Order against Shri K K Agarwal, Alankar Finance, Adhikash Finance & Ors for non-compliance with Regulation 6(3) and 8(2) of SEBI (SAST) Regulations, 1997

 

ORDER OF THE ADJUDICATING OFFICER UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 AND UNDER SECTION 15A(b) OF SEBI ACT, 1992 AGAINST

 

 

FOR THE CONTRAVENTION OF REGULATIONS 6(3) and 8(2) OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997 IN THE MATTER OF ACQUISITION OF SHARES OF M/S. KRISHNA FILAMENTS LTD. (KFL).

I was appointed as the Adjudicating Officer to inquire into and adjudge under Section 15A of the SEBI Act, 1992 for the alleged non disclosure of acquisition of shares of Krishna Filaments Ltd. (hereinafter referred to as “KFL”) by the aforesaid entities to the target company in terms of Regulations 6 and 8 of SEBI (Substantial Acquisition of Shares and Takeovers Regulations, 1997.

THE ALLEGATIONS : 

The allegations against the noticees were set out through identical show cause notices dated 23.7.2002 and 14.8.2002.

The allegations as per the show cause notice and as explained to the parties in the personal hearing in terms of Rule 4(4) of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 are as under :

·        It is alleged that Mr.K K Agarwal, MD of KFL acting in concert with other noticees had acquired shares of KFL  between April 1996 and March 1998 but failed to make the requisite disclosure under Regulation 6(3) and 8(2) of SEBI (Substantial Acquisition of Shares and Takeovers Regulations, 1997 which makes them liable to be proceeded against under Section 15A of SEBI Act, 1992. Details of purchases of shares by the noticees are as under :

Sr. No.	Name of the Entity	KFL shares acquired	% to KFL’s equity	Amount (Rs.)	SAST Reg. violation	Year
1	K K Agarwal, MD of KFL	Promoter			6(3)  8(2)	1997 1997, 98
2	Alankar Finance	2,15,500	4.69%	24,168,198	6(3)  8(2)	1997 1997, 98
3	Agnikamal Finance	77,000	1.67%	8,758,095	6(3)  8(2)	1997 1997, 98
4	Adhikash Finance	54,450	1.18%	6,044,705	6(3)  8(2)	1997 1997, 98
5	Renold Finance	65,950	1.43%	7,044,578	6(3)  8(2)	1997 1997, 98
6	Kalapit Trading	65,100	1.42%	6,884,366	6(3)	1997
7	Satyanand Prasad Finance	1,61,500	3.51%	16,350,840	6(3)  8(2)	1997 1997, 98

 

It is alleged  that the other noticees were acting in concert with Mr.K K Agarwal, MD of KFL for the aforesaid acquisition as funds for the above purchases were provided to the noticees 2 to 7 which are under control of Shri Nalinesh R Dalal and Shri Anantnarayan Iyer by KFL . These shares were again sold to front companies of KFL namely, Competent Trading Pvt Ltd, Dominance Trade and Investment Ltd, Precise Exports (P) Ltd, Gainful Exports P Ltd, Marvellous Trading P Ltd, Responsive Plastics P Ltd, Lyric Investments & Trading P. Ltd (hereinafter referred to as ‘Competent & Ors’) by noticees 2 to 7 in off market deals i.e. the transactions were not carried out on the floor of the exchange.

Copy of the investigation report and other relied upon documents were sent vide letters dated 31.12.2002 and 9.6.2004 to Dhebar & Associates, Advocates who represented Mr.K K Agarwal. Subsequently, Mr. Ravi Kumar Varanasi, Advocate appeared in place of Dhebar & Shah, Advocates and once again copies of the following relied upon documents were sent to him vide letter dated October 26, 2004 at his request :

1.                  Statement of Shri Nalinesh R Dalal, Alankar Finance & Inv. P. Ltd dated 11.2.2000.

2.                  Statement of Shri Anantnarayan Gopal Iyer, Director, Adhikash Trading Pvt Ltd dated 14.2.2000.

3.                  Statement of Shri Nalinesh R Dalal, Alankar Finance & Inv. P Ltd dated 16.2.2000.

4.                  Statement of Shri Nalinesh R Dalal dated 29.8.2000.

5.                  Statement of Shri Anantnarayan Iyer dated 29.8.2000.

6.                  Statement of Shri Nalinesh R Dalal dated 27.9.2000.

7.                  Statement of Shri Anantnarayan Iyer dated 27.9.2000.

 

REPLY AND PERSONAL HEARING

Shri N R Dalal, Chartered Accountant, appeared on behalf of Alankar Finance & Investments P Ltd, Agnikamal Finance & Trading Pvt Ltd, Kalpit Trading Pvt Ltd and Satyanand Prasad Finance Ltd and Shri Anantnarayan Iyer, appeared on behalf of Adhikash Finance & Trading, Renold Finance & Investment in  the adjudication proceedings.

Shri Ravikumar Varanasi, Advocate, appeared on behalf of Shri K K Agarwal.

Reply by Noticees 2 to 7

 

The allegations arising from the show cause notice are that 6 entities namely Alankar Finance & Others as detailed therein have together acquired 6,39,500 shares for a consideration of Rs.6,92,50,782 between April 1996 and March 1998.

 

It was noticed that KFL siphoned off large funds by getting fictitious bills for machinery / spare parts etc. worth crores of rupees. It was observed that during 1.4.96 to 31.03.98, KFL obtained fictitious bills, for purchase of machinery and its spare parts, issued by the above mentioned seven companies or their group companies; namely, 1) Alankar Finance & Investments Pvt. Ltd., 2) Agnikamal Trading Pvt. Ltd., 3) Sanvy Trading Pvt. Ltd., 4) Navrang Trading Pvt. Ltd. 5) Repute Trading Pvt. Ltd. 6) Aganit Trading Pvt. Ltd. 7) Adhikash Finance 8) Dharmesh Trading Pvt. Ltd. 9) Renold Finance & Investment Pvt.Ltd. 10) Suraj Trading 11) Dharamraj Trading Pvt. Ltd. All these companies were controlled by Shri. Nalinesh R Dalal and Shri Anantnarayan Iyer. Subsequently, these shares were sold to front companies of KFL namely Competent Trading Pvt Ltd and others as stated in the show cause notice.

While admitting that the shares were acquired  as set out in the show cause notice by Alankar Finance & Ors, it was submitted that Shri K K Aggarwal, Managing Director of KFL had funded and requested them to hold these shares in the name of the aforesaid companies for which they received certain consideration. It was stated that funds for the acquisition of the aforesaid shares were received from KFL or its associate company Krishna Vinyl Ltd and Krishna Organo Chem Ltd. In turn, blank cheques were handed over to Shri .K K Aggarwal, who used it for making payments to brokers. It was also submitted that the shares so acquired were held by them only for the benefit of Shri K K Aggarwal and these shares were sold to the concerned companies of KFL namely Competant Trading P Ltd. Dominance Trade and Investment P Ltd. And Precise Exports P Ltd.

 

It was further submitted on behalf of the noticees no. 2 to 7 that the shares were never in their custody and further that the demat account of Alankar Finance and Investments (P) Ltd., Agnikamal Finance and Trading (P) Ltd., Adhikash Finance & Trading Ltd., Renold Finance and Investments (P) Ltd. Kalpit Trading (P) Ltd., Satyanand Prasad Finance Ltd had  the address of KFL. They have claimed that the broker, Harsh Investment in its statement to SEBI had stated that the shares were always delivered at the office of KFL and the funds were handed over to them. On the question of non reporting of these transactions for which the adjudication proceedings are initiated, it was submitted that they are not aware of the provisions of SEBI(SAST) Regulations, 1997. These are small companies closely held and they have trusted Shri K K Aggarwal, MD of KFL who requested them to lend their name for holding the shares.

 

Reply on behalf of Shri K K Agarwal

 

It was denied by the learned counsel that Shri K K Aggarwal or KFL had funded the acquisition of shares by making payment for the fictitious bills as alleged. It was submitted that the bogus bills alleged to have been raised against the company by the suppliers have not been furnished.

 

Referring to the statement of Shri Nalinesh R Dalal dated 11/2/2000 (Qtn No.2 wherein he has stated that he took over the company sometime in 1995-96) it was submitted that in view of this, it is not correct to allege that the company namely Alankar Finance belonged to the promoters of KFL or Shri K K Aggarwal. It was further submitted that Shri Jiten Mehta was the Financial Consultant of KFL and not employee of KFL as stated in the Investigation Report.

 

Referring to the statement of Shri Anantanarayan Gopal Iyer, Director of Adikash Trading Pvt LTd dated 14/2/2000 ( Qtn No.34) it was submitted that the witness was not sure whether Rs.20.5 lakhs received from Competent Trading on 27/3/1998 was for the sale of shares by him to Competent Trading Pvt Ltd. The witness went on to state that he has to check up with Shri Jiten Mehta, Financial Consultant of KFL who was the sole person after the death of Shri Deepak Thate in June 1997 who was looking after transfer of funds from / to KFL group.

 

It was submitted that KFL or Shri K K Aggarwal have nothing to do with the purchase of shares of KFL by Competent Trading from Adikansh as they appear to be independent transactions. It was submitted that the acquisition of shares by Competent and others cannot be equated to the acquisition either by KFL or Shri K K Aggarwal. They are not the front companies of KFL as alleged. Neither Shri Aggarwal nor KFL holds any shares in these companies. As regards common address of these supposed to be front companies namely Competent and others with that of Regd.office of KFL, it was submitted that the Regd.Office of KFL is located at Eucharistic Congress Building, Convent Street, Colaba which houses many independent offices. Therefore, merely by reason of common address they cannot be treated as PACs, it was argued.

 

As regards outstanding amount of Rs.17.5 crores owed by KFL to the alleged front company namely Competent and others it was submitted that this was due to regular supply of materials.

 

As regards pledging of shares of Agnikamal Finance & Trading Pvt Ltd. and Renold Finance & Investments Pvt Ltd. to IDBI for the foreign currency loan availed by KFL it was submitted that they executed the pledge agreement independently as co-obligants for the loan. In so far as the return of these loans to KFL by IDBI on the redemption of pledge it was submitted that the same was based on the authorization letters of Agnikamal and Renolds. They had stood as co-obligant for the loan in view of the reputation of the company.

 

It was submitted that merely because Shri Lunkaran Kayal, the brother in law of Shri O P Aggarwal, one of the promoters of KFL, is a common Director in Lyric Investment and Trading Pvt Ltd and Precise Exports Pvt Ltd. and authorized signatory in the other companies namely Competent Trading Pvt Ltd and others, it is not correct to allege that Competent Trading Pvt Ltd and other companies are front companies of KFL or Persons Acting in Concert for the acquisition of shares.

 

APPRECIATION OF EVIDENCE AND FINDINGS

·        It is alleged that Mr.K K Agarwal, MD of KFL acting in concert with other noticees had acquired shares of KFL between April 1996 and March 1998 but failed to make the requisite disclosure under Regulation 6(3) and 8(2) of SEBI (Substantial Acquisition of Shares and Takeovers Regulations, 1997. Details of purchases of shares by the noticees and alleged violations are as under :

Sr. No.	Name of the Entity	KFL shares acquired	% to KFL’s equity	Amount (Rs.)	SAST Reg. violation	Year
1	K K Agarwal, MD of KFL	Promoter			6(3)  8(2)	1997 1997, 98
2	Alankar Finance	2,15,500	4.69%	24,168,198	6(3)  8(2)	1997 1997, 98
3	Agnikamal Finance	77,000	1.67%	8,758,095	6(3)  8(2)	1997 1997, 98
4	Adhikash Finance	54,450	1.18%	6,044,705	6(3)  8(2)	1997 1997, 98
5	Renold Finance	65,950	1.43%	7,044,578	6(3)  8(2)	1997 1997, 98
6	Kalapit Trading	65,100	1.42%	6,884,366	6(3)	1997
7	Satyanand Prasad Finance	1,61,500	3.51%	16,350,840	6(3)  8(2)	1997 1997, 98
		TOTAL	13.9%

It is alleged that the other noticees were acting in concert with Mr.K K Agarwal, MD of KFL for the aforesaid acquisition as funds for the above purchases were provided to the noticees 2 to 7 which are under control of Shri Nalinesh R Dalal and Shri Anantnarayan Iyer by KFL . These shares were again sold to front companies of KFL namely, Competent Trading Pvt Ltd, Dominance Trade and Investment Ltd, Precise Exports (P) Ltd, Gainful Exports P Ltd, Marvellous Trading P Ltd, Responsive Plastics P Ltd, Lyric Investments & Trading P. Ltd by noticees 2 to 7 in off market deals i.e. the transactions were not carried out on the floor of the exchange.

There is no material to suggest that the acquisition of additional shares as above were disclosed to the target company in terms of Regulation 6(3) and 8(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

 

As per the investigation report, KFL siphoned off large funds by getting fictitious bills for machinery / spare parts etc. worth crores of rupees. It was observed that during 1.4.96 to 31.03.98, KFL obtained fictitious bills, for purchase of machinery and its spare parts, issued by 1) Alankar Finance & Investments Pvt. Ltd., 2) Agnikamal Trading Pvt. Ltd., 3) Sanvy Trading Pvt. Ltd., 4) Navrang Trading Pvt. Ltd. 5) Repute Trading Pvt. Ltd. 6) Aganit Trading Pvt. Ltd. 7) Adhikash Finance 8) Dharmesh Trading Pvt. Ltd. 9) Renold Finance & Investment Pvt.Ltd. 10) Suraj Trading 11) Dharamraj Trading Pvt. Ltd. All these companies were controlled by Shri. Nalinesh R Dalal and Shri Anantnarayan Iyer. As per the investigation report, the dealing in shares and arrangement of funds, relating to purchase of shares by Alankar, Agnikamal, Adhikash, Kalpit, Renold & Satyanand Prasad noticee no.2 to 7 were looked after by Shri K K Agarwal, Managing Director of KFL, directly or through his trusted employee or close confidant i.e. Mr.Jiten Mehta / Mr.Deepak Thattee. Blank signed cheques were obtained from Mr.Dalal and Mr.Iyer by Mr. K K Agarwal. These cheques were used by Mr.K K Agarwal or his nominees as above to pay the brokers and sub brokers for the purchase of shares of KFL. Mr.Dalal and Mr. Iyer confirmed this modus operandi in their statement to SEBI, copies of which were made available to the party. Order for purchase of shares of KFL in the name of noticees 2 to 7 i.e. Alankar & Ors were given by Mr. Jiten Mehta and payment to brokers were also made by him. Delivery of shares for the purchases made by noticees 2 to 7 were given to Jiten Mehta at KFL’s office at Colaba or at his residence. Jiten Mehta, an employee of KFL later became its consultant. Correspondence address for Noticees 2 to 7 as per the records of M/s.Intime Spectrum Registry, the RTA was the registered address of KFL ie. Eucharistic Congress Building, Colaba, Mumbai. Authorised signatory in most of these companies as recorded with the Registrar was Mr.Lunkaran Kayal, a close relative of Mr.O P Agarwal, Chairman of KFL. The shares purchased in physical form by Noticees no.2 to 7 were taken by KFL from the Registrar after getting them transferred in the names of noticees 2 to 7 i.e. Alankar & Ors. After the shares were demutualised, the control over them were kept with KFL through DP account opened in the name of the nominee of KFL by the noticees no. 2 to 7 i.e. Alankar & Ors with NSDL. As such, all these seven companies i.e. Competent Trading, Dominance Trade, Precise Export, Responsive Plastic, Marvellous Trading, Gainful Exports. Lyric Investment were at all times controlled by KFL through its employees / consultants. Thus a coordinated web of various companies was created so that the identity of the persons transacting in the scrip of KFL is hidden behind these front companies.

 

The summary of sale of shares of KFL by noticees no.2 to 7 to the three front companies of KFL viz. Competent Trading, Dominance Trade, Precise Export are as under :

 

Name of the Company	Qty.	Amt. (Rs.)
Alankar Finance and Investment Ltd.	162900	25157260
Agnikamal Finance Pvt.Ltd.	77000	8693320
Adhikash Finance & Trading Pvt.Ltd.	54450	6660290
Kalpit Trading Pvt.Ltd.	65100	6967070
Satyanand Prasad Finance Pvt. Ltd.	161500	16150000
Renold Finance and Investment Pvt. Ltd.	65950	4364158
TOTAL	586900	67992098

 

 

Between 1.1.97 and 31.12.98 KFL transferred funds to Competent Trading, Dominance Trade and Precise Exports Ltd which in turn transferred these funds to a set of other four front companies of KFL viz. Responsive Plastics, Marvellous Trading Pvt Ltd, Gainful Exports P Ltd and Lyric Investment &Trading P Ltd. These funds were used to purchase the shares of KFL as above. As per the investigation report, the companies controlled by Dalal and Iyer i.e. Alankar and Ors were used as a medium for transfer of funds. Noticees no.2 to 7 which were used as a facade to purchase the shares of KFL, later on transferred the shares to the front company of KFL viz. Competent & Ors. Competent & Ors as on 31.3.99 were holding 13,48,000 equity shares of KFL as under :

 

Name of the Company	Purchases (No. of shares)	Sales (No. of shares)	No. of Shares held as on 31.03.1999
Competent Trading	424700	177400	247300
Dominance Trade	339100	123500	215600
Precise Exports	261500	84300	177200
Responsive Plastics	227300	200	227100
Marvellous Trading	263500	46800	216700
Gainful Exports	155000	400	154600
Lyric Investments	111900	2400	109500
Total	1783000	435000	1348000

 

Funds amounting to Rs.65.35 lakhs were transferred to Precise Exports from Aug 1997 to March 20, 1998. Each time the shares were transferred to Competent, Dominance, Precise etc.. the same amount was paid by these companies to the brokers for purchase of shares. Substantial payment for purchase of KFL shares by Competent trading was made to the sub broker Dharamshi Capital Services. Dharmashi Capital Services has purchased 42,200 shares of KFL for Rs.108.71 lacs for Competent Trading, payment of which was received by it from KFL.

 

In view of the fact that the authorized signatories in respect of noticees no.2 to 7 as recorded with the Registrar was Mr.Lunkaran Kayal, close relative of O P Agarwal, delivery of shares purchased on behalf of noticees no.2 to 7 were taken by the representatives of KFL at the request of K K Agarwal as per the record of In-Spectrum Registry, RTA, funding of the purchases of KFL shares by KFL through Competent and Ors, which are in turn controlled by KFL, in view of the statements of Dalal and Iyer, the persons who controlled noticees no.2 to 7, it can reasonably be concluded that a coordinated web of various companies was created so that identity of persons purchasing the shares is hidden behind these front companies viz. Competent & Ors.

 

KFL and KVL subscribed to the preference shares of the front companies viz.Competent Trading & Ors to the extent of Rs.27.03 crores which is quite disproportionate to the equity capital of these companies. KFL did not receive any dividend in respect of these investments. The details are as under :

 

 

It may be seen from the above table that Gainful Exports and Marvellous Trading which had a paltry sum of Rs.200/- as share capital received Rs.3.2 crores and 5.39 crores from KFL towards preferential shares for KFL. Similarly, Responsive Plastics & Lyric Investments which had a paltry sum of Rs.2000/- as capital had received a sum of Rs.67 lakhs and Rs.3.07 crores towards preferential share capital from KFL.

 

Precise Exports Pvt Ltd has held 310,100 shares of Krishna Vinyl Limited (KVL), an unlisted associate concern of KFL. Similarly, Dominance Trade and Investments Pvt Ltd had held 68,100 shares of KVL. These shares were received by transfer from Renold Finance & Alankar Finance.

 

Further, there are common directors in Competent Trading and Ors  as can be seen from the table below.

 

Further, there is common shareholding in Competent Trading & Ors as can be seen from the table below.

 

 

KFL submitted details of its investment as on 31.3.1998 in 11% non-convertible redeemable cumulative preference shares of Rs.100/- each in Competent & Ors each amounting to Rs.3.50 crores i.e. Rs.10.50 crores in total. KFL also invested in Krishna Vinyl Ltd (KVL), an unlisted associates preference shares. KFL has invested in Competent Trading for Rs.1 crore, Dominance Trade for Rs. 1.50 crore, and Precise Exports Rs.1 crore . In all Rs.17.5 crores were invested in unlisted companies. This investment did not yield any return.  Vide resolution dated 20.3.98, KFL authorized Mr K K Agarwal to invest in 11% non-convertible redeemable cumulative preference shares of Rs.100 in Competent Trading for Rs.3.5 crores, Dominance Trade for Rs.3.5 crores and in Precise Exports for Rs.3.50 crores.

 

In this context, the Hon’ble Supreme Court decision in Delhi Development Authority vs Skipper Construction Co. Pvt Ltd. (1996) 4 Comp LJ 233 (SC) … AIR 1996 SC 2005 that (para 27 at page 247 of COMP LJ ) may be referred to.

 

“The concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where , therefore, the corporate character is employed for the purpose of committing illegality or defrauding others , the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. The fact that an individual and members of his family have created several corporate bodies would not prevent the court from treating all of them as one entity belonging to and controlled by that individual and family. If it is found that these corporate bodies are merely cloaks behind which lurks the individual and /or members of his family and that the device of incorporation was really a ploy adopted for committing illegalities and /or to defraud people” (underlining supplied).

 

Acting in concert is something about which actual evidence is normally difficult to come. The Hon’ble Supreme Court in the case of CIT vs East Coast Commercial Co.Ltd. AIR (1967) SC 768 (Kedia Family case) had dealt with the question in the context of Section 23A of the Indian Income Tax Act, 1922 wherein the question was whether Kedia family had acted in concert to control the affairs of the concerned company. In the facts of that case, there was no evidence of any overt act showing that they were acting in concert and thereby constituted and acted as a block.

 

In para 14 of the judgement, the Hon’ble Supreme Court observed as follows:

“….. if the members of the Kedia family form a block and had more than 75 per cent of the voting power, it was not necessary to prove that they actually exercised controlling interest. It is the holding in aggregate of a majority of the shares issued by a person or persons acting in concert in relation to the affairs of the company which establishes the existence of a block. It is sufficient, if having regard to their relation, etc., their conduct and their common interest, that it may be inferred that they must be acting together, evidence of actual concerted acting is normally difficult to obtain, and is not insisted upon.” (p.772)

 

Acquirer: “acquirer” means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer;

 

“Person acting in concert “ comprises –

 

(1)   persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company,

(2)   without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established :

(i)                 a company, its holding company, or subsidiary or such company or company under the same management either individually or together with each other;

(ii)               a company with any of its directors, or any person entrusted with the management of the funds of the company;

(iii)             directors of companies referred to in sub clause (i) of clause (2) and their associates;

(iv)             ……

(v)               ………..

(vi)             ………….

(vii)           …………

(viii)         ………….

(ix)             ……….

(x)               any investment company with any person who has an interest as director, fund manager, trustee, or as a shareholder having not less than 2 per cent of the paid-up capital of that company or with any other investment company in which such person or his associate holds not less than 2 per cent of the paid up capital of the latter company.

 

In view of large investments made by KFL / KVL in Competent & Ors. to the extent of Rs.27.03 crores which is quite disproportionate to the equity capital of these companies, the fact that these preference shares did not yield any dividend whatsoever there being common directors and common shareholding pattern in Competent & Ors, the funding of purchase of shares of KFL by noticees 2 to 7 through Competent & Ors by KFL in the aforesaid manner and the sale of shares of KFL to Competent & ors., the delivery of shares received by KFL’s nominees Mr. Jiten Mehta, the correspondence address of noticees No.2 to 7 being the registered office of KFL, Mr. Lunkaran Kayal being the authorized signatory of noticees No.2 to 7 as per the records of RTA and Mr. Kayal being the close relative of Mr. O P Agarwal, Chairman of KFL, these are too many instances to be just incidental and not by design. By weighing the pre ponderance of probabilities, it can be reasonably be concluded that all the noticees are acting in concert with each other in the matter of acquisition of shares of KFL.

 

The standard of proof required in a proceeding of this nature is at variance with the standard of proof required in criminal cases. It is sufficient if the preponderance of probabilities suggests towards the indulgence of the delinquent in the misconduct. The strict rules of Evidence Act and proof beyond reasonable doubt are not applicable to a proceeding of this nature. The Supreme Court’s decision in Gulabchand vs Kudilal AIR, 1966, SC 1734 and the decision of the Special Court for trial of offences relating to transactions in securities in the matter of National Housing Bank versus ANZ Grindlays Bank, 1998 (2 ) LJ 153 is relied upon in this regard.

 

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 the 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 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 discussion, it is concluded that noticees no.2 to 7 acting in concert with noticee no.1 had acquired shares of KFL constituting 13.90% of KFL’s total equity but did not inform KFL about their holding as required under Regulation 6(3) & 8(2)of SEBI (SAST) Regulations, 1997 for the year 1997 and 1998.

 

Regulation 6(3) reads as under :

 

Transitional Provision

6(3) 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.

 

Regulation 8(2) reads as under :

Continual disclosures

(1)   …

(2)   A promoter or every person having control over a company shall, within 21 days from the financial year ending march 31, as well as the record date of the company for the purposes of declaration of dividend, disclose the number and percentage of shares or voting rights held by him and by persons acting in concert with him, in that company to the company.

 

Section 15A(b) of SEBI Act, 1992 (prior to its amendment on 29.10.2002) reads as under :

 

Section 15A. If any person, who is required under this Act or any rules or regulations made thereunder, -

(a)…

(b) to file any return or furnish any information, books or other documents within the time specified therefore in the regulations, fails to file return or furnish the same within the time specified therefore in the regulations, he shall be liable to a penalty not exceeding five thousand rupees for every day during which such failure continues.

 

The noticees No. 2 to 7 have not disputed that they held the shares of KFL in the name of the aforesaid companies and the funds for the said acquisition came from KFL and its associate companies but submitted that Shri KK Agarwal had purchased the shares and requested them to hold the same for which they received certain consideration.

 

Timely disclosures as envisaged under Regulations is very important for achieving the object of the Act. The requirement of making a time bound disclosure to the company by persons acting in concert as envisaged under the Regulations is an important material information and has a bearing on the investment or disinvestment decisions of the investing public. The company in turn is required to disclose the same to the stock exchanges in which its shares are listed in terms of Regulation 8(3) of SEBI(SAST) Regulations, 1997. Non-disclosure of the same would prejudicially affect the interest of the investors. It would be difficult to assess with mathematical precision, the loss caused to the investors by such non-disclosure at the relevant time by the noticees and what impact it would have had on the stock prices had timely disclosures been made.

 

It is pertinent to note here that SEBI had framed a Regularization scheme on 19.9.2002 to deal with cases of non compliance with Regulations 6 and 8 of SEBI (SAST) Regulations, 1997. Had the noticees availed the said scheme the amount payable for the non compliance of Regulation 6(1) and 8(2) in the present case would come to Rs.30000/- . However, the noticees did not avail the said scheme. Further, the default is repetitive in nature in so far as violation of Regulation 8(2) is concerned as it has not been complied with for two successive years.

 

ORDER

 

Having regard to the violation of Regulation 6(3) and 8(2) of SEBI(SAST) Regulations, 1997, by the noticees, the factors contained in Section 15J of the SEBI Act, 1992, and the amount that the noticees would have paid had they availed the Regularization scheme, I, hereby, impose a consolidated penalty of Rs. 50,000/- (Rupees Fifty Thousand Only) jointly and severally on the noticees viz. Shri K K Agarwal, MD of KFL, Alankar Finance and Investments (P) Ltd., Agnikamal Finance and Trading (P) Ltd., Adhikash Finance & Trading (P) Ltd., Renold Finance and Investments (P) Ltd., Kalpit Trading (P) Ltd and Satyanand Prasad Finance Ltd under Section 15A(b) of SEBI Act, for the non-compliance with the aforesaid Regulation 6(3) and 8(2) of SEBI(Substantial Acquisition of Shares and Takeover )Regulations, 1997 for the years 1997 and 1998.

 

The penalty amount shall be paid through a crossed demand draft drawn in favour of “SEBI – Penalties Remittable to Government of India”, payable at Mumbai and may be sent to Shri R.S. Loona, Executive Director, Law, Securities and Exchange Board of India, B Wing, Mittal Court, 1^st Floor, Nariman Point, Mumbai 400 021.

 

 

 

PLACE: Mumbai                                                                                S V KRISHNA MOHAN

DATE : June 20, 2005                                                                      ADJUDICATING OFFICER