Securities Appellate Tribunal
Sebi vs Shri Dhaval A. Mehta on 27 November, 2007
ORDER
G. Anantharaman, Member 1.1 A preliminary analysis into the buying, selling or dealing in the shares issued through Initial Public Offerings (IPOs) of various companies during the period 2003-2005, by Securities and Exchange Board of India (hereinafter referred to as SEBI) prima facie showed that, certain entities opened many demat accounts (for short afferent accounts) in fictitious/ benami names and the said entities had cornered/ acquired the shares of the such companies allotted in the IPOs, by making applications in fictitious/ benami names with each of the applications being of small value so as to make it eligible for allotment under the retail category. It was further revealed that, subsequent to the allotment of IPO shares, the fictitious/benami allottees had transferred the said shares to their principals who were prima facie identified by SEBI as key operators / master account holders. The modus operandi as detailed above led to the prima facie view that the thousands of entities in whose names demat accounts and bank accounts had been opened and IPO applications made, were either benami, name lenders or non existent.
1.2 In the above facts and circumstances, SEBI vide an ad interim ex parte order dated April 27, 2006 inter alia prohibited various key operators including Shri Dhaval A Mehta not to buy, sell or deal in the securities market including in IPO's, directly or indirectly till further directions as it was inter alia found that they had prima facie violated the provisions of Regulation 3 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (for short the FUTP Regulations) and the provisions of Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000. It was further directed to treat the said interim order as show cause notice against the entities named therein and an opportunity was also provided to the said entities to file their objections, if aggrieved. SEBI also ordered for an investigation to look into the alleged violations.
2.1 Shri Dhaval A. Mehta (hereinafter referred to as Shri Mehta for the sake of brevity) vide letter dated May 19, 2006 inter alia requested for the inspection of all the documents relied upon by SEBI in the aforesaid ex- parte interim order and further requested for the extension of time for filing the objections. As requested by Shri Mehta, SEBI granted an opportunity to him to inspect the documents, on June 19, 2006. Subsequently, vide letter dated June 22, 2006, Shri Mehta inter alia stated that the provisions of Section 11B, 11 (4) of the Securities and Exchange Board of India Act, 1992 (for short the Act) did not empower SEBI to pass the ad interim order. He contended that the directions under Section 11B of the Act could be passed only after making or causing to be made an enquiry and that there was nothing on record to show that the said requirement was followed in his case. According to him, under Section 11 (4) of the Act, SEBI can take any of the measures specified therein either pending investigation or enquiry or on completion of such investigation or enquiry. He further contended that, no directions could be issued against him as he was not an intermediary registered with SEBI and also not associated with the securities market. He urged that no prima facie case was made out which warranted the issuance of the ad interim order which was passed in gross violation of principles of natural justice. He stated that he was doing finance business involving borrowing and lending money. He added that, he had raised funds inter alia from one Ashmi Financial Consultancy Ltd. (for short Ashmi) and the loan amount taken from the said Ashmi was disbursed among various individuals (who had applied for the allotment of shares in IPOs) at a higher rate of interest. According to him, as per the terms of understanding of the loan, the borrower had transferred certain shares to his demat account and thereafter, he had transferred the said shares to Ashmi as a security against the money borrowed from it. He added that, the said shares were ultimately sold by Ashmi as per the instructions of the individual borrowers.
2.2 According to Shri Mehta, all the individual borrowers had valid demat accounts with their respective depository participants and therefore, he could not be treated as the key operator. He stated that his role was limited in providing finance to entities / persons in the normal course of business and that he had no role in making fictitious/benami applications. In respect of IPO of IDFC, Shri Mehta stated that as per the arrangement entered into between himself, Ashmi and the various individuals (borrowers), he had received shares from the said individuals and thereafter, the said shares were transferred to Ashmi. The said Ashmi had subsequently sold the said shares and the consideration was given back to Shri Mehta after deducting the loan amount along with the interest. He claimed that the money thus received by him was returned back to the individual borrowers. In respect of the IPO of Suzlon Energy Ltd. he stated that the shares received by him as per the loan arrangement were transferred to the account of one Ms.Sheelu Lalwani as per the instructions of Ashmi. He added that, as per the advice of the borrowers, he instructed Ashmi to sell the said shares and to adjust the consideration against the money borrowed by him from the said Ashmi. He stated that he had not used any afferent accounts to obtain the IPO shares of Suzlon Energy Ltd. He claimed that the income earned by him was limited to the differential interest rates. He urged that he had not violated inter alia the provisions of the FUTP Regulations. He further requested for an opportunity of hearing.
2.3 Pursuant to the receipt of the aforesaid reply, an opportunity of hearing was granted to Shri Mehta on November 3, 2006 and the same was adjourned to February 7, 2007, as per his request. On February 7, 2007, Shri Joby Mathew, advocate appeared before me and made submission on behalf of Shri Mehta. Shri Sandeep Mehta, the brother of Shri Mehta was also present at the time of the hearing. The learned advocate made submissions on the lines of the reply of Shri Mehta dated June 22, 2006. As it was inter alia submitted that the afferent accounts from which the shares were transferred to the demat account of Shri Mehta were not fictitious, Shri Mehta was advised to produce the details of various information / documents including the share transfers and the details of IPO applications, Bank Accounts, etc. Shri Mehta vide letter dated February 22, 2007 inter alia furnished the details of the investors financed by him along with their address and demat account details. He also enclosed the copy of his demat account statements and the bank account statements for the relevant period, in addition to the extract of the ledger account copy of Ashmi's account as reflected in his books.
2.4 I have perused the reply of Shri Mehta, the oral submissions made on his behalf and other materials available on record. In the facts and circumstances, sole issue for consideration at this juncture is, whether based on the available materials on record and considering the submissions made by Shri Mehta, the directions issued by SEBI vide ad interim ex parte order dated April 27, 2006 need to be continued, revoked or modified in any manner in so far as it relates to Shri Mehta.
3.1 Shri Mehta in his reply inter alia contended that the provisions of Sections 11B, 11 (4) of the Act did not empower SEBI to pass the ad interim order. He also urged that the directions under Section 11B thereof could be passed only after making or causing to be made an enquiry and that there was nothing on record to show that the said requirement was followed in his case. He further added that it was not clear from the interim order as to whether SEBI had initiated an investigation in terms of Section 11C of the Act in order to exercise its powers under Section 11(4) thereof. According to him, no directions could be issued against him under Section 11 (4) (b) of the Act as he was not an intermediary registered with SEBI and also not a person associated with the securities market. In this context, I note that the primary function and duty of SEBI is to protect the interests of the investors in securities and to regulate the securities market. The said duty is inter alia performed under Sections 11, 11B of the Act which is the very soul and heart of it. On a careful perusal of Section 11, it could be seen that SEBI has been mandated to protect the interests of investors in securities by such measures as it thinks fit which provide a large sweep to SEBI. The provisions of SEBI such as 11B, 11(4) etc are meant to arm SEBI with authority so as to enable it effectively to exercise power and achieve the declared objectives of the Act. It is clear that a common thread runs through the various provisions of the Act to empower SEBI to take preventive as well as punitive measures so as to protect the investors and to promote the securities market. One cannot lose sight of the fact that SEBI has to regulate in a dynamic market situation which is likely to throw up several exigencies calling for the immediate intervention by Regulator, all of which cannot be captured in detail in the text of the law and that the same has to be read into the scheme of the enactment in a harmonious construction. The power of SEBI has to be aligned with what is sought to be achieved in the legislative intent and any attempt to deny the same would stultify the very purpose for which the law was enacted. If one has regard to the aforesaid principles, it would follow that the power which has been conferred under Section 11B of the Act to issue direction are of a widest possible amplitude and are exercisable in the interests of investors. The powers of SEBI to pass orders under these sections have been judicially recognized by various judgments. The Hon'ble High Court of Bombay in the matter of Anand Rathi v. SEBI had inter alia observed as follows:
...It cannot be gainsaid that SEBI has to regulate speculative market and in case of speculative market varied situations may arise and looking into the exigencies and requirements, it has been entrusted with the duty and functions to take such measures as it thinks fit. Section 11B is an enabling provision enacted to empower the SEBI Board to regulate securities market in order to protect the interest of the investors. Such an enabling provision must be so construed as to subserve the purpose for which it has been enacted...." Further the Hon'ble Court had observed "Section 11B is an enabling provision enacted to empower SEBI to protect interest of investors and to promote the development of and to regulate the securities market and to prevent malpractices and manipulations inter alia by brokers.... 3.2 Further the contention that as he was not an intermediary registered with SEBI and not a person associated with the securities market, no order could be passed against him, takes a restricted and blinkered view of SEBI's powers. He may not be an intermediary registered with SEBI in its strict sense, but by any stretch of imagination, it cannot be said that a person, who had cornered large number of IPO shares (by off market transfers immediately after the allotment and around the time of listing) to the detriment of retail genuine investors, is not a person associated with the securities market. I note that SEBI has plenary powers to take measures to prohibit, unearth and deal with fraudulent and manipulative transactions to effectively protect the interest of investors and such powers travel beyond the straight-jacket of registered intermediaries to the vast expanse of people associated with the securities market. This is also needed in order to promote an orderly development of healthy and vibrant securities market. In view of the above, the contention that SEBI did not have power to pass directions under Sections 11 and 11 B of the Act against Shri Mehta is devoid of any merits and accordingly is rejected. As far as his contention that initiation of investigation/ enquiry is a condition precedent for passing a direction under Section 11 (4) of the Act, I note that the powers under Section 11 (4) of the Act are in addition to and not in derogation of powers under Sections 11 (1), (2), (2A) and (3) and 11B of the Act. SEBI being the regulator carries with it all the necessary powers expressed or implied which are essential to meet any exigencies in its widest amplitude in order to protect the interest of investors. In such circumstances, the contention that the initiation of investigation/inquiry is a condition precedent for the issuance of direction under Section 11 (4) of the Act is difficult to accept. Further, the Hon'ble Securities Appellate Tribunal (SAT), in its order dated January 08, 2007 inter alia observed in the matter of Karvy Stock Broking Ltd. v SEBI "If the prima facie facts disclose a case for proceeding further in the matter and depending upon the nature and gravity of the wrong doing, it would decide what measures it needs to take under Section 11 to protect the securities market and also the interests of the investors. If it feels that immediate preventive action is essential, it can "restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities" with immediate effect"...." The SAT further observed in the case cited supra "The provisions of the Act are basically intended to protect the interests of the investors and to promote the market. However, the Act as initially enacted provided primarily for taking promotional or protective measures. The power to take preventive or punitive measures was implicit. Now it has been expressly extended to taking even the preventive or punitive measures....
In view of the above, we hold that the word 'inquiry' used in Section 11(4) refers to the inquiries held under Sections 11, 11B, also to the enquiry under the inquiry regulations framed under Section 12(3) and also to the inquiry held under Chapter VIA and it is during the pendency of any of these inquiries that an interim order could be passed with a view to protect the interests of investors or in the interest of the market". A contrary view of SAT in the matter of Bhoruka Financial Services Ltd. v. SEBI has been stayed by the Hon'ble Supreme Court of India, vide order dated August 25, 2006.
3.3 In the scheme of regulatory directions by way of ad interim orders, pre decisional hearing is not a must when the facts and circumstances of the particular case demand an urgent action, in order to protect the interest of investors and the securities market in general. However, the same would be followed by an opportunity to the party, if aggrieved, to explain his case. When the imperative of the situation demands emergent action, the rules of natural justice can be deferred and the post decisional hearing would serve the purpose. Having said so, the argument that no investigation has been carried out by SEBI in respect of the alleged manipulations in the Initial Public Offerings is not correct and misleading. In fact, SEBI, vide order dated January 20, 2006 ordered for an investigation to look into the alleged manipulation in respect of the dealings in the Initial Public Offerings. In the facts and circumstances, the contention that SEBI could not pass the ad interim directions is devoid of any merits and accordingly is rejected.
3.4 The fact that the demat account of Shri Mehta received large number of IPO shares from various afferent accounts as mentioned below, is not disputed.
Name of the Depository Participant Client ID Names of IPOs Number of afferent accounts from which shares received through off market transfers No of shares transferred through off market transfers Karvy Stock Broking Ltd.
10139886 IDFC Ltd.
660175560 Khandwala Intergrated Financial Services Pvt. Ltd.
10139886 Suzlon Energy Ltd.
386361808 3.5 I note that Shri Mehta vide letter dated February 22, 2007 enclosed the list of investors financed by him in the IPOs of Suzlon Energy Ltd and IDFC Ltd. alongwith their address, demat account details etc. A perusal of the said details (as furnished by Shri Mehta) indicate that a number of demat accounts had been opened by the purported investors having a common address. Some of such details, as provided by Shri Mehta are given below:
a) In the case of IPO of Suzlon Energy Ltd.
It has been noted that about 300 demat accounts were opened by the purported applicants in such a manner that most of the said accounts were either in the same name or with different combinations of a particular name, with a common address at 57, Jajkeshavni Chali, Ahmedabad 380018 as given below:
1. Parmar Kirti Shankar
2. Naresh Manilal Parmar
3. Rajput Bharat Bhagvanbhai
4. Babiben Chawda
5. Parmar Bindhu Arvind
6. Jagdish Kumar Solanki
7. Chouhan Govind Mohan
8. Tulsi C. Chamar
9. Tusharbhai S. Parmar
10. Jashi Parmar
11. Rathod Baldevbhai Sheeva
12. Panjal Mani Ratikumar
13. Parmar Vijay Dudhabhai
14. Chawda Padmadevi Suresh
15. Parvati H. Rathod
16. Chamar Jayanti M
17. Pasiben Chawda
18. Parmar Nainadevi Vijayakumar
19. Raiben Chouhan
20. Khemi Parmar
21. Jayanti Madhabhai Chamar
22. Parvati Hirabhai Rathod
23. Raiben Govindbhai Chouhan
24. Khemi B Parmar
25. Chawda Pasi Motibhai
26. Prajapati Chhagabhai Keshabhai
27. Solanki Jagdishkumar Natwarlal
28. Bharat Rajput
29. Panjal Rekhaben
30. Bindhuben A Parmar
31. Shivabhai Parmar
32. Hirabhai K Rathod
33. Vijay Parmar
34. Tulsi Chhanbhai Chamar
35. Hansaben Baldevbhai Pardhi
36. Naina Parmar
37. Padmadevi Chawda
38. Rajeshkumar K Parmar
39. Eshwarlal Khandas Shah
40. Solanki Jagdish Natwar
41. Rekhaben M Panchal
42. Solanki Ranjan Jagdish
43. Baldev Sheevabhai Rathod
44. Nikhil Manilal Panchal
45. Pasi Chawda
46. Chhagaji Keshaji Prajapati
47. Babiben Chhanalal Chawda
48. Mani Panchal
49. Shah Prakashbhai Ishvarbhai
50. Vitthalbhai C. Rathod
51. Chhagabhai Prajapati
52. Rathod Vittalbhai
53. Chawda Babi Chhanalal
54. Solanki Natwar Govind
55. Nikhil Kumar Panchal
56. Chauhan Raidevi Govind
57. Rekhaben Panchal
58. Rathod Vitthalbhai Cheharabhai
59. Rekhaben Manilal Panchal
60. Sureshkumar Panchal
61. Vitthalbhai Chherabhai Rathod
62. Vitthalbhai Rathod
63. Hansa Panchal
64. Rekha Panchal
65. Padma Chawda
66. Rajput Bharat B
67. Dinabhen Vithalbhai Rathod
68. Padma S Chawda
69. Parmar Manjulaben Kirtikumar
70. Raiben G Chauhan
71. Padma Suresh Chawda
72. Babi Chawda
73. Vijaykumar Parmar
74. Jagdishkumar Natwarlal Solanki
75. Prakash I Shah
76. Hemlata Mahesh Rathod
77. Nainaben V Parmar
78. Natwarlal Govindlal Solanki
79. Baldev Pitambarbhai Parmar
80. Babiben C Chowda
81. Baldev P Parmar
82. Baldev Rathod
83. Baldev S Rathod
84. Bhagwatiben Govindbhai Parmar
85. Bhagwatiben Parmar
86. Bhagwatiben G. Parmar
87. Bharat B Rajput
88. Bharat Bhagwanbhai Rajput
89. Bindhuben Arvindbhai Parmar
90. Panchal Rekhaben Manilal
91. Binduben Parmar
92. Chamar Shanta
93. Pardhi Hansaben
94. Parmar Manjulaben
95. Rathod Hirabhai Kanjibhai
96. Hansaben B Pardhi
97. Parmar Manjula Kirtibhai
98. Nikhil Panchal
99. Mani Parmar
100. Chauhan Raiben Govindbhai
101. Parmar Shivabhai S
102. Parmar Hemlataben Vasantbhai
103. Naresh M Parmar
104. Parmar Tusharbhai S
105. Parmar Kirtibhai
106. Parmar Manjuben Jayantibhai
107. Parmar Bindhuben
108. Laxmiben Hirabhai Rathod
109. Hansaben Pardi
110. Nikhil M Panchal
111. Hemlala M Rathod
112. Prajapati Chhagaji
113. Laxmiben H Rathod
114. Parmar Tusharbhai Shankarbhai
115. Chawda Pasiben
116. Khemi Baldevbhai Parmar
117. Solanki Natwarlal Govindlal
118. Shailesh Parmar
119. Parmar Laxmi Kantilal
120. Parmar Mani
121. Tulsi Chamar
122. Rathod Dinaben
123. Jayantibhai H Rathod
124. Jayanti Chamar
125. Laxmiben Parmar
126. Rathod Hemlata Mahesh
127. Pasiben Motibhai Chawda
128. Shivabhai S Parmar
129. Suresh Motibhai Chawda
130. Hemlataben B Parmar
131. Jitendra Manilal Parmar
132. Manilal Panchal
133. Parmar Jashi Manilal
134. Hirabhai Kanjibhai Rathod
135. Parmar Jitendra Manilal
136. Parmar Nainaben
137. Chamar Tulsi Chhanbhai
138. Jayantibhai Hirabhai Rathod
139. Shailesh Baldevbhai Parmar
140. Parmar Rajeshkumar Kalidas
141. Parmar Shailesh Baldevbhai
142. Rathod Jyantibhai Hirabhai
143. Rathod Laxmiben Hirabhai
144. Rathod Gunvant Hirabhai
145. Chamar Shanta Madhabhai
146. Gunvant H Rathod
147. Motiben H Rathod
148. Chowda Suresh
149. Rathod Parvati Hirabhai
150. Chawda Mulji Mohan
151. Pasiben M Chawda
152. Parmar Kirtibhai S
153. Panjal Hansa Baldev
154. Baldev Kumar Rathod
155. Vitthal Kumar Rathod
156. Shah Prakash Ishverlal
157. Solanki Ranjanben Jagdishbhai
158. Parmar Rajesh Kalibhai
159. Shanta Madhabhai Chamar
160. Parmar Hemlata Vasant
161. Parmar Shiva Somalal
162. Parmar Tushar Shankar
163. Parmar Manju Jayanti
164. Rathod Dina Vithaldas
165. Parmar Bhagwati Govindkumar
166. Shah Ishver Khandasbhai
167. Parmar Khemi Baldevbhai
168. Parmar Mani Bhagwandas
169. Parmar Kokila Rameshbhai
170. Parmar Naresh Manilal
171. Rathod Motiben Kanjibhai
172. Gunvant Hirabhai Rathod
173. Motiben Kanjibhai
174. Nainaben Parmar
175. Suresh Chawda
176. Chhgaji Prajapati
177. Suresh M Chawda
178. Vijay D Parmar
179. Chawda Padma
180. Manilal R Panchal
181. Chhgaji K Prajapati
182. Parmar Vijay
183. Chavda Babiben
184. Panchal Nikhil
185. Panchal Manilal
186. Rathod Baldev
187. Chhamar Jayanti
188. Rathod Dinaben V
189. Chavda Muljibhai M
190. Chavda Pasiben Motibhai
191. Chavda Padma Suresh
192. Chavda Suresh Motibhai
193. Parmar Naynaben Vijay
194. Parmar Rajesh Kumar K
195. Parmar Hemlataben B
196. Parmar Manjulaben K
197. Chmar Shanta C
198. Chamar Tulsi C
199. Parmar Jashi M
200. Parmar Mani B
201. Parmar Jitendra M
202. Parmar Laxmiben K
203. Parmar Manjuben J
204. Shah Prakash I
205. Solanki Ranjanben J
206. Solanki Jagdishkumar N
207. Parmar Shivabhai
208. Parmar Tusharbhai
209. Rajput Bharat
210. Parmar Hemlataben
211. Parmar Rajeshkumar
212. Parmar Laxmiben
213. Parmar Bhagwatiben G
214. Chauhan Govindbhai M
215. Shah Ishvarlal K
216. Chauhan Raiben G.
217. Shah Prakash
218. Solanki Ranjanben
219. Solanki Natwarlal
220. Solanki Jagdishkumar
221. Parmar Baldev
222. Chhamar Tulsi
223. Parmar Jashi
224. Parmar Jitender
225. Parmar Kokila
226. Parmar Khemi
227. Parmar Shailesh
228. Parmar Naresh
229. Chauhan Raiben
230. Chauhan Govindbhai
231. Shah Ishvarlal
232. Chavda Muljibhai
233. Parmar Bhagwatiben
234. Parmar Bindhuben
235. Parmar Manjuben
236. Shanta Chamar
237. Jitendra Parmar
238. Kokila Parmar
239. Manjuben Parmar
240. Kirtibhai Parmar
241. Tusharbhai Parmar
242. Manjulaben Parmar
243. Rajeshkumar Parmar
244. Hemlataben Parmar
245. Manjulaben K Parmar
246. Manjuben J Parmar
247. Laxmiben K Parmar
248. Kirtibhai S Parmar
249. Jashi Manilal Parmar
250. Kokila Rameshbhai Parmar
251. Mani Bhagwandas Parmar
252. Muljibhai M Chawda
253. Dinaben V Rathod
254. Govindbhai M Chauhan
255. Ishvarlal K Shah
256. Kokila R Parmar
257. Jashi M Parmar
258. Shanta M Chamar
259. Jayanti M Chamar
260. Shailesh B Parmar
261. Jitendra M Parmar
262. Mani B Parmar
263. Ranjanben J Solanki
264. Natwarlal G Solanki
265. Jagdishkumar N Solanki
266. Laxmiben Kantibhai Parmar
267. Manjuben Jayantiben Parmar
268. Kirtibhai Shankarbhai Parmar
269. Tusharbhai Shankerbhai Parmar
270. Manjuben Kirtikumar Parmar
271. Shivabhai Somabhai Parmar
272. Rajeshkumar Kalidas Parmar
273. Hemlataben Vasantbhai Parmar
274. Pardhi Hansaben Baldevbhai
275. Chavda Babiben Chhanalal
276. Panchal Manilal Tatilal
277. Prajapati Chhagaji Keshaji
278. Rathod Baldev Sheevabhai
279. Panchal Nikhil Manilal
280. Prakash Shah
281. Natvarlal Solanki
282. Ranjenben Solanki
283. Prakash Ishvarlal Shah
284. Ranjenben Jagdishbhai Solanki
285. Dinaben Rathod
286. Govindbhai Chauhan
287. Muljibhai Chawda
288. Ishvarlal Shah
289. Naresh Parmar
290. Govindbhai Mohanbhai Chauhan
291. Muljibhai Mohanbhai Chawda
292. Shah Ishvarlal Kandad
293. Chauhan Govindbhai Mohanbhai
294. Parmar Kirtibhai Shankerbhai
295. Parmar Shivabhai Somabhai
296. Parmar Bhagwatiben Govindbhai
297. Parmar Bindhuben Arvindbhai
298. Parmar Laxmiben Kantibhai
299. Chawda Muljibhai Mohanbhai Besides, there were about 258 demat accounts with a common address i.e. 56 Jajakeshavni Chali, Ahmedabad 380018, in the same method and manner. A perusal of the details provided by Shri Mehta also clearly indicates the adoption of similar modus operandi, with several names being reported from the same address like 23 Jajakeshavni Chali, Ahmedabad 380018, 24 Jajakeshavni Chali, Ahmedabad 380018, 48 Jajakeshavni Chali, Ahmedabad 380018 etc.
b) Similar pattern (as done in the case of Suzlon Energy Ltd) is noticed in the case of IPO of IDFC Ltd. Some of the common addresses noticed here are 48/B, 735 Krishan Nagar, Ahmedabad, B/46, Arya Nagar Society, Ahmedabad, C-27, Malhar Flats, Ahmedabad etc. 3.6 The pattern as above is of a piece with the modus operandi noticed in the cases of other key operators as well which was the very staple of the major irregularities in the allotment process of 21 IPOs leading to cornering of shares by a few to the detriment of retail investors. Further, the payments made by Shri Mehta in respect of the IPO applications (of the purported applicants) out of his bank accounts and the subsequent off market transfers of allotted shares to his demat account, majority of which were credited just before the date of listing [i.e. in the case of Suzlon Energy Ltd., off market transfers took place on October 15, 2005, October 17, 2005 and October 18, 2005 (the date of listing being October 19, 2005) and in the case of IDFC Ltd., the off market transfers took place on August 8, 2005 and August 10, 2005 (the date of listing being August 12, 2005)] would prima facie indicate his complicity in the entire game plan, meant for the purpose of cornering the IPO shares to the detriment of the retail genuine investors.
3.7 Though Shri Mehta contended that such credits were received as security in terms of the loan arrangement entered into between himself, the borrowers and the so called Ashmi (from whom Shri Mehta had borrowed money), he had failed to produce the proof of the putative tripartite loan arrangement entered into between him and the said Ashmi on the one hand and also between him and the said borrowers on the other hand. Thus, the claims/ contention made by Shri Mehta in this regard are not supported by any material evidence.
3.8 Shri Mehta is prima facie found to be one of the key operators (as per the interim order of SEBI) who had received off market credit of shares of 500 or more dematerialsed account holders in the IPO's of Suzlon Energy Ltd. and IDFC Ltd. In such a situation, the role of Shri Mehta has to be seen in the context of the large scale cornering of IPO shares at the time of issue that substantially interfered with the allotment process, tweaking it unfairly in favour of a few. Shri Mehta has not disputed the large credit of IPO shares as mentioned in the table at para 3.4. In the case of IPO of IDFC, 1,46,832 shares were sold on the listing date at the price of Rs.69.50 against the listing price of Rs.34. Similarly, the Suzlon Energy Ltd. shares (61,808) were sold @ Rs.692.85 as against the issue price of Rs.510. It is further noted that the afferent applicants had acquired substantial number of shares allotted in the various IPOs (in the retail category) and particularly, in the case of IDFC Ltd., the percentage of shares allotted to the afferent applicants vis-a -vis the retail allotment was 10.18%.
3.9 A perusal of the demat account (no. 10139886) of Shri Mehta maintained with the depository participant, Khandwala Integrated Financial Services Pvt. Ltd., inter alia shows the following transactions on various dates.
Date/ Period of off market transfer of shares to the account of Shri Mehta from the afferent accounts Name of the IPO Date of listing Number of shares credited to the account of Shri Mehta Number of shares debited from the account of Shri Mehta Name of the financier to whom the said shares had been transferred with the date of such transfer August 08, 2005 IDFC Ltd./ August 12, 2005 1,46,832 1,46,832 Ashmi - August 11, 2005 September 09, 2005 IDFC Ltd.
August 12, 2005 1330 1330 Ashmi -September 09, 2005 October 17-18, 2005 Suzlon Energy Ltd October 19, 2005 14,576 14,576 Ms. Sheelu Lalwani -October 18, 2005 October 19, 2005 Suzlon Energy Ltd.
October 19, 2005 40,016 40,016 Ms. Sheelu Lalwani -October 19, 2005 October 20, 2005 Suzlon Energy Ltd.
October 19, 2005 7,216 7,216 Ms. Sheelu Lalwani -October 20, 2005 3.10 According to Shri Mehta, he had received large number of IPO shares as security from the persons, who had borrowed money from him. However, he failed to produce any material in support of the alleged loan arrangement. The circumstances of the present case prima facie indicate that even if the demat accounts existed in the name of the respective account holders (as contended by Shri Mehta), they acted as mere name lenders, as the money for the IPO applications was debited from the account of Shri Mehta. Further, immediately after the allotment the shares were credited to his demat account through off market transfers. The above, coupled with the fact that Shri Mehta stood to gain by such transfers, prima facie shows that Shri Mehta had made use of number of demat accounts which appear to be under his control, for the purpose of cornering such shares to the detriment of the retail genuine investors. He is prima facie an unjust beneficiary of the entire transactions with or without the others. Page 15 of 23 3.11 Shri Mehta contended that he had only financed certain people in making IPO applications and that he had not manipulated the securities market. In this context, I note that the issue germane to the present case is that Shri Mehta had prima facie cornered IPO shares to the disadvantage of the retail genuine investors. Through a fair market practice, one could not have obtained such allotments of large number of IPO shares as mentioned in the table at para 3.4. Admittedly, Shri Mehta had received large number of IPO shares through off market transfers from numerous afferent accounts and made benefits out of the said shares. Any market practice which facilitates cornering is an abomination. Prima facie, the cornering of shares as happened in this case can not be treated as a normal market practice. The abuse of allotment process for cornering shares in unjust enrichment smacks of a venality of the worst order and whoever participated in the same either on their own or on behalf of some financiers or jointly is tarred with the same brush and they can not be allowed to seek legitimacy for their unfair shenanigans by making a facile plea that he had only financed to the people who had made applications in the IPOs. The contention that Shri Mehta's role was limited to the extent of lending money to the individual borrowers in making IPO application is unable to believe, in the facts and circumstances of the case. There is no documentary evidence in support of the loan arrangement at various levels. Though, Shri Mehta claimed that he had received the financial assistance from Ashmi (Rs.6.5 crores), the same has not been satisfactorily explained by him through the bank account transcripts (as provided by him). Though, the said bank account (provided by Shri Mehta) statements shows the credit of Rs.6.5 crores on September 27, 2005, it would not clearly indicate as to whether the said amount was received from Ashmi or from a third party. The credit in the Bank Account of Shri Mehta remains unexplained for want of supporting transcript of Bank Account of Ashmi. It can be prima facie presumed that the said money belonged to him and not received from Ashmi or some other third party as contended by him. May be, it is his money or somebody else's money which might have been used, but that is not the core issue. The fact remains that Shri Mehta alone paid for the IPOs out of his Bank Account. Further, it was Shri Mehta only who received large number of IPO allotted shares as mentioned above, immediately after the allotment through off market transfers and just before or after the listing of the said scrips. What more, the entire control over funds and movement into and out of afferent accounts have remained only with Shri Mehta, thereby prima facie indicating that such afferent accounts are just conduits for receiving shares on allotment and retransmitting them back to Shri Mehta upon allotment in a make- believe arrangement to induce the impression that there were beneficiaries behind those accounts which was just a myth. Though the entire edifice has been built on such afferent account holders, they are hardly seen in action excepting that their names and addresses helped create and complete the paper work and documentation. Therefore, all the exercise to reconstruct the case history to invest it with the trappings of a financial transaction is just an after thought to give a veneer of acceptability to unmitigated market abuse festering with all its enormity and gravity. Further, such an attempted rejig does not detract from what really transpired with the IPO allotment to the detriment of retail investors. Any market practice which favours abusing the IPO allotment process (at the cost of genuine retail investors) through cornering and offloading on listing for raking in unfair gains can not be a standard or bench mark to defend such execrable activity hurting the retail investors by depriving them of their legitimate dues.
3.12 The copy of bank account statement of Shri Mehta maintained with the Catholic Syrian Bank Ltd., Fort Branch, Mumbai (Account No. 001522) (as furnished by him vide letter dated February 22, 2007) reveals that the application money in respect of numerous applications (approximately 1216) for Rs.48,960/- (per application) had been debited on October 3, 2005 and October 4, 2005 in his account in respect of the IPO of Suzlon Energy Ltd. Similarly, on July 29, 2005, application money in respect of approximately 719 applications in respect of the IPO of IDFC Ltd. for Rs.47,600/-( per application) had been debited in his account. He also enclosed the copy of his bank account statement (without the name of the bank), from which it is seen that on September 29, 2005, application money in respect of approximately 2476 applications in the IPO of Suzlon Energy Ltd. for Rs.24,705/-had been debited in his account. Apparently, no margin money was received from the purported applicants. Each application was for a value less than Rs.50,000/thereby not requiring to mention the Permanent Account Number of the purported applicants. In view of the above also, it appears that the purported applicants were non existent or merely name lenders. This is further strengthened in the facts and circumstances, by the fact that immediately after the IPO allotment, the allottees made off market transfers to the demat account of Shri Mehta.
3.13 In the facts and circumstances, the available materials on record (including the documents provided by Shri Mehta) prima facie indicate, inter alia, the following:
? Shri Mehta failed to explain satisfactorily his contention that he had received Rs.6.5 crores from Ashmi. ? Number of demat accounts were opened with the same name of the purported applicants (or in different combinations) with common address. ? Admittedly, Shri Mehta made the payments from his own bank account in respect of the IPO applications (Suzlon Energy Ltd. and IDFC Ltd.) of the said demat account holders who appears to be either fictitious or name lenders. ? The IPO shares allotted to the said purported applicants were credited to the demat account of Shri Mehta through off market transfers, immediately after the allotment, on a large scale simultaneous off market transfers on various days just before the listing of the said shares. ? Shri Mehta failed to establish that the investors (afferent account holders) were given back their money after the sale of the IPO shares, as contended by him. 3.14 Prima facie, the fact remains that, a number of demat accounts which on the facts and circumstances of the case appeared to be under the control of Shri Mehta, were pressed into service to corner shares with own money or borrowed funds for wangling a patently unfair advantage which no market practice can either bless or anoint. Any attempt to morph it to make it appear as financing transaction is at once mischievous and beguiling and needs to be frowned upon, while the case history in the broad picture of IPO manipulation reeks of vilest of manipulative intent. It is very difficult to unravel all the threads in the tangled skin of the abuse of the IPO allotment process, since the intentions of the players are shrouded in secrecy and stealth. There can be no direct evidence to fathom the same, but it has to be a matter of inference from the attendant circumstances of the case which prima facie establishes that there was cornering of the shares by certain players either on their own or in concert with others in an abuse of the IPO allotment process. The manner how it was executed through fictitious afferent accounts and exercise of control over them to facilitate off-market transfers on allotment has all the ingredients of a devious design and the same definitely casts a reflection on the conduct of parties including Shri Mehta which can by no stretch of imagination be regarded as a fair market practice. The receipt of such large number of shares through off market transfers from various afferent accounts cannot be considered as a normal market practice. Taking into account the totality of the facts and circumstances, it can be inferred that either the afferent account holders were non - existing or fictitious or name lenders. 3.15 Though Shri Mehta claimed that he had transferred the IPO shares (IDFC Ltd. and Suzlon Energy Ltd.) to the account of the Ashmi and Sheelu Lalwani in terms of the loan arrangement, he failed to produce any specific authorization received from the purported applicants (who received shares pursuant to the IPO allotment) in respect of the said transfer of shares. The only inference which can be drawn in the facts and circumstances is that the said afferent account holders if at all existed, were only name lenders and that Shri Mehta was prima facie having full control over demat/ afferent accounts of the purported IPO applicants and the shares allotted. It is noteworthy that in the case of IPO of Suzlon Energy Ltd., the allotted shares were transferred to the account of one Ms. Sheelu Lalwani and not to the demat account of the Aashmi which had given money to Shri Mehta. It is strange that these shares were transferred to a third party, though, according to Shri Mehta, no financial assistance was availed from the said Ms. Sheelu Lalwani. 3.16 Further, the conduct of a market participant has to be appraised in the overall context of the happenings in the market at the material point of time and the individual involvement can not be viewed in isolation. It would prima facie indicate that it was Shri Mehta who had made the payments in respect of numerous applications for IPO shares and upon receipt of the allotments, it was Shri Mehta who had got the said allotted shares transferred to his demat account through off market transactions in and around the date of listing of the respective scrips. Thus, prima facie, he had cornered IPO shares meant for retail investors. Also any suggestion attributing innocence to the parties involved in such transactions would give rise to an untenable situation where certain other third persons/entities alone would be responsible for the manipulation and none else. Thus, it prima facie appears that Shri Mehta had complete control over the dematerialized accounts held in the names of fictitious / benami entities and those fictitious / benami entities were merely name-lenders. Further, what is material to the case on hand is whether Shri Mehta prima facie cornered the shares or not, by abusing IPO allotment process, while the loan theory as canvassed in a crafty move to reconstruct the events for providing an escape route is totally beside the point in the attendant circumstances of the case essentially turning on cornering of shares by a bunch of key operators employing a common modus operandi in the broad picture of the case. 3.17 Proof of manipulation almost always depends on inferences drawn from a mass of factual details. Findings must be gathered from patterns, nature of the transactions etc. The evidence, direct or circumstantial, should be sufficient to raise a presumption in its favour with regard to the existence of a fact sought to be proved. As pointed out by Best in "Law of Evidence", the presumption of innocence is no doubt presumptio juris; but everyday practice shows that it may be successfully encountered by the presumption of guilt arising from circumstances, though it may be a presumption of fact. It is exceedingly difficult to prove facts which are especially within the knowledge of the parties proceeded against and in that view the findings would be inferential from the conduct of the parties. The legal proof in such circumstances partakes the character of a prudent man's estimate as to the probabilities of the case. The Hon'ble Securities Appellate Tribunal has observed in the matter of Ketan Parekh v. SEBI:
...Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available....
3.18 In view of the above, it is seen that Shri Mehta had prima facie played a major role in cornering the shares, thereby, inter alia, violating the provisions of FUTP Regulations and DIP Guidelines. Shri Mehta could not adduce anything convincing to rebut such a prima facie finding. On the other hand, the available records prima facie establish the role of Shri Mehta in cornering the shares in IPO allotment to the detriment of the genuine retail investors for the purpose of making unjust enrichment. I am, therefore, convinced that there are reasonable grounds to confirm the ad interim order dated April 27, 2006 against Shri Mehta having his address at 5-A, Vaishnav Society, Ramnagar, Sabarmati, Ahmedabad 380005.
4.1 Therefore, in exercise of the powers delegated to me in terms of Section 19 read with Sections 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992, I hereby confirm the ad interim order of Securities and Exchange Board of India dated April 27, 2006 against Shri Daval A. Mehta (Permanent Account Number ALKPM 2611G).