ORDER
G. Anantharaman, Member
UNDER SECTIONS 11B AND 11(4)(b) OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992
1.1 Karuna Cables Limited (hereinafter referred to as ‘KCL’) is a company listed on Stock Exchange, Mumbai (BSE) and the National Stock Exchange. There was a sudden spurt in price and trading volume of small cap companies in BSE and NSE including KCL. The shares of KCL witnessed a sharp price variation during the period of February to September 2005. The share price of KCL went up form Rs. 22.4 on February 10, 2005 to Rs. 159.5 on September 16, 2005 in 153 trading days representing a rise of 636%. The analysis of the information available with SEBI prima facie revealed that:
a) Considering that the allotment of shares was made to the multiple entitles having the same address it appeared that these shares were allotted to benami or fictitious entities.
b) It appeared that partly paid shares were converted to fully paid shares after a gap of 8-9 years, and that too without receiving the allotment money at the time of conversion of partly paid shares to fully paid shares.
c) It appeared that the company made wrong and misleading disclosure of promoter’s holding in the company to BSE.
d) It appeared that entities connected to the promoters rematerialized large quantity of shares of the company possibly to circulate and offload their holding without getting detected or to avoid audit trail.
e) It appeared that company made misleading and premature corporate announcements (such as receipt of big orders of Rs 48.70 million from Central Distribution Power Ltd. (CPDCL) and then cancellation of this order) to BSE.
f) There was absence of wide spread investor interest in the share of the company since June 2000 to January 2005, followed by sudden increase in share price and volume since February 2005. It appeared that the promoters, the entities connected to them and interconnected entities indulged in large number of off-market deals, who in turn dealt heavily in the market and thereby contributed to the sudden rise in trading volumes and the corresponding price rise.
The above prima facie findings indicated a possible designing and orchestrated execution of a plan by the promoters, to make personal gains at the expense of investors by enticing them to participate in the trading of the shares of the company and with a view to offload their holdings which were not disclosed as part of promoter’s holding, as it seems.
1.2 In view of the above, SEBI issued an ad-interim ex-parte Order dated 29.11.2005, for the reasons stated therein, pending investigation with the following directions:
• The promoters of Karuna Cables Ltd. (KCL) viz, Mahendra C. Shah, Hasu M Shah, Mit Shah, Akshat Shah, Kirti C. Shah, Jaswant C. Shah, Sanjay B Shah, Ceetee Trading and Leasing Pvt. Ltd. and the non-executive independent directors of KCL N. S. Rangnath, C.V.V. Prasad and Pavankumar Sanwarmal are hereby directed not to buy, sell or deal in securities of Karuna Cables Ltd, directly or indirectly, till further directions in this regard and Karuna Cables Ltd. is further directed that it shall not issue any equity shares or any other instruments convertible into equity shares, in any manner, or shall not alter its capital structure in any manner, till further directions in this regard.
• The clients viz., Richtone Fintrade & Investment Pvt. Ltd., Vinayak Trimbak Sarkhot, Pradnya Sarkhot, Bipin Shah, Bhavana Bipin Shah, N. G. Builders & Developers, Narendrapal Gupta, Manju Gupta, Vijay Bhagwandas Shah and Vintel Securities Pvt. Ltd. are hereby directed not to buy, sell or deal in securities of Karuna Cables Ltd, directly or indirectly, till further directions in this regard.
• The clients Ritedeal Trading Company Pvt. Ltd, Ajit Suryavanshi, Santosh Rohidas Jagtap, New Leader Trading Co. Pvt. Ltd., Ramdas Kshirsagar, Umesh Choukekar, Rightstar Trading Company Pvt. Ltd., Dattu Shitole, Amar Adhav, Rajkishore Singh, Santosh Pawar and Vijay Suryavanshi who have already come to SEBI’s adverse notice in the cases of IFSL Ltd. and Mega Corporation Ltd. are hereby directed not to buy, sell or deal in any securities directly or indirectly, till further directions in this regard.
• The Stock Brokers viz. Galaxy Broking Ltd., Accord Capital Markets Ltd., B. Lodha Securities Ltd., CSL Stock Broking Pvt. Ltd., SVS Securities Pvt. Ltd. Indiabulls Securities Ltd., and Fortis Securities Ltd., are hereby directed not to buy, sell or deal in securities of Karuna Cables Ltd., directly or indirectly, for the entities mentioned, till further directions in this regard.
