Order in the matter of proposed acquisition of equity shares of M/s. Gem Spinners India Limited

WTM/RKA/CFD/20/2012 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: RAJEEV KUMAR AGARWAL, WHOLE TIME MEMBER ORDER IN THE MATTER OF PROPOSED ACQUISITION OF EQUITY SHARES OF M/S. GEM SPINNERS INDIA LIMITED– EXEMPTION APPLICATION FILED UNDER REGULATION 11 OF SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011. Date of Hearing: March 21, 2011 Appearances: For Applicant: S. Vasudevan, Authorised Representative For SEBI: 1. Mr. Santosh Kumar Shukla, Joint Legal Advisor 2. Mr. Anindya Kumar Das, Deputy General Manager 3. Mr. Durgesh Kumar Thakur, Asst. Legal Adviser 4. Mr. Harishkumar Benkar, Asst. Manager 1. Gem Spinners India Limited (hereinafter referred to as ‘the target company’) is a company incorporated under the Companies Act, 1956, having its registered office at No. 14, Mangalam Village, Madurathagam Taluk, Kancheepuram District, Pin 603 107. The equity shares of the target company are listed on the Bombay Stock Exchange Limited (BSE) and on Madras Stock Exchange Limited (MSE).

2. Mr. R. Veeramani, Mr. S. R. Asaithambi, Mr. R. Sekar and Mr. S. R. Kumar (hereinafter referred to as ‘the applicants’), have filed an application dated October 18, 2011 with SEBI under regulation 3(1)(l) read with regulation 4(2) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as 'the Takeover Regulations, 1997'). Thereafter, the acquirers and SEBI had exchanged correspondences to submit further facts and developments in respect of the proposed acquisition and status of the target company, etc. In the application read with their subsequent correspondences with SEBI, the applicants have stated that:- a. The target company was incorporated in the year 1990. Target company has issued 4,13,71,990 equity shares in total of Rs. 5/- each and its paid up equity share capital is Rs. 20, 68, 59,950. The applicants are promoters of the target company. b. The target company is engaged in manufacturing of cotton yarn. The target company had setup a spinning unit with 25,000 Spindles during 1994 with a project cost of Rs. 68 crore funded by IDBI Bank and ICICI Bank in foreign currency loan in Deutsche Mark. c. In the year 1999, due to 100% erosion of capital the target company was referred to Board for Industrial and Financial Reconstruction (hereinafter referred to as 'BIFR').

Scheme of rehabilitation was arrived at during 2002.As per the Scheme; the applicants (promoters) have brought in around Rs. 6 crore in the target company. d. As the performance of the target company had improved during the years 2005 and 2006 and its networth had become positive, the target company opted out of BIFR on August 17, 2006. e. However, as a measure to strengthen the target company's eroding networth the promoters had brought in funds in the form of loan. The applicants (promoters) have brought in Rs. 36.75 crore towards their equity and unsecured loan for the business of the target company. f. Since the target company’s networth as on March 31, 2009 had again become negative (Rs. 6.58 lakhs) due to the factors beyond its control, it again filed a reference with BIFR under section 15(1) of the Sick Industrial Companies ( Special Provisions) Act, 1985(SICA) on November 04, 2009. g. On February 03, 2010, BIFR appointed Indian Overseas Bank (IOB) as Operating Agency (OA) under section 17(3) of the SICA to prepare a Draft Rehabilitation Scheme (DRS) for the target company based on the DRS submitted by the target company.

The BIFR had directed the target company to submit a DRS to the OA within two months under a copy of its DRS to all the secured creditors. OA was directed to hold joint meeting of all concerned and submit a fully tied-up DRS, if it emerges. h. By May 31, 2010, the target company had settled the dues of ICICI Bank, a secured creditor and had submitted a One Time Solution (OTS) proposal to IDBI, another secured creditor. On May 31, 2010, BIFR directed the target company to submit a DRS and its audited balance sheet as on March 31, 2010 to BIFR and the IOB. IOB was directed to conduct joint meeting of concerned agencies from whom the target company had sought relief/ concessions and submit fully tied–up DRS. i. By March 28, 2011 the target company had settled all the dues aggregating to Rs. 232.56 lakhs of the secured creditors namely, ICICI Bank and IDBI Bank under the OTS scheme out of the unsecured loan brought in by the applicants between March 2010 and March 2011. j. While granting credit facilities to fund the working capital of the target company, the IOB, the target company’s banker, insisted the promoters (applicants) to convert their unsecured loans into equity shares to make the networth of the target company positive so that it can come out of the BIFR.

If the applicants do not do so, the target company would remain sick and would be within the reference of BIFR. k. Accordingly, the target company has proposed to make preferential allotment of 2,00,00,000 equity shares (32.59% of the expanded capital) of Rs. 5/- each to the applicants pursuant to the conversion of a portion of (Rs. 10 crore) their unsecured loan. l. Based on the target company's application it has been deregistered from BIFR on November 30, 2011. m. The proposed infusion of funds in the target company by the applicants is to ensure that there is no financial charge on the target company due to long term secured loans and there is cash savings for the target company. n. The shareholders of the target company have passed the special resolution, under section 81(1A) read with section 192A of the Companies Act through postal ballot, approving the aforesaid preferential allotment of equity shares to the applicants. The price determined in accordance with SEBI (ICDR) Regulations, 2009 would be Rs. 4/- per equity shares. However, since the face value of the equity shares is Rs. 5/-per share, the allotment to the promoters would be at Rs. 5/- per equity share. o. On November 23, 2011, the BSE granted in-principle approval for the aforesaid preferential allotment of equity shares under clause 24(a) of the Listing Agreement.

3. The shareholding pattern of the target company, prior to the proposed acquisition and thereafter would be as following- Shareholders category Shareholding prior to the Shareholding post pref. pref. allotment allotment No. of Percentage No. of Shares Percentage Shares (%) (%) Promoter Holding Indian Promoters (a) Individuals 2,24,43,500 54.25 4,24,43,500 69.16 (b)Bodies Corporate 0 0 0 0 Foreign promoters 0 0 0 0 SUB- TOTAL (A) 2,24,43,500 54.25 4,24,43,500 69.16 Public shareholding Institutions 1,24,93,990 30.20 1,24,93,990 20.36 Private Bodies Corporate 2,80,190 0.68 2,80,190 0.46 Individuals 61,54,310 14.87 61,54,310 10.02 SUB-TOTAL (B) 1,89,28,490 45.75 1,89,28,490 30.84 TOTAL( A + B) 4,13,71,990 100.00 6,13,71,990 100.00

4. Pursuant to the proposed acquisition of 2,00,00,000 equity shares by the applicants, the total promoters’ shareholding will increase from 54.25% to 69.16% and the applicants’ shareholding in the target company will increase from 54.03% to 69.02%. Since this proposed increase (14.99%) in the shareholding of the applicants is beyond permissible creeping limit (5%) under regulation 11(1) of the Takeover Regulations, 1997(since repealed), they have sought exemption from the applicability of the provisions of regulations 11 and 12 of Takeover Regulations, 1997 on the basis of facts and circumstances stated herein above .As the proposed acquisition, if completed, would trigger regulation 3 of the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations, 2011), the applicants, vide their letter dated December 13, 2011, have requested that their application should be considered under the Takeover Regulations 2011.

5. Since the applicants had informed that after filing the application the networth of the target company had become positive and it had been de-registered by the BIFR, SEBI prima facie felt that the main reason for seeking exemption did not survive and, therefore, the proposed acquisition may not merit exemption. However, before taking a final view in the matter, it was deemed necessary to grant an opportunity of personal hearing to the applicants in terms of regulation 11(5) of the Takeover Regulations, 2011.

6. Mr. S. Vasudevan, the authorized representative of the applicants appeared before me on March 21, 2012 and made submissions on the lines of the submissions made in the application and subsequent correspondences. Vide letter dated March 27, 2012 the applicants also made written submissions. It has been submitted on behalf of the applicants that on several occasions, when the target company was in financial difficulties, the applicants (promoters) have infused funds in the target company as under: Amount Details in Rs. Lakhs Pre IPO Equity in 1994 1,470 Additional Equity in 1996 850 Unsecured loan from 1997 to 2010 including under OTS to ICICI Bank 1,355.2 Further funds to pay off bank borrowings IDBI Bank 902 Total Equity and unsecured loan brought-in by Promotes till date 4,577 Amount proposed to be capitalised on conversion of a portion of loan of the promoters 1,000 7. During hearing the authorized representative of the applicants submitted that IOB, vide its letter no. IARD/37/2011-12 dated May 9, 2011, recommended to BIFR to discharge the target company from the purview of SICA only in view of the conversion of the abovesaid portion of promoters’ loan into equity shares. By the said letter dated May 9, 2011, the IOB had also informed BIFR that the process of allotment of equity shares would be completed after obtaining necessary exemption from SEBI.

8. The applicants have submitted that said loan amount of Rs. 10 crore against which the equity shares are to be allotted to the promoters has made the networth of the target company positive because it was adjusted as ‘share application money’ and now it forms part of networth of the target company. In view of these facts only, the BIFR in its order dated November 30, 2011 held that the target company does not remain to be a sick industrial company in terms of section 3(1) (o) of the SICA and it deregistered the target company from the purview of SICA/ BIFR.

9. The applicants have clarified that the networth of the target company, pre and post conversion of loan into equity shares and as noted in BIFR order dated November 30, 2011 is as under: Pre Post Particulars Amount Amount In Rs. Lakhs In Rs. Lakhs Paid up share capital (A) 2068.60 2068.60 Equity shares Nil 1000.00 Share Application money Free Reserves – capital reserve (B) 197.19 197.19 Total of (A) and (B) 2265.79 3265.79 Accumulated losses (c) 2831.51 2831.51 Networth (D) = (A)+(B)-(C) (565.72) 434.28

10. It is submitted on behalf of the applicants that the facts, circumstances and the reasons for exemption as submitted by the applicants to SEBI in the application still survive and if the exemption is not granted, the promoters may not convert the portion of their unsecured loan as proposed and the target company will have to face the consequential impact of again becoming its networth negative. The target company would become sick and the consequences may even result in its winding-up.

11. The proposed preferential allotment of equity shares upon conversion of unsecured loan of the applicants is for the benefit of the target company and its shareholders. The applicants, being promoters, are committed to revive the target company and the proposed acquisition is not for any undue benefit or enrichment of the applicants. The equity shares allotted to applicants against share application money (unsecured loan of Rs. 10 crore) would be locked-in as per SEBI (ICDR) Regulations, 2009. The applicants are already in control of the target company and the proposed acquisition would not result in any change in control in the target company.

12. In view of these submissions the applicants have requested that they may be granted exemption from the obligation to make an open offer under regulation 3 of the Takeover Regulations, 2011.

13. I have carefully considered the application dated October 18, 2011, their oral as well as written submissions and other relevant material available on record. The target company was referred to BIFR on November 04, 2009 because its networth had become negative. On May 31, 2010, BIFR directed the target company to submit a DRS and its audited balance sheet as on March 31, 2010 to BIFR and the IOB. While the reference was pending with BIFR, the applicants again extended funds by way of loan to the target company to clear dues of ICICI Bank and IDBI bank under the OTS scheme.

14. Even after clearing dues of the ICICI Bank and IDBI Bank under the OTS scheme, the networth of the target company was negative and it was still under reference of the BIFR. In the meantime, the target company proposed to convert a portion (Rs. 10 crore) of promoters’ unsecured loan into equity shares and on May 09, 2011, the IOB informed BIFR that by the proposed action of the target company its networth will turn positive. In view of the same, IOB had recommended de-registration of the target company from BIFR.

15. I further note from BIFR order dated November 30, 2011 that the networth of the target company had become positive because the said loan amount of Rs. 10 crore was shown as “share application money” in its audited balance sheet as on September 30, 2011. In view of these facts only, the BIFR deregistered the target company from the purview of SICA. I find that but for considering the said loan amount of Rs. 10 crore as ‘share application money’ for allotment of equity shares on conversion that loan, the networth of the target company would be negative. If that loan is not converted as proposed, the networth of the target company would be negative same as it was when it was under reference of BIFR. Therefore, I find that the reasons on which the exemption was sought in the application survives even after the target company was de registered by BIFR.

16. Now the question for determination is whether in the facts and circumstances of the instant case, the proposed acquisition should be granted exemption. I note that the primary objective of Takeover Regulations is fair and equal treatment of all shareholders and protection of their interests. Therefore, exemptions from obligation of making open offer should be granted if the exemption would not compromise the interest of the investors.

17. From the documents submitted by the applicants, I note that the applicants have from time to time extended financial assistance to the target company by way of loans so as to save it from financial problems. The applicants have so far given an unsecured loan of Rs. 20.17 crore out of which only Rs.10 crore is proposed for conversion into equity shares. The proposed conversion of loan of the applicants is for the purpose of keeping the target company's networth positive so that it is out of BIFR reference and it can get investment and business. From the material on record I note that if the applicants do not convert unsecured loan into equity shares, financial health of the company will worsen and public shareholders will suffer. Therefore, proposed infusion of funds by the applicants in the target company would be in the interest of the target company and also its public shareholders. I further note that the applicants have not acquired additional shares in the target company after coming into force of the Takeover Regulations, 1997 and all the requisite disclosures under Chapter II thereof had been made by them and the target company within the stipulated time.

18. I note that the shares of the target company are infrequently traded. In the last 52 weeks from today the highest price of the shares of the target company on BSE was Rs. 2.65 and lowest price was Rs. 1.72. I further note that in the notice dated February 10, 2011 issued to the shareholders for passing resolution in respect of the proposed allotment through postal ballot, the target company had disclosed to make the proposed allotment to the application at a price of Rs. 4/-per equity share i.e. the price higher than the price determined as per the SEBI (ICDR) Regulations, 2009. However, the target company has finally proposed to allot the equity shares on conversion of loan to the applicants at the price of Rs. 5/- per equity shares. Further, the equity shares allotted to the applicants shall be locked-in for a period of 3 years from the date of the allotment as required under the SEBI (ICDR) Regulations, 2009. In my view, therefore, by the proposed allotment, the applicants will not make any personal gain or unjust enrichment.

19. I further note that on November 23, 2011, BSE has already granted in-principle approval for listing of the shares proposed to be allotted on conversion of the loan and in view of this proposed conversion only the BIFR has deregistered the target company on November 30, 2011.

20. In view of the above findings, I find that in the facts and circumstances of the present case, the proposed acquisition is fit for grant of exemption from the obligation of the applicants to make an open offer under regulation 3 of the Takeover Regulations, 2011.

21. I, therefore, in exercise of the powers conferred upon me by virtue of section 19 of the SEBI Act read with regulation 11 of the Takeover Regulations, 2011 grant exemption to the applicants Mr. R. Veeramani, Mr. S. R. Asaithambi, Mr. R. Sekar and Mr. S. R. Kumar in respect of the proposed acquisition of 2,00,00,000 equity shares of Gem Spinners India Limited pursuant to conversion of unsecured loan of Rs. 10 crore at a price of Rs. 5/- per equity share as submitted in the application dated October 18, 2011. The exemption is granted subject to following conditions- a. The allotment of equity shares as proposed shall be in accordance with the SEBI (ICDR) Regulations, 2009. b. The allotment of equity shares as proposed in the application shall be completed within 15 days of the date of this order. c. On acquisition of equity shares, the applicants shall file a report with SEBI in the manner specified in regulation 10(7) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 within 21 days from the date of the allotment. d. This exemption shall not be construed as exemption from requirements of disclosure requirements under Chapter V of the Takeover Regulations, 2011 and compliance of SEBI (Prohibition of Insider Trading) Regulations, 1993, the Listing Agreement or any other applicable Acts, Rules, Regulations.

22. Application dated October 18, 2011 is disposed of accordingly.

DATE: May 24, 2012 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA