ADJUDICATION ORDER, IN ORIGINAL, RELATING TO M/S. SNOWCEM INDIA LIMITED (SIL) AND M/S KOSHA INVESTMENTS LIMITED (KIL) IN THE MATTER OF ALLEGED VIOLATION OF SECTION 15H OF THE SEBI ACT, 1992 READ WITH SUB-REGULATION 1 OF REGULATION 11 OF SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997
1 Background Information
The undersigned was appointed Adjudicating Officer, in the present case vide Member’s order dated September 30, 2003 to enquire into and adjudge the alleged contravention of Sub-regulation 1 of Regulation 11 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, by M/s Snowcem India Limited (M/s SIL) and M/s Kosha Investments Limited (M/s KIL).
2 Show Cause Notice
Pursuant to the Member’s Order dated September 30, 2004, Show Cause Notices containing the facts / allegations / violations, as brought out in the investigation report, were served on M/s. KIL and M/s SIL, in terms of letter no.OIAE/R/1035(M)/04 and letter no.OIAE/R/1036(M)/04 respectively, both dated February 11, 2004 asking them to show cause why an inquiry against them should not be held into the alleged contravention by them of Section 15 H of the SEBI Act, 1992 read with Sub- Regulation 1 of Regulation 11 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. M/s KIL and M/s SIL were also requested to appear for personal hearing on March 2, 2004. The relevant extract of the Investigation Report of Snowcem India Limited (page 82-93) was also sent as annexure to both the parties.
Further to the above mentioned letters, letter number OIAE/R/3463/04 and OIAE/R/3465/04 dated February 19, 2004, were sent advising M/s KIL and M/s SIL respectively, to furnish their replies as also appear for a personal hearing before the undersigned on March 4, 2004 instead of March 2, 2004, the latter date being a holiday.
3 In the Case of M/s SIL
3.1 Reply to the show cause notice
M/s SIL submitted their reply through Crawford Bayley & Co, Advocates & Solicitors vide their letter dated February 27, 2004, therein requesting for inspection of all the documents relied upon in the findings of the investigating officer to make the allegations contained in the Show Cause Notice dated February 11, 2004.
In response to the reply sent by M/s Crawford Bayley & Co, the undersigned vide letter dated March 3, 2004 informed M/s Crawford Bayley & Co, that a copy of the relevant extract of the Investigation Report has already been forwarded vide Show Cause Notice dated February 11, 2004.
M/s Crawford Bayley & Co, in their reply, dated March 15, 2004, reiterated their request for inspecting all the documents relied upon in the findings of the investigating officer to make the allegations contained in the Show Cause Notice dated February 11, 2004.
In response to the above, the undersigned vide letter number OIAE/R/6801/04, dated April 6, 2004, advised M/s Crawford Bayley & Co. that the inspection of the aforementioned extracts may be conducted on any working day at the office of Shri P K Bindlish, GM, SEBI, after obtaining prior appointment with him.
M/s Crawford Bayley & Co. completed the inspection of the documents on April 23, 2004.
3.2 Statement Recorded
Mr. Bharat Sharma of M/s Crawford Bayley & Co. represented M/s SIL during the personal hearing conducted on May 17, 2004 at SEBI, Bandra Kurla Complex office. An undertaking as regards appointment of M/s Crawford Bayley & Co. by M/s SIL to represent them in the said proceedings dated May 17, 2004, was duly signed and submitted by Mr. B M Jhaveri, Company Secretary, SIL.
Mr. Bharat Sharma of M/s Crawford Bayley & Co. submitted to the undersigned a detailed reply to the SCN issued to M/s SIL in which they denied the charges levied on them.
The transcript of the statement is as follows:
“Q. 1 Please introduce yourself.
ANS On behalf of M/s SIL- Shri B. M. Jhaveri, Company Secretary, M/s SIL; and on behalf of M/s Crawford Bayley & Co.- Shri Bharat Sharma.
Q. 2 Please offer your comments with regard to the charges in the show cause notice.
ANS We do not accept the charges. Our detailed reply in this regard is being handed over to you.”
3.3 Member’s Order
The matter regarding whether M/s SIL “acted in concert” with M/s KIL in acquiring shares of M/s SIL in violation of Regulation 11 of SEBI (SAST) Regulations, 1997, was heard by Member, SEBI and the Member vide his order dated December 19, 2003 interalia mentioned that, “…in view of the distinct and mutually exclusive legal status envisaged in the Regulations for the persons acting in concert and the target company, the SIL cannot be treated as a person acting in concert with KIL within the meaning of Regulation 2(1) (e) of the said Regulations. In view of this, I feel that it is a fit case to drop further proceedings against SIL. Therefore, in exercise of powers conferred upon me under Section 19 read with Section 11 and Section 11B of SEBI Act, 1992, it is hereby directed that the further proceedings against Snowcem India Ltd be dropped.”
3.4 Our observation
In light of the above order of Member, SEBI, dated December 19, 2003 M/s SIL is not found guilty of having violated Regulation 11of the SEBI (SAST) Regulations, 1997 and therefore no monetary penalty is being imposed on them.
4 In the Case of M/s KIL
4.1 Reply to the show cause notice
M/s. KIL submitted their reply vide their letter dated February 25, 2004 requesting the undersigned to grant them 15 days time to submit the reply to the show cause notice served on them vide letter no. OIAE/R/1035(M)/04, dated February 11, 2004.
In response to the reply, M/s KIL was granted time up to March 15, 2004 for submitting the reply as also appear for a personal hearing, vide letter number OIAE/R/4492/04, dated March 4, 2004.
In response, M/s KIL vide their letter dated March 15, 2004 refuted the allegations contained in the Show Cause Notice dated February 11, 2004
M/s KIL was again requested to appear for a personal hearing on April 5, 2004, vide our letter number OIAE/R/6008/04 dated March 25, 2004.
In their reply faxed to us on April 5, 2004, M/s KIL requested the undersigned to once again reschedule the personal hearing proceedings to any day after one week from April 5, 2004, sighting the absence of their counsel Mr. Riaz Chagla who was supposed to be appearing for them in the said matter.
In response to their fax, the personal hearing was rescheduled for April 19, 2004 and the same was communicated to M/s KIL vide our letter number OIAE/R/6799/04, dated April 6, 2004. The undersigned also advised M/s KIL that as two adjournments have already been granted, if they failed to appear for Adjudication proceedings on April 19, 2004, the same would be conducted ex parte.
M/s KIL did not appear for the adjudication proceedings on the said date nor did the undersigned receive any communication from them stating the cause for their absence or their request to advance the adjudication proceedings to a future date.
As brought out above, M/s KIL did not turn up for the personal hearing on three occasions, i.e. on March 15, 2004, April5, 2004, and April 19, 2004, and on the last occasion the undersigned did not receive any communication from M/s KIL explaining the reason for their absence or requesting a future date for personal hearing, therefore, the adjudication proceedings have been proceeded against M/s KIL ex parte.
4.2 Member’s Order
The matter regarding whether M/s KIL acquired shares of M/s SIL in violation of Regulation 11 of SEBI (SAST) Regulations, 1997, was heard by Member, SEBI. The Member vide his order dated January 27, 2004 has inter alia observed that, “…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.”
“Further, in terms of Regulation 22 (12) of the said Regulations, the payment of consideration to the shareholders of the Target Company has to be paid within 30 days of the closure of the offer. The maximum time period provided in the said Regulations for completing the offer formalities in respect of an open offer is 120 days from the date of public announcement. The public announcement in the instant case ought to have been made taking June 29, 1999 as the reference date and thus the entire offer process would have been completed latest by October 27, 1999. Since no public announcement for acquisition of shares of the Target Company has been made, which has adversely affected interest of shareholders of Target Company, it would be just and equitable to direct the Acquirer viz. Kosha Investments Ltd to pay interest @ 15% per annum on the offer price. 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.”
“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. This order shall come into force with immediate effect.”
M/s KIL has not till date made the Public Offer to acquire further shares of M/s SIL, as directed by SEBI.
4.3 Our observation
In light of the above order, M/s KIL has been found to have violated Regulation 11(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
The penalty for such violation has been specified under Subsection (ii) of Section 15 H of SEBI Act, 1992. The Act interalia states that “If any person, who is required under this Act or any 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 twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher…”
Reference is also invited to Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, wherein it has been mentioned that:
“…While adjudging the quantum of penalty under section 15(I), the adjudicating officer shall have due regard to the following factors, namely-
- the amount of disproportionate gain or unfair advantage, wherever quantifiable, as a result of the default;
- the amount of loss caused to an investor or group of investors as a result of the default;
- the repetitive nature of the default….”
While the Investigation Report (IR) has not quantified the amount of profit made by M/s KIL, however, from the IR it is possible to quantify “the amount of loss caused to an investor or group of investors as a result of the default”.
4.4 Calculation of the penalty to be imposed on M/s KIL
Keeping in view the Member’s order dated January 27, 2004, wherein, he has directed M/s KIL to make a public offer keeping June 29, 1999 as the reference date, the amount of notional loss caused to the shareholders has been calculated as follows:
i) Reference date for making the public offer: June 29, 1999
ii) Price of SIL-scrip as mentioned in the IR on a date very close to the reference date: Rs 51.00, as on June 24, 1999.
iii) 20% of the total number of outstanding shares of M/s SIL as on September 23, 1999 (as mentioned in the Investigation Report): 21,01,620 shares.
iv) Minimum amount to be offered to the shareholders= Rs (2101620 shares X 51.00) = Rs 10,71,82,620.
v) Simple Interest amount @ 15% on the minimum amount offered= Rs (0.15 X 10,71,82,620) per year = Rs 1,60,77,393
vi) Simple Interest amount for 5 years (i.e. from 1999 to 2004) = Rs (1,60,77,393) X 5 = Rs 8,03,86,965
vii) Total notional loss to the shareholders = Rs 10,71,82,620 (Principal) + Rs 8,03,86,965 (Interest) = Rs 18,75,69,585
M/s KIL was directed by SEBI, vide Member’s order dated January 27, 2004, to make a public offer taking June 29, 1999 as the reference date.
If M/s KIL had made a public offer, they would have had to make a minimum payment of Rs 18,75,69,585 to the investors/ shareholders of M/s SIL for acquiring the stipulated 20% from them.
Therefore, by not making a public offer, M/s KIL have deprived the investors/shareholders of M/s SIL to the tune of Rs 18,75,69,585 which they would have received from M/s KIL.
Thus, this amount (Rs 18,75,69,585) can be treated as the amount of loss to the investors.
Notwithstanding the above, any penalty levied which is lower than the amount of loss, as calculated above, may be considered as inequitable in law. This is so because an acquirer could acquire shares in violation of the Takeover Regulations, and yet purposefully fail to make an open offer knowing that the quantum of penalty that would be levied on him would be lower than the quantum of money that he would have to pay if he had to make an open offer.
4.5 Order
Keeping the above in view, I recommend that a monetary penalty of Rs 18,75,69,585/- under Rule 5 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, be levied on M/s Kosha Investments Limited for violating Regulation 11(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
The penalty amount shall be paid through a crossed demand draft drawn in the favour of “SEBI- Penalties Remittable to Government of India”, payable at Mumbai, and may be sent to Sri P K Bindlish, General Manager, Securities and Exchange Board of India, Mittal Court Office, 1st Floor, Nariman Point, Mumbai- 400 005.
| Date: December 02, 2004 |
SUJIT PRASAD |
| Place: Mumbai |
Adjudicating Officer |