Order in the matter of Sri Vajra Granites Limited

WTM/GM/EFD/DRAIII/11/MAY/2017 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 and regulations 44 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 read with regulation 35 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 In respect of: - 1 Annapareddy Leela PAN: ACHPA5541M 2 Annapareddy Sudhaker Reddy PAN: ADIPA6803E 3 Eleti Vijaya Lakshmi PAN: Not Available 4 Annapareddy Namrathha PAN: AHZPA5662L 5 Elti Hanumanth Reddy PAN: Not Available In the matter of Sri Vajra Granites Limited

1. Sri Vajra Granites Limited (hereinafter referred to as “Target Company” or “VGL”) is a company registered under the Companies Act, 1956 and its securities are listed in the Bombay Stock Exchange. Ms. Annapareddy Leela, Mr. Annapareddy Sudhaker Reddy, Ms. Elti Viaya Lakshmi, Ms. Annapareddy Namrathha and Mr. Eleti Hanumanth Reddy (hereinafter referred to as the "Noticees") were the promoters and promoter group entities of VGL during the period from September 2006 to December 2006.

2. It was observed by Securities and Exchange Board of India (SEBI) that on October 09, 2006, the shareholding of the Noticees in VGL increased from 36.97% to 53.49% (i.e. by 16.52%) pursuant to preferential allotment of 19,03,500 equity shares of VGL to them. As the Noticees had together acquired more than 5% shareholding/voting rights of the Target Company in a financial year, the acquisition attracted regulation 11(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (since repealed) requiring them to make a public announcement for an open offer. However, they did not make any public announcement. In view of this, a Show Cause Notice (SCN) dated October 30, 2015 was issued to the Noticees alleging that they have failed to make public announcement for open offer in terms of regulation 11(1) read with regulation 14(1) of the Takeover Regulations, 1997, and hence they were required to show cause as to why suitable directions under sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 and regulations 44 & 45 of the Order in the matter of Sri Vajra Granites Ltd.

Takeover Regulations, 1997 read with regulation 35 of Takeover Regulations, 2011 should not be issued against them.

3. Noticees filed their reply vide letters dated August 9, 2016. They were granted an opportunity of hearing on January 17, 2017. Mr. P R Ramesh, Advocate appeared for hearing on behalf of the Noticees and made submissions. He also filed written submissions vide letter dated January 27, 2017 after the personal hearing. The summary of the reply, written and oral submissions is as under:

i. That pursuant to an application filed by VGL before the Board for Industrial and Financial Reconstruction ("BIFR") a case was registered (Case No. 220/2000) by them. After inquiring into the matter, BIFR declared VGL as a sick industrial company vide order dated July 19, 2001 and appointed State Bank of India as Operating Agency in the matter. The rehabilitation scheme sanctioned by BIFR on September 1, 2003 provided for one time settlement of the outstanding dues of Financial Institutions by way of contribution of interest free unsecured loans of ` 465.34 lakh from promoters and their associates, i.e., the Noticees. With regard to repayment to promoters, it was directed that ` 100 lakh would be converted into 10 lakh equity shares of `10/- each and the balance amount of ` 365.34 lakh shall be paid back to the promoters after successful completion of the implementation of the scheme, if necessary by raising the capital through rights issue. As directed, the promoters brought into the company `465.34 lakh as interest free unsecured loans and VGL issued and allotted 10 lakh equity shares of `10 each (i.e., for `100 lakh) to the promoters on November 26, 2003. ii.

That the company vide letter dated July 8, 2005 represented before BIFR that its net worth has become positive and stood at `924.81 lakh as on March 31, 2004 and `947.72 lakh as on March 31, 2005 and therefore, it may be discharged from the purview of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). Through this letter, the company had also requested BIFR to permit it to issue equity shares to promoters in order to pay back the balance amount. iii. That subsequent to the representation of the company, BIFR passed a release order dated August 9, 2005 discharging the company from the purview of BIFR. The order says that the sanctioned scheme has been ‘substantially implemented’ meaning that the sanctioned scheme would come to an end on fulfilment of all obligations and therefore the order itself provides for fulfilment of the remaining obligations for the unexpired period of the scheme. In August 2006, an amount of `1,90,35,000/- remained to be paid by VGL to the promoters in fulfilment of the obligations under the sanctioned scheme and the preferential issue of 19,03,500 equity shares of `10 each to the prompters/noticees was in discharge of this obligation under the sanctioned scheme.

Therefore, it has been submitted that the acquisition by the Noticees is ‘pursuant to a scheme’ sanctioned under the SICA, and in terms of regulation 3(1)(j) of the Takeover Regulations, 1997, it is eligible for exemption from the applicability of regulation 11 of Takeover Regulations, 1997. iv. That raising capital by way of rights issue was not opted as during the relevant period the stock prices were below par value of `10/- per share and in such circumstances, rights issue would have been a failure.

v. That the Noticees subscribed to the shares at `10/- per share, whereas the price in terms of SEBI (DIP) Guidelines, 1999 in the preferential issue would have been `5.15 and thereby, they have helped the company to write-off half of the unsecured loans on the date of allotment. vi. With respect to Smt. Annappareddy Namrata and Elti Hanumantha Reddy, it has been additionally submitted that they had not acquired any shares in the preferential allotment, hence there is no cause of action against them. In this regard, reliance has been placed upon Daiichi Sankyo Company Ltd. vs. Jayaram Chigurupate and Others (2010) 7 SCC 449 and SEBI order in the matter of Koffee Break Pictures Ltd. dated March 9, 2016. vii. With respect to Elti Hanumantha Reddy, it has been also submitted that he died on December 23, 2008, therefore the proceedings against him may be treated as abated. Copy of death certificate dated December 30, 2008 issued by Nizamabad Municipal Corporation has been submitted.

4. I have considered the SCN, replies and submissions made by the Noticees. It has not been disputed that on October 9, 2006, VGL allotted on preferential basis 19,03,500 equity shares of the company to some of the promoters of the company (Annapareddy Leela, Annapareddy Sudhakar Reddy and Eleti Vijay Lakshmi) resulting in increase in the shareholding of the promoter and promoter group entities from 36.97% to 53.49% of the total share capital of VGL. It has also not been disputed that that no public announcement for open offer was made by the Noticees pursuant to this acquisition. However, it has been contended by the Noticees that the preferential issue was ‘pursuant to a scheme’ sanctioned by BIFR and hence the acquisition by the Noticees is exempt from the applicability of regulation 11 of the Takeover Regulations, 1997 in terms of the provision of regulation 3(1)(j) of the Takeover Regulations,

1997. With respect to the charges against Smt. Annappareddy Namrata and Elti Hanumantha Reddy, it has been submitted that they had not acquired any share in the preferential allotment, therefore, there is no cause of action against them. Thus, in order to determine whether the noticees have violated the provision of regulation 11(1) read with regulation 11 (4) of the Takeover Regulations, 1997, the issues that arise for consideration in the present case are as follows: a) Whether the acquisition by the Noticees was ‘pursuant to a scheme’ sanctioned by BIFR and hence is exempt from the applicability of regulation 11 of the Takeover Regulations, 1997 in terms of the provisions of regulation 3(1)(j) of the Takeover Regulations, 1997? b) With respect to Annappareddy Namrata and Elti Hanumantha Reddy, whether acquisition of shares by a person is mandatory for him to be termed as Persons Acting in Concert (PAC) with the acquirer?

5. With regard to the first issue, it is pertinent to refer to the relevant provisions in Takeover Regulations, 1997 as it prevailed during the time of the acquisition. The provisions are as under. Consolidation of holdings “11. (1) No acquirer who, together with persons acting in concert with him, has acquired, in accordance with the provisions of law, 15 per cent or more but less than fifty five per cent (55%) of the shares or voting rights in a company, shall acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him to exercise more than 5 per cent of the voting rights, in any financial year ending on 31st March, unless such acquirer makes a public announcement to acquire shares in accordance with the regulations. … … …” Applicability of the regulation “3. (1) Nothing contained in regulations 10, 11 and 12 of these regulations shall apply to: … … … (j) pursuant to a scheme: (i) framed under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); … … …”

6. It is observed that in terms of regulation 3(1)(j)(i) of the Takeover Regulations, 1997, an acquirer and the persons acting in concert with him, whose acquisition triggers regulations 10, 11 and 12 of Takeover Regulations, 1997, are exempted from making a public announcement for an open offer, if the acquisition is pursuant to a scheme framed under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). The Noticees have submitted that the acquisition of 19,03,500 equity shares on October 09, 2006 by some promoters was pursuant to a scheme sanctioned by BIFR and therefore they are exempt from making any public announcement for open offer, with respect to the said acquisition.

7. In order to proceed further, it is pertinent to refer to the rehabilitation scheme sanctioned by BIFR on September 1, 2003. Para 6 (3) of BIFR order is extracted below: “Promoter-Directors would bring in an amount of Rs. 465.34 lakhs, out of their own sources and through their friends/Associates as their share of contribution towards the cost of implementation of the Rehabilitation Scheme, out of which, Rs. 100 Lakhs would be converted into 10 Lakhs Equity shares of Rs.10/- each. The Balance amount of Rs. 365.34 Lakhs would be paid back soon after the successful completion of the implementation period of the scheme, if necessary by raising capital through right issue.”

8. The scheme provided for a one time settlement of the outstanding dues of Financial Institutions by way of contribution of interest free unsecured loans from promoters and their associates. Accordingly, the Noticees brought into the company an amount of `465.34 lakh as interest free unsecured loan. As per direction of BIFR, out of `465.34 lakh, a sum of `100 lakh was repaid to the promoters by VGL by issuing and allotting 10 lakh equity shares of `10/-each to the promoters on November 26, 2003. The scheme provided that the balance amount of approximately `365.34 lakh was to be paid back by VGL to the promoters, soon after the successful completion period of the rehabilitation scheme, if necessary by raising capital through right issue. It is noted that the rehabilitation scheme was implemented successfully and the company’s net worth turned positive. Therefore, vide letter dated July 8, 2005, VGL requested BIFR to discharge it from the purview of SICA. The company also requested BIFR to permit it to convert an amount of `150 lakh to `200 lakh of the unsecured loans into equity at par and to allot it to promoters, their relatives and friends. Subsequent to this representation, the BIFR passed an order dated August 9, 2005 discharging VGL from the purview of SICA. The relevant paragraph (para 6) of the said order is as under:

“The Board, on consideration of the progress of implementation of the scheme sanctioned by the Board and also on review of the company’s ABS for the FY 2004-05 notes that the scheme has been substantially implemented by the concerned agencies, as a result of which company’s net worth has turned positive. In view of this, the Board hereby directs as under:- i) That the company has ceased to be an industrial company within the meaning of Section 3(1)(o) of the Act and, therefore, the company is hereby discharged from the purview of SICA; ii) that the un-fulfilled obligations under the aforesaid sanctioned scheme, if any, would continue to remain in full force for the unexpired period of the scheme and shall be discharged by all concerned agencies according to the directions contained in the scheme.”

9. It is observed from a perusal of the order that the request of the company to issue shares on preferential basis to promoters was not considered. However, the Noticees relying upon the aforesaid para have submitted that since some obligation towards unsecured creditors remained to be fulfilled, the order uses the words ‘substantially implemented’ and para 6(ii) provides for fulfilment of the remaining obligations for the unexpired period of the scheme. In this regard, in my view, it appears from a reading of the order dated August 9, 2005, that the order recognises that the unsecured loan given by the promoters to the company has not been paid back to them in full and therefore it has been observed in the order that the scheme has been substantially implemented and unfulfilled obligations would continue to remain in full force and shall be discharged according to the directions contained in the scheme. The scheme, sanctioned by BIFR on September 1, 2003, directed only `100 lakh to be converted into 10 lakh equity shares of `10 each to be allotted to the promoters and their associates.

The scheme envisaged the balance amount to be paid back to promoters soon after the successful implementation of the scheme, if necessary by raising capital through rights issue. The order while recognising the liability of the company to repay the remaining amount to the promoters, gave VGL an option to raise capital by way of rights issue in order to repay them. This is clearly stated in para 6(3) of the BIFR order dated September 1, 2003 (referred to in para 7 of this order). For payment of the balance amount, though the order gave the company an option to repay them by raising capital through rights issue, it did not give the company an option to repay the promoters by making preferential allotment of shares to them. The scheme did not entitle the Noticees to go for preferential allotment of shares to themselves in the guise of fulfilling ‘unfulfilled obligations’ (outstanding payment to promoters), resulting in dilution of shareholding of public shareholders. The directions of BIFR have been misconstrued so as to circumvent takeover regulations and acquire shares without going through the open offer route.

The argument that the rights issue as per the BIFR directions was not feasible as the market price of the share was below its face value is an afterthought on the part of the Noticees to justify the acquisition. This is all the more relevant as the provisions of the Companies Act, 1956 provided for a rights issue at discounted rate. Moreover, the rights issue was directed to be done to raise funds to pay off the promoters. There was no mandate to convert the outstanding repayment towards the promoters into equity shares in favour of the promoters.

Thus, the subject acquisition was not in compliance of the BIFR order. I am, therefore, of the view that preferential allotment of 19,03,500 equity shares to the promoters on October 09, 2006 cannot be said to be in pursuance to the scheme sanctioned by BIFR in the instant case. The noticees are hence not entitled to exemption from making public announcement under the Takeover Regulations, 1997.

10. With regard to the second issue as to whether Smt. Annappareddy Namrata and Elti Hanumantha Reddy may be treated as Persons Acting in Concert (PAC) with acquirers or not, it is noted that they were promoters of VGL and they have not acquired any shares on October 9, 2006. The definition of “person acting in concert” provided in regulation 2(1)(e) of the Takeover Regulations, 1997 reads as under:

“2. (1) In these regulations, unless the context otherwise requires:- … … … (e) “person acting in concert” comprises, - (1) persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company. (2) … … …”

11. The counsel for the Noticees has cited the decision of Hon’ble Supreme Court in the matter of Daiichi Sankyo Company Ltd. vs. Jayaram Chigurupate and Others (2010) 7 SCC 449 and SEBI order in the matter of Koffee Break Pictures Ltd. dated March 9, 2016. The meaning of the above definition was explained by the apex court in Daiichi Sankyo Company Ltd. Case as under: ".. There can be no “persons acting in concert” unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares etc. of the target company. ...... The idea of “persons acting in concert” is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sin qua non for the relationship of “persons acting in con cert” to come into being."

12. It is noted from above, that for terming two or more persons as persons acting in concert, an element of the shared common objective or purpose of substantial acquisition of shares ought to be there and a promoter may not always be an ‘acquirer’ or ‘persons acting in concert’ under the Takeover Regulations, 1997 unless this condition is fulfilled. Thus, merely holding the position as a ‘promoter’ would not be the basis for establishing him as person acting in concert with the acquirer. That is to say, a 'promoter' may not be deemed to be acting in concert with the other promoters unless prior meeting of minds or any co-operation in acquisition between that person and another is shown or established. In the instant case, I find that the said two Noticees have not acquired any shares in the allotment pursuant to the preferential issue. Thus, I am of the view, in the absence of any other evidence to show prior meeting of minds between these persons and acquirers, the charges alleged in the SCN against these two Noticees may be dropped. It is also noted that as Eleti Hanumantha Reddy passed away on December 23, 2008, the present proceedings against him thus stand abated.

13. In view of above, I find that Annapareddy Leela, Annapareddy Sudhakar Reddy and Eleti Vijay Lakshmi have consolidated their holdings in VGL beyond the prescribed limit without making a public announcement in terms of regulation 11 of the Takeover Regulations, 1997 and are therefore liable to provide exit opportunity to the public shareholders of VGL. In the context of enforcement of regulations 10, 11 and 12 of the Takeover Regulations, 1997, 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."

14. In view of the observations in para 9, I do not find any reason to deviate from the normal rule to make public announcement to acquire shares of the Target Company in accordance with the provisions of Takeover Regulations, 1997. Further, as the public announcement now would provide a delayed exit opportunity to the shareholders of VGL, the acquirers are liable to pay interest on the consideration amount at the rate of 10% p.a. from January 10, 2007 (being the date within which the payment would have fallen due had the acquirers made an open offer for the subject acquisition) till the date of actual payment to those shareholders who were holding shares in the target company on the date of violation and who are eligible for interest as per law.

Directions 15. In view of the above, in exercise of powers conferred upon me under sections 11, 11B of the Securities and Exchange Board of India Act, 1992 and regulation 44 of Takeover Regulations, 1997 read with regulations 32 and 35 of the Takeover Regulations, 2011, I hereby issue the following directions:

(a) Annapareddy Leela, Annapareddy Sudhakar Reddy and Eleti Vijay Lakshmi shall jointly and severally make a public announcement to acquire shares of the target company, in accordance with the provisions of the Takeover Regulations, 1997, within a period of 45 days from the date of this order; and (b) They shall along with the consideration amount, pay interest at the rate of 10% per annum from January 10, 2007 till 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 process, after adjustment of dividend paid, if any. 16. A copy of this order shall be served upon the Noticees and the stock exchange for ensuring compliance with the above direction.

Date: May 16, 2017 G. MAHALINGAM Place: Mumbai WHOLE TIME MEMBER