Order against M/s SPS International Ltd in the case of Gold Multifab Ltd

ORDER UNDER SECTION 11B OF SEBI ACT, 1992 AGAINST M/S SPS INTERNATIONAL LIMITED AND ITS CHAIRMAN AND MANAGING DIRECTOR MR. S. K. JAIN IN THE CASE OF GOLD MULTIFABLTD.

Gold Multifab Ltd. (GML) came out with a public issue of 27,50,000 equity shares of Rs. 10/- each for cash at par aggregating Rs. 275 lacs between February 27 and March 1, 1996. SPS International Ltd. (SPS) had acted as Registrars to the Issue. Investigations were ordered to enquire into the affairs relating to subscription in the public issue of GML The investigations revealed that GML had made allotments to applicants who applied after the closure of the issue with antedated stockinvests. Shares were also allotted to applicants who had cancelled their stockinvests i.e. without receiving the consideration. It was also revealed during the investigations that the Public Issue was not getting subscription and so the required amount of minimum subscription was arranged through financial arrangement by SPS. The understanding was that the financier would apply in the public issue to ensure that requirement of minimum subscription is met with; and once the shares were allotted and listed, these would be bought back by the Promoters of GML from financiers and financier would get back loan (with interest) advanced as subscription.

Investigations were carried out with Bank of India, Cumballa Hill Branch, Mumbai (BoI) which had issued 18 stockinvests for Rs. 165.75 lacs, on 24/4/96 and 26/4/96 i.e, stock invest issued after the closure of the public issue accompanied applications which were pre-dated as if made before closure of the issue which closed on March 1, 1996. These late applications (which were made after the closure of the issue) were considered for allotment by SPS, the registrar to the issue . Details of these applications are as follows:
 

Sr. No.	Applicant	Amount of stockinvest	Date of Issue (as per BoI)
1	Tejas Shah	1000000	24/4/96
2	Indu Ben Rana	1000000	26/4/96
3	Novel Serrao	1000000	24/4/96
4	Ganesh Sakpal	1000000	24/4/96
5	Kishore Chokhani	1000000	24/4/96
6	Sanjay Bakliwal	1000000	24/4/96
7	Subhash Sankpal	1000000	24/4/96
8	Radheshyam Chokhani	1000000	26/4/96
9	Rajesh K Shah	935000	26/4/96
10	Deepal Shah	935000	26/4/96
11	Sanjay Shah	935000	26/4/96
12	Chiman Lal Shah	935000	26/4/96
13	Rajul Shah	935000	26/4/96
14	Samrath Shah	935000	26/4/96
15	Anil Chokhani	800000	26/4/96
16	Datta More	1000000	24/4/96
17	Narendra Parmar	165000	26/4/96
18	Rekha Lodaya	1000000	24/4/96
	Total	16575000

Further, it was observed that subscription through 8 applications aggregating to Rs. 75 lacs were received with stockinvests issued by Centurion Bank, Nariman Point, Mumbai on 1/3/96. Later these stock invests were cancelled on 4/3/96.

Sr. No.	Applicant	Amount of stockinvest
1	Pankaj Shah	1000000
2	Sangeeta Shah	1000000
3	Nita Shah	1000000
4	Tejas Shah	1000000
5	Kanti Lal Shah	1000000
6	Nitin Kumar Didwania	1000000
7	Pravina Shah	500000
8	Hemendra Shah	1000000
	Total	7500000

However, it was seen that these applicants were also allotted shares in the public issue of GML even when no consideration was received from these applicants. These applications were also made after the closure of the issue. It was observed that after finalisation of the Basis of Allotment with Vadodara Stock Exchange (VSE), GML allotted 26,87,400 shares to 1794 applicants which included applicants who had applied after the closure of the issue with antedated stockinvests (issued by Bank of India) and also applicants who had applied after the closure of the issue and whose stockinvests were cancelled (stock invests issues by Centurion Bank were cancelled). These shares, for which consideration was either not received at all or was received after the closure of the Issue, accounted for about 34% of the shares allotted. GML, thus, allotted shares without receiving the minimum subscription.

In the course of investigations it was noticed from the ledger accounts pertaining to six associates of SPS in the books of Gold Multifab Ltd., that large sums (Rs. 185.80 lacs) had been transferred from the account of GML to these entities. Almost whole of the subscription received in the public issue was transferred to associates of SPS. MD of GML also admitted to having paid these funds to associates of SPS. Details of the same are given below:
 
 

Transferee	Amount as per Ledgers (Rs.)
Prime Investments	20.00
Jai Bhawani Entps.	18.30
Vishnu Associates	30.00
Rama & Company.	66.14
Vishal Manufacturers	20.56
Balaji Finance	30.80
Total	185.80

Investigations further brought out that these funds were deposited into the bank accounts of these entities which were used to pay back amount subscribed by financiers.

