(1.) 0 BACKGROUND
1.1. ZED INVESTMENT LIMITED (hereinafter referred to as ZIL) came out with a public issue of 20, 00, 000 equity shares of Rs. 10/- each for cash at par aggregating to Rs. 200 lakhs, which opened on 30/08/96 and closed on 03/09/96. The issue was lead managed by M/s Geefcee Finance Ltd. and M/s Alankit Assignments Ltd. were the Registrars to the issue.
1.2 ZIL was incorporated in 1993 as Private Limited Company and was converted into Public Limited Company in February 1993. As per the prospectus, the company was promoted by Shri Zile Singh, Shri Anil Kumar and Shri Neeraj Kumar and Shri Rakesh Kumar Srivastava, Shri Zile Singh, Shri Anil Kumar, Shri Neeraj Kumar and Shri Raj Kumar Shukla were the directors of the company. The prospectus was signed by Shri Rakesh Kumar Srivastava for self and for Shri Zile Singh, Shri Anil Kumar and Shri Neeraj Kumar as their constituted attorney.
1.3 Central Bureau of Investigation (CBI) vide its letter dated 14.7.2000 informed SEBI about a case number RC4 (E)/97-EOW.I/DLI against the aforesaid company. Vide said letter CBI informed the findings of its investigations conducted against the aforesaid company and its promoters/directors and other persons associated with it. While informing that on the basis of the findings of its investigation CBI has filed the aforesaid case in the Hon'ble Court of Chief Metropolitan Magistrate, Tis Hazari, Delhi, SEBI was requested to take action against the aforesaid persons within the provisions of SEBI Act and other relevant laws.
(2.) 0. FINDINGS OF THE INVESTIGATIONS
The findings of CBI communicated vide aforesaid letter were examined and prima-facie were found to be correct. The main findings against the company and the other persons mentioned above are summarised as under:
2.1. On 16.11.93, Tarun Goyal a Chartered Accountant got ZIL incorporated by giving the names of non-existent directors namely Shri. Zile Singh, Shri. Neeraj Kumar and Shri. Anil Kumar, showing them as residents of certain fictitious addresses. In various documents, the company's address was shown as 203, Dhaka Chambers, 2069/39, Naiwala, Karol Bagh, New Delhi - 110 005, which was the office address of Tarun Goyal. Tarun Goyal himself conducted business transactions on behalf of ZIL. Income Tax returns of the company for A.Y. 1994-95, 1995-96 and 1996-97 were either prepared by Tarun Goyal or got prepared by him. Tarun Goyal was also director of Geefcee Finance Ltd. (GFL) and its Head, Merchant Banking which was registered as a Merchant Banker and lead managed the issue of ZIL.
2.2. On 1.2.96, Tarun Goyal got ZIL converted into a public limited company and showed its address as 255, Cycle Market, Jhandewala, New Delhi, where the company never existed.
2.3. On 12.4.96, Tarun Goyal as director of Geefcee Finance Ltd. (GFL) (and also Head, Merchant Banking), a SEBI registered Lead Manager, applied to SEBI, NRO for issue of acknowledgement card for ZIL's public issue. Tarun Goyal furnished false and incorrect information to SEBI and obtained the SEBI acknowledgement card for the issue on 31.5.96.
2.4. In June, 1996, Tarun Goyal handed over the company to Rakesh Kumar Srivastava (R K Srivastava), Chairman-cum-MD of PLS group of companies, who was inducted as director of the company w.e.f. 4.6.96. Sh. Raj Kumar Shukla, Sh. Arun Kumar Chaudhary and Sh. Madan Lal Srivastava, who were already directors in PLS group of companies, joined ZIL's board on 4.6.96, 4.6.96 and 6.9.96 respectively. Smt. Seema Srivastava, w/o R K Srivastava also joined ZIL's board. Though Form No. 32 in respect of directorship of Sh. Arun Kr. Chaudhary was not filed with ROC, he started functioning as director from the date of taking over the ZIL. The documents in respect of directorship of R K Srivastava and Sh. R K Shukla were filed with ROC by Tarun Goyal.
2.5. The takeover of ZIL by Shri R K Srivastava and others was negotiated and finalised by Sh. Arun Singh, a Chartered Accountant who also submitted a certificate to SEBI regarding full subscription of promoters quota. The final prospectus was signed on 2.7.96 by R K Srivastava for himself and on behalf of the other first three directors namely, Sh. Zile Singh, Sh. Neeraj Kumar and Sh. Anil Kumar, after which, ZIL was completely taken over by R K Srivastava and it became a part of PLS group. Office of the company was then set up at B-20, Lajpat Nagar, New Delhi - 110 024, which was the head office of PLS group of companies. All the operational work in regard to the public issue was carried out by R K Srivastava, Raj Kumar Shukla and Arun Kumar Chaudhary, as directors of the company. These persons (hereinafter referred to as "Noticees") opened current accounts with Canara Bank, Lajpat Nagar, New Delhi and The Bank of Rajasthan Ltd., Karol Bagh, New Delhi in the name of ZIL to collect money through its public issue.
2.6. Auditors' report (as furnished in the prospectus) and balance sheets for A.Y. 1994-95 and 1996-97 signed by Sh. R.S. Aggarwal (Proprietor M/s . RSA & Co., Chartered Accountants) was submitted to various authorities including Income Tax and ROC by Tarun Goyal. As per statement of Sh. R.S. Aggarwal given to CBI, all these balance sheets, P&L accounts, audit reports, annexures, schedules etc. of ZIL had been signed by him on the instructions of Tarun Goyal and he had not seen any account books or any documents of ZIL.
2.7. In the final prospectus signed by R K Srivastava for himself and for the first three directors, R K Srivastava did not mention whether ZIL was one of the companies under PLS group or that ZIL would offer a buy-back scheme for shares. However, in order to induce the investors, it was advertised that ZIL is in PLS group they will buy-back shares from public. The accused persons induced the general public as well as old investors of PLS group to invest in ZIL 's issue promising that the shares allotted to them would be bought back on a higher rate under the buy-back scheme. Advertisement for the public issue were published in weekly paper 'Noida Bazar Patrika' and a magazine 'PLS Profit-Plus'. The noticees also organised meetings-cum-lunch parties of old investors of PLS group to allure them.
The issue opened on 30.08.96 and closed on 3.9.96. 87 investors subscribed to 8 lacs shares reserved for promoters, while 1596 investors subscribed to the public issue component.
2.8. After subscription of the issue, noticees started buy-back of shares allotted to investors from promoters quota as well as public issue against advance post-dated cheques (PDCs) of different amounts (principal + profit / interest) and different dates from the accounts of three associate concerns of PLS group namely Bristol Finance Ltd (account operated by R K Srivastava), PLS Softech Ltd. (account operated by R K Srivastava & Arun Kumar Chaudhary) and Prekhsa Overseas Ltd. (account operated by Smt. Preeti Chaudhary, w/o Sh. Arun Kumar Chaudhary). In many cases, noticees collected the share certificates under the buy-back scheme without providing the PDCs.
2.9 In April '97, noticees withdrew money from the company's bank accounts, closed their offices and disappeared. PDCs issued to investors were dishonoured by banks due to 'insufficient funds'. The said withdrawal of money was done by the noticees for making payments towards purchase of shares from stock market, to meet office expenses, payment to Shri Tarun Goyal as consideration of sale of ZIL to the noticees, payment to chartered accountants etc. Amounts from company's bank account were also transferred to the sister companies i.e. PLS Technicals Ltd. and Shreejee Capital Management Ltd.
2.10. After receipt of number of complaints regarding the activities of ZIL a case was registered with Lajpat Nagar Police Station and later on, on the instructions and order of Govt. of India the case was transferred to CBI and was investigated by the CBI, Economic Offences Wing-I, 7th Floor, NDMC Bldg., Satya Marg, Yashvant Place, Chanakya Puri, New Delhi - 21 vide R C No. 4(E)/97-EOW-I/Delhi. After completion of their investigation CBI filed chargesheet against various persons including Shri Tarun Goyal and other noticees u/s 120-B r/w Section 420 IPC on 27.8.99 before the Metropolitan Magistrate, Delhi which is till pending.
2.11 In short, the irregularities/violations committed in the public issue and other affairs of ZIL by the company and other persons mentioned above are summarised as under :
(a) Fraudulent incorporation of the company;
(a) Fraudulent conversion into a public limited company;
(b) Fraudulent public issue in 1996
(c) (d) Mis-statements / concealment of material facts, viz. :
Fake registered office address, non-existent persons projected as promoter-directors along with their fake profile and details, fictitious addresses projected as addresses of promoter-directors, fraudulent disclosures related to financial performance of the company, concealment of material fact related to involvement of Tarun Goyal as a person controlling the affairs of ZIL, concealment of material facts related to acquisition of the company by Rakesh Kumar Srivastava, Chairman-cum-MD of PLS group of companies, before public issue, non-disclosure of details related to associate concerns of Rakesh Kumar Srivastava.
(e) Irregularities in issue process in violation of SEBI (Disclosure and Investor Protection) Guidelines (DIP Guidelines) viz.:
Allotment of promoter quota shares to investors at large, offer of buy-back scheme without disclosing the same in prospectus in violation of SEBI DIP guidelines for buy-back of securities, issue of advertisements in violation of SEBI DIP guidelines for issue of advertisement, Fraudulent operations and conduct of business of the company, Fraudulent operations of bank accounts, Diversion and mis-appropriation of public issue proceeds.
Show CAUSE NOTICES
3.1 As the role of Shri Tarun Goyal who fraudulently incorporated the company, on the one hand and the other persons who were shown as promoters/directors of the company in the prospectus, on the other hand was different, different show cause notices on different dates were issued to the different persons.
3.2 Vide detailed show cause notice dt. 16.11.2000, addressed to Shri Goyal, while giving the findings of the investigations, he was asked to show cause as to why appropriate action should not be initiated against him under Section 11 and Section 11B of the SEBI Act, including interalia debarring him from associating with the capital market related activities, dealing in securities, accessing the capital market and associating with any of the intermediary in the capital market for a period of 5 years.
3.3 Further, vide detailed show cause notices dated 07.12.2000 addressed to Shri R K Srivastava and Arun Kumar Chaudhary, show cause notice dated 16.03.2001 addressed to Shri R K Shukla, show cause notice dated 31.01.2001 addressed to Ms. Preeti Chaudhary, these persons were asked as to why appropriate action should not be initiated against them under Section 11 and Section 11B of the SEBI Act, including inter-alia debarring them from associating with the capital market related activities, dealing in securities, accessing the capital market and associating with any of the intermediary in the capital market for a period of 5 years.
(3.) 0 REPLY TO THE SHOW CAUSE NOTICE
4.1 Reply Of Shri Tarun Goyal
Shri Tarun Goyal submitted his reply dated 13.9.2002 wherein he submitted as under :
a. His association with M/s Zed Investments Ltd. and its promoters has been completely professional. While denying the allegation that the promoters of the company were non-existent, he submitted a copy of ration card for Shri Zile Singh and copy in support of educational qualification of Shri R K Srivastava, Shri A K Chaudhury and Shri R K Shukla. Further, he submitted a notarised copy of rent agreement for the registered office of the company.
b. As regards other charges of fraud and cheating etc. levied by CBI, it was informed that the said charges have been disputed by him in the court of Shri J.P. Narain, M.M. Delhi. It was also informed that Shri Goyal has also filed a petition before the Additional District and Sessions Judge, Karkardooma, Delhi for quashing the said charges and he expects to succeed in the matter.
c. He also denied the charges of fraudulent conversion of ZIL into public company, fraudulent public issue, preparation of income tax return of ZIL etc. Regarding other charges such as concealment of material facts in the prospectus, allotment of promoter quota shares in violation of SEBI (DIP) guidelines, fraudulent operations and conduct of business etc., he submitted that he was not responsible for the acts of omission and commission of the company and its promoters / directors after the company was taken over by Shri R K Srivastava & Ors. and as such his association with the company was purely in professional capacity.
2. Reply of Shri R. K. Srivastava
Shri R.K. Srivastava filed his reply dt. 06.01.2001 through Shri Mukesh Kumar, Advocate (for M L Srivastava & Co., Associate Advocates) and made inter-alia the following submissions :
a. R K Srivastava has nothing to do with the formation of ZIL.
b. In June 1996, Tarun Goyal along with Arun Singh fraudulently and dishonestly made false representation to R K Srivastava and induced him to purchase ZIL.
c. After purchasing ZIL entire function in bringing public issue was conducted/managed by Tarun Goyal and Arun Singh whereas R K Srivastava simply financed the public issue incurring personal losses and had no knowledge about their activity.
d. R K Srivastava had no knowledge about the history of fake and bogus company ZIL and only learnt about the facts of the case when CBI filed its charge sheet in September/October, 1999.
4.3. Reply of Shri Raj Kumar Shukla
Shri Raj Kumar Shukla filed his reply vide his letter dated 30.3.2001 and submitted inter-alia as under :
(a) The show cause notice was baseless and not within jurisdiction of SEBI.
(b) Section 11 and Section 11B of SEBI Act did not apply to the case where the findings were of some other agency and the matter was sub-judiced.
(c) It was also alleged that nobody aggrieved in the case had complained to SEBI .
(d) CBI took over the case in April, 1997 and it was not clear as to why there was a delay of 3 years in issuing show cause notice by SEBI and as such any action by SEBI after such delay is barred by Law.
(e) At present he is not a director in any of the companies in question nor was he indulging in any of the acts which were subject matter before SEBI.
(f) SEBI's notice did not refer to him. There was no document / witness to support SEBI's case against him.
R.K. Shukla sought further time to present his final reply, however, no addendum to his reply dated 30.3.2001 was received by SEBI till date.
4.4 Reply of Shri Arun Kumar Chaudhary
Shri Arun Kumar Chaudhary furnished his reply vide his letter dated 27.01.2000 and submitted interalia as under :
a. That he was in simple employment of Shri Rakesh Kumar Srivastava and was discharging duties sincerely whatever job was entrusted to him in the course of official duties.
b. That Tarun Goyal, Arun Singh and his associates managed entire affairs in getting approval of the prospectus, terms and conditions of the issue and R K Srivastava simply provided the needed finance in good faith. After receiving documents from CBI in February/March, 2000 it was learnt that actual fraud had been played by aforesaid persons.
c. He had no knowledge about the share market nor ever indulged directly/indirectly in trading of securities or committed any irregularity or made any mis-statement by concealing any fact as highlighted in SEBI show cause notice.
4.5. Reply of Ms. Preeti Chaudhary
Ms. Preeti Chaudhary filed reply vide her letter dated 05.02.01 and submitted interalia as under :
(a) She is not a director/employee/agent of ZIL. She is a law abiding and simple household lady.
(b) Her husband, Shri Arun Kumar Chaudhary was in employment of PLS Company. She has never seen the face of share market nor indulged in any manner in the sale and purchase of securities in public or with stock exchanges nor in future she intended to enter into any sort of business including securities business.;