Order against Promoters Of RDB Industries - (Violation Of Disclosure Norms Under Regulation 6(3) & 8(2) Of Sast)

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO-28/2006-07]

 

 

In respect of

 

1.      RDB Industries Limited (hereinafter referred as 'RDB’ or Target Company ) is a company having its registered office at Bikaner Building 1^st Floor, 8/1,Lal Bazaar Street, Kolkata -700 001 was incorporated  on November 15,1991 as R.D.Builders & Developers Limited under the Companies Act , 1956 and received certificate for commencement of Business on December 18,1991. The name of the company was changed to RDB Industries Limited on August 19,1994. The equity shares of RDB are listed on the Bombay Stock Exchange and Calcutta Stock Exchange.

 

2.      Mr. Vinod Dugar and Mrs. Sheetal Dugar belonging to the promoter group of RDB (hereinafter referred as Acquirers or Promoters) acquired more than 26% of the issued and paid up share capital in Ankur Constructions Pvt Limited (hereinafter referred to as ACPL) and Loka Properties Pvt Limited (hereinafter referred to as LPPL) on April 28, 2006, the said companies held 3,75,000(5.91%) and 3,77,100(5.94%) equity shares respectively of Target Company. Subsequent to such acquisition, their shareholding in the Target Company rose from 17,10,353(26%) to 24,62,453 equity shares representing 38.78% of the paid up equity share capital of RDB .

 

3.      On April 28, 2006 the Board of Directors of RDB passed the special resolution under Section 81(1A) of the Companies Act, 1956 authorized preferential issue of 36,50,000 equity shares to promoters of RDB and other entities. On July 24, 2006, the Board of Directors of Target Company issued and allotted , on preferential basis 36,50,000 equity shares for cash, at a price of Rs.70/- per equity share which includes a premium of Rs. 60/- per equity share aggregating to Rs. 25,55,00,000 to promoters of RDB and other entities. Out of 36,50,000 equity shares, Mr. Vinod Dugar and Mrs. Sheetal Dugar, belonging to the promoter group of RDB were allotted 20,00,000 and 10,00,000 equity shares respectively. The equity share capital held by the promoters of RDB prior and subsequent to the preferential issue is as follows :

Category	Equity shares/Voting Rights(%) before Preferential Allotment	Equity shares/Voting Rights(%) after Preferential Allotment
Promoters	24,62,453(38.78)*	54,62,453(54.62)
Others	38,87,547(61.22)	45,37,547(45.38)
Total	63,50,000(100)	10,000,000(100)

*Includes the shareholding of Ankur Constructions Pvt Ltd and Loka Properties Pvt Ltd which hold 3,75,000(5.91%) and 3,77,100(5.94%) equity shares respectively of Target Company.

 

 

4.      Pursuant to the acquisition as mentioned at point 2 above and instant preferential allotment the acquirers belonging to the promoter group triggered the provisions as contained under Regulation 11(1) of SEBI (Substantial Acquisition of Shares and Takeovers Regulations), 1997{hereinafter referred to as ‘SAST’} thereby obligating them to make a Public Announcement (hereinafter referred to as ‘PA’} under Regulation 11(1) read with Regulation 14(1) of SAST to acquire minimum 20% of the voting capital of RDB in terms of Regulation 21(1) of SAST. Subsequently, on May 05, 2006 Microsec Capital Limited, the Merchant Banker to the open offer (hereinafter referred to as MB) on behalf of Mr. Vinod Dugar and Mrs. Sheetal Dugar(Acquirers) and Ankur Constructions Pvt Limited and Loka Properties Pvt Limited(Persons Acting in Concert) made the Public Announcement to acquire 20,00,000 shares, representing 20% of the expanded paid up equity share capital of RDB. In terms of Regulation 18 of SAST the MB filed the draft Letter of Offer (LoO) on May 17, 2006 with SEBI for comments, if any. Subsequently, the MB vide letter dated June 1, 2006 filed with SEBI the compliance status of Chapter II under SAST Regulations which included the compliance status of the promoters of RDB under Regulations 6 (3) and 8 (2) of SAST Regulations. From the perusal of the said status it is observed that there were delays in complying with the provisions of Regulations 6 (3) and 8 (2) of SAST Regulations. A table depicting the delays is  specifically noted as under:

