WTM/TCN/01 /CFD/ APRIL /08

SECURITIES AND EXCHANGE BOARD OF INDIA

CORAM: T C NAIR, WHOLE TIME MEMBER
IN THE MATTER OF PUBLIC OFFER FOR ACQUISITION OF 103,88,445
OF THE EQUITY SHARE CAPITAL OF JAGATJIT INDUSTRIES LTD.
(TARGET COMPANY) BY M/S L.P JAISWAL & SONS PVT. LTD. AND
MR. KARAMJIT S. JAISWAL (KSJ)(ACQUIRERS) AND PERSONS
ACTING IN CONCERT - SECURITIES AND EXCHANGE BOARD OF
INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS)
REGULATIONS, 1997 {TAKEOVER REGULATIONS}
1.0 Background
1.1 This case has been brought to me pursuant to the Show Cause Notice
(hereinafter

referred

to

as

SCN)

issued

vide

letter

no

CFD/DCR/TO/AG/105821/07 dated 10.10.2007 in the matter of public

offer for acquisition of 103,88,445 of the equity share capital of JAGATJIT
INDUSTRIES LTD. (target company) by M/s L.P Jaiswal & Sons Pvt. Ltd.
and Mr. Karamjit S. Jaiswal (KSJ)(acquirers) and persons acting in concert
(hereinafter referred to as PAC)made on 14.04.2006.
1.2 The target company was incorporated in 1994 and is engaged in the
manufacture of liquor and various kinds of malted milk. The shares of the
company are listed in BSE, DSE, Ludhiana Stock Exchange and Kolkata
Stock Exchange. The company was promoted by Late Mr L.P Jaiswal. On
31.03.2004, the acquirers were holding 74,18,748 equity shares constituting
15% and acquirers along with PACs were holding 1,16,63,628 equity
shares constituting 23.59% of the paid up capital and voting rights in the
target company. The paid up capital/voting capital of the company was
4,94,42,224 shares.
1.3 On 30.04.2004, the board of directors of the target company resolved to
offer 25,00,000 special series equity shares of Rs 10/- each at a premium of

Rs 20/- per share carrying differential rights as to dividend and voting (nil
dividend and 20 voting rights per share)(hereinafter referred to as DVR
shares) to M/s L P Jaiswal & Sons Pvt. Ltd. (one of the promoters). In this
regard, the shareholders approval was obtained through postal ballot and
the result was announced in the EGM held on 16.06.2004.
1.4 Pursuant to the shareholders approval, the aforesaid shares were allotted
which constituted 4.81% of the enhanced paid up capital of 51942224
(4,94,42,224 + 25,00,000) and 50.28% of the voting rights on 17.06.2004. This
allotment resulted in the increase in the shareholding of the acquirers from
15% to 19.10% of paid up capital and 57.74% of the voting rights (taking
voting capital as 9,94,42,224) and that of acquirer along with PACs
increased 62.0% of the voting rights. Pursuant to the acquisition of voting
rights by acquiring DVR shares, the acquirers triggered regulation 11(1).
However, no open offer was made by the acquirers at that time.
1.5 On 08.10.2004, KSJ acquired 100 shares from open market @ Rs 32/- per
share and on 13.10.2004, KSJ acquired 21,90,404 shares through gift deed
from one of the relatives. Hence, the total acquisition made by KSL of
21,90,504 shares in October 2004 represented 4.21% of the total paid up
capital of 5,19,42,224 shares and 2.21% of the total voting capital of
9,94,42,224. The same was within the creeping limit of 5% as available in
terms of the prevailing Takeover Regulations. A public announcement
was made taking 17.06.2004 as trigger date and 30.04.2004 as reference
date for pricing.
1.6 For the delay in making the offer, it was stated by the acquirer that in view
of the legal advice taken that the preferential allotment of 25,00,000 DVR
shares did not trigger an open offer under the Takeover Regulations, no
open offer was made. However, in the light of the judgment of Supreme
Court in the matter of Swedish Match AB and others Vs SEBI, the
company sought legal opinion again and it was advised that the acquirer
should make the open offer as a matter of abundant precaution.
Accordingly, a public announcement was made. On 27.04.2006, draft letter

