BEFORE THE SECURITIES APPELLATE TRIBUNAL, MUMBAI
Appeal No.147/04, 147A/04 & 147B/04
Date of Hearing : 2.5.05
Date of Decision : 25.5.05
In the matter of:
Appellants : 1. M/s. Nipar Financial Services Pvt. Ltd., Baroda
(147/04)
2. Mr. Nitin Hasmukh Parikh, Baroda (147A/04)
3. Mr. Akshay Ashwin Parikh, Baroda (147B/04)
Respondent : Securities and exchange Board of India, Mumbai
Appellants by : Shri Nitin Parikh, PCS
Respondent by : S/Shri Dipan Merchant &
V.N. Shingnapurkar, Advocates
Coram:
Justice Kumar Rajaratnam, Presiding Officer
Per: Justice Kumar Rajaratnam, Presiding Officer
The appeals are taken up for final disposal with consent of parties.
2. Since a common order has been passed against all the appellants and since a common question of law arises, by consent, a common order is passed.
3. The appellants challenge the impugned order dated 22nd July 2004 passed by the respondent. Vide said impugned order, the respondent has prohibited M/s. Nipar Financial Services Ltd. and its directors, Shri Nitin Parikh and Shri Akshay Parikh, from buying, selling or dealing in securities in any manner whatsoever for a period of two years. The respondent has stated that this impugned order was passed in terms of section 19 read with section 11 and 11B of SEBI Act, 1992.
4. Facts of the case are that the respondent conducted an investigation into the public issue of M/s. Growmore Solvents Ltd. (GSL), which had come out with a public issue of 84,50,000 equity shares of Rs.10/- each for cash at par aggregating Rs.845 lakhs in March 1994. The issue opened on 7th March 1994 and closed on 11th March 1994.
5. As per the report submitted by the post issue lead manager to the issue, the above issue was subscribed to the extent of 93.37%. However, when the respondent conducted investigations, it was found that the subscription figures submitted by the post issue lead manager were incorrect and it was found that the issue had not received mandatory minimum subscription of 90% as required in terms of SEBI (Disclosure and Investor Protection) Guidelines and also in terms of the prospectus. Thus, even though the issue had failed, it was shown to have succeeded, by manipulation on the part of several entities.
6. Nipar Financial Services Pvt. Ltd. (Nipar), the appellant No.1, was the Registrar to the issue and investigation revealed that Nipar was also involved in the above violations.
7. The appellant No.1 was in the business of Registrar and Share Transfer since 1989 and had handled approximately 75 issues till 1997. The appellant-company was also acting as share transfer agent of approximately 15 companies handling about two lakhs folios. The appellant stated that it had ample strength of approximately 30 to 50 persons.
8. The appellant No.1 was the Registrar to the public issue of Growmore Solvents Ltd., which was opened on 7th March 1994 and closed on 11th March 1994. The appellant No.2 was non-wholetime director of Nipar and appellant No.3 was the Managing Director of Nipar.
9. The respondent during investigation has found that as per the basis of allotment report dated 20.5.94 submitted by BOI Finance Ltd., the post issue lead manager to the issue, the public issue was subscribed in the following manner:
|
Category
|
No. of Appli-
cations
Received
|
No. of share applied for
|
No. of shares allotted
|
Amount Payable on Application
|
% of Public Issue
|
|
1. NRIs
|
35
|
39,700
|
39,700
|
3,97,000
|
0.47
|
|
2. Employees
|
25
|
5,000
|
5,000
|
50,000
|
0.06
|
|
3.Net Public Offer
|
1834
|
78,46,300
|
78,45,800
|
3,92,29,000
|
92.84
|
|
4.Total subscription Received (1+2+3)
|
1894
|
78,91,000
|
78,90,500
|
3,96,76,000
|
93.37
|
|
5.Subscription through stock invest
|
201
|
27,01,500
|
27,01,500
|
1,35,07,500
|
32.00
|
|
6. Out of 5 above collections thru PNB
|
22
|
26,00,000
|
26,00,000
|
1,30,00,000
|
30.77
|
It is seen from the above that:
I. Applications for 27,01,500 shares i.e. 33% of the shares allotted in the issue, were accompanied with stock invests.
II. Of these, applications for 96% shares were collected by Punjab National Bank, Navrangpura Branch (hereinafter referred to as PNB), one of the Bankers to the issue.
10. The respondent had also submitted that the collection schedule of Punjab National Bank, which is one of the bankers to the issue, showed that the 22 stock invest applications collected by the said bank branch were accompanied by 16 stock invests (Nos.577402 to 577417) for Rs.5 lakhs each and 50 stock invests (Nos.577330 to 577379) for Rs.1,00,000/- each totalling Rs.1,30,00,000/-. Scrutiny of the bank schedule, stock invest register etc. revealed that stock invest books bearing serial Nos.577301-577400 and 577401-577450, from which the above 66 stock invests were issued, were issued out from the valuable securities register only on 22.3.94 and 26.3.94, i.e. after the closure of the issue.
11. The respondent has also submitted that the bank records showed that the stock invests in question were cancelled and it is apparent that stock invests used for subscribing to the issue of GSL were not encashed. The respondent has also submitted that the cancelled stock invests were in the possession of PNB. Hence it was the contention of the respondent that the subscription against the applications accompanied by these stock invests were never received by GSL.
12. The respondent has further submitted that 30% of the subscription to the public issue had come through stock invests, which were not encashed subsequently. If 30% of subscription received through these stock invests were deducted from the total subscription received, then the public issue had been subscribed to the extent of approximately 62% only, which was much below the mandatory minimum requirement of 90%. Thus the issue of GSL did not receive mandatory minimum subscription of 90% as required in terms of SEBI (Disclosure and Investor Protection) Guidelines and terms of prospectus.
13. In view of the above, the issue should have failed. However, the issue was shown as subscribed to the extent of 93.37% and was subsequently listed on the Stock Exchanges.
14. According to the respondent, Nipar (the first Appellant), the Registrar to the issue, failed to weed out late applications and multiple applications. Further Nipar had handed over the stock invests to GSL and had not taken steps to realize the stock invests, which is in violation of SEBI (Registrars to an Issue and share Transfer Agents) Regulations, 1993.
15. In response to respondent’s queries about the role of the appellants in the public issue of GSL, the Nipar vide its letter dated 7th October 2002 submitted that it was not in possession of any record relating to the public issue as they had been handed over to GSL long time back.
16. The appellant submitted that after going through the impugned order dated 22nd July 2004, they were surprised to note that the respondent has mentioned that show cause notices dated 31st July 2003, 25.9.2003 and 22.12.2003 were sent to the appellants. However, the appellant submitted that the same had not been received by them since they had discontinued their business. Their office was closed from June 2003 till 20th November 2003. Subsequently, the premises were given on rent till May 2004 and thereafter they were lying totally closed.
17. The appellant submitted that the company had a branch office at Ahmedabad and except the computer work which was done at Baroda, the entire work had been handled at Ahmedabad, since the Bankers to the issue and the company were based in Ahmedabad. The branch is headed by a qualified and experienced Company Secretary. The appellants further submitted that they had exercised due diligence, ensured proper care and exercised professional judgment by employing qualified and experienced personnel and laying down proper procedure to be followed. However, in spite of that, if some procedural mistakes did occur, the appellants could not be held responsible.
18. The appellant further submitted that it is not correct to state that the issue would have failed if the alleged applications with stock invests were not taken into consideration, since in that case the underwriters to the issue, would have been required to bring in the shortfall as the issue was fully underwritten.
19. The main contention of the appellants is that the alleged violation had taken place in 1994. The investigation proceedings were commenced in 2004 and there has been considerable unexplained delay. I have no doubt in my mind that the conduct of the appellants is detrimental to the interest of the investors and safety and orderly development of the securities market as found by the respondent. Hence the impugned order is upheld as far as appellant Nos.1 and 3 are concerned. However, the appellant No.2 is a non-Executive Director and was not at all involved in the day-to-day management of the company. I quote from the Memo of Appeal the following portion:
“The day to day management of Appellant No.1 was under the supervision of its Managing Director i.e. Appellant No.3 The appellant No.2 was not at all involved in the day to day management of the company……….”.
I, therefore, absolve appellant No.2 from the penalties imposed by the respondent. This view of mine is in line with the view taken by this Tribunal in Radhavallabh Dhoot (Appeal No.140/03) and Rahul H. Shah (Appeal No.133/03).
20. The impugned order stands modified as indicated above.
21. No order as to costs.
Sd/-
Justice Kumar Rajaratnam
Presiding Officer
Place: Mumbai
Date: 25th May 2005
Avm