PYRAMID SAIMIRA THEATRE LTD. Vs. THE SECURITIES AND EXCHANGE BOARD OF INDIA
LAWS(SB)-2010-4-1
SECURITIES APPELLATE TRIBUNAL
Decided on April 07,2010

PYRAMID SAIMIRA THEATRE LTD. Appellant
VERSUS
The Securities and Exchange Board of India Respondents

JUDGEMENT

N.K. Sodhi, J. (Presiding Officer) - (1.) THIS is one of those cases where the issuer company has misused its Initial Public Offer (IPO) to the detriment of the genuine investors including its employees by allotting 98.5% of the shares under the employee category to its seven chosen persons who were masqueraded as its employees. Pyramid Saimira Theatre Ltd. is the issuer company which is the appellant before us. It came out with an IPO in December, 2006 in which 4,22,200 shares representing 5% of the total size of the issue were reserved for its employees. 98.5% of these shares were allotted to seven persons who, on the appellant's own showing, joined just before the opening of the public offer and left soon thereafter. The details of the allotment made to these persons including the duration of their employment is shown in the chart below: JUDGEMENT_1_LAWS(SB)4_2010.htm These allottees sold the shares within 3 days of their listing on the stock exchange(s) and made an unlawful gain of more than Rs. 2.31 crores.
(2.) THE Securities and Exchange Board of India (for short the Board) on investigations found that the allottees were not the genuine employees of the company and that the company had orchestrated the whole scheme to enable the aforesaid persons to appropriate the employees' quota of shares. It further found that the company and the seven persons connived to deprive the lay investors including the genuine employees of the company from participating in the public issue. Accordingly, a common show cause notice dated February 22, 2008 was issued to the aforesaid seven persons and the appellant company alleging violation of Regulations 3(b) and 3(c) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as the Regulations). The noticees including the appellant were called upon to show cause why suitable directions under Sections 11 and 11 B of the Securities and Exchange Board of India Act, 1992 (for short the Act) be not issued to them including directions to disgorge the profits made by them. None of the allottees (the aforesaid seven persons) has come up in appeal before us and in this case we are only concerned with the appellant company. The appellant filed its reply on August 17, 2009 denying all the allegations. In para 9 of the reply, the selection and recruitment of the seven persons was sought to be justified on the ground that it was done in the best interests of the company with a view to accomplish the key tasks at a fast pace. It was also pleaded that the employment of these persons was necessary keeping in view the business model of the company. It is pertinent to note that at no stage of the proceedings and not even before us during the course of the hearing did the company disown itself from the fact of having employed them. On a consideration of the material collected by the whole time member during the course of the enquiry and on the basis of the records procured during the course of the investigations, he came to the conclusion that the allegations made against the appellant stood established. The whole time member found that the appellant company and the seven allottees had connived to deprive the common investors including the genuine employees of the company from allotment under the public issue. He further found that there was no credible evidence in the records of the company to show that the seven allottees were its genuine employees. Besides, there is also a finding by the whole time member that the seven allottees collectively made an unlawful gain of Rs. 2.31 crores by selling the shares in the market though there is no material on the record to indicate whether the appellant company also shared the ill -gotten gains. Accordingly, by his order dated November 10, 2009 the appellant has been restrained from accessing the securities market and from dealing in securities in any manner whatsoever for a period of 7 years. It is against this order that the present appeal has been filed. We have heard the learned senior counsel on both sides and they have taken us through the records of the case including the impugned order. The fact that the appellant company came out with an IPO in December, 2006 and allotted, among others, 4,15,816 shares to the aforesaid seven persons referred to in the chart above is not disputed. What is asserted by the appellant in the memorandum of appeal and also by its learned senior counsel at the time of arguments is that the seven allottees were its employees and they had been selected and recruited taking into account the best interests of the company with a view to accomplish the key tasks at a fast pace. This fact is seriously disputed by the learned senior counsel for the respondent Board.
(3.) THE primary question that arises for our consideration is whether the allottees were the employees of the appellant company. The records placed before us clearly answer this question in the negative. It is the appellant's own case that the seven allottees on employment had been posted in the Bangalore office of the company where a register for recording the attendance of the employees is maintained. Admittedly, the names of these seven allottees do not appear in that register. The only explanation furnished by the appellant for non appearance of their names in the register is that they had been given flexible working hours and that they were constantly travelling. This is no explanation at all and we cannot accept the same. Again, the seven allottees were singled out for payment of salary in cash when all others were paid through cheques or by bank deposits. The vouchers against which the cash payment was made to them were generated from the Chennai office when they were supposed to be working in Bangalore. There are several other discrepancies in the vouchers and the cash book as pointed out by the whole time member and we agree with him that these mitigate against their being employees of the company. The appellant has also placed on record a copy of the letter dated March 27, 2007 written by it to the Employees Provident Fund Commissioner, Chennai to enroll the seven allottees as members of the provident fund. It is amusing to note that by the time this letter was written, the so called employees had already left the service of the company as per its own showing. This apart, by the time this letter was written, the Board had started making enquiries asking for the details of the allottees. The Board by its letter of March 26, 2007 sent by fax had sought details from the appellant including details pertaining to the provident fund of the seven allottees. Obviously, the letter written on March 27 2007 was a crude patch up operation by the appellant There is yet another reason why we cannot hold the allottees to be the employees of the appellant When we look at their background, they were already well settled in Mumbai for a long time carrying on their established textile business. We say so because they were high net worth individuals and their bank accounts show debit and credit entries running into crores of rupees. Each one of them had several demat accounts and this would show beyond doubt that they were seasoned market players. With this background, would any one leave Mumbai and go to Bangalore to take up a traveling job for a mere paltry salary ranging from Rs. 7,500/ - to Rs. 25,000/ - per month. The answer has to be in the negative. Interestingly, the applications by some of them for obtaining a job indicate that they were desperate in getting one. Some of them applied for "any office job" or "any suitable job". Again, it is the appellant's own case that each one of the allottees was in the employment from July/August 2006 to December 2006/early January 2007. They all joined a few months before the IPO and left immediately after the issue closed. As per the service rules of the company, every employee is put on probation for a period of 6 months but these allottees were kept on probation for a period of 3 months only to ensure that they become eligible for allotment. It may be mentioned that only permanent employees were eligible to apply for shares in the employee category. They were all allowed to resign and go without serving one months' notice. The jobs advertised by the company and the ones for which the allottees applied were totally different in most of the cases. In this background, the whole time member was right in holding that the allottees were made to don the cloak of employees only to enable them to apply for the shares in the employee's category in the IPO. We have, therefore, no hesitation in holding that the allottees were not the employees of the appellant company and if anything, they were ghost employees. Thus, the complicity and connivance of the appellant stands established. It follows that the appellant aided and abetted the seven allottees in receiving shares under the employee quota. In the written submissions of the appellant filed after the conclusion of the hearing, it is submitted that the finding that there was no material on the record that the appellant had shared the ill -gotten gains with the seven allottees mitigates against the conclusion that the allottees were not the employees of the appellant We are not impressed with this argument. The appellant has been found to have violated Regulation 3(b) of the Regulations. This Regulation prohibits a person from using or employing any manipulative or deceptive device or contrivance in contravention of the Act or Regulations in connection with the issue, purchase or sale of any security listed or proposed to be listed on any stock exchange. The mere fact that the appellant so brazenly contrived to allot 98.5 per cent of the shares from the employee quota to the seven allottees who were not its employees is proof enough to establish the violation of this Regulation. It is not the requirement of this Regulation that the person violating it should also have shared the ill -gotten gains. Therefore, if the Board could not establish that the appellant had shared the spoils with the allottees does not mean that the latter were its employees.;


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