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

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 2

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: 3

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 4

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 5

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 6

Regulations is required. Later on, in the light of the judgment of the Hon ble 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 31 st 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 7

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. 8

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 order- A) 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? 9

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 10

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. 11

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. 12

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 13