SEBI Fines Shubhlaxmi Jewel Art Promoter Group ₹10 Lakh For Failing To Make Mandatory Open Offer

The Securities and Exchange Board of India has imposed a ₹10 lakh penalty, jointly and severally, on the promoter and promoter-group members of Shubhlaxmi Jewel Art Limited.

The penalty was for acquiring more than 5% additional voting rights without making the mandatory open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

SEBI Adjudicating Officer Amit Kapoor held that promoter Narendrasinh J. Chauhan and seven promoter-group members, being persons acting in concert (PACs), violated Regulation 3(2) of the SAST Regulations.

The proceedings arose from the company board's approval on November 2, 2021, of a preferential allotment of 23 lakh convertible warrants. Of these, 18 lakh were intended for Chauhan, while 5 lakh were meant for non-promoter allottees.

Upon conversion of the warrants, the board approved allotment of 18 lakh equity shares to Chauhan on May 8, 2023.

According to SEBI, Chauhan and the other noticees were members of the promoter group and therefore persons acting in concert. The acquisition increased the promoter/promoter-group shareholding by 5.82%, triggering the mandatory open-offer requirement under Regulation 3(2) of the SAST Regulations.

However, no open offer was made, leading to adjudication proceedings.

The noticees argued that the acquisition arose from a preferential allotment intended to rescue the financially distressed company. They said it did not result in any change in control and caused no prejudice to public shareholders.

Referring to Regulation 3(2), the regulator observed,

“..acquirer, along with PACs, holding 25% or more shares or voting rights in a target company, may acquire more than 5% of the shares or voting rights in the target company in a financial year, only after making an open offer for acquiring shares of such target company in accordance with SAST Regulations.”

It noted that, for calculating additional voting rights acquired, gross acquisitions must be considered. It added that where new shares are issued, the difference between pre-allotment and post-allotment voting rights constitutes the additional acquisition.

Observing the shareholding pattern before and after issuance of the 18 lakh equity shares, it observed,

“I note that pursuant to the conversion of warrants into the equity shares, shareholding of the Acquirer (Noticee 1) increased by more than 5% which in turn resulted in increase in his shareholding and also that of the Promoter/ Promoter Group of the Target Company, by 5.82%.”

It also rejected the noticees' contention that the preferential allotment was undertaken to rescue the company and benefited public shareholders. It held that such considerations were irrelevant to compliance with Regulation 3(2).

The regulator said an open offer is mandatory when an acquirer and PACs already holding 25% or more acquire more than 5% additional voting rights in a financial year.

Accordingly, SEBI imposed a ₹10 lakh penalty on the noticees, jointly and severally.