SECURITIES AND EXCHANGES BOARD OF INDIA
ADJUDICATION ORDER
UNDER
SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
READ WITH
SECTION 15A(a) OF SEBI ACT, 1992
AGAINST
MOTWANI ENTREPRISES (P) Ltd.
FOR NON COMPLIANCEWITH REGULATION 9 OF SEBI (FUTP) REGULATIONS, 1995
I was appointed as Adjudicating Officer by SEBI vide order dated 23rd June, 2003 to inquire into and adjudge under Section 15A(a) of SEBI Act, 1992 the alleged non compliance of summons issued by SEBI, by Motwani Enterprises (P) Ltd. (MEL) for production of documents and submission of information pertaining to investigation in the matter of alleged irregularities in the transactions of shares of Roofit Industries Ltd. (“RIL”).
Accordingly, a show cause notice dated 1st September 2003 was issued to MEL. The said show cause notice alleges that MEL did not comply with the summons dated 23.07.02 and reminder dated 05.09.02 issued by SEBI for production of certain documents and submission of information to the investigating authority as detailed hereinafter. Vide summons dated 23rd July 02, MEL was called upon to furnish details of its shareholding, demat and bank account statements, its trades in scrip in of RIL and relationship with RIL etc.
The show cause notice was served on MEL on 04.11.04 through Mr. Vishwas Pathak, Advocate High Court, as per the authorization of MEL dated 03.11.04.
REPLY AND PERSONAL HEARING
Mr. Vishwas Pathak filed reply to notice vide letter dated 22.11.04 on behalf of MEL. In the personal hearing on 25.11.04 Mr. V. Ravi Kumar, practicing Company Secretary appeared on behalf of MEL. The submissions made in the letter and in the hearing are as follows:
MEL admitted having received summons dated 23.07.02, but stated that it had sought extension of time till 30.09.02 to submit documents sought by SEBI as it pertained to previous years and needed compilation from different sources and finalization of MEL’s accounts was in progress. Due to the losses suffered by MEL, many staff left its services.
It was contented that the expansion and diversification plans of MEL were stalled because of SEBI’s misdirected investigation; the negative publicity generated by SEBI investigation resulted in lenders backing off from financing, causing near bankruptcy.
It was further contented that the information sought by SEBI vide its summons was for the period 08.11.00 to 06.02.01 and 22.01.01 to 04.05.01 whereas the alleged price manipulation in the scrip of RIL related to the time period October 1999 to December 1999 and hence irrelevant. The information sought vide summons dated 23.07.02 were furnished in the adjudication proceedings as Annexure I to X to the reply dated 22.11.04. It was submitted that MEL has incurred severe losses and as many of its employees have left, its capacity to pay penalty is severely restricted. It was prayed that the proceedings be dropped.
APPRECIATION OF EVIDENCE AND FINDINGS
Vide summons dated 23.07.02 and 01.08.02, the company was called upon to furnish the following information/ documents:
1. Name and Address of promoters and directors during the last 3 financial years.
2 The complete details of shareholding pattern (Names of the shareholder, No of shares held by them. % of shares held by them to total capital) as on March 2000 and March 2001.
3. The names and addresses of group / associated entities.
4 Details of settlement wise/ broker wise trade executed in the scrip of M/s Roofit Industries Ltd. for the time periods March 2000 to March 2001 be given in the following format.
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Sr. No
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Name and address of the trading member
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Exchange/sett. No./ period
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Date of trading
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Gross Purchase
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Rate
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Gross sale
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Rate
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Net quantity
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5. A copy of the ‘Demat Securities’ of all the Demat / Beneficiary ‘ accounts in the name of the company and associated entities name from March 2000 to March 2001 highlighting the movement of shares into and out of the Company’s account.
6 To furnish a copy of the statement of all bank accounts for the time period March 2000 to March 2001 highlighting the payments made or received from the broker regarding trades in M/s Roofit.
7 To submit demat account no i.e.
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Client Name
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Client ID
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DP Name
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8 To confirm whether :
a) the noticee had/ have given any loan to the RIL
b) Group /associated entities had /have given loan to the captioned company. If yes, then details of such transactions /loans /arrangements be furnished.
9. To confirm whether :
a) The noticee had /have received any loan from the RIL
b) group / associated entities had /have received any loan from the RIL . If yes , then details of all such transactions /loans / arrangements.
10) To confirm whether :-
a) the noticee and its promoters /directors are / were directly or indirectly related to the captioned company. If yes, then details of such relationship be provided.
In response to SEBI’s summons, MEL vide its letter dated 12.08.02 sought time till 31.08.02 for providing details of information sought. Vide letter dated 28.08.02 further extension was sought by MEL till 30.09.02 to submit the information / documents sought.
SEBI vide its letter dated 05.09.02 once again advised the company to submit the information latest by 16.09.02.
Vide reply dated 22.11.04 to the SCN issued by Adjudicating Officer, certain information was provided as Annexure I to X thereto. Submission of information which was part of the summons to the Adjudicating Officer is irrelevant because the information was required by the Investigating Officer for the purpose of investigation. In the present proceedings, we are concerned with non-compliance of the summons issued by SEBI calling upon the noticee to furnish certain information and documents on 23.07.02.
However, from the material on record it is noticed that the following information sought was filed.
1. Names and addresses of promoters and directors
2. Shareholding Pattern
3. Names and addresses of group/associated entities
4. Details of Demat Account
5. Loans to Roofit Industries Ltd
6. Loans from Roofit Industries Ltd
7. Relationship with Roofit Industries Ltd
It was further stated therein that the remaining details of Annexure ‘A’ is under compilation. This is despite the fact that SEBI after issuing two summons as referred above and also an urgent reminder letter dated 05.09.02 directing the noticee to submit the information latest by 16.09.02 failing which appropriate action would be initiated.
vide letter dated 16.09.02, MEL had provided certain information as discussed later and had also requested for further time to furnish the balance information sought by SEBI. The contents of this letter are examined.
Under Sr. No. 1 of the letter cited, the list of names and address of promoters and directors of MEL is given in Annex 1. This is in response to item No. 1 of the summons. While SEBI wanted this information for the last three years, the information furnished by MEL is inadequate and unclear.
Under Sr. No. 2 of the letter dated 16.09.02, the shareholding pattern of MEL was furnished in Annex 2. This is in reply to item No. 2 of SEBI’s summons. While SEBI required MEL to furnish complete details of shareholding as on 31st March 2000 and 2001, MEL furnished information which is incomplete and unclear. Though the information sought in respect of item No.2 of the summons is furnished in an inadequate manner, nevertheless the names of the shareholders with their shareholding and % thereof has been furnished.
In Sr. No. 3 to the letter dated 16th September 2002, MEL has given details of names and address of group / associates entities in Annex 3. This is purportedly in reply to item No. 3 of SEBI’s summons. The information given may be treated as sufficient compliance in respect of this item of the summons.
In Sr. No. 4 to the letter dated 16th September 2002, MEL has given details of Client ID and the name of its DP. This is in reply to item No. 7 of SEBI’s summons. The information given may be treated as sufficient compliance in respect of this item of the summons.
In Sr. No. 5, 6 & 7 to the letter dated 16th September 2002, MEL has given details of loans given / received to / from RIL and relationship with RIL in Annex 5, 6, & 7. This is in reply to query No. 8, 9 &10 respectively, of SEBI’s summons. The information given may be treated as sufficient compliance in respect of this item.
There is no material to suggest that the company had complied with the aforesaid summons and furnished information, pertaining to queries 4, 5 & 6 of the summons in relation to the details of trading in the scrip of RIL, furnishing of demat account and bank account statement as specified. It is noticed that despite issuance of summons and repeated extension of time to submit the information, the company failed to furnish the full information sought by SEBI. It is difficult to understand as to why a company would require so much time to give details of trades in RIL scrip in the format provided etc (query 4). This information would be very crucial for SEBI to establish if artificial trades were being done in the scrip of RIL by entities associated with it. MEL has not furnished the required information in this regards.
It is not understood as to why MEL did not furnish copies of demat (item No.5) and bank account (item No.6) statements for the specified period although these can be filed easily. There was no compiling of information involved as claimed but; merely sending copies of the statement for the relevant period would have been in compliance with items 5 & 6 of the summons. MEL had not done so despite lapse of considerable time. The demat statement is important for SEBI as it would establish the movement of RIL scrip in and out of MEL’s account during the said period and help investigation arrive at a conclusion as to the involvement of MEL in the alleged price manipulation. MEL did not provide copy of the same to SEBI.
Similarly, the bank account statement would help investigators to track the fund flow and to examine if any money was received or paid by MEL from or to RIL or its associates during the period of price manipulations. MEL did not provide the bank account statement to SEBI.
It is significant to note here also from the bank account statement filed vide annexure VI to reply dt.22.11.04 on behalf of the noticee that the printouts of this statement was taken on 25.11.01 itself. Similarly, the demat statements that were filed as Annexure to the reply dated 22.11.04 were obtained on 19.09.02 as per the printout date. This being so, it is not understood as to why these statements were not submitted to the Investigation Authority at the relevant time i.e. in September, 2002. Therefore, the contention that compilation of information was being attended to and there was delay is contrary to the evidence on record. It is clear despite being in possession of the bank statement on 25.11.01 and demat statement on 19.09.02, these were not filed in response to the summons of the Investigating Authority and was filed after a lapse of three years before the Adjudicating Officer. These documents were required by the Investigating Authority for which summons were issued and no useful purpose would be served by filing the same before Adjudicating Officer at this stage after so many years of delay.
Even in respect of item Nos. 1 & 2 the information furnished by MEL is not complete as discussed earlier. This information is required by the Regulator to satisfy itself whether there was any artificial trades in the shares of RIL. This information sought vide query 4, 5 and 6 was within the realm of the company and could have been provided easily and there is no material to suggest that this was furnished by the company.
As can be seen, the summons dated 23rd July, 2002 had sought important information having a bearing on the investigations as discussed earlier. From the material on record it is seen that SEBI had initiated preliminary investigations in the matter of shareholding pattern of RIL and price manipulation in the shares of RIL, in December 2001 on the basis of a complaint that the entire shares RIL was directly and indirectly held by the management of the company. Low floating stock of the company creates conducive conditions for price manipulation. The price of RIL scrip moved up from Rs.127 to Rs.268 and the volumes traded increased from 2,100 shares to 113,400 shares in the short period October 1999 to December 1999.
Against this background, the details sought by SEBI vide its summons dated 23rd July 02 is absolutely vital for SEBI to carry out its solemn objective of investor protection and regulation of capital markets. Needless to say, non co-operation of such nature by the company which is being probed for its transactions in securities would hamper the progress of investigations. It is of utmost importance that vital information is collected quickly by the investigating authorities and analyze the same before deciding on what future course the investigation should proceed. It is clear that the company did not fully comply with the summons and did not furnish the necessary information as detailed above despite several extension of time to submit the same. The company has adopted dilatory tactics to delay and hamper the investigations. SEBI is mandated to protect the interest of investors in securities. Stock Market by nature are highly dynamic and corrective action need to be taken effectively and efficiently without loss of time in the larger public interest as demanded by the exigencies of situation.
In terms of Regulation 9 (3) of SEBI (FUTP) Regulations, 1995, the investigating officer shall have the power to examine orally and to record the statement of the person concerned. As per Regulation 9(1), it shall be the duty of every person in respect of whom the investigation has been ordered to produce to the investigating Officer such books, accounts and other documents in his custody or control and furnish him with such statements and information as the said officer may reasonably require for the purpose of investigation. Regulation 13 of SEBI (FUTP) Regulations, 2003 provides for repeal of 1995 regulation and savings of any action taken under the 1995 regulations.
Section 15A(a) of the SEBI Act, 1992 reads as under:-
Penalty for failure to furnish information
If any person who is required under this Act or any rules or regulations made there under :
(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less for each such failure.
While deciding on the quantum of penalty, it would be appropriate to refer to the order passed by the Hon’ble SAT in Alkan Projects Pvt Ltd Vs SEBI (Appeal No.88/04) dated 9.8.04 wherein it was stated that the capacity to pay the penalty also has to be considered while imposing penalty. The following is extracted from the said order:
“Although Section 15J does not consider impecuniosity as a factor in adjudicating the quantum of penalty, it appears to us it would be an important factor along with the three factors mentioned in 15J viz., (a) amount of disproportionate gain (b) amount of loss caused to the investor and (c) repetitive nature of default.
The Supreme Court in its pronouncement dealing with compensation under the criminal procedure code has held that the means of the accused has also to be considered if a workable order is to be passed (see) (i) (1978) 2 SCC 111, Sarwan Singh Vs Punjab (ii) (1988) 4SCC 51 Hari Singh Vs Sukhbir Singh.
Although the judgements related to trials with respect to criminal trials it would not be out of place to mention that the principle laid down by the Supreme Court with regard to the ability or the means of the appellant to pay a penalty in monetary terms would also apply on principle to the law laid down by the Supreme Court.”
The Hon’ble SAT in the orders referred above had also observed that while imposing penalty the provisions regarding court fees as per Rule 9 of the SAT (Procedure) Rules, 2000 also needs to be taken into account since there is statutory right of appeal.
From the copy of the balance sheet of MEL as on 31.03.00, filed by Mr. V. Ravikumar vide letter dated 29.11.04, it is seen that MEL had made a profit after tax of Rs.28,706/- for the period 14.07.99 to 31.03.00. Although, MEL is not a loss making company as per its own admission its ability to pay is limited and as per Hon’ble SAT’s order cited, ability to pay is one of the factors to be taken into account while imposing penalty besides the factors contained in Section 15J of SEBI Act, 1992.
In view of the foregoing, it is established that there is no compliance whatsoever by M/s Motwani Entreprises (P) Ltd. to queries 4, 5 & 6 of the summons issued by the Investigating Officer of SEBI on 23rd July 02 and letter dated 5th September 02. It is also seen that Motwani deliberately did not furnish information which was already in its possession in respect of queries 5 & 6, as discussed earlier. In respect of item No. 1 & 2 of the summons, the information provided can be treated as part-compliance. The company did not cooperate with the Investigating Officer and did not comply with the summons issued in a matter involving larger public interest as the information was sought in terms of the summons to investigate into the price manipulation in the scrip of RIL which as seen earlier had witnessed unusual rise in prices and volumes traded within a short period of 3 months. The price had shot up for Rs.127 to Rs.268 and the volumes traded registered a steep increase from a meager 2,100 shares to 113,400 shares in a short period between October 1999 and December 1999.
This type of non compliance with the summons issued repeatedly, adopting dilatory tactics and stonewalling the investigations into the price rigging in the shares of Roofit Industries Ltd. launched by the statutory regulator in the larger public interest with the avowed objective of protecting the interest of investors in the securities market calls for a deterrent penalty that sends a signal to all those connected with the securities market that such callous and indifferent attitude will not be viewed leniently.
ORDER:-
Having regard to the factors contained in Section 15J of SEBI Act, 1992, the ability of the company to pay the penalty and following the order of Hon’ble SAT in Alkan Projects Pvt Ltd cited supra, I hereby impose a penalty of Rs.30,000/- (Rupees Thirty Thousand only) on M/s Motwani Entreprises (P) Ltd. under Section 15A (a) of SEBI Act, 1992.
| Date: December 30, 2004 |
S V Krishna Mohan |
| Place: Mumbai |
Adjudicating & Enquiry Officer |