Adjudication order in respect of Sharp Industries Ltd., Shri Hasmukh Sheth, Shri Vinod Sheth and Shri Rajesh Sheth under Section 15 I of the SEBI Act read with Rule 5 of SEBI (Procedure for Holding Inquiry by Adjudicating Officer) Rules, 1995.
Whereas Securities and Exchange Board of India (SEBI) had conducted an investigation into the alleged irregularities in the trading in the shares of M/s Sharp Industries Ltd. (hereinafter referred to as Company), and into the possible violations of the provisions of the SEBI Act and various rules and regulations made thereunder.
Whereas it prima facie appeared to the Full Time Member of SEBI that the above mentioned company and its promoter/ director viz. Shri Hasmukh Sheth, Shri Vinod Sheth and Shri Rajesh Sheth have failed to provide information in response to summons issued under the SEBI Act and thereby made themselves liable for action under section 15 A (a) of the SEBI Act. Pursuant to this the Whole Time Member appointed the undersigned as Adjudicating officer vide order dated August 3, 2004 under Rule 3 of SEBI (Procedure for holding Inquiry and Imposing penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘said rules’) to enquire into and adjudge under Sec. 15 A(a) of the SEBI Act for the alleged violations by the above mentioned entities.
NOTICE :-
Pursuant to the aforesaid appointment the repeated show cause notices under Rule 4 (1) of the said rules were issued to the aforesaid entities as per the details below
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Name
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Notice sent on
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M/s Sharp Industries Ltd.
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August 25, 2004
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Shri Hasmukh Sheth
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August 25, 2004
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Shri Vinod Sheth
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August 25, 2004
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Shri Rajesh Sheth
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August 25, 2004
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Shri Hasmukh Sheth
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September 21, 2004
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Shri Vinod Sheth
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September 21, 2004
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Shri Rajesh Sheth
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September 21, 2004
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M/s Sharp Industries Ltd.
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October 8, 2004
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Shri Hasmukh Sheth
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October 8, 2004
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Shri Vinod Sheth
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October 8, 2004
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Shri Rajesh Sheth
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October 8, 2004
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REPLY :-
Reply to the aforesaid notices was received from the company vide letter dated November 24, 2004, but no reply was received from the directors mentioned above. However, the company in its reply mentioned that their reply is common for all the directors who have been served with the notice in this proceedings.
PERSONAL HEARING
The personal hearing in the matter was fixed on November 29, 2004 vide notice dated November 1, 2004. In reply to the notice the company informed vide letter dated November 24, 2004 that their reply dated November 24, 2004 may be considered as representation made in person and take the same into consideration.
In view of the above, I now deal with the submissions made by the company and its above mentioned directors (collectively referred as ‘company’ for the purpose of this adjudication) before me for the purpose of this adjudication.
BACKGROUND
The Whole Time Member, SEBI, in exercise of powers conferred upon him under Section 19 of the SEBI Act, appointed Shri PK Nagpal, Chief General Manager of SEBI, on 3rd October, 2003 to investigate into the affairs relating to buying, selling and dealing in the shares of M/s Sharp Industries Ltd.(SIL) and to submit a report to the Board.
Preferential Issue of the Company
In December 1999, the company in its AGM passed a resolution to allot 12 lac equity shares by way of a preferential issue to the promoters @ Rs.100 per share (Rs. 10/- face value and Rs.90/- premium). As per information obtained from BSE, Neminath was one of the preferential allottees and was to be allotted 250000 shares. The company vide its letter dated 25.3.00 applied to BSE for listing of the said shares received by the Exchange on 3.5.2002. However, as per BSE, the company did not complete the listing formalities and hence they kept the listing in abeyance.
As per SEBI Preferential Issue Guidelines, the price of the preferential allotment is a price not less than the higher of – (i) Average weekly high and low of closing prices of the related shares during 6 months preceding relevant date or (ii) Average of weekly high and low of the closing prices of shares quoted during 2 weeks preceding the relevant date. (Relevant date being a date 30 days prior to date on which meeting of general body of shareholders is held in terms of Section 81 (1A) of the Companies Act, 1956, to consider the issue. AGM was held on 28.12.99. Hence in this case the relevant date was 28.11.99. The trades during the last 2 weeks of November, 1999 were hence very crucial. Since the allotment was to be made to the promoters, they would have gained if the price of the scrip declined. However, the data indicates that the price of the scrip had steadily increased during this period. It is to be noted that Neminath had sold shares at Rs.48.41, a rate much lower than Rs.100/- (price as per preferential allotment) in the market.
It is alleged that the company has not responded to the repeated summons/reminders sent by SEBI for information with respect to the details such as when the company received the actual payment from the allottees, details like cheque nos., bank, statement of the bank account of company showing receipt of consideration, details of trading of the directors/associates in the scrip, etc. SEBI also issued summons to the directors to provide information and to appear in person. However, the above mentioned company as well as the directors have not co-operated with SEBI in this matter and no information has been provided.
After repeated reminders, it was informed by the company that it has now become a BIFR company. It is odd that the company which showed a net profit of Rs. 6.63 crore for 9 months period ended 31.3.00 and also issued fresh shares for Rs. 12 crore (details of these funds were not provided to SEBI by the company) has now become a BIFR company within a short period of time. However, annual reports of the company for subsequent years were not available for analysis. It is also alleged that the company was not filing any return with BSE also.
SEBI sought aforesaid information from the Managing Director of Sharp Industries Ltd. (SIL) vide letter dated 24.11.03. A reminder was sent on 10.12.03. However, the above mentioned company did not reply. Vide SEBI’s summons dated 19.12.03, the above mentioned company was asked to produce documents / information by 26.12.03 but no reply was received. Again vide summons dated 6.1.04 the above mentioned company was required to produce documents / details asked for by 12.1.04. In spite of these summons being received by the above mentioned company, they did not send any information. The Managing Director of SIL was summoned to appear in person on 20.2.04 vide summons dated 13.2.04 along with the information / documents. The above mentioned company vide its letter dated 19.2.04 informed that it would produce the documents in a week’s time. As there was no response, vide summons dated 4.3.04 the Managing Director of SIL was summoned again to appear on 10.3.04 but he failed to do so. The above mentioned company vide its letter dated 6.3.04 informed that its corporate office was shifted to Vasai and was passing through a severe financial crunch due to which junior and senior staff has left. Also that it has become BIFR company under Section 15 of SICA Act. The above mentioned company requested for additional time so as to reply to queries, but it never replied.
SEBI vide summons dated 14.6.04 summoned the Promoter / Directors of the above mentioned company namely Shri Hasmukh Sheth, Shri Rajesh Sheth and Shri Vinod Sheth to appear in person and to provide information. However, till date SEBI failed to receive any response to the said summons.
It is alleged that, the above mentioned company and its directors in spite of receiving all letters/ summons from SEBI have not supplied information / documents and thus have not co-operated with the investigation authority.
REPLY OF THE COMPANY
Sharp Industries Ltd. (hereinafter referred to as “SIL” or “Company) is a company incorporated under Company’s Act having its registered office at Waliv village, Vasai (Eas), district Thane. SIL has been carrying on business of manufacturing and selling of flexible laminates for packaging applications. SIL has two factories at Vasai district, Thane and at Waluj district Aurangabad both in the state of Maharashtra.
SIL was originally promoted in 1989 by S/Shri Ishwarlal Dang and Ranchodbhai Patel and was formed by amalgamation of two companies belonging to each of the families viz. Swift Packaging Pvt. Ltd. And Sharp Prints Pvt. Ltd.
In March 1990, SIL took over assets and liabilities of Angel Plastics Pvt. Ltd. A company promoted by the Dangs and Patels and having facilities for the manufacture of 2100 TPA of Multi-layer Co-extruded as Polypropylene (CPP) Film at Waluj, near Aurangabad.
In 1996 the current promoters led by Shri VInod Sheth acquired 30% stake from original promoters and thereafter acquired 21% through open public offer in line with the guidelines of SEBI takeover hold.
SIL has facilities for production of 5500 tons per annum of flexible packaging laminates at Vasai district Thane and facilities of production of 2100 t.p.a of cast propylene film, a raw material for packaging laminates at Waluj Industrial Estate, Aurangabad in Maharashtra. SIL has modern plants for support functions such as rotogravure cylinder making, packaging design and colour maging.
SIL’s plants for Rotogravure Cylinders is based on Filmless Electronic Engravind Technology and it is fully computerized and is equipped with electronic scanning and colour imaging facilities. SIL also has facilities for copper and nickel plating grinding of Rotogravure Cylinders wit Acigraf Equipment.
The Compnay’s plants operated with high level of capacity utilization of 82-85% till December 2000. the company enjoyed product approvals and continuous orders from prestigious clients like Hindustan Lever Ltd, Procter & Gamble, Dabur, Castrol, Perfetti, etc. The capacity utilization sharply deteriorated since year 2001 due to continuous losses eroding working capital of the company which in turn affected production of plants. The company’s sales during the year 2003 and the current year 2003 – 04 are mainly in the nature of jobwork sales due to complete erosion of working capital.
The sales of the Company declined from Rs. 144 crores for 18 months ended 21.12.2000 (annualized Rs.96 crores) to Rs. 53 crores in year ended 31.12.2001 due to recession in end user segments and unhealthy competition from unorganized sectors.
With a view to counter the recession market trends the company tried to introduce new products based on holographic lamination and printing technology. Substantial expenditure was increased on this new product development however the same could not materialize in terms of sales due to market not being ready to accept the new technology. As a result of the above the company incurred heavy losses in the year 2001. Losses gradually eroded the available resources and thereupon the company entered the vicious cycle of lower sales due to restricted availability of working capital that in time further increased the losses by wiping out the working capital resources. During the fifteen months ended March 2004 the company’s sales comprised mainly of job working i.e toll manufacturing for other flexible packaging company’s. In light of marginal capacity utilization the company incurred loss before interest and depreciation.
The company’s net worth was fully eroded by its accumulated losses as on December 2002 and accordingly as per the provisions of the Sick Industrial Companies Act, reference was filed with BIFR.
Owing to the depleting financial position two things happen simultaneously, firstly there was exodus of staff from the company and secondly post dated cheques issued to the creditors were bounced. This led unsecured creditors to file Criminal cases against the directors of the Company. With in a short period of time following criminal cases were filed in various courts across the country.
This practically led the promoters to shift their entire concentration from the Business to attending matters in the court. Further erosion in the working capital also led to closure of plants of the Company and labour issues also cropped up simultaneously. The Company was practically closed with no staff attending the work owing to threats form the unsecured creditors, routine visits of the policeman with regard to criminal cases. The promoters also shifted their operation to the plant, where also it became difficult on account of labour issues and strike by them. For almost a year the promoters were mostly operating from the home and concentrating on attending the legal issues arising on account of the poor financial position of the company. They were thus not able to attend to and comply with other legal formalities with regard to Registrar of Companies, Listing Agreement and also complaint from your office.
In the meantime Financial Institutions with the, introduction of the Securitization Act, started transferring their debts to Asset Reconstruction Company of India Limited (ARCIL) and with majority of the debts being transferred to ARCIL, Company approached ARCIL to work out a restructuring package for the Company an a scheme of arrangement was proposed with the Shareholders, Unsecured Creditors, Secured Creditors and Statutory creditors of the Company under Sec.391 of the Companies Act, 1956.
Application was moved before the Hon’ble High Court at Mumbai for granting of stay against all the pending cases against the Company and also to convene the meeting of the shareholders, creditors of the company. The High court was pleased to grant stay against the cases pending against the company and its promoters and this enable the promoters to start taking active action for the rehabilitation of the Company. A meeting as per the directions of the Court was held in October 2004. While the meeting of secured Creditors could not be convened on account of adequate quorum, the shareholders and Unsecured creditors have approved the scheme in majority. Copy of the scheme as proposed is enclosed and marked as Annexure-2.
From the above scheme it is apparent that On the sanction of this Scheme the Equity capital of the Company shall be written down by 95% of the existing paid up Equity Capital. Each share of Rs.10 each fully paid up shall be written down to Rs.0.50 paise. Accordingly the debts of the unsecured and secured creditors is to be restructured so that the operations of the company can be re-started smoothly. With the completion of the process, it is expected that the Company would re-start the operation from 2005-06.
From the above facts it is clearly evident that there were serious constraint with respect to the company thus diabling it from communicating to you earlier.
With regard to the specific requirement of your letter the details of person who were allotted shares is as per Annexure-3. The shares were allotted for cash. The Company had made initial listing application to the Stock Exchange which had sought further details, however due to reasons stated herein above no further communication was made by the Company to the stock exchange and accordingly the shares are yet to be listed at the Stock exchange. Since the shares have been listed no dematerialization has been carried out by the Company.
We would further like to state that our family or associates had not bought or sold shares any substantial shares save and except some normal trading in shares of Sharp Industries Limited during the period April 1999 to September 2000.
Considering what has been stated herein above and circumstances beyond the control of the Company and its promoters we would request you to not to take any action against the company or its promoters under Sec.11 of the SEBI Act, 1992.
We are trying to depute a authorized representative to appear on behalf of the company and all its directors to whom the notice has been send on the 29th day of September 2004 at 2.30 p.m. as required by your office. If we are unable to do so please consider the above reply as representation made in person and take the same into consideration.
The above reply is common for all the directors who have been served with the notice dated 1st November 2004.
FINDINGS
It has been observed that SEBI was carrying on investigations into the affairs of the company relating to buying, selling and otherwise dealings in the shares of M/s Sharp Industries Ltd. During the course of investigation SEBI issued various letters and summons to the company and its above promoter / directors.
The details of the said summons issued u/sec 11 C (2) of SEBI Act are as under :-
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Sr. No.
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Name
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Summon
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1
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M/s Sharp Industries Ltd.
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December 19, 2003
January 12, 2004
February 13, 2004
March 4, 2004
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2
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Shri Hasmukh Sheth
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June 14, 2004
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3
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Shri Vinod Sheth
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June 14, 2004
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4
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Shri Rajesh Sheth
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June 14, 2004
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Vide aforesaid summons company was repeatedly asked to furnish details of funds received, bank statements, etc. but no such details were ever provided to SEBI. I observe that these information were vital in nature and was necessary and required for the purpose of investigation. The company has in their reply before me tried to furnish some details which is not relevant at this point of time, as this is a separate proceedings i.e. Adjudication and not the investigation. The company has taken certain other defences for non – furnishing of information in compliance of a statutory summons, such as excessive litigation on account of bouncing of cheques, closure of business, losses etc which are not at all convincing to me. The conduct of the company has thus been non – co -operative and against the provisions of law. This is further evident from my experience in this adjudication proceedings as well. During the adjudication proceedings notices were sent from August 2004 onwards several times to the company and its promoters / directors but only in November 2004 the company could file a reply vide letter dated November 24, 2004. The company and its above promoters / directors also did not attend the personal hearing. The said non compliance of the summons by not furnishing the documents/ information is in violation of Section 11 C(2) of SEBI Act, 1992 and the company is liable for adjudication under Section 15 A (a) of SEBI Act, 1992.
In view of the above it is observed that the company has violated provisions of section 15 A (a) of SEBI Act requiring the company to furnish information and documents. The violations in this regard attracts the penalty as prescribed under section 15 A (a) of the SEBI Act and in order to adjudge the quantum of penalty, I have to consider the following factors :
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 regards the disproportionate gain or unfair advantage there are no quantifiable figures available with respect to the default observed on the part of the company and its directors. There are also no figures or data to quantify the amount of loss caused to an investor or group of investors as a result of the default. However, since there has been deliberate non – compliance of the statutory summons issued u/sec 11 C (2) of SEBI Act, by the company and its directors, thereby causing interference in the statutory investigation process, I consider that the monetary penalty needs to be imposed as a corrective measure. I find the said violation as repetitive in nature since number of times summons were issued to company which were not complied by it.
I have also considered the submission of the company that it was referred to BIFR but this defence has got no merit since responding to summons has got no financial implications.
ORDER
The submissions of the company have been considered and dealt in detail as above and in view of the findings arrived at, I consider it to be a fit case for imposition of penalty under sections 15 A (a) of the SEBI Act, 1992. In view of the same and in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with, Rule 5 of the said Rules, I hereby impose penalty as under :
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Sr. No.
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Entity
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Amount of Adjudication penalty
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1
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M/s Sharp Industries Ltd.
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Rs.2,00,000/-
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2
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Shri Hasmukh Sheth
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Rs.50,000/-
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3
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Shri Vinod Sheth
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Rs.50,000/-
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4
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Shri Rajesh Sheth
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Rs.50,000/-
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It is clarified that the above directors are jointly and severally liable on behalf of the company, with respect to the penalty imposed on the company.
The aforesaid penalty shall be paid 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 the Chief General Manager of SEBI, Investigation Department, ID-1 at SEBI, Mittal Court, B- Wing, 1st Floor, 224 Nariman Point, Mumbai 400 0021.
Date : January 31, 2005.
Place : Mumbai
AMIT PRADHAN
ADJUDICATING OFFICER