Order in the matter of TCM Ltd.[SAT Appeal No.:399/2015]

WTM/RKA/EFD-DRA-II/48/2015 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 Regulations 44 and 45 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 read with Regulations 32 and 35 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 in respect of: - 1. Mr. Joseph Varghese (PAN: ABOPV3793J) 2. Mr. George Varghese (PAN: ABOPV3794R) 3. Mr. T. Thirugnanam (PAN: ADIPT4382P) In the matter of acquisition of the shares of TCM Ltd.

1. TCM Ltd. (hereinafter referred to as "the target company") is a company having its registered office at 'Snigdha', No. 32/1111, Chathangat Cross Road, Palarivattom, Cochin - 682025. The shares of the target company are listed on Bombay Stock Exchange Limited ("BSE"). 2. Mr. Joseph Varghese, Mr. George Varghese and Mr. T. Thirugnanam (hereinafter collectively referred to as "the promoter group" and individually by their respective names) were the promoters of the target company at the relevant time. Mr. T. Thirugnanam alongwith Mr. Joseph Varghese and Mr. George Varghese continued to be promoters of the target till December 31, 2010. Thereafter, only Mr. Joseph Varghese and Mr. George Varghese are the promoters of the target company. 3. As on March 31, 2009, the promoter group held 8,96,038 shares in the target company constituting 26.36% of its share capital. During the financial year 2009-10, two of the promoter group entities, namely Mr. Joseph Varghese and Mr. George Varghese (hereinafter collectively referred to as 'the acquirers') acquired 1,56,424 (4.61%) and 1,51,217 (4.45%) equity shares, respectively of the target company. Of these, on January 08, 2010, Mr. George Varghese acquired 1,46,875 (4.32%) equity shares pursuant to which his individual shareholding had increased from 70,849 (2.08%) equity shares to 2,17,724 (6.41%) equity shares and the cumulative shareholding of the promoter group had increased to 11,80,086 (34.72%) equity shares, i.e., an increase of 8.36% in the cumulative shareholding of the promoter group which is beyond 5% limit of creeping acquisition. Thereafter, the promoter group continued to acquire shares in the target company and their cumulative shareholding in the target company increased to 12,03,679 shares, i.e., 35.42% as Order in the matter of TCM Ltd.

on March 26, 2010. Accordingly, there was a cumulative increase of 9.06% in the shareholding of the promoter group in the target company. 4. In view of the above acquisitions, SEBI issued a show cause notice dated July 08, 2014 (hereinafter referred to as "the SCN") to the promoter group of the target company (hereinafter collectively referred to as "the noticees") calling upon them to show cause as to why suitable directions under sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 ("SEBI Act") and regulation 44 and 45 of the Takeover Regulations, 1997 read with the corresponding provisions of regulations 32 and 35 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as “Takeover Regulations, 2011”) should not be issued against them. 5. The following was, inter alia, alleged in the SCN: - (i) Consequent to the aforementioned acquisitions, the collective shareholding of the promoter group of the target company increased from 26.36% to 35.42%, i.e., an increase of 9.06% of the share capital of the target company.

(ii) The aforementioned acquisitions were made through transactions being in excess of 5% of the share capital of the target company listed on the stock exchange when on January 08, 2010, Mr. George Varghese acquired 1,46,875 (4.32%) equity shares pursuant to which the cumulative shareholding of the promoter group had increased to 11,80,086 (34.72%) equity shares, i.e., an increase of 8.36% in the cumulative shareholding of the promoter group. (iii) The said increase of 5% shares in the shareholding of the promoters triggered the requirement of making a public announcement of an open offer under regulation 11(1) of the Takeover Regulations, 1997. (iv) As per regulation 14(1) of the Takeover Regulations, 1997, the public announcement, referred to in regulation 11, shall be made not later than four working days of entering into an agreement for acquisition of shares or voting rights or deciding to acquire shares or voting rights exceeding the respective percentage specified therein. (v) Thus, in terms of regulation 11(1) read with regulation 14(1) of the Takeover Regulations, 1997, the promoter group of the target company, was required to make a public announcement of an open offer for acquiring shares of the target company within 4 working days from the last date of acquisition, i.e., January 08, 2010 which they failed to make.

