SECURITIES AND EXCHANGE BOARD OF INDIA

AP/AO- 09/2005

 

01.          Securities and Exchange Board of India (SEBI) conducted investigation into the dematerialization of shares of Accurate Exports Ltd., (hereinafter referred to as “AEL”), listed in the Stock Exchange, Mumbai (BSE).

 

02.          Pursuant to the aforesaid investigation, SEBI appointed, vide order dated July 16, 2004, the undersigned as the Adjudicating Officer under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter Adjudication Rules) read with Sec. 15 I of SEBI Act, 1992 to inquire into and adjudge the failure of Nokia Finance International Pvt. Ltd. (NFI), Member of Ahmedabad Stock Exchange to comply with the summons of SEBI in violation of Sec.11C (6) for which penalty may be imposed under Sec. 15A of SEBI Act, 1992. The aforesaid appointment was communicated vide proceedings of the Whole Time Member, SEBI, dated July 30, 2004.

03.          The undersigned issued notice (SCN) dated October 14, 2004 under SEBI Adjudication Rules to NFI, communicating the allegations levelled against it and calling up on it as to why an inquiry in terms of the said Rules should not be conducted against it.

 

04.          NFI did not reply to the SCN. In the above circumstances the undersigned thought it fit to hold an inquiry in the matter. Accordingly, inquiry along with the personal hearing in the enquiry proceeding against NFI, was held on February 14, 2005.  Mr. Samir Shah, Director of NFI appeared and consented for the joint proceedings i.e. both for enquiry and adjudication and made submissions. He stated that NFI has closed business for the last 2-3 years and therefore not in a position to reply to the proceedings. He further stated that the reply submitted to the investigation officer may be treated as reply to these proceedings. He submitted that as NFI’s office is closed for the last 2-3 years, they are not in a position to respond to the summons and pleaded for dropping the proceedings.  

 

05.          From the material on record it is seen that SEBI launched investigation on the various aspect of AEL, including the alleged dematerialization of shares higher than its paid-up capital and the subsequent trading in its scrip in the secondary markets. The Investigation Department issued summons to NFI as follows:

 

Date of Summons	Compliance date	Summons served	Compliance requirement	Status of compliance
10.12.03	20.12.03	Yes	Information and documents in the annexure to summons	Not complied
19.02.04	04.03.04	Yes	Personal appearance + Information and documents in the annexure to summons	Appeared in person
08.03.04	22.03.04	Yes	Personal appearance + Information and documents in the annexure to summons	Partly complied

 

06.          The information and documents sought from NFI, that were listed in the annexure to the aforesaid summons are as detailed below:

a)      name and address of directors of NFI as on specified periods and details of other directorships held by them.

b)     Complete details of shares of AEL allotted to NFI during specified period.

c)      Complete details of transactions in the shares of AEL by NFI in the specified period.

d)     Details of Off market trades done by NFI in AEL scrip in the aforesaid period.

e)      Copy of demat statement

f)       Copy of bank account statement indicating the funding for the aforesaid transactions.

 

07.          Query a) was not mentioned in annexure to the summons dated February 19, 2004. Even from a cursory look it is clear that the information and documents sought by SEBI, vide the aforesaid summons, are very basic and crucial to its investigation of AEL. There is nothing to suggest from the material available on record that NFI complied with the summons dated December 10, 2003 at all. As regards the summons dated February 19, 2004, I find that there has been part compliance with the summons in as much as NFI’s authorized representative’s statement was recorded on March 05, 2004 at the venue mentioned in the summons, namely ASE. However, there is nothing to suggest that NFI furnished to IO the information and documents listed in the annexure to the summons. Appearing in person and furnishing information / documents sought are two distinct and different compliance requirements. To that extent, there has been only part compliance by NFI with the summons. In fact, it is seen from the statement dated March 05, 2004 that the authorized representative of NFI undertook to file “all the required information by March 15, 2004”. However, even before that, summon dated March 08, 2004 was issued to NFI seeking personal appearance and documents.

 

08.          NFI, vide letter dated March 16, 2004, filed the following documents:

a)      Letter dated March 03, 2004, from its ‘client’ Coverage and Consultants Ltd. (CCL)

b)     Demat statement of transactions, dated May 03, 2004, for the period May 01, 2001 to May 31, 2002

 

09.          These documents are examined in detail. The aforesaid letter dated March 03, 2004 gives the date wise break-up of the shares of AEL totaling to 48,272,451 shares, which have been transferred to NFI’s demat account (10010658) by ‘client’ CCL. It is mentioned that transfer, from various demat accounts, is done to enable NFI to sell these shares on behalf of CCI. CCI further requested NFI to return the balance of 672,451 shares, which are lying unsold, to the demat account of the former. The letter also acknowledges that NFI had already returned 47,600,000 to CCL, at the instance of the latter, to various demat accounts. The contents of the demat statement are self explanatory and hence not elaborated.

 

10.          The aforesaid demat statement furnished, is in compliance with query e) (listed earlier) of the annexure to the summons. The contents of the letter March 03, 2004 may be treated as in little compliance with query c) of the annexure to the summons. The information sought was complete details of transaction in the scrip of AEL for the period May 01, 2001 to May 31, 2002 and that too in a specified format. Whereas what is furnished is only details of shares received from and retuned to the client, CCL. Ideally, NFI should have culled out the required information from its database/ledger and furnished it to the IO. It has not done so. From the barely visible dated stamp of the letter dated March 16, 2004, vide which these documents were forwarded, it appears that it was received by SEBI on March 22, 2004. Since information / documents pertaining to queries a, b, d, and f in the annexure to the summons and full information pertaining to query c was not furnished to the IO, summons dated March 08, 2004 was issued to NFI. From the material available on records, NFI did not comply with the summons.     

 

11.          NFI has also stated that its business and office is closed for the last 2-3 year. However, it has not furnished any material to suggest that it has surrendered its certificate of registration as broker or has initiated steps for the same. It is well known that merely making a bland statement, without any documentary evidence to back up a material defence, is a weak defence. Moreso, Regulation 18 of SEBI (Stock Brokers & Sub Brokers) Regulations 1992, requires brokers to maintain books of accounts and other specified records for a minimum period of 5 years. The information and documents sought vide summons from NFI pertains to the years 2001 and 2002. NFI was statutorily bound to preserve the documents pertaining to the aforesaid information, till 2006 and 2007 respectively, as per the cited regulations. However, when the SEBI sought the same in March 2004, i.e. after 3 & 2 years respectively after the event, NFI expressed its inability to provide the same, citing closure of business and office as the reason. It is not the case of NFI that it has ceased to be a broker by surrendering its certificate of registrations.

 

12.          I am not impressed with the submissions of NFI in as much it has not furnished queries a, b, d, and f in the annexure to the summons and has furnished part information pertaining to query c. Further, as already discussed, NFI did not comply with summons dated December 12, 2003 or to summons dated March 08, 2004. Therefore, NFI has not complied with the provisions of Section 11C (2) of SEBI Act, 1992 for which penalty is imposable under Sec. 15A (a) of SEBI Act 1992.

 

13.          To determine the quantum of penalty under Section 15A(a), the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz.(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default ; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default.

 

14.          From the material on record, it is seen that NFI held about 3.89 crores shares of AEL in its demat account as on February 25, 2002, which is 1.79 crores more than the authorized capital of AEL. NFI was one of the entities involved in selling these shares in the secondary markets. Besides the finding in the investigation that Nokia (NFI) was dealing on behalf of M/s Coverage & Consultants for substantially large trading in the shares of AEL, it was also doing on its own behalf.  The amount of disproportionate gain, if calculated with accuracy it will come out to the enormous.  It is the undisputed finding that NFI was holding 1.79 crores more shares in excess of authorized capital of the company.  No reason or explanation is given by NFI as to from which source it got these unauthorized shares.  This makes the case more serious since it was an ultimate information for Investigating Authority to uncover the other real culprits.  It is the finding of investigation that during the investigation period price of AEL ranged between Rs. 2.00 to Rs 0.10.  Even if we consider the lowest price of Rs. 0.10, the value of the unauthorized shares with NFI can be roughly calculated to RS. 18 lacs.  This according to me can be construed as undue gain to NFI in the whole process.    Had NFI co-operated with the Investigation Authority, during the investigation, the other real culprit who introduced excess demat shares in the market could also have been nabbed.  All the informations sought by SEBI was crucial and important for completing the investigation in a timely manner.  The non-cooperative attitude of NFI, who is also a member of stock exchange has protracted and hampered the investigation and SEBI probe into the multi crore fraud.  I further find the non-cooperative behavior of NFI as repetitive as on number of times it failed to comply with statutory summons.

 

15.          Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 18,00,000 (Eighteen Lacs Only) on Nokia Finance International Pvt. Ltd. for the reasons discussed above. This penalty is justified and appropriate as it would disgorge the unjust enrichment and disproportionate gain accrued to the entity.

 

16.          The company shall pay the said amount of penalty by way of demand draft in favour of “SEBI- Penalties Remittable to Government of India”, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to the Chief General Manager, Investigation Department, ID-2, Mittal Court, 1st Floor, B- Wing, 224, Nariman Point, Mumbai 400 021.

 

 

 

 

DATE: MAY 20, 2005 PLACE: MUMBAI

AMIT PRADHAN ADJUDICATING OFFICER