of offer in the case was filed with the Securities and Exchange Board of
India (hereinafter referred to as SEBI) wherein the said details of the
acquisition were provided. The offer was made for acquisition of
103,88,445 shares constituting 20% of the total paid up capital and 10.45%
of the total voting rights. It was disclosed in the draft letter of offer that the
pricing for the DVR shares was determined as per the pricing norms
specified in the SEBI (Disclosure and Investor Protection) Guidelines, 2000
(hereinafter referred to as the DIP Guidelines). It was also disclosed that
the issue of DVR shares was made to protect the target company against
the Takeover threats. On 15.07.2006, the target company vide letter dated
15.07.2006 approached BSE for listing of the DVR shares. BSE vide letter
dated 25.07.06 informed them that with respect to the listing of DVR shares
since the guidelines are yet to be framed by SEBI, you may not list the same at
this point of time. As and when the guidelines are framed and made operative, you
are requested to approach the exchange for compliance with the guidelines.
2.0 Complaints made by Mr Anand P Jaiswal, M/s Blossom Investments
Pvt. Ltd. (Blossom) and M/s Talkatora Investments & Trading Company
Pvt. Ltd. (Talkatora) (hereinafter collectively referred to as the
complainant) received on 08.08.2006
2.1 Mr Anand P Jaiswal is the son of Late Mr L P Jaiswal and holds 8,51,408
equity shares (1.72%) in the target company and holds 300 shares in M/s L
P Jaiswal & Sons Pvt. Ltd. (one of the acquirer for the instant open offer).
He is a resident of UK and was director in target company from 1981 till
Nov 2003.
2.2 Blossom and Talkatora are the companies registered under the Companies
Act, 1956 and are controlled by Mr Anand P Jaiswal. They held 7,76,000
shares (1.56%) and 12,68,116 shares (2.56%) respectively in the target
company.
2.3 The complainant has alleged that the acquirer and the target company
committed the following violations:

A. Violations under the SEBI (Prevention of Fraudulent and Unfair Trade

Practices Relating to Securities Market) Regulations, 2003: The target
company did not disclose to the stock exchanges the real beneficiaries of the
GDRs thus violating the provisions of the SEBI (Prevention of Fraudulent
and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
B. Listing Agreement: (a) In terms of Clause 24(a) of the Listing Agreement,
no in-principle approval has been taken for issuing such DVR shares by the
target company.
(b) In terms of clause 36 of the Listing Agreement, the company did not
disseminate the information pertaining to the issue of such DVR shares,
which was quite price sensitive.
C. Provisions of the Companies Act, 1956: (a) The issue of DVR shares is
permitted under the Act only if the Companies (Issue of Share Capital with
Differential Voting Rights) Rules, 2001 are complied with. These rules, inter
alia, provide that the Article of Association (AoA) of the company authorizes the
issue of shares with differential voting rights. However, in the instant case, the
AoA did not provide for the same.
(b) Before passing the resolution through postal ballot, the 30 days prior
notice of the proposed resolution was not sent to the shareholders in terms
of Sec 192A of the Companies Act, 1956.
D. Pricing of DVR shares: The pricing of the DVR shares though stated to
have been done as per the DIP Guidelines, has not been done in appropriate
manner. The price of the normal voting rights shares has been taken as
benchmark for determining the price for these shares and the same is not
correct.
3.0 Submissions made by the target company
3.1 Vide letter dated 18.08.2006, the aforesaid complaint was forwarded to
the Merchant Banker to which the Merchant Bankers replied vide letter
dated 05.10.2006 enclosing the letter of the target company dated

041.0.2006. Vide the aforementioned letter, the target company

submitted the following:
3.2 Listing Agreement: The Clause 24(a) requires in principle approval to
be taken for listing of further shares or securities to be issued. Since in
the present case, the shares issued in June 2004 were not proposed to
be listed at that time and had lock in period, clause 24(a) of the Listing
Agreement is not attracted. Further, when the target company
approached BSE vide letter dated 15.07.2006 for listing of the DVR
shares. BSE vide letter dated 25.07.06 informed them that with respect
to the listing of DVR shares since the guidelines are yet to be framed by SEBI,
you may not list the same at this point of time. As and when the guidelines are
framed and made operative, you are requested to approach the exchange for
compliance with the guidelines.
However, the target company had been frequently informing Stock
Exchanges about the issue of these shares. The same was also intimated
to the Stock Exchange under clause 35 of the Listing Agreement.
3.3 Provisions of the Companies Act, 1956:

The Memorandum of

Association (MoA) and Article of Association (AoA) of the company

specifically authorize issue of DVR shares. The capital clause of MoA
and Article 5 of the AoA provided the issue of such shares.
The capital clause of the MoA read as follows:
The authorizes share capital for the company is divided into 7,50,00,000
equity shares of Rs. 10 each with power to increase, reduce or divide the
capital for the time being into several classes and to attach thereto respectively
such preferential, priority, deferred, qualified or special right, privileges,
conditions or restrictions, whether in regard to the dividend, voting, return of
capital, distribution..
Article 5 of the AoA of the company also authorizes the company to
issue shares with such terms and conditions and with rights and

privileges annexed thereto as the resolution shall prescribe. It is stated

therein that
The company in General Meeting may, from time to time, by a special
resolution increase the capital by the creation of new shares, such increase to
be of such aggregate amount and to be divided into shares, of such respective
amounts as the resolution shall prescribe. The new shares shall be issued upon
such time and conditions and with such rights and privileges annexed thereto
as the resolution shall prescribe and, in particular, such shares may be issued
with a preferential qualified right to dividends, and in the distribution of
assets of the company, and with right of voting in general meeting of the
company in conformity with section 87 of the Act.
Therefore, the company can issue DVR shares in General Meeting by
way of a Special Resolution. The AoA has left it to the discretion of the
members to fix the quantum of the privileges and restrictions on
various rights.
Further, as regards the 30 days notice, as per Rule 2A of the Companies
(Passing of Resolution by Postal Ballot) Rules, 2000, the target
company sent the notices to all the shareholders under Certificate of
Posting on 13.05.2004. An advertisement to this effect was also issued
in vernacular paper in Punjab where registered office of the target
company is situated.
3.4 Pricing of DVR shares: The target company issued the shares at a price
as determined in terms of the provisions of the DIP Guidelines. The
same was also confirmed by PWC vide their certificate dated
26.05.2004.
As there were no specific guidelines for the pricing of the DVR shares,
the prevailing general guidelines were adopted to the extent
applicable.
3.5 Timing of the Public Announcement
When the DVR shares were issued, the company and the acquirer were
legally advised that no public offer in terms of the Takeover

Regulations is required. Later on, in the light of the judgment of the

Honble Supreme Court in the matter of Swedish Match AB and others
Vs SEBI, the company sought legal opinion again and it was advised
that the acquirer should make the open offer as a matter of abundant
precaution. Accordingly, a public announcement was made.
The public announcement was made with bonafide intention and not
to bury any irregularities as alleged. The offer is in interest of the
shareholders and they are being compensated for the delay by paying
interest by the acquirers.

Show Cause Notice

4.0 After examining the complaints made by the complainant vide letters
dated 08.08.2006, 30.03.2007 and submissions made by the acquirers
and the target company vide letters dated 04.10.2006 and material
available on record, SEBI issued SCN dated 10.10.2007 to the acquirers.
In the said SCN, it was, inter alia, alleged that :
a. The said allotment of DVR shares made by the target company has
been found to be made in violation of relevant provisions of the
Companies Act, 1956.
b. Regulation 11(1) of the Takeover Regulations {as was applicable on
17.06.2004} in terms of which no acquirer who together with PACs with
him, has acquired, in accordance with the provisions of the law, 15% or
more but less then 75% of the shares or voting rights in a company
could acquire, through creeping acquisition, more than 5% of the
voting rights in any financial period ending 31st March unless such
acquirer made public announcement in accordance with the
Regulations.
c. Therefore, in the instant case, public announcement can be made only
if the acquirers had acquired the shares/voting rights in accordance
with the law. The acquisition of 25,00,000 DVR shares in the aforesaid
manner without complying with the requirements of the provisions of

the Companies Act, 1956, amounts to violation of the provisions of

regulation 11(1) of the Takeover Regulations and therefore, the
acquirers are liable for action under the Takeover Regulations and the
SEBI Act, 1992.
d. In view of the above, the acquirers were called upon to show cause as
to why one or more or all action(s) under regulations 44 and 45 of the
Takeover Regulations and sections 11 and 11B of the SEBI Act, 1992,
including freezing of voting rights as acquired by the acquirers on
DVR shares, should not be initiated against the acquirers for the
aforementioned violations.
5.0 Hearing
5.1 An opportunity of hearing was granted to the acquirers on 27.02.2008
and thereafter on 18.03.2008. On the date of hearing, among others, Mr.
J.J. Bhatt, Mr. Atul Rajadhyaksha, Senior Advocates, and Mr. M.K.
Doogar and Mr. Deepak Singhi, Directors, Chartered Capital and
Investment Ltd. appeared on behalf of the applicants. The acquirers
also filed written submissions on 28.11.2007, 18.03.2008, 27.03.2008 and
04.03.2008.

6.0 Submissions of the acquirer

6.1 The learned advocate appearing on behalf of the acquirers contended
that ex-facie the jurisdictional ingredients for invoking the powers
under section 11 and/or 11B of the SEBI Act are absent in the present
case.
6.2 The oral and written submissions made on behalf of the acquirers are
as under:A. The present SCN is liable to be dropped and may not be proceeded
with in view of the pendency of the subsisting proceedings before the
Company Law Board wherein not only all the issues raised in the SCN
but a large number of other issues have also been raised.

B. The allegations made by Mr. Anand Prasad Jaiswal (the complainant)

to SEBI are identical to the issues raised by him before the Company
Law Board (hereinafter referred to as CLB).
C. Section 55A of the Companies Act, 1956 vests with SEBI the authority
of administering the sections stated therein. It does not empower SEBI
to invoke the provisions of the SEBI Act, 1992 to enforce the provisions
of the Companies Act, 1956.
D. In case, the approval is not granted by SEBI prior to the hearing of the
matter relating to the validity of the allotment of the shares by CLB
which is the appropriate forum to deal with the issue of allotment of
shares, it would be in the interest of justice that SEBI be requested to
await the outcome of the proceedings in CLB, as any expression of
opinion by SEBI may prejudice the case of either party.
E. During the pendency of the proceedings before CLB, CLB has passed
only interim order and the prayer of the complainant for freezing of
the voting rights has not been granted by CLB. The final hearing of the
petition filed by the complainant before the CLB is fixed for 26.03.08
when the CLB may take a view on all the allegations. There is not any
emergent situation warranting action under section 11 and /or 11B of
the SEBI Act.
F. SEBI is not competent to pass any interim order freezing the voting
rights of the DVR shares under section 11 and 11B as proposed in the
SCN for the reasons mentioned therein.

7.0 Consideration of the issues and Findings

7.1 On consideration of the submissions made on behalf of the complainants
and the acquirers, I note that the following issues are the matters for
determination in this orderA) Whether under the provisions of the Companies Act, 1956 and the SEBI
Act, 1992 SEBI has the power to decide the legality and propriety of
allotment of DVRs and take actions for violations?

B) Whether pursuant to the acquisition of aforesaid DVR shares allotted

in the manner as stated above, the Takeover Regulations got triggered?

7.2 Powers of the Securities and Exchange Board of India have been
enumerated under section 55A of the Companies Act, 1956. Section
55A of the Companies Act, 1956 reads as hereunder:
The provisions contained in sections 55 to 58, 59 to 81, 108, 109, 110, 112,
113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207, so far as they
relate to issue and transfer of securities and non-payment of dividend shall, (a) in case of listed public companies;
(b) in case of those public companies which intend to get their securities
listed on any recognized stock exchange in India, be administered by
the Securities and Exchange Board of India; and
(c) in any other case, be administered by the Central Government.
Explanation.-For removal of doubts, it is hereby declared that all
powers relating to all other matters including the matters relating to
prospectus, statement in lieu of prospectus, return of allotment, issue
of shares and redemption of irredeemable preference shares shall be
exercised by the Central Government, Tribunal or the Registrar of
Companies, as the case may be.
Thus, section 55A of the Companies Act, 1956 clearly segregates the
sections which shall be administered by SEBI from those to be
administered by the Central Government.
At present, section 55A of the Companies Act, 1956 confers upon SEBI
the right to administer certain provisions relating to the issue and
transfer of securities and non-payment of dividend in the case of listed
public companies and those companies that intend to get their
securities listed. The Companies Act, 1956 stipulates that all powers
relating to all other matters including those relating to prospectus,
statement in lieu of prospectus, return of allotment, issue of shares and
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redemption of irredeemable preference shares shall be exercised by the

Central Government, Company Law Board, Registrar of Companies as
the case may be.
Section 86 of the Companies Act, 1956 permits a company to issue
equity shares with DVR subject to compliance of the conditions
prescribed under the Companies (Issue of Share Capital with
Differential Voting Rights) Rules, 2001. However, section 86 is not
specified in section 55A of the Companies Act, 1956 and hence is not
administered by SEBI. Therefore, under the present statutory
provisions, SEBI does not have any power to regulate the issuance of
the DVR shares. However, any change in the shareholding/voting
rights or control in pursuance of the acquisition of shares/voting rights
by virtue of allotment of such DVRs is regulated by SEBI under the
provisions of the Takeover Regulations. Further, the issue and listing of
the DVR shares will also attract the applicability of the DIP Guidelines
and the Listing Agreement. In view of the above, the Central
Government may be the competent authority to determine whether the
issuance of the DVR shares, as has been done in the instant case, is
legal or otherwise.

7.3 In the present case, it is noted that:A. Pursuant to the allotment of the DVR shares, which constituted 4.81%
of the enhanced paid up capital of 51942224 and 50.28% of the voting
rights on 17.06.2004, there was an increase in the shareholding of the
acquirers from 15% to 19.10% of paid up capital and 57.74% of the
voting rights (taking voting capital as 9,94,42,224) and that of acquirer
along with PACs increased 62.0% of the voting rights, thereby
triggering regulation 11(1) of the Takeover Regulations. Therefore, the
acquirers made a public announcement taking 17.06.2004 as trigger
date and 30.04.2004 as reference date for pricing.

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B. Regulation 11(1) of the Takeover Regulations (as was applicable on

17.06.2004) reads as hereunder:
11. (1) 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% 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.

C. As noted earlier, regulation 11(1) of the Takeover Regulations may

trigger pursuant to the increase in shareholding/voting right of the
acquirers in the target company on account of allotment of DVR shares.
A public announcement can be made in terms of regulation 11(1) of the
Takeover Regulations, if the shares/voting rights were acquired in
accordance with law. However, the legality or lack of it of the DVR
shares so allotted pursuant to which there was an increase in the
shareholding of the acquirers from 15% to 19.10% of paid up capital
and 57.74% of the voting rights (taking voting capital as 9,94,42,224)
and that of acquirer along with PACs increased to 62.0%, is one of the
issues that is yet to be determined by the Competent Authority.
D. In my view, under the facts and circumstances of this case and for the
reasons stated above, the public announcement in the matter shall not
be proceeded with till the legality of the DVR shares so allotted is
determined by the Competent Authority.

7.4 This decision is in respect of the special facts and circumstances of the
present case and may not be treated as precedent for the other cases which
should be decided on their own merits under the facts and circumstances
of respective cases.

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The issues raised in this matter are accordingly disposed of. However,
SEBI reserves its right to take any action to enforce the provisions of the
law administered by it and the provisions of regulations and guidelines
framed by it and take appropriate action in the matter in accordance with
law if the Competent Authority in the matter holds such issue of DVR
shares to be in accordance with law and the Companies Act, 1956.

T C NAIR
WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA

Place: Mumbai
Date: 08.04.2008

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