BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO- 20/2006-07]

 

 

In respect of

 

1.      SILVERLINE HOLDINGS CORPORATION

 

2.      SHREYAS HOLDING LTD.

 

3.      SUBRA MAURITIUS LTD.

 

 

1.                  Securities and Exchanges Board of India (hereinafter, SEBI) conducted investigation in the matter of Silverline Technologies Ltd (STL) in June 2001 for the period October 1999 to June 2000, as the scrip witnessed price volatility, with suspected involvement by Ketan Parekh entities. The shares of the company are listed in NYSE (ADS), BSE, NSE, ASE and MSE. As part of the investigation, the (joint) statements of the promoters of STL, namely 1) Silverline Holdings Corporation 2) Shreyas Holding Ltd. and 3) Subra Mauritius Ltd. was recorded on February 04, 2003. Based on its contents it was alleged that the promoters did not make necessary disclosure in terms of Regulation 8(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter, SAST) for the years ending March 31, 1999 and 2000, as well as for the record date for declaration of dividend during the calendar years 1999 and 2000. Accordingly, Mr. K.R.C.V. Seshachalam was appointed as Adjudication Officer under Section 15 I of SEBI Act, 1992, read with Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') vide SEBI order dated April 19, 2004 to inquire into and adjudge under Section 15 A, r/w 15 H of SEBI Act, 1992, the alleged violation Regulations 8(2) of SAST by the promoters of STL. The matter was transferred to Mr. A. Chandrasekher Rao vide order dated December 28, 2004 and subsequently to the undersigned, vide order dated December 20, 2005.

 

2.                  The undersigned issued Show Cause Notices (SCNs) all dated August 03, 2006 to 1) Silverline Holdings Corporation 2) Shreyas Holding Ltd. and 3) Subra Mauritius Ltd. under Rule 4(1) of Adjudication Rules, 1995, communicating the charges, as aforesaid. As the first entity is based in USA and the other two entities are based in Mauritius, STL was requested to serve the SCNs on its promoters, under intimation to the undersigned. There was no response to any of the SCN.

 

3.                  In the above circumstances the undersigned was of the opinion that an inquiry should be held in the matter. Accordingly notices of inquires all  dated September 07, 2006 were issued to the three promoters, fixing the date for inquiry on September 22, 2006, and STL was requested to serve these notices as well. In response, through a tele-conversation, on or around September 08, 2006, STL confirmed that there will be representation for the inquiry on September 22, 2006. Inexplicably though, STL returned the SCNs and notices of inquiry issued to Shreyas Holding Ltd. and Subra Mauritius Ltd. vide its letters dated September 19, 2006, preferring that undersigned arrange to serve the notices directly, while providing the addresses of the aforesaid entities in Mauritius. The notice of inquiry issued to Silverline Holdings Corporation was also similarly retuned vide STL’s letter dated September 21, 2006, mentioning the address in US. The aforesaid conduct of STL raises serious question mark about its intentions and motives.

 

4.                  Notwithstanding the aforesaid contumacious and repugnant behaviour of the noticees / STL, the undersigned, in the interest of natural justice, thought it fit to grant another opportunity of personal hearing. Accordingly, September 28, 2006 was fixed as the date for inquiry; vide notice of inquiry dated September 22, 2006. The said inquiry notices were addressed to the three promoters of STL and was served on STL through fax, RPAD and courier. From the material on record it is seen that earlier during the investigations, summons were issued to the aforesaid three promoters and were served through STL. In response, Krishnakumar Subramanian, Vice Chairman and Director of STL, appeared before the IO on their behalf on February 04, 2003 and his statement was recorded. In other words, the director of STL acted as the ‘authorized agent’ of the noticees, from the very beginning. Therefore, service of SCNs and NIs addressed to the promoters, on STL, would constitute due service as STL is an ‘authorized agent’ of the promoters, in terms of Rule 7(a) of Adjudication Rules. Also, the premise of STL is certainly the place where its promoters ‘carried on business’ in terms of Rule 7(b) of Adjudication Rules. Accordingly, the notices of inquiry dated September 22, 2006 mentioned that service of notices on STL would constitute due service of notice on its promoters, in terms of Rule 7 (a) and (b) of Adjudication Rules. In response, Vigil Juris, Advocates, vide fax dated September 27, 2006, on behalf of the noticees, sought four weeks additional time to file reply to the SCNs.

 

5.                  In the inquiry held on September 28, 2006 Ms. Shafaq Uraizee and Hrishikesh Waghela, Advocates, Vigil Juris appeared for the inquiry on behalf of the noticees and agreed to file the vakalatnama at the earliest.  They also pleaded for adjournment to enable them to file a reply to the SCN on behalf of the noticees, after taking their instructions. The undersigned agreed to the request and adjourned the inquiry to October 13, 2006 and also allowed them to file their reply. However, neither the noticees nor their Advocates appeared before me on the day of inquiry. Instead, Vigil Juris, vide letter dated October 13, 2006 expressed their inability to attend the inquiry as they were yet to receive any instructions from their clients. Meanwhile, the three noticees confirmed the appointment of  Vigil Juris to represent them in the proceeding and sought additional time till end of November 2006 to file their reply, as details under:

 

 

 

6.                  The reasons furnished by the noticees for not filing reply to the SCN are ludicrous, preposterous. Although the three noticees are purportedly based in different places, their aforesaid respective letters, as if by magic, reached me on October 13, 2006, i.e. on the day of inquiry. The aforesaid letter were not in letter heads of the noticees, but were just print outs from ink jet printers. Given the background that the director of STL was responding to SEBI on behalf of the notice promoters from day one it is not understandable as to why the noticee can not make arrangements for representing their case in the present proceedings.

 

7.                  Notwithstanding the aforesaid and stretching the limits of principles of natural justice, I granted one more opportunity by issuing notices of inquiry to the three entities, fixing November 17, 2006 as the date of inquiry. These notices were also addressed to STL and dispatched through RPAD. As part of the non-co-operation movement by STL and its promoters the said notices came back with remark as ‘Unclaimed’.  Further despite so many opportunities, the noticees have failed to file any reply in the matter.  Having exhausted all possible avenues, I decided to proceed ahead with the inquiry with the material available on records, in terms of Rule 4(7) of Adjudication Rules. 

 

 

8.                  I have carefully considered the material on record. Before recording my findings, it is necessary to understand the background under which this adjudication was initiated. From the material on record it is seen that STL share price witnessed sharp rise from Rs. 364 to Rs. 1,013 between October, 1999 and March 2000. It fell sharply from Rs. 933 to Rs. 564 between March and June 2000. Therefore, SEBI launched investigation in the matter for the aforesaid period. Investigation revealed that certain OCBs traded significant volumes in the scrip. Some of these volumes were traded through Ketan Parekh entities also. Silverline Holdings Corporation, Shreyas Holding Ltd. and Subra Mauritius Ltd., promoters of STL offloaded an aggregate of 210,42,593 shares of STL in off market transactions to OCBs in the calendar years 1999 and 2000 for which  they claim to have received payment in foreign currency, abroad. Out of this, 148,65,000 shares (70%) were sold to an OCB Transatlantic Corp. Ltd, 41,50,000 shares (20%) were sold to OCBs Brentfield Holdings Ltd. & ALMEL Investment and the remaining 20,27,593 shares (10%) were sold to other OCBs. These OCS in turn sold these shares in the secondary market, during the period of price fluctuation, some of which were through Ketan Parekh entities.

 

9.                  In the aforesaid background it was important to examine the role of noticees, as the motive of such large scale offloading of STL shares by the promoters to OCBs was not clear. It is precisely to address the lack of transparency that the IO summoned the promoters of STL namely 1) Silverline Holdings Corporation 2) Shreyas Holding Ltd. and 3) Subra Mauritius Ltd., seeking their personal appearance and also the following information:

 

                     I.      Details regarding their purchase /sale of shares of STL, during the calendar years 1999 and 2000,

                   II.      Details regarding transactions/loans/arrangements made to any registered stock broker or its associated entities and

                 III.      Details regarding transactions/loans/arrangements received from any registered stock broker or its associated entities. 

 

10.       The details of the summons and the response of the promoters are as under:

No.	Summons dated	Date for compliance of summons	Response/ remark
1.	07.10.2002	-	Sought time till 20.11.2002. Subsequently sought further time till 09.12.2002.
2.	21.11.2002	09.12.2002	Sought time till 13.12.2002. K. Subramaniam, Director STL, appeared in person on 16.12.2002 without any information sought; agreed to appear on 26.12.2002 and along with the information, but did not do so
3.	26.12.2002	-	Reminder for compliance on 26.12.2002
4.	04.10.2002*	25.10.2002	Uday Khona, Co. Sec. appeared, but without any information; agreed to file the same by 01.11.2002, but did not do so.

* Summons issued to Managing Director of STL seeking details of filings made by promoters of STL to the company under SAST Regulations.

 

11.              Given the continued contumacious behavior of promoters and PACs and STL towards the regulator’s summons, a letter was sent on January 21, 2003 to Securities Exchange Commission (SEC), US and NYSE, US, informing about them about non–cooperation of the aforesaid entities.  Only after this move by the SEBI did they show semblance of co-operation and - K. Subramanian, Director of STL agreed to appear in person on behalf of the three promoters, vide letter dated February 03, 2003 and did so on February 04, 2003 and his statement was recorded, from whose contents, this proceedings originate.

 

12.              Before recording findings and dealing with the alleged violation of SAST regulations, it is important to have clarity on the objectives of this Regulation. Section 11(2)(h) of the SEBI Act, 1992 empowers SEBI to regulate substantial acquisition of shares and takeover of companies, even though these activities are in the realm of corporate domain. This was done with the specific objective of protecting the interest of the investors, especially the small investors. Small investors are typically scattered and do not have a unified common voice to protect their interest, especially when there is a change in control or management etc. To address these issues, in a focused manner, the SAST Regulation 1994 was promulgated (subsequently replaced by the 1997 Regulations); its cardinal principles being 1) Equality of treatment and opportunity to all shareholders, 2) protection of minority interest and 3) transparency and fairness. The aforesaid objectives are sought to be achieved through well defined process of disclosures and opportunity to exit.

 

13.              The shares held in a listed company by its promoter / person in control of that company, is an important parameter as it reflects the insider perspective and perception about the company’s growth prospects, etc. Therefore, the information pertaining to any change in this shareholding, is important for the investors. Regulation 8(2) of SAST requires a promoter or person having control over a company, to disclose details of his shareholding, along with that of persons acting in concert with him to the company, within 21 days from the financial year ending March 31. The aforesaid, disclosure is also required to be made even for the record date for the purpose of declaring dividend. In turn the company is required u/r 8(3) to compile and furnish the aforesaid information to the stock exchanges to enable wide dissemination of this information to the investors and the general public. Thus, investors and potential investors get an opportunity to reformulate their perception about the prospects of the company. Seen in this background, disclosures under Chapter II of SAST have wider economic function that goes beyond the basic function of facilitating informed price discovery. Therefore, any non disclosure needs to be viewed seriously and not a mere technicality.   

 

14.              The relevant portion of K. Subramanian’s statement dated February 04, 2006, from which the allegation of violation of SAST regulation arises, is as under:

 

“Q. As per the filings of the company with the exchange under the takeover regulations, as on March 31, 1998 the holding of M/s Subra Holding Inc. (M/s Silverline Holdings Corporation) was 1,93,54,954 shares and 2,20,50,030 warrants.  Further, the company vide its letter dated April 01, 1999 has given the holding of M/s Subra Holdings Inc. (M/s Silverline Holdings Corporation) as 1,93,54,954 shares and 2,20,50,030 warrants.  However, from the sales records as submitted by you, it appears that M/s Subra Holdings Inc. (M/s Silverline Holdings Corporation) sold 53,00,000 shares on February 26, 1999 to M/s Transatlantic.  Please explain the discrepancy.

 

Ans.: M/s STL was not informed of the change in their shareholding by the promoter group companies and therefore M/ STL has reported the same figures.  This appears to be an administrative lapse, at best. However, we understand that under the takeover regulations, the promoter group companies should have made the above disclosures.”

 

15.              It is seen from the filing dated April 01, 1999 of STL with the exchange (u/r 8(3) of SAST) that the shareholding of Silverline Holdings Corporation was 193,54,954 shares and 220,50,030 warrants as on, both, March 31, 1998 and 1999. Whereas, as per the statement filed by K. Subramaniam, Silverline Holdings Corporation sold 53,00,000 shares of STL on February 26, 1999. In response to an earlier query (page 2 of the statement), K. Subramaniam stated that the promoters did not buy shares of STL. Logically, therefore, the shareholding of Silverline Holdings Corporation in STL ought to be less in March 31, 1999 than in March 31, 1998, to the extent of shares sold by it. This information on change in shareholding of Silverline Holdings Corporation is not reflected in the filing made by STL with stock exchange u/r 8(3) of SAST. Admittedly, neither Silverline Holdings Corporation nor its PACs namely Shreyas Holding Ltd. and Subra Mauritius Ltd. disclosed the same to STL, in terms of Regulation 8(2) of SAST for the year ending March 31, 1999. This is so because Regulation 8(2) of SAST cast an obligation on promoter or every person having control over a company to disclose the number and percentage of shares or voting rights held by him and by PAC with him to the company within 21 days from financial year ending March 31, and as well as the record date of the company for its purpose of declaration of dividend.  Further, STL has paid dividend @ 17.5%, each, for the years ending March 1999 and 2000. Therefore, there are two more instances wherein the promoters of STL were required to inform STL about their holding, along with that of PACs, in terms of regulation 8(2) of SAST, for the dividend record date. It is also undisputed that they did not do so. Therefore, three instances of violation of Regulation 8(2) of SAST by the promoters are established, as aforesaid. The principle of joint and several liability of promoter and persons acting in concert, in SAST regulation, is well established – if one of the noticee made the disclosure on behalf of all the three entities, then all the three would have deemed to have complied with the regulation. In the absence of the same, all the three noticees are liable for the legal consequences of the default, including monetary penalty.

 

16.              Given the importance of disclosures under takeover regulations, as already discussed, and given the fact that Silverline Holdings Corporation held 51% of STL equity, as per STL’s letter dated April 01, 1999, non disclosure u/r 8(2) cannot be treated as a mere administrative lapse.

 

17.              In the aforesaid violation of SAST Regulation, there is an additional dimension, namely Overseas Corporate Bodies (OCB). The dubious role played by OCBs was brought out in  the report of the Joint Parliamentary Committee on Stock Market scam and matters relating thereto, Lok Sabha Secretariat, December, 2002 (hereinafter, JPC Report, 2002), the relevant portion of which is reproduced below :

     

8.76 SEBI has mentioned five OCBs [namely Kensington, Brentfield, Wakefield, Far East and Almel, para 8.15 (ii)] and two sub-accounts of FIIs which have aided, assisted and abetted in creation of artificial market and volumes, circular trading and building up concentrated positions in a few scrips.  SEBI is reportedly taking action against four OCBs and one sub-account for violation of its regulations regarding substantial acquisition of shares. As regards market manipulations by OCBs, SEBI is stated to be examining the matter legally.

 

8.80 In the Committee's view, there is a need to have a fresh look at OCBs' operations after an in-depth study of inflows and outflows on a holistic basis covering their PIS and non-PIS transactions.  The exercise should also include identification and plugging of loop holes and possible establishment of a proper regulatory set up with stringent penal provisions for violations.  The regulatory provisions should inter-alia enable detection of cases where same set of individuals have formed more than one OCB and have their investment spread across the OCBs to escape provisions of SEBI's Take Over Code.

 

            8.82 SEBI has reported that more than 80 per cent of OCBs are registered in Mauritius and some of them seem to act as front for promoters of certain Indian companies.

 

18.              It is seen that, five OCBs indulged in fraudulent and unfair trade practices in the so called Ketan Parekh scrips, aiding and abetting him in the process. Either by default or by sheer coincidence, two of the OCBs through which the promoters of STL collectively sold 41,50,000 shares of STL (see para 8 of this order), namely Almel Investment Ltd and Brentfield Holdings Ltd, were among the OCBs named in the JPC report. Given this background and seriousness attached to the matter I am of the view that the non disclosure appears to be conscious decision of the promoters of STL to deliberately maintain cloak over their transactions with less than honourable entities - OCBs. It may not be out of context to mention that given the role of OCBs in the securities scam of 2001, they were banned from making investment under Portfolio Investment Scheme (PIS) w.e.f. 29.11.2001.

 

19.              As the violation stands established, I now proceed to determine the quantum of penalty that can be imposed u/s 15A(b) of SEBI Act 1992.

 

Section 15 A (b) of SEBI Act, 1992 reads as under:

Penalty for failure to furnish information, return, etc.

15A. If any person, who is required under this Act or any rules or regulations made thereunder,-

(b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to a penalty not exceeding five thousand rupees for every day during which such failure continues;

 

20.              To determine the quantum of penalty under Section 15A(b), the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz.(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default ; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default.

 

21.              Neither the amount of unfair gain to the promoters, nor the loss caused to investors, on account of the default, is quantifiable from the information available on records. The nature of default is repetitive in nature as there are three instances of violation of regulation 8(2) of SAST, as already discussed and further no corrective steps are taken by the noticees by way of filing belated disclosures.

 

22.              Nevertheless, this order will be incomplete if conduct of the noticees is not highlighted, as it will also have a bearing on the quantum of penalty imposed. As already detailed, the noticees deliberately did not file reply to the SCN and also did not appear before me for the inquiry. Moreover, the noticees also created an illusion of appointing advocate to represent them in the proceeding. Besides prolonged and sustained contumacious behaviour towards the regulator as well as towards this proceeding, the noticees also deliberately delayed as well as mislead the proceedings and the Adjudicating Officer on personal level.

 

23.              The maximum penalty imposable u/s 15 A(b) of SEBI Act 1992 for the aforesaid violation is Rs. 5,000 per day for every day of default. From the material on record, there is nothing to suggest that there is compliance by the promoters, even belatedly. In other words, as on date, the violation continues. The number of days of default from April 21, 1999 (the dates of other two defaults not being available) till date (November 21, 2006) works out 2,771 days and the maximum penalty which can be imposed on the promoters of STL for violation of Regulation 8(2) of SAST is Rs. 415.65 lakhs. (2,771 days X Rs. 5,000 per day X 3 defaults).

 

24.              I understand that, under the SEBI Consent Order Scheme a penalty of Rs. 25,000 per default has been proposed by SEBI for violation of Regulation 8(3) of SAST. In the past I have imposed twice this amount as penalty, wherein there was ‘belated compliance’. Reg 8(3) is closely interlinked with Reg 8(2). Therefore, penalty for violation of Regulation 8(3) cannot be too much out of alignment with that of Regulation 8(2). However, keeping in mind the totality of facts and circumstances of the instant case, which include the opaque transaction scam tainted OCBs, the contumacious behaviour of the noticees and STL towards the regulator during investigations and also in the proceedings, their deliberate attempt to delay and mislead the AO etc. I feel that the basis of computation of adjudication penalty as adopted in previous cases will not apply to the present proceedings and definitely as an exception for this case, the penalty needs to be far too deterrent to give a right kind of message to the persons in the market that their misdeeds and the misconducts of the like nature will not be spared and dealt with firmly.  I am therefore of the opinion that an amount of Rs. 10,00,000/- each as penalty would be appropriate. Accordingly, I hereby impose a penalty of Rs. 30,00,000 lakhs on 1) Silverline Holdings Corporation 2) Shreyas Holding Ltd. and 3) Subra Mauritius Ltd. collectively.

 

25.       Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a consolidated penalty of Rs. 30,00,000/-(Rs. Thirty  Lakhs) only on  1) Silverline Holdings Corporation 2) Shreyas Holding Ltd. and 3) Subra Mauritius Ltd. under section 15A(b) of SEBI Act, 1992, for the aforesaid violation. The aforesaid entities are liable to pay penalty jointly and in case of default, the entities shall be liable severally.

 

25.              The aforesaid entities shall pay the said amount of penalty by way of demand draft(s) in favour of “SEBI- Penalties Remittable to Government of India”, payable at Mumbai within 45 days of receipt of this order. The said demand draft(s) shall be forwarded to Shri Sanjiv Dutt, Chief General Manager, Investigation Department, ID-5, SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Mumbai 400 051.

 

26.              This order of adjudication is made and passed on 22^nd day of November 2006 at Mumbai.

 

 

 

 

AMIT PRADHAN

ADJUDICATING OFFICER