Gazala Constructions Private Limited vs Sebi

Date of Decision 14.07.2016

Appeal No. 22 of 2016

Concord Realty Private Limited 312/3, Sharda Chamber No. 1, 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

WITH Appeal No. 26 of 2016

Lakeside Properties Private Limited 312/3, Sharda Chamber No. 1, 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

WITH Appeal No. 42 of 2016

Grantview Properteis Pvt. Ltd. 201, Pallavi CHS Ltd. Tata Colony, Mulund (East), Mumbai - 400 081. ...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 2

WITH Appeal No. 138 of 2016 Gazala Constructions Private Limited D-1, Plot No. 854, Hari Om Bhawan CHS Ltd., Charkop, Kandivali (West), R.S.C. - 12, No. 41, Sector - 8, Mumbai - 400 067. ...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 WITH Appeal No. 145 of 2016 Kinita Real Estate Pvt. Ltd. Shop No. KI-04, Gokul Village (Two) Hsg. Soc., Shanti Park, Mira Road (East), Dist. Thane - 401 107. ...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

WITH Appeal No. 146 of 2016 Nazima Impex Pvt. Ltd. Shop No. 5, Adeshwar Krupa CHS Ltd. Shanti Park, Mira Road, Dist. Thane - 401 107. ...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

WITH Appeal No. 161 of 2016 Jayalalita Commodities Pvt. Ltd. Room No. 6, Hari Nivas CHS Ltd., Daulat Nagar No. 7, Nr. Daulat Nagar, Borivali (East), Mumbai - 400 006. ...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 3

Ms. Rinku Valanju, Advocate for the Appellant in Appeal Nos. 22, 26, 42, 138, 145, 146 and 161 of 2016.

Mr. Aditya Chitale, Advocate with Mr. Pulkit Sukhramani, Advocate i/b. The Law Point for the Respondent in Appeal Nos. 22, 26, 42, 138, 145, 146 and 161 of 2016.

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

Per : J.P. Devadhar (Oral)

1.

Appellants in all these appeals are aggrieved by the orders passed by

the Adjudicating Officer ('AO' for short) of Securities and Exchange Board

of India ('SEBI' for short). The AO of SEBI has imposed penalty against

each appellant u/s. 15A(b) of Securities and Exchange Board of India Act,

1992 ('SEBI Act' for short) for violating the provisions contained in the

Securities and Exchange Board of India (Substantial Acquisition of Shares

and Takeovers) Regulations, 1997 ('1997 Regulations' for short) read with

Securities and Exchange Board of India (Substantial Acquisition of Shares

and Takeovers) Regulations, 2011 ('2011 Regulations' for short) and the

Securities and Exchange Board of India (Prohibition of Insider Trading)

Regulations, 1992 ('PIT Regulations' for short). Penalty is also imposed

against each appellant u/s. 15A(a) of SEBI Act for violating Section 11C(3)

and Section 11C(5) of SEBI Act. Since the violations said to have been

committed by each appellant is common, all these appeals are heard together

and disposed of by this common decision.

2. Counsel for the parties state that the decision in one appeal would

squarely apply to all other appeals.

3. Accordingly, facts relevant to Appeal No. 22 of 2016 are set out

hereinbelow:-

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(a) Appellant is a private limited company and the business of the

appellant is to trade in materials and invest in securities;

(b) As on December 31,2009 Mahan Industries Limited ('MIL'

for short) had issued capital of 71,50,000 shares of ` 10 each;

(c) On January 4, 2010 MIL made preferential allotment of

convertible equity warrants for ` 30 crores. All appellants

herein had subscribed to the said convertible equity warrants;

(d) On January 15, 2010 MIL split its one share of ` 10 each into

10 equity shares of ` 1 each. Hence, as on January 15, 2010

MIL had issued capital of ` 7,15,00,000 divided into

7,15,00,000 shares of ` 1 each and outstanding convertible

equity warrants of ` 30 crores;

(e) On February 20, 2010 the Board of Directors of MIL decided

that convertible warrants, where full consideration was

received by MIL may be converted into equal number of

shares of ` 1 each. Accordingly, on February 20, 2010 MIL

made allotment of 24,85,00,000 shares of ` 1 each (out of

30,00,00,000 shares of ` 1 each). Out of 24,85,00,000 shares

issued on February 20, 2010 the appellant who had applied for

convertible equity warrants received 1,69,50,000 shares.

Balance 5,15,00,000 shares were issued by MIL to the

remaining convertible equity warrant holders sometime in

May 2010;

(f) According to SEBI, on issuance of 24,85,00,000 shares on

February 20, 2010, total shares issued by MIL stood at

32,00,00,000 shares and since the appellant on 5

February 20, 2010 received 1,69,50,000 shares of MIL, the

shareholding of the appellant in MIL exceeded 5% and hence

disclosure obligation under Regulation 7(1) and 7(1A) read

with Regulation 7(2) of 1997 Regulations and also under

Regulation 13(1) of PIT Regulations got triggered.

Admittedly, the appellant made no disclosure under any of the

aforesaid regulations;

(g) During the course of investigation it was also noticed by SEBI

that the appellant had failed to furnish certain information

called for, pursuant to the summons dated February 22, 2013

which was in violation of section 11C(3) of the SEBI Act.

Similarly, it was also noticed that the appellant had failed to

appear in person before the enquiry officer pursuant to

summons dated March 8, 2013 which was in violation of

section11C(5) of SEBI Act;

(h) For the aforesaid violations committed by the appellant, SCN

was issued to the appellant on October 1, 2014;

(i) In view of the Show Cause Notice, appellant filed consent

application which was rejected by SEBI.

(j) Thereupon Show Cause Notice dated October 1, 2014 was

heard and disposed of by passing the following order:-

(i) Penalty of ` 2,50,000 under section 15A(b) of SEBI

Act for violating Regulation 7(1) of 1997 Regulations

read with Regulation 35 of 2011 Regulations;

(ii) Penalty of ` 2,50,000 under section 15A(b) of SEBI

Act for violating Regulation 13(1) of PIT Regulations; 6

(iii) Penalty of ` 2,00,000 under section 15A(a) of SEBI

Act for violating Section 11C(3) of SEBI Act; and

(iv) Penalty of ` 2,00,000 under section 15A(a) of SEBI

Act for violating section 11C(5) of SEBI Act.

Challenging the aforesaid order appellant has filed the present appeal.

In all other cases similar penalties have been imposed for committing

similar violations.

4. With reference to penalty of `2,50,000 imposed under section 15A(b)

of SEBI Act for violating regulation 7(1) of the 1997 Regulations and

penalty of ` 2,50,000imposed under section 15A(b) of SEBI Act for

violating Regulation 13(1) of PIT Regulations, it is submitted by counsel for

appellant that in the present case, the controversy has arisen on account of

MIL issuing 30,00,00,000 shares in two tranches i.e. initially issuing

24,85,00,000 shares on February 20, 2010 and thereafter issuing the balance

5,15,00,000 shares in May, 2010. If the entire 30,00,00,000 shares were

issued at a time, the shareholding of the appellant would have been less than

5% and hence disclosure obligation would not have arisen. Therefore, if on

account of MIL issuing shares in two tranches on account of which the

shareholding of the appellant between February 20, 2010 to May, 2010

exceeded 5%, appellant cannot be held guilty of violating the 1997

Regulations and the PIT Regulations and in any event penalty ought not to

have been imposed.

5. Counsel for SEBI, on the other hand submitted that in the present

case it is not in dispute that as on the date of the appellant acquiring

1,69,50,000 shares of MIL on February 20, 2010 shareholding of the 7

appellant in MIL exceeded 5% and accordingly disclosure provisions

contained under the 1997 Regulations and PIT Regulations got triggered.

Counsel for SEBI further submitted that MIL had in fact issued a notice on

November 5, 2009 wherein it was clearly stated that convertible warrants

would be created, offered, issued, allotted and delivered in one or more

tranches. Therefore, on February 20, 2010, when the appellant received

1,69,00,000 from MIL, the shareholding of appellant in MIL exceeded 5%

and hence the appellant was liable to make disclosure under the provisions

contained in the 1997 Regulations and PIT Regulations. Since no

disclosures were made, the appellant was liable to pay penalty. In support

of the above contention reliance is placed by counsel for SEBI on a decision

of this Tribunal in case of Akriti Global Traders Ltd. vs. Securities and

Exchange Board of India (Appeal No. 78 of 2014) decided on September

30, 2014.

6. We see no merit in the above contentions advance on behalf of the

SEBI. It is relevant to note that when the appellant applied for the

convertible equity warrants of MIL it was known that as and when the

warrants were converted into shares, the shareholding of the appellant

would be below 5% and as such the appellant would not be required to make

disclosure either under the 1997 Regulations or under the PIT Regulations.

Therefore, on February 20, 2010 when the appellant received 1,69,50,000

shares from MIL, there was no reason for the appellant to believe that its

shareholding in MIL would exceed 5%. Fact that as per notice dated

November 5, 2009 MIL could issue shares in tranches does not mean that

the appellant was given to understand that on account of MIL issuing shares

in tranches, the shareholding of the appellant may exceed 5%. Apart from

the above, there is no material on record to suggest that the appellant was

made aware that its shareholding in MIL between February 20, 2010 till 8

May 2010 exceeded 5%. In such a case, where the appellant had subscribed

to the convertible equity warrants so as to hold shares on conversion below

5%, cannot be said have violated the regulations made by SEBI on ground

that the appellant had failed to make disclosures, especially, when there was

no reason for the appellant to believe that its shareholding had exceeded 5%.

7. The decision of this Tribunal in case of Akriti Global Traders Ltd.

(supra) is distinguishable on facts. In that case admittedly the appellant

therein had made belated disclosures to the stock exchange under

Regulation 29(1) of 2011 Regulations but no disclosures were made to the

company as provided under Regulation 29(1), (2) and (3) of the 2011

Regulations. In that context, it was held that the obligation to make

disclosures under provisions contained in 2011 Regulations and also under

the PIT Regulations would arise as soon as there is acquisition of shares by

a person in excess of the limits prescribed under the respective regulations.

In the present case, the appellant had subscribed to the convertible equity

warrants with a view to have less than 5% shareholding and there is nothing

on record to suggest that the appellant was informed or made aware that on

account of partial conversion of convertible equity warrants on February 20,

2010 the shareholding of the appellant had exceeded 5% and hence, the

appellant was required to make disclosures under the 1997 Regulations and

PIT Regulations.

8. In these circumstances, in the facts of present case, in our opinion,

failure to make disclosure during the period from February 20, 2010 till

May 2010 cannot be attributed to the appellant and, therefore, the appellant

cannot be held guilty of violating the 1997 Regulations and PIT

Regulations. Consequently, penalty imposed under section 15A(b) of SEBI

Act on ground that the appellant has violated the 1997 Regulations and PIT

Regulations cannot be sustained.

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9. As regards the penalty of ` 2,00,000 imposed for violating section

11C(3) and ` 2,00,000 for violating section 11C(5) of the SEBI Act it is not

in dispute that the appellant had failed to furnish all particulars sought in the

summons issued against the appellant and that the appellant had failed to

appear inspite of receiving the summons. Counsel for the appellant,

however, submitted that in the present case, inadvertently the date of

summoning was mistaken to be the date before which the letters, documents

were to be filed with SEBI and accordingly it is submitted that it is not a fit

case for imposing penalty on the ground the appellant has violated section

11C(3) and section 11C(5) of the SEBI Act.

10. 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.

11. In the result, in all these appeals penalty imposed under section

15A(b) of SEBI Act for allegedly violating the 1997 Regulations and PIT

Regulations is quashed and set aside. However, penalty under section

15A(a) of SEBI Act for violating section 11C(3) and section 11C(5) of

SEBI Act respectively is upheld. Each appellant is directed to pay the 10

penalty imposed by the AO of SEBI for violating section 11C(3) and

penalty imposed for violating section 11C(5) of SEBI Act, within a period

of six weeks from today. If the appellants pay the said amount within six

weeks from today, then, SEBI shall accept the same in full and final

settlement of the claim under the impugned order. If the appellants fail to

pay the aforesaid penalty within six weeks from today, then, SEBI shall be

entitled to recover that amount with interest @ 12% p.a. from the date of the

order passed by the AO of SEBI till payment.

12. All the appeals are disposed of in the aforesaid terms with no order as

to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

Sd/-

Dr. C.K.G. Nair Member

14.07.2016 Prepared and compared by:

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