Order against Universal Media Network Limite d

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[Adjudication Order No. AP/AO-18/2006-07]

 

 

In respect of

 

 

1.                  Securities and Exchanges Board of India (hereinafter referred as 'SEBI') conducted investigation in the matter of Universal Media Network Ltd. (UMN) as the company issued advertisements in the print media in June 2002 pertaining to corporate action, which were in complete variance with its actual performance. The scrip of UMN was listed in BSE, Ahmedabad, Jaipur and Calcutta Stock exchange and the otherwise illiquid scrip witnessed increase in volumes and price, coinciding with the aforesaid misleading advertisements. SEBI investigation revealed that UMN, besides committing other fraudulent and undesirable activities in the markets, did not make the required disclosures under the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred as 'SAST'). Accordingly, Mr. K.R.C.V. Seshachalam was appointed as Adjudication 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 August 25, 2004 to inquire into and adjudge under 15 A of the SEBI Act, 1992, the alleged violation Regulations 6, 7 & 8 of SAST by UMN. The matter was transferred to Mr. A. Chandrasekhar Rao vide order dated December 28 2004 and subsequently to the undersigned, vide order dated December 20, 2005.

 

2.                  The then AO, Mr. Rao, issued a Show Cause Notice (SCN) dated October 10, 2005 under Rule 4(1) of Adjudication Rules, 1995, communicating the charges, as aforesaid. As per the material on records, there was no response to the SCN and status of service of notice was unclear.  

 

3.                  In the above circumstances the undersigned was of the opinion that an inquiry should be held in the matter and accordingly notice of inquiry dated June 13, 2006 was issued to UMN, fixing the date for inquiry on June 30, 2006, enclosing therewith a copy of the SCN and its annexures to facilitate UMN to file its reply and defend the proceedings. The notice of inquiry sent through RPAD returned undelivered with the comments “left”. A fresh notice of inquiry, dated July 11, 2006 was issued, fixing July 28, 2006 as the date for inquiry. This notice along with copy of SCN was affixed on the last known office premise of UMN in terms of terms of Rule 7 of Adjudication Rules and the report of affixture dated July 24, 2006 is available on records. Surprisingly, UMN responded vide letter dated July 27, 2006 and sought postponement of the inquiry. The address mentioned in the letter head, matched with the postal address to which the SCN and NI were dispatched earlier. Considering the request of noticee, a fresh notice of inquiry, dated August 01, 2006 was issued, fixing August 11, 2006 as the date for inquiry. The aforesaid notice of inquiry sent by RPAD did not elicit any response. As a final stride, one more notice of inquiry dated September 25, 2006 was sent fixing September 28, 2006 as the date of inquiry. This time the notice was sent through official courier of SEBI, but the same also returned undelivered. Under the circumstances, the undersigned was of the opinion that UMN failed to appear before the AO deliberately. Therefore, in terms of Rule 4(7) of the Adjudication Rules, I proceed ahead with the inquiry ex-parte and record my findings as under.

 

4.                  I have carefully considered the material on record. As already mentioned, UMN did not reply to the SCN nor did its representative attend the inquiry despite the fact that both the SCN and NI were served on it. The allegation that UMN did not make disclosures under SAST to the Stock Exchanges arises from the letter dated May 14, 2004 sent by BSE to SEBI in the course of the investigations. Copy of this letter was attached as annexure D to the SCN. At paragraph 6 of this letter, it is mentioned that:

 

"The exchange has not received any intimation form the company in terms of SEBI Takeover Regulation (Regulation 6, 7 & 8 and Amnesty Scheme) and SEBI Insider Trading Regulation for the last 3 years."

 

5.                  Chapter II of SAST, provides provision pertaining to transitional and continuous disclosures to and by corporations. Regulation 6 (2) & (4) of SAST requires corporations to make disclosures to the stock exchanges in which its shares are listed, about the details of shareholding of

                                I.      persons holding more than 5% of its equity

                             II.      promoters / person(s) having control over the company

within three months of coming into force of SAST on February 20, 1997; i.e. by May 20, 1997.

It is undisputed that UMN did not make the necessary disclosures as required u/r 6(2) and 6(4) of SAST and the violation is thus established.

 

6.                  Regulation 7(3) of SAST requires corporations to make disclosures to the stock exchanges in which its shares are listed, about the details of shareholding of

                          I.      persons holding more than 5% of its equity. (W.e.f. September 2002, this disclosure limit was expanded to include 10% and 14% levels and from December 2004 onwards, 54% and 74% limits were also required to be disclosed to the stock exchanges)

                       II.       persons holding more than 15% but less than 75% of company’s equity when they acquire shares aggregating to 5% or 10% (from September, 2002 onwards, 2% or more) of the company’s equity

within seven days of receipt of such information from the acquirer.

It is undisputed that UMN did not make the required disclosure u/r 7(3) of SAST. As per the BSE letter dated May 14, 2004, UMN did not make disclosure for the last three year. In the given context, it implies that UMN did not make disclosure u/r 7(3) of SAST for the years 2001-02, 2002-03, and 2003-04. But does that establish the violation? The violation would be established only if there is/are instance(s) of acquirers acquiring more than 5, 10, 14, 54 and 74% of the UMN’s equity during the said period or if entities holding more than 15% but less than 75%, acquired 5 or 10 or more than 2% (as the case may be) of UMN’ equity during the said years and if UMN failed to disclose the same to the stock exchanges within 7 days. The material available on record is silent on any acquisition, as aforesaid. Only if there is acquisition as aforesaid, UMN is required to make the disclosure under 7(3) to the stock exchanges. Therefore, merely because UMN did not make disclosure u/r 7(3) does not establish the violation, given the absence of information on acquisition, as aforesaid.  

 

7.                  Regulation 8(3) requires corporations to make yearly disclosures to the stock exchanges in which its shares are listed, about the changes if any, in respect of shareholding of person/s who

                          I.      hold more than 15% of the company’s equity

                       II.      is promoter or is a person in control of the company

as on 31^st March of every year as well as on the record date for dividend declaration, within 30 days.

It is undisputed that UMN did not make the required disclosure u/r 8(3) of SAST. As per the BSE letter dated May 14, 2004, UMN did not make disclosure for the last three year. In the given context, it implies that UMN has not made disclosure u/r 8(3) of SAST for the years ending March 2001-02, 2002-03, and 2003-04 and the violation stands established.

 

8.                  As the violations stand established, the next step is to determine the quantum of penalty that can be imposed on UMN. But before that it is important to have clarity on the objectives of SAST Regulations. Section 11(2)(h) of the SEBI Act, 1992 empowers SEBI to regulate substantial acquisition of shares and takeover of companies, even though these activities are in the realm of corporate domain. This was done with the specific objective of protecting the interest of the investors, especially the small investors. Small investors are typically scattered, do not have a unified common voice to protect their interest, especially when there is a change in control or management etc. To address these issues, the SAST Regulation 1994 was promulgated (subsequently replaced by the 1997 Regulations); its cardinal principles being 1) Equality of treatment and opportunity to all shareholders, 2) protection of minority interest and 3) transparency and fairness. The aforesaid are sought to be achieved through well defined process of disclosure and opportunity for exit. Therefore, the default in the instance case, though undisputed, needs to be viewed in the aforesaid context.

 

9.                  The shares held in a listed company by its promoter / person in control of a company, is an important reflection of his perception about the company’s growth prospects, etc. Therefore, information pertaining to any change in his share holding, is important for the investors. Similarly, a person holding more that 15% equity of a listed company is not merely a financial investor, there is an implied strategic interest in the company by an investor holding small but significant holding. Therefore, any change in his shareholding also is of importance to the investors. Disclosure of these information to the stock exchange enables wide dissemination of information to the investors and the general public, which in turn enables them to reformulate their perception about the prospects of the company. Seen in this background, disclosure u/r 6(2) & (4) and 8(3) have wider economic function that far exceeds the basic function of facilitating informed price discovery. Therefore, non disclosure needs to be viewed seriously and not as a mere technicality.

 

10.              Over and above the aforesaid defaults, UMN has also choose not to avail the ‘SEBI Regularization scheme, 2002 for the non-compliance with regularizations 6 & 8 of SAST Regulations’ (hereinafter Regularization Scheme) which was in operation from October 01, 2002 to January 31, 2003. The aforesaid is a reflection of the deliberate nature of the default by UMN.

 

11.              The aforesaid violations of SAST attracts the penalty under Section 15A (b) of SEBI Act, which inter-alia reads as under:

 

Penalty for failure to furnish information, return, etc. (Prior to 29.10.2002 i.e. the date of amendment to SEBI Act, 1992)

 

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

(b) to file any return or furnish any information, books or other documents within the time specified therefore in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to a penalty not exceeding five thousand rupees for every day during which such failure continues;

 

 

Penalty for failure to furnish information, return, etc. (Post amendment)

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

(b) to file any return or furnish any information, books or other documents within the time specified therefore in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less];

 

12.              To determine the quantum of penalty under Section 15A (b), the undersigned considered the following factors as provided in the 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 amount of unfair gain to UMN by the aforesaid default or loss caused to the investors as a result of the default is not computable from the material available on records. However, the nature of default is repetitive as already discussed.

 

13.              Penalty for violation of Regulation 6(2) & (4) of SAST is governed by the un-amended provisions of Section 15A (b) of SEBI Act, 1992. The maximum penalty imposable is Rs. 5,000 per day for every day of default. The number of days of default, till date works out 3,417 days and the maximum penalty that can be imposed on UMN for violation of Regulation 6(2) & (4) of SAST is Rs. 170.84 lakhs each.

 

14.              I understand that, under the SEBI Consent Order Scheme a penalty of Rs. 25,000 per default was proposed by SEBI for violation of Regulation 8(3) of SAST. In the past I have taken a view in some matters and imposed twice this amount as penalty. In those matters the companies had taken corrective steps and filed belated disclosures. In the instant matter, I am of the opinion that five times the amount under the scheme as penalty would be appropriate, as UMN did not even make any belated attempt to make the necessary disclosure nor did it co-operate in the proceedings, as already discussed. Penalty pertaining to the violation of 8(3) for the year ending March 31, 2002 would come under the purview of un amended provisions of Section 15A (b) of SEBI Act, 1992, whereas penalty pertaining to the violation of 8(3) for the years ending March 31, 2003 and 2004 would come under the purview of amended provisions of Section 15A (b) of SEBI Act, 1992. Notwithstanding the aforesaid, I am inclined to impose uniform penalty for violation of Regulation 8(3) of SAST @ 5 times the amount under the consent order scheme, as un amended provision of Section 15A (b) does not have any upper ceiling. Considering the fact that disclosure u/r 6(2) & (4) are broadly similar to that of 8(3), the penalty imposed for this violation cannot be off alignment to the penalty imposed for violation of Regulation 8(3). Therefore, I restrict the penalty imposed on UMN for violation of 6(2) & (4) to Rs. One lakh each. The consolidated penalty would be as under:

 

 

 

15.              Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 5,75,000 (Five Lacs Seventy Five Thousands only) on Universal Network Media Ltd under section 15A (b) of SEBI Act, 1992.

 

16.              Universal Media Network Ltd. shall pay the said amount of penalty by way of demand draft 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 should be forwarded to Ms Barnali Mukherjee, Deputy General Manager, Investigation, ID-6, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.

 

17.              This order of adjudication is made and passed on 27^th day of September 2006 at Mumbai.

 

 

 

AMIT PRADHAN

ADJUDICATING OFFICER