Svc Industries Limited vs Sebi

Date of Decision : 27.05.2019

Appeal No. 360 of 2018

SVC Industries Limited 301, A-1, Shubham Centre, Near Holy Family Church, 491, Cardian Gracious Road, Andheri (E), Mumbai - 400 099. ....Appellant

Versus

1.

Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051.

2. Bombay Stock Exchange Floor 25, P J Tower, Dalal Street, Fort, Mumbai - 400 001. ...Respondents

Mr. Ram Upadhyay, Advocate i/b Law Competere Consultus for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Nishant Upadhyay, Advocate i/b Desai & Diwanji for Respondent No. 1.

Mr. Manish Chhangani, Advocate i/b Khaitan & Co. for Respondent No. 2.

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CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M.T. Joshi, Judicial Member

Per : Justice Tarun Agarwala, Presiding Officer

1. The appellant has questioned the veracity and legality of

the order of BSE Limited ('BSE' for short) dated March 8,

2018 by which their application / representation to remove its

name from the list of suspected shell Companies and from the

Graded Surveillance Measures ('GSM' for short) Stage VI

has been rejected.

2. The facts leading to the filing of the present appeal is

that the Ministry of Corporate Affairs ('MCA' for short)

issued a letter dated June 9, 2017 to Securities and Exchange

Board of India ('SEBI' for short) enclosing a list of 331

listed shell Companies with a request to initiate necessary

action as per SEBI laws / regulations. Pursuant to the said

letter SEBI issued a letter dated August 7, 2017 to BSE,

Metropolitan Stock Exchange of India Ltd. and National

Stock Exchange of India Ltd. directing them to identify the

suspected shell Companies on their Exchange platform and

initiate necessary action as per SEBI laws and Regulations. 3

In this regard SEBI further advised Stock Exchanges to take

the following measures, namely, place the Companies in

Graded Surveillance Measures (GSM) Stage VI with

immediate effect, and thereafter initiate a process of verifying

credentials / fundamentals of such Companies and appoint an

independent auditor to conduct audit of such listed companies

and, if necessary, even conduct forensic audit of such

companies to verify its credentials / fundamentals. SEBI

further directed that if upon verification, the Exchange does

not find appropriate credentials / fundamentals about

existence of the Companies in which case Exchanges will

initiate the proceedings for compulsory delisting the

companies.

3. SEBI vide its letter dated August 9, 2017 issued further

direction directing the Exchanges to seek the following

documents from the companies for the purpose of verification

of credentials / fundamentals of the companies, namely, status

of filing its annual income tax returns for the last three years,

status regarding any pending dispute with the income tax

department, status regarding Company's compliance with the

requirements of the Companies Act, status regarding filing of

annual returns of last three years, status whether company is a 4

going concern, bank statement of last one year, status of the

company with respect to default to any bank / financial

institution and status of the company's compliance with all

the listing regulation requirements.

4. Based on the direction issued by SEBI dated August 7,

2017 and August 9, 2017 BSE issued a letter dated August 7,

2017 and August 10, 2017 to the appellant requiring it to

submit the necessary auditor's certificate along with the

documents. Based on the letter of SEBI dated August 7, 2017

BSE issued a notice dated August 7, 2017 to the appellant

intimating them that the company would be placed in GSM

Stage VI with effect from August 8, 2017.

5. The appellant filed an application / representation dated

August 10, 2017 before the respondent contending that their

action in keeping them in the list of the suspected shell

Companies was wholly erroneous as well as their action in

placing them in the GSM Stage VI and consequently

requested to take immediate remedial action so that their

reputation is salvaged and the hardships caused to the

investors are removed.

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6. However, in response to the letter of BSE dated August

10, 2017 to submit auditor's certificate, the appellant

submitted the auditor's certificate and the necessary

documents, namely, annual income tax returns of last three

years, Company's compliance under Companies Act,

evidence of a going concern, copy of bank statement of last

one year etc. The auditor also certified that even though the

plant is closed since September 2000 it is still a going

concern.

7. Subsequently BSE vide its various letters dated August

23, 2017, September 11, 2017, September 21, 2017,

November 7, 2017, November 2, 2017, February 1, 2018 and

February 15, 2018 asked for various information and

documents such as provident fund details, number of

employees, salary statement etc. which was duly supplied by

the appellant and requested that their name should be

removed from the list of suspected shell companies and also

from the GSM Stage VI.

8. At this stage, it would be relevant to note what Graded

Surveillance Measure (GSM) is about. The said GSM was

introduced by SEBI in continuation to earlier surveillance 6

measure already implemented by SEBI and Exchanges.

Through this GSM, additional measures were taken on

securities which witnessed an abnormal price rise which did

not commensurate with financial health and fundamentals like

earnings, book value, fixed assets, net worth etc. Such list of

securities identified under GSM would be placed in various

GSM category i.e. from GSM Stage I to GSM Stage VI

depending upon the gravity of the price movement.

9. In this regard the appellant made an application dated

August 17, 2017 to BSE contending that the appellant has

wrongly been shown as a shell Company and has wrongly

been placed in GSM Stage VI in as much as the appellant has

not manipulated the share price and, on the other hand, the

appellant is a going concern and has fully complied with BSE

listing regulations.

10. BSE after considering the matter and after giving an

opportunity of hearing passed the impugned order rejecting

the application / representation of the appellant and continued

to keep the appellant in GSM Stage VI. BSE in the impugned

order had noted that the Company has complied with the

listing regulations and that the auditor's certificate had

certified that as per balance sheet the Company has a positive 7

net worth and that the company is a going concern. BSE,

however, concluded that the balance sheet does not reflect the

true and fair position of the company and considering the fact

that the company had suspended its operations the entire

assets should be written off. Further, pre-operative expenses

like salaries to office staff, rent, audit fees, etc. should not be

included under "capital works in progress" and if the

expenses relating to pre-operative expenses are deleted from

this head the company would have a negative net worth. It

was contended that the expenditure so added under the head

capital works in progress created an illusion that the company

has a huge asset based which is incorrect.

11. Having heard the leaned counsel for the parties at some

length we find that the approach adopted by SEBI as well as

by BSE is totally erroneous for the following reasons:-

(a) The letter addressed by MCA on June 9, 2017

merely required SEBI to initiate necessary action

against 331 listed shell Companies as per SEBI

laws / Regulations. SEBI was, thus, required to

investigate as to whether 331 Companies were in

fact shell Companies or not and if they were shell 8

Companies then necessary action was required to

be taken as per SEBI laws and Regulations.

(b) SEBI took two months to issue directions to the

Stock Exchanges to take necessary actions when it

issued the letter dated August 7, 2017. Such

direction to the Exchanges directing them to place

331 shell Companies under GSM Stage VI without

verifying their credentials / fundamentals was

wholly illegal and in violation of principles of

natural justice.

(c) If there was urgency in the matter SEBI should

have reacted immediately when it received the

request from the MCA vide letter dated June 9,

2017. It took SEBI two months to issue a direction

to all the Stock Exchanges. Thus there was no

urgency in the matter. Consequently, placing the

appellant in GSM Stage VI without giving them a

notice or an opportunity of hearing was in

violation of the principles of natural justice even

though the Exchanges has the power to transfer

securities of any Company to any GSM Stage 9

based on some set parameters without giving a

hearing which in the instant case is not known.

(d) The contention of the Exchange as well as SEBI

that they were not required to investigate as to

whether the 331 listed Companies are shell

Companies or not is patently erroneous. Based on

MCA letter dated June 9, 2017 SEBI was required

to investigate as to whether 331 shell Companies

named therein were shell Companies or not and

whether the said Companies had no credentials /

fundamentals and only thereafter SEBI was

required to take action in accordance with SEBI

Act and Regulations framed there under.

(e) No investigation has been done to find out as to

whether the appellant Company is a shell

Company or not. Contention that SEBI and BSE

were not required to investigate as to whether the

Company is a shell Company or not is totally

erroneous.

(f) The desired information asked by BSE was

supplied. The statutory auditor's certificate 10

certifying the appellant as a going concern, income

tax returns, annual returns for the past three years

and bank statement of one year were supplied. List

of employees working in the company were given.

Thus, there was no reason for the respondent to

continue grading the Company in the GSM Stage

VI based on the impugned communication.

(g) BSE could not pick holes in the balance sheet nor

are they competent to hold whether any

expenditure should be a revenue expenditure or a

capital expenditure. If BSE does not agree with the

balance sheet it was open to the respondent to

appoint an independent auditor or even go in for a

forensic audit which they have not done. It was

stated that the respondent appointed an

independent auditor but we find no reference of

the independent auditor's report in the impugned

order.

(h) Even otherwise the independent auditor's report

does not give any finding as to whether the

company is a going concern or not and is also 11

silent on the factum of the number of employees

employed by the company.

(i) The essential ingredients as per direction of SEBI

dated August 7, 2017 and August 9, 2017 to verify

the credentials / fundamentals has not been carried

out in the right earnest even though all the

information was duly supplied by the appellant.

(j) In Assam Company India Ltd. and Ors. vs The

Union of India & Ors. Manu/GH/01542/2019 the

Gauhati High Court held that there is no statutory

definition of a shell Company in any laws of India.

However, in popular parlance, a shell company is

artificially identified with dubious activities

concerning serious economic offences such as tax

evasion, money laundering, benami transactions,

conversion of black money into white, round-

tripping with host of other associated offence. No

such finding has been given by the respondent

except that the appellant company is not carrying

out any production activities since September

2000.

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(k) The objective of the SEBI Act is to promote the

development of, and to regulate the healthy growth

of securities market as well as to protect the

interest of the investors. It has the power to issue

necessary direction if it is satisfied upon an inquiry

that such direction is necessary in the interest of

the investors. We are of the opinion that before

branding the appellant as a shell Company it was

obligatory on the part of the SEBI as well as on the

part of the BSE to investigate and find out whether

the appellant is a shell Company or not.

(l) We also find that that there are six stages where a

company could be placed where securities of the

company witness an abnormal price rise which

does not commensurate with the financial health

and fundamentals. Such exercise has not been

done either by SEBI or BSE and the appellant

company has been placed straightway in GSM

Stage VI which is wholly arbitrary.

12. Thus, for the reasons stated aforesaid the impugned

order passed by the BSE cannot be sustained and is quashed.

We direct SEBI and BSE not to place the appellant in the 13

category of a shell Company or place it in GSM Stage VI. It

is however open to SEBI or BSE to take such action in

accordance with SEBI Act or its regulations for placing the

appellant in GSM Stage or to compulsory delist the Company

or to take such other measure as advised to them under the

SEBI's laws and Regulations. However, such action could

only be initiated in accordance with law. The appeal is

allowed. In the circumstances of the case, parties shall bear

their own costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member 27.05.2019 Prepared and compared by:msb