Order in the matter of Splash Media Infra Limited

WTM/RKA/IVD/132/2014 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER SECTIONS 11(1), 11(4)(b) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH THE SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009. IN THE MATTER OF SPLASH MEDIA AND INFRA LIMITED 1. Splash Media and Infra Limited (hereinafter referred to as “SMIL”) had, on December 22, 2010, filed a Draft Letter of Offer (hereinafter referred to as “DLO”) with SEBI in respect of its proposed rights issue. The said DLO was filed through its merchant banker, Khandwala Securities Ltd. (hereinafter referred to as “KSL”). SEBI sought several clarifications from KSL with respect to the DLO. Since no satisfactory clarification was received, SEBI initiated investigation in the matter. SEBI also appointed an external auditor, namely, M/s Sarath and Associates for examining the veracity of the financial information disclosed in the DLO. Subsequently, vide its letter dated May 23, 2013, the said DLO was withdrawn by KSL. Accordingly, SEBI did not issue any observation on the said DLO and SMIL did not make the proposed rights issue. 2. Based on the observations of the investigation and the report of the external auditor, a common show cause notice (SCN) dated January 08, 2014 was issued to SMIL and its directors, namely, Mr. Nalin R. Panchal, Mr. Vishal S. Gogawat and Mr. Kailash C. Sharma (hereinafter collectively referred to as 'the noticees' or by their respective names) contemplating suitable directions under sections 11(1), 11(4)(b) and 11B of the Securities and Exchange Board of India Act, 1992 (the SEBI Act) read with regulation 107 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (the ICDR Regulations) alleging inter alia as follows: (a) SMIL did not disclose in its DLO the pendency of the suit in respect of its project at Juhu Hanuman Nagar Co-operative Housing Society, Hanuman Nagar, Gulmohar Road, Andheri (West), Mumbai. In this regard, it has been alleged that the noticees violated provisions of regulation 57(1), (2) (a)(i) and (ii) read with Clause IV(B) of Part A of Schedule VIII of the ICDR Regulations.

Order in the matter of Splash Media and Infra Limited (b) SMIL incorrectly disclosed in its DLO the profit of `7.66 lakhs under the heading “Income from trades in tiles”. SMIL had disclosed a turnover of `26.68 crore for the six month period April-September 2010 whereas as per the MVAT return filed by SMIL, its total turnover for the Financial Year 2010-11 was more than `30 crore. In this regard, it has been alleged that the noticees violated provisions of regulation 57 (2) (a) (i) and (ii) read with Clause IX(B)(10) of Part A of Schedule VIII of the ICDR Regulations.

(c) SMIL had paid `3.01 crore to Sukusama Trades and Investments Private Ltd (STIP) as an investment in STIP which was planning to purchase some commercial property. SMIL had received back `20 lakh from STIP and, as on September 30, 2010, `2.81 crore was outstanding. STIP was admittedly a related party of SMIL as on September 30, 2010. Subsequently, when STIP could not acquire the said property, SMIL withdrew the proposed investment plan in STIP. However, SMIL had not provided the details of aforesaid information in its DLO. In this regard, it has been alleged that the noticees violated provisions of regulation 57 (2) (a) (i) and (ii) read with Clause IX(B)(12) of Part A of Schedule VIII of the ICDR Regulations. 3. The aforementioned provisions which are alleged to have been by the noticees are reproduced hereunder: SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009 "Manner of disclosures in the offer document. 57. (1) The offer document shall contain all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision(2) Without prejudice to the generality of sub-regulation (1): (a) the red-herring prospectus, shelf prospectus and prospectus shall contain: (i) the disclosures specified in Schedule II of the Companies Act, 1956; and (ii) the disclosures specified in Part A of Schedule VIII, subject to the provisions of Parts B and C thereof." Schedule VIII, Part A "IV. (B) Risk Factors: The risk factors shall be classified as those which are specific to the project and internal to the issuer and those which are external and beyond the control of the issuer." "IX B. Financial Information of the issuer: (10) The turnover disclosed in the Profit and Loss Statement shall be bifurcated into: (a) turnover of products manufactured by the issuer;

(b) turnover of products traded in by the issuer; and (c) turnover in respect of products not normally dealt in by the issuer but included in (b) above, shall be mentioned separately". (12) Related Party Transactions: The issuer shall disclose the following details of related party transactions and make disclosures in accordance with the requirements of Accounting Standard (AS 18) “Related Party Disclosures” issued by the Institute of Chartered Accountants of India: (a) Information with respect to transactions or loans between the issuer and (i) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the issuer; (ii) associates; (iii) individuals owning, directly or indirectly, an interest in the voting power of the company that gives them significant influence over the issuer, and close members of any such individual’s family; (iv) key managerial personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of the issuer, including directors and senior management of companies and close members of such individuals’ families; (v) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence and includes enterprises owned by directors or major shareholders of the issuer."

4. Vide its letter dated April 2, 2014, SMIL submitted its reply to the SCN. Vide their separate letters dated April 7, 2014 the remaining noticees adopted the reply filed by SMIL. The noticees were also granted an opportunity of personal hearing on May 15, 2014 when Mr. Joby Mathew, Advocate appeared and made submissions on behalf of the noticees. The noticees have denied all the charges and allegations in the SCN and have made inter alia the following submissions: (a) SMIL had acquired development rights for a project named Krishna Marvel in respect of a plot of land admeasuring 8,287 square meters at Juhu, Vile Parle (W), Mumbai which is part of a larger plot of land at CTS no. 455, 464 (Part) and 484 (Part) except property bearing CTS No. 484 A/2 on Gulmohar Road, Juhu, Vile Parle (W), Mumbai. The said litigation was filed with respect to Plot A/2 of CTS no. 484 for which SMIL had not acquired any development rights. The aforesaid litigation was not filed against the noticees. In view of this, the aforesaid litigation was not required to be disclosed in the DLO. (b) The trading in tiles is not part of operations of SMIL and was a one-time activity to avoid loss.

Only profit from sale of tiles was shown in the Profit and Loss account since sale of tiles was not part of the main operations of SMIL and showing the full sale would have misled its shareholders had the rights issue been made. (c) DLO was dated December 17, 2010 whereas the MVAT return was the revised return as filed by SMIL in April 2011. Further, sales figure as disclosed in the DLO was sales net of tax whereas the sales figures in its MVAT return is gross sales inclusive of tax. (d) The names of the related parties, the nature of transactions and the amount paid to/received from such parties was disclosed in the DLO. Further, it has been disclosed in the DLO under the heading “Statement of Related Party Transactions” that share application money to the tune of `281 lakh was paid to STIP when STIP intended to acquire a commercial property that was beneficial for SMIL as well. Thus, the related party transactions have been duly disclosed in the DLO. Further, the said share application money was refunded by STIP to SMIL on January 18, 2011 after STIP could not acquire the said property.

5. I have carefully considered the SCN issued to the noticees, their replies/submissions and the relevant material available on record. It is admitted fact that the DLO, in this case, was withdrawn and SEBI did not issue any observation thereon. Further, SMIL did not make its proposed rights issue. 6. In this case, there is no allegation or charge of any active suppression or concealment of any material information by the noticees from the shareholders of SMIL in its proposed rights issue. There is also no allegation or charge with regard to any plan or scheme or device to defraud the shareholders of SMIL while making rights issue. It is noted that allegations/ charges in the SCN is limited to certain non-disclosures in the DLO with regard to a right issue of the SMIL that was filed with SEBI on December 22, 2010. Admittedly, in this case, the letter of offer was not issued at all by SMIL to its shareholders. Thus, deficiency, if any, with regard to alleged information in DLO has not influenced any investment decision of the shareholders and they have not been induced to invest in the proposed rights issue.

7. The noticees have vehemently contested the allegations in the SCN with regard to non-disclosures in DLO relying on documentary evidence, disclosures made in DLO, etc. Considering the submissions of the noticees in this regard, I am of the view that the issues could be debatable at the time of filing of DLO with SEBI. The issues of non-disclosures have remained academic particularly in view of the fact that no case of any fraudulent device is made out in this case and that the rights issues was withdrawn and letter of offer was not issued to the shareholders of SMIL.

8. In view of specific allegation levelled in the SCN and peculiar facts and circumstances of this case, I proceed to examine the applicability of the alleged provisions. I note that regulation 57(1) and (2) (a) (i) and (ii) read with clauses IV(B), and IX B (10) and (12) of Part A of Schedule VIII of the ICDR Regulations apply only with regard to an Offer Document [as defined in regulation 2(1) (x)], i.e., Red Herring Prospectus, Prospectus and Shelf-Prospectus or Information Memorandum as per section 60A of the Companies Act, 1956. These provisions are not applicable to a letter of offer / DLO. It is the provisions of regulation 57(2)(b) read with Part E of Schedule VIII that applies in case of letter of offers (LOO). As per Part E of Schedule VIII of the ICDR Regulations, the disclosures specified therein have to be made in LOO if an issuer is eligible to do so as per criteria specified in Part E otherwise it has to make disclosures as per Part A. In the instant case, the SCN has charged the noticees with violation of provisions that are applicable in case of public issues. Further, there is ambiguity in the SCN as to whether the issuer was eligible to make disclosures in its LOO as per Part E of Schedule VIII or not. In any case, if at all, it was to be alleged that there were deficiencies in the disclosures in LOO, the charge of violation of regulation 57(2) (b) read with regulation 57(1) and applicable provisions of Schedule VIII would be the probable charge. It is worth mentioning here that it is the LOO on the basis of which the applicants subscribe in rights issues and not the DLO. In the present case, admittedly, the SCN is not the one alleging non-disclosures in LOO and that the LOO was not issued to shareholders as rights issue was not made at all by SMIL. 9. Considering the above facts and circumstances, I am of the view that it would be in fairness of things to dispose of the SCN without issuing any direction against the noticees, as contemplated in the SCN. The SCN bearing no. IVD/ID9/SKS/VJ/ 8982/2014 dated January 08, 2014 issued to the noticees is accordingly disposed of.

Sd/-

DATE: NOVEMBER 10th, 2014 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA