Order against Promoters Of RDB Industries - (Violation Of Regulation 11(1) Of Sast)

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO-29/2006-07]

 

 

In respect of

Acquisition of shares of and

 

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 (hereinafter referred to as ‘BSE’) and Calcutta Stock Exchange (hereinafter referred to as ‘CSE’).

 

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, acquirers, 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. It was observed from the LoO, that the disclosure pertaining to change in the shareholding pattern of the promoters in the Target Company was not in conformity to the stipulations as provided in the Standard Letter of Offer of SEBI. MB was communicated to submit the details of the same and on examination of the details submitted it was prima-facie observed that the shareholding of the promoters alongwith Person Acting in Concert (hereinafter referred to as ‘PAC’) have increased surpassing the provisions as contained under Regulation 11(1) of SAST. Therefore, it was deemed fit to further examine the matter. Subsequently, MB vide letters dated June 10 and 26, 2006 submitted the details of acquisitions of the shares/voting rights of RDB by the promoters of RDB. It was observed from the details submitted that within the period 1999 – 2003, the promoters along with PAC’s of RDB had acquired shares/voting rights of RDB which violated the stipulations (as applicable on dates of Trigger) as provided under Regulation 11(1) of SAST and thereby triggered Regulation 11(1) of SAST obligating the promoters alongwith PAC’s to make a PA under Regulation 11(1) read with Regulation 14(1) of SAST within four working days of acquisition of such shares/voting rights of RDB. However, such PA was never made by the Promoters and PAC thereby making them liable for penalty under Section 15H(ii) of SEBI Act, 1992. The relevant extract of the provisions of Regulations 11(1) is as under :

No acquirer who, together with persons acting in concert with him, has acquired, in accordance with the provisions of law, 15 per cent or more but less than fifty five per cent.(55%) of the shares or voting rights in a company, shall acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him to exercise more than 5% of the voting rights, in any financial year ending on 31st March, unless such acquirer makes a public announcement to acquire shares in accordance with the Regulations.

 

5.      The provisions highlighted in bold in the aforesaid reproduced Regulation have been amended quite a few times from the date of SAST coming on force. Therefore, as the instant matter relates to prior period violations , it will be prudent to note down the applicable stipulations as prescribed under Regulation 11(1) of SAST as on the respective dates of acquisition of shares/voting rights. Such an exercise would be advantageous for correlating the observed breach on various dates, with the applicable stipulations as on the respective dates of breach. The said stipulations as on respective dates are as under :

Reference Date	Creeping Acquisition Limit(%)	Reference Date for Creeping Acquisition
20-02-1997 to 27-10-1998	2%	“In any period of 12 Months”
28-10-1998 to 23-10-2001	5%
24-10-2001 to  08-09-2002	10%
09-09-2002 onwards	5%	“In any Financial year ending on 31 March “

 

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 15H (ii) of the SEBI Act, 1992, the aforesaid alleged violation by the below mentioned promoters/acquirers and PACs (hereinafter referred to as ‘Noticees’):

 

 

7.      Show Cause Notices (hereinafter referred to as “SCN”) dated November 22, 2006 were issued to the aforementioned noticees under Rule 4(1) of Adjudication Rules, communicating the charges. The SCN alleged that noticees (promoters/acquirers and PACs) acquired shares/voting rights on March 3, 1999,March 24,1999, August 12, 2002 and march 28,2003 respectively of RDB which violated the stipulations (as applicable on dates of Trigger) as provided under Regulation 11(1) of SAST and thereby triggered Regulation 11(1) of SAST obligating the promoters alongwith PAC’s to make a PA under Regulation 11(1) read with Regulation 14(1) of SAST within 4 working days of acquisition of such shares/voting rights. However, such PA was never made by the Promoters alongwith PAC’s. Therefore, in light of which the noticees were advised to show cause as to why an inquiry should not be held against them in terms of Rule 4(3) of the captioned Rules and penalty be not imposed. The noticees were granted 2 weeks time from the date of receipt of SCN to submit the reply to the notice.

 

8.      At the outset it may be noted that Noticee No. 1 vide his letter dated December 11, 2006 communicated that Noticee No. 3 and Noticee No. 4 are no more and have subsequently also enclosed the copies of the death certificates of the respective Noticees. In light of which, proceedings against the deceased are abated. Further, in reply to the aforesaid SCN, the Noticees vide their respective letters dated December 11, 2006 sought extension of two weeks time to submit their reply claiming that the alleged violations pertained to earlier period, for which old records were not readily available. Noticee No. 1(authorized by other Noticees) vide letter dated December 26, 2006 submitted that  that all the Noticees are promoters of RDB and have always been in control of the Target Company by virtue of our shareholding and also by virtue of our representation on the Board of the Target Company. The shares of the Target Company were listed on BSE and CSE. The shares of the Target Company were infrequently traded as a result of poor operations of the company. The Target Company made losses in the year 1997 onwards right upto financial year ended 31 March, 2002. Shareholders were panicked and desperately wanted to off load the shares of the Target Company. In order to provide exit option to the shareholders who wanted to dispose of their shares, the promoters purchased shares as and when the shareholders intented. It is also submitted that Pursuant to the special resolution passed by the shareholders of the Target Company under Section 81(1A) of the Companies Act, 1956 at the extra Ordinary General Meeting held on May 26, 2006, the Board of Directors of the Target Company issued and allotted , on preferential basis 30,00,000. As a result of preferential allotment the shareholding of the Acquirers/Promoter Group increased from 38.78% to 54.62% shares/voting rights in the Target Company. Subsequently, an open offer was made to the shareholders of RDB to acquire 20% shares of RDB. I also observed that , it is submitted by the Noticees that, even if it is assumed that Acquirer/Promoter Group had breached provisions of Takeover Regulations on the dates as alleged in the SCN, resulting in triggering of open offer, then also directing the promoter/acquirer group to make open offer taking the said dates as relevant dates, would not be in the interests of the shareholders of the Target Company since the price at which the instant open offer has been announced is around four times the price calculated as per provisions of SAST.

 

9.      I also observe that the Noticees have admitted of having violated provisions of Regulation 11(1) of SAST subsequent to acquisition of 5.18% shares/voting rights on March 3, 1999 of RDB. However, with regard to (1) acquisition of 2,40,000 shares/voting rights on March 24,1999 constituting 3.78% of equity capital of Target Company, (2) acquisition of 25,100 shares/voting rights on August 12, 2002 constituting 0.40% of equity capital of Target Company and (3) acquisition of 1,21,000 shares/voting rights on March 28, 2003 constituting 1.91% of equity capital of Target Company, the noticees maintain that they have not violated the provisions of Regulation 11(1) of SAST as the acquisition were below 5% of the total equity paid –up capital of RDB. It is also submitted that the alleged violations were not intentional and are at the highest technical, procedural and venial breaches have not caused any adverse consequences to anybody.

 

10.  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 noticees, fixing the date for inquiry on 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.

11.  In the written submission filed subsequent to the hearing, the Noticees have mainly relied to submissions already made earlier vide Noticee 1 letter dated December 26, 2006. In addition, they have also submitted that Securities and Appellate Tribunal dated November 17, 2004 in Appeal No. 138/2004 (Contact Consultancy Services Ltd Vs SEBI) has held that no ends of justice will be met if action is taken either to make a public offer or to impose a penalty but not both. In this context I am consciously aware of the cited matter, however, I feel that the parity of reasoning is neither warranted nor justified in the instant matter , moreso because in the instant matter the acquirers /promoter group of RDB were obligated 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 pursuant to the preferential allotment. Therefore, making of the instant open offer does not absolves the promoters from their obligation of making a PA on the earlier respective dates of violations which triggered the provisions of Regulation 11(1) of SAST. Therefore, their plea that the interests of public shareholders have already been taken care of by providing them an opportunity to exit has no merit as the instant adjudication proceedings against the promoters are directed towards previous violations of the promoters and the present open offer does not have any bearing on the past year violations committed by the promoters.

 

12.  I have carefully considered the submissions put forth by the noticees and from the material on record, the following in tabular format are the details of acquisition of shares/voting rights by the promoters pursuant to which the provisions of Regulation 11(1) of SAST were triggered.

