Order against M/s. Libord Finance Ltd. in the matter of Mazda Fabrics and Processors Ltd

1. M/s. Mazda Fabrics and Processors Limited (hereinafter referred to as ‘the company’ or ‘Mazda’) was originally incorporated as a private company and subsequently converted into a public company on 05-10-1995. The company is engaged in the business of processing man-made fabrics. Post conversion into a pubic company, the company came out with a public issue of 51,54,000 shares at Rs.10/- per share at par amounting to Rs.5,15,40,000/-. The net public offer to the resident Indian public was for 34, 56, 400 shares. The issue had opened on 06-03-1996 and closed on 16-03-1996. After the closure of the issue, the shares were allotted to the applicants. The shares were listed in Bombay Stock Exchange Limited (herein after referred to as ‘BSE’) with effect from May 29, 1996 and opened at Rs.15/- to Rs.16/-. During the period from 25-05-1996 to 07-06- 1996 the prices and volumes of the scrip started to rise. In the subsequent settlements, the prices and volumes continued to rise with the price having soared from Rs.8.50/- on 06-06-1996 to Rs.112.50/- on 30-08-1996. The stock exchange suspended the trading in the shares suspecting that the trades were aimed at rigging the price of the scrip. In view of this suspicion, the exchange conducted a preliminary investigation. The said investigations alleged that the price of the scrip was rigged by a set of stock brokers and their clients in a very short span of time. The matter was independently investigated by the Securities and Exchange Board of India (herein after referred to as ‘SEBI’) to look into the possible violations of the provisions of the SEBI Act, the Rules, Regulations and the Circulars made thereunder.

2. From the investigations conducted by SEBI, it was revealed that the public issue of the company did not get genuinely subscribed and that the promoters of the company had approached M/s. Clio Finance Limited (herein after referred to as “Clio’) for bailing out the issue by arranging funds for subscribing the issue. This was done to circumvent the provisions of SEBI (Disclosure and Investment Protection) Guidelines and Section 69 of the Companies Act, 1956, which prescribes that 90% of the public issue, needs to be subscribed by public; else the money so received towards the subscription has to be returned to the investors. The promoters had asked Shri Suresh Bafna to arrange finances to bail out the public issue. Shri Suresh Bafna, a Director of Clio had arranged for applications for subscribing to the issue on an understanding that the company will buy back these shares from them immediately after the allotment and will also pay interest from the date of application, for the amount so financed. The investigations further revealed that there was an implicit understanding between the promoters of the company and the financiers (who applied for subscription only with the object of bailing out the issue) and in implementation of the understanding, the company purchased the shares back from the entities who purchased the shares only to give a false impression of proper subscription of the issue. There are many other connected facts related to whole episode of the subscription of the public issue but all would not be relevant to this case.

3. The noticee, M/s. Libord Finance Limited (now known as ‘Libord Infotech Limited’) was appointed as the Lead Manager to the issue. The investigations alleged that the noticee failed to ensure that the Registrar was making proper allotments to applicants, since certain applications were made only to bail out the issue and had thus aided and abetted the promoters of the company in their unfair practices. It was alleged that 50 applications were received for 1000 shares each accompanied by cheques issued from an account maintained with State Bank of Indore, Raipur and that the said cheques were in continuous serial numbers (from 249570 to 245919) and that the continuous cheque numbers for different applications should have alerted the noticee or the registrar in scrutinising the applications accompanied with these cheques to ensure whether they are genuine applications. However, it was found that those applications were accepted and allotments were made to the applicants. Investigations revealed that these shares were allotted to bail out the public issue of the company only in order to attain the minimum subscription and that the said acts appear to have the effect of assisting the promoters of the company in fulfilling the subscription level. The Investigation Report further stated that the Registrar had allotted the same set of shares to two different persons (shares with distinctive numbers from 003269501 to 003273500). Similarly, shares with distinctive numbers from 004811001 to 004871000 were also allotted to two different persons. The noticee was primarily alleged of not coordinating with the Registrar to monitor the flow and processing of the applications. Thus, the noticee had not complied with the directive of SEBI made vide SEBI Circular RMB GI Series Circular No. (92-93) dated 01-03-1993 that directs the lead manager to co-ordinate with the Registrar during the public issue thereby violating Clauses 1, 2 and 9 of the Code of Conduct prescribed for Merchant Bankers and Regulation 13 of the SEBI (Merchant Bankers) Regulations, 1992. In view of the aforesaid allegations, it was decided to conduct an enquiry under the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing of Penalty) Regulations, 2002 in order to enquire and adjudge the alleged contraventions of the noticee.

4. It was however revealed that the certificate of registration of the noticee was valid only till June, 2002, and that their certificate of registration has not been renewed. Since no useful purpose would have been served in proceeding with the Enquiry Proceedings as the notice was no more an intermediary, it was decided to issue necessary directions under Section 11 and 11B of the SEBI Act, 1992.

5. Accordingly, a show cause notice dated 09-06-2004 was issued to the noticee. The notice required the noticee to show cause as to why directions in the nature of restraining the noticee from buying, selling or dealing in securities and also restraining it from associating with any corporate body in accessing securities market for a suitable period should not be passed against it. The noticee was required to reply to the said notice within 21 days of receiving it.

6. The noticee replied to the show cause notice vide their reply dated 20-07-2004. Pursuant to their reply, another notice dated 01-06-2006 for hearing was sent to the noticee requiring them to appear before me for a hearing scheduled on 20-06-2006. On the said date, the noticee was represented by their Director, Shri Lalit Dangi and Advocate, who made their submissions. Written submissions dated 20-06-2006 were also submitted in support of their contentions.

7. I have perused the show cause notice, its reply, the oral submissions as well as the written submissions made by the noticee. The issues that arise for my consideration in the instant case are as under:

a) Whether the noticee aided the promoters of Mazda in their attempt in bailing out the issue? b) Whether the noticee has contravened the relevant provisions of the Code of Conduct prescribed for Merchant Bankers?

8. I note that the noticee has been charged for non-compliance of SEBI Circular SEBI Circular RMB GI Series Circular No. (92-93) dated 01-03-1993 thereby contravening clauses 1, 2 and 9 of the Code of Conduct prescribed for a Merchant Banker under SEBI (Merchant Bankers) Regulations, 1992. The relevant portion of the said circular is reproduced for convenience:

“E. POST ISSUE OBLIGATIONS. “3. Lead Manager responsible for post-Issue activities shall maintain close co-ordination with the Registrars to the Issue, and arrange to depute its officers to the offices of various intermediaries at regular intervals after the closure of the Issue to monitor the flow of applications from collecting Bank Branches, processing of the applications including those accompanied by stockinvest and other matters till the basis of allotment is finalised, despatch completed and listing done. Any act of omission or commission on the part of any such intermediaries noticed during such visits should be duly reported to SEBI.”

The above circular prescribes that a lead manager to an issue is supposed to maintain a close co-ordination with the Registrars (in this case it was M/s. PCS Industries Limited) and should arrange to depute its officers on regular intervals after the closure of the issue to monitor the flow of the applications from the collecting branches, processing of applications including those accompanied by stock invests and other matters till basis of allotment is decided, despatch is completed and listing is done. The allegation was that the lead managers were not diligent enough and did not co-ordinate with the Registrar to the issue. If the same was done then the unfair designs of the promoters would have come to light.

9. On perusal of the reply and the submissions, I note that the noticee has denied all the charges and has stated that it was not served a copy of the investigation report and that the show cause notice was issued to them after a period of 8 years. They had further stated that they were not involved in the bailing out of the public issue nor aided the promoters in their attempts in bailing out the issue with the help of certain other entities. The noticee has also submitted that the Registrar to the issue did not inform them regarding the serial numbers of the cheques for different applications and therefore they were unaware of the same. In this connection, I note that all the charges and the findings of the investigation had been made known to the noticee in the show cause notice dated 09-06-2004 itself. Therefore, in my view the principles of natural justice have been duly followed by SEBI.

10. I note that the SEBI (Merchant Bankers) Rules, 1992 define a merchant banker under Rule 2(e) as – “any person who is engaged in the business of issue management either by making arrangement regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management”. On a joint reading of the above said circular and the definition, it is clear that a lead manager to the issue manages an issue and has a duty cast upon it to monitor the inflow of applications and to process it in co-ordination with the Registrar to the issue. This has been prescribed in order to ensure that all activities relating to the public issue are carried out in full without any lapses. I find that the irregularity (bailing out of the public issue) could have been sensed if the lead manager and the registrar to the issue would have carried on their work with due care and diligence. The circular cited supra also makes it necessary for the lead manager to process the applications, and all other matters till the allotment is finalised and despatch complete. Since the lead manager did not adhere to the circular properly, I hold it liable for non-exercising due care and diligence as prescribed under Clauses 1, 2 and 9 of the Code of Conduct prescribed for Merchant Bankers and Regulation 13 of the SEBI (Merchant Bankers) Regulations, 1992. In this regard I cite below the said provisions, for convenience – “CODE OF CONDUCT FOR MERCHANT BANKERS 1. A Merchant Banker shall make all efforts to protect the interests of investors. 2. A Merchant Banker shall maintain high standards of integrity, dignity and fairness in the conduct of its business. …….. 9. A Merchant Banker shall not discriminate amongst its clients, save and except on ethical and commercial considerations. “ 11. I also note that the registrar to the issue (M/s. PCS Industries Limited) has been directed vide an order dated 05-12-2006 passed by SEBI, to restrain themselves from acting as an intermediary in any capacity for a period of 6 months for its lapses/non-adherence of code of conduct in the matter of Mazda.

12. Therefore, based on the above said findings, I hereby hold the noticee liable for having violated the SEBI Circular RMB GI Series Circular No.(92- 93) dated 01-03-1993 thereby contravening Clauses 1, 2 and 9 of the Code of Conduct prescribed for Merchant Bankers read with Regulation 13 of the SEBI (Merchant Bankers) Regulations, 1992.

13. Therefore, in exercise of powers conferred upon me under Section 11 and 11B read with Section 19 of the SEBI Act, 1992, I hereby restrain M/s. Libord Finance Limited, now known as M/s. Libord Infotech Ltd. (Permanent Account Number – AAA CL 2515 N) from accessing the securities market and also prohibit it from buying, selling or otherwise dealing or associating with the securities market in any manner whatsoever for a period of one (1) month.

14. This order shall come into force with immediate effect.

DATE:18/02/2008 T C NAIR PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA