ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
READ WITH REGULATIONS 7(1) & (2) OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES & TAKEOVERS) REGULATIONS, 1997 AND SECTION 15A OF THE SEBI ACT, 1992.
AGAINST BIRLA MUTUAL FUND
BACKGROUND:
1. Birla Mutual Fund (hereinafter referred to as the “acquirer”) is a Mutual Fund registered with the Securities and Exchange Board of India (hereinafter referred to as the SEBI) with Registration No. MF/0204/94/8 managed by the Birla Sun Life Asset Management Company Limited and sponsored by Birla Global Finance Limited and Sun Life.
2. The acquirer was found to have acquired a total of 2,50,600 shares of M/s Subex Systems Limited (hereinafter referred to as SSL) (market purchase of 1,80,600 shares and on December 30, 1999, 70,000 shares allotted on a preferential basis ) during the period from September 07, 1999 to December 31, 1999 under its various schemes, constituting 7.06% of the total paid up capital of SSL, whose shares were then listed on the Bangalore Stock Exchange and the Hyderabad Stock Exchange (for brevity’s sake, hereinafter referred to as the BgSE and HSE respectively).
3. As the sum total holdings of all the schemes of the acquirer constituting 7.06% of the total paid up share capital of SSL entitled the acquirer to exercise more than 5% of the voting rights of SSL, the acquirer was required to disclose in terms of Regulation 7(1) and (2) of the SEBI (Substantial Acquisition Of Shares & Takeovers) Regulations, 1997 (for brevity’s sake, herein after referred to as the Takeover Regulations), their aggregate shareholding in SSL to SSL, within 4 working days of October 18, 1999 i.e. the date on which the acquirer crossed the threshold limit of 5% of the voting rights in SSL.
4. As the acquirer failed to make the necessary disclosures to SSL about the said acquisition, within the period as prescribed under Regulation 7(1) and (2) of the Takeover Regulations, the acquirer was found to have contravened the said provisions of the Takeover Regulations.
5. In view of the same, adjudication proceedings were initiated against the acquirer by the Chairman, SEBI and in this context, I was appointed as the Adjudicating Officer, vide his order dated December 16, 2004 to enquire into and adjudge the alleged contravention by the acquirer of Regulation 7(1) & (2) of the Takeover Regulations read with sub-section (b) of Section 15A, of the SEBI Act, 1992 (hereinafter referred to as the Act).
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
6. A show cause notice dated March 07, 2005 was issued to the acquirer in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 (Rules) where under they were asked to show cause as to why enquiry proceedings should not initiated against them for the alleged violation of the provisions of sub regulations (1) and (2) of Regulation 7 of the Takeover Regulations. The details of the said acquisition made by the acquirer were forwarded to them with an advice to make their submissions, if any, along with supporting documents that they wished to rely upon, within 14 days from the date of the receipt of the notice, and also indicate whether they were desirous of a personal hearing.
7. In reply to the same, the acquirer in their reply dated March 31, 2005 inter alia stated as follows:
I. As per the half yearly audited report for September 30, 1999, the share capital of SSL appearing in the balance sheet is Rs.31,92,1000 and hence 5% of the share capital of SSL as on September 30, 1999 amounts to Rs.15,96,050.
II. None of the schemes of the acquirer crossed the 5% limit as on September 30, 1999.
III. Subsequently SSL made a preferential allotment of 3,30,800 shares, in which Birla Advantage Fund was allotted 30,000 shares and as a result the scheme crossed the 5% limit. Hence, exceeding the 5% limit was not due to fresh purchase but a consequence of the preferential allotment done by SSL.
IV. Regulation 7 (1) and (2) of the Takeover Regulations would apply only when the acquisition is done by an acquirer who also has a beneficial interest in the acquisition.
V. In the case of a fund, the trustees acquired the shares for the benefit of the large number of investors.
VI. Since the trustees have no beneficial interest in the acquisition of the shares of SSL, the provisions of the Takeover Regulations would not apply for such an acquisition.
While requesting that the said submissions be considered, the acquirer requested for a personal hearing.
8. Subsequently as sought by the acquirer, a notice of hearing dated April 01, 2005 under Rule 5(1) of the Rules, was sent to them advising them to be present at the personal hearing to be held on May 11, 2005. On the said date, the acquirer was represented by their officials, who during the course of the hearing deviated from the stand made in their reply dated March 31, 2005 and admitted that they had not complied with the provisions of Regulation 7(1) and (2) of the Takeover Regulations. The said admission was however punctuated with the statement that the violation, if at all, was only technical in nature and that there was no intention to violate either the spirit or the letter of the Takeover Regulations. Further to that, in their letter dated May 12, 2004, the acquirer while reiterating the contentions advanced by them made the following additional submissions :
i. Birla Advantage Fund held 1,46,400 shares in SSL as on December 14, 1999. Consequent to the preferential allotment of 30,000 shares made in favour of Birla Advantage Fund, the scheme crossed the 5% limit on December 24, 1999 although the excess holding over the 5% limit was offloaded by July 27, 2000.
ii. In case of aggregate holding of all the schemes of the acquirer in SSL, the 5% threshold was crossed on October 18, 1999 and the excess holding over the 5% limited was offloaded by December 12, 2000.
iii. Adequate systems were now in place to monitor compliance with the Takeover Regulations.
However, no documents were enclosed by them in support of the contentions advanced by them.
CONSIDERATION OF ISSUES:
9. I have taken into consideration the facts and circumstances of the case, the submissions made on behalf of the acquirer through the letters cited in the earlier part of the order and during the course of the hearing as well as the material available on record.
10. Before proceeding to consider the issue involved, it would be essential to recapitulate the facts in brief, leading to the present proceedings.
SSL came out with a public issue of 9,71,000 equity shares of Rs.10/- each for cash, at a premium of Rs.65/- per share aggregating to Rs.728.25 lakh. The issue which opened on July 19, 1999 and closed on July 23, 1999, was over subscribed by 6.04 times. The trading of the shares of SSL that commenced at the BgSE on September 03, 1999, opened at Rs.80/- and moved up thereafter to close at Rs.1908 on December 27, 1999. At the HSE, the trading commenced on September 07, 1999 and opened at Rs.165/- and finally closed on December 31, 1999 at Rs. 1,815/-. In the wake of the phenomenal rise in the price of the scrip of SSL, SEBI initiated an investigation into the trading in the scrip of SSL during the period from the date of its listing up to December 31, 1999.
11. Upon an analysis of the trading patterns of the various entities including the brokers/clients who had traded in the said scrip, it was inter alia found that the acquirer was the single largest buyer of the shares of SSL at both the exchanges with 1,33,800 shares i.e., 76,500 shares constituting 66.58% at the BgSE and 72,700 shares constituting 33.81% at the HSE. The acquirer was also found to have made the maximum purchase in the said scrip (around 78%) in the month of September 1999, the first month of the IPO listing, when the price ranged between Rs.80-300.
12. The table given below clearly evidences the acquisition made by the acquirer under various schemes during the period from September 7, 1999 to December 31, 1999, as detailed below:
|
FUND
|
TRADE DATE
|
QTY
|
CUM. HOLDING
|
VOTING SHARE CAPITAL OF SSL
|
% OF CUM. HOLDING TO VOTING SHARE CAPITAL OF SSL
|
|
Birla Tax Plan 99
|
7-Sep-99
|
1,500
|
1500
|
3219200
|
0.05
|
|
India Excel Offshore Fund
|
7-Sep-99
|
1,200
|
2700
|
3219200
|
0.08
|
|
Birla Tax Plan 98
|
10-Sep-99
|
2,000
|
4700
|
3219200
|
0.15
|
|
Birla Tax Plan 99
|
10-Sep-99
|
5,000
|
9700
|
3219200
|
0.30
|
|
India Excel Offshore Fund
|
10-Sep-99
|
9,200
|
18900
|
3219200
|
0.59
|
|
Birla Advantage Fund
|
14-Sep-99
|
5,300
|
24200
|
3219200
|
0.75
|
|
Birla Tax Plan 99
|
14-Sep-99
|
2,000
|
26200
|
3219200
|
0.81
|
|
Birla Advantage Fund
|
15-Sep-99
|
6,600
|
32800
|
3219200
|
1.02
|
|
Birla Advantage Fund
|
16-Sep-99
|
12,900
|
45700
|
3219200
|
1.42
|
|
Birla Advantage Fund
|
17-Sep-99
|
17,200
|
62900
|
3219200
|
1.95
|
|
Birla Advantage Fund
|
20-Sep-99
|
10,700
|
73600
|
3219200
|
2.29
|
|
Birla Advantage Fund
|
21-Sep-99
|
5,000
|
78600
|
3219200
|
2.44
|
|
Birla Advantage Fund
|
23-Sep-99
|
10,000
|
88600
|
3219200
|
2.75
|
|
Birla Advantage Fund
|
24-Sep-99
|
6,900
|
95500
|
3219200
|
2.97
|
|
Birla Advantage Fund
|
27-Sep-99
|
19,500
|
115000
|
3219200
|
3.57
|
|
Birla Advantage Fund
|
29-Sep-99
|
26,300
|
141300
|
3219200
|
4.39
|
|
Birla Advantage Fund
|
4-Oct-99
|
2,300
|
143600
|
3219200
|
4.46
|
|
Birla Advantage Fund
|
5-Oct-99
|
2,200
|
145800
|
3219200
|
4.53
|
|
Birla Advantage Fund
|
15-Oct-99
|
6,000
|
151800
|
3219200
|
4.72
|
|
Birla Tax Plan 99
|
15-Oct-99
|
4,000
|
155800
|
3219200
|
4.84
|
|
India Excel Offshore Fund
|
18-Oct-99
|
5,400
|
161200
|
3219200
|
5.01
|
|
India Excel Offshore Fund
|
28-Oct-99
|
1,200
|
162400
|
3219200
|
5.04
|
|
Birla Advantage Fund
|
5-Nov-99
|
10,000
|
172400
|
3219200
|
5.36
|
|
Birla Balance Fund
|
5-Nov-99
|
700
|
173100
|
3219200
|
5.38
|
|
Birla Advantage Fund
|
3-Dec-99
|
2,000
|
175100
|
3219200
|
5.44
|
|
Birla Advantage Fund
|
14-Dec-99
|
3,500
|
178600
|
3219200
|
5.55
|
|
Birla Balance Fund
|
20-Dec-99
|
300
|
178900
|
3219200
|
5.56
|
|
Birla Balance Fund
|
23-Dec-99
|
1,000
|
179900
|
3219200
|
5.59
|
|
Birla Balance Fund
|
24-Dec-99
|
700
|
180600
|
3219200
|
5.61
|
|
Birla Advantage Fund
|
31-Dec-99
|
30,000
|
210600
|
3550000
|
5.93
|
|
Birla Balance Fund
|
31-Dec-99
|
12,000
|
222600
|
3550000
|
6.27
|
|
Birla Tax Plan 98
|
31-Dec-99
|
2,000
|
224600
|
3550000
|
6.33
|
|
Birla Tax Plan 99
|
31-Dec-99
|
7,000
|
231600
|
3550000
|
6.52
|
|
India AdvanOffshore Fund
|
31-Dec-99
|
15,000
|
246600
|
3550000
|
6.95
|
|
India Excel Offshore Fund
|
31-Dec-99
|
4,000
|
250600
|
3550000
|
7.06
|
13. As is apparent from the table, the acquirer which was holding 155,800 shares constituting 4.84% of the voting share capital of SSL as on 15th October 1999, acquired additional 5,400 shares on 18th October 1999, with a result that their holdings in SSL crossed 5% on the said date. The sum total holdings of all the schemes of the acquirer; constituted 7.06% of the total voting paid-up share capital of SSL as on 31st December 1999. This clearly exceeded the threshold limit of 5% prescribed under Regulations 7(1) and (2) of the Takeover Regulations which reads as under (as it existed prior to amendment dated 9.9.2002):
7(1) "Any acquirer, who acquirers 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 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."
7(2) The disclosures mentioned in sub-regulation 1 shall be made within 4 working days -
a) the receipt of intimation of allotment of shares; or
12. the acquisition of shares or voting rights, as the case may be.
Thus, every acquirer, acquiring shares in excess of 5% of paid-up voting share capital of a target company is required to disclose the aggregate of their shareholding to the company concerned, within 4 working days of such acquisition.
14. However, no such disclosure seems to have been made by the acquirer to SSL in the instant case, resulting in the violation of the provisions of Regulation 7(1) and 7(2) of the Takeover Regulations. The fact that the acquirer had crossed the threshold limit of 5% prescribed in the Takeover Regulations which was not disclosed to SSL is not in dispute. In fact an admission to this effect was made by them in their letter dated October 21, 2000 in response to a query raised by SEBI in this matter.
15. It transpires that when SEBI had vide its letter dated September 23, 2004 advised the acquirer to furnish information inter-alia as regards their compliance with Regulation 7 of the Takeover Regulations, the acquirer vide their letter dated October 01, 2004 submitted that the holding of the schemes of BMF as on September 30, 1999 was 1,41,300 shares while the paid up capital of SSL comprised of 31,92,100 shares as on September 30, 1999 (as per the balance sheet of the company as on 30, September 1999) and had further submitted that the aggregate holding of all the schemes of BMF amount to 4.42% of the paid up capital of SSL. It was further admitted that during the period between September 1999 and March 2000, SSL had made a further allotment of equity shares including preferential allotment to the schemes of BMF and resulting in the aggregate holding of the schemes of the acquirer as on March 31, 2000 rising to approximately 7.92% of the paid up capital of SSL.
16. However when the acquirer was called upon by SEBI vide letter dated October 15, 2004 to provide proof of compliance with Regulation 7 of the Takeover Regulations, upon acquiring shares in excess of 5% of the paid up voting share capital of SSL vide letter dated October 21, 2004 they submitted that from their records, they were not able to trace any disclosure made by them to SSL under the Takeover Regulations. It was further stated that although it appeared that the aggregate holding across all the schemes of the acquirer crossed the 5% limit in December 1999, the same appeared to be a technical omission. This admission was however followed up by additional submissions made vide letter dated October 25, 2004, in which the acquirer submitted that each scheme, represented by a separate set of investors and floated by them was a distinct entity, having a separate portfolio and managed by the fund manager after taking into consideration the investment objectives of the scheme. It was stated that all the schemes except Birla Advantage Fund held the scrip of SSL below the 5% threshold limit and that even the said Fund held 1,46,400 shares upto December 14, 1999 which was well below the 5% threshold limit under the Takeover Regulations but after the preferential allotment of 30,000 shares on December 24,1999, the holding in the said scheme increased to 1,76,400 shares.
17. I am not impressed with the contentions of the acquirer that the 5% limit was crossed as a result of the preferential allotment and not as a result of fresh purchase of additional shares from the market, especially considering that the shares acquired by them through preferential allotment were in any case, not exempted from the applicability of the Takeover Regulations. Their other contention of the non-applicability of the Takeover Regulations based on the premise that the acquisition in question was made by a Fund where the Trustees acquired the shares for the benefit of a large number of investors as opposed to that of any ordinary acquirer which had a beneficial interest in the acquisition is also untenable, considering the definition of `acquirer’ under the said Regulations. Regulation 2(1) (b) of the Takeover Regulations defines an acquirer as any person who acquires or agrees to acquire shares in a company either by himself or with any person acting in concert with the acquirer. There are no two opinions as regards the status of the acquirer in the instant case and as is apparent from the definition of an “acquirer” no exemption is granted in terms of the Regulations, as regards acquisition made by a Fund.
18. On a cumulative analysis of the relevant provisions read with the facts stated above, it would seem that the failure to disclose the details of the acquisition in the instant case was largely on account of a lack of due diligence on the part of the acquirer who is now trying to unsuccessfully and unjustifiably raise the plea of technicality, make out a case, for getting out of making minimal or no disclosures, required to be made by them, which is against the very spirit and letter of the Takeover Regulations. One of the objectives of the said Regulations is to protect the rights of the investors through prompt disclosures. The purpose of making these timely disclosures to the company is meant to ensure transparency in transactions and inform the company about the cornering/ concentrating of shares by others so as to enable it to take preventive measures if it so desired, to ward off the entry of potential raiders and strengthen the position of the management. Thus the provision of Regulation 7 of the Takeover Regulation which emphasizes upon timely disclosure has nexus with the object of Regulation 7 of the Takeover Regulation.
19. Although there are the dicta of various courts to the effect that penalty need not be imposed especially in cases where there was a technical breach coupled with a lack of intention to commit the said breach, as is the plea raised in the instant case, it is the undisputed finding that the excess shares were on account of a preferential allotment. Hence the acquirer could not have been unaware of their obligation to make the necessary disclosures to SSL, which remain undisclosed till date. I have taken cognizant of the fact that no evidence has been furnished by the acquirer to evidence the lack of intention on their part to violate the provisions of the said Regulations. In any case, mens rea or a guilty mind is not a necessary ingredient to determine the quantum of offence in case of a violation of the provisions of the SEBI Act and the Rules and Regulations framed there under. No attempts appear to have been made by the acquirer to rectify the anomaly of divesting their excess holding which appears to have been held on by them for more than a year, as per their own admission. Even here no proof has been submitted by them to substantiate their contention. No proof has been provided by the acquirer as regards the absence of liquidity in the market during the time when the excess shares were sold, evidencing the market equilibrium remaining unaffected. In view of the aforesaid and the undisputable non compliance with the provisions of Regulations 7(1) and (2) of the Takeover Regulations, the levy of a penalty is very much necessitated.
20. As specifically provided in Section 15A(b) of the SEBI, Act, 1992, failure to make requisite disclosures attracts monetary penalty not exceeding five thousand rupee for every day during which such failure continues.
21. However, the Parliament in its wisdom has directed certain factors also be taken in to account by the adjudicating officer, before imposing a penalty as is evident from the provisions of Section 15J of the Act which also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) rules, 1995 i.e. 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 and the repetitive nature of the default
22. These factors mentioned above, are to be relied upon with due discretion that is to be exercised judiciously, depending upon the facts and circumstances of each case as well as after analysing all the relevant material available on record especially in the case of failure to perform statutory obligations.
23. In the present case, no material is available on record or for that matter been furnished by the acquirer as to the disproportionate gain or unfair advantage enjoyed by them as a result of the default. However it cannot be denied that the said default would have certainly caused a certain amount of disadvantage to the shareholders of SSL and the investor class as a whole. Moreover the default of the acquirers is continuing till date. However, the penalty cannot be a multiplier simpliciter of the number of days and the amount i.e., Rs.5000/-. The commensurate penalty to be levied in the instant case, should therefore be fixed keeping in mind the rationale behind the requirement of the disclosures to be made to the company, the nature of violation, the extent to which the violation has affected the interest of the investors in securities, the facts and circumstances of the case as discussed earlier in detail, the mitigating factors, if any.
PENALTY
24. Bearing in mind, the factors enumerated above as well as after taking into consideration, the facts and circumstances of the present case and the material available on record, the rationale behind the requirement of making these disclosures, on a judicious exercise of the discretion conferred upon me, I in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 think it appropriate to levy an amount of Rs 75,000/- (Rupees Seventy Five Thousand only) as penalty payable by Birla Mutual Fund for their non compliance with Regulation 7(1) and (2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997.
25. 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 which may be sent to Shri. S V Muralidhar Rao, General Manager, Securities and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai – 400021.
G. BABITA RAYUDU
ADJUDICATING OFFICER
PLACE: MUMBAI
DATE : MAY 25, 2005