Appeal No. 66 of 2003
|
Date of Decision |
15.11.2006 |
|
Milan Mahendra Securities Pvt. Ltd. |
……
|
Appellant
|
|
Versus |
|
|
|
Securities & Exchange Board of |
……
|
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