Securities Appellate Tribunal
Sebi vs Suryadeep Salts, Refinery & Chemicals ... on 1 January, 1800
ORDER
G.N. Bajpai, Chairman
1. M/s. Suryadeep Salts, Refinery & Chemicals Works Ltd. (hereinafter referred as "SSRCL") came out with a public issue of 58,50,000 equity shares at par. The issue opened for subscription on 06/03/1996 and closed on 09/03/1996. It was gathered from the statutory reports filed with SEBI that the issue was subscribed to the extent of 94.52% and 8 applicants were allotted 48,80,000 equity shares (which was 88.24% of the total) out of total 55,29,900 shares allotted to the public.
2. Investigations were conducted by SEBI into the alleged price manipulations and irregularities in the public issue of M/s. Suryadeep Salts, Refinery & Chemicals Works Ltd. (hereinafter referred to as "SSRCL"). Investigations revealed that above referred eight applications were made through stock invests which were issued by the Global Trust Bank, Bandra Branch. The eight applicants were Surendra Somani, Rakesh Naval, Chandra M. Singhi, Raj Basantani, Seema Basantani, Madhukar Patil, Ajay Verma and Kewal Verma. Investigations with the aforesaid applicants revealed that this was a financing arrangement and it was not a case of genuine subscription in the public issue of SSRCL. These 8 applicants entered into an arrangement with one Yes Investments, according to which, they were to apply for shares in the public issue of M/s Suryadeep Salt Refinery and Chemicals Works Ltd and on allotment, shares were to be returned to M/s Yes Investments who would pay back the amount subscribed in the shares along with interest @ 18% pa . It was stated by the applicants that they had received back their money along with the interest and in turn they had issued power of attorney in favour of the nominee of M/s. Yes Investments. If the shares allotted to these financiers namely, Surendra Somani, Rakesh Naval, Chandra M. Singhi, Raj & Seema Basantani, Madhukar Patil, Ajay and Kewal Verma are excluded from the total subscription, then the public issue is subscribed only to the extent of 6.28% while the requirement is that subscription to the extent of 90% of shares offered to the public should be received .
3. The fact that these 8 applicants were not genuine subscribers but it was merely a financing arrangement is evident from analysis of bank accounts. It was also seen during the course of investigations that Rs. 2.44 crores was repaid to the applicants (principal amount along with interest on the same for the period of date of subscription and date of repurchase) vide cheques bearing Nos.249801 to 249821 dated 17.5.96 drawn on Global Trust Bank, Bandra. These cheques were issued by M/s. Yes Investments. Investigations showed that fund for payment to M/s Yes Investments came from the current account of SSRCL (CA 1180) at Vijaya Bank, Alkapuri branch, Vadodara. The amount was transferred through an account of Prarthana Engg. (CA No.1272), Vijaya Bank, Alkapuri branch. Rs.2,55,95,000/- was transferred from the public issue account of SSRCL to the account of Prarthana Engineering which in turn transferred Rs.2,49,70,000/- to the account of M/s. Yes Investments by way of demand draft Nos.844993 to 845000, 845651 to 845655, 845663 to 845674, 845676 and 845730, out of the money received from SSRCL . Thus, it is seen that Prarthana Engineering charged Rs. 6,25,000 (Rs. 2,55,95,000 minus Rs.2,49,70,000/)for arranging finance in the guise of subscription to SSRCL. It was also seen that M/s Yes Investments also charged Rs.5,70,000 to act as a conduit in arranging these loans disguised as subscription.
4. Investigations revealed that the account of M/s Prarthana Engineering was introduced by Dr. Rajendrasinh Rathod-Director of SRCCL and it appeared that this account was opened merely to facilitate transfer of money from SSRCL to M/s Yes Investments. The credit entries in the account of Prarthana Engineering are on account of transfer of monies from SSRCL. A sum of Rs.1.19 crore was transferred on 10.5.96 from account of SSRCL to account of Prarthana Engineering This amount in turn was transferred by Prarthana Engineering by way of demand draft to the account of M/s Yes Investments on the same day. Likewise, further funds have been transferred from account of SSRCL to account of Prarthana Engineering first and then from the account of Prarthana Engineering to the account of M/s Yes Investments almost simultaneously. It is clear from analysis of the bank accounts of SSCRL, Prarthana Engineering, Yes Investments and these 8 applicants that the company i.e SSRCL purchased its own shares in violation of Section77 of Companies Act, 1956 and didn't utilise the funds for which it had approached public. SSRCL and its Directors thus colluded with M/S Yes Investments and M/S Prarthana Engineering in violating the provisions of Section 69 of Companies Act, 1956, the terms of the prospectus and the provisions of SEBI - DIP Guidelines 1992 by giving a misleading impression that public issue received the required minimum subscription.
5. Investigations further revealed that promoters cornered approximately 89% of total shares allotted through buy - back of shares from financiers by using public issue proceeds. This cornering by promoters led to a condition of artificial scarcity. Investigations brought out that M/s Yes Investments as a nominee of Dr. Rathod, Director of SRCCL started trading in SSRCL shares through various brokers. The shares were transacted for Yes Investments, promoters of SSRCL by Aash Infin & Agrowth Pvt. Ltd., Scallop Investment and Allbless Trading. The trading of these entities affected the prices and these entities were the market movers. The trading of these entities accounted for approximately 60% of total transactions in the scrip at the exchange.
6. Investigations brought out that, shares delivered after "no delivery" period were in the name of persons who actually sold those shares during settlement prior to book closure and were not transferred in the name of last holder as should have been. This shows that buyer and seller were acting in collusion and shares purchased by the buyer were being passed on to the seller for circulation in the system. Consequently same share certificates were being routed in the market through various brokers. It was also found that some of the shares sold in the market belonged to promoters and these were issued to them prior to public issue. This further corroborates the nexus between promoters and the operators who were offloading shares in the market i.e. Yes Investment, Albless, AIAPL, Scallop, etc.
7. It was also noticed that when the BSE Sensex was falling, share price of SSRCL was showing upward movement. The company had not started production and there was no justification for a rise in price to the extent of Rs.41/- for the maiden issue. Directors of SRCCL in connivance with AIAPL, Scallop, Albless, M/s. Yes Investments and Prarthana Engineering. created a false market in the shares of SRCCL by first cornering the shares through buy back arrangement with the financiers and then indulging in large trading through various brokers knowing fully well that they was hardly any floating stock.
8. Investigations further revealed that with such large quantity of shares being available with the promoters, a condition of artificial scarcity was created. M/s YES Investments as a nominee of Dr. Rathod, Director of SRCCL started trading in SSRCL shares through various brokers. The shares were apparently transacted by Aash Infin & Agrowth Pvt. Ltd., Scallop Investment and Allbless Trading. The study of total trades by these entities especially Aash Infin & Agrowth Pvt. Ltd. (AIAPL) shows that their trading affected the prices and they were the market movers. The trading of Aash Infin & Agrowth Pvt. Ltd., Scallop Investment and Allbless Trading in the scrip of SSRCL amounted to approx. 60% of total transactions in the scrip at the exchange. The initial buying spree during settlement no. 6 & 7 had prompted the rise in scrip price. The subsequent selling pressure during settlement no. 8 & 9 resulted in drop in the share price. During no delivery period buying by these entities pushed the share price to high of Rs. 41.
9. Further, investigations revealed that approximately 90,000 shares formed the traded floating stock and these very shares were being purchased by Scallop, Allbless through their associates at the counters of different brokers. Interestingly, it was noticed that shares having distinctive numbers (20671-28970, 30071-45070, 85071-110070, 70071-82470, 82571-85070, 61171-69570, 137071-147570) were being either bought or sold by these entities during various settlements. It was noticed that the shares which had been sold by AIAPL during the settlement no. 6, 7 & 8 were in the names of Kaveriben Mehta, Narharlal Bhatt, Samir Dholkia, Doshi Ashish, Nagin Waghela and Shital Desai. These shares were off loaded in Settlement no.7 by Shri. Hemendra Shah. The shares received by AIAPL during settlement no.9 & 12 bears the same distinctive numbers as was delivered by them during aforesaid previous settlements. Settlement no.10 &11 being no-delivery period, the actual delivery of shares were taken during Settlement no.12. At this point, it is necessary that the shares received should be attached with new transfer deed and shares are duly transferred in the name of last holder. In this case it was observed that the shares received at the end of book closure were in the name of persons who actually sold those shares during settlement no.7 i.e. prior to book closure. This show that buyer and seller were acting in collusion and shares purchased by buyer were being passed by the seller for circulation in the system and consequently same shares were being routed in the market through various brokers. It was also seen that Shri. Ashok Parmar and Shri. Nagin Waghela who were shareholders and whose share certificates were in circulation for connected with YES Investment. They had obtained power of attorney on behalf of YES Investment from the financiers. It was observed that, large no. of shares off loaded by AIAPL, Scallop and Allbless belong to promoters of SSRCL and were allotted to them prior to public issue.
In view of the above, a show-cause notice was issued to SRCCL and its Directors Dr. Rajendrasinh Rathod for having violated Regulation 4(a) (b) (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 read with Section 11(1) and 11(2)(b) & (e) of SEBI Act, 1992. SRCCL and its Directors were asked as to why suitable directions including directions prohibiting SSRCL from accessing the capital market and debarring Mr. Rathod from dealing in securities for a suitable period, under Section 11 B of the SEBI Act read with Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations should not be issued. No replies to the above mentioned show cause notices were received.
An opportunity for personal hearing before me was given to SSRCL and its Directors Dr. Rajendrasinh Rathod on 24/05/2002 which was attended by Shri A M Johri and Shri Rajendra Joshi on behalf of SRCCL and Dr. Rathod. They stated that they had come to attend hearing without any details from their clients and wanted some time for making written submissions. They were asked to submit written submissions to the office of the undersigned latest by 05/06/2002. A letter dated 03/06/02 was received from Dr. Rajendrasinh Rathored stating that the facts as brought out in the investigation of the transactions pertaining to SRCCL are true and uncontested. He has also stated that he has resigned from the company and that the company had been complying with all the requirements as laid down by SEBI. He has requested for a lenient view to be taken.
10. I have considered findings of investigations material and evidence available on record and submissions made by the company/directors from time to time. I am fully satisfied that the charges levelled in the show cause notice are substantiated .I find that SSRCL and its director Shri Rathod has given a misleading impression that public issue received the required minimum subscription and have connived with AIAPL, Scallop, Allbless, M/s. YES Investments and Prarthana Engg. to create a false market in the shares of SRCCL by buying and selling through various brokers knowing fully well that they was hardly any floating stock. I also notice that . Shri Rathod, Director of the company has also accepted the findings of investigations.
11. In view of the above, I in the exercise of powers conferred upon me by Section 4 (3) and 11 B of SEBI Act 1992 read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, direct that M/S Suryadeep Salt Refinery and Chemical Work Ltd. be prohibited from accessing the capital markets for a period of (three)(3) years. I also direct that its Director Dr. Rajendrasinh Rathod, be debarred from dealing in securities for a period of three (3) years. This aspect of the order shall come into force with effect from August 19th, 2002.
12. It is further directed that promoters of M/s Suryadeep Salt Refinery and Chemical Work Ltd. shall write to all allottees/existing shareholders asking them whether they would like to remain invested with the company and if allottees/existing shareholders choose to exit; they should be given an option to sell the shares to the promoters. If the shares offered are fully paid up, then the promoters should give the face value to the allottees/existing shareholders and if the shares are partly paid up, then the promoters should give the amount subscribed to the allottees/existing shareholders. It is directed that the company shall send its compliance report (giving evidence as to writing to all the allottees/existing shareholders by the promoters and purchase of shares from such allottees/existing shareholders by the promoters who choose to exercise the option) within 45 days of receipt of this order.