IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No.28/2004
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Date of Hearing
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1.07.2005
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Date of Decision
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08.08.2005
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In the matter of:
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Snowcem India Limited
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Appellant – Represented by Mr. V. M. Singh, Advocate
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Versus
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Securities & Exchange Board
of India
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Respondent – Represented by Mr. Kumar Desai &
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Ms. Daya Gupta, Advocates.
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Coram:
C. Bhattacharya, Member
R. N. Bhardwaj, Member
Per: C. Bhattacharya, Member
1. Appeal is taken up for final disposal with consent of both parties.
2. Heard the counsels from both the sides. The facts of the case are that Snowcem India Ltd.,(SIL) is a Public Limited Company, the shares of which are listed in Bombay, Delhi, Ahmedbad and Madras Stock Exchanges, as also at National Stock Exchange (NSE). About 60% of the shares of SIL was held by OCBs (Overseas Corporate Bodies) and foreign collaborators. One domestic investment company viz. Kosha Investments Ltd., (KIL) held about 21% shares of SIL. The balance shares were publicly held.
3. The shares of SIL were rather illiquid up to May, 1999. However, during the period June to August, 1999 there was a sudden spurt in the trading of these shares and the price zoomed. The unusual activity in the increase in trading volume and prices first attracted the notice of NSE who conducted an investigation on their own and submitted a report to SEBI. Thereafter, SEBI conducted an investigation in relation to the period June, 1999 to August, 1999 in regard to the price movement of SIL shares. It has been alleged that the investigation conducted by SEBI revealed that KIL, the promoter company for SIL had themselves traded substantially in the shares. On the basis of the investigation, SEBI issued a show cause notice to SIL on 16-9-2002 alleging that KIL had indulged in circular trading in the scrip of SIL through a selected cartel of brokers of both BSE & NSE. One such broker was one Shri Sourabh Bora (SB) to whom, it was alleged, SIL allotted 4,38,600 equity shares in an irregular manner. The show cause notice alleged that funds were transferred into the account of KIL from the account of SIL and, thereafter, from the account of KIL to the account of SB. SIL was, therefore, alleged to have provided funds through KIL to SB to enable KIL to buy SIL’s own shares which was in violation of section 77 of the Companies Act. It was alleged that there was actually no infusion of funds in SIL by way of sale proceeds of these 4,38,600 shares to SB. The show cause notice detailed how the funds were allegedly first transferred from the account of SIL to the account of KIL and from the account of KIL to the account of SB and thereafter, the cheque given by SB for payment of the share price was put through. SIL was, therefore, charged for aiding and abetting KIL, its own promoter company, in manipulation of the shares of SIL. The other allegation was that SIL had violated section 77 of the Companies Act, 1956 by buying back their own shares by funding KIL. SIL replied to the show cause notice. SIL was also given a personal hearing. Thereafter, the Whole time Member of SEBI has passed an order dated December 05, 2003 giving a direction restraining SIL from accessing the securities market and dealing in securities market for a period of two years, under section 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 2003. Being aggrieved by the impugned order the appellants have filed this appeal.
4. In their reply to the show cause notice as also during the personal hearing with SEBI, SIL had taken a stand that it has been regularly lending funds to KIL for long as ICD (Inter Corporate Deposit). SIL and KIL are two independent corporate entities who are run by their respective boards and managements. SIL has no control over KIL and it was not its concern and it has never tried to find out what KIL was doing with the funds that SIL was lending to KIL. During the course of hearing of this case the learned counsel representing SIL took us through the entire history of how SIL has been lending funds to KIL. He admitted that there was never any written request from KIL to SIL for funds nor any documentation that SIL would like to have with it. Terms and conditions for placing the ICDs were never talked about or decided. The only thing which SIL was serious about was to get interest @ 18% p.a. which KIL was paying from time to time.
5. The facility of placement of funds from SIL to KIL was being used by KIL very frequently with multiple transactions on a single day on many days. It is observed that the accounts of SIL, KIL and SB were all maintained in the same bank branch viz. Oman International Bank at Nariman Point, Mumbai. KIL’s tradings in the shares of SIL and its payments to brokers for such transactions were almost exclusively supported by the funds transferred from the accounts of SIL. The details of transactions indicate that in most of the cases exactly matching funds were first placed to the credit of account of KIL by SIL and, thereafter, the payment to the broker was met by KIL. The seamless manner in which funds transfer was automatically taking place from the account of SIL to the account of KIL and, thereafter, to the concerned brokers for trading in the shares of SIL tends to suggest as if there was an unseen thread which was controlling the whole fund transfer operation of both KIL and SIL.
6. In regard to the allotment of 4,38,000 shares to SB, the counsel for the respondent pointed out that since SIL’s shares were rather illiquid, issue of these shares was meant to increase the liquidity in the market. After SIL’s board decided by a resolution to allot these shares to SB, SIL received SB’s firm commitment with a cheque for Rs.3,28,95,000/- in the first week of September itself. After a gap of about 3 weeks, on the 28th of September these shares were allotted to SB although SIL received credit of SB’s cheque by encashing it only on 1st October, 1999. The explanation given was that because of the half yearly closing of the banks, credit was available only on 1st October (and not on 28th
Sept.) However, the fact is that on 1st October, SIL had first lent identical amount to KIL. Thereafter, KIL issued a cheque in favour of SB for the same amount. After receiving credit for that amount in SB’s account, the cheque of SB to SIL was paid. All these transactions have taken place on the same day i.e. on 1st October, 1999. The counsel for respondent argued that this itself shows that the cheque though given by SB in September was held back and that only when SIL provided the funds and routed it through the accounts of KIL was it encashed.
7. The counsel for the appellants strongly pleaded that KIL was the Indian promoter of SIL and that SIL had no means to know or was not required to know what KIL was doing with the funds lent to it. However, the facts of this case are such that this argument seems to be a rather technical defence and is almost like a proverbial Fig Leaf. SIL’s shares up to May, 1999, were rather illiquid which its management knew. For about 3 months i.e. June to August, 1999 suddenly there was tremendous spurt in both volume and price of the shares of SIL in both BSE and NSE. Every transaction that KIL undertook was being funded by transfer of funds from the accounts of SIL to the accounts of KIL. It is inconceivable that the management of SIL was totally unaware of what was happening when KIL and SIL were group companies. KIL had been buying very heavily in the shares of SIL during this period. They even got more than 6% of their holdings increased which was transferred in their name during this period. The manner of seamless transfer of funds from SIL’s account to KIL’s account -- whenever required -- indicates that there was a very close relationship between the management of the two entities. As such, we find it difficult to accept the argument that SIL was absolutely unaware or had no means to know that KIL was in fact using the funds for buying the shares of SIL. There are separate investigation and adjudicating proceedings and orders against KIL which are subject matters of separate appeals before this Tribunal. The unlimited and continuous funds flow from SIL to KIL on day to day basis certainly helped KIL to indulge into heavy circular trading as has been alleged against them. Also, apart from providing funds for KIL’s numerous trade transactions in the scrip of SIL, the entire chain of transactions by which 4,38,600 shares which were earlier forfeited, were reissued to SB and for which the funds were funnelled to SB’s account via the account of KIL, strongly suggest that SIL’s role in it was not above board.
8. As a regulator, SEBI is charged with the responsibility of zealously protecting the integrity of the system and are required to take preventive steps to keep the system free of contamination. Having regard to this role of SEBI and in view of the fact that SIL’s funding had aided KIL to enter into numerous transactions in SIL’s scrip and, particularly, keeping in view the fact that the transactions relating to allotment of shares and funding of those shares by SIL were not above board – in fact the chain of events suggests strong complicity among the parties concerned – no exception can be taken for the impugned order issued by SEBI, restraining SIL from accessing the securities market and dealing in securities. We do not find, therefore, any reason to interfere with SEBI’s order.
9. Having said that, one also needs to look into not only whether the order was justifiable but also whether such restraint from securities market is to be for a period of full two years. The order was issued by the Whole time Member of SEBI on December 05, 2003. in our view such restraint orders which are cautionary in nature will serve its purpose even if it is shorter than two years. In the case of the appellant the order has already run for one year seven months. Considering all facts of this case, we feel that the period for which the impugned order has already run is good enough. The impugned order stands modified accordingly. The restraint on the appellant will stand lifted from the date they receive a copy of this order in their hand.
10. No order as to costs.
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R. N. Bhardwaj
Member
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C. Bhattacharya
Member
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Mumbai,
8th August, 2005.