BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Appeal No. 142/2003 Date of Hearing: 2nd July, 2004 Date of decision: 21st July, 2004 In the matter of K. C. Palanisamy Appellant – Represented by Shri R. Vidya Shankar, Advocate Versus Adjudicating Officer, Southern Regional Office,Securities and Exchange Board of India Respondent – Represented by Ms. Deepa Kuruvilla, Advocate Coram: Justice Shri Kumar Rajaratnam, Presiding Officer Dr. B. Samal, Member Per : Dr. B. Samal, Member The appeal was taken up with the consent of both parties. 2. The present appeal is against imposition of a penalty of Rs.2 lakhs on the acquirer i.e. K. C. Palanisamy for violation of regulation 3(4) read with regulation 3(5) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and under clause (a) of section 15A a penalty of Rs.3 lakhs on the acquirer for violation of section 3(3)under clause (b) of Section 15 A of the said Act. 3. The acquirer was holding 37,97,000 shares forming 60.51% of the paid up equity capital of Karur KCP Packaging Ltd., The acquirer proposed to acquire a further 37,24,600 (37.25%) of the paid up capital of the company by preferential allotment as a result of which the acquirer’s holding in the post issue paid up capital of the company was to rise to 75.22%. The Board Meeting of the company held on 7th January, 2002 duly authorized convening of an EGM of the company on 4th February, 2002 for considering the issue of preferential allotment of 37,24,600 equity shares of Rs.10/- each at a premium of Rs.30/- per share to the acquirer. This was to fulfill the requirement as required under section 81(1A) of the Companies Act, 1956. 4. According to the appellant the company vide letter dated 7th January, 2002 disclosed full details of the proposed preferential allotment to the stock exchange as required under regulation 3(1)©(ii) of the SEBI (SAST) Regulations, 1997 for being notified on the notice board of the stock exchange. According to the appellant the details so disclosed includes information concerning the name of proposed allottee, number of shares to be allotted, consideration for allotment, percentage holding before and after the proposed allotment, purpose of allotment and that there will be no change in control as a consequence of allotment. By this procedure the stock exchange and through them the public at large were put on notice of full particulars concerning the proposed preferential allotment. 5. The Explanatory Statement annexed to the notice convening EGM of the company on 4/2/2002 proposed the resolution for preferential allotment of shares to the acquirer, pursuant to section 173(2) of the Companies Act, 1956 again gave full particulars as per regulation 3(1)(c) (ii) of SEBI Regulations. The resolution was passed and the same was duly informed to the concerned stock exchange pursuant to regulation 7 of SEBI Regulations. 5. The acquirer received a communication from the Respondent (SEBI) dated 13.3.2003 inter alia calling for certain details concerning the preferential allotment and also stating that there is non compliance with regulation 3(4) read with 3 (5) of the SEBI Regulations. This was replied by the acquirer on 28.3.2003. The appellants specifically submitted that he was under the view that regulation 3(4) was no longer required to be complied with in view of repeal of regulation 3© itself with effect from 1.9.2002. The Respondent vide its letter dated 12.5.2003 clarified that as the acquirer has taken advantage of exemption under Regulation 3(1)(c) during its existence in statute, compliance with regulation 3(4) is a must. The appellant submitted that he has complied with the said direction of SEBI vide its letter dated 30.5.2003. 6. The appellant submitted that the required information was disclosed to the stock exchange by forwarding copy of notice of Board Meeting and by disclosures under regulation 3(1) (c ) (i) and Regulation 7 of SEBI Regulations, that no investor has suffered any loss on account of technical non compliance with regulation 3(3) nor has the acquirer gained anything by this process. Due transparency has been ensured in the matter and finally the delay in filing the report along with the requisite fees with SEBI as per Regulation 3(4) and 3(5) was due to a bonafide error. However, the report has since been filed and that in view of the above no levy of penalty was warranted. 7. The relevant provisions of law/the said regulations is extracted below: 11. (1) No acquirer who, together with persons acting in concert with him, has acquired, in accordance with the provisions of law, [15% or more but less than 75%] of the share or voting rights in a company, shall acquire, either by himself or through or with persons acting in concert with him additional shares or voting rights entitling him to exercise more than [10%] of the voting rights, in any period of 12 months, unless such acquirer makes a public announcement to acquire shares in accordance with the Regulations. However, Regulation 3 of the said Regulations lays down that in certain cases (as specified therein) acquirer shall not be required to make public announcement, as contemplated under Regulation 10,11 & 12. One such exception as carved out under Regulation is acquisition of shares by way of preferential allotment, as contained in clause © of the sub-Regulation (1) of Regulation 3, which stands omitted w.e.f. 9.9.2002. Prior to its omission, the said clause ( C) read as under: “Nothing contained in Regulation 10,11 and 12 of these