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Order against Shri Badrinarayan B Somani and Others

Oct 27, 2005
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Orders : Orders of AO

ADJUDICATION ORDER 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 SHRI. BADRINARAYAN B SOMANI, SMT. PRIYA B SOMANI, ABEE SHARES & STOCK (I) LTD AND ABEE TELEVISIONS PVT. LTD.

  1. Securities and Exchange Board of India (hereinafter referred to as SEBI) vide order dated July 12, 2004 appointed Shri S.V. Krishna Mohan as Adjudicating Officer to inquire into and adjudge under Section 15 H (ii) and Section 15 A (a) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the alleged non compliance of the provisions of Regulation 3 (1)(c) and Regulation 3(4) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997(hereinafter referred to as the ‘Takeover Regulations’) by Shri. Badrinarayan B Somani, Smt. Priya B Somani, Abee Shares & Stock (I) Ltd, and Abee Televisions Pvt. Ltd  (hereinafter referred to as the ‘acquirers) pursuant to acquisition of the shares of Abee Info-consumables Ltd (hereinafter referred to as the target company) though preferential allotment.  It is alleged that the said acquisition was pursuant to the preferential allotment made by the Target Company and consequent to the said acquisition, the share holding of the acquirers / allotees increased from 30.67% to 67.11% of the share capital of the target company. 

     
  2. The provisions of Regulation 3 (1) ( C )( ii ) of the Takeover Regulations  prior to the amendment on 9.9.2002 provided that the preferential allotment, made in pursuance of a resolution passed under Section 81 (1A) of the Companies Act 1956 is exempted from the applicability of Regulation 10, 11 and 12 of the Takeover Regulations provided,

 

(i)                 the Board Resolution in respect of the proposed preferential allotment is sent to all the stock exchanges on which the shares of the company are listed for being notified on the notice board

(ii)               full disclosures of the identity of the class of the proposed allottee (s) is made and if any of the proposed allottee(s) is to be allotted such number of shares as would increase his holding to 5% or more of the post issued capital, then in such cases , the price at which the allotment is proposed , the identity of such person(s), the purpose and reason for such allotment, consequential changes if any, in the board of directors of the company and in voting rights, the shareholding pattern of the company and whether such allotment would result in change in control over the company are disclosed in the notice of the General Meeting called for the purpose of consideration of the preferential allotment.

 

  1. In view of the requirements enumerated under the said provision, it was alleged that in the notice of the general meeting called for the purpose of consideration of the preferential allotment, necessary disclosures, as required under Regulation 3(1)( c ) of the Takeover Regulations were not made. Further in respect of the acquisition under Regulation 3(1)(c) of the Takeover Regulations, Regulation 3(4) stipulates that 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 persons to exercise 15 percent or more of the voting rights in a company. In this regard it is alleged that the report in terms of the provisions of Regulation 3(4) has been filed only after a delay of 407 days.
     
  2.  I was appointed as the Adjudicating Officer in the place of Shri S.V. Krishna Mohan vide SEBI’s order dated September 30, 2004.

     
  3.  In terms of the provisions of Rule 4 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the “Rules”) a show cause notice no. A&E/BS/A-SCN/44804/2005 dated July 13, 2005 was issued to the acquirers requiring them to show cause as to why an enquiry should not be held against them in respect of the violations alleged to have been committed by them. The acquirers replied to the notice vide their letter dated August 10, 2005. In the said reply, the acquirers submitted the following

·        We have complied with all the provisions of Regulation 3(1) (c) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 as all the necessary disclosures prescribed therein have already been made by Abee Info Consumables Limited. A cursory look at the notice dated 27.07.2002 issued by the said company convening Extra Ordinary General Meeting on 26.08.2002 shows compliance of all the prescribed legal requirements.

·        Regarding delay in compliance under Regulation 3(4) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, the mandate of the said regulation is triggered only when the acquirer and the persons acting in concert with him, would entitle to exercise 15% or more of the voting rights in a target company. This implies that the said regulation shall not apply to a case where the acquirer already holds 15% of the voting rights in a company. It is worthwhile to note that the word “would” is nothing but a past tense of the verb “will” which indicates simple futurity.

·        The voting rights/shares held by the acquirer(s) along with the persons acting in concert was and is always in excess of 15% but less than 75% of the total issued capital of the company since the first IPO. Thus none of the provisions of Regulation 3(4) shall be attracted in this regard. However in order to avoid the further delay in listing, we have filed the report as contemplated in the Regulation. 

  1. After considering the reply submitted by the acquirer, it was felt that an inquiry may be held and the acquirer may be granted an opportunity of hearing in the matter. Accordingly, the acquirers were advised to attend the inquiry on October 18, 2005.  Shri Ajay M Antarkar attended the inquiry as the authorised representative of the acquirers and made the following submissions.

