Order in respect of Kumaka Industries Limited

WTM/PS/132/CFD/JAN/2016 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 Kumaka Industries Limited Date of Hearing: July 02, 2015 Appearance: For SEBI: Dr. Anitha Anoop, Deputy General Manager, Mr. N. Murugan, Assistant General Manager and Mr. Rohan Vijay, Assistant Manager. For Noticee: Mr. Pankaj Kadakia, Chairman and Mr. Jayesh Vyas, Practicing Company Secretary. 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. Kumaka Industries Ltd. (hereinafter referred to as 'the Company') is one such company against whom the interim order was passed. The copy of the interim order was forwarded to the Company vide letter dated June 05, 2013. 3. The Company filed its replies making reference to the interim order, vide letter dated June 11, 2013. 4. The submissions of the Company vide letter dated June 11, 2013, inter alia are as follows:

 Trading in the equity shares of the Company has been suspended by the Bombay Stock Exchange.  The Company has applied for the revocation of the suspension of its equity shares at Bombay Stock Exchange.  It would comply with the MPS requirement within one year from the date of the revocation of suspension by BSE. 5. Thereafter, SEBI vide letter dated June 12, 2014, intimated that the Company is given an opportunity of hearing on July 23, 2014. The compliance officer of the Company vide return e-mail dated June 13, 2014 informed that it has not received the copy of the interim order. It is noted that earlier letter dated June 11, 2013 from the Company, clearly makes reference to the interim order. Thereafter, the opportunity of personal hearing granted to the Company was adjourned. The Company vide letter dated July 14, 2014, informed that its registered office has been shifted and requested for the communications to be sent to its corporate office address mentioned therein and also recorded that the hearing fixed on July 23, 2014, had been deferred. 6. Thereafter, SEBI vide e-mail dated May 27, 2015, intimated that the Company is given an opportunity of hearing on July 2, 2015. 7. On July 2, 2015, Mr. Pankaj Kakadia, Chairman of Kumaka Industries Limited and Jayesh S. Vyas, practicing Company Secretary appeared for the Company and made oral submissions. It was submitted that the Company has submitted a draft scheme of arrangement to SEBI, a part of which covers the issuance of bonus shares to the public shareholders while promoters foregoing their entitlements which, according to the Company will, result in MPS compliance. The Company sought for a week’s time for written submissions. 8. Thereafter, vide letters dated July 10, 2015 and July 30, 2015, the Company made written submissions. The submission in brief, is as follows: a. the public shareholders in the Company was more than 25% of its paid up capital subsequent to its IPO in 1995. Subsequently, the partly paid shares of the public shareholders were converted into fully paid shares on pro-rata basis without forfeiting the money paid on the partly paid shares as per the Scheme of Arrangement approved by the shareholders of the Company at their AGM held on August 14, 1997.

b. Consequently, 24,13,000 partly paid up shares, became 6,03,250 fully paid shares in the hands of the public shareholders. In view of that, the paid up capital also got reduced from 1,38,85,000 reduced to 1,20,85,625. Therefore, the public shareholding got reduced from 27% to 13% attracting non-compliance of Clause 40A of the Listing Agreement. c. The Company has proposed a draft ‘scheme of arrangement’. Part VIII of the Draft Scheme deals with the issuance of bonus shares to the public shareholders. As per the scheme 21,04,865 bonus shares are proposed to be issued to the public shareholders in the ratio of seven shares for every five shares, while promoters forgoing their right to bonus shares subject to the approval of the Hon’ble High Court of Bombay and shareholders of the Company. This would result in the reduction of public shareholding at the prescribed level leading to the compliance of MPS requirement. The said scheme is under the consideration of SEBI and BSE. 9. I have considered the reply and the submissions made by the Company and other materials on record. SEBI had issued circulars dated December 16, 2010, February 08, 2012 and August 29, 2012, in order to suitably amend Clause 40A of the Listing Agreement by specifying the manner in which public shareholding may be raised to the prescribed minimum level. The amended Clause 40A of the Listing Agreement, inter alia, provided the following methods for complying with the MPS requirements: a. Issuance of shares to the public through prospectus, b. Offer for sale of shares held by promoters to public through prospectus, c. Sale of shares held by promoters through the secondary market i.e. OFS through Stock Exchange, d. Institutional Placement Programme, e. Rights Issues to public shareholders, with promoters/ promoter group shareholders forgoing their rights entitlement, f. Bonus Issues to public shareholders, with promoters/ promoter group shareholders forgoing their bonus entitlement, g. Any other method as may be approved by SEBI, on a case to case basis.

10. I have perused the draft ‘Scheme of Arrangement’ filed by the Company. Part VIII of the draft Scheme deals with the issuance of bonus shares to the public shareholders. As submitted by the Company, 21,04,865 bonus shares are proposed to be issued to the public shareholders in the ratio of seven shares for every five shares, whereas the promoters will forgo their right to bonus shares. The said scheme is subject to the approval of Hon’ble High Court of Bombay and the shareholders of the Company. The submissions made by the Company vide its letters dated July 10, 2015 and July 30, 2015 on the facts leading to the reduction of public shareholding are narrated in the draft ‘Scheme of Arrangement’ as well. 11. BSE had forwarded to SEBI vide its letter dated September 9, 2014 the draft composite ‘scheme of arrangement’ filed by the Company. SEBI vide letter dated September 15, 2015 has given its comments on the draft ‘Scheme of Arrangement’. It is noted that as per section 391(2) of the Companies Act, 1956 “If a majority in number representing three-fourths in value of the creditors, or class of creditors, or members, or class of members, as the case may be, present and voting either in person or, where proxies are allowed under the rules made under section 643, by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Tribunal, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also on the company, or in the case of a company which is being wound up, on the liquidator and contributories of the company” 12. The Hon’ble High Court of Bombay has ordered for the meeting of the shareholders and creditors which is to be convened on February 08, 2016. It is noted that even after the approval of the shareholders/ creditors, the Court has to approve the scheme and thereafter the bonus shares have to be issued by the Company as per the scheme.

Therefore, as on this date the non-compliance of the MPS requirement continues. 13. I note that the amended provisions of rules 19 and 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 at least 25%. From the aforesaid discussion, it is clear that the Company did not comply with the MPS requirements on or before June 03, 2013, i.e., the prescribed due date and the non-compliance continues as on this date. In this context, regarding the argument of the Company that the shares of the Company stood suspended, it may be noted that it is the responsibility of the Company to have the suspension revoked. Moreover, the status of the Company as suspended from the Stock Exchange cannot be an excuse for non-compliance of the MPS requirement. 14. 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 me, to confirm the directions issued vide the interim order against the Company, its directors and promoters/ promoter group.

This order shall not be an impediment to the scheme of arrangement covered in the SEBI’s letter dated September 15, 2015 to BSE and as approved by the Hon’ble High Court of Bombay. 15. 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, Kumaka Industries Ltd., its directors, promoters and promoter group, till further orders. Kumaka Industries Ltd., on compliance of the MPS requirement may bring to SEBI’s notice its compliance and appropriate orders may be passed at that time. 16. Copy of this Order shall be served on the stock exchanges and depositories for their information and necessary action.

DATE: January 11th, 2016 PRASHANT SARAN PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA