Order in the matter of Samtex Fashions Ltd

1. In continuation of the avowed objective to safeguard market integrity, SEBI looked into the recommendations given by Shri Lalit Dua, (hereinafter referred to as Shri Dua) Director of LRS Portfolio & Advisory Services Pvt. Ltd. The research reports of Shri Dua were published on www.indiainfoline.com, a website of SEBI registered stock broker India Infoline Ltd. The website also disseminates detailed information about listed corporates, general comments on capital markets and other financial aspects for the consumption of the investor. In view of the same, several investors visit the website on a regular basis.

2. Prima-facie, a distinct modus operandi was noticed in the conduct of Shri Dua. Shri Dua used to disseminate company favourable articles in media on frequent basis projecting a bright future of companies whose shares were thinly traded. Thereafter, in contrast to the recommendations, his associated entities used to offload shares (purchased prior to the recommendations) of such companies on the back of induced investor interest created by his recommendations.

3. Based on the findings of the preliminary investigation, SEBI, while initiating formal investigation into the matter, vide an ad interim exparte order dated March 21, 2006 under section 11B, 11(4)(b) and 11D passed pending investigation, prohibiting the promoter associate entities of Samtex Fashions Ltd viz., Anju Mittal, Ms. Rama Mittal, Suresh Goel, Rachna Goel and Sincerely Finance and Investment Pvt. Ltd. from buying, selling and dealing in any manner in the shares of Samtex Fashions Ltd till further orders passed by SEBI.

4. In view of the above prima facie findings in the ad interim order dated March 21, 2006, SEBI conducted preliminary investigation during the period April 1, 2005 to September 30, 2005 into buying, selling or dealing into the shares of Samtex Fashions Ltd (hereinafter referred to as “Samtex” or “the company”) to ascertain whether any violation of any provision of SEBI Act, 1992 and various Rules and Regulations made thereunder.

5. It was found that Consolidated Securities Limited (CSL) and promoter group transacted in the scrip prior to the announcement of its financial results. It was observed that although the director of CSL had given buy recommendation for the scrip in his research report published on www.indiaiinfoline.com on May 04, 2005 and supplementary report published on July 13, 2005, by Lalit Dua, CSL was net seller (5.06% of equity capital of the Company) in large amount during the investigation period May 5, 2005 to September 13, 2005.

6. I have carefully considered the prima facie findings as recorded in the ad interim ex-parte Order have also examined the investigation report and my findings are as under:

6.1 I note that Samtex Fashion Limited is incorporated as public limited company and is in business of manufacture of Men's & Women's structured garments. The shares of the company are listed on the Bombay Stock Exchange Limited (BSE), Kolkata Stock Exchange (CSE) and Ahmedabad Stock Exchange (ASE). CSE and ASE have informed that there was no trading in the scrip of Samtex Fashions Ltd. during the period of investigation.

6.2 I note that the price of the scrip opened at Rs.24 on April 1, 2005, moved up to a high of Rs.60 on July 20, 2005 and closed at Rs.35.35 on September 30, 2005. The total volume of shares traded during this period was 9404997 shares with average daily volume of 73477 shares. The member Integrated Master Securities (P) Ltd. (hereinafter referred to as “Integrated Master”) had a major concentration of 26.27% (2470590 shares) and 31.89% (2998888 shares) in gross purchase and gross sales respectively. No other member had any major concentration in the scrip. I note that Consolidated Securities Ltd. (CSL) and promoters/company related entities transacted through this broker.

6.3 I note that the member Integrated Securities bought 1,72,000 shares accounting for 99.46% of the market volume of 1,72,925 shares. It dealt on behalf of its client, Consolidated Securities Ltd., (having Directors-

Rohit Gupta and Lalit Dua). They bought 1,65,000 shares of the company, the counter party to the trades was the same member i.e Integrated Master dealing on behalf of persons acting in concert or connected to promoter related entities namely, Anju Mittal and Rama Mittal, who sold 85,000 shares and 80,000 shares respectively. These two opening trades executed at Rs. 19.85 (previous closing Rs. 21.95 on April 05, 2005) were structured trades where quantity and rate of buy and sell orders were same and time difference between buy and sell orders were 30 sec and 3 sec respectively).

