In the matter of acquisition of shares of Khatoo Synthetics Limited

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO- 07/2006-07]

 

 

In the matter of acquisition of shares of  

KHATOO SYNTHETICS LTD

 

AND

 

In respect of its

 

Promoters/Acquirers

 

 

1.      Khatoo Synthetics Ltd. (hereinafter referred as ‘KSL’ or ‘Target Company) has its registered office at Mumbai and its shares are listed in the Stock Exchanges of Mumbai, Madras and Hyderabad. Vivro Financial Services Pvt. Ltd., Merchant Banker, filed a draft Letter of Offer dated October 10, 2005 with Securities and Exchanges Board of India (SEBI) under Regulation 18(1) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred as ‘SAST Regulations’), on behalf of Mrs. Usha Venkataramani, Mrs. Vatsala Ranganathan and Shriram EPC Ltd. (hereinafter new acquirers, 2005) for acquiring 100,000 shares of KSL, constituting 20% of its equity. From this filing, and from the letters dated October 31, 2005 and November 2, 2005, including its annexures, filed by the Merchant Banker, it prima-facie appeared that the promoters/acquirers and persons acting in concert with them (PACs), acquired and increased their aggregate share holding in KSL to 33.92% of its equity without complying with the preconditions specified in the provisions of SAST.

 

2.      Accordingly, the undersigned was appointed as Adjudicating Officer under Section 15 I of SEBI Act, 1992, read with Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') vide SEBI order dated February 22, 2006 to inquire into and adjudge under 15H (ii) of the SEBI Act, 1992, the aforesaid alleged violation by the below mentioned promoters/acquirers and PACs (hereinafter referred to as ‘Noticees’):

 

 

3.      Show Cause Notices (SCN) dated March 09, 2006 was issued to the noticees under Rule 4(1) of Adjudication Rules, communicating the charges. The SCN alleged that noticees (promoters/acquirers and PACs) acquired 60,600 shares of KSL on March 22, 2001, constituting 12.32% of KSL’s equity, thereby increasing their aggregate holding in KSL to 33.92% of its equity as under:

 

	Share holding as on 31.10.2000		Share holding after acquisition on 22.03.01
Name	Number	%	Number	%
Acquirers and PACs	109,000	21.80	169,600	33.92
Equity of KSL	500,000	100.00	500,000	100.00

 

4.      It is alleged that prior to the aforesaid acquisition, the aggregate share holding in KSL of the noticees was more than 15% of KSL’s equity. Hence, they were prohibited from acquiring more than 5% of KSL’s equity in any period of 12 months, without making a public announcement to acquire further shares from shareholders of KSL, in terms of Regulation 11(1) of SEBI (SAST) Regulations, 1997. The aforesaid public announcement had to be made within 4 days of deciding to acquire shares of KSL, as per Regulation 14(1) of the said Regulations. Non compliance with the aforesaid attracts penalty under Section 15H (ii) of SEBI Act, 1992.

 

5.      Noticee 1 did not reply, though the SCN issued through KSL by RPAD was acknowledged. Noticees 2-20, except noticees 10, 16 and 19, in their respective replies mentioned their individual shareholding in KSL as on March 31, 2000 and submitted that their shareholding remained unchanged as on March 31, 2001. Navinkumar J. Agarwal filed a reply on behalf of noticee 10 stating that the latter was his grandfather and furnished a copy of the Death Certificate evidencing death of noticees 10 on January 30, 2003. Noticee 19 did not reply to the SCN despite the service of notice through RPAD. Noticees 21-23 in their respective replies stated their individual shareholding in KSL as on May 25, 2000/October 31, 2000 and submitted that their shareholding remained unchanged as on March 31, 2001. Noticee no. 29 filed a reply on behalf of Noticees 16, 24-29 stating that they collectively acquired 61,600 shares of KSL on March 22, 2001, at a price of Rs. 1.50 to Rs. 1.70 in order to give exit opportunity to the shareholders who invested in KSL in 1986, for the following reasons: small equity of KSL, KSL never declared dividend as it was incurring losses and KSL is an illiquid scrip. There was no undue gain to the acquirers and the default in not making a public announcement was due to oversight and not out of any malafide intention, it was submitted. The track record of the company in other compliance relating to BSE, ROC, etc. are well in time, it was submitted. Given the above the lenient view was prayed for. Noticees 30 and 31 submitted that they did not acquire any shares and that they were not shareholders of KSL as on March 31, 2001. The shareholding details submitted by the aforesaid noticees is consolidated in tabular form as under:

 

No.	Noticee	Date of Reply	Shares held on 31.03.00	Shares held on 25.05.00	Shares held on 31.10.00	Shares acquired on 22.03.01	Shares held on 31.03.01
1	Rajkumar Goyal *	Did not reply to the SCN
2	Shivshankar Gaur	24.4.06	2,600				2,600
3	Sushila Gaur	24.4.06	2,100				2,100
4	Suchiti Gaur	24.4.06	1,000				1,000
5	Sharad Kumar Gaur	24.4.06	1,000				1,000
6	Shishir Gaur	24.4.06	500				500
7	Rajat Gaur	24.4.06	500				500
8	Chandramohan Poddar	24.4.06	1,900				1,900
9	Veena Poddar	24.4.06	500				500
10	Banarasilal Agarwal	20.4.06	Expired
11	Sanjay Agarwal	24.4.06	9,000				9,000
12	Bajranglal Agarwal	24.4.06	7,900				7,900
13	Jugal Kishore N Agarwal HUF	24.4.06	1,900				1,900
14	Kamalkishor Agarwal	24.4.06	1,600				1,600
15	Navinkumar Agarwal- HUF	24.4.06	1,600				1,600
16	Pravin Punit Agarwal-HUF	20.4.06				7,000	7,000
17	Mahesh Agarwal	27.4.06	1,600				1,600
18	Jugalkishore Agarwal	24.4.06	6,900				6,900
19	Natwar Synthetics Limited	Did not reply to the SCN
20	Delux Impex Pvt Ltd	24.4.06	19,750				19,750
21	Pravin Jugalkishore Agarwal	24.4.06		21,950			21,950
22	Ashok Agarwal	24.4.06		1,000			1,000
23	Brijlata Bubna	24.4.06			7,000		7,000
24	Punit Agarwal	20.4.06				7,000	7,000
25	Nameet Agarwal	20.4.06				10,600	10,600
26	Premlata Agarwal	20.4.06				7,000	7,000
27	Alka Agarwal	20.4.06				7,000	7,000
28	Sunita Agarwal	20.4.06				8,000	8,000
29	Navinkumar Agarwal	20.4.06				15,000	15,000
30	Manjari Agarwal	27.4.06	Nil
31	Asha Agarwal	27.4.06	Nil
	Total					61,600

* as per the SCN, he held 6,100 shares of KSL as on October 31, 2000 and sold 1,000 shares on March 22, 2001.

 

6.      In the above circumstances the undersigned was of the opinion that an inquiry should be held in the matter and accordingly notice of inquiry dated May 05, 2006 was issued to the 31 noticees, fixing the date for inquiry on May 18/19, 2006. None of the noticees nor their authorized representatives appeared before the AO for the inquiry. However, Noticee 29 sought adjournment of the inquiry vide letter dated May 13, 2006. Fresh notice of inquiry dated May 16, 2006 was issued to the Noticees 16, 24-29, fixing the date for inquiry on May 26, 2006. Mr. Jayesh Vithalani, Company Secretary & Mr.  Ramesh Samria, Advocate, appeared before the AO on behalf of Noticees 16, 24-29 and filed seven letters of authorization dated May 13, 2006. They reiterated the submission made by noticee 29 vide letter dated April 20, 2006 and sought permission to file additional written submissions, which was granted. The advocate filed written submission dated May 29, 2006 on behalf of noticee 29. He also filed twenty one letters of authority, dated May 13, 2006, authorizing Mr. Vithalani / Samria to represent noticees 2-9, 11-15, 17-18, 20-23, 30 & 31 in the proceedings.

 

7.      In the written submission filed subsequent to the hearing by the Advocate, Mr. Ramesh Samria, vide letter dated May 29, 2006, it is stated that the promoters of KSL and PACs held 21.60% of KSL’s equity as on October 31, 2000 and acquired 61,600 shares of KSL on March 22, 2001, thereby increasing their shareholding to 33.92% of KSL’s equity as under :

 

 

8.      It was submitted that the default in compliance with Regulation 11(1) and 14(1) was on account of lack of professionalism as much as there was no Company Secretary and not because of any intention to defy the law. The shares of KSL being illiquid, small investors approached the management/promoters to help them disinvest their holdings and the promoters acquired the shares of KSL in good faith, in ignorance of obligations under SAST, it was submitted. Upon noticing the non compliance, a corrigendum was made in the letter of offer dated November 04, 2005 whereby interest for the period March 2001 till November 2005 calculated @ 15% per annum by way of compensation was added to the open offer price of KSL as applicable on March 2001, Rs. 5.96 per share, thereby, increasing the open offer price to Rs.10.22 per share as against Rs. 5 offered earlier, it was submitted. The aforesaid, it was contended, had compensated the investors along with interest. In support this contention, the copies of the corrigendum dated November 04, 2005 and post offer public announcement dated December 12, 2005 was furnished as Exhibit A and B respectively. Citing the aforesaid and in view of Rule 5 of Adjudication Rules, he prayed for a lenient view.

 

9.      Noticee 19 sought adjournment of the inquiry vide letter dated May 17, 2006 and did not appear for the inquiry fixed for May 26, 2006. In the written submission vide letter dated May 24, 2006, noticee 19 submitted that it did not receive the SCN and affidavit dated May 24, 2006 signed by its director A.S. Oberai. In the affidavit, the director acknowledged receiving the NI dated May 05, 2006 and claimed that none of the other noticees were promoters of KSL in March 2001. It was further submitted that the company or its directors were not aware of the alleged transaction nor did they did provide any assistance financial or otherwise to the other noticees and that they had no control of the other noticees at the relevant time or was the company or its directors under the control of the noticees or KSL. Noticee 19’s name had been changed to India Online Network Ltd, and subsequently to IOL Broadband Ltd. with effect from June 25, 2003 as evidenced from certified copies of fresh certificate of incorporation consequent to change of name, annexed to letter. Accordingly, henceforth, the term notice 19 would refer to IOL Broadband Ltd.

 

10.  I have carefully considered the submissions put forth by the noticees. The acquisition of 61,600 shares on March 22, 2001 by the acquirers, namely noticees 16, 24-29, is not disputed. Noticees 2-9, 11-15, 17-18 and 20-23 have merely reiterated their shareholding in KSL, which matches with the data furnished in the annexure to the SCN; in other words there is no dispute on the facts. Further, as per the letter dated May 29, 2006, signed by Advocate Mr. Samria, who is authorized to represent noticees 2-9, 11-18, 20-31, it is admitted that the promoters of KSL and PACs held 21.60% of KSL’s equity as on October 31, 2000 and acquired 61,600 shares of KSL on March 22, 2001, thereby increasing their shareholding to 33.92% of KSL’s equity. Therefore, the violation stands established.

 

11.   From the material on record, it is seen that notice no. 1 was a promoter of KSL and was holding 5,100 shares of KSL on March 22, 2001. The aggregate shareholding of promoters and PACs of KSL, including that of noticee 1, was 21.60% of KSL’s equity prior to the impugned acquisition, as per the SCN. This fact is corroborated by the submission made by the noticees vide letter dated May 29, 2006, as discussed in the previous paragraph. In view of above and also in the absence of any attempt by noticee no. 1, rebutting the charges, I am of the view that noticee no. 1 is a promoter/acquirer in the impugned acquisition.

 

12.  In making the aforesaid finding on noticee 1, I am consciously aware of the inter linkages and implication of the term promoter on one hand and acquirer and persons acting in concert on the other hand. This aspect was more than adequately brought out in the order dated July 31, 2001 of the SAT in the appeal No. 34 of 2001 in the matter of Modipon Ltd.; the relevant portion which is reproduced below.

 

“It may be noted that the promoter as such need not be an acquirer automatically. Any person and shareholder including the promoter will become an acquirer or a person acting in concert with the acquirer only if he falls within the definition of these expressions provided in regulation 2 (b) and 2 (e). It is the conduct of the party that decides the identity. A dormant promoter or a promoter simpliciter who neither acquires or agrees to acquire shares or voting rights or control over the target company is not an acquirer………

 

There is no hard and fast rule that a promoter can never be an acquirer or person acting in concert. If a promoter acquires or agrees to acquire shares or voting rights or gains control over the Target Company he can be safely considered as an acquirer who in turn would be subject to the provisions of regulation 11. Likewise a promoter can be a person acting in concert provided he is found to cover within the scope of the definition under regulation 2 (1) (e). Whether a promoter is also an acquirer or person acting in concert would depend on the facts of each case. It is to be noted that there is no blanket prohibition on the promoters acquiring shares etc. in the company. In fact regulation 11 impliedly recognises the promoters’ right to acquire further shares”.

 

 

13.  As regards, noticee 10, as per the material on record, it is gathered that he expired on January 30, 2003, whereas the acquisition happened on March 22, 2001, when he was alive. As per the data available, no acquisition of shares is made as on 22.03.01, by notice no. 10, although he is shown as promoter. The fact remains that the noticees together were holding 21.80% of equity of KSL as admitted vide letter dated May 29, 2006. Since noticee 10 is no more alive, and a finding against him cannot be arrived at, I am disinclined to give any findings against him.

 

14.  In respect of notice no. 19 it is observed that it held 8,650 shares of KSL as on March 31, 2000 and sold them on May 25, 2000. It is neither an acquirer on March 22, 2001 nor is there any material on record to suggest that it was a PAC. Noticee 19 is also not a party to the Share Purchasing Agreement (SPA) dated August 29, 2005 entered collectively by noticees 2-5, 11-13, 15-18, 20-21 and 23-31, to sell their aggregate holding of 163,500 shares of KSL to the new acquirers, 2005. Nor is he named as a promoter or PAC in the draft letter of offer. Given the aforesaid, noticee 19 is not found to be a PAC.

 

15.  To sum up the findings, the promoters/acquirers, held 21.60% of equity of KSL which is more than 15% of KSL’s equity and acquired 61,600 (12.32%) shares on March 22, 2001 i.e. more than 5% of KSL’s equity, which is prohibited in Regulation 11(1) of SAST, unless the acquirers makes a public announcement to acquire further shares from the shareholder of KSL. The promoters/acquirers have acquired these 61,600 shares @ Rs. 1.5 to Rs. 1.7 per share, from a set of shareholders to give them exit option as the scrip was illiquid. By doing so they have violated a cardinal principle of SAST regulations, namely, “Equality of treatment and opportunity to all shareholders”. By giving an exit opportunity to a select group of shareholders, the acquirers have discriminated against the interest of the remaining shareholders, who did not get the exit opportunity. It is also quite possible that acquirers acquired shares from shareholders who were probably close to them, and hence they got the exit opportunity. SAST regulation precisely attempts to prevent such discriminative treatment of any class of shareholder. Further, had the open offer been made by the acquirers in accordance with SAST, the shareholders would have got exit option at Rs. 5.96 and not at Rs. 1.5 to Rs. 1.7 paid by the acquirers; here again the interest of the shareholders was compromised. Given the fact that the scrip was illiquid, there was all the more need to grant an exit option to all shareholders of KSL, which was not done.

 

16.  Thus the violation is established, which attracts penalty under Section 15H (ii) of SEBI Act, 1992 which reads as under:

 

"Penalty for non-disclosure of acquisition of shares and takeovers  

15H.  If any person, who is required under this Act or any rules or regulations made thereunder, fails to-

 

(i.) ………..

 

(ii) make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakh rupees."

 

 

17.   To determine the quantum of penalty under Section 15H (ii), the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz. (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default. The unfair gain to the promoters/acquirers as a result of the default can be computed by working out the value of open offer the acquirers had to make to the shareholder of KSL in March 2001. The promoters/acquirers were required to make an open offer to acquire a minimum of 100,000 shares constituting 20% of SIL’s equity of 500,000 shares, in terms of Regulation 21(1) of SAST Regulation. Since KSL scrip was illiquid, the price at which acquirers had to make the open offer was Rs. 5.96 per share, in terms of Regulation 20 (3) of SAST Regulations, minus the value of 61,600 shares acquired at the maximum rate of Rs. 1.70 per share from the shareholders of KSL. Accordingly the value of default of the promoters/acquirers works out to Rs. 491,280. Besides, there is also a loss of opportunity for the shareholders of KSL, who did not get the exit opportunity, from March 2001 till November 2006. Since the maximum penalty imposable u/s 15H (ii) of SEBI Act, 1992, is Rs. 5 lakhs, I restrict myself to a penalty of equivalent amount. It may be emphasized here that the default of not making public announcement was by the promoters/acquirers (noticees) and therefore penalty is payable by them; and that the target company is loss making has no bearing on the penalty imposed on the promoter/acquirers. This view is well supported by the ruling of SAT in its order dated May 14, 2003 in the appeal No 96 of 2002 in the matter of P.C. Surana. It also needs to be emphasized that the open offer made by  Mrs. Usha Venkataramani, Mrs. Vatsala Ranganathan and Shriram EPC Ltd. to the shareholders of KSL in November 2005 @ Rs. 10.22 per share, which includes interest @15% from March 2001 to November 2005, does not absolve the promoters/acquirer from their default. The interest payment is the rightful remedy to the shareholders of KSL and is being offered by the present acquirers and the penalty imposed is payable by the promoters/acquirers for their default during the impugned acquisition.  

 

18.  Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules and as discussed above, I hereby impose a consolidated penalty of Rs. 5,00,000/-(Rs. Five Lakhs) only on the following promoters/acquirers,

 

 

for the aforesaid violation. The aforesaid entities are liable to pay penalty jointly and in case of default, the entities shall be liable severally.

 

19.  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, within 45 days of receipt of this order. The said demand draft should be forwarded 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.

 

20.  This order of adjudication is made and passed on 29th day of June 2006 at Mumbai.

 

 

AMIT PRADHAN

ADJUDICATING OFFICER