Order in the matter of acquisition of shares of Sarla Performance Fibres Ltd

WTM/RKA/CFD-DCR-1/107/2014 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) and regulation 35 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations, 2011) in respect of : (1) Mr. Madhusudan Jhunjhunwala; (2) Mr. Krishnakumar Jhunjhunwala; (3) Ms. Vrinda K Jhunjhunwala; (4) Ms. Sarladevi M Jhunjhunwala; (5) Satidham Industries Pvt Ltd.; (6) Hindustan Cotton Co.; (7) Krishnakumar & Sons – HUF; and (8) Madhusudan Jhunjhunwala HUF ..............................................( Noticees) In the matter of acquisition of shares of Sarla Performance Fibres Ltd. 1. Sarla Performance Fibers Limited (hereinafter referred as the "Target Company") is a company incorporated under the Companies Act, 1956, having its registered office at 304, Arcadia, 195, Nariman Point, Mumbai – 400 021. The shares of the Target Company are listed on the Bombay Stock Exchange Ltd. ("BSE") and the National Stock Exchange Ltd. ("NSE").

2. SEBI observed that the Noticees who are promoters of the Target Company collectively held 55% of its share capital as on October 30, 2008. Between October 31, 2008 to April 06, 2009, four of the promoters Viz; Mr. Madhusudan Jhunjhunwala, Madhusudan Jhunjhunwala- HUF, Hindustan Cotton Co. and Satidham Industries Pvt. Ltd. acquired 3,47,477 shares (constituting 4.99% of the share capital) of the Target Company. Consequently, the collective shareholding of the promoters had increased from 55% to 59.99% of the share capital of the Target Company. On April 06, 2009, Madhusudan Jhunjhunwala - HUF further acquired 19,915 shares (0.287%) at a price of ₹ 39 per share. Consequently, the promoters' collective shareholding in the Target Company increased to 60.28% i.e. more than the permissible threshold limit of 5% prescribed under regulation 11(2) of Takeover Regulations, 1997. Thus, prima facie, these acquisitions had triggered the obligation to make public announcement in accordance with the provisions of regulation 11(2) read with regulation 14(1) of Takeover Regulations, 1997 within 4 working days from April 6, 2009. In the matter of acquisition of shares of Sarla Performance Fibres Ltd.

3. Since the promoters of the Target Company who were alleged to be acting in concert with respect to the above acquisitions had failed to make the requisite public announcement a Show Cause Notice (SCN) dated March 28, 2014, was issued calling upon them to show cause as to why suitable directions under sections 11, and 11B of the SEBI Act, regulations 44 and 45 of the Takeover Regulations, 1997 read with corresponding provisions of regulations 32 and 35 of Takeover Regulations, 2011 should not be issued against them for the alleged violations of regulation 11(2) read with regulation 14(1) of the Takeover Regulations, 1997. 4. The noticees did not file written reply to the SCN, however, vide letter dated April 21, 2014, they requested for an opportunity of personal hearing. Accordingly, the noticees were granted an opportunity of personal hearing on July 3, 2014 when Ms. Shailashri Bhaskar, Practicing Company Secretary, Ms. Neeta Desai, Practicing Company Secretary and Mr. Mahendra Sheth, Company Secretary of the Target Company appeared on behalf of the noticees and made oral submissions.

Subsequently, the noticees, vide letter dated July 9, 2014, filed their written submissions in the matter. The submissions of the noticees are, inter alia, as follows: i. As per the proviso to regulation 11(2) that was inserted vide amendment dated October 30, 2008, the acquisition of additional 5% was permitted by an acquirer who already held 55% shares in a Target Company provided that the shares are acquired through open market purchases in the normal market segment. The Noticees had understanding that this benefit of additional 5% acquisition without making public announcement, was applicable for every financial year. ii. Based on the above understanding, the four promoters of the Target Company as alleged in the SCN acquired 4.91% of the share capital of the Target Company during the financial year ending on March 31, 2009, which resulted in increase of their shareholding in the Target Company from 55% to 59.91% as on March 31, 2009. iii. The aforesaid acquirers further purchased 2,23,019 shares constituting 3.21% of the share capital of the Target Company during the financial year ending March 31, 2010. This acquisition being less than the creeping acquisition limit of 5% provided by the Takeover Regulations increased the shareholding of the Noticees in the Target Company from 59.91% to 62.83% as on March 31, 2010. iv.

Thus, in the instant case, acquisitions were made ensuring that the total shareholding of the noticees within a financial year did not exceed 5%. Further, all the alleged acquisitions were through open market purchase in normal segment on the stock exchanges and necessary disclosures were also made to the stock exchanges within the prescribed time.

v. Till August 6, 2009, the above ambiguity with respect to applicability of regulations 11(2) was clarified by SEBI when it issued circular dated August 6, 2009, wherein it was inter alia, clarified that an acquirer may acquire additional shares or voting rights upto a maximum of 5% voting rights in a target company in one or more tranches, without any restriction on the time-frame. vi. It is only on subsequent to issuance of this interpretative circular, it became clear that the acquisition of 5% was permitted on a one time basis. The Noticees were unaware about the exact permissible limit under regulation 11(2) till the issuance of this circular. vii. The acquisitions beyond 55% were thus under bona fide belief rather than as an attempt to consolidate the shareholding in violation of law. Even, the Takeover Regulations, 2011 allows a creeping acquisition limit of 5% without being under obligation to make an open offer in every financial year. viii. In view of the above, the Noticees have requested SEBI to take a lenient view in the matter and drop the proceedings against them. 5. I have considered the SCN, the oral and written submissions of the Noticees.

It is undisputed fact that the all other Noticees were acting in concert with Noticees who actually acquired shares as alleged in the SCN. Further, the acquisitions in question that resulted in increase in collective shareholding of the Noticees from 55% to 60.28% i.e. more than 5% have not been disputed. In this regard, the Noticees have submitted that their acquisition in respective financial years i.e. 2008-09 and 2009-10 did not increase beyond 5%. According to them their acquisitions were bona fide and in view of ambiguity with regard to application of regulation 11(2) their acquisitions being within 5% in each financial year, they should be given benefit of doubt and a lenient view should be taken in the facts and circumstances of this case. 6. In order to deal with the charge and the above submissions of the Noticees, it is necessary to refer to background of second proviso of regulation 11(2) that was inserted therein vide amendment dated October 30, 2008. It is noted that prior to this amendment, relevant provisions of regulation 11 provided as under:- " Consolidation of holdings 11. (1) No acquirer who, together with persons acting in concert with him, has acquired, in accordance with the provisions of law, 15 per cent or more but less than fifty five per cent.(55%) of the shares or voting rights in a company, shall acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him to exercise more than 5% of the voting rights, in any financial year ending on 31st March, unless such acquirer makes a public announcement to acquire shares in accordance with the Regulations.

(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 of the shares or voting rights in a target company, shall acquire either by himself or through persons acting in concert with him any additional shares or voting rights therein, unless he makes a public announcement to acquire shares in accordance with these Regulations: Provided that in a case where the target company had obtained listing of its shares by making an offer of at least ten per cent. (10%) of issue size to the public in terms of clause (b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulation) Rules, 1957, or in terms of any relaxation granted from strict enforcement of the said rule, this sub-regulation shall apply as if for the words and figures „seventy five per cent. (75%)‟, the words and figures „ninety per cent. (90%)‟ were substituted.

7. In terms of the above regulation 11(1), an acquirer holding 15% or more but less than 55% of the shares or voting rights in a target company, in which mandatory minimums public shareholding limit was 25%, could acquire additional 5% shares or voting rights in any financial year ending on 31st March. This acquisition of 5% in every financial year is commonly called as 'creeping acquisition'. However, in terms of above provision of regulation 11(2) an acquirer, holding 55% or more but less than 75% shares or voting rights in such target company could acquire any additional shares or voting rights therein only by way of an open offer by making a public announcement in accordance with the Takeover Regulations, 1997. On harmonious construction of these two provisions, the provisions of regulation 11 (1) were being applied such that an acquirer holding less than 55% shares or voting rights in a target company could not cross the threshold of 55% by way of 'creeping acquisition' under regulation 11(1). 8. On October 30, 2008, the Takeover Regulations, 1997 were amended vide SEBI (Substantial Acquisition of Shares and Takeover Regulations) (Amendment) Regulations, 2008 whereby another proviso was added in regulation 11(2) which provided as under:- "Provided further that such acquirer may, 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 up to 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%)." 9. As per the language of this proviso, an acquirer holding 55% or more but less than 75% of shares or voting right in a target company could acquire additional shares or voting rights upto 5% without making a public announcement. This acquisition was, however, allowed subject to the two conditions that -(a) the acquisition should be made through open market purchase in normal segment on the stock exchange or it is pursuant to buy back of shares by the target company; and (b) the post acquisition shareholding of the acquirer should not increase beyond 75%. It is relevant to mention here that this amendment was brought in to provide 'creeping acquisition' upto 5 % to persons holding above 55 % but below 75 % shares or voting rights in a target company.

10. Following the above amendment, SEBI received several queries/informal guidance requests regarding the applicability of the amended regulation 11 (2) such as – whether the acquisition of 5 % under amended regulation 11 (2) is only an interim measure upto March 31, 2009, whether it is only a one-time measure, whether shares can be acquired in several tranches, whether 'creeping acquisition' of 5% under regulation 11(2) was available in every financial year, etc. In view of such doubts and ambiguities, SEBI issued interpretative circular dated August 06, 2009 under regulation 5 of the Takeover Regulations, 1997 for removal of difficulties in interpretation of the second proviso to regulation 11(2). The said circular provided as under:- "SEBI has been receiving representations from market participants / listed companies with respect to the interpretation of the proviso inserted by the aforesaid amendment. After examining these representations, it is hereby clarified that – a) The acquisition, within the limit of five per cent (5%) under the second proviso to sub-regulation (2) of regulation 11, may be made by an 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 the target company; b) The acquirer together with persons acting in concert with him, holding shares or voting rights as specified at (a) above, may acquire additional shares or voting rights upto a maximum of five per cent (5 %) voting rights in the target company in one or more tranches, without any restriction on the time-frame within which the same can be acquired; c) The aforesaid acquisition of five per cent (5 %) shall be calculated by aggregating all purchases, without netting the sales. d) Consequent to such acquisition, the percentage of shareholding / voting rights of the acquirer, together with persons acting in concert with him, in the target company, shall not increase beyond seventy five per cent (75 %).

This limit is applicable irrespective of the level of minimum public shareholding required to be maintained by the target company in terms of clause 40A of the Listing Agreement." 11. Thus, on and from August 06, 2009 the generally prevailing doubts and ambiguities were removed and it was clarified that an acquirer who holds 55% or more but less than 75% of the shares or voting rights in a target company could acquire additional shares or voting right upto a maximum of 5% in a target company in one or more tranches without any restriction on the time-frame. without making a public announcement. Accordingly, an acquirer falling under regulation 11(2) could not avail benefit of 'creeping acquisition' of 5% in every financial year. 12. In this case, there is no dispute as to compliance with two conditions of the proviso of regulation 11(2). Admittedly, the noticees held 55% shares in the Target Company before the acquisition of 4.91% shares therein by the said four promoters during the financial year ending on March 31, 2009. This acquisition was clearly exempted from obligation to make public announcement as it was within 5% threshold in regulation 11(2).

13. I note that the collective shareholding of the noticees in the Target Company had increased from 59.91% as on March 31,2009 to 60.28% as on April 06,2009, which resulted in acquisition of more than 5% shareholding as per regulation 11(2). Admittedly, the persons belonging to the promoter group of the Target Company had purchased 2,23,019 shares constituting 3.21% of the share capital of the Target Company during the financial year ending March 31, 2010. Pursuant to the same, the collective shareholding of the noticees in the Target Company had increased from 59.91% to 62.83% as on March 31, 2010. Considering the ambiguity prevailing till clarification was issued on August 06,2009 and the fact that noticees have not acquired more than 5% in any financial year, I give benefit of doubt to them with regard to their acquisitions on or before August 06, 2009. 14. I further note that as on August 06, 2009, the noticees collectively held 43,73,167 shares (constituting 62.92% of shares capital) of the Target Company and two of the promoters viz; Madhusudan Jhunjhunwala- HUF, and Satidham Industries Pvt Ltd. acquired additional 27,633 shares (0.40%) in the Target Company from August 06, 2009 till September 23, 2011. These acquisitions were admittedly made when doubts with regard to applicability of regulation 11(2) post the above amendment were removed on August 06, 2009. Thus, they cannot feign ignorance about applicability of regulation 11(2) as clarified by circular dated August 06, 2009 and cannot be given benefit of doubt with regard to these acquisitions.

Since these acquisitions were clearly in breach of regulation 11(2), the consequences of this breach should follow. In this regard, I note the Hon'ble SAT vide order dated September 08, 2011 in the matter of Nirvana Holdings Private Limited vs. SEBI (Appeal no. 31/2011) observed as follows: "It must be remembered that whenever an acquirer violates Regulation 10, 11 or 12 of the takeover code by not making a public announcement, he should be directed to comply with the provision by making a public offer. The words “unless such acquirer makes a public announcement” appearing in Regulations 10 and 11(1) make these provisions mandatory and a public announcement has to be made. Similar words appear in Regulation 12 as well. These provisions make the acquisition conditional upon a public announcement being made. The primary object of the takeover code is to provide an exit route to the public shareholders when there is substantial acquisition of shares or a takeover. This right to exit is an invaluable right and the shareholders cannot be deprived of this right lightly. It is only when larger interest of investor protection or that of the securities market demands that this right could be taken away.

Therefore, as a normal rule, a direction to make a public announcement to acquire shares of the target company should issue to an acquirer who fails to do that. The Board need not give reasons as to why such a direction is being issued because that is the mandate of Regulations 10, 11 and 12. However, if the issuance of such a direction is not in the interest of the securities market or for the protection of interest of investors, the Board may deviate from the normal rule and issue any other direction as envisaged in Regulation 44 of the takeover code. In that event, the Board should record reasons for deviation. "

15. I note that regulation 44 read with regulation 45 of the Takeover Regulations, 1997 provided for consequences of breach thereof .These regulations gave flexibility to SEBI to enforce regulation 11(2) by way several directions including for- (a) making public announcement (b) disinvestment of shares acquired in breach of regulations; (c) transfer of any proceeds or securities to the investors protection fund, etc. The guiding principles for the directions as provided in these regulations are the interest of the investors and securities market which are the statutory guiding principles as inbuilt in the SEBI Act, the Takeover Regulations, 1997 and the Takeover Regulations, 2011. 16. In this case, the noticees who were already in control of the Target Company did not acquire 5% or more in the financial year 2008-2009 and 2009-2010 when the acquisitions described in the SCN took place. Further, both the conditions of the second proviso of 11(2) {i.e. the acquisitions were through open market purchase in normal segment on the stock exchange and post acquisition shareholding of the noticees remained below 75%} were complied with in this case.

The most of the acquisitions had happened when the doubts and ambiguities as mentioned above were prevailing in the market and such acquisitions were under bona fide belief rather than as an attempt to consolidate their shareholding in violation of Takeover Regulations,1997. Further, the acquisition with regard to which fault is found in this case is only for 27,633 shares (0.40%) of share capital of the Target Company. I further, note that subsequently, regulation 3(2) of the Takeover Regulations, 2011, which came into force on October 23, 2011, permits creeping acquisition of 5% by any acquirer who holds 25% or more shares or voting rights in a target company during every financial year. Accordingly, the noticees are now entitled to avail the benefit of further creeping acquisition of 5% in every financial year. In this case, the noticees had acquired the shares which are found to be in violation of regulation 11(2) of the Takeover Regulations, 1997 at an average price of `97.14 per share. If the public announcement were to be directed under regulation 44 read with regulation 11(2) of the Takeover Regulations, 1997, the open offer would be at price of ` 129.05 per share (calculated in terms of regulation 20 of the Takeover Regulations, 1997 alongwith interest @ 10% per annum thereon) whereas the present average market price of the shares of the Target Company considering the trading on BSE and NSE in the last six months is `280/per share.

Thus, the public announcement, if made now would be a mere formality. Considering this fact and other mitigating factors as aforesaid, I am of the view that a direction to sell 27,633 shares of the Target Company in small lots on the concerned stock exchange and transfer of the entire proceeds of such sale of shares to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009 would be commensurate with the violation as found in this case. Since the Investor Protection and Education Fund is utilised for the purpose of protection of investors and promotion of investor education and awareness, I am of the considered view that in the facts and circumstances of this case the above directions would be in the interest of investors. 17. I, therefore, in exercise of powers conferred upon me under sections 19, 11 and 11B of the SEBI Act, 1992 and regulations 44 and 45 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 read with regulation 32(1)(h) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, hereby issue following directions to the noticees,viz; Mr. Madhusudan Jhunjhunwala, Mr. Krishnakumar Jhunjhunwala, Ms. Vrinda K Jhunjhunwala, Ms. Sarladevi M Jhunjhunwala, Satidham Industries Pvt Ltd, Hindustan Cotton Co., Krishnakumar & Sons – HUF, and Madhusudan Jhunjhunwala HUF:- i. The noticees shall, jointly and severally, disinvest 27,633 shares of Sarla Performance Fibres Ltd. through sale to parties not connected/ related to them in small lots in trenches on the BSE and NSE ensuring that such sale does not disturb the market equilibrium; and transfer of the entire proceeds of such sale of shares to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009.

ii. The noticees shall complete the sale of shares as directed above within 3 months from the date of this order and file a report to the SEBI detailing the compliance of the above directions within two weeks from the date of such compliance. 18. This Order shall come into force with immediate effect.

Sd/ DATE: September 5th ,2014 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA