1.1 In view of the price of the shares of M/s. Konkan Tyres Ltd. (hereinafter referred to as "the company") rising about 230% in 143 trading days, i.e., during the period March 1, 2005 to September 21, 2005, Securities and Exchange Board of India (hereinafter referred to as "SEBI") conducted a preliminary examination of the dealings in the scrip of the Company. From the data obtained from the Stock Exchange Bombay (hereinafter referred to as "BSE") which is the only exchange where the shares of the Company are listed, it was seen that the scrip of the Company was in 'Z' group. It was also seen that trading of the scrip of the Company was compulsorily in dematerialized form and only 35.65% of the equity capital of the Company representing 11, 31, 420 shares are in dematerialized form. The balance 20, 42, 680 shares are in physical form and hence not available for trading. This shows that the shares available for trading are limited in number.
1.2 It is seen that Shri Omprakash G Soni is Chairman of the Company, while Shri Ramesh Kumar Putta, Shri Fateh Sinh Solanki are directors and Shri Sunil Kumar Menon and Shri Narayan N Iyer are additional directors. It is further observed that several entities related / connected to the company appeared both under the promoter category as well as non-promoter category. For example, M/s. Esskay Rubber Industries Pvt. Ltd. is holding 4.56% and 2.42% under Promoters and Private Corporate Bodies respectively. The Promoter Shri Omprakash G Soni himself is shown holding 2.11% under promoter's category as well as 3.15% under Indian Public Category. It thus appears that the shareholding pattern of the company submitted to the BSE is inaccurate and does not reflect the genuine promoter holding in the company.
1.3 It was observed that the Company has all along been a loss making company. The Company was undergoing labour problems and financial crunch due to which the company had suspended operation in the second half of the year ended March 31, 2004. Since the operation of the company was suspended, the bank had taken action under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and taken possession of all the properties and collateral securities including factory building, plant, machinery, and stock. Auditor's report has mentioned that the company has defaulted in repayment of dues to the bank and the account has become non performing asset, NPA. In sharp contrast to the record of turnover and profitability of the company in the past 8 years the quarterly unaudited results for the quarter ended June 30, 2005 as furnished by the company to BSE, showed a sudden significant turnaround in the performance of the company. The Company which was loss making till the financial year ended March 2005 and as such did not declare any dividend, showed a net profit of Rs. 64 lakhs during the quarter ended June 30, 2005, as compared to a net loss of Rs. 25 lakhs in June 30, 2004 quarter. Since the operation of the company was suspended during the second half of the year ended March 31, 2004 and the bank had taken possession of all the moveable and immoveable properties of the company indicating as already highlighted earlier the dire financial straits of the Company, the sudden improvement in financial performance during the quarter ended June 2005 did not appear to be credible.
1.4 A flurry of corporate announcements made by the Company reflected aggressive advertisement of the future plans of the company which inter-alia included expansion into other automobile industrial products, raising Rs. 100 million by way of issuing any debt instrument overseas or domestic market for requirement of expansion and acquisition in the on going business, opening marketing offices overseas, acquiring production facility, receipt of order from Mirador Traders, Dubai, UAE for the supply of 20 Containers of Procured Tread Rubber having approximate value of Rs. 32.50 million, increasing the plant capacity by 100% in 2 months etc.
1.5 In the light of the past poor track record of the Company till March 2005, which included the Company's account being declared as an NPA during the financial year 2003-04, the sudden holding out of hope and promise of a bright future through aggressive public announcements in the past 4-5 months appeared to have more of conjuror's touch to it.
Such announcements coupled with the rise in the price and trading volume of the share during the same period accentuated the gnawing doubt in regard to the sincerity of the promoters and the credibility of announcements.
2.1 During the period March 1, 2005 to May 23, 2005, the price of the scrip of the Company on BSE opened at Rs. 5.70 and closed at Rs. 9.00 i.e., an increase of 58% in 58 trading days. The corporate announcements were made between May 24, 2005 and August 11, 2005.
Thereafter, during the period May 24, 2005 to August 11, 2005, the price of the share opened at Rs. 9.51 and closed at Rs. 23.84 i.e. an increase of 151% in the next 58 trading days. The average daily traded quantity had increased from 7922 shares during the pre-announcement period to 64, 432 shares during the period of announcement. The coincidence between the steep rise in price and trading volumes and the flurry of favourable corporate announcements led to the inevitable conclusion that both the price and volume were artificial, driven by such announcements.
2.1.1 To verify the factual position, certain basic information like background of the company, activities of the Company, turnover of the Company, details of Letter of Credit with bank, if any, the way the export commitments were sought to be met including details of procurement of material components were elicited from the Company vide an e-mail dated September 24, 2005 for which no reply was received till September 29, 2005, on which date SEBI had passed an interim order.
2.2 Trading in the share by major clients between March 1, 2005 and September 21, 2005 2.2.1 During the period March 1, 2005 and September 21, 2005 it was observed that there had been substantial trading, both buying and selling of the shares of the company by the promoters and its associate entities, resulting in a net sale of 2, 79, 504 shares during the period when the price of the share was artificially jacked up. Besides, the trading done by major clients in the share during the relevant period indicated that the net sales by them was 9, 78, 964 shares. The trading by the promoters was mainly done through three major broking firms namely, Bhupendra M Bheda, M/s. DSE Securities Ltd. and M/s.
Unique Brokers Ltd., all brokers of BSE. It was further observed that major clients had together bought 5, 84, 006 shares and sold 15, 62, 970 shares on gross basis and were net sellers to the extent of 9, 78, 964 shares. Out of the above, M/s. Konkan Capfin Ltd and M/s. Olympic Agro Industries (having a common Director Shri Omprakash G Soni apparently the Chairman of the Company) and Smt. Indu Soni (having the same address as that Shri. Omprakash G Soni) are related to each other and also related to the Company in view of common directorship / sharing address with Shri. Omprakash G Soni. They altogether bought 69, 796 shares and sold 3, 49, 300 shares accounting for 1.18% and 5.88% respectively of the total market volume. Thus, they have together sold 2, 79, 504 shares on net basis.
2.2.2 In addition to the promoter entities' own sales, M/s. Konkan Capfin Ltd., an entity related to the promoter of the company had made an off- market transfer of one lakh shares to Shri Fateh Sinh Solanki who in turn was a net seller to the tune of 1, 74, 319 shares. Since the scrip of the Company is in 'Z' group of BSE and all trades need to be settled by delivery and no square off is permitted, it can be inferred that the off-market transfer by M/s. Konkan Capfin Ltd. was done to enable Shri Fateh Sinh Solanki to meet his delivery obligations for the shares sold by him.
2.2.3 From the details of dematerialized holdings, it was seen that during July 2005, the dematerialized holdings of the entities who were apparently a part of the promoter group viz. Shri. Omprakash G Soni, Smt. Nimesha Omprakash Soni and Smt. Indu Soni had declined to zero.
During August 2005, the dematerialized account holdings of Shri.
Omprakash G Soni and Indu Soni increased by 77, 786 shares and there was no holding by Smt. Nimesha Omprakash Soni. By September 21, 2005 shareholding of Shri. Omprakash G Soni had increased by 8, 400 shares and there was no change in the holding of Smt. Nimesha, Shri. Omprakash Soni and Smt. Indu Soni. From the dematerialized account holding of M/s. Esskey Rubber Industries Pvt. Ltd., which was categorized as 'person acting in concert' with promoter, it was observed that during July 2005, holding had reduced by 1, 44, 800 shares. The trading data of the top 25 clients furnished by BSE included transactions by those clients who have made gross sales of 37, 575 shares or more. The reduction in dematerialized holding of M/s. Esskey Rubber was observed to be higher than the 37, 575 shares threshold. However, M/s. Esskey Rubber did not appear amongst the major trading clients identified by BSE. This lead to the inference that M/s. Esskey Rubber might have indulged in off-market transactions. However, the report of off- market transfer of one lakh shares and more during the month of July 2005 did not reveal any transfers by M/s. Esskey Rubber and hence it was felt that the off- market transfers might have been done in small quantities (less than 1 lakh shares) to one or more entities.
2.2.4 The sudden price rise and spurt in trading volume in the share did not pass muster in the light of the past performance of the company till the financial year ending March 31, 2005 and was apparently sought to be propped up through aggressive public announcements which conjured up a rosy picture of the company, to beguile the investors at large.
The beneficiaries of these steps were the promoters and associate entities who had been continuously selling their holdings while at the same time the company was making positive announcements aggressively.
2.2.5 Besides attempting to benefit from artificially propped up prices, the promoters of the Company also attempted to mislead the public by classifying some of the promoter holding as public holding.
The effect of this misclassification is that when the promoters sell their shares which are classified in the public category, the same would not reflect in the reduction in the promoter holding and the investors will be kept in dark regarding the off- loading by promoters.
2.2.6 The price rise and increased trading interest had enabled the promoters to sell some of their holdings. If this state of affairs were allowed to continue, it was apprehended that innocent investors would be lured to invest in the shares of the company at the apparently inflated price and thereby providing an opportunity to the present promoters / substantial share holders of the company to offload their holding with unjust gains. Further all the above clearly indicated a careful designing and orchestration of a plan by the promoters to make personal gains at the expense of investors by enticing them to participate in the trading of the shares of the company.
2.2.7 In view of the above, vide the ad-interim order dated September 29, 2005, the promoters and directors of the Company namely, S / Shri Omprakash G Soni, Sunil Kumar Menon, Ramesh Kumar Putta, Fateh Sinh Solanki, Narayan N Iyer, Smt Indu Omprakash Soni, M/s. Konkan Capfin Ltd, M/s. Olympic Agro Industries and M/s. Esskey Rubber Industries Pvt Ltd. were directed not to buy, sell, pledge or deal in securities of the Company, directly or indirectly, till further directions in this regard, for the alleged violation of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003. The Company was further directed not to issue any equity shares or any other instrument convertible into equity shares or alter its capital structure in any manner till further directions in this regard. Further the brokers of BSE namely, Shri Bhupendra M Bheda, M/s. DSE Securities Ltd., and M/s. Unique Stock Brokers Ltd. through whom the promoter entities have dealt were directed not to buy, sell or deal in securities of the Company on behalf of the above-mentioned promoters and directors, directly or indirectly, till further directions in this regard.
3.1 In view of the fact that the above mentioned interim order came to be passed without an opportunity of hearing given to entities against whom the order was passed, on January 31, 2006 a personal hearing was given to S / Shri Omprakash G Soni, Sunil Kumar Menon, Ramesh Kumar Putta, Fateh Sinh Solanki, Narayan N Iyer, Smt. Indu Omprakash Soni, M/s. Konkan Capfin Ltd, M/s. Olympic Agro Industries, M/s. Esskey Rubber Industries Pvt Ltd, Shri Bhupendra M Bheda, M/s. DSE Finance Services Ltd and M/s. Unique Stock Brokers Ltd. Shri Omprakash G Soni appeared for himself and on behalf of Smt Indu Omprakash Soni, M/s.
Konkan Capfin Ltd, M/s. Olympic Agro Industries and M/s. Esskey Rubber Industries Pvt. Ltd. During the hearing on 31st January 2006 and later by way of written submissions vide letter dated February 2, 2006 with regard to sale of shares, Shri Soni submitted that shares were mortgaged with various parties during the crisis which was sold by parties for recovery of their dues when there was movement in the market and that the Board of Directors and the associates of the Company were working for the long term benefit of investors, share holders and the financial institution of the Company by putting all the efforts to restart the unit which was sick with NPAs and was closed for more than 3 years.
3.2 Shri Bhupendra was personally present for his case while M/s.
Unique Stock Brokers were represented by Shri Prakash Shah, Chartered Account. Both the brokers submitted that they had stopped trading on behalf of the above mentioned entities even before SEBI passed an order directing them to stop dealing in the scrip of the Company.
3.3 I note that three directors of the Company, Shri Sunil Kumar Menon vide letter dated October 10, 2005, Shri Ramesh Kumar Putta vide an undated letter received by SEBI on October 11, 2005 and Shri Narayan N Iyer vide letter dated October 10, 2005 informed SEBI that they were only appointed Directors and had no qualifications of shares. They further submitted that they were not involved in any market manipulation and that they were aware of some corporate discussions and decisions taken at the Board meeting conducted on May 30, 2005, though no corporate public announcements were made at that time. I note that Shri Fateh Sinh Solanki vide letter dated October 5, 2005 submitted that he ceased to be on the Board of Directors since October 5, 2003.
4.1 I find no merit in the submissions made by Shri. Omprakash G Soni with regard to sale of shares of the Company. He only submitted that when there was movement in the scrip of the Company, shares were sold by those with whom they were mortgaged with. However, in support of his submission Shri Omprakash G Soni had not submitted any documentary evidence to my satisfaction to show mortgage or sale of shares. On the contrary it has been found from the trade details that during the period March 1, 2005 and September 21, 2005 there had been substantial trading, both buying and selling of the shares of the company by the promoters, including Shri Omprakash G Soni and its associate entities, resulting in a net sale of 2, 79, 504 shares during the period when the price of the share was artificially jacked up.
4.2 I note that BSE vide letter dated October 11, 2005 informed SEBI that M/s. DSE Financial Services Ltd has not dealt on behalf of the Company and it was erroneously added in the list of brokers who dealt on behalf of the Company.
4.3 I note that three directors of the Company, Shri Sunil Kumar Menon, Shri Ramesh Kumar Putta and Shri Narayan N Iyer informed SEBI that they were only appointed Directors and had no qualifications of shares. I note that three directors, viz., Shri Sunil Kumar Menon, Shri Ramesh Kumar Putta and Shri Narayan N Iyer submitted that they were only appointed directors and have no qualification shares. Since SEBI is yet to complete investigation, it would not be possible to judge the merit of the submissions made by these directors. I also note that Shri Fateh Sinh Solanki submitted that he ceased to be on the Board of Directors since October 5, 2003.
4.4 I note that Shri Fateh Sinh Solanki had submitted that he had ceased to be director of the Company; however the order was passed against him for his dealings in the scrip of the Company and not in his capacity as director of the Company. As such it is immaterial whether he was director or not and I do not accept the submission made by him.
5.1 Thus, on the conspectus of the facts and the attendant material circumstances, I, in exercise of powers conferred upon me under Section 19 of Securities and Exchange Board of India Act, issue further directions under Sections 11, 11 (4) and 11B of Securities and Exchange Board of India Act, that the ex-parte interim order dated September 29, 2005 against Shri Omprakash G Soni, Smt Indu Omprakash Soni, Shri Sunil Kumar Menon, Shri Ramesh Kumar Putta and Shri Narayan N Iyer, Shri Fateh Sinh Solanki, M/s. Konkan Capfin Ltd, M/s. Olympic Agro Industries and M/s. Esskey Rubber Industries Pvt. Ltd. and brokers of BSE namely., Shri Bhupendra M Bheda, Broker, Reg No. INB010002515, Bombay Stock Exchange, M/s. Unique Stock Brokers Ltd., Broker, Reg No.INB011072130 Bombay Stock Exchange shall remain in force till further orders which SEBI will pass on conclusion of the investigation proceedings referred to hereinabove.
5.2 In view of the clarification provided by BSE as mentioned at paragraph 4.2 above, there will be no directions against M/s. DSE Finance Services Ltd.