Order in the matter of acquisition of Equity Shares of Kothari Fermentation and Biochem Limited

WTM/ 621 /CFD/ 12 /2006

 

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA 

CORAM: Dr. T.C. NAIR

 

ORDER

 

1.0 Background

1.1 M/s. Kothari Fermentation and Biochem Limited (hereinafter referred to as “the target company”) is a company limited by shares incorporated under the Companies Act, 1956, having its registered office at No. 16, Community Centre, First Floor, Saket, New Delhi – 110 017. The equity shares of the target company are listed on the Bombay Stock Exchange Limited (BSE), Delhi Stock Exchange Association Limited (DSE), Calcutta Stock Exchange (CSE), Jaipur Stock Exchange (JSE) and Guwahati Stock Exchange (GSE). The target company has applied for delisting of its shares listed on the CSE, JSE and GSE. The delisting letters are awaited. The target company has been declared sick under section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as ‘SICA’) by the Board for Industrial and Financial Reconstruction (BIFR).

1.2 M. L. Kothari, Pramod Kothari, Motilal Kothari (HUF), Pramod Kothari (HUF) and Kavita Kothari (hereinafter referred to as “the acquirers”) are the promotes of the target company and along with the promoters and persons acting in concert, hold 42.48% of the total equity capital of the target company.

2.0 Application seeking exemption

2.1 The acquirers have, vide letter dated May 2, 2006, filed an application with the Securities and Exchange Board of India (SEBI) under regulation 4(2), read with regulation 3(1)(l) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as “the Takeover Regulations”).

2.2 In the application, the acquirers have submitted, inter alia, the following:-

2.2.1 The acquirers, along with other promoters and persons acting in concert, are already in control of the target company. The acquisition is for the purpose of bringing funds in the target company for repayment of bank loans.

2.2.2 The acquisition would be done by way of allotment of 16,95,000 preferential share warrants convertible into one equity share for each warrant, within 18 months of the allotment of warrants. The acquisition price would be minimum Rs. 12.72 per share at the time of conversion of share warrants into equity shares. The acquirers would bring minimum 10% of the price at the time of allotment of share warrants.

2.2.3        The acquirers propose to acquire 21.76% of the post-acquisition equity shares/ voting rights of the target company. Pursuant to the acquisition, the shareholding of the acquirers, along with the persons acting in concert, would increase from 42.48% to 54.99% of the total equity capital of the target company. The shareholding pattern of the target company, pre and post-acquisition is as under:

 

Shareholders’ category	Number of registered shareholders as on date of application	Before the proposed acquisition		After the proposed acquisition
		Number of shares/ total voting rights held	% of shares/ total voting capital held	Number of shares/ voting rights	% of shares/ voting rights
Promoter group/ Acquirers	17	25,88,800	42.48%	42,83,800	54.99%
FIs/ Banks	3	6,300	0.10%	6,300	0.08%
FIIs/ NRIs/ OCBs	5	12,200	0.20%	12,200	0.16%
Public	11,670	34,87,700	57.22%	34,87,700	44.77%
Total	11,695	60,95,000	100.00%	77,90,000	100.00%

 

3.0 Exemptions sought

3.1 The acquirers have made application to seek approval under Regulations 11(1) and 11(2) of the Takeover Code, to allot preferential share warrants to existing promoters so that promoters’ holding would be increased to 54.99% of the total paid capital after allotment. The share warrants would be convertible within 18 months from the date of warrants at the rate calculated as per Regulation 20(4) of the Takeover Regulations and/ or clause 13.1.1 of SEBI (Disclosure & Investor Protection) Guidelines, 2000 as on relevant date as may be applicable.

3.2 Further, the acquirers have stated that the present number of shareholders in the target company is 11,695 and therefore, postal ballot for passing a special resolution for the preferential allotment would involve huge costs and will pose a heavy financial burden, which due to the adverse financial position the target company will not be able to undertake. Therefore, considering the precarious financial position of the target company, the acquirers have sought waiver of the condition of passing the proposed special resolution through postal ballot.

4.0 Grounds for seeking exemption

4.1 The acquirer has, inter alia, made the following submissions: -

4.1.1 The acquirers are individuals and promoters of the target company. The acquirers, alongwith promoters and persons acting in concert, already hold 42.48% shareholding in the target company. All the acquirers are classified as “Promoter” in the disclosures made to stock exchanges under Clause 35 of the Listing Agreement and Regulation 8(3) of Takeover Regulations.

4.1.2 The acquirers, who are also the promoters, are willing to infuse their own funds in order to repay the Bank loans.

4.1.3 The target company is declared a sick company by BIFR. The net worth of the target company is negative and there are heavy accumulated financial losses amounting to Rs. 10.52 crores. The promoters are interested in revival of the target company.

4.1.4 The allotment shall not in anyway prejudice the interest of any shareholder or creditors of the target company. On the contrary, non-allotment of the shares would result in failure of the target company to repay the Bank loan and revival of the target company. It would cause extreme financial burden on the target company and ultimately result to the creditors and shareholders of the target company.

4.1.5 The proposed preferential allotment would not result in change of the composition of the Board of Directors (BOD) of the target company as they along with the persons acting in concerts are already in control of the target company.

