2020 (12) TMI 1219 - Board - SEBI

Fraudulent IPO proceedings - certain applicants of the IPO were funded by the entities connected with the Company itself and subsequently, the IPO proceeds were not utilized towards the objects of raising funds and instead were allegedly transferred to a few of the entities who had funded the applicants of the IPO - Underwriting Agreement to subscribe unsubscribed portion of the IPO - ex-parte ad interim order issued - Whether the Noticee nos. 4 to 11 are connected and whether the Company through its connected entities/Noticees has funded the subscription of its IPO? - HELD THAT - A careful consideration of clauses of the Underwriting Agreement reveals that the obligation of the underwriter was limited/restricted to only those IPO applications that was to be procured by it only in case of default of payment by an applicant after allotment of shares or in case of withdrawal of such applications by applicants (to whom allocation of equity shares has been made) just prior to allotment of shares to those applicants - no other clause in the aforesaid agreement that can be shown to have imposed a contractual obligation on the underwriter to subscribe to the entire unsubscribed portion of the IPO so as to cross the minimum threshold of 90% subscriptions of total quantity of shares offered in the IPO. Thus, the said Underwriting Agreement which is being peddled by the Company as a strong defense shield to ward off the charges of funding of IPO subscription by the Company, is actually of no help to the Company given the facts and circumstances of the present case. In absence of such a financial backing, the only consequence would have been the failure of the IPO thereby compelling the Company to refund all the application amounts so collected from the applicants. Therefore, the argument of the Company projecting its Underwriting Agreement as an answer to the allegations of funding subscription to its own IPO does not hold ground at all hence, is liable to be rejected as not maintainable on the face of the aforesaid factual evidence and observations made in preceding paragraphs. Particularly the details of the financial transactions highlighted above, the evasive replies of the Company and its Directors and complete absence of any explanation from the other Noticees , we are persuaded to hold that the Company, its Directors and the rest of the Noticees have successfully implemented a fraudulent scheme to achieve sufficient number of applications by way of funding the applicants, with the sole motive to get the listing of its equity shares on SME segment of BSE. Thus, as far as the first issue is concerned, the same has to be answered affirmatively against the Noticees and in favour of the allegations levelled in the SCN. Diversion of IPO proceeds in deviation from the Objects of the IPO - Whether the proceeds of IPO have been utilized by the Company in terms of the Objects stated in the Prospectus? - Considering the overall conduct of the Noticee no. 1, I find it beyond acceptance that the Company and its Directors (Noticee nos. 1 to 3) are not in a position to explain the details of transfer of INR 15.65 Crore, when it was disclosed to the investors in the IPO documents that the IPO proceeds would be utilized for the stated Objects of the Issue. Consediring facts and the circumstances and the manner and timing of transfer of funds made immediately after the IPO, I am constrained to observe that the amount of INR 10.59 Crore which was immediately diverted from the IPO proceeds to various entities belonging to the funding group entities represent nothing but reimbursement of the funds that were provided by the funding group entities (Noticee nos. 4 to 11) so as to make the IPO of the Company successful by helping it cross the statutory ceiling of 90% of total subscription amounts. Company, in connivance with the funding group Noticees at the first stage, financially supported the applications of the 161 IPO applicants who were allotted 13,24,000 shares. Subsequently, out of INR 15.97 Crore received under the IPO, the Company siphoned off INR 15.60 Crore (approx.) by transferring the same to various entities out of which, INR 10.59 Crore (approx.) was transferred to the funding group Noticees. By acting in tandem and in concert to fructify their scheme, all the Noticees in this proceedings have been able to make the IPO of HPC successful by way of funding the IPO applications to the extent of 29.03% of the total shares subscribed under the IPO in the absence of which, the IPO would have been hit by non-achievement of the mandatory 90% of shares offered in the IPO and resultantly the scrip of Company would have failed to reach the listing platform of the stock exchange. The feeble attempt to produce certain self made documents to project utilization of IPO proceeds is nothing but an eyewash that the Company has attempted to make. Thus, the claimed grievance of not having provided adequate opportunities does not exist anymore in the present case as the Company and its Directors have provided whatever explanation and documentary proofs they intended to file out of their own volition, which have been duly considered by me and the findings on such explanations have already been recorded in this order. Under the circumstances, the unassailable fact remains that despite providing adequate opportunities, and in spite of furnishing various explanations and documents, the Noticees including the Company have not been able to produce any tangible material or evidence so as to justify the transfer of huge sums of IPO proceeds to different entities, in gross violation of the stated Objects of the IPO. Transfer of funds immediately after the IPO coupled with the evasive and unsubstantiated explanations offered by the Company with respect to claimed utilization of IPO proceeds, further explain the reasons as to why the Company had not actually utilized the IPO proceeds towards the Objects of its IPO. In reality, the specious claims of utilization of the IPO proceeds remained far away from the actual utilization in terms of the stated Objects, resulting in the un-fulfillment of the promises made to the shareholders by way of the Prospectus. Noticees in this case have crafted the scheme with intricacies and in such a manner that the degree of proof to expose their fraudulent acts would be of preponderance of probabilities which, as held by me earlier are clearly tilted against the Noticees. In exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11(4) and 11B thereof, pass the following directions i. Noticee nos. 2 and 3 (promoters of the Company) are directed to make a public offer through a merchant banker to acquire shares of the Company from public shareholders by paying them the value determined by the valuer in the manner prescribed in Regulation 23 of the SEBI (Delisting of Equity Shares) Regulations, 2009 and acquire the shares offered in response to the public offer, within three months from the date of this Order ii. BSE to facilitate valuation of shares to be purchased as directed at (i) above, and compulsorily delist the Company, if the public shareholding reduces below the minimum level in view of aforesaid purchase. iii. The Noticee no. 1 is hereby restrained from accessing the securities market by issuing prospectus, offer document or advertisement soliciting money from the public in any manner for a period of 8 years. iv. Noticee no. 2 and 3 are hereby restrained from holding post of director, any managerial position or associating themselves in any capacity with any listed public company and with any public company which intends to raise money from the public, or with any intermediary registered with SEBI for a period of 3 years. v. The Noticees, as mentioned below are hereby restrained and prohibited from buying, selling or otherwise dealing in the securities market, directly or indirectly in any manner whatsoever manner, for the period specified in their respective columns Sr. No. Name of Entity Debarred vide interim order Period of debarment. vi. Obligation of the debarred Noticees, in respect of settlement of securities, if any, purchased or sold in the cash segment of the recognized stock exchange(s), as existing on the date of this Order, can take place irrespective of the restraint/prohibition imposed by this Order in respect of pending transactions, if any. Further, all open positions, if any, of the aforesaid debarred Noticees in the F O segment of the stock exchange, are permitted to be squared off, irrespective of the restraint/prohibition imposed by this Order. vii. It is further clarified that during the period of the aforesaid restraint, the existing holding of securities, including the units of mutual funds shall remain under freeze.

Summary

Issues Involved:
1. Connection among Noticees and funding of IPO.
2. Utilization of IPO proceeds as per the stated objects in the Prospectus.

Issue I: Connection and Funding of IPO

The case involves allegations that the company and other Noticees deployed a scheme in the IPO of HPC Biosciences Ltd. to fraudulently achieve the threshold of minimum applications required for listing. The investigation revealed that certain entities connected with the company funded IPO applicants, and the IPO proceeds were subsequently transferred to these funding entities. The Noticees were interconnected through fund movements, common directorships, and shared addresses.

The company issued 45,00,000 equity shares in the IPO, and out of the total shares allotted, 13,24,000 shares were funded by the connected entities, representing 29.03% of the total shares allotted. The investigation found that the company transferred approximately INR 15.65 Crore out of the INR 15.96 Crore raised in the IPO to various entities, including INR 10.59 Crore to the funding entities.

The company and its directors provided evasive replies and failed to furnish supporting documents to justify the fund transfers. The underwriting agreement cited by the company did not impose an obligation on the underwriter to subscribe to the entire unsubscribed portion of the IPO, and the company's conduct contradicted its defense.

The company and its connected entities were found to have fraudulently funded the IPO applications to achieve the mandatory subscription threshold of 90%. The scheme involved the company and its connected entities funding the IPO applicants and subsequently reimbursing the funding entities from the IPO proceeds.

Issue II: Utilization of IPO Proceeds

The company raised INR 15.96 Crore through the IPO, but failed to provide supporting documents for the utilization of the IPO proceeds. The company claimed to have utilized INR 8.99 Crore for development of farm land, INR 27.03 Lakh for issue expenses, and INR 2.20 Lakh for miscellaneous expenses. However, the company did not provide details for the remaining INR 6.68 Crore.

The agreements provided by the company for land development were found to be unregistered, unenforceable, and lacking in credibility. The company failed to produce any verifiable documents to support its claims of fund utilization. The investigation revealed discrepancies and contradictions in the company's submissions, indicating that the funds were not utilized for the stated objects of the IPO.

The company transferred INR 15.65 Crore out of the IPO proceeds to various entities, including INR 10.59 Crore to the funding entities, without providing any legitimate explanation or supporting documents. The investigation concluded that the funds were diverted to reimburse the funding entities for their role in making the IPO successful.

Judgment and Directions:

1. Noticee nos. 2 and 3 (promoters of the Company) are directed to make a public offer to acquire shares of the Company from public shareholders and acquire the shares offered in response to the public offer within three months.
2. BSE is to facilitate valuation of shares and compulsorily delist the Company if the public shareholding reduces below the minimum level.
3. The Company is restrained from accessing the securities market for 8 years.
4. Noticee nos. 2 and 3 are restrained from holding any directorial or managerial position in any listed public company or public company intending to raise money from the public for 3 years.
5. The Noticees are prohibited from buying, selling, or dealing in the securities market for the specified periods.

The order shall come into force immediately, and a copy of the order is to be forwarded to the Noticees, all recognized stock exchanges, depositories, and registrar and transfer agents for ensuring compliance.