Order against M/s. Yellow Saphire Investment Ltd. in the matter of Jaiprakash Industries Ltd

1. An investigation was conducted by the Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) into the trading in the scrip of M/s. Jaiprakash Industries Limited (herein after referred to as ‘JPIL’ or the ‘company’) for the period June 1999 to December 1999. The investigation revealed that M/s. Yellow Saphire Investment Limited (‘the noticee’ or ‘YSIL’), now merged with M/s. Merrygold Investment Ltd. vide order dated 25-07-2005 of the Hon’ble High Court of Delhi in Company Petition No. 144 of 2005, had dealt in the scrip of JPIL through its broker, M/s. H B Securities Limited, (hereinafter referred to as “HBSL” or “broker”). The said broker is a member of the National Stock Exchange, (hereinafter referred to as ‘NSE’) having SEBI Registration Number INB 230607337.

2. The investigations revealed that the YSIL had traded in the scrip of JPIL during November, 1999. It had purchased 341500 shares of JPIL through the broker on 17-11-1999 and sold 121300, 205000 and 15200 shares on 17-11-1999, 18-11-1999 and 19-11-1999 respectively in order to square-off the buy position to make the net delivery obligation nil for the settlement. It was observed that the total income of YSIL was Rs.46882/-and Rs.60229/- for the year ending March 31, 1999 and March 31, 2000 respectively and that its buy transaction of about Rs.2 crore was found to be substantial when compared with its financial capacity. The investigations observed that YSIL failed to provide the necessary authorisation for entering into such huge deals. It was also observed that YSIL did not have requisite margins with its broker for such transactions. It is noted that during investigations YSIL had stated that margins were paid in the form of securities but failed to provide such details. Investigations had inferred that such dealings were at the behest of the broker since YSIL was not able to refute when confronted with the said statements. Based on the above, investigations have alleged that the noticee had indulged in the purchase and sale of the company’s securities not intending to effect transfer of beneficial ownership but intended to operate only as a device to cause fluctuations in the market price of the securities and also indulged in an activity which was calculated to create a false and misleading appearance of trading on the securities market. By the said acts YSIL was alleged to have violated the provisions of Regulation 4 (b) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities) Regulations, 1995.

3. In view of the allegations levelled against YSIL, a show cause notice dated 29-09-2004 under Sections 11(4) and 11B of the SEBI Act, 1992 read with Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities) Regulations, 1995 was issued to it. The show cause notice conveyed the allegations to the noticee and required it to respond to it within 21 days. The show cause notice further informed YSIL that in the absence of any reply within the stipulated period it shall be construed that the noticee has no explanations to offer and that SEBI may proceed accordingly. The show cause notice enclosed the statements of the director of YSIL and the broker.

4. I note that YSIL had replied vide its letter dated 04-11-2004 received by SEBI on 09-11-2004. The main submissions of the noticee are crystallised below:

i. That the allegations relating to the transactions under investigations are stale and the show cause notice has been issued more than 5 years after the alleged transactions and that the subject matter of investigation is barred by the law of limitation.

ii. That all the transactions were carried out On-line on the terminal of the exchange as per the practice and conventions of the stock market and there was nothing in the transactions which was clandestine in so far as they were concerned iii. That the investigating officer has grossly failed to disclose the cause, facts and circumstances and the source and reasons of the investigation iv. That the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade relating to the Securities Market) Regulations, 2003 were not applicable at the time of the alleged transactions v. That the whole proceedings were bad and illegal in law as the procedure required to be followed under Regulation 8 of the SEBI (Prohibition of Fraudulent and Unfair Trade relating to the Securities Market) Regulations, 1995 was not followed.

vi. That allegations in the show cause notice were based on inference and surmises vii. That there was no allegation that the alleged transaction had caused any injury or loss to any investor

5. I note that several letters were exchanged with respect to the personal hearing afforded to the noticee. I note that one Shri M. S. Sharma, had intimated vide his letter dated 21-02-2007 that YSIL had been dissolved without being wound up under the orders of the Hon’ble high Court of Delhi vide order dated 25-07-2005 and had requested that the proceedings against YSIL be dropped. SEBI vide letter dated 10-04-2007 requested Shri M. S. Sharma to forward a copy of the Order dated 25-07- 2005 of the Delhi High Court dissolving YSIL along with his identification. I note that vide letter dated 18-04-2007, Shri M. S. Sharma had forwarded an uncertified copy of the order of the High Court.

6. Before considering the issues that arise in the present case it is pertinent to decide the status of YSIL in the light of the High Court’s order sanctioning the amalgamation. I note that the noticee along with Miraculous Investment Co. Ltd., Glorious Investment Co. Ltd. and Cornflower Investment Ltd. (all are companies incorporated under the Companies Act, 1956 and having their registered office at H-72, Connaught Circus, New Delhi - 110001) (all the above said companies are collectively referred to as the ‘Transferor Companies’) had entered into a scheme of amalgamation with Merrygold Investment Ltd. (a company incorporated under the Companies Act, 1956 and having its registered office at H-72, Connaught Circus, New Delhi – 110001) (the ‘Transferee Company’) and applied for a sanction of the said scheme before the Hon’ble High Court of Delhi in Company Petitions 140, 141, 142, 143 and 144 of 2005. I note that the Hon’ble High Court of Delhi vide its order dated 25-07-2005 has sanctioned the Scheme of Amalgamation under Section 391(2) read with Section 394 of the Companies Act, 1956. The Hon’ble High Court ordered that consequent upon the amalgamation of the companies, the Transferor companies shall stand dissolved without resorting to the process of winding up.

I note that the Hon’ble High Court has approved the said scheme of amalgamation with effect from 01-04- 2003. From a plain reading of the court’s order it can be seen that the noticee ceased to be a legal person on and after 01-04-2003. I further note that the Hon’ble Court has further ordered that all proceedings now pending by or against the Transferor Companies be continued by or against the Transferee Company. I also note that at Item no. 4.5 at Page no. 8 of the Scheme of Amalgamation, it is mentioned that upon coming into effect of this Scheme, all legal proceedings by or against the Transferor Companies pending at the Appointed Date and or initiated thereafter until the Effective Date shall be continued as per the directions of the Transferee Company and at its costs and risks and as and from the Effective Date shall be continued and enforced by or against the Transferee Company as the case may be. Therefore, all legal proceedings initiated against the noticee would not abate but would continue against the Transferee Company. Therefore the current proceedings against YSIL need to be proceeded accordingly against the Transferee Company (Merrygold Investment Ltd.) and directions, if any would have to be made against the transferee company only.

7. I note that the allegations against the erstwhile Yellow Saphire investment Ltd. was that while dealing in the scrip of JPIL it had indulged in acts which created false impression of trading in the securities market and entered into transactions not intended to effect transfer beneficial ownership, rather intended to operate only as a device to cause fluctuations in the market price of the scrip and therefore guilty of violating the provisions of Regulation 4 (b) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities) Regulations, 1995. YSIL had traded in the scrip of JPIL during November, 1999. It had purchased 341500 shares of JPIL through the broker on 17-11-1999 and sold 121300, 205000 and 15200 shares on 17-11-1999, 18-11-1999 and 19-11-1999 respectively in order to square-off the buy position to make the net delivery obligation nil for the settlement. I note that there is no substantive material found in the said show cause notice issued to YSIL. I, therefore hold that the charges against YSIL are not substantiated with evidence in the present proceedings and it cannot be held guilty of violating the relevant clauses of Regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities) Regulations, 1995.

8. I hereby dispose of the present proceedings initiated against YSIL (now amalgamated with Merrygold Investment Ltd.) without any directions.

9. Therefore, I in terms of Section 19 and powers conferred under Sections 11(4) and 11B of the SEBI Act, 1992, hereby direct that no directions are required to be issued to Yellow Saphire Investment Limited now amalgamated with Merrygold Investment Limited in the present proceedings.

DATE: 10.03.2008 T. C. NAIR PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA