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- The company has two satellite channels with enviable reach and viewer ship and this could not have been operational for a period of more than three and half years, that too without any borrowings, had the preferential allotment funds not come into the company.
- It is incorrect that large number of shares was allotted without sufficient consideration being received. The Investigating Officer erroneously assumed that advances for purchase of software and other commercial transactions were made by the company only for the purpose of re-circulation and re-routing of the funds to subscribe to the preferential allotment of Aastha Broadcasting Network Limited. The learned Investigating Officer has also mentioned that a part of the funds of the preferential allotment were invested in unquoted companies, based on Aastha Broadcasting Network Limited "comfort level". There is nothing legally or ethically wrong with this.
- As regards the purchase of software, the Investigating Officer erroneously assumed that the software was not purchased at all by the company. During the deposition made before the Investigation Officer, he was informed that the amount paid was only an advance and did not constitute consideration for the purchase of software and that production of software is a long-term process with the purchase transaction taking place only on the delivery of software to the company. Further, advancing money is the regular practice for procurement of software in the electronic entertainment industry.
- As regards the 1,19,373 shares, (difference between shares allotted in the said preferential allotment and the actual holding of these shares as on 10th October 2003), the Investigating Officer has wrongly assumed that these shares appear to have been delivered in the market. It was completely legal to transfer the said shares and no violation of any provision of any law has taken place since these shares were not under any lock-in period. Therefore, the apprehension of the Investigating Officer that the shares could have been off loaded in the market is unjustified.
- It is also alleged that the company was financing its own preferential allotment by channelling money through layers of interconnected entities. This is an erroneous assumption and monies were paid by the company to various entities for procuring software and for the purpose of genuine commercial transactions. As far as utilization of proceeds of the issue is concerned, it is a matter to be investigated by the Department of Company Affairs. The in-principle approval of listing application of the Company by BSE is ample proof of genuine receipt of funds and their utilization as the issue was examined by BSE in great detail through an independent chartered accountant. BSE took almost 2 years to clear the issue since they took up the processing of listing application in January 2002.
- The Investigating Officer’s calculation that the effective issue price works out to Rs. 3.04 per share based on the assumption that 70% of the funds did not appear to have been effectively received by the company is flawed in law and such methods of arriving at any issue price cannot be legally justified to pronounce the captioned order or undertake further investigation particularly so when the full consideration money of Rs. 10/- per share has been realized and utilized by the company.
- Since BSE has already examined the issue genuine receipt of funds and its utilization and has given its in-principle approval, the question of violation of SEBI (DIP) guidelines does not arise.
- As regards the allegation that clause 13.5A of the DIP Guidelines have been violated, the company has not violated the said guidelines since in the subsequent annual accounts the required disclosures were made. The Company has disclosed the utilization of issue proceeds in the Cash Flow Statement annexed to the Balance Sheet every year as required under clause 32 of the listing agreement.
- The Investigating Officer has also pointed out that there could be a possible violation of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulation, 1995 read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and section 77 and 79 of Companies Act. Suspicion of possible violation of the FUTP Regulations cannot form basis of passing the captioned order and no further investigation can be justified since the Investigating Officer has not even brought out existence of circumstances suggesting any event, which would lead to violation of the provisions of the FUTP Regulations. As regards the possible violation of section 77 & 79 of the Companies Act, 1956 we submit that the Companies Act provides for a mechanism to deal with any violations under the said Act. Even if a hypothetical situation is considered where all the 1,19,373 shares were off loaded in the market at an all time high price of Rs. 39.25 post allotment, the allottees could have been benefited maximum only to the extent of Rs. 46.85 lakhs which is merely 5% of the total amount invested by them in the company. Since the shares were not under lock-in period, no violation can be considered to have been made. It is also a point to note that not even a single share out of shares allotted to promoters has moved into market. Also, the time taken by BSE to process the listing application was punishing long for which, the investors should not be made to suffer.
- The only plausible allegation in the captioned order is that of violation of the SEBI DIP Guidelines, which under no circumstances justify such a harsh action by SEBI on shareholders of the company. The alleged violations of DIP Guidelines i.e. (a) pricing of the issue and (b) the subsequent disclosure requirement are not tenable for the reasons stated earlier. SEBI’s apprehension that some shares could have already been off loaded in the market and to ensure that the remaining shares do not find their way out into the hands of innocent investors and the markets at large, is based only on the assumption that the preferential allotment was irregular is totally incorrect and misplaced and cannot form a basis to arrive at a conclusion that the shareholders of the company will in future off load the shares in the market, which will result in shares finding their way into the hands of innocent investors.
- The market determines the prices of a share only after considering the fundamental strength of a company and therefore there cannot be a situation like "the shares finding their ways into the hands of innocent investors" particularly so when full disclosures of the source and use of funds as required by the DIP Guidelines were made by the company.
- Since the extensive investigation against the company has been made during past 2 years where Company, allottees, their related entities, Bankers, Brokers have been examined in detail along with their records, no further investigations should be undertaken
- The entire subscription money was received within 12 months of the allotment and so there is no violation of the DIP Guidelines. Further, clause 8.6.2 of DIP Guidelines provide that if subscription money is proposed to be received in calls, such calls should be structured in such a manner that the entire subscription money is called within 12 months from the date of allotment
- Out of the 93 lakh shares, 49 lakh shares were allotted to the promoters who complied with the provision of SEBI (Substantial acquisition of shares and takeovers) Regulation, 1997. The shares were transferred between promoters inter se only. Although these shares were dematted, not a single share has ever been traded on the stock exchange. The balance quantity of 44 lakh shares was issued to bodies’ corporate belonging to persons other than the promoter group. We understand that some of the shares were sold by them in off market deals to their friends and relatives. We therefore submit that since BSE has given the in-principle approval, there was neither any emergency nor any need to pass the order dated 15/01/04
- The 1,19,373 shares which have been transferred to related entities amount to only 1.28% of the total shares which have been frozen by SEBI pending investigations. However, as a result all i.e. 100% of the preferential share issue subscribers have been prohibited from buying/selling and dealing in the securities of the company. It is visible that for acts of some entities, 98.72% shareholders have been incorrectly penalized. It is unfair that holders of 98.72% shares suffer owing to doubts about the deeds of holders of 1.28% shares
4.The said investigation has been conducted to ascertain the possible violation of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003 and Section 77 and 79 of Companies Act and also the provisions of SEBI (Disclosure and Investor Protection) Guidelines, 2000 (hereinafter referred to as the said guidelines).
5.SEBI investigations conducted till 15/01/04, had made a prima facie case of, interalia non-receipt of full money in respect of preferential allotment of shares and offloading of unlisted shares in the market. Hence, in order to ensure that no further harm is caused to the market or that investors are not adversely affected, a preventive interim order of direction was passed on 15/01/04. Vide the said order certain entities/ persons were prohibited from buying/selling or dealing in the securities of the company viz., CMM Broadcasting Network Ltd., pending completion of the investigation. The said order further directed that the shares of CMM Broadcasting Network Ltd, held by the entities/persons mentioned therein and lying in their demat accounts and other demat accounts of such persons/entities be frozen till further orders.
6.A post decisional hearing was granted to those persons/entities on 10/03/04 which was attended by their representatives Mr. Deepak Shah and Mr. Hiren H. Doshi. The representatives, apart from making oral submissions, made written submission vide their letters dated 28/1/04 and 05/03/04. Vide their said letters they submitted that :
7.I have carefully considered the submissions made on behalf of the persons/entities mentioned in the order dated 15/01/04.
8.I note that the findings of the investigation have brought out that that the company has not received the total consideration of Rs. 9.3 cr for the 93 lakh shares issued on a preferential basis on allotment thereof. Investigation revealed that in many cases, the funds given as consideration by one preferential allottee were again channelled back by the company to the same / another preferential allottee. This preferential allottee then used such funds to remit its preferential allotment consideration to the company. Similar course of action has been followed by other preferential allottees. All that has been done was transfer the funds to the bank accounts via book entries and back via a chain of associated entities. Effectively, a substantial part i.e. as much as around 70% of the funds which were stated to have been received by the company as preferential allotment consideration were not received at all by the company. Investigation has brought out that a total amount of Rs. 6.47 cr was re-circulated using layers of related entities. In effect, only Rs. 2.83 cr appears to have been received by the company.
9.I note that the company has allotted the subject shares on a preferential allotment basis in pursuance of a resolution passed under section 81(1A) of the companies. The amount of consideration was not to be received in calls. Therefore, clause 8.6.2 of the SEBI (DIP) Guidelines, 2000 which relates to issue of shares where the subscription money is to be received in calls, will not be applicable in this instant case. I note that the company has admitted receipt of preferential issue moneys over a period of twelve months from the date of allotment of the shares. There is thus a violation of clause 13.4.2 of SEBI (DIP) Guidelines 2000.
10.I also note that clause 13.5A of the said guidelines provides as follows :-
"The details of all monies utilised out of the preferential issue proceeds shall be disclosed under an appropriate head in the balance sheet of the company indicating the purpose for which the monies have been utilised. The details of un-utilised monies shall also be disclosed under a separate head in the balance sheet of the company indicating the form in which such un-utilised monies have been invested".
I find that the company has not complied with the above guidelines. As brought out earlier, a large part of the consideration had not been received by the company at all. The same funds have been re circulated time and again. In such a situation, the exact utilisation of the preferential allotment moneys has not been reflected by the company. The correct use of the preferential issue proceeds has not been disclosed. The use of funds has been shown as advances /investments etc. The fact remains that majority of such funds have not been used for genuine business purposes. By the end of financial year 2001, the same funds have been re-circulated time and again
11.Investigation revealed that large number of shares were allotted without receipt of full consideration from the shareholders. The same funds were rerouted time and again from the company to the shareholders and back. Effectively the complete consideration was not received while all the shares were allotted. The pattern of use of funds suggests that funds were not used for genuine business purposes. Large advances were given on unsecured, interest free basis to entities related to the company/its promoters, some of which were also preferential allottees. Moneys were shown to have been given by the company to these entities as share application moneys for allotment shares of unlisted entities who were also related to the company /its promoters. But these shares were proposed to be allotted at a future date, interestingly mostly at the end of the financial year. In other case, moneys were shown to have been given as advance for purchase of shares. It is surprising that unsecured and interest free advances are given in such a manner that too for purchase of shares of unlisted related entities. No agreement /documents have been provided to evidence terms and conditions of such use of funds. These funds then were re-routed through the related entities on a regular basis and used for making preferential allotment consideration to the company. Effectively no moneys came into the company in this regard.
12.The company has also stated having remitted part of the consideration for the purpose of purchase of the software. However, I find that purchase of said software has not been completed for as long as 3 and half years from the purported date of remitting consideration for the same. It is surprising that the purchase of software has not been completed even after such a long period of time. It is also seen that this amount has been advanced by the company free of any interest. It is highly irregular that the funds which have been stated to have been given by the company as far back as August 2000 ostensibly for purchase of software have not been used for this purpose and the company is still an interest free creditor of these moneys to the software seller. I further find that this consideration has been in turn immediately remitted by the purported seller of the software to other preferential allotees under the guise of loans or share application moneys. If the moneys were indeed meant to be advance moneys as claimed for use of software purchases, there was no reason for the software seller to promptly remit the same when they should have been used for business purposes. It was also observed that these preferential allotees, in turn, have given these funds to the company itself as their preferential allotment consideration. Thus, once again, effectively no moneys came into the company
13.I also note that funds have not been received or used in the manner claimed by the company. The effective price has been calculated on the basis of funds which appear to have been received. For the other funds, it has been revealed that these were rerouted and re circulated from the company, preferential allottees and other related entities. I also note that the BSE has not yet accorded listing permission to the 93 lakh shares allotted by the company on a preferential allotment basis. Further, it is only SEBI investigation which has revealed non genuineness of the fund flow in respect of the preferential allotment.
14. In view of the aforesaid facts, the circumstances and findings of investigation, I have no hesitation in confirming the interim order dated. 15.01.2004.
ORDER
15.Therefore, in exercise of the powers conferred upon me by virtue of Section 19 read with Section 11(4)(b), Section 11(1) and 11B of SEBI Act, I hereby confirm the order dated 15.01.2004 and direct that the following entities/persons be prohibited from buying, selling or dealing in the securities of the company – CMM Broadcasting Network Ltd either directly or indirectly till further orders. It is further directed that the shares of CMM Broadcasting Network Ltd. held by the following entities /persons and lying in all their demat accounts shall be frozen till further orders.
This order shall come into force with immediate effect.
