Order in the matter of Twilight Litaka Pharma Ltd.

WTM/GM/EFD/ 95 / 2018-19 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under Sections 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992, in the matter of Twilight Litaka Pharma Ltd (TLPL) in respect of: Sr. No. Noticees PAN 1. Twilight Litaka Pharma Limited AAACL4246J 2. Rajendra Chandmal Bora ABJPB7383B 3. Raghavan Mathurakavi Srinivasa Ayyangar AABPR6112R 4. Avinash Shantaram Chandvankar ABCPC5392A 5. Ramesh Ramourti AFZPR8263G 6. Prof. P.D Gupte N.A. 7. Sanjeev D Tole AAKPT3940L 8. Gopal Ramourti AABPR7659B 9. Nainish Rajendra Bora AGCPB5354L 10. Abhijit Rajendra Bora AAUPB1605N The aforesaid entities are hereinafter referred to by their respective names/serial numbers or collectively as “the Noticees”.

1. Twilight Litaka Pharma Limited ("TLPL") was incorporated on January 18, 1974 under the Companies Act, 1956. It is engaged in the manufacture of various drugs and Pharmaceuticals formulation and its manufacturing facility is located at Pimpri, Pune. TLPL belongs to the Litaka Group of Companies. The company got listed at BSE on July 15, 1986 and on NSE on June 15, 2010.

2. Securities and Exchange Board of India ("SEBI") received a complaint dated 27.02.2012 from Income Tax Department ("ITD"), Pune against TLPL alleging booking of bogus purchases and sales by way of accommodation entries on account of its sister concerns and some other entities and inflation of turnover in the books of accounts by TLPL by creating circular transactions through some paper concerns as well as real concerns. Since the matter related to irregularities in the books of accounts, M/s Sarath and Associates ("Sarath"/ "forensic auditor"), Chartered Accountants were appointed by SEBI for forensic auditing and examination of the Order in the matter of TLPL books of accounts relating to inflation of turnover and booking of accommodation entries.

3. As per the report submitted to SEBI by the forensic auditor, TLPL had indulged in manipulation of its books of accounts. The modus operandi of TLPL as brought out by Sarath in its report (hereinafter referred to as "the forensic audit report"/ "the audit report") inter alia is as under:- (i) The Company adopted a method of inflating the sales and purchases through circular trading activities through group companies. The sales and purchases were inflated as high as 85% of the total turnover booked over the last five years. The funds were raised through the financial institutions by showing improved performance. (ii) The company had floated several paper entities to accommodate the transfer entries of funds raised through discounting the purchase bills and letter of credits against the non-existent purchases from various bank accounts. To accommodate the fund transfers, bank accounts were opened in the names of the paper entities and the staff of TLPL were signatories to these accounts. (iii) A major portion of the sundry debtors and sundry creditors were pre-decided by the management, and these were facilitated by circular transactions, accommodative and inappropriate year-end provisional entries.

(iv) The opening balances of some of the accounts were not matching with the closing balances of the previous financial years, resulting in inconsistencies in the outstanding balances of loans and advances, sundry debtors and creditors of the audited balance sheet vis-a vis the books of accounts. (v) Approximately 75-80% of closing stocks in the audited balance sheet contributed to inflated turnover; purchases booked in the audited balance sheets were non-existent. (vi) Certain additions to fixed assets appearing in the audited balance sheet of F.Y 2010-11 were fictitious, these additions being due to adjustment entries in the paper entities. (vii) The export sales were booked by passing journal entries in the group companies, on monthly basis. The statutory auditor had certified the compliance reporting in the annual report for the non-existent export business done by the company. (viii) The artificially inflated profits were booked over the years and the dividends were declared by the company over the years, without real cash inflows. This has resulted in acute shortage of funds, non-payment of EMI of the banks and financial institutions, creditors and cancellation of declared dividend by the company for F.Y 2010-11.

4. SEBI conducted an investigation into the trading activities in the scrip of TLPL relating to falsification and irregularities in the financial accounts of the company and the subsequent impact on the price and volume of the scrip for the period December 16, 2009 to December 15, 2010 (hereinafter referred to as "the investigation period"). The SEBI investigation relied on the forensic audit report's conclusions and correlated them to the price and volume changes in the scrip and the reduction in promoter shareholding in TLPL.

5. Based on the above prima facie conclusions, a show cause notice dated June 23, 2016 (hereinafter referred to as "SCN") was issued. The SCN summarised the significant revelations in the forensic audit report as being the following: (i) The company had booked bogus sales of `266.71 crore for F.Y 2009-10 and `577.24/- crore for F.Y 2010-11 and booked bogus purchases of `349.1 crore for F.Y 2009-10 and `509.97/- crore for F.Y 2010-11. (ii) The company had intentionally inflated the turnover through multi layered maze of paper companies which were involved in circular transactions of money to give an impression of huge turnover. Bank accounts of these companies for which the staff members of TLPL were made signatories, were used to infuse funds into TLPL by availing the facility of Letter of Credit and Bill Discounting from the Banks. (iii) The company had created reserves by inflating revenues through entries of false transactions. (iv) The company has declared dividend of 30% for the F.Y 2010-11 in the AGM held on 29 September, 2011 for an amount of ₹ 3,71,71,928. However the company failed to deposit the same amount in the separate bank account and pay within 30 days of declaration of dividend as per section 207 of Companies Act, 1956. Company has cancelled the declared dividend of F.Y 2010-11 in its AGM held on 29.09.12 thereby substantiating the allegation that the reserves and surpluses are the results of fake revenue and the negative cash flows. Accordingly the SCN alleged that the actions/omissions of TLPL and its Board of Directors are in contravention of section 12A(a), (b) and (c) of SEBI Act, 1992, Regulation 3(b),(c) and (d) and regulations 4(1) and 4(2)(k) and (r) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 ("FUTP Regulations") and directed the noticees to show cause why suitable directions under Sections 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 should not be issued against them for the violation of aforementioned provisions.

6. List of the replies to the SCN (on merits of the case and allegations raised in the SCN) and date(s) of replies are stated below: TABLE 1 Sr. No. Noticee Date of Reply 1. Twilight Litaka Pharma Limited 29.07.2016 2. Rajendra Chandmal Bora 10.08.2016 3. Raghavan Mathurakavi Srinivasa 17.08.2016 and 16.08.2017 Ayyangar 4. Avinash Shantaram Chandvankar 11.08.2016 * 5. Ramesh Ramourti 29.07.2016 and 16.08.2017 6. Prof. P.D Gupte N.A. ** 7. Arun N Joshi N.A. 8. Sanjeev D Tole 13.12.2016 and 12.09.2017 9. Gopal Ramourti (M.D. of TLPL) 29.07.2016, 30.08.2017, 03.01.2019 and 18.01.2019 10. Nainish Rajendra Bora 02.08.2016 11. Abhijit Rajendra Bora 25.08.2016 and 04.06.2018 * Though reply was received from A.S. Chandvankar, as per subsequent email dated 03.11.2017 received from Gopal Ramourti, it has been informed that Mr. Chandvankar has passed away. However no official certification to this effect has been received. ** As per email dated 03.11.2017 received from Gopal Ramourti, Prof. P.D. Gupte has passed away. However no official certification to this effect has been received.

7. Summary of the written submissions made by the noticees are as follows: (a) TLPL (i) The SCN under reply is barred by the Law of limitation. As of March 31, 2009 and March 31, 2010, the book value per share worked out on the basis of the net worth of the company was Rs 49.81 and Rs 70.82 per share respectively. During the respective periods, the high and low of the share prices traded in the market were - March 2009: High `27.40 & Low ` 22.00; March 2010: High `102.80 & Low ` 78.60. The Financial results for the year ending 2010 was disclosed to the Stock Exchanges on 17/05/2010. The market price of the share was at its peak of `203.90 in October, 2010 that is around 5 months thereafter. Even assuming, without admission, that the same peaked in view of the disclosures of results for the preceding quarter, the results of the said quarter were consistent with that of the previous years and was in no way meteoric as is being projected by SEBI. Thus it can it never be imputed that the price fluctuation was as a result of artificial increase in sales of the company. (ii) The allegations in respect of which an alleged inspection or investigation is being sought to be asserted by SEBI is ostensibly for determination of manipulation of sales and purchases by the company which is the exclusive domain of Central Government, Company Law Board or the Registrar of Companies, as the case may be and SEBI cannot exercise the powers of inspection in this case and in view thereof, the Investigation by itself is a nullity and hence the show cause notice allegedly emanating there from deserves to be withdrawn forthwith.

(iii) The ITD conducted search action under section 132 of the I.T. Act on 13.11.2011 and the Deputy Commissioner of Income tax Central circle Pune has, after carrying out a thorough scrutiny of the Income of our client in terms of Sections 132 of Income tax Act, 1961, duly accepted the Income tax returns filed by TLPL without any disallowance for the said period of December 16th 2009 to 15th December 2010 covering the Assessment years 2009-2010 and 2010-2011 respectively. However, deductions claimed under section 80-IC of the Income-tax Act in respect of the sales from the factory at Baddi Himachal Pradesh were disallowed. Accordingly, assessment orders dated 25th March 2014 under Sections 143(3) and 153A of the Income tax act in respect of the previous years 2009-10 and 2010-11 respectively were passed. The said orders are under appeal before the Commissioner of Income Tax, Appeals, more particularly for challenging the disallowance under section 80IC and therefore the quantum of sales and purchases duly assessed by the Income tax authorities has attained finality. When the Department was vested with powers to disallow expenses or add income for the purpose of computing revenue, a preliminary report made out by the Income tax department or its actions of search can only be referred to as a complaint of Income tax department, which has since ceased to be a complaint once the assessment orders are passed without adding back the purchases or reduction in sales.

As such, the aforesaid facts clearly belie the allegation of booking of bogus purchases and sales by giving accommodation entries to its sister concerns and some other entities and inflation of turnover in the books of accounts by TLPL. (iv) All the purchases and sales by the Company have been supported by required invoices, delivery-challans etc. and duly corroborated by the corresponding parties for purchase/sale and also duly reported by VAT Returns. The sales and purchases were never inflated nor were any funds raised through the financial institutions. It is highly improbable that such acts would escape the stringent scrutiny by the financial institutions who have carried out extensive due diligence exercise including by way of detailed credit assessment, factories inspection, third party verifications from customers and Suppliers, Audit by Independent CAs, Independent Credit rating, etc before advancing limits and making disbursements of credit. (v) It is denied that the 8 entities referred to in the forensic audit report, were floated by TLPL to carry out any accommodation entries as alleged.

None of them fall under a group concern within the meaning of Group Concerns under the provisions of Companies Act, 1956. None of the said entities are firms in which the directors of TLPL are shareholders or proprietors/partners and furthermore there were no trading transactions of sale or purchase by TLPL with any of these entities except certain raw material purchases supported by proper excise gate pass for manufacturing purposes. The company was enjoying certain Non Fund based Limits with its Bankers and has periodically opened Letters of Credit in favour of its suppliers. These entities are part of the suppliers who have catered to TLPL's requirements of materials for many years. (vi) The company followed an accounting and ERP software called "Oracle" till the year 2010-11 and subsequently migrated to Tally with effect from 2011-12. For the previous years (i.e. 2009-10 & 2010-11), trial runs were carried out to enable a smooth migration and for which it was necessary to have the data in Tally as well. It appears that the Audit team from Sarath and Associates may have been more accustomed to Tally and hence relied on the Tally programme completely overlooking the accounts prepared in Oracle, which was the authentic accounts used for the audit and final accounting of the annual accounts for the financial years 2009-10 & 2010-11.

Consequently, the basis and premise of audit itself was erroneous and the same resulted in the erroneous finding.

(vii) The company had taken loans for its operations by pledge of shares of the promoters in the year 2010 as a result of unexpected growth in business and delays in review of normal annual working capital limits from the Banks (which TLPL was legitimately entitled to as per the debt /equity prevailing at the material time). The company also made substantial capital expenditure during the said period by way of purchase of factories etc. The delay in sanction of working capital eventually resulted in a temporary default in repayment of loans raised for the company against the pledged shares leading to sale of shares by the Lenders over which the promoters had no control. These shares came to be sold by the lenders when in fact the share prices decreased thereby causing a loss to the company. (viii) The forensic audit report refers to receipts of payments by the promoter shareholders namely GR Capital, Gopal Ramourti, NR Bora, LR Bora, AR Bora from the share sale proceeds not being reflected in corresponding bank entries. It is but obvious that the lenders who had received the sale proceeds in respect of the sale of the pledged shares, having already lent monies to the company, would appropriate the proceeds to satisfy their dues and hence no money would flow into the company's account or the account of promoters as such.

(ix) The average value received by pledge of these shares by the Company was at around Rs 55/- per share over the investigation period whereas the Company price had a peak value of ` 203.90 during October 2010 thereby showing the bonafides of the Company and its Promoters/Management. None of the promoters have availed/used any of these loan against shares and the entire amount so raised by way of loan against the pledge of the said promoters' shares were used entirely by the company for temporary working capital. (x) The entire stocks as shown in the audited accounts and balance sheet were not only verified and certified by the Management team but also audited by independent Chartered Accountant under overall supervision of the statutory Auditors of the Company. Besides each of these stocks were consumed in the following years under the manufacturing process in the various factories and the trading and manufacturing sales of the following year as can be evidenced from the stock movement register maintained at each of the respective locations. Stocks were not only verified and certified by the Management team but also audited by independent Chartered accountant at the respective locations.

In addition, the Bankers had carried out quarterly inspections to identify and verify the drawing power in order to set up the limits for the corresponding quarter based on this stock and debtors position. None of these audits ever showed any major discrepancies other than the periodic slow moving and non moving items that were marked out and written off. (xi) It is denied that the Fixed Assets appearing in the Audited Balance sheet of FY 2010-11 are fictitious. The Bankers of the company had taken symbolic possession of the Fixed Assets of the company under SARFAESI Act during the year 2012 and the list of all the Land and Building, Plant and Machinery and other additions to the Fixed Assets Schedule as Accounted and duly Audited on a year on year basis were found to be matching with the inventory and panchnama was recorded by the respective banks. No discrepancy whatsoever came to be alleged in that respect. (xii) The export sales of the company was a negligible portion of the total sales and misrepresenting the same would not help the Company in any way as no export benefits or concessional banking finance has ever been availed by the company.

(xiii) Dividend declared for the year 2010-11 was conditional upon and subject to the permission of the company's lenders as per the contractual obligations and the refusal of the necessary permission led to the cancellation of the said dividends despite the liquidity available with the company. The company has not inflated the profits in any of the accounting years and dividend declared and paid in the various years were in full compliance of the Companies Act 1956. It is pertinent to note that the performance of the Company and the cash flows generated in the years from 2005 to 2010 shows the availability of the necessary cash flows in those four years where the dividend was paid out as declared, particularly in the years 2009-10 and 2010-11 where the net cash flow from operating activity showed a surplus of Rs 516 lakh and Rs 1417 lakh respectively. The normal banking limits of the Company for increase in the working Capital is sanctioned by September/October each year. But in 2011, the same was delayed till March of 2012 despite a substantial growth in the business of the Company.

This coupled with the acquisition of the subsidiary in late 2010 and other Capital Expenditure incurred in the Baddi Factory to meet with the growing requirement of the main customer i.e. M/s Herbal life International led to a shortage of funds. After the search conducted by the Income Tax Department, the company came under pressure due to the rigid /stiff position adopted by its various suppliers and vendors who demanded immediate payments for their supplies and services without being willing to extend the usual period of credit. Similarly, the buyers and distributors were not willing to pay any advance amounts to TLPL towards the purchases by them. Furthermore, the simultaneous actions by SEBI set in motion against TLPL resulted in the steep fall in the share prices of the company's scrip and the potential investors in equity shied away from investing in TLPL which led the company to adverse circumstances.

(b) Gopal Ramourti (i) The Company, which was incorporated in 1974, had manufacturing capabilities of over decades in its 5 WHO-GMP compliant manufacturing units and serviced leading pharmaceutical Companies like Novartis, Pfizer, Herbalife, Lupin, Cipla, Mcleods, Wockhardt etc engaging over 1500 employees. It had exports to over 30 countries and a large domestic formulation business in India covering over 200,000 medical professionals in 27 states through 1018 field personnel and over 1200 stockists. (ii) The forensic audit recommended by SEBI carried out by M/s. Sarath & Associates report relied on the Tally programme for examining the records. The company was earlier using Oracle programme for regular accounting and maintenance of records. Simultaneously, the Tally programme was also run on trial basis for migration from 1st April 2012. Since the Auditors were not comfortable with Oracle programme they preferred Tally programme for auditing. This has misled the auditors as the Tally programme cannot be considered to be authentic or a mirror image of the Oracle data. It can be observed from the forensic audit report that each and every attachment of ledger accounts shown as evidence were from this trial run of the Tally Package.

In other words, all the evidences cited in Forensic Audit Report contain screen shots of Tally Accounting Package and hence inaccurate. (iii) The "approach" of the Auditors was to accept the report of the ITD and their documents, findings etc without applying their mind or seeking any concrete evidence to discover the veracity of those allegations and instead jumping to conclusions by blindly following their allegations. (iv) When pledged shares of the promoters are sold for loans given to the Company, the obvious fallout will be a journal entry in the books of the Company to debit the lender and credit the promoter whose shares are sold. Expecting funds inflow into the Company for crediting the "loan from promoter group" under the circumstances defies accounting logic. (v) While the forensic audit report alleges that paper companies were used to inflate the turnover of the Company named therein, there is no sale to any of these Companies at all in any of these years. (vi) Purchase and sale of Generic formulations was carried out in the trading division with proper invoices, delivery challans and payments /receipts were duly made/ obtained for these transactions.

The counter parties were all private/public limited companies and not paper concerns. Additionally, all necessary statutory compliances like VAT return, Income tax return have been duly filed both for the Company and the counter parties. (vii) In order to prove and provide evidence of Circular Trading and bogus purchase / sales, no attachments or enclosures or evidence can be found in the Audit Report like: (a) Non-existent Lorry Receipts or Consignment Notes (b) Denial from the counter party of invoices. (viii) The Company has achieved consistent and steady growth rates over the last several years and no meteoric rise happened in the results declared during the Investigation period. Growth rate was around 32 % for the year ended 31st March 2010. In fact in the quarterly results, the growth is around the same level of around 34 % (annualized) and nothing spectacular by any standards. The annual and quarterly percentage of increase in turnover are depicted below : TABLE 2 Year Turnover PAT Book % Growth (` in Crs) (` in Value of of Crs) shares Turnover 31st March Mar-06 157.08 9.67 12.82 26.45 Mar-07 198.63 14.09 16.27 26.45 Mar-08 296.81 18.03 23.57 49.42 Mar-09 373.18 22.12 32.70 25.73 Mar-10 494.64 32.63 49.81 32.54 Mar-11 660.51 49.44 70.82 33.53

TABLE 3 Qtr Net Sales Total Growth Net Profit Income (Rs in Crs) Dec-09 127.873 128.408 - 8.724 May-10 138.844 140.268 34 8.713 Jun-10 151.853 152.245 34 12.526 Sep-10 171.026 171.658 54 14.266 Dec-10 172.152 172.826 2 13.620

This is also the period when the GDP of India grew around 9% and the pharma industry was growing at around 16/17 % and the BSE Sensex grew by around 35 % (between Sept 2009 and Dec 2010 ) hitting a then all time high of 21,004 on 5th Nov 2010. (ix) The Company was ordered to be wound up on 30.04.2014 and provisional liquidator was appointed by the Bombay High Court, who took charge of books of account of the Company on 12.09.2014. All the factory operations were discontinued as the banks took possession of the Fixed Assets. Staff members of the Company also left one by one. Consequently, the records of the Company and man power etc. are unavailable and it is difficult now to collate fresh information and data in this regard. (x) The Promoters/Directors have neither purchased nor sold any shares during this period and furthermore did not benefit in any way. During the investigation period, loans were taken by the company (not individuals) for its genuine business needs against pledge of shares belonging to the promoters. It is important and pertinent to note that the Promoters did not raise any money by pledge of their shares but assisted the Company by lending their shares to the Company to meet its working capital needs while awaiting genuine and bona fide limits from its bankers. The lenders were unwilling to wait out the fall in price leading to the invocation of the pledge of shares. Their decision to sell the pledged shares is what caused a sharp fall in the shareholding of promoters from 63.74 % to 42 % (i.e. a reduction of 46.27 lakh shares). This was clearly beyond the control of the promoters or the Company. (xi) The average market price at the time of the pledge was around Rs 111.14 per share assuming a minimum of 2 time cover requirement of the lender and a higher cover would only mean a higher market value. Loans were therefore availed of at a valuation of an approximate average of Rs 55 per share through the year.

(xii) The volume of TLPL's shares traded during the period when TLPL shares were pledged, increased in comparison to the earlier period (i.e. before the Investigation period). It went up from 28,900 shares a day to 151,000 shares per day for the following reasons: a) The overall market improved due to good economic growth and favorable factors that led the BSE Sensex from around 15551 ( 1st Sept 2009) to a historic high of 21004 ( Nov 2010 ) that is a 35 % growth in a little over a year and the volumes also grew. b) This period was characterized by several new investors coming into the Stock Market as can be seen from the volumes and price movements across the sectors improving the overall market volumes. c) TLPL was also listed in the NSE for the first time on 15th June 2010 and witnessed increased interest from investors with a growth in the number of shareholders from 15124 to 18536. d) The number of shareholders also went up during this period as per the annual report of the Company as below: March 2009 15,124 March 2010 15,162 March 2011 18,536 March 2012 19,818 (xiii) Only roughly 29 % of the shares pledged were in fact invoked/sold.

It is only those lenders who were unwilling to wait out the sudden drop in share price and erosion in cover that sold and created further panic. The principal cause of this fall in the scrip of TLPL was the invocation by ECL Finance Ltd by sending a recall notice on 8th December with one day notice to repay Rs 5 Crs forthwith and upon failure to repay, invoked 912500 shares (33% of invocation on that day) and sold it immediately thereafter. In fact, as many as 29.22 lakh shares were invoked to be sold immediately thereafter on 9th Dec 2010 and around 18.30 lakh shares were invoked on 14th Dec 2010. In other words, on 2 days around 47.52 lakh shares were invoked demonstrating that the sale of promoters shares (21.74 % ) took place within a week. It is further relevant to point out that the market conditions turned hostile suddenly (particularly for the mid segment shares despite a surge in the BSE Sensex) and over 500 such scrips are reported to have hit the lower circuit on the 14th Dec 2010 apparently due to hurried margin calls. The BSE Sensex also dropped around 9% to 19,242 on 9th Dec 2010 from its historic peak on 5th Nov 2010 of 21004 (that is around a month following the historic peak achieved in Diwali that year).

(xiv) No allegations are made out in the SCN that any of the promoters or directors benefited in any way due to the alleged corporate announcement. On the contrary, loan was taken against LIC policy of ` 62.90 lakh and was used to invest into TLPL to supplant the fund requirements during early 2011.

(c) Rajendra C Bora (i) It is settled position in law that the obligation of the directors in terms of the Companies Act 1956 is to sign the Financial Statements of the Company after duly satisfying themselves of the same and presenting the same to the Stock Exchanges where the company's shares are listed and to the shareholders of the company for their approval and once that obligation is discharged bonafide, directors cannot be held liable for any alleged consequences thereof impacting the prices of the shares of the company in the stock exchange by colouring such an impact as being fraught with manipulation or fraud. (ii) The Noticee also adopts the reply of the company i.e. Twilight Litaka Pharma Limited.

(d) Nainish Rajendra Bora, Ramesh Ramourti and Raghavan Ayyangar Replies filed by these noticees stated that they have adopted the submissions of TLPL. The content of their replies is also broadly similar to the one submitted by Rajendra C Bora. Additionally Raghavan Ayyangar has also mentioned that he had resigned from the Board of Directors of TLPL with effect from October 06, 2014 which was duly acknowledged by the company.

(e) Abhijit Bora Some emails were received from Abhijit Bora pertaining to his having resigned from the board of directors of TLPL in 2011 and that the same had not been recorded by the company in the subsequent Annual Reports. He also distanced himself from the allegations in the SCN claiming he was not in charge of the accounts and financial matters of the company. Submissions made in his reply post the opportunity of personal hearing granted to him are inter alia as follows:

 I had resigned from the TLPL from 01.11.2010 and thereafter I have not kept any connection with the Company. I had also disassociated my family relationship with my father Shri Rajendra Chandmal Bora and Nainish Rajendra Bora who had been Chairman and ED & CFO respectively of the Company during Investigation period so as to completely keep me away from them from all sides.  A long and inordinate delay of more than around 7 years has caused great prejudice in defending the case in a proper and comprehensive manner.  SEBI has solely relied upon the Forensic Audit conducted by M/s Sarath and Associates (Sarath) and thereupon conclusive findings are drawn which is in gross violation of basic principle of law of equity, fair play and natural justice.  The common SCN dated 23.06.2016 issued to 10 persons/entities does not elucidate my role and involvement particularly in making alleged erroneous corporate announcements on 31.01.2010 and 17.05.2010 by the TLPL and other noticees except that during the relevant time I was an executive director of TLPL.  ITD conducted search u/s 132 of the Income Tax Act, 1961 against TLPL on 13.11.2011 and pursuant thereto passed Assessment Orders dated 25.03.2014 u/s 143(3) r. w. 153A of the I T Act inter alia for financial years 2009-10 and 2010-11.

It is understood from sources that ITD has duly accepted Returns as filed by TLPL save and except disallowing deduction u/s 80IC as claimed by TLPL for which an Appeal before CIT is filed by TLPL. Thus, the quantum of sales, purchase and other entries as passed in the books of TLPL are duly assessed by ITD as genuine.  As an Executive Director of TLPL, I was only handling International Business Division of TLPL. Mr. Ramourti, qualified Chartered Accountant was looking after financial management and Banking Operations of TLPL and Mr. Nainish was looking after Treasury and day to day Banking operations of TLPL as can be seen from the particulars of their appointment mentioned in the Annexure to the notice of AGM dated 20.08.2010.  During October 2010, through outside sources, I came to know about wrongdoings in TLPL and since at the relevant time nothing was discussed in board meeting and the conduct of the board meeting was merely a formality only on paper, I resigned from TLPL on 01.11.2010.  Section 27 of SEBI Act, 1992 stipulates that the person should not be held liable for any punishment under SEBI Act if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

(e) P.D. Gupte and AS Chandvankar TLPL's MD i.e. Gopal Ramourti had informed vide email dated 03.11.2017 that P.D. Gupte and AS Chandvankar had expired. No official certification to this effect has however been received.

(f) Sanjeev Tole (i) Sanjeev Tole is a Company Secretary by profession and has an experience of over 35 years. He was appointed as the Company Secretary of the Company in the year 1991. Prior to joining the Company, he was acting as a Deputy Company Secretary for more than 15 years in a Pune based listed public limited company having more than one lakh shareholders. After his appointment as the Company Secretary he was also appointed as a non-executive director of the Company in October 1992. He subsequently resigned from the Board of Directors on 12 January 2011. Being a non-executive director, he was not involved in the day to day affairs of the Company and his role as a non-executive director was very limited. As a result, he was neither entitled to, nor drawing any salary or remuneration during his entire tenure as a non-executive director apart from the sitting fees for attending meetings of the board of directors similar to other Independent Directors, although, he was drawing salary for the services being rendered by him as a Company Secretary of the Company. He was only responsible for undertaking Secretarial, Legal Administration and HR functions of the Company.

This division of role, responsibilities and assignments was in fact specifically decided by the board of directors of the Company in its meeting held on 16 August 2005 and was also officially communicated to him. (ii) Mr. Tole is 64 years old and is neither in employment nor in practice as Company Secretary and is fully retired from all professional commitments. As a result, he is not in possession of most of the documents/records of the Company, which would have demonstrated that he had exercised reasonable care and diligence while acting as a non-executive director of the Company. The same has clearly jeopardised his position and has restricted him from putting up a complete reply to the SCN. Further, he is not even in a position to call upon the Company to supply it with documents required by him for preparing the reply as after the passing of the winding up order, all the documents and records of the Company have been taken into possession by office of the Liquidator pursuant to the order of the High Court dated 30 April 2014. (iii) The concerned senior executives of the Company along with the employees of the Accounts Department used to prepare statement of Accounts, Trial Balance, Balance Sheet & Profit & Loss Account at the Bombay Head Office under supervision of Mr Ramourti and Mr Nainish Bora.

After preparation of final accounts, the Managing Director & Chief Financial Officer used to go through the same. Thereafter the accounts were submitted to the Statutory Auditors to conduct audit. The company had appointed M/s. V. Shankar Aiyar & Co. Chartered Accountants, Mumbai as Auditors of the Company, a very well experienced and reputed audit firm established in the year 1947. (iv) After completion of the audit, the Audit Committee of the Company used to hold meetings to check, examine, consider and review the accounts to the Board of the Company. The obligations of the audit committee to check and examine the accounts in terms of clause 49 of the Listing Agreement is not a mere formality as the obligations are quite onerous. The Chairman of Audit Committee, Mr Avinash Chandvankar was also an experienced Chartered Accountant holding the post of Independent Director in the Company. In the duly convened Audit Committee Meeting, Audit Committee used to consider duly audited accounts and after its satisfaction would place the same for the approval by the Board of Directors. All the Audit Committee Meetings were also attended by the Statutory Auditors of the Company.

Thereafter, duly audited accounts were placed before the Board for its consideration. After detailed discussion, the Board used to adopt these accounts and used to authorize some of the directors to sign these accounts on behalf of the Board to the effect that these accounts reflects true and fair view of the operations of the Company. Such discussions were not a mere formality and all the issues raised by the board of directors were always duly addressed by the Managing Director himself, either verbally or in writing. Whenever Mr. Tole attended the Audit Committee meetings in his capacity of secretary of the said committee, he did not come across any discussion, any doubts, any whisper of discomfort or dissatisfaction from internal auditors, independent directors or statutory auditors. The audit reports were always unqualified and even without any emphasis of matter. There were no observations highlighted during the Audit Committee meetings about the internal controls of the Company. Mr. Tole thus had no reason to suspect the accuracy, completeness or correctness of the financial statements when they were placed before the Board meeting for approval.

(v) While placing audited accounts for consideration before the Audit Committee as well as the Board, the Company used to obtain certificate from Mr Nainish Bora, Executive Director and CFO and/or Mr Gopal Ramourti, Managing Director wherein they would certify that the Audited Financial Results of the Company which are being placed before the Audit Committee/Board as the case may be, do not contain any false or misleading statements or figures and that the same do not omit any material facts which may make the statements or figures contained therein misleading. This was the certification along with the Corporate Governance Report submitted to the Board and Managing Director and CFO have signed the same. (vi) After the Accounts were adopted by the Board of Directors, the same used to be submitted to the Auditors for their signatures and report thereon. In the Audit Report the auditors used to clearly state that they have received all the information and that the Balance Sheet gives true and fair views of state of affairs of the Company. (vii) Mr. Tole has never signed any balance sheet of the Company in his capacity as a director, but has always signed as Company Secretary in pursuance of provisions of Section 215 of the Companies Act 1956. Audited Balance Sheet is signed by the Directors as well as Company Secretary pursuant to the provisions of the Companies Act and they are signing it in different capacities with different responsibilities.

The Directors sign the Balance Sheet on behalf of the Board confirming that Balance Sheet reflects a true and fair view of the affairs/operations of the Company, whereas the Company Secretary signs the Balance Sheet to confirm that the Company has complied with all the relevant provisions of applicable Acts and Rules such as holding of Audit Committee & Board Meetings and its proper conduct, due notification to the Stock Exchange, closure of Trading Window etc. Circular No. 7 of 1972 dated 12 May 1972 issued by the Ministry of Company Affairs (MCA) deals with the restrictive role and responsibility of the Company Secretary when there are Managing Directors and others who are responsible for the accounting activities. (viii) The auditors of the Company i.e. M/s. V. Shankar Aiyar & Co. Chartered Accountants had not made a single qualification in respect of true and fair views of the financial data / balance sheet in the Auditors Report for the period under investigation in the present matter. (ix) The Company had availed credit facilities from a consortium of 8 banks and the members of this consortium used to carry out periodical inspection and stock audit of each factory.

These reports were always placed on record in the consortium meeting. The consortium banks or members, at no given point of time, mentioned about there being any negative finding or remark in these reports. Instead, they readily increased the credit limits of the Company on a year on year basis. (x) A liability, if any, can only be attributed to Mr. Tole if he would have not acted in spite of there being several instances which would have raised a red-flag/suspicion in the mind of any reasonable man. (xi) In paragraph IX of the SCN, it has been alleged that the Company and its board of directors including Mr. Tole have by their actions/omission violated the provisions of SEBI Act, 1992, Regulation 3 and 4 of the PFUTP Regulation. However, such serious allegation has been levied without even specifying the role or specific act which attributes any such conduct of wrong doing on Mr Tole in the entire exercise of preparing of the financials of the Company. The SCN is absolutely ambiguous in applying facts as to which specific act allegedly fits into the parameters of fraud prescribed by a particular sub-regulation or regulation of the PFUTP Regulations or that of Section 12 of the SERI Act, 1992. (xii) The corporate announcements were made by the Company in compliance with the obligations imposed upon it by the Listing Agreement, which mandates quarterly disclosure of financial statements to the stock exchanges.

The financial results disclosed by the Company to stock exchanges in effect represent the true and fair picture of the financials approved by the Board of Directors of the Company. It is submitted that the only level of care that is expected of Mr. Tole is to ensure that the financials are approved by the Board of Directors and are in the format prescribed in the Listing Agreement. (xiii) At this juncture, we would also like to submit that SEBI's averment that the corporate announcement made by the Company in respect of the financial statements and specifically the one mentioned in paragraph IV of the SCN had a major impact on the price of the shares of the Company, is clearly a surmise and conjucture. Increase in the price of the shares of a Company after making of the corporate announcements is quite natural and an expected market reaction. (xiv) SEBI has failed to look into the fact that during the investigation period, apart from announcement pertaining to financials, the Company had made various other positive price sensitive announcements. The price of shares of any company which has made such positive corporate announcement during the course of one calendar year is bound to rise and the same cannot be seen as a red flag for any prudent person to suspect that the financials of the Company have been manipulated.

He cannot comment in respect of period beyond investigation as he had resigned from the board of directors in the month of January 2011 and therefore he is neither aware nor responsible for the fall in the price of the shares of the Company after his disassociation. (xv) The importance of cogent evidence and manner of proving fraud has also been laid down by Hon'ble Securities Appellate Tribunal in the case of Ess Ess Intermediaries Anand Saurashtra Society Vs SEBI reported in 2013 SAT 73, in paragraphs 11 and 12 of Order. The same is reproduced herein: "11. We now deal with the main issue regarding whether or not the Appellant has violated Regulations 4(1) and 4(2),(a),(b),(e),(g) and (n) of the PFUTP Regulations, 2003. Regulation 4(1), as reproduced above, provides that no person shall indulge in fraudulent and unfair trade practice in securities. Regulation 4(2) provides that dealing in securities shall be deemed to be fraudulent and an unfair trade practice if it involves fraud and may include all or any of the ingredients enumerated in sub-sections (a),(b),(e),(g), and (n) of Regulation 4(2).

Regulation 4(2)(a) deals with an act which creates a false impression with respect to trading in the securities market. Regulation 4(2)(b) deals with a situation where the securities are not intended to be transferred but operate only as a device to inflate or depress the price of such securities for wrongful gain or avoidance of loss. Regulation 4(2)(e) deals with manipulation of the price of a security. Regulation 4(2)(p) deals with transactions which are not intended to be performed by taking them to their logical conclusion. Similarly, Regulation 4(2)(n) prohibits circular transactions between intermediaries which ore mainly intended to increase commission and also to provide a false appearance of trading in that security. Paras 12 to 15 of the Impugned Order deal with the allegedly manipulative way in which the trades in question were synchronized. 12. Thus, a perusal of the above stated provisions of Regulation 4 and its sub-regulations reveals that the allegation of fraud can be levelled against a person/entity only for good reasons and on the basis of clear and unambiguous evidence.

Such an allegation of fraud may shake the very foundation of the business of the entity in question and may adversely affect the same. Therefore, the onerous task of proving such a serious allegation lies on the person levelling such accusation on the basis of preponderance of probability. ..." (xvi) Hon'ble Securities Appellate Tribunal emphasising on the importance of evidence for liability of a director in the matter of Rahul H. Shah v. SEBI (2004) 55 SCL 416 (SAT) observed that: "no hard and fast rule exists whereby it could be said as to when director will be vicariously responsible for acts of directors in charge of day to day affairs of company — principle set out by Supreme Court indicate that if finding is given that appellants have nothing to do with day to day affairs of company then they cannot be held to be guilty of violation because no vicarious liability exists under Section 118. However, the principle set out by the Supreme Court and the spirit of Section 27 of the Act would indicate that if a finding is given that the appellants have nothing to do with the day today affairs of the company, they cannot be held guilty of any violation as there is no such thing as vicarious liability under Section 11B of SEW Act read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995."

Vide letter dated March 13, 2018, the Institute of Company Secretaries of India ("ICSI") forwarded a copy of the order dated January 18, 2018 passed by ICSI's Board of Discipline which had initiated an enquiry into the matter and concluded that Sanjeev Tole being the Company Secretary of TLPL was not guilty of Professional or other misconduct.

8. An opportunity of personal hearing was granted to all the noticees. The Opportunity was availed of by the following noticees on the dates mentioned against their names: TABLE 4 Sr. Noticee Date of Hearing Representative No. 1. Twilight Litaka Pharma 16.08.2017 Adv. Raghavan Limited Sarathy 2. Ramesh Ramourti 3. Raghavan Mathurakavi Srinivasa Ayyangar 4. Gopal Ramourti (M.D. of In person TLPL) 5. Sanjeev D Tole 16.08.2017 In person along with Advocates - Sharad Abhyankar and Manish Chhangani, Khaitan & Co. 6. Abhijit Rajendra Bora 24.05.2018 Advocate Prakash Shah and Suraj Padhiyar, Company Secretary

9. Summary of the oral submissions made by the noticees who availed of the opportunity of personal hearing are as follows: (a) TLPL, Ramesh Ramourti and Raghavan Ayyangar Advocate Raghavan Sarathy submitted that directions against the company are of no effect since the company is currently under liquidation proceedings. SEBI should either take permission of the High Court /NCLT before proceeding against the company or the current proceeding itself should be transferred to the company court.

(b) Gopal Ramourti Gopal Ramourti gave a chronology of the affairs of the company leading up to the forensic audit report’s allegations of malpractices and also made his submissions regarding the allegations in the show cause notice. His submissions were as follows: (i) The company was incorporated in 1974 and was engaged in the pharmaceutical business. Its business model was primarily threefold-contract manufacturing, exports and domestic formulations. At one point of time, the company was producing 70% of TB medication under use in the country. Contract manufacturing being a low margin business, there was an increasing focus towards the other two areas of the business. Estimating a rapid growth in business, infrastructure was sought to be expanded by the company. In 2010, land and factory was purchased for which bank finance was sought. Approval for bank loans came late and hence shares of promoters were pledged for raising finance. Inadequate financial planning led to the crisis in the company. In addition to informal borrowings, loans were taken from institutional lenders, who had also been monitoring business activity in the company.

(ii) The current investigation into the company’s affairs was subsequent to raids conducted by the Income-tax Department. The forensic audit report was also prepared and submitted pursuant to the same. However, subsequently the ITD has concluded their examination and submitted an assessment report. This report does not indict the company for any malpractice with respect to its books of accounts. However, since the assessment report disallows certain tax exemptions, the company has filed an appeal against the assessment report. Therefore the very reason for which the audit report was submitted has ceased to exist. The ‘finding’ of the audit report must be seen in the context of the subsequent actions of the IT department. (iii) The forensic audit report’s principal allegation is that of the company engaging in circular transactions. This is incorrect. Transactions are backed by invoices and bank statements. Possibly one of the reasons why the audit report has erred is because it relied on entries made using the accounting software – Tally which was, during the relevant period, on a trial run.

Till 2010-11, the company had been using Oracle. In the years 2009-10 and 2010-11, a parallel run was taking place in order to migrate all accounting activity to ‘Tally’. By the year 2012, Tally was fully functional. Therefore entries made during the relevant period where two different accounting software were being used at the same time, was bound to be some errors. Infact, an email to this effect had also been sent to the forensic auditor. In the detailed reply to SEBI dated July 29, 2016, all these aspects had been discussed and were backed by relevant VAT returns and income tax returns etc. to disprove allegations of circular transactions and bogus invoices. (iv) The SCN does not point to the reasons for which such alleged manipulation of books of accounts or circular trading could have taken place. There had been no exit of promoter holding pursuant to the period during which the alleged irregularities had taken place, except when the lenders had sold the pledged shares of the promoters. In November 2010, the company’s scrip was in tandem with the general market upswing. In December 2010, there was a sudden fall in the scrip’s price pursuant to sale of the pledged shares by the lenders.

(v) The winding up proceedings against the company were initiated by the State Bank of Hyderabad. Lenders to the company were largely institutional and there was never any complaint from these institutions regarding malpractices in the company’s management of its books.

(c) Sanjeev Tole Advocate Sharad Abhyankar representing Sanjeev Tole presented the following chronology which according to him was relevant for the case:  The noticee had joined Litaka Pharma in 1991 and was its company secretary. From 1992 onwards he was also its non-executive director. The company was managed by the Bora family.  In 2005 reverse merger of the company took place with Twilight. Pursuant to the restructuring, functions were delineated between Mr. Gopal Ramourti and the Boras. The functions relating to financial decisions were to be carried out by MD - Gopal Ramourti. Sanjeev Tole was to report to Abhijit Bora.  On 12 January, 2011 the noticee stepped down as director. He also submitted as follows: (i) Certain documents enclosed in the reply dated December 13, 2016 earlier filed by the noticee, were pointed out to demonstrate that the Board of the company had limited the noticee's role to legal and secretarial functions. A resolution had also been passed on December 08, 2009 whereby the list of "officers in default" were published which did not include Sanjeev Tole. Accounting functions were being handled by the Mumbai office while legal and secretarial functions were being performed from the company's Pune office (where the noticee was posted). (ii) There was no reason to believe that there were any malpractices taking place in the company. Though the noticee was a secretary to the Audit Committee of the company as well, there was never even a whisper of objections raised in the Audit Committee that could give rise to doubts regarding financial malpractices. (iii) A consortium of 8 banks which had lent funds to the company had also been scrutinizing the company's financial statements. However, no questions had been raised with respect to the company's accounting practices. Infact, the banks kept increasing working capital lending limits.

The reports of Auditors were also unqualified, leading to the presumption that there was no reason to suspect any wrongdoing by the company or its management. (iv) The noticee also mentioned that when he had come to know of promoters having pledged shares, he sent a formal letter to the promoters, in his capacity as company secretary, stating that they are duty bound by securities law to communicate this information formally to the company for onward disclosure to the stock exchange. Pursuant to his letter the promoters formally conveyed details regarding the pledge of shares to the noticee who inturn ensured disclosure of the information to the stock exchange. (v) With reference to the SCN issued to the noticees, Mr. Tole also pointed out that the rise in the price of TLPL's scrip could not be attributed solely to the specific corporate announcements indicated in the SCN. There were several corporate announcements made by the company during that period. (vi) The noticee also pointed out that the dividend declared in 2010 had been paid in 2011. However, the instance of dividend declared but not paid took place after his resignation from the company.

(d) Abhijit Bora (i) The noticee should be exonerated since he had resigned on 01.11.2010. The Date of resignation was considered for all the other persons who were directors in TLPL. (ii) The Annual report of the company indicated clearly that the noticee's job was professional and executive in nature. He was concerned with the commercial/international business and had nothing to do with banking/financial transactions. (iii) His name was wrongly indicated as director subsequent to his resignation, regarding which had made complaints to SEBI and to the company.

10. Since more than six months had elapsed from the last date of hearing and receipt of written submissions, vide letter dated December 04, 2018, the noticees were afforded an opportunity to make additional submissions, if any, on the SCN. Mr. Gopal Ramourti filed additional submissions dated 03.01.2019 and 18.01.2019 and appeared in person on 04.01..2019 for clarifying certain aspects of the written submissions.

Issues for Consideration 11. The SCN alleges at para IX that the investigation revealed that the actions/omissions of TLP and its Board of Directors are in contravention of section 12A(a), (b) and (c) of SEBI Act, 1992, regulations 3(b), (c) and (d) and regulations 4(1) and 4(2)(k) and (r) of the SEBI (PFUTP) Regulations, 2003. With respect to the 'Financial Irregularity' aspect of the investigation conducted in the scrip of TLPL, the Investigation Report has primarily relied on the Forensic Audit Report to conclude that manipulation of books of accounts took place. No independent verification of the same or separate investigation by the Board appears to have taken place. In this context, the investigation report, had concluded that among other things, TLPL had engaged in manipulation of books of accounts for the FY 2009-10 and 2010-11 and misled the investors by not providing a true and fair view of its quarterly and yearly financials. Accordingly, the limited question to be addressed in this Order is whether the books of accounts of TLPL were manipulated and whether the same amounts to violation of section 12A(a), (b) and (c) of the SEBI Act, 1992, regulations 3(b), (c) and (d) and regulations 4(1) and 4(2)(k) and (r) of the SEBI (PFUTP) Regulations, 2003.

12. The SCN has relied on the forensic auditor's report to specifically allege that TLPL had manipulated its books of accounts in the following manner- (i) Sales recorded to the tune of ` 266.71 crore for FY 2009-10 and ` 577.24 crore for FY 2010-11, were inflated. (ii) Purchases recorded to the tune of ` 349.1 crore for FY 2009-10 and `509.97 crore for FY 2010-11, were inflated. (iii) Certain additions to Fixed assets appearing in the audited balance sheet of FY 2010-11 are fictitious and are a result of book additions due to adjustment entries in the paper companies. (iv) Export sales were inflated by booking the same through entries in group companies on monthly basis. There are no documents to support the recorded export sales. (v) Profits were artificially inflated, with there being no real cash flows. According to the Forensic audit/ Investigation report, the inflation in turnover was by way of multi-layered maze of companies which were involved in circular transactions of money. TLPL allegedly had transacted with a set of paper companies, bank accounts of which were opened by making the staff members of TLPL as signatories to those companies.

13. I note that the Forensic Audit Report carries several caveats and contradictions. The forensic audit has not attempted to segregate the actual sales from the bogus sales and has resorted to categorising the entire sales of TLPL as "bogus" implying thereby that there was no actual sales of TLPL for the relevant period. Further even the figures of bogus sales for the same period differs from one page to the other in the report. For instance, while bogus sales is recorded on page 19 of the report as Rs 348.77 crore for the FY 2009-10, on the next page i.e. page 20, breakup of client wise sales for FY 2009-10 is provided, which has been totalled as Rs 266.71 crore.

14. On page 46 of the Forensic Audit Report, the following inter alia is stated: "The Forensic Audit has further led to the following facts other than bogus sales and purchases and circulatory transactions: 7. Falsification of Bank Statements"

However, on page 47 of the report, it is stated that the report is mainly based on a sample scrutiny and admits inadequate audit due to absence of bank statements and confirmations, but arrives at a conclusion of Rs 4892.67 crore as the amounts involved in financial irregularity without any supporting evidence. On the other hand, in atleast 2 unnumbered pages of the Report, extracts of ledger entries are reproduced along with the narration that bank statements do not reflect the entries in the ledger extract. The audit report does not furnish any further details to highlight the variation between ledger entries and bank statements.

15. On page 17 of the Report, the following is stated: " The turnover, purchases and expenses are termed as bogus in the entire report hereafter for the reasons, the management has failed to submit the supporting documents like, physical stock existence, invoices, delivery challans, Lorry receipts for purchases and sales, the supporting documents for the expenses booked. Similar methods of manipulations are adopted in all the three years under audit."

Conclusion on bogus purchases or expenses of a company solely on account of its management's failure to submit supporting documents is not a fool-proof method of forensic audit. The documents annexed to the forensic audit report also do not provide a coherent picture supporting the allegation of financial irregularity. Despite such limitations of the Forensic Audit Report, I have examined each of the allegations made in the Forensic Audit Report and tested the same against available evidence along with supporting documents provided by the noticees during the course of opportunity of hearing granted to them.

16. Accordingly, the following issues are listed for consideration: (i) Whether the Income-tax Department's reference corroborates financial irregularity or manipulation of financial statements by the noticees? (ii) Whether the absence of documents supporting sales/purchases supports the allegation of financial irregularity? (iii) Whether the Forensic Audit Report reveals manipulation of books of accounts ? (iv) Whether there is sufficient evidence supporting the allegation of artificial inflation in purchases and sales by TLPL? (v) Whether the price and volume movement in the scrip of TLPL points to manipulation of the company's financial statements? (vi) Whether the pledge of promoter shares supports the allegation of manipulation of company's financial statements?

17. The legal provisions cited by the SCN and relevant for application in this case are reproduced hereunder for ease in reference: "SEBI Act- Section 12A Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. 12A. No person shall directly or indirectly— ... (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c)engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;

...

PFUTP Regulations: Prohibition of certain dealings in securities 3. No person shall directly or indirectly— ... (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

Prohibition of manipulative, fraudulent and unfair trade practices 4. (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:— ... (k) an advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors; (r) planting false or misleading news which may induce sale or purchase of securities."

Reference by Income-tax Department to SEBI 18. The investigation in the instant case was triggered by a reference dated 27.02.2012 made by the Income-tax Department (ITD) pursuant to a search and seizure and survey action carried out by the ITD at the premises of TLPL. The said letter inter alia stated that many of the seized documents contain details of concerns promoted by the Group to carry out accommodation entries and also alleged that certain purchases and sales shown by TLPL were not genuine, on the basis of statements made by the company's officials. Accordingly on receipt of the letter from ITD, SEBI directed a forensic audit and issued the SCN on the basis of the report of the forensic auditor, which in turn had relied on the information provided by ITD. However, subsequently, it is understood that the ITD conducted an assessment of the income of TLPL and passed orders dated March 25, 2014 with respect to TLPL for the FYs 2009- 10 and 2010-11 along with another order dated March 13, 2014 with respect to Unilite Healthcare Pvt. Ltd. (a related business concern of TLPL) for the FY 2010-11.

These assessment orders did not raise any allegations of non-genuine sales or purchases or related matters. The final orders against TLPL were merely in the context of whether expenditure incurred on a certain factory was eligible for exemption in terms of section 80IC of the Income-tax Act. The said assessment orders concluded that the claim of deduction under section 80-IC made by company is not allowable and accordingly issued demand notice and directed issuance of show cause notice for imposition of penalty. However, the said assessment orders contained no findings or conclusions with respect to the allegations raised in ITD's letter dated 27.02.2012, which is the subject matter of this Order. There have been no other communication, reference or orders from ITD received by SEBI regarding any finding of financial irregularity or fabrication of false sales and purchase figures. Furthermore, the Managing Director of TLPL i.e. Gopal Ramourti has submitted an affidavit dated January 11, 2019 affirming that there are no other proceedings against the company or its MD pertaining to alleged manipulation of books of accounts.

In the absence of any further contrary information in this regard, it is understood that the grounds on which ITD had initially referred the case to SEBI, no longer subsists at present. Infact, the ITD Assessment order of Unilite Ltd. (which was described in the audit report as being a paper company for the purpose of making adjustment entries) also erodes the credibility of the report's conclusions.

Absence of documents 19. The noticees have submitted that pursuant to the search and seizure conducted by the ITD, several documents pertaining to the company had been seized by the ITD. Subsequently, the company was ordered to be wound up vide order dated 30.04.2014 of the Hon'ble Bombay High Court and the Official Liquidator took custody of the records of the company. In their reply, the noticees have enclosed copies of the High Court's order and the minutes recorded by the Liquidator to support their claim. Consequently, according to the noticees, since considerable time has elapsed after the alleged period of violation, they are unable to buttress their arguments with sufficient documentation. I have considered the noticees' submissions. Given the constraints indicated above, I take note of the noticees' inability to produce complete documentary evidence to rebut the allegations.

Financial Irregularity- Artificial inflation in purchases and sales 20. In response to the allegation that sales were inflated, the company's MD i.e. Gopal Ramourti submitted, vide his letter dated September 15, 2017, certain invoices and sales tax returns to substantiate that there were genuine sales made by the company. At the same time, he claimed that since the Official Liquidator had taken custody of all original documents of the company, he was unable to support his arguments with sufficient documents.

21. As per the Acknowledgement copies of the Sales Tax Returns filed for the financial years 2009-10 and 2010-11, the gross sales on which sales tax has been paid are `472,60,03,431 and ` 537,96,88,594, respectively. Mr. Ramourti has also submitted documents evidencing export sales amounting to ` 33,50,336 in the financial year 2009-10. I have also examined the annual reports of TLPL for the FYs 2009-10 and 2010-11, disclosed on the stock exchanges. The said annual reports have disclosed the gross sales for financial year 2009-10 as being ` 482,98,24,224 and for financial year 2010-11 as being ` 651,32,86,395, both figures appearing to be relatively close to those stated in the aforesaid Sales Tax Returns. On the other hand, the forensic audit report, at page 19, lists bogus sales for the financial years 2009-10 and 2010-11 as ` 348.77 crore and ` 577.24 crore respectively. The forensic audit report, while claiming that there are bogus sales in 2009-10 and 2010-11, has not accounted for what constitutes actual sales. Clearly, based on the acknowledgement copies of the sales tax returns and export sales invoices, it cannot be said that the company's sales were bogus. Since the sales tax return itself records ` 472.60 crore as sales for the FY 2009-10 and the Annual Report for the same year records sales as being `482.98 crore, it would have been prudent for the forensic auditor to extract the inflated sales more methodically. Instead, I find that the forensic auditor has done a sample scrutiny and hastily rushed to conclusions leading to the enforcement proceedings against the Noticees in this context.

22. Bulk of the forensic audit report was based on ledger entries, certain extracts of which are included in the report. Also, there are some observations pointing out that the sales/purchase entries made do not have corresponding entries in the concerned bank statements. The report also provided illustrations of ledger entries where the opening and closing balances of the end of one financial year and beginning of another did not match, raising obvious questions of incorrect financial statements. In reply to these allegations, TLPL and its MD – Gopal Ramourti have contended that the Forensic Audit Report has wrongly looked at the Tally Accounting Software for financial year pertaining to 2009-10 and 2010-11. According to TLPL and Gopal Ramourti's submissions, TLPL had earlier used Oracle Accounting Software and later changed to the Tally Software. The transition took place between 2009 and 2012 and therefore accounts in the Tally Software during the said period were in ‘trial run’ mode. At the time of the forensic audit in 2012, the company was fully using Tally. However, those ledger entries in Tally pertaining to earlier financial years could not be relied upon since there were bound to be errors during the phase of transition from one Accounting Software to the other. To support his claim, Gopal Ramourti has vide reply dated 18.01.2019 submitted certain ledger extracts prepared under the Oracle Software for the same impugned period. I have perused the same. The format of the entries differ from those recorded in the forensic audit report thereby indicating that the financials were being prepared in the Oracle accounting package as well. This points to the distinct possibility that the forensic auditor's reliance on the ledger extracts prepared in the Tally software ignoring the statement of accounts in Oracle may have led to the divergences in the finding. Moreover, I do not find that the financial irregularities concluded by the auditors and alleged in the SCN have been made after correlating the same with bank statements. Therefore, in my opinion, the finding of 'bogus sales' given by the Forensic Auditor does not stand sufficiently substantiated against the Noticees.

Price and volume changes in the TLPL scrip 23. A reading of paras III, IV and V of the SCN suggests that there is a link between announcement of financial results for quarters ended March 31, 2010 & December 31, 2010 and the increase in price and volumes in the scrip of TLPL during the calendar year 2010. Though the SCN does not explicitly make out any allegation of market manipulation, the charts reproduced point towards the aforesaid suggestion. I am not however inclined to accept the indirect suggestion of market manipulation to be connected to the allegation of financial irregularity in the books of accounts made out in the forensic report mainly for two reasons. Firstly, the improvement in the performance of the company was not disproportionate to the financial results of the previous years or previous quarters. Secondly, there were several other announcements in and around the same period which would have equally aroused the attention of investors in the scrip of TLPL, for instance those pertaining to additions in clients and capital expenditure by way of purchase/installation of factories and plant & machinery, which have not been factually disputed. Further, the Investigation Report itself suggests that certain other entities (not alleged to be in collusion with the noticees to this Order) had indulged in self trades leading to volume manipulation in the scrip of TLPL.

Pledge of shares by promoters 24. While not a specific allegation in the SCN, the reduction of promoter shareholding in the company has been listed as one of the relevant facts in the SCN. The investigation report notes that shareholding of the promoter entities reduced from 63.74% to 42% which was due to invocation of shares pledged by the promoters and that while rosy financial results were published in the public domain, promoters offloaded shares by not repaying the loans. Since this allegation is significant in determining the circumstances or motive behind financial irregularities in the books of accounts, I consider it necessary to determine the factual veracity of this allegation. With respect to this aspect of the SCN, the Noticees have provided several supporting documents including statements to show the value of shares pledged and value of shares sold, letters from certain lenders evidencing the loans having been given and the invocation of the pledge. From the contents of the SCN, written and oral submissions of Gopal Ramourti in this context (which is already recorded earlier in this Order), and the details of pledge of shares stated in the Annexure to the Investigation Report, I note the following points to be relevant: (i) In the instant case, the borrower or the beneficiary of the loan was TLPL though the shares pledged as collateral belonged to the promoters of the company.

(ii) Promoters owned around 135 lakh shares as of December 31, 2009. However, promoter shares pledged during the period between December 29, 2009 and December 31, 2010 aggregated to 198 lakh shares on a gross basis. The aforesaid fact implies that bulk of the loans, availed by pledge of shares, were in fact being regularly repaid. (iii) Market conditions had been volatile since October 2010 and was witnessing a drop in prices from November 2010 onwards. (iv) The letter from ECL Finance Ltd. on record supports the statement that the sudden sale of 5 crore rupees worth of TLPL’s shares on the 8th of December, 2010 triggered a series of invocation of high volumes of shares in quick succession. Letters pertaining to invocation of pledge from the following lenders have been enclosed in Gopal Ramourti's submissions-  ECL Finance Ltd. (08.12.2010)  Cholamandalam Investments and Finance Company Ltd. (14.12.2010)  Prabhudas Liladher Financial Services Ltd. (09.12.2010)  JM Financial Products Ltd. (15.11.2011) In between 1st December and 15th December of 2010, 48,74,413 pledged shares were invoked for sale.

It is only reasonable to assume that such sudden sale of large volume of shares had caused further erosion of the stock price, thereby making it even more difficult for the promoters to raise money to pay off the loans taken for the company.

25. I have perused the letters pertaining to the pledge of the shares received from some of the lenders. The fact that the company was the borrower/beneficiary of the loan amounts availed, the promoters' shares were the collateral for such loans and in many cases the promoters were the guarantors for repayment were all recorded in these letters. Investigation has not revealed any facts contrary to these records. In the absence of any investigation involving trail of funds, it is difficult to confirm the possibility of gain to the promoters. In the absence of any evidence submitted in investigation indicating siphoning of funds received by the company by way of pledge of the promoters shares, it is difficult to accept that the pledge of shares is a circumstance supporting the allegation of financial irregularity orchestrated by the company and its directors.

26. Further, on a thorough examination and evaluation of records, I do not find sufficient material either in the forensic audit report or in the investigation report to support the allegation of financial irregularity or manipulation of financial statements as alleged in the SCN, though the suspicions drawn from the forensic audit report may have been valid. Also, in the context of the ITD not having passed any adverse orders regarding 'bogus' purchase or sales by TLPL despite having done a detailed assessment of the company's financial statements, the initial complaint forwarded by ITD may not continue to be relevant in the context of any securities market violation. I also note that some of the defences advanced by the noticees, such as the use of Oracle for accounting (rather than Tally ,which the forensic auditor had relied on) has not been adequately supported by documentary evidence. However, on the whole, the material produced in defence tends to puncture significant holes in the allegations made in the SCN. For the said reasons and in view of the facts and circumstances stated above, I do not find sufficient material on record to hold the noticees liable for having violated section 12 A (a), (b) and (c) of SEBI Act, 1992, regulations 3 (b), (c) and (d) and 4(1) and 4 (2) (k) and (r) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003 (PFUTP Regulations). Since the allegations of fraud and manipulative practices against the company and its directors do not survive in the instant facts and circumstances, the liability of Noticee No. 7 (Sanjeev Tole) in the capacity of Company Secretary or the noticees who were Independent Directors or members of the Audit Committee of TLPL do not require to be addressed in this Order.

27. The Show cause notice dated June 23, 2016 is accordingly disposed of.

DATE: February 28, 2019 G. MAHALINGAM PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA