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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 15HB OF THE SEBI ACT, 1992

     

    AGAINST

    �SHRI SUDHIR MEHTA��

    BACKGROUND:

    1.                 The Securities and Exchange Board of India (for brevity�s sake, hereinafter referred to as SEBI) had initiated an investigation into the unnatural rise in the price as well as volume of the equity shares of K Sera Sera Productions Limited (previously known as Garnet Paper Mills Limited and for brevity�s sake, hereinafter referred to as the KSS) alleged to have been contributed by certain entities that had traded in the said scrip, as also the possible violation of the provisions of the SEBI Act, 1992 and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market) Regulations, 1995 (hereinafter referred to as the Act and the FUTP Regulations respectively).� The findings of investigation inter-alia alleged that these entities had dealt/traded in the said scrip based on the advise of Sudhir Mehta (for brevity�s sake hereinafter referred to as SM), which advice was not based on any prudent commercial sense. Incidentally Sudhir Mehta was the brother of the late Harshad Mehta, a well known broker.� Subsequently several other individuals had traded in the scrip of KSS, based on the advice rendered by the entities advised by SM.

    1. In view of the same, the investigating authority issued summons under Sections 11C(3) and 11C(5) of the Act upon SM on specified dates with an advise to appear in person before the competent authority on scheduled dates and as mentioned in the summons, to produce details of the trades entered into in the scrip of KSS on the exchange or through the off market route along with documents that SM intended to rely upon in his defense or any other documents relevant to the proceedings initiated by SEBI in this regard. It was further made clear to SM that in case he failed to appear on the scheduled dates before the investigating authority; necessary action would be initiated against him under the relevant provisions of the Act and the relevant provisions of the Regulations framed there under. It appears that although SM acknowledged these summons, he did not reply to the same but subsequently asked for an adjournment citing frivolous grounds.

     

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

     

    1. In view thereof, adjudicating proceedings were initiated against SM and in that context, I was appointed as the Adjudicating Officer vide the order of SEBI dated July 14, 2005 to inquire into and adjudicate the violations alleged to have been committed by SM. Thereafter, I issued a notice dated October 24, 2005 to SM with an advice to show cause as to why adjudication proceedings should not be initiated against him and why penalty should not be imposed upon them under Sections 15HA and 15HB of the Act.� SM was also 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.

     

    1. As SM did not reply to the said notice even after the expiry of the period stipulated in the notice, I sent a notice of hearing dated January 13, 2006 to SM to appear before me on January 30, 2006 and to indicate his confirmation of attendance. Further a letter dated January 25, 2006 was sent to SM advising him to confirm his attendance by January 27, 2006. However neither SM nor his representative appeared on the scheduled date nor sent any letter before the scheduled date seeking an adjournment. Subsequently however, vide his letter dated January 30, 2006, SM requested that as he was going out of town, two weeks time be granted to him for collecting the required information and to appear in person. Accordingly another notice dated February 01, 2006 was sent to SM advising him to participate in the hearing proceedings before me and make his submissions if any, on February 13, 2006. Once again although SM acknowledged the notice, he did not either appear for the said proceedings or reply to the said notice.

    CONSIDERATION OF EVIDENCE AND FINDINGS

    1. As there has been adequate service of notice on SM and sicne despite the same SM has failed to participate in the present proceedings, the case is proceeded with based on the material available on record including the findings in the investigation report, as also the relevant regulatory provisions. While taking into account the issues highlighted in the investigation report as against SM, I consider it necessary to recapitulate certain facts in brief, relevant to the present proceedings.

     

    1. �Trading in the shares of KSS, then known as Garnet Paper Mills which were listed at the Stock Exchange, Mumbai (BSE), the Delhi Stock Exchange (MPSE) and the Ahmedabad Stock Exchange (ASE) was suspended at the BSE since January 7, 2002 for non-payment of listing fees. The suspension was revoked with effect from June 25, 2002 and the scrip was put in the �Z� group on trade to trade basis till December 01, 2002 due to the non arrangement with the depositories.

     

    7.                 A sudden spurt in the price of the shares of KSS was noted during the period October 10, 2002 to October 25, 2002. There was a rise in the price as well as volume of the shares during the period October 28, 2002 to November 22, 2002. The price of the scrip increased from Rs 8/- on October 10, 2002 to Rs 19.60 on October 25, 2002 and Rs 20.55 on October 28, 2002 to Rs 26.45 on November 22, 2002. The price was between Rs 30/- to Rs 40/- during the month of December 2002 and rose to about Rs 40/- to Rs 46/- during the month of January 2003 and has been rising slowly till date. Currently its price is around Rs 150/-.

     

    8.������ An analysis of the details of trade of the various brokers and clients who had traded heavily in the scrip as also the details of the trades from other exchanges namely DSE and ASE where the scrip is listed was carried out, whereafter it was inter alia noted that a set of clients, possibly related to each other and to the company, had traded amongst themselves and that the price rise in the said scrip in the initial period was mainly on account of circular trades between three clients namely; Pratham Finance and Leasing Limited, (Director Mukesh Vora) Ritesh Jaywant Shah and Dhananjay Kumar. Pratham Finance and Leasing Limited, dealing through Magnum Equity Broking was connected to Mukesh Vora, dealing through Sunidhi Consultancy. Jaywant Shah, father of Ritesh Jaywant Shah upon being questioned by the investigating officials, affirmed that he had traded in the scrip of KSS during the period of low volumes, merely on the basis of advice of SM. He further stated that� in lieu of the money that SM owed him, SM had given almost 50,000 shares of KSS to him from time to time during the period October 2002 to December 2002. Mukesh Vora stated that out of the 2600 shares of KSS purchased by him, 1100 shares of KSS had been purchased on the basis of the advise given by SM, of which all but 100 had been sold. However neither Jaywant Shah nor Mukesh Vora were able to substantiate their statements with sufficient evidence.

     

    9.                 In order to determine the veracity of the facts brought to light during the course of the investigation, summons under Sections 11C(3) and 11C(6) of the Act were sent to SM, which he did not comply.

     

    10.���� The details of the summons sent to SM along with the information sought for from him is as under:

     

    Sl. No.

    Date of Summons

    Information sought there under

    To reply by/ to appear on

    1.

    October 29, 2004

    To appear in person and to furnish details of trades done by him in the scrip of KSS during the period from October 10, 2002 to June 30, 2003. (on the exchange or off market trades) and other documents intended to be relied upon.

    November 24, 2004

    2.

    November 25, 2004

    To appear in person and to furnish details of trades done by him in the scrip of KSS during the period from October 10, 2002 to June 30, 2003 (on the exchange or off market trades) and other documents intended to be relied upon.

    November 29, 2004

     

     

    11.            As is apparent from the contents of the table given above, summons were issued to SM by the investigating authority to appear personally before the investigation authority and furnish the detailed information as sought for. This information if provided by SM could have highlighted many aspects of the investigation especially the veracity of the statements made by entities discussed earlier and enabled the investigating authorities to arrive at a logical and early conclusion in the investigating proceedings. Furthermore extra light could have been thrown on other issues viz; the relationship, if any of SM with KSS, the details of the shares of KSS held by him, manner of having obtained the shares in the first place, subsequent purchases/ sales made by him in the said scrip, if any through the market and by way of off market transactions and in case of market transactions; the name and address of the intermediary through whom he had bought or sold and in case of off-market transactions, the complete details of the transaction including identity of the counter party to the transaction, rate, quantity bought/ sold etc. The copy of the demat statement of SM if produced could have revealed details of the transfers mad to other parties in the electronic mode (off market sale) if any, and indicated the distinctive numbers of the shares of KSS bought or sold by him in the physical form, in case of sale made by him to the other parties through market/ off market transactions, and provided the details of payments received along with copy of his bank statement depicting the relevant entry showing the deposit of cheque received, if at all. However as SM failed to cooperate with the investigating team, reliance had to be placed upon the information provided by other entities questioned by the investigating authorities, without the benefit of the same being cross checked with SM.�

     

    12.            I have noted that on being summoned on two occasions under Sections 11C(3) and 11C(5) of the Act, SM did not comply with the said summons for one reason or another and in fact, tried to procrastinate the proceedings by seeking an adjournment, well after the expiry of the scheduled date of personal appearance and submission of information.

     

    13.            �In this context, I have examined the provisions of Section 11C(3) of the Act which reads 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�.

    14.            �Further 11C(5) of the Act reads as under:

    �Any person, directed to make an investigation under sub-section (1), may examine on oath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of his business and may administer an oath accordingly and for that purpose may require any of those persons to appear before it personally�.

    15.Thus every entity connected with an investigation process is under an obligation to appear and provide on oath the information as sought for by the Investigating Authority. The decision to call for such information and the judgment as to its relevancy is completely the discretion of the investigating authority and is in furtherance of the discharge of its official duties. It is not for the noticee to question the relevance of the information sought for.� The noticee under the summons is only obliged legally or morally, to cooperate with the Investigating Authority and furnish the required information.

     

    16.��� Although there is evidence on record that the said summons were acknowledged by SM, he failed to comply with the summons and thereby tried to thwart the attempts of SEBI to effectively gather vital evidence for the timely conclusion of the investigation proceedings. Taking into account the sensitivity of the securities market, an early conclusion of investigation is a very important objective. From the manner in which SM failed to appear before SEBI or even participate in the adjudication proceedings and in the absence of any adequate explanation from him as regards his non-appearance before the investigating authority on the scheduled dates, or even me before me, it can be reasonably concluded that SM was consistently tried to evade the summons process and that his default in co-operating with the investigation proceedings, is willful and that he was intent on disobeying the summons. SM has thus failed to comply with a regulatory directive, to appear in person or produce the documents when called for.

     

    17.            Any evasion of the regulatory provisions of the regulator issued in the interests of the investors or non-adherence to the same for any reason whatsoever is bound to affect the interests of such investors as also the sound and smooth functioning of the capital market. If no cognizance were to be taken of the same, and no liability fixed there upon, the entire purpose of incorporating the provisions in the said enactments would become redundant.

     

    18.� I have noted that the provisions of Sections 15HA and 15HB of the Act have been invoked against SM for the contravention of the provisions of Section 11C (3) and 11C (5) of the Act.

     

    19.� Section 15HA of the Act provides that if any person indulging in a fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of Rs. 25 crore or 3 times the amount of profit made out of such practices which ever is higher.

     

    20.� Section 15HB of the Act provides that whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder, for which no separate penalty has been provided shall be liable to a penalty which may extend to Rs.1 crore.

     

    21.� On a cumulative analysis of the facts and circumstances of the case, it is clear that SM has contravened the provisions of Sections 11C(3) and 11C(5) of the Act, by failing to furnish the information as sought for and appear in person before the investigating team. Such an act on the part of SM suggests blatant and deliberate non-cooperation, clearly warranting penal action. However, the facts on record do not make out a case of SM indulging in a fraudulent or unfair trade practice or rather, there is no evidence on record to suggest or arrive at such a finding. In view thereof, SM cannot be held guilty of violating the provisions of Section 15HA of the Act.� However, I am of the considered opinion that SM would be liable to a penalty in terms of the provisions of� Section 15HB of the Act for the blatant contravention of provisions of Sections 11C(3) and 11C(5) of the Act in that �he has failed to comply with a regulatory directive.��

     

    22.� At the time of levying the penalty, certain factors are required to be taken into 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 Inquiry and Imposing Penalties 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.

     

    23.���� 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�� no�� material available on record as to the extent of the disproportionate gain or unfair advantage enjoyed by SM as a result of the default nor is there on record any mention of the extent of undue gain or advantage enjoyed by them, there can be no two opinions on the fact that the default on the apart of SM would have certainly caused a certain amount of disadvantage to the shareholders of KSS and the investor class as a whole considering that any delay in obtaining information relevant to the investigating proceedings especially in cases of rise in price and volume, as in the present case, would have thwarted the efforts of the investigating team to arrive at an early conclusion of investigation which in such cases is a very important objective. Moreover this is a case involving a deliberate and blatant disregard of a regulatory directive by the entity consistently.

     

    PENALTY:

    24.            Bearing in mind these facts, upon a judicious exercise of the powers conferred upon me and on analyzing the material available on record as also the refusal of this entity to respond to regulatory directives,� I am inclined to hold that although the penalty need not be imposed in terms of the quantum specified in Section 15HB of the Act, the imposition of penalty is very much warranted and hence in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by the Adjudicating Officer) Rules, 1995, in the interest of justice, equity and good conscience, I think that it would be appropriate to impose a penalty of Rs. 1,00,000 (One lakh only) on Sudhir Mehta.

    25.���� 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 M.S Ray Chief General Manager, Securities and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai � 400021.

     

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

    �� DATE� : FEBRAURY 16, 2006�� ���� ADJUDICATING OFFICER




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