ORDER UNDER RULE 5 OF SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST TWINSTAR HOLDINGS LIMITED FOR THE VIOLATION OF REGULATION 3(4) AND3(5) OF SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997.
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) vide order dated April1, 2004 appointed Shri. Krishnamohan as the Adjudicating Officer to inquire into and adjudge under Section 15 A(a) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the violation of Regulation 3(4) and 3(5) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as ‘Takeover Regulations’) alleged to have been committed by Twinstar Holdings Limited (hereinafter referred to as ‘THL’) in pursuant to acquisition of 90,00,000 shares representing 11.98% of the paid up share capital of Sterlite Industries (India) Limited (SIL) by way of preferential allotment on May 23, 1998.
2. NOTICE AND REPLY
A notice no. A&E/PB/457/2004 dated June 09, 2004 was issued to THL in terms of Rule 4 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the “Rules”) seeking reply on the alleged contravention of Regulation 3(4) and 3(5) of the Takeover Regulations.
3. THL vide its letter dated July 12, 2004 replied to the said notice. In its reply, THL made the following submissions:
· On May 23, 1998, Sterlite had allotted warrants on preferential basis to THL. The said warrants were converted into equity shares on January 31, 2000. Subsequent to such allotment the holding of THL in Sterlite increased from 25.65% to 37.63%
· In the case of preferential allotment which are exempted from the applicability of Regulation 10,11 and 12, Regulation 3(4) and 3(5) prescribed certain procedural formalities to be complied with.
· The provisions of Regulation 3(4) of the Takeover Regulations would apply to a case where any person along with persons acting in concert with him crosses the limit of 10% or more of voting rights in a company for the first time. In the present case THL was already holding 25.65% of the paid up share capital of SIL. Therefore, the acquisition did not trigger the provisions of Regulation 3(4) of the Takeover Regulations.
· As regards alleged non compliance of Regulation 3(4) and 3(5), it is not able to find out whether any report has been filed or not since the same is an old matter and as a matter of good corporate governance and abundant caution, THL filed the report once again with all relevant enclosures on March 9, 2004.
· Most of the details that are to be given in form of report under Regulation 3(4) were always part of public knowledge.
· As the default are of procedural nature and as such do not trigger an open offer under the provisions of the Takeover Regulations and also the fact that no disproportionate gain has been made by any person nor any group of investors suffered any loss, no penalty should be levied.
In view of the above submissions, THL requested SEBI not to hold any inquiry and impose penalty on it.
4. I have been appointed as Adjudicating Officer vide SEBI’s Order dated September 30, 2004. After considering the reply, it was felt that an opportunity of hearing may be granted to them. Hence THL was advised to attend the personal hearing scheduled on November 18, 2004. THL vide their letter dated November 17, 2004 sought adjournment. Subsequently, THL was advised to attend the hearing on November 25, 2004. As THL sought one more adjournment, the matter was scheduled for hearing December 3, 2004. Shri Shripal Lakdawala, Shri Vinay Gaokar and Advocate Shri. J.C. Pereira attended the personal hearing on December 24, 2004 as representatives of THL and made the following submissions:
· Regulation 3(4) does not apply as the acquirer already held 25.65% of shares of the target company prior to the acquisition and that the acquisition in question did not result in the acquirer crossing the prescribed threshold of 10%. In the event that Regulation 3(4) does not apply there would be no question of compliance with Regulation 3(5).
· The company is unable determine whether or not such report was filed though it believes that the same was done. The matter is approximately six years old and the records are difficult to trace. In any event it is admitted position that on March 9, 2004 the required report has been filed and the requisite payment under Regulation 3(5) has been made. It is submitted that the same was filed once again out of abundant caution.
· There was substantive compliance with Regulation 3(4) as all details required to be contained in the report were always in the public domain and were public knowledge. Authorities, including the stock exchange, and the Registrar of Companies were aware of the said details.
· Penalty under Section 15A(a) can only be levied in the event of a complete failure to file the report, and not in delayed filing as in the present case. The provisions of Section 15A(a) are to be contrasted with the provisions of Section 15A(b) which apply to a filing which is beyond the time specified therefore. In this case Section 15A(b) would not be applicable as the said provision does not concern the failure or delay in filing a report. Hence no penalty can be imposed under Section 15A(a) or (b).
· Without prejudice to the above, the factors to be taken into account in determining the quantum of penalty as specified in Section 15J ought to be taken into account. In the present case, there is no culpable mind and there is no intention to suppress information. It is not even the case of SEBI that any disproportionate gain or unfair advantage has been made or that any loss has caused to any investor or any group of investors, or that the default is repetitive in nature. The erstwhile section 15A(a) is applicable in the present case by virtue of Article 20 of the Constitution and accordingly the maximum penalty that can be imposed is Rs. 1,50,000/-.
· Reliance is placed on the judgment of the Bombay High Court in the case of SEBI Vs Cabot International Corporation Limited reported in (2004) 51 SCL 307. In particular, reliance is placed on paragraph 25(G) of the said judgment to contend that even in the case of delinquency where the default occurred due to bonafide belief that the person was not liable to act in the manner prescribed by the statute or that there was too technical or venial a breach, the authority may refuse to impose a penalty even though the statute prescribes a minimum penalty. Reliance is also placed on paragraph 31 of the said judgment where in similar facts, the High court upheld the order of the SAT which overturned the penalty imposed by SEBI in respect of a delayed filing under Regulation 3(4), which delay in that case was 529 days.
CONSIDERATION OF EVIDENCE AND FINDINGS:
5. I have taken into consideration the facts and circumstances of the case, the written submissions of THL and the submissions made by it during the personal hearing. It is noted that prior to the preferential allotment on May 23, 1998, THL was holding 25.65% shares in SIL and pursuant to the acquisition of 90,00,000 shares in the preferential allotment, the share holding of THL increased to 37.63%. In respect of the said acquisition under Regulation 3(1)( C), THL was required to submit the report along with the fee to SEBI within 21days from the date of acquisition in terms of the provisions of Regulation 3(4) and 3(5) of the Takeover Regulations.
6. In this regard, Regulation 3 (4) of the Takeover Regulations prior to the amendment on September 9, 2000 stated as follows;
“In respect of acquisition under clauses (a)(b)(c) (e) and (i) of sub Regulation (1), the acquirer shall, within 21 days of the date of acquisition, submit a report along with supporting documents to the Board giving all details, in respect of acquisitions which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him) would entitle such person to exercise 10% or more of the voting rights in a company”.
7. Further, Regulation 3(5) of the Takeover Regulations provides the following;
“The acquirer shall along with the report referred to under sub regulation (4) pay a fee of Rs. 10,000/- to the Board either by a Banker’s Cheque or Demand Draft in favour of the Securities and Exchange Board of India payable at Mumbai.”
8. It is noted that THL filed the said report only on March 9, 2004. Hence, it is alleged that the report was filed after a delay of 2096 days which is in contravention of Regulation 3(4) and 3(5) of the Takeover Regulations. In this regard, THL submitted that the said report has been filed as a measure of abundant caution as they were not aware whether any report was filed earlier. As no documentary proof has been submitted by THL in support of the said contention the same can not be accepted.
9. It is noted that THL further submitted that the requirements of Regulation 3(4) does not apply as the acquirer already held 25.65% of shares of the target company prior to the acquisition and that the acquisition in question did not result in the acquirer crossing the prescribed threshold of 10%. This submission of THL is not legally tenable as it is clear that Regulation 3(4) is applicable to all cases where the acquisition exceeds the limit prescribed in the Regulations irrespective of the existing holding of the acquirer. What is envisaged in Regulation 3(4) is not a one time reporting. Thus the contention that Regulation 3(4) is not applicable as the acquirer had already crossed the benchmark before the present acquisition is not tenable. In this regard, the Hon’ble Securities Appellate Tribunal clarified this aspect in the matter ( Appeal No:12/ 2001) Naagraj Ganeshmal Jain Vs SEBI. Hence, it is clear that the provisions of Regulation 3(4) and 3(5) apply to the acquisition made by THL.
10. THL submitted that there was substantive compliance with Regulation 3(4) as all details required to be contained in the report were always in the public domain and were public knowledge. Authorities, including the stock exchange, and the registrar of companies were aware of the said details. In this regard, it is noted that the objective of sub regulation 3(4) and 3(5) is to ensure transparency in respect of the transactions exempted under the provisions enumerated under Regulation 3(1) and further monitoring of such exempted transactions by SEBI. Hence, the contention of THL that as details pertaining to shareholding were known to public and hence there was substantial compliance of the reporting requirement under Regulation 3(4) and 3(5) are not tenable. In view of the same, as stated above, it is clear that THL failed to comply with the provisions of Regulation 3(4) and 3(5) of the Takeover Regulations.
11. In this regard, Section 15A(a) of the SEBI Act prior to the amendment on October 29, 2002 provided that if any person who is required under this Act, or any Rules or Regulations made thereunder 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 and fifty thousand rupees for each such failure. Subsequently the penalty has been enhanced to one lakh rupees for each day during which such failure continues or one crore rupees whichever is less. In this regard, THL submitted that the penalty under Section 15A(a) can only be levied in the event of a complete failure to file the report, and not in delayed filing as in the present case. Such contention can not be accepted as it would lead to an absurd situation as there would be no referral point of time to decide the occurrence of default. Further, 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.
12. The provisions of Section 15J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, the Adjudicating Officer shall take into account the following factors namely,
a) the amount of disproportionate gain or unfair advantage, wherever quantifiable made as a result of the default.
b) the amount of loss caused to an investor or group of investors as a result of the default,
c) the repetitive nature of the default
13. In the case of SEBI Vs Cabot International Capital Corporation, while dealing with the aspect of non compliance of Regulation 3(4), the Hon’ble Bombay High Court held that there is no obligation upon the Adjudicating Officer to necessarily impose a penalty particularly where there is a technical contravention and there are justifiable reasons like the default occurred due to bonafide belief that he was not liable to act in the manner prescribed by the statute. It is noted that subsequently the Hon’ble Securities Appellate Tribunal in Appeal no. 20 of 2003 in the matter of Godrej Boyce Mfg Company Ltd Vs SEBI reiterated the above view. In view of the above judgments, and taking into account the fact that the facts of the present case are similar to the above referred cases, I am of the view that no penalty is warranted in respect of the contravention of Regulation 3(4) and 3(5) of the Takeover Regulations by Twinstar Holdings Ltd. Accordingly, no penalty is imposed on Twinstar Holdings Ltd in respect of the violation of Regulation 3(4) and 3(5) of SEBI (Substantial Acquisition of Shares and Takeovers Regulations), 1997.
S. Biju
Adjudicating & Enquiry Officer
Date: December 10, 2004
Place: Mumbai
Cc: 1) Twinstar Holdings Ltd
2) Securities and Exchange Board of India