Securities Appellate Tribunal
Sebi vs Incap Financial Services Ltd. on 15 November, 2002
ORDER
G.N. Bajpai, Chairman
1. Whereas M/s Incap Financial Services Ltd. (hereinafter referred to as IFSL) had made a public issue of 25,40,000 Equity shares of Rs.10/- each for cash at par, which opened on 9th May, 1995 and closed on 20th May, 1995.
2. Whereas in the scrip of IFSL, allegations of manipulation in promoters' contribution, late subscription in public issue etc., were leveled and therefore, Securities and Exchange Board of India (hereinafter referred to as SEBI) vide its order dated April 02, 1998 and Order dated September 30, 1998 initiated investigations into the alleged manipulation in promoters' contribution, late subscription in public issue etc.
3. It has been observed from the prospectus dated April 10, 1995 that the following were the directors of IFSL:
Name of the person Area of Responsibility Shri Kantibhai Patel, Promoter and Chairman General Administration, Finance and Investments Shri. Urmilesh Gandhi, Promoter and Managing Director Project Finance, Investment Planning and stock market operation.
Shri. Roopram Sharma, Director Management Law, Accounts etc. Shri. Nimesh Patel, Director Lease and Finance Shri. Kirti S Kotaria, Director Finance and Investment
4. It was seen from the investigations that the public issue of IFSL did not genuinely receive minimum subscription of 90% of the issue size from the public and an illlusion of subscription to the public issue of IFSL was created by M/s. Viswapriya Financial Services and Securities Ltd (hereinafter referred as 'VFSSL'), apparently acting in concert with the promoters of IFSL.
5. Minimum subscription of 90% is mandatory for each issue of capital to public and if the company does not receive 90% of issued amount from public subscription before the closure of issue, as per the provision of Companies Act, SEBI Disclosure and Investor protection Guidelines and terms of prospectus, the company is under obligation to refund the subscription to the public unless underwriting obligations have been invoked.
6. From the investigations it was seen that the public issue of IFSL was subscribed in the following manner:
On realizing that the public subscription to the issue had not forth come, IFSL under cover of a letter dated 20.05.1995 addressed to the Manager, Punjab National Bank, Shahibaug, Ahmedabad had enclosed 5 applications along with cheques for Rs.156 Lac towards the public issue and had apparently left them with the Registrars to the Issue namely Super Corporate Services Ltd. with instructions to have them deposited with one of the Bankers to the Issue, to meet shortfall in subscription, in case it was not possible to arrange funds before the 7 day report. It appears that this tactic was resorted to enable the Registrars to report full collection in the seven-day report.
7. Apparently, these cheques were lodged with the bankers around the 30th May, 1995 i.e. only after the closure of the issue and all these cheques bounced. The applications so submitted were from :--
Wizma Consultants (P) Ltd. for Rs.50 Lakhs* Wizma Securities Ltd. for Rs. 31 Lakhs Hics Cements Ltd. for Rs.50 Lakhs* U.N. Gandhi for Rs. 15 Lakhs K.S. Kotaria for Rs.10 Lakhs
8. The cheques for the two* companies have been signed by Mr. Urmilesh Gandhi, Promoter and Managing Director of IFSL. From the recorded statement of Shri Kantibhai Patel, promoter and Chairman of IFSL, it was seen that Mr. Urmilesh Gandhi was aware of the fact that there were no funds to meet the aforesaid cheques and that they would ultimately bounce; and hence, he set about arranging funds from other sources for meeting the shortfall in public subscription. VFSSL was one of the entities who had been approached by Mr. Urmilesh Gandhi for the purpose. After the closure of the said public issue, Mr. Urmilesh Gandhi had apparently flown to Madras along with Shri Dilip Gajjar, PRO of IFSL, to tie up funds with VFSSL.
9. Pursuant to the above, VFSSL, as power of attorney holder had made applications using stock invests issued by Central Bank of India and Global Trust Bank Ltd., Chennai, for an aggregate of 18 lac shares amounting to Rs.180 lacs, which was 70% of the public issue of IFSL. Shri Kantibhai Patel, Chairman, IFSL and Shri Kirti S Kotaria, Director, IFSL respectively, have in their statements under oath stated that the applicants, on whose behalf VFSSL had subscribed to the issue as Power of Attorney holder, were non existent.
10. In statement recorded under oath, Shri R Subramaniam, Managing Director, VFSSL had stated that VFSSL had no arrangement with IFSL or their associates. Whereas, scrutiny of bank account statements of VFSSL, IFSL and Wizma Securities Ltd (Wizma), an associate of IFSL obtained from Central Bank of India, Adyar Br., Chennai revealed following funds flow:
Date Amount From To 27.5.95 10000000 VFSSL (A/c No513 with CBI) IFSL (A/c No. 770-CBI) 27.5.95 10000000 IFSL (A/c No. 770-CBI) Wizma (A/c No. 769-CBI) 27.5.95 10000000 Wizma (A/c No. 769-CBI) VFSSL (Prime Advance A/c for issue of Stockinvests) 29.5.95 10500000 VFSSL (A/c No. 513-CBI) IFSL (A/c No. 770-CBI) 29.5.95 8000000 IFSL (A/c No. 770-CBI) Wizma ( A/c No. 769-CBI) 29.5.95 2500000 IFSL (A/c No. 770-CBI) VFSSL (A/c No. 513-CBI) 29.5.95 8000000 Wizma ( A/c No. 769-CBI) VFSSL (Prime Advance A/c for issue of Stockinvests)
11. The Bank Records of Central Bank of India further showed that -
(i) Shri R Subramaniam, Managing Director of VFSSL had introduced the accounts of IFSL as well as Wizma with CBI's Adyar Br.
(ii) Authorised signatory for both accounts was Shri Urmilesh Gandhi whom Shri R. Subramaniam had met.
(iii) Shri K V Nandakumar, representative of VFSSL was authorised by Shri Urmilesh Gandhi to collect the cheque books for both these accounts on their behalf.
(iv) Both these accounts were opened only on 22.5.95 (i.e. after closure of public issue of IFSL on 20.5.95).
(v) Date of opening of the accounts, flow of funds, stock invest register, fixed deposit ledger of CBI etc. revealed that the stock invests used for subscribing to the public issue of IFSL were apparently issued after the date of closure of the issue.
(vi) CBI vide its letter dated 14th December, 1998 had accepted that stock invests No. 104117 to 104128 totalling Rs.80 lacs which were used by VFSSL for subscribing to the public issue of IFSL, were issued only on 27.5.95.
12. From the above it appears that VFSSL had apparently subscribed to the public issue of IFSL, pursuant to an understanding with the promoters of IFSL that the shares allotted would be bought back by the promoters of IFSL at a pre-determined rate. The said arrangement was couched in the form of an extension of bridge loan by VFSSL to IFSL. The amount of bridge loan was routed back by IFSL to VFSSL through Wizma for the purpose of procuring stock invests, which were used for subscribing to the public issue of IFSL.
13. Investigations further revealed that the amount of subscription by VFSSL was paid back to them from the public issue proceeds as detailed below:
VFSSL had by their fax dated 22nd May, 1995 requested Canara Bank, Bhadra Branch (one of the bankers to the issue) to note lien in their favour against public issue proceeds. In satisfaction of that lien, Canara Bank vide their letter dated 24th July, 1995 had remitted an amount of Rs.1,83,84,568/- to VFSSL by two demand drafts Nos. 405313 and 405314. VFSSL had, thus, received back their entire amount of subscription in the public issue of IFSL even before the shares of IFSL were admitted to dealing on the exchange.
14. The above clearly showed the arrangement between VFSSL, IFSL, its promoters and associates.
15. Shri R Subramniam in his statement under oath had stated that all the applicants as whose power of attorney holder VFSSL had applied in the public issue of IFSL were borrowers under their Prime Advance Scheme and had entered into separate loan agreements with VFSSL. He accepted that VFSSL had not met any of the applicants/ borrowers in person. He claimed that the loan agreement and the power of attorney was generally witnessed by a person whose identity was independently verified by VFSSL. But VFSSL could not produce copy of any of the agreements or power of attorney. The fact that VFSSL had not met any of the applicants nor could they produce any of the agreements etc. lent credence to the statements of Sarvashri Kantibhai Patel and Kirti Kotaria that the applicants were non existent.
16. Investigations also revealed that subscription of further Rs.60 lacs arranged through other sources had also been remitted back out of proceeds of public issue collection.
17. Investigations thus revealed that the public issue of IFSL was shown to be subscribed by bringing in major part of the subscription much after the closure date of the issue, and such subscription was paid back immediately out of public issue proceeds and the issue did not genuinely receive minimum subscription of 90% of the issue size from the public.
18. It was further observed from the investigations that after printing the share certificates at the company premises, the share certificates were dispatched only to 36 allottees out of total 91 allottees. The remaining share certificates, more particularly those applicants on whose behalf VFSSL had applied as Power of Attorney holder were retained with the promoters / directors, as their subscription had been paid back to VFSSL from out of issue proceeds. The same was confirmed by Shri Kantibhai Patel and Shri Kirti S. Kotaria in their statements. VFSSL had also accepted that the share certificates were not received by them.
19. In view of the above, it was alleged that VFSSL as Power of Attorney Holder had made applications in fictitious names for 18 lac shares amounting to 70% of the public issue of IFSL after the date of closure of the issue with an understanding with the promoters that the amount of their subscription would immediately be paid back and this enabled the promoters of IFSL to make a dubious issue successful and to create an illusion of subscription to the public issue of IFSL. VFSSL thus aided, abetted and connived with the promoters of IFSL in creating an illusion of subscription, allotting the shares and cornering them. It was further alleged that but for the connivance of VFSSL with the promoters of IFSL, the public issue of IFSL would have failed.
20. Pursuant to investigations, show cause notice No. IES/ID3/UN/26116/01 dated 30th March 2001 was issued to VFSSL requiring them to show cause as to why directions under Section 11B of the SEBI Act, 1992 should not be issued against them. VFSSL vide its letters dated 20th April and 21st May, 2001 sought time till 15th June, 2001 to file its reply. Reminder dated 25th July, 2001 was sent advising VFSSL that in case SEBI did not hear from them within 15 days, it would be presumed that they had no explanation to offer and SEBI would be constrained to pass appropriate orders on the basis of documents and information available on record. Whereupon, VFSSL vide its letter dated 13th August, 2001 again sought time till 31st August, 2001 to reply to the show cause notice. When no reply was received, letter dated October 11, 2001 was sent to VFSSL giving them one last opportunity to furnish the reply as also to appear for personal hearing before Chairman on 24th October, 2001.
21. In reply, a letter dated 12th October, 2001 was received from VFSSL seeking postponement of personal hearing to around 10th November, 2001 and stating that they have already sent their reply on the subject vide their letter dated 3rd September, 2001. However from a copy of their letter dated 3rd September, 2001 which was annexed to their letter of 12th October, 2001, it was noted that the said letter of 3rd September, 2001 claimed to have been sent in reply to show cause notice No. IES/ID3/UN/26116/01 dated 30th March, 2001 did not bear reference to the said show cause notice but referred to another show cause No. IES/PD/CMM/99-00/12620 dated 10th June, 1999 which was sent for initiation of prosecution proceedings.
22. In letter dated 3rd September, 2001, VFSSL had submitted that -
1. They had never met the borrowers, but had acted through market intermediaries.
2. They had no knowledge that the applicants were non-existent.
3. VFSSL had issued cheques and given applications to Central Bank of India before the issue closing date.
4. Stock invests issued by CBI bore dates on or before closing date of Incap public issue.
5. The applications were lodged before the closure of the issue.
6. VFSSL is a non banking financial company registered with RBI and carrying on business of loan and investment company, and as such, their act of giving bridge loan or financing the applicants for subscribing to public issues was in their normal course of business.
7. VFSSL had 2 separate transactions concerning Incap - A bridge loan and another public issue subscription loans. Each of these transactions had their own terms and conditions and separate counter partner. As financier, VFSSL was not concerned with the subscription of public issue but only interested in safeguarding the monies lent.
8. VFSSL had complained to the Registrar and stock exchange regarding non-receipt of share certificates. After the loan was settled, VFSSL authorized Registrar to hand over the share certificate to the guarantor.
23. Shri R Subramaniam, Managing Director, VFSSL appeared before the then Chairman, SEBI on 20th November, 2001 and made oral submissions.
24. At the time of hearing, the then Chairman, SEBI had specifically asked Shri Subramaniam whether he could produce the applicants on whose behalf VFSSL as power of attorney holder had made applications in the public issue of IFSL, since the allegation was that the applicants were non-existent/ fictitious. Shri Subramaniam agreed to do so. He was given one month's time upto 21.12.01 for the purpose and he was also advised that in case of failure to do so, it would be construed that the applicants were fictitious.
25. However, instead of producing the applicants, VFSSL sent a letter dated 3rd December, 2001 questioning the very validity of issuance of show cause notice to them and terming the entire process as legally not valid and without any authority. VFSSL took the plea that SEBI did not have any jurisdiction to issue a show cause under Section 11(B) of SEBI Act, 1992, since VFSSL was merely a lender in the instant matter and in no way associated with the securities market and as a NBFC, could not be covered and did not fall within the purview of the definition "Associated or Connected with Securities Market." VFSSL also sought another hearing if their submissions were not acceptable to SEBI.
26. Accordingly, another opportunity for personal hearing before the Chairman on 30/4/02 was granted to VFSSL vide letter dated April 4, 2002. VFSSL vide their letter dated 26th April, 2002 requested for postponement of hearing to the first week of May which was acceded to and the hearing was postponed to 10th May, 2002. However, VFSSL did not appear before me on 10th May, 2002.
27. I have gone through their contentions and after examination of records of proceeding, the investigation report, correspondence with VFSSL, the facts of the case, the manner in which the public issue of IFSL was shown to be subscribed, in my opinion, the activities of VFSSL are detrimental to the interest of genuine investors in the public issue of IFSL and to the integrity of the capital market.
28. I find from the foregoing that VFSSL had been, on one pretext or another, trying to prolong the entire process. They had always been seeking extension after extension, whether it is to reply to show cause or for personal hearing. On principles of natural justice, they have been given a number of opportunities to clarify their position. Ultimately when VFSSL was advised to produce the applicants to allay the allegations that the applicants were non-existent, they had started questioning the jurisdiction of SEBI to take action against them. This only shows that their objection is not based on merits but is an attempt to sidetrack the issue. The failure on the part of VFSSL to produce the applicants in spite of being specifically told to do so lead me to conclude that the applicants as whose power of attorney holder VFSSL had applied are non-existent.
29. VFSSL has stated that as a NBFC, extension of bridge loans to companies or loans to applicants for public issue subscription is part of their normal activities. They have argued that they have had 2 separate transactions concerning IFSL - one a bridge loan of Rs.180 lacs to IFSL and the other, public issue subscription loans totalling Rs.180 lacs to various applicants. This argument is not acceptable on the basis of facts and findings in the case. Bridge loans are given/ taken for the purpose of implementation of the object of the public issue and are repaid later from proceeds of public issue. In the instant case, bank records/ flow of funds clearly indicate that the amount of so called bridge loan given by VFSSL to IFSL has immediately been transferred back on the same date to VFSSL's Prime Advance account, for the purpose of purchase of stock invests for applying to the public issue of IFSL. Thus, it is very clear that these are not two separate loan transactions but are interlinked.
30. If these two are separate and independent loan transactions, VFSSL should have received, after the closure of public issue, repayments totalling Rs.360 lacs together with interest, i.e. Rs.180 lacs from IFSL and another Rs.180 lacs from the applicants. This has not been the case. VFSSL has received repayment of bridge loan alone from the bankers of IFSL. VFSSL did not separately get any amount from the applicant borrowers in repayment of public issue loans nor the share certificates. Yet VFSSL kept quiet and did not take any action against either the applicant borrowers or the guarantor (for non repayment of monies allegedly lent to the applicants) or the registrars to the issue/ IFSL (for non-receipt of share certificates). I also note that the amount of so called bridge loan and the sum total of amounts allegedly lent to the applicants are identical. This cannot be a mere coincidence. Thus, it is clear that the entire scheme is premeditated and designed in such a way that the safety of VFSSL's loan allegedly given to various so called public issue applicants is ensured, by couching the transaction as bridge loan. All this is possible only if VFSSL had certain understanding and arrangement with the promoters of IFSL. Hence, it is evident that the two transactions - i.e. bridge loan of Rs.180 lacs to IFSL and Prime Advance of Rs.180 lacs to applicants in the public issue of IFSL are an integral part of one and the same transaction and the nomenclature used such as 'bridge loan', 'prime advance' etc. are merely cosmetic terms intended to distract from the main purpose of entering into such transactions i.e. to bail out the public issue of IFSL after its closure date, with prior arrangement with promoters of IFSL for ensuring safety of VFSSL's funds used for subscribing in the public issue of IFSL.
31. In view of what is discussed above, I am unable to accept the explanation of VFSSL that that they had merely acted as financiers in the matter. The fact of the matter is that VFSSL had made applications to the tune of 70% of the public issue of IFSL, as power of attorney holder of certain individuals named by the promoters of IFSL, without even bothering to verify whether they were existent or not, after entering into an arrangement with the promoters of IFSL to ensure safety of their monies, through the mechanism of bridge loan. VFSSL thus connived with and abetted the promoters of IFSL in creating an illusion of subscription to the public issue; aided, abetted and connived with the promoters of IFSL to allot and corner shares in the public issue of IFSL. Their said action is in violation of the terms of issue of the prospectus, circulars and SEBI Guidelines on Disclosure and Investor Protection (GL/IP. No. 1/SEBI/PMD/92-93 dated June 11, 1992 and amendments thereto).
32. As regards putting in applications after closure date, VFSSL had argued that they had given the cheques, application form for stock invests etc. to the bank before closure date and that the stock invests bore the date 20th May, 1995 and that they were not concerned with the internal entries of the bank. They have further stated that the Central Bank of India have made wild allegations against them in view of certain disputes between them. I have perused all records in this regard. The date of cheque or the date of application for stock invests were not relevant. One can always fill in and keep the application form, cheques etc. ready and tender it in the bank later. Banks issue stock invests only against funds received. In the instant case, funds for the purpose of issue of stock invests have been received in the account only on 27th May, 1995 and the fixed deposits against the security of which the stock invests were issued etc. were created on 27th May, 1995. The stock invest register shows the date of issuance as 27th May, 1995. The bank had also confirmed that the stock invests were issued only on 27th May, 1995. The bank records are acceptable and relied upon evidence under Bankers Book Evidence Act. Hence I conclude that the stock invests were issued on 27th May, 1995 and therefore the applications in question were put in only after the date of closure of the issue, to bail out the issue.
33. As regards VFSSL's plea that they are a NBFC and were not connected or associated with the securities market, the same is not acceptable to me in the light of Hon'ble Gujrat Highcourt's decision in "Karnavati Fincap Ltd. Vs SEBI and M/s Alka Spinners Ltd. Vs SEBI." Both were decided on 6th May,1996 . [ 1996(10), SCL.5 GUJ.]
34. In the above said matters, their Lordship Mr. Justice R. Balia while deciding the cited matter inter alia has rightly pointed out that "In ordinary meaning, the persons associated with the securities market would include all and sundry who have something to do with the securities market. It is to be noted that the securities market in the sense is not confined to stock exchanges only. The words 'persons associated with the securities market' are of much wider import than intermediaries. 'Persons associated with' denotes a person having connection or having intercourse with the other." In the present case that "other" with whom a person is to have connection or intercourse is the securities market. In the instant case, the associate of Viswapriya (Prime Advance) applied in the public issue of IFSL, were allotted shares and these shares were sold back to promoters of IFSL and VFSSL was repaid out of the public issue proceeds from the public issue collection account with Canara Bank, Bhadra branch, Ahmedabad.
35. In view of the above, I hold that VFSSL is a person "associated/connected with the securities market" and is subject to directions and action under section 11(B) of SEBI Act, 1992.
36. In the light of the foregoing discussions, it is concluded that -
After the date of closure of public issue of IFSL, M/s VFSSL had put in applications to the tune of 70% of the public issue, as power of attorney holder of fictitious persons, in order to bail out the issue and to create an illusion that the issue had genuinely received minimum subscription of 90% of the issue size from the public;
VFSSL had ensured safety of their subscription by couching the transaction as a bridge loan and marking lien thereon against public issue proceeds.
VFSSL had pursuant to the arrangement, received back their subscription from out of issue proceeds on July 24, 1995, even before the shares of IFSL were admitted for dealing on the exchange.
37. In the light of the above discussions, it is clear that the said action of VFSSL is undesirable and enables dubious issues to show minimum subscription and get listed. VFSSL have thereby aided, abetted and connived with the promoters in allotting and cornering the shares. In this way, VFSSL has caused a lot of harm to the integrity, fairness and transparency of the capital market. Such activities are detrimental to the orderly development of the capital market and militate against the interest of genuine investors and therefore needs to be curbed.
38. I, therefore, hold M/s. VFSSL guilty of the charges leveled against them and I conclude that their activities are detrimental to the interest of genuine investors and orderly development and integrity of the capital market and if left unchecked could undermine the faith of the investors in the securities market.
39. Therefore, in the interest of investors and healthy development of securities market, in exercise of the powers conferred on me under Section 4(3) read with Section 11B of Securities and Exchange Board of India Act, 1992, I, G N Bajpai, direct that M/s. Viswapriya Financial Services & Securities Ltd. with its registered office at "Vishwapriya", 2, First Cross Road, Kasturba Nagar, Adyar, Chennai 600 020 (Managing Director : R. Subramaniam) be hereby prohibited from accessing capital market and/ or dealing in securities market in any capacity for a period of five years with effect from 25th November, 2002.
40. I note that VFSSL has already been prohibited from accessing the capital market and dealing in securities market for a period of five years with effect from 11th September, 2002 in the case of Rajesh Exports Ltd.. The prohibition under this order shall run concurrently with the order dated 11th September, 2002 against VFSSL and will be in force upto and including 24th November, 2007.