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Order against Shri Deepak Agarwal

Jan 30, 2006
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Orders : Orders of AO

ORDER UNDER RULE 5 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST SHRI DEEPAK  AGARWAL.  

 

1.      Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) vide order dated November 27, 2002 appointed Shri. S.V. Krishna Mohan as the Adjudicating Officer to inquire into and adjudge under Section 15I read with Section 15 H of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the violation of the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 alleged to have been committed by Shri Deepak Agarwal (hereinafter referred to as ‘the noticee’) by acquiring the shares of Ritesh Polyester Limited (hereinafter referred to as RPL) without making mandatory public announcement and public offer in terms of the provisions of Regulation 10(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 (hereinafter referred as Takeover Regulations) and Regulation 11(1) of Takeover Regulations 1997. Subsequently, I was appointed as the Adjudicating Officer in the place of Shri. S. V. Krishnamohan.

 

2.      It is alleged that the noticee being a promoter of RPL, along with persons acting in concert had acquired 20.86% of shares from Shri Pawan Kumar Agarwal and family without making an open offer and thereby violated the provisions of Regulation 10(2) of SEBI Takeover Regulations.

 

 

 FACTS OF THE CASE

 

3.       RPL came out with a public issue of 30,00,000 shares of Rs.10/- each at a premium of Rs.5/- per share. The issue opened on 12th June 1995 and the earliest closing date was 16th June, 1995 and final closing date was 22nd June 1995.

 

4.      Investigation conducted by SEBI found that the public issue did not receive the minimum subscription even after the devolvement period. Moreover, it was found that Shri Surendra Kumar Agarwal one of the promoters of RPL misrepresented that the issue received the minimum subscription by arranging for finance (in the garb of subscription) from Shri Pawan Kumar Agarwal and family (financiers).

 

5.      It is alleged that subsequent to the public issue, the promoters of RPL through its director Shri Surendra Kumar Agarwal purchased the shares back from the Pawan Kumar Agarwal family in the name of Pratha Investments (Proprietary concern of Smt.Sharmila Gang, wife of Shri Mukesh Gang, Auditor of Ritesh Polyester Limited) and Ritesh Capital during the period 05.09.1995 to 09.09.1995.

 

 

6.      In this regard it is alleged that the promoters of RPL along with persons acting in concert such as Pratha Investments and Ritesh Capital had acquired 20.86% of post issue capital of RPL from Shri. Pawan Kumar and family without making public announcement and open offer in terms of the provisions of Regulation 10(2) of SEBI Takeover Regulations. Subsequently, as the Takeover Regulations 1994 has been repealed by SEBI (Substantial Acquisition of shares and Takeovers) Regulations 1997, by virtue of the provisions of Regulation 47 of the Takeover Regulations 1997, the said violation is also a violation in terms of the provisions of Regulation 11 (2) of the Takeover Regulations 1997.

 

 

  NOTICE AND REPLY

 

7.      A Show Cause Notice (hereinafter referred to as ‘SCN’) dated June 8, 2005 was issued to the noticee under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing penalties by Adjudicating Officers) Rules, 1995 (hereinafter referred to as the Rules) was issued to Shri Deepak Agarwal, requiring him to show cause as to why an inquiry should not be held for the violation alleged to have been committed by him.

 

8.      The noticee vide his letter dated June 24, 2005 and July 19, 2005 replied to the show cause notice. In the said reply, the noticee stated that at the time when the alleged violation had taken place, he was a minor and about 10 years old and he had not committed the violation as alleged in the show cause notice. Upon considering the reply submitted by the noticee, it was felt that an inquiry may be held in the matter. In view of the same, the noticee was advised to attend the inquiry on July 21, 2005. Shri V.Harish Kumar Adocate, authorized representative of the noticee attended the inquiry and made the following submissions :

 

·        It is submitted that Deepak Agarwal was a minor and about 10 years old at the time the alleged violation had taken place. He was neither a promoter nor a director of Ritesh Polyesters Limited at that time.

·        He had not purchased or acquired any shares either from the market or from Pawankumar Agarwal and family subsequent to the public issue.

·        It was not necessary for him to make the mandatory public announcement as he has not acquired any shares as alleged in the show cause notice.

 

Subsequent to the said hearing, the noticee submitted the details such as the prospectus of RPL at the time of the public issue and the details of the directors of RPL etc.

 

CONSIDERATION OF EVIDENCE AND FINDINGS

 

9.      The issue for consideration in the matter is whether the noticee who is stated to belong to the promoter group, had acquired along with persons acting in concert, shares of Ritesh Polyster Ltd in violation of the provisions of the Takeover Regulations. It is noted from the facts of the case that the company came out with a public issue and in the prospectus dated 30.3.2005 issued by the company in this regard states that at the time of issue of the prospectus the issued subscribed and paid up capital of the company was 24,96,000 shares of Rs 10 each amounting to Rs. 2,49,60,000. Out of the proposed issue, 15,00,000 equity shares of Rs. 10 each on cash with a premium of Rs. 5 per share are reserved for firm allotment to the promoters , directors, their friends and relatives. It is further stated that the share holding of  promoters, their friends and relatives falling within the meaning of promoters as defined under the provisions of the SEBI Guidelines shall be subject to lockin in the manner specified in the prospectus.

 

10. In the above scenario, as per the disclosures made at the time of the issue of the prospectus, it is pertinent to note that the promoters contribution included contribution from the noticee. In view of the same, it is concluded that the noticee was a promoter in terms of the provisions of SEBI Disclosure and Investor Protection Guidelines.

11. The next issue for consideration is whether the noticee along with other promoters had acted in concert with other entities such as Ritesh Capital Ltd, Smt. Sharmila Gang, and her proprietory concern Pratha Investment (hereinafter referred to as the persons acting in concert) in acquiring the shares of the target company in violation of the provisions of the Takeover Regulations.

 

12. In this regard, it is noted that Regulation 2(b) of the Takeover Regulations 1994 defines an acquirer in the following manner “ Acquirer means any person who acquires or agrees to acquire shares in a company either by himself or with any person acting in concert with the acquirer. As seen from the above definition, commonality of objective between the acquirer and the persons acting in concert mandate that their actions should not be viewed in isolation. This implies that in cases where shares have been acquired pursuant to a common objective, , the aggregate share holding of the acquirers and the persons acting in concert have to taken into account to determine whether the threshold limit prescribed under the regulations have been violated.

 

 

13. It is noted from the facts of the case that subsequent to the public issue, large amount of money was withdrawn from the proceeds of the public issue, which is stated to be given as short term loans to the persons acting in concert. It is an undisputed fact that Pratha Investment and Ritesh Capital have utilized the money for purchasing the shares of the target company from Shri. Pawan Kumar Aggarwal and family in the following manner.

Name of shareholder

Quantity

Sold to

Cheque / Draft

Date

Amount

Shri Basudev D.Agarwal

120000

Ritesh Capital Limited

Draft

7/9/95

900000

Shri Rajkumar B.Agarwal

133000

Pratha Investment Cons.

Draft

5/9/95

997500

Shri Pawankumar B.Agarwal

120000

Pratha Investment Cons.

Draft

7/9/95

900000

Shri Pawankumar B.Agarwal

29200

Pratha Investment Cons.

Draft

9/9/95

219000

Smt.Savitridevi B.Agarwal

246400

Pratha Investment Cons.

Draft

9/9/95

1848000

Smt.Savitridevi B.Agarwal

92200

Ritesh Capital Ltd.

Draft

9/9/95

691500

Shri Nareshkumar B. Agarwal

126400

Ritesh Capital Ltd.

Draft

5/9/95

948000

Shri Nareshkumar B. Agarwal

9800

Pratha Investment Cons.

Draft

5/9/95

73500

Smt.Kalpana P. Agarwal

93300

Ritesh Capital Ltd.

Draft

5/9/95

699750

Smt.Sushilkumar N.Agarwal

133300

Pratha Investment Cons

Draft

7/9/95

999750

Ms.Preeta R. Agarwal

14100

Ritesh Capital Limited

Draft

6/9/95

105750

Smt.Sulochana R. Agarwal

216000

Pratha Investment Cons

Draft

9/9/95

1620000

Smt.Sulochana R. Agarwal

102600

Ritesh Capital Ltd.

Draft

9/9/95

769500

 

14. The connection between the above mentioned promoter group and the persons acting in concert is evident from the following facts. Ritesh Capital is stated to be a group company of the target company RPL. Further, Smt. Sharmila Gang is the wife of Shri.Mukesh Gang who was the auditor of the target company. Pratha Investment is the proprietory concern of Smt. Sharmila Gang. As stated before, the source of funds for the purchase of the shares of the target company was given by way of short term loans to the said entities. The manner in which the shares were purchased from Shri Pawan Kumar Aggarwal and family by the said entities utilizing the funds given to them as loans clearly indicate the preconceived plan the on the part of the said entities and the promoter group . As common intention to acquire the said shares by the promoter group and the persons acting in concert is established from the facts and circumstances of the case including the source of funds for the acquisition, it is concluded that the promoters along with the persons acting in concert had acquired the shares of the target company on the dates mentioned above.

 

15.  Vide his letter dated August 4, 2005 the noticee forwarded the percentage of the shares held by him and other entities. Ritesh Exports Ltd held 6,00,000 shares which amount to 8.71%, Shri.Ritesh Agarwal held 4,01,200 shares amounting to 5.82%, Shri. Deepak Agarwal held 2,24,000 shares amounting to 3.25%, Shri Surender Kumar Agarwal held 13,81,300 shares amounting to 20.04% and Mrs. Roop Rekha Agarwal held 6,16,500 shares amounting to 8.95%. The aggregate shareholding of the said entities amount to 46.77 % of the share capital of RPL.

 

 

16. As stated before, 20.86% of the shares were purchased by the acquirers through persons acting in concert from Shri. Pawan Kumar and family. Consequent to the said acquisition of 20.86% from the sellers, the aggregate share holding of the acquirers and the persons acting in concert have increased from 46.77 % to 67.63% of the shares of RPL. As the promoters were holding 46.77% shares in the company, acquisition of further shares was in effect consolidation of their share holding. In this regard, Regulation 10 (2) of the repealed regulations states the following “ An acquirer who on the date of commencement of these regulations holds shares which carry more than ten percent of the voting rights in the capital of the company, shall not acquire any further shares in the company from the open market unless such acquirer makes a public announcement of the intention to acquire shares in the open market in accordance with the regulations. In this regard, it is also pertinent to note that though consolidation of holdings is permitted to some extent under Regulation 11(1) of the Take over Regulations 1997, the same also prescribe a similar mandate in the following words

“ 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 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.

 

17. In view of the above provisions it is concluded that the acquirers along with the persons acting in concert had violated the provisions of Regulation 10(2) of the Takeover Regulations. As stated before, the Takeover Regulations 1994 has been repealed by the Takeover Regulations 1997, however, by virtue of the provisions of Regulation 47 of the regulations the said violation is also a violation of Regulation 11(1) of the Takeover Regulations 1997.

In this regard, Section 15 H of the SEBI Act as it stood on September 9, 1995 provided  the following.

“If any person who is required under this Act or rules or regulations made thereunder, fails to make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty of an amount not exceeding five lakh rupees.

Hence the violation committed by the acquirers and persons acting in concert attract the above penalty.

 

18. In this regard, the provisions of Section 15J of the SEBI Act, 1992 and Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalty by Adjudicating Officer) Rules, 1995 require that while adjudging the quantum of penalty, the adjudicating officer shall have due regard to the following factors namely:

1.      The amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of default

2.      The amount of loss caused to an investor or group of investors as a result of the default

3.      The repetitive nature of default

 

19.  It is noted from the submissions of the noticee that he was a minor of 10 years when the violation had taken place. In support of his contention, the noticee submitted a copy of the birth certificate   issued by the Municipal Corporation of Hyderabad which state the date of birth of the noticee as 16. 11.1985. Upon perusal of the said document and considering the facts of the case it is noted that when the violation had taken place, the noticee was about 10 years old and was a minor. As stated above, it is found on the basis of the facts of the case that the noticee is a part of the promoter group who along the persons acting in concert had acquired the shares of RPL.

 

20.  The contention that the noticee being a minor cannot be deemed to have violated the provisions of the Regulations is not sustainable in view of the finding that the noticee belong to the promoter group who along with the persons acting in concert made the acquisition.

 

21. Further, with regard to the specific contentions raised by the noticee with regard to his status as a minor at the time of commission of the violation, Section 82 of the Indian Penal code states that

 

“ Nothing is an offence which is done by a child under seven years of age. Further, Section 83 of the Code states that nothing is an offence which is done by a child above seven years of age and under twelve, who has not attained sufficient maturity of understanding to judge the nature and consequences of his conduct on that occasion. It is noted from the facts and circumstances of the case that though, Shri. Surender Kumar Agarwal and Smt. Roop Rekha Agarwal who are the father and mother of the noticee are stated to be the directors of RPL at the time the violation was committed, the noticee was not holding any official post.  Further  it is also pertinent to note that the Honourable Securities Appellate Tribunal in Appeal No:34/2001 Modipon Vs SEBI held that a dormant promoter or a promoter simpliciter who neither acquires or agrees to acquire shares or voting rights over a target company is not an acquirer. The Hon’ble Tribunal made the said observation while deciding the question as to whether the promoters holding warrants exclusion from the public shareholding for becoming eligible to participate in the offer. However, guidence is drawn from the said observation of the Tribunal in analysing the role played by noticee in the acquisition which resulted in the violation.

 

22. In the particular facts and circumstances of the case, though it is found that the noticee belong to the promoter group by virtue of his shareholding being included in the promoters quota as per the terms of the prospectus, the role of the noticee in the conspiracy to acquire shares of the target company is not evident. Considering the above facts, further as the noticee was not holding any official post in the company and also considering the fact that the noticee was a minor when the violation had taken place, I am of the view that facts of the case do not warrant imposition of monetary penalty on Shri. Deepak Agarwal in terms of the provisions of Section 15 H of the SEBI Act. Hence no penalty is imposed on Shri Deepak Agarwal in terms of Section 15 H of the SEBI Act

 

23.  In terms of the provisions 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 Shri. Deepak Agarwal  and to Securities and Exchange Board of India.

 

PLACE:  Mumbai S. Biju
DATE :  January 30, 2006  Adjudicating Officer