Order against Amadhi Investment Ltd

WTM/MSS/ISD/ 45 /2010 SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: M. S. SAHOO, WHOLE TIME MEMBER IN THE MATTER OF IPO IRREGULARITIES - DEALINGS BY M/s. AMADHI INVESTMENTS LIMITED IN INITIAL PUBLIC OFFERS OF IDFC LTD. (IDFC), SASKEN COMMUNICATION TECHNOLOGIES LTD. (SASKEN) AND FCS SOFTWARE SOLUTIONS LTD. (FCS) Date of Hearing: March 19, 2010 Appearances: For Noticee: Mr. Anish Kharidia, Practising Company Secretary, and Mr. Nitin Shah, Authorised Representative. For SEBI: Mr. Jai Sebastian, Asstt. Legal Adviser (Presenting Officer) Mr. S. Ramann, Officer on Special Duty Mr. B. J. Dilip, Deputy General Manager Mr. Sisir Mondal, Manager, and Ms. Kshama Wagherkar, Asstt. Legal Adviser. ORDER UNDER SECTIONS 11, 11 (4) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 1. On noticing certain irregularities in the transactions in the shares issued through initial public offers (IPOs) made during the period 2003-2005, before their listing on the stock exchanges, the Securities and Exchange Board of India (SEBI), pending investigations, vide an ad interim ex-parte Order dated April 27, 2006, which itself was a show cause notice, directed certain persons, including Amadhi Investments Limited (Amadhi), not to buy, sell or deal in the securities market, including in IPOs, directly or indirectly, till further directions. In the said show cause notice, it was alleged that Amadhi acted as a financier to a key operator (KO), namely, Sugandh Estate and Investments Private Ltd. (SEIPL) in the IPOs of IDFC Ltd., Sasken and FCS and made an ill-gotten gain of Rs.1,53,17,119. After taking into account the reply of Amadhi to the show cause notice, SEBI confirmed the interim directions vide Order dated December 01, 2008.

2. On completion of the investigations, SEBI issued a show cause notice dated December 16, 2008 (SCN) under Sections 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act), alleging that Amadhi acted as a financier, and in concert with the KO, employed fraudulent, deceptive and manipulative practices to corner the shares meant for retail individual investors (RIIs) in the IPOs of IDFC, Sasken and FCS and made unlawful gains by selling the shares so cornered. These acts of Amadhi were in violation of Section 12A (a) (b) and (c) of the SEBI Act, 1992 and regulations 3 (a), (b) (c) and 4 (1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (PFUTP Regulations). Accordingly, it called upon Amadhi to show cause as to why suitable directions under Section 11(4) read with Section 11 and Section 11B of the SEBI Act, 1992, including directions restraining it from buying, selling or dealing in securities in any manner for a suitable period and to disgorge Rs.83,84,796 with interest, not be issued. The SCN also offered the opportunities for inspection of documents and personal hearing.

3. SEBI has issued several letters (December 16, 2008, February 19, 2009, March 5, 2009, March 19, 2009, March 31, 2009, April 1, 2009, and April 21, 2009) seeking reply to the SCN and offering opportunities for inspection of documents and personal hearing. Amadhi kept on seeking extension of time for these over and over again on various pretexts. Vide letter dated April 27, 2009, Amadhi was offered still another opportunity of inspection on May 11, 2009 and hearing on May 20, 2009 with a clear advice that no further opportunity would be allowed. Though it availed inspection of documents on May 11, 2009, it never replied to the SCN nor did it appear for personal hearing. Its letter dated May 15, 2009 seeking inspection of additional documents was received on May 20, 2009 after the scheduled hearing time. While SEBI was in the process of proceeding further in the matter, Amadhi applied to SEBI for settlement of the proceedings through the consent procedure. SEBI, vide letter dated February 1, 2010, declined to settle the proceedings as the terms offered were not appropriate. Accordingly, the proceedings revived. Vide letter dated February 19, 2010, SEBI offered still one more opportunity for inspection of documents and personal hearing on March 5 and 12, 2010 respectively and advised Amadhi to submit reply to the SCN by March 5, 2010. The inspection of documents and hearing were rescheduled on March 2, 2010 and on March 19, 2010 respectively at its request. It, however, did not avail of the opportunity of inspection. Nor did it file any reply to the SCN. It, however, appeared for personal hearing on March 19, 2010.

