In the matter of:

J.M.Financial & Investment Consultancy Services Ltd      Appellant

Vs.

Shri Ananta Barua,
Adjudicating Officer
Securities & Exchange Board of India                              Respondent
 

APPEARANCE

Mr. G.Dave
Advocate
I/b. Dave & Girish & Co.,

Mr. M.R.Mondkar
Director
J.M.Financial & Investment
Consultancy Services Ltd                                              for Appellant

Mr.Ananta Barua
Division Chief,
SEBI                                                                                  for Respondent
 

(Arising out of the order dated 20.10.2000 made by the Adjudicating officer, Securities & Exchange Board of India)

M/s. J.M.Financial & Investment Consultancy Services Ltd, the Appellant herein, is a public limited company. The Appellant is a Category I Merchant Banker, holding a certificate of registration granted by the Securities and Exchange Board of India (SEBI). M/s. FICS Consultancy services Ltd (the company) is also a public limited company. Reportedly, the Appellant and the company are promoted by the by same group persons. The Appellant is also stated to be one of the promoters of the company. The paid up capital of the company is Rs.5 lakhs, of which 84% is held by the promoters and the remaining 16% by the public. Though the shares of the company are listed on the Stock Exchange, Mumbai, it has been stated that there was hardly any trading since November 1990. The Appellant was holding 5450 shares accounting for 10. 90% of the paid up capital of the company till it acquired 6, 999 shares (13.99% of the company�s paid up capital on 24.3.1998) from the family members of one Mahendrabhai Kampani, who were reportedly controlling of the business of the said company. As a result of acquisition of the additional shares, the Appellant�s holding in the Company�s paid up capital rose to 24.89%. Since the Appellant and the said Mahendrabhai family members were the promoters of the company, the acquisition enjoyed the exemption provided under regulation 3 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Regulations). Said regulation provides exemption to certain acquisitions specified therein, from complying with the requirements of regulations 10, 11 and 12. In terms of sub regulation (3), those claiming exemption under regulation 3 (1) (e) (iii) (b) are required to notify the concerned stock exchange, the details of the proposed acquisition at least 4 days in advance of the date of the acquisition, provided the acquisition results in the acquirer�s voting right in the company exceeding 2% (5% with effect from 28.10.1998). Further, in terms of sub regulation (4) the acquirer is required to submit a report to SEBI with certain details within 21 days from the date of acquisition in case the acquirer�s voting right as a result of the acquisition exceeded 10% (15% with effect from 28.10.1998) or more in the company. Against the said statutory requirement, the stock exchange was notified of the acquisition of shares on 27.4.1998 and the requisite report was submitted to SEBI on 1.12.1998. On receipt of the report, SEBI sought further details from the Appellant. After considering the details furnished by the Appellant, SEBI decided to adjudicate the matter. For the purpose, the Respondent was appointed as the Adjudicating Officer. The Adjudicating Officer, after inquiry, viewed the Appellant guilty of failure to comply with the requirements of sub regulations (3) and (4) of regulation 3 and vide order dated 20.10.2000 imposed a monetary penalty of Rs. 1, 80, 000 invoking the penal provisions of section 15A of the Securities & Exchange Board of India Act, 1992 (the Act). The said adjudication order is under challenge in the present appeal.
 

Shri. Dave, learned Counsel appearing for the Appellant, submitted that though technically the company can be called a public limited company, in view of its size and ownership pattern, for all practical purposes, it could be considered as a private company, that it is a closely held company with a paid up capital of Rs. 5 lakhs, and that there is only16% public holding in the company. The total number of shareholders numbered just 57, consisting of 30 promoter members and 27 outsiders. Further, though the company is listed with the Bombay stock exchange, virtually there was no trading in the shares for the past several years. He also submitted that since the transfer of shares being interse promoters it cannot be said that the ownership or controlling pattern of the company changed as a result of the acquisition.
 

Shri Dave submitted that transaction in question in true sense is covered under regulation 3 (1) (g) and as such the requirements of sub regulations (3) and (4) of regulation 3 are not applicable. He further submitted that the Appellant acquired the shares under the bonafide belief that the acquisition is exempt in terms of regulation 3. Learned Counsel submitted that the Appellant acquired 6999 shares of the company on 24.3.1998 from various share holders belonging to one of the promoter groups, and thereby though technically it can be said that the acquisition is covered under 3 (1) (e) (b) of the Regulations, for all practical purposes it could be considered as an acquisition falling under regulation 3 (1) (g). The shares were purchased at the face value of Rs. 10 per share. Learned Counsel submitted that the said acquisition was reported to the Respondent vide its letter dated 1.12.1998 on its own, after the internal audit report pointed out the omission. Bombay stock exchange was informed much earlier, i.e. on 27.4.1998.
 

Learned Counsel submitted that even if it is assumed that the Appellant had failed to report in time the acquisition to the stock exchange and the Respondent in terms of sub regulations (3) and (4), there was no justification to impose any penalty on the Appellant as the failure was purely technical, unintentional and of no consequences to anybody. He submitted that the Appellant enjoyed impeccable reputation and it is law abiding. He further submitted that failure to report requisite details to the said authorities had not in any way benefited the Appellant and no loss has been caused to anybody. The very action of the Appellant that on its own it submitted the reports to the authorities, goes to prove its bonafide. The Adjudicating Officer has to decide the matter judicially and cannot whimsically penalise the Appellant. He has to record his findings and prove the failure on the part of the Appellant and take into consideration all the relevant factors for deciding as to whether the failure need be penalised. If he is satisfied that it is a fit case to invoke penal provisions, then he is required to decide the quantum of penalty, taking into consideration factors provided in section 15J of the Act. Shri Dave submitted that in the Appellant�s case, the Adjudicating Officer had not followed any of these requirements and without application of mind imposed monetary penalty, and as such the impugned order was bad and deserve to be set aside.
 

Shri Ananta Barua, learned Representative of the Respondent submitted that in view of the fact that the Appellant had admitted its failure to comply with the requirements of sub regulations 3 and 4 of the regulation 3, the Adjudicating Officer was perfectly justified in imposing the monetary penalty provided in section 15A. He further submitted that inspite of the proven failure on the part of the Appellant, the Adjudicating Officer imposed only a token penalty of Rs. 1.8 lakhs against a much higher penalty leviable under section 15A, demonstrates that he had taken into consideration the factors provided in section 15J.
 

Shri Barua submitted that the requirements of sub regulations (3) and (4) are of considerable importance as these are meant to provide transparency to the benefit of the investors and help the Respondent to monitor and ensure compliance of the Regulations. He submitted that stock exchange was informed of the acquisition after 40 days of the date of acquisition and report was submitted to the Respondent after a delay of 230 days. He submitted that from the compliance angle, so long the shares are listed on the stock exchange it was of no relevance as to whether the shares of the company were actively traded or not. Exemption provided under regulation 3 is not relatable to the size of the company�s paid up capital or the numerical size of its shareholders. According to Shri Barua the requirements of notifying stock exchanges under sub regulation (3) and reporting acquisition to the Respondent under sub regulation (4) are pre requisites for enjoying exemption under regulation 3 and failure to do so takes away the cover of exemption.
 

Referring to the Appellant�s submission that the Adjudicating Officer in his order has not referred to any adverse consequences of the acquisition, Shri Barua stated that after the impugned acquisition the Appellant became the single largest share holder of the company with its holding reaching 24.89% of the capital and Mahendrabhai Kampani family ceased to hold any share in the company, though at the pre acquisition stage their holding accounted for about 10. 90% of the company�s paid up capital. Therefore there was a significant change in the share holding and control of the company and as such the remaining share holders and general investors ought to have been made known through the notification to stock exchange of such proposed acquisition to enable them to take timely well informed decision on their investment. He further submitted that filing of the report with the Respondent under regulation 3(4) is to enable it to ensure as to whether the particular acquisition did actually fall within the exempted category specified under regulation 3 (1) (e) of the Regulations or not. The objective is that if SEBI comes to the conclusion after perusing the report that the acquirer did not fulfill the conditions to avail exemption from making public announcement as specified in the said regulations, it can insist the acquirer to make public announcement for acquisition of such shares from others in accordance with the requirements of the Regulation.
 

Referring to the submission that there was no undue gain to the Appellant or loss to the investor as a result of the acquisition, Shri Barua submitted that since the holding of the Appellant in the company�s capital increased to 24.89% there was a significant change in the share holding and control consequent to the said acquisition and that by not notifying the stock exchange, the Appellant deprived the other share holders holding 16% in the company�s capital to take timely decision.
 

Shri Barua also submitted that the claim of the Appellant that it had on its own filed the report, etc., is not a valid excuse to absolve it from the failure to comply with the statutory requirements. On the contrary, the Appellant being a Category I Merchant Banker since 1992, it ought to have complied with the requirements without any default. He further submitted that mens rea is not a requirement, of section 15A and that failure per se would invite penalty. To support the view that for imposing penalty for late filing of returns proof of mens rea is not necessary, Supreme Court decision in Gujarat Travancore Agency, Cochin v. Commissioner of Income Tax, Kerala (AIR 1989 SC 1671) and a subsequent case following the ratio of the said case, in Additional Commissioner of Income Tax, Gujarat v. I.M.Patel & Co. (AIR 1992 SC 1762), was relied on by the learned Representative.
 

I have carefully considered the submissions made by the parties in the appeal. The Appellant�s submission that the acquisition of shares of the company is covered under regulation 3 (1) (g) and as such sub regulations (3) and (4) are not attracted, is devoid of any merit. Sub regulation 3 (g) provides exemption from the compliance of the requirements of certain provisions of the regulations, provided "the acquisition is by way of transmission on succession or inheritance". Facts of the case do not support that the instant acquisition was by way of transmission on succession or inheritance. On the contrary it is on record that it was a commercial transaction between the parties based on a mutually agreed consideration. The Appellant itself had admitted in its letter dated 31.12.1998, copy of which has been annexed to the appeal, that " the transfer of 6999 equity shares of FICS Consultancy Services Ltd (FICS) was an inter se transfer of shares between promoters of FICS and hence regulation 3 (1) (e) (iii) (b) of the Regulations is applicable". It is also seen from the admission made by the Appellant before the Adjudicating Officer that the Appellant "acquired the shares at the face value of Rs. 10". If the acquisition was by way of transmission on succession or inheritance, there was no question of any purchase consideration required to be paid. The Appellant and the Respondent have also admitted that the transaction is covered under regulation 3 (1) (e) (iii) (b) of the Regulation as could be seen from the adjudication order and the correspondence relied upon by them in the appeal.
 

Shri Barua�s submission that compliance of the requirements under sub regulations 3 and 4 is a pre requisite for availing exemption under regulation 3 is not legally tenable. Compliance of the requirements of the said sub regulations 3 and 4 is required only if the acquisition comes under the exempted category. In terms of the explanation to regulation 3 (1) (e) the benefit of availing of exemption from applicability of Regulations for increasing share holding or inter se transfer of share holding among group companies, relatives and promoters shall be subject to such group companies or relatives or promoters filing statements concerning group and individual share holding as required under Regulations 6, 7 and 8. Requirements of notifying stock exchange and reporting to SEBI in terms of sub regulations (3) and (4) are consequential to availing of exemption and not a requirement to avail exemption under regulation 3 as is made crystal clear in the Regulations.
 

It is an admitted fact that the Appellant on 24.3.1998 acquired 6, 999 shares constituting 13. 99% of the paid up capital of the company from a co-promoter group and that as a result of the said acquisition the Appellant�s holding in the share capital of the company increased to 12, 449 shares from the then existing holding of 5, 450 shares. After the acquisition the Appellant�s holding accounted for about 24. 89% of the company�s paid up capital, thereby making it the largest single shareholder in the company. It has also been admitted that though acquisition of shares took place on 24.3.1998, Bombay stock exchange on which the company�s shares are listed was notified of the acquisition only on 27.4.1998 though such notification should have been made on or before 18.3.1998 (4 working days in advance of the acquisition) in terms of sub regulation (3) and requisite report under sub regulation (4) was submitted to SEBI on 1.12.1998 after a delay of about 230 days as against 21 days prescribed. Thus the failure to comply with the statutory requirement stands established.
 

As rightly pointed out by Shri Barua, the fact that the company is small in size in terms of the paid capital, and that its shares are hardly traded on the Bombay Stock Exchange, etc., does not in any way absolve the Appellant from complying with the statutory requirements. These are factors which may to some extent be relevant while considering the penal consequences that could visit the defaulter. The argument that there was no change in the control of management of the company is difficult to accept. It is evident that as a result of acquisition of shares from one of the promoters i.e., Kampanis, the Appellant has strengthened its position by becoming the largest share holder in the company and Kampanis who were reportedly running the business of the company ceased to be the share holders. The submission that there is no change in the over all ownership by the promoter category even after acquisition and as such the acquisition of shares by the Appellant is of no consequence cannot be accepted as a non event. The fact that management control, exercisable by persons within the promoters group had changed as a result of acquisition of shares by the Appellant cannot be ignored. From the point of view of the outside share holders acquisition of shares by the Appellant making it the dominant share holder in the company is of some importance, as that would have prompted them to sell or buy shares activating trading. It is difficult to come to a firm conclusion as to how the general share holders would have reacted on knowing the Appellant becoming the major share holder in the company or on knowing the exit of Kampani family, one of the promoter groups holding of 10% in the company�s capital. But the Appellant cannot prejudge the reaction of the investors in such a scenario. The fact remains that the outside share holders were deprived of the important information at the relevant point of time. Viewed from this angle the failure on the part of the Appellant to comply with the requirement of notifying the stock exchange under sub regulation (3) cannot be ignored.
 

The Appellant�s contention that the delay in filing the reports was not intentional but by over sight and that on reporting the failure by its own internal audit team, requirement was complied with, cannot in Appellant�s case help much. The Appellant being a Category I Merchant Banker since 1992, is supposed to know the statutory requirements to be complied with in matters relating to public issue of shares, acquisition of shares etc. A Merchant Banker is supposed to be diligent and expected to advise its clients about the statutory requirements. In fact the Regulation itself recognizes the expertise in the Merchant Bankers as could be seen from various regulations relating to public announcement, etc. According to regulation 13, before making any public announcement of offer referred to in regulation 10, regulation 11 or regulation 12, the acquirer is required to appoint a merchant banker holding a Category I registration. The public announcement referred to in the Regulation is required to be made by the Merchant Banker and none else. Further, regulation 24 enumerates obligations of the Merchant Bankers appointed under regulation 13 mentioned above. One of the obligations enumerated thereunder is that " the merchant banker shall ensure compliance of the Regulations and any other laws or rules as may be applicable in this regard". Since the merchant banker is loaded with the obligation to ensure compliance of the statutory requirements applicable to acquisition of shares by even others, it is difficult to accept the Appellant�s argument that the failure on its part was inadvertent and need be condoned. There is no scope for seeking such a relief, by an expert agency like a Merchant Banker, that failure to comply with the statutory requirements attendant to acquisition of shares was due to inadvertence, as the Merchant Banker itself, by its very role, is required to be diligent and not negligent. Appellant�s failure has to be viewed in the back ground that it is a Category I Merchant Banker fastened with the obligation of ensuring legal compliance by others. A person entrusted with such a duty, himself failing to comply with the legal requirements in a matter directly concerning him, cannot be viewed lightly and the Adjudicating Officer�s decision imposing monetary penalty on the Appellant cannot be considered as unwarranted. The Appellant�s submission that the Respondent had mechanically and without appreciating the provisions of sections 15A and 15J and without application of mind had decided the matter is devoid of any merit. The Adjudicating Officer in his detailed order has explained the factual position and the legal provisions based on which he decided to impose the penalty. However the Respondent�s conclusion that there was a delay of 40 days in complying with the requirements of notifying the stock exchange the details of acquisition and based on that conclusion levying a total penalty of Rs. 80, 000/- worked out @ Rs. 2, 000/- per day of default for 40 days is not legally sustainable. The failure under sub regulation (3) is not of a continuing nature after acquisition and therefore penalty cannot be decided on the basis of per day default post acquisition, as decided by the Adjudicating Officer. Sub regulation requires the acquirer to notify the requirements at least 4 days in advance of the date of acquisition. It is clear from the provisions of the said regulation that notifying stock exchange is a pre acquisition requirement. Therefore the decision to impose Rs. 80, 000 based on a per day penalty of Rs. 2, 000/- for a period of 40 days after completion of the offence, is not legally sustainable. For the failure to comply with the requirements of sub regulation (4) the Adjudicating Officer has imposed a sum of Rs.1 lakh as against a maximum penalty of Rs.1.5 lakhs prescribed under section 15A (a) of the Act. I do not consider it is necessary to remand this case only to re-decide the quantum of penalty under section 15A (b) in view of the finding on which penalty for failure to comply with the requirements of sub regulation (3) has been decided. I am not suggesting that failure to comply with the requirements of sub regulation (3) need not attract penalty. I have only pointed out the error involved in quantifying the penalty by the Respondent. Taking into consideration the totality of facts and circumstances of the case, I am of the view that a sum of Rs.1 lakh as penalty for failure to comply with the requirements of sub regulation (3) and (4) would be fair and reasonable. Accordingly, the total quantum of penalty payable by the Appellant is fixed at Rs.1 lakh and to this extend the impugned order stands modified. The impugned order as modified sustains.
 

The appeal is disposed of in the above lines.