ORDER OF THE ADJUDICATING OFFICER UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
AGAINST M/S.ATCOM TECHNOLOGIES LTD.
FOR THE ALLEGED VIOLATIONS OF REGULATION 11(2) OF SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997 IN THE MATTER OF ACQUISITION OF THE SHARES OF NHN CORPORATION LTD.
I was appointed as Adjudicating Officer by SEBI to inquire into and adjudge the alleged contravention of Regulation 11(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 by ATCOM Technologies Ltd. (hereinafter referred to as the acquirer) for the alleged failure to make the public announcement to acquire further shares in terms of the said Regulations pursuant to the acquisition of additional equity of NHN Corporation Ltd. on 5.4.01 (hereinafter referred to as “target company”).
NOTICE
Notice dated 17/06/2003 was issued under Rule 4 of SEBI (procedure for holding enquiry and imposing penalties by Adjudicating Officer) Rules, 1995, seeking the reply of the acquirer on the alleged contravention of Regulation 11(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 for acquisition of additional shares in NHN Corporation on 5.4.01.
The acquirer had acquired 2,00,000 shares representing 1.04% equity of the target company on 5.4.01. Pursuant to this acquisition, the shareholding of the acquirers in the target company increased from 76.29% to 77.33%.
Prior to the acquisition on 5.4.01, the acquirers were already holding more than 75% of the paid up capital of the target company and as required under Regulation 11(2) read with Regulation 14(1) of the SEBI (SAST) Regulations, 1997 for any further acquisition the acquirers were required to make public announcement within a period of 4 days of acquisition.
REPLY & PERSONAL HEARING
The acquirer stated that the said 2,00,000 shares of NHN Corporation Ltd. were only kept with him as security on 5.4.01 without exercising the voting rights during the period of holding and returned to the depositor (borrower) on the fulfillment of obligation under which these shares were taken as security. The voting rights were exclusively reserved with the depositor (borrower) during the said period.
No consideration was paid during the deposit as it was not sale/purchase transaction but only security for the loan to be advanced.
The acquirer contended that violation of Regulation 11(2) would occur only if the borrower failed in its obligation and subsequently the lender acquired and exercised the voting right on the same shares.
A personal hearing was granted to the acquirer and Shri Surendra Jain, Company Secretary and Manager (Finance) attended the hearing. The learned representative reiterated the contents of the reply and stated that the shares were kept with them as security on 5th April 2001 for a loan to be advanced to M/s. Saral Disha Investments Ltd. The shares were held in the electronic form, in the demat account of the acquirer. He further stated that subsequently the loan could not be advanced and the shares in question were returned to the party on 15th April 2002.
A copy of the agreement between M/s. Saral Disha Investments Ltd. and the acquirer, was submitted.
APPRECIATION OF EVIDENCE AND FINDINGS
The point that arises for consideration in the present proceedings is whether the acquirer had contravened the provisions of Regulation 11(2) of SEBI (SAST) Regulations, 1997 when it had acquired 2,00,000 shares of the target company on 5.4.01 from M/s. Saral Disha Investments Ltd..
It is the case of the acquirer that the acquisition of 2,00,000 shares which represented 1.04% equity of the target company was on account of pledge as a security for a loan of Rs.30.00 lakhs to be advanced to Saral Disha Investments as per the agreement dated 15.3.01. As the loan could not be advanced, the shares in question (which were in electronic form) were returned to the borrower on April 15, 2002 i.e. after more than one year.
In terms of regulation 11(2) no acquirer who, together with persons acting in concert with him has acquired, in accordance with the provisions of law, 75% of the shares or voting rights in a company, shall acquire either by himself or through persons acting in concert with him any additional shares or voting rights, unless such acquirer makes a public announcement to acquire shares in accordance with the regulations.
It is not in dispute that the acquirer had already held 76.29% of the paid-up capital of the target company prior to the aforesaid acquisition on 5.5.01 and with the aforesaid acquisition the shareholding had moved from 76.29% (146,48,000 shares) to 77.33% (148,48,000 shares).
