Adjudication Order in respect of The Karur Vysya Bank Ltd in the matter of Arvind Remedies Ltd

Case:  Adjudication Order in respect of The Karur Vysya Bank Ltd in the matter of Arvind Remedies Ltd

Violation of: 

             Regulation 29(1) and 29(2) read with Regulation 29(3) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as "SAST Regulations, 2011") and Regulations 13(1), and 13(3) read with Regulation 13(5) of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as "PIT Regulations, 1992")

Parties: Karur Vysya Bank Ltd (hereinafter referred to as “Noticee”)

Arvind Remedies Ltd. (hereinafter referred to as “ARL / the company”)

 

Examination Period: January 01, 2014 to January 31, 2015

Facts of the case:

·      ARL had taken a short term loan of Rs. 25 Crores from the Noticee for the purpose of working capital requirements for which 75,00,000 shares of ARL were pledged by the promoter – Arvindkumar B Shah.

·     Subsequently, the Noticee has invoked pledge of 75,00,000 shares of ARL on various dates. It was alleged that due to invocation of pledge, the shareholding of the Noticee increased to 40,29,500 shares, constituting 5.91% of the total share capital of ARL, on October 15, 2014.

·     As the shareholding of the Noticee crossed 5% of the share capital of ARL, the Noticee was required to make requisite disclosure, within two working days, to the company under Regulation 13(1) of PIT Regulations, 1992, and

·     Under Regulation 29(1) read with 29(3) of SAST Regulations, 2011 the Noticee was required to disclose the same to the Stock Exchanges and Company.

·      However, no disclosures as stipulated under afore-mentioned Regulations were made by the Noticee thereby violating Regulation 13(1) of PIT Regulations, 1992 and Regulation 29(1) and 29(3) of SAST Regulations, 2011.

               

·       Further it was observed that due to the invocation of pledged shares, the shareholding of the Noticee had further increased to 63,29,500 shares, constituting 9.29% of the total share capital of ARL, on January 27, 2015. As prior to the said acquisition, Noticee was already holding more than 5% of the share Capital of ARL and the said acquisition of shares was more than 2% of the share capital of ARL.

·      The Noticee was required to make requisite disclosure in this regard within two working days of the acquisition to the company under Regulation 13(3) read with 13(5) of PIT Regulations, 1992, and to the company and stock exchanges under Regulation 29(2) read with Regulation 29(3) of SAST Regulations, 2011. However, no disclosures as stipulated under afore- mentioned Regulations were made by the Noticee.

Issues:

a.  Whether the Noticee failed to disclose the change in its shareholdings to the stock exchanges and the company, and thereby violated Regulation 29(1) and 29(2), read with 29(3) of SAST Regulations, 2011, and Regulations 13(1), and 13(3) read with 13(5) of PIT Regulations, 1992?

b.   Does the violation, if established, attract monetary penalty under Section 15A (b) of SEBI Act, 1992?

c.   Quantum of Penalty

Show Cause Notice, Replies and Personal Hearing

Show Cause Notice dated March 13, 2018 was issued for the aforesaid violations to which the following replies were submitted

·     Regulation 29(4) states that Regulation 29 shall not be applicable to Scheduled Commercial Bank or Public Financial Institution and since Karur Vyas Bank is a Scheduled Commercial Bank, provisions of Regulation 29 of SAST Regulations, 2011 is not applicable to the noticee

·      At no point, the noticee held more than the threshold limit of 5 % of the share capital of ARL, hence no disclosure required under Regulation 13 (1) of PIT Regulations, 1992 and Regulation 29(2) and 29 (3) of SAST Regulations, 2011 not required. Continual disclosure as per Regulation 13 (3) read with Regulation 13(5) also not applicable to the Noticee.

·      Bank has intimated to ARL on the invocation of pledged shares as also the disposal of invoked shares vide letter dated 13.12.2014 and 17.02.2015.

During the personal hearing granted to the Noticee, the following submissions were made -

·     Noticee invoked the pledges on various dates and immediately sold the shares in the market through proper market mechanism and had at no time shares exceeding the prescribed limits in the SAST and PIT regulations.

·      Noticee’s highest holding during the relevant period (i.e. September 08, 2014 to February 23, 2015) was on 15.10.2014 which amounted to 2.94% which was below the threshold limit for disclosure under SAST and PIT Regulations.

·   Noticee further submitted that they are a bank of 100 years of existence and shares were acquired in the normal course of banking transaction by invoking the security given for the loan.

Findings

The Noticee  invoked a total of 75,00,00 shares during the period from September 08,2015 to February 02, 2015 and  the pledged shares were invoked  in tranches on various dates further they were  immediately or shortly sold  afterwards, in the market.

The shareholding of the Noticee was constantly fluctuating and the same ranged between 1.51% to nil during the period from September 08, 2014 to February 24, 2015.

The highest shareholding of the Noticee during the above period was on October 08, 2014 and October 15, 2014, when it held 20,00,000 shares, amounting to 2.94% of the shareholding of ARL, which is much below the threshold of 5% specified under the SAST Regulations, 2011 and the PIT Regulations, 1992.

In view of the same, the Adjudicating Officer is of the view that the requirement for disclosure under the SAST Regulations, 2011 and PIT Regulations, 1992 cannot be cast on the Noticee.

                                            

Adjudication Order:

No penalty is warranted against the Noticee in the matter and accordingly the matter is disposed of.

Case:  Adjudication Order in respect of The Karur Vysya Bank Ltd in the matter of Arvind Remedies Ltd

Violation of: Regulation 29(1) and 29(2) read with Regulation 29(3) of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as "SAST Regulations, 2011") and Regulations 13(1), and 13(3) read with Regulation 13(5) of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as "PIT Regulations, 1992")

Parties: Karur Vysya Bank Ltd (hereinafter referred to as “Noticee”)

Arvind Remedies Ltd. (hereinafter referred to as “ARL / the company”)

 

Examination Period: January 01, 2014 to January 31, 2015

Facts of the case:

·      ARL had taken a short term loan of Rs. 25 Crores from the Noticee for the purpose of working capital requirements for which 75,00,000 shares of ARL were pledged by the promoter – Arvindkumar B Shah.

·         Subsequently, the Noticee has invoked pledge of 75,00,000 shares of ARL on various dates. It was alleged that due to invocation of pledge, the shareholding of the Noticee increased to 40,29,500 shares, constituting 5.91% of the total share capital of ARL, on October 15, 2014.

·         As the shareholding of the Noticee crossed 5% of the share capital of ARL, the Noticee was required to make requisite disclosure, within two working days, to the company under Regulation 13(1) of PIT Regulations, 1992, and

·         Under Regulation 29(1) read with 29(3) of SAST Regulations, 2011 the Noticee was required to disclose the same to the Stock Exchanges and Company.

·       However, no disclosures as stipulated under afore-mentioned Regulations were made by the Noticee thereby violating Regulation 13(1) of PIT Regulations, 1992 and Regulation 29(1) and 29(3) of SAST Regulations, 2011.

               

·       Further it was observed that due to the invocation of pledged shares, the shareholding of the Noticee had further increased to 63,29,500 shares, constituting 9.29% of the total share capital of ARL, on January 27, 2015. As prior to the said acquisition, Noticee was already holding more than 5% of the share Capital of ARL and the said acquisition of shares was more than 2% of the share capital of ARL.

·      The Noticee was required to make requisite disclosure in this regard within two working days of the acquisition to the company under Regulation 13(3) read with 13(5) of PIT Regulations, 1992, and to the company and stock exchanges under Regulation 29(2) read with Regulation 29(3) of SAST Regulations, 2011. However, no disclosures as stipulated under afore- mentioned Regulations were made by the Noticee.

Issues:

a.  Whether the Noticee failed to disclose the change in its shareholdings to the stock exchanges and the company, and thereby violated Regulation 29(1) and 29(2), read with 29(3) of SAST Regulations, 2011, and Regulations 13(1), and 13(3) read with 13(5) of PIT Regulations, 1992?

b.    Does the violation, if established, attract monetary penalty under Section 15A (b) of SEBI Act, 1992?

c.       Quantum of Penalty

Show Cause Notice, Replies and Personal Hearing

Show Cause Notice dated March 13, 2018 was issued for the aforesaid violations to which the following replies were submitted

·      Regulation 29(4) states that Regulation 29 shall not be applicable to Scheduled Commercial Bank or Public Financial Institution and since Karur Vyas Bank is a Scheduled Commercial Bank, provisions of Regulation 29 of SAST Regulations, 2011 is not applicable to the noticee

·        At no point, the noticee held more than the threshold limit of 5 % of the share capital of ARL, hence no disclosure required under Regulation 13 (1) of PIT Regulations, 1992 and Regulation 29(2) and 29 (3) of SAST Regulations, 2011 not required. Continual disclosure as per Regulation 13 (3) read with Regulation 13(5) also not applicable to the Noticee.

·      Bank has intimated to ARL on the invocation of pledged shares as also the disposal of invoked shares vide letter dated 13.12.2014 and 17.02.2015.

During the personal hearing granted to the Noticee, the following submissions were made -

·      Noticee invoked the pledges on various dates and immediately sold the shares in the market through proper market mechanism and had at no time shares exceeding the prescribed limits in the SAST and PIT regulations.

·       Noticee’s highest holding during the relevant period (i.e. September 08, 2014 to February 23, 2015) was on 15.10.2014 which amounted to 2.94% which was below the threshold limit for disclosure under SAST and PIT Regulations.

·    Noticee further submitted that they are a bank of 100 years of existence and shares were acquired in the normal course of banking transaction by invoking the security given for the loan.

Findings

The Noticee  invoked a total of 75,00,00 shares during the period from September 08,2015 to February 02, 2015 and  the pledged shares were invoked  in tranches on various dates further they were  immediately or shortly sold  afterwards, in the market.

The shareholding of the Noticee was constantly fluctuating and the same ranged between 1.51% to nil during the period from September 08, 2014 to February 24, 2015.

The highest shareholding of the Noticee during the above period was on October 08, 2014 and October 15, 2014, when it held 20,00,000 shares, amounting to 2.94% of the shareholding of ARL, which is much below the threshold of 5% specified under the SAST Regulations, 2011 and the PIT Regulations, 1992.

In view of the same, the Adjudicating Officer is of the view that the requirement for disclosure under the SAST Regulations, 2011 and PIT Regulations, 1992 cannot be cast on the Noticee.

                                            

Adjudication Order:

No penalty is warranted against the Noticee in the matter and accordingly the matter is disposed of.

Set-off of Export Receivables against Import Payables

There have been many times in business practice wherein the imports and exports are related to the same manufacturer/trader. Many cases have been found that the importer wants to set off their trade payables with the trade receivables.

Reserve Bank of India (RBI), as a measure to resort such cases, have prescribed the regulations for setting-off of export receivables against import payables, but the same are subject to certain terms and conditions as stated below:

ü  The import must be as per the Foreign Trade Policy in force.

ü  Invoices/Bills of Lading/Airway Bills and Exchange Control copies of Bills of Entry for home consumption have been submitted by the importer to the Authorized Dealer bank.

ü  Payment for the import is still outstanding in the books of the importer.

ü  Both the transactions of sale and purchase may be reported separately in R-Returns (NOSTRO and VOSTRO) and Foreign Exchange Transactions – Electronic Reporting System (FETERS)

ü  The relative EDF will be released by the AD bank only after the entire export proceeds are adjusted / received.

ü  The set-off of export receivables against import payments should be in respect of the same overseas buyer and supplier and that consent for set-off has been obtained from him.

ü  The export / import transactions with Asian Clearing Union (ACU) countries should be kept outside the arrangement.

ü  All the relevant documents are submitted to the concerned AD bank who should comply with all the regulatory requirements relating to the transactions.

Important changes in Private placement of Securities

Ministry of Corporate Affairs (MCA) has vide notification dated 7 August 2018 notified section 10 of Companies (Amendment) Act, 2017.  Pursuant to this notification, revised section 42 of the Companies Act, 2013 has been made effective.  Section 42 of the Companies Act, 2013, deals with the offer and allotment of securities through Private Placement.

Furthermore, the rules for private placement are also amended.  The key highlights of the amendment are as follows:

1. If the Company has taken the shareholders’ approval u/s 180(1)(c) of the Act and if it’s within the limits, separate shareholders’ approval is not required for issuing Non-convertible debentures. Further, if the proposed amount of the offer is within the limits of sec 180(1)(c) Board resolution would be adequate
2. Private Placement offer letter cannot be circulated till Board Resolution/Special Resolution is filed with ROC
3. Private Placement offer letter (Form PAS-4) is not required to be filed with ROC
4. Offer or invitation to subscribe or issue of securities is to be made to a select group of persons which are identified by the Board (identified persons).
5. Right of Renunciation is prohibited
6. The limit of the minimum size of investment in the offer of securities of Rs. 20,000 (Rupees Twenty thousand) is removed
7. Return of allotment (Form PAS-3) is to be filed with RoC within 15 (fifteen) days instead of 30 (thirty) days from the date of the allotment
8. Company cannot utilize monies raised through private placement till the return of allotment is filed with Registrar of Companies (RoC)
9. In case of default in filing return of allotment = Company, its Promoters and Directors shall be liable to a penalty of  Rs. 1,000/- (Rupees one thousand) for each day during which such default continues but not exceeding Rs. 25,00,000/- (Rupees twenty-five lakhs)
10. If an offer is made or monies are accepted in contravention of the provisions of  this section- Company, its Promoters and Directors shall be liable for a penalty which may extend to the amount raised through the private placement or Rs, 2,00,00,000/- (Rupees two crore), whichever is lower (Earlier it was whichever is higher)
11. Any offer/invitation/issue of securities through private placement exceeding 50 identified person or more   shall be treated as a public offer and all the provisions of the Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall become applicable 

Write-off of unrealized export bills

Reserve Bank of India (RBI) vide Section 7 of Foreign exchange Management Act (FEMA), 1999 read with Export Regulations, 2016 regulates the export of goods and services. There are certain cases wherein exporters are unable to realize their outstanding export receivables.

Following are the provisions specified in the regulations for writing off such outstanding export receivables:

1. An exporter who has not been able to realize the outstanding export dues despite best efforts, may either :     

·               Self-write off or

·         Approach the AD Category – I banks who had handled the relevant       shipping documents      

2.                   The limits prescribed for write-offs of unrealized export bills are as under:

Type	Rate
Self “write-off” by an exporter (Other than Status Holder Exporter)	5%*
Self “write-off” by Status Holder Exporters	10%*
Write-off” by Authorized Dealer Bank	10%*

   
 *of the total export proceeds realized during the previous calendar year

3.       The above write-off will be subject to conditions that the relevant amount has remained outstanding for more than one year, satisfactory documentary evidence is furnished in support of the exporter having made all efforts to realize the dues, and the case falls under any of the under noted categories: 

•   The overseas buyer has been declared insolvent and a    certificate from the official liquidator indicating that there is no possibility of recovery of export proceeds has been produced. 

·        The overseas buyer is not traceable over a reasonably long period of time. 

·     The goods exported have been auctioned or destroyed by the Port /  Customs / Health authorities in the importing country.

·    The unrealized amount represents the balance due in a case settled through the intervention of the Indian Embassy, Foreign Chamber of Commerce or similar Organization; 

·       The unrealized amount represents the undrawn balance of an export bill (not exceeding 10% of the invoice value) remaining outstanding and turned out to be unrealizable despite all efforts made by the exporter;

·   The cost of resorting to legal action would be disproportionate to the unrealized amount of the export bill or where the exporter even after winning the Court case against the overseas buyer could not execute the Court decree due to reasons beyond his control; 

·       Bills were drawn for the difference between the letter of credit value and actual export value or between the provisional and the actual freight charges but the amounts have remained unrealized consequent on dishonor of the bills by the overseas buyer and there are no prospects of realization.

4.        The exporter must surrender proportionate export incentives if any, availed of in  respect of the relative shipments. 

5.        In case of self-write-off, the exporter should submit to the concerned AD bank, a Chartered Accountant’s certificate (indicating the export realization in the preceding calendar year, amount of write-off already availed of during the year, export benefits availed of by the exporter which have been surrendered, relevant EDF to be written off, Bill No., invoice value, commodity exported, country of export). 

However, the following would not qualify for the write off facility:

·           Exports made to countries with externalization problem

·    EDF which are under investigation by agencies like, Enforcement Directorate,   Directorate of Revenue Intelligence, Central Bureau of Investigation, etc. as also the outstanding bills which are subject matter of civil / criminal suit.

Cases not covered by the above instructions / beyond the above limits, may be referred to the concerned Regional Office of Reserve Bank of India.