WTM/RKA/CFD-DCR/ 01/2015

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA

ORDER
Under sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 and
regulation 32 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
2011 in respect of CMS Computers Limited and CMS Traffic Systems Limited
In the matter of acquisition of shares of Kaycee Industries Limited.
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1. Kaycee Industries Limited (hereinafter referred to as "the target company") is a company
having its registered office at 32, Ramjibhai Kamani Road, Ballard Estate, Mumbai - 400001.
The shares of the target company are listed on Bombay Stock Exchange Limited ("BSE").
2. As on July 18, 2013, the promoters of the target company comprised CMS Computers
Limited (hereinafter referred to as "the acquirer") and CMS Traffic Systems Limited, holding
together 35,725 equity shares constituting 66.81% of the paid up capital of the target
company.
3. On May 13, 2013, the board of directors of the target company passed a resolution for
preferential allotment of its 10,000 equity shares to the acquirer subject to approval of
shareholders. On July 06, 2013, the shareholders of the target company approved the
resolution in respect of the said preferential allotment through postal ballot.
4. Accordingly, on July 19, 2013, the target company allotted 10,000 equity shares of 100/each at the price of 3,312/- per share (i.e. with a premium of 3212/-) to the acquirer.
Consequently, the shareholding of the promoters of target company changed as described in
the following table:
Pre-allotment Shareholding

Post-allotment shareholding

No. of shares

% of shares

No. of shares

% of shares

CMS Computers Limited

4,069

7.61

14,069

22.16

CMS Traffic Systems Limited

31,656

59.20

31,656

49.88

Total Promoters' shareholding

35,725

66.81

45,725

72.04

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Order in the matter of Kaycee Industries Limited

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5. Thus, consequent to the aforesaid preferential allotment of equity shares to the acquirer,
there was an increase in the collective shareholding of the promoters of the target company
from 66.81% to 72.04% (i.e. 5.23%).
6. Since such acquisition exceeded permissible 5% creeping limit under regulation 3(2) of SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to
as "the Takeover Regulations, 2011"), SEBI issued a show cause notice dated May 26, 2014
(hereinafter referred to as "the SCN") to the acquirer and the other promoter namely, CMS
Traffic Systems Limited, who is deemed to be a person acting in concert ("PAC") with the
acquirer in terms of regulation 2(1)(q)(2)(iv) of the Takeover Regulations, 2011 calling upon
them to show cause as to why suitable directions under sections 11 and 11B of the Securities
and Exchange Board of India Act, 1992 ("SEBI Act") and regulation 32 of the Takeover
Regulations, 2011 should not be issued against them. The said two promoters of the target
company are hereinafter collectively referred to as "the Noticees".
7. The Noticees filed their replies to the SCN vide letters dated June 12, 2014. The Noticees
were also granted an opportunity of personal hearing on July 22, 2014 when their authorized
representative appeared and made oral submissions on their behalf. Vide letters dated July 24,
2014, the Noticees also filed their written submissions after the personal hearing in the
matter.
8. In their replies/written submissions, the Noticees, inter alia, submitted that they could realize
only after the preferential allotment that their shareholding had marginally increased above
5% of the total capital and the same was unintentional. The Noticees have further submitted
that all the requirements in respect of the preferential allotment such as obtaining in-principle
approval/listing approval from the stock exchange, obtaining shareholders' approval, making
disclosures and pricing the equity shares issued under preferential allotment, etc. have been
complied with. Further, the Noticees, who are promoters already holding 66.81% equity
shareholding in the target company and control over it, never intended to acquire additional
shares in the target company so as to consolidate their holdings in the target company to the
detriment of other shareholders. Hence, no direction as contemplated in the SCN should be
issued against them.
9. I have considered the SCN, replies and submissions made by the Noticees and other material
available on record. Before dealing with issues involved in this case, I deem it necessary to
refer to the provisions of the Takeover Regulations, 2011 (as amended on March 26th, 2013)
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that are alleged to have been violated by the Noticees in this case. The said regulations are
reproduced as follows:.
"Substantial acquisition of shares or voting rights.
3 (1).............
(2) No acquirer, who together with persons acting in concert with him, has acquired and holds in
accordance with these regulations shares or voting rights in a target company entitling them to exercise
twenty-five per cent or more of the voting rights in the target company but less than the maximum
permissible non-public shareholding, shall acquire within any financial year additional shares or voting
rights in such target company entitling them to exercise more than five per cent of the voting rights,
unless the acquirer makes a public announcement of an open offer for acquiring shares of such target
company in accordance with these regulations:
Provided that such acquirer shall not be entitled to acquire or enter into any agreement to acquire
shares or voting rights exceeding such number of shares as would take the aggregate shareholding
pursuant to the acquisition above the maximum permissible non-public shareholding.
Explanation. For purposes of determining the quantum of acquisition of additional voting rights
under this sub-regulation,
(i) gross acquisitions alone shall be taken into account regardless of any intermittent fall in
shareholding or voting rights whether owing to disposal of shares held or dilution of voting rights owing
to fresh issue of shares by the target company.
(ii) in the case of acquisition of shares by way of issue of new shares by the target company or where the
target company has made an issue of new shares in any given financial year, the difference between the
pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of
additional acquisition ."

"Timing.

(1)................................................................................................................................
(2) Such public announcement,
(g) pursuant to an acquirer acquiring shares or voting rights in, or control over the target company,
under preferential issue, shall be made on the date on which the board of directors of the target
company authorises such preferential issue.",
10. In this case, admittedly, on May 13, 2013 the board of directors of the target company had
authorised the preferential issue of 10,000 equity shares to the acquirer and the allotment
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was made by the target company on July 19, 2013. It is undisputed fact that the Noticees
who are the only promoters of the target company were acting in concert for the purpose of
said acquisition of 10,000 equity shares. It is also admitted fact that consequent to the said
preferential allotment of 10,000 equity shares to the acquirer, the collective shareholding of
the Noticees in the target company increased from 66.81% to 72.04% and the said increase
was beyond the permissible creeping limit of 5% provided under regulation 3(2) of the
Takeover Regulations, 2011.
11. According to the Noticees, the said minimal increase in their shareholding was
unintentional. In my view, the intention and motive are not relevant for the purposes of
application of regulation 3(2) though it could be considered as a mitigating factor for the
purpose of considering the directions to enforce the Takeover Regulations, 2011. The
language of this regulation envisages mandatory obligation to make a public announcement
of an open offer in case of acquisition of more than 5% shares in a target company.
12. The Noticees have also submitted that it is only after the preferential allotment that they
could realize that their shareholding had marginally increased above 5%. In this regard , I
note that the Noticees were the only promoters holding 35,725 ( i.e. 66.81% ) shares in the
target company when board of directors of the target company authorised the preferential
allotment in this case. In this case, prior to preferential allotment, the share capital of the
target company was represented by merely 53,470 shares out of which 35,725 shares (i.e.
66.81%) were held by these promoter Noticees. Considering these facts, the preferential
allotment of 10,000 shares would, in my view, be sufficient to alert any reasonable /prudent
allottee that the increase in his shareholding might be substantial enough to cross the 5%
limit. I, therefore, do not find merit in submissions of the Noticees in this regard.
13. Another contention of the Noticee is that all the requirements in respect of the preferential
allotment such as obtaining in-principle approval/listing approval from the stock exchange,
obtaining shareholders' approval, etc had been complied with in this case. Compliance of
applicable requirements with regard to the preferential allotment are independent from the
applicability of the obligation under regulation 3(2) of the Takeover Regulations, 2011. Any
preferential allotment even if it is in compliance of other applicable requirements, would
trigger the obligation under regulation 3(2) if the acquisition in question breaches the
specified threshold. Accordingly, compliance of the requirements relating to preferential
allotment cannot be a reason to exonerate the Noticees as sought to be contended by them.

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14. Considering the above, I find that the Noticees have collectively acquired 10,000 (i.e. 5.23%
equity shares) of the target company in breach of the provisions of regulation 3(2). For the
purposes of suitable direction under regulation 32, I proceed to examine the facts and
circumstances of this case.
15. I note that regulation 32 of the Takeover Regulations, 2011 which provides consequences of
breach as found in this case gives flexibility to SEBI to enforce regulation 3(2) by way of
several directions including - (a) disinvestment of shares acquired in breach of regulations;
(c) transfer of any proceeds or securities to the investors protection fund; (c) making open
offer for acquiring shares of the target company, etc. In this case, no fault can be found with
regard to the acquisition of the Noticees to the extent of 5% shares since as per regulation
3(2) they were entitled to acquire upto 5% equity shares in the target company without
attracting the obligation to make open offer. It is only the acquisition of 0.23% ( i.e. 146
equity shares) which was in breach of regulation 3(2) in this case. It is admitted position that
the Noticees are the only promoters of the target company and currently hold 72.04% of its
share capital. Further, no new promoter has been added in the promoter group of the target
company and there has been no change in the control over the target company consequent
to the preferential allotment. Admittedly, the preferential allotment in question was made
with approval of shareholders by way of a special resolution and the Noticees did not have
any price advantage as they had acquired the equity shares of `100 each at the price of
`3312 per equity share and the consideration has been received by the target company and
formed part of its capital. There is no dispute as to the fact that all requisite disclosures with
regard to the preferential allotment were made as per the essential requirements and that
post acquisition disclosures were also made to the stock exchange. Thus, the acquisition in
question was not in clandestine manner to the detriment of the non- promoter shareholders.
16. Considering the peculiar facts and circumstances of this case, I am of the view that the
direction to the acquirer to sell 146 shares (0.23%) of the target company in small lots on the
concerned stock exchange and transfer of the entire proceeds of such sale of shares to the
Investor Protection and Education Fund established under the Securities and Exchange
Board of India (Investor Protection and Education Fund) Regulations, 2009 would be
commensurate with the breach as found in this case. Since the Investor Protection and
Education Fund is utilized for the purpose of protection of investors and promotion of
investor education and awareness, I am of the considered view that in the facts and
circumstances of this case the above directions would be in the interest of investors and the
securities market.
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Order in the matter of Kaycee Industries Limited

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17. I, therefore, in exercise of powers conferred upon me under sections 11, 11B read with
section 19 of the SEBI Act and regulation 32 of the Takeover Regulations, 2011, hereby
issue the following directions to the Noticees viz. CMS Computers Limited and CMS Traffic
Systems Limited:
i.

The Noticees shall, jointly and severally, disinvest 146 shares of Kaycee Industries
Limited through sale to parties not connected/ related to them in small lots in tranches
on BSE ensuring that such sale does not disturb the market equilibrium; and transfer of
the entire proceeds of such sale of shares to the Investor Protection and Education
Fund established under the Securities and Exchange Board of India (Investor Protection
and Education Fund) Regulations, 2009.

ii.

The Noticees shall complete the sale of shares as directed above within 3 months from
the date of this order and file a report to the SEBI detailing the compliance of the above
directions within two weeks from the date of such compliance.

18. This order shall come into force with immediate effect. A copy of this order shall be served
upon the Noticees, stock exchanges and depositories for ensuring compliance with the
above directions.

Sd/DATE: January 5th, 2015

PLACE: MUMBAI

RAJEEV KUMAR AGARWAL

WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA

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Order in the matter of Kaycee Industries Limited

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