Order in the matter of Velan Hotels Ltd.

WTM/PS/74/CFD/FEB/2015 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM : PRASHANT SARAN, WHOLE TIME MEMBER ORDER Under sections 11(1), 11(2)(j), 11(4) 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 respect of Velan Hotels Limited

1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") had passed an interim order dated June 04, 2013 (hereinafter referred to as "the interim order ") with respect to 105 listed companies who did not comply with the Minimum Public Shareholding ("MPS") norms as stipulated under rules 19(2)(b) and 19A of the Securities Contracts (Regulation) Rules, 1957 (hereinafter referred to as "SCRR") within the due date i.e., June 03, 2013. The interim order was passed without prejudice to the right of SEBI to take any other action, against the non-compliant companies, their promoters and/or directors or issuing such directions in accordance with law. The interim order was to be treated as a show cause notice by those companies for action contemplated in paragraph 18 thereof.

2. Velan Hotels Limited (hereinafter referred to as "the Company") is one such company against whom the interim order was passed. The equity shares of the Company are listed on the Bombay Stock Exchange Limited ("BSE").

3. The Company vide letter dated June 05, 2013 filed its reply to the interim order, inter alia submitting the following :

(a) The Company is yet to comply with the MPS requirement of 25%. (b) During the last financial year, it had made several efforts to off-load shares and that such efforts did not bear fruit. As the Company was in the 'project development phase' and none of its envisaged projects were completed within the expected time schedule, the market had significantly undervalued its shares and hence potential investors were reluctant to participate in the project.

(c) The Company was in a bonafide belief that one or the other financial institution would extend equity participation in the expansion projects and thereby it could source the required funds at the same time concomitantly comply with the requirements of Clause 40A (of listing agreement) and the MPS norms. (d) Trading in its shares has been very minimal and share price have also dropped to its lowest since last year (2012). (e) Its expansion projects are underway and would probably be completed by the end of March 2014. The same may take considerable time from there to generate some revenue out of them and thereby increase wealth of the shareholders at large. If only the same happens, new investor/institution will come up in favour of buying its shares. Till such time, it is sceptical about any efforts in this regard. (f) Despite the adverse situation and circumstances, the Company in order to comply with the MPS requirements, is contemplating Offer for Sale (OFS) through stock exchange at an early possible date. It is consulting with few recognised brokers who could undertake the assignment for it. (g) The promoters are keen to comply with the MPS requirements and would sincerely attempt every alternate option that may be suggested.

4. The Company vide letter dated June 08, 2013 to SEBI proposed that – (a) SEBI may appoint a custodian and that the promoters' excess shares would be transferred to the custodian. (b) The shares will be held by the custodian till a suitable buyer is identified. On finding a buyer, the promoters shall approach the custodian through SEBI to complete the transaction. (c) During the period, when shares are held by the custodian, it may enjoy voting rights and shall vote on behalf of what is fair to the public shareholders. (d) If SEBI chooses to enforce that promoters should only have 3 times the public holder's voting rights, they are willing to comply with the same.

The Company also stated that pursuant to a rights issue (claimed to have been made to raise capital for 3 upcoming projects) during 2011, the promoters holding increased from 56% to 80.19% as they had to subscribe to nearly 82% of the issue to achieve 90% subscription. It was stated that they were not confident of finding a buyer before its projects are commissioned and the market starts valuing it. The Company further submitted that it does not have the required finance to issue bonus shares with promoters foregoing their share.

5. Vide another letter dated July 10, 2013, the Company referred to the proposal made vide letter dated June 8, 2013 and requested SEBI that till such time its proposal is accepted, the sanctions imposed by the interim order be removed. It was also stated that several projects of the Company need to be completed and that such projects are long overdue for commissioning and require the full attention and dedication of the board of directors and top management.

6. The Company was afforded an opportunity of personal hearing on July 04, 2014 and the same was communicated to the Company vide SEBI's letter dated June 05, 2014. In response, the Company stated that it was undergoing financial stress and its senior management were in discussions with its bankers to ease out the situation and requested that the hearing be fixed in the month of August or September 2014. Accordingly, the personal hearing was scheduled on August 04, 2014. However, the Company vide e-mail dated August 01, 2014, referred to the notice wherein its bankers had issued notice for possession of the Company's assets and requested for adjournment of the personal hearing to any date between 21st and 28th of August 2014. This request was accepted and the personal hearing was fixed on August 25, 2014. On the date of hearing, Mr. Gautham M.R., the Executive Director of the Company appeared and reiterated the submissions made by the Company vide its replies/letters. He also requested SEBI to take such replies as the submissions of the Company in the matter and did not wish to file further written submissions. Accordingly, the hearing was concluded.

7. I have considered the submissions made by the Company and other material available on record. The interim order was issued against the Company as it failed to maintain the minimum public shareholding of 25% as mandated under rule 19A of the SCRR and Clause 40A of the Listing Agreement read with section 21 of the Securities Contract (Regulation) Act, 1956 ("SCRA"). The Company, in its submissions, had stated that pursuant to a 'rights issue' during 2011, the promoters' shareholding increased from 56% to 80.19%. Vide an e-mail dated October 30, 2014, the Company stated that the shares (in the rights issue) were allotted to the promoters on November 04, 2011. It was also informed that 2,42,14,119 shares issued in this rights issue was also listed in the BSE.

8. The amended provisions of rule 19A of the SCRR came into effect from June 04, 2010. In terms of rule 19A(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.". Considering the fact that the Company was compliant with the MPS requirements as on June 04, 2010, and became non-compliant subsequently post the allotment of additional shares to the promoters on November 04, 2011, the Company had, at its disposal, a period of twelve months for achieving compliance. This time period expired on November 03, 2012. {i.e., twelve months' period from November 04, 2011 (the date when the public shareholding fell below 25%)}. Admittedly, the Company has not achieved compliance with the MPS requirement compliance till date. Even as per the Shareholding Pattern of the Company for the quarter ended December 2014, as available in the website of BSE, the public shareholding is at 19.85% which is less than the minimum requirement of 25%. Therefore, the Company is in continuous violation of the MPS requirements.

9. The Company has stated that it is keen to comply with the MPS norms but is not able to do so as it is under financial stress and that banks have proceeded against it by issuing notices for possession of its assets. The Company has, in view of the said circumstances, requested SEBI to remove the sanctions imposed vide the interim order. However, the relevant statute does not provide for exemptions or relaxation of the continuous listing requirements mandated under rule 19A of the SCRR read with Clause 40A of the Listing Agreement. As long as the Company remains listed, it shall comply with the applicable law including the continuous listing requirements as stipulated.

10. The Company, vide letter dated June 08, 2013, had made a proposal that SEBI may appoint a custodian and that excess shares of the promoters would be transferred to the custodian. As can be seen, this proposal had been made after the due date (i.e., June 03, 2013) for compliance with the MPS norms. Such proposal should have been made before June 03, 2013 for being considered by SEBI. Further, this is a quasi-judicial proceeding, wherein such proposals cannot be considered. The sequence of events of the instant case indicates that the Company did not undertake any steps towards achieving compliance before the due date and is in continuous violation of the MPS norms.

11. Considering the fact that the Company has not complied with the MPS requirements till date in breach of rule 19A of the SCRR and Clause 40 A of the Listing Agreement read with section 21 of the SCRA, and such non-compliance being continuous in nature, it becomes necessary for SEBI, to confirm the directions issued vide the interim order against the Company, its directors and promoters/promoter group. Further, for proper regulation of the securities market and in view of the continuing nature of the violations committed by the Company, SEBI may also initiate other action, as appropriate in law, against the Company, its directors and promoters.

12. Accordingly, I, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11(1), 11(2)(j), 11(4) and 11B thereof and section 12A of the Securities Contracts (Regulation) Act, 1956, hereby confirm the directions issued vide the interim order dated June 04, 2013 against the company, Velan Hotels Limited, its directors, promoters and promoter group.

13. This Order shall remain in force till further directions.

14. Copy of this Order shall be served on the stock exchanges and depositories for their information and necessary action.

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Date : February 27, 2015 Place : Mumbai