ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ WITH REGULATIONS 6(1) & (3) AND 8(1) & (2) OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES & TAKEOVERS) REGULATIONS, 1997 AND SECTION 15A OF THE SEBI ACT, 1992.
AGAINST M/S. J B MARZBAN & CO. PVT LTD, M/S. PEARL COSMETICS AND CHEMICALS PVT LTD, M/S. USHA HOLDINGS PVT LTD, M/S. MADHU FANTASY LAND PVT LTD, M/S. VAKHARIA ESTATE & INVESTMENTS PVT LTD AND M/S. J B MARZBAN TRUST
IN THE MATTER OF BEST EASTERN HOTELS LTD
BACKGROUND:
1. I was appointed as the Adjudicating Officer by the Chairman, SEBI, vide order dated September 30, 2004 to enquire into and adjudge the alleged contravention of sub-regulations (1) & (3) of Regulation 6 (for the year 1997) and sub-regulations (1) & (2) of Regulation 8 (for the years 1997 & 1998) of the SEBI (Substantial Acquisition Of Shares & Takeovers) Regulations, 1997 (for brevity’s sake referred to as the Takeover Regulations) read with sub-section (b) of Section 15A, of the SEBI Act, 1992 (hereinafter referred to as the Act) by M/s. J B Marzban & Co. Pvt Ltd, M/s. Pearl Cosmetics and Chemicals Pvt Ltd, M/s. Usha Holdings Pvt Ltd, M/s. Madhu Fantasy Land Pvt Ltd, M/s. Vakharia Estate & Investments Pvt Ltd and M/s. J B Marzban Trust (collectively referred to as the “past promoters” of Best Eastern Hotels Ltd) in the matter of the non disclosure of their shareholding in Best Eastern Hotels Ltd (hereinafter referred to as BEHL) a company whose shares are listed on the Bangalore, Chennai and Mumbai stock exchanges.
2. The Securities and Exchange Board of India (hereinafter referred to as the SEBI) received a draft letter of offer under cover of letter dated May 3, 2001 from M/s. Khandwala Securities Limited, the merchant banker, acting on behalf Mr. Vinaychand Kothari and persons acting in concert i.e., Mr. Dilip V Kothari, Smt. Meena V Kothari, Smt. Neelam D Kothari, M/s. Vandeep Developers Pvt Ltd and M/s. Vandeep Holdings Pvt Ltd (collectively referred to as the “acquirers”) for an open offer made by them to the shareholders of BEHL for the purchase of 90,477 fully paid equity shares of Rs.10 each at the price of Rs.10 per share representing 5.6% of the subscribed and paid-up share capital of BEHL. Thereupon, SEBI vide its letter dated May 24, 2001 while advising the merchant banker to carry out certain changes in the said draft letter of offer also called upon them to confirm and disclose as to whether the applicable provisions of the Takeover Regulations had been complied with by the past promoters. In response thereto, the merchant banker vide their letter dated May 30, 2001 informed SEBI that the past promoters had not complied with the provisions of Chapter II of the said regulations.
3. A disclosure to this effect is also mentioned in the letter of offer dated May 30, 2001 that was sent to the shareholders of BEHL. The relevant portions of the disclosures made in this regard at page 15 para no.4.11 of the said letter of offer reads as follows:
‘……………….the earlier promoters of BEHL have also not complied with the provisions of Regulations 6(1), 6(3), 8(1) and 8(2) of Chapter II of the SEBI (SAST) Regulations, 1997 upto April 21, 1998 ……’
SHOW CAUSE NOTICE/ REPLY/ PERSONAL HEARING:
4. In view of the alleged violation of the Regulations above mentioned, a notice dated August 21, 2002 was issued to the past promoters in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 wherein they were asked to show cause as to why enquiry proceedings should not held against them for the alleged violation of the provisions of sub regulations (1) and (3) of Regulation 6 (for the year 1997) and sub regulation (1) and [2] of Regulation 8 (for the years 1997 & 1998) of the Takeover Regulations. A copy of the letter of offer dated May 30, 2001 along with the copy of the letter of M/s. Khandwala Securities Ltd dated May 30, 2001 was enclosed along with the said notice. Further, the past promoters were advised 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. In reply to the same, the past promoters vide their letters; all dated August 31, 2002 and September 16, 2002 denied non-compliance of the said Regulations as brought out in the notice. The past promoters further made the following submissions through their Solicitors; M/s. Poddar & Co, vide letters, all dated September 23, 2002.
a. The alleged non-compliance was for the period from 1997 to 1998. However, the show cause notice was issued after a period of more than 4 or 5 years as applicable, from the date of the alleged non-compliance and hence was not bonafide or maintainable in law.
b. The show cause notice was issued on the basis of the information provided by M/s.Khandwala Securities Ltd, who were acting on behalf of the acquirers. Consequently, the notice issued on the basis of records taken from a third party was biased, malafide and liable to be set aside.
c. There was a change in management and control of BEHL from the past promoters to the acquirers under an agreement completed in March/ April 1999.
d. Prior to the said date, the company used to file statutory returns with all the three exchanges on which it was listed as per the listing agreement entered into with the said exchanges and the company had always followed the complete procedure.
e. As required under sub regulations (1) and (3) of Regulation 6 and sub regulations (1) and [2] of Regulation 8, the past promoters too had made disclosures through the company at the relevant point of time and had copies bearing acknowledgement from the company.
f. Hence there was no violation of sub regulations (1) and (3) of Regulation 6 and sub regulation (1) and [2] of Regulation 8 and consequently the question of imposition of any penalty did not arise.
5. On the basis of the above submissions, the past promoters requested for a personal hearing but did not enclose any documents as proof of having filed the said disclosures with the company.
6. In the mean time, SEBI introduced the SEBI Regularisation Scheme, 2002 (hereinafter referred to as the said ‘Scheme’) which was in force from October 1, 2002 to January 31, 2003 for listed companies which had failed to comply with or complied with the requirements of Regulations 6[2], 6[4] and 8[3] of the Takeover Regulations after the expiry of the period specified in the Takeover Regulations. For persons who had failed to comply with or complied with the requirements of Regulations 6[1], 6[3], 8[1] and 8[2] of the Takeover Regulations after the expiry of the period specified in the Takeover Regulations, the scheme was in force from October 1, 2002 to December 31, 2002. Consequently, an opportunity was provided both to the target companies and the persons in control / promoters, for regularization of the non-compliance with Regulations 6 and 8 of the Takeover Regulations for the years 1997 – 2002.
7. However, M/s Poddar & Co. acting on behalf of all the past promoters informed the then adjudicating officer vide letter dated October 23, 2002 that their clients did not desire to participate in the said scheme, in view of the fact that they had complied with Regulations 6[1], 6[2], 8[1] and 8[2] of the Takeover Regulations and that the said fact had categorically been brought out by them in their response to the show cause notice as well as in their letter dated October 23, 2002 wherein they had stated that their clients had made the required disclosures to the company and had necessary proof in support thereof.
8. Thereafter a notice of hearing bearing no. A&E/SVK/526/04 dated June 29, was sent to the past promoters in terms of rule 5(1) of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, advising them to attend the hearing proceedings to be held on August 19, 2004 before the then adjudicating officer.
9. In response to the same, M/s. Vakharia Estate & Investments Pvt Ltd, vide their letter dated August 19, 2004 sought for adjournment on the ground that their advocates, M/s Poddar & Co were out of station. Simultaneously M/s. Poddar & Co, vide their letter dated August 24, 2004 also requested for an adjournment on the same ground and requested for a fresh date of hearing. Accordingly, upon their request, the hearing was scheduled for October 15, 2004. Subsequently, Shri. M B Vakaria, on behalf of the past promoters, vide his hand delivered letter dated October 14, 2004 inter alia stated that the past promoters had, in the past, given full and detailed particulars in the matter and taken the position that there had been no contravention from their side in relation to the proceedings with respect to the company and the trust. He further stated that the said position has been accepted even by Shri Dilip V Kothari representing BEHL as well as by the then adjudicating officer and on the said basis submitted that “SEBI may act accordingly”.
10. Shri Dilip V Kothari, representing the acquirers and BEHL had been granted a hearing which was scheduled to be held on October 18, 2004. Hence, keeping in mind, the principles of natural justice, another opportunity was granted to the past promoters not only to be heard in person on October 18, 2004 but also provide proof of the documents which was stated to be in their possession. The said decision was communicated to Shri M B Vakharia vide notice bearing no. A&E/GBR/2339/04 dated October 14, 2004, and it was also made clear to the past promoters that no further requests for adjournment would be entertained and that in case they failed to appear for the said proceedings, the matter would be decided on the basis of the material available on record.
11. Despite the same, no body appeared on behalf of the past promoters for the said hearing on October 18, 2004.
CONSIDERATION OF ISSUES:
12. I have taken into consideration the submissions made on behalf of the past promoters, the material available on record including the show cause notice, the replies of the past promoters as well as the notices of hearing sent to them. I have noted that the past promoters were holding 74,500 shares i.,e 4.66% of the shareholding and voting rights of BEHL and remained promoters of BEHL as on May 30, 2000 as disclosed in the letter of offer filed by the acquirers with SEBI. Therefore by virtue of being a promoter of BEHL, the past promoters were under an obligation to comply with the provisions of sub regulations (1) and (3) of Regulation 6 for the year 1997 and sub regulations (1) and (2) of Regulation 8 for the years 1997 and 1998 of the Takeover Regulations.
13. Sub regulations (1) and (3) of Regulation 6 of the said Regulations reads as follows:
“6[1] Any person, who holds more than five percent shares or voting rights in any company, shall within two months of notification these Regulations disclose his aggregate shareholding in that company, to the company.
6[3] A promoter or any person having control over a company shall within two months of notification of these Regulations disclose the number and percentage of shares or voting rights held by him and by person(s) acting in concert with him in that company, to the company”.
14. Further sub regulations (1) and (2) of Regulation 8 of the said Regulations reads as follows:
“8 (1) Every person, including a person mentioned in Regulation 6 who holds more than fifteen percent shares or voting rights in any company, shall, within 21 days from the financial year ending March 31, make yearly disclosures to the company, in respect of his holdings as on 31st March.
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 for 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.
15. From the letter of offer dated May 30, 2002 as well as the information provided by the merchant banker to the offer, the past promoters have allegedly not complied with the provisions above mentioned. Accordingly a notice dated August 21, 2002 was issued to them to confirm the compliance of the said Regulations and in case of non-compliance, show cause as to why action as prescribed should not be initiated against them. However, the past promoters consistently stated that they had not violated any of the provisions of the Regulations and had documentary proof to prove the same. This was made clear vide the letters dated August 31, 2002, September 16, 2002 and September 23, 2002. However, none of the documents evidencing proof of the disclosures were annexed to any of the said letters.
16. In this context, it would be relevant to refer to the scheme that was introduced to enable defaulting persons and companies to comply with the disclosure requirements mentioned under Regulations 6 and 8 of the Regulations that they had failed to make earlier, within the stipulated period as provided for in the Regulations.
17. As the required disclosures were allegedly not made by the past promoters, they had the opportunity to regularize their non-compliance by participating in the said scheme. However, vide their letter dated October 23, 2003 the past promoters categorically stated that they did not desire to participate in the scheme as they had complied with the provisions of the said Regulations and had necessary proof of the same. As brought out earlier, the past promoters did not provide any documentary proof of their compliance at any point of time. On the contrary, despite being offered adequate opportunity to present the case, they sought adjournments for one reason or the other. In all, three opportunities were granted to them. Yet vide their letter dated October 14, 2004, without referring to the documentary proof allegedly in their possession, the past promoters stated that ‘SEBI may act accordingly’ on the basis of their contentions made earlier. In fact, their decision not to attend the proceedings held on October 18, 2004 was clearly conveyed by Shri Dilip V Kothari, representing BEHL and the acquirers who had also attended the proceedings held on October 18, 2004.
18. That being the case, the past promoters sent a letter dated October 20, 2004 wherein while referring to their contentions made earlier, they further added that they did not consider it necessary to attend the hearing and that the hearing was only for the purpose of producing proof of their contentions. Having stated this, strangely enough they requested for another opportunity of hearing.
19. The events above mentioned are rather peculiar. While on the one hand, the past promoters state that they do not consider it necessary to attend the hearing as it was only for the purpose of producing proof in support their contention and thus conveyed their lack of inclination to attend the proceedings, on the other hand they seek another opportunity of hearing.
20. It is a basic principle of natural justice that before the commencement of any proceedings, the authority concerned should give to the affected party, the notice of the case against him to enable him to adequately defend himself. However, it is not an essential part of the natural justice to give hearing at every opportunity. Furthermore, natural justice does not necessarily predicate an oral hearing, unless the context requires otherwise. The only requirement of natural justice is that no one should make any decision adverse to the individual, without giving him an adequate opportunity of meeting any relevant allegation against him and of presenting his case, which in the present case was given to the past promoters who could have adequately defended themselves not only through written submissions stating compliance, but also by furnishing documents evidencing proof of compliance. Keeping these principles in mind, the request for another adjournment was accordingly declined.
21. The past promoters have challenged the present proceedings stated to have been initiated solely on the basis of the letter of offer dated May 30, 2001 and the letter of the merchant banker to SEBI dated May 30, 2001. The above conclusion seems to be too far fetched. The information was provided by the target company to the merchant banker. The notice that was served on the past promoters was meant to enable them to provide evidence to substantiate their claim and contradict the contentions of the merchant banker as made out in the letters above mentioned. However, the past promoters never availed of any of the opportunities granted to them to contradict these contentions. Most relevant is the fact that even when they were offered the opportunity to regularize their non-compliance of the Regulations by participating in the scheme, they clearly stated their disinclination to participate in the scheme, on the ground that they had already complied with the Regulations and were in possession of the said documents. However, mere contentions by the past promoters of being in possession of the said documents without furnishing the documentary proof of the same to substantiate the claim, does not absolve them from the charge of non-compliance of the said Regulations.
22. The past promoters have also questioned the alleged delay in the initiation of the present proceedings. From the facts above mentioned, it is clear that the issue of non-compliance was brought to the notice of SEBI only vide letter of the merchant banker May 30, 2001 and the letter of offer dated May 30, 2001. Accordingly a show cause notice dated August 21, 2002 was served on the past promoters seeking their explanation for the issues raised therein. Hence no case is made out on the basis of this ground.
23. It is clear from the facts and events above mentioned that it was open for the past promoters to conclude these proceedings at a very early stage simply by producing the said documents as proof of having made the disclosures at the relevant point of time.
24. Instead, they procrastinated time and again and resorted to the tactics stated earlier, not only wasting the time of all parties involved but also making a mockery of the system. It is not that the promoters are unaware of the compliance requirement of the Regulations. The promoters are very much aware of the legal implications but knowingly decided not to comply with it. On the basis of the above, it is clear that the past promoters had nothing to offer or submit in support of their defense.
25. One of the objectives of the Takeover Regulations is to protect the rights of the investors through prompt disclosures.
26. 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.
27. These disclosures made to the SEBI or the Stock Exchanges provide inputs to them to monitor the transactions and ensure that the public offer, in case required, is not avoided to the disadvantage of the investors.
28. Assuming that the contention of the past promoters is to be accepted, especially as regards having made the disclosures, nothing prevented them to place the same on record, during the adjudication proceedings at any point of time, in support of their contentions, or even enclose the same in the various correspondence as proof of the disclosures allegedly made by them in the year 1997 and 1998. No detail whatsoever was provided by them as regards the entire transaction. In the absence of any documents evidencing that the past promoters have complied with the said Regulations or in the absence of any material available on record, viz., the dates when the required disclosures / information was furnished to the company or any other information relevant to the case, it would not be wrong to conclude that there has been total non-compliance of Regulations 6[1], 6[3], 8[1] and 8[2] of the Takeover Regulations.
29. Failure to make requisite disclosures attracts monetary penalty as specifically provided in Section 15A(b) of the SEBI, Act, 1992 which reads as follows:
“If any person who is required under this Act, or any rules or Regulations made there under –
(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 thereof in the Regulations, he shall be liable to a penalty not exceeding five thousand rupee for every day during which such failure continues.”
30. In the case of the past promoters, the table below enumerates the due dates for compliance, the number of days of delay in the said compliance and the penalty that can be levied under the provisions of section 15A(b) of the Act (calculated on the basis of the quantum of the penalty that is to be imposed as on the date of the commission of the offence).
|
Non-compliance of Regulations
|
Due date for
Compliance
|
Date of compliance
|
No. of days of delay
|
Penalty as per Section 15A(b) of the SEBI Act,1992*
|
Penal Amount in Rs.*
|
|
6(1) & 6(3)
|
20-Apr-1997
|
Not complied till date of hearing i.e
18-Oct-2004
|
2738
|
Rs.5000/- per day till the date of compliance
|
1,36,90,000
|
|
8(1) & 8(2)
|
21-Apr-1997
|
-do-
|
2737
|
- do-
|
1,36,85,000
|
|
8(1) & 8(2)
|
21-Apr-1998
|
-do-
|
2372
|
-do-
|
1,18,60,000
|
|
Total
|
3,92,35,000
|
*However, with effect from October 28, 2002 the penalty amount was increased to Rs.1 lac per day during which the failure continued or Rs.1 crore whichever is less
31. It is to be noted that the Takeover Regulations deal primarily with issues which include consolidation of holdings, conditional offers, change in control, periodic disclosures and most important of all investor protection. The past promoters would seem to that extent to have failed to satisfy the criteria of having ensured transparency in their various transactions and provide proof of the disclosures of their shareholding and control in a listed company.
32. However, the Parliament in its wisdom has directed certain factors to 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 reads as follows:
15 J. While adjudging quantum of penalty under section15-I, 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
33. Upon perusal of the provisions of Section 15J, it is clear that the adjudicating officer is required to have due regard to the factors stated in the section. The same is a direction and not an option, which is however to be exercised with due regard to his discretion. This discretion is to be exercised judiciously, depending upon the facts and circumstances of each case as well as after analysing of all the relevant material available on record especially in the case of failure to perform statutory obligations.
34. In the present case, there is no dispute regarding the fact that no documentary proof was submitted to the adjudicating officer at any point of time by the past promoters for the present proceedings to be dropped.
35. Hence bearing in mind these facts as well as the consistent refusal by the past promoters to cooperate in the present proceedings, I am inclined to hold that although the penalty need not be imposed in terms of the calculations made in the tabular column brought out earlier, the imposition of penalty is very much necessitated.
ORDER:
36. In terms of the SEBI Regularisation Scheme, the amount payable for regularizing non-compliances of Regulations 6(1), 6[3], 8[1] and 8[2] is Rs.10000/- each per year. Keeping the same in mind as well as the non-cooperative stand of the past promoters, 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, I am inclined to arrive at a equitable resolution of the issue on hand and in the interest of justice, equity and good conscience think it appropriate to levy a penalty of Rs.1,00,000/- collectively payable by all the six past promoters for non-compliance under Regulations 6[1], 6[3], 8[1] and 8[2] as mentioned earlier.
37. The penalty amount shall be paid 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 & ENQUIRY OFFICER
PLACE: MUMBAI
DATE : NOVEMBER 1, 2004