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Capital markets regulator Securities and Exchange Board of India (SEBI) has taken extremely strict enforcement action against real estate major Omaxe Limited and its promoters. In case of serious violation of Minimum Public Shareholding (MPS) rules that protect transparency, fairness and rights of retail investors in listed companies, SEBI has banned a total of six institutions and individuals, including Omaxe, from trading in the securities market. Along with this, the regulator has also imposed a combined financial penalty of ₹ 1.92 crore on all these parties for creating a deceptive system by ignoring the rules. There has been a stir in Dalal Street and real estate sector as soon as this strict order came out, because in its detailed order, SEBI has exposed each and every layer of the alleged fraud perpetrated by the fund at the promoter level.
As per the official order passed by the Whole Time Member of SEBI, the main listed company Omaxe Limited has been banned from the Securities Market for 3 months directly. At the same time, even more strict action has been taken against the key strategists and group units involved in this entire financial game. The market ban has been imposed for a long period of 1 year on the company’s main promoters Rohtash Goyal, Jai Bhagwan Goyal, group subsidiaries Dream Home Developers Pvt Ltd and Guild Builders Pvt Ltd as well as former Joint MD of Omaxe Sunil Goyal. During this moratorium period, all these six parties will neither be able to make any new investment nor trade in their existing holdings, directly or indirectly, in any listed shares, bonds, derivatives or units of mutual funds. Apart from this, there will be a complete ban on these persons joining any recognized intermediary or market infrastructure institution.
As per Indian securities laws, it is a mandatory statutory requirement for every listed company that at least 25 per cent of its total paid-up share capital should be in the hands of genuine and independent public shareholders. Its basic objective is to ensure that the promoter group cannot arbitrarily alter the company’s liquid flow and share prices. SEBI, in its detailed investigation, found that Omaxe Limited had completely failed to achieve this 25% limit through legitimate and independent public investors. On paper, the company showed that it had achieved the limit of 25%, but in reality, the entities which were projected as independent public shareholders, used the money to buy shares, the original source of which was Omex itself and the firms associated with its group.
SEBI’s financial forensic investigation report has made sensational revelations about the complex and winding paths of the fund. According to the investigation, Omex and its associate companies transferred a huge amount of money totaling ₹46.50 crore to the bank accounts of intermediary companies like DVM Realtors Pvt Ltd (DRPL), Garv Buildtech Pvt Ltd and Jeet Builders Pvt Ltd (JBPL). This entire amount was diverted through different accounts and finally invested in the Offer for Sale (OFS) brought by the company on 3 June 2013 and 29 October 2013. These alleged intermediaries purchased shares of Omex with Omex’s own money and later got themselves registered as non-promoters i.e. ‘public shareholders’. SEBI said in clear words that this transfer of funds and share purchase cannot be considered as independent or isolated transactions under any circumstances, but it was an organized scheme by the promoters to buy their own shares in a benami manner.
In the investigation report, SEBI proved through mathematical figures how the exchange and shareholders were misled. According to the order, after the OFS of June 3, 2013, the company had reported its public shareholding as 16.21 per cent, but when shell shares purchased from company funds were taken out of the calculation, the actual public shareholding came down to just 14.57 per cent. Similarly, after the second OFS on October 29, 2013, the company had declared public shareholding as 20.97 percent, whereas in reality it was only 19.04 percent. After this, when the company issued bonus shares to the shareholders, it was claimed that the mandatory 25% rule was fulfilled by showing the public holding as 25.01 percent on paper. SEBI’s forensic audit revealed that if the shares purchased from the promoter fund and the bonus shares received from them are deducted, the actual public shareholding comes down to only 22.71 percent, which automatically proves the serious violation of rules.
Market regulator SEBI has termed this entire methodology devised by Omaxe and its promoters as not a simple mistake but a deliberate ‘fraudulent and deceptive scheme and artifice’ perpetrated on investors in the securities market. SEBI in its final decision underlined that the sole objective of the promoters was to create a false illusion in the market that the company had legally acquired 25% public shareholding, while behind the scenes the control of the company itself was hidden in a public garb. This act was considered a flagrant and unacceptable violation of Section 12A of the Securities and Exchange Board of India Act, 1992 and various provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, i.e. PFUTP Regulations, 2003.
Under the SEBI order, a total fine of ₹1.92 crore has been imposed on six parties for violation of minimum public shareholdings norms and making false and misleading disclosures of shareholding pattern, which has been ordered to be deposited in the government treasury within the prescribed time limit. Market analysts believe that this strict decision of SEBI is a clear and strong message to all real estate and corporate companies listed in the Indian stock market that circumvention of public shareholding rules by round-tripping of funds by promoters will not be tolerated at any cost. To maintain the confidence of retail investors, the regulator is now also closely forensically examining old deals and off-market transactions.