Securities Appellate Tribunal
M/S. Ushdev Trade Limited vs Sebi on 14 September, 2010
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.106 of 2010
Date of decision: 14.9.2010
M/s. Ushdev Trade Limited
6th Floor, New Harileela House,
Mint Road, Mumbai - 400 001. ..... Appellant
Versus
The Securities and Exchange Board of India
SEBI Bhawan, Bandra Kurla Complex, ......Respondent
Mumbai - 400 051.
Mr. Somashekhar Sundaresan, Advocate with Mr. Ravichandra S. Hegde, Advocate for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Mihir Mody, Advocate for the Respondent. CORAM : Justice N.K. Sodhi, Presiding Officer Samar Ray, Member P.K. Malhotra, Member Per : Justice N.K. Sodhi, Presiding Officer M/s. Ushdev Trade Ltd. (formerly known as Ushdev Power Ltd.) is the appellant before us and Mr. Vijay Gupta, Mrs. Suman Gupta and Mr. Prateek Gupta who are related to each other are its promoters. They are also the promoters of and manage and control M/s. Ushdev International Ltd. which is the target company whose shares are listed on the Bombay Stock Exchange Ltd., Mumbai (BSE). M/s. Ushdev Commercial Services Pvt. Ltd. (for short Ushdev Commercial) is another group company managed and controlled by the promoters of the target company. It is not in dispute that the appellant and Ushdev Commercial are group companies and promoters of the target company and form part of the 'Ushdev group' of companies. They have also been shown as associates of the target company in its annual report for the year 2004-05. As on June 30, 2005, Ushdev Commercial held 7,55,300 equity shares of the target company which represented 18.74 per cent of its entire share capital. Ushdev Commercial decided to transfer on August 8, 2005 its entire shareholding in the target company to the appellant in an off market transaction at the price of ` 29.10 per share. It is clear that this 2 transfer of shares by Ushdev Commercial to the appellant was from one promoter group company to another. Despite this transfer, the shareholding pattern of the target company remained the same and after the transfer there was no change in control over the target company.
2. BSE carried out a snap investigation in the trading of the scrip of the target company for the period from September 8, 2005 to September 28, 2005 and referred the matter for further investigations to the Securities and Exchange Board of India, the respondent herein which shall be referred to hereinafter as the Board. Investigations revealed certain irregularities in the disclosure of the shareholding pattern made by the target company to BSE. The Board found that the appellant had acquired 18.74 per cent shares of the target company from Ushdev Commercial in an off market transaction and since this acquisition was more than fifteen per cent of the total paid up equity share capital of the target company, it (the appellant) was required to make a public announcement in terms of Regulation 10 read with Regulation 14(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter called the takeover code). As the appellant had not come out with a public offer, the Board found that the former had violated the provisions of the takeover code. The Board also found from the annual report of the target company for the year 2004-05 that Ushdev Commercial and the appellant were shown as entities related to the target company whereas in the shareholding pattern submitted by the target company to BSE for the quarters ending June and September 2005, they had been shown under the non promoter category. The Board initiated adjudication proceedings against the appellant and the target company under Chapter VI A of the Securities and Exchange Board of India Act, 1992 (for short the Act) for the imposition of monetary penalty for the aforesaid irregularities. The target company was issued a show cause notice dated May 29, 2008 alleging that it had violated clause 35 of the Listing Agreement by making inaccurate disclosures in its quarterly reports to BSE. During the adjudication proceedings, the target company made an application for consent for the settlement of the matter and the terms of settlement proposed by it were accepted by the Board where after the adjudication proceedings came to an end without admission or denial of guilt by the target company.
3
3. The appellant was also issued a notice dated May 29, 2008 pointing out the violation of Regulation 10 read with Regulation 14(1) of the takeover code and it was called upon to show cause why an enquiry should not be held against it for the imposition of monetary penalty. The precise charge against the appellant as levelled in the show cause notice reads as under:
"It is observed that you have acquired 18.74% shares from UCSPL through off-market transaction, as submitted by your promoter Shri. Prateek Gupta. Since the instant acquisition done by you is more than 15% of the total paid up equity share capital of the company, therefore, you were required to make a public announcement in terms of Regulation 10 read with Regulation 14(1) of SEBI (Substantial Acquisition of Shares and Takeovers), Regulations, 1997 (hereinafter referred to as "SAST") which was not made by you. Therefore, it is alleged that you have violated the aforementioned provisions of SAST ............"
The appellant attended a personal hearing on March 18, 2010 and submitted that the purchase of shares was an inter se transfer of shares within the promoter group and the appellant was under a bonafide belief that the open offer would not get triggered. It was also submitted that the appellant was not aware that exemption from the provisions of the takeover code had to be obtained for this transfer. The appellant also furnished the details of its acquisition of shares of the target company. After considering the show cause notice and the submissions made by the appellant, the adjudicating officer by his order of April 29, 2010 levied a monetary penalty of ` 72,14,000 on the appellant under Section 15H (ii) of the Act for the violation of Regulation 10 read with Regulation 14(1) of the takeover code. It is this order which is now under challenge in this appeal.
4. We have heard the learned counsel for the parties who have taken us through the records. The fact that Ushdev Commercial transferred 18.74 per cent of the equity share capital of the target company to the appellant in an off market transaction is not in dispute. It is also not in issue that Ushdev Commercial and the appellant are promoters of the target company. It is, thus, clear that the transfer of shares was from one promoter to the other. Regulation 10 of the takeover code which is said to have been violated by the appellant (shorn of the unnecessary details) provides that no acquirer shall acquire shares or voting rights which entitle the acquirer to exercise fifteen per cent or more of the voting right in a company unless the acquirer makes a public announcement to acquire shares of that company in accordance with the takeover code. The primary object 4 of this provision is to give an exit opportunity to the existing shareholders of the target company in such an eventuality. However, Regulation 3 exempts certain transfers of shares from the provisions of Regulation 10 and one such exemption relates to inter se transfer of shares amongst promoters. Regulation 3 (1)(e)(iii)(b) as it stood at the relevant time read as under:-
"Applicability of the regulation.
3(1) Nothing contained in regulations 10, 11 and 12 of these regulations shall apply to:
(a) xxx
(b) xxx
(c) xxx
(d) xxx
(e) inter se transfer of shares amongst -
(i) xxx
(ii) xxx
(iii) (a) xxx
(b) promoters:
Provided that the transferor(s) as well as the transferee(s) have been holding shares in the target company for a period of at least three years prior to the proposed acquisition.
................................."
Since the acquisition by the appellant was by way of transfer of shares from one promoter to another, it would have been exempt from the provisions of Regulation 10 provided that the transferor and the transferee fulfilled the requirements of the proviso to Regulation 3(1)(e)(iii) reproduced above. The proviso requires that the transferor and the transferee should have held the shares for a period of three years which they did not. Even though the transfer in the instant case was not strictly covered by the exemption clause, it could, nevertheless, be exempted by the Board under Regulation 3(l) of the takeover code had the appellant filed an application in this regard. Since there was a violation of Regulation 10, the Board could have initiated proceedings against the appellant under Section 11B of the Act for issuing a direction to the latter to make a public announcement if it was satisfied that it was necessary in the interest of investors to do so. Admittedly, this course was not adopted. We are satisfied that even though the appellant violated the provisions of Regulation 10 of the takeover code, this violation, in the circumstances of the case, has not prejudiced or jeopardized the interest of the shareholders of the target company and cannot be said to be serious enough calling for an exorbitant penalty as imposed by the 5 adjudicating officer. This is not a case where a non promoter has acquired a substantial chunk of shares in the target company changing its shareholding pattern and has gone away without making a public announcement. The acquisition by the appellant is within the promoter group which has not led to any change in control of the target company nor has its management changed. However Regulation 10 having been violated, penalty must follow as observed by the Supreme Court in Chairman, SEBI vs. Shriram Mutual Fund AIR 2006 SC 2287. Having regard to the overall facts and circumstances of this case and the provisions of Section 15 J of the Act, we are of the view that the ends of justice would be adequately met if the amount of penalty is reduced to ` 5 lacs. We order accordingly.
The appeal stands disposed of as above with no order as to costs.
Sd/-
Justice N.K.Sodhi Presiding Officer Sd/-
Samar Ray Member Sd/-
P.K. Malhotra Member 14.9.2010 Prepared & Compared by RHN