Securities Appellate Tribunal
Ask Me Info Hubs Ltd. vs Stock Exchange on 24 August, 2001
ORDER
1. This is an appeal under section 22A of the Securities Contracts (Regulation) Act, 1956 (the Act) directed against the decision of the Stock Exchange, Mumbai (BSE) - the respondent herein - refusing approval for listing of 20,50,000 shares issued by the appellant, on preferential basis to its promoters etc. The decision taken in this regard on 27-12-2000 was communicated to the appellant vide the respondent's letter dated 16-1-2001. The appellant is aggrieved by the said decision. Hence, this appeal.
2. The appellant is a public limited company incorporated in the year 1962. At the time of incorporation, its name was Cellulose & Chemicals Ltd. and the main object was manufacturing and trading in chemicals. In the year 2000, its Memorandum of association was amended to enable it to take up the business of purveyors/vendors of data, managers of data bank, call center operators etc. Consequently the appellant also changed its name from Cellulose & Chemicals Ltd. to Ask Me Info Hubs Ltd. The paid up capital of the appellant was Rs. 45 lakhs consisting of 4.5 lakhs equity shares of Rs. 10 each, till it was increased in August, 2000. Its equity shares are listed on BSE since 16-8-1984. On 16-8-2000, the appellant issued 20,50,000 equity shares of Rs. 10 each on a preferential basis at a premium of Rs. 25 per share, to its promoters etc., fetching Rs. 717.5 lakhs. On 25-8-2000 the appellant approached BSE seeking permission for listing the said 20,50,000 shares the BSE rejected the application and informed the appellant the said decision vide its letter dated 16-1-2000 inter alia stating as under:--
"In this connection, we advise that your case was put forward before the Listing Committee of the Exchange for consideration at its meeting held on 27th December, 2000. The Committee after considering the profile of your company, its business activities, capital structure etc. inter alia observed that the price of the scrip, during the period specified by SEBI for pricing of the preferential issue, had been pushed down from Rs. 71.25 to Rs. 13.30 in order to make the preferential offer at lower price and the clients dealing in the scrip were related to each other and with the company. In view of the above, it has been decided under the powers conferred on the Exchange under the Rules, Bye-laws and Regulations not to approve your application for listing 20,50,000 shares issued @ Rs. 35 per share on a preferential basis to promoters and others on the Exchange. Your application, in this regard therefore, stands rejected."
3. The appellant has refuted BSE's conclusion that the share price was pushed down from Rs. 71.25 to Rs. 13.30 in order to make the preferential offer at lower price to the select few and that the clients dealing in the scrip were related to each other and with the appellant. The manner in which the issue price has been arrived at has been explained by the appellant in its pleadings. The learned representative appearing for the appellant had also stated that the preferential issue price of Rs. 35 per share has the approval of shareholders at the extraordinary general meeting held on 16-8-2000. According to him, even though equity share of the company was quoted at Rs. 3.63 on 16-8-2000, preferential issue price was fixed at Rs. 35 to the benefit of the company. He submitted that in any case price determination is not a factor to be looked into by the exchange while deciding the request for listing that it is covered under SEBI regulations and the issue price has been arrived as per the SEBI formula and that the enforcement authority is SEBI in this regard. The exchange's scrutiny should be limited to the extent of ascertaining compliance of the SEBI formula provided for price determination and exchange cannot assume the powers of SEBI in any case.
4. The appellant's main grievance is that the impugned order is an ex parte order without giving it any opportunity of being heard and without calling for any explanation, and that the order has been passed against all the established principles of natural justice. The learned representative further submitted that the appellant is not aware of the basis on which the respondent has drawn its conclusion as no details or materials have been provided to the appellant and as a result it could not refute the allegations made by the respondent.
5. According to the learned representative, BSE has been hostile to the appellant as is evident from the fact that even the change of name of the appellant, as approved by the competent authority i.e., Registrar of Companies, has not been effected in the records of the exchange despite its several requests. He stated that BSE is acting as if it is a superior authority to the department of company affairs and the SEBI, and has chosen to decide the appellant's application in an arbitrary manner ignoring even the well established, rules of natural justice.
6. The appellant has inter alia prayed that (i) the unilateral and ex parte order of the respondent be quashed and the shares issued on preferential basis be ordered to be listed by the respondent (11) further the respondent be directed to effect the change of name of the appellant on the records of the respondent.
7. Shri P.N. Modi, the learned counsel appearing for the respondent submitted that the appellant's conduct is suspect in this regard. He stated that the respondent had conducted a preliminary investigation and came to the conclusion that the appellant had pushed down the share price and having done so the issue price was calculated by applying the SEBI formula. The charge against the appellant is not that it did not apply the SEBI formula, but manipulated the price movement in such a way so that even on application of the SEBI formula, the issue price would be far below the genuine market rate to benefit the allottees. He stated that the Appellant is not concerned about the interest of the other shareholders, as it is evident from its action that the preferential issue was got approved in the extraordinary general meeting held on 16-8-2000 and then the respondent was approached for listing on 25-8-2000 and when the listing matter was pending consideration, in October, 2000 the Appellant issued bonus shares in the ratio of 2:1 and in December, 2000 the name of the company was changed to misguide the public that it is in infotech company which was the flavour of the season. He pointed out that when the preferential issue was placed before the shareholders for their approval in the extraordinary general meeting, they were not informed of the appellant's plan to issue bonus shares soon. The shareholders were also not aware of the game plan of the Appellant and that the issue price was arrived at artificially by depressing the market value of the share. Shri Modi submitted that the Respondent, is under obligation to protect the interest of the investors and it is bound to ensure that listing approval is not accorded to those securities failing to fulfil the requisite qualification.
8. The learned counsel submitted that since the investigation carried out by the Respondent revealed manipulation of share price and the matter being serious requiring further investigation, this was reported to SEBI on 28-12-2000 alongwith a copy of the investigation report with a request to investigate and take appropriate action, since the SEBI's powers of investigation are much wider and more far reaching than the Respondent's powers. The learned counsel stated that the SEBI has apparently taken up the investigation, and as such whatever representations the Appellant wants to make should be made to the SEBI, which is now seized of the matter.
9. The learned counsel submitted that there was no breach of the rules of natural justice in the case or there was any need to hear the appellant in the matter since the price manipulation was done by persons related to the appellant and not by the appellant itself. The learned counsel submitted that details of the findings of the internal investigation by the respondent were not furnished to the appellant since the SEBI has been requested to investigate the matter and the Respondent did not want to impede or prejudice the SEBI's investigation by unilaterally divulging details of the investigation/and or the finding to the appellant. The learned counsel, submitted that in case the Tribunal directs to produce the said investigation report the same will be produced.
10. With reference to the appellant's prayer to direct to effect the change in name, in the Respondent's records, the learned counsel staled that, it is not a matter covered under section 22A of the SCR Act and the same is beyond the jurisdiction of the Tribunal.
11. On a specific query from the Tribunal that since the Respondent's listing committee in its meeting held on 27-12-2000 had already decided not to approve the appellant's listing application, in what way the reference to the SEBI made on the next day i.e., on 28-12-2000 would support its ease, the learned counsel submitted that it has no objection to hold on the matter till the SEBI's instructions are received in the matter and the Respondent is willing to withdraw the impugned letter. On 18-7-2001, i.e., on the next date of hearing the respondent filed a written statement inter alia staling that:
"In view of the fact that the investigation into the alleged price manipulation is pending before SEBI and has not been finally concluded, the respondent states that it will withdraw its letter dated 16-1-2001 until the completion of SEBI's investigation and receipt of SEBI's investigation report by the respondent. The respondent states that it will give the appellant a fresh opportunity to be heard after the receipt of SEBI's investigation report".
12. I have very carefully considered the rival submissions, both written and oral, as put forth by the parties.
13. As Shri Modi rightly pointed out, it is beyond the jurisdiction of this Tribunal to decide the appellant's grievance on the Respondent's inaction on its request to record the change of name.
14. It is on record that the Appellant company's equity shares of face value of Rs. 10 each were listed on BSE on 16-8-1984. It's present application is for getting approval for listing of 20,50,000 equity shares of the same face value issued on preferential basis at a premium of Rs. 25 on 16-8-2000. For the purpose the Appellant had applied to BSE on 25-8-2000. BSE's decision thereon dated 27-12-2000 refusing listing permission was communicated to the Appellant vide its letter dated 16-1 -2001. A copy of the said letter has been filed with the appeal. Material portion from the said letter has been reproduced in the introductory paras of this order. It has been stated in the said letter that the price of the scrip, during the period specified by the SEBI for pricing of the preferential issue had been pushed down from Rs. 71.25 to Rs. 13.30 in order to make the preferential offer at lower price and the clients dealing in the scrip were related to each other and with the company. In view of the same, the listing permission was declined. The order is a non-speaking cryptic one without giving any clue as to how the respondent has arrived at the price pushing charge.
15. The letter dated 16-1-2001 conveying the Committee's decision not to approve listing to the shares issued in the preferential issue made on 16-8-2000 is a final order from the Respondent's side. The fact that after taking such a decision, the matter was referred to the SEBI for investigation, does not in any way support the action taken by the Committee on 27-12-2000 without hearing the Appellant. It was for the Respondent to decide the matter on the basis of the information before it following the established procedure or defer the decision in case further enquiry was required in the matter. Listing of securities is exclusively the domain of the exchanges and undoubtedly BSE has exercised the power conferred on it for the purpose, but arbitrarily. In terms of bye-law 34 of BSE, 'the Governing Board shall consider and may in its description approve subject to such terms as it deemed proper, or defer or reject any application for admission of the securities of a company to dealings on the Exchange'. In terms of regulation 2.3 of BSE, companies which are listed on the exchange shall apply for admission for dealings on the exchange of any new (original or further) issues of securities made by them. It was in the context of such a requirement the Appellant approached BSE seeking approval in spite of the fact that its equity shares were already listed with BSE in 1984. The guiding principle to be followed in the case of listing of further shares is available in rule 19(4) of the Securities Contracts (Regulation) Rules, 1957. According to the said rule :
"A fresh application for listing will be necessary in respect of all new issued desired to be dealt in, provided that, where such new securities arc identical all respects with those already listed, admission to dealings will be granted on the company intimating to the stock exchange particulars of such new issues.
Explanation:- Shares are identical in all respects only if (a) they are of the same nominal value and same amount per share has been called up (b) they are entitled to dividend at the same rate and for the same period, so that at the next ensuing distribution, the dividend payable on each share will amount to exactly the same sum, net and gross and (c) they carry the same rights in all other respects."
16. The Governing Board, in items of BSE's bye-law 34 cited above is certainly competent to accord or not to accord listing approval to the applicants. In this context it is also to be noted that the exchange is duty bound to take necessary steps to protect the interests of all persons associated with it and its wisdom in granting or not granting permission to trade shares need be recognised in the normal course provided the decision is taken in a fair and reasonable manner without any prejudice or any bias. Stock exchanges arc also amenable to the rule of law. They are expected to follow the well respected procedural safeguards available against arbitrariness and discrimination. Adherence to principles of natural justice is one such safeguard. The principles of natural justice are known in the jurisprudence of administrative law as the fundamental rules of justice. It is fundamental rule of law that no decision must be taken which will affect the right of any person without first being informed of the case and giving him an opportunity of putting forward his case. There is catena of Court decisions holding that any order involving consequences must be made consistently with the rules of natural justice. To cite one, in State of Orissa v. Dr. BinaPani Devi AIR 1967 SC 1269 the Supreme Court had held that even an administrative order which involves civil consequences must be made consistently with the rule of natural justice. The person concerned must be informed of the case, the evidence in support thereof supplied and must be given a fair opportunity to meet the case before an adverse decision is taken. This principle is applicable to stock exchanges also.
17. The impugned order had been undisputedly made without affording an opportunity of being heard to the Appellant. The respondent's argument that the price was pushed down by the persons known to the appellant and as such it was not necessary to hear the appellant is unacceptable for the simple reason that the order is directed against the appellant and its fall-out is also on the appellant. Further, the argument that since the SEBI is now investigating the matter the appellant should approach the SEBI is also unacceptable. We are here on an order already passed by the respondent and not on an issue pending before the SEBI. In this context, it is to be understood that the SEBI's investigation is entirely independent and cannot be treated as an input to the decision already taken by the respondent. It is for the SEBI to decide further course of action against the Appellant and decide as to whether in its inquiry the Appellant need be heard or not. The fact that the Respondent has already disposed of the application is a matter of record.
18. The respondent's submission that 'it will withdraw its letter dated 16-1 -2001 until the completion of the SEBI's investigation and receipt of the SEBI's investigation report by the Respondent' is not a ground to absolve it from its failure to follow the principles of natural justice before rejecting the Appellant's application. There is absolutely no justification for bringing the SEBI into the matter which has already been decided by the respondent. The SEBI is adequately empowered to meet the situation in case the charges reported against the Appellant are established even after the shares are listed, as there are legal provisions to deal with the appellant in that event. Nothing prevented the Respondent from withdrawing its letter and deciding the application afresh by following the procedure even if it so really wanted and could have informed the Tribunal. The respondent has not done so. It had opted only to make a statement of its 'willingness to withdraw the letter until completion of the SEBI's investigation' and receipt of the report. To me this does not appear to be a fair approach as the SEBI is not bound lo complete its investigation in a short time frame, that a listing application is not a matter to be kept pending indefinitely. To accept the Respondent's version would in effect be keeping the listing application in limbo-indefinitely. If the intention is to delay the decision, the said approach is the ideal one. When there is an alternate and effective way of dealing with the matter expeditiously by the Respondent itself why it is not resorting to the same is not clear.
19. It is crystal clear that the Respondent has taken decision on the Appellant's application without following the principles of natural justice, inasmuch as the Appellant was not even given a copy of the investigation report based on which the application was rejected. The Appellant was also not given an opportunity to put forth its views. This is a serious lapse which cannot be ignored or condoned. It appears to me that the impugned order is unreasonable in the sense that it is manifestly arbitrary and bad. In my view linking the SEBI's investigation td decision making in this case is unwarranted as action can be taken, if so warranted, separately for violation of the SEBI Act, the Rules etc. after the investigation results are known. The respondent is, therefore directed to make available the relevant material to the appellant and also afford it a fair and reasonable opportunity of being heard and thereafter, considering its submission, pass a reasoned order. Since the matter related to listing of shares allotted in August, 2000 and the application was also filed in August, 2000 and that already one year is over by now it was but fair to dispose of the application without any further delay. One should not be insensitive to the time factor in a matter involving listing of shares.
20. For the reasons staled above, I am of the view that the impugned order need be set aside. Accordingly, I do so and remand the mailer with the direction that the respondent will dispose of the matter within 3 months from today following the requirements mentioned above. Thus, the appeal is allowed by way of remand.
21. On the side line, this appeal raises a policy issue which perhaps the concerned authorises would like to consider. This is a case where the Appellant had approached BSE seeking listing permission for equity shares issued in a preferential allotment. The Appellant's equity shares of the same denomination are already listed on BSE. As per the practice in vogue further issue of securities (same class) requires fresh listing approval for trading on exchanges. In this context rule 19(4) cited in this order may be referred to. It is not very clear as to why such fresh approvals are required again and again for listing the same class of securities (identical), especially in view of the fact that it is a preferential issue made with the approval of the shareholders under section 81A and that the SEBI guidelines are already in position to take care of the requirements of pricing etc. If it is felt that some sort of filtering is required at the entry stage of the scrip to the market in further issues, better ways and means can be thought of, by providing clear cut guidelines instead of leaving it to the discretion of each stock exchange. Listing should not be viewed mainly as a means to augment the finances of stock exchanges. It's objective is much wider, generation of fund is only incidental. However, it is for the authorities concerned to examine the matter and decide as to whether such fresh listing requirement of same type securities' by exchanges can be dispensed with subject to compliance of certain guidelines which the SEBI should be in a position to provide taking into consideration the interest of the shareholders. A copy of this order may be forwarded to the Ministry of Finance (Deptt. of Economic Affairs), and the Securities and Exchange Board of India, so as to enable them to consider the matter.