BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA
Coram: Dr. T. C. Nair, Whole Time Member
Name of the noticee : Shri Ashwin S Mehta
Date of Hearing : 17-07-2006
Appearance of parties
For Noticee : Shri Surendra Kumar Jain, Counsel for noticee
For SEBI : Shri P K Bindlish, General Manager
Shri Pradip Bhowmick, Manager
DIRECTIONS UNDER SECTION 11(4)(b) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 AGAINST SHRI ASHWIN S MEHTA, IN THE MATTER OF DEALING IN THE SCRIP OF WESTERN PROJECTS LIMITED
WTM/TCN/ID3/ 101/02/2007
1.0 BACKGROUND
1.1 This order is directed on Shri Ashwin S Mehta (herein after referred to as the ‘noticee’). The allegation against the noticee was that he on 07-12-2001 proposed to acquire 17.5% of the shares of Western Projects Limited (herein after referred to as ‘WPL’) at Rs. 3/- per share and filed an application with the Securities and Exchange Board of India (herein after referred to as ’SEBI’) for exemption from making a public announcement under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (herein after referred to as ‘SAST Regulations’). The noticee had submitted among others that since there were only 60 share-holders in WPL, the cost of making an open offer of 20% would be costly and would substantially increase the cost of acquisition of the shares of WPL. Accordingly, the noticee sought exemption from SEBI in making an open offer. The application was scrutinized by the Take Over Panel of SEBI which recommended exemption subject to the fulfillment of certain conditions mentioned therein. The noticee had represented that the shares of WPL were frequently traded and since it was frequently traded, the offer price of Rs.3 per share of WPL was justified under the provisions of SAST Regulations. But investigations had revealed that the shares of WPL were listed in the Calcutta Stock Exchange (CSE) and were traded only for 6 days and except the said period there was no active trading in the said scrip for the years 2000 to 2002. However, exemption was not granted by SEBI and his application was rejected, as the same was not justified.
1.2 The noticee was alleged to have mislead SEBI by claiming that the shares were frequently traded and tried to escape from the possibility of making the offer by considering the book value of the share, which was Rs.58/-. It was also alleged that the noticee along with Shri Vishal J Shah (also a Director of WPL), Proprietor of M/s. Vishal J Shah and Co., member, CSE had conspired to mislead SEBI and misrepresent that the shares of WPL are frequently traded and tried to take advantage of the trade price in comparison with the book value price which was much higher than the traded price and thus was alleged to have violated the provisions of Regulation 4(b),(c) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities) Regulations, 1995. In view of the aforesaid allegations it was felt necessary to enquire into the said allegations.
2.0 SHOW CAUSE NOTICE AND ITS REPLY
2.1 In order to enquire into the allegations leveled against the noticee, a Show Cause Notice dated 06-11-2003 was issued to the noticee under Section 11(4)(b) and Section 11B of the SEBI Act, 1992 read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. The aforesaid show cause notice informed the noticee of the charges against him. The show cause notice required the noticee to show cause as to why suitable directions including issuing such directions debarring him from accessing the securities market and prohibiting him from buying and selling in securities for a specified period should not be issued for the alleged contraventions of the relevant regulations. The noticee was further required to submit his reply together with supporting documents within 21 days from the date of receipt of the notice.
2.2 The noticee replied to the show cause notice vide his letter dated 31-12-2003 wherein he had put forth his submissions. The noticee was also issued a notice for hearing dated 05-12-2003 requiring him to appear before the erstwhile Whole Time Member, SEBI and the hearing was scheduled for 18-12-2003. I also note that the noticee had requested for inspecting the documents relied on in the case and that SEBI by letter dated 08-01-2004 had agreed to the request of the noticee and the noticee was intimated that he could inspect the documents on 14-01-2004. On the said date the noticee was represented by his agents M/s. Deepak Shah and Associates, Chartered Accountants who had inspected the documents. A notice for hearing dated 21-01-2004 was issued to the noticee wherein he was advised to attend a hearing before the erstwhile Whole Time Member, SEBI on 09-02-2004. This was subsequently postponed to 12-02-2004 on the request of the noticee. As the Whole Time Member in charge of the proceedings had resigned thereafter it was not possible to conclude this enquiry proceeding. Subsequently when the case was referred to me, a notice dated 16-05-2006 was sent to the noticee requiring him to appear before me for a hearing which was scheduled for 15-06-2006. On request from the noticee the date of hearing was re-scheduled to 17-07-2006. On the said day, the noticee represented by Shri Surendra Kumar Jain, Advocate appeared before me and made his submissions. I also note that the noticee also submitted his written submissions dated 15-07-2006 for consideration.
