Securities Appellate Tribunal
Sebi vs G.S. Organics Ltd. on 1 January, 1800
JUDGMENT
G.N. Bajpai, Chairman
1. G.S. Organics Ltd. (hereinafter referred as GSO ) came with the public issue which opened for subscription on 17th September, 1996 and closed on 21st of September. The issue was mainly subscribed through applications made by Phi-Alpha Investments Pvt. Ltd. (hereinafter referred as PAIL) which was holding Power of Attorney on behalf of the applicants. Madhya Pradesh Stock Exchange (MPSE) had rejected the listing application of G.S. Organics Ltd. apprehending that GSO had made some arrangements with Phi-Alpha Investments Pvt. Ltd. Chennai, for garnering the required subscription and questioned the genuineness of the stockinvests received in the issue. Investigations were conducted to probe into these allegations by the Securities and Exchange Board of India (hereinafter referred as SEBI)
2. Mr. Yogendra Dubey, M.D., GSO, in his statement mentioned that since the Issue had not received any subscription, GSO was advised by Premium Capital Market & Investments Ltd. (Premium), -- Lead Managers for GSO's issue-- to get the issue subscribed through financing. An Agreement was entered into on 12/9/96 with Premium for arranging subscription of the issue.
3. Pursuant to the aggrement , Mr. Dubey went to the office of VFSSL at Chennai on 20/9/96 alongwith Mr. S.K. Bandi and Mr. Ashok Porwal. VFSSL agreed to provide finance worth Rs. 200 lacs towards subscription in the Issue at a fee of Rs. 15 lacs as interest for 1 month. The financing was to be done through stockinvests, and GSO was asked to open a Current Account with Vijaya Bank, Adyar, Chennai, and to execute an irrevocable PoA in favour of Thamiraparani Investments Ltd. (TIL) an associate of VFSSL, for operating and closing this account with Vijaya Bank. Mr. Dubey, further stated that he signed an Agreement for the financing with VFSSL and handed over post dated signed cheques drawn on Vijaya Bank to VFSSL. He further mentioned that he also paid Rs. 2 lacs in cash to VFSSL as interest.
4. Mr. Dubey also stated that he received a call from Mr. Bandi on 23/9/96, informing him of the receipt of 2014 stockinvests from VFSSL. He then took these stockinvests for deposit at State Bank of Hyderabad, Rajwada, Indore on 24/9/96. On pointing out by the Registrar to the issue--Vibra, that all applications with these stockinvests were made by PAIL as Power of Attorney (PoA) holder and this PoA was not attached with the applications. It was also mentioned that these stockinvests were marked as "Vijaya Bank A/c G.S. Organics Ltd." and were not payable in the name of the company. Mr. Dubey stated that then he contacted Mr. Bandi, who in turn contacted VFSSL asking for the PoA executed in favour of PAIL, an associate of VFSSL. He claims that he paid Rs. 1 lac on 15/10/96 through 3 demand drafts to VFSSL, as they insisted on this further payment. He has stated that he paid a further Rs. 1.40 lacs through a demand draft no. 5440699.5.97 issued by SBH to VFSSL. As informed by Mr. Dubey, the Basis of Allotment for public issue of GSO was finalized on 2/11/96, based on the applications made by PAIL as holder of PoA.
5. It was seen that as per the 78-day Post-Issue Monitoring Report dated 9/12/96 submitted by Premium a total of 2029 valid applications were received in the Issue for 40,11,000 shares, i.e. the issue was subscribed to the extent of 1.009 times. From the Basis of Allotment finalized with MPSE on 2/11/96, as furnished by Vibra Financial Services Ltd. (Vibra), Registrars to the Issue, a total of 39,75,900 shares were allotted to 2029 applicants. On 3/11/96, all allotments were made which included allotments made to all the 2014 stockinvest applicants for 39,64,900 shares. Thus, stockinvest allottees were about 99.73% of the total allottees.
6. Investigations with the stockinvest-issuing banks also revealed that all the stockinvests were issued in the names of the various persons on the basis of applications for issue of stockinvests made by PAIL as their PoA holder. The stockinvests were issued against Fixed Deposits of PAIL and Viswapriya Financial Services & Securities Ltd. (VFSSL), Chennai.
7. Investigations brought out that, all the stockinvests were made payable to "Vijaya Bank A/c G.S. Organics Ltd.". These 2014 stockinvests were presented for realisation on 4/11/96 by Vibra with State Bank of Hyderabad (SBH), Rajwada, Indore, Bankers to the company as also Bankers to the Issue. However, since these were marked "Vijaya Bank A/c G.S. Organics Ltd." and not simply as 'G.S. Organics Ltd.' these stock invests were rejected by Vijaya Bank on presentation by SBH. Thus these stock invests were not realised and no subscription was received against them.
8. Investigations with Vijaya Bank also confirmed the financing arrangement between VFSSL and Mr. Dubey of GSO. It was seen that Vijaya Bank Adyar, Chennai was Banker to VFSSL. GSO also opened a Current Account (No. 738) with Vijaya Bank on 20/9/96 and this account was introduced by VFSSL. It was observed that GSO issued an irrevocable PoA in favour of Thamiraparani Investments Ltd. (TIL), Chennai, for operating this current account.
9. It was also seen during the course of investigations that GSO filed a Writ Petition with the Hon'ble High Court of Madras seeking a direction against Vijaya Bank for realising the 2014 stockinvests and to remit the proceeds thereof to State Bank of Hyderabad, Rajwada, Indore. The Hon'ble High Court of Madras, through its Order dated December 3, 1996, dismissed the Writ Petition.
10. The Hon'ble High Court dismissed the application and observed that GSO did not disclose the true and correct facts to the court especially relating to issue of irrevocable PoA in favour of TIL, and existence of the agreement between GSO and TIL. It also remarked that safety to the investors was lacking in view of the irrevocable PoA to operate current account of GSO opened with Vijaya Bank being given to TIL and opening acount for realisation of stock invests with Vijaya Bank in preference to the bankers to the issue and the bankers to the company.
11. Investigations with Lead Manager and Registrar clearly brought out the existense of financing arrangement between GSO and VFSSL. It was seen that Premium had forwarded a letter of South India Stock Broking Services Ltd. (SISBSL), a member on the National Stock Exchange, an associate company of VFSSL Group; offering its marketing and financing services to arrange full subscription of the issue etc. The proposed arrangement ensured that GSO would be able to make payments after completion of listing. Premium, also forwarded a letter from Capital Services (India) Ltd. (CSIL), group company of the VFSSL Group requesting payment of brokerage on the 2014 applications arranged by VFSSL aggregating to Rs. 200 lacs.
12. Investigations with Vibra revealed that a letter was written by Mr. Dubey in response to letter of Registrar seeking advice on acceptance or rejection of the 2014 stockinvests. It was stated in this letter that they were approached by a high value net worth investor who was interested in subscribing the issue and was ready to invest funds on a long-term basis and this letter also contained admission to the effect "as the state of the primary market is in doldrums, every issuer is entering into some kind of arrangement to get the issue subscribed and ours was not an exception". It was also stated that the name of the banker was put on the stockinvest to avoid transit collection loss and get the shares listed within 30 days. In another letter GSO again wrote to the Registrar advising them to accept all the applications at GSO's risk and responsibility since the Board of Directors was entitled in their absolute discretion to accept or reject any application.
13. It was observed that shares were allotted even when consideration was not received by GSO. Shares were dispatched also to 15 share holders who had applied in the public issue with cheques/cash.
14. To summarise, the financial arrangement between VFSSL, PAIL, TIL and GSO is evident from the following:
The Account opening form of GSO for the Current Account with Vijaya Bank bears the name of VFSSL as the introducer.
VFSSL and PAIL are the joint holders of the current account with Times Bank, from which funds were transferred for creating the deposits for issuing the stockinvests.
All the 2014 stockinvests issued by Central Bank, were issued against applications made by PAIL, the PoA holder, against Fixed Deposits created after debiting the current account of PAIL with the bank.
Mr. S. Radhakrishnan appears as an authorised signatory in the Account opening form of VFSSL with Times Bank. The same Mr. Radhakrishnan also signed as PoA holder for TIL with Vijaya Bank.
The above mentioned correspondence between Premium and GSO on one hand and Registrar and GSO on the other hand.
15. In view of the above evidences gathered in the course of investigations, it was clear that GSO and its Directors made allotments to applicants even when no consideration was received for the shares allotted and GSO and its Directors went ahead with allotting shares to applicants without receiving the minimum subscription. This allotment was in contravention of Section 69 of the Companies Act, 1956, SEBI Guidelines on Disclosure and Investor Protection (June 18, 1992) and also the terms and conditions of the Prospectus for the Issue. GSO entered into an arrangement with VFSSL and its associates for financing applications in the issue, under which VFSSL and its associates advanced a bridge loan of Rs. 200 lacs. This amount was utilised for financing applications to Public Issue by circumventing the provisions of Section 69 of the Companies Act, 1956, SEBI Guidelines on Disclosure and Investor Protection (June 18, 1992) and also the terms and conditions of the Prospectus for the Issue.
16. A show cause notice under Sec 11 B of SEBI Act 1992 read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 was issued to the Company, and its Directors asking them to show cause why suitable directions, including directions for prohibiting the Company from accessing the capital market and debarring Directors from dealing in securities for a suitable period of time, should not be issued.
17. Mr. Yogendra Dubey (MD-GSO) replied on behalf of the company and its Directors. He has put the entire blame on the LM to the issue - M/S Premium Capital Market and Investment Pvt. Ltd. He has also submitted that the Company has filed 2 FIRs against (on 05/05/1998 and 15/05/98) M/S Premium Capital Market and Investment Pvt. Ltd. in this regard.
18. An opportunity for hearing was given to the Company and its Directors. The matter was heard by me on 23/04/2002. Mr. Yogendra Dubey along with Mr. Milind Vipradas presented their case before me. The above arguments were reiterated. They excepted the findings of SEBI that the issue was not genuinely subscribed and so they entered into arrangement with VFSSL on the advise of Premium. Mr. Dubey also stated that they were technical persons who knew about production only and did not understand the Capital market and financial matters. They depended totally on the advise of Premium and believed that Premium was acting in lawful manner. They pleaded that a lenient view be taken by SEBI and the Company should not suffer further on account of misdemeanors of Premium.
19. I have carefully examined the findings of investigation, submissions made from time to time and material and evidence available on record. I find that GSO and its Directors went ahead with allotting shares to applicants without receiving the minimum subscription. They have this violated the provisions of Section 69 of the Companies Act, 1956, SEBI Guidelines on Disclosure and Investor Protection (June 18, 1992) and also the terms and conditions of the Prospectus for the Issue. GSO and its Directors also made allotments to applicants even when no consideration was received for the shares allotted. In view of the above, I in the exercise of powers conferred upon me by Sec. 4 (3) and 11 B of SEBI Act 1992 read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 direct that GSO be prohibited from accessing the capital markets for a period of 3 years. I also direct that Mr. Yogendra Dubey, Mr. Milind Vipra Das AND Mr. Pramod Joshi are debarred from dealing in securities for a period of three (3) years. This order shall come into force with effect from 14/08/02.