Order against Rikhav Securitiees Ltd in the matter of Vaswani Industries Ltd

WTM/RKA/CFD/2/2012 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: RAJEEV KUMAR AGARWAL, WHOLE TIME MEMBER In the matter of Interim order dated July 11, 2011 against Rikhav Securities Limited in the matter of Vaswani Industries Limited. Date of Hearing: December 01, 2011 Appearances: For Noticee: 1. Mr. Prakash Shah, Advocate 2. Ms. Binal Shah, Advocate 3. Mr. Hitesh Lakhani, Director of Rikhav Securities Limited, and 4. Mr. Sunil Chheda, Director of Rikhav Securities Limited. For SEBI: 1. Mr. Sunil Kadam, General Manager 2. Mr. Deepesh M. U., Asst. General Manager 3. Mr. Amitesh Kumar, Asst. Legal Adviser, and 4. Mr. Anubhoy Roy, Asst. Legal Adviser (Presenting Officer) ORDER Under Sections 11, 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 read with Regulation 107 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 1. Based on various complaints from applicants alleging deliberate huge withdrawals and rejections after the closure of the Initial Public Offer (IPO) of Vaswani Industries Limited (hereinafter referred to as the ‘Company’) SEBI, vide Order dated May 26, 2011, inter alia directed detailed investigations in the matter. While the investigations were in progress, SEBI vide an interim order dated July 11,2011 inter alia, prohibited Rikhav Securities Limited (Rikhav), who was a sub-syndicate member in respect of the said IPO, from acting as a syndicate member/sub-syndicate member for all forthcoming issues till further directions. In this order SEBI had prima facie found that Rikhav by- • Placing large orders on behalf of the applicants during the first two days and then withdrawing/cancelling those bids, • Allowing large number of Non Institutional Investors (NIIs) to place high bids and then withdrawing/cancelling the bids, • Arranging the financing and controlling the large number of bids placed by Retail Individual Investors (RIIs) clients and then cancelling/withdrawing, had inflated the bid book to a large extent and thus appears to have induced the investors to subscribe to the issue.

2. Rikhav filed an appeal before the Hon’ble Securities Appellate Tribunal (SAT) challenging the order dated July 11, 2011. The Hon’ble SAT, vide its order dated November 16, 2011, noted that SEBI order qua Rikhav was an ad-interim ex-parte order and directed SEBI to hear the Rikhav within the next two weeks. The Hon’ble SAT further observed that, it shall, however, be open to the Whole Time Member (SEBI) to seek such further information/ documents from Rikhav as may be required. The Whole Time Member shall then pass such interim or final order as he deems fit qua Rikhav within a period of four weeks thereafter.

3. Accordingly, Rikhav was granted an opportunity of personal hearing before me on November 28, 2011 which was adjourned to December 1, 2011 at its request. It appeared and made oral submission through authorized representatives during the hearing and also filed a written submission vide its letter dated December 12, 2011. Rikhav has made following submissions- a. Withdrawal is permitted post closure of bidding and not banking the cheques was at the instruction of the clients. The bidding sub syndicate members do not have any control over stop payment instructions made by the clients or insufficient funds in the accounts of the clients. It further stated that the Sub syndicate member does not have any discretion whatsoever and is duty bound to carry out the instructions of the subscribers immediately, in letter and spirit. Failure to carry out instructions of the IPO invites penal actions. Even if refused to carry out instructions of applicants, they could have simply issue ‘cheque return’, ‘stop payment’ instructions for which Rikhav can’t be blamed. b. Out of 1221 bids in RII category through Rikhav, 1154 bids were placed on the last day of bidding which resultantly cannot create artificial demand.

Therefore, the allegation that it inflated the bid book is misplaced. The allegation of inflating the bid book would hold good only if it is proved that all twelve or at least a few sub syndicate members acted in collusion. There are no such allegations or findings and therefore such allegation deserves to be expunged. In Para-4 of the order as many as 12 syndicate members have been mentioned where substantial quantities of bids had been lodged and were later withdrawn. No orders have been passed against any of these entities as SEBI has concluded that there is no violation. Therefore, the order dated July 11,2011 against it is discriminatory, unfair, unjust and untenable. c. In the NII category, except for 2 bids all other six bids were received through IPO sub brokers. Manba Investments Securities Pvt. Ltd. and Manba Broking Services Pvt. Ltd. had applied through IPO sub broker Nikita Manisha Shah. Other NII applications (except group entities of Rikhav) were new clients introduced by one IPO sub broker Jayantilal B Shah. It is not responsible for financing done by Client (Manba). Post closure of bidding, there were developments in the market like listing of Muthoot Finance Ltd., at a discount, and another major public issue of Power Finance Corporation Limited etc., which affected investor sentiments, which resulted in the withdrawals. d. Financing by an NBFC is common and permitted activity under the law.

IPO financing by the group entity of Rikhav was genuine and neither it nor its financing NBFC had any control on the applications of the clients. Further, the withdrawal of such financed bids was only to the extent of 40% and the same was at the decision of respective applicants. If All such applications and the cheques of NBFC were forwarded to the bankers to the issue and the NBFC had not issued ‘stop payment’ instructions in respect of any of its financed cheques. e. SEBI order dated July 11, 2011 violated principles of natural justice as no personal hearing was given and statements recorded were not provided to it and it has not been given cross-examination of persons whose statements have been recorded by SEBI during investigations and reference thereto has been made in the order (para-9 on page 9). Further, the order does not specify which law Rikhav has violated. It is further alleged that as per the said order the investigation in the matter has been ordered to look into the role of intermediaries. Since, sub syndicate members are not registered by SEBI and therefore they are not intermediaries.

Since there is no investigation pending against Rikhav, no order could be passed under section 11 (4) or section 11B of SEBI Act qua it.

4. I note that investigation in the matter is still on -going.Therefore, in the present proceedings, the limited issue for my consideration at this stage is whether in the facts and circumstances as reflected from the material available on record, the direction issued vide order dated July 11, 2011 in so far as it relates to Rikhav needs to be continued, revoked or modified in any manner.

5. I have considered the oral and written submissions made on behalf of Rikhav and other material available on record. I note that Rikhav has not disputed the facts involved in the matter. The bidding/rejection/withdrawals patterns in the IPO of the company are summarised in the following Tables- Table A-Day-wise total Bidding details: Bid Date Cat. Total shares % of No. of % of No. of % of bid total shares shares Shares shares bidding through through through through of the valid bids valid invalid invalid day bids of bids bids of the day the day 8122560 85.88% NII 9122160 96.44% 999600 10.56% 29.04.11 RETAIL 336360 3.56% 336360 3.56% 0 0 8122560 85.88% Total 9458520 100.00% 1335960 14.12% 1860120 59.02% 02.05.11 NII 1987560 63.07% 127440 4.05% 411480 23.06% RETAIL 1163880 36.93% 752400 13.87% 2271600 72.08% Total 3151440 100.00% 879840 27.92% 5688460 19.70% 03.05.11 NII 5821080 20.16% 132600 0.46% 0 0 QIB 800040 2.77% 800040 2.77% 12657720 43.84% RETAIL 22249080 77.07% 9591360 33.23% 18346200 63.55% Total 28870200 100.00% 10524000 36.45% Corrections on 04.05.11 374760 Total 68.66% bidding 41,854,920 12739820 30.43% 28740340 *Note: While there are no additional bids on the 4th day and only corrections are permitted the bid file of the exchange treat the bid as bid of 4th day.

Table B-Day-wise bidding details through Rikhav Bid Date Cat. Total % of total No. of shares % of valid shares Shares % of Invalid As % shares bidding through valid bids as total through throughi invalid of to total bid for w.r.t. the bids bids through valid bids nvalid (no. of bids of the total bids Rikhav on the as % to bids shares) to day of the day day total bids total bid of the day shares through Rikhav 29-04-2011 NII 2326320 24.59% 0 0.00% 0.00% 2326320 100% 24.59% 2/5/2011 NII 1020240 32.37% 167400 16.41% 5.31% 852840 83.59% 27.06% RETAIL 265320 8.42% 167400 63.09% 5.31% 97920 36.91% 3.11% 02-05-2011 Total 1285560 40.79% 334800 26.04% 10.62% 950760 73.96% 30.17% 3/5/2011 RETAIL 4611360 48.75% 928560 20.14% 3.22% 3682800 79.86% 12.76% 03-05-2011 Total 4611360 48.75% 928560 20.14% 3.22% 3682800 79.86% 12.76% Total 8223240 1263360 6959880

6. It is noted that on April 29, 2011, the bidding through Rikhav in the IPO were made only for NII applicants. The details of such bids are as under:-

Sr.No. Bidding Time Applicant’s name Number of shares 1. 10:27:34 Rikhav Brokers Pvt. Ltd. 6,12,240 2. 10:34:09 Ms. Reeta Jain 40,800 3. 10:35:03 Ms. Indira Jain 40,800 4. 13:37:03 Manba Investments & Securities Pvt. Ltd. 4,08,120 5. 13:37:04 Manba Broking Services Pvt. Ltd. 4,08,120 6. 15:24:22 Sarafaraz Pathan 6,12,240 7. 15:35:32 AHL Investment Consultants Pvt. Ltd. 2,04,000 Total 23,26,320

7. It is observed that on the issue opening date i.e. April 29, 2011 first bid of the IPO was placed by Rikhav for its NII client Rikhav Brokers Pvt. Ltd. for a quantity of 6,12,240 shares (about 6.1% of the total issue size). In the initial one and half hour of bidding only bids through Rikhav were placed in the bidding system and that too for a quantity of about 7% of the total issue size. It is noted that out of total number of shares bid on this day, bids through Rikhav were for 24.59% shares and all these bids through Rikhav were placed in NII category at the maximum price band.The shares bid through Rikhav on this day constitute 23.26% of the entire issue size. All the bids for these shares were rejected/ withdrawn after closure of bidding process.

8. On the second day of bidding i.e. May 02, 2011, bids for total 31, 51,440 shares were received in the IPO, out of which bids for 22, 71,600 shares (72.08% ) were rejected/ withdrawn. On this day, bids for 12, 85,000 shares were placed through Rikhav, out of which bids for 9, 50,760 shares (73.96%) were rejected/ withdrawn. All these bids through Rikhav were placed at the maximum price band, like on the first day.

9. On the third day of bidding i.e. May 03, 2011, bids for 2, 88, 70,200 shares (2.88 times the issue size) were received in the IPO, out of which bids for 1,83,46,200 shares (63.55%) were rejected/ withdrawn. On this day, total 1154 bids for 46, 11,360 shares were placed through Rikhav, out of which 919 bids for 36, 82,800 shares (79.86%) were rejected/ withdrawn. On this day, all the bids placed through Rikhav were in RII category and at cut-off price.

10. The overall withdrawal/rejection pattern of bids placed through Rikhav is tabulated as under:

Category No. of bids No of shares Valid Bids 278 1095960 Not Banked (Cheques not presented by Rikhav) 232 1719600 Insufficient funds/ cheque returns 469 4399920 Stop payment 175 701760 Withdrawal 75 306000 1229 8223240

11. I note that when a bid is placed in the exchange file and it is kept open at the closure of the bidding period, then the quantity of that bid is included in the overall bid position in the exchange websites and is available to public. The bidding details are updated every hour and act as the indicator of demand in the IPO. Rikhav did not submit the cheques with respect to 232 bids placed through it, to the banker to the issue after successful bidding. In the IPO process the sub syndicate members are expected to directly forward the cheques received from applicants to the regional/ local collection centres of banker to the issue for the realization of the cheques. This is a critical aspect of the IPO process as unless the cheque is encashed by the banker to the issue, the bid placed by the client cannot be considered. Rikhav did not present cheques relating to these bids that resulted in inflating the bid book by 17, 19,600 shares (17.19% of the total issue size) even after closure of bidding.

12. Rikhav has contended that withdrawal of bids is legally permitted and sub -syndicate member is bound to carry out stop payment instructions of the subscribers. In this regard, I find that the pattern of bidding/withdrawal/rejection is unique in this case as the issue saw unprecedented withdrawals i.e. almost three times of the issue size. I find that Rikhav was one of the largest sub-syndicate members through whom bidding in both NII and RII categories were placed in the IPO. The percentage of withdrawals/ rejections of the bids placed through Rikhav are significantly higher than that of the other brokers/ sub syndicate members. Out of the total bids placed through Rikhav, all the bids in the NII category and 77% bids in RII category were withdrawn/ rejected. Bids through Rikhav contributed to about 82% of the issue size and withdrawals/ rejections of such bids were as high as about 70% of the total issue size. In terms of number of bids, out of total of 1229 bids placed through Rikhav, 951 bids (77.37%) were invalid. Further, on first two days of bidding, bids placed through Rikhav NII were 2.2 times of the subscription available in that category. As seen from Table A in para 5, the subscription in RII category was substantially high on the third day of bidding as compared to subscription in this category on previous two days. All the bids placed through Rikhav on first and second day of bidding in NII category were withdrawn. This suggests that bidding pattern in NII category on first and second day of bidding may have been with a design to influence the investment decision of RIIs.

13. Rikhav has submitted that Manba Investments Securities Pvt. Ltd. and Manba Broking Services Pvt. Ltd. for whom it has placed bids in the NII category are group companies and they are no way related or connected with it. Further, IPO financing by the group entity Total Holdings and Finvest Private Limited (a NBFC) was genuine and neither it nor its financing NBFC had any control on the bids of the clients. In this regard, I find that pattern of financing and withdrawal, prima facie, suggests that Rikhav (through its group entity Total Holdings and Finvest Private Limited) and Manba Investment & Securities Pvt. Ltd. have acted in concert. This issue will, however, be looked into in the ongoing investigations.

14. Performance of other IPOs, as contended by Rikhav, does not explain the two contradictory phenomena i.e. first, heavy bidding and then unusual and unprecedented withdrawals as observed in instant IPO since the sensex was indicating poor sentiment even at the time of opening of the issue.

15. Regarding the contention of Rikhav that SEBI has not taken any action against any other broker/sub -syndicate member, I find that the investigation is still in progress and SEBI reserves right to take appropriate action in accordance with law, as and when deemed appropriate, against those who are found to be violating the SEBI Act, rules and regulations, etc.

16. The contentions of Rikhav regarding grant of opportunity of personal hearing and furnishing of statements have become non est since the personal hearing has already been granted to it and the statements asked by Rikhav have been provided to it vide SEBI letter dated December 2, 2011. The contention that Rikhav was not allowed cross-examination of persons whose statements had been referred in the order dated July 11, 2011 is not tenable as the order dated July 11, 2011 was ad interim ex parte order. While passing the final order in the matter, the requirements of natural justice including the opportunity of cross-examination, if required, shall be complied with.

17. Rikhav has also submitted that the order dated July 11, 2011 does not specify the law which has been violated by it. In this regard, I note that in para 14 of the order the observation regarding prima facie contravention of regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 has been made. Hence, this contention of Rikhav is also not tenable.

18. The other legal contention of Rikhav is that the scope of SEBI investigations does not cover it and no order can be passed against it since it is not an “intermediary”. It is noted that Rikhav is a stock broker registered with SEBI. In the IPO of the company it was playing the role of intermediary between the company and the investors. I find that Rikhav, while acting as sub-syndicate member in the IPO was acting as an intermediary/person associated with the securities market for the purposes of section 11, 11B, 11C, 11D of the SEBI Act. Further, the powers under sections 11, 11B, 11C, 11D of the SEBI Act are not restricted to an ‘intermediary’ only but also extend to ‘any person associated with the securities market’. The observations in para. 26(xii) of the order dated July 11, 2011 are inclusive. The scope of investigation referred in this para. includes the role of Rikhav also in addition to the role of other intermediaries involved in the IPO of the company. Therefore, the investigation and the orders in the instant case are within the four corners of law.

19. Reliance on SAT order in the matter of Karvy Stock Broking is also misplaced in the instant case. The principles laid down by SAT in Karvy case have not been violated. In the order dated July 11, 2011, the prima facie findings and the directions against Rikhav, relate to its activities as a syndicate member/sub-syndicate member. I further find that the interim order dated July 11, 2011 has been issued within the scope of powers conferred under sections 11, 11B, 11C and 11D of the SEBI Act.

20. The contention of Rikhav that the regulation 107 of SEBI (ICDR) Regulations, 2009 is ultra vires is not correct. This regulation lists the possible ‘directions’ which could be passed within the powers conferred upon Board under the SEBI Act. The said regulations have been framed within the statutory powers conferred upon the Board under the SEBI Act.

21. I find that in an unprecedented case like this, where immediate regulatory intervention is required, the mass of data and patterns of behavior are required to be further examined to conclude the findings. The initial pattern of behavior indicates towards extensive role of Rikhav in the unusual bidding and withdrawal in the IPO. Considering all the facts and circumstances and the fact that investigation in the matter is still in progress, I am of the view that it would be in the fitness of things to consider the necessity to safeguard the securities market and interests of investors against any entity having prima facie found to have contravened the provisions of regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

22. In view of the above, I, in exercise of the powers conferred upon me under section 19 read with sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 and regulation 107 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, hereby confirm the direction issued vide ad-interim ex-parte order dated July 11, 2011 against Rikhav Securities Limited. The said direction shall continue to remain in force till further order in the matter.

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

RAJEEV KUMAR AGARWAL DATE: January 11, 2012 WHOLE TIME MEMBER PLACE: MUMBAI SECURITIES AND EXCHANGE BOARD OF INDIA