(1.) M/s Vatsa Corporation Ltd. is a Merchant Banker registered with SEBI. M/s Vatsa Corporation Ltd. (hereinafter referred to as 'the merchant banker') was the Lead Manager to the public issue of Hitek Insustries (Bihar) Limited.
(2.) M/s. Hitek Industries (Bihar) Ltd. (hereinafter referred to as Hitek) was incorporated as a Private Limited company on March 15, 1983 under the Companies Act, 1956 and was converted into a Public Limited Company on August 12, 1983. The Company came out with a public issue in 1984 which was followed by a rights issue in 1986. Subsequently, the company came out with another public issue on March 21, 1994.
2. M/s. Hitek Industries (Bihar) Ltd. (hereinafter referred to as Hitek) was incorporated as a Private Limited company on March 15, 1983 under the Companies Act, 1956 and was converted into a Public Limited Company on August 12, 1983. The Company came out with a public issue in 1984 which was followed by a rights issue in 1986. Subsequently, the company came out with another public issue on March 21, 1994.
2.1 Hitek informed the Stock Exchange, Mumbai (BSE) vide its letter dated December 13, 1995 that it received letters from some of their shareholders that they lost around 20 lakh share certificates and requested BSE to prohibit trading in the said shares. BSE vide their notice No. 160/96 dated January 6, 1996 declared that these 20 lacs shares would be considered as bad deliveries in the market.
2.2 The scrip of Hitek suddenly showed a spurt in volume and price during December 1995 and January 1996. The scrip witnessed a price rise from Rs.11.50 to 29.28 from Settlement 10 to 28 in December, 1995 and January, 1996. The price tumbled to Rs.8.20 on January 11, 1996. The scrip was suspended indefinitely by BSE on January 12, 1996, after the company informed the BSE of its intention to issue duplicate shares pursuant to intimation by some share holders regarding loss of their share certificates.
Vide order dated May 21, 1996, an investigation into the affairs of the dealings in the shares of public issue of Hitek was initiated by SEBI. A show cause notice dated December 19, 2002 was issued to the merchant banker to showcause as to why suitable directions under Section 11 and 11B of SEBI Act, 1992 including a direction to disassociate itself from the capital market for a particular duration should not be passed on the following grounds:
3.1 Vatsa Corporation Limited acting as the Lead Manager to the Issue tried to procure subscription by arranging stock invests in order to bail out the issue, the same has been stated by Shri P.P. Verma, the promoter of Hitek in his statement dated 27.01.97.
3.2 As Lead Manager to the Issue, the merchant banker failed to ensure that the ï¿½Basis of Allotmentï¿½ is finalized in accordance with the guidelines prescribed by SEBI. The merchant banker failed to exercise due care as the ï¿½Basis of Allotmentï¿½ was finalized only on the basis of the photocopies of the stock invests.
3.3 The Merchant Banker failed to ensure that share certificates, refund orders and cancelled stock invests are properly dispatched as the Registrar to the issue had given hand delivery of share certificates to the aforesaid 25 applicants.
3.4 The merchant banker failed to ensure that the stock invests are not deposited in banks other than the Controlling Bank branches. The stock invests were deposited in Bank of America which is not a collecting/controlling Bankers to the issue.
3.5 The merchant banker should have eliminated late applications. However, the "basis of allotment" was approved by Magadh Stock Exchange on 21.7.94. Eight application forms were dated 22.7.1994. Allotment was done without getting the consideration for shares allotted. The stock invests were not realized by the time the basis of allotment was finalized. The listing of the scrip was done prior to realization of stock invests. Hence, the merchant banker failed to handle the mandate with due diligence and care.
3.6 The merchant banker closed the issue on the earliest closing date eventhough the issue did not receive minimum subscription. When a issue is closed on the earliest closing date, the underwriters cannot be called upon to subscribe the shortfall in the public issue. In the instant case, the issue was fully underwritten and the merchant banker closed it on the earliest closing date even when the issue was under subscribed. Hence the merchant banker failed to exercise due diligence.
3.7 The merchant banker acting as the lead manager violated SEBI Circular dated December 24, 1992 which states that, "Lead Manager responsible for post issue activities shall maintain close co-ordination with the Registrar to the issue and arrange to depute its officers from regular intervals after the closure of issue to monitor the flow of applications from collecting bank branches, processing the applications including those accompanied by stock invests and other matters till the basis of allotment is decided, dispatch is completed and listing done. Any act of omission or commission on the part of Registrars noticed during such inspections should be duly reported to SEBI".
3.8 The merchant banker further violated SEBI RMB(G1 series), Circular No.1 (92-93) dated March 1, 1993 which states that, "Lead manager responsible for post-issue activities shall maintain closed co-ordination with the Registrar to the issue and arrange to depute its officers from regular intervals after the closure of issue to monitor the flow of applications from collecting bank branches, processing the applications including those accompanied by stock invests and other matters till the basis of allotment is decided, dispatch is completed and listing done. Any act of omission or commission on the part of Registrars noticed during such inspections should be duly reported to SEBI. Further, the lead manager shall be responsible for ensuring dispatch of refund orders/allotment letters/certificate by Regd. Post only, in terms of Ministry of Finance, Stock Exchange Division, Guideline No.F/8/15/SE/86D dated 3.6.86 addressed to the stock exchanges."
3.9 The merchant banker violated Code of Conduct as prescribed by Regulation 13 of SEBI (Merchant Bankers) Rules & Regulations, 1992 by not overseeing that the allotment is done only after realization of stock invests and stock invests are deposited in banks in collecting branches only.
3.10 The merchant banker through financing arrangement aided and abetted in cornering shares which led to artificial scarcity of floating stock in the market. Shri Prem Prakash Verma, Managing Director of Hitek stated that the Registrar handed over share certificates allotted to various allottees to one Shri R.P. Sinha, who was an employee of the company during that time. This resulted in cornering of shares and led to artificial scarcity of floating stock in the market. As a result of which there was a spurt in the share price.
3.11 The merchant banker proceeded with the allotment of shares before the realization of stock invests which is not in conformity with the provisions of Section 69, Section 73 of the Companies Act, 1956 and guidelines for Disclosure and Investor Protection issued by SEBI on 11.6.92.
(3.) THE merchant banker vide letter dated 17.1.03 replied to the above showcause notice and made the following submissions:
4.1 THE merchant banker denied that they tried to bail out the issue of Hitek by arranging loan disguised as subscription to stock invests on the following grounds:
a. THE merchant banker never tried to bail out any issue including HIBL by arranging stock invest towards subscription.
b. SEBI had never given any opportunity to cross-examine Mr. P.P. Verma, promoter of HIBL on the above subject matter.
c. SEBI had not given any documentary proof / evidence as produced by Shri P.P. Verma, for us to examine and contest the same.
d. SEBI had already accepted the statement of Shri P.P. Verma without examining the facts of the case.
THE above act shows that SEBI has pre decided the issue that the merchant banker is responsible for the same without having given an opportunity to prove its case.
4.2 THE merchant banker denied that it failed to ensure the basis of allotment in accordance with the guidelines prescribed by SEBI on the grounds that the merchant banker has taken due care in exercising its power in finalizing the basis of allotment. THE merchant banker has gone by the certificates received by the registrars to the issue stating that the issue has been over subscribed and on the basis of the same, the basis of allotment was finalized. THE same was produced to the Magadh Stock Exchange.
4.3 THE merchant banke denied that it failed to ensure that there are no irregularities in the dispatch of share certificates on the ground that the registrars to the issue informed us that all the share certificates / refund orders and other stock invests have been properly dispatched.
4.4 Regarding the allegation that the merchant banker failed to ensure that the stock invests are not deposited in banks other than the controlling bank branches, it was replied that the fact of stock invests having being filed in Bank of America was not brought to the merchant bankers notice and the same must have been done by the company in connivance with the bankers and the registrars to the issue. It was further replied that it was bankers i.e. Bank of America's duty to ensure that the same were not sent for encashment since they were not collecting Bankers to the issue.
4.5 THE merchant banker further denied that it closed the issue on the earliest closing date eventhough the issue did not receive minimum subscription on the grounds that:
a. THE merchant banker decided to close the issue at the earliest closing date on the basis of the collection figures received from the Registrar to the issue and after consultations and approval from Hitek.
b. Had the issue been under subscribed and the merchant banker had closed on the earliest closing date, Hitek would have complained about the negligence of the merchant banker with SEBI. THE same had not been done which proves that the merchant banker, at no given period of time, acted in any negligible manner and had failed to exercise the due diligence.
c. THE merchant banker never violated the SEBI Circular dated 24.12.92 and SEBI RMB (G1 series) Circular No.1 (92-93) dated 1.3.93.
4.6 THE merchant banker denied that it aided and abetted, through financing arrangements, in cornering shares which led to artificial scarcity of floating stock in the market on the following grounds:
a. SEBI acted on the basis of the statement made by Shri P.P. Verma, Promoter of Hitek. SEBI had not relied on any documents produced by HIBL or its promoters. Such documents were not forwarded to them for their comments.
b. THE merchant banker never aided the promoters of HIBL in arranging finance towards subscription of the said issue and hence the question of cornering shares of HIBL which has led to artificial scarcity of floating stock in the market, does not arise.
c. Mr. P.P. Verma alleged that Shri R.P. Sinha was a Power of Attorney holder of some POA which the company was never aware of. In fact, the matter, was never brought to the notice of the management of VCL at any given period of time. In case there was such a POA, Mr P.P. Verma should have taken due care and should have brought to the notice of the merchant banker and SEBI. Since he has failed to do so, there is a strong feeling that Mr. P.P. Verma was thickly involved in the above process of cornering the shares which led to artificial scarcity of floating stocks in the market as alleged by SEBI.
THE merchant banker stated that, as lead manager to the issue of Hitek, they always acted earnestly and had abided by all the guidelines / rules / law applicable at that given period of time. THE merchant banker acted in due diligence manner and never violated any rules and regulations at that given period of time and it never tried to finance or financed any public issues including Hitek with an object to subscribe to the issue and also never tried to corner shares of any other company in which it acted as a lead manager including that of Hitek.;