In the matter of:

(a) Appeal No. 3/2001

Arya Holding Limited                                                Appellant
Vs.

Shri P. Sri Sai Ram, Adjudicating Officer
Securities & Exchange Board of India                    Respondent

(b) Appeal No. 4/2001

Zeus Management Consultants Pvt. Ltd                Appellant

Vs.

Shri P.Sri Sai Ram, Adjudicating Officer
Securities & Exchange Board of India                  Respondent
 

(c) Appeal No. 5/2001

Sri Vithesa Holding Pvt.Ltd                                   Appellant

Vs.

Shri P.Sri Sai Ram, Adjudicating Officer
Securities & Exchange Board of India                 Respondent
 

APPEARANCE:

Mr. Digish Shah
Authorised Representative                                    for Appellants
 

Mr. Ananta Barua
Dy. Legal Adviser, SEBI                                       for Respondent
 
 

(Appeals arising out of the orders dated 13.12.2000 made by the Adjudicating Officer, Securities & Exchange Board of India)
 
 

All the three adjudication orders under challenge, made on 13.12.2000 by Shri P. Sri Sai Ram relate to acquisition of shares by the Appellants, in Fidelity Finance Ltd. Taking into consideration that the issues to be considered in these appeals are common, with the consent of the parties, the appeals were heard together and a common order is passed. The Appellants in all the three appeals were represented by Shri Digish Shah. Respondent was represented by ShriAnanta Barua, its Dy. Legal Adviser. But for slight change in the quantum of shares acquired in one case, the facts considered relevant for deciding these appeals are common.
 

Arya Holdings Ltd had acquired 37, 35, 000 equity shares of Fidelity Finance Ltd (the company) on 15.5.1998 in pursuance of a preferential allotment made by the company. As a result of the said acquisition Arya Holding�s equity stake in the company rose from 4.15% to 24.9%. Zeus Management Consultants Pvt. Ltd., also acquired 37, 35, 000 equity shares of the company pursuant to the said preferential allotment resulting in its holding reaching 24.9% from 4.15%. Sri Vithesa Holdings P.Ltd, the Appellant in appeal No. 5/2001 had acquired 25, 30, 000 equity shares of the company pursuant to the said preferential allotment and as a result thereof its share holding in the company increased from 11.9% to 20.31%. In terms of regulation 3 (1) (c) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Regulations) (i) a copy of the Board Resolution in respect of the proposed preferential allotment is required to be sent to the concerned stock exchange and (ii) also to make certain disclosures relating to preferential allotment as specified in clause 3 (1) (c) (ii) in the notice of the General meeting called for the purpose of consideration of the preferential allotment. The Respondent viewed that the notice of the General Meeting dated 17.2.1998 issued by the company for the purpose of considering the preferential allotment did not contain details regarding change in the Board of Directors (ii) changes in the voting rights and (iii) changes in shareholding pattern. Therefore, the Respondent ordered adjudication in the matter and for the purpose Shri P.Sri Sai Ram was appointed as Adjudicating Officer in all the three cases. The Adjudicating Officer, after holding enquiry came to the conclusion that the notice of the General meeting did not disclose some of the requirements as required in regulation 3 (1) (c) (ii); the board resolution was not sent to the Stock exchanges as required under clause (i) of the sub regulation; and based on that finding viewed the Appellants guilty of failure to comply with the requirements of the Regulations and imposed a sum of Rs. 25, 000 as monetary penalty on each of the Appellants. The Appellants have challenged the said orders in the present appeals.
 

Shri Digish Shah, Authorised Representative of the Appellants, submitted that the shares were allotted to the Appellants in terms of the consent of the members of the company obtained in the resolution passed in the general meeting held on 18.3.1998. He submitted that the company vide it�s notice dated 17.2.1998 had informed the share holders about its proposal to issue one crore equity shares of Rs.10 each, aggregating to Rs.10 crores on preferential basis to promoters and associates including the three Appellants herein. In support he relied on the copy of the notice dated 17.2.1998 annexed to the appeal. Referring to the charge of non-compliance of the requirements of regulation 3 (1) (c) (i) Shri Shah submitted that the company had forwarded vide its letter dated 20.2.1998, certified true copy of the board resolution passed on 17.2.1998 to stock exchanges at Ahmedabad, Mumbai and Chennai. With reference to the charge of non-disclosure of the details in the notice of the general body meeting Shri Shah submitted that it has been clearly mentioned in the explanatory statement at item No.4 of the notice dated 17.12.1998, that the proposed allotment will not result in the change in control over the company and supported this by referring to the pre and post acquisition structure of the Board furnished alongwith the appeal. Shri Shah submitted that the change in voting right of the persons, was inadvertently not disclosed in the notice and that this omission is purely technical in nature. Referring to the requirement of disclosure of changes in the share holding pattern in the company, he submitted that at item No.4 in the explanatory statement to the notice it has been clearly mentioned that the allottees� holding will not exceed 25% of the expanded capital. He admitted that the detailed break up was not given and this omission was not of any major consequence to the interests of the investors of the company, that this was only a technical lapse. He also submitted that in view of compliance of the substantive requirements of regulation 3 (1) (c) the benefit of exemption provided under regulation 10 may not be denied to the Appellants.
 

Shri Shah also submitted that the requirements of regulation 3 (3) have been complied without any undue delay and that in any case the Adjudicating Officer in para 6.3 of the impugned order has also viewed the slight delay leniently and spared the Appellants from the pain of penalty. Shri Shah submitted that the alleged failure of full disclosure in the notice has not in any way adversely effected the interests of anybody. The Appellants have not benefited in any way as a result of the acquisition as they acquired the shares @ Rs.10/- per shares as against the then prevailing market quotation of Rs. 4.25 in Chennai Stock Exchange and Rs. 3/- in the Mumbai Stock Exchange. He also submitted that the financial position of the Appellants is very bad and they may not be burdened with liability to pay the monetary penalty as ordered by Adjudicating Officer.
 

Shri Ananta Barua, appearing for the Respondent submitted that the Appellants had not forwarded the copy of the Board Resolution to the concerned stock exchanges as required under regulation 3 (1) (c) (i), but only a letter stating therein the date of the next board meeting, was forwarded to the exchanges on 11.2.1998. Referring to the disclosure to be made in the notice of the general meeting, the learned Representative submitted that the notice is required to disclose (i) the identity of class of the proposed allottees (ii) the price at which the allotment is proposed (iii) the identity of allottees and reasons for allotment (iv) consequential changes, if any, in the board of directors of the company and in voting rights (v) share holding pattern of the company (vi) would be change, if any, in the control over the company. According to the learned Representative the mere statement in the notice that "the shares which may be issued on preferential allotment basis are likely to be offered for Sri Vithesha Holdings P.Ltd, Arya Holding P.Ltd, Zeus Management Consultants P.Ltd., Ashok Muthanna and such other associates of the promoters" is not sufficient disclosure of the identity of the proposed allottees as required. The learned Representative further submitted that a statement that "the preferential allotment shall not result in change in control over the company" is deficient as the same did not clearly specify that there was no change in the Board of Directors or state the names of the persons who will continue to be in control. According to Shri Barua stipulations of disclosure in the regulation are mandatory and any deviation should be seriously taken note of and the acquirer has to face the consequences for non-compliance of the same. Learned Representative submitted that the Appellants have admitted to have failed to comply with the requirement of Regulations 3 (1) (c) and as such they are not entitled to avail of the exemptions from the compliance of the requirements of regulations 10 and consequently provisions of section 15H are attracted. It was also submitted that even though the said section provides for a maximum penalty of rupees five lakhs for the failure, the Adjudicating Officer has imposed only rupees twenty five thousand as penalty in each case, and as such, no injustice has been done to the Appellants warranting the Tribunal�s intervention as sought for by the Appellants.
 

From the facts of the case as available before me it is seen that the Appellants had acquired shares of the company, exceeding the benchmark provided in regulation 10. Regulation 10 requires:

"no acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise fifteen percent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations"

The Appellants� claim for exemption is based on the ground that the acquisition was pursuant to preferential allotment made by the company vide approval granted by the company�s share holders in their meeting held on 18.3.1998 and that regulation 3 (1) (c) gives exemption to the acquisitions pursuant to preferential allotment, from the purview of regulation 10. In this context it is considered relevant to have a close look at the said regulation 3 (1) (c). Said regulation is extracted below:

"Applicability of the Regulation

As far as compliance of clause (i) is concerned, it is clear from the documentary evidence before me that the Appellants had vide letters dated 20.2.1998 addressed to the three stock exchanges at Mumbai, Chennai and Ahmedabad forwarded copy of the resolution passed at the board meeting held on 17.12.1998. Copies of these letters have been filed with the appeal. It appears that the Respondent had formed its view based on the Appellants letter dated 11.2.1998 addressed to the said stock exchanges informing about the Board meeting scheduled to be held on 17.2.1998 to fix the Extra Ordinary General Meeting. Therefore the findings of the Adjudicating Officer that the requirements of 3(1)(c)(i) has not been complied with is contrary to the factual position.

Now coming to the requisite disclosure in the notice of the General meeting called for the purpose of consideration of the preferential allotment, by the Appellants own admission disclosures on certain aspects such as changes in voting rights and change in share holding pattern were not furnished. Disclosure of the specified information in the notice is very important from the point view of the public share holders, as the particulars so furnished would help them to take an informed decision about the future of their investments in the company. Failure to disclose full details on the specific aspects provided in the regulation cannot be considered as trivial or of no consequence to be overlooked. Since the Appellants have failed to comply with the requirements of clause (ii) of regulation 3 (1) (c) in toto, the exemption under the regulation 3 (1) (c) is not available to them. Once it is held that the acquisition do not have the benefit of exemption as provided under the said regulation, the acquirer is required to comply with the requirement of making a public offer in terms of regulation 10, and failure to do so would attract the provisions of section 15H(ii). According to section 15H (ii) "if any person, who is required under this Act, or any rules or regulations made thereunder fails to make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakhs rupees". Reference to section 15 A (b) in the order is only a mistake.

Evidently the acquisitions attract the provisions of section 15H(ii) as the Appellants having not complied with the requirements of regulation 10 in the context of exemption under regulation 3 (1) (c) not available to them. The observation of the Adjudicating Officer that as a result of failure to comply with the requirements of regulation 10, the investors have not been put to loss, as the acquisition of shares was at a price higher than the prevailing market price is not acceptable. In this context it is to be noted that the shares were acquired by the Appellants at the rate of Rs. 10/- per share against the prevailing market price at rupees three or four. If the Appellant had made a public offer to purchase the shares at the same rate of Rs. 10/- at which they acquired, the other share holders would have availed of the golden opportunity and gained in this process. Therefore, the conclusion that the share holders has not been put loss as a result of non-compliance of regulation 10, is not correct. In these circumstances, imposition of penalty of Rs. 25, 000/- by the Adjudicating Officer is found in order.

For the reasons stated above imposition of penalty made by the Adjudicating Officer vide orders dated 13.12.2000 is upheld. The appeals are dismissed.