Shri Amar Gala vs Sebi

Date of Decision: 16.4.2018

Appeal No.279 of 2017

Shri Amar Gala B-0403, Ashok Tower, Dr. S.S. Road, Parel. Mumbai 400012. ..... Appellant

Versus

Securities and Exchange Board of India SEBI Bhawan, Block C4-A, "G" Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ... Respondent

Ms. Poonam Gadkari, Advocate with Mr. Ritesh A. S. i/b. Juris Matrix LLP Partners for the Appellant.

Mr. Karan Bhosale, Advocate with Mr. Chirag Bhavsar, Advocate i/b. MDP & Partners for the Respondent.

CORAM : Justice J. P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per : Justice J. P. Devadhar (Oral)

1.

Appellant is aggrieved by the order passed by the Adjudicating Officer

('AO' for short) of Securities and Exchange Board of India ('SEBI' for short) on

26th July, 2017. By the said order penalty of Rs.25 lakh is imposed on the

appellant under Section 15HB of Securities and Exchange Board of India Act,

1992 for violating various provisions contained in the Securities and Exchange

Board of India (Substantial Acquisition of Shares and Takeovers) Regulations,

2011 ('SAST Regulations' for convenience).

2. Facts relevant for the present appeal are as follows: 2

(a) On 22nd January, 2015 the appellant entered into a Share

Purchase Agreement (SPA for short) with the promoters of

Enbee Trade and Finance Limited (target company) for

acquisition of 58,200 fully paid up equity shares of the target

company constituting 23.76% of the pre-preferential capital of

2,45,000 shares and 15.94% of the post preferential capital of

3,65,050 shares. The said agreement specifically records that

the appellant is desirous of picking up controlling stake in the

target company from the promoters and also from other

shareholders so as to acquire control over the target company.

(b) On 17th April, 2015 appellant made a public announcement of

open offer under Regulation 3(1) and 4 of SAST Regulations,

2011.

(c) On 20th February, 2015 and 27th March, 2015 representatives

of the appellant were appointed as Additional Directors on the

Board of Directors (BOD) of the target company, i.e. even

before the public announcement was made by the appellant on

17th April, 2015.

(d) Before the representatives of the appellant were appointed as

Additional Directors on the BOD of the target company,

appellant had deposited 1% of the consideration payable under

the open offer in cash in the escrow account and had furnished

bank guarantee for the remaining 99%.

(e) In June 2015 directors representing the original promoters

resigned from the target company and by a letter dated 3

7.7.2015 the target company informed BSE that the appellant

has taken over the target company.

(f) On the basis of above facts SEBI issued a show cause notice to

the appellant alleging that the appellant had violated

Regulation 13(1), 22(1), 22(2) and 24(1) of the SAST

Regulations, 2011. Thereafter, an opportunity of hearing was

given to the appellant and by the impugned order, the AO of

SEBI has held that the appellant has violated Regulation 13(1),

22(1), 22(2) and 24 of the SAST Regulations, 2011 and

accordingly imposed penalty of Rs.25 lakh under Section

15HB of SEBI Act.

3. Counsel for the appellant submitted that penalty of Rs.25 lakh imposed on

the appellant is unjustified for the following reasons.

(a) Only 23.76% of the paid up capital of the target company was

acquired under the SPA which was less than 25% of the total

capital of the target company so as to trigger open offer

obligation stipulated under Regulation 3(1) of the SAST

Regulations, 2011. Similarly, on execution of the SPA

appellant did not acquire control over the target company so as

to trigger open offer obligation under Regulation 4 of the

SAST Regulations, 2011. It is only on 17th April, 2015 when

preferential shares were allotted the shareholding of the

appellant exceeded 25% which triggered the open offer

obligation under Regulation 3 of the SAST Regulations, 2011

and accordingly the public announcement was made.

Therefore the appellant could neither be said to have violated 4 Regulation 13(1) nor made open offer announcement

belatedly.

(b) Regulation 24(1) prohibits appointment of the representatives

of the acquirer as directors of the target company during the

offer period. In the present case, representatives of the

appellant were appointed as additional directors of the

company in February/March, 2015, whereas, open offer

obligation got triggered on 17.4.2015. Therefore, it could not

be said that the appellant got his representatives appointed as

additional directors of the target company during the offer

period in violation of Regulation 24(1). At best it could be

said to be an inadvertent error committed without any malafide

intension.

(c) Appellant could not be said to have completed the acquisition

process in violation of Regulation 22(1) and 22(2) because,

acquisition process was completed by depositing one hundred

percent of the consideration payable under the open offer. Fact

that the appellant had furnished bank guarantee for 99% of the

consideration, could not be said to be in violation of

Regulation 22(1) and 22(2), because, the bank guarantee was

backed by fixed deposit which could be easily and logically

construed as equivalent to cash. In any event immediately on

being pointed out the alleged discrepancy the appellant had

deposited the entire amount in cash in the escrow account and

therefore imposition of exorbitant penalty of Rs.25 lakh is

unjustified in the present case.

5

4. We see no merit in the above contentions.

5. It is not in dispute (see para 3 of the memorandum of appeal) that under

the SPA dated 22.1.2015 appellant was not only entitled to acquire 23.76%

shares of the target company from the erstwhile promoters but also was entitled

to acquire certain shares on preferential basis. In fact the SPA records that the

shares are acquired with a view to acquire controlling stake in the target

company resulting in change in the management and control of the target

company. Admittedly entire consideration under the SPA has been paid by the

appellant to the erstwhile promoters even before the shares were transferred to

the name of the appellant and the representatives of the appellant were appointed

as additional directors of the target company. These facts on record clearly

demonstrate that on execution of the SPA appellant indirectly acquired control

over the target company and therefore in terms of Regulation 4 read with

Regulation 13(1) of the SAST Regulations, 2011 appellant was obliged to make

public announcement on 22nd January, 2015. Argument of the appellant that on

execution of the SPA he was under the bonafide belief that there is no change in

the control over the target company is without any merit. Consequently decision

of the AO that the appellant by failing to make public announcement on

execution of SPA on 22nd January, 2015 has violated Regulation 13(1) of the

SAST Regulations, 2011 cannot be faulted.

6. Once it is held that the open offer obligation got triggered on execution of

SPA on 22.1.2015, then as per Regulation 24(1) of the SAST Regulations, 2011

the appellant could not have appointed his representatives as Directors on the

BOD of the target company till the open offer process was completed. In the

present case, apart from making public announcement belatedly on 17th April,

2015, the appellant had appointed his representatives as additional directors on 6

the BOD of the target company even before making public announcement which

was in violation of Regulations 24(1) of the SAST Regulations, 2011.

7. Although the proviso to regulation 24(1) permits appointment of the

representatives of the acquirer as additional directors of the target company

during the offer period subject to depositing one hundred percent of the

consideration payable under the open offer in cash in an escrow account,

appellant had deposited in cash in escrow account only 1% of the total

consideration payable on the open offer and had given bank guarantee for the

balance 99% which was in violation of Regulation 24(1) of SAST Regulations,

2011.

8. Argument that the bank guarantee was backed by fixed deposit amount

which is nothing but cash is without any merit. When proviso to Regulation

24(1) specifically provides that 100% of the consideration payable under the

offer shall be deposited in cash in an escrow account, then that obligation has to

be discharged only by depositing in cash and not by furnishing bank guarantee.

Therefore, in the fact of the present case, appellant by failing to deposit 100% of

the consideration payable under the open offer in cash in an escrow account has

violated Regulation 24(1) of the SAST Regulations, 2011 cannot be faulted.

9. Decision of the AO that the appellant has also violated Regulation 22(1)

and 22(2) of SAST Regulations, 2011 cannot be faulted, because, admittedly the

target company had sent a letter to the BSE on 7.7.2015 stating that sale of shares

of the target company under the SPA has been completed and that the appellant

had deposited 100% of the offer size in the escrow account. As noted earlier,

100% of the offer size was not deposited in cash as stipulated in Regulation 22(2)

of SAST Regulations, 2011. Thus decision of the AO that acquisition process 7

was completed without complying with the conditions in violation of Regulation

22(1) and 22(2) of SAST Regulation, 2011 cannot be faulted.

10. Argument that the appellant acquired control over the target company

only after the preferential shares were issued is falsified by the conduct of the

appellant in appointing his representative as additional directors on the BOD of

the target company even before preferential shares were issued. Similarly,

failure to deposit 100% of the offer size in cash in an escrow account cannot be

said to be inadvertent error.

11. Strong reliance was placed by counsel for appellant on the order passed by

the AO of SEBI on 3.10.2017 in case of Jayantilal Bhandari and Ors. wherein

penalty of Rs.5 lac only has been imposed. That decision is not comparable with

the facts of present case, because, the appellant is found to be guilty of violating

multiple regulations contained in the SAST Regulations, 2011.

12. Penalty imposable for such violations under Section 15HB of SEBI Act is

upto Rs.1 crore. However, the AO after taking into consideration all mitigating

factors has imposed penalty of Rs.25 lac which cannot be said to be unreasonable

or harsh.

13. In the result we see no merit in the appeal and the same is dismissed with

no order as to costs.

Sd/-

Justice J. P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

16.4.2018 Prepared and compared by RHN