N.K. Sodhi, J. (Presiding Officer) -
(1.) THE precise charge levelled against the Appellants in these two Appeals No. 49 & 50 of 2011 is that they made a false/ misleading corporate announcement relating to an export order which led to increase in the price and volumes of the scrip of M/s. Vijay Textiles Limited (hereinafter referred to as the company) and when the price went up the promoters of the company off -loaded a substantial part of their holdings thereby making huge profits. It is on this basis that both the Appellants have been charged with violating the provisions of Regulations 4(1), 4(2)(e) and (r) of the Securities and Exchange Board of India (Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003 (for short the Regulations). Since common questions of law and fact arise in these two appeals, they are being disposed of by this order.
(2.) THE shares of the company are listed on the Bombay Stock Exchange Limited (BSE) and the Hyderabad Stock Exchange. The Securities and Exchange Board of India (for short the Board) carried out investigations in the scrip for the period from November 1, 2004 to March 11, 2005 and it was observed that on BSE the price and volumes had witnessed a huge spurt. Investigations revealed that the company had come out with a false/misleading news regarding it having received an export order from a Swiss company which induced investors to purchase the scrip. It was also observed that the so -called export order did not fructify and the company omitted to bring this information to the notice of the investors. Investigations further revealed that after the price of the scrip had gone up considerably, the promoters of the company (one of which is the Appellant in Appeal No. 50 of 2011) sold a substantial part of their holdings thereby making huge profits. On the conclusion of the investigations, the Board was prima -facie of the view that the Appellants had violated the provisions of the Regulations and accordingly two show cause notices both dated May 8, 2008 were issued to the Appellants which contain identical allegations alleging that the company had made the following corporate announcements during November 2004 to February 2005.
a) Opening of retail Showroom
b) Opening of Studio
c) Bagging of export order.
Since no fault has been found with the announcements at (a) & (b) above, it is not necessary to deal with those announcements in any detail. However, it was alleged that the announcement regarding the bagging of the export order was false and misleading which did not materialize. According to the show cause notice, this announcement was made by the company on February 21, 2005 and again on February 24, 2005 stating that it had bagged an export order worth 4.60 million US $ (about Rs. 20 Crores) from Simran Enterprises from Europe for the supply of exclusive range of home furnishings. It is further alleged that the company produced an unsigned fax letter from the Swiss Firm which was only a letter of intent and did not refer to the placing of any order with the company. It is the case of the Board that when the company made this corporate announcement the price of the scrip went up and the promoters including the Appellant in Appeal No. 50 of 2011 sold a substantial part of their holdings and thus violated Regulations 4(1), 4(2)(e)& (r) of the Regulations. The Appellants filed their detailed replies to the show cause notices denying the allegations. It was stated that the price of the scrip was in the upward mode since October 2004 and that the company had made several corporate announcements as a result whereof the price of the scrip went up. It was pointed out that on November 20, 2004 the Board of directors considered the proposal for division/splitting of the share capital of the company and on November 22, 2004 they decided to set up a Design Studio. The Board of directors approved the sub -division of the shares in their meeting held on November 27, 2004. Again, in their meeting held on January 20, 2005, the Board of directors considered the declaration of interim dividend and in their meeting held on January 31, 2005 they recommended interim dividend of 40% and also announced the financial results for the quarter ending December 2004. The Appellants also stated in their reply that a public announcement was made on February 17, 2005 that the Board of directors of the company would consider the matter regarding the issue of bonus shares in their meeting to be held on February 24, 2005. In the meeting held on February 24, 2005, a recommendation was made for the issue of bonus shares in the ratio of 2:1. On February 21, 2005, the company announced that it had received an export order worth Rs. 20 crores. The Appellants also pointed out that on February 22, 2005 the company had executed a lease for a duration of 25 years for an area of about 12,000 sq ft. for setting up its large retail showroom at Ameerpeth, Hyderabad. Since all these announcements were price sensitive, the company informed the BSE of these announcements where its shares were listed and, according to it, this was done as per the requirements of the listing agreement and other securities laws. As regards the announcement pertaining to the export order, it was admitted that the same was made on February 21, and February 24, 2005. It was pointed out that the representatives of Simran Enterprises had approached the company and had expressed interest in purchasing the fabric made by it and that a presentation had been made to them at the Hyderabad showroom. The Appellants also pleaded that in pursuance to their meeting with the representatives of Simran Enterprises in December 2004, the company received a letter dated February 15, 2005 through fax from Simran Enterprises inter -alia expressing its intent to purchase furnishing fabrics from the company worth Rs. 20 crores within a period of 12 months. It is also pleaded that on receipt of this letter the announcement regarding the receipt of the export order was made on February 21, and February 24, 2005. It is denied that the announcement is false or is in any way misleading and it is the case of the company that it pursued the matter further with Simran Enterprises through telephone calls and also by addressing three letters dated March 10, 2005, May 2, 2005 and February 2, 2006. Since no response was received from Simaran Enterprises nor did they open the letter of credit, the company, according to the Appellants, made an announcement that the export order worth Rs. 20 crores with the Swiss Firm had not materialized due to inability of the buyer to open a letter of credit. This announcement was not only sent to the BSE but was also published in a newspaper "Business Standard" dated October 28, 2006 alongwith its unaudited financial results. The company pleaded that there was no misrepresentation as alleged and that increase in the price of the scrip could not be attributed to the announcement made regarding the export order and that it was due to the other corporate announcements made during the same time as referred to above with which no fault has been found. It is also pleaded that the sale of shares made by the promoters had no co -relation with the public announcement regarding the export order and that they had been selling their holdings much before and after the said announcement.
On a consideration of the material collected during the course of the investigations and the enquiry, the adjudicating officer came to the conclusion that the Appellants had falsely informed the BSE about the receipt of the export order when actually it was just an intent of purchase and not an actual purchase. He also found that the Appellants failed to inform the investors that it was during a period of 12 months that Simran Enterprises intended to purchase the furnishing fabrics from the Appellants and not just in one flow. He also observed that the letter was unsigned. It was on this basis that the adjudicating officer concluded that the Appellants had deliberately made an inaccurate and misleading corporate announcement regarding the export order. He then observed that "The price of the said scrip on February 21, 2005 touched a high of Rs. 48.85 because of said announcement." He also concluded that when the price of the scrip increased as a result of this misleading announcement, the promoters and directors sold their shares and made huge profits at the behest of gullible investors thereby violating Regulations 4(1) and 4(2)(e) and (r) of the Regulations. Accordingly, by his two identical orders dated January 13, 2011 he imposed a monetary penalty of Rs. 25 lacs on each of the Appellants. It is against these orders that the present two appeals have been filed.
(3.) WE have heard the learned Counsel for the parties at length who have taken us through the record and the impugned order.;