Order against Shri. Kunaram Chaudhary

Feb 26, 2007

Orders : Orders of AO

ADJUDICATION ORDER NO. BS/AO-4/2007

ORDER UNDER 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 SHRI KUNARAM CHAUDHARY

I was appointed as the Adjudicating Officer vide order dated December 29, 2004 issued by the Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) to inquire into and adjudge under Section 15 I read with Section 15 A and Section 15 HA 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 Shri Kunaram Chaudhary (hereinafter referred to as ‘the noticee’) on account of failure to furnish information to SEBI regarding his dealings in the scrip of Ransi Software Ltd. (hereinafter referred to as RSL). Further, it is alleged that the noticee had violated the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred as FUTP Regulations) in respect of his dealings in the scrip of RSL.
SEBI conducted investigation into the trading in the scrip of RSL, as it was alleged that the promoters of RSL issued preferential shares on consideration other than cash to some entities, allegedly overvaluing these entities. Subsequently these shares which were denied listing for overvaluation were dematerialized and offloaded. In this regard, prima facie it appeared to the Investigating Authority that the noticee being a director of RSL was involved in the said manipulation. In this regard the investigating authority of SEBI issued the summons dated September 17, 2004 requiring the noticee to personally present before the Investigating Authority of SEBI on September 28, 2004. It is alleged that the noticee did not appear before the Investigating Authority as required in the summons.
It is further alleged that the noticee in his capacity as a director of RSL, acted in a fraudulent manner by publishing news items in order to disseminate false information to create interest in the scrip of RSL. Further it is alleged that RSL issued shares on preferential basis to the shareholders / promoters of non genuine companies and the said shares were allegedly traded without listing on the Stock Exchange. In view of the alleged involvement of the noticee in the said activities as a director of the company, the noticee is alleged to have violated provisions of Regulation 3, 5(1) and 6(a) of SEBI FUTP Regulations, 1995, which makes the noticee liable to the penalty under section 15 HA of the SEBI Act.

NOTICE
A notice number A&E/BS/42344/2005 dated June 10, 2005 was issued to the noticee in terms of Rule 4 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the “Rules”) seeking his reply as to why an inquiry should not be held for the violation alleged to have been committed by him.
It is noted that the said notice sent by registered post has been returned undelivered and in view of the same, substituted service of the notice was effected on June 20, 2006.
It is noted that the noticee did not reply to the show cause notice, however considering the facts and circumstances of the case, it was decided to conduct an inquiry in the matter. The noticee was advised to attend the inquiry on December 20, 2006. The said notice sent by registered post was duly received by the noticee and acknowledged. However, the noticee failed to attend the inquiry on the said date.
As the noticee failed to reply to the show cause notice and further as he failed to attend the inquiry, the inquiry is proceeded further on the basis of the evidence available on record.

CONSIDERATION OF EVIDENCE AND FINDINGS
The allegation against the noticee is that he violated Regulations 3, 5(1) and 6(a) of FUTP Regulations. Regulation 3 provides that no person shall buy, sell or otherwise deal in securities in a fraudulent manner. Regulation 5(1) provides that no person shall make any statement or disseminate any information which is misleading in a material particular and is likely to induce the sale or purchase of securities by any other person or is likely to have the effect of increasing or depressing the market price of securities. Further, Regulation 6 (a) states that no person shall in the course of his business, knowingly engage in any act, or practice which would operate as a fraud upon any person in connection with the purchase or sale of, or any other dealing in, any securities.
In this regard It is noted from the facts of the case as evident from the records that on December 4, 2001, RSL issued 5,00,00,000 shares of Rs.10/ each on preferential basis for consideration other than cash to the existing shareholders of Madho Agro Farm Pvt. Ltd. and P C Patel Green Wood Pvt. Ltd. on the terms and conditions for acquisition of 100% equity of the said companies. It is alleged that the said shares were issued on a valuation of Rs.50 crore. However, in the valuation done by an independent auditor, the said companies were valued at Rs. 5 crore. In view of the above, it is alleged that there was gross overvaluation of the said companies for the purpose of issuing shares on preferential basis.
In view of the irregularities such as overvaluation of the said companies for acquisition of which shares were allotted on preferential basis, listing permission for the said preferential issue was not granted by BSE. However, the said shares were allegedly dematerialized and traded in connivance with certain entities. It is further noted that on January 28, 2002 and February 13, 2002, it was reported in newspapers that RSL had bagged an export order of Rs.19.65 crore from a Canada based V Karya and Company. It was also reported that the company was on the verge of another export order from a US based company and further it had initiated negotiations with a company in Singapore for a software development contract worth 12.21 crore. It is alleged that the said information were published to create interest in the scrip and to dupe the investors and as a result of such false statements, large trading had taken place in the scrip of the company.
Further, it is also noted that large quantities of shares (approx.60 lakhs shares) which were allotted to some preferential allottees and related entities were dematerialized by these entities. These entities entered into off market transactions with one Kishore Thakkar who in turn sold the shares in large quantity (approx. 54 lakhs shares) through off market deals during the period.
The sale price of the above shares during the period ranged from Rs.1 to Rs.3.55. As details of sale price for each share are not available on record, considering the fact that the minimum price during the period was Rs. 1, the sale proceeds amount to Rs. 54 Lakhs. It is pertinent to note that the issuance of the shares had been done without receipt of consideration by way of cash. Hence the sale proceeds were undue profit to the sellers at the cost of the small investors who purchased the shares. Hence there was undue enrichment to the sellers and the persons acting in concert with them as a result of this fraudulent activity.
As the noticee did not confront the evidence available on record which show his complicity as the director of the company in the above activities, it is concluded that the noticee violated the provisions of Regulations 3, 5(1) and 6(a) of FUTP Regulations. In this regard it is pertinent to note that the violation of Regulation 3, 5(1) and 6(a) of FUTP Regulations attract the penalty under Section 15 HA of the SEBI Act. It is further noted that Section 15 HA of the SEBI Act was inserted by way of amendment to the SEBI Act on October 29, 2002. As stated before, shares were allotted on preferential basis on December 4, 2001 and newspaper reports about the companies were published on January 28, 2002 and February 13, 2002 to generate interest in the scrip and the shares were subsequently offloaded during the period 27.2.2002 to 16.04.2002. Hence on the basis of the facts of the case available on record, it is seen that the provisions of penalty came into existence subsequent to the violation committed by the noticee. In this regard, the Hon’ble Securities Appellate Tribunal vide order dated 7.2.2005 in Appeal No. 151/2004 in the matter of Rameshchandra Mansukhani Vs SEBI held that only those penalties existing at the time of commission of the violation is applicable in respect of the violation. Taking into account the said decision of the Hon’ble Securities Appellate Tribunal, I am of the opinion that no penalty can be imposed on the noticee under Section 15 HA of the SEBI Act in respect of the violations of Regulations 3, 5(1) and 6(a) of SEBI FUTP Regulations as the penalty came into effect subsequent to the commission of the violation.
The other allegation against the noticee is that he failed to comply with the summons issued by SEBI. It is noted that the investigating authority of SEBI issued summons / letter dated September 17, 2004 requiring the noticee to appear in person before the investigating authority on September 28, 2004. In this regard, Section 11 C (3) empowers the investigating authority to require any person associated with securities market to furnish such information or produce such records as may be required by the authority. Further section 11 C (5) provides that the investigating authority may examine on oath any such person and for that purpose, may require any such person to appear before it personally.
In this regard, it is noted that the noticee failed to appear before the investigating authority. Further the noticee failed to reply to the show cause notice dated June 10, 2005 and also the hearing notices issued on December 8, 2006 in the adjudication proceedings. This shows non cooperative attitude adopted by the noticee. The said non cooperation by the noticee is more serious in view of the fact that he is stated to be the director of the company RSL. In view of the facts and circumstances of the case as stated above, it is concluded that the noticee failed to appear before the investigating authority on September 28, 2004 in response to the summons issued to him on September 17, 2004.
Timely submission of information in the investigation proceedings is very important for conclusion of the proceedings on time which is critical for ensuring confidence of the investors in the securities market. It is noted that by not appearing before the investigating authority and on account of failure to provide necessary information, the noticee violated the provisions of Section 11C of the SEBI Act as mentioned above.
Failure to furnish information to SEBI attracts penalty under Section 15 A (a) of the SEBI Act. In this regard, Section 15 A (a) of the SEBI Act reads as under: Penalty for failure to furnish information, return, etc.: If any person, who is required under this Act or any rules or regulations made thereunder to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less”.
On account of his failure to provide information to SEBI, the noticee is liable to the penalty under Section 15 A (a) of the SEBI Act. In this regard, the provisions of Section 15 J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, the Adjudicating Officer shall have due regard to the following factors namely;

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

c)                  the repetitive nature of the default
As no cause has been shown by the noticee with regard to the charges levelled against him, no mitigating factors are noted.
The noticee failed to appear before the investigating authority or furnish information in response to Summons dated September 17, 2004. It is further noted that the noticee did not respond to the show cause notice and also did not attend the inquiry on December 20, 2006. In view of the above facts though non co-operative attitude is evident from the facts of the case, considering the fact that only one summons was issued to the noticee, it cannot be concluded that the violation committed by the noticee is repetitive in nature.
It is also pertinent to note from the facts of the case that the noticee was the director of RSL during investigation period. For calculating unfair advantage accrued to the noticee or amount of loss caused to the investors, it is pertinent to take into account the following facts as available on record:

a)     On December 4, 2001 RSL issued 5,00,00,000 shares of Rs.10/ each on preferential basis for consideration other than cash to the existing shareholders of Madho Agro Farm Pvt. Ltd. and P C Patel Green Wood Pvt. Ltd. on the terms and condition for acquisition of 100% equity of the said companies.

b)     The shares were issued on a valuation of Rs.50 crore. However it was revealed in the investigation that the said companies had a value of Rs. 5 crore only. As there was gross overvaluation for the purpose of issuing shares on preferential basis, listing permission for the said preferential issue was not granted by BSE.

d)     On January 28, 2002 and February 13, 2002, it was reported in newspapers that RSL has bagged an export order of Rs.19.65 crore from Canada based V Karya and Company. Further, It was also reported that the company was on the verge of another export order from a US based company and it had initiated negotiations with a company in Singapore for a software development contract worth 12.21 crore. The said information was disseminated to create interest in the scrip and to dupe the investors and as a result of such false statements large trading had taken place in the scrip of the company.

e)     It is noted that large quantities of shares (approx.60 lakhs shares) which were allotted to some preferential allottees and related entities were dematerialized by these entities.

f)        These entities entered into off market transactions with one Kishore Thakkar who in turn sold the shares in large quantity (approx. 54 lakhs shares) through off market deals during the period.

g)     The sale price of the above shares during the period ranged from Rs.1 to Rs.3.55. As details of sale price for each share are not available on record, on the basis that minimum price during the period that was Rs. 1, the sale proceeds amount to Rs. 54 Lakhs.

h)      It is pertinent to note that the issuance of the shares had been done without receipt of consideration by way of cash. The receipts from such sale were undue profit to the sellers at the cost of the investors who purchased the shares. Hence there was undue enrichment to the sellers and the persons acting in concert with them as a result of this fraudulent activity.Considering the above factual details, it is felt that the failure on the part of the noticee to furnish information to SEBI has to be viewed in the background of the said facts. The Honourable Securities Appellate Tribunal had occasion to consider a similar factual situation in Appeal No: 114 of 2005 Nokia Finance International Pvt. Ltd. Vs SEBI. In the said appeal, the Honourable Securities Appellate Tribunal had occasion to scrutinize the failure on the part of the appellant who dealt in the excess dematerialized shares, to provide necessary information to the investigating authority of SEBI. In the said matter, while upholding the penalty imposed by the adjudicating officer, the Honourable Tribunal observed that in a serious case of excess dematerialized shares than the authorized capital being traded in the market, the appellant could have availed the opportunity to submit the required information however he failed to do so and the penalty has been imposed in terms of the provisions of law.
In the instant case, as stated before, the noticee failed to provide required information in respect of his dealings in the shares of RSL to the investigating authority. Further the conduct of the noticee in not providing the information to the investigating authority and also not providing any explanation for his failure to provide information has to be taken into account in the light of the facts and circumstances of the case available on record which clearly indicate the manipulative role played by the noticee in cheating the investors. In this regard, it is also pertinent to note that the noticee failed to reply to the show cause notice in the adjudication proceedings and failed to attend the inquiry. The conduct of the noticee indicates his attempts to evade and resist the regulatory queries and compliance of legal provisions.
Viewed in the background of the facts and circumstances of the case as narrated above, the manipulative role played by the noticee in duping the investors pursuant to a conspiracy is evident. In view of the same, the failure to furnish information to the investigating authority has to be viewed seriously especially as the noticee was the director of RSL. As stated before, while offloading the shares, the sale price of the above shares ranged from Rs.1 to Rs.3.55. As details of sale price for each share is not available on record, considering the fact that the minimum price during the period was Rs. 1, the sale proceeds amount to Rs. Fifty Four Lakhs. Hence it is seen that the loss caused to the investors appears to be Rupees Fifty Four Lakhs or more.

ORDER
Considering the facts and circumstances of the case, in terms of the provisions of Section 15 A (a) of the SEBI Act and Rule 5 of the Rules, I, hereby impose a penalty of Rupees Fifty Four lakhs (Rs.54,00,000) on Shri Kunaram Choudhary for the failure on his part to furnish information to the investigating authority of SEBI. Considering the facts and circumstances of the case, this penalty is justified and appropriate as it would also disgorge the unjust enrichment and disproportionate gain accrued to Shri Kunaram Choudhary.
The penalty shall be paid by way of demand draft drawn 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 shall be forwarded to General Manager, Investigation Department (ID-6), Securities and Exchange Board of India, Plot No. C4-A, ‘G’ Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.
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 Shri Kunaram Chaudhary and to Securities and Exchange Board of India.

PLACE: MUMBAI BIJU. S

February 26, 2007 ADJUDICATING OFFICER