SECURITIES AND EXCHANGE BOARD OF INDIA
ADJUDICATION ORDER
UNDER
SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
READ WITH
SECTION 15H(ii) OF SEBI ACT, 1992
AGAINST
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1
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ASIAN COFFEE LTD.(since merged with Tata Tea Ltd)
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2
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CONSCOFE INVESTMENTS LTD.
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3
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CONSOLIDATED COFFEE LTD.(now Tata Coffee Ltd)
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4
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TATA TEA LTD.
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FOR NOT MAKING PUBLIC ANNOUNCEMENT IN TERMS OF 11(1) OF SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997 IN THE MATTER OF ACQUISITION OF SHARES OF SAPTARISHI AGRO INDUSTRIES LTD.(SAIL)
I was appointed as Adjudicating Officer, by SEBI to inquire into and adjudge under 15H(ii) of the SEBI Act, 1992 for not making public announcement in terms of Regulation 11(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, by the aforesaid entities (hereinafter referred to as ‘the acquirers’) in the acquisition of shares of Saptarishi Agro Industries Ltd. (SAIL), on a preferential basis on 31st August 1999.
THE ALLEGATIONS:
The show cause notice issued to the acquirers alleges that the acquirers acquired 5,980,000 shares of SAIL on a preferential basis, thereby increasing their share holding from 52.22% to 63.89% of its post issue equity, on 31st August 1999 as detailed below.
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Entity
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Prior to preferential allotment
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After preferential allotment
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Shares
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%
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Shares
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%
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*Asian Coffee Ltd.
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4,836,030
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26.12
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5,186,030
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21.17
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Conscofe Investments Ltd.
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4,831,600
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26.10
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5,281,600
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21.56
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Consolidated Coffee Ltd.
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-
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-
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1,100,000
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4.49
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Tata Tea Ltd.
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-
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-
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4,080,000
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16.66
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Sub Total
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9,667,630
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52.22
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15,647,630
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63.89
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SAIL
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18,514,200
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100.00
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24,494,200
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100.00
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* since merged with Tata Tea Ltd.
It was alleged that the board resolution in respect of the proposed preferential allotment was not sent to the stock exchanges in which SAIL scrip is listed, as required under Regulation 3(1)(c)(i) of SEBI (SAST) Regulation, 1997. It is further alleged that, in the notice of the general meeting, called for the purpose of consideration of the aforesaid preferential allotment, necessary disclosures required under Regulation 3(1)(c)(ii) of the said regulations have also not been made.
For the aforesaid acquisition, the acquirers were required to make a public announcement to acquire shares of SAIL in terms of Regulation 11(1) of SEBI (SAST) Regulations, 1997 read with 14(1) of the said regulation. It is alleged that the acquirers have not made the public announcement in accordance with the regulations, which makes them liable for penalty under Section 15H(ii) of SEBI Act, 1992.
REPLY AND PERSONAL HEARING:
Mulla & Mulla & Craigie Blunt & Caroe, Advocates replied to the notice on behalf the acquirers.
It was submitted that Asian Coffee Ltd. was merged with Consolidated Coffee Ltd. and the latter’s name was changed to Tata Coffee Ltd. The advocates also dwelt upon the background of the company SAIL.
SAIL was promoted as a joint sector company by TIDCO and the acquirers had acquired controlling interest in SAIL in 1996. However, TIDCO had equal representation on the board of SAIL and the Chairman, appointed by TIDCO, had the casting vote in case of a tie. The management of SAIL was with TIDCO and the Company Secretary of SAIL, at the relevant time was Mr. Susai who is also nominee Director of TIDCO.
The financial position of SAIL was very bad as the company was making losses. As on 31.3.1999 its networth was Rs.39.55 lacs as against the paid up share capital of Rs.1,853 lacs. It was in this background that the acquirers converted their ICD and interest free trade finance of Rs.598 lacs to SAIL into shares at par value though SAIL scrip was quoting at Rs.2/- to Rs.3/- at that time. It was also submitted that the acquirers also agreed to waive interest on the aforesaid ICD which worked out to approximately Rs.165 lacs at the request of TIDCO and SAIL. Consequent to the waiver of the interest on the ICD as aforesaid, other financial institutions also waived interest amount of Rs. 188 lacs due to them, thus preventing the company from being referred to BIFR under SICA.
Therefore, it was argued that the acquirers acquired 59.8 lacs shares of SAIL on 31.8.1999 by way of preferential allotment in order to prevent SAIL from becoming a sick company. By doing so, the acquirers had paid par value to shares which are just quoting at Rs.2/- to Rs.3/-. Hence, it was contended that the aforesaid acquisition of shares did not result in loss to any investor. On the contrary, their acquisition as above had prevented the company from being declared as sick which would have negatively impacted the investors.
It was also contended that the acquirers had subsequently sold off all their holdings in SAIL. Therefore, in submitting their reply to this notice, their clients had constraint of limited records and information available and without complete and free access to all relevant records and documents to support their contentions. It was contended that Mr. Susai, Company Secretary was authorized to fulfill the statutory compliances pertaining to the preferential allotment of shares. Accordingly, the acquirers have proceeded on the belief that all compliance aspects would be taken care off by SAIL.
SAIL had filed the board resolution proposing the preferential allotment with all the stock exchanges in which SAIL was listed. The necessary shareholders’ approval in this regard was also obtained in the general meeting. They did not envisage that there would be breach in compliance in regard to disclosure in the notice for general meeting. Hence, considering all aspects of the case, it was pleaded that no penalty may be imposed.
In the personal hearing held on 8.12.2003 Mr. Yazdi Dandiwala, Partner of the advocate firm and Mr. Sanjay Dube, Vice President, Tata Financial Services appeared and reiterated the contents of their reply cited. It was also conceded that it was an aberration in terms of non-compliance with the notice requirements u/s.81(1A) of the Companies Act, 1956. Since the violation, if any, is only technical and as the acquisition of shares was to prevent SAIL from being declared as sick company, they contented that no penalty may be imposed. They also argued that the reference to Regulation 11 of SEBI (SAST) Regulations, 1997 in the present case is irrelevant. The advocates subsequently submitted the written arguments vide their undated letter which was received on 11.12.2003.
APPRECIATION OF EVIDENCE AND FINDINGS:
It is not in dispute that the acquirers have acquired 5980000 shares of the target company on 31.8.99 through preferential allotment under Section 81(1)A of the Companies Act, 1956 and increased their stake from 52.22% to 63.89% of the post issue equity. It is the case of SEBI that since copies of the Board Resolution were not filed with the stock exchanges where the shares of the company are listed as required under Regulation 3(1)( c)(i) and as the notice of the general meeting called for the purpose of consideration of preferential allotment did not contain necessary disclosures as required under Regulation 3(1)(c)(ii) of the said regulations, the acquirers were required to make a public announcement to acquire further shares of SAIL in terms of Regulation 11(1) of SEBI(SAST) Regulations, 1997 read with Regulation 14(1) of the said regulations. Since the requisite public announcement was not made, the matter was referred for adjudication.
It is the case of the acquirers that the statutory compliances pertaining to the preferential allotment was entrusted to Mr.Susai, Nominee Director of TIDCO and they were under bonafide belief that all statutory compliances with the preferential issue would be fulfilled. It was further submitted that they had no reason to believe that despite specific authorization to the Director of the company in this behalf there would be any breach.
The acquirers claimed that SAIL has sent the board resolution in respect of the proposed preferential allotment to all the stock exchanges. However, no documentary evidence in this regard is furnished. On the other hand, it appears that they have left it to Mr. Susai, Nominee Director of TIDCO to complete the necessary statutory compliances. Secondly, the acquirers have conceded that in terms of Regulation 3(1)(c)(ii) of SEBI (SAST) Regulations, 1997 they have not made the necessary disclosures.
Preferential allotment per se is not exempt from making a public announcement by the acquirer. It is subject to Regulation 3(1)( c) (i) and (ii) in the matter of filing the copy of the resolution to the stock exchanges and the requisite disclosures regarding the identity of the class of the proposed allottee and if any of the proposed allottee is to be allotted more than 5% of the post issue, then the price at which the allotment is proposed and reason for such allotment, consequent changes in the board of directors of the company and in voting rights, shareholding pattern of the company and whether such allotment would result in change of control of the company are to be disclosed in the notice of general meeting called for the purpose of consideration of preferential allotment. There is no material to suggest that the aforesaid disclosures have ever been made while considering the preferential allotment on 31.8.99.
In this context, it may be pointed out that in the appeal No.48/2001 dt.20.3.02 in the matter of Luxury Homes vs SEBI the Hon’ble SAT had observed that “it is to be noted that regulation 3 provides exemption from complying with the requirements of regulations 10, 11, 12 in respect of certain type of acquisitions stated in the said regulation. The requirement of compliance in terms of regulations 10, 11, 12 is by the acquirer. So if the acquirer is keen to avail of the exemptions, it is for him to satisfy as to whether the preconditions required to be complied with to avail exemption have been complied with or not”. (underlining supplied).
It is contended by the acquirers that they have pumped in additional funds by subscribing to the preferential allotments to save the company from being declared as ‘sick company’ and referred to BIFR. The shares in question were acquired at a price of Rs.10/- when they were worth just Rs.2-3/-. It was submitted that the acquirers have infact lost about Rs.12.35 crores in the process but agreed to infuse additional capital in view of the financial distress of the company.
This issue was squarely dealt with by the Hon’ble SAT in appeal no.96/2002 dt.14.5.03 in the matter of PC Surana vs SEBI (2003) 44 SCL649(SAT-MUM). The facts pertaining to the cited case are comparable to the instant case and SAT upheld imposition of penalty by the Adjudicating Officer even though the promoters and others had infused funds into the sick company (Magnum Intermediates Ltd.) through a preferential allotment, without the full disclosure in the notice for general meeting.
The relevant portion in the cited order is reproduced below:
17. Takeover Regulation provides exemptions to certain type of acquisitions. The exempted category of acquisition has been stated in regulation 3. Some of these exemptions are automatic and some of them are subject to fulfillment of certain specific conditions. The acquisitions falling under any one of the exempted category appearing under regulation 3 are out of the purview of Chapter III. One of such exemptions is preferential allotments as provided under regulation 3(1)(c). The said exemption is not automatic. To avail the exemption certain pre-requirements have to be followed. As per the said regulations provisions of regulations 10,11 and 12 are not applicable to preferential allotment, made in pursuance of a resolution passed under section 81(1A) of the Companies Act provided the following conditions are fulfilled:
(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 disclosed in the notice of the General Meeting called for the purpose of consideration of the preferential allotment”.
18. It is thus clear from the provisions of regulation 3(1)(c) that an acquisition pursuant to a preferential allotment simplicitor will not be eligible for exemption unless the requirements stipulated in clauses (i) & (ii) are complied with. In this context it is pertinent to mention that since the law specifically provides that the exemption is subject to compliance of certain requirements specified therein, to avail such exemption, it is absolutely necessary to fully comply with the specified requirements. The regulation does not provide for any relaxation from compliance of the specified requirements.
24. Failure to disclose full details on the specific aspects provided in the regulation cannot be considered as trivial or of no consequence to be overlooked. Since the requirements of clause (ii) of regulation 3(1)(c) have not been complied with fully, the exemption under regulation 3(1)(c) is not available to the acquisition by the Appellant. Once it is held that the acquisition do not have the benefit of exemption as provided under the said regulation, the acquirer is required to comply with the requirement of making a public offer in terms of regulation 11, and failure to do so would attract the provisions of section 15H(ii). The need for strict compliance of the conditions provided in regulation 3(1)(c) to avail exemption from the scope of Chapter III of the Takeover Regulations, has been clearly stated by this Tribunal in Arya Holdings (Supra).
25. For the reasons stated above it is clear that the Appellant has failed to fulfil the requirements of regulation 3(1)(c) and therefore, the acquisition in question is not exempted from the purview of regulation 11(1). (underlining supplied).
On the submission that the acquirers had acquired shares at a higher price than the market price, the Hon’ble SAT observed as under in the same order :
“From the appellants own version, the promoters had acquired the shares at a premium of Rs.2/- per share and the said price was higher than the market price. In that context a public offer to purchase shares at such a premium from the existing share holders would have been certainly beneficial to the share holders and by not making the public offer, the shareholders were denied the benefit. Therefore, the appellants version that investors had not lost anything was not correct.”
The Hon’ble SAT has upheld a penalty of Rs.5 lakhs imposed by the Adjudicating Officer in the aforesaid case.
In the case of Arya Holding Ltd vs P.Sri Sai Ram, Adjudicating Officer (2001) 31 SCL 549 also the Hon’ble SAT had stressed the need for strictly complying with the requirement of Regulation 3(i) (c) to avail exemption and therefore it is not correct to content that the breach is only a technical or venial breach as contended by the Learned Counsel. The following is extracted from the said Order of the Tribunal :
“An acquisition pursuant to a preferential allotment simplicator will not be eligible for exemption unless the requirements stipulated in clauses (i) & (ii) are complied with. In this context it is pertinent to mention that since the law specifically provides that the exemption is subject to compliance of certain requirements specified therein, to avail the exemption it is absolutely necessary to comply with the specified requirements. The regulation does not provide for any relaxation of the specified requirements. It is therefore necessary to examine whether the Appellant had fulfilled the requirements of clauses (i) and (ii) of regulation 3 (1) (c).
Now coming to the requisite disclosure in the notice of the General meeting called for the purpose of consideration of the preferential allotment, by the Appellants own admission disclosures on certain aspects such as changes in voting rights and change in share holding pattern were not furnished. Disclosure of the specified information in the notice is very important from the point view of the public share holders, as the particulars so furnished would help them to take an informed decision about the future of their investments in the company. Failure to disclose full details on the specific aspects provided in the regulation cannot be considered as trivial or of no consequence to be overlooked. Since the Appellants have failed to comply with the requirements of clause (ii) of regulation 3 (1) (c) in toto, the exemption under the regulation 3 (1) (c) is not available to them. Once it is held that the acquisition do not have the benefit of exemption as provided under the said regulation, the acquirer is required to comply with the requirement of making a public offer in terms of regulation 10, and failure to do so would attract the provisions of section 15H(ii).
Evidently the acquisitions attract the provisions of section 15H(ii) as the Appellants having not complied with the requirements of regulation 10 in the context of exemption under regulation 3 (1) (c) not available to them. The observation of the Adjudicating Officer that as a result of failure to comply with the requirements of regulation 10, the investors have not been put to loss, as the acquisition of shares was at a price higher than the prevailing market price is not acceptable. In this context it is to be noted that the shares were acquired by the Appellants at the rate of Rs. 10/- per share against the prevailing market price at rupees three or four. If the Appellant had made a public offer to purchase the shares at the same rate of Rs. 10/- at which they acquired, the other share holders would have availed of the golden opportunity and gained in this process. Therefore, the conclusion that the share holders have not been put to loss as a result of non-compliance of regulation 10, is not correct (underlining supplied).
The acquirers had acquired 5,980,000 shares of SAIL on 31.8.99 through preferential allotment which increased their holding from 52.22% to 63.89% of SAIL’s equity. Since the acquirers held more than 15% and less than 75% of SAIL’s equity, they are prohibited from acquiring more than 5% of SAIL’s equity in any period of 12 months without making any public announcement in terms of Regulation 11(1) of SEBI (SAST) Regulations, 1997.
As the aforesaid acquisition was through preferential allotment, exemption from making public announcement was available to the acquirers, subject to fulfilling the requirements of Regulation 3(1)(c) of the said regulations. In view of the non compliance of Regulation 3(1)( c) (i) & (ii) as discussed above, the acquirers were required to make a public announcement to acquire further shares in terms of Regulation 11(1) in terms of SEBI (SAST) Regulations as seen above.
A seven Judge Bench of the Honourable Supreme Court in R S Joshi, STO Vs. Ajit Mills Ltd. AIR 1977 SC2279 held that it is not necessary that penalty should be confined only to wilful acts of omission and commission in contravention of the provisions of the enactment. For proper enforcement of provisions of Law, it is common knowledge that absolute liability is imposed and the acts without mens rea are made punishable.
In para 19 of the Judgement, the Apex Court observed as under:-
“The notion that a penalty or a punishment cannot be cast in the form of an absolute or no fault liability but must be preceded by mens rea must be rejected. The classical view that “no mens rea, no crime” has long ago been eroded especially regarding economic crimes”.
In view of the above observations of the apex court, what is to be seen in such a situation is whether there is a factum of breach of the Regulations by the company. If the breach is established, factors like intentions, capacity to pay the penalty are not germane to the issue.
In case of SEBI v/s Cabot International Capital Corporation in Appeal no
7 of 2001 in SEBI Appeal No 24 of 2000 , the Hon’ble High Court of Bombay, the
following was observed.......
”The penalty imposable under the SEBI Act and the Regulations under
Section 15I and 15J, is deterrent in nature to see that the parties or
person concerned complies with the Regulations strictly. This imposition
of the penalty under SEBI Act and Regulations is civil in nature and
cannot be equated with penal in character as referred and submitted by
the respondents and /or observed by the Appellate Authoritiy. It is also
clear that the word "penalty" has different colour and shades and facets
and that has to be interpreted and imposed on the basis
of particular act and policies or scheme. It is also clear that there
can be two distinct liabilities under the same act i.e. civil and/or
criminal. The authorities or Regulatory Authority have ample power to
initiate both proceedings, if case is made out, within the framework of
the SEBI Act or the Regulations.
The SEBI Act and the Regulations, are intended to regulate the security
market and the related aspects, the imposition of penalty, in the given
facts and circumstances of the case, cannot be tested on the ground of
"no mens rea, no penalty". For breaches of provisions of SEBI Act and
Regulations, according to us, which are civil in nature, mens rea is
not essential."
In view of the above, it is concluded that the acquirer had violated Regulation 11(1) of SEBI(SAST) Regulations, 1997 when they acquired 5980,000 shares of the target company and increased their from 52.22% to 63.89% of the paid up capital of the target company as on 31.8.99 since the acquisition was not preceded by a public announcement to acquire further shares from the other shareholders of the target company. Had the acquirer made a public announcement to acquire further shares from the other shareholders, they would have got an opportunity to tender their shares pursuant to such public announcement and exited from the company at a beneficial price to be determined under the Regulations. Therefore, the interest of the investors is prejudicially affected. Further, such announcement if made, would have also impacted the price movements of the share in the stock exchange and the investors would have had an opportunity to exit from the company. This secondary market exit opportunity to the shareholders of the target company would have been in addition to the open offer which the acquirer was required to make under the Regulations.
There is considerable force in the argument of the Learned Counsel that the provisions of Section 15H(ii) as existing prior to October 2002 are applicable in the instant case since the alleged violations took place on 31st August, 1999. This argument needs to be accepted and also finds support in the Order of the Hon’ble SAT in Appeal No.151/2004 dated 7.2.2005 in the matter of Rameshchandra Mansukhani NRI vs SEBI. It has been held by the Hon’ble Tribunal that for irregularities that were committed prior to the amendment of the SEBI Act on 29.10.2002, penalty as existing at the relevant period only is to be imposed and not the new penalties under the amended Act. The SAT held that it is the common ground that at the relevant period the maximum penalty was Rs.5 lacs. The amendment enhancing the penalty to Rs.5 crores came into force with effect from 29th October, 2002.
The Hon’ble SAT at page 16 of the order held as under :
“Penalties unless specifically made retrospective must inevitably be only with effect from the date of amendment. Accordingly, we hold that at the relevant time, the maximum penalty was Rs.5.00 lakhs”.
ORDER
Having regard to the nature and gravity of the charges established, the factors contained in Section 15J of SEBI Act, 1992, taking into account the loss caused to the investors due to the failure of the acquirers to make a public announcement to acquire further shares of the target company in terms of Regulation 11(1) of SEBI(SAST) Regulations, 1997, the facts and circumstances having regard to the submission that the acquirers no longer hold any shares of the target company, I hereby impose, under Section 15H(ii) of SEBI Act, 1992, a consolidated penalty of Rs.3,00,000 (Rupees three lakhs only) on the acquirers viz. Asian Coffee Ltd. (since merged with Tata Tea Ltd.), Conscofe Investments Ltd., Consolidated Coffee Ltd. (now Tata Coffee Ltd.) and Tata Tea Ltd. The acquirers are jointly and severally liable to pay the penalty.
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, may be sent immediately to Shri S.V.M.D. Rao, General Manager, Securities and Exchange Board of India, Mittal Court, ‘B’ Wing, 224 Nariman Point, Mumbai–400 021.
Date: 27 June, 2005 S V Krishna Mohan
Place : Mumbai Adjudicating Officer