G.N. Bajpai, Chairman
1. Krishna Filaments Ltd. (hereinafter referred to as KFL) was incorporated in July 1988 as Orkays Rope Manufacturing Company Ltd. It came out with a public issue in March 1994 of 24.5 lakh equity shares of Rs. 10/- each at a premium of Rs. 10/- per share aggregating to Rs.490 lakhs. Later in April 1997 KFL had brought out a public issue of 33,45,000 optionally fully convertible discounted debentures (OFCDD) of Rs. 200 each for cash at a discounted price of Rs.160/- aggregating to Rs.5352 lacs. OFCDD were convertible into an equity share at the end of 17 months from the date of allotment at a discount of 33 1/3 % to the average daily closing prices for the previous six months at BSE subject to a maximum conversion price of Rs.200/-.
2. An unusual spurt in price and volume in the scrip of Krishna Filaments Ltd. (KFL) was observed during the period May-June 1998 at a time when both BSE Sensex and NSE Nifty fell sharply. The price of KFL increased from Rs.153/- on BSE on 15th May 1998 to Rs.311/- on 9th June 1998 in BSE. Investigations were initiated by SEBI to look into the affairs relating to dealings in the scrip of KFL.
3. Investigations revealed that there were large purchases by a set of entities immediately prior to the conversion date (the record date for conversion of OFCDD fell on 13/11/98). Investigations brought out that price of the scrip KFL appears to have been artificially increased to fix conversion price at a higher level. This conversion price was eventually fixed at Rs.144/- per share for non-promoters / other shareholders and Rs.200/- (for promoters and) collaborators. It was revealed that a complicated web of various companies was created by KFL and its directors for making purchase of shares of KFL. These companies also provided smoke screen to hide out identity of persons (Directors of KFL), who artificially increased the price of shares of KFL. KFL and its Directors were aided, assisted and abetted by Alankar Finance, Agnikamal Finance, Adhikash Finance, Kalpit Trading, Stayanand Prasad Finance and Renold Finance.
4. Investigations showed that large quantity of shares of KFL were purchased in 1998 by a set of seven companies, namely Competent Trading, Dominance Trade, Precise Exports, Marvellous Trading, Lyric Investments, Responsive Plastics and Gainful Exports. It was noticed that these purchases were mainly through off market deals. It was noticed that sellers and buyers were acting in a collusive manner. The sellers were namely Alankar Finance Pvt. Ltd., Agnikamal Finance Pvt. Ltd. Adhikash Finance, Kalpit Trading, Renold Finance and Satyanand Prasad Finance. These entities were controlled by Shri Nalinesh Dalal and Shri Anantnarayan Iyer and were acting as fronts for KFL/its Directors.
5. Investigations into source of funding for purchase of shares by these seller companies Alankar Finance Pvt. Ltd., Agnikamal Finance Pvt. Ltd. Adhikash Finance, Kalpit Trading, Renold Finance and Satyanand Prasad Finance prima facie revealed that funds for the purchase of these shares actually came from KFL. It was seen that during the period 1.4.96 to 31.03.98, KFL obtained fictitious bills, for purchase of machinery and its spare parts, issued by the above mentioned companies or their group companies namely Alankar Finance & Investments Pvt. Ltd., Agnikamal Trading Pvt. Ltd., Sanvy Trading Pvt. Ltd., Navrang Trading Pvt. Ltd., Repute Trading Pvt. Ltd. and Aganit Trading Pvt. Ltd., Adhikash Finance, Dharmesh Trading Pvt. Ltd., Renold Trading, Renold Finance, Suraj Trading, Dharamraj Trading Pvt. Ltd.
6. Besides dealing in shares of KFL, these six companies also purchased shares of Krishna Vinyl Ltd. (KVL), an unlisted associate concern of Krishna Filaments Ltd., on behalf of Mr. K. K. Agarwal, Managing Director of KFL.
7. The fictitious nature of transactions i.e. purchase and sale of machineries /its spare parts is further evident from the fact that there was a net debit balance of about Rs.16.20 crores, which Krishna Filaments Group owed to the group of companies since the last 2/3 years. This amount was not claimed by companies of Dalal and Iyer from Krishna Filaments group as there were no genuine claims by these companies against KFL group companies and these debits had merely arisen on account of issue of fictitious bills and creating book entries (without actual movement of goods).
8. Investigation also revealed that several amounts have been paid to as well as received from Directors of KFL i.e. Mr. K K Agarwal, R K Agarwal, S K Agarwal and O P Agarwal to/by the above mentioned group companies controlled by Mr. Dalal or Mr. Iyer on various occasions. It was also noticed that later the same amount which was received from directors of KFL by various companies of Mr. Dalal & Mr. Iyer was transferred back to KFL and its associate concerns. Thus, the funds received from Directors were ploughed back to KFL/associate concerns through the medium of companies controlled by Mr. Dalal and Mr. Iyer.
9. It was observed that the funds siphoned off through fictitious bills were used to purchase shares of KFL in the name of these companies as under:
Name of the Company Qty Amt. (Rs.) Alankar Finance 215500 24168198 Agnikamal Finance 77000 8758095 Adhikash Finance 54450 6044705 Kalpit Trading 65100 6884366 Satyanand Prasad Finance 161500 16350840 Renold Finance 65950 7044578 TOTAL
10. Investigations also brought out that the entire dealing of shares and arrangement of funds relating to purchase of shares by the above mentioned six companies was looked after by Mr. K. K. Agarwal, Managing Director of KFL, directly or through any one of his trusted employees and close confidantes, Mr. Jiten Mehta/Mr. Deepak Thattee. It was gathered during the course of investigations that blank signed cheques were obtained from Mr. Dalal & Mr. Iyer by Mr. K. K. Agarwal. These cheques were used by Mr. K. K. Agarwal/his nominee for payment to the brokers and sub-brokers for purchases of Krishna Filaments Ltd./KVL shares and also for taking out sale consideration received from sale of these shares from the accounts of these companies. The above modus operandi was admitted by Mr. Dalal and Mr. Iyer in their statement recorded from time to time with SEBI.
11. Investigations with brokers and sub-brokers brought out that orders for purchases of shares of Krishna Filaments Ltd. and KVL in the name of these six companies, were given by Mr. Jiten Mehta. It may be recalled that Mr. Jiten Mehta was an employee of KFL group and close confidante of Mr. K. K. Agarwal. Later he became consultant to the KFL group. It was also seen that brokers/sub-brokers received payment for these purchases from Jiten Mehta. Similarly, delivery of these shares (in the name of these six companies) were given by the brokers & sub-brokers to Mr. Jiten Mehta either at his office of KFL at Colaba or at his residence.
12. It was also noticed during the course of investigations with the Registrar Intime Spectrum Registry, that the correspondence address for these companies (Alankar, Agnikamal, Adhikash, Kalpit, Renold, and Satyanand Prasad) as per its records was the registered address of Krishna Filaments Ltd. i.e. Eucharistic Congress Building, Colaba. The RTI in its statement admitted that shares of KFL transferred in the name of Competent Trading, Dominance Trade Investment, Precise Exports, Gainful Exports etc. when sent for signature to KFLs office were kept back by KFL/its Directors and not returned for dispatch to transferee. Even when the shares were put in the demat mode, control of the DP accounts was kept with KFL and its associates. These accounts, in the name of the above mentioned six companies, were operated by nominees or relatives of Directors of KFL (for example Mr. KK Dalal and Mr. Vijay Desai). Further, the address given on the account opening forms by the above mentioned four companies to NSDL was that of Krishna Filaments Ltd. Even the first shareholders address was also that of Krishna Filaments Ltd.
13. It was also observed during the course of investigations that shares held in the name of Agnikamal Finance and Renold Finance were pledged by KFL in favour of IDBI for availing foreign currency loan. It was seen that KFL fraudulently pledged these shares by forging the signatures of Mr. Dalal and Mr. Iyer and passing resolutions on behalf of these companies without the knowledge of the directors of these companies.
14. It is pertinent to mention that both Mr. Dalal and Mr. Iyer admitted on oath in their statements that they were acting at the behest of Mr. K. K. Agarwal MD of KFL. They stated that though Mr. Jiten Mehta was never a director or a employee or a shareholder in any of their companies, they allowed Mr. Jiten Mehta to transact in the shares of KFL and KVL since they were given assurance by Mr. K K Agarwal that Mr. Jiten Mehta was his authorized person and employee of KFL and that Mr. Mehta would transact in shares of KFL and KVL on his behalf. They were also assured by Mr. Agarwal that all the funds for this purpose would be arranged by them. In return for these services, some amounts were given to Mr. Dalal and Mr. Iyer. It was stated that this was profits from trading in Ropes and Chemicals in some of the companies in control of Mr. Dalal and Mr. Iyer viz. Repute Trading Pvt. Ltd., Navrang Trading Pvt. Ltd., Sanvy Trading Pvt. Ltd. and Aganit Trading Pvt. Ltd., with KFL, KVL and Krishna Organic Chemical Ltd., which is also a KFL group company. It was stated that these alleged dealings in Ropes and Chemicals were also arranged by KFL Group and handled by Mr. Deepak Thatte and Mr. Jiten Mehta, employees and close confidantes of Mr. K. K. Agarwal. It was admitted by Mr. Dalal and Mr. Iyer that only the transactions were routed through these companies and profits to the extent of approximately Rs.1 lac in each company was left which was withdrawn by Mr. Dalal and Mr. Iyer as directors remuneration over a period of time. Other Directors namely Mr. Madhukar Shetty and Mr. Atul Sant also admitted that they are not aware of anything shown in the books of account of the company and that they merely lent their name for small amounts ranging from Rs. 5000/- to Rs.10000/- received by them.
15. It was further noticed that during the course of investigations that shares held in the name of these six companies mentioned above, (Alankar, Agnikamal, Adhikash, Kalpit, Renold, and Satyanand Prasad) were later transferred to other set of front companies namely, Competent Trading, Dominance Trade and Precise Exports. These three companies were acting as front for Krishna Filaments Ltd. These three companies showed purchase of shares of Krishna Filaments Ltd. and KVL from these six companies by raising debit notes i.e. in off market deals which were not routed through any broker or any recognised stock exchange. Investigations showed that these debit notes were raised in order to justify possession of shares consequent to searches by Income Tax Department at KFL group companies and their directors. It is evident from the two set of debit notes having the same numbers and issued on the same date but having different quantity and different rates that these debit notes were actually issued to justify the possession of shares, which were found during the course of Income Tax search. The I. T search took place in August 1997 but the debit notes were shown to have been raised in March 1997. The statement of Mr. Iyer and Mr. Dalal were recorded to seek clarification about two sets of debit notes having same numbers and issued on the same date. They admitted that these debit notes were ante dated and were issued actually after the I.T search at KFL. They further admitted that the shares were shown to have been sold at prices, which had no relevance with the then existing market prices, as they concentrated on adjusting the physical quantity of the shares found during the course of I.T search. It shows that book entries were passed by the respective companies at the behest of KFL
16. The Summary of sale of shares of KFL by the companies of Mr. Dalal and Mr. Iyer to other set of front companies of KFL namely Competent Trading, Dominance Trade and Precise Exports, is as under
Name of the Company Qty. Amt. (Rs.)
Alankar Finance 162900 25157260
Agnikamal Finance 77000 8693320
Adhikash Finance 54450 6660290
Kalpit Trading 65100 6967070
Satyanand Prasad Finance 161500 16150000
Renold Finance 65950 4364158
17. Investigations revealed that funds for purchase of shares of KFL and Krishna Vinyl Ltd. by Competent, Dominance and Precise came from KFL/associate concerns of KFL. It was seen that funds from KFL first came to Competent, Dominance and Precise and on the same date they were transferred to sellers which were companies in control of Mr. Dalal and Iyer. The funds received by sellers were transferred back by them to KFL. Thus, no consideration was actually received by the sellers (Alankar, Agnikamal, Adhikash, Kalpit, Renold, and Satyanand Prasad; companies under the control of Mr. Dalal and Mr. Iyer) for apparent sale of these shares. It was observed that the same fund was rotated several times by KFL.
18. It was also observed that the promoters were having a large chunk of shares with them and whatever little floating stock was there, the same was cornered by the company and its directors through continuous purchases settlement after settlement through their front entities. This cornering enabled the promoters of KFL to rig the price of KFL so that a higher conversion price of its OFCDD could be fixed. The prices artificially rose from Rs.153/- to Rs.311/- and this rigging enabled KFL to fix the OFCDD price at Rs.144/- per share.
19. Mr. N R Dalal, Mr. Anantnarayan Iyer, Mr. Mahendra B Joshi, Mr. Madhukar Shetty, Mr. Atul Sant and Mrs. P Dalal acting through the companies under their control viz. Alankar Finance Pvt. Ltd., Agnikamal Finance Pvt. Ltd. Adhikash Finance, Kalpit Trading, Renold Finance, Satyanand Prasad Finance, have aided and abetted KFL and its directors in purchasing its own shares in violation of section 77 of Companies Act, rigging the price of KFL and violation of SEBI (Substantial Acquisition of shares and Takeover) Regulations, 1997. These acts are in contravention of Regulations 4 (a)(c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995; SEBI (Substantial Acquisition of shares and Takeover) Regulations, 1997 and section 77 of the Companies Act, 1956.
20. In light of the above findings bringing out aiding, assistance and abetment by Mr. N R Dalal a show cause was issued to him asking him to show cause as to why suitable directions under Section 11B of SEBI Act, 1992 and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, including directions prohibiting him from accessing the capital market and dealing in securities for a suitable period should not be issued for the above-mentioned violations.
21. A reply was received from Mr. N R Dalal stating that his role was confined to putting the transactions in the books of the companies and he had given full facts during the course of investigations. He has requested for a lenient view to be taken.
22. An opportunity for personal hearing before the Chairman SEBI was given on 07/11/2001 and again on 28/05/2002. Mr. N R Dalal did not turn up for the hearing. In his written submissions he has once again reiterated what he had mentioned in reply to the show cause. I therefore proceed to decide on the basis of material and evidence available on record. I find that Mr. N R Dalal as Director of M/S Alankar Finance and Investment P Ltd., aided, assisted and abetted KFL and its Directors in price manipulation in the scrip of KFL. Mr. N R Dalal was part of the group of individuals and companies involved in issuing fictitious bills for machinery and its spare parts to KFL and its associate companies. Later these companies issued blank signed cheques to Mr. K.K. Agarwal. Purchases of shares of KFL were made from funds received from KFL/its Directors in the name of these companies. Mr. N R Dalal provided the faade and convenient mask to hide the identity of KFL and its Directors. Mr. N R Dalal falsified the books of accounts of M/S Alankar Finance and Investment P Ltd. and acted as fronts for KFL and its Directors and held these shares in its own name while the actual beneficiaries of these shares were KFL and its Directors.
23. In view of the above, I in the exercise of powers conferred upon me by Sec. 4 (3) and 11 B of SEBI Act 1992 read with Sec. 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 direct that Mr. Nalinesh R Dalal be debarred from dealing in securities for a period of three (3) years.. This order shall come into force with effect from 14/08/02.