ADJUDICATION ORDER NO. - BS/AO-5 /2007
ORDER UNDER RULE 5 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST SHRI KULDIP HANDOO
- Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) vide order dated May 13, 2003 appointed Shri. S.V. Krishna Mohan as the Adjudicating Officer to inquire into and adjudge under Section 15I read with Sections 15A, 15G and 15H of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the violations alleged to have been committed by Shri Kuldip Handoo (hereinafter referred to as ‘the noticee’). It is alleged that the noticee failed to furnish to SEBI, information regarding his dealings in the scrip of Sun Infoways Ltd. (hereinafter referred to as SIL). Further it is also alleged that the noticee violated the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997(hereinafter referred to as Takeover Regulations) by acquiring the shares of SIL without making mandatory public announcement and public offer in terms of the provisions of Regulations 10 and 12 of the Takeover Regulations. It is also alleged that the noticee dealt in the shares of SIL on the basis of unpublished price sensitive information thereby violated the provisions of Regulation 3 of the Insider Trading Regulations and therefore is liable to the penalty prescribed under Section 15G of the SEBI Act. Subsequently, I was appointed as the Adjudicating Officer in place of Shri.S.V.Krishnamohan.
FACTS OF THE CASE
- It is noted from the records that SIL was promoted by Shri Shrikant Vasant Jogelkar and Shri Sujit Shrikant Jogelkar in June 1994 as Best Mulyankan Consultants Pvt. Ltd. and the name of the company was changed to Sun Infoways Ltd. with effect from 11th May 2000.
- It is noted that during the course of the investigation conducted by SEBI, the original promoter Shri Shrikant Vasant Jogelkar submitted that he and his family members sold their stake in SIL for a total consideration of Rs.98,34,659/- (Rs.4.95/- per share) to the noticee and persons acting in concert namely Anil Pujari, Hozefa Vohra, Rajan Tawate, Pravin Sonalkar and Tanvir Zaki (hereinafter commonly referred to as the acquirers). Subsequent to the said acquisition, Tanvir Zaki, Rajan Tawate, Pravin Sonalkar, Hofeza Vohra and the noticee were appointed as directors of SIL on 1.2.2000.
- In the light of the above factual scenario, it is alleged that the noticee along other persons acting in concert namely Anil Pujari, Hozefa Vohra, Rajan Tawate, Pravin Sonalkar and Tanvir Zaki had acquired 98% of the shares of SIL from Shri Shrikant Vasant Jogelkar and his associates without making public announcement and open offer in terms of the provisions of Regulations 10 and 12 of the Takeover Regulations. It is further alleged that the noticee dealt in the shares of SIL on the basis of unpublished price sensitive information relating to the merger of the company Zap Infotech Ltd with SIL. Further it is also alleged that the Investigating Authority of SEBI issued summons to the noticee requiring the noticee to submit certain information pertaining to his dealing in the scrip. Further, the noticee was also required to be present before the investigating authority. In this regard it is alleged that the noticee failed to comply with the said summons.
NOTICE AND REPLY
- A Show Cause Notice (hereinafter referred to as ‘SCN’) A&E/BS/35858/2005 dated March 11, 2005 was issued to the noticee in terms of the provisions of Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing penalties by Adjudicating Officers) Rules, 1995 (hereinafter referred to as the Rules), requiring the noticee to show cause as to why an inquiry should not be held for the violation alleged to have been committed by him.
- It is noted that the said notice sent by registered post was returned undelivered and substituted service of the notice was effected in terms of Rule 7(c) of the Rules. It is noted that the noticee did not reply to the show cause notice, however in the interest of justice, it was decided to conduct an inquiry in the matter and the noticee was granted an opportunity of hearing on March 22, 2006. It is noted that the noticee failed to attend the inquiry on the said date. As the noticee failed to reply to the show cause notice despite being granted sufficient time and opportunities, the inquiry is proceeded on the basis of the facts and material available on record.
CONSIDERATION OF EVIDENCE AND FINDINGS
- The first allegation against the noticee is that he failed to comply with the summons dated January 16, 2002, July 30, 2002 and December 10, 2002 issued by investigating authority and in view of the same, he is liable to the penalty prescribed under Section 15 A (a) of the SEBI Act, 1992. In this regard it is pertinent to note that Section 11C (3) of the SEBI Act empowers the investigating authority of SEBI to require any person associated with the securities market to furnish such information or to produce such records as may be required by the investigating authority. Further, Section 11 C (5) empowers the investigating authority to examine such persons. Timely submission of information is very important for concluding investigation proceedings and non co-operation by an entity can be detrimental to the interests of investors and securities market on account of any delay in the investigation. Failure to furnish information attract penalty under Section 15A(a) of the SEBI Act. In this regard, the provisions of Section 15A(a) of SEBI Act provides the following:
Penalty for failure to furnish information, return, etc.:” If any person, who is required under this Act or any rules or regulations made thereunder, to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.”
- During the course of the investigation, prima-facie it appeared to the investing authority that the noticee acquired the shares of SIL during the relevant period. In view of the same, the investigating authority issued summons dated January 16, 2002, July 30, 2002 and December 10, 2002 to the noticee advising him that his attendance was required in connection with the investigation instituted by SEBI.
- On perusal of the records, it is noted that no proof of delivery of the said summons is available on record. In the absence of proof of service of notice, the same cannot be deemed to have been served on the noticee. The Honorable Securities Appellate Tribunal in the matter Appeal No.5 of 2006 Jay Shah Vs. SEBI held that proof of service of summons have to be necessarily taken into account while deciding questions of failure to comply with summons. The observations of the Honourable Tribunal are taken into account for necessary guidance.
- In the present case, as stated before, no proof of service of summons is available on record. In view of the same, in the facts and circumstances of the case it cannot be concluded that the noticee failed to comply with the summons issued by the investigating authority.
11. The second issue for consideration in the matter is whether the noticee dealt in the shares of SIL on the basis of the unpublished price sensitive information and on account of their said actions, whether the noticee contravened the provisions of Regulation 3 of the Insider Trading Regulations so as to be liable to the penalty under Section 15 G of the SEBI Act.
12. It is noted from the facts of the case that the unpublished price sensitive information was pertaining to the merger of SIL with Zap Infotech Ltd in 2000. It is alleged that the noticee was the director of SIL at the relevant time. It is alleged that the noticee was aware of the said impending merger. It is further alleged that the noticee executed transactions on the basis of the said unpublished price sensitive information.
13. The provisions of Regulation 2(e) of the Insider Trading Regulations at the relevant point of time defined the term ‘insider’ in the following manner :
“2. In these regulations, unless the context otherwise requires :—
(e) “insider” means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access by virtue of such connection to unpublished price sensitive information in respect of securities of the company, or who has received or has had access to such unpublished price sensitive information;”
Further, Regulation 2(c) reads as under:
Connected person means “any person who
i) is a director , as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956), of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act;
or
ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company and who may reasonably be expected to have access to unpublished price sensitive information in relation to that company.
In view of his connection with the company as its director, the noticee can be regarded as an insider within the meaning of regulation 2(e) of the Insider Trading Regulations.
14. Regulation 3 of the Insider Trading Regulations as existing on the date of the impugned transactions provided the following :
“No insider shall-
(i) either on his own or on behalf of any other person, deal in securities of a company listed on any stock exchange on the basis of any unpublished price sensitive information ; or
(ii) communicate, counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities.
- Unpublished price sensitive information is defined in Regulation 2(k) which was substituted by the SEBI (Insider Trading) (Amendment) Regulations, 2002, w.e.f. 20-2-2002. Prior to its substitution, clause (k) read as under :
‘(k) “unpublished price sensitive information” means any information which relates to the following matters or is of concern, directly or indirectly, to a company, and is not generally known or published by such company for general information, but which if published or known, is likely to materially affect the price of securities of that company in the market—
(i) financial results (both half-yearly and annual) of the company;
(ii) intended declaration of dividends (both interim/final);
(iii) issue of shares by way of public rights, bonus, etc.;
(iv) any major expansion plans or execution of new projects;
(v) amalgamation, mergers and takeovers;
(vi) disposal of the whole or substantially the whole of the undertaking;
(vii) the information as may affect the earnings of the company;
(viii) Changes in policies, plans or operations of the company
- As can be seen from the above definition, any information pertaining to merger of companies is regarded as price sensitive information. As per the findings of the investigation conducted by SEBI, the merger of Zap with SIL was proposed on the basis of the valuation of Zap Infotech by SS Kothari & Co. It is alleged that SS Kothari & Co. had valued Zap to the extent of Rs.359 Crores as on 31.3.2000. It is further observed in the investigation report that subsequent to the above valuations, Sun Infoways and Zap Infotech agreed to merge and in consideration of which, Sun Infoways Limited was to issue 55,88,200 shares of Rs.10/- each at a premium of Rs.840/- per share to the promoters of Zap Infotech. Any such unpublished information which is of concern directly or indirectly to a company which, if published, is likely to materially affect the price of the securities.
- As held by the Honourable Securities Appellate Tribunal in Appeal No. : 50/2003 DSQ Holdings Limited Vs. SEBI, the persons who receive unpublished price sensitive information is clearly in an advantageous position ahead of other investors. Thus in the above factual situation, it has to be determined whether the said unpublished price sensitive information was available to the noticee. In this regard, it is pertinent to note that noticee was appointed director of the company on February 1, 2000. As a director of the company it can be presumed that he was in possession of the said price sensitive information and no reply has been received from the noticee in this regard.
- In this regard, while analyzing the question as to when the said information pertaining to the merger was made public, it is noted that BSE’s Bulletin dated 4.8.2000 had mentioned that a board meeting of the company is proposed to be convened on 16.8.2000 for finalizing the acquisition of the entity viz ZAP Infotech. Subsequently BSE bulletin dated 17.8.2000 stated that on 16.8.2000 the MOU with ZAP was approved for Rs.475 Crores by allotting shares to promoters of ZAP at Rs.850 per shares as per preferential basis.
- In this regard, it is noted that the said information provided by BSE bulletin was on the basis of the letter of SIL dated 16.8.2000 apprising BSE of the merger. Hence it can be seen that the information regarding the merger was in public domain on 17.8.2000.
- Evidence indicating the exact date on which the said information was available to the noticee is not seen from the records. However, it is pertinent to analyse the facts and circumstances of the case to see whether dealings of noticee in the scrip of the company indicate that such information was available to the noticee and whether he traded on the basis of the said information.
21. In this regard no trading details in respect of the trades executed by the noticee are available on record. However, it is noted from the facts of the case that one Act React Holdings Pvt. Ltd. (APL) traded in the scrip and the noticee is stated to be the director of APL. Trading details of APL are as follows:
|
CLIENTS
|
BROKER
|
BUY
|
SELL
|
GROSS
|
|
ACT REACT HOLDING
|
JCL
|
6100
|
7500
|
13600
|
|
ACT REACT HOLDING
|
SMK
|
0
|
9000
|
9000
|
|
ACT REACT HOLDING
|
TJ STOCK
|
1600
|
11900
|
13500
|
22. Further, the trade details of APL, through Portfolio Equity Services (sub broker to T J Stock Broking Services Pvt. Ltd.), are as given below in the table.
|
Sett. No. / Dates
|
Quantity Bought
|
Price
|
Quantity Sold
|
Price
|
|
05/2000-01 (24/4/00 to 28/4/00)
|
0
|
0
|
2000
|
72.64
|
|
06 (2/5/00 to 5/5/00)
|
0
|
0
|
1200
|
83.06
|
|
08 (15/5/00 to 19/5/00)
|
0
|
0
|
1000
|
124.79
|
|
09 (22/5/00 to 26/5/00)
|
700
|
163.47
|
0
|
0
|
|
12 (12/6/00 to 16/6/00)
|
0
|
0
|
4000
|
245.90
|
|
13 (19/6/00 to 23/6/00)
|
900
|
339.87
|
0
|
0
|
|
15 (3/7/00 to 7/7/00)
|
0
|
0
|
2200
|
269.64
|
|
18 (24/7/00 to 28/7/00)
|
0
|
0
|
1500
|
394.61
|
|
TOTAL
|
1600
|
|
11900
|
|
23. Though noticee is stated to be director of APL, based on the evidence available on record, it has to be seen whether the noticee had access to price sensitive information and further the said information was communicated by the noticee to APL. As the noticee was a director of SIL, it can be presumed that the noticee had access to price sensitive information. However, with regard to the question as to whether the said information was communicated to APL, it is seen that no evidence in this regard is available on record. In view of the same, though substantial trades have been executed by APL as stated above, on the basis of evidence available on record, it is not clear whether any price sensitive information was communicated by the noticee to APL and the trades by APL were result of such information. In view of the same considering the facts and circumstances of the case and the evidence available on record, it can not be concluded that the noticee violated the provisions of Regulation 3 of the Insider Trading Regulations.
- The third issue for consideration in the mater is whether the noticee along with persons acting in concert had acquired the shares of SIL in violation of the provisions of the Takeover Regulations. It is noted from the facts of the case that in January 2000, Shri. Shrikant Vasant Jogelkar and his family members sold their 98% stake in SIL for a total consideration of Rs.98,34,659/- (Rs.4.95/- per share) to the noticee and others namely Shri. Anil Pujari, Shri. Hozefa Vohra, Shri. Rajan Tawate, Shri. Pravin Sonalkar and Shri.Tanvir Zaki.
- It is pertinent to note that thereafter on February 1, 2000 the noticee, Rajan Tawate, Pravin Sonalkar, Hofeza Vohra and Tanvir Zaki were appointed as directors of SIL. This indicates that the said acquisition had resulted in change in management of the company and also the above persons obtained control over management of SIL.
- With regard to the question whether the noticee acted in concert with other persons such as Anil Pujari, Hozefa Vohra, Rajan Tawate, Pravin Sonalkar and Tanvir Zaki in acquiring the shares of SIL in violation of the provisions of the Takeover Regulations, it is pertinent to note that regulation 2(b) of the Takeover Regulations 1997 defines an acquirer in the following manner - 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. The Honourable Securities Appellate Tribunal in Appeal No: 12 of 2001 Naagraj Ganeshmal Jain Vs. P. Sri. Sai. Ram Adjudicating Officer observed that a person becomes an acquirer by virtue of his action- who acquires or agrees to acquire shares etc. The identification is thus action related. Further the above definition of acquirer, read along with the definition of persons acting in concert as contained in regulation 2(1)(d) implies that the commonality of objective between the acquirer and the persons acting in concert mandate their actions should not be viewed in isolation. Hence in cases where shares have been acquired pursuant to a common objective, the aggregate share holding of the acquirers and the persons acting in concert have to be taken into account to determine whether the threshold limit prescribed under the regulations have been breached.
- It is noted that the shares were acquired by the said group of persons to obtain substantial number of shares and voting rights. Further, consequent to the said acquisition, the said persons also acquired control over the target company as it is evident from their appointment as directors after the said acquisition. In view of the same, the aggregate shareholding of the noticee and persons acting in concert has to be taken into account to see whether the threshold limit prescribed under the regulations have been breached by the said persons. It is noted from the facts of the case that the acquirers including the noticee were not holding any shares prior to the said acquisition. Further, consequent to the said acquisition, the aggregate share holding of the acquirers reached 98% of the total shares and voting rights in SIL.
- In this regard, Regulation 10 of the Takeover Regulations, prescribe that no acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise fifteen percent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the regulations.
- Further regulation 12 of the Takeover Regulations provides that no acquirer shall acquire control over the target company unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the regulations.
- As the acquisition has resulted in acquiring 98% of shares and voting rights in SIL, the requirement of public announcement and offer to acquire the shares from the general public has to be necessarily adhered to in terms of the provisions of Regulation 10 of the Takeover Regulations. Further, the noticee and persons acting in concert had acquired control over the target company. Subsequent to acquisition of shares, the said persons were appointed as directors of SIL on February 1, 2000. Hence the requirement of public announcement and public offer in terms of Regulation 12 also has to be adhered to. In this regard, it is noted from the evidence available on record that no public announcement and offer in terms of the provisions of Regulation 10 and 12 have been made by the acquirers.
- Further on the basis of the evidence available on record, it is seen that the said acquisition is not under any of the exempted categories under Regulation 3 of the Takeover Regulations.
- It is noted from the facts of the case no public announcement and offer has been made by the acquirers and the persons acting in concert in accordance with the mandate of the said regulations.
33. In view of the same, it is concluded that as the noticee failed to make necessary public announcement and offer in terms of Regulation 10 and 12 of the Takeover Regulations, he had violated the provisions of Regulations 10 and 12 of the Takeover Regulations. The above violations attract the penalty under Section 15H of the SEBI Act.
- In this regard, It is pertinent to refer to the order of the Hon’ble Securities Appellate Tribunal in Appeal No.151/2004 in the matter of Rameshchandra Mansukhani NRI vs SEBI wherein the Honourable Tribunal held that the penalty existing on the date of commission of the violation should be imposed and not enhanced penalty which came into being by way of subsequent amendment. The order passed by the Honourable Tribunal is relied upon in this case.
- In this regard, Section 15 H of the SEBI Act as it stood on the date of acquisition on 29th January 2000 provided the following.
“If any person who is required under this Act or rules or regulations made thereunder, fails to make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty of an amount not exceeding five lakh rupees.
Hence the violation committed by the noticee attracts the above penalty.
- The provisions of Section 15J of the SEBI Act, 1992 and Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalty by Adjudicating Officer) Rules, 1995 require that while adjudging the quantum of penalty, the adjudicating officer shall have due regard to the following factors namely:
- The amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of default
- The amount of loss caused to an investor or group of investors as a result of the default
- The repetitive nature of default
- With regard to the above factors to be considered while determining the quantum of penalty, it is noted that no quantifiable figures are available to ascertain the loss to the investors or gain to the noticee. However, not making public announcement and offer as mandated under Takeover Regulations deprives the small investors of the exit opportunity and is detrimental to the interest of small investors. Hence taking into account the mandate of Section 15 H of the SEBI Act as it stood at the time the violation was committed by the noticee, and considering the facts and circumstances of the case, I am of the view that the violation committed by the noticee has to be viewed seriously and attract the maximum penalty prescribed by the statute.
ORDER
- In exercise of the powers conferred under Section15 I and Section 15 H of the SEBI Act, 1992, read with Rule 5 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, I, impose a penalty of Rs.5,00,000/- (Rupees Five Lakhs) on Shri Kuldip Handoo for the contravention of the provisions of Regulation 10 and 12 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
- The penalty shall be paid by way of demand draft drawn in favour of “SEBI – Penalties Remittable to Government of India” payable at Mumbai within 45 days of receipt of this order. The said demand draft shall be forwarded to Deputy General Manager, Investigation Department – ID8, Securities and Exchange Board of India, Plot No.C4-A, “G” Block, Bandra Kurla Complex Bandra (East), Mumbai 400 051.
- 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 Shri. Kuldip Handoo and to Securities and Exchange Board of India.
PLACE: Mumbai Biju. S
DATE: March 16, 2007 Adjudicating Officer