IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

 

Appeal No.44/2004

 

 

Date of Decision

31.07.2006

 

 

Ritesh Polyesters Ltd. and Surender Kumar Agarwal	������������������������������ Appellants
Versus
Securities & Exchange Board of India.	�������� ��������������������Respondent

 

 

Ms. Krishna Sharma Advocate� for the appellant.

 

Mr. Kumar Desai Advocate with Ms.Daya Gupta, Advocate and Ms. Bhavana Ravi Kumar, Representative of SEBI�� ��for the Respondent

 

CORAM

 

��������� Justice N. K. Sodhi, Presiding Officer

��������� C. Bhattacharya, Member

��������� R. N. Bhardwaj, Member

 

Per:�� Justice N. K. Sodhi, Presiding Officer(Oral)

 

 

����������� This order will dispose of a bunch of four Appeals nos.41 to 44/2004 in which common questions of law and fact arise and which are directed against a common order.� Since arguments were addressed in Appeal no.44 of 2004, the facts are being taken from this case.���������
��������� Ritesh Polyesters Ltd. (hereinafter called the company) is a company incorporated under the provisions of the Companies Act, 1956.� Its promoters� are Ritesh Exports Ltd. Secunderabad, Shri Surender Kumar Agarwal, his wife Smt. Rooprekha Agarwal and their two sons Ritesh Agarwal and Deepak Agarwal.� Ritesh Exports Ltd. one of the promoters is a group company and a sister concern of the appellant herein.� The company came out with a public issue of 30 lac equity shares of Rs.10/- each for cash at a premium of Rs.5/- per share aggregating Rs.450 lacs.� A prospectus was issued inviting the general public to invest in the share capital of the company.� The issue opened on June 12, 1995 and closed on June 22, 1995.� The prospectus stipulated that out of the present issue, 15 lac shares of Rs.10/- each for cash at a premium of Rs.5/- per share were reserved for firm allotment to the promoters and directors of the company and their friends and relatives.� The total amount to be invested by the promoters in the public issue was to the tune of Rs.2.25 crores (Rs.225 lacs).� The prospectus further contained a stipulation that the promoters will bring in their share before the date of opening of the public issue and that the same shall be certified by a certificate from the Auditors.� The issue went through.� Pratha Investments, Ritesh Capital and Ritesh Agarwal later approached the company for the issue of duplicate shares and they alleged that they had misplaced the shares allotted to them.� The company responded with an advertisement in the newspaper and notice to the stock exchange.� The stock exchange came to know from its members that some of the shares reported as lost had already been sold in the market.�� The Bombay Stock Exchange after suspending the trading in the scrip of the company reported the matter to the Securities and Exchange Board of India (for short the Board).� It was then that the matter was investigated.� It was found during the course of the investigations that only 7.96% of the public issue had been subscribed by the public till the closing date and that the promoters who were required to� subscribe Rs.225 lacs had only brought in Rs.35 lacs.� Various other irregularities were also found to have been committed during the course of the public issue which were enquired into by the Board.� The prospectus provided that the money received in respect of the public issue would be kept in a separate bank account(s) and the company had undertaken that it shall not appropriate the funds unless approval of the regional stock exchange was obtained on the basis of allotment and listing of shares.� The company after collecting the proceeds of the public issue transferred the amount to its current account No.1315 maintained with Dhanalakshmi Bank.� It has also been found that a sum of Rs.5 lacs received by the company from some of the underwriters had been deposited in the current account maintained with the State Bank of Patiala, Secunderabad.�� Similarly some applications received from the investors were directly received by the Managing Director of the company along with stock invests which had been issued long after the closure of the issue and these amounts too, do not appear to have gone into the separate account of the company.� Be that as it may, there are other serious irregularities found by the Board during the course of the investigations.� As admitted by the company in its reply to the show cause notice, the promoters had brought in a sum of Rs.1,66,29,500/- by cheques which were deposited with the company.� This amount by itself, even if all cheques had been honoured, was far short of the promoters� quota to the public issue.�� The shortfall as per the company�s own admission is of Rs.58,70,500/-.� Not only this, we have on record the statement from the bank that cheques worth Rs.77,29,500/- issued by Surender Kumar Agarwal and Mrs. Rooprekha Agarwal � the two promoters � were returned unpaid.� Ritesh Exports Ltd. is another promoter of the company.� It had contributed towards the promoters� share to the extent of Rs.58,50,000/- by cheques.� It has been found from the record� of the two companies that a sum of Rs.36.50 lacs had been received by Ritesh Exports Ltd. from the company and the said amount was returned back to the company on the following day.� In other words, the actual amount received from Ritesh Exports Ltd. is only to the tune of Rs.22 lacs.� Deepak Agarwal and Ritesh Agarwal are also two promoters of the company and they contributed Rs.10.5 lacs each towards the promoters� share.� It is clear from the record that they received this amount from Pratha Investments which is the sole proprietorship concern of one Ms. Sharmila Gang who is the wife of Mr. Mukesh Gang who is� the auditor of the company.� Pratha Investments in turn had received the money from the company.� It is thus clear that it was the company�s money which Deepak Agarwal and Ritesh Agarwal had invested towards the promoters� share in the public issue.� Having taken note of these facts as found by the Board and supported by the material on the record we are satisfied that the promoters of the company had in fact played a fraud with the public and misstated facts in the prospectus.� As per the prospectus the promoters were required to contribute Rs.225 lacs before the date of opening of the public issue and, instead, they contributed only Rs.35 lacs because some of the cheques, as already mentioned, had bounced and Ritesh Exports Ltd. had received Rs.36.5 lacs from the company for making the investments which it returned the following day.� Similarly, Deepak Agarwal and Ritesh Agarwal had also received money through the proprietorship concern of the auditors who had in turn received the money from the company.� We are in agreement with the findings recorded by the Board in this regard and these by themselves should be enough to uphold the impugned order debarring the company and its promoters from accessing the capital market for a period of 10 years.� It is pertinent to mention here that none of these findings have been challenged by the appellants in the grounds of appeal.

��������� We have on record the 30 days� unsubscribed issue report submitted by the Lead Manager to the issue addressed to the Board informing the latter that only about 7.96% of the public issue had been subscribed by the public.�� This �subscription was not enough for the issue to go through and since the issue remained unsubscribed to the extent of 92.04%, the underwriters as per their� agreement� with the company stepped in and pumped in about 40% of the amount towards the public issue.� The Board also found during the course of the investigations, which fact is not disputed, that one Pawan Kumar Agarwal and his family members came forward to subscribe to the public issue though belatedly and invested Rs.1,07,72,250/- which is about 49% of the total issue.� The 60 days� report submitted by the lead manager then� indicates that the issue remained unsubscribed only to the extent of 3.49% obviously because �Pawan Kumar Agarwal and his family and the underwriters had invested the balance amount.� On investment being made by Pawan Kumar Agarwal and his family, 14,36,300 shares were allotted to them during the devolvement period. �Pawan Kumar Agarwal and his family further sold these shares to Ritesh Capital Ltd. and Pratha Investments through off market transactions @ Rs.7.50 per share as they were partly paid.� The shares were handed over to the Managing Director of the company along with signed blank transfer deeds.� The details of the payments received by Pawan Kumar Agarwal and his family members are mentioned in the chart referred to in para 21 of the impugned order.� It is clear from this chart that Ritesh Capital Ltd. had paid an amount of Rs.41,14,500/- for acquiring 5,48,600 shares and Pratha Investments had paid Rs.66,57,750/- for acquiring 8,87,700 shares from Pawan Kumar Agarwal and his family.� It is relevant to mention here that Ritesh Capital Ltd. which had purchased the shares from Pawan Kumar Agarwal and his family is a group company and a sister concern of the appellant.�� There� is then on record the bank statement of the accounts of Ritesh Capital Ltd. and Pratha Investments which they were maintaining with the State Bank of Patiala.� The company, too, was maintaining� an account with that bank.� The statements show that in early September 1995 when the shares were purchased by Pratha Investments and Ritesh Capital Ltd. from Pawan Kumar Agarwal and his family, amounts had been transferred from current account No.1315 of the company to the account of� Pratha Investments� and Ritesh Capital Ltd.� In other� words, Pratha Investments and Ritesh Capital Ltd. had taken loans from the company which amount was utilized by them for purchasing the shares from Pawan Kumar Agarwal and his family.� It is, therefore, clear that the shares were purchased from the funds of the company.� The Board is justified in coming to the conclusion that the company in collusion with the Agarwal family had arranged for finance in the garb of subscription for bailing out the public issue.� It was, therefore, a myth that the public issue had been subscribed to the extent of 96%.� The company was utilizing the proceeds which it had received from the public in pursuance to the public issue for subscribing to the issue and� it had also taken finance from Pawan Kumar Agarwal for the purpose.� Having gone through the records and the findings recorded by the Board we have no hesitation to uphold that the company and its promoters right from the beginning committed grave irregularities/ illegalities in coming out with the public issue and, as already observed, made wrong statements in the prospectus and that the promoters did not subscribe their share of the promoters� quota to the public issue.� This was, indeed, a fraud played on the public and the Board was justified in debarring the promoters and the company from accessing the capital market for a period of 10 years.� We are also in agreement with the direction issued by the Board requiring the promoters of the company to buy back the shares.� We further agree with the Board that the company after collecting the amount of Rs.225 crores by way of subscription from the public issue had advanced loans to its sister concerns and Pratha Investments for purchasing its own shares back from Pawan Kumar Agarwal and his family members.� This, too, is a serious� irregularity because a company after receiving money through a public issue is not expected to divert those funds for� purchasing its own shares.

��������� The appellants in appeal no.43/2004 have taken a plea that they were minors at the time when the company went in for the �public issue and, therefore, the Board was not justified in issuing any direction to them.� We are unable to accept this plea.� We are informed that the Board has launched prosecution against the company and its promoters.� In those proceedings it may be relevant for these appellants to contend that they were minors, but in the present proceedings which are of civil nature, the plea can have no relevance.� At any rate, they had attained majority on the date when the impugned order was passed and, therefore, the direction restraining them from accessing the capital market could be �issued by the Board.��������

��������� ��������� Before concluding, we may refer to the request made on behalf of the appellants.� Ms. Krishna Sharma, Advocate on behalf of the appellant appeared� before us and made a request that the case be adjourned.� The ground on which the adjournment was sought is that Mr. Anil Agarwal who was to be present in the court today is not available as he is busy with the admission of his son.� We have declined the request for adjournment because it was not necessary for Mr.� Anil Agarwal to be present in the court.� Moreover we find from the record that on earlier occasions as well adjournments were sought by the appellants from time to time. When� these cases came up for hearing on 8^th May, 2006 we adjourned the case for today on the request of Ms. Krishna Sharma.� Mr. Anil Agarwal had enough time to make� arrangements to be present in court, if he so wanted.� The ground on which the adjournment was sought is not adequate for us to adjourn this bunch of old appeals pending since the year 2004.� Ms. Krishna Sharma did not address any arguments.� Mr. Kumar Desai, learned counsel for the respondent took us through record and after hearing him we have disposed of the appeals on merits.

��������� For the reasons recorded above, we uphold the impugned order and dismiss the appeals.� No order as to costs.

Sd/-

Justice N. K. Sodhi

Presiding Officer

 

 

Sd/-

C. Bhattacharya

Member

 

 

Sd/-

R. N. Bhardwaj

����� Member

31/07/2006.

Smn/31/7