WTM/SR/CFD-FAC/08/02/2017. Case: In Re: Arvind Remedies Limited and Ors. Vs. Securities and Exchange Board of India

Case NumberWTM/SR/CFD-FAC/08/02/2017
JudgesS. Raman, Whole Time Member
IssueSecurities And Exchange Board Of India Act, 1992 - Sections 11(1), 11(4), 11B, 12A(a), 12A(d), 19
Judgement DateFebruary 16, 2017
CourtSecurities and Exchange Board of India


S. Raman, Whole Time Member

Background -

1.1 Arvind Remedies Limited ("ARL") is a company incorporated under the Companies Act, 1956, on June 17, 1998. ARL is engaged in the business of manufacturing of allopathic and ayurvedic pharmaceutical formulations. ARL operates primarily in the hospital marketing segment comprising Central/State Government institutions, etc. The Registered Office of ARL is at 190, Poonamallee High Road, Chennai, 600084. The shares of ARL are listed on BSE and the National Stock Exchange of India Limited ("NSE").

Forensic Audit of ARL -

1.2 SEBI received a reference dated September 18, 2015, from Punjab National Bank ("PNB") informing that a consortium of banks led by PNB had a Forensic Audit of ARL conducted by M/s. Maharaj N.R. Suresh and Co. A copy of the Forensic Audit Report dated May 23, 2015, was also forwarded to SEBI, which revealed large scale irregularities including falsification of books of accounts and statements; maintenance of multiple databases, etc.

1.3 The observations contained in the aforementioned Report were as under -

"i. A lot of time was taken by ARL to produce records for the Audit.

ii. ARL's accounts were maintained in software called Focus 6.2, which lacked security control, access control and data base control.

iii. ARL maintained different sets of database - one for books of accounts and the other for the purpose of excise, sales tax and internal control purpose. Checks/controls in data entry and processing were absent as a result of which, wrong/erroneous data were also keyed in and processed.

iv. The financial database modules were frequently changed but the overall financial figures were balanced with published accounts. The internal deletions/additions were made to satisfy various inspection agencies like Stock Auditors, Internal Auditors, Cost Auditors, etc.

  1. ARL prepared different Profit And Loss Account and Balance Sheet for the purpose of Excise Department where actual turnover was reported. In case of returns filed with the Tamil Nadu Sales Tax authorities, ARL updated the returns. ARL purchased majority of stocks from certain "Controlled Parties/Entities" and sold the same to them. This was to avoid/minimize extra outflow of VAT and to maintain revenue neutrality. The aforesaid parties were -

  2. Preventive Pharmaceuticals Private Limited;

    ii. Aroma Remedies Private Limited;

    iii. Holy Remedies Private Limited;

    iv. Zurich Bio Tech Pharma;

  3. Venus International Private Limited;

    vi. Cosmic Remedies Private Limited;

    vii. Avathar Pharmaceuticals Private Limited;

    viii. Bright Drug Industry;

    ix. Bright Medicure Private Limited.

    vi. Sales to the aforementioned parties were not exhibited in the actual books of accounts. However sales to Government agencies and Government hospitals across India and to a particular hospital at Lahore, Pakistan, were shown. Such sales shown in books did not tally with the sales tax returns including Inter-State sales.

    vii. Major differences were observed in Inter-State purchases and Inter-State sales and exports.

    viii. ARL was regularly inflating sales and purchases, which indicates that it had not manufactured goods shown as manufactured in the Annual Accounts, relied upon by bankers. ARL adopted certain practices to show these transactions, which were primarily records of non-existent movement of goods such as fake bills generated on customers who did not requisition such purchases. In many cases, ARL only passed book entries under Parties' Control Account or Journal Control Account (Collections from debtors were shown as debited to this account and payments to the customer's account were made by crediting the said account). For example, the purchase account was debited for an amount and the supplier account was credited simultaneously. Later, the goods were shown to have been sold and the customer's account was accordingly debited.

    ix. While the original Stores Ledger (which matched with Financial Books) was produced to the Forensic Auditors on March 5, 2015, another Stock Ledger was produced on March 7, 2015 (which was reconciled with the original Excise Return).

  4. Two sets of sales register were produced, one on February 17, 2015, that matched with books of accounts and another on March 14, 2015, which was reconciled with the Excise Return.

    xi. In March 2014, the Deputy Commissioner of Income Tax confirmed that multiple accounts were maintained by ARL. Further, Central Sales Tax for the Financial Years 2011-12 and 2012-13 were paid through the abovementioned Control Accounts.

    xii. No Central Sales Tax as exhibited in books was paid nor were original challans produced.

    xiii. Transactions were only book entries where tax paid amount were adjusted through the Control Accounts."

    Investigation conducted by SEBI -

    2.1 Pursuant to receipt of the Forensic Audit Report, SEBI conducted an investigation of ARL to ascertain whether its books of accounts were manipulated during the Financial Years 2011-12, 2012-13, 2013-14 and 2014-15 ("Investigation Period") and whether there were any other related violations.

