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    ORDER

    UNDER RULE 5 OF THE SEBI (PROCEDURE FOR HOLDING

    ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995

    READ WITH SECTION 15A OF THE SEBI ACT, 1992

    AGAINST

    �SHRI ASHUTOSH KOTHARI

    ���������

    BACKGROUND:

    1.                 SEBI had initiated an investigation into the violations alleged to have been committed by various entities during the allotment of shares of Design Auto Systems Ltd.(�DASL�) on swap and preferential basis as also the possible violation of the provisions of the SEBI Act, 1992, SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market) Regulations, 1995 and the SEBI (Stock brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as the Act, the FUTP Regulations and the Broker Regulations, respectively).� The scrip of DASL was listed on the Stock Exchange, Mumbai (BSE), Madhya Pradesh Stock Exchange (MPSE) and Ahmedabad Stock Exchange (ASE) at the time of investigation.� The trading details of various entities that had traded in the scrip of DASL were collected.� Upon analyzing the allotment details and the trading patterns of the entities that had traded in the scrip of DASL, it was inter alia observed that Shri Ashutosh Kothari (for brevity�s sake, hereinafter referred to as �AK�) was one of the entities, alleged to have traded extensively in the scrip of DASL at the relevant point of time.

     

    2.������ In view of the same, the investigating authority issued summons under Sections 11C (3) and 11C (5) upon AK seeking his personal appearance and the production of the relevant documents as stated in the annexures therein. It was further made clear to AK that in case he failed to appear before the investigating authority; necessary action would be initiated against him under the relevant provisions of the Act. The details of the summons issued to him are as under:

    Date of summons

    To furnish trading details by

    To appear in person on

    18.11.2003

    24.11.2003

    27.11.2003

    28.11.2003

    10.12.2003

    15.12.2003

    18.12.2003

    26.12.2003

    29.12.2003

     

    �������� It has been alleged that although the summon dated November 28, 2003 was acknowledged by AK, he failed to appear before the investigating authority and also failed to submit the required information.

    �������� NOTICE/ REPLY/ PERSONAL HEARING:

     

    3.������ In view thereof, I was appointed as the Adjudicating Officer vide the order of the Whole Time Member, SEBI dated February 03, 2005 to inquire into and adjudicate the alleged violations as stated above.� Accordingly, I issued a notice dated March 21, 2005 (along with the copies of the summons with annexures) to AK where under AK was advised to show cause as to why adjudication proceedings should not be initiated against him and why penalty should not be imposed upon him under Section 15A of the Act.� AK was advised to make his submissions, if any, along with supporting documents that he wished to rely upon, within 14 days from the date of the receipt of the notice.

    4.������ However the said notice returned undelivered with a remark �left�.��� Subsequently, notices dated May 13, 2005 and August 09, 2005 sent to AK were returned undelivered with a remark �left�.�

    5.                 In view of the same, a notice dated August 25, 2005 was sent through the Madhya Pradesh Stock Exchange (MPSE) with an advice to forward the same to the AK.� MPSE vide its letter dated September 20, 2005 enclosed the report of affixation of the said notice along with the photographs of the site where the said notice was affixed.� Thereafter, a notice of hearing dated September 20, 2005 was sent to AK to appear before me on September 28, 2005 was forwarded to MPSE to serve the said notice of hearing the AK.� MPSE confirmed that the same had been affixed on the outer door of the said premises on September 22, 2005 and witnessed by two persons in the manner prescribed under Rule 7(3) of the SEBI (Procedure For Holding Enquiry And Imposing Penalty By The Adjudicating Officer) Rules, 1995 (Rules).�� A report to this effect was forwarded by MPSE vide their letter dated October 03, 2005.�

    6.������ Subsequently, however the AK appeared in the office of the undersigned on September 29, 2005 at 2.00 p.m. and requested for being granted a personal hearing.� He denied receiving any of the above mentioned notices on the ground that he had moved out of the house to which the notices was sent which, was stated to belong to his uncle; Shri Suresh Kothari earlier Finance Manager of DASL and presently working in Bhopal with Dainik Bhaskar.�� It was contended that his uncle had sold his premises to one Shri Pramod Wayker who had received the notice dated August 25, 2005 and handed the same to him only on September 23, 2005 where after he rushed to attend the present proceedings.� The AK denied any involvement in the said case either in regard to his receiving the shares in question or even the opening the said demat account into which the said shares of DASL were transferred.� He denied knowing BBL but stated that he knew Shri Ujjwal Shende, Accounts Clerk at DASL who was stated to have received these unlisted shares of DASL and as also Mr Murali Nair, an employee of DASL.

    CONSIDERATION OF EVIDENCE AND FINDINGS

    7.                 I have considered at length the facts and circumstances of the case, the findings in the investigation report that are relevant to the issue under consideration, as also the relevant regulatory provisions. While taking into account the issues highlighted in the investigation report as against the AK, I consider it necessary to recapitulate certain facts in brief, giving rise to the present proceedings.

     

    8.                 BBL was allotted 10 crore unlisted shares of DASL at Rs.10/- per share on a preferential basis on October 29, 2001. The shares of DASL are listed at the Stock Exchange, Mumbai (BSE), the Madhya Pradesh Stock Exchange (MPSE) and at the Ahmedabad Stock Exchange (ASE), wherein MPSE is the regional stock exchange. The price of the scrip of DASL was Rs.4.25 as on October 12, 2001 with a volume of 1800 shares.� The price of the scrip reached the peak of Rs.11.20 on November 07, 2001 supported by huge volumes.� The price came down gradually and was quoting at Rs.1.65/- per share as on January 11, 2002. Though the price movement in the scrip was not substantial during the period August 2001 to January 2002 (which is also the period of investigation) it was noted that there was spurt in volumes which increased substantially and reached to 18.96 lacs shares by December 05, 2001.� While 62.25 lakh shares of DASL are listed at all the stock exchanges named above, 10.11 crore shares of DASL, issued on a preferential basis to BBL were not granted listing permission at BSE though they are listed at the MPSE.� No listing application in that regard was made with the ASE.

     

    9.������ The issued subscribed and paid up capital of DASL is Rs. 107.325 crore which can be broken down thus:

    Till 11.07.1994 � 62.25 lakh shares at Rs 10 per share�� ���������� =����������� Rs.6.225 crores

    On 06.12.1999 � Allotment of 11 lakh shares at Rs 10 per share�

    �������������������������� on a preferential basis to its promoters and

    �������������������������� associates namely Vargin Finance Pvt. Ltd.,

    ������������ ��������������Sarvesh Garg and Rita Garg.������������������ ������ =���������� Rs. 1.10 crores

    On 29.10.2001 � Allotment of 10 crore shares at Rs. 10 per share

    ����������������������� on a preferential basis to Bonanza Biotech Ltd =���� ���� Rs. 100� crores

    ����� �������������������������������������������������������������������������������������������Rs. 107.325 crores

    ��������������������������

     

     

    10.���� While 62.25 lakh shares of DASL are listed at all the stock exchanges named above, 10.11 crore shares of DASL, issued on a preferential basis to BBL were not granted listing permission at BSE though they are listed at the MPSE.� No listing application in that regard was made with the ASE.

     

    11.���� These 10 crore unlisted shares allotted on a preferential basis to BBL, which were dematerialized and credited to their account by CDSL, were found to have been delivered in the market by BBL, by transferring them into the demat accounts of various brokers and other entities, one among them being the AK. These shares were then offloaded into market to cheat the innocent investors. In view of the same, SEBI initiated an investigation to track the flow of the unlisted securities from BBL to the various entities and the violations committed by them in the said process.� During the course of investigation, it was found that AK was one among the many recipients of the unlisted shares of BBL and had received 1,50,00,000 unlisted shares of DASL in his demat account.� In order to seek further information in this regard, summons under Section 11C(3) of the Act, were sent to AK, which were allegedly non complied with by AK and hence the present proceedings.�

     

    12.���� There is on record the acknowledgement by AK of the summons dated November 28, 2003 which called for his presence along with certain specified information on December 15, 2003.� The information and document sought for from AK were listed in the Annexure, which is as under:

     

    i.                   Trades, if any, executed by AK in the shares of DASL during the financial years 2000-01 and 2001-02.

    ii.                 The details of the entities with whom AK had traded in the scrip,

    iii.              Names of the other scrips in which AK had traded, if at all, during the said years,

    iv.                The details of shares of DASL held in demat form during the period from August 2001 to January 2002

    v.                  Copies of the demat transaction statements,

    vi.                Details of the bank statements showing the funds flow corresponding to the said transactions

    vii.             Other details relating to the dealings in the shares of DASL through the stock exchange mechanism viz., name of the broker/sub-broker, date/settlement no, details of the purchases/sales made, details of the demat account where the delivery obligation was met etc.,

    viii.           Similar such information relevant to the off market transactions in the scrip of DASL if any, in the period between November 2001 to January 2002

    ix.               Details of entities through whom, AK had traded, if at all, in the scrip of DASL during the said period

    x.                 Details for the period between November 2001 to January 2002 in respect of the entities through whom AK had dealt in the scrip of DASL

    xi.               Details relating to the cheque, the issuing bank, collecting banks and their accounts thereof.

     

    13.            During the course of investigation, it was found that AK had a demat account no.INXXXXXXXXXXXXXXX and 1.50 crore unlisted shares of DASL was transferred by BBL to this account on December 27, 2001 and again transferred back to the account of BBL on January 10, 2002.� Thus, 1.50 crores of unlisted shares of DASL had moved in & out of demat account of AK all within the matter of 14 days.�

     

    14.            Further the total holding of AK in DASL as on December 27, 2005 was 1,50,00,000 shares amounting to more than 13.98% of the total paid up capital of DASL as on that date (both listed and unlisted).� Being unlisted shares, the percentage holding of AK would go up to 15% of the unlisted capital.� In this context, to gather further information in this regard, further trading details and other related information was called for from him by serving the said summons.�

     

    15.            However as stated earlier, AK appeared before me on September 29, 2005 and denied receiving copy of the said summons.� AK further denied any involvement in the said case either as regards having acquired the shares in question or having in the first place opened the said demat account, into which the shares were transferred and stated that he only had a savings account with Syndicate Bank.�� AK contended that although he did not recollect exactly when he joined DASL, it was probably sometime during 2000, that he joined DASL as an Asst. Accounts Clerk and earned a starting salary of around Rs.1800/- per month and his work involved collection/deposit of cheques, making of vouchers, typing etc. He contended that he left this job after around two and half years i.e., around August 2002 at which point of time, his salary was about Rs.2,650/-. AK further stated that during the course of work, he has often signed various documents and at the time of joining DASL had submitted his photographs, which possibly may have been used for the purpose of opening the demat account into which 1.50 crores unlisted shares of DASL were transferred.� The AK contended that after passing his B.Com, he was presently taking his exams for the final semester of MBA and submitted a copy of his driving license as proof of his identity as also a letter dated September 23, 2005 stated to have been sent to me by speed post in which he had requested that he be granted a personal hearing after November 14, 2005.� In the said letter he also provided his address of correspondence.��

     

    16.            I have examined the contentions advanced by AK and the copy of his driving license as also his contentions of not having received the said summons.� In order to examine the factual aspect of the case to the extent possible, given the constraints of lack of any other information available on record; I contacted Arihant Capital Markets Limited (Arihant); the Depository Participant at Indore, with whom the demat account was opened in the name of AK.� Arihant confirmed in this regard that an account number IN XXXXXXXXXXXXXXX was indeed opened with them on December 26, 2001 in the name of AK which was still operational and presently running all debit balance.� They forwarded the copies of the demat statement evidencing the transaction in the said account, the copy of the application made by AK for opening the demat account, copy of the agreement dated December 26, 2001 entered into between the DP (Arihant) and AK for the purpose of opening the demat account, as well as copies of the telephone bill of Suresh Kothari, the uncle of AK and the driving license of AK, submitted as proof of residence and identity respectively.�����

     

    17.            Upon perusal of the said documents, it is observed that corroborating with the findings of the investigation, AK had indeed opened a demat account No INXXXXXXXXXXXXXXXX with Arihant Capital Markets Limited �While observing the movement of the shares debited/credited from/to the demat account of AK, the following details in respect thereof are noted:-

     

    Date

    NAME

    NO.

    CREDIT

    OPENING BALANCE/ DEBIT

    BALANCE

     

     

     

     

     

    �� ���0

    27-Dec-01

    By Inter depository transfer CDS

    1302120000000344

    15,00,00,000

     

    15,00,00,000

    10-Jan-02

    To CDS/1302120000000344

     

     

    15,00,00,000

    0

     

    CLOSING BALANCE

     

     

     

    0

     

     

    18.���� Upon analysis of this demat statement, it is apparent that one and a half crore unlisted shares of DASL had moved in and out of the demat account of AK from/to the account of BBL, all within a matter of 14 days.� It transpires that BBL is the entity found (as per the findings of investigation) to be responsible for offloading the unlisted shares of DASL into the market, with the assistance of various brokers and other entities.

     

    19.���� Thus, there is no dispute of the shares in question having being transferred to the demat account of AK, opened on December 26, 2001 with Arihant. Although AK has denied any knowledge/involvement in the opening of the said account, based on circumstantial evidence on record as well as the documents forwarded by Arihant, it is evident that he could not have been unaware in the entire account opening procedure.� All the documents in question bear his signature.� More relevantly, the said documents mention his bank details i.e., a savings account with Syndicate Bank, which fact was incidentally admitted by him before me during the course of the present proceedings.� There is also on record a copy of the driving license submitted at the time of the opening of the account, as proof of his identity which is identical to that submitted before me.�� Taking these facts into consideration, the argument advanced by AK that his signatures obtained during the course of his daily work and the photographs submitted by him at the time of joining DASL,� were used against him for the opening of the said account appears to be untenable.� Assuming the same for a while, minute details as to his savings bank account and copy of his driving license would not have been readily available with a third party without his prior knowledge.� His signature on the application form or the agreement entered into with the Arihant could not have been obtained merely in the course of his daily work with DASL, without his prior consent/knowledge.� It is not as if AK is illiterate.� On the contrary, he is presently pursuing his masters in business administration and would not have been unaware of the implications of transfixing his signatures on the said documents.�

     

    20.            I have however noted the fact that from the date of the opening of the demat account i.e December 26, 2001 till date, there is no record of any other transaction entered into by AK, other than the one discussed earlier. Moreover the market value of the shares in question� at the relevant time ranged between five to six rupees and even going by the lower side would amount to Rs 45,00,00,000/-. Given that AK had no resources other than his present job, it seems difficult to arrive at a finding that he could have personally transacted in such quantities.� In fact the investigation findings do not show him to be a market participant, active or otherwise Given that he was working as a class IV employee in DASL, perhaps added to his being made a willing accomplice to the management of BBL and DASL, (possibly due to some monetary inducement) in attempting to propagate the fraud of offloading unlisted shares in the market.� In the said process, a one time credit /debit of shares of DASL were made to/from the account of the acquirer.����

    21.���� Be that as it may, I have examined the provisions of Section 11C(3) of the Act which read as under:

    ������� �The Investigating Authority may require any intermediary or any person associated with securities market in any manner to furnish such information to or produce such books, or registers, or other documents, or record before him or any person authorised by it in this behalf as it may consider necessary if the furnishing of such information or the production of such books, or registers or other documents, or record is relevant or necessary for the purposes of its investigation�.

    22.���� Thus every entity connected with an investigation process is under an obligation to provide the information as sought for by the Investigating Authority.

    23.���� From a perusal of the Annexure listing the information sought for from AK by the investigating authority, it is clear that this information was crucial and central to the investigation findings. It is a serious case of excess dematerialized unlisted shares than the authorized capital being traded in the market.

     

    24.���� The details of the deals entered into by AK, the entities with whom AK had transacted would have indicated the extent of his transactions and the relationship if any, with any other entity directly or indirectly involved in these transactions, while the details of the bank statements would certainly have indicated the funding pattern of the transactions entered into by AK.

     

    25. ��� However, AK did not provide any of the said information. Although there is evidence on record that the said summons were acknowledged by him or on his behalf, AK has denied receiving the said summons and has also denied any association with the person stated to have receive the said summons.� Further, AK has also denied receiving the notice of hearing dated September 20, 2005 served upon him by MPSE.� Admittedly, he received the notice dated August 25, 2005 issued in these proceedings from Shri Wayker on September 23, 2005, by which date the AK could not have been unaware of the notice of hearing dated September 20, 2005 affixed on the outer door of the premises where he last resided i.e., where Shri Wayker presently resides.� Further to these facts, is a letter dated September 23, 2005 stated to have been sent to me by speed post on September 24, 2005, which I am yet to receive till date.� Even I were to assume that AK did not receive the said summons, it is apparent that AK is not willing to provide any of the information sought for in relation to the transfer of 1.50 crores of unlisted shares of DASL into his demat account, since AK did not supply the necessary information even during his personal hearing before me. AK could have availed of the opportunity of submitting all the required information and come clean, but he failed to do so.� The behaviour of AK at the time of personal hearing granted to him on September 29, 2005 indicates that he was not willing to reveal any information about the matter in that he feigned complete ignorance of any knowledge of the said shares and the account into which the shares were transferred.

     

    26.���� These facts clubbed together indicate that the visit of the AK to this office on September 29, 2005 was anything but a coincidence.� It is clear that AK was not totally unconnected with the introduction of the unlisted shares of the DASL into the market.� There appears to be sufficient evidence on record to lead to the conclusion that AK was a willing accomplice to the management of BBL and DASL, possibly due to the monetary inducements, in attempting to propagate the fraud of offloading these unlisted shares into the market.

    27.���� Based on these facts and the evidence on record regards the receipt of the summon dated November 28, 2003 by AK, it would appear that the credibility of the AK is suspect to a large extent as also his contentions advanced before me.� Hence, �AK is liable for a penalty under Section 15A of the SEBI Act, 1992 for failure to comply with summons u/s 11C(3) of the SEBI Act, 1992, by failing to furnish the details of information of trades and also to appear in person before the investigating team under Section 11C(5) of the SEBI Act, 1992.� In view of the same, I am of the view that the imposition of a penalty is warranted in the facts of the case.�

     

    28.���� At the time of levying penalty certain factors are also be taken in to account by the adjudicating officer, as is evident from the provisions of Section 15J of the Act which also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 i.e. the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; the amount of loss caused to an investor or group of investors as a result of the default and the repetitive nature of the default.

     

    29.���� These factors mentioned above, are to be relied upon with due discretion that is to be exercised judiciously, depending upon the facts and circumstances of each case as well as after analysing all the relevant material available on record. In the present case, taking into consideration my views as above and in the absence of any reason or record to disbelieve or nullify these findings, although there is a violation of Section 15A of the ��Act, ��there ��is ��no ��material �available on record as to the

     

    disproportionate gain or unfair advantage enjoyed by AK as a result of the default nor is there on record any mention of an undue gain or advantage enjoyed by him. Moreover this is a first time violation, if at all, wherein the shares in question in a one time transaction, were credited/debited into the demat account of the acquirer within a period of fourteen days, apparently to facilitate a fraudulent activity which took place with the knowledge and participation of the AK in the hope of earning some commission in the whole deal. Hence necessary cognizance of the same needs to be taken.�

     

    30.���� In view of the above, the commensurate penalty to be levied in the instant case should therefore be fixed, keeping in mind the nature of violation, the extent to which the violation has affected the interest of the investors in securities and the facts and circumstances of the case as discussed earlier in detail.

     

    PENALTY:

    31.���� Upon a cumulative analysis of the facts of the case, I in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, and in the interest of justice, equity and good conscience I think it is appropriate to levy a penalty of Rs.40,000/-(Rupees Forty Thousand only) on Shri Ashutosh Kothari.

    32.���� The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of �SEBI- Penalties remittable to the Government of India and payable at Mumbai which may be sent to Shri P K Bindlish, General Manager, Securities and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai � 400021.

     

     

     

    ��������� PLACE: MUMBAI�������������������������� G. BABITA RAYUDU

    �� DATE: OCTOBER 3, 2005��������� ADJUDICATING OFFICER


     



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