Securities Appellate Tribunal
Jayantilal Jitmal vs Sebi on 9 September, 2010
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 5 of 2010
Date of decision: 9.9.2010
Jayantilal Jitmal
34, Khetan Tower,
Camp Road, Shahibaug,
Ahmedabad - 380 004. ......Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai. ...... Respondent
Mr. Rahul Arote, Advocate with Mr. Sharan Jagtiani, Advocate for the Appellant. Mr. Shiraz Rustomjee, Advocate with Mr. Kersi Dastoor and Ms. Jainee Shah, Advocates for the Respondent.
CORAM : Justice N. K. Sodhi, Presiding Officer Samar Ray, Member P. K. Malhotra, Member Per : Justice N. K. Sodhi, Presiding Officer (Oral) This appeal has also arisen out of the Initial Public Offerings (IPO) scam that was unearthed by the Securities and Exchange Board of India (for short the Board) in the year 2005-2006. As many as 21 companies came out with their IPOs during the years 2003 to 2005 including Infrastructure Development and Finance Company Limited (IDFC), Nectar Lifescience Ltd. (Nectar), Yes Bank Ltd. (Yes Bank), FCS Software Solutions Ltd. (FCS), Tata Consultancy Services Limited (TCS) and National Thermal Power Corporation Limited (NTPC) with which we are concerned in this appeal. What happened was that several entities opened many demat accounts in fictitious/benami names and the said entities had cornered/acquired the shares of those 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. The strategy adopted was that subsequent to the receipt of IPO allotment, the fictitious/benami allottees transferred shares to their 2 principals who controlled their accounts and who, in turn, transferred the shares to the financiers that had originally made available the funds for executing the game plan. In view of the then booming market, financiers then sold most of these shares on the first day of listing or soon thereafter thereby making a windfall gain of the price difference between the issue price and the listing/traded price. The appellant herein is said to be a financier. He was served with a show cause notice dated June 15, 2006 alleging that he had cornered/acquired shares in the IPOs of 6 companies namely IDFC, Nectar, Yes Bank, FCS, TCS and NTPC. It was also alleged that the appellant acted through Roopalben Panchal (for short Roopalben) who acted as a key operator and opened many demat accounts in fictitious and benami names and made large number of applications in the 6 IPOs referred to above in the category of retail investors in fictitious and benami names. The show cause notice further states that on allotment of shares in the category of retail investors, the said shares were transferred to the demat account of Roopalben who subsequently transferred the shares to the account of the appellant through off market deals. The appellant is then said to have sold the shares on the first day of listing or soon thereafter making huge gains and on this basis he has been described as the ultimate beneficiary of the scam. The appellant filed his detailed reply on January 31, 2007 denying all the allegations. He pleaded that he has a large family and relatives numbering about 75 and that he was managing the common fund of the family. It is also his case that he had implied authority from each member to use his/her name for making application(s) in different IPOs. It is admitted that he filed multiple applications in different IPOs on behalf of his so called large number of family members using different combinations of names. It is also admitted that on allotment, the shares were credited to the respective demat accounts of the applicants (family members) from where all the shares were transferred to the demat account of Roopalben who then transferred the shares in the demat account of the appellant. He then sold the shares after listing and made some profits. As regards the funds, it is pleaded that 50% of the amount for the various applications had been provided by the appellant from the common fund of the family and that the remaining 50% of the amount was funded by banks. On a consideration of the material collected by the Board during the course of the 3 investigations and the enquiry conducted by the adjudicating officer, the latter came to the conclusion that the appellant was a financier who had cornered shares in the IPOs of the aforesaid 6 companies by filing multiple applications and subsequently sold the shares when they were transferred to his demat account through Roopalben. The adjudicating officer found that the appellant was the ultimate beneficiary of the scam and that he made a profit of R.10,64,354/- on the sale of shares of the aforesaid 6 companies. Accordingly, by his order dated September 29, 2009 he imposed a monetary penalty of Rs. 31 lacs on the appellant for violating Section 12A of the Securities and Exchange Board of India Act, 1992 (for short the Act) and Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (for short the Regulations). It is against this order that the present appeal has been filed.
2. We have heard the learned counsel for the parties who have taken us through the record. The short question that arises for our consideration is whether the appellant acted as a financier and cornered shares in the IPOs of the 6 companies mentioned hereinabove. It is common case of the parties that the procedure adopted for making applications and the subsequent transfer of shares to the demat account of the appellant was the same in all 6 IPOs with which we are concerned in this appeal. We are examining the allotment made in the IPO of TCS and the findings recorded would apply to the allotments made in the other 5 IPOs as well.
3. Allotment by TCS in the IPO was made on August 21, 2004 and the shares were listed on August 28, 2004. Each application for the maximum number of shares which could be allotted in the retail category had to be filed with an application fee of Rs.44,100/-. It is common ground between the parties that as many as 75 applications in different names and combinations had been filed by the appellant and that on allotment, each retail application was allotted 17 shares. It is also not in dispute that on allotment, 17 shares got credited in the demat account of every first named applicant. It is also clear from the record and which fact is not disputed by the appellant that after the shares were credited in the demat accounts of the applicants, these were transferred to the demat account of Roopalben. In other 4 words, 1275 shares got credited in the account of Roopalben in this manner. Roopalben then transferred these shares to the demat account of the appellant who, in turn, sold them in the market and made huge profits because of the difference in the issue price and the price at which they were sold. What is contended by the appellant is that 50% of the funds that were used for filing applications had come from the common fund of the family and that the remaining 50% had been financed by banks. We have on record that 50% of the subscription money came from the account of Shripal Sanjay Kumar - Proprietor, Jayantilal Jitmal, that is from the appellant's own account. The learned counsel for the appellant argued that the money lying in this account belongs to the common pool of the family. There is not an iota of material on the record to show that the money lying in this account belongs to the family fund. The mere ipse dixit of the appellant cannot be accepted. It is obvious that 50% of the subscription money had been paid by the appellant from his own account. As regards the remaining 50%, we cannot accept the plea of the appellant that the amount had been funded by the banks. If that were so, there should have been documentation. There is not a single document on the record to show that any bank had ever advanced loan to the appellant or to any of the applicants for subscribing to the shares in different IPOs. We cannot believe that the bank could have advanced loans without documentation. In the absence of any material on the record and the fact that the appellant filed the 75 applications on behalf of different applicants alongwith the application money not being in dispute, the only inference that we can draw is that the remaining 50% of the application money also came from the appellant. The fact that on allotment these shares came to the account of Roopalben who, in turn, transferred them to the account of the appellant not being in dispute, further substantiates our finding that it was the appellant who provided the funds for filing the applications in different names for allotment. When we look at the names in which different applications had been filed, it is clear that the appellant filed multiple applications using combinations of the same names. We find from the impugned order that the adjudicating officer accepted the plea of the appellant that 50% of the finance had come from the banks. We are unable to uphold this finding in the absence of any material showing that the 5 banks had ever advanced any loan. The onus to establish this fact was on the appellant and since he failed to produce any material the inference has to be drawn against him. It is interesting to note that after the appellant sold the shares in the market and made huge profits, he paid tax on that amount in his own name. If the shares really belonged to the applicants and had been purchased by them from their common family fund, there was no reason for the appellant to credit the entire amount in his own account and pay tax thereon. Again, in his reply to the show cause notice the appellant has admitted that he reflected the allotment of shares of various companies and subsequent transactions in his books of accounts. If the shares belonged to the other members of the family, why should the appellant reflect those in his books of accounts and the subsequent transactions. This further makes it clear that it was the appellant who was the beneficial owner of the shares. We have, therefore, no hesitation to hold that the entire application money was paid/funded by the appellant and that it was he who filed different applications in different/benami names and cornered the shares as alleged. It necessarily follows that by making multiple applications in different combinations of names, the appellant cornered the shares meant for the retail category of investors and thereby violated the provisions of Section 12A of the Act and Regulations 3 and 4 of the Regulations. In Himani Patel vs. Securities and Exchange Board of India, Appeal no. 154 of 2008 decided on September 7, 2009, this Tribunal held that cornering of shares through multiple applications in different combinations of names was violative of the provisions of the Act and the Regulations.
4. Before concluding, we may take note of another argument advanced by the learned counsel for the appellant. He contends that after the allotment was made in the name of the applicants and shares credited to their demat accounts, these were unauthorizedly transferred by the depository participants (Karvy) into the demat account of Roopalben without any instructions. It is further contended that when the appellant raised an objection with Roopalben as to how the shares could be transferred in her demat account, she transferred them to the demat account of the appellant and this is how, according to the appellant, shares came to his account. The argument is being noticed only to be rejected. We cannot believe that 6 depository participants would unauthorisedly transfer the shares to the account of Roopalben. This happened not only in the IPO of TCS but also in the case of five other IPOs as well. Assuming that the shares were unauthorisedly transferred, then on an objection being raised we wonder why they did not go back into the demat accounts of the allottees from where they had come. Again, there is nothing on the record to show that the appellant ever raised an objection when the shares were transferred to the demat account of Roopalben. His ipse dixit in this regard cannot be accepted. On the other hand, it is clear that the transfer of shares from the allottees to the demat account of Roopalben and subsequently to the demat account of the appellant was a part of the game plan.
5. It was then argued by Sh. Sharan Jagtiani learned counsel for the appellant that while calculating the profits made by the appellant on the sale of the shares in the market, the shares of FCS have been counted twice and that the penalty needs to be reduced accordingly. We find from the impugned order that this error has occurred resulting in a difference of approximately Rs.64,000/-. We are not inclined to reduce the amount having regard to the facts and circumstances of the case and the gravity of the mischief played by the appellant. The adjudicating officer has already erred by awarding the penalty on the lower side and we do not find any cogent reason to reduce the same.
For the reasons recorded above, the appeal fails and the same is dismissed with no order as to costs.
Sd/-
Justice N. K. Sodhi Presiding Officer Sd/-
Samar Ray Member Sd/-
P. K. Malhotra Member 9.9.2010 ptm Prepared & Compared by ptm