Allowed

In the matter of Sundaram Finance Ltd.

SAT29 Jan 2003

Case brief

AI extract

What is this about?

The Tribunal allowed an appeal challenging a penalty imposed for belatedly filing a Section 3(4) report under SEBI's 1997 Takeover Regulations. The Court held that the failure to report within 21 days attracted Section 15A(a), not 15A(b), and a penalty was unwarranted given the bona fide nature of the lapse.

What did the court decide?

The impugned order imposing monetary penalty was set aside and the appeal was allowed.

What the court decided

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BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

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Appeal No.37/2002

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In the matter of:

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1. Sundaram Finance Ltd., 2. Wheels India Ltd., 3. Spicer Heavy Axle Holdings Inc. Appellants Vs.

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Securities and Exchange Board of India Respondent Appearance: Shri P. N. Kapadia, Advocate, Ms. R. R. Mulla Pheroze Advocate I/b. M/s. Gagrat & Co., For Appellants Ms. Poonam Bamba, Jt. Legal Adviser, SEBI Shri Vinay Chauhan, Legal Officer, SEBI For Respondent

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ORDER

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Appellant No.1 and Appellant No.2 are companies incorporated under the Indian companies Act, 1913. Appellant No.3 is a company incorporated under the laws of the State of Michigan, USA with its registered office in Ohio, USA. The Appellants are the major shareholders in an Indian company viz. Axles India Ltd. (the target company). They are also the promoters of the target company. The target company decided to issue 61,20,000 equity shares of Rs.10/- each at par for cash on Rights basis to its equity shareholders as on 18.1.2001. The aforesaid issue opened on 29.1.2001 and closed on 27.2.2001. Pursuant to the

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said Rights offer the Appellants applied for and were allotted shares of their full entitlement. The remaining shareholders did not apply for their full entitlement and the Appellants acquired the unsubscribed portion of the Rights issue, as per the disclosure made in the Letter of Offer. As a result of acquisition of shares in the Rights issue, the promoters holding in the target company increased from 83.63% to 90.96% and the public shareholding came down to 9.04% from 16.37%. The acquisition is stated to be exempted in terms of regulation 3(1) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the 1997 Regulations) from the compliance of the requirements under Chapter III of the said Regulations. However, they failed to file the report under regulation 3 (4) with the Respondent within the 21 days’ time limit prescribed in the regulation. The report was filed only on 22.11.2001. The Respondent, on coming to know of the said failure on the part of the Appellants decided to adjudicate the matter and for the purpose an adjudicating officer was appointed. The adjudicating officer, after enquiry confirmed the failure and imposed one lakh rupees as monetary penalty on the Appellants. The order passed by the adjudicating officer on 21.5.2002 imposing the monetary penalty is under challenge in the present appeal.

In the matter of Sundaram Finance Ltd. — Securities and Capital Markets | SAT (2003)

Allowed

In the matter of Sundaram Finance Ltd.

SAT29 Jan 2003

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Case brief

AI extract

What is this about?

What did the court decide?

The impugned order imposing monetary penalty was set aside and the appeal was allowed.

What the court decided

¶1

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

¶2

Appeal No.37/2002

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In the matter of:

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1. Sundaram Finance Ltd., 2. Wheels India Ltd., 3. Spicer Heavy Axle Holdings Inc. Appellants Vs.

ORDER

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imposition of penalty, that it is thus clear that the Respondent and the adjudicating officer had decided to proceed against the Appellants intentionally under Section 15A(b). He submitted that reliance on the said section was not a wrong citation of the section is evidenced from the fact that the text of the said section has been extracted and explained in the impugned order. He further submitted that that sub section (b) of section 15A is not attracted in respect of documents or reports which were required to be filed with the Respondent. In this context he cited this Tribunal’s decision in Housing Development Finance Corporation Ltd., V. Securities and Exchange Board of India (2000) 28 SCL 289 and submitted that the facts of the said case is almost identical to the Appellants’ case, that in both the cases the exemption from making public offer was available and the question was belated filing of report under regulation 3(4), that in fact the delay involved in filing the report by the Housing Development Finance Corporation was 286 days and in that case the adjudicating officer, had held that the failure was in terms of section 15A(b) of the Act and imposed Rs.150000 as monetary penalty in terms of the show cause notice issued for the violation of the said sub section (b) of section 15A. He submitted that the said order was set aside by the Tribunal, holding that the Respondent had deliberately chosen the penal provisions under clause (b) of section 15A instead of invoking the provisions under clause (a) and that it was not a case of wrong labeling of the relevant provisions in the Act as the facts did not support that proposition. Learned Counsel submitted that clause (a) and clause (b) of section 15A are intended to meet different situations that an adjudication for violation falling under clause (b) can not be considered as an adjudication for violation of clause (a) of section 15A. He submitted that the maximum penalty payable for the offences under these clauses is different, that the penalty for failure to comply with the requirements under clause (b) is very rigorous and is imposable on a day to day basis so long as the failure continues whereas under clause (a) only a lumpsum penalty not exceeding Rs.150000 is imposable.

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the power under which action was taken by the Government would not per se vitiate the action if it could be justified under some other power under which government could lawfully do that act.” She also referred to the State of Karnataka V Muniyalla (1985) 1 SCC 196 therein the Hon’ble Supreme Court had reiterated the view held in Ahmedabad Municipal Corporation that … merely because an order is purported to be made under a wrong provision of law, it does not become invalid so long as there is some other provision of law under which the order could be validly made. Mere recital of a wrong provision of law does not have the effect of invalidating an order which is otherwise within the power of the authority making it.” She cited two more decision of the Hon’ble Supreme Court in support of her submission that the Adjudicating officer enjoyed the power to impose the penalty for belated filing of the report with the Respondent. These decisions are (i) Collector of Central Excise, Calcutta V Pradymna Steel (196 (82) ELT 441 (SC) and (ii)State of Sikkim V Dorjee Tshering Bhuta and ors (1991) 4 Scc 243. In both these decision it was held that if source of power is traceable, exercise of such power can not be set aside merely because it was done under a different provision. She countered the Appellants’ submission that section 15A(a) does not take cognizance of the delay in filing the report, and it is only the failure to report, by stating that the failure referred to in the said section is with reference to the reporting requirement under regulation 3(4) that the said regulation requires reporting within 21 days of the acquisition and as such filing if done beyond the said 21 days would be considered as belated filing.. In this context she referred to the observation of this Tribunal in HDFC’s case (supra) that ‘the argument that clause (a) does not prescribe any time limit for compliance is incorrect. The opening words in the section that “if any person who is required under the Act or any rules or regulation made thereunder” should be read in conjunction with clause (a) and in that context it would be seen that every requirement referred in clause (a) is relatable to time limit. If the Appellants’ argument that clause (a) does not prescribe any time limit is accepted it would lead us to an absurd situation as there would be no referral point of time to decide the occurrence of the default. If the requirement of reporting etc. under clause (a) is not relatable to a time factor for compliance, no offence can be made out and consequently no penalty also will be leviable and thereby clause (a) would

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conclusion that the Appellants had wilfully delayed the filing of the report with the Respondent. On the contrary, there is no reason to believe that having disclosed all the material facts relating to the proposed and actual acquisition of shares in the Rights issue to the concerned stock exchanges and the Respondent, the Appellants would intentionally avoid filing the requisite report with the Respondent, especially, in view of the fact that filing of the report would not have caused any adverse effect on them. It is also not that the Respondent was unaware of the Rights issue and also of the would be increase in the Appellants’ holding in the capital of the target company in case the other share holders did not subscribe in the Rights issue, and the fact that the Appellants had voluntarily come forward with an offer to purchase the shares from the minority shareholders in terms of clause 40 of the listing agreement. On their own, if they had not come forward to acquire the minority interest, not filing of the report with the Respondent could be viewed as a deliberate action so as to suppress material facts from the Respondent and thereby disabling the Respondent from proceeding against the Appellants for the said failure. In the facts and circumstances of the case it is difficult to hold that the Appellants either acted “deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation.” The failure for which the Appellant has been charged, in the light of the facts and circumstances specific to the case, appears to be a mere technical breach of the provisions of the regulations and that the said breach was on a bonafide belief that the Appellants were not required to file the report as their holding in the target company’s paid up capital was above 90% of the total capital. The Appellants’ version that they had acted on the basis of the advice given by the Lead Managers/legal adviser, remains unrebutted. Lead Manager is supposed to be an expert in the matters requiring compliance under the 1997 Regulations, and if the Appellants had gone by the advice given by the expert Lead Manager, they can not be blamed entirely. It is also noted that as a result of the acquisition of that portion of the shares which the other share holders did not opt to subscribe, there was no change in control or management of the target company.

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Regulations. One such exempted type of acquisitions is interse transfer of shares amongst group companies. Even though the acquisitions exempted under regulation 3 are exempted from the purview of the substantive provisions like making public offer, etc. in the Regulations, the acquirer is required to inform the concerned stock exchange details of the proposed acquisition at least 4 working days in advance of the proposed acquisition in terms of regulation 3(3). In terms of regulation 3(4) the acquirer is also required within 21 days of the date of acquisition, submit a report alongwith supporting documents to the Board giving all details in respect of acquisition which would entitle him to exercise 10% or more of the voting rights in the target company. Object of these two sub-regulations are different. While reporting to the concerned stock exchanges under regulation 3(3) is meant to enlighten the investing public in their investment decision in the shares of the company, requirement under regulation 3(4) is meant to serve as an input to enable SEBI to ensure whether the acquisition is one enjoying exemption and if not, to follow up further course of action in the interest of investorssuch as directing public offer, etc. Regulation 3(4) is more relevant from the enforcement point of view. In the present case it is on record that the TWL had complied with the requirements of regulation 3(3) and failure is confined to compliance of regulation 3(4) by the Appellant. Since, the Respondent has admitted that the acquisition is covered under regulation 3, there is no question of any public offer, etc. required as a result of the acquisition. So the consequence of delayed filing has not in any way affected any follow up requirement on the part of the Respondents. Therefore it could be said that the non-compliance remained in effect only a technical formality. It may not be so in all cases as the report would be crucial in certain cases depending on the facts and circumstances of each case. It is made clear that the report is not to be discounted or treated irrelevant as such, in all the cases.

In the matter of Sundaram Finance Ltd.

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In the matter of Sundaram Finance Ltd.

Case brief

What is this about?

What did the court decide?

What the court decided

Issues for consideration

Cases cited

Parties & counsel

Coram

Case details

Similar cases

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Statutes considered