Confirmatory Order in the matter of Market Manipulation using GDR issues against Arun Panchariya and Pan Asia

DIRECTIONS UNDER SECTIONS 11(1), 11(4) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 IN THE MATTER OF ALLEGED MARKET MANIPULATION USING GDR ISSUES AGAINST PAN ASIA ADVISORS LIMITED AND MR. ARUN PANCHARIYA

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI), vide an ad interim ex-parte Order dated September 21, 2011 (hereinafter referred to as the Order), barred Pan Asia Advisors Limited (hereinafter referred to as Pan Asia) and Mr. Arun Panchariya from rendering services in connection with instruments that are defined as securities in the Indian securities market or in any way dealing with them, with immediate effect. The Order had also directed that none of the intermediaries registered with SEBI shall deal with Pan Asia and Mr. Arun Panchariya (hereinafter together referred to as the parties and individually by their respective names) in any capacity with regard to or in connection with the dealing of securities as defined in the Indian securities market. The parties had challenged the Order by way of an appeal (No.191 of 2011) before the Honourable Securities Appellate Tribunal. While disposing of the said appeal, the Honourable Tribunal, vide Order dated November 9, 2011 directed SEBI to pass a final order within four weeks on all issues raised by the appellants including the question of jurisdiction. The parties were given an opportunity to inspect documents on November 16, 2011 which they availed. They also sought inspection of additional documents which was scheduled on November 24, 2011. The parties were afforded an opportunity of hearing on November 22, 2011, when the counsel for the parties appeared and sought adjournment on the ground that they had requested SEBI to grant inspection of certain documents. They had also undertaken to approach the Honourable Tribunal for seeking extension of time for passing an Order. The hearing was therefore adjourned to November 30, 2011, when the parties were represented by Mr. Somasekar Sunderasan, Advocate, who made submissions. He further sought time till December 5, 2011 for filing written submission. When the Honourable Tribunal’s Order directing SEBI to pass an Order in the matter within a specified time was brought to the notice of the counsel, he submitted that his client would approach the Honourable Tribunal for seeking extension of time for passing an order in the matter and that in the meanwhile they would not press SEBI for passing of the Order within the timeline fixed by the Honourable Tribunal. Subsequently, written submissions were submitted by the parties.

2. I have considered the submissions made by the parties in the light of the facts and circumstances of the matter. SEBI was alerted by its surveillance systems of the large scale off-market transactions in certain scrips, namely, IKF Technologies Limited, Avon Corporation Limited, CAT Technologies Limited, Asahi Infrastructure Limited and K Sera Sera Limited and that certain Foreign Institutional Investors (hereinafter referred to as FIIs), namely, India Focus Cardinal Fund (India Focus), KII Limited (KII), Mavi Investment Fund (Mavi) and Sophia Growth (Sophia), were converting the Global Depository Receipts (hereinafter referred to as GDRs) underlying the shares of the aforesaid companies held by them into equity shares to sell in the Indian market and that most cancellations happened within a short period of time of their issue. Further, on noticing that a few entities were repeatedly appearing as counterparties to the extent of 33% to 75% of the shares sold by FIIs in these scrips, SEBI conducted an examination into the same. The prima facie findings of the said examination pointed to the various aspects of the GDR issues like the large size of the issue vis-à-vis the existing size of the issuing company, unimpressive financials of the company, common initial investors, high proportion of cancellation of GDRs repeatedly by a set of FII/Sub- Accounts, sale in Indian stock exchanges and a major portion being bought by a common set of clients, the trading amongst the said clients and subsequent off-loading by them.

The preliminary findings had pointed towards an elaborate scheme to manipulate the trading in these securities thereby damaging the integrity of the market. It was also noticed that the aforesaid companies have financials that may not readily attract investors to subscribe to such large sized issues and that the successful subscription of those GDRs raised a possible doubt about the genuineness of subscribing investors or the actual motives of the promoters or directors of the companies issuing them. The preliminary investigation in the matter found, from the information submitted by the aforesaid issuer companies that Pan Asia was the manager or arranger to each of the issues(except one) and that the proceeds of the GDR issues were deposited in European American Investment Bank AG, Austria (Euram Bank). The Order had also observed that a repetitive pattern emerged from the examination that the same set of sub-accounts were selling most of their holdings to the same set of counter parties, a common bank where the GDR proceeds were deposited and that these GDR issues (except in the case of Cals Refineries Limited) were managed/arranged by Pan Asia.

The preliminary investigation also found that Mr. Arun Panchariya is the founder and owner of Pan Asia. The Order had inter alia observed “33. One of the initial investors in GDRs, the arranger, the FIIs cancelling GDR, the counterparties to these FII trades and the bank where proceeds are deposited are all related to Panchariya. These evidences clearly indicate that Arun Panchariya has control over all aspects of the operation of ‘structured GDRs’ - providing services of placement of the GDRs issue, assisting the GDR holding entities to exit by arranging to purchase the GDRs from them. Prima facie, Arun Panchariya has facilitated issue of GDRs for several companies by arranging a common set of subscribers, which otherwise may not have been possible given the magnitude of capital raised in comparison to existing equity capital of these companies, their unimpressive financial statements and low volumes in trading of their shares. 34. In the GDR issue of all the companies examined, whenever Panasia has been the Arranger of the issue, proceeds have been deposited with European American Investment Bank AG (Euram), a bank incorporated in Austria.

Euram is also registered as an FII in India. In its existence as a FII, Euram has never made an investment in India in its own name and is only listed as an investor in India Focus. 35. Euram has a joint venture with Arun Panchariya led Panasia known as Euram Bank Asia Ltd, that is located in Dubai. Euram Bank Asia Ltd. proclaims to offer access to the group’s global financial services and is a provider of investment banking and private banking services. The details of EURAM BANK ASIA Ltd. are at http://www.eurambankasia.com wherein it is stated that their head office is in Dubai International Financial Center. According to the website of Dubai International Financial Center, Arun Panchariya and Satish Panchariya are the directors of Euram Bank Asia Ltd. 36. The Sub-Account, India Focus, is registered under the FII, Euram. Mr Arun Panchariya was the director of India Focus until October 28, 2010. Both Euram and India Focus got registered with SEBI in November 2008 and December 2008, respectively.”

The Order had further observed:

“77. From the data available, it appears that Mr Arun Panchariya is a common link between Company and the initial subscribers to GDRs and for the purchase of GDRs by Sub-Accounts as well as sell to their majority counterparties in the domestic market. India Focus is a Sub-Account managed by him and observed to be most active in converting GDRs managed by Panasia and selling them in Indian markets.

Further, prima facie, Group members acting as major counterparties to sell orders of India Focus are also connected to Arun Panchariya. 78. ........................ The repetitive acts of Mr. Arun Panchariya and Panasia of facilitating issue of GDRs for the prima facie purpose of selling the GDRs in the Indian market through matched and synchronised trades thereby misleading Indian investors, is a prima facie violation of Section 12A (a), (b) and (c) of SEBI Act, 1992 read with Regulation 3(b) (c) & (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 2003.” 3. The primary submission made by Pan Asia and Mr. Arun Panchariya is that SEBI does not have jurisdiction to pass an Order against them. In support of the said contention, Pan Asia has submitted as follows:

a. Pan Asia is not and cannot be termed as a ‘person associated with the Indian securities market’ either as a market intermediary or as a market player. Pan Asia does not deal, sell or buy Indian securities in any manner and in that view of the matter, Pan Asia is not a person falling under SEBI’s jurisdiction under the provisions of the Securities and Exchange Board of India Act, 1992 (SEBI Act) or any other provision under Indian law conferring jurisdiction upon SEBI; b. Pan Asia merely advises various companies (including Indian companies) at the time of the listing of GDRs on stock exchanges outside India. Pan Asia was approved by and regulated by relevant regulators outside India at the time of such issuance of GDRs and it still is; c. The role of Pan Asia in relation to listing of GDRs outside India concludes with the listing of the GDRs on the relevant exchange outside India. The Order, deals with alleged market manipulation in relation to underlying shares pursuant to conversion of GDRs. Pan Asia’s role in relation to such issues is long-concluded by the time that the GDRs are converted into underlying shares; d. SEBI does not regulate and does not have any role to play in relation to the activity of the issuance of GDRs (at the time when Pan Asia advised companies outside the territory of India in connection with the GDR issues made by such companies). e. The provisions of the SEBI Act cannot apply outside India; that the Order proceeds on the incorrect assumption that Pan Asia is ‘connected to the Indian securities market’.

The entity had mentioned the observation of the Honourable Gujarat High Court in the case of Karnavati Fincap Ltd. & Anr. v. Securities and Exchange Board of India [1996 87 CompCas 186 Guj] ruled that "Persons associated with" denotes a person having connection or having intercourse with the other; in the present case that "other" with whom a person is to have connection or intercourse is the securities market"….”, to submit that it is not registered and is not required to register as an intermediary under Section 12 of the SEBI Act and has no dealings and does not undertake any buying or selling of Indian securities. It was contended that Pan Asia’s role in relation to GDR issues was limited to advising in relation to the listing of GDRs on stock exchanges outside India and therefore either in relation to the issuance of GDRs or otherwise, it cannot be stated that it is associated with the Indian securities market in any manner. f. Pan Asia, as an International Corporate Advisor for GDR issues, merely undertakes the responsibility of an agent for floating such GDR issues. The functions of Pan Asia in relation to any GDR or FCCB issue can be summarized as follows: i. conducting due diligence in collecting and evaluating all possible information which may have a bearing on the issue for the purpose of the listing of GDR issues abroad “outside of territory and jurisdiction of India’; ii. assessing the market for the purpose of the issue and marketing the issue; iii. obtaining confirmation of acceptance of subscription acceptance from the initial investors to the GDR issues;

iv. assisting the issuer company at all stages from preparing the documentation, making investor presentation, selection of other manager(s) etc.; v. receipt of confirmation of subscription monies received in the requisite company's escrow account opened/maintained by the company with the escrow account holding bank; vi. receipt of depositary's (Depository Banks) confirmation of issue of instructions to the clearing systems of the GDR subscribers and confirmation from the requisite foreign stock exchange of the listing of the GDRs issue); vii. ensuring that the issuer company complies with applicable non-Indian legal formalities in respect of the same.

g. From the date of closing of the GDR issue, Pan Asia does not render any other or further service to its customers either in respect of buying, selling, trading or dealing in the GDRs. It is pertinent in this regard to note that even the Order does not allege any wrongdoing or illegality upon Pan Asia in relation to any activity: i) in the context of the listing of the GDRs abroad; or ii) post the listing of GDRs in question. h. The Order proceeds on the basis that there is alleged manipulation of scrips of Indian listed companies based on the shares issued to parties after conversion of the GDRs. However, it is most relevant to note that Pan Asia does not have any role to play in relation to the conversion of the GDRs or thereafter. The holders of the GDRs may choose to, at any point convert the same into underlying shares of the Indian company. Upon conversion, the underlying shares can be traded as Indian securities by the last holder of the same and that Pan Asia has no control over the ultimate holders of the GDRs when they are converted. i. The Issue of Foreign Currency Convertible Bonds and Ordinary shares (through Depository Receipt Mechanism) Scheme, 1993 (Scheme) governs the process in relation to GDR issues in India and the same does not confer any jurisdiction in relation to issuance of GDRs upon SEBI. j. Further, in relation to the requirements of listing outside India, the issuances of GDRs are regulated and monitored by regulatory authorities outside India where the GDRs are listed.

Pan Asia is indeed regulated and approved by relevant regulators in this regard. Assuming whilst denying that any wrong-doing was to be attributed to Pan Asia in course of the functions it undertakes, the same would be actionable under the relevant laws of the jurisdiction where the GDRs are listed. It is therefore apparent that SEBI does not have any jurisdiction over Pan Asia in relation to the issuance of GDRs. k. In any event, the most relevant aspect to be appreciated is that the functions undertaken by Pan Asia do not involve any activity that affect or have any relevance to the interest of investors in India. SEBI is bound to ensure protection of the interest of investors in India. In the absence of any implication of the functioning of Pan Asia on the interest of the investors in India, SEBI does not and cannot exercise jurisdiction in such regard. Incidentally, it is also relevant to mention that in the event of any transaction, even within India, that does not have any implication on investors in India, cannot and ought not to be amenable to SEBI’s jurisdiction. The test that ought to be applied in this regard is as to whether the transaction in question involves any implication on the interest of investors.

In the event that the answer is in negative, as in case of the functions undertaken by Pan Asia, it cannot be the position that SEBI assumes jurisdiction over such a transaction. Such exercise of jurisdiction, as in the present case, would indeed be incorrect and in disregard of the correct intent of legal provisions. 4. The entity (Pan Asia) has referred to the case of GVK Industries Limited vs. The Income Tax officer to submit that the provisions of an enactment in India cannot have extra-territorial application where it has no nexus with India and that the functions of Pan Asia with respect to the issuance of GDRs have no nexus whatsoever with Indian laws granting jurisdiction to SEBI. Similar submissions were made on behalf of Mr. Arun Panchariya. He further submitted that his business involves advising companies outside

India on behalf of Pan Asia in relation to their investment decisions. He further submitted that he is personally regulated by the Financial Services Authority, the United Kingdom, the Dubai Financial Services Authority and the Financial Services Commission, Mauritius. Mr. Arun Panchariya further submitted that the mandates in relation to the GDR issues outside India are granted to Pan Asia and that Pan Asia is a separate legal entity which has its own management and decision making. He further submitted that he had, as a part of the team at Pan Asia, undertaken the various functions in relation to the issues of GDRs. He has also stated that he had resigned from Pan Asia and is not presently a part of its management team.

5. Since the parties have raised the question of the jurisdiction of SEBI to issue directions against them, for the reasons stated in their submissions, it would be appropriate that I deal with the said issue before dealing with the other submissions. In this regard, I note that the Order had observed that Pan Asia was the manager or arranger to the GDR issues of the companies-Asahi Infrastructure and Projects Limited, Avon Corporation Limited, K Sera Sera Limited, IKF Technologies Limited, CAT Technologies Limited and Maars Software International Limited. In the present matter, SEBI, has, in the course of preliminary examination, noted certain peculiar facts and circumstances, some of which are given below:

i. the issuer companies did not have strong financials to raise such large GDR issuances which was several times the size of the issued capital. ii. the issuer companies had a common arranger/advisor for their GDR issues (except in the case of Cals Refineries Limited) in Pan Asia, iii. there were similar set of GDR subscribers to these issues iv. the GDR issue proceeds were credited in the same bank, Euram Bank, v. India Focus Cardinal Fund, a sub account was found to have converted substantial quantitative of GDRs (of six out of seven companies) and that the said entity is registered as a sub account under the FII, Euram Bank Mr Arun Panchariya was the director of India Focus Cardinal Fund until October 28, 2010 vi. same set of FIIs had sold shares after converting the GDRs of the select companies, vii. same set of entities allegedly acted as major counterparties to the selling FIIs, viii. during the period January 1, 2009 to December 31, 2010, there were 21 such companies for which Pan Asia was the arranger of the GDR issues and India

Focus Cardinal Fund was observed cancelling GDRs and selling shares in Indian Markets. 6. It was a submission that Pan Asia has acted as an international corporate advisor for GDR issues and that it undertakes the responsibility of an agent for floating such GDR issues. Admittedly, it was involved in the GDR issues of all scrips (except Cals Refineries Limited) mentioned in the Order. Mr. Arun Panchariya submitted that he is part of the team at Pan Asia and had undertaken functions in relation to the GDR issues. It was also noticed that Alka India Limited was one of the entities forming part of the alleged Group and which had traded in the shares of the select companies mentioned in the Order. It was observed that Mr. Arun Panchariya was shown as the director-promoter of Alka India Limited. He is also the brother of Mr. Satish Panchariya, a promoter and director of Alka India Limited. Alka India Limited and Pan Asia was found to have the same address in India. I also note the following observation from the Order

33. “One of the initial investors in GDRs, the arranger, the FIIs cancelling GDR, the counterparties to these FII trades and the bank where proceeds are deposited are all related to Panchariya. These evidences clearly indicate that Arun Panchariya has control over all aspects of the operation of ‘structured GDRs’ - providing services of placement of the GDRs issue, assisting the GDR holding entities to exit by arranging to purchase the GDRs from them. Prima facie, Arun Panchariya has facilitated issue of GDRs for several companies by arranging a common set of subscribers, which otherwise may not have been possible given the magnitude of capital raised in comparison to existing equity capital of these companies, their unimpressive financial statements and low volumes in trading of their shares. 34. In the GDR issue of all the companies examined, whenever Panasia has been the Arranger of the issue, proceeds have been deposited with European American Investment Bank AG (Euram), a bank incorporated in Austria. Euram is also registered as an FII in India. In its existence as a FII, Euram has never made an investment in India in its own name and is only listed as an investor in India Focus. 35. Euram has a joint venture with Arun Panchariya led Panasia known as Euram Bank Asia Ltd, that is located in Dubai. Euram Bank Asia Ltd. proclaims to offer access to the group’s global financial services and is a provider of investment banking and private banking services. The details of EURAM BANK ASIA Ltd. are at http://www.eurambankasia.com wherein it is stated that their head office is in Dubai International Financial Center. According to the website of Dubai International Financial Center, Arun Panchariya and Satish Panchariya are the directors of Euram Bank Asia Ltd. 36. The Sub-Account, India Focus, is registered under the FII, Euram. Mr Arun Panchariya was the director of India Focus until October 28, 2010. Both Euram and India Focus got registered with SEBI in November 2008 and December 2008, respectively. 37. During the period January 01, 2009 to December 31, 2011, there were 21 companies for which Panasia was the arranger of the GDR issues and India Focus was observed cancelling GDRs and selling shares in Indian Markets …………”

7. The fact that the parties were the advisors/arrangers for GDR issues for the select companies, when seen in conjunction with the alleged manipulative trading done by the sub-accounts and the Group entities, the prima facie relationship/connection observed between Pan Asia/Mr. Arun Panchariya with entities Like India Focus Cardinal Fund and Alka India Limited were sufficient enough for SEBI to have a prima facie case against the entities involved in the matter and accordingly, the Order was passed. The issue of GDRs finally resulted into substantial conversion and selling of the underlying shares in the Indian securities market. GDR derives its existence from securities listed in Indian Stock markets. The issuance of GDRs are from the authorised share capital (falling under the jurisdiction of SEBI and other Indian regulators)of a company listed in Indian Stock Exchanges. Any structuring or manipulation related to GDRs has a direct impact on the stocks of the companies trading in Indian market. The fact that the underlying security of the GDRs are Indian securities and the two way fungibility of GDRs allows for conversion of GDRs in Indian market and vice versa, allows for SEBI jurisdiction to regulate the GDRs.

