Vaman Madhav Apte & Ors. vs Sebi

DATE : 04.03.2016

Appeal No. 449 of 2014

1.

Vaman Madhav Apte

2. Devaki Laxman Apte

3. Vikram Vaman Apte

4. Mithila Vaman Apte

24B, Woodlands, Pedder Road, Mumbai - 40 026. ..... Appellants

Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051. ...... Respondent

Mr. Ankit Lohia, Advocate with Mr. Deepak Dhane, Advocate for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Tomu Francis, Advocate for the Respondent.

CORAM : Justice J. P. Devadhar, Presiding Officer Jog Singh, Member

Per : Justice J. P. Devadhar (Oral)

1. Appellants are aggrieved by the order passed by the Adjudicating

Officer ('AO' for short) of the Securities and Exchange Board of India

('SEBI' for short) on October 31, 2014. By the said order, penalty of

` 25,00,000/- is imposed on the appellants to be paid jointly and severally

under Section 15H(ii) of Securities and Exchange Board of India Act, 1992

('SEBI Act' for short) for violating Regulation 11(2) of the Securities and

Exchange Board of India (Substantial Acquisition of Shares and Takeovers)

Regulations, 1997 ('Takeover Regulations, 1997' for short) read with 2 Regulation 35 of the Securities and Exchange Board of India (Substantial

Acquisition of Shares and Takeovers) Regulations, 2011 ('Takeover

Regulations, 2011' for short).

2. Appellants were the promoters of Apte Amalgamations Ltd.

('Company' for convenience) a company registered under the Companies

Act, 1956. The shares of Apte Amalgamations Ltd. are listed on the

Bombay Stock Exchange ('BSE' for short) since 1983. However, trading

in the shares of the said company was suspended by the BSE in the year

2001 and the said suspension was revoked only in the year 2010.

3. Appellants as promoters, held shares of the company in excess of

55%. During the year 2009, the appellants acquired additional shares of the

company to the extent of 2.44% through off market. Regulation 11(2) of

the Takeover Regulations, 1997 provides that no acquirer who together

with persons acting in concert with him holds 55% or more but less than

75% of shares or voting rights in a target company shall acquire either by

himself or through persons acting in concert with him any additional shares,

unless he makes a public announcement to acquire shares in accordance

with the Takeover Regulations, 1997. However, the second proviso to

Regulation 11(2) provides that an acquirer covered under Regulation 11(2)

may acquire additional shares, upto 5%, without making a public

announcement, provided the acquisition is made through open market

purchase in normal segment on the stock exchange.

4. Since the additional shares to the extent of 2.44% were acquired by

the appellants in the year 2009 not through the stock exchange but in the off

market it is apparent, that the said acquisitions were not covered under the

second proviso to Regulation 11(2) of the Takeover Regulations, 1997. 3

5. Sometime in May 2010, the appellants sought to sell the shares of

the company to purchasers which were in excess of the limits prescribed

under Regulation 10 of the Takeover Regulations, 1997 and hence offer

obligations under the Takeover Regulations, 1997 got triggered.

Thereupon, the purchasers made public announcement on May 19, 2010

and the open offer was made on June 29, 2010.

6. On perusal of the documents annexed to the open offer, it was noticed

by SEBI that the appellants had acquired shares of the company in the year

2009 in contravention of Regulation 11(2) of the Takeover Regulations,

1997. Accordingly, AO was appointed to inquire into and adjudge on the

alleged violations. Thereupon, the AO issued show cause notice on May 6,

2014, calling upon the appellants to show cause as to why action should not

be taken against the appellants for violating the provisions contained in the

Takeover Regulations, 1997.

7. In their respective reply filed on July 28, 2014, the appellants denied

the allegations set out in the show cause notice and further stated that

assuming there is any violation, the said violation being technical in nature,

the show cause notice be discharged. Thereafter, personal hearing was

granted to the appellants and by the impugned order it is held that the

appellants have violated Regulation 11(2) of the Takeover Regulations,

1997 and, therefore, by virtue of the powers conferred under Regulation 35

of the Takeover Regulations, 2011, penalty of ` 25 lac has been imposed

on the appellants under Section 15H (ii) of the SEBI Act.

8. Mr. Ankit Lohia, learned counsel appearing on behalf of the appellants

submitted as follows :-

a) The charge of alleged violation levelled against the appellants

relate to the year 2009, whereas, the proceedings are initiated 4

against the appellants in the year 2014 i.e. after of about 5 years

from the date of alleged violation. Inordinate delay in initiating

proceedings against the appellants is in gross violation of the

principles of natural justice and has caused serious prejudice to

the appellants and hence the impugned order which suffers from

gross delay and laches is liable to be quashed and set aside.

b) Admittedly, the trading in the shares of the target company were

suspended during the relevant period and, therefore, it was not

possible to acquire shares of the company through the stock

exchange. In such a case, acquisition of shares through off market

cannot be faulted.

c) Impugned acquisition of shares to the extent of 2.44% i.e. within

the permissible limit of 5%, was made under the bonafide belief

that since trading on the stock exchange being suspended,

acquisition of shares through off market would not attract

obligation to make public announcement. Thus, the impugned

acquisition in the facts of present case being covered under the

second proviso to Regulation 11(2), the AO ought not to have

held that the appellants have failed to make public announcement.

d) Even if it is held that in the facts of present case, acquisition

through off market was in violation of Regulation 11(2), the said

violation would be technical, procedural and venial breach

because, in view of the trading in the shares of the company being

suspended, the appellants inadvertently believed that the off

market purchases would be covered within the sweep of second

proviso to Regulation 11(2) and hence no fault could be found

with the appellants.

5

e) The alleged violations are not deliberate and intentional and in

contumacious disregard of provisions of law.

f) The AO failed to consider the submission of the appellants that at

the relevant time the company was in financial shambles and as a

result of the financially weak and unviable position, many

employees had left the company. Appellants had also to suffer

financial difficulties since they were trying to run the company by

some means.

g) The AO failed to consider that the alleged violations committed by

the appellants had no impact on the price of the shares of the

company.

h) The AO failed to consider that there is no investor complaint

against the appellants till date and no investor is aggrieved by the

alleged violations committed by the appellants.

i) The AO has failed to appreciate that the appellants had no intention

of making any undue benefit and, therefore, the question of

disproportionate gain or unfair advantage or loss to investors or

shareholders of the company on account of the alleged violations

does not arise.

j) In the facts and circumstances of the present case, imposing

penalty of ` 25 lac is not only unwarranted but also

disproportionate to the violations allegedly committed by the

appellants.

9. We see no merit in the above contentions.

10. It is well established in law that in order to claim exemption, the

claimant must strictly comply with the terms of the exemption provisions.

In the present case, to claim exemption from complying with the open offer 6

obligation contained in Regulation 11(2) of the Takeover Regulations,

1997, the appellants ought to have acquired additional shares in the manner

specified under the second proviso to Regulation 11(2). As per the second

proviso to Regulation 11(2), an acquirer holding 55% or more but less than

75% shares or voting rights in a target company could acquire additional

shares upto 5% without making public announcement only if the additional

shares were acquired through open market in normal segment on the stock

exchange.

11. In the present case, admittedly, the additional shares have not been

acquired through open market in normal segment on the stock exchange,

but the said shares have been acquired by the appellants through off market.

Thus, the acquisition of additional shares by the appellants cannot be said

to be in compliance with the provisions contained in the second proviso to

Regulation 11(2) of the Takeover Regulations, 1997.

12. Argument of the appellants that since the trading in the shares of the

company were suspended during the relevant period, the appellants

bonafide believed that the shares could be purchased through off market is

without any merit, because, under the second proviso to Regulation 11(2)

exemption from making open offer is available only if the acquisition is

made through open market purchase in normal segment on the stock

exchange and not by any other method. Therefore, if the trading in the

shares of the company were suspended during the relevant period it could

not be presumed that the appellants could acquire shares through off

market. The language of the second proviso to Regulation 11(2) being

clear and unambiguous, the appellants are not justified in contending that in

the absence of trading in the shares of the company on the stock exchange,

the appellants could acquire shares in the off market. 7

13. If there was genuine need to purchase the shares, then the appellants

could have approached SEBI seeking relaxation of the condition set out

under the second proviso to Regulation 11(2). Without seeking relaxation

of the conditions set out in the second proviso to Regulation 11(2)

appellants could not have acquired shares through off market and still claim

that the said acquisitions are in compliance with the second proviso to

Regulation 11(2).

14. Argument of the appellants that the proceedings initiated against the

appellants suffer from gross delay and laches and, therefore, the impugned

order is liable to be quashed and set aside is without any merit, because,

firstly, neither the SEBI Act nor the regulations framed thereunder

prescribe any time limit for initiating proceedings against the persons who

have violated the securities laws. Secondly, neither the SEBI Act nor the

regulations framed thereunder provide that if there is delay in initiating

proceedings, no action can be taken against the person who has committed

violations of the securities laws.

15. Appellants contend that even if acquisition of shares through off

market is not in consonance with Regulation 11(2), the said violation would

be technical, procedural and venial breach and hence no action need be

taken. There is no merit in the above contentions, because, the Parliament

has considered such violations to be serious violations and, accordingly,

provided penalty of ` 25 crore under Section 15H(ii) of SEBI Act.

Therefore, argument of the appellants that the violations committed by

them are technical, procedural or venial in nature cannot be accepted.

16. Various arguments advanced on behalf of the appellants namely

(one) that there was no intention to violate the provisions of law, (two) 8

there were financial difficulties in running the company, (three) the

violations did not have any impact on the price of the shares of the

company, (four) there were no investor complaints, (five) there was no

undue profits made by appellants and (six) the penalty imposed is

disproportionate to the violations committed are totally unsustainable,

because, once the violations are committed, then whether there was any

intention to violate the provisions or not, whether there were financial

difficulties or not, whether the violation had any impact on the share price

or not, whether there was any investor compliant or not and whether, there

was any undue profit or not, penalty imposable for violating Regulation

11(2) of the Takeover Regulations, 2011 would be not less than ` 25 crore.

17. In the instant case, SEBI by misconstruing the provisions contained

in Section 15H(ii) of SEBI Act, has erroneously imposed penalty of

` 25 lac by treating the above factors as mitigating factors. In view of the

decision of the Apex Court in case of SEBI vs. Roofit Industries Ltd.

reported in (2016) 194 Comp. Cas. 186 (S.C.) which holds that mitigating

factors set out in Section 15J are not applicable to violations covered under

Section 15H(ii) as it stood prior to September 8, 2014, we were inclined to

remand the matter to enable SEBI to take corrective measures. However,

counsel for SEBI was not in favour of remand and sought dismissal of the

appeal. Thus, in the facts of present case, where penalty of ` 25 lac is

imposed as against the imposable penalty of ` 25 crore, the appellants are

not justified in contending that the penalty imposed is disproportionate to

the violations committed.

18. On account of certain arguments advanced by the counsel for

appellants which were inconsistent with the pleadings on record, we, on

conclusion of arguments had declared that we are dismissing the appeal 9

with costs quantified at ` 15,000/-. However, considering that for the lapse

on part of the counsel, it would be improper to penalize the appellants, we

refrain from imposing costs.

19. Accordingly, for all the aforesaid reasons, the appeal is dismissed

with no order as to costs.

Sd/-

Justice J. P. Devadhar Presiding Officer

Sd/-

Jog Singh Member 04.03.2016 Prepared & Compared by PTM