KRISHNA FILAMENTS LTD. Vs. CHAIRMAN, SECURITIES AND EXCHANGE

JUDGEMENT

(1.) THIS order will dispose of Appeals nos. 277 to 280 of 2004 and Appeal no. 30 of 2005. We have heard the learned counsel for the parties at length and since we are remanding the case back to the Securities and Exchange Board of India (for short the Board) for passing a fresh order in accordance with law, it is not necessary to notice the facts in detail which have given rise to this bunch of appeals filed under section 15T of the Securities and Exchange Board of India Act, 1992 (for short the Act). The arguments were addressed in Appeal no. 279 of 2004 (Krishna Filaments Ltd. v Securities and Exchange Board of India). We shall refer briefly to the facts of this case. The appellant is a company incorporated under the provisions of Companies Act, 1956. It came out in April May 1997 with a public issue of 33,45,000 secured optionally fully convertible discounted debentures of Rs.200 each for cash issued at a discounted price of Rs. 160 aggregating to Rs. 5,352 lacs. The face value of the debenture was Rs. 200 and it was offered at a discounted price of Rs.160 per debenture. The debenture holders had an equity option or the option of converting them into non -convertible debentures carrying 19 per cent interest thereon. Under the equity option, the debenture holder could opt for the conversion of the debenture into one equity share of Rs.10 each at the end of seventeen months from the date of allotment at a price of 33 1/3% discount to the average of daily closing prices at Bombay Stock Exchange for the previous six months from the record date subject to a maximum of Rs.200 per share and a minimum of Rs.10 per share. In case the conversion price was below Rs.200 per share, the balance had to be carried forward as 19 per cent non -convertible debentures to be redeemed in three equal installments each at the end of 36, 48 and 60 months from the date of allotment. The other option with the debenture holders was to convert them into non -convertible debentures of Rs.200 carrying interest at the rate of 19 per cent and these could be redeemed in three equal installments each at the end of 36 -48 and 60 months from the date of allotment. It is common ground between the parties that 13th November, 1998 was the date of conversion and the average price as on that date for the previous six months was Rs.154. It is also not in dispute that only 8.8 per cent of the debenture holders exercised the equity option whereas the remaining large majority opted for getting them converted into non -convertible debentures with 19 per cent interest. It is alleged that with a view to enable large number of debenture holders to convert their debentures into equity of the company, the company and its promoters manipulated the price of the share in the market so that the conversion price becomes higher. What is alleged is that the company and its directors with their own funds purchased the shares of the company with a view to squeeze the floating stock from the market so that the price of the share could go up. It is further alleged that these purchases were made by the appellant company through a set of front entities and it is in this manner that the shares of the company were cornered and the price rigged in the market. It is also alleged that the company gave its own funds to the front entities against fictitious bills raised by the latter and with those funds the shares of the appellant company were purchased from the market. According to the allegations, the appellant company was allotted some preference shares as well by these companies and it is towards the payment of those shares that the funds were allegedly made available to them which were also utilized for purchasing the shares of the appellant company from the market. It was, thus, alleged that the appellant company had violated Regulation 4(a), (c), (d) & (e) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter called the Regulations). It was also alleged that the front companies of the appellant and their directors / promoters had acquired shares in violation of Regulation 11(2) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (for short the takeover code). With these allegations the appellant was served with a notice dated July 16, 2001 calling upon it to show cause why suitable directions under section 11B of the Act be not issued including directions prohibiting the appellant from accessing the capital market and dealing in securities for a suitable period and also for making a public announcement for acquiring shares in contravention of Regulation 11(2) of the takeover code. The appellant filed a detailed para -wise reply controverting the allegations in toto. The Board by its order dated 10th September, 2004 came to be conclusion that the charges lavelled against the appellant stood established and it accordingly issued directions to the appellant debarring it from accessing the capital market for a period of five years from the date of the order. The Board also concluded that the appellant acting in concert with others had acquired shares in contravention of Regulation 11(2) of the takeover code and since no public announcement for acquisition of the shares of the appellant had been made which, according to the Board, adversely affected the interest of the share holders of the appellant, the appellant was directed to come out with a public announcement in accordance with the provisions of the takeover code. It is against this order that the present bunch of appeals has been filed. It is pertinent to mention here that not only the appellants in this bunch of appeals but several other entities and individuals have been issued similar directions by the impugned order. The learned counsel for the parties have taken us through the impugned order and also the show cause notice issued by the Board. The learned counsel for the appellant strenuously contended that the show cause notice issued by the Board was vague and so are the findings recorded in the impugned order. It is also urged that the Board has placed reliance on the statements of some of the persons who were summoned to appear before it and who made statements against the appellant company and its promoters and also against the so -called front entitles and since the Board did not allow the appellant to cross examine those persons, the principles of natural justice stood violated. It is not necessary to notice the other contentions raised by the learned counsel for the appellant since we are holding that, in the facts and circumstances of the present case, the principles of natural justice has been violated. The learned counsel for the respondent, on the other hand, was equally emphatic in submitting that the copies of the statements of the witnesses had been furnished to the appellant and this, according to him, was sufficient compliance of the principles of natural justice and that it was open to the appellant to lead evidence to controvert those statements. The learned counsel for the respondent also placed before us a plethora of documents which according to him clearly established the charges levelled against the appellant. There is, however, serious dispute between the parties as to whether all of these documents which have now been produced before us were supplied to the appellant during the course of proceedings before the Board. Be that as it may, we find from the impugned order that no reference has been made to any of these documents while recording findings therein. What we find from the impugned order is that the findings recorded by the Board are based primarily on the statements of Mr. N.R. Dalal, Mr. Iyer, Mr. Gupta, Mr. Jiten Mehta and Mr. Sunil Nair. It is true that the copies of the statements of these witnesses had been furnished to the appellant during the course of the investigation but we do not think that reliance could be placed on those statements without allowing these witnesses to be cross examined by the appellant. This is so because the appellant in its reply had categorically denied the allegations made in the show cause notice and had taken a specific plea that these witnesses had made false statements before the Board. The veracity of their statements on some of the issues could be tested only if they had been allowed to be cross examined. Some of these persons are alleged to have been closely associated with the appellant at some point of time and, therefore, it was all the more necessary that they should have been allowed to be cross examined. Moreover, the allegations in the show cause notice by themselves appear to be vague and disjointed and in the impugned order, the Board seems to have picked up in verbatim the corresponding paras from the show cause notice without anything more while recording the findings. The impugned order has serious repercussions on the right of the appellant to carry on its business. As already observed, the learned counsel for the respondent tried to justify the findings recorded in the impugned order on the basis of the documents which he placed before us. Since there is a serious dispute between the parties as to whether those were supplied to the appellant or not, we deem it proper to remand the case back to the Board to pass a fresh order in accordance with law after affording an opportunity of hearing to the appellant and after complying with the principles of natural justice. The contentions raised before us on either side remain open. We also make it clear that the impugned order is being set aside only qua the appellants in Appeals nos. 277 to 280 of 2004 and Appeal no.30 of 2005. The impugned order qua all other entities excepting M./s Dharamshi Capital Services which has filed Appeal no.89 of 2005 which is being dealt with separately but including those who filed appeals and withdrew the same has become final. All other appeals ordered to be heard with this bunch of appeals shall be dealt with separately. In view of our findings recorded above, the appeals are allowed, the impugned order is set aside and the case remanded to the Board for a fresh decision in accordance with the observations made hereinabove. The Board is directed to decide the matter expeditiously preferably within six months and it will be open to it to issue a fresh or supplementary show cause notice, if so advised. It will also be open to the parties to place further documents, if necessary, before the Board. The learned counsel for the appellant states that all the appellants in this bunch of appeals could be served on the address of the appellant company. There is no order as to costs.