6. Two of the noticees, namely, Mr. Joseph Varghese and Mr. George Varghese filed their replies to the SCN vide letters dated October 01, 2014 and October 02, 2014. Subsequently, the noticees were also granted an opportunity of personal hearing on February, 2015 when Mr. Joseph Varghese appeared for himself and on behalf of Mr. George Varghese and made submissions. The third noticee, i.e., Mr. T. Thirugnanam neither filed a reply to the SCN nor did he appear for the personal hearing. Under such circumstances, the proceedings against him are being conducted ex-parte. The replies/submissions of the noticees are inter alia as following:- A. Mr. Joseph Varghese: (a) His shareholding in the target company as on March 31, 2009 was 5,91,951 shares comprising 17.42% of the share capital of the target company. The total promoter shareholding on the same date was 9,91,362 shares, i.e., 29.17% and not 8,96,038 shares (26.36%) as mentioned in the SCN. The total promoter shareholding as on March 31, 2010 increased by 6.25% and not 9.06% as mentioned in the SCN. (b) During the year 2009-10, he acquired 61,859 shares, i.e., 1.82% increasing his holding to 6,53,810 shares (19.24%) as on March 31, 2010. (c) The purchases by other promoter are independent to his purchase and he was not aware of the purchases of Mr. George Varghese.

(d) His understanding was that the 5% ceiling under Takeover Regulation was for individual acquisitions of promoter or joint acquisitions with another promoter. (e) The matter has been pending for more than 4 years and without any query or show cause notice. (f) This is the only one instance where a lapse has occurred inadvertently. B. Mr. George Varghese: (a) His shareholding in the target company as on March 31, 2009 was 70,849 shares comprising 2.08%. The total promoter shareholding on the same date was 9,91,362 shares, i.e., 29.17% and not 8,96,038 shares (26.36%) as mentioned in the SCN. The total promoter shareholding in the target company as on March 31, 2010 increased by 6.25% and not 9.06% as mentioned in the SCN. (b) During the year 2009-10, he acquired 1,50,458 shares, i.e., 4.43% increasing his holding to 2,21,307 shares (6.52%) as on March 31, 2010. (c) The purchases by other promoter are independent to his purchase and he was not aware of the purchases of Mr. Joseph Varghese. (d) The 1.82% difference in the increase (6.25 - 4.43) was due to the acquisition of 61,859 shares by another promoter Mr. Joseph Varghese during the year.

His own acquisition was only 4.43%. (e) The slight increase was in fact accidental and not at any rate intentional or purposeful. (f) His understanding was that the 5% ceiling under the Takeover Regulation, 1997 was for individual acquisitions of promoter or joint acquisitions with another promoter. (g) The matter has been pending for more than 4 years and this is the only one instance where a lapse occurred inadvertently.

7. I have considered the SCN, replies and submissions made by the noticees and other material available on record. In the present case, it is admitted position that the noticees were, at the relevant time, forming promoter group of the target company. I note that two members of the promoter group, Mr. Joseph Varghese and Mr. George Varghese are members of the same family. 8. Mr. Joseph Varghese and Mr. George Varghese have submitted that the total promoter shareholding as on March 31, 2009 was 9,91,362 shares, i.e., 29.17% and not 8,96,038 shares (26.36%) as mentioned in the SCN. In support of this submission, the noticees have submitted a copy of the statement showing shareholding pattern as per clause 35 of the Equity Listing Agreement. However, the copy of the said statement submitted by the noticees do not indicate as to whether the said statement was filed with the stock exchange or not. In fact, the shareholding pattern of the target company as on March 31, 2009 and the disclosures filed by it with the stock exchanges in this regard clearly indicate that the entire promoter group cumulatively held 26.36% shares of the target company wherein the individual shareholding of the promoter group entities was as under:

Sl. No. Name of the shareholder No. of shares held As % of total shareholding 1 Joseph Varghese 4,97,386 14.63% 2 George Varghese 70,090 2.06% 3 T. Thirugananam 3,28,562 9.67% Total 8,96,038 26.36% 9. In view of the above, the contention of the noticees that the cumulative promoter group shareholding as on March 31, 2009 was 29.17% is factually incorrect. 10. In terms of regulation 11(1) an acquirer may consolidate to the extent of 5% in any financial year without an open offer. Any acquisition beyond 5% in a financial year would entail an open offer of 20% by making a public announcement to acquire shares in accordance with the Takeover Regulations, 1997. However, as discussed above, in the instant case, the cumulative shareholding of the promoter group increased from 26.36% to 35.42% (i.e., increase of 9.06%) during the financial year 2008 -2009. I note that on January 08, 2010, Mr. George Varghese acquired 1,46,875 (4.32%) equity shares pursuant to which the cumulative shareholding of the promoter group had increased to 11,80,086 (34.72%) equity shares, i.e., an increase of 8.36% in the cumulative shareholding of the promoter group which is beyond 5% limit of creeping acquisition.

In this regard the noticees have contended that the purchases by the promoters are independent of each other and they were not aware about the purchases by the other promoters and that their understanding of the Takeover Regulations, 1997 was that 5% ceiling was for acquisitions by a promoter individually or jointly with another promoter. 11. I note that the basis of the allegation against the noticees is that in terms of regulation 11(1) an acquirer may consolidate his holding to the extent of 5% in any financial year without making an open offer. Any acquisition beyond 5% in a financial year would entail an open offer of 20% of the share capital of the target company, by making a public announcement to acquire shares in accordance with relevant provisions of the Takeover Regulations, 1997. The provisions of regulation 11(1) of the Takeover Regulations, 1997 as it existed at the time of acquisitions in this case reads as follows: - " 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% 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.

12. Thus, in terms of regulation 11(1), an acquirer holding 15% or more but less than 55% of the shares or voting rights in a target company, could acquire additional 5% shares or voting rights in any financial year ending on 31st March without making any open offer of shares. 13. In the instant case, the noticees were part of the promoter group of the target company and in its joint control during the relevant time. Out of these, Mr. Joseph Varghese and Mr. George Varghese are members of the same family and continue to be part of the promoter group of the target company as well as in its joint control till date. By virtue of these relations/connections the noticees are persons acting in concert with regard to the acquisitions in question. The noticees have failed to prove anything contrary to this fact. In these facts and circumstances, the community of interests and commonality of objectives of all the noticees are established in this case. I, therefore, find that all the noticees were "persons acting in concert" with regard to the acquisitions in question. 14. In view of the above, I find that the acquisition as found hereinabove, was done in breach of the provisions of regulation 11(1) of the Takeover Regulations, 1997 and the acquisition made on January 08, 2010 itself triggered the obligation of the noticees to make the requisite public announcement in accordance with the provisions of the Takeover Regulations, 1997 which they failed to do.

In terms of regulation 11(1) read with regulation 14(1) of the Takeover Regulations, 1997 within 4 days from January 08, 2010. 15. In this context, I note that the Hon'ble Securities Appellate Tribunal, vide order dated September 08, 2011 in the matter of Nirvana Holdings Private Limited vs. SEBI (Appeal no. 31/2011) observed as follows:

"It must be remembered that whenever an acquirer violates Regulation 10, 11 or 12 of the takeover code by not making a public announcement, he should be directed to comply with the provision by making a public offer. The words “unless such acquirer makes a public announcement” appearing in Regulations 10 and 11(1) make these provisions mandatory and a public announcement has to be made. Similar words appear in Regulation 12 as well. These provisions make the acquisition conditional upon a public announcement being made. 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." 16. In the present case, the obligation of the noticees to make the open offer has been triggered on account of breach of regulation 11(1) and the acquisitions in such breach have been repeated by them. For the purposes of suitable direction under regulation 44, I proceed to examine the facts and circumstances of this case. 17. I note that regulation 44 of the Takeover Regulations, 1997 which provides consequences of breach as found in this case gives flexibility to SEBI to enforce regulation 11 by way of several directions including - (a) disinvestment of shares acquired in breach of regulations; (b) transfer of any proceeds or securities to the investors protection fund; (c) making open offer for acquiring shares of the target company, etc. 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. 18. In this case, no fault can be found with regard to the acquisition of the noticees to the extent of 5% shares since as per regulation 11(1) they were entitled to acquire upto 5% equity shares in the target company without attracting the obligation to make open offer.

It is only the acquisition beyond 5% limit which was in breach of regulation 11(1). In this case, the acquirers had acquired 1,38,000 shares (i.e., 4.06%) beyond the 5% limit. It is admitted position that the noticees are the only promoters of the target company and currently hold 35.42% of its share capital. Further, no new promoter has been added in the promoter group of the target company and there has been no change in the control over the target company consequent to these acquisitions.

19. Had the noticees made the public announcement within a period of 4 days from January 08, 2010 in accordance with the Takeover Regulations, 1997 and complied with all related activities within the timelines specified therein, all formalities with respect to their public announcement and the open offer would have been completed on April 16, 2010, i.e., 93 days from the date of making of public announcement. As per the provisions of regulation 20(7) of the Takeover Regulations, 1997 if the acquirer acquires shares after making the public announcement at a price higher than the offer price, then the highest of the price paid for such acquisition shall be payable in the open offer. Thus, the acquirers in this case, could have acquired further shares only in compliance of these regulations. In this case, they not only failed to make the public announcement within 4 days from January 08, 2010 but also made further acquisitions in breach of the regulations. The details of subsequent acquisitions prices by the noticees are as follows:

Name of promoter/ Date of acquisition No. and % of shares Price of acquirer acquired acquisition (`) Joseph Varghese January 08, 2010 1,46,875 and 4.32% 23 Joseph Varghese January 31, 2010 20,000 and 0.59% 24.40 George Varghese March 26, 2010 3,583 and 0.11% 23.60

20. Thus, had the noticees made the public announcement within the time stipulated in regulation 14 of the Takeover Regulations, 1997, the price offered to the shareholders in the open offer could have been determined taking into consideration the highest of the price of such acquisitions. It is also relevant to mention that at the relevant time, the shares of the target company were infrequently traded on the stock exchange. 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. In this case, the noticees had acquired the shares which are found to be in violation of regulation 11(1) of the Takeover Regulations, 1997 at an average price of `23.17 per share. If the public announcement were to be directed under regulation 44 read with regulation 11(1) of the Takeover Regulations, 1997, the open offer would be at price of `35.33 per share (calculated in terms of regulation 20 of the Takeover Regulations, 1997 alongwith interest @ 10% per annum thereon) whereas the present average market price of the shares of the target company considering the trading on BSE in the last six months is `49.92 per share.

Thus, the public announcement, if made now would be a mere formality. 21. Considering the above, I, in exercise of powers conferred upon me under sections 11, 11B read with section 19 of the SEBI Act and regulations 44 and 45 of the Takeover Regulations, 1997 read with regulations 32 and 35 of the Takeover Regulations, 2011, hereby issue the following directions to the noticees, viz; Mr. Joseph Varghese and Mr. George Varghese:- (i) The noticees shall, jointly and severally, disinvest 1,38,000 shares of TCM Ltd. through sale to parties not connected/related to them in small lots in trenches on the BSE ensuring that such sale does not disturb the market equilibrium; and transfer of the entire proceeds of such sale of shares to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009. (ii) The noticees shall complete the sale of shares as directed above within 3 months from the date of this order and file a report to the SEBI detailing the compliance of the above directions within two weeks from the date of such compliance.

22. This order shall come into force with immediate effect. A copy of this order shall be served upon the noticees for ensuring compliance with the above directions.

Sd/- DATE: MAY 29TH, 2015 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA