WTM/GA/99/MIRSD/11/06
SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: G. ANANTHARAMAN, WHOLE TIME MEMBER
ORDER UNDER SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002 AGIANT M/S. MEGHRAJ SP CORPORATE FINANCE (PRIVATE) LIMITED {FORMERLY KNOWN AS MEGHRAJ FINANCIAL SERVICES (INDIA) PVT LTD}, MERCHANT BANKER HAVING REGISTRATION NO. INM 000001220
Date of Hearing: September 05, 2006
Appearances :
For noticee : Shri. M.P. Rao and Ms N.S Nappinar Advocates,
Shri Rajan Satija and Shri Aziz Mutvalli
For Securities and Exchange Board of India: Shri P K Kuriachan, General Manager.
1.0 BACKGROUND
1.1 The facts giving rise to the present proceedings in brief are stated below. A public announcement under regulation 11(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the Takeover Regulations) was made on August 21, 2003 by Andavar Investments Pvt Ltd, Subramanian Investments Pvt. Ltd, Valliammai Investments Pvt. Ltd. and Ramanathan Investments Pvt. Ltd. (hereinafter collectively referred to as the acquirers) to acquire 7,42,560 equity shares of SRP Tools Ltd. (hereinafter referred to as the target company). The shares of the target company were listed on the Madras Stock Exchange Ltd. (hereinafter referred to as MSE). The acquirers were part of the promoter group of the target company and together with persons acting in concert, they were holding 74.998% of the paid up equity share capital of the target company at the time of the aforesaid public announcement. The said 7,42,560 equity shares (25.002% of the voting share capital) of the target company had constituted for its entire balance issued paid–up capital.
1.2 The acquirers had appointed M/s. Meghraj SP Corporate Finance (Private) Limited {formerly Known as Meghraj Financial Services (India) Pvt. Ltd.} (hereinafter referred to as the Merchant Banker), a registered merchant banker with Securities and Exchange Board of India (hereinafter referred to as SEBI) having registration no. INM 000001220, as their manager in respect of their public announcement of offer. Accordingly, the Merchant Banker filed a copy of the letter of offer with SEBI on August 29, 2003. The said offer was made by the acquirers for consolidating their shareholding in the target company. Since the acquirers had proposed to acquire the entire balance outstanding shares of the target company from the public, SEBI vide its letter dated September 19, 2003 had informed the Merchant Banker that the said acquisition might result in the delisting of shares of the target company and therefore, the acquirers had to follow the provisions of the Securities and Exchange Board of India (Delisting of Securities) Guidelines, 2003 (hereinafter referred to as the Delisting Guidelines). In the said letter, SEBI had also advised the Merchant Banker to withdraw the public announcement which was already made in terms of the Takeover Regulations and further advised to make a fresh public announcement in accordance with the provisions of the Delisting Guidelines. However, despite the above advice, the acquirers had acquired 13.932 % of the equity shares of the target company at a price of Rs.35/- per share through a negotiated deal on September 22, 2003, which had resulted in the increase in their shareholding from 74.998% to 88.93% of the total paid-up share capital of the target company.
1.3 In view of the above, SEBI had initiated proceedings against the acquirers under the provisions of the Takeover Regulations and vide order dated August 31, 2004, SEBI had directed the acquirers to make a fresh public offer under the provisions Delisting Guidelines with respect to the acquisition of 7,42,560 equity shares of the target company within a period of 45 days from the date of the said order. As the acquirers had already acquired 13.932% of the equity shares of the target company on September 22, 2003, SEBI had also directed them to hold those shares in trust to be offered under the provisions of the Delisting Guidelines. The acquirers were further directed to pay the price as determined in terms of the Delisting Guidelines, to those shareholders whose shares were already acquired by them. In the said order, it was also directed to initiate Enquiry Proceedings against the Merchant Banker, as it had not exercised due care and diligence as expected from it under the provisions of Securities and Exchange Board of India (Merchant Bankers) Regulations,1992 (hereinafter referred to as the said Regulations).
2.0 APPOINTMENT OF THE ENQUIRY OFFICER
2.1 SEBI, vide order dated October 18, 2004 appointed an Enquiry Officer under the provisions of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as the 2002 Regulations), to enquire into the alleged contravention committed by the Merchant Banker, of the provisions of the said Regulations and the Takeover Regulations.
2.2 A notice dated November 3, 2004 was issued to the Merchant Banker and the Merchant Banker was called upon to show cause as to why action should not be initiated against it, as it had failed to exercise due care and diligence as contemplated under regulation 13 read with Schedule III of the said Regulations, in the matter of the open offer made by the acquirers in respect of the acquisition of 7,42,560 equity shares of the target company. Copy of the orders dated August 31, 2004 and October 19, 2004 (communicating the order of appointment of the Enquiry Officer) were also forwarded to the Merchant Banker with the said show cause notice.
2.3 The Merchant Banker inter alia submitted before the Enquiry Officer that the acquisition of 13.932 % of the paid up capital of the target company by the acquirers on September 22, 2003 was without its knowledge and it came to know about the said acquisition only when it had received letters dated September 23, 2003 from the acquirers enclosing the copies of the letters addressed by them to MSE about the said acquisition. It was further submitted that it had not made any payment from the escrow account in respect of the said acquisition. The Enquiry Officer had conducted the enquiry in terms of the 2002 Regulations and vide report dated November 30, 2004, the Enquiry Officer recommended to debar the Merchant Banker from carrying out its merchant banking activities for a period of one month. The Enquiry Officer had inter alia noted that persons who operate in the market were required to maintain high standards of integrity, promptitude and fairness in the conduct of their business dealings and persons, who operate in a manner otherwise, could not be considered fit or proper to operate in the market.
3.0 CONSIDERATION OF ISSUES AND FINDINGS:-
3.1 Based upon the recommendation of the Enquiry Officer, a notice dated December 06, 2004 under regulation 13(2) of the 2002 Regulations was issued to the Merchant Banker asking it to show cause as to why the penalty as recommended by the Enquiry Officer should not be imposed upon it. A copy of the Enquiry Report was also forwarded to the Merchant Banker with the said show cause notice.
3.2 The Merchant Banker vide its reply dated December 27, 2004 inter alia contended that it was not aware of the acquisition of 4,13,770 equity shares (constituted for 13.932% ) of the target company by the acquirers on September 22, 2003 till it received letters dated September 23, 2003 from the said acquirers enclosing copies of the letters addressed by them to MSE about the said acquisition. The Merchant Banker further stated that the above acquisition made by the acquirers was without taking its prior consent and by doing so, the acquirers had violated the following provision of the Memorandum of Understanding (MoU) entered into between the acquirers and the Merchant Banker:-i.e “Any action proposed to be taken by the acquirers related to this Offer shall be subject to the concurrence of the Manager to the Offer”.
3.3 The Merchant Banker further claimed that it had not made any payment from the escrow account with respect to the acquisition of shares of the target company by the acquirers on September 22, 2003. The Merchant Banker had also stated that its Mumbai Office had received the SEBI letter dated September 19, 2003 through a fax at 3.43 pm (on the same day) advising them not to proceed with the offer and the said intimation was faxed by it to its Chennai office on the same day at 3.55 pm. The Merchant Banker added that, since the person handling the subject matter at its Chennai office was not available on that evening, the message was attended to by the said officer, on the next working day i.e. on September 22, 2003. The Merchant Banker stated that it was not aware at the material time, of any plans of the acquirers to acquire shares of the target company other than through the offer process.
3.4 The Merchant Banker also stated that, pursuant to the order of SEBI dated August 31, 2004, the target company had initiated the delisting process and the exit price under the said delisting process was Rs.35/- per share which was same as that of the earlier offer made by the acquirers under the provisions of the Takeover Regulations. The Merchant Banker further contended that there was no disproportionate gain or unfair advantage made by the acquirers as a result of their action of acquiring 13.932% of shares of the target company on September 22, 2003 and that the amount of loss caused to the investors or group of investors by the said action of the acquirers was nil, as there was no difference in the exit price. In view of the above, it was claimed by the Merchant Banker that, no investor was adversely affected due to the acquisition of the shares of the target company by the acquires on September 22, 2003 and that it had not received any investor complaints, so far. It was also stated by the Merchant Banker that there was no procedural lapse on its part and the lapse, if any, was technical in nature which had not affected any investor. The Merchant Banker further added that it had fulfilled its responsibility as a Merchant Banker in terms of the Takeover Regulations. The Merchant Banker also stated that the action of acquirers in acquiring 13.932 % of the equity shares of the target company on September 22, 2003 was not of repetitive nature.
3.5 The Merchant Banker was also granted an opportunity of hearing on September 05, 2006. Shri M. P. Rao and Ms N.S Nappinar (advocates), as authorized by the Merchant Banker appeared and made submissions before me on its behalf. Shri Rajan Satija and Shri Aziz Mutvalli (employees of the Merchant Banker) were also present at the time of hearing.
3.6 Shri. M.P. Rao, the learned advocate reiterated the submissions made by the Merchant Banker vide its reply dated December 27, 2004 and further stated that the management of the Merchant Banker existing at the relevant point of time was changed subsequently. The learned advocate also submitted that the Merchant Banker is not carrying out any Merchant Banking activities at present.
3.7 Considering the above facts and circumstances of the case, the issues for consideration are:-
a) whether the Merchant Banker had failed to exercise due care and diligence as contemplated under regulation 13 read with Schedule III of the said Regulations while acting as a Manager to the offer made by the acquirers for acquiring 7,42,560 equity shares of the target company ?
b) if so, what would be the appropriate penalty?
3.8 The fact that the Merchant Banker was appointed as the manager to the offer made by the acquirers for the acquisition of 7,42,560 shares of the target company was not disputed before me. I note that , in terms of regulation 13 of the Takeover Regulations, an acquirer before making any public announcement of offer (as referred to in regulations 10 or 11 or 12) has to appoint a merchant banker who is not its associate /group company.
3.9 It appears that the acquirers had made the offer, in respect of their aforesaid acquisition of shares of the target company, believing that they were obliged to make the said offer under the provisions of the Takeover Regulations. However, I note that the provisions of Delisting Guidelines would be applicable, inter alia in respect of any acquisition of shares of the company (either by a promoter or by any other person), consequent to which the public shareholding falls below the minimum limit specified in the listing conditions or listing agreement which might result in delisting of securities. The public announcement in respect of the said acquisition has to be made under the provisions of the Delisting Guidelines and not under the provisions of the Takeover Regulations.
3.10 Admittedly, the acquirers (who were part of the promoter group) together with persons acting in concert were holding 74.998% of the paid up equity share capital of the target company at the time of the offer (made under the provisions of the Takeover Regulations). The acquirers had proposed to acquire the entire outstanding balance paid up capital of the target company, which would have resulted in the delisting of the shares of the target company (in case the offer succeeded) from the stock exchange in which the said shares were listed. In such case, the proper course of action available to the acquirers would have been to make an offer to buy the outstanding shares remaining with the shareholders of the target company, in accordance with the provisions of the Delisting Guidelines.
3.11 I further note that, in terms of clause 14 of the code of conduct specified in schedule III of the said Regulations, a merchant banker shall render the best possible advice to the clients having regard to their needs. In terms of the code of conduct, a merchant banker has to guide his client in a prudent manner and has to further fulfill its obligation in a prompt, ethical and professional manner. The merchant banker shall also exercise due diligence, ensure proper care and exercise independent professional judgment. I note that the acquirers in the present case had desired to acquire the entire balance outstanding shares of the target company remaining with the public shareholders, which would have resulted in the delisting of the shares ( in case the offer succeeded) of the target company from MSE, where the said shares were listed. In such situation, the proper course of action for the Merchant Banker was to advise the acquirers to make a public announcement of offer under the provisions of the Delisting Guidelines. The Merchant Banker had failed to do so. Therefore, it is fairly established that the Merchant Banker had failed to render the best possible advice to the acquirers, as required above, in respect of their acquisition of 7,42,560 equity shares of the target company.
3.12 I further note that not only the Merchant Banker had failed to advise its client to make the offer in terms of the Delisting Guidelines, but it had also failed to act accurately in terms of the advice given by SEBI (vide letter dated September 19, 2003). The fact remains that the SEBI letter dated September 19, 2003 was received by the Merchant Banker at its Mumbai office on the same day (at 15:43 hrs) and the same was faxed by the Merchant Banker to its office at Chennai at 15:55 hrs. It was also not disputed that the said advice of SEBI was communicated to the acquirers only on the next working day, i.e on September 22, 2003. As the Merchant Banker was inter alia advised by SEBI to make a fresh public announcement in accordance with the provisions of the Delisting Guidelines, it should have informed the acquirers on the same day ( on September 19, 2003), about the advice of SEBI.
3.13 The Merchant Banker could not adduce any satisfactory evidence to justify its actions which had prevented its Mumbai Office from directly communicating the advice of SEBI to the acquirers, immediately without any default. The Merchant Banker should have avoided such delay in communicating the advice of SEBI. Failure to take prompt and appropriate action by its Chennai office can not be taken as a plea by the Merchant Banker for escaping its liability. The Merchant Banker failed to function diligently as expected from it as a registered intermediary. The contention of the Merchant Banker that the concerned officer at its Chennai office was not available on September 19, 2003, can not be taken as an excuse from complying with the regulatory requirements in a responsible and timely manner, as stipulated in terms of the said Regulations. It could have deputed or made available any other officer from its Chennai office or could have taken steps to orally communicate the advice of SEBI, considering its importance. The communication of the said advice to the acquirers in a timely manner was mandatory and the Merchant Banker was expected to comply with the same in its capacity as the manager to the offer made by the acquirers. The very existence of the code of conduct in the said Regulations is for its compliance and to further ensure that the merchant banker acts in a manner consistent with his responsibilities to obviate such untoward happenings. In the present matter, the Merchant Banker not only failed to take proper steps to act with care in time but also ignored in communicating the advice of SEBI to the acquirers.
3.14 In the facts and circumstances of the case, it is fairly established that the Merchant Banker had failed to give best possible advice to the acquirers in respect of their acquisition of 7,42,560 equity shares of the target company and further failed to act promptly and diligently while communicating the advice of SEBI to the acquirers, thereby failed to exercise due diligence and proper care. The above acts are in violation of regulation 13read with clause 14, clause 3 and 4 of schedule III of Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992.
3.15 Having held so, I note from the submissions made by the Merchant Banker that, the acquirers had not taken prior consent from the Merchant Banker, before acquiring the shares of the target company on September 22, 2003. It was also submitted that, no investor was adversely affected due to the aforesaid acquisition of shares and that no investor complaint was received by it either directly or from SEBI. The Merchant Banker further stated that there was no disproportionate gain or unfair advantage made by the acquirers. I also note that, the Merchant Banker had not made any payment from the escrow account in respect of the acquisition of the shares of the target company on September 22, 2003 by the acquirers. I further note that there is no material to establish complicity of the Merchant Banker in respect of the acquisition of the shares of the target company by the acquirers on September 22, 2003. I further note that pursuant to the order of SEBI dated August 31, 2004, the target company had initiated the delisting process and the exit price under the said delisting process was Rs.35/- per share which was same as that of the earlier offer made by the acquirers under the provisions of the Takeover Regulations.
4.0 ORDER
In view of the foregoing and taking into account, the mitigating circumstances as explained above, I decide to reduce the quantum of penalty recommended by the Enquiry Officer and I, in exercise of the powers conferred vide regulation 13(4) of (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, hereby impose a minor penalty of censure on M/s. Meghraj SP Corporate Finance (Private) Limited {formerly Known as Meghraj Financial Services (India) Pvt. Ltd.}, merchant banker with registration number INM 000001220.
| Place: Mumbai |
G. ANANTHARAMAN |
| Date: 8.11.2006 |
WHOLE TIME MEMBER |
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SECURITIES AND EXCHANGE BOARD OF INDIA
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