JUDGMENT
N.K. Sodhi, J. (Presiding Officer)
1. This appeal filed under Section 15T of the Securities and Exchange Board of India Act, 1992 (for short the Act) is directed against the order dated July 13, 2004 passed by the whole time member of the Securities and Exchange Board of India (hereinafter called the Board) holding the appellant guilty of violating Regulation 6(d) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the Regulations) and prohibiting it from accessing the capital market for a period of five years. The appellant has also been debarred from buying, selling or dealing in securities directly or indirectly for the said period. Having heard the learned Counsel for the parties we are clearly of the view that the impugned order is as arbitrary as it could be and smacks of highhandedness on the part of the regulator.
2. The then Chairman of the Board by his order dated October 22, 2001 ordered investigations to find out whether there was any manipulation in the scrip of Sawaca Business Machines Limited (for short the company) which is the appellant herein. Investigations were ordered because the Board observed that the scrip of the company was illiquid and its price had gone up from Rs. 6.80 per share in October, 1999 to Rs. 38.75 on December 30, 1999. The investigations revealed some irregularities on the part of the company on the basis of which it was issued a show cause notice dated September 29, 2003. The charge leveled against the company in the show cause notice reads as under:
From the above it is alleged that the company Sawaca Business Machines Limited and their Directors are guilty of violating provisions of Regulation 4(a), (b) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 and therefore is liable for exemplarily action under Section 11B and 11(4) of SEBI Act, 1992.
You are, therefore, called upon to show cause why suitable directions under Section 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 should not be issued to you. This show cause notice is being issued to you without prejudice to any other action that SEBI may initiate against you.
3. The company filed its reply denying the allegations. The Board on the basis of the material collected during the course of the investigation proceedings and on a consideration of the reply furnished by the company found that it had violated the provisions of Clause 13.4.2 of SEBI (Disclosure and Investor Protection) Guidelines, 2000 (for short the Guidelines). It also found that the preferential allotment of shares made by the company on January 5, 2000 was not in accordance with law and that the company had resorted to fictitious book entries for showing receipt of subscription towards the preferential allotment and thereby violated Regulation 6 of the Regulations. On the basis of these two findings the company was prohibited from accessing the capital market and was debarred from buying, selling or dealing in securities directly or indirectly for a period of five years. Hence this appeal.
4. We shall now deal with the findings recorded by the Board and whether they are justified on the basis of the material on the record. The only allegation that was made against the company in the show cause notice was that it violated the provisions of Regulation 4(a), (b) and (d) of the Regulations. Regulation 4 of the Regulations reads as under:
4. No person shall
(a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person;
(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;
(c) indulge in any act, which results in reflection of prices of securities based on transactions that are not genuine trade transactions;
(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities;
(e) pay, offer or agree to pay or offer, directly or indirectly, to any person any money or moneys worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing, or causing fluctuation in the market price of securities.
Regulation 6(d) of the Regulations which the company is alleged to have violated reads as under:
6. No person shall
(a) .
(b) .
(c) .
(d) indulge in falsification of the books, accounts and records (whether maintained manually or in computer or in any other form);
(e) .
5. It is clear from the show cause notice that the only allegation leveled against the company was that it had violated the provisions of Clauses (a), (b) and (d) of Regulation 4. The Board has not found the company guilty of any of the charges mentioned in these clauses. What the Board has found is that the company had violated Clause 13.4.2 of the Guidelines. At the outset we may mention that the violation of the Guidelines was not a charge leveled in the show cause notice. Further, it is common case of the parties that Clause 13.4.2 was introduced by the Board for the first time with effect from 04/08/2000 by its circular no. 3 dated 04/08/2000. The finding of the Board that the company had violated this clause cannot therefore be sustained because this clause was not in existence at the time when the violation is alleged to have been committed. The whole time member of the Board does not appear to have applied his mind to this aspect and how could it hold the company guilty of a charge which did not form the subject matter of the show cause notice. The company was never afforded an opportunity to explain its position in regard to the alleged violation. Incidentally, we may mention that Clause 13.4.2 of the Guidelines as introduced in August 2000 only provides that the equity shares and securities convertible into equity shares at a later date allotted in terms of a resolution passed by a company shall be made fully paid up at the time of their allotment. The learned Counsel for the appellant contends and in our view rightly as we shall see later that the preferential shares allotted on January 5, 2000 had been fully paid up on that date. Be that as it may, the action of the Board is wholly arbitrary and flagrantly violates the principles of natural justice and also the principle of audi alterem partem and cannot be sustained.
