DEPUTY GENERAL MANAGER
INVESTIGATIONS DEPARTMENT
IVD/ID6/BM/MIL/ /2006
December 8, 2006
M/s. Magan Industries Ltd.
32, Rajsukh Complex,
Opposite Gujrath Vidyapith,
B/H Lotus Co-Op Hsg. Ltd.,
Ashram Road,
Ahmedabad – 380 014.
Sub: Notice to show cause under Section 11 and 11B of SEBI Act, 1992 read with Regulations 11 and 13 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 in the matter of Magan Industries Ltd.
1.0 Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigations into the dealing in the scrip of Magan Industries Ltd. (hereinafter referred to as ‘MIL’ or ‘the company’) based on advertisements that appeared in different local and national news papers for three consecutive days (10th to 12th July, 2002) before the meeting of Board of Directors of MIL. The company, MIL was incorporated in January 1991 as a public limited company and was promoted by Shri Dashrath Singh Shekhawat. The scrip was listed at ASE on April 15, 1993.
2.0 It was observed during investigations that the company has not paid dividend since 2000. The scrip of the company was shifted to "Z" group from "B2" group with effect from 12th September 2003. The company had not submitted quarterly results for the quarter ending, March 2003 & June 2003 as per the requirement of Clause 41 of the Listing Agreement. Hence, the company was issued show cause notice by the exchange. In the absence of any compliance pursuant to the said show cause notice, the Exchange decided to suspend trading in the securities of the company w.e.f. 27th January 2004, until further notice. The scrip was traded on the exchange till 23rd January 2004 with volume 79,700 shares and closing price of the scrip was Rs. 0.31.
Table 1: Share Holding Pattern-
|
|
As on 31/12/2001
|
|
Share Holders
|
No of Shares
|
% Holding
|
|
Indian Promoters
|
3908100
|
15.33
|
|
Private corporate Bodies
|
1985068
|
7.78
|
|
NRIs
|
244500
|
0.96
|
|
General public
|
19362332
|
75.93
|
|
Total
|
25500000
|
100
|
3.0 The details of advertisements published by the company are given in Table 2.
Table 2
|
Name of then News Paper
|
Date on which Advertisement was published
|
|
Financial Express
|
10/7/2002
|
|
Gujarat Samachar
|
10/7/2002
|
|
Sandesh
|
10/7/2002
|
|
Economic Times
|
11/7/2002
|
|
Mumbai Samachar
|
12/7/2002
|
|
Business Standard
|
12/7/2002
|
4.0 One of the advertisements gives notice about the meeting of the Board of Directors of the company. The advertisement stated as follows:
“Notice is hereby given that the Board of Directors will meet at the registered office of the company on Monday the 15th of July 2002 to transact the following business, among others.
(A). To consider and take on record financial results for the Quarter ended June 30, 2002;
(B). To decide on and recommend declaration of dividend on equity share capital.
(C). To discuss and approve issue of bonus shares subject to the approval of the shareholders.
For and on behalf of the Board of Directors
Managing Director”
The date mentioned in the above advertisement is 5th July, 2002.
4.1 Another advertisement, dated 15th July, 2002, contained audited financial results of the company for the year ended 30th June, 2002. This advertisement also highlighted some corporate actions and the business plans of the company, which are given below:
“Diversification in Biotech & Pharmaceutical Formulation”
“Cash bonus 1:1 to Loyal Investors”
“50% Dividend”
“Promoting concept of Emergency Medical Kit with 59 items”
“Prompt & efficient service to investors through CA Firm”
“Earnings 186% of Equity”
Copies of the advertisements are enclosed as Annexure 1.
4.2 As stated above, in the advertisement certain information like “Diversification in Biotech & pharmaceutical Formulation, Cash Bonus, 50% Dividend, earning 186% of equity, new product promotion and new service to investor through CA firm” - were highlighted in bold to attract the attention of gullible investors.
In the said advertisement following facts seems to be false as well as unreasonable:
Ø For the whole year 2001-02, the company has reported a turnover of Rs. 32.85 crores, of which Rs. 31.23 crore (constituting 95% of the total turnover) has been clocked in the 4th quarter.
Ø The total of Rs. 11.85 crores under the head ‘Income from firm’ has been clocked in a single quarter (viz., 4th quarter).
Ø The company has reported a total profit before interest and tax (PBIT) to be Rs. 13.62 crores under the ‘Media software segment’ whereas the total revenue generated from this segment is stated to be Rs. 8.98 crores only (i.e., The profit is more than the revenue).
4.3 It was also observed that in a notice dated July 05, 2002 the company has informed exchange about the proposal to Buy-back its shares. However immediately thereafter vide letter dated July 08, 2002 the Company has informed the exchange that it has inadvertently mentioned that the board will consider buy-back instead of bonus issue of shares. The Company stated that the board would consider the proposal of bonus issue. The BoD at its meeting held on 15th July 2002, has recommended Bonus issue in the ratio of 1:1. Other than this it is observed that the company had come up with many stories of corporate developments through different websites. The company which is in the business of hire purchase and leasing operations had also come up with the news during second week of July 2002 that the company was diversifying its activities into biotech and pharma sector and plans cultivation of herbs for herbal products (http://www.pharmabiz.com/, www.domain-b.com). Copies of these advertisements are placed at Annexure 2.
4.4 It was observed that these advertisements were published through the advertisement agency, Garima Communication. Garima Communication stated that the advertisements were placed by the Managing Director of the company, Shri Dashrath Singh Shekhawat. According to Shri Dinesh Singh of Garima Communication, matter for the advertisement was supplied by the company whereas layout and design was prepared by the ad agency. The final layout was confirmed by Mr. Sathal, an employee of company, after receiving the same from the ad agency by fax. In the client ledger of ‘The Mehsana Urban Co-op Bank’ for the Garima communication, it is stated that ‘Magan Industries’ has paid Rs.195,000/- by way of cheque no. 018235. In sales register, it is observed that the company MIL had paid Rs.195,201/- through Voucher no. 196 on 11th July 2002, Rs.350,372/- through Voucher no. 217 on 20th July 2002 and Rs.183,402/- through Voucher no. 225 on 24th July 2002.
5.0 The Managing Director of MIL was summoned to be present on 13th January 2003. SEBI had not received any response from the company in this regard. After this, the managing director of the company was summoned to be present on 23rd December 2003 at 4 p.m. before the Investigation Officer, but again no response had been given by the company. SEBI did not receive any reply from the company even after sending reminders many times. In reply to the summons dated 24th February 2004, the company replied that as at present there is no MD of the company, they would like to send one of the directors of the company. However, next summons sent to the company had returned back undelivered. On 7th June 2004, summons were sent to the company as well as to the promoters. The summons to the promoters were sent directly to the address given by the Depository and through the Depository Participant of the Promoters. There was no response from the company.
6.0 It was also observed that the company has not filed its shareholdings particulars as required under SEBI (Substancial Acquisition of Shares and Takeovers) Regulations since April 01, 2001 till date. The company has not given any response on the matter to SEBI even after sending many reminders. Also, as per SEBI (Disclosure and Investor Protection) Guidelines, a listed company proposing to issue bonus shares has to fulfill the requirement of the following SEBI guidelines:
Ø ‘bonus shares can be issued only out of free reserves (i.e. reserves not set apart for any specific purpose) built out of the genuine profits or share premium collected in cash only’.
Ø A company which announces its bonus issue after the approval of the Board of Directors must implement the proposal within a period of six months from the date of such approval and shall not have the option of changing the decision.
Ø Consequent to the issue of the bonus shares if the subscribed and paid up capital exceed the authorised share capital, a resolution shall be passed by the company at its general body meeting for increasing the authorised capital.
7.0 On the basis of information available on record with stock exchanges and other sources, it could not be established that the company has issued bonus shares to its shareholding within six month of approval from the BOD of the company. Hence, it is clear that the company has not complied with the SEBI (Disclosure and Investor Protection) Guidelines to be followed in the case of bonus issue of shares. The non cooperative approach of the company towards the SEBI as well as Exchanges proves that the company did not have any intention to issue bonus share and to distribute dividend. Further, SEBI (DIP) Guidelines also state that ‘bonus shares can be issued only out of free reserves (i.e. reserves not set apart for any specific purpose) built out of the genuine profits or share premium collected in cash only’. However, investigations revealed that the company did not have genuine profit and reserves for the Bonus issue as well as the announced dividend. The financial statement for the financial year ended on June 30, 2001 and June 30, 2002 submitted to the stock exchanges by the company as well published in advertisement dated July 22/23, 2002 were showing many discrepancies i.e. Profit before tax and depreciation is lesser than the profit after tax and depreciation for the year ended June 2001 (PBTD is Rs. 3.7 crores and PATD is Rs.3.82 crores). It is also found that the company was making loss of Rs. 30 lakhs during the year ending March 31, 2002 (from BSE) and after three months the company stated that it is making profit of more than Rs. 15 crores. The total of Rs. 11.85 crores under the head ‘Income from firm’ has been clocked in a single qurter (viz., 4th quarter). The company has reported a total profit before interest and tax (PBIT) to be Rs. 13.62 crores under the ‘Media software segment’ whereas the total revenue generated from this segment is reported to be Rs. 8.98 crores only (i.e., The profit is more than the revenue). There were inconsistencies in the announcement in notice and action taken by the company i.e. the company had stated in first advertisement that Board would consider quarterly result and Board had come out with the annual audited result for year ended June 2002. It seems that purpose of the announcement of financial statement was only to attract investor by presenting good financial records. SEBI (DIP) Guidelines also state that consequent to the issue of the bonus shares, if the subscribed and paid up capital exceed the authorised share capital, a resolution shall be passed by the company at its general body meeting for increasing the authorised capital. It is noted that after issuing the bonus shares to its shareholders, the company’s paid-up capital was going to be doubled, yet there was no corporate action on part of the company to increase the authorised capital before recommendation of Bonus issues by the BOD.
8.0 The company’s shares were illiquid in market. The average volume in the scrip of the company was around 100 shares per day before May 2002. Thereafter, the volumes rose to 86,600 shares per day. It appears that this high rise in demand for the scrip is mainly because of the advertisement in the newspapers as well as good financial results announced for the year ended June 2002. The company has also announced for the distribution of the 50% dividend to the shareholders but company has not distributed the dividend (Source-capitaline). The company has not filed its shareholdings under SEBI (SAST) Regulations since 1st April 2001 to till date. The company has not given any response on the matter to SEBI even after sending many reminders. The non cooperative approach of the company towards SEBI as well as Exchanges is only an affirmation of the fact that company did not have any intention to issue bonus share and to distribute dividend as decided in the BoD meeting on 15th July 2002.
9.0 The Trading Analysis on ASE reveals that after April 2001, the scrip was traded only once in the ASE, on March 24, 2003, at price Rs. 0.25 and volume was 51, 000 and since then there was no trading in the scrip. For trading on BSE, from the price-volume data obtained from the BSE, it is observed that the scrip of the Magan was illiquid and volume traded in exchange is very meager. From the May 20, 2002 volume traded in exchange started rising. The volume was at its peak in the week in which company had come out with the advertisement for proposed agenda for the said BOD (advertisement was published on 5th July 2002). The price-volume chart for the period May 6, 2002 to August 30, 2002 is enclosed as Annexure 3. The volume crossed nine lakh on July 10, 2002, i.e., on the date of advertisement, and price reached to its highest of Rs.5.35 on July 9, 2002, a day before the advertisement. After this, once again, the trading in exchange become negligible. This tremendous rise in volume and price only for a short span of time coinciding with the period during which the company has came up with the proposal of corporate action, which was cancelled later on, indicates possibility of nexus between the company, share broker/ sub-broker and client in creation of volumes and rise in price for their personal benefit.
Off-Market transaction details
During the investigation period large off-market deals were noted in the transaction statements of major shareholders of the company. Details are given in following table.
|
SNo
|
Date
|
Share from
|
No. of shares
|
To
|
|
|
|
Name
|
Client ID
|
Name
|
Client ID
|
|
1.
|
18-06-2002
|
Jhabbarmal S Chindalia
|
10140892
|
5,22,000
|
Durgaram Dudi
|
10101793
|
|
2
|
28-06-2002
|
Aswin Patel
|
10726854
|
1,70,000
|
Radha Panjaria
|
10480554
|
|
3
|
28-06-2002
|
Aswin Patel
|
10726854
|
18,000
|
Ramswaroop Panjaria
|
10491444
|
|
4
|
01-07-2002
|
Aswin Patel
|
10726854
|
1,62,000
|
Ramswaroop Panjaria
|
10491444
|
|
5
|
16-05-2002
|
Mohanbhai K Shah
|
10437122
|
85,000
|
Danhem Holding P Ltd
|
17038691
|
|
6
|
16-05-2002
|
Ram N Brij Mohan
|
10437000
|
1,65,000
|
Danhem Holding P Ltd
|
17038691
|
|
7
|
16-05-2002
|
R B Rabari
|
10130235
|
2,50,000
|
Havemore
|
17044954
|
|
8
|
09-07-2002
|
Dasharath S Shekhawat
|
11045136
|
47000
|
Not Known
|
12544437
|
|
|
|
|
|
3000
|
Not Known
|
10004594
|
|
9
|
02-07-2002
|
Shekhawat Holding
|
11832570
|
15000
|
Not Known
|
11045136
|
|
|
05-07-2002
|
Shekhawat Holding
|
11832570
|
162800
|
Dasharath S Shekhawat
|
11045136
|
It can be noted from the above table that the Shree Dashrath Singh Shekhwat, promoter of the company had sold 50,000 shares in off-market deals. Shree Dashrath Singh Shekawat is director of a company, viz., Shekhawat Holding Pvt. Ltd., which had transferred 162,800 shares on July 05, 2002 from the demat account of Shehawat Holding to the demat account of Shree Dashrath Singh Shekhwat, which were traded in the market.
It is noted that most of top 50 shareholders of the scrip belong to Ahmedabad (with very few exceptions). It is also observed that the major ultimate clients who deal in the scrip trade also belong to the Ahmedabad.
10.0 Investigation has concluded that certain individuals had purchased shares in off-market deals during the May-June 2002 and tried to off load the same in market when interest was generated in the scrip by the advertisement regarding the bonus issue. However, it appears that the entire dematerialized share could not be sold. It can be attributed to the fact that there were over supply of the shares in market and price could not sustain at higher level for longer period of time. During the period, the promoters had offloaded the shares in market as well as aided others in offloading the shares by creating interest in the scrip by issuing misleading advertisement regarding the bonus issue in ratio of 1:1 and representing company’s bright prospects by giving false and misleading financial statement in media.
11.0 Investigation also revealed that the circumstances in which the advertisements were issued and the off market transactions as well as offloading the shares in the market by Shri Shekhawat suggest that there was an effort by the company to issue advertisements in the media with an intention to create demand for the shares of the company in the market by attracting investors and then to facilitate Shri Shekhawat in offloading the shares in the market. Hence, it is clear that there was an attempt on part of the company to defraud the common investors by issuing misleading advertisements and facilitating the offloading of shares of the company by Shri Shekhawat in the market.
12.0 The above mentioned acts of yours have violated the provisions of Regulation 5(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995.
13.0 Hence, you are required to show cause as to why suitable directions under Section 11 read with 11B of SEBI Act, 1992 read with Regulations 11 and 13 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) 2003, including directions debarring MIL from accessing the capital markets/dealing in securities for a suitable period of time may not be issued against MIL for the above mentioned violations committed by MIL.
14.0 This is without prejudice to SEBI’s right to initiate prosecution under Section 24 of the SEBI Act, 1992, or any other action as it may deem fit in terms of the provision of the said Act or the Rules and Regulations framed there under.
15.0 Your reply, if any, should reach us within 15 days of receipt of this notice failing which it will be presumed that you have no explanation to offer in this matter and further necessary action as deemed fit will be initiated against you without any further reference to you. You may specify whether you desire to be heard personally in the matter.
BARNALI MUKHERJEE