Order against Advance Finstock Private Ltd. and others in the matter of Pyramid Saimira Theatre Ltd

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI), vide an ad interim ex-parte order dated April 23, 2009 (hereinafter referred to as the Order), in the matter of Pyramid Saimira Theatre Limited (hereinafter referred to as PSTL), inter alia directed various persons/entities (as mentioned therein) including Advance Finstock Private Limited (hereinafter referred to as AFPL) and its directors, Mr. Popatlal K Shah, Mr. Karul P. Shah, Mr. Anand B Hundia, Mr. Rajesh B Hundia and Mr. Sanjay Hundia (hereinafter collectively referred to as the parties) not to buy, sell or deal in the securities market including in Initial Public Offerings directly or indirectly, till further directions, as AFPL was prima facie found to have carried out suspicious banking transactions and channeled those funds, either directly or indirectly, in the stock markets. Thereafter, Mr. G.B Yadav, Advocate, filed a reply (to the Order) on behalf of the parties, vide letter dated March 5, 2010. An opportunity of hearing was also afforded to the parties on April 6, 2010, when Mr. G.B. Yadav, the advocate, appeared on their behalf and made submissions, which were on the lines of the aforesaid reply.

2. I have considered the submissions made by parties in their reply, the oral submissions made during the hearing and other material available on record. At this stage, the limited issue for consideration is whether, based on the available material and after considering the submissions made by the parties, the ex-parte directions issued by SEBI against them, in terms of the Order, needs to be continued, revoked or modified in any manner. The circumstances which led to the passing of the Order had been mentioned in detail in the said order. The investigation in the matter of PSTL, prima facie revealed the operation of a widely distributed network of persons/entities who had joined hands in breaching market integrity by manipulating the shares of PSTL, forging a letter purported to be issued by SEBI to Mr. P.S. Saminathan (promoter of PSTL), publicizing its contents and the manipulators taking benefit of the artificial price rise caused by the said letter and selling of their substantial stake in the market to their advantage and to the detriment of the unsuspecting investors, carrying out suspicious banking transactions and routing those funds for securities market operations, offloading substantial shares at an artificial inflated price on December 22, 2008 etc. It was noticed that M/s. Om Associates had transferred funds into the account of Mr. Amol Kokane, who had traded substantially in the shares of PSTL and prior to the money transfers, M/s. Om Associates had received funds from certain entities including from M/s. R.S.

Enterprises. The preliminary findings of SEBI in the matter had observed that AFPL had transacted directly with M/s. Om Associates as well as with M/s. R. S. Enterprises and M/s. Gayatri Gems, who in turn had transacted with M/s. Om Associates. In terms of the Order, the allegation against AFPL (and its directors) was that, it appeared to have carried out suspicious banking transactions and channeled those funds, either directly or indirectly, in the stock markets. In this regard, the advocate, during the hearing, submitted that AFPL is registered with the Reserve bank of India (RBI) as a non-banking financial company (NBFC) and is engaged in financial services. He further stated that AFPL is involved in discounting of cheques/pay order/demand drafts for commission and in turn issues its cheques at the desired destination. It was submitted that AFPL had bank accounts in major destinations as required for its business or otherwise maintains roaming account whereby its cheques are honoured at par. It was also stated that cheques are issued to the clients on a written request and such requests cum acknowledgement forms containing the details of the cheque/Pay Order/Demand Draft received and the cheques so issued are retained by AFPL for record.

It was submitted that cheques issued by AFPL are 2/3 days post dated to ensure that cheques received against the issued cheques get cleared on presentation, before the cheques issued by AFPL are cleared. According to him, in this manner, in case any cheque (received from the party) gets dishonored, ‘stop-payment’ instructions could be given to its bankers so that the payment could be stopped. The advocate also submitted that AFPL is aware of the person from whom the cheques are received and the discounted cheques are given, but is not aware as to the identity of the person who becomes the beneficiary of the instrument and the purpose of such remittance. It was submitted that while accepting a request for issuance of cheques, the applicant has to sign on an undertaking wherein they declare that the monies underlying such instruments is ‘lawful money’. The learned counsel reiterated that the role of AFPL was only restricted to the issuance of cheques and collection of commission for rendering such services, without being concerned with the activities of the persons thereafter, as well as the purpose for which such discounted cheques are utilized.

While referring to the banking transactions of M/s. Om Associates, M/s. Gayatri Jems, M/s. R. S. Enterprises and Mr. Amol Kokane, it was contended that the parties had nothing to do with the impugned banking transactions. It was further submitted that AFPL had issued cheques at the instance of its client, one Rahul Nemi. According to it, AFPL only charges a commission for its services and is not concerned as to whom cheques are requested to be issued (to M/s. Gayatri gems, in this case) and the end use of the funds and that due diligence, in the nature of collecting the details as to the identity of the applicant requesting for cheque discounting services, is taken and recorded. It was submitted on behalf of AFPL that during the relevant period, the parties had not traded in stock market nor invested in any initial public offering and have not made any transactions of purchase and sale of shares through their Axis Bank, Palampur Branch account, as indicated in the Order.

3. I have noted the submissions made on behalf of the parties. However, I find that cheques were received from various banks on various dates and have been issued to M/s. Gayatri Gems and M/s. Ganesh Trading Co. on various dates. As already mentioned in the Order, the account statement of M/s. Om Associates revealed that immediately prior to transfer of Rs.10,00,000/- to Mr. Amol Kokane on September 10, 2008, M/s. Om Associates had received credits from various entities including from M/s. Gayatri Gems and that the further trail of those accounts revealed that the funds were being rotated through all those accounts as well as through the large network of their connected accounts in a complex circuitous manner and without any seemingly bonafide business purpose. As there have been transactions between AFPL and M/s. Om Associates directly as well as with M/s. Gayatri Gems and M/s. R.S. Enterprises, I am of a considered view that the independent role of AFPL should not be seen in isolation and the case needs to be seen in its entirety. Further, the large scale market abuse that happened in the present case and the nature of channeling of funds through a web of entities, which have been explained in detail in the Order, do not convince me to revoke the interim directions issued against the parties, at this stage. Therefore, after giving thoughtful consideration to the submissions made on behalf of the parties, the other material available on record and the facts and circumstances of the case, I find that it would not be appropriate to revoke the interim directions issued against the parties, vide the Order, at this stage. It goes without saying that, if their role in the manipulation is not brought out in definite terms by the ongoing investigation, necessary directions would be issued at an appropriate stage.

4. In view of the foregoing, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11, 11(4) and 11B thereof, hereby confirm the directions issued against Advance Finstock Private Limited, Mr. Popatlal K. Shah, Mr. Karul P. Shah, Mr. Anand B. Hundia, Mr. Rajesh B. Hundia and Mr. Sanjay Hundia, vide the ex-parte interim Order dated April 23, 2009 in the matter of Pyramid Saimira Theatre Limited.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: JULY 5, 2010