SEBI Vs. HSBC SECURITIES AND CAPITAL MARKET INDIA PVT LTD
LAWS(SB)-2003-12-9
SECURITIES APPELLATE TRIBUNAL
Decided on December 09,2003

Appellant
VERSUS
Respondents

JUDGEMENT

T.M. Nagarajan, Whole Time Member - (1.) 1 HSBC Securities and Capital Market (India) Pvt Ltd [hereinafter referred to as 'HSBC Securities'] is registered with SEBI inter alia as a Category I Merchant Banker bearing Registration No. INM0000010353. 1.2 HSBC Securities acted as a Merchant Banker for the open offer made by Mr. V K Modi, Dr. B K Modi, Mod Fashions and Securities Pvt Ltd and Modikem Ltd in concert with Witta International Inc., and Sidh International Ltd (hereinafter referred to as 'the acquirers') under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as 'Takeover Regulations'), to the shareholders of Modi Rubber Ltd (hereinafter referred to as 'target company') to acquire upto 87, 64,186 fully paid up shares of the target company representing 35% of the paid up capital of the target company. 1.3 The offer opened on 4th June, 2001 and was to be closed on 3rd July, 2001. The nd Acquirers were to complete all the formalities by August, 2001 i.e. acceptance/rejection of the shares offered by the share holders and corresponding payment for the acquired shares/ return the share certificates for the rejected shares. The shares tendered in the offer were 108,06,760 including 27,04,205 shares by LIC. On 21st July,2001, LIC, one of the share holder of MRL which had lodged 27,04,205 shares in response to the offer, wrote to HSBC Securities (Merchant Banker) and Karvy (Registrar to the Issue) to return the shares tendered by it on the ground that (a) the said shares had been tendered in an unauthorised manner and (b) their act of lodgement of the shares was the "offer" and not an "acceptance" of the offer. On 23rd July,2001 HSBC Securities replied to LIC that shares once tendered cannot be returned. Offer closed on 23rd July, 2001. 1.4 LIC has filed a suit being Suit No.2497 of 2001 in the Hon'ble Bombay High Court - LIC v/s MRL and others and took a notice of motion No.1704 of 2001 praying for interim relief. The Hon'ble High Court issued orders dated 24 July,2001 and 1st August,2001 ordering maintenance of status quo in the matter. 1.5 In the said open offer, SEBI did not allow Modipon and Modi Spinning and Weaving Mills considered as the promoters of MRL to participate in the Open offer. Modipon and Modi Spinning and Weaving Mills filed two appeals before Hon'ble Securities Appellate Tribunal (hereinafter referred to as 'SAT') against SEBI's order, bearing Appeal Nos. 34/2001 and 43/2001 respectively. SAT, vide its Order dated 31st July, 2001 allowed Modipon to participate in the offer. 1.6 Pursuant to the above, a revised public announcement dated 1st August, 2001 was issued by HSBC Securities to shareholders of the target company, stating that payment of consideration could be made by 22nd August,2001 subject to the final orders of the Hon'ble High Court. On 6th August 2001, HSBC Securities (being defendant) filed an affidavit before the Hon'ble High Court in Notice of Motion no.1704 of 2001 in Suit No.2497 of 2001 in Life Insurance Corporation of India Ltd vs Modi Rubber Ltd & Ors and inter alia prayed for passing appropriate Orders with regard to acceptability or otherwise of the shares tendered by LIC. The Hon'ble High Court vide its interim order dated 24th August, 2001 observed to the effect that, if interim injunction was not granted LIC would permanently lose about 20 lakh shares, based on proportional acceptance by the acquirers. While granting injunction, the Hon'ble High Court directed that in case the suit is finally dismissed, then LIC would submit about 20 lakh shares to the Acquirers for purchase in accordance with the public offer and in case the Acquirers for any reason do not want to purchase the said shares, LIC shall not insist on the Acquirers to purchase the said shares. In other words, as per the order, while LIC would be under an obligation to tender the shares the Acquirers shall be under no obligation to purchase the same if they do not want to do so. 1.7 The Hon'ble High Court also stipulated that LIC shall not, without Court's approval, transfer or encumber the said 20 lakh shares during the pendancy of the suit. The Hon'ble High Court took note of the fact that considering the number of shares received in response to the public offer, in case the shares tendered by LIC were excluded, the balance would be less than 35% of paid up capital of the company and, therefore, the acquirer would have to purchase all the shares offered (by the public other than LIC). And the acquirer, subject to the court's decision on the Suit, could do this. 1.8 On 30th August, 2001, HSBC Securities indicated that it is proceeding with proportionate allotment and specifically sought confirmation from SEBI with regard to the acceptance of the shares tendered by Modi Spinning and Weaving Mills Ltd. Further, on 3rd September 2001, HSBC Securities wrote to the acquirer that the shares tendered by Modi Spinning and Weaving Mills would be accepted on Pro-rata basis. SEBI vide letter dated 6th September 2001 advised HSBC Securities to await the decision of SAT and be guided accordingly. HSBC Securities informed SEBI and the acquirers on 17th September 2001 that the shares tendered by Modi Spinning and Weaving Mills Ltd would be accepted on pro-rata basis in case SAT order is in favour of Modi Spinning and Weaving Mills Ltd. SAT vide its interim order dated September 20, 2001, restrained HSBC Securities and others from finalising the public offer without taking into account the shares lodged by the Modi Spinning and Weaving Mills Ltd till 25th October, 2001 and vide final order dated November 9, 2001 SAT allowed Modi Spinning and Weaving Mills Ltd to participate in the public offer made by the Acquirers. 