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Order in the matter of Monotype India Limited

SEBI

Jun 17, 2016

Judgment

Subsequent
References

CaseIQ

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Summary of Order dated June 17, 2016 — SEBI v. Monotype India Limited

Factual and Procedural Background

This matter concerns the Securities and Exchange Board of India’s (SEBI) proceedings under sections 11(1), 11(2)(j), 11(4) and 11B of the SEBI Act, 1992 read with section 12A of the Securities Contracts (Regulation) Act, 1956, regarding Monotype India Limited’s alleged non-compliance with Minimum Public Shareholding (MPS) norms under rule 19A of the Securities Contracts (Regulation) Rules, 1957 (SCRR).

SEBI issued an order dated January 22, 2016 observing that Monotype India Limited (the Company) had not complied with MPS norms and directed an enquiry into whether promoters and connected entities had reduced their shareholding to 75% or below. The Company made submissions (letter dated March 17, 2016 and subsequent emails) explaining the historical position, including that the promoter’s holding was 75.27% prior to a court-approved scheme of amalgamation and that various corporate actions and a pending scheme before the Hon'ble Calcutta High Court affected its ability to dilute promoter shareholding earlier.

SEBI advised the Company (email dated March 30, 2016 and letter dated April 13, 2016) that promoters could make an Offer for Sale (OFS) of 0.27% based on the pre‑scheme paid up capital and the shareholding pattern as of December 31, 2014. The promoter carried out OFS transactions in April and May 2016; BSE confirmed that after completion of a second OFS in May 2016 the Company was in compliance with MPS norms.

A personal hearing was held on June 06, 2016; the Company provided oral and written submissions. SEBI considered the record, BSE confirmations and the Company’s submissions and ultimately issued an order dated June 17, 2016 revoking prior directions issued against the Company, its directors, promoters and promoter group (interim order dated June 04, 2013 and SEBI orders dated July 22, 2014 and January 22, 2016).

Legal Issues Presented

Whether Monotype India Limited had achieved compliance with the Minimum Public Shareholding (MPS) requirement under rule 19A of the SCRR, taking the pre‑scheme capital and the shareholding pattern as of December 31, 2014 into account.
Whether the directions previously issued (interim order of June 04, 2013 and SEBI orders of July 22, 2014 and January 22, 2016) should be revoked in view of the promoter having reduced its holding via OFS.
Whether SEBI should scrutinize the post‑implementation shareholding pattern after the scheme allotment and listing of newly allotted shares to ensure continued compliance with MPS norms.

Arguments of the Parties

Company's Submissions

The promoters’ holding was 75.27% prior to the scheme of amalgamation and was reduced to 25.23% after the Hon'ble High Court approved the scheme (effectively due to allotment of fresh shares pursuant to the scheme).
While the scheme was pending before the Hon'ble Calcutta High Court (filed in 2011 and sanctioned December 09, 2014), it was not appropriate for the promoter to dilute its shareholding; the promoter therefore did not reduce shareholding earlier.
As a remedial measure following SEBI's order, the promoter undertook an OFS of 44,880 shares (face value Re.1 post stock split), which corresponds to 4,488 shares of Rs.10 each in pre‑scheme terms, thus reducing promoter holding to 75% of the pre‑scheme capital.
The Company asserted it had complied with MPS by an SEBI‑approved method and requested that the directions be vacated and that SEBI not initiate penal proceedings for delay in compliance, explaining the increase to 75.27% arose from a mandatory open offer in June–July 2011.
The Company stated it had sought legal advice which advised against dilution while the scheme was sub judice and that it had not applied to the High Court to alter shareholding during the pendency of the scheme.

SEBI / Regulatory Position (as recorded in the order)

SEBI had observed non‑compliance with rule 19A of the SCRR in its order dated January 22, 2016 and directed an inquiry into promoters’ shareholding reduction to 75% or below.
SEBI advised the Company by communications dated March 30, 2016 and April 13, 2016 that promoters may make an OFS of 0.27% based on pre‑scheme capital and the shareholding pattern as of December 31, 2014 to achieve MPS compliance.
SEBI recorded the confirmation from BSE that, after completion of the second OFS in May 2016, the Company was in compliance with MPS norms.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The whole time member considered: (a) the Company’s written and oral submissions; (b) the confirmations and communications from the Bombay Stock Exchange (BSE) regarding the OFS transactions; and (c) other material on record.

The analysis proceeded as follows:

SEBI’s initial finding (Jan 22, 2016) established that the Company had not complied with the MPS requirement under rule 19A of the SCRR and directed further inquiry into promoter shareholding.
The Company explained historical reasons for non‑compliance: a mandatory open offer in 2011 led to promoter shareholding increasing to 75.27%, and a Scheme of Amalgamation filed in 2011 and sanctioned in December 2014 affected capital structure and the timing of any dilution.
SEBI advised that the promoter could make an OFS of 0.27% of pre‑scheme capital (shareholding pattern as of December 31, 2014) to achieve compliance; the promoter undertook OFS activity in April and May 2016.
BSE’s confirmation established that the first OFS (50,000 shares) resulted in only 20,000 shares being accepted, and a subsequent OFS on May 16–17, 2016 for 24,880 shares was completed successfully; cumulatively, the promoter sold the necessary quantum (44,880 shares post stock split) to bring its holding down to 75% on a pre‑scheme basis.
Given that the promoter’s holding was reduced to 75% as regards the pre‑scheme capital (and BSE’s confirmation of MPS compliance), the court concluded that the directions previously issued could be revoked. The court nonetheless directed that SEBI should scrutinize the Company’s shareholding pattern after implementation of the scheme and listing of newly allotted shares to ensure continued compliance.

The reasoning is limited to the facts on record and SEBI’s statutory powers relied on in the order; there is no extended legal doctrinal discussion or citation of case law in the document.

Holding and Implications

Holding: The authority revoked the directions issued by way of the interim order dated June 04, 2013 and the SEBI orders dated July 22, 2014 and January 22, 2016 against Monotype India Limited, its directors, promoters and promoter group.

Implications and immediate consequences:

The core regulatory directions previously imposed on the Company and related persons were revoked in view of the promoter having reduced its shareholding to 75% (on the pre‑scheme basis) through OFS transactions confirmed by BSE.
SEBI will scrutinize the shareholding pattern after the scheme’s implementation and listing of newly allotted shares to ensure that the Company continues to comply with MPS requirements following the corporate actions arising from the sanctioned scheme of amalgamation.
A copy of the Order was directed to be served on the stock exchanges and depositories for information and necessary action.
The Order does not state that any new precedent was established; it is focused on revocation of prior directions as applied to the facts and documents on record in this case.

Order signed by: PRASHANT SARAN, Whole Time Member, Securities and Exchange Board of India. Date: June 17, 2016. Place: Mumbai.

Show all summary ...

Under sections 11(1), 11(2)(j), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 read with section 12A of the Securities Contracts (Regulation) Act, 1956 in the matter of non-compliance with the requirement of minimum public shareholding by listed companies In respect of Monotype India Limited Date of hearing: June 06, 2016 Appearance: For the Company: Mr. Prakash Shah, Advocate and Mr. Naresh Jain, Director For SEBI: Dr. Anitha Anoop, General Manager, Mr. Pradeep Ramakrishnan, Deputy General Manager, Mr. T. Vinay Rajneesh, Assistant General Manager and Mr. Rohan Vijay, Assistant Manager

1. Securities and Exchange Board of India ("SEBI"), vide an Order dated January 22, 2016, had for the reasons stated therein, observed that the company, Monotype India Limited (the Company) had not complied with the Minimum Public Shareholding (MPS) norms stipulated under rule 19A of the of the Securities Contracts (Regulation) Rules, 1957 ("SCRR"). SEBI was directed to make an enquiry into the subject as to whether the promoters and their connected entities have reduced their shareholding to 75% or below and come out with findings and thereafter proceed in accordance with law.

2. Thereafter, the Company vide letter dated March 17, 2016 made the following submissions: (a) The promoters holding in the Company was 75.27% prior to the approval of the scheme of amalgamation and reduced to 25.23% after approval by the Honble High Court. (b) As the matter was pending in the Honble Calcutta High Court since 2011, the Company was unable to reduce the promoters holding to 75% as required under rule 19A of the SCRR. (c) The Company is in compliance of the MPS norms upon allotment of shares to the shareholders of the transferor companies as per the Scheme approved by the Honble High Court. (d) As observed in the SEBI Order dated January 22, 2016 and to comply with the same by offering shares in OFS, the Company submitted that the promoter/director of the Company would tender shares to the extent of 0.27% of the old capital of the Company i.e. 5000 shares of Rs.10/- each (equivalent to 50000 shares of Re.1/- now) upon getting listing approval of new shares by BSE and lifting of directions issued vide the interim order.

3. SEBI vide email dated March 30, 2016 and letter dated April 13, 2016, advised the Company that its promoter/s can make offer for sale of 0.27% as per the pre-scheme paid up capital and the shareholding pattern of the Company for the quarter ended on December 31, 2014 for the purpose of achieving compliance with the MPS requirement.

4. The Company vide e-mail dated May 18, 2016 submitted that the offer for sale of 44880 shares of Re.1/- constituting 0.27% of pre-scheme capital had been completed and referred to the disclosures made in that regard in terms of the Takeover Regulations. BSE, vide e-mail dated May 23, 2016 confirmed and stated as under: (a) Swagatam Tradevin Limited, the promoter of the Company had offer 50,000 equity shares under the OFS on April 26, 2016 (for non-retail investors) and April 27, 2016 (for retail investors). (b) In the first OFS, bids were received for only 20,000 shares and accepted by the promoter. Therefore, Company was not able to achieve compliance with the MPS norms. (c) Another OFS was made on May 16, 2016 and May 17, 2016 for 24,880 shares which was completed successfully. (d) On completion of the second OFS, the Company is in compliance with MPS norms.

5. The Company was afforded an opportunity of personal hearing on June 06, 2016. In the personal hearing, the Company was represented by Mr. Prakash Shah, Advocate and Mr. Naresh Jain, Director. The representatives made oral submissions and also tendered written submissions dated June 04, 2016. The following submissions were inter alia made therein: (a) SEBI had granted permission to make offer for sale of excess promoter shareholding of 0.27% as per the pre-scheme paid up capital. (b) Thereafter, the promoter, Swagatam Tradevin Limited approached BSE expressing its intention to make the OFS of 50,000 equity shares. BSE, vide notice dated April 25, 2016 on its website informed all market participants about the opening of the OFS. (c) On completion of OFS, SEBI was informed vide e-mail dated May 18, 2016. (d) The promoter holding of 12,40,860 shares of Rs.10/- each consisting of 75.27% was reduced by 4488 shares to 12,36,372 shares of Rs.10/-, which worked out to 75% of the total shareholding as on December 31, 2014. With effect from March 17, 2015, the stock split was from Rs.10/- to Rs.1/- therefore OFS of 44,880 shares of face value of Rs.1/- as on May 17, 2016 should be considered as 4480 shares of face value of Rs.10/- as on December 31, 2014. (e) A copy of the latest shareholding pattern filed with BSE was annexed and the Company submitted that it had complied with the MPS norms by one of the SEBI approved methods. (f) The Company therefore requested SEBI to vacate the directions issued vide the interim order and confirmed vide orders dated July 22, 2014 and January 22, 2016. (g) The Company also requested SEBI not to initiate penal proceedings for delay in compliance with the MPS norms on the following grounds:

i. On and around June-July 2011, then promoter of the Company, viz., Swagatam Tradevin Limited (holding 74.23%) was mandatorily required to make an open offer in terms of the Takeover Regulations. Post the open offer, the shareholding of the promoter increased to 75.27%.

ii. The Company submitted that only on account of the mandatory offer, the promoters holding increased by 0.27% beyond 75%.

iii. On and around 2011, the Company filed a Scheme of Amalgamation/Merger before the Honble High Court of Calcutta whereby effectively the promoter shareholding was reduced from 75.27% to 25.23% from March 18, 2015 on allotment of 68,66,36,929 fresh shares pursuant to approval of scheme of merger.

iv. The Company had persistently, consistently and in timely manner followed the process and procedure for approval of the scheme.

v. Subsequent to the Order passed by SEBI on January 22, 2016, the Company had advised Swagatam Tradevin Limited to make the OFS for compliance with the MPS norms. The representatives also sought liberty to file additional submissions, which was allowed.

6. Thereafter, vide submissions dated June 07, 2016 and June 09, 2016, the Company inter alia made the following submissions: (a) The Company and its promoter were keen in complying with the MPS norms. However, as the Company had filed a petition for amalgamation on November 29, 2011, it was not considered appropriate by the promoter to dilute its shareholding post the filing of the scheme before the Honble High Court. Thereafter, the Company had persistently and consistently followed the process and procedure for approval of scheme. (b) Before submission of letter dated May 21, 2013 with BSE, the Company had sought legal opinion from an Advocate on whether the promoter could go for dilution of its shareholding as per SEBI circular dated December 16, 2010 relating to compliance with MPS norms. (c) The Advocate had opined that as the matter was sub-judice and pending with the Honble Calcutta High Court, it was not advised to dilute the shareholding, if done may be a violation of orders of the Honble High Court passed on December 01, 2011 upon submission of the scheme. Therefore, the promoter did not dilute its shareholding. (d) Further, the Company had not applied or moved any application before the Honble High Court for any change in shareholding and therefore is not able to furnish any order passed by the Honble Court whereby the Company and promoters were restrained from diluting their shareholding in the Company for the purpose of compliance with MPS requirement. (e) The Company submitted that no fault could be attributed to it or any of its directors or promoter for the delay in complying with the MPS norms and requested SEBI not to initiate penal proceedings in the larger interest of the Company and its shareholders.

7. I have considered the submissions made by the Company, the confirmation from BSE that the Company has complied with the MPS norms and other material available on record. The Company has stated that during June-July 2011, its promoter Swagatam Tradevin Limited had to mandatorily make an open offer to the public shareholders in terms of the Takeover Regulations and on acquisition of shares in the open offer, its shareholding had increased to 75.27% from 74.23%. It is also submitted that a Scheme for amalgamation for merger of 6 companies (including the aforesaid promoter) into the Company was filed before the Honble Calcutta High Court in the year 2011 and the same was sanctioned on December 09, 2014. The Company has submitted that its promoter was not able to make an OFS during the period the Scheme was pending consideration before the Honble High Court.

8. I note that the promoter of the Company had made an OFS and sold 44,880 shares of Re.1/- (post stock split) during May 2016 and had brought down its shareholding to 75% (considering the capital prior to the Scheme). BSE has also confirmed that the Company is now in compliance with the MPS norms. As the promoters shareholding was brought down to 75% (which implies that the public shareholding is at 25%, the requirement under rule 19A of the SCRR) of the pre-scheme shareholding, the directions imposed on the Company, its promoter/s and directors can now be revoked. However, SEBI shall scrutinize the shareholding pattern of the Company post implementation of the Scheme and listing of the newly allotted shares (as per the approved scheme), in order to be satisfied that the Company continues to be compliant with the MPS norms pursuant to such corporate actions.

9. In view of the foregoing, I, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11(1), 11(2)(j), 11(4) and 11B thereof and section 12A of the Securities Contracts (Regulation) Act, 1956, hereby revoke the directions issued vide the interim order dated June 04, 2013 and confirmed vide SEBI Orders dated July 22, 2014 and January 22, 2016 against the company, Monotype India Limited, its directors, promoters and promoter group.

10. Copy of this Order shall be served on the stock exchanges and depositories for their information and necessary action. PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Date: June 17th, 2016 Place: Mumbai