Order in the matter of Filatex Fashions Limited

WTM/PS/01/IVD/ID-04/APRIL/2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER ORDER Under Section 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 read with Regulation 11 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 In the matter of Filatex Fashions Limited In respect of Ms. Sangeeta Sethia, Mr. Swaminathan Rajendran, Mr. Prabhat Sethia, Shree Chand Sethia, Mr. Naresh Chand Chandak, Mr. Prashant Kumar Sethia, Ivy League Schools Limited, Ms. Ratna Devi Sethia, Mr. Mahavir Golecha, Mr. Rajkumar Sethia and Ms. Shailaja Katar

1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’), conducted investigation in respect of the trading in the scrip of Filatex Fashions Limited (hereinafter referred to as ‘Filatex/ target company’) during the period of April 2, 2007 to November 21, 2007.

2. The investigation inter-alia revealed that on August 31, 2007, one Risk Capital and Tech Fin. Corp. Limited, presently known as IFCI Venture Capital Limited (hereinafter referred to as ‘IFCI’), sold 3,00,000 shares each of Filatex in the physical form to one Sangeeta Sethia and Swaminathan Rajendran, who were acting as the front entities of Prabhat Sethia, the promoter and Managing Director of Filatex (hereinafter collectively referred to as ‘acquirers’). By the acquisition of these shares, the combined holding of the promoters had increased from 28.88% as on quarter ended June 30, 2007 to 35.73% as on August 31, 2007 making it mandatory for them to make a public announcement to acquire further shares as per the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as ‘Takeover Regulations’).

3. On completion of the investigation, SEBI inter alia issued a common show cause notice (hereinafter referred to as ‘SCN’) dated April 07, 2011 to individuals/ entities namely Ms. Sangeeta Sethia, Mr. Swaminathan Rajendran, Mr. Prabhat Sethia, Shree Chand Sethia, Mr. Naresh Chand Chandak, Mr. Prashant Kumar Sethia, Ivy League Schools Limited, Ms. Ratna Devi Sethia, Mr. Mahavir Golecha, Mr. Rajkumar Sethia and Ms. Shailaja Katar (the original subscribers/ promoters/ PACs to the Memorandum of Association of Filatex) (hereinafter all collectively referred to as ‘noticees’) to show cause as to why suitable directions including directions to restrain from accessing the securities market for a specified period and to make an open offer should not be issued under Sections 11, 11B and 11(4) of the SEBI Act, 1992 read with Regulation 45 of the Takeover Regulations.

4. I note that the SCN was delivered to all the noticees except Swaminathan Rajendran. One of the noticees, namely Prabhat Sethia confirmed to SEBI that the SCN has been delivered to Ms. Sangeeta Sethia, Ivy League Schools Limited, Mahavir Golechha, Ms. Shailaja Katar, Prashant Kumar Sethia and Rajkumar Sethia vide letter dated June 05, 2011. He also intimated that Shree Chand Sethia is not alive and they are not in contact with Swaminathan Rajendran, Ms. Ratna Devi Sethia and Naresh Chand Chandak. I note that Shree Chand Sethia was not available during the course of investigation also and that the company had failed to provide any details of his.

Ms. Sangeeta Sethia replied to the SCN vide her letter dated June 05, 2011 and submitted that she is only an investor and not involved in the management of Filatex. The noticees namely Prashant Sethia and Mahavir Golecha, also submitted that they were investors and not involved in the management of Filatex, vide their separate letters both dated June 07, 2011, as stated by Ms. Sangeeta Sethia.

The noticee namely Rajkumar Sethia vide his letter dated June 23, 2011 replied to the SCN and submitted that he is neither a member of the board of Directors of Filatex nor an investor. He further submitted that he had purchased 1,000 shares of Filatex through one broker, i.e., Dynamic Equities Pvt. Limited from open market which he still holds in his demat account. Vide another letter dated July 26, 2011, Rajkumar Sethia submitted that at the time of formation of the company, Prabhat Sethia issued 20 shares of Filatex to him as a goodwill gesture. It has also been submitted that he had never attended any of the board/ committee meetings of Filatex. Filatex has also submitted to SEBI vide its letter dated July 26, 2011, that Rajkumar Sethia is neither the promoter nor the director of Filatex and that he is not concerned with the day to day affairs/ management of the company.

5. Thereafter, opportunities of personal hearing were granted to the noticees on June 28, 2011 before me. However, Prabhat Sethia, one of the noticees requested for an adjournment, vide his letter dated June 27, 2011. The request was acceded to and the matter was adjourned to August 12, 2011. In the meantime, Prabhat Sethia submitted his reply vide his letter dated August 09, 2011 received by SEBI on August 29, 2011. Thereafter, another opportunity for personal hearing was granted to all the noticees on September 16, 2011. However the same was rescheduled to September 23, 2011, as per the request of Prabhat Sethia. On the date fixed for personal hearing, Mr. Bharat B. Shah, the authorized representative of Prabhat Sethia, Ms. Sangeeta Sethia and Ms. Shailaja Katar appeared and made oral submissions.

6. I note the submission of Prabhat Sethia that he could not deliver the SCN to Ms. Ratna Devi Sethia and Naresh Chand Chandak. Further, it is also observed that the SCN could not be delivered to Swaminathan Rajendran despite various attempts. I observe that during the investigation, various attempts were made to trace Swaminathan Rajendran, when a team from SEBI visited the premises of Filatex and met Prabhat Sethia. During this visit, Prabhat Sethia informed that Swaminathan Rajendran was an ex-employee of Filatex. He also informed that Swaminathan Rajendran had joined the company in the year 2004-2005 as a manager and used to get a salary of 15,000 per month in cash. Further, Prabhat Sethia submitted that Swaminathan Rajendran went on leave and did not join back. I note that Prabhat Sethia could not provide the details of the address of Swaminathan Rajendran who admittedly was the employee of Filatex.

I have seen that several attempts have been made by SEBI to deliver the SCN and the hearing notices on all the noticees. Although replies have been sent by Ms. Sangeeta

Sethia, Prabhat Sethia, Rajkumar Sethia, Prashant Sethia and Mahavir Golecha, none of the noticees turned up for the personal hearing. Nor did SEBI receive any intimation in this regard. I note that SEBI has issued a press notification on May 16, 2012, as a mode of substituted service on Swaminathan Rajendran with an advice that in the absence of any reply, the matter would be proceeded ex-parte. It has been observed that the stipulated period mentioned in the publication has expired and considering the fact that sufficient opportunities have already been provided to the noticees for explaining their case, I am compelled to proceed ex-parte.

7. The submission of Prabhat Sethia in brief are as under:

- The nine persons called for the personal hearing namely Prabhat Sethia, Naresh Chand Chandak, Mahavir Golecha, Ms. Shailaja Katar, Mr. Rajkumar Sethia, Shree Chand Sethia, Prashant Kumar Sethia, Ms. Ratna Devi Sethia, Ivy League Schools Limited were the original subscribers/ promoters/ PACs to the Memorandum of Association of Filatex. - None of these except Prabhat Sethia are members of the board of Filatex. Further, these promoters were not aware of the transactions of Ms. Sangeeta Sethia and Swaminathan Rajendran. - Public issue of Filatex was made in the year 1996, the shares were allotted in the physical forms and were traded in physical form in market. Later on, when SEBI came out with regulation for compulsory dematerialization of share, IFCI who had subscribed to 4,00,000 shares of Filatex during the public issue, approached them to sell their shares in the physical form. Likewise, other small investors also approached them to sell their shares in physical form. In order to facilitate them, they had bought the shares in physical form and converted them into demat form. Thereafter, they sold these shares immediately in the market. - They had no intention to increase their shareholding or voting power in the company. The transactions were done merely to facilitate the dematerialization of shares of Filatex. While doing so, they did not realize that they were required to make certain disclosures as per SEBI Regulation and it is out of ignorance they did not comply with the disclosure norms. - As on April 01, 2007, Ms. Sangeeta Sethia and Swaminathan Rajendran had held 3,91,673 shares i.e., 3.63% of the share capital and they were required to make public announcement for open offer only if their combined holding would have crossed 8.63% of the capital as Regulation 11(1) triggers only after acquisition of an additional 5% of shares or voting rights. - Due to these transactions there was no change of control and the same was done in the interest of the company and its shareholders.

8. I have carefully considered the SCN issued to the noticees, replies filed, submissions made therein and all the material available on record. Considering the above, the issue that arises for my consideration is: a. Whether the noticees were part of a single group and were acting in concert? b. Whether the acquirers have triggered Regulation 11(1) of the Takeover Regulations?

9. Whether noticees were part of a single group and were acting in concert? a. I note that Ms. Sangeeta Sethia, Swaminathan Rajendran and Prabhat Sethia are the only noticees whose role have been discussed in the SCN. Ms. Sangeeta Sethia (wife of Mr. Prabhat Sethia, promoter and Managing Director of Filatex) and Mr. Swaminathan Rajendran, an employee of Filatex acquired 3,00,000 shares each in physical form on August 31, 2007 from Risk Capital (presently known as IFCI) and dematerialized the shares on September 21, 2007. I note the submission made by Prabhat Sethia in his reply that the noticees namely Naresh Chand Chandak, Mahavir Golecha, Ms. Shailaja Katar, Rajkumar Sethia, Shree Chand Sethia, Prashant Kumar Sethia, Ms. Ratna Devi Sethia and Ivy League Schools Limited were the original subscribers/ promoters/ PACs to the Memorandum of Association of Filatex and were not involved in the management of the target company. Prabhat Sethia in his reply has also submitted that none of these were aware of the transactions of Ms. Sangeeta Sethia and Swaminathan Rajendran in the target company. The noticees namely

Prashant Sethia, Mahavir Golecha and Rajkumar Sethia in their submission to SEBI has also said that they were not involved in the management of the target company.

In view of the discussion above, I note that Naresh Chand Chandak, Mahavir Golecha, Ms. Shailaja Katar, Mr. Rajkumar Sethia, Shree Chand Sethia, Prashant Kumar Sethia, Ms. Ratna Devi Sethia and Ivy League Schools Limited cannot be said to be operating for a common objective and purpose of acquisition of shares of the target company.

b. Now, I will proceed with the connection between the noticees namely Prabhat Sethia, Ms. Sangeeta Sethia and Swaminathan Rajendran. I note that Ms. Sangeeta Sethia is the wife of Prabhat Sethia, the promoter and Managing Director of Filatex. Further, Swaminathan Rajendran, was employed as accountant in Filatex during the period of investigation and was having the same address as that of Filatex. I have seen the details of the demat account of Swaminathan Rajendran, maintained with PCS Securities Limited (bearing no. 1203070000109587). From the same, it is seen that the account was opened on September 12, 2007 and Ms. Sangeeta Sethia was his nominee. Further, the average annual income of Swaminathan Rajendran for last three years therefrom was shown as only 1,00,000. I have also seen the bank account details of Swaminathan Rajendran maintained with UCO Bank, bearing account no. 09790110003848 which was opened on September 07, 2007 and was introduced by Ms. Sangeeta Sethia. These facts makes it clear that Ms. Sangeeta Sethia and Swaminathan Rajendran were well connected to each other.

c. In this background, I note from the SCN that IFCI had subscribed to 4,00,000 equity shares of 10 each of Filatex in March, 1996. IFCI had not traded in the scrip of Filatex except selling of 11,000 shares in the year 2000. Meanwhile, the shares of Filatex were split to 5 each from 10 in 2006. Thereafter, IFCI has submitted that they followed-up with the promoters of Filatex to buy-back the shares and accordingly sold 6,00,000 shares to Prabhat Sethia.

d. I have seen the respective demat account details of Ms. Sangeeta Sethia and Swaminathan Rajendran and note that they had dematerialized 3,00,000 shares each on September 21, 2007. The details as received from the share transfer agent of Filatex namely Sharex Dynamic (India) Pvt. Limited shows that these shares were acquired in physical form from IFCI, on August 31, 2007. As noted above, the bank account of Swaminathan Rajendran was opened on September 07, 2007 i.e., after the date of acquisition of shares. Further, the bank account of Ms. Sangeeta Sethia maintained with HDFC Bank bearing no. 05211000057277 does not reflect any entry with respect to the payment made to IFCI towards acquisition of the shares. It has been observed that the consideration for these shares was paid by Prabhat Sethia to IFCI and later on the shares were transferred/ dematted in the account of Swaminathan Rajendran and Ms. Sangeeta Sethia.

e. I note that during the period of investigation, Swaminathan Rajendran had transferred 36,50,000 to Filatex, being the sale proceeds of selling the shares of Filatex in the market. When Prabhat Sethia was confronted with the fact of transfer of these 36,50,000 from the account of Swaminathan Rajendran to Filatex during October 8- 10, 2007, Prabhat Sethia mentioned that the amount was taken as a loan by Filatex from Swaminathan Rajendran. However, I note that Prabhat Sethia has neither produced any documentary evidence for the same nor shown that there has been a repayment of the stated loan. Further, it is interesting to note that Swaminathan Rajendran was an employee of Filatex who had joined the company in the year 2004- 2005 as a manager and used to get a salary of 15,000 per month only and the explanation regarding his loan to Filatex appears to be an afterthought of Prabhat Sethia. I have seen the analysis of bank account of Ms. Sangeeta Sethia as provided in the SCN and note that the proceeds of sales of shares of Filatex were transferred to Prabhat Sethia and/ or the company on many occasions as detailed hereunder: Date From To Cheque Amount ( ) No. 1/Aug/2007 PCS Securities Ltd. (broker) Sangeeta Sethia 0016570 2,13,331.43 7/Aug-2007 PCS Securities Ltd. (broker) Sangeeta Sethia 0008206 10,38,118.38 10/Aug/2007 Sangeeta Sethia Prabhat Sethia 0263390 2,50,000.00 11/Aug/2007 Sangeeta Sethia Prabhat Sethia 0263391 2,00,000.00 14/Aug/2007 Sangeeta Sethia Prabhat Sethia 0263392 6,00,000.00

6/Sept/2007 PCS Securities Ltd. (broker) Sangeeta Sethia 0571552 2,38,800.61 14/Sept/2007 PCS Securities Ltd. (broker) Sangeeta Sethia 0008568 18,80,021.17 24/Sept/2007 Sangeeta Sethia Prabhat Sethia 0263397 42,50,000.00 25/Sept/2007 PCS Securities Ltd. (broker) Sangeeta Sethia 0017789 5,56,504.33 27/Sept/2007 Sangeeta Sethia Prabhat Sethia 0263399 4,00,000.00 27/Sept/2007 Sangeeta Sethia Prabhat Sethia 0263398 5,50,000.00 28/Sept/2007 PCS Securities Ltd. (broker) Sangeeta Sethia 0008752 10,48,097.43 28/Sept/2007 PCS Securities Ltd. (broker) Sangeeta Sethia 0008748 10,34,865.96 28/Sept/2007 PCS Securities Ltd. (broker) Sangeeta Sethia 0008728 13,49,836.40 28/Sept/2007 Sangeeta Sethia Prabhat Sethia 0408976 34,50,000.00 28/Sept/2007 Sangeeta Sethia Prabhat Sethia 0263400 5,00,000.00 22/Nov/2007 Sangeeta Sethia Prabhat Sethia 0408978 10,00,000.00 24/Dec/2007 Sangeeta Sethia Filatex Fashions Ltd. 0408986 3,00,000.00 f. From the above discussed details like date of bank/ demat account opening by Swaminathan Rajendran, introducer/ nominee of bank/ demat account of Swaminathan Rajendran, fund transferred to the company/ Prabhat Sethia and order-placement by Prabhat Sethia, it is clear that Ms. Sangeeta Sethia and Swaminathan Rajendran were only acting as front entities to Prabhat Sethia. I note that the consideration in respect of the shares purchased from IFCI was paid by Prabhat Sethia and the shares were transferred/ dematted in the accounts of Ms. Sangeeta Sethia and Swaminathan Rajendran. In view of this, it can be concluded that the noticees namely Prabhat Sethia, Ms. Sangeeta Sethia and Swaminathan Rajendran were operating for a common objective and purpose of acquisition of shares of the target company and can be referred to as ‘persons acting in concert’ (hereinafter referred to as ‘PAC’) in terms of the Takeover Regulations.

10. Whether the acquirers have triggered Regulation 11(1) of the Takeover Regulations? a. I note that during the period of investigation, Ms. Sangeeta Sethia, wife of Prabhat Sethia, the promoter and Managing Director of Filatex sold 7,68,000 shares in the market, accounting for 7.11% of the paid up capital of Filatex. Similarly, Swaminathan Rajendran, who was employed as accountant in Filatex during the period of investigation and was having the same address as that of Filatex sold 4,99,400 shares constituting 4.62% of the share capital of the company. The summary of trading and holdings of Ms. Sangeeta Sethia and Swaminathan Rajendran as provided by the share transfer agent of Filatex, viz., Sharex Dynamic (India) Pvt. Limited has been brought out below for reference: Date Trading of Sangeeta Sethia Trading of Swaminathan Grand % to (A) Buy Sell Balance Buy Sell Balance Total Capital (B) (C) Qty. (D) (E) (F) Qty. (G) (D + G) 01/04/07 0 0 5,273 0 0 386600 3,91,873 3.63 30/04/07 0 0 5,273 0 3,86,600 0 5,273 0.05 04/05/07 50,000 0 55,273 0 0 0 55,273 0.51 11/05/07 0 56,000 -727* 0 0 0 -727* -0.01 15/05/07 60,000 0 59,273 0 0 0 59,273 0.55 23/05/07 54,440 0 1,13,713 0 0 0 1,13,713 1.05 31/07/07 0 35,000 78,713 0 0 0 78,713 0.73 01/08/07 0 44,000 34,713 0 0 0 34,713 0.32 03/08/071,52,880 10,000 1,77,593 0 0 0 1,77,593 1.64 09/08/07 0 8,000 1,69,593 0 0 0 1,69,593 1.57 10/08/07 0 30,000 1,39,593 0 0 0 1,39,593 1.29 31/08/073,00,000 0 4,39,593 3,00,000 0 3,00,000 7,39,593 6.85 10/09/07 0 85,000 3,54,593 0 0 3,00,000 6,54,593 6.06 11/09/07 0 50,000 3,04,593 0 0 3,00,000 6,04,593 5.60 12/09/072,00,000 0 5,04,593 0 0 3,00,000 8,04,593 7.45 13/09/07 0 1,50,000 3,54,593 0 0 3,00,000 6,54,593 6.06 14/09/07 0 0 3,54,593 1,99,400 0 4,99,400 8,53,993 7.91 17/09/07 0 0 3,54,593 0 1,99,400 3,00,000 6,54,593 6.06 20/09/07 0 40,000 3,14,593 0 0 3,00,000 6,14,593 5.69 24/09/07 0 1,00,000 2,14,593 0 0 3,00,000 5,14,593 4.76 25/09/07 0 80,000 1,34,593 0 0 3,00,000 4,34,593 4.02 26/09/07 0 80,000 54,593 0 23,500 2,76,500 3,31,093 3.07 27/09/07 0 0 54,593 0 50,000 2,26,500 2,81,093 2.60 28/09/07 0 0 54,593 0 80,000 1,46,500 2,01,093 1.86 03/10/07 0 0 54,593 0 1,46,500 0 54,593 0.51 *Ms. Sangeeta Sethia sold 56,000 shares on May 11, 2007 though she was holding 55,273 shares only. Pay-in for balance 727 shares were adjusted from her next buying i.e. May 15, 2007.

From the above table, it has been observed that as on August 10, 2007, Ms. Sangeeta Sethia and Swaminathan Rajendran together held 1,39,593 shares i.e. a holding of 1.29% of total capital of Filatex. Further, both Ms. Sangeeta Sethia and Swaminathan Rajendran acquired 3,00,000 shares each on August 31, 2007 which increased their consolidated holding to 6.85% of the total paid up capital of Filatex. However none of these names were reflected in the list of persons holding more than 1% of the share capital of the company as seen from the BSE website.

b. It is seen that Prabhat Sethia in his reply has relied upon certain details of trading of Ms. Sangeeta Sethia and Swaminathan Rajendran which is different from the table reproduced in the SCN. I have seen the differences pointed out between the two tables by Prabhat Sethia and note that the table as produced by Prabhat Sethia does not contain the complete details of holdings of Ms. Sangeeta Sethia. The details as provided by the share transfer agent of Filatex show that Ms. Sangeeta Sethia was having two client IDs i.e. 00036236 and 5183972 and the quantities therein tally with those contained in the table in the SCN. In view of this, the submissions of Prabhat Sethia do not merit consideration.

c. From the above discussion, I note that the noticees namely Ms. Sangeeta Sethia and Swaminathan Rajendran were continuously acquiring the shares of Filatex for which the consideration money/ sale proceeds were coming from Prabhat Sethia and due to this, the holding of the promoters of Filatex increased from 28.88% as on quarter ended June 30, 2007 to 35.73% (increased by 5.80% in a financial year) as on August 31, 2007. I note that the acquisition of shares (more than 5% of the share capital) by the PACs i.e., Ms. Sangeeta Sethia and Swaminathan Rajendran along with Prabhat Sethia without making any public announcement is in violation of Regulation 11(1) of the Takeover Regulations and they have failed to make an open offer as mandated under Regulation 11 of the Takeover Regulations.

11. I note that the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 have been repealed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 with effect from October 22, 2011. Regulation 35(2)(b) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 provides that the previous operation of the repealed regulations or any obligation or liability acquired shall remain unaffected as if the repealed regulations has never been repealed.

12. Therefore, in exercise of the powers conferred upon me under Section 11, 11B and 11(4) of the SEBI Act and Regulation 11 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 read with Regulation 35(2)(b) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, I hereby direct Ms. Sangeeta Sethia, Mr. Swaminathan Rajendran and Mr. Prabhat Sethia to make public announcement to the shareholders of the target company, within 90 days of the date of this order, in terms of Takeover Regulations.

13. I note that in terms of Takeover Regulations the payment of consideration to the shareholders of target company is required to be completed within 90 days from the date of public announcement. In the present case, if the acquirers would have come out with the public offer on the date when they crossed the threshold limit prescribed under Regulation 11 of Takeover Regulations then the shareholders of the target company would have got the exit opportunity, if they wished so, much before.

14. Since no public announcement for acquisition of shares of the target company has been made, which has adversely affected the interest of the shareholders of the target company, it would be just and equitable to direct the acquirers to pay interest at the rate of 12% per annum on the offer price. The acquirers are hereby accordingly directed to pay the interest of 12% per annum to the shareholders or the loss of interest caused to the shareholders for the period of delay.

15. This order shall come into effect immediately.

DATE : 4/APRIL/2013 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA