Securities Appellate Tribunal
Cil Nova Petrochemicals Ltd. & Another vs Sebi on 7 June, 2010
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.4 of 2010
Date of decision: 7.6.2010
1) CIL Nova Petrochemicals Ltd.
391-396(P), Moraiya Village,
Sarkhej Bhavla Highway,
Taluka Sanand, Ahmedabad.
2) GSL Nova Petrochemicals Ltd.
396, 403, Moraiya Village,
Sarkhej Bhavla Highway,
Taluka Sanand, Ahmedabad. ...... Appellants
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4-A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai. ......Respondent
Mr. Janak Dwarkadas, Senior Advocate with Mr. Biren Saraf, Mr. Ankit Lohia, Mr. Sanjay Asher, Ms. Tanvi Jindal and Ms. Akshaya Bhansali, Advocates for Appellants.
Mr. Darius Khambata, Additional Solicitor General with Ms. Daya Gupta, Advocate for the Respondent.
CORAM : Justice N.K. Sodhi, Presiding Officer Samar Ray, Member Per : Justice N.K. Sodhi, Presiding Officer Nova Petrochemicals Limited was a public limited company carrying on its business/manufacturing activities in the state of Gujarat. It shall be referred to hereinafter as Nova. Nova alongwith its sister concern Nova Polyyarn Ltd. presented in the High Court of Gujarat a scheme of arrangement for the demerger of Nova which was sanctioned on August 27, 2009. As a consequence of the demerger, two companies that emerged after change of their names are the appellants before us. Clause 7(a) of the scheme of arrangement provided that all legal proceedings whether civil or criminal before any statutory or quasi judicial authority or Tribunal by or against Nova pending on or before the appointed date or which may be instituted thereafter shall make both the appellants herein jointly and equally responsible or liable in relation to such proceedings. Since proceedings against Nova were pending before its demerger which culminated in 2 the passing of the impugned order, the said order is being challenged jointly by the two appellants in the present appeal.
2. Nova was a listed company whose shares were listed, among others, on the National Stock Exchange of India Ltd (NSE) and the Bombay Stock Exchange Ltd. (BSE). The Securities and Exchange Board of India (hereinafter called the Board) noticed unusual price rise in the scrip of Nova during the period from November 28, 2005 to March 31, 2006 and it carried out investigations to find out whether any irregularities had been committed in the trading of the scrip and whether there was any violation of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (for short the Regulations). Investigations revealed that Nova made some corporate announcements which were not genuine and were misleading in nature and that those had been made solely to lure innocent investors to trade in the scrip of Nova. It also transpired that as a result of misleading corporate announcements which were price sensitive, the price of the scrip increased from Rs.96.95/- on BSE to Rs.146.85/- during the period of investigations and from Rs.91.80/- on NSE to Rs.147.85/- during the same period. Investigations further revealed that when the price of the scrip went up, entities related to Nova including its promoter directors off loaded their shares in the market. The Board also noticed that there was a huge variation between unaudited financial results for the quarters ending June, 2005 to March, 2006 and audited results of Nova as on March 31, 2006 for which Nova could not offer any explanation as required under Clause 41 of the listing agreement. On completion of the investigations, the Board issued to Nova a show cause notice dated June 1, 2009 making the aforesaid allegations. It was alleged that Nova by making misleading announcements lured the gullible investors to invest in the scrip and aided and abetted related entities to off load the shares when the price went up thereby violating section 12A of the Securities and Exchange Board of India Act, 1992 (for short the Act) and Regulations 3 and 4 of the Regulations. It was called upon to show cause why suitable directions be not issued restraining it from accessing the securities market. It is not in dispute that Nova received the show cause notice and sought extension of time on a number of occasions to file its reply but it did not do so inspite of several reminders issued to it. The Board was left with no option but to proceed ex-parte on the basis of the 3 material that was collected during the course of the enquiry and the investigations. On a consideration of the allegations made in the show cause notice and the material available on the record, the whole time member exercising the powers of the Board framed the following two issues which, according to him, arose for consideration.
"Whether Nova had made misleading corporate announcements and thereby benefited the related entities to off load their holding? Whether Nova had declared non genuine financial results?"
The whole time member found that both the charges stood established and by his order dated January 12, 2010 restrained Nova from buying, selling and dealing or accessing the securities market directly or indirectly in any manner whatsoever for a period of two years from the date of the order. It is against this order that the present appeal has been filed.
3. We have heard the learned senior counsel on both sides.
4. We shall deal with the two issues seriatim. Let us first examine whether Nova made misleading corporate announcements as alleged and whether those resulted in the increase in the price of its scrip. Two price sensitive information regarding the scrip of Nova came in the public domain on January 23, 2006 and February 20, 2006. On receipt of information from Nova, BSE flashed on January 23, 2006 on its website and trading screen news that the former had informed that a meeting of its board of directors would be held on January 28, 2006, inter alia, to consider the proposal for Bonus Issue. On January 28, 2006 the board of directors of Nova in their meeting recommended the issue of one equity share for every one share held by a shareholder on the record date to be decided by the board of directors. This date was subsequently decided by the board of directors in their meeting held on March 4, 2006 at 3 p.m. and fixed March 20, 2006 as the record date. The second price sensitive information that was sent by Nova to BSE was by its letter of February 16, 2006 received by BSE on February 20, 2006 and this is what Nova informed BSE:
"Dear Sir, We have to inform that the Company has decided to expand the existing capacity of its Poly Condensation Plant and Power Plant. The said expansion is proposed to be funded through Follow on Public Issue/ FCCB/GDR etc. To consider the above, we propose to hold a meeting of our Board of Directors on 04/03/2006. The following items are proposed to be considered by the Board.4
01. Expansion of Poly Condensation and Power Plant.
02. To approve issuance of Follow on Public Issue/ FCCB/GDR.
03. To fix the record date for Bonus Issue." (emphasis supplied) It is common case of the parties that on February 20, 2006 BSE flashed this information/letter on its website and trading screen informing all and sundry that the company (Nova) had decided to expand the existing capacity of its Poly Condensation Plant and Power Plant and the expansion was proposed to be funded through a public issue/ Foreign Currency Convertible Bonds (FCCB)/ Global Depository Receipts (GDR). On March 4, 2006 an extra ordinary general meeting of the members of Nova was held at 12.30 p.m. in which the promoter directors of the company were also present. The recommendations made by the board of directors in their meeting held on January 28, 2006 was accepted and the general body decided to issue one bonus share for every existing equity share held by a shareholder. From the recorded proceedings of the extra ordinary general meeting it is clear that the issue regarding the expansion of Poly Condensation Plant and Power Plant was not discussed as wrongly mentioned in the impugned order. On the same day i.e. on March 4, 2006, the board of directors of Nova also met at 3 p.m. and besides fixing the record date for the issue of bonus shares, they also discussed the note prepared by the company's financial and technical executives regarding the expansion of its Poly Condensation Plant and Power Plant. The board of directors was informed that as per the opinion of the company's executives the proposed expansion would be cost effective and would improve the company's bottom line as profitability projections based on realistic assumptions were very positive. The board of directors fully endorsed the proposal for expansion as is clear from the proceedings which read as under:
"The Board took a careful note of the proposal and after discussion decided to fund the aforesaid expansion through follow on public issue and get the project report prepared by a reputed management consultant. Further it was decided that the financial and economic viability of the project should be got vetted by a reputed agency like SBI Caps, whereafter a suitable Merchant Banker should be engaged for preparation of Draft Prospectus, appointment of under writers and finalization of price of the issue and such related matters.
The Board felt that to finalize the above, it is not feasible to hold frequent Board meetings and therefore a committee comprising of the Chairman and Managing Director of the company be constituted. The decision taken by the committee may be placed before the Audit Committee whereafter approval of the Board should be taken."5
With a view to finalise the expansion plan, the board of directors passed the following resolution:
"Resolved that a committee of the following Directors viz. Shri Vedprakash Chiripal and Shri Shyam Gupta be constituted to consider and finalize all matters related to Follow on Public Issue including appoint (sic) of Management Consultant for project report finalization, consultant for vetting the project report and Merchant Banker.
The Board further decided to place the report and all related matters before the Audit Committee and seek approval of the Board thereafter." A reading of the proceedings of the board meeting as reproduced above lead us to conclude that the board of directors conveyed the impression that the expansion plan was already on the launching pad and a committee of two directors had been appointed only to give the final touches. BSE and NSE were both informed on March 6, 2006 that the board of directors of Nova had discussed the proposal for the expansion of the company's Poly Condensation Plant and Power Plant and also to finance the same by means of FCCB/GDR/IPO. It is, thus, clear that the decision to expand the company's plants and to finance them through IPO or other means which was already in the public domain was reiterated to the public on March 6, 2006. This information admittedly was price sensitive and had a positive impact on the price immediately and the same started rising as is clear from the price movement chart that was furnished to us by the learned senior counsel appearing for the appellants. The chart showing the price movement of the scrip of Nova alongwith the dates on which corporate announcements were made is as under:
Price Movement of shares of Nova Petrochemicals Limited Date Opening Price Particulars of Bonus Particulars of Corporate Issue Announcement of Expansion Plan BSE NSE January 96.95 96.4 Corporate announcement 23, 2006 Re Bonus.
January 98.95 99.9
24, 2006
January 99.45 99.95
25, 2006
January 95.90 95 On 28th January 2006 the
27, 2006 Board of Directors
recommended the Bonus
Issue in the ratio of 1:1
January 98.30 95.2
30, 2006
January 97.95 102.75
31, 2006
6
Date Opening Price Particulars of Bonus Particulars of Corporate
Issue Announcement of
Expansion Plan
BSE NSE
February 99.45 99
1, 2006
February 100.30 100.95
2, 2006
February 95.50 98.05
3, 2006
February 97.55 95.6
6, 2006
February 97.00 100.9
7, 2006
February 93.00 95.3
8, 2006
February 97.20 91
10, 2006
February 97.00 94
13, 2006
February 92.50 94.45
14, 2006
February 94.50 97.9
15, 2006
February 98.00 99
16, 2006
February 101.35 104
17, 2006
February 102.50 104 On 20th February 2006 the
20, 2006 Company made a
Corporate Announcement
that a meeting of the Board
of Directors will be held to
consider the expansion
plan.
February 104.95 105.25 Corporate announcement
21, 2006 that an EOGM to
consider bonus issue
would be held on March
4, 2006.
February 105.05 107
22, 2006
February 105.10 106
23, 2006
February 100.60 105
24, 2006
February 108.60 111
27, 2006
February 113.50 113.1
28, 2006
March 1, 121.00 111.6
2006
March 2, 123.95 121
2006
March 3, 127.00 124.95 On 4th March 2006 the On 4th March 2006 the 2006 EOGM approved the Board of Directors decided Bonus Issue. to expand the Company's plants.
7 Date Opening Price Particulars of Bonus Particulars of Corporate Issue Announcement of Expansion Plan BSE NSE March 6, 130.00 134.9 On 6th March 2006 the 2006 Company made a corporate announcement that the Board had discussed the expansion plan. March 7, 137.50 136.8 2006 March 8, 144.75 140.05 2006
5. At this stage we may take note of another undisputed fact which has a material bearing on the conduct of Nova and its promoters/directors. During the period from January 23, 2006 to March 8, 2006 more than 25 persons acting in concert (PACs) with Nova had sold a total of 8,87,233 shares of Nova which constituted more than 6 per cent of its total share capital. The learned senior counsel appearing for the Board pointed out that these PACs included Mr. Vedprakash Chiripal and Mr. Shyam Gupta the two directors who constituted the committee set up by the board of directors of Nova on March 4, 2006. One of them was the chairman and managing director of Nova. This fact was not disputed on behalf of the appellants. After the expansion proposal had come in the public domain through the stock exchanges (BSE and NSE) and the PACs including two directors of Nova having sold a substantial percentage of the shares after the price of the scrip had gone up, the committee of two directors (Vedprakash Chiripal and Shyam Gupta) which had been set up on March 4, 2006 submitted a detailed report on June 13, 2006 recommending to the board of directors of Nova that the expansion of Poly Condensation Plant in its present form was not advantageous and that the expansion of Power Plant would not serve any useful purpose and accordingly recommended that the expansion was "not support worthy in the present circumstances and be dropped".
We wonder how this committee could revisit the decision to expand which decision had been taken by the board of directors and had already been communicated to the stock exchanges on February 20, 2006 and reiterated on March 6, 2006 when its mandate was only to work out the details of the expansion plan. It appears to us that the decision to expand was only an eye wash meant to hoodwink the public investors with a view to lure them in investing in the scrip of Nova. On receipt of this report Nova is said to have 8 informed the stock exchanges about the dropping of the expansion plan on June 14, 2006. There is a serious dispute before us whether stock exchanges were informed about the decision of the committee to drop the expansion plan. We have no hesitation to hold that the appellants are lying before us and that they did not inform the stock exchanges (BSE and NSE) about the decision of the committee to drop the expansion plan. We say so because it is the appellants' own case that the report of the committee was considered by the board of directors of Nova on July 31, 2006 who accepted the same. Assuming this to be true (though it is not so), how could Nova inform the stock exchanges on June 14, 2006 about the decision to drop the expansion plan when the said decision was taken only on July 31, 2006. What, if the board of directors had rejected the committee report which they could. Lies have no legs to stand upon. From the records placed before us by the respondent Board, it is clear that the report of the committee of directors was not even a part of the agenda of the board meeting held on July 31, 2006 and the proceedings show that the said report was never discussed. The appellants have not placed anything on the record to show that this report was ever discussed in the board meeting on July 31, 2006 though a statement to that effect has been made in the affidavit. While the appeal was pending before us, the Board made enquiries from the stock exchanges as to whether they had received letter dated June 14, 2006 from Nova informing them about the decision to drop the expansion plan and their reply was in the negative. Alongwith its reply, NSE informed the Board that the agenda of the board meeting of July 31, 2006 had no item regarding the report of the committee of directors submitted on the expansion plan. NSE informed the Board that there were only 3 items on the agenda which had nothing to do with the expansion plan. BSE also informed the Board that Nova had sent to it the outcome of the meeting of the board of directors held on July 31, 2006 and the same did not contain anything pertaining to the expansion plan. As already observed, the appellant has not placed any material on the record to show that the report of the committee of directors was at all discussed in the meeting of the board of directors held on July 31, 2006. It is, thus, clear that Nova having informed the exchanges about the expansion plan did not inform them when the proposal was dropped. Intimation was, perhaps, given to the Ahmedabad Stock Exchange but that is really of no consequence. We are in agreement with the whole time member that Nova never intended to expand the existing 9 capacity of its Poly Condensation Plant and Power Plant and that the proposal was discussed in its board meeting on March 4, 2006 only with a view to make misleading corporate announcements in this regard which were actually made and which resulted in the price of the scrip going up considerably as is clear from the record. Their dishonest intention is further clear from the fact that more than 25 PACs including the two directors quickly off-loaded their shares thereafter within a short period from January 23, 2006 to March 8, 2006 during which period the price of the scrip increased from Rs. 91 to Rs.147.85 as is clear from the price volume data of BSE and NSE as produced by the appellants alongwith the appeal paper book. We do realise that a corporate entity could take a decision and due to subsequent developments or change in circumstances it may have to revise the same but that is not the case here. The chain of events as narrated above make it clear that Nova and its directors from the very beginning had the intention to mislead the investors, raise the price of the scrip and off-load their shares.
6. What is contended by Shri Janak Dwarkadas learned senior counsel appearing for the appellants is that the whole time member grossly erred in losing sight of the fact that Nova had declared a bonus of 1:1 and the said information had come in the public domain on January 23, 2006 and that resulted in the increase in the price of the scrip. The learned senior counsel may be partly right because a corporate announcement like payment of bonus could have a significant effect on the price of the scrip and which effect is usually positive but in the instant case the announcement of bonus had only a marginal effect as, after the announcement, the price of the scrip increased from Rs.96.95 to Rs.102.50 on BSE and from Rs.96.4 to Rs.104 on NSE. Then came the misleading corporate announcement on February 20, 2006 as already noticed above and the price of the scrip increased from Rs.102.50 to Rs. 144.75 on the BSE and from Rs.104 to Rs.140.05 on the NSE. It is clear from the chart that the corporate announcement regarding bonus did not have a very significant effect on the price of the scrip where as the misleading corporate announcement regarding the expansion plan had a substantial impact on the price and it shot up considerably. From the aforesaid discussion, it follows that Nova made misleading announcements which resulted in the increase of its share price and that more than 25 PACs including its chairman cum managing director and 10 another director sold their shares in the market as alleged in the show cause notice. We are satisfied that Nova and its promoters/directors indulged in unfair trade practices and are guilty of violating Regulations 3 and 4 of the Regulations.
7. This brings us to the second issue regarding declaration of non genuine financial results. With a view to fulfill their wicked objective of increasing the price of the scrip of Nova and then offloading the shares in the market, Nova and its directors not only made misleading corporate announcements to lure the lay investors but also published non genuine financial results to attract their attention for the same purpose. A summary of the final and quarterly financial results of Nova during the relevant period is given below in a tabular form:-
(Rs. In Crores) Description FY ended Quarter ended Quarter ended Quarter ended Quarter ended Mar. 31, 2006 Mar., 2006 Dec., 2005 Sept., 2005 June., 2005 (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Total income 483.69 120.62 169.16 128.34 83.51 Expenditure 442.66 108.57 155.34 117.80 74.74 Net Profit (Loss) (5.23) 1.05 2.39 0.03 (2.09) Equity 13.5 13.5 13.5 13.5 13.5 EPS (earning per -4.07 - 1.77 0.02 -1.54 share) A mere look at the aforesaid table shows that there is a substantial variation between the unaudited and audited accounts. Whereas profit has been shown for the quarters ending September, 2005, December, 2005 and March, 2006, there is a huge loss suffered by Nova for the financial year ending March 31, 2006. Similarly, there is a substantial discrepancy in the earning per share as shown in the quarterly results and the audited financial results for the year ending March 31, 2006. Clause 41 of the Listing Agreement which has a statutory force, requires every listed company to furnish unaudited financial results on a quarterly basis in the prescribed format to the stock exchanges where it is listed and it is also required to publish its Annual Results in the prescribed format.
Clause 41 at the relevant time also provided as follows:-
"The unaudited results should not substantially differ from the audited results of the company. If the sum total of the First, Second, Third and Fourth quarterly unaudited results in respect of any item given in the same proforma varies by 20 percent when compared with the audited results for the full year the company shall explain the reasons to the Stock Exchanges."
Despite huge discrepancies between audited and unaudited financial results, Nova did not offer any explanation to BSE at the relevant time. However, during the course of the 11 investigations carried out by the Board, it made a query from BSE as to whether Nova had furnished any explanation regarding the discrepancies pertaining to the audited and unaudited financial results. On receipt of this query from the Board, BSE by its letters dated October 1, 2008 and November 6, 2008 sought an explanation from Nova regarding the discrepancies. Nova by its letter dated November 19, 2008 replied as under
and furnished two explanations as referred to therein :
"Dear Sir, Sub. : Reasons for variation in the Aggregate of quarterly Unaudited results and Audited results for the year 2005-06.
---------------------------------------------------------
We refer to your letters no. DCS/COMP/SD/313/08-09 dated 1st October, 2008 and DCS/COMP/SD/367/2008-09 dated 6th November, 2008 and submit the explanation for variation of more than 10% between aggregate of the quarterly Unaudited results and Audited results of the Company for the year 2005-06 as under. :
a. During the year under review the Company had submitted a proposal to the Banks for the reduction in the rate of interest and had accordingly provided interest at the reduced rate in the Unaudited Financial Results. However, the said proposal was not considered by the Head offices of the Banks till finalization of Accounts and therefore the Company had to provide interest amount at the contracted rate in the final Audited Accounts which is higher, than the aggregate amount shown in the Unaudited Financial Results which is the one of the reason for variation in the Unaudited and Audited Results for the year 2005-06.
b. In the Unaudited Financial Results of the Company for the aforesaid accounting year, the Company had made provision of tax of Rs.2.00 lacs whereas in the Audited Accounts, the provision of taxation for Rs.177.86 lacs (comprising of Deferred Tax [Rs.171.16 lacs] & FBTL [Rs.6.25 lacs]) was made after calculating the liability of the taxation. The Deferred Tax provision in fact increased the Deferred Tax Liability (Reserves) to that extent.
Due to Completion of assessment of earlier years, certain expenses were disallowed by the Income tax Authorities. And as result of the same, the amount of the unabsorbed depreciation reduced to a greater extent due to which the Company was compelled to provide for Deferred Tax in the accounting year 2005-06 (Assessment year 2006-
07) at the time finalisation of the accounts for the year. This results into the increase in the loss of the Company for that year. This is the root cause for the vast difference between the Unaudited Financial Results and Audited Results.
We hope that the aforesaid clarification will be upto your satisfaction." A reading of the aforesaid letter reveals the absurdity of the explanations which cannot be accepted by any accounting standards or principles. How could a company show lower rate of interest in its books on presumptive basis without any confirmation from the banks 12 and how could it not make provision for its known tax liability which was substantial. The accounts were prepared in a manner to show fictitious profits in the unaudited results which later turned into substantial losses thereby changing the complexion of the accounts completely. We are satisfied that all this was done deliberately to lure the lay investors to invest in the scrip of Nova so that the demand goes up which actually resulted in the price rise. Again, when the price increased the promoter directors and other connected entities of Nova quickly sold their shares in the market. It is, thus, clear that the discrepancy between unaudited and audited financial results was not an innocent act but a deliberate fudging of the accounts with an ulterior motive to increase the price of the scrip. We cannot lose sight of the fact that fictitious profits as shown in the unaudited financial results were price sensitive which resulted in the price of the scrip going up. In this view of the matter, the charge that Nova had declared non genuine financial results stands established. Perhaps with a view to protect the market from such accounting misdeeds, the format of the Listing Agreement was amended in the year 2008 bringing two very important changes. The limit of 20 per cent in the discrepancy was brought down to 10 per cent meaning thereby that if the discrepancy exceeds this limit, the listed company is required to offer its explanation which obviously has to be plausible and satisfactory. The more important change that has been brought about is that the quarterly unaudited financial results should be subjected to limited review by the statutory auditors of the company.
8. For the reasons recorded above, we are clearly of the view that both the charges levelled against Nova stand established and that no fault can be found with the impugned order. The Board has already been soft on the appellants when it debarred them from accessing the securities market only for a period of 2 years and no interference in this regard is called for.
In the result, the appeal fails and the same stands dismissed with no order as to costs.
Sd/-
Justice N.K.Sodhi Presiding Officer Sd/-
Samar Ray Member 7.6.2010 Prepared and compared by RHN 13 After we pronounced the order, the learned counsel for the appellants has made an oral prayer to stay the operation of our order to enable his clients to move the Supreme Court. Since the charges levelled against the appellants pertain to the year 2006 and they have been operating in the market since then, we direct that the operation of our order shall remain in abeyance till July 12, 2010.
Sd/-
Justice N.K.Sodhi Presiding Officer Sd/-
Samar Ray Member 7.6.2010 Prepared and compared by RHN