In the matter of Adjudication Proceedings against Soundcraft Industries Limited

ADJUDICATION ORDER NO. - BS/AO-6/2007

ORDER UNDER SECTION 15I OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST SOUNDCRAFT INDUSTRIES LIMITED

1. Pursuant to the investigation conducted by the Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) into the dealings in the scrip of Soundcraft Industries Ltd. (hereinafter referred to as ‘SIL’) , SEBI appointed the undersigned as the Adjudicating Officer to inquire into and adjudge under Section 15I of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the violation alleged to have been committed by SIL on account of its failure to furnish to SEBI, information sought during the investigation proceedings.
   
2. SEBI conducted investigation into the trading in the scrip of SIL as the scrip witnessed sharp fall in the price and volume at both BSE and NSE during the period 2001 to 2002. Investigation revealed that mainly a group of brokers and clients were trading in the scrip during the said period. These entities were allegedly executing structured trades and indulged in circular trades. It is noted that the said entities had 96% of the total trading in the scrip at both BSE and NSE during the period. 
   
    
3.  It is noted from the findings of the investigation that SIL had passed 3 resolutions during 2001 for preferential allotment of shares. However, the shares were not allotted therein. It is alleged in this regard that an attempt was made by few interconnected brokers and clients to maintain the price of the scrip at a desired level to attract investors at the price on which the preferential allotment was proposed.
   
   
4. In view of the above circumstances, the investigating authority of SEBI issued summons / letters dated March 5, 2004, March 19, 2004, April 10, 2004, October 5, 2004, October 18, 2004, October 25, 2004 and November 30, 2004 to SIL requiring it to furnish the details on the proposed preferential allotment by SIL. It is alleged that SIL failed to comply with the said summons and failed to submit the information to the investigating authority.
   
   NOTICE AND REPLY
   
5. A show cause notice in terms of the provisions of Rule 4(1) of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 was issued to SIL on May 18, 2006 seeking reply of SIL as to why an inquiry should not be held against it in respect of the violations alleged to have been committed by it.
   
    
6. It is noted that the said notice sent by registered post was duly received and acknowledged by the official liquidator of SIL. Though no reply was received in the matter, considering the facts of the case, it was decided to conduct an inquiry in the matter and SIL was advised to attend the inquiry on March 29, 2007. It is noted that the said notice sent by registered post returned undelivered with remark ‘left / shifted’. 
   
    
7. As SIL failed to reply to the show cause notice despite being given sufficient time and opportunity, the inquiry is proceeded with taking into account the facts and material available on record. 
   
   CONSIDERATION OF EVIDENCE AND FINDINGS
   
   
8. The allegation against SIL is that it failed to comply with the summons / letters dated March 5, 2004, March 19, 2004, April 10, 2004, October 5, 2004, October 18, 2004, October 25, 2004 and November 30, 2004 issued by investigating authority. In this regard it is pertinent to note that Section 11C(3) of the SEBI Act empowers the investigating authority of SEBI to require any person associated with the securities market to furnish such information or to produce such records as may be required by the investigating authority. Further, Section 11C(5) empowers the investigating authority to examine such persons. Timely submission of information is very important for concluding investigation proceedings and non co-operation by an entity can be detrimental to the interests of investors and securities market on account of any delay in the investigation. 
   
    
9. In this regard, the provisions of Section 15A(a) of SEBI Act provides the following:
   
   “Penalty for failure to furnish information, return, etc.: If any person, who is required under this Act or any rules or regulations made thereunder, to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.”
   
10. It is noted that investigating authority issued letter dated March 5, 2004 to SIL inter alia stating the following:
    
    “With reference to the captioned subject it came to our notice that SIL had passed resolutions under Section 81(1A) of the Companies Act, 1956 for preferential allotment in its EGM dated July 5, 2001 and October 12, 2001. It was noted therein that the company had offered 50 lakh shares in each of those proposed preferential allotment. However, it was noted, as per records available, that no shares were allotted therein.
    
    Hence you are required to tender your reply regarding the reasons for non allotment thereof and the actions taken subsequent to the lapse of three months from the dates of EGMs as mentioned above.”
    
    
11. The above details were required to be submitted by March 9, 2004. In response to the above letter, SIL vide its letter dated March 8, 2004 informed that the details required by the investigating authority were under compilation and requested time till last week of March 2004 to submit its reply. 
    
     
12. Subsequently, the investigating authority issued letter dated March 19, 2004 advising SIL to submit the following details:
    1. The copies of resolutions passed in the Board Meetings calling the EGMs dated 5^th July, 2001 and 12^th October 2001.
    2. The agenda of the Extra Ordinary General Meetings alongwith the copies of notices calling the shareholders.
    3. A record of the minutes of the said meetings.
    4. A record of the details of proceedings of the Extra Ordinary General Meeting (recording the votes of the quorum in favour and against the agenda items).
    5. The name/s of the financial institution/s with whom SIL negotiated for subscription to the shares of the company on preferential basis.
    6. What business consideration or otherwise was considered for such negotiations.
    7. The reasons for the negotiations to not materialize.
    8. Details of all the information submitted to the Stock Exchanges regarding these Board Meetings and EGMs regarding preferential allotment. 
       
        
13. Subsequently, the investigating authority issued another letter dated October 5, 2004 advising SIL to submit the following details:
    1. The actual holdings of the promoters / directors distributed category wise. You are also required to give details of the holdings of the promoters’ shareholding as and when they were dematerialized till January 2002.
    2. Details of corporate announcements, if any, made by the company during the years 2001-02 and when were these intimated to the stock exchanges.
    3. Annual report of the company for the year ending 31^st March 2002.
    4. Quarterly financial statements of the company for the quarters ending 30^th June 2001, 30^th September 2001, 31^st December 2002 and 31^st March 2002.
    5. List of promoters, directors, relatives and associate entities of the company along with their addresses and telephone numbers. The details of the directorships of the promoters / directors may also be furnished.
    6. Detail of dealings in the scrip by the promoters, directors, relatives and associate entities of the company for the period 1^st July 2001 to 31^st January 2002.
    7. Quarterly distribution schedules of the shareholding in the company during the financial year 2001-02.
    8. Details of loans / advances given or taken by the company during the financial year 2001-02.
    9. The copies of resolutions passed in the Board Meetings calling for EGMs dated 2^nd April 2001, 5^th July 2001, 12^th October 2001 and 11^th February 2002.
    10. The agenda of the EGMs along with the copies of notices calling the shareholders.
    11. A record of the minutes of the said meeting.
    12. A record of the details of proceedings of the EGMs recording the votes of the quorum in favour of and against the agenda items.
    13. The names and address of the financial institutions with whom SIL negotiated for subscription to the shares of the company on preferential basis during the financial year 2001-02.
    14. What business consideration or otherwise was considered for such negotiations.
    15. The reasons for the negotiations to not materialize.
    16. Details of all the information submitted to the Stock Exchange regarding these board meetings and EGMs.
    17. The address and contact number of the compliance officer of the company. 
        
         
14. SIL was advised to provide the said details by 11^th October 2004. It is noted that the above summons is duly received and acknowledged by SIL under its seal. 
     
15. Subsequently, investigating authority of SEBI issued summons dated October 18, 2004 and advised SIL to submit the required details by October 21, 2004. It is noted that the above summons is duly received and acknowledged by SIL under its seal. However, as SIL failed to submit the details, the investigating authority of SEBI issued another summons dated October 25, 2004 and advised SIL to submit the required details by October 29, 2004. It is seen that no reply has been received from SIL. 
    
     
16. In view of the above, it is established that SIL failed to comply with the summons dated March 5, 2004, March 19, 2004, October 5, 2004, October 18, 2004 and October 25, 2004 issued by the investigating authority. In this regard, it is noted from the findings of the investigation that SIL had passed 3 resolutions during 2001 for preferential allotment of shares. However, the shares were not allotted therein. In this regard an attempt was made by few interconnected brokers and clients to maintain the price of the scrip at a desired level to attract investors at the price on which the preferential allotment was proposed. In view of the above facts and circumstances, investigating authority sought certain details from SIL. It is noted that the details / information sought by the investigating authority were pertaining to the preferential allotment like the agenda of the EGMs along with the copies of notices calling the shareholders meeting, record of the minutes of the said meeting, holdings of the promoters / directors, details of corporate announcements etc. Such details are readily available with a company and the fact that SIL did not provide the details despite summons being issued to it repeatedly indicates that SIL deliberately adopted non co-operative approach with the intention to avoid any inquiry into the matter. The said failure on the part of SIL to comply with the summons/notices attract penalty under Section 15A (a) of the SEBI Act which state the following:
    
    “Penalty for failure to furnish information, return, etc.: If any person, who is required under this Act or any rules or regulations made thereunder, to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.”
    
     
17. In this regard, the provisions of Section 15J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, the adjudicating officer shall have due regard to the following factors namely;
    1. the amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of the default
    2. the amount of loss caused to an investor or group of investors as a result of the default
    3.  the repetitive nature of the default 
       
        
18. It is noted from the details available on record that SIL had passed 3 resolutions during 2001 for preferential allotment of shares. However, the shares were not allotted therein. In this regard an attempt was made by few interconnected brokers and clients to maintain the price of the scrip at a desired level to attract investors at the price on which the preferential allotment was proposed. This also indicates manipulative practices in the scrip at the behest of the company SIL. Though, it is not possible to quantify the gains made by SIL or the loss caused to investors based on the available facts on record, it can be presumed that such practices result in substantial gain to the person involved therein at the cost of other investors. Further, such manipulation results in loss of confidence of genuine investors. Investigation revealed that mainly a group of brokers and clients in collusion with the Chairman and Managing Director of SIL, Shri R.K. Basantani were trading in the scrip during the period. These entities were allegedly executing structured trades and indulged in circular trades. It is noted that the said entities had 96% of the total trading in the scrip at both BSE and NSE during the period. As it is seen from the facts available on records, SIL failed to comply with the summons / letters dated March 5, 2004, March 19, 2004, October 5, 2004, October 18, 2004 and October 25, 2004. In view of the same, the failure on the part of SIL can be termed as repetitive in nature. 
     
19. Further, the failure has to be viewed in the context of the attempt by the company SIL to push through the preferential allotment. The facts of the case indicate that SIL deliberately wanted to avoid any inquiry into the matter and therefore did not provide even basic details sought by the investigating authority. The Honourable Securities Appellate Tribunal had occasion to consider a similar factual situation in Appeal No: 114 of 2005 Nokia Finance International Pvt. Ltd. Vs SEBI. In the said appeal, the Honourable Securities Appellate Tribunal had occasion to scrutinize the failure on the part of the appellant who dealt in the excess dematerialized shares, to provide necessary information to the investigating authority of SEBI. In the said matter, while upholding the penalty imposed by the adjudicating officer, the Honourable Tribunal observed that in a serious case of excess dematerialized shares than the authorized capital being traded in the market, the appellant could have availed the opportunity to submit the required information, however he failed to do so and the penalty has been imposed in terms of the provisions of law. Hence the violation committed by SIL has to be viewed seriously and attract penalty prescribed under Section 15A(a) of the SEBI Act.
    
    ORDER
20. Considering the facts and circumstances of the case it is established that Soundcraft Industries Ltd. failed to provide necessary information to the investigating authority of SEBI in response to the summons issued by it. Considering the facts and circumstances of the case and the violation committed by Soundcraft Industries Ltd., I impose a penalty of Rs Five Lakh (Rs.500,000) on Soundcraft Industries Ltd. in terms of the provisions of Section 15A(a) of the SEBI Act, 1992 for failure to provide necessary information to SEBI. In the facts and circumstances of the case, I am of the view that the said penalty is commensurate with the violation committed by Soundcraft Industries Ltd. 
    
     
21. The penalty shall be paid by way of demand draft drawn 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 shall be forwarded to General Manager, Investigation Department (ID3), Securities and Exchange Board of India, Plot No. C4-A, ‘G’ Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051. 
    
     
22. In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, copies of this order are sent to Soundcraft Industries Ltd. and also to Securities and Exchange Board of India.

PLACE: Mumbai                                                                                                                                          Biju. S

DATE: March 30, 2007                                                                                                            Adjudicating Officer