CO/242/ISD/03/2004
SECURITIES AND EXCHANGE BOARD OF INDIA
BACKGROUND
Prior to the public issue
Rs. 75,00,000 Divided into 7,50,000 equity shares of Rs. 10/- each held by present and erstwhile directors and their friends / relatives.
Rs. 20,00,000 2,00,000 – 6% redeemable preference shares of Rs. 10/- each, issued on August 20, 1988
Public Issue Rs. 5,20,00,000 52,00,000 shares of Rs. 20/- each Out of which 19,000 shares reserved for preferential allotment to employees. 12,48,000 shares reserved for preferential allotment to NRI/OCB on repatriation basis.
Total Post issue capital Rs. 8,05,00,000
1. Mr Ashok Agarwal - s/o Shri Rameshwar Agarwal 2. Mr Suresh Agarwal - s/o Shri Rameshwar Agarwal 3. Mr Ajay Agarwal - s/o Shri Rameshwar Agarwal 4. Mr Vijay Vishnu Sali - s/o Shri Vishnu Sali 5. Mr Kuldip and Parulekar - s/o Shri Nandkumar Parulekar 6. Dr. A.Y Degani - s/o Shri Yahya Degani 7. Mr Bharat N. Vaishnawa - s/o Shri Niranjan Prasad Vaishnawa 8. Mr Hemant Hemnani - s/o Shri Ramdas Hemnani 9. Mr Anil Sharma - s/o Shri Sharma
SEBI had received a complaint from Mr Radheshyam Khandelwal, a member of the BSE, alleging the following :
The company mentioned in the prospectus about declaration of dividend in the previous year. The same was certified by Bank of Baroda in its due diligence certificate. It is alleged by the complainant that almost 2000 investor complaints regarding non receipt of dividend had been filed either before the Bombay High Court or the Investor Service Cell of the BSE. It is further alleged by the complainant that the company, while replying to the complaints, stated that it had not declared any dividend during the preceding year. Therefore, the company is alleged to have committed a deliberate act of mis-stating of the facts in the prospectus and thereby misguided the investors.
It is alleged by the complainant that the company had deliberately contravened the provisions of Section 113 (1) of the Companies Act, 1956 by not dispatching the share certificates to the applicants even after the lapse of almost 2 ½ years after the closure of the public issue.
It is alleged by the complainant that the directors of the company had pledged their personal holdings of 7,50,000 shares to the Bank of Baroda while availing an increase in the credit limit of the company for the purpose of working capital requirements. It is alleged that the directors Mr A.A Kazi and Dowell Leasing and Financing Ltd had given an undertaking to the Bank of Baroda for non – disposal of their shares which formed part of the above mentioned 7,50,000 share. But the same was not disclosed by the company in its prospectus, while filing it with SEBI for the purpose of coming out with a public issue. Therefore, this fact was not reported by the BSE in its notice issued to the members at the time of granting listing permission to the shares of the company. As a result, the complainant, who was a member of the BSE, had sold the shares of the company which included some shares forming part of the above mentioned 7,50,000 shares bearing distinctive nos. from 1 to 7,50,000. The complainant also stated that he had made payments to his clients who had delivered the above mentioned shares. Subsequently, objections were raised by the company and Bank of Baroda stating that the above mentioned shares formed part of the undertaking for non disposal given by the directors of the company at the time of taking loans from the bank. Therefore, the complainant alleged that the company had violated SEBI’s guidelines for disclosure and investor protection by hiding an important aspect of its capital structure and thus misguided the investors.
The complainant had sold some shares out of the said 7,50,000 shares and delivered them to the exchange. However, the said shares were later returned to the complainant as bad delivery. The company refused to transfer the said shares on the ground that the same were fake / forged shares. However, the distinctive nos. of the shares were between 1 and 7,50,000 and the same were already acknowledged by the company as forming part of its share capital in its prospectus. Therefore, the complainant alleged that the company had some malafide intentions in denying the transfer of shares. On one hand, the company had pledged the same shares for availing loans from Bank of Baroda and gave an undertaking for non disposal and on the other hand, the company claimed the same shares to be fake / forged. Pursuant to the complaint, SEBI conducted an investigation to find out the veracity of the allegations made by the complainant. The investigation concluded that the company had committed the following irregularities such as non disclosure in the prospectus about the fact of pledging 7,50,000 shares with Bank of Baroda by the promoters for the purpose of availing the extended credit facility, non transfer of the shares when they were lodged for transfer by the purchasing parties and misguiding the prospective investors by stating that the company had paid dividend in the previous year before coming out with the public issue in 1993.
SHOW CAUSE NOTICE, REPLY AND HEARING
6. Pursuant to the said investigation, a show cause notice dated 22.12.99 was issued to Shri Ashok Agarwal, Director of a company to show cause as to why direction under Section 11B of SEBI Act, 1992 restraining the company and its directors from accessing the capital market for a suitable period, should not be passed. It was also mentioned that reply, if any, should reach SEBI within 15 days from the date of receipt of the show cause notice failing which SEBI would be constrained to presume that he has no evidence to adduce and SEBI would pass such direction in terms of Section 11B of the SEBI Act, 1992 or take any other action that is deemed fit in the interest of investors and the securities market. The said show cause notice was addressed to the registered office of the company and sent by registered post which came back "undelivered" on 20.1.00. A show cause notice was again sent to the residential address of Shri Ashok Agarwal which came back with a remark "not claimed return to sender" on 08.2.00. In the interest of natural justice, an opportunity of personal hearing was granted to Shri Ashok Agarwal on 14.5.02 and the same was adjourned to 5.7.02 as per the request of Shri Ashok Agarwal. However, Shri Ashok Agarwal failed to turn up for the said hearing. However, SEBI received a letter dated 31.7.02 from Shri Ashok Agarwal. Vide the said letter, Shri Agarwal, inter alia, contended that he was the Chairman of the company in professional capacity and resigned from the said post on 18.12.94. He also submitted that he had filed winding up petition no. 530/95 before High Court of Bombay against the company which was dismissed by the court directing him to file it before Company Law Board, Mumbai Bench. He further submitted that he did not file it because he had no faith in it. He also submitted that the company is in the possession of the Official Liquidator of Bombay High Court. He also requested SEBI to delete his name from the proceedings.
FINDINGS 7. I have perused the material available on record, I am convinced that adequate opportunity has been given to Shri Ashok Agarwal to explain his case. I find that the fact of pledging of 7,50,000 shares with Bank of Baroda by the promoters for the purpose of availing the extended credit facility was not disclosed in the prospectus at the time of initial public offer. The promoters are required to have a certain fixed holdings in the company for a fixed period of time to ensure commitment to the purpose for which the additional capital is being raised from the market. Therefore, the holdings of the promoters which have already been pledged to a bank for raising credit limits becomes a liability on the company which can be exercised by the bank at any time. I note that Section 56 of Companies Act stipulates the matters to be stated and reports to be set out in the prospectus. The said Section reads as follows :- "56(1) Every prospectus issued –
Shall state the matters specified in Part I of Schedule II and set out the reports specified in Part II of that schedule; and the said Parts I and II shall have effect subject to the provisions contained in Part III of that schedule. …… …… I also note that clause (6) of Part II of Schedule II requires the company to disclose the principal terms of loan and assets charged as security in the prospectus. I also note that clause 13 of Part II of Schedule II enjoins the company to disclose the restrictions, if any, on transfer and transmission of shares / debentures and on their consolidation / splitting. Hence, non-disclosure of such an important fact is a grave act of omission on the part of the company. 8. I am not convinced with the reply of Shri Ashok Agarwal inasmuch as his letter dated 31.7.02 does not address the contents of the show cause notice dated 22.12.99 and I find the same to be vague in nature. I note that the company did not declare any dividend for the previous year before coming out with the public issue in 1993. I also find that prospective investors have been misguided with the statement of the company in the prospectus to the effect that the company had paid dividend in the previous year of the public issue. I also find that the shares which were lodged for transfer by the purchasers were not transferred. 9. I do not find merit in the contentions of Shri Ashok Agarwal inasmuch as he was one of the signatories to the declaration made in the prospectus. I note that the said declaration as mentioned in the prospectus dated 26.10.1993 reads as follows :- " All the provisions of the Companies Act, 1956 and the guidelines issued by the Government and SEBI from time to time have been complied with and no statement made in prospectus is contrary to the provisions of Companies Act, 1956 and SEBI Rules thereunder". 10. I find that Shri Ashok Agarwal, being the chairman of the company at the relevant point of time, is also responsible for the acts of the omissions on the part of the company. In view of the above, I am convinced that continuance of Shri Ashok Agarwal in the securities market is detrimental to the interest of investors and also endangers the safety and integrity of the securities market. I find that it is a fit case for issue of directions under Section 11(B) read with Section 11 of SEBI Act.
Direction 11. Therefore, in exercise of the powers conferred upon me by virtue of Section 4(3) read with Section 11 and Section 11B of SEBI Act. I hereby direct that Shri Ashok Agarwal be restrained from associating with any corporate body in accessing the securities market and also be prohibited from buying, selling or dealing in securities for a period of five years. This direction shall come into force with immediate effect. DIRECTIONS UNDER SECTION 11B READ WITH SECTION 11 OF SECURITIES AND EXCHANGE BOARD OF INDIA, ACT, 1992 AGAINST SHRI ASHOK AGARWAL IN THE MATTER OF TRIDENT STEELS LTD
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