SECURITIES AND EXCHANGE BOARD OF INDIA

01.          Securities and Exchange Board of India (SEBI) conducted investigation into the dematerialization of shares of Accurate Exports Ltd., (hereinafter referred to as “AEL”), which were 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 Sec. 15 I of SEBI Act, 1992 to inquire into and adjudge the failure of Coverage and Consultants Ltd (CCL) to comply with the summons issued by SEBI in violation of Section 11C (6) for which penalty may be imposed under Section 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 Rule 4(1) of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (Adjudication Rules hereinafter) to CCL 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.          The SCN, dispatched through Registered post with Acknowledgement due, returned undelivered with the comments “refused”. It is inferred from the aforesaid that CCL deliberately refused to accept the SCN.

05.          Under the aforesaid circumstances, the undersigned was of the opinion that an inquiry should be held in the matter. Accordingly, a notice dated June 06, 2005 was issued to CCL, fixing June 24, 2005 as the date for inquiry. As per the information available in the web site of Ministry of Company Affairs, CCL is registered with the Registrar of Companies, Madhya Pradesh (M.P.). To ensure service of the notice, it was despatched to the Executive Director of M.P. Stock Exchange (MPSE), requesting them to arrange the service the notice on CCL in terms of Rule 7 of the Adjudication Rules. Vide its letter dated June 14, 2005, MPSE furnished the acknowledgement of serving of notice on CCL, with signature of CCL’s director and seal of CCL. Despite service of notice no representative of CCL appeared before me on the date fixed for inquiry. In the opinion of the undersigned, CCL deliberately failed to appear for the inquiry and therefore I proceed ahead with the inquiry ex-parte, in terms of Rule 4(7) of the Adjudication Rules.

06.          From the material on record it is seen that SEBI launched investigation into various aspect of AEL, including the alleged dematerialization of AEL’s shares in excess of its paid-up capital and the subsequent trading in the secondary markets. I find that the Investigation Department issued summons dated March 08, 2004 to CCL asking its representative to appear before the Investigating Officer on March 19, 2004. The summons also required CCL to furnish information and documents pertaining to queries in the annexure, as detailed below:

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

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

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

d)      Details of Off market trades done by CCL 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.          Even from a cursory look it is found that the information and documents sought by SEBI, vide the aforesaid summons, are very basic and crucial to its investigation of AEL. However, from the material available on record there is nothing to suggest that CCL complied with the summons. In fact, as per the investigation report, few reminders to the summons have also been sent to CCL, but without any avail. Besides, as already mentioned, CCL also refused to accept the SCN issued by the undersigned and also failed to appear before me for the inquiry. Therefore, from the aforesaid, I am left with no other option but to pronounce that CCL has not furnished the information and the documents in compliance of a statutory summons issued by the SEBI for which penalty is imposable under Sec. 15A (a) of SEBI Act 1992. However, the terms of reference of my appointment also mentions Sec. 11C (6) of SEBI Act, 1992, which is applicable for prosecuting entities in criminal courts.

08.          It is found from the investigation report that whereas the authorized capital of AEL was just 21,000,000 shares, the aggregate of AEL shares held by CCL in its demat account was 48,272,751 shares. Issuing shares in excess of paid-up capital of a company, is as good as printing currency; the latter being a cognizable offence. From the material on record, it is self evident that CCL is part of a much bigger fraud on the securities market and should not be seen as an isolated instance of not responding to summons.

09.          However, 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.

10.          From the material on record, it is seen that 130,910,650 shares of AEL were issued in excess of AEL’s paid-up capital. Further, it is also seen that CCL traded large volumes in the scrip of AEL during the period of investigation - bought and sold 8,881,050 and 9,372,965 shares respectively. It is seen that CCL traded through members Equisearch Broking (P) Ltd. and Active Finstock (P) Ltd.

11.          Further, from the letter dated March 03, 2004, by CCL to member Nokia Finance International (P) Ltd. (NFI), it is seen that CCL transferred 48,272,451 shares of AEL to NFI’s demat account (10010658) from various demat accounts, to enable NFI to sell these shares on behalf of CCL. The said letter also mentions about CCL’s request to NFI to return the 672,451 unsold shares of AEL to the demat account of CCL. The letter also acknowledges that NFI returned 47,600,000 share of AEL to CCL, at the instance of the latter, to various demat accounts. As already mentioned, the authorized capital of AEL is just 21,000,000 shares, whereas CCL transferred 48,272,451 shares to NFI and received back 47,600,000 unsold shares. In other words, CCL transferred to NFI, 2.72 crore shares in excess of AEL’s capital (or 2.3 times AEL’s capital). And NFI returned to CCL 2.1 crore shares in excess of AEL’s capital (or 2 times AEL’s capital). Clearly, it is self evident that CCL is not an ‘innocent’ by stander who merely happened to have traded in the scrip of AEL in the said period. CCL is very much part of the fraud on the securities markets.

12.          From the aforesaid discussion the amount of disproportionate gain by CCL can be computed. It is undisputed that CCL was holding 2.72 crores more shares in excess of authorized capital of AEL. No reason or explanation is given by CCL as to the source of these unauthorized shares. This makes the case more serious since it was the ultimate information for Investigating Authority to uncover the culprits who perpetuated this fraud. It is the finding of investigation that during the investigation period price of AEL scrip 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 CCL can be roughly calculated to RS. 27 lacs. This, according to me can be construed as undue and disproportionate gain, in terms of Section 15 J(a) of SEBI Act, 1992, to CCL in the whole process. Had CCL co-operated with the Investigation Authority, during the investigation, the other culprits who introduced excess demat shares of AEL in the market, could have also been brought to book. All the information sought by SEBI was crucial and important for completing the investigation process in a timely and effective manner. The non-cooperative attitude of CCL has protracted and hampered the investigations and probe by the regulator into the multi crore fraud. I further find the non-cooperative behavior of CCL as repetitive, in terms of Section 15 J(c) of SEBI Act, 1992 as it not only failed to comply with statutory summons, issued by the investigating authority, but it also failed to respond to the notices issued in this adjudication proceedings.

13.          The penalty which can be imposed under Section 15A(a), with effect from October 29, 2002, is one lakh rupees for each day of failure or one crore rupees, which ever is less. It is a well-settled position of law that when there is a requirement to comply with a statutory requirement within a specified time limit, non- compliance will not be treated as delay. In this instance, the non- compliance occurred on March 19, 2004, when CCL did not respond to SEBI’s summons. In other words, CCL has not complied with SEBI’s summons till date and this is not an instance of delay in compliance, and rather it is a complete failure to do so on the part of CCL. Therefore, theoretically it is possible to impose penalty of Rs. One crore on CCL, under Section 15A(a) of SEBI Act, 1992, but in the facts and circumstances of the case, I find it fit and appropriate to impose a penalty of Rs. 27 Lacs on CCL which will disgorge CCL from unjust enrichment.

14.          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. 27,00,000 (Twenty Seven lakhs only) under Section 15A (a) of the SEBI Act, 1992, on Coverage and Consultants 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.

15.          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: JUNE 28, 2005                                                             AMIT PRADHAN

PLACE: MUMBAI                                                                                                       ADJUDICATING OFFICER