Case Detail:               Zoom Lens of SAT order in the matter of Rakesh Ramniklal Sheth
Target Company:      Genus Commutrade Limited
Acquirers:                  Rakesh Ramniklal Sheth
Industry:                     Finance and Investments
Merchant Banker:     NA

Target Company:
Genus Commutrade Limited (GCL) was incorporated in May 1995 as Ganapati Hi-Tech  by Hitesh R Bhatt, Bharat P Bhatt and Ramanbhai M Patel. On December 3,
1999, the name of the company was changed from Ganapati Hi-Tech to Genus Commutrade. Ahmadabad based GCL is engaged in the business of trading, import and export of communication hardware and develops software.

Acquirers:                  Rakesh Ramniklal Sheth

Sellers:                       NA
Triggering event:
1.  This Appeal is filed before the Hon'ble SsAT by Rakesh Ramniklal Sheth (Appellant) against the order passed by the Adjudicating Officer on September 30, 2011 imposing a penalty of Rs. 25 lakhs on the appellant for violating the provisions of regulation 10 of SEBI (SAST) Regulations, 1997 in respect of acquisition of 17.77% shares odf Genus Commutrade Ltd. (TArget Company) on September 14, 2002 through off market transaction thereby increasing his shareholding from 2.96% to 20.72%.

2.      In appeal, the appellant has contended that:

2.1. The receipt of shares by him was merely to secure the repayment of money and was not the acqisition in a true sense as the shares were received without any corresponding consideration;

2.2. It was simply the transfer of possession of shares without ownership for which declaration under section 187-C(1) of the Companies Act, 1956 was filed with the Target Company;

2.3. NO intention to make substantial acquisition of shares or to acquire control or takeover the management of the Target Company;

2.4. The procedure for holding enquiries as laid down in the Enquiry Rules was not followed;

2.5. There was an inordinate delay in passing of the order which vitiates the proceeding;

2.6. The penalty imposed upon him is beyond the scope of section 15H of SEBI Act aas the maximum penalty of Rs. 5 Lakhs could be imposed at the relevant time when the alleged violation took place.

1.   With respect to the contention of appellant that Enquiry Procedure Rules are not followed and there has been inordinate delay in passing of the order;

1.1. The Hon'ble SAT stated that show cause notice issued to the appellant clearly   shows that opportunity was given to the appellant to show cause as to why an enquiry should not be held and why penalty should not be imposed. It is only after issue of such notice that another notice was issued granting the appellant opportunity of personal hearing;

1.2. Further, even if we assume that there was some deficiency in the procedure, it has not caused any prejudice to the appellant in presenting his case since as many as three opportunities of personal hearing were given to him that he did not avail;

1.3.It does not lie in the mouth of the appellant to make a complaint about the delay when he himself has not cooperated in the enquiry and has submitted reply to the show cause notice belatedly and has not cared to appear before adjudicating officer for personal hearing.

2.    As regards the contention of the appellant that transfer was without ownership and was only to secure the repayment is concerned, the Hon’ble SAT stated that this is not acceptable:

2.1.In terms of Regulation 2(b) of SEBI (SAST) Regulation, 1997, when the shares were transferred to the demat account of the appellant from the account of Atul H Shah and others, it is an acquisition within the meaning of the Regulations and the intention of the appellant is immaterial.

2.2.Further as regards the consideration for transfer of shares is concerned, Hon’ble SAT stated that the finance provided by the appellant to Atul H. Shah is the consideration for transfer of shares to the demat account of the appellant as the shares were transferred with an intention that in case Atul H Shah makes default in repayment of finance then he can recover the same by selling them.

3.  However, as regards the imposition of penalty is concerned, the Hon’ble SAT observed that AO has erred in imposing a penalty of Rs. 25 Lakhs on the appellant and reduced the penalty from Rs. 25 Lakhs to Rs. 2 Lakhs.

Hon’ble SAT reduced the penalty of Rs.25 lakhs imposed by the Adjudicating Officer for the violation of regulation 10 of SEBI (SAST) Regulations, 1997 to Rs.2 Lakhs considering the fact that the maximum penalty prescribed at the time when the alleged violation was committed was Rs.5 Lakhs.

1.Whether where the shares have been transferred in the demat account of the appellant, the contention of the appellant that the transfer was to secure the repayment of money is acceptable?

2.Whether the decision of Hon’ble SAT upholding the order of Adjudicating Officer with respect to the violation of regulation 10 i.e. Open Offer is reasonable considering the contention made by the appellant that transfer of shares to his demat account was merely transfer of possession of the shares without ownership / proprietorship rights?

3.Considering the fact that by not making the Open Offer, the appellant has deprived the public shareholders of the Target Company from an opportunity to exit, the penalty of Rs.2 lacs imposed on the appellant is justifiable.

4.Whether apart from the penalty of Rs.2 lakhs, the appellant should be mandated to give Open Offer to the shareholders of the Target Company at a price including the interest for the period when the alleged violation was committed till the date of actual payment of offer consideration?

In future, we can expect to see some others cases also where considering the facts and circumstances of the case, only penalty may be imposed for the violation of Takeover Open Offer obligations instead of mandatory the Noticee or the appellant, as the case may be, to given Open Offer.

Prepared by: Ms. Ruchi Hans
For any professional query, please contact:
Ms. Divya Vijay

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