Order against VFSL Capital Limited (Earlier known as Veronica Financial Services Ltd) and its Director Mr. Nazir Hakeem

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) issued a notice dated October 31, 2007 (hereinafter referred to as the notice) to Veronica Financial Services Limited (presently known as VFSL Capital Limited) and its director, Mr. Nazeer Hakeem to show cause as to why directions under Sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the Act) read with Regulations 44 and 45(6) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the Takeover Regulations) should not be initiated against them. The facts of the case as mentioned in the notice are as follows. SEBI conducted an investigation in the shares of Veronica Laboratories Limited (hereinafter referred to as the Company) for the period February 26, 2003 to March 5, 2003. The said investigation revealed that the Company and Veronica Financial Services Limited (hereinafter referred to as VFSL) were promoted by seven members of one Sheth family. During 1998, the Sheth family had handed over the affairs of the Company to Mr. Nazir Hakeem, director of Hakeem Auto Limited and Jem Fiscal Private Limited, through a loan agreement. Thereafter, the Sheth family had officially resigned from the directorship of the Company in 2000-2001 and that VFSL was taken over by Mr. Nazir Hakeem had in the year 2000. It was observed that, during April 2001, VFSL had acquired more than 15% shares of the Company and that its holding had increased to 59% as on August 31, 2001 by acquiring more than 5% shares (which was belonging to the Sheth family) on four instances. However, no public announcement was made by VFSL as required under Regulations 10, 11(1) and 12 of the Takeover Regulations. Thereafter, the shareholding of VFSL in the Company had reduced below 2%. In the year 2003, the holding of VFSL in the Company had crossed 15% and thereafter it had acquired shares more than 5% without making a public announcement, as required under Regulations 10 and 11(1) of the Takeover Regulations. It was also alleged that VFSL had prima facie violated Regulations 7,8,10,11 and 12 of the Takeover Regulations.

2. Thereafter, vide letter dated November 21, 2007, Mr. Nazir Hakeem on behalf of VFSL and himself, stated that they were desirous of availing consent scheme, in terms of SEBI Circular dated April 20, 2007 and accordingly the proceeding against them was kept in abeyance. Thereafter, pursuant to the rejection of the said application, VFSL vide letter dated December 17, 2009, filed its reply which is being considered in the later part of this Order. Subsequently, an opportunity of hearing was granted to VFSL and Mr. Nazir Hakeem (together called as the entities and individually by their respective names) on January 6, 2010. Mr. Ulhas Deosthale as authorized by the entities appeared before me and submitted that the Company is in the process of winding up and that it has no assets of its own left. Thereafter, VFSL, vide letter dated January 21, 2010 informed that, a perusal of the website of the Hon’ble High Court of Bombay revealed that the Company Petition (No. 465/2004) filed by the creditor, SICOM Limited would be coming up for hearing on December 1, 2010. It was further informed that some other creditors had also filed winding up petitions and that it would take some more time to ascertain the status of the same. Though, VFSL had requested additional time to file the required information, it had not filed any information about the status of the matter, thereafter. It is learnt (from the website of the Hon’ble High Court of Bombay) that the Company Petition No. 465/2004 filed by SICOM Limited was allowed by the Hon’ble High Court on July 21, 2010.

3. I have considered the notice, the replies of the entities as stated above, the submissions made during the course of hearing and other material available on record. The issue to be decided is whether the entities have violated Regulations 7, 8, 10, 11 and 12 of the Takeover Regulations as alleged in the notice. The facts of the case as mentioned in the notice remained undisputed before me. It was contended that an associate company of VFSL, Jem Fiscal Limited (JFL) had entered into an agreement with the erstwhile promoters of the Company on September 30, 1998 to extend a loan upto an amount of 60 lakhs. The said loan was secured by way of pledge of physical shares (52,18,200 shares) of the Company held by the promoter directors and their seven family members. As per the reply of VFSL, 14,60,000 shares which were lying with The United Western Bank Limited, Latur (UWBL) were also pledged as a security with JFL and that the borrowers had agreed that the said shares which were in lock-in would be transferred to JFL on release from UWBL. Annexure I to the notice (demat statement of VFSL) indicate the receipt of shares of the Company by VFSL and the consequent violations. The entities did not dispute such receipt of shares and therefore, I do not consider it necessary to reproduce the same in this Order. It was further stated in the reply of VFSL that, while extending loans to the promoters, JFL had merely taken delivery of physical share certificates with blank transfer deeds duly signed by the holders of the shares and when the trading in the shares of the Company was transferred to “compulsory demat” sometime during 2001, JFL was left with no alternative but to transfer the physical shares in their own name and dematerialize the same for recovery of the loans.

4. It was stated in the reply of VFSL that, as JFL had availed unsecured loans from VFSL, the physical share certificates were handed over to VFSL for transfer in its favour for settling the unsecured loans availed by them from VFSL and that it had transferred and dematerialized the shares of VLL to recover the dues. Thus, the reply of VFSL would only indicate that the shares of the Company were ultimately transferred to it and dematerialized thereafter. In view of the above, the contention of VFSL that it was never its intention to acquire control over the Company and beneficial ownership would not benefit as it had already transferred the shares of the Company in its name, which triggered the relevant provisions of the Takeover Regulations. It is not is dispute that VFSL had not made any public announcement in terms of the provisions of the Takeover Regulations, as alleged in the notice. The agreement dated September 30, 1998 (between JFL and the erstwhile promoters of the Company) was signed by Mr. Nazir Hakeem in the capacity as the Managing Director of JFL. It was the submission that shares were subsequently transferred in the name of VFSL.

The contention that the beneficial ownership and consequently, the voting rights always remained with the Sheth family and that the intention of VFSL was never to acquire control over the Company cannot be accepted. As the shares of the Company were admittedly transferred in the name of VFSL and the same were dematerialized it cannot be said that VFSL had not acquired any voting rights. The moment the shares are registered in the name of VFSL, it would become entitled to voting rights and accordingly, the same would attract the provisions of the Takeover Regulations. As mentioned in the notice, 50,67,244 shares (constituting 52% of the paid up capital of the Company) of the Company were transferred to the account of VFSL during 2001. The annexure attached to the notice mention the dates when VFSL had triggered various provisions of the Takeover Regulations. When VFSL had acquired 13,07,244 shares of the Company, it had crossed 15% of the equity capital of the Company and thus, triggered Regulation 10 of the Takeover Regulations. Investigation has revealed that there are two instances (on April 12, 2001 and January 30, 2003) of violation of Regulation 10 of the Takeover Regulations.

The notice stated that on the said dates, the shareholding of VFSL had increased to more than 15%. The said acquisitions were not followed by any public announcement, as required under the Takeover Regulations. Thereafter, it had again acquired more than 5% of the equity capital of the Company on May 21, 2001, August 17, 2001, August 30, 2001 and on August 31, 2001. The shareholding of VFSL in the Company reached 63.311% on November 27, 2001. Investigation has revealed that there are six instances (on May 21, 2001, August 17, 2001, August 30, 2001, August 31, 2001, January 31, 2003 and February 11, 2003) of violation of Regulation 11 (1) of the Takeover Regulations by VFSL during the period April 2001 to July 2003. The same were mentioned in the notice. It was the submission of VFSL that the debits to its demat account were on account of inter-company transfer and most of the credits were re-transfers from its associate company. The annexure attached to the notice specifically mention the acquisition of shares and the consequent violations. The aforesaid reply of VFSL would only support the allegations.

Therefore, I do not have any hesitation in holding that VFSL had violated Regulation 11(1) of the Takeover Regulations. Further by acquiring more than 50% of the equity share capital of the Company (on August 30, 2001), VFSL had also triggered Regulation 12 of the Takeover Regulations. VFSL in its reply stated that it had received 66,78,200 shares of the Company. VFSL’s contention that though it was holding more than 50% of the equity shares of the Company, it was not in control of the Company cannot be accepted in the facts and circumstances of the case.The submission of VFSL that since the shareholding never exceeded 75%, Regulation 11(2) of the Takeover Regulations was not attracted, cannot hold good in view of the clear provision of the said regulation. Since, the acquisitions were not followed by the public announcements, VFSL had violated Regulations 10, 11(1) and 12 of the Takeover Regulations, as alleged in the notice.

5. Further, it is also alleged that the entities had violated Regulations 7 and 8 of the Takeover Regulations. The details of such alleged violations are given in Annexure I to the notice. It was the contention that even if the shares are considered to be acquired, they were not required to intimate the stock exchanges about the alleged acquisition of shares, as the requirement was only to intimate the Company whose shares are being acquired and not to the stock exchanges where the shares of such company are listed. The entities also stated, as regards intimation to the Company, that, since the loans were given to its promoters, it can be construed that the Company was intimated and therefore not violated the provisions of the Takeover Regulations. I am unable to accept such plea. The Annexure to the notice clearly mention the percentage change in the shareholding of VFSL in the Company (i.e >2%, >5%, >15%, <2% etc. at various stages). As per Regulation 7 of the Takeover Regulations, the acquisition of shares or voting rights which entitle an acquirer to more than 5% shares or voting rights in a company shall disclose the aggregate of his shareholding or voting rights to such company.

The same is a statutory requirement and cannot be ignored by the person concerned. Further, as per Regulation 8(1) of the Takeover Regulations, any person holding more than 15% shares or voting rights in a company shall disclose to the company about his holdings. VFSL could not establish that it had intimated its aggregate holding in the Company, to the Company as required under Regulations 7 and 8. As stated above, VFSL had not only transferred the shares in its name but also dematerialized the same. In view of the above, the contention that as the shares were taken as security for the loans extended to the promoter shareholders of the Company, it cannot be considered as an “acquisition” and compliance under Regulation 8 of the Takeover Regulations was not necessary, cannot be accepted. It is also observed that VFSL started selling its shares of the Company from February 20, 2002 onwards. There were nineteen instances of purchases and ninety five instances of sale of the shares of the Company. Further, in terms of Regulation 7(1A), any purchase or sale aggregating 2% or more of the share capital of a company by the acquirer shall be disclosed to the company and the stock exchanges where the shares of such company are listed within two days of such purchase or sale along with the aggregate shareholding after such acquisition or sale.

This was also not complied with by VFSL. Thus, there are multiple instances where VFSL had failed to make the necessary disclosures as required under Regulations 7 and 8 of the Takeover Regulations.

6. Having found VFSL guilty of contravening the aforesaid provisions of the Takeover Regulations, the next step would be to decide on the nature of directions to be issued to VFSL and its director. In this regard, I note that the notice had contemplated actions under Sections 11 and 11B of the SEBI Act read with Regulations 44 and 45(6) of the Takeover Regulations. I note that the Company was ordered to be wound up by an order of the Hon’ble High Court of Bombay, as stated above in this Order. Therefore, the question of directing VFSL to make a public announcement would not arise. I also note that SEBI had initiated adjudication proceedings against VFSL and its director for the alleged violations of Regulation 10, 11(1) and 12 of the Takeover Regulations. Adjudication proceedings were also initiated against VFSL inter alia for the alleged violations of Regulations 7(1), (1A) and (2) and 8 of the Takeover Regulations. The said proceedings were disposed of by SEBI, vide Consent Orders dated January 27, 2009, June 15, 2009 and June 18, 2009. Considering the case in its totality, I dispose of the present proceeding initiated against the entities as ordered hereinbelow.

7. 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 and Sections 11(4) and 11B thereof read with Regulations 44 and 45(6) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, hereby warn VFSL Capital Limited (earlier known as Veronica Financial Services Limited) and its director Mr. Nazir Hakeem to be cautious while dealing in the securities market in future. They are further advised strictly to comply with all the necessary norms relating to their transactions in the securities market and any failure, if any, on their part would be viewed seriously.

DR. K.M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

PLACE: MUMBAI DATE: JANUARY 6, 2011