SECURITIES AND EXCHANGE BOARD OF INDIA
ADJUDICATION ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
READ WITH SECTION 15A(b) & 15H(ii) OF THE SEBI ACT, 1992
AGAINST
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1
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SHRI KISHORE RAJARAM CHHABRIA
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2
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SHRI MADANLAL DWARKADAS CHHABRIA
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3
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IMFA HOLDING PVT LTD.
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4
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MAHAMERU TRADING CO. P. LTD.
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5
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SHRISH FINANCE & INVESTMENT P. LTD.
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6
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GALAN FINVEST P. LTD.
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7
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VENEER INVESTMENTS & FINANCE P. LTD.
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8
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STINGRAY TRADERS P. LTD.
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9
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DARREL TRADERS P. LTD.
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10
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BEETHOVEN TRADERS P. LTD.
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11
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ALGID INVESTMENT & FINANCE P. LTD.
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12
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AIRDALE INVESTMENT & TRADING P. LTD.
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FOR VIOLATION OF REGULATION 6(1) & 8(1) OF SEBI(SAST) REGULATIONS, 1997 AND REGULATION 10(2) OF SEBI (SAST) REGULATIONS, 1994
1.0 I was appointed as the Adjudicating Officer by SEBI to enquire into and adjudge under Sections 15A(b) and 15H(ii) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the alleged violation of the provisions of the SEBI (SAST) Regulations, 1994 and 1997 (hereinafter referred to as the ‘said Regulations’) by
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1
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SHRI KISHORE RAJARAM CHHABRIA
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2
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SHRI MADANLAL DWARKADAS CHHABRIA
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3
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IMFA HOLDING PVT LTD.
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4
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MAHAMERU TRADING CO. P. LTD.
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5
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SHRISH FINANCE & INVESTMENT P. LTD.
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6
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GALAN FINVEST P. LTD.
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7
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VENEER INVESTMENTS & FINANCE P. LTD.
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8
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STINGRAY TRADERS P. LTD.
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9
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DARREL TRADERS P. LTD.
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10
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BEETHOVEN TRADERS P. LTD.
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11
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ALGID INVESTMENT & FINANCE P. LTD.
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12
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AIRDALE INVESTMENT & TRADING P. LTD.
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(hereinafter referred to as the ‘acquirers and persons acting in concert’) for the acquisition of the shares of Herbertsons Ltd (hereinafter referred as the ‘target company’).
2.0 SHOW CAUSE NOTICE
Accordingly, a Show Cause Notice dated January 28, 2003 was issued to the acquirers and persons acting concert. It is alleged that the acquirers and persons acting in concert who already held 2215800 shares of the target company which constituted 26% of the paid-up capital on December 14, 1993 as detailed in the show cause notice had acquired 3,75,000 shares on August 11, 1995 and increased their holding in the target company to 2590800 shares constituting 27.21% of the paid-up capital. It is alleged that the aforesaid acquisition was not preceded by a public announcement to acquire further shares in terms of Regulation 10(2) of SEBI(SAST) Regulations, 1994.
Subsequent Acquisitons
It is alleged that further acquisitions of shares of the target company were made by MDC and KRC through PACs namely Imfa, Mahameru and Shirish between 27.10.94 and 13.2.97 as detailed in the show cause notice. Subsequently, these acquirer entities themselves were taken over by Seven Star Investment & Trading Co. P. Ltd. which is fully owned by MDC. It is therefore alleged that MDC, KRC and PACs with them viz. Galan and its subsidiaries, Imfa, Mahameru and Shirish acquired shares of the target company between the aforesaid dates without making a public announcement . The link for acting in concert was also provided for in the show cause notice.
It is alleged that the acquirers viz. KRC, MDC, Galan and its subsidiaries and Seven Star Trading failed to make disclosure of their holdings in the target company to the company in violation of Regulation 6(1) for the year 1997 and Regulation 8(1) for the years 1998-2001 in terms of SEBI(SAST) Regulations, 1997.