 

Sl. No.	Regulation/Sub-regulations	Due Date for Compliance as mentioned in the Regulation	Actual date of compliance	Delay, if any (in no. of days) Col.4-Col.3
1	2	3	4	5
1	6 (3)	20-Apr-97	26-Mar-03	2,166
2	8(2)	21-Apr-98	26-Mar-03	1,800
3	8(2)	21-Apr-99	26-Mar-03	1,435
4	8(2)	21-Apr-00	26-Mar-03	1,069
5	8(2)	21-Apr-01	26-Mar-03	704
6	8(2)	21-Apr-02	26-Mar-03	339

 

5.      The relevant extract of the provisions of Regulations 6(3) and 8 (2) of SAST is reproduced as under-

 

Transitional provisions

 

6.  (1) …

 (2)….

(3) A promoter or any person having control over a company shall within two months of notification of these regulations disclose the number and percentage of shares or voting rights held by him and by person(s) acting in concert with him in that company, to the company.

 

 

Continual disclosures.

 

1. (1) … …

 

(2) A promoter or every person having control over a company shall, within 21 days from the financial year ending March 31, as well as the record date of the company of the purposes of declaration of dividend, disclose the number and percentage of shares or voting rights held by him and by persons acting in concert with him, in that company to the company."

 

6.      Accordingly, the undersigned was appointed as Adjudicating Officer under Section 15 I of SEBI Act, 1992, read with Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') vide SEBI order dated August 17, 2006 to inquire into and adjudge under 15 A (b) of the SEBI Act, 1992, the aforesaid alleged violation made by the following promoters of RDB.

 

 

7.      The Show Cause Notice (hereinafter referred to as SCN) dated November 27, 2006 were issued to above noticees, under Rule 4(1) of Adjudication Rules, 1995.

 

8.      At the outset it may be noted that Noticee No. 1 vide his letter dated January 19, 2007 communicated that Noticee No. 3 and Noticee No. 4 are no more and have also enclosed the copies of the death certificates of the respective Noticees. In light of which, proceedings against the deceased are abated. In common reply to the aforesaid SCN, Noticee No. 1(authorized by other Noticees) vide letter dated December 26, 2006 submitted that all the noticees are promoters of RDB and have always been in control. The alleged violations were not intentional and are at the highest technical, procedural and venial breaches have not caused any adverse consequences to anybody. On becoming aware of the alleged violations , all the requisite disclosures were made by the Target Company under Regulation 6(2) and Regulation 8(3), albeit belatedly, on March 31, 2003 under the SEBI Regularization Scheme, 2002 and the Target Company paid a penalty of Rs. 80000/- . Therefore, it would not be fair in any case to impose a further penalty on us and the notice be discharged.

 

9.      In the above circumstances the undersigned was of the opinion that an inquiry should be held in the matter and accordingly notice of inquiry dated January 15, 2007 was issued to the respective Noticees, fixing the date for inquiry for February 2, 2007. Shri. Vinay Chauhan, Partner Corporate Law Chambers India representing the noticees, appeared before me for the inquiry and reiterated the submissions earlier made by Noticee No. 1 in their common reply dated December 26, 2006.  Further, they also wished to file additional submissions/documents for which time was granted till February 9, 2007.

 

10.  At the outset I take note and state that the promoters contention of not imposing a further penalty for the instant non compliances on the ground that the Target Company had made all the requisite disclosures under Regulation 6(2) and Regulation 8(3), albeit belatedly, on March 31, 2003 under the SEBI Regularization Scheme, 2002 and paid a penalty of Rs. 80000/- does not seems to be a valid contention having merit primarily because of the delayed compliances which the Target Company got regularized by participating in the SEBI Regularization Scheme, 2002 i.e Regulation 6(2) and 6(4) for the year 1997 and Regulation 8(3) for 1997 -2002 , were compliances whose onus of complying rested with the Target Company and not with the promoters. And secondly that the amount paid by the Target Company for getting the aforementioned past non-compliances regularized does not tantamount to be called as penalty (as no Adjudicating Officer was appointed), instead it was a lump sum amount specified therein in the “Scheme”. Further, it would be worth noting here that the promoters, if they desired, could also have taken advantage of the said scheme and got the non-compliances of  Regulations 6 (3) and 8 (2) of SAST Regulations regularized and comply with the law of the land. However, the advantage of such one time opportunity was not availed by the promoters of RDB even though of being aware of the non-compliances.

 

TAKEOVERS: SUBSTANCE AND REGULATORY SUPERVISION

11.  Takeovers significantly influences growth of the corporate sector and otherwise which in turn is one of the major contributors to the wealth of the economy as a whole, moreso in the liberalized set-up with free movement of capital. However, it is always in the better interest of the stakeholders if such acquisitions are coupled with the twin motives of rational allocation and optimal utilisation of resources. It would serve the economy as well as the stakeholders better if this rational allocation and optimal utilization of resources takes place within the orderly framework of regulations and that such a framework should be one which comports with principles of fairness, transparency and equity, and above all with the need to protect the rights of the shareholders. I have carefully considered the submissions put forth by the Noticees and all the other materials on record. Given the facts of this case it is important to have clarity on the objectives of SAST Regulations. Section 11(2) (h) of the SEBI Act, 1992 empowers SEBI to regulate substantial acquisition of shares and takeover of companies, even though these activities are in the realm of corporate domain. This was done with the specific objective of protecting the interest of the minority shareholders especially the small retail investors. Small retail investors are typically scattered, do not have a unified common voice to protect their interest, especially when there is a change in control or management etc. To address these issues, the SAST Regulation 1994 was promulgated (subsequently replaced by the 1997 Regulations); its cardinal principles being 1) Equality of treatment and opportunity to all shareholders, 2) protection of minority interest and 3) transparency and fairness. The aforesaid are sought to be achieved through well defined process of disclosure and opportunity for exit. Therefore, the defaults in the instance matter, though undisputed and at the same time agreed upon by the Noticees, needs to be viewed in the aforesaid context.

 

12.  Chapter II of SAST provides provision pertaining to continuous disclosures to and by corporations.  Regulation 6(3) required promoter or any person having control over a company to disclose the number and percentage of shares or voting rights of the company held by him and by persons acting in concert with him to the company within two months of notification of SAST Regulations. Further, Regulation 8(2) deals with yearly disclosures of number and percentages of shares/voting rights, required to be made to the company by the person/s who

                    I.      Is a promoter(in addition to persons acting in concert) or every person having control over a company

                 II.      Within 21 days from the financial year ending March 31, as well as the record date for dividend declaration.

 

13.  It may be important to note here that the aforesaid disclosures have to be made to the company. These disclosures basically act as facilitator with regard to further compliances made by the companies to the Stock Exchanges where the shares of the company are listed. In light of which we can logically deduce that disclosure by promoters under Regulation 6(3) facilitates compliances to be made by the company under Regulation 6(4) of SAST. Further, disclosure by promoters under Regulation 8(2) facilitates compliance to be made by the company under Regulation 8(3) of SAST. Keeping this in mind, disclosure of information under Regulation 8(3) to the stock exchange enables wider dissemination of information to the investors and the general public, which in turn enables them to reformulate their perception about the prospects of the company and take informed decisions. Primarily because the shares held in a listed company by its promoter / person in control of a company, is an important reflection of his perception about the company’s growth prospects, etc which in turn is incorporated in decision making process of minority shareholders while making their investment decisions. Therefore, though non- compliance under Regulation 6(3) and 8(2) might be viewed stringently, but if the succeeding compliances under Regulation 6(4) and 8(3) have been done on time , then non –compliance of Regulation 6(3) and 8(2) may be liberally treated. Primarily, such a perception on my part is moreso induced because compliance of  disclosure requirements which help in dissemination of information in terms of Regulation 6(4) and 8(3) is important to the investors and at the same time encompasses and fulfills the intent with which the whole takeover process is designed. I feel the aforestated is the ideal and the inherent spirit of SAST, by which all the concered should be governed, however in the instant matter the action of the promoters was not in the true spirit which governs SAST.

 

14.  In the instant matter it may be noted that the promoters have admitted the default as alleged. It is also noted that the Target Company had participated in the SEBI Regularization Scheme, 2002 and have made all the requisite disclosures in terms of Regulation 6(2) and 6(4) for the year 1997 and Regulation 8(3) for 1997-2002, albeit belatedly, on March 31, 2003 and paid Rs. 80000/-. The said disclosures which were regularized by the Target Company should ideally contain information as provided by the promoters under Regulation 6(3) and Regulation 8(2), but in the instant matter it would be prudent to note that the former disclosures made in the scheme by the Target Company were itself delayed and hence does not absolve the onus on part of the promoters from complying with relevant disclosure requirements.  Therefore, the instant matter does merits a penalty which might act as an indicator for all concerned to adhere to provisions of disclosure requirements contained in SAST.

 

15.  The violation of Regulation 6(3) for the year 1997 & Regulation 8(2) for the years 1998 till 2002 of SAST, will attract penalty under Section 15 A (b) of SEBI Act, 1992 which reads as under:

 

Penalty for failure to furnish information, return, etc.

 

15A. If any person, who is required under this Act or any rules or regulations made thereunder,-

 

(b)    to file any return or furnish any information, books or other documents within the time specified therefore in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to a penalty not exceeding five thousand rupees for every day during which such failure continues.

 

16.  I also observe that disproportionate gain, unfair advantage, etc. are not sine quo none for imposing a penalty when the statutory obligations contemplated in the SEBI Act and the regulations made thereunder are contravened. The Hon’ble Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual Fund [2006] 68SCL216(SC) has held that once the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant. Further in the matter of SAT Appeal No. 66 of 2003 Milan Mahendra Securities Pvt. Ltd. Versus Securities & Exchange Board of India, SAT has also observed, “the purpose of these disclosures is to bring about transparency in the transactions and assist the Regulator to effectively monitor the transactions in the market. We cannot therefore subscribe to the view that the violation was technical in nature”. At the same time I am duty bound to examine the factors given under Section 15J of the SEBI Act, 1992, for adjudging quantum of penalty under section 15I. The Hon’ble Supreme Court(cited above) has not curtailed or taken away the effect of guiding factors which an adjudicating officer has to take into account while arriving at a figure of penalty.  To determine the quantum of penalty under Section 15A (b), the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz.(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 and; (c) the repetitive nature of the default. The amount of unfair gain to promoters of RDB by the aforesaid non-compliance or loss caused to the investors as a result of the default is not computable from the material available on records. However, I note that the nature of default is repetitive and involves substantial delays, as already discussed. I understand that, under the SEBI Consent Order Scheme a penalty of Rs. 25,000 per default has been proposed by SEBI for the similar previous disclosure violations. In the circumstances, I am of the view that twice the penalty under the scheme would be appropriate in the instant case. In other words, the penalty amount would be Rs. 50,000 for every default and therefore the adjudication penalty is worked out as under :

 

Sl. No.	Regulation/Sub-regulations Violated	Due Date for Compliance as mentioned in the Regulation	Actual date of compliance	Amount of Penalty(in Rs.)
1	6 (3)	20-Apr-97	26-Mar-03	50,000
2	8(2)	21-Apr-98	26-Mar-03	50,000
3	8(2)	21-Apr-99	26-Mar-03	50,000
4	8(2)	21-Apr-00	26-Mar-03	50,000
5	8(2)	21-Apr-01	26-Mar-03	50,000
6	8(2)	21-Apr-02	26-Mar-03	50,000
			Total =	3,00,000

 

17. In view of the above, I hereby impose a consolidated adjudication penalty of Rs. 3,00,000 (Rupees Three lakh only) on the promoters/Noticees of RDB (excluding the deceased namely Mr. Moti Lal Dugar and Mrs. Suraj Devi Dugar) for the aforesaid violation. The Noticees are liable to pay penalty jointly and in case of default, the Noticees shall be liable severally.

 

18.  The promoters of RDB shall pay the said amount of penalty by way of demand draft in favour of “SEBI- Penalties Remittable to Government of India”, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to, Shri S V M D Rao, General Manager, Division of Corporate Restructuring, Securities and Exchange Board of India, SEBI Bhavan, Plot No. C4-A, “G” Block, Bandra Kurla Complex, Bandra (East), Mumbai–400 051.

 

19.  This order of adjudication is made and passed on 22^nd day of February, of 2007 at Mumbai.

 

                                                                                                                                              AMIT PRADHAN

ADJUDICATING OFFICER