Order in respect of Bombay Rayon Fashions Limited

WTM/PS/111/CFD/DEC/2015 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 Bombay Rayon Fashions Limited Date of Hearing: June 12, 2015 Appearances: For Noticee: Mr. Prashant Agrawal, Managing Director Mr. A.R. Mundra, Executive Director - Finance For SEBI: Dr. Anitha Anoop, Deputy General Manager, Mr. Pradeep Kumar, Assistant General Manager, Mr. Rohan Vijay, Assistant Manager.

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. In terms of the said rule, listed companies are statutorily mandated to have a minimum of 25% shareholding by the public. 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. Bombay Rayon Fashions 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 (hereinafter referred to as ‘BSE’) and the National Stock Exchange (hereinafter referred to as ‘NSE’).

3. The Company filed its reply to the interim order vide its letter dated June 24, 2013 and submitted as under: a. The Company vide its letter dated May 31, 2013, had intimated SEBI about the steps taken by it for achieving the requirements of MPS of 25%. b. The Company had made constant endeavours to ensure compliance with the MPS norms, inter alia through offer for sale route. c. It is confident about achieving the requirement of MPS by July 2013.

4. Thereafter, SEBI had received a letter dated January 13, 2014, from the State Bank of India, Industrial Finance Branch, requesting for approval of pledge of the promoter/ promoter group shares of the Company. Vide this letter the following was also submitted: a. The present promoter/ promoter group shareholding in the Company is 92.27%. Due to the financial distress, the Company was unable to comply with the MPS norms despite sustained efforts. Due to non-adherence to Rule 19(2)(b) and Rule 19(A) of the SCRR, the Company is barred from pledging the promoter/ promoter group shares. b. The Company was facing financial stress resulting in delay in servicing its debt obligations. The debt facilities of the Company were restructured by the lenders (24 banks) under the ‘CDR mechanism’ and State Bank of India has been appointed as the ‘monitoring institution’ for the same. c. The final Corporate Debt Restructuring (hereinafter referred to as CDR) package for the Company was approved and a letter of the approval was issued by CDR on September 27, 2013. As per the CDR guidelines, the pledge of certain shares has been stipulated as part of the CDR package.

d. In the joint lenders meeting held on December 23, 2013, the lenders had mandated the monitoring institution i.e. State Bank of India to appeal to SEBI for relaxation and to ensure pledge for successful implementation of CDR. The same will give greater control to the lenders and ensure financial discipline. e. It was said that the enforcement of security conditions proposed in the CDR package is critical for the successful implementation of the package and for the turnaround of the Company.

5. SEBI vide its letter dated February 04, 2014, replied to the State Bank of India while stating that as the exemption is required by the Company, the application for the same has to be made by it. Later, the Company through its Managing Director vide letter dated June 05, 2014, while referring to the letter of State Bank of India requested for the exemption from the requirement of Rule 19(2)(b) and Rule 19A of the SCRR to the promoters/ promoter group of the Company for pledging their free holding in the Company in favour of CDR lenders to comply with the stipulations of CDR. SEBI vide its letter dated July 02, 2014, replied to the Company intimating thereby that the interim directions issued vide the interim order are continuing and therefore the request of grant of exemption cannot be acceded to.

6. Pursuant to the same, the Company vide its another letter dated August 27, 2014, while submitting the following, requested for a further period of twelve (12) months for compliance with the regulations of achieving MPS and exempt the directors other than the promoter directors from the implication of para 17 of the interim order: a. The Company intends to increase the public shareholding to 25% in order to comply with the provisions of SCRR. It had made substantial efforts from January 2013 to July 2013 to bring down the promoter shareholding by way of ‘offer for sale’ and issue of fresh shares by way of private placement. However, the same has not crystalized due to prevailing market conditions. b. In July 2013, the Company had approached its lenders for the debt restructuring through CDR Forum. Thereafter, significant time and efforts of the management were devoted for putting in place the CDR scheme, which had delayed the process of achieving MPS. The process of achieving MPS is expected to take some more time as the Company has to wait for appropriate time to approach the investors. c. The Company is in discussion with the lenders for a proposal of conversion of a part of debt into equity. A proposal in this regard has been put for discussion before the Monitoring Committee on August 21, 2014, the same has to be taken up by the meeting of lenders and approved. d. The proposal of conversion of Working Capital Term Loan and Funded Interest Term Loan to equity was not part of the approved restructuring scheme, the said facilities have defined repayment schedule with 2 years of moratorium and 8 years of repayment. The Company vide the said letter had also sought guidance regarding the date to be considered as ‘relevant date’ for the purpose of determination of price for equity conversion.

7. State Bank of India vide its letter dated March 25, 2015, while writing on behalf of the lenders, in the capacity of ‘monitoring institution’ requested SEBI to consider permitting the pledge of shares by the promoters of the Company. It was further submitted that the pledge is pursuant to the approved CDR package as per the RBI norms, in respect of the loans raised much earlier. Vide this letter, the following was also submitted: a. The Company had intended to increase the public shareholding through an OFS on the floor of the exchange. However, due to lack of interest and based on the feedback received from sample set of investors who were approached, the OFS could not be launched. On expiry of the timeline for increasing the public shareholding had expired, SEBI had issued the interim order. b. In accordance with the guidelines, rules and CDR framework issued by RBI, a CDR package was approved by the lenders in September 2013. The CDR package was in respect of the loans that were already availed by the Company. One of the conditions of the approved package was for the promoters to pledge the shares held by them in the Company.

c. As the interim order had prohibited the promoters/ promoter group from buying, selling or otherwise dealing in the securities of the Company, the promoters are unable to comply with one of the conditions of the CDR package which is the requirement of pledge of shares of the Company.

8. SEBI vide letter dated April 30, 2015, had intimated State Bank of India that the proceedings initiated against the Company are continuing and any decision on the request would be subject to the outcome of the said proceedings. Thereafter, in the interest of justice, the Company was afforded an opportunity of personal hearing on May 25, 2015. The date of personal hearing was later postponed to June 12, 2015, when Mr. Prashant Agrawal, Managing Director and Mr. A.R. Mundra, Executive Director from the Company appeared and made oral submissions, with regard to the attempts of the Company for complying with the MPS norms. It was also submitted that the Company is proposing to convert the debt of the Company into equity and requested liberty to file a written proposal in this regard. As regards the proposal, the Company was advised to approach SEBI.

9. Thereafter, the Company vide its letter dated June 19, 2015, submitted a proposal for conversion of partly restructured debt into equity and allot 3,08,00,000 equity shares to the lenders (bankers) and requested for approval for the same from SEBI. The Company proposed to approach CDR Empowered Group through monitoring institution i.e. State Bank of India, with a fresh proposal of equity conversion. It was also submitted that the Company will be able to comply with the MPS criteria, if the lenders agree to the right of conversion of a part of debt into equity. In support of the same, the Company submitted that as per the CDR Master Circular, the lenders (bankers) have the right to convert Working Capital Term Loan and Funded Interest Term Loan into equity and the same has been mentioned in LoA issued by CDR Cell.

10. State Bank of India vide its letter dated November 10, 2015, while requesting permission for pledging the shares of the promoters of the Company to the lenders submitted as under:

a. The restructuring package for the Company was approved by the lenders on July 08, 2013, flash report was filed by SBI with CDR on July 25, 2013 (with cut-off date fixed as April 01, 2013) and the letter of approval for the CDR package was on September 27, 2013. b. As per the package, the lenders have the right to convert the amount of Working Capital Term Loan and Funded Interest Term Loan, at any time during the restructuring period (in addition to conversion into equity of upto 20% of the Term Debt outstanding beyond 7 years as also entire/ part of any interest/ principal amount in default). c. The ‘Joint Lenders’ Forum’ on November 04, 2015 has ‘in principle’ agreed that conversion of outstanding Working Capital Term Loan and Funded Interest Term Loan into equity may be undertaken, as per the SEBI guidelines, treating November 04, 2015, as the ‘reference date’. d. The letter also stated that Joint Lenders’ Forum are in the process of obtaining approval of their respective authorities to this proposition. e. It was said that if the lenders decide to convert the entire Working Capital Term Loan and Funded Interest Term Loan, the promoters’ shareholding would come to around 65-66%.

State Bank of India vide this letter also stated that the promoters of the Company be permitted to pledge the shares in favour of the lenders as the process of conversion of Working Capital Term Loan and Funded Interest Term Loan into equity may involve time.

11. I have considered the submissions of the Company and the material available on record. 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. As per the shareholding pattern of the Company as disclosed to BSE, for the quarter ended September 30, 2015, the promoter holding is at 92.10% and the public shareholding is at 7.90%. From the above, it can be seen that the Company is non-compliant with the MPS requirements since passing of the interim order and such non-compliance continues till date.

12. I note that the Company vide its reply dated June 24, 2013, had submitted that it was confident of achieving the requirement of MPS by July 2013. Later, vide letter dated January 13, 2014, the State Bank of India communicated SEBI about the financial stress faced by the Company and the CDR package approved on September 26, 2013. It is important to note that the Company had made the reference to CDR Empowered Group on July 25, 2013 (i.e. after the passing of the interim order) and the same was admitted on August 23, 2013.

13. I have seen the CDR package dated September 26, 2013, which under the head ‘Security’ mentioned about the pledge of the equity shares of the Company and the details thereof. The same are as under: a. 17,00,000 equity shares held by Ms. Vinita Agarwal – currently exclusively charged to SBI. b. 40,00,000 shares owned by Reynolds Shirting Limited – currently exclusively charged to SBI. c. 17,50,000 shares owned by B.R. Machine Tools Pvt. Limited – currently exclusively charged to Axis Bank. d. Pledge of 97,24,207 unencumbered shares of BRFL owned by the India Promoters.

The package also stated that the Indian promoter shall give an undertaking to pledge the shares of the Company and such pledge will be subject to SEBI approval and till then a negative lien shall be created.

14. Based on the above facts and the CDR package, it appears that the Company had not appraised the CDR Empowered Group about the interim order passed by SEBI, though the reference for it was made after the passing of the said order. Further, I note that the Company has not submitted anything to show that it is exempted from the compliance of MPS requirement.

15. From the above, it can be said that the Company has not taken concrete steps towards complying with the MPS norms, even after a period of more than two years from the date of passing of the interim order. The Company vide its letter dated August 27, 2014, had sought for a period of twelve months for complying with the MPS requirement. In view of the same, it can be said that the Company has not maintained its own timelines set for the purposes of complying with the MPS requirements. These facts suggest that the Company and its promoters are adopting delaying tactics for complying with the MPS requirements and are not serious about their proposals. I note that Rule 19A of the SCRR and Clause 40A of the Listing Agreement do not provide for the extension of time lines prescribed therein.

16. Having considered the above, I also note that the Company vide its letter dated June 19, 2015, had sought an approval for the issue of new shares by conversion of the partly restructured debt into equity and allot 3,08,00,000 equity shares to the lender banks. The Company has also said that as per CDR Master Circular, the lenders (bankers) have the right to convert Working Capital Term Loan and Funded Interest Term Loan into equity and there is no restriction for the sale of equity shares acquired by lenders (bankers) through conversion option.

In this regard, it is relevant to note the following from the heading ‘standard conditions’ in the CDR package, “… 26. CDR Lenders shall have a right to convert entire/ part of defaulted interest and entire/ part of defaulted principal into equity as per SEBI pricing formula in the event of default. However, in the case of those CDR Lenders who already have default conversion rights, the same would be governed by existing loan covenants. The company/ promoters shall take necessary steps and obtain all requisite/ necessary/ statutory/ other approvals for such allotment of equity shares or a part of it in terms of their existing loan agreements. 27.(a) CDR Lenders shall have a right to convert into equity upto 20% of the terms debt outstanding beyond seven years as per SEBI guidelines/ loan covenants whichever is applicable. (b) As regards WCTL and FITL the conversion option would be available at any time during the restructuring period. i. In the event the lenders or any of the lenders exercises its right to sell the shares issued in terms of the conversion clause as (a) or (b) above, the first right of refusal to buy back the shares would be offered to the promoters.

…” In this regard, I note the admission of the Company made vide its letter dated August 27, 2014, that the proposal of conversion of Working Capital Term Loan and Funded Interest Term Loan to equity was not part of the approved restructuring scheme. Further, it is observed that the discussed proposal of conversion itself is at the proposal stage only.

17. In view of the non-compliance by the Company with the MPS requirements, till date, in the breach of the Rule 19A of the SCRR and Clause 40A of the Listing Agreement read with Section 21 of the SCRA, such non-compliance being continuous in nature and also the fact that the Company has failed to take concrete steps towards the compliance of MPS requirements, it becomes necessary, for the proper regulation of the securities market, to confirm the directions issued against the Company, its directors and promoters/ promoter group. Further, considering the non-compliance by the Company with the MPS norms and also the fact that such violations are being continued by them, SEBI may also initiate other action, as appropriate in law, against the Company, its directors and promoters.

18. I also note that the State Bank of India vide its letter dated November 10, 2015, while requesting permission for pledging the shares of the promoters of the Company to the lenders has submitted that the ‘Joint Lenders’ Forum’ on November 04, 2015 has ‘in principle’ agreed to undertake conversion of outstanding Working Capital Term Loan and Funded Interest Term Loan into equity, as per the SEBI guidelines, treating November 04, 2015, as the ‘reference date’.

I note that one of the main objectives of the CDR framework is to provide for timely and transparent mechanism for restructuring of the corporate debts, so that losses to the lenders can be minimized through an orderly and co-ordinated restructuring programme. CDR Empowered Group in the instant case has restructured the debt of the Company for its sound growth, which in effect will benefit its shareholders also.

19. 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 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 Bombay Rayon Fashions Limited. It is clarified that the said direction shall not affect the rights of the lenders in any manner.

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

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

Date: December 11th, 2015 PRASHANT SARAN Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA