Significance of "Intent" in Corporate Announcements

Introduction
Goedesic Limited, a company engaged in the business of providing products and solutions for content, communication, collaboration and electronic computing etc. (the “Company”) and listed on the BSE Limited (“BSE”) and the National Stock Exchange of India Limited (“NSE”)1 was subject to an investigation by the Securities and Exchange Board of India (“SEBI”) for the period of April 1, 2012 to March 31, 20132 (the “Investigation”). The Investigation, inter-alia, revealed that the Company made certain misleading corporate announcements during the period of Investigation with respect to buy-back of shares and payment of dividends which impacted the price and volume of the scrip of the Company. This article delves into the intricacies of the aforesaid violation along with related aspects revealed during the period of Investigation and the view taken by the SEBI towards investor protection and strengthening the regulation of the securities market.

Issues
The show-cause notice dated December 22, 2015 issued to the Company and other noticees pursuant to the Investigation, inter-alia, alleged that:

  1. the Company was constantly misleading the stock-exchanges, FCCBs holders, regarding the utilisation of the proceeds of FCCBs, restructuring process and also regarding the expected proceeds to be realised from the redemption of restructured investments, which did not happen.
  2. the Company was aware about its dismal financial health and still made announcements for buy-back of shares as well as proposed for payment of dividend.
  3. the announcements pertaining to the buy-back and payment of dividend had positively impacted the price of the scrip of the Company.
  4. the sequence of events indicates that the intention behind making announcements of buy-back and payment of dividend despite knowing the financial incapacity to honour the same, was to positively influence the price of the scrip of the Company

Misleading Corporate Announcements
There was a decrease in the total income and net profit of the Company from quarter ended March 31, 2012 with losses of Rs.18.96 crores and Rs.15.57 crores in the quarter ended December 31, 2012 and March 2013 respectively, the Company for the period ended June 2013 indicated ‘profits’ which were essentially increase in other income due to “net gain on exchange fluctuations” and “balance written back” as against profits. In this context, corporate announcements with respect to buy-back of shares and payment of dividends misled the market sentiments with respect to the strength of the Company’s scrip. The relevant corporate announcements along with their consequent impact on the closing market price of the scrip and its trading volume have been briefly highlighted below for ease of reference:

S.No Date Announcement Impact
1. August 14, 2012 The Board of Directors of the Company (“BoD”) Informed the BSE that the BoD has approved the proposal to buy-back 25% of the equity shares of the Company through open offer and announced a dividend policy wherein dividend shall be declared in the Annual General Meeting (“AGM”) of the shareholders of the Company. The scrip closed on August 16, 2012 at about 20% above its previous day closing price. BSE& NSE)

Trading volume Increase on ugust 16, 2012 (BSE): 980%

Trading volume Increase on ugust
16, 2012 (NSE): 560%

2. November 12, 2012 BoD discussed the recommendation given by the buy- Back committee and decided to meet on November 22, 2012 to deliberate and announce the decision on the same. The scrip closed on November 13, 2012 at
about 4% below its previous day closing price. (BSE)Trading volume Decrease on November 13, 2012 (BSE): 51%The scrip closed on November 13, 2012 at
about 4% below its previous day closing price. (NSE)Trading volume Decrease on November 13, 2012 (NSE): 49.51%
3. November 27, 2012 BoD discussed and approved to buy-back upto 25% of the equity shares of the Company at the maximum buy-back price of Rs. 75/- per share subject to the approval of the shareholders through postal ballot The scrip closed on November 29, 2012 at
about 8% above its previous day closing price. (BSE)Trading volume Decrease on November 29, 2012 (BSE): 50%The scrip closed on November 29, 2012 at about 8% above its previous day closing price. (NSE)Trading volume Decrease on November 29, 2012 (NSE): 34%
4. December 4, 2012 BoD considered and recommended final dividend @ Rs. 2/- per share on the face value of Rs. 2/- each on the equity shares of the Company to be paid after the approval of the shareholders in the AGM. The scrip closed on December 4, 2012 at about 7.80% below its previous day closing price. (BSE)

Trading volume Increase on December 4, 2012 (BSE): 160%

The scrip closed on December 4, 2012 at
about 9% below its previous day closing price. (NSE)

Trading volume Increase on December 4, 2012 (NSE): 190%

Key Observations
The following key observations came forth during the Investigation:

  1. No- Further Action: Although the Company had informed that it expected to start the process of postal ballot after the redemption of the FCCBs issued by it in the year 2008 (which was due for redemption in January 18, 2013), SEBI identified that subsequent to the aforesaid BoD meeting dated November 27, 2012 no further action was initiated by the Company in order to obtain the approval of the shareholders for buy-back of shares.
  2. Missing Buy-back Proposal in AGM Notice: In the AGM dated February 11, 2013, the shareholders of the Company had raised queries regarding the buy-back of shares and in response the Company had informed that the buy-back shall be done after the redemption of FCCBs, however, there was no proposal for consideration in the aforesaid AGM notice with respect to the buy-back of shares.
  3. FCCB Redemption: The Company vide its announcement dated January 18, 2013 on its website communicated that the Company is in discussion with the bondholders and the redemption process for FCCBs was ongoing, which due to structural and regulatory issues may take around forty-five (45) days to complete. Further, on April 25, 2013, the Company informed the BSE that the Company was aggressively working towards resolving the regulatory/investment restructuring/asset redemption process to ensure that the redemption was completed at the earliest. However, the Company did not take any subsequent steps towards the completion of the buy-back of its shares and it eventually defaulted in the redemption of the FCCBs as well.
  4. Element of “Fraud”: The Company and the noticees played a clear fraud on the shareholders by making two important specious announcements and fulfilling none of them, indicating that the announcements were nothing but used as a subterfuge to artificially increase the price of the scrip of the Company.
  5. Knowledge of the “Financial Condition”: The Company and its BoD, despite being aware of the actual precarious financial health of the Company, announced the buy-back of shares and also proceeded with the proposal for payment of dividends to the shareholders of the Company and that both the announcements positively impacted the price of the scrip of the Company; however none of the said announcements were fulfilled.
  6. Short-term Loan from ICICI: A short-term loan of Rs. 55 Crore from ICICI Bank was secured by the Company and the Company in-turn hypothecated all its currents assets, cash receivables, and had also agreed to mandatorily pre-pay the said loan out of the receivables of the investments made by the Company in foreign subsidiaries. Taking into account the events surrounding the default in repayment of the loan, and subsequent demands made by ICICI Bank, it was clear that the financial health of the Company was admittedly adversely impacted to such an extent that the Company was not able to service its debt liability which was initially limited to only Rs. 58.59 Crore (short term loan) and Rs. 12.29 Crore (Derivative Trading Limit)
  7. Stay Order: ICICI Bank had obtained a stay order dated December 28, 2012 against the Company preventing it from paying the dividend has been presented as one of the major grounds of defense by the Company to escape the liability arising out of the Investigation. The Company had contended that the stay order was never challenged by it as it intended to repay the loan. However, no details of such repayment or part payment nor the details of any steps taken towards meeting the debt liability to ICICI Bank were produced by the Company which could have demonstrated that the Company had the financial capability to honour the obligations with respect to buyback and dividend. The silence observed by the Company on the issue suggested that the Company was not having sufficient liquidity with it so as to repay the loans taken from the ICICI Bank, due to which the proposed dividend payment could not materialise.
  8. Dividends:The dividends to the shareholders were to be paid only out of the profits of the Company, in terms of the Section 205 of the erstwhile Companies Act, 1956. However, the Company did not make any efforts to convince SEBI that the Company was having sufficient profits in that financial year or previous financial years, out of which it could have paid the dividend so declared by it.

SEBI’s verdict
SEBI observed that the Company had not only misled the investors about the issues governing the FCCBs but had also made the announcement of buy-back of equity shares despite being clearly aware of its precarious financial status and lack of liquidity to fructify such public announcements, which shows that the said announcement was made with “no intention” to fulfill the same and predictably, no step whatsoever towards such buy-back was taken by the Company after making such an announcement. SEBI, vide order dated April 19, 2021 restrained the Company and other noticees from accessing the securities market and further prohibition on them from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, for a period of two (2) years from the date of the order

W&B view:
SEBI vide this order has emphasized the fact that corporate announcements that are not backed by “intent” are misleading and have the potential of causing the investors to base their investment decisions on false market information. Investor protection and maintaining and strengthening the integrity of the securities market are the guiding principles for regulatory intervention by SEBI and this verdict is guided by the same.

  1. The Company had issued Foreign Currency Convertible Bonds ("FCCBs") in the year 2008, which were due for redemption on January 18, 2013. In terms of the FCCB Offering Circular, the proceeds of the FCCBs were invested along with internal accruals in overseas subsidiary companies set up by the Company or for acquisition of foreign companies directly or indirectly through the foreign subsidiaries.
  2. At the time of the Investigation, the Company was under liquidation and w.e.f. May 13, 2014, and the official liquidator attached to the Hon'ble High Court had taken the possession of all the books and accounts of the Company.
Dated: May 3, 2021
Author: Prashaant Vikram Rajput -Partner and Head of Capital Markets; Arohi Londhe, Associate

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