SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
IN RESPECT OF INQUIRY HELD UNDER RULE 4 OF THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
IN THE MATTER OF ALLEGED FAILURE TO COMPLY WITH REGULATION 8 OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997
By
Mr. Pankaj A Desai and Person’s Acting in Concert with him (Viz. Mayekar Investment Private Ltd., Kanta Anantrai Desai, Anantrai L. Desai, Praful A. Desai, Devi D. Desai, Dilip Anantrai Desai, Jyoti Praful Desai, Kirtida P. Desai, Shagufta Investment Private Limited, Sumit P. Desai and Darshan P. Desai)
1.0 Background
1.1 The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) vide order dated 23.05.03 initiated investigations into the dealings in the shares of M/s. IQMS Software Ltd. (herein after referred to as ‘the target company’) and appointed the investigating officer to conduct investigations in terms of the Securities and Exchange Board of India Act, 1992 (the SEBI Act) into alleged manipulations in the shares of the target company. During the investigations it was prima facie observed that some persons have made substantial acquisition of the shares in the target company. Therefore, vide order dated 8th December, 2003 the investigation was also initiated to ascertain whether any provisions of the SEBI Act, and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as ‘the Takeover Regulations’) have been violated by any person.
1.2 Pursuant to the said investigations, vide order dated April 27, 2004, Shri J. Ranganayakulu, Joint Legal Adviser, SEBI (hereinafter referred to as ‘the erstwhile Adjudicating Officer’) was appointed as the Adjudicating Officer under section 15I of the SEBI Act read with Rule 3 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘the Adjudication Rules’) to inquire into and to adjudge the alleged contraventions under section 15A of the SEBI Act. Subsequently, by an order dated January 27, 2005, the matter pending before the erstwhile Adjudicating Officer was transferred to the undersigned. As per the said orders, the present inquiry and adjudication proceedings is in respect of the alleged contravention of regulation 8(1) of the Takeover Regulations by Mr. Pankaj A Desai and , allegedly, the persons acting in concert with him viz. Mayekar Investment Private Ltd., Kanta Anantrai Desai, Anantrai L. Desai, Praful A. Desai, Devi D. Desai, Dilip Anantrai Desai, Jyoti Praful Desai, Kirtida P. Desai, Shagufta Investment Private Limited, Sumit P. Desai and Darshan P. Desai (hereinafter collectively referred to as ‘the noticees’).
2.0 Inquiry and Show Cause Notice
2.1 The erstwhile Adjudicating Officer had issued a show cause notice dated 15.07.2004 under Rule 4 of the Adjudication Rules to the noticees. In this show cause notice, it was alleged that the noticees were holding a total of 18,00,300 shares which constituted 16.98% of the total paid-up capital of the target company however, they had not made disclosure as required under regulation 8(1) of the Takeover Regulations. Thus, the noticees had violated regulation 8(1) of the Takeover Regulations. The noticees were called upon to show cause, within 15 days of the date of the receipt of the notice, as to why an inquiry should not be held against them and penalty as specified under section 15A (b) of the SEBI Act should not be imposed upon them.
2.2 After seeking time, the noticees vide letters dated 29.07.04 sent by and on behalf of them filed their replies to the show cause notice before the erstwhile Adjudicating Officer. After considering the replies of noticees the undersigned issued further notices of hearings to the noticees in terms of Rule 4 of the Adjudicating Rules, fixing the dates of personal appearance. Such notices were also sent to Shri J.J.Bhatt, advocate of the noticees to appear on 28.09.06. These notices were sent by Registered Post A.D.
2.3 The notices sent to Mr. Pankaj A. Desai, Mayekar Investment Private Ltd., Praful A Desai, Jyoti P. Desai and Darshan P Desai were returned undelivered by Department of Posts with remark “not claimed”. However, all the noticees vide their letters as given below filed their replies-
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SL. No.
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Reply from
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Date of reply
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1.
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Pankaj A. Desai
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25.09.06
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2.
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Mayekar Investment Private Ltd.
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25.09.06
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3.
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Kanta Anantrai Desai
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25.09.06
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4.
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Anantrai L. Desai
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23.09.06
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5.
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Praful A. Desai
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25.09.06
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6.
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Devi D. Desai
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23.09.06
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7.
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Dilip Anantrai Desai
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23.09.06
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8.
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Jyoti Praful Desai
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25.09.06
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9.
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Kirtida P. Desai
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23.09.06
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10.
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Shagufta Investment Private Limited
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25.09.06
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11.
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Sumit P. Desai
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23.09.06
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12.
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Darshan P. Desai
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25.09.06
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2.4 The noticees requested to consider their replies to the show cause notice and also inter alia submitted that the provisions of regulation 8 had no application in their case. The noticees did not appear on 28.09.06 for personal appearance.
3.0 CONSIDERATION OF EVIDENCE AND FINDINGS
3.1 In view of the above replies of the noticees, I proceed with the inquiry in terms of Rule 4(7) of the Adjudication Rules based on the material available on record. I note that it was observed during the above mentioned investigations that as on 31.03.2001, total number of shares in the target company were 1,16,34,500 of Rs.10/ each. Out of these shares, 44, 34,500 were partly paid up to the extent of Rs.5/- each and they carry half of the voting rights with respect to a fully paid up shares. It was also observed that as on 31.03.01, the total paid up equity share capital of the target company was Rs.9,41,72,500. Share holding of noticees as on 31.03.01 was noted as follows:
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Name Of the Entity
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Partly paid
shares
as on 31.03.01
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Fully paid
shares as
On 31.03.01
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Total
shareholding
as on 31.03.01
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Darshan Desai
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-----------
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100000
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100000
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M/s Mayekar Investment
Private Ltd.
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75000
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100000
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175000
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Kanta Anantrai Desai
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41700
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100000
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141700
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Kanta Anantrai Desai
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35600
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100000
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135600
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Praful A. Desai
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40700
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100000
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140700
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Dilip Anantrai Desai
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------------
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200000
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200000
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Jyoti Praful Desai
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-----------
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200000
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200000
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Kirtida P. Desai
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32500
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200000
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232500
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M/s Shagufta Investment
Private Limited
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75000
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75000
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Pankaj A. Desai
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55500
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55500
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Sumit P. Desai
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99000
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99000
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Devi D Desai
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45300
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200000
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245300
|
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Total
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401300
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1399000
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1800300
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Thus, it was observed that as on 31st March, 2001, all the noticees together held 18, 00,300 equity shares (including 401300 partly paid up shares) in the target company which constitutes 16.98% of the total number of shares (carrying voting rights i.e. 9417250) in the target company.
3.2 The noticees, vide their above mentioned replies have inter alia submitted the following:-
(a). Takeover Regulations being a self contained code in itself cannot be linked or connected with investigations of different subject matter being investigated under the provisions of some other regulations. Accordingly, the show cause notice appears to be a mis-joinder of cause of action and mis-joinder of regulations.
(b). As per the prospectus dated 29.08.2000 in respect of the public issue made by the target company in September 2000, 45 lakh equity shares were offered to Indian public. As per one of the terms of the said prospectus Rs. 5/- per equity share was to be paid on the application and Rs. 5/- per equity share was to be paid on allotment. The post public issue equity share capital in the target company was 1,16,34,500 equity shares.
(c). The status of shareholdings of the noticees in the target company on different dates was as follows –
(i). As on 31.03.2001 ----13, 99,000 fully paid-up equity shares and 4, 01,300 partly paid-up equity shares.
(ii). As on 31.03.2002 ---- 7, 99,000 fully paid up equity shares and 4, 01,300 partly paid-up equity shares.
(iii). As on 14.10.2003 --- 3, 01,988 fully paid equity shares and 4, 01,300 partly paid-up equity shares.
(d). The noticees had not paid the balance money of Rs. 5/- per equity share on allotment and the target company was entitled to forfeit them as per the terms of its prospectus. The target company has not forfeited them. Neither the allotment money has been paid by the noticees nor has the application money been refunded to them by the target company.
(e). As per Article 80 of the Article of Association of the target company, on a poll, the voting right of a shareholder in respect of his equity shares shall be in proportion to his share of the paid up capital in respect of the equity shares. In terms of Article 84 of the Articles of Association of the target company no shareholder is entitled to vote in a General Meeting unless all calls or other sums presently payable by him in respect of his shares in the company have been paid. Thus, the noticees were not entitled to vote and had no voting rights in respect of the partly paid-up shares as the monies called in terms of the prospectus and due on allotment in respect of the said shares were not paid.
(f). They have not acted in concert. Assuming that they deemed to have acted in concert with other family members, the combined holding was below 15% in view of the following –
(i). Total holding of the noticees in the target company as on 31.03.2001 was 15,99,650 equity shares [13,99,000 fully paid up + 2,00,650 (half of 4,01,300 partly paid up shares)].
(ii). Total equity capital in the target company as on 31.03.2001 was 1,16,34,500 equity shares. Thus, the percentage of shareholding (voting rights) of the noticees would be 13.75% of the total number of equity shares of the target company.
(iii). Schedule 1A read with section 6 of the Companies Act does not include brother’s son in the list of relatives. Shri Darshan P. Desai and Shri Sumit P. Desai are sons of brother of Shri Pankaj Desai. Therefore, their holdings of 1,00,000 and 99,000, respectively need to be excluded for the purpose of calculating total shareholding of the noticees and in that case the percentage of their holding could be only 12.07%. Thus, even if it is assumed that the noticees were persons acting in concert with each other, regulation 8 (1) was not attracted in their case as their total shareholding was below 15%.
(g). The noticees have never intended to acquire control in the target company. The noticees have not violated the provisions of regulation 8 of the Takeover Regulations.
3.3 I observe that investigation pursuant to the order dated 23rd May, 2003 was conducted in respect of the alleged price manipulation in the shares of target company and into possible violations of SEBI( Prohibition of Fraudulent and Unfair Trade Practices Relating to securities Market) Regulations,1995 and SEBI (Stock Brokers and Sub-brokers) regulations,1992.The investigations pursuant to order dated 08.12.03 was to ascertain whether any provisions of the Takeover Regulations have been violated by any person. The show cause notice issued in the present proceedings is limited to the alleged contravention of regulation 8 (1) of the Takeover Regulations by the noticees. There is nothing in the present proceedings to link or connect any other proceedings as contended by the noticees. The instant proceedings are independent of any other proceedings, if initiated or to be initiated, in respect of any alleged violations regarding manipulation of the prices of the shares of the target company by any person and contravention of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to securities Market) Regulations, 1995 and SEBI (Stock Brokers and Sub-brokers) regulations, 1992. In view of this, I do not agree with the contention of the noticees regarding mis-joinder of causes of action in the show cause notice issued in instant proceedings and hence I reject the same.
3.4 In terms of regulation 2 (1) (k) of the Takeover Regulations ‘shares’ means shares in the share capital of a company carrying voting rights and includes any securities which would entitle the holder to receive shares with voting rights. Section 87 (1) (b) of the Companies Act provides that subject to the provisions of section 92 (2) of the Companies Act the voting rights of a member shall be in proportion to his share of the paid–up equity capital of the company. It appears that the investigation report has proceeded on the premise that the partly paid-up shares (in respect of which Rs. 5/- per share had been paid on application) carried the voting rights in proportion of the total amount paid on such partly paid -up shares. Thus, total 44, 34,500 partly paid up shares represented 2217250 voting capital and the total voting rights in the company was 9417250 (i.e. 7200000 on fully paid up equity shares + 2217250 on total partly paid up equity shares). Similarly, the total voting rights in respect of the shareholding of all the noticees was calculated to be 15,99,650 (i.e. 13,99,000 on fully paid up equity shares + 2,00,650 on 4,01,300 partly paid up equity shares) which represented 16.98% of the total voting rights (9417250) in the target company as on 31.03.2001. According to the noticees the entire shareholding held by them collectively did not entitle them to have 15% or more voting rights in the target company as they did not have voting rights in respect of the partly- up equity shares held by them in view of the terms of the prospectus of the company and its Articles of Association.
3.5 There is no dispute about the fact that all the fully paid-up shares of the target company carry voting rights. The aggregate shareholding of the noticees, as on 31.03.01, as observed during the investigations is also admitted by the noticees. The dispute is with respect to the shareholding which carries voting rights as on 31.03.01. In this regard, the Articles of Association of the target company and the disclosures made by it in its prospectus dated 29.08.2000 are seen. In terms of section 28 of the Companies Act a company limited by shares may adopt all or any of the regulations contained in Table A in Schedule I. As per regulation 59 of Table A in Schedule I of the Companies Act provides that no member shall be entitled to vote at any general meeting unless all calls or other sums presently payable by him in respect of shares in the company have been paid. In the present case, it is noted that in Article 80 of its Articles of Associations the target company has adopted the said provision. In this connection, the other question arises as to when the calls were payable and what was the consequences of default in payment of calls. In its prospectus dated 29.08.2000 the target company had disclosed to the applicants that Rs. 5/- per equity share shall be paid on application and Rs. 5/- per equity share shall be paid on allotment. Thus, the balance sums in respect of such shares were payable on allotment. The target company had also disclosed in the said prospectus that failure to pay the amount due on allotment or before the last date stipulated to make such payments shall inter alia render the shares and the amount already paid thereon liable for forfeiture in terms of Articles of Association of the target company. From the BSE’s Listing Notice No. 68015/ 2000 dated 10.11.2000, it is noted that the last date of payment of allotment money was 30.11.2000. It is admitted position that as on 31.03.2001, 4,01,300 equity shares held by the noticees remained partly paid-up. As per the investigation report as on 31.03.2001, total 44,34,500 equity shares in the target company remained partly paid-up. In view of the above provisions in the Articles of Association of the target company if no sum was paid in respect of such partly paid- up shares in terms of the prospectus, the shareholders having such shares did not have the voting rights in respect of such shares. Therefore, the consequences as disclosed in the prospectus such as forfeiture etc. could have followed. However, it is noted that the target company had not chosen to forfeit such shares and the amounts paid thereon and the said partly paid up shares had been included in the total share capital of the target company.
3.6 If the above position as submitted by the noticees is accepted, as on 31.03.2001, there were 7,20,0000 fully paid-up equity shares in the target company which carried voting rights. Out of these fully paid-up shares the noticees held 13, 99,000 equity shares carrying voting rights. Consequentially, their shareholding carrying voting rights, as on 31.03.01 would represent 19.43% in the total voting rights in the target company as on the said date. Therefore, I do not agree with the submission that the aggregate shareholding of all the noticees which carried voting rights in the target company was less than 15% as on 31.03.01.
3.7 The instant proceedings are limited with respect to the alleged contravention of regulation 8 (1) of the Takeover Regulations by the noticees. The text of regulation 8 as applicable at the relevant time is extracted below:
“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.”
3.8 Regulation 8 of the Takeover Regulations requires yearly disclosures to the company by every person, including the person mentioned in regulation 6, holding fifteen percent or more shares or voting rights in the company. Regulation 6 contains transitional provision and applies to the companies which were listed as on the notification of the Takeover Regulations on 20.02.1997. In the instant case, the target company was incorporated in March 2000 and its shares were also listed in the year 2000. In the instant case, the noticees are not the persons mentioned in regulation 6 (1) of the Takeover Regulations. There is nothing on record to suggest that the noticees were promoters or persons having control over the target company or they were persons acting in concert with such promoters or persons having control over the target company. Thus, the notices are not the persons mentioned in regulation 6 (3). As none of the noticees held more than 15% voting rights in the target company and the concept of persons acting in concert is not contemplated in regulation 8 in respect of such shareholders who are not promoters or persons having control over the target company, I find that the regulation 8 (1) did not apply to the noticees as on 31.03.03. In view of this, I do not consider it necessary to examine whether the noticees were persons acting in concert or not.
3.9 If regulation 8 (1) did not apply to the noticees then the obligation on noticees to make disclosures as required by regulation 8 (1) does not arise. In such a case, there can not be failure to make disclosures as requires by regulation 8 (1) of the Takeover Regulations so as to attract the provisions of section 15A of the SEBI Act.
4.0 Considering the above facts, I find that there has not been any failure on the part of the noticees in complying with regulation 8 (1) of the Takeover Regulations so as to attract the provisions of section 15A of the SEBI Act and for which the penalty can be imposed under section 15I of the SEBI Act read with Rule 5(1) of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995.Therefore, I am not inclined to proceed to adjudge the penalty under section 15I of the SEBI Act read with rule 5 of the Adjudication Rules against noticees in the instant adjudication proceedings. Accordingly, the instant adjudication proceedings are disposed of. As required under rule 6 of the said Adjudication Rules a copy of this order is being sent to all the noticees and also to SEBI.
| Dated: October 12, 2006 |
SANTOSH SHUKLA |
| Mumbai |
ADJUDICATING OFFICER |