Securities Appellate Tribunal
Diamond Projects Pvt. Ltd. vs Securities And Exchange Board Of India on 18 May, 2004
Equivalent citations: [2005]59SCL549(SAT)
ORDER
Kumar Rajaratnam, J. (Presiding Officer)
1. The appeal is taken up with consent of the parties.
2. This appeal need not detain us too long since it appears that it is an open and shut case.
3. The appellant is the acquirer of a target company, viz., Enterprise Intelligent Systems Ltd. The acquirer acquired 11,32,945 equity shares in the target company on 13.5.2000 on a preferential basis @ Rs.18.50 per share.
4. No doubt, the Board of Directors allotted the shares in their meeting held on 13.5.2000 pursuant to the authority given by the shareholders as required under the Companies Act. The appellant was charged with the violation of Regulation 3(1)(c) and 3(4) of SEBI (Substantial Acquisition of Shares & Takeovers) Regulation, 1997. Regulation 3(1)(c) of the Securities & Exchange Board of India (Substantial Acquisition of shares & Takeovers) Regulations, 1997 (hereinafter referred to as the 'Regulation') was in force as a Regulation and was omitted by the SEBI (Substantial Acquisition of Shares & Takeovers) (Second Amendment) Regulations, 2002 with effect from 9.9.2002.
5. Prior to the omission of clause (c), there was a mandate on the part of the company to make the following disclosures:
"Full disclosure of the identity of the class of the proposed allottee(s) is made, and if any of the proposed allottee(s) is to be allotted such number of shares as would increase his holding to 5% or more of the post issued capital, then in such cases, the price at which the allotment is proposed, the identity of such person(s), the purpose of and reason for such allotment consequential changes, if any, in the board of directors of the company and in voting rights, the shareholding pattern of the company, and whether such allotment would result in change in control over the company are all disclosed in the notice of the general meeting called for the purpose of consideration of the preferential allotment."
6. Regulation 3(1)(c) was the Regulation which granted automatic exemption to such members who wished to increase their holding to 5% or more on the post issued capital. In other words, if the company complied with the provisions of Regulation 3(1)(c)(ii) (as it then was) and made a full disclosure of the identity of the class of proposed allottees who wished to hold 5% or more of the post issued capital to the general meeting for consideration of the preferential allotment, then they will be spared the rigour of Regulation 11 and if they did not, they would be subject to penalty under section 15H of the Act.
7. If such a disclosure is not made, the company will be liable for a penalty for non-disclosure, which was a sum not exceeding Rs.5 lakhs (at the relevant time).
8. It is not in dispute that the acquirer (appellant) was allotted 11,32,945 shares in the form of preferential allotment constituting 21.96% of the paid up capital of the company. The price was a reasonable price at Rs.18.50 per share and much above the price of Rs.8.50 per share as per the resolution. Admittedly, the appellant had not complied with Regulation 3(1)(c) inasmuch no details were provided with regard to the identity of the allottee, consequential changes in the Board of Directors, consequential changes in the shareholding pattern and consequential changes in the management, if any. The maximum penalty under section 15H(2) is Rs.5 lakhs.
9. The learned counsel for the appellant relied on a judgment of the Supreme Court and submitted that penalty ought to be reasonable when there is no mala fide intention to defraud the shareholders. The Supreme Court, in connection with a sales tax case 1969(2) Supreme Court Cases 627 (Hindustan Steel Ltd. v. State of Orissa), pronounced as follows:
"Under the Act penalty may be imposed for failure to register as a dealer-Section 9(1) read with Section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Those in charge of the affairs of the Company in failing to register the Company as a dealer acted in the honest and genuine belief that the Company was not a dealer. Granting that they erred, no case for imposing penalty was made out."
10. We have carefully considered the frank admission by the counsel for the appellant that a mistake had been committed without any intention to cheat the public. It is also brought to our notice that the company had incurred a loss of Rs.14 lakhs in the financial year 2000-2001 and the accumulated loss was Rs.52 lakhs. It was further submitted that the company had not paid any liabilities including salaries, provident fund, income-tax to the extent of Rs.5.5 lakhs. It was vehemently submitted that any penalty would financially cripple the company.
11. We feel, in matters of strict liability, the respondent must pass a workable orders to maintain the ability of the company to make effective payment. This penalty is meant only as a deterrent and should be imposed with discretion. When a person comes forward and makes a clean breast of the violation of the Regulation, the respondent, if such disclosure is bona fide, the respondent should pass a workable order so that it can be implemented. It was submitted by the counsel for the appellant that the following circumstances should be taken into consideration before imposing an equitable penalty:
(1) Neither the appellant company nor the target company was having a qualified Company Secretary at the time of allotment.
(2) Immediately on appointment of the Company Secretary in target Company, namely, Enterprise Intelligent Systems Ltd., the acquirer company has filed the Report dated 01.08.2001, under Regulation 3(1)(c) & 3(4) of SEBI (Substantial Acquisition of Shares & Takeovers) Regulation, 1997, along with the fee of Rs.10000/-.
(3) The appellant, from the first instance, i.e. from the date on which the report-dated 01.08.2001 was filed with the SEBI, had apologised for the delay caused in the submission of the report.
(4) The appellant had replied the queries and submitted the requisite documents as and when required by the SEBI.
(5) On 20.05.2002, SEBI issued a show cause notice for taking action under Reg. 44, 45(6), 11 & 11B and 15A of the said Regulations.
(6) Immediately the appellant vide letter dated 23.05.2002 had filed the reply submitting genuine facts while requesting to condone the delay, etc. (7) The appellant had appeared before the Chairman of SEBI, Shri Bajpai for the personal hearing on 24.07.2002 and conveyed the Chairman that the intentions of the appellant were not to hide the facts but to make the full disclosure of the facts to the Regulatory. The appellant also had submitted the written representation with the Chairman during the hearing.
(8) The appellant had also appeared before the Adjudicating Officer, Shri S.V. Krishna Mohan, on 01.10.2002 and while submitting the written representation urged that the intentions of the appellant should be taken into consideration while passing the order.
(9) The appellant also put on record before the Adjudicating Officer the financial position of the appellant company with a request that it is a question of survival of the appellant, if a heavy penalty would be levied on it.
12. Taking a practical view of the matter and the fact that the appellant had incurred heavy losses, we reduce the penalty from Rs.5,00,000/- to Rs.1,50,000/-. We, however, hold that the appellant had violated Regulation 3(1)(c) and dismiss the appeal on merits. However, we modify the penalty from Rs.5 lakhs to Rs.1,50,000/-.