2014 (9) TMI 1154 - Board - Companies Law

Consolidation of holdings - exemption from obligation to make public announcement - doubtful acquisitions of shares - collective shareholding of the noticees in the Target Company - Held that - The noticee s who were already in control of the Target Company did not acquire 5% or more in the financial year 2008-2009 and 2009-2010 when the acquisitions described in the SCN took place. Further both the conditions of the second proviso of 11(2) i.e. the acquisitions were through open market purchase in normal segment on the stock exchange and post acquisition shareholding of the noticees remained below 75% were complied with in this case. The most of the acquisitions had happened when the doubts and ambiguities as mentioned above were prevailing in the market and such acquisitions were under bona fide belief rather than as an attempt to consolidate their shareholding in violation of Takeover Regulations, 1997. Further the acquisition with regard to which fault is found in this case is only for 27, 633 shares (0.40%) of share capital of the Target Company The noticees are now entitled to avail the benefit of further creeping acquisition of 5% in every financial year. In this case the noticees had acquired the shares which are found to be in violation of regulation 11(2) of the Takeover Regulations 1997 at an average price of 97.14 per share. If the public announcement were to be directed under regulation 44 read with regulation 11(2) of the Takeover Regulations 1997 the open offer would be at price of 129.05 per share (calculated in terms of regulation 20 of the Takeover Regulations 1997 alongwith interest @ 10% per annum thereon) whereas the present average market price of the shares of the Target Company considering the trading on BSE and NSE in the last six months is 280/per share. Thus the public announcement if made now would be a mere formality. Direction to sell 27, 633 shares of the Target Company in small lots on the concerned stock exchange and transfer of the entire proceeds of such sale of shares to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations 2009 would be commensurate with the violation as found in this case. Since the Investor Protection and Education Fund is utilised for the purpose of protection of investors and promotion of investor education and awareness this case the above directions would be in the interest of investors. In exercise of powers conferred upon under sections 19 11 and 11B of the SEBI Act 1992 and regulations 44 and 45 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 read with regulation 32(1)(h) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 hereby issue following directions to the noticees - i. The noticees shall jointly and severally disinvest 27, 633 shares of Sarla Performance Fibres Ltd. through sale to parties not connected/ related to them in small lots in trenches on the BSE and NSE ensuring that such sale does not disturb the market equilibrium; and transfer of the entire proceeds of such sale of shares to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations 2009. ii. The noticees shall complete the sale of shares as directed above within 3 months from the date of this order and file a report to the SEBI detailing the compliance of the above directions within two weeks from the date of such compliance.

Summary

Issues Involved:
1. Alleged violation of regulation 11(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 by the promoters of the Target Company.
2. Failure to make a public announcement as required under regulation 11(2) read with regulation 14(1) of the Takeover Regulations, 1997.
3. Clarification and interpretation of regulation 11(2) post the amendment dated October 30, 2008.
4. Determination of appropriate enforcement action and penalties for the alleged violations.

Issue-wise Detailed Analysis:

1. Alleged violation of regulation 11(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 by the promoters of the Target Company:

The promoters collectively held 55% of the Target Company's share capital as of October 30, 2008. Between October 31, 2008, and April 6, 2009, they acquired additional shares, increasing their collective shareholding to 60.28%, which exceeded the permissible threshold limit of 5% prescribed under regulation 11(2) of the Takeover Regulations, 1997. This acquisition triggered the obligation to make a public announcement within 4 working days from April 6, 2009.

2. Failure to make a public announcement as required under regulation 11(2) read with regulation 14(1) of the Takeover Regulations, 1997:

The promoters failed to make the requisite public announcement following their acquisition of additional shares. A Show Cause Notice (SCN) was issued on March 28, 2014, calling upon them to explain why suitable directions should not be issued against them for the alleged violations.

3. Clarification and interpretation of regulation 11(2) post the amendment dated October 30, 2008:

The promoters argued that the proviso to regulation 11(2) inserted by the amendment allowed them to acquire an additional 5% without making a public announcement, provided the shares were acquired through open market purchases. They believed this benefit was applicable for every financial year. However, SEBI issued a circular on August 6, 2009, clarifying that the acquisition of 5% was a one-time measure and not applicable annually. The promoters claimed they were unaware of the exact permissible limit until this circular was issued and that their acquisitions were made under a bona fide belief rather than an attempt to consolidate their shareholding in violation of the law.

4. Determination of appropriate enforcement action and penalties for the alleged violations:

SEBI considered the SCN, oral and written submissions, and the prevailing ambiguity regarding regulation 11(2) before the issuance of the circular on August 6, 2009. It was noted that the promoters had not acquired more than 5% in any financial year and complied with the conditions of the proviso to regulation 11(2). However, acquisitions made after August 6, 2009, when the ambiguity was removed, were found to be in violation of regulation 11(2). SEBI decided that a direction to sell 27,633 shares (0.40% of the share capital) acquired in breach of regulation 11(2) and transfer the proceeds to the Investor Protection and Education Fund would be commensurate with the violation. This decision considered the mitigating factors and the current market price of the shares.

Conclusion:

SEBI directed the promoters to disinvest 27,633 shares of the Target Company through sale on the BSE and NSE and transfer the proceeds to the Investor Protection and Education Fund. This order was issued to ensure compliance with regulation 11(2) and protect the interests of investors and the securities market. The promoters were required to complete the sale within three months and file a compliance report within two weeks of completion. The order came into immediate effect.