·              As regards the allegation of contravention of Regulation 3(1)(c) of SEBI (Substantial Acquisition and Takeover of Shares) Regulations, 1997 is concerned, it is submitted that the required disclosures and the names of the proposed allottees as applicable has been duly complied with. There was no change in Board of Directors or control in voting rights of the company arising out of the preferential issue made by the company. The notice dated 27 July 2002 issued by the company convening the EGM on 26 August 2002 is relied upon as mentioned in item number1 of the explanatory statement.

·              It is further submitted that as per the legal advise sought by the acquirers, the obligation to file report with SEBI arises only and only when the acquirers and the persons acting in concert would be entitled to exercise 15% or more of the voting rights in the target company. Thus the word “would” indicates simple futurity when the threshold limit of 15% or more of the total voting rights are likely to be exceeded. The holding of promoters was always in excess of 15% but less than 75% since IPO was made by the Company. Thus the obligation to file the prescribed report with SEBI shall not apply to the present case which is a question of law. However, in order to expedite the listing application, the company had filed the said report as advised by Mumbai Stock Exchange, which is the cause of issuance of notice. The acquirers request to take a lenient view in the matter and sort out the issue amicably.

 

CONSIDERATION OF EVIDENCE AND FINDINGS:

 

  1. The issue for consideration is whether the acquirers had made necessary disclosures in terms of Regulation 3(1)(c) and whether the report in terms of the provisions of Regulation 3(4) was filed in accordance with the Regulations. As stated before, preferential allotment in terms of the provisions of Regulation 3 (1) (C) was exempted from the applicability of the requirement of public announcement under Regulation 11 of the Takeover Regulations subject to fulfillment of the following conditions.

 

The Board resolution in respect of the proposed allotment is sent to all the stock exchanges on which the shares of the company are listed as required under Regulation 3 (1) ( C )( i ) and further, full disclosures of the identity of the class of the proposed allottee is made and if any of the proposed allottee is to be allotted such number of shares as would increase his holding to 5% or more of the post issued capital, then in such cases the price at which the allotment is proposed , the identity of such persons, the purpose and reason for such allotment, consequential changes if any , in the board of directors of the company, and in the voting rights, the shareholding pattern of the company and whether such allotment would result in change in control over the company are disclosed in the notice of the General Meeting called for the purpose of consideration of the preferential allotment”

 

  1. It is noted from the submissions of the acquirer that the consent of the  shareholders was obtained in accordance with the provisions of Section 81 (1A) of the Companies Act 1956 at an Extra Ordinary General Meeting held on August 26, 2002 to issue equity shares to the tune of Rs.10 crores on preferential basis to a select group of persons. In this regard, on perusal of a copy of the notice dated July 27, 2002 it is  noted that the item No :1 of the explanatory statement to the notice for the meeting states the following

 

“In order to augment the long term funds, the company has decided to come out with a preferential issue to a select group of persons as contemplated by SEBI (Disclosure and Investor Protection) Guidelines 2000. The promoters/directors of the company intend to subscribe substantial part of the preferential issue which will strengthen the net worth of the company on one hand and will increase the promoter’s stake on the other hand”

 

The shareholding pattern before and after the proposed issue was annexed as Annexure No: 1 to the notice .On perusal of the notice it is further noted that the identity of the proposed allottee and the percentage of their holding post- preferential allotment is also mentioned. The percentage of Shri. B.B. Somani post preferential issue is mentioned as 37.80%. The percentage of Smt. P.B. Somani is stated as 2.33%. The percentage of Abee Shares & Stock (India) is mentioned as 2.31% and that of Abee Televisions Private Limited is mentioned as 3.28%. The said notice also states that Mr. B.B Somani and Mrs. P.B Somani are deemed to be concerned or interested in the said resolution, to the extent of their shareholding.

 

It is further noted that subsequently a resolution was passed in the Extraordinary General meeting of the company on August 26, 2002 approving the preferential allotment.

 

  1. From the above, it is seen that the identity of the proposed allotees, purpose and reason for such allotment etc have been stated in the notice. However it is noted that the consequential changes in the board of directors of the company and whether such allotment would result in change in control over the company etc are not stated in the said notice. In this regard, the acquirers submitted that as no consequential changes took place in the Board of Directors of the company, the relevant information was inapplicable. Consequential changes in proposed voting rights/ shareholding has been duly disclosed in Annexure No: 1 mentioned in the explanatory statement under Section 173(2) of the Companies Act 1956. As the provisions of Regulation 3(1)(c)(ii) require disclosure of the consequential changes if any in the board of directors, and as it is seen from the submissions of the acquirers no changes had taken place in the board consequent to the preferential allotment, the contention that the relevant information is inapplicable is correct. In view of the fact that the necessary disclosures as contemplated under the provisions 3(1)(c) have been made in the explanatory statement of the notice it cannot be concluded that the acquirers have not complied with the provisions of Regulation 3(1) (c) of the Takeover Regulations.

 

  1. Another allegation against the acquirers is that in respect of the acquisition under Regulation 3(1)(c) of the Takeover Regulations, the report as required under the provisions of Regulation 3(4) was not filed within the prescribed time. In this regard, Regulation 3 (4) of the Takeover Regulations prior to the amendment on September 9, 2000 stated as follows;

 

“In respect of acquisition 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 10% or more of the voting rights in a company”.

 

  1. It is an undisputed fact that the acquirers filed the said report only on November 14, 2003. Hence, it is alleged that the report was filed after a delay of 407 days which is in contravention of Regulation 3(4) of the Takeover Regulations. In this regard, the acquirers submitted that the mandate of regulation 3(4) is triggered only when the acquirer and the persons acting in concert with him, would entitle to exercise 15% or more of the voting rights in a target company. This implies that the said regulation shall not apply to a case where the acquirer already holds 15% of the voting rights in a company. The report was filed only in order to expedite the listing application, and the company had filed the said report as advised by Mumbai Stock Exchange.

 

  1. The said submission of the acquirers is not legally tenable as it is clear that Regulation 3(4) is applicable to all cases where the acquisition exceeds the limit prescribed in the Regulations irrespective of the existing holding of the acquirer. In this regard, as held by the Hon’ble Securities Appellate Tribunal in the matter (Appeal No: 12/ 2001) Naagraj Ganeshmal Jain Vs SEBI what is envisaged in Regulation 3(4) is not a one time reporting. The acquirer has to file the report under Regulation 3(4) in all the cases where the acquisition exceeds the prescribed limit. Thus the contention that Regulation 3(4) is not applicable as the acquirers were already holding 15% before the present acquisition is not tenable. Hence, it is clear that the provisions of Regulation 3(4) apply to the acquisition made by the acquirers. In view of the same, it is concluded that the acquirers failed to comply with the provisions of Regulation 3(4) of the Takeover Regulations.

 

  1. In this regard, Section 15A (a) of the SEBI Act prior to the amendment on October 29, 2002 provided that if any person who is required under this Act, or any Rules or Regulations made thereunder to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty not exceeding one lakh and fifty thousand rupees for each such failure. Subsequently, the penalty has been enhanced to one lakh rupees for each day during which such failure continues or one crore rupees whichever is less. It is noted that as the legal liability to file the report and the default on the part of the acquirers to comply with the same, had occurred prior to the amendment on October 29,2002, the enhanced penalty is not applicable in respect of the default committed by the acquirers. Hence the penalty applicable in respect of the violation committed by the acquirers shall not exceed one lakh and fifty thousand rupees for each such failure.

 

  1. 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, it is noted from the facts of the case that earlier SEBI vide order dated July 2, 2004 held that the approval granted by the shareholders for preferential allotment of shares to the promoters appears to be in the interest of the shareholders of the company. It is pertinent to note that in the said order, it was held that consequent to the change in the shareholding, there has not been any change in the control of the company. Considering the said factors, SEBI vide the said order held that though the actual allotment had been made on 11. 09.2002, just two days subsequent to 9.9.2002 when by way of amendment to the Takeover Regulations, the provision for exemption of such acquisition by way of preferential allotment were deleted, considering the fact that a months notice has been given to the shareholders and the shareholders granted approval to the said allotment in the meeting on 26.08.2002, and further there has been nothing on record to show that the allotment has been made with undue haste, it is seen that the approval given by the shareholders for preferential allotment of shares to the promoters appears to be in the interests of the investors.

 

  1. Viewed in the context of the said order as well as the facts and circumstances of the case in respect of the violation of Regulation 3(4) of the Takeover Regulations, it appears that no disproportionate gain has been accrued to the acquirers and further the loss caused to the investors is not discernible in the facts and circumstances of the case. Further the default on the part of the acquirers cannot be termed as repetitive in nature.

 

  1. In this regard it is pertinent to note that the objective of Regulation 3(4) is to ensure transparency in the transactions and assist in the monitoring of all exempted transactions by the regulatory authority. Hence the failure to comply with the mandate of Regulation 3(4) of the Takeover Regulations has to be viewed seriously. However considering the facts and circumstances of the case, the factors enumerated under Section 15J of the SEBI Act as stated above and also considering the fact that the acquirers filed a report though after considerable delay, a lenient view is taken with regard to the quantum of penalty.

 

  1. In exercise of the powers conferred under Section15 A(a) of the SEBI Act, 1992, and Rule 5 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 I hereby impose a consolidated penalty of Rupees Forty Thousand  on the acquirers for the delay in  complying with the provisions of  Regulation 3(4) of SEBI  (Substantial Acquisition of Shares and Takeovers) Regulations 1997. The said penalty shall be paid by the acquirers jointly or severally.

 

  1.  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 the  General Manager, Division of Corporate Restructuring, Securities and Exchange Board of India, Mittal Court, ‘B’ Wing, 224, Nariman Point, Mumbai – 400 021.

 

  1. 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 the acquirers Shri. Badrinarayan  B Somani, Smt Priya B Somani, Abee Shares & Stock (I) Ltd and Abee Televisions Pvt. Ltd  and also to Securities and Exchange Board of India.

 

  

 

 Date: October  27, 2005                                                                                           Biju S  

 Place: Mumbai                                                                                                          Adjudicating Officer