Order in respect of Dehradun Tea Company Limited

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO-31 /2006-07]

 

 

In respect of

 

1.      Dehradun Tea Company Limited (hereinafter referred as “DTCL” or “Company”) was incorporated on March 31, 1863 under Act No. XIX of 1857 of the Legislative Council of India titled “An Act for the incorporation and Regulation of the Joint Stock Companies and other Association”. The company has its registered office at Milford House, Ballupur , Dehradun. DTCL is primarily engaged in the business of Tea Plantation and Manufacturing of Organic Tea in the State of Uttaranchal and also engaged in business of real estate and other investment as per its Memorandum of Association .  The authorized share capital of DTCL is Rs. 50,00,000 divided into 5,00,000 equity shares of Rs. 10 each. The total issued and paid up Equity share capital of DTCL is 1,02,000 equity shares of Rs. 10 each. The equity shares of DTCL are listed on Calcutta Stock Exchange.

 

2.      Logical Buildwell Private Limited (hereinafter referred as LBPL or  “Acquirer”) entered into a Share Purchase Agreement(hereinafter referred as “SPA”) with persons belonging to promoter and non promoter group on July 10, 2006 to acquire 54,450 fully paid up equity shares representing 53.38% of the total voting equity share capital of DTCL. Out of the total shares under the SPA, the acquirer acquired 45,010 equity shares representing 44.13% of the total voting equity share capital from the persons belonging to the promoter group and 9,440 equity shares representing 9.25% of the total voting equity share capital from the persons belonging to the non promoter group.

 

 

3.      Pursuant to the acquisition under the SPA  as mentioned at point 2 above the acquirer triggered the provisions as contained under Regulation 10 and Regulation 12 of SEBI (Substantial Acquisition of Shares and Takeovers Regulations), 1997{hereinafter referred to as ‘SAST’} thereby obligating them to make a Public Announcement (hereinafter referred to as ‘PA’} under Regulation 10 and Regulation 12 read with Regulation 14(1) of SAST to acquire minimum 20% of the total voting equity share capital of DTCL in terms of Regulation 21(1) of SAST. Subsequently, in terms of Regulation 15(1) of SAST, Enam Financial Consultants Private Limited, the Merchant Banker to the open offer (hereinafter referred to as MB) made the Public Announcement on July 13, 2006 on behalf of Acquirers to acquire 20,400 equity shares, representing 20% of the total voting equity share capital of DTCL. In terms of Regulation 18 of SAST the MB filed the draft Letter of Offer (LoO) on July 27, 2006 with SEBI for comments, if any. The LoO filed with SEBI contained the compliance status of Chapter II under SAST Regulations which included the compliance status of the promoters/Sellers/Major Shareholders/Acquirers of DTCL. From the perusal of the said status it was observed that there were delays made by the promoters in complying with the provisions of Regulations 8 (2) for years 2003, 2004 2005 and 2006 respectively and Regulation 7(1) and 7(2) for the year 2003 of SAST Regulations. A table depicting the delays is  specifically noted as under:

 

Sl. No.	Regulation/Sub-regulations	Due Date for Compliance as mentioned in the Regulation	Actual date of compliance	Delay, if any (in no. of days) Col.4-Col.3
1	2	3	4	5
1	8 (2)	21-Apr-2003	22-Apr-2003	1
2	8(2)	21-Apr-2004	23-Apr-2004	2
3	8(2)	21-Apr-2005	25-Apr-2005	4
4	8(2)	21-Apr-2006	24-Apr-2006	3
5	7(1)&7(2)	11-June-2003	12-June-2003	1

 

4.      The relevant extract of the provisions of Regulations 7(1), 7(2) and 8 (2) of SAST is reproduced as under-

 

Acquisition of 5% and more shares of a company

 

Regulation 7(1) : "Any acquirer, 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 per cent or ten per cent. or fourteen per cent. shares or voting rights in a company, in any manner whatsoever, shall disclose at every stage the aggregate of his shareholding or voting rights in that company to the company and to the stock exchanges where shares of the target company are listed.";

Regulation 7(2) :  The disclosures mentioned in sub-regulations(1) and (1A) shall be made within  two days –

(a) the receipt of intimation of allotment of shares; or

(b) the acquisition of shares or voting rights, as the case may be.

Continual disclosures.

 

 

Regulation 8(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 of 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."

 

5.      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 September 13, 2006 to inquire into and adjudge under 15 A (b) of the SEBI Act, 1992, the aforesaid alleged violations made by the following promoters of DTCL.

 

6.      The Show Cause Notices (hereinafter referred to as SCN) all dated October 4, 2006 were issued to above noticees, under Rule 4(1) of Adjudication Rules. The Noticees were advised to show cause as to why an inquiry should not be held against them for the aforesaid alleged violations for which penalty can be imposed under section 15A(b) of SEBI Act, 1992. The Noticees were provided 14 days, from the date of receipt of the SCN, to file their reply.

 

7.       At the outset it may be noted that Mr. Sudhir Prakash and Mr. S.P. Chaurasia are the promoters of the company and the other Noticees are Persons Acting in Concert. In common reply to the aforesaid SCN, Noticee No. 1(authorized by other Noticees) vide letter dated October 19, 2006 submitted and agreed that delay did happen in complying with Regulation 8(2) of SAST. However, necessary compliances under Regulation 8(3) of SAST have always been done on or before the time as prescribed under the SAST Regulations, is also submitted by the noticees. It has also been submitted that the insignificant delay on part of the promoter to make disclosures under Regulation 8(2) has neither affected the compliance required to be done under Regulation 8(3) by the company to the Stock Exchange nor affected institutional/public/minority shareholders interest in the company. With regard to alleged violation under Regulation 7(1) & 7(2) of SAST, it is submitted that the delay of one day under Regulation 7(1) & 7(2) was on account of late Reporting by M/s Namokar Finvest to the company. However, reporting required to be made under Regulation 7(3) by the company to the Stock Exchange was done on time. The Noticees have also submitted that the alleged violations were at the highest technical due to a bonafide error and have neither caused any adverse consequences to anybody nor have hit any of the factors as mentioned in Section 15J of SEBI Act, 1992. Therefore the Noticees requested for a lenient view in the instant matter.

 

8.      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 all January 25, 2007 were issued to the respective Noticees, fixing the date for inquiry for February 12, 2007 and February 15, 2007 respectively. Subsequently, Noticee No. 1 and other Noticees vide their common respective letters dated February 8, 2007 reiterated the earlier submissions made by Noticee No.1 vide his letter dater October 19, 2006. The Noticees sought 15 days time for personal hearing in the instant matter. It was evident from the replies of the Noticees that they all have authorized Noticee No. 1 to act on their behalf, therefore in consonance to the principles of natural justice notice of inquiry dated February 14, 2007 was issued to Noticee No. 1, fixing the date for inquiry on February 28, 2007. The Noticee was also advised to submit authority letters duly signed by other Noticees at the time of personal hearing. Shri. JJ Bhatt, Advocate, authorized by and representing the noticees, appeared before me for the inquiry and reiterated the submissions earlier made by the Noticees vide letters dated October 19, 2006 and February 8, 2007. Further, with regard to alleged violation of Regulation 7(1) and 7(2) of SAST it was submitted that the promoters of the company have not acquired shares during the relevant period of the violation and consequently the violation of Regulation 7(1) and Regulation 7(2) cannot be alleged against the promoters. To substantiate this very contention they wished to file additional submissions/documents for which time was granted till March 5, 2007. The said additional documents were filed by the Noticees vide their letter dated March 5, 2007. Before taking a view in the matter it is important to understand the purpose and objectives of SAST Regulations.

 

TAKEOVERS: SUBSTANCE AND REGULATORY SUPERVISION

9.      Takeovers significantly influences growth of the corporate sector and otherwise which in turn is one of the major contributors to the wealth of the economy as a whole, moreso in the liberalized set-up with free movement of capital. However, it is always in the better interest of the stakeholders if such acquisitions are coupled with the twin motives of rational allocation and optimal utilisation of resources. It would serve the economy as well as the stakeholders better if this rational allocation and optimal utilization of resources takes place within the orderly framework of regulations and that such a framework should be one which comports with principles of fairness, transparency and equity, and above all with the need to protect the rights of the shareholders. I have carefully considered the submissions put forth by the Noticees and all the other materials on record. Given the facts of this case it is important to have clarity on the objectives of SAST Regulations. Section 11(2) (h) of the SEBI Act, 1992 empowers SEBI to regulate substantial acquisition of shares and takeover of companies, even though these activities are in the realm of corporate domain. This was done with the specific objective of protecting the interest of the minority shareholders especially the small retail investors. Small retail investors are typically scattered, do not have a unified common voice to protect their interest, especially when there is a change in control or management etc. To address these issues, the SAST Regulation 1994 was promulgated (subsequently replaced by the 1997 Regulations); its cardinal principles being 1) Equality of treatment and opportunity to all shareholders, 2) protection of minority interest and 3) transparency and fairness. The aforesaid are sought to be achieved through well defined process of disclosure and opportunity for exit. Therefore, the defaults in the instance matter, though undisputed and at the same time agreed upon by the Noticees, needs to be viewed in the aforesaid context.

 

10.  At the outset it would be prudent on my part to submit that from the available records it is evidently comprehensible that the violation of Regulation 7(1) and Regulation 7(2) of SAST as alleged is on account of acquisition made by M/s Namokar Finvest Pvt Ltd( not belonging to the promoter group) and not on account of acquisition made by the promoters, thereby absolving the promoters from alleged violation of Regulation 7(1) and Regulation 7(2) and corresponding adjudication proceedings for such violation. From the additional submission it is observed that the said entity was not a promoter as on 30.06.2003. At the same time the violation is as on 11.06.2003. The records of the MB does not directly implicate the promoters for violation of Regulation 7(1) and Regulation 7(2) because the data furnished with respect to chapter II disclosures concerns compliance status of promoters/Sellers/Major Shareholders/Acquirers of DTCL. Thereby, promoters contention that the alleged violation of Regulation 7(1) and Regulation 7(2) is not attributable to them bears enough weight for me to discharge the promoters from the said alleged violation. Chapter II of SAST provides provision pertaining to continuous disclosures to and by corporations. Regulation 8(2) deals with yearly disclosures of number and percentages of shares/voting rights, required to be made to the company by the person/s who

                    I.      Is a promoter(in addition to persons acting in concert) or every person having control over a company

                 II.      Within 21 days from the financial year ending March 31, as well as the record date for dividend declaration.

 

11.  The underlying spirit of making the disclosures under the SAST Regulation’s can be understood only pursuant to a detailed and elaborate explanation. I am duty bound and crave for justice in the instant matter for which I resort to elaborate explanation in succeeding paragraphs on the relevant disclosure requirements under SAST. It may be important to note here that the aforesaid alleged disclosures have to be made to the company. These disclosures basically act as facilitator with regard to further compliances made by the companies to the Stock Exchanges where the shares of the company are listed. In light of which it can be logically deduced that disclosure by promoters under Regulation 8(2) facilitates compliance to be made by the company under Regulation 8(3) of SAST. Keeping this in mind, disclosure of information under Regulation 8(3) to the stock exchange enables wider dissemination of information to the investors and the general public, which in turn enables them to reformulate their perception about the prospects of the company and take informed decisions. Primarily because the shares held in a listed company by its promoter / person in control of a company, is an important reflection of his perception about the company’s growth prospects, etc which in turn is incorporated in decision making process of minority shareholders while making their investment decisions. Therefore, though non- compliance under Regulation 8(2) might be viewed stringently, but if the succeeding compliances under Regulation 8(3) have been done on time, then non –compliance of Regulation 8(2) may be liberally treated. Primarily, such a perception on my part is moreso induced because compliance of disclosure requirements which help in dissemination of information in terms of Regulation 8(3) is important to the investors and at the same time encompasses and fulfills the intent with which the whole takeover process is designed. I feel the aforestated is the ideal and the inherent spirit of SAST, by which all the concered should be governed.

 

12.   Further, I also note that Regulation 8(3) of SAST requires corporations to make yearly disclosures to the stock exchanges in which its shares are listed, about the changes if any, in respect of shareholding of person/s who

                    I.      hold more than 15% of the company’s equity or voting rights

                 II.      is promoter or is a person in control of the company

as on 31^st March of every year as well as on the record date for dividend declaration, within 30 days.

 

13.  The shares held in a listed company by its promoter / person in control of a company, is an important reflection of his perception about the company’s growth prospects, etc. Therefore, information pertaining to any change in his shareholding is important to the investors. Similarly, a person holding more that 15% equity of a listed company is not merely a simple investor; therefore, any change in his shareholding also is of importance to the investors. Disclosure of these information to the stock exchange enables wide dissemination of information to the investors and the general public, which in turn enables them to reformulate their perception about the prospects of the company. Seen in this background, disclosure u/r 8(3) has a much wider economic function that far exceeds the basic function of facilitating informed price discovery.

 

14.  From the above discussions it is noted that any change in the holding of the promoters or persons acting in control, which has been disclosed under Regulation 8(2) shall be succeedingly disclosed under Regulation 8(3) to the respective Stock Exchnage. Therefore, in my viewpoint, timely disclosures under Regulation 8(3) has a larger purpose associated as it contains information under Regulation 8(2), hence the delay in complying with Regulation 8(2) in the instant matter shall be treated liberally as Regulation 8(3) was timely complied. Moreso, this argument of mine has weight attached and will be appreciated if minute literary observation of Regulation 8(2) and Regulation 8(3) is resorted too. To elaborate, disclosure under Regulation 8(2) shall be made within 21 days from the financial year ending March 31 as well as the record date. Further disclosure under Regulation 8(3) shall be made within 30 days from the financial year ending March 31 as well as the record date. Therefore in this intermittent 9 day period the company has to compile information under Regulation 8(1) and Regulation 8(2) and disclose the same under Regulation 8(3) to the Stock Exchanges. Logically, I feel that this variation of around 9 days between disclosures under Regulation 8(2) and Regulation 8(3) tantamount to a leeway for the promoters so as to benefit out of it only in exceptional circumstances.  However, I feel that this leeway shall be granted to the promoters only if disclosures under Regulation 8(3) have been made on time. The above observation should not be seen in dilution of the requirement under Regulation 8(2) and it is only case specific. Nine days time is given to the companies to compile disclosures under Regulation 8(2) and to file the same under Regulation 8(3) to the Stock Exchanges. If the promoters repetitively cause enormous delay in disclosing under Regulation 8(2) then it will tend to create problems for the companies in making timely disclosures under Regulation 8(3) to the Stock Exchanges. Most importantly it should not appear to be deliberate on the part of the Promoters so as to entail a serious view in the whole scheme of events.

 

15.  What are the consequences of not making the disclosure u/r 8(3)? An entity (including its PACs) holding more than 15% but less than 75% or 55%(as applicable at relevant period of violation) of a listed company’s equity, can acquire 5% of that company’s equity, every financial year, without the need to make a public offer, till it reaches 55% level, in which case provisions under Regulation 11(2) and Regulation 12 of SAST would get triggered entailing an open offer in terms of SAST. In the absence of disclosure u/r 8(3), investors will not have information about any change in shareholding of promoter/person in control or also about change in shareholding of a person who could be potential contenders for control over the company. Therefore, a delayed disclosure under Regulation 8(2) which facilitates compliance under Regulation 8(3) does not serve any purpose. The aforesaid state of affairs is undoubtedly, undesirable and what is sought to be avoided through SAST.

 

16.  In the instant matter it may be noted that the promoters have admitted the default as alleged. The violation by the promoters of Regulation 8(2) of SAST for the year’s 2003, 2004, 2005 and 2006 will attract penalty under Section 15 A (b) of SEBI Act, 1992 which reads as under:

Penalty for failure to furnish information, return, etc.

 

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

(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 therefor in the regulations, 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

17.  However as the company has made timely disclosures under Regulation 8(3) therefore the insignificant delay in compliance with Regulation 8(2) may be viewed liberally. It is noted that the delay is only for a period which varies from 1 to 4 days. It is also important that the noticees have all the time made compliances under Regulation 8(2) although with a delay of 1-4 day. The aforesaid is important factor in favour of Noticees. I also observe that there is nothing on record to suggest that noticees got disproportionate gain or unfair advantage, etc. arising out of the violation.  At the same time I am duty bound to examine the factors given under Section 15J of the SEBI Act, 1992, for adjudging quantum of penalty, under section 15I. To determine the quantum of penalty under Section 15A (b), 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. Except the violations being repetitive no other factor specified aforesaid is satisfied. Therefore, after duly considering the facts and circumstances of the instant matter I feel that the repetitive violation of Regulation 8(2) by the promoters warrants a token penalty of Rs. Forty Thousand which shall act as a warning to the promoters to adhere to the stipulations provided under SAST Regulations in future and ensure that their actions are not inimical to the underlying spirit with which SAST Regulations are governed. The aforestated consolidated penalty amount is worked out as under:

Sl. No.	Regulation/Sub-regulations Violated	Due Date for Compliance as mentioned in the Regulation	Actual date of compliance	Amount of Penalty(in Rs.)
2	8(2)	21-Apr-2003	22-Apr-2003	10,000
3	8(2)	21-Apr-2004	23-Apr-2004	10,000
4	8(2)	21-Apr-2005	25-Apr-2005	10,000
5	8(2)	21-Apr-2006	24-Apr-2006	10,000
			TOTAL	40,000

 

18.  In view of the above, and in terms of the provisions of section 15A(b) of the SEBI Act, 1992, I hereby impose a consolidated adjudication penalty of Rs. 40,000 (Rupees Forty Thousand only) on the promoters/Noticees of DTCL for the aforesaid violation. The Noticees are liable to pay penalty jointly and in case of default, the Noticees shall be liable severally.

 

19.  The promoters of DTCL shall pay the said amount of penalty by way of demand draft 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 should be forwarded to the General Manager, Division of Corporate Restructuring, Securities and Exchange Board of India, SEBI Bhavan, Plot No. C4-A, “G” Block, Bandra Kurla Complex, Bandra (East), Mumbai–400 051.

 

20.  This order of adjudication is made and passed on 15^th day of March, 2007 at Mumbai.

 

                                                                                                                                 AMIT PRADHAN

ADJUDICATING OFFICER