Securities Appellate Tribunal
Mr. Madhusudan Jhunjhunwala And Others vs Sebi on 25 August, 2015
Author: J.P. Devadhar
Bench: J.P. Devadhar
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Date of Decision : 25.8.2015
Appeal No. 387 of 2014
1.Mr. Madhusudan Jhunjhunwala
2. Mr. Krishnakumar Jhunjhunwala
3. Ms. Vrinda K. Jhunjhunwala
4. Mrs. Sarladevi M. Jhunjhunwala
5. Satidham Industries Pvt. Ltd.
6. Hindustan Cotton Co.
7. Krishnakumar & Sons - HUF &
8. Madhusudan Jhunjhunwala - HUF 28, Sheela Apartments, 6th Floor, B Desai Marg, Mahalaxmi, Mumbai - 400 026. ...... Appellant Versus Securities and Exchange Board of India SEBI Bhawan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ...... Respondent Mr. Zal Andhyarujina, Advocate with Mr. Kingshuk Banerjee, Advocate i/b Wadia Ghandy & Co. for the Appellants.
Mr. Kumar Desai, Advocate with Mr. Manish Acharya, Advocate i/b Vigil Juris for the Respondent.
CORAM: Justice J.P. Devadhar, Presiding Officer Jog Singh, Member Per: Justice J.P. Devadhar
1. Appellants are aggrieved by the order passed by the Whole Time Member of Securities and Exchange Board of India (SEBI for short) on 5th September, 2014. By that order, appellants are jointly and severally directed to disinvest 27,633 shares of Sarla Performance Fibres Ltd. ('Target Company' for short) through sale to parties not connected/related to them in small lots in trenches on the Bombay Stock Exchange Ltd. (BSE) and National Stock Exchange of India Ltd. (NSE) by ensuring that such sale does 2 not disturb the market equilibrium; and thereafter transfer the entire proceeds of such sale of shares to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009 ('Fund' for short). By the said order appellants are further directed to complete above sale of shares within 3 months from the date of order and file a report to SEBI to that effect within two weeks from the date of such compliance.
2. Appellants no. 1 to 8 constitute promoter group of the Target Company, whose shares are listed on the BSE and NSE. As on 30th October, 2008 the appellants collectively held 55% shares of the Target Company.
3. Regulation 11(2) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ('Takeover Regulations, 1997' for short) provides that an acquirer holding 55% or more but less than 75% shares or voting rights in such target company shall not acquire any additional shares or voting rights in the target company unless he makes a public announcement in accordance with the Takeover Regulations, 1997.
4. By Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2008, a proviso was added to Regulation 11(2) with effect from 30th October, 2008. As per the said proviso, an acquirer holding 55% or more but less than 75% of shares or voting rights in a target company could acquire additional shares or voting rights upto 5% without making a public announcement subject to the condition that (i) the acquisition is made through open market purchase in normal segment on the stock exchange or pursuant to a buy back of shares by the target company (ii) the post acquisition shareholding of the acquirer shall not increase beyond 75%.
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5. According to the appellants there was ambiguity in the proviso inserted to the Regulation 11(2) with effect from 30th October, 2008 because from the proviso it was not clear as to whether the acquisition of shares upto 5% was an interim measure upto March 31, 2009 or whether it was only a one time measure or the shares could be acquired in several tranches or whether creeping acquisition of 5% under regulation 11(2) was available in every financial year. While SEBI was considering the request for clarification, the appellants continued to acquire shares of the Target Company.
6. On 6th August, 2009 SEBI issued a clarificatory circular stating that an acquirer who holds 55% or more but less than 75% of the shares or voting rights in a target company could acquire additional shares or voting rights upto a maximum of 5% in the target company in one or more tranches without any restriction on the time frame without making a public announcement. It was further clarified that the aforesaid acquisition of 5% shall be calculated by aggregating all purchases, without netting the sales.
7. It is not in dispute that as on 6th August, 2009 the appellants collectively held 43,73,167 shares (constituting 62.92% of share capital) of the Target Company, which was far in excess of 5% permitted under the proviso to Regulation 11(2) inserted with effect from 30th October, 2008.
8. It is the case of the appellants that on account of sheer ignorance and inadvertence some member of the appellant group acquired 27,633 shares of the company during the period between 6th August, 2009 to 23rd September, 2011, over and above 43,73,167 shares held on 6th August, 2009.
9. By a show cause notice dated 28th March, 2014 appellants were called upon as to show cause as to why action should not be taken against the appellants for acquiring the shares of the company in violation of Regulation 11(2) of the Takeover Regulations, 1997. Appellants filed reply to the said 4 show cause notice inter-alia stating that the lapse was due to the ambiguity in the proviso inserted to Regulation 11(2) of the Takeover Regulations, 1997 and requested that a lenient view be taken in the matter and requested that further proceedings be dropped. Thereafter personal hearing was granted to the appellants and by the impugned order the appellants are directed to disinvest 27,633 shares of the Target Company acquired by the appellants after 6th August, 2009 and deposit the sale proceeds with the Fund within three months from the date of the order and file compliance report within two weeks thereafter. Challenging the aforesaid order the present appeal is filed.
10. Mr. Zal Andhyarujina, learned counsel appearing on behalf of the appellants submitted that in the present case the appellants acquired additional shares of the target company through open market purchase in the normal segment on the stock exchange by ensuring that the total shareholding of the appellants in a financial year did not exceed 5%. On acquisition of such shares, necessary disclosures were also made to the stock exchanges within the prescribed time. Acquisition of 27,633 shares after SEBI clarificatory circular dated 6th August, 2009 was not intentional and it was an outcome of the ambiguity in Regulation 11(2) of the Takeover Regulations, 1997 because acquisitions were made under the bonafide belief that the benefit of additional 5% acquisition was available for every financial year, without making any public announcement of the same. Since 27,633 shares of the target company were acquired out of sheer negligence and inadvertence after the issuance of clarification by SEBI on 6th August, 2009, counsel for the appellant submitted that a lenient view be taken in the matter. Counsel for appellants submitted that SEBI is not justified in penalizing the appellants especially when there was inherent ambiguity in the proviso inserted to Regulations 11(2) of the Takeover Regulations, 1997. Counsel for the appellants further submitted that 5 in the present case, the number of shares sold after 6th August, 2009 is more than the number of shares acquired after 6th August, 2009. In these circumstances counsel for the appellants submitted that in the facts of the present case SEBI ought to have taken a lenient view and accordingly submitted that the impugned order be quashed and set aside.
11. We see no merit in the above contentions.
12. Under Regulation 11(2) an acquirer holding 55% or more but less than 75% of shares or voting rights in a target company could acquire additional shares only by making public announcement in accordance with Takeover Regulations, 1997. By inserting a proviso to Regulation 11(2) with effect from 30th October, 2008 it was provided that an acquirer holding 55% or more but less than 75% of the shares or voting rights in a target company could acquire additional shares or voting rights upto 5% without making a public announcement subject to the conditions set out therein.
13. In the present case admittedly appellants had collectively held 45,73,167 shares (constituting 62.92% of the share capital) of the company as on 6.8.2009 which was in excess of 5% permitted under the proviso to Regulation 11(2). Since the clarificatory circular was issued on 6.8.2009, in the impugned order, benefit of doubt was given to the appellants in respect of 62.92% shares held by the appellants even though such acquisition was in violation of Regulation 11(2) of Takeover Regulations, 1997. It is only in respect of 27,633 shares acquired after 6.8.2009, the appellants are directed to disinvest the shares.
14. Having already crossed 5% limit provided under the proviso to Regulation 11(2), appellants could not have acquired any additional shares after 6.8.2009. Fact that the appellants had purchased the shares through open market in normal segment and had disclosed the same to the stock exchanges 6 would not come to the rescue of appellants who have violated Regulation 11(2). Ambiguity if any, in the proviso to Regulation 11(2) was removed by the clarificatory circular dated 6.8.2009. Therefore, acquisition of 27,633 shares even after the clarificatory circular dated 6.8.2009 was in gross violation of Regulation 11(2) of Takeover Regulations, 1997.
15. It is relevant to note that in the clarificatory circular dated 6th August, it was also specifically stated that the acquisition of 5% shares under the proviso to Regulation 11(2) shall be calculated by aggregating all purchases, without netting the sales. Therefore fact that the appellants have sold more shares than 27,633 shares acquired after 6th August, 2009 would not absolve the appellants from disinvesting 27,633 shares acquired after 6.8.2009.
16. Thus, in the facts of present case the whole time member was justified in holding that the appellants are not justified in contending that the shares were purchased bonafide under the belief that they were entitled to acquire the shares, because, admittedly 27,633 shares were acquired after the doubts if any, relating to the scope of the proviso to Regulation 11(2) were cleared by SEBI on 6th August, 2009.
17. As per Regulation 44 & Regulation 45 of the Takeover Regulations, 1997 a person contravening the said regulations could be directed inter alia to
(a) make public announcement or (b) disinvest the shares acquired in breach of Regulations and transfer the sale proceeds to the investor protection fund etc. In the present case after considering all available options, the whole time member has come to the conclusion that in the facts of the present case it would be just and proper to direct the appellants who have violated Regulation 11 of Takeover Regulations, 1997 to disinvest 27,633 shares of the target company through sale to parties not connected/related to them in small lots or trenched in BSE and NSE by ensuring that such sale do not disturb the 7 market equilibrium and thereafter transfer the entire proceeds of such sale of shares to investor protection and education fund established by SEBI.
18. For the reasons stated hereinabove we see no reason to interfere with the impugned order. Accordingly the appeal is hereby dismissed with no order as to costs.
Sd/-
Justice J.P. Devadhar Presiding Officer Sd/-
Jog Singh Member 25.8.2015 Prepared and compared by RHN