Judgment:
1. Regulation 11(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as the Regulations) is said to have been violated in this case for which the maximum monetary penalty of Rs. 5 lakhs has been imposed on the appellants. Khatoo Synthetics Ltd. is the target company. Its paid up share capital at the relevant time was Rs. 50 lakhs divided into 5 lakhs shares of Rs. 10 each. It is common case of the parties that the appellants held 87,700 shares of the target company as on 31-3-2000. Some of them acquired further shares and their total holdings as on 25-5-2000 came to 1,02,000 shares. It is also not in dispute that on 31 -10-2000, the appellants held 1,09,000 shares in the target company which constitutes 21.8 per cent of its paid up share capital. Appellant Nos. 1 to 7 acquired 61,600 snares of the target company on 22-3-2001 which constitutes 12.32 per cent of the total capital of the target company. It is the appellants' own case that they were all acting in concert when the shares were acquired on 22-3-2001 and even earlier. Regulation 11 of the Regulations at the relevant time provided that no acquirer who together with persons acting in concert with him had 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 10 per cent of the voting rights in any period of 12 months unless such acquirer made a public announcement to acquire shares in accordance with the regulations. Since appellant Nos. 1 to 7 acting in concert with the other appellants had acquired on 22-3-2001 more than 10 per cent of the shares of the target company, regulation 11 got triggered and they were required to make a public announcement to acquire further shares in accordance with the regulations. According to regulation 21 of the Regulations, the public offer made by the acquirer to the shareholders of the target company has to be for a minimum 20 per cent of the voting capital of the company. In other words, when the appellants acquired 12.32 per cent of the shares of the target company on 22-3-2001 they were required to make a public announcement. This public announcement, according to the Regulation 14(1), could be made not later than four working days of entering into an agreement for acquisition of shares. It is, thus, clear that the appellants should have come out with a public announcement to acquire at least 20 per cent shares from the shareholders. The purpose of these regulations is to give an option to at least 20 per cent shareholders of the target company to exit. In view of the aforesaid admitted position, the learned representative of the appellants conceded that Regulation 11 got triggered when the appellants acquired shares on 22-3-2001 and he also admits that they did not make a public announcement as required by Regulation 11. It is, therefore, clear that the appellants violated Regulation 11. The Securities and Exchange Board of India ('the Board') initiated adjudication proceedings under Chapter VI-A of the Securities and Exchange Board of India Act, 1992 ('the Act'). In view of the admitted position as stated above, the adjudicating officer came to the conclusion that the appellants violated Regulation 11 by not making a public announcement and after taking into consideration, the factors enumerated in Section 15J of the Act he, by his order dated 29-6-2006, levied a penalty of Rs. 5 lakhs on the appellants. It is this order which is now under challenge in this appeal filed under Section 15T of the Act.
2. We have heard the learned representative of the appellants and also Mr. Cherag Balsara, Advocate on behalf of the Board. The facts that Regulation 11 got triggered when the appellants acquired shares on 22-3-2001 and that they did not come out with a public announcement are not disputed. Since the violation of Regulation 11 is admitted, penalty under Section 15H(ii) had to follow. The learned representative of the appellants argued that his clients had made a clean breast of all the facts and disclosed each fact to the Board and this, according to him, clearly indicates that they had no intention to violate the regulations. He also urged that since the appellants acted bona fide, the adjudicating officer should not have levied any penalty. We are unable to accept this contention in view of the law laid down by the Apex Court in Chairman, SEBI v. Shriram Mutual Fund MR. 2006 SC 2287 wherein the learned judges after holding that mens rea was not an essential element for imposing penalty for breach of civil obligations observed as under: 35. In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulation is established and hence the intention of the parties committing such violation becomes wholly irrelevant. A breach of civil obligation which attracts penalty in the nature of fine under the provisions of the Act and the Regulations would immediately attract the levy of penalty irrespective of the fact whether contravention was made by the defaulter with guilty intention or not. We also further held that unless the language of the statute indicates the need to establish the presence of mens rea, it is wholly unnecessary to ascertain whether such a violation was intentional or not. On a careful perusal of Section 15(D)(fo) and Section 15E of the Act, there is nothing which requires that mens rea must be proved before penalty can be imposed under these provisions. Hence once the contravention is established then the penalty is to follow. (p. 2206) In view of the aforesaid legal position, penalty has to be levied on the appellants for violating Regulation 11 which violation, as already observed, is admitted.
3. The question that now arises is what should be the quantum of penalty. Section 15J of the Act prescribes the factors which the adjudicating officer shall take into account while determining the quantum of penalty. He has to have due regard to the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; the amount of loss caused to an investor or group of investors as a result of the default and also the repetitive nature of the default. Having regard to these factors the adjudicating officer worked out the total penalty leviable and came to the conclusion that the disproportionate gain which the appellants had made by not making a public announcement comes to Rs. 4,91,280 and this apart, the shareholders lost the opportunity to exit from the target company. He accordingly imposed a penalty of Rs. 5 lakhs which was then the maximum penalty leviable under Section 15H of the Act. The learned representative of the appellant has seriously challenged before us the method by which the adjudicating officer has calculated the disproportionate gain which the appellants made by not making a public offer in March, 2001. He also urged before us, that the adjudicating officer was in error in not taking into consideration another factor which, according to the appellants, was relevant in the circumstances.
He pointed out that the appellants continued to hold the shares of the target company till 29-8-2005 on which date they transferred their entire holdings in favour of Mrs. Vatsala Ranganathan, Shriram EPC Ltd. and Smt. Usha Vcnkataramani (hereinafter called the new acquirers). He further pointed out that when the new acquirers acquired the shares, regulation 10 of the Regulations got triggered and they came out with a public offer on the following day, i.e., 30-8-2005. In that public offer they offered a price of Rs. 10.22 per share as against the book value of Rs. 5.96. The price offered by the new acquirers included interest at the rate of 15 per cent with effect from 22-3-2001 the date on which the appellants ought to have come out with a public offer.
This position is not disputed by the respondent before us. In view of these facts, the learned representative of the appellants contends that since the shareholders of the target company had been compensated, there was no occasion for the adjudicating officer to impose the maximum penalty. There is some merit in this contention. Since the appellants did not come out with the public offer in March, 2001, at least 20 per cent of the shareholders of the target company must have suffered inasmuch as they did not get the option to exit. However, this option was given to them in August 2005 by the new acquirers but that was to a different set of shareholders. If the appellants had come out with a public offer in March 2001, at least 20 per cent of the shareholders could have made an exit by offering their shares. In August 2005 when the new acquirers made a public offer, then obviously a different set of shareholders could get an exit. We are of the view that only 20 per cent of the shareholders of the target company were compensated and had the appellants also come out with a public offer another 20 per cent of the shareholders could have benefited. This is a mitigating factor which has not been taken into consideration by the adjudicating officer. In this view of the matter, we find that this was not a case where the maximum penalty should have been levied. Having regard to the facts and circumstances of the case, we are of the view that the ends of justice would be adequately met if the quantum of penalty is reduced to Rs. 3 lakhs. We order accordingly.