ORDER OF THE ADJUDICATING OFFICER 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 AVAYA INTERNATIONAL LLC. FOR THE VIOLATION OF REGULATION 7(1) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997.
1. Securities and Exchange Board of India (hereinafter referred to as SEBI) vide Order dated May 24, 2004 appointed Shri S.V. Krishna Mohan as Adjudicating Officer to inquire into and adjudge under Section 15A(b) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the alleged violation of Regulation 7(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997(hereinafter referred to as the ‘Takeover Regulations’) by Avaya International LLC (hereinafter referred to as ‘AILLC’) pursuant to its acquisition of 36,30,035 shares representing 25.5% of the paid up share capital of Tata Telecom Ltd. (TTL) on September 30, 2000. It was alleged that pursuant to the said acquisition, AILLC failed to comply with the provisions of Regulation 7(1) of the Takeover Regulations on account of its failure to make necessary disclosures with regard to its share holding as required under the Regulations.
NOTICE AND REPLY
2. The Adjudicating Officer issued a show cause notice no. A&E/546/04 dated July 12, 2004 under Rule 4 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the “Rules”) to AILLC seeking its reply on the alleged contravention of Regulation 7(1) of the Takeover Regulations.
3. AILLC through their Advocates M/s Amarchand Mangaldas replied to the notice vide letters dated July 23, 2004 and August 16, 2004. In the said replies, AILLC submitted that as per an agreement dated September 30, 2000, Lucent Technologies Inc a company based in the USA, agreed to cause its subsidiary Lucent International Inc to transfer the beneficial ownership of 25.5% of the paid up capital of TTL to AILLC. Though, Lucent International agreed to transfer the shares of TTL as per their agreement on September 30, 2000, the actual transfer of shares was completed upon necessary regulatory approvals and completion of internal procedures on November 14, 2003. Upon completion of transfer of shares, necessary disclosures were made on November 17, 2003 as per Regulation 7(1) of the Takeover Regulations. Further, at the time of acquisition of shares of TTL, AILLC believed that disclosures under Regulation 7(1) of the Takeover Regulations were required only after all the modalities and formalities in relation to the transfer of the shares were completed. This is evinced by the fact that AILLC promptly made disclosures in accordance with the Regulation 7(1) of the Takeover Regulations on November 17, 2003, on completion of the transfer formalities on November 14, 2003.
4. I have been appointed as Adjudicating Officer in the place of Shri S.V. Krishna Mohan vide SEBI’s order dated September 30, 2004. After considering the above reply submitted by AILLC, an opportunity of hearing was granted to them on October 19, 2004. Shri Ashwath Rau and Shri Indranil Deshmukh of M/s Amarchand Mangladas and Suresh A Shroff & Co., Advocates represented AILLC in the adjudication proceedings held on October 19, 2004.
5. During the personal hearing the representatives of AILLC made the following submissions:
(i) The contribution and distribution agreement dated September 30, 2000 between Lucent Technologies Inc and Avaya Inc was an agreement to sell the shares of TTL as part of enterprise communications business being spun off / demerged from Lucent to Avaya. The agreement was not a sale agreement nor a voting arrangement in relation to the TTL shares and AILLC acted on the bonafide belief that the reporting requirement in terms of Regulation 7 of the Takeover Regulations was applicable at the time of transfer of TTL shares to it, and the requirement was complied with on November 17, 2003 within 3 days of the transfer.
(ii) The technical violation the takeover code by AILLC was on account of the bonafide belief in relation to the requirements applicable to it and there was no intention to act in a subversive manner and malafide was clearly absent as evinced by the fact that all disclosures were made in full in relation to the spin off transaction since September, 2000 including in the context of recent open offer made by Avaya Mauritius Ltd, a sister company of AILLC, for the shares of TTL on account of its acquisition of majority control of TTL by acquiring Tata group holding.
(iii) In view of the recent decision of the Hon’ble Bombay High Court in the case SEBI Vs Cabot International Capital Corporation and that of the Hon’ble Securities Appellate Tribunal in Godrej & Boyce Manufacturing Company Limited Vs SEBI, there is no obligation on the part of the Adjudicating Officer to impose penalty where there is a technical contravention and it is established that the party had acted bonafide and not dishonestly. Given the various considerations to be taken into the account by the Adjudicating Officer, in terms of Section 15J of the SEBI Act, the acquisition of TTL shares by AILLC has not resulted in any disproportionate gain or any loss to the investors.
