Securities Appellate Tribunal
Dhaval Mehta vs Sebi on 8 September, 2009
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 155 of 2008
Date of decision: 08.09.2009
Dhaval Mehta
5-A, Vaishnav Society, Ramnagar,
Sabarmati, Ahmedabad. ......Appellant
Versus
Securities and Exchange Board of India
Plot No. C4-A, 'G' Block,
Bandra Kurla Complex,
Mumbai. ...... Respondent
Mr. Neville P. Lashkani, Advocate with Mr. Joby Mathew, Mr. Shashikant
Chandok, Advocates for the Appellant.
Mr. Shiraz Rustomjee, Advocate with Ms. Daya Gupta, Advocate for the
Respondent.
CORAM : Justice N. K. Sodhi, Presiding Officer
Samar Ray, Member
Per : Justice N. K. Sodhi, Presiding Officer (Oral)
ORDER :
The appellant herein is one of the persons who played a big role in the IPO scam that was discovered by the Securities and Exchange Board of India (for short the Board) in the years 2005 and 2006. He has filed the present appeal under Section 15T of the Securities and Exchange Board of India Act, 1992 against the order dated October 31, 2008 passed by the whole time member of the Board restraining him from buying, selling or dealing in securities for a period of two years from the date of the order. Since the whole time member found that the appellant had unduly enriched himself by his unlawful conduct and made huge profits after cornering shares reserved for the retail investors, he directed him to disgorge a sum of Rs.72 lacs which, according to the impugned order, represents the unlawful gains made by the appellant. He has also been directed to pay interest at the rate of 10 per cent from the date of listing of the shares. 2
The appellant claims to be a financier. According to his own version, he borrowed a sum of Rs.16 crores from Ashmi Financial Consultancy Pvt. Ltd. Ahmedabad (hereinafter referred to as the finance company) which amount in turn was lent by him to as many as 4580 applicants who applied for shares in the Initial Public Offerings (IPO's). 3870 applicants applied for shares in the IPO of Suzlon Energy Limited and another 719 applications were allegedly financed for the shares of IDFC Ltd. It is common ground between the parties that Suzlon IPO opened on September 23, 2005 and closed on September 29, 2005 and the shares allotted by the issuer company were listed on the stock exchange(s) on October 19, 2005. Similarly, the IPO of IDFC opened on July 15, 2005 and closed on July 22, 2005 and the shares issued by the company were listed on the stock exchange(s) on August 12, 2008. It is also not in dispute that in the case of Suzlon IPO, 1 share was allotted for every 6 shares applied for and in the IPO of IDFC, 1 share was allotted for every 5 shares applied for. Both the IPOs were over subscribed on the very first day of their opening. It is the appellant's case that he borrowed money from the finance company on oral terms and that there was no documentation in regard to the said loan. Similarly, loans were advanced to 4580 applicants without any documentation and on terms which were orally agreed between the parties. It is also the appellant's case that as per the verbal terms of the loan, each applicant on allotment of shares was required to transfer the shares back to the appellant who in turn was to transfer the shares to the finance company. Again, there is no dispute between the parties that in the case of Suzlon IPO, all the applicants (3870) applied for 96 shares each and deposited a sum of Rs. 48,960/- as application money with each application and in the case of 1217 applicants, 100% finance had been provided by the appellant where as in the case of the remaining applicants, the appellant provided 50% finance and the remaining portion of the amount was financed by the Centurian Bank. 719 applications in the case of IDFC IPO were totally financed by the appellant and each applicant had been allotted 266 shares though each application was for 1400 shares. As per the oral understanding between the applicants and the appellant, most of the shares allotted to the former were transferred to the demat account of 3 the appellant after the shares were listed. The appellant, as per his understanding with the finance company, transferred the shares to the latter which in turn, on the asking of the applicants sold the shares in the market at the market price. Taking the appellant's version at its face value (though there are several lacunae therein), we are not inclined to accept the same as it is most incredible. The whole time member was right when he drew the inference that the applicants were in fact the front entities of the appellant and the finance company and that it were they who applied for the shares in the names of the applicants with a view to corner the shares reserved for the retail investors. Had the applicants been genuine investors, they would have themselves sold the shares on their listing because the price of the scrip even on the first day of listing was much higher than issue price. Shares in Suzlon IPO were issued at the rate of Rs.510/- per share and the price of the share on the first day of listing was Rs.692.85. Instead of making profit and returning the loan to the appellant, each applicant without exception dutifully transferred the shares to the demat account of the appellant. This clearly shows that they were not genuine investors and were only name lenders who acted on the dictates of the appellant and the finance company who were in concert with each other for cornering shares reserved for the retail investors. On a query made by us from the learned counsel for the appellant as to whether the appellant was registered as a money lender and whether the finance company was registered as a non banking finance company with the Reserve Bank of India, his answer was in the negative. This apart, there are several other factors from which an inference could be drawn that the applications for allotment of shares were in fact on behalf of the appellant and the finance company. An amount of Rs. 16 crores was advanced to the appellant without any documentation or security and he, too advanced the same to the small time investors in the market without documentation or security. None of the applicants contributed any amount by way of margins or otherwise towards the application money and the entire amount was financed either by the appellant and the finance company and in some cases partly by the Centurian Bank. It is equally strange that the appellant as a financier was not interested in taking his loan amount back and as per the oral terms, the 4 applicants had to transfer their shares on allotment. Why should a financier be interested in the shares and not in the money that he has advanced? The explanation furnished by the learned counsel for the appellant is that shares were transferred to the demat account of the appellant by way of security. This version, too, cannot be accepted. The money was advanced at the time when the applicants filed their applications for allotment and there was no certainty at that point of time as to whether the shares would be allotted and if so to what extent. No financier would run the risk of loosing huge amount of Rs.16 crores if the applicants were not to return the money just in case no allotment was made to them. Again, the shares which were allotted in the names of the applicants were transferred by the appellant to the finance company which sold them on the asking of the applicants. It is the appellant's own case that the applicants had no concern with the finance company. Why should they then agree to the shares being sold by it. The appellant claims that interest was charged and paid to the finance company for the amount borrowed. No record has been produced to substantiate this plea. Another factor which makes us raise our eye-brows is that most of the applicants were the friends and relatives of friends of the appellant, most of whom were residing in the same building and each one of them applied for identical number of shares and took loan for an identical amount. Each applicant made sure that the amount for which he applied for the shares was less than Rs.50,000/- so that he did not have to disclose the details of his Permanent Account Number. It is not disputed that the refund issued by the issuer company for the excess number of shares applied was received by the applicants who in turn passed it on to the appellant. From the circumstances narrated hereinabove, we are in agreement with the findings of the whole time member that the appellant played a fraud by filing large number of applications under different names and that the applicants were mere name lenders. It is also clear that the appellant and the finance company which is said to have financed all the applications subverted the IPO allotment process and cornered the shares that were reserved for the retail investors. Thousands of genuine investors were 5 deprived of the allotment. Their conduct is most reprehensible and deserves no leniency.
This brings us to the direction issued in the impugned order requiring the appellant to disgorge a sum of Rs.72 lacs. The whole time member has found that the appellant and the finance company have jointly made unlawful gains by cornering shares meant for the retail investors. Since the appellant and the finance company were hand in glove and no record was produced to show the actual amount of unlawful gains received by the appellant, the whole time member worked out the illegal gains as the difference between the issue price and the price at which the shares were sold in the market after they were listed. On this basis, which appears to be fair and reasonable in the circumstances of the case, the amount of illegal gains made by the two work out to Rs. 1,43,67,775/- from all the applicants in the IPO's of Suzlon and IDFC. In the absence of any material as to how the illegal gains were distributed between the appellant and the finance company, the whole time member, in our view rightly proceeded on the basis that they shared the amount equally. It is on this basis that the appellant was required to disgorge a sum of Rs. 72 lacs. Disgorgement is a monetary equitable remedy to prevent a wrong doer from unjustly enriching himself as a result of his illegal conduct. Disgorgement of illegal gains are ordered against those who violate the securities laws and make unlawful gains. The amount should not exceed the total profits realized as a result of the unlawful activity and the amount ordered to be disgorged should approximately be equal to the amount of unjust enrichment. In the instant case, the whole time member has worked out the amount from the prices that were available and we find no ground to interfere with the order in this regard.
Before concluding, we may mention that this appeal had come up for hearing on August 31, 2009 alongwith Appeals no. 154 of 2008 and 2 of 2009 and when the arguments in Appeal no. 154 of 2008 had almost concluded on September 2, 2009, the learned counsel in all these appeals made a request that they be allowed to withdraw the same including the present one. On an objection 6 raised by the learned counsel appearing for the respondent Board, the request was declined and we proceeded to decide the appeals on merits.
In the result, the appeal fails and the same stands dismissed. Since the appellant in connivance with the finance company had indulged in a fraud which is bigger than the one committed by the appellant in Appeal no. 154 of 2008, the respondent Board shall have its costs which are assessed at Rs.1 lac.
Sd/-
Justice N. K. Sodhi Presiding Officer Sd/-
Samar Ray Member 08.09.2009 ptm Prepared & Compared by ptm