Securities Appellate Tribunal
Sandip Save, Promod Broota, Nitin ... vs The Chairman, Securities And Exchange ... on 27 November, 2002
Equivalent citations: [2003]41SCL47(SAT)
ORDER
1. This appeal is against the order made by the Adjudicating Officer on 31.1.2002 imposing monetary penalty against the Appellants, holding them guilty of violating the provisions of sections 15A and 15H of the Securities and Exchange Board of India Act, 1992 (the Act) read with regulations 7(1) and 11 (1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the 1997 Regulations). The impugned order is in respect of the acquisition of nine lakh shares of Aftek Infosys Ltd. (the company) from the Industrial Development Bank of India (IDBI) some time in November, 1999. The said nine lakh shares account for 15.68% of the total shares of the company. The Appellants are the promoters of the company. According to the Adjudicating Officer, since the acquisition of the said shares by the Appellants was in excess of the 5% bench mark provided in regulation 11(1), public announcement to acquire shares from other shareholders of the company was required to be made by them, which they failed to comply with. With reference to the finding of failure to comply with the requirements of regulation 7(1), the Adjudicating Officer, rejecting the Appellants' contention that they did not hold 5% shares in the company either by themselves individually or with persons acting in concert to attract the requirement of regulation 7(1), held that the Appellants collectively or acting in concert had acquired 15.68% shares, raising their holding in the company's capital from 21.06%. to 36.74%.
2. Dr. Pravin P. Shah, learned Representative of the Appellants explained the facts leading to the filing of the present appeal. He submitted that the Appellants are the promoters of the company, that they are technocrats and their sole intention was to keep the company maintain its professional identity and ensure that its ownership and management does not go into wrong hands. Learned Representative stated that the company made a public issue (IPO) of 37,30,000 equity shares of Rs.10/- each in 1995 of which 10,00,000 equity shares were reserved for "Firm Allotment" to IDBI under "Venture Capital Fund" that this was disclosed in the prospectus, that the shares to be allotted to IDBI had 'lock in' for a period of three years. Dr. Shah submitted that IDBI was treated not on par with other subscribers as is evident from the fact that they got shares under firm allotment and that the shares allotted to them were put under 'lock in' for 3 years. He submitted that IDBI subscribed to the said 10 lakh equity shares at the rate of Rs.10/- each at a total cost of rupees one crore and consequently acquired significant control over the company. In support of the said contention Dr. Shah referred to various clauses in the "Subscription Agreement" dated 5.4.1995 (the Agreement) entered into between the company and IDBI, and in particular to the following:
IDBI agrees to subscribe to and Aftek agrees to allot equity shares of Rs.10/- each, that the company shall not issue shares on more favourable terms than IDBI to any other person - otherwise it shall be applicable to IDBI also.(2.2); that the company shall enter into requisite selling and purchasing arrangements to the satisfaction of IDBI. (3(iv); the terms and condition of appointment of Managing Director shall be subject to the approval of IDBI.(3(v); the funds brought in to meet the shortfall for completing the project and/or working capital will be in such form and with the terms as required by IDBI from the Promoters and specified Persons (4(d)); any proposed change in the nature or scope of the project shall not be implemented or funds committed there for without the prior approval of IDBI (5.1(i)) prior concurrence of IDBI is required to any modification or cancellation of the agreements with machinery supplies, collaborators, technical consultants, suppliers of raw materials; and any operations related to Bank are subject to verification by any person authorised in this behalf by IDBI. (5.2(iii)(a))
3. The Agreement also stipulated (5.3) that without the prior approval of IDBI, the company shall not (i)undertake any new Project, diversification, modification, or substantial expansion of the Project.(ii)change capital structure, create charge on assets, give guarantees, issue debentures, raise loans, accept deposits from public except raising of loans from banks or granting as in the ordinary course of business.(iii)repay any loans availed of from any other party. (iv)undertake any scheme of amalgamation or reconstruction (vi) carry on any general trading activity other than the sale of its own products, that unless otherwise agreed to by IDBI, the company shall (i) maintain an accounting and cost control system satisfactory to IDBI (ii) provide all such information at the request of IDBI (iii) carry out alterations to Memorandum and Articles of Association as may be required by IDBI to safeguard the interests arising out of this agreement.(iv) modify or terminate the existing selling/purchasing arrangements in such a manner as may be required by IDBI.
4. The Agreement also specifically gave IDBI the right to appoint and remove from time to time, one director on the Board of Directors of the company (5.4) and also stipulated (5.5) that , no change in existing management or in terms of their appointment without IDBI's approval (ii) in future all change in management and key persons to be made as and when required by IDBI and no such changes should be made without approval from IDBI. (iii), IDBI can appoint professionals to inspect and examine working of the company, financial and accounting systems, to carry out concurrent audit etc., - the cost of which would be borne by the company (iv) the company to constitute such committees of the Board as required by IDBI. (v) the company shall not recognise transfer of shares by promoters and the company shall furnish to IDBI undertaking for non-disposal of shares by Promoters; the company will offer the shares held by IDBI subscribed in terms of the agreement to the public whenever required by IDBI (6.3)
5. Dr. Shah submitted that from the clauses cited from the Agreement, it is clear that IDBI had substantial control over the company and hence IDBI was a Promoter of the company as defined in regulation .2(1)(h) of the 1997 Regulations.
6. Learned Representative submitted that immediately after the public issue the promoters' holding reached 30.85% of the total paid up capital of the company, and that of IDBI's at 23.60%, that in January 1999, the company made a preferential allotment of 15 lakh equity shares in which the Appellants did not participate and as a result the aggregate holding of the promoters was reduced to 22.46% and that of IDBI to 17.42%.
7. Dr. Shah submitted that IDBI vide letter dated 26.8.1999 informed the Appellants of their plan to sell nine lakh shares of the company at market related price, giving first option to the Appellants stating that in case the Appellants fail to convey their willingness to buy back the shares, it would be presumed that the Appellants had exercised the right of refusal available to them in terms of clause 6.4 of the Subscription Agreement and IDBI shall be free to dispose off the shares in the market or otherwise. Learned Representative submitted that in response to the said letter Shri Ranjit Dhuru, on behalf of the promoters (Appellants) informed IDBI vide his letter dated 31.8.1999 about their interest in buying back the said shares and also enquired about the price, that Shri Nitin Shukla, also wrote to IDBI on 27.9.1999 reaffirming their willingness to acquire nine lakh shares and indicated a price of Rs.150/- per share as the purchase price, that on 12.11.1999, IDBI wrote to the Appellants informing their willingness to sell the shares to the Appellants at the rate of Rs.477.75 per share aggregating to Rs.42.99 crores and required that the (i) the offer should be accepted on or before 5 P.M. on 15.11.1999 (ii) 10% or Rs.4.29 crores should be paid by 5 P.M. on 15.11.1999 and (iii) the balance 90% be paid by 5 P.M. on 19.11.1999 that it was also stipulated in the said letter that if the payment is defaulted the ten per cent payments made will be liable to be forfeited, that since the shares held by IDBI are in the process of dematerialisation and if the shares are purchased by the Appellants , IDBI will deliver the same in the demat form only after getting the same dematted.. Learned Representative submitted that IDBI, thus gave very limited time to the Appellants to acquire the shares and to make the payment therefor. He further submitted that on the morning of 15.11.1999 itself IDBI filed caveats in the Bombay High Court and the City Civil Court at Bombay and asked the Appellants to give atleast 48 hours notice to them in case they intended to move the court for any relief against IDBI. Dr. Shah stated that the promoters did not have the capacity to acquire the entire 9 lakh shares by investing Rs.42.99 crores, but at the same time their 22% holding in the company's capital was not adequate to ward off a raider taking over the company, that since IDBI was holding about 16% of the company's paid up capital, the Appellants wanted to avoid hostile takeover of the company by a stranger by acquiring IDBI's holding, and therefore, they were desirous of acquiring a part of the holding of IDBI and also wanted to ensure that the remaining part of the aforesaid shares does not go into undesirable hands. He further submitted that since the Appellants were not having funds for the purpose, to raise funds they approached several financiers. Learned Representative submitted that there was every reason to believe, from the conduct of IDBI that they had some one else readily available on hand to purchase the shares and the Appellants were desperate to ensure that the company does not go to a third party, that they allocated the responsibility for rasing funds for the purchase of the said nine lakh shares, inter se themselves and each promoter tried to raise funds for the amount that was allocated to him, and eventually different promoters independently made arrangements with different financiers and raised the requisite funds. In this context learned Representative referred to the following details furnished in a tabular form forming part of the appeal book.
STATEMENT OF FINANCING-CUM-OPTION ARRANGEMENT Existingshareholding of Promoters priortoacquisition from IDBI Existing% of promoters Number of Shares acquired from IDBI Total HeldbyPromoter(a+c) %Held by the Promoters Financing agreement with Total Financial Assistance (Rs. in crores) Loan Component (Rs. in crores) Option Component (Rs. in crores) No. of shares under option Without Entitlement of each Promoter in Number Total shares with Promoters if they had acquired No. %of Total a b C d e f g h I j k(a +j) l Ranjit Dhuru 193250 3.37% 21000 214250 3.73% JDP Shares & Finance Ltd.
5.29 0.43 4.86 100 000 1515 00 344 750 6.01% Panther Investrade Ltd.
1.94 0.47 1.47 305 00 Nitin Shukla 193150 3.36% 16000 209150 3.64% Panther Investrade Ltd.
7.25 0.68 6.57 135 500 1515 00 344 650 6.00 % Ravindranath Malekar 192350 3.35% 16000 208350 3.63% Classic Credit Ltd.
7.27 0.68 6.59 135 500 1515 00 343 850 5.99% Mukul Dalai 83600 1.46% 5000 88600 1.54% Mividha Investments Pvt. Ltd 2.29 0.21 2.08 425 00 4750 0 131 100 2.28 % Promod Broota 81900 1.43% 5000 86900 1.51% Mividha Investments Pvt. Ltd 2.29 0.21 2.08 425 00 4750 0 129 400 2.25 % Ashutosh Humnabadkar 187500 3.27% 16000 203500 3.54% Panther Investrade Ltd 7.26 0.68 6.58 135 500 1515 00 339 000 5.91% C.V. Khopkar 84000 1.46% 5000 89000 1.55% Classic Credit Ltd.
2.29 0.21 2.08 425 00 4750 0 131 500 2.29 % Sandip Save 193250 3.37% 16000 209250 3.65% Classic Credit Ltd.
7.28 0.68 6.6 135 500 1515 00 344 750 6.01% Total 1209 000 21.0 6% 1000 00 1309 000 22.8 0% 800 000 9000 00 210 9000 36.74 % % of Total Capital 21.06% 1.74 % 22.80 %
13. 94 % 15.6 8% 36.74 % "Notes:
1. It is appearent from the above column - c that none of the Promoters individually or all the Promoters taken together have acquired more than 5% shares.
All the Promoters together have acquired only 1.74%
2. Mr. Mukul Dalal had pledged his shares against Housing Loan taken by him from IL&FS. Considering the fall in price of the shares, IL&FS had sold part of his share without reference to him. None of the other promoters have sold any shares held by them.
3. The last three columns are given only for information without prejudice to our stand".
8. Learned Representative submitted that for acquiring one lakh shares, loan was raised by the Appellants, and for acquiring eight lakh shares financial assistance was obtained from financiers by entering into separate Financing-cum-Option-Agreements by the concerned Appellant and the concerned financier, that the agreement gave option to the financiers to acquire the shares for the purchase of which they were giving finance. He submitted that the Appellants accepted IDBI's offer by their letter dated 15.11.1999 and offered revised payment schedule i.e. 10% by 15.11.1999, 20% by 19.11.1999 and 70% by 30.11.1999 and also agreed to pay interest @ 18% per annum for 11 days (from 20.11.1999 to 30.11.1999)on the 70% balance amount and IDBI accepted the revised terms.
9. According to Dr. Shah, the Appellants and the financiers acquired the shares, that the financiers acquired eight lakh shares at the same price at which they were offered by IDBI and no profit has been made by the Appellants, that on 2.12.1999 IDBI transferred the entire nine lakhs shares to the demat accounts of the respective Appellants and they, thereafter transferred the shares aggregating to eight lakhs to the demat accounts of the four financing parties, that the Appellants collectively acquired and held only one lakh shares which accounted for 1.74% of the company's capital, that the eight lakh shares acquired by the four financiers accounted for 13.94% of the company's capital. Learned Representative submitted that although actually the acquisition by the Appellants was only one lakh shares i.e.1.74%, the Adjudicating Officer wrongly held that the Appellants first acquired nine lakh shares from IDBI and then sold eight lakh shares to the financiers. He submitted that the basic difference in the perception of the Appellants and the Adjudicating Officer is that according to the Adjudicating Officer the Appellants acquired nine lakh shares (15.68%) from IDBI and then sold eight lakh shares to the financiers, whereas according to the Appellants they beneficially acquired only 1 lakh shares (1.74%) and the financiers acquired 8 lakh shares, that based on his perception the Adjudicating Officer held that prior to 15.11.1999 the Appellants were holding 21.06% and they acquired 15.68% more as against the 5% limit specified under Regulation 11(1). Dr. Shah submitted that in fact the Appellants' holding increased only by 1.74% against the 5% limit specified under regulation 11(1). He submitted that later on the Appellants and their family members borrowed Rs.4.57 crores from Ratnakar Bank Ltd. and repaid the amount borrowed from the financiers to meet the cost of one lakh shares that their borrowing from the Ratnakar Bank is still outstanding.
10. Dr. Shah reiterated his contention that the Appellants acquired only one lakh shares (1.74%). He narrated the sequence of events in the transaction, that on paying the balance amount (70%) on 30.11.1999, IDBI sent the shares for demat, that the credit for the respective number of shares to the demat account of the respective Appellants was made on Thursday 2.12.1999 and not on 29.11.1999 as alleged by the Respondent, that the Appellants learnt about this credit only on 6.12.1999 (Monday), that on 7.12.1999 they issued DP instructions to their respective DPs for transfer of shares acquired to the respective financiers, that the transaction by making debit/credit entries in the respective accounts were effected on 8.12.1999, that three Appellants are staying at Pune and Sholapur and as a result it required time to complete the transaction. He submitted that thus it is crystal clear that neither any of the Appellants individually, nor all of them together, in fact, acquired more than 5% equity shares of the company from IDBI.
11. Learned Representative submitted that the Appellants are first time entrepreneurs, that they had no capacity to acquire nine lakh shares for Rs.42.99 crores from IDBI and they had not enough finance or resources or risk bearing capacity, the whole purpose was to save the company from going to unknown outsiders. He further submitted that in the agreement with the financiers, the financial assistance has been divided into two components - loan assistance, and option/loan arrangement, that the promoters paid interest @ 18% only on the loan component for acquiring one lakh shares and not on the entire sum of Rs.42.99 crores, that this further demonstrates that the Appellants borrowed for themselves only the sum required for acquiring 1 lakh shares. He stated that as per clause 8 of the Option/Loan Agreement for failure to finance any portion of the agreed amount, the risk of forfeiture by IDBI was to be borne by financier ; because financier was to acquire 89% (8 lakh out of 9 lakh) shares.
12. Learned Representative submitted that the scheme thereunder the Appellants were to buy back shares directly from IDBI was adopted as IDBI wanted to deal only with the Appellants and not with any third party (financiers) and that is why the Appellants had to enter into the total deal with IDBI in their names, and the Appellants had to hold on the shares so acquired for a while as IDBI could not deliver shares immediately, for want of converting them to demat form, and on delivery in demat form by IDBI the shares were transferred to the financiers. He further submitted that to make it a spot delivery contract, option agreement structure was adopted for eight lakh shares so as not to violate the provisions of the Securities Contracts Regulation Act, that in clause 5 (e) of the agreement it has been provided that the "promoter" nominate financier as a purchaser for the shares for which option has been exercised by the financier and both to do the needful for effectuating the transfer of the relevant shares directly in favour of the financier. He submitted that it was a foregone conclusion that the said eight lakh shares would be acquired by the financier, in view of the rising price trend of the company's shares, that on 15.11.1999 i.e. the date of arrangement with the financiers, the company's share price was Rs.515.96, against the price of Rs.477.75 payable to IDBI
13. Dr. Shah submitted that the Regulations should be interpreted and administered keeping in mind the objectives or the purpose of the Regulations. In this context he referred to the observations made by the Hon'ble Calcutta High Court in Bansarilal Jaipuria V. Sitaram Jaipuria & others (In Re. Swadeshi Cotton Mills Ltd.,) (1972) 42 Comp.cas 29(cal) in the context of the interpretation of certain provisions of the Monopolies and Restrictive Trade Practices Act, 1969. He submitted that the objective of the 1997 Regulations is to promote the development of the healthy capital market, that as capital market requires promoters and investors, and therefore, the law should be interpreted and administered fairly to both, that the Respondents should look at the broad picture, the objectives or intentions of the parties and not be guided by mere technicalities or narrow interpretation, that the application of this rule of interpretation would necessarily require(i) looking at the intention of the parties as borne out by their conduct (ii) looking at the substance rather than the form of the transaction (iii) looking at all the facts and circumstances and giving due weight age to substance. He referred to the definition of the expression "acquirer" in regulation 2(1)(b) and "person acting in concert" in regulation 2(1)(e)(1) and submitted that the requirement of "intention" is well built in to the definition, that the words "agrees to acquire" in regulation 2 (1)(b) and "common objective or purpose" in regulation 2(1)(e)(1) is the pointer in this regard. He submitted that acquisition of shares/voting rights can be voluntary or deliberate or involuntary that intention comes in to when the acquisition is voluntary or deliberate. He submitted that whenever the question has arisen about the intention of the parties, the Courts look at the conduct of the concerned parties to determine their intention. In support he cited CIT V. Madan Gopal Radhey Lal 73 ITR 652 (SC) and CIT Vs. Associated Industrial Development Co. P. Ltd. 82 ITR 586 (SC). According to Dr. Shah intention is relatable to the mental attitude of the acquirers (in this case Appellants/financiers) and therefore they know how many shares they intended to acquire, that the Appellants had demonstrated that they intended to acquire only one lakh shares and not nine lakh shares. He submitted that intention should be backed by the purchase power as well; that the Appellants neither had the resources nor the risk bearing ability to acquire nine lakh shares, hence they could not intend to acquire nine lakh shares, and further that intention has to be borne out or evidenced by the subsequent conduct of the Appellants/financiers, that the conduct is clear from the fact that Appellants paid interest to financiers only on the money borrowed for purchasing one lakh shares and not for purchasing the entire nine lakh shares, that soon after they came to know of the credit of the shares in their demat account by IDBI, those eight lakh shares were transferred to financiers and the transfer was effected at the same price (Rs.477.75) at which the shares were purchased from IDBI even though the ruling price on 7.12.1999 was higher (Rs.1292/- per share), that the acquisition of the shares by financiers was under the binding Option Agreements which were entered into simultaneously while granting the loan as well as while entering into the Agreement with IDBI to buy the shares. He further submitted that the Appellants never became the beneficial owners of the aforesaid eight lakh shares, that they never acquired beneficial interest in more than one lakh shares, that at best they became a legal owner of eight lakh shares for a short duration, that the eight lakh shares received in the Appellants' demat accounts was subject to the prior option agreements with financiers, that the Appellants did not acquire any voting right in respect thereof even for the short duration. He submitted that the relevance of "intention" is evident from Takeover Committee Report 2002 (2002)(37 SCL ST 37 AT P. 65) " as could be seen from the observation therein that ".....The Committee also noted that Regulations are also applicable in case of intention to acquire shares which would imply that registration of shares is not a pre requisite for determining acquisition of shares." He further submitted that assuming that the Appellants intended to acquire, and in fact acquired nine lakh shares, then why should they sell the shares immediately, that too at the same price at which they acquired from IDBI (Rs.477.75) when the ruling market price as on 7.12.1999 was Rs.1292/- per share, that this itself shows that in substance, from inception the Appellants had not acquired 8 lakh shares. In support of his contention that what is required to be considered is the essence of the transaction, referred to Maxwell on "The Interpretation of Statutes-12th Edn p.138 - 141). He also cited Mcdowell & Co. Ltd. 154 ITR 148 (SC); Associated Rubber Industry Ltd. 157 ITR 77 (SC) National Cements Ltd. 42 ITR 69, 77 (SC) and Rajbir Kaur & Anr (1989) (1) SCC 019, Tarkeshwar Sio Thakur Jiu 1979 (3) SCC 106, Panbari Tea Company Ltd. 57 ITR 422 (SC) and National Steel Works Ltd. 46 ITR 646 (SC).
14. Learned Representative as an alternate argument submitted that, in respect of the eight lakh shares, the Appellants were agents of financiers because IDBI insisted on dealing only with Promoters and not with financiers, that financiers had paid the full consideration for eight lakh shares, that in the intervening few days, Appellants held eight lakh shares as agent of the principal or for and on behalf of the principal, that they held eight lakh shares in a fiduciary capacity on behalf of financiers because of the pre-existing and overriding agreement between them and financiers.
15. Dr. Shah submitted that the Appellants had entered into the Agreement with IDBI on 5.4.1995, that pursuant to the same the Appellants gave an irrecoverable undertaking to IDBI for buyback of shares, that 1997 Regulations came into force only from February, 1997, and thus the Appellants had the obligation to buy back the shares as agreed to before the 1997 Regulations came into force. He submitted that the definition of the term acquirer includes a person who agrees to acquire shares in the target company, that the promoters had agreed to acquire the shares from IDBI much prior to the coming into force of the 1997 Regulations and therefore, these Regulations did not apply in their case, in any event, that was their honest belief and understanding.
16. Learned Representative submitted that the transaction also enjoyed exemption under regulation 3(1)(e)(iii) in as much as the transfer from IDBI to the Appellants were interse the promoters. In this context he referred to the definition of promoter in regulation 2(1)(h) and regulation 2(1)(c ) providing the definition of the expression 'control' and submitted that as per the Agreement, IDBI enjoyed several powers including Veto power in respect of almost all the major decisions concerning the company. He submitted that IDBI is a co-promoter and therefore acquisition of shares from IDBI is exempt under regulation 3(1)(e)-(iii) (b) and public offer is not required. He further submitted that proviso to Explanation (i) to regulation 12 provides that if more than 2 persons are in control over a target company cessor of any one from such control, shall not be deemed to be a change of control of management, provided the transfer of joint control is through sale at or above the market value of the shares, that in the instant case, IDBI ceased to be in control and IDBI transferred its shares at the market price, hence the transfer is exempt under Regulation 12.
17. Learned Representative submitted that spirit of Takeover Regulations should also be considered along with the other submissions that (a) IDBI which is a premier Public Financial Institution had pre existing buy back arrangements with the Appellants, that under regulation 3(1)(i), transfer of shares from State Financial Institutions as co-promoters pursuant to an agreement is exempt. He further submitted that IDBI subscribed to the shares of the company under the Venture Capital Scheme, that a transfer from a Venture Capital Fund to the promoter is exempt under regulation 3 (1)(1a). He submitted that when viewed in the spirit of the Takeover Regulations, there is no violation of regulation 11 (1).
18. Dr. Shah submitted that the purpose of the Regulations is to safeguard the public shareholders and hence in judging the action of any person in the context of the compliance of the Regulations, one should consider (i) whether there was any intention to cause adverse effect or prejudice the interest of public shareholders (ii) whether the public share holders' interest has been adversely affected. He submitted that even if the Appellants had made a public offer it would have been only an academic exercise, as the minimum offer price as per regulation 20 would have been Rs.495.20 per share as against substantially higher market price (between 1745 and Rs.3613 per share)then prevailing, no shareholder would have offered his shares in the public offer, because he would have gained substantially by selling the shares in the market. He submitted that Appellants had no intention to deprive public shareholders any benefit, nor was there any dishonest behaviour on their part, nor did they act negligently, that their action was based on the honest belief that no harm has been caused to the public shareholders. Dr. Shah submitted that the bona fide conduct of the Appellants is evident from the fact that they did not even participate in the preferential issue made by the company on 25.2.2000, though by subscribing to the preferential issue they could have made a staggering profit of more than Rs.50 crores without diluting their holding.
19. With reference to the disclosure under regulation 7(1) and 7(2), learned Representative submitted that the Appellants were not required to make any such disclosure as none of the individual promoters acquired 5% or more of the shares or voting rights in the company, that acquisition of all the promoters taken together also did not reach 5% or more of shares or voting rights in the company. He submitted that IDBI had given a public notice as per the Government guidelines for transfer in excess of 1% shares in any company, thus there has been transparency about this transaction.
20. Dr. Shah submitted that even if it is assumed for the sake of argument, that the Appellants did become the legal and beneficial owners of the nine lakh shares and if viewed that there was violation of the Regulations, the Appellants were not to be penalised as they had not intentionally violated any provision of the Regulations and as a result of their action no harm has been caused to public shareholders, that every non compliance does not become an offence and does not attract penalty. In support he cited the observation made by the Hon'ble Supreme Court in Motilal Padampath Sugar Mills Co. Ltd. V. State of UP (118 ITR 326 SC at p.339) that there is no presumption that every person knows every law, that it would be contrary to common sense and reason if it were so. He also cited this Tribunal's decision in Samrat Holdings Ltd. V SEBI (2001 29 SCL 417 (SAT) and Cabot International Capital Corporation V SEBI (23001 29 SCL 399 (SAT). He referred to Hindustan Steel Ltd. v. State of Orissa AIR 1970 SC 253 and stated that therein it has been held by the Hon'ble Supreme Court that penalty will not ordinarily be imposed unless the party either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. He cited Akbar Badrudin Jiwani V. Collector of Customs 1990 (47) ELT 161 to support his contention that for an action based on bonafide belief no penalty is imposable. In this context he also cited Cement Marketing Co. of India 124 ITR (SC).
21. Learned Representative submitted that the totality of the circumstances need be considered and not a particular fact in isolation for judging the Appellants' action. He submitted that the Appellants' action be not judged in hind sight but should be judged on the facts and circumstances of the case at the relevant time, and also looking at the substance of the transaction and the intention of the Appellants. Dr. Shah submitted that though section 15J of the Act expressly requires certain factors to be considered by the Adjudicating Officer, while deciding the penalty, he has disregarded these factors in the instant case. According to the learned Representative, no case has been made out against the Appellants and there is no justification to impose penalty on them and therefore, the impugned order can not be sustained.
22. Shri Kumar Desai, learned Counsel appearing for the Respondents referred to the reply filed by the Respondent and submitted that the Appellants who are the promoters of the company acquired nine lakh shares of the company @ Rs.477.75 per share, from IDBI on 30.11.1999, that out of which eight lakh shares were thereafter sold to three Ketan Parekh entities. He submitted that the nine lakh shares acquired by the Appellants accounted for 15.68% of the total voting capital of the company, that the acquisition was in excess of the 5% bench mark provided in regulation 11(1) and therefore, the requirement of making public announcement attracted. He referred to regulation 11(1) which stipulated that "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 share or voting rights entitling him to exercise more than 5% 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". He submitted that after acquiring nine lakh shares which constituted 15.68% of the company's share capital the shareholding of the Appellants in the company increased to 36.74%. In this context he referred to the factual position tabulated in the Respondent's reply.
Name of the Promoter Buy-back by each promoter in number of shares Total holding of shares with promoters after acquiring 9.00 lakhs from IDBI No. % of Total Ranjit Dhuru 151500 344750 6.01% Nitin Shukla 151500 344650 6.00% Ravindranath Malekar 151500 343850 5.99% Mukul Dalal 47500 131100 2.28% Promod Broota 47500 129400 2.25% Ashutosh Hamnabadkar 151500 339000 5.91% C. V. Khopkar 47500 131500 2.29% Sandip Save 151500 344750 6.01% Total 900000(15.68%) 2109000 36.74%
23. Shri Desai submitted that thus having acquired shares beyond the 5% bench mark provided in regulation 11(1) public offer to acquire shares, was required to be made by the Appellants , that for the non compliance of the requirements of the said regulation, consequences as provided in section 15(H) of the Act are attracted. As per the said section if any person who is required under the Act or any rules or regulations made thereunder, fails to make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakhs rupees. Shri Desai submitted that in the given set of facts and the legal provisions, the monetary penalty imposed by the Adjudicating Officer is to be sustained.
24. With reference to the finding of the Adjudicating Officer that the Appellants violated the provisions of regulation 7(1), Shri Desai submitted that regulation 7 requires the acquirer who acquires shares or voting rights which would entitle him to more than 5% shares or voting rights in a company to disclose the aggregate of shareholding or voting right in that company to that company within 4 working days of the acquisition of shares or voting rights, that since the acquirers i.e. the Appellants in the instant case had failed to disclose their shareholding to the target company, they are liable for the penalty provided under Section 15A(b) of the Act, thereunder if any person, who is required under the Act or any rules or regulations made thereunder, fails to file any return or furnish any information, books or other document within the time specified therefor in the regulations, he shall be liable to a penalty not exceeding five thousand rupees for every day during which such failure continues. He submitted that the Appellants have not till date complied with the said requirement and the Adjudicating Officer, imposed only a sum of Rs.1,50,000/- as fine, though considering the continuing default he could have imposed a much larger sum as penalty.
25. Shri Desai countering the Appellants' version that they were under obligation to buyback the shares in terms of the undertaking for buyback of shares given by them to IDBI, submitted that as per the said undertaking, buyback requirement on the Appellants is a self imposed condition for the benefit of the Appellants, that they had right of refusal and they could have refused to purchase the shares, in case they were not interested. He pointed out that it was not a statutory requirement but a requirement arising out of an agreement entered into between the Appellants and IDBI and the Appellants can not claim that they had no choice but to agree to buy back shares and comply with the said condition. In this context he referred to IDBI's letter dated 26.8.1999 to the Appellants which referred to the Agreement entered into by the Appellants with IDBI on 5.4.95. The said letter stated that in terms of the said agreement "IDBI subscribed to 10,00,000 equity shares of Rs.10/- each, in the company at par and paid an aggregate amount of Rs.100 lakhs. In terms of the provisions of Article VI of the said agreement, the company procured and furnished to IDBI, an undertaking from all of you, agreeing to buyback the shares subscribed by IDBI, at the market related price and on other terms as may be mutually agreed. IDBI now proposes to sell about 9,00,000 equity shares of the company and therefore call upon you to convey within 7 days from the date of this letter, your willingness to buyback the above referred 9,00,000 nos. equity shares of the company at the market related price, and on other terms as may be mutually agreed. In case you fail to convey your willingness to buyback the shares, it would be presumed that you have exercised your right of refusal available to you, in terms of the provisions of Clause 6.4 (Article VI if the Agreement ) and IDBI shall be free to dispose off the shares of the company, subscribed by it under the said Agreement, in the market or otherwise. In case you convey your willingness to buyback the shares, a final letter offering to sell the shares at a mutually agreed price will be issued by IDBI to you and the same will be required to be accepted by you within a short time, say a day. Further, a part of the payment of the sale consideration will be required to be made alongwith your acceptance and balance within 7 days from the date of acceptance by you. Meanwhile, please acknowledge receipt." Shri Desai submitted that the Appellants responded to the said offer, vide their letter dated 31.8.1999, informing IDBI that they are interested in buying back the shares as offered by IDBI and requested to "indicate the price at which IDBI would be interested in selling the shares to the promoters and also the basis of the working of the price." Learned Counsel referred to the Appellants' letter dated 27.9.1999 to IDBI, reiterating and confirming their willingness to purchase the nine lakh shares indicating a price of Rs.150/- per share, that in the said letter they had also stated that it was "without prejudice to our first right of refusal ". Learned counsel further referred to the following paras in IDBI's letter in this regard:
"3. In above connection, we may clarify that since the shares of the company have been listed and actively traded on the Bombay Stock Exchange, we offer the said 9,00,000 shares to you at the closing price of the share on the said Exchange as on Friday, the November 12, 1999 (i.e. the date of issue of this letter) which was Rs.477.75 per share.
4. If the above offer is acceptable to you, please pay to IDBI by demand draft/Bankers' pay order (payable at Mumbai) for Rs.429, 97,500, being 1/10th (one tenth) of the aggregate consideration amount of Rs, 4299,75,000 by 5.00 pm on November 15, 1999 in token of your acceptance. The balance amount of Rs.3869,77,500 is payable in the same manner by 5.00 p.m. on November 19, 1999. If the said balance amount is not received by IDBI as stipulated, the 1/10th amount paid by you shall be liable to be forfeited.
5. In the event IDBI does not receive either the 1/10th payment or the balance amount within the time limit stipulated, it would be construed that you are not willing to buy the shares and IDBI will then be free to sell the shares to anybody in the market or otherwise.
6. The shares held by IDBI are in the process of dematerialisation. The shares, if purchased by the promoter, will be delivered in Demat form only for which purchaser may also furnish relevant details like DP number, customer ID number etc."
26. The Appellants vide their letter dated 15.9.1999 accepted the offer subject to the condition that 10% of the purchase consideration would be paid by 15.11.1999, 20% by 19.11.1999 and the balance 70% by 30.11.1999. It was also agreed to by the Appellants that their "failure to make payment of any of the instalments due on November 19, 1999 or November30, 1999 shall entitle IDBI to forfeit the amount of Rs.4,29,97,500 which they agreed to treat as security deposit, that on such default, IDBI was given right, without any further reference to them to dispose off the shares to any body else in whatsoever manner they may decide. That they agreed to pay interest at the rate of 18% per annum for 11 days (i.e. from November 20, 1999 to November 30, 1999) on the balance 70% of the aggregate consideration along with the instalments payable on November 30, 1999. IDBI vide its letter dated 15.11.1999 agreed to the Appellants' offer. Shri Desai submitted that the buyback was thus agreed to in terms of an agreement entered into between the parties. He submitted that it is an admitted fact that the agreement was carried out, that IDBI received money from the Appellants, and in turn transferred the shares to them. Learned Counsel submitted that it is of little consequence for the purpose of regulation 11(1), as to from whom the requisite funds were mobilised and on what terms, that the promoters of company approaching financiers to mobilise funds for purchase of shares is not uncommon. In this context he referred to the "Finance Cum Option Agreement for Purchase of Aftek shares" entered into by the Appellants with the financiers, filed along with the appeal and stated that the terms and conditions of all these agreements are substantially common. For referral purpose he cited 'Finance cum Option Agreement' between Shri Charuhas V. Khopkar and Classic Credit Ltd. He submitted that it has been made clear in the said agreement that the Appellant required large sums of money to acquire the shares of the company, and for that he approached the financier for finance and the financier agreed to provide the financial assistance which consisted of the following two components i.e. (a) Rs.21,25,000 (Rupees twenty one lakhs twenty five thousand only) by way of a Loan Assistance on the terms and conditions specified in Clause 4 herein below. (b) Rs.2,08,00,000 (Rupees two crores eight lakhs only) under the Option/Loan Agreement on the terms and conditions specified in Clause 5 hereinbelow.
4. Loan Assistance The terms and conditions of the Loan Assistance mutually agreed upon are as follows:
(a) The amount of the Loan Assistance would be Rs.21,25,000 (Rupees twenty one lakhs twenty five thousand only)
(b) The Borrower shall be required to pay interest at the rate of 18% per annum on the amount of the loan outstanding from time to time.
(c) The principal amount of the loan along with interest shall be payable on or before 31st March, 2000.
(d) The Borrower shall also pay to the Financier all expenses and charges incurred by the Financier in enforcing repayment of the Principal or payment of interest or other dues under this clause or liquidated damages under sub-clause (e) below or which are incurred in any other manner whatsoever by the Financier in pursuance of this Agreement and these expenses and charges shall be regarded as and constitute dues from the Borrower to the Financier and the Borrower shall pay the same to the Financier as and when and in the manner they are demanded by the financier by means of a letter or invoice.
(e) In the event of default in payment of the principal, interest or the dues mentioned in under sub-clause (d) above on the due date, the Borrower shall pay to the Financier as liquidated damages at the rate of 36 percent per annum on the amount in default for the period of the default.
5. Option/Loan Arrangement The terms and conditions of the Option / Loan Arrangement mutually agreed upon are as follows:
(a) The Option/Loan arrangement would be for the Sum of Rs.2,08,00,000 (Rupees two crores eight lakhs only)
(b) The Financier has an Option to purchase up to 42,500 shares (hereinafter referred to as "the said Option Shares") out of the said Shares at an aggregate amount of Rs.2,08,00,000 or such lower amount as is proportionate to the number of shares for which the Option is exercised by the Financier.
(c) The Option offer contain herein is open up to the end of 15th December, 1999, at the end of which the offer contained herein shall, unless earlier accepted by the Financier, expire.
(d) The Financier shall exercise the Option contained herein by writing to the Borrower stating that he accepts the Option either in full for 42,500 shares or for such lesser number of shares, as the Financier may specify in the said Letter of Acceptance.
(e) If the Option is exercised by the Financier, then the amount of Rs,2,08,000 or such lower amount as is proportionate to the number of shares for which the Option is exercised by the Financier, would be treated as a payment for the purchase of the shares for which the Option has been exercised by the Financier, from the date on which the payment has been made by the Financier.
The Borrower shall nominate the Financier as a purchaser in respect of the shares for which the Option has been exercised by the Financier and the Borrower and the Financier shall do the needful for completely effectuating the transfer of the relevant shares directly in favour of the Financier. PROVIDED HOWEVER THAT in the event the shares are first transferred in the name of the Borrower, the Borrower and the Financier shall take such steps as may be necessary for transferring the relevant Shares in favour of the Financier.
(f) If the Option is not exercised by the Financier or is exercised only in respect of a part of the shares, then the said amount of Rs.2,08,00,000 or a part thereof in proportion to the number of shares for which the Option has not been exercised, shall be treated as a Loan Assistance over and above the Loan Assistance specified in Clause 4 hereinabove, and all the terms and conditions mentioned in clause 4 hereinabove would be applicable to the said Loan Amount also.
5. Security for Financial Assistance
(a) The repayment by the Borrower to the Financier of the total Financial Assistance together with all interest thereon and the dues and the liquidated damages under this Agreement shall be secured by the pledge by the Borrower with the Financier of the aforesaid 47,500 shares of Aftek (hereinafter referred to as "the said Security Shares") and for this purpose, the Borrower shall take all the necessary steps to get the said Security Shares transferred in favour of the Financier or the nominee of the Financier.
(b) The Borrower shall ensure that the transfer deeds and other necessary documents lodged by the Borrower with the Financier as aforesaid are correct and complete in all respects and sufficient for transfer of the said Security Shares in the name of the Financier or its nominee, if so desired by the Financier, without further recourse to or act to be performed by the Borrower.
(c) The Borrower hereby declares, assures and warrants that the said Security Shares upon receipt from IDBI would be the Borrower's absolute property as beneficial owner thereof and the same shall be unencumbered and the Borrower hereby agrees and undertake that till the entire amount of the Financial Assistance, interest and other dues under this Agreement are paid off in full to the Financier, the Borrower shall not sell, agree to sell and/or encumber the said Security Shares in any manner whatsoever.
(d) The Borrower hereby indemnifies and keeps the Financier indemnified against all cost, charges, expenses, penalties, claims, demands and damages that the Financier may incur or be put to by reason of any third party claiming any right, title or interest in respect of the said Security Shares.
(e) It is expressly agreed by the Borrower that it shall not hold the Financier responsible for the loss or mutilation, if any, of the said Security Shares when such loss or mutilation is not attributable to any willful act of commission or omission on the Financiers' part.
(f) For the purpose of this Clause, the following events are "Events of Default"
(i) If the Financier has a reasonable apprehension that the Borrower is unable to pay his debts or proceedings for taking him into insolvency, either voluntarily or compulsorily, may be or have been commenced.
(ii) If the Borrower is unable or fails to or had admitted in writing his inability to pay his obligation under this Agreement on maturity
(iii) The Borrower commits breach of any of the clauses of this Agreement.
(iv) If any extraordinary circumstance has occurred which makes it improbable for the Borrower to fulfill its obligations under this Agreement
(g) If any Event of Default, or any event which after a lapse of time is capable of becoming an Event of Default, takes place, the Borrower shall forthwith give notice thereof to the Financier in writing specifying the nature of such Event of Default or such event.
(h) In the Event of Default, the Borrower hereby irrevocably and unconditionally authorise the Financier (but not so as to make it imperative upon the Financier to do so) to sell and/or otherwise dispose off the said Security Shares or any part thereof to anyone by any means whatsoever, including but without limiting, by public auction or by private treaty, as and when the Financier may, in its absolute discretion, deem fit and to apply the net proceeds of such sale in satisfaction of the amount due to the Financier from the Borrower under this Agreement. The Borrower agrees that it shall not be necessary for the Financier to give the Borrower any notice of such intended sale and /or transfer and that such notice shall be deemed to have been waived by the Borrower who hereby agrees and undertakes not to raise any dispute as to the value at which the said Security Shares are sold / transferred by the Financier and the decision made by the Financier in this regard shall be final and binding on the Borrower.
PROVIDED HOWEVERTHAT in the event of default, the Financier shall also have rights to adjust / apportion the said Security Shares or any part thereof towards the outstanding Financial Assistance and/ or interest thereon without any recourse to the borrower."
27. Shri Desai submitted that from the above clauses in the agreement it is clear that the financier had not made money available to the Appellants to purchase shares on his behalf but provided funds to the Appellants to purchase shares and certainly he did put safeguards to protect his interest by providing for adequate security for the funds so advanced.
28. Shri Desai submitted that the Appellants can not claim that they were unaware of the law, that they were fully aware of the provisions of the Takeover Code, is evident from the following clause 9 in the agreement:
SEBI Takeover Code
(a) "The Borrower has represented to the Financier that pursuant to Regulations 6 and 8 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as "the SEBI Takeover Code") Aftek with the consent of IDBI has made declarations to the Securities and Exchange Board of India / Bombay Stock Exchange that IDBI is a Co-Promoter of Aftek and thus, the acquisition of shares by the Borrower from IDBI is exempt under Regulation 2(1)(e)(iii)(B) of the SEBI Takeover Code and does not require making a Public Offer under the SEBI Takeover Code.
(b) It has been agreed that the Financier is not and should not be regarded as "person acting in concert" with the Borrower and vice versa within the meaning of Regulation 2(1)(e) of the SEBI Takeover Code in case it exercises the Option to buy any of the said Option Shares."
29. Shri Desai submitted that the Appellants designed the transfer in such a way that their individual acquisition did not exceed 5% limit provided in the regulation and prepared document for record purpose so as to circumvent the requirement of the regulation, that it can not be said that they were unaware of the provisions of the 1997 Regulations as is being attempted to project now. Shri Desai submitted that the Appellants also made a profit on sale of the shares to the financiers.
30. Shri Desai submitted that the Appellants are the acquirers and each of them had acquired shares by acting in concert with the others. He referred to the definition of the expression " acquirer" provided in regulation 2(1)(b) and also to the definition of the words 'person acting in concert' in regulation 2 (1) (e), and submitted that the acquirer includes persons acting in concert with him that to decide whether persons are acting in concert the test is as to whether there is any commonality of the objective, that in the instant case, the common object was to acquire nine lakh shares of the company from IDBI and the Appellants acted to accomplish the said objective. He submitted that the total acquisition by them has to be taken into consideration and not the acquisition made by each one of them separately. In this context he referred to para 9.2 in the order wherein it has been stated :
"I find that all the notices are full time working directors of Aftek. They are also promoters of the target company. I find that all the notices interse on 14th November, 1999 arrived at an understanding to buy back 900000 shares from IDBI at Rs.477.75. The said understanding was fall out of subscription agreement dated 5th April 1995 and irrevocable undertaking dated 10th April 1995 executed by these notices in favour of IDBI at the time of grant of financial assistance. I find that a common letter dated 26th August, 1999 and 12th November 1999 was written by IDBI to these notices jointly for selling the shares to the promoters at market related price. In letters dated 31st August 1999 and 29th September 1999 by Shri Ranjit Dhuru, Promoter, MD and Shri Nitin Shukla agreed to buy entire quantity of 900000 equity shares by the promoters in one go. In a letter dated 15th November 1999 written by all the notices jointly to IDBI accepted the offer subject to payment schedule, i.e. the notices will pay to IDBI by 5 p.m. on 15th November 1999 a sum of Rs.4,29,97,500 being 10% of the total consideration, Rs.8,59,95,000 being 20% on 19th November 1999 and balance 70% i.e. Rs.30,09,82,500 by 30th November 1999. I also find that the notices wanted that the shareholding of these notices in the target company was retained around the original holding of 25%. They were also anxious that this lot of shares did not go into undesirable hands. Thus the main purpose of acquisition of these shares was to retain the control of the notices in the target company. Thus notices have been acting with common objective and purpose and thus all the notices will come within the purview of regulation 2(1)(b) and (e) of the Regulation. I therefore hold that all the notices have acted in concert for the acquisition of these shares for the purpose of retaining their holding or control in the target company."
31. According to Shri Desai, the Adjudicating Officer has clearly established the concerted action by the Appellants. Learned Counsel submitted that it is not disputed that the Appellants had acquired the company's shares in excess of the limit stipulated in regulation 11(1), that compliance of regulation is thus triggered and subsequent sale of shares does not absolve the Appellants from their failure in complying with the requirements attendant to the acquisition of shares already made by them. He submitted that the agreement with the financiers provide terms and conditions to protect the interest of the financiers and that there is no prohibition on the Appellants selling those shares to some one else, in case their liability to repay the money to the financier had been met with. The Appellants' argument that they had no intention to retain the said nine lakh shares is of no consequence. The Regulations provide for compliance of certain requirements on triggering the code and there is no escape but to comply with those requirements, that mens rea is not an ingredient to be considered for the purpose of imposition of monetary penalty for the failure to comply with the requirements of the regulation 11 (1) read with section 15H(ii).
32. Shri Desai submitted that IDBI is not a promoter of the company, that IDBI had financed the company under a venture capital scheme, the fact that IDBI is not a promoter is borne out of the agreement dated 5.4.1995 also. He further submitted that IDBI was not in control of the company, and no evidence to show that it was controlling the company has been produced. It is a well settled practice followed by the lending financial institutions that they never interfere in the management of the companies and the interference comes, if at all, only when their interest as a financier is likely to be adversely affected as a result of any action by the management. In this context he referred to para 12.4 of the impugned order wherein the Adjudicating Officer has clearly explained the role of IDBI that "Thus, all 9 directors are from promoters group and there is no single director from IDBI. Thus, all the notices are in control of Aftek as per Regulation 2( c ) which defines control to include the right to appoint majority of directors or control the management or policy decisions. From the constitution of the Board of Aftek it is clear that it is the notices alone who control the management of Aftek or policy decisions. Therefore IDBI cannot be treated as in control of the target company. IDBI had imposed certain conditions under the subscription agreement for seeking prior approval by IDBI in respect of removal of any director or appointment of any director, changes in the projects, etc. Such conditions are similar to the conditions which the All India Financial Institutions provide for their granting financial assistance for the purpose of protecting their loan or subscription. By imposing such conditions, it cannot be said that IDBI has acquired the control of the target company. I have also perused a copy of the extract of the prospects in respect of its public issue which opened for public subscription on 20th April 1995. I find that from the said prospectus under the heading "promoters and their background" the name of the notices have been given. Further the details in respect of the management has also been given. It is specified that the overall management of the company is vested in the Board of Directors. The Company's Board consisted of 9 directors including the CMD. Shri Ranjit Dhuru is the Chairman and Managing Director and remaining 8 promoters including all notices are full-time working directors. Further, the details of the terms and conditions of venture capital assistance from IDBI has also been furnished. From the said terms and conditions of the prospectus it is also clear that IDBI has merely given financial assistance. IDBI's name has also not been shown as promoter in the offer document. IDBI's name has also not been shown in control nor any of the directors of IDBI shown as a director amongst the directors of the Target Company. I therefore come to the finding that IDBI cannot be treated as promoter or in control of the target company. Therefore, the question of treating it as a case of interse transfer amongst the promoters under regulation 3 (1)( c ) (iii) or treating as a case of joint control to sole under regulation 12 explanation 1 proviso does not arise. I therefore reject this contention as untenable."
33. Learned Counsel countering the Appellants' version that the acquisition of shares is exempted under regulation 3(1)(ia) submitted that, the said exemption is not available to the acquisition. He referred to the following observation in the order that "under regulation 3(1)(ia) transfer of shares from venture capital fund or from venture capital investor registered with the Board to promoters of a venture capital undertaking or venture capital undertaking pursuant to venture agreement with the venture capital fund or venture capital investor or with such promoter or venture capital undertaking is exempted. The above amendment was inserted in the SEBI Regulations only from 30th December 2000 and did not have any retrospective operation. It is further observed that to be entitled for availing this exemption certain conditions need to be fulfilled such as that the promoters should be the promoter of the venture capital undertaking and the venture capital fund should be registered with SEBI. Aftek does not appear to be a venture capital undertaking or IDBI does not appear to be registered with SEBI as a venture capital fund. In any case buy back or acquisition in this case has taken place in November 1999 which is much before the notification of amendment on 30th December 2000. None of the requirement as specified in regulation 3 (1)(ia) has been fulfilled in the case under consideration. Therefore, even if it is presumed that all the conditions are applicable or have been complied with this provision cannot be given retrospective operation. I therefore reject the contention that the acquisition is exempted under regulation 3 (1)(ia)".
34. Shri Desai submitted that the information furnished by IDBI to stock exchange is not a substitute for compliance of the disclosure requirements by the Appellants under the Regulations. He referred to regulation 7(1) and submitted that the disclosure required thereunder is applicable to acquisition of shares or voting rights in a company in any manner. He submitted that the disclosure by acquirer in terms or regulation 7(1) is very important as that enables the company with first hand information about block holding and also the investors at large, as the company reports the shareholding/voting right position to the stock exchanges. According to him the requirements of regulation 7(1) is meant to protect the interest of the management of the target company and also the other shareholders in the company. He submitted that the shareholders have a right to know who are all acting in concert and the extent of their interest in terms of shares/voting rights in the company in which they hold shares that the argument that nobody is going to be adversely affected and as such no compliance of the statutory requirement is required deserve to be dismissed. He further submitted that duration of holding the shares is not that relevant or to say that if the shares are not held for a long period disclosure under regulation 7(1) and public offer under regulation 11 are not required is contrary to the purpose for which such requirement has been provided in the Regulations. He submitted that once regulation 7 is violated section 15A is attracted. In this context he referred to the following finding in the impugned order that:
"15.1 The notices have contended that as they did not even hold 5% shares in Aftek either by themselves alone or together with persons in concert he was under no obligation to inform Aftek.
15.2 I do not find any merit in the above submission. I find that the notices have collectively or acting in concert have acquired 15.68% shares. Their holding had reached to 36.74% from 21.06% after said acquisition of 15.68%.
15.3 The subscription agreement dated April 4, 1995 and also undertaking for buy back of shares dated 10th April 1995 executed by all these 9 notices in favour of IDBI shows that the said acquisition was pursuant to their agreement. I also find that the letter dated 26th august, 1999 and 12th November 1999 written by IDBI to all the 9 notices. All these documents show that all these notices have acted in concert with a common purpose and objective. The purpose of acquisition of these 9 lakhs shares was for the purpose of retaining by the notices their control in the target company and ensuring that these shares do not fall into some undesirable hands or to any competitor company. I have concluded in para 10.0 above that these notices have acted in concert for acquisition of these 9 lakh shares from IDBI.
15.4 The provision of regulation 7 of the Takeover Regulations, 1997 have been enacted with an objective to ensure transparency in the transaction and assist regulatory bodies to effectively monitor such transactions to safeguard the interests of the investors / existing shareholders of the company or for defence mechanism and providing the shareholder an opportunity to exit at that stage, in case of a change in shareholding pattern or control over their company where it is not to the satisfaction of a shareholder.
15.5 The purpose of notifying the target company by the acquirer and the company in turn has to inform the exchange, is for the public to take informed investment or disinvestment decision. In case of increase in holding of one group, the say or contribution of other group to that extent is reduced. The investors have to take timely informed decision as regards investment or disinvestment. depending upon their perceptions as to whether the consolidation by one group or exit of the other group or a leading financial institution would be in the interests of the company or detrimental to the interests of the company as a whole.
15.7 The information as specified in regulation 7 is, nevertheless, a crucial document which enables the stock exchange to effectively perform its regulatory function being a self-regulatory organisation and to ensure compliance of the said Regulations. The report / information will enable the stock exchange to protect the interests of investors by disseminating the information received from the company through acquirer which enables the investors to take timely well-informed decision relating to their investment or disinvestment.
15.8 As per regulation 7 an acquirer who acquires shares or voting rights which taken together have not been held by him would not entitle him to 5% or more of the voting rights shall disclose the aggregate of his shareholding or voting rights to the company. In this case the notices acting in concert have acquired 15.68% of shares which is far exceeding 5% and therefore required to make disclosure to the company in terms of regulation 7(1). I find no such disclosure was made by the notices to the target company. I therefore hold the notices guilty of violation of regulation 7(1)."
35. Learned Counsel submitted that the Adjudicating Officer has clearly established the Appellants' failure to comply with the requirements of regulation 7(1) and 11(1).
36. Shri Desai submitted that as per Section 15A(b) of the SEBI Act, 1992 " If any person, who is required under this Act, or any rules or regulations made thereunder 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 not exceeding five thousand rupees for every day during which such failure continues" that non compliance of the reporting requirement in terms of regulation 7(1) thus attracts the penalty provided in section 15 A(b).
37. Shri Desai submitted that it is evident from the facts on record that the Appellants have failed to comply with the requirements of regulation 7(1) and 11(1) and thereby the penal provisions contained in Sections 15A(b) and 15H(ii) are attracted. Learned Counsel submitted that it is evident from the impugned order that the Adjudicating Officer has taken into consideration all the relevant factors including the factors to be considered in terms of section 15J of the Act and decided the quantum of penalty, and this Tribunal should not interfere in the decision as to the quantum of penalty taken by the Adjudicating Officer, based on his best judgement. He submitted that violation of the provisions of regulation 7 (1) and 11(1) are not technical as the compliance has a bearing on the investor protection. In this context Shri Desai cited House of Lords in Wings Ltd., V. Ellis (1984) 3 All ER 577 to show that how the courts view failure to disclose/wrong disclosure, even if such failure is unintentional, having an adverse effect on others concerned.
38. Shri Desai reiterated his contention that the Adjudicating Officer having found the Appellants guilty of violation of the provisions of the requirements of regulation 7 (1) and 11 (1) has rightly imposed monetary penalty and the quantum of penalty imposed is also just and reasonable. He submitted that the case law relied on by the Appellants with reference to imposition of penalty do not have application to the instant case in view of the facts of the case.
39. The company made a public issue of 37,30,000 equity shares of Rs.10/- each, sometime in April, 1995, by issuing a prospectus. It is seen from the copy of the prospectus filed along with the appeal that the company was promoted by S/Shri Ranjit Dhuru, A. Humnabadkar, Nitin Shukla, Ravindranath Malekar and Sandip Save, all of them are Appellants herein. They are also shown as directors of the company. Subsequently the remaining Appellants and one Shri Kiran Kulkarni were appointed as directors of the company. All the said nine directors are described as promoters as per the disclosure made in the prospectus. The Appellants have admitted that they are promoters of the company. It has also been stated in the prospectus that the overall management of the company is vested in the Board consisting only of the said directors. Shri Ranjit Dhuru is the Chairman and Managing Director of the Company. The directors are functioning on a whole time basis managing the affairs of the company.
40. It is seen from the prospectus that out of the 37,30,000 shares offered for subscription, ten lakh shares were to be allotted to IDBI on a "firm allotment" basis @ Rs.10/- per share under 'venture capital scheme' with a lock in period of 3 years." After the public issue, as per the information furnished by the Appellants in the Appeal Memorandum, the Appellants held 30.85%, IDBI held 23.60% and others held 45.55%, of the total capital of the company.
41. It is seen that on 5.4.1995 the company had entered into a Subscription Agreement (the Agreement) with IDBI for the purpose of IDBI subscribing to ten lakh shares offered on firm allotment basis to them. In the said agreement "promoters" or "promoters group" has been explained to mean " S/Shri Ranjit Dhuru, Ashutosh Humnabadkar, Nitin Shukla, Ravindranath Malekar or any or more of them as the subject or context may require". The Agreement has provided several "conditions applicable during currency of the Agreement". Since a gist of the same has already been stated in the earlier part of this order, I am not repeating the same, except to note that the same conditions are applicable only during the currency of the Agreement. The Agreement was binding on the parties from 5.4.1995 till "IDBI continue to hold the shares acquired by them in terms of this agreement". The currency of the agreement is thus specified. The Agreement ceases to operate the day IDBI disposes of their holding. IDBI thus had only a temporary role. Even though the Agreement contains several conditions binding on the company's management, the Appellants had not cited even a single instance to show that the said Agreement was meant to control the affairs of the company by IDBI and that IDBI had at any time interfered in the management of the company during the currency of the Agreement. The conditions provided in the Agreement are standard conditions found in the Subscription Agreements put in by way of precaution to meet contingencies adversely affecting IDBI's interest. As long as their investment interest remains protected, these conditions remain just "paper conditions only". As Dr. Shah rightly pointed out the intention should be taken note of. The intention of IDBI is clear that it was not interested in controlling the company. It is noticed that the Board of Directors of the company remained unchanged during the period, that IDBI, though as per the Agreement could nominate one director, did not nominate any one. There is nothing to show that IDBI was a promoter of the company in terms of regulation 2(h)(1) where under a promoter means (i) the person or persons who are in control of the company, or (ii) person or persons named in any offer document as promoters". As Dr. Shah had repeatedly stated that one has to see the intention of the parties and not go by technicalities, and on applying the said yardstick - rightly so, it can be safely concluded that IDBI is not a promoter of the company or was in control of the company individually or with the Appellants.
42. Now, coming back to the share Subscription Agreement, it is seen from Chapter VI therein that in terms of clause 6.2 (i) IDBI had the right to call upon the promoters to buyback the shares subscribed by IDBI in terms of the agreement at any time as may be decided by IDBI (ii) The company was required to procure and furnish to IDBI a suitable undertaking from the promoters in this regard. (iii) The purchase price of such shares would be market related and on mutually agreed terms But clause 6.4 provides that "Without prejudice to any of the rights available to IDBI including those under section 6.2 and 6.3 above, if IDBI decide to dispose of the shares subscribed by it under this Agreement, in the market, the promoters of the company will have the first right of refusal." The "Undertaking for buyback of shares" executed by the Appellants was in terms of clause 6.2(ii) of the Subscription Agreement.
43. The question of compliance of the requirements of regulation 7(1) and 11(1) relating to the transaction involving nine lakh shares, between IDBI and the Appellants need be seen in the context of the agreements referred to above and the other attendant factors.
44. It is seen that IDBI vide its letter dated 26.8.99 informed the Appellants of their plan to dispose of about 9 lakh equity shares and offered to sell the same to the Appellants at market related price and on other terms as may be mutually agreed and wanted to have the Appellants' willingness in case they wanted to acquire those shares, within 7 days of the letter. It was made clear in the said letter that in case they fail to convey their willingness to buy back the shares it would be presumed that they have exercised their right of refusal available to them in terms of clause 6.4 (Article VI of the Agreement) and IDBI would be free to dispose of the shares in the market or otherwise. The Appellants accepted the offer to purchase the shares @ Rs.477.75 per share, which was the market price on 12.11.1999, i.e. the date on which IDBI confirmed the sale of shares in response to the willingness received from the Appellants. The payment was required to be completed by 30.11.1999. Since the shares were in physical form, the same were to be demated and after demating transferred to the Appellants' account on 2.12.1999. The said nine lakh shares accounted for about 15.68% of the company's capital.
45. According to the Appellants, as averred in their appeal "The promoters had a holding of only 22%, which was not adequate to block even a Special Resolution, let aside an Ordinary Resolution. Further the aforesaid 9 lakh shares constituted approximately 16% of the total shares issued, subscribed and paid up equity share capital of Aftek. Hence, the promoters wanted to avoid hostile takeover of Aftek and they wanted to ensure wider distribution of the shares held by IDBI. Hence, the promoters were desirous of acquiring a part of the aforesaid nine lakh shares and also wanted to ensure that the remaining part of the aforesaid shares does not go into undesirable hands. Hence, the promoters approached different financiers for raising the funds required for this purpose.". "The promoters also had a strong apprehension that IDBI had a ready buyer for the aforesaid shares for a possible hostile takeover. This fear was based on the following facts and circumstances of the case and the high- handed manner in which IDBI had acted in this respect:
* The IDBI's total holding at that time was 17% as against the promoters' holding of 22%.
* The action of IDBI was totally contrary to the oral promises given by it and also not in keeping with the stature of a public financial institution of the repute of IDBI.
* Very short period given for exercising the first right of refusal.
* Very limited time given for making the payment, both 10% and 90%.
* Caveats filed by IDBI in the Bombay High Court and the City Civil Court on the morning of 15.11.1999 itself.
* The promoters request for extension of time, at discussions with IDBI, was not granted - IDBI agreed only to a minor rescheduling of the payment terms.
* Thus, this was a part of a well thought and well orchestrated plan by IDBI"
(emphasis supplied)
46. The Appellants' intention of acquiring nine lakh shares is thus clear from their above averment. The statement that 'the promoters were desirous of acquiring a part of the aforesaid nine lakh shares and also wanted to ensure that the remaining part of the aforesaid shares does not go into undesirable hands" is the main point in this regard. The commonality of the objective, which is the major test for deciding as to whether persons acted in concert in terms of regulation 2(1)(e), among the Appellants was to "ensure that the shares held by IDBI did not go into undesirable hands", and with this objective they acquired the entire nine lakh shares offered by IDBI and disposed of 8 lakh shares to the persons of their choice whom they did not consider "undesirable". There is no doubt that it was the Appellants who acquired the shares from IDBI. The 4 financiers namely, Classic Credit Ltd., Panther Investrade Ltd., JDP Shares and Finance P. Ltd. and Mividha Investments Ltd. which according to the Respondent's version are Ketan Parekh group entities, provided requisite funds to meet the cost of acquisition in terms of "Financing cum Option Agreement entered into by them with the Appellants (financing Agreement). I have perused one of the said agreements dated 15.11.1999 entered into between Shri Charuhas V. Khopkar and Classic Credit Ltd., (the text of all those financing Agreements are substantially identical but for the 'finance portion') for referral purpose. It has been stated in the financing Agreement that "Since the Borrower does not have the large sum of money required for acquiring his agreed entitlement of the shares he is looking for finance for this purpose. Accordingly the borrower has approached the Financier for finance" and "the Financier has agreed to provide the finance required by the Borrower (hereinafter referred to as "the financial assistance) on the terms and conditions mutually agreed upon by them." In several clauses in the financial Agreement it has been made clear that the financial assistance was for acquiring the shares of the company (e.g. cl 1(a), (b) ). The Financing Agreement has two components - one described as 'Loan Assistance' and the other described as 'Option/Loan Arrangement'. Under the Loan Assistance under clause 4, the principal amount of the loan along with interest was required to be paid on or before 31st March 2000, and in the event of default in payment of the principal, interest or other dues on the due date, the Borrower was required to pay the financier liquidate damages @ 36% per annum on the amount in default for the period of default. Under the Option/Loan Agreement the financier had an option to purchase upto certain number of shares at the total amount advanced or such lower amount as is proportionate to the number of shares for which the option is exercised by the financier. The option offer was available upto 15.12.1999. If the option is exercised by the financier, then the amount of 'x' (in each agreement it is different) or such lower amount as is proportionate to the number of shares for which the option is exercised by the financier, would be treated as a payment for the purchase of the shares for which option has been exercised by the financier, from the date on which the payment has been made by the financier. If the option is not exercised by the financier or exercised only in respect of a part of the shares, then the said amount or a part thereof in proportion to the number of shares for which the option has not been exercised shall be treated as a Loan Assistance over and above the Loan Assistance specified in clause 4 of the financial Agreement and all the terms and conditions mentioned in the said clause 4 would be applicable to the said loan amount also. The financial Agreement also requires that the repayment by the Borrower to the financier of the total Financial Assistance together with all interest thereon and the dues and the liquidated damages shall be secured by pledge of the shares (x number) (the said security of shares) In this context following clause 6( c )and (d) of the financial Agreement is also considered relevant:
"(c) The Borrower hereby declares, assures and warrants that the said security shares upon receipt from IDBI would be the Borrower's absolute property as beneficial owner thereof and the same shall be unencumbered and the Borrower hereby agrees and undertakes that till the entire amount of the financial Assistance, interest and other dues under the Agreement are paid off in full to the Financier, the borrower shall not sell, agree to sell and/or encumber the said security shares in any manner whatsoever."
(d) "The Borrower hereby indemnifies and keep the financier indemnified against all cost, charges, expenses, penalties, claims, demands and damages that the Financier may incur or be put to by reason and by any third party claiming any right, title or interest in respect of the said security shares."
47. The details of the share purchase financed under the financial Agreements executed on 15.11.1999 as revealed in the order are as under:
Appellant/ Borrower Financier Entitlement of the Appellant (Shares) No. of shares Financed Amount (Rs.) Sandip Save Classic Credit Ltd., 151500 151500 7,28,00,000 R. Malekar Classic Credit Ltd., 151500 151500 7,26,82,500 A. Humnabadkar Panther Investrade Ltd 151500 151500 7,26,32,727 R. Khopkar Classic Credit Ltd., 47500 47500 2,29,25,500 R. Dhuru Panther Investrade Ltd. JDP Shares and Finance P. Ltd.
151500 41500 1,93,75,000
--
110000 5,28,25,000 Ntin Shukla Panther Investrade Ltd., 151500 151500 7,25,17,500 Mukul Dalai Mividha Investments Ltd., 47500 47500 2,29,25,000 P. Broota Mividha Investments Ltd., 47500 47500 2,29,25,000 Total 9,00,000 9,00,000 43,16,07,727
48. In the light of the clear terms of the financial Agreement extracted above it is difficult to accept the Appellants' argument that they purchased shares on behalf of the financiers and that their role in the transaction was that of an agent acting on behalf of the financiers. The financial Agreement entered into by the Appellants with the financiers clearly establishes that the financiers had provided financial assistance to the Appellants to meet the Appellants' fund requirement for acquiring the shares, and the reason for acquiring the shares by the Appellants has already been stated by them that it was to retain control and to ensure that the shares does not go into undesirable hands. The shares so acquired served as the underlying securities for the funds made available. It is evident from the financial Agreement that there was no binding obligation on the part of the financiers to purchase the shares and they obviously purchased the shares by exercising the option as the market quote for the scrip was going up. It is not clear as to how the Appellants were sure that the shares sold to the financiers were in the "safe hands" as financiers being financiers one can not expect them to dispose of the shares 'to the right person' and their concern could be the "right price" rather than the "right person" It is clear that the Appellants had intentionally acquired the shares and in their best judgment they did not retain 8 lakh shares for long and allowed the financiers to exercise option.
49. The Appellants' argument that IDBI is a co-promoter and as such the acquisition of shares by the Appellants from IDBI is covered in terms of exemption available under regulation 3(1)(e)(iii) being interse transfer among promoters is untenable as IDBI is not a promoter of the company in terms of regulation 2(1)(h)(1)(i) or (ii). Further it is also to be noted that in terms of the explanation to regulation 3(1)(e), "the benefit of availing of exemption from applicability of Regulations for increasing shareholding or inter se transfer of shareholding among group companies, relatives and promoters shall be subject to such group companies or relatives or promoters filing statements concerning group and individual shareholding as required under regulations 6,7 and 8." There is also no evidence of having complied with the said requirement. On the contrary one of the charges against the Appellants is that they did not comply with the requirements of regulation 7. The argument that it was only a case of change in control from joint control of IDBI and the Appellants to sole control of the Appellants as per explanation (i) to regulation 12, and as such regulation 11 (1) is not attracted is also not tenable, for the reasons already stated in the order. There is nothing to show that IDBI was in control of the company. The argument that the transaction is exempted under regulation 3(1)(1a) as it is a case of transfer of shares from venture capital fund to promoters of venture capital undertaking is also not correct. In terms of regulation 2(m) of the Securities and Exchange Board of India (Venture Capital Funds) Regulations 1996 "Venture Capital funds means a fund established in the form of a trust or company including a body corporate and registered under these regulations which - (i)has a dedicated pool of capital (ii) raised in a manner specified in the regulations; and (iii) invests in venture capital undertaking in accordance with the regulations".
50. According to sub regulation (n) "Venture Capital undertaking means a domestic company - (i) whose shares are not listed on a recognised stock exchange in India (ii) which is engaged in the business for providing services, production or manufacture of articles or things but does not include such activities or sectors which are specified in the negative list by the Board with the approval of the Central Government by notification in the Official Gazette in this regard."
51. It is a fact that IDBI is not a Venture Capital Fund as defined in the regulations and not registered with SEBI as a Venture Capital Fund. The company, whose shares are listed on Stock Exchanges, is not a Venture Capital Undertaking in terms of the cited definition.
52. In any case, the exemption under regulation 3(1)(ia) is available only from 30.12.2000 and it can not therefore be said that the transaction which took place in November 1999 was saved by the exemption made available prospectively by the Regulations in December 2000.
53. The Appellants' submission that they did not participate in the preferential issue made in January 2000 is of no relevance. The Appellants themselves had admitted their inability to raise funds and that could be the reason for not participating in the said issue as the share price at that time was very high. They could get financiers in November 1999 and they purchased the shares. The Appellants, referring to the definition of the acquirer, had submitted that they had agreed to acquire shares in 1995 and as such the provisions of the 1997 Regulations which came into force in 1997 can not have application. There is no merit in the submission for the reason that there was no such agreement to acquire the shares as the buyback was optional. They could have, if they so desired, exercised the right of refusal, on IDBI offering the shares to them and not acquired the shares. Therefore, the acquisition in this case is relatable to the decision they conveyed to purchase the shares as offered by IDBI at the rate quoted by IDBI.
54. It is evidenced from the facts on record that the Appellants, acting in concert with each other, had acquired 9 lakhs shares or say 15.68% of the company's share capital in November 1999 and as a result of the said acquisition their total holding in the company's capital increased from 21.06% to 36.74%.
55. As per regulation 11(1) of the 1997 Regulations "No acquirer who, together with persons acting in concert with him, has acquired, in accordance with the provisions of law, not less than 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 share 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".
56. In terms of regulation 2(b) "acquirer means any person, who directly or indirectly acquires, or agrees to acquire shares or voting rights in the target company or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer."
57. In terms of regulation 2(1)(e) (1) "persons acting in concert" comprises .-persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company,"
58. It is clear from the material on record that the Appellants had acted in concert with each other and acquired the shares of the company with common objective of gaining control over the company. Therefore, in terms of regulation 11, on acquiring shares together by them beyond the prescribed limit of 5% attracted the requirements of making public announcement to acquire shares of the target company in accordance with the regulations. In this context the following finding recorded by the Adjudicating Officer is revealing:
"9.2 I find that all the notices are full time working directors of Aftek. They are also promoters of the target company. I find that all the notices interse on 14th November 1999 arrived at an understanding to buy back 900000 shares from IDBI at Rs.477.75. The said understanding was fall out of subscription agreement dated 5th April 1995 and irrevocable undertaking dated 10th April 1995 executed by these notices in favour of IDBI at the time of grant of financial assistance. I find that a common letter dated 26th August 1999 and 12th November 1999 was written by IDBI to these notices jointly for selling the shares to the promoters at market related price. In letters dated 31st August 1999 and 29th September 1999 by Shri Ranjit Dhuru, Promoter, MD and Shri Nitin Shukla agreed to buy entire quantity of 900000 equity shares by the promoters in one go. In a letter dated 15th November 1999 written by all the notices jointly to IDBI accepted the offer subject to payment schedule, i.e. the notices will pay to IDBI by 5 p.m. on 15th November 1999, a sum of Rs.4,29,97,500 being 10% of the total consideration, Rs.8,59,95,000 being 20% on 19th November 1999 and balance 70% i.e. Rs.30,09,82,500 by 30th November 1999. I also find that the notices wanted that the shareholding of these notices in the target company was retained around the original holding of 25%. They were also anxious that this lot of shares did not go into undesirable hands. Thus the main purpose of acquisition of these shares was to retain the control of the notices in the target company. Thus notices have been acting with common objective and purpose and thus all the notices will come within the purview of regulation 2(1)(b) and (e) of the Regulations. I therefore hold that all the notices have acted in concert for the acquisition of these shares for the purpose of retaining their holding or control in the target company."
59. I do not find any material evidence to take a different view.
60. In terms of Section 15H(ii) of the Act, if any person who is required under the Act or any rules or regulations made thereunder fails to make a public announcement to acquire shares at a minimum price, he shall be liable to a penalty not exceeding five lakh rupees. However Section 15J provides certain factors to be taken into consideration by the Adjudicating Officer while imposing the quantum of penalty as under:
"15 J. While adjudging quantum of penalty under Section 15I, the adjudicating officer shall have due regard to the following factors namely:
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default,
(b) the amount of loss caused to an investor or group of investors as a result of the default.
(c) The repetitive nature of the default.
61. Since the Appellants failed to make the public announcement as per regulation 11(1) the Respondent can not be said to have wrongly penalised the Appellant. The Adjudicating Officer has imposed a penalty of four lakh rupees as against the maximum imposable penalty of Rs.5 lakhs and he has stated that he had arrived at the said quantum after taking into consideration the factors provided in Section 15J. I do not consider it necessary, in the absence of any material contrary, to interfere in the decision of the Adjudicating Officer in this regard.
62. The Appellants' argument that making a public offer, at that point of time was merely academic as the ruling market price at the relevant time was much higher than the minimum offer price. This is not a valid argument. The question is whether the Appellant did comply with the requirements of the regulations and in case it was found that there was failure, in the given set of facts and circumstances, imposition of penalty was justified. The offender can not adjudicate and decide that offence committed by him was of no consequence and as such no penalty as provided by the law is warranted.
63. The Appellants had contended that they did not hold 5% in the company either by themselves or collectively, and as such there was no obligation to inform/report their holding to the company. In the earlier part of this order it has been concluded that the Appellants had acquired 15.68% shares and their holding increased to 36.74% from 21.06%. It has also been concluded that the Appellants had acted in concert in acquiring the shares.
64. In terms of regulation 7(1) "Any acquirer who acquires shares or voting rights which (taken together with shares or voting rights if any, held by him) would entitle him to exercise more than five percent shares or voting rights in a company, in any manner whatsoever, shall disclose the aggregate of his shareholding or voting rights in that company, to the company".
65. The scope of regulation 7 was examined by this Tribunal in Mega Resources Ltd., V. Securities and Exchange Board of India (2002) 48 CLA 311 (SAT). The Tribunal held :
"The Regulations notified in 1997, which replaced the 1994 Regulations, is the one in force regulating substantial acquisition of shares and takeovers. The 1997 Regulations was framed mainly on the input provided by a committee headed by Justice P.N. Bhagwati. The Committee viewed that " the Regulations for substantial acquisition of shares and takeovers should operate principally to ensure fair and equal treatment of all shareholders in relation to substantial acquisition of shares and takeovers". The general principles which should guide the interpretation and operation of the Regulation, specially in circumstances which are not explicitly covered by the regulations, laid down by the Committee inter alia include (i)Equality of treatment and opportunity to all shareholders and (ii) protection of interests of shareholders. To translate these principles to reality, measures to bring in transparency in transactions is required. For this purpose dissemination of full information is required. It is with this end in view the 1997 Regulations has made several provisions for making disclosures at pre-acquisition and post acquisition stages of acquisition. Requirement of disclosure under regulation 7(1) and 7(2), at post acquisition stage is one among them.
Regulation 7 which the Appellant is stated to have violated reads as under:
7(1): Any acquirer, who acquires shares or voting rights which (taken together with shares or voting rights, if any, held by him) would entitle him to more than five percent shares or voting rights in a company, in any manner whatsoever shall disclose the aggregate of his shareholding or voting rights in that company, to the company.
(2) The disclosures mentioned in sub regulation (1) shall be made within four working days of;
(a) the receipt of intimation of allotment of shares; or
(b) the acquisition of shares or voting rights as the case may be (3) Every company, whose shares are acquired in a manner referred to in sub regulation (1), shall disclose to all the stock exchanges on which the shares of the said company are listed, the aggregate number of shares held by each of such persons referred above within seven days of receipt of information under sub regulation (1)"
(emphasis supplied)
66. In this context it is to be noted that Shri Banerjee had submitted that duty to disclose under regulation 7(1) is cast on the acquirer on his holding exceeding 5% independent of the share holding of persons acting in concert with him. In this context he had referred to the provisions of regulations 10 and 11 to show that where ever the holding of the persons acting in concert is to be taken into consideration the same has been so specifically mentioned, that in the absence of any such requirement in regulation 7(1) it has to be viewed that it is the absolute share holding of the acquirer that alone be taken into consideration for deciding the bench mark percentage of 5 provided therein and that since the Appellant's holding was less than 5% it was not incumbent on it to make the disclosure. The expression "acquirer" as per regulation 2(1)(b) means:
" any person who directly or indirectly acquires or agrees to acquire shares or voting rights in the target company or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer".
67. The expression "person acting in concert" has been defined in regulation 2(1)(e) as under:
2(1)(e): "person acting in concert" comprises,-
(1) persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co.operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company (2) without prejudice to the generality of this definition, the following persons will be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established:
(i) a company, its holding company, or subsidiary or such company or company under the same management either individually or together with each other;
(ii) a company with any of its directors, or any person entrusted with the management of the funds of the company;
(iii) directors of companies referred to in sub-clause (i) of clause (2) and their associates;
(iv) mutual fund with sponsor or trustee or asset management company;
(v) foreign institutional investors with sub-account(s);
(vi) merchant bankers with their client(s) as acquirer;
(vii) portfolio managers with their client(s) as acquirer;
(viii) venture capital funds with sponsors;
(ix) banks with financial advisers, stock brokers of the acquirer, or any company which is a holding company, subsidiary or relative of the acquirer;
Provided that sub-clause (ix) shall not apply to a bank whose sole relationship with the acquirer or with any company, which is a holding company or a subsidiary of the acquirer or with a relative of the acquirer, is by way of providing normal commercial banking services or such activities in connection with the offer such as confirming availability of funds, handling acceptances and other registration work;
(x) any investment company with any person who has an interest as director, fund manager, trustee, or as a shareholder having not less than 2 per cent of the paid up capital of that company or with any other investment company in which such person or his associate holds not less than 2 per cent of the paid-up capital of the latter company".
68. On a combined reading of the above cited definitions it is not possible to agree with Shri Banerjee's submission that in view of the use of the word "acquirer" in singular and the absence of the words "acting in concert" in the regulation excludes an acquirer whose individual holding does not exceed 5%, from complying with the requirement of the regulation. In the light of the definition of the expression 'acquirer' and the 'persons acting in concert' and also taking into consideration the purpose of regulation 7, I am of the view that the acquisition of shares by persons acting in league, is very relevant and the disclosure of such concerted acquisition to the target company and the company in turn to the concerned stock exchange is in tune with the objective of the said disclosure. If one is to accept Shri Banerjee's contention, that would mean that each person acting in concert could acquire upto 5% shares without making the disclosure and continue to do so upto 15%, without attracting the requirements of public offer in terms of regulation 10. Such an interpretation would defeat the very purpose of the Regulations . As already stated one of the objects of the Regulations is to protect the interests of the investors through prompt disclosures. In my view the shares acquired by all those persons acting in league has to be taken as a whole for the purpose of regulation 7. Since the Appellant itself having admitted that the holding of the Appellant with its associate (s) exceeded 5% of the paid up capital of Bombay Dyeing , it was incumbent upon the Appellant to make the disclosure, as per regulation 7(1) to Bombay Dyeing"
69. Though the Appellants among themselves had acquired 15.68% of the company's shares, they did not comply with the requirement of regulation7(1). Penalty for non compliance of the said requirement is provided in Section 15A (b) of the Act.
70. The Appellants had cited several decisions of the Hon'ble Supreme Court, High Courts and this Tribunal. The principle laid down in Jaipuria's case (supra) has been followed in intepreting the provisions of the regulations, the finding that the Appellants have violated the provision of regulation 7(1) and 11(1) is not based on any narrow or technical interpretation of the regulations as contended by the Appellants. The fact that the acquisition of shares by the Appellants was intentional has been established by the Appellants' own version extracted in the earlier part of this order. Therefore, the ratio laid down in Madan Gopal Radhey and other cases cited by the Appellants to support the argument that the Appellants' intention in the context has not been taken into consideration, is not applicable to the instant case.
71. The learned Counsel had argued that if for any reason it is held that the Appellants had violated regulations 7(1) and 11(1), imposition of penalty is not warranted. In support he had cited Hindustan Steel, Akbar Badrudin Jivani and this Tribunal's decisions in Samrat Holdings and Cabot International.
72. It is not that the Appellants were unaware of the compliance requirement of the regulations. Clause 9 of the financial Agreement refers to the compliance requirement of "SEBI Takeover Code". The fact that the Appellants were fully aware of the legal provision and that they interpreted the same to meet their requirements is evident from the following clause in the said agreement.
73. "9(b) it has been agreed that the Financier is not and should not be regarded as "a person acting in concert' with the borrower and vice versa within the meaning of regulation 2(1)(e) of the SEBI Takeover Code in case it exercises the option to buy any of the said option shares.".
74. This clause itself is indicative of the fact that the Appellant was aware of the legal requirement but agreed not to accept financiers as persons acting in concert. If the Appellants were not persons acting in concert such declaration in the agreement was not required. It is clear that the Appellants knew the legal provisions and knowingly they decided not to comply with it. Therefore, the cases cited by the Appellants in this regard are of no support to them. The reliance on Motilal Padampath Sugar Mills (Supra) to the effect that there is no presumption that everyone knows every law has also no application to the case for the reason stated above. In this context the following observation made by the Hon'ble Supreme Court in Dinesh Chandra Jamnadas Gandhi V State of Gujrat AIR 1989 SC 1011, has to be noted:
" It is no defence that the accused acted on a misinterpretation of the statute which he honestly believed to be true"
75. Taking into consideration all the relevant factors, I am inclined to agree with the finding arrived at by the Adjudicating Officer that the Appellants had failed to comply with the requirements of regulation 7(1) and 11(1). In the light of the reasoning given by him, I do not consider it necessary to interfere in the decision taken by the Adjudicating Officer imposing monetary penalty separately qunatified for the failure of regulation 7(1) and regulation 11(1).
76. For the reasons stated above the appeal is dismissed.