Partly allowed

In the matter of Subhash Projects & Marketing Ltd. and others

SAT1 Jun 2006

Case brief

AI extract

What is this about?

This collective appeal challenged SEBI orders restricting various associated companies and directors from accessing securities markets due to irregularities in SPML's 1995 rights issue. The Tribunal upheld the bans on most entities but modified the restriction for the parent company to reflect time already served, citing its critical role in national infrastructure.

What did the court decide?

Orders of prohibiting access to securities markets were upheld/confirmed for most entities; for the principal appellant, the prohibition period was modified to reduce it to the extent already undergon

In the matter of Subhash Projects & Marketing Ltd… — Securities and Capital Markets | SAT (2006)

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IN THE SECURITIES APPELLATE TRIBUNAL MUMBAI

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Appeal Nos: 65, 65A to 65D of 2004 145 of 2004 283 to 295 of 2004

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Date of Hearing

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Date of Decision 01.06.2006

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Appellants – Represented by:

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Subhash Projects & Marketing Ltd. P.C. Sethi Anil Kumar Sethi Subhash Chand Sethi Sushil Kumar Sethi Mr. Ashish Bhakta, Advocate Zoom Industrial Services Ltd. 20^th Century Engineering Ltd. International Constructions Ltd. SPML India Limited

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Versus

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Securities & Exchange Board of India Respondent- Represented by Mr. Cherag Balsara, Mr. Mihir Mody, Mr. Ravi Hegde and Mr. Paras Parekh, Advocates

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CORAM

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C. Bhattacharya, Member R.N. Bhardwaj, Member

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Per: R.N. Bhardwaj, Member

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Appeals taken up for disposal with the consent of parties.

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The appeals have been taken up for disposal together with the consent of both the parties in view of the commonalities of facts and circumstances of the case. A common order has been passed in appeal No. 65, 65A to 65D of 2004. For appeals numbering 145 of 2004 and 283 to 285 of 2004 though different orders have been passed by the Whole Time Member of SEBI but the facts and circumstances of the case remains same on which orders have been passed as companies involved are associated companies of the Subhash Projects and Marketing Limited with common Directors. Briefly stated, the facts are as under:

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Subhash Projects & Marketing Limited (‘SPML’ for short) was incorporated on 27^th August, 1981 and went public on 27^th August, 1983. It came out with the rights issue and secured non-convertible redeemable debentures with the detachable warrant. The rights issue opened on 6/10/1995 and closed on 6/11/1995.

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SEBI received a reference from the Income Tax Office in May, 1996 and also number of complaints regarding the above referred issue. It was stated in the complaints there was irregular subscription and price manipulation before the rights issue. In view of these complaints SEBI conducted preliminary investigation and lateron based on the findings of preliminary investigation it ordered formal investigation on 08/06/1999. The investigation report regarding rights issue

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subscription was submitted on 27/11/2000 while the investigation report regarding price manipulation was submitted on 30/03/2001. Based on the investigation reports the show cause notice dated 30/08/2002 was issued to the appellants and

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they were provided with the alleged violations committed by them as per the annexures 1 to 13 of the show cause notice. Briefly the following violations were noted in the investigations:

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(i) SPML had willfully delayed the issuance of advertisement giving additional disclosures;

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(ii) The rights issue did not actually receive genuine minimum subscription of 90% of the issue;

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(iii) SPML and its Directors / associates created an illusion that the rights issue of SPML had received mandatory minimum subscription of 90%;

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(iv) Applications from associates of SPML were received after the closure of the issue;

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(v) SPML received applications directly and lateron deposited them with the bankers to the issue.

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(vi) Outstation cheques were accepted which were not as per the terms of the letter of offer.

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(vii) SPML funded the subscription to the issue of Sethi family, Zoom Industrial Services Limited, etc.;

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(viii) SPML also advanced monies to M/s. Raj Investments for creating false volumes and trading in the scrip of SPML.

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In view of these irregularities SEBI issued an order under Section 11 and 11B of SEBI Act, 1992 and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 and restrained the appellants company and the 4 Directors who are appellants in appeal Nos. 65A to 65D of 2004. The order restrained the appellants from accessing the security markets and dealing in securities for a period of 5 years vide the impugned order 28/1/2004.

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Appeal No. 145/2004 – Zoom Industrial Services Limited: M/s. Zoom Industrial Services Limited (‘Zoom’ for short) is an associate of SPML and also a listed company. Shri Subhash Chand Sethi one of the promoter of SPML was also a Director of Zoom at the relevant time. Zoom was involved in submitting applications subsequent to closure of the rights issue. The cheque books from which Zoom issued the subscription cheque were admittedly issued by the banker

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only on 08/11/1995 and 9^th November, 1995 i.e., after the closure of the issue on 6/11/1995. Zoom applied for shares and debentures in excess of its entitlement. It also subscribed to the rights issue by taking overdraft of Rs. 2 crore from Vysya Bank. The amount of overdraft were repaid after the closure of rights issue of SPML out of the funds of SPML. Similarly Zoom also subscribed to the debentures subsequent to the date of closure of rights issue. In view of the above irregularities conferred upon it under Section 19 read with Section 11B of SEBI Act, 1992 prohibited Zoom from accessing the security market and dealing in securities directly or indirectly for a period of 18 months vide order dated 25/06/2004.

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Appeal No. 283 of 2004 – 20^th Century Engineering Limited: M/s. 20^th

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Century Engineering Limited (‘20^th Century’ for short) is a listed company whose shares are listed on National Stock Exchange of India. The Directors of 20^th Century are Shri Subhash Sethi, Shri Anil Kumar Sethi, Shri Sushil Kumar Sethi and Shri Subhash Sethi being a Director of SPML India Limited also. During the investigation it was found that 20^th Century traded in the shares of SPML in 7 settlements during the period under investigation. It was further observed that counter party to most of these trades was SPML India Limited and the associate company of both 20^th Century and Zoom. Thus it appeared that 20^th Century had entered into transactions which were not genuine. A show cause notice dated 5^th of August, 2003 was issued to 20^th Century asking them to show as to why

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appropriate directions should not be issued against them to Section 11B of SEBI Act read with Regulations 11 and 12 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 for having allegedly entering into transactions which were not genuine and were intended to create a false or misleading appearance of trade on the securities market while trading in the scrip of SPML which was its associate company. SEBI prohibited 20^th Century from accessing the capital market and also barred them from buying, selling or dealing in securities for a period of 1 year.

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Appeal No. 284 of 2004 – International Constructions Limited (formerly Subhash Capital City Limited): M/s. International Constructions Limited (formerly Subhash Capital City Limited) (‘ICL’ for short) is also an associate company of SPML. It was revealed through investigations that ICL had applied for debentures which were in excess of its entitlement. It was also revealed that cheques deposited along with the applications was dishonored. It was found that the said returned cheque was represented on 27/11/1995 i.e., after the closure of the issue when funds were arranged in the accounts of SPL. ICL was also involved in transfer of funds used for monitoring the price of SPML scrip at the time of rights issue. In view of these irregularities SEBI vide its order dated 17^th August, 2004 in exercise of powers conferred under Section 90E read with Section 11 and 11B of SEBI Act, 1992 and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995

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prohibited ICL from accessing the securities market or dealing in securities for a period of two years.

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Appeal No. 285 – SPML India Limited: M/s. SPML India Limited (‘SPMLIL’ for short) which is an associate company of SPML and also a listed company. SPMLIL had applied in excess of its entitlement and it was also revealed that the concerned bank account did not have the funds to support an application and cheque No. 093817 deposited along with the application of SPMLIL was dishonoured which was subsequently re-presented on 27/11/1995 after necessary funds had been arranged. SPMLIL was also found guilty of creating artificial volume of shares of SPML. It was charged for having violated Regulations 4A to 4E of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. SPMLIL was prohibited by SEBI vide its order dated 18^th August, 2004 for accessing the securities market and dealing in securities for a period of two years.

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From the above brief details it is quite clear that SEBI has based its decision in all the cases on the same set of facts and orders have been issued bearing in mind the involvement and the quantum of irregularities committed by the respective companies. All the appellants are involved in violations of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 and Sections 11 and 11B of the SEBI Act, 1992.

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The learned counsel for the appellants has mainly argued by the appellant company which is covered under appeal No. 65/2004 and the Directors of the Company who are being dealt with in Appeal Nos. 65A to 65D. The arguments are equally applicable to other cases. The learned counsel for the appellants submitted that there was an inordinate delay on the part of SEBI in issuing the final order when the reference from the Income Tax office, Kolkatta was received way back in 1996. The investigation commenced in 1999 and the impugned order has been passed as late as January, 2004.

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The learned counsel submitted that the order was not a remedial order but it was a punitive order which invoked the provisions of Section 11 and 11B of SEBI Act, 1992. The learned counsel submitted that after 10 years since the rights issue was over there could not be any emergency for such an order which prohibited them from accessing the securities market. The impugned order therefore is penal in nature. The Sections 11 and 11B of SEBI Act, 1992 empowers SEBI to issue directions in the best interest of the market and for the protection of investors. He also cited number of cases where the Tribunal had taken a view on Sections 11 and 11B.

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The learned counsel further submitted that under SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 SEBI was required to prepare investigation report and issue show cause

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notice. He pointed out that no investigation report in the instant case was prepared and the show cause notice was vague. He also argued that as per the direction of SEBI advertisement had been placed into two newspapers i.e. Dainik Jagran and Pioneer which were respectable newspapers with substantial readership and circulation. He submitted that SEBI had not specified any particular newspaper in which the advertisements were to be published. It was therefore not in order to pass a value judgment on newspapers in which the notices were published. He also submitted that individual letters had been sent to the shareholders making the additional information as required by SEBI. The learned counsel submitted that there was no clinching evidence to support that funds were directed towards supporting the subscription to the rights issue by the appellants. The banking overdraft facility availed of by members of Sethi family could have been used for other transactions between the appellant and the family members. It could not be concluded that it was merely for subscription of rights issue. He submitted that appellants could not be penalized if outstation cheques have been issued by the bank. The appellants did not have any control over the receipt of applications. It was for the bank to have not accepted the outstation cheques. The impugned order cites two brokers acting on behalf of the appellants, M/s. Raj Investments had extensively dealt in shares of the appellant. The impugned order further states that based on the investigation report funds flowed from the appellants’ account to such companies i.e., Blue Chip Capital Market P. Ltd., Jain Enclave Pvt. Ltd., Vardhman Finvest Pvt. Ltd., and Sarawgi Developers Pvt. Ltd., which in turn

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flowed out to Raj Investments. It was alleged that the appellants had funded Raj Investment for trading in its own shares. He argued that the impugned order did not deal with the reasons for flow of funds between the appellants and these finance companies or between the finance companies and the Raj Investments. The evidence is only circumstancial. He pointed out that the funds were given to these companies for purchase of properties. In fact the appellants had to recover the funds from these four companies when the property transactions did not go through. He further pointed out that the impugned order did not take into account the legal proceedings initiated by the appellant No.1 for recovery of funds.

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The learned counsel further submitted that the penalty imposed by way of directions contained in the impugned order would have a crimping impact on the appellants. The appellants would no longer be able to subscribe to purchase or sell or otherwise deal in the securities of any nature not only securities issued by appellant No.1. He further submitted that the appellant was a company with sound business practices. It was involved in the execution of Turn-Key Infrastructure projects mainly water supply, sewerage, cross country pipe lines, waste disposal, irrigation projects, roads, hydro power project, electrification projects, etc. The company was a listed company with public shareholding whose interest would lie in the best interest of the company. It was employing approximately 800 people. The company has been taking up projects on Built-Operate-Transfer (BOT) basis. He submitted a list of BOT projects which is extracted as under:

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S. No.	Name of the Project	Total Value (Rs. in crores)
1.	MSW, MCD New Delhi	34.65
2.	Rupin H.E.P Stage III (2X 7.5 MW) Uttranchal	75.00
3.	AWA Hydro-Electric Project of 3 MW, HP	15.00
4.	IQU Hydro-Electric Project of 3 MW, HP	15.00
5.	LUNI Hydro-Electric Project of 3 MW, HP	15.00
6.	Neogal Hydro-Electric Project of 3 MW, HP	15.00
7.	Binwa Stage II, HP	15.00
8.	Rajkot Bypass National Highway, NHAI	196.00
9.	Panipat Highway Project NHAI	250.00
10.	Keerthi Hole Hydro Electric Project, Karnataka	100.00
11.	Tamilnadu Ropeways Corporation Ltd.	75.00

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The appellants also submitted an affidavit dated 11/04/2005 stating that the

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company’s order book position was Rs. 1,350/- and it expect to bag orders for projects worth Rs. 2,000/- crore in the very near future. The company had the potential to enter into more BOT projects in the areas of Roads and Highways, Sea Ports, Hydel Plants, Special Economic Zones and urban infrastructure. The company’s effort to finance such investments is chocked up and will remain as such if the order is not set aside. The company needed funds from other avenues such as preferential allotment, private placement and public rights issue, GDR, etc. He submitted in the affidavit that the company had a good standing in the industry with large number of company’s competitors i.e., Gammon India Limited, JP Group, Nagarjuna Constructions, Hindustan Constructions Limited, etc. He

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therefore submitted that the order should be set aside as it has already suffered since 28/01/2004.

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The learned counsel for the respondent submitted that the impugned order has been correctly passed against the appellants i.e. Subhash Projects & Marketing Limited and its Directors. He also stated that the order has been passed correctly against all the associate companies who are the appellants in 145/2004 and 283 to 285/2004. He submitted there was no delay on the part of SEBI in passing the order. He referred to the writ petition filed before the Hon’ble Calcutta High Court where the appellants were arrayed as respondents. The writ petition was disposed of by Calcutta High Court on 28/01/2003 wherein the respondents i.e., SEBI were directed to take steps against the appellant within a period of 12 months. It was submitted that the impugned order has been passed within the aforesaid period of 12 months. He submitted that delay in fact occurred due to repeated adjournments sought by the appellants. He further submitted that last hearing took place on 02/12/2003 and the appellants filed their written submission on 16/12/2003 and the impugned order was passed on 28/01/2004. The learned counsel further submitted that this was a case of blatant violation committed by the appellants of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. It was also wrong to say that the impugned order was penal. In fact he submitted that the impugned order punitive in nature because it would prevent the appellants from defrauding investors and

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thus would protect the interest of prospective investors which would help in promoting the securities market. He further submitted that Sections 11 and 11B of SEBI Act, 1992 read with Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 empower the respondent to pass an order restraining the appellants from accessing securities market and dealing in securities for a particular period for violation of provisions of the Regulations.

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The learned counsel for the respondent further submitted that the details of violations committed by the appellants were provided in the annexures 1 to 13 of the show cause notice which was issued on 30/08/2002. The information in the show cause notice which was based on the investigation report regarding rights issue subscription receive don 27/11/2000 while the investigation report regarding price manipulation was received by SEBI on 30/03/2001.

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The learned counsel submitted that most of the appellant’s shareholders were in Kolkatta whereas the appellants intentionally published additional information through advertisement in two newspapers having limited circulation in Delhi only. The publication of additional information as required by SEBI did not serve the purpose. He further submitted that the appellants contention of having sent letters was not supported by any proof. He submitted that subscription to rights issue by the Sethi family were finance out of the subscription received by

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the appellant No.1 i.e., Subhash Projects & Marketing Limited. It was an accepted fact that bank accounts were opened by the companies / Sethi family for subscription to the aforesaid issue and the funds received from the issue were routed to the aforesaid entities for repayment after the rights issue.

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It was clear that the bank would be issuing cheque books bearing cheque numbers which are subsequent in any point of time it had issued on an earlier date and the cheques bearing numbers of an earlier period subsequent. It has been well set out cheque books were issued on 08/11/1995 which was collected by Zoom on 09/11/1995. Further cheque books were issued by Federal Bank on 08/11/1995 and 12/11/1995 and cheques were utilized by Gangwal, Jain and Bakliwals for subscription of the aforesaid rights issue. It is submitted that the entities who had taken the aforesaid cheque books are clearly associate promoters and companies wherein the promoter Director of the appellant No.1 are also Directors.

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The order clearly set out the fund flow from the appellant’s account to other companies and subsequently to Raj Investments. It was not correct to say that the fund was given for property transactions. It was also not correct to refer to cases of Videocon International, BPL and Sterlite which were not applicable to the facts and circumstances in the present case.

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He further submitted that Zoom Industrial Services and SPMLIL were entities controlled by Sethi family. The issue was shown to be fully subscribed

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despite the company not receiving the adequate applications. He submitted that the impugned order clearly shows the reasoning and linkage and also the flow of funds from associate companies to Raj Investments for manipulating the price. He submitted that violations of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 were involved and therefore the impugned order should be upheld in toto.

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We have gone the appeals and the submissions and arguments made on behalf of the appellants. We have also gone through the arguments and written submissions from the appellants and the respondent. We have also gone through the show cause notice and other material connected with these appeals. We find that there were some irregularities / amounts with regard to the subscription of rights issue of equity shares and secured non convertible redeemable debentures which opened on 06/10/1995 and closed on 06/11/1995. The information pertaining to Bharath Hydro Power Corporation Limited which was one of the group companies of appellant No.1 was to be advertised in two newspapers on or before 06/11/1995 but it was advertised in two Delhi newspapers on 12/11/1995. It is a fact that majority of shareholders would be in and round Kolkatta. The appellant did sent individual letters to the applicants but there was no proof in how many cases the letters had been issued. It also appears that the associated companies such as Zoom Industrial Services limited, SPMLIL, Gangwals, Jain, Bakliwals, etc., issued cheques for subscription of rights issue from cheque books

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issued by bank after the closure of rights issue on 06/11/1995. It also an accepted fact that outstation cheques were received directly which has also been confirmed by HFCL, the lead Manager to the issue. This was against the provisions of disclosure and investors protection guidelines.

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That Sethi family made applications using stock invests issued by Canbank and Vysya Bank Limited. The amounts to these banks were repaid through a circuitous route from the appellant No.1. The funding of applications were through group companies i.e. Zoom Industrial Services, Subhash Capital City Limited which was subsequently changed to International Construction Limited. There was also price manipulation before the subscription of the issue as daily volume increased substantially around the issue time. We, however find that there has been some delay on the part of SEBI also. The investigation report and final order could have been issued earlier. In view of the facts and circumstances of the case and the findings we order as under:

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(i) Appeal No. 145/2004 – Zoom Industrial Services Limited:- Zoom has subscribed to rights issue by taking overdraft of Rs. 2 crores from Vysya Bank Limited, which was repaid after the closure of rights issue of SPML out of the funds transferred from SPML. Zoom had also subscribed to debentures subsequent to the date of closure of rights issue. Zoom had been prohibited from accessing the

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securities market and dealing in securities for a period of 18 months vide order dated 25/06/2004. We uphold the impugned order and dismiss the appeal.

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(ii) Appeal No. 283 of 2004 – 20^th Century Engineering Limited: In the case of M/s. 20^th Century Engineering Limited in view of the pattern of trading gross volumes traded in the scrip of SPML the broker and counter party being associates, 20^th Century was found guilty of violating Regulation 4B of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. It was prohibited from associating with any corporate body in accessing the capital market and also prohibited from buying and selling or dealing in securities directly or indirectly for a period of one year vide SEBI order dated 19/08/2004. Since the period has already lapsed the appeal becomes infructuous. Accordingly the appeal is dismissed as infructuous.

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(iii) Appeal No. 284 of 2004 – International Constructions Limited (formerly Subhash Capital City Limited): M/s. International Constructions Limited had applied for the issue of SPML for equity shares and debentures in excess of its entitlement. The cheque had been returned which was re-presented on 27/11/1995 after the

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closure of the issue. ICL was also involved in transfer of funds for the purpose of price manipulation of SPML at the time of rights issue. SEBI prohibited ICL from accessing securities market or dealing in securities vide its order dated 17/08/2004. In view of the facts and circumstances of the case we confirm the impugned order and the appeal is accordingly dismissed.

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(iv) Appeal No. 285 – SPML India Limited: M/s. SPML India Limited has been found guilty of violating Regulations 4(a) to 4(e) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 and therefore SPMLIL has been prohibited from accessing the security market and dealing in securities for a period of two years vide SEBI’s order dated 18/08/2004. In view of the facts and circumstances of the case we confirm the impugned order and the appeal is dismissed accordingly.

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(v) Appeal Nos. 65, 65A to 65D/2004 – Subhash Projects and Marketing Limited and its Directors:- As regards the appeals of SPML and its Directors are concerned we by and large agree with the contention of the learned counsel for the respondent. However, in view of the inordinate delay in taking action by SEBI and also in view of the fact that the appellant company is a listed company

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which is engaged in important national infrastructure development projects it would be appropriate and fair to allow the company to compete in the national development activities as mentioned in the affidavit submitted by the appellant that company had the expertise to undertake turnkey projects and execution of infrastructure projects, irrigation projects, hydro power projects and electrification projects and it has over 800 persons on its role it would be necessary for it to have access to the capital market, if the finances of the company get chocked up it would not be able to fulfill its commitment and participate in the national developmental projects. It has been stated in the affidavit that the company has been competing with the companies like L&T, ABB, Siemens, Kirloskar, IVRCL, Gammon, HCC, Nagarjuna, etc., and commanded a high reputation in the infrastructure industry. In view of the extraordinary facts and circumstances of the case, while upholding the impugned order, we modify the order by reducing the period of prohibition to the period already undergone till date. The appeal is disposed of accordingly.

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Appeals are disposed of accordingly. No order as to costs.

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(R.N.Bhardwaj) Member

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(C. Bhattacharya) Member

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Place: Mumbai Date

In the matter of Subhash Projects & Marketing Ltd. and others

Case brief

What is this about?

What did the court decide?

In the matter of Subhash Projects & Marketing Ltd. and others

Case brief

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