Securities Appellate Tribunal
Svc Industries Limited vs Sebi on 27 May, 2019
Author: Tarun Agarwala
Bench: Tarun Agarwala
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved on: 20.05.2019
Date of Decision : 27.05.2019
Appeal No. 360 of 2018
SVC Industries Limited
301, A-1, Shubham Centre,
Near Holy Family Church,
491, Cardian Gracious Road,
Andheri (E),
Mumbai - 400 099. ....Appellant
Versus
1.Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051.
2. Bombay Stock Exchange Floor 25, P J Tower, Dalal Street, Fort, Mumbai - 400 001. ...Respondents Mr. Ram Upadhyay, Advocate i/b Law Competere Consultus for the Appellant.
Mr. Gaurav Joshi, Senior Advocate with Mr. Nishant Upadhyay, Advocate i/b Desai & Diwanji for Respondent No. 1.
Mr. Manish Chhangani, Advocate i/b Khaitan & Co. for Respondent No. 2.
2CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member Per : Justice Tarun Agarwala, Presiding Officer
1. The appellant has questioned the veracity and legality of the order of BSE Limited ('BSE' for short) dated March 8, 2018 by which their application / representation to remove its name from the list of suspected shell Companies and from the Graded Surveillance Measures ('GSM' for short) Stage VI has been rejected.
2. The facts leading to the filing of the present appeal is that the Ministry of Corporate Affairs ('MCA' for short) issued a letter dated June 9, 2017 to Securities and Exchange Board of India ('SEBI' for short) enclosing a list of 331 listed shell Companies with a request to initiate necessary action as per SEBI laws / regulations. Pursuant to the said letter SEBI issued a letter dated August 7, 2017 to BSE, Metropolitan Stock Exchange of India Ltd. and National Stock Exchange of India Ltd. directing them to identify the suspected shell Companies on their Exchange platform and initiate necessary action as per SEBI laws and Regulations. 3 In this regard SEBI further advised Stock Exchanges to take the following measures, namely, place the Companies in Graded Surveillance Measures (GSM) Stage VI with immediate effect, and thereafter initiate a process of verifying credentials / fundamentals of such Companies and appoint an independent auditor to conduct audit of such listed companies and, if necessary, even conduct forensic audit of such companies to verify its credentials / fundamentals. SEBI further directed that if upon verification, the Exchange does not find appropriate credentials / fundamentals about existence of the Companies in which case Exchanges will initiate the proceedings for compulsory delisting the companies.
3. SEBI vide its letter dated August 9, 2017 issued further direction directing the Exchanges to seek the following documents from the companies for the purpose of verification of credentials / fundamentals of the companies, namely, status of filing its annual income tax returns for the last three years, status regarding any pending dispute with the income tax department, status regarding Company's compliance with the requirements of the Companies Act, status regarding filing of annual returns of last three years, status whether company is a 4 going concern, bank statement of last one year, status of the company with respect to default to any bank / financial institution and status of the company's compliance with all the listing regulation requirements.
4. Based on the direction issued by SEBI dated August 7, 2017 and August 9, 2017 BSE issued a letter dated August 7, 2017 and August 10, 2017 to the appellant requiring it to submit the necessary auditor's certificate along with the documents. Based on the letter of SEBI dated August 7, 2017 BSE issued a notice dated August 7, 2017 to the appellant intimating them that the company would be placed in GSM Stage VI with effect from August 8, 2017.
5. The appellant filed an application / representation dated August 10, 2017 before the respondent contending that their action in keeping them in the list of the suspected shell Companies was wholly erroneous as well as their action in placing them in the GSM Stage VI and consequently requested to take immediate remedial action so that their reputation is salvaged and the hardships caused to the investors are removed.
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6. However, in response to the letter of BSE dated August 10, 2017 to submit auditor's certificate, the appellant submitted the auditor's certificate and the necessary documents, namely, annual income tax returns of last three years, Company's compliance under Companies Act, evidence of a going concern, copy of bank statement of last one year etc. The auditor also certified that even though the plant is closed since September 2000 it is still a going concern.
7. Subsequently BSE vide its various letters dated August 23, 2017, September 11, 2017, September 21, 2017, November 7, 2017, November 2, 2017, February 1, 2018 and February 15, 2018 asked for various information and documents such as provident fund details, number of employees, salary statement etc. which was duly supplied by the appellant and requested that their name should be removed from the list of suspected shell companies and also from the GSM Stage VI.
8. At this stage, it would be relevant to note what Graded Surveillance Measure (GSM) is about. The said GSM was introduced by SEBI in continuation to earlier surveillance 6 measure already implemented by SEBI and Exchanges. Through this GSM, additional measures were taken on securities which witnessed an abnormal price rise which did not commensurate with financial health and fundamentals like earnings, book value, fixed assets, net worth etc. Such list of securities identified under GSM would be placed in various GSM category i.e. from GSM Stage I to GSM Stage VI depending upon the gravity of the price movement.
9. In this regard the appellant made an application dated August 17, 2017 to BSE contending that the appellant has wrongly been shown as a shell Company and has wrongly been placed in GSM Stage VI in as much as the appellant has not manipulated the share price and, on the other hand, the appellant is a going concern and has fully complied with BSE listing regulations.
10. BSE after considering the matter and after giving an opportunity of hearing passed the impugned order rejecting the application / representation of the appellant and continued to keep the appellant in GSM Stage VI. BSE in the impugned order had noted that the Company has complied with the listing regulations and that the auditor's certificate had certified that as per balance sheet the Company has a positive 7 net worth and that the company is a going concern. BSE, however, concluded that the balance sheet does not reflect the true and fair position of the company and considering the fact that the company had suspended its operations the entire assets should be written off. Further, pre-operative expenses like salaries to office staff, rent, audit fees, etc. should not be included under "capital works in progress" and if the expenses relating to pre-operative expenses are deleted from this head the company would have a negative net worth. It was contended that the expenditure so added under the head capital works in progress created an illusion that the company has a huge asset based which is incorrect.
11. Having heard the leaned counsel for the parties at some length we find that the approach adopted by SEBI as well as by BSE is totally erroneous for the following reasons:-
(a) The letter addressed by MCA on June 9, 2017 merely required SEBI to initiate necessary action against 331 listed shell Companies as per SEBI laws / Regulations. SEBI was, thus, required to investigate as to whether 331 Companies were in fact shell Companies or not and if they were shell 8 Companies then necessary action was required to be taken as per SEBI laws and Regulations.
(b) SEBI took two months to issue directions to the Stock Exchanges to take necessary actions when it issued the letter dated August 7, 2017. Such direction to the Exchanges directing them to place 331 shell Companies under GSM Stage VI without verifying their credentials / fundamentals was wholly illegal and in violation of principles of natural justice.
(c) If there was urgency in the matter SEBI should have reacted immediately when it received the request from the MCA vide letter dated June 9, 2017. It took SEBI two months to issue a direction to all the Stock Exchanges. Thus there was no urgency in the matter. Consequently, placing the appellant in GSM Stage VI without giving them a notice or an opportunity of hearing was in violation of the principles of natural justice even though the Exchanges has the power to transfer securities of any Company to any GSM Stage 9 based on some set parameters without giving a hearing which in the instant case is not known.
(d) The contention of the Exchange as well as SEBI that they were not required to investigate as to whether the 331 listed Companies are shell Companies or not is patently erroneous. Based on MCA letter dated June 9, 2017 SEBI was required to investigate as to whether 331 shell Companies named therein were shell Companies or not and whether the said Companies had no credentials / fundamentals and only thereafter SEBI was required to take action in accordance with SEBI Act and Regulations framed there under.
(e) No investigation has been done to find out as to whether the appellant Company is a shell Company or not. Contention that SEBI and BSE were not required to investigate as to whether the Company is a shell Company or not is totally erroneous.
(f) The desired information asked by BSE was supplied. The statutory auditor's certificate 10 certifying the appellant as a going concern, income tax returns, annual returns for the past three years and bank statement of one year were supplied. List of employees working in the company were given. Thus, there was no reason for the respondent to continue grading the Company in the GSM Stage VI based on the impugned communication.
(g) BSE could not pick holes in the balance sheet nor are they competent to hold whether any expenditure should be a revenue expenditure or a capital expenditure. If BSE does not agree with the balance sheet it was open to the respondent to appoint an independent auditor or even go in for a forensic audit which they have not done. It was stated that the respondent appointed an independent auditor but we find no reference of the independent auditor's report in the impugned order.
(h) Even otherwise the independent auditor's report does not give any finding as to whether the company is a going concern or not and is also 11 silent on the factum of the number of employees employed by the company.
(i) The essential ingredients as per direction of SEBI dated August 7, 2017 and August 9, 2017 to verify the credentials / fundamentals has not been carried out in the right earnest even though all the information was duly supplied by the appellant.
(j) In Assam Company India Ltd. and Ors. vs The Union of India & Ors. Manu/GH/01542/2019 the Gauhati High Court held that there is no statutory definition of a shell Company in any laws of India. However, in popular parlance, a shell company is artificially identified with dubious activities concerning serious economic offences such as tax evasion, money laundering, benami transactions, conversion of black money into white, round- tripping with host of other associated offence. No such finding has been given by the respondent except that the appellant company is not carrying out any production activities since September 2000.
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(k) The objective of the SEBI Act is to promote the development of, and to regulate the healthy growth of securities market as well as to protect the interest of the investors. It has the power to issue necessary direction if it is satisfied upon an inquiry that such direction is necessary in the interest of the investors. We are of the opinion that before branding the appellant as a shell Company it was obligatory on the part of the SEBI as well as on the part of the BSE to investigate and find out whether the appellant is a shell Company or not.
(l) We also find that that there are six stages where a company could be placed where securities of the company witness an abnormal price rise which does not commensurate with the financial health and fundamentals. Such exercise has not been done either by SEBI or BSE and the appellant company has been placed straightway in GSM Stage VI which is wholly arbitrary.
12. Thus, for the reasons stated aforesaid the impugned order passed by the BSE cannot be sustained and is quashed. We direct SEBI and BSE not to place the appellant in the 13 category of a shell Company or place it in GSM Stage VI. It is however open to SEBI or BSE to take such action in accordance with SEBI Act or its regulations for placing the appellant in GSM Stage or to compulsory delist the Company or to take such other measure as advised to them under the SEBI's laws and Regulations. However, such action could only be initiated in accordance with law. The appeal is allowed. In the circumstances of the case, parties shall bear their own costs.
Sd/-
Justice Tarun Agarwala Presiding Officer Sd/-
Dr. C.K.G. Nair Member Sd/-
Justice M.T. Joshi Judicial Member 27.05.2019 Prepared and compared by:msb