ADJUDICATION ORDER NO. - BS/AO-21/2007
ORDER UNDER SECTION 15I OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT 1992 READ WITH RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY THE ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST M/s STERLING CONSULTANCY SERVICES PVT LTD.
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) has initiated adjudication proceedings against M/s Sterling Consultancy Services Pvt. Ltd.(hereinafter referred to as the ‘noticee’ ) for the alleged violation of the provisions of Regulation 7(1) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the ‘Takeover Regulations’) on account of its failure to make disclosures in respect of its holding in the company Washington Software Ltd. (hereinafter referred to as the target company). I was appointed as the Adjudicating Officer to conduct the adjudication proceedings in the matter vide order dated April 3, 2006.
SHOW CAUSE NOTICE
2. A show cause notice under Rule 4(1) of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by the Adjudicating Officer) Rules, 1995 was issued to the noticee on 12th July, 2006, seeking reply of the noticee as to why an inquiry should not be held against noticee in respect of the violations alleged to have been committed by it.
3. The noticee replied to the show cause notice vide their letter dated 28th July, 2006. Considering the reply submitted by the noticee and considering the facts and circumstances of the case, it was decided to conduct an inquiry in the matter. Vide letter dated November 14th, 2006 the noticee was advised to attend the inquiry on 28th November, 2006. The noticee vide letter dated November 24, 2006 sought an adjournment of hearing scheduled on 28th November, 2006 on the ground of poor health of one of its directors Shri Ajit Sanghvi by attaching a “Medical Certificate”.
4. Considering the request made by the noticee a second hearing notice was issued to it vide letter dated March 16th, 2007, requiring the noticee to attend hearing on March 28th 2007. On the said date, the noticee attended the hearing through its authorized represented Advocate Vinay Chauhan, and made submissions. Subsequently, the noticee vide letter dated 5th April, 2007 submitted written submissions in respect of the contentions raised during the course of the hearing on 28th March, 2007.
CONSIDERATION OF ISSUES:
5. I have taken into consideration the facts and circumstances of the case, the submissions advanced on behalf of the noticee, material available on record including the documents and the case laws relied upon by the noticee.
6. As stated before, the issue for consideration in the present adjudication proceedings is whether the noticee violated the provisions of Regulation 7 of the Takeover Regulations. In this regard, it is pertinent to analyse the mandate and scope of Regulation 7 (1) and Regulation 7(2) as it stood at the time the violations were alleged to have been committed. The text of the said provisions provided the following:
7(1) Any noticee who acquires shares or voting rights which (taken together with shares or voting rights if any held by him) would entitle him to more than five percent shares or voting rights in a company in any manner whatsoever shall disclose the aggregate of his shareholding or voting rights in that company, to the company as well as to the Stock Exchanges where the shares of the target company are listed.”
7(2) the disclosures mentioned in sub- regulations (1) shall be made within two days of:-
(a) the receipt of information of allotment of shares; or
(b) the acquisition of shares or voting rights as the case may be
7. As per details furnished by the Washington Software Limited (target company), M/s Sterling Consultancy Services Pvt. Ltd. (noticee) and one of its director Shri Ajit R. Sanghvi were allotted 3,50,000 and 3,40,000 shares respectively at the time of reissue of forfeited shares in December, 1999/ January, 2000 @ Rs. 7.50 each. The acquisition of 6,90,000 shares by these entities amounts to about 10% of the total paid up capital of the company. The acquisition by noticee alone stood at 5.07% of the total paid up capital of the company.
8. While analysing the alleged violation committed by the noticee, it is pertinent to note the following contentions made by the noticee vide their letter dated 28th July, 2006. The noticee submitted that along with its director Shri. Ajit Sanghvi, it had acquired 6,90,000 shares of the target company; from one of the promoter group companies of the target company viz Suryodaya Service Station Ltd. Copies of letters acknowledging the transfer of shares from Suryodaya Service Station Ltd. to noticee was annexed to the written submission. After acquiring the shares, the noticee lodged the physical shares along with transfer deeds for transfer of shares in the name of noticee and its directors. It is noted from the facts available on record that the noticee alone had acquired 3,50,000 shares of the target company which amounts to 5.07% shares of the company.
9. It is further submitted by the noticee that on 8th July, 2000, the noticee through its director Shri. Ajit Sanghvi informed the company that it had acquired a total of 6,90,000 shares of the target company along with its director. It is also submitted by the noticee that on the basis of the disclosure given by it the target company vide its letter dated 14th July 2000 informed all stock exchanges the shareholding of the noticee in the target company.
10. The noticee further submitted that delay in informing the target company was unintentional and a technical lapse adding that it has not made any gains or derived any unfair advantage.
11. It is pertinent to note here that the noticee in its written submissions has not mentioned the exact date on which the shares were acquired by it. It is also noted that the letter issued by the target company informing the transfer of shares in the name of the noticee also did not mention the date of acquisition. The noticee in its written submission dated 28th July 2006 has accepted the delay in informing the target company, though referring it as a procedural and technical lapse. So it can be clearly inferred that the noticee has failed to make necessary disclosure to the target company within the time limit as required under Regulation 7(1) and 7(2) of Takeover Regulations.
12. It is pertinent to note that Regulation 7(1) of Takeover Regulations imposes an obligation on the acquirer of share to disclose to the company and all the stock exchanges where share of the target company are listed, his aggregate shareholding or voting rights in the target company, if the same is above five percent. In the written submissions, by the noticee it is contented that on the basis of the information given by the noticee, the target company vide its letter dated 14th July 2000, had informed the concerned Stock Exchanges about its shareholding in the target company. The information given by the target company to all concerned Stock Exchanges was given under Regulation 7(3) of the Takeover Regulation, which imposes an obligation on the target company to make disclosures of acquisition by any acquirer within Seven days of receipt of the information of allotment of share or acquisition of shares or voting rights to the Stock Exchanges.
13. In this context, the noticee further submitted that delay in these disclosures was unintentional and as a result of such acquisition it did not acquire any control over the target company or over its policy decisions. In this regard, it is pertinent to note the order passed by the Hon’ble Supreme Court in Shriram Mutual Fund Vs SEBI AIR 2006 SC 2287, wherein the Court held that the violations of the provisions SEBI Act and Regulations attract the penalty irrespective of the intent. The Hon’ble Court held that penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulation is established and hence the intention of the parties committing such violation becomes totally irrelevant.
14. As stated before, the noticee was bound to make the necessary disclosures about its acquisition of shares of the target company in December, 1999 /January 2000. As the noticee made the disclosures to the Target company only on 8thJuly, 2000, and target company disclosed the acquisition to Stock exchanges on 18th July, 2000. So there was a delay of more than six months in complying with the provisions of Regulation 7 of the Takeover Regulations.
15. Considering the facts and circumstances of the case and considering the fact that the noticee was aware of their aggregate holding in the target company, I am of the view that the facts of the present case warrant imposition of penalty.
16. One of the objectives of the Takeover Regulations is to protect the interests of the investors through mandatory disclosures. The purpose of making these timely disclosures to the stock exchanges is meant to ensure transparency in transactions. Delay in making necessary disclosures deprived the investors of valuable information. On account of failure to comply with the provisions of Regulation 7, the noticee is liable to the penalty prescribed under Section 15 A (b) of the SEBI Act.
17. Failure to furnish the information, return etc or delay to make requisite disclosures attracts monetary penalty as specifically provided in Section 15A(b) of the SEBI, Act, 1992 which as on the date of commission of the violation provided the following :
15A “If any person who is required under this Act, or any rules or Regulations made there under –
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 thereof in the Regulations, he shall be liable to a penalty not exceeding five thousand rupee for every day during which such failure continues;
18. In this regard, the provisions of Section 15J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, the adjudicating officer shall have due regard to the following factors namely;
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- the amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of the default
- the amount of loss caused to an investor or group of investors as a result of the default
- the repetitive nature of the default
19. It is also contended by the noticee that the penalty for solitary belated compliance cannot, in any event exceed beyond One Lakhs and fifty thousand rupees as held by Honourable Securities Appellate Tribunal in its order dated October 31, 2000 in the matter of VLS Finance Vs Adjudicating Officer, Appeal No. 12 of 2000.
20. On the basis of the facts available on record it is not possible to quantify the disproportionate gain or unfair advantage accrued to the noticee as a result of the said default. With regard to the exact loss caused to the investors, the same cannot be computed on the basis of the facts available on record. However the investors were deprived of valuable information which may have influenced their decisions in respect of investment in the target company. As stated before, there has been delay in complying with the provisions of Regulation 7(1) and 7 (2) by the noticee.
Order
21. In view of the above, in terms of the provisions of Section 15A (b) of the SEBI Act read with Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by the Adjudicating Officer) Rules, 1995, I impose a penalty of Rupees one lakh (Rs. 1,00,000) on M/s. Sterling Consultancy Services Pvt. Ltd. for the delay in complying with the provisions Regulation 7(1) and 7(2) of the Takeover Regulations. Considering the facts and circumstances of the case I am of the view that the said penalty is in commensurate with the violation committed by M/s. Sterling Consultancy Services Pvt. Ltd.
22. The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India’ and payable at Mumbai. The demand draft shall be sent to Chief General Manager, Investigation Department (ID7), Securities and Exchange Board of India, SEBI Bhavan, Plot No.C-4A, G-Block, Bandra Kurla Complex, Mumbai – 400 051.
23. In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, copies of this order are sent to M/s Sterling Consultancy Services Private Limited and to Securities and Exchange Board of India.
PLACE: MUMBAI BIJU. S
DATE : June 7, 2007 ADJUDICATING OFFICER