ORDER
N.L. Lakhanpal, Member
1. This is an appeal against the order passed by SEBI on February 20, 2004 imposing a penalty of Rs. 5,00,000/- on the appellant for violation of Regulation 11(1) read with 14(1) of the Securities & Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997. The appellant, it seems, is the promoter and managing director of Golden Carpets Ltd. holding 30.82% of its equity. In the year 2002, when the company was facing certain difficulties, he advanced it an unsecured interest free loan of Rs. 61 lakhs and approached the Industrial Development Bank of India for restructuring. The approval letter from the IDBI shows that the first condition of this restructuring approval was that the appellant would convert this loan into equity share capital. Accordingly, the Board of Directors passed a resolution on 24.12.2002 under which 6,10,000 equity shares of face value of Rs. 10/- each out of the shares forfeited by the company for non-payment of call money were reissued to him. These 6,10,000 shares constituted 6.4 % of the total share capital of the company. This increase in the shareholding being more than the creeping limit of 5%, constituted breach of Regulation 11(1) of SEBI (Substantial Acquisition of Shares and Takeover) Regulation, 1997 as the acquisition had taken place without making a public announcement. Accordingly, the adjudication proceedings were held and penalty of Rs. 5,00,000/- was imposed under Section 15H of the Securities & Exchange Board of India Act, 1992. Being aggrieved, the appellant has filed the present appeal.
2. In the memorandum of appeal as well as on the date of hearing for admission and for interim order, the learned counsel for the appellant Shri Iyer made out a case for setting aside the impugned order relying on the judgement of the Hon’ble Supreme Court of India in Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Ltd. AIR 1964 SC 250. His argument, in brief, was that since there was no allotment involved in a reissue of forfeited shares, such reissue could be validly rescinded by the board as the passing of the resolution by the Board of Directors of the company on 24.12.2002 for preferential allotment in the instant case, being a case of an inadvertent mistake of law, was non est. He therefore argued that the subsequent rescinding of the resolution by the Board was the end of the matter and there was no cause thereafter for SEBI to proceed further in the matter. The learned counsel for the respondent submitted that this was an arguable issue and any ruling on this by the Tribunal could have a bearing on several other cases and that the matter be therefore deferred for detailed hearing on a subsequent date. Thereupon the learned counsel for the appellant agreed to drop this line of argument and pressed for final orders on his alternative submission in the memorandum of appeal for reducing the penalty amount to the barest minimum in view of the bonafides of the entire transaction.
3. The matter was therefore taken up for final disposed with the consent of parties even though it was listed for hearing only for admission and interim orders. On going through the impugned order, the memorandum of appeal as well as the other documents on record, we find that the facts of the case are not in dispute. The preferential allotment stands annulled by a subsequent resolution of the Board of Directors of the company even though we agree with the respondent that this annulment does not absolve the appellant from the consequence of violation of the Regulations. The learned counsel for the appellant also pointed out and it is also clear from the impugned order that until September 9, 2002, such acquisitions by way of preferential allotments were entitled to automatic exemption from the discipline of the Regulations. It is also not disputed during that the IDBI had imposed a condition while approving the restructuring proposal for converting the loan of Rs. 61 lakhs into equity. Taking all these factors into account, we believe that this is a violation that needs to be viewed leniently. Section 15(J) of the SEBI Act lists three factors for determining the quantum of penalty as (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; and (c) the repetitive nature of the default.
4. In the present instance, we find that the appellant is entitled to a lenient view on each of these counts. This is obviously the first default and the gain to the appellant or loss to the investors, apart from being non-quantifiable, can at the most be only notional in an admittedly illiquid scrip. In these circumstances, we uphold the impugned order but reduce the amount of penalty from Rs. 5 lakhs to Rs. 1 lakh. The appeal is disposed of accordingly. No costs.