 

Sr. No.	Noticee	Date of Acquisition	No. of Shares/Voting rights Acquired	Acquisition as % of total paid up equity capital of RDB	Shareholding of Promoter(Group) / Acquirer before Acquisition.	Shareholding of Promoter(Group)/ Acquirer after Acquisition.
1	M/s Khatod Investment & Fin Co. Ltd	03-03-1999	3,29,000	5.18	46.74%	54.62%
2	M/s Khatod Investment & Fin Co. Ltd	24-03-1999	2,40,000	3.78	54.62%	61.74%
3	Ms. Rekha Jhabak	12-08-2002	25,100	0.40	29.08%	34.42%
4	Rekha Benefit Trust	28-03-2003	1,21,000	1.91	33.32%	40.47%

 

13.  To sum up the findings, at the outset it is observed that the promoter group held more than 15% of total paid–up equity capital of Target Company. Thereby, as per the provisions of Regulation 11(1) of SAST, the promoters/acquirer were mandated to make a PA in terms of SAST if they acquire share/voting rights in excess of 5%/10%(as applicable on the date of acquisition) in any period of 12 Months from the date of acquisition/In any Financial year ending on 31 March (as applicable on the date of acquisition) without making a PA. On a careful observation of the aforementioned shareholding pattern of the promoter group read with para 5 of the instant order it is evident that barring the acquisition of Ms. Rekha Jhabak, all the other three acquisitions surpassed the threshold limit (as applicable) stipulated under Regulation 11(1) of SAST, thereby obligating the acquirers/promoters to make a mandatory open offer so as to provide exit opportunity to the shareholders of RDB. It may be noted that M/s Khatod Investment & Fin Co. Ltd acquired 3,29,000 shares/voting rights on 03-03-1999 representing 5.18% of the total paid-up equity capital of RDB. Subsequently, they breached the provisions of Regulation 11(1), primarily because they acquired more than 5% shares/voting rights in the same period of 12 months preceeding the date of acquisition , which they could have acquired only by making a PA in terms of Regulation 11(1). Similarly, again on 24.03.1999, they acquired 2,40,000 shares/voting rights representing 3.78% of the total paid–up equity capital of RDB. I observe that though this very acquisition is less than 5%, but in the same period of 12 months preceeding the date of acquisition, because of the instant acquisition the promoters surpassed the limit of 5% stipulated under Regulation 11(1) of SAST i.e their shareholding rose from 54.62% to 61.74%. Hence such acquisition also could have been possible only subsequent to a PA in terms of Regulation11 (1). Further, Rekha Benefit Trust acquired 1,21,000 shares/voting rights on 28-03-2003 representing 1.91% of the total paid-up equity capital of RDB. I observe that though this very acquisition is less than 5% but in any Financial year ending on 31 March preceeding the date of acquisition, because of the instant acquisition, the promoter  surpassed the limit of 5% stipulated under Regulation 11(1) of SAST i.e their shareholding rose from 33.32% to 40.47%. Subsequently, they breached the provisions of Regulation 11(1), which they could have acquired only by making a PA in terms of Regulation 11(1). By acquiring shares/voting rights in breach of stipulations provided under Regulation 11(1) of SAST the promoters have violated a cardinal principle of SAST regulations, namely, “Equality of treatment and opportunity to all shareholders”. By giving an exit opportunity to a select group of shareholders, the acquirers have discriminated against the interest of the remaining shareholders, who did not get the exit opportunity. It is also quite possible that acquirers/promoters acquired shares from shareholders who were probably close to them, and hence they got the exit opportunity. SAST regulation precisely attempts to prevent such discriminative treatment of any class of shareholder. Further, had the respective open offers been made by the acquirers/promoters in accordance with SAST at that relevant time, the shareholders would have got exit option at Rs. 5.10 and Rs. 13.04 respectively. The promoters have themselves submitted that the shares of the Target Company were infrequently traded as on the respective dates when the acquisitions were made, given this fact, there was all the more need to grant an exit option to all shareholders of RDB.

 

14.  Thus the violation is established, which attracts penalty under Section 15H (ii) of SEBI Act, 1992 which reads as under:

 

"Penalty for non-disclosure of acquisition of shares and takeovers  

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

 

(i.) ………..

 

(ii) make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakh rupees."

 

The penalty under the said section was amended vide SEBI(Amendment) Act, 2002 w.e.f 29.10.2002. It would be applicable in respect of acquisition made on 28.03.2003 Pursuant to such amendment Section 15H (ii) of SEBI Act, 1992 which reads as under:

 

"Penalty for non-disclosure of acquisition of shares and takeovers

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

 

(i.) ………..

 

(ii) make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty of twenty five crore rupees or three times the amount of profits made out of such practices whichever is higher"

 

15.   To determine the quantum of penalty under Section 15H (ii), 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 unfair gain to the promoters/acquirers as a result of the default can be computed by working out the quantum of outflow in terms of consideration payable had the acquirers/promoter made the open offer in terms of Regulation 21(1) of SAST Regulation taking the respective dates of Acquisition of shares/voting rights as the reference dates. Accordingly the cumulative notional value of default of the promoters/acquirers can be worked out by multiplying the price per share that would have been paid by the promoters at that relevant period with the minimum number of shares which would have been acquired by the promoters in terms of Regulation 21(1) of SAST. The said computation of amount involved as a result of defaults works out to be Rs. 29514800. The working of the same is depicted in tabular format as under :

 

S.No	Violation Date  (Trigger Date)	Price Per Share (3)	Shares to be  Acquired through PA* (4)	Amount of Default (3) * (4)
1	03-03-1999	5.10	1270000	6477000
2	24-03-1999	5.10	1270000	6477000
3	28-03-2003	13.04	1270000	16560800
			Total Amount	29514800

*Shares Acquired would have been in terms of Regulation 21(1) of SAST. Accordingly, the value would be arrived as 20% of total voting capital of RDB. Total voting capital of RDB on the respective dates of violation was 63,50,000. Therefore 20% of 63,50,000 amounts to 1270000.

 

 

16.  It is observed from the aforesaid that violation at serial no. 1& 2 have been made in the same financial year, identical in terms of amount of default involved and severity of violation. However violation at serial no.3 is entirely at a different footing and merits to be viewed sternly. The basis to perceive violation at serial no. 3 at a different footing  arises from the following factors; Firstly, it tantamount to be repetitive in nature, which is one of the parameters under section 15J of SEBI Act, 1992 which has to be borne in mind while adjudging quantum of penalty in the matter. Secondly, the said violation corresponds to the period in which the penalty amount under section 15H(ii) was amended and subsequently enhanced which read as “ he shall be liable to a penalty not exceeding five lakh rupees”  to “he shall be liable to a penalty of twenty five crore rupees or three times the amount of profits made out of such practices whichever is higher”. Thirdly, on a close scrutiny of the observed variance in the price of share between violation 2 & violation 3, it may be noted that the price has risen approximately 2 times. Which in turn would have been a golden opportunity for the public shareholders to decide with regard to exiting the company mainly on account of handsome returns and secondly on account of further investment of their liquid asset which they would have earned , if they exited. Therefore, violation at serial no.3 signifies a larger and very severe opportunity loss on part of the public shareholders.

 

17.   However, it merits to be mentioned here that the promoters have been a part of the company in times of distress and prosperity, they have not exited the company and have further infused funds in the company for its revival. The same is evident from the performance of the company over a period of time. It is observed that the amount involved as a result of default is Rs. 2.95 crore. Therefore, taking into consideration aforesaid facts and repetitive nature of violation of Regulation 11(1), I feel appropriate to impose Adjudication penalty of Rs. 5 Lakhs each for the two respective violations in the year 1999 and on account of the enhanced penalty subsequent to the amendment of section 15H(ii) w.e.f 29.10.2002, a penalty of Rs. 10Lakhs would be appropriate for the violation in 2003. Therefore, I restrict myself to a consolidated penalty of Rs. 20,00,000( Rupees Twenty Lakhs) in terms of section 15H (ii) of SEBI Act, 1992, It may be emphasized here that the default of not making public announcement was by the promoters/acquirers (noticees) and therefore penalty is payable by them. It also needs to be emphasized that the instant open offer made in terms of SAST by Mr. Vinod Dugar and Mrs. Sheetal Dugar (Acquirers) and Ankur Constructions Pvt Limited and Loka Properties Pvt Limited (Persons Acting in Concert) to the shareholders of RDB is an obligatory open offer (not voluntary) and it does not absolve the promoters/acquirer from their past period default under Regulation 11(1) of SAST resulting in undue enrichment. Further, it has also come to notice during the inquiry that in the instant open offer, there were no shares tendered by the shareholders of the company, primarily because the market price of RDB’s share was in excess to the offer price announced.

 

18.  Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules and as discussed above, In view of the above, I hereby impose a consolidated adjudication penalty of Rs. 20,00,000 (Rupees Twenty Lakhs) on the promoters/Noticees of RDB as depicted below (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.

 

 

19.  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.

 

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

 

 

AMIT PRADHAN

ADJUDICATING OFFICER