MUMBAI Appeal No. 5/2000 In the matter of: Status Management Services Ltd Appellant Vs. Securities
& Exchange Board of India
Respondent
APPEARANCE: Shri
Mihir J Thakore
Shri
Jayesh Desai
Ms.
Poonam A Bamba
Mr.
Rajasekhar Reddy
ORDER This appeal,
by M/s. Status Management Services Limited, the appellant herein, is directed
against the order dated 17th December, 1999 made by the Securities
& Exchange Board of India, the Respondent herein. The impugned order
captioned "Directions under section 11(1) and 11B of the SEBI At, 1992
� Vanishing companies" is a common order addressed to 49 companies and
84 company directors, debarring them from carrying on any capital market
related activities, raising funds from the capital market, dealing in securities
etc. The Appellant Company is aggrieved as having considered it as one
of the "vanishing companies" and subjected to the impugned direction.
The Appellant Company was incorporated as a private limited company on 8th April 1993. According to the company�s Memorandum of Association, the main objects to be pursued by the company on its incorporation are: 2. To act as financial consultants, management consultants and provide, arrange, render, advice, service, consultancy in the filed of capital market, to promote/incorporate companies, investment, leasing, finance hire-purchase, instalment, trading, merchant banker, general administrative, project report secretarial, commercial, financial, legal economic, labour, industrial, public relations, scientific, technical, direct/indirect taxation and other levies, statistical, accountancy, quality control and data processing 3. To act as investment advisers and financial advisers". In the wake complaints from individual investors and Investor Associations that quite a large number of companies after raising funds from the public by issuing prospectus had disappeared from their notified address, leaving the investors high an dry, concerned authorities like Department of company Affairs, Reserve bank of India and Respondent decided to take action and co-ordinate their efforts to track down these companies and book them for default. A Central Co-Ordination and Monitoring Committee was set up as a joint mechanism, consisting senior officers of DCA, RBI and SEBI. To begin with, 80 companies were identified by the Respondent, mainly based on the reports form various stock exchanges, as vanishing companies, by adopting the following criterion:
where no correspondence has been received by the stock exchanges for a long time and no office of the company is located at the mentioned registered office address. The learned
Counsel, appearing for the Appellant company submitted, that the Respondent�s
decision identifying the Appellant as a vanishing company and subjecting
it to penal consequences is untenable as the Appellant did at no point
of time vanish, as alleged. He submitted that the Respondent�s claim that
they had issued a show cause notice to the Appellant company and its directors
remain unsubstantiated as neither a copy of the notice nor even the exact
date of issuance of such notice has been furnished. Even assuming that
show cause notice was issued, it would have gone only to the Appellant�s
old Karolbagh address, as is evident from the address shown in the public
notice. He submitted that even on 14.9.1999, the date on which the public
notice including the Appellant�s name therein was issued, the Respondent
showed the registered office of the Appellant at the Karol Bagh address
despite notifying the change of address to Registrar of Companies and Delhi
Stock Exchange. The learned Counsel submitted that the Appellant�s registered
office was shifted from Karol Bagh to Lajpat Nagar and from there to Rohini
mainly due to change in management and for functional reasons and the requisite
information regarding change of address was filed with the Registrar of
Companies and Delhi Stock Exchange. Photo copy of the endorsement from
them acknowledging receipt of the intimation relating to shifting office
to the present address at Rohini, as piece of evidence, was produced in
support of the submission. He also submitted that the fact that the impugned
order addressed to the Appellant's Rohini address had reached the Appellant
company goes to the prove the Appellant's existence at the given address
i.e. A/74, Sector 8, Rohini, Delhi 110 085 and awareness of the same by
the Respondent. Since the Appellant had not received the notice stated
to have issued before 14.9.1999 i.e. date of public notice, the same could
not be replied. According to the learned Counsel on seeing the public notice
dated 14.9.1999 the Appellant vide letter dated 21.9.1999, requested the
Respondent to send a copy of the show cause notice stated to have been
sent, to enable it to reply. But the Respondent did not respond. A copy
of the said letter stated to have been sent to the Respondent, annexed
to the Appeal was relied on to support this. He also submitted that the
Appellant had been filing returns with Delhi Stock Exchange and the Registrar
of Companies. Photocopies of acknowledgements stated to have been issued
by them in this behalf were produced. Copies of the audited Annual Accounts
of the Appellant for the years 1996-97, 1997-98 and 1998-99 and acknowledgement
from the Income Tax authorities showing filing of Return for the Assessment
Year 1999-2000 filed with the Appeal were also cited as evidence to show
that the Appellant company existed at the given address. The learned Counsel
urged that since the impugned order is of far reaching consequence made
exparte, without giving the Appellant an opportunity to present its case,
the same need to be set aside and the matter be remanded with direction
to the Respondent to decide the matter after adequate opportunity to present
the case is given to the Appellant.
Ms. Poonam
A Bamba, learned Representative appearing for the Respondent submitted
the back ground in which the impugned order was issued and also the PIL
filed by an Investors Association in the Allahabad High Court seeking Court's
intervention to protect the interests of investors in the hands of those
companies which had vanished after raising money from the public. Stand
taken by the Respondent in the said PIL was also explained. She laboured
considerably to establish that the Appellant is one of the vanished companies.
In support, she mainly relied on Delhi Stock Exchange's version that the
Appellant Company was not operating from the given address. She submitted
that since the Appellant failed to file returns/ reports and documents.
Delhi Stock Exchange and Registrar of Companies had informed them that
prosecutions have been launched against the Appellant. According to the
learned Representative, a representative of Delhi Stock Exchange had done
physical verification of the premises stated to be occupied by the Appellant
and only after satisfying the factual position that the Appellant was not
at the address, the report was submitted. Stock exchange being a responsible
institution, report from them need to be taken at face value and that the
exchange had reported in writing that the Appellant was found not operating
even
at its latest address mentioned in the appeal i.e. at A-1/74 Sector 8,
Rohini, New Delhi 110 085.
I have
very carefully gone through the rival contentions and the facts placed
before me. My views thereon are discussed in the following paragraphs.
It is
a mandatory requirement under section 146 of the Companies Act, 1956, that
a company shall, as the day on which it begins to carry on business, or
as from the thirtieth day after the date of its incorporation, whichever
is earlier, have a registered office to which all communications and notices
may be addressed and that this address be notified to the concerned Registrar
of Companies. Any change in the situation of registered office is required
to be notified to the Registrar of Companies within 30 days of the change.
The section requires that the registered office shall not be removed out
side the city, town or village where it is situated, except on the authority
of a special resolution of the company. But, if the change is from one
State to another, it will require the approval of the Company Law Board.
Registered office address is the official address of a company where shareholders,
creditors, and others, can reach the company. Listed companies are expected
to keep up date the address with the concerned stock exchanges also for
functional reasons. Failure to notify the address or change of address
to Registrar of Companies is an offence under the Companies Act. The prescribed
format in which address is notified to the Registrar is a public document
available for inspection by the public in the Registrar's office. The relevance
of notifying the address to Registrar is, to enable the public to know
the whereabouts of the company, in case need arises. The Companies Act
does not prohibit a company shifting its registered office from one place
to another. All that the act requires is to follow the procedure and notify
the change to the Registrar. But frequent change of address, though legally
unobjectionable, motive is suspect.
There cannot be two views as to the question of taking deterrent action in accordance with the procedure established by law, against those companies, which had dupes the public and vanished. As Supreme Court observed in the case of Radheshyam Khemka vs. State of Bihar ( 1993) 77 Com. Case 356, investors are often taken for a ride by unscrupulous company management. To quote the observations of the Supreme Court in this regard: - It has
been stated in the impugned order itself that "in response to the public
notice, 26 directors and 31 companies have submitted their explanation,
which is under consideration. Whereas the remaining 84 directors and 49
companies as mentioned in the Annexure to the public notice have failed
to submit any explanation to the show cause notice/public notice. In view
of the failure of the above said companies to submit the statutory reports,
directors report and other required reports and financial statements to
the stock exchanges which is in violation of the provisions of Securities
Contracts (Regulation) Act and in the absence of any explanation from such
directors/companies to the alleged violations and proposed action I am
constrained to take a view that the said directors/companies as named in
the Annexure to this direction, have no explanation to offer in respect
of the above said violation of the clause of the listing agreement and
in respect of directors as proposed to be issued against them under section
11B of SEBI Act as mentioned in the show cause notices/public notices issued
to them". The Respondents in their reply to the Appeal had also stated
that "SEBI was contained to proceed exparte in the matter. The impugned
directions were therefore issued by SEBI after taking into account the
facts on record".
It is very clear from the portion of the order extracted that the Respondent had acted in a very fair manner, as they had not hurried with any action against those who had responded to the notice and that their cases were considered separately. Since others had failed to respond, and taking into consideration the gravity of the situation, the Respondent had to take suitable action and obviously it could be done only exparte. Since it was an enmasse action against 49 companies and 84 directors and the decision was largely based on the information furnished by the concerned stock exchanges, the Respondent cannot be blamed for identifying any company as a vanishing company, if the material furnished by the stock exchange in respect of that company was inadequate or was incorrect. In the instant case, the Appellant had submitted that it had not received any show cause notice from the Respondent. The Respondent had also not produced any evidence to show that the show cause notice issued to the Appellant could not be served, as the Appellant was found not at the given address. However, when the public notice was issued on 14.9.1999 the Appellant reportedly responded to that by issuing a letter on 21.9.1999. But the learned Counsel could not tell the Tribunal the mode of sending the letter for want of details readily with him. But a copy of the said letter has been annexed to the Appeal. It is also seen from the photocopy of the fee receipts and acknowledgement from the stock exchange and Registrar of Companies that the Appellant had filed certain documents with those authorities. The authenticity of these receipts and acknowledgement was questioned by the learned Representative of the Respondent submitting that the same authorities had written to them that they had initiated penal action against the Appellant and its directors for default in filing returns/reports. In view of the divergent position stated by the parties, in the absence of further evidence it is difficult to come to any definite conclusion on the question as to whether the Appellant had vanished or not. Taking into consideration the gravity of the allegation and the effect of the impugned order, it is felt that the matter need be further probed, which this Tribunal cannot do. This is a matter which require further investigation by the Respondent, as it involves examination of the records available with the Delhi Stock Exchange, concerned Registrar of Companies and the appellant. It appears that the Respondent had gone by the statement furnished by the Delhi Stock Exchange, Registrar of Companies, the statutory authority with whom the company has to notify change of address, had not given any report about the whereabouts of the appellant company as born out of his records that too in the context of the appellant claiming that the change of address had been notified to the Registrar. The following version of the Respondent from their reply shows that the investigation to locate the company was incomplete. As already
observed those companies which had vanished with the investor�s money need
to be located and punished as per the law. But if there is any possibility
of tracking down those rogue companies and restoration of funds to the
investors is possible, action should be oriented to achieve that goal.
Such an action would be more in the interest of investors who had lost
their money. In the instance case I find from the latest audited annual
accounts of the appellant annexed to the Appeal that the Appellant was
carrying on business in the year 1998-99. The financial position as disclosed
therein as per the summary extracted below is also note worthy.
Particulars ScheduleAs at 31.3.98 SOURCE OF FUNDS Share Capital I 38, 365, 500.00 8, 365, 500.00 Reserve & Surplus II 60, 110, 046.61 60, 097, 071.75 ----------------- ----------------- Total Rs. 98, 475, 546.61 98, 462, 571.75 APPLICATION OF FUNDS Fixed Assets III 182, 541.82 231, 800.71 Investments IV 80, 542, 000. 00 78, 497,000.00 Current assets, loans & advances V 34, 339, 123. 29 35, 787, 531.04 Less: Current liabilities & Provisions VI (16, 786, 675.00) (16, 280, 860.00) MISCELLANEOUS EXPENDITURE VII (To the extent not written off or adjusted) 198, 556. 50 227, 100. 00 ------------------- ------------------- Total Rs. 98, 475, 546. 61 98, 462, 571. 75 ============
The Appellant's
annual accounts disclose a positive net worth and a nominal operational
profit. The Balance sheet and Profit and Loss Account filed with the appeal
do not indicate that the Appellant is dormant. If the financial position
as disclosed in the annual account is to be accepted, the impugned direction
per se may require reconsideration. However, I do not want to make any
comments at this stage on the merits of the exparte order against the Appellant.
Taking
into consideration the financial position as disclosed in the Appellant's
Annual Accounts for the year 1998-99 that the impugned order was made exparte
and that the Appellant had requested for a hearing and readiness to furnish
all the relevant facts, it is felt that it would be more in tune with the
interests of investors to re-examine the status of the appellant, after
giving a reasonable opportunity of being heard. For this purpose, the respondent
will issue /serve notice on the appellant at its registered office address
as furnished in the Appeal memorandum and the appellant will receive and
respond to the notice and present its case before the Respondent, within
the time frame fixed by the Respondent and thereafter considering the Appellant's
submission the Respondent may pass suitable orders in accordance with the
law.
In view
of the facts and circumstances discussed above, the impugned order to the
extent it applies to the appellant, is set aside and the matter is remanded
for de novo consideration and suitable orders by the Respondent after affording
the Appellant a reasonable time frame. If the appellant fails to make use
of the opportunity provided to present its case within the time frame,
the Respondent is at liberty to pass such order as is deemed fit in the
facts and circumstances of the case.
Thus the
appeal is allowed by way of remand.
(C.
Achuthan)
Place:
Mumbai
Presiding Officer Date: August 2, 2000 |
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