In the matter

Shri Sharad Doshi                                                Appellant

Vs

The Adjudicating officer & others                     Respondent
 

Present:
Shri Lalit Ratadia                                                  for Appellant

Mr Ananta Barua and
Shri Subhashish Sharma                                     for Respondent
 

This appeal under Section 15T of the Securities and Exchange Board of India Act, 1992 by Shri Sharad Doshi , the Appellant, is directed against the Order dated 25.11.97 made by the Adjudicating Officer, imposing one lakh rupees as penalty for contravention of regulations 6 and 9 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations , 1994, while acquiring shares of a listed company namely M/s Ancient Traders Ltd.
 

Certain irregularities relating to acquisition of shares of M/s Ancient Traders Ltd. (ATL) by Shri Sharad Doshi, noticed by the Income Tax Department in the course of investigations were brought to the notice of the Securities and Exchange Board of India. Shares of ATL are listed on Delhi Stock Exchange. SEBI followed up the matter by carrying out an investigation and based on the findings thereof, the matter was referred for adjudication. The Adjducating Officer, after enquiry, came to the conclusion that Shri Doshi violated regulations 6 and 9 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations , 1994 (the Takeover Regulations) and resultantly vide order dated 25.11. 97 imposed one lakh rupees as penalty against him. Aggrieved by this, shri Doshi has appealed to this tribunal praying that the penalty be dropped or the same be substantially reduced .
 

Shri Lalit Ratadia, authorised Representative appearing for the Appellant, submitted that the purchase of shares in question did not attract the provisions of the Takeover Regulations. According to Shri Ratadia, in June 1995 the Appellant alongwith one Shri Dhiren Dhokia entered into an agreement with the members of one Dalmia family who were holding substantial number of shares in the capital of ATL, to participate in the company�s management, with the understanding that the said Dalmia family members will give their shares along with the transfer deeds on payment of purchase consideration that the deal will be complete only on compliance of the formalities required under the Takeover Regulations and that in the event of non compliance of those requirements or SEBI not according approval, the shares would revert back to the said Dalmia family.
 

Shri Ratadia , referring to the shares purchased by the Appellant referred to in adjudication order, stated that even though purchase consideration was paid to the sellers and share certificates along with the transfer deeds were received by the Appellant, the shares were not yet registered in the name of the Appellant and consequently those shares did not carry voting rights so as to attract the provisions of the Takeover Regulations . According to him, holding shares pending registration by itself would not attract regulation 9 and that the purchase of shares by the Appellant was an adhoc deal subject to reversal. The whole thrust of Mr Ratadia�s argument was on the proposition that the shares not registered in company�s books do not carry voting rights and acquisition of shares not carrying voting rights is beyond the purview of the Takeover Regulations.
 

The LD Representatives argued alternatively, that there was a lapse on the part of the Appellant in furnishing the information to the Delhi Stock Exchange in terms of regulation 6 and it was due to oversight and wrong impression about the legal provision as to the timing of the compliance. Referring to the non-compliance of the requirements of regulation 9, Shri Ratadia submitted that it was due to non availability of the requisite records, which were with the Income Tax authorities and only in February 1996 the Appellant could make the public announcement and file the draft offer document with SEBI. He submitted that the Appellant was under the impression that the regulations would be applicable only on completion of acquisition of shares and that the acquisition would be complete only on registration of the transfer of shares by the company. Shri Ratadia stated that everybody�s interest has been adversely affected as a result of purchase of shares by the Appellant, as could be seen from the fact that not even a single shareholder had responded the to the public offer made by the Appellant for acquisition of 20% of the shares. He further submitted that the Appellant had agreed to make an offer of purchase of shares of ATL from the public @ of Rs 10.57 as directed by SEBI. But the draft offer document for the purpose submitted to SEBI for clearance in February 1996 was yet to be approved.
 

According to the learned Representative, non compliance of the regulations is a technical default and does not warrant any penalty , that if such a technical lapse should be punished, the penalty should have been minimal only, and that the quantum of penalty imposed by the Adjudicating Officer by any standard is highly disproportionate to the gravity of the offence. The fact that the default is only technical in nature and that no loss has been caused to any investor, has been over-looked by the Adjudicating Officer while deciding the quantum of penalty and the quantum has been fixed in an arbitrary manner in total disregard to the guiding principles provided in Section 15J of the SEBI Act.
 

Shri Ananta Barua , an Officer of SEBI representing the Respondents, submitted that this is a clear case of intentional violation of the provisions of the Takeover Regulations by the Appellant for personal gains. Referring to various paragraphs in the Memorandum of Appeal in support , he pointed out that the Appellant was fully aware of the requirements of the law at the time of acquisition of shares, but to suit his interest opted not to comply with the mandatory legal requirements at the relevant point of time. Shri Barua stated that from the Appellant�s own version he had acquired through off market deals from Nauvea Finance Pvt Ltd (NFPL) and thereafter substantial number of shares accounting for about 74% of ATL �s capital , were acquired through off market deals from few others and as a result , appellant�s total holding in the company�s paid up capital rose to the extent of 78.22%. He attributed the change in the Board of managemnet of ATL to the acquisition of shares and the appellant�s dominant voting capacity as a result of the same. He pointed out that he Takeover Regulations, did not postulate any change in management control to attract the Regulations and that the trigger point was acquisition of shares carrying voting rights beyond the prescribed limit. In this case, the appellant did not comply with the requirements of regulations 6 and 9 of the Takeover Regulations. He stated that he shares were acquired by the appellant on different dates and the first acquisition was of 20,000 shares from NFPL on 16.6.95. Shri Barua refuted the Appellant�s contention that the Takeover Regulations would be attracted only after registration of transfer of shares. According to him the moment a person�s shareholding in a company exceeded bench mark, the Regulations would be attracted. He submitted that when the transferee pays the purchase consideration to the transferor and the share certificates along with the transfer deeds are passed on to the transferee, all the rights and obligations attached to the share would pass on to the transferee. In support of this contention, he cited the Supreme Court �s decision in LIC of India vs Escorts Ltd (AIR 1986 SC 1370). He further submitted, quoting the definition of the expression "acquirer" in the Takeover Regulations, that when a person acquires or agrees to acquire shares with voting rights the regulations would be attracted. Shri Barua submitted that the appellant himself had clearly admitted non-compliance of the requirements of the regulations as could be seen from his pleadings and that describing such a wilful contravention of the law as a technical lapse and attributing the same to ignorance or inadequate understanding of the law, as a technical lapse and attributing the same to ignorance or inadequate understanding of the law, cannot be a valid ground to absolve the appellant from the charge. He further submitted that , but for the discovery of the irregularities by the Income Tax department and the apprehension that the Income Tax Department would report the matter to SEBI and the fear of penal action by SEBI, the appellant would not have come forward. He pointed out that the appellant had not made any offer as has been claimed and as such the question of public response to the offer did not arise.
 

Regarding the imposition of penalty and its quantum. Shri Barua submitted that the offence has to be viewed in the light of the fact that the transaction is of a commercial nature for personal gains, disregarding the principles of equity, fair play and transparency. According to him , taking into consideration the facts of the case as admitted by the appellant and the gravity of the offence, the penalty of one lakh rupees imposed by the Adjudicating Officer cannot be considered high.
 

I have heard the views of the respective parties. Material facts are not in dispute in this case. The appellant on 16.06.95 acquired from NFPL 20,000 shares which accounted for 4% of the capital of ATL. Thereafter, on different dates the appellant bought 3,71,100 shares from few persons through off market deals. Total number of shares held by the appellant in ATL accounted for about 78% of its capital.
 

In terms of regulation 6 , an acquirer who holds five percent or less than 5% shares is required to disclose his aggregate holding in the company to the Stock Exchanges where the shares are listed, within four days of the acquisition. The appellant who was four percent shares was required to make the requisite disclosure to the Stock Exchange on acquisition of shares exceeding the limit of five percent prescribed in the regulation. The appellant failed to do so. Ignorance or inadequate understanding of the legal provisions as the reason for the default put forth by the Id Representative of the appellant is not an acceptable defence. For the admitted facts it is clear that the appellant has clearly violated the provisions of regulation 6 by not disclosing his aggregate holding in the company, to the Stock Exchange, within the time stipulated in the regulations.
 

Regulation 9(1) provides that an acquirer who holds shares carrying ten percent or less of voting rights in a company shall not through negotiations acquire any further shares, which when taken together with his existing shareholdings would carry more than ten percent of the voting rights, unless,the acquirer makes a public announcement to acquire shares at a minimum offer price from the company�s other shareholders. In terms of regulation 13, the public announcement referred to in regulation 9 is required tobe made not later than four days of either the finalisation of the negotiation or entering into an agreement or memorandum of understanding to acquire shares. The expression "acquirer� for the purpose of the Takeover Regulations means any person who acquires or agrees to acquire shares in a company either by himself or with any person acting in concert with the acquirer. Acquisition of those shares carrying voting rights alone would attract the provisions of the regulation. Admittedly, the appellant was already holding 4% shares while acquiring rest of the shares. The appellant�s contention that the purchase of shares of ATL was conditional one subject to compliance of the SEBI regulations and approval, that in the event of non-compliance or SEBI rejecting the deal,the shares would revert back to the sellers, and that the shares will carry voting rights only on entering the transfer of shares in the company�s records, in my view, is devoid of any legal support. The appellant has not substantiated the contention that the transaction was subject to reversal. In any case, the Takeover regulations do not exempt such �adhoc� acquisition from its scope. In this context, it is pertinent to mention that the obligation to comply with the regulation under reference is cast on the acquirer. A combined reading of regulations 9(1) and 13 would clearly show that the time limit prescribed for public announcement to acquire shares is relatable to the finalisation of the negotiations or entering into the agreement or memorandum of understanding to acquire shares. Date of registration of shares acquired in the Company�s register is not the starting point.
 

The argument that the shares will carry voting rights only after registration of the transfer in the company�s register of members is not legally tenable. Provisions relating to company�s shares, voting rights, etc are available in the Companies Act , 1956. According to section 86 of the Companies Act a company�s share capital will be of two kindgs viz (i) equity share capital and (ii) preference share capital. Equity share capital and preference share capital have been defined in section 85. Section 87 deals with the voting rights. Equity share by its very nature carry voting right where as a preference share does not enjoy such built up voting rights, but only in exceptional circumstances, that too for limited purposes. Voting rights is attached to equity share or say, it is built in the moment the share is issued. In the common parlance, share carrying rights means equity share or ordinary share as sometimes called. However, the right to exercise such voting right to the person holding equity share is not automatic. A person holding shares with voting rights will be entitled to exercise that voting right only on entering his name in the company�s register of members required to be maintained under section 150 of the Companies Act . In other words, in order to be eligible to exercise the voting rights attached to a share, physical possession of share certificate alone is not enough, but it is necessary to have the name of the holder entered in the company�s members register. While the voting right is attached to equity share, registration of holding the share enables the holder to exercise the voting rights attached thereto. Admittedly, the shares in question are equity shares and equity shares under the law carry voting rights irrespective of its ownership. The appellant �s contention that the shares in question are not carrying voting right cannot survive in view of the legal position stated above. In this context, I would like to mention that para 84 from the Supreme Court�s decision in Escorts case relied upon by the ld Representative of the Respondent�s is of not any help in deciding the issue under consideration, as the said para is on the interse rights and obligations of transferor or transferee of shares pending registration of the transfer in the company's books.
 

The submission that non compliance of the requirements of regulation 9(1) was not intentional , but due to circumstances beyond the control of the appellant as the records and share certificates were lying with the Income Tax Authorities does not stand to reason in veiw of the fact that the shares were acquired in June 1995 and the search and seizure operation by the Income Tax Authorities was in November 1995.
 

Regulating substantial acquisition of shares and takeover of companies for protecting the interest of investors is one of the functions assigned to SEBI by the Act. For the purpose, SEBI has notified the Takeover Regulations. The Takeover Regulations provide for transparency in the transactions and also for following the principles of equity and fairness of the benefit of the shareholders at large. Regulation 9 which provides for a public announcement to acquire shares of company at a minimum offer price from the other shareholders is one of the core provisions in the Takeover Regulations for protecting the interest of the investors. The SEBI Act provides a maximum penalty of five lakh rupees for the offence of non disclosure of acquisition of shares or failure to make public announcement referred to above. The Act also provides for prosecution of offenders. In view of the stringent penal consequences provided in the Act, it is difficult to accept the appellant�s version that non-compliance of regulations is a mere technical lapse to be viewed leniently.
 

The contention that the penalty of one lakh rupees imposed by the Adjudicating officer is high and that the quantum has been decided arbitrarily, disregarding the factors required to be taken into account as provided under section 15J of the Act , in my view, is not correct. The Adjudicating Officer in his order has clearly stated that while levying the penalty he had taken into consideration the nature of the offence, various other factors and circumstances as also the provisions of Section 15J of the Act. Against the maximum penalty of five lakh rupees provided in the Act, sum of one lakh rupees imposed, in my view is not unreasonable. I do not find any justification to interfere with the impugned order.
 

For the reasons stated above, I do not find any merit in this appeal and accordingly the same is dismissed.