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In the matter of Genomics Biotech Ltd

May 11, 2006
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Orders : Orders of SAT

IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

Appeal No.69/2004

 

Date of Decision

11.05.2006

 

In the matter of:

 

Genomics Biotech Ltd.,

Appellant – Represented by Mr. Vishwas Pathak , Advocate

Versus 

 

1. The  Stock Exchange, Mumbai

2. Securities and Exchange Board of India

Respondent – Represented by Mr. P. N. Modi, Advocate

Respondent – Represented by Mr. V. N. Shignapurkar, Advocate

 

Coram:

          Justice N. K. Sodhi, Presiding Officer

          C. Bhattacharya, Member

          R. N. Bhardwaj, Member

 

Per: Justice N. K. Sodhi, Presiding Officer(Oral)

 

          Challenge in this appeal is to the communication dated 17th December, 2003 addressed to the appellant by the Bombay Stock Exchange (BSE) whereby the former was informed that its application for listing 50 lacs equity shares had been rejected by the Listing Committee of the Exchange in its meeting held on 15th of October, 2003.  A copy of the proceedings of the meeting of the Listing Committee was attached to the communication.

 

          The appellant Genomics Biotech Ltd., (for short GBL) is a public limited company which is listed on the regional stock exchange at Delhi and also with BSE.  It is alleged that with a view to extend its business in Biotechnology it approached Lord Krishna Infotech Ltd., (LKIL), an existing Information Technology company for diversification and to enter into the field of Bio-Informatics involving use of information technology to the field of Biotechnology.  It is further alleged that the directors of both companies agreed to join hands and get their respective companies evaluated through their Chartered Accountants.   LKIL held its extra ordinary general meeting on December 30, 2001 and decided to allot 1 crore equity shares to GBL.  Similarly GBL held its extra ordinary general meeting on December 31, 2001 and decided to allot 50 lacs equity shares to LKIL.  The formal allotment of these shares was made by the Board of Directors of both the companies in their meetings held on 8th January, 2002.  GBL allotted 50 lacs shares of Rs.10/- each  to LKIL at a premium of Rs.10/- and in return accepted 1 crore shares of LKIL.  In other words, the allotment of shares  by the  two companies was made on swap  basis in the ratio of 1:2.

 

          Having made the aforesaid allotments on swap  basis GBL approached the regional stock exchange at Delhi and made a formal application for listing its 50 lacs shares allotted to LKIL.  It appears that the stock exchange at Delhi addressed several letters to the appellant seeking information from it regarding the preferential allotment of shares to LKIL.  The appellant failed to respond to the letters sent by that exchange and the information sought was not furnished.  The Delhi Stock Exchange then addressed a communication to the Securities and Exchange Board of India (for short the Board) Mumbai informing the latter that since GBL had failed to furnish the required information and also considering the fact that LKIL was a non existing company since it did not exist at the given address which was an open piece of land with some debris lying thereon, the listing application filed by GBL was being closed.   The appellant did not take any action thereafter.  GBL then made an application dated 16/2/2002 to the BSE to list the additional of 50 lacs shares on its exchange.  It is this request which has been declined by the Listing Committee of the BSE for reasons which have been stated in the minutes of its meeting held on 15/10/2003.  Hence this appeal. 

 

          We have heard the learned counsel for the parties and find no merit in the appeal.  Having gone through the records of the appeal paper book we are satisfied that GBL and particularly its Managing Director had been acting fraudulently in the matter of allotment of additional shares to LKIL on swap  basis.  As already observed 50 lacs shares of GBL were allotted to LKIL in the extra ordinary general meeting held on December 31, 2001.  It is on record that M/s. Neeraj Gupta & Co., Chartered Accountants prepared a valuation report of GBL on 4/7/2002 observing therein that the value of its share was Rs.8.50 per equity share after rounding off.  It is obvious that this valuation report could not have been taken into consideration by GBL or its shareholders when it decided to allot the preferential shares to LKIL on 31/12/2001.   Even before the valuation report of the company was prepared by its Chartered Accountants, the company had already decided to allot additional shares to LKIL on swap  basis.  We fail to understand as to how this could be done.  Allotment on swap basis could not be made without knowing the net worth of the company.   Be that as it may, it is the case of the appellant that both the companies were evaluated by their respective Chartered Accountants who had recommended the  swap  ratio of 3 shares of GBL to 4 shares of LKIL.  Admittedly, both the companies did not accept this swap ratio and on some basis    which is not disclosed to us and not even to  the BSE, the allotment was made in the ratio of 1:2.  The learned counsel for the appellant was at pains to point out that the ratio of 3:4 as suggested by the Chartered Accountants is  1.5:2 and this was rounded off by the appellant to 1:2.  This rounding off on the face of it is absurd.   Though  the learned counsel for the appellant admits that it was a mistake committed by the two companies, we do not think that this was a mistake.  They had a hidden   game plan and this was done by design and since they were not acting transparently BSE was justified in rejecting the request for listing.

 

          The fraudulent conduct of the appellant and its Managing Director is further borne out from the fact that in the notice issued for the extra ordinary general meeting on December 31, 2001 this company did not disclose the interest of  its Managing Director in LKIL  to which 50 lacs equity shares were being allotted.  It is admitted before us that  LKIL has two directors on its Board who are the sons of Shri Shiv Kumar Gupta, the Managing Director of the appellant.   This  relationship was not disclosed.   Not only this, the two daughters-in-law of  Shri Shiv Kumar Gupta (wives of his two sons) are also promoters of LKIL and his grand son is also a shareholder in that company holding 10% shares.  Each of the two daughters in law hold 25% shares in LKIL.  These relationships which are material information were not disclosed to the shareholders of GBL which is a public limited company.  GBL and its Managing Director obviously, defrauded the public and its shareholders by withholding this material information.

          When  the application for listing came up for consideration before the Listing Committee of the BSE, it found that the swap ratio of 1:2 as adopted by the two companies (GBL and  LKIL) was not fair and since it aroused its suspicion, it appointed an independent Chartered Accountant to evaluate the two companies and submit a report.  The independent Chartered Accountant M/s. Vijay Mehta & Co., submitted its report dated 16/6/2003 to the BSE and pointed out that the swap ratio as per valuation of shares of GBL and  LKIL  should have been 2:35 i.e. for every two shares of GBL, 35 shares of  LKIL should have been exchanged.  When this report was received by BSE, it became clear to it that the ratio of 1:2 as adopted by the two companies was with a sinister motive and that  GBL had not acted in a transparent manner all through.   We are in agreement with the view expressed by BSE and find no ground to hold otherwise.

 

          There is yet another reason why we are upholding the order of BSE declining the request of the appellant to list the additional 50 lacs equity shares.  These shares were allotted on preferential basis to LKIL which appears to be a vanishing company.  The address of LKIL as furnished by GBL wa

+s found to be incorrect and there was no company existing at the spot when the Stock Exchange, Delhi made its enquiries.  We are more than satisfied that the allotment was not fair and that the BSE was right in not allowing the request of the appellant for the listing of the additional shares. 

          Before concluding we may mention that the appellant company and  its Managing  Director have from the beginning made attempts to defraud the shareholders of GBL who are members of the public and made the  allotment in a fraudulent manner to LKIL without disclosing the interest in that company.  Even the relationship with the directors and shareholders of that company was withheld from the shareholders of GBL. By not adopting the fair swap ratio of 2:35 as suggested by the independent chartered accountant, GBL and its managing director have obviously diluted the net worth of GBL which is a fraud on its shareholders. We are of the view that this is a fit case where the Board should investigate into the affairs of the appellant and proceed against it in accordance with law.

          In the result, the appeal fails and the same stands dismissed with costs which are assessed at Rs.50,000/-.  The appellant shall deposit this amount with  the BSE within four weeks from the date of receipt of a copy of this order.

 

sd/-

Justice N.K. Sodhi
Presiding Officer

sd/-

C.Bhattacharya
Member

sd/-

R.N.Bhardwaj
Member

11/05/2006.

Smn/11/5/