In the matter of Laffan Software Ltd

Sep 12, 2006

Orders : Orders of SAT

IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Appeal No.44/2005

Date of Decision 12/09/2006

Laffan Software Ltd.

Appellant

Versus

Securities & Exchange Board of India.

Respondent

None for the appellant

Mr. Ravi Hegde, Advocate with Mr. Pratik Pawar, Advocate for Respondent.

CORAM

Justice N. K. Sodhi, Presiding Officer

C. Bhattacharya, Member

R. N. Bhardwaj, Member

Per: C. Bhattacharya, Member

The appeal in this case has been filed against the adjudicating order dated December 30, 2004 imposing a penalty of Rs.1,00,000/- on the appellant.

The facts of this case, in short, are that M/s. Laffan Software Ltd., the appellant, had acquired, 10 lac equity shares through a preferential allotment, representing 5.71% of the paid up share capital of ETP Corporation Ltd. (the target company) as on June 18, 2002. It was alleged that pursuant to the said acquisition, the appellant failed to comply with the provisions of Regulation 7(1) and 7(2) of the Securities & Exchange Board of India (Substantial Acquisition of Shares & Takeovers) Regulations, 1997.(for short, Takeover Regulations) as it had failed to make necessary disclosures with regard to its share holding to the company. In spite of notice being served, the appellant did not participate in the adjudication proceedings and the Adjudicating Officer carried on with the adjudication proceedings ex parte and levied a penalty of Rs.1,00,000/- on the appellant for violation of Regulation 7(1) and 7(2) of the Takeover Regulations. Being aggrieved, the appellant has filed this appeal.

There was no representation from the appellant during the course of the hearing. However, the learned counsel for the respondent took us through all the facts and merits of the case. In the appeal memo the appellant has stated that they had no intention, whatsoever, to acquire control over the target company or representation on its Board and they were under the bona fide belief that since it was a preferential allotment of shares made by the target company after completing all necessary formalities, there was no need for them to specifically again send a notice of disclosure to the company about this shareholding. The learned counsel for the respondent argued that Regulation 7(1) of the Takeover Regulations, which was applicable during that period, required the acquirer to disclose his shareholding or voting rights in the company, to the company if the acquisition of more than 5% shares or voting rights has taken place. Sub regulation (1) of Regulation 7 before its amendment with effect from 9/9/2002 read as follows:

“(1) any acquirer, who acquires shares or voting rights which (taken together with shares or voting rights, if any, held by him) would entitle him to more than five percent shares or voting rights in a company, in any manner whatsoever, shall

disclose the aggregate of his shareholding or voting rights in that company, to that company.”

The regulation was subsequently amended requiring the acquirer to disclose at every stage, the aggregate of his shareholding and voting rights in the target company to the company and to the stock exchanges where the shares of the company are listed.

We have gone through the adjudication order and it appears that the Adjudicating Officer has fixed the quantum of penalty of Rs.1,00,000/- on the basis of findings recorded in paragraph 8 of the order which reads as under:

“8.It is noted that the Hon’ble Securities Appellate Tribunal

vide Order dated August 31, 2004 in the matter of Reliance Industries Ltd., Versus Securities and Exchange Board of India, Mumbai held that the Adjudicating Officer would be justified in not imposing penalty where the breach of provisions

of law is only technical or venial.

The disclosure required under the Regulation 7 serves two purposes. Firstly, it provides the company with the necessary

information to take pre-emptive action to prevent any hostile

takeover. Secondly, as the said information is made available

to the investors through the Stock Exchanges, it would enable the investing public to take informed decisions to remain invested or to exit out of the company based on their perception about possible change in management in case of a

takeover. Hence, the non-disclosure by Laffan has deprived both ETP and the investing public of valuable information which could have affected the investing decision of the investors and any violation of said requirement can not be construed as merely technical or venial in nature.” (emphasis by the Tribunal)

It appears he finds two violations committed by the appellant when he holds that “non-disclosure by Laffan has deprived both ETP and the investing public of valuable information which could have affected the investing decision of the investors”. Apparently, the onus of sending intimation to the stock exchange at the material time was not on the appellant as per law prevailing at that time and as such the finding that investing public were deprived of valuable information due to the appellant’s non intimation cannot be sustained.

However, the fact remains that the appellant had failed to comply with the provisions of Regulation 7(1) of the Takeover Regulations which casts a responsibility on any acquirer, who acquires shares or voting rights of more than five percent shares or voting rights in a company, in any manner whatsoever, to disclose the aggregate of his shareholding or voting rights in that company, to that company. Sub regulation (2) of Regulation 7 of the Takeover Regulations stipulates that the disclosure required to be made under sub regulation (1) to the target company shall be made within two days on receipt of intimation of allotment of shares or acquisition of shares or voting rights as the case may be. Apparently, the regulation does not make any distinction between ordinary acquisition of shares through market operations or allotment through preferential issue. However, the fact remains that the appellant was not in possession of any other shareholding of the target company before the preferential allotment. We have been informed by the learned counsel for the respondent that within three months these shares were offloaded by the appellant through normal market operation. As such, there was no undue gain or profit as mentioned in Section 15J of the Securities and Exchange Board of India Act, 1992, though the appellant had failed to disclose its shareholding to the target company as were issued to them by the target company. We are, therefore, of the view that the ends of justice will be met if a smaller penalty of Rs.20,000/- only is imposed on the appellant. Accordingly, the impugned order is modified and the appeal stands disposed of with no order as to costs.

Sd/-

Justice N. K. Sodhi
Presiding Officer

Sd/-

C. Bhattacharya
Member

Sd/-

R. N. Bhardwaj
Member

Smn