ZOOM LENS: ADJUDICATING ORDER IN THE MATTER OF M/S. S. KUMARS.COM LTD

Case Details:	ZOOM LENS: Adjudicating Officer order in the matter of M/s. SKumars.Com Limited
Target Company:	S Kumars.com Limited
Acquirers:	Hanumesh Realtors Private Limited (“HRPL”)
Industry:	Textile
Merchant Banker:	NA

 Case Abstract:

Target Company:	S.Kumars.com Ltd. (presently known as S Kumar Online Limited) is the infotech arm of the S Kumars Group, and is engaged in online trading activities. Incorporated as a private limited company on May 14, 1999, it was then converted into a public limited company on Aug. 31, 1999 and got its present name on July 28, 2001. Through its online presence, the company has created e-commerce opportunities for the business and trading communities and is beneficial to consumers, traders and manufacturers.
Acquirers:	Hanumesh Realtors Private Limited was incorporated in 2003 and is based in Mumbai. The main object of HRPL is to carry on all kinds of business of builders, developers and to buy and sell or acquire or given on lease any land, building, factories, industrial units, commercial complex, etc and to deal in all kinds of such activities and to carry on business of estate agents.
Sellers:	NA
Triggering event:	1. SEBI has initiated adjudication proceedings against Hanumesh Realtors Private Ltd (Acquirer) to inquire into and adjudicate the violation of Regulation 11(1) read with Regulation 14 of SEBI (SAST) Regulations, 1997 for the acquisition of shares of the S Kumars.com Ltd (presently known as S Kumars Online Limited) (Target Company). It was observed from the quarterly shareholding pattern filled with the Bombay Stock Exchange (BSE) for the period ended 31st December 2009 that the Acquirer belongs to the promoters group of the Target Company and holds 94,47,814 shares aggregating 36.62% of the share capital and voting rights of the Target Company. 2. On March 03, 2010, the Target Company had made preferential allotment of 28,25,000 to the Acquirer due to which the shareholding of promoters group of the Target Company increased from 1,28,01,010 shares to 1,56,26,010 shares. However the individual shareholding of the Notice increased from 94,47,814 (36.62%) shares to 1,22,72,814 shares (42.87%) i.e. an increase of 6.25% shares in single Financial Year. However the Notice failed to make Public Announcement thereby violating the provision of Regulation 11(1) of the SEBI (SAST) Regulations, 1997. Accordingly a Show Cause Notice was issued to the Notice to which he made the following submissions Contention: 1. The Notice contended that Regulation 11(1) of the SEBI (SAST) Regulations, 1997 permits the acquirers to acquire up to 5% in any financial year. However in their case, the percentage increase in the promoter group shareholding is 4.97% only, which is well within the creeping limit of 5 % as provided in regulation 11(1) and hence regulation 11 was not triggered pursuant to the said preferential allotment of shares. 2. Though the individual holding of the Noticee exceeds 5%, but the overall promoters holding has not exceeded 5% and therefore the provisions of Regulation 11(1) have not been violated. 3. Noticee contended that this interpretation of Regulation 11(1) is in the same manner as our interpretation and there are many companies, which have made preferential allotments in this manner. The Acquirer gave references of informal guidance made by SEBI in the matter of Suryajyoti Spinning Mills Ltd and an order passed by the Adjudicating Officer of SEBI in the matter of Jamnalal Sons Pvt. Ltd. wherein it was held that the creeping acquisition of the group as a whole is only to be considered and that the acquisition of the individual entity in the group need not be looked into. Adjudicating Officer Decision: Adjudicating Officer (A.O.) noted that Regulation 2(1)(b) of SEBI (SAST) Regulations, 1997 defines Acquirer as “any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, either by himself or with any person acting in concert”. The definition of the Acquirer specifically provides that when a person acquires shares of a company and crosses the prescribed threshold limits, he shall be individually and/or collectively liable to be governed by the provisions of the SEBI (SAST) Regulations, 1997. Further Regulation 11(1) provides that “No acquirer who, together with persons acting in concert with him, has acquired, in accordance with the provisions of law, 15 per cent or more but less than fifty five per cent (55%) of the shares or voting rights in a company, shall acquire, either by himself or through or with persons acting in concert with him, additional shares or voting rights entitling him to exercise more than 5% of the voting rights, with post acquisition shareholding or voting rights not exceeding fifty five per cent., in any financial year ending on 31st March unless such acquirer makes a public announcement to acquire shares in accordance with the regulations”. From the analysis of regulation it was observed that Regulation 11(1) provides no relief to a shareholder, who in his individual capacity had crossed the creeping limit of 5 %. In the present case, since the shareholding of the individual promoter increased by 6.25%, therefore, it was under obligation to comply with the provisions of regulations 11(1) read with 14 (1) of the SEBI (SAST) Regulations, 1997, which it had failed to do, thus it had violated the provision of Regulation 11(1) of the said regulations. Therefore after considering the facts and circumstances of the case, the Adjudicating Officer imposed the penalty of Rs. 1.87 crore [notional loss suffered by the investors (i.e. Rs. 1.72 crore) plus three times the undue advantage accrued to the Notice by avoiding the public offer (i.e. Rs. 15 lakh)] upon the Notice for the violation of Regulation 11(1) of SEBI (SAST) Regulations, 1997.
Offer Details:	NA

Distinguishing Feature:  

The Adjudicating Officer held that for the purpose of calculating creeping acquisition limit of 5% as provided in regulation 11(1) of SEBI (SAST) Regulations, 1997, the increase in the shareholding of the group as a whole as well as the individual entity in the group needs to be looked into. However, it is to be noted that in regulation 10 and 11 of SEBI (SAST) Regulations, 1997 dealing with the Open Offer obligations, it is no where prescribed that the increase in Individual Shareholding of the acquirer will also be considered for determining the Open Offer obligations.

Queries for Discussion: ADD QUERIES

1.Whether in view of the fact that SEBI (SAST) Regulations, 1997 does not prescribes any provisions for considering the individual shareholding of the Acquirer for determining the Open Offer obligations, the order of the Adjudicating Officer is acceptable?

2.What is the impact of this present order on the informal guidance given in the matter of M/s. Suryajyoti Spinning Mills Ltd. and also on the order earlier passed by the Adjudicating Officer of SEBI in the matter of M/s. Jamnalal Sons Pvt. Ltd.?

3.Whether the imposition of penalty on the Noticee for the violation of regulation 11(1) is justified, since the increase in the shareholding of the Notice along with PACs is within the creeping acquisition limit as prescribed under regulation 11(1) of SEBI (SAST) Regulations, 1997? Looking Ahead:  Now it is to be seen whether the Notice will go for an appeal before the Hon’ble SAT against the order of the Adjudicating Officer. Zoom – In       What’s hot in takeovers in this month? Case Abstract Distinguishing Feature Queries for Discussion Looking Ahead Comment on this Case Rate this Case Prepared by:-  Ms. Ruchi Hans, Asstt. Manager, Corporate Professionals Capital Private Limited