5.0 Further submissions

5.1  In the application dated May 2, 2006, the acquirers had stated that the allotment would be by way of allotment of 38,00,000 preferential share warrants convertible into one equity share against each warrant and that the acquirers propose to acquire 38.4% of equity shares/ voting rights, to the total subscribed and paid up capital/ total voting rights of the target company after increased paid up capital. The number of shares to be acquired by the acquirers has been revised vide letter dated May 11, 2006 to SEBI. In the said letter, the acquirers have informed that the proposed preferential allotment of 38,00,000 share warrants would have increased the promoters’ shareholding to 64.57%. Therefore, in order to comply with the provisions of Regulation 11(2) of the Takeover Code, the promoters propose to acquire 16,95,000 equity shares within 18 months. This would contain promoters’ shareholding below 55% after such acquisition. Further, the acquirers have forwarded the BIFR order and informed SEBI that the target company is in constant interaction with Bank and Financial Institution for One Time Settlement (OTS) of its loan accounts (NPA A/cs) and preferential allotment to promoters is required for repayment of loans, which would help in reviving the target company. The revival package would then be submitted by the target company to the BIFR.

5.2  The target company has, vide letter dated May 17 2006 to SEBI, forwarded a copy of the Notice sent to its shareholders for holding an Extra Ordinary General Meeting (EGM) on May 31, 2006, as per the provisions of SEBI (DIP) Guidelines, 2000 for allotment of convertible share warrants on preferential basis to the promoters. It has also forwarded vide letter dated June 1, 2006 to SEBI, the proceedings of the said EGM, along with certified true copies of the special resolutions passed at the EGM, including the resolution passed for allotment of convertible share warrants to the promoters.

5.3 The acquirers have, vide letter dated June 15, 2006, informed SEBI that inter alia the target company has submitted proposal to Allahabad Bank for OTS of their dues. The proposal is at the final stage of approval by the Bank’s board. The target company has proposed to pay the settled amount of loans within four quarters after sanction of the proposal. A sum of Rs. 218.65 lacs would be provided by the promoters through allotment of equity shares after conversion of share warrants and the balance would be met from internal sources and loans from associates. The target company has discussed the matter of submitting revival package with the operating agency and it has been suggested that the revival package would be submitted to BIFR after getting sanction from Allahabad Bank, by incorporating the terms of settlement in the revival package.

6.0 Recommendation of the Takeover Panel

6.1 The aforesaid application dated May 2, 2006 was forwarded by SEBI to the Takeover Panel in terms of Regulation 4(4) of the Takeover Regulations. In its report dated June 27, 2006, the Takeover Panel has considered the application and the documents and has found that since the matter is before the BIFR which has declared the company sick under 3(1)(o) of SICA and revival package is to be submitted to the operating agency, at this stage the case is not required to be considered by this Committee.

7.0 PERSONAL HEARING

7.1 An opportunity of personal hearing was  given to the acquirers on August 3, 2006 at 3.00 p.m. vide letter dated July 19, 2006 for making submissions  before the Whole Time Member. However the acquirers, vide their letter dated August 2, 2006,  sought adjournment for a next date, citing unavoidable circumstances. Acceding to the request of the acquirers for adjournment, the hearing was rescheduled on September 4, 2006 at 3.00 p.m. vide letter  dated August 3, 2006. However, adjournment was again sought by the acquirers vide their letter dated September 2, 2006 stating that Shri Motilal Kothari, acquirer had to appear in a court case in Guwahati on September 5, 2006 and therefore sought adjournment for personal hearing. A final opportunity of hearing was granted to Shri Motilal Kothari on October 9, 2006 at 2.30 p.m. vide letter dated September 12, 2006 with an advise that they have been granted a final date of personal hearing on the aforesaid date and that no further extension would be granted. However neither there was any communication from the acquirer nor did they attend the hearing on the said date.

 

8.0 Findings

8.1       I have carefully considered the application dated May 2, 2006, the submissions of the acquirers, the recommendations of the Takeover Panel and the relevant material available on record.

8.2 I have noted that the target company has been declared as a sick company by the BIFR. The net worth of the target company is negative and the target company has incurred heavy accumulated financial losses amounting to Rs. 10.52 crores.

8.3 I find that the proposed preferential allotment would not result in change of the composition of the BOD of the target company, as they, along with the persons acting in concert, are already in control of the target company.

8.3 I have further noted the acquirers’ submissions that the promoters of the target company are interested in the revival of the company. This is evident from their submissions that they, being also the promoters, are willing to infuse their own funds in order to repay the Bank loans of the target company.

8.4 However,  I find that inspite of giving enough opportunities to the acquirers in appearing before me for a personal hearing in the matter, none of the acquirers have taken advantage of this opportunity in person or through their legal representatives. I am therefore doubtful of the acquirers’ initiative and interest in pursuing the process of revival of the target company.

8.5 I have noted that the Takeover Panel has stated that the application of exemption is not required to be considered by it at this stage when the matter is before the BIFR which has declared the company sick under 3(1)(o) of SICA and the revival package for the target company is yet to be submitted to the operating agency. I entirely agree with the Report of the Takeover Panel in this regard.

8.6 In view of the above, taking into account all the mitigating facts and circumstances as mentioned above, in my view, under the facts and circumstances of the present case, considering the application of the acquirers for grant of exemption may not be desirable.

7.0 Order

7.1  In view of the above findings, I, in exercise of the powers conferred upon me by virtue of section 19 of the Securities and Exchange Board of India Act, 1992, read with Regulation 4(6) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, dispose of  the application dated May 2, 2006 filed by M/s. Kothari Fermentation and Biochem Limited.

  

Place: Mumbai	T. C. NAIR
Dated: December 4, 2006	WHOLE TIME MEMBER
	SECURITIES AND EXCHANGE BOARD OF INDIA