3.0 ISSUES FOR CONSIDERATION
3.1 I have perused the investigation report, the show cause notice, reply and the submissions of the noticee. The issues that arise for consideration in the present case are:
i) Whether the noticee had conspired with Shri Vishal J Shah in creating some artificial trades just to by-pass the provisions of SAST Regulations?
ii) Whether the noticee had violated the relevant provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995?
3.2 I note that the noticee had made an application before SEBI for grant of exemption in making a public announcement for his proposed acquisition of 83,740 shares of WPL which constituted about 17.57% of the paid up capital of the said company. The application was made to SEBI under Regulation 4(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 seeking exemption from the applicability of Regulations 10 and 12 of the said Regulations. In the application the notice had stated that he proposed to acquire 83,740 shares of the target company constituting 17.5% of its paid up capital at the rate of Rs. 3/-per share. I note that the Take Over Panel of SEBI wanted a clarification as to the following:
a) Whether the shares of the target company (WPL) are frequently or infrequently traded in terms of the Regulations, taking the date of the application as the date of reference.
b) Justification that the proposed offer price of Rs.3.50/- per share is in terms of Regulation 20(6) taking into consideration all the parameters laid down under sub-regulations (2) or (3) of Regulation 20 as may be applicable.
c) How the proposed offer price of Rs.3.50/- per share is in conformity with the provisions of the Regulations?
3.3 The noticee in his clarification had submitted that the shares shall be deemed to be frequently traded if the date of his application for exemption (07-12-2001) be taken as the date of reference. This was based on the total annualised trading turnover of shares of the target company on the Calcutta Stock Exchange which was more than 2% of the total number of shares listed during the preceding six calendar months i.e. June, 2001 to November, 2001 as required by the SAST Regulations. The noticee also submitted that the average weekly high and low of the closing prices of shares of the target company at Calcutta Stock Exchange during 26 weeks previous to the reference date worked out to be Rs.3.18/-
3.4 I also take note that during the period from April 2000 to March 2002, trading has taken place only during May 2001 to September 2001. It is noted that the trading had taken place prior to the date of application filed by the noticee seeking exemption from SEBI. Trades in the scrip of WPL happened only on 6 days and a total of 10,000 shares were traded. It is important to note that all trades were executed (both buying and selling) by M/s. Vishal J Shah and Co. Shri Vishal J Shah, the proprietor of this broking entity was also a director in WPL. The trades appeared to have been executed only to aid the noticee to claim that the shares of WPL were liquid and that he can take the benefit of Clause (d) of Regulation 20 (2) of the SAST Regulations, which prescribes that (prior to its amendment) the minimum offer price shall be the highest of the average of the weekly high and low of the closing prices of the shares of the target company as quoted on the stock exchanges where the shares of the company are most frequently traded during the 26 weeks preceding the date of public announcement.
3.5 I also note that the explanation (i) to Regulation 20(3) of the SAST Regulations prior to its amendment reads as below:
Explanation (i) read as follows:
“(i) For the purpose of this clause, shares shall be deemed to be infrequently traded if on the stock exchange, the annualised trading turnover in that share during the preceding six calendar months prior to the month in which the public announcement is made is less than two percent. (by number of shares) of the listed shares. For this purpose, the weighted average number of shares listed during the said six months period may be taken.”
Thus facts and circumstances of the case would create an impression that the trades were executed only to aid the noticee to circumvent the relevant provisions of the SAST Regulations and be benefited by the low price of the scrip when compared to its book value.
3.6 The noticee in his reply has submitted that his ‘opinion’ that the shares were frequently traded cannot constitute a serious offence warranting directions as specified in the show cause notice. It is also submitted that since his application seeking exemption was rejected by SEBI, no cause of action would lie on those grounds. He has also submitted that no harm was caused to any share holder of WPL and that the allegations in the show cause notice were based on surmises and thus baseless.
3.7 It is noted that the noticee had relied on the trades executed during the period from May 2001 to September 2001 in his clarification submitted to SEBI when he was called for. The trades executed in a scrip prior to the date of filing the application by the noticee, which according to the concerned stock exchange was highly illiquid is also to be noted. Besides, prima facie the trades appear to be creating artificial volumes in the scrip of WPL. All these create a strong suspicion in the minds that the noticee was behind those trades. However, the investigations do not reveal any nexus between the noticee and Shri Vishal J Shah and various clients who dealt in the scrip. Thus the benefit of doubt may be given to the noticee. Hence, I am of the view that it would not be appropriate to pass directions against the noticee in the absence of proper and concrete evidence.
4.0 ORDER
4.1 I, therefore, in exercise of powers conferred upon me under Section 19 of the SEBI Act, 1992 hereby direct that the proceedings under Section 11 of the SEBI Act, 1992 are hereby dropped against Shri Ashwin S Mehta in the matter of his dealing in the scrip of WPL.
DATE: 23.02.2007 T C NAIR
PLACE: MUMBAI WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA