Order in the matter of acquisition of shares of CG-Vak Software and Exports Limited.

WTM/RKA/CFD-DCR/07/2014 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act) read with regulations 44 and 45 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Regulations, 1997) read with regulation 35 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations, 2011) - in respect of Mr. G. Suresh

In the matter of acquisition of shares of CG-VAK Software and Exports Limited. Appearances:

For the Noticees: 1. Dr.S.K.Jain, Practicing Company Secretary, S.K.Jain & Co.

2. Shri.Vikas Ganeshmal Bengani, S.K.Jain & Co. For SEBI: 1. Mr. Santosh Kumar Shukla, Joint Legal Adviser 2. Shri B.N.Sahoo, General Manager 3. Shri Susanta Kumar Das, Assistant General Manager 4. Shri.Parag Kumar Sinha, Assistant Legal Adviser 1. CG-Vak Software and Exports Limited ('the Target Company') is a company incorporated under the Companies Act, 1956 having its registered office at 171, Mettupalayam Road, Coimbatore-641043. The shares of the Target Company are listed on the Bombay Stock Exchange Limited ('BSE'). Mr.C.Ganapathy, Ms. S.Latha, Ms.G.Saraswathy and Mr.G.Suresh are from amongst the promoter group of the Target Company.

2. On August 3, 2010, Mr.G.Suresh {hereinafter referred to as "the noticee") acquired 10,708 shares in the Target Company which increased his shareholding from 14.9% to 15.1%. Since, this acquisition breached the threshold limit of 15% specified under regulation 10 of the of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as "the Takeover Regulations, 1997"), it was prima facie observed that he was obligated to make public announcement of open offer in accordance with the Takeover regulations, 1997. In the matter of acquisition of shares of CG-VAK Software and Exports Limited.

3. In view of the above, SEBI issued a show cause notice ("SCN") dated September 19, 2013 to Mr. G. Ganesh ( hereinafter referred to as "the noticee") alleging that consequent to the acquisition of shares on August 3, 2010, there was increase in his pre-acquisition shareholding (as on August 2, 2010) of the noticee, individually, from 7,54,068 shares (14.9%) to 7,64,766 shares (15.1%) in the Target Company and that he had failed to make a public announcement to acquire shares in accordance with provisions of regulation 10 read with regulation 14(1) of the Takeover Regulations, 1997 within 4 working days from August 3, 2010. The SCN called upon the noticee to show cause as to why suitable directions under sections 11 and 11B of the SEBI Act read with regulations 44 and 45 of the Takeover Regulations, 1997 and regulations 32 and 35 of the Takeover Regulations, 2011 should not be issued against him. 4. The noticee filed his reply vide letter dated October 28, 2013. The noticee was also granted an opportunity of personal hearing before me on December 24, 2013 when the authorised representatives of the noticee appeared and made submissions on his behalf.

The noticee also filed his written submissions dated December 27, 2013 in the matter. The submissions of the noticee are inter alia as follows: a. Prior to the acquisition of 10,708 shares by the noticee on August 03,2010 i.e. on August 2, 2010, the Promoter and Promoter Group of the Target Company, held 7,54,068 shares constituting 32.46% of the total shareholding in the Target Company. On acquisition of 10,708 shares by the noticee on August 03, 2010, the total shareholding of the Promoter and Promoter Group increased from 32.46% to 33.35% i.e. 0.89%. The total shareholding of the Promoter Group in the Target Company has always more than 15% since its incorporation. The Promoter Group has always been in control of the Target Company. b. The word "acquirer" as defined in regulation 2(b) of Takeover Regulations, 1997 makes it clear that an acquirer may act alone or part of a group of persons acting in concert. The noticee and other promoters are persons acting in concert (PACs) with each other and he alongwith other Promoters acting in concert with them always held shares/voting rights in the Target Company beyond 15%, before he acquired 10708 shares on August 3, 2010. c. Since, the shares held by the noticee taken together with the shares held by the PAC is more than 15% on the date of acquisition of shares, regulation 10 of Takeover Regulations, 1997 is not applicable.

As per regulation 11(1), an acquirer along with PACs can acquire upto 5% of the shares in a financial year. Thus, the noticee either by himself or acting with PACs was entitled to acquire upto 5% of shares or voting rights in the Target Company in the financial year ending 31.03.2011. Since the acquisition in question was within this creeping limit of 5%, the acquisition in question was exempted under regulation 11(1) and the noticee was not under obligation to make public announcement as alleged in the SCN. Thus, the noticee has not made any violation of regulation 10 read with regulation 14(1) of the Takeover Regulations, 1997. d. The threshold limit of 15% under regulation 10 of the Takeover Regulations, 1997 cannot be applied individually when such individuals form part of a Promoter Group whose collective shareholding in the Target Company at all time is more than 15%. There is nothing in the language of regulation 10 of Takeover Regulations, 1997, which suggests that the limit prescribed therein can be applied collectively as well as individually. If it is applied for acquisition of shares by Promoters Group collectively as well as to an individual forming part of the Promoter Group, then it will lead to a totally absurd, irrational and illogical conclusion. e. The provisions of regulation 3(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011(Takeover Regulations, 2011) which provides that individual acquisitions exceeding the prescribed threshold shall also attract the obligation of open offer has no retrospective application.

There were no such provisions in the Takeover Regulations, 1997 and the provisions in regulation 3(3) have been made for the first time in 2011. Hence, SEBI cannot apply the provisions of Takeover Regulations, 2011 to the acquisition made by the noticee when at the relevant time Takeover Regulations, 1997 were in force. f. In support of the above contentions the noticee has relied upon the order dated June 19, 2013 passed by Hon'ble Securities Appellate Tribunal (SAT) in Appeal no. 23 of 2013 in the matter of Sunil Krishna Khaitan and others vs. SEBI( hereinafter referred to as "the Khaitan's case") wherein the Hon'ble SAT has held as under-

´31. In this connection, it may also be pertinently noted that the SAST Regulations, 1997 allow certain persons/ entities to act in concert for the purpose of acquisition. Even the definition of “persons acting in concert” as provided in Regulation 2(e)(1) clearly provides that this expression includes persons who agree to cooperate with each other to acquire shares/voting rights in a target company or control over the target company pursuant to a formal or informal understanding between them, directly or indirectly. Thus, the definition is wide enough and gives ample scope to persons to act in concert as one unit for the purpose of acquisition of shares/voting rights. Further, Regulation 2(e)(2) also enumerates various persons who could act in concert and they, inter alia, include a company, its holding company, a subsidiary, directors, mutual fund with sponsor or trustee, foreign institutional investors, merchant bankers, soon and so forth. In this context, if we look at the new SAST Regulations, 2011, we note that Regulation 3(3) specifically provides that acquisition of shares by any person within the meaning of sub-regulations 3(1) and 3(2) would be attracting the obligation to make an open offer for acquiring shares of the target company irrespective of its aggregate shareholding with persons acting in concert if the shareholding of such individual person exceeds the threshold limit prescribed by regulation 10. It is pertinent to note that such a specific and unambiguous provision making an individual liable to make a public offer in case the individual shareholding increases during the course of the acquisition even while acting in concert with other persons is conspicuously missing in the SAST Regulations, 1997. KLL was, therefore, not required to make a public offer and the finding in the Impugned Order qua appellant no. 3,i.e., KLL is hereby set aside.

At any rate, since the amendment of the Takeover Code and the inclusion of regulation 3(3) in the SAST Regulations, 2011 the discussion regarding the applicability of regulation 10 of the SAST Regulations, 1997 has been rendered academic. Having said that, in the facts and circumstances of the present case, KLL cannot be called upon to make an open offer by applying regulation 3(3) of the new Takeover Code retrospectively.´ g. The noticee has also relied upon order dated October 31, 2013 passed by the Hon'ble SAT in Appeal no. 2 of 2013 in the matter of Smt. Madhuri S.Pitti vs. SEBI (hereinafter referred to as the "Pittie's case") wherein referring to the above judgment in Khaitan's case, Hon'ble SAT held that benchmark of 15% under regulation 10 of the Takeover Regulations 1997 would apply when the individual is acquiring shares / voting rights on his behalf alone. h. According to the noticee, the Target Company has made regular disclosures under clause 35 of the Listing Agreement wherein the details of shareholding of the Promoters and non-promoters have been disclosed on quarterly basis since its incorporation.

Further, the noticee had made disclosures from time to time under regulation 13(4) of the SEBI (PIT) Regulations, 1992 about all his acquisitions in the Target Company. The information about the acquisition of 10708 shares on August 3, 2010 was in public domain whereas the SCN was issued after more than 3 years. This apart from vitiating the dispensation of justice to the noticee would be detrimental to him on account of unjustified action contemplated in this case. While the collective increase is exempted in regulation 11(1) the individual increase of merely 0.2% is charged for enforcement action including direction to make open offer. As an alternative argument it is submitted that the public announcement as contemplated in the SCN is not necessary in view of the facts and circumstances of this case. i. In view of the above, the action contemplated in the SCN is uncalled for and the SCN may be set aside. 5. I have considered the SCN, the oral and written replies/submissions of the noticee and the material available on record. In this case, it is undisputed fact that the acquirer (noticee) was a part of the Promoter group and continues to be so till date.

It is admitted fact that pursuant to the acquisition of 10708 shares on August 03, 2010, the individual shareholding of the acquirer in the Target Company increased from 14.9% to 15.1%. It is also admitted fact that the noticee and other promoters of the Target Company were acting in concert. It is undisputed fact that the collective shareholding of the Promoter group of the Target Company was 32.46% as on March 31, 2010 and increased to 33.35% as on March 31, 2011. Since, the increase in shareholding of the promoter and Promoter group was less than 5% during the financial year 2010-11, there was no breach of regulation 11(1) of Takeover Regulations, 1997 pursuant to the acquisition dated August 03, 2010. 6. The only dispute in the matter is whether the increase in the individual shareholding of the noticee from 14.9% to 15.1% was in breach of regulation 10. According to the noticee, the threshold limit of 15% under regulation 10 applies only when the individual acquires shares/voting rights on his behalf alone and not when he acquires shares being part of group acting in concert. The noticee has contended that the acquisition in question falls within the ambit of regulation 11 and not within regulation 10 since the noticee along with other promoters of the Target Company, being persons acting in concert already held more than 15% shares in the Target Company prior to the acquisition on August 3, 2010. 7. I note that the acquisition in question happened on August 03, 2010 but the SCN was issued on September 19, 2013 i.e. after more than 3 years.

I further note that at the time of acquisition dated August 03, 2010 the noticee was part of the Promoter group of the Target Company and remains the promoter till date. Thus, the noticee along with other promoters remains in control of the Target Company. The increase in his individual shareholding was only by 10708 shares (i.e. merely 0.2%). Had the noticee been holding 15% instead of 14.9% as on August 03, 2010 this acquisition would have got the benefit of exemption of creeping limit under regulation 11(1). I find merit in the submissions of the noticee that the acquisition in question was not in a clandestine manner and the requisite disclosures were available in public domain. In the facts of this case, I do not deem it necessary to deal with legal aspect of issues raised by the noticee. In view of the mitigating facts and circumstances as discussed hereinabove, I find that even if the impugned acquisition breached the threshold limit prescribed under regulation 10 of the Takeover Regulations, 1997, it would not be appropriate to insist public announcement under regulation 14(1) of the Takeover Regulations, 1997 by the noticee in this case.

The Board may, however, take any other appropriate action at appropriate stage.

DATE: February 20th, 2014 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA