In the matter of:

Shin Ho Petrochemical Co. Ltd                                   Appellant

Vs.

Securities & Exchange Board of India                       Respondent
 

APPEARANCE:

Mr. S.V.Narasimha Rao
Chief Executive
Shin Ho Petrochemical (India)Ltd

Mr. T.S.V.Panduranga Sharma
Chartered Accountant                                                    for Appellant

Mr. Ananta Barua
Division Chief, SEBI

Ms Babita Rayudu
Legal Officer, SEBI                                                      for Respondent
 

(Appeal arising out of the order dated 9.10.2000 made by the Adjudicating Officer appointed by the Securities and Exchange Board of India)

Shin-Ho Petrochemical (India) Ltd, (the Company) earlier known as Shin-A Chemical (India) Ltd., was incorporated in 1989 as a private limited company. It was converted into a public limited company, in April 1991. The company is engaged in the manufacture and sale of expandable polystyrene resin. The company made a public issue of shares in 1993. The shares of the company are listed on the Madras Stock Exchange and Bombay Stock Exchange.
 

Shin-A Corporation of South Korea was the foreign collaborator and joint venture partner in the company�s business. The said Korean Company was holding about 13% of the paid up capital of the company. In 1995-96, the said Korean Company was taken over by Shin-Ho group, also of South Korea, and the name of the Korean Company was changed to Shin-Ho Petrochemical Company Limited. As a result of the preferential issue of shares made by the company the foreign collaborator�s holding in the company�s capital increased to 51%. Subsequently Government approval was obtained by the company to allot upto 74% of its capital to the said Shin-Ho Petrochemical Company Ltd., (the Appellant). In 1997, the Appellant acquired 5, 75, 200 shares (accounting for 4.86% of the capital) from 26 Indian shareholders. The acquisition was reported to the Respondent by the company vide its letter dated 27.10.1997. In the said letter it was also stated that the transaction is exempted from the requirement of regulation 11 etc., as it is covered under regulation 3 (1) (e) (iii) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Regulations). However, the Respondent did not view that it was a transaction between the promoters and foreign collaborator entitling exemption and decided to enquire into the matter. Accordingly an Adjudicating Officer was appointed by the Respondent vide its order dated 4.8.2000 "to enquire into and adjudge contravention of sub section (ii) of section 15H of the Securities and Exchange Board of India Act, 1992 (the Act) read with sub clause (iii) (a) of clause (e) of sub regulation (1) of Regulation 3 read with sub regulation (2) of Regulation 11 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (the Regulations) by Shin-Ho Petrochemicals Co. Ltd., Korea, in the matter of acquisition of shares of Shin-Ho Petrochemicals (India) Ltd". The Adjudicating Officer after inquiry came to the conclusion that the acquisition did not come under the purview of regulation 3 (1) (e) (iii) for availing the benefit of exemption from complying with the requirements of regulation 11 and imposed a sum of Rs.5 lakhs as monetary penalty for violating the provisions of the said regulation vide order dated 9.10.2000. The Appellant has challenged the said order in the present appeal.
 

Shri S.V.Narasimha Rao, learned Representative of the Appellant referred to various documents filed along with the appeal to show that the share transaction was interse the promoters and the foreign collaborator, and thereby covered under regulation 3 (1) (e). He submitted that the transferee i.e., the Appellant, is the foreign collaborator of the company and this fact has been admitted by the Respondent. Shri. Rao contested the Respondent�s contention that the transferors are not promoters covered by the definition of "promoters" available under section 2 (h) of the Regulations. According to Shri Rao, Shri. V.Ramesh, the managing director of the company is a promoter of the company and the 26 transferors are all his relatives and associates, associated with him in promoting the company. He submitted that the Respondent�s contention that Shri. V.Ramesh is not a promoter of the company is contrary to the evidence on record. In support, citing documentary evidence he stated that the original collaboration agreement was signed between Shri.V.Ramesh and Shin-A Corporation of Korea. Shri. Ramesh subsequently transferred this agreement in favour of the Indian Company (page 9 of the prospectus). Industrial license was in his name. Shri. Ramesh also signed the original joint venture agreement with the Korean Company. Under the heading "other ventures promoted by the Indian promoting company and/or its promoters", details of Navabharat Industries Linings and Equipment Limited are given (page 7 of the prospectus). No other individual or corporate body mentioned in the prospectus had even the remotest connection with Navabharat Industrial Linings & Equipment Limited. The particulars of this company were provided only because Shri. Ramesh was its managing director, and was a promoter of Shin-A Chemicals. He further stated that Shri. Ramesh entered into a Promoters� agreement with Tamilnadu Industrial Development Corporation (TIDCO) for setting up the project and (page 18 of the prospectus) also gave personal guarantees to all the financial institutions for the moneys they lent to the company. Shri. Rao stated that Shri. Ramesh has been a Director of the company from its inception (page 16 of the prospectus) and subsequently became its Managing Director, a position, which he holds even on date. According to him as per regulation (2) (1) (h), definition of a promoter includes a person or persons who are in control of the company. Shri. Ramesh by virtue of being the Managing Director of the company is a person in control of the management of the company. He reiterated that in the light of irrebuttable evidence, it has to be accepted that Shri. Ramesh is a promoter of the company. He further submitted that the share holding of Shri. Ramesh and his relatives need be taken into consideration. In this context he referred to para 4.4 of the adjudication order wherein the names and share holdings of 27 transferors have been listed and stated that shareholders at sl.No.1, 2 and 3 are close relatives of Shri. Ramesh - Ms. V Rajeshwari is his wife, Ms. V Shilpa is his daughter and Mr. V Sandeep is his son - and the total number of shares transferred by them to the Appellant accounted for 3.92% out of the 4.86% shares involved in the transaction. Shri. Rao submitted that the remaining .94% shares were transferred by 24 transferors. The Respondent�s submission that the names of the transferors were not mentioned as promoters in the prospectus is devoid of merit, as all that the prospectus requires is to classify the promoters and there is no requirement to state therein the name of each and every promoter. According to him the fact that the transferors are promoters is borne out of the records that their names were shown as promoters in the list filed with stock exchange. He submitted that the letter filed by the company with the stock exchange as accepted by them would prove this fact. He submitted that a true copy of the same was made available to the Respondent. Shri. Rao submitted that the Respondent had refused to accept the transferors as promoters because they were numbering 26 and some of their holding was very low. In the absence of any restriction on the number of promoters and minimum holding of shares held to consider as a promoter, the Respondent�s decision to ignore them as promoters should not be agreed to. He further submitted that in the prospectus dated 2.4.1993 the company had clearly stated the quantum "reserved to promoters" and also the number of equity shares held by "Director�s friends and relatives". He referred to the information under para "previous issue of shares for cash" appearing on page 16 of the prospectus that " the company had issued 23, 12, 525 equity shares of Rs. 10 each for cash at par and the same has been allotted for the aggregate face value of Rs. 2, 31, 25, 250 to the Indian and Korean promoters of the company" He submitted that as the prospectus was issued by the company prior to the notification of the Regulations in 1997, the definition of promoters provided in the 1997 Regulations, was not applicable to them. The expression promoter need be understood as it was commonly understood at the time of allotment. In this context he referred to section L of SEBI guidelines for Disclosure and Investor Protection issued in 1992 and also the related clarifications. Shri. Rao submitted that the transferors are friends / associates /relatives of Shri. Ramesh and as such constituted part of the promoter group. Therefore the transaction comes well within the exemption provided under regulation 3 (1) (e) (iii) (a). He also submitted that acquisition of additional shares by a promoter in due course will not change his status as a promoter to exclude his holdings from the promoter group holding. A promoter is a promoter irrespective of the variation in his holding.
 

Shri. Rao further submitted that both the transferor group (Indian promoters) and the Appellant transferee (Foreign collaborator) held more than 5% of the shares before and after the transfer of shares fulfilling the eligibility criteria. The learned Representative submitted that the Adjudicating Officer�s interpretation of regulation 3 (1) (e) (iii) (a) that interse transfer of shares between promoters cannot be recognized for regulation 3 (1) (e) (iii) unless the transferor and transferee each were holding 5% of the capital, is erroneous. In the present case, the Indian promoter group held 24.58% of the share capital before the transfer and the foreign collaborator held 51%. Even after the transfer of the shares, Indian promoter�s holding continued to be above 5%. He submitted that if the Adjudicating Officer�s view is taken, a promoter with 20% share holding can sell to another promoter holding 25% of the capital. But a small promoter holding just 100 shares can never sell his shares to his advantage to another large promoter as his shareholding being less than 5% of the paid up capital without attracting the Regulations. This cannot be the spirit of the Regulations, he claimed.
 

Shri. Rao also rebutted the Adjudicating Officer�s view that the Appellant did not notify the exchanges at least 4 days in advance, of the proposed acquisition, stating that it is contrary to the facts as the proposed acquisition was reported to the Madras and Bombay stock exchanges well in advance of the acquisition as required under regulation 3 (3) and also to the Respondent under regulation 3 (4). He also submitted that the transaction being interse transfer of shares between promoters, and foreign collaborator, it was in accordance with the Regulations and that as a result of the transaction there was no change in the control or management of the company. Shri. Rao submitted that the findings of the Adjudicating Officer was without appreciating the factual and legal position.
 

Shri. Ananta Barua, learned Representative of the Respondent, who was also the Adjudicating Officer, submitted that in terms of the Regulations, any acquirer who acquires shares or voting rights which entitles him to exercise more than 10% or more of the voting rights in the target company is required to make a public announcement, in accordance with the Regulations. But there are certain cases of acquisition enumerated under regulation 3, exempted from complying with the requirements of regulation 11 etc., But such exemption is available subject to fulfillment of certain requirements specified in the said regulation. According to Shri. Barua, for availing exemption under regulation 3 (1) (e) (iii) i.e., interse transfer of shares between the Indian promoters and foreign collaborator of the Target Company, it is necessary that the transferor(s) and the transferee(s) have been holding individually or collectively not less than 5% shares in the Target Company for a period of atleast 3 years prior to the proposed acquisition. Shri Barua further submitted that the acquirer is mandatorily required to report the details of the said acquisition to the stock exchange where the shares are listed and also to SEBI in accordance with the provisions contained in regulation 3. Learned Representative submitted that since the eligibility requirements have not been fulfilled, the transaction cannot avail the benefit of exemption, and it was therefore necessary to comply with the requirements of regulation 11. Since the requirement of the said regulation was not complied with, penalty as provided under section 15H(ii) of the Act attracted.
 

On the question as to whether the transferors are promoters or not Shri. Barua reiterated, the version in the Adjudication Order. He submitted that the claim of the Appellant that the transferors of shares are promoters is contrary to facts. Even though prima facie it appeared that 26 resident share holders are part of the Indian Promoter category, they are not to be considered so as they did not fit into the definition of the term promoters in regulation 2 (h), as none of them was named in the offer document dated 2.4.1993. He submitted that nowhere in the prospectus even Shri. Ramesh has been named as a promoter. According to Shri. Barua, Shri. Ramesh cannot be considered as a promoter of the company merely for the reason that he is its Managing Director. According to him, Managing Director of a company is only an executive officer of the company and not a promoter as such. Citing the definition of the expression "promoter" provided in the Regulation Shri. Barua stated that Shri. Ramesh is not a person who has sufficient shareholding or stake in the company to appoint majority of directors or person who is in control of the company. Shri. Barua also submitted that definition of promoter available in DIP guidelines is of no help for the purpose, in view of the specific definition of the expression �promoter� given in the Regulations. He further submitted that the group of transferors were collectively holding only 4.86% of the share capital against the prescribed minimum holding of 5% stake, in the 3 years preceding the transfer and as such did not fulfil the conditions to avail exemption as provided in the regulation.
 

I have carefully considered the rival contentions. Securities and Exchange Board India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 provides certain ground rules to be followed by parties in the matters relating to substantial acquisition of shares and takeovers. The objective of the Regulations is to provide an orderly framework within which the process of substantial acquisition of shares could be conducted. Justice Bhagwati Committee report, based on which the 1997 Regulations have been drafted, had clearly stated that the Regulations for substantial acquisition of shares and takeovers should operate principally to ensure fair and equal treatment of all share holders in relation to substantial acquisition of shares and takeovers. While on the one hand the Regulations should not impose conditions, which are too onerous to fulfill and hence make substantial acquisition and takeover difficult, at the same time they should ensure that such process do not take place in a clandestine manner without protecting the interests of the shareholders. Regulation 3 providing exemption to certain type of acquisitions was included in the Regulations, precisely in tune with the objectives stated above.
 

As already stated one of the measures provided in the Regulations, to protect the interests of shareholders in the target company is found in regulation 11. Provisions of the said regulation 11 as applicable to the present case at the relevant point of time are extracted below.

However, certain acquisitions, crossing the bench mark provided in regulation 11, are not required to make public announcement. They are specifically exempted. Since these are specific exemptions, it is necessary to strictly interpret the eligibility criteria provided for the purpose, lest the exemption provision will be misused. The cases of acquisition which enjoy exemption from the scope of regulation 11 are stated in regulation 3 (1). One of such exempted acquisitions, is interse transfer of shares amongst certain entities, as provided under regulation 3 (1) (e). In terms of clause (iii) of the said regulation, exemption is available to interse transfer of shares amongst:

"(iii)(a) Indian promoters and foreign collaborators who are shareholders;

As could be seen from the text of regulation 3 (1) (e) (iii) extracted above that to avail exemption under sub clause (iii) "the transferor(s) as well as the transferee(s) in sub clause (a) and (b) have been holding individually or collectively not less than 5% shares in the target company for a period of at least three years prior to the proposed acquisition". Even if it is assumed for argument sake that the transferors are promoters, that by itself is not enough to avail exemption. Size of their pre-acquisition holding is also relevant. The Appellant�s submission that since the promoters and foreign collaborators were holding 24.58% and 51% of the share capital of the company respectively before the transfer, the requirement is fully met with, is difficult to accept. The proviso refers to the holding of shares by the actual transferor(s) and transferee(s) and not the total holding of the promoter group to which the transferors stated to belong, as well as the total holding of the foreign collaborators as a whole. It is evident from the factual position made available in the proceedings, that even though the promoter group as a whole was holding 24.58% of the share capital, the holding of the transferors was just 4.86% which is less than the minimum of 5% shareholding stipulated in the regulation. Since the benefit of exemption under regulation 3 (1) (e) (iii) is available only on fulfillment of the requirement of the stipulated 5% pre acquisition holding by the transferor(s) as well as the transferee(s) and that in the instant case the transferors� holding was short of the said minimum, the acquisition fails to get the benefit of exemption available under 3 (1) (e). Consequently the exemption from complying with the requirements of regulation 11 is also not available to the Appellant. In any case for want of adequate shareholding by the transferors, as stipulated in the proviso to the regulation 3 (1) (e) (iii), exemption is not available to the acquisition, I do not consider it necessary to look for a definite answer to the question as to whether the transferors are promoters or not, for the purpose of disposing the present appeal. Even if it is established that they are promoters, still the exemption would not be available to the transaction for the reason stated above.
 

The Appellant�s main grievance is on the finding of the Adjudicating Officer that the acquisition is not exempted in terms of regulation 3 (1) (e) (iii) resulting in imposition of penalty. The Appellant has not aired any grievance against the actual quantum of penalty imposed. In the absence of any challenge from the Appellant to the decision of the Adjudicating Officer imposing the maximum penalty of Rs. 5 lakhs provided under section 15H(ii), I do not consider it necessary to examine the merits of the said decision.
 

It has been established that the acquisition of shares by the Appellant is not entitled to avail of the exemption provided under regulation 3 (1) (e). Therefore the Appellant was required to comply with the requirements of regulation 11(1). Having failed to comply with the said requirements, imposition of penalty in terms of section 15H(ii) is justified.
 

For the reasons stated above, the impugned order survives.
 

The appeal is dismissed.