Pan Asia and Mr. Arun Panchariya have also argued that since they are not connected to Indian stock market, SEBI does not have any jurisdiction on them. However as mentioned above, their activities had a direct bearing on the securities listed on the stock exchanges in India. The parties were involved in advising six companies which had issued GDRs and that they were advising 21 companies in respect of GDR issues during the relevant period. SEBI noted certain commonalities, which has a bearing on the Indian Securities market and the investors dealing therein. Even otherwise, the submission of the parties appears to be contradictory. On one hand the parties admittedly are involved in the GDR issuances which finally come into the Indian securities market on cancellation and on the other hand contend that they would not come under the jurisdiction of SEBI. In such a situation, if SEBI were to observe that since the parties have not done anything in India and therefore would not come under its jurisdiction, it would be absurd and would defeat the very purpose of investor protection as mandated under the Securities and Exchange Board of India Act, 1992. Therefore, the parties would definitely be treated as ‘person associated with the securities market’ and thus covered under the regulatory ambit of SEBI.

In this regard, I take support from the following observations of the Honourable

Gujarat High Court made in Karnavati Fincap Limited vs. Securities and Exchange Board of India [1996 87 Comp Cas 186 Guj]:

“5. The words "other persons associated with the securities market" have not been defined in the Act. The question then arises whether "persons associated with the securities market" takes its colour from persons enumerated in clause (ba). If one has to go by the literal meaning, the interpretation which restricts the meaning of "persons associated with the securities market" to the persons enumerated in clause (ba) is not acceptable. In ordinary meaning, the persons associated with the securities market would include all and sundry who have something to do with the securities market. It is to be noted that the securities market in the sense is not confined to stock exchanges only. The words "persons associated with the securities market" are of much wider import than intermediaries."Persons associated with" denotes a person having connection or having intercourse with the other; in the present case that "other" with whom a person is to have connection or intercourse is the securities market…………………….”

8. Therefore, directions under Sections 11(4) and 11B of the SEBI Act could be issued against the parties in the matter. It is to be noted that the Order had restrained the parties from rendering services in connection with instruments that are defined as securities (under the Securities Contracts (Regulation) Act, 1956) in the Indian market or in any way dealing with them. Further, it has been directed that intermediaries registered with SEBI shall not deal with Pan Asia and Mr. Arun Panchariya in any capacity with regard to or in connection with the dealing of securities as defined in the Indian securities market. Both the aforesaid directions were issued only with the sole purpose of insulating the Indian securities from further manipulation and abuse. The interim directions being preventive and remedial, under Sections 11 and 11B of the Securities and Exchange Board of India Act, 1992, I find no excess on the part of SEBI to issue such directions against the parties. In view of the above reasons, the case laws referred to by the parties would not support their case. Therefore, I am of the considered view that there has been no lack of jurisdiction of SEBI while issuing such directions against the parties, vide the Order.

9. Having considered and arrived at a finding that SEBI has jurisdiction to issue such directions against the parties, I proceed to deal with the other submissions. Their submissions are summarised herein below:

i. Apart from advising issuer companies for the purpose of their GDR issues, there is no connection or interaction between Pan Asia and the issuer Companies. That Pan Asia had known the initial investors only to the limited extent of knowing that they were investors interested in specific markets and that it had no control over such Initial Investors as alleged by the Order or at all. ii. That the fact that Mr. Arun Panchariya was one of the directors of India Focus Cardinal Fund until October 2010, does not mean in any manner that Pan Asia or even Mr. Arun Panchariya exercised any control over India Focus. iii. As regards the allegation that Mr. Arun Panchariya was connected to Alka India Limited, it was submitted that Mr. Arun Panchariya had resigned from its board as early as in the year 2001 and that the fact that his brother is a director of the said company does not mean that the said company is under the control of Mr. Arun Panchariya as stated in the Order. According to Pan Asia, the reason Basmati Securities Private Limited and Oudh Investments and Finance Limited are alleged to be connected to Pan Asia is on account of alleged cross-shareholding amongst them and that by itself cannot mean that it exercises control over the day to day working of such companies. iv.

There is no connection between Pan Asia and the FIIs/sub-accounts/the entities who have alleged to have traded in the shares of the issuer companies. Pan Asia has not traded in the Indian securities market. It has not assisted in any purported trading by any party. The increase in volumes and trading in the scrip is only a natural and obvious consequence of the ‘unfreezing’ of the underlying shares pursuant to the cancellation of the GDRs of the issuer company. The alleged trading between the FIIs/sub-accounts and the entities did not result in any major change in the price of the scrips of the issuer companies. The trading did not confer any substantial or illegal gain on the allegedly connected parties. v. As regards the GDR issue size of the select companies was concerned, it was submitted that the issue size is determined on the basis of marketability and possible demand for such instruments abroad and that it is incorrect to say that the financials of such companies could not have easily attracted investors to subscribe to such issues. It was also submitted that the regulations set out by the Financial services Authority (FSA) and various other regulators abroad are extremely stringent about KYC norms and anti-money laundering requirements and that it is not possible for companies or individuals regulated by such stringent requirements to have non-genuine investors whose identity would be suspect. vi.

Pan Asia has no role to play in or control over the decision making by the investor. vii. It was further submitted that the pricing of GDR is indeed a regulated aspect even under Indian laws and that the Scheme prescribes a formula based on which the floor price of the GDRs is set. The Central Government had by its circular dated November 27, 2008 revised the formula on the basis of which such pricing is determined. The formula prescribed by the Central Government also takes into account, as one of the factors, the market price of the shares of the issuer company. Pan Asia further submitted that the increase in volumes is a natural consequence of cancellation in GDR’s and that there cannot be any illegality or manipulation attributed to such increase in volumes. viii. It was submitted that a substantial portion of the GDRs issued by the Issuer Companies is still unconverted and that the funds in this regard have however been issued by the Initial Investors and have accrued to the benefit of the Indian Issuer Companies. That there is no illegality or irregularity in relation to Indian law in this regard. ix.

According to Pan Asia, the Order incorrectly insinuates that the increase in the volume of shares of the issuer companies pursuant to conversion of GDRs happens without knowledge of the Indian investors. x. Pan Asia stated that it was not the merchant banker in relation to the various GDR issues and that it would only undertake corporate advisory services in relation to such issuances. Further the fact that proceeds of GDR issues were deposited in European American Investment Bank AG (“EURAM”) does not and cannot have any relevance to the observations in the Order. xi. That there is no connection demonstrated between Pan Asia and the Initial Investors apart from the fact that some such investors applied in more than one GDR issue managed by Pan Asia. That it is common practice for Pan Asia to advertise the GDR issues of various Indian companies that it may be advising and that it is required as part of its services to refer such issues to various international parties that may be interested in subscribing to the GDRs. The ultimate decision to invest in the same or the period for which the GDRs are to be retained etc. are decision of such investors. xii.

As regards the GDR issues of Proto Developers Limited (“Proto”) and IT People (India) Limited (“IT People”), it was submitted that there has been no sale of any GDRs of Proto and IT People despite the issues being managed by Pan Asia. It was submitted that there is no connection between the FIIs/sub-accounts or the entities with Pan Asia. xiii. It was contended that Mr. Arun Panchariya is one of the founders of Pan Asia which is an independent legal entity authorised and regulated by the FSA and in fact so is Mr. Arun Panchariya and that Mr. Arun Panchariya is no longer a part of the management of Pan Asia. xiv. That simply because Mr. Arun Panchariya is the brother of Mr. Satish Panchariya who is the director of Alka India Limited does not mean that there is any connection between Alka and Pan Asia which is a separate legal entity. The trading by Alka India Limited in scripts of companies whose GDR issues were managed by Pan Asia is totally irrelevant. Further with regard to the alleged common address between Pan Asia and Alka India Limited, it was submitted that the allegation in this regard is based on an email dated July 7, 2010 provided by one Ms. Sheetal Mudaliar Shaikh from Deutsche Bank AG (Deutsche) and that Pan Asia is not aware of the basis on which such information is provided by Deutsche.

Pan Asia denied that it has a common address with Alka. xv. That there appears to be nothing wrong in India Focus Cardinal Fund converting such shares and selling them in the Indian market. Such activity is a common practice in the foreign investment market since it would appear to allow FIIs an opportunity to make profits based on the arbitrage possibly available between the price of the GDR and the price of the underlying. Such activity is not barred by any provision of Indian law and is therefore legal and acceptable in the various jurisdictions that such FIIs operate in including in India. That it is incorrect to allege that just because India Focus Cardinal Fund traded in scrips of various Indians companies, there was any objective ‘to take funds out of India’. It is unclear as to how the Order contends that objective of FIIs is to simply ‘invest in Indian Companies’ rather than to undertake trading for its own purpose. xvi. That the information in relation to such Initial Investors is confidential information under the laws of the jurisdictions where Pan Asia operates. The permission from such Initial Investors is required before sharing such information.

Further, Pan Asia is not required to share such information with SEBI given that it does not fall within its regulatory remit. Such information was only shared by Pan Asia, to the extent that it could, after compliance with requirements under its own laws and purely in the spirit of co-operation and goodwill. Further, the Order whilst making general allegation about the Indian shareholders being affected does not in any manner demonstrate as to how such investors are affected. The Order whilst alleging from time to time that there were ‘artificial volumes’ in the scrips fails to appreciate that increase in volumes is a natural and obvious consequence of ‘de-freezing’ of GDRs which cannot be alleged to be illegal or manipulative in any manner. 10. I note that Mr. Arun Panchariya had made similar submissions in his reply/written submissions. This is a case where SEBI was of the prima facie view that certain companies with financials that may not readily attract investors to subscribe to their large GDR issues had in fact issued GDRs which were substantially larger than the total equity of such companies prior to the GDR issues and that the GDRs (ranged between 17.75% to 78.49% of the issue size) were converted into equity shares.

It was also observed that the shares of the identified seven companies in the Order were generally less-liquid before the GDR issues when compared to the period post such GDR issuance. It was further observed from the GDR cancellation data that India Focus Cardinal Fund had converted their GDRs in Asahi Infrastructure Projects Limited, Avon Corporation Limited, K Sera Sera Limited, IKF Technologies Limited, CAT Technologies Limited and Maars Software International Limited. KII Limited had also converted the aforesaid GDRs except in the cases of IKF Technologies Limited, CAT Technologies Limited and Maars Software International Limited. Similarly, Sophia Growth and Mavi Investment amongst others had also converted their GDRs in some of the select scrips. The details of the quantities which were cancelled/converted and the name of the scrips were given in the table at pages 29 and 30 of the Order. Pursuant to the conversion, the entities/sub-accounts started to sell the same in the Indian stock exchanges. The Order had observed that for the trading of Group members like Basmati Securities Private Limited, SV Enterprises, Alka India Limited, JMP Securities Private Limited and Oudh Finance and Investment Private Limited, their buy trades were matching on a consistent basis with the sell trades of the sub-accounts.

The Order also observed that the high percentage of trades of sub-accounts matching with the Group entities as counterparties across different companies raised a suspicion of a possible pre-arrangement between the Group and the sub-accounts due to the fact that most of the companies examined were illiquid companies and that it would be difficult for the sub-accounts to sell their holdings without experiencing major price fall. The Order had further observed that the sub-accounts and the aforesaid Indian clients (trading entities) were the major contributors to the volumes of the select scrips in the Order. The Order has inter alia observed that the various aspects of the GDR issues like, the large size of the issue vis- à-vis existing size of the issuing company, un-impressive financials of the company, common initial investors, high proportion of cancellation of GDRs repeatedly by a set of Foreign Institutional Investors (FIIs)/Sub-Accounts, sale in Indian stock exchanges, the majority of which is with a constant group of clients and further off-loading by them point towards an elaborate scheme to manipulate markets.

With respect to the submission that just because Mr. Arun Panchariya was one of the directors of India Focus Cardinal Fund it would not mean that that Pan Asia or Mr. Arun Panchariya exercised any control as alleged by the Order, I note that Mr. Arun Panchariya was not only the director but was also the investment manager of India Focus Cardinal Fund. It can be inferred that the said entity was under the control of Mr. Arun Panchariya for its investment activities.

11. The submission that on the days when the FII/sub accounts have allegedly sold their shares in the issuer companies, their concentration ranged from 18% to 53% of the day’s net volume would imply that apart from the said trading there was trading to the extent of 82% to 47% by other entities cannot be accepted on following grounds;

i. The increased volume in the scrip is not only due to the trading of sub-Accounts. It is also due to trades by Group members. Therefore, even if there has been lower concentration of sub-accounts, the total concentration of Sub-Accounts and Group is high on most of the days, they have traded. Further, it is never alleged that 100% of the volume is created by Group and Sub-Accounts. ii. The definition of Group is not exhaustive. There might be other members of the Group and the same is the matter of investigation being carried out by SEBI. iii. Even if, the concentration of sub-accounts is less on few days, it would not discharge them of the allegation of offloading their holdings in the examined companies in a structured manner. 12. I also note that the volumes of the scrips had increased significantly after the conversion of GDRs into equity shares and the subsequent sale in the stock exchanges. The details of the same were provided in a table in the Order at page 27. Further substantial quantities of the GDRs (approximately 18% to 79%) issued by the identified companies were converted into equity shares. It was the submission that SEBI was not correct in alleging that the investors did not have complete market information in relation to the cancellation of GDRs, as SEBI itself had required that disclosures are made in relation to conversion of GDRs. In this regard, I note that, although, there are quarterly disclosures which are made to stock exchanges regarding percentage of GDR outstanding in a company, the information would be of hardly any significance for Indian investors if the GDRs converted have been sold, by the time information appears on the websites of Stock Exchanges. The conversion of GDRs and sale of converted shares are done in the GDR accounts of FIIs/Sub-Accounts. The sale of shares post GDR conversion do not get reported to SEBI on a daily basis. Further, monthly reporting done to SEBI by custodians does not have details of specific FII/Sub-Accounts who have dealt in GDRs and contains only gross figures of change in number of GDRs held/converted/sold by all the clients of that particular custodian. The preliminary investigation has observed that a repetitive pattern emerged as the same set of Sub- Accounts sold most of their holdings to the same set of counterparties.

13. It has been prima facie observed that Mr. Arun Panchariya had links with other entities suspected to be the part of the scheme of converting and selling GDRs in Indian market in a structured manner. Mr. Arun Panchariya was the founder and owner of Pan Asia, as stated in the Order and that he had resigned from the directorship of Pan Asia only after the Order. Further, he was found to be the Investment Manager and one of the directors of India Focus Cardinal Fund. Needless to say, India Focus Cardinal Fund was found to be the most active Sub-Account in cancelling GDRs and selling them in the Indian Market in the select scrips. The role of Pan Asia in the issuance of GDRs by Indian companies is essentially that of an “arranger” of the investors for the issue. In respect of the submission that Pan Asia does not have any connection and control over the initial investors, it is noted that the initial investors are the same set of foreign entities investing across the companies examined by SEBI. The said companies with the same initial investors do not have any common factor apart from Pan Asia arranging their GDR issues.

Therefore, it appears that the reason for such initial investors to keep the shares of select companies in their portfolio was Pan Asia. Further, the alleged connection between Mr. Arun Panchariya and the Indian clients (entities of the group) which had traded with the sub accounts including India Focus Cardinal Fund have been mentioned in the Order. The preliminary investigation of SEBI has found connections between the entities and that most of them were found to be connected to Mr. Arun Panchariya and his brother Mr. Satish Panchariya. The Order had mentioned that Mr. Arun Panchariya was a director and promoter of Alka India Limited. In almost all the scrips, a major portion of the shares sold by the Sub-Accounts have been bought by the Group entities including Alka India Limited, Basmati Securities Private Limited and Oudh Finance and Investment Private Limited. These entities were found related to each other and therefore being controlled by one common objective as observed in their trading behaviour. The very high percentage of the trades of the sub-accounts matching with the Group entities as counterparties across various companies identified in the Order, prima facie suggested a pre-arrangement between the Group and the sub-accounts.

Further, the trades of the Sub-Accounts and the Group entities were found to have contributed substantially to the volumes of such scrips.

14. At this stage, the findings points out to a case where a group of sub-accounts have sold considerable quantities of shares on conversion of the GDRs of the respective companies, the counterparties were seen to be another set of entities whose presence as counterparties was regular in the identified scrips when the said sub-accounts sold those shares. The companies which had issued such GDRs had financials which could not readily attract investors. Such companies have come out with GDR issue of size considerably larger than their existing equity capital size. Further, GDRs were issued by such companies on the advice/arrangement from Pan Asia whose founder was none other than Mr. Arun Panchariya. Considering the facts that, a common entity (Pan Asia) and Mr. Arun Panchariya of Pan Asia advised all the companies in their GDR issuances, Mr. Arun Panchariya’s alleged relationship with Alka India Limited and India Focus Cardinal Fund, the pattern of trading by the sub-accounts and the Group entities especially Alka India Limited, Oudh Finance and Investment Private Limited and Basmati Securities Private Limited and the Groups inter-se trading, as outlined in the Order and the prima facie findings of the preliminary examination which pointed to the various suspicious aspects of the GDR issues like the size of the issue being multiple times the existing capital of issuing company, unimpressive financials of the company, common initial investors, high proportion of cancellation of GDRs repeatedly by a set of FII/Sub-Accounts, sale in Indian stock exchanges by them and a major portion being bought by common set of clients, the inter-se trading amongst the said clients and subsequent off-loading by them, when seen in totality, do not convince me at this stage to vacate the interim directions issued against the parties.

Mr. Arun Panchariya was prima facie found to have been connected with the entities involved in the alleged manipulation in one or the other way. Given this chain of events and circumstances, the preponderance of probability at this stage suggests the involvement of Pan Asia and Mr. Arun Panchariya in the alleged scheme of things. The parties have submitted that they had no role to play in the alleged manipulation, I am unable to consider the said submission and their case on merits, at this stage, since the investigation in the matter is not yet completed. Considering the facts and circumstances and also the submissions made by the parties, SEBI shall expeditiously complete the investigation in the matter, in the interest of justice and thereafter shall immediately take appropriate actions in accordance with law. During the course of hearing, it was submitted that if Mr. Arun Panchariya was aware that SEBI required information with respect to the GDR issues, he would have promptly furnished all the required information. The submission that he was not aware of such developments is factually incorrect, as I note that a copy of the e mail dated December 15, 2010 from SEBI was also marked to Mr. Arun Panchariya.

I also note that an email dated December 27, 2010 from Pan Asia to SEBI regarding the visit of a director of Pan Asia to SEBI was also in the knowledge of Mr. Arun Panchariya as a copy of the said email was also marked to him.

15. In view of the foregoing, I, in exercise of the powers conferred on me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11(1), 11(4) and 11B thereof, hereby confirm the directions issued vide the ad interim ex-parte Order dated September 21, 2011 against Pan Asia Advisors Limited and Mr. Arun Panchariya in the matter of alleged market manipulation using GDR issues.

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: JANUARY 17, 2012