IN THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
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Date of Hearing
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24/11/2004
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Date of Decision
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12/01/2005
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Appeal No: 75 of 2004
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Appellant – Represented by:
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Ranjit Mohan Dhuru
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Mr. Aspi Chinoy, Sr. Advocate with Mr. Vinay Chauhan, Advocate
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Shri S.K.Sen, Sr. Advocate with Mr. V.N. Shingnapurkar, Advocate
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Appeal No: 75A of 2004
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Appellant – Represented by:
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Ravindranath Umakant Malekar
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Mr. Aspi Chinoy, Sr. Advocate with Mr. Vinay Chauhan, Advocate
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Shri S.K.Sen, Sr. Advocate with Mr. V.N. Shingnapurkar, Advocate
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Appeal No: 75B of 2004
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Appellant – Represented by:
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Charuhas Vasant Khopkar
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Mr. Aspi Chinoy, Sr. Advocate with Mr. Vinay Chauhan, Advocate
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Shri S.K.Sen, Sr. Advocate with Mr. V.N. Shingnapurkar, Advocate
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Appeal No: 75C of 2004
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Appellant – Represented by:
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Ashutosh Humnabdkar
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Mr. Aspi Chinoy, Sr. Advocate with Mr. Vinay Chauhan, Advocate
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Shri S.K.Sen, Sr. Advocate with Mr. V.N. Shingnapurkar, Advocate
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Appeal No: 75D of 2004
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Appellant – Represented by:
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Sandip C Save
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Mr. Aspi Chinoy, Sr. Advocate with Mr. Vinay Chauhan, Advocate
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Shri S.K.Sen, Sr. Advocate with Mr. V.N. Shingnapurkar, Advocate
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Appeal No: 75E of 2004
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Appellant – Represented by:
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Promod Broota
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Mr. Aspi Chinoy, Sr. Advocate with Mr. Vinay Chauhan, Advocate
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Shri S.K.Sen, Sr. Advocate with Mr. V.N. Shingnapurkar, Advocate
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Appeal No: 75F of 2004
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Appellant – Represented by:
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Nitin Kashinath Shukla
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Mr. Aspi Chinoy, Sr. Advocate with Mr. Vinay Chauhan, Advocate
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Shri S.K.Sen, Sr. Advocate with Mr. V.N. Shingnapurkar, Advocate
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Appeal No: 75G of 2004
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Appellant – Represented by:
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Mukul Suryakant Dalal
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Mr. Aspi Chinoy, Sr. Advocate with Mr. Vinay Chauhan, Advocate
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Versus
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Securities & Exchange Board of India
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Respondent- Represented by
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Shri S.K.Sen, Sr. Advocate with Mr. V.N. Shingnapurkar, Advocate
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CORAM
Justice Kumar Rajaratnam, Presiding Officer
Dr. B. Samal, Member
N.L. Lakhanpal, Member
Per: N.L.Lakhanpal, Member
1. The appeals were taken up for final disposal through this common order with the consent of parties.
2. The appeals have been filed against the order dated march 8, 2004 passed by the respondent, Securities and Exchange Board of India, prohibiting the appellants from buying, selling or dealing in securities for a period of one year. The order has been passed by Shri G.N. Bajpai, Chairman, SEBI, in exercise of powers conferred on him under Section 4(3) read with Section 11B of SEBI Act, 1992 and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. The appellants have been charged with violation of Regulation 4(a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 by colluding with the “Ketan Parikh group entities” in creation of artificial market and volumes in the scrip by cornering tradable securities in the market” and having thereby caused artificial shortage of shares to induce investor interest in the scrip. Regulation 4(a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 provides that : -------
“Regulation 4:- No person shall
(a) Effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person;
(b) indulge in any act which is calculated to create a false or misleading appearance of trading on the securities market;
(c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions;
(d) enter into a purchase or sale, of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities;”
3. The appellants, who are stated to be information technology professionals, are promoters of Aftek Infosys Limited – a private limited company incorporated on March 25, 1986. It was converted into a public limited company on October 28, 1994. The company made a public issue of 37,30,000 equity shares of the face value of Rs. 10/- each in June, 1995 and the public issue was oversubscribed 66.12 times. Out of this issue 10,00,000 equity shares of Rs. 10/- each for cash at par were allotted to Industrial Development Bank of India (IDBI) as venture capital. The subscription agreement was entered into between the promoters and the IDBI in terms of which the promoters, namely, present appellants, had the first right of refusal for buy back of shares whenever IDBI decided to sell the same after a lock-in period of 3 years. In January, 1999 the company raised additional funds through private placement of 15,00,000 shares of the company at a price of Rs. 36.50 per share thus raising its paid up capital to Rs. 5,74,07,000. For this preferential issue the company had appointed M/s. Triumph International Finance (India) Limited (Triumph for short) as lead managers. Things were going on smoothly for the company until August 26, 1999 when IDBI wrote to the promoters expressing its desire to disinvest the shares held by it at market related prices in terms of the subscription agreement dated April 5, 1995. The promoters agreed to buy back the shares and offered a purchase price of Rs. 150/- per shares “taking into account factors such as SEBI formula for fixing of issue price in preferential allotment of shares, the need for promoters to retain control and the interest of the promoters, the shareholders and the company, etc.” However, by its letter dated November 12, 1999 IDBI wrote to the company and its directors, the present appellants, to purchase the shares at a price of Rs. 477.75 which was the closing price of the company’s hares on the bourses on November 12, 1999 by November 15, 1999 and to pay the advance amount of 10% of the total consideration aggregating Rs. 4,29,97,500/- by 5.00 p.m. on November 15,1999 and the balance of about Rs. 39 crore within a week thereafter failing which IDBI would be free to sell these shares in the market or otherwise. IDBI also filed a caveat in the Delhi High Court on November 15, 1999. According to the appellants they were taken by surprise by these developments and suspected a hostile takeover attempt by some competitors with the help and connivance of IDBI. In order to prevent such an eventuality the appellants approached Triumph who had helped them in the private placement of 15,00,000 shares of the company in January, 1999. The Triumph and its related entities, described in the impugned order as KP group entities, agreed to provide necessary finance and entered into financing-cum-option agreements with the promoters whereby the financiers had the option to purchase these shares at a price of Rs. 477.75 per share and the option was to be exercised by 15th December, 1999. SEBI’s case against the appellants is that by entering into these finance-cum-option agreements with the “KP group entities”, the appellants enabled the later to corner the stocks thereby causing artificial shortage to induce investor interest in the scrip. The price of the scrip which was Rs. 477.75 on November 12, 1999 increased to Rs. 1108.2 on December 3, 1999 and further to Rs. 1,815 on 15/12/1999, the date on which the option was to be exercised. SEBI’s case in para 8 of the impugned order seems to be that these finance-cum-option agreements were a mere facade and the real purpose of these agreements was to transfer the shares being offered by IDBI to “Ketan Parikh entities”. SEBI has come to this conclusion mainly on the ground that these finance-cum-option agreements were heavily loaded in favour of the “KP entities” which no prudent person would have entered into. The appellants, on the other hand, have argued that the situation was forced on them; that so called KP entities were SEBI approved market intermediaries at the relevant time who had come to any adverse notice until then and that their only anxiety at the relevant time was to ward off any hostile takeover about which they had reasonable apprehensions because of the unexplainable conduct of the IDBI. It is the further case of the appellants that SEBI has not even alleged any nexus between them and the so called KP entities and that they had not obtained any financial benefit whatsoever from this entire transaction.
