Securities Appellate Tribunal
Rameshchandra Mansukhani, Nri vs Adjudicating Officer, Securities And ... on 7 February, 2005
ORDER
B. Samal, Member
1. Appeal is taken up for disposal with consent of both parties.
2. The appellant challenges the impugned order dated June 25, 2004 which reads as follows:
" Having regard to the submissions made, the factors contained in Section 15J, of SEBI Act, 1992, and the gravity of charges established for the aforesaid reasons, the acquirer who failed to make a make announcement under the SEBI (SAST) Regulations, 1997, to acquire further shares upto 20% of the equity capital of M/s. Man Industries Ltd., from their shareholders is liable for a penalty of Rs.4,36,85,949/- (Rupees Four crore thirty Six Lakhs Eighty Five Thousand Nine Hundred Forty Nine only) on Shri Rameshchandra Mansukhani, NRI under Section 15H(ii) of SEBI Act, 1992 for violation of Regulation 3(1)(c) (i) and (ii) read with Regulation 11(1) of SEBI (SAST) Regulations, 1997.
The penalty amount shall be paid through a crossed demand draft drawn in favor of "SEBI - Penalties Remittable to Government of India" and payable at Mumbai, may be sent to Shri Murlidhar Rao, General Manager, Securities and Exchange Board of India, Exchange Plaza, IVth Floor, Bandra Kurla Complex, Bandra (E) Mumbai - 400 051."
3. The impugned order relates to the preferential allotment of shares to the appellant by MAN Industries Ltd., a company incorporated under the Companies Act, 1956 (hereinafter referred to as "Target Company") which is listed on the Stock Exchange at Mumbai. The appellant is the Chairman and one of the promoters of the Target Company. The Promoter Group along with the appellant hold more than 40% in the target company and have control over the Target Company.
4. The promoters of the Target Company are quality conscious business people and the same is borne out by the fact, that the Target Company is an ISO 9002 Company. The Target Company enjoys the distinction of being one of the largest manufacturer-exporter of Aluminium Extruded products and Saw Pipes from India. The Target Company has been granted recognition and has been a winner of several awards for its quality performance in the field of manufacture and exports including the following:
a) American Petroleum Institute (APAI) Certification.
b) Certification by Engineers India Ltd., (EIL)
c) Government recognized "Export House" Status
d) Recipient of Export Excellence Award in 1993 & 1994
e) Recipient of Management Excellence Award in 1995
f) Recipient of Udyog Ratna in 1995
g) Recipient of Rajeev Ratna Award in 1994
h) Recipient of EEPC Award in 1996 & 1999
i) Recipient of "Niryat Shree" Award of FIEO for 2001-2002.
5. The company embarked upon setting up of a PE/CTE coating plant at Pithampur in Madhya Pradesh. With a view to finance the said PE/CTE coating plant proposed to be set up at Pithampur, the Target company availed of the Term Loan of Rs.5 crores from State Bank of India. One of the terms and conditions of the said loan was that there would be infusion of additional equity of Rs.3 crores by the promoters of the target company. At the relevant time the market conditions were not conducive to making a public offer and also the chances the chances of the general shareholders subscribing to a Rights Issue at that time were bleak as the scrip of the target company was ruling much below the par value. There was also stiff competition and time was of the essence. According to the appellant even slight delay would have resulted in the Target company letting slip a golden opportunity as this would have caused huge financial losses to the target company and its shareholders. In such a situation, the only realistic option appeared to be asking the promoters to subscribe to the additional capital of the Target company on preferential basis. Accordingly 30 lacs equity shares were allotted to the appellant t the face value of Rs.10/- each although at the relevant time the market price of the said shares was hovering in the range of Rs.6/6.50 per share only. Thus the appellant took up the said 30 lacs equity shares at a loss of nearly Rs.1.20 crores simply to bail out the target company to enable it to go ahead with its commercial commitments.
6. The sequence of events relating to the preferential allotment and the facts relevant to the order are detailed below:
a. On August 21, 2001 the Board of Directors of the Target Company, keeping in view the market conditions prevailing at the relevant time and particularly the below par market price of the target company's scrip, considered the issuing of shares by way of preferential allotment to the promoters and included the same as one of the business items to be transacted at the Annual General Meeting scheduled to be held on 28/9/2001. The Board of Directors also approved the Draft of the Notice along with the Explanatory Statement of the proposed AGM on that date at which the necessary resolution for preferential allotment under section 81(1A) of the Companies Act, 1956 was proposed to be tabled.
b. The Target Company made necessary disclosures in the Explanatory statement annexed to the said notice of the AGM. However, some of the necessary details as required under clause 13.1A of the SEBI (Disclosure and Investor Protection ) Guidelines, 2000 were not adequately provided in the said Explanatory Statement. The said notice of the AGM along with the explanatory statement was sent to the Stock Exchange, Mumbai. The said notice containing the resolution for preferential allotment was also sent to the Stock Exchange in order to place the information in the public domain.
c. The said resolution for preferential allotment was passed by the members on 28th September, 2001 and the preferential allotment was made to the appellant on 27th December, 2001 as per the provisions of Regulation 3(1)(c) of SEBI (SAST) Regulations, 1997.
d. When the Target Company approached the Stock Exchange Mumbai for getting the addition 30,00,000 equity shares listed, it was asked to obtain a No Objection letter from the Respondent SEBI in respect of full disclosure under clause 13.1A of the SEBI (Disclosure and Investor Protection ) Guidelines, 2000. Accordingly the Target Company approached the Respondent SEBI.
e. SEBI vide its letter dated March 7, 2003 addressed to the appellant had inter alia stated that the acquisition of 11.20% attracted Regulation 11(1) of the Regulations. Further the said letter dated that in terms of Regulation 3(1)(c) of the Regulations an acquirer, in order to be eligible for exemption from the applicability of Regulations 110,11 and 12 are required to comply with the following conditions.
(i) In terms of Regulation 3(1) (c) (i) Board Resolution in respect of the proposed preferential allotment is sent to all the Stock Exchanges on which the shares of the company are listed for being notified on the Notice Board.
(ii) In terms of Regulation 3(1) (c) (ii), certain disclosures are required to be made in the notice of the General Meeting called for the purpose of consideration of the preferential allotment.
The provisions of Regulation 3(1)(c) (i) & (ii) is reproduced below:
i) the identity of the class of proposed allotees and ii) if the proposed allotee is to be allotted any shares that would increase his holding to over 5% of the post issue capital, then in such cases, the price at which the allotment is proposed, the identity of such persons the purpose of and the reason of such allotment, consequential changes in the Board and in voting rights, the shareholding pattern of the company and whether such allotment would result in control etc.
It is observed that a copy of the Board resolution of MIL passed for preferential allotment on 28.1.2001 has not been sent to the Stock Exchange which has resulted in non compliance with regulation 3 (1) (c) (i). It is further observed from the notice of the General Meeting dated 25.08.2001 of MIL that it did not contain disclosures regarding class and identity of the proposed allottees purpose and reason of such allotment, Price at which shares proposed to be issued, consequential changes in the Board of Directors, Voting Rights, Shareholding Pattern of the company and whether such allotment would result in any change over the company. This has resulted in non-compliance of Regulation 3 (1) (c) (ii) of the Regulations. That a copy of the Board resolution of MIL passed for preferential allotment on 28.1.2001 has not been sent to the Stock Exchange which has resulted in non compliance with regulation 3 (1) (c) (i).
7. The fundamental premises on which SEBI has based the penalty in terms of Section 11B and Regulations 44 and 45(6) of the Take Over Code in the order is the finding by SEBI that the decision of the Board of Directors proposing preferential allotment was not communicated to the stock exchanges as required in sub clause 1 of the proviso to Regulation 3(1)(c) of the Takeover Code. The issues which attracted penalties are as under:
(i) SEBI has considered the Board Resolution dated August 25, 2001 as the relevant resolution that was required to be sent to the stock exchanges for the purpose of compliance with sub clause (1) of the proviso to Regulation 3(1)(c) of the Takeover Code.
(ii) SEBI has proceeded on the basis that the said resolution was never sent to the stock exchange.
(iii) SEBI has further proceeded on the basis that the disclosure in the explanatory statement annexed to the Notice of the Annual General Meeting was not made in terms of sub clause (ii) of Regulation 3(1)(c) of the Takeover Code.
8. The appellant in the Memorandum of Appeal has confirmed that the resolution as part of the Notice convening the Annual General Meeting was sent to the stock exchange as such there was substantial compliance by the Target Company. Further all the disclosures were made in the explanatory statement annexed to the said notice except the pre and post shareholding pattern. On a perusal of the notice given for holding 13th Annual General Meeting on 28th September, 2001 we find that under Item No.10 the following has been stated:
"Resolved that subject to approval of the Reserve Bank of India and/or Central Government under Foreign Exchange Management Act, 1999 and subject to such other approvals, permissions and sanctions as may be necessary, if any, of the Companies Act, 1956, or any other Act, consent of the company be and is hereby given under section 81(1) of the Companies Act, 1956 to the Board of Directors for allotment of 50 lacs equity shares to promoters at Rs.10/- per share"
9. It is also further found in the Annexure to Notice - under Explanatory Statement it has been indicated as under:
Item 10 A. "As stipulated by the banks and lending institutions that promoters should increase their equity in the capital of the company, your Board of Directors has proposed to allot shares to the promoters at face value of Rs.10/- each per share aggregating to Rs.5 crores. The resolution proposed may be passed as special resolution with or without modification(s). Shri R.C. Mansukhani, Shri J.C. Mansukhani and Shri J.L. Mansukhani are interested in this resolution."
10. According to the appellant the only shortcoming on the part of the appellant was in respect of not filing the board resolution separately with the stock exchange and not making adequate disclosure in the explanatory statement annexed to the notice of the Annual General Meeting. No sooner that the appellant became aware of the said shortcoming the said board resolution was also separately filed with the Stock Exchange despite the fact that it had already been filed with the stock exchange as part of the notice of the Annual General Meeting. Further the appellant has also stated that the Target Company once again disclosed the entire information to its shareholders regarding the preferential allotment vide its Annual Report for the year 2002-03. We have no hesitation in accepting these facts of the case. We also accept the statement of appellant that the non filing of the resolution and mere non disclosure of the pre and post shareholding pattern cannot be considered a contravention of the Takeover Code, but merely a shortcoming or a lapse on the part of the appellant resulting in a breach since the lapse was devoid of any intention to avoid any provision of the Takeover Code.
11. The appellant has stated that there is no change in control owing to the preferential allotment which is germane to determining the penalty, if any, that has to be levied in respect of any breach of the Takeover Code.
12. The appellant has also submitted that there is no dispute regarding the fact that the allotment in question took place on December 27, 2001. Thus if the provision of section 15 H(ii) have to be applied then that has to be applied as they existed on December 27, 2001 and not as they existed on the date of passing the order i.e. 25th June, 2004. At the time of making the said preferential allotment i.e. December 27, 2001 the maximum penalty that could be imposed under the provisions of section 15H(ii) of the SEBI Act was Rs.5 lacs. The said section 15H(ii) of the SEBI Act was amended only on 29th October, 2002 whereby the penalty was enhanced to Rs.25 crores or three times the amount of profit made out of such failure, whichever was higher. In this context the appellant has quoted Article 20(1) of the Constitution of India as under:
"No person shall be convicted of any offence except for violation of law in force at the time of the commission of the act charged as an offence nor be subject to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence."
13. Thus the law existed at the time of commission of the offence has to be applied and not the law as existing on the date of the order. The appellant has submitted that in this case, SEBI has completely ignored the law as was prevalent on December 27, 2001 and instead has proceeded on the basis of the law as it existed on the date of issue of the order. Consequently the penalty imposed by SEBI is grossly erroneous and illegal as the maximum penalty that could be imposed on December 27, 2001 was an amount of Rs.5 lacs.
14. The appellant has further submitted that the appellant acquired the equity shares at a price of Rs.10/- each through preferential allotment only to assist the Target company to meet the condition stipulated by its bank for availing of the loan and the same was done in full compliance with exemption provisions of the Takeover Code. The market price for the shares of the target company at the time of preferential allotment was approximately Rs.6/6.50 only. Therefore, according to the appellant he has suffered loss of Rs.3.50 per share. However, the Adjudicating Officer, while imposing penalty has wrongly applied the provisions of Section 15 H(ii) as they existed on the date of issue of the order and has calculated on some kind of a notional profit by assuming that the appellant made profit by not offering the shares to the shareholders when in realty the appellant incurred a loss of approximately Rs.1.2 crores at the relevant time.
15. Heard both parties. It is a fact that the respondent should have imposed the penalty as per the provisions existing on the date of preferential allotment.
16. We have perused section 15 J of the SEBI Act 1992 which reads as under:
"15 J. While judging quantum of penalty under Section 15J, 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."
17. This Tribunal in Cabbot International Corporation Vs. SEBI held that where the violation is of technical nature and due to a bonafide error, the Tribunal should not consider imposing heavy penalty and should help in pointing out the defect to the appellant so that it does not recur again and the Tribunal declined to impose any penalty in that case as there was substantial compliance. This order of this Tribunal was confirmed by the Bombay High Court.
18. It is the common ground that at the relevant period the maximum penalty was Rs.5 lacs. The amendment enhancing the penalty to Rs.5 crores came I to force with effect from 29th October, 2002.
19. There appears to be no application of mind that at the relevant time the maximum penalty was Rs.5 lacs and therefore, the penalty of Rs. 4,36,85,949/- was not permissible under law.
20. It is fairly conceded that there is nothing to show under the regulation that the regulation was amended with retrospective effect. Penalties unless specifically made retrospective must inevitably be only with effect from the date of amendment. Accordingly we hold that at the relevant time the maximum penalty was Rs.5 lacs. The Adjudicating Officer has imposed a penalty of Rs.4,36,85,949/-.
21. Taking into consideration the totality of the facts and circumstances of the case we uphold the impugned order of the respondent as the compliance has not been made fully by the appellant.
22. However, taking into account all the factors under section 15J of the Act, and also the case of Cabbot International Ltd., Vs. SEBI, we reduce the quantum of penalty to Rs.1,00,000/-. The excess amount if any remitted by the appellant may be refunded by the Respondent as expeditiously as possible.
No order as to costs.