Order against Chandrakant A Parekh in the matter of IPO Irregularities

WTM/MSS/ISD/51/2010 SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: M. S. SAHOO, WHOLE TIME MEMBER IN THE MATTER OF IPO IRREGULARITIES - DEALINGS BY MR. CHANDRAKANT AMRATLAL PAREKH IN INITIAL PUBLIC OFFER OF SUZLON ENERGY LTD. (SUZLON) Date of Hearing: April 23, 2010 Appearances: For Noticee: Mr. Dhaval Chandrakant Dave, Advocate, and Mr. Jaydev V. Karani, Chartered Accountant. For SEBI: Mr. Jai Sebastian, Assistant Legal Adviser (Presenting Officer) Mr. S. Ramann, Officer on Special Duty Mr. B. J. Dilip, Deputy General Manager Mr. Vishal Mahadev Padole, Assistant General Manager, and Mr. Amitesh Kumar, Assistant 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 Chandrakant Amratlal Parekh (Chandrakant) not to buy, sell or deal in the securities market, including in IPOs, directly or indirectly, till further directions.

2. On completion of the investigations, SEBI issued a show cause notice (SCN) dated November 20, 2009 under Sections 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act), alleging that Chandrakant acted as a financier as well as a key operator (KO) and employed fraudulent, deceptive and manipulative practices to corner the shares meant for retail individual investors (RIIs) in the IPO of Suzlon and made an unlawful gain of Rs.24,29,340 by selling the shares so cornered. These acts of Chandrakant were in violation of Section 12A (a), (b) and (c) of the SEBI Act, 1992 and regulations 3 and 4 (1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (PFUTP Regulations) and Guideline 1.2.1 (xxiva) read with Guideline 7.6.1.2.1 of the SEBI (Disclosure and Investor Protection) Guidelines, 2000. Accordingly, it called upon Chandrakant 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 him from buying, selling or dealing in securities in any manner for a suitable period and to disgorge an amount of Rs.24,29,340 and interest thereon, not be issued against him. The SCN also offered the opportunities for inspection of documents and personal hearing.

3. Chandrakant availed inspection of documents on February 8, 2010 and filed reply to the SCN vide letter dated March 27, 2010. He availed of the personal hearing on April 23, 2010 and made oral submissions. He filed additional written submissions vide his letter dated May 04, 2010.

4. I have carefully considered the SCN, the reply and the oral and the additional written submissions of Chandrakant. Accordingly, I proceed to dispose of the proceedings on merits.

5. The presenting officer submitted that the Adjudicating Officer had found Chandrakant guilty in the same matter and imposed a penalty of Rs.66 lakh vide his Order dated January 8, 2010. The said Order has been upheld by Hon’ble Securities Appellate Tribunal (SAT) upon an appeal filed by Chandrakant. Hence the charge against Chandrakant is already established. The learned advocate for Chandrakant vehemently contradicted this submission of the presenting officer. He stated that the presenting officer was misleading the proceedings as there was no Order yet from SAT and the appeal was yet to be heard. Both the presenting officer and the learned advocate were advised to produce the documentary evidence within a week in support of their respective claims. The presenting officer has submitted the Order dated April 20, 2010 of SAT in support of his claim. Instead of producing documentary evidence, the learned advocate has stated that it is in the process of moving an appropriate application before SAT for the purpose of recalling its Order. This makes clear that SAT has upheld the charge against Chandrakant in the same matter and the learned advocate attempted to derail the proceedings. Nevertheless I proceed to deal with the matter afresh on merits in adherence to the principles of natural justice.

6. It is alleged in the SCN that the IPO of Suzlon opened and closed on September 23, 2005 and September 29, 2005 respectively. Chandrakant provided finance to 165 persons to enable them to make 5 applications each in the RII category of Suzlon IPO. Accordingly, these 165 persons filed 825 applications - 5 applications each from five different demat accounts held with five different depository participants. Each application was allotted 16 shares. Thus, these 165 persons received a total allotment of 13,200 Suzlon shares and the corresponding refunds. They transferred all the shares received on allotment as well as the refunds to Chandrakant around the date of listing. Chandrakant, in turn, sold these shares in the market immediately and made an unlawful gain of Rs.24,29,340. He paid a sum of Rs.300 for each application towards user charges for using the demat accounts of the 165 persons for making 825 applications. The SCN provides evidence for these transactions in the form of bank and demat statements of Chandrakant. Based on these transactions, the SCN alleges that Chandrakant filed 825 applications through 165 persons under the RII category of Suzlon IPO and thereby manipulated the retail segment of the IPO market and cornered 13,200 Suzlon shares to the detriment of RIIs. By selling such unlawfully acquired shares, he made an unlawful gain of Rs.24, 29,340.

7. Chandrakant has made the following submissions: 7.1 The SCN has been issued for violation of provisions of Section 12A (a) (b) and (c) of the SEBI Act, regulations 3 and 4(1) of PFUTP regulations and certain provisions of the DIP guidelines. Chandrakant, however, did not violate any of provision of law as explained under: 7.1.1 The charge has following ingredients: a. 165 persons opened 5 demat accounts each with the same address as that of Chandrakant; b. These 165 persons opened individual bank accounts with Chandrakant as the second holder; c. Chandrakant provided necessary finance to these 165 persons to make 825 applications; d. These 165 persons made a total of 825 applications in the retail category of Suzlon IPO; e. These 165 persons transferred the shares received on allotment to Chandrakant in off-market transactions; f. Chandrakant paid user charges to 165 persons to ensure that they apply for the shares in the Suzlon IPO and transfer the shares on allotment to him; and g. Chandrakant sold these shares received from 165 persons and made a profit. None of the above ingredients is prohibited in law or is in violation of any provision of law and, therefore, is not in contravention of Section 12A (a) of the SEBI Act, 1992. 7.1.2 The notice for violation of regulation 3 and 4(1) of PFUTP regulations is without jurisdiction.

An action under these provisions can be initiated only by following the procedure under regulation 5, which has not been done in this case. Further, there was no intention to defraud any of the 165 persons or none of them was induced to deal in securities as evidenced by the fact that none of them has any grievance against Chandrakant. Hence Chandrakant did not violate Section 12(A) (b) and (c) of the Act as well as regulation 3 and 4(1) of the PFUTP regulations. 7.1.3 The DIP Guidelines do not have binding force of law. Further, the guidelines are meant for guidance of those who are associated with making a public issue such as Registrar to Issue (RTI) and not individuals applying pursuant to such public issue. Hence recourse to the guidelines is unwarranted. 7.2 Chandrakant essentially made multiple (825) applications in the RII category. There is no prohibition in law against multiple applications. There is an obligation on RTI to weed out multiple applications. He cannot be held liable for failure of RTI to weed out multiple applications. 7.3 It has been alleged that Chandrakant acted as ‘financier’ and ‘key operator’.

These terms are not defined in securities laws. In the absence of such definition, Chandrakant cannot be termed as ‘financier’ or ‘key operator’. 7.4 The SCN has been issued under Section 11, 11 (4) and 11B of the SEBI Act 1992. These are not applicable to Chandrakant. Section 11 is general in nature which enables SEBI to prescribe measures in general for investor protection and cannot be invoked against an investor like him. Section 11 (4) deals with measures to be taken by SEBI during or on completion of investigation under Section 11C of the Act. Since Chandrakant has not been informed about the submission of report on completion of investigation, Section 11(4) cannot be invoked. Section 11B is not applicable to him as he is not one of the persons specified therein. 7.5 SEBI has no powers to impose penalty of disgorgement. 7.6 The period to restrain a person from participating in securities market can not be for infinity.

8. Chandrakant has confirmed the transactions as well the gain made from these transactions, alleged in the SCN. He has, however, claimed that the gain is legitimate as this has been earned without violating any provision of law. Now let me deal with each of the contentions of Chandrakant.

9. The following issues arise for consideration: a. Did Chandrakant make multiple applications in the Suzlon IPO? b. Does the law prohibit multiple applications in IPOs? c. Could the RTI have weeded out these multiple applications?

d. Did the acts of Chandrakant amount to violation of any law? e. Are the gains made by Chandrakant lawful? f. Can Sections 11, 11(4) and 11B be invoked against Chandrakant? g. Does SEBI have power to direct Chandrakant to disgorge unlawful gains?, and h. Is the proceeding vitiated by any infirmity in the process?

10. I examine the above issues seriatim: 10.1 Did Chandrakant make multiple applications in the Suzlon IPO? The learned advocate submitted at the hearing that Chandrakant essentially made multiple applications in Suzlon IPO. He has taken a slightly different position in his written submission dated May 4, 2010. I, however, note from his oral and written submission that he paid 165 persons user charges to ensure that they actually apply for the shares in the Suzlon IPO and transfer the shares on allotment to him. This means that he hired the services, i.e. name lending, of 165 persons. He provided the entire amount required for making applications and received the entire allotment. His address was the address of 825 demat accounts of 165 persons. He was the second holder of bank accounts of the 165 persons. He had full control over funds, refunds, shares, bank accounts and demat accounts and the 165 persons who were mere name lenders, lent the name for consideration of user charges and acted on the dictates of Chandrakant. Thus, Chandrakant de facto made 825 applications through 165 name lenders.

10.2 Does the law prohibit multiple applications in IPOs? Chandrakant has argued that multiple applications are not prohibited in law. I find that the law provides a framework for raising of resources by companies. The then DIP Guidelines of SEBI reserved a certain percentage of the issue size for RIIs. It defined a RII to mean an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000. These two provisions aimed at ensuring equitable distribution of shares in the retail segment among RIIs and prevent non-RIIs from getting allotment in this category. These envisaged an investor to apply for shares for a value up to Rs.1,00,000. These did not envisage an investor making 825 applications each up to Rs.1,00,000, which defeats the solemn objectives of such provisions. If a person does so, he deprives genuine RIIs from getting their fair share in allotment. Therefore, though multiple applications as such are not prohibited, such applications for securities for an aggregate value of more than Rs.1,00,000 in the retail segment are clearly prohibited. Further, the prospectus, which is a statutory document issued under the Companies Act and the securities laws and contains the statutory disclosures and covenants, carried this prohibition.

The prospectus clearly prohibited more than one application by a person. Hence, the prospectus read with the DIP Guidelines clearly prohibited multiple applications in retail segment of Suzlon IPO as that would subvert the very process of reservation and allotment. Chandrakant, however, made multiple (825) applications for an aggregate value Rs.4,03,92,000 with the full knowledge of prohibition on the same. 10.3 Could the RTI have weeded out these multiple applications? The learned advocate has argued that Chandrakant cannot be held liable for failure of the RTI to weed out multiple applications. I find that had Chandrakant made multiple applications in a plain and simple manner, i.e. had he made 825 applications in his own name using only his demat account, the RTI could have detected and weeded out such applications. However, in order to avoid such detection, Chandrakant crafted an elaborate arrangement to camouflage his identity and create an impression that 825 different persons were applying for the shares. But for this fraudulent design, the RTI would have detected and weeded out these multiple applications.

10.4 Did the acts of Chandrakant amount to violation of any law? 10.4.1 Chandrakant filed 825 applications in a fraudulent manner to corner larger number of shares than the number which he would otherwise have been entitled to had he filed a single application in his name. I note that regulation 3 prohibits a person from buying, selling or otherwise dealing in securities in a fraudulent manner. It also prohibits a person from employing any device, scheme or artifice to defraud in connection with dealing in or issue of securities. Regulation 4(1) prohibits a person from indulging in a fraudulent or unfair trade practice in securities. A design to engineer 825 applications in the retail category for an aggregate value of Rs.4,03,92,000 is clearly fraudulent. Therefore, the conduct of Chandrakant amounts to mischief prohibited under regulation 3 and 4 (1) of PFUTP regulations and Section 12A (b) and (c) of the SEBI Act. This design manipulated the market for securities in the retail segment of Suzlon IPO and being in contravention of the provisions of regulation 3 and 4(1)of PFUTP regulations, violated Section 12A (a) of the SEBI Act.

It also violated the DIP Guidelines which prohibits multiple applications in the retail segment of IPOs. 10.4.2 It has been argued that the DIP Guidelines do not have force of law. These Guidelines have been framed under Section 11 of the SEBI Act and hence are statutory in nature. SAT and Courts have consistently upheld Orders of SEBI issued for violation of the DIP Guidelines, including the provisions relating to multiple applications (Himani Patel Vs. SEBI1 and Yogesh M. Bhansali (HUF) and others Vs. SEBI2). 10.4.3 It has been argued that Chandrakant can not be held as ‘key operator’ or ‘financier’ in the absence of statutory definition of these terms. In common parlance, a person providing finance is called financier and a person masterminding a design and having full command over its 1 Appeal No. 154 of 2008 dated 07.09.2009 2 Appeal No. 21 of 2009 dated 23.09.2009 implementation is called key operator. Chandrakant did exactly that. These activities are in violation of statutory provisions. It matters little whether he is termed ‘financier’, ‘key operator’ or otherwise when the conduct of the person is in contravention of law.

10.5 Are the gains made by Chandrakant lawful? Chandrakant cornered 13,200 suzlon shares by an unlawful design. Hence the gains arising from disposal of such shares are unlawful. 10.6 Can Sections 11, 11(4) and 11B be invoked against Chandrakant? It has been argued that Chandrakant is not a person associated with securities market and hence Section 11 (4) and 11B can not be invoked against him. The Hon’ble High Court of Gujarat in the matter of Karnavati Fincap Ltd. and Alka Spinners Ltd. Vs SEBI3 has inter alia observed: “….. In ordinary meaning, the persons associated with the securities market would include all and sundry who have something to do with the securities market. …… The words “persons associated with the securities market” are of much wider import than intermediaries. ……It is inconceivable to think that a buyer or seller of a scrip is not a person associated with securities market, where or through which he transacts his business, whether as trader or as investor, of selling or buying the required scrip.” The words “all and sundry” above would include Chandrakant who through 165 persons deceitfully cornered the shares meant for other RIIs.

Further, the fact that Chandrakant has received shares in his demat account from 165 persons in consequence of his venture cannot be ignored. After co-relating the facts of the case with the above judgment, it is very clear that Chandrakant is a person associated with the securities market, as stated under Section 11B of the SEBI Act. Thus there is no infirmity in invoking Section 11 (4) and 11B against Chandrakant. 10.7 Does SEBI have power to direct Chandrakant to disgorge unlawful gains? It is a well settled principle that a person who has unjustly enriched himself by his unlawful conduct should be required to disgorge the illegal gains made by him. SEBI’s power to do has been upheld by the Hon’ble SAT in various matters (Dhaval Mehta Vs. SEBI4, Shri Shadilal Chopra Vs. SEBI5, Himani Patel Vs. SEBI6 and Yogesh M. Bhansali (HUF) and others Vs. SEBI7) where its Orders directing disgorgement in similar facts and circumstances were upheld by SAT. In the matter of Dhaval Mehta (supra) SAT held: “Disgorgement is a monetary equitable remedy to prevent a wrong doer from unjustly enriching himself as a result of his illegal conduct.

Disgorgement of illegal gains are ordered against those who violate the securities laws and make unlawful gains. The amount should not exceed the total profits realized as a result of the unlawful activity and the amount ordered 3 SCA Nos. 2692 and 2694 of 1996 dated 06.05.1996 4 Appeal No. 155 of 2008 dated 08.09.2009 5 Appeal No. 201 of 2009 dated 02.12.2009 6 Appeal No. 154 of 2008 dated 07.09.2009 7 Appeal No. 21 of 2009 dated 23.09.2009 to be disgorged should be approximately be equal to the amount of unjust enrichment. In the instant case, the whole time member has worked out the amount from the prices that were available and we find no ground to interfere with the order in this regard.” Similarly, SAT in the matter of Shri Shadilal Chopra (supra) held: “Disgorgement is the forced giving up of profits obtained by illegal or unethical acts. It is a repayment of ill-gotten gains that is imposed on wrong doers. It is a monetary equitable remedy that is designed to prevent a wrong doer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment. In this view of the matter, no fault can be found with the impugned order passed by the whole time member.” There is absolutely no doubt that SEBI has powers to ask a wrong doer to disgorge unlawful gains made by him.

10.8 Is the proceeding vitiated by any infirmity in the process? 10.8.1 It has been argued that Section 11(4) can not be invoked as neither the status of investigation has been stated in the SCN nor a copy of the investigation report has been provided to Chandrakant. I note that Section 11(4) enables SEBI to take certain measures, either pending investigation or on completion of such investigation. The SCN starts with: “SEBI carried out investigations...’ Further, all the documents relied on by SEBI in support of the charges against Chandrakant have been provided to him and it is not necessary to provide the entire investigation report. Hence I do not find any infirmity in invoking Section 11(4) of the SEBI Act, particularly when there is no dispute about the transactions based on which charges have been leveled. 10.8.2 It has been argued that an action under regulation 3 and 4 (1) of PFUTP regulations can be initiated only after having an investigation under regulation 5, and not under Section 11C of the Act. I note that the PFUTP regulations have been framed under the SEBI Act which enables investigations under certain circumstances.

The regulations made under the Act carry further the objectives of the Act. Regulation 5 is essentially reproduction of provisions of Section 11C (1). Thus investigation under Section 11 includes investigation under regulation 5 of PFUTP regulations.

11. Had Chandrakant applied in individual capacity, he could have got an allotment of only 16 Suzlon shares. However, he managed to get 13,200 Suzlon shares by engineering 825 applications in the retail category through 165 persons who were name lenders and acted at the dictates of Chandrakant. Had he not done so, these shares would have been available for allotment to RIIs. Thus, Chandrakant clearly cornered the shares meant for RIIs in a deceitful manner and in the process, deprived RIIs of their rightful share in allotment in Suzlon IPO. By selling these shares in market, he became the sole beneficiary of this deceptive scheme. He had full control over funds, refunds, shares, bank accounts, demat accounts and the 165 persons, and he master-minded and executed the chain of transactions to camouflage his identity and to obtain allotment of shares in the RII category at the cost of RIIs. He, therefore, manipulated the demand for shares in the RII category of IPO and distorted the market integrity. In the process, he enriched himself with an unlawful gain of Rs.24,29,340. I, therefore, find Chandrakant guilty of employing a manipulative and deceptive device to corner the shares in the RII category of the Suzlon IPO to the detriment of RIIs. I find that by these activities, he violated Section 12A (a), (b) and (c) of the SEBI Act, 1992, and regulations 3 and 4 (1) of PFUTP Regulations and the relevant DIP Guidelines.

12. The interest of the market and of the investors requires that such a person is not allowed to participate in the market and unjustly enrich himself at the cost of investors. Such acts of serious irregularities threaten the market integrity and orderly development of the market and call 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 Chandrakant pursuant to the ad interim ex-parte Order, I hereby issue the following directions: a) Chandrakant Amratlal Parekh (PAN: AHXPP5708J) 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) Chandrakant Amratlal Parekh shall disgorge the unlawful gain of Rs.24,29,340 (Rupees twenty four lakh twenty nine thousand three hundred and forty only). He shall also pay the interest on this unlawful gain at the rate of 6% (six percent) per annum for 4 ½ years (October 2005 – April 2010, i.e. from the date of listing of the IPO of Suzlon till this Order), amounting to Rs.6,55,922. He shall thus disgorge a total amount of Rs.30,85,262 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, he 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.

13. The directions issued in this Order shall supersede the directions issued vide the ad interim ex-parte Order dated April 27, 2006 only after the directions under Para 12 are fully complied with.

14. This Order shall be served on all recognized stock exchanges and depositories to ensure that Chandrakant Amratlal Parekh is not allowed to undertake transactions as prohibited in Para 12 above.

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

PLACE: MUMBAI M. S. SAHOO DATE: May 10, 2010 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA