BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI

          Appeal No.  49 of 2011 

                    Date of decision: 28.4.2011     

M/s. Vijay Textiles Ltd.
104, Surya Towers,
Sardar Patel Road,
Secunderabad- 500 003.

                                     ……Appellant 

Versus

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

                                …… Respondent 

Mr. Pesi Mody, Advocate with Mr. Anant Upadhyay, Advocate for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Kersi Dastoor, Advocate for the Respondent.
CORAM : Justice N.K. Sodhi, Presiding Officer
P.K. Malhotra, Member
S.S.N. Moorthy, Member
Per : Justice N.K. Sodhi, Presiding Officer (Oral)
The precise charge levelled against th e appellants in these two Appeals no. 49 &
50 of 2011 is that they made a false/ misleading cor porate announcement relating to an
export order which led to increase in the pr ice and volumes of the scrip of M/s. Vijay
Textiles Limited (hereinafter referred to as the company) and when the price went up the
promoters of the company off-loaded a substa ntial part of their holdings thereby making
huge profits. It is on this basis that both th e appellants have been charged with violating
the provisions of Regulations 4(1), 4(2)(e) and (r) of the Securities and Exchange Board
of India (Fraudulent and Unfair Trade Pr actices relating to Securities Market)
Regulations 2003 (for short th e Regulations). Since common questions of law and fact
arise in these two appeals, they are being disposed of by this order.

2. The shares of the company are listed on the Bombay Stock Exchange Limited
   (BSE) and the Hyderabad Stock Exchange. Th e Securities and Exchange Board of India
   (for short the Board) carried out investigations in the scri p for the period from
   November 1, 2004 to March 11, 2005 and it wa s observed that on BSE the price and 2
   volumes had witnessed a huge spurt. Investiga tions revealed that the company had come
   out with a false/misleading news regarding it having received an export order from a
   Swiss company which induced investors to pur chase the scrip. It wa s also observed that
   the so-called export order did not fructify and the company omitted to bring this
   information to the notice of the investors. Investigations further revealed that after the
   price of the scrip had gone up considerably, the promoters of the company (one of which
   is the appellant in Appeal no. 50 of 2011) sold a substantial part of their holdings thereby
   making huge profits. On the conclusion of the investigations, the Board was prima-facie
   of the view that the appellants had violat ed the provisions of the Regulations and
   accordingly two show cause notices both dated May 8, 2008 were issued to the appellants
   which contain identical allegations alleging that the company had made the following
   corporate announcements during November 2004 to February 2005.
   a) Opening of retail Showroom
   b) Opening of Studio
   c) Bagging of export order.
   Since no fault has been found with the annou ncements at (a) & (b) above, it is not
   necessary to deal with those announcements in any detail . However, it was alleged that
   the announcement regarding the bagging of th e export order was false and misleading
   which did not materialize. According to th e show cause notice, this announcement was
   made by the company on February 21, 2005 and again on February 24, 2005 stating that
   it had bagged an export order worth 4.60 million US $ (about ` 20 Crores) from Simran
   Enterprises from Europe for the supply of ex clusive range of home furnishings. It is
   further alleged that the company produced an unsigned fax letter from the Swiss Firm
   which was only a letter of intent and did not refer to the placing of any order with the
   company. It is the case of the Board that when the company ma de this corporate
   announcement the price of the scrip went up and the promoters including the appellant in
   Appeal no. 50 of 2011 sold a substantial pa rt of their holdings and thus violated
   Regulations 4(1), 4(2)(e)& (r) of the Regul ations. The appellants filed their detailed
   replies to the show cause notic es denying the allegations. It wa s stated that the price of
   the scrip was in the upward mode since October 2004 and that the company had made
   several corporate announcements as a result whereof the price of the scrip went up. It was 3
   pointed out that on November 20, 2004 the Board of directors considered the proposal for
   division/splitting of the share capital of the company and on November 22, 2004 they
   decided to set up a Design Studio. The Board of directors approved the sub-division of
   the shares in their meeting held on November 27, 2004. Again, in their meeting held on
   January 20, 2005, the Board of directors consid ered the declaration of interim dividend
   and in their meeting held on January 31, 2005 they recommended interim dividend of
   40% and also announced the financial results for the quarter ending December 2004. The
   appellants also stated in their reply that a pub lic announcement was made on
   February 17, 2005 that the Board of director s of the company would consider the matter
   regarding the issue of bonus shares in their meeting to be held on February 24, 2005. In
   the meeting held on February 24, 2005, a re commendation was made for the issue of
   bonus shares in the ratio of 2:1. On February 21, 2005, the company announced that it
   had received an export order worth 20 crores. The appellants also pointed out that on February 22, 2005 the company had executed a lease for a duration of 25 years for an area of about 12,000 sq ft. for setting up its large retail showroom at Ameerpeth, Hyderabad. Since all these announcements were price sensitive, the company informed the BSE of these announcements where its shar es were listed and, according to it, this was done as per the requirements of the list ing agreement and other securities laws. As regards the announcement pertaining to the expo rt order, it was admitted that the same was made on February 21, and February 24, 2005. It was pointed out that the representatives of Simran Enterprises had approached the company and had expressed interest in purchasing the fabric made by it and that a presentation had been made to them at the Hyderabad showroom. The appellants also pleaded that in pursuance to their meeting with the representatives of Simran Enterprises in December 2004, the company received a letter dated Februa ry 15, 2005 through fax from Si mran Enterprises inter-alia expressing its intent to purchase furn ishing fabrics from the company worth 20 crores
   within a period of 12 months. It is also pl eaded that on receipt of this letter the
   announcement regarding the receipt of the e xport order was made on February 21, and
   February 24, 2005. It is denied that the announcement is false or is in any way misleading
   and it is the case of the company that it pursued the matter further with Simran
   Enterprises through telephone calls and also by addr essing three letters dated March 10, 4
   2005, May 2, 2005 and February 2, 2006. Since no response was received from Simaran
   Enterprises nor did they ope n the letter of credit, the company, according to the
   appellants, made an announcement that the export order worth ` 20 crores with the Swiss
   Firm had not materialized due to inability of the buyer to open a lett er of credit. This
   announcement was not only sent to the BSE but was also published in a newspaper
   “Business Standard” dated October 28, 2006 alongwith its unaudited financial results.
   The company pleaded that there was no misrepre sentation as alleged and that increase in
   the price of the scrip could not be attribut ed to the announcemen t made regarding the
   export order and that it was due to the othe r corporate announcements made during the
   same time as referred to above with which no fault has been found. It is also pleaded that
   the sale of shares made by the promoters had no co-relation with the public
   announcement regarding the export order and that they had been selling their holdings
   much before and after the said announcement.
3. On a consideration of the material collected during the course of the
   investigations and the enquiry, the adjudicating officer came to the conclusi on that the
   appellants had falsely informed the BSE about the receipt of the export order when
   actually it was just an intent of purchase a nd not an actual purchase. He also found that
   the appellants failed to inform the investors that it was during a period of 12 months that
   Simran Enterprises intended to purchase the furnishing fabrics from the appellants and
   not just in one flow. He also observed that the letter was unsigned. It was on this basis
   that the adjudicating officer concluded that the appellants had deliberately made an
   inaccurate and misleading corporate announcemen t regarding the export order. He then
   observed that “The price of the said scrip on Febr uary 21, 2005 touched a high of
   48.85 because of said announcement.” He also concluded that when the price of the scrip increased as a result of this misleadi ng announcement, the promoters and directors sold their shares and made huge profits at the behest of gullible investors thereby violating Regulations 4(1) and 4(2)(e) and (r) of the Regulations. Accordingly, by his two identical orders dated January 13, 2011 he imposed a monetary penalty of 25 lacs
   on each of the appellants. It is against these orders that the present two appeals have been
   filed. 5
4. We have heard the learned counsel for th e parties at length who have taken us
   through the record and the impugned order.
5. The first question that arises for our consideration is whether the announcement
   made by the appellants regarding the export order was deliberately made to mislead the
   investors and whether the price of the scrip went up only be cause of this announcement.
   The fact that the price of the scrip increased is not in dispute. Let us now examine
   whether the announcement regarding the export order was misleading. Having regard to
   the facts and circumstances of this case, we are of the view that it was not misleading and
   that the increase in price cannot be attributed solely to th is announcement. As already
   observed, the appellants had announced on Febr uary 21 and February 24, 2005 that the
   company had received an export order from a Swiss firm for the s upply of furnishing
   fabrics worth about ` 20 crores. It is common ground between the parties that this
   information was price sensitive and, according to the Listing Agreement which binds the
   appellants, the information had to be sent to the stock exchange where the shares of the
   company were listed and it is through this mo de that the information is disseminated to
   the public. The Insider Trading Regulations framed by the Board also require such
   information to be made known to the public . The company was in negotiations with
   Simran Enterprises, a Swiss firm and it is its case that the representatives of this firm had
   visited the premises of the company in De cember, 2004 and having approved the fabric
   had agreed to place an order for the supply of the same which material was to be supplied
   during a period of 12 months. A letter date d February 15, 2005 was then received from
   Simran Enterprises through fax which is reproduced hereunder for facility of reference:-
   “ LETTER OF INTENT / SOURCING AGREEMENT

Date : 15th February 2005

Mr. Vijay Kumar Gupta
Managing Director
Vijay Textiles Limited,
104, Surya Towers,
Sardar Patel Road,
Secunderabad – 500 003.
Andhra Pradesh
India.

Dear Mr. Gupta,

We thank you very much for the lovely presentation given by you at your
showroom during our recent visit to India. We ar e quite impressed with

6
the quality of fabric an d your capability to execut e large export orders.
We are therefore, pleased to enter into an understanding for sourcing our
requirements of furnishing fabrics from Vijay Textiles Limited in India.

Under our business understanding it is our intent to purchase USD$4.6
Million (INR 200.00 Million approx.) worth of furnishing fabrics from
Vijay Textiles Limited within a period of twelve months.

Please feel free to revert back to us in case of any clarification or concern.

With Warm regards,

Yours Sincerely,

For Simran Enterprises”
Admittedly, this letter is unsigned though it refers to the presentation made by the
company at its showroom when the representati ves of the Swiss firm had visited. It is
true, as found by the adjudicating officer, that this was not a firm order placed by the
purchaser on the company but it does express the intention of the purchaser to purchase
the fabric from the company. The adjudica ting officer has expre ssed a doubt about the
genuineness of this letter but in the circumstances of this case we are unable to agree with
him on this count. The letter is on the letterhead of the Sw iss firm and has been faxed
and, therefore, contains not only the name of that firm but also the fax number from
where it was faxed and also the date and the time. If the matter had rested here, we might
have agreed with the adjudicating officer but the company pursued the matter further and
addressed as many as three letters da ted March 10, 2005, May 2, 2005 and February
2,2006 requiring Simran Enterprise s to open a letter of credit to enable the company to
process the order further. These letters wr itten by the company have not been doubted.
If the adjudicating officer had any doubt about the letter he should have made further
queries from the company and its promoter s and should have satisfied himself in
whatever manner regarding the negotiations th at had taken place between the parties as
reflected in the letter in question. Expressing a mere doubt as to the existence of the
letter does not justify the imposition of pena lty particularly when we look to the other
circumstances of the case. The letter dated 15 th February, 2005 from Simran Enterprises
may not be an order in the strict sense of the term but when we go through the letters
subsequently addressed by the company, it make s the intention of the parties clear that
the letter was understood by the company as an order and it insisted that before it could

7
be processed any further it was necessary for th e purchaser to open a letter of credit. In
other words, it appears to us that since the negotiations between the parties had reached a
level where the purchaser had sent a letter of intent and the company was wanting a letter
of credit to be opened, it would be reasonable to infer that the company treated this letter
as an order on the basis of which it ma de public announcement on February 21 and
February 24, 2005. We have alre ady noticed that after receipt of this letter the company
pursued the matter with the Swiss firm for opening a letter of credit and when this did not
happen, the company made an announcement th at the export order did not fructify on
account of the failure of the buyer to open a letter of credit. Merely because the purchase
order did not eventually come through does not mean that the announcement made by the
appellants was false or misleading. In th ese circumstances we cannot hold that the
company deliberately made a misleading co rporate announcement. Again, we cannot
agree with the adjudicating officer that this announcement was made only to increase the
price of the scrip. It is common ground between the partie s that the company had not
only made an announcement regarding the expo rt order but had also, at around the same
time, made several other public announcements relating to price sensitive events which
were summarized by the investigating officer in his report as under:-
“Corporate News / Announcements
November 20, 2004 : VTL Board considers proposal for division/splitting
of share capital
November 22, 2004 : Setting up of a Studio
November 27, 2004 : Board approves sub-division of shares
January 3, 2005 : Board to consider fixing of record date for sub-
division/split of shares.
January 20, 2005 : Considers declaration of Interim Dividend.
January 31, 2005 : Board recommends interim dividend. Announces the
results for the December, 2004 quarter.
February 17, 2005 : Board to consider Bonus Issue
February 21, 2005 : Receives export order worth Rs.200 million
February 22, 2005 : Setting up of another new large Retail Showroom at
Hyderabad
February 24, 2005 : Members approve issue of Bonus Shares, Receives export
order worth US$ 4.60 Millions.”
Apart from the aforesaid price sensitiv e announcements, the company’s financial
performance had also shown increase in the profits for the year e nding March, 2004 as
compared to March, 2003. The profits of the company significantly improved during the
period ending March, 2005 and it earned a profit of 5.23 crores on an equity capital of 3.32 crores. The company had also declared a dividend of 40 per cent and made a
bonus issue in the ratio of 2:1. The financ ial performance of the company has been

8
noticed by the investigating officer in his re port and we are of the firm view that the
financial performance coupled with the aforesaid announcements made in regard to price
sensitive events other than the export order were primarily responsible for the increase in
the price of the scrip. Let us not forget that good financial perf ormance coupled with
bonus issue and dividend are far more price sensitive than a mere declaration of an export
order though that is also price sensitive. In this view of the matter, we cannot agree with
the adjudicating officer that the company deliberately made a false corporate
announcement regarding the export order only to increase the price of the scrip.

6. Shri Kumar Desai, learned counsel for th e Board then strenuously argued that the
   company did not promptly inform the public about the fact that the order had not
   materialized and that it took se veral months to inform the i nvestors in this regard. He
   points out from the letter of February 15, 2005 that the Swiss firm was to purchase the
   fabric within a period of 12 months and that the company informed the public almost 6
   months after the expiry of that period that the export order did not materialize. We are
   unable to accept this argument. Firstly, it is alleged in the show cause notice that the
   company did not inform the public at all about the non finalization of the export order
   which is not true. Even the investigati on report did not make a mention about the
   company having informed the public about the non finalization of this order. We wonder
   what kind of an investigation was carried out when a public announcement in this regard
   was made by the company which not only appe ared on the website of BSE but had also
   been published in a financial newspaper “Business Standard”. Be that as it may, we have
   already noticed that the company on receipt of the letter of intent was pursuing the matter
   with the purchaser for the opening of a letter of credit and some letters have been written
   in this regard which have been referred to above. It was reasonable for the company to
   wait for some time before it could finally conclude that the expor t order had not been
   finalized. We cannot, therefore, accept the contentions of the learned counsel for the
   Board nor the findings recorded in the impugned order in this regard.
7. When confronted with the fact that the company had informed the public about
   the non finalization of the export order th rough BSE and also through an announcement
   made in a newspaper, the learned counsel fo r the Board then urged that the company did
   not inform the public in the same manner in which the information regarding the placing 9
   of the export order had been disclosed. He re again we cannot agree with him. The
   information was sent to BSE and was on its website because the company had made this
   announcement alongwith its un-audited financial results for the period ending September
8. These un-audited financial results containe d a note in this regard. We are of the
   view that this publication was way better to inform the investors because un-audited
   financial results are closely looked into and examined both by those who wish to invest in
   the market and also by those who are already invested in the company. Those wanting to
   invest want to know the financial performance and so do those who are already invested.
   In the absence of any prescribed mode of making such an announcement, we cannot but
   hold that this announcement was made in a manner which prominently brought to the
   notice of the public the fact that the export order had not been finalized.
9. We may notice another argument raised on behalf of the respondent Board. It is
   argued that when the price of the scrip went up, the promoters including the appellant in
   Appeal no.50 of 2011 sold a s ubstantial part of their ho ldings thereby making huge
   profits and are, therefore, guilt y of violating the Regulations as alleged. It is contended
   that between February 21, 2005 and Februa ry 25, 2005 the promoters of the company
   sold more than 54 per cent of the total qua ntity sold by them during the investigation
   period and since this period coincides with the announcement in regard to the export
   order, they are guilty of violating the Re gulations. We cannot accept this contention
   either. We have already held that ther e was no misleading announcement made by the
   company and its promoters and that the pric e of the scrip went up not because of the
   announcement regarding the export order but because of the other corporate
   announcements which are far more price sensit ive. We find from the record that the
   promoters had been selling their stocks much before and after the dates of the two public
   announcements regarding the export order. Th ere is no allegation levelled against the
   promoters that they did not make the n ecessary disclosures required under various
   securities laws and we have on record that su ch disclosures were made. In this view of
   the matter, we find no fault with the sales made by the promoters. Lastly, it was argued
   by Mr. Desai that pursuant to the public announcements made on the 24 th February, 2005
   regarding the export order and the issue of bonu s shares in the ratio of 2:1 by the Board
   of Directors of the company, the price of the scrip thereafter had fallen. He contends that 10
   it is wrong to say that the price of the scri p went up only because of the declaration of
   bonus. There is no merit in this contention as well. The learned c ounsel is not right in
   contending that the announ cement regarding bonus was made for the first time on
   February 24, 2005. As a matter of fact, the matter regarding issue of bonus shares was
   first made known to the public on February 17, 2005 when BSE was informed that a
   meeting of the Board of Directors of the company would be held on February 24, 2005 to
   consider the issue of bonus shares to the existing shareholders. This announcement to the
   public was enough to raise the price of the scrip which did actually go up. The price and
   volume data of the scrip and the record clearly supports this view.
10. No other point has been raised.
    For the reasons recorded above, we a llow the appeals and set aside the impugned
    orders. Parties shall bear their own costs in both the appeals.

Sd/-
Justice N.K.Sodhi
Presiding Officer
Sd/-
P.K. Malhotra
Member
Sd/-
S.S.N. Moorthy
Member
28.4.2011
RHN

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