Order against Shri Shantanu R Kothavale

May 29, 2007

Orders : Orders of AO

ADJUDICATION ORDER NO. - BS/AO-13/2007

ORDER UNDER SECTION 15I OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH 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 SHANTANU R KOTHAVALE

Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) vide order dated June 19, 2006 initiated adjudication proceedings against Shri Shantanu R Kothavale (hereinafter referred to as ‘the noticee’) and I was appointed as the adjudicating officer to inquire into and adjudge under Section 15I read with Sections 15A(a), 15A(b) and 15H(ii) 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 the noticee on account of non compliance of the provisions of Regulations 3(3), 3(4), 3(5), 11(1) and 14(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as Takeover Regulations) in respect of his shareholding in Rajkumar Forge Ltd. (hereinafter referred to as ‘RFL’).

FACTS OF THE CASE
The noticee along with other promoters of RFL (hereinafter referred to as persons acting in concert) acquired 18,62,400 shares of RFL in the preferential allotment on April 28, 2001 thereby increasing the aggregate shareholding from 2.05% to 28.86%. In this regard, it is alleged that the noticee failed to submit necessary report to the Board within the prescribed time thereby violating the provisions of Regulation 3(3), 3(4) and 3(5) of the Takeover Regulations.
It is further alleged that subsequent to the said acquisition, the noticee along with the persons acting in concert acquired 28,74,000 equity shares and voting rights in RFL on November 26, 2001 increasing his shareholding in the target company from 28.86% to 49.29 % beyond the prescribed limit of 5% enumerated under Regulation 11(1) of the Takeover Regulations. In this regard it is alleged that the noticee failed to make public announcement to acquire shares of RFL in terms of the provisions of Regulation 11(1) of the Takeover Regulations.

NOTICE AND REPLY
A Show Cause Notice (hereinafter referred to as ‘SCN’) A&E/BS/71169/2006 dated July 10, 2006 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.
The noticee replied to the show cause notice vide letter dated August 3, 2006. Considering the reply of the noticee, it was decided to conduct an inquiry into the matter and the noticee was advised to attend the hearing on August 23, 2006. The hearing was adjourned to September 12, 2006 on the request of the noticee. Advocate Vinay Chauhan, authorized representative of the noticee attended the hearing on September 12, 2006 and made the submissions. The noticee made additional submissions vide his letter dated September 26, 2006. The noticee made further submissions vide his letter dated March 29, 2007.

CONSIDERATION OF EVIDENCE AND FINDINGS
The noticee along with persons acting in concert acquired the shares of RFL in a preferential allotment on April 28, 2001 thereby increasing his shareholding from 2.05% to 28.86%. In this regard, it is alleged that the noticee failed to submit necessary report to the Stock Exchange and SEBI within the prescribed time thereby violating the provisions of Regulation 3(3), 3(4) and 3(5) of the Takeover Regulations. The text of the said Regulations are as follows:

3(3) In respect of acquisitions under clauses (c), (e),(h)and (i) of sub-regulation (1), the stock exchanges where the shares of the company are listed shall, for information of the public, be notified of the details of the proposed transactions at least 4 working days in advance of the date of the proposed acquisition, in case of acquisition exceeding [5%]of the voting share capital of the company.

3(4) In respect of acquisitions under clauses(a),(b),(c), (e)and (i) of sub-regulation (1), the acquirer shall, within 21 days of the date of acquisition, submit a report along with supporting documents to the Board giving all details in respect of acquisitions which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him) would entitle such person to exercise [15%]or more of the voting rights in a company.

3(5) The acquirer shall, along with the report referred to under sub-regulation(4), pay a fee of [twenty five thousand rupees ] to the Board, either by a bankers cheque or demand draft in favour of the Securities and Exchange Board of India, payable at Mumbai.
Subsequent to the said acquisition, the noticee along with the persons acting in concert acquired 28,74,000 equity shares and voting rights in RFL on November 26, 2001 increasing the aggregate shareholding in the target company from 28.86% to 49.29 % beyond the prescribed limit of 5% enumerated under Regulation 11(1) of the Takeover Regulations. In this regard it is alleged that the noticee failed to make public announcement to acquire shares of RFL in terms of the provisions of Regulation 11(1) of the Takeover Regulations. The text of the said Regulations are as follows:

11. (1) No acquirer who, together with persons acting in concert with him, has acquired, in accordance with the provisions of law, [15per cent or more but less than fifty five per cent (55%) ] of the shares or voting rights in a company, shall acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him to exercise more than 5% of the voting rights, in any financial year ending on 31st March, unless such acquirer makes a public announcement to acquire shares in accordance with the Regulations.
The noticee submitted that RFL had raised funds by way of loans from various financial institutions including IDBI, IFCI & ICICI. The company's liability towards loans repayment as on May 23, 2000 was Rs. 7.06 crores. The company has been incurring heavy losses since 1996 and was not in a position to pay even the interest on the loans raised. As on 31 March 2001 the accumulated loss of the company was Rs 17,31,48,618/-. The networth of the company was negative. It was in this context that the noticee as one of the directors of the company, and a Non Resident Indian, agreed to bailout the company from the impending financial crisis by agreeing to subscribe to the equity shares of the company to be allotted by way of preferential allotment.
Consequently the Board of the company passed a resolution on November 27, 2000 inter alia according its consent to offer/issue and allot 72,00,000 equity shares of Rs 10/- each at par to the noticee. Pursuant to the said Board resolution, the company vide Notice dated December 26, 2000 intimated to the shareholders about the convening of EGM on January 30, 2001 for inter alia seeking the approval of shareholders for issuing 72,00,000 equity shares of Rs 10/- each at par to the noticee. In the Explanatory at Item No 2 it was inter alia stated as follows:

"ITEM NO.2

The company commenced its project with the promoters' initiative, public participation in equity capital and loan funds from Financial Institutions. In the beginning, the project was estimated with fair amount of profits to accommodate burden of interest and repayment of the loan funds. However, the activities of project development did not work as planned as the teething problems prolonged beyond estimation. This reason had cascading effect on operations of the company in subsequent years and the increasing burden of debt servicing resulted in increasing accumulated losses. As the shareholders are aware, the entire networth was eroded by the accumulated losses as at the year ended on March 31, 2000. Major part of accumulated loss was due to ever-increasing burden of interest from the Financial Institutions. Therefore, the company approached the Financial Institutions for remission in interest liability. The Institutions have kindly agreed to grant complete remission of interest with the condition that the company repays their entire loan in one installment on or before March 13, 2001.

To survive the company out of such situation, Mr. Shantanu Raikumar Kothavale, Director of the company has offered his assistance to the Company by subscribing to the equity capital of the company to the tune of Rs. 7,20,00,000 (Rupees seven crores and twenty two lacs only). The company proposes to avail the timely assistance offered by Mr. Shantanu Raikumar Kothavale by issuing and allotting 72,00,000 (Seventy two lakhs) Equity shares of the company at par at Rs.10 each on preferential basis. The company has to seek permission of shareholders by special resolution as these shares are not issued to the existing shareholders on rights basis. Therefore, special resolution as stated at lTEM-2 is proposed.

Mr. Shantanu Raikumar Kothavale is the son Mr. Rajkumar Shankarao Kothavale, Promoter and Managing Director of the company. Mr. Shantanu Rajkumar Kothavale is, himself, a director of the company. He is a Computer Software Professional based at 3650, Buckley Street, No. 202, Santa Clara, CA 95051, USA. The company proposes to issue and allot to him 72,00,000 (Seventy two lacs shares of face value of Rs.10/- at par (i.e. Rs.10 each) fully payable on allotment. The present value of each share according to the valuation guidelines notified by erstwhile Controller of Capital Issues Government of India in 1990, is lesser than the value at which shares are proposed to be issued / allotted to Mr. Shantanu Raikumar Kothavale. The certificate of valuation of shares according to the said guidelines issued by the Statutory Auditors is available for inspection at the Registered Office of the company and shall also be laid before this General Meeting.

On issue and allotment of such shares to Mr. Shantanu Raikumar Kothavale, his individual percentage of shareholding would be 59.47% and his holding together with that of his relatives would be 62.79%. He also being one of the promoter shareholders, the promoters’ shareholding would be 65.16%. Such equity issue and allotment, and the consequential change in holdings would not result into change in constitution of the present Board of Directors of the company. The said issue and allotment would affect the shareholding pattern of the company to an extent that the promoter shareholders' equity holding would increase to 65.16% of Equity share Capital of the company having voting rights. However, the said issue and allotment would not result in change in control over the company. The company shall complete the allotment within three months from the date of this General Meeting, if approved by the members.
It is further submitted that in consonance with Regulation 3(1)(c)(i) of Takeover Regulations, RFL on January1, 2001 intimated the respective stock exchanges viz. Ahmedabad Stock Exchange, Pune Stock Exchange & Bombay Stock Exchange about the proposed preferential allotment and also enclosed the copy of resolution passed by the Board of the company. Copy of the letter dated January 1, 2001 sent to the respective stock exchanges is annexed as Exhibit "C" to the submissions of the noticee.
Pursuant to the approval of the shareholders the Board of directors allotted 1862400 equity shares of Rs 10/- each at par to the noticee on April 28, 2001. It is submitted that the entire 72,00,000 equity shares could not be allotted to the noticee since he could bring funds only in respect of 1862400 shares. As a result of the said allotment shareholding of the noticee in the company increased from 2.05% (104100 equity shares) to 28.86 % (1966500 equity shares).
Thereafter, in the month of October the noticee expressed his desire to the company to subscribe the balance shares. The company issued notice dated October 30,2001 to the shareholders of the company inter alia seeking their approval for allotment of shares to the noticee, since the currency of the earlier approval granted by them was only for three months and the same had expired. This approval was nothing but technical requirements of ratification of the earlier resolution permitting issue of preferential shares to the noticee. In the Explanatory statement at Item No 1 following was stated:

"ITEM NO.1

The company commenced its project with the promoters' initiative, public participation in Equity Capital and loan funds from Financial Institutions. In the beginning, the project was estimated with fair amount of profits to accommodate burden of interest and repayment of the loan funds. However, the activities of project development did not work as planned as the teething problems prolonged beyond estimation. This reason had cascading effect on operations of the company in subsequent years and the increasing burden of debt servicing resulted in increasing accumulated losses. As the shareholders are aware, the entire networth was eroded by the accumulated losses as at the year ended on March 31, 2000. Major part of accumulated loss was due to ever-increasing burden of interest from the Financial Institutions. Therefore, the company approached the Financial Institutions for remission in interest liability. The Institutions have kindly agreed to grant complete remission of interest with the condition that the company repays their entire loan on or before March 31, 2002. To survive the company out of such situation, Mr. Shantanu Rajkumar Kothavale, Director of the company had offered his assistance to the company by subscribing to the Equity Capital of the company to the tune of Rs. 7,20,00,000 (Rupees Seven crore twenty lacs only).

The company proposed to avail the timely assistance offered by Mr. Shantanu Raikumar Kothavale by issuing and allotting 72,00,000 (Seventytwo lakhs) equity shares at par at Rs.10 each on preferential basis and had sought permission of shareholders by special resolution as these shares were not issued to the existing shareholders on rights basis, in the EOGM held on 30^th January, 2001. However since Mr. Shantanu Rajkumar Kothavale could only bring funds for 18,62,400 equity shares of Rs.10 - each and the company could allot 18,62,400 equity shares.

Now Mr. Shantanu Ra;kumar Kothavale is in a position to bring in funds to enable the company to issue and allot 53,37,600 equity shares (i.e. balance of equity shares which were issued to him with your previous permission). Since your permission was valid only for 3 months from the date of EOGM i.e. January 30, 2001, the fresh permission is sought for by this proposed special resolution.

On issue and allotment of such shares to Mr. Shantanu Raikumar Kothavale his individual percentage of shareholding would be 59.47% and his holding together with that of his relatives would be 62.79%. He also being one of the promoter shareholders, the promoters’ shareholding would be 65.16%. Such equity issue and allotment, and the consequential change in holdings would not result into change in constitution of the present Board of Directors of the company. The said issue and allotment would affect the shareholding pattern of the company to an extent that the promoter shareholders' equity holding would increase to 65.16% of equity share capital of the company having voting rights. However, the said issue and allotment would not result in change in control over the company. The company shall complete the allotment within three months from the date of this General Meeting, if approved by the members.
It is submitted that the said Notice issued to the shareholders contained all the requisite disclosures as required in terms of Regulation 3(I)(c)(ii) of Takeovers Regulation, at the relevant point of time. Pursuant to the approval of the shareholders the Board of directors allotted 28,74,000 equity shares of Rs 10/- each at par to the noticee on November 26, 2001. It may be pointed out that further shares to the tune of 28,74,000 equity shares could only be allotted to the noticee since he could bring funds only in respect of 28,74,000 equity shares. As a result of the said allotment of further 74,000 equity shares noticee’s shareholding in the company increased from 28.86 % (1966500 equity shares) to 49.30% (4850500 equity shares).
Consequent to the said allotment of 28,74,000 equity shares to the noticee , a Return of allotment, pursuant to sec 75 (1) of the Companies Act was also filed with the Registrar of companies on November 26, 2001. Copy of return of allotment is annexed as Exhibit "E". Further the requisite formalities in respect of the said allotment of shares in terms of FEMA Regulations were also complied with by the noticee. The same is evident from Letter dated March 4, 2002 (Exhibit "F") received from RBI.
It is submitted by the noticee that inadvertently, no disclosures were made under Regulation 3 (3) of the Takeover Regulations and no reports were filed under Regulation 3(4) of the Takeover Regulations for the preferential allotments of 18,62,400 equity shares & 28,74,000 equity shares made on April 20, 2001 & November 26, 2001, within the prescribed time of 21 days. The same have been filed belatedly on October 05, 2005 and September 21, 2006. Copies of the said reports are annexed as Exhibit "G" and Exhibit "H" to the reply.
With regard to the Violation of Regulation 3(3), 3(4) and 3(5) of the Takeover Regulations consequent to acquisition of shares on April 28. 2001 resulting in increase in shareholding from 2.05% to 28.86%, the noticee has admitted that he had not complied with the requirements of Regulation 3(3). In so far as filing of Report under Regulation 3(4) is concerned it is submitted that the same has been filed belatedly on October 5, 2005.
With regard to the violation of Regulation 11(1) of the Takeover Regulations consequent to acquisition of shares on November 26, 2001 resulting in increase in shareholding from 28.86% to 49.30 % it is submitted that since the acquisition of 2874000 shares through preferential allotment made on 26.11.2001, resulting in increase In shareholding from 28.86% to 49.30%, being an exempted acquisition under Regulation 3(1) (c), compliance of regulation 11(1) does not arise- and therefore the noticee cannot be held for violation of the said regulation with reference to the acquisition of said shares. As stated hereinbefore, both the conditions for availing the exemption viz. sending of board resolution to the exchanges (Exhibit A) and making of requisite disclosures in the Notice to the shareholders (Exhibit D) having been complied with, the charge of violation of Regulation 11(1) cannot survive.
The noticee has submitted that it had not violated any of the provisions of the SEBI Act or the Regulation, referred to in the show cause notice intentionally. The slight delay involved in filing the reports under Regulations 3(3) and 3(4) of the SEBI Takeover Regulations was unintentional. Further, since the acquisition under reference being an exempted one, there was no need to comply with the requirements of Regulation 11(1) and accordingly there is no violation warranting imposition of any monetary penalty for the same.
The noticee has submitted the following mitigating factors in the matter for consideration:

a)     I am an NRI, based in USA. Never in the past have I been penalized by any of the regulatory bodies.

b)     The purpose of acquisition of shares by way of preferential allotment was to bailout the company from the financial crisis, as opposed to acquiring substantial shares or control over the company.

c)      The 47,36,400 shares were acquired at par value of Rs 10/ whereas at the relevant time the book value of the shares of the company was negative. Certificate of the Auditors in this regard is annexed as Exhibit "I".

d)     As a result of my contribution, the company has again become vibrant and has also been derigestered from BIFR vide letter no 236/2003 dated 06/6/05 ( Exhibit "J").

e)     For the said acquisition, requisite permissions were obtained from RBI and the requisite returns were filed by the company with ROC and stock exchanges. The information regarding allotment of shares to me was already under public domain.

f)        I had no intention at all to avoid filing of the report. As soon as the deficiency regarding non filing of report under Regulation 3(4) was brought to my notice, the report was filed with SEBI in the prescribed format on October 05, 2005. In so far as second preferential allotment is concerned, the report under regulation 3(4) was not filed in time under the bona fide impression that the same is required to be filed only once, when an acquirer acquires the shares beyond the threshold limit of 15% for the first time.

g)     The said violations are at the highest technical, procedural and venial breaches and have not caused any adverse consequences to anybody. I never intended or consciously or deliberately avoided to comply with the filing of the requisite report. The same was inadvertent and happened because of the peculiar facts and circumstances of the case.

h)      I have not made any disproportionate gain or unfair advantage, as a result of belated filing of report.

i)        No loss has been caused to any investor or group of investors as a result of the technical default. On the contrary the company has come back on track.

j)        The alleged default is not repetitive
Considering the above submissions of the noticee it is noted that admittedly the noticee violated the provisions of Regulation 3(4) and 3(5) of the Takeover Regulations in respect of his acquisition of shares on April 28, 2001 which resulted in increase in the shareholding from 2.05% to 28.86%. In this regard, the noticee has admitted that Report under Regulation 3(4) has been filed belatedly on October 5, 2005.
With regard to the acquisition of shares on November 26, 2001 by the noticee which resulted in increase in his shareholding in the target company from 28.86% to 49.29 %, it is noted from the submissions of the noticee that the same also amounted to exempted acquisition under Regulation 3(1)(c) and therefore violation of regulation 11(1) is not established against the noticee. However, admittedly there has been a delay in filing of Report under Regulation 3(4) as the same has been filed belatedly on September 22, 2006.
In view of the above details violation of Regulation 3(4) and 3(5) of the Takeover Regulations by the noticee for his acquisition of shares on April 28, 2001 and November 26, 2001 is established. The said violations attract penalty under Section 15 A(a) of the SEBI Act which provides as follows:

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

(a) 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.
It is noted that the said penalty was prescribed by the SEBI (Amendment) Act, 2002 w.e.f 29.10.2002. Penalty as it stood at the time of the violation provided for the following

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

(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of not exceeding one lakh and fifty thousand rupees for each such failure.
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.
It is observed that there has been delay of 1621 days and 1760 days respectively in filing report under Regulation 3(4) of Takeover Regulations for the acquisition of shares on April 28, 2001 and November 26, 2001. The said violations attract penalty under Section 15A(a) of the SEBI Act as stated above.
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;

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

c)      the repetitive nature of the default
It is pertinent to note in this regard that the purpose of acquisition of shares by way of preferential allotment by the noticee was to bailout the company from the financial crisis, as opposed to acquiring substantial shares or control over the company. It is noted from the submissions of the noticee that as a result of his contribution, the company has again become vibrant and has also been deregistered from BIFR vide letter no 236/2003 dated 06/6/05. It is further noted that the said issue and allotment did not result in change in control over the company. There is no evidence available on record to show any disproportionate gain or unfair advantage to the noticee, as a result of belated filing of report or any loss to any investor or group of investors. Considering the above factors a lenient view is taken with regard to imposition of penalty on the noticee for the violations as stated above.

ORDER
Considering the facts and circumstances of the case, for the violation of Regulation 3(4) and 3(5) of the Takeover Regulations on the part of Shri Shantanu R Kothavale, in terms of the provisions of Section 15 A(a) of the SEBI Act and Rule 5 of the Rules, I , impose a penalty of Rupees One Lakh (Rs.100,000/) on Shri Shantanu R Kothavale.
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, Division of Corporate Restructuring, 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 Shantanu R Kothavale and to SEBI.

PLACE: Mumbai Biju. S

DATE: May 29, 2007 Adjudicating Officer