Securities Appellate Tribunal
In Re: Mega Corporation Ltd. vs Unknown on 24 July, 2006
ORDER
G. Anantharaman, Member UNDER SECTIONS 11B AND 11(4)(B) OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 1.1 By an ad-interim ex-parte order dated 24.10.2005, the following directions were issued, for the reasons stated therein, pending investigation.:
a) The promoters of the company viz, Crayons Global Finance Ltd., Himanshu Mehta, Vimi Investments and Finance Ltd., Kunal Lalani, Beena Mehta, R.N. Mehta, Hiten Mehta, Odyssey Corporation Ltd. Pooja Equisearch Pvt. Ltd. and directors of the company Kunal Lalani, Hemanshu Mehta, Surendra Chhalani, H M Lalani, N K Nayak, K S Venkataraman, S L Golchha and Sachin Mehra are hereby directed not to buy, sell or deal in securities of Mega Corporation Ltd, directly or indirectly, till further directions in this regard and Mega Corporation Ltd. is further directed that it shall not issue any equity shares or any other instrument convertible into equity shares, in any manner, or shall not alter its capital structure in any manner, till further directions in this regard.
b) The clients viz. Ajit Suryavanshi, Ritedeal Trading Company Pvt. Ltd, Vishal Kumar Textiles P Ltd, Amar Adhav, Dadasaheb Gavhane, Dattu Shitole, Rightstar Trading Company Pvt. Ltd, Deepak Narvekar, Deepak Todkar, Fine Line Mercantile Co. (P) Ltd., Ganesh Raut, Haresh Posnak, Jagdish Parab, Jay Shah, Jaydeep Mane, Jayesh Waghela, Kiran Dhanavade, Lokesh Kapoor, Mahesh Kokate, Premkumar Singh, Stockholm Mercantile Co Pvt. L., Rajkishore Singh, Ramdas Kshirsagar, Sharpline Trading Co Pvt. Ltd, Topflag Exports Pvt. Ltd, Ranjan Mandal, Sandeep Kadam, Santosh Jagtap, Santosh Narvekar, Santosh Pawar, Umesh Choukekar, Vijay Suryavanshi, Vivekanand Patankar, Nirmal Jain, Mahendra Gopal Gorivale, Laxmans Singh Saijari and Patric Xess are hereby directed not to buy, sell or deal in securities of Mega Corporation Ltd, directly or indirectly, till further directions in this regard.
c) The clients Vishal Kumar Textiles P Ltd, Amar Adhav, Deepak Narvekar, Deepak Todkar, Ganesh Raut, Jay Shah, Jayesh Waghela, Stockholm Mercantile Co Pvt. L., Rajkishore Singh, Sharpline Trading Co Pvt. Ltd, Umesh Choukekar are hereby directed not to buy, sell or deal in any securities, directly or indirectly, till further directions in this regard.
d) The Stock Brokers viz., India Bulls Securities Ltd., Fortis Securities Ltd., Ruchiraj Shares and Stock Brokers (P) Ltd., who contributed significant volume in the trading of shares of the company while dealing on behalf of the interconnected clients are hereby directed not to buy, sell or deal in securities of Mega Corporation Ltd. on behalf of the promoters, directors and clients, directly or indirectly, till further directions in this regard.
e) The Depositories shall not give effect to any transfer of shares of Mega Corporation Ltd. lying in the beneficial owner accounts of the entities mentioned at paragraph 5.1 a) and 5.1 b) of the interim order
f) The Depositories shall not give effect to any transfer of any securities lying in the beneficial owner accounts of the entities mentioned at paragraph 5.1 c) of the interim order.
The ex-parte order states that the entities/persons against whom these directions were issued may file their objections, if any, to the order within 15 days from the date of the order and, if they so desire, avail themselves of an opportunity of personal hearing at the Securities and Exchange Board of India, Head Office, First Floor, Mittal Court, "B" Wing, Nariman Point, Mumbai 400 021 on a date and time to be fixed on a specific request, to be received in this behalf from the entities/persons within 15 days from the date of the order.
2.1 Mega Corporation Ltd. (hereinafter referred to as "MCL") vide its reply dated December 19, 2005 submitted that:
(i) it made its corporate announcements in the normal course of business and with a view to comply the requirements of the Listing Agreement. It emphasized that these were not hollow announcements but were supported by actual facts and underlying documents as proof. The announcements were very few and far between and were bonafide and as approved by the board of directors.
(ii) in the changing market dynamics, the company cannot be faulted for movement in its share price. The shareholders' independent decisions to deal in the company's shares cannot be twisted with a view to have adverse ramifications. Hence, if the impugned order is not revoked, it would have disastrous effect on the shareholders who may view SEBI's order as creating aberration in price discovery and for erosion in value of their investments in the company's scrip. The promoters are continuing with the company and have shown their commitment to remain invested in the company.
(iii) It maintained arms length relationship with its promoters. It has its own separate existence in law independent of its promoters.
2.2 The Directors of MCL viz. Narendra Kumar Nayak, Surendra Chalani, Sachin Mehra, S.L.Golchha, Hulas Mal Lalani, Kunal Lalani, Hemanshu Mehta and AVMKS Venketaraman clarified that they were not connected to either the stock brokers or their clients who traded in the scrip of MCL nor were they connected with the entities that have traded in the scrip of MCL. It was further submitted that they have not invested in the shares of MCL or IFSL nor were they associated with entities which have traded in IFSL. Being non-promoter directors they were only nominated to the Board and had no other connection with MCL or its promoters.
2.3 The reply of the Promoters of MCL viz. Vimi Investments & Finance P. Ltd., Crayons Global Finance P. Ltd., Beena Mehta, Hiten Mehta, Odyssey Corporation Ltd., Pooja Equiresearch P. Ltd. and R.N. Mehta also echoed the same.
2.4 The clients viz. Ajit Suryavanshi, Ritedeal Trading Company Pvt. Ltd., Vishal Kumar Textiles P Ltd, Amar Adhav, Dadasaheb Gavhane, Dattu Shitole, Rightstar Trading Company Pvt. Ltd, Deepak Narvekar, Deepak Todkar, Fine Line Mercantile Co. (P) Ltd., Ganesh Raut, Haresh Posnak, Jagdish Parab, Jay Shah, Jaydeep Mane, Jayesh Waghela, Kiran Dhanavade, Lokesh Kapoor, Mahesh Kokate, Premkumar Singh, Stockholm Mercantile Co Pvt. L., Rajkishore Singh, Ramdas Kshirsagar, Sharpline Trading Co Pvt. Ltd, Topflag Exports Pvt. Ltd, Ranjan Mandal, Sandeep Kadam, Santosh Jagtap, Santosh Narvekar, Santosh Pawar, Umesh Choukekar, Vijay Suryavanshi, Vivekanand Patankar, Nirmal Jain, Mahendra Gopal Gorivale, Laxmans Singh Saijari and Patric Xess, Vishal Kumar Textiles P Ltd, Amar Adhav, Deepak Narvekar, Deepak Todkar, Ganesh Raut, Jay Shah, Jayesh Waghela, Stockholm Mercantile Co Pvt. L., Rajkishore Singh, Sharpline Trading Co Pvt. Ltd, Umesh Choukekar and the Stock Brokers viz., Fortis Securities Ltd., and Ruchiraj Shares Stock Brokers (P) Ltd., have neither submitted their replies nor requested for personal hearing in the matter. India Bulls Securities Ltd. vide their letter dated October 26, 2005 submitted their reply giving details of the trading done by their clients and steps taken by them to ensure the compliance of the said order.
3.1 As requested by the company, its promoters and directors, an opportunity of personal hearing was granted on January 20, 2006. Shri Jagdish Khanna, authorized representative of MCL, its promoters and directors vide letter dated January 4, 2006 requested for refixing the hearing on any date on or after January 27, 2006. A fresh date of hearing was granted on February 3, 2006. Shri. Kunal Lalani, Managing Director, Hemanshu Mehta, Director, Surendra Chhalani, Whole Time Director, Mukesh Singhal, Manager, Finance and Jagdish Khanna, Chartered Accountant attended the hearing on the above date on behalf of the promoters and directors and made their submissions.
4.1 I have carefully considered the facts and circumstances of the case, the material on record and the submissions made by the various parties.
4.2 It is observed that though during the financial year 2004-05, the company showed income from investments at Rs.10.08 crore, accounting for 72% of the total income of the company, the balance sheet did not give details of the investments. Subsequently, the company submitted that the profit of around Rs 10.08 crores resulted from the sale of shares of three companies i.e. Lakshmi Overseas Ltd., Karuna Cables Ltd. and IFSL Ltd.
4.3 When the company was asked to submit further details of acquisition of these shares, it did not do so till the issuance of the interim order in the matter and the same also found mention in the said order. The issue of non-submission of the said details was again brought to the notice of the company representatives during the personal hearing granted to them. Subsequently, the company, vide letter dated February 13, 2006 submitted the details such as copies of contract notes, bills, client ledger, etc issued by the broker M/s DPS Shares and Stock Brokers Pvt. Ltd. to company for their dealing in the above mentioned shares. The documents submitted by the company were forwarded to BSE Ltd. for verification of the trade and confirmation of issuance of such contract notes/bills by the broker M/s DPS Shares and Stock Brokers Pvt. Ltd. to the company. BSE, after verifying the trade data provided by the company with their records confirmed vide its letter dated March 8, 2006 that none of the transactions mentioned in the contract notes were executed by the member in the BSE Online Trading System (BOLT). BSE also obtained further clarification from the broker M/s DPS Shares and Stock Brokers Pvt. Ltd., who, vide letter dated March 21, 2006, denied issuing any such contract notes/bills and also denied having any such client. The denial of the exchange and the broker about the execution of trades mentioned in the contract note raises serious doubts about the genuineness of the contract notes and bills submitted by the company to SEBI. This also suggests that the company reported huge profits in their annual results, apparently by manipulating their books of accounts to induce the investors into buying the shares of the company, which needs to be examined in the on-going investigation. Definitely, the same impacts the company as well adversely, while the book results are prima facie seen to have been fudged, thereby impairing the quality of full and true disclosures to the investors.
4.4 It was observed that few individuals viz. Nirmal Jain, Laxman Singh Saijari, Patrix Xess, Mahendra Gopal Gorivale who had each dematerialized around 25-30 lakh shares during March-April 2005 were having the same address as that of the associate company, prima-facie evidencing a connection between them and the Company. The company had denied any connection with the abovementioned entities in its submissions. However, scrutiny of the bank account opening forms, Demat account opening forms, bank statements, etc. of the above mentioned individuals as well as the entities associated with the company appear to suggest that these individuals are directly or indirectly connected to the company, which needs to be examined in the on-going investigation.
4.5 It was also observed that the balance sheet for the year 2004-05 filed by the company with the Exchange and the one submitted by the company to SEBI for the same year do not match. The balance sheet submitted by the company to the stock exchange did not contain the details of the investments. However, the balance sheet submitted at the time of personal hearing contained the details of investments made by the company in various shares. BSE has confirmed that the company did not file any revised/modified balance sheet to the exchange. The act of the company of submitting the revised/modified balance sheet shows that MCL appeared to misguide SEBI.
4.6 The interim order, inter-alia, highlights that the company came out with a flurry of corporate announcements (such as entering in to the business of worldwide outbound packaged tour, forex service, etc., in which the company had no apparent track record) profit projections from ventures which were yet to begin and hence, premature and equally misleading, done with the sole purpose of luring the investors to buy its shares. The company had replied that the corporate announcements were made as per the requirements of the listing agreements and these announcements had insignificant impact on the price of the scrip. However, from the analysis of the price movement subsequent to the two announcements made by MCL in the month of April 2005 it is noticed that these announcements appear to have had a major impact on the price of the scrip as during this period the price rose from Rs.22.60 to Rs.31.45 accounting for a rise of around 40% within a period of 8 trading days.
4.7 It prima facie appears that the collective gross purchases and gross sales of connected clients represented around 59% (45318970 shares) and 60% (46891852 shares) of the total market gross quantity of 768,35,415 shares during the period April 1, 2005 to September 16, 2005. The entities who prima facie appeared to be connected to the promoters and to each other, had accounted for major trading volume in the share for a period of five and a half months. These entities, through large off market deals during the period April 1, 2005 to September 16, 2005 amongst themselves and dealing through multiple brokers generated large trading volumes and the same has been brought out in detail in the ad-interim ex-parte order. Around the same period large quantities of shares were also transferred to these clients by the entities connected to the company. Thus by entering into such a large quantity of circular trading, these entities brought about a sudden spurt in the volume of the company and the average monthly volume which languished around 15,000 shares between September 2002 to December 2004 soared to around 1,50,00,000 shares between January 2005 to September 2005. In this manner, these entities prima-facie connected with the promoters have generated significant volume in the shares of the company apparently with a view to induce investors to deal in the shares of the company. It is pertinent to mention that none of the clients mentioned above have submitted their reply or sought the opportunity of personal hearing given to them and the same gives rise to adverse inference against them and their role in the whole scheme.
4.8 Further, there was absence of wide spread investor interest in the share of the company since September 2002 to December 2004. However, there was sudden increase in share price and volume since January 2005. The jump in profit was from the income generated from non-core business activity and from dealing in selected penny stocks by the company, together with a flurry of corporate announcements (such as entering in to the business of worldwide outbound packaged tour, forex service, etc., in which the company had no apparent track record). The same coupled with managing a web of off-market deals to transfer large quantities of shares to a group of interconnected clients, who in turn dealt heavily in the market and contributed to the sudden rise in trading volumes and the corresponding price rise, indicate a possible designing by the promoters, to make personal gains at the expense of investors by enticing them to participate in the trading of the shares of the company.
4.9 I observe that the interim order dated 24.10.2005 has not imposed any punishment but sought to prohibit the persons concerned temporarily from dealing only in the scrip of MCL. As the preliminary evidence prima facie points to the involvement of all the persons as described above, in the overall interest of investors and safety and integrity of the securities market, I feel that the interim order needs to be confirmed. It is further noted that Investigation proceedings are in progress to ascertain the role played by MCL and its promoters and directors in the apprehended manipulations.
4.10 In this context, it is pertinent to quote Section 27 of the SEBI Act, 1992 which states that "where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly...:" In this regard, Hon'ble SAT in Rahul H Shah's case (2004) 55 SCL 416 (SAT) has observed that "it is not possible for us to lay down any hard and fast rule as to when a director will be vicariously responsible for the acts of the directors in charge of the day today affairs of the company." However, even non-executive directors shall be made liable where Non-executive directors are commonly appointed so as to watch and keep a check on the whole time directors, to provide a view of an impartial outsider, to bring the benefit of their experience to the company, to act as a figure head (particularly in the case of a non-executive chairman), to add credibility to the company with the public and shareholders, though the inference has to be drawn from the facts and circumstances surrounding each case. In any event, there has to be a modicum of evidence linking the said directors with the manipulation and in its absence, complicity cannot be presumed. This aspect will be examined during the course of investigation. At this stage, the limited objective is whether there is a prima facie case for passing an interim order.
4.11 Urgency of the matter or public interest at times require flexibility in application of the rule as the circumstances of the case and the nature of the matter may warrant. Thus, putting temporary restrictions on the rights of market participants in the overall interest of the market and the investors would serve the interests of justice. It has to be kept in mind that SEBI is vested with statutory powers to regulate securities market with the object of ensuring investors protection, orderly and healthy growth of securities market so as to make SEBI's regulatory function over the capital market effective and meaningful. Further, in view of clear provisions of Section 11(4) read with Section 11B of SEBI Act, and in light of series of judgments of various High Courts, there can be no doubt that SEBI, in view of the exigencies of the matter has power to pass appropriate orders. For a prima facie case, it is necessary that the information which is available with the authority is more than a mere rumor, gossip or hunch and should be specific information, rather than vague information. In this case, there is adequate material to come to a prima facie finding as discussed above. I am, therefore, convinced that there are reasonable grounds in this matter to confirm the interim order.
5.1 In the light of the above, in exercise of the powers conferred upon me in terms of Section 19 read with Section 11(4)(b) and Section 11B of the SEBI Act, I have no hesitation in confirming the ad interim ex-parte order dated 24th October 2005, with all the directions against all the persons mentioned therein, in the interest of investors safety and integrity of the securities market.
5.2 This order shall come into force with immediate effect.