Order against Masat Texturising and Twisting Private Limited

1.1 Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’), as a part of ongoing surveillance activity, had initiated a probe and advised Bombay Stock Exchange Ltd. (hereinafter referred to as ‘BSE’) and National Stock Exchange (hereinafter referred to as ‘NSE’) to look into the dealings in the shares issued through Initial Public Offerings (hereinafter referred to as ‘IPOs’) before the shares were listed on the Stock Exchanges. During the investigation, it was found that large number of multiple dematerialized accounts with common addresses were opened in the name of benami or fictitious entities and/or persons by a few operators who have played major role in cornering the shares meant for retail investors.

1.2 SEBI found that certain entities had cornered IPO shares reserved for retail applicants by making applications in the retail category through the medium of thousands of fictitious/ benami IPO applicants with each of the application being for small value so as to be eligible for allotment under the retail category. Subsequent to the receipt of IPO allotment, these fictitious/ benami allottees had transferred shares to their principals who in turn transferred the shares to the financiers who had originally made available the funds for executing the game-plan.

1.3 It was alleged that Masat Texturising & Twisting Pvt. Ltd (hereinafter referred to as “Masat”) was a Financier to Roopal Panchal, a key operators in the IPO of FCS Software. It was also alleged that Masat received 42,700 shares from Roopalben Panchal on September 21, 2005 and made corresponding ill-gotten notional profits of Rs.55,12,570. In view of these findings, SEBI vide ad interim ex-parte order dated April 27, 2006 under section 19 read with sections 11 and 11B of the SEBI Act, 1992 and Section 19 of the Depositories Act, 1996 issued certain interim directions against Masat for violation of Regulation 3 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003 (hereinafter referred to as ‘FUTP Regulations’) pending enquiry and passing final order. Masat was directed not to buy, sell or deal in the securities market including in IPOs, directly or indirectly, till further directions.

1.4 The ad interim ex-parte order dated April 27, 2006, further stated that the said order shall be treated as show cause notice against Masat and was given an opportunity for filing its objections, if any, to the order within 15 days from the date of the order and if it so desires, avail an opportunity of personal hearing within 15 days from the date of the order. They were also given an opportunity to avail inspection of the relevant documents relied upon by SEBI against them, prior to hearing.

1.5 Masat made submissions vide their letter dated February 01, 2007 and March 12, 2007. Further, they also availed an opportunity of personal hearing before me on March 5, 2007.

1.6 I have carefully examined the prima facie findings recorded against in the ad interim ex-parte order dated April 27, 2006 and also considered the written submissions made by Masat. The main submissions made by Masat are as follows:

i. They did not deny that they financed Roopal. However, submitted that the transaction was purely commercial loan transactions to earn interest and purpose of which this finance was used was unknown. ii. They received shares from Roopal towards part pre-payment of loan, which were valued at Rs 80 per share. The shares were thereafter sold in the market. The gains made by them were not ill-gotten but legitimate gains.

2. I have examined the dealings of Masat with Roopal in the IPO of FCS to ascertain whether the charge of financier alleged against Masat is justified and also decide whether interim directions against Masat is required to be continued or not.

2.1 I note that FCS issue opened on August 22, 2005 and closed on August 26, 2005. FCS issue was listed on September 21, 2005. The issue price was Rs.50 per share. Application money in retail category was Rs. 45,000 and allotment was 100 shares per application.

2.2 I noted from examination of the bank transaction statement of Masat that Rs. 9 crore was transferred to Roopal during the currency of IPO of FCS i.e. Rs.5,62,50,000 was transferred on August 25, 2005 vide cheque no. 440448 and Rs. 3,37,50,000 transferred on August 30,2005 vide cheque no. 4404452. The amount of Rs. 9 crore corresponds to application money for 2,000 applications at the rate of Rs. 45,000 for each retail application. (Rs 45,000 * 2000). Corresponding allotment for these applications works out to be 2,00,000 shares (2,000 * 100).

2.3 It is noted that Masat received 42,700 shares of FCS from Roopal on September 21, 2005. Corresponding refund money after adjustment of allotment money work out to be Rs 8,78,65,000. However, Masat received Rs. 8,65,84,000 on September 26, 2005 from Roopal vide 675898 suggesting that 42,700 shares were valued at the rate of Rs. 80 i.e. Rs. 34,16,000. I note that 42,700 shares were received on September 21, 2005 at rate of Rs. 80 whereas the closing price on the September 21, 2005 (date of listing) was Rs. 179.10. Had these transactions were truly a loan transaction, the valuation of 42,700 shares would have been at the rate of Rs 179.10 instead of Rs 80. As a result, valuations towards repayment of loan would have been Rs. 76,43,300. Whereas, I note that these shares were valued at Rs. 34,16,000 and no prudent borrower would agree to under value the shares or agree for such under valuation by Rs. 42,27,300. I note that valuations were made in favor of the financier instead of borrower.

2.4 I also note that 42,700 shares were valued Rs. 80 whereas corresponding closing market price on date of transfer i.e. September 21, 2005 was Rs. 179.1. Thus, the manner in which the shares were received and valued prima facie indicates that it was a prior understanding / arrangement between Roopal and Masat to corner the shares and accordingly finance was made available to execute the game plan.

2.5 I have also noted that out of 42,700 shares received from Roopal, 40,500 shares were sold in the Market through Khandwala in settlement no. 2005183 on September 24, 2005 at an average rate of Rs.217 and 2,200 shares were sold in the market through Khandwala in settlement no. 2005184 on September 26, 2005 at an average rate of Rs.169.85. Thus, it is seen that Masat made actual ill-gotten profits of Rs. 57,46,170 (Rs. 55,48,500 (Rs. 217 – Rs. 80) * 40,500 shares and Rs 197670 (Rs. 169 – Rs. 80) * 2,200 shares) as against notional gains of Rs.55,12,570 recorded in the interim order dated April 27, 2006.

3. In view of above prima facie findings, I note that Masat acted as financier of Roopalben Panchal, received shares and thereafter sold them and made ill-gotten gains. Further, I understand that investigations are now completed and already a detailed show cause notice dated January 7, 2009 has been issued against Masat Texturising and Twisting Private Ltd calling upon to show cause as to why suitable directions should not be issued against them under section 11(4) read with 11 and 11B of the SEBI Act, 1992. In view of the above, I confirm the ad interim order and it shall continue till the disposal of show cause notice dated January 7, 2009.

DATE : 12.1.2009 T.C. NAIR PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA