SECURITIES AND EXCHANGE BOARD OF INDIA
ADJUDICATION ORDER AGAINST SOMPLAST LEATHER INDUSTRIES LTD UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 READ WITH SECTION 15-I OF SECURITIES AND XCHANGE
BOARD OF INDIA ACT, 1992.
1.0 INTRODUCTION
1.1 The instant proceeding is directed against the non furnishing of information, in compliance of summons issued by the Investigating Authority (IA) appointed under Section 11C(1) of the Securities and Exchange Board of India Act, 1992 (hereinafter called "Act"). Pursuant to the BSE's Investigation report received by SEBI wherein the trading pattern of the shares of Somplast Leather Industries Ltd. (SLIL) for the period from January 2, 2002 to October 01, 2002 was examined, the SEBI Board ordered an investigation to find out the alleged irregularities and possible violation of provisions of the Act and various rules and regulations framed there under. During the said investigation by the Board, SLIL was summoned to provide certain information relating to its violating the Listing agreement of BSE by making preferential allotment of equity shares and dematerialized part of the additional issue without taking in-principle approval for listing in the preferential issue on exchange, during the investigation period.
1.2 Based on the finding of the investigation report, prima facie it appeared to the Board, that the said SLIL had failed to provide information in response to summon issued by the IA and made itself liable for initiation of action U/S –15A (a) of the Act. Consequently, the undersigned has been appointed as an Adjudicating Officer under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter called as "Rules") to inquire into the alleged violation of non-compliance of summon issued by the Investigating Officer. The aforesaid appointment was communicated vide proceedings of the Whole Time Member, SEBI, dated August 3, 2005.
2.0 NOTICE
2.1 A show cause notice (SCN) dated August 10, 2005 under Rule 4(1) of the said Rules was issued to Somplast Leather Industries Ltd. communicating the detailed charges leveled against it.
3.0 REPLY
3.1 Somplast did not reply to the SCN, though the time for filing the same had expired.
4.0 THE INQUIRY
4.1 In view of the above, the undersigned was of the view that an inquiry should be held in the matter and a notice of inquiry was therefore issued to Somplast vide letter dated September 9, 2005, fixing the date of inquiry on September 21, 2005. No authorized representative of Somplast appeared before the undersigned. Also no request for adjournment was received for the inquiry on the cited dated. Therefore, the undersigned decided in terms of Rule 4(7) of the said Rules to proceed with the inquiry, as it appeared that Somplast deliberately avoided filing of reply to the notice under Rule 4 (3) of the said Rules and also failed to appear for the inquiry despite service of notice of inquiry.
5.0 BACKGROUND
5.1 SEBI received investigation report of the BSE vide letter dated May 31, 2003, wherein the trading pattern of the shares of Somplast for the period from January 02, 2002 to October 01, 2002 (settlement nos. 192 / 2001 – 2002 to 132 / 2002 – 2003) was examined. It was alleged that the company made a preferential issue of 2.425 crore equity shares of Rs. 10 each and dematerialized the additional shares with CDSL and NSDL without listing the additional shares on the exchange. Further, the company refused to dematerialize 900 shares held by Rajkot Investment Trust Ltd. [Address: M K Ghiya Bldg, 2, Diwanpara Road, Rajkot – 360 001] under the pretext that those shares were stolen.
5.2 A preliminary investigation was initiated by SEBI to look into the matters. Subsequently, a formal investigation into the dealings in the shares of Somplast Leather Industries Ltd. was initiated by SEBI and vide order dated September 23, 2004, Shri M. S. Ray (Division Chief) was appointed as the Investigating Authority (IA).
5.3 During the course of investigations IA issued letters/summons to SLIL and sought information relating to preferential issue of equity shares and dematerialization and listing on the exchange of the said SLIL's shares which is described as under:
a. The names and address of the promoters and directors of the SLIL
b. The details of any issue of capital made by the above-mentioned SLIL during the period from January 01, 2000 till date. The details shall include the number of shares issued, the entities to whom the shares were issued, etc.
c. The details of the dealings of the promoters/directors of the SLIL in the scrip during the investigation period
d. The shareholding pattern of the SLIL as on January 01, 2002 and any transfers of shares that have been effected during the investigation period.
e. A copy of the agreement entered into by the SLIL with the depositories for the purpose of dematerialization of the shares of the SLIL.
f. The details of all the Demat Requisition Numbers (DRN) received by the SLIL during the period from January 01, 2000 to September 30, 2002.
5.4 The above information was called for from the SLIL vide letters dated September 30, 2003 and October 17, 2003 and summons dated November 18, 2004. However, no reply was received from SLIL. The details of the letters/summons seeking information from SLIL is explained as under:
Letter dated
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To be complied by
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30.09.03
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15.10.03
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17.10.03
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24.10.03
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18.11.04*
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29.11.04
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*summons to furnish information/documents u/s. 11(3) and 11C(3) of SEBI Act, 1992
5.5 Upon conclusion of investigations certain serious violations were allegedly observed in respect of SLIL viz; (i) excess issue of equity shares on preferential basis without taking in-principle approval for the same which was in violation of Clause 24 (a) of the "Listing Agreement" of BSE, and SEBI circular no. SMDRP/Policy/Cir-15/2001 dated March 8, 2001, (ii) failure to furnish information as required in the investigation process which is in violation with provisions of Section 11(3), Section 11C (3) read with Section 15A (a) of the SEBI Act, 1992, etc.
6.0 REPLY
6.1 It is observed that SLIL neither filed any reply nor made any oral submissions as nobody appeared for the personal hearing. The notices were duly served upon SLIL during the present proceedings. I now proceed with this inquiry on the basis of available material in the records.
7.0 FINDINGS
7.1 It is observed from the records that SEBI initiated investigations into the trading pattern of the shares of SLIL for the period from January 02, 2002 to October 01, 2002 (settlement nos. 192 / 2001 – 2002 to 132 / 2002 – 2003). It was found that the SLIL made a preferential issue of 2.425 crore equity shares of Rs. 10 each and dematerialized the additional shares with CDSL and NSDL without listing the additional shares on the exchange. Further, the company refused to dematerialize 900 shares held by Rajkot Investment Trust Ltd.
7.2 The Investigating Officer of SEBI issued letters/summons to SLIL to appear in person and also to furnish information / produce documents pertaining to share capital and share holding pattern of the company, details of promoters & directors during the period of investigation and their dealing in SLIL scrip, copy of demat statement and details of Demat Requisition Number (DRN) received during the period of investigation. It is observed that following letters /summons were sent to SLIL:
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Letter dated
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To be complied by
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30.09.03
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15.10.03
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17.10.03
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24.10.03
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18.11.04*
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29.11.04
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* summons to furnish information/documents u/s. 11(3) and 11C(3) of SEBI Act, 1992
7.3 It is found that SLIL has failed to respond to above letters/summons and in doings so the company has prevented the Investigating Authority from accessing the information / documents relating to issue and allocation of preferential issue and in-principle approval for the listing of the said shares with the exchange, and other related information as mentioned in the said letters/summons. I have also observed that summons/letters were issued quite in advance and sufficient time was given to the company to respond and assist the investigations being carried out.
7.4 The aforesaid information/documents sought vide above letters/summons, according to me, were vital and crucial for the regulator to ascertain occurance of any irregularity and also enable it to take approriate counter measures to protect the interest of investors, in a time bound manner.
7.5 The non co-operative attitude of the company SLIL has even continued during the present proceedings of adjudication as well. The company was issued show cause notice dated August 10, 2005 and was given 14 days time to respond by way of written submissions, but this time too it has chosen not to reply. This has further continued when nobody from SLIL attended the personal hearing fixed on September 21, 2005 before me.
7.6 Therefore it can be concluded that SLIL has not complied with the provisions of Section 11 (3) and 11C (3) of SEBI Act, 1992 by way of non-compliance of statutory summons requiring it to file documents/informations, which was very crucial to the whole investigation process. I am of the considered view that it is a fit case for imposition of adjudication penalty against SLIL under Section 15A (a) of SEBI Act, 1992.
7.7 To determine the quantum of penalty under Section 15A (a), the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz. (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or in group of investors as a result of the default and; (c) the repetitive nature of the default.
7.8 From the material on record, the figures of disproportionate gains, unfair advantage or loss to the investors, cannot be ascertained. However, the persistent non-co-operative attitude of SLIL can be seen throughout the process of investigation and as well as in the present adjudication proceedings. This is repetitive in nature and should be dealt firmly.
7.9 In the past this has been quite prevalent that many fly by night companies have duped the investors and then got vanished from the scene. Regulators have faced serious problems and constraints in catching those companies. If the companies are not responding to their regulators then one can imagine the plight of innocent investors as to what response they will be getting to their grievances with the companies. To deal with the situation the legislatures have laid down stringent provisions in the Act, so that the regulators using the said provisions could deal with the situation in an effective manner. Hon'ble Securities Appellate Tribunal (SAT) has in Yogi Sungwon (I) Ltd Vs SEBI (Appeal no. 2000/2001) in paragraph 25 of the order has said, "It is not that the penalty is attracted per se the violation. The Adjudicating Officer has to satisfy that the violation deserved punishment." Taking a definite clue from the guidance of SAT order, I hold that for the aforesaid reasons the violation of Section 11 (3) and 11C (3) of SEBI Act, 1992 by the company SLIL deserves the punishment and for which penalty is prescribed under section 15A (a) of SEBI Act, 1992, which inter-alia reads as under:
Section 15A (a): Penalty for failure to furnish information, return, etc.
"If any person, who is required under this Act or any rules or regulations made thereunder-
(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];
(b) ……
(c) ……."
7.10 Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 2,00,000 (Two Lacs Only) on Somplast Leather Industries Ltd., for the reasons discussed above. This penalty is justified and appropriate in the light of discussions aforesaid.
7.11 Somplast Leather Industries Ltd shall pay the said amount of penalty by way of demand draft in favour of “SEBI- Penalties Remittable to Government of India”, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to the Chief General Manager, Investigation Department, ID-5, Mittal Court, 1st Floor, B- Wing, 224, Nariman Point, Mumbai 400 021.
DATE: SEPTEMBER 30, 2005 AMIT PRADHAN
PLACE: MUMBAI ADJUDICATING OFFICER