Order in the matter of Kirloskar Investment and Finance Ltd

1. The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted an investigation into the affairs relating to the change in control of Kirloskar Investment and Finance Ltd. (hereinafter referred to as ‘KIFL’) and dealing in its shares. Preliminary investigations, revealed possible violation of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997 (hereinafter referred to as ‘SAST Regulations’). During the time of investigation the scrip of KIFL was listed on Bombay Stock Exchange (hereinafter referred to as ‘BSE’) and Bangalore Stock Exchange (hereinafter referred to as ‘BgSE’).

2. KIFL was promoted by Vijay R. Kirloskar and associates and was undertaking lease, hire purchase, bill discounting and portfolio investments and other fund based activities. KIFL was a non banking finance company (hereinafter referred to as ‘NBFC’) whose application for registration was rejected by Reserve Bank of India (hereinafter referred to as ‘RBI’). Investigations revealed that Mr. G.K. Chakrapani, Mr. Rajesh Sharma, Mr. Sanjay Sharma and Dr. Arvind Pandey (hereinafter collectively referred to as ‘noticees’) had acquired control over the management of the KIFL from Mr. Hari Singh Champawat (Ex-Chairman, KIFL) along with Mr. Keshar Singh Rathore (Ex-Whole Time Director, KIFL) and Mr. Manohar Singh Rathore (Ex-Director, KIFL) without complying with the necessary requirements of Regulation 12 of SAST Regulations.

3. On completion of investigations, inter alia, SEBI issued separate Show Cause Notices (hereinafter referred to as ‘SCN’) to noticees all dated August 30, 2004, communicating thereby the alleged violation of Regulation 12 of SAST

Regulations. The SCN alleged that noticees had acquired the control of KIFL from Hari Singh Champawat, Manohar Singh Rathore and Keshar Singh Rathore without making a public announcement as required by the provisions of SAST Regulations. Accordingly, it called upon the noticees to show cause as to why appropriate action under the Securities and Exchange Board of India Act, 1992 and/ or SAST Regulations should not be issued against them for their failure to make public announcement to acquire a minimum of 20% of the equity capital of the company at a minimum price specified under Regulation 20 plus interest towards compensation to the investors for the period of delay as per the Regulations.

4. The SCN returned un-delivered from G.K. Chakrapani and Arvind Pandey. However, reply was received from Rajesh Sharma and Sanjay Sharma vide their letters dated November 08, 2004 and November 10, 2004 respectively. Subsequently, vide letters dated February 28, 2005, SCN were again issued to G.K. Chakrapani and Arvind Pandey. To this Arvind Pandey replied to the SCN vide his letter dated March 04, 2005. SCN issued to G.K. Chakrapani again returned undelivered with remark ‘not known’. Thereafter, the SCN of G.K. Chakrapani was pasted at his last available address on March 22, 2007.

5. Pursuant to this an opportunity of personal hearing was granted to the noticees on April 24, 2007 before the then Whole Time Member. The hearing notice of Sanjay Sharma was returned undelivered and of G.K. Chakrapani was pasted on his last known address. I note that none of the noticees attended the scheduled hearing nor any request for adjournment was received.

6. In view of the consistent failure to deliver the SCN and hearing notices on the noticees, the SCN were uploaded on the SEBI website and a press notification dated August 13, 2009, was issued as a mode of substituted service on the noticees who have failed to reply to the SCN and whose hearing letters also returned undelivered, with an advice that in absence of any reply, the matter would be proceeded ex-parte. I note that the stipulated period mentioned in the publication has expired. I have seen the service report and find that the principles of natural justice have been duly complied with, and it appears that the noticees are not interested in submitting their stand in the present proceedings. In view of this, I am compelled to proceed with the matter ex-parte, on the basis of material available on record, as against the noticees who have neither replied to SCN nor appeared for hearing, having complied with the principles of natural justice.

7. I have carefully examined the SCN, replies of SCN and other material available on record. The contentions of the noticees in their replies, in brief, are: (i) Dr. Arvind Pandey a. As RBI prohibitory order of August, 1999, was in force and all decision including the policy decisions were taken with due/ prior approval of special officer appointed by RBI. b. Since August 08, 2001, whole management was entrusted to the Committee of Management appointed by Hon’ble High Court of Karnataka. In view of this, he was never in the position to appoint majority of directors/ to control the management and hence can not be covered under Regulation 2 of SAST Regulations. c. Was appointed in the capacity of Vice President of KIFL to take care of and to handle the day to day affairs of KIFL. Joined KIFL as senior level employee who had to follow the instructions of the Board of Directors, special officer appointed by RBI and Committee of Management appointed by Court. His salary was fixed at Rs.35,000/- per month. In view of this he can neither be considered in the management nor in the control of KIFL. d. Not acted as director of KIFL as on October 16, 2001. e. He never had access to relevant records and books of KIFL. f. He had no control either individually or in concert, directly or indirectly over KIFL, in any manner whatsoever.

(ii) Sanjay Sharma a. The directors appointed were neither controlling the management decisions nor were exercising any kind of right, which entitles them to appoint new directors on the Board. b. The promoters of KIFL remained same. c. New directors had not acquired any shareholding rights in KIFL.

d. Directors were not given any kind of special right for controlling the policy decisions of KIFL. The directors did not enter into any kind of voting agreement or any shareholding agreement with the company. e. No special management right assigned to any of the directors of KIFL. f. Not handling day to day activities of the company or was taking decisions in Board Meeting. g. Not attended even a single board meeting. h. No knowledge of dilution of shareholding of Hari Singh Champawat and never came in control of management of KIFL. i. Not an acquirer in terms of Regulation.

(iii) Rajesh Sharma a. Had not acquired the control of KIFL. Mere appointment as a director in a company can not be considered equivalent to control. b. As KIFL was facing severe crises in multifarious fields/ areas including strategic, financial, operational, technical and other areas/ fields, hence, it was considered necessary and expedient that a team of experts from required fields/ areas be appointed for the betterment of KIFL. c. Decisions like change of registrar and share transfer agents of KIFL was taken with a view to serve the shareholders with more efficiency. d. Noticees together held 2,300 shares in KIFL. Noticees have not taken any shares out of dilution of shareholding by Hari Singh Champawat. It is impossible to control the company with such negligible shares in company. e. Was terminated from directorship by Committee of Management w.e.f. October 30, 2001. Had he been in control of company, he would not have been terminated within a short span of about 5 months. He got a salary of Rs.25,000/- per month. f. The actions/ activities mentioned in SCN were of routine in nature and company/ director/ employees are required to perform the same in ordinary course of business. g. Appointed as Whole Time Director of KIFL subject to confirmation/ ratification in the ensuing General Meeting by passing a special resolution.

8. Before proceeding further, the argument of the noticees that they had never gained control of KIFL needs to be considered, as by the prohibitory order of RBI dated August,1999, all decision including the policy decisions were taken with due/ prior approval of special officer appointed by RBI and further, since August 08, 2001, whole management was entrusted to the Committee of Management appointed by Hon’ble High Court of Karnataka. I have seen the said prohibitory order of RBI and also the order of Hon’ble High Court of Karnataka as stated by the noticees in their replies. From these, I note that RBI after satisfying itself about the unsatisfactory financial position of KIFL, appointed a special officer in the public interest to monitor the day-to-day working of the company. I note from the letter of RBI dated September 01, 1999, which specifically states that the special officer appointed by RBI, shall under no circumstances, be considered as in-charge of or responsible to the company. Further, vide order of Hon’ble Karnataka High Court dated August 08, 2001, a committee of eminent persons was formed to manage the affairs of the KIFL. I note that the said committee was entitled to look into all the aspects with regard to the affairs of KIFL especially to formulate scheme for payment to depositors, negotiation with banks for out of Court settlement, engage lawyers and accountants, etc. I observe that the said committee of eminent persons was not in-charge of or responsible to KIFL. In view of this the argument of the noticees finds no merits.

9. After having examined the stated facts and circumstances, the issue remains for my consideration is whether the noticees herein had acquired control of KIFL?

a. I note from the minutes of the board meeting dated April 09, 2001 of KIFL, that G.K.Chakrapani was appointed as the Chairman of the Board of KIFL pursuant to the resignation of Hari Singh Champawat. His name was proposed by Hari Singh Champawat and was seconded by Keshar Singh Rathore. Further, on the same day Keshar Singh Rathore resigned from the Board of KIFL and Rajesh Sharma was appointed as Whole Time Director of KIFL, his name was proposed by G.K. Chakrapani and was seconded by Hari Singh Champawat, Director. Dr. Arvind Pandey was appointed as Vice President of KIFL w.e.f. April 03, 2001, subsequently he was co-opted as director on October 16, 2001. From the minutes of the board meeting dated April 30, 2001 of KIFL, I observe that Sanjay Sharma was co-opted as director of KIFL, his name was proposed by G.K. Chakrapani and was seconded by Rajesh Sharma. I also note that Hari Singh Champawat and Keshar Singh Rathore were although on the board of the company but they did not attend the company's Board Meetings held after April 09, 2001.

b. Dr. Arvind Pandey vide its letter dated March 04, 2005, has submitted that he was never a Director of KIFL and did not have substantial number of shares of the company. As regards the control of KIFL, he has submitted that at the relevant time, he was not having any direct/ indirect control in KIFL.

As regards Rajesh Sharma, I note that vide its letter dated November 08, 2004, has admitted of having 1100 equity shares of KIFL, 100 of these held since October 13, 1997 and rest were purchased by him later on. I have seen the statement of Rajesh Sharma, before the Investigating Authority on November 25, 2002, wherein he submitted that he was offered the job to act as Whole Time Director of KIFL by Hari Singh Champawat in April, 2001 and was terminated from the job in the month of October, 2001. Further, he in his reply has submitted that actions/ activities being performed by the directors/ employees of KIFL were routine in nature and required to perform in ordinary course of business.

Sanjay Sharma in his reply dated November 10, 2004 to SEBI, has denied of handling day to day activities or taking decisions of KIFL, he has also denied of attending even a single board meeting of KIFL. Further, it has been submitted that he was neither controlling any kind of management decisions nor given any kind of special right for controlling the policy decisions of KIFL.

d. Pursuant to the above discussion, I note that the main argument of the noticees is that they were not in the direct control of KIFL. Dr. Arvind Pandey has argued to the extent that he was never a director of KIFL, however this argument falls flat by having a looking at his statement before Investigating Authority on November 25, 2002, wherein he has introduced himself as Ex. Vice President and present Director of KIFL. As regards the submission of Sanjay Sharma that he had never attended the board meeting of KIFL, reliance may be placed on the minutes of board meeting dated May 31, 2001, which shows that the meeting was attended by Sanjay Sharma along with G.K. Chakrapani and Rajesh Sharma.

e. Rajesh Sharma in his reply has submitted that he was appointed as Whole Time Director of KIFL subject to confirmation/ ratification in the ensuring General Meeting by passing a special resolution and this falls in purview of the first proviso to Regulation 12 of SAST Regulations, which states “that nothing contained in Regulation 12 shall apply to any change in control which takes place in pursuance of a special resolution passed by the shareholders in a general meeting”. I note that, if such resolution was passed then, no violation of the SAST Regulations by the noticees can be made out. However, I note that no copy of such resolution has been placed on record.

f. Further, I do not find any material on record to show that in what circumstances Dr. Arvind Pandey became the director of KIFL, when he was a salaried employee of KIFL. From the above discussion, I also note that the profile of Rajesh Sharma and Sanjay Sharma do not appear to be that of persons who wrests control of a company. Discussing this, it appears that Arvind Pandey, Rajesh Sharma and Sanjay Sharma were not playing any crucial role in KIFL. I have seen the documents on record and find that noticees were not holding any shares or voting rights of KIFL. Further, no evidence has been found on record to show that they had controlled the company without holding substantial number of shares. An inference can be drawn from the submission that these three persons became the director of KIFL in professional capacity and were drawing salaries for their work. However, I note that no document supporting such claim is on record. In view of all this, I am inclined to give benefit of doubt to Dr. Arvind Pandey, Rajesh Sharma and Sanjay Sharma on the issue.

g. Further, as regards G.K. Chakrapani, it appears that he has been put as Chairman of the Board by Hari Singh Champawat. I note that he has not replied to the SCN or appeared for hearing, in view of this, it is not clear as to how he became Chairman of KIFL. In light of the finding above that Dr. Arvind Pandey, Rajesh Sharma and Sanjay Sharma became the director of KIFL in professional capacity. I note that G.K. Chakrapani also came on the board of KIFL along with Rajesh Sharma but in absence of any further document to show that he was exercising any control over KIFL, benefit of doubt may also be given to G.K. Chakrapani.

10. Thus, the present proceedings are disposed of as ordered herein below.

11. In view of the foregoing, I, in exercise of the powers conferred upon me under Section 11 and 11B of SEBI Act, 1992 read with Regulation 44 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997, hereby dispose of the Show Cause Notice dated August 30, 2004, issued to G.K. Chakrapani, Rajesh Sharma, Sanjay Sharma and Dr. Arvind Pandey, in the matter of Kirloskar Investment and Finance Ltd., without any directions.

DATE : 11.2.2010 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA