Securities Appellate Tribunal
In Re: Minal Engineering Ltd. vs Unknown on 25 January, 2006
ORDER
G. Anantharaman, Member
1. Background:
1.1 Trading and sharp rise in a short period in shares of companies with low market capitalization commonly referred to as "small cap stocks" or "penny stocks" in the recent times have been engaging the attention of SEBI, the stock exchanges and the media. They have been under the surveillance of SEBI and the stock exchanges for some time. Minal Engineering Ltd (hereinafter refereed to as "the company" or "MEL")., was one such "small cap" company, whose shares witnessed a sharp price variation during the period February 2005 to September 2005.The share price of the company went up from a below par level of Rs.4.33 on February 7, 2005 to Rs.452.35 on September 15, 2005 in 97 trading days representing a rise of 105 times or 10,446%. The shares were traded at or near the upper circuit limit on most of the days during the entire period, February 2005 to September 2005.
1.2 While the highest trading volume of 8,403 shares were observed only on one day on September 15, 2005, the average daily volume during the period under examination was only around 663 shares, against a total non-promoter holding of 1,39,500 shares. There were even a few starkly lean days when only one share was traded. Clearly, the quantum jump in price of 105 times from below par of Rs.4.33 to a high of Rs 452.35 in 97 trading days took place on very thin volumes, signifying only limited investor interest and participation in the share. This sharp price rise and sudden increase in trading frequency only during the above mentioned period (February 2005 to September 2005) was incomprehensible when compared to the trading record of the shares of the company in the past nine years or so.
1.3 The shares traded only on 4 days in 1996 at Rs.12. There was no trading in the share till 1999, when the shares were traded only on 3 days and that too sporadically at below par of Rs.7. The share was traded only once in 2000, again at below par of Rs. 5.40/-. Thereafter the scrip languished without any trading for nearly 5 years between July 20, 2000 and February 06, 2005. Thus the share remained infrequently traded at below par price for nearly nine years. As mentioned in the foregoing paragraph, the scrip resumed trading regularly from February 7, 2005, when 100 shares were traded at below par at Rs 4.33, after nearly 5 years since the last trading in 2000. By February 22, 2005, the price of the shares rose to Rs. 8.97 (more than 100%) and by March 11, 2005, the price of the share rose by 481.52% in 14 trading days to Rs.20.85. This unusual movement in price prompted the BSE on which the share is listed, to transfer the shares to Trade for Trade segment on February 22, 2005 and to reduce the circuit filter in the shares from 10 % to 5 % on March 11, 2005, as a part of BSE's normal surveillance measure.
1.4 The steep increase in price of the share combined with low trading volume in the share warranted an immediate examination of the dealings in the scrip, which was accordingly undertaken by SEBI and the preliminary findings are as follows:
1.4.1 There has been no investor interest in the shares since it was listed in 1994. If at all, the shares traded sporadically.
1.4.2 The trading interest resumed since February 2005 and since then, there has been a continuous effervescence in the price of the share.
1.4.3 The trading volume was very low on most occasions, and there were only 9 trading days when more than 10 trades took place and there were only 30 trading days out of 97, when more than 500 shares were traded, demonstrating scant investor interest.
1.4.4 On many occasions the price was discovered through cross deals.
1.4.5 BSE, as a surveillance measure shifted the shares to Trade for Trade segment. In addition to this reduced the circuit filter for the share from 10% to 5%, but the share price continued to rise touching the upper circuit on many trading days.
1.4.6 The lack of shareholder interest in the company is demonstrated by the forfeiture of shares which were more than the number of paid up shares.
1.4.7 The fundamentals of the company are weak and even the company's performance for the FY 2004-05 was shown by including an income of partnership firm. The performance of the company thus does not apparently justify the price rise. There was a sudden drop in profitability of the company in the Q1 of 2005, with the earlier source of income apparently withering away.
1.4.8 Since February, the promoters who own more than 90% of the shares have carefully orchestrated a series of steps attempting to show the company in a better light and share trading was resumed and price rose on thin volumes apparently to attract the investors to trade in the shares. It was the creation of deliberate make believe.
1.4.9 There was a discrepancy of 20,900 shares in the breakup of the promoters' shareholding and the aggregate promoters' shareholding in the report filed by the company at BSE for the quarter ended June 2005.
1.4.10 Shri Shrikant Parikh, the Managing Director cum promoter of the company transferred shares to one Shri Ketan Shah presumbaly to tide over the latter's pay-in obligation.
1.4.11 The approval of the shareholders of the company to reissue 22,58,000 forfeited shares (which were forfeited in the year 1998) at a price of Rs.21 per share when the current market price is around Rs. 400, coupled with the sudden dematerialisation of the promoters shareholding after March 2005, as already mentioned, is only a thin end of the wedge, indicating the gameplan of the promoters. Since, according to the prevailing directions of SEBI to the stock exchanges, only dematerialized shares can be traded on the stock exchanges, the step taken by the promoters to suddenly dematerialize the shareholding, pointed to a real possibility that the promoters had decided to off load the shares in the market at an inflated price and make windfall gain. The prevailing high price of the share seems to be totally jacked up, while being propped up on an equally specious performance as gathered from reported results.
1.5 On the basis of the aforesaid findings, it prima facie, appeared that there existed manipulation of the price of the shares where the performance of the company did not justify the sudden spurt in the share price. In view of the above, SEBI vide an ex-parte interim order dated September 28, 2005, issued the following directions:
"(a) the following promoters and directors of of Minal Engineering Ltd., viz. J B Parikh, Shrikant J Parikh, J V Joshi, Amul J Patel, Vikram J Parikh, Malay Karbhari and Kamlesh Khandhor shall not buy, sell or deal in securities of Minal Engineering Ltd., directly or indirectly;
(b) the Depositories shall not give effect to any transfer of shares of Minal Engineering Ltd. lying in the beneficial owner accounts of said promoters and directors;
(c)Minal Engineering Ltd. shall not reissue its forfeited shares nor shall issue any bonus shares. If such reissue or issue is already made, the allottees shall not further transfer the shares and the company and the depositories shall not give effect to any such transfer, if attempted to be made.
1.6 An opportunity for post decisional hearing was granted to the aggrieved parties. The promoters, directors/the company were granted 15 days time to file their objections to the ex-parte ad interim order.
2. Reply of the Company and directors:
2.1 Vide letter dated October 4,2005, Kanga & Co, Advocates & Solicitors, submitted inter alia on behalf of the company and its directors/promoters, namely J B Parikh, Shrikant J Parikh, J V Joshi, Amul J Patel, Vikram J Parik as follows;
2.2 There was no mala fide or deceptive intention on the part of the Company or the promoters to make undue gains at the cost of investors taking advantage of artificial price rise and false market in the shares of the company.
2.3 In respect of the financial result of the Company for the Year 2004-05, it was submitted that there was no increase in sales during the year. The company became partner in the firm of M/s C. Mahendra Infojewels in the month of September 2004 having a share of 18.5% therein. The BoD of the Company decided to enter into the jewellery business and accordingly the Board Resolution was passed on September 1, 2004 for change of object clause subject to the approval of shareholders, At the Extraordinary General Meeting held on September 26, 2005, the shareholders of the company have confirmed the alteration of the object clause and have also approved the change of name of the company to 'Minal Jewels Limited' subject to approval by the ROC, Gujarat.
2.4 In the Financial Year 2004-05, the Company received Rs.417.87 lakhs as its share in profit from the partnership firm M/s.C.Mahendra Infojewels(hereinafter referred to as 'CMIJ'). CMIJ has a manufacturing unit at Seepz, SEZ near Mumbai with a turnover of Rs.103 Crores from export of diamond jewellery with profit margin of Rs.28 Crores or thereabouts. The track record of the said firm has been consistent since last 5 years. In pursuance of the partnership, the profit share of the company is 18.5% in the said firm and the Company has received its share of profit of Rs.417.87 lakhs. The statement that the turnover of Rs.4.36 Crores has been made in 2004-05 is incorrect. It was claimed that the Company had intimated Bombay Stock Exchange on October 28, 2004 regarding its foray into diamond jewellery business by joining partnership with of CMIJ.
2.5 As regards the decline in profit for June 2005 quarterly results, it was stated that the jewellery business is seasonal and the major export business is normally in the last two quarters of the year on account of festivals of X'mas and Valentine's Day. Promoters/directors have declared the actual results as available and this itself proves that they do not intend to make undue gains by showing inflated profitability of the Company.
2.6 It was submitted that Mr. Malay Karbahai and Mr. Kamalesh Kandhor were no more the directors or additional Directors of the company. These two persons were appointed as Independent Directors, Mr. Malay Karbahai did not offer himself for appointment in the AGM held of August 8, 2005 and Mr Kamlesh Jhandhor has also resigned from the directorship of the company on August 26, 2005. The same was intimated to ROC,Gujarat.
2.7 It was submitted that there was no discrepancy of 20,900 shares in the promoter shareholding as alleged. The company produced the shareholding pattern as submitted under clause 35 of the Listing Agreement. It was further clarified that the shareholding of relatives of Mr Malay Karbhari (who is no longer a Director) viz. Mr Suryakant Karbhari, holding 12,400 shares and Mrs. Vibha Karbhari, holding 8100 shares were shown under the heading shareholding of promoters as Mr. Malay Karbhari was earlier appointed as Additional Director. Earlier, the promoters' shareholding was increased due to the inclusion of the above 20,500 shares of the relatives of Mr Malay Karbhari. Mr Malay Karbhari is not the promoter or director of the company.
2.8 It was submitted that although 10,000 shares has been entrusted by Managing Director, Mr Shrikant Parikh from his own holdings to Mr Ketan shah for sale in the market in the month of June 2005, only 2000 shares out of this lot were sold and Mr Shrikant Parikh decided not to sell any further shares. Accordingly, Mr Ketan Shah returned the 8,000 unsold shares to Mr Shrikant Parikh.
2.9 As regards forfeiture of 22,58,000 shares of the Company , it was stated that the procedure for forfeiture by giving notice to shareholders and complying with other formalities has been duly followed. In the forfeiture category, shares allotted to relatives of the promoters, viz. Ms. Anila S. Parikh, 5,35,000 shares, Nayan J. Parikh, 18,600 shares, J.B. Parikh, 1,400 shares and Mrs Ami N. Parikh, 11,100 shares are included on account of non-payment of call money. In the General Meeting, the shareholders unanimously approved re-issue of the above forfeited shares at the rate of Rs.21/- per share in order to augment financial resources to carry out the jewellery business. It was further stated that the above price of Rs.21/- per share was decided after taking into consideration the evaluation and the price as per guidelines and after discussion with the Bombay Stock Exchange. The company submitted that the forfeited shares were not going to be issued to the promoters of the company. The issue of the forfeited shares is to be in favour of non-promoters and accordingly, the promoters' holding would be brought below 75% as per guidelines. The issue of forfeited shares would be considered only after the record date of the bonus shares expires. Accordingly, the Applicant for forfeited shares would not have a right to get any bonus shares. The ratio for issue of bonus shares has also been fixed according to guidelines.
2.10 As regards dematerialization of shares is concerned, it was stated that the same was done due to practical requirement and not with the intention of selling and making so called wind fall gains at the Stock Exchange, as alleged. It was submitted that the physical shares were in huge quantity and it was difficult to store the same. The promoters for the shares consolidated their shareholding into jumbo certificates and thereafter, the said shares were given for dematerialization. The promoters had no intention to sell the said shares. In fact, Mr Shrikant Parikh holding 10,14,165 shares does not even have a client registration number with any stock broker in India. The company further stated that neither the increase in price of the shares nor the subsequent decrease in price has motivated the promoters to sell the shares of the Company. The rise in the price of shares has been due to better prospects of the Company and driven by market forces and not due to any unscrupulous activities of company or promoters above named.
2.11 Vide letter dated October 21, 2005 the company further submitted as under;
a) Since the last several days somebody was playing with the scrip of the company by selling 5 to 10 shares a day and brining the price by 5% every day at the expense of small investors.
b) The Managing Director of the company had to suffer by making the company a partner in the Partnership firm CMIJ where he was a partner. As a consequence, he had to reduce his share being the Managing Partner in said Partnership firm without receiving any consideration from the company.
c) the intention of the promoters was to merge C.Mahendra Infojewels(CMIJ), a partnership firm with the company and make the company into a robust and profitable company with proper recognition in the jewellary industry so as to enable the company to regularly earn valuable foreign exchange and create employment opportunities
d) While CMIJ has been rapidly growing in the past 3-4 yeares , being a partnership firm it had limited options to raise funds. Converting the CMIJ into a publically traded company would cost around Rs.10 crores for IPO of the size of Rs.100 crores and above, an expense the owners would like to avoid if possible. On the other hand MEL being a publically traded company and was looking for some good diversification. MEL was a ready platform for CMIJ whereas CMIJ was a good opportunity for MEL. The merger would be therefore mutually beneficial for the firms and investors at large. In the said circumstances, it was decided to convert the company from an industrial company into a jewellary manufacturing company and hence the name was changed to Minal Jewels Limited.
e) The company had regularly and properly made disclosures to Mumbai Stock Exchange as required by law and listing Agreement.
f) All the disclosures of profit and EPS of 32 were made truly and audited by Auditors and made available to Public so that they can react intelligently and make the scrip a premium one. The company had duly declared and paid the dividend.
3. Oral Hearing:
3.1 The company was given an opportunity for oral hearing. Company & directors appeared through Mr Shilesh Vaidya of Kanga & Co and Shrikant Parikh, MD MEL on November 18, 2005 and reiterated their earlier submissions. Company filed written submissions vide letter dated November 30, 2005.
3.2 In the personal hearing the company held that it had informed BSE about the partnership with CMIJ and produced a letter dated October 20, 2004 addressed to BSE. The same was forwarded to BSE seeking their comments. BSE wide letter dated November 29, 2005 replied that the Exchange had received 3 letters from the company during the month of October, 2004 as under;
Sr. No. Letter Date of Receipt Contents of the Letter
Date by BSE
1 12/10/2004 25/10/2004 Various Compliances of quarter ended
Sept 2004
2 20/10/2004 25/10/2004 Intimation regarding Board Meeting
on 30/10/04 for quarterly results of
the quarter ended Sept 2004
3 25/10/2004 30/10/2004 EDIFAR Registration
It was further informed by BSE that the letter dated October 20,2004 containing the information that the company was joining partnership with firm called CMIJ with effect for September1, 20004 was not received by inward at BSE.
3.4 The said letter from BSE was forwarded to the company seeking their comments vide letter dated December 19, 2005. The company replied vide its letter dated December 23, 2005 enclosing therewith a copy of the letter addressed to BSE, Mumbai. The company had reiterated its earlier submissions before SEBI.
4. Findings:
4.1 I have carefully considered the materials on record including the oral and written submissions of the company, its directors/ promoters. My findings are as below:
4.2 The fundamentals of the company always remained weak and the company's performance for the FY 2004-05 was made to look robust by including share income of partnership firm. The claim of the company that it had informed BSE about joining partnership with CMIJ is found to be incorrect. The company's letter to BSE about foraying into diamond jewellery business dated October 20, 2004 with an acknowledgment no. 8027 from BSE dated October 23, 2004 was forwarded to BSE for verification with their records. BSE vide letter dated November 29, 2005 informed SEBI that they had not received the said letter from the company. However, BSE had received a letter dated October 20, 2005 from the company which dealt with a different matter altogether. In the absence of authentication of the company's claim in terms of the official records of BSE, it stands to reason that the information with regard to the joining of partnership with CMIJ was not in public domain and the same remained only with directors/promoters. Further, the company did not make any effort to verify BSE website and it did not file any complaint to BSE about non-publication of the said information. The sudden manifest concern of the company on the issue in the wake of the interim order coupled with a slew of letters from the promoters addressed to BSE are designed more to set the record straight as an after thought when the reality check started staring them in the face. Hence, the explanation given by the company that the rise in the price of shares has been due to better prospects of the Company and driven by market forces and not due to any unscrupulous activities of company or promoters cannot be accepted in the absence of the aforesaid disclosure.
4.3 It is relevant to note in the above background that promoters held more than 90% of the share capital of the company. It is apparent that the promoters being holders of more than 90% of the shareholding would be the actual beneficiaries of such a phenomenal price rise. There were no reasonable explanations given as to why the Managing Director of the company had given 10,000 shares of the company in an off market deal to Shri Ketan Shah at the peak of the price rise. Perhaps it was meant to test the market without disclosing the identity. Satisfactory reply has not been received as to why the remaining shares from Shri Ketan Shah were taken back. The whole exercise remains inexplicably shrouded.
4.4 Equally intriguing is the explanation adduced for the reissue of 22, 58,000 forfeited shares (which were forfeited in the year 1998) at a price of Rs.21 per share when the current market price at that time was Rs.128/- has its own distinct overtones in terms of ultimately benefiting themselves. The urgency and timing of obtaining shareholder's approval for reissue of forfeited shares after 7 years, i.e. in August 8, 2005 when the share price reached Rs.128/- is equally suspicious. The claim of the company that shareholders unanimously approved to re-issue the above forfeited shares at the rate of Rs.21/- per share, in effect means that the decision was taken by the promoters themselves by virtue of their holding more than 90% of the equity shares of company. Every act has been stage managed with all the contrivances to prepare the ground for a course of carefully planned action to benefit the promoters and their associates.
4.5 I have noted the company's submission that the forfeited shares are not going to be issued to the promoters of the company and the issue of the forfeited shares is to be in favour of non-promoters and accordingly, the promoters holding would be brought below 75% as per guidelines.
4.6 I do not agree with the contentions of the promoters that the reason for sudden dematerialization of shares was only logistical considerations related to storage. Percentage of dematerialized shares of the company was 0.87 on March 2005 and by the end of September 2005, it was found from the records of Depositories that the company had dematerialized the entire share capital. Promoters submitted that the shares were in huge quantity and was difficult to store, therefore, the shares were consolidated in to jumbo certificate and dematerialized thereafter. The explanation of the directors is not convincing as maintaining a Demat Account is more expensive than maintaining jumbo certificate. Definitely the sudden flurry of activity to get the entire promoters' holding dematerialized during the period of price rise coupled with slew of corporate announcements meant to shore up the price is indicative of an intention to sell the shares in the secondary market taking advantage of the market. No other explanation will appear plausible in the besetting circumstances. Thus, there was a total rev up to the final act of disposal of shares in the market when the interim order halted them in the tracks.
4.7 SEBI is vested with statutory powers to regulate securities market with the object of ensuring investor protection, together with the orderly and healthy growth of the securities market so as to make SEBI's regulatory function over the capital market effective and meaningful. There will be exigencies in the course of the diurnal activities of the market when the urgency of the matter or public interest may necessitate putting restrictions on the rights of market participants in the over all interests of the market and investors. Further, in view of clear provisions of Section 11(4) read with Section 11B of SEBI Act, and in view of numerous judicial interpretations, there can be no doubt that SEBI, in view of the exigencies of the matter has power to pass appropriate orders. For a prima facie case, it is necessary that the information which is available with the authority is more than a mere rumor, gossip or hunch and should be specific information, rather than vague information. The opinion has to be formed in a subjective manner on which a reasonable and prudent person would act.
4.8 In the instant case, there is an overwhelming burden of material evidence to strongly indicate that the promoters of the company were having their own interest in the developments, though it was aborted due to the interim order. Further in a case like this, the decision would rest only on what is probable in the materiality of circumstances, rather than on strict proof. Such interest needs to be inferred from the attendant circumstances of the case, since there will be no express disclosure of such interest in a context where market participants are apt to act on the sly for obvious reasons. In the admitted situation as above, it would be very difficult to unravel every limb of the transaction, especially the intent more so in an interim order of this nature based upon prima facie appreciation of the materials after hearing the party. In this connection I would like to advert to the decision of Supreme Court in the case of Collector of Customs v/s D. Bhoormull, wherein the Hon'ble Supreme Court (AIR 1974 SC 859) held that "El Dorado of absolute proof being unattainable, the law accepts for it probability as a working substitute in this work-a-day world. The law does not require the prosecution to prove the impossible. All that it requires is the establishment of such a degree of probability that a prudent man may, on its basis, believe in the existence of the fact in issue. Thus, legal proof is not necessarily perfect proof often it is nothing more than a prudent man's estimate as to the probabilities of the case".
4.9 The other cardinal principle having an important bearing on the incidence of burden of proof is that sufficiency and weight of the evidence is to be considered - to use the words of Lord Mansfield in Blatch V. Archar (1774) 1 Cowp 63 at p.65 "According to the Proof which it was in the power of one side to prove and in the power of the other to have contradicted". Since it is exceedingly difficult, if not absolutely impossible for the prosecution to prove facts which are especially within the knowledge of the opponent or the accused, it is not obliged to prove them as part of its primary burden.
4.10 In the instant case there are two strands of developments, namely, the abnormal price rise in the scrip in the market and the slew of activities and actions initiated by the promoter along side with it. Just because the promoter group could not take the plunge due to the interim order at the culmination of the preparatory exercise, the same would not mean that there was no intertwining of the two strands in a common cause and purpose. The serried happenings in the company's front cannot be viewed in isolation from the unprecedented rise of its share price in the market. There is a definite synergy between the two developments at once interrelated and connected by the runes of an obvious design to make hay while the sun shines, which unfortunately came to be thwarted by the interim order. In such a backdrop I am unable to convince myself that these events were fortuitous without any design, while the promoters, in beguiling innocence, embarked upon a course of action which otherwise has a distinct co-relation with the market movement of the scrip. The seemingly disparate developments have a symbiotic relationship and to build "serendipity" as a factor into the same would forever validate and stamp the concept of "non sequitur" on the causal relationship in the swathe of market transactions, rife with such errantries, besides precluding an enquiry into the real time alerts emanating from such deviousness. No prudent person can buy such argument, the acceptance of which would allow the market manipulation to go unchecked. I find that the material circumstances coupled with preponderant of probabilities justify confirming the ad interim order with all the directions therein against the company and the directors.
4.11 A regulatory agency like SEBI, entrusted with the duty to protect the interest of its investors must have the capacity to move quickly to curb further mischief and to take action that, in its opinion, is necessary to instill and maintain public confidence in the integrity of capital markets. The proposed direction is not by way of punishment or penalty but only by way of emergency measure, pending detailed investigation into the whole matter.
5. Conclusion:
5.1 In the light of the above, I find that, prima-facie, the conduct of the above entities is not in consonance with the high standards of integrity, fairness and professionalism expected from securities market participants in a market, based on disclosures.
5.2 Allowing the company and its respective directors to continue their dealings in the securities market without any restrictions would be prejudicial to the interests of the investors and the safety and integrity of the securities market.
5.3 Justifying the abrupt price rise as a normal market behavior on the disclosure of information regarding the new business venture where there had been none as evidenced from the communication with the stock exchange amounts to paltering with truth and such incorrect dissemination of price sensitive information is bound to undermine the confidence of investors in securities market and seriously hinder the orderly development of securities market.
5.4 It is the responsibility of SEBI as market regulator to curb such untoward practices like manipulation of the market where the share price could reach as high as 10,446% within such a short span of time without any matching corporate information in the public domain. SEBI had initiated formal investigations into the matter. Based on the findings of investigation, appropriate proceedings will be initiated against the concerned entities as provided under the SEBI Act and the Rules and Regulations made thereunder.
5.5 In view of the above, I have no hesitation in confirming the ad interim order dated 28th September 2005, directing the following promoters and directors of Minal Engineering Ltd. viz. J B Parikh, Shrikant J Parikh, J V Joshi, Amul J Patel, Vikram J Parikh, Malay Karbhari and Kamlesh Khandhor shall not buy, sell or deal in securities of Minal Engineering Ltd., directly or indirectly, subject to following modifications in the directions mentioned therein, in the interest of the investors and safety and integrity of the securities market.
(a) Minal Engineering Ltd. may issue bonus shares provided the following promoters and directors of Minal Engineering Ltd. viz. J B Parikh, Shrikant J Parikh, J V Joshi, Amul J Patel, Vikram J Parikh, Malay Karbhari and Kamlesh Khandhor shall not further transfer the shares. The company and the depositories shall not give effect to any such transfer, if attempted to be made.
(b) Minal Engineering Ltd. may reissue its forfeited shares provided that the allottees shall not further transfer the shares. The company and the depositories shall not give effect to any such transfer, if attempted to be made.
5.6 All the above directions shall take effect immediately and shall be in force until further orders.