Mr. Madhusudan Jhunjhunwala And Others vs Sebi

BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Date of Decision : 25.8.2015

Appeal No. 387 of 2014

1.

Mr. Madhusudan Jhunjhunwala

2. Mr. Krishnakumar Jhunjhunwala

3. Ms. Vrinda K. Jhunjhunwala

4. Mrs. Sarladevi M. Jhunjhunwala

5. Satidham Industries Pvt. Ltd.

6. Hindustan Cotton Co.

7. Krishnakumar & Sons - HUF &

8. Madhusudan Jhunjhunwala - HUF 28, Sheela Apartments, 6th Floor, B Desai Marg, Mahalaxmi, Mumbai - 400 026. ...... Appellant

Versus

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

Mr. Zal Andhyarujina, Advocate with Mr. Kingshuk Banerjee, Advocate i/b Wadia Ghandy & Co. for the Appellants.

Mr. Kumar Desai, Advocate with Mr. Manish Acharya, Advocate i/b Vigil Juris for the Respondent.

CORAM: Justice J.P. Devadhar, Presiding Officer Jog Singh, Member

Per: Justice J.P. Devadhar

1. Appellants are aggrieved by the order passed by the Whole Time

Member of Securities and Exchange Board of India (SEBI for short) on 5th

September, 2014. By that order, appellants are jointly and severally directed

to disinvest 27,633 shares of Sarla Performance Fibres Ltd. ('Target

Company' for short) through sale to parties not connected/related to them in

small lots in trenches on the Bombay Stock Exchange Ltd. (BSE) and

National Stock Exchange of India Ltd. (NSE) by ensuring that such sale does 2

not disturb the market equilibrium; and thereafter transfer the entire proceeds

of such sale of shares to the Investor Protection and Education Fund

established under the Securities and Exchange Board of India (Investor

Protection and Education Fund) Regulations, 2009 ('Fund' for short). By the

said order appellants are further directed to complete above sale of shares

within 3 months from the date of order and file a report to SEBI to that effect

within two weeks from the date of such compliance.

2. Appellants no. 1 to 8 constitute promoter group of the Target

Company, whose shares are listed on the BSE and NSE. As on 30th October,

2008 the appellants collectively held 55% shares of the Target Company.

3. Regulation 11(2) of the Securities and Exchange Board of India

(Substantial Acquisition of Shares and Takeovers) Regulations, 1997

('Takeover Regulations, 1997' for short) provides that an acquirer holding

55% or more but less than 75% shares or voting rights in such target company

shall not acquire any additional shares or voting rights in the target company

unless he makes a public announcement in accordance with the Takeover

Regulations, 1997.

4. By Securities and Exchange Board of India (Substantial Acquisition of

Shares and Takeovers) (Amendment) Regulations, 2008, a proviso was added

to Regulation 11(2) with effect from 30th October, 2008. As per the said

proviso, an acquirer holding 55% or more but less than 75% of shares or

voting rights in a target company could acquire additional shares or voting

rights upto 5% without making a public announcement subject to the

condition that (i) the acquisition is made through open market purchase in

normal segment on the stock exchange or pursuant to a buy back of shares by

the target company (ii) the post acquisition shareholding of the acquirer shall

not increase beyond 75%.

3

5. According to the appellants there was ambiguity in the proviso inserted

to the Regulation 11(2) with effect from 30th October, 2008 because from the

proviso it was not clear as to whether the acquisition of shares upto 5% was

an interim measure upto March 31, 2009 or whether it was only a one time

measure or the shares could be acquired in several tranches or whether

creeping acquisition of 5% under regulation 11(2) was available in every

financial year. While SEBI was considering the request for clarification, the

appellants continued to acquire shares of the Target Company.

6. On 6th August, 2009 SEBI issued a clarificatory circular stating that an

acquirer who holds 55% or more but less than 75% of the shares or voting

rights in a target company could acquire additional shares or voting rights

upto a maximum of 5% in the target company in one or more tranches without

any restriction on the time frame without making a public announcement. It

was further clarified that the aforesaid acquisition of 5% shall be calculated by

aggregating all purchases, without netting the sales.

7. It is not in dispute that as on 6th August, 2009 the appellants

collectively held 43,73,167 shares (constituting 62.92% of share capital) of

the Target Company, which was far in excess of 5% permitted under the

proviso to Regulation 11(2) inserted with effect from 30th October, 2008.

8. It is the case of the appellants that on account of sheer ignorance and

inadvertence some member of the appellant group acquired 27,633 shares of

the company during the period between 6th August, 2009 to 23rd September,

2011, over and above 43,73,167 shares held on 6th August, 2009.

9. By a show cause notice dated 28th March, 2014 appellants were called

upon as to show cause as to why action should not be taken against the

appellants for acquiring the shares of the company in violation of Regulation

11(2) of the Takeover Regulations, 1997. Appellants filed reply to the said 4

show cause notice inter-alia stating that the lapse was due to the ambiguity in

the proviso inserted to Regulation 11(2) of the Takeover Regulations, 1997

and requested that a lenient view be taken in the matter and requested that

further proceedings be dropped. Thereafter personal hearing was granted to

the appellants and by the impugned order the appellants are directed to

disinvest 27,633 shares of the Target Company acquired by the appellants

after 6th August, 2009 and deposit the sale proceeds with the Fund within

three months from the date of the order and file compliance report within two

weeks thereafter. Challenging the aforesaid order the present appeal is filed.

10. Mr. Zal Andhyarujina, learned counsel appearing on behalf of the

appellants submitted that in the present case the appellants acquired additional

shares of the target company through open market purchase in the normal

segment on the stock exchange by ensuring that the total shareholding of the

appellants in a financial year did not exceed 5%. On acquisition of such

shares, necessary disclosures were also made to the stock exchanges within

the prescribed time. Acquisition of 27,633 shares after SEBI clarificatory

circular dated 6th August, 2009 was not intentional and it was an outcome of

the ambiguity in Regulation 11(2) of the Takeover Regulations, 1997 because

acquisitions were made under the bonafide belief that the benefit of additional

5% acquisition was available for every financial year, without making any

public announcement of the same. Since 27,633 shares of the target company

were acquired out of sheer negligence and inadvertence after the issuance of

clarification by SEBI on 6th August, 2009, counsel for the appellant submitted

that a lenient view be taken in the matter. Counsel for appellants submitted

that SEBI is not justified in penalizing the appellants especially when there

was inherent ambiguity in the proviso inserted to Regulations 11(2) of the

Takeover Regulations, 1997. Counsel for the appellants further submitted that 5

in the present case, the number of shares sold after 6th August, 2009 is more

than the number of shares acquired after 6th August, 2009. In these

circumstances counsel for the appellants submitted that in the facts of the

present case SEBI ought to have taken a lenient view and accordingly

submitted that the impugned order be quashed and set aside.

11. We see no merit in the above contentions.

12. Under Regulation 11(2) an acquirer holding 55% or more but less than

75% of shares or voting rights in a target company could acquire additional

shares only by making public announcement in accordance with Takeover

Regulations, 1997. By inserting a proviso to Regulation 11(2) with effect

from 30th October, 2008 it was provided that an acquirer holding 55% or more

but less than 75% of the shares or voting rights in a target company could

acquire additional shares or voting rights upto 5% without making a public

announcement subject to the conditions set out therein.

13. In the present case admittedly appellants had collectively held

45,73,167 shares (constituting 62.92% of the share capital) of the company as

on 6.8.2009 which was in excess of 5% permitted under the proviso to

Regulation 11(2). Since the clarificatory circular was issued on 6.8.2009, in

the impugned order, benefit of doubt was given to the appellants in respect of

62.92% shares held by the appellants even though such acquisition was in

violation of Regulation 11(2) of Takeover Regulations, 1997. It is only in

respect of 27,633 shares acquired after 6.8.2009, the appellants are directed to

disinvest the shares.

14. Having already crossed 5% limit provided under the proviso to

Regulation 11(2), appellants could not have acquired any additional shares

after 6.8.2009. Fact that the appellants had purchased the shares through open

market in normal segment and had disclosed the same to the stock exchanges 6

would not come to the rescue of appellants who have violated Regulation

11(2). Ambiguity if any, in the proviso to Regulation 11(2) was removed by

the clarificatory circular dated 6.8.2009. Therefore, acquisition of 27,633

shares even after the clarificatory circular dated 6.8.2009 was in gross

violation of Regulation 11(2) of Takeover Regulations, 1997.

15. It is relevant to note that in the clarificatory circular dated 6th August, it

was also specifically stated that the acquisition of 5% shares under the proviso

to Regulation 11(2) shall be calculated by aggregating all purchases, without

netting the sales. Therefore fact that the appellants have sold more shares

than 27,633 shares acquired after 6th August, 2009 would not absolve the

appellants from disinvesting 27,633 shares acquired after 6.8.2009.

16. Thus, in the facts of present case the whole time member was justified

in holding that the appellants are not justified in contending that the shares

were purchased bonafide under the belief that they were entitled to acquire the

shares, because, admittedly 27,633 shares were acquired after the doubts if

any, relating to the scope of the proviso to Regulation 11(2) were cleared by

SEBI on 6th August, 2009.

17. As per Regulation 44 & Regulation 45 of the Takeover Regulations,

1997 a person contravening the said regulations could be directed inter alia to

(a) make public announcement or (b) disinvest the shares acquired in breach

of Regulations and transfer the sale proceeds to the investor protection fund

etc. In the present case after considering all available options, the whole time

member has come to the conclusion that in the facts of the present case it

would be just and proper to direct the appellants who have violated

Regulation 11 of Takeover Regulations, 1997 to disinvest 27,633 shares of the

target company through sale to parties not connected/related to them in small

lots or trenched in BSE and NSE by ensuring that such sale do not disturb the 7

market equilibrium and thereafter transfer the entire proceeds of such sale of

shares to investor protection and education fund established by SEBI.

18. For the reasons stated hereinabove we see no reason to interfere with

the impugned order. Accordingly the appeal is hereby dismissed with no

order as to costs.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Jog Singh Member

25.8.2015 Prepared and compared by RHN