Order in the matter of Kolkata Weir Industries Limited

WTM/SR/ERO /18/08/2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: S. RAMAN, WHOLE TIME MEMBER ORDER Under Sections 11, 11A, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992, against Kolkata Weir Industries Limited and its Directors/Promoters, viz. Shri Sahajahan Khan, Shri Samsul Alam Khan, Shri Ram Krishna Mondal, Shri Prabir Haldar, Shri Ratan Kumar, Shri Ajay Kumar Srivastab, Shri Selim Laskar, Shri Lukaman Ansari, Shri Chandan Chowdhury, Shri Sahajamal Khan and Shri Lakshmi Kanta Gayen.

1. The Securities and Exchange Board of India (hereinafter referred to as “SEBI”) had received a complaint dated June 2, 2010, alleging illegal mobilization of funds by Kolkata Weir Industries Ltd. (hereinafter referred to as “KWIL”).

2. On a preliminary examination, SEBI observed that the matter was related to private placement of securities by KWIL, an unlisted company. Subsequently, vide letters dated September 24, 2010 and February 21, 2011, SEBI sought information from the Office of the Registrar of Companies, West Bengal (hereinafter referred to as “ROC”), on whether the preference shares issued by KWIL were in the nature of redeemable preference shares or convertible preference shares and also requested the ROC to provide relevant documents available with it, in respect of the aforesaid matter.

3. Vide letter dated July 27, 2011, the ROC replied to SEBI inter alia stating the following – "It appeared from (KWIL's) records available with this office that there were prima facie factual supports to huge amount of inflow of funds in (KWIL) and (KWIL) issued redeemable preference shares several times during the year 2009-10 and 2010-11 to large number of people. In this regard, in terms of the provisions of section 234 of the Companies Act, 1956, (KWIL) was asked by this office to furnish detailed information and explanation regarding huge amount of inflow of funds and preference shares issued by it and (KWIL) furnished relevant information by letter dated

11/03/2011. Examining (KWIL's) reply and verification of (KWIL's) records available in MCA portal the following observations are made: (KWIL) has issued redeemable preference shares several times since incorporation to large number of people, the details of which are as follows: i. On 19/10/2009, the company issued 19,00,000 nos. 12.50% Redeemable preference shares of face of 10 each to 3475 persons. ii. On 1/06/2010, the company again issued 7,00,000 nos. Redeemable preference shares of face value of 100 each to 15759 persons. iii. On 10/01/2011, the company again issued 10,00,000 nos. Redeemable preference shares of face value of 100 each to 25582 persons. iv. On 30/03/2011, the company again issued 10,00,000 nos. Redeemable preference shares of face value of 100 each to 24297 persons. …"

4. SEBI also received complaints dated March 3, 2012 and December 17, 2012, alleging illegal mobilization of funds by KWIL and the original Brochure alongwith Application Form as received by the complainants from KWIL were enclosed therein.

5. SEBI, vide letter dated May 22, 2012, sought the following information from KWIL in relation to the alleged mobilization of funds from the public through issue of preference shares, viz. – i. Certified copy of the Memorandum and Articles of Association of the company; ii. Audited Balance Sheet and Profit & Loss Account of the company for the last 3 years; iii. Name, addresses and occupation of all the promoters/directors of the company; iv. Statement of mobilization of funds through issue of preference shares duly certified by the Statutory Auditors of the company; v. Names and details of the Key Managerial Personnel of the company; vi. Other information in respect of each and every series of preference shares issued by the company, viz. – a. Details regarding filing of Prospectus/Red Herring Prospectus with ROC.

b. Date of opening and closing of the subscription list. c. List of agents with addresses who have been appointed by the company. d. Details regarding the number of application forms circulated inviting subscription. e. Details regarding the number of applications received. f. Details regarding the number of allottees. g. List of such allottee alongwith address and contact number. h. Number of preference shares allotted and value of such allotment against each allottee's name. i. Details regarding subscription amount raised. j. Date of allotment of the preference shares. k. Copies of the minutes of Board/Committee meeting in which the resolution has been passed for issue and allotment of preference shares. l. Date of dispatch of preference shares certificates, etc. m. Copies of application forms, RHP, pamphlets, advertisements and other promotional material circulated for issuance of preference shares. n. Terms and conditions of the issue of preference shares.

6. KWIL, vide letter dated June 4, 2012, sought extension of time by 15 days to submit its reply to the abovementioned SEBI letter dated May 22, 2012. In response to the aforesaid request, SEBI vide letter dated June 7, 2012, advised KWIL to submit the information by June 18, 2012. However, vide reply dated June 18, 2012, KWIL submitted only the following information to SEBI, viz.

i. Certified copy of the Memorandum and Articles of Association of the company; ii. Audited Balance Sheet and Profit & Loss Account of the company for the financial years 2009–10 and 2010–11; iii. Name, addresses and occupation of all the promoters/directors of the company; iv. Names and addresses of the Key Managerial Personnel of the company.

7. As KWIL had not cooperated with SEBI by providing complete information in its reply dated June 18, 2012 or subsequently thereafter, SEBI proceeded to obtain relevant information about KWIL from the filings made by it with the ROC, as available on the 'MCA 21 Portal' (maintained by the Ministry of Corporate Affairs).

8.1 The material available on record i.e. correspondences exchanged between SEBI and KWIL alongwith the documents contained therein; complaints dated March 3, 2012 and December 17, 2012 alongwith the original Brochure and Application Form enclosed therein; information obtained from the 'MCA 21 Portal', have been perused. On an examination of the same, it is prima facie observed that – i. KWIL invited subscription from the public for "Private Placement of Redeemable Preference Shares" (hereinafter referred to as "Offer of redeemable preference shares") of 10 each or 100 each, in accordance with the following plans, viz. -

Plan A B C D E Issue Price Minimum 10 Redeemable Preference Shares 1000 1000 1000 1000 1000 Redemption Period 3 Yrs 4.6 Yrs 8 Yrs 10 Yrs 12.6 Yrs Redemption Premium 700 1000 3000 5000 9000 Redemption Amount 1700 2000 4000 6000 10000

Plan A B C D E Issue Price Minimum 100 Redeemable Preference Shares 1000 1000 1000 1000 1000 Redemption Period 3 Yrs 4.6 Yrs 8 Yrs 10 Yrs 12.6 Yrs Redemption Premium 700 1000 3000 5000 9000 Redemption Amount 1700 2000 4000 6000 10000 ii. The "Offer of redeemable preference shares" is made on a private placement basis and cannot be accepted by any person other than to whom it is offered. Further, such Offer cannot be transferred or renounced in anyone's favour.

iii. The application under the "Offer of redeemable preference shares" can be made for a minimum amount of 1000 and in multiples of 1000 thereafter. The principal and redemption premium shall be paid on maturity on surrender of the preference shares Certificate. The duly discharged shares Certificate may be surrendered to KWIL in advance i.e. 6 months before the due date, to enable KWIL to issue repayment Warrant/DD in time.

iv. The size of the Issue is 3 Crores, with an option to retain over subscription, to be decided by the Board of Directors of KWIL. Further, KWIL retains the right to increase or decrease the size of the Issue. The allotment of the redeemable preference shares will be made within 60 days from the date of receipt of application.

v. KWIL issued redeemable preference shares on several occasions since incorporation, to a large number of investors, the details of which are as follows –

No. of subscribers Sr. No. Year Date of Issue Type of Security Total Amount ( ) to the Issue 1. 2009 – 10 19.10.2009 19,00,000 Redeemable Preference 3475 1.9 Crores

Shares of 10 each 2. 2010 – 11 01.06.2010 7,00,000 nos. 12.5% Cumulative 15759 7 Crores Redeemable Preference Shares of face value of 100 each 10.01.2011 10,00,000 nos. Redeemable Preference 25582 10 Crores

Shares of face value of 100 each 30.03.2011 10,00,000 nos. Redeemable Preference 24297

Shares of face value of 100 each 10 Crores

3. 2011 – 12 10.04.2011 10,00,000 nos. Redeemable Preference 18846 10 Crores

Shares of face value of 100 each 10.06.2011 9,00,000 nos. Redeemable Preference 17850 9 Crores

Shares of face value of 100 each

Total 105809 47.90 Crores vi. From the balance sheet of KWIL as on March 31, 2012, it is observed that KWIL had mobilized 47.90 Crores through the "Offer of redeemable preference shares" and 0.05 Crores through the issue of equity shares.

vii. From the audited accounts of KWIL, it is observed that KWIL collected share application money to the tune of 6.3 Crores in 2009-10, which increased to 10.25

Crores in 2010-11 and further increased to 40.03 Crores in 2011-12. Further, KWIL raised additional capital of 3.95 Crores and 29.78 Crores in the financial year 2010- 11 and 2011-12, respectively. It is noted that the aforesaid monetary amount collected was lying under the head "Share Application Money pending allotment" without actual allotment.

8.2 In the context of the abovementioned details of the "Offer of redeemable preference shares", the issue for determination in the instant matter is whether the mobilization of funds by KWIL through the aforesaid Offer, is in accordance with the provisions of the SEBI Act, 1992 (hereinafter referred to as "SEBI Act") read with the Companies Act, 1956 (hereinafter referred to as "Companies Act").

8.3 I note that – i. The jurisdiction of SEBI over various provisions of the Companies Act in the case of public companies, whether listed or unlisted, when they issue and transfer securities, flows from the provisions of Section 55A of the Companies Act. While examining the scope of Section 55A of the Companies Act, the Hon'ble Supreme Court of India in Sahara India Real Estate Corporation Limited & Ors. vs. SEBI (Civil Appeal no. 9813 of 2011) (Judgment dated August 31, 2012) (hereinafter referred to as the "Sahara Case"), had observed that:

"We, therefore, hold that, so far as the provisions enumerated in the opening portion of Section 55A of the Companies Act, so far as they relate to issue and transfer of securities and non-payment of dividend is concerned, SEBI has the power to administer in the case of listed public companies and in the case of those public companies which intend to get their securities listed on a recognized stock exchange in India."

8.4 In this regard, i. Reference is also made to Sections 67(1) and 67(3) of the Companies Act, which are reproduced as under:

"67. (1) Any reference in this Act or in the articles of a company to offering shares or debentures to the public shall, subject to any provision to the contrary contained in this Act and subject also to the provisions of sub-sections (3) and (4), be construed as including a reference to offering them to any section of the public, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner. (2) ... (3) No offer or invitation shall be treated as made to the public by virtue of sub-section (1) or sub-section (2), as the case may be, if the offer or invitation can properly be regarded, in all the circumstances- (a) as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation; or (b) otherwise as being a domestic concern of the persons making and receiving the offer or invitation … Provided that nothing contained in this sub-section shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more: Provided further that nothing contained in the first proviso shall apply to non-banking financial companies or public financial institutions specified in section 4A of the Companies Act, 1956 (1 of 1956).”

ii. While examining the scope of Section 67 of the Companies Act, the Hon'ble Supreme Court of India in the Sahara Case observed that:

"Section 67(1) deals with the offer of shares and debentures to the public and Section 67(2) deals with invitation to the public to subscribe for shares and debentures and how those expressions are to be understood, when reference is made to the Act or in the articles of a company. The emphasis in Section 67(1) and (2) is on the “section of the public”. Section 67(3) states that no offer or invitation shall be treated as made to the public, by virtue of subsections (1) and (2), that is to any section of the public, if the offer or invitation is not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation or otherwise as being a domestic concern of the persons making and receiving the offer or invitations. Section 67(3) is, therefore, an exception to Sections 67(1) and (2). If the circumstances mentioned in clauses (1) and (b) of Section 67(3) are satisfied, then the offer/invitation would not be treated as being made to the public. The first proviso to Section 67(3) was inserted by the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000, which clearly indicates, nothing contained in Sub-section (3) of Section 67 shall apply in a case where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more. … Resultantly, if an offer of securities is made to fifty or more persons, it would be deemed to be a public issue, even if it is of domestic concern or proved that the shares or debentures are not available for subscription or purchase by persons other than those received the offer or invitation. … I may, therefore, indicate, subject to what has been stated above, in India that any share or debenture issue beyond forty nine persons, would be a public issue attracting all the relevant provisions of the SEBI Act, regulations framed thereunder, the Companies Act, pertaining to the public issue. …"

iii. In the facts of the instant case, it is observed that although the "Offer of redeemable preference shares" is stated to have been made on a private placement basis, yet, through the same offer, KWIL approached 1,05,809 investors and mobilized funds amounting to 47.90 Crores. The aforesaid facts clearly indicate that the number of persons to whom the "Offer of redeemable preference shares" was made by KWIL was fifty persons or more and therefore, such offer would prima facie qualify as a public issue under the first proviso to Section 67(3) of the Companies Act, which has been elucidated by the Hon'ble Supreme Court of India in the Sahara Case. In this regard, it is pertinent to note that by virtue of Section 55A of the Companies Act, Section 67 of that Act, so far as it relates to issue and transfer of securities, shall also be administered by SEBI in the case of companies who intend to get their securities listed.

8.5 I note that – i. From the abovementioned, it will follow that since the "Offer of redeemable preference shares" is a public issue of securities, such securities shall also be listed on a recognized stock exchange, as mandated under Section 73 of the Companies Act. In this regard, reference is made to Sections 73 of the Companies Act of which sub-Sections (1), (2) and (3) are relevant for the instant case, which is reproduced as under:

"73. (1) Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchanges for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange. (1A) … (2) Where the permission has not been applied under subsection (1) or such permission having been applied for, has not been granted as aforesaid, the company shall forthwith repay without interest all moneys received from applicants in pursuance of the prospectus, and, if any such money is not repaid within eight days after the company becomes liable to repay it, the company and every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per cent, as may be prescribed, having regard to the length of the period of delay in making the repayment of such money. (3) All moneys received as aforesaid shall be kept in a separate bank account maintained with a Scheduled Bank 1 [until the permission has been granted, or where an appeal has been preferred against the refusal to grant such. permission, until the disposal of the appeal, and the money standing in such separate account shall, where the permission has not been applied for as aforesaid or has not been granted, be repaid within the time and in the manner specified in sub-section (2)]; and if default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees.”

ii. In the Sahara Case, the Hon'ble Supreme Court of India also examined Section 73 of the Companies Act, wherein it observed that – "Section 73(1) of the Act casts an obligation on every company intending to offer shares or debentures to the public to apply on a stock exchange for listing of its securities. Such companies have no option or choice but to list their securities on a recognized stock exchange, once they invite subscription from over forty nine investors from the public. If an unlisted company expresses its intention, by conduct or otherwise, to offer its securities to the public by the issue of a prospectus, the legal obligation to make an application on a recognized stock exchange for listing starts. Sub-section (1A) of Section 73 gives indication of what are the particulars to be stated in such a prospectus. The consequences of not applying for the permission under sub-section (1) of Section 73 or not granting of permission is clearly stipulated in sub-section (3) of Section 73. Obligation to refund the amount collected from the public with interest is also mandatory as per Section 73(2) of the Act. Listing is, therefore, a legal responsibility of the company which offers securities to the public, provided offers are made to more than 50 persons."

iii. In the facts of the instant case, since the "Offer of redeemable preference shares" was made to fifty persons or more by KWIL, the same will attract the requirement of compulsory listing before a recognized stock exchange in terms of Section 73(1) of the Companies Act. It therefore prima facie appears that KWIL has violated the provisions of Section 73(1) of the Companies Act since it has failed to ensure listing with a recognised stock exchange of the securities issued under the "Offer of redeemable preference shares".

iv. From the audited accounts of KWIL, it is observed that KWIL collected share application money to the tune of 6.3 Crores in 2009-10, which increased to 10.25

Crores in 2010-11 and further increased to 40.03 Crores in 2011-12. Further, KWIL raised additional capital of 3.95 Crores and 29.78 Crores in the financial year 2010- 11 and 2011-12, respectively. It is noted that the aforesaid monetary amount collected was lying under the head "Share Application Money pending allotment" without actual allotment. As per Section 73(2) of the Companies Act, the obligation to refund the amount with interest that was collected from investors under the "Offer of redeemable preference shares" is mandatory on KWIL. In this regard, there is no evidence on record to indicate whether or not KWIL has paid interest to the investors where shares are not allotted within 8 days under the "Offer of redeemable preference shares", as per the aforesaid Section. In view of the same, I find that KWIL has prima facie not complied with the provisions of Section 73(2) of Companies Act.

v. Section 73(3) of Companies Act says that all moneys received shall be kept in a separate bank account maintained with a Scheduled Bank and if default is made in complying with this sub-Section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees. In the instant case, there is no evidence on record to indicate whether or not funds received from the investors under the "Offer of redeemable preference shares" has been kept in separate bank account by KWIL. In view of the same, I find that KWIL has prima facie not complied with the provisions of Section 73(3) of Companies Act.

8.6 Under Section 2(36) read with Section 60 of the Companies Act, a company needs to register its prospectus with the ROC, before making a public offer or issuing the prospectus. As per the aforesaid Section 2(36), “prospectus” means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate. As mentioned above, since the "Offer of redeemable preference shares" was made to fifty persons or more, it has to be construed as a public offer. Having made a public offer, KWIL was required to register a prospectus with the ROC under Section 60 of the Companies Act. In this regard, there is no evidence on record to indicate whether or not KWIL has done so for the "Offer of redeemable preference shares". In view of the same, I find that KWIL has prima facie not complied with the provisions of Section 60 of Companies Act.

8.7 Under Section 56(1) of the Companies Act, every prospectus issued by or on behalf of a company, shall state the matters specified in Part I and set out the reports specified in Part II of Schedule II of that Act. Further, as per Section 56(3) of the Companies Act, no one shall issue any form of application for shares in or debentures of a company, unless the form is accompanied by abridged prospectus, contain disclosures as specified. Based on the material available on record, it is observed that KWIL has not complied with the provisions of Section 56(1) and 56(3) of the Companies Act and therefore, has prima facie violated the aforesaid provisions.

8.8 Upon a consideration of the aforementioned paragraphs, I am of the view that KWIL is prima facie engaged in fund mobilising activity from the public, through the "Offer of redeemable preference shares", which is a public issue made to fifty persons or more under the provisions of the Companies Act.

9. SEBI's powers under Sections 11, 11A, 11B and 11(4) of the SEBI Act, as interpreted by judicial authority, are not fettered by any other law including the Companies Act and in view of provisions of Section 55A of the Companies Act, administrative authority on the subjects relating to public issue of securities is exclusively with SEBI. For this purpose, SEBI can exercise its jurisdiction under Sections 11(1), 11A, 11B and 11(4) of the SEBI Act read with Section 55A of the Companies Act, over companies who issue redeemable preference shares to fifty persons or more, but do not comply with the applicable provisions of the Companies Act including Sections 56, 60, 73, etc. therein.

10. I note that KWIL was advised to provide information (sought vide SEBI letter dated May 22, 2012) towards the preliminary examination conducted by SEBI in respect of the "Offer of redeemable preference shares". I note that vide letter dated June 18, 2012, KWIL only submitted the following documents, viz. Certified copy of Memorandum and Articles of Association, Audited Balance Sheet and Profit & Loss Account for the financial years 2009–10 and 2010–11 and Names/Addresses of Directors & Key Managerial Personnel. However, I note that KWIL failed to provide other relevant information in respect of the "Offer of redeemable preference shares" such as details regarding filing of Prospectus/Red Herring Prospectus with ROC, Date of opening & closing of subscription list, No. of allottees and amount collected, etc. I note that even after having prima facie mobilized funds from investors, KWIL did not provide such fundamental details pertaining to the "Offer of redeemable preference shares" to SEBI. I find it highly improbable that KWIL did not have such details to furnish to SEBI especially since the "Offer of redeemable preference shares" was claimed to have been made on a private placement basis to a limited no. of investors. I also find a total absence of information regarding the "Offer of redeemable preference shares" in the public domain which, when coupled with KWIL's reluctance to furnish complete information, clearly indicates a lack of transparency on its part. In these circumstances, I find it is essential to determine how KWIL mobilized funds running into several tens of Crores of rupees without conforming to statutory norms governing public issues. I find that reasonable opportunity has been afforded to KWIL to respond to SEBI and its refusal do so, when considered in light of the abovementioned prima facie finding at paragraphs 8.1–8.8, leads me to believe that such refusal to submit the information sought was only to conceal the true nature and operation of the fund mobilising activity by way of the "Offer of redeemable preference shares".

11. Protecting the interests of investors is the foremost mandate for SEBI and therefore, steps have to be taken in the instant matter to ensure only legitimate fund raising activities are carried on by KWIL and no investors are defrauded. In light of the same, I find there is no other alternative but to take recourse through an interim action against KWIL for preventing it from further carrying on with its fund mobilising activity under the "Offer of redeemable preference shares".

12. In view of the foregoing, I, in exercise of the powers conferred upon me under Sections 11, 11A, 11B and 11(4) of the SEBI Act, hereby direct KWIL and its Directors/Promoters, viz. Shri Sahajahan Khan, Shri Samsul Alam Khan, Shri Ram Krishna Mondal, Shri Prabir Haldar, Shri Ratan Kumar, Shri Ajay Kumar Srivastab, Shri Selim Laskar, Shri Lukaman Ansari, Shri Chandan Chowdhury, Shri Sahajamal Khan and Shri Lakshmi Kanta Gayen - a. not to collect any more money from investors through issuance of securities in any manner whatsoever; b. not to dispose of any of the properties or alienate any of the assets owned/acquired by KWIL without prior permission from SEBI; c. not to divert any funds raised from public at large which are kept in bank account(s) and/or in the custody of KWIL.

13. The above directions shall take effect immediately and shall be in force until further orders.

14. This Order shall also be treated as a show cause notice to KWIL and its Directors/Promoters, viz. Shri Sahajahan Khan, Shri Samsul Alam Khan, Shri Ram Krishna Mondal, Shri Prabir Haldar, Shri Ratan Kumar, Shri Ajay Kumar Srivastab, Shri Selim Laskar, Shri Lukaman Ansari, Shri Chandan Chowdhury, Shri Sahajamal Khan and Shri Lakshmi Kanta Gayen, who may show cause as to why appropriate directions under the SEBI Act should not be taken against them for non-compliance with the provisions of the Companies Act including Sections 56, 60, 73, etc. therein.

15. KWIL and its abovementioned Directors/Promoters shall, within 15 days from the date of receipt of this Order, file their reply, if any, to this Order. KWIL and its abovementioned

Directors/Promoters may also indicate, in such reply, whether they wish to avail an opportunity of personal hearing in the matter.

16. This Order is without prejudice to the right of SEBI to take any other action that may be initiated against KWIL and its abovementioned Directors/Promoters, in accordance with law.

Place: Mumbai S. RAMAN Date: August 14, 2013 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA