N.K. Sodhi, J. (Presiding Officer) -
(1.) THIS order will dispose of a bunch of 5 Appeal Nos. 113, 144 to 146 and 149 of 2008 all of which are directed against the common order passed by the whole time member of the Securities and Exchange Board of India (for short the 'Board') holding the appellants guilty of violating the provisions of Regulation 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (for short the 'Regulations'). He also found that the appellants other than the appellant in Appeal No. 113 of 2008 had violated Regulation 11(2) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short the 'takeover code') and by his order dated 5 -6 -2008 be restrained them from accessing the securities market for a period of two years in addition to the period of debarment already undergone in pursuance to an interim order passed by the Board. He also directed the appellants other than the appellant in Appeal No. 113 of 2008 to make public announcements in accordance with the takeover code by taking 31 -3 -1998 as the reference date for calculation of the offer price. Since the main arguments were addressed in Appeal No. 113 of 2008, the facts are being taken from this case. Learned Counsel for the parties were agreed that the decision in this appeal shall govern the other appeals as well.
(2.) KRISHNA Filaments Limited (hereinafter referred to as 'KFL') is a company incorporated under the provisions of the Companies Act, 1956. It came out in April/May 1997 with a public issue of 33,45,000 optionally fully convertible discounted debentures (for short the debentures) of Rs. 200 each for cash at a discounted price of Rs. 160. The debenture holders had the option to convert them into equity shares of Rs. 10 each at the end of 17 months from the date of allotment at a discount of 33 1/3 per cent to the average daily closing price for the previous six months on the Bombay Stock Exchange (BSE) subject to a maximum conversion price of Rs. 200 per share and a minimum of Rs. 10 per share. Another option that the debenture holders had was to convert them into non -convertible debentures of Rs. 200 each carrying interest at the rate of 19 per cent redeemable in three equal instalments at the end of 36,48 and 60 months from the date of allotment. It is common ground between the parties that 13 -11 -1998 was the date of conversion and the average price of the scrip as on that date for the previous six months was Rs. 154. The Board observed that the price of the scrip of KFL increased from Rs. 153 on BSE and Rs. 154 on National Stock Exchange (NSE) on May 15, 1998 to Rs.311 on 9 -6 -1998 on BSE and Rs. 313 on 4 -6 -1998 on NSE. As a result of this unusual spurt in price and volumes in the scrip, the Board carried out investigations which revealed that KFL and its directors had rigged the price of the scrip upwards to fix the conversion price of the debentures at Rs. 154 per share for non promoters/other shareholders and Rs. 200 for promoters and collaborators. According to the Board, the device adopted by KFL and its directors was to corner the already low floating stock of the scrip from the market by sucking out its liquidity with a view to ensure that the price of the scrip goes up. Investigations further revealed that KFL used a complicated web of different companies to purchase the shares from the market and this, according to the Board, was done to hide the identity of the persons carrying out the rigging operations. According to the investigations, two sets of companies were used for cornering the shares. The first set of companies is Alankar Finance (P.) Ltd., Agnikamal Finance (P.) Ltd., Adhikash Finance (P.) Ltd., Kalpit Finance (P.) Ltd., Renold Finance (P.) Ltd. and Satyanand Finance (P.) Ltd. (hereinafter referred to as Alankar, Agnikamal, Adhikash, Kalpit, Renold and Satyanand, respectively). Alankar, Agnikamal, and Satyanand were allegedly controlled by Nalinesh R. Dalai, a Chartered Accountant whereas Adhikash and Renold were controlled by Anant Narayan Iyer, a financial consultant and this set of companies shall collectively be referred to hereinafter as Dalal -Iyer companies. The other set of companies that were allegedly used to execute the game -plan were Competent Trading (P.) Ltd., Dominance Trade and Investment (P.) Ltd., Precise Exports (P.) Ltd., Marvellous Trading (P.) Ltd., Lyric Investments and Trading (P.) Ltd., Responsive Plastics (P.) Ltd., and Gainful Exports (P.) Ltd. (hereinafter referred to as Competent, Dominance, Precise, Marvellous, Lyric, Responsive and Gainful, respectively). These companies were allegedly controlled by M/s. Jiten Mehta and Sunil Nair and they shall collectively be referred to hereinafter as Mehta -Nair companies. Based on the findings recorded in the investigation report, the appellant was served with a show -cause notice dated 16 -7 -2001 calling upon it to show cause why suitable directions under Section 11B of the Securities and Exchange Board of India Act, 1992 be not issued including directions prohibiting it from accessing the capital market. Similar notices were issued to the appellants in the connected appeals. The appellants filed their replies denying the allegations. The whole time member came to the conclusion that KFL and its directors manipulated the price of the share in the market so that the conversion price of the debentures becomes higher. It was found that KFL and its directors gave their own funds for the purchase of shares by different front entities against fictitious machinery and spare parts bills and also against allotment of preference shares and it was in this manner that the price of the scrip was sought to be pushed upwards. In view of these findings, the then chairman of the Board found that the appellants violated Regulation 4 of the Regulations and also Regulation 11(2) of the takeover code and by his common order dated 10 -9 -2004 concluded that the charges levelled against them stood established. Accordingly, KFL and its promoters along with its associate companies and their directors were prohibited from accessing the capital market and dealing in securities for a period of five years. All these entities other than KFL were also directed to come out with a public announcement under the takeover code. Feeling aggrieved by this order, the appellants filed Appeal Nos. 277 to 280 of 2004 and Appeal No. 30 of 2005 before this Tribunal. These appeals came up for hearing on 1 -3 -2007 and the Tribunal found that the findings against the appellants had been recorded primarily on the statements of N.R. Dalai, A.N. Iyer, one Mr. Gupta, Jiten Mehta and Sunil Nair. Even though copies of the statements of these witnesses had been furnished to the appellants during the course of the investigations, they were not allowed to be cross -examined and the Tribunal found that this was in violation of the principles of natural justice. The allegations made in the show -cause notice were also found to be vague and disjointed. Some additional documents were sought to be placed before the Tribunal for the first time and there was a dispute between the parties as to whether those had been produced during the course of the hearing before the Board. The Tribunal set aside the order impugned in the appeals and observed that "...We deem it proper to remand the case back to the Board to pass a fresh order in accordance with law after affording an opportunity of hearing to the appellant and after complying with the principles of natural justice. The contentions raised before us on either side remain open." It was left open to the Board to issue a fresh or supplementary show -cause notice, if so advised. In pursuance to the observations made in the remand order, the Board issued a fresh show -cause notice dated 29 -5 -2007 to the appellant and the same was addressed to the other appellants as well. After referring to the background which necessitated the investigations to which reference has been made in the earlier part of our order, it is alleged that Dalal -Iyer companies which were intimately connected with KFL made gross purchases of 6,39,500 shares and net purchase of 4,37,800 shares of KFL from the market with the funds received from KFL/its directors as under:
________________________________________________________________ Name of the Company Qty. Amt. (Rs.) ________________________________________________________________ Alankar 215500 24168198 ________________________________________________________________ Agnikamal 77000 8758095 ________________________________________________________________ Adhikash 54450 6044705 ________________________________________________________________ Kalpit 65100 6884366 ________________________________________________________________ Satyanand 161500 16350840 ________________________________________________________________ Renold 65950 7044578 ________________________________________________________________ Total 639500 69250782 ________________________________________________________________
The show -cause notice then refers to the funds received by Dalal -Iyer companies from KFL and its directors and it is alleged that the funds were given to these companies against fictitious and bogus machinery and spare parts bills. The details of the fund -flow were furnished in Annexure B to the show -cause notice. Having purchased the shares from the market, Dalal -Iyer companies are then said to have sold these shares to Mehta -Nair companies mainly through off -market transfers. It is further alleged that these off -market transactions were not made through regular contract notes but through debit notes raised by the sellers (Dalal -Iyer companies) at prices which were markedly different from the market price. According to the show -cause notice, the bills raised by Dalal -Iyer companies were not genuine and were used only as a conduit to transfer the funds to these companies to enable them to purchase the shares of KFL. These facts are said to have been corroborated by the statements made by N.R. Dalal and A.N. Iyer and copies of their statements were annexed to the show -cause notice.
(3.) THE show -cause notice also alleges that KFL and its associate company Krishna Vinyl Ltd. (KVL which is the appellant in Appeal No. 149 of 2008) had transferred funds to the tune of Rs. 27.03 crores to Mehta -Nair companies by way of investment in preference shares of these companies. It is alleged that these companies were unlisted companies and there was no justification for KFL and KVL to make such huge investments which did not yield any interest or dividend. According to the Board, these funds were in fact provided to Mehta -Nair companies for purchase of shares of KFL from the secondary market.;