IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

 

Appeal No. 66 of 2003

 

Date of Decision

15.11.2006

 

Milan Mahendra Securities Pvt. Ltd.

Appellant

 

Versus

 

 

 

Securities & Exchange Board of India

Respondent

 

Present : Mr. S.H. Merchant & Mr. O. Mohandas, Advocates for the appellant

Mr. Kumar Desai & Ms. Daya Gupta, Advocates for the respondent

 

Coram:

Justice N.K. Sodhi, Presiding Officer

C. Bhattacharya, Member

Per: Justice N.K. Sodhi, Presiding Officer (oral)

 

 

This appeal is directed against the order dated 22.4.2003 passed by the adjudicating officer imposing a penalty of Rs. 1,50,000/- on the appellant for violating Regulation 7 (1) and (2) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short the Regulations).

   2.            The appellant before us is a stock broker registered with the Securities and Exchange Board of India (for short the Board). It received a notice dated 2.7.2002 calling upon it to show cause why an enquiry should not be held against it for the alleged contravention of Regulation 7 (1) and (2) of the Regulations. It is alleged that the appellant acquired on 29.10.2000 10 lac shares of Shonkh Technologies International Ltd. (for short the target company) from Saimangal Investrade Ltd. (for short Saimangal) which were transferred in its demat account with National Securities Depository Ltd. (NSDL) evidencing the acquisition. It was also alleged that this acquisition constituted 5.72% of the paid up capital of the target company and that the appellant had failed to report the acquisition of these shares to the target company in terms of Regulation 7(1) and (2) of the Regulations. Another allegation made in the show cause notice was that on 13.3.2001 the appellant acquired a further 10 lac shares of the target company from Classic Credit Ltd. (for short Classic) which were transferred to its depository account and this acquisition too exceeded 5% of the paid up capital of the target company thereby violating Regulation 7(1) and (2). The appellant filed a reply to the show cause notice in which it did not dispute the acquisition of the shares but pleaded that those were received by way of security for the advances the appellant had made to its clients and that those shares were received in the ordinary course of business. It was further pleaded that in the case of Saimangal, the shares were returned to it within 20 days and in the case of Classic the shares were pledged with Global Trust Bank which pledge was invoked by the said bank on 9.4.2001. The appellant also stated in its reply that the default committed by it was only a technical infraction of the Regulation and the same be condoned. The adjudicating officer considered the reply and came to the conclusion that the appellant had violated Regulation 7(1) when it acquired shares on 29.12.2000 from Saimangal and 13.3.2001 from Classic. Accordingly, by his order dated 22.4.2003 he imposed a penalty of Rs. 1,50,000/- on the appellant. Hence this appeal.

   3.            We have heard the learned counsel for the parties. The counsel for the appellant strenuously contended that since the shares were acquired by the appellant by way of security for advances given to the clients the same cannot be termed as acquisition within the meaning of the Regulations and there was no violation of Regulation 7(1). He also urged that the violation, if any case, was only technical in nature and the same be condoned. We have considered the submissions made by the appellant and are unable to accept the same. It is common ground between the parties that 10 lac shares of the target company were transferred from Saimangal to the demat account of the appellant in its proprietary account on 29.12.2000 and again an equal number of shares were transferred to its proprietary account on 13.3.2001 from Classic. Since these shares were transferred to the proprietary account of the appellant it has to be held that the appellant had acquired these shares within the meaning of the Regulations. The plea that these shares were received by the appellant in the ordinary course of the business cannot be accepted because, had it been so, the shares would have been received by the appellant in its pool account which is maintained by a stock broker for the purpose of trading those shares on behalf of his clients. The shares were not transferred to the pool account and, therefore, for all purposes, the appellant became the beneficial owner of those shares. Section 2(1)(a) of the Depositories Act, 1996 defines a beneficial owner to mean a person whose name is recorded as such with a depository. Admittedly, the name of the appellant was recorded with the depository in the demat account when the shares were transferred. Again, when we look at Section 41 of the Companies Act it becomes clear that every person holding equity share capital of a company and whose name is entered as a beneficial owner in the records of the depository shall be deemed to be a member of that company. It is thus clear that the appellant for all purposes had become a shareholder of the target company when the aforesaid shares were transferred to its proprietary account. It cannot therefore be said that the shares were transferred in the ordinary course of its trading activities. We also cannot agree with the learned counsel for the appellant that the violation in the instant case was only technical and deserves to be condoned. The Regulations were framed on the basis of the input provided by a committee headed by Justice P.N. Bhagwati which had recommended that substantial acquisition of shares and takeovers should operate principally to ensure fair and equal treatment to all shareholders in relation to substantial acquisition of shares and takeovers. The object of the Regulations is to give equal treatment and opportunity to all shareholders and protect their interests. To translate these principles into reality measures have to be taken by the Board to bring about transparency in the transactions and it is for this purpose that dissemination of full information is required. It is with this end in view that the Regulations require the making of disclosures on pre-acquisition and post-acquisition stages and the requirement in Regulation 7 at post acquisition stage is one among them. As observed, the purpose of these disclosures is to bring about transparency in the transactions and assist the Regulator to effectively monitor the transactions in the market. We cannot therefore subscribe to the view that the violation was technical in nature.

   4.            Lastly, the learned counsel for the appellant contended that the appellant has closed down its business as a stock broker for the last several years and that this should be taken as a mitigating factor condoning the infraction of Regulation 7(1). We cannot accept this contention either. May be the appellant has closed down its business as a stock broker but that would have no relevance for determining whether it had violated Regulation 7 when it acquired shares of the target company on 29.12.2000 and again on 13.3.2001.

   5.            No other point was raised.

   6.            In the result the appeal fails and the same stands dismissed leaving the parties to bear their own costs. The appellant will pay the penalty amount within 45 days from today.

 

Justice N.K. Sodhi
Presiding Officer
 
 
 
C. Bhattacharya

Member

 

 

 

15.11.2006

 

 

//SR20/11/06 12:33