Order in the matter of acquisition of shares of Servotech Engineering Industries Limited

WTM/RKA/CFD-DCR/05/2015 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 and regulation 32 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 in respect of Mr. Radhey Shyam Lahoti, Mr. Ram Awatar Lahoti, Mr. Sitaram Lahoti, M/s. Focus Investments & Traders Private Limited, M/s. Lahoti Exports Private Limited and M/s Quality Products Marketing Private Limited. In the matter of acquisition of shares of Servotech Engineering Industries Limited. 1. M/s Servotech Engineering Industries Limited (hereinafter referred to as “the Target Company”) is a company having its registered office at 203, Chartered House, Dr C. H. Street, Near Marine Lines Church, Mumbai– 400 002 and its equity shares are listed on the Bombay Stock Exchange Limited (BSE). 2. SEBI received an application dated June 23, 2013 under regulation 11 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as "Takeover Regulations, 2011"), from the promoter group of the Target Company comprising Mr. Radhey Shyam Lahoti, M/s. Focus Investments & Traders Private Limited, M/s. Lahoti Exports Private Limited, M/s Quality Products Marketing Private Limited, Mr. Ram Awatar Lahoti and Mr. Sitaram Lahoti seeking exemption from the obligation to make open offer under regulation 3(1) of the Takeover Regulations, 2011 with respect to the proposed increase in their shareholding/ voting rights in the Target Company above 25%. 3. It was inter alia submitted in the application that - 1) The promoter group held 10,68,908 equity shares constituting 20.83% shares/voting rights of the Target Company. Out of the total issued share capital of 51,31,400 equity shares (of ₹ 10 each) of the Target Company, only 36,83,689 equity shares were fully paid and the remaining 14,47,711 equity shares were partly paid to the extent of ₹ 2.50 per share and ₹ 7.50 per share continued to be unpaid. On July 20, 1996, notice was given to the shareholders for paying the calls in arrears but no calls on shares were paid. As on March 31, 2012, an amount of ₹1,08,57,834 was due and payable from the shareholders.

In the matter of Servotech Engineering Industries Limited

2) The board of directors of the Target Company, in its meeting held on October 03, 2012 passed a resolution to send final notice for payment of remaining amount on the partly paid shares and also informing the shareholders that if the calls in arrears were not paid latest by March 13, 2013, the Target Company would forfeit the shares. Letters dated December 10, 2012 and February 4, 2013 were issued by the Target Company to the shareholders for payment of the balance amount. 3) Since no response was received from the shareholders, the Target Company was to forfeit the partly paid shares in terms of its Articles of Association. Pursuant to the proposed forfeiture, the shareholding/voting rights of the promoter group was to increase from 20.83% to 29.02% which would have triggered the obligation to make open offer under the provisions of regulation 3(1) of Takeover Regulations, 2011. 4) The promoter group had sought exemption on the following grounds:- a) There was no active/direct acquisition of voting rights or shares by them in the Target Company and the increase in percentage of voting rights from the current holding of 20.83% to 29.02% was to be on account of the forfeiture of shares by the Target Company.

The partly paid shares had to be forfeited in the interest of the Target Company and its shareholders in accordance with the provisions of the Articles of Association and the Companies Act, 1956. b) The proposed increase in shareholding/voting rights was not in the nature of consolidation of holdings by the Noticees, rather it was incidental and consequential to the forfeiture of partly paid -up shares by the Target Company. c) Regulation 10(4)(c) of Takeover Regulations provides exemption from open offer if the increase in shareholding of any shareholder is pursuant to the buy back of shares under section 77A of the Companies Act, 1956. In this case, the proposed forfeiture/cancellation of shares was akin to buy back of shares, since in case of forfeiture/ cancellation of shares also there was no active acquisition by the promoter group. d) They had been the promoters of the Target Company since 1994 and had always been in control of the Target Company. Therefore, there would be no change in the control or management of the Target Company pursuant to the proposed increase in their voting rights.

They will continue to manage and control the affairs of the Target Company.

e) The defaulting shareholders had been given ample opportunities to make good the default in making the balance payment towards calls in arrears by the Target Company by dispatching the notices to their addresses as per the Register of Members available with the Target Company. Further, the Target Company had specifically informed the defaulting shareholders that if the calls in arrears were not paid the Company would forfeit the shares. f) The proposed passive acquisition was not detrimental to the interest of public shareholders in any manner. The increase in the percentage of shares due to the forfeiture/ cancellation of shares would not create any implication in the share market. g) Pursuant to the proposed forfeiture of 14,47,711 equity shares of the Target Company, the public shareholding would still be in compliance with the minimum public shareholding i.e., more than 25% as required under clause 40A of the Listing Agreement. 4. On examination of the aforesaid application SEBI observed that:- 1) In terms of section 87(1)(b) of the Companies Act, 1956, the voting rights of a shareholder are in proportion to his share of the paid-up equity capital of the company. The total issued capital of the Target Company was 51,31,400 equity shares of which 14,47,711 equity shares had been partly paid-up to the extent of ₹ 2.50 per share. The remaining 36,83,689 equity shares were fully paid-up. Accordingly, the paid-up capital of the Target Company was ₹ 4,04,56,167.50. 2) Prior to June 2012, the Noticees held 16.74% of the equity share capital and 21.23% of the voting rights in the Target Company. Subsequently, one of the promoters i.e. Mr. Radhey Shyam Lahoti had acquired equity shares of the Target Company in the following manner:- Date of No. of Pre- Post- Pre- Post-acquisition shares acquisition acquisition acquisition acquisition bought shareholding shareholding voting rights voting rights of promoter of promoter of promoter of promoter group group group group During June 4,035 8,58,800 8,62,835 21.23% 21.33% 2012 (16.74%) (16.81%) During July 1,393 8,62,835 8,64,228 21.33% 21.36% 2012 (16.81%) (16.84%) During 1,380 8,64,228 8,65,608 21.36% 21.40% August 2012 (16.84%) (16.87%)

During 7,900 8,65,608 8,73,508 21.40% 21.59% September (16.87%) (17.02%) 01, 2012 to September 24, 2012 September 95,000 8,73,508 9,68,508 21.59% 23.94% 25, 2012 (17.02%) (18.87%) September 1,00,000 9,68,508 10,68,508 23.94% 26.41% 26, 2012 (18.87%) (20.82%) 3) As a result of the aforesaid acquisitions, the collective shareholding of the promoter group increased from 16.74% to 20.82% and consequently, their collective voting rights in the Target Company increased from 21.23% to 26.41%. Thus, the promoter group of the Target Company was required to make a public announcement in accordance with the provisions of regulation 3(1) read with regulation 13(2) of the Takeover Regulations, 2011 prior to the placement of purchase order on September 26, 2012 to acquire additional shares. 5. In view of the above, the application was rejected and a show cause notice dated March 18, 2014 (SCN) was issued to the promoter group comprising Mr. Radhey Shyam Lahoti, M/s. Focus Investments & Traders Private Limited, M/s. Lahoti Exports Private Limited, M/s Quality Products Marketing Private Limited, Mr. Ram Awatar Lahoti and Mr. Sitaram Lahoti ("hereinafter referred to as “the Noticees") alleging that they had failed to make the requisite public announcement prior to the acquisition of shares on September 26, 2012 in violation of regulation 3(1) read with regulation 13(2) of the Takeover Regulations, 2011. 6. The Noticees vide their letter dated April 23, 2014 replied to the SCN. An opportunity of personal hearing was also granted to them and after seeking adjournment they availed the opportunity on August 05, 2014 when Mr. Vinay Chauhan, Advocate and others appeared and made submissions on their behalf. The Noticees, vide their letter dated August 20, 2014 also filed the written submissions in the matter. The submissions of the Noticees inter alia are as below: 1) The Target Company was incorporated on October 07, 1994 and came out with an IPO of 25 lakh equity shares of ₹ 10 each, of which ₹ 2.50 was payable on application and the balance ₹ 7.50 was payable on allotment in case of Indian public. As on March 31, 2014, the total subscribed equity shares of the Target Company were 51,31,400 shares of ₹10 each, out of which, 14,47,711 equity shares are partly paid up to ₹ 2.50 only and the remaining balance shares are fully paid up of ₹ 10 each.

2) The trading in the scrip of the Target Company was suspended on BSE with effect from July 14, 2013 due to non-compliance of the provisions of the Listing Agreement. The trading suspension was revoked only with effect from May 02, 2012. Prior to revocation of suspension of trading in equity shares, the Target Company was incurring losses for many years and its net worth was eroded. In view of the same, company was not able to employ regular secretarial staff and not able to carry out regular listing compliances. 3) As a result of efforts of promoters and post compliance of various regulatory requirements, BSE revoked the suspension on May 02, 2012. Thus, after a gap of around 9 years, the scrip of the Target Company became eligible for trading on the exchange. The promoters in consultation with various financial consultants, continued to revive the Target Company. 4) Since there was change in regulatory regime involving Takeover Regulations, wherein as per the Takeover Regulations, 2011, the initial threshold limit for acquisition of shares without involving obligation to make open offer, was increased to 25%, the promoters of the Target Company, who were holding around 16.74% shares in June 2012 decided to acquire further shares (within 25% limit) of the Target Company from the market in the ordinary course.

5) Accordingly, during June 18, 2012 to September 09, 2012, Mr. Radhey Shyam Lahoti, one of the promoters of the Target Company, purchased 14,708 shares, which increased the collective shareholding of the promoter group from 16.74% to 17.02%. 6) Subsequently, Mr. Radhey Shyam Lahoti purchased 95,000 shares on September 25, 2012, which increased the shareholding of the promoter group from 17.02% to 18.87%. Further, consequent to the said acquisition, disclosure under regulation 29(2) of the Takeover Regulations, 2011 was made wherein it was disclosed that post acquisition of 95,000 shares, his individual shareholding increased from 24,500 shares to 1,19,500 shares constituting 2.33% shares/voting capital of the Target Company. 7) Mr. Radhey Shyam Lahoti further purchased 1,00,000 shares on September 26, 2012, which increased the collective shareholding of the promoter group from 18.87% to 20.82%. Further, consequent to the said acquisition, disclosure under regulation 29(2) of the Takeover Regulations, 2011 was made wherein it was disclosed that post acquisition of 1,00,000 shares, his individual shareholding increased from 1,19,500 shares to 2,19,500 shares constituting 4.28% shares/voting capital of the Target Company.

8) While interacting with financial consultants with regard to reviving the Target Company, it was also suggested to the promoters that the capital structure of the Target Company is to be organized properly in light of the 14,47,711 partly paid shares. Consequently, the board of directors decided to issue notices to shareholders to make the payment of balance amount, failing which the partly paid shares would be forfeited. No response from any of the shareholders was received and accordingly, the board of directors decided to forfeit the shares. In the circumstances, as the shareholding of promoters was increasing from 20.93% to 29.02%, before actually forfeiting the shares, an application was filed with SEBI under regulation 11 of Takeover Regulations, 2011, inter alia seeking exemption from making open offer under regulation 3(1) since the promoter shareholding would cross 25% threshold post the forfeiture of partly paid up shares by the Target Company. 9) For the first time, pursuant to receipt of queries from SEBI's end, in context of processing of exemption application, it was realized that there was a mistake in calculating the percentage of shareholding/voting rights.

Thus, on September 26, 2012 when 1,00,000 shares were acquired by Mr. Radhey Shyam Lahoti, the shareholding/voting rights of the promoters collectively did not increase from 18.87% to 20.82% but from 23.94% to 26.41% (i.e. above 25%). The Noticees were under the bona fide impression that they still have bandwidth of acquiring further shares till they reach 25% threshold limit as stipulated under regulation 3(1) of Takeover Regulations, 2011, but the same, as it transpires now, was incorrect impression. 10) The calculation made for computation of percentage of shares was an honest and bona fide mistake as is evident from the disclosures filed with the stock exchanges wherein all along shareholding/voting rights were disclosed without taking into account proportionate voting rights for partly paid up shares. 11) There was no need for the Noticees to breach the 25% threshold, since they were already in control and management of the Target Company and were holding the maximum block of shares vis-à-vis other shareholders of the Target Company. 12) Further, as per section 87(1) of the Companies Act, 1956, a) Every member of a Company limited by shares and holding any equity share capital therein shall have a right to vote, in respect of such capital, on every resolution placed before the company, and b) His voting right on a poll shall be in proportion to his share of the paid up equity capital of the company.

13) The issued capital of the Target Company was 51,31,400 equity shares of which 36,83,689 equity shares were fully paid up and 14,47,711 equity shares were partly paid up to the extent of ₹ 2.50. Therefore, the paid up capital of the Target Company was ₹ 4,04,56,167.50. 14) The fact that, technically, in terms of section 87 of the Companies Act, 1956, partly paid shares will not carry voting rights but only proportionate voting rights (relatable to the payment made i.e. only 1/4th in the instant case), was completely missed by the Noticees. 15) Section 177 of the Companies Act, 1956 stipulates that "At any general meeting, a resolution put to vote of the meeting shall, unless a poll is demanded under section 179, be decided on a show of hands". 16) The aforementioned section clearly states that every resolution put to vote at the meeting shall be decided on a show of hands. However, only exception to this rule is that if a poll is demanded under section 179 of the Companies Act, 1956 and a demand of polling can be made by following shareholders as stipulated under section 179(1)(a).

For the ease of reference section 179(1)(a) is reproduced as below:- In the case of a public company having share capital, by any member or members present in person or by proxy and holding shares in the company - (i) which confer a power to vote on the resolution not being less than one-tenth of the total voting power in respect of the resolution, or (ii) on which an aggregate sum of not less than fifty thousand rupees has been paid up. 17) From a plain reading of the above section read with provisions of section 87 of the Companies Act, 1956, it can be inferred that only when a poll is demanded by the shareholders as stipulated under section 179 of the Companies Act, 1956, then only section 87(1)(b) comes into operation i.e. proportionate rights of the shareholders can be considered only when there is a poll. During all the general meetings of the company, all the resolutions had been passed by the show of hands and never poll had been demanded/ conducted. In view of the same, the provision relating to use of voting rights, i.e., section 87(1)(b) of the Companies Act, 1956 has not been invoked for the company.

18) During the relevant period under consideration, two Annual General Meetings (AGMs) were held on September 28, 2012 and September 28, 2013. In both the AGMs, resolutions have been passed by "show of hands". No poll was ever demanded by any shareholder and therefore, the Noticees have never exercised any voting rights beyond 25%. 19) Promoters neither had any mala fide to hide the information nor did they intend to harm the investor's interest as they have suo moto filed an application for seeking exemption under regulation 11 of Takeover Regulations, 2011 on June 29, 2013 as the Target Company was proposing to forfeit the shares on which calls were in arrears. 20) The alleged violation as mentioned in the show cause notice had come to the notice of SEBI only after the promoters had filed the application for seeking exemption. This establishes that the promoters follow the procedures specified in SEBI Act, 1992 and Rules/ Regulations etc. specified there under and did not have any mala fide intention to avoid any provision of Rules/ Regulations made under SEBI Act. 21) In terms of good corporate governance the company had given full disclosures in the application filed before SEBI and had not hidden any details.

22) The impugned acquisition is the consequence of bona fide error on the part of Noticees in assuming full voting right for partly paid shares instead of proportionate voting rights. But for this, the Noticees would not have acquired shares resulting in voting rights crossing 25%. 23) Without prejudice to the aforesaid, it is also submitted that on case of partly paid shares, wherein the calls are in arrears, the Takeover Regulations do not specify as to when the Takeover Code triggers. For instance, in the instant case, as per SEBI's interpretation, Takeover Code has been triggered, since the voting rights of the promoters went beyond 25%, however, that may not be the case, if the shareholders having partly paid shares pay up the balance amount i.e. call in arrears. On the receipt of such balance amount, all the shares will have equal voting rights and due to this, the percentage of voting rights of the promoters would again fall below 25%. In such a situation, there will not be any breach of any Takeover Regulations. 24) It is also submitted that the trading activity in the scrip is very low.

The financial position of the Target Company continues to remain weak with losses of ₹ 50 lakhs, ₹ 29 lakhs and ₹ 8 lakhs in 2011-12, 2012-13 and 2013-14 respectively and any adverse direction of saddling the promoters with open offer will be detrimental to the health of the company at this juncture.

25) The alleged violations are technical, venial and unintentional, dehors sinister intent or design on the part of the Noticees. The same has not caused any loss to any investor/shareholder or the securities market in any manner. Further, there are no shareholder/ investor complaints in this regard. 26) As a result of the alleged violations, the Noticees have not made any gain or gained an unfair advantage. The quantum of shares involved in the impugned transaction is less than 1% and is exceedingly insignificant. 27) Without prejudice to the aforesaid, it is prayed that no direction of making open offer be issued against the Noticees. Any such direction would derail and disrupt the plan to revive the Target Company since the funds which could be utilised for pumping into the Target Company would get frittered away in acquiring 26% shares in open offer. 28) Further, any such direction would be harsh/excessive/disproportionate in the peculiar facts and circumstances of the case, wherein there was inter alia no change in control, the violation is technical in nature and the same has occurred due to a bona fide error.

29) In this context, it is submitted that ends of justice would be met by directing the Noticees to disinvest the shares in excess of 25%.. It is also submitted that the Noticees would remit the entire sale proceeds arising as a result of sale of such excess shares to SEBI. Same would be in the interest of investors, Target Company and the securities market. Reference has been made to regulation 32 of the Takeover Regulations, 2011 which contemplates such kind of directions for the breach of Takeover Regulations. 30) Reference has also been made to the order dated November 09, 2010 passed by SEBI against Nirvana Holdings Private Limited, Nara Bhuvananeshwari and Nara Lokesh in the matter of Heritage Foods (India) Limited, wherein under the similar circumstances for the similar violations pertaining to breach of Takeover Regulations, the Whole Time Member, SEBI, under the power conferred upon him, had issued the directions to disinvest the excess shareholding acquired by the acquirer. 31) Thus, direction of disinvestment of shares acquired in breach of Regulations would meet the ends of justice and same would also be in overall interest of the Target Company and its shareholders.

7. I have carefully considered the SCN, replies and submissions of the Noticees and other relevant material available on record. In this case, it is an undisputed fact that one of the promoters of the Target Company namely Mr. Radhey Shyam Lahoti had acquired 14,708 equity shares during

June 2012 to September 24, 2012. Further, on September 25, 2012 and September 26, 2012, he had again acquired 1,95,000 equity shares of the Target Company. It is also an undisputed fact that all the Noticees being part of promoter group of the Target Company were acting in concert with respect to such acquisitions by Mr. Radhey Shyam Lahoti. 8. In this case, during the relevant time, the total share capital of the Target Company was 51,31,400 equity shares, of which 14,47,711 equity shares were partly paid-up to the extent of ₹ 2.50 per share and the remaining 36,83,689 equity shares were fully paid-up. I note that section 87(1) of the Companies Act, 1956 provides that "subject to the provisions of section 89 and sub section 2 of section 92, (a) every member of a company limited by shares and holding any equity share capital therein shall have a right to vote, in respect of such capital, on every resolution placed before the company; and (b) his voting right on a poll shall be in proportion to his share of the paid up equity capital of the company." As per provisions of this section, every shareholder/member of a company limited by shares and holding any equity share capital has a right to vote in proportion to his share of the paid up equity capital of the company.

Thus, it is clear that partly paid-up shares also carry voting rights in proportion to the amount paid up thereon. 9. In view of the aforesaid provision of the Companies Act, 1956, prior to acquisition in question, the paid-up capital of the Target Company was ₹4,04,56,167.50. (representing 78.84 % total voting rights). Pursuant to acquisition of 1,00,000 equity shares of the Target Company by one of its promoters viz; Mr. Radhey Shyam Lahoti on September 26, 2012, the collective shareholding of the Noticees in the Target Company increased from 16.74% to 20.82% and consequently, their collective voting rights in the Target Company increased from 21.23% to 26.41%. It is this acquisition, which is the basis of the allegation against the Noticees as alleged in the SCN. Since the charge against the Noticees is limited with regard to aforesaid acquisition on September 26, 2012, I do not deem it necessary to examine submissions of the Noticees with regard to probable increase in their shareholding / voting rights on account of forfeiture of equity shares by the Target Company. I, however, make it clear that findings in this order should not be construed as final conclusion with regard to any possible increase in shareholding/ voting rights of the Noticees in the Target Company on account of any other acquisition including increase due to forfeiture of shares by the Target Company.

10. Referring to the provisions of sections 177 and 179 of the Companies Act, 1956, the Noticees have contended that only when a poll is demanded by the shareholders as stipulated under section 179, then only section 87(1)(b) comes into operation i.e. proportionate rights of the shareholders can be considered only when there is a poll. According to them during the period under consideration, two Annual General Meetings (AGMs) were held on September 28, 2012 and September 28, 2013 and in both the AGMs, resolutions were passed by "show of hands" and no poll was ever demanded by any shareholders in terms of section 179. Therefore, the provision relating to use of voting rights, i.e., section 87(1)(b) of the Companies Act, 1956 has not been invoked. 11. I have examined the provisions of section 87, 177 and 179 of the Companies Act, 1956. I note that section 87 declares right and entitlement of a shareholder to vote on every resolution placed before the company. As per provisions of section 87(1)(b), voting right on a poll shall be in proportion to the member's share of the paid-up equity capital of the company.

I further note that sections 177 and 179 deal with manner and procedure of voting on a resolution. In terms of section 177 unless a poll is demanded under section 179, voting on a resolution in any general meeting shall be on a 'show of hands'. Section 179 deals with the procedure of demand for poll. In my view, the right or entitlement to vote will not be diminished or extinguished if the poll is not demanded. Such shareholder will have right to vote and would be in position to exercise his voting rights on a poll. 12. It is pertinent to mention that the Takeover Regulations, 2011 are applicable when an acquirer acquires or agrees to acquire shares that entitle him to voting rights in a Target Company. It is not relevant whether he actually exercises such voting rights or not. In this regard, it is relevant to mention the provisions of regulation 3(1) of the Takeover Regulations, 2011 which reads as under: "Substantial acquisition of shares or voting rights. 3. (1) No acquirer shall acquire shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle them to exercise twenty-five per cent or more of the voting rights in such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations."

13. It is noted that the provisions of regulation 3 are not linked to the right of the shareholder to exercise the voting rights but to the nature of the shares he holds i.e. shares carrying voting rights. I note that in the context of regulation 10, 11 and 12 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 which is pari materia the provisions of regulations 3(1), 3(2) and 4 of the Takeover Regulations, 2011, Hon'ble Securities Appellate Tribunal (SAT) in the matter of Shri Sharad Doshi vs The Adjudicating officer and others,( Order dated April 07, 1998 in Appeal no. 01/1998), held that:- "...Voting rights is attached to equity share or say, it is built in the moment the share is issued. In the common parlance, share carrying rights means equity share or ordinary share as sometimes called. However, the right to exercise such voting right to the person holding equity share is not automatic. A person holding shares with voting rights will be entitled to exercise that voting right only on entering his name in the company’s register of members required to be maintained under section 150 of the Companies Act.

In other words, in order to be eligible to exercise the voting rights attached to a share, physical possession of share certificate alone is not enough, but it is necessary to have the name of the holder entered in the company’s members register. While the voting right is attached to equity share, registration of holding the share enables the holder to exercise the voting rights attached thereto. Admittedly, the shares in question are equity shares and equity shares under the law carry voting rights irrespective of its ownership. The appellant ‘s contention that the shares in question are not carrying voting right cannot survive in view of the legal position stated above.... " 14. I further note that in its order dated October 25, 2002, Hon'ble SAT in the matter of Ashwin Doshi vs SEBI and others (in Appeal no. 44/2001), held that "...The voting rights are embedded in the equity share. Attachment does not alter the basic characteristic of the equity share. .... Therefore, the percentage of voting rights exercisable by a person has to be worked out in relation to the total number of shares carrying voting rights issued by a company, and not to the exclusion of the holding of any person who is not in a position to exercise the voting rights for one reason or the other...."

15. With regard to the computation of voting rights on partly paid-up shares for the purposes of the Takeover Regulations, the following ruling of Hon'ble SAT in the matter of Luxury Foams Ltd. and others vs SEBI, (order dated March 20, 2002 in Appeal no. 48/2001) is worth mentioning: "......it is clear that the member / shareholder cannot exercise voting right in respect of any shares registered in his name in case of any calls or other sums presently payable by him have not been paid or in regard to which the company has and has exercised any right of lien.... In the instant case, the Appellants version that since the 4,40,00,000 shares have been allotted to them on partly paid basis, those shares do not carry any voting rights is contrary to the legal position flowing from section 87(1)(b).... In the light of the legal position regarding voting rights attached to the partly paid shares in terms section 181 and 87 of the Companies Act, it is difficult to subscribe to the Appellants version that 440 lakh equity shares of Rs.10 lakh issued but partly paid, have no voting rights and as such should be excluded for the purpose of computing the percentages prescribed in regulation 10 etc., is not tenable...."

16. Considering the above, I am of the view that the triggering point under regulation 3 of the Takeover Regulations, 2011 is the acquisition of shares carrying / entitling voting rights which result in breach of 25% threshold under the said regulation. Further, if partly paid-up shares carry voting rights and entitle the shareholder to vote on a resolution, it is immaterial for applicability of Takeover Regulations, 2011 as to whether he actually votes or not or is prevented from voting on a resolution since polls were not demanded. Accordingly, the calculation of voting rights should be based on the number of shares carrying voting rights irrespective of the fact whether such voting rights are exercisable or not. I, therefore, do not find merit in the submissions of the Noticees in this regard. 17. The Noticees have further contended that the computation of percentage of their voting rights was an honest and bona fide mistake on their part as all along they considered the total shareholding without taking into account proportionate voting rights for partly paid up shares. This contention of the Noticees does not appeal to reason since by virtue of clause 88 of the Articles of Association of the Target Company, the public shareholders holding partly paid shares were restricted from exercising their proportionate voting rights.

Thus, the total exercisable voting rights in the Target Company when the acquisitions in question were made would be much less than what Noticees have sought to contend. Consequently, the Noticees were in a dominant position in the Target Company as the percentage of their voting rights was more than the percentage of shares actually held by them. Thus, the computation of their voting rights by the Noticees was incorrect not only in terms of section 87(1)(b) of the Companies Act, 1956 but also in terms of clause 88 of the Articles of Association of the Target Company itself. As mentioned above, clause 88 of the Articles of Association of the Target Company completely restricted the voting rights on partly paid shares. In these circumstances, I am unable to accept the above explanation of the Noticees. 18. In this case, it is established that pursuant to 1,00,000 equity shares of the Target Company by Mr. Radhey Shyam Lahoti on September 26, 2012, the collective voting rights of the Noticees in the Target Company increased from 21.23% to 26.41%. This acquisition breached the 25 % threshold prescribed in regulation 3(1) of the Takeover Regulations, 2011. Mr. Radhey Shyam Lahoti could acquire voting rights / shares beyond 25% threshold only by making a public announcement which he failed to make.

I, therefore, find that the Noticees, being persons acting in concert with respect to this acquisitions, are jointly and severally liable with regard to such failure. 19. I note that in the context of enforcement of regulation 10, 11 and 12 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 which is pari materia the provisions of regulations 3(1), 3(2) and 4 of the Takeover Regulations, 2011, 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:

"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 ." 20. I note that the object and purpose of the Takeover Regulations,1997 and Takeover Regulations, 2011 is to provide equality of treatment of all stakeholders, to provide an exit opportunity to the shareholders in case of substantial acquisition of shares or takeover and to ensure that persons in control of the target companies do not consolidate their shareholdings in the Target Company in a clandestine manner and to the detriment of other shareholders.

I note that regulation 32 of the Takeover Regulations, 2011 provides for consequences of breach thereof. 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. I, therefore, am of the view that the above mentioned principles laid down by Hon'ble SAT shall apply in the present case also. 21. In this case, the increase in breach of regulation 3(1) is to the extent of 1.41% voting rights (represented by 57,043 shares). I note that the acquisition in question on September 26, 2012 was at the price of ` 4.28 per share. Had the Noticees made the public announcement in terms of regulation 3(1) read with 13(2) of the Takeover Regulations, 2011 the offer price in the open offer could have been `5.47 per share and all formalities with respect to their public announcement and the open offer would have been completed on December 18, 2012. However, since no such public announcement was made by the Noticees and if they make the public announcement now the offer price would be `6.74 per share (calculated in terms of regulation 8 of the Takeover Regulations, 2011 alongwith interest @ 10% per annum thereon).

The average market price of the shares of the company for last six months is `3.04 per share. In view of these facts and circumstances, I am of the view that the exit opportunity consequent to the breach by the Noticees in this case would be in the interest of investors. 22. I am also of the view that since the public announcement now would provide a delayed exit opportunity to the shareholders of the Target Company, the Noticees should pay interest on the consideration amount to the shareholders who tender their shares in the open offer and who are eligible for interest as per law. 23. I, therefore, in exercise of powers conferred upon me under sections 19, 11 and 11B of the SEBI Act, 1992 and regulation 32 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, hereby issue following directions to the Noticees, viz; Mr. Radhey Shyam Lahoti, Mr. Ram Awatar Lahoti, Mr. Sitaram Lahoti, M/s. Focus Investments & Traders Private Limited, M/s. Lahoti Exports Private Limited and M/s Quality Products Marketing Private Limited :- a) The Noticees shall make a public announcement to acquire shares of the Target Company in accordance with the provisions of the Takeover Regulations, 2011, within a period of 45 days from the date of this order; b) The Noticees shall, alongwith the consideration amount, pay interest at the rate of 10% per annum from December 19, 2012 to the date of payment of consideration, to the shareholders who were holding shares in the Target Company on the date of violation and whose shares are accepted in the open offer, after adjustment of dividend paid, if any.

24. This order shall come into force with immediate effect.

Sd/- DATE: January 23rd, 2015 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA