Per: Justice Kumar Rajaratnam, Presiding Officer
The appeal is taken up with the consent of parties.
2. The appellant in this appeal challenges the impugned order dated 11th January 2003. The appellant has been found guilty of violating the SEBI (Merchant Bankers) Regulations and while acting u/ss. 11 and 11-B of the Act, the respondent passed an order directing the appellant not to deal in securities as an intermediary in any manner whatsoever for a period of two years. This order is under challenge before this Court.
3. The facts very briefly are Subhash Projects & Marketing Ltd., hereinafter called ‘SPML’ had made two simultaneous (but not linked) rights issues of 36,52,612 equity shares of Rs.10/- each at a premium of Rs.190/- per share, aggregating Rs.73,05,22,400/- (Rs.50/- payable on application, the aggregate amount payable on application being Rs.18,26,30,600) and 24,35,074 17% secured non-convertible redeemable debentures of Rs.150/- each for cash at par with a detachable warrant aggregating Rs.36,52,61,100/- (Rs.20/- payable on application, aggregate amount payable on application being Rs.4,87,01,480). The issue opened for subscription on October 6, 1995 and closed on November 6, 1995.
4. Hinduja Finance Corporation Ltd. (HFCL), now renamed as “Hinduja TMT”, the appellant, was the lead Manager to the rights issue with pre-issue responsibility, which included capital structuring, drafting of the offer document, marketing of the issue, etc. HFCL had also given a standby underwriting commitment to SPML to the extent of 8,00,000 equity shares.
5. There were many serious complaints against the appellant and the appellant did not act with responsibility as a lead manager. There are many allegations against the appellant. Some of them are as follows:
(a) The appellant submitted applications after the closure date and withdrew them thereafter. The appellant charged underwriting commission of Rs.224 lacs for procurement of 8,00,000 shares which is higher than the permissible limit etc. There was also a reference from Income Tax Authority (ITA) in respect of the applications submitted by appellant. Pursuant to these complaints and reference from ITA, SEBI initiated investigations in the scrip of SPML.
(b) The appellant had not ensured timely issuance of advertisement by SPML giving additional disclosures, as directed by SEBI.
(c) The appellant had given applications to the tune of Rs.4 crores to the company, which was deposited with the bankers to the issue only after the closure of issue. The same was done to meet the shortfall in subscription and to allow SPML time to procure subscription from other sources.
(d) Once SPML had managed to fill the shortfall in subscription by bringing in applications after closure date from its associates and family members, appellant had withdrawn their applications.
(e) The appellant had submitted applications accompanied by outstation cheques.
(f) The appellant had failed to intimate the post-issue merchant banker/bankers to the issue/the stock exchanges about the directions of SEBI about giving option to investors to withdraw their applications up to 21.11.1995.
(g) The rights issue of SPML did not receive minimum subscription of 90% of the issue.
On these allegations, a show cause notice was issued.
6. It is also brought to our notice that the merchant banking licence of the appellant has expired on 15.10.1997. The appellant did not choose to renew the same.
7. It was submitted by the learned counsel for the appellant that the alleged violation took place in the year 1995 and the show cause notice was issued in the year 2002. This long lapse of time itself would vitiate the enquiry conducted by SEBI.
8. Although it is fair to say that all enquiries must be conducted expeditiously and unnecessary delay would not be in public interest, we feel it appropriate that in case of this type where there are serious irregularities the delay by itself is not fatal to the prosecution. The most serious of the complaints was that the appellant along with the company that went in for rights issue acted in concert by making deposits with the bankers after the closure of the issue. It was submitted that this was done to meet the shortfall to enable the issue to go through. There has been no satisfactory explanation from the appellant. The answer of the appellant for the shortfall was that “we are not able to comment on this” and they further stated “we are unable to comment as to why HFCL applied in the first place when the issue had secured more than 90% subscription and our application has no records to justify the same”. In other words, the entire defense of the appellant was that it had no record to justify its case. We are in concurrence with the view of SEBI that a major part of the subscription to the rights issue had been brought in after closure of the issue by way of applications from close associates of SPML only in order to reach the 90% subscription figure. We are also of the view, on the basis of the materials, that SPML must have been assisted by the appellant. There has been a concert of minds between the appellant and SPML. The SEBI had discharged the appellant under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 1995 but however found the appellant guilt
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y of the SEBI (Merchant Bankers Regulation). Ultimately the proved allegation against the appellant was that the appellant illegally helped the issuer-company, SPML, to create an illusion of full subscription by making applications after the closure of the issue. This, we feel, is a serious violation. It is in these circumstances SEBI, exercising powers u/s 11-B of the Act, directed the appellant not to deal in securities as an intermediary for a period of 2 years. 9. We do not find any error in the impugned order. Accordingly, the appeal stands dismissed. 10. No order as to costs.