SECURITIES AND EXCHANGE BOARD OF INDIA 

CORAM: G. ANANTHARAMAN

 WTM/GA/105/IVD/11/06

DIRECTIONS UNDER SECTIONS 11 READ WITH 11 B OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 IN THE MATTER OF INVESTIGATIONS IN RESPECT OF INITIAL PUBLIC OFFERINGS AGAINST INDIA BULLS SECURITIES LTD.

Date of Hearing: April 28, 2006 & November 10, 2006

Appearances

 For Noticee :   Shri. Sameer Gehlaut, Chairman

Shri. Chetna Ghowe, Vice President

Shri Gagan Banga , Director

For Securities and Exchange Board of India: Shri. Sanjiv Dutt, Chief General Manager.

1.0  BACKGROUND

1.1  Securities and Exchange Board of India (hereinafter referred to as SEBI) conducted an investigation into the buying, selling or dealing in the shares issued through Initial Public Offerings (IPOs) of companies during the period 2003-2005. The investigation conducted by SEBI found that, many dematerialized accounts (hereinafter referred to as “afferent accounts”) in fictitious/ benami names were opened by certain entities (hereinafter referred to as the “Key Operators”) and these entities had cornered/ acquired the shares of various companies allotted in the IPOs, by making applications in fictitious/ benami names with each of the applications being of small value so to make it eligible for allotment under the retail category.

1.2 The investigation conducted by SEBI prima facie revealed that subsequent to the allotment of IPO shares of various companies, the fictitious/benami allottees had transferred the said shares to their principals who in turn had transferred the shares to the financiers that had provided finance for executing the entire game plan. It was also found that the financiers in turn had sold most of the said shares immediately upon listing and thereby made huge gains from the price difference between the IPO price and the listing price. The modus operandi as detailed above led to the suspicion that the thousands of entities in whose names dematerialized accounts (hereinafter referred to as demat accounts) and bank accounts had been opened and IPO applications made, were either benami, name lenders or non existent. SEBI had adopted the floor level of 500 or more demat accounts, for the aforesaid investigation as it was felt that it would impart the necessary focus and direction to the whole exercise of tracking down the real culprit accounts in cornering the IPO allotment and dealing with them effectively in a demonstrative regulatory action. For the purpose of investigation, the period from the date of closure of IPO till one day after the listing and commencement of trading on the stock exchanges was reckoned (hereinafter referred to as the relevant period).

1.3 In the course of the said investigation, information was provided by  the depositories with respect to the accounts of the entities who had received shares from more than 500 demat accounts through off-market transactions of shares during the relevant period.

1.4 It was found that India Bulls Securities Ltd. (hereinafter referred to as IBSL), a depository participant, registered with SEBI under section 12 of Securities and Exchange Board of India Act, and 1992 (hereinafter referred to as the Act), had received 13,939 shares of Tata Consultancy Services (hereinafter referred to as TCS) from 559 demat accounts in its Beneficial Owner account ID 10131283 held with the depository participant, IBSL, during August 21, 2004 to August 24, 2004. IBSL is also a member of National Stock Exchange of India Ltd. (hereinafter referred to as NSE) and Bombay Stock Exchange Ltd. (hereinafter referred to as BSE) and registered as a stock broker with SEBI under section 12 of the Act. The shares of TCS were listed on the stock exchanges on August 25, 2004.

1.5 It prima facie appeared on the basis of parameters employed in sampling that, IBSL acted as one of the key operators in the aforesaid IPO irregularities. During the course of investigation it was also revealed that on August 26, 2004, IBSL transferred 17 shares of TCS to Shri Ajay Kumar Gupta, who was identified as a financier by SEBI. In view of the above, it appeared that IBSL had cornered large number of shares of TCS in its public issue through afferent accounts. Also it appeared that some of the shares were subsequently transferred to its financier viz. Shri Ajay Kumar Gupta.

2.0   SEBI orders dated April 27, 2006 and April 28, 2006.  

2.1 In view of the findings of the investigations, SEBI, vide an interim order dated April 27, 2006 which was further clarified by the SEBI Press Release dated April 28, 2006, inter alia directed various market participants (including IBSL), not to buy, sell or deal in the securities market including in IPOs, directly or indirectly, in so far as they relate to the transactions in the proprietary account ( in case of SEBI registered intermediaries like, brokers and depository participants) till further directions.

2.2  Subsequent to the aforesaid order, on the written representation made by IBSL, an opportunity of hearing was granted to IBSL on April 28, 2006. Pursuant to the said hearing and after considering the written submissions made by ISBL and having regard to the balance of convenience in the materiality of circumstances of the case, the aforesaid interim order dated April 27, 2006 so far as it relates to IBSL was kept in abeyance, subject to verification of clients and until further directions.

3.0              Inspection carried out by National Securities Depository Limited  (NSDL) and a team of officials of SEBI, NSE and BSE

3.1               Pursuant to the SEBI order dated April 28, 2006, SEBI had advised NSDL to conduct an inspection (including physical verification) of 559 demat accounts maintained with IBSL. NSDL, vide report dated May 03, 2006 inter alia informed that out of 211 clients, 163 clients personally represented before it and in the case of joint holders, all the joint holders represented themselves. It was inter alia reported by NSDL that out of the sample of clients selected for verification, barring few clients, majority of the clients had appeared before the inspecting team of NSDL and their submitted documents related to the Proof of Identity (POI) and Proof of Address (POA). In addition, it was also reported by NSDL that they had carried out verification of KYC documentation of all the 559 clients. The NSDL report based on the findings of its verification did not point out any serious observations to raise doubts about the genuineness of the clients.

3.2              An inspection was also carried out by a team of officials of SEBI, BSE and NSE. In the said inspection report in which it was inter alia observed that, out of the 559 clients who had transferred TCS shares to IBSL, 459 clients were holding demat account IBSL and the remaining clients had beneficiary accounts with other depository participants The analysis of the said 459 demat accounts revealed that those accounts were opened by the clients on various dates in the year 2000 to 2004. It was also found out during the inspection that IBSL had obtained the copies of proof of address and proof of identity from all clients towards compliance of Know Your Clients (KYC) requirements. The analysis of the client database in respect of 100 demat accounts revealed that they were located in different parts of the country. The Inspecting team had also identified a sample of 20 clients who were based in & around Delhi, from a total of 559 clients on a random basis for verifying the genuineness of the clients. In all cases except one case (wherein the beneficial owner was out of station and his identity was confirmed by his relatives), the clients were available and produced the necessary identity documents. The analysis of clients ledger suggested that the clients in general have a normal trading pattern and have appeared to have traded in the secondary market for varying period during the year. Client ledgers also did not reflect that the clients had traded only in TCS IPO.

3.3              The aforesaid inspection had also revealed that, at the time of opening of a broking account with IBSL, the client had an option to maintain a running account for funds and securities wherein the broker retains the clients’ funds and securities with itself till the client gives a specific instruction for withdrawal/transfer of the same. The securities of clients were kept in a separate beneficiary account opened in the name of IBSL (BO ID: 10131283). This account was internally referred to as the “Client margin account”.  The clients were encouraged to keep their securities in Client margin account for increasing their trading limits. One of the reasons given by Indiabulls for transfer of the 13939 shares of TCS by the 559 clients to the Client margin account is that these shares were transferred by the respective clients towards margin requirements. It was also observed that, IBSL had obtained a Power of attorney from all client for operating their demat account to facilitate the transfer of securities. It was also observed, on an analysis of trades of 100 selected clients for selected days it was observed that in 95 cases orders were placed through user ID enabled for internet trading by the exchange. This indicates that these trades were executed by the clients from various internet user IDs and it is noted that about 451 out of 459 clients were internet trading clients. Further, the stock transfer instruction log maintained by IBSL shows 455 transfer instructions, totaling 11033 shares, placed by different clients during the period of August 21, 2004 to August 26, 2004 at different times of the day for moving TCS shares lying in their respective Client Demat IDs to the client margin account of the member. This inspection also did not cast any doubts on the genuineness of DP accounts.

3.4              The verification of records and visits to the residence of the short listed clients did not indicate anything suspicious to raise doubts about their genuineness. From the verification of the records and the submissions made by IBSL, it appears that the said 13,939 shares of TCS were transferred by 559 entities to the Client Margin Account of IBSL towards margin for enhancing their trading limits or for selling.

4.0              Letters/Replies/Submissions made by IBSL.

4.1              IBSL, vide letter dated November 10, 2006, reiterated its earlier submissions (made vide letters dated May 02, May 05, May 11, June 02 and June 23, 2006 ) and stated that 559 demat account holders had transferred 13,939 TCS shares to IBSL’s client margin account towards the margin requirements. It was further stated that the aforesaid clients had been in existence for years and the demat accounts were not opened for the sole purpose of making the application in TCS IPO. It was also claimed the all the 559 demat accounts were genuine and were backed by requisite documentation and none of the accounts were either fictitious or benami. It was further contended in the reply that IBSL had accepted the shares in its client margin account in the capacity of a broker for the limited purpose of facilitating the clients’ transaction. It was also claimed by IBSL that the sale proceeds of TCS shares of 559 clients were transferred to the individual clients account.  In view of the above submissions, IBSL requested to withdraw the SEBI interim order dated April 27, 2006.

5.0               Hearing

5.1              An opportunity of hearing was granted to IBSL on November 10, 2006 wherein its Chairman, Vice President and the Director had appeared and made submissions on behalf of IBSL. IBSL reiterated the submissions made by it in its replies as stated above. During the course of the said hearing, IBSL was advised to produce the following documents;

a)     System audit report of TCS.

b)     Ledger statement of IBFSL with respect to 558 demat accounts.

c)      Client margin accounts.

5.2              IBSL vide letter dated November 13, 2006 submitted the aforesaid documents.

6.0   CONSIDERATION OF ISSUES AND FINDINGS

6.1   I have perused the submissions made by IBSL in various letters mentioned above and considered the oral submissions made by it during the time of hearing on November 10, 2006 and other materials available on record. In the facts and circumstances, the following issues are framed for consideration.

a)  whether the demat account holders from whom IBSL had received the shares of TCS through off market transactions were genuine or not and whether there were multiple accounts with a common address?

6.2             I note that the inspection carried out by NSDL and the team of officials of SEBI, NSE and BSE did not indicate anything suspicious to raise doubts about the genuineness of the demat account holders.

6.3             In the sampling process as employed in the IPO investigation, the account of IBSL got picked up as the key operator by the sample size with its attendant parameters. On detailed examination in the course of inspection by NSDL and also by a team of officials of SEBI, BSE and NSE, it transpires that the 559 accounts do not have the characteristics of a typical afferent account, while DP account no. 10131283 of IBSL partakes the character of the client margin account of IBSL. The same finding is further strengthened by the fact that Shri Ajay Kumar Gupta who was treated as a financier in the interim order dated April 27, 2006 in the unfolding scheme as per the parameters employed was found to be a man of limited resources, thereby raising a question on the financial competence of the beneficial owner. In any event, none of these accounts have been identified as afferent accounts actively involved in the manipulation of IPO allotment.

6.4             In the facts and circumstances of the case, there is nothing on record to   show that the 559 demat accounts holders from whom IBSL had received the shares of TCS through off market transactions were not genuine.

6.5             On the basis of the above discussions I find merit in the submissions of IBSL that they had received TCS shares in its client margin account from various clients as a stock broker and not as a key operator for cornering of IPO allotment shares and for its manipulation.

7.0  Order

7.1             In view of the above, I, hereby direct, in exercise of the powers conferred upon me in terms of section 19 read with section 11 and 11B of the SEBI Act, 1992 , that the interim order dated April 27, 2006 would stand finally disposed off qua India Bulls Securities Ltd. without any further directions .

 7.2  This Order shall come into force with immediate effect.