PUNRASAR HOLDING PVT. LTD. (FORMERLY PUNRASAR STOCK BROKING PVT. LTD.) Vs. SECURITIES AND EXCHANGE BOARD OF INDIA

JUDGEMENT

(1.) WHETHER the appellants in these two appeals (No. 205 and 206 of 2009) were appointed to the board of directors of Winsome International Limited (for brevity the target company) during the offer period and thereby violated the provisions of Regulation 22(7) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (referred to hereinafter as the takeover code) is the short question before us. These appeals raise common questions of law and fact and are being disposed of by this order. Facts leading to the filing of the appeals are these.

(2.) M /s. Punrasar Holding Pvt. Ltd., the appellant in Appeal No. 205 of 2009 together with Shri Sheo Ratan Agarwal, the appellant in the connected appeal entered into a share purchase agreement on April 19, 2006 with the promoters of the target company for acquiring 40.70 per cent of its paid -up equity capital amounting to 7,00,000 shares at a price of Rs. 11.50 per share on a spot delivery contract basis. This acquisition triggered Regulations 10 and 12 of the takeover code and, therefore, the appellants made a public announcement on April 24, 2006 to the shareholders of the target company to purchase upto 3,44,000 fully paid -up equity shares of Rs. 10 each representing 20 per cent of its paid -up equity share and voting capital at a price of Rs. 12 per share payable in cash. The draft letter of offer which has eventually to go to the shareholders has first to be sent to the Securities and Exchange Board of India (for short the Board) for its comments under Regulation 18 of the takeover code. It was sent on May 5, 2006 by Sumedha Fiscal Services Limited, the Manager to the offer on behalf of the appellants. It appears that while scrutinising the draft letter of offer, the Board noticed that Shri Prakash Chand Choraria, a director of Punrasar Holding Pvt. Ltd. and Shri Sheo Ratan Agarwal were appointed as directors on the board of the target company on April 19, 2006, the day the share purchase agreement was executed. This, according to the Board, was in violation of Regulation 22(7) of the takeover code and, therefore, two identical notices both dated March 14, 2008 were issued to the appellants to show cause why an enquiry should not be held against them and why penalty should not be imposed on them under Section 15HB of the Securities and Exchange Board of India Act, 1992 (for short the Act) for this violation. They filed separate but identical replies dated April 4, 2008 pointing out that they had been appointed to the board of directors of the target company in the meeting held on April 19, 2006 which was held prior to the board meeting for considering the share purchase agreement and that it was a matter of coincidence that their appointment was made on the same day on which the share purchase agreement had been executed. It was further pointed out that both the appellants had undertaken not to participate in any matter(s) concerning or relating to the offer including any preparatory steps leading to the offer and also abstained from all proceedings relating to the offer as per Regulation 22(9) of the takeover code. On a consideration of the reply filed by the appellants and after affording them a personal hearing on November 7, 2008, the adjudicating officer concluded that the appellants had not placed any material on record to establish that they were appointed directors to the board of the target company prior to the execution of the share purchase agreement as alleged by them and observed "As the Noticee has failed to produce any material in his defence, I am unable to accept the contentions raised by the Noticee". The adjudicating officer further observed that it was quite curious that the target company would have two board meetings in a day, one for the appointment of new directors and the other for considering the offer of the acquirers when the new directors are themselves the acquirers. He also referred to the provisions of the Companies Act and observed that the appointment of a director of a public limited company is not made instantaneously. He further observed that the share purchase agreement could not have been entered into without proper negotiations and discussions and since the appellants are a party to the agreement, it could be assumed that they would have participated in the negotiations and discussions and that they must be well aware that they would be entering into the agreement to acquire a substantial amount of shares of the target company. The adjudicating officer concluded that the appellants violated Regulation 22(7) of the takeover code and that the violation warranted the imposition of monetary penalty. After taking into account the factors enumerated in Section 15J of the Act, he imposed a monetary penalty of Rs. 3 lacs on each of the appellants by his two separate orders both dated August 14, 2009. It is against these orders that the present appeals have been filed.