4. While admitting the transactions alleged in the SCN, Amadhi made the following three preliminary submissions: 4.1 Amadhi submitted that without inspection of the additional documents listed in its letter dated May 15, 2009, it is handicapped to defend itself. The said letter was perused. It was observed that Amadhi was asking for documents which in the opinion of Mr. Kharidia could have been relied upon by SEBI to determine its role. Vide letter dated February 24, 2010, it stated that the list of documents stated in the letter dated May 15, 2009 was merely illustrative and it might seek further documents. The list was perused. The first item listed the statements, if any, of SEIPL. The presenting officer stated that SEBI was not relying on such statements for the charge. The second item listed consent order passed by SEBI against SEIPL. The presenting officer responded that SEBI was not relying on such order for the charge. Besides, the consent orders are available in public domain. A perusal of the other additional documents sought for inspection indicated that these were either available in public domain, or not being relied upon by SEBI for the charge or have no bearing on the matter in hand.

For example, Amadhi has sought documents relating to any reference received from parliamentary standing committee indicating its role. The presenting officer clarified that the charge relies mostly on demat and bank statements of Amadhi which establish the flow of funds and securities between Amadhi and the KO and these have already been provided. I agreed with the presenting officer. I found that Amadhi was attempting to use SEBI to gather even those documents which it did not need for its defence, with the sole aim of delaying the disposal of the proceedings. SEBI cannot be obliged to provide the documents which have no bearing on the matter or which, in the opinion of Mr. Kharidia, could have been relied by SEBI. Moreover, there was no dispute about the transactions. Hence the demand for inspection of additional documents was rejected. 4.2 Amadhi sought one month time for submitting a written reply in addition to the oral submission being made at the hearing. I found that it had got enough time (December 16, 2008 – March 19, 2010) and opportunities to submit reply to the SCN. It never submitted the reply though it sought several extensions for the same.

In any case, there was no dispute about the alleged transactions. No purpose would be served by granting further time except delaying the disposal of the proceeding further. Hence, the demand for further one month for reply was rejected. 4.3 Amadhi insisted that its application for consent may be reconsidered. It recounted how keenly it had been interested for settlement of the proceeding through consent procedure since the issue of the SCN. It submitted that it would be willing to offer better consent terms should SEBI be willing to reconsider. I found that this submission had no bearing on the instant proceeding which was being disposed of on merit.

5. I have carefully considered the SCN, the oral submission of Amadhi and other material on record. Accordingly, I proceed to dispose of the proceedings on merit.

6. The SCN alleges that Amadhi provided finance to a KO, who acquired the shares under the RII category of IPOs and transferred the said shares in off-market to Amadhi at issue price / gratis and refunded the balance money. The details of these transactions between Amadhi and the KO are as under: Name Issue Issue Finance to KO Refund through of Shares Refund through money from of Period / price from KO KO IPO Date of (Rs.) Date Cheque Amount Date No. of Value Date Cheque Amount Listing No. (Rs.) Shares (Rs.) No. (Rs.) 1 2 3 4 5 6=(9+12) 7 8 9 ( 3 * 8) 10 11 12 IDFC 15.7.2005- 34 21.07.05 391214 2,00,00,000 09.08.05 2,65,468 90,25,912 10.08.05 266106 1,73,00,000 22.7.2005/ 26.07.05 391211 2,00,00,000 02.09.05 266 9,044 10.08.05 266109 2,11,00,000 12.08.2005 26.07.05 391212 76,00,000 10.08.05 266132 1,65,044 Total 4,76,00,000 2,65,734 90,34,956 3,85,65,044 Sasken 11.8.2005- 260 22.07.05 391242 1,70,00,000 05.09.05 4,700 NIL 19.08.05 417616 69,00,000 17.8.2005/ 19.08.05 417617 68,50,000 09.09.2005 22.08.05 026628 32,50,000 Total 1,70,00,000 4,700 1,70,00,000 FCS 22.8.2005- 50 31.08.05 391269 2,25,00,000 19.09.05 10,800 5,40,000 23.09.05 275576 2,00,00,000 26.8.2005/ 31.08.05 391270 2,25,00,000 21.09.05 27,400 13,70,000 26.09.05 275581 5,60,00,000 21.09.05 31.08.05 391273 1,12,50,000 28.09.05 275591 1,40,000 31.08.05 391271 2,25,00,000 28.09.05 275587 7,00,000 Total 7,87,50,000 38,200 19,10,000 7,68,40,000 The IPO of IDFC opened and closed on July 15, 2005 and July 22, 2005 respectively. Around the closure of the issue, Amadhi provided Rs.4.76 crore, corresponding to subscription money for 1000 applications @ Rs.47,600 each under the RII category, to the KO through three cheques. The IPO got listed on August 12, 2005. The KO refunded Rs.90,34,956 by way of transfer of 2,65,734 IDFC shares (2,65,468 on August 9, 2005 and 266 on September 2, 2005) @ issue price of Rs.34 each. It also refunded the balance amount of Rs.3,85,65,044 through three cheques. Thus, the KO refunded a total of Rs.4.76 crore which it had taken from Amadhi. Similar is the story in respect of the IPO of FCS, as indicated in the table above. In case of IPO of Sasken, however, Amadhi provided Rs.1.7 crore to the KO and received back the entire amount from the KO along with 4,700 Sasken shares. Thus, Amadhi received Sasken shares free.

