ORDER AGAINST M/S. DARSHAN INVESTMENT PVT. LTD.
IN THE CASE OF M/S. INCAP FINANCIAL SERVICES LIMITED
UNDER SECTION 11B OF SEBI ACT, 1992 mu.
Whereas M/s Incap Financial Services Ltd. (hereinafter referred to as IFSL) had made a public issue of 25,40,000 Equity shares of Rs.10/- each for cash at par, which opened on 9th May, 1995 and closed on 20th May, 1995.
Whereas in the scrip of IFSL, allegations of manipulation in promoters’ contribution, late subscription in public issue etc., were levelled and therefore, Securities and Exchange Board of India (hereinafter referred to as SEBI) vide its order dated April 02, 1998 and Order dated September 30, 1998 initiated investigations into the alleged manipulation in promoters’ contribution, late subscription in public issue etc.
It has been observed from the prospectus dated April 10, 1995 that the following were the directors of IFSL:
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Name of the person
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Area of Responsibility
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Shri Kantibhai Patel, Promoter and Chairman
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General Administration, Finance and Investments
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Shri. Urmilesh Gandhi, Promoter and Managing Director
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Project Finance, Investment Planning and stock market operation.
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Shri. Roopram Sharma, Director
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Management Law, Accounts etc.
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Shri. Nimesh Patel, Director
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Lease and Finance
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Shri. Kirti S Kotaria, Director
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Finance and Investment
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It was seen from the investigations that the public issue of IFSL did not genuinely receive minimum subscription of 90% of the issue size from the public and an illlusion of subscription to the public issue of IFSL was created by M/s. Darshan Investment Pvt. Ltd. (DIPL), apparently acting in concert with the promoters of IFSL.
Minimum subscription of 90% is mandatory for each issue of capital to public and if the company does not receive 90% of issued amount from public subscription before the closure of issue, as per the provision of Companies Act, SEBI Disclosure and Investor Protection Guidelines and terms of prospectus, the company is under obligation to refund the subscription to the public unless underwriting obligations have been invoked.
From the investigations it was seen that the public issue of IFSL was subscribed in the following manner:
On realizing that the public subscription to the issue had not forthcome, IFSL under cover of a letter dated 20.05.1995 addressed to the Manager, Punjab National Bank, Shahibaug, Ahmedabad had enclosed 5 applications along with cheques for Rs.156 Lac towards the public issue and had apparently left them with the Registrars to the Issue namely Super Corporate Services Ltd. with instructions to have them deposited with one of the Bankers to the Issue, to meet shortfall in subscription, in case it was not possible to arrange funds before the 7 day report. It appears that this tactic was resorted to enable the Registrars to report full collection in the seven-day report.
Apparently, these cheques were lodged with the bankers around the 30th May, 1995, i.e., only after the closure of the issue, and all these cheques bounced. The applications so submitted were from :--
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- Wizma Consultants (P) Ltd. for Rs.50 Lakhs*
- Wizma Securities Ltd. for Rs. 31 Lakhs
- Hics Cements Ltd. for Rs.50 Lakhs*
- Urmilesh Gandhi for Rs. 15 Lakhs
- K.S.Kotaria for Rs.10 Lakhs
The cheques for the two* companies have been signed by Mr. Urmilesh Gandhi, Promoter and Managing Director of IFSL. From the recorded statement of Shri Kantibhai Patel, promoter and Chairman of IFSL, it was seen that Mr. Urmilesh Gandhi was aware of the fact that there were no funds to meet the aforesaid cheques and that they would ultimately bounce; and hence, he set about arranging funds from other sources for meeting the shortfall in public subscription. Darshan Investment Pvt. Ltd. (hereinafter referred to as ‘DIPL’) is one of the entities who had been approached by Mr. Urmilesh Gandhi for the purpose.
Pursuant to the above, DIPL subscribed to nearly 25% of the public issue vide application number 380505 dated 20th May, 1995 for 6,00,000 equity shares of IFSL. DIPL had enclosed to their application Cheque no.699862 for Rs.60 Lacs drawn on Bank of Baroda, Gorwa Branch favoring Punjab National Bank a/c IFSL Public Issue. Investigations revealed that the said cheque though purported to have been enclosed with application dated 20th May, 1995 has in fact been issued only after the closure of the issue. Investigations brought out that the set of cheque book bearing serial nos. starting from 699851…, containing cheque no. 699862 had been issued to the account holder by Bank of Baroda only on 14.6.1995 whereas the public issue of IFSL closed on 20th May 1995. Therefore, it would not have been possible to enclose cheque no.699862 dated 20th May, 1995, with the application form dated 20.5.95. It was, therefore, evident that DIPL had subscribed to nearly 25% of the public issue after the closure of public issue, with a view to bailing out the public issue of IFSL, when it failed to elicit minimum subscription of 90%.
Investigations further revealed that a major part of subscription by DIPL was paid back to them from the public issue proceeds as detailed below:
DIPL had entered into a buyback arrangement with Wizma Consultants (P) Ltd. (Wizma) – a promoter group company, vide agreement dated July 22, 1995, in which it was specifically stated that DIPL was holding 520000 equity shares of Incap which DIPL had agreed to sell to Wizma. The agreement was signed by Shri R S Thakkar, director, DIPL and by Smt. Gita N Gandhi, wife of Shri Urmilesh Gandhi. As part of the purchase consideration, DIPL was paid Rs.50 lacs vide Demand Draft No. 0352623 dated 22/7/95 drawn on Canara Bank, Old Sachivalaya Branch, Ahmedabad.. This payment of Rs.50 lacs made to DIPL for sale of said shares of IFSL has been collected into the current account No.3198 of DIPL with Punjab National Bank, Relief Road, Ahmedabad Branch. Investigations also revealed that the amount of Rs.50 lacs paid to DIPL was remitted out of proceeds of public issue collection, even before the shares of IFSL were admitted for dealing on the exchange.
Similarly, subscription of further Rs.180 lacs arranged though other sources has also been remitted back out of proceeds of public issue collection.
Investigations thus revealed that the public issue of IFSL was shown to be subscribed by bringing in major part of the subscription much after the closure date of the issue, and such subscription was paid back immediately out of public issue proceeds and the issue did not genuinely receive minimum subscription of 90% of the issue size from the public.
It was further observed from the investigations that after printing the share certificates at the company premises, the share certificates were dispatched only to 36 allottees out of total 91 allottees. The remaining share certificates, more particularly those pertaining to DIPL were retained with the promoters / directors, as major part of their subscription had been paid back to DIPL from out of issue proceeds. The same was confirmed by Shri Kantibhai Patel and Shri Kirti S. Kotaria in their statements.
In view of the above, it was alleged that DIPL subscribed to nearly 25% of the public issue after the closure of the issue with an understanding with the promoters that the amount of their subscription would immediately be paid back and this enabled the promoters of IFSL to make a dubious issue successful and to create an illusion of subscription in the public issue of IFSL. DIPL thus aided, abetted and connived with the promoters of IFSL in creating an illusion of subscription, allotting the shares and cornering them. It was further alleged that but for the connivance of DIPL with the promoters of IFSL, the public issue of IFSL would have failed.
Pursuant to investigations, show cause notice dated 30th March 2001 was issued to DIPL requiring them to show cause as to why directions under Section 11B of the SEBI Act, 1992 should not be issued against them. A reminder dated 30th May, 2001 was also sent to them. DIPL replied to the show cause notice vide their letter dated 13.6.01 refuting all charges and stating that –
- DIPL had never applied in public issue of IFSL;
- Never filled in the application form and had no knowledge of any application in the public issue of IFSL;
- Never taken part in public issue of IFSL or anything related thereto;
- There was no connivance whatsoever.
Letters dated July 26, 2001, January 23, 2002 and February 7, 2002 written to DIPL at the address where show cause notice was served were returned undelivered. An opportunity of personal hearing was granted to DIPL vide letter dated June 21, 2002 to appear before me on July 3, 2002 which was served to them through the Ahmedabad Stock Exchange but DIPL failed to appear before me. Thereafter, letter dated July 24, 2002 was sent to DIPL forwarding documents on record evidencing connivance of DIPL in the matter and giving them an opportunity to clarify their position either in writing or in person by appearing before me on 17th August, 2002. DIPL again failed to appear before me nor sent any written reply.
I find that DIPL had failed to reply to the show cause notice also within the period stipulated therein and cared to reply only when reminded.
In view of the above facts and after examination of records of proceeding, the investigation report, correspondence with DIPL, the manner in which the public issue of IFSL was shown to be subscribed, in my opinion, the activities of DIPL are detrimental to the interest of genuine investors in the public issue of IFSL and to the integrity of the capital market. In the light of the irrefutable evidence on record, I am unable to accept the explanation of DIPL that that they have never taken part in public issue of IFSL or anything related thereto. In my opinion, DIPL had connived with and abetted the promoters of IFSL in creating an illusion of subscription to the public issue; helped the promoters of IFSL to allot and corner shares in the public issue of IFSL. Their said action is in violation of the terms of issue of the prospectus, circulars and SEBI Guidelines on Disclosure and Investor Protection (GL/IP.No.1/SEBI/PMD/92-93 dated June 11, 1992 and amendments thereto).
In the light of the foregoing discussions, it is concluded that M/s Darshan Investments Pvt. Ltd. had –
- Put in application for subscribing to the public issue of IFSL after the date of closure, in order to bail out the issue and to create an illusion that the issue has genuinely received minimum subscription of 90% of the issue size from the public;
- Had subscribed to the issue with an understanding with the promoters of IFSL that the amount of their subscription would be remitted back to them through an agreement for buy back of shares allotted;
- In pursuance the agreement, DIPL received back major part of their subscription from out of issue proceeds on July 22, 1995, even before the shares of IFSL were admitted for dealing on the exchange.
In view of the foregoing discussions, I have no doubt in my mind that the said action of DIPL is undesirable and enables dubious issues to show minimum subscription and get listed. DIPL have connived with the promoters in allotting and cornering the shares. This is detrimental to the orderly development of the capital market and is against the interest of genuine investors.
In the light of foregoing discussions and facts as recorded, I hold M/s. Darshan Investment Pvt. Ltd. guilty of the charges leveled against them and I conclude that their activities are detrimental to the interest of genuine investors and orderly development and integrity of the capital market and if left unchecked could undermine the faith of the investors in the securities market.
Therefore, in exercise of the powers conferred under Section 11B of Securities and Exchange Board of India Act, 1992, I, G N Bajpai, direct that M/s. Darshan Investment Pvt. Ltd. (Director: Mr. Rajeshri Shailesh Thakkar; Address: 4, Mayur Apartments, Behind R B School, Paldi, Ahmedabad - 380 007) be hereby prohibited from accessing capital market and/ or dealing in securities market in any capacity for a period of two years with immediate effect.
Dated this the 28th day of August, 2002
MUMBAI.
G. N. BAJPAI
CHAIRMAN
SECURITIES AND EXCHANGE BOARD OF INDIA