ORDER
ORDER UNDER RULE 5(1) OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF FLEX INTERNATIONAL PVT. LTD.
1.0. The undersigned has been appointed as the Adjudicating Officer by the Securities and Exchange Board of India in terms of an order dated 30th August, 2004 to inquire into and adjudge under Section 15 H (ii) of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘the said Act’) the alleged contravention of Regulation 3(1)(c) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as ‘the said Regulations’) by Flex International Pvt. Ltd. and M/s. Apoorva Extrusions Pvt. Ltd. (hereinafter referred to as the acquires/ preferential allottees) in the matter of acquisition of shares of Flex Industries Ltd. (target company) on 02.06.03 as a result of conversion of warrants allotted through preferential allotment on 29.11.01.
2.0. Before I proceed to deal with the case, it would be pertinent to make a reference to the relevant provisions of the said Act/Regulations as then existed.
Regulation 3(1) Nothing contained in Regulations 10,11 and 12 of these Regulations shall apply to:
(c) 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% or more of the post issued capital, then in such cases, the price at which the allotment is proposed, the identity of such person(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;
Note: Omitted vide SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2002 dated 9th September, 2002.
3.0. Non-compliance of the above regulations attracted penalty prescribed under section 15H (ii) of the said Act which reads as under:
15H(ii). Penalty for non-disclosure of acquisition of shares and takeovers.
If any person, who is required under this Act or any rules or regulations made thereunder, fails to:
ii) make a public announcement to acquire shares at a minimum price
he shall be liable to a penalty of twenty five crores rupees or three times the amount of profits made out of such failure, whichever is higher.
3.1 After being so appointed as the Adjudicating Officer, as per the procedure laid down in SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as : “the SEBI Rules”), a notice in accordance with Rule 4 of the SEBI Rules was served on the acquirers vide letter no. Adj/32/RRB/2004-NRO dated September 24, 2004 to show cause, within 14 days as to why an enquiry should not be held against them for the alleged violation of Regulation 3(1) (c) for failure to submit the requisite report to SEBI within the time stipulated by the Regulations. The said notice provided the details of the provisions of law and the violations alleged to have been committed by them, also calling upon them to explain why the penalty for the abovesaid violations as prescribed in clause (ii) of Section 15H of the said Act should not be imposed upon them. They were also advised that if they desired a personal hearing they may indicate the same. A reply was received vide letter dated October 07, 2004 and a personal hearing was fixed for December 16, 2004. They were also intimated that they may appear for a hearing, either personally or through their lawyer or other authorized representative before the Adjudicating Officer at Block No.1, Rajendra Bhawan, Rajendra Place, New Delhi-110008. They were also advised that if they wished to produce any documents or evidence which they considered relevant to the enquiry they should bring the same with them on the said date of hearing. However, on the said date the Adjudicating Officer had to visit Mumbai office and the hearing was rescheduled for January 03, 2005.
3.2 On January 03, 2005 Shri Subhash Khatua, Executive Manager (Secretarial) along with Shri N. Sitaraman, Advisor duly authorized by the company made submissions on behalf of Flex International Pvt. Ltd. The submissions made by them vide their letter dated 7th October, 2004, letter dated 03.01.05 and during the hearing are given hereunder:
- The Target Company was a listed Company, inter-alia, with its shares presently listed on the Mumbai Stock Exchange and National Stock Exchange.
- The Acquirer Companies acquired more than the threshold limit of 15% envisaged in Regulation 10 of the Takeover Regulations in the Target Company.
- The collective shareholding of the Promoter Group increased by 14.28% which was more than the permissible annual creeping limit of acquisition of 5% specified in Regulation 11(1) of the Takeover Regulations.
- The proposal to issue 1,00,000 equity shares to Financial Institutions/ Mutual Funds and 1,00,00,000 warrants to promoters/associates on preferential basis under the negotiated settlement scheme as approved by the Financial Institutions was approved by the Board of Directors of the target company (i.e. Flex Industries Ltd.) at their meeting held on 21.02.01 and by the Members of the Company at their Extra-Ordinary General Meeting (EGM) held on 19.03.01. These were intimated to all the Stock Exchangers, where the Target Company’s shares were listed on 20.02.01 & 21.02.01 respectively. A copy of the notice convening the said EGM was also sent to the Stock Exchanges on that date i.e. 24.02.01.
- Since the Company could not act upon the approval within the requisite three months period from the date of approval as provided under SEBI guidelines, the proposal was again considered and approved by the Board of Directors at their meeting held on 31.07.01. The members of the Target Company approved the proposal once again at the Annual General Meeting held on 30.08.01. A copy of the intimation letter regarding holding of Board meeting on 31.07.01 to consider the proposal to take fresh consent from its members for issue of shares/warrants to Financial Institutions and Mutual Funds and Promoters & Associates respectively was sent to all the Stock Exchanges, where the Company’s equity shares were listed on 24.07.01 and subsequently intimation with regard to convening of the AGM was also sent on 31.07.01. Further, copies of the AGM notice and minutes were sent to all the Stock Exchanges, where the shares of the company were listed, on 06.08.01 and 27.09.01 respectively. Copies of the Notice(s) calling the aforesaid General Meetings were also enclosed.
- The target company had also disclosed the relevant details as required under SEBI guidelines in the explanatory statement(s) sent to its Members, which included number of shares and percentage of holding of Promoters and Associates before and after the proposed issue in the explanatory statement to the notices dated 21.02.01 and 31.07.01 convening the EGM and AGM respectively. The relevant portion of the same was reproduced, as given hereinbelow:
“After issue of Equity Shares on Preferential basis to Financial Institutions as aforesaid but before and after conversion of warrants into Equity Shares.”
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Category
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Before the conversion of warrants
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After the conversion of warrants
|
|
|
No. of shares
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%age
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No. of shares
|
%age
|
|
Equity Shares
-Promoters & Associates
- Financial Institutions
- Others
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12083827
10416806
16569904
|
30.9282
26.6615
42.4103
|
22083827
10416806
16569904
|
45.0043
21.2282
33.7675
|
- It was stated that the explanatory statements met with the requirements of the said para 13.1A of SEBI Guidelines.
- SEBI vide its Order dated 25.08.04 had accepted that the Target Company by sending necessary intimations to the Stock Exchanges along with relevant resolutions and notices and giving necessary details/information in the Explanatory Statements annexed to the Notices convening the General Meeting(s) had abided and made full disclosures in accordance with the guidelines for preferential issues contained in SEBI (Disclosure and Investor Protection) Guidelines, 2000 except that specific names of the allottees. It was also admitted that the issue of warrants had not resulted in any change in the Management control of the Company. The warrants were allotted on 29th November, 2001 as per the then existing provisions of regulation 3(1) (c ) of the Takeover Regulations. The preferential allotment of warrants had been made to the acquirers pursuant to the provisions of Section 81(1A) of the Companies Act, 1956.
§ Reliance was placed on the definition of ‘promoter’ as defined under the then SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, which is reproduced as under:
‘Promoter’ means –
(1) (i) the person or persons who are in the control of the company, or
(ii) person or persons named in any offer document as promoters;
(2) a relative of the promoter within the meaning of section 6 of the Companies Act, 1956 (1 of 1956); and
(3) in case of a corporate body,
(i) A subsidiary or holding company of that body; or
(ii) Any company in which the ‘Promoter’ holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter; or
(iii) Any corporate body in which a group of individuals or corporate bodies or combinations thereof who hold 20% or more of the equity capital of the ‘Promoter’; and
(4) in case of an individual –
(i) any company in which 10% or more the share capital is held by the ‘Promoter’ or a relative of the ‘Promoter’ or a firm or Hindu undivided family in which the ‘Promoter’ or his relative is a partner or coparcener or a combination thereof,
(ii) any company in which a company specified in (i) above, holds 10% or more of the share capital, or
(iii) Any HUF or firm in which the aggregate share of the Promoter and his relatives is equal to or more than 10% of the total;
It was submitted that promoters included person or persons, who are in control of the company and its associate group companies etc. Therefore, the company in the Explanatory Statement(s) had disclosed promoters as a whole, which includes the allottees of the aforesaid warrants at the time of allotment.
· Further, it was submitted that there was no loss caused to an investor or group of investors for the non-disclosure of specific names of the allottees.
· Moreover, the company to the best of its knowledge, had abided by all the requirements of SEBI Guidelines with regard to issue and allotment of warrants to the Promoters/Associates. The Company allotted warrants on preferential basis for the first time since the relevant Guidelines and Rules came into force. Moreover, at the time of sending Notice to the shareholders, the target company could not visualize the names of persons (Promoters/Associates) and thus was not sure who would be applying for the allotment of warrants. Therefore, it could not mention their specific names.
· As regards penal provisions prescribed under Section 15H(ii) of SEBI Act, 1992, it was submitted that the penal provisions mentioned by SEBI vide its letter dated 24th September, 2004 under Point No. 2.0, was not applicable to the Acquirer in view of the non-applicability of Regulations 10 & 11 of Takeover Regulations to the allotment of warrants made by the Target Company on 29th November, 2001.
· That the SEBI Member Mr. T.M. Nagarajan vide order dated 25th August, 2004 under Point No. 5.7 & 5.8 clearly pronounced in favour of the Company, “ ……... it was clear that the provisions of Regulations 10 & 11 of Takeover Regulations did not apply to allotment of warrants made by the Target Company on 29th November, 2001 in terms of exemptions available under the then existing regulation 3(1) (c ) of the Takeover Regulations. ……. the deletion of the provisions for exemption of preferential allotment from the Takeover Regulations was intended to avoid possible misuse of the exemption for the purpose of effecting a change of the hands of control over the company, without incurring an obligation to make a public offer as envisaged in the Takeover Regulations. The facts of the case do not indicate any such intentions on the part of the company/acquirers. …. the controlling interest of the Promoters and Associates in the Target Company had not been altered significantly. Further, consequent to the acquisition of additional shareholding, there had been no change in the control of the target company…….”
§ Further, the shares allotted by the target company to Flex International Pvt. Ltd. and Apoorva Extrusion Pvt. Ltd. were locked in for three years as per order of the Hon’ble whole time member of the board.
§ That it had no malafide intention in not disclosing the specific names of the allottees and the shares allotted to Financial Institutions/Mutual Funds and warrants to promoters and its associates on preferential basis for the first time since the relevant guidelines and rules came into force, in as much as the relevant Board Resolutions were sent to the Stock Exchanges where the shares of the Company were listed for Notification. Moreover, at the time of sending the notices to the shareholders, the Target Company in the Explanatory Statement disclosed promoters as a whole and could not visualize the name of the person (Promoters and Associates) and thus was not sure who would be applying for the allotment of warrants.
§ In a recent decision of the Adjudicating and Enquiry officer dated 10.12.04 in the case of SEBI vs. Twinstar Holdings Ltd., it was held that in view of the judgement in SEBI vs. Cabot International Capital Corporation and Others that no penalty is warranted particularly where there is a technical contravention of the Takeover Regulations.
In view of the above submissions, it was requested that the proceedings initiated against the Acquirer may be dropped, a lenient view may be taken and no penalty may be imposed.
4.0. Findings:
Notwithstanding the Hon’ble Member’s finding as aforesaid, the said Order dated 25.08.04 had directed that Adjudication Proceedings be initiated against the Acquirers for not having made full disclosures as envisaged under Regulation 3(1) (c) of the Takeover Regulations.
In view of the fact that all other disclosures were made except for the specific names of the allottees, I am of the view that a token penalty may be levied.
5.0. Recommendations:
Keeping in view the facts and circumstances of the case, their submissions, findings as accorded above and taking into account factors as contained in Section 15J of the SEBI Act and specially the fact that most of the disclosures were made I am of the opinion that a token penalty of Rs.25,000/- should be commensurate in the case .
The acquirers i.e. Flex International Pvt. Ltd. and Apoorva Extrusions Pvt. Ltd. are directed jointly and severally to pay the said amount of Rs.25,000/- by way of a demand draft in favour of "SEBI-Penalty remittable to Government of India, payable at Mumbai within 45 days of the date of the order. The said demand draft shall be sent to General Manager, Corporation Finance Department, Corporate Restructuring Division, Securities and Exchange Board of India, Mittal Court, B-Wing, 224 Nariman Point, Mumbai-400 021.
(RAJ RANI BHALLA)
(ADJUDICATING OFFICER)
DATE: 31.01.05
PLACE: NEW DELHI