Regulations shall apply to: (c) preferential allotment , made in pursuance of a resolution passed under section 81(1A) of the Companies Act, 1956 (1 of 1956). Provided that, (i) Board Resolution in respect of the proposed preferential allotment is sent to all the stock exchanges on which the shares of the company are listed for being notified on the notice board; (ii) Full disclosures of the identity of the class of the proposed allottee(s) is made, and if any of the proposed allottee(s) is to be allotted such number of shares as would increase his holding to 5% or more of the post issued capital, then in such cases, the price at which the allotment is proposed, the identity of such person(s), the purpose of and reason for such allotment control over the company are all disclosed in the notice of the General Meeting called for the purpose of consideration of the preferential allotment” Sub-Regulation (3) of Regulation 3 of the said Regulations therefore lays down that: In respect of acquisition under clauses © (e), (h) and (i) of sub-regulation (1), {© omitted with effect from September 9, 2002} the stock exchanges where the shares of the company are listed shall, for information of the public, be notified of the details of the proposed transactions at least 4 working days in advance of the date of the proposed acquisition, in case of acquisition exceeding 5% of the voting share capital of the company. Further, Clause (b) of Section 15A of the said Act prescribed penalty for failure to furnish information, return etc. within the specified time by any person as required under the said Act or any rules or regulations thereunder. Clause (b) of Section 15A reads as under:
“15A. Penalty for failure to furnish information, return etc. -- If any person, who is required under this Act, or any rules or regulations made thereunder,-- (a)xxxxx b) to file any return or furnish any information, books or other documents, within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to [a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less;].”
8. Heard both the parties. There is no dispute about the delay in filing the requisite report with SEBI. The acquirer had already held 60.51% of the paid up share capital of the company. Therefore, there was no need for the promoter to acquire further shares to gain control of the company. It was only to heed to the banker’s stipulation that the temporary advances made by him be converted into equity shares. As per the evidence submitted by the appellant the disclosure as per the requirement of Regulation 3(3) was received by the stock exchange on 15/2/2002 and 16/2/2002 i.e. much after the date of acquisition i.e. 4.2.2002.
9. Regulation 3(4) read with Regulation 3(5) requires that for the said acquisition, being in excess of the bench mark prescribed therein, the acquirer shall submit a report to SEBI within 21 days of the date of the acquisition which contains all the details in respect of the acquisition and also along with the report pay a fee of Rs.10,000 to the Board. As per the material available on record, the report to be filed as per the above provisions of law i.e. on or before 25.2.2002 has been sent by the acquirer vide report dated 30.5.2003 which had reached SEBI, Mumbai office on 2.6.2003. It is thus evident that there is a delay of 462 days in filing the report under regulation 3(4) read with regulation 3(5) of the said regulations. This delay in filing the report has also been admitted by the appellant as a bonafide error. The appellant pleads that the transaction has been transparent and involves no violation of any statutory provisions.
10. The acquirer had already held 60.51% of the paid up equity capital of the company. He has acquired additional shares to fulfill certain conditions of the bankers. Therefore, it is not very much for the purpose of acquiring further shares to gain control over the company. The appellant has also fulfilled certain regulation though not fully. The appellant pleaded that the violation may be taken as technical. We accept the submissions of the appellant.
11. The learned Counsel for the Respondent submitted that for smooth functioning of security market, it is essential that the acquirer must adhere to the conditions as stipulated in the relevant Act. The purpose of imposing penalties is to have the effect of deterrent. 12. This Tribunal in Cabbot International Corpn. Vs. SEBI held that where the violation is of technical nature and due to a bonafide error the Tribunal should not consider imposing heavy penalty and should help in pointing out the defect to the appellant so that it does not recur again and the Tribunal declined to impose any penalty in that case as there was substantial compliance. This order of this Tribunal was confirmed by the Bombay High Court. 12. The Adjudicating Officer has imposed a total penalty of Rs.5 lakhs. Taking into consideration the totality of the facts and circumstances of the case and taking all the factors under section 15J of the Act, we are of the view that the penalty be reduced to Rs.25,000/- for failure to comply or delay in complying with the requirements of sub regulation 3(3), 3(4) and 3(5). This penalty amount to be remitted within six weeks from the date of receipt of this order. The impugned order stands modified to this extent. The appeal disposed of accordingly. No order as to costs.
(Pronounced in Court)
Justice Kumar Rajaratnam Presiding officer
Dr. B. Samal, Member
Place: Mumbai Date: 21st July, 2004 |