MO/ 86/ISD / 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. INFINITE FINANCIAL SERVICES PVT. LTD.

Date of hearing: August 02, 2006

Appearance :

For Noticee :   Shri Sanjay Mehta, Advocate

  Shri Mahesh K Shah, Whole Time Director

   Shri Anish Kharidia, Company Secretary

FOR SEBI :    Shri Sanjeev Dutt, Chief General Manager

   ShriV.R. Prasad, Deputy Legal Adviser

    Ms. Kshama J. Chavan, Legal Officer

ORDER

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

1.0 Background

1.1             By an ad interim ex-parte Order dated April 27, 2006 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 M/s. Infinite Financial Services Pvt. Ltd. (hereinafter referred as IFSPL).

1.2             The ad interim ex-parte Order dated April 27, 2006 states that IFSPL, Depository Participant (hereinafter referred to as ‘DP’) of National Securities Depository Ltd (hereinafter referred to as ‘NSDL’) prima facie appears 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 sharing common addresses thereby cornering the retail portion of shares in Initial Public Offering (hereinafter referred to as ‘IPO’). In view of the above preliminary finding, IFSPL was directed not to open fresh demat accounts till further directions.

1.3 Para 17.18 of the ad interim ex-parte Order dated April 27, 2006, stated that the said Order shall be treated as show cause notice against the concerned entities named therein including IFSPL. These entities were given an opportunity for filing their objections, if any, to the Order within 15 days from the date of the Order and if they so desire, avail themselves of an opportunity of personal hearing at the SEBI Head Office, Mumbai within 15 days from the date of the Order. They were also given an opportunity to avail the facility to inspect the relevant documents relied upon by the SEBI against them, prior to hearing.

2.0 Findings regarding IFSPL in SEBI’s  ad interim ex-parte Order

2.1 The focus of the 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 cornering of IPO shares in retail segment through benami / fictitious demat accounts.

2.2  At paragraph 9.11 of the Order, it has been mentioned that around 524 demat account holders of IFSPL shared common addresses.

2.3 At para 12.56 of the ex-parte Order, it is stated that on physical verification done by the Chartered Accountant (CA) firm it was found that Shri Mahesh Shah, Whole Time Director of IFSPL acted on behalf of one of the Key Operators had used the names of certain persons to open many demat accounts and had given few common addresses to facilitate receipt of IPO allotment advices and refund orders.

2.4 At para 12.56 (b) of the Order, it is stated that the Beneficiary Owners (hereinafter referred to as ‘BOs’) of Centurion Bank of Punjab Limited (hereinafter referred to as ‘CBPL’) were only name lenders (benamis) to the IPO issues. Shri Mahesh Shah, Director of IFSPL acting on behalf of one of the key operators, has informed that they had used the names of certain persons to open many demat accounts and had given few common addresses to facilitate receipt of IPO allotment advices and refund orders. Shri Mahesh Shah also indicated the involvement of Shri Tushar Shah and Shri Paragbhai, who are the directors of a key operator viz. SEIPL.

2.5  At table 12.56 (f) of the Order, it is stated that Shri Mahesh K Shah, Whole Time Director had opened the account of various BOs with CBPL by collecting their Proof of Identity (POI) and Proof of Address (POA) and further opened their bank accounts with his name as first name and others as joint holder in Apni Sahakari Bank Ltd., Ahmedabad. Further Shri Mahesh Shah opened accounts in various names for benefits he could derive from them and financed the margins for the funding of accounts opened with CBPL. Shri Tushar Shah and Shri Paragbhai of Sugandh Estate Investment Private Ltd. (hereinafter referred to as ‘SEIPL’) were active participants in his activities.  Shri Mahesh Shah had collected voter IDs and other related documents from the dwellers and had opened demat accounts with CBPL in their names.

2.6             At para 12.62 of the ex-arte Order, it is stated that on physical verification conducted by SEBI of demat clients of CBPL sharing common addresses, it was found that Shri Mahesh K. Shah had used about 150 names with common addresses at 85-88, City Centre, CG Road, Navrangpura, Ahmedabad for making applications in various IPOs such as IDFC, Kernex, Suzlon, ICICI etc. Shri Shah had arranged the IPO finance for the above applicants and that the bank account of the clients were either opened by him or introduced by him. Further analysis of some bank statements of the clients with Apni Sahakari Bank Ltd. revealed that the accounts were opened in the names of Shri Shah and that about three names were added to the account as joint names.

2.7             In view of the above findings in the Order, directions as mentioned at Para 1.2 above were issued to IFSPL.

3.0 Reply of IFSPL and Oral Submissions

3.1 IFSPL filed its preliminary submissions to the Order cum show cause notice on May 1, 2006. It also availed of the opportunity given to inspect the documents relied upon by SEBI on June 20, 2006. The submissions made by IFSPL in the aforesaid letters are as under:

                                i.            IFSPL nor Shri Mahesh K. Shah nor his family members had any connection with SEIPL or any of its directors including Shri Tushar Shah and Shri Paragbhai.

                             ii.            IFSPL nor Shri Mahesh K. Shah nor his family members had any transactions pertaining to finance or securities with SEIPL or any of its directors.

                           iii.             IFSPL and Shri Mahesh K. Shah have no direct or indirect dealings / relationship with the key operator SEIPL or its directors Shri Tushar Shah and Shri Paragbhai.

                           iv.            SEIPL nor Tushar H. Shah nor Shri Paragbhai have beneficiary accounts with IFSPL (DPID – IN 301661) and with their branch office at Gandhinagar (DPID-IN 302429).

                              v.            IFSPL / Shri Mahesh K. Shah does not have an office at Sakar 1, near Ellisbridge, Ahmedabad.

                           vi.             IFSPL nor Shri Mahesh K Shah, director of IFSPL had any transaction with Shri Tushar Shah, Shri Paragbhai, directors of SEIPL and SEIPL. IFSPL has annexed a certificate of Chartered Accountant firm, M/s Ashokkumar S. Gupta & Co. to the effect.

                         vii.            It is a question of mistaken identity with Shri Mahesh Kantilal Shah, director of IFSPL having office at 85-88, City Centre, C.G. Road, Navrangpura, Ahmedabad – 9 and Shri Maheshbhai having at Sakar -1, Near Ellisbridge, Ahmedabad.

                      viii.            IFSPL / Shri Mahesh K. Shah, director of IFSPL is not directly or indirectly connected with and does not have any transactions / dealings with any of the 24 key operators and 85 financiers mentioned in the Order.

                           ix.            None of the key operators and financiers have any BO accounts with DP of IFSPL.

                              x.            As regards number of demat account holder having common addresses :  

a.      Out of 524 accounts with IFSPL DP (DPID-IN301661) sharing common addresses, 66 accounts are active and other accounts have been closed by BOs prior to March 31, 2006.  

b.      IFSPL at their branch office at Gandhinagar under a separate DP ID (IN302429) number of account sharing addresses (more than 20) was nil.

c.       Further IFSPL does not have DP except a branch with direct connectivity to NSDL.

                           xi.            There is no material or major discrepancy found by the inspecting authority so far as compliance of KYC norms were concerned.

                         xii.             The technical lapses which were brought out by NSDL during the inspection were duly and properly complied with at a later stage.

                      xiii.            With respect to Shri Mahesh K Shah, Whole Time Director being instrumental in opening several demat accounts with CBPL, the concerned Chartered Accountant (CA) appointed by SEBI found that some alleged conversation took place between one lady and the branch head of the CBPL, Ahmedabad Branch. The said conversation is completely devoid of particulars and  authenticity.  Neither IFSPL nor Mr. Mahesh k Shah owns or posses and or occupies any office premises at Sarkar I, nor do they operate in any manner whatsoever from any of the premises situated at Sarkar I, Ellisbridge, Ahmedabad.

                 xiv.                  A detailed enquiry conducted by IFSPL indicated  that there existed one Shri Maheshbhai in Sarkar I, Ellisbridge, Ahmedabad who had his office address as “105, Sarkar I,  Ellisbridge, Ahmedabad and he is employed with M/s Mehta Lodha & Co and the same firm was  having office at the aforesaid address. This indicated that Shri Mahesh K Shah, Whole Time Director of IFSPL had been wrongly projected as Shri Maheshbhai who is alleged to have been instrumental in opening the demat account with CBPL.

                         xv.            IFSPL denied of having any direct nexus with SEIPL or any of its directors.

3.2 IFSPL was given an opportunity of personal hearing before me and it was represented by Shri Sanjay Mehta, Advocate, Shri Mahesh K Shah, Whole Time Director and Shri Anish Kharidia, Company Secretary. The submissions made by IFSPL vide its letter dated May 01, 2006 were reiterated.  Besides, they also handed over written submissions vide letter dated August 04,  2006 and the same are considered.

4.0  Consideration of the issues

4.1 I have carefully considered the prima facie findings as recorded in the ad interim ex-parte Order and the submissions made by IFSPL. I have noted that there are four prima facie findings against IFSPL, i.e. opening of 524 demat accounts with common addresses, Shri Mahesh K Shah, Whole Time Director was instrumental in opening several demat accounts with CBPL and connection/ link with SEIPL, one of the key operators and failure to adhere to KYC norms.

4.2 At the outset, I have noted that J. Jayaraman, CA firm appointed by SEBI made a serious observation at para 12.56 (b) of the interim ex-parte Order that Shri Mahesh Shah, Director of IFSPL acting on behalf of one of the Key Operators, namely SEIPL has opened benami accounts with common addresses with CBPL. Further, at table 12.56 (f) of the said Order, it was also stated that Shri Mahesh K Shah had collected voter IDs and other related documents from the dwellers and had opened demat accounts with CBPL in their names. It has also been noted that 524 multiple demat accounts sharing common addresses were also opened with IFSPL which prima facie lead to the suspicion regarding the genuineness of these account holders and accordingly the ad interim ex parte Order was passed against IFSPL directing it not to open fresh demat accounts pending enquiry and passing of final Orders.

4.3             Shri Mahesh K. Shah, during the course of hearing before me clarified that he is not the same person as indicated in the interim Order and it is a mistaken identity. In this regard, he has submitted two affidavits dated May 1, 2006 and July 28, 2006 which state as under:

i.                    IFSPL / Mahesh K. Shah have or neither had any connection or association with SEIPL or any of its directors including Tushar H. Shah and Mr. Paragbhai.

ii.                 SEIPL nor Mr. Tushar H Shah nor Mr. Paragbhai had  beneficiary accounts with IFSPL and with our branch office at Gandhinagar.

iii.                IFSPL /Mahesh K Shah does not have an office at Sakar I, near Ellisbridge,  Ahmedabad.

iv.               IFSPL / Mahesh K Shah have never had any transactions pertaining to finance or securities with SEIPL or any of its directors.  

4.4             Taking into consideration the above submissions of IFSPL, it is necessary to examine the veracity of his claim. In view of the fact that enquiry proceedings have been initiated against IFSPL and are in progress, this aspect may be examined by the Enquiry Officer.

4.5             As regards the opening of 524 demat accounts sharing common addresses, IFSPL submitted that they have currently 66 active accounts and other accounts have been closed by the BOs prior to March 31, 2006. Further IFSPL at its branch office at Gandhinagar, Ahmedabad had nil number of accounts sharing common addresses and there was no DP except for its branch connectivity to NSDL.  It is on record that IFSPL had opened 524 demat accounts with common address which prima facie indicated that IFSPL 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. The DPs which prima facie appeared to have failed in adhering to the Know Your Client norms laid down by SEBI and thereby facilitating opening of demat accounts in fictitious / benami names and cornering the retail portion of IPO shares have been asked not to open fresh demat accounts till further directions.

4.6 Further, I have noted that at para 17.10 of the ex-parte Order, SEBI had directed Depositories to conduct inspection of DPs identified in Order to verify whether all the account holders of the DPs referred at para 17.9 of the Order are genuine and KYC norms laid down by SEBI have been complied with. In this connection, NSDL vide its letter dated June 12, 2006 submitted their verification report which is under examination by the Enquiry Officer.

4.6             I have noted that an Enquiry Officer has already been appointed under the SEBI (Procedure for Holding Enquiry by an Enquiry Officer and Imposing Penalty) Regulations, 2002, to enquire into the irregularities observed against IFSPL. I am, therefore of the view that issues, if any, shall be taken up by him and necessary action may be taken against IFSPL, if it is found guilty of violating any regulations of SEBI. In the meantime, based on the material available on record and the submissions made by IFSPL, I am of the view that interim prohibition stated in para 17.9 of the ex parte Order on IFSPL may not be required to be continued.

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 IFSPL 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 in subsequent proceedings pursuant to his report.

5.3 This order shall come into force with immediate effect.