BEFORE THE SECURITIES APPELLATE TRIBUNAL, MUMBAI
Appeal No.136/2005
and
Appeal No.136A/2005
Date of Hearing : 18.11.2005
Date of Decision : 5.12.2005
In the matter of:
Appellants : 1. Tata Coffee Ltd., Kodagu, Karnataka (136/02)
2. Tata Tea Ltd., Kolkata (136A/05)
Respondent : Securities and Exchange Board of India, Mumbai
Appellants by : S/Shri Aspi Chinoy & Pesy Mody and
Ms. Rea Zaiwalla, Advocates
Respondent by : Shri Vivek Menon, Advocate
Coram:
Justice Kumar Rajaratnam, Presiding Officer
C. Bhattacharya, Member
R.N. Bhardwaj, Member
Per: Justice Kumar Rajaratnam, Presiding Officer
Both the appeals are taken up together by consent of parties by a common order since common questions of law and facts arise out of a common order passed by the respondent.
2. The appellants challenged the order dated 27th June 2005 passed by the respondent in imposing a consolidated penalty of Rs.3,00,000/-. Both the appellants were jointly and severally liable to pay the penalty.
3. The operative portion of the order of the Adjudicating Officer reads as follows:
“Having regard to the nature and gravity of the charges established, the factors contained in Section 15J of SEBI Act, 1992, taking into account the loss caused to the investors due to the failure of the acquirers to make a public announcement to acquire further shares of the target company in terms of Regulation 11(1) of SEBI (SAST) Regulations, 1997, the facts and circumstances having regard to the submission that the acquirers no longer hold any shares of the target company, I hereby impose, under section 15H(ii) of SEBI Act, 1992, a consolidated penalty of Rs.3,00,000 (Rupees three lakhs only) on the acquirers viz. Asian Coffee Ltd. (since merged with Tata Tea Ltd.), Conscofe Investments Ltd., Consolidated Coffee Ltd. (now Tata Coffee Ltd.) and Tata Tea Ltd. The acquirers are jointly and severally liable to pay the penalty.”
4. The facts very briefly are a show cause notice was issued to the appellants alleging that the appellants acquired 59,80,000 shares of Saptarshi Agro Industries Ltd. (hereinafter referred to as ‘SAIL’) on a preferential basis thereby increasing their shareholding from 52.22% to 63.89% on 31st of August 1999. It is not necessary to give the break up of holdings of the appellants who acted in concert since it is admitted that the appellants had increased their shareholding in SAIL from 52.22% to 63.89%.
5. The allegation against the appellants was that the Board resolution with regard to the proposed preferential allotment was not sent to the stock exchange, in which SAIL is listed as required under first proviso to Regulation 3(1)© of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as ‘Regulations’). It was further alleged that necessary disclosures were not made in full with reference to the preferential allotment and therefore the appellants had violated second proviso to regulation 3(1)© of the Regulations.
6. The circumstances under which the appellants acquired the target company to rehabilitate the target company make interesting reading and require a brief mention in these appeals.
7. The appellants are part of the Tata group of companies. The appellants had collectively acquired 96,67,630 shares of the target company in or about 1996. This comprised of 52.22% of the issued capital of the company. The target company was promoted as a joint sector company by Tamil Nadu Industrial Development Corporation (hereinafter referred to as ‘TIDCO’). TIDCO was a government enterprise and held 16.15% of the target company’s shareholding. By agreement, TIDCO had equal representation on the Board of the target company. The Chairman of the target company was appointed by TIDCO. The Company Secretary also belonged to TIDCO. It is common ground that the target company’s performance was very poor. To assist the company and to improve its financial position, the appellants had, in our view, unwisely advanced large sums to the target company as inter-corporate deposits to the detriment of their own shareholders. The appellants had also issued corporate guarantees to secured loans raised by the target company to third parties. These decisions no doubt have been made bona fide but it cannot be said that these decisions were made in the best interests of the appellants or in the interest of the shareholders of the appellants since the subsequent events confirm our view. The financial position of the target company deteriorated further. By 31st of March 1998, almost 85% of the net worth of the company was eroded. The company became a junk company by September 1998 since 98.92% of the net worth was completely wiped off. The matter was also brought to the notice of BIFR. The accounts on 31ST of March 1999 showed that the target company had an accumulated loss of Rs.17.92 crores. Curiously it is the contention of the appellants that TIDCO wanted the appellants to rehabilitate the target company. It is not known why the appellants did not insist in TIDCO chipping in their bit as co-promoter for rehabilitating the target company, unless it can be said that the appellants were easily persuaded by TIDCO to sink in more funds into a sinking ship.
8. Be that as it may, TIDCO wanted the appellants to convert the advances of Rs.5.98 crores into equity shares of the said company at par. The value of the scrip at the relevant time was Rs.2/- per share. It does not make sense to us why a company, which is known for its wise business discretion, has chosen to buckle under the pressure of TIDCO in converting the loans at par when the scrip was quoted at two rupees. What is more glaring was that the appellants also guaranteed repayment of loans taken by the target company to bankers. The
appellants at paragraph 9 of the grounds of appeal referred to these guarantees to third party bankers as a sacrifice. We are not sure whether such sacrifices are prudent business decisions. The nature of the guarantees is at paragraph 9, which reads as follows:
“Pursuant to the Appellant Companies aforesaid sacrifice in order to save the said Company, other financial institutions/creditors of the said company also waived substantial portions of their claims against the said Company. Interalia, ICICI was persuaded to waive all interest claims and also waive 30% of its principal claims (a total of Rs. 3.13 crores), which is agreed to on the basis of immediate payback of 70% of its principal claim as a one time settlement. Funds for this settlement were raised from a third party and repayment thereof was guaranteed by Consolidated Coffee Ltd. whose name was subsequently hanged to Tata Coffee Ltd. (Appellant No.2 hereto). Similarly, the other major financial institution creditor namely IDBI was also persuaded to write off its entire interest claim against the said Company of Rs.1.22 crores and to additionally write off 25% of its principal claim amounting to Rs.1.2 crores.
9. The appellants further submitted in their memo of appeal at paragraph 10 as follows:
“The Appellants were not interested in acquiring further shares and agreed to convert their ICDs and trade advances into equity allotted at par, although it entailed a loss of Rs 14 crores, only at the request of the said Company, TIDCO and the financial institutions and only in order to save the said Company from becoming a Sick Company / being liquidated, which would have irreparably prejudiced all the shareholders. Further as stated above the marginal change in the shareholding pattern whereby the Tata Group Companies (the appellants) shareholding was increased from 52.22% to 63.89% was irrelevant since even pre-allotment, the said companies had the majority shareholding of over 50%.”
It is submitted that the appellants have exited from the target company at Rs.2/- per share after all these “sacrifices”.
10. Now coming to the facts of the case, the decision of the Adjudicating Officer, in a large measure, was based on an erroneous reading of the decision of the Constitutional Bench of the Supreme Court reported in AIR (1977) in the case of R.S. Joshi etc. vs. Ajit Mills Ltd. and another. In Joshi’s case the matter related to unjust enrichment of a person. The matter also related to strict liability. It was a case under the provisions of the Bombay Sales Tax Act, 1959 (as applicable to Gujarat). The matter relates to sums collected by dealers by way of sales tax, though not exigible, were to be forfeited to the public exchequer punitively.
11. The case before us is a case of penalty for violation of regulation after taking into account the factors in section 15J of SEBI Act, which deals with quantum of penalty. Section 15J reads as follows:
“15-J. Factors to be taken into account by the adjudicating officer.- While adjudging the quantum of penalty under section 15-I, the adjudicating officer shall have due regard to 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;
© the repetitive nature of the default.”
In this context, the Division Bench of the Bombay High Court in SEBI vs. Cabot International Capital Corporation reported in (2004) 51 SCL 307 held that if it can be shown that a contravener never intended or consciously avoided to comply with the obligations under the Regulations, then the Cabot judgment is an authority to hold that no case is made out for any penalty notwithstanding the provisions of section 15J.
12. It is alleged that the appellants have violated the provisos to regulation 3(1)© of the Regulations. Now let us examine the provisos (i) and (ii) to regulation 3(1)©, which read as follows:
“3. (1) Nothing contained in regulations 10, 11 and 12 of these regulations shall apply to :
(a) --------
(b) --------
© 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 persons(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;”
13. A careful reading of regulation 3(1)©, as it then was, makes it clear that preferential allotments will trigger the code in so far as regulations 10, 11 and 12 are concerned. In other words, an exemption is granted for the acquirer from making an open offer if preferential shares are purchased in the target company. However, there is a proviso even with respect to preferential shares. As set out earlier, Regulations 10, 11 and 12 will apply if the Board resolution of the acquirer with respect to the proposed preferential allotment is not sent to all the stock exchanges in which the target company is listed. The second proviso is that there must be a full disclosure to the target company if the acquirer acquires five or more per cent shares of the post issued capital. The requirements that are to be made to the target company are (1) the price at which the allotment is proposed, (2) the identity of the persons, (3) the purpose and the reason for such allotment and (4) consequential changes in the Board of Directors and the changes in the voting rights and other details. If these details are provided by the acquirer in accordance with the provisos (i) and (ii) of regulation 3(1)©, the acquirer would be exempt from making an open offer as required under regulations 10, 11 and 12 of the Regulations. It is as simple as that.
14. As far as the first proviso is concerned, materials have been placed before us to show that the stock exchanges have been informed by the appellants. The Adjudicating Officer proceeds on the footing that no documents were produced and therefore there was a violation of the regulation but did not ask the appellants to produce the records or the acknowledgment.
15. Mr. Chinoy, the learned senior counsel for the appellant, submitted that the appellants had informed the stock exchange and if only the Adjudicating Officer had sought for it the appellants would have produced the same. In fact, records have been shown to us after giving copies to the learned senior counsel for the respondent, Mr. Dipan Merchant, to establish that the stock exchanges have been informed about the change of the shareholding pattern.
16. We feel that in a statutory appeal ends of justice will be met by looking at the correspondence after giving the respondent an opportunity to rebut the same. We are satisfied, after hearing both counsel, that the appellants have complied with the first proviso of regulation 3(1)© of the Regulations.
17. Coming to the second proviso with regard to furnishing of the necessary details, it has been fairly stated by Mr. Chinoy, without wasting the time of the Tribunal, that there had not been full compliance of all the details that are required under the second proviso. According to Mr. Chinoy, it was never the intention of the appellants to deny the shareholders of the target company the information. On the contrary, the shareholders were informed of all the details at the succeeding AGM after the increase in the shareholding took place.
18. It was further submitted that the appellants may not have made the wisest of decisions in infusing capital into a sinking target company, but the effort of the appellants was genuine, bona fide and in the interests of the shareholders of the target company. By no stretch of imagination can it be said that some of the decisions taken in financing the target company were wise and prudent and in the interests of the shareholders of the appellants. But the court is not a moral force and must decide the matter strictly in accordance with law.
19. The learned counsel for the appellants, having admitted that there were certain inadequate information given to the target company, relied on a Division Bench judgment of the Bombay High Court reported in (2004) 51 SCL 307 in the case of SEBI vs. Cabot International Capital Corporation.
20. The High Court in Cabot International had upheld the order of the Tribunal with certain modifications. The High Court held that mens rea of the appellant required to be alleged and proved by the Adjudicating Officer was not necessary since the proceedings are civil in nature. The Division Bench has held that it depends on the facts of each case whether for violation of Regulation penalty is mandatory or not.
21. After exhaustively dealing with all the case laws, the High Court held that if the contravener never intended or consciously or deliberately avoided to comply with the obligations under the Regulation and that non-filing of the report to the target company was a technical and minor defect and the breach was based on a bona fide belief that all information was furnished, although it turned out to be inadequate, then no penalty is required to be imposed.
22. We, accordingly, hold that the first proviso of regulation 3(1)© of the Regulations has been complied with and the second proviso has not been fully complied with.
23. We, however, find that the defect was technical and minor and the breach was based on a bona fide belief that all information was submitted to the target company.
24. In the peculiar facts and circumstances of this case, following the judgment in Cabot International and for the reasons stated therein, the impugned order is set aside. The appeals are disposed of accordingly.
25. No order as to costs.
Sd/-
Justice Kumar Rajaratnam
Presiding Officer
Sd/- Sd/-
(R.N. Bhardwaj) (C. Bhattacharya)
Member Member
Place: Mumbai
Date: 5th December 2005
Avm