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TMI Blog2006 (4) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 35/2003 i.e. M/s Shonk Technologies International Ltd (in short STIL) was incorporated on 28.8.1984 as Gaurav Trading and Finance Ltd having its Regd. Office at Nirmal, 6th Floor, Nariman Point, Mumbai. In 1986 its name was changed to Sapphire Finance and Mercantile Ltd.; in 1994 to Jai Stock Brokers Ltd.; in 1997 to Shreeji brokers Ltd.; In Jan 2000 to Shreeji Yatayat India Ltd.:(SYIL) and in July, 2000 to Shonk Technologies International Ltd.(STIL). The respondent company started its operation as a Non-Ranking Finance Company. Thereafter it expanded its activities into the area of broking and trading operations. It also diversified into transport business activities. As per the Memorandum of Association filed in Dec. 2000 the present main object of the company is to carry on the business in the field of Electronics, Tele Communications, set up or connect SAP/ERP Solutions, etc. As per the balance sheet as on 31.3.2000 the respondent company had a paid up capital of ₹ 2,24,00,000 comprising 22,40,000 shares of ₹ 10 each. In July, 2000, the respondent company i.e. SYIL a listed company (now STIL) took over the entire business as a going concern of an unlisted s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral Shri. K.P. Pathak basing his arguments on the due diligence report (placed at Annexure VIII, pages 67 to 93 of the reply of the company in CP No. 35/2003, extracts given in the ensuing paragraphs); the preliminary report of the SEBI; the unusual transaction between listed company and unlisted company violating the provisions of Sections 391/394 of the Companies Act, 1956; etc. My attention was drawn to the unusual transaction allegedly entered into to defraud the general public and another body corporate. It was pointed out how the business of the company was carried on otherwise for a fraudulent or unlawful purpose and how the persons concerned in the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company. It was pointed out that as per the balance sheet as on 31.3.2000 the respondent company had a paid up capital of ₹ 2,24,00,000 comprising 22,40,000 shares of ₹ 10 each. On 14.7.2000 the company increased its authorized share capital from ₹ 2.5 crores to ₹ 20 crores by creating 1,75,00,000 shares of ₹ 10 each without filing the requisite form No. 5 in the office of Registrar of Companies, Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 34 individuals. The public limited companies to whom the shares were allotted included a few companies belonging to Ketan Parekh group viz., M/s Panther Fincap Management Services Ltd.; M/s Classic Credit Ltd.; and M/s Panther Investrade Ltd. The aforesaid shares were allotted for consideration otherwise than cash and there was no contract reduced to writing in this regard. The respondent company had also filed Form No. 3 stating that the aforesaid allotment was made in the satisfaction of the acquisition of the entire business undertaking of STL. It was stated that the purchase price of the property was arrived at ₹ 106.91 crores on the basis of valuation reports prepared by the Statutory Auditors of STL. The property was not valued by the approved valuer. Since the company had acquired the entire business undertaking from STL the shares should have been in the normal course allotted to STL. However, in the instant case, it was pointed out that the shares were allotted to the shareholders of STL, and Form No. 3 containing the particular of the contract are silent as to why the shares were allotted to the shareholders of STL, though the value of the property acquired by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered a very sharp increase. There were common clients of these brokers. c) That Ketan Parekh entities namely Classic Credit Ltd.; Panther Fincap Management Services; and Luminant Investment P. Ltd. were the selling clients of broker - Credit Suisse First Boston India Securities Pvt Ltd. (CSEB) and at the same time these entities/other set of entities belonging to Ketan Parekh group were buying these very shares through other brokers by acting as buying clients. The whole transaction was given a colour of purchase and sale of shares but were not genuine transactions. These transactions were entered into with a view to create artificial market in the scrip which were otherwise relatively non descript and illiquid. The SEBI's report further mentioned that a small group of brokers deliberately indulged in recalculating the stock among themselves to create the appearance of artificial demand and liquidity in the shares Fictitious trades though circular trading also artificially benchmarked the price which induced others to purchase and/or sell shares. The synchronized set of Ketan Parekh entitles constituted large percentage of total volumes of trade at the exchange. The larg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 67 of Annexure G). It was mentioned that in consideration of the transfer of the entire business undertaking of Shonk Technologies, SYIL has made a preferential allotment of equity shares to the shareholders of STL in the same proportion as they were holding in STL . It was pointed out that pursuant to the allotment of shares to the shareholders of Shonk Technologies Ltd. it was the promoters and shareholders of Shonk Technologies Ltd. who became the majority shareholders of the so called acquiring company. It was argued that this condition of agreement showed that the consideration for the sale of entire business undertaking was received by the shareholders of STL instead of the STL. Consequently, this resulted in the loss to the STL to the tune of ₹ 1,047,753,690.00 which was also reflected in the books of accounts of the STL and was also mentioned in the directors report dated 31.12.2000 (placed at Annex P.3). My attention was drawn to this very disturbing aspect of the agreement /scheme entered into between both the respondent companies that the agreement as made between the two companies that STL did not get any consideration for the agreement and the consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an NBFC. (Ref. page 82 of reply in CP 35/03). It was strongly argued that all the above mentioned facts raised serious questions and doubts as to the credentials of the respondent company. Admittedly, for a long time in the past the company was not complying with the requirements of law; it was not even following the guidelines by SEBI, it was carrying on the business of NBFC without registration; this company had got its sales tax registration cancelled; it did not have any employees at all; it was not maintaining any complete and accurate corporate registers with the relevant provisions pertaining to disclosure of interest by directors, etc. In such circumstances, it was questioned by the counsel for the petitioner as to why would company like STL agree to sell its business undertaking to a company with this type of track record and that Shonk Technologies International Ltd. never bought or acquired the business undertaking STL and in fact, it was the other way round that the promoters and shareholders of the Shonk Technology Ltd. took away with them the business of STL and acquired STIL or SYIL, a listed company because after the allotment of shares to the shareholders of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of inspection under Section 209A, and that the compounding of contraventions pointed out during inspection under Section 209A was immaterial and hence, irrelevant, still it was a fit case for investigation under Section 237(b). While responding to the plea of the respondents that SEBI, CBI and the Dept. of Company Affairs (now Ministry of Company Affairs) under 209A of the companies Act had already carried out inspections and investigations, the counsel for the petitioner drew my attention to the decision of the Bombay High Court in Appeal No. 1-14/2005 in CP No. 39/2003 in the case of Panther Fincap and Management Services Ltd. v. Central Government at page 58 onwards wherein this matter has been considered in detail: ...I am also of the further opinion that the investigation in respect of the corporate fraud can be initiated and considered by the Central Government under Section 237(b)(i) of the Companies Act. I have not been able to come across any provisions under the SEBI act in which any corporate fraud can be investigated by the SEBI. Undoubtedly it can be investigated under normal criminal law by the CBI. I am further of the opinion that merely because the mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any malafide intention then it is not possible to stall the investigation merely the basis of contentions and arguments advanced by the learned Counsel for the appellants all the authorities cannot be permitted to carry the investigation simultaneously respect of the very same material. I therefore, reject the contention on behalf of the appellant in investigation. It has been contended by the learned Counsel for the appellant that there are serious allegations in the present case and thus this Court must refrain from exercising jurisdiction and interfering with the investigation at this stage. I find considerable substance in the contention advanced by the learned Counsel for the respondent. It is well settled that the court must be reluctant in interfering in the matter where the same is still at investigating stage. The court cannot and should not usurp the jurisdiction vested in the central government to form an opinion and come to a conclusion as to whether the investigation is necessary or not limited jurisdiction or power is conferred on the court is to ascertain whether there is a material in support of the opinion arrived at by the central government and/or the said exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect or wholly irrelevant and none of the said arguments fall within the scope of Section 237(b) of the Act. It was pointed out that none of the creditors, shareholders or concerned persons have filed any complaint or have been aggrieved and that no case of any fraud or unlawful purpose has ever been averred or established. Regarding the allegation of the listed company taking over unlisted company it was argued that the take over of the company was pursuant to or as a consequence of and in term of due diligence report of a reputed legal firm namely M/s Amarchand and Mangaldas and Suresh A. Shroff and Co. New Delhi, as given in its report dated 10.10.2000. The report specifically and elaborately explained the basis and the procedure to be followed and also confirmed that the entire transaction was in accordance with law. Further the detailed procedure suggested and advised had been worked out on elaborate scrutiny and after taking into consideration all the relevant facts which formed pail of the report. A legal due diligence check list was also worked out elaborately and was made the basis of the legal action. Reference was made to the report at page 67, Annexure - VIII, to the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he witnesses whom they wish to examine as well as the list of documents they wish to refer and rely upon. It was pointed out that the enquiry is complete and there is no necessity for any further information and, therefore, the present investigation apart from being exercise in futility may only tantamount to a fishing and roving enquiry which is clearly prohibited under Section 237(b). For this ground, it was argued, again the reference to the SEBI report for basis of investigation is wholly outside the scope of Section 237(b) and cannot be said to be a circumstance for investigation under Section 237(b), As regards Special Resolutions not filed it was brought to my notice that the special resolution had been filed with the authorities and the requisite fees had also been paid by the respondent company. Further it was argued that the non payment of stamp duty cannot be made the basis for invoking powers under Section 237(b) and in any case the transfer was of undertaking and there was no sale of assets involved per se and consequently the question of payment of stamp duty on so called transfer of assets would not arise. As regards non compliance with Section 391 of the Act, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. On a consideration of the facts and circumstances of the case, I am satisfied that the grounds for ordering investigation do exist. I find overwhelming material pointing to the circumstances suggesting that the business of the company was conducted for a fraudulent and unlawful purpose with the intent to defraud the general public and the other body corporate and the persons concerned in the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company. This is a case squarely covered under the provisions of Section 237(b) as the pre conditions for initiating such action exist as would be clear from the following:- (i) STL an artificial person divorced from its shareholders seems to have been cheated. Consequently, it has suffered a loss of more than ₹ 104 crores as reflected in the books of accounts. Shareholders are not the company. Company is a separate legal entity whose interest itself seems to have been compromised by paying sale consideration to the shareholders. This in itself is a sufficient ground for ordering investigation under Section 237(b) of the Act. This is a very unusual case where the consideration for taki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was carrying out NBFC activities. It has not applied for any exemption either. 8.12 As per representations by SYIL, SYIL has not received any notices from any authority directing or pointing towards any compliance related issues till the date of this report on the basis of information made available. SYIL has not maintained complete and accurate corporate registers in accordance with the relevant provisions pertaining to disclosure of interest by Directors and these compliances should be met with.(Ref.: page 83 of reply in CP 35/2003) 2. 7.8. As suggested above, in respect of non-compliances made by SYIL in the past, some amount as retention amount may be set aside to meet any contingent liabilities that may arise on account of such non compliances. This amount should cover all non compliances under the Companies Act or the rules made there under, guideline issued by SEBI and in respect of non registration as an NBFC. (Ref. page 82 of reply in CP 35/03). The respondent cannot choose to rely on one part and ignore the other. The above extract makes the credentials and intention of the respondent company amply clear. Such credentials raise suspicion and the question a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Counsel for the appellant that the business of the company should be conducted in presence for the purpose of ordering investigation by the central government under Section 237(b)(i). I find no reason to differ on this issue. As regards the respondents' argument that since inspection under Section 209A has already been ordered in the case of the respondent company and hence there is no justification for multiplicity of proceedings for the same action by way of investigation under Section 237(b) of the Act, the scope of inspection and the scope of investigation is entirely different. Inspection does preclude investigation. Section 209A of the Act has been introduced in the place, of Sub-section (4), Clauses (b), (c)(d) of Section 209 by Companies Amendment Act (XLI) of 1974) with effect from 1.1.1975 to strengthen the law suitably. Inspection under this Section could not be effective unless the inspector is given power to compel production of books, and to examine on oath, etc., as an Income Tax Officer has under Section 131 of the Income Tax Act. The inspection under this section is not an investigation, though it may led to one, in case there is anything wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit of doubt should always be given to the accused. The accused is always presumed to be innocent until the prosecution proves him to be guilty, while in civil cases all that is necessary to insist upon is that the proof adduced in support of a fact is such that should make a prudent man to act upon the supposition that it exists. The general rule in civil action is that an uncontested case may be established by a minimum of proof, and a contested case by a balance of probabilities. For instance, a case of corruption charges against an employee may fail under the Prevention of Corruption Act, but on the same set of facts an employee can be charge sheeted and dismissed under the disciplinary proceedings. In the present case the petitioner is on a very sound footing besides having come to this Board bona-fide. Only investigation under Section 237(b) of the Act can bring out the true state of affairs. Let the truth prevail. An order to investigate under Section 237(b) of the Act, in any case cannot prejudice the respondents. An order of this Board under this section, directing an investigation is only analogous to the issue of a fact finding commission. 5. In view of the above, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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