ORDER
ORDER UNDER RULE 5(1) OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF TOUBRO INFOTECH INDUSTRIES LTD.
1.0. The undersigned has been appointed as the Adjudicating Officer by the Securities and Exchange Board of India in terms of an order dated 27 October, 2003 to inquire into and adjudge under Section 15 I (ii) of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘the said Act’) the failure by Toubro Infotech Industries Ltd. and its directors to comply with order of Chairman, SEBI dated 25.03.03 passed under Section 11B of the said Act, directing them to refund the money raised in the public issues for secured debentures which opened on 1st September, 1999 and 1st April, 2000 respectively.
2.0. Before I proceed to deal with the case, it would be pertinent to make a reference to the relevant provisions of the said Act as alleged to have been contravened by Toubro Infotech Industries Ltd. (hereinafter referred to as “TIIL”)
Section 11B - Power to issue directions
Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,-
(i) in the interest of investors, or orderly development of securities market; or
(ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market; or
(iii) to secure the proper management of any such intermediary or person, it may issue such directions,-
(a) to any person or class of persons referred to in section 12, or associated with the securities market; or
(b) to any company in respect of matters specified in section 11A as may be appropriate in the interests of investors in securities and the securities market.
Section 15HB - Penalty for contraventions where no separate penalty has been provided
Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.
3.0. Brief Facts:
After being so appointed as the Adjudicating Officer, as per the procedure laid down in SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as : “the SEBI Rules”), notices in accordance with Rule 4 of the SEBI Rules were served on M/s. Toubro Infotech and Industries Ltd. and the directors vide letters no. Adj/16/RRB/2002-NRO all dated December 8, 2003 through registered post to show cause, within 14 days as to why an enquiry should not be held against them for the alleged non-compliance with orders passed under Section 11 & 11B of the said Act. No reply to the said show cause notice was received. Vide letter of even no. dated February 05, 2004 they were given a personal hearing on February 16, 2004. They were also intimated that they may appear for hearing, either personally or through their lawyer or other authorized representative before the Adjudicating Officer at Block No.1, Rajendra Bhawan, Rajendra Place, New Delhi-110008. They were also advised that if they wished to produce any documents or evidence which they considered relevant to the enquiry they should bring the same with them on the said date of hearing.
On February 16, 2004 Ms. Mukta Datta, Advocate represented Mr. S L Baluja and submitted that he had resigned from the company w.e.f. 10.04.01 and had not associated himself with the capital market since his resignation. Shri Nirnimesh Dube, Advocate represented the company and the Managing Director and sought two weeks adjournment for putting certified copy of SAT order on record. The same was granted and the hearing was rescheduled for 27.02.04. Subsequently a letter dated February 16, 2004 was received through post submitting, inter-alia, that the adjudication proceedings may be kept in abeyance until the disposal of their appeal by SAT, against SEBI order dated 25.03.03.
On 27.02.04, Shri Ranjan Deb, Shri Pratik Jalan and Shri Surender Dubey represented the company and again submitted that in view of interim order dated February 20, 2004 vide which SAT had stayed the directions of SEBI directing the company to refund monies, till the final disposal of the appeal, it may not be appropriate to proceed with the present adjudication proceedings.
On 01.11.04 an application was filed on behalf of the company and its directors that in view of the final order dated 19.07.04 passed by SAT, the adjudication proceedings may be dropped.
4.0. Findings
- A perusal of the order dated 19.07.04 passed by SAT reveals that in its judgment Hon’ble SAT had framed the following 5 factual/legal issues for its determination:
A. Whether issue of secured debentures by the company was a private placement or public issue.
B. Whether SEBI has power to issue guidelines without laying them before Parliament as required u/s 31 of the Act.
C. Whether in light of the order of Hon'ble Supreme Court in Civil Appeal No. 9738/03 wherein the debenture holders were allowed to convert their debentures into preferential shares, order of SEBI survives.
D. Whether there was any grievance from the debenture holders (against the company with respect to non-compliance of the formalities of a public issue).
E. Whether SEBI has power to restrain persons from accessing the securities market prior to the introduction of Section 11(4).
- In the present proceedings the issue for adjudication is the failure of the company and its directors to refund the money raised in the public issues for secured debentures by which they had made themselves liable for further action in terms of Section 15HB of the SEBI Act, 1992. For these proceedings, I am only referring to the relevant portions of the said order.
- On the first issue, SAT referred to the provisions of English Companies Act and dictionary meaning of the word 'subscription' and examined the language used in the letters of offer circulated by the company. SAT further noted that there were no investor complaints (the complaints mentioned by SEBI in its order were received from the persons enquiring about becoming an agent of the company) and also recorded that the company could have employed agents with regard to private placement of shares in light of the provisions of Section 76(1) (b) (iii) of the Companies Act. Hon’ble SAT held that the material placed on record / relied upon by SEBI, can not be the basis of concluding that it was a 'public issue'. SAT further held that in order to treat an issue as being made to public it must be established that there was a calculated offer on the part of the company to bring in an uninvited guest to subscribe to the debentures and the persons other than those receiving the offer or invitation had in fact actually subscribed to the offer.
- Regarding third issue, while referring to the order of Hon'ble Supreme Court in Civil Appeal no. 9728/2003 whereby all the debenture holders were directed to be allotted preferential shares, and also referring to the submissions from both the parties SAT set aside the order of SEBI in so far as directing the company to refund the money on the ground that this direction was not enforceable in view of the order of Supreme Court.
- In the facts and circumstances of the case, Hon’ble SAT also reduced the period of debarment from five years to the period already undergone by the appellants.
In my view, SAT’s conclusion that the issue of debenture was in the nature of ‘Private Placement’ and not a ‘Public issue’ was a mixed question of fact and law and such determination depends upon the appreciation of evidences, submissions made and approach of a court which can decide either way in the given facts and circumstances of the case. Since no appeal under Section 15Z of SEBI Act was filed by SEBI, the said finding of Hon’ble SAT has become final and binding.
As already held by the Hon’ble SAT that all the debenture holders of the issue in question have been allotted preferential shares, as majority of the debenture holders had voted in favor of this proposal in the proceedings before the Hon’ble Delhi High Court, which fact was subsequently confirmed by the Hon’ble Supreme Court, the refund to the debenture holders in terms of SEBI’s impugned order is not possible.
In the whole process, the only missing point is, that presumably, at no point of time the fact of SEBI’s directions having been issued against the company were brought to the notice either of the Hon’ble Delhi High Court or the Hon’ble Supreme Court by the company. This was a serious concealment of a very relevant fact which makes the credentials of the company doubtful and motives suspicious. In case the directions of SEBI, which is a regulator of the securities market were brought before the courts, there is a possibility that the order would have been different.
However, presently, I have to consider as to whether the company and its directors be penalized for the failure to refund. It is seen from the order of SAT that even the counsels of both the parties agreed that in view of the order of Supreme Court, the direction of SEBI for refunding the monies to the debenture holders can not be implemented. It is a fact that all the debenture holders have been allotted preferential shares of the company. Further, the company has stated on an affidavit before SAT that all the grievances brought to the notice of SAT by SEBI were fully satisfied and that no investor complaint was pending as on that date. Further, an undertaking that future complaint, if any, will be redressed expeditiously was taken with an affidavit by Hon’ble SAT. Thus, the main object of SEBI regarding investor protection may also be considered to have been achieved.
5.0. Keeping in view the provisions of the SEBI Act and the order of SAT, I am of the view that the cause of action in the present proceedings does not survive any more and I hereby discharge the company M/s. Toubro Infotech Industries Ltd. and its directors namely Shri Kanwardeep Singh, Shri Ravinder Singh, Major Gurgeet Singh, Shri S L Baluja and Shri Sergio Coreno from the present proceedings.
(RAJ RANI BHALLA)
ADJUDICATING OFFICER
DATE: 31.01.05
PLACE: NEW DELHI