Market regulator Securities and Exchange Board of India (SEBI) has imposed a fine of Rs10 lakh on Karvy Financial Services Ltd for delay in making public announcement to acquire shares of Regaliaa Realty Ltd.
Karvy Financial made public announcement for open offer with a delay of 81 days, in violation of Substantial Acquisition of Shares and Takeovers (SAST) norms.
SEBI’s investigation revealed that Karvy had extended a loan amount of Rs7 crore to Regaliaa whose promoters had pledged 55.56% of the paid-up share capital in favour of Karvy, in addition to the securities for availing the loan. Karvy invoked the pledge as the firm defaulted on payment of instalments. This took Karvy’s shareholding in the company to 55.56%, thereby breaching the threshold of 25% as stipulated under SAST norms.
In October 2016, the regulator had directed Karvy to make the public announcement to acquire shares of the target company within 45 days.
Karvy however chose to challenge SEBI’s order and filed an appeal before the Securities Appellate Tribunal (SAT). The tribunal dismissed Karvy’s plea in April 2018, thereby reaffirming SEBI’ decision.
Accordingly, it was required to make the public announcement within 45 days from the date of the Tribunal's order but it announced only in August 2018, with a delay of 81 days.
"... by not making the mandatory public announcement within the stipulated time period the noticee has violated the statutory requirements of law and accordingly, the noticee has to be penalised for the same," SEBI said.
In its reply, Karvy stated that consequent to the offer, it had actually paid the offer price of Rs20.55 (being Rs11.50 plus interest of Rs9.05 at 10% from 2012 for a period of around eight years for the delay) to the public shareholders of the target company and contended that there is no justification for initiation of adjudication proceedings against it for imposition of monetary penalty for the alleged delay.
In its submissions Karvy also contended that it has not made any gains or derived any unfair advantage because of alleged delay in making open offer and that the delay has also not caused any loss to the investors or group of investors.
SEBI then pointed out that “…payment of interest is the compensation paid to the shareholders of the target companies due to their losing an exit opportunity at the right time as a result of the failure on the part of the acquirers to make the public announcement within the stipulated time period prescribed under the SEBI (SAST) Regulations and such interest payment by the acquirer cannot be considered as a penalty that has been paid by the acquirer. The directive by SEBI to the noticee to pay interest on a sum, which is due to the shareholders is not a penalty; it is the legitimate claim of the shareholders for the delay involved in making payment to them. Thus, note that the liability to pay interest is a part and parcel of the legal liability to pay compensation upon delay in making an open offer”.
SEBI also highlighted that “losing an exit opportunity by the shareholders at the right time as a result of the failure on the part of the acquirers to make the public announcement within the stipulated time period prescribed under the SEBI (SAST) Regulations, is a loss to the investors”.
Prasanta Mahapatra, the adjudicating officer of SEBI, then maintained the “view that by not making the mandatory public announcement within the stipulated time period the noticee has violated the statutory requirements of law and accordingly the noticee has to be penalized for the same. The contention of the noticee that they have compensated the investors by paying interest for the delayed public announcement of open offer cannot be a valid ground to escape liability”.
He however did consider it as a mitigating factor while arriving at the quantum of penalty on Karvy Financial Services.