1.1 Ramco Industries Ltd. (promoter company of Rajapalayam Mills Ltd - hereinafter referred to as RML) submitted to SEBI a report dated August 27, 2003 under Regulation 3(4) of SEBI (Substantial Acquisition of shares and Takeovers) Regulations 1997 (hereinafter referred to as "Takeover Regulations") claiming exemption for acquisition of 4,00,000 equity shares of Rs. 10/- each representing 11.39% of the enhanced voting capital of the Rajapalayam Mills Ltd. (hereinafter called the Target Company) on August 21, 2003, pursuant to conversion of warrants allotted on May 10, 2002 on preferential basis. It was then observed that S/Shri P R Ramasubrahmaneya Rajha and Shri P R Venketrama Raja (also belonging to promoter group) had also similarly acquired 50,000 equity shares each representing 1.42% of the enhanced voting capital of the Target Company on August 21, 2003. As a result of the said acquisition the collective shareholding of Ramco Industries Ltd and Sarvashri P R Ramasubrahmaneya Rajha, Chairman of Ramco Industries Ltd and P R Venketrama Raja, Vice Chairman and Managing Director of the said company (hereinafter collectively referred to as the "Acquirers") was found to have increased by 11.17% (from 17.75% to 29.46%) of the voting share capital of the Target Company i.e. more than the permissible annual creeping limit of acquisition of 5% specified in Regulation 11(1) of the Takeover Regulations.
1.2 The Target Company is a listed company, with its shares listed at the Madras Stock Exchange and The Stock Exchange, Mumbai.
2.1 The Acquirers did not make a public announcement to acquire 20% of the voting capital of the company from the public as envisaged in the Takeover Regulations. A show cause notice was, therefore, issued on November 14, 2003 to the Acquirers to show cause as to why regulatory action should not be taken against them for the said prima facie violation.
3.1. The Acquirers submitted their reply to the above said Show Cause Notice vide their letter dated 06.12.2003 stating inter alia that: a The preferential allotment of warrants which entitled the owners thereof to receive shares at a later date was completed prior to 09.09.2002 and therefore the acquisition through the preferential allotment was completed prior to the amendment on 09.09.2002.
b The subsequent conversion of warrants into shares is merely a legal consequence, and not a fresh acquisition, in terms of the right vested with the promoters to convert the warrants into shares under the terms and condition of the warrants issued earlier.
c Regulation 3(1) (c) of the Regulations not only applies to preferential allotment of equity shares but also in terms of the definition of the word "Share", would apply to preferential allotment of any security which entitles the holder thereof to receive equity shares at a later date, pursuant to Regulation 2(1)(k) of the Regulations.
d By virtue of the preferential issue, the Promoter group has not gained any fresh control over the Target Company.
e All the requirements set out in regulation 3(1) ( c) of the Regulations were complied with by RML.
f The issue of share warrants was in itself an agreement to acquire shares at a later stage. This was the point of acquisition at which the Regulations were triggered but for the exemption under Regulation 3 (1) ( c).
g The exemption under Regulation 3(1) ( c) of the Regulations was already availed of and cannot be set at naught by a subsequent removal of the exemption in September 2002.
h Vested rights accrued in the hands of promoters in relation to conversion of warrants into equity shares, cannot be altered by subsequent amendment to the Regulations.
i It is a well settled law that accrued rights cannot be affected with retrospective effect by any exercise of sub-ordinate legislative power and hence the amendment to the regulations cannot affect such accrued rights in favour of the promoters.
j Parliament had not conferred on SEBI, under sections 29 and 30 of the SEBI Act, the right to issue Sub-ordinate Legislation on retrospective basis.
k Therefore, the deletion of Regulation 3 (1) (c) of the Regulations does not operate to defeat the rights of the above Promoters to covert the warrants issued prior to such deletion into equity shares on a subsequent date.
l For the above reasons, removal of the exemption under Regulation 3(1) (c) of the Regulations on 09.09.2002, does not affect the acquisition of warrants converted into shares on a subsequent date by the acquirers.
m Hence, there is no violation of any of the provisions of the Regulations as alleged.
4.1 An opportunity of personal hearing was granted to the Acquirers.
The hearing took place as scheduled on 25.03.2004 and was attended by Mr. K K Shroff, Advocate, Mr. A V Dharmakrishna, Mr. K Selvanayagam and Mr. J Ramasubramanian. They reiterated the written submissions made by Acquirers vide letter dated 06.12. 2003.
5.1 I have carefully considered the facts of the case, the written as well as oral submissions made by the Acquirers and also the documents submitted by them in support of their submission. The issues that arise for consideration are : Whether the acquisition made by the acquirers in the Target Company qualified for exemption from the applicability of Regulation 11 of the Takeover Regulations and whether the acquirers had committed any violation of the Takeover Regulations and, if so, the regulatory action, if any, called for.
5.2 Recapitulation of relevant facts of the case will facilitate consideration of the issues in proper perspective: It was on February 27, 2002 that the shareholders of Rajapalayam Mills Ltd i.e. the Target Company had, at its Extra-ordinary General meeting, passed a resolution authorising the Board of Directors of the company to issue on preferential basis, pursuant to the provisions of Section 81(1A) of the Companies Act 1956 and in accordance with the guidelines for preferential issues contained in SEBI (Disclosure and Investor Protection) Guidelines 2000, 50,000 warrants of Rs.100/- each, to Ramco Industries Ltd (40,000 warrants) and Shri P R Ramasubrahmaneya Rajha (5000 warrants) and Shri P R Venketrama Raja (5000 warrants) - all representing the promoters. The warrants carried an option to convert each warrant into an equity share at a price of Rs. 1025/- each; the right of conversion was exercisable within a period of 18 months from the date of allotment; 10% of the price was to be paid upfront on allotment of warrants and the balance 90% at the time of exercise of the option. The Target company sub-divided its equity shares of Rs. 100/- each into equity shares of Rs. 10/- each effective August 12, 2002. The warrants had been allotted on May 18 and 24 , 2002 to the promoter group entities and on exercise of the right of conversion, the allotment of equity shares have been made to these promoter-entities i.e. the "Acquirers" on August 21, 2003.
5.3 I find that the acquirers have ultimately on August 21, 2003, acquired shares in the Target Company which was more than the annual permissible creeping limit of 5% of voting rights in the Target Company.
5.4 As per Regulation 11(1) of the Takeover Regulations, "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 75 per cent 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 per cent of the voting rights in any financial year ending on 31st March unless such acquirer makes a public announcement to acquire shares in accordance with the regulations." 5.5 The applicability of Regulation 11 of the Takeover Regulations is dealt with in Regulation 3 ibid. The Regulations 3(1) and 3(1)(c) ibid as it stood at the relevant point of time read as under:- 3(1) "Nothing contained in regulation 10, 11 and 12 of these regulations shall apply to: "(c) preferential allotment, made in pursuance of a resolution passed under section 81 (1A) of the Companies Act, 1956 (1 of 1956): (i) board resolution in respect of the proposed preferential allotment is sent to all the stock exchanges on which the shares of the company are listed for being notified on the notice board; (ii) full disclosures of the identity of the class of the proposed allottee(s) is made, and if any of the proposed allottee(s) is to be allotted such number of shares as would increase his holding to 5 per cent or more of the post issued capital, then in such cases, the price at which the allotment is proposed, the identity of such person(s), the purpose of and reason for such allotment, consequential changes, if any, in the board of directors of the company and in voting rights, the shareholding pattern of the company, and whether such allotment would result in change in control over the company are all disclosed in the notice of the general meeting called for the purpose of consideration of the preferential allotment;" 5.6 Briefly stated, the Regulation 11 of the Takeover Regulations prohibits any acquirer from acquiring shares or voting rights exceeding the permissible annual creeping limit of 5% in a Target Company without making a public announcement to acquire shares from the public in accordance with the Regulations. The inclusive definition of "shares" given in Regulation 2(k) covers "any security which would entitle the holder to receive shares with voting rights". The warrants issued by the Target Company on preferential basis to the acquirers entitled the holders to apply for and allotment of shares on or before expiry of 18 months from the date of allotment of warrants. The preferential allotment of the warrants had been made pursuant to a Resolution passed by the shareholders of the company at Extraordinary General Meeting held on February 27, 2002. The resolution had been passed in terms of the provisions of section 81(1A) of the Companies Act 1956 and the allotment had been made in accordance with the guidelines for preferential issues contained in SEBI (Disclosure and Investor Protection) Guidelines 2000. It is also observed that the relevant Board resolution had been sent to the stock exchanges for notification.
The explanatory statement appended to the notice had given details regarding the purpose of the proposed preferential allotment, the pattern of shareholding before and after the conversion of the warrants allotted on preferential basis to the "Acquirers". The statement had also stated that lock in period and the number of shares/ warrants subjected to such lock in, would be as per SEBI guidelines. It had also been mentioned that the issue of warrants would not result in any change in the management control of the company. The warrants were allotted on May 18 and 24, 2002, viewed in the light of the then existing provisions of regulation 3(1)(c) of the Takeover Regulations, the preferential allotment of warrants had been made to the "acquirers" by the Target Company, pursuant to the provisions of Section 81(1A) of the Companies Act, 1956; the relevant board resolution had been sent to the Stock Exchanges' and disclosures had been made of the particulars specified.
5.7 Thus, there is sustainable force in the argument that the provisions of regulation 11 of the Takeover Regulations did not apply to the preferential allotment of the warrants made by the Target Company to the Acquirers on May 18 and 24, 2002, in terms of exemption available under the then existing provisions of regulation 3(1)(c) ibid.
5.8 The issue for consideration, however, got complicated due to deletion of the regulation 3(1)(c) effective 9 September 2002 - subsequent to the said preferential allotment of the warrants on May 18 and 24, 2002 and prior to the conversion of the warrants into shares on August 21, 2003.
5.9 It is noted that the deletion of the provisions for exemption of preferential allotment from the Takeover Regulations was intended to avoid possible misuse of the exemption for the purpose of effecting a change of the hands of control over the company, without incurring an obligation to make a public offer as envisaged in the Takeover Regulations. The facts of the case do not indicate any such intentions on the part of the company/ the Acquirers.
5.10 In terms of Regulation 12 read with Regulation 2(c), 'control' includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.
5.11 It is seen from the particulars furnished in the explanatory statement to the notice for the AGM that the promoters and associates as a class were holding 45.93% of the share capital of the target company (significant percentage by itself) and on conversion of warrants allotted to the promoters and associates into shares, their shareholding in the Target Company stood increased to 53.63%.
Consequent to the acquisition of additional shareholding, however, there was no change in the control of the company.
5.12 The preferential allotment had been made with a view to part financing the company's expansion and to reduce the debt burden or, in other words, the preferential allotment of warrants, which were eventually converted into shares, had been made in the larger interest of the company and with the approval of the shareholders.
5.13 In view of the foregoing, I am inclined to agree that the said acquisition on August 21, 2003 of shares in the Rajapalayam Mills Ltd by its promoters, viz. Ramco Industries Ltd, Shri P R Ramasubrahmaneya Rajha and Shri P R Venketrama Raja, through conversion of warrants allotted on preferential basis on May 18 and 24, 2002 can be deemed to have been covered under the exempted category in terms of the then regulation 3(1)(c) of the Takeover Regulations. However, the shares so acquired would need to be subjected to an appropriate lock in requirement.
6.1 In the light of the above findings, and in exercise of the powers conferred upon me under Section 19 of SEBI Act, 1992 read with Regulation 44 and 45 of the Takeover Regulations, I hereby direct that the report submitted by the Acquirers on August 27, 2003 regarding acquisition of shares in Rajapalayam Mills Ltd on preferential basis by its promoters viz. Ramco Industries Ltd, Shri P R Ramasubrahmaneya Rajha and Shri P R Venketrama Raja be taken on record. I also hereby direct that the equity shares allotted by Rajapalayam Mills Ltd on August 21, 2003 to Ramco Industries Ltd., Shri P R Ramasubrahmaneya Rajha and Shri Venketrama Raja through conversion of warrants, be subjected to lock in of 3 years from the date of allotment of the shares.