This financial arrangement for garnering minimum subscription was further corroborated from extracts from the Cash Flow Statement forming a part of the audited Annual Accounts of GML for the year 1996-97. Annual accounts showed that an amount of Rs. 1,01,97,000 arose as Proceeds from Issue of Share Capital, while an amount of Rs. 1,29,54,000 has been shown as Deployment towards Inter-Corporate Deposit. Of this figure of Inter-Corporate Deposit, Rs. 129.04 lacs is the amount shown as "Non-Current Assets" arising from payments to associates of SPS. From this it is clear that almost the entire inflow from the public issue were transferred to the associates of SPS.

Mr. Vivek Bhatia, M.D., GML, when questioned as to reasons for which such large payments were made to SPS, stated that he has handed over a signed blank chequebook to SPS in order to meet Public Issue expenses but the blank signed cheques were misused by SPS to make payments to its associates. Investigations revealed that issue was not getting the required minimum subscription and this requirement was shown to have been met through financing arrangement. This is evident from the following finding of investigations.

It was seen that some of the major applicants had made applications from two addresses: 301, Anmol Housing Co-op Soc. Ltd., French Bridge, Opera House, Mumbai and Secretariat Dept., Empire House, S. B. Marg, Lower Parel, Mumbai. All these applications were traced to Mani Investments, an entity engaged in financing operations i.e. in advancing loans in the garb of subscription to Issues with the understanding that the shares, once allotted, would be bought back by the Promoters of the Issuer Company, after paying for the interest on the amount financed for the concerned period.

Details of these applications and allotments made against such applications are as follows:
 

Sr. No.	Applicant	Shares Applied	Shares Allotted
1	Rajesh Sharma	2,00,000	41,000
2	Poonam Singh	2,00,000	41,000
3	Ratin Sampat	2,00,000	41,000
4	Tejas Shah	2,00,000	41,000
5	Indu Ben Rana	2,00,000	41,000
6	Novel Serrao	2,00,000	41,000
7	Ganesh Sakpal	2,00,000	41,000
8	Kishore Chokhani	2,00,000	41,000
9	Sanjay Bakliwal	2,00,000	41,000
10	Subhash Tankpal	2,00,000	41,000
11	Radheshyam Chokhani	2,00,000	41,000
12	Rajesh K Shah	1,87,000	38,300
13	Deepal Shah	1,87,000	38,300
14	Sanjay Shah	1,87,000	38,300
15	Chiman Lal Shah	1,87,000	38,300
16	Rajul Shah	1,87,000	38,300
17	Samrath Shah	1,87,000	38,300
18	Anil Chokhani	1,60,000	32,800
19	Narendra Parmar	82,500	6,800

From the extracts of the Bank accounts of GML and the associates of SPS with Corporation Bank, Friends Colony, New Delhi, the following payments were noticed to have been made to Mani Investments by the associates of SPS who were paid Rs.185 lakhs out of the issue proceeds. The amounts for making these payments to Mani were received by these entities from GML, as detailed below:
 

Date	Paid to Mani by	A/c no.	Amount	Cheque No.	Corresponding Dr. Amt.	A/c.
16/5/96	Vishnu Assoc.	CA-316	901350	0432653	900000	CA-333
16/5/96	Vishal Manuf.	CA-318	901350	0002723	900000	CA-333
16/5/96	Rama & Co.	CA-317	1225836	0004336	795000	CA-333
					324000	CA-349
25/5/96	Rama & Co.	CA-317	1602100	0004343	1600000	CA-349
16/5/96	Balaji Finance	CA-357	901350	0004384	900000	CA-333
25/5/96	Balaji Finance	CA-357	1682130	0004387	1680000	CA-349
	Total		7214116

Perusal of the fund flows shows that the entire payment of Rs. 72.14 lacs made to Mani Investments was paid from the account of above mentioned associates of SPS who as stated earlier in turn received funds from GML. When confronted with the above evidences, Mani Investments submitted that they had financed applications through stockinvests aggregating Rs. 71.94 lacs in the Public Issue of GML and that an aggregate amount of Rs. 72.14 lacs was received by it as repayment of the financing done. It was also stated that they had not received shares allotted to them and they were never bothered about the shares as the amount subscribed were received back by them with interest. It was also admitted that applications were made after the closure of the issue.

On the basis of the above evidences gathered in the course of investigations, it is clear that Registrar colluded with GML and its Directors in making allotments to applicants who had applied about 7 weeks after the closure of the issue and to applicants, whose applications were accompanied by antedated and cancelled stockinvests, without receiving any consideration. The allotment was made to these invalid applications in violation of Section 69 of the Companies Act, 1956, SEBI Guidelines on Disclosure and Investor Protection (June 18, 1992) and also the terms and conditions of the Prospectus for the Issue. It was noticed that Registrar also failed to ensure proper despatch of share certificates, refund orders, cancelled stockinvests, and provided false/misleading information to be incorporated in the 78-Day Report. It was observed that proceeds of the Public Issue of GML were received by associate concerns of SPS for making repayments to financiers (Mani Investments) who made applications to bail out the issue and give appearance of meeting the requirement of minimum subscription. It thus appeared SPS colluded with GML in making available proceeds of Public Issue to GML for purchase of its own shares, in contravention of Section 77 of Companies Act, 1956.

Pursuant to the investigations showing prima facie irregularities, enquiry proceedings were initiated by SEBI under its Regulations including SEBI (Registrars to an Issue and Share Transfer Agents) Rules & Regulations, 1993 on March 31, 1999. A show cause notice was issued by the Enquiry Officer on the Registrar on April 19, 1999. The Registrar submitted a written reply to the show cause notice on May 21, 1999, informing that its registration with SEBI had expired on 15/9/97 and has since not been renewed. Since the intermediary was no longer a registered intermediary, enquiry proceedings were discontinued.

In light of the aforesaid facts, SPS was asked to show cause why suitable directions under Section 11B of SEBI Act, 1992, including directions for debarring them from acting as an intermediary in the capital market, prohibiting access to the capital market and dealing in securities, should not be passed against SPS and its Director Shri SK Jain. This show cause notice was issued in supercession of the earlier show cause notice issued by Enquiry Officer.

SPS has replied to the show cause vide their letter dated 21/06/2002. SPS has denied all the charges against them. They have put the entire blame on M/S Gold Multifab Ltd. and its MD_Mr. Vivek Bhatia. They have stated the allegation of the firms mentioned in the show cause as being their associates has to be proved beyond any doubt. They have stated that the dealings of Mr. Vivek Bhatia with the six firms was a totally commercial transaction and that they have no role to play in this matter. They have requested for no action to be taken against SPS and its Director.

An opportunity for personal hearing before me was given to SPS which was not availed of by them. in their written submission the Chairman and MD of SPS- Mr. S K Jain has stated that neither the Company (SPS) nor he has received any single penny out of the issue proceeds other that the official fee charged by SPS from GML for discharging duties of Registrar to Issue.

I have carefully examined the findings of investigation, submissions made from time to time and material and evidence available on record. I find that the charges levelled against the Registrar was fully substantiated. I find that Registrar allotted shares to applicants who had applied much after the closure of the issue . I also notice that shares were allotted to applicants, who got stock invests cancelled and did not give/ bring any consideration. These acts were in violation of SEBI Guidelines dated 2/1/92 and Section 69 of the Companies Act. It was also noticed by me that Registrar failed to ensure proper despatch of share certificates, refund orders and provided false/misleading information to SEBI in respect to subscription received and despatch of shares. I also notice that Registrar abetted promoters of GML in arranging finance for circumventing requirement of minimum subscription. The applications were arranged with the understanding that shares once allotted and listed would be purchased back by the promoters from the issue proceeds and the financier would be paid the amount subscribed with interest. I find that Registrar alongwith promoters of GML was involved in purchase of its own shares, in contravention of Section 77 of Companies Act, 1956. In view of above I find that there is no merit in the argument that neither the Company (SPS) nor he has received any single penny out of the issue proceeds other that the official fee charged and it is promoter of GML who was responsible for misdeeds mentioned in the show cause notice.

In view of the above, I in the exercise of powers conferred upon me by Sec. 4 (3) and 11 B of SEBI Act 1992 in the interest of investors and capital market, direct that M/s. SPS International Limited be prohibited from accessing the capital markets for a period of 2 years. I also direct that Mr. S. K. Jain, Director of the M/s. SPS International Limited also be debarred from dealing in securities for a period of 2 years. This order shall come into force with effect from 20^th September, 2002.
 

 

Date: 18/9/2002

Place: Mumbai