ORDER
G.N. Bajpai, Chairman
1.1 Delhi Stock Exchange (hereinafter referred to as “DSE”) vide letter dated 3rd May 2001 informed the Securities and Exchange Board of India (hereinafter referred to as “the SEBI”) that Jay -Yushin Ltd (hereinafter referred to as “Target Company”) had issued 2, 93, 500 equity shares representing 7.59% of the total paid up capital of Target Company on preferential basis to foreign collaborator, Ushin Limited (hereinafter referred to as “the Acquirer”). Pursuant to this acquisition, the Acquirer’s shareholding went up by 6.17% from 18.33% ( pre-preferential ) to 25% ( post-preferential ) triggering the provision of Regulation 11(1) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as “the Regulations”). Such preferential allotment was exempted from the applicability of Regulations 10, 11 and 12 in terms of Regulation 3(1)(c) of the Regulations. DSE had pointed out that the Target Company has not forwarded to it, copies of Board resolution relating to the new issue of capital prior to dispatching the notice to the shareholders of the Target Company as required under Regulation 3 (1) (c) (i) of the Regulations.
1.2 In terms of Regulation 3 (1) (c) (i) of the Regulations, the Acquirer has to ensure that the Board resolution in respect of the proposed preferential allotment is sent to all stock exchanges where the shares of the Target Company are listed, for being notified on the notice board of the Exchange.
1.3 As per Regulation 3 (1) (c) (ii) of the Regulations, the notice of EGM should disclose, inter alia, the identity of class of proposed allottees, consequential changes in control, Board of Directors, Voting Rights and Shareholding pattern in case any of the allottees is allotted such number of shares as would increase his holding to 5% or more of the post issue capital.
1.4 Further, DSE vide letter dated 22nd March 2002 advised the Target Company to file required information with SEBI under the Regulations. In response to which the Target Company vide letter dated 17th April 2002 informed SEBI that the Target Company entered into an agreement dated 30th May 1986 with the Acquirer, whereby Acquirer had option to increase its equity contribution upto 40% of the total paid up equity share capital of the Target Company. Acquirer vide letter dated 18th March 1998 requested the Target Company to increase its equity stake from existing 18.83% (pre-preferential) to 25% (post-preferential). Acquirer’s request was approved by shareholders of the Target Company in an Extraordinary General Meeting held on 14th May 1998. Allotment of 29,35,500 equity shares of Rs. 10/- each fully paid up at a premium of Rs. 30/- per share by way of preferential allotment was approved by members and allotment was made in the Board of Directors meeting held on 30th September 1998. Target Company vide letter dated 18th December 2000 applied to DSE for listing of these shares on DSE.
2. SHOW CAUSE NOTICE
2.1 In view of the acquisition of 6.17% shares by way of preferential allotment by the Acquirer without complying with the requirements of Regulation 3 (1) (c) (i) and Regulation 3 (1) (c) (ii) of the Regulations, the exemption from the applicability of Regulation 11(1) of the Regulations would not be available. SEBI issued a show cause notice dated 30th January 2003 to the Acquirer to show cause as to why action under regulation 44 and regulation 45 (6) of the Regulations read with section 11 and section 11B of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “the Act”), should not be initiated.
3. REPLY TO SHOW CAUSE NOTICE
3.1 Acquirer vide letter dated 13th February 2003 replied to the above show cause notice inter alia submitting as follows :
Acquirer subscribed to the preferential allotment of shares and allotment was made without any intention to suppress any material information. All facts and Information were within the knowledge of shareholders, stock exchanges and other regulatory bodies. The acquisition made by way of preferential allotment under Section 81 (1) (A) of the Indian Companies Act, 1956 is exempt under Regulation 3 (1) (c) of the Regulations from compliance of Chapter III of the Regulations. Acquirer was under the impression that the Regulations do not apply to this acquisition. Non compliance with certain disclosures was more of a technical lapse and was unintentional on the part of the Acquirer and did not affect anyone’s interest. Further, the Target Company continued to be under the control of the same Promoters and there has not been any change brought about in the Board of Directors as well.
4. PERSONAL HEARING
4.1 A personal hearing was granted to the Acquirer on 5th March 2003, wherein Sri Dinesh Agnani and Sri M K Doogar representing the Acquirer appeared before me and made submissions. Further written submissions dated 4th March 2003, which were reiteration of reply made in response to the show cause mentioned above were also filed by the Acquirer.
4.2 Pursuant to the aforesaid hearing, after due consideration of the facts and circumstances of the case and the submissions made by the Acquirer, I came to the conclusion that it is a fit case to initiate adjudication proceedings in terms of Section 15 H (ii) of the SEBI Act,1992. Accordingly, vide my order dated10th March 2003, I appointed an Adjudicating Officer to adjudicate penalty, if any, leviable on the Acquirer for the alleged violations of the Regulations. Thereafter the Adjudicating Officer issued a show cause notice dated 27.03.03. The Acquirer had challenged the said show cause notice in the Hon’ble High Court of Delhi contending that SEBI can not issue a second show cause notice on the same facts when a hearing was conducted subsequent to the first show cause notice pursuant to which no order has been passed.
4.3 Hon’ble High Court, after hearing the Acquirer and SEBI, passed an order dated 20th February 2004 directing SEBI to pass an order in respect of the first show cause notice dated 30th January 2003 in respect of which hearing had already been given to the acquirer.
4.4 In view of the above, I hereby pass this order formally recording the reasons based on which the Adjudicating Officer was appointed.
5. CONSIDERATION OF ISSUES
5.1 I have carefully considered the facts of the case, the written as well as oral submissions made by the Acquirer and also the documents submitted by the Acquirer in support of its submissions.
5.2 Acquirer claimed that the said acquisition is exempt under Regulation 3(1)(c) of the Regulations from compliance of Chapter III of the Regulations. No doubt the said acquisition i.e., by way preferential allotment under sec 81(1)(A) of the Indian Companies Act, 1956, does fall under exempted category. However, the said exemption is not automatic in nature. Exemption is available only if the Acquirer fulfils certain conditions precedent, like making required disclosures under Regulation 3(1)(c)(i) and Regulation 3 (1) (c) (ii) of the Regulations. I, prima facie, find that the Acquirer has not complied with the requirements of Regulation 3(1)(c)(i) and Regulation 3(1)(c)(ii) of the Regulations and as such consequential exemption from the applicability of Regulation 11 (1) of the Regulations may not be available to the Acquirer.
5.3 It is also observed that there was considerable delay (1294 days) in filing the required report by the Acquirer in terms of Regulation 3(4) of the Regulations and Regulation 3(5) has not been complied with till date.
5.4 Further, I find that the allotment of shares to the Acquirer was approved by the shareholders in the AGM. From the records, I also find that there has not been any change in the control and there has not been any consequential change in the Board of Directors of the Target Company pursuant to the allotment of equity shares. In the light of the above, I do not find it a fit case to give direction to make an open offer in terms of Regulation 44 and Regulation 45(6) of the Regulation and section 11 and 11B of the SEBI Act,1992 .
5.5 In view of the findings made above, I conclude that adjudication proceedings should be initiated against the Acquirer for not having made full disclosures as required under the then provisions of Regulation 3(1)(c) and consequently violating Regulation 11(1) of the Regulations. Since the adjudication proceedings are to be taken up against the Acquirer for violation of Regulation 11(1) of the Regulations on the ground that the Acquirer is not entitled for exemption under Regulation 3, there is no need to take action for the delayed filing of report under Regulation 3(4) and non compliance with Regulation 3(5) of the Regulations.
6. ORDER
6.1 Therefore, in exercise of the powers conferred upon me under Section 4(3) of SEBI Act 1992 read with regulations 3(1)(c), 44 and 45 of the said Regulations, I direct that adjudication proceedings be initiated against the Acquirer. The Acquirer may make his submissions before the Adjudicating Officer, who shall consider the same on merits and pass appropriate order in accordance with law. A fresh Order appointing the Adjudicating Officer will be issued separately.
6.2 This order shall come into force with immediate effect.