WTM/RKA/ISD/42/2016. Case: In Re: Kailash Auto Finance Ltd. Vs. Bombay High Court SEBI Cases

Case NumberWTM/RKA/ISD/42/2016
JudgesRajeev Kumar Agarwal, Whole Time Member
IssueIncome Tax Act, 1961 - Section 2(42A); Securities And Exchange Board Of India Act, 1992 - Sections 11 (4), 11(1), 11B, 12A(a), 19
Judgement DateMarch 29, 2016
CourtBombay High Court SEBI Cases

Order:

Rajeev Kumar Agarwal, Whole Time Member

  1. SEBI noticed sudden unusual price movement and volume during the period from November 07, 2014 to December 31, 2015 in the scrip of Kailash Auto Finance Ltd. (hereinafter referred to as "Kailash Auto"), a company having its shares listed on the Bombay Stock Exchange Ltd. ('BSE'). SEBI undertook preliminary examination in the matter. It was observed that during November 07, 2014 to December 31, 2015, price of the scrip fell from ` 28.05/- per share to a low of ` 2.01/- per share and daily average trading volume in the scrip was 7 lakh shares. Prior to this period, during July 22, 2013 to November 05, 2014, the price of the scrip ranged between ` 36.85/- and ` 28.45/-, with daily average trading volume of 15 lakh shares with daily average number of trades of 685. Thus, substantial fall in price and average traded volume was noted during November 07, 2014 to December 31, 2015. On further scrutiny it was observed that earlier, during January 17, 2013 to June 04, 2013, the price of the scrip had increased from ` 11/- to ` 36.25/in 36 trading days and average trading volume during this period was merely 280 shares per day with average number of trade as low as 3 per day. For the purposes of preliminary examination of facts and circumstances prevailing during these periods these periods were taken in three patches i.e., (a) January 17, 2013 to June 04, 2013 (Patch -1), (b) July 22, 2013 to November 05, 2014 (Patch-2) and (c) November 07, 2014 to December 31, 2015 (Patch -3). The price movement vis-à-vis traded volume in the scrip during this period is illustrated below:

  2. During preliminary examination several acts and omissions, in connection with dealing in shares of Kailash Auto having a bearing on the securities market, including layering of funds, circulation of funds and securities, amongst inter -connected parties for acquisition and divestment of securities of connected unlisted private companies and corporate actions including capital reduction, issuance of bonus shares, private placement and merger of such companies with Kailash Auto were also observed. These activities needed examination of several aspects of interconnected transactions amongst the large number of entities. As a part of preliminary examination, the bank statement of the concerned suspected entities for the relevant period were analysed. The data and information available in public domain such as Ministry of Corporate Affairs ("MCA") website, BSE website and other databases had to gathered and examined. During the course of examination, Kailash Auto, Registrar to Issue and Share Transfer Agent of Kailash Auto, and suspected entities who had been holding shares in concerned private unlisted companies were also asked to provide information relevant to the matter. However, no satisfactory response were provided by these entities.

  3. SEBI had also advised BSE to conduct surprise inspection at the registered office of Kailash auto to determine, inter alia, the following:

    (a). Whether the company exists at the registered office/corporate office;

    (b). Whether any operations of the company are conducted at the said address.

  4. BSE conducted a surprise inspection at the registered office of Kailash Auto (i.e., '19, Rollant Complex, 37/17, The Mall, Kanpur, Uttar Pradesh - 208 001') and reported that the said premises was occupied by a chartered accountant firm - M/s. Ajay Kedia & Associates and only one office boy of Kailash Auto was available at the time of site visit. On further inquiry, it was learnt that the said chartered accountant firm had given Kailash Auto a small table space in its office for collecting posts, couriers, and other documents received in the name of the company for which one office boy Mr. Atul Verma was appointed. BSE conducted inspection at corporate office of Kailash Auto (i.e., 'Room No. 10, Ground Floor, Rajsheela Premises Co-op Society Ltd., Building No. 597, J.S.S. Road, Mumbai - 400 002') also and reported that the claimed corporate office was locked and no company officials were available at the time of visit of BSE officials at that address. Thus, it was gathered that no operation was carried out by Kailash Auto at the said registered office/corporate office addresses.

  5. The preliminary examination, inter alia, further revealed that:

    "(a). With effect from November 19, 2012 the management and control of Kailash Auto was acquired by Careful Projects Advisory Ltd. (hereinafter referred to as "CPAL") and Panchshul Marketing Ltd. (hereinafter referred to as "PML") who had together acquired shares amounting to 69.81% of the total paid-up share capital of the company from Padma Impex Ltd., the erstwhile promoter of Kailash Auto through a share purchase agreement dated May 02, 2012. Consequently, the board of directors of Kailash Auto had approved CPAL and PML as promoters of Kailash Auto.

    (b). On November 22, 2012, the board of directors of Kailash Auto had agreed for reduction of share capital of Kailash Auto and merger of CPAL and PML with Kailash Auto. The scheme of reduction of share capital of Kailash Auto and amalgamation of CPAL and PML with it were approved by the Hon'ble High Court of Allahabad and the Hon'ble High Court Bombay vide separate orders dated May 9, 2013 and May 10, 2013, respectively. The swap ratio for the amalgamation was approved as follows:

    (i) The paid up value per share of the transferee company (Kailash Auto) would be of ` 1/- each, fully paid up post reduction of capital.

    (ii) The paid up value per share in the transferor companies (CPAL and PML) would be of ` 1/- each, fully paid up.

    (iii) Accordingly, for every equity share of ` 1/- held by the shareholders of CPAL and PML, one equity share of ` 1/- of Kailash Auto (post reduction of capital) was to be allotted to them as fully paid-up in the equity share capital of the company.

    (c). Pursuant to the scheme of reduction of capital approved by the Hon'ble High Court, the paid-up share capital of Kailash Auto of ` 3,80,59,000/- consisting of 38,05,900 equity shares of ` 10/- each was reduced to ` 38,05,900/- consisting of 38,05,900 equity shares of ` 1/- each. Consequently, the paid up share capital was reduced by 90%. Further, pursuant to amalgamation of CPAL and PML with Kailash Auto, additional 58,59,10,800 equity shares of ` 1/- each amounting ` 58,59,10,800/- were issued to shareholders of CPAL and PML as consideration. Total 26,56,617 equity shares of ` 1/- held by CPAL and PML were cancelled due to crossholding.

    (d). CPAL and PML were incorporated as private limited companies with share capital ` 1,00,000/- each, consisting of 10,000 equity shares of ` 10/- each on September 15, 2010 and September 19, 2010, respectively.

    (e). During Financial Year 2010-11, CPAL had made private placement of its 3,30,155 equity shares of face value ` 10/- each at the share premium of ` 590/- each to 13 entities (hereinafter referred to as the 'primary allottees of CPAL') and purportedly raised a share premium of ` 19,47,91,450/- within a short time of its incorporation. However, Kailash Auto has submitted to SEBI a list of 13 entities claiming to have allotted 33,01,550 equity shares of face value ` 1/- each to the said entities as mentioned in following Table:

    (f). During the Financial Year 2011-12, CPAL had a paid up share capital of ` 285,686,800/-consisting of 285,686,800 shares of ` 1/- each. CPAL had increased its authorised share capital from ` 3,450,000/- to ` 290,000,000/- and then its shares were split from ` 10/-each to ` 1/- each, thereby converting 340,155 equity shares of ` 10/- each into 3,401,550 equity shares of ` 1/- each.

    (g). Thereafter, during the same financial year, CPAL had issued 187,085,250 equity shares of ` 1/- each as bonus shares in the ratio of 55 shares for 1 share and further issued 95,200,000 equity shares of ` 1/- each through private placement. The list of the persons who received bonus shares, and persons who were allotted shares in this private placement amongst others (hereinafter referred to as the "recipients of CPAL shares") is given in the following Table:

    (h). As observed from the balance sheet of Kailash Auto for Financial Year 2011-12, the aforesaid recipients of CPAL shares were its existing shareholders prior to bonus issue as well the private placement. The primary allottees of CPAL were the only shareholders as there was no other issuance of shares after the first private placement and before the bonus issue and second private placement. This implies that the aforesaid recipients of CPAL shares had become shareholders of CPAL on purchase of shares from the primary allottees of CPAL before the bonus issue and second private placement.

    (i). Similarly, PML had made private placement of 3,36,900 equity shares of face value ` 10/-each at a premium of ` 690/- each during the Financial Year 2010-11 to 15 entities (hereinafter referred to as "primary allottees of PML") and purportedly raised a share premium of ` 23,24,61,000/- within short time of its incorporation. The list of primary allottees of PML is mentioned in following Table:

    (j). During the Financial Year 2011-12, PML had a paid up share capital of ` 30,02,24,000/- consisting of 30,02,24,000 shares of ` 1/- each. PML had increased its authorised share capital from ` 1,00,00,000/- to ` 31,00,00,000/-. and then its shares were split from ` 10/-each to ` 1/- each, thereby converting 3,46,900 equity shares of ` 10/- each into 34,69,000 equity shares of ` 1/- each.

    (k). Thereafter, during Financial Year 2011-12, PML had issued 225,485,000 equity shares of ` 1/- each as bonus shares in the ratio of 65 shares for 1 share and further issued 7,12,70,000 equity shares of ` 1/- each through private placement. The list of the persons who received bonus shares and persons who were allotted shares in this private placement (hereinafter referred to as the "recipients of PML shares" is given in the...

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