In the matter of IPO Investigations - Ajay Kumar Gupta

ORDER

(UNDER SECTIONS 11 AND 11B OF SEBI ACT, 1992)

1.1 By an ad interim ex-parte order dated April 27, 2006 (hereinafter referred to as the ‘order’) under section 19 read with sections 11, 11b and 11(4) of the Securities and Exchange Board of India Act, 1992 and section 19 of the Depositories Act, 1996 pending enquiry and passing final Order, certain interim directions were issued against various market participants including Shri Ajay Kumar Gupta (AKG).

1.2 During the investigations conducted by SEBI, it was prima facie observed that AKG was financier of Indiabulls Securities Ltd. (hereinafter referred to as ‘IBSL’) in the IPO of Tata Consultancy Services Ltd (hereinafter referred to as ‘TCS’) based upon certain parameters in investigation relating to off-market transactions. There was a transfer of 13939 shares from as many as 559 demat accounts to the account of IBSL with client ID 10131283.

1.3 In the case of AKG, it was observed that 17 shares were transferred from the account of IBSL to AKG with client ID 10069837 on August 26, 2004. It was further observed that AKG had sold these 17 Shares and made a profit Rs. 2345.15/-

1.4 In view of the irregularities observed, all financiers, including AKG, were directed not to buy, sell or deal in securities market including in IPOs, directly or indirectly till further orders.

1.5 It was also stated that the said Order was to be treated as show cause notice against the concerned persons/entities named therein. The entities/persons against whom the order was issued were given liberty to file their objections, if any, to the interim order within 15 days from the date of the order and if they so desire avail themselves of an opportunity of personal hearing at SEBI, Head Office, on a mutually convenient date and time, within 15 days of the order. They were further given the liberty to inspect the relevant documents on any working day prior to the hearing.

2.0 Writ petition filed by AKG

2.1 AKG, filed a representation dated May 09, 2006 with SEBI. However, before the said representation could be examined or any personal hearing could be given before SEBI, AKG filed a Civil Writ Petition no 8095 of 2006 before the High Court of Delhi at New Delhi.

2.2 Hon’ble High Court of Delhi vide order dated May 11, 2006 disposed off the said petition with the following Order;

"…………….On instruction from the petitioner, who is present in the Court, he states that the Petitioner shall not operate his Demat Account until the passing of an Order on the Petitioner’s representation against the Show Cause Notice contained in the impugned Order.

In view of this statement, the operation of the impugned Order viz –a- viz operation of the Demat Account shall be held in abeyance.

The petitioner to appear before the respondents on 17^th May 2006 at 11.00 at 32, Rajendra Place, Securities and Exchange Board of India, Northern Regional Office, New Delhi.

The Respondent shall pass an Order within fifteen days of the hearing.

This Order shall not be treated as a precedent. The Writ Petition is disposed off with liberty granted to the Petitioner to approach this Court if the circumstances so warrant."

 3.0 Hearing and submissions made by AKG

3.1 In compliance with the Hon’ble High Court order, hearing was granted to AKG at the Delhi Office of SEBI on May 17, 2006. AKG appeared for the personal hearing and he was represented by Shri Rajesh Batra, Advocate.

3.2 During the hearing, Shri Rajesh Batra made oral submissions on behalf of AKG, mainly to the following effect:

3.2.1. AKG is a small time investor and his financial condition is not sound. AKG does not fit into any of the three categories of persons mentioned in the order.

3.2.2. Further, he adverted to the written submissions of May 09, 2006 and inter-alia clarified as follows:

3.2.2.1. That upon allotment of 17 shares of TCS, these shares were credited to his demat account on August 21, 2004. Upon his express instruction, these shares were transferred from his demat account to the client margin account of IBSL on August 26, 2004, since he wanted to sell the shares. However, since TCS scrip price remained below his expectations during the day, he did not sell the shares and instructed IBSL to transfer them back to his demat account.

3.2.2.2. Subsequently on September 14, 2004, AKG instructed IBSL to transfer the 17 shares to the client margin account and sold the aforesaid shares of TCS on the same day @ Rs. 1013/- per share, thereby making a profit of Rs. 2771/-.

3.2.2.3. The reply dated May 9, 2006 contains inter-alia the following declarations:

1.  

   1. AKG had never financed IBSL or any one else to indulge into any share trading activity or for any IPO allotment.
   2. He had never had any dealings, whether pre-listing or off market with IBSL or any client of IBSL or with any other person regarding the IPO of TCS.
   3. The entire sale proceeds out of the sale of the 17 shares of TCS had been received by him, being the bonafide allottee of the shares.
   4. He had never taken any financing for applying in any IPO from IBSL or any one else.

3.2.3. In the course of hearing additional details were called from AKG by May 18, 2006. On May 18, 2006, AKG sought two days time to furnish the said details.

3.2.4. Subsequently on May 22, 2006, AKG filed written submissions vide his letter dated May 18, 2006 purporting to furnish the details called for on May 17, 2006. The details furnished are as under:

3.2.4.1. Details of shares in his DP account No. 10069837 with Indiabulls Securities Limited as on August 26, 2004 are reported to be 500 shares of Arihant Cap. Mkt., 228 shares of Gruh Finance and 17 shares of TCS.

3.2.4.2. Details of his shares in the Client Margin Account of Indiabulls Securities Limited (Number 10131283) on 26^th August 2004 are reported to be 50 shares of Bindal Agro, 700 shares of IFCI, 7 shares of DCM, 280 shares of VXL, 200 shares of Petronet.

3.2.4.3. On 25^th of August 2004, his exposure of transactions was Rs. 24,788 and the shares in Client margin account of Indiabulls Securities Ltd. were worth Rs. 13042/- resulting in an exposure to margin ratio of approx 190%.

3.2.4.4. A summary of the trades executed from trading account number C16970 of AKG for the year 2004-05 and 2005-06 is given below:

3.2.4.5. With reference to the question during the personal hearing regarding the loan taken from Indiabulls Financial Services Ltd (IFSL) for IPO’s, AKG submitted that he had never taken any loan for any IPO from IFSL. AKG further stated that he has been allotted shares in different IPO’s for a total value of Rs. 27,718/-.

3.2.4.6. With reference to the query regarding the details of AKG’s total trading turnover during the last few years, the following details were submitted;

3.2.4.7. AKG submitted that had never traded in the shares of IFSL though he was allotted 4000 shares of IFSL by way of ESOPs and those shares were still lying in his demat account.

3.2.4.8. AKG submitted that the shares had been transferred to Indiabulls Client Margin Account for the purpose of getting limits for putting trades in secondary market. In case the shares were sold in the market, the shares from Client Margin Account were also used to effect delivery of shares to the stock exchange as per the exchange obligations arising out of his sale transactions.

3.2.5. Some of the specific queries like reasons for his off-market dealings with IFSL, details of shares lying in the client margin account of IBSL as on April 28, 2006 and copy of code of conduct as applicable to the employees for dealing in securities raised during the hearing on May 17, 2006 were not replied to in the written response dated May 18, 2006 received on May 22, 2006.

4.0 Analysis of Evidence:

4.1 I have carefully considered the submissions made by AKG and the materials available on record.

The comparison of trading of AKG vis-à-vis his annual income (as per income shown in the Form-16) for the year 2004-05 and 2005-06 reveals as under:

(in Rs.)