In the matter of

M/s.Tirupati Finlease Ltd                                       Appellant

Vs.

Securities & Exchange Board of India                 Respondent
 

APPEARANCE:

Shri Kalpesh Zaveri
Advocate

Mr. Bajranglal B Agarwal
Chairman & Mng.Director
Tirupati Finlease Ltd                                               for Appellant

Shri S.V.Krishnamohan
Division Chief, SEBI

Shri Vijayakrishnan
Legal Officer, SEBI                                                  for Respondent
 
 

The Appellant Company is aggrieved by the Respondent�s order dated 16^th February 2000, debarring it from accessing capital market for a period of 5 years. The order is issued under regulation 11 of the Securities & Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995.
 

The Appellant Company was originally incorporated as a private limited company on 2^nd November 1993 and subsequently converted into a public limited company on 31.3.1995.In January 1996 the Appellant Company issued 23,00,000 equity shares of Rs.10 each. Out of the said 23 lakhs shares 17.80 lakhs were issued to the public. The remaining 5.20 lakhs shares were reserved for allotment to the promoters, directors, and their friends, relatives and associates. The public issue opened for subscription on 8^th January 1996 was closed on 10^th January 1996 as the issue was overwhelmingly over subscribed. Shares were listed on Ahmedabad Stock Exchange (ASE) on 26^th March 1996. It was reported that there was substantial variation in the collection figures of the public issue as per the 3 days report and the final report submitted by the lead manager of the issue. Further, unusual movements in the share prices and volumes traded in the scrip not based on any economic fundamentals were witnessed at ASE. The shares, which were listed at Rs.41/- per share, had gone up to Rs.60/- on 9^th May 1996. Intraday volatility was also reported high on certain days, eg. On 23.4.1996 price movement was found in the range of Rs.38 to Rs.53. Trading in the scrip on ASE, attributing to volatility was suspended on 16.5.1996. The Respondent had, in the meantime, decided to "investigate into the affairs relating to dealings in the shares in respect of the public issue of the company by M/s.Tirupati Finlease Ltd, and other intermediaries / persons associated with public issue and into the irregularities of price rigging and market manipulations in the said scrip which is violative of the of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995". Investigations lead to the conclusion that the promoters had indulged in unfair and fraudulent trade practices in dealing in the shares. Artificial scarcity was made by withholding 7,24,800 shares from the market, resulting in illiquidity in the shares, which in turn resulted in volatility in prices. Based on this finding, invoking regulation 11, the Appellant was debarred from accessing capital market for a period of 5 years.
 

Shri Kalpesh Zaveri, learned Counsel submitted that the Appellant had not done anything wrong to warrant any penal action from the Respondent. According to the Appellant the public issue opened on 8th January, was closed on 10^th January, 1996 in the wake over subscription, that allotment of shares was finalised on 7^th February, 1996 in the presence of the Respondent�s representative and that the final allotment of shares was submitted to ASE on 14^th February, 1996. ASE for reasons best known to them did not finalise the same, but directed the Appellant to contact the Respondent. The Appellant tried several times to contact the concerned officer of the Respondent but did not succeed. Since the Respondent was evasive and non-responsive, the Appellant Company approached the Gujarat High Court by way of a Writ Petition and then the Respondent woke up and finalised the allotment, and listing approval was thereafter accorded by ASE on 26^th March, 1996. The learned Counsel denied any abnormal movement in the price or in the volumes of shares traded on ASE, as alleged by the Respondent. Having failed to stall the public issue, the learned Counsel submitted that the Appellant was issued a show cause notice (SCN) by the Respondent on 13.1.1997 under section 11B of the Act. The Appellant Company responded to the same by denying the allegations. But, without any final adjudication in the matter covered in the SCN, a notice of prosecution was sent to the Chairman and Managing Director of the Appellant on 3^rd March 1997. This notice was also replied to. Subsequently, after a considerable gap, vide letter dated 3^rd December, 1998 the Appellant was called for a personal hearing before the Chairman, SEBI, on 15^th December, 1998.The letter was silent on the scope of the personal hearing. Since the time provided was too short to prepare submissions, the Appellant sought adjournment and the adjourned hearing was held on 25^th January, 1999.Thereafter, after a gap of one year the impugned order was issued, i.e. on 16^th February, 2000 under regulation 11. He pointed out, the delay from the Respondent�s side at each stage, including the time gap between the hearing and the issuance of the order, was indicative of the Respondent�s bias towards the Appellant. When the adjudication proceeding was going on, the Respondent filed a criminal case against the Chairman and Director of the Appellant, before the Court of Additional Chief Metropolitan Magistrate at Ahmedabad in January 1999. While the Respondent was after the Appellant, they did little realise the plight of the investors by keeping trading of shares under suspension for such a long period spanning over 4 years. Learned Counsel submitted that suspension of trading for such a long period was not an investor protection measure.
 

It was submitted that the inquiry was not conducted in a just and fair manner following the principles of natural justice. Even before suspending trading, no opportunity was given to the Appellant and no reason for such suspension was communicated. He rebutted the allegation regarding manipulation of prices by the Appellant. Countering the Respondent�s allegation of the Appellant�s involvement in holding back share certificates by paying to the mailing agent, the learned Counsel submitted that payment was made for the mailing services for dispatching the shares allotted and refund orders, on behalf of the Registrar, to save time as they were running against the deadline for dispatching certificates and refund orders because of the delay caused by the Respondent, and to avoid any complication under section 73 of the Companies Act. The mailing agency was not appointed by the Appellant but by the Registrar to the Issue and the agency was not under the control of the Appellant. Instead of routing payment through Registrar, the payment was made directly to meet the crisis. It has been mentioned in the agreement with the Registrar to the issue that the company shall make available in advance to the Registrar requisite funds to postage, mailing charges for dispatching of allotment letters/allotment advice, share certificates and stock instruments, etc. The action of the Appellant to comply with requirement of law cannot be used against it.
 

The learned Counsel further submitted that out of a total issue of 30 lakhs shares comprising the post issue paid up capital of the Appellant, only 4.95 lakhs shares accounting for just 16% were traded between 26.3.1996 to 16.5.1996 i.e. between date of listing and date of suspension. He submitted that the allegations leveled against the Appellant were not only baseless but also contrary to the records of the stock exchange. He cited ASE�s treatment of the Appellant by delaying payment of security deposit by over six months, as an example to prove the bias of the authorities against the Appellant. It was also stated that there was hardly any complaint from the investors against the Appellant, but there were several complaints against suspension of trading of shares, which the Respondent also knew. He submitted, the order is not based on correct facts. The Appellant had produced authoritative evidence to show the dispatch of shares to the Mutual Funds, but it has been ignored by the Respondent.
 

Explaining the scope of regulation 11, the learned Counsel submitted that the Respondent was not empowered thereunder to issue the impugned order debarring the Appellant from accessing the capital market. He urged that since the impugned order was issued after a lapse of one year from the date of closing the hearing, on this ground itself the order need be set aside. Further, having suspended the trading, imposition of further penalty on the Appellant through the impugned order was illegal.
 

Shri Krishnamohan, learned Representative of the Respondent submitted that they had already instructed ASE to consider revoking of the indefinite suspension of the trading of the Appellant�s share. A copy of the letter dated 4^th May 2000 evidencing this fact has been filed in the Tribunal. He denied the allegation that no action has been taken against the Registrar to the issue. He submitted that the Respondent had completed inquiry against the Registrar and notice was issued to them to show cause as to why a penalty of 6months suspension as recommended by the inquiry officer not be imposed. He denied the charge of bias, levelled by the Appellant.
 

The learned Representative submitted that they had noticed unusual movements in the share price of the Appellant company which shot up from Rs.38 on April 22, 1996 to Rs.53 on April 23, 1996.He referred Exhibit �A� to their reply charting the price movement from 10.4.1996 to 10.5.1996 and pointed out that throughout this period, the share price moved up, though there was no change in the economic fundamentals of the scrip. As the price had almost doubled within the said period and there was continuous upward movement, the Respondent had suspended the trading pending investigation to prevent further volatility, in the interests of investors. He quoted the same facts stated in the impugned order in his attempt to show that the Appellant had created artificial scarcity in the supply of shares by holding back 7,24,800 shares from the market. He submitted that the Managing Director of the Appellant had taken two parcels containing 3 lakhs shares meant for two mutual funds and this fact had been admitted by the mailing agent. According to him the impugned order was made in public interest after affording reasonable opportunity to the Appellant. Since the charges being grave in nature, with a view to protect the integrity of the capital market the Appellant was directed not to access the capital market for a period of 5 years.
 

I have weighed the rival contention putforth by the parties. The subject matter of the appeal evolves around the public issue of 17.8 lakhs shares out of a total issue of 23 lakhs shares made by the Appellant in January 1996. The capital profile of the Appellant at the pre and post issue scenario is considered relevant in this context. It is seen from the prospectus issued by the Appellant that out of the total issue of 23 lakhs equity shares of Rs.10/- each, 5.20 lakhs shares were reserved for allotment to the "promoters, directors, their friends, relatives and associates". 17.80 lakhs shares were offered to the public, out of which 4.25 shares were reserved for preferential allotment to Non Resident Indians and 3.55 lakhs for preferential allotment to Indian Mutual Funds. Thus the net offer to the Indian public was only 10 lakhs shares. Post issue paid up capital of the Appellant was to be Rs.3 crores consisting of a total of 30 lakhs shares of Rs.10/- each. The Appellant had pre-issue paid up capital of Rs.70 lakhs, comprising 7 lakhs shares of Rs.10/- each. In this context it is also pertinent to note the following information relating to promoters contributions and lock in period as disclosed in the prospectus.
 

Dt.of allotment            No. of Issue               Percentage         Lock in period
                                        equity  shares             total
                                         (Rs.) equity

March 29, 1993                      300                          10 0.01                     NIL
March 16,1995                 209700                         10 6.99                     NIL
July 24, 1995                     100000                         10 3.33                     NIL
August 19,1995                160000                         10 5.33                     NIL
August 21,1995                 230000                        10 7.67                     5 Years
Present issue                      520000                      10 17.33                     5 Years
                                             ----------                     --------------
                                            1220000                             40.67
                                            -----------                     --------------

On a perusal of the above figures it is seen that the Appellant had issued 7 lakhs shares to the promoters, directors, their friends, relatives and associates, etc. before making the public issue. Out of the 7 lakhs shares 4.70 lakhs shares were not under any lock in obligation and as such those shares were freely transferable. Post issue equity stake of the promoter was 40.65% out of which 25% was under lock in restriction for 5 years.
 

Even though the impugned order refers to variance in the collection figures submitted by the lead manager, the Appellant, has not been held responsible for the same, by accepting that it was the collection Bank which receives application money from the Applicants and submits reports, and not the issuer company.
 

The basis on which the impugned order has been made, as stated in the order, relate to the alleged involvement of the Appellant in withholding 7,24,800 shares from the market and thereby creating illiquidity and resultant volatility. According to the order, 3 lakhs shares allotted to two mutual funds contained in two parcels were retrieved from the mailing agent appointed and remunerated by the Appellant. The remaining 4,24,800 shares meant for 1493 allottees were delivered to the promoter of the company by the same mailing agent. According to the information furnished by the Registrar to the Issue to the Respondent, these allottees mainly belonged to the category of friends and relatives of the promoters, as is borne out by the fact that there were no complaints from them regarding non-receipt of certificates. The Appellant had produced documentary evidence from the postal authorities showing dispatch of the said two bundles to the mutual funds, which the Respondent appears to have not taken cognizance of and the reason to discard this evidence is not available from the impugned order. The learned Representative also could not explain as to how their contention would survive in the light of the endorsement of the postal authorities evidencing dispatch of the parcels, produced by the Appellant. For loss of certificates in transit the Appellant cannot be held responsible. Even assuming that the remaining 4,24,800 shares were blocked from entering the market (all these shares need not necessarily would have gone to sale in the market) , it is difficult to believe that it was the cause of volatility in the market at that point of time.
 

Incidentally, in the normal course, when the shares are listed, and the allotment is over by issuing share certificates to the applicants and the collection money is received from the separate collection account, volatility in the price and trade volume immediately in the aftermath of the public issue may not be of any relevance to the issuer company, as the company had already received the issue price. The loss or gain would normally affect those who deal in these shares. That being the normal case, in the absence of clinching evidence to pin down the Appellant, it cannot be held that the Appellant was responsible for the volatility in the market. This view is strengthened from the scope and reach of regulation 7 and 12 of the 1995 Regulations. The focus of the Regulation is on dealing in securities and a company cannot deal in its own securities in the market. Normally the persons holding shares in the company would be the riggers as manipulating the share prices, hike would be to their advantage. In this case it may not be forgotten that the promoters had 4.7 lakhs shares in their custody not subject to any lock in restriction at the time of public issue. The possibility of the promoters, in the absence of any lock in period, desiring to dispose of the shares in an artificially created market could not be ruled out. This assumption on the role of promoters is strengthened from the findings of the inquiry recorded in the impugned order itself. It has been stated therein that:
 

"investigation revealed that the promoters in connivance with the Banker to the issue and the Registrar have deposited applications after closure of the issue and have also indulged in unfair and fraudulent trade practices by creating artificial scarcity of the floating stock in the scrip (emphasis supplied).

Further in para numbered 3 on the page 3 of the order, it has been stated that:
 

"The Registrar to the issue who could not produce proof of despatch of shares certificates to 1493 allottees has stated that these articles containing share certificates totaling to 4218 certificates (4, 24, 800 shares) were delivered to the promoter of the company by the mailing agent" (emphasis supplied)

Again in para numbered 4, on the same page it has been stated that:
 

"As regards the charge of unlawfully retrieving two parcels containing 3, 00, 000 shares allotted to two mutual funds by the company, it is noted that the mailing agent had admitted to the Registrar that he had pulled out these parcels meant for the mutual funds and handed them over to Shri Bajranglal Agarwal, Managing Director of the Company as per his directions." It is further observed that the mailing agent although knowing fully well that the articles were not dispatched to the mutual funds had in fact written to them vide his letter dated 7.5.1996 confirming the dispatch of these articles on 27.3.1996. "This act of the mailing agent established that he was acting in concert with the Promoter Company which has resulted in low floating stock so as to facilitate rigging of the prices by the company". In this context it is also relevant to note that the Appellant in its prospectus had mentioned that the company was promoted by Mr. Bajranglal Agarwal. Having said the role of the promoter in creating artificial scarcity of shares in the market, the order says that:

"upon careful consideration of the material on record it is established that the company had created artificial scarcity in the scrip by retrieving 3,00,000 shares meant for despatch to mutual funds and by itself taking delivery of 14.93 articles totaling 4,24,800 shares. Thus, the withholding of 724800 shares from the market, the company had created illiquidity in the scrip which resulted in volatility in the share prices due to mismatch of demand and supply". (Emphasis supplied)

Even if it is assumed for argument sake (though cannot sustain on the face of the evidence produced from the postal authorities) that by retaining 3, 00, 000 shares meant for mutual funds, and 4, 24, 800 shares of others, an artificial scarcity was created in the market to manipulate the price movement, the charge cannot stick on the Appellant, as in the Respondent�s own version, the so called situation was created by the promoter of the Appellant company. There is no evidence to show that the shares were withheld by the promoter Managing Director, at the instance or for and on behalf of the Appellant. On the contrary since the Appellant was not to be benefited by price rigging at that point of time and it was the promoters who would have benefited more in the event of hike in price, and in the light of the clear finding of the role of promoter in withholding the shares, the Appellant company cannot be said to have indulged in unfair and fraudulent trade practices to attract the penal consequences in terms of the impugned order. Further the Appellant�s version that during the month of January, 1999 criminal case No. 1 of 1999 was preferred by the Respondent before the Court of Additional Chief Metropolitan Magistrate at Ahmedabad against its Chairman and Director has been admitted by the Respondent in their reply. From this statement it appears that the Appellant Company was not arrayed as an accused in the prosecution but only its Chairman and Director were charged. It is also noticed that ASE has been asked by the Respondent vide letter dated 4.5.2000 to consider "revoking the indefinite suspension in the trading of this scrip"- effected from 16.5.1996. In this context it is made clear that a company and its promoters are separate legal entities. A Company cannot be substituted for promoters for the purpose of imposing penalties. It is also seen that the Respondent has asked ASE to consider revoking the 4 year old ban on trading in the Appellant�s scrips, but at the same time by the impugned order the Appellant has been debarred from accessing the market for the next five years!
 

In view of the above, I do not consider it necessary to examine the other points raised in the Appeal as it is evident that the impugned order has been directed to the Appellant without any justification.
 

For the reasons stated above, I am of the view that the impugned order against the Appellant cannot sustain. Accordingly the appeal is allowed and the impugned order is set aside.