SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
IN THE MATTER OF PREFERENTIAL ALLOTMENT OF SHARES OF ABEE INFO-CONSUMABLES LTD TO A SELECT GROUP OF PERSONS INCLUDING THE PROMOTERS AND APPLICABILITY OF REGULATION 11(1) OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997
WTMN/49/CFD/ 7 /04
1.0 BACKGROUND
1.1 Shri Badrinarayan B Somani & persons acting in concert (PACs) [hereinafter referred to as “the Acquirers”] submitted a report dated 13.09.03 to SEBI under Regulation 3(4) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as “the said Regulations”) claiming exemption under Regulation 3(1)(c) for acquisition of 53,28,200 equity shares representing 53.28% of the enhanced voting capital of Abee Info-Consumables Ltd. (hereinafter referred to as “the Target company”) by way of preferential allotment made on 11.09.02. Pursuant to the aforesaid preferential allotment, the shareholding of the Acquirers increased from 30.67% to 67.11% shares in the Target company.
1.2 The shares of the Target company are listed at Pune Stock Exchange, The Stock Exchange, Mumbai and Ahmedabad Stock Exchange.
2.0 SHOW CAUSE NOTICE
2.1 As the aforesaid acquisition was, prima facie, found to be in violation of Regulation 11(1) read with 14(2) of the Regulations, a show cause notice dated 04.12.03 was issued to the Acquirers inter alia stating that:
- the exemption under regulation 3(1)(c) of the acquisition from the applicability of Regulation 11(1) of the said Regulations may not be available to the Acquirers since the provisions of Regulation 3(1)(c) were deleted effective 09.09.02.
- a public announcement to acquire a minimum of 20% shares from the shareholders of the Target company should have been made by the Acquirers in terms of the said Regulations, within 4 working days from the date of 11.09.02.
- why, therefore, one or more or all action(s) under Regulation 44 and Regulation 45(6) of the said Regulations and Sections 11 and 11B of the SEBI Act 1992, should not be initiated against the Acquirers for violations of the provisions of the said regulations.
3.0 REPLY OF THE ACQUIRERS
3.1 The Acquirers submitted their reply to the above show cause notice vide letter dated 15.01.04, inter alia, stating that all the Regulations and legal formalities as existed before 09.09.02 in respect of the preferential allotment were duly complied with and thereafter the allotment was made on 11.09.02. Subsequently, the Pune Stock Exchange, Ahmedabad Stock Exchange and Bombay Stock Exchange approved the listing of the shares. The Acquirers further submitted that they had complied with all the formalities that existed prior to 09.09.02 and that the process cannot be revoked only because of the subsequent amendment in the Regulations. The Acquirers submitted that they had taken every care and caution and due diligence in respect of acquiring the said shares and that there was no intention or willful avoidance of any of the compliances. Hence in their opinion, there was no violation of the provisions of Regulation 11(1).
4.0 HEARING
4.1 An opportunity of personal hearing was availed by the Acquirer on 11.03.04 and they made submissions reiterating their earlier written reply dated 15.01.04.
5.0 CONSIDERATION OF ISSUES
5.1 I have carefully considered the facts of the case, the written as well as oral submissions made by the Acquirers and also the documents submitted by the Acquirers in support of its submissions.
5.2 I find that in the instant case the Acquirers had acquired 53.28% shares of the Target company i.e. more than the creeping annual limit of 5% permitted under Regulation 11(1) of the said Regulations. The Regulation 11(1) that existed as on 11.09.02 reads as follows :
“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 75 per cent 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 per cent 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.”
5.3 In terms of Regulation 14(1), inter alia, the public announcement referred to in Regulation 11 shall be made by the merchant banker not later than four working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the respective percentage specified therein.
5.4 By virtue of the amendment to the Regulations, the provisions of Regulation 3(1)(c) envisaging exemption for acquisition by the Acquirers by way of preferential allotment stands deleted effective 09.09.02. As on the date of preferential allotment in question (i.e. 11.09.02), therefore, the exemption under Regulation 3(1)(c) was not available. The said Regulation 3(1) which was deleted from the Regulations provided that :
“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;]
5.5 As the acquisition of shares in the target company by the Acquirers, by virtue of the said preferential allotment on 11.09.02 exceeded the permitted annual creeping acquisition limit of 5%, the acquisition, strictly speaking, can be deemed to have triggered the provisions of Regulation 11 of the said Regulations, casting obligations on the part of the Acquirers to make announcement of offer to acquire 20% of shareholdings from the public. However, the facts and circumstances of the preferential allotment in the instant case are too relevant to be ignored.
5.6 In the instant case, the preferential allotment of shares had been made by the company to its own promoters to augment the long term funds of the company. The actual allotment had been made on 11.09.02. The amendment to the said Regulations, deleting the provisions for exemption of such acquisition had been notified on 09.09.02 i.e. just two days earlier. There is nothing on record to show that the allotment had been made, with any undue haste, to complete the same on or about the date of the said amendment.
5.7 On perusal of the facts of the case, it is observed that :
- The Board of Directors of the target company had approved the preferential allotment in question at its meeting held on 27.07.02.
- A month’s notice had been given to the shareholders of the Target company on 27.07.02, convening an Extra Ordinary General Meeting on 26.08.02 to pass necessary resolution for preferential allotment of 1,00,00,000 shares in favour of a select group of persons including the Acquirers. It had been disclosed in the notice that the promoters/directors of the company intended to subscribe substantial part of the preferential issue to strengthen the net worth of the company and to increase the promoters stake so as to inculcate a sense of belongingness amongst the major creditors.
- The shareholders of the Target company at the EGM on 26.08.02 had approved the allotment of 54,88,800 shares in favour of a select group of persons including the Acquirers.
- The Target company had also informed the Stock Exchange Mumbai, Pune Stock Exchange and Ahmedabad Stock Exchange on 28.08.02 about the proposed preferential allotment in favour of the Acquirers.
- In pursuance of the above, the Board of Directors of the Target company, at its meeting held on 11.09.02, allotted 53,28,200 shares on preferential basis to the Acquirers. As a result of the aforesaid allotment, the shareholding of the Acquirers increased from 30.67% (Pre-acquisition) to 67.11% (Post acquisition) in the Target company.
5.8 Thus, effective steps seem to have been taken almost two months prior to the amendment of the Regulations.
5.9 I note that the deletion of the provisions for exemption of preferential issues was intended to avoid misuse of the exemption to effect a change of the hands of control over the company. The facts of the case do not indicate any such intentions on the part of the Company/Acquirers. The promoters had inducted additional equity to augment long term funds of the company.
5.10 In terms of Regulation 12 read with Regulation 2(c), "control" includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. The promoters had shareholdings of 30.67% in the share capital of the company, which stood increased to 67.11% after the preferential allotment. The shareholdings of the promoters thus increased from 30.67% (which by itself was significant) to more than simple majority (67.11%). It is however observed that consequent to the change in shareholding, there has not been any change in the control of the company, in terms of the parameters mentioned in the Regulations.
5.11 I find that the purpose of the Preferential Issue to a select group of persons, mainly the promoters was to augment the long term funds of the company. This, could be considered as, in the larger interest of the company and its shareholders. Had the allotment been made a few days earlier, it would have had the benefit of the then available exemption from the provisions of the said Regulations requiring public announcement of offer to acquire 20% of shareholding from public.
5.12 In view of the above mitigating factors, I am not inclined to disregard the approval given by the shareholders for preferential allotment of shares to the promoters which appears to be in the interest of the shareholders of the company.
5.13 It is however, observed that there was considerable delay (407 days) in filing the required report in terms of Regulation 3(4) of the said Regulations. Further, the required disclosures had also not been made in the notice for the Extra Ordinary General Meeting called for the purpose of consideration of the preferential allotment. Such lapses in compliance with Regulatory requirement need to be appropriately dealt with so as to ensure general compliance.
6.0 ORDER
6.1 In view of the findings made above and in exercise of the powers conferred upon me under Section 19 of SEBI Act 1992 read with regulations 44 and 45 of the said Regulations, I direct that adjudication proceedings be initiated against the Acquirers for not having made full disclosures as required under the then provisions of Regulation 3(1)(c) and for delay in filing the report in terms of Regulation 3(4) of the said Regulations. The Acquirers may make their submissions before the Adjudicating Officer, who shall consider the same on merits and pass appropriate order in accordance with law. Order appointing the Adjudicating Officer will be issued separately.
This order shall come into force with immediate effect.
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T. M. NAGARAJAN
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Date: July 2, 2004
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WHOLE TIME MEMBER |
| Place: MUMBAI |
SECURITIES AND EXCHANGE BOARD OF INDIA |