At, SEBI Securities Exchange Board of India Securities Appellate Tribunal
By, CORAM: JUSTICE KUMAR RAJARATNAM
By, PRESIDING OFFICER
By, N.L. LAKHANPAL
Appellants – Represented by: Mahendra Bhuta, Company Secretary. Respondent - Represented by: Mr. Vivek Menon, Advocate.
Per: N.L. Lakhanpal, Member
1. The appeal is taken up for final disposal with the consent of parties.
2. The appellants 1 to 11 had acquired 32,03,340 equity shares of BSEL Information Systems Limited (now known as BSEL Infrastructure Realty Limited) constituting 31.56% of shares of paid up capital of the target company BSEL Information Systems Limited during April, 1997. Due to this acquisition the shareholding of the appellants in the target company increased from 30.04% to 61.6%. Securities and Exchange Board of India (SEBI) investigated these acquisitions and came to the conclusion that the acquisition was in violation of Regulations 10 and 11 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and directed the appellant acquirers to make an open offer vide SEBI’s order dated 23/10/2002. The appellants were also directed to pay interest @ 15% per annum from April, 1997 to the date of final payment in the open offer. This order was complied with by the appellants. The open offer opened on 03/02/2003 and closed on 04/03/2003. However, in the meanwhile the matter had also been referred for adjudication and the Adjudicating Officer issued show cause notice to the appellants on 27/02/2003 asking why penalty should not be imposed on the appellants under Section 15H(ii) of the SEBI Act, 1992 for their failure to make public announcement as required under Regulations 10 and 11 of SEBI (SAST) Regulations, 1997. The appellants replied stating that Chairman, SEBI, had already dealt with this irregularity on their part vide his order dated October 23, 2002 directing them to make a public announcement taking 01/04/1997 as reference date and loading interest @ 15% per annum to the offer price and that they had duly complied with these orders. In the impugned order the Adjudication Officer has duly taken note of this compliance and has treated it as a mitigating factor while imposing a penalty of Rs. 5 lakhs under Section 15H(ii) of SEBI Act, 1992.
3. The facts in this case as narrated above are uncontested. The only argument raised in the memorandum of appeal and pressed at the time of the oral hearing of this appeal is that the default of not having made a public announcement was due to genuine belief that Regulation 10 and 11 would not be applicable since the appellants were already holding more than 30% of the equity of the target company and that since they had duly complied with the Chairman, SEBI’s order relating to public offer, the additional penalty of Rs. 5 lakhs under Section 15H(ii) in separate adjudication proceedings would be extremely harsh. The appellants have further argued that they were the promoters of the company and the acquisition made in April, 1997 was in reality merely an infusion of additional capital in the interest of the company and its shareholders and not for any personal gain of the acquirers. According to them, this is evident from the fact that the appellant acquirers are still holding those shares and have not disposed them off in the market. The appellants have also stated that there is no change whatsoever in the management and control of the target company as a result of the acquisition.
4. We have carefully gone into the facts of the case and we find ourselves completely satisfied with the bonafides of the appellants. As promoters they had every reason to believe that acquisition of further 31.5% shares over and above their holding of 30.04% of was not going to materially affect the management and control and voting rights in the company which were already overwhelming in their favour. Yet, when it was pointed out to them that they were nevertheless in breach of Regulations 10 and 11, they faithfully complied with the orders of Chairman, SEBI dated October 23, 2002 directing them to make a public offer and also to fix the offer price by adding interest @ 15% per annum from April, 1997 onwards till the date of actual payment of consideration to the shareholders. According to the appellants the public offer with such a high rate of interest on the issue price has cost them as much as Rs. 60 lakhs and this figure has not been contested by the respondents. The Adjudication Officer has also treated this compliance by the appellants as a strong mitigating factor. In any case with the compliance of this order, the interests of the investors have been fully taken care of and the question that remains is only of imposition of a penalty for default. The Adjudicating Officer has arrived at the figure of Rs. 5 lakhs in the belief that any matter referred for adjudication must result in imposition of some penalty. This Tribunal has held in a number of cases that this proposition is not correct. When a matter is referred to adjudication, what is under adjudication is not only the quantum of penalty but also the questions as to whether the penalty is leviable under the law at all and even if it is leviable whether a penalty needs to be levied in the facts and circumstances of a particular case. These questions have to be determined by the Adjudicating Officer judicially with due application of mind. This view of this Tribunal has also been upheld by the Hon’ble Bombay High Court in Cabot International Capital Corporation Vs. SEBI, appeal No. 7/2001 in SEBI appeal No. 24/2000. The impugned order does not reveal that the appellants acted deliberately in defiance of law or were guilty of conduct contumacious or dishonest or acted in conscious disregard of their obligations. On the contrary the appellants have faithfully complied with the orders directing them to make a public offer and have thus assisted the regulator in safeguarding the investor interest at a considerable cost to themselves. Reference was made during argument to the order of SEBI dated 31/03/2003 where a penalty of Rs. 5 lakhs was imposed on M/s. VLS Finance Limited in lieu of requiring VLS Finance Limited to make a public announcement under SEBI (SAST) Regulations, 1997. This order was confirmed by the Tribunal in Appeal 61/2003. There was broad consensus during the hearing of Appeal 61/2003 between the parties that SEBI should either direct the party to go for a public announcement if the party is in violation of Regulation 10 of SEBI (SAST) Regulations or proceed under Section 15H(2) of the SEBI Act, 1992 for imposing a penalty. Rightly, SEBI in appeal No. 61/2003 took the stand that the ends of justice will be met if action is taken either to make a public offer or to impose a penalty but not both. This is in consonance with fair play, justice and equity. We commend this approach of SEBI which is in keeping with the spirit of Articl
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e 20 of the Constitution of India. The present case is not the one warranting a departure from this salutary practice. In the circumstances we have come to the conclusion that no specific penalty is called for under Section 15H(2) of SEBI Act, 1992, in the facts and circumstances of this case since the earlier order directing a public offer has been fully complied with thus safeguarding the interests of the minority shareholders, which is the main objective of SEBI (SAST) Regulations, 1997. 5. Accordingly the appeal is allowed and the impugned order is set aside. Any amount paid by the appellants pursuant to the impugned order shall be refunded within four weeks from the date of this order. There shall be no order as to costs.