MO/76/IVD/01/2007

 

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA

CORAM: Dr. T. C. NAIR, WHOLE TIME MEMBER

 

IN THE MATTER OF IPO INVESTIGATIONS -

M/S. PRAVIN RATILAL SHARE AND STOCK BROKERS LIMITED

 

DATE OF HEARING : August 02, 2006

 

APPEARANCE:

 

FOR NOTICEE:  Shri J.J. Bhatt, Senior Advocate

   Shri B. Damodar, Advocate, Kanga & Co.

  Shri Mayuresh Pandya , Consultant

  Shri Atul Sharedalal, Director, PRSSBL Ltd.

  Shri Jigen Sharedalal, Director, PRSSBL Ltd.

  Shri Keyur Shah, Senior Executive, PRSSBL Ltd.

 

FOR SEBI:   Shri Sanjeev Dutt, Chief General Manager

     Shri V.R.Prasad, Deputy Legal Advisor

     Ms. Kshama Chavan, Legal Officer

 

ORDER

 

(UNDER SECTIONS 11 AND 11B OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992)

1.0 Background

 

1.1 Securities and Exchange Board of India (hereinafter referred to as “SEBI”) has issued, vide ad-interim ex-parte Order dated April 27, 2006 (hereinafter referred to as “the said Order”), certain interim directions against various market participants including M/s. Pravin Ratilal Share and Stock Broker Limited (hereinafter referred to as “PRSSBL”) under Section 19, read with Sections 11, 11B and 11(4) of the SEBI Act, 1992 and Section 19 of the Depositories Act, 1996, pending enquiry and passing of final Order.

 

1.2 The said Order states that PRSSBL, Depository Participant (hereinafter referred to as “DP”) of National Services Depository Limited (hereinafter referred to as “NSDL”) prima facie appeared to have grossly failed in adhering to the “Know Your Client” (hereinafter referred to as “KYC”) norms laid down by SEBI, thereby facilitating opening of demat accounts in fictitious /benami names and cornering the retail portion of shares in Initial Public Offerings (hereinafter referred to as “IPOs”). In view of the above preliminary findings, PRSSBL was directed not to open fresh demat accounts till further directions.

 

1.3 Para 17.18 of the said Order further states that the said Order shall be treated as show cause notice against the concerned entities named therein, including PRSSBL. These entities were given opportunity to file their objections, if any, to the said Order within 15 days from the date of the Order and if they so desired, avail themselves of an opportunity of personal hearing at the SEBI Head Office, Mumbai within 15 days from the date of the Order.

 

2.0 Findings on PRSSBL in SEBI’s Ad-interim Ex-parte Order

 

2.1 The focus of SEBI investigations has been on entities indulging in off-market transactions after allotment of shares but prior to listing and commencement of trading on the stock exchanges, in connection with the cornering of IPO shares in retail segment through benami / fictitious DP accounts. In the ad-interim ex-parte Order dated April 27, 2006, SEBI’s prima facie findings are as under :

 

2.2 As per the data submitted by NSDL, there were 21 IPOs in which 23 dematarialised account holders received off market credit of shares from 500 or more dematarialised account holders having certain commonalities. At page 11, table 5.7 (a) and table 7.2 of the ex- parte interim Order, Shri Deepakkumar Shantilal Jain, (hereinafter referred to as Deepakkumar) Client and a key operator having Client ID No. 10403856 received 2,36,859 shares of Infrastructure Development Finance Co. Ltd. (hereinafter referred to as “IDFC”) from 686 demat accounts. Similarly, in the IPO of Jet Airways (India) Ltd, Opee Stock Link Ltd. having Client ID No. 10127493 received 12039 shares from 553 demat accounts.

 

2.3 At para 8.3, it is stated that based on the information submitted by NSDL, out of 37,240 afferent accounts, 510 afferent accounts were held with PRSSBL.

 

2.4 In view of the above findings in the Order, directions as mentioned in Para 1.2 above were issued to PRSSBL.

 

3.0 Oral Hearing and Submissions of PRSSBL

 

3.1  PRSSBL, vide letter dated June 14, 2006, filed its preliminary submissions to the said ad-interim ex-parte Order after  availing the opportunity to inspect the documents relied upon by SEBI. The submissions interalia made by PRSSBL are as under:

 

3.1.1       PRSSBL vide letter dated May 03, 2006 has stated that all the demat accounts have been opened as per the Know Your Client Norms (KYC) prescribed by SEBI. It has submitted that it was not guilty of any violation.

 

3.1.2       As regards the allegation of opening 510 afferent accounts and those opened by Opee Stock Link Ltd. and Deepakkumar, PRSSBL submits that none of these 512 accounts with PRSSBL is benami or fictitious. All the 512 entities are existing entities and are not fictitious / benami entities. It is submitted that the accounts of these 512 entities have been opened by PRSSBL after complying with the norms and requirements specified by SEBI as well as NSDL. The copies of all the 512 account opening forms  filled in by these 512 beneficiary owners (BO) can be produced at any time. Further on perusal of 512 application forms, it will be apparent that they are in accordance with the norms which are specified by SEBI as well as NSDL. PRSSBL further submitted that these are being opened only after verifying the identity and proof of address.

 

3.1.3       From the physical verification conducted by NSDL, it appears that officials of NSDL were completely satisfied with the existence of the beneficiary owners. Officials of NSDL could not point out any lacuna or fraud in the KYC Norms which PRSSBL had followed while opening the account. The officials of NSDL have verified the account opening forms as well as KYC forms and also verified the genuineness of the clients. Therefore the stand of PRSSBL that it has not opened any fictitious or benami accounts stands supported by inspection report of NSDL. In this view, it is submitted that PRSSBL has not opened even a single account of any benami person as alleged by SEBI in its impugned Order. It is therefore, denied that the beneficiary accounts with PRSSBL are afferent accounts or that PRSSBL has facilitated the opening of afferent accounts in utter disregard of KYC norms.

 

3.1.4 It is submitted that out of the 512 beneficiary accounts which have been opened with PRSSBL, 358 accounts are active accounts. On analysis of these accounts, it emerges that these accounts have been opened from the year 1999 to the year 2005. On a perusal it is obvious that the accounts have been opened by various people  and there is a gradual rise in the number of accounts  which have been opened by the 512 BOs.

 

3.1.5 335 accounts have BO holdings of various companies ranging from 1 to 145 companies. This will indicate that  in the accounts of these persons, credits are being made through sources other than through public issues. The value of the holdings of these entities ranges from thousands to lacs of rupees. This also will indicate that these are not one time accounts opened for cornering IPO process.

 

3.1.6       It is submitted that out of 512 BO accounts, 214 beneficiary owners were already holding shares in physical certificate form prior to the opening of the accounts. These 214 entities had requested PRSSBL to forward their physical certificates for the purpose of getting them dematted. This will indicate that these entities were already shareholders prior to opening the demat accounts with PRSSBL.

 

3.1.7       Further out of 512 entities, 346 entities have been carrying  on transactions in the secondary market. These transactions have been carried out through 19,400 instruction slips signed by the beneficiary accounts and forwarded through their brokers. Out of 512 beneficiary accounts 214 have held physical certificates and 346 had been carrying on with  market transactions.

 

3.1.8       It is alleged by SEBI that Opee Stock Link Limited has in the public issue of Jet Airways Ltd. received 12,039 shares through 553 entities. In this connection, it is denied that 553 entities referred to  by SEBI in its Order have opened BO accounts with PRSSBL. However out of these  only 190 people have opened accounts with PRSSBL. It is further alleged by SEBI in its Order that Shri Deepakkumar has in the public issue of IDFC Ltd. received 2,36,859 shares through 686 accounts. Out of these only 185 accounts have been opened through PRSSBL and more than 500 have been opened through other Depository Participants. It is submitted that PRSSBL or its Directors have neither received nor given any share in the account of either OPEE or Deepakkumar. It is submitted that PRSSBL is not aware as to from which source OPEE or Deepakkumar are getting their shares credited. PRSSBL has had no understanding with either OPEE or Deepakkumar regarding any shares relating to IPO. In the account of OPEE and Deepakkumar debits and credits of various securities (other than IPO) have also been made.

 

3.1.9 An analysis of the demat accounts of OPEE Stock Link Ltd. as well as Deepakkumar have been carried out and it revealed that OPEE Stock Link Ltd. has undrtaken transactions in 984 scrips in this account. This indicates that OPEE stock Link Ltd. is an active investor in the primary and the secondary markets. The total number of transactions carried out by OPEE Stock Link Ltd is 21,436 in number. This account has been opened by OPEE Stock Link Ltd on August 18, 2000 and has been active till date it was frozen by SEBI i.e. on April 28, 2006.

 

3.1.10  Shri Deepakkumar has opened an account with PRSSBL on August  11, 2004. He has carried out transactions in 380 scrips till today. In other words Deepakkumar is an investor carrying out transactions in the primary and the secondary markets. In view of the above also it can not be said that PRSSBL has facilitated opening of demats for the IPO scam.

 

3.1.11  Since KYC norms is not a part of the Depository Act or the regulations, PRSSBL cannot be held guilty of having violated the provisions of the Act and or the Regulations.

 

3.1.12  In the Order, it is further stated that PRSSBL has facilitated opening of fictitious and benami accounts and cornering the retail portion of IPO shares. It is denied that PRSSBL has facilitated in opening of fictitious or benami accounts or cornering of any retail portion of the IPO shares. It is submitted that the accounts opened by the beneficiary owners with PRSSBL had transactions not only in the primary market but also in the secondary market since the year 1999 onwards. Therefore, it is not as PRSSBL has opened fresh accounts only for the purpose of  enabling the BOs to corner the retail portion of the IPO shares.

 

3.1.13  It is further submitted that impugned Order has been passed by SEBI under the provisions of Sections 11(4)(b), 11B and 11 of SEBI Act & Section 19 of the Depository Act. It is submitted that the provisions of Section 11 (4)(b) can only be invoked when the investigations are pending or completed. In this case, SEBI has neither investigated or inspected any of “Know Your Client” norms to come to conclusion that PRSSBL has violated the Know Your Client Norms. Since the investigation has  not been initiated or completed, Section 11(4)(b) cannot be invoked against PRSSBL. Neither has SEBI conducted any inquiry nor initiated an inquiry with regard to violation  of the “Know Your Client” Norms. SEBI has passed Order on the presumption that all the 512 entities are fictitious or benami entities  and hence the reliance placed by SEBI on the provisions of Section 11(4) (b) is not tenable.

 

3.1.14 It is submitted that the Order has been passed by SEBI under the provisions of Section 19 of the Depositories Act, 1996. SEBI has passed Order  on the presumption because it has found that 510 clients whose names appeared in the various IPOs have opened accounts with PRSSBL. SEBI has not made any enquiry regarding the breach of the KYC norms or non- compliance with KYC guidelines and without making any enquiry has passed directions under Section 19 of the Depositories  Act.

 

4.0 Personal Hearing

 

4.1 Further, PRSSBL appeared for personal hearing before me on August  2,  2006 through the persons recorded on the first page of this Order and made submissions in detail.

 

4.0  Consideration of the issues

 

4.1 At the outset, I have noted that PRSSBL had challenged the ad interim ex parte Order before the Hon’ble High Court of Gujarat at Ahmedabad. The Hon’ble High Court after hearing both the parties disposed of the Writ  Petition vide  Order dated December 22, 2006 directing SEBI to decide finally the show cause notice issued upon the petitioner which is at Annexure A to the Petition i.e the show cause notice issued vide Order dated 27 April 2006, as expeditiously as possible and in no case later than four weeks from the date of receipt of the writ of the  Court.

 

4.2 Taking into account the above direction issued by the Hon’ble High Court and prima facie findings as recorded in the ad interim ex-parte Order and the submissions of  PRSSBL my findings are as under:

 

4.3 I have noted that there is a prima facie finding that PRSSBL has failed to adhere to the KYC norms laid down by SEBI and opened fictitious/ benami demat  accounts facilitating the cornering of retail portion of  IPOs.

 

4.4 At the outset, I find that the ad interim ex-parte Order, was passed in exercise of the powers under section 11 (4) and 11 B of the SEBI Act, 1992. Section 11(4) empowers SEBI to pass such orders both before investigation or inquiry and also after completion of investigation or inquiry. The ad interim ex-parte Order itself records that the Order has been passed pursuant to a detailed investigation. Further, the proviso to section 11 (4) provides for passing of such an ad interim ex-parte Order, pending post decisional hearing. I do not find any legal infirmity in passing such Order. Further, I have noted that on June 7, 2006 PRSSBL was given an opportunity for inspection of documents relied upon by SEBI including the material provided by NSDL. Therefore, the contention of PRSSBL as stated in para 3.1.13 that since investigation has not been initiated or completed, section 11 (4) (b) cannot be invoked against PRSSBL is devoid of merit. The present Order gives only a prima facie finding as to the necessity of passing the above directions at this stage.  As regards initiation of enquiry, SEBI has already appointed an Enquiry Officer to enquire into the charges.

 

4.5 As regards the prohibition imposed on the DPs, I am of the view that such prohibition was required as a precautionary measure for the purpose of safety, security and integrity of the market in view of the serious prima facie findings of large scale opening of demat accounts in fictitious and benami names (afferent accounts), and these accounts being used for the purpose of cornering the shares meant for retail investors in various IPOs.  In light of such findings, the DPs who had more than 500 such accounts were directed not to open fresh demat accounts pending verification and enquiry by depositories. It is, therefore, clear that the prohibition on opening fresh demat accounts was issued upon a serious suspicion on the genuineness of the afferent accounts subject to verification by depositories.

 

4.6 In respect of PRSSBL, as per the findings of interim Order, it is observed that 510 afferent accounts are held with them. Further, Key Operators named in the interim Order, i.e. Opee Stock Link Ltd and Deepakkumar who also hold their demat accounts with PRSSBL, have received credit of shares in the IPOs from multitude of demat accounts as mentioned at 2.1.1 above. In this connection, PRSSBL submitted that 510 afferent account as alleged by SEBI are not benami / fictitious but are of existing entities. Further, they submitted that majority of these accounts are still active and were also observed to have been used both in primary and secondary market which indicates that these are not one time accounts opened only for the purpose of cornering shares in IPO. I have noted the above submissions made by PRSSBL. However the prima facie findings of large scale off market transfers from the afferent accounts to the demat accounts of Key Operators and that some of these afferent accounts also share common addresses with the Key Operators appear to suggest that these accounts may  not be  genuine.

 

4.7 In view of the above prima facie findings, it appears that PRSSBL may have failed to comply with the KYC norms laid down by SEBI in terms of exercising due diligence to establish the identity of the clients as prescribed in SEBI circulars dated August 4, 2000 and August 24, 2004 and opened afferent accounts. However, for the purpose of ascertaining the genuineness of these accounts and compliance of KYC norms, SEBI had directed both depositories to verify the same.

 

4.8             I have noted that SEBI had directed depositories to conduct inspection of DPs identified in Order to verify whether all the account holders of these DPs are genuine and KYC norms laid down by SEBI have been complied with. In this connection, NSDL vide its letter dated August 10, 2006 submitted that out of 510 afferent accounts of PRSSBL, 162 demat are closed and 348 demat account are active. Accordingly, 348 demat account holders were called for personal verification and corresponding KYC documentation was examined. Pursuant to in person verification, it was observed that 138 demat account holders were represented by persons like wife, brother, father, friend etc. NSDL was advised to provide further information which was provided by it vide its letter dated October 30, 2006. The said information has been forwarded to the Enquiry Officer who has been appointed to enquire into the charges against PRSSBL. Therefore, I am of the view that issues, if any, shall be taken up by him and necessary action may be taken against PRSSBL if found guilty of violating any regulation of SEBI.

 

4.9             I have also noted that another ex-parte interim Order dated November 21, 2006 was issued in continuation of ex-parte Order dated April 27, 2006. Depositories and certain DPs including PRSSBL were directed to disgorge jointly and severally the ill-gotten gains and an amount of Rs.1,37,52,828.55/- has been mentioned against PRSSBL. The findings of the said Order are co-terminus with the findings of enquiry. I further note that the Hon’ble Securities Appellate Tribunal vide Order dated January 11, 2007 admitted the appeal filed by PRSSBL and stayed the operation of the impugned Order. Further, in a similar case where the final Order was passed by SEBI, the Hon’ble Securities Appellate Tribunal has allowed SEBI to initiate proceedings against that entity for disgorgement in accordance with law. Therefore, in my view, the enquiry proceedings are to be concluded before further action with regard to the penalty and disgorgement is taken. Based on the above findings, it prima facie appears that PRSSBL was lax in following KYC and other norms which it was obliged to follow. In view of the fact that 9 months have already elapsed, the entity being restrained from opening new accounts, I am of the view that the interim Order against PRSSBL barring them from opening new accounts may not be required.

 

5.0 Order

 

5.1 In view of the above, I, in exercise of the powers conferred upon me in terms of section 19 read with section 11 and 11B of SEBI Act, 1992 hereby direct that there is no need to continue with the directions issued to PRSSBL not to open fresh demat accounts.

 

5.2  It is clarified that the present Order gives only a prima-facie finding as to the necessity of passing the above directions at this stage and accordingly all issues and contentions are left open to be decided by the Enquiry Officer and to be decided in subsequent proceedings pursuant to his report.

 

5.3 This Order shall come into force with immediate effect. 

 

PLACE: MUMBAI

DATE: 16-01-2007

 

  T C NAIR

 WHOLE-TIME MEMBER

SECURITIES AND EXCHANGE BOARD OF INDIA