    2.2 As per information obtained by SEBI from BSE and NSE websites and Annual Reports of ARL, the details pertaining to the Board of Directors of ARL for the period from April 1, 2010 to March 31, 2015, is as under -

    2.3 The shareholding pattern in ARL during the period of Investigation (as obtained from the BSE website), is as under -

    2.4 As per information obtained by SEBI from BSE and NSE website, the details pertaining to the Promoters of ARL, is as under -

    2.5 The shareholding of Promoters of ARL for the quarters ended September 2014 to March 2015 is as follows:

    2.6 The Promoters of ARL offloaded 28.33% of their shareholding during the quarter ended December 2014. During the next quarter i.e. March 2015, they offloaded an additional 4.49% of their shareholding in ARL. Dr. Arvind Kumar Babhutmalji Shah, the Managing Director of ARL held only 0.72% shareholding as at the end of the quarter ended March 31, 2015, while the entire Promoter shareholding was reduced to only 3.58%. The aforesaid offloading occurred through -

    a. Direct sales in the market;

    b. Off-market transfers to connected entities and their subsequent sale in the market;

    c. Pledge of shares and sale of such shares by the lenders after invocation of the pledge.

    2.7 The financial performance of ARL during the Investigation Period (as obtained from the BSE website), is as under -

    2.8 As per the Balance Sheet of ARL as on March 31, 2014, the total assets were ` 1091.58 Crores. However, as on March 31, 2016, the total assets were reduced to ` 559.07 Crores, a reduction by ` 532.51 Crores.

    2.9 The reduction in the assets was primarily due to the following -

    a. With regard to tangible assets, ARL was shown to have returned machinery worth around ` 103 Crores to the suppliers in the Financial Year 2014-15.

    b. ARL was shown to have destroyed raw materials, stock in progress and finished goods of value ` 197 Crores in the Financial Year 2014-15 under self-certification and no external agencies including Drug Control Authorities, Central Excise and Pollution Control Board were involved, as is the requirement for destruction of chemicals and hazardous goods under the Drugs and Cosmetics Act and Rules.

    2.10 ARL showed steady growth in Revenue and Profits till the quarter ended September 2014, whereafter, ARL started disclosing significant losses as under -

    a. In the quarterly results for December 2014, under exceptional item, ARL showed a loss on account of stock destroyed for ` 126.17 Crores, which was increased to around ` 197 Crores in subsequent disclosures made by the company in the Financial Year 2014-15.

    b. In January 2015, ARL made a disclosure about a strike in its factory, viz. Unit No. 1 at Kakkalur. ARL also disclosed that major part of machineries (worth around ` 103 Crores) of Unit No. 2 at Kakkalur were dismantled and sent back to the suppliers. There is no evidence recorded in the books of any money being returned by the suppliers.

    2.11 The price of the scrip of ARL increased from the opening price of ` 43.95 on April 1, 2014, to reach a high of ` 66.05 as on September 8, 2014. Thereafter, the scrip witnessed significant fall and closed at ` 14.7 on March 31, 2015. The price chart of the scrip of ARL for the period April 1, 2014 to March 31, 2015, as obtained from the BSE website, is as under -

    2.12 ARL was found to have used the following entities (which were mostly incorporated during the Financial Years 2010-11 and 2011-12) to show fictitious purchase and sale transactions, viz. -

    "a. Preventive Pharmaceuticals Private Limited;

  5. Aroma Remedies Private Limited;

  6. Holy Remedies Private Limited;

  7. Zurich Bio Tech Pharma;

  8. Venus International Private Limited;

  9. Cosmic Remedies Private Limited;

  10. Avathar Pharmaceuticals Private Limited;

  11. Bright Drug Industry;

  12. Bright Medicure Private Limited;

  13. Maximus Wellnus Drugs Private Limited;

  14. Marina Dealcom Private Limited;

  15. Elixir Life Science Private Limited;

  16. Mascot Machines Private Limited;

  17. Matrix Device and Mechanism Private Limited;

  18. Zeal Hi-Tech Engineers Private Limited."

    2.13 The entities at paragraph 2.12(a) to (i) were referred to as Controlled Parties/Entities in the Forensic Audit of ARL conducted by M/s. Maharaj N.R. Suresh and Co. [refer to paragraph 1.2(v) at page 2]. In the Statutory Auditors' Report of ARL for the 15 months period ended June 30, 2015, M/s. Vivekanandan and Associates (who were appointed subsequent to cessation of M/s. Doshi, Chatterjee, Bagri & Co., as the Statutory Auditors of ARL) identified a similar pattern in transactions of ARL with several other entities. I note that the investigation carried out so far collectively refers to all such entities, including entities mentioned at paragraph 2.12(j) to (o), which ARL used for showing fictitious purchase and sale transactions. In view of the aforesaid, all the entities at paragraph...

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