While imposing penalty for any breach of regulation provided under the Takeover Regulations, 1997, one should also consider the mitigating factors provided under the SEBI Act and other relevant legislation for the time being in force.

[Case Brief] Capetown Trading Company Private Limited vs Securities and Exchange Board of India

Case name Capetown Trading Company Private Limited vs Securities and Exchange Board of India
Case number Appeal No. 102 of 2018
Court/Tribunal Securities Appellate Tribunal
Coram Justice Tarun Agarwala, Presiding Officer

Dr. C.K.G. Nair, Member

Justice M.T. Joshi, Judicial Member

Decided on  June 28, 2019
Relevant Act/Sections Section 15H(ii) of the SEBI Act, 1992,

Regulation 12 and 14 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 

Author of the case brief Shubhi Maheshwari

 

BRIEF FACTS AND PROCEDURAL HISTORY

The present appeal was filed challenging the order of the Adjudicating Officer (“AO”) of the Securities and Exchange Board of India (“SEBI”) imposing a penalty of Rs. 50 Lakh on the appellant under Section 15H(ii) of the SEBI Act, 1992 for violation of Regulation 12 read with Regulation 14 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Regulations, 1997″) for short) for failure to make an open offer in the year 2006.

Certain entities filed an offer letter with SEBI for acquiring 20% of the equity capital of the Target Company in terms of Regulation 10 and 12 of the Takeover Regulations, 1997 in the year 2011. A public announcement for the same was also made on August 9, 2011.

While examining these offer letters, SEBI noticed that the appellant had acquired 30,000 shares constituting 4.08% of the shares of the target company on March 31, 2006. The appellant was described as the promoter of the target company in the offer letter. By the said acquisition, he came to control the target company. Despite this, the appellant failed to make necessary public announcement and an open offer for acquiring Minimum of 20% of the shares of the target company.

ISSUE

Whether the penalty of Rs. 50 Lakhs imposed on the appellant under Section 15H(ii) i.e. failure to make a public announcement to acquire shares at a minimum price is proportionate or not. 

ARGUMENTS FOR THE APPELLANT

The appellant admitted the failure and prayed only for mitigation of the amount of penalty imposed. 

The appellant came to control the target company in March 2006 but under special circumstances. There was no identified promoter of the company at that point in time. The share capital of the company was limited to 7,35,000 equity shares and the appellant was holding only 30,000 shares constituting 4.08%. There were a number of other shareholders, two of which had a holding of 14.29% each. 

The appellant bought 30,000 shares at Rs. 5.50 per share on March 31, 2006 at a total investment of Rs. 1,65,000/-. The appellant sold these shares in the open offer made on August 9, 2011 at a price of Rs. 10 per share and made a gain of about Rs. 1,35,000/-. Even if the appellant had to make an open offer in the year 2006 soon after acquiring 4.08% share capital the total cost of the same would have been only about Rs. 12.67 Lakh at a price of Rs. 8.62 per share. 

Therefore, even if the most demanding direction relating to violation of Takeover Regulations, that is, direction to make an open offer was made by SEBI in this matter, would have cost the appellant only Rs. 12.67 Lakh. However, penalty of Rs. 50 Lakhs had been imposed. Therefore, the penalty imposed was too harsh and disproportionate considering the facts of the matter

ARGUMENTS FOR THE RESPONDENT

The amount of Rs. 50 Lakh imposed is appropriate because the penalty provision at the relevant time was three times the profit made or Rs. 25 Crore whichever is higher. 

More than 95% of the equity share capital was held by others, about 30 shareholders, who were denied an exit option at the relevant point of time which was also a factor leading to no trading in the shares of the company and the company potentially becoming sick consequently. 

DECISION HELD:

Penalty imposable for violation of Regulation 15H(ii) at the relevant time was Rs. 25 Crore or three times the amount of profits made out of such failure, whichever is higher. In the instant matter, this provision would imply a penalty of Rs. 25 Crore.

It is not that the maximum penalty is always imposed, mitigating factors as provided under Section 15J of the SEBI Act 1992 as well as any other mitigating factors have to be considered while imposing the penalty.  

A violation needs to be analyzed in terms of its market wide implications or in terms of its implications on the security of the company concerned and the investors therein. The penalty provisions are incorporated to address micro impact as well as a macro or market-wide impact of violations. Otherwise, if such a distinction is not made penalty provisions under Section 15H(ii) of SEBI Act would invariably lead to a minimum penalty of Rs. 25 Crore as it existed prior to September 8, 2014. Amendment made on this date itself clearly shows that was not the intention of law.

In the instant case too, penalty imposed at Rs. 50 Lakhs was not interpreted purely in terms of the letters but also by taking mitigating factors into account. Since the profit made by the appellant in terms of the impugned acquisition of 4.08% of the equity share capital of the target company was only Rs. 1.35 Lakh; the total investment was only Rs. 1.65 Lakh; the total amount saved (or profits made) through avoiding an open offer to minimum of 20% of the equity shareholders was only Rs. 12.67 Lakh. 

In the instant matter by taking control of the company in March 2006 in terms of the impugned acquisition directing an open offer could have been the normal direction. Such a direction is, however, dispensed with because by the time SEBI came to know the violations in 2011 ownership and control of the company had moved hands and the appellant herein also sold off the shares acquired in 2006. Hence, the monetary penalty of Rs. 50 Lakh has been imposed. 

The Securities Appellate Tribunal held that the amount of penalty imposed should have some correlation with the most penalizing of the directions on takeover violations i.e. cost of making an open offer. In the instant case the cost was estimated to be Rs. 12.67 Lakh at the relevant time. Further considering interest / time factor into account, an amount of Rs. 20 Lakh was held to serve the interests of justice. Accordingly, the order was upheld on merit, the penalty amount was reduced from Rs. 50 Lakh to Rs. 20 Lakh. 

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