Securities Appellate TribunalIn Re: Jayaswal Neco Limited vs Unknown on 7 February, 2006ORDERMadhukar, Member1. BACKGROUND
 

1.1 Jayaswal Neco Ltd. (hereinafter referred to as 'the target company') is a public limited company incorporated under theCompanies Act, 1956, having its registered office at F- 8, MIDC Industrial Area, Hingna Road, Nagpur. The equity shares of 'the target company' are listed on the Bombay Stock Exchange Ltd. and the National Stock Exchange of India Ltd.1.2 By a letter dated December 09, 2002, M/s Corporate Ispat Alloys Limited (acquirer), a group company of 'the target company' filed an application with the Securities and Exchange Board of India (SEBI) under regulation 4(2) read with regulation 3(1)(l) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997, (Takeover Regulations) seeking exemption from the applicability of regulation 11(1) thereof with respect to conversion of 16% redeemable cumulative preference shares of Rs. 2450 lacs held by the acquirer and the persons acting in concert (PACs) with it, namely, Nagpur Agro and Food Processors Ltd., Shri Arbind Jayaswal, Shri Basant Lall Shaw, Shri Manoj Jayaswal and Shri Ramesh Jayaswal into equity shares on March 30, 2002.1.3 It was submitted in the said application that before such conversion the acquirer and PACs were holding 6411454 equity shares of the target company in addition to the above mentioned cumulative preference shares. On March 30, 2002, the said cumulative preference shares were converted into equity shares of Rs. 1500 lacs and new 0.0001% preference shares of Rs. 950 lacs of the target company as per the conditions imposed by Financial Institutions as a result of restructuring of loan liabilities of the target company towards the said Financial Institutions. It was also stated that as a result of such conversion the shareholding of the promoters (including the shareholding of acquirer and persons acting in concert with it) in the target company increased from 32.07% to 50.08%.1.4 From the said application dated December 09, 2002, it was noted that the acquisition had already taken place on March 30, 2002. Therefore, SEBI vide letter dated December 31, 2002, advised the acquirer that an application for exemption under regulation 4(1) of Takeover Regulations could be filed only with respect to a proposed acquisition and the application filed by the acquirer was not maintainable in view of the fact that as a result of such conversion, the promoters' shareholding had increased from 32.07% to 50.08% exceeding the limit of 10% specified in then existing provision of regulation 11(1) of Takeover Regulations. The acquirer was also advised to comply with the applicable provisions of the Takeover Regulations.1.5 Vide letter dated January 13, 2003, while admitting that the said application seeking exemption has been made after the acquisition of equity shares, the acquirer inter alia submitted that the said conversion had taken place in compliance with the terms and conditions of restructuring scheme sanctioned by the Financial Institutions. The equity shares allotted on such conversion are to be pledged with the Financial Institutions. Such conversion may, therefore, not be treated as a voluntary acquisition by the acquirer and PACs. Such conversion was imposed upon the acquirer and PACs as without such conversion, the Institutions would not have agreed for the restructuring scheme providing the relief to the target company. Besides, the conversion is at face value of Rs. 10 per share as against the market price of around Rs. 4 per share.1.6 It was also submitted that in respect of bona fide lapse of the target company in respect of non compliance with the provisions ofsection 81 (1A)of the Companies Act and SEBI (Disclosure and Investor Protection) Guidelines, 2000 the target company, on realizing the irregularities, has passed the special resolution after making necessary disclosures to the shareholders in the explanatory statement to the notice convening the general meeting Further, there was no intention to defeat the provision of law or to gain any unfair and undue advantage to the detriment of anybody. It was also stated that there was no change in control and management of the of the target company pursuant to such conversion. In view of these submissions, the acquirer requested SEBI to take an equitable and fair view in the circumstances and to allow the application for exemption as a special case.1.7 The target company vide its letters dated August 08, 2003 and September 08, 2003 further submitted that the shareholders of the target company passed the special resolution in the general meeting held on September 30, 2002 for ratification of allotment of equity shares to the acquirer and PACs pursuant to the aforesaid conversion. The target company had also made an application undersection 621Aof the Companies Act, 1956 to the Regional Director (Central Government) for composition of offence undersection 81(1A)of the Companies Act in respect of such allotment of equity shares and the Regional Director allowed the application for composition of offence on payment of compounding fees.1.8 In the light of these developments, while considering their separate prayer in respect of DIP Guidelines and listing, SEBI by letter dated October 03, 2003 advised the Stock Exchange Mumbai, (Bombay Stock Exchange, Ltd.) for taking appropriate steps for listing of 150 lacs equity shares issued to acquirer and PACs and 77,62,452 shares to ICICI, IFCI and IDBI in terms of the special resolution passed by shareholders in the general meeting held on September 30, 2002.2. SHOW CAUSE NOTICES AND REPLIES
 

2.1 As far as acquisition of equity shares due to conversion was concerned, a show cause notice dated February 24, 2004 was issued to the acquirer and PACs in respect of the above mentioned increase of shareholding of the promoters (including acquirer and PACs) from 32.07% to 50.08% exceeding the limit specified in the then existing provision of regulation 11(1) of the Takeover Regulations, calling upon them as to why actions should not be initiated against them under regulation 44 and 45 (6) of Takeover Regulations andsections 11,11Bof the SEBI Act, 1992 for violation of regulation 11(1) read with 14(1) of the Takeover Regulations.2.2 Vide replies dated March 20, 2004 and April 12, 2004, while reiterating the earlier submissions by and on behalf of the acquirer and PACs, the acquirer inter alia submitted that consequent to the said conversion there was no acquisition of additional shares or voting rights by the acquirer and PACs. The acquirer further submitted that on account of losses incurred by the target company, it did not declare and pay dividend to the acquirer and PACs in respect of the said 16% cumulative preference shares for two consequent financial years ended on December 31, 1998 and December 31, 1999. Therefore, the voting rights had been vested with them in the year 2000 itself pursuant to the operation ofsection 87(2) (b)of the Companies Act, 1956 and no additional acquisition of voting rights has taken place pursuant to conversion of cumulative preference shares into equity shares on March 30, 2002.2.3 It was submitted that the Annual General Meeting with reference to the financial year ended on December 31, 1999 was held on June 30, 2000 and the date of payment of dividend in that behalf would have been August 11, 2000 being the 42nd date from the date of the said Annual General Meeting. The acquirer has further submitted that the increase of equity shareholding from 32.07% to 50.08% on March 30, 2002 was not material as there was no increase in the voting rights in that behalf. It is further submitted by the acquirer that the target company is already a potentially sick industrial company and in terms of new obligations cast upon the acquirer and PACs under the CDR approved Scheme they are called upon to infuse additional capital of Rupees 10 crore into the target company. Under these circumstances it would be inequitable to initiate any action against the acquirer and PACs. Making any public offer would entail substantial cost towards legal expenses, public announcement, appointment of merchant banker etc.
 

2.4 In view of the above replies by and on behalf of the acquirer that there was no increase in the voting rights pursuant to the conversion of preference shares on March 30, 2002, SEBI vide another show cause notice No. CFD/DCR/RC/TO/17995/04 dated August 16, 2004 advised the acquirer that the proceeding initiated under the show cause notice dated February 24, 2004 are not proceeded with further. It was pointed out in this show cause notice that as per information submitted in the letter of acquirers dated April 12, 2004 the acquirer were holding 11% voting rights in the target company. As a result of vesting of voting rights on August 11, 2000 the voting rights of the acquirer increased from 11% to 60% and the voting rights of the promoter group (including the acquirer and PACs) increased from 32.07% to 70% in the target company. As the acquirers had failed to comply with the provisions of regulation 11(1) read with 14(1) of the Takeover Regulations pursuant to the said increase in voting rights, the acquirer and the PACs were called upon to show cause why actions should not be initiated against them under 44 and 45 (6) of Takeover Regulations andsections 11,11Bof the SEBI Act, 1992.2.5 The acquirer vide letter dated August 19, 2004 had inter alia submitted that in view of the automatic vesting of voting rights with the acquirer and PACs by virtue of operation of provisions ofsection 87 (2)(b)of the Companies Act, 1956 there is no willful breach of regulation 11 and regulation 14 of the Takeover Regulations and no penal action may be taken under the regulations. The acquirer also requested that the proposed action may be reviewed in view of these facts and circumstances.2.6 The acquirer vide letter dated October 25, 2004 further submitted that due to adverse conditions in the market, another restructuring package was approved by CDR Empowered Group on December 23, 2003. This restructuring package is subject inter alia to a condition that the promoter group (including acquirer and PACs) pledge their entire existing shareholding (including the equity of Rs. 15 crores allotted in March 2002) until all dues of lenders are satisfied in full. The promoter group (including acquirer and PACs) is also required to infuse additional fund upto Rs. 10 crores and pledge their entire shareholding in the target company in favour of the lenders. The said Rs. 10 crores as required under the package has already been brought in, however, the pledge has not been possible as the earlier shares allotted for an amount of Rs. 15 crores are not yet listed and are illiquid security.2.7 After considering the replies of the acquirer and the facts and circumstances of the case, the acquirer was advised vide letter dated February 21, 2005 to resubmit the application under regulation 3(1)(l) read with regulation 4 of the Takeover Regulations, incorporating all the facts and circumstances.3. REVISED APPLICATION
 

3.1 Vide letter dated February 28, 2005, the acquirer filed the revised application. While reiterating its earlier submissions as mentioned above the acquirer submitted inter alia the following:-i. The increase in the voting rights was a result of vesting of voting rights on August 11, 2000 by operation of law undersection 87(2)(b)of the Companies Act, 1956.ii. There was no intention to acquire shares in violation of the SEBI regulations. The acquisition of voting rights has taken place by operation of law and violation is technical.iii. Upon conversion of the preference shares into equity shares on March 30, 2002, there was no acquisition of additional voting rights.iv. The target company is already under the control of the acquirer and PACs.v. The clearance of SEBI in respect of regulations 11 and 14 would help the implementation of the CDR Schemes.4. RECOMMENDATION OF THE TAKEOVER PANEL
 

4.1 The above mentioned application was forwarded to Takeover Panel vide letter dated March 14, 2005 for its consideration. The Panel vide its recommendation dated March 18, 2005 observed that
 ...the acquisition of shares in respect whereof the exemption is now sought had already taken place and even the acquired convertible shares had embedded voting rights, grant of exemption as sought is not recommended.4.2 In view of the above observation, the matter was referred back to the Takeover Panel to consider the case on merits of the case. The Takeover Panel vide its report dated December 08, 2005 observed that no further consideration on the application is warranted in view of the earlier recommendation.5. FINDINGS
 

5.1 I have carefully considered the show cause notice dated August 16, 2004, replies of the acquirer, applications submitted by the acquirer, the recommendations of the Takeover Panel and relevant material available on record.5.2 I note that the conversion of cumulative preference shares on March 30, 2002 had taken place in accordance with the conditions stipulated by the Financial Institution for restructuring the loans of the target company. The shares have been allotted to the acquirer and PACs as per the terms and conditions of this CDR package. It is submitted by the acquirer that the target company is a potentially sick industrial company and the preference shares held by the acquirer and PACs have been converted into equity shares in the target company against funds infused by them. From this I find that the conversion had been as a matter of compulsion as submitted by the acquirer.5.3 It is also noted that the shareholders of the target company have ratified the said allotment by passing a special resolution in the Annual General Meeting held on September 30, 2002 and the disclosures in the notice of Annual General Meeting as specified in Chapter XIII of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 were made. Further, the violation of provisions ofsection 81 (1A)of the Companies Act, 1956 by the target company while allotting the above shares on preferential basis is already compounded by Regional Director undersection 621Aof the Companies Act, 1956.5.4 I have further noted that the Stock Exchange Mumbai had already granted its in-principal approval for listing of the shares issued against the conversion of 16% redeemable cumulative preference shares allotted to the acquirer and PACs on a preferential basis.5.5. I have also noted that by the conversion of preferential shares to equity shares, the promoters have relinquished their rights to cumulative dividend and preferential repayment of capital. They could have continued to hold the preferential shares and exercise the voting rights vested in them.5.6 I have noted that application dated February 28, 2005 was filed by the acquirer for the purpose of exemption from complying with the provisions of regulations 11 and 14 of the Takeover Regulations in respect of the acquisition of voting rights accrued pursuant tosection 87(2)(b)of the Companies Act, 1956 on August 11, 2000. It is noted that the voting rights vested in the acquirer and PACs in terms of the provision ofsection 87(2)(b)of the Companies Act, 1956 and it was without any act on the part of the acquirer and PACs. It is observed that the said vesting of voting rights had not resulted in change in control of the target company.5.7 I have noted that there is no automatic exemption provided in the Takeover Regulations for the acquisition of voting rights pursuant to operation ofsection 87(2) (b)of the Companies Act, 1956, as happened in the present case. Further, as observed by the Takeover Panel application for exemption under regulation 3(1)(e) read with regulation 4 can be made for proposed transaction only. However, I find that the voting rights that vested in the acquirer and PACs on August 11, 2000 thereby increasing voting rights of the promoters (including acquirer and PACs) from 32.07% to 70% has been by virtue of operation of law.5.8 I find merit in the submission of the acquirer that enforcing the provisions of regulations 11 and 14 in respect of said vesting of voting rights would put extra cost on making public announcement, appointment of merchant banker etc. on the acquirer who are already under the financial burden to infuse funds in the target company in terms of the stipulation of the restructuring package under the CDR Schemes. Further, the peculiar facts and circumstance of this case as mentioned above suggest that had an exemption application been filed before vesting of the voting rights, the transaction would have been eligible for being considered for exemption from open offer under Takeover Regulations. Taking into account all the mitigating facts and circumstances, as mentioned above, I find that this is a fit case for not insisting on the acquirer and PACs to make public announcement in accordance with the provisions of Chapter III of the Takeover Regulations.6. Order
 

6.1 In view of the above findings, I, in exercise of the powers conferred upon me by virtue ofSection 19of the Securities and Exchange Board of India Act, 1992, read withRegulation 4(6)of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, hereby hold that the acquirer and PACs would not be required to make the public announcement in accordance with the provisions of Chapter III of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 in respect of vesting of voting rights on 11.08.2000 with the acquirers and PACs in the target company. Accordingly, the show cause notice dated August 16, 2004 and application dated February 28, 2005 are disposed of.