Order In respect of Neha International Limited

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. DSR/AO-04 /2006-07]

 

   BRIEF FACTS OF THE CASE:

 

1.                  Neha International Limited (hereinafter referred as ‘NIL’ or ‘Target Company) has its registered office at Hyderabad and its shares are listed in Bombay Stock Exchange Limited (hereinafter referred to as “BSE”), Madras Stock Exchange (hereinafter referred to as “MSE”) and Pune Stock Exchange (hereinafter referred to as “PSE”). The authorized share capital of NIL is Rs. 6,50,00,000 divided into 65,00,000 equity share of Rs. 10 each.  The total paid–up share capital of NIL was 45,63,400 equity shares of Rs. 10/-each amounting to Rs.4,56,34,000/-  As per the report under Regulation 3(4) of SEBI (Substantial Acquisition of Shares and Takeovers), Regulations, 1997(hereinafter referred to as SAST or said Regulations) submitted by the company on behalf of the acquirer who is the promoter of the Target Company vide their letter dated 23.06.2006, the promoters holding stood at 32.40%. The Target Company made a preferential allotment and allotted sixteen lakh equity shares each on 27.12.1997 to the acquirer. Pursuant to the said preferential allotment, promoters collectively held 30,78,463 equity shares constituting 49.95% of the post preferential issue share capital. Consequently, the collective share capital of the promoters had gone up from 32.40% to 49.95%. The individual shareholding of the noticee went up to 40.13% from 19.14%. In terms of Regulation 3(1)(c)(i) of the said regulations, the Board resolution passed in the Board meeting held on August 28, 1997 was not sent to the respective stock Exchanges. The disclosures in terms of Regulation 3(1)(c)(ii) were also not fully complied with in the notice of AGM dated 28.07.1997. In view of the non compliance of Regulation 3(1)(c)(i) and Regulation 3(1)( c)(ii), it was alleged that the acquirer is not eligible for exemption from the applicability of Regulation 11(1) of the said Regulations.

 

APPOINTMENT OF AO:

 

2.                  Accordingly, Shri. Amit Pradhan was appointed as Adjudicating Officer under Section 15 I of SEBI Act, 1992, read with Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') vide SEBI order dated December 19, 2006 to inquire into and adjudge under section 15H (ii) of  SEBI Act, 1992, the aforesaid alleged violation of Regulation 11(1) of SAST by the promoter/acquirer i.e Shri G.Vinod Reddy (hereinafter referred to as the noticee or acquirer). Pursuant to the transfer of Shri. Amit Pradhan to Northern Regional Office,  I was appointed as Adjudicating Officer vide order dated June 12, 2007 and  the proceedings thereof were conveyed vide communication dated July 19, 2007.

 

SHOW CAUSE, REPLY AND HEARING:

 

3.                  A Show Cause Notice (SCN) dated May 25, 2007 was  issued to the  noticee under Rule 4(1) of Adjudication Rules, alleging that he had acquired 16,00,000 shares of NIL on a preferential basis on December 27, 1997, constituting 25.96% of NIL’s post preferential equity share capital, thereby increasing his aggregate holding in NIL from 19.14% to 40.13% of its equity as under:

Acquirer	Prior to preferential allotment		After preferential allotment
	Shares	%	Shares	%
Acquirer (Promoter)	873536	19.14	2473536	40.13
Promoters(Other than Acquirer)	604927	13.26	604927	9.82
Total Promoters	1478463	32.40	3077463	49.95
Total Paid –up Capital of Neha International Limited	4563400	100.00	6163400	100.00

 

 

4.                  It is alleged that prior to the aforesaid acquisition by way of preferential allotment, the aggregate share holding of the noticee was more than 15% of NIL’s equity.  Hence, he was prohibited from acquiring shares/voting rights of NIL in excess of 5% in any period of 12 months, without making a public announcement .As the noticee did not, allegedly, comply with the requirements of Regulation 3(1)(c)(i) and Regulation 3(1)(c)(ii) of the said regulations, thus , violated the provisions of Regulation 11(1) {then existing at the time of allotment} and the acquisition of such shares was not exempt from making a Pubic Announcement. The said PA, in terms of Regulation 14(1) of SAST, was to be made within 4 days of deciding to acquire shares of NIL.  It was also alleged that non compliance with the aforesaid attracts penalty under Section 15H (ii) of SEBI Act, 1992.

 

5.                  The noticee replied to the SCN vide his letter dated June 6, 2007. It was, inter alia, contended that the unit of the Target Company suffered losses due to a gale storm and the repair could not be taken up immediately due to paucity of funds. The noticee further submitted that he being the core promoter had lent money to the company as unsecured loan for meeting day to day operational costs. As the company had also not fulfilled its financial commitment to Term Lending Banks, therefore, the bankers suggested to the noticee to convert the unsecured loan into equity share capital. Accordingly, the unsecured loan was converted into share application money and finally converted to share capital by allotting 16,00,000 equity shares of Rs. 10 each. The preferential allotment made to the noticee at par value of Rs. 10/- while the minimum issue price was Rs. 6.45 (arrived at as per the SEBI Guidelines for preferential allotment). It is also submitted that though the company had not made proper disclosures in the notice of AGM, however, disclosure stating that the preferential allotment did not result in change in management and control, was made. It is further submitted by the noticee that there was no intentional deviation of the regulations and assured SEBI of total compliance of the requirements in future. The noticee also requested for condonation of the lapses in the interest of justice as he had already suffered heavy losses in the matter.  

 

6.                  In the interest of natural justice, a notice of inquiry dated August 21, 2007 was issued to the noticee fixing the date for inquiry on September 3, 2007. The noticee and Shri. S. Sarveswar Reddy, practicing Company Secretary appeared before me for the inquiry.  The noticee reiterated the submissions already made vide reply dated 6.6.2007.

 

CONSIDERATION OF ISSUES AND FINDINGS THERE OF:

 

7.                  I note that the noticee held 19.14 % (more than 15%) of equity of NIL prior to the preferential allotment and acquired 16,00,000 (25.96% of the post preferential equity capital) shares by way of preferential allotment on December 27, 1997.  The acquirer did not comply with Regulation 3(1)(c) of the said Regulations, thereby rendering him ineligible from getting exemption from the applicability of Regulation 11(1) of the said Regulations. Therefore, the acquirer triggered Regulation 11(1) of the said Regulations, which prohibits the acquirer from acquiring shares in excess of 5% unless the acquirer makes a public announcement to acquire further shares from the shareholders of NIL. The noticee acquired 16,00,000 shares @ Rs. 10per share. By doing so, he has committed breach of a cardinal principle of SAST regulations, namely, “Equality of treatment and opportunity to all shareholders” inasmuch as he failed to make public announcement as required under law.  I am, thus, convinced that the violation stands established and the same attracts penalty under Section 15H (ii) of SEBI Act, 1992(as existed then) which reads as under:

 

"Penalty for non-disclosure of acquisition of shares and takeovers  

15H.  If any person, who is required under this Act or any rules or regulations made thereunder, fails to-

 

(i.) ………..

 

(ii) make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakh rupees."

 

8.        I further note that vide SEBI (Amendment) Act, 2002, the penalty leviable under section 15H(ii) has been enhanced from Rs. Five Lakhs to Twenty Five crore rupees or three times the amount of profits made out of such failure, whichever is higher. I note that the said amendment came into force w.e.f. 29.10.2002. Whereas, in the instant case, the breach was committed by the noticee during the year 1997. Therefore, while dealing with the applicability of enhanced penalty under Section 15H(ii), I have relied on the ratio laid down by Hon’ble Securities Appellate Tribunal in Rameshchandra Mansukahni vs SEBI (Appeal No.151/2004) to the effect that penalties unless specifically made retrospective must inevitably be only with effect from the date of amendment.

 

 I have also considered and relied upon section 6 of the General Clauses Act,1897 and also the ratios laid down by Hon’ble Supreme Court while interpreting the said section in Ambalal Sarabai Enterprises Ltd. vs. Amrithlal & Co (2001) 8 SCC 397, Darshan Singh vs. Ram Pal Singh and Another 1992 Supp (1) SCC 191, Govind Das v. ITO, (1976) 1 SCC 906, Jose Da Costa v. Bascora Sadasiva Sinai Narcornium, (1976) 2 SCC 917 and Garikapati Veeraya v. N. Subbiah Choudhry, AIR 1957 SC 540, to the effect that statute unless expressly made retrospective is prospective in operation.

 

 In view of this, I hold that the enhanced penalties have no application and the penalty as was in force at the relevant point of time shall apply in this case.

 

9.                  While determining the quantum of penalty under Section 15H (ii), I have also duly considered the factors as provided in section 15J of SEBI Act, 1992 viz. (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 and; (c) the repetitive nature of the default. The unfair gain to the promoter/acquirer as a result of the default can be computed by working out the value of open offer the acquirers had to make to the shareholders of NIL in January 1998. The noticee was required to make an open offer to acquire shares constituting 20% of NIL post preferential equity share capital of 12,32,680 shares, in terms of Regulation 21(1) of SAST Regulations. Since NIL scrip was illiquid(infrequently traded), the price at which acquirer had to make the open offer was at least at  par value at which they had acquired the shares i.e Rs. 10 per share, in terms of Regulation 20 (5) of SAST Regulations. Thus, there is an element of disproportionate gain/unfair advantage caused to the noticee inasmuch as the Noticee would have spent huge money in the event of making open offer in terms of the said regulations.  Since this liability of the acquirer relates to January, 1998 and over nine years have elapsed, I feel that there is an opportunity loss to the shareholders at large inasmuch as the noticee denied an exit opportunity to the shareholders.  I do not find any material on record to establish repetitive nature of the default committed by the noticee.

 

10.               I have also considered the   mitigating factors as pleaded by the noticee in his reply such as no change in control of the company, infusion of funds by the acquirer to revive the company etc. I am of the view that the same do not absolve the noticee from his statutory liabilities/obligations.   The argument of the noticee, that the target company was loss making unit at the stage of preferential allotment, is untenable and devoid of merit inasmuch as   the penalty is imposed on the promoter/acquirer but not on the Target Company. This is so, in view of the fact that the default (of not making public announcement) was on the part of the promoter/acquirer. This view is well supported by the ruling of Hon’ble SAT (order dated May 14, 2003) in Appeal No 96 of 2002 in the matter of P.C. Surana. I am, therefore, convinced that it is a fit case to impose maximum monetary penalty provided under law against the acquirer.

 

11.      In view of my findings mentioned hereinabove and after taking into account the facts and circumstances of the case and in exercise of the powers conferred upon me under section 15-I (2) and 15H (ii) of SEBI Act, 1992 read with Rule 5 of Adjudication Rules, I hereby impose a maximum monetary penalty of Rs. 5 lakhs (Rs. Five lakhs only) on the Noticee viz., Shri G. Vinod Reddy. The said penalty will commensurate with the default committed by the noticee.  

 

12.              The penalty amount should be paid through a crossed demand draft drawn in favour of “SEBI – Penalties Remittable to Government of India” and payable at Mumbai, within 45 days of receipt of this order. The said demand draft should be forwarded to Ms. Soma Majumdar, Deputy General Manager, Securities and Exchange Board of India, SEBI Bhavan, Plot No. C4-A, “G” Block, Bandra Kurla Complex, Bandra (East), Mumbai–400 051.

13.      In terms of Rule 6 of the Adjudication Rules, copies of this order are sent to the noticee and also to the Securities and Exchange Board of India.

 

 

DATE: OCTOBER 25, 2007       D.S.REDDY

PLACE: MUMBAI  ADJUDICATING OFFICER