Allowed

Hemant Sonawala

SAT5 Nov 2002

Case brief

AI extract

What is this about?

In an appeal against a penalty imposed for non-compliance with takeover regulations, the Tribunal held that the 5% stake requirement for promoter exemptions applies to individual transferors, not the collective group. Crucially, the Tribunal set aside the penalty regarding Regulation 11 as it was beyond the scope of the adjudicating officer's jurisdiction, limiting the decision to the violation of

What did the court decide?

The impugned order was set aside to the extent it imposed a penalty for violation of Regulation 11 due to lack of jurisdiction; the penalty for violation of Regulation 6 was not addressed in detail.

Hemant Sonawala — Securities and Capital Markets | SAT (2002)

Allowed

Hemant Sonawala

SAT5 Nov 2002

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Case brief

AI extract

What is this about?

What did the court decide?

The impugned order was set aside to the extent it imposed a penalty for violation of Regulation 11 due to lack of jurisdiction; the penalty for violation of Regulation 6 was not addressed in detail.

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contravention of Regulation 3(1)(e)(iii)(b) and Regulation 11 and the section 15H(ii) of the SEBI Act, 1992. Whether the acquisition is under Regulation 10 or 11, it has led to violation of Regulation 3(1)(e)(iii) (b) and Section 15H of the SEBI Act, 1992, and, therefore, mere non mentioning of Regulation 11 of takeover Code will not be fatal as the same is covered under Section 15H of the SEBI Act. No prejudice has been caused to the Appellant by non-mentioning of Regulation 11. The reply / submissions made by the Appellant in respect of the applicability of Regulation 3(1)(e)(iii)(b) is equally applicable to Regulation 11. The reply of the Appellant would not have been different even if the Regulation 11 would have been expressly mentioned. The reply of Appellant in respect of breach of Section 15H of the SEBI Act and the applicability of Regulation 3(1)(e)(iii)(b) by the Appellant would have been same whether it is an acquisition existing under Regulation 10 or 11, that the whole proceeding should not be set aside on the technical ground. More over no prejudice is caused to the Appellant. The well-established principle in law is that so long as any power is traceable to the statute concerned, the mere omissions or error in reciting the correct provision of law does not denude the power of the authority from the statutory action so long as its action is legitimately traceable to a statutory power governing such action. In this case, the power is traceable under Section 15H of the SEBI Act and Regulation 11 and therefore, non-mentioning of Regulation is not fatal. In this case, the following cases are relied upon in support of the above proposition (BSE Brokers’ Forum, Bombay & ors. vs. SEBI – 2001(3) SC pg.482 – relying para 22); Peerless General Finance & Investments Co. Limited vs. RBI 1992) 2 SC pg.343; Union of India vs. Tulsiram Patel (1985) – 3 SC Cases – pg.398. Collector of Central Excise, Calcutta vs. Pradyumna Steels Ltd (1962) 82 ELT – pg.441 –SC; Municipal Corporation of City of Ahmedabad vs. Hiraben Manilal – AIR 1983 – SC – pg.37.

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it is seen that the acquirer vide its letter dated 18.9.97 informed the company about the details of number and percentage of shares / voting rights held by the promoters or persons having control over the company. It is noted that in terms of Regulation 6(3), this information was required to be disclosed to the company by April 20, 1997, whereas, the same was submitted to the company vide their letter dated September 18, 1997. Therefore there was a delay of almost 5 months in making the requisite disclosure to the company. The acquirer, on being confronted with this fact during the personal hearing, sought some time to explain the said delay. Subsequently, vide their letter dated December 28, 2001 they submitted that the acquirer being one of the promoters of the company, its shareholding together with the persons acting in concert with them was known to the company and as such there was substantial compliance with the spirit of the said regulation. Further submitted that in compliance with the provisions of the law in that behalf they had filed particulars relating to "relatives" with the company and as such the company was in the know of persons who were the acquirer’s relatives and that such persons are deemed to be acting in concert with them. They further mentioned that all other requisite disclosures in term of the takeover code were duly filed by them with the concerned persons / authorities on or before the prescribed due date in that behalf and as such there was no malafide or dishonest intention behind the late filing of requisite particulars under Regulation 6(3). The same was never with a view to deny any information to any person entitled to receive the same or to cause any harm or prejudice to other shareholders. In the end, they also prayed that such delay be condoned and no penalty be imposed upon them in this regard. Admittedly, the acquirer has not filed the requisite statement under sub -regulation (3) of Regulation 6 with the company within the time specified therefore. That is, the acquirer has failed to comply with sub regulation (3) of Regulation 6. So far as the acquirer’s request for condonation of delay in furnishing the requisite information to the company is concerned, it may be

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the Appellant, it is evident that the delay was unintentional, and the Appellant of its own complied with the requirements. According to the Appellant the requirements of reporting under Regulation had been done. It is also to be noted that the reporting was a transitional provision required to be complied with, by April 1997. The Appellant belatedly complied with the requirement – i.e. by September 1997. The Respondent has chosen to impose monetary penalty for the said failure almost after 5 years thereafter. Shri Khambatta has submitted that in the light of the facts specific to the case and following the principles laid down by the Hon’ble Supreme Court in Hindustan Ltd. penalty is not warranted for the failure. He had cited from Hindustan Steel that "An Order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation, is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." He had also cited the decision of this Tribunal in Cabot International (supra) and Samrat Holding. However, I do consider it necessary to examine the case laws cited by the parties on the imposition of the penalty. On a perusal of the order it appears that the Adjudicating Officer had decided to impose penalty only for violation of Regulation 11 (1) and not for Regulation 6(3). It is evident from the following paras in the order:

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"Shin-Ho a Corporation of South Korea was the foreign collaborator and joint venture partner in the company’s business. The said Korean Company was holding about 13% of the paid up capital of the company. In 1995-96, the said Korean company was taken over by Shin-Ho group, also of South Korea, and the name of the Korean company was changed to Shin-Ho Petrochemical Company Limited. As a result of the preferential issue of shares made by the company the foreign collaborator’s holding in the company’s capital increased to 51%. Subsequently Government approval was obtained by the company to allot upto 74% of its capital to the said Shin-Ho Petrochemical Company Ltd., (the Appellant) . In 1997, the Appellant acquired 5,75,200 shares (accounting for 4.86% of the capital) from 26 Indian shareholders. The acquisition was reported to the Respondent by the company vide its letter dated 27.10.1997. In the said letter it was also stated that the transaction is exempted from the requirement of Regulation 11 etc., as it is covered under Regulation 3(1)(e)(iii) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ( the Regulations). However, the Respondent did not view that it was a transaction between the promoters and foreign collaborator entitling exemption and decided to enquire into the matter. Accordingly an Adjudicating Officer was appointed by the Respondent vide its order dated 4.8.2000 "to enquire into and adjudge contravention of sub section (ii) of Section 15H of the Securities and Exchange Board of India Act, 1992 (the Act) read with sub clause (iii)(a) of clause (e) of sub regulation (1) of Regulation 3 read with sub regulation (2) of Regulation 11 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 1997(the Regulations) by Shin-Ho Petrochemicals Co. Ltd., Korea, in the matter of acquisition of shares of Shin-Ho Petrochemicals (India)Ltd". "The Adjudicating Officer after inquiry came to the conclusion that the acquisition did not

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As could be seen from the text of Regulation 3(1)(e)(iii) extracted above that to avail exemption under sub clause (iii) " the transferor(s) as well as the transferee(s) in sub clause (a) and (b) have been holding individually or collectively not less than 5% shares in the target company for a period of at least three years prior to the proposed acquisition". Even if it is assumed for argument sake that the transferors are promoters, that by itself is not enough to avail exemption. Size of their pre-acquisition holding is also relevant. The Appellant’s submission that since the promoters and foreign collaborators were holding 24.58% and 51% of the share capital of the company respectively before the transfer, the requirement is fully met with, is difficult to accept. The proviso refers to the holding of shares by the actual transferor(s) and transferee(s) and not the total holding of the promoter group to which the transferors stated to belong, as well as the total holding of the foreign collaborators as a whole. It is evident from the factual position made available in the proceedings, that even though the promoter group as a whole was holding 24.58% of the share capital, the holding of the transferors was just 4.86% which is less than the minimum of 5% shareholding stipulated in the regulation. Since the benefit of exemption under Regulation 3(1)(e)(iii) is available only on fulfillment of the requirement of the stipulated 5% pre acquisition holding by the transferor(s) as well as the transferee(s) and that in the instant case the transferors’ holding was short of the said minimum, the acquisition fails to get the benefit of exemption available under Regulation 3(1)(e). Consequently the exemption from complying with the requirements of Regulation 11 is also not available to the Appellant. In any case for want of adequate shareholding by the transferors, as stipulated in the proviso to the Regulation 3(1)(e)(iii), exemption is not available to the acquisition, I do not consider it necessary to look for a definite answer to the question as to whether the transferors are promoters or not, for the purpose of disposing the present appeal. Even if it is established that they are promoters, still the exemption would not be available to the transaction for the reason stated above."

Hemant Sonawala

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Hemant Sonawala

Case brief

What is this about?

What did the court decide?

Issues for consideration

Cases cited

Parties & counsel

Coram

Case details

Similar cases

What the court decided

A compact analysis

Statutes considered