Promoters ordered to sell shares for regulation violation, proceeds to Investor Protection Fund

The Securities and Exchange Board of India (SEBI) directed the promoters to disinvest 27,633 shares of the Target Company due to the violation of regulation 11(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The proceeds from the sale were to be transferred to the Investor Protection and Education Fund to ensure compliance and safeguard investor interests. The promoters were given three months to complete the sale and required to file a compliance report within two weeks of completion.

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Issues Involved:
1. Alleged violation of regulation 11(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 by the promoters of the Target Company.
2. Failure to make a public announcement as required under regulation 11(2) read with regulation 14(1) of the Takeover Regulations, 1997.
3. Clarification and interpretation of regulation 11(2) post the amendment dated October 30, 2008.
4. Determination of appropriate enforcement action and penalties for the alleged violations.

Issue-wise Detailed Analysis:

1. Alleged violation of regulation 11(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 by the promoters of the Target Company:

The promoters collectively held 55% of the Target Company's share capital as of October 30, 2008. Between October 31, 2008, and April 6, 2009, they acquired additional shares, increasing their collective shareholding to 60.28%, which exceeded the permissible threshold limit of 5% prescribed under regulation 11(2) of the Takeover Regulations, 1997. This acquisition triggered the obligation to make a public announcement within 4 working days from April 6, 2009.

2. Failure to make a public announcement as required under regulation 11(2) read with regulation 14(1) of the Takeover Regulations, 1997:

The promoters failed to make the requisite public announcement following their acquisition of additional shares. A Show Cause Notice (SCN) was issued on March 28, 2014, calling upon them to explain why suitable directions should not be issued against them for the alleged violations.

3. Clarification and interpretation of regulation 11(2) post the amendment dated October 30, 2008:

The promoters argued that the proviso to regulation 11(2) inserted by the amendment allowed them to acquire an additional 5% without making a public announcement, provided the shares were acquired through open market purchases. They believed this benefit was applicable for every financial year. However, SEBI issued a circular on August 6, 2009, clarifying that the acquisition of 5% was a one-time measure and not applicable annually. The promoters claimed they were unaware of the exact permissible limit until this circular was issued and that their acquisitions were made under a bona fide belief rather than an attempt to consolidate their shareholding in violation of the law.

4. Determination of appropriate enforcement action and penalties for the alleged violations:

SEBI considered the SCN, oral and written submissions, and the prevailing ambiguity regarding regulation 11(2) before the issuance of the circular on August 6, 2009. It was noted that the promoters had not acquired more than 5% in any financial year and complied with the conditions of the proviso to regulation 11(2). However, acquisitions made after August 6, 2009, when the ambiguity was removed, were found to be in violation of regulation 11(2). SEBI decided that a direction to sell 27,633 shares (0.40% of the share capital) acquired in breach of regulation 11(2) and transfer the proceeds to the Investor Protection and Education Fund would be commensurate with the violation. This decision considered the mitigating factors and the current market price of the shares.

Conclusion:

SEBI directed the promoters to disinvest 27,633 shares of the Target Company through sale on the BSE and NSE and transfer the proceeds to the Investor Protection and Education Fund. This order was issued to ensure compliance with regulation 11(2) and protect the interests of investors and the securities market. The promoters were required to complete the sale within three months and file a compliance report within two weeks of completion. The order came into immediate effect.

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