Enakshi Impex Pvt. Ltd. vs Sebi

Date of Decision: 02.03.2017

Misc. Application No. 121 of 2016 And Appeal No. 177 of 2016

Enakshi Impex Pvt. Ltd. 312/3, Sharda Chamber No. 1, 31, Keshavji Naik Road, Bhat Bazar, Masjid (W), Mumbai - 400 009. ...... Appellant

Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ...... Respondent

Ms. Rinku Valanju, Advocate with Ms. Nikita Hinger, Advocate for the Appellant. Mr. Aditya Chitale, Advocate with Mr. Pulkit Sukhramani, Advocate i/b The Law Point for the Respondent.

CORAM : Justice J. P. Devadhar, Presiding Officer Jog Singh, Member Dr. C. K. G. Nair, Member

Per : Jog Singh (Oral)

1.

The present appeal is directed against the impugned order dated

September 29, 2015 by which the learned Adjudicating Officer ('AO' for

short) in exercise of powers conferred under Section 15I(2) of SEBI Act read

with Rule 5 of the Adjudication Rules has imposed following penalties on the

appellant on account of following violations :

1. ` 2,50,000/- under Section 15A(b) of SEBI Act for violation of Regulation 7(1) of SAST Regulations, 1997 read with Regulation 35 of SAST Regulations, 2011.

2 2. ` 2,00,000/- under Section 15A(a) of SEBI Act for violation of Section 11C(3) of SEBI Act, 1992.

3. ` 2,00,000/- under Section 15A(a) of SEBI Act for violation of Section 11C(5) of SEBI Act, 1992.

2. At the outset, a decision of this Tribunal dated July 14, 2016 in Appeal

No. 22 of 2016 (Concord Realty Pvt. Ltd. vs. SEBI) has been brought to our

notice. Under somewhat similar circumstances, it has been held in Concord

Realty Pvt. Ltd. that "Once it is established that there is failure to furnish

requisite particulars called for and there is failure to appear before the

concerned officer of SEBI as per the summons issued to the appellant, it

obviously means that there is violation of section 11C(3) and section 11C(5) of

SEBI Act. Penalty for such violations under section 15A(b) of the SEBI Act is

` 1 lakh per day subject to a maximum of ` 1 crore. Thus, as against the

penalty of ` 1 crore imposable for violating section 11C(3) and penalty of ` 1

crore imposable for violating section 11C(5), the AO of SEBI after considering

all mitigating factors has imposed penalty of ` 2 lakh for violating section

11C(3) and ` 2 lakh for violating section 11C(5) of SEBI Act which cannot be

said to be unreasonable and excessive. Accordingly, the penalty imposed for

violating section 11C(3) and 11C(5) is upheld."

3. In view of this judgment of Concord Realty Pvt. Ltd., Ms. Rinku

Valanju, learned counsel for the appellant, fairly states that she is not pressing

the penalty of ` 4,00,000/- imposed on the appellant for violation of Sections

11C(3) and (5) of the SEBI Act, 1992 and requests four weeks' time to deposit

` 4,00,000/- with SEBI as directed in the impugned order.

4. Turning to question of violation of various provisions of SAST

Regulations of 1997 and 2011 read with Regulation 13(1) of Prohibition of 3

Insider Trading Regulations, 1992, we would like to reproduce the relevant

provisions herein below for the sake of convenience :-

"Violation of provisions of regulations 7(1) and 7(1A) read with regulation 7(2) of SAST Regulations, 1997 and regulation 13(1) of PIT Regulations, 1992

SAST Regulations, 1997

"Acquisition of 5 per cent and more shares or voting rights of a company

"7(1) Any acquirer, who acquires shares or voting rights which (taken together with shares or voting rights, if any, held by him) would entitle him to more than five per cent or ten per cent or fourteen per cent or fifty four per cent or seventy four per cent shares or voting rights in a company, in any manner whatsoever, shall disclose at every stage the aggregate of his shareholding or voting rights in that company to the company and to the stock exchanges where shares of the target company are listed.

(1A) Any acquirer who has acquired shares or voting rights of a company under sub-regulation (1) of regulation 11 or under second proviso to sub-regulation (2) of regulation 11, shall disclose purchase or sale aggregating two per cent or more of the share capital of the target company to the target company, and the stock exchanges where shares of the target company are listed within two days of such purchase or sale along with the aggregate shareholding after such acquisition of sale.

Explanation. - For the purposes of sub-regulations (1) and (1A), the term 'acquirer' shall include a pledge, other than a bank or a financial institution and such pledgee shall make disclosure to the target company and the stock exchange within two days of creation of pledge.

(2) The disclosures mentioned in sub-regulations (1) and (1A) shall be made within two days of, -

(a) the receipt of intimation of allotment of shares; or

(b) the acquisition of shares or voting rights, as the case may be."

PIT Regulations, 1992

"Disclosure of interest or holding by directors and officers and substantial shareholders in a listed companies - Initial Disclosure"

4

"13. (1) Any person who holds more than 5% shares or voting rights in any listed company shall disclose to the company in Form A, the number of shares or voting rights held by such person, on becoming such holder, within 2 working days of : -

(a) the receipt of intimation of allotment of shares; or

(b) the acquisition of shares or voting rights, as the case may be."

5. The case of the appellant is that the question of deemed PAC cannot be

decided in isolation only based on commonality of address to bring home the

charge of violation of SAST or PIT Regulations in question against the

appellant as has been done by the learned AO in the impugned order.

6. Per contra, the case of SEBI as submitted by Shri Chitale, learned

counsel is that as on December 31, 2009, Mahan Industries Ltd. (MIL) had

issued capital of 71,50,000 shares of ` 10/- each and on January 4, 2010 MIL

made a preferential allotment of convertible equity warrants for ` 30 crore. On

January 15, 2010, MIL split its one share of ` 10/- each into 10 equity shares

of ` 1/- each and hence as on this date the company had issued capital of

7,15,00,000 shares of ` 1/- each and outstanding convertible equity warrants

of ` 30 crore. On February 20, 2010, the Board of Directors of MIL decided

that convertible warrants, where full amount of consideration has been

received by the company, may be converted into equal number of shares of

` 1/- each. Accordingly, on February 20, 2010, MIL made an allotment of

24,85,00,000 shares of ` 1/- each to the preferential allottees of the convertible

equity warrants. Therefore, on February 20 2010, MIL had issued capital of

32,00,00,000 shares of ` 1/- each and outstanding convertible preferential

warrants worth ` 5,15,00,000/- .

7. The details of the shares allotted to the appellant pursuant to conversion

of equity warrants into equity shares of ` 1/- each by MIL on February 20, 5

2010 and its percentage to the issued capital of MIL as on that date was as

under :-

% of shares to the issued No. of shares capital of the company Name allotted (32,00,00,000 shares of ` 1/- each) Enakshi Impex Pvt. Ltd. 1,41,65,000 4.43

8. Pursuant to the aforesaid conversion of equity warrants into equity share

of ` 1/- each by MIL on February 20, 2010, two other entities namely Gazala

Constructions Pvt. Ltd. and Narois Impex Pvt. Ltd. (hereinafter referred to as

"Gazala" and "Narois" respectively) were allotted 1,72,50,000 shares and

1,66,75,000 shares of MIL respectively. The shareholding of Gazala and

Narois constituted 5.39% and 5.21% respectively of the share capital of MIL at

the relevant time. Investigation further revealed that Shri Mitesh Chandrakant

Shah and Shri Sagar Dinesh Patel were the common directors of the appellant,

Gazala and Narois. Further, Narois and appellant shared a common address

and, thus, they were persons acting in concert in acquisition of shares of MIL

on February 20, 2010. It was further observed that since the acquisition of

shares by the appellant, Gazala and Narois on February 20, 2010 entitled them

individually as well as collectively to more than the threshold limits of shares

or voting rights of MIL as stipulated under Regulations 7(1) and 7 (1A) read

with Regulation 7(2) of SAST Regulation, 1997. They were under obligation

to make disclosure about their aggregate shareholding or voting rights in the

MIL to MIL as well as to BSE within 2 days of transaction as stipulated by the

aforementioned regulations. However, it was observed that no disclosures, as

stipulated by the aforementioned regulations, for the said transaction dated

February 20, 2010 were made by the appellant. Therefore, it was alleged that

the appellant violated the provisions of Regulations 7(1) and 7(1A) read with

regulation 7(2) of SAST Regulations, 1997.

6

9. It was further observed that since pursuant to conversion of equity

warrants into equity share of ` 1/- each by MIL on February 20, 2010,

appellant alongwith Gazala and Narois held 5% or more shares of MIL, they

were under an obligation to make disclosure regarding their shareholding or

voting rights in MIL to MIL in Form A within 2 days of transaction as

stipulated by Regulation 13(1) of PIT Regulations, 1992. However, it was

observed that the appellant did not make the requisite disclosure as stipulated

by the aforementioned regulations. Therefore, it was alleged that the appellant

violated the provisions of regulation 13(1) of PIT Regulations, 1992.

10. We have heard both the learned counsel for the parties at length and

perused the pleadings. A minute perusal of paragraphs 23 to 29 of the

impugned order makes it clear that the learned AO has not brought out any

convincing and cogent evidence to support the finding that the noticee i.e.

appellant acted as a PAC with Narois within the meaning of Regulation

2(e)(2)(i) of SAST Regulations, 1997. It is noted that in paragraph 24 of the

impugned order, learned AO has held that on February 20, 2010, the

acquisition date, the appellant and Narois were under the same management as

per sub-section (1B) of Section 370 of the Companies Act, 1956 and that Shri

Karan Kapoor and Shri Ravindra Balekar, who were founders of the appellant

company and Narois, by virtue of their common shareholding of 50% each in

both these companies, were controlling both these companies on the date of

acquisition i.e. February 20, 2010. Based on this observation, the learned AO

had held in para 26 of the order that the appellant and Narois were under the

same management on the date of acquisition of shares and hence the appellant

was a deemed PAC with Narois under Regulation 2(e)(2)(i) of SAST

Regulations, 1997 and that being the case, the shareholding of the appellant 7

was to be taken alongwith that of Narois. Therefore, shareholding of the

appellant when taken together with Narois' shareholding entitled them to more

than the threshold limits of voting rights of MIL as stipulated under Regulation

7(1) of SAST Regulations, 1997 and imposed the obligation to make

disclosure about their aggregate shareholding or voting rights in MIL to MIL

and to BSE within 2 days of the transactions as stipulated under the SAST

Regulations. Since the required disclosures under Regulation 7(1) of SAST

were not made, the appellant is stated to have violated Regulation 7(1) read

with Regulation 7(2) of SAST Regulations, 1997.

11. We note it with concern that there is no material / evidence which can

support the present findings of the learned AO. In fact, to some extent the

learned AO has travelled even beyond the scope of show cause notice dated

October 1, 2014. Therefore, we are constrained to hold that the learned AO

has not satisfactorily examined and considered the contentions of the appellant

raised during the proceedings before him, particularly pertaining to the

question of 'person acting in concert' i.e. PAC for holding the appellant liable

for violation of Section 7(1) of the SAST Regulations, 1997 read with

Regulation 35 of SAST Regulations, 2011.

12. In this view of the matter, penalty of ` 2,50,000/- imposed on appellant

is set aside and restored to the file of learned AO for hearing this aspect afresh

and deciding it as per law after giving an opportunity of hearing to the

appellant in respect of the allegation under the SAST Regulations, 1997 read

with those of 2011. Accordingly, the impugned order is upheld to the extent of

imposition of two penalties of ` 2,00,000/- each for violation of Sections

11C(3) and (5) of the SEBI Act, 1992 whereas the penalty of ` 2,50,000/- 8

under SAST Regulations, 1997 is set aside and the matter is remanded to the

learned AO for a fresh look as directed hereinabove.

13. The appellant is directed to deposit the penalty of ` 4,00,000/- within a

period of four weeks from today failing which the respondent shall be at liberty

to initiate appropriate proceedings to recovery of the said amount as per law.

14. The appeal and misc. application stand disposed of with the abovesaid

directions. No costs.

Sd/-

Justice J. P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C. K. G. Nair Member 02.03.2017 Prepared & Compared by PTM