PROCEEDINGS
Shri R.K.Krishnamurthy, Advocate appeared for KRC.
Shri Abeezar Faizullabhoy, Advocate, J.Sagar Associates, appeared for noticees 6-12.
Shri Somasekhar Sundaresan, Advocate appeared for MDC, Imfa, Mahameru and Shirish
It was submitted that KRC does not hold a single share in the target company and as such there was no obligation to comply with Regulation 6(1) & 8(1) of the Regulations. It was, however, submitted that KRC complied with Reg. 6(3) & 8(2) of 1997 Regulations. Copies of letter dated 17.4.97 were filed. Regulation 8(2) was complied with by KRC vide his letter dated 13.1.99.
It was submitted that the acquisition on 14.12.93 which constituted 26% of the equity of the target company and the subsequent conversion of the compulsorily convertible debentures are not covered under SEBI (SAST) Regulations, 1994 obliging his client to make a public announcement since the acquisition had taken place prior to coming into force of the 1994 Regulations. The debentures were compulsorily converted into 3.75 lakh equity shares on August 11, 1995. Since no action was initiated against his client before the repeal of 1994 Regulations, it was argued that the present proceedings cannot be continued.
As regards the acquisition of 1039341 shares of the target company by IMFA constituting 10.91% of the paid-up capital between 27.10.94 and 22.11.95, it was submitted that it is not shown as to how Rs.1.31 crores was funded by KRC and MDC through Galan Investments as alleged and the same was not there in the original show cause notice dated 8.1.99 issued by SEBI. According to the Learned Counsel, the said show cause notice alleges that Rs.4.13 crores was given by MDC for the acquisition of 10.91% of the paid-up capital and there is no reference to his client KRC. It was submitted that merely because KRC is the nephew of MDC, it cannot be alleged that they are PACs. The Learned Counsel referred to Page 103 of the SAT Order wherein it was noted that there was no material on record to establish that KRC and MDC acquired 27.215% paid-up capital of the target company despite MDC being a director in one of the Galan’s group company.
In respect of the acquisition of 10.91% shares by IMFA, it is not the case of SEBI that no one other than MDC and Directors of IMFA had acted in concert in the said acquisition and KRC is not alleged to have made available any funds to IMFA for the acquisition of shares.
Similarly, in respect of the acquisition of 4.97% of the paid-up capital by Mahameru and 3.83% of the paid-up capital by Shirish, there is no allegation that KRC was acting in concert with MDC. As regards the observations by the Division Bench of the Hon’ble High Court, Mumbai in Shirish Investments case, the Learned Counsel submitted that it was only prima-facie conclusions for the purpose of disposal of notice of motion. There is no material produced by SEBI in support of the allegation that KRC has funded Rs.1.31 crores for the acquisition of shares by IMFA.
It was submitted that KRC had complied with the requirement of disclosure under 6(3) and 8(2) and having complied with the same, there was no reason for not complying with 6(1) and 8(1). He has not complied with the same since there was no statutory obligation to comply with Regulation 6(1) & 8(1). The Learned Counsel referred to the order of the Hon’ble Supreme Court in Clariant International case dated 25.8.04 and submitted that since his client was not holding any shares in the target company, he cannot be termed as a share holder and fastened with the liability to comply with Reg.6(1) and 8(1).
Referring to the acquisitions at page 3 of the show cause notice, it was submitted that KRC had no interest in IMFA, Mahameru and Shirish and in any case, the said acquisitions were prior to coming into force of the 1997 Regulations and it has not been shown as to how KRC funded Rs.1.31 crores. KRC had no interest in Sevenseas and Royal Wines. Galan originally belonged to KRC but was later on transferred to MDC. There is no concerted action between his client and others and there was no covert act in the acquisition. It was submitted that SEBI Order dated 19.2.02 directing the parties to divest their stake was modified by SAT to make a public announcement which his client has complied with. Prior to the amendment, Section 15H of the SEBI Act contemplates a maximum penalty of Rs.5.00 lakhs.
Shri Abeezar Faizullabhoy, Advocate appearing for IMFA, Shirish, Galan, Veneer, Stingray, Darrel, Beethoven, Algid and Airdale submitted that these are investment companies and have complied with Reg.6(1) and 8(1) of SEBI(SAST) Regulations, 1997.
For the alleged violation of Regulation 10(2), it was submitted that the said Regulation applies only to those acquirers who were also shareholders as on the date of coming into force of the 1994 Regulations and holds 10% or more of the shareholding. Relying on the judgement of the Supreme Court in Clariant International case, it was submitted that the term “holds” as found in Regulation 10(2) means a holder of shares and it should be given its plain meaning. The Learned Counsel referred to the judgement of SC in Howra Trading Co. Ltd. Since IMFA was not holding shares on the date when the 1994 Regulations came into force, there was no obligation to make an open offer in terms of Regulation 10(2). The other entities viz. Veneer, Stingray, Darrel, Beethoven, Algid and Airdale were shareholders when the 1994 Regulations came into force. His client was acting under the bonafide belief and as legally advised that since the condition precedent for making an open offer was not met, there was no obligation to comply with Reg. 10(2). The subsequent amendment to the Regulations in the year 1997 whereby the term “shares if any held” were incorporated proves his point that at the relevant time, IMFA was not obliged to make the public announcement in terms of Reg.10(2).
In any case, the subsequent making of an open offer together with payment of interest at 15% p.a. without deducting the dividend already paid should be taken into account even assuming that his client is liable to make an open offer. Besides, other factors under Section 15J of the Act also needs to be considered by the AO.
It was submitted that his clients received finance for business purposes and not for the purchase of shares of the target company. The details of purchase of shares by his clients are as under:
1. IMFA - 27.10.94 - 27.11.95 – 1039341 shares (10.91%)
27.2.97 – 1.8.97 – 54000 shares (.56%)
2. Shrirish made the first purchase on 26.8.96 and the last purchase on 14.2.97
3. Darrel bought 25800 shares on 16.12.98 through creeping acquisition route.
It was submitted that none of the noticees individually held 10% or more of the share capital of the target company in November 1994 and therefore the pre-condition of having 10% or more shares in the target company are not satisfied as required under Reg.10(2). However, it was admitted that the noticees 6-12 have collectively held 27.21% of the paid-up capital. Galan held no shares.
In so far as Reg.6(1) is concerned, it was submitted that except for Airdale which made the necessary disclosures, the shareholding of the other noticees viz. Galan, Veneer, Stingray, Darrel, Beethoven and Algid were below 5% and therefore they are not required to make the disclosure under 6(1). Referring to the judgement of Bombay High Court in Sangita Valia case, it was submitted that Section 15A(b) is attracted when there is delay in compliance and not for failure to comply as is applicable under Section 15A(a). It was submitted that none of the noticees have individually held 15% or more of the shares in the target company and as such there was no requirement to comply with Reg. 8(1).
It was further submitted that in the disclosures made by KRC and MDC to the target company under Reg.8(2), the shareholding of all the noticees were disclosed and therefore the object of the Regulation of making the necessary disclosure is complied with.
Shri Somasekhar Sundaresan appearing for MDC, IMFA, Mahameru and Shirish had submitted that the acquisition of IMFA which constituted 10.91% of the paid-up capital took place between 22.10.94 and 25.11.95. The shares were ultimately registered in the name of IMFA only on 30.5.96. At the time when the acquisition of these shares had taken place, MDC had no shares in IMFA which was under the control of Mr.Ram Raheja. It was submitted that Mahameru acquired 473100 shares (4.97%) between 14.11.95 and 28.10.96 and there was no overlapping period in which together they were acquiring so as to conclude that there was common understanding. Royal Wines, a proprietary firm of MDC had advanced Rs.2.8 crores to Mahameru and when there was a default, MDC took over Mahameru through Seven Star and the shares were registered on 26.9.96. Shirish which was incorporated on 19.8.96 cannot possibly act in concert with Mahameru, IMFA prior to its incorporation. Although Shirish was owned by S.J.Chhabria, nephew of MDC, he is not a relative within the meaning of the said term in terms of Section 6 of Companies Act, 1956.
Shrish had acquired 364750 shares between 27.8.96 and 13.2.97 which constituted 3.83% of the paid-up capital. MDC had nothing to do with Shirish during the aforesaid period. MDC gave a loan of Rs.8.35 crores during December 1993 to Oswal Electronics of S.J.Chhabria. Subsequently, a further sum of Rs.4.00 crores was also advanced. Based on the advice of Chartered Accountant Shirish was taken over on 18.2.97 when they defaulted in the repayment of the loans advanced to S.J.Chhabria.
Acquisitions after 20.2.97.
It was submitted that the following acquisitions were made
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Date
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Name of the Acquirer
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% of Shareholding
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27.02.97 & 01.08.97
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Imfa
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0.56%
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10.09.98 & 16.12.98
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Beethoven
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1.31%
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16.12.98
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Darrell
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0.27%
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The aforesaid acquisitions were not registered by the target company and proceedings are under way before CLB.
It was denied that Imfa, Shirish and Mahameru had anything in common so as to club them as acquirers or PACs. Further the indirect acquisition was not known to 1994 Regulations and acquisition of unlisted companies of Mahameru, Imfa and Shirish by MDC is covered under Reg.3(d) of 1994 Regulations which exempts acquisition of unlisted companies.
Referring to Regulation 10(2) of 1994 Regulations, the Learned Counsel submitted that on 4.11.94 when these regulations came into force, none of his clients namely MDC, IMFA, Mahameru and Shirish held any shares in the target company. It was submitted that the said regulations would apply to acquirer who holds shares carrying more than 10% of the voting rights of the target company, and in view of this no liability can be fastened on them to make an open offer. The Learned Counsel referred to and relied upon the orders of SAT in Fascinating Leasing case and that of SC in Clariant & Swedish Match case.
In the case of Mahameru, the acquisition took place between 14.11.95 and 10.8.96 and their shareholding was zero when the 94 Regulations came into force. There is also no acquisition simultaneously alongwith IMFA.
Shirish was incorporated in August 1996 and its first purchase of shares was on 27.8.96 before the 94 Regulations came into force. Their purchases continued till 14.6.97 which constituted 3.87% of the paid up capital and these shares lodged for transfer on 28.5.97 are not registered till date. It was denied that there was any violation of Regulation 6 and 8 of SEBI (SAST) Regulations.
APPRECIATION OF EVIDENCE AND FINDINGS
As regards purchase of 22,15,800 shares, of the target company on 14.12.1993 by six subsidiaries of Galan and the acquisition of 75,000 fully convertible debentures of the target company by Airdale, Galan subsidiary which were subsequently converted into 3,75,000 equity shares on 11.8.95, the Hon’ble SAT in Appeal No.13 & 14 /2002 dated 1st August, 2003 has held that the total acquisition of the shares of the target company by Galan subsidiaries prior to the notification of the 94 regulations was 25,90,800 shares which constituted 27.21% of the paid up capital of the target company and it cannot be considered illegal.
The following is extracted from the said order :
“It is an admitted fact that Galan subsidiaries acquired 26,90,800 equity shares (27.21%) of the paid up capital of the Target Company. Out of the same 22,15,800 (26%) shares were acquired on 14.12.1993 and 3,75,000 shares as a result of coversion of 75,000 debentures. These debentures were also purchased on 14.12.1993, though converted to shares only on 11.8.1995. According to the definition of the expression “shares” provided in the 1994 Regulations “Shares” means “share in the share capital of a company carrying voting rights and includes any securities which would entitle the holder to receive shares with voting rights.” The debentures purchased being convertible to equity shares with voting rights, in terms of the said definition, are also to be considered as “shares”. These “shares” were also purchased on 14.12.1993, prior to the notification of the 1994 Regulations. It is noticed that Hon’ble Bombay High Court also in its order in the Notice of Motion (Shirish) cited, has held that as the debentures were purchased before the 1994 Regulations came into force, the shares arising out of conversion of those debentures cannot be considered as acquisition of shares under the 1994 Regulations. The Respondent has also admitted this factual position”.
“In my view for the reasons stated, Galan companies, cannot be subjected to any action under the SEBI Act even if it is found that the requirements of 40A and 40B of the Listing Agreement were not complied with in respect of the acquqisition of 27.21% shares of the Target Company”.
“Based on the material available before me, I am inclined to hold that 27.21% shares of the Target Company was acquired by KRC through the companies controlled by him. There is no material to hold that it was joint acquisition by KRC and MDC acting in concert with each other.”
“In the light of the factual and legal position as discussed above I am of the view that the Respondent has no jurisdiction or authority to direct the Appellants to disinvest 27.21% shares of the Target Company acquired by KRC in December, 1993.” (underlining supplied)
FINDING
In view of the aforesaid finding of the Tribunal on a question of fact which is final, it cannot be further said that the acquisition prior to coming into force of 1994 Regulations and the conversion of compulsorily convertible debentures into equity shares on 11.8.95 as aforesaid can be treated as being in violation of SEBI (SAST) Regulations, 1994.
ACQUISITION BY IMFA, MAHAMERU AND SHIRISH
The showcause notice alleges that between 27.10.94 and 13.2.97 IMFA, Mahameru and Shirish had acquired 10.91%, 4.97% and 3.83% of the paid up capital of the target company without making a public announcement.
The contention with regard to funding for the above said acquisition was made before the Tribunal and the Tribunal has given a clear finding in this regard. The above finding of fact by the Tribunal is final and binding on the Adjudicating Officer. In any case there is no fresh material to take a different view. The Tribunal has held that in so far as acquisition of 18,77,191 shares representing approximately 19.71 % of the paid up capital of the target company, there is violation of SEBI (Takeover) Regulations and substituted the direction of SEBI of divesting the shareholding to that of making an open offer.
In this connection, it is useful to refer to the finding of the Appellate Tribunal in Appeal No.13&14 /2002 dated 1.8.2002.
The following is extracted from the Order of the Tribunal :
“What is to be considered therefore is the applicability of regulation to the acquisition of shares made in the name of IMFA (10.91%) Mahameru (4.97%) and Shirish (3.83%) during the currency of the 1994 Regulations. I have already held, based on the material on record, that these acquisitions were made by the Appellants acting in concert with each other and the acquisition attracted the provisions of regulation 10(2) of the 1994 Regulations.”
The Tribunal referred to the judgment of the Bombay High Court in the same matter and extracted the same in its order as under :
“We are satisfied that the circumstances established on record prima facie do lead to the inference that the defendant Nos. 1 and 11, acting in concert with the defendant Nos.2 to 10, acquired the shares of Herbertsons Ltd., over a period of time. Since they were acting in concert, the acquisition by each one of them must be considered to be the acquisition of the others as well. The funds for the acquisition of the shares, whether through the defendant Nos. 2 and 6 to 10 or through defendant Nos. 3 to 5, originated from the companies controlled either by the defendant No. 1 or the defendant No.11. Advancing of funds to the defendant Nos. 3, 4 and 5 cannot be said to be by way of investment because the facts disclose that the amounts were advanced free of interest and without any security, and for acquiring the shares of Herbertsons Ltd., the defendant Nos. 3, 4 and 5 were also managed by persons known to the defendant Nos. 1 an 11 and associated with them in their various companies.”
“ The course adopted by the defendant Nos. 1 and 11 leaves no room for doubt that they were acting in concert and through unlisted companies who hardly had a share capital base and which were managed by persons related or known to them….………The identical nature of transactions and the events that followed prima facie established that the defendant Nos. 1 and 11 alongwith the defendant Nos.3,4 and 5 were acting pursuant to a plan and the similarity of events were not accidental.”
After quoting from the Order of the Bombay High Court, the SAT recorded as under :
“It is true that the views expressed by the Hon’ble Bombay High Court in its
order cited earlier, was only a prima facie view made on the basis of the facts on
record before it. But in the absence of sufficient evidence it is not possible for this
Tribunal to reach at a materially different conclusion. I have very carefully perused whatever material brought on record by the parties in the appellate proceedings and considered the same. The parties have not produced adequate evidence before the Tribunal to take a different view. In fact I do not have before me such material based on which I can take a view different from what the Hon’ble High Court had taken.”
In the adjudication proceedings also, the parties have relied upon the same documents and evidence and no additional material is brought out to arrive at a different conclusion. In fact, the parties have accepted that finding of the Tribunal and made a public announcement thereafter
It is difficult to accept the contention of the Learned Counsel that in view of the term “holds” used in Regulation 10(2) and as clarified by the Supreme Court in Clariant International case, and as none of his clients i.e. MDC, IMFA, Mahameru and Shirish have held any shares in the target company on 4.11.94, the Regulation would not apply to them. This has been examined in detail by the Hon’ble Tribunal and the following is extracted from the said order :
“In any event, when the acquisition of shares by IMFA was itself in excess of 10% it trigged the application of the 1994 Regulations in view of the subsequent interpretation of Regulation 10 as contained in the High Court order in Shirish (supra). Therefore, the issue as to whether IMFA acted in concert with Galan or whether MDC acted in concert with KRC or whether there was any concert at all, is wholly irrelevant with regard to the alleged breach, namely, the failure to make a public announcement. The reasons, therefore, was only a bonafide, belief that it was not required under Regulation 10, which was reasonable interpretation as even recognized by this Tribunal as the right interpretation in the case of Fascinating Leasing Vs. SEBI. (1998) 17 SCL 204) It is only in the said High Court judgement against which Special Leave has now been granted by the Supreme Court on 5.8.2002, that a different interpretation has been given to the said Regulation 10”.
Therefore having regard to the definition “acquirer” which includes a person who acquires or agrees to acquire either by himself or with any person acting in concert with the acquirer, the Tribunal’s findings on Regulation 10(2) is direct on the facts of the case concerning the same parties and also after taking into account the views expressed by the Division Bench of the Bombay High Court in Shirish Investments case which was quoted in the Tribunal’s order. The decision of the SC in Clariant’s case relied upon by the Learned Counsel is different and distinguished from the facts of the present case and therefore it is not of any help to the parties.
The SC in Clariant International Ltd. Vs. SEBI (Civil Appeal No.3183/2003 dated 25.8.04) was concerned with the issue as to the shareholders who were eligible to receive interest in the matter of public announcement made in the said case and whether the dividend paid by the target company to its shareholders is required to be deducted from the interest payable and in that context having regard to the term “shareholders” used under Regulation 44 has held as under :
“The shareholder having regard to the direction issued by the Tribunal must be one who was a shareholder on the triggering date”.
The SC in the above case has concluded that interest was therefore payable only to such persons who were shareholders of the target company on the triggering date. The issue relating to interpretation of Regulation 10(2) was not before the SC in the said case whereas the Tribunal and the Division Bench of the Bombay High Court in Shirish matter has dealt with the same in detail.
In view of the above and as held by the Hon’ble SAT, it is concluded that Regulation 10(2) of SEBI(SAST) Regulations, 1994 is violated in the matter of acquisition of 18,77,191 shares of the target company constituting 19.71% of the paid-up capital with IMFA alone acquiring 10.91% of the paid-up capital. Having held that the parties have violated Regulation10(2) of SEBI (SAST) Regulations, 1994, the Hon’ble SAT substituted the directive of SEBI from disinvestment of the shares acquired in violation of the Regulations to that of making a Public Announcement in terms of the Regulations. The parties have since complied with the aforesaid order of SAT and also paid interest @ 15% p.a. for the delayed period without deducting the dividend paid. Therefore, although Regulation 10(2) is violated, it does not warrant imposition of penalty in view of the order of the Hon’ble SAT in Contact Consultancy case.
In Contact Consultancy Services Pvt. Ltd. Vs. SEBI (Appeal No.138/2004) vide its order dated 17.11.04, the Hon’ble SAT has observed as under :
“Rightly, SEBI in appeal No. 61/2003 took the stand that the ends of justice will be met if action is taken either to make a public offer or to impose a penalty but not both. This is in consonance with fair play, justice and equity. We commend this approach of SEBI which is in keeping with the spirit of Article 20 of the Constitution of India. The present case is not the one warranting a departure from this salutary practice. In the circumstances we have come to the conclusion that no specific penalty is called for under Section 15H(ii) of SEBI Act, 1992, in the facts and circumstances of this case since the earlier order directing a public offer has been fully complied with thus safeguarding the interests of the minority shareholders, which is the main objective of SEBI (SAST) Regulations, 1997”.
The aforesaid order was modified by the Hon’ble SAT by its order dated 9.2.2005 in the Review Application 11/2005 to the effect that the aforesaid observations will be treated as the Order of the Tribunal and not consented to by the parties.
The aforesaid order of the Hon’ble SAT is to be given due weightage considering its binding nature on SEBI in view of the judgement of the Hon’ble Supreme Court in Union Bank of India Vs. Kamalakshi Finance Corporation Ltd, special leave petition (civil) No. 7717 of 1990 decided on 24.9.1991. The following is extracted from the aforesaid judgement of the Hon’ble Supreme Court delivered by a three Judge Bench.
“…….there can be no justification for any Assistant Collector or Collector refusing to follow the order of the Appellate Collector or Appellate Tribunal, as the case may be, even where he may have some reservations on its correctness. He has to follow the order of the higher Appellate Authority……..
utmost regard should be paid by the adjudicating authorities and the Appellate Authorities to the requirements of judicial discipline and the need for giving effect to the orders of higher Appellate Authorities which are binding on them”
VIOLATION OF REGULATION 6(1) AND 8(1)
Transitional provision
Regulation 6(1) reads as under :
“Any person, who holds more than five per cent shares or voting rights in any company, shall within two months of notification of these regulations disclose his aggregate shareholding in that company, to the company.”
Continual disclosures
Regulation 8(1) reads as under :
“Every person, including a person mentioned in regulation 6 who holds more than fifteen per cent shares or voting rights in any company, shall, within 21 days from the financial year ending March 31, make yearly disclosures to the company, in respect of his holdings as on 31st March.
It was submitted that Airdale made the necessary disclosure under Regulation 6(1). In respect of Galan, Veneer, Stingray, Darrel, Beethoven and Algid, it was submitted that their individual shareholding was less than 5% and therefore there is no obligation to make the necessary disclosure. It was submitted that none of the noticees have individually held 15% or more of the shares in the target company and therefore there is no requirement to comply with Regulation 8(1). It was submitted that in the disclosure made by KRC and MDC under Regulation 8(2), the shareholding of all the noticees was disclosed and therefore the object of the Regulations of making the necessary disclosure is complied with.
Regulation 6(1) is a transitional provision which is to be complied with only once when the 1997 Regulations came into force. It applies to every person who holds more than 5% shares in the target company and is required to disclose his aggregate shareholding in that company to the company within two months of notification of the Regulations. The Regulations were notified on 20.2.97. As can be seen from the share holding of the noticees, except in the case of Airdale (7.61%) and IMFA (10.91%), no other noticee was individually holding more than 5% shares. It may be noted that in the return filed by KRC under Regulation 6(3) vide letter dated April 17, 1997 to the target company, the share holding of Mahameru, Shirish, Veneer, Algid, Beethoven, Stingray, Darrell and also that of Airdale and IMFA was disclosed. Therefore, non compliance of Reg.6(1) by Airdale and IMFA may be treated as a technical violation considering that this is only a one-time requirement to be complied with and also taking into account the fact that the disclosure of other entities including those who held less than 5% shareholding was made under Regulation 6(3) as seen above. Under the circumstances, no penalty is warranted.
It is also useful to refer to the following observations of the Hon’ble Bombay High Court in Cabot International Ltd vs SEBI [2004] 51 SCL 307(BOM).
“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 the 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.“
4.2 In the judgment of Supreme Court in Hindustan Steel Limited v State of Orissa, AIR 1970 SC 253, the Hon’ble court held us under;
“An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi criminal proceeding and penalty will not be ordinarily be imposed unless the party obliged either acted in defiance of the law or acted in conscious disregard of its obligations. Penalty will not also be imposed merely because it is lawful to do so. Where penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judiciously and on a consideration of all the relevant circumstances.”
Regulation 8(1)
Under Regulation 8(1), every person who holds more than 15% shares in the target company is required to make yearly disclosures to the target company. It is alleged that the said disclosure was not made by the noticees for the years 1998-01. It is submitted that none of the noticees individually held 15% or more of the paid-up capital of the target company and therefore are not required to comply with Reg.8(1). From the material on record, there is nothing to suggest that any of the noticees are holding individually 15% or more of the paid-up capital. It is also noticed that the necessary disclosures were made under Regulation 8(2) on 17.4.97 by KRC to the target company and in the said letter the shareholding of the noticees are given as under :
|
Shareholder
|
Shareholding
|
Registered Folio No.
|
|
|
No. of equity shares
|
% Holding
|
|
|
Airedale Inv. & Trading Pvt. Ltd.
|
7,25,000
|
7.61%
|
A000554
|
|
Beethoven Traders Pvt. Ltd.
|
3,50,000
|
3.68%
|
B000321
|
|
Veneer Inv & Fin P. Ltd.
|
4,04,840
|
4.25%
|
V000329
|
|
Algid Inv. & Fin P. Ltd.
|
4,04,835
|
4.25%
|
A000555
|
|
Stingray Traders P. Ltd.
|
3,56,125
|
3.74%
|
S001028
|
|
Darrel Traders P. Ltd.
|
3,50,000
|
3.68%
|
D000286
|
|
Imfa Holdings P. Ltd.
|
10,39,341
|
10.91%
|
I000115
|
|
Mahameru Trading Co. P. Ltd.
|
4,73,100
|
4.97%
|
M001122
|
|
Shirish Fin & Inv. P. Ltd.
|
3,64,750
|
3.83%
|
Shares acquired pending Regn.
|
In so far as the penalty under Section 15H(ii) is concerned regarding failure to make the public announcement in terms of the Regulations as already discussed earlier, the Hon’ble SAT in Contact Consultancy Services Pvt. Ltd. vide its order dated 17.11.04 has held that since the order directing the public offer has been complied with, it safeguards the interest of the minority shareholders and no specific penalty was called for under Section 15H(ii) of the SEBI Act. The aforesaid order of the Appellate Tribunal is binding on the Adjudicating Officers in view of the judgement of the Hon’ble Supreme Court in Union Bank of India Vs. Kamalakshi Finance Corporation Ltd, special leave petition (civil) No. 7717 of 1990 decided on 24.9.1991, discussed earlier.
ORDER
As the acquirers had made a public announcement pursuant to the acquisition of shares of the target company in terms of the order of the Hon’ble SAT dated 1.8.03 and as the interest of the shareholders of the target company had been addressed with the payment of interest @ 15% p.a. for the delayed period without deducting the dividend paid during the interregnum, it cannot be said that any loss is caused to the investors in terms of Section 15J of the Act in view of the order of the Hon’ble SAT in Contact Consultancy Services (P) Ltd. matter, referred to above.
Accordingly, no penalty is imposed.
Place: Mumbai S.V. KRISHNA MOHAN
Date : August 24 2005 ADJUDICATING OFFICER