SECURITIES AND EXCHANGE BOARD OF INDIA
Coram: Dr. T. C. NAIR, WHOLETIME MEMBER
Name of the noticee/s: M/s. Munga Holdings Limited and its directors, Shri S. Dutta Roy, Shri R. P. Sharma, Shri R. Adak, Shri Suchanti and Shri Radha Krishna Pandey
Date of hearing: 19-05-2006
Appearance of parties
For the noticees:
1) Shri S. Dutta Roy and Shri R Adak represented by Shri Harmindar Chawla of M/s. Chawla and Associates, Advocates
2) No representation for Shri R. P. Sharma
3) Personal appearance for Shri N. Suchanti and Shri Radha Krishna Pandey dispensed with.
For SEBI: Shri Sanjiv Dutt, Chief General Manager
Shri Sachin Yadav, Manager
ORDER
UNDER SECTION 11B READ WITH SECTION 11(4) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 AGAINST M/s. MUNGA HOLDINGS LIMITED AND ITS DIRECTORS SHRI S. DUTTA ROY, SHRI R. P. SHARMA, SHRI R. ADAK, SHRI SUCHANTI AND SHRI RADHA KRISHNA PANDEY
WTM/TCN/IVD7/ /2007
1.0 BACKGROUND OF THE CASE
1.1 The Delhi Stock Exchange (hereinafter referred to as “DSE”) had examined the trading pattern of the scrip of M/s. Munga Holdings Ltd. (hereinafter referred to as ‘Munga’ or the ‘company’ or ‘MHL’) for the period 1st January 2001 to 31st August 2001 (hereinafter referred to as “period under consideration”) and submitted a report to the Securities and Exchange Board of India (hereinafter referred to as “SEBI”). As per the investigation report of DSE, during the period under consideration, the price of the scrip had gone up from Rs. 3.50 on 1st January 2001 to Rs. 43 on 31st August 2001. This resulted in a rise of 1130%, only in 52 trading days. There was no adequate volume to support the rise in the price of the scrip of the Company. The following observations were also made by DSE with respect to the Company:
(i) it has not submitted the distribution schedule on quarterly basis which is a violation of clause 35 of the Listing agreement
(ii) it has not submitted the Annual Report with complete schedule to DSE for the year 1998-99 and 2000-01 which is a violation of clause 31 (a) of the Listing agreement
(iii) it has not submitted the copy of all notices for AGM and EGM in advance and also the proceedings of General Meeting. This is in violation of clause 31 (C) and 31 (D) of the Listing agreement
(iv) it has not submitted to DSE the results indicating total turnover / sale, gross profit, net profit / loss, provision for tax and depreciation etc. which is a violation of clause (20) of the Listing agreement
(v) it has not closed transfer books once in a year at the time of AGM to have the record date for the purpose of bonus shares, right issue and dividend etc. which is a violation of clause (16) of the Listing agreement
(vi) it has not submitted to DSE the audited results for the year ending 31st March 2001
(vii) it failed to file disclosures under the regulation 8 (3) of Securities and Exchange Board of India (Substantial acquisition of shares and take over) Regulations, 1997 as on 31st March 2001
(viii) it had made preferential allotment of 20 Lacs shares in March 1996 to five group companies. At the same time, the same five group companies allotted 55.36 Lacs shares to the Company, at the same price and premium. The details of the said preferential allotments are as under:
(a) it had allotted 5 lacs shares with the premium of Rs. 90/- per share to M/s. Divya Mercantile Ltd. and on the same day M/s. Divya Mercantile Ltd. allotted 5 Lacs of its shares of Rs. 10/- with the premium of Rs. 90 per share to the Company
(b) it had allotted 6 Lacs shares of Rs 10/- with the premium of Rs.90 per share to M/s. Shukhlamber Exports Ltd. which in turn on the same day allotted 9 Lacs share of Rs. 10/- with the premium of Rs.90 per share to the Company
(c) it had allotted 3 Lacs shares to M/s. Shambu Mercantile Ltd. with the premium of Rs.90 per share and on the same day M/s. Shambu Mercantile Ltd. allotted 20 lacs shares of Rs. 10/- with the premium of Rs.90/- per share to the Company
(d) The company allotted 3 Lacs shares of Rs. 10/- with the premium of Rs.90/- per share to Welcon Traders Exports Ltd. and on the same day Welcon Traders Exports Ltd allotted 20 Lacs shares of Rs. 10/- with the premium of Rs.90/- per share to the Company
(e) The company allotted 3 Lacs shares of Rs. 10/- with the premium of Rs.90/- per share to Zircon Traders Ltd. and on the same day Zircon Traders Ltd allotted 1.36 Lacs shares of Rs. 10/- with the premium of Rs.90/- per share to the Company
(ix) The company allotted 2.99 Lacs shares to three merged entities - Plaza Fiscal Services Ltd., Amarjyoti Fiscal Services Ltd. & Muller Fiscal Services Ltd. in January 1991, which are not listed with the Exchange due to non-submission of documents required by the exchange vide its their letters dated 28/09/1993 and 24/11/1993
(x) It has been stated by DSE that the Company merged with M/s. Binani Cement Ltd. (hereinafter referred to as “Binani” or ‘BCL’) on 9th October 2000 on the approval of the Calcutta High Court vide its order no. 644 dated 17.01.2001. As per the scheme of amalgamation, Binani shall allot 9 shares for every one share of Munga to the shareholders of Munga. It has been observed by DSE that consequent to the merger, the shareholders of Munga (who will get 9 shares of Binani Cements Limited against 1 share held) are going to be benefited immensely and therefore, it seems that the trading in the scrip was structured by entities, which are associates of Munga, to take benefit once the shares of Binani (presently an unlisted company) are listed with the exchange and / or subsequently when Binani raises fresh capital either from the public or from institutions.
1.2 DSE in its investigation report had stated that while processing the Listing application of the company, details of bank statement along with a certificate from the Chartered Accountants confirming the receipt of money pursuant to which such allotment has been made were sought from the Company. Despite repeated reminders made by DSE, the Company has failed to furnish the desired documents. It has further been stated by DSE that Munga has failed to furnish information / documents sought by the exchange for Listing of shares allotted on preferential basis. As such these shares have not been listed by DSE.
1.3 In view of the above, SEBI vide an order dated 08.08.02, directed an investigation into the trading in the scrip of the Company for possible violations, if any, of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Rules, 1992, Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 and Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995.
1.4 Investigation revealed that M/s. EXV Finvest Ltd. and M/s. Ananya Traders Ltd. were two entities who were the major traders in the scrip of the Company. It was found that these two entities were related to the Company. It was found that M/s. Ananya Traders Ltd. and M/s. EXV Finvest Ltd. both had the same address as the company i.e. 9, Ezra Street, Kolkata. Further Shri. S. Dutta Roy, a director of the Company was found to be also a Director of M/s. Ananya Traders Ltd. The relation of M/s. EXV Finvest Ltd. with the Company was that the Company had a holding 8.89% of M/s. EXV Finvest Ltd.
1.5 From the trade record it was observed that between the period 28.05.01 and 06.08.01 only 11 trades were executed in the scrip of the Company, all of which were executed by and between M/s. Ananya Traders Ltd. and M/s. EXV Finvest Ltd. constituting 100% trading in the scrip of the company. During this period the price of the scrip of the company rose from Rs.33.25 to Rs.42. It was alleged that the said trading was done by related entities of the Company to influence price as well as volume of the scrip of the company.
1.6 The investigations alleged that Munga failed to comply with the Listing Agreement with the Delhi Stock Exchange and the relevant disclosures as required under Regulation 8(3) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997. It was further alleged that Munga in concert with the other entities had:
a) created a false market or misleading appearance of trading in the market
b) entered into transactions that were not genuine trade transactions and
c) entered into transactions that were not intended to effect transfer of beneficial ownership but intended to operate only as a devise to inflate or cause fluctuation in the market price of the security.
1.7 In view of the alleged breaches by Munga, it was decided to call for explanations from the company and its directors. The company (Munga) and its directors are collectively called the “noticees” for brevity.
2.0 SHOW CAUSE NOTICE AND REPLIES
2.1 Show cause notice dated 24-04-2003 under Section 11B of the Securities and Exchange Board of India Act, 1992 was issued to Munga requiring them to explain to the charges contained therein. Similar show cause notices dated 05-10-2005 were issued to its directors Shri S. Dutta Roy, Shri R. P. Sharma, Shri R. Adak, Shri Suchanti and Shri Radha Krishna Pandey.
2.2 The company replied to the show cause notice vide its reply dated 25-06-2003. Shri S. Dutta Roy replied to the notice vide his reply dated 30-12-2005, Shri R. Adak replied vide his replies dated 21-10-2005(seeking extension of time to reply) and 02-12-2005, Shri Suchanti vide his reply dated 20-10-2005 and Shri Radha Krishna Pandey vide his reply dated 24-10-2005. I note that Shri R. P. Sharma did not reply to the show cause notice and therefore a notice dated 13-12-2005 was affixed at his premises on 16-12-2005.
2.3 In order to afford a reasonable hearing the noticees were required to appear before me for a personal hearing. In view of this a notice for personal hearing dated was sent to Shri R. P. Sharma, Shri S. Dutta Roy and Shri R. Adak advising them to appear for a hearing scheduled for 04-05-2006. I note that a letter was received from M/s. Chawla and Co., Advocates intimating that they were engaged as the counsel by Shri S. Dutta Roy and Shri R. Adak and that they needed some time for preparing for the hearing. On their request the date of hearing was postponed to 19-05-2006. On the said date M/s. Chawla and Co. appeared before me on behalf of their clients and made their submissions.
3.0 CONSIDERATION OF ISSUES
3.1 I have perused the show cause notices issued to the entities, the replies given, other relevant material on record. Before I delve into the issues, I wish to record the following:
a) Since the charges are the same against the company and its directors, I proceed to pass a common order against them.
b) Shri R. P. Sharma has not replied to the show cause notice nor has appeared before inspite of service of the notice and the substituted service of the notice for personal hearing. Thus this order so far as Shri R. P. Sharma is considered shall be an ex-parte order.
c) Shri N. Suchanti and Shri Radha Krishna Pandey, directors of the company have replied that they were non-executive and independent directors and that they functioned from 18-10-2000 to 01-02-2001. Since they were not in office during the relevant investigation, I am of the view that it would not be just to saddle them with responsibilities when they were not in service and therefore they can be absolved from the charges made out in the show cause notices issued to them.
3.2 I note that the replies given by the noticees are also similar in their contents. The submissions made by the noticees are given below:
a) The Company vide letter dated 25.06.03 informed SEBI that all its assets and properties had been transferred and vested in Binani pursuant to an order of merger dated 11th December 2000 passed by the Hon’ble High Court at Calcutta upon which the Company had no practical existence and that it became liable to be dissolved without being wound up. Even so, the Company had during its existence complied with all the requirements of the Listing Agreement religiously and had submitted the relevant documents and returns on a timely basis. It was also submitted that all the books, records and documents having been taken over by Binani had constrained the Company in furnishing a detailed reply to the show cause notice issued by SEBI. One of the submissions made by the Company before SEBI was that, post merger the company had become non-existent for all practical purposes. It was noticed from clause 2 of Part II of the scheme of amalgamation, approved by an order No. 644 dated 17.01.01 passed by the Hon’ble High Court of Calcutta, if any suit appeal or any other proceedings of whatsoever nature by or against the Company be pending, the same shall not abate, be discontinued or be in anyway prejudicially affected by reason of the transfer of the undertaking of the Company or anything contained in this scheme, but the proceedings may be continued, prosecuted and enforced by or against Binani in the same manner and to the same interest as it would be or might have been continued, prosecuted and enforced by or against the company as if this scheme had not been made.
b) The directors in their reply have reiterated the same submission made by the company. With regard to the charge that price manipulation in the scrip of Munga Holding Limited the directors Shri S. Dutta Roy and Shri R. Adak have replied that the directors have not indulged in any activity resulting in artificial rise in the price of the scrip. They have submitted that no investor/shareholder has been affected adversely by the artificial price rise/volume. They have also submitted that common directorship on two distinct corporate entities do not prove any malafide action in share transactions.
3.3 The main issues to be considered in this case are:
a) Whether the company and its directors violated any requirements of the listing agreement?
b) Whether the company and its directors have violated the provisions of Regulation 8(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997?
c) Whether directions in the nature of restraining them from accessing the securities market or prohibiting them from dealing in securities for a suitable period are warranted?
3.4 I take note of the order of the Hon’ble Calcutta High Court and wish to reproduce the relevant parts that are necessary for my consideration of issues. The High Court while approving the Scheme of amalgamation has prescribed as follows:
“Part II
1. “With effect from the appointed date, the undertaking of MHL shall without further act or deed be transferred to and vest in and be deemed to be transferred to and vested in BCL pursuant to Section 394 (2) of the Companies Act, 1956.”
2. “If any suit, appeal or any other proceedings of whatsoever nature (hereinafter called “the proceedings”) by or against MHL be pending, the same shall not abate, be discontinued or in anyway prejudicially affected by reason of the transfer of the undertaking of MHL or anything contained in the scheme but the proceedings may be continued, prosecuted and enforced by or against BCL in the same manner and to the same extent as it would be or might have been continued, prosecuted and enforced by or against MHL if this scheme had not been made.”
“Part III
2. “Until the scheme is sanctioned and transfer effected as aforesaid, MHL shall carry on its business in the usual course which shall be deemed to be carrying on the said business for and on behalf of and in trust for BCL with effect from the appointed date.”
I find that the effective date of the merger is 01-04-2000. The order makes it clear that any activity which Munga undertakes after the effective date is only on and behalf of Binani. Thus it is clear that any obligations or liability devolves on Binani and that it is liable for all the obligations of the erstwhile Munga. Thus in the instant case since the shares were traded till the close of 2003 in the DSE, it should have been the duty of Binani to have filed the necessary returns and adhere to the listing agreement. Therefore, on similar lines it is Binani who should have complied with Regulation 8(3) of the Takeover code. Thus the issues at No. 3.3.a and 3.3.b mentioned supra go in favour of the noticees.
3.5 With regard to the charge that the noticees have manipulated the price of the securities of Munga, I note that from the scheme of amalgamation the swap ratio for the scheme has been concluded at nine shares of BCL for every one share of MHL. As per the investigation, during the period January 2001 to August 2001, the price in the scrip of MHL had increased from Rs.3.50 to Rs.43.00 resulting in a rise of 1130% in only 52 trading days, without adequate volumes. In this regard, DSE had observed that, the increase in price might have been brought out with a view to benefit the shareholders of MHL once BCL comes up with a public issue or when Binani’s shares are listed in Stock Exchanges. The findings of investigations by SEBI has brought out that the price increase was a result of transactions entered into by entities associated with the erstwhile management of MHL. The findings did not attribute any malafide intentions to those transactions. Therefore, I find it would be right to conclude, based on the records made available to me that there is no concrete evidence to establish manipulation in the scrip of MHL resulting in the price rise as detailed above. Thus the issue at No.3.3.c supra also is in favour of the noticees. In the result, I find that since the charges have not been established the noticees can be exonerated from the allegations. I further refer to my earlier order dated 02-11-2006 against M/s. Binani Cements Limited making them liable for the adherence of listing agreement and disclosures under Regulation 8(3) of the Securities and Exchange Board of India (Substantial acquisition of shares and take over) Regulations, 1997. But taking into consideration the circumstances the company has been directed to be more careful in future with regard to statutory compliance.
4.0 ORDER
4.1 I, therefore in exercise of powers conferred under Section 19 of the SEBI Act, 1992 and Section 11B read with Section 11(4) of the SEBI Act, 1992, hereby order that no directions need to be passed against M/s. Munga Holdings Limited and its directors Shri S. Dutta Roy, Shri R. P. Sharma and Shri R. Adak.
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Date: 16-01-2007
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T C Nair
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Place: Mumbai
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Whole-Time Member
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Securities and Exchange Board of India
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