Hanumesh Realtors Pvt. Ltd. vs sebi appeal no.66 of 2012 sat order dated 25 july 2012

BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI

Appeal No. 66 of 2012

Date of Decision : 25.07.2012

Hanumesh Realtors Pvt. Ltd.
Regd. Off. at Raaj Chambers,
SKM Fabrics, (Andheri) Premises,
Plot No. 115, 115/1 to 3,
R.K. Paramhans Marg,
Andheri (E), Mumbai – 400 069.
(Formerly at Padam 1, Flat No. 17,
4-B.G. Deshmukh Marg, Mumbai – 400 026)

… Appellant

Versus

Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai – 400 051.

       …Respondent

Mr. Gaurav Joshi, Advocate with Mr. Lalit Katariya, Mr. S.R. Garud and
Mr. A. Surve, Advocates for the Appellant.

Mr. Shiraz Rustomjee, Senior Advocate with Ms. Harshada Nagare, Advocate for the
Respondent.

CORAM : P.K. Malhotra, Member & Presiding Officer ( Offg.)
S.S.N. Moorthy, Member

Per : P.K. Malhotra

The issues that arise for our consideration in this appeal are (1) whether the

appellant has violated provisions of regulation 11(1) read with regulation 14(1) of the

Securities and Exchange Board of India (Substantial Acquisition of Shares and

Takeovers) Regulations, 1997 (the takeover code) and (2) whether the Securities and

Exchange Board of India (the Board) was justified in imposing a penalty of

` 1.87 crore on the appellant under Section 15H of the Securities and Exchange

Board of India Act, 1992 (the Act).

The facts of the case fall in a narrow compass. The appellant is a company

registered under the Companies Act, 1956 and engaged in the business of builders

and developers. S Kumars Online Ltd. (the target company) is a company listed on

the Bombay Stock Exchange Ltd. (BSE). Out of the equity capital of the company

consisting of 2,58,00,000 shares, the promoter group, including the appellant, held

1,28,01,010 shares which amounts to 49.62 per cent shares in the equity capital of the

company. The shareholding of the appellant in the target company for the quarter

ending December 31, 2009 was 94,47,814 shares (36.62 per cent). The company

proposed to issue equity shares on preferential basis to raise funds for its ongoing

project of e-commerce and for payment of existing liabilities. After following due

procedures under the Companies Act, the appellant was allotted 28,25,000 shares at

par on preferential allotment basis on March 3, 2010. Subsequent to this preferential

allotment, the shareholding of the appellant in the target company increased to

1,22,72,814 shares. With this allotment of shares to the appellant on preferential

basis, while the total shareholding of the promoter group increased from 49.62 per

cent to 54.59 per cent, the individual shareholding of the appellant in the promoter

group increased from 36.62 per cent to 42.87 per cent. Thus, pursuant to the said

preferential allotment, the shareholding and voting rights of the appellant in the target

company increased by 6.25 per cent. On such increase, according to the Board,

regulation 11(1) of the takeover code got triggered. As the appellant had acquired

more than 5 per cent shares, it was required to make an open offer which should have

been made not later than four working days as required by regulation 14(1) of the

takeover code. This, not having been done, a show cause notice dated November 22,

2010 was issued by the Board to the appellant calling upon it to show cause as to why

action should not be taken for the aforesaid violations and penalty imposed under

Section 15H of the Act. The appellant filed its reply dated December 8, 2010 denying

the allegations that it has violated the provisions of regulation 11(1) and 14(1) of the

takeover code. However, the adjudicating officer, after considering the reply of the

appellant, held it guilty of violating the aforesaid provisions and imposed a penalty of

` 1.87 crore under Section 15H(ii) of the Act. Hence, this appeal.

We have heard Mr. Gaurav Joshi, Advocate for the appellant and Mr. Shiraz

Rustomjee, Senior Advocate for the respondent Board. It is the case of the appellant

that the promoter group, including the appellant, held 49.62 per cent share capital of

the target company before the allotment of preferential shares to the appellant.

Pursuant to the allotment of preferential shares to the appellant, the promoter group

shareholding increased to 54.59 per cent which was an increase of 4.97 per cent only

and hence regulation 11(1) of the takeover code was not attracted. Although the

individual holding of the appellant increased by more than 5 per cent, the overall

promoter holding had not exceeded 5 per cent due to corresponding drop in

percentage terms of other shareholders ’ holding. As the overall promoters ’ holding

has not exceeded 5 per cent, according to appellant, the provisions of regulation 11(1)

read with regulation 14(1) of the takeover code are not attracted. On the other hand,

the case of the Board is that on allotment of preferential shares to the appellant, the

shareholding of the appellant in the target company increased from 36.62 per cent to

42.87 per cent, which is more than 5 per cent, and therefore, the provision of

regulation 11(1) got triggered and the appellant was required to make an open offer

within the period stipulated in regulation 14(1) of the takeover code irrespective of

the fact, whether the increase in the shareholding of the total promoter group was less

than 5 per cent. In support of his contentions and interpretation of regulation 11(1) of

the takeover code, learned counsel for the appellant has relied on the interpretive

letter dated April 2, 2009 issued by the Board in favour of Suryajyoti Spinning Mills

Ltd. and also on the order dated August 28, 2008 passed by the adjudicating officer in

the case of Jamnalal Sons Private Limited. Under similar circumstances, in the case

of Suryajyoti Spinning Mills Ltd., where the shareholding of the acquirers increased

more than 5 per cent after preferential issue but overall increase in holding of the

promoter group remained within 5 per cent, the interpretive letter expressed the view

as under:

4.1 In terms of Regulation 11(1) of the Regulations, an acquirer
(including persons in concert with him) who has acquired
15% or more but less than 55% shares or voting rights in a
target company may acquire upto 5% shares or voting
rights in a financial year ending 31st March, without
making a public announcement in terms of the Regulations.
In case of acquisitions through preferential allotment, the
said creeping limit of 5% is reckoned with respect to
enhanced equity share capital of the target company
pursuant to the preferential allotment.

4.2 In the case described in your request, pursuant to proposed
preferential allotment of equity shares, the promoters
(along with persons acting in concert) shareholding in the
target company will increase from 36.39% to 41.33% of the
enhanced capital. Since the said increase would be within
the creeping limit of 5% as provided in regulation 11(1) of
the Regulations, regulation 11 would not be triggered
pursuant to preferential allotment and further it is observed
that there is no consequent change in control and as such,
the acquirers (promoters) will not be required to make a
publider the Rgulations

In the case of Jamnalal Sons also where, after the rights issue, shareholding of the

acquirers increased by more than 5 per cent but total increase in holding of the

promoter group was below 5 per cent, the adjudicating officer has held that question

of claiming exemption by the acquirer from the applicability of regulation 11(1) of

the takeover code does not arise. The appellant had also placed on record statement

showing shareholder pattern of Bajaj Hindustan Limited, another company, where

under similar circumstances, no action was initiated by the Board against that

company. It was therefore strenuously argued by Mr. Joshi that, in the facts and

circumstances of the case, the provisions of regulation 11(1) of the takeover code are

not attracted and even the Board has also been consistently taking this stand under

similar circumstances in the cases cited above. Therefore, there is no justification for

the Board to give a different interpretation to the provisions of the regulations and

punish the appellant.

Mr. Shiraz Rustomjee, learned senior counsel for the Board, supported the

order passed by the adjudicating officer stating that the interpretive letter dated April

2, 2009 issued by the Board to Suryajyoti Spinning Mills Ltd. is of no help to the

appellant as the position explained therein was based on the representation made by

the applicant in that case and the letter clearly states that it does not express decision

of the Board on the question referred. He further stated that the view taken by the

adjudicating officer in its order dated August 28, 2008 in the case of Suryajyoti

Spinning Mills Ltd. is not correct appreciation of the provisions of regulation 11(1) of

the takeover code and is not binding either on the Board or on this Tribunal. With

regard to the statement showing shareholding pattern of Bajaj Hindustan Limited, it

was stated by the learned senior counsel that this statement is of no help to the

appellant as this was never under scrutiny or examination by the Board and no order,

either accepting or rejecting the said statement, is available on record. Learned senior

counsel for the Board has also drawn our attention to the judgment of the Apex Court

in the case of Swedish Match AB vs. Securities & Exchange Board of India (Civil

Appeal No. 2361 of 2003 decided on August 25, 2004) in which the Supreme Court

has interpreted the provisions of regulation 11 of the takeover code and has observed

that if the additional shares are acquired entitling an acquirer to exercise more than 5

per cent of the voting rights, the statutory embargo to the effect that the acquirer must

make a public announcement to acquire shares in accordance with the Regulation

comes into operation. The decision of the Apex Court is of 2004 which has not been

considered either while issuing the interpretive letter dated April 2, 2009 or while

passing the order by the adjudicating officer on August 28, 2008. The Supreme Court

judgment makes it clear that even when a single acquirer acquires more than 5 per

cent voting rights, irrespective of the total voting rights of the promoter group, the

acquirer is under an obligation to make public announcement under regulation 11 of

the takeover code.

After hearing learned counsel on both sides and perusing the material on

record we are of the opinion that the view taken by the adjudicating officer in the

impugned order needs to be upheld. The takeover code obligates acquirer of shares or

voting rights of a company in three different scenarios which are discussed in

regulations 10, 11 and 12 of the takeover code. They operate in different areas of

acquisition and consolidation of holdings of a listed company. Regulation 10 provides

for making the public announcement in cases where acquisition of shares or voting

rights of the company is 15 per cent or more by the acquirer or by persons acting in

concert with him. Regulation 12 makes a provision for public announcement in case

of acquisition of “ control ” over the target company. Regulation 11 makes provision

for public announcement in case of consolidation of holdings. For the purpose of

present case, we are concerned with regulation 11(1) of the takeover code which

reads as under:

“11(1) No r , with ang concert
him, has acquired, in accordance with the provisions of law, 15 per
cent or more but less than fifty five per cent (55%) of the shares 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 5 per cent of the voting
rights, with post acquisition shareholding or voting rights not
exceeding fifty five per cent in any financial year ending on 31st March
unless such acquirer makes a public announcement to acquire shares in
accorde with tgu.”

A bare reading of the aforesaid provisions will make it clear that the

provisions of this regulation apply to an acquirer when he is acting (i) by himself or

(ii) through persons acting in concert with him, or (iii) with persons acting in concert

with him. Hon’ble Supre , while interpreting the provision of regulation 11 in

the case of Swedish Match AB (supra), has observed that the pre-conditions attracting

regulation 11 are:

“ (i) that an acquirer had acquired shares in concert with another; (ii)
such acquisition was more than 15% but less than 50% of the shares or
voting rights in a company; (iii) in the event, the acquirer intends to
acquire such additional shares or voting rights which would allow him
to exercise more than 5% of the voting rights within a period of 12
months, public announcement is required to be made therefor. (iv)
such acquisition of additional shares contemplates three different
situations, i.e., the acquisition may be by acquirer himself or
through or with the person acting in concert with the person with
whom they had acquired shares earlier in concert with each
oth (emphasis supplied)

The Court has also observed that regulation 11 does not brook any other

interpretation. The Apex Court further observed that if additional shares are acquired

entitling an acquirer to exercise more than 5 per cent of the voting rights, the statutory

embargo to the effect that the acquirer must make a public announcement to acquire

shares in accordance with the regulation comes into operation.

In view of the clear position, as emerging from the aforesaid decision of the

Apex Court, we are inclined to uphold the view expressed by the adjudicating officer

that when the appellant, while holding 36.62 per cent of the shares / voting rights of

the company, acquired further shares increasing his shareholding to 42.87 per cent,

which is more than 5 per cent of the shareholding, it was under an obligation to

comply with the provisions of regulation 11(1) read with regulation 14(1) of the

takeover code. We therefore uphold this finding.

It was then argued by the learned counsel for the appellant that the penalty of

` 1.87 crore imposed on the appellant is not only contrary to the provisions of

Section 15H(ii) of the Act, it is also excessive and has no correlation with the

violation alleged to have been committed. It was submitted that once the Board has

come to the conclusion that there was no unfair gain made by the appellant, the

question of making any profit for computation of penalty under Section 15H of the

Act does not arise. Even the factors for determining the penalty, more particularly the

factor enumerated in Section 15J(b) of the Act, refer to the actual amount of loss

caused to the investors and not a notional loss which has been considered by the

adjudicating officer while arriving at the amount of penalty. It was further argued by

him that the appellant acted bonafide based on the three instances mentioned above

including the order passed by the adjudicating officer of the Board on August 28,

2008 in the case of Jamnalal Sons Private Limited. According to learned counsel, the

appellant has acted in good faith based on the interpretation of the other instances and

no penalty could be imposed on the appellant for an alleged technical violation.

Learned senior counsel for the Board, however, submitted that the

adjudicating officer has strictly applied the principle as laid down in Section 15H and

15J of the Act while arriving at the penalty. The adjudicating officer has specifically

observed that by not making a public offer the appellant has caused notional loss to

the investors and he has accordingly calculated the penalty.

We have given our thoughtful consideration to this aspect of the matter and

are of the view that there being violation of the regulatory framework, penalty must

follow. However, in the facts and circumstances of the case, the adjudicating officer

has failed to consider the mitigating factors and has imposed maximum penalty that

could have been imposed under the law. The adjudicating officer has specifically

recorded that the price of acquisition was above the prevailing market price and,

therefore, it cannot be concluded that the appellant had made any unfair gain. He has

also stated that the loss to the investors is a notional loss and not the actual loss. If the

Board felt that non-compliance on the part of appellant will lead to loss to the

investors, it could have very well issued a direction to the appellant to come out with

an open offer as stipulated by regulation 11(1) of the takeover code. There is nothing

on record to show that any such step was taken by the Board. The Board itself has

chosen not to issue any direction to the acquirer to come out with a public offer under

section 11(1) but decided to initiate adjudication proceedings and levied penalty.

While deciding the quantum of penalty, the stand taken by the Board in its

interpretive letter dated April 2, 2009 issued to Suryajyoti Spinning Mills Ltd. and the

order dated August 28, 2008 passed by the adjudicating officer in the case of

Jamnalal Sons Private Limited can definitely be considered as other mitigating

factors. We are, therefore, of the considered view that in the facts and circumstances

of the case, ends of justice would be met by reducing the penalty to ` 10 lakh.

We order accordingly.

In the result, while upholding the order of the adjudicating officer on the issue

of violation / contravention of the provisions of regulation 11(1) read with

regulation 14(1) of the takeover code, we reduce the penalty to ` 10 lakh. No costs.

                        Sd/-  
      P.K. Malhotra  
                      Member &

Presiding Officer ( Offg.)

               Sd/-  
                     S.S.N. Moorthy   
                 Member

25.07.2012
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