JUDGMENT
Kumar Rajaratnam, J. (Presiding Officer)
1. This appeal need not detain us for too long.
2. Regulation 3(1)(c) of the Securities & Exchange Board of India (Substantial Acquisition of shares & Takeover) 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.
3. 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.”
4. 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 rigor of Section 11 and if they did not they would be subject to penalty under Section 15H of the Act.
5. If such a disclosure is 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).
6. The case of SEBI briefly is as follows. The appellant allotted 8000 equity shares of Rs. 10 each at Rs. 19.40 per share on a preferential basis to the promoters without disclosing the identity of the proposing allottees, consequential changes in voting rights, changes in the Board of Director and the shareholding pattern of the appellant.
7. The case of the appellant, on the other hand, was that the Board resolution in respect of the proposed allotment was sent to Bombay and Delhi Stock Exchange. The purpose and reason for which the issue was made had been indicated in the explanatory statements of the resolution. The issue was priced at Rs. 19.40 per share which is more than the price worked out by the statutory auditors. The explanatory statement indicated clearly that the allotment would not result in any change in the management control of the company. The class of persons to whom the proposed allotment was to be made was indicated in the resolution although the allotment of a few allottees may exceed 5% but the names were not clearly spelt out. The finding of the enquiry officer clearly indicated that most of the details given by the appellant were satisfactory. However, the enquiry officer held that as far as the identity of the proposed allottee was concerned, it was not disclosed fully. The enquiry officer also held that the exact identity of persons whose holdings were to increase by more than 5% of the post issued capital were not clearly stated. The enquiry officer however held that the price at which the allotment was proposed was bonafide and above the par value. The enquiry officer also held that the appellant had disclosed information with regard to the change in the control of the company. The purpose and reason for allotment was genuine and bonafide i.e. for establishing additional manufacturing facilities according to the respondent. Therefore the only violation appears to be that the identity of the class of persons was not fully disclosed. In this regard, the learned counsel for the appellant took us through the agenda of special business of the AGM dated 23.6.1998. The relevant portion of the resolution is at item 5 and reads as follows.
“RESOLVED THAT in accordance with the provisions of Section 81(1-A) and other applicable provisions, if any, of the Companies Act, 1956, and of the subsisting Guidelines of SEBI, and other applicable Rules and Regulations under the law in this regard, and further subject to such approvals, consents and sanctions as may be necessary, including any alterations and modifications thereto as may be agreed to by the Board of directors, or any committee appointed by the Board, consent be and is hereby granted for the private placement of capital and/or preferential/firm allotment of upto 10,00,000 equity shares and/or warrants of Rs. 10/- each at a price, calculated in accordance with the subsisting SEBI Guidelines, and determined by the statutory auditors of the Company, at one or more times, with one or more calls, to one or more persons, viz. the Indian promoters, including Continental Device India Ltd, Delta Electronics Pvt. Ltd., their Directors, associates and friends, and/or companies/or persons of the promoter/Management group, proprietary firms, bodies corporate and/or financial institutions including corporations or banks, all of whom would be resident in India, on such terms and conditions with such attributes and in such ratios and/or number not exceeding in the aggregate the number of shares herein above mentioned as may be decided by the Board or the committee appointed by the Board at the time of issue.”
8. From this it is clear that the name of Continental Device India Ltd., Delta Electronics Pvt. Ltd. their directors and associates and friends were willing to accept private placement amongst themselves of 10,000 equity shares. From this it appears that there was no shares purchased as private allotment by Delta Electronics. However, it is an admitted fact that the management control remained unchanged. In fact in the AGM the shareholders were informed that there would be no change in the management control. They were also intimated that there may be some persons whose holdings may exceed 5%. Although the exact details were not forthcoming, the class of persons mentioned in the AGM more or less tallies with the requirement of the Regulation. The allotment price for the preferential issue was above the price determined by the statutory auditors by the preferential issue. There also appears to be no violation of the listing agreement with the stock exchange. No material facts were hidden it appears from SEBI at any relevant point of time. The stock exchange of Delhi and Mumbai have accepted the preferential issue and have cleared it for listing. The learned counsel for the appellant submitted that there was a technical flaw in not disclosing the exact name of the would-be preferential holders the class of people was mentioned in the resolution. He submitted that
(i) It was not possible to determine in advance the specific names of people/persons who would subscribe to the preferential issue in view of the very short notice for raising the funds and also the lack of confirmation that everyone to whom the preferential issue was offered would subscribe to it.
(ii) Therefore the general class of people to whom the preferential issue was to be offered was made fully transparent in the AGM notice and also in all the communications to the Stock Exchanges.
(iii) The final allotment was only made to the specific class of persons determined and specified in the notice and not to anyone outside it.
(iv) It was not essential that all persons identified under the class of shareholders approved by the General body for offer of equity shares would subscribe to the same. In the case of Delta Electronics, their decision to subscribe was left to their Board and they exercised their prerogative of not subscribing to the preferential issue. Hence no offer/allotment was made to them. By no stretch of imagination can this be construed as any violation of the Takeover code.
9. Strictly speaking the respondent was partly responsible for the delay in the proceedings against the appellant. The appellant sent all the details on 6.9.1998. On 13.7.1999, after a gap of 10 months, the respondent asked for further information. One year later, on 6.9.2000, the respondent issued show cause notice. The hearing concluded on 31.10.2000. However, the order was passed two years later on 9.10.2002. For the matter to conclude it has taken 4 years and we feel that there has been a substantial compliance of the Regulation 3(1)(c) as it then was. However, in view of the fact that exact details of the promoters were not forthcoming, the company has clearly violated the condition in the Regulation as it then was. The non-disclosure may not be an offence under the Companies Act but non-disclosure of complete information would be a violation of the Regulation.
10. The fact of the matter is that most of the details were correctly disclosed to the respondent and there was no loss to the shareholders. It is also clear that the management to the company had not changed after the issue. The issues have been listed in the two stock exchanges. For all these reasons we feel that the misconduct is of a technical nature and we propose to take a sympathetic view of the matter and reduce the fine from Rs. 1 lakh to Rs. 25,000/-. The order of the respondent is accordingly modified. The appellant shall deposit this amount of Rs. 25,000/- within four weeks from the date of receipt of this order.