Order against Fintech Compu Systems Ltd in the matter of Pashupati Cables Ltd

WTMO/ 59 /CFD/12/2005

1.0 BACKGROUND

1.1 Pasupati Acrylon Limited (hereinafter referred to as ‘the target company’) is a company limited by shares incorporated under the Companies Act, 1956, having its registered office at Thakurdwara, Kashipur Road, Distt. Moradabad, U.P – 244 601. The equity shares of the target company are listed on the Bombay Stock Exchange Ltd and the Calcutta Stock Exchange Limited.

1.2 The target company has proposed to allot 1,40,00,000 equity shares constituting 18.07% of equity capital of the target company by way of preferential allotment to Prabhat Capital Services Limited (hereinafter referred to as ‘the acquirer’) and the persons acting in concert (PACs) with it viz. Shubh Exim Ltd., Sind Wave Finance Services, Gurukripa Finvest P Ltd. and Inder Overseas P Ltd. The said 1,40,00,000 equity shares represent 18.07% of the enhanced equity capital of the target company after proposed allotment.

1.3 The acquirer and PACs belong to the promoter group of the target company. Presently, the shareholding of promoter group is 47.43% in the equity capital of the target company which includes 7.84% equity shares held by PICUP which is a State level Financial Institution and the acquirer does not hold any shares in the target company. Pursuant to the proposed preferential allotment, the shareholding of promoter group would increase from 47.43% to 56.93% in the enhanced equity capital of the target company. The proposed acquisition would, therefore, attract Regulation 11(1) read with proviso to Regulation 11(2) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (hereinafter referred to as ‘the Takeover Regulations’).

2.0 APPLICATION FOR EXEMPTION -

2.1 The acquirer has, vide its letter dated 14.3.2005, made an application under Regulation 4(2) of the Takeover Regulations seeking exemption from the applicability of relevant provisions of Chapter III of the Takeover Regulations and making the following submissions on its own behalf and on behalf of the PACs:-

 (a) The target company is engaged in manufacturing of acrylic fibre and yarn with technological collaboration from SNIA-BPD, Italy. The target company incurred substantial losses in the years 2000-01, 2001-02, 2002-03 and 2003-04. As per the Sick Industrial Companies (Special Provisions) Act, 1985 the target company was referred to the Board of Industrial and Financial Reconstruction (BIFR). The reference has been registered with the BIFR bearing case no. 364/2003.

 (b) On account of the losses, the target company failed to meet the debt repayment obligation and interest thereon. It had approached the financial institutions and banks for restructuring of its debts under Corporate Debt Restructuring (CDR) Mechanism to make the target company’s operations viable by reducing debt and interest burden, re-scheduling of loans, etc.

 (c) The lead banker, Allahabad Bank referred the matter to the Corporate Debt Restructuring Cell of IDBI for restructuring the debts of the target company under the CDR Mechanism. CDR Empowered Group after discussing the restructuring proposal approved the same at its meeting held on 9.11.2004. The CDR package inter alia stipulates to write down equity share capital by 10% and the promoters are required to infuse/convert unsecured loan of Rs.14 crores into equity share capital of the target company.

 (d) The allotment of shares shall be in due compliance of the SEBI Guidelines governing preferential allotment. The allotment shall not in any way prejudice the interest of any shareholder or creditors of the target company. On the contrary, non-allotment of the shares would result in failure of the CDR proposal and would cause extreme financial burden on the target company and ultimately result in loss to the creditors and shareholders of the target company.

 (e) The proposed preferential allotment would not result in change of the composition of the Board of Directors of the target company as they along with the PACs are already in control of the target company.

 (f) The present number of shareholders in the target company is 77,793 and therefore, postal ballot for passing a special resolution for the preferential allotment would involve huge costs and will pose a heavy financial burden, which due to the adverse financial position the target company will not be able to undertake. Therefore, the precarious financial condition of the target company would be affected if the condition of passing the proposed special resolution through postal ballot is imposed.

2.3 The shareholding pattern of the target company before and after the proposed preferential allotment is as under:

Shareholder category	BEFORE DERATING OF CAPITAL					AFTER DERATING OF CAPITAL
	No. of registered shareholders as on date of application	Before the proposed acquisition		Before the proposed acquisition		No of registered shareholders as on date of application	Before the proposed acquisition		After the proposed acquisition
		No. of shares/total voting rights held	% of shares total voting capital held.	No. of shares / voting rights	% of shares/voting rights		No. of shares/total voting rights held	% of shares total voting capital held.	No. of shares / voting rights	% of shares/voting rights
Promoter group [including PICUP (a financial institution) holding 7.84%]	17	30111880	47.43	30111880	38.86	17	27100692	47.43	27100692	38.10
Acquirers		Nil	Nil	14000000	18.07				14000000	19.68
Sub-Total ‘A’	17	30111880	47.43	44111880	56.93	17	27100692	47.43	41100692	57.78
FIs/Banks	14	172925	0.27	172925	0.22	14	155633	0.27	155633	0.22
FIIs/NRIs/ OCBs	991	5692142	8.96	5692142	7.35	991	5122928	8.97	5122928	7.20
Public	76771	27504299	43.34	27504299	35.50	76771	24753869	43.33	24753869	34.80
Sub-Total ‘B’	77776	33369366	52.57	33369366	43.07	77776	30032429	52.57	30032429	42.22
Total (A+B)	77793	63481246	100	77481246	100	77793	57133121	100	71133121	100

 

 

 

 

3.0 RECOMMENDATION OF THE TAKEOVER PANEL –

3.1 The aforesaid application dated 14.3.2005 was forwarded to the Takeover Panel in terms of sub-regulation (4) of Regulation 4 of the Takeover Regulations. The Takeover Panel forwarded its report dated 21.4.2005 by which the Panel has recommended as under –

“On the facts stated, the target company appears a Sick Industrial Unit as per the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985 and rehabilitation by way of Corporate Debt Restructuring is and conditionally  approved by the CDR Cell and the equity shares on preferential basis are proposed to be allotted in pursuance of Corporate Debt Restructuring Scheme.

Subject to verification of applicants statement that the promoters control PACs, in view of CDR Cell’s approval, grant of exemption as sought is recommended though present holding of promoters along with PACs exceed 55%.”

4.0 FURTHER SUBMISSIONS -

4.1 In view of the recommendation of the Takeover Panel to allow exemption subject to verification of the statement of the acquirer that the promoters control PACs, further information was sought from the acquirer. In this regard the acquirer vide its letter dated 12.5.2005 submitted that :-

·        M/s Inder Overseas Pvt. Ltd, one of the PACs, is classified as ‘Promoter’ in the disclosures made to stock exchanges under Clause 35 of the Listing Agreement and Regulation 8(3) of Takeover Regulations.

·        Mr. Vineet Jain, promoter director (MD) of the target company, along with his spouse is holding more than 26% equity share capital in Gurukripa Finvest Pvt. Ltd and Sindwave Finance Services Ltd. Thus, these companies are covered under the definition of ‘Promoter’ under Regulation 2(1)(h)(a)(ii) of the Takeover Regulations.

·        The acquirer and Shubh Exim Ltd., are associated with the target company for a long time and controlled by Mr.Vineet Jain, MD of the target company. Further, in these companies control has been acquired by Mr.Vineet Jain in terms of Regulation 12 of the Takeover Regulations.

4.2 The acquirer has, vide its letter dated 31.8.2005, further submitted that as per the CDR terms and conditions the capital of the target company is to be reduced by 10% and the proposed preferential allotment is to be made after the reduction of capital. As the process involves approval of shareholders and  of the High Court, the target company proposes to pass the resolution for reduction of capital. The acquirer submitted that the condition of time limit for completion of formalities may not be imposed.

4.3 The target company has submitted an undertaking dated 14.11.2005 stating that:

i.        A general meeting of shareholders of the target company will be called for passing a special resolution under section 81(1A) of the Companies Act, 1956 in respect of the proposed preferential allotment to the acquirer and PACs.

ii.      Target company shall make the following disclosures in the explanatory statement in terms of Section 173 of the Companies Act forming part of the Notice of General Meeting:

·        The price at which the allotment is proposed.

·        The identity of proposed allottees.

·        The purpose of and reason for such allotment.

·        Consequential changes, if any, in the Board of Directors of the target company and in voting rights, the shareholding pattern of the target company, and

·        Whether such allotment would result in change in control over the target company.

iii.    The guidelines for preferential allotment (including pricing) as specified under Chapter XIII of SEBI (Disclosure and Investor Protection) Guidelines, 2000 shall be complied with.

iv.     The prospective acquirer and PACs (promoter group shareholders) of the target company, being interested party to the resolution, shall abstain from voting in respect of the said resolution under Section 81(1A) of the Companies Act, 1956.

4.4 The undertaking dated 14.12.2005 on the above lines has also been submitted from the acquirer for and on behalf of the acquirer as well as the PACs.

5.0 FINDINGS

5.1           I have carefully considered the application dated 14.3.2005 and have taken into consideration the above mentioned recommendations of the Takeover Panel, submissions of the acquirer and relevant material available on record.

5.2 I note that the target company has been suffering financial losses continuously for the past 4-5 years and that the networth of the company is eroded. It is observed that the proposed allotment of 1,40,00,000 equity shares representing 18.07% of equity share capital of the target company to acquirer and persons acting in concert with it as mentioned in the application is in pursuance of Corporate Debt Restructuring (CDR) mechanism approved as on 9.11.2004 by the Corporate Debt Restructuring Empowered Group.

5.3 I observe from the application that CDR package inter alia stipulates for writing down of equity share capital of target company by 10% and infusion of additional capital of Rs.14 crores by promoters. In order to make the CDR package effective and in accordance with the stipulations provided by CDR Empowered Group, promoters are required to bring Rs.14 crores by way of equity share capital. Accordingly, the preferential allotment as submitted has been proposed. It has been categorically submitted by the acquirer that pursuant to the proposed preferential allotment there would not be any change in composition of the Board of Directors or control of the target company pursuant to the aforesaid allotment.

 

5.4 After considering the facts and circumstance of the present case as brought out in the application of the acquirer and the conditions stipulated by the CDR Empowered Group, the submissions and the undertaking of the acquirers and PACs and the undertaking of target company, as mentioned hereinabove, I find that proposed acquisition of 18.07% equity shares of target company by acquirers and PACs be granted exemption from requirements of Chapter III of the Takeover Regulations.

5.5  However, I note that the facility of postal ballot for passing of the special resolution as per the procedure laid down for postal ballot in Rule 2A and Rule 5 of the Companies (Passing of the Resolution by Postal Ballot) Rules, 2001 shall be provided since the target company is undergoing debt restructuring which is a major development where all shareholders must be given an opportunity to participate in the decision making process. I further take into consideration the submission of the acquirer that the proposed allotment could be made after reducing the capital by 10% in accordance with the applicable provisions of law. The acquirer has requested that the condition of time limit for completion of formalities may not be imposed. In this regard, I find that the open ended exemption for indefinite period may not be granted in the interest of the investors and the securities market.   

6.0 ORDER

6.1  In view of the above findings, I, in exercise of the powers conferred upon me by virtue of Section 19 of the Securities and Exchange Board of India Act, 1992, read with Regulation 4(6) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, hereby grant exemption to the acquirer and PACs, from complying with the requirements in Regulation 11 of Chapter III of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 in respect of the proposed preferential allotment of 1,40,00,000 equity shares of the target company to the acquirer and the PACs subject to the following conditions-

 i). The acquirer and the target company shall comply with the  undertaking as mentioned in paragraph 4.3 and 4.4 above.

 ii). The facility of voting through postal ballot for passing of the special resolution as per the procedure laid down in Rule 2A and Rule 5 of Companies (Passing of the Resolution by Postal Ballot) Rules, 2001 shall be provided.

 

6.2 I further direct that the formalities in respect of proposed preferential allotment shall be completed within 90 days of receipt of necessary approvals of the High Court in respect of derating/ reduction of capital, if any as submitted in the application and the acquirer shall file a report with SEBI in the manner specified in Regulation 3(4) read with 3(5) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

 

	MADHUKAR
Date: 10September. 2004	WHOLE-TIME MEMBER
Place:MUMBAI	SECURITIES AND EXCHANGE BOARD OF INDIA