IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

Appeal No.166 of 2005

 

Date of Decision

6.2.2006

 

 

Aastha Broadcasting Network Ltd.	……	Appellant Represented by Mr. J.J. Bhatt, Sr. Advocate with Mr. Manish Parekh, Ms. Anjali Chandurkar, Mr. Vinay Chauhan, Mr. Sanjay Kotak, Advocates
Versus
Securities & Exchange Board	……	Respondent
of India		Represented by Mr. Ravi Hegde & Mr. Paras Parekh, Advocates

 

Coram:

            Justice N.K. Sodhi, Presiding Officer

            C. Bhattacharya, Member

            R. N. Bhardwaj, Member

 

Per:  Justice N.K. Sodhi, Presiding Officer

 

            This order will dispose of a bunch of 38 appeals in which common questions of law and fact arise.  Learned counsel for the parties are agreed that the decision in Aastha Broadcasting Network Ltd. vs. Securities and Exchange Board of India Appeal no. 166 of 2005 will govern the other cases as well.  Since arguments were addressed in this appeal, the facts are being taken from this case.

   2.            Aastha Broadcasting Network Ltd. is the appellant before us.  It was incorporated in the year 1981 to carry on the business of investments and finance and in the year 2000 it passed a resolution to carry on multimedia activities and to operate satellite channels.  The share capital of the appellant is Rs. 10 crores divided into 1 crore equity shares of Rs. 10/- each.  7 lac shares of this company are listed on the Bombay Stock Exchange (BSE) and the remaining 93 lacs are still unlisted.  In the Annual General Meeting held on 16.5.2000 the appellant decided to issue 93 lac shares out of which 51 lacs were to be allotted to its promoter group and 42 lacs to other entities.

   3.            The Securities and Exchange Board of India ((for short “the Board”) investigated into the scrip of the appellant for some alleged violation of the Regulations and guidelines issued by it under the Securities and Exchange Board of India Act, 1992 (hereinafter called “the Act”).  During the course of the investigation it transpired that the shares allotted by the appellant had been dematted without the listing permission from the Stock Exchanges.    The investigations also revealed that there was re-routing of the funds for the allotment and that the money which originated from the appellant company was recycled through different layers of related entities.  The Board found that there was a prima facie case against the appellant for non-receipt of full consideration money in regard to the allotment of shares in question and off-loading of unlisted shares in the market.  The Board by its order dated 15.1.2004 prohibited the allotees and other entities to whom the shares had been transferred from buying, selling or dealing in securities of the company till further orders.  The effect of this interim order was that the shares allotted by the appellant on preferential basis were frozen.

   4.            After the investigations were complete, a notice dated 6.8.2004 was issued to the appellant and 39 other entities calling upon them to show cause  why suitable directions under Sections 11(4)(b) read with Section 11 and 11B of the Act and Regulations 11 and 13 of the Securities and Exchange Board of India (Prohibition of Fraudulent & Unfair Trade Practises relating to securities market) Regulations, 2003 (for short “the Regulations”) be not issued to them prohibiting/debarring them from buying, selling and dealing in securities.  Five charges were levelled against the appellant.  Since we are concerned with only two of them, we need not refer to the other three which had not been proved during the course of the enquiry.  The two main charges against the appellant were (i)  it had not disclosed the details of the monies utilised by it out of the preferential issue in its balance sheet for the year 2000-2001 thereby it violated clause 13.5A of the Guidelines issued by the Board.  (ii)  the appellant and 39 other entities to whom notice had been issued had violated Regulations 5(1) and 6(a) of the Regulations by circulating and recirculating the money amongst its group of entities while making the preferential allotment.  The allegation was that the appellant company had received only a sum of Rs. 2.83 crores for the allotment of shares whereas it had issued shares worth Rs. 9.30 crores through the process of recirculation.

The appellant company filed its reply denying all the allegations including the aforesaid two charges.  On a consideration of the entire material on record including the replies furnished by the appellant and its entities, the Board found that there had been no disclosure by the appellant company regarding the utilisation of the preferential issue proceeds nor had the details of the unutilised monies been mentioned in its balance sheet.  The Board, therefore, concluded that Clause 13.5A of the Guidelines issued by it had been violated.  The Board also found that Regulations 5(1) and 6(a) read with Regulations  2(1)(c) and 3 of the Regulations had been violated by the appellant as it recirculated the money at the time of making the preferential allotment.  Several instances have been referred to by the Board in the impugned order to show how the same money was subjected to several rounds of circulation through its own entities or other companies at the time of allotment.  The appellant company was confronted with these instances and it had no satisfactory explanation.  The Board also found that most of the preferential allotees had directors which were common and related to the directors of the appellant company.  The appellant and the entities had accounts in the same branch of a few banks with a view to facilitate quick movement/disbursement of funds.  At this stage it may be useful to refer to the findings recorded by the Board in this regard which are in paragraph 15.6 of the impugned order and the same reads as under:-

“15.6. The striking common feature in terms of common address, common directors, common bank accounts at the same branch are neither fortuitous nor accidental, but by design in a sordid nexus of complicity and control. I have also seen from the investigation report that shares allotted on a preferential basis by Aastha has been subscribed to by entities belonging to the Aastha group to the extent of 51 lakhs shares and another 42 lakhs shares has been subscribed to by other entities. Aastha had received only a sum of Rs. 2.83 crores as against the issue size of Rs. 9.3 crores. The balance sum of Rs.6.47 crores have been mobilized through recirculation of funds by the company involving layers of related entities. In effect, only a sum of Rs. 3.04 per share has been received as against the issue price of Rs. 10 per share. This acted as a fraud against the existing shareholders of the company and the other investors in the market.”

   5.            In view of the foresaid findings,  the Board by its order dated 6.9.2005 prohibited the appellant company and other entities from buying, selling and dealing in securities and accessing the capital market till 14.1.2007.  It further directed that the shares of the appellant company which had been frozen by order dated 15.1.2004 shall continue to remain frozen till the said date.  It is against this order that the present appeals have been filed.

   6.            We have heard the learned counsel for the parties and are of the view that the appeal deserves to be dismissed.  The Board in the impugned order has referred to various circuitous methods adopted by the appellant company at the time of the allotment of preferential shares to its entities.  The learned senior counsel appearing on behalf of the appellant very fairly conceded that those transactions had been entered into between the company and its entities but contended that even though the company did not get the proceeds  of the preferential allotment of shares in the year 2000-01 it received the entire amount in the following year i.e. year 2001-02 and therefore there was no fraud or manipulation resorted to either by the appellant company or by any other entity.  He also urged that the quantum of penalty imposed by the Board was too harsh and not commensurate with the gravity of the irregularity, if any, found by the latter.  Having given our thoughtful consideration to the arguments advanced by the learned senior counsel on behalf of the appellant, we are unable to accept the same.  The fact that there was manipulation in the circulation of money at the time of allotment is clear from the instances quoted in the impugned order which have not been disputed by the appellant. For instance, CMM Ltd. made a payment of Rs. 25 lacs to the appellant company on 15.7.2000.  It may be mentioned that the previous name of the appellant was CMM Ltd. which was subsequently changed and therefore this transfer by CMM Ltd. to the account of the appellant company was a transfer from one account to the other by the same entity.  Having received  the amount the appellant transferred the same to Sunrise Movies on the same day.  Sunrise Movies transferred the same amount on 17.7.2000 to Cheneena Impex.  Cheneena Impex then paid this amount (Rs. 25 lacs) to the appellant on 18.7.2000 and shares worth this amount were allotted to it.  These transactions and transfers were admitted by the learned senior counsel appearing for the appellant.  These transactions clearly indicate that money which originated from the appellant company came back to it within a span of three days and in the process shares were allotted to Cheneena Impex.  It is not necessary for us to find out whether Cheneena Impex was an entity of the appellant or not.  There are several other similar instances which have not been disputed.  In view of these specific instances referred to by the Board we have no hesitation to hold that the funds were rotated through intermediaries only as name lenders and that the company received only a meagre sum of Rs. 2.83 crores as against the issue size of Rs. 9.3 crores.   In this view of the matter, the Board was right in holding that the appellant company played a fraud on the existing investors of the company who held 7 lac shares and that the investors in the market were led to believe that the preferential allotment was successful.  This in turn would have increased the demand for the shares of the appellant company and would have resulted in defrauding the innocent investors had the Board not passed the interim order on 15.1.2004 prohibiting the appellant and its entities from buying, selling or dealing in scrips.

   7.            As regards the other charge regarding non-disclosure of the details of the monies utilised by it out of the preferential issue in its balance sheet, the learned senior counsel did not seriously challenge the correctness of the findings recorded by the Board in this regard.  He however, contended that even though the guidelines issued by the Board stood violated, the violation was only technical and did not warrant such a stringent punishment so as to debar the appellants and its entities from buying, selling or dealing in securities and accessing the capital market till 14.1.2007.   It is true that the company did not furnish the details in its balance sheet in the year 2000-01 and even if the money was received in the following year, there was a violation of the Guidelines and coupled with the findings recorded on the other charge we do not think that the appellant is entitled to any relief.

   8.            In the result, the appeal fails and the same stands dismissed leaving the parties to bear their own costs.

 

Justice N.K. Sodhi Presiding Officer

C. Bhattacharya Member

R.N. Bhardwaj Member

 

 

 

 

 

 

 

 

6.2.2006