The contention that the aforesaid acquisition was by way of pledge is examined.
According to Section 172 of the Indian Contract Act “The bailment of goods as security for payment of a debt or performance of a promise is called pledge. The bailer is in this case called the ‘pawner’. It is seen from the definition that there are three essential ingredients of a pledge (1) there must be a bailment must be by way of security (3) the security must be for payment of a debt or performance of a promise. It is thus clear that a pledge is the delivery of goods by the pledger of the pledge by way of security upon a contract that they shall, when the debt is paid or the promise is performed, be returned or otherwise disposed of according to the directions of the pledgor.
In a pledge, there is no transfer of title from the pledgor to the pledgee. The title to the goods remains with the pledgor but the pledge is entitled to realize the amounts due by sale of goods pledged, after due notice to the pledgor.
In the instant case, there is no pledge created in favour of the acquirer. It is not possible to accept the contention of the acquirer that despite the shares being in their depositories account, they are not the owners of the said shares which according to them are under pledge. Therefore, the contention of the acquirer that notwithstanding that the shares are held by it in its depositories account, it nevertheless, is not the beneficial owner is contrary to facts and law. There is no valid pledge created in favour of the acquirer for securing any debt. It is to be noted that the shares are in electronic form and they were transferred to the depository account of the acquirer on 5.4.01. Thus, the acquirer had acquired right, title and interest on the 2,00,000 shares of the target company. It therefore, cannot further be argued that the shares were held as ‘pledge’ when the transfer of title is complete in the first instance as the shares moved from Saral Disha Investments Ltd. accounts to that of the acquirer. If it were the intention of the acquirer to hold the shares as a pledgee, the proper course would be to create the pledge as provided under Section 12 of the Depositories Act, 1996 with the previous permission of the Depository and also as per SEBI (Depositories and Participants) Regulations, 1996 which has not been done. In any case, the transaction cannot be termed as pledge when the acquirer received the shares in its demat account on 5.4.01 since the transfer of title was complete on the said date in favour of the acquirer and it became the beneficial owner of the 2,00,000 shares.
As per the Judgement of the Hon’ble Supreme Court in LIC vs Escorts Ltd. (1986) 1 SCC-264 ( at para 84) the rights of the shareholder are
“The rights of a shareholder are (i) to elect directors and thus to participate in the management through them; (ii) to vote on resolutions at meetings of the company; (iii) to enjoy the profits of the company in the shape of dividends; (iv) to apply to the court for relief in the case of oppression; (v) to apply to the court for relief in the case of mismanagement; (iv) to apply to the court for winding up of the company; (vii) to share in the surplus on winding up. A share is transferable but while a transfer may be effective between transferor and transferee from the date of transfer, the transfer is truly complete and the transferee becomes a shareholder in the true and full sense of the term, with all the rights of a shareholder, only when the transfer is registered in the company’s register.”
In the instant case, the Acquirer acquired title to the 2,00,000 shares of the target company on 5.4.2001 when the shares moved into his Depository Account in electronic form. In other words, it became the beneficial owner of these shares. A beneficial owner, as per Depositories Act, 1996 is one whose name is recorded as such with the Depository.
As per Section 10 (3) of Depositories Act, 1996, the beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository. Needless to say, he has both ownership rights and voting rights. In fact, these two are inseparable as voting rights are attached to the ownership rights. In case of a pledge, the title of ownership of the pledged property remains with the pledgor. However, in the instant case, for the reasons as discussed above, there is no valid pledge created in favour of the acquirer in view of the absolute and complete transfer of title in favour of the acquirer in the first instance.
