ORDER
UNDER RULE 5(1) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
READ WITH REGULATIONS 7(1) & (2) OF THE SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 1997 AND SECTION 15A OF THE SEBI ACT, 1992.
AGAINST
SHRI ASHUTOSH KOTHARI
BACKGROUND:
1. Shri Ashutosh Kothari (for brevity’s sake, hereinafter referred to as the acquirer) was found to have acquired 1,50,00,000 amounting to more than 13.98% of the total paid up capital of Design Auto Systems Ltd (for brevity’s sake hereinafter referred to as ‘DASL’) on December 27, 2001.
2. As the sum total of the holdings of these shares of DASL constituting 13.98% of the total paid up capital of DASL as on December 27, 2001 entitled him to exercise more than 5% of the voting rights of DASL, the acquirer was required to disclose to DASL, their aggregate shareholding in DASL within 4 working days of December 27, 2001 i.e. the date on which the acquirer crossed the threshold limit of 5% of the voting rights in DASL, in terms of Regulation 7(1) and (2) of the SEBI (Substantial Acquisition Of Shares & Takeovers) Regulations, 1997 (for brevity’s sake, herein after referred to as the Takeover Regulations).
3. However, as the acquirer failed to make the necessary disclosures to DASL about the said acquisition, within the period prescribed under Regulation 7(1) and (2) of the Takeover Regulations, he was found to have contravened the said provisions of the Takeover Regulations making him liable under Section 15A (b) of the SEBI Act, 1992 (hereinafter referred to as the Act).
4. In view of the same, adjudication proceedings were initiated against the acquirer by SEBI and in this context, I was appointed as the Adjudicating Officer, vide an order dated February 3, 2005 to enquire into and adjudge the alleged contravention by the acquirer of Regulations 7(1) and (2) of the Takeover Regulations read with sub-section (b) of Section 15A, of the Act.
NOTICE/ REPLY/ PERSONAL HEARING:
5. Accordingly, I issued a notice dated March 23, 2005 to the acquirer in terms of Rule 4 of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 (Rules) where under he was asked to show cause as to why enquiry proceedings should not initiated against him for the alleged violation of the provisions of sub regulations (1) and (2) of Regulation 7 of the Takeover Regulations. The details of the said acquisition made by the acquirer were forwarded to him with an advice to make his submissions, if any, along with supporting documents that he wished to rely upon, within 14 days from the date of the receipt of the notice and also indicate whether he was desirous of a personal hearing.
6. The said notice was returned undelivered with a remark “left”. Subsequent notices dated May 13, 2005 and August 09, 2005 sent to the acquirer were also returned undelivered with a remark “left”.
7. In view of the same, a notice dated August 25, 2005 was sent through the Madhya Pradesh Stock Exchange (MPSE) with an advice to forward the same to the acquirer. MPSE vide its letter dated September 20, 2005 enclosed the report of affixation of the said notice along with the photographs of the site where the said notice was affixed. Thereafter, a notice of hearing dated September 20, 2005 to appear before me on September 28, 2005 was forwarded to MPSE to serve the same on the acquirer. MPSE confirmed that the same had been affixed on the outer door of the said premises on September 22, 2005 and witnessed by two persons in the manner prescribed under Rule 7(3) of the SEBI (Procedure For Holding Enquiry And Imposing Penalty By The Adjudicating Officer) Rules, 1995 (Rules). A report to this effect was forwarded by MPSE vide their letter dated October 03, 2005.
8. It is thus clear that although the acquirer was granted sufficient opportunities to present his case or appear before me, he failed to avail the said opportunities. Subsequently, however the acquirer appeared in the office of the undersigned on September 29, 2005 at 2.00 p.m. and requested for being granted a personal hearing. He denied receiving any of the above mentioned notices on the ground that he had moved out of the house to which the notices was sent which was stated to belong to his uncle; Shri Suresh Kothari earlier Finance Manager of DASL and presently working in Bhopal with Dainik Bhaskar. It was contended that his uncle had sold his premises to one Shri Pramod Wayker who had received the notice dated August 25, 2005 and handed the same to him only on September 23, 2005 where after he rushed to attend the present proceedings. The acquirer denied any involvement in the said case either in regard to his receiving the shares in question or even the opening the said demat account into which the said shares of DASL were transferred. He denied knowing BBL but stated that he knew Shri Ujjwal Shende. Accounts Clerk at DASL who was stated to have received these unlisted shares of DASL and as also Mr Murali Nair, an employee of DASL.
CONSIDERATION OF ISSUES:
9. I have considered at length the facts and circumstances of the case, the findings in the investigation report that are relevant to the issue under consideration, as also the relevant regulatory provisions. While taking into account the issues highlighted in the investigation report as against the acquirer, I consider it necessary to recapitulate certain facts in brief, giving rise to the present proceedings.
10. Bonanza Biotech Limited (BBL) was allotted 10 crore unlisted shares of DASL at Rs.10/- per share on a preferential basis on October 29, 2001. The shares of DASL are listed at the Stock Exchange, Mumbai (BSE), the Madhya Pradesh Stock Exchange (MPSE) and at the Ahmedabad Stock Exchange (ASE), wherein MPSE is the regional stock exchange. The price of the scrip of DASL was Rs.4.25 as on October 12, 2001 with a volume of 1800 shares. The price of the scrip reached the peak of Rs.11.20 on November 07, 2001 supported by huge volumes. The price came down gradually and was quoting at Rs.1.65/- per share as on January 11, 2002. Though the price movement in the scrip was not substantial during the period August 2001 to January 2002 (which is also the period of investigation) it was noted that there was spurt in volumes which increased substantially and reached to 18.96 lacs shares by December 05, 2001.
11. The issued subscribed and paid up capital of DASL is Rs. 107.325 crore which can be broken down thus:
Till 11.07.1994 – 62.25 lakh shares at Rs 10 per share = Rs.6.225 crores
On 06.12.1999 – Allotment of 11 lakh shares at Rs 10 per share
on a preferential basis to its promoters and
associates namely Vargin Finance Pvt. Ltd.,
Sarvesh Garg and Rita Garg. = Rs. 1.10 crores
On 29.10.2001 – Allotment of 10 crore shares at Rs. 10 per share
on a preferential basis to Bonanza Biotech Ltd = Rs. 100 crores
12. While 62.25 lakh shares of DASL are listed at all the stock exchanges named above, 10.11 crore shares of DASL, issued on a preferential basis to BBL were not granted listing permission at BSE though they are listed at the MPSE. No listing application in that regard was made with the ASE.
13. These 10 crore unlisted shares allotted on a preferential basis to BBL, which were dematerialized and credited to their account by CDSL, were found to have been delivered in the market by BBL, by transferring them into the demat accounts of various brokers and other entities, one among them being the acquirer. These shares were then offloaded into market to cheat the innocent investors. In view of the same, SEBI initiated an investigation to track the flow of the unlisted securities from BBL to the various entities and the violations committed by them in the said process.
14. During the course of investigation, it was found that the acquirer had a demat account no.INXXXXXXXXXXXXXXX and 1.50 crore unlisted shares of DASL was transferred by BBL to this account on December 27, 2001 and again transferred back to the account of BBL on January 10, 2002.
15. It is thus apparent that the total holding of the acquirer in DASL as on December 27, 2005 was 1,50,00,000 shares amounting to more than 13.98% of the total paid up capital of DASL as on that date (both listed and unlisted). Being unlisted shares, the percentage holding of the acquirer would go up to 15% of the unlisted capital. To gather further information in this regard, further trading details and other related information was called for from the acquirer. However, neither was the said information provided nor did the acquirer appear in person before the investigation authority. The result was that apart from the finding that as on December 27, 2001, the holding of the acquirer in DASL crossed the threshold limit of 5% prescribed under the Regulations; no further information was available in this regard.
16. However as stated earlier, when the acquirer appeared before me on September 29, 2005, he denied any involvement in the said case, either as regards having acquired the shares in question or having in the first place opened the said demat account, into which the shares were transferred. The acquirer stated that during the course of work, he had often signed various documents and at the time of joining DASL had submitted his photographs, which possibly may have been used for the purpose of opening the demat account into which 1.50 crores unlisted shares of DASL were transferred. He contended that he only had a savings account with Syndicate Bank and although he did not recollect exactly when he joined DASL, it was probably sometime during the year 2000. He stated that he had joined DASL as an Asst. Accounts Clerk when he was 21 years old and earned a starting salary of around Rs.1800/- per month and his work involved, collection, deposit of cheques, making of vouchers, typing etc. He contended that he left this job after around two and half years i.e., around August 2002 at which point of time, his salary was about Rs.2,650/-.
17. The acquirer contended that after passing his B.Com he was presently taking his exams for the final semester of MBA and submitted a copy of his driving license as proof of his identity as also a letter dated September 23, 2005 stated to have been sent by him by speed post to me, in which he had requested to be granted a personal hearing after November 14, 2005. In the said letter his address of correspondence was mentioned.
18. I have examined the contentions advanced by the acquirer and the copy of his driving license. In order to examine the veracity of the contentions made by the acquirer to the extent possible, given the constraints of lack of any other information available on record; I contacted Arihant Capital Markets Limited (Arihant); the Depository Participant at Indore, with whom the demat account was opened in the name of the acquirer. Arihant confirmed in this regard that an account number IN XXXXXXXXXXXXXXX was indeed opened with them on December 26, 2001 in the name of the acquirer which was still operational and presently running on debit balance. They forwarded the copies of the demat statement evidencing the transaction in the said account, the copy of the application made by the acquirer for opening the demat account, copy of the agreement dated December 26, 2001 entered into between the DP (Arihant) and the acquirer for the purpose of opening the demat account, as well as a copies of the telephone bill of Suresh Kothari, the uncle of the acquirer and the driving license of the acquirer, submitted as proof of residence and identity respectively.
19. Upon perusal of the said documents, it is observed that, corroborating with the findings of the investigation, the acquirer had indeed opened a demat account No INXXXXXXXXXXXXXXXX with Arihant Capital Markets Limited While observing the movement of the shares debited/credited from/to the demat account of the acquirer, the following details in respect thereof are noted:-
|
Date
|
NAME
|
NO.
|
CREDIT
|
OPENING BALANCE/ DEBIT
|
BALANCE
|
|
|
|
|
|
|
0
|
|
27-Dec-01
|
By Inter depository transfer CDS
|
1302120000000344
|
15,00,00,000
|
|
15,00,00,000
|
|
10-Jan-02
|
To CDS/1302120000000344
|
|
|
15,00,00,000
|
0
|
|
|
CLOSING BALANCE
|
|
|
|
0
|
From the above, it is noted that the total holding of the acquirer in DASL as on December 27, 2001 was 15,00,00,000 shares amounting to more than 13.98% of the total paid up capital of DASL as on that date (both listed and unlisted). Being unlisted shares, the percentage of the acquirer would go up to 15% of the unlisted capital. The result was that as on December 27, 2001, the holding of the acquirer in DASL crossed the threshold limit of 5% prescribed under Regulations 7(1) and (2) of the Takeover Regulations which (as it existed prior to the amendment dated 9.9.2002) mandates as follows:-:
7(1) "Any acquirer, who acquirers 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."
7(2) The disclosures mentioned in sub-regulation 1 shall be made within 4 working days of
a) the receipt of intimation of allotment of shares;
or
b) the acquisition of shares or voting rights, as the case may be.
20. Thus, every acquirer, acquiring shares in excess of 5% of the total paid up capital of a target company is required to disclose the aggregate of their shareholding to the company concerned, within 4 working days of such acquisition. As the number of shares transferred to the demat account of the acquirer crossed the threshold limit of 5% of the voting rights of DASL on December 27, 2001, the acquirer was required to disclose the aggregate of his shareholding to DASL, within 4 working days of such acquisition in terms of Regulations 7(1) and (2) of the Takeover Regulations, which disclosures were not made.
21. Upon analysis of the demat statement of the acquirer, it is apparent that one and a half crore unlisted shares of DASL had moved in and out of the demat account of the acquirer from/to the account of BBL, all within a matter of 14 days. It transpires that BBL is the entity found (as per the findings of investigation) to be responsible for offloading the unlisted shares of DASL into the market, with the assistance of various brokers and other entities.
22. There is no dispute of the shares in question having being transferred to the demat account of the acquirer, opened on December 26, 2001 with Arihant. Although the acquirer denied any knowledge/involvement in the opening of the said account, based on the circumstantial evidence on record as well as the documents forwarded by Arihant, it is evident that the acquirer could not have been unaware of the entire account opening procedure. All the documents in question bear his signature. More relevantly, the said documents mention his bank details i.e., a savings account with Syndicate Bank, which fact was incidentally admitted by him before me during the course of the present proceedings. There is also on record a copy of the driving license submitted at the time of the opening of the account, as proof of his identity which is identical to that submitted before me.
23. Taking these facts into consideration, the argument advanced by the acquirer that his signatures obtained during the course of his daily work and the photographs submitted by him at the time of joining DASL, were used against him for the opening of the said account appears to be untenable. Assuming the same for a while, minute details as to his savings bank account and copy of his driving license would not have been readily available with a third party without his prior knowledge. His signature on the application form or the agreement entered into with the Arihant could not have been obtained merely in the course of his daily work with DASL, without his prior consent/knowledge. It is not as if the acquirer is illiterate. On the contrary, he is presently pursuing his masters in business administration and would not have been unaware of the implications of transfixing his signatures on the said documents.
24. Another fact to be considered is his strong denial of having received the notice of hearing dated September 20, 2005 served upon him by MPSE. Admittedly, he received the notice dated August 25, 2005 from Shri Wayker on September 23, 2005 by which date the acquirer could not have been unaware of the notice of hearing dated September 20, 2005 affixed on the outer door of the premises where he last resided i.e., where Shri Wayker presently resides. Further to these facts, is a letter dated September 23, 2005 stated to have been sent to me by speed post on September 24, 2005, which I am yet to receive till date. These facts clubbed together indicate that the visit of the acquirer to this office on September 29, 2005 was anything but a coincidence. Based on the same, it would appear that the credibility of the acquirer to a large extent is suspect as also his contentions advanced before me.
25. I have however noted the fact that from the date of the opening of the demat account i.e December 26, 2001 till date, there is no record of any other transaction entered into by the acquirer, other than the one discussed earlier. Moreover the market value of the shares in question at the relevant time ranged between five to six rupees and even going by the lower side would amount to Rs 45,00,00,000/-. Given that the acquirer had no resources other than his present job, it seems difficult to arrive at a finding that the acquirer could have personally transacted in such quantities. In fact the investigation findings do not show him to be a market participant, active or otherwise. Given that he was working as a class IV employee in DASL, perhaps added to his being made a willing accomplice to the management of BBL and DASL, (possibly due to an urge to make some extra money) in attempting to propagate the fraud of offloading unlisted shares in the market. In the said process, a one time credit /debit of shares of DASL were made to/from the account of the acquirer, which co-incidentally crossed the threshold limit of 5% of the voting rights of DASL as on December 27, 2001, which mandated the acquirer making necessary disclosures of their holding in DASL to DASL in terms of Regulation 7(1) and (2) of Takeover Regulations, which were not made.
26. In terms of Section 15A(b) of the SEBI, Act, 1992, failure to make requisite disclosures attracts monetary penalty not exceeding five thousand rupee for every day during which such failure continues.
27. At the time of levying penalty certain factors are also be taken in to account by the adjudicating officer, as is evident from the provisions of Section 15J of the Act which also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 i.e. the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; the amount of loss caused to an investor or group of investors as a result of the default and the repetitive nature of the default.
28. These factors mentioned above, are to be relied upon with due discretion that is to be exercised judiciously, depending upon the facts and circumstances of each case as well as after analysing all the relevant material available on record. In the present case, taking into consideration my views as above and in the absence of any reason or record to disbelieve or nullify these findings, although there is a violation of Section 15A (b) of the Act, there is no material available on record as to the disproportionate gain or unfair advantage enjoyed by the acquirer as a result of the default nor is there on record any mention of an undue gain or advantage enjoyed by him. Moreover this is a first time violation, if at all, wherein the shares in question in a one time transaction, were credited/debited into the demat account of the acquirer within a period of fourteen days, apparently to facilitate a fraudulent activity which took place with the knowledge and participation of the acquirer in the hope of earning some commission in the whole deal. Hence necessary cognizance of the same needs to be taken.
29. In view of the above, the commensurate penalty to be levied in the instant case should therefore be fixed, keeping in mind the nature of violation, the extent to which the violation has affected the interest of the investors in securities and the facts and circumstances of the case as discussed earlier in detail. .
PENALTY
30. While the penalty cannot be a multiplier simpliciter of the number of days and the amount i.e., Rs.5000/-, on a cumulative analysis of the facts and circumstances of the case and the discussion above, on a judicious exercise of the discretion conferred upon me, I in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995 think it appropriate to levy a penalty of Rs.40,000/- (Rupees Forty Thousand only) upon Shri Ashutosh Kothari for his failure to comply with the provisions of Regulations 7(1) and (2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 read with Section 15A(b) of the SEBI Act, 1992 in the matter of acquisition of 150,00,000 representing 13.98% of the total paid up capital of Design Auto Systems Ltd on December 27, 2001.
31. Shri Ashutosh Kothari is directed to pay the penalty amount within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India’ and payable at Mumbai which may be sent to Mr P.K.Bindlish, General Manager, Securities and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai – 400021.
PLACE: MUMBAI G. BABITA RAYUDU
DATE : OCTOBER 3, 2005 ADJUDICATING OFFICER