In the matter of Kosha Investments Ltd

IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

Appeal No: 64 of 2004

 

Date of Hearing	13/07/2005
Date of Decision	08/08/2005

 

	Appellant – Represented by:
Kosha Investments Ltd.	Mr. Mustafa Doctor, Advocate with Mr. Vijay Nane, Advocate
Versus
Securities & Exchange Board of India		Respondent- Represented by
	Mr. Dipan Merchant with Mr. Ravi Hegde, Advocates

 

 

CORAM

 

          C. Bhattacharya, Member

          R.N. Bhardwaj, Member

 

 

Per:    R.N. Bhardwaj, Member

 

1.                  Appeal taken up for final disposal with the consent of parties.

2.                  The appeal is against the impugned order dated 27/01/2004 passed by Whole Time Member of SEBI the operative portion of which reads as under:

“15.     In view of the findings above and in exercise of the powers conferred upon me under Section 19 read with Section 11B of SEBI Act read with regulations 44 and 45 of the said Regulations, I hereby direct the Acquirer viz., Kosha Investments Ltd to make public announcement in terms of regulation 11(1) of the said Regulations taking June 29, 1999 as the reference date for calculation of offer price. The public announcement shall be made within 45 days of passing of this order.

“16      ………….. The Acquirers are hereby accordingly directed to pay interest @15% per annum to the shareholders for the loss of interest caused to the shareholders from October 28, 1999 till the date of actual payment of consideration for the shares to be tendered and accepted in the offer directed to be made by the Acquirers.

“17.     It is also noted that an order dated 3.12.03 was passed by me restraining the Kosha Investments Ltd. from buying, selling or dealing in securities in any manner, directly or indirectly, for a period of two years for violating the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. However, I direct that the said order dated 3.12.2003 shall not hamper the implementation of this order.”

3.                  In the order the appellant, Kosha Investments Limited (‘KIL’ for short) has been given direction under Section 19 read with Section 11B of SEBI Act read with Regulations 44 and 45 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 to make a public announcement within 45 days of its order, in terms of Regulation 11(a) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 taking June 29, 1999 as the reference date for calculation of offer price.

4.                  The facts of this case have been dealt in appeal No. 27 of 2004 wherein KIL had been charged under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. The present case is also arising out of the investigation conducted by SEBI covering the period from June, 1999 to August, 1999 when there was an initial upward movement in the price of the scrip and also there was substantial increase in the volume of trade of Snowcem India Limited (SIL for short).  The allegation against KIL is that it acquired substantial quantity of shares of SIL during the aforesaid period and thus violated the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The charge against KIL was about circular trading, synchornised trading and working in concert with others to maintain or increase the price has been dealt in detail in appeal No. 27 of 2004.

5.                  It had been found from investigation that KIL had consistently bought and sold shares of SIL prior to June, 1999 and also after August, 1999.  It is mentioned in the record that KIL was holding 21,32,900 shares of SIL constituting 20.29% total paid up capital of SIL.  The additional purchase of 10.81% of the paid up capital of SIL constituted violation of Regulation 11(1) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short ‘the said Regulations’).

6.                  On the basis of above findings SEBI issued a show cause notice to KIL on 14/11/2002 asking them to show cause as to why one or more actions under Regulations 44, 45(6) of the said Regulations read with provisions of Section 11 and 11B of SEBI Act should not be initiated for its failure to make public announcement in terms of Regulation 11(1) of the Regulations. SEBI also granted personal hearing to KIL on 06/11/2003. KIL in its reply to the show cause notice and also in the personal hearing pleaded that KIL was actually holding 31,84,228 shares as on 31^st March, 1999 instead of 21,32,900 shares as shown by SEBI in the statement. KIL also pleaded that it had pledged its shares to lenders who had lent money to SIL, since KIL was one of the promoter of SIL, it would help SIL to get money whenever SIL required from lenders by pledging its shares. Therefore out of the 11,36,700 shares 6,61,800 shares were such which had been pledged by KIL earlier but were taken back later on.  Therefore, they contended that they did not violate any provisions of the said Regulations. The representative of KIL while appearing before SEBI admitted that there was no agreement entered into with the alleged pledgees, they also pleaded ignorance of the provisions of Regulation 58 of SEBI (Depositories and Participants) Regulations, 1996 which prescribes the procedure and manner of creating pledge or hypothecation.

7.                  Learned counsel for the appellant argued that KIL had been regularly purchasing and selling shares of SIL. He also argued that KIL had not acquired 5% or more than 5% shares or voting rights in respect of shares of SIL at any point of time in the period of 12 months. He submitted that out of 11,36,700 shares which were purchased during June, 1999 to August, 1999, during the same period KIL also sold numbers of shares of SIL.  He pointed out that KIL was not holding more 5% shares of SIL at any point during the year and therefore the provisions of Takeover Code did not trigger. He further argued that even if SEBI did not take into account the repurchases of pledged shares as return of shares, SEBI should accept that KIL did not acquire 5% or more shares at any point of time since sale and purchase of shares was being done simultaneously and it did not trigger the Takeover Code. He argued that SEBI ought to have taken into account that KIL also sold shares during the relevant period. He went on to argue that it was erroneous to determine the total share holding of KIL at any given point of time during the investigation by completely ignoring the sale of shares made by it during the relevant period.  He said that such a lopsided interpretation of Takeover Code would be erroneous and not maintainable. He said that determining the shareholding of a person without netting off would give a distorted picture. He therefore concluded that for the reasons mentioned above, the provisions of Takeover Code were not applicable in this case and no violation of SEBI Regulations has taken place.

8.                  The learned counsel for the respondent argued that 6,61,800 shares during the aforesaid period i.e., June, 1999 to August, 1999 had been transferred in the name of KIL, which constituted 6.29% of the paid up capital of SIL and since it acquired more than 5% limit prescribed, it amounted to violation of Takeover Code Regulations. He admitted that KIL had been purchasing and selling the shares of SIL but following the recommendations of Bhagwati Committee on takeover matters it has been decided to consider for the purpose of 5% acquisition limit, the total purchase i.e. the absolute purchases of shares of SIL during the period of 12 months without reducing the sale of shares, which means that no netting off of acquisition was to be done.  The learned counsel submitted that in view of this, the contention of KIL that they have also sold the shares of the target company during the said period and have not violated the Takeover Regulations cannot be accepted.

9.                  We have carefully considered the submissions made by the appellant and the documents submitted by both, the appellant and the respondent.  We find that KIL had been purchasing and selling the shares during the aforesaid period which was a cause for initial movement of the price of the scrip which also lead to the action taken against KIL for violating SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. The only point of contention is whether a person who acquires shares during the period of 12 months and also makes sale of shares during the same period should there be netting off of shares for the purpose of Takeover Regulations. In this connection we would like to look at the provisions.  Regulation 11(1) is quoted as below:

“11. (1) 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 75 per cent] 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 per cent 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.”

10.             The above regulation makes it mandatory for the acquirer to make a public announcement who acquired 5% or more shares in accordance with the Regulations. The question arises at what point of time such announcement be made. This is mentioned in Regulation 14(1) which reads as follows:

“14. (1) The public announcement referred to in regulation 10 or regulation 11 shall be made by the merchant banker not later than four working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the respective percentage specified therein :

“Provided that in case of disinvestment of a Public Sector Undertaking, the public announcement shall be made by the merchant banker not later than 4 working days of the acquirer executing the Share Purchase Agreement or Shareholders Agreement with the Central Government or the State Government as the case may be, for the acquisition of shares or voting rights exceeding the percentage of shareholding referred to in regulation  10 or regulation 11 or the transfer of control over a target Public Sector Undertaking.”

11.             We do not agree with the view of the appellant that out of 6,61,800 shares 3,90,300 shares were pledged shares which were only repurchased by KIL and therefore these should not be taken as shares acquired by the KIL. In the absence of any agreement of the alleged pledging of shares, the acquisition of these shares would be taken only as purchase of shares. There is no record from the Depositories that these shares were pledged by KIL.

12.             The above regulation clearly says that the public announcement should not be made later than 4 working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the respective percentage.  A plain reading of this regulation shows that if a person has exceeded the voting right by the required percentage or it has violated or triggered the Takeover Code by exceeding the respective percentage it should make a public announcement for open offer within 4 days of that event. In this case of KIL we find that it has exceeded the stipulated 5% limit of paid up capital on 29/06/1999 which was taken as the reference date for calculation of offer price by SEBI. In fact the appellant had given a statement of shares of KIL and the percentage holding of SIL capital on certain dates. The statement is reproduced herein below:

13.             We, therefore, feel that for the purpose of acquisition of shares it has to be seen in the light of the Regulations which support the view that even taking sale of shares KIL has breached the threshold limit of 5% capital of paid up capital and thus it triggered the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997.

14.             In view of the fact that KIL was holding 3190628 shares of SIL as on 29/06/1999 which was 30.36% of the paid up capital of SIL, KIL violated the provisions of Takeover Code Regulation 11(1) and is liable to make public announcement to acquire shares in accordance with the regulations.

15.             In view of the facts and circumstances of the case, we uphold the orders of SEBI asking acquirers to make public offer as per its order dated 27/01/2004 and dismiss the appeal.

16.             No order as to costs.

 

(R.N.Bhardwaj) Member

(C. Bhattacharya) Member

 

Place: Mumbai

Date:  08/08/2005

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