CONSIDERATION OF EVIDENCE AND FINDINGS:
6. It is noted that vide agreement dated September 30, 2000, AILLC agreed to acquire 25.5% shares of TTL from Lucent Technologies International Inc. In this regard Regulation 7(1) of Takeover Regulations as applicable on September 30, 2000 provided that ;
“Any acquirer who acquires the shares or voting rights which (taken together with shares or voting rights, if any held by him) would entitle him to more than five percent shares or voting rights in a company, in any manner whatsoever shall disclose the aggregate of his share holding or voting rights in that company, to the company.”
Further, Regulation 7(2) of the Takeover Regulations stipulate that the said disclosures shall be made within 4 days of the receipt of intimation of allotment of shares or the acquisition of shares or voting rights as the case may be.
7. In its reply dated August 16, 2004, AILLC stated that though the beneficial ownership of the shares was held by AILLC from September 30, 2000 in terms of agreement, the transfer of legal ownership of the shares was subject to the receipt of necessary regulatory approvals on completion of internal procedures and the transfer of shares were completed only on November 14, 2003. With regard to the said contention of AILLC, it is noted that in the reply, AILLC further stated that they have exercised that rights as the owner of the shares during the period from September 30, 2000 to November 14, 2003, and the actual transfer of shares and voting rights in its favour was completed only on November 14, 2003. Hence, AILLC stated that there was no requirement to make any disclosure in accordance with Regulation 7(1) of the Takeover Regulations until November 14, 2003.
8. In this regard, it is pertinent to note that the mandate of Regulation 7 of the Takeover Regulations is to require any acquirer to report his holdings exceeding five percent of the shares and voting rights in a company to that company. The object of the provision is to ensure timely disclosures regarding the dominant holdings in a company. The provision requires the acquirers to disclose their identity to the company indicating the aggregate of the shares or voting rights held by them. Further the provision requires the company to disclose the same to the Stock Exchanges on which the shares of the company are listed so that the investors of the company are aware of the identity of the acquirers. Hence the provision provides for dissemination of information to the company and to the investors. The expressions “would entitle him” mentioned in the Regulation 7(1) clearly indicate that if by virtue of any acquisition, the acquirer is entitled to more than five percent shares or voting rights in a company he shall disclose the aggregate of his share holding and voting rights to the company. It is noted from the reply submitted by AILLC that the beneficial ownership of the TTL shares passed on to AILLC and particulars of the same were consolidated in the accounts of AILLC after September 30, 2000. It is further noted from the submission of AILLC that it had exercised rights as the owner of the shares during the period September 30, 2000 to November 14, 2003. These facts clearly indicate that AILLC acquired the said shares on September 30, 2000. Hence it is clear that AILLC acquired more than five percent of the shares of TTL on September 30, 2000. In view of the same, AILLC was bound to comply with the disclosure requirements enumerated under the provisions of the Regulation 7(1) of the Takeover Regulations when its holdings in TTL crossed five percent on September 30, 2000. As AILLC did not make the necessary disclosures in terms of the requirements of Regulation 7(1) when its holdings in TTL crossed five percent on September 30, 2000, it violated the provisions of Regulation 7(1) of the Takeover Regulations and hence is liable to the penalty prescribed under the provisions of Section 15A(b) of the SEBI Act, 1992.
9. Section 15A(b) of the SEBI Act as it stood on September 30, 2000 provided that if any person who is required under the Act, Rules or Regulations made thereunder to file any return or furnish any information, books or other documents within the time specified in the regulations, fails to file return or furnish the same within the specified time, he shall be liable to a penalty not exceeding five thousand rupees for everyday during which such failure continues. In this regard, AILLC submitted that the violation of the provision was on account of the bonafide belief that the reporting requirement in terms of Regulation 7 is applicable at the time of completion of all the formalities in respect of the transfer of shares of TTL to AILLC which was completed on November 14, 2003. Further, AILLC submitted that the technical violation of the Takeover Regulations was on account of bonafide belief in relation to the requirements applicable to it and there was no intention to act in a subversive manner and malafide was clearly absent.
10. With regard to the above submissions made by AILLC, it is pertinent to note that absence of guilty intention or malafide shall not absolve the party from the liability arising out of the violation of the provisions of the SEBI Act and the Regulations as held by Hon’ble Bombay High Court in its order dated March 03, 2004, in the case of SEBI Vs Cabot International Capital Corporation. In this regard, AILLC submitted that the Hon’ble High Court in the above matter held that there is no obligation upon the Adjudicating Officer to necessarily impose a penalty particularly where there is a technical contravention and there are justifiable reasons like the default occurred due to bonafide belief that he was not liable to act in the manner prescribed by the statute.
11. 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 take into account the following factors namely, the amount of disproportionate gain or unfair advantage made as a result of default, loss caused to the investors and the repetitive nature of the default. In this regard, AILLC submitted that the acquisition of the shares of TTL has not resulted in any disproportionate gains to it or any loss to the investors. They further stated that the acquisition has served to augment investor wealth as the price of TTL scrip has consistently increased since the spin off as per the agreement dated September 30, 2000. AILLC submitted that on account of acquisition of majority control of TTL, Avaya Mauritius Ltd a sister concern of AILLC made an open offer to the public in accordance with the provisions of the Takeover Regulations and the provisions of the Regulations were complied with.
12. With regard to imposing of penalty for violation of the provisions of the Takeover Regulations, AILLC cited the judgment of Hon’ble Supreme Court in the case of Superintendent and Remebrancer of Legal Affairs to Government of West Bengal Vs Abani Maity, reported in 1979 (4) SCC 85 in support of its contention that the word ‘liable occurring in the statute does not convey a sense of an absolute obligation of penalty’, even if this word is used along with the words ‘shall be’. Further, in respect of its submission that no penalty may be imposed for the violation of the Regulation 7 in the particular facts of the case, AILLC cited the decision of the Hon’ble Securities Appellate Tribunal in the case of Godrej Boyce Manufacturing Company Ltd., Vs SEBI (Appeal No. 20/2003).
13. It is noted that the Hon’ble Securities Appellate Tribunal vide Order dated August 31, 2004 held that the Adjudicating Officer would be justified in not imposing penalty where the breach of provisions of law is only technical or venial or where the breach flows from a bonafide belief that the offender was not liable to act in the manner prescribed by the statute. In this regard, it is pertinent to note that Regulation 7 of the Takeover Regulations aims to ensure timely disclosures where the holdings of the acquirer exceeds five percent of the shares and voting rights in a company. Any violation of said requirement can not be termed as technical or venial in nature. Further, the objective of such provision is to provide for transparency and dissemination of information to the investors and to the company. The disclosure requirements in terms of Regulation 7 serves two purposes i.e the company is informed of sizable holding so that if necessary, it can take necessary measures to prevent the acquirer from dislodging the management. Further, as the said information is made available to the investors through the Stock Exchanges, the investing public will come to know of the position enabling them to take decisions as to whether to continue with the company or to exit from the company. Hence such disclosures help the public and the investors of the company to take well informed investment decisions. AILLC submitted that the acquisition of the shares of TTL was well within the knowledge of TTL, its shareholders and public at large as the web site of TTL described it as a Tata Avaya Company. However, this cannot be considered as compliance with the disclosure requirements of the Regulation 7(1) of the Takeover Regulations. Further if proper information was imparted to the investors of the company in accordance with the provisions of Regulation 7, the same would have enabled the investors to take well informed investment decisions. Hence, the investors were deprived of valuable information which would have been available to them had AILLC made necessary disclosures in terms of Regulation 7(1) of the Takeover Regulations when its holding crossed the prescribed limit.
14. It is submitted by AILLC that the violation was committed as it was under the belief that the reporting requirement in terms of Regulation 7 was applicable only on November 14, 2003 when all the formalities pertaining to the transfer of TTL shares to it are completed. This contention is contrary to the facts of the case as it is evident that AILCC acquired the shares on September 30, 2000 and it is noted from the submission of AILLC that it had exercised rights as the owner of the shares during the period September 30, 2000 to November 14, 2003. In view of the same, AILCC was bound to comply with the provisions of Regulation 7(1) of the Takeover Regulations within four days of the date of acquisition of the shares on September 30, 2000. As AILLC made necessary disclosures in terms of Regulations 7(1) only on November 17, 2003, it is observed that there is a delay of 1137 days in complying with the provisions of Regulation 7(1) of the Takeover Regulations. However, taking into account the facts and circumstances of the case and in view of the fact that AILLC made disclosures regarding their holding on November 17, 2003, a lenient view is taken with regard to the quantum of penalty attracted in respect of the violation committed by AILLC.
ORDER
In view of the violation of Regulation 7(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 committed by Avaya International LLC in respect of its acquisition of 36,30,035 shares representing 25.5% of Tata Telecom Ltd on September 30, 2000, I hereby impose a penalty of Rs.1,00,000/- (Rupees One Lakh only) on Avaya International LLC.
The penalty shall be paid by way of Demand Draft / Pay Order drawn in favour of the “Securities and Exchange Board of India” Mumbai and the same shall be sent to Shri S.V. Muralidhar Rao, General Manager, Securities and Exchange Board of India, Mittal Court, ‘B’ Wing, 224, Nariman Point, Mumbai – 400 021.
Biju. S
Adjudicating & Enquiry Officer
Date: November 01, 2004
Place: Mumbai
Cc: 1) Avaya International LLC
2) Securities and Exchange Board of India