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SEBI doesn’t impose penalty on Axis Capital

WLR entities( WLL Recovery III Ltd, WLR Recovery IV/ ESC Ltd, India Asset Recovery Fund Ltd and WLR/GS India Ltd) entities have agreed to transfer 451 FCCBs constituting 8,32,00,480 equity shares upon conversion and 4,22,45,920 equity shares collectively aggregating 1,25,446,400 equity shares representing 30.24% of the total voting capital of the Target Company.

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Security and Exchange Board of India’s (SEBI) Adjudicating Officer Parag Basu has disposed of proceedings initiated against the Axis Capital Limited without imposition of any monetary penalty.

The reason was that the alleged violations of regulation 45 (5) of the Substantial Acquisition of Shares and Takeover (SAST) Regulations, 1997 and Clause 4 and Clause 20 of the Code of Conduct for merchant bankers provided under Schedule III of the Merchant Banker Regulations read with Regulation 13 of Merchant Banker Regulations 1992 has not been established.


The following are brief facts:
Spicejet India Limited (Target Company) made a public offer of 800 Foreign Currency Convertible Bonds of a denomination of USD 100,000 with a condition to exercise the option of conversion of the FCCB into equity shares. The FCCBs issued by the Target Company were subscribed by Goldman Sachs Investment Partners (Mauritius) Ltd (GS) (435 FCCBs) and Istithmar World PJSC (375 FCCBs).
Pursuant to the share purchase agreement between the KAL Airways Pvt. Ltd and Mr Kalanithi Maranan Royal Holdings Services Ltd, the acquirers agreed to acquire 31,077,500 equity shares of the Target Company.
WLR entities( WLL Recovery III Ltd, WLR Recovery IV/ ESC Ltd, India Asset Recovery Fund Ltd and WLR/GS India Ltd) entities agreed to transfer 451 FCCBs constituting 8,32,00,480 equity shares upon conversion and 4,22,45,920 equity shares collectively, aggregating 1,25,446,400 equity shares, representing 30.24% of the total voting capital of the Target Company.
Thus, the acquirers agreed to acquire an aggregate of 1,56,523,900 (31,077,500+1,25,446,400) equity shares in the Target Company. The acquirers made an open offer in accordance with regulation 10 and regulation 12 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (SAST Regulations).
A public announcement was made by the acquirers on June 14, 2010, wherein it was stated that the public offer is being made by the acquirers with WLR entities as ‘persons acting in concert’ within the meaning of SAST Regulations for the appointment of merchant banker. M/s Enam Securities Limited (Now known as M/s Axis Capital Limited) Filed the draft letter of offer with Securities and Exchange Board of India vide letter dated June 24, 201 Pursuant to above, SEBI issued a letter of observations vide letter dated October 04, 2010.
Violations:
• Axis capital limited has violated the provisions of regulation 45(5) of SEBI SAST (Substantial acquisition of shares and takeovers) Regulations 1997.
Regulation 45(5)- For any mis-statement to the shareholders or for concealment of material information required to be disclosed to the shareholders, the acquirers or the directors where the acquirer is a body corporate, the directors of the target company, the merchant banker to the public offer and the merchant banker engaged by the target company for independent advice would be liable for action in terms of the regulations and the Act.
• Clause 4 and Clause 20 of the Code of Conduct for Merchant Bankers provided under schedule III of the Merchant bankers Regulations 1992 read with regulation 13
SCHEDULE III
Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992
[Regulation 13] CODE OF CONDUCT FOR MERCHANT BANKERS

  1. A merchant banker shall at all times exercise due diligence, ensure proper care and exercise
    Independent professional judgment
  2. A merchant banker shall not make untrue statement or suppress any material fact in any documents,
    Reports or information furnished to the Board.

Appointment of Adjudicating officer – The Adjudicating Officer, vide order dated March 28, 2011under Section 15-I of the SEBI Act read with rule 3 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 to inquire and adjudge the alleged violations of regulation 45 (5) of the SAST Regulations,1997 and Clause 4 and Clause 20 of the Code of Conduct for merchant bankers was appointed.
Allegations –

  1. That Axis Capital limited had amended the Share purchase agreement on October 05, 2010 i.e. after issuance of the letter of observations by SEBI dated October 04, 2010.

Regulator findings-

An amendment can only be executed and signed by the parties to the original agreement and no person who is not a party to the original agreement will be authorized to sign the amendment agreement. In the present case, theshare purchase agreement entered into between Acquirers, Target Company and WLR entities and upon perusal of the same, Axis capital limited was not a party to the said agreements. Further, under the existing legal framework, Axis capital limited cannot amend the original agreement which was executed between the original parties.

  1. The letter dated October 11, 2010 by Axis capital limited did not mention that Share purchase agreement entered into between Acquirers, Target Company and WLR entities have been Amended post issuance of the letter of observations of SEBI dated October 04, 2010.

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Regulator findings-
The amendment to Share purchase agreement , the parties to the agreement needs to participate in the discussions and finalise the terms of the agreement. After the said actions, the parties will prepare the draft agreement which will be finalized by the parties and will be given effect to the amendments. The said exercise cannot be done overnight. Further, BMR Associates, a Chartered Accountant issued a certificate dated October 04, 2010 for the purpose of outward remittance, the date on which SEBI issued its observation letter. In view of the same, the regulator find merit in the submissions of the Axis capital limited that amendments to the Share purchase agreement were not carried out after receipt of SEBI observation letter dated October 04, 2010. 

Source ILNS

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