In view of the above, it is concluded that the acquirer had violated Regulation 11(2) of SEBI(SAST) Regulations, 1997 when it acquired 2,00,000 shares of the target company and increased its holding from 76.29% to 77.33% of the paid up capital of the target company since the acquisition was not preceded by a public announcement to acquire further shares from the other shareholders of the target company. Had the acquirer made a public announcement to acquire further shares from the other shareholders, they would have got an opportunity to tender their shares pursuant to such public announcement and exited from the company at a beneficial price to be determined under the Regulations. Therefore, the interest of the investors is prejudicially affected. Further, such announcement if made, would have also impacted the price movements of the share in the stock exchange and the investors would have had an opportunity to exit from the company. This secondary market exit opportunity to the shareholders of the target company would have been in addition to the open offer which the acquirer was required to make under the Regulations.
The decision of the Hon’ble Securities Appellate Tribunal in Can Bank Investments Management Services Ltd (AMC of Canbank MF) Vs. Adjudicating Officer is relied upon in determining the quantum of penalty wherein it was observed as under :
“ It is difficult to agree with the Appellants viewpoint that in the light of the Adjudicating Officer’s observations that none of the factors mentioned in section 15 J is applicable to the case, the Adjudicating officer should have not imposed the penalty. Section 15 J does not state that the penalty should not be imposed in case of proven failure. In terms of Section 15 I it is for the Adjudicating Officer to decide whether a particular failure has to be punished by imposing monetary penalty. He has to take into consideration all the relevant facts and decide judicially. However, with a view to curtail arbitrary imposition of the maximum penalty for each of the failures covered under section 15I, legislature has provided guidelines in section 15 J.”
It would be very difficult to determine with mathematical precision the cost of the opportunity loss on the investors at the relevant time when the acquirer failed to make a public announcement to acquire shares for the shareholders of the target company.
Section 15H of SEBI Act, 1992 (as it existed prior to the amendment) reads as under:-
15H - Penalty for non disclosures of Acquisition of Shares and Takeovers
If any person who is required under this Act or any Rules or Regulations made there under fails to ………
make a public announcement to acquire shares at a minimum price ……………..
he shall be liable to a penalty not exceeding five lakh rupees.
ORDER
It is pertinent to refer to the order of the SAT in Appeal No.151/2004 dated 7.2.2005 in the matter of Rameshchandra Mansukhani NRI vs SEBI. It has been held by the Hon’ble Tribunal that for irregularities that were committed prior to the amendment of the SEBI Act on 29.10.2002, penalty as existing at the relevant period only is to be imposed and not the new penalties under the amended Act. The SAT held that it is the common ground that at the relevant period the maximum penalty was Rs.5 lacs. The amendment enhancing the penalty to Rs.5 crores came into force with effect from 29th October, 2002. The Hon’ble SAT at page 16 of the order held as under :
“Penalties unless specifically made retrospective must inevitably be only with effect from the date of amendment. Accordingly, we hold that at the relevant time, the maximum penalty was Rs.5.00 lakhs”.
For the aforesaid reasons, the penalty imposed is limited to Rs 5.00 lakhs (Rupees five lakhs only) for failure to make public announcement in accordance with the Regulations in term of Section 15 H (ii) of SEBI Act, 1992.
Having regard to the submissions made, the factors contained in section 15J of SEBI Act,1992 as discussed above, the gravity of the charges established, the facts and circumstances and following the order of the Hon’ble SAT in Rameshchandra Mansukhani NRI cited above, I hereby impose a penalty of Rs.5.00 lakhs (Rupees Five Lakhs only) on ATCOM Technologies Ltd who contravened the provisions of Regulation 11(2) of SEBI (SAST) Regulations, 1997 read with Section 15H(ii) of SEBI Act, 1992 in the matter of acquisition of shares of NHN Corporation Ltd. It shall be remitted by way of a crossed Demand Draft drawn in favour of “SEBI – PENALTIES REMITABLE TO GOVERNMENT OF INDIA” and forwarded immediately to Shri S C Das, Executive Director, SEBI, 224, Mittal Court, “B” Wing, Nariman Point, Mumbai – 400 021.
Date : June 23, 2005 S V Krishna Mohan
Place : Mumbai Adjudication & Enquiry Officer