• The Depositories shall not give effect to any transfer of shares of Karuna Cables Ltd. lying in the beneficial owner accounts of the entities and
• The entities/persons against whom these directions are issued may file their objections, if any, to this order within 15 days from the date of this order and, if they so desire, avail themselves of an opportunity of personal hearing at the Securities and Exchange Board of India, Head Office, First Floor, Mittal Court B wing, Nariman Point, Mumbai 400 021 on a date and at a time to be fixed on a specific request, to be received in this behalf from the entities/persons within 15 days from the date of this order.
1.3 KCL vide letter dated December 14, 2005 on behalf of the promoters viz. Mahendra C. Shah, Hasu M Shah, Mit Shah, Akshat Shah, Kirti C Shah, Jaswant C Shah and the non-executive independent directors viz. N.S. Rangnath, CVV Prasad and Pavankumar Sanwarmal requested for grant of additional 15 days time to file written submissions and also sought personal hearing.
1.4 The promoters of the company, the clients viz. Richtone Fintrade & Investment Pvt. Ltd., Vinayak Trimbak Sarkhot, Pradnya Sarkhot, Bipin Shah, Bhavana Bipin Shah, N.G. Builders & Developers, Narendrapal Gupta, Manju Gupta, and Vintel Securities Pvt. Ltd., Ritedeal Trading Company Pvt. Ltd., Ajit Suryavanshi, Santosh Rohidas Jagtap, New Leader Trading Co. Pvt. Ltd., Ramdas Kshirsagar, Umesh Choukekar, Rightstar Trading Company Pvt. Ltd., Dattu Shitole, Amar Adhav, Rajkishore Singh, Santosh Pawar and Vijay Suryavanshi and the stock brokers Accord Capital Markets Ltd., B Lodha Securities Ltd. CSL Stock Broking Pvt, Ltd., SVS Securities Pvt. Ltd. and Fortis Securities Ltd. have neither submitted their replies nor requested for personal hearing in the matter. India Bulls Securities Ltd. vide their letter dated December 1, 2005 submitted their reply giving details of the trading done by their clients and steps taken by them to ensure the compliance of the said order.
2.1 The company submitted its replies vide various letters which have been dwelt upon, in the subsequent part of the order. KCL stated vide its reply dated February 7, 2006 that:
2.1.1 The company is engaged in manufacturing of various Aluminum Conductors, Aluminum Conductors Reinforced, Aluminum Alloy Conductors and Aluminum wires and cables of all variety. Thus it is engaged in manufacturing and marketing of power cables and not manufacturing and marketing any metal.
2.1.2 Ceetee Trading and Leasing Pvt. Ltd. was never included in the promoter category right from inception. Hence it is denied that KCL provided inaccurate disclosures with regard to the promoter holding to the investors.
2.1.3 The public issue was handled by renowned lead managers SICOM Limited and Keynote Corporate Services Limited and Registrars to the issue were R and D Consultants Private Limited. The lead manager and registrar had submitted all relevant information regarding public issue as per statutory requirements and stipulations of SEBI, BSE, NSE and other relevant authorities. It stated that it was not directly involved in the procedures at the time of finalizing of allotment.
2.1.4 The public issue was made in May 1996 and in that period delivery of shares was in physical form. The electronic mode was introduced subsequently. As per the offer document the application money was to be paid in two instalments – Rs. 2.5 on application and balance Rs. 7.5 on allotment. The allotment of the shares was made in July, 1996 and the allotment money (call money) was required to be paid by September, 1996. The application for delivery in electronic mode became applicable to KCL in 2000 by which time the payment of allotment of money had become long over due. It is in these circumstances that KCL was advised that it could apply for single category with a single ISIN number as trading between partly paid and fully paid shares would create confusion in the market place. As stated earlier KCL passed through a bad patch due to financial constraints imposed by the banks resulting into closure of the factory, which could be reopened only after one time settlement with the bank. The shares remained partly paid due to the fact that on listing, the shares were traded below par and therefore, in a depressed market condition a large part of allotment money remained unpaid. The shareholders made payment of the allotment money only after getting the news of the reopening of the undertaking of KCL. It is further, submitted that KCL has turned around its financial position from loss making to profit generation in the year 31st March, 2003 as it would be clear from the financial position.
2.1.5 It had made Public Issue in terms of which the applicants were required to make payment of Rs. 2.50 as application money and balance Rs. 7.50 per share as allotment (call) money.
2.1.6 The amount received was against call in arrears and company had deposited money in regular bank accounts as the same was not required to be kept in a separate account.
2.1.7 As regards transactions in bank statement of February 3, 2005 (Rs. 4 lakhs) and February 7, 2005 (Rs. 15,000) and transactions during 14th December, 2004 and 20th December, 2004 amounting to Rs. 6.90 lakhs it was clarified that there was an error in putting the marker on the amount of Rs. 4 lakhs and Rs. 15,000 due to which it was considered as allotment (call) money received in cash. The fact was that the allotment (call) money totaling Rs. 6.90 lakhs received during the period 14th December to 20th December, 2004 was withdrawn during the same period and redeposited in February (Rs. 4.15 lakhs) as the same was not required for business purposes.
2.1.8 Regarding payments made to H R K Fabricators it was stated that they made a payment of Rs. 31.50 lakhs to them against their bill No. 104 for purchase of machineries (melting furnaces) from them. When KCL took possession of the factory, all the machinery was in damaged condition, which required overhauling / replacement. Hence they had to spend large amounts to relocate the machinery to ensure quality production.
2.1.9 Regarding payment made to RJ Corporation of Rs. 15.47 lakhs and Key Stone Company of Rs. 30 lakhs on 2.3.05, it was stated that they were the suppliers of material and the above payments were made in the regular course of business dealings of purchases.
2.1.10 Regarding payment of Rs. 26.50 lakhs made to Sanskruti Fin Pvt. Ltd. on 3.3.2005, it was stated that the said amount was paid to them on account, which was returned in the 2nd and 3rd week of March, 2005 (in instalment on various dates) and the amount was redeposited in our regular Bank account only. It was further clarified that on enquiries made with them; they confirmed that they had not dealt in the shares of Karuna Cables Ltd. as alleged in the SEBI order.
2.1.11 It was denied that the above transactions were with a view to recycling funds to show the bank entries towards receipt of call money. Regarding analysis of the quarterly results submitted to BSE, it was stated that there was no fresh issue of capital during the year. The increase in the share capital was on account of payment of call in arrears from the partly paid shareholders of KCL.
2.1.12 At the request of the shareholders their cheques were received but not deposited in the same quarter but were deposited in the last quarter of the financial year 2004-05. The shares were fully paid only after clearance of the cheques and even the demat of shares was done subsequent to the clearance of cheques.
2.1.13 As regards the financial performance of KCL it was stated that since the restart of the business of KCL, after the one time settlement with the bank, KCL has been on the growth path both in terms of turnover and profits.
2.1.14 Regarding the corporate announcements, it was submitted that except for two announcements which related to receipt of major orders other announcements were only technical in nature.
2.1.15 Regarding the allegation of entities connected to the promoters, it was submitted that Ceetee Trading and Leasing Pvt. Ltd. was promoted by Mahendra C. Shah and Hasu M. Shah. However, KCL was promoted in November 1985 and subsequently Mahendra C. Shah resigned from KCL and was replaced by Dhiresh Chandrakant Shah in 1994. Thus there is no connection between Ceetee Trading and Leasing Pvt. Ltd. and Mahendra C. Shah.
2.1.16 Regarding the off market transactions of Richtone, it was submitted that the shares of Akshat Shah and Mit Shah were transferred to Richtone as a collateral security for obtaining inter corporate deposit for KCL as KCL was in need of funds and it was necessary to provide collateral security of shares as a comfort to the lender. However, as the promised inter corporate deposit did not materialize, the shares were taken back from Richtone. Thus it is incorrect to impute any connection between the promoters and Richtone and Vinayak Trimbak Sarkhot, Director of Richtone based on a single transaction, which also did not materialize.
2.1.17 As regards common contact address of Pradnya Sarkhot and Vinayak Sarkhot it was submitted that the allegation of their connection with them was imaginary and far from truth.
2.1.18 As regards transactions between Bipin Shah, Bhavna Shah, N.G. Buildrs and Developers, Manju Gupta, Vijay Bhagwandas Shah, Vintel Securities Private Limited, Ceetee Trading and Leasing Pvt. Ltd. and Richtone, it was submitted that they did not know of their transactions and were not in a position to offer comments.
2.2 As regards dealing in shares by promoters and entities connected to them, it was submitted as under:
• Vijay Bhagwandas Shah, Richtone Fin Trade, Vinayak Sarkhot, Narinder Pal Gupta were neither promoters nor entities connected with the promoter.
• As regards rematerialization of shares, it was submitted that dematerialization and rematerilization were done at the request of individual shareholders in accordance with the depository regulations. Further, KCL had no hand in such rematerialization. It was denied that Ceetee Trading and Leasing Pvt. Ltd, Richtone and Vinayak Sarkhot were connected to the promoters.
• As regards payment of Rs. 10 lakhs to Bipin Shah, it is submitted that the transaction was a financial transaction and it was repayment of loan taken from Mr. Bipin Shah earlier.
• As regards dealing in shares of KCL by interconnected entities it was submitted that in a free market the transactions were done on order driven basis where KCL or its promoters had no hand.
3.1 Shri Pavankumar Sanwarmal submitted vide letter dated 26.12.2005 that:
• He was appointed as Non-executive Independent Director of KCL on 29.11.2004 and he was not the promoter of KCL.
• He was, however, included as a member of the Audit Committee of the Company subsequent to his above appointment.
• He was not connected with the day-to-day working of the company.
• He had not played any role as far as the findings were concerned.
• He was holding 1,25,000 shares of the face value of Rs. 2/- each of KCL.
• He had not sold or dealt in the share of KCL.
4.1 Shri Vijay Shah stated that:
• At the relevant time, he did not have any knowledge of the promoters/directors of KCL, the entities dealing on behalf of the promoters/directors, the entities connected/interconnected with the promoters/directors.
• He did not have any knowledge that there existed a careful designing and orchestrated execution of a plan by the promoters to make personal gains at the expense of investors by enticing them to participate in the trading of the shares of the company with a view to offload their holdings.
• All the transactions carried out by him were in the normal course of business.
• The transactions carried out by him did not have any impact on the market price or volume in the market as all the purchases and sale made by him were done off the market in the form of spot transactions. When the purchase transactions were carried out by him, he did not have any knowledge that Ceetee Trading and Leasing Pvt. Ltd. or Richtone Fintrade & Investment Pvt. Ltd. were promoter related/connected entities or that they had any link/nexus/connection with the promoters of the company.
• He requested that he might be given opportunity for a personal hearing.
5.1 Shri N.S.Ranganath submitted vide letter dated 28.12.05 that:
• He was appointed as Non-executive Director on 1.7.03.
• He was also included as Chairman of the Investor Grievance committee and Member of the Audit Committee of KCL subsequent to his above appointment.
• He had not played any role as far as the findings were concerned.
• He was holding 25,000 shares of KCL in physical form which he had purchased during the year August 2003 and did not have any Demat Account.
6.1 Vide letter dated December 8, 2005, Galaxy Broking requested to furnish a copy and provide inspection of all the documents. It also requested for personal hearing to explain their case in the correct perspective. It denied each and every allegation/contention made in the interim order. It stated that reference was made for the first time in the order of its role by stating “During the period February 10, 2005 to July 7, 2005, it had the highest concentration of around 10% and around 12% of gross purchases and gross sales respectively”. It stated that no documentary evidence to support this finding has been provided to it. It further requested for a personal hearing. Subsequently, vide letter dated 23rd December, 2005, it stated that the request for personal hearing asked for in its letter dated 8th December be ignored. Further, vide letter dated January 2, 2006, it stated that SEBI might treat its reply dated 8th December as withdrawn save and except in so far as it dealt with its alleged role as acting in concert with its clients for the alleged violations of SEBI(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
6.2 Out of 10 entities mentioned in the captioned order, only one of the entity i.e. Richtone Fintrade Investment Pvt. Ltd. was their client. It was not aware of the fact that Richtone Fintrade had entered into off market transactions with Mr. Akshit Shah and Mr. Mit Shah being the promoters of KCL. It had executed the trades in KCL for and on behalf of its clients in the normal course of broking business and it had not executed any trades on its own account. Therefore, it had not violated the provisions of SEBI(FUTP) Regulations, 2003. It only executed orders for clients and did not influence the investment decisions of its clients. It did not possess any knowledge of the purported manipulated intentions of its clients. It had no overt or covert prior understanding with its clients to enter into any trades with an intention to manipulate the scrip of KCL.
7.1 KCL was granted personal hearing on February 8, 2006. Shri. P.N. Modi, Counsel, Dr. M.C.Shah, Managing Director and Shri. Prakash Shah, Authorised Representative attended the hearing on the above date. Shri Vijay Shah was also granted opportunity of personal hearing on February 8, 2006 but he did not appear on the said date.
8.1 Having carefully considered the facts and circumstances of the case, the materials on record and the oral as well as written submissions made by the parties mentioned above, I now proceed to deal with the issues as under:
8.2 I have noted that some applicants of the public issue made by KCL were having distinct names but had common address. Some of the instances noticed are given below:
Address
No. of Applicants
No. of shares applied
1 Dharmendra Society G Flr, Haji Bapu Road Malad
(E), MUMBAI 400096
40
20,000
1/1/60/7 Azamabad, Hyderabad, 500020
8
30,000
1-18 Narayan Bldg, Dubhash Lane V P Road, Bombay
– 400004
229
1,14,500
10 Indian Mercantile Mansion, 1st Floor Opp Regal
Cinema, S P Chowk, Bombay – 400039
24
12,000
104 Dayal Bhavan, 2nd Floor, R No 6, New Chinch
Bunder, Mumbai – 400009
40
20,000
13/B Shanti Nagar, 2nd Sector, Sama Sadan,
Borivali (E), Bombay – 400092
104
52,000
188 Mansukhnivas, B/5, 1st Flr, Khetwadi Back
Road, Opp 11th Lane Mumbai – 400004
39
19,500
19 Zankadi Bhadawani Street, Vardham Complax,
Bhavnagar – 364001
44
44,000
2/10 Vidhya Villa, Old Nagardas Road, Andheri
(E), Bombay – 400069
80
43,700
8.3 The allotment of shares to the multiple applicants, who were having same addresses, suggests that KCL had allotted shares to these applicants who appear to be benami or fictitious, apparently to fulfill the requirement of minimum subscription. KCL stated that it was not directly involved in the process of finalizing the allotment. KCL also stated that it had specifically mentioned in the offer document that a person should submit only one application. Merely stipulating conditions without ensuring whether such conditions are being adhered to would not absolve KCL of its responsibilities in the event of manipulation. Further, the receipt of multiple applications from certain entities sharing common addresses and consequent allotment to them without verifying their genuineness does not appear prima facie to be in dispute but the arguments of KCL to suggest that it had no role in the same, cannot insulate them from whatever happened.
8.4 From the documents submitted by KCL, it is observed that KCL received the letter of cancellation of the order from Central Distribution Power Ltd. on April 25, 2005. However, KCL had made the announcement on July 12, 2005 and thereby seemed to have kept the investors in dark about the cancellation of the order and gave misleading appearance. This is, prima-facie, in violation of Regulation 3 read with Regulation 2(c ) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
8.5 It appears that KCL made wrong and misleading disclosure of promoters’ holding in KCL to BSE. It is observed that subsequent to the public issue in 1996, M/s Ceetee Trading and Leasing Pvt. Ltd. was the major shareholder with the holding of 11.09 lakh shares amounting to around 5% of the total listed capital. The scrutiny of the DP Account Opening Form of M/s Ceetee Trading and Leasing Pvt. Ltd. revealed that Shri Mahendra C Shah and Ms Hasu Mahendra Shah were the first directors. Subsequently, on June 14, 2003, KCL authorized its directors Ms Hasu M Shah and Shri Sanjay B Shah to operate the Depository account. This indicates that M/s Ceetee Trading and Leasing Pvt. Ltd. is a promoter entity and therefore, their shareholding should be shown under the Promoter’ Holding category. However, the quarterly shareholding report to BSE for the quarter ended March 2004 shows the holding of M/s Ceetee Trading and Leasing Pvt. Ltd. (479500 shares) and Shri Sanjay B Shah (373900 shares) in the non promoter category. From the shareholding pattern from March 2004 to September 2005, it is observed that there is no change in promoter’s holding; however, by not disclosing the holding of M/s M/s Ceetee Trading and Leasing Pvt. Ltd. and Shri Sanjay B Shah in the promoter’s category KCL seems to have provided inaccurate disclosures with regard to the promoter’s holding to the investors. Thus KCL’s contention that Ceetee Trading and Leasing Pvt. Ltd. was never included in the promoter category right from inception is far from convincing. Ceetee Trading and M/s. Karuna Cables have common directors/promoters. Hence, it should have atleast shown them as persons acting in concert.
8.6 It is further observed that partly paid shares were converted to fully paid shares after a gap of 8-9 years without receiving the allotment money. During the year 2004-05, KCL converted 54,54,600 (43%) partly paid shares to fully paid shares; however, it did not make any specific announcement to BSE. KCL informed that the quarterly results submitted to the exchanges included the information regarding increase in the share capital of KCL.
