ADJUDICATION ORDER NO. - BS/AO-29/2007
ORDER UNDER SECTION 15I OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST INDIABULLS SECURITIES LTD.
- Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) vide order dated May 25, 2006 initiated adjudication proceedings against Indiabulls Securities Ltd., (hereinafter referred to as “the noticee”). The undersigned was appointed as the Adjudicating Officer to inquire into and adjudge under Section 15I read with Sections 15HA of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the violations alleged to have been committed by the noticee in respect of its dealings in the initial public offerings of some companies.
FACTS OF THE CASE
- SEBI conducted investigation into the affairs relating to buying, selling or dealing in the shares through initial public offerings (IPOs) during the period 2003 – 2005 by the following companies:
1. Amar Remedies Ltd.
2. Datamatics Technologies Ltd.
3. Dishman Pharma & Chemicals Ltd.
4. FCS Software Solutions Ltd.
5. Gateway Dispriparks Ltd.
6. Gokaldas Export
7. ILFS Investmart
8. Indraprasth Gas
9. Infrastructure Development Finance Co. Ltd.
10. Jet Airways (India) Ltd.
11. Nandam Exim Ltd.
12. National Thermal Power Corporation Ltd.
13. Nectar Lifesciences Ltd.
14. Patni Computer Systems Ltd.
15. Sasken Communication Technologies Ltd.
16. Shoppers Stop Ltd.
17. SPL Industries Ltd.
18. Suzlon Energy Ltd.
19. T.V. Today Network Ltd.
20. Tata Consultancy Services Ltd.
21. Yes Bank Ltd.
- It was observed that many entities cornered / acquired the shares in the various IPOs by the above companies during the period 2003 – 2005 by making fictitious applications in the category reserved for retail investors through the medium of thousands of fictitious / benami applicants for the IPOs. It is alleged that the said entities (hereinafter referred to as the ‘Key Operators’) had opened many demat accounts in fictitious and benami names and made large number of applications in the IPOs in the category of retail investors in fictitious and benami names.
- On allotment of shares in the category of retail investors in the IPOs, the said shares were transferred to the demat accounts of these key operators. It is alleged that these key operators subsequently transferred the shares through off market deals to ultimate beneficiaries (hereinafter referred to as the ‘financiers’) who appeared to be the financiers in the process. In this regard, it is alleged that the said practice was adopted to corner the quota for retail investors in the IPOs of the companies.
- It is alleged that the noticee acted as Key Operator in the manner as stated above and opened large number of fictitious / benami accounts (hereinafter referred to as afferent accounts). It was noted that in the IPO of Tata Consultancy Services Ltd., 13939 shares were received from 559 accounts to the noticee’s account (Client ID No. 10131283). The said actions of the noticee is alleged to be in violation of Section 12A of SEBI Act and Regulations 3, 4 and 6 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and Regulation 3 and 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.
NOTICE AND REPLY
- A Show Cause Notice (hereinafter referred to as ‘SCN’) A&E/BS/68771/2006 dated June 7, 2006 was issued to the noticee in terms of the provisions of Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing penalties by Adjudicating Officers) Rules, 1995 (hereinafter referred to as the Rules), requiring the noticee to show cause as to why an inquiry should not be held for the violations alleged to have been committed by it. The noticee replied to the SCN vide letter dated June 23, 2006. Considering the reply of the noticee, it was granted an opportunity of hearing on December 15, 2006. Shri Gagan Banga, authorised representative of the noticee attended the hearing on December 15, 2006 and made submissions.
CONSIDERATION OF EVIDENCE AND FINDINGS
- It is noted from the submissions of the noticee with regard to the allegation of the noticee being a “Key Operator” as it received credit of TCS shares from a multitude of afferent accounts upto one day after listing of TCS shares on 26th August, 2004, the noticee received 13939 TCS shares from its 559 regular trading clients based out of 81 different cities in its client margin account. The said account was maintained by the broker as per the SEBI requirements of collecting margins from clients before allowing clients to trade.
- The noticee has drawn attention to the fact that the 559 account holders who transferred the 13939 TCS shares to the noticee, transferred the shares in the client margin account of the noticee (Account No.10131283) for their trading purposes towards meeting their margin requirements as per the Stock Exchange rules and regulations.
- It is noted that pursuant to the SEBI order dated April 28, 2006, SEBI had advised NSDL to conduct an inspection (including physical verification) of 559 demat accounts maintained with the noticee. NSDL, vide report dated May 03, 2006 inter alia informed that out of 211 clients, 163 clients personally represented before it and in the case of joint holders, all the joint holders represented themselves. It was inter alia reported by NSDL that out of the sample of clients selected for verification, barring few clients, majority of the clients had appeared before the inspecting team of NSDL and submitted documents related to the Proof of Identity (POI) and Proof of Address (POA). In addition, it was also reported by NSDL that they had carried out verification of KYC documentation of all the 559 clients. The NSDL report based on the findings of its verification did not point out any serious observations to raise doubts about the genuineness of the clients.
- It is further noted that an inspection was also carried out by a team of officials of SEBI, BSE and NSE. In the said inspection report, it is found that, out of the 559 clients who had transferred TCS shares to the noticee, 459 clients were holding demat account with the noticee and the remaining clients had beneficiary accounts with other depository participants. The analysis of the said 459 demat accounts revealed that those accounts were opened by the clients on various dates in the year 2000 to 2004. It was also found out during the inspection that the noticee had obtained the copies of proof of address and proof of identity from all clients in compliance of Know Your Clients (KYC) requirements. The analysis of the client database in respect of 100 demat accounts revealed that they were located in different parts of the country. The Inspecting team had also identified a sample of 20 clients who were based in & around Delhi, from a total of 559 clients on a random basis for verifying the genuineness of the clients. In all cases except one case (wherein the beneficial owner was out of station and his identity was confirmed by his relatives), the clients were available and produced the necessary identity documents. The analysis of clients ledger suggested that the clients in general have a normal trading pattern and have appeared to have traded in the secondary market for varying period during the year. Client ledgers also did not reflect that the clients had traded only in TCS IPO.
- The securities of clients were kept in a separate beneficiary account opened in the name of the noticee (BO ID: 10131283). This account was internally referred to as the “Client margin account”. The clients were encouraged to keep their securities in Client margin account for increasing their trading limits. The reasons given by the noticee for transfer of the 13939 shares of TCS by the 559 clients to the Client margin account is that these shares were transferred by the respective clients towards margin requirements. On the basis of the verification of the records and the submissions made by the noticee, it appears that the said 13,939 shares of TCS were transferred by 559 entities to the Client Margin Account of the noticee towards margin for enhancing their trading limits or for selling.
- The said factual conclusion have also been arrived in the order WTM/GA/105/IVD/11/06 dated November 28, 2006 passed by Whole Time Member, SEBI. In view of the facts as stated above, it can not be held that the noticee acted as Key Operator in violation of Section 12A of SEBI Act and Regulations 3, 4 and 6 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and Regulation 3 and 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and accordingly the present adjudication proceedings against the noticee is disposed of.
- In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 copies of this order are sent to Indiabulls Securities Ltd. and to Securities and Exchange Board of India.
Place: Mumbai Biju. S
Date: December 5, 2007 Adjudicating Officer