1.9 On 27th September, 2001, HSBC Securities filed a 45 days report to SEBI pursuant to Regulation 24(7) of Takeover Regulations and informed that after transferring Rs.4,76,28,547/- from the Escrow Account to special account for payment to shareholders(other than Modipon and Modi Spinning and Weaving Mills Ltd.), a sum of Rs.13,13,80,380/- had been earmarked for Modipon and Modi Spinning and Weaving Mills Ltd and the balance Rs.2,09,91,073/- would be transferred to the acquirers on completion of the formalities. 1.10 HSBC Securities had released the balance amount of Rs 2,09,91,073 to the Acquirers on 18th October, 2001. 1.11 SEBI vide letter dated 25th January 2002 sought details from HSBC Securities regarding the amount in escrow account for meeting the liability towards LIC/ public shareholders as the case may be and the extent of compliance with relevant provisions of Takeover Regulations. 1.12 On examining the material available on record, SEBI vide letter dated May 27, 2002 sought for the explanation of HSBC Securities as to why action under sub-regulation (4) of Regulation 45 of the Takeover Regulation should not be initiated against it for violating Regulation 24(6) and Regulation 28 of the Takeover Regulations for having released the balance amount from the escrow account to the acquirer prior to the completion of all the obligations with respect to the open offer. 1.13 HSBC Securities vide letter dated 18.6.2002 furnished its reply to the aforesaid letter inter alia stating that it has fully carried out the requirements of the Regulations. ENQUIRY :
(2.) 1 On considering the reply of HSBC Securities, SEBI appointed, vide order dated 12th September, 2002, an Enquiry Officer to enquire into the alleged contravention of Regulation 24(6) by HSBC Securities. The Enquiry Officer conducted the enquiry in accordance with the procedure laid down in SEBI (Procedure for Holding Enquiry by Enquiry Officer and imposing penalty) Regulations, 2002 (hereinafter referred to as 'Enquiry Procedure Regulations') and submitted his report on 30th May, 2003. FINDINGS OF THE ENQUIRY : The Enquiry Officer in his report observed to the following effect: He contention of HSBC Securities that tHe public announcement was for acquisition of 87,64,186 shares constituting 35% of tHe equity capital of tHe target company and that tHere was no obligation on tHe acquirers to acquire exactly 35% of tHe paid up capital is untenable. WHen tHe acquirer makes a public announcement to acquire shares from tHe public at large for tHe purchase of upto a definite number of shares, constituting a certain percentage of tHe equity share capital, He is under an obligation to acquire tHe shares upto tHe specified number. 3.2 Offer given by tHe acquirer was not a "conditional offer" and tHerefore tHe contention of HSBC Securities that tHe acquirer is not under obligation to acquire 87, 64,186 shares representing 35% of tHe paid up capital of tHe target company is not tenable. 3.3 THe Hon'ble Mumbai High court had observed that if tHe shares tendered by LIC are excluded, tHe number of shares offered by public would be 32% i.e. less than 35% of equity capital of tHe company, and all tHe shares tendered by public would tHerefore have to be accepted. THe acquirers could have accepted all tHe shares tendered by tHe public (32.36%) and depending on final outcome of tHe suit, tHey could have purchased tHe remaining 2.64% from LIC. 3.4 THe balance shares of 15,31,452 tendered by tHe public should have been retained and tHe balance in tHe escrow account should not have been released by tHe merchant banker. THe obligation in respect of otHer shareholders for 15, 31,451 shares were not informed to tHe court. 3.5 HSBC Securities has acted negligently and caused tHe release of tHe balance amount from tHe escrow account to tHe acquirers without ensuring that tHe acquirer has complied with all tHe provisions of Takeover Regulations. 3.6 HSBC Securities as Merchant Banker has violated tHe provisions of Regulation 24(6) of Takeover Regulations and recommended major penalty of suspension of tHe certificate of registration granted tHe Merchant Banker for a period of 6 months. SHOW CAUSE NOTICE AND HEARING
(3.) 1 Pursuant to the enquiry-report, a show cause notice dated 1st August, 2003, was issued in terms of Regulation 13(2) of the Enquiry Procedure Regulations, to HSBC Securities forwarding a copy of the Enquiry Report. HSBC Securities vide its letter dated 20th August, 2003 furnished its reply to the said show cause notice. Thereafter, an opportunity was granted to HSBC Securities for being heard and the date of hearing was slated for September 25, 2003. HSBC Securities sought adjournment of the said hearing on the ground of non-availability of its Counsel on the said date. Accordingly, the hearing was adjourned to October 9, 2003. The opportunity was availed by HSBC Securities. Shri K Balakrishnan, Director, Ms. Jasmine Batliwala, Director of HSBC Securities along with their counsels Viz S/Shri Virag Tulzapurkar and S. Saikrishna. Shri S.N. Talwar, Senior Partner, Shri S. Balakrishnan Senior Associate and Shri Suneet Barve from Crawford Bayley & CO., attended the hearing and Shri Virag Tulzapurkar made the submissions on behalf of HSBC Securities. SUBMISSIONS OF HSBC SECURITIES : HSBC Securities contended that :;


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