7. Amadhi, on receipt of the shares from the KO, sold the same in the market and off-market and made an unlawful gain of Rs.83,84,796 as under: IPO Receipt of Shares from KO Sale of Shares received from KO Unlawful Profit Date of Receipt No. of Shares Value (Rs.) Date of Sale No. of Shares Amount (Rs.) (Rs.) 1 2 3 4 5 6 7 8 = (7 – 4) IDFC 09.08.05 2,65,468 90,34,956 16.08.05 2,66,000 90,44,000 0 02.09.05 266 Sasken 05.09.05 4,700 NIL 12.09.05 700 3,03,800 3,03,800 09.09.05 4,000 18,52,000 18,52,000 Total: 21,55,800 Total: 21,55,800 FCS 19.09.05 10,800 19,10,000 23.09.05 8,200 17,93,996 13,83,996 21.09.05 27,400 26.09.05 15,000 31,72,500 24,22,500 26.09.05 15,000 31,72,500 24,22,500 Total: 81,38,996 Total: 62,28,996 Total 83,84,796 Amadhi received 38,200 FCS shares valued at Rs.19,10,000. It sold these shares for Rs.81,38,996 and thereby made a profit of Rs.62,28,996. It sold 4,700 Sasken shares for Rs.21,55,800. Since these shares were received gratis, the entire amount was its profit. It, however, did not make any profit from disposal of the IDFC shares which it transferred to Mr. Jitendra Lalwani at issue price. It, thus, made a total profit of Rs.83,84,796.

8. With the help of the above transactions, the SCN alleges that Amadhi financed the KO to make applications under the RII category of IPOs. On allotment of the shares, it received the entire allotment from the KO at issue price (in case of IDFC and FCS) and also the balance money. It received Sasken shares free. In this manner, Amadhi managed to acquire 2,65,734 IDFC shares, 4,700 Sasken shares and 38,200 FCS shares under the RII category. Had it not adopted this modes operandi, these shares would have been available for RIIs. The SCN, therefore, alleges that Amadhi manipulated the retail segment of the IPO market and cornered the shares meant for RIIs, by financing the KO to make applications under the RII category. By selling such unlawfully acquired shares, it made an unlawful gain of Rs.83,84,796.

9. Amadhi made the following submissions during the hearing: a. It does not dispute the transactions (receipt and payment of money and shares between Amadhi and the KO) attributed to it. It, however, sought a few corrections in the computation of the amount of alleged ill-gotten profit. b. It extended finance to KO in normal course of its business of lending money. It did not have knowledge that the KO was manipulating the IPO allotment. There was no agreement in support of the loan nor was there any security to secure the loan. There was, however, an understanding through negotiation with the KO that the KO would repay the loan by way of shares received in IPOs at issue price and the balance loan amount by cash.

10. The charge to be determined is: Did Amadhi corner the shares meant for RIIs through an understanding with the KO and make unlawful gains? The determination of this charge, in turn, requires examination of the following issues: a) What was the nature of the understanding between the KO and Amadhi? b) Did Amadhi corner the shares reserved for RIIs?, and c) What is the amount of the unlawful gain?

11. Amadhi has admitted that it had an understanding to the effect that Amadhi would extend loan to the KO and the loan would be repaid by the KO by way of transfer of shares received in allotment at issue price and the balance amount of the loan by cash. It has only contested that it did not extend the loan for making applications in IPOs. I find it very hard to believe that a professional lender extends loan without knowing its end use, but agrees to repayment of the loan in a few days by way of transfer of shares received on allotment at issue price. Generally, a money lender knows the end use, but does not appropriate entire gains from the end use. In this case, if Amadhi is to be believed, it did not know the end use, but it had precise understanding with the borrower that it would appropriate the entire gains from the end use. Further, I find that the money is lent after the closure of the issue but before the allotment. It is lent for about a month (period between closure of the issue and its listing). It corresponds to a specified number of IPO applications. The refund takes place by way of transfer of all the shares received in allotment against these IPO applications. Such shares are transferred to the lender at issue price around the date of listing, and at times, after the listing. The KO, who has the option to sell the shares in market at a much higher price, chooses to transfer the same in off-market to the lender at issue price or gratis. Why should the KO transfer shares to Amadhi at the issue price / gratis without making profits unless they are part of the game plan. The pattern and timing of movement of money and shares between the KO and Amadhi over successive IPOs leaves no doubt in mind that Amadhi financed the IPO applications in the RII category made by the KO with a view to corner the shares.

12. The amount of finance extended by Amadhi corresponded to a specified number of IPO applications in the RII category. For example, Amadhi extended Rs.4.76 crore to enable 1,000 applications under the IDFC’s RII category, each application being for Rs.47,600. Similarly, each lot of shares transferred to Amadhi corresponded to the allotment to a certain number of applicants in the RII category. For example, Amadhi received 2,65,734 shares corresponding to allotment to 999 applications. Had Amadhi applied in individual capacity, it could have got an allotment of only 266 IDFC shares. However, it could get 2,65,734 IDFC shares by entering in to an arrangement with the KO. Had it not done so, these shares would have been available for allotment to RIIs. Thus, Amadhi clearly cornered the shares meant for RIIs and in the process, deprived RIIs of their rightful share in allotment in these IPOs.

13. Amadhi suggested two corrections. First, it submitted along with proof of sale that it did not sell one lot of 15,000 FCS shares at Rs.211.5 per share. It actually made a profit of Rs.56,21,496 and not Rs.62,28,996, as alleged in the SCN. The presenting officer accepted this submission. Second, Amadhi suggested that the issue price may be reduced from the sales consideration of Sasken shares to arrive at the net profit. Neither Amadhi nor the Presenting Officer explained why Amadhi received Sasken shares free from the KO or why Amadhi transferred IDFC shares to Mr. Lalwani at issue price. In the absence of this, I consider it appropriate to rely on the actual inflows and outflows of funds to / from Amadhi, as evidenced by its bank statements. Accordingly, Amadhi made a profit of Rs.21,55,800 from Sasken shares. Thus, it made a total profit of Rs.77,77,296 from disposal of unlawfully acquired shares.

14. From the above, it is clear that Amadhi employed fraudulent, deceptive and manipulative practices to corner the shares meant for RIIs in the aforesaid IPOs and made unlawful gains by selling the shares so cornered. Hence, it violated Section 12A (a), (b) and (c) of the SEBI Act, 1992 and regulations 3 and 4 (1) of the PFUTP Regulations.

15. Amadhi manipulated the demand for shares in the RII category and thereby distorted the market integrity. It deprived the RIIs of their legitimate share in the IPOs of IDFC, Sasken and FCS and made an unlawful gain of Rs.77,77,296 to the detriment of the RIIs. The interest of the market and of the investors requires that such an entity is not allowed to participate in the market and unjustly enrich itself at the cost of investors. Such acts of serious irregularities threaten the market integrity and orderly development of the market and calls for regulatory intervention to protect the interest of investors. Accordingly, in exercise of the powers conferred upon me under Section 19, read with Sections 11, 11 (4) and 11B of the SEBI Act, 1992, and after taking into account the period of prohibition already undergone by Amadhi pursuant to the interim order, I hereby issue the following directions: a) Amadhi Investments Limited (PAN AAACA7300E) be restrained from buying, selling or dealing in the securities market in any manner whatsoever or accessing the securities market, directly or indirectly, for a period of one year from the date of this Order; and b) Amadhi Investments Limited shall disgorge the unlawful gain of Rs.77,77,296 (Rupees seventy seven lakh seventy seven thousand two hundred and ninety six only). It shall also pay the interest on this unlawful gain at the rate of 6% (six percent) per annum for 4 ½ years (September 2005 – March 2010, i.e. from the date of listing of the IPOs of Sasken and FCS till this Order), amounting to Rs.20,99,870. It shall thus disgorge a total amount of Rs. 98,77,166 within 45 (forty five) days from the date of this Order by way of crossed demand draft drawn in favour of “Securities and Exchange Board of India”, payable at Mumbai. In case the aforesaid amount is not paid within the specified time, it shall be restrained from buying, selling or dealing in securities market in any manner whatsoever or accessing the securities market, directly or indirectly, for a further period of seven years, without prejudice to SEBI’s right to enforce disgorgement along with further interest till actual payment is made.

16. The directions issued in this Order shall supersede the directions issued vide the ad interim ex-parte Order dated April 27, 2006 and vide Order dated December 1, 2008, only after the directions under Para 15 are fully complied with.

17. This Order shall be served on all recognized stock exchanges and depositories to ensure that Amadhi Investments Limited is not allowed to undertake transactions as prohibited in Para 15 above. 18. This Order shall come into force with immediate effect. PLACE: MUMBAI M. S. SAHOO DATE: April 06, 2010 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA