Order in the matter of Orissa Sponge Iron & Steel Ltd

WTM/MPB/ISD/95 /2017

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: MADHABI PURI BUCH, WHOLE TIME MEMBER ORDER Under Sections 11, 11(4), 11A and 11B of the Securities and Exchange Board of India Act, 1992 in the matter of M/s Orissa Sponge Iron & Steel Limited (PAN: AAACO2568G) Background of case: 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 has annexed a list of 331 shell companies for initiating necessary action as per SEBI laws and regulations. MCA has also annexed the letter of Serious Fraud Investigation Office (hereinafter referred to as “SFIO”) dated May 23, 2017 which contained the data base of shell companies along with their inputs.

2. SEBI as a market regulator is vested with the duty under section 11(1) of the SEBI Act, 1992 (hereinafter referred to as “SEBI Act”) of protecting the interests of the investors in securities and to promote the development of and regulations of securities markets by appropriate measures as deemed fit. 3. SEBI was of the view that companies whose names are included as shell companies by SFIO and MCA, were potentially involved in (a) Misrepresentation including of its financials and its business and possible violation of SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 (hereinafter referred to as “LODR Regulations”) and/or Order in the matter of Orissa Sponge Iron & Steel Limited (b) Misusing the books of accounts/funds of the company including facilitation of accommodation entries to the detriment of minority shareholders and therefore reneging on the fiduciary responsibility cast on the board, controlling shareholders and key management person (KMP)

4. SEBI was also of the view that investors should be alerted on the possible enforcement action 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, 1992, in respect of listed shell companies including M/s Orissa Sponge Iron & Steel Limited (hereinafter referred to as “OSISL” / “Company”), vide its letter dated August 7, 2017, based on the view stated at para 3 and 4 above. SEBI placed trading restrictions, on the promoters/directors so that they do not exit the company at the cost of innocent shareholders. In view of the said objective, SEBI vide the said letter dated August 7, 2017 also placed the scrip in the trade to trade category with limitation on the frequency of trade and imposed a limitation on the buyer by way of 200% deposit on the trade value, so as to alert them trading in the scrip. The said measures were initiated by SEBI pending final determination after verification of credentials and fundamentals by the 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 measure, trading in scrip was not suspended but allowed under strict monitoring so that investors could take informed investment decisions, till SEBI and Exchanges completed their detailed examination of such companies.

6. Pursuant to the same, Bombay Stock Exchange Limited (hereinafter referred to as “BSE”) vide notice dated August 7, 2017, National Stock Exchange of India Limited (hereinafter referred to as “NSE”) vide notice dated August 7, 2017 and Metropolitan Stock Exchange of India Limited (hereinafter referred to as “MSE”) vide notice dated August 07, 2017, to all its market participants, initiated actions envisaged in the SEBI letter dated August 7, 2017 in Order in the matter of Orissa Sponge Iron & Steel Limited respect of all the listed securities as identified by MCA and communicated by SEBI, with effect from August 8, 2017.

7. On August 09, 2017, SEBI further advised the Exchanges to submit a report after seeking auditor's certificate, from all such listed companies, providing the status of certain aspects of the company like company's compliance requirement with Companies Act, whether company is a going concern and its business model, status of compliance with listing requirements, etc.

8. In the meantime, aggrieved by the aforesaid letters dated August 7, 2017 issued by SEBI and BSE, OSISL filed an appeal No. 255 of 2017 before the Hon’ble Securities Appellate Tribunal (hereinafter referred to as “SAT”). The Hon’ble SAT vide order dated October 12, 2017 directed the following:- “………. 2. Counsel for appellant states that BSE has sought additional documents from the appellant and the appellant would furnish the same to BSE within a period of two weeks from today. 3. Counsel for SEBI states that on the appellant furnishing requisite documents to BSE, SEBI would collect the same from BSE and pass an order in the case of appellant after giving an opportunity of personal hearing within a period of six weeks from today. ……….”

9. Pursuant to the direction of Hon’ble SAT, SEBI vide email dated October 26, 2017 had requested BSE to furnish information/documents provided to them by OSISL to SEBI. BSE vide emails dated October 26, 2017 and November 15, 2017 submitted the OSISL letters dated October 24, 2017 and August 21, 2017 respectively to SEBI. OSISL vide its letter dated August 21, 2017 submitted the Auditors Certificate to BSE and vide letter dated October 24, 2017 submitted the reply to the queries raised by BSE. After consideration of OSISL letters

Order in the matter of Orissa Sponge Iron & Steel Limited dated August 21, 2017 and October 24, 2017, BSE had submitted its report dated November 20, 2017 to SEBI. The gist of BSE report is mentioned at paragraph 16 of this order.

10. The Hon’ble SAT in the matter of J. Kumar Infra Projects Limited vs. SEBI dated August 10, 2017 held that the measures taken by SEBI vide its letter dated August 07, 2017 was in the nature of quasi-judicial order and the same has been passed without investigation. Without prejudice to the powers enumerated in section 11(1) of SEBI Act, SEBI has been granted power under section 11(4) and 11B of SEBI Act, 1992 to pass order in the interests of investors or securities market by taking any of the measures enumerated therein either pending investigation or inquiry or on completion of such investigation or inquiry. The inquiry under section 11B of the SEBI Act can also be caused to be made by SEBI.

11. SEBI vide letter dated October 18, 2017 had advised OSISL to provide following information: (a) Summary of dealings of the Company or its directors or its promoters with or through Mr. Shashi Kant Khetan, either directly or indirectly, including the nature and quantum thereof. Provide details of the all transactions along with supporting documents; (b) Details of Association of the company or its directors or its promoters, whether direct or indirect, with Mr. Shashi Kant Khetan. (c) Details of employees on the rolls of the Company, their respective roles, remuneration received qualifications and experience for the job. Details of Provident Fund contributions made by the Company for the aforesaid employees. For ease of furnishing the information, broad categories of roles: Blue collar, Junior management, Middle management, senior management, may be given in a consolidated manner. (d) Details of any submissions made to Income tax by Company/Directors or Promoters during 2014, if yes, provide the copy of the documents/letter. (e) To provide written confirmation of the following statements recorded during an investigation by enforcement agency under section 131 of Income Tax Act, 1961 dated

Order in the matter of Orissa Sponge Iron & Steel Limited

24/07/2014 on oath by Mr. Shashi Kant Khetan (Ex-director of Orissa Sponge Iron & Steel Limited).

-“I was engaged in the job of providing/facilitating/arranging accommodation entries to various beneficiaries in the form of share capital, unsecured loans and long term capital gains through a cartel of companies, exclusively formed for the purpose of providing long term capital gains to various beneficiaries who are bereft of any actual, business till 2010. ”

-“As already stated by me above, no such meetings (AGMs) have ever been held for these I am doing business of share broking. I am also earning some commission income from providing accommodation entry of bogus share capital and long term capital gain”

(f) Reasons for resignation of Mr. Shashi Kant Khetan from Orissa Sponge Iron & Steel Limited. (g) Details of any notices served by any Government agency/Regulatory body to the company/promoters/directors from 2010 till date.

12. OSISL vide its letter dated October 26, 2017 submitted the information sought by the SEBI’s letter dated October 18, 2017 which are as under:

(a) None of the Directors or the Promoters or the Company have any dealings with Mr. Shashi Kant Khetan, Ex-Director of the Company directly or indirectly (b) To the best of our knowledge and as per our records there is no association with Mr. Shashi Kant Khetan with any of the Directors, Promoters and the Company. (c) Details of employees with the desired information is enclosed. As on October 01, 2017, there are 275 employees. (d) No submission has been made to the Income Tax Department by the Company, Directors and Promoters during the year 2014 except the normal submission of information and documents by the Company to ITO in the course of Income Tax Assessment and Appeals.

Order in the matter of Orissa Sponge Iron & Steel Limited (e) We as a company are not aware of the business done by Mr. Shashi Kant Khetan and also not aware of any submission made by him before your good self. We are not in a position to confirm or deny any statement made by Mr. Shashi Kan Khetan. (f) Mr. Shashi Kant Khetan did not resign from the Company. As he did not attend the Board Meetings convened by the company for continuous period of one year, he was disqualified to be a Director due to the operation of Section 167 of the Companies Act, 2013. Accordingly he ceased to be a Director with effect from 02.01.2017. (g) Notice from various Government Agencies and Regulatory authorities were received during the last 7 years and are also currently being received by the Company in the normal course of business. Ever since the plant was shut down in 2012, the revenue source dried up and due to continuous losses suffered by the Company, the Company landed up in financial crisis. For non payment of outstanding dues all the affected creditors viz. Banks and NBFC, Statutory Authorities (PF, Excise & Sales Tax, water tax etc), Employees, Trade Creditors, Creditors for overhead expenses etc. have served notice on the Company and some of them have gone legal also. Legal cases are being contested and compliance related cases are being complied.

Hearing and Reply:

13. Pursuant to the decision of Hon’ble SAT that the communication of SEBI dated August 7, 2017 is in the nature of quasi-judicial order, SEBI vide communication dated October 16, 2017 granted an opportunity of hearing to OSISL on October 24, 2017. OSISL vide letter dated October 17, 2017 requested for the adjournment of hearing. Accordingly, the hearing was rescheduled and SEBI vide communication dated October 23, 2017, granted an opportunity of hearing to OSISL on October 31, 2017. On October 31, 2017, Mr. Vinay Chauhan, Advocate and Mr. S Ramakrishnan, Consultant, Authorized Representatives (hereinafter referred to as “ARs”) appeared for OSISL and made oral submissions which are as under:

(a) OSISL was incorporated in the year 1979 through joint venture with Government of Odisha. Company was profit making company till 2007. The company had suffered losses

Order in the matter of Orissa Sponge Iron & Steel Limited from 2012 onwards and the plant of the company was shut down. As on date, the company was suspended from trading by stock exchanges due to non-payment of penalty. (b) The company is awaiting for a lease deed to be executed with Government of Odisha for mining rights. The discussion is at the advance stage. (c) Company had complied all the compliance with stock exchanges except with payment of penalty. Company had requested the stock exchanges to waive of the penalty. Response from the stock exchange is awaited. (d) The company had certain defaults with Banks/financial institutions. With respect to said defaults meetings are going on with them to settle these defaults. The banks/financial institutions are also awaiting for the outcome of the execution of above stated lease deed. (e) The shortcomings of non-compliance of Companies act were also cured and auditor report to that effect was given to stock exchanges. The Bank statement of last 3 years were also given to stock exchanges. (f) The shortcoming of non-compliance and defaults were disclosed in the Annual reports. (g) The day to day management activities are done by Mr. Mohanty. There are close to 300 employees both on contract and permanent.

The company was asked to provide the information / response on the following queries (supported by documentary evidence) latest by November 07, 2017:

(a) An affidavit from Mr. Prasanta Kumar Mohanty stating “Has he ever known or spoken to Mr. Shashi Kant Khetan other than his strict capacity as a director; if yes, details of what it was regarding”. (b) The company in its Annual Report FY 2016-17 has reported an amount of Rs.3.18 crore as a Profit on sale of Freehold land. In this regard, furnish the sale deed, receipts for property taxes paid and circle rates of land sold. (c) The company in its Annual Report FY 2016-17 has reported an amount of Rs.10.25 crore as a Cash and Cash equivalents. During the hearing, ARs stated that as on September 2017, the current status of cash available is approximately Rs. 6 crore. In this regard,

Order in the matter of Orissa Sponge Iron & Steel Limited furnish the bank statements of cash and cash equivalents showing the balance as on March 31, 2017 and as on September 30, 2017.

14. SEBI vide email dated November 01, 2017 has also advised OSISL to furnish the aforesaid information by November 07, 2017.

15. Considering the Hon’ble SAT deadline in the mater, SEBI vide reminder email dated November 07, 2017, had advised OSISL to furnish the aforesaid information by November 07, 2017. OSISL vide email dated November 07, 2017 had requested 15 days’ time to submit the information sought by SEBI vide email dated November 01, 2017. SEBI vide email dated November 07, 2017 advised OSISL to furnish the said information by November 10, 2017. OSISL vide its letter dated November 10, 2017 submitted additional written submission in the matter along the information sought by SEBI at the time of hearing and vide email dated November 01, 2017 which are inter alia as under:

(a) Reply to query 1: The affidavit of Mr. Prasanta Kumar Mohanty is annexed. In the year 2009, Ms Nandita Sen (ex-ITC and a taxation expert) resigned as an independent director. The then chairman of Audit committee Mr. P K Paul recommended the name of Mr. Shashi Kant Khetan (chartered accountant) as in independent director in place of Ms. Nandita Sen. Accordingly OSISL appointed Mr. Shashi Kant Khetan as one of the Independent Directors. Since Mr. Shashi Kant Khetan did not attend the Board Meetings convened by the company from time to time in the year 2016 for continuous period of one year, he was disqualified to be a Director due to the operation of Section 167 of the Companies Act, 2013. Accordingly he ceased to be a Director with effect from 02.01.2017. Mr. Shashi Kant Khetan was an independent director not holding any shares in OSISL and OSISL as a company was not aware of what he was doing in his personal affairs as it was not a concern of OSISL

Order in the matter of Orissa Sponge Iron & Steel Limited (b) Reply to query 2: The Company had enclosed the copy of sale deed dated June 07, 2016 entered between OSISL and Balbhadra Developers Private Limited (BDPL), receipt of payment of property tax of Rs. 1032/-. The company had applied for the certified copy of circle rate for the plot no. 266/3328 and same will be submitted upon receipt. (c) Reply to query 3: Detailed statements comprising of the cash and bank balance as on March 31, 2017 and September 30, 2017 with bank statements as on March 31, 2017 and September 30, 2017 of Indus Ind Bank, ICICI Bank and Yes Bank are enclosed.

16. Pursuant to SEBI’s letter dated August 9, 2017, BSE submitted its report dated November 20, 2017 stating that, Company had submitted the Auditor Certificate from M/s A.K. Bhardwaj & Co., Chartered Accountant. As per the Auditor Certificate: (a) Company has filed annual income tax returns for the last 3 years. Further dispute for Assessment Year (AY) 2007-08 to AY- 2015-16 aggregating to Rs. 2.98 crs is outstanding against which appeal has been filed by the company. (b) Company has complied with all requirements of Companies Act, 2013. Company has duly filed Annual return for the last three years. (c) Company is a going concern and is engaged in the business manufacturing and sale of sponge iron, steel billets and generation of power. The plant for generation of power was shut down and remains shut down from June 2012 to till date. (d) The company is in default with all its lenders including Banks and NBFC/ARC and as on March 31, 2017 an announcement aggregating to Rs. 521.63 Cr. is outstanding. (e) Company has duly complied with all the listing regulations for a period of last 3 years except filing of Financial Result under regulation 33 for the quarter ended June 2017 and Annual Report under regulation 34 for the financial year ended 2016 (the company was required to submit the annual report for March 2016 in electronic mode, however company has submitted the annual report for March 2016 in physical form) The no. of employees in the company in Financial Year (FY) 2014-15, 2015-16 and 2016-17 are 440, 342 and 302 respectively.

Order in the matter of Orissa Sponge Iron & Steel Limited

BSE in its report also stated that trading in the securities of the company is under suspension w.e.f. February 25, 2016 vide Exchange notice no. 20160203-10 dated February 03, 2016 for non-compliance for two consecutive quarters i.e. June 2015 and September 2015. The trading of the company was allowed on trade for trade basis in Z group only on first trading day of every week for six months. Further, trading in the securities of the company was discontinued w.e.f. September 14, 2016 vide Exchange notice no. 20160829-17 dated August 29, 2016.

Consideration: 17. On perusal of the materials available on record, the following prima facie/potential issues arise for consideration.

(a) Whether there is prima facie evidence of misrepresentation including of its financials and/or its business and possible violation of LODR Regulations by the company. (b) Whether there is prima facie evidence to show that the company is misusing the books of account/funds including facilitation of accommodation entries to the detriment of minority shareholders and therefore the board, controlling shareholders and KMP are reneging on the fiduciary responsibility cast on them. (c) In view of the determination on the above issues, pursuant to SAT Appeal and the order of SAT in the said appeal, whether, in view of the representation of the Company, the action envisaged in SEBI letter dated August 7, 2017 needs reconsideration.

18. On the basis of documents available on record, my observations on above issues are as under: Issue No. 1. Whether there is prima facie evidence of misrepresentation including of its financials and/or its business and possible of violation of LODR Regulations by the company.

Order in the matter of Orissa Sponge Iron & Steel Limited

Issue No. 2. Whether there is prima facie evidence to show that the company is misusing the books of account/funds including facilitation of accommodation entries to the detriment of minority shareholders and therefore the board, controlling shareholders and KMP are reneging on the fiduciary responsibility cast on them.

19. Based on the replies given by the company in response to SEBI’s queries, observations are as under:

(a) Vide affidavit dated November 09, 2017, Mr. Prasanta Kumar Mohanty stated as under:

(i) “I am Director of Orissa Sponge Iron & Steel Limited since 1979. (ii) I know Mr. Shashi Kant Khetan only in the capacity of Director of Orissa Sponge Iron & Steel Ltd since his appointment as Independent Director in the Company. (iii) To the best of my knowledge and memory, during the tenure of Mr. Shashi Kant Khetan as an Independent director, save and except for discussions during the Board Meetings of Orissa Sponge Iron & Steel Ltd, I have not spoken Mr. Shashi Kant Khetan with regard to any other matter. (iv) I also confirm that at no point of time, I was ever aware of the alleged activities of Mr. Shashi Kant Khetan (in terms of providing accommodation entries as insinuated by SEBI vide its letter dated 18.10.2017) and I never had any kind of discussions with him in this regard.”

(b) The company in its Annual Report of FY 2016-17 has reported an amount of Rs.3.18 crore as a profit on sale of freehold land. During the course of hearing dated October 31, 2017 and SEBI vide email dated November 01, 2017 had advised OSISL to submit sale deed, receipts for property taxes paid and circle rates of land sold. OSISL vide letter dated November 10, 2017 submitted the copy of sale deed dated June 07, 2016 entered between OSISL and Balbhadra Developers Private Limited (BDPL) and receipt of payment of Order in the matter of Orissa Sponge Iron & Steel Limited property tax of Rs. 1032/-. The company also stated that it had applied for the certified copy of circle rate for the plot no. 266/3328 and same will be submitted upon receipt. As per the copy of sale deed dated June 07, 2016 entered between OSISL & BDPL, it is noted that the company has sold land (area– Ac.0.867 decimal) and buildings situated at district Khurda, P.S. New Capital, Hal PS. Mancheswar, Tehasil Bhubaneswar under the jurisdiction of Sub Registrar Khandagiri, Khurda, Odisha being Mouza Kalarahanga Khata No. 763/4, Plot No. 266/3328. The total consideration of sale was of Rs.3.93 crore, out of which Rs.3.36 crore sale proceeds is related to land and Rs.0.57 crore sale proceed is related to building. It is noted that OSISL vide email dated November 23, 2017 submitted the certified copy of circle rates i.e. Government rate as per Benchmark Valuation of Mouza Kalarahanga of plot no. 266/3328 is Rs. 4 crore per acre. It is also noted that, the company has paid the stamp duty as per Government Bench Mark Valuation of Rs.5.02 crore.

Further, as per MCA records, BDPL was incorporated on April 27, 2016, having registered address at N-2/88 & 89, IRC Village, Jaydev Vihar, Bhubaneswar, Khordha OR 751015. The directors of BDPL are Mr. Sourab Agarwal & Ms. Priyanka Agarwal. The addresses of OSISL & BDPL are different. The statement of profit/ (loss) of the above transaction is as follows:

Particulars Rs. in Crore Particulars Rs. in Crore Land Building Sale Value 3.36 Sale Value 0.57 Less: Original Cost 0.18 Less: Depreciated 1.34 Value Profit/(Loss) 3.18 Profit/(Loss) (0.77) From the above, it is noted that the building was sold for a loss of Rs.0.77 crore and the same has been included under miscellaneous expenses. The company has submitted the copy of relevant bank statement for receipt(s) of sale proceeds from BDPL and receipt of payment of property tax of Rs.1,032/- dated June 11, 2015.

Order in the matter of Orissa Sponge Iron & Steel Limited (c) The Company in its Annual Report of FY 2016-17 has reported an amount of Rs.10.25 crore as a Cash and Cash equivalents. During the course of hearing dated October 31, 2017 and SEBI vide email dated November 01, 2017 had advised OSISL to submit bank statements of cash and cash equivalents showing the balance as on March 31, 2017 and as on September 30, 2017. Company has submitted bank statements as on March 31, 2017 and September 30, 2017 of bank accounts with Indus Ind Bank, ICICI Bank and Yes Bank.

With regard to balance as on March 31, 2017, as per the company’s submission, the balance of Rs.10.25 crore consists of Rs.0.01 crore as a cash in hand and Rs.10.24 crore in bank accounts including deposits worth Rs.0.03 crore. In support of its submission, the company has submitted the balance confirmation certificate/bank statement/reconciliation statement for 3 banks aggregating to Rs.10.18 crore viz. IndusInd Bank, current A/c.No.200001749254 of Rs.10.01 crore, ICICI Bank, A/c.No.018705009304 of Rs.0.13 crore and Yes Bank, A/c.No.001781400000603 of Rs.0.04 crore. With regard to balance as on September 30, 2017, as per the company’s submission, the balance of Rs.6.78 crore consists of Rs.0.01 crore as a cash in hand and Rs.6.77 crore in bank accounts including deposits worth Rs.6.03 crore. In support of its submission, the company has submitted the balance confirmation certificate/bank statement/reconciliation statement for banks aggregating to Rs.6.70 crore viz. 12 deposits (Rs.50 lakhs each) with IndusInd Bank worth Rs.6.03 crore and IndusInd Bank, current A/c.No.200001749254 of Rs.0.67 crore.

20. In view of substantive documentation and explanations provided by OSISL during the hearing and in its replies in respect of all the queries, I do not find any prima facie evidence nor suspicion of misrepresentation by the company, misuse of books of accounts / funds of the company or violation of LODR Regulations.

Order in the matter of Orissa Sponge Iron & Steel Limited

Issue No. 3. In view of the determination on the above issues, pursuant to SAT Appeal and the order of SAT in the said appeal, whether, in view of the representation of the Company, the action envisaged in SEBI letter dated August 7, 2017 needs reconsideration.

21. In absence of prima facie evidence / suspicion of misrepresentation by the company, misuse of the books of accounts / funds of the company or violation of LODR Regulations, there is no reasonable ground to further verify the financials of the Company warranting an audit. I am, therefore, of the considered view that the actions envisaged in SEBI’s letter dated August 7, 2017 against OSISL are liable to be revoked. I note that the trading in the securities of the company was under suspension. However, the present order does not affect the trading status of the company as it stood immediately prior to issuance of letter dated August 7, 2017 by SEBI.

ORDER

22. In the facts and circumstances of the case, I, in exercise of the powers conferred upon me under Sections 11, 11(4), 11A and 11B read with Section 19 of the Securities and Exchange Board of India Act, 1992, hereby, revoke the actions envisaged in SEBI’s letter dated August 07, 2017 and the consequential actions taken by Stock Exchanges against Orissa Sponge Iron & Steel Limited.

23. Accordingly the representation of OSISL is disposed of.

24. Copy of this Order shall be forwarded to the recognised stock exchanges and depositories for information and necessary action.

Order in the matter of Orissa Sponge Iron & Steel Limited

25. 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: NOVEMBER 23, 2017 MADHABI PURI BUCH PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Order in the matter of Orissa Sponge Iron & Steel Limited