MO/38/CFD/08/2006
SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: DR.T.C. NAIR, WHOLE TIME MEMBER
Order against M/s. K. G. Fabriks Ltd. formally known as Southern Technologies Ltd. and M/s. Crocodile (India) Pvt. Ltd. under section 11 & 11B of SEBI Act, 1992 read with Regulations 44 & 45 (6) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
Date of hearing: 31.05.06
Appearances:
M/s K.G.Fabriks Limited Shri KG Balakrishnan
and M/s Crocodile (India) Pvt. Ltd. Shri MEV Selvam
SEBI Shri S.V Muralidhar Rao,GM
Shri Amit Tandon, AGM
Shri N. Murugan, LO.
1.0 Facts of the case
1.1 Shri. Kannapiran Mills Limited (hereinafter referred to as ‘Target Company’) is a public limited company having its shares listed in Coimbatore Stock Exchange (CSX) and Madras Stock Exchange Ltd (MSE). The capital structure of the company as on March 31, 1995 was as follows:
Authorized capital is 60.00 lakhs equity shares of Rs.10/-each amounting to Rs.6,00,00,000/- and the paid up capital was 26,82,880 equity shares of Rs.10/-each amounting to Rs.2,68,28,800/-. As per the report under 3(4) of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (hereinafter referred to as said Regulations) submitted on behalf of acquirers who are the promoters of the target company vide letter dated 06.07.2005, the promoters holding stood at 83.03%. The target company came out with preferential allotment and allotted five lakh shares each on 27.12.2000 to M/s. K. G. Fabriks Ltd. and M/s. Crocodile (India) Pvt. Ltd (hereinafter referred to as acquirer). After the said allotment, the promoters collectively held 32,27,714 shares constituting 87.64% of the post issued share capital of the target company. It was also observed from the said report that the Board resolution to that effect was passed at the meeting held on 21.11.2000 for seeking the consent of the members to issue one lakh – 12% cumulative redeemable preference shares of Rs.100 each at par and equity shares / debentures/ Bonds of face value of Rs.10 each of the aggregate nominal value upto 100 lakhs at par. The notice of Extraordinary General Meeting (EGM) dated 21.11.2000 was issued to the shareholders intimating them that EGM will be held on 23.12.2000.
2.0 Show Case Notice, Reply and Personal hearing
2.1 The aforesaid acquisition resulted in triggering of Regulation 11(2) (as it then stood) and the promoters group neither made any open offer nor claimed exemption under Regulations 3(1) (c) (i) and 3(1) (c) (ii) within the time specified under the said Regulations. SEBI issued a show cause notice dated 10.01.2006 alleging the violation of the provisions of the said Regulations and also called upon the acquirers to show cause as to why action could not be initiated against them under Section 11, 11B of SEBI Act, 1992 read with Regulations 44 and 45 (6) of the said Regulations. The main allegations in the said show cause notice were as under:
1. The acquirers acting in concert with the promoters had acquired five lakhs shares each representing 4.61% of the enhanced voting capital (36,82,880 shares) of target company through preferential allotment made on 27.12.2000 and the shareholding of the promoters had gone up by 4.61% viz, from 83.03% to 87.64%.
2. The Board resolution dated 21.11. 2000 was not sent to the CSX and MSE as per 3(1) (c) (i) of the said Regulations.
3. The disclosures regarding identity of the proposed allotees, purpose and reason for such allotment, consequential change in control, Board of Directors, voting rights and shareholding pattern due to the above said allotment as per Regulation 3(1)(c) (ii) of the said Regulations were not mentioned in the notice of EGM dated 21.11.2000.
4. In view of the non compliance of Regulations 3(1) (c) (i) and 3(1) (c) (ii) of the said Regulations, the acquirers are not eligible for exemption under 3(1) (c) from the applicability of Regulation 11 (2) of the said Regulations.
5. The acquisition of shares by the acquirers acting in concert with other promoters triggered the provisions of the said Regulations and therefore acquirers were under the obligation to make public announcement in accordance with regulation 11(2) of the said Regulations, which they failed to comply with.
2.2 Vide letters dated 23.01.2006 the acquires submitted similar replies wherein they elaborated the circumstances under which the target company’s financials were badly affected resulting into the target company going for preferential allotment. Vide the aforesaid letters, the acquirers further submitted the following:
1. that the target company was not able to serve the debts availed from IDBI, and other banks and the Board of Directors of the target company decided to mobilize funds by way of issue of preference shares for an aggregate face-value of 300 lakhs and had accordingly obtained the required consent of the shareholders under section 81 (1A) of the Companies Act, 1956 at the EGM held on 25.03.2000. They further submitted that in view of the conditions prevailing in the capital market at that time there was absolutely no response from any investor and the Board of Directors again sought the consent of the shareholders at the EGM held on 04.08.2000 for issue of 1, 50,000-12% cumulative redeemable preference shares of Rs.100/- each at par and equity shares/ debenture bonds of face-value of Rs.10/- each of the aggregate nominal value up to Rs.1.50 lakhs at par. This proposal also failed to evoke any response from the investors.
2. It was further submitted that in the meanwhile there was an erosion of 50% of the peak net worth of the target company. Further, IDBI vide its letter dated 30.10.2000 gave an ultimatum to the target company to settle its dues before 29.12.2000.
3. it was further submitted that under the circumstances the consent of the shareholders was again sought for the issue of one lakh – 12% cumulative redeemable preference shares of Rs.100/- each at par and equity shares/debentures/ bonds of face-value of Rs.10/- each of the aggregate nominal value of Rs.10/- each aggregating to Rs.100 lakhs at the EGM held on 23.12.2000.
4. Further, it was submitted that the acquirers had subscribed to the shares in the preferential issue as a promoter group at par value of Rs.10/- while the book value of share was only Rs.3.21.
5. The acquirers submitted that the Board resolution dated 21.11.2000 was intimated to the stock exchanges and share holders were given adequate information regarding the state of the target company and proposal. It was further submitted that the disclosure guidelines were complied with to the extent of purpose/object of the issue and issue price. It was further submitted that the necessary disclosures under regulation 7 of the said Regulations were furnished to the stock exchanges on 03.01.2001.
2.3 The acquirers were given an opportunity to attend the personal hearing before me on 31.05.2006 when Mr KG Balakrishnan along with Mr MEV Selvam appeared for both the acquirers and reiterated the submissions which they have already forwarded to SEBI vide their letters dated 23.01.2006. They further pleaded for a lenient view since no shareholder’s interest has been affected by the acquisition through preferential allotment.
3.0 Consideration of Issues
3.1 At this juncture I note that Regulation 3(1) (c) (i) & (ii) of the said Regulations as it existed then, read 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;”
3.2 I also note that Regulation 11(2) of the said Regulations as it existed then, reads as follows:
“… No acquirer who, together with persons acting in concert with him has acquired in accordance the provisions of law, 75% of the shares or voting rights in a company, shall acquire either by himself or through persons acting in concert with him any additional shares or voting rights, unless such acquirer makes a public announcement to acquire shares in accordance with the regulations.”
3.3 I further note that Regulation 45(6) of the said Regulations reads as follows:
(6) “…The penalties referred to in sub-regulations (1) to (5) may include:-
a) criminal prosecution under section 24 of the Act;
b) monetary penalties under section 15H of the Act;
c) directions under the provisions of section 11B of the Act.
3.4 I note that both the acquirers vide their replies dated 23.01.2006, admitted that the disclosures such as identity of the proposed allottees, consequential change in control, board of directors, voting rights and the shareholding pattern were not made for the reason that the subscription by way of preferential allotment was made at the last moment.
3.5 As regards the violation of regulation 3(1) ( c) (i) of said Regulations although both the acquirers have claimed that the board resolution dated 21.11.2000 was sent to both CSX & MSE, the receipt of same has been denied by both CSX & MSE vide their letters dated 16.03.2006 and 28.02.2006, respectively addressed to SEBI. Therefore, I hold that the necessary disclosure by way of sending the Board resolution has not been made under regulation 3 (1) (c) (i). Since both regulation 3 (1) (c) (i) & (ii) have not been complied with by the acquirers, they are not entitled for exemption from complying with regulation 11(2) of said Regulations. Therefore, I am convinced that the acquirers are guilty of violating the provisions of the regulation 11 (2) of the said Regulations as they failed to fulfill their obligation to make public offer. However, I find that the allotment of shares to the acquirer has been approved by the shareholders in Extraordinary General Meeting (EGM) subsequently. I further find that there was no change in control and the management of the target company even after the said preferential allotment of shares to the acquirers.
3.6 In view of the above, by not disclosing the relevant details as required under regulation 3 (1) (c ) (i) and 3 (1) (c ) (ii) the acquirers have prima facie, violated these regulations and thus are liable to be penalised appropriately. However in my view, this non compliance, in the given facts and material circumstances of the case, does not require issuance of directions interalia directing the acquirer to make public offer and the ends of justice would be met by conducting Adjudicating Proceedings against the acquirer in terms of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995.
3.7 Order accordingly.
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Date: 16.8.2006
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T. C. NAIR |
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Place: Mumbai
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Whole Time Member |
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Securities and Exchange Board of India |