ORDER OF THE ADJUDICATING OFFICER UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 AGAINST M/S. RAJ MONEY MARKET LTD. IN THE MATTER OF ACQUISITION OF SHARES OF M/S.RAJ RAYON LTD. IN VIOLATION OF REGULATIONS 3(3), (4) & (5) OF SEBI(SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997 READ WITH SECTION 15A(a)&(b) OF SEBI ACT, 1992.
I was appointed as Adjudicating Officer vide SEBI’s order to inquire into and adjudge the alleged contravention of Regulation 3 (3),(4) & (5) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 read with Section 15A(a)&(b) of SEBI Act, 1992 by M/s. Raj Money Market Ltd.(hereinafter referred to as the acquirer) in the matter of acquisition of shares of M/s.Raj Rayon Ltd.(hereinafter referred to as the target company)
It is alleged that the acquirer while acquiring shares of the target company on 15.05.2002 constituting 21.22% of its equity, the acquirer had not informed the stock exchanges 4 days in advance of the proposed acquisition as required under Regulation 3(3) of SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 1997. It is also alleged that the acquirer had not filed the report on the acquisition to SEBI as required under regulation 3(4) of SEBI(SAST) regulations, 1997 within the time specified therein.
NOTICE & REPLY
A notice was issued to the acquirer under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, seeking the reply of the acquirer on the alleged contravention of Regulation 3(3), (4) and (5) of SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
The notice alleges that Raj Money Market Ltd. after acquiring 13,83,000 shares of the target company on 15/5/2002 and thereby increasing its shareholding from 36.73% to 49.50% did not comply with Regulation 3(3) of SEBI(SAST)Regulations, 1997 as the stock exchanges were not informed 4 working days prior to the proposed transaction. The notice also alleges that a report to SEBI of the acquisition was not submitted within 21 days from the date of acquisition as required under Regulation 3(4) and (5) of SEBI(SAST)Regulations, 1997. It is, however, stated in the notice that the said report was submitted with a delay of 131 days on 14/10/2002.
The acquirer submitted a reply vide its letter dated 31st March, 2003. The acquirer had authorized ms. krishna Tanna and Mr. Pradeep Aggarwal, Company Secretary of Raj Rayon Ltd to appear in the adjudicating proceedings.
The learned counsel has referred to the reply already filed by the acquirer vide its letter dated 31/03/2003 and made further submissions as under in support of the reply filed .
Explaining the background of the preferential allotment, the learned counsel, while referring to the notice of extraordinary general meeting dated 1/4/202 has submitted that SICOM Ltd had sanctioned a term loan of 1,000 lakhs to the target company and one of the terms and conditions of the said sanction was that the promoters should bring in additional share capital of Rs.150 lakhs. As per the financial conditions prevailing then, the promoters had to bring in additional capital and for this purpose, the necessary resolution under Section 81(1A) of the Companies Act, 1956 was passed. As per the explanatory statement to the said notice, the acquirer who is one of the promoters of the target company was offered 13,83,000 shares in the preferential allotment at a price of Rs.10 each against the then prevailing market price of around Rs.6/- and subsequent to the preferential allotment, the shareholding of the acquirer had gone upto 49.5% of the paid up capital of the company.
It was submitted that the Board Resolution under Section 81(1A) of the Companies Act, 1956 was passed on 01/04/2002.
The learned counsel had submitted that both the Bombay and Jaipur Stock Exchanges were informed about the proposed acquisition vide the target company’s letter dated 5/4/2002 which was received by the BSE on 8/4/2002. The shareholders meeting was held on 30/4/2002 and the proposed allotment was given approval by the shareholders by passing the necessary Resolution. Subsequently, on 7/5/2002, the target company has addressed a letter to stock exchange, Mumbai and to the Stock Exchange, Jaipur about the preferential allotment. Copies of these letters are enclosed to the reply of the acquirer.
It was submitted that the actual allotment has taken place on 15/5/2002 in accordance with the proposal as notified in the notice for the extraordinary general meeting.
The learned counsel has contended that the notice of EGM has made all the necessary disclosures as required under Regulation 3(1)© of SEBI (SAST)Regulations, 1997. It was further submitted that since the stock exchanges were already intimated vide the target company’s letter dated 5/4/2002 by which the copy of the notice of EGM was sent informing about the proposed allotment and also by way of a letter dated 7/5/2002 by the target company, there was full compliance with Regulation 3(3) of SEBI(SAST)Regulation, 1997 since they had informed more than 4 days ahead of the proposed allotment and therefore, no penalty is warranted under Section 15A(b) of SEBI Act, 1992.
As regards submission of a report to SEBI in terms of Regulation of SEBI 3(4) and (5) of SEBI(SAST)Regulations, 1997, the learned counsel has submitted that immediately after the allotment was over on 15/5/2002, the acquirer on 16/5/2002 has submitted the report in the prescribed form through the messenger of the acquirer. It was submitted that since the said report was sent by enclosing a cheque, SEBI did not accept the same and insisted on a demand draft / pay order. The messenger of the acquirer returned to the office and did not inform about this to the higher ups and he further proceeded on long leave. In view of this, there was misplacement of the papers in the office and the matter was finally discovered and resolved on 4/10/2002 when a report under Regulations 3(4) of SEBI(SAST)Regulations, 1997 together with the requisite fee by way of pay order was sent vide their letter dated 28/9/2002 which was received in SEBI’s office on 4/10/2002.
The learned counsel has submitted that this human error was unintentional and may be condoned. It was finally submitted that the acquirer’s financial condition is not healthy and any penalty at this stage would be detrimental to its financial condition. The learned counsel further submitted that there is no element of mens rea and it cannot be stated that there was any undue advantage for the acquirer for the delay which happened due to the unfortunate circumstances explained and requested to take a lenient view.
APPRECIATION OF EVIDENCE AND FINDINGS
There is no denial of the fact that the acquirer had acquired 13,83,000 shares of M/s.Raj Rayon Ltd. constituting 21.22% of the equity of the target company on 15/5/2002. Prior to the aforesaid acquisition, the acquirer who belonged to the promoter group had held 5017700 shares of the target company. After the acquisition in the preferential allotment on 15/5/2002, the total holding of the acquirer had risen to 49.5% of the total paid up capital of the target company. It was explained by the learned counsel that the preferential allotment was made to the acquirer who belonged to the promoter group so as to infuse additional capital into the company as a condition precedent for sanction of loan by SICOM, a financial institution, which had granted a term loan.
As per the material on record, the meeting of the Board of Directors of the Target company was held on 1/4/2002 for considering preferential allotment to the promoters’ group under Section 81(1A) of the Companies Act, 1956. On 5/4/2002, stock exchange, Mumbai was informed about the notice of EGM scheduled for 30/4/2002 for considering the issuance of preferential allotment for Rs.150 lakhs. A perusal of the enclosed notice of EGM shows the name of the acquirer for allotment of 13,83,000 shares in the Annexure to the note and the explanatory statement.
After the EGM passed the Resolution on 30/4/2002 the target company vide letter dated 7/5/2002 had informed about the allotment of shares in preferential allotment to promoters, friends, relatives etc. The allotment was finally made on 15/5/2002 in the meeting of the Board of Directors.
As held by the Hon’ble SAT in Yogi Sungwon (India) Ltd v/s. SEBI, Appeal No.36/ 2000, in terms of Regulation 3(3), the acquirer is required to notify the concerned stock exchanges, the details of the proposed transactions atleast 4 working days in advance of the proposed acquisition in case of the acquisition exceeding the prescribed limit. Therefore, the onus is on the acquirer to inform the stock exchanges in terms of the Regulations. In the instant case, it was the target company and not the acquirer who had informed the stock exchanges about the proposed transactions in terms of the Listing Agreement. Vide letter dated 05.04.02, the target company had forwarded copy of the notice dated 01.04.2002 of EGM to be held on 30.04.02 to the stock exchange. In the said notice, the name of the proposed allottees including that of M/s Raj Money Market Ltd. was duly mentioned alongwith the percentage of shares to be offered in the proposed preferential allotment. This information on the proposed allotment is conveyed in advance to the stock exchanges. The actual allotment took place on 15.05.2002. Thus, the object of informing the stock exchanges 4 days prior to the proposed acquisition under Regulation 3(3) of SEBI(SAST) Regulations, 1997 is duly met, although the same was not informed by the acquirer. Hence, the proposed change in shareholding pattern was communicated to the investors through the medium of Stock Exchange and, therefore, it is presumed that the market has discounted this factor as reflected in the response of the share prices to the proposed acquisition.Therefore, information in this regard furnished by the target company containing the name of the acquirer may be treated as sufficient compliance and under the peculiar circumstances the benefit of doubt is given in favour of the acquirer in so far as compliance of Regulation 3(3) is concerned.
As regards compliance with Regulation 3(4) which envisages that a report in respect of the acquisition has to be filed by the acquirer within 21 days of the acquisition, there is no dispute that the same was filed on 4/10/2002 after a delay of 131 days.
The learned counsel submitted that there is no element of mens rea, but it may be stated that mens rea is not an essential ingredient in cases imposing strict liability.
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 Appeal No.7 of 2001, in SEBI Appeal No.24 of 2000, SEBI v Cabot International Ltd. the Hon’ble Bombay High Court has held as under:-
“The SEBI Act and the Regulations, are intended to regulate the Securities 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 the same judgement, the Hon’ble High Court while summarizing the principles on penalties has also observed as under :
“though looking to the provisions of the statute, the delinquency of the defaulter may itself expose him to the penalty provision yet despite that in the statute minimum penalty is prescribed, the authority may refuse to impose penalty for justifiable reasons like the default occurred due to bonafide belief that he was not liable to act in the manner prescribed by the statute or there was too technical or venial breach etc.”
In the instant case, the acquirer belongs to the promoter group and had acquired additional shares in the preferential allotment at a price of Rs.10/- each in view of the condition imposed by SICOM Ltd. which had granted a term loan of 1000 lakhs to the target company that the promoters should bring in additional capital. Therefore, the acquisition was by infusion of fresh capital by the promoter group to comply with the conditions imposed by term lending institution i.e SICOM Ltd. It may be pertinent to note that there is no change in the management or control pursuant to the acquisition which also did not trigger making of an open offer by the acquirer to the public. It has already been seen that in view of the intimation to the stock exchange by the target company no penalty was imposed for the violation of Regulation 3(3) as discussed earlier. It is the case of the acquirer that the report under Regulation 3(4) and (5) was sent to SEBI with a messenger and since a cheque was enclosed instead of a draft, the same was returned and there appears to be no further efforts as the messenger through whom the report was sent was stated to be on long leave. Ultimately, the report under Regulation 3(4) was filed after a delay of 131 days. The acquirer did not exercise due diligence in the matter of compliance with the statutory provisions to make sure that the report is complete in all respects and submitted to the regulator within the prescribed time together with the requisite fees in the form of demand draft or pay order.
Section 15A(a) of SEBI Act 1992 prior to its amendment reads as under :
“Penalty for failure to furnish information
If any person who is required under this Act or any rules or regulations made there under :
(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty not exceeding one lakh and fifty thousand rupees for each such failure.”
Under the aforesaid facts and circumstances and taking into account the judgemnet of Hon’ble High Court of Mumbai in SEBI Vs Cabot Interantional Capital Corporation(2004), 51 SCL(BOM), as discussed above, it is fair and just to impose a token penalty of Rs. 10000/- although in terms of Section 15A(a), of SEBI Act, 1992, if any person who is required under the Act or any Rules or Regulations made thereunder to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty not exceeding Rs.1,50,000/-.
ORDER
Having regard to the submissions made, the factors contained in Section 15J of SEBI Act, 1992, the gravity of the charges established for the aforesaid reasons and the mitigating circumstances as explained above, I hereby, impose a penalty of Rs. 10,000/- (Rupees Ten Thousand only) under Section 15A(a) of SEBI Act, 1992 on M/s. Raj Money Market Ltd. for the delay of 131 days in submitting a report to the SEBI of its acquisition of shares of Raj Rayon Ltd. in terms of Regulations 3(4) of SEBI(substantial acquisition of shares and takeover) Regulations,1997. The constructive compliance of Regulation 3(3) in the aforesaid manner is also considered as a mitigating factor.
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 Muralidhar Rao, General Manager, Securities and Exchange Board of India, B Wing, Mittal Court,, 1st Floor, Nariman Point, Mumbai 400 021.
PLACE: Mumbai S V Krishna Mohan
DATE : 24th June, 2005 Adjudicating Officer