Order against Ratnabali Capital Market Limited

Date of hearing: February 17, 2010 Appearance: For Mr. Vikash Somani, Mr. Suresh Kumar Somani and Mrs. Jaishree Somani: Mr. Somasekhar Sundaresan, Advocate Mr. Suresh Somani, Joint Managing Director, Ratnabali Capital Markets Limited Mr. A.A. Jarmi, Chief Operations Officer, Dalmia Securities Private Limited For the Securities and Exchange Board of India: Ms. Neelam Bhardwaj, General Manager Ms. Suchismita Sahoo, Manager Ms. Chhavi Sinha, Legal Officer Mr. Apoorv Garg, Legal Officer

1. On an examination of the draft letter of offer filed by Dalmia Securities Private Limited (the manager to the offer), on behalf of Mr. Vikash Somani, Mr. Suresh Kumar Somani, Mrs. Jaishree Somani (hereinafter collectively referred to as the acquirers), in respect of the public offer for acquisition of 20% of the issued and paid up share capital of Ratnabali Capital Markets Limited (hereinafter referred to as the target company), Securities and Exchange Board of India (hereinafter referred to as SEBI) interalia observed that the acquirers along with the persons acting in concert (hereinafter referred to as PAC) had acquired 2,24,771 equity shares comprising 4.32% of the paid up share capital of the target company by way of open market purchases during the financial year ending March 31, 2009 (hereinafter referred to as Financial Year 08-09), in terms of the second proviso to Regulation 11(2) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the Takeover Regulations). Pursuant to the said acquisition, the shareholding of the acquirers along with the PAC in the target company increased from 67.40% to 71.72%. Thereafter, the acquirers, during the period commencing from April 1, 2009 to June 17, 2009 had further acquired 1,65,529 equity shares constituting 3.18% of the paid up capital (hereinafter referred to as Financial Year 09-10 acquisitions) of the target company under an erroneous belief that they could purchase 5% additional shares in each financial year, in terms of second proviso to Regulation 11(2) of the Takeover Regulations. Pursuant to the above mentioned acquisitions, the collective shareholding of the acquirers along with PACs increased from 67.40% to 74.90% of the paid up share capital of the target company and the same (7.5%) exceeded the limit of 5%, specified under second proviso to Regulation 11 (2) of the Takeover Regulations.

2. In view of the above, a notice dated January 18, 2010 was issued by SEBI to the acquirers to show cause as to why directions under Regulation 44 of the Takeover Regulations which, interalia, includes directions to disinvest shares to the extent of 1,30,07,075 shares representing 2.5% of the total shares capital and to transfer profit, if any, in selling these shares, to the Investor Protection Fund of the stock exchange and directions under Regulations 44 read with Regulations 45, for withdrawal of the public announcement dated August 12, 2009 should not be issued against them. An opportunity of hearing was granted to the acquirers on February 17, 2010, when Mr. Somasekhar Sundaresan, Advocate, made elaborate submissions on behalf of the acquirers. Mr. Suresh Somani (Joint Managing Director, target company) and Mr. A.A.

Jarmi, Chief Operations Officer, Dalmia Securities Private Limited were also present during the hearing. The learned counsel did not dispute the facts of the case. While contending that no actions as stipulated under the show cause notice are warranted against the acquirers, the learned counsel stated that the acquisition of 3.18% shares of the target company during the Financial Year 2009-10 by the acquirers was in the belief that the second proviso to Regulation 11(2) of the Takeover Regulations enabled an annual purchase of 5% additional shares without making a public announcement. He contended that the said proviso nowhere specified the period within which the additional acquisition of 5% could be made. The learned counsel also submitted that pursuant to the clarification (SEBI Circular dated August 6, 2009), the acquirers made a public announcement (on August 12, 2009) at Rs. 123.40. According to him, the acquirers cannot be directed to divest their shares and also to make a public announcement at the same time/simultaneously. Thereafter, the learned counsel, vide letter dated March 2, 2010 forwarded the memorandum of submissions on behalf of the acquirers, which reiterated the submissions made during the hearing.

3. I have examined the show cause notice dated January 18, 2010 issued to the acquirers, the submissions made by Mr. Somasekhar Sundaresan, Advocate, the written submissions dated March 2, 2010 filed on their behalf and the material available on record. The facts of the case which remained undisputed before me are given below in brief:

i. the acquisition of 4.32% paid up capital of the target company during the financial year 2008-2009 ii. further acquisition of 3.18% of the paid up capital during the financial year 2009-2010 iii. increase in the shareholding of the acquirers along with PACs from 67.40% to 74.90% of the paid up share capital of the target company.

4. In the present case, it was alleged that, the above increase (7.5%) was in excess of the limit of 5% specified in second proviso to Regulation 11(2) of the Takeover Regulations and hence SEBI issued the show cause notice to the acquirers for the reasons stated therein. In the facts and circumstances of the present case, the sole issue to be considered is whether the acquisition of 2.5% equity shares of the target company by the acquirers over and above the limit of 5% prescribed in second proviso to Regulation 11(2) of the Takeover Regulation warrant actions as mentioned in the show cause notice. Before considering the contentions of the acquirers, it is necessary to mention the provisions of Regulation 11(2) of the Takeover Regulations. The same is reproduced hereinbelow:

“Consolidation of holdings

11(2). No acquirer, who together with persons acting in concert with him holds, fifty-five per cent (55%) or more but less than seventy-five per cent (75%) of the shares or voting rights in a target company, shall acquire either by himself or through or with persons acting in concert with him any additional shares entitling him to exercise voting rights or voting rights therein, unless he makes a public announcement to acquire shares in accordance with these Regulations: [Provided ……… …………………………..] [Provided further that such acquirer may, notwithstanding the acquisition made under regulation 10 or sub-regulation (1) of regulation 11, without making a public announcement under these Regulations, acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him upto five per cent. (5%) voting rights in the target company subject to the following:- (i) the acquisition is made through open market purchase in normal segment on the stock exchange but not through bulk deal /block deal/ negotiated deal/ preferential allotment; or the increase in the shareholding or voting rights of the acquirer is pursuant to a buy back of shares by the target company; (ii) the post acquisition shareholding of the acquirer together with persons acting in concert with him shall not increase beyond seventy five per cent.(75%)]

5. Thus, Regulation 11(2) of the Takeover Regulations provides that an acquirer who together with person acting in concert with him holds 55% or more but less than 75% of the shares or voting rights in a target company cannot acquire either by himself or through or with persons acting in concert with him any additional shares entitling him to exercise voting rights or voting rights therein unless he makes a public announcement. The second proviso to the aforesaid Regulation prescribes that the acquirer may acquire either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him upto 5% voting rights in the target company without making a public announcement, subject to certain conditions mentioned therein. It was the contention of the learned counsel that there was a confusion regarding the scope of application of the second proviso to Regulation 11(2). According to him, since Regulation 11(1) of the Takeover Regulations refers to acquisition of 5% in a financial year, the acquirers believed that they could acquire 5% in every financial year in terms of second proviso to Regulation 11(2) thereof also. He further submitted that the market participants were having certain doubts and concerns in respect of the said proviso and for the said reasons, SEBI considered it appropriate to come out with the circular dated August 6, 2009 clarifying the applicability of the said proviso. According to him, the very fact that SEBI came out with a subsequent circular in respect of the applicability of its earlier notified Regulation [second proviso to Regulation 11(2)] would make it very clear that there was ambiguity in the said provision. He strenuously argued that, even if the benefit of 5% mentioned in second proviso to Regulation 11(2) was not available, the acquisition in excess of 5% by itself could not be considered to be in contravention of the provisions of the Takeover Regulations. According to him, even if the acquirers triggered the provisions of Takeover

Regulation, they were legally obliged to give an exit opportunity to the shareholders of the target company by way of a public offer, which in the given case was rightly done, immediately after the clarification by SEBI was issued. The contention of the learned counsel merits consideration. The Takeover Regulations inter alia deals with the substantial acquisition of shares/voting rights and change in control. It also prescribes various obligations such as open offer, disclosure requirements etc. Substantial acquisition of shares/voting rights per se is not in contravention of Regulation 11(2) of the Takeover Regulations. If the acquisition of shares/voting rights triggered Regulations 11(2), the law mandates such an acquirer to make a public announcement in accordance with the provisions of the Takeover Regulations. The failure to make a public announcement as specified under the Takeover Regulations would lead to consequences as contemplated therein. What is prohibited in the context of the present case is the acquisition of shares/voting rights beyond the specified limit without a public announcement, as required therein. It is not in dispute that the acquirers made the public announcement on August 12, 2009 immediately after the issuance of SEBI Circular dated August 6, 2009.

6. The case of the acquirers was that they were under the bonafide belief that they could acquire 5% every year in terms of the second proviso to Regulation 11(2). We cannot lose sight of the fact that the subject matter of the case did create concerns among the market participants about its scope and application. On considering their concerns, SEBI thought fit to resolve the ambiguity and the same was done vide Circular dated August 6, 2009. Immediately after the said Circular, the acquirers appointed a Merchant Banker, made escrow arrangement and also made public announcement in respect of their acquisition in excess of 5%, as stipulated under the second proviso to Regulation 11(2). Nowhere, it is alleged in the show cause notice that the said public announcement was in contravention of the Takeover Regulations. There is also no case that the acquirers continued with their acquisition after the aforesaid circular of SEBI. The issuance of the clarificatory circular on receipt of various queries in respect of the applicability of second proviso to Regulation 11(2) would indicate that SEBI did take cognizance of the concerns of the market participants and thought it necessary to issue a clarificatory circular. One of the actions proposed in the show cause notice was a direction to withdraw the offer made by the acquirers. The learned counsel vehemently argued that the said case does not fulfill any of the criteria for withdrawing the offer, as specified in Regulation 27 of the Takeover Regulations. In view of the above discussions and considering the case in its totality, I am of the view that the present case, is not a fit one for directing the withdrawal of the offer, as contemplated in the show cause notice.

7. As regards the proposed action for disinvestment of 1,30,075 shares of the target company, representing 2.5% of its total equity capital, the learned counsel submitted that the show cause notice misinterpreted the provisions of the Takeover Regulations. According to him, such a direction can be passed only against an acquirer who had acquired shares in a target company in breach of Regulations 10, 11 or 12 of the Takeover Regulations. It is clear that second proviso to Regulation 11(2) does not prohibit acquisition beyond 5%. If the acquisition is beyond 5%, the acquirer would not be entitled for the benefit envisaged under the second proviso and in such a case he becomes liable to make a public announcement in accordance with the provisions of the Takeover Regulations. In the present case, I note that, even prior to the issuance of the show cause notice, the acquirers made the public announcement. The scheme of the Takeover Regulation is that as and when any person while acquiring the shares in a company triggers any of its provisions, he is required to make a public announcement in accordance with the Regulations. Admittedly, a public announcement was made by the acquirers in respect of their acquisition of shares in excess of 5%, within four working days of the date of the issuance of the circular dated August 6, 2009. The learned counsel further argued that if

SEBI directs an acquirer to disinvest the shares acquired by him, beyond the specified limit, it would curtail its own power to direct an acquirer to make the public offer to the shareholders of a company to acquire such number of shares at an offer price as determined by it. In my view, the present case has to be considered in the context of the ambiguity in respect of the said provision [second proviso to Regulation 11(2)] which was prevalent among the market participants pursuant to its insertion. Having said so, I would also like to observe that ideally the acquirers should have approached SEBI seeking clarification on the subject matter as was done by various other market participants, before proceeding for further acquisition. I also note that the acquirers have not purchased any shares after June 17, 2009. Considering the overall circumstances of the case, I am convinced that the present case is not a fit one to issue directions against the acquirers as contemplated in the show cause notice dated January 18, 2010.

8. In view of the foregoing, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Section 11B thereof and Regulations 44 and 45 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 hereby dispose of the show cause notice dated January 18, 2010 issued to Mr. Vikash Somani, Mr. Suresh Kumar Somani, Mrs. Jaishree Somani, without any directions.

DR. K.M.ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: MARCH 19, 2010