6. We will now deal with the other findings recorded by the Board. It is not in dispute that the company made a preferential allotment of shares to the existing shareholders on January 5, 2000. 52 lac shares of Rs. 10/- each at par were allotted on preferential basis. It is the case of the company that it received Rs. 5.20 crores as on that date and it has produced before us a copy of its bank account maintained with the Indian Overseas Bank, Ashram Road, Ahmedabad to show that the preferential shares had been fully paid up on the date of their allotment. The Board has, however, found that the company received only a sum of Rs. 4.8 crores against Rs. 5.20 cores and that the entries in this regard are also fictitious book entries inasmuch as the amounts are alleged to have been received by transfer and withdrawn on the same day. The Board further found that without actual infusion of funds into the account of the company it issued the preferential allotment of shares. After taking note of the statement of the bank account of the company it held in paragraph 12 of the impugned order as under:
It is seen that the amounts received towards the preferential allotment of shares were credited to and debited from the companys account on the day of the allotment itself.
It appears that the Board found that the company had received Rs. 4.80 crores in its account by way of transfer but since that amount was debited on the same day the receipt was fictitious. This finding is also arbitrary and without any material on the record. It is true that a sum of Rs. 4.80 crores was received in the account of the company on 05/01/2000 through different entries by way of transfer and the said amount has also been taken out from the account on the same day. There is nothing on the record to show from where the amount was received by way of transfer and where did the amount go after it was debited. It was the duty of the Board to have found out the source from where the funds came by way of transfer and where did the funds go after the amount was debited. It is only after such an enquiry that the Board could conclude that the receipt of amounts by way of transfer was fictitious. The Board did not make any enquiry from the company in this regard and having failed to perform its duty it presumed that since the amount was taken out from the account on the same day, the receipt was fictitious. Going by the statement of the bank account one can see that the amount was received by the company and may be it was taken out for some legitimate purpose. We cannot, therefore, uphold the finding of the Board that without infusion of actual funds, the preferential allotment of shares was made. The learned Counsel for the appellant has placed before us a copy of the statement of the bank account wherein three more credit entries on December 29, 1999 find mention. These entries pertain to three different amounts received by the company by way of transfer and these are Rs. 15,50,000/-, Rs. 15,00,000/- and Rs. 9,50,000/- aggregating Rs. 40 lacs. If this amount is added to the amount of Rs. 4.80 crores noticed by the Board then the company received a sum of Rs. 5.20 crores on or before January 5, 2000 on which date the preferential allotment was made. The Board has failed to take note of these credit entries appearing in the bank account statement. The finding recorded in this regard is also contrary to the record and cannot but be termed as arbitrary. On the basis of these findings the Board concluded that Regulation 6(d) of the Regulations had been violated. Here again we may mention, that violation of Regulation 6(d) was not a charge mentioned in the show cause notice and for this reason as well the Board was not justified in recording such a finding because the company never had the opportunity of putting across its case in this regard. Moreover, Regulation 6(d) prohibits any person including a company from indulging in falsification of the books, accounts and records whether maintained manually or in computer or in any other form. The statement of the bank account is a statement prepared by the bank which was furnished by the appellant to the investigating officer. It is not a record prepared by the company. The Board has not referred to any other record of the company which it had falsified and therefore it was not justified in holding that the company had violated Regulation 6(d). In this view of the matter, the impugned order cannot be sustained.
7. The appellant is a listed company. The impugned order which is arbitrary to the core has, by debarring it from accessing the securities market for a period of five years seriously damaged its reputation besides, working to the detriment of its investors. It has remained out of the market for more than two years now. The damage caused is irreparable both to the company and its shareholders. We are, therefore, of the view that this is a fit case where the Board should be burdened with heavy costs.
8. In the result, the appeal is allowed and the impugned order set aside. The appellant will have its costs which are assessed at Rs. 2 lacs. The Board shall pay this amount within six weeks.