G.N.Bajpai, - (1.) A sudden spurt was observed in the share prices of Information Technologies (India) Ltd (hereinafter referred to as "ITIL") during January and February, 2000. The price of the scrip rose from Rs.469.35 per share on 3.1.2000 to Rs.2023.05 on 22.2.2000 and trade volumes in the shares of ITIL from 80,200 shares on 3.1.2000 to 1,73,000 shares on 22.2.2000. NSE, where the scrip is listed, conducted an investigation on the trading of the shares on ITIL during the period 3.1.2000 to 26.4.2000 and submitted reports to SEBI. On the direction of SEBI, The Stock Exchange, Mumbai (BSE) also conducted an investigation and submitted report to SEBI. 1.1 The finding of the investigation by NSE included the following: (a) Common clients were observed to be trading through Lloyd Credits Ltd and Victory Financial Services Ltd and their trading accounted for 55% to 88% of the trading of the gross quantity traded in various settlements. (b) Several structured and cross deals involving large quantity of shares were observed for various settlements. (c) They suspected creation of artificial volumes and false market with an intention of manipulating the price of the scrip. 1.2 The findings of BSE included the following: (a) 81% of the net purchases were concentrated amongst four members and net sales were widely scattered. (b) The trades were done either by members or clients who were also members. (c) They recommended that transactions by the members on other exchanges may also be examined.
(2.) SEBI vide orders dated 21.5.2001 and 26.7.2001 directed that an investigation be conducted in the matter. The findings of the said investigation included the following: (a) The promoters and associated entities indulged in manipulation of the price of the scrip through artificial trades, falsely fabricating accounts of the company, artificially creating volumes and thereby violated subregulations (a) to (e) of Regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as "the FUTP Regulations") and Regulation 4 of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as "the Insider Trading Regulations"). (b) ITIL aided and assisted the promoters of the company in the manipulation of price of the scrip by indulging in falsification of the books, accounts and records, thereby violating Regulation 6 (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. (c) The acquisition by the promoters and associated entities did not comply with the requirement of Regulation 11 (2) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations 1997 (hereinafter referred to as "the Takeover Regulations") while acquiring 24,15,532 shares of ITIL. Based on the findings of the investigation, a Show Cause Notice dated 4.9.2002 was issued to M/s Sumac Iron and Steel Pvt. Ltd advising them to show cause why action in terms of Section 11B read with Regulation 11 of the FUTP Regulations should not be taken against them.
(3.) 1 Following are the allegations contained in the show cause notice dated 4.9.2002 in respect of violation of the FUTP Regulations and the Insider Trading Regulations: 4.1.1 ITIL was a part of the Usha group of companies promoted by Shri Vinay Rai and family. The following three companies are the main promoter companies as reported by ITIL : 1. Pukhraj Holdings Pvt. Ltd. 2. RKKR Agencies Pvt. Ltd. 3. Utility Tradelinks Pvt. Ltd. Shri Vinay Rai and Anil Rai were promoter directors of the company 4.1.2 ITIL came out with its initial Public Issue on 14.1.1993 for 25,00,000 shares of Rs. 10/- each at a premium of Rs.30/- each. The issue was undersubscribed and devolved on the underwriters. Underwriters therefore subscribed for 3,64,600 shares and the balance was subscribed by the promoters. The promoters, directors, relatives and group companies were holding about 92% of the post issue capital of the company. The Company changed its name from Usha Services and Consultants Ltd. to Information Technologies India Ltd in December, 1993. 4.1.3 In May, 1999, the company's balance sheet showed that reserves and surplus have increased 20 times from Rs.33.40 Crores to Rs.605.75 Crores. The amount that was accounted for by intangible assets by valuing the human resources and brand value was Rs.509.27 Crores. The same was nil during the previous accounting year. The company had also valued its brand and created Reserves to the extent of Rs.446 crores during the year 2000 and thereby manipulated the book value of the shares by Rs.65. 4.1.4 The total fictitious reserves created by the company accounts for Rs.509 crores in 1999 , Rs.904 crores in 2000 and Rs.426 crores in 2001 accounting for about 84% in 1999, 87% in 2000 and 76% in 2001 to the total reserves of the company. Because of these fictitious results, their book value per share had been manipulated upwards by Rs.74 in 1999, Rs.66/- in 2000 and Rs.32/- in 2001 out of the total book value of Rs.92/- in 1999, Rs.80/- in 2000 and Rs.45/- in 2001. 4.1.5 ITIL had accounted the Human Resources Value as an "Intangible Assets" in its books and simultaneously created reserves under 'Reserves & Surplus' to the extent of about Rs. 458 crores in the balance sheet of the company by which the book value of the company had increased by Rs.66 (Rs.10 paid up). Thus the management of the company resorted to accounting the brand value and human resources to artificially boost the net-worth per share by about Rs.130 per share during the year 1999 and 2000.This is a fictitious and bogus entry made in the books of the company in order to boost the net worth of the shares. Thus the balance sheet of the company did not give a true and fair view of the state of affairs of the company. 4.1.6 The distribution schedule of the Company dated the 7th January 2000 shows that the largest percentage of holding is in the 'other body corporate' category. The list of bodies corporate as given with the distribution schedule submitted by the company, consists of 57 bodies corporate in all and revealed that almost all these bodies corporate were owned / controlled / managed either directly or indirectly by the promoters' group. 4.1.7 Thus, the promoters were holding directly or indirectly through their front companies including M/s Sumac Iron and Steel Pvt. Ltd to the extent of 92.41% of the company as on 07.01.2000. Thus all these companies were acting in concert. The general public were holding to the extent of only 5.11 % in January 2000 and which has further reduced to 1.39% in May 2000. 4.1.8 Besides the promoter companies the following 16 promoter group / associate companies which form part of the above mentioned promoter group / associate holdings had dealt in the shares of ITIL during the above period through the members of NSE, DSE and OTCEI. 1. Sumac Iron & Steels Pvt. Ltd. 2. New Age Commercial Pvt. Ltd. 3. Ambika Ferro Alloys Pvt. Ltd. 4. Vedant Steel Casings Pvt. Ltd.;