2004
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