In the matter of Khoday India Limited- minimum public shareholding requirement

WTM/PS/25/CFD/JULY/2014 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM : PRASHANT SARAN, WHOLE TIME MEMBER ORDER Under sections 11(1), 11(2)(j), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 read with section 12A of the Securities Contracts (Regulation) Act, 1956 in the matter of non-compliance with the requirement of minimum public shareholding by listed companies

In respect of Khoday India Limited

1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") had passed an interim order dated June 04, 2013 (hereinafter referred to as "the interim order ") with respect to 105 listed companies who did not comply with the Minimum Public Shareholding ("MPS") norms as stipulated under rules 19(2)(b) and 19A of the Securities Contracts (Regulation) Rules, 1957 (hereinafter referred to as "SCRR") within the due date i.e., June 03, 2013. The interim order was passed without prejudice to the right of SEBI to take any other action, against the non-compliant companies, their promoters and/or directors or issuing such directions in accordance with law. The interim order was to be treated as a show cause notice by those companies for action contemplated in paragraph 18 thereof.

2. Khoday India Limited (hereinafter referred to as "the Company") is one such company against whom the interim order was passed. The equity shares of the Company are listed on the Bombay Stock Exchange Limited ("BSE"), the Madras Stock Exchange Limited ("MSE") and the Bangalore Stock Exchange Limited ("BgSE").

3. The Company vide its letter dated June 11, 2013 submitted its reply to the interim order, wherein the following submissions were inter alia made :

(a) The issued, subscribed and paid-up capital of the Company is ₹37,59,12,370/- (divided into 3,75,91,237 equity shares of ₹10/- each) of which 3,36,60,195 shares (89.54%) are held by the promoters/promoter group and the remaining 39,31,042 shares (10.46%) are held by public shareholders.

(b) The Company has around 15,000 public shareholders widely distributed all over India as well as outside India. (c) Though the shares are listed on the MSE and BgSE, they have not been traded during the past 5 years. Even in the BSE, the volume of trading of the Company's shares is extremely low. (d) The Company could not declare dividend in the absence of any distributable profits during the past six financial years i.e., 2007-08 to 2012-13. (e) With a view to provide liquidity to the investors at a fair price and provide an exit opportunity to the public shareholders, the Company had on May 03, 2013, submitted to BSE the draft of a proposed Scheme of Arrangement ("the Scheme") under sections 391 to 393 read with sections 100 to 104 in compliance with the SEBI Circular dated February 04, 2013 and also submitted further documents in compliance with a subsequent SEBI Circular dated May 21, 2013. (f) The Scheme provides for reduction of Company's paid-up capital to the extent of the public shareholding i.e., ₹3,93,10,420/- subject to compliance with the procedures laid down under the aforesaid SEBI Circulars as well as the provisions of sections 100-104 and 391-393 of the Companies Act, 1956 and payment of ₹75/- per share to the public shareholders (paid-up capital of ₹10/- and a premium of ₹65/-). The proposed price is 139% more than the fair value of ₹31.39/- as per the Share Valuation Report dated March 28, 2013 issued by an independent Chartered Accountant. The price is also 40% more than the floor price as prescribed under the SEBI (Delisting of Equity Shares) Regulations, 2009 ("the Delisting Regulations"). (g) Considering the prevailing market conditions and thin trading volumes, the Company is not confident of acquiring at least 50% of the shares from the public which is the prescription under the Delisting Regulations for a successful offer. In the circumstances, the proposed Scheme provides for a quicker and effective exit opportunity for its public shareholders. (h) The Merchant Banker has also certified that the Scheme is fair and reasonable vide their Fairness Opinion dated April 17, 2013, which was also submitted to the BSE. (i) The Board of Directors are of the unanimous view that the proposed Scheme is fair, just and reasonable from the perspective of the public shareholders of the Company.

In view of its submissions, the Company requested SEBI to consider its Scheme and not to initiate action as contemplated in the interim order.

4. On submission of the Scheme to the stock exchanges, it is noted that BSE, MSE and BgSE had vide their respective letters to SEBI inter alia observed that post sanction of the Scheme, the Company would apply for consequential delisting from the stock exchanges and continue existence as a public limited company and that the proposed Scheme appears to be defective and not in conformity with the Delisting Regulations. In response to the letters from the stock exchanges, SEBI vide letter dated August 30, 2013, while making the following observations, advised them not to grant 'no-objection' certificate and to intimate the Company to include the observations of stock exchanges in its filings made to the Hon'ble High Court : (a) Quasi-judicial proceedings are pending against the Company as the interim order is passed against it for non-compliance with the MPS requirement. (b) The Scheme provides for reduction of capital and consequential delisting from the stock exchanges after implementation. (c) Any company desirous of delisting its equity shares has to obtain prior approval of its shareholders by a special resolution passed through postal ballot after disclosure of all material facts. However, similar approval is not necessary in case of reduction of capital. Therefore, the shareholders would be forced to exit without their consent. (d) As per regulation 14(1) of the Delisting Regulations, all the public shareholders are entitled to participate in the book building process which leads to fair price discovery. However, the price to be paid to the public shareholders under the reduction of capital scheme may not be fair as there is no provision of price discovery. The same may place the public shareholders in a disadvantageous position as they might not be able to get the best price for exiting from the Company. (e) The Company is trying to circumvent the Delisting Regulations through the proposed Scheme.

5. Thereafter, the Company vide letter dated September 10, 2013 referred to the BSE letter communicating the comments of SEBI and inter alia submitted the following : In paragraph 10.3 of the Scheme, it is specifically stated that the Scheme is presented under section 391-393 read with sections 100-104 of the Companies Act and in accordance with the SEBI Circular dated February 4, 2013. As per paragraph 5.16 of the Circular, listed companies are required to obtain shareholders' approval for the Scheme by a special resolution passed through postal ballot and e-voting, in such a manner that the Scheme shall be acted upon by the Company only if votes cast by public shareholders in favour of the proposal is atleast two times the number of votes cast by public shareholders against it. This requirement was modified to provide for a simple majority of the public shareholders' vote vide SEBI Circular dated May 21, 2013. Section 100 of the Companies Act specifically stipulates passing of a special resolution by the shareholders of a company before filing petition before the Hon'ble High Court for reduction of capital. Further, any scheme for reduction involves alteration of Articles of Association of the company which requires passing of a resolution by the shareholders through postal ballot as mandated by the Companies (Passing of Resolution by Postal Ballot) Rules, 2011. Therefore, a petition seeking sanction for its proposed Scheme will be filed before the Hon'ble High Court of Karnataka only after obtaining the consent of the requisite majority of the public shareholders.

The submissions regarding the proposed price, the fairness report and the reasons why it is not confident of obtaining exit under the Delisting Regulations, as submitted vide its reply dated June 11, 2013 were reiterated by the Company. The Company requested SEBI to reconsider the letter dated August 30, 2014.

6. As no new facts or grounds were submitted by the Company in the letter cited above, SEBI vide e-mail dated September 30, 2013 advised BSE to reiterate the earlier stand and communicate the same to the Company on an urgent basis.

7. The Company was afforded an opportunity of personal hearing on June 25, 2014. The same was communicated to the Company vide SEBI letter dated June 04, 2014. In response, the Company submitted that it had filed a petition before the Hon'ble High Court of Karnataka on June 07, 2014 seeking sanction of the Scheme and that its petition (COP No. 132/2014) was admitted in the hearing held on June 12, 2014 and notice of advertisement of petition was ordered. The Company stated that it would be publishing a notice in all editions of 'The Hindu' (English Newspaper) and the Bangalore edition of a Kannada daily newspaper. The Company requested that the proceedings be kept in abeyance including the scheduled personal hearing till the disposal of its petition. The above request was not acceded to and the same was communicated to the Company. The Company appeared in the personal hearing on June 25, 2014 through its Company Secretary, Mr. R. Venkat Subramanyam, who tendered Written Submissions and made oral submissions reiterating the submissions made is the Written Submissions. The following were inter alia submitted in the Written Submissions :

(a) In compliance with the SEBI Circular dated February 04, 2013, the Company circulated to its shareholders the letter of BSE dated September 06, 2013 and the Company's comments on the same, vide page nos. 15-18 of the Company's Annual Report for the financial year 2012-2013.

(b) At the Annual General Meeting held on December 30, 2013, the special resolution for reduction of paid-up equity shares capital to the extent of public shareholding was approved by a majority of public shareholders as well as all categories of shareholders voting on the resolution through postal ballot and manual voting procedure, in the manner prescribed in the SEBI Circular dated February 04, 2013 as amended by SEBI Circular dated May 21, 2013 read with section 100 of the Companies Act.

(c) SEBI has placed a "Discussion Paper" on comprehensive revision of the existing Delisting Regulations since in its opinion the regulations are fraught with certain intractable issues and challenges from the perspective of both investors and promoters.

(d) From the promoters' perspective, sustained and substantial investment of resources is required to develop and grow its business in liquor and contract segments. Full ownership of the Company would provide increased operational and financial flexibility to support the Company's businesses and strategic needs.

(e) Subject to the Order of the Hon'ble High Court, Company will be applying for consequential delisting of its shares from BSE, BgSE and MSE.

(f) The earlier submissions with respect to the proposed price were reiterated.

In view of its submissions, the Company requested SEBI to drop further proceedings and refrain from initiating action as contemplated in the interim order.

8. I have considered the submissions of the Company. The Company has requested SEBI to keep the proceedings in abeyance as it had filed its Scheme before the Hon'ble Karnataka High Court for sanctioning the same. I note that this proceeding is with respect to the compliance or otherwise by the Company with the MPS requirements and not with respect to its capital restructuring. The Scheme as proposed by the Company is not a means for achieving compliance with the MPS requirements. Though the Company has stated that its Company Petition seeking sanction of its Scheme is admitted, it is noted from the website of the Hon'ble High Court that the petition is "Pending for Admission". Further, there is also no stay of this proceeding with respect to the Company, its directors and promoters. Considering the above, I do not find any ground to keep this proceeding in abeyance. Hence, I proceed to deal with the matter.

9. The interim order was issued against the Company as it was non-compliant with the provisions of rule 19A of the SCRR and Clause 40A of the Listing Agreement read with section 21 of the Securities Contract (Regulation) Act, 1956 ("SCRA"), by not maintaining atleast the minimum level (of 25%) of public shareholding as of June 03, 2013 (the time line before which such compliance was to be achieved). This contravention is still continuing as the shareholding of public shareholders in the Company, as per filing made for the quarter ended March 31, 2014, is only at 10.46%. The amended provisions of rules 19A of the SCRR came into force with effect from June 04, 2010, offering a time period of three years (i.e., on or before June 03, 2013) for a listed company to maintain public shareholding of atleast 25%. Even after passing of the interim order, the Company has not taken any steps to comply with the MPS requirement.

10. Considering the fact that the Company has not complied with the MPS requirements till date in breach of rule 19A of the SCRR and Clause 40 A of the Listing Agreement read with section 21 of the SCRA, and such non-compliance being continuous in nature, it becomes necessary for SEBI, for proper regulation of the securities market, to confirm the directions issued against the Company, its directors and promoters/promoter group. In view of the violations and its continuous nature, SEBI may also initiate other action, as appropriate in law, against the Company, its directors and promoters.

11. Accordingly, I, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11(1), 11(2)(j), 11(4) and 11B thereof and section 12A of the Securities Contracts (Regulation) Act, 1956, hereby confirm the directions issued vide the interim order dated June 04, 2013 against the company, Khoday India Limited, its directors, promoters and promoter group.

12. This Order shall remain in force till further directions.

Copy of this Order shall be served on the stock exchanges and depositories for their information and necessary action.

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Date : July 24th, 2014 Place : Mumbai