Order against Ashmi Financial Consultancy Pvt. Ltd. in the matter of IPO rregularities

Date of Hearing: June 24, 2010 Appearances: For Noticee: Mr. R. R. Bhonsale, Advocate Mrs. Poonam Gadkari, Advocate Mr. Anish Kharidia, Practising Company Secretary, and Mr. Nitin Shah, Authorised Representative. For SEBI: Mr. Jai Sebastian, Asstt. Legal Adviser (Presenting Officer) Mr. B. J. Dilip, Deputy General Manager Mr. Pradip Bhowmick, Assistant 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 Ashmi Financial Consultancy Pvt. Ltd. (Ashmi / Noticee), not to buy, sell or deal in the securities market, including in IPOs, directly or indirectly, till further directions. The said show cause notice offered opportunities of inspection of documents and personal hearing. After considering the reply to the show cause notice and hearing Ashmi, SEBI confirmed the interim directions against it vide Order dated September 23, 2008. 2. On completion of the investigations, SEBI issued a show cause notice dated April 22, 2009 (SCN) under Sections 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act). The SCN alleges that Ashmi, in concert with three Key Operators (KOs), namely, Mr. Dhaval Mehta (Dhaval M), Mr. Dhaval Katakia (Dhaval K) and Mr. Dharmesh Bhupendra Mehta (Dharmesh), employed fraudulent, deceptive and manipulative practices to corner the shares meant for retail individual investors (RIIs) in the IPOs of IDFC Ltd. (IDFC) and Shoppers’ Stop Ltd. (Shoppers) and made unlawful gains by selling the shares so cornered.

These acts of Ashmi were in violation of Section 12A (a), (b) and (c) of the SEBI Act and regulations 3 (a), (b), (c) and (d) and 4 (1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations). Accordingly, it called upon Ashmi to show cause as to why suitable directions under Section 11(4) read with Sections 11 and 11B of the SEBI Act, 1992, including directions to restrain it from buying, selling or dealing in securities in any manner, disgorge the ill-gotten gains made by it along with interest, and realize the shares in its frozen demat accounts. The SCN also offered opportunities of inspection of documents and personal hearing. 3. While the proceedings were on, vide letter dated on September 1, 2009, Ashmi sought settlement of proceedings through the consent procedure. On conclusion of consent proceedings, SEBI, vide letter dated February 1, 2010, declined to settle the same as the terms offered by Ashmi for settlement were not appropriate. Accordingly, the pending proceedings revived. Ashmi availed the personal hearing on June 24, 2010 and filed reply to the SCN vide its letter dated July 03, 2010. Before the Order could be passed, vide its letter dated January 07, 2011, Ashmi again sought settlement of proceedings through the consent procedure.

Vide letter dated March 28, 2011, SEBI similarly declined to settle the proceedings. 4. I have carefully considered the SCN, the reply, the oral submissions and other material on record. Accordingly, I proceed to dispose of the proceedings on merit. 5. The SCN alleges that Ashmi provided finance to KOs, namely Dhaval K, Dhaval M and Dharmesh to enable them to apply for shares under the RII category in the IPOs of Shoppers and IDFC. The KOs transferred all the shares received by them on allotment to Ashmi in off-market at issue price and refunded the balance money. For example, the IDFC IPO opened and closed on July 15, 2005 and July 22, 2005 respectively. Around the closure of the issue, Ashmi provided to a KO (Dhaval K) a sum of Rs.71,40,000, corresponding to subscription money for 150 applications @ Rs.47,600 each, for subscription under the RII category in the IDFC IPO. The KO received 39,900 shares on allotment @ 266 shares on 150 applications. Post allotment, he transferred the entire 39,900 shares in off-market before listing to Ashmi at the issue price of Rs.34, for a total value of Rs.13,56,600 (39,900 * Rs.34).

It refunded the balance amount of Rs.57,83,400 (Rs.71,40,000 – Rs.13,56,600) to Ashmi through a cheque before listing. Thus, before listing, Ashmi received the entire amount; it had extended to the KO, in cash and kind, and thereby cornered the shares in the retail category at the cost of RIIs. It adopted more or less similar modus operandi in respect of other KOs / IPOs, as detailed in the table given below:

Name of Issue Issue Name of Finance to KOs Refund through Shares from Refund through IPO Period / Price KO KOs Cash from KOs Date of (Rs.) Date Amount Date No. of Value Date Amount Listing (Rs.) Shares (Rs.) (Rs.) 1 2 3 4 5 6=(9+11) 7 8 9 ( 3 * 8) 10 11 Shoppers 28.04.05- 238 Dhaval K 06.05.05 1,85,93,750 24.05.05 9,250 22,01,500 20.05.05 1,00,00,000 04.05.05/ 09.06.05 150 35,700 21.05.05 63,00,000 23.05.05 24.05.05 56,550 Total 1,85,93,750 9400 22,37,200 1,63,56,550 Dharmesh 06.05.05 2,51,56,250 24.05.05 12,700 30,22,600 20.05.05 2,20,00,000 28.05.05 1,33,650 Total 2,51,56,250 12,700 30,22,600 2,21,33,650 IDFC 15.7.05- 34 Dhaval K 22.07.05 71,40,000 10.08.05 39,900 13,56,600 11.08.05 57,83,400 22.7.05/ Total 71,40,000 39,900 13,56,600 57,83,400 12.08.05 Dhaval M 15.07.05 2,18,75,000 11.08.05 1,46,832 49,92,288 10.08.05 8,00,000 2,08,25,000 20.08.05 36,442 12,39,028 10.08.05 6,00,000 07.09.05 3,990 1,35,660 11.08.05 1,48,00,000 07.10.05 1,330 45,220 11.08.05 16,00,000 28.10.05 266 9,044 12.08.05 47,00,000 14.08.05 78,00,000 17.08.05 1,00,000 Total 4,27,00,000* 1,88,860 64,21,240 3,04,00,000 * Dhaval M to refund Rs.58,78,760 as on October 28, 2005. 6. Ashmi, on receipt of the shares from the KOs, sold the same in the market as well as in off-market and made an unlawful gain of Rs.1,13,24,544, as detailed in the Table hereunder: IPO Receipt of Shares from KOs Sale of Shares received from KOs Unlawful Date of No. of Issue Value (Rs.)

Date of Market / No. of Sale Profit (Rs.) Receipt Shares Price Sale Off Market Shares Amount (Rs.) (Rs.) 1 2 3 4 5 6 7 8 9 = (8 – 5) Shoppers 24.05.05 21,950 238 52,24,100 24.05.05 Off 20,000 78,74,000 34,40,970 09.06.05 150 35,700 25.05.05 Market 2,100 8,26,770 Total 22,100 52,59,800 22,100 87,00,770 IDFC 10.08.05 39,900 34 13,56,600 12.08.05 Market 2,00,000 1,36,36,000 78,83,574 11.08.05 1,46,832 49,92,288 26.09.05 26,000 18,52,500 20.08.05 36,442 12,39,028 27.10.05 2,760 1,72,914 07.09.05 3,990 1,35,660 07.10.05 1,330 45,220 28.10.05 266 9,044 Total 2,28,760 77,77,840 2,28,760 1,56,61,414 Total 1,13,24,544 7. Vide its reply dated July 3, 2010 and oral submissions on June 24, 2010, Ashmi has submitted as under: a. It had sought inspection of certain documents vide letter dated May 13, 2009. The same has not been provided and to that extent, it is handicapped to respond to the SCN. b. It is not proper for the investigating authority to unilaterally improvise the findings as contained in the Order dated September 23, 2008. c. It extended loans @ 21% interest per annum to KOs in ordinary course of business to enable them to invest in capital market.

The objective of loan was to earn interest and not financing applications in any IPO. Though there was no formal agreement in support of the loan, it collected promissory notes / post dated cheques. Towards security of the loans, Dhaval K and Dharmesh sold the shares, received by them on allotment in the IPOs, to Ashmi at negotiated rate. Towards security of loan, Ashmi received 1,88,860 IDFC shares from Dhaval M. At the instruction of Dhaval M, it sold the said shares and transferred the entire sale proceeds to him. d. The funds provided by Ashmi to Dhaval M would have fetched 2,38,602 IDFC shares. However, Ashmi got only 1,88,860 shares. This implies that there is no relation between funding and cornering of shares in the retail category of IPOs. e. The Shoppers IPO was open during the period April 28, 2005 to May 04, 2005, while Ashmi provided funds to Dharmesh and Dhaval K only on May 06, 2005, i.e., after the closure of the issue. Hence the funds were not provided to make applications in the Shoppers IPO. f. The ill-gotten gains Rs.1,13,24,544 alleged in the SCN includes gains in respect of IDFC shares made by Dhaval M and transaction expenses.

If these are excluded, the net gain is Rs.47,26,801. Thus, through loan transactions with the KOs, it earned a legitimate profit of Rs.47,26,801 and not the unlawful gain of Rs.1,13,24,544, as alleged in the SCN. 8. Let me first deal with the contentions raised by the noticee. (a) The presenting officer for SEBI submitted that Ashmi, vide its letter dated May 13, 2009, has sought a very long list of documents. The list is extremely open-ended. For example, the list includes: ‘Copy of Documents, Statements, Reports or Extract of, communication or any other materials relating to reference if any received from various Government agencies like CBI, RBI, SFIO, Parliamentary Standing Committee and other agencies indicating our role or involving our name therein’. The list includes many such items. Over and above, Ashmi has stated that this list is merely illustrative. There is absolutely no indication why a particular document is needed. Further, Ashmi has asked for various documents which are available in public domain. For example, it has asked for orders, including consent orders, passed by SEBI against certain persons.

He further submitted that the proceedings rely mostly on bank and demat statements of the noticee which establish the flow of funds and securities between Ashmi and the KOs and the same have been provided. I agree with the presenting officer. SEBI cannot be obliged to provide the documents which have no bearing on the matter, more so, when there is no dispute about the transactions which form the basis of allegations. (b) Order dated September 23, 2008 of SEBI was a confirmatory order passed for the limited purpose of confirming the ad-interim order dated April 27, 2006. I note that these orders were issued, pending completion of investigation, based on prima facie findings. If investigation finds that an allegation made in the interim order is not correct, such allegation is dropped in the SCN. Similarly, if investigation reveals a new violation, the same is included in the SCN. I find that the investigation has been carried out in accordance with the SEBI Act, 1992. Based on the investigation findings, the SCN has been issued. The SCN is expected to be improvement over the interim / confirmatory orders.

In fact, if the investigation does not improve upon prima facie findings based on which interim order was issued, it would be an exercise in futility. (c) I find this submission quite fallacious. It is hard to believe that a professional lender extends such large amount of money without entering into any formal agreement, without knowing the end use of the loans and without maintaining any security. If it was loan, it would have been repaid in cash with interest @ 21%. This did not happen. Neither the return was 21% nor was the amount repaid in cash. If it was loan, the noticee would have used the post dated cheques to recover the loan. This did not happen. It realized the money by selling the securities received from the KOs. If it was loan, the noticee would have received security while granting loan. In this case, as claimed by the noticee, the security was given for last few hours of the duration of loan. For example, the noticee received Shoppers shares from KOs on May 24, 2005. It sold the said shares on May 24, 2005 itself. Further, security is given to secure a loan. It is not given to the lender to sell it within hours of receipt.

If the noticee was in the business of money lending, it would have extended loans to others also. It, however, extended finance only to three persons who are KOs. Further, I note from the auditor’s report annexed to the written submission dated March 19, 2007 in response to the SEBI’s interim order dated April 27, 2006 that the auditors have observed: “As informed to us, the company has granted loans to companies or other parties covered in the register maintained under Section 301 of the Companies Act, 1956. Numbers of such parties are three. The terms and conditions of the repayment and interest are not stipulated.” While the auditors have observed that the terms and conditions of the repayment and interest were not stipulated, the copy of board resolution dated June 10, 2005 and copy of promissory notes issued by Dhaval M specifies the interest rate. This raises doubt over the credentials of the documents/ information provided by Ashmi. Moreover, Ashmi is not a registered stock broker/sub-broker to deal in securities on behalf of others. There was no reason as to why Ashmi should sell the shares on behalf of the three borrowers.

Hence I find it difficult to believe that Ashmi was a mere money lender. (d) There is no dispute about the payment / receipt of funds to / from Dhaval M. Ashmi has merely submitted that the funds provided to Dhaval M would have fetched 2,38,602 IDFC shares, whereas Ashmi received only 1,88,860 shares. This only proves that either all the applications made in IPOs did not receive allotment or the investigation has been able to locate transfer of 1,88,860 shares to Ashmi. This is evident from the reply dated July 3, 2010 of Ashmi that it sold on August 12, 2005 the entire 1,88,860 shares received from Dhaval M. As per the SCN, it had not received the entire 1,88,860 shares from Dhaval M by that time. This means that Ashmi has received some more shares from Dhaval M, which are not reflected in the SCN. In any case, what is important is the attendant circumstances surrounding the transactions, including exact matching in respect of other IPOs / KOs. (e) I find that while the public issue of Shoppers closed on May 04, 2005, the application money was realized only on May 07, 2005. Money was transferred from Ashmi to the KOs on May 06, 2005, i.e., prior to realization of application money by the issuer.

It is a matter of common sense that one parts with money only when it is required and, therefore, natural that the noticee provided money in some cases after the closure of the issue. (f) I find that the SCN alleges that Ashmi has made unlawful gains through illegal transactions. In case of illegal gains, what is material is the total gain and not net gain. The expenses incurred on making illegal gains and taxes paid on such illegal gains cannot be excluded for the purpose of disgorgement. The issue of gains in respect of IDFC shares made through Dhaval M is discussed in Para 10.3. 9. The following issues arise for consideration: a. Is Ashmi a mere money lender? b. Did Ashmi corner the shares reserved for RIIs in the IPOs of IDFC and Shoppers? d. If so, what is the amount to be disgorged by Ashmi? 10. I will examine the above issues in seriatim: 10.1 A money lender lends money against security and proper documentation and receives back money with interest. In the instant case, the noticee provided an aggregate of Rs.9.35 crore without any security and documentation. It received back the money in kind (shares).

The striking features of these transactions are: the money was provided to KOs around the closure of the IPOs, the money provided exactly matched the amount payable on a set of applications under the retail category, most of the shares received on allotment were transferred to the noticee, the shares were transferred in lots matching allotments to a certain number of retail applications, the shares were transferred in off-market around the date of listing, the shares were transferred at the issue price, excess money over and above the allotment amount were transferred back to the noticee, etc. The timing and manner of movement of shares and funds from and to KOs, by no stretch of imagination, can be associated with normal lending of money, more so, when Ashmi was neither a registered money lender nor a Non Banking Financial Company. 10.2 I note that Ashmi provided finance to KOs in lots corresponding to application money for a certain number of IPO applications in the RII category. For example, it extended

Rs.1,85,93,750 to Dhaval K to enable the latter to make 425 applications under the Shoppers’s RII category, each application amount being for Rs.43,750. It received all the shares allotted to KOs in response to the applications made under the said IPO. Each lot of shares received by Ashmi corresponded to the allotment to a certain number of applicants in the RII category. For example, Ashmi received 9,400 shares (376x25 shares) from Dhaval K corresponding to allotment to 376 applications. It similarly received 12,700 shares from Dharmesh. Thus it managed to get 22,100 Shoppers shares through two KOs by entering into an arrangement with them. Had it not done so, these shares would have been available for allotment to RIIs. Similarly, in the case of IDFC, Ashmi managed to get 2,28,760 shares following the similar modus operandi. The pattern and timing of movement of money and shares between the KOs and Ashmi leaves no doubt in mind that Ashmi financed the IPO applications in the RII category made by the KOs, cornered the shares meant for RIIs and in the process, deprived RIIs of their rightful share in allotment in these IPOs.

10.3 Ashmi has submitted that it sold the shares at prices different from those mentioned in the SCN. From the available contract note-cum-bills, I find that the sale prices of shares were indeed as submitted by Ashmi. The illegal gains need to be recomputed by taking these sales prices into account. As regards gains from sale of 1,88,860 IDFC shares acquired through Dhaval M, I find that Ashmi has received the entire sales consideration. It is not clear how the gains from this sale were shared between Ashmi and Dhaval M. In the absence of proper and reliable records, it was presumed in SEBI’s Order dated October 31, 2008 passed against Dhaval M that Ashmi and Dhaval M jointly made the ill-gotten gain and shared it in the ratio of 50:50. Accordingly, Dhaval M was directed to disgorge 50% of the illegal gain from sale of such shares and the said Order has been upheld by Hon’ble SAT. Ashmi should, therefore, be liable for 50% of the unlawful gain from sale of 1,88,860 IDFC shares. Taking these into account, the unlawful gain to be disgorged from Ashmi works out Rs.79,71,510 as under: Name of KO Name Number Basis/Remarks Amount of ill-of IPO of Shares gotten Gain (Rs.)

Dhaval Mehta IDFC 1,88,860 1,88,860 * (Rs. 68.18 –Rs. 34) 32,21,000 50 % profit sharing Dhaval Katakia IDFC 39,900 39,900*(Rs. 68.18 – Rs. 34) 13,63,780 SSL 9,400 9,400*(Rs. 393.70 – Rs. 238) 14,63,580 Dharmesh B. SSL 12700 10,600*(Rs. 393.70 – Rs. 238) + 19,23,150 Mehta 1,950*(Rs. 365.5 – Rs. 238) + 150*(Rs. 398.7 – Rs. 238) Total 79,71,510 11. From the above facts and circumstances of the case, I find that Ashmi, in concert with three KOs, 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 Shoppers and IDFC and made an unlawful gain of Rs.79,71,510 to the detriment of the RIIs. By these activities, Ashmi has violated Section 12A (a), (b) and (c) of the SEBI Act, 1992, and regulations 3 (a), (b), (c), (d) and 4 (1) of PFUTP Regulations. 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 Ashmi pursuant to the interim order, I hereby issue the following directions: a. Ashmi Financial Consultancy Pvt. Ltd. (PAN:AAECA8167F) shall 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 three months from the date of this Order; and b. Ashmi Financial Consultancy Pvt. Ltd. shall disgorge the unlawful gain of Rs.79,71,510.

It shall also pay the interest on this unlawful gain at the rate of 10% per annum for 5.5 years (May / August 2005 – March 2011, i.e. from the date of listing of the IPOs of Shoppers and IDFC till this Order), amounting to Rs.43,84,330. Thus, it shall disgorge a total amount of Rs.1,23,55,840 (One crore twenty three lakh fifty five thousand eight hundred and forty only) within 45 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. Further, the demat accounts of Ashmi Financial Consultancy Pvt. Ltd. shall remain frozen till the above amounts are paid. 12. The directions issued in this Order shall supersede the directions issued vide the ad interim ex-parte Order dated April 27, 2006 and Order dated September 23, 2008. 13. This Order shall be served on all recognized stock exchanges and depositories to ensure that Ashmi Financial Consultancy Pvt. Ltd. is not allowed to undertake transactions, as prohibited in Para 11 above.

14. This Order shall come into force with immediate effect.

DATE: April 7, 2011 M. S. SAHOO PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA