Order in the matter of Southern Fuel Limited

WTM/SR/CFD/ 26 /03/2017 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: S. RAMAN, WHOLE TIME MEMBER ORDER UNDER SECTIONS 11 AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH SECTION 12A OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956, IN THE MATTER OF NON–COMPLIANCE WITH THE REQUIREMENT OF MINIMUM PUBLIC SHAREHOLDING BY LISTED COMPANIES. IN THE MATTER OF SOUTHERN FUEL LIMITED –

Background –

1.1 Southern Fuel Limited (“Southern Fuel”) is a company incorporated under the Companies Act, 1956, on April 23, 1993. The Registered Office of Southern Fuel is at SF 108/2, Saravanampatti Road, Vellakinar, Coimbatore – 641029, Tamil Nadu. The shares of Southern Fuel are listed on BSE Limited (“BSE”).

1.2 On October 30, 2015, SEBI received a letter dated October 19, 2015, from Shivamani & Company Private Limited (“SCPL”) inter alia stating – i. “We are the Promoters of Southern Fuel, which was originally promoted by Mr. Pritamlal Chanchani, his family members and associates in 1994, to set up a plant for the manufacture of Low Ash Metallurgical Coke at Tamil Nadu. The project cost was high at its inception and later on, due to foundation problems that arose due to the presence of black cotton soil and issues relating to changes in design, the implementation of the project was delayed. Further, the Company could not sustain its pace due to various issues including change of governmental policies on custom duties and financial problems. ii. Due to these circumstances, a reference was made to the Board for Industrial and Financial Reconstruction (“BIFR”), constituted under the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”), on the basis of our audited accounts for the half year ended September 30, 1998. At the hearing held on August 5, 1999, BIFR declared the company ‘sick’ under SICA (with case no. 128/1999) and appointed IDBI as Operating Agency (“OA”) u/s 17(3) of the SICA to formulate a rehabilitation scheme for the Company. iii.

While the BIFR proceedings were in progress, attempts were made to restart the company by entering into an arrangement in November 2000 with M/s BLA Industries Ltd., Gujarat… iv. During 2004, SCPL submitted a proposal to BIFR for a one time Settlement with the Financial Institutions and made a request to reduce/extinguish the existing share capital by 90% and further, make a fresh allotment of equity shares of ₹310 Lakhs to the new Promoters. On September 12, 2005, BIFR passed an Order (“BIFR Order”) for the revival scheme. The Scheme was in vogue till August 30, 2008. v. We, the new Promoters, could not revive the operations of SCPL and the plant was eventually closed in the year 2012. We tried to sell the Company by sale of shares and executed a Share Purchase Agreement with Mr. Ramesh Kumar Sharma and Mrs. Kaushal Sharma (“Acquirers”) on November 16, 2012. As per the SPA, the Acquirers were to acquire 90.60% of the paid up capital of the company, which was the entire Promoter’s holding (held by Shri C. V. Kaleeswaran, Shri K. Vijay Anandh and SCPL). They made an advance payment of ₹51 Lakhs against the total consideration of ₹5 Crores. vi.

The Acquirers issued a public announcement on 16.11.2012 and issued a Detailed Public Statement in the newspapers on 23.11.2012. The open offer closed on May 13, 2013 and of the 7,600 shares tendered, 3060 shares were accepted. In spite of having completed the Open Offer, the Acquirers have not honoured their commitment and not made the payment of ₹4.49 Crores required to be paid by them as per the terms and conditions of the SPA. They have not consummated the SPA till date and further, did not acquire any of the shares i.e. 3060 shares (tendered and accepted) from the public shareholders who surrendered their shares in the Open offer. The latest BenPos as on October 10, 2015 as well as the BenPos as on April 10, 2013, the identified date, indicate that the Promoters as well as the shareholders who tendered their shares in the Open offer continue to remain as shareholders till date. We the erstwhile Promoters still continue to manage the affairs of the Company and are still in charge of the management of the Company. There has been no change in management till date. vii. Further, the Acquirers have written a letter dated June 23, 2014, expressing their inability to proceed with the SPA and requesting us to rescind the Agreement and for a refund of ₹51 Lakhs advanced to us. viii.

We replied to this letter on July 22, 2014, by registered post and the same has been refused to be accepted by the Acquirers – Shri Ramesh Kumar Sharma and his wife, Mrs. Kaushal Sharma. We have thereafter, sent several reminders to them and none of the letter have (been) returned undelivered or replied. ix. In light of the above, we request you to initiate suitable action against Shri Ramesh Kumar Sharma and his wife, Mrs. Kaushal Sharma and further, direct them to consummate the SPA and honour the commitments under the SPA.”

1.3 Vide an e–mail dated January 22, 2016, SEBI requested BSE to provide the latest shareholding pattern of Southern Fuel.

1.4 BSE replied vide an e–mail dated January 29, 2016, informing SEBI that “the latest shareholding pattern for the captioned scrip is available for the quarter ended June 2015. The filing was received on 24.09.2015.” From the information submitted by BSE, the following is observed –

Shareholding (As on 30-06-2015) Category No. of shares held % Shareholding 1. Promoters 3130150 *90.60 2. Non – Promoters 324850 9.40 TOTAL 3455000 100.00 * Since May 24, 2013

1.5 Vide letter dated February 2, 2016, SEBI sought status of compliance with minimum public shareholding requirement prescribed under Rule 19A(2) of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”) and relevant provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”).

1.6 Southern Fuel replied vide letters dated February 8, 2016 and February 16, 2016, inter alia informing SEBI:

“a. The erstwhile Promoters of the Company – SCPL, Shri C. V. Kaleeswaran and Shri K. Vijay Anand currently hold more than 75% of the paid-up share capital, which is not in compliance with Rule 19(2) of the SCRR and the provisions of the Listing Regulations, which requires that every publicly listed company is required to maintain public shareholding at 25% in order to meet the continuous listing requirement. b. Since the company has been officially taken over with the completion of the open offer, the erstwhile Promoters, who are still managing the Company, are unable to take necessary steps to comply with this requirement. Further, any steps being taken to revoke the suspension of the shares of the company from the stock exchange is also not being completed due to this roadblock.”

Ad–Interim Ex Parte Order dated June 8, 2016 –

2.1 Vide an Order dated June 8, 2016 (“Interim Order”), SEBI issued the following directions against Southern Fuel, –

12. “In view of the foregoing, I, in exercise of the powers conferred upon me by virtue of Section 19 and under Sections 11(1), 11(2)(j), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) read with Section 12A of Securities Contracts (Regulation) Act, 1956 (“SCRA”), pending passing of the final order, hereby:

a. Direct freezing of voting rights and corporate benefits like dividend, rights, bonus shares, split, etc. with respect to the excess of proportionate promoter/promoter group shareholding in the above mentioned non – compliant companies, till such time these companies comply with minimum public shareholding requirement.

i. For the purpose of above direction, proportionate promoter/promoter group shareholding shall be computed on the basis of the public shareholding in the company; e.g. if public shareholding in a company after the deadline is less than 25%, say 10%, in such case, the proportionate promoter shareholding would be 30% (i.e. three times the existing public shareholding). Thus the excess promoter/promoter group holding i.e. 60%, shall be frozen till the minimum public shareholding requirement is complied with. ii. In case of more than one entity in the promoter/promoter group in a company, the excess promoter holding for the purpose of taking action shall be computed on a proportionate basis. For illustrating the example above, if there are three promoters; A, B and C with shareholdings of 45%, 35% and 10% respectively; the excess promoter holding of 60% shall be allocated as follows: 1. A: (60% multiplied by [45%/45%+35%+10%]) = 30.00% 2. B: (60% multiplied by [35%/45%+35%+10%]) = 23.33% 3. C: (60% multiplied by [10%/45%+35%+10%]) = 06.67% Total = 60.00% Based on the above, the excess shareholding of the promoters (including persons allegedly shown as public shareholders) of the Company that should be frozen is presented in the following table:

SR. NO. NAME OF THE PROMOTER/ SHAREHOLDING EXCESS SHAREHOLDING TO BE SHAREHOLDER (AS ON 30.09.2015) FROZEN 1. Shivamani & Company Pvt. Limited 89.73 61.80 2. Mr. V. Kaleeswaran 0.44 0.30 3. Mr. K. Vijay Anandh 0.43 0.30 TOTAL 90.60 62.40 b. Prohibit the promoter/promoter group and directors of these non – compliant companies from buying, selling or otherwise dealing in securities of their respective companies, either directly or indirectly, in any manner whatsoever, except for the purpose of complying with minimum public shareholding requirement till such time these companies comply with the minimum public shareholding requirement. c. Restrain the shareholders forming part of the promoter/promoter group in the non – complaint companies from holding any new position as a director in any listed company, till such time these companies comply with the minimum public shareholding requirement.

d. Restrain the directors of non – compliant companies from holding any new position as a director in any listed company, till such time these companies comply with the minimum public shareholding requirement.

13. This order is without prejudice to the right of SEBI to take any other action, including the following against the non – compliant companies, their promoters and/or directors or issuing such directions in accordance with law: a. Levying monetary penalty under adjudication proceedings; b. Initiating criminal proceedings by way of prosecution proceedings; c. Moving the scrip to trade – to – trade segment; d. Excluding the scrip from F&O segment; e. Any other action/direction as may be deemed appropriate.

For the above purpose, this Order shall be treated as a show cause notice and the above persons may show cause as to why such proposed action should not be initiated against them.

14. The Board/Audit Committee of these non – compliant companies shall, at the end of each quarter, submit compliance report to the stock exchanges where the shares of company are listed, giving the extent to which compliance has been achieved and the efforts taken therefor. …

15. …

16. The entities/persons against whom this Order is being passed may file their replies, if any, within 21 days from the date of this Order. The entities mentioned herein may also, if they so desire, indicate in their replies whether they wish to avail of the opportunity of personal hearing before SEBI on a date and time to be fixed on a specific request.”

Proceedings pursuant to the Interim Order dated June 8, 2016 –

2.2 Vide a letter dated June 25, 2016, Southern Fuel inter alia requested for an opportunity of personal hearing.

2.3 During the intervening period, SEBI received confirmation from BSE’s e–mail dated September 29, 2016, confirming that there was no change in the public shareholding and the same remained at 9.40%.

2.4 Accordingly, an opportunity of personal hearing was granted to Southern Fuel on November 10, 2016, which was attended by the authorised representatives of the said company.

2.5 During the course of the hearing and vide written submissions dated November 11, 2016, Southern Fuel submitted as under –

1. “The Company, Southern Fuel, was referred to the BIFR and we, the current Promoters of the Company, took over the affairs of the company pursuant to a revival scheme duly approved by the Hon’ble BIFR. We could however, not revive the company and the company continued to make losses and the networth of the company was also completely eroded. The operations of the company were eventually closed in the year 2012 and the Promoters of the company have been trying to sell the company from that date. 2. Pursuant to the BIFR Order, the Promoters of the company, Shivamani & Company Private Limited, Mr. C V Kaleeswaran and Mr. Vijay Anand hold 90.60% of the total paid up capital of the company. The public hold 9.40% of the total share capital of the company. 3. The (Interim Order dated June 8, 2016) stipulates that the Promoter shareholding in the company is to be reduced to below 75% (through) any of the following methods:  Issuance of shares to public through Prospectus;  Offer for sale of shares through Prospectus;  Offer for sale of shares by Promoters through the secondary market;  Rights Issue of shares to the public, with the Promoters foregoing their entitlement;  Bonus Issue of shares to the Public, with the Promoters foregoing their entitlement;  Any other method as may be approved by SEBI.

4. We would like to humbly submit that although we have tried to comply with the above methods, we are not in a position to carry out any of methods stated above. Since the shares of the company are under suspension and unless the suspension is revoked, Offer of sale using the market mechanism or an FPO or Offer for sale through a prospectus will not be permitted. Further, as there is not activity in the company, no investor is interested (in) investing in our company and therefore, an Institutional Placement or a Rights Issue is ruled out. Since our networth is negative and there are no reserves, a bonus issue is also not possible. 5. Our attempts at delisting the company would also be unsuccessful, since the company has more than 6000 shareholders and it is difficult to trace these shareholders. The Delisting Regulations stipulates that promoter shareholding shall reach 90% and proof must be given of delivery of the Letter of Offer to all shareholders in order that delisting be successful. However, ensuring that the Letter of Offer reaches all the shareholders of our company would be very difficult and almost impossible.

6. In light of the above, we kindly request you to permit us to find another buyer/acquirer/acquirers so that the Promoters could sell their shares to them in such a manner that the company would also be minimum public shareholding compliant post the sale of shares by the Promoters.”

Consideration of Issues and Findings –

3.1.1 In the instant proceedings, the issues for consideration are as under – a. Whether Southern Fuel is now compliant with the requirement of minimum public shareholding as stipulated under Rule 19(2)(b) and Rule 19A of the SCRR? b. Whether any other action as contemplated under the Interim Order dated June 8, 2016, is warranted against Southern Fuel?

3.1.2 I have considered the oral and written submissions made by Southern Fuel during the hearing held on November 10, 2016 and vide letter dated November 11, 2016, alongwith all relevant material available on record. I shall now proceed to deal with the issues as under –

3.1.3 Whether Southern Fuel is now compliant with the requirement of minimum public shareholding as stipulated under Rule 19(2)(b) and Rule 19A of the SCRR?

3.1.4 Vide Notifications dated June 4, 2010 and August 9, 2010, the Ministry of Finance amended the SCRR to provide for minimum and continuous public shareholding requirements in listed companies as it was felt that a dispersed shareholding structure was essential for the sustenance of a continuous market for listed securities, to provide liquidity to the investors and to discover fair prices.

3.1.5 The amended provisions of Rule 19(2)(b) and the newly inserted Rule 19(A) of the SCRR are reproduced below for reference:

“Requirements with respect to the listing of securities on a recognised stock exchange. 19 (2) … (b) (i) At least twenty five per cent of each class or kind of equity shares or debentures convertible into equity shares issued by the company was offered and allotted to public in terms of an offer document; or (ii) At least ten per cent of each class or kind of equity shares or debentures convertible into equity shares issued by the company was offered and allotted to public in terms of an offer document if the post issue capital of the company calculated at offer price is more than four thousand crore rupees: Provided that the requirement of post issue capital being more than four thousand crore rupees shall not apply to a company whose draft offer document is pending with the Securities and Exchange Board of India on or before the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, if it satisfies the conditions prescribed in clause (b) of sub-rule 2 of rule 19 of the Securities Contracts (Regulation) Rules, 1956 as existed prior to the date of such commencement: Provided further that the company, referred to in sub clause (ii), shall increase its public shareholding to at least twenty five per cent, within a period of three years from the date of listing of the securities, in the manner specified by the Securities and Exchange Board of India.

Continuous Listing Requirement. 19A. (1) Every listed company [other than public sector company] shall maintain public shareholding of at least twenty five per cent.: Provided that any listed company which has public shareholding below twenty five percent, on the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, shall increase its public shareholding to at least twenty five per cent, within a period of three years from the date of such commencement, in the manner specified by the Securities and Exchange Board of India. Explanation: For the purposes of this sub-rule, a company whose securities has been listed pursuant to an offer and allotment made to public in terms of sub-clause (ii) of clause (b) of sub-rule (2) of rule 19, shall maintain minimum twenty five per cent public shareholding from the date on which the public shareholding in the company reaches the level of twenty five percent in terms of said sub-clause. (2) Where the public shareholding in a listed company falls below twenty five per cent at any time, such company shall bring the public shareholding to twenty five per cent within a maximum period of twelve months from the date of such fall in the manner specified by the Securities and Exchange Board of India. [Emphasis supplied] (3) Notwithstanding anything contained in this rule, every listed public sector company shall maintain public shareholding of at least ten per cent.:

Provided that a listed public sector company- (a) which has public shareholding below ten per cent, on the date of commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2010 shall increase its public shareholding to at least ten per cent, in the manner specified by the Securities and Exchange Board of India, within a period of three years from the date of such commencement; (b) whose public shareholding reduces below ten per cent, after the date of commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2010 shall increase its public shareholding to at least ten per cent, in the manner specified by the Securities and Exchange Board of India, within a period of twelve months from the date of such reduction.”

3.1.6 A result of the aforementioned Notifications was that all listed companies (other than PSUs) were mandated to have minimum public shareholding of 25%. Further, in listed companies where the public shareholding was less than 25%, such companies were mandated to raise the same to the minimum of 25% by June 3, 2013.

3.1.7 The methods by which listed companies could ensure compliance with the requirement of 25% minimum public shareholding were specified by SEBI under the erstwhile Clause 40A of the Listing Agreement [presently Regulation 38 of the Listing Regulations; See also SEBI Circular no. CIR/CFD/CMD/14/2015 dated November 30, 2015], one of which included the following (introduced vide Clause 2(vii) of the) – a. Issuance of shares to public through prospectus; b. Offer for sale of shares held by Promoters to public through prospectus; c. Sale of shares held by Promoters through the secondary market i.e. OFS through Stock Exchange; d. Institutional Placement Programme (IPP); e. Rights Issues to public shareholders with Promoters/Promoter Group shareholders foregoing their rights entitlement; f. Bonus Issues to public shareholders with Promoters/Promoter Group shareholders foregoing their bonus entitlement; g. Any other method as may be approved by SEBI on a case–to–case basis.

3.1.8 The shareholding patterns of Southern Fuel (as obtained from the BSE website) as on September 29, 2016, is as under –

Shareholding (As on 29-09-2016) Category No. of shares held % Shareholding 1. Promoters 3130150 *90.60 2. Non – Promoters 324850 9.40 TOTAL 3455000 100.00 * Since May 24, 2013

3.1.9 From the preceding paragraph, it is observed that Southern Fuel continues to remain non– compliant with the requirement of minimum public shareholding as stipulated under Rule 19(2)(b) and Rule 19A of the SCRR.

3.1.10 Whether any other action as contemplated under the Interim Order dated June 8, 2016, is warranted against Southern Fuel, its Promoters and Promoter Group alongwith its Directors?

3.1.11 As per the Notifications dated June 4, 2010 and August 9, 2010, which amended the SCRR, all listed companies were required to have minimum public shareholding of 25% and where the public shareholding in such companies was less than 25%, the same was required to be raised to the minimum of 25% by June 3, 2013. As stated at paragraph 3.1.9, Southern Fuel continues to remain non–compliant with the requirement of minimum public shareholding as stipulated under Rule 19(2)(b) and Rule 19A of the SCRR.

3.1.12 The non-compliance by Southern Fuel with the minimum public shareholding requirement, till date, is in breach of Rule 19(2)(b) and Rule 19A of the SCRR and Clause 40A of the Listing Agreement [presently Regulation 38 of the Listing Regulations; See also SEBI Circular no. CIR/CFD/CMD/14/2015 dated November 30, 2015] read with Section 21 of the SCRA. Such non-compliance being continuous in nature and in light of the fact that no concrete steps towards compliance of minimum public shareholding requirement was taken by Southern Fuel, it becomes necessary, for the proper regulation of the securities market, to confirm the directions issued vide the Interim Order against Southern Fuel, its Directors and Promoters/Promoter Group.

Order –

4.1 In view of the foregoing and in exercise of the powers conferred upon me in terms of Section 19 read with Sections 11(1), 11(2)(j), 11(4) and 11B of the SEBI Act and Section 12A of the SCRA hereby confirm the directions issued vide the Interim Order dated June 8, 2016, against Southern Fuel Limited.

4.2 This Order shall come into force with immediate effect.

4.3 A copy of this Order shall be served on the Stock Exchanges and Depositories for their information and necessary action.

Place: Mumbai S. RAMAN Date: March 31, 2017 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA