MUMBAI APPEAL NO 12/2000 In the matter of VLS Finance Ltd. Appellant Vs. Shri
P. Sri Sai Ram
Track
Parts of India Ltd.
Respondent No. 2
APPEARANCE Mr.
Mahendra Bhuta
Mr.
Alkesh Goradia
Mr.
Ananta Barua
Mr.
Adesh Tandon
ORDER
This appeal
by VLS Finance Ltd., the Appellant herein, is against the order dated 20.4.2000
made by the Adjudicating Officer, imposing a penalty of Rs.5 lakhs under
section 15H(i) of the Securities and Exchange Board of India Act, 1992
(the Act), based on the finding of an inquiry made by him that regulation
6 of the Securities and Exchange Board of India (Substantial Acquisition
of Shares and Takeovers) Regulations, 1994 (the regulations) has been violated
by the Appellant.
Background of the appeal emerging from the impugned order is as follows: The Appellant
is a public limited company incorporated under the Companies Act, 1956.
It is a listing Non-Banking Finance company, interalia, engaged mainly
in the business of lease financing, hire purchase, financing and financial
consultancy. Respondent No.2 (the Respondent Company) is also a public
limited company incorporated under the Companies Act engaged in the manufacturing
business. The Appellant had advanced a loan of Rs.2 crores (subsequently
raised to Rs.2.40 crores) to the Respondent company, in pursuance of an
agreement dated 18.2.1995 entered into between them. By the said agreement
the Respondent Company under took to secure the said loan by way of demand
promissory note which was to be a continuing security to the Appellant
for the monies which may become due from the Respondent Company. To secure
the loan facility the promoters and their family members and associate
members of the Respondent Company agreed to pledge some of their shares
by way of collateral security with the Appellant. In terms of the said
agreement some of the promoters, directors and family members and group
companies of the Respondent company executed in favour of the Appellant
respective Deed of Pledge dated 18.2.1995 whereby they deposited and pledged
with the Appellant the shares of the Respondent company owned by them,
together with blank transfer form intended as creditors security for repayment
of the loan amount alongwith interest accrued thereon. The Respondent Company
and the various pledgers breached the terms and conditions of Deed of Pledge,
by failure to pledge additional shares by way of security as covenanted
and undertaken in the said agreement. Out of the shares so pledged, 51,
500 shares belonged to one Sameer Bhargava and others of the promoter group.
With the shares pledged, the promoters had provided blank transfer forms
and as per the agreement, promoters were to provide fresh transfer forms
upon expiry of any of the transfer forms for shares pledged, till the repayment
of the loan amount with interest accrued thereon in full. However, the
holders of the said 51,500 shares refused to their commitment and also
refused to provide fresh transfer forms and instead demanded return of
the shares pledged by them. In this context, to protect its interest, the
Appellant got the shares transferred in its name on 27.11.1995. However,
these shares were re-transferred to the original holders on 30.5.1996 in
terms of settlement reached as between the parties in a petition filed
before Company Law Board by the share owners. However, the Securities and
Exchange Board of India (SEBI) took up the matter for inquiry on a complaint
received by it alleging violation of the take over regulations by the Appellant
and appointed by Adjudicating Officer to inquire into the alleged contravention
of regulation 6 of the 1994 Regulations and impose penalty in case so warranted,
as provided under section 15H of the Act. The Adjudicating Officer, after
inquiry came to the conclusion that the Appellant was guilty of violating
regulation 6 and imposed a sum of Rs.5 lakhs as penalty, as provided under
section 15H(i) of the Act.
Shri Mahendra
Bhuta, learned Representative of the Appellant submitted that the Appellant
had not acquired any shares of the Respondent company in contravention
to the provisions of regulation 6 to warrant penalisation under section
15H of the Act. He submitted that the Appellant being a finance company,
during the course of its business had advanced loans to the Respondent
company on mutually agreed terms and conditions and one of such conditions
was to provide collateral security of shares of the Respondent company
owned by its promoters, directors and their relatives and group companies.
It was an accepted condition that the pledgers alongwith the share certificates
will furnish blank transfer forms to enable the Appellant to transfer the
shares so pledged in its name to protect its interest. Accordingly, blank
transfer forms were given to the Appellant along with share certificates.
The holders of 51,500 shares did not agree to furnish fresh transfer forms
in place of the forms provided by them, the validity of which were to expire
due to efflux of time and they were demanding return of the share certificates,
though the loan amount was still due from the Respondent company. In that
context, the Appellant was left with no choice but to get the shares transferred
in its name to protect its interest otherwise the very purpose of pledging
the shares would have become redundant. He submitted that the Appellant
is also a limited company with obligations to protect the financial interests
of its share holders. He pointed out that 51,500 shares were transferred
in its name on 27.11.1995 and the moment the holders of those shares agreed
to furnish blank transfer forms, a mutual settlement was arrived at, the
same was endorsed by Company LAW Board, in a petition filed by the owners
of the said shares, the hares were re-transferred to the original owners
on 30.6.1996, though these shares continued to be part of the collateral
security against the loan amount given to the Respondent company. Shri
Barua submitted that it was never the intention of the Appellant to acquire
shares and that it had no plan to manage or control the affairs of the
company so as to attract the provisions of the 1994 Regulations. The transfer
of shares, which the Adjudicating Officer identified as trigger point attracting
the provisions of the Regulations, was actually exercise of a remedial
measure pre-determined by the parties through an agreement. If the Appellant
had not taken such measure, the pledged shares would not have been of any
security, as the right to dispose of those shares would have gone back
to the owners, after the validity of the transfer forms expired. He submitted
that the Appellant is being targeted to harass in the wake of the ongoing
group rivalry among the promoters of the Respondent Company. He submitted
that group rivalry had virtually brought the business activities of the
Respondent Company to stand still.
Shri Bhuta
cited the observations made by the Adjudicating Officer in para 6.8 of
the impugned order as endorsing the Appellant�s view point that the shares
were transferred by the owners of those 51,500 shares to the appellant,
by way of pledge to secure the loan given by the Appellant to the Respondent
company and the Appellant did not own these shares. Shri Bhuta submitted
that the Adjudicating Officer having admitted that the Appellant was not
the owner of the shares erred in concluding that the transaction attracted
regulation 6. He submitted that the finding of the Adjudicating Officer
that the act of getting the equity shares transferred in its name, in the
context of refusal by the pledgers of the respective shares to provide
fresh transfer forms is acquisition of shares, in terms of the regulation
is not legally tenable. He has contended that any transaction which does
not result in change in ownership is not an acquisition. In support of
this version he cited Supreme Court�s observation in Devidas Gopal Krishnan
Vs. State of Punjab (AIR 1967 SC 1895) that "Acquisition is the act by
which a person acquires property in a thing. `Acquire� is to become the
owner of the property. One can, therefore, acquire a property either by
voluntary or involuntary transfer". He submitted that in the light of the
said view of the Supreme Court, ownership is an essential and integral
part of any act or activity to be termed as acquisition. According to the
learned Representative the expression "owner", unless a statute in its
definition connotes otherwise, means availability of all rights attached
to property on permanent basis till the ownership continues without interference
from other and to the exclusion of others. He submitted that in the instant
case, the beneficial owners of the shares were persons other than the Appellant
and the rights of the Appellant as per agreement were not unfettered. The
Appellant, therefore, cannot be treated as absolute owner of the shares
in question. He also cited respondent SEBI�s version in the case of acquisition
of shares of ACC Cements Ltd. by Gujarat Ambuja Cements Ltd. that "Acquisition
of the share did not mean a change in the control unless the buyer had
the majority on the Board of Directors". In this context the learned Representative
submitted that the Appellant had got transferred just 7.36% of the capital
in its name, as an ad-hoc measure, without any object of effecting any
change in the structure of the Board of Directors or for exercising any
type of control over the Respondent company. In the Adjudicating Officer�s
own version the Appellant was not the owner of the shares in question.
But still he held the Appellant guilty of non-compliance of regulation
6 of the 1994 Regulations. Referring to the several course of actions available
to the Appellant as raised by the Respondents, the learned Representative
submitted that it was for the Appellant to decide as to which course was
to be adopted in its interest. He submitted that vide letter dated 10.3.1995
placed at Annexure 1 to the appeal, the Appellant had served notice on
the Respondent company stating its decision to transfer the shares in its
name in case the said Respondent fails to comply with the undertaking given
in the agreement. According to him the allegation that the pledge property
was acquired without notice was baseless. He denied the charge that the
transaction in question was acquisition in terms of 1994 Regulations.
Shri Ananta
Barua, appearing for the Respondent SEBI, submitted that admittedly the
Appellant had acquired 51, 500 shares constituting 7.36% of the paid up
capital of the Respondent company, whereby attracting the provisions of
the 1994 Regulations and 1997 Regulations. Since the Appellant became the
registered holder of 51, 500 shares of the Respondent Company, it became
the legal holder of the said shares. He referred to the definition of the
expression "acquirer" provided under regulation 2(b) of the 1994 Regulations
and submitted that as per the said definition, the Appellant is an acquirer.
He further pointed out that for attracting the provisions of regulation
6 of the 1994 Regulations and submitted that as per the said definition,
the Appellant is an acquirer. He further pointed out that for attracting
the provisions of regulation 6 of the 1994 Regulations, it was not necessary
that the person should own the shares or control the affairs of the Target
Company. Any acquirer holding shares as acquired in the manner prescribed
in the regulations would be covered for the purpose of the regulation.
He further submitted that the regulation does not exclude from its ambit
the acquisition of shares by effecting transfer of the pledged shares owned
by the defaulters. In fact wherever exemption was considered necessary,
the Regulations have provided the same explicitly. Acquisition of the shares
in the instant case is not an exempted acquisition. He submitted that intention
to not to interfere in the management of the Respondent company or to acquire
control over it does not absolve the Appellant from the statutory obligation
of complying with the provisions of regulation 6. He further submitted
that the view taken by the Respondent in the case of acquisition of shares
of ACC Cements ltd. by Gujarat Ambuja Cements cannot be applied to the
instant case as it was a matter covered under 1997 Regulations and not
under 1994 Regulations.
Mr. Barua
submitted that if a view is taken that shares acquired by way of transfer
of pledged shares are not covered under the Regulations, the very object
of making the Regulations will be negated as interested persons will first
create an artificial pledge and thereafter get the shares transferred in
their name and through this route company�s management / control will be
acquired with impunity. He further submitted that the very transfer of
shares by the Appellant in its name was wrong, even if it is assumed that
the pledgers had defaulted as the transfer was done without giving proper
notice to the parties as required under law.
According
to Shar Barua in terms of regulation 6(1) an acquirer who holds 5% or less
than 5% shares in a company, and acquires more than 5% shares, unless covered
under the specific exemption provisions of the 1994 Regulations, is required
to disclose the aggregate of his holding therein to the company and also
to all the stock exchanges where the shares are listed within the time
frame as stipulated in the regulation. He submitted that transfer of the
pledged shares without following the statutory requirement was not the
only remedy available to the Appellant to protect its interests. The Appellant
was at liberty to initiate civil proceedings or to seek specific performance
of the concerned agreement. The submission of the Appellant that the promoter
groups were fighting and the Respondent company had become non-functional
because of such group fighting, etc. are not of any consequence as far
as the conduct of the Appellant is concerned with reference to the compliance
of the provisions of regulation 6.
The Respondent
Company was represented by Mr. Adesh Tandon in the hearing. The learned
Representative endorsed the submission made by the Respondent SEBI and
submitted that the cope of regulation 6(1) was wide enough to cover the
instant transaction as sub-clause (c) of section 6(1) refers to acquisition
in any other manner not covered by sub-clause (a) and (b) of the regulation.
He submitted that the fact that the Appellant acquired 51, 500 shares constituting
7.36% of the equity capital of the company on 27.11.1995 remains admitted.
It is on record that the Appellant had failed to report the said acquisition
to the Respondent Company and the concerned stock exchanges within the
stipulated time. It is also an undisputed fact that with the registration
of the shares held by the Appellant in the Respondent Company�s register,
the Appellant became its member. It was of no great significance as to
in what circumstances the Appellant acquired shares and for what purpose
it was transferred. The fact is that the Appellant acquired shares beyond
the limit prescribed by regulation 6 warranting compliance of the requirements
of the regulation but did not do so and thereby attracted the penal consequences.
Learned
Representative submitted that the Takeover Regulations are statutory regulations.
Private contract cannot over ride the substantive provisions of the law.
The contention that the interse agreement enabled the Appellant to transfer
the ownership of those shares does not mean that the transfer is immune
from the requirements provided under the law. He submitted that ownership
of the shares is not the deciding factor as contended by the Appellant,
the right to vote is important. The Appellant acquired the voting right
by getting its name entered on the Respondent Company�s register of members
on 27.11.1995. He pointed out that the Appellant was not short of other
remedies to safeguard its interest and it could have protected its interest
by pursuing one of those remedies, without resorting to a measure ignoring
the attendant legal requirements.
Since
the Appellant had relied on an order of Company Law Board, based on which
the shares in question were re-transferred to the original holders and
the copy of the order was not readily available at the time of hearing,
the Appellant was directed to file a copy of the same in the Tribunal within
15 days from the date of hearing and simultaneously forward a copy to the
Respondents. The Respondents were asked to file their submission thereon
within 7 days of receipt of the order copy from the Appellant. It is seen
that even though the Appellant filed a copy of the relevant order on 26th
September 2000 stating that copy of the order has been served on the respondents,
they did not file any reply / material in this regard. I have perused the
said order. It is seen that Company Law Board Order is nothing but an endorsement
of the mutual settlement arrived at by the Appellant and the parties, paving
way for re-transfer of the shares to the original holders.
It is considered necessary to have a close look at the substantive portion of the impugned order at this juncture. In para 6.9 of the order, the Adjudicating Officer has summarised his findings as under: "I find that VLS is a Merchant Banker, VLS is not like an ordinary person, who may not have knowledge of SEBI Regulations. As a Merchant Banker, they should be particular about compliance of SEBI Regulations. There is no specific provision in the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1994 to indicate exemption in respect of acquisition of shares for securing a loan transaction through pledge of shares. The transaction in this case related to acquisition of shares of more than 5% of the paid up capital of TPIL. Those shares stood transferred in the name of VLS on 27.11.1995. That means the name of VLS appeared in the Register of shareholders of the company w.e.f. 27.11.95. VLS was required to disclose the aggregate of the shareholdings to the Stock Exchanges of Delhi and Kanpur where the shares of the Company were listed. That was required to be done within 4 days from the date of the acquisition as per Regulation 6(1) and 6(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994. Normally, the acquirer was required to make such disclosure within 4 days from the date of acquisition of shares i.e. the date of the agreement (signing of Transfer form). In this case, the acquirer should have at least made such disclosure within 4 days from 27.11.95, the date of transfer in their favour in the books of the company. VLS did not do that. As such, VLS violated Reg (6) ibid and consequently, Section 15(H)(i) of the Securities and Exchange Board of India Act, 1992. Section 15(H)(i) provides that a person who violates that provision shall be liable to a penalty not exceeding Rs.5 lacs."
"In view of what is stated above, I find that penalty can be levied in these legal proceedings in respect of violation of Regulation 6 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994. In para 6.9 above, I held that VLS Finance Ltd. the acquirer violated Regulation 6 ibid and consequently violated Section 15(H)(i) of the Securities and Exchange Board of India Act, 1992. Therefore, in terms of Section 15H(i) of the Securities and Exchange Board of India Act, 1992 a penalty of Rs.5, 00,000/- (Rupees Five lacs) is imposed on VLS Finance Ltd."
The charge
that the Appellant became the holders of 51, 500 shares of the Respondent
company, which constituted 7.36% of its paid up capital stands proved in
the light of the Appellant�s own submission. The said acquisition exceeded
the statutory limit and warranted reporting as required under regulation
6 of the 1994 Regulations also stands established. However, it is felt
that the decision of the Adjudicating Officer, imposing Rs.5 lakhs as penalty
invoking the provisions of section 15H need detailed examination. In this
context, it is considered necessary to have a close look at the provisions
of regulation 6 of the 1994 Regulations and section 15H of the Act. Regulation
6 is as under:
"Acquisition of 5% and more shares of a company:-
(b) by one or more transactions; or (c) in any other manner not covered by (a) and (b) above,
(2) The disclosures mentioned in sub-regulation (1) shall be made within four working days of: -
(ii) the
acquisition of shares, as the case may be.
"Penalty for non-disclosure of acquisition of shares and takeovers. 15H. If any person who is required under this Act or any rules or regulations made thereunder, fails to:-
(ii) make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakh rupees". It is
well settled that mere mention of a wrong provision of law, when the power
exercised is available even though under a different provision is by itself
not sufficient to invalidate the exercise of that power. There is a plethora
of Supreme Court decisions of this dictum. Keeping in mind the said principle
I have perused the provisions of the Act, to find out whether there is
any other provision in the Act, under which monetary penalty as levied
by the Adjudicating Officer is leviable for default under regulation 6.
In my effort, I stumbled on the provisions of section 15A(b) of the Act.
Under the said section if any person who is required under the Act or any
rules or regulations made thereunder "to file any return or furnish any
information, books or documents within the time specified therefor in the
regulations, fails to file return or furnish the same, he shall be liable
to a penalty not exceeding five thousand rupees for every day during which
such failure continues". As far as the default part is concerned, i.e.
failure to report the aggregate share holding of the acquirers, to the
stock exchange and the company, the same squarely fits into the ambit of
the said section 15A(b). Even though this section does not refer to the
requirement to `disclose�, on a realistic interpretation it can be concluded
that the, failure to disclose the holdings to the company and the concerned
stock exchange within the stipulated time by an acquirer would come under
the purview of the section.
Now comes the question as to whether the penalty levied / leviable under section 15H can be considered as the penalty levied / leviable for the default identified under section 15A(b). It is seen that section 15H provides for a penalty for exceeding Rs.5 lakhs where as section 15A(b) provided for a penalty not exceeding five thousand rupees for every day during which such failure continues. It appears that the wording of these sections that the default under section 15H(i) is a one time default where as the default under section 15A(b) is a continuing default and penal provision has designed separate penalty to meet with the defaults under these 2 sections taking into consideration the nature of the defaults. In any case, in terms of section 15J of the Act while adjudicating quantum of monetary penalty, the Adjudicating Officer is required to have due regard to the following factors, namely: -
(b) the amount of loss caused to an investor or group of investors as a result of the default; (c) the repetitive nature of the default. Since
it is not clear as to what weighed in the mind of the Adjudicating Officer
and which factor in section 15J persuaded him to impose the maximum penalty,
it is not possible for this Tribunal to substitute the said penalty of
Rs.5 lakhs as penalty under section 15A(b) of the Act. In this context
it is also seen from sub-section (a) of the same section 15A that for similar
default involving failure to report certain matters to SEBI, the maximum
penalty leviable is only Rs.1.50 lakhs. It is for the Adjudicating Officer
to dispassionately decide as to whether any monetary penalty is justified
in the facts and circumstances of the case, and if the imposition of penalty
is justified to decide the quantum of penalty taking into consideration
of factors provided under section 15J with reference to default under regulation
6, made out in the order. For the purpose, the matter need be remanded
to the Adjudicating Officer and consequently the impugned order need to
be set aside. I do so accordingly. It is made clear that the Adjudicating
Officer, will decide the penalty, if considered necessary, taking into
consideration all the relevant aspects and legal provisions including the
views expressed by the Supreme Court in Hindustan Steel Ltd. Vs. State
of Orissa (AIR 1970 SC 253) and also after giving the Appellant a reasonable
opportunity to putforth its point of view.
For the
reasons stated above, the appeal is allowed by way of remand.
(C.
ACHUTHAN)
Place:
Mumbai
PRESIDING OFFICER Date: 31.10.2000 |
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