8.7 The table showing the difference between the increase in the share capital reported through quarterly results and the actual receipts of money as per the bank statements is given below:
(Rs in Lakhs)
Quarter
Increase in the share capital as per Quarterly
Reports
Actual receipts as per bank statements
Difference (Actual amount received – Amount shown in
Quarterly reports)
April 04 to June 04
28.6
0.80
-27.8
July 04 to Sep 04
130.7
5.0
-125.7
Oct 04 to Dec 04
12.4
13.52
1.12
Jan 05 to Mar 05
236.0
364.19
128.19
8.8 In addition, a comparison of the increase in the share capital as per the quarterly results filed with the Stock Exchange vis-à-vis actual amount received by KCL in each quarter shows that during the quarter April-June, 2005 and July-Sept, 2005, KCL converted the partly paid shares amounting to Rs. 27.8 lakhs and Rs 125.7 lakhs respectively to fully paid shares without actually receiving the allotment money. KCL has stated that the cheques were received but not deposited on the request of the shareholders. However, KCL did not furnish any evidence in support of its contentions. KCL stated that the shares were made fully paid only after clearance of the cheques received from the shareholders and demat was also done subsequently. It is found that KCL had admitted that the shares were shown fully paid before the receipt of actual money from the shareholders and the fact that KCL did not deposit the cheques as per the request of the shareholders suggests that the shares were allotted to connected persons. Further, KCL has not submitted any evidence to suggest that the cheques were received by them.
8.9 KCL had shown the transfer of funds of Rs 37.50 lacs from its own bank account located at Hyderabad on March 1, 2005 towards receipt of call money and immediately on March 2, 2005 transferred Rs. 30.00 lakhs to a company called Keystone Commercial Pvt. Ltd. KCL stated that the amount of Rs. 37.50 lakhs was received from Mr. Atul J Agarwal being call money on 5,00,000 shares and hence the amount was shown as a transfer. However KCL has not explained why an amount of Rs. 30.00 lakhs was transferred to Keystone Commercial Pvt. Ltd. Hence, it is necessary to ascertain the exact details.
8.10 Similarly, on March 2, 2005 the bank account of KCL showed a receipt of Rs 30.00 lakhs. However, on March 3, 2005 KCL transferred Rs 26.50 lakhs to Sanskruti Fin Pvt. Ltd. It is also observed that some of the entities having address of Sanskruti Securities Ltd. have dealt in the shares of KCL which appear to be connected to Sanskruti Fin.Pvt. Ltd. Thus, the sequence of events as narrated above, prima facie seems to suggest an underpinning design rather than developments in the realm of fortuitous circumstances.
8.11 During the period December 14, 2005 to December 20, 2005 the bank account of KCL showed Rs 6.90 lakhs as receipt of call money. However, the entire amount was withdrawn as cash during the same period. The immediate transfer of funds to other entities, cash withdrawals, non maintenance of separate bank account for receipt of call money and receipt of call money in cash, prima-facie suggest that KCL could be recycling the same funds to disguise them as receipt of call money. KCL admitted that the amount of Rs. 6.90 lakhs was withdrawn from their Bank Account maintained with Bank of Baroda, Boribunder branch and enclosed a photocopy of the bank statement. However, the reasons for withdrawal were not stated and investigations are under process to ascertain the exact details.
8.12 It is found that some of the entities connected to the promoters dealt in the shares – Vijay Bhagwandas Shah (1202700100001472) received 50000 shares from Vinayak Sarkhot on March 16, 2005, 91316 shares from Vintel Securities Pvt. Ltd. on July 20, 2005, 406300 shares from Ceetee Trading and Leasing Pvt. Ltd., on March 16, 2005 and March 21, 2005, 292500 shares from Richtone Fin Trade and Investment Pvt. Ltd. on March 21, 2005. Vijay Bhagwandas Shah transferred 501000 shares through off-market deals to various entities on March 16, 2005, March 17, 2005 and Mach 18, 2005 and these entities have subsequently sold these shares in the market.
8.13 Richtone Fin Trade and Investment Pvt. Ltd. have transferred 532500 shares to Vintel Securities Pvt. Ltd. on March 22, 2005 and March 24, 2005. Vintel Securities Pvt. Ltd., while dealing through the broker Galaxy Broking Ltd. had bought 3,89,826 and sold 5,04,089 shares and while dealing through the broker Indiabulls Securities Ltd. bought 57,810 shares and sold 1,44,640 shares in the market.
8.14 The promoters / directors of KCL – Mit Shah and Akshat Shah transferred 292500 shares to Richtone Fin Trade and Investment Pvt. Ltd. on March 21, 2005, who in turn transferred the same quantity of shares to Vijay Bhagwandas Shah on March 21, 2005 . On March 22, 2005 Richtone Fin Trade and Investment Pvt. Ltd. has transferred the same quantity of shares to the promoters / directors of KCL – Mit Shah and Akshat Shah. KCL has not disputed the facts but stated that the shares were transferred to Richtone as collateral security for obtaining inter corporate deposit for KCL. At a later stage when the deposit did not materialize the shares were transferred back. KCL stated that being aware of the financial constraints faced by it which was hampering its revival, Mr Vinayak Sarkhot had offered to arrange working capital to the tune of of Rs. 25 lakhs to KCL against the deposit of its promoters shares as security. Accordingly, the shares of Mr. Akshat M Shah and Mr Mit Shah were transferred to Richtone Fintrade and Investments Pvt. Limited where Mr Vinayak Sarkhot is a director. However, immediately on the next day Mr Sarkhot informed that the party who was to give the loan did not have the funds ready and therefore they returned the said shares to Mr Akshat Shah and Mr Mit Shah. This indicates that Mr Vinayak Sarkhot was closely associated with KCL, while the entire construction on transfer and re-transfer of shares smacks of a make-believe.
8.15 Vinayak Sarkhot transferred 90000 shares in off market to Arvind B. Makwana on May 19, 2005 and June 04, 2005. Vinayak Sarkhot received 310215 shares in off market from Alliance Intermediaries and Network P. Ltd. during the period from January 08, 2005 to April 29, 2005 and 1500 shares from Kamal Paste having the same residential address as that of the promoters on March 15, 2005. Vinayak Sarkhot further received 3900 shares on July 12, 2005 from Pradnya Sarkhot and 10000 shares from Sheetal Gogate on March 05, 2005. The entities Kamal Paste, Pradnya Sarkhot and Sheetal Gogate are not appearing as major clients in market. Vinayak Sarkhot purchased 97300 shares in market during the period from March 30, 2005 to July 13, 2005 and sold 36300 shares during the period April 20, 2005 to July 13, 2005. Thus, Shri Vinayak Sarkhot was in possession of huge percentage of shares of KCL during the relevant period but KCL has not given any satisfactory explanation to this issue. This coupled with the fact that the promoters of KCL had transferred a substantial holding to Mr Vinayak Sarkhot during the said period indicates a seeming nexus between the entities. Therefore, the contention of KCL that the shares were transferred to Shri Vinayak for the purpose of raising finance and that there had been no other relation with the said person appears to be untenable. It is also relevant to note that during the same period Shri Vinayak seems to have acted as a conduit for circulating the KCL shares among various entities trading in the market. By thus transferring shares, KCL appears to have tried to give these transactions the colour of genuine transactions done for generating finance whereas prima-facie it appears to create artificial volume and price.
8.16 Narinder Pal Gupta transferred 450000 shares in off market to Bhavana Bipin Shah on March 21, 2005. Narinder Pal Gupta has dealt in market in the name of N.G.Builders & Developers (Prop. : Narendrapal Gupta (HUF)) and purchased 631512 shares from market during the period from February 25, 2005 to April 01, 2005 and sold 622287 shares in market during the period from March 11, 2005 to August 31, 2005. Also Manju Gupta connected / related to Narendra Pal Gupta, (Prop: N G Builders & Developers) has transferred 450000 shares on March 21, 2005 to Bipin Shah in off market. Neither Manju Gupta nor Bipin Shah and his connected entity, Bhavana Bipin Shah are appearing as major clients in the market. It was also observed that Bhavana Bipin Shah and Bipin Shah have transferred 4,50,000 shares each to Richtone Fintrade & Investment Pvt. Ltd. on March 22, 2005. Richtone Fintrade & Investment Pvt. Ltd. in turn transferred 147500 shares to Mit Shah and 1,45,000 shares to Akshat Shah, promoters of KCL on March 22, 2005. The contention of KCL that it had no knowledge of the above transactions appears to palter with facts in view of the linkage between the above mentioned parties and the promoters of KCL as described. Hence, prima-facie, ignorance feigned by KCL appears to be one of convenience, to wriggle out of the consequences of an elaborate design of transfers, retransfers, etc.
8.17 On September 30, 2004, the three entities connected to the promoters viz. Ceetee Trading and Leasing Pvt. Ltd., Richtone Fin Trade and Investment Pvt. Ltd. and Vinayak Sarkhot rematerialized around 0.76 lakhs, 11.21 lakhs and 3.73 lakhs shares of KCL respectively. The rematerialization of shares appears to have been carried out with intent to circulate and offload their holding without getting detected or to avoid audit trail. KCL stated that the entities are not connected to the promoters. In the materiality of the case, it does not carry conviction.
8.18 KCL paid Rs 5.00 lakhs each on March 14, 2005 and March 15, 2005 to Bipin Shah. It is also noticed that during the month of March 2005, Bipin Shah was engaged in large number of off-market deals with the promoters and the entities connected to the promoters. This suggests that Bipin Shah is connected to the promoters and appears to have dealt in the shares of KCL at their behest. KCL stated that the payment was made for repayment of loan taken from Bipin Shah earlier. Prima facie, again it appears that dealing in the shares of KCL at the behest of the company is sought to be cloaked as financial transaction, for obvious reasons.
8.19 There was absence of wide spread investor interest in the share of KCL since June 2000 to January 2005, followed by sudden increase in share price from Rs. 22.4 to Rs. 159.5 in 153 trading days representing a rise of 636%. There was also increase in the trading volumes from a monthly volume of 6,64,910 shares during June 2003 – January, 2005 to 42,50,555 shares during the period February, 2005 – September, 2005. It appears that the promoters, the entities connected to them and interconnected entities indulged in large number of off-market deals and thereby contributed to the sudden rise in trading volumes and the corresponding price rise.
8.20 It is prima facie found that independent non-executive directors namely, Shri Pavankumar Sanwarmal and Shri N.S.Ranganath were members of the Audit Committee. Further, the role and involvement of all non-executive directors is being examined in the ongoing investigation.
8.21 As regards Galaxy Broking and Mr Vijay Shah it may be mentioned that though they have denied all the allegations against them, the extent of their involvement in the alleged manipulations can be ascertained only on completion of the on-going investigations. Hence, no conclusion can be arrived at, at this stage. Further, the brokers have been restricted from dealing only with the clients/entities mentioned in the ad-interim ex-parte order, on a prima-facie appreciation of their connection in the whole scheme.
8.22 I observe that the interim order dated 29.11.2005 has not imposed any punishment but sought to prohibit the persons concerned temporarily from dealing only in the scrip of KCL. As the preliminary evidence prima facie points to the involvement of the persons as described above, in the overall interest of investors and safety and integrity of the securities market, I feel that the interim order needs to be confirmed. It is further noted that Investigation proceedings are in progress to ascertain the role played by KCL and its promoters and directors in the apprehended manipulations.
8.23 In this context, it is pertinent to quote Section 27 of the SEBI Act, 1992 which states that “where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly…:” In this regard, Honourable SAT in Rahul H Shah’s case (2004) 55 SCL 416 (SAT) has observed that “it is not possible for us to lay down any hard and fast rule as to when a director will be vicariously responsible for the acts of the directors in charge of the day today affairs of the company.” However, even non-executive directors shall be made liable where Non-executive directors are commonly appointed so as to watch and keep a check on the whole time directors, to provide a view of an impartial outsider, to bring the benefit of their experience to the company, to act as a figure head (particularly in the case of a non-executive chairman), to add credibility to the company with the public and shareholders, though the inference has to be drawn from the facts and circumstances surrounding each case. In any event, there has to be a modicum of evidence linking the said directors with the manipulation and in its absence, complicity cannot be presumed. This aspect will be examined during the course of investigation. At this stage, the limited objective is whether there is a prima facie case for passing an interim order.
8.24 Urgency of the matter or public interest at times require flexibility in application of the rule as the circumstances of the case and the nature of the matter may warrant. Thus, putting temporary restrictions on the rights of market participants in the overall interest of the market and the investors would serve the interests of justice. It has to be kept in mind that SEBI is vested with statutory powers to regulate securities market with the object of ensuring investors protection, orderly and healthy growth of securities market so as to make SEBI’s regulatory function over the capital market effective and meaningful. Further, in view of clear provisions of Section 11(4) read with Section 11B of SEBI Act, and in light of series of judgments of various High Courts, there can be no doubt that SEBI, in view of the exigencies of the matter has power to pass appropriate orders. For a prima facie case, it is necessary that the information which is available with the authority is more than a mere rumor, gossip or hunch and should be specific information, rather than vague information. In this case, there is adequate material to come to a prima facie finding as discussed above. I am, therefore, convinced that there are reasonable grounds in this matter to confirm the interim order.
9.1 Therefore, in exercise of the powers delegated to me by the SEBI Board in terms of Section 19 of the Securities and Exchange Board of India Act 1992 read with Section 11B and 11(4)(b), I hereby confirm the ad interim order dated 29th November 2005, with all the directions against all the persons mentioned therein, in the interest of investors and safety and integrity of the securities market.
9.2 This order shall come into force with immediate effect.