WTM/RKA/CFD-DCR/05/2015

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 Mr. Radhey Shyam Lahoti, Mr. Ram Awatar Lahoti, Mr. Sitaram Lahoti,
M/s. Focus Investments & Traders Private Limited, M/s. Lahoti Exports Private Limited
and M/s Quality Products Marketing Private Limited.
In the matter of acquisition of shares of Servotech Engineering Industries Limited.
______________________________________________________________________________
1. M/s Servotech Engineering Industries Limited (hereinafter referred to as the Target
Company) is a company having its registered office at 203, Chartered House, Dr C. H. Street,
Near Marine Lines Church, Mumbai 400 002 and its equity shares are listed on the Bombay
Stock Exchange Limited (BSE).
2. SEBI received an application dated June 23, 2013 under regulation 11 of SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as "Takeover
Regulations, 2011"), from the promoter group of the Target Company comprising Mr. Radhey
Shyam Lahoti, M/s. Focus Investments & Traders Private Limited, M/s. Lahoti Exports Private
Limited, M/s Quality Products Marketing Private Limited, Mr. Ram Awatar Lahoti and Mr.
Sitaram Lahoti seeking exemption from the obligation to make open offer under regulation 3(1)
of the Takeover Regulations, 2011 with respect to the proposed increase in their shareholding/
voting rights in the Target Company above 25%.
3. It was inter alia submitted in the application that 1) The promoter group held 10,68,908 equity shares constituting 20.83% shares/voting rights
of the Target Company. Out of the total issued share capital of 51,31,400 equity shares (of
10 each) of the Target Company, only 36,83,689 equity shares were fully paid and the
remaining 14,47,711 equity shares were partly paid to the extent of 2.50 per share and
7.50 per share continued to be unpaid. On July 20, 1996, notice was given to the
shareholders for paying the calls in arrears but no calls on shares were paid. As on March
31, 2012, an amount of 1,08,57,834 was due and payable from the shareholders.
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2) The board of directors of the Target Company, in its meeting held on October 03, 2012
passed a resolution to send final notice for payment of remaining amount on the partly
paid shares and also informing the shareholders that if the calls in arrears were not paid
latest by March 13, 2013, the Target Company would forfeit the shares. Letters dated
December 10, 2012 and February 4, 2013 were issued by the Target Company to the
shareholders for payment of the balance amount.
3) Since no response was received from the shareholders, the Target Company was to forfeit
the partly paid shares in terms of its Articles of Association. Pursuant to the proposed
forfeiture, the shareholding/voting rights of the promoter group was to increase from
20.83% to 29.02% which would have triggered the obligation to make open offer under
the provisions of regulation 3(1) of Takeover Regulations, 2011.
4) The promoter group had sought exemption on the following grounds:a)

There was no active/direct acquisition of voting rights or shares by them in the

Target Company and the increase in percentage of voting rights from the current
holding of 20.83% to 29.02% was to be on account of the forfeiture of shares by the
Target Company. The partly paid shares had to be forfeited in the interest of the
Target Company and its shareholders in accordance with the provisions of the
Articles of Association and the Companies Act, 1956.

b)

The proposed increase in shareholding/voting rights was not in the nature of

consolidation of holdings by the Noticees, rather it was incidental and consequential
to the forfeiture of partly paid -up shares by the Target Company.

c)

Regulation 10(4)(c) of Takeover Regulations provides exemption from open offer if

the increase in shareholding of any shareholder is pursuant to the buy back of shares
under section 77A of the Companies Act, 1956. In this case, the proposed
forfeiture/cancellation of shares was akin to buy back of shares, since in case of
forfeiture/ cancellation of shares also there was no active acquisition by the promoter
group.

d)

They had been the promoters of the Target Company since 1994 and had always been
in control of the Target Company. Therefore, there would be no change in the
control or management of the Target Company pursuant to the proposed increase in
their voting rights. They will continue to manage and control the affairs of the Target
Company.

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e)

The defaulting shareholders had been given ample opportunities to make good the
default in making the balance payment towards calls in arrears by the Target
Company by dispatching the notices to their addresses as per the Register of
Members available with the Target Company. Further, the Target Company had
specifically informed the defaulting shareholders that if the calls in arrears were not
paid the Company would forfeit the shares.

f)

The proposed passive acquisition was not detrimental to the interest of public
shareholders in any manner. The increase in the percentage of shares due to the
forfeiture/ cancellation of shares would not create any implication in the share
market.

g)

Pursuant to the proposed forfeiture of 14,47,711 equity shares of the Target

Company, the public shareholding would still be in compliance with the minimum
public shareholding i.e., more than 25% as required under clause 40A of the Listing
Agreement.

4. On examination of the aforesaid application SEBI observed that:1) In terms of section 87(1)(b) of the Companies Act, 1956, the voting rights of a shareholder
are in proportion to his share of the paid-up equity capital of the company. The total
issued capital of the Target Company was 51,31,400 equity shares of which 14,47,711
equity shares had been partly paid-up to the extent of 2.50 per share. The remaining
36,83,689 equity shares were fully paid-up. Accordingly, the paid-up capital of the Target
Company was 4,04,56,167.50.
2) Prior to June 2012, the Noticees held 16.74% of the equity share capital and 21.23% of the
voting rights in the Target Company. Subsequently, one of the promoters i.e. Mr. Radhey
Shyam Lahoti had acquired equity shares of the Target Company in the following manner:Date
of No. of PrePostPrePostacquisition shares
acquisition
acquisition
acquisition
acquisition
bought shareholding shareholding voting rights voting rights
of promoter of promoter of promoter of promoter
group
group
group
group
During June 4,035
8,58,800
8,62,835
21.23%
21.33%
2012
(16.74%)
(16.81%)
During July 1,393
8,62,835
8,64,228
21.33%
21.36%
2012
(16.81%)
(16.84%)
During
1,380
8,64,228
8,65,608
21.36%
21.40%
August 2012
(16.84%)
(16.87%)
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During
7,900
September
01, 2012 to
September
24, 2012
September
95,000
25, 2012
September
1,00,000
26, 2012

8,65,608
(16.87%)

8,73,508
(17.02%)

21.40%

21.59%

8,73,508
(17.02%)
9,68,508
(18.87%)

9,68,508
(18.87%)
10,68,508
(20.82%)

21.59%

23.94%

23.94%

26.41%

3) As a result of the aforesaid acquisitions, the collective shareholding of the promoter group
increased from 16.74% to 20.82% and consequently, their collective voting rights in the
Target Company increased from 21.23% to 26.41%. Thus, the promoter group of the
Target Company was required to make a public announcement in accordance with the
provisions of regulation 3(1) read with regulation 13(2) of the Takeover Regulations, 2011
prior to the placement of purchase order on September 26, 2012 to acquire additional
shares.
5. In view of the above, the application was rejected and a show cause notice dated March 18, 2014
(SCN) was issued to the promoter group comprising Mr. Radhey Shyam Lahoti, M/s. Focus
Investments & Traders Private Limited, M/s. Lahoti Exports Private Limited, M/s Quality
Products Marketing Private Limited, Mr. Ram Awatar Lahoti and Mr. Sitaram Lahoti
("hereinafter referred to as the Noticees") alleging that they had failed to make the requisite
public announcement prior to the acquisition of shares on September 26, 2012 in violation of
regulation 3(1) read with regulation 13(2) of the Takeover Regulations, 2011.
6. The Noticees vide their letter dated April 23, 2014 replied to the SCN. An opportunity of
personal hearing was also granted to them and after seeking adjournment they availed the
opportunity on August 05, 2014 when Mr. Vinay Chauhan, Advocate and others appeared and
made submissions on their behalf. The Noticees, vide their letter dated August 20, 2014 also
filed the written submissions in the matter. The submissions of the Noticees inter alia are as
below:
1) The Target Company was incorporated on October 07, 1994 and came out with an IPO of
25 lakh equity shares of 10 each, of which 2.50 was payable on application and the
balance 7.50 was payable on allotment in case of Indian public. As on March 31, 2014,
the total subscribed equity shares of the Target Company were 51,31,400 shares of 10
each, out of which, 14,47,711 equity shares are partly paid up to 2.50 only and the
remaining balance shares are fully paid up of 10 each.
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2) The trading in the scrip of the Target Company was suspended on BSE with effect from July
14, 2013 due to non-compliance of the provisions of the Listing Agreement. The trading
suspension was revoked only with effect from May 02, 2012. Prior to revocation of
suspension of trading in equity shares, the Target Company was incurring losses for many
years and its net worth was eroded. In view of the same, company was not able to employ
regular secretarial staff and not able to carry out regular listing compliances.
3) As a result of efforts of promoters and post compliance of various regulatory requirements,
BSE revoked the suspension on May 02, 2012. Thus, after a gap of around 9 years, the
scrip of the Target Company became eligible for trading on the exchange. The promoters
in consultation with various financial consultants, continued to revive the Target
Company.
4) Since there was change in regulatory regime involving Takeover Regulations, wherein as per
the Takeover Regulations, 2011, the initial threshold limit for acquisition of shares without
involving obligation to make open offer, was increased to 25%, the promoters of the
Target Company, who were holding around 16.74% shares in June 2012 decided to acquire
further shares (within 25% limit) of the Target Company from the market in the ordinary
course.
5) Accordingly, during June 18, 2012 to September 09, 2012, Mr. Radhey Shyam Lahoti, one of
the promoters of the Target Company, purchased 14,708 shares, which increased the
collective shareholding of the promoter group from 16.74% to 17.02%.
6) Subsequently, Mr. Radhey Shyam Lahoti purchased 95,000 shares on September 25, 2012,
which increased the shareholding of the promoter group from 17.02% to 18.87%. Further,
consequent to the said acquisition, disclosure under regulation 29(2) of the Takeover
Regulations, 2011 was made wherein it was disclosed that post acquisition of 95,000
shares, his individual shareholding increased from 24,500 shares to 1,19,500 shares
constituting 2.33% shares/voting capital of the Target Company.
7) Mr. Radhey Shyam Lahoti further purchased 1,00,000 shares on September 26, 2012, which
increased the collective shareholding of the promoter group from 18.87% to 20.82%.
Further, consequent to the said acquisition, disclosure under regulation 29(2) of the
Takeover Regulations, 2011 was made wherein it was disclosed that post acquisition of
1,00,000 shares, his individual shareholding increased from 1,19,500 shares to 2,19,500
shares constituting 4.28% shares/voting capital of the Target Company.

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8) While interacting with financial consultants with regard to reviving the Target Company, it
was also suggested to the promoters that the capital structure of the Target Company is to
be organized properly in light of the 14,47,711 partly paid shares. Consequently, the board
of directors decided to issue notices to shareholders to make the payment of balance
amount, failing which the partly paid shares would be forfeited. No response from any of
the shareholders was received and accordingly, the board of directors decided to forfeit the
shares. In the circumstances, as the shareholding of promoters was increasing from
20.93% to 29.02%, before actually forfeiting the shares, an application was filed with SEBI
under regulation 11 of Takeover Regulations, 2011, inter alia seeking exemption from
making open offer under regulation 3(1) since the promoter shareholding would cross
25% threshold post the forfeiture of partly paid up shares by the Target Company.
9) For the first time, pursuant to receipt of queries from SEBI's end, in context of processing
of exemption application, it was realized that there was a mistake in calculating the
percentage of shareholding/voting rights. Thus, on September 26, 2012 when 1,00,000
shares were acquired by Mr. Radhey Shyam Lahoti, the shareholding/voting rights of the
promoters collectively did not increase from 18.87% to 20.82% but from 23.94% to
26.41% (i.e. above 25%). The Noticees were under the bona fide impression that they still
have bandwidth of acquiring further shares till they reach 25% threshold limit as stipulated
under regulation 3(1) of Takeover Regulations, 2011, but the same, as it transpires now,
was incorrect impression.
10) The calculation made for computation of percentage of shares was an honest and bona fide
mistake as is evident from the disclosures filed with the stock exchanges wherein all along
shareholding/voting rights were disclosed without taking into account proportionate
voting rights for partly paid up shares.
11) There was no need for the Noticees to breach the 25% threshold, since they were already in
control and management of the Target Company and were holding the maximum block of
shares vis--vis other shareholders of the Target Company.
12) Further, as per section 87(1) of the Companies Act, 1956,
a) Every member of a Company limited by shares and holding any equity share capital
therein shall have a right to vote, in respect of such capital, on every resolution placed
before the company, and
b) His voting right on a poll shall be in proportion to his share of the paid up equity
capital of the company.
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13) The issued capital of the Target Company was 51,31,400 equity shares of which 36,83,689
equity shares were fully paid up and 14,47,711 equity shares were partly paid up to the
extent of 2.50. Therefore, the paid up capital of the Target Company was
4,04,56,167.50.
14) The fact that, technically, in terms of section 87 of the Companies Act, 1956, partly paid
shares will not carry voting rights but only proportionate voting rights (relatable to the
payment made i.e. only 1/4th in the instant case), was completely missed by the Noticees.
15) Section 177 of the Companies Act, 1956 stipulates that "At any general meeting, a resolution
put to vote of the meeting shall, unless a poll is demanded under section 179, be decided
on a show of hands".
16) The aforementioned section clearly states that every resolution put to vote at the meeting
shall be decided on a show of hands. However, only exception to this rule is that if a poll is
demanded under section 179 of the Companies Act, 1956 and a demand of polling can be
made by following shareholders as stipulated under section 179(1)(a). For the ease of
reference section 179(1)(a) is reproduced as below:In the case of a public company having share capital, by any member or members present in person or
by proxy and holding shares in the company (i) which confer a power to vote on the resolution not being less than one-tenth of the total voting
power in respect of the resolution, or
(ii) on which an aggregate sum of not less than fifty thousand rupees has been paid up.
17) From a plain reading of the above section read with provisions of section 87 of the
Companies Act, 1956, it can be inferred that only when a poll is demanded by the
shareholders as stipulated under section 179 of the Companies Act, 1956, then only
section 87(1)(b) comes into operation i.e. proportionate rights of the shareholders can be
considered only when there is a poll. During all the general meetings of the company, all
the resolutions had been passed by the show of hands and never poll had been demanded/
conducted. In view of the same, the provision relating to use of voting rights, i.e., section
87(1)(b) of the Companies Act, 1956 has not been invoked for the company.
18) During the relevant period under consideration, two Annual General Meetings (AGMs)
were held on September 28, 2012 and September 28, 2013. In both the AGMs, resolutions

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have been passed by "show of hands". No poll was ever demanded by any shareholder and
therefore, the Noticees have never exercised any voting rights beyond 25%.
19) Promoters neither had any mala fide to hide the information nor did they intend to harm
the investor's interest as they have suo moto filed an application for seeking exemption
under regulation 11 of Takeover Regulations, 2011 on June 29, 2013 as the Target
Company was proposing to forfeit the shares on which calls were in arrears.
20) The alleged violation as mentioned in the show cause notice had come to the notice of SEBI
only after the promoters had filed the application for seeking exemption. This establishes
that the promoters follow the procedures specified in SEBI Act, 1992 and Rules/
Regulations etc. specified there under and did not have any mala fide intention to avoid any
provision of Rules/ Regulations made under SEBI Act.
21) In terms of good corporate governance the company had given full disclosures in the
application filed before SEBI and had not hidden any details.
22) The impugned acquisition is the consequence of bona fide error on the part of Noticees in
assuming full voting right for partly paid shares instead of proportionate voting rights. But
for this, the Noticees would not have acquired shares resulting in voting rights crossing
25%.
23) Without prejudice to the aforesaid, it is also submitted that on case of partly paid shares,
wherein the calls are in arrears, the Takeover Regulations do not specify as to when the
Takeover Code triggers. For instance, in the instant case, as per SEBI's interpretation,
Takeover Code has been triggered, since the voting rights of the promoters went beyond
25%, however, that may not be the case, if the shareholders having partly paid shares pay
up the balance amount i.e. call in arrears. On the receipt of such balance amount, all the
shares will have equal voting rights and due to this, the percentage of voting rights of the
promoters would again fall below 25%. In such a situation, there will not be any breach of
any Takeover Regulations.
24) It is also submitted that the trading activity in the scrip is very low. The financial position
of the Target Company continues to remain weak with losses of 50 lakhs, 29 lakhs and
8 lakhs in 2011-12, 2012-13 and 2013-14 respectively and any adverse direction of
saddling the promoters with open offer will be detrimental to the health of the company at
this juncture.

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25) The alleged violations are technical, venial and unintentional, dehors sinister intent or design
on the part of the Noticees. The same has not caused any loss to any investor/shareholder
or the securities market in any manner. Further, there are no shareholder/ investor
complaints in this regard.
26) As a result of the alleged violations, the Noticees have not made any gain or gained an unfair
advantage. The quantum of shares involved in the impugned transaction is less than 1%
and is exceedingly insignificant.
27) Without prejudice to the aforesaid, it is prayed that no direction of making open offer be
issued against the Noticees. Any such direction would derail and disrupt the plan to revive
the Target Company since the funds which could be utilised for pumping into the Target
Company would get frittered away in acquiring 26% shares in open offer.
28) Further, any such direction would be harsh/excessive/disproportionate in the peculiar facts
and circumstances of the case, wherein there was inter alia no change in control, the
violation is technical in nature and the same has occurred due to a bona fide error.
29) In this context, it is submitted that ends of justice would be met by directing the Noticees to
disinvest the shares in excess of 25%.. It is also submitted that the Noticees would remit
the entire sale proceeds arising as a result of sale of such excess shares to SEBI. Same
would be in the interest of investors, Target Company and the securities market. Reference
has been made to regulation 32 of the Takeover Regulations, 2011 which contemplates
such kind of directions for the breach of Takeover Regulations.
30) Reference has also been made to the order dated November 09, 2010 passed by SEBI
against Nirvana Holdings Private Limited, Nara Bhuvananeshwari and Nara Lokesh in the
matter of Heritage Foods (India) Limited, wherein under the similar circumstances for the
similar violations pertaining to breach of Takeover Regulations, the Whole Time Member,
SEBI, under the power conferred upon him, had issued the directions to disinvest the
excess shareholding acquired by the acquirer.
31) Thus, direction of disinvestment of shares acquired in breach of Regulations would meet the
ends of justice and same would also be in overall interest of the Target Company and its
shareholders.
7. I have carefully considered the SCN, replies and submissions of the Noticees and other relevant
material available on record. In this case, it is an undisputed fact that one of the promoters of
the Target Company namely Mr. Radhey Shyam Lahoti had acquired 14,708 equity shares during
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June 2012 to September 24, 2012. Further, on September 25, 2012 and September 26, 2012, he
had again acquired 1,95,000 equity shares of the Target Company. It is also an undisputed fact
that all the Noticees being part of promoter group of the Target Company were acting in
concert with respect to such acquisitions by Mr. Radhey Shyam Lahoti.
8. In this case, during the relevant time, the total share capital of the Target Company was
51,31,400 equity shares, of which 14,47,711 equity shares were partly paid-up to the extent of
2.50 per share and the remaining 36,83,689 equity shares were fully paid-up. I note that section
87(1) of the Companies Act, 1956 provides that "subject to the provisions of section 89 and sub section 2
of section 92, (a) every member of a company limited by shares and holding any equity share capital therein shall
have a right to vote, in respect of such capital, on every resolution placed before the company; and (b) his voting
right on a poll shall be in proportion to his share of the paid up equity capital of the company." As per
provisions of this section, every shareholder/member of a company limited by shares and
holding any equity share capital has a right to vote in proportion to his share of the paid up
equity capital of the company. Thus, it is clear that partly paid-up shares also carry voting rights
in proportion to the amount paid up thereon.
9. In view of the aforesaid provision of the Companies Act, 1956, prior to acquisition in question,
the paid-up capital of the Target Company was 4,04,56,167.50. (representing 78.84 % total
voting rights). Pursuant to acquisition of 1,00,000 equity shares of the Target Company by one
of its promoters viz; Mr. Radhey Shyam Lahoti on September 26, 2012, the collective
shareholding of the Noticees in the Target Company increased from 16.74% to 20.82% and
consequently, their collective voting rights in the Target Company increased from 21.23% to
26.41%. It is this acquisition, which is the basis of the allegation against the Noticees as alleged
in the SCN. Since the charge against the Noticees is limited with regard to aforesaid acquisition
on September 26, 2012, I do not deem it necessary to examine submissions of the Noticees with
regard to probable increase in their shareholding / voting rights on account of forfeiture of
equity shares by the Target Company. I, however, make it clear that findings in this order should
not be construed as final conclusion with regard to any possible increase in shareholding/ voting
rights of the Noticees in the Target Company on account of any other acquisition including
increase due to forfeiture of shares by the Target Company.
10. Referring to the provisions of sections 177 and 179 of the Companies Act, 1956, the Noticees
have contended that only when a poll is demanded by the shareholders as stipulated under
section 179, then only section 87(1)(b) comes into operation i.e. proportionate rights of the
shareholders can be considered only when there is a poll. According to them during the period
under consideration, two Annual General Meetings (AGMs) were held on September 28, 2012
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and September 28, 2013 and in both the AGMs, resolutions were passed by "show of hands"
and no poll was ever demanded by any shareholders in terms of section 179. Therefore, the
provision relating to use of voting rights, i.e., section 87(1)(b) of the Companies Act, 1956 has
not been invoked.
11. I have examined the provisions of section 87, 177 and 179 of the Companies Act, 1956. I note
that section 87 declares right and entitlement of a shareholder to vote on every resolution placed
before the company. As per provisions of section 87(1)(b), voting right on a poll shall be in
proportion to the member's share of the paid-up equity capital of the company. I further note
that sections 177 and 179 deal with manner and procedure of voting on a resolution. In terms of
section 177 unless a poll is demanded under section 179, voting on a resolution in any general
meeting shall be on a 'show of hands'. Section 179 deals with the procedure of demand for poll.
In my view, the right or entitlement to vote will not be diminished or extinguished if the poll is
not demanded. Such shareholder will have right to vote and would be in position to exercise his
voting rights on a poll.
12. It is pertinent to mention that the Takeover Regulations, 2011 are applicable when an acquirer
acquires or agrees to acquire shares that entitle him to voting rights in a Target Company. It is
not relevant whether he actually exercises such voting rights or not. In this regard, it is relevant
to mention the provisions of regulation 3(1) of the Takeover Regulations, 2011 which reads as
under:
"Substantial acquisition of shares or voting rights.
3. (1) No acquirer shall acquire shares or voting rights in a target company which taken together with shares
or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle
them to exercise twenty-five per cent or more of the voting rights in such target company unless the acquirer
makes a public announcement of an open offer for acquiring shares of such target company in accordance with
these regulations."
13. It is noted that the provisions of regulation 3 are not linked to the right of the shareholder to
exercise the voting rights but to the nature of the shares he holds i.e. shares carrying voting
rights. I note that in the context of regulation 10, 11 and 12 of the SEBI (Substantial Acquisition
of Shares and Takeovers) Regulations, 1997 which is pari materia the provisions of regulations
3(1), 3(2) and 4 of the Takeover Regulations, 2011, Hon'ble Securities Appellate Tribunal (SAT)
in the matter of Shri Sharad Doshi vs The Adjudicating officer and others,( Order dated April 07, 1998 in
Appeal no. 01/1998), held that:-

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"...Voting rights is attached to equity share or say, it is built in the moment the share is issued. In the
common parlance, share carrying rights means equity share or ordinary share as sometimes called. However,
the right to exercise such voting right to the person holding equity share is not automatic. A person holding
shares with voting rights will be entitled to exercise that voting right only on entering his name in the
companys register of members required to be maintained under section 150 of the Companies Act. In other
words, in order to be eligible to exercise the voting rights attached to a share, physical possession of share
certificate alone is not enough, but it is necessary to have the name of the holder entered in the companys
members register. While the voting right is attached to equity share, registration of holding the share enables
the holder to exercise the voting rights attached thereto. Admittedly, the shares in question are equity shares
and equity shares under the law carry voting rights irrespective of its ownership. The appellant s contention
that the shares in question are not carrying voting right cannot survive in view of the legal position stated
above.... "
14. I further note that in its order dated October 25, 2002, Hon'ble SAT in the matter of Ashwin
Doshi vs SEBI and others (in Appeal no. 44/2001), held that
"...The voting rights are embedded in the equity share. Attachment does not alter the basic characteristic of
the equity share. .... Therefore, the percentage of voting rights exercisable by a person has to be worked out in
relation to the total number of shares carrying voting rights issued by a company, and not to the exclusion of
the holding of any person who is not in a position to exercise the voting rights for one reason or the other...."
15. With regard to the computation of voting rights on partly paid-up shares for the purposes of the
Takeover Regulations, the following ruling of Hon'ble SAT in the matter of Luxury Foams Ltd.
and others vs SEBI, (order dated March 20, 2002 in Appeal no. 48/2001) is worth mentioning:
"......it is clear that the member / shareholder cannot exercise voting right in respect of any shares registered in his
name in case of any calls or other sums presently payable by him have not been paid or in regard to which the
company has and has exercised any right of lien.... In the instant case, the Appellants version that since the
4,40,00,000 shares have been allotted to them on partly paid basis, those shares do not carry any voting rights is
contrary to the legal position flowing from section 87(1)(b).... In the light of the legal position regarding voting rights
attached to the partly paid shares in terms section 181 and 87 of the Companies Act, it is difficult to subscribe to
the Appellants version that 440 lakh equity shares of Rs.10 lakh issued but partly paid, have no voting rights
and as such should be excluded for the purpose of computing the percentages prescribed in regulation 10 etc., is not
tenable...."

16. Considering the above, I am of the view that the triggering point under regulation 3 of the
Takeover Regulations, 2011 is the acquisition of shares carrying / entitling voting rights which
result in breach of 25% threshold under the said regulation. Further, if partly paid- up shares
carry voting rights and entitle the shareholder to vote on a resolution, it is immaterial for
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applicability of Takeover Regulations, 2011 as to whether he actually votes or not or is prevented

from voting on a resolution since polls were not demanded. Accordingly, the calculation of
voting rights should be based on the number of shares carrying voting rights irrespective of the
fact whether such voting rights are exercisable or not. I, therefore, do not find merit in the
submissions of the Noticees in this regard.
17. The Noticees have further contended that the computation of percentage of their voting rights
was an honest and bona fide mistake on their part as all along they considered the total
shareholding without taking into account proportionate voting rights for partly paid up shares.
This contention of the Noticees does not appeal to reason since by virtue of clause 88 of the
Articles of Association of the Target Company, the public shareholders holding partly paid
shares were restricted from exercising their proportionate voting rights. Thus, the total
exercisable voting rights in the Target Company when the acquisitions in question were made
would be much less than what Noticees have sought to contend. Consequently, the Noticees
were in a dominant position in the Target Company as the percentage of their voting rights was
more than the percentage of shares actually held by them. Thus, the computation of their voting
rights by the Noticees was incorrect not only in terms of section 87(1)(b) of the Companies Act,
1956 but also in terms of clause 88 of the Articles of Association of the Target Company itself.
As mentioned above, clause 88 of the Articles of Association of the Target Company completely
restricted the voting rights on partly paid shares. In these circumstances, I am unable to accept
the above explanation of the Noticees.
18. In this case, it is established that pursuant to 1,00,000 equity shares of the Target Company by
Mr. Radhey Shyam Lahoti on September 26, 2012, the collective voting rights of the Noticees in
the Target Company increased from 21.23% to 26.41%. This acquisition breached the 25 %
threshold prescribed in regulation 3(1) of the Takeover Regulations, 2011. Mr. Radhey Shyam
Lahoti could acquire voting rights / shares beyond 25% threshold only by making a public
announcement which he failed to make. I, therefore, find that the Noticees, being persons acting
in concert with respect to this acquisitions, are jointly and severally liable with regard to such
failure.
19. I note that in the context of enforcement of regulation 10, 11 and 12 of the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 which is pari materia the provisions of
regulations 3(1), 3(2) and 4 of the Takeover Regulations, 2011, the Hon'ble SAT, vide order
dated September 08, 2011 in the matter of Nirvana Holdings Private Limited vs SEBI (Appeal No.
31/2011) observed as follows:

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"The primary object of the takeover code is to provide an exit route to the public shareholders when there is
substantial acquisition of shares or a takeover. This right to exit is an invaluable right and the shareholders
cannot be deprived of this right lightly. It is only when larger interest of investor protection or that of the
securities market demands that this right could be taken away. Therefore, as a normal rule, a direction to
make a public announcement to acquire shares of the target company should issue to an acquirer who fails to
do that. The Board need not give reasons as to why such a direction is being issued because that is the
mandate of Regulations 10, 11 and 12. However, if the issuance of such a direction is not in the interest of
the securities market or for the protection of interest of investors, the Board may deviate from the normal rule
and issue any other direction as envisaged in Regulation 44 of the takeover code. In that event, the Board
should record reasons for deviation ."
20. I note that the object and purpose of the Takeover Regulations,1997 and Takeover Regulations,
2011 is to provide equality of treatment of all stakeholders, to provide an exit opportunity to the
shareholders in case of substantial acquisition of shares or takeover and to ensure that persons in
control of the target companies do not consolidate their shareholdings in the Target Company in
a clandestine manner and to the detriment of other shareholders. I note that regulation 32 of the
Takeover Regulations, 2011 provides for consequences of breach thereof. The guiding principles
for the directions as provided in these regulations are the interest of the investors and securities
market which are the statutory guiding principles as inbuilt in the SEBI Act, the Takeover
Regulations, 1997 and the Takeover Regulations, 2011. I, therefore, am of the view that the
above mentioned principles laid down by Hon'ble SAT shall apply in the present case also.
21. In this case, the increase in breach of regulation 3(1) is to the extent of 1.41% voting rights
(represented by 57,043 shares). I note that the acquisition in question on September 26, 2012
was at the price of ` 4.28 per share. Had the Noticees made the public announcement in terms
of regulation 3(1) read with 13(2) of the Takeover Regulations, 2011 the offer price in the open
offer could have been `5.47 per share and all formalities with respect to their public
announcement and the open offer would have been completed on December 18, 2012.
However, since no such public announcement was made by the Noticees and if they make the
public announcement now the offer price would be `6.74 per share (calculated in terms of
regulation 8 of the Takeover Regulations, 2011 alongwith interest @ 10% per annum thereon).
The average market price of the shares of the company for last six months is `3.04 per share. In
view of these facts and circumstances, I am of the view that the exit opportunity consequent to
the breach by the Noticees in this case would be in the interest of investors.
22. I am also of the view that since the public announcement now would provide a delayed exit
opportunity to the shareholders of the Target Company, the Noticees should pay interest on the
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consideration amount to the shareholders who tender their shares in the open offer and who are
eligible for interest as per law.
23. I, therefore, in exercise of powers conferred upon me under sections 19, 11 and 11B of the
SEBI Act, 1992 and regulation 32 of the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011, hereby issue following directions to the Noticees, viz; Mr. Radhey Shyam
Lahoti, Mr. Ram Awatar Lahoti, Mr. Sitaram Lahoti, M/s. Focus Investments & Traders Private
Limited, M/s. Lahoti Exports Private Limited and M/s Quality Products Marketing Private
Limited :a) The Noticees shall make a public announcement to acquire shares of the Target Company in
accordance with the provisions of the Takeover Regulations, 2011, within a period of 45 days
from the date of this order;
b) The Noticees shall, alongwith the consideration amount, pay interest at the rate of 10% per
annum from December 19, 2012 to the date of payment of consideration, to the shareholders
who were holding shares in the Target Company on the date of violation and whose shares are
accepted in the open offer, after adjustment of dividend paid, if any.
24. This order shall come into force with immediate effect.

Sd/DATE: January 23rd, 2015

PLACE: MUMBAI

RAJEEV KUMAR AGARWAL

WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA

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