P C SURANA Vs. POONAM A BAMBA ADJUDICATING OFFICER
LAWS(SB)-2003-5-11
SECURITIES APPELLATE TRIBUNAL
Decided on May 14,2003

Appellant
VERSUS
Respondents

JUDGEMENT

C.Achuthan, - (1.) MAGNUM Intermediates Ltd., is a public limited company (the company). Its shares are listed on OTC Exchange of India. The company is jointly promoted by Shri G. P. Aggarwal, Shri P. C. Surana and Shri Bansidhar Poddar. The company, as has been stated in the appeal, to meet partly the fund requirements for the proposed expansion, issued 25,00,000 equity shares on preferential basis to "promoters" (Shri G. P. Aggarwal and relatives, Shri P. C. Surana and relatives) and "others" in March 1999. Out of the said 25 lakh shares issued, 16,70,000 shares were alloted to the promoters and the remaining 8,30,000 shares to others. The shares of face value of Rs.10/- each were issued at a price of Rs.12/- per share i.e. with a premium of Rs.2/- per share. As a result of allotment of 16,70,000 shares to the promoters, their voting capital in the company increased from 52% to 59.15% i.e. by 7.15%. On knowing about the said acquisition of shares by the company's promoters, the Respondent sought details thereof. Based on the information so collected the Respondent decided to enquire into the matter to ascertain whether the promoters had violated the provisions of regulation 11 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 1997 (the Takeover Regulations) attracting the penal provisions of section 15H (ii) of the Securities and Exchange Board of India Act, 1992 (the Act). For the purpose, an adjudicating officer was appointed. The adjudicating officer on concluding the enquiry, held the promoters guilty of violating regulation 11(1) and imposed a penalty of five lakhs rupees on the promoters who acquired the shares. Shri P.C. Surana, one of the promoters, claiming to be aggrieved by the said order, preferred the present appeal.
(2.) Shri T. N. Tripathi, learned Counsel appearing for the Appellant referred to the activities of the company, the details of the share issue made so far, the financial constraints the company was facing and the circumstances necessitating to make the preferential allotment. He submitted that in the then prevailing circumstances, there was no other alternative but to make the preferential allotment to raise the equity capital to comply with the Industrial Development Bank's requirement for funding the company's expansion project. He submitted that the preferential offer was not made with the intent to give an opportunity to the allottees to substantially acquire the shares, that the sole intention was to part finance the substantial expansion of the company, that by subscribing to the shares, the promoters have not benefitted in any way and the investors have not lost any money by not getting these shares because the shares had never quoted above its par value, that there were no malafide intentions on the part of the promoters as the shares were acquired at Rs.12/- which was more than the market price, that in fact funding the company by preferential allotment was in the best interest of the company's other share holders. Learned Counsel submitted that as a result of acquiring shares in the company's preferential issue, the promoters' holding in the company's voting capital raised from 52% to 59.15%. In this context he referred to regulation 11(1) and submitted that even though the quantum of shares acquired by the promoters in the instant case was in excess of the prescribed limit, by virtue of the exemption available to them under regulation 3(1) ( c ), the acquisition did not attract the requirement of making public announcement in terms of regulation 11(1). He referred to regulation 3(1)( c) and submitted that the Appellant had substantially complied with the requirements of the said regulation. Shri Tripathi in this connection referred to the resolution passed by the Board of Directors of the company and also the resolution passed by the shareholders in the Extra Ordinary General Meeting of the members of the company held on 19.2.1999, that by the general resolution "approval of the members was given to the Board to issue and allot for cash 25,00,000 equity shares of Rs.10/- each of the company at a premium of Rs.2/- per share to the promoters and others on preferential basis." In this context he referred to the conditions provided in regulation 3 (1) ( c ) required to be complied with to avail exemption, and submitted that the Appellant has complied with the requirement of clause (i) by sending the relevant Board resolution to OTC Exchange India, that the Respondent has not disputed the compliance. He referred to clause (ii) of regulation 3 (1) ( c ) and submitted that as per the said clause "full disclosures of the identity of the class of the proposed allottee(s) is made, and if any of the proposed allottee(s) is to be allotted such number of shares as would increase his holding to 5 per cent or more of the post issued capital, then in such cases the price at which the allotment is proposed, the identity of such person (s), the purpose of and reason for such allotment, consequential changes, if any, in the board of directors of the company, and in voting rights, the shareholding pattern of the company and whether such allotment would result in change in control over the company are disclosed in the notice of the general meeting called for the purpose of consideration of the preferential allotment". Learned Counsel referred to the resolution passed in the company's general body of members held on 19.2.1999 and also to the explanatory statement pursuant to section 173(2) of the Companies Act, 1956 issued along with the notice calling the said general meeting. He submitted that in the said explanatory statement the company had clearly stated the reason and the purpose of making the preferential allotment, the nature and quantum of securities offered, its price and also the identity of the class of the proposed allottees. He submitted that the Appellant having thus complied with the requirements of regulation 3(1)(c ) was exempted from complying with the requirements of regulation 11(1) and as such penal provisions under section 15H(ii) did not attract.
(3.) LEARNED Counsel submitted that only two persons had acquired more than 5% shares in the preferential allotment, i.e. Shri P. C. Surana and Shri Ratanlal Lath, that acquisition of shares by Shri Surana was not disclosed in the notice as he was already holding more than 5% shares, as disclosure of the acquisition of shares by those already holding more than 5% shares is not a requirement of clause (ii), that non disclosure of shares allotted to Shri Ratanlal Lath is not an issue covered in the show cause notice, as the scope of the show cause notice is with reference to acquisition of 16,70,000 shares by the promoters and not the acquisition of shares by others. He submitted that there was no change in the Board of directors or in the control over the company as a result of the allotment and as such there was nothing to disclose thereon, that an affirmative statement that there was no change in the Board of Directors and management was not made as it was of no consequence, that in any case at best the omission to make such a disclosure was purely a technical one. He further submitted that, the position of the promoters, board of directors and even the control over the management remained unchanged, that therefore it can not be held that the provisions of regulation 3 (1) (c ) (ii) were not complied with.;


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