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Adjudication order against Rajesh R Shah

May 20, 2005
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Orders : Orders of AO

SECURITIES AND EXCHANGE BOARD OF INDIA

AP/AO- 08/2005 

 

ADJUDICATION ORDER AGAINST SHRI RAJESH R SHAH IN THE MATTER OF ALANG INDUSTRIAL GASES LTD UNDER RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 READ WITH SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992.

 

(I)                INTRODUCTION

 

Pursuant to the investigation into the scrip of Alang Industrial Gases Ltd. (hereinafter referred to as “Alang ”), Securities and Exchange Board of India (SEBI) appointed the undersigned as Adjudicating Officer under Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as said Rules) read with Section 15 I of SEBI Act, 1992 to inquire into and adjudge the alleged practices of Shri Rajesh R Shah (hereinafter referred to as "Shah") which are prohibited under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as said Regulations) for which penalty is imposable under Section 15A (b) of SEBI Act, 1992. The aforesaid appointment was conveyed vide order dated September 20, 2004.  

 

(II)             NOTICE

 

A show cause notice (SCN) dated December 16, 2004 under Rule 4(1) of the said Rules was issued to Shri Shah communicating the detailed charges leveled against him. The SCN was dispatched to Shri Shah by mode of hand delivery, which returned "not accepted".

 

(III)          REPLY

 

Shri Shah refused to accept the show cause notice, and therefore did not file any reply to the SCN.

 

(IV)          THE INQUIRY

 

In view of the above, the undersigned was of the view that an inquiry should be held in the matter and a notice of inquiry was therefore issued to Shri Shah vide letter dated March 28, 2005, fixing the date of inquiry on April 25, 2005. either Shah nor his authorized representative appeared before the undersigned. Shri Shah however faxed a written reply dated April 25, 2005 and requested for adjournment. As requested by Shri Shah the personal hearing was once again fixed for May 16, 2005 at 11.30am. Shri Shah reached to Mittal Court Office of SEBI instead of Bandra Kurla Office where the office of undersigned is situated. Shah was still accommodated and was told to appear before the undersigned at 2.30 pm on the same day. But Shri Shah did not avail the said opportunity. Therefore, the undersigned decided in terms of Rule 4(7) of the said Rules to proceed with the inquiry, as it appeared that Shri Shah deliberately failed to appear for the inquiry despite service of notice of inquiry.

 

(V)             BACKGROUND

 

(i) The Clearing & Settlement Department of the Stock Exchange, Mumbai suspected that the trades entered on March 16, 2001 in the scrip of Alang were not genuine and might be in the nature of financing transactions. The scrip was not frequently traded on the Exchange. It was observed that a few ultimate clients had common addresses. On 16th March 2001, the member Century Consultants LTd. had bought the entire quantity traded in the market which had been sold predominantly by 4 members viz Bang Equity Broking Pvt. Ltd., Sovereign Securities Pvt. Ltd., Kaushik Shah Securities, Shri Kirtikumar Fulchand Vora. The sale proceeds of the scrip for the members having sale position in the scrip were withheld for settlement no. 51. It was proposed by the exchange that if the transactions were found covered within the ambit of funding/financing and thereby considered as fictitious transactions, the same may be annulled as per the provisions of the Exchange. BSE forwarded the investigation report to SEBI vide letters dated 22.4.2002 and 5.9.2002 for conducting further investigation with regard to the linkages between the buying and selling clients.

 

(ii) From the price volume statement of the scrip for the period January 1, 2001 to March 31, 2001 it was observed that the scrip was infrequently traded on the Exchange. In settlement no. 51 (12/3/01 to 16/3/01) the scrip was traded only on 16th March 2001 and there was no trading in the scrip on other days of the settlement.

 

(iii)            Mr. Dilip Sheth transferred 400000 shares and 45000 physical shares in February 2001. Out of these, 300000 shares were transferred to Shri Rajesh Shah and 100000 shares were transferred to Mr. Falgun Shah. 45000 physical shares were got dematerialized. The shares were sold by Mr. Dilip Sheth because he was in need of money. There was no written agreement although Shri Rajesh Shah contended that this verbal agreement was for arising finance rather than sale of shares but no payment was made. It was observed that the statement of Shah was a false statement contrary to the evidence available in the form of the bank accounts of Mr Sheth, Shah and his wife, Mrs. Swati Shah, which indicated part payment by Shah to Mr. Dilip Sheth.

 

(iv)            From the demat account of Shah it was observed that 3,00,000 shares were transferred to the demat account of Mr. Anil K Shah and Mr. Chetan P Shah on March 16, 2001 (the partners in Shree Ganesh Enterprises). It is alleged that the quantity of the shares held by Rajesh Shah was in excess of 5% of the total capital of the company and which mandated him to disclose the same to the company in terms of Regulation 7 (1) of said Regulations.

 

(VI)          REPLY

 

Shri Shah filed a written reply to the personal hearing notice dated March 28, 2005 vide a letter dated April 25, 2005 as under :

 

1. With reference to the show cause notice dated December 16, he denied that such notice was never served on him and he came to know about it through the personal hearing notice. Shri Shah further stated that he never refused to accept or denied to accept any notice till date. He submitted that he had personally appeared and gave his explanation on January 20, 2004, March 17, 2004, March 25, 2004 and April 1, 2004. Shri Shah further confirmed that he had given in writing the detailed explanation in respect of alleged transactions.

 

2.      Shri Shah stated in connection with the 2nd notice of personal hearing that it was received by him on 20th April, 2005 and he felt the time given for appearance with the documents was only five days. Shri Shah on medical ground requested for adjournment for the period of 15 days to enable him to produce all the necessary documents and desired to furnish the medical certificate for the same.

 

3.      Shri Shah in his reply stated that with reference to the show cause notice dated December 16, 2004 he has already submitted his explanation before the Investigating Authority.

 

4.      Shri Shah also submitted that Mr. Dilip Sheth had transferred those shares in his account for raising finance and he had not purchased or acquired those shares from the market or any one and therefore it was not necessary for him to disclose the acquisition of shares he was holding as required under Regulation 7 (1) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and therefore he is in the opinion that he do not attract any adjudication proceedings.

 

5.      Shri Shah submitted that Mr Dilip Sheth is the promoter of Alang Industrial Gases Ltd and therefore it was his duty to inform the necessary authorities about the acquisition of shares and not of his therefore he could not be held responsible for neglecting of Mr. Dilip Sheth's duties. He further submitted that the said shares were returned back to Shri Dilip Sheth by him and he is not responsible for alleged acts.

 

(VII)       FINDINGS

 

1. It is observed that Shri Dilip Sheth transferred 300000 shares of Alang to Shri Rajesh Shah in February 2001. Consequently, Shri Shah was required to make disclosure of the said acquisition to the company in compliance of Regulation 7 (1) of the said Regulation. The said Regulation inter-alia provides as under:

 

“(1) Any acquirer, who acquirer shares or voting rights which (taken together with shares or voting rights, if any, held by him) would entitle him to more than five per cent shares or voting rights in a company, in any manner whatsoever shall disclose the aggregate of his shareholding or voting rights in that company, to the company”.

 

  1. It is further observed that the quantity of shares was in excess of 5% of the total capital of the company consisting of 54,00,470 shares. The percentage of acquisition by Shri Rajesh Shah in this case has been to the extent of 5.56%. Therefore it was just a matter of 0.56% of acquisition of excess shares which triggered the requirement of disclosure under Regulation 7(1) of the said Regulations.

 

  1. It is a finding in the investigation report made available to me that the said number of shares were held by Shri Rajesh Shah during February 2001 to March 16, 2001. Since the date of February is not exactly mentioned, in the interest of justice, I take it as February 28, 2001 that is the last day of February in 2001. It therefore means that Shri Shah held the shares only for a period of 16 days before transferring them to demat accounts of Shri Anil K Shah and Shri Chetan P Shah on March 16, 2001.

 

  1. In terms of Regulation 7 (2) of the said Regulations, the disclosure required under Regulation 7 (1) of the said Regulations, was to be made within four working days of the acquisition of shares or voting rights as the case may be. It therefore means that Shri Shah delayed the disclosure (which he never made in real sense) in a strict sense by 12 days. Of course, the violation of Regulation 7 (1) of the said Regulation gets proved in respect of Shri Rajesh Shah.

 

  1.  Now the question here to be answered is whether the said failure per se is punishable. The said position is answered by SAT in appeal nos. 27-31 of 2002, based on the Hon’ble Supreme Court Judgment in Hindustan Steel Ltd. v State of Orissa, AIR 1970 SC 253, as under:

 

“An Order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation, is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statue."

 

  1. In terms of the above it will not be possible to rely on the notion that failure per se is punishable. In the present case, Shri Rajesh Shah has just exceeded 0.56% of the shares over and above 5%, which required him to make disclosure to the company under Regulation 7 (1) of said Regulations. In the circumstances, I find it inappropriate to take a serious view of the same. It is also the fact that Shri Shah held those shares for just 12days and disposed off later. From the records made available to me, I do not find any material which can satisfy the factors under Section 15 (J) of SEBI Act, 1992 for the purpose of adjudging and imposing the adjudication penalty under Section 15A (b) in respect of Shri Rajesh Shah. This is precisely because the violation here is of a technical in nature and in view of the judgment of the Supreme Court as cited above, I am justified in not imposing the penalty in the matter.

 

(VIII) ORDER

 

I therefore do not impose any penalty on Shri Rajesh R Shah for the reasons discussed above.

 

AMIT PRADHAN

ADJUDICATING OFFICER

 

 

DATE: MAY 20, 2005  

PLACE: MUMBAI