BACKGROUND

1. Securities and Exchange Board of India (SEBI) carried out an an examination in respect of Regaliaa Reality Ltd., (hereinafter referred to as “RRL” / “Target Company)) and observed that Karvy Financial Services Ltd., (“hereinafter referred to as “KFSL” / “Acquirer” / “Noticee”), an NBFC registered with RBI extended a loan amount of 7,00,00,000/- (Rupees Seven Crore only) to RRL whereby in addition to providing other securities by RRL for availing the Business Loan, the promoters of the RRL had also pledged 20,00,100 (Twenty Lakhs and One Hundred) Equity Shares, constituting 55.56% of the paid up share capital of the RRL (“Pledged Shares”) in favour of KFSL (Acquirer). On account of the Target Company defaulting on payment of instalments, the Acquirer invoked the pledge. Consequent to invocation of pledge on February 16, 2012, the Acquirer acquired equity shares and voting rights in respect of the pledged shares and the shareholding of the Acquirer (KFSL) in the Target Company increased from 0% to 55.56%, thereby breaching the threshold of 25% as stipulated under Regulation 3(1) of the Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as “SAST Regulations”).

2. Accordingly, upon examination of the matter, SEBI vide Order dated October 27, 2016 inter-alia directed KFSL to make the public announcement to acquire shares of the target company in accordance with the provisions of the SEBI (SAST) Regulations, 2011, within a period of 45 days from the date of the order.

3. Thereafter, KFSL had filed an Appeal before the Hon’ble Securities Appellant Tribunal (SAST) challenging the SEBI’s Order dated October 27, 2016 and the Hon’ble SAT vide Order dated April 26, 2018 dismissed the Appeal filed by KFSL, thereby reaffirming the decision of the SEBI.

4. In view of Hon’ble SAT dismissing the Appeal filed by the Noticee, the Noticee was required to make the public announcement within 45 days from the date of the Order of the Hon’ble SAT dated April 26, 2018. Whereas, it is observed that the Noticee had made the public announcement on Aug 31, 2018 to acquire shares of the target company from the public shareholders at the price of 11.50/- per share along with interest (till the date of payment) and filed draft letter of offer with SEBI.

5. Therefore, it is alleged that the Noticee had made public announcement for making the open offer, with a delay of 81 days pursuant to SEBI order October 27, 2016 read with Hon’ble SAT order dated April 26, 2018. Accordingly, it is alleged that the Noticee has violated the provisions of Regulation 3(1) and 4 read with Regulations 13, 14, 15, 16, 17 and 18 of SEBI (SAST) Regulations, 2011.

APPOINTMENT OF ADJUDICATING OFFICER

6. Pursuant to investigation, SEBI initiated Adjudication proceedings against the Noticee and appointed the undersigned as Adjudicating Officer vide Order dated May 4, 2021 under Section 19 read with Sub-section (1) of Section 15-I of the SEBI Act, 1992 and Rule 3 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 (hereinafter referred to as “SEBI Adjudication Rules”) to inquire into and adjudge the alleged violation of the provisions of Regulations 3(1) and 4 read with Regulations 13, 14, 15, 16, 17 and 18 of SEBI (SAST) Regulations, 2011 by Karvy Financial Services Ltd., (“Noticee” / “KFSL”), under Section 15H(ii) of SEBI Act.

SHOW CAUSE NOTICE, REPLY AND HEARING

7. A Show Cause Notice ref. no. EAD-8/PM/NJMR/10764/2021/1 dated May 24, 2021 (hereinafter referred to as “SCN”) was issued to the Noticee mentioning the aforementioned allegation against the Noticee and requiring it to show cause within 14 days of receipt of the SCN, as to why an inquiry should not be held and penalty be not imposed against it under Section 15H(ii) of SEBI Act for the aforesaid alleged violation committed by it. I note that the SCN was duly served on the Noticee by Speed Post and Email.

8. The Noticee vide Email dated June 2, 2021 sought additional time till June 30, 2021 to furnish the reply due to paucity of staff and resources at hand on account of lockdown situation. Accordingly, vide email dated June 18, 2021 the Noticee was informed of granting extension of time till June 25, 2021 to furnish its reply. The Noticee vide email dated June 25, 2021 submitted its reply, which is summarized hereunder:

a) That we neither acquired control of the Regaliaa Realty Ltd (Target company) (TC) nor did we have any directors on the Board of the TC.

b) The erstwhile promoters who pledged the shares and failed to honour the financial commitments to Karvy Financial Services Limited (KFSL), are the ones who complained to SEBI and by this complaint, the promoters have attempted to take advantage of their own default and have put us to discomfort, which is untenable;

c) The pledge had to be invoked in the normal course of business as an NBFC only to protect our financial interest;

d) We could have invoked the pledge in two or more tranches to keep the percentages below 25%; i.e., by invoking the pledge for less than 25% in the first instance, selling the shares, and then invoking and selling again. However, the shares are infrequently traded [Only 24,000 (Twenty-Four Thousand) odd shares traded in around 500 (Five Hundred) trading days of 2011 and 2012] and the promoters who were wilfully defaulting would have not repaid the loans if we had not invoked the entire shares pledged to us as security.

e) We submit that, till December 31, 2018, we were never shown as Promoter and Promoter Group or persons in control in any of the disclosures and reporting made by the company, since we were holding these shares as a security only. We are submitting the shareholding pattern filed by the company with the stock exchanges after the invocation of pledge for your reference in this regard, which establishes that the information to the public has always been that the promoters continued to be in control and were managing the affairs of the company.

f) It is submitted that in February 2012, M/s. Regaliaa Realty Limited and its coborrowers have defaulted in fulfilment of the loan obligation pursuant to which on 16th February, 2012, KFSL was constrained to invoke the pledge on 20,00,100 equity shares into its own Demat Account with the sole intention of eradicating the risk associated with the pledged security. By virtue of the pledge being invoked, KFSL shareholding in Regalia Realty Limited was 55.56%. However, since the shares were infrequently traded, KFSL could not dispose the same through sale.

g) It is submitted that all the proceedings in this matter against KFSL have been initiated by SEBI pursuant to a complaint filed by M/s Regaliaa Realty Limited. There has been no incident which have affected the interest of the public shareholding or affected the interest of investors in the securities market. We submit that, the complainants were taking advantage of their own default. It is reiterated that, as per provisions of Regulation 10 (1)(b)(viii) of the SEBI (SAST) Regulations 2011 the invocation of Pledge of shares by the Lender is exempted from the obligation to make an open public offer as outlined in Regulation 3 & 4 of the SEBI (SAST) Regulations, 2011. We submit that in no manner it can be construed that, KFSL was interested or involved in the acquisition of shares or voting rights for the purpose of exercising/ gaining control over M/s. Regaliaa Realty Limited. Under the circumstances we submit that, it is only as a risk mitigating measure that KFSL has invoked the pledge resulting in transfer of shares to its demat account and there has been no intention whatsoever to acquire shares or gain control of the company.

h) It is reiterated that the pledge was invoked by KFSL to ensure repayment of the loan and not with an objective of acquiring the company. KFSL was always willing and always had the intention to credit back the shares to the respective demat accounts of the promoters. KFSL had also entered into an MOU with the TC in February, 2016. KFSL craves leave to refer to such MOU.

i) It is also submitted that the invoking of pledge has not been prejudicial to the interest of the shareholders as even after the transfer of shares in the name of KFSL has been affected, the shares held by the public remained intact and the public shareholding continued to remain more than 25% as stipulated in the Listing agreement.

j) SEBI issued show cause notice no. EFD /DRA3 /NRM /48171 /2016 dated 23rd February 2016, under section 11B to KFSL alleging failure on the part of KFSL to seek exemption under section 11 of SEBI SAST Regulations 2011. KFSL responded to such show cause notice vide its reply dated 17th March, 2016. Hearings were held before the Whole Time Member (WTM) of SEBI in the month of August 2016. SEBI’s WTM had issued an order dated October 27, 2016, against KFSL directing KFSL to make an open offer. Thus, aggrieved by the said order KFSL challenged it before the Securities Appellate Tribunal (SAT) by filing an appeal against the same. SAT vide its order dated April 26, 2018 dismissed the appeal filed by the applicant and affirmed the decision of SEBI.

k) On 31st August, 2018 KFSL in due compliance to the SEBI order made the Public Announcement for Open offer for acquisition of up to 9,36,000 (Nine Lakh Thirty-Six Thousand) fully paid-up equity shares of Regalia Realty Ltd of the face value of Rs. 10/- (Rupees Ten) each constituting 26% (Twenty Six percentage) of the voting share capital of Regalia Realty Limited to the public shareholders of the target company by Karvy Financial Services Limited (acquirer) pursuant to the directions by the Securities and Exchange Board of India (“SEBI”) vide its order no. WTM/RKA/EFD/165/2016 dated October 27, 2016 and in compliance with and pursuant to Regulations 3(1), Regulation 4 read with Regulation 14, Regulation 15(1) and Regulation 32 (1) (f) and other applicable provisions of the SEBI Takeover Regulations

l) It is submitted that, on 7th September, 2018 the Detailed Public Statement (DPS) was published in Financial Express in English language, Janasatha in Hindi language, Lakshya Deep in Marathi language and Makkal Kural in Tamil Language on September 7, 2018. The Draft Letter of Offer along with the supporting documents were filed with SEBI on September 17, 2018.

m) We submit that, the approval from SEBI for the open offer was received on 7th February, 2020 and the open offer process was completed by March 2020. It is pertinent to state here that SEBI issued SEBI (Substantial Acquisition of Shares and Takeovers) (Third Amendment) Regulations, 2018 on December 28, 2018 (‘Amendment Regulations’) exempting certain class of NBFCs and HFCs from the requirement of disclosing acquisition (resulting from encumbrance) and disposal (resulting from release of encumbrance). Clearly such amendment was done with a view to deal with the situation as faced in the instant case.

n) We humbly submit that, it is SEBI’s view itself vide the third amendment regulations that, such invocation of pledge should not be construed as a breach of SAST guidelines or PIT Regulations. We request that such intent/view of SEBI be applied in our case as well in letter and spirit and no further proceedings be initiated against us in this matter.

o) It is submitted that, KFSL was involved in multiple litigation with the TC and the management was KFSL was engaged with the TC to sort out the various disputes as the same were entailing costs and time of the key personnel of KFSL. We submit that, part of the aforesaid delay of 81 days was on account of discussions between the TC and officials of KFSL. 

p) It is further submitted that, the TC took time in submitting the information as required by KFSL and its merchant bankers for completion of the open offer and such delay cannot be attributed to KFSL.

q) It is further submitted that, KFSL has acquired the shares along with interest and the cost per share of the TC paid by KFSL including interest is Rs 20.55 and such price is well above the highest price in the scrip during the period September 2018 till date which clearly shows that the delay has not impacted the investors in any manner. We further submit that, the delay has not in any manner been beneficial to KFSL.

r) We request you to consider the facts and circumstances of the case, multiple proceedings initiated by SEBI in this matter against KFSL and also appreciate the fact that the delay in making a public announcement has been unintentional and due to circumstances beyond our control. We reiterate that, this delay has not compromised the interest of investors and has also not resulted in any gains to KFSL whatsoever.

9. Further, in order to conduct an inquiry in the matter, the Noticee was given an opportunity of hearing on July 12, 2021, which was communicated to the Noticee vide email dated July 5, 2021. In view of Covid-19 Pandemic, the hearing was scheduled through videoconference on WebEx platform. On the scheduled date of hearing i.e., July 12, 2021, the Noticee appeared through its Authorized Representatives (ARs). During the course of hearing, the ARs while reiterating the submissions made by the Noticee on June 25, 2021, sought additional time of 5 days to make fresh submissions, which was acceded to. The Noticee vide Email dated July 15,2021 made additional submissions, which are summarized hereunder. For the sake of brevity, the submissions which were earlier made by the Noticee as mentioned above and which are forming part of the additional submissions, are not reiterated.

a) We respectfully submit that the present proceedings suffer from enormous laches. Admittedly, the alleged violations relate to delayed make of Public Announcement by us on 31.8.2018, under the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, pursuant to SEBI Order dated 27.10.2016 r/w SAT Order dated 26.4.2018. Post making of the said Public Announcement, we had made ‘Detailed Public Statement’ on 7.9.2018, followed by filing of the ‘Draft Letter of Offer’ with SEBI on 17.9.2018 and sought approval of the SEBI for the same. The said approval was granted by SEBI on 7.2.2020. Thereafter, we had gone ahead with sending of the ‘Letter of Offer’ to the public shareholders of Target Company and completed the offer and paid the consideration etc. by 24.3.2020. SEBI was aware of the Public Announcement made by us on 31.8.2018. Admittedly, the SCN has been issued on 24.5.2021 (i.e., after almost 3 years of the Public Announcement). Post making of the public offer and paying interest to the public shareholders of the Target Company amounting to Rs 9.05 per share for 8 years for the delayed period, we were of the bonafide belief that the whole matter has been put to rest. Shockingly, after 3 years of the Public Announcement, we are being subjected to penalty proceedings, for the violation which has already been cured and has become academic. Clearly, there has been extraordinary inordinate delay in the issuance of SCN. The aforesaid inordinate delay has severely prejudiced us and the said inordinate delay has not been explained by SEBI. On this ground alone, the SCN proceedings needs to be and ought to be discontinued and SCN needs to be dropped.

b) In this context, the Noticee place reliance on the Orders of the Hon’ble SAT dated January 31, 2020 in the matter of Ashlesh Gunvantbhai Shah Vs SEBI (SAT Appeal no 169 of 2019) and August 22, 2019 by the Hon’ble Securities Appellate Tribunal in the matter of Ashok Shivlal Rupani and anr. Vs SEBI (SAT Appeal no 417 of 2018).

c) We respectfully submit that, given the admitted position that we have made the public announcement on 31.8.2018, at the minimum price as stipulated under Takeover Regulations, no penalty can be imposed on us under sec 15H(ii) of the SEBI Act. Section 15H(ii) of the SEBI Act, inter alia, states that, if any person, who is required under the Regulations, fails to make public announcement to acquire shares at a minimum price he shall be liable to penalty. Clearly, what is contemplated in sec 15H(ii) is absolute failure to make public announcement. It is not applicable to the cases where public announcement has been made albeit belatedly. Further, while interpreting sec 15H(ii), it may be noted that it is a penal provision and therefore needs to be interpreted strictly and nothing can be imported/read into the section, which is not flowing from the plain and unambiguous language of the section. On this ground also the SCN needs to be discharged.

d) Given the admitted position that we have already made the Public Announcement, albeit belatedly, and we have already paid compensatory interest @ of 10 % to the public shareholders for 8 years for the delay, there is no justification for initiation of adjudication proceedings against us for imposition of monetary penalty for the alleged delay. In this context your attention is invited to the following Order dated 5.9.2005 passed by the Hon’ble Securities Appellate Tribunal in the matter of Sterling Investment Corporation Ltd.& others vs SEBI (SAT Appeal no 388 of 2004). 

e) We have already made public announcement on 31.8.2018 and we have paid interest of Rs. 9.05/- per share at the rate of 10% for a period of around 8 years (i.e., since 2012) on the offer price of Rs. 11.50/- to the public shareholders of the Target Company, who have tendered their shares in the public offer. Therefore, as held by Hon’ble Tribunal, the ends of justice would be met if action is taken either to make a public offer or impose a penalty but not both. In the present case since public offer has already been made, the penalty proceedings are not warranted and the same should be dropped.

f) We also invite your attention to the Order dated 27.6.2018 passed by the Adjudicating Officer SEBI in the matter of M/s Emmsons International Ltd., wherein it was found that there was delay of 85 days in making public announcement and the acquirers had paid the interest to the shareholders @ of 10% in the delayed public offer. Based, inter alia, on the aforesaid, the Adjudicating officer has imposed a monetary penalty of Rs. 3,00,000/- under sec 15 H (ii) of SEBI Act. There has been undue delay in initiation of proceedings (i.e., around 3 years). It is well settled now that “undue delay is a mitigating factor which has to be considered while imposing a penalty under section 15J of the SEBI Act”. (Refer: Anita Jajodia vs SEBI – SAT Order dated 20.1.2021).

g) In view of the foregoing submissions, we respectfully submit that the alleged lapse (i.e., the alleged delay in making Public Announcement) be viewed leniently and no penalty be imposed on us.

CONSIDERATION OF ISSUES, FACTS OF THE CASE AND FINDINGS

10.It is alleged in the SCN that the Noticee had made public announcement for making the open offer, with a delay of 81 days pursuant to SEBI order October 27, 2016 read with SAT order dated April 26, 2018 and thereby violated the provisions of Regulations 3(1) and 4 read with Regulations 13, 14, 15, 16, 17 and 18 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

11.After perusal of the material available on record, I have the following issues for consideration viz.,

I. Whether the Noticee has violated the provisions of Regulations 3(1) and 4 read with Regulations 13, 14, 15, 16, 17 and 18 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

II. Whether the Noticee is liable for monetary penalty under Section 15H(ii) of SEBI Act

III. If so, what quantum of monetary penalty should be imposed on the Noticee

ISSUE I: Whether the Noticee has violated the provisions of Regulations 3(1) and 4 read with Regulations 13, 14, 15, 16, 17 and 18 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

12.Before moving forward, it is pertinent to refer to the relevant provisions of Regulation 3(1) and 4 read with Regulations 13, 14, 15, 16, 17 and 18 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Regulation 3 (1) - No acquirer shall acquire shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle them to exercise twenty-five per cent or more of the voting rights in such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations.

Regulation 4 - Irrespective of acquisition or holding of shares or voting rights in a target company, no acquirer shall acquire, directly or indirectly, control over such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations.

Regulation 13

(1) The public announcement referred to in regulation 3 and regulation 4 shall be made in accordance with regulation 14 and regulation 15, on the date of agreeing to acquire shares or voting rights in, or control over the target company;

(2) Such public announcement, —

i. in the case of market purchases, shall be made prior to placement of the purchase order with the stock broker to acquire the shares, that would take the entitlement to voting rights beyond the stipulated thresholds;

ii. pursuant to an acquirer acquiring shares or voting rights in, or control over the target company upon converting convertible securities without a fixed date of conversion or upon conversion of depository receipts for the underlying shares of the target company shall be made on the same day as the date of exercise of the option to convert such securities into shares of the target company;

iii. pursuant to an acquirer acquiring shares or voting rights in, or control over the target company upon conversion of convertible securities with a fixed date of conversion shall be made on the second working day preceding the scheduled date of conversion of such securities into shares of the target company;

iv. pursuant to a disinvestment shall be made on the same day as the date of executing the agreement for acquisition of shares or voting rights in or control over the target company;

v. in the case of indirect acquisition of shares or voting rights in, or control over the target company where none of the parameters referred to in subregulation (2) of regulation 5 are met, may be made at any time within four working days from the earlier of, the date on which the primary acquisition is contracted, and the date on which the intention or the decision to make the primary acquisition is announced in the public domain;

vi. in the case of indirect acquisition of shares or voting rights in, or control over the target company where any of the parameters referred to in subregulation (2) of regulation 5 are met shall be made on the earlier of, the date on which the primary acquisition is contracted, and the date on which the intention or the decision to make the primary acquisition is announced in the public domain;

vii. pursuant to an acquirer acquiring shares or voting rights in, or control over the target company, under preferential issue, shall be made on the date on which the board of directors of the target company authorises such preferential issue.;

viii. the public announcement pursuant to an increase in voting rights consequential to a buy-back not qualifying for exemption under regulation 10, shall be made not later than the ninetieth day from the date of closure of the buy-back offer by the target company.;

ix. the public announcement pursuant to any acquisition of shares or voting rights in or control over the target company where the specific date on which title to such shares, voting rights or control is acquired is beyond the control of the acquirer, shall be made not later than two working days from the date of receipt of intimation of having acquired such title.

(2A) Notwithstanding anything contained in sub-regulation (2), a public announcement referred to in regulation 3 and regulation 4 for a proposed acquisition of shares or voting rights in or control over the target company through a combination of,-

(i) an agreement and any one or more modes of acquisition referred to in sub-regulation (2) of regulation 13, or

(ii) any one or more modes of acquisition referred in clause (a) to (i) of sub-regulation (2) of regulation 13, shall be made on the date of first such acquisition, provided the acquirer discloses in the public announcement the details of the proposed subsequent acquisition.

(3) The public announcement made under regulation 6 shall be made on the same day as the date on which the acquirer takes the decision to voluntarily make a public announcement of an open offer for acquiring shares of the target company.

(4) Pursuant to the public announcement made under sub-regulation (1) and sub-regulation (3), a detailed public statement shall be published by the acquirer through the manager to the open offer in accordance with regulation 14 and regulation 15, not later than five working days of the public announcement:

Provided that the detailed public statement pursuant to a public announcement made under clause (e) of sub-regulation (2) shall be made not later than five working days of the completion of the primary acquisition of shares or voting rights in, or control over the company or entity holding shares or voting rights in, or control over the target company.

Explanation. — It is clarified that in the event the acquirer does not succeed in acquiring the ability to exercise or direct the exercise of voting rights in, or control over the target company, the acquirer shall not be required to make a detailed public statement of an open offer for acquiring shares under these regulations

Regulation 14

(1) The public announcement shall be sent to all the stock exchanges on which the shares of the target company are listed, and the stock exchanges shall forthwith disseminate such information to the public.

(2) A copy of the public announcement shall be sent to the Board and to the target company at its registered office within one working day of the date of the public announcement.

(3) The detailed public statement pursuant to the public announcement referred to in sub-regulation of regulation 13 shall be published in all editions of any one English national daily with wide circulation, any one Hindi national daily with wide circulation, and any one regional language daily with wide circulation at the place where the registered office of the target company is situated and one regional language daily at the place of the stock exchange where the maximum volume of trading in the shares of the target company are recorded during the sixty trading days preceding the date of the public announcement.

(4) Simultaneously with publication of such detailed public statement in the newspapers, a copy of the same shall be sent to, —

(i) the Board through the manager to the open offer,

(ii) all the stock exchanges on which the shares of the target company are listed, and the stock exchanges shall forthwith disseminate such information to the public,

Regulation 15

(1) The public announcement shall contain such information as may be specified, including the following, —

(a) name and identity of the acquirer and persons acting in concert with him;

(b) name and identity of the sellers, if any;

(c) nature of the proposed acquisition such as purchase of shares or allotment of shares, or any other means of acquisition of shares or voting rights in, or control over the target company;

(d) the consideration for the proposed acquisition that attracted the obligation to make an open offer for acquiring shares, and the price per share, if any;

(e) the offer price, and mode of payment of consideration; and

(f) offer size, and conditions as to minimum level of acceptances, if any.

(2) The detailed public statement pursuant to the public announcement shall contain such information as may be specified in order to enable shareholders to make an informed decision with reference to the open offer.

(3) The public announcement of the open offer, the detailed public statement, and any other statement, advertisement, circular, brochure, publicity material or letter of offer issued in relation to the acquisition of shares under these regulations shall not omit any relevant information, or contain any misleading information

Regulation 16

(1) Within five working days from the date of the detailed public statement made under sub-regulation (4) of regulation 13, the acquirer shall, through the manager to the open offer, file with the Board, a draft of the letter of offer containing such information as may be specified along with a non-refundable fee, as per the following scale, by way of direct credit in the bank account through NEFT/RTGS/IMPS or any other mode allowed by RBI or by way of a banker’s cheque or demand draft payable in Mumbai in favour of the Board,—

Table:-

(2) The consideration payable under the open offer shall be calculated at the offer price, assuming full acceptance of the open offer, and in the event the open offer is subject to differential pricing, shall be computed at the highest offer price, irrespective of manner of payment of the consideration:

Provided that in the event of consideration payable under the open offer being enhanced owing to a revision to the offer price or offer size the fees payable shall stand revised accordingly, and shall be paid within five working days from the date of such revision.

(3) The manager to the open offer shall provide soft copies of the public announcement, the detailed public statement and the draft letter of offer in accordance with such specifications as may be specified, and the Board shall upload the same on its website.

(4) The Board shall give its comments on the draft letter of offer as expeditiously as possible but not later than fifteen working days of the receipt of the draft letter of offer and in the event of no comments being issued by the Board within such period, it shall be deemed that the Board does not have comments to offer:

Provided that in the event the Board has sought clarifications or additional information from the manager to the open offer, the period for issuance of comments shall be extended to the fifth working day from the date of receipt of satisfactory reply to the clarification or additional information sought.

Provided further that in the event the Board specifies any changes, the manager to the open offer and the acquirer shall carry out such changes in the letter of offer before it is dispatched to the shareholders.

(5) In the case of competing offers, the Board shall provide its comments on the draft letter of offer in respect of each competing offer on the same day.

(6) In the event the disclosures in the draft letter of offer are inadequate the Board may call for a revised letter of offer and shall deal with the revised letter of offer in accordance with sub-regulation (4).

Regulation 17

(1) Not later than two working days prior to the date of the detailed public statement of the open offer for acquiring shares, the acquirer shall create an escrow account towards security for performance of his obligations under these regulations, and deposit in escrow account such aggregate amount as per the following scale

Table:-

Provided that where an open offer is made conditional upon minimum level of acceptance, hundred percent of the consideration payable in respect of minimum level of acceptance or fifty per cent of the consideration payable under the open offer, whichever is higher, shall be deposited in cash in the escrow account.

Provided further that in case of indirect acquisitions where public announcement has been made in terms of clause (e) of sub-regulation (2) of regulation 13 of these regulations, an amount equivalent to hundred per cent of the consideration payable in the open offer shall be deposited in the escrow account. (2) The consideration payable under the open offer shall be computed as provided for in sub-regulation

(2) of regulation 16 and in the event of an upward revision of the offer price or of the offer size, the value of the escrow amount shall be computed on the revised consideration calculated at such revised offer price, and the additional amount shall be brought into the escrow account prior to effecting such revision.

(3) The escrow account referred to in sub-regulation (1) may be in the form of, —

(a) cash deposited with any scheduled commercial bank;

(b) bank guarantee issued in favour of the manager to the open offer by any scheduled commercial bank; or

(c) deposit of frequently traded and freely transferable equity shares or other freely transferable securities with appropriate margin;

Provided that securities sought to be provided towards escrow account under clause (c) shall be required to conform to the requirements set out in sub-regulation (2) of regulation 9.

Provided further that the deposit of securities shall not be permitted in respect of indirect acquisitions where public announcement has been made in terms of clause

(e) of sub-regulation

(2) of regulation 13 of these regulations] 63[Explanation: The cash component of the escrow account as referred to in clause (a) above may be maintained in an interest-bearing account, subject to the merchant banker ensuring that the funds are available at the time of making payment to the shareholders

(4) In the event of the escrow account being created by way of a bank guarantee or by deposit of securities, the acquirer shall also ensure that at least one per cent of the total consideration payable is deposited in cash with a scheduled commercial bank as a part of the escrow account.

(5) For such part of the escrow account as is in the form of a cash deposit with a scheduled commercial bank, the acquirer shall while opening the account, empower the manager to the open offer to instruct the bank to issue a banker’s cheque or demand draft or to make payment of the amounts lying to the credit of the escrow account, in accordance with requirements under these regulations.

(6) For such part of the escrow account as is in the form of a bank guarantee, such bank guarantee shall be in favour of the manager to the open offer and shall be kept valid throughout the offer period and for an additional period of thirty days after completion of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer.

(7) For such part of the escrow account as is in the form of securities, the acquirer shall empower the manager to the open offer to realise the value of such escrow account by sale or otherwise, and in the event, there is any shortfall in the amount required to be maintained in the escrow account, the manager to the open offer shall be liable to make good such shortfall.

(8) The manager to the open offer shall not release the escrow account until the expiry of thirty days from the completion of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer, save and except for transfer of funds to the special escrow account as required under regulation 21.

(9) In the event of non-fulfilment of obligations under these regulations by the acquirer the Board may direct the manager to the open offer to forfeit the escrow account or any amounts lying in the special escrow account, either in full or in part.

(10) The escrow account deposited with the bank in cash shall be released only in the following manner, —

(a) the entire amount to the acquirer upon withdrawal of offer in terms of regulation 23 as certified by the manager to the open offer: Provided that in the event the withdrawal is pursuant to clause (c) of sub-regulation (1) of regulation 23, the manager to the open offer shall release the escrow account upon receipt of confirmation of such release from the Board;

(b) for transfer of an amount not exceeding ninety per cent of the escrow account, to the special escrow account in accordance with regulation 21; 

(c) to the acquirer, the balance of the escrow account after transfer of cash to the special escrow account, on the expiry of thirty days from the completion of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer, as certified by the manager to the open offer;

(d) the entire amount to the acquirer upon the expiry of thirty days from the completion of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer, upon certification by the manager to the open offer, where the open offer is for exchange of shares or other secured instruments.

e)the entire amount to the manager to the open offer, in the event of forfeiture for non-fulfilment of any of the obligations under these regulations, for distribution in the following manner, after deduction of expenses, if any, of registered market intermediaries associated with the open offer, —

(i) one third of the escrow account to the target company;

(ii) one third of the escrow account to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009; and

(iii) one third of the escrow account to be distributed pro-rata among the shareholders who have accepted the open offer.

Regulation 18

(1) Simultaneously with the filing of the draft letter of offer with the Board under subregulation (1) of regulation 16, the acquirer shall send a copy of the draft letter of offer to the target company at its registered office address and to all stock exchanges where the shares of the target company are listed.

(2) The letter of offer shall be dispatched to the shareholders whose names appear on the register of members of the target company as of the identified date, not later than seven working days from the receipt of comments from the Board or where no comments are offered by the Board, within seven working days from the expiry of the period stipulated in sub-regulation (4) of regulation 16.

Explanation: (i) Letter of offer may also be dispatched through electronic mode in accordance with the provisions of Companies Act, 2013. (ii) On receipt of a request from any shareholder to receive a copy of the letter of offer in physical format, the same shall be provided. (iii)The aforesaid shall be disclosed in the letter of offer.

Provided that where local laws or regulations of any jurisdiction outside India may expose the acquirer or the target company to material risk of civil, regulatory or criminal liabilities in the event the letter of offer in its final form were to be sent without material amendments or modifications into such jurisdiction, and the shareholders resident in such jurisdiction hold shares entitling them to less than five per cent of the voting rights of the target company, the acquirer may refrain from dispatch of the letter of offer into such jurisdiction:

Provided further that every person holding shares, regardless of whether he held shares on the identified date or has not received the letter of offer, shall be entitled to tender such shares in acceptance of the open offer.

(3) Simultaneously with the dispatch of the letter of offer in terms of sub-regulation

(2), the acquirer shall send the letter of offer to the custodian of shares underlying depository receipts, if any, of the target company.

(4) Irrespective of whether a competing offer has been made, an acquirer may make upward revisions to the offer price, and subject to the other provisions of these regulations, to the number of shares sought to be acquired under the open offer, at any time prior to the commencement of the last one working day before the commencement of the tendering period.

(5) In the event of any revision of the open offer, whether by way of an upward revision in offer price, or of the offer size, the acquirer shall, —

(a) make corresponding increases to the amount kept in escrow account under regulation 17 prior to such revision;

(b) make an announcement in respect of such revisions in all the newspapers in which the detailed public statement pursuant to the public announcement was made; and

(c) simultaneously with the issue of such an announcement, inform the Board, all the stock exchanges on which the shares of the target company are listed, and the target company at its registered office.

(6) The acquirer shall disclose during the offer period every acquisition made by the acquirer or persons acting in concert with him of any shares of the target company in such form as may be specified, to each of the stock exchanges on which the shares of the target company are listed and to the target company at its registered office within twenty-four hours of such acquisition, and the stock exchanges shall forthwith disseminate such information to the public:

Provided that the acquirer and persons acting in concert with him shall not acquire or sell any shares of the target company during the period between three working days prior to the commencement of the tendering period and until the expiry of the tendering period.

(6A) The acquirer shall facilitate tendering of shares by the shareholders and settlement of the same, through the stock exchange mechanism as specified by the Board

(7) The acquirer shall issue an advertisement in such form as may be specified, one working day before the commencement of the tendering period, announcing the schedule of activities for the open offer, the status of statutory and other approvals, if any, whether for the acquisition attracting the obligation to make an open offer under these regulations or for the open offer, unfulfilled conditions, if any, and their status, the procedure for tendering acceptances and such other material detail as may be specified:

Provided that such advertisement shall be, —

(a) published in all the newspapers in which the detailed public statement pursuant to the public announcement was made; and

(b) simultaneously sent to the Board, all the stock exchanges on which the shares of the target company are listed, and the target company at its registered office.

8) The tendering period shall start not later than twelve working days from date of receipt of comments from the Board under sub-regulation (4) of regulation 16 and shall remain open for ten working days.

(9) Shareholders who have tendered shares in acceptance of the open offer shall not be entitled to withdraw such acceptance during the tendering period.

(10) The acquirer shall, within ten working days from the last date of the tendering period, complete all requirements under these regulations and other applicable law relating to the open offer including payment of consideration to the shareholders who have accepted the open offer. (11) The acquirer shall be responsible to pursue all statutory approvals required by the acquirer in order to complete the open offer without any default, neglect or delay:

Provided that where the acquirer is unable to make the payment to the shareholders who have accepted the open offer within such period owing to non-receipt of statutory approvals required by the acquirer, the Board may, where it is satisfied that such non-receipt was not attributable to any wilful default, failure or neglect on the part of the acquirer to diligently pursue such approvals, grant extension of time for making payments, subject to the acquirer agreeing to pay interest to the shareholders for the delay at such rate as may be specified:

Provided further that where the statutory approval extends to some but not all shareholders, the acquirer shall have the option to make payment to such shareholders in respect of whom no statutory approvals are required in order to complete the open offer.

11A Without prejudice to sub-regulation 11, in case the acquirer is unable to make payment to the shareholders who have accepted the open offer within such period, the acquirer shall pay interest for the period of delay to all such shareholders whose shares have been accepted in the open offer, at the rate of ten per cent per annum: Provided that in case the delay was not attributable to any act of omission or commission of the acquirer, or due to the reasons or circumstances beyond the control of acquirer, the Board may grant waiver from the payment of interest Provided further that the payment of interest would be without prejudice to the Board taking any action under regulation 32 of these regulation or under the.

(12) (a) The acquirer shall issue a post offer advertisement in such form as may be specified within five working days after the offer period, giving details including aggregate number of shares tendered, accepted, date of payment of consideration.

(b) Such advertisement shall be, —

(i) published in all the newspapers in which the detailed public statement pursuant to the public announcement was made; and

(ii) simultaneously sent to the Board, all the stock exchanges on which the shares of the target company are listed, and the target company at its registered office.

FINDINGS

13. I note that KFSL is a registered NBFC with RBI, had extended credit facility aggregating to 7 crore to the target company (RRL), inter alia, by taking pledge of 20,00,100 shares of the target company (constituting 55.56% of the paid-up share capital of the company) held by the Directors of the target company as collateral security for the aforesaid credit facility. Consequent upon the target company defaulted in repaying the loan, the Noticee invoked the pledge on February 16, 2012 and got 20,00,100 pledged shares of the target company transferred to the demat account of the Noticee. As a result of such acquisition, the shareholding of the Noticee in the target company rose from 0% to 55.56%, thereby breaching the threshold of 25% stipulated under Regulation 3(1) of SEBI (SAST) Regulations, 2011. Consequent to the said breach of the threshold of 25%, KFSL was under a mandatory obligation to make a public announcement for an open offer in accordance with the SEBI (SAST) Regulations, 2011.

14.Accordingly, upon examination of the matter, SEBI vide Order dated October 27, 2016 inter-alia directed KFSL to make the public announcement to acquire shares of the target company in accordance with the provisions of the SEBI (SAST) Regulations, 2011, within a period of 45 days from the date of SEBI order. Subsequently, an appeal was filed by the Noticee before the Hon’ble SAT, which was dismissed by the Hon’ble SAT vide Order dated April 26, 2018, affirming the decision of SEBI.

15.In view of the Hon’ble SAT dismissing the Appeal filed by the Noticee, the Noticee was required to make the public announcement within 45 days from the date of the Order of the Hon’ble SAT dated April 26, 2018. Whereas, it is observed that the Noticee had made the public announcement on Aug 31, 2018 to acquire shares of the target company from the public shareholders at the price of 11.50/- per share along with interest (till the date of payment) and filed draft letter of offer with SEBI. Thus, it is alleged that there is a delay of 81 days for making the open offer, pursuant to SEBI order October 27, 2016 read with the Hon’ble SAT order dated April 26, 2018. It is to be noted that the instant proceedings have been initiated against the Noticee for delay in making the open offer in pursuance of the aforementioned SEBI Order read with the Hon’ble SAT Order.

16.I note that the Noticee in its reply has inter-alia made the following submissions, which have been appropriately dealt by the Hon’ble WTM, SEBI vide Order dated October 27, 2016 and accordingly issued Directions issued thereunder, which have been duly upheld by the Hon’ble SAT.

a) That we neither acquired control of the Regaliaa Realty Ltd (Target company) (TC) nor did we have any directors on the Board of the TC. The pledge had to be invoked in the normal course of business as an NBFC only to protect our financial interest;

b) It is also submitted that the invoking of pledge has not been prejudicial to the interest of the shareholders as even after the transfer of shares in the name of KFSL has been affected, the shares held by the public remained intact and the public shareholding continued to remain more than 25% as stipulated in the Listing agreement

c) We could have invoked the pledge in two or more tranches to keep the percentages below 25%; i.e., by invoking the pledge for less than 25% in the first instance, selling the shares, and then invoking and selling again. However, the shares are infrequently traded [Only 24,000 (Twenty-Four Thousand) odd shares traded in around 500 (Five Hundred) trading days of 2011 and 2012] and the promoters who were wilfully defaulting would have not repaid the loans if we had not invoked the entire shares pledged to us as security.

d) It is submitted that in February 2012, M/s. Regaliaa Realty Limited and its coborrowers have defaulted in fulfilment of the loan obligation pursuant to which on 16th February, 2012, KFSL was constrained to invoke the pledge on 20,00,100 equity shares into its own Demat Account with the sole intention of eradicating the risk associated with the pledged security. By virtue of the pledge being invoked, KFSL shareholding in Regalia Realty Limited was 55.56%. However, since the shares were infrequently traded, KFSL could not dispose the same through sale.

e) We submit that, till December 31, 2018, we were never shown as Promoter and Promoter Group or persons in control in any of the disclosures and reporting made by the company, since we were holding these shares as a security only;

f) It is reiterated that, as per provisions of Regulation 10 (1)(b)(viii) of the SEBI (SAST) Regulations 2011 the invocation of Pledge of shares by the Lender is exempted from the obligation to make an open public offer as outlined in Regulation 3 & 4 of the SEBI (SAST) Regulations, 2011.

17.Therefore, I am not going to deal with such contentions raised by the Noticee once again, since the same have been appropriately settled vide the aforesaid Orders of SEBI and SAT vide Orders dated October 27, 2016 and April 26, 2018 respectively. The issue before me is to inquire and adjudge the alleged violation of delay in making open offer by the Noticee and accordingly I proceed further to record my findings hereunder, while taking into consideration the reply furnished by the Noticee in this regard.

18.I note that in terms of the provisions of Regulation 3(1) of SEBI (SAST) Regulations, 2011, no acquirer himself or with persons acting in concert with him can acquire shares or voting rights in a target company which entitle him to exercise 25% or more voting rights in the target company unless such acquirer makes a public announcement to acquire shares of such company in accordance with SEBI (SAST) Regulations, 2011. In the present case, it is an undisputed fact that due to the invocation of pledge by KFSL on February 16, 2012, KFSL’s shareholding in the target company had increased from 0% to 55.56%. Consequently, KFSL breached the threshold of 25% as stipulated in regulation 3(1) and thus, KFSL was under an obligation to make a public announcement of an open offer in accordance with the provisions of SEBI (SAST) Regulations, 2011. In terms of the Directions issued by SEBI vide Order dated October 27, 2016 read with the Order of the Hon’ble SAT dated April 26, 2018, the Noticee should have made the public announcement of acquisition of 25% shares of the target company within 45 days. Whereas, it is noted that the Noticee had made the Public Announcement on August 31, 2018 for Open offer for acquisition of up to 9,36,000 (Nine Lakh Thirty-Six Thousand) fully paid-up equity shares of Regalia Realty Ltd of the face value of 10/- (Rupees Ten) each constituting 26% (Twenty-Six percentage) of the voting share capital of Regalia Realty Limited to the public shareholders of the target company. Thus, it can be seen that the Noticee had made the public announcement on August 31, 2018 i.e., with a delay of 81 days from the date of expiry of 45 days as per the SEBI Order dated October 10, 2016 read with Hon’ble SAT Order dated April 26, 2018, which has not been disputed by the Noticee. Therefore, it is concluded that the Noticee had admittedly made the public announcement for open offer with a delay of 81 days.

19.The Noticee while admitting the delay in making public announcement has stated that it was involved in multiple litigation with the target company and the management of KFSL was engaged with the target company to sort out the various disputes as the same were entailing costs and time of the key personnel of KFSL. Further, the Noticee attributed the delay on the target company for taking time in submitting the information as required by KFSL and its merchant bankers for completion of the open offer.

20.It is a matter of record that the Noticee had acquired 55.56% shareholding in the target company by invoking pledge on February 16, 2012. However, it can be seen that the Noticee did not make the public announcement under the provisions of Regulation 3(1) of the SEBI (SAST) Regulations, 2011. The Noticee issued a public announcement on August 31, 2018, i.e., consequent upon the Directions issued by SEBI vide Order dated October 27, 2016 and as upheld by the Hon’ble SAT vide Order dated April 26, 2018. I note from the material available on record that upon called by SEBI, the Noticee has been corresponding with SEBI since October 2014 on the subject acquisition of shares. Thus, even if it is assumed that the Noticee was not aware of making public announcement at the time of acquisition of shares in 2012, however after having called upon by SEBI in 2014, the Noticee was aware of the regulatory requirement of making open offer. I note from the above sequence of events that KFSL was well aware of the regulatory requirement of making open offer upon breaching 25% threshold stipulated under Regulation 3(1) of the SEBI (SAST) Regulations, 2011, yet the Noticee delayed in making the public announcement, citing litigations with the target company. I note that SEBI (SAST) Regulations in first place has put onus of public announcement on acquirer, and not on target company. I note that it is a settled principle of law to comply with the regulatory requirements in a time bound manner and non-compliance thereof cannot be attributable to any circumstances, which if had done diligently, could have been avoided. Therefore, I am not inclined to accept the submissions made by the Noticee in this regard that the delay in making public announcement was due to certain litigations with the target company.

21.The Noticee further submitted that there has been extraordinary inordinate delay in the issuance of SCN, which has prejudiced them and, on this ground, the SCN out to be dropped. I note that pursuant to acquisition of 55.56% shareholding in the target company by invoking pledge on February 16, 2012, upon receipt of a complaint by SEBI, the Noticee was called upon in October 2014 and July 2015 to furnish the information sought for in this regard. Thereafter, SEBI vide show cause notice dated February 23, 2016 called upon KFSL to show cause as to why suitable Directions under Sections 11 and 11B of the SEBI Act and Regulation 32 of SEBI (SAST) Regulations, 2011 should not be issued against it for the alleged violations. I note that KFSL filed its reply to the SCN vide letter dated March 17, 2016 and also requested for the inspection of documents relied upon by SEBI in arriving at the conclusions as captured in the SCN. The inspection of documents was provided to KFSL on April 29, 2016, wherein its authorized representatives inspected the documents. Thereafter, the matter was heard in person on August 30, 2016, pursuant to which, KFSL vide letter dated September 7, 2016 furnished its reply. After considering the material available on record vis-à-vis the reply furnished by the Noticee, Hon’ble WTM, SEBI vide Order dated October 27, 2016 issued Directions to KFSL to make public announcement for open offer within 45 days from the date of the Order. Aggrieved by the Directions issued by SEBI vide the aforesaid Order, KFSL preferred an Appeal before the Hon’ble SAT in the year 2016 and 2017. The Hon’ble SAT vide Order dated April 26, 2018 upheld the Directions issued by SEBI and directed KFSL to make open offer in pursuance of SEBI’s Order dated October 27, 2016. It is noted that the Noticee made a public announcement for open offer on August 31, 2018. Further, it is noted that KFLS had published pre-offer advertisement in different newspapers on February 26, 2020. I note from the disclosures made under SEBI (SAST) Regulations, 2011 in the scrip of RRL, on the BSE website that KFSL intimated BSE on April 29, 2020 about acquisition of 3,42,152 shares constituting 9.5% shareholding by stating transaction period as April 27, 2020, thereby taking its total shareholding to 23,42,252 shares representing 65.06% of the total shareholding.

22.From above sequence of events, it is to be noted that the open offer requirement triggered in the year 2012 had concluded in 2020 by KFSL, upon Directions issued by SEBI in the year 2016, which were duly upheld by Hon’ble SAT in 2018. The instant proceedings were initiated on May 4, 2021 with the appointment of the undersigned as an Adjudicating Officer and on May 24, 2021, the SCN issued by the undersigned was served upon the Noticee. From the above, it can be seen that there is no delay in initiation of the instant proceedings The delay in complying with the regulatory requirements by the Noticee is due to the acts and deeds committed by itself whereas, the Noticee is trying to draw inference from the above facts as delay on the part of SEBI in initiating the instant proceedings, which is misconceived. Further, I find that the Noticee’s delay in making the public announcement has resulted in denying the statutory right of the shareholders of the company to exit through open offer mechanism at the respective point of time. Therefore, I find no merit in the contentions raised by the Noticee that there is delay in issuing the SCN and find no reason to squash the SCN on this ground.

23.In this context, I find it relevant to refer to the order passed by Hon’ble SAT in the case of Metex Marketing Pvt., Ltd., vs.SEBI (order dated June 4, 2019) wherein Hon’ble SAT held that: “This Tribunal has consistently held that in the absence of any specific provision in the SEBI Act or in the Takeover Regulations, the fact that there was a delay on the part of SEBI in initiating proceedings for violation of any provision of the cannot be a ground to quash the penalty imposed for such violation.” 

24.Further, I deem it appropriate to refer to the observations made by Hon’ble SAT in the matter of Vaman Madhav Apte & Ors. Vs. SEBI vide Order dated March 04, 2016, which reads as follows:

“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.”

25.It is no doubt true that no period of limitation is prescribed in the or the Regulations for issuance of a show cause notice or for completion of the adjudication proceedings. The Hon’ble Supreme Court in Government of India vs, Citedal Fine Pharmaceuticals, Madras and Others, [AIR (1989) SC 1771 ] held that in the absence of any period of limitation, the authority is required to exercise its powers within a reasonable period. What would be the reasonable period would depend on the facts of each case and that no hard and fast rule can be laid down in this regard as the determination of this question would depend on the facts of each case. This proposition of law has been consistently reiterated by the Hon’ble Supreme Court in Bhavnagar University v.Palitana Sugar Mill (2004) Vol.12 SCC 670, State of Punjab vs. Bhatinda District Coop. Milk P. Union Ltd., (2007) Vol.11 SCC 363 and Joint Collector Ranga Reddy Dist. & Anr. vs. D. Narsing Rao & Ors. (2015) Vol. 3 SCC 695. The Hon’ble Supreme Court recently in the case of Adjudicating Officer, SEBI vs. Bhavesh Pabari (2019) SCC Online SC 294 held:

“There are judgments which hold that when the period of limitation is not prescribed, such power must be exercised within a reasonable time. What would be reasonable time would depend upon the facts and circumstances of the case, nature of the default/statute, prejudice caused, whether the thirdparty rights had been created etc.”

26.In Ravi Mohan & Ors. v. SEBI and other connected appeals decided on August 27, 2013, the Hon’ble SAT while referring to its own decision in HB Stockholdings Ltd. v. SEBI (Appeal no. 114 of 2012 decided on August 27, 2003) and decision of Hon’ble Supreme Court in Collector of Central Excise, New Delhi v. Bhagsons Paint Industry (India) reported in 2003 (158) ELT 129 (S.C.), held as under:

“....Based on decision of this Tribunal in case of HB Stockholdings Ltd. vs. SEBI (Appeal no. 114 of 2012 decided on 27.08.2013) it is contended on behalf of the appellants that in view of the delay of more than 8 years in issuing the show cause notice, the impugned order is liable to be quashed and set aside. There is no merit in this contention, because, this Tribunal while setting aside the decision of SEBI on merits has clearly held in para 20 of the order, that delay itself may not be fatal in each and every case. Moreover, the Apex Court in case of Collector of Central Excise, New Delhi vs. Bhagsons Paint Industry (India) reported in 2003 (158) ELT 129 (S.C) has held that if there no statutory bar for adjudicating the matter beyond a particular date, the Tribunal cannot set aside the adjudication order merely on the ground that the adjudication order is passed after a lapse of several years from the date of issuing notice....”

27.I note that the Noticee placed reliance on the decisions of the Hon’ble SAT in the cases of Ashok Shivlal Rupani Vs SEBI and Ashlesh Gunvantbhai Shah Vs SEBI, which are misplaced as the facts in both these cases are not comparable. I note that in the case of Shivlal Rupani, the violation adjudicated therein pertained to failure to file necessary disclosures under Regulation 13(4) and 13(5) of the SEBI (Prohibition of Insider Trading Regulations, 1992 and Regulation 30(4) of SEBI (Listing and Disclosures Requirements) Regulations, 2015 read with Clause 36 of the Listing Agreement. The instant proceedings however, involve adjudication of alleged violations of the SEBI (SAST) Regulations 2011, wherein the Noticee has been show- caused for serious charge of delay in making public announcement for open offer, from which the Noticee cannot try to wriggle out by citing the said legal position. I note that in the case of Ashlesh Gunvantbhai Shah, the Hon’ble SAT has held that “it is no doubt true that no period of limitation is prescribed in the or the Regulations for issuance of a show cause notice or for completion of the adjudication proceedings but in the absence of any period of limitation, the authority is required to exercise its powers within a reasonable period”. In this regard I note that Hon’ble SAT has qualified the said ruling by saying that the reasonable period would depend on the facts of each case and that no hard and fast rule can be laid down in this regard as the determination of this question would depend on the facts of each case. As regards application of the said ruling in this matter, I am of the view that present proceedings do not suffer from any infirmity on the ground of delay for the reasons recorded in the paragraph 21 and 22 above.

28.In the light of the aforesaid observations of the Hon’ble Supreme Court and Hon’ble SAT and from the above facts and circumstances of the case, it cannot be said that there was inordinate and unnecessary delay in the matter as contended by the Noticee. Therefore, in the absence of any prejudice, the proceedings cannot be quashed simply on the ground of delay in launching the same, which is not found in this case.

29.From the summary of findings as mentioned above, I conclude that the Noticee by making public announcement for open offer with a delay of 81 days, has violated the provisions of Regulation 3(1) and 4 read with Regulations 13, 14, 15, 16, 17 and 18 of SEBI (SAST) Regulations, 2011.

ISSUE II: Whether the Noticee is liable for monetary penalty under

Section 15H(ii) of SEBI Act

30.It is established that the Noticee had made public announcement for open offer with a delay of 81 days, which is violation of the provisions of Regulations 3(1) and 4 read with Regulations 13, 14, 15, 16, 17 and 18 of SEBI (SAST) Regulations, 2011. Accordingly, the Noticee is liable for monetary penalty under Section 15H(ii) of SEBI Act, the provisions of which are reproduced hereunder: Section 15H(ii) of SEBI Act

If any person, who is required under this Act or any rules or regulations made thereunder, fails to make a public announcement to acquire shares at a minimum price; he shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher.

31.The Noticee drawn reference to the language used in section 15 H(ii) of the SEBI Act whereby the Noticee has contended that the said penal provision is applicable only in cases wherein any person “fails” to make a Public Announcement. The Noticee has contended that the word “fails” mentioned in the said penal section is of utmost importance and means that the person who was supposed to do the act prescribed under the said provisions completely failed to do so. Therefore, the Notice has contended that since it had made the necessary public announcement with a delay, the said penal section cannot be applied on it.

32.In the context, I find that the Hon’ble Supreme Court of India in K. P. Verghese Vs. Income Tax Officer, Ernakulam & another (1981) 3 SCC 173 observed as under while dealing with interpretation on statutory provisions:

"The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and as pointed by Lord Denning, it would be idle to expect every statutory provision to be "drafted with Devine prescience and perfect clarity. We can do no better than to repeat the famous words of Judge Learned Hand when he said:

..."it is true that the words used, in another literal sense, are the primary and ordinarily less reliable source of interpreting and meaning of any writing; be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning"

33.I am of the view that the term “fails” mentioned in section 15H(ii) of the SEBI Act includes failure to make the public announcement within the stipulated time. It is on record that the Noticee had failed to make the public announcement within the stipulated time period. The objective of the SEBI (SAST) Regulations is to provide an orderly framework within which the process of substantial acquisition and takeovers could be conducted in a fair and transparent manner to the advantage of all the stakeholders. Justice Bhagwati Committee Report based on which the SEBI (SAST) Regulations have been framed, has clearly stated that, while on the one hand the regulations should not impose conditions which are too onerous to fulfil and hence, make the substantial acquisition of shares and takeovers difficult, at the same time they should ensure that such process do not take place in a clandestine manner without protecting the interest of the shareholders. If the aforementioned contentionsv of the Noticee are to be accepted, it would defeat the aforesaid objective of the SEBI (SAST) Regulations and open the flood gates for the acquirers to make the public announcements at their own whims and fancies without any respect for the regulatory obligations.

34.In this context, it is also pertinent to mention the observations made by Hon’ble SAT in the matter of M/s Shri Housing Private Limited Vs SEBI, vide Appeal No 319 of 2014, decided on July 20, 2015, wherein Hon’ble SAT had observed as under:

“………. Lastly, section 15H undoubtedly talks about making of open offer by the acquirer in accordance with law and does not talk of delayed open offer. However, such open offer by an acquirer has to be made under the Takeover Regulations, 1997 and regulations have to be looked into and interpreted in totality. Therefore, any offer made by an acquirer after the statutory time limit of 4 days prescribed in Regulations 14(1) would not amount to sufficient compliance of Takeover Regulations and, therefore, the respondent would be justified in imposing suitable penalty in a given situation depending upon the facts and circumstances of each case”

35.Therefore, in view of the above observations the Hon’ble Apex Court and Hon’ble SAT, the contention of the Noticee in this regard is groundless and devoid of any merit.

ISSUE III: If so, what quantum of monetary penalty should be imposed on the Noticee

36.While determining the quantum of monetary penalty under Section 15H(ii) of SEBI Act, I have considered the factors stipulated in Section 15-J of SEBI Act, which reads as under:

Section 15J - Factors to be taken into account by the Adjudicating Officer

While adjudging quantum of penalty under Section 15 - I, the Adjudicating Officer shall have due regard to the following factors, namely: (

a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;

(b) the amount of loss caused to an investor or group of investors as a result of the default;

(c) the repetitive nature of the default 

37.The material made available on record has not quantified the amount of disproportionate gain or unfair advantage made by the Noticee and the loss suffered by the investors as a result of the Noticee’s default. There is also no material made available on record to assess the amount of loss caused to investors or the amount of disproportionate gain or unfair advantage made by the Noticee as a result of default.

38.The Noticee in its reply stated that consequent to the offer, it had actually paid the offer price of 20.55/- (being 11.50/- plus interest of 9.05/- i.e., @ of 10% from 2012 – for a period of around 8 years for the delay) to the public shareholders of the target company and contended that there is no justification for initiation of adjudication proceedings against it for imposition of monetary penalty for the alleged delay. The Noticee in its defence has relied upon the Order of the Hon’ble SAT in the matter of Sterling Investment Corporation Ltd.& others vs SEBI (SAT Appeal no 388 of 2004).

39.It is pertinent to note here that payment of interest is the compensation paid to the shareholders of the target companies due to their losing an exit opportunity at the right time as a result of the failure on the part of the acquirers to make the public announcement within the stipulated time period prescribed under the SEBI (SAST) Regulations and such interest payment by the acquirer cannot be considered as a penalty that has been paid by the acquirer. The directive by SEBI to the Noticee to pay interest on a sum which is due to the shareholders is not a penalty; it is the legitimate claim of the shareholders for the delay involved in making payment to them. Thus, I note that the liability to pay interest is a part and parcel of the legal liability to pay compensation upon delay in making an open offer.

40.At this juncture, I note that Hon’ble SAT, in its order dated July 20, 2015, in the matter of Shri Housing Pvt. Ltd. vs SEBI has observed that:

“…..We are of the considered opinion that the very purpose of public offer envisaged under the Takeover Regulations, 1997 would be frustrated if the acquirers are given opportunity to make public announcement after a long lapse of time from the date of acquisition i.e. the date of SPA’s are signed by the parties to acquire shares beyond 15% and/or control of a particular company by the acquirer…………It has, therefore, caused definite prejudice to the shareholders of Premier in the matter of exercising their statutory rights / option to exit or to continue with the said company through open offer mechanism at the very inception when the SPA’s were entered into by the appellant. Therefore, the violation of such a valuable statutory right of shareholders to exit and/or to continue with the company cannot be compensated by paying meagre interest by the acquirer. The time limit of 4 days prescribed in Regulation 14(1) is crucial and important as time is of the essence in such acquisitions and consequent open offer. Therefore, any offer made by an acquirer after the statutory time limit of 4 days prescribed in Regulations 14(1) would not amount to sufficient compliance of Takeover Regulations and, therefore, the respondent would be justified in imposing suitable penalty in a given situation depending upon the facts and circumstances of each case.”

41.Thus, in light of the above observations, the contention of the Noticee that since it had already paid the interest amount to the shareholders of RRL, no additional penalty should be imposed on them through the present proceedings, is without any basis and devoid of merit.

42.The Noticee in its submissions stated that they have not made any gains or derived any unfair advantage because of alleged delay in making open offer and that the delay has also not caused any loss to the investors or group of investors. In this connection, I find it pertinent to rely upon the observations of the Hon’ble SAT in the matter of Luharuka Commotrade Pvt., Ltd., Vs SEBI decided on January 13, 2016, wherein the Hon’ble SAT observed that – “Similarly, argument of the appellant that the delayed compliance of open offer has occurred inadvertently and since delayed compliance has not caused any loss to the shareholders no penalty could be imposed is without any merit. Under the Takeover Regulations, 1997 imposition of penalty is not dependent on the loss caused to the shareholders on account of the delay in making open offer and the penalty is imposable when the regulations are violated even if such violation does not result in any loss to the investors”.

43.I note that losing an exit opportunity by the shareholders at the right time as a result of the failure on the part of the acquirers to make the public announcement within the stipulated time period prescribed under the SEBI (SAST) Regulations, is a loss to the investors. In view of the above and in line with the ratio laid down by the Hon’ble SAT I find no merit in the submissions made by the Noticee.

44.I am of the view that by not making the mandatory public announcement within the stipulated time period the Noticee has violated the statutory requirements of law and accordingly the Noticee has to be penalized for the same. The contention of the Noticee that they have compensated the investors by paying interest for the delayed public announcement of open offer cannot be a valid ground to escape liability. However, I have nevertheless considered the same as a mitigating factor while arriving at the quantum of penalty on the Noticee.

ORDER

45.After taking into consideration the nature and gravity of the violations established in the preceding paragraphs and in exercise of the powers conferred upon me under Section 15-I of the SEBI Act, 1992 read with Rule 5 of the SEBI Adjudication Rules, 1995, I hereby impose a penalty of 10,00,000/- (Rupees Ten lakhs only) on the Noticee i.e., Karvy Financial Services Ltd., under Section 15H(ii) of SEBI Act,

46.The said penalty imposed on the Noticee, as mentioned above, is commensurate with the violation committed and acts as a deterrent factor for the Noticee and others in protecting the interest of investors.

47.The Noticee shall remit / pay the said amount of penalty within 45 days of receipt of this order either by way of Demand Draft in favor of “SEBI - Penalties Remittable to Government of India”, payable at Mumbai, OR through online payment facility available on the SEBI website www.sebi.gov.in on the following path by clicking on the payment link.

ENFORCEMENT → Orders → Orders of AO → PAY NOW

48.Noticee shall forward said Demand Draft or the details / confirmation of penalty so paid through e-payment to the Division Chief, Enforcement Department-I, DRA-IV, SEBI, in the format as given in table below:

Table:-

49.In terms of Rule 6 of the SEBI Adjudication Rules, copies of this order are sent to the Noticee and also to SEBI.