BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO. AP/AO- 15/2006-07]
UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES,
1995 READ WITH SECTION 15-I OF SECURITIES
AND EXCHANGE BOARD OF INDIA ACT, 1992
In the matter of Investigations in
PRAKASH FOTRAN SOFTECH LTD
AND
In respect of
TOP CASSETTES LTD.
(NOW KNOWN AS TOP TELEMEDIA LTD)
01. Securities and Exchange Board of India (SEBI) conducted investigation into certain irregularities by Prakash Fotran Softech Ltd (PFS) whose shares are listed in the Stock Exchange, Mumbai (BSE), ASE and MPSE. The irregularities by PFS lead to malpractices in its scrip during the period October, 1999 to December, 1999. During the course of the investigation, the Investigating Officer (IO) SEBI summoned Top Cassettes Ltd (TCL) to provide information and also to appear in person. It is alleged that TCL did not adequately respond to these summons. Accordingly vide order dated July 07, 2005, the undersigned was appointed as Adjudicating Officer under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter Adjudication Rules) read with Sec. 15 I of SEBI Act, 1992 to inquire into and adjudge the failure of TCL to comply with the summons of SEBI IO for which penalty may be imposed under Sec. 15A of SEBI Act, 1992. The aforesaid appointment was communicated vide proceedings of the Whole Time Member, SEBI, dated August 12, 2005.
02. The undersigned issued notice (SCN) dated November 22, 2005 under Rule 4 (1) of SEBI Adjudication Rules to TCL, communicating the allegations levelled against it and calling up on it as to why an inquiry in terms of the said Rules should not be conducted against it. The SCN despatched through RPAD at TCL’s address at Ahmedabad, returned undelivered with the remark “left”. The second SCN dated February 24, 2006 sent to TCL’s address at Pune, as found from records, also elicited the same response. Subsequently, in response to my request, the Investigation Department arranged to paste a fresh SCN dated April 25, 2006 at TCL’s office premise at Ahmedabad. In this regard the report dated May 29, 2006 of affixing the SCN by the Ahmedabad Stock Exchange, in terms of Rule 7 of Adjudication Rules is available on records. As if by miracle, TCL sprang to life and vide letter dated June 07, 2006 sought complete copy of the SCN dated April 25, 2006 along with its annexures to enable it to file its reply. Considering the request of TCL, a copy of the SCN dated April 25, 2006 was sent by RPAD to TCL at the address mentioned in its letter head, which is the same where the SCN was earlier affixed. However, this letter returned undelivered with the remark “left”!
03. After playing this cat and mouse game, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, vide notice dated July 11, 2005, the date for inquiry was fixed for July 28, 2006. This notice along with SCN was affixed on the office premise of TCL by ASE in terms of terms of Rule 7 of Adjudication Rules and the report of affixing dated July 17, 2006 is available on records. Predictably, TCL did not respond to the notice of inquiry also. I am of the opinion that TCL failed to appear before me, deliberately. Therefore, in terms of Rule 4(7) of the Adjudication Rules, I proceed with the inquiry ex-parte and record my findings as under.
04. Given the nature of this case, it is important to understand the background in which TCL was summoned to produce information and also to appear in person. The relevant details are presented below:
a) R & R Wood Products, a partnership firm in the business of value added wood work, was incorporated as R & R Wood Products Pvt. Ltd. in January 1994 in MP. Its name was changed to Prakash Touchwood Ltd. in March 1994. The company came out with a public issue in December 1995 and its shares were subsequently listed in ASE, MPSE and BSE. As per the declaration filed by the company, it did not start production after its public issue, as the term lending institution; MPFC had taken over its (old and new) assets in March 1996. Given this “dismal track record” of the company it is not clear as to what prompted the company to switch over from wood work to software business. Strangely, it decided to “diversify” into software and on March 1999 changed its name to Prakash Fotran Softech Ltd (PFS)! Confirming PFS' criminal antecedents, MPFC has filed a police complaint and criminal complaint before the District Court, Dhar as plant and machinery worth Rs. 36 lakhs were missing at the time of takeover. The company’s track record in meeting its obligations under the listing agreements was very poor and was most of the time suspended from trading and was notified as “unknown company” by the BSE and being considered to be notified as a “vanishing company” by SEBI.
b) In September 1999, PFS announced exaggerated financial performance for the quarter ending June 1999, along with announcement of dividend @ 10%, which was withdrawn in March 2000. Not surprisingly, coinciding with the aforesaid “corporate developments” the hitherto illiquid scrip witnessed spurt in price and volumes during the period from October to December 1999 (period of investigation). To illustrate, the closing prices and number of shares traded were Rs. 20, 23.5 & 23.25 and 2,300, 2,500 & 1,300 in the months of June, July and August, 1999, respectively. Whereas, during the period of investigation the average number of shares traded was 74,600 shares with highest rate of Rs. 46.5 recorded on November 26, 1999.
c) Predictably enough, the entities that offloaded the shares during this “boom” phase were entities connected to PFS, which also includes TCL. Pivotal Stoxare Ltd (PSX) and Coverage & Consultants (C&C) respectively, sold 734,800 and 220,000 shares of PFS during the period of investigation. PSX, C&C, PFS and TCL are all inter connected from the following facts. Himansu Trivedi is a common director of PSX, C&C and TCL. Moreover, C&C and TCL share common address at Apollo Towers at Indore. TCL held 17.46% of PFS’ equity as on 30.09.00. Besides C&C, Himansu Trivedi and Rajesh Jain, director, PFS, also traded heavily in the scrip of TCL during the period June to November 2000. Therefore, the picture that emerges is that, TCL is a large shareholder in the dud scrip of PFS; PFS engineered ‘corporate development’ which created the ground for TCL to offload its worthless investment in PFS at high rate, through entities like PSX, C&C, Himanshu Trivedi etc.
d) Undoubtedly, the issue of summonses by the IO to TCL and TCL’s so called response to the same needs to be seen in the background of outright fraud and debauchery perpetuated by these inter connected entities.
05. Having seen the background, I now examine the summons issued to TCL by the IO, SEBI in the investigation in the matter of PFS. Summons dated September 10, 2004, issued under Sec 11(3) of SEBI Act, 1992, required the Managing Director (MD) of TCL to appear before the IO on September 17, 2004. Further, the following documents were also required to be produced vide annexure of the summons, as under:
a) Shareholding pattern of the company Top Cassettes Ltd and Associate Companies.
b) Details of the Promoters and their Shareholdings in TCL
c) The documents pertaining to the company/or its directors relationship with PFS, its group companies and directors.
d) The details of the dealing of the directors of your company/associate companies on the scrip PFS during July 1999 to December 1999.
06. There was no response at all to the said summons by TCL. The IO issued the second summons vide letter dated September 17, 2004, requiring personal appearance of TCL’s MD on September 24, 2004 along with information / documents sought. TCL responded to this summons vide letter dated September 22, 2004, seeking 20-30 days to collect the information, as they were 5 years old. The IO issued third summons dated September 24, 2004, seeking personal appearance on September 27, 2004 along with information / documents sought. There was no response at all to the summons by TCL, although service of the summons through RPAD was acknowledged. However vide letter October 21, 2004, TCL furnished the following:
a) A copy of Distribution Schedule as on 31.03.2000 as submitted to BSE was enclosed. This schedule included names of shareholders and number of shares held by them in response to the requirement of shareholding pattern. It was submitted that it does not have any associate company.
b) Regarding its promoters and their shareholdings in TCL, it was submitted that the schedule includes equity holdings of the directors and list of top 50 shareholders.
c) With regard to the relationship with the PFS, it was submitted that TCL or its directors has no relationship with PFS and its group companies and directors.
d) With regard to the details of the dealings of its directors in the scrip during the investigation period it was submitted that directors of the company had informed the management that they had not done any dealing in scrip of PFS during July 1999 to December 1999 and it does not have any associate company.
07. The information on the shareholding pattern of TCL and its associates was sought by IO for the period October – December, 1999. This information was required to be filed earliest by September 17, 2004 and latest by September 27, 2004. However, what was filed by TCL vide letter October 21, 2004 was a copy of the distribution schedule as on 31.03.2000 filed with BSE. It is difficult to believe that it takes 1-2 months to merely take photocopies of this readily available statement and forward it to the Investigating Officer (IO). Since this readily available document was filed with delay, it raises serious doubts about TCL’s intention towards co-operation to the investigation. Was the content of this document sufficient enough to meet the IO’s requirement, as there is divergence between the period for which IO sought the information and the period for which TCL provided the information? In the normal course, TCL would have got the benefit of doubt. But in the background of the manipulation that took place in the scrip of PFS, as already discussed, it will be difficult to accord TCL the benefit of doubt. The information sought was specific to investigation period and what was furnished was of different period and given the delay in filing this statement and the non appearance of TCL’s MD before the IO, I am of the opinion that TCL did not furnish the shareholding pattern of TCL and its associates sought for the period pertaining to October – December, 1999, as sought vide query 1 of the annexure to the summons.
08. As regards the information of shareholding of the promoters of TCL for the period October – December, 1999 sought by the IO, TCL replied that the copy of distribution schedule as on 31.03.2000 filed with BSE contains details of equity holding of its directors and top 50 shareholders. On the face of it, I can make out that there is a wide deviation between the information sought by the IO and what was purportedly provided by TCL, albeit in a belated manner. Therefore, TCL has not filed information pertaining to query 2 of the annexure to the summons also. In other words it is concealment of a very relevant fact, which according to me has got a purpose.
09. As regards the information pertaining to the relationship of TCL/its directors with PFS/its group companies and directors sought by the IO, TCL replied that neither its directors nor the company has any relationship with PFS/its group companies/directors. As already discussed, the inter linkages between PFS, TCL, C&C and PSX are well established. In making the aforesaid statement, TCL has completely glossed over the fact that it held 17.46% of PFS's shares as on 30.09.00 i.e. subsequent to the period of investigations, but what was its holding during the investigations, has been concealed which according to me was a very vital information. This holding is significant holding; it may not be out of context to point out here that this much shareholding might have attracted SEBI SAST Regulations. Therefore, TCL has furnished wrong information in respect to query three of the annexure to the summons.
10. As regards the details of transactions by the directors of TCL/associate companies of TCL in PFS for the period July to December 1999 sought by the IO, TCL replied that its directors have not transacted in the scrip of PFS during the cited period. This statement is a blatant lie considering the fact that Himansu Trivedi was one among the entities that made the largest delivery of PFS scrip to brokers during the period of investigation. Therefore, TCL has defaulted in providing information pertaining to query 4 of the annexure to the summons.
11. Over and above, the aforesaid TCL’s MD did not appear in person before the IO as summoned. In this regard, it may be stated that Sections 11C (3) and 11C (5) of SEBI Act, 1992 empowers the IO to obtain records, documents, information etc and to record statement from any person in pursuance of investigation. Regulation 8(1)(a) of FUTP, 2003 casts obligation on entities to provide books, accounts and other documents and records in its custody or control and to furnish such statements and information as required by the IO for conducting investigation. Since TCL neither furnished information sought vide summons nor appeared in person, it is established that TCL failed to discharge its statuatory obligatoin, as aforesaid, which makes its liable for penalty under Section 15A(a) of SEBI Act, and which 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-
(a) 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];
12. To determine the quantum of penalty under Section 15A (a), 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. As already detailed, PSX and C&C, which are entities related to TCL, sold a total of 954,800 shares (734,800 and 220,000 respectively) of PFS. It may be emphasized that these shares were worthless, had the manipulation did not take place. Given the fact the number of PFS shares traded prior to the manipulation was just 1500-2500 shares per month, which went up to an average of 76,600 shares per day during the period of manipulation, it would not have been possible for PSX and C&C to sell more than 9 lakh shares of PSF, if not for the manipulation engineered by PFS, as already discussed. The value of these shares, even at the lowest price of Rs. 20/- during the period of investigation, works out to Rs. 19,096,000/-. This, however, does not include the value of the shares offloaded (sold) by TCL during the investigation period, since TCL did not furnish the required information. This value may be treated as the unfair gain to TCL and its related entities as a result of the fraud perpetuated on the securities markets by PFS, which was supported by TCL. There are corresponding losses to the general investors also, as after the shares were offloaded by these entities including TCL, the price of shares gone down around Rs. 20/-. Further, TCL failed to respond to summons thrice, and as such I find the violation as repetitive.
13. The Hon'ble SAT in its order dated May 20, 2005 in the appeal no. 114 of 2005 in the matter of Nokia Finance International vs. SEBI, upheld the aforesaid manner of computation of the penalty, where the entity failed to provide information sought by the IO. The relevant portion of the order is as follows:
“It is a serious case of excess dematerialized shares than the authorized capital being traded in the market. The appellant could have availed of the opportunity of submitting all the required information and come clean, but he failed to do so. We, therefore, feel that there is no violation of natural justice in this particular case and the penalty has been imposed as per the regulations. The impugned order indicates that the various factors to be reckoned under Section 15(J) of SEBI Act, 1992 were duly considered before deciding on the quantum of penalty imposed. In view of the fact that appellant has failed to give the necessary information to the respondent for conducting investigation into a very serious irregularity in the market, we are inclined to uphold the impugned order and dismiss the appeal”.
14. The SAT in its earlier ruling in the order dated May 04, 2001 in the appeal No. 36 of 2000 in the matter of Yogi Sungwon (India) Ltd. vs SEBI, also ruled that the AO has to satisfy himself about the severity of the violation before imposing penalty. The relevant portion of this order is as follows:
“As already stated above, in terms of section 15I whether penalty should be imposed for failure to perform the statutory obligation is a matter of discretion left to the Adjudicating Officer and that discretion has to be exercised judicially and on a consideration of all the relevant facts and circumstances. Further in case it is felt that penalty is warranted the quantum has to be decided taking into consideration the factors stated in section 15J. It is not that the penalty is attracted perse the violation. The Adjudicating Officer has to satisfy that the violation deserved punishment.”
15. Taking a definite clue from the principles laid down by SAT, I am fully satisfied that this case deserves severe penalty since it is a matter of fraud involving crores of rupees. Keeping in view the facts and circumstances of the case and non-cooperation by TCL during investigations and also during the proceedings before me, I am of the view that it is a fit case for imposition of maximum penalty as prescribed under Section 15 A (a) of SEBI Act. Since more than 700 days have elapsed since September 27, 2004, when TCL was required to comply with summons, and it has not done so, penalty at the maximum of Rs. 1 lakh per day would work out to Rs. 700 lakhs. Since maximum permissible penalty under Section 15A (a) is Rs. 100 lakhs, I restrict myself to the said amount, considering all the fact and circumstances of this case.
16. 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 penalty of Rs. 100,00,000/- (Rs. One Crore only) on Top Cassettes Ltd. (Now Known as Top Telemedia Ltd.) under section 15A (a) of SEBI Act, 1992 for the violations established in above paragraphs of the order.
17. Top Cassettes Ltd shall pay the said amount of penalty by way of demand draft 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 should be forwarded to Ms. Barnali Mukherjee, Deputy General Manager, World Trade Centre, 29th Floor, Cuffe Parade, Mumbai 400 005.
18. This order of adjudication is made and passed on 30th day of August 2006 at Mumbai.
AMIT PRADHAN
ADJUDICATING OFFICER