Order in the matter of Venmax Drugs and Pharmaceuticals Limited

Under Sections 11, 11(4), 11A and 11B of the Securities and Exchange Board of India Act, 1992 in the matter of Venmax Drugs and Pharmaceuticals Limited

Background of the case:

1. Securities and Exchange Board of India (hereinafter referred to as “SEBI”) was in receipt of a letter no. F. No. 03/73/2017-CL-II dated June 9, 2017 from the Ministry of Corporate Affairs (hereinafter referred to as “MCA”) vide which MCA had annexed a list of 331 shell companies for initiating necessary action as per SEBI laws and regulations. MCA had also annexed the letter of Serious Fraud Investigation Office (hereinafter referred to as “SFIO”) dated May 23, 2017 which contained the data base of shell companies along with their inputs.

2. SEBI as a market regulator is vested with the duty under section 11(1) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act”) to protect the interests of the investors in securities and to promote the development of and regulations of securities markets by appropriate measures as deemed fit.

3. SEBI was of the view that the companies identified as shell companies by SFIO and MCA could be potentially involved in: (a) Misrepresentation including that of their respective financials and businesses and possible violations of SEBI (Listing Obligations and Disclosure Requirements) Regulation, 2015 (hereinafter referred to as “LODR Regulations”) and/or (b) Misusing their respective books of accounts/funds including facilitation of accommodation entries to the detriment of minority shareholders and therefore

Order in the matter of Venmax Drugs and Pharmaceuticals Limited reneging on the fiduciary responsibility cast on the board, controlling shareholders and key management person (KMP)

4. SEBI was also of the view that investors should be alerted on the possible enforcement actions by various authorities leading to potentially significant impact on the price of the stock.

5. Therefore, in the interest of investors, SEBI took the pre-emptive interim measures under section 11(1) of SEBI Act in respect of listed shell companies including Venmax Drugs and Pharmaceuticals Limited (hereinafter referred to as “VDPL” / “Company”), vide its letter dated August 7, 2017, based on the view stated at para 3 and 4 above. SEBI placed trading restrictions on promoters/directors so that they do not exit the company at the cost of innocent shareholders. In view of the said objective, SEBI vide the letter dated August 7, 2017 also placed the scrip in the trade to trade category with limitation on the frequency of trades and imposed a limitation on the buyers by way of 200% deposit on the trade value, so as to alert them on trading in the scrip. The said measures were initiated by SEBI pending final determination after verification of credentials and fundamentals by the stock exchanges, including by way of audit and forensic audit, if necessary. The measures also envisaged, on the final determination, delisting of companies from the stock exchange, if warranted. By virtue of these measures, trading in the scrip was not suspended but allowed under strict monitoring so that investors could take informed investment decisions till SEBI and stock exchanges complete their detailed examination of such companies.

6. Pursuant to the above, all the recognized stock exchanges, vide notice dated August 7, 2017, addressed to all its market participants, initiated actions envisaged in the SEBI letter dated August 7, 2017 in respect of all the listed companies as identified by MCA and communicated by SEBI, with effect from August 8, 2017.

7. With regard to the said letter dated August 7, 2017, VDPL, vide letter dated September 19, 2017 represented the following to SEBI: “2 … a. SEBI has purportedly received d list or 331 companies from the Ministry of Corporate Affairs ("MCA") (purportedly by its letter dated June 9, 2017) which are identified as 'suspected shell companies'.

b. The Notification does not specify the criterion adopted to identify these 331 companies as 'suspected shell companies' and the specific provisions of law pursuant to which such entities have been identified as ‘shell companies'.

c. The Notification, after two months from the receipt of the list from the MCA, directs the exchanges to place identified listed companies in Stage VI of the Graded Surveillance Measures (GSM) with immediate effect.

d. The effect of the Notification would be that the trading in the listed companies would be permitted only once in a month under the trade to trade category. Any upward price movement in these scrips is not permitted beyond the last traded price and Additional Surveillance Deposit of 200% of the trade value is to be collected from the buyer which is retained with the exchanges for five months. This substantially reduces the trading in these scrips on the basis of a mere suspicion.

f. Shares of the promoters/directors of such listed companies are - allowed to be transferred by depositories only after 'verification' by the exchanges. There is effectively a freeze on trading by such promoters/directors except to buy securities of the listed company until 'verification' of the credential/fundamentals by the exchanges is completed - without specifying any time period for such 'verification'-in other words inordinately. g. Exchanges are directed to appoint an independent auditor to audit such listed companies, and if necessary, even conduct forensic audit of such companies to 'verify' its credentials/fundamentals. h. If on such verification, the 'credentials/fundamentals' of the companies are found to not be 'appropriate', exchanges are directed to initiate proceedings for compulsory delisting against the company. 3. We most respectfully submit that: a. The Notification has been issued without following due legal process. The list of 'suspected' companies have been identified without setting out the criterion applied or even a mention of the legal provisions relevant for such identification.

b. There is no criterion or legal provision that defines a 'shell company'. The issuance of the Notification against VENMAX is arbitrary. c. The Notification has been issued in a mechanical and flippant manner despite the list of 'suspected' entities available with SEBI for about two months. d. Without any notice or enquiry, the Notification has been issued overnight with immediate effect substantially curbing the trading of VENMAX scrip. e. The issuance of the Notification has the effect of curbing trading even in genuine scrips such as VENMAX which is contrary to the interest of the shareholders of VENMAX. Such a curb on trading ought to have been effected only after allowing us an opportunity of being heard. Since neither the MCA nor SEBI has provided -any notice prior to the Notification, the same will cause undue hardships and losses to the public shareholders of VENMAX. 4. The following will demonstrate that there is no reason to even suspect that VENMAX is a 'shell company': a. The company is a going concern. The company is presently engaged in the business of Trading in Bulk drugs and pharmaceutical machinery and focused on developing the specialty products in oncology portfolio by entering into contract with research laboratories in Hyderabad. Later on with the value added developed oncology products, the Company is planning to establish a CGMP Manufacturing unit in Pharma City (Hyderabad) with the new facilities by taking loans from promoters, strategic investors and Banks. b. The company has filed Annual Income Tax returns and status of filing annual income tax return for last three years are as under: S. No. Assessment Year Acknowledgement Date of Filing Number 1 2016-17 495634201141016 14/10/2016 2 2015-16 841124251300915 30/09/2015 3 2014-15 373985381290914 29/09/2014 c. The company has complied with all requirements of Companies Act as per Secretarial Audit Report given under Section 204(1) of the Companies Act, 2013. The status of filing annual returns with RoC for last three years is as under:

Sr. No. Financial Year Date of Annual Date Filing Returns General Meeting with ROC 1 2015-16 29/09/2016 26/11/2016 2 2014-15 30/09/2015 11/11/2016 3 2013-14 29/09/2014 15/11/2014 d. Based on the Secretarial Audit conducted by M/s. B S S & Associates, Company Secretaries, Hyderabad, for the Financial Years 2014-15, 2015- 16 and 2016-17, and on the basis of records maintained by the Company and records available on the Bombay Stock Exchange website i.e. www.bseindia.com, the company has been regularly complying with all the Listing Regulations and filing of outcome of Board meetings for the Quarterly results and Listing Agreement for the Financial Years 2014-15, 2015-16 and 2016-17. 5. The Notification has been posted on public websites for the world to see without as much as a notice or intimation to VENMAX. The substantial curb on the tradability of the shares of VENMAX leads to substantial loss of goodwill, financial hardship and is detrimental to the interest of our shareholders. 6. The loss of reputation of VENMAX on account of-the issuance and continuation of the Notification, without any basis or criterion, cannot be ascertained in monetary terms but is indeed huge and irreparable. 7. In the above circumstances, it is evident that VENMAX therefore is not a shell company and the Notification ought not to apply to it. We request you to forthwith direct the BSE not to implement the Notification qua VENMAX and restore the status of trading of VENMAX as it existed prior to the Notification.”

8. On August 9, 2017, SEBI further advised the Stock Exchanges to submit a report after seeking auditor's certificate, from all such listed companies, providing the status of certain aspects of the company like company's compliance with Companies Act, whether company is a going concern, its business model, status of compliance with listing requirements, etc. In this regard, the concerned stock exchange i.e. Bombay Stock Exchange Ltd. (“BSE”) submitted its report on December 14, 2017. Vide the said report, BSE has not provided any recommendations with regard to VDPL.

9. Vide a letter dated October 27, 2017, SEBI asked for the following information from VDPL:

“ … 1. Summary of dealings of the Company/directors of the company/promoters of the company with or through Mr. Shirish Chandrakant Shah, either directly or indirectly, including the nature and quantum thereof. Provide details of the all transactions along with supporting documents in the last 5 years;

2. Details of Association of the company/directors of the company/promoters of the company, whether direct or indirect, with Shirish Chandrakant Shah;

3. Details of Association of the company/directors of the company/promoters of the company, whether direct or indirect, with the following companies  Allied Computers International Asia Ltd.  Prraneta industries Ltd. (Now as Aadhar ventures India Ltd.)  Mahan industries Ltd.  Prabhav industries Ltd.  Empower Industries Ltd.  Iris media Works Ltd.  GCV Securities Ltd.  Sanguine Media Ltd.  Emporis Projects Ltd.  Avance Technologies Ltd.  Shri Ganesh Spinners Ltd.  LN Industries India Limtied  Secunderabad Health Care Limited  Dhanush Technologies Ltd.  Vishesh Infotecnics Ltd.

4. Details of Private placements made by the company, if any along with the utilization of the proceeds;

5. Details of any search conducted by Income Tax Department at the premises of the company/directors of the company/promoters of the company;

6. Details of employees on the rolls of the Company, their respective roles, remuneration received qualifications and experience for the job. Details of Provident Fund contributions made by the Company for the aforesaid employees. For ease of furnishing the information, broad categories of roles: Blue collar, Junior management, Middle management, senior management, may be given in a consolidated manner.”

10. The company filed its reply to SEBI’s letter dated October 27, 2017 vide letter dated November 14, 2017 and stated as under:

“1) Summary of dealings with Shirish Chandrakanth Shah- Mr Nitesh vijaya Vargia and Mr Rajesh Vijaya Vargia are brothers and shareholders of Venmax Drugs. They have introduced Mr Shirish Chandrakanth shah to Mr N V Narender, CMD of Venmax drugs in the year 2010. Shirish Shah expressed his interest to invest in Venmax Drugs through preferential allotment as per the guidelines of BIFR order and proposed his person Mrs Hnasa Vijay Jogadia as Director in to our Board. The details of clandestine / fraudulent transactions and our steps to prevent further damage are here with mentioned in Annexure1 for your kind perusal.

2) Details of Association with Shirish Shah- Details mentioned in Annexure-1

3) Details of Association with the following companies- Neither the CMD nor the Board of Directors of the Venmax dealt with the mentioned companies, except one of the Director for a short period Mrs Hansa vijaya Jogadia suggested by Shirish shah has clandestinely, fraudulently transacted in YES BANK with some of the companies without the knowledge of the CMD and Board of Directors. The details of YES BANK transactions are here with enclosed…

4) Details of private placement made by the company-The company made a preferential allotment on 12th May 2012, as per the directions of BIFR order dated 22nd Jan 2008. The preferential allotment was made to Mr NV Narender to the tune of 8,71,280 shares @ Rs 12.50/-per share by converting his unsecured loans of Rs

1,08,91,000/-, which were brought in by him during the past 4 years, reflecting in BS of Venmax as on 30-03-2012.The details BIFR Order, Board resolutions, Auditor certificate and Details of utilization of unsecured loans are here with enclosed …

5) Details of any search conducted by IT department- No search was conducted by IT department on the Company/Directors. However consequential proceedings were initiated by Dy Commissioner of Income Tax -CC2(2),Mumbai, on Venmax Drugs and we were asked to furnish details under assessment section 153C &143(3) for the AY 2008-09 TO 2013-14.

After many hearings and submission of records, the Dy Commissioner of IT was satisfied, and no additions were made on account of transactions made by Shirish shah.

The hearings were attended by CMD and orders were passed by the IT department with a demand of Rs 8.79 lakhs (which is that of MAT u/s 115JB) and the same is being requested to reconsider to reassess the order in view of BIFR order pertaining to those years.

6) Details of Employees- Employees as on 2010-11--- on roles as per PF- 22 Employees On Contract(out sourcing ) basis -20 Employees. Employees as on 2011-12----- on roles as per PF- 9 to 14 Employees On contract (out sourcing) basis -12 Employees Employees as on 2012-13---- On roles as per PF - 5 to 7 Employees. On contract ( Out Sourcing) basis -10 Employees

Since 2013 the number of Employees are 12 members which includes regular and out sourcing. The names of employees, salaries and their PF amounts are here with mentioned …

Since the Company is presently engaged in the business of Trading in Bulk drugs and Pharmaceutical machinery and focused on developing the Oncology products by entering in to contract with Research Laboratories in Hyderabad. The outcome of the product results are awaited in Jan 2018.

Later on with the value added developed oncology products, the company is planning to establish GMP plant in pharma City with new facilities by taking loans from promoters, strategic investors and Banks.

Annexure – 1 Submission of information sought by SEBI with regard to transactions with Shirish Shah;

Mr. Nitesh Vijaya Varghia & Mr Rajesh Vijaya Varghia are brothers and shareholders (6 Iakh shares) in Venmax Drugs & Pharmaceuticals Ltd. Mr Nitesh was a Director in Venmax Board from 2006 to 2010. Both the brothers introduced Mr. Shirish C shah (from Mumbai) and persuaded the C MD & Directors saying that he will buy 12.34 lakhs shares of company in preferential allotment as per the BIFR guidelines. … They insisted the CMD to induct Mrs. Hansa Vijay Jogadia (from Mumbai) and Mr. Nitesh preferred to resign from Directorship to facilitate her to be on the Board of Venmax Drugs. Keeping in view of investment through preferential allotment as per the clause No-10.4 of BIFR order dated 22-01-2008, the Board of Directors had inducted her in July 2010, in to the Board and gave authorization to operate in YES bank, to do marketing transactions like buying and selling the Bulk drug intermediates. The copies of Board resolution and correspondence with YES Bank are here with enclosed.

Later on Mr. Shirish shah pressurized the CMD to transfer the preferential shares of 12.32 lakhs to their candidates without infusing funds in to Venmax Drugs. When CMD bluntly refused his unreasonable demand, then Shirish Shah made Mrs. Hansa Vijay Jogadia to transact clandestinely in YES bank to the tune of Rs 7.1 crores without the knowledge of CMD and Directors. The transactions were not connected to the company's business but for their personal business operations. The statement of account in YES bank is here with enclosed.

During normal checking of bank accounts the CMD noticed the astonishing transactions of Rs 7. 1 crores, immediately directed the Yes Bank officials to invalid the signature power of Hansa Vijay jogadia and replaced with other directors. Then Shirish shah threatened the CMD with dire consequences if he does not resume her signature. When the CMD did not heed to his demand he agreed to reverse the transactions in the Yes bank and requested the CMD to give exclusive signature power to Mr. Rajesh vijay Varghia. Then up on hope of reversing the transactions the Board agreed to give power of signature to Dr Ramakrishnaiah (director) and Mr Rajesh Vijay Varghia( Confident of Shirish,) who is willing to join as Vice President Finance for Yes bank purpose. Despite the above efforts from the Board they did not reverse the transactions. The copies of Board resolution and willingness letters of Rajesh are here with enclosed.

For reversing the transactions Mr. Shirish Shah started blackmailing the CMD to enhance the Equity from Rs 4.3 crores to Rs 150 crores to play the share market .CMD and the Board did not yield to his demand and sacked the Hansa Vijay Jogadia from Directorship as per the rules of the company's laws and made notified in our annual reports, the Yes bank transactions are not connected to our business and initiated legal proceedings on Hansa Vijaya Jogadia and filed a complaint to local police station. Copy is here with enclosed.

We are law abiding individuals and sincere in filing all the information to the departments since 1990 and not defaulted in any aspect, we request you to understand the situation in which we were pulled in without our knowledge…”

11. In the meantime, aggrieved by the aforesaid letter dated August 7, 2017 issued by SEBI, VDPL filed an appeal No. 285 of 2017 before Hon’ble Securities Appellate Tribunal (hereinafter referred to as “SAT”). Hon’ble SAT vide order dated November 6, 2017 directed the following:- “2. As the appellant has already made a representation to SEBI against the said communication dated August 7, 2017, with a copy to BSE, Counsel for the appellant on instruction seeks to withdraw the appeal with liberty to pursue the representation filed before SEBI. Accordingly, we permit the appellant to withdraw the appeal with liberty to pursue the representation pending before SEBI.

3. SEBI is directed to dispose of the representation made by the appellant as expeditiously as possible and in any event within a period of six weeks from today. It is made clear that passing of any order on the representation made by the appellant would not preclude SEBI from further investigating the matter and initiate appropriate proceedings, if deemed fit.”

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

Hearing and Reply:

13. An opportunity of personal hearing was granted to VDPL on November 14, 2017 when its authorized representative appeared and made, inter alia, the following submissions: i) The company was founded in the year 1990 an since then, it has followed all ethical practices. ii) The company has always been prompt in all statutory filings. There is no case pending against the company as on date. iii) The financial condition of the company had weakened in the year 2008 and it was referred to BIFR. BIFR then passed an order for revival of the company. iv) Two shareholders of the company, namely Mr. Nitesh Vijaya Vargia and Mr. Rajesh Vijaya Vargia introduced Mr. Shirish Chandra Shah to the company in 2010. v) Mr. Shah offered to extend financial support to the company. However, he stipulated a condition that his representative Ms. Hansa Jogadia be appointed as a director and she shall be the signatory in an account opened in Yes Bank in the name of the company. Then Ms. Jogadia was appointed as a director and she was also made the signatory in the Yes Bank account. vi) Later, on receipt of an account statement from Yes Bank, it was found out that Mr. Shah (through Ms. Hansa Jogadia) had made transaction worth Rs. 7.1 crore in a span of 45 days from the opening of the account. Thereafter, on becoming aware of the same, the company got the signatories changed in the said account. vii) Subsequently, Mr. Shah offered to reverse the transactions that he had carried out through the Yes Bank account. At that point of time Mr. Ramakrishna and Mr. Rajesh Vijaya Vargia were made the signatories to the account and Mr. Narender (CMD of the company) got his name removed as a signatory. viii)But even then, the entries in the bank account were not reversed by Mr. Shah. Mr. Shah then asked that the equity capital of the company should be increased to Rs. 150 crore. The company did not accede to the same. ix) Thereafter, the company filed a criminal complaint against Ms. Hansa Jogadia. No case was filed against Mr. Shah out of fear of his connections with the Mafia. Ms. Hansa Jagodiya was later removed as a director of the company.

14. During the hearing, VDPL was asked to provide the information / response on the following points (supported by documentary evidence) as early as possible and latest by November 28, 2017: i) An affidavit by Mr. N V Narender sequentially detailing out the dealings between VDPL and Mr. Shirish Chandrakant Shah and its related entities. ii) A Certificate from Auditor of the company stating under which accounting standards / legal provision, the Auditor allowed the company to book revenues of Rs 25.92 Lakhs when in reality, the company only used to get the commission from transactions between its vendors and customers. iii) Clarification and details along with supporting documents regarding accounting entries of Long term Borrowings (from Directors, Shri NV Narender, others) as per note 4 of financial statement of FY17 which are appearing without corresponding cash flows in the Bank account statement of the company with SBI. iv) Clarification and details with respect to Trade Payables which has been reduced by Rs 50 Lakhs in FY 17 without corresponding entries in Bank statement of the company. v) Clarification and Details regarding fall in other Non-current Assets of the company from Rs 1.0051 Cr in FY 16 to Rs 11.56 Lakhs in FY 17 without corresponding entries in bank statement of the company. vi) Explain purchases of Stock in Trade of Rs 24.42 lakhs as per financial statements FY 17 which are not reflecting in Bank Account statement.

vii) Explain with documentary evidences, how Advance for supply of goods and Services of Rs 36.18 lakhs in FY 16 has become NIL in FY 17. viii)Submit documentary proof of Deposit worth Rs 6 lakhs reflected in financial statements of FY 17. ix) Clarification regarding why the company has not paid its statutory dues. Provide copy of letter/documentary evidences of disputes of the company regarding its statutory dues, x) Submit documentary proof like legal notices, Court papers, correspondence among others to reflect efforts undertaken by the company to realize its sundry debtors and Capital Advances of Rs 45.93 Lakhs before writing it off in FY 17. The company shall also file a declaration that none of these were related party transactions. xi) Details along with documentary proof regarding State investment subsidy of Rs 9.28 Lakhs written off in FY 17.

15. A reminder email was sent to company on November 24, 2017 to submit the reply by November 28, 2017. However, company vide email dated November 28, 2017 asked for extension till December 02, 2017 to submit its reply. Considering the SAT deadline in this matter, an email dated November 28, 2017 was sent to company advising it to file its reply by November 30, 2017. As no reply was received from the company, it was contacted through telephone on December 01, 2017. During telephonic conversation, representative of the company replied that SEBI would be receiving reply by December 04, 2017. Thereafter company vide email dated December 06, 2016 filed its “draft reply” (without Annexures) and stated that “hard copies along with annexures will be sent to you by speed post”. After multiple follow-ups and reminders through telephone with Mr. N V Narender (MD, VDPL) on December 06, 07, 08 and 11, 2017, company finally submitted its reply on December 12, 2017.

16. The company submitted, inter alia, the following query-wise response:

i) An affidavit by Mr. N V Narender sequentially detailing out the dealings between VDPL and Mr. Shirish Chandrakant Shah and its related entities.

Company vide its letter dated December 12, 2017 has enclosed the affidavit. The relevant extracts of Affidavit are as follows:  The promoters and the directors of the company were in the lookout for investors. Mr. Nitish Vijay Vargia, one of the major shareholders and a Director on the Board, along with his associates has promised to bring the required funds and failed to do so.  In one of the meetings held in the month of January 2010, he informed that he had spoken to one of the prospective investors namely Shirish C Shah from Mumbai and he also stated that he had evinced the interest in the company, provided a directorship is given to him. Further Nithish Vijay Vargia informed that in case the deal fructifies, he has no objection to resign from the board to facilitate his induction.  The board authorized Mr. N V Narender (CMD) to discuss with Shirish C Shah taking the help of Mr. Nitish Vijay Vargia.  In the month of February 2010, I had meeting with Shirish C Shah along with Mr. Nitish Vijay Vargia at Mumbai and presented the prospects and invited him to visit the factory.  In the month of April 2010, he along with Mr. Nithish Vijay Vargia had visited the factory and verified the documents and they enquired whether the company has any objections to carry on the trading activity in the intermediates in Mumbai since he knew many people from Pharma trading community in Mumbai.  In the month of July 2010, we had one more meeting with Mr. Nithish Vijay Vargia who by then resigned in the month of March, 2010 to accommodate Shirish C Shah onto the board.  Mr. Shirish C Shah informed that he was very busy and might not be able to contribute and suggested that he would nominate Smt. Hansa Vijay Jugadia, as Director who would represent him on the Board.  Accordingly, the board meeting was held 29th July, 2010 and Smt. Hansa Vijay Jugadia was inducted in the board as an Additional director.  Mr. Nithish Vijay Vargia has applied pressure to open the bank account with single signature of Hansa Jugadia and assured that funds will be infused by Shirish C Shah.

 In the Board meeting held on 29th July, 2010, board authorized to open the bank account in YES Bank with an authorization to operate by Hansa Jugadia.  In the month of October and November, 2010, Shirish C Shah promised that he would infuse the funds into the system as required as per the BIFR and also the funds for trading activity.  In the month of December 2010, he stated that he had infused funds and requested to allot the shares in the name of Investors for which he would send the list of prospective allottees.  A board meeting was held on 7th January, 2011 to approve the third quarter results and allotment of shares. The bank statement is called for to allot the shares and to ensure the infusion of funds  We were surprised to note that no tangible funds were infused into the system. Only some unauthorized transactions had been carried out. The fact has been brought to the board and it was decided unanimously to stop the signature of the Director Smt. Hansa Vijay Jugadia and replaced with signatures of N V Narender and Dr Rama Krishnaiah (Director).  Further, it was also decided in the Board meeting to make police a complaint by Dr. Ramakrishnaiah against erring Director Smt. Hansa Jugadia.

Further, the board had instructed the CMD to send a notice to Smt. Hansa Jugadia to explain the transactions.  Accordingly, a complaint is lodged in S R Nagar Police Station against Erring Director on 09/02/2011  The board meeting was held on 14th November 2011 to take up the agenda of approval of unaudited quarter results and to take action on irregularities committed by Mrs. Hansa Vijay Jogadia.  The board directed Dr. A Ramakrishnaiah to take stringent action on the Erring Director Smt. Hansa Jugadia. Accordingly, the complaint was lodged on 2nd Dec, 2011.  The auditor has sought the explanation with regards to the transactions in the YES bank and the management had explained that those transactions are unauthorised transactions and company has no knowledge of the same. The auditor has instructed to add a suitable note in the Annual Accounts. Accordingly, “Note No. 18 had been inserted. One of the directors of the company has committed the fraud by mis-utilizing the bank account of company with YES bank Mumbai and has conducted transactions between 26/08/2010 and 28/12/2010.  These transactions have no connection with the business of the company in any way.

The company has initiated criminal proceedings against the director. The company has not accounted these transactions in the books of accounts” was inserted. The auditor also qualified his report accordingly referring our note.  The Income tax department has taken up a consequential proceedings on the company by Deputy commissioner of income tax CC2(2), Mumbai and the company was asked to furnish the details under assessment sections 153C & 143(3) for the Assessment year 2008-09 to 2013-14 on account of searches conducted on Shirish C Shah and his Associates.  After many hearings and submissions of records, the Deputy Commissioner thoroughly satisfied that there were no connections with Shirish C Shah and the transactions were carried out without the knowledge of the company.

ii) A Certificate from Auditor of the company stating under which accounting standards /legal provision, the Auditor allowed the company to book revenues of Rs 25.92 Lakhs when in reality, the company only used to get commission from transaction between its vendor and customer,

Company has enclosed Auditor Certificate, Copy on Invoices, VAT return copies, extract of object clause of the Memorandum. The relevant extracts of the reply are as follows:  The company has purchased Pharmaceutical specialized Machinery namely Reactors from Nama Chemical Industries.  The said machinery were acquired against an enquiry from UNIMAX fabricators who deals in the Specialized Pharma equipments.  The company has also filed VAT returns disclosing both the purchases and sales in the same financial year (June 2016 and September 2016).  The company has carried out the trading activity in terms of main objective No.2 of Memorandum of Association of the company which was incorporated in the year 1988.

 In the case of a commission, the ownership of the Machinery will not come to Venmax where as in case of Trading, the ownership changes the hands. This is primarily the difference between Trading Activity and Commission. Further, if it is a commission activity, the service tax will be affected and in the case of trading VAT of the respective state will apply.  The company humbly submit that the said transactions squarely fall under trading activity and not Commission activity. This is purely, business convention and practice and no specific accounting standard are required. The said transaction falls under the provisions of Contract Act, 1872 and sale of Goods Act, 1930.

iii) Clarification and Details along with supporting documents regarding accounting entries of Long term Borrowings (from Directors, Shri NV Narender, others) as per note 4 of financial statement of FY17 which are appearing without corresponding cash flows in the Bank account statement of the company with SBI.

Company has enclosed copy of the Group balance of directors loan for FY 2015-16, Copies of the ledger account for FY 2015-16, copy of Group balance of directors loan for FY 2016-17 and ledger copies for FY 15-16 of loan from Vijay Vargia (others) and loan from MD and Mr N V Narender, copies of correspondence with Hong Kong Pharma traders M/s BLS Trade Links, copies of Air Tickers and Bills. The response of the company is as under:

 During the financial year 2015-16, the group unsecured loans (note no. 3) is Rs.1,68,95,238. It includes loan from Nitesh Vijay Vargia Rs.1,33,77,749/- and loan from Narender Rs.16,37,600.  It is customary to maintain a separate ledger account for the current year transactions and transferred the same to loan from Directors. In advertently, the loan from Mr. Narender has been disclosed separately  During the financial year 2016-17, the auditor felt that though the loan is received from Nitesh Vijay Vargia ,the then Director, in view of his non continuation as director, he felt that the said loan should be classified as loan from others. Accordingly, reclassification/re-grouping done.

Explanation regarding unsecured loans without corresponding bank account transactions

 The MD, Mr. N V Narender’s monthly salary of Rs.25, 000/-aggregating to Rs.3, 00,000/- per year due to him was converted into unsecured loan on his consent. It is customary to make the Cash payment if the payment is less than 20,000/-. Accordingly, Salary to the staff Rs.10, 000/- per month and Rs3,000/- per month to office boy was made in cash which was also treated as unsecured loan brought in by N V Narender (MD).  Similarly, for the Rent of Rs, 3,000/- aggregating to Rs.36, 000/- per annum was also paid in cash. Since the payments are less than 20,000/-.  The Managing director has travelled to Bombay, Delhi to meet the statutory authorities and attend the concerned legal advisors and to Hong Kong and New York to have a marketing tie ups for the product 2-Bromo-1-Penylpropane.  The Managing director has taken the personal loan by pledging the gold instead of transferring the same to the company account and withdrew the cash as an advance and he was felt that it is better to spend the money directly and book the expenditure.

S.No Particulars Amount 1 Remuneration to Managing Director 3,00,000 2 Salary to Staff 1,52,650 3 Rent 36,000 4 Vehicle Maintenance & Repairs and Maintenance 50,143 5 Postage and Courier 59,000 6 Printing and Stationery 1,21,970 7 Travelling Expenses 2,17,056 Total 12,90,251

 It may brought to your notice that Rs. 3,53,000/- has directly remitted into the bank account to meet statutory expenditures like payment to RTA, Share transfer agent (CIL Securities Ltd), NSDL&CDSL and Company Secretary payments.  The cash expenditure incurred by the Managing Director was out of business compulsion. Further, we confirm that the whole expenditure incurred was a bonafide genuine business expenditure.  The amounts were brought in, not in a single day but incurred as and when expenditure demanded. In addition to the above, there was also a threat from IT and other statutory departments to freeze the bank account. Apprehending such severe action, we are compelled to incur the expenses in cash to avoid lock up off limited available funds.  There is no withdrawal of any unsecured loan either in the financial year 2015-16 and 2016-17 as apprehended.

iv) Clarification and Details with respect to Trade Payables which has been reduced by Rs 50 Lakhs in FY 17 without corresponding entries in Bank statement of the company.

 The opening balance of the trade payables is Rs.57, 24,576 and the closing balance Rs. 7, 58,369. The break up for the same is as follows: Sr No. Party Name Amount(in Lakhs) 1 Nama Chemicals Industries 46.7 2 BSS Associates 0.11 3 Deepak Paints 0.59 4 Durga Prasad and Associates 1.23 5 Sri Durga Engineers 1.81 6 GPR Chits 4.08 7 Sammarth Horo 1.44 8 Sri Ram Chits 1.26 Total 57.24

Out of the 8 parties above, the three parties are still continuing as Trade payables. Sr Party Name Amount(in Lakhs) No. 1 GPR Chits 4.08 2 Sammarth Horologicals 1.44 3 Sri Ram Chits 2.06 Total 7.58

 The statutory audit fee payable to M/s Durga Prasad and Associates, Chartered Accountants, has been regrouped under Short term provisions in Note 7.b.  Rs.11, 000/- due to BSS Associates, Company Secretary, has been settled by making payment. Copy enclosed.  The amount payable to Nama Chemicals Industries Rs.46.7 Lakhs has been settled through Tripartite agreement. Copy is enclosed as Annexure 4.4  The Rs. 2.41 lakhs creditors were lying in our books were due for 2 parties namely Deepak paints and Sri Durga Engineers, for many years. On enquiry, we came to know that these parties were no longer in existence and closed their establishment. The auditor insisted that since the credit has been continuing for many years, suggested to treat the credits as income. The same has been put up to the Audit Committee and the credits were treated as Income. Thus reduction in the trade payables is explained in full v) Clarification and Details regarding fall in other Non-current Assets of the company from Rs 1.0051 Cr in FY 16 to Rs 11.56 Lakhs in FY 17 without corresponding entries in bank statement of the company,

The relevant extracts of the reply are as follows: The details of other non-current assets as on 31.03.2016 follows 1 Advance for Expenses Rs.3,50,619

2 Advance for supply of Goods Rs.36,18,281 and Services 3 Long Trade receivables Rs.50,90,948 4 Deposits Rs. 6,16,738 5 TDS Receivables Rs.3,74,570 Total 1, 00, 51,156

The following are still continuing under other Non-Current Assets 1 TDS Receivables Rs.3,74,570 2 Advance for R&D Rs. 85,000 Expenditure 3 Deposits Rs. 6,96,738 Total Rs.11, 56,308

 Rs.3, 50, 619/- has been booked as expenses submission bills. Rs.85, 000/- is advance given to BASR Fine Chemicals Pvt Ltd was earlier grouped under Advance for Raw material is regrouped under Advance for expenses.  TDS is continuing balance. Hence, no explanation is required.

Deposits:

 The opening balance of Rs, 6.19 lakhs is enhanced to Rs. 6.96 lakhs on addition of deposit in the court with regard to case pending against the company at X Additional CCC

Advance for Raw Material and Supply of Goods 1 Rychold Chemicals Industries Rs. 28, 90,744 2 Krishi Fabs Rs. 6, 42,537 3 BASR Fine Chemicals Rs. 85,000 Total Rs 36,18,283

 Out of the above, Rs, 85,000/- was paid to BASR Fine Chemicals for R&D is classified as Advance for expenditure as per AS 26: Intangible Assets.  Rychold Chemicals was a Drug Manufacturing for the past few years and used to supply crude Recemic Cetraline for manufacturing Recemic Centreline and we used to buy the same. Rychold also used to buy Trityl Chloride from us for their end product of Zudovidine. Inadvertently, amounts due for supply of Trytyl Chloride wrongly grouped as Advance for supply of goods Recemic Cetriline. Hence, the same has been transferred to Long term Debtors which was written off. The reason for Written off is discussed in detail in our answer to query no.7.  Advance amount of Rs.6, 42, 523/- to Krishi Fabs towards purchase of capital equipment is also written off. Details of written off along with Documentary evidence is dealt in the answer to query no.7.

Long Term Trade Receivables

1 Graupel Pharma Private Limited Rs 9,95,330 2 Maven Life Sciences Rs 10,60,545 3 M Y Drugs Rs 4,31,992 4 Nikitha Chemicals Rs 3,64,160 5 Pioneer Chemicals Rs 9,80,850 6 Sri Chem Pharma Agencies Rs 9,14,566 7 Vasava Pharmaceuticals Pvt Ltd Rs 7,75,495 Total Rs 50,90,946

 There is an opening balance of Rs.50.9 lakhs and as explained above, Rs.28.9 lakhs was due from Rychold has been clubbed as debtors making the total noncurrent debtors as Rs.79.8 lakhs.The company has written off the Rs 28.9 lakhs due from Rychold which is discussed in details to query no. 7.  The Maven Life sciences is Bulk Drug Manufacturing Company with its registered office at Hari Hara Estate, Street No.8, Hubsiguda, and Hyderabad. The Venmax has supplied Methyl – Cyclo Propraine on 26/09/2012 for an amount of 10.6 lakhs.

 The management is decided to write off the Rs. 10.6 lakhs due from Maven Life Sciences and was approved in the Audit Committee meeting and the duly adopted in the Board Meeting.  Despite the follow up from the company and legal notices, the Maven Life Sciences has not paid the amount and subsequently, we came to know that the company was closed its activity and the promoters were absconding.  Balance of Rs.40.5 lakhs as per the recommendation of the auditors has been classified as Current Debtors.

vi) Explain purchases of Stock in Trade of Rs 24.42 lakhs as per financial statements FY 17 which are not reflecting in Bank Account statement

 The company has purchased Pharmaceutical specialized Machinery namely Reactors from Nama Chemicals. The said machinery was acquired against an enquiry from UNIMAX fabricators who deals in the Specialized Pharma equipment’s.  The purchases have been done through proper VAT invoice bearing numbers 006 and 013.  As already informed that there is a consequential search on the company in connection with Shirish C Shah. The Income Tax assessments completed on March, 2016 by an addition of Rs 3.96 crores with a tax liability of 79.7 lakhs.  There is a constant pressure from the IT department to make the payment failing which they are prepared to take appropriate action. Apprehending an action from the Income Tax Department, the company consciously took a decision not to operate the bank account till the representation from the company to the Commissioner of IT Mumbai is favorably settled.  The invoice clearly states that the credit limit was 90 days. In view of the credit worth of the MD and his relationship with the Creditors the due date of 90days was extended up to December, 2016 and Tripartite agreement was entered to settle the dues. In view of the above, the transactions has not been routed through the bank.

vii) Explain with documentary evidences, how Advance for supply of goods and Services of Rs 36.18 lakhs in FY 16 has become NIL in FY 17

The relevant extracts of the reply are as follows: The advance for supply of Goods and Services includes the following 1 Rhycold Chemicals Rs.28.91 2 Krishi Fabs Rs. 6.42 3 Advance for R&D Expenses Rs. 0.85 (BASR Fine Total Rs. 36.18  Out of the above, Rs, 85,000/- was paid to BASR Fine Chemicals for R&D is classified as Advance for expenditure as per AS 26: Intangible Assets.  Venmax Drugs was manufacturing Trityle Chloride (used for Anti - AIDS Product) for the past 8 years and supplying to various companies in India. The company had sold 9,000 kgs to Rychold Chemicals situated at Plot No. 14, 15, 17 & 28, Industrial Park, Peddapuram, East Godavari Dist, Andhra Pradesh, on 31.03.2011 in two invoices of 5,000 kgs and 4,000 kgs. including central excise Modvat and VAT ,the total amount is coming to Rs.28, 90,742/-  Despite the vigorous follow up and legal notices, the Rhycold Chemicals did not pay the above said amount. The company had filed a suit on 28/03/2014 for recovery of an amount of Rs.48, 75,708/- (which includes principle, interest and legal charges) in the court of Hon’ble X Addl Chief Judge CCC at Hyderabad.  Many hearings were conducted by the Hon’ble court for the past three years.

Neither the proprietor, Mr. Kolli Koteswara Rao, of Rychold nor his representatives attended the court even after paper publication. We came to know that the company was locked by the Bankers for recovery of their dues.  The management has informed to the auditor about the status of the case and the auditor had suggested for write off. Then the company has put up the subject matter before the audit committee and the MD has assured the committee that the case will be followed up vigorously for recovery of dues from Rychold and accordingly, the due entries have been written off.  The Krishi Fabs was a proprietary concern, situated in Jeedimetla, Hyderabad, fabricating the Reactors and Receivers for the Bulk Drug Manufacturing Units. Venmax Drugs and Pharmaceuticals Limited placed a purchase order in 2008 for SS316 reactors and receiver for a worth of Rs. 27.7 lakhs by giving an advance of Rs.6.43 lakhs on the condition that they should deliver the equipment within 6 months.  Despite the follow up, the owner of the Krishi Fabs Mr. Krishna Rao, was giving one reason or other and avoiding our purchase team.

Later on we have given many reminders and legal notices.  During the year 2015, we came to know that he closed his fabrication activities and absconding and his whereabouts are not known. On an enquiry in his known circle, we came to know in December 2016 that he was expired due heart attack.  The company put up the subject matter to the Audit Committee and the Audit committee suggested to write off the Debtor as it will never be recovered.

viii)Submit documentary proof of Deposit of worth Rs 6 lakhs reflected in financial statements of FY 17,

The relevant extracts of the reply are as follows:

Sr Particulars Amount no 1 AXIS Bank 4,00,000 2 Union Bank 2,00,000 3 Deposit with Court for Shri Ram Chit 87,000 Case TOTAL 6,87,000

 The Fixed deposits Rs.4, 00,000/- lying in the AXIS bank towards issue of Bank Guarantee in favour of AP Pollution Control Board.

 The fixed deposit of Rs.2, 00,000/- lying in the Union Bank of India towards the issue of Bank Guarantee in favour of AP Pollution Control Board.  The Deposit in the court of X Additional Senior Civil Judge CCC, Hyderabad towards deposit amount for getting Stay in the case of Shri Ram Chits.

ix) Clarification regarding why the company has not paid its statutory dues. Provide copy of letter/Documentary evidences of disputes of the company regarding its statutory dues.

The company has been incurring continuously cash losses. Hence, the company could not pay the statutory dues on time.

The statutory dues in the books of Accounts are as on 31.03.2017 as follows Sr Particulars Amount(‘000) no 1 Provident Fund 61.91 2 VAT 61.05 3 ESI 17.09

The above pending dues of PF, ESI and VAT will be paid as and when the financial position improves

The following are the disputes pending final settlement.

a) Provident Fund Department:

 The Hon’ble BIFR in its order dated 22/01/2008 had directed

1. the PF authorities to permit the company to pay the reconcile dues to PF in eight quarterly instalments 2. To waive the penalties of Rs.8.16lakhs levied or leviable on the company due to late payment of PF dues

 The company has paid all the dues with PF department till 31/04/2014. But, the PF department neither waived the penalties of Rs.8.16lakhs nor responded positively to the request of company’s plea to implement the BIFR order.  The company is making its best efforts to convince the authorities at Delhi.  Since there is an order on waiver of Penal charges from BIFR, the above said amount has not been taken into Books of Accounts.

b) ESI Department:

 As per the Audited books of accounts of Venmax Drugs as on 31.3.2006, the amount due to ESI department was Nil which was mentioned in BIFR order dated 22.08.2008. (Clause No.10.1.5 in Page No.13As per the ESI department, total dues were Rs.8.13lakhs and interest thereon was 10lakhs.  The Hon’ble BIFR in its order dated 22/01/2008 directed 1. The ESI department to reconcile the dues and permitted the company to pay the reconciled amount in eight quarterly instalments. 2. To waive the penal interest and damages levied or leviable on the company due to late payment of ESI dues 3. To withdraw all the pending cases against the company and the managing director.  Since 2008, the company is continuously pursuing with ESI department both in Delhi as well as in Hyderabad to reconcile the dues of the ESI. Many representations were submitted to the authorities of ESI. Till today, no positive directions have come from ESI department to reconcile the dues as directed by the BIFR.

c) Customs Authorities:  The total dues with interest and penalties as per the Central Excise and Customs Authorities as on 31.03.2006 were follows (mentioned in BIFR order.)

Sr Particulars Amount(lakhs) No 1 Duty Claimed 3.83 2 Interest thereon 14.69 3 Penalty 5.96 TOTAL 24.48

 The company had filed an appeal before CEGAT,Mumbai in 2004. Pending finalisation of appeal, the company agreed to pay before BIFR, the principle amount of Rs.3.83 lakhs and paid accordingly.

 The Hon’ble BIFR in its order ,dated 22-01-2008 had directed the customs authorities to collect the principle amount of Rs.3.83 lakhs and 1. to waive the interest of Rs.14.69lakhs and penalties of Rs.5.96lakhs levied or leviable on the company and the managing director 2. to permit the company to pay the Rs.3.83lakhs in eight quarter instalments 3. to exempt the company from penal provisions of the Central Excise Tax act.  The Hon’ble CEGAT, Mumbai, has conducted hearings and gave an order on 02/03/2017 directing the Joint Commissioner, Customs, to consider the plea of the company and review the waiver of interest and penalty provisions by considering the BIFR orders. The CMD had attended the personal hearings before the Custom authorities on various dates. The orders from Customs authority is awaited.

d) Income Tax Department:  The Income tax department has taken up a consequential proceedings on the company by deputy commissioner of income tax CC2(2), Mumbai and were asked to furnish the details under assessment sections 153C & 143(3) for the Assessment year 2008- 09 to 2013-14 on account of searches conducted on Shirish C Shah and his Associates.

 After many hearings and submission of the records, the Deputy Commissioner of Income tax (ITO) has satisfied and no additions were made on account of transactions made by Shirish C Shah. The hearings are being attended by CMD and orders were passed with a technical Demand of Rs.8.79lakhs and the same is being contested by the company.

x) Submit documentary proof like legal notices, Court papers, correspondence among others to reflect efforts undertaken by the company to realize its sundry debtors and Capital Advances of Rs 45.93 Lakhs before writing it off in FY 17. The company shall also file a declaration that none of these were related party transactions.

Write off of Sundry Debtor and Capital Advances consist of following (Amount in Lakhs) 1 Rychold Chemicals 28.91 2 Krishi Fabs 6.42 3 Maven Drugs Private Limited 10.6 Total 45.93 This has been exhaustively dealt vide our answers to query no 5 & 7 xi) Details along with documentary proof regarding State investment subsidy of Rs 9.28 Lakhs written off in FY 17,

 At the time of setting up a plant at Medak Dist., the AP State Government has given a subsidy of 9.28 lakhs to meet part of the project cost.  The accounting standard 12 have been issued by the Institute of Chartered Accountant of India in the year 2006 for the Government Grants. The Standards requires Capital Grant to be adjusted to plant and Machinery and calculate the depreciation otherwise the subsidy to be amortised in proportion of the Depreciation charged to the profit and loss account.  The said plant and machinery has been sold and the management felt that there is no relevance to the Subsidy existing under the head reserves and surplus. Accordingly, the same has been transferred to profit and Loss Account by nullifying the existing subsidy in the books of accounts in view of the losses.

Consideration of issues:

17. On perusal of the material available on record, the following issues arise for consideration.

1) Whether there is prima facie evidence of misrepresentation by VDPL including that of its financials and/or its business? 2) Whether there is prima facie evidence to show that the company is misusing the books of accounts / funds including facilitation of accommodation entries, to the detriment of minority shareholders and therefore the board, controlling shareholders and KMP are reneging on the fiduciary responsibility cast on them? 3) In view of the determination on the above issues and the order of SAT in the aforesaid appeal, whether, in light of the representation of the company, the action envisaged in SEBI letter dated August 7, 2017 needs reconsideration?

18. On the basis of documents available on record, my observations on above issues are as under:

Issue No. 1. Whether there is prima facie evidence of misrepresentation by VDPL including that of its financials and/or its business?

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

19. Based on the material available on record, my prima facie observations are as under:

i) The company with regard to purchases and sales made in FY 2016-17 has provided copies of 2 sales invoices to UNI MAX Fabricators and Dealers (“UNIMAX”) and 2 purchase invoices from NAMA Chemical Industries (“NAMA”). From the reply following is noted

Purchases (NAMA Chemical Sales (UNIMAX Fabricators and Industries) Dealers) Date of Amount(In Rs) Date of Transaction Amount(In Rs) Transaction 29/06/2016 16,54,000 30/06/2016 17,26,000 29/09/2016 7,88,000 30/09/2016 8,66,000 Total 24,42,000 Total 25,92,000

As per Annual Report 2016-17, the total purchases and totals sales reported were Rs 24,42,000 and Rs 25,92,000, respectively. In this regard, it is noted that VDPL as well as the BSE report state that VDPL has only one bank account in State Bank of India bearing account number 35644354313 through which all business related activities are carried out. Total credits and total debits in the bank statement for FY 2016-17 are Rs 3,63,000 and Rs 6,73,193 respectively. However, the full value of sales and purchases is not reflected in the bank statement of VDPL thereby showing that the transactions carried out by VDPL were either non-existent or in cash or as claimed by VDPL, were directly settled between NAMA and UNIMAX. This would require further examination including testing the transaction for whether or not there was transfer of aforementioned funds or not. This would determine whether there is a misrepresentation of financials of VDPL or not.

ii) It is also observed that purchases and sales were made from and to only one party each i.e. NAMA and UNIMAX, respectively. From MCA website, it appears that the registered address of VDPL is Nama Chemical Industries, Shed No.22, Plot No.84, Phase-I, IDA Cherlapally, Hyderabad TG 500051 IN. Hence the registered office address of VDPL is registered in the name of NAMA. Further, two sales invoices of NAMA submitted by VDPL indicate that the same address is shared between NAMA and VDPL.

From the above, I find that during FY 2016-17, VDPL in its books has shown purchases from only one seller i.e. NAMA, who appears to be a connected party of VDPL as it shares the same address as that of VDPL.

iii) VDPL has submitted a copy of Agreement of Settlement dated December 29, 2016 for Rs 46.7 lakhs (reflecting in trade payable for FY 2015-16) between VDPL (1st party), NAMA (2nd Party) and Syntho Chirals Private Limited (“Syntho” - 3rd Party). The relationship of the parties under the agreement is shown in the diagram below:

VDPL Rs 46.7 lakhs for purchases Rs 48.6 lakhs for sales (Date of invoice: 07/03/2016) (Date of invoice: 14/03/2016) NAMA Syntho Chemica Agreement of Settlement for Rs 46.7 lakhs (Date: 29/12/2016)

As per the agreement, NAMA has agreed to collect Rs 46.7 lakhs from Syntho. Further, VDPL has also furnished letter dated December 28, 2016 whereby NAMA has given its consent to collect the payment of Rs.46.7 lakhs from Syntho. The agreement states that the parties have only agreed to settle the amount between NAMA and Syntho. The amounts indicated is for settling the dues of VDPL to NAMA and Syntho to VDPL for FY 2015-16. It is unclear whether the dues were actually settled in terms of the agreement as VDPL has not substantiated it with documentary evidence. However, VDPL has actually accounted for the amount of Rs.46.7 lakhs due to NAMA in FY16-17.

From the MCA website, it is observed that Mr. N V Narender, who is the Managing Director of VDPL, is also one of the directors of Syntho Chirals Private Limited (since November 15, 2014). The relationship is explained in the diagram below:

(Source:https://www.tofler.in/visualization?cin=L24230TG1988PLC009102)

Thus, the above transaction of VDPL with Syntho appears to be a related party transaction on account of a common director, but the company has not disclosed the same in Annual report 2015-16 and 2016-17. The Annual report of 2015-16 and 2016-17 for Particulars of Contracts & Arrangements with Related Parties, inter alia stated that “There was no contract or arrangements made with related parties as defined under Section 188 of the Companies Act, 2013 during the year under review.” Thus, there is prima facie evidence of misuse of funds/books of accounts of VDPL.

iv) It is noted that, total deposits for Rs. 6.96 lakhs have been shown in the annual report for FY 2016-17. However, no bank statement/certificate was provided to support the current existence of these deposits.

v) In addition to the above, the following aberrations are also noted in respect of the financials of VDPL which give rise to a strong suspicion of misrepresentation of financials and/or misuse of funds / books of accounts of VDPL: a. It is noted that Mr Nitesh Vijay Vargiya had ceased to be Director of VDPL from March 31, 2010. As per ledger account provided by VDPL, the loan from Mr Nitesh Vijay Vargia for amount Rs.1,33,77,749 was reclassified from loans from director in FY 2015-16 to loans from others in FY 2016-17. The loan from him has been reclassified as loan from others in FY 2016-17 instead of FY 2010-11 with much delay. VDPL has not provided any explanation for such delay in reclassification of the loan.

b. As per VDPL’s submission, MD (Mr. Narender) has taken the personal loan by pledging the gold and met company expenditure of Rs 12,90,251 in FY 2016-17. It appears from VDPL’s submissions that Mr. Narender was making expenditures on behalf of VDPL and the same was accounted as “unsecured loan from directors”. VDPL has not provided the necessary documentation in this regard to show that the said expenditure was made on behalf of VDPL, and thus there is a doubt as to whether the liability of “unsecured loans from directors” is genuine. Also, there is no documentation to show the source of expenditure which further raises question of the genuineness of the said liability.

c. It is also observed that Trade Payables to Sri Ram Chits has increased from opening balance of Rs.1.26 lakhs to Rs.2.06 lakhs. VDPL has not provided any explanation for increase in Trade payables to Sri Ram Chits especially in light of the fact that the purchase and sale for FY2016-17 was only from / to one entity namely: NAMA and UNI MAX.

d. In respect of the sales and purchases for the FY 2016-17, VDPL has provided a copy of the settlement agreement dated December 29, 2016 where under the payment which was supposed to be received by VDPL, was agreed to be paid directly by the purchaser to NAMA. It is pertinent to note that the said settlement agreement relates to transactions for FY 2015- 16 and not 2016-17. Thus, there is a lack of documentary evidence in respect of realization of consideration by VDPL for its sales shown in the annual report of 2016-17.

e. With respect to written off sundry creditors, VDPL in its reply stated that it has written off amount payable to Deepak Paints and Sri Durga Engineers aggregating to Rs 2.41 lakhs and the same was treated as other income in profit and loss account for FY 2016-17. However as per P&L account for FY 2016-17, the total sundry creditors written off was Rs 3.20 lakhs. Hence there appears to be a mismatch in figures as reflected in the Annual Report FY 16-17 and VDPL’s submissions.

f. As per VDPL’s submissions, deposits of the company have increased from Rs 6,16,738 to Rs 6,96,738, i.e. an increase of Rs.80,000 from FY15-16 to FY16-17 on account of addition of deposit in the court with regard to case pending against the company. VDPL has submitted copy of petition and Demand Draft (DD) dated October 14, 2009 for deposit of Rs.87,000/- made with the court. Since the DD was not pertaining to FY 2016-17, the company would have accounted for amount of Rs.87,000/- in the year 2009-10 itself. However, as per the company’s submissions, the same has been accounted for in FY 2016-17 for an amount of Rs.80,000/- instead of Rs 87,000/-.

g. With respect to supply of goods and services, VDPL in its reply has stated that it had earlier wrongly classified the amount receivable from Rychold Chemicals of Rs 28,90,744 under other non-current assets for supply of Trytyl chloride under advance of supply of goods. The same has been rectified in and written off in FY2016-17. Further, the company had written off an amount of Rs 6,42,537 which was paid to Krish Fabs towards purchases of capital equipment in year 2008. As per company submission the said amount was also written off in year 2016-17 with approval of audit committee. It is noted that VDPL has not provided the audit committee minutes in that regard. Since the write-offs are material, particularly when the company is making losses, the said write-offs need to be examined in detail.

h. An amount of Rs.50,90,948 is indicated as long term trade receivables in Annual Report FY 2016-17. VDPL has also submitted the details of the said amount to be received from 7 such entities. However, the figures in the table provided by VDPL add up to approx. Rs.55,22,938 instead of Rs.50,90,948.

i. As per Agreement of Settlement dated December 29, 2016, agreement was entered between VDPL (1st party), NAMA Chemicals Industries (2nd Party) and Syntho Chirals Private Limited (3rd Party) for Rs 46,70,000. It is noted that the said agreement was for transaction done in FY 2015- 2016 and not FY 2016-2017. It is noted that in year 2016-17 the entire sales were made to UNIMAX Fabricators and Dealers but in the Agreement of settlement there was no mention about UNIMAX. Thus, the sales proceeds should have been reflected in the bank statement of VDPL which is not the case.

20. In view of the above, I observe that with respect to the transactions reported in the financials, there are no corresponding entries in the bank statement of VDPL. Further, it had entered into transactions with related parties but has not disclosed the same in its financials nor has complied with other legal requirements in that regard. Further, VDPL has failed to submit adequate documents to substantiate the figures disclosed in its financials and to establish their genuineness. In respect of explanation sought from it VDPL has provided irrelevant and vague particulars without providing actual documents. Considering the above, in my view, there is prima facie evidence of misuse of books of accounts/funds by VDPL, and a strong suspicion regarding misrepresentation of financials by VDPL.

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

21. In view of the prima facie observations regarding misuse of books of accounts/funds by VDPL and the suspicion regarding misrepresentation of its financials, the persons who are in control of the company and the directors of the company are prima facie liable for action by SEBI and should not be permitted to exit the company at the cost of innocent shareholders.

22. Further, on account of the prima facie observations regarding misuse of books of accounts/funds by VDPL and the suspicion regarding misrepresentation of its financials, it is also imperative that in the interest of investors, the financials of the company be independently audited to establish their genuineness.

23. Further, pending enquiry/audit, considering the interest of public shareholders involved in VDPL, I find it is appropriate to revert the trading in the securities of VDPL to the status as it stood prior to issuance of letter dated August 7, 2017 by SEBI.

24. In light of the above, I am of the view that following urgent interim actions are required to be taken, pending audit/further enquiry.

INTERIM ORDER

25. In the facts and circumstances of the case, I, in exercise of the powers conferred upon me under sections 11, 11(4), 11A and 11B read with section 19 of the Securities and Exchange Board of India Act, 1992, hereby, modify the actions envisaged in SEBI’s letter dated August 7, 2017 and the consequential actions taken by Stock Exchanges against VDPL and direct as under:

i. The trading in securities of VDPL shall be reverted to the status as it stood prior to issuance of letter dated August 7, 2017 by SEBI. ii. Stock Exchange shall appoint an independent forensic auditor, inter alia, to verify: a) Misrepresentation including of financials and/or business of VDPL, if any; b) Misuse of the funds/books of accounts of VDPL, if any. iii. The promoters and directors in VDPL are permitted only to buy the securities of VDPL. The shares held by the promoters and directors in VDPL shall not be allowed to be transferred for sale by the depositories. iv. The other actions envisaged in SEBI’s letter dated August 7, 2017 in para 1 (d), as may be applicable, and the consequential action taken by Stock Exchanges shall continue to have effect against VDPL.

26. The ‘directors’ for the purpose of directions above shall mean and include: a) the persons who are acting as directors on the date of this order, or b) the persons who were acting as directors of this company as on August 7, 2017, who ceased to be directors by way of disqualification by any other authority or by way of resignation or by any other means, on or after August 7, 2017.

27. Accordingly, the representation dated September 19, 2017 made by VDPL is disposed of.

28. The above directions shall take effect immediately and shall be in force until further Orders.

29. The findings in this order have been rendered on the basis of the prima facie evidence available at this stage. However, detailed examination / forensic audit needs to be undertaken to unearth the entire extent of violations. In this context, VDPL is advised to file its reply/objections to this order, if any, within 30 days from the date of receipt of this order and may also indicate whether it desires to avail an opportunity of personal hearing on a date and time to be fixed on a specific request made in that regard in the reply/objection. In the event VDPL fails to file its reply or to request for an opportunity of personal hearing within the said 30 days, the preliminary findings of this order and ad-interim directions shall stand confirmed against VDPL automatically, without any further orders.

30. Copy of this order shall be forwarded to the recognized stock exchanges and depositories for their information and necessary action. A copy of this order shall also be forwarded to the Ministry of Corporate Affairs and Serious Fraud Investigation Office for their information.

Sd/-

DATE: December 18, 2017 MADHABI PURI BUCH PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA