In the matter of acquisition of shares of Sri Kannapiran Limited

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO- 25/2006-07]

 

 

In the matter of acquisition of shares of  

SRI KANNAPIRAN MILLS LTD

 

AND

 

In respect of its

{1. M/s K.G Fabriks Ltd & 2. M/s Crocodile (India) Pvt Ltd}

(Promoters/Acquirers)

 

 

1.      Sri Kannapiran Mills Ltd. (hereinafter referred as ‘SKML’ or ‘Target Company) has its registered office at Coimbatore and its shares are listed in Coimbatore Stock Exchange (CSE) and Madras Stock Exchange (MSE). The authorized share capital of the SKML as on March 31, 1995 was 60.00 lakhs equity shares of Rs. 10/-each amounting to Rs.6,00,00,000/- and the paid up capital was 26,82,880 equity shares of Rs.10/- each amounting to Rs. 2,68,28,800/-. As per the report under Regulation 3(4) of SEBI (Substantial Acquisition of Shares and Takeovers), Regulations 1997(hereinafter referred to as SAST or said Regulations) submitted on behalf of acquirers who are the promoters of the Target Company vide their letter dated 06.07.2005, the promoters holding stood at 83.03%. The Target Company made a preferential allotment and allotted five lakh equity shares each on 27.12.2000 to M/s K.G Fabriks Ltd. and M/s Crocodile (India) Pvt Ltd( hereinafter referred to as acquirer). Pursuant to the said allotment promoters collectively held 32,27,714 equity shares constituting 87.64% of the post preferential issue share capital. Consequently the collective share capital of the promoters had gone up by 4.61% viz, from 83.03% to 87.64%. In terms of Regulation 3(1)(c)(i) of the said regulations the Board resolution dated 21.11.2000 was not sent to CSE and MSE. The disclosures in terms of Regulation 3(1)( c)(ii) were also not mentioned in the notice of EGM dated 21.11.2000. In view of the non compliances of Regulation 3(1)(c)(i) and Regulation 3(1)( c)(ii), the acquirers are not eligible for exemption under 3(1)(c) from the applicability of Regulation 11(2) of the said Regulations.

 

2.      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 28, 2006 to inquire into and adjudge under section 15H (ii) of the SEBI Act, 1992, the aforesaid alleged violation of Regulation 11(2) of SAST by the below mentioned promoters/acquirers and PACs (hereinafter referred to as ‘Noticees’):

 

 

3.      Show Cause Notices (SCNs) dated December 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) collectively acquired 1,000,000 shares of SKML on a preferential basis on December 27, 2000, constituting 4.61% of SKML’s post preferential equity share capital, thereby increasing their aggregate holding in SKML from 83.03% to 87.64%of its equity as under:

 

Acquirer	Prior to preferential allotment		Pursuant to preferential allotment
Name	Number	%	Number	%
Promoters	2,227,714	83.03	3,227,714	87.64
Equity of SKML	26,82,880	100.00	36,82,880	100.00

 

4.      It is alleged that prior to the aforesaid acquisition by way of preferential allotment, the aggregate share holding in SKML of the noticees was more than 75% of SKML’s equity.  Hence, they were prohibited from acquiring any additional share of SKML, without making a public announcement to the shareholders of SKML in terms of Regulation 11(2) of SEBI (SAST) Regulations, 1997{then existing at the time of allotment}. It is also alleged that the acquirers did not complied with Regulation 3(1)(c) of the said Regulations , thereby rendering them ineligible from getting exemption from the applicability of Regulation 11(2) of the said Regulation. The said public announcement had to be made within 4 days of deciding to acquire shares of SKML, in terms of Regulation 14(1) of the said Regulations. It was alleged that non compliance with the aforesaid attracts penalty under Section 15H (ii) of SEBI Act, 1992.

 

5.      Noticee 1 and Noticee 2 replied to the SCN issued to them on December 22, 2006 vide their letter dated January 9, 2007. It was submitted that the Target Company was on the verge of closure at the time of subject acquisition as its financial position and operations were totally collapsed. The promoters and associate concerns had the obligations to infuse of fund to make the net worth positive in a situation where infusion of funds by other stakeholders was not even a remote possibility. It was under these circumstances that the company had passed a resolution for preferential allotment in a short span of time when two earlier attempts to raise capital had failed. The preferential allotment made to the promoters at par value of Rs. 10/- while the book value of shares was only Rs. 3.21 and the promoters have not unduly enriched themselves, as submitted by the noticees. It is also submitted that the preferential allotment did not resulted in change in management and control. It is submitted by the noticees that non-compliance of Regulation 11(2) of SAST read with Regulation 14(1) being merely technical in the circumstances referred in the reply, may not be viewed seriously and no penalty be imposed on them.  

 

6.      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, 2006 was issued to the two noticees, fixing the date for inquiry on January 22, 2007. The authorized representatives of the noticees appeared before the AO for the inquiry.

 

7.      During the course of inquiry under Rule 4(3) of the said Rules, the noticees appeared and requested for joint inquiry. The same was allowed keeping in view the disposal of the matter. The noticees while re-itereiating the submissions made vide their replies both dated 9.1.2007, further stated that the violations as alleged in the show cause notices was not intentional and was under their bonafide belief that they were not required to make a public offer to the minority share holders and under the impression that the same was exempted under SAST. They also sought permission to place additional facts/documents on record.

 

8.      Vide letter dated January 27, 2007, the noticees placed following facts on records:

 

i.                    Global Trust Bank Ltd had agreed to release term loan to settle IDBI overdue term loan subject to company increasing its paid up capital by atleast Rs. 100 lakhs. A copy of such sanction letter dated November 16, 2000 is filed by the noticees.

ii.                 The shares of SKML were acquired at face value of Rs. 10/- per share even though the book value was at Rs. 3.21 per share with the intention to revive the company.

iii.               In view of one time settlement with IDBI, SKML got interest waiver of Rs.854.54 lakhs in 2000-01.

iv.               The present book value of shares of SKML as on 30.9.2006 is now gone upto Rs.101.31. In this regard, balance sheets are filed supporting the same.

 

9.      To sum up the findings, the promoters/acquirers held 83.03% of equity of SKML prior to the preferential allotment and acquired collectively 1,000,000 (4.61%) shares by way of preferential allotment on December 27, 2000.  The acquirers did not comply with Regulation 3(1)(c) of the said Regulations , thereby rendering them ineligible from getting exemption from the applicability of Regulation 11(2) of the said Regulation. Therefore the acquirers triggered Regulation 11(2) of the said Regulation, which prohibits the acquirer from acquiring any further shares , unless the acquirers makes a public announcement to acquire further shares from the shareholder of SKML. The promoters/acquirers have acquired these 1,000,000 shares @ Rs. 10per share. By doing so they have violated a cardinal principle of SAST regulations, namely, “Equality of treatment and opportunity to all shareholders”. By not giving an exit opportunity to the shareholders of SKML, the acquirers have discriminated against the interest of the shareholders, who did not get the exit opportunity. SAST regulation precisely attempts to prevent such discriminative treatment of any class of shareholder.

 

10.  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."

 

 

11.   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 value of open offer the acquirers had to make to the shareholder of SKML in January 2001. The promoters/acquirers were required to make an open offer to acquire shares constituting 20% of SKML post preferential equity share capital of 36,82,880 shares, in terms of Regulation 21(1) of SAST Regulation. However, in the instant scenario it is observed that pursuant to the preferential allotment, the acquirers/promoters were holding 87.64% of the equity share capital of SKML, thereby limiting the public holding to 12.36%. Consequently, the public offer in the instant matter would have been for 12.36% of the post preferential equity share capital of SKML i.e 455204 shares. Since SKML scrip was illiquid(infrequently traded), the price at which acquirers had to make the open offer was at least at the par value at which they had acquired the shares i.e Rs. 10 per share, in terms of Regulation 20 (5) of SAST Regulations. Therefore the liability of the acquirer in terms of total consideration payable in the instant offer assuming full response in the open offer would have been Rs. 45,52,040/-. I am also aware that there are mitigating factors in favour of noticees as brought out in their additional reply such as no change in control of the company, infusion of funds by the acquirers to revive the company etc. The effort of revival is apparent as the book-value of the shares of the company has now gone upto Rs. 101.31 Lakhs as on 30.09.2006, from Rs. 3.21/- , but the same does not absolves the noticees from their liabilities under SAST Regulations.  Since this liability of the acquirer relates to year 2000 and over seven years have elapsed, I seriously feel that there is an opportunity loss to the minority shareholders at large as they have been prevented from liquidating their stakes in a company which is otherwise not liquid.   Since the maximum penalty imposable u/s 15H (ii) of SEBI Act, 1992, is Rs. 5 lakhs, I restrict myself to a penalty of equivalent amount. 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; and that the target company was loss making at the stage of preferential allotment has no bearing on the penalty imposed on the promoter/acquirers. This view is well supported by the ruling of SAT in its order dated May 14, 2003 in the appeal No 96 of 2002 in the matter of P.C. Surana.

 

12.  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, I hereby impose a consolidated penalty of Rs. 5,00,000/-(Rs. Five Lakhs) on the following promoters/acquirers(Noticees)

 

for the aforesaid violation. The aforesaid entities are liable to pay penalty jointly and in case of default, the entities shall be liable severally.

 

13.  The penalty amount shall be paid through a crossed demand draft drawn in favour of “SEBI – Penalties Remittable to Government of India” and 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, Securities and Exchange Board of India, SEBI Bhavan, Plot No. C4-A, “G” Block, Bandra Kurla Complex, Bandra(East), Mumbai–400 051.

 

14.  This order of adjudication is made and passed on 31^st  day of January 2007 at Mumbai.

 

                                                                                                                                AMIT PRADHAN

ADJUDICATING OFFICER