Decided on March 28,2003



C.Achuthan, - (1.) VLS Finance Ltd., (the company) is a public limited company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of financing projects, leasing and investments. It had made a public issue of equity shares sometime in March, 1994. Shares of the company are listed on several stock exchanges in India. The company had decided to raise further capital from the market. For the purpose a prospectus was issued on 14.11.94. In the said public issue 36,66,600 equity shares of Rs.10/- each at a premium of Rs.390/- per share aggregating to Rs.146,66,40,000 were offered. The Public issue opened on 15.12.1994. It was reportedly oversubscribed by five times. The company in the said prospectus, under the head "Capital Structure" at item 7 of the notes (page 11) had made the following disclosure: "The promoters have been issued 10 lakh optionally convertible non transferable warrants (OCNT), each convertible into 10 equity shares at their option which shall be exercised not earlier than 12 months and not later than 60 months from the date of allotment of the warrants. This OCNT warrants issue was approved by the shareholders in their meeting held on 2.8.94 and allotted to the promoters in the Board meeting held on the same day. The promoters have given an undertaking to the company that they shall opt for conversion at Rs.400/- per share. They have also undertaken that the conversion shall be opted in phases so that the growth rate in the Earning Per Share (EPS) is maintained every year. At each stage of conversion of OCNT Warrants with the promoters, it would be ensured that promoters' holding does not fall below 25% of the expanded capital. At each stage of conversion of the OCNT Warrants 25% of the shares arising out of such conversion would be locked in for a period of 5 years from the date of allotment of such shares."
(2.) Delhi Stock Exchange (DSE) one of the stock exchanges on which the company's shares are listed, vide their letter dated 20.11.1998 informed the Respondent that the company's promoters did not opt for conversion of the OCNT Warrants in 1996-97, and 97-98 and in 1998, that the Board of Directors of the company in their meeting held on 7.5.1998 allotted one lakh equity shares of ten rupees each against one lac warrants, that the company had taken the stand that since these warrants are optionally convertible, the promoters had the right to opt for conversion of these warrants into any number of equity shares, which was at variance with the terms of the prospectus The Respondent vide its letter dated 28.1.1999 called upon Shri Somesh Mehrotra of the company to honour the promoters' commitment relating to the conversion of the warrants as undertaken. In reply to the same, the company vide its letter dated 1.2.1999 stated that the warrants have been converted as per the terms of its issue. In the meantime the Respondent is stated to have received complaints from several investors/shareholders against the promoters' failure to convert the warrants as per the terms. The Respondent took up the matter with the company and also with the company's lead manager in the public issue. They explained their point of view. But the Respondent found those explanations unsatisfactory and again advised the promoters to honour their commitments as disclosed in the prospectus. In response to the same they reiterated their stand that the promoters had not failed to honour their commitments and as such no action from SEBI was warranted. Respondent issued a show cause notice to the Appellants on 3.4.2002 alleging that they had failed to honour their commitment relating to conversion of warrants as undertaken and represented by them in the prospectus and they were also informed that appropriate orders under section 11B of the Act would be considered for the said failure. The Appellants responded to the same by denying the charges. Respondent was not satisfied. Thereafter the Appellants were asked to show cause vide notice dated 7.6.2002 as to why they should not be debarred from accessisng the capital market for a period of five years. The Appellants made oral and written submissions in response to the notice. But the Respondent was not impressed. In that context the Respondent viewed "that the promoters had made a promise in the prospectus without any intention of performing it which amounts to a fraud. One can reasonably state that cases like these make investors loose their confidence in the capital markets. Such promoters should not be allowed to back out of their undertaking made in the prospectus, by taking recourse to interpretation of the undertaking given by them in the prospectus." The Respondent felt that the action of the promoters of the company (the Appellants) was detrimental to the orderly development of securities market and to the interest of investors and therefore felt necessary to take action "in order to ensure that the investors in the securities market do not in any way suffer any losses and are not put to any harm and that the safety and integrity of the market remain unimpaired". The Respondent vide its order dated 20.9.2002 issued the following direction: " Mr. M. P. Mehrotra, promoter of the company and Mr. Somesh Mehrotra, director of the company, honour their commitment relating to the conversion of warrants as undertaken or represented by them in the prospectus dated November 14, 1994 within a period of 30 days from the date of the order, failing which Mr. M. P. Mehrotra and Mr. Somesh Mehrotra and the other companies which they have promoted or in which they are holding or controlling a substantial interest, shall hereby be restrained, from accessing the capital market, directly or indirectly for a period of 5 years." The Appellants claiming to be aggrieved by the said order filed the present appeal inter alia praying to set aside the same.
(3.) SHRI Fredun De Vitre, learned Counsel, appearing for the Appellants briefly referred to the facts of the case. He submitted that the company being desirous of issuing OCNT Warrants on preferential basis to the promoters group, in its Annual General Meeting (AGM) held on 2.8.94 resolved to issue OCNT Warrants to the promoters, inter alia authorising the Board of Directors to resolve any question in implementing the said resolution. He referred to the text of the resolution passed by the shareholders on 2.8.94, filed along with the appeal memorandum and in particular to the following portion of the resolution: "The consent of the company is hereby accorded to its Board of directors or their duly constituted committee, as the case may be (hereinafter referred to as the Board or Committee) to offer, issue and allot: * On preferential basis to the Promoter Directors, their relatives, friends, associates and the companies promoted by the Promoter Directors or controlled by them or associates.(promoter group) * In such manner and within such period and at such time or times and upon such terms and conditions and at such price including security, rate of interest etc. as may be deemed appropriate, by the Board of Directors, * Equity shares/Fully Convertible Debentures/Partly Convertible Debentures and or any one or more of such securities and or other instruments with or without detachable warrants or naked warrants with a right exercisable by the warrant holders to convert or subscribe to equity shares; * For cash at such price (including premium) as may be decided by the Board but not exceeding Rs.400/- per share upto an aggregate amount not exceeding Rs.400 crores (inclusive of such premium as may be fixed on such securities)";

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