BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI
Appeal No. 115/2003
Date of Hearing: 29th June, 2004
Date of decision: 21st July, 2004
In the matter of
1. Wall Street Securities & Investments Ltd.,
2. Alliance Victory International Ltd., Appellants – Represented by Ketan Dand, Practicing Company
Secretary.
Versus
Securities and Exchange
Board of India Respondent – Represented by
Shri Jaideep Mitra, Advocate
Coram:
Justice Shri Kumar Rajaratnam, Presiding Officer
Dr. B. Samal, Member
Shri N. L. Lakhanpal, Member
Per : Dr. B. Samal, Member
The present appeal is challenging the order passed by the Adjudication & Enquiry Officer, SEBI dated 28th January, 2003 imposing a penalty of Rs.2.5 lakhs each on(1) M/s. Wall Street Securities & Investments Ltd., and (2) M/s. Alliance Victory International Ltd., under section 15H(ii) of SEBI Act, 1992.
2. It is alleged that the acquirer who belong to the promoter group had acquired 60 lakh shares of the target company and contravened the provisions of Regulation 3(1)©(ii) and Regulation 11(1) of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 read with Section 15H(ii) of SEBI Act, 1992. The acquirers, who are also promoters were already holding shares in excess of 5%prior to the preferential allotment in the target company on March 31, 2001 had acquired shares as under:
Shares %age of paid up capital
1) Wall Street Securities and
Investments Ltd., 5,400,000 46.45%
2) Alliance Victory
International Ltd., 600,000 5.16%
Total 6,000,000 51.61%
The acquirers are overseas corporate bodies and being controlled by the promoters of the target company. The acquirer companies and the target company belong to the group of companies called House of Patels as per the information submitted by the target company in its report dated 23rd June, 2001 to SEBI.
3. Upto 1999 the company was classified by the Reserve Bank as HP/Leasing Company. Subsequently the RBI reclassified the company as “Loan Company” in 1999 due to fall in the company’s business during the lean years from 1995 to 1999. With the change in classification, company could accept deposits upto only one and a half times of its Net Owned Funds as against four times of its Net Owned Funds prior to reclassification. As the company had, already deposits in excess of one and a half times of its Net Owned Funds, as these had been accepted earlier, and not in a position to refund excess of deposits, it had no other go but to increase its Net Owned Fund.
4. Regulation 3(1)©(ii) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 reads as under:
Regulation 3(1) “Nothing contained in Regulation 10,11 & 12 of these regulations shall apply to:
(a) xxxxxx
(b) xxxxx
(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) xxx
(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 per cent or more of the post issued capital, then in such case, the price at which the allotment is proposed, the identity of such person (s), the purpose of and reason of 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 the 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. The Extra Ordinary General Meeting notice dated 01.07.99, furnished the following draft resolution :-
“Resolved that in supercession of the Special Resolution passed at the 12th Annual General Meeting of the company held on 25th June, 1999 and pursuant to section 80, 81(1-A) and other applicable provisions, if any of the Companies Act, 1956 and subject to the approval, if required of the Securities and Exchange Board of India (SEBI), the Reserve Bank of India, the Financial Institutions/Banks and such other approvals as may be necessary consent of the company be and is hereby accorded to the Board of directors of the Company (hereinafter called the Board which terms shall include any committee of the Board) to issue upto 6,00,000 Cumulative Convertible Preference shares of Rs.100 each, aggregating to Rs.6,00,00,000 (Rupees Six Crores only, for cash at par and to offer the said shares for subscription for cash at par by way of private placement with Non Resident Indians. Overseas Corporate Bodies, Foreign Institutional Investors and/or the promoters of the Company at such time or times and in one or more tranches and on such terms including conversion into equity shares at par or at a premium as the Board may deem fit.”
It is clear from the above that only the identity of the class of the proposed allottees to whom preferential allotment would be made were disclosed, but the identity of the allottees was not disclosed. Even the class of the proposed allottees were stated to be NRIs, OCBs, FIIs and/or the promoters of the company. There is no dispute that the following disclosures as required in terms of proviso (ii) to Regulation 3(1)© of the SEBI (SAST) Regulations, 1997 have not been made with regard to:
· Identity of allottees.
· Consequential Changes in Board of Directors
· Consequential Changes in voting rights
· Consequential Changes in shareholding pattern
· Whether such allotment would result in change in control over the company.
6. The appellants submitted that as promoters they already held in excess of 5% of share capital prior to the acquisition and as such they need to have complied only with the first part of Regulation 3(1)©(ii) i.e. disclosure of identity of class of allottees only and not with the second part i.e. disclosure of identity of allottees, changes in Board of Directors, changes in voting rights, changes in shareholding pattern and whether such allotment would result in change in control etc.
7. As per the regulation if any of the proposed allottees is to be allotted 5% and more of the paid up capital, then in such case the full disclosure as stated in para 5 has to be made. There is no exemption to promoter group from this disclosure requirement. As per Regulation 11(1) no acquirer together with person acting in concert with him has acquired in accordance with the provisions of law (15% or more but less then 75%) of the shares or voting rights in a company, shall acquir, either by himself or through persons acting in concert with him, additional shares or voting rights which entitle 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.
8. On perusal of the notice of the Extra Ordinary General Meeting convened for the purpose of consideration of the preferential allotment it is seen that the requisite disclosure with regard to identity of allottees, the changes in board of directors, changes in voting rights, changes in shareholding pattern, whether such allotment would result in change in control etc. were not made. Hence the acquirer has violated the relevant regulations mentioned above.
9. The overall average price of the scrip between September, 2000 and February 2001 was Rs.2.82 and the weekly closing price for the period between February 9, 2001 and February 28, 2001was Rs.2.68. The shares were also not frequently traded. Wall Street Finance Ltd., has converted 6 lakhs of convertible cumulative preference shares by issuing 60 lakh equity shares of Rs.10/- each at par on March 31, 2001. The acquisition of shares at the rate of Rs.10/- per shares is to be compared with its average weekly high/low price of Rs.2.82 per shares in the six months prior to acquisition and the average weekly high/low of Rs.2.68 per shares prior to 2 weeks before the acquisition. The acquirers had acquired share at the price of Rs.10/-
10. The learned Counsel for the Respondent submitted that the option of exit was not made available to the existing shareholders when overall average price of the shares between September 2000 and February, 2001 was hovering around Rs.2.82. Had the acquirer made an open offer and complied with Regulation 11(1) of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 and other regulations, the other shareholders of the company would have atleast got Rs.10/- i.e. the price the acquirers had paid.
11. After hearing both parties we are inclined to uphold the order of the Adjudication & Enquiry Officer. However, considering the provisions of Section 15J of the Act we find that the appellants have not derived gain out of the transaction and the violation is not repetitive. Further it is very difficult to estimate the loss suffered by the existing shareholders. In view of this we reduce the quantum of penalty to Rs.25,000/- each payable by (i) Wall Street Securities & Investments Ltd., and (ii) Alliance Victory International Ltd., The penalty amount will be deposited with the Respondent within six weeks from the date of receipt of this order. The impugned order is modified to the above extent.
The appeal is disposed of accordingly.
No order as to costs.
(Pronounced in Court)
Justice Kumar Rajaratnam
Presiding officer
Dr. B. Samal, N. L. Lakhanpal,
Member Member
Place: Mumbai
Date: 21st July, 2004.