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 MAHENDRA A SHAH
1. 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 15I 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. Mahendra A Shah (hereinafter referred to as Shri.Shah) for 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 Shri.Shah 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.
2. SEBI conducted investigation into the trading in the scrip of RSL, as promoters of RSL issued preferential shares on consideration other than cash to some entities, allegedly overvaluing these entities and subsequently these shares that were denied listing for overvaluation were dematerialized and traded in the stock exchange. In this regard it prima facie appeared to the Investigating Authority that Shri Shah being a promoter of RSL was involved in the said manipulation, SEBI issued the following summons / letters dated August 25, 2004 and September 09, 2004 requiring Shri Shah to submit certain information in respect of his dealings in the scrip of RSL and also to personally appear before the Investigating Authority of SEBI. It is alleged that Shri Shah did not submit the information sought by SEBI nor appeared before the Investigating Authority as required in the summons.
3. It is further alleged that Shri Shah as a promoter of RSL, acted in a fraudulent manner by publishing news items in order to disseminate false information to create generate interest in the scrip of RSL. Further RSL issued shares on preferential basis to the shareholders / promoters of alleged non genuine companies and the said shares were allegedly traded without listing on the Stock Exchange. In view of the alleged involvement of Shri Shah in the said activities as a promoter of the company, Shri Shah is alleged to have violated provisions of Regulation 3, 5(1) and 6(a) of SEBI FUTP Regulations, 1995, which makes Shri Shah liable to the penalty under section 15 H A of the SEBI Act.
NOTICE
4. A notice number A&E/BS/42343/2005 dated June 10, 2005 was issued to Shri Shah 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. The said notice sent by registered post was duly received and acknowledged.
5. It is noted that Shri Shah did not reply to the show cause notice, however in view of the facts and circumstances of the case and in the interest of justice, it was decided to conduct an inquiry in the matter. Shri Shah was advised to attend the inquiry on July 22, 2005. The said notice sent by registered post was duly received and acknowledged. However, Shri Shah failed to attend the inquiry on the said date.
6. In the interest of justice another opportunity was granted to Shri Shah and he was advised to attend the inquiry on August 18, 2005. The said notice sent by registered post was duly received and acknowledged. However, Shri Shah again failed to attend the inquiry in the matter.
7. As Shri Shah failed to reply to the show cause notice and further as he failed to attend the inquiry despite being given two opportunities to do so, the inquiry is proceeded further on the basis of the evidence available on record.
CONSIDERATION OF EVIDENCE AND FINDINGS
8. The allegation against Shri Shah 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.
9. Penalty for violation of provisions of FUTP regulations is provided in Section 15 HA of SEBI Act which provides that if any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty five crore rupees or three times the amount of profits made out of such practices, whichever is higher. Accordingly adjudication proceedings were initiated under provisions of Section 15 HA of SEBI Act against Shri Shah.
10. In this regard It is noted facts of the case as stated on 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 to the said companies.
11. 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.
12. In view of the said actions Shri Shah is alleged to have violated the provisions of Regulations 3, 5(1) and 6(a) of FUTP Regulations. In this regard it is pertinent to note that for the said 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, 20-02 to generate interest in the scrip and the shares were subsequently offloaded in the market 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 Shri Shah. 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 had held that only those penalties existing at the time of commission of the violation is applicable in respect of the said violation. Taking into account the said decision of Hon’ble Securities Appellate Tribunal, I am of the opinion that no penalty can be imposed on Shri Shah 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.
13. The other allegation against Shri Shah is that he failed to comply with the summons issued by SEBI. It is noted that the investigating authority of SEBI issued summons / letters dated August 25, 2004 requiring Shri Shah to appear in person before the Investigating Officer on September 6, 2004. In this regard, Section 11C(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.
14. As Shri Shah failed to appear before the Investigating Authority on September 6, 2005, the Investigating Authority gave Shri Shah another opportunity vide summons dated September 09, 2004 to appear before it on September 15, 2004 but Shri Shah allegedly again failed to appear before the Investigating Authority.
15. In this regard it is noted that Shri Shah failed to appear before the Investigating Authority on two occasions. Further Shri Shah failed to reply to the show cause notice dated June 10, 2005 and hearing notices issued on July 7, 2005 and August 3, 2005 in the adjudication proceedings. It is noted that the notices sent by registered post were received and acknowledged. However, Shri Shah did not reply to the show cause notice and also he did not appear in the inquiry on July 22, 2005 and August 18, 2005. This shows non cooperative attitude adopted by Shri Shah. The said non cooperation by Shri Shah is more serious in view of the fact that he is stated to be the Chairman and Managing Director of the company RSL. In view of the facts of the case as stated above it is concluded that Shri Shah failed to appear before the Investigating Authority on September 6, 2004 and September 15, 2004 in response to summons issued to him on August 25, 2004 and September 9, 2004.
16. Timely submission of information in the investigation proceedings is very important for conclusion of the proceedings on time which is critical for investor confidence in the securities market. It is noted that by not appearing before the Investigating Authority, Shri Shah violated the provisions mentioned above.
17. 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”.
18. On account of his failure to provide information to SEBI, Shri. Shah is liable to the penalty under Section 15 A(a) of the SEBI Act. In this regard, the provisions of Section 15J 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
19. As no cause has been shown by Shri. Shah with regard to the charges levelled against him, no mitigating factors are noted.
20. Shri Shah did not respond to the summons and appear before the Investigating Authority in response to Summons dated August 25, 2005 and September 9, 2004. It is further noted that Shri Shah did not respond to the show cause notice and also did not attend the inquiry on July 22, 2005 and August 18, 2005, despite receiving the notices and acknowledging the same. In view of the above facts, it is concluded that the violation committed by Shri Shah is repetitive in nature.
21. It is also pertinent to note from the facts of the case that apart from being a promoter, Shri Shah was also the Chairman cum Managing Director of RSL during investigation period. For calculating unfair advantage accrued to Shri Shah or amount of loss caused to the investors, following is noted from the facts available on records:
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.
c) 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 market and 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 is not available on record, on the basis that minimum price during the period that was Rs. 1, the sale proceeds would be minimum 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 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.
22. 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 the 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.
23. In the instant case, as stated before, Shri. Shah failed to provide required information in respect of his dealings in the shares of RSL to the investigating authority. Further the conduct of Shri. Shah 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 Shri. Shah in cheating the investors. In this regard it is also pertinent to note that Shri. Shah failed to reply to the showcause notice in the adjudication proceedings. Further Shri. Shah failed to attend the inquiry despite being given enough time and opportunities to do so. The conduct of Shri. Shah indicate his attempts to evade and resist the compliance of legal provisions.
24. Viewed in the background of the facts and circumstances of the case which clearly indicate the manipulative role played by Shri. Thakkar in duping the investors pursuant to a conspiracy. In view of the same, the failure to furnish information to the investigating authority have to be viewed seriously especially as Shri. Shah was the Managing Director of RSL. It is noted that 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, as the minimum price during the period was Rs. 1, the sale proceeds would be minimum Rs. 54 Lakhs. Hence it is seen that the loss caused to the investors appears to be Rupees 54 lakhs or more.
ORDER
25. Considering the facts and circumstances of the case, for the failure on the part of Shri Mahendra A Shah to furnish information and appear before investigating authority of SEBI, 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 Mahendra A Shah. This penalty is justified and appropriate as it would disgorge the unjust enrichment and disproportionate gain accrued to Shri Mahendra A Shah.
26. 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, Mittal Court, ‘B’ Wing, First Floor, 224, Nariman Point, Mumbai -400 021.
27. 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 Mahendra A Shah and to SEBI.
PLACE: MUMBAI BIJU. S
SEPTEMBER 30, 2005 ADJUDICATING OFFICER