Order in respect of JMD Alloys Ltd.

WTM/SEBI/MPB/ISD/39/2018 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: MADHABI PURI BUCH, WHOLE TIME MEMBER ORDER IN RE REPRESENTATION(S) FILED BY JMD ALLOYS LTD. IN RESPECT OF S. NO. ENTITY’S NAME PAN 1 JMD Alloys Ltd. AAACG7070J Background: 1. Securities and Exchange Board of India (hereinafter referred to as “SEBI”) was in receipt of a letter no. F. No. 03/73/2017-CL-II dated June 9, 2017 from the Ministry of Corporate Affairs (hereinafter referred to as “MCA”) vide which MCA had annexed a list of 331 companies identified as “shell companies” for initiating necessary action as per SEBI laws and regulations. MCA had also annexed the letter of Serious Fraud Investigation Office (hereinafter referred to as “SFIO”) dated May 23, 2017 which contained the database of shell companies (identified as shell companies by SFIO and MCA) along with their inputs 2. SEBI as a market regulator is vested with the duty under section 11(1) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act”) to protect the interests of the investors in securities and to promote the development of and regulation of securities markets by appropriate measures as deemed fit. 3. SEBI was of the view that the companies identified as shell companies by SFIO and MCA were potentially involved in: (a) Misrepresentation including that of their respective financials and businesses and possible violations of SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015 (hereinafter referred to as “LODR Regulations”) and/or Order in respect of JMD Alloys Ltd.

(b) Misusing their respective books of accounts/funds including facilitation of accommodation entries to the detriment of minority shareholders and reneging on the fiduciary responsibility cast on the board, promoters and Key Management Persons. 4. SEBI was also of the view that investors should be alerted on the possible enforcement actions by various authorities leading to potentially significant impact on the price of the stock. 5. Therefore, in the interest of investors, SEBI took the pre-emptive interim measures under section 11(1) of SEBI Act in respect of listed shell companies (identified by MCA) vide its letter dated August 7, 2017, based on the view stated at para 3 and 4 above. The said letter was addressed by SEBI to all the Nationwide Stock Exchanges i.e. Bombay Stock Exchange Limited (“BSE”), National Stock Exchange of India Limited (“NSE”) and Metropolitan Stock Exchange of India Limited (“MSEI”) since active trading was happening only on these Stock Exchanges. 6. Vide the said letter, SEBI placed trading restrictions on promoters/directors so that they do not exit the company at the cost of innocent shareholders.

SEBI vide the letter dated August 7, 2017 also placed the scrips in the trade to trade category with limitation on the frequency of trades and imposed a limitation on the buyer by way of 200% deposit on the trade value, so as to alert them on trading in the scrip. The said measures were initiated by SEBI pending final determination after verification of credentials and fundamentals by the stock exchanges, including by way of audit and forensic audit, if necessary. The measures also envisaged, on the final determination, delisting of companies from the stock exchange, if warranted. By virtue of these measures, trading in the scrip was not suspended but allowed under strict monitoring so that investors could take informed investment decisions till SEBI and stock exchanges completed their detailed examination of such companies. 7. Pursuant to the above, Calcutta Stock Exchange Limited (“CSE”) vide letter dated August 14, 2017 informed SEBI that it has come across the letter of SEBI dated August 7, 2017 addressed to nationwide stock exchanges (i.e. BSE, NSE and MSEI), as displayed on their websites.

In that regard, it informed that out of the 331 suspected shell companies, 85 companies are exclusively listed with CSE. Further, out of these 85 companies, 59 companies are under “suspended” status due to non-compliance of SEBI (LODR) Regulations, 2015. CSE enclosed a list of the said companies and sought specific directions of SEBI in view of the fact that there were no specific directions to CSE in the aforesaid letter of SEBI dated August 7, 2017. 8. The said list of companies exclusively listed on CSE, forwarded by CSE included the name of JMD Alloys Ltd. (hereinafter referred to as “JAL” / “company”) whose representation is the subject matter for consideration in the present order. In the said list, the status of JAL was shown as “suspended” since March 21, 2014. 9. In response to CSE’s letter, SEBI vide its Letter No. SEBI/HO/ISD/ISD/P/21403/1 dated September 07, 2017 advised CSE to take following measures w.r.t companies exclusively listed on CSE: a) “CSE shall initiate a process of verifying the credentials /fundamentals of such companies b) CSE is requested to advise companies to produce the auditor’s certificate giving the following information for the purpose of verification of credentials/fundamentals of the company i. Status of filing its annual income tax return for last three years and status of any pending disputes with Income tax department, if any; ii.

Status of company’s compliance with all the requirements of Companies Act and annual returns filing during last three years; iii. Whether company is a going concern and description of its business model. Bank statement of last one year with active/dormant status iv. Status of Company with respect to default to any bank/financial institution v. Status of Company’s compliance with all the listing regulation requirements for a period of last three years c) CSE shall verify Auditor’s Certificate along with these documents and give an opportunity of hearing to the companies before submitting the report to SEBI as soon as possible d) Further, from the list of 331 companies, Exchanges shall identify the entities which are registered as clients with trading members and advice the trading members of these entities to verify the credentials/fundamentals. The verification of credentials/fundamentals of the clients by the trading members may exclude the companies which are being verified directly by exchanges as listed entity. In case, if on verification of credentials of these said clients is not found satisfactory, then their UCC should be temporarily disabled by Exchanges and report on the same shall be submitted to SEBI.” JAL’s representation 10. It is noted that vide its letter dated August 23, 2017, JAL had made a representation addressed to SEBI and BSE, whereby it had prayed that its name be removed from the list of shell companies and a certification be issued to it in that regard.

The said prayer was made on the basis of submissions along with other documents which are summarized as under: a. Reference is made to BSE’s notice whereby it was inter alia informed to all the market participants that SEBI vide its letter dated August 7, 2017 has forwarded a list of 331 shell companies as identified by the Ministry of Companies Affairs and has directed the stock exchanges to identify the companies listed on their trading platform and initiate specific measures mentioned therein. b. The company is shocked and surprised by the said notice, wherein behind our back you have declared us a “shell company”, which is in gross violation of principles of natural justice. The said notice does not disclose the parameters based on which we have been declared a shell company. The said letter has been issued without conducting an investigation and without following the legal process. Further, the letter is without mentioning the legal provisions relevant for such identification. c. JAL submitted its background since its incorporation, its business details and also mentioned the long pending legal disputes which it had with the electricity department because of which JAL’s net worth eroded. d. It also mentioned that due to its bad financial position, the loans taken from Central Bank of India could not be repaid in time due to which the matter was reported to BIFR.

Subsequently, the company’s management opted for one time settlement with Central Bank of India to permanently clear the dues. e. JAL also provided the following details for three financial years i.e. 2013-14, 2014-15 and 2015-16:  Revenue from operations  Income Tax Returns  Electricity Payments  Number of employees.  Statutory payments such as Sales Tax, Excise duty and Service tax f. JAL has been regularly filing its annual income tax return and there is no pending dispute with Income Tax Department. g. JAL has been regularly complying with the applicable provisions of the Companies Act. The company has been regular in filing balance sheet and annual report with the ROC. h. As on date, the company has not availed any bank loan and has not defaulted on any bank loan in the past. i. The company was going through a financially rough patch and was grappling with various litigations, and therefore, it could not keep track of listing agreement compliances. Consequent to non-compliance, the company was suspended by BSE in 2002. Subsequently, in the month of December 2016, BSE has compulsorily delisted the company from BSE and has imposed certain conditions to be complied by the promoters of the company.

The factum of compulsory delisting came to our knowledge recently. The company had not received any direct communication in this regard.

11. Aggrieved by the aforesaid letter dated August 7, 2017 issued by SEBI, JAL also filed an appeal (No. 113 of 2018) before Hon’ble Securities Appellate Tribunal (hereinafter referred to as “SAT”). Hon’ble SAT vide order dated April 11, 2018 disposed of the appeal and directed the following:- “… 2. Appellant is aggrieved by the communication issued by SEBI on 7th August, 2017. It is the case of the appellant that the appellant had made a representation to Bombay Stock Exchange (BSE) and also SEBI on 23rd August, 2017 against the said communication dated 7th August, 2017 and the same has not yet been disposed of. 3. In these circumstances, we dispose of the appeal by directing BSE and SEBI to dispose of the representation made by the appellant on 23rd August, 2017 as expeditiously as possible. 4. Appeal is disposed of in the aforesaid terms with no order as to costs.” Hearing and Reply: 12. Pursuant to the decision of Hon’ble SAT, an opportunity of personal hearing was granted to JAL on May 23, 2018 when its authorized representative appeared and made, inter alia, the following submissions: (a) JAI, is working in steel sector and is engaged in manufacturing of TMT bars. (b) That in 1999, dispute arose between Electricity Department and JAL which led to huge amount of litigation and the business of the company went down. That the disputed matter was put to rest on September, 2016. (c) That post settlement of electricity dispute, the promoters of the company infused funds into the Company and the company is trying to increase capacity building and is selling TMT bars. (d) That the company is operational, is diligently filing returns and though the performance of the company was not good at the beginning, but after dispute resolution, the company is endeavoring to increase its performance. (e) That in 2002, the company was suspended on BSE for non-compliance of listing agreement and in 2008, company was suspended on CSE. That in December 2016, company has undergone compulsory delisting in BSE. (f) That as per BSE calculation, the cost of the shares was determined as zero and thus promoters are not required to give exit option to shareholders under compulsory delisting. 13. JAL was asked to provide the information / response on the following points (supported by documentary evidence) latest by May 30, 2018:

1. Copy of the BSE Letter valuing the shares of JAL as zero under compulsory delisting leading to no exit option obligation on promoters. 2. Since 2016, what all actions company has done in compliance with compulsory delisting. 14. Vide letter dated May 29, 2018, JAL filed its written submissions along with the response to the queries / information sought from it during the hearing: “... Not a Shell Company 3. We are a company incorporated in the year 1994 under the provisions of Companies Act 1956, having registered office at Patna, Bihar. The Company operates in steel sector. 4. In the year 1994-95, the core business of the Company was manufacture of MS Ingot and MS Bars of various sizes. The Company had a Melting Furnace and a Rolling mill with a capacity of 30000 MT per annum (situated at Village Deokuli, Bihta, Patna) where manufacturing activities were carried out. 5. As stated during the course of hearing, in the year 1999, we had a dispute with the Electricity Board with regard to raising of certain electricity bills pertaining to our manufacturing units, which in our view were raised arbitrarily.

Because of the long festering dispute/litigation with the Electricity Department, resulting in complete disconnection of electricity supply to our factory (which was only partially restored after a considerable lapse of time pursuant to Court's directions), our operations suffered considerably. 6. The intermittent supply of electricity over a period of time resulted in stoppage/ slowdown of operations of the Company. The aforesaid events took a heavy toll on the business operations of the Company. Consequently, turnover, revenues and capacity utilization, etc. started dwindling. Coupled with the aforesaid events, our operational plight was further compounded by the entire steel sector coming under stress during 2001- 2005 due to various external sectors. 7. Consequent to aforesaid factors, the Company could not meet its loan repayment obligations to its Bank viz. Central Bank of India (CBI) .The Company's account with CBI became NPA, leading to initiation of DRT proceedings by CBI against the Company.- Parallely, in the year 2002-03 the Company was referred to BIFR. 8. Sometime around February 2008, with a view to put an end to the DRT proceedings both the parties arrived at One-time-settlement, wherein the Company settled the outstanding loan amounts by making a payment of Rs.710 Lacs.

The said amount was subsequently paid by the Company in September 2009. 9. The marathon litigation with regard to Electricity bill payment finally came to an end in September 2016, with the passing of the Order dated 8.9.2016 by the Division Bench of the Hon’ble High Court of Patna. It may be pointed out that as per the Electricity Department the calculation of amount payable by the Company worked out to around Rs 36 Crores, whereas actual amount payable by the Company, in consonance with the directions of the Hon'ble High Court of Patna, came out to around Rs 51 lacs only.

The said amount was subsequently paid by the Company to the Department and the whole issue stood resolved. 10. Despite the aforesaid: (i) the Company was always operational (though operations were low-key); (ii) the Company had employees at its office, factory, etc.; (iii) the Company had been paying all the requisite statutory taxes as applicable ( viz sales Tax, Excise Duty & Service Tax) (iv) the Company had been regularly filing its Annual Return, Balance sheet etc. in consonance with the provisions of the Companies Act; (v) the Company had been regularly filing its Income Tax Returns etc. in consonance with the provisions of the Income Tax Act 11. It may be appreciated that all along the Company went through a period of considerable business uncertainty, owing to sword hanging on its head - with regard to amount of electricity bill which Electricity Department had calculated erroneously on a very high side based on wrong methodology. Further, the operations of the Company virtually came to a grinding halt resulting in losses and complete erosion of Net Worth of the Company. Over the last ten years the net worth of the Company has been negative 12. With electricity bill issue behind the Company, Post September 2016 the Company raised funding, expanded and modernized its plant and increased its capacity from 30,000 MT to 1,80,500 MT.

From April 2018, the production has also commenced. Currently the Company is manufacturing TMT Bars. As on date the Company is debt free, there are no loans, etc. from the banks. 13. Additionally, we may also point out that Calcutta Stock Exchange had vide its letters dated 06.02.2018 & 24.04.2018 had inter alia sought various information from us. We had vide our letter dated 26.02.2018 & 02.05.2018 inter alia provided the information as sought for by CSE. The compilation containing the documents submitted to CSE was also handed over during the course of hearing. It may be noted that Auditor (viz. R K D S & Associates Chartered Accountant) have also vide their certificate dated 25.04.2018 confirmed that: 1. The company has duly filed its annual income tax return for the last three years, viz. FY 2016-17, 2015-16 & 2014-15 and there is no pending dispute with Income Tax Department. 2. The company has duly filed its Annual Return filings for last three years viz. FY 2016-17, 2015- 16 & 2014-15, as per provisions of the Companies Act 2013. 3. The company is a going concern and is engaged in running a Steel Re-Rolling Mill Unit, producing Steel Bars and other Rolled Products.

4. The company is not availing any credit facilities from any banks/financial institutions.

14. From the facts set out above, it would be clear that we have been operational for last 23 years and continue to operate. Further, we have a legitimate business. Furthermore, we have been regularly paying various statutory dues and Taxes to the Government of India. Furthermore, we have enjoyed impeccable track record and no action has been taken by any regulatory authority against us. 15. Thus, we are not a shell company. Compulsory Delisting 16. With regard to delisting by BSE and compliances thereof, following are be noted : (i) On 24.12.16 BSE issued a Public Notice inter alia notifying the names of various companies which were compulsorily delisted by it w.e.f. 13.12.16. The said Public Notice included our name also. (ii) The said Public Notice also included the 'Fair value to be paid by the Promoters to the public shareholders'. In so far as we are concerned, against the name of our company the value of shares was indicated as zero. (iii) At the relevant time, the Company was not aware of the said Public Notice made by BSE. It was only post issuance of captioned order dated 7.8.17 by SEBI, while preparing representation in consultation with its advisors, the Company became aware of the said Public Notice, compulsorily delisting the shares of the Company.

Here it may be noted that scrip of the Company was suspended by BSE since 2002 and no trading was taking place since then. (iv) While filing response to the captioned Order passed by SEBI, we had in our reply (which was marked to BSE also) specifically stated that : (a) the Company was going through a financially rough patch and grappling with various litigations and therefore it could not keep track of compliances with the provisions of listing agreement; (b) that the factum of compulsory delisting came to its knowledge recently and that the Company has not received any direct communication in the matter. (c) that the Company as well as its promoters will abide by the direction of compulsory delisting and the consequences flowing there from and take necessary steps in the said direction in consultation with BSE. (v) Subsequently, we had sent reminders to BSE (dated September 18, 2017) inter alia seeking hearing in the matter but to no avail. (vi) Till date, BSE has not informed any further compliance to be done by the Company including under Delisting Regulations. Since the net worth of the Company is negative, therefore in our respectful submission no exit offer is required to be made by the Promoters of the Company in terms of Delisting Regulations.

17. However, we submit that in case if any compliances are required to be made at our end, under the provisions of Delisting Regulations, we will make the compliances as advised by SEBI.

18. We repeat, reiterate and confirm the submissions made vide reply dated August 23, 2017 in the matter. Needless to state, these submissions are in addition to and in continuation of our earlier replies. Prayer 19. In view of the foregoing submissions, it is humbly prayed that our name be removed from the list of shell companies and a confirmation be issued to us in this regard for our records.” CONSIDERATION OF ISSUES: 15. I have considered the representation of JAL, its written submissions and other material available on record. On the basis thereof, the following issues arise for consideration. A. Whether the letter dated August 7, 2017 issued by SEBI was applicable to JAL? B. Considering the representation made by JAL, whether any directions are required to be issued by SEBI in respect of JAL? 16. On the basis of the representation/submissions of JAL and other material available on record, my observations on above issues are as under: A. Whether the letter dated August 7, 2017 issued by SEBI was applicable to JAL? 1) JAL is a company which is exclusively listed on CSE. Further, it has been suspended on CSE since March 21, 2014, which was also confirmed by CSE vide email dated February 1, 2018. CSE has also confirmed that the requisite regulatory filings have not been done by JAL since last two years. 2) It is also relevant to mention that the trading platform of CSE is not operational since April 2013. The matter relating to CSE’s exit is sub-judice in Hon’ble Calcutta High Court. 3) BSE has issued a notice dated December 12, 2016 for compulsorily delisting 64 companies including JAL w.e.f. December 13, 2016 since these companies stood suspended for more than 13 years. As these 64 companies had either failed to reply to notice issued by the exchange or failed to take steps for revocation of suspension in the trading of the securities or had consented to go ahead with the compulsorily delisting, BSE issued final public notice on December 24, 2016 with respect to delisting of these 64 companies including JAL indicating the fair value of JAL to be zero.

4) It is noted that the letter dated August 7, 2017 was issued by SEBI pursuant to identification of 331 companies as “shell companies” by Ministry of Corporate Affairs. The said letter was addressed by SEBI to all the Nationwide Stock Exchanges i.e. BSE, NSE and MSEI since active trading was happening only on these Stock Exchanges. Thus, the directions issued vide the said letter were applicable to companies which were listed at least on any one of these nationwide stock exchanges. 5) No specific directions were issued vide letter dated August 7, 2017 against companies exclusively listed on CSE or against their promoters / directors. 6) CSE vide letter dated August 14, 2017 informed SEBI that it has come across the letter of SEBI dated August 7, 2017 addressed to nationwide stock exchanges, and in that regard, it informed that out of the 331 suspected shell companies, 85 companies are exclusively listed with CSE. CSE enclosed a list of the said companies and sought specific directions of SEBI in view of the fact that there were no specific directions to CSE in the aforesaid letter of SEBI dated August 7, 2017. 7) In response to CSE’s letter, SEBI vide its Letter No. SEBI/HO/ISD/ISD/P/21403/1 dated September 07, 2017 advised CSE to take following measures w.r.t companies exclusively listed at CSE: a) CSE shall initiate a process of verifying the credentials /fundamentals of such companies b) CSE is requested to advise companies to produce the auditor’s certificate giving the following information for the purpose of verification of credentials/fundamentals of the company i. Status of filing its annual income tax return for last three years and status of any pending disputes with Income tax department, if any; ii.

Status of company’s compliance with all the requirements of Companies Act and annual returns filing during last three years; iii. Whether company is a going concern and description of its business model. Bank statement of last one year with active/dormant status iv. Status of Company with respect to default to any bank/financial institution v. Status of Company’s compliance with all the listing regulation requirements for a period of last three years c) CSE shall verify Auditor’s Certificate along with these documents and give an opportunity of hearing to the companies before submitting the report to SEBI as soon as possible d) Further, from the list of 331 companies, Exchanges shall identify the entities which are registered as clients with trading members and advice the trading members of these entities to verify the credentials/fundamentals.

The verification of credentials/fundamentals of the clients by the trading members may exclude the companies which are being verified directly by exchanges as listed entity. In case, if on verification on credentials of these said clients is not found satisfactory, then their UCC should be temporarily disabled by exchanges and report on the same shall be submitted to SEBI. 8) The above mentioned directions issued by SEBI to CSE vide letter dated September 7, 2017 are administrative in nature and consequential actions in that regard is to be taken by CSE. The process in that regard is underway. The consequential action which may be taken by CSE or SEBI against companies exclusively listed on CSE (including JAL) in pursuance of the directions issued to CSE vide the aforesaid letter shall be independent of the actions that were envisaged vide the August 7, 2017 letter against companies listed on nationwide stock exchanges. 9) Considering the above facts and circumstances, I find that the letter dated August 7, 2017 issued by SEBI was not applicable to JAL since the said letter had no application to Companies exclusively listed on CSE, and on the date of the letter dated August 7, 2017, JAL had been compulsorily delisted from BSE (w.e.f.

December 24, 2016). B. Considering the representation made by JAL, whether any directions are required to be issued by SEBI in respect of JAL? 1) It is noted from the representation dated August 23, 2017 and the written submissions dated May 29, 2018 submitted by JAL that the only prayer made by JAL is to get its name removed from the list of shell companies. In this regard, it is noted that the list of “shell companies” identified by MCA was received by SEBI from MCA vide letter dated June 9, 2017 for initiating necessary actions as per SEBI laws and regulations. 2) The identification of certain companies as “shell companies” (including JAL) was done by Ministry of Corporate Affairs. Since the said list of 331 shell companies was not prepared by SEBI, any amendment to the said list is not within the purview of SEBI. 3) Therefore, the appropriate authority for removal of any name from the list of 331 companies is Ministry of Corporate Affairs. 17. In view of the foregoing, I find that no directions are required to be issued by SEBI in respect of JAL at present. The representation made by JAL vide its letter dated August 23, 2017 and its subsequent communications in that regard is accordingly disposed of.

18. It is clarified that this order is without prejudice to any other action that may be taken against JAL by CSE or SEBI pursuant to SEBI’s Letter No. SEBI/HO/ISD/ISD/P/21403/1 dated September 07, 2017 or under any other provisions of securities law. 19. Copy of this Order shall be forwarded to the nationwide stock exchanges and CSE for their information and necessary action. 20. A copy of this Order shall also be forwarded to the Ministry of Corporate Affairs and Serious Fraud Investigation Office for their information.

Sd/- DATE: September 7th, 2018 MADHABI PURI BUCH PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA