ORDER
T.M. Nagarajan, Member
1. Gujarat Ambuja Exports Ltd. (hereinafter referred to as the “Target company”) is a company incorporated under the Companies Act, 1956 and having its registered office at Ambuja Tower, Opp. Memnagar Fire Station P. O. Navjivan, Navrangpura, Ahmedabad 14. The main business of the target company is Manufacturing and Exports and Trading of Agro Commodities and Agro Processed products.
1.1 The equity shares of the Target Company are listed at the Mumbai Stock Exchange (BSE), National Stock Exchange (NSE) & Ahmedabad Stock Exchange (ASE).
1.2 Shri Vijay Kumar Gupta, Smt. Sulochana V Gupta, Shri Manish V Gupta, Ms Shilpa Manish Gupta, Shri Mohit V Gupta [hereinafter referred to as ‘Acquirers’],are the promoters of the target company holding 1,29,51,305 shares aggregating to 54.50% of total paid up equity. The acquirers propose to acquire 1,71,36,302 equity shares of Rs. 10/- each by way of preferential issue of additional equity shares pursuant to Section 81 (1A) of the Companies Act, 1956. After the proposed acquisition and allotment pursuant to merger of Jupiter Biotech Ltd. (hereinafter referred to as ‘JBL’) with the target company, the total voting power being held by acquirers will be 73.77%.
APPLICATION FOR EXEMPTION
2. The Acquirers made an application dated January 24, 2004 to the Securities and Exchange Board of India (hereinafter referred to as SEBI) under sub-regulation (2) of regulation 4 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as “the Regulations”) seeking exemption from applicability of Regulation 10 and 11 ( 1) of the Regulations in respect of the proposed acquisition of 1,71,36,302 equity shares of Rs. 10/- each of the target company in cash by preferential allotment of shares.
2.1 As per the application seeking exemption, the shareholding pattern of the acquirers in the Target Company, are as follows:
Shareholding pattern of the target company before and after the proposed acquisition and amalgamation of JBL.
Share holders’ Category
Number of Registered shareholders / (Folios) as on date of
application
Before acquisitionn Target Company(RAFI 1
Amalgamating company (JBL)
Total ot shares holding in GAEL and JBL as proportionate to total
capital alter allotment on amalgamation
After the acquisition
proposed
GAEL
In JBL
No. ol shares /total voting rights held
No. ot shares/total voting rights held
No. of shares/total voting rights held
% of shares / voting capital held
No. ol shares / voting rights
% of shares / voting rights
Promoter Group
16
10
12951305
3107100
16058405
57.63
33194707
73,76
Acquirers
As above
As above
As above
As above
As above
As above
As above
As above
Fls/Banks
8
0
245303
0
245303
0.88
245303
0.55
Flls / Nflls/OCBS
1512
3
126206
700
126906
0.46
126906
0.28
Public
71789
4374
10442884
990200
1
1 433084
41.03
1 1 433084
25.41
SUBMISSIONS IN THE EXEMPTION APPLICATION
3. In the aforesaid application and subsequent correspondence exchanged with SEBI, the Acquirer, inter-alia, submitted as under:
1. The acquirers propose to acquire 1,71,36,302 equity shares of Rs. 10/- each and these equity shares shall have same voting rights as available to the existing equity shareholders.
2. After the proposed acquisition, if allowed, the total voting power being held by the promoter group will be 73.77%.
3. The proposed acquisition is not in the nature of acquisition of control, as 3 out of the 5 proposed acquirers are on the board of the target company including 2 as Managing Directors.
4. It is further stated that the target company has almost 72000 shareholders holding equity in physical as well as in demat form. If the company prefers to make right issue then the minimum expenditure for the said right issue would be anyways in between Rs. 40 to Rs. 50 lakhs. Besides, it would be a time consuming process.
5. The target company also proposes to issue additional 4098000 equity shares of Rs. 10/- each to the shareholders of erstwhile Jupiter Biotech Ltd. in the ratio of 1:1 as per the exchange ratio and scheme approved by the Hon’ble Gujarat High Court order U/s 391 / 394 in pursuance to the scheme of amalgamation filed. Thus, after the shares are issued the capital of the company would be Rs. 278636980/- made up of 27863698 equity shares of Rs. 10/- each fully paid up.
CONSIDERATION OF THE APPLICATION
4. The said application dated January 24, 2004 was forwarded to the Takeover Panel in terms of sub-regulation (2) of regulation 4 of the Regulations. The Takeover Panel observed that “Facts stated in the application disclose that the sum of Rs. 35 crores is intended to be raised in the form of equity by preferential allotment to the promoters to provide additional requirements of funds. It appears that promoter group intend to have entire 17136302 equity shares intended to be created without making right issue. The only ground on which exemption is sought is the possibility of incurring cost between Rs. 40 lakhs to Rs. 50 lakhs in case right issue is made. This, by itself, is not sufficient ground to recommend grant of exemption as sought. Hence, grant of exemption as sought is not recommended.”
4.1 SEBI vide its letter dated March 11, 2004 forwarded the copy of the recommendation of the Takeover Panel to the acquirers and also granted an opportunity of personal hearing on March 25, 2004. Shri Khona Kaushik, Chartered Accountant, appeared before me on behalf of the acquirer and made the submissions.
4.2 The representative of the acquirers interalia submitted before me that
1. The target company is in Agro Processing Commodities business where the industry price-earning ratio is very low in the range of 2 or 3
2. The EPS of the company as per the last audited accounts was Rs. 4.44
3. Considering the EPS and the price earning ratio, the pricing of equity shares would not be justified beyond Rs. 10/- per share as even considering the recent capital repayment transactions no shareholder would like to pay a price of more than Rs. 10/-
4. The Market price of equity shares of the company is presently quoted at Rs. 27/- to Rs. 28/- per share which may be attributable to the general bullish sentiments in the stock exchange. Besides the shareholders may not be quite convinced about maintaining of the present price level after the right issue and hence the response from the shareholders is expected to be absolutely very poor. He further submitted that considering the above background even otherwise right issue would be successful only if promoters subscribe to the right issue. In such circumstances promoters will get benefit from the right issue as they would get allotment of shares at a down to earth price of Rs. 10/- per share but this price would mean that the equity of the company will increase by many fold.
It was also submitted that
1. The increase in equity of the company would be minimum at not more than Rs. 12.50 Crores as per present pricing.
2. Post allotment performance of the company would not suffer and there are around 70000 shareholders of the company who would not be adversely affected.
3. The promoters would not be able to sell any shares out of the additional share allotted to them as those shares would be subject to lock in period.
4. Though a very small benefit to the company, there would be saving of at least Rs. 40 lakhs to Rs. 50 lakhs on the expenditure that may be incurred on the right issue.
5. Besides the time to get the funds from right issue would be certainly more time-consuming than that available under the Preferential allotment. This will also enable the company to get the much needed liquidity at the earliest.
In view of the above it is requested by the representative to consider the application for exemption.
CONCLUSION
5. I have perused the relevant documents and the submissions made on behalf of the acquirers before me. The submission that the right issue would lead to incurring cost which can be saved by preferential allotment is not found to be tenable ground for seeking exemption. It is noted that, the target company has reserve and surplus of Rs. 161.34 crores as on March 31, 2003. The profit after tax of the target company during the above financial year is Rs. 11.06 crores. Further the submissions regarding the present high market price of the shares of the target company and the impact of market movements on response to the rights issue are presumptive in nature and are not tenable grounds for grant of exemption.
5.1 It may also be noted that the said Regulations provide for the exemption from open offer requirement for the acquisition of shares by way of rights issue interalia subject to the disclosure of intention to acquire additional shares beyond entitlement in the letter of offer and also provided that the acquisition does not result in change in control in management . Therefore, in the event of the response to the right issue being very poor resulting in subscription by promoters beyond their entitlement, as submitted, the said acquisition by promoters through rights issue would qualify for exemption under the aforesaid provisions.
5.2 It is stated that the acquirers are not opting for raising funds through the rights issue in view of urgency. However, the reason for urgent needs for the funds has not been explained in the application or in the further submissions made before me.
ORDER
6. Having regard to the above, and the recommendations made by the Takeover Panel and also in the interest of the public shareholders of the Target company, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act 1992 read with sub regulation (6) of regulation 4 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 , hereby reject the application of the Acquirers and direct the Acquirers to comply with the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 regarding open offer as and when the Acquirers acquire the shares / voting rights in the target company .
6. 1 This order shall come into force with immediate effect.