4. Against this background the short point that arises for our consideration in this appeal is whether the transfer of about 10,00,000 shares bought back from IDBI by the appellants in November / December, 1999 to the so called KP group entities was bonafide or collusive or at least imprudent aimed at enabling the KP groups entities to corner stocks with a view to artificially raising its price in violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. SEBI’s case is that since the agreements signed with the KP group entities for financing the buy back of shares from IDBI were heavily loaded against the appellants and since no prudent person would enter into such an agreement, the transfer had to be collusive in nature. According to SEBI when the prices of the shares were constantly rising the appellants could have sold the shares in the open market and paid back the financier what they had borrowed for buying the shares back from IDBI. SEBI buttresses its case about the cornering of the stock with a view to artificially raising the price by the fact that the company fixed 15/11/1999 to 3/12/1999 as the no delivery period coinciding with the date of compulsory D-Mat w.e.f. 29/11/1999 thus further reducing the floating stock in the market facilitating further price manipulation by the KP group entities. SEBI also cross checked the facts with IDBI from which it received a reply on 29/07/2003 stating that there was never any intention of offering the shares to any third party and that even in the event of a refusal by the promoters to buy back the shares, IDBI would have sold the same only through Stock Exchanges in small lots. On the basis of this letter from IDBI, SEBI has dismissed the contention of the appellant promoters that they acted in this particular manner only because they were afraid of a hostile takeover threat.
5. We have carefully gone into the facts on record and have also applied our minds to the arguments of the learned counsel on both sides. The appellants have filed a statement at Exhibit ‘M’ with their memorandum of appeal showing the price behaviour of various IT companies, namely, Mastek, Satyam, Polaris, Aftek along with the BSE index for the period 01/01/1991 to 05/09/2000. This statement shows that the prices of these IT stock were continuously rising from January, 1999 to March, 2000. This is also incidentally admitted in para 10 of the impugned order that the investors had a fancy for software / technology stocks at that point of time. Further we find that there is no allegation that the appellants themselves actually indulged in any price rigging. The allegation against them is that they facilitated price rigging by the imprudent / collusive transfer of bulk shares to the KP group entities. We therefore have to, at this stage, examine exactly what transpired between IDBI and the appellants. It is common ground that the two sides entered into a subscription agreement on 05/04/1995 whereby the appellants invited IDBI to buy 10,00,000 shares of Rs. 10/- each at face value during the IPO of 1995 even though the promoters had issued shares at a differential premium of Rs. 20/- per share to NRIs and Rs. 10/- per share to mutual funds and financial institutions / bankers. The shares offered to IDBI had a lock-in period of 3 years after which IDBI had the option to sell the same with the promoters having the first right of refusal. The IDBI, it seems, notified its intent of exercising this option for the first time on August 26, 1999 and followed it up with its letter dated 12th November, 1999. The copies of these two letters are reproduced below for a better appreciation of the context in which the impugned transactions took place in November / December, 1999:
LETTER DATED AUGUST 26, 1999
“Dear Sirs,
Aftek Infosys Ltd. (Aftek) – Direct Subscription
To equity shres of Rs. 100 lakh by IDBI
“ As you are aware, Aftek (formerly Aftek Business Machines Ltd.) entered into a Subscription Agreement with Industrial Development Bank of India (IDBI) on April 5, 1995, in terms of which IDBI has subscribed to 10,00,000 equity shares of Rs. 10/- each, in the company, at par, and paid an aggregate amount of Rs. 100 lakh. In terms of the provisions of Article VI of the said Agreement, the company procured and furnished to IDBI, an Undertaking from all of you, agreeing inter-alia, to buyback the shares subscribed by IDBI, at the market related price and on other terms as may be mutually agreed.
“ IDBI now proposes to sell about 9,00,000 equity shares of the company and therefore call upon you to convey within 7 days from the date of this letter, your willingness to buyback the above referred 9,00,000 nos. equity shares of the company at market related price, and on other terms as may be mutually agreed.
“ In case you fail to convey your willingness to buyback the shares, it would be presumed that you have exercised your right of refusal available to you, in terms of the provisions of Clause 6.4 (Article VI of the Agreement) and IDBI shall be free to dispose off the shares of the company, subscribed by it under the said agreement, in the market or otherwise.
“ In case you convey your willingness to buyback the shares, a final letter offering to sell the shares at a mutually agreed price will be issued by IDBI to you and the same will be required to be accepted by you within a short time, say a day. Further, a part of the payment of the sale consideration will be required to be made alongwith your acceptance and balance within 7 days from the date of acceptance by you.
“Meanwhile, please acknowledge receipt.”
LETTER DATED NOVEMBER 12, 1999
“Dear Sirs,
Disinvestment of shares held by IDBI
in Aftek Infosys Ltd. (Aftek) in your favour
“As you are ware, IDBI proposes to sell in the market 9,00,000 shares of Aftek Infosys Ltd. (Aftek) and pursuant to Clause 6.4 of the Subscription Agreement dated April 5, 1995 entered into between IDBI and Aftek, we have, by our letter dated August 26, 1999, offered by you, by way of first right of refusal, the said shares at the market related price. In this connection, Shri Ranjit M. Dhuru has, by his letter dated August 31, 1999, communicated that the promoters are willing to buy the said shares from IDBI. He also made certain suggestions for working out the share price. It is stated by him that the said letter is on his behalf as also on behalf of the other promoters.
“2. Shri Ranjit Dhuru had discussions with us on the above subject in the month of September 1999. During the discussions, Shri Dhuru was explained by us that fixing the price based on six months’ average market price is not applicable in this case. After discussions, he in his letter dated September 27, 1999, had suggested a buyback price of Rs. 150 per share.
“3 In above connection, we may clarify that since the shares of the company have been listed and actively trade on the Bombay Stock Exchange, we offer the said 9,00,000 shars to you at the closing price of the share on the Exchange as on Friday the November 12, 1999 (i.e. the date of issue of this letter) which was Rs. 477.75 per share.
“4. If the above offer is acceptable to you, please pay to IDBI by demand draft/Bankers’ pay-order (payable at Mumbai) for Rs. 429,97,500, being 1/10th (one tenth) of the aggregate consideration amount of Rs. 4299,75,000 by 5.00 pm on November 15, 1999 in token of your acceptance. The balance amount of Rs. 3869,77,500 is payable in the same manner by 5.00 pm on November 19, 1999. If the said balance amount is not received by IDBI as stipulated, the 1/10th amount paid by you shall be liable to be forfeited.
“5. In the event IDBI does not receive either the 1/10th payment or the balance amount within the time limit stipulated, it would be construed that you are not willing to buy the shares and IDBI will then be free to sell the shares to anybody in the market or otherwise.
“6. The shares held by IDBI are in the process of dematerialization. The shares, if purchased by the promoter, will be delivered in Demat form only for which purchaser may also furnish relevant details like DP number, customer ID number etc.”
6. It is seen from the above two letters that while the letter dated August 26, 1999 is business-like in its tone and tenor and talks repeatedly of a mutually agreed price for the sale of shares in terms of the subscription agreement, the letter dated November 12, 1999 was almost an ultimatum which had the potential to cause serious apprehensions in the minds of the appellants. According to the appellants, this letter was received by them on November 12, 1999 at 7.00 p.m. and this contention seems to be, by and large, correct because the letter itself mentions the closing price of the scrip on the date of issue of the letter which means that the letter must have been drafted and dispatched after the closure of trading on that date. November 13 and 14, 1999 were Saturday and Sunday and the letter demanded payment of Rs. 4,29,97,500/- by 5.00 p.m. on November 15, 1999 and the balance of Rs. 38,69,77,500/- by 5.00 p.m. on November 19, 1999. The letter also stated that in case the remaining amount of more than Rs. 38 crore was not received, the payment of Rs. 4,29,97,500/- made on November 15, 1999 was liable to be forfeited. The consequences of the appellants not complying with this “ultimatum” dated 12th November, 1999 were spelt out in para 5 of the letter stating that “IDBI will then be free to sell the shares to anybody in the market or otherwise”. In order to drive home the fact that it meant business, IDBI followed it up with a caveat in the Delhi High Court. It is a known fact that even the best of companies do not have this kind of ready cash available with them. In the event the appellants acted in the only manner they could, i.e., getting finance from whatever source and on whatever terms they could and we have fully sympathy with the appellants. From the behaviour of IDBI they had every reason to suspect a hostile takeover and they fully believed their version that the only option before them was to transfer these shares to a known party whom they believed to be only financiers and share brokers not interested in the takeovers or to allow a hostile takeover by some unknown entities with the active help and connivance of IDBI. They thus acted out of sheer instinct for survival and it is not even SEBI’s case that the agreements they entered into with the financiers were illegal in any respect. We also note that the so called KP entities had not come to any adverse notice of any authorities at the relevant point of time.
7. The appellants have further argued that there is no question of their facilitating rigging of prices by permitting the cornering of stocks because these stocks were in any case with the IDBI and were thus out of circulation. It is therefore their case that if the price rise had indeed taken place it had taken place independently of those transactions as was indeed the case with all technology stocks. They have further argued that if they are being accused of having entered into imprudent deals with the financiers on the ground that they could have made profit by selling stocks in the market and paying off the financiers, the IDBI can as well be accused of having incurred losses by divesting when it did because it could have made 5 times the profits by holding on to the stocks until March, 2000. It is further seen from last para of IDBI’s letter dated 12/11/1999 that the shares were in the process of de-materialisation and were to be delivered only in D-Mat form which meant that they were not available for delivery before November 29, 1999. The argument in the impugned order therefore that the appellants could have sold these shares (presumably in violation of the agreements with the financiers) at a higher price to pay off the financiers is thus totally untenable because the shares were just not available for offering to any other buyers. They have further argued that the accusations about the no delivery period, etc., are indicative of total lack of application of mind because the book closure dates had been fixed by the company vide its letter dated October 22, 1999 to BSE i.e., before the receipt of letter dated November 12, 1999 from IDBI. This book closure was also conducted in compliance with the listing requirements which mandate a notice of 42 days. The dates were fixed in accordance with this calendar because the annual general meeting was required to be held on or before 31st December, 1999 in accordance with the provisions of the Companies Act and the book closure dates were fixed by working backwards in accordance with the listing agreements. Similarly the compulsory D-Mat of the shares was also mandated by SEBI and not by the company or by the appellants. According to the appellants therefore the impugned order needlessly seeks to link the routine corporate events mandated by law with the impugned transaction of transfer of shares to the “KP group entities” which was occasioned solely by the sudden and inexplicable “ultimatum” received from IDBI and by no other reasons. We notice that this argument about no-delivery period having been fixed as per statutory requirements was taken by the appellants before SEBI as well. The impugned order records this argument without any rebuttal. We have, therefore, no alternative except to accept this position as a true statement of facts.
8. Lastly the appellants have taken serious objection to SEBI relying on letter dated 29/07/2003 from IDBI stating that IDBI would have sold these shares only in small lots through Stock Exchanges even if the appellants did not buy these shares back. We are in agreement with the appellants that this letter, the text of which is not before us and which the appellants claim was never even shown to them, runs contrary to the tone and tenor of the letter dated November 12, 1999. We are therefore in agreement with the appellants that this letter dated 29/07/2003 should never have been relied upon by SEBI to arrive at any finding against the appellants. In fact, we are prima facie of the view that a deeper probe by SEBI into the circumstances leading to IDBI’s letter dated November 12, 1999 could have thrown more light on this entire issue. However, since IDBI is not a party before us, we are refraining from saying anything further on the subject. However, as far as the appellants are concerned, we find no case whatsoever against them.
9. The appeals are therefore allowed and the impugned order is set aside. There shall be no order as to costs.
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(Justice Kumar Rajaratnam)
Presiding Officer
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(Dr. B. Samal)
Member
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(N.L. Lakhanpal)
Member
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Place: Mumbai
Date: 12/01/2005
*/as