Order Against Gurupath Merchandise Ltd

 

 

1. The undersigned has been appointed as Adjudicating Officer under Rule 3 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as “the Adjudicating Rules”) to enquire into and to adjudge under Sec.15-I of Securities and Exchange Board of India Act, 1992 for the alleged violations of not submitting report under regulation 3(4) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 with Securities and Exchange Board of India (hereinafter referred to as “SEBI”) after  acquiring the shares of CMM Broadcasting Network Limited in excess 15 percent of the paid up capital of the said company by the following companies having their places of business at Kolkata, viz., Bicharshil Traders Pvt. Ltd., Bhairav Tradelink Pvt. Ltd., Divya Dealers Ltd., Deepmala Dealers Pvt. Ltd., Gurupath Merchandise Pvt. Ltd., Jeet Vanijya Pvt. Ltd., Naveltex Marketing Pvt. Ltd., Saltlake Merchants Pvt. Ltd., and Savera Traders Pvt. Ltd., (hereianafter collectively referred to as ‘the acquirers’).
   
    
2. The aforesaid appointment of the undersigned as the Adjudicating Officer was consequent to the investigations carried out by SEBI into the matter of CMM Broadcasting Network Ltd., As per the investigation carried out by SEBI, the acquirers were allotted 4200000 shares of at Rs. 10/- each on preferential allotment basis on August 14, 2000 by CMM Broadcasting Network Ltd., however, the said acquirers failed to submit a report with SEBI in terms of sub regulation (4) of Reg. 3 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as the aforesaid acquisition of 4200000 shares by the acquirers crossed 15 percent of voting rights in CMM Broadcasting Network Ltd.
   
    
3. In the above circumstances the acquirers were called upon by the undersigned vide notice dated October 20, 2004 issued under rule 4(1) of SEBI (Procedure for Inquiry by Adjudicating Officer and Imposing Penalties) Rules, 1995 as to why inquiry should not be held and monitory penalty should not be imposed on them. 
   
    
4. The aforesaid notice issued by the undersigned was delivered to Gurupath Merchandise Ltd., (hereinafter referred to as GML) on October 25, 2004. Vide its letter dated November 11, 2004, GML submitted its reply interalia as follows:

 

a)      GML acquired only 466000 equity shares of CMM Broadcasting Network Ltd., by way of allotment under preferential issue of CMM Broadcasting Network Ltd.

 

b)     GML never acted in concert with any one and did not acquire more than 15% of paid up and voting share capital of the above company and, therefore,

 

c)      GML requested neither to initiate any inquiry nor to impose any monitory penalty.

 

 

1. Up on consideration of the aforesaid reply of November 11, 2004 the undersigned was of the opinion that an inquiry should be held in the matter. Accordingly, notice of inquiry dated January 6, 2005 was issued to GML fixing January 18, 2004 as the date for inquiry..

 

1. On January 18, 2005, Shri Deepak Shah, Authorised Representative of GML appeared before the undersigned. At the commencement of the inquiry, the said authorized representative was advised by the undersigned that the latter was appointed by SEBI to conduct adjudication and impose penalty in terms of Sec. 15A (a) of Securities and Exchange Board of India Act, 1992 for failure of GML to submit the required report under Reg. 3 (4) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and due to a typographical error it was mentioned in the show cause notice as Sec. 15H. At the time of inquiry, the aforesaid authorized representative of GML made the following submissions apart from reiterating the submissions made vide its written reply dated November 11, 2004:

 

a)       The charges were framed on a wrong reading of Regulation 2(1)(e) wherein the definition of the persons acting in concert has clearly outlined that only those persons who act with a common objective and pursuant to an agreement or understanding cooperate to acquire shares of a target company.

 

b)       In the instant case, there was no common objective with any of the companies listed in the show cause notice nor was there any agreement or understanding with any of those companies to cooperate in acquiring the shares of the target company.

 

c)       In the absence of GML falling into the definition of the persons acting in concert with the other acquirers as detailed in the show cause notice, it was not liable to file a report as required under Sub regulation 3(4) of SEBI (SAST) Regulations which says that only if shares exceeding 15 % have been acquired by a person, together with persons acting in concert, if any, the necessary disclosures are required to be made.

 

d)       To substantiate its claim GML submitted that it did not fall within the definition of persons acting in concert, as it had an independent board of directors, different shareholders and also the areas of operation were also different and the decision to invest in the shares of CMM Broadcasting Network Ltd was independent and was not a coordinated activity.

 

e)       The Authorized Representative of GML made a further submission that even assuming without admitting if there was a lapse in filing of the required report, the same can only be treated as a technical irregularity and a lenient view can be taken by the Adjudicating Officer after taking into consideration the factors mentioned in section 15J of SEBI Act.

 

1. On specifically asked by the Adjudicating Officer whether GML was filing any documents, the Authorised Representative replied that there were no documents to be filed in the instant proceedings. The proceedings during the inquiry were recorded and a copy of the same was furnished to the authorized representative of GML. Further, at the time of inquiry, the undersigned asked the Authorised Representative of GML to furnish the details of the directors of GML at the relevant point of time. In response, the Authorised Representative furnished a list of directors of GML as on May 16, 2000, as per which Shri Prakash Shukla and Shri Pradeep Kumar Jain were the directors of GML.

 

1. The undersigned considered the reply of GML dated November 11, 2004 and the submissions made by the authorized representative of GML, from which the following issues emerge for giving findings:

 

 

(a)    whether GML acquired shares of CMM Broadcating Network Ltd., acting in concert with other acquirers; and

 

(b)    whether there was any default on part of GML in submitting the report required to be filed under Reg. 3(4) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

 

1. Reg. 2(1)(b) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 defines an “acquirer” as any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer. In the instant case, admittedly GML acquired 466000 shares of CMM Broadcasting Network Ltd., Therefore, there is no dispute as to whether GML is an acquirer.   In terms of Reg. 2(1) (e) of  Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 “person acting in concert” comprises, interalia, persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly cooperate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company. In the instant case, the investigation of SEBI revealed that the acquirers acting in concert with each other acquired more than 15 per cent of the paid up capital/ voting rights of CMM Broadcasting Network Ltd. GML contended that it never acted in concert with any other person and there was no common objective with any of the companies listed in the show cause notice nor there was any agreement or understanding with any of those companies to whom show cause notices were issued to cooperate in acquiring the shares of the target company i.e CMM Broadcasting Network Ltd. In support of its contention, GML claimed that it had an independent board of directors, different shareholders and also the areas of operation were different. GML further claimed that the decision to invest in the shares of CMM Broadcasting Network Ltd. was independent and was not a coordinated activity. From the list of directors furnished by GML and other acquirers, it was seen that some of the individuals are common on the boards of directors of the acquirers. From the following table, it can be seen that there were common directors on the board of directors of most of the acquirers. From the following table, it can further be seen that most of the acquirers have common place of business.

 

Sr.No.	Name of the Acquirer	Directors (S/Shri)
1.	Bicharshil Traders Pvt. Ltd. 28, Strand Road, 2nd Floor, Kolkata-1.	Anil Kumar Jain and Prakash Shukla.
2.	Bhairav Tradelink Pvt. Ltd., 13C, Jabakusum House, 34, C.R. Avenue, Kolkata – 12.	Shambhu Nath Pandey, Saab Singh and Prabhat Kumar Jain.
3.	Divya Dealers Ltd., 28, Strand Road, 2nd Floor, Kolkata-1.	Anil Kumar Jain and Ashok Kumar Shukla.
4	Deepmala Dealers Pvt. Ltd. 28, Strand Road, 2nd Floor,  Kolkata-1.	Anil Kumar Jain and Manoj Saraogi.
5	Gurupath Merchandise Pvt. Ltd. 14, Ganesh Chandra Avenue, 2nd Floor, Kolkata – 13.	Prakash Shukla and Pradeep Kumar Jain.
6	Jeet Vanijya Pvt. Ltd., 10, Princep Street, 2nd Floor, Kolkata 72.	Surendra Kumar Jain and Prabhat Kumar Jain.
7	Naveltex Marketing Pvt. Ltd., 1-B, Black Burn Lane, 4th Floor, Kolkata -12.	Susanta Sengupta and Shambhu Nath Pande.
8	Saltlake Merchants Pvt. Ltd., 28, Strand Road, 2nd Floor, Kolkata-1.	Ashok Kumar Shukla, Prabhat Kumar Jain.
9	Savera Traders Pvt. Ltd., P-33, Mission Row Extension, 2nd Floor, Kolkata – 13.	Susanta Sengupta, Faruqui Siyadatnajma, Anil Kumar Jain.

 

 

1.  In view of the above, the undersigned is not inclined to give credence to the argument of GML that it has an independent board of directors and it is independent from other acquirers. Further, from the definition of the ‘person acting in concert’, it can be seen that there need not be a formal agreement between the persons to act in concert, but an informal agreement is sufficient. Whether there exists an informal agreement or not can be found from the conduct of the parties and other circumstances. In the instant case, many of the acquirers have common addresses and common directors. All of the acquirers were allotted shares on preferential allotment basis on a single day from a single company. In the view of the undersigned, the said facts are sufficient to prove that GML and other acquirers were acting in concert with a common object of acquiring substantial part of shareholding/ voting rights in CMM Broadcasting Network Ltd.

 

1.  Further, none of the acquirers disputed the finding of the SEBI investigation that their collective acquisition crossed 15 percent of the voting rights in CMM Broadcasting Network Ltd.

 

1. In terms of sub regulation (4) of Regulation 3 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 the acquirer shall within 21 days of the date of acquisition in respect of the acquisitions stated therein submit a report along with supporting documents to SEBI giving all details in respect of acquisitions taken together with shares or voting rights, if any, held by him or by persons acting in concert with him would entitle such persons to exercise 15 per cent or more of the voting rights in a company. In the instant case all the acquirers were the acquirers in terms of the above regulation and therefore they have a joint and several responsibility to submit the report to SEBI.

 

1.  Since the violation of the acquirers including GML is established, the quantum of penalty has to be decided by the undersigned.

 

1.  At the time of the commission of the aforesaid violations by the acquirers, section 15A (a) of Securities and Exchange Board of India Act, 1992 prescribed a penalty of not exceeding one lakh and fifty thousand rupees for each failure, if any person who is required under the Act or any rules or regulations made thereunder to furnish any document, return or report to SEBI .

 

1. To determine the quantum of penalty under Section 15A (a), 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.

 

1. As regards the disproportionate gain or unfair advantage there are no quantifiable figures available on record with respect to the default of GML. There are also no figures or data on record to quantify the amount of loss caused to an investor or group of investors as a result of the default. Further, the violation committed by GML was a one time violation and not repetitive in nature.

 

1. Therefore in exercise of the powers conferred under section 15-1(2) of the SEBI Act, 1992, read with Rule 5 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, the undersigned hereby imposes a penalty of Rs. 20,000/- (Rupees Twenty thousand only) on Gurupath Merchandise Ltd. for the aforesaid violation of Reg. 3(4) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. GML 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 R. Mohan, General Manager, Securities and Exchange Board of India, Mittal Court, 1^st Floor, B- Wing, 224, Nariman Point, Mumbai 400 021.

 

1. In terms of Rule 6 of the SEBI (Procedure for holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, copies of this order are sent to GML and also to SEBI.

 

 

Date: January 31, 2005                     A. Chandra Sekhar Rao

Place: Mumbai                                    Adjudicating Officer