Order in the matter of Vaswani Industries Ltd

DIRECTIONS UNDER SECTIONS 11(1) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH REGULATION 107 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2009, IN THE MATTER OF INITIAL PUBLIC OFFER OF VASWANI INDUSTRIES LIMITED

Background 1. The Initial Public Offer (hereinafter referred to as “IPO”) of Vaswani Industries Ltd. opened on April 29, 2011 and closed on May 03, 2011. The company made an offer of 10,000,000 equity shares in a price band of Rs. 45/- to Rs. 49/-. Ashika Capital Ltd. was the sole Book Running Lead Manager to the issue.

2. As on the date of issue closure, the company had received bids for 800,040 shares from Qualified Institutional Buyers (hereinafter referred to as “QIBs”), 16,935,240 shares from Non-Institutional Investors (hereinafter referred to as “NIIs”) and 23,887,440 shares from Retail Individual Investors (hereinafter referred to as “RIIs”). The level of subscription in the issue was at 0.16 times, 11.29 times and 6.82 times for the QIBs, NIIs and RIIs respectively.

3. The issue price was fixed at Rs. 49 and the securities issued through the IPO were allotted to investors on May 10, 2011. However, the listing and trading permission was yet to be granted by the stock exchanges.

4. In the meantime, SEBI was in receipt of about 100 complaints on May 13, 2011 from investors pointing out large scale withdrawals/rejections in the issue. A summary of the allegations are as under:-

• Certain applications were submitted to artificially inflate the subscriptions in QIB and HNI category to attract and mislead the investors. Post the closure of the issue, the same applications are being withdrawn by way of stop payment, stop allotment, cheque return, wrong cheque dates, etc. • The above is a pre-planned move amongst the Promoters of the issuer company, BRLM, Registrar and the other operators. • Listing of securities of the company should be stopped till an investigation of the withdrawal of applications is completed. • Before permitting the securities of the company to list, investors should be given an exit option so that the securities allotted to them in the IPO can be withdrawn; subsequently, a call on the investment in the company can be taken by the investors post listing of the same.

5. SEBI sought confirmation regarding the alleged drop in subscription levels and the withdrawals in the issue from the stock exchanges. The following data from the stock exchanges, prima-facie, confirmed the allegations:- Category No. of Subscript Times No. of No. of Withdrawals / Total Valid Times Equity Equity ion in the subscri shares shares for Technical Withdrawals shares subscribed shares shares issue (No. bed as for cheque rejections / Technical considered after allotted offered of shares) on date applicati Returned (No. of rejections for withdrawal/ of ons not Cases shares) actual (No. of allotment rejections issue banked Rejections shares) closure QIBs 5000000 800040 0.16 0 0 0 0 800040 0.16 800040 NIIs 1500000 16930800 11.29 4101960 10963200 606000 15671160 1259640 0.84 1259640 RIIs 3500000 23859720 6.82 2290080 9771360 1073760 13135200 10724520 1.35 7940320 Total 10000000 41590560 4.16 6392040 20734560 1679760 28806360 12784200 1.28 10000000

Considering the number of complaints received and the fact that there was no news/development about the issuer during/post the closure of the IPO which could have precipitated such huge withdrawals, SEBI vide email dated May 13, 2011, advised Bombay Stock Exchange Ltd. and the National Stock Exchange of India Ltd., to withhold the listing of securities until further instructions. The Bankers to the Issue were also advised to ensure that the issue proceeds mobilized through the issue and kept in the ‘public issue account’ is not accessible to any entity until further instructions from SEBI. Simultaneously, data pertaining to broker-wise and terminal-wise summary of withdrawals along with reasons for the withdrawals/rejections was sought from the Registrars to the Issue (RTIs).

6. It was thought fit to keep the investors informed about the developments in the matter. Accordingly, a Press Release in the matter was issued on May 18, 2011.

7. SEBI continues to receive complaints from investors, many urging cancelation of the issue and some demanding listing of the securities.

8. From a preliminary analysis of the data on withdrawals/rejections obtained from the RTIs/Stock Exchanges, the following observations appear pertinent:- i. 3813 applications have been withdrawn in the issue. Out of the withdrawn applications, 666 applications amounting to a total of Rs. 31.32 Cr belongs to cases where bids have been punched in the system, but the cheques were not sent for payment. Amongst the remaining 3147 applications, 2785 applications have been on account of “Cheque Return” amounting to a total of Rs. 101 Cr.

ii. Two terminals have contributed to about 60% of the total withdrawals (calculated based on number of applications). Further, three terminals contributed to about 61% of the withdrawals (calculated based on the number of shares).

iii. Applications in the HNI category amounting to Rs. 44.6 Cr (which works out to about 90% of the issue size) have been made on the opening day of the issue at the cap of the price band. All these applications have been withdrawn subsequently.

9. A sum of Rs. 49 Cr being the issue proceeds has been kept in the ‘public issue account’ opened for the purpose which is accessible by the issuer only after the listing permission is granted by the stock exchanges. If no listing permission is granted, the provisions of Section 73 of the Companies Act gets attracted, which inter-alia provides that in cases where the permission for listing the shares allotted in IPO has not been granted, if the money is not repaid within eight days after the company becomes to liable to pay it, i.e., from the date of refusal or within 70 days from the date of Bid/Issue closing date, whichever is earlier, then the company and its Directors are liable to repay the money with interest at the rate of 15% per annum.

10. While further inquiries in the matter are in progress, SEBI weighed the following aspects:- a. Allegations in this regard pertain to irregularities in subscriptions, more particularly in the NII category, firstly by an artificial inflation of the demand in the bid book to mislead and induce participation by the RIIs, and a withdrawal of bids by the NIIs thereafter, thereby trapping the unwary RIIs. If that were borne out to be true, permitting listing in the stock exchanges at this stage would close the door for protection envisaged in the interest of investors under Section 73 of the Companies Act. b. Taking steps under the SEBI/Companies Act by ordering cancellation of the issue and refunding the funds back to the allottees without a detailed examination in the matter does not appear to be appropriate as it may prejudice the position of the issuer. c. Deferring the decision on listing pending outcome of the detailed examination of the allegations may result in the money being blocked in the public issue account with neither the issuer nor the investor being able to have access to the same.

11. It is possible that to some extent investors might have been influenced by high subscription levels to invest to the securities of the issuer company. Giving an option to withdraw could have been considered as has been the normal practice. However, it is noted that withdrawal option generally precedes allotment whereas in the instant case, allotment has already been completed by the time SEBI was informed of the matter.

12. Having regard to the above, on a balance of all relevant considerations, the only fair and reasonable option left is to defer the listing of the securities till the matter is examined completely.

13. Considering the extra-ordinary circumstances in the matter, I am of the considered opinion that pending the outcome of a detailed examination of the allegations, immediate action is called for in this matter, in the interest of investors.

Order 14. Therefore, in view of the foregoing reasons, in order to protect the interest of investors and the integrity of the securities market, I, in exercise of the powers conferred upon me under Section 19 the Securities and Exchange Board of India Act, 1992 and Sections 11(1), and 11B thereof, read with Regulation 107 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, hereby issue the following directions, by way of this ad interim order: a. A detailed investigation shall be initiated in the matter. Vaswani Industries Ltd., its Promoters, Directors and the intermediaries connected with the issue are directed to fully co-operate in the aforesaid investigation. b. The investigation shall be expeditiously completed within a period of thirty days from the date of this Order, so that a decision on the listing application by the stock exchanges can be taken within the statutory time limit provided under the Companies Act. c. In the meantime, the Bankers to the Issue shall place the amount in the public issue account in an interest earning account.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: MAY 26, 2011