6.4 On April 13 2005, Integrated Master bought 1,66,787 shares accounting for 81.90% of the market volume of 2,03,638 shares. It dealt on behalf of its client, Consolidated Securities Ltd. which bought 1,58,123 shares, the major counter party to the trades was the same member i.e Integrated Master Securities dealing for its connected clients Suresh Goel (Promoter / Director of Samtex Fashion Ltd.), Sameer Goel & Rachna Goel (Director-Sincerely Finance & Investment (P) Ltd. I note that all the clients are connected to the company promoter / Directors of Samtex Fashions Ltd. who sold 60,000 shares, 20,000 shares and 55,000 shares respectively. Further I note that first buy order for 135000 shares was placed at Rs.23.8 and then three sell orders for 50000, 10000 and 20000 were placed at the same price within 19 sec to 53 seconds. Further within next 21 seconds, a sell order for 55000 shares (thus totaling 135000 shares) was placed at the price of Rs. 23.9. The buy order rate was also updated to Rs.23.9 before this fourth sell order was placed.

6.5 The company vide its letter dated April 15, 2005 informed the Stock Exchange in terms of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997, Regulation 7(3) about purchase of 1,58,123 shares by Consolidated Securities Ltd., in the open market on April 13, 2005 as the holding of CSL crossed 5%.

6.6 On May 16, 2005, Integrated Master Securities bought 332429 shares accounting for 69.77% of the market volume of 4,76,452 shares. It dealt on behalf of its client, Consolidated Securities Ltd. which bought 3,24,429 shares, the major counter party to the trades was the same member i.e. Integrated Master Securities dealt for its connected clients Sunil Mittal and Rita Mittal (Promoter related entities Samtex Fashions Ltd.), who sold 1,25,000 shares and 50,000 shares respectively. I note that two trades were executed at the prices Rs. 37.15 and Rs. 36.80. Further these two trades were structured (quantity and rate of buy and sell orders were same and time difference between buy and sell orders were 9 sec and 0 sec respectively). I further note that the trades between Consolidated Securities Ltd and the company related entities were synchronised / structured wherein the time difference between the buy and sell orders was in the range of 0 to 74 seconds and the rates and quantities were also same for some trades. I observe that all of them were trading through the same broker.

6.7 I note that an article / Research Report) by Shri Lalit Dua, LRS Research appeared on www.indiainfoline.com on May 04, 2005. The report had given details of the global and Indian textiles Industry and its future prospects. In the report, the author had also given details of possible bright future and corporate developments of the company. The report had also emphasized the business of its subsidiary SSA International which objects were in export and processing Rice. Report dated May 04, 2005 also predicted the merger of the subsidiary SSA International Ltd. into Samtex Fashions Ltd. The company also made announcements regarding the Board Meeting to consider merger on May 25, 2005. I was also stated that the board of the company approved to the merger and authorised the Company’s Managing Director to appoint any professional consultancy Agency / Firm to do a feasibility study for merger on June 2, 2005. The research report had given ‘BUY’ recommendation for the scrip to investors. 6.8 I further note that another supplementary report relating to Samtex Fashion was published on July 13, 2005. This report brought out that the P/E of the scrip Samtex Fashions (prevalent at the time when the report was published) was 4.34 which was way below estimated P/E of 21 because the market had not factored the implications of the sales and profitability of the company after the merger. The report also mentioned that Samtex had potential to attain a P/E of at least 10 on the forward earnings projections for 2005-06. The price of the scrip reached a high of Rs.60 on July 20, 2005 and started falling after that. It is also observed that the Company did not make any further announcements regarding the merger. Further, it is pertinent to note that the client Consolidated Securities Ltd., having directors Rohit Gupta and Lalit Dua traded in the scrip in large amount.

6.9 It was observed that CSL wherein Shri Dua is a director had purchased 1,72,000 shares accounting for 99.46% of the market volume on April 06,

2005 and 1,58,123 shares on April 13, 2005 prior to the publication of research Report from the entities related to the company. CSL totally purchased 350003 shares and sold 45583 shares during the period from April 1, 2005 to May 4, 2005 prior to the publication of Research Report on May 04, 2005. CSL purchased 832216 shares and sold 626816 shares during the period May 5, 2005 to June 29, 2005 prior to the publication of supplementary report on July 13, 2005. CSL started offloading its holding from July 12, 2005 however it had indicated Samtex Fashion had a bright future in his supplementary report dated July 13, 2005 (the price of scrip had touched its peak on July 20, 2005 to Rs.60).

6.10 SEBI vide letter dated September 20, 2005, sought details from the company about its corporate developments, transactions by the related entities, shareholdings of top 10 shareholders, acknowledged copies of disclosures received / made. The company vide its letter dated replied to the said letter of SEBI and furnished the required details. After perusal of the said letter, I observe that Consolidated Securities had done disclosures as required under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 and SEBI (Insider Trading) Regulations, 1992.

6.11 SEBI vide letter dated November 05, 2007, advised Samtex Fashions Ltd., to offer their comments on the observations that the promoter/ director related entities offloaded their shares of Samtex Fashions at higher prices in the market in connivance with Consolidated Securities Ltd / Shri Lalit Dua who published research reports giving buy recommendation for Samtex Fashions shares and the company also made announcements regarding the merger as predicted by the research report. The Company Samtex was also asked to provide the status of the announcement made by the company on June 3, 2005 regarding the merger of the company’s 100% Wholly Owned Subsidiary company viz., SSA International Ltd. with Samtex Fashions, copy of minutes of meeting of Board of Directors held on June 2, 2005, name and address of the professional consultancy Agency / Firm appointed to do a feasibility study for merger and a copy of their report, if any, relationship of the company/ promoters /directors and their related entities with Consolidated Securities Ltd. and Shri Lalit Dua, whether any research analyst including Shri Lalit Dua met the officials / promoters / directors of the company, bank account statements of the aforesaid promoter / director / related entities, annual reports of the company.

6.12 The Company vide its letter dated December 22, 2007 replied to the aforesaid letter stating that there had been no connivance of Company’s Promoters / Directors either with Consolidated Securities Ltd. or Shri Lalit Dua, who might have published the research report on his own. The Company further informed that no announcement regarding the merger of SSA International Ltd. with Samtex Fashions was made by the Company. On the Board meeting held June 2, 2005, only preliminaries for the merger were discussed and the Chairman & Managing Director was authorized by the Board to appoint a professional consultancy agency / firm to do a feasibility study for the merger of SSA with Samtex. Accordingly vide letter dated June 10, 2005, M/s V. P Kapoor & Co., a firm of practicing Company Secretaries, was requested to make a feasibility report especially keeping in view the impact of stamp duty, change, if any, required in the object cause of the MOA of the Company, cost involved in merger and other administrative / legal requirements. The said firm had submitted a report vide its letter dated August 25, 2005 detailing therein the various steps involved in the merger and the approximate cost etc. involved therein. The said report was examined by the company and was placed before the Board of Directors in their subsequent meeting held on October 27, 2005. After discussing the report, the Board decided that in view of the time consuming process involved in the merger, cost escalation in the labour expenses, uncertainty of the levy of stamp duty and other administrative / legal steps required, the proposal for the merger be kept in abeyance for the time being. The company further informed that since there was no announcement of the merger, the company had not submitted any further information on the subject matter to the Stock Exchange.

6.13 Regarding the sale of shares by the directors/ promoters related entities and the time difference between the buy and sell orders, the Company replied that there had been no structured trade dealings between Directors/ promoters related entities and the counterparties and it could be co-incidence that the shares sold by the Directors/ promoters related entities might have been routed by some other investors whose identity was not known to the selling entities. The company further clarified that the entities who sold shares were not on management team / employment of the company and were not the core promoters but were coming in the list of Promoters since the IPO in the year 1994.

The company further stated that they were not aware whether the parties / investors, who purchased the shares in the market further sold /offloaded the shares and the reasons thereof and they were not even aware of the research report published by Lalit Dua (LRS Research) wherein they had published buy recommendation of Samtex Fashions.

6.14 The company further informed that the Directors had met Shri Lalit Dua and discussed in general about the likely prospects of the Ready Made Garment Industry as a whole. Further from the bank statements of the promoters / directors, it was observed that the money received from the broker Integrated Master after the sale of shares were immediately transferred to SKB Builders and Fabricators, associate company of promoters.

6.15 Subsequently, SEBI vide letter dated January 2, 2008, to Samtex Fashions Ltd. asked to provide reasons for appointing M/s V. P. Kapoor & Co. to do feasibility study for merger, whether any other professional consultancy Agency / Firm was considered before appointing M/s V. P. Kapoor & Co., their names and addresses and copies of correspondence exchanged with them, copies of all the correspondence exchanged with M/s V. P. Kapoor & Co., copy of bank account statement highlighting remuneration paid to M/s V. P. Kapoor & Co for aforesaid feasibility study, copies of bank account statements of SKB Builders and Fabricators, reasons for transfer of money and minutes of Board meeting held on October 27, 2005.

6.16 The company vide its letter dated January 14, 2008 informed that M/s. V P Kapoor & Co. was an old firm of Company Secretaries and were considered to be well versed with the provisions of Company Law. Mr. V P Kapoor, the proprietor of the firm has also edited two books on Company Law and Procedures. As the thought regarding merger was at a very preliminary stage, they had requested the said firm to intimate the various steps and cost etc. involved in the case of the merger. The company also provided a copy of letter written by company to M/s. V P Kapoor & Co. dated June 10, 2005 and a copy of letter of M/s. V P Kapoor & Co. dated August 25, 2005 submitting the report. The company further informed that a nominal fee of Rs. 5510 inclusive of Rs. 510 by way of service tax and education cess after deducting TDS of Rs.309 net amount of Rs.5201 was paid to M/s. V P Kapoor & Co. for the aforesaid study on May 4, 2006. The company did not provide bank account statement of SKB Builders stating that the bank account statement was too large and provided bank account details of Samtex Fashions and SKB Builders and stated that there were no fund transfers between Samtex Fashions and CSL / LRS Portfolio / Shri Lalit Dua during the period April 1, 2005 to October 30, 2005. The company also informed that the promoter transferred the funds to SKB Builders to meet their funds requirements for ongoing and future works / job contracts.

6.17 SEBI then advised M/s V. P. Kapoor & Co, to provide copies of all the correspondence exchanged with the captioned company, copies of all documents / news reports relied upon while preparation of aforesaid feasibility report, copy of the feasibility report prepared by them, copy of bank account statement highlighting remuneration received by them from Samtex for aforesaid feasibility study, whether they had done any such feasibility study prior to the aforesaid study and the details thereof, whether they had done any such feasibility study subsequent to the aforesaid study and details thereof. Accordingly, M/s V P Kapoor & Co. vide letter dated January 22, 2008 replied stating that whatever they communicated to Samtex was mere interpretation of legal provisions as contained in various sections of the Companies Act and the Listing Agreement and they relied upon the applicable Sections and provisions of law. He also stated that he had edited two books on Company Law and Procedures which were written by Ms. Mamta Bhargava and published by M/s Shreeji Publishers in 2003 and 2005. They also stated that they had relied on the contents of the ‘Handbook on Mergers, Amalgamations and Takeovers, Law and Practice Second edition 2004’ published by the Institute of Company Secretaries of India, New Delhi. They also informed that they had given advisory opinion to M/s Hero Corporate Services Ltd on January 16, 2004 regarding restructuring and to National Industrial Corporation Ltd on July 17, 2006 and National Aviation Company of India Ltd on September 10, 2007 and December 12, 2007 regarding merger / amalgamation matters. They also clarified that they do not prepare feasibility reports like any Project or Management Consultants and their opinions are limited to interpretation of legal provisions.

6.18 Regarding substantial trading in the scrip of Samtex Fashions Ltd., CSL replied that it had substantial shares even as on March 31, 2005 which were bought during the previous financial year 2004-2005. No investment can be made at some research report coming four/six months down the line and ignoring all market dangers/risk in terms of company not performing or market going down, industry facing a recession, global down trend, global recession and investment had been made purely on an fundamental basis and after due research through analysis of companies balance sheet and industry scenario and it is important to note that even after first report that company had bought shares of Samtex Fashions and the shares were sold only after the company had felt that its target had been achieved and the selling process had started before the second supplementary research report.

6.19 Vide letter dated November 05, 2007, LRS and Lalit Dua were advised to offer their comments on the observations that the promoter/ director related entities offloaded their shares of Samtex Fashions at higher prices in the market in connivance with Consolidated Securities Ltd. / Shri Lalit Dua who published research reports giving buy recommendation for Samtex Fashions shares and the company also made announcements regarding the merger as predicted by the research report. LRS was also advised to provide the details like relationship with the company/ its directors / promoters/ related entities, bank account statements and annual reports.

6.20 Lalit Dua neither provided any bank account statement nor any details of bank account. They also did not provide any annual reports. Lalit Dua (LRS) stated that he was on the Board of Directors of CSL in his capacity as an independent Director till October 19, 2005, his role was limited in its day to day management, affairs and investment decisions and neither he nor any of his associates held even a single share in CSL. He also stated that CSL has been taken over by Mundra Credit and Investment Pvt. Ltd. in September 2005. Erstwhile directors of CSL were Mr. T S Bhatia (Promoter Director), Shri Lalit Dua and Mr. Sanjay Gogia (Independent Directors). He stated that report was prepared on concrete facts, objective analysis and contained projections which he believed to be true and there was nothing in research report which was contrary to his belief or stated with intention to mislead or misguide the investors. He also stated that all his research reports contained requisite disclosures including that of Samtex Fashions. He denied that he had given any buy report for Samtex Fashions and he had given any price target for Samtex Fashions. He also pointed out that there were other analysts also who had come out with favourable reports regarding Samtex viz., BRICS (Reports dated September 23, 2005 with target price of Rs.70 and dated February 7, 2006 with target price of Rs.82. He further denied any connivance with the promoters / management of the company Samtex Fashions and stated decrease in shareholding of promoters was a sheer coincidence. He also stated that he had met with the promoters of Samtex Fashions through a common friend at some wedding or function where general issues about the industry and other macro issues were discussed. He also submitted that the supplementary research report was not a fresh research report but only an update and the currency and utility of the equity analysis for an investor was of very short duration, normally 24 hours.

6.21 As per the account opening form of Consolidated Securities Ltd. provided by HDFC Bank that Shri Rohit Gupta and Shri Lalit Dua were authorised signatories for Consolidated Securities Ltd. The bank also provided bank account statement of Consolidated Securities Ltd for the period April 1, 2005 to August 31, 2005. However, from the details provided the bank, no connection could be established between the promoters of Samtex and CSL.

6.22 From the facts of the case, I find that CSL bought shares before the publication of research report by one of its director, Shri Lalit Dua, through synchronized/ structured trades with the promoter related entities at lower prices. The Promoters / directors met Shri Lalit Dua in one social function (the date on which they met is not known). Shri Lalit Dua published research report predicting merger of Samtex with its subsidiary, later the company made announcements regarding the merger. CSL offloaded shares in the market after publication of supplementary report at higher prices and the company did not make any announcement regarding the decision to keep the proposal of merger in abeyance. All these facts create suspicion about the connection of CSL, Lalit Dua and the promoters/ directors of the Company. However, the analysis of trading of CSL do not conclusively indicate that they were acting solely on the basis of the research report. Further trading pattern of CSL does not conclusively establish any manipulation in the scrip. No conclusive evidence is available to establish connection between the CSL or Lalit Dua and the Company/ its promoters / directors apart from structured trades and these structured trades were not observed to be affecting the price of the scrip.

6.23 Thus, from the facts and details available on record, it is not sufficient to establish any legally sustainable charges against CSL, Shri Lalit Dua, the company and its promoters. In view of the above, that there is no need to continue with the directions issued in the interim order dated March 21, 2006 against the promoter related entities viz., Anju Mittal, Rama Mittal, Suresh Goel, Rachana Goel and Sincerely Finance & Investment P Ltd.

6.24 The order shall come into force with immediate effect.

PLACE: MUMBAI T .C. NAIR DATE: 15.1.2009 WHOLE-TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA