Order against Shri Manilal Kotecha in the matter of Pyramid Saimira Theatre Ltd

For Securities and Exchange Board of India: Dr. Pradnya Saravade, Officer on Special Duty Ms. Anita Kenkare, General Manager Mr. Vijayakrishnan G, Deputy Legal Adviser Mr. T. Vinay Rajneesh, Legal Officer

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI), vide an ex-parte ad interim order dated April 23, 2009, in the matter of Pyramid Saimira Theatre Limited (hereinafter referred to as PSTL), inter alia directed Mr. Manilal Kotecha not to buy, sell or deal in the securities market including in Initial Public Offerings (IPOs) directly or indirectly, till further directions as he was prima facie found to have played a key role in facilitating Mr. Nirmal Kotecha in carrying out suspicious banking transactions, carrying out and disguising his manipulative intent and gaining advantage from the forgery. The entities/persons against whom the said order was passed were advised that they may file their objections, if any, within thirty days from the date of the said order and, if they so desire, avail of an opportunity of personal hearing.

2. Thereafter, Mr. Manilal Kotecha, vide letter dated May 15, 2009, had filed his objections to the said order and inter alia submitted as follows: a. That the directions issued by the said order had resulted in deprivation of his right to carry on legitimate business activities; b. That not even a prima facie case has been made out to warrant the issuance of such an ex-parte order of serious consequence against him and that the imminent urgency has not been explained to support the order; Also that the order should demonstrate that the situation was emergent warranting an ad interim order in his case; c. That funds withdrawn by him from the bank have been linked to the actions of Mr. Nirmal Kotecha (grandson of Mr. Manilal Kotecha), without appreciating the possibility of other use of the said funds and without providing any evidence to show that the funds were directly or indirectly used for transactions/ abnormal designs in the securities market; d. That the power to issue directions under section 11, 11 (B) and section 11 (4) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the Act) have to be exercised judiciously, that it is well settled that a discretionary power is not to be invoked arbitrarily devoid of justification; That an order under Section 11B of the Act can be issued “after causing or causing to made an enquiry”; e. That the said order is in total disregard to the mandatory provision in Section 11 (4) of the Act, wherein SEBI shall either before or after passing such orders give opportunity of hearing to such intermediaries or persons concerned;

f. That none of the trades executed by him have been found to be in violation of rules/ regulations framed by SEBI including the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as PFUTP Regulations) and that he had never bought and sold even a single share in the scrip of PSTL; g. That the power to look into suspicious banking transactions does not fall within the purview of SEBI; h. That he is a senior citizen aged about 85 years, now retired and that all through his working life he had been engaged in the business of working as a General Manager, United India Insurance Company; Also, that he has been a regular investor in the securities market and that after his retirement he had put in his savings in the securities market; i. That the order has not made a single finding showing what the suspicious banking transactions were and how the same were suspicious in nature. No allegation/averment/observation/finding or whisper thereof has been made by SEBI that the money withdrawn by him has been directly or indirectly been put in the securities market; j. That it has not been shown in the order as to what loss would have been caused to the securities market, if he was allowed to continue trading in the market or how the interest of the investor would be affected if he was not debarred with immediate effect; k. That an order of this nature, which is based merely on surmise and conjectures, would adversely affect him and would besmirch his impeccable reputation and would also result in irreparable damage to him and to his standing in the financial markets.

3. In view of his submissions/objections, Mr. Manilal Kotecha has requested that the said order to the extent it applied to him, be reconsidered and the directions against him be withdrawn. He had also requested that an opportunity of personal hearing be given to him. Accordingly, an opportunity of personal hearing was given to him on July 01, 2009.

4. I have considered the objections filed by Mr. Manilal Kotecha, the oral submissions made by Mr. Shyam Mehta, learned counsel who appeared on his behalf and other material available on record. In the facts and circumstances, the limited issue for consideration at this juncture is, whether based on the available materials on record and after considering the submissions made by Mr. Manilal Kotecha, the directions issued by SEBI vide ad interim ex parte order dated April 23, 2009 need to be continued, revoked or modified in any manner, in so far as it relates to Mr. Manilal Kotecha.

5. Before, considering the issue, I would like to mention in brief, the circumstances which led to the passing of the ex parte order dated April 23, 2009 against various persons/entities including Mr. Manilal Kotecha - i. SEBI, while investigating the case of forged letters dated December 19, 2008 purported to be issued by SEBI to Mr. P. S. Saminathan (Chairman and Managing Director, PSTL) and Mr. Nirmal Kotecha (who was a person acting in concert with the promoters of PSTL and was a major shareholder in the said company), found that Mr. Nirmal Kotecha had offloaded substantial number of shares of PSTL on December 22, 2008 at artificially inflated prices. It was found that one of the forged letters (purported to be issued by SEBI) dated December 19, 2008 was sent to Mr. P. S. Saminathan, directing him to make an open offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (hereinafter referred to as SAST Regulations) for acquiring additional stake of 20% at a price not less than Rs.250/- within 14 days. Another forged letter (also purported to be issued by SEBI) dated December 19, 2008 was addressed to Mr. Nirmal Kotecha, seeking certain details about his acquisitions in PSTL, his relationship with Mr. P. S. Saminathan and Mr. N.C.Ravichandran (promoter/shareholder of PSTL), the agreement entered into with Mr. P.S. Saminathan, if any, for the interse transfer of shares, copies of his bank accounts and demat statements for the period January 2007 till December 2008, advances made to PSTL, if any and the details of his networth certificate and Income Tax Returns for the period 2006-07 and 2007-08, which were to be furnished within a period of fourteen days.

ii. The contents of the forged letter issued to Mr. P.S. Saminathan were given wide publicity by media reports on December 21, 2008 (Sunday) and December 22, 2008 (Monday) stating that SEBI had ordered Mr. P.S. Saminathan, one of the promoters of PSTL to make an open offer (as stated above), for allegedly violating creeping acquisition norms. The closing share price of PSTL on December 19, 2008 was Rs.75.45/- at National Stock Exchange of India Limited (hereinafter referred to as NSE). The share price of PSTL shot up to Rs.83/- at NSE and Rs.82.90/- at Bombay Stock Exchange Limited (hereinafter referred to as BSE), on December 22, 2008, when the markets opened up. In the meanwhile, PSTL informed (in the morning on December 22, 2008) BSE and NSE, that it had not received any communication from SEBI as published in the media with respect to the open offer (as mentioned in the forged letter). Subsequently, PSTL claimed to have received the said letter (forged letter purported to be issued by SEBI) at around 10.30 a.m. on December 22, 2008. Thereafter, Mr. P.S. Saminathan informed BSE and NSE about the receipt of the letter from SEBI. It was revealed by the courier company (Blue Dart) that they were instructed by the ‘sender’ to deliver the forged letter (though dated

December 19, 2008) to PSTL only on December 22, 2008 (Monday). With respect to the letter issued to Mr. Nirmal Kotecha, it was claimed by Mr. Nirmal Kotecha that the purported letter was received at his residence by his wife on Saturday (December 20, 2008) through courier and that his wife was unable to recollect the name of the courier service. Prima facie, the preliminary analysis of the case by SEBI inter alia revealed the following:

a) That one Amol Kokane had lent his name for facilitating Mr. Nirmal Kotecha to carry out his fraudulent, abusive, manipulative and illegal activities, detrimental to the interests of investors and to the integrity of the securities market;

b) That the bank trail of the high value funds transferred to Mr.Amol Kokane’s account, from where they were transferred to the stock market, has revealed that these funds have been received from various entities/ persons who appear to be connected to each other, and in whose bank accounts, funds appear to have been circulated through a large network of their connected accounts, in a complex pattern and ostensibly without any bonafide business purpose;

c) That the investigation prima facie also revealed frequent high value cash withdrawals and cash deposits, by limiting individual cash withdrawals and deposits to below Rupees ten lacs in some of these accounts;

d) that there were fund transfers from and between Mr. Nirmal Kotecha and his close relatives (his mother, wife) and related/associated entities/persons etc. and that the same modus operandi (withdrawing high value cash by keeping individual cash withdrawals below Rs.10,00,000/- that prima facie appeared in some of the connected persons/ entities accounts from where high value funds were transferred to Mr. Amol Kokane’s account and from where these funds were transferred to the stock market) prima facie also appeared to have adopted in the transfer of funds into and out of Mr. Nirmal Kotecha’s account, as well as the accounts of his immediate relatives/ his related entities;

e) that there were purchases made by related/ associated persons of Mr. Nirmal Kotecha in the PSTL scrip just prior to the publication of the news about the forged SEBI open offer letter that was sent to Mr. P S Saminathan on December 19, 2008 and again sale of substantial number of shares of PSTL just prior to the announcement by Mr. Saminathan denying the open offer, on the morning of December 22, 2008 by these related/ associated persons;

f) that Mr. Nirmal Kotecha was a major seller in the PSTL scrip on December 22, 2008, having sold 15,05,862 shares on market at an average price of Rs. 75.85 per share on that day. It was further seen that out of the same, he sold 6,69,611 shares on BSE and NSE at an average rate of Rs. 80.92 per share on December 22, 2008, before Mr. Saminathan denied receipt of the purported SEBI letter that morning;

g) that Mr. Nirmal Kotecha, Mr. Rakesh Sharma and Mr. Rajesh Unnikrishnan prima facie appeared to have jointly played a key role in an arrangement contrived to defraud investors in the market by disseminating the false information contained in the forged letter to the media and by trying to mislead the media into believing in the authenticity of the information that was circulated to them.

iii. The above preliminary findings led to a prima facie inference that Mr. Nirmal Kotecha had played a key role in the forgery, dissemination of the information contained in the forged letter to the media, and misleading the media to believe in the authenticity of the information that was circulated to them. Besides, it was prima facie found that there were entities/ persons, related/associated with Mr.Nirmal Kotecha including Mr. Manilal Kotecha who had played a key role in facilitating Mr. Nirmal Kotecha in carrying out suspicious banking transactions, disguising his manipulative intent and gaining advantage from the forgery.

iv. In view of the grave emergency that had arisen because of the forged letter (purported to have been issued by SEBI) which was sent to a promoter of PSTL and which was given wide media publicity and taking into consideration the fraudulent, abusive, manipulative and illegal activities committed by certain entities/persons to the detriment of the genuine investors and adversely affecting the integrity of securities market, it became necessary for SEBI as a regulator to immediately intervene in order to restore the confidence of the investors and to stop further harm to the securities market and the investors. It prima facie appeared that the said manipulative conduct had resulted in substantial losses to investors, who were left holding stocks with little or no value. It also prima facie emerged that Mr. Nirmal Kotecha was one of the major beneficiaries of the said manipulation and had masterminded the forgery. Therefore, with a view to protect the interest of investors and securities market from further damage, pending investigation and passing of final order and invoking powers under the Act, SEBI, vide the said interim order had passed certain directions in the matter. One of the directions was restraining Mr. Manilal Kotecha from buying, selling or dealing in the securities market including in IPOs, directly or indirectly, till further directions.

6. Coming to the facts of the present proceeding, the prima facie finding in respect of Mr. Manilal Kotecha as per the ex-parte order dated April 23, 2009, among other issues, was: a. that an amount of Rs. 25,00,000/- was transferred on August 22, 2008 from Mr. Nirmal Kotecha’s account to Mr. Manilal Kotecha’s account; b. that three self withdrawals of Rs. 8,00,000/- each have been done on August 22, 25 and 26, 2008 respectively from Mr. Manilal Kotecha’s account; c. That the same modus operandi (withdrawing high value cash by keeping individual cash withdrawals below Rs 10,00,000/- to avoid triggering of Rules framed under the Prevention of Money Laundering Act, 2002 that prima facie appeared in some of the connected persons/ entities accounts, from where high value funds were transferred to Mr. Amol Kokane’s account and from where they were ultimately transferred to stock market through the stock broker India Capital Markets Private Limited) prima facie also appeared to have adopted in the transfer of funds into and out of Mr. Nirmal Kotecha’s account, as well as the accounts of his immediate relatives/ his related/ associated entities etc. including Mr. Manilal Kotecha’s account.

7. In reply to the said banking transactions mentioned in the order, Mr. Manilal Kotecha has vide his reply dated May 15, 2009 stated as follows:

a. That he had received Rs. 25,00,000/- from his grandson Mr. Nirmal Kotecha; b. That out of the said Rs. 25,00,000/- received by him, he had withdrawn Rs. 8,00,000/- each on August 22, 25 and 26, 2008;

c. That the said money was withdrawn by him since the same was to be handed over to Mr. Nirmal Kotecha; d. That Mr. Nirmal Kotecha had transferred the said amount to his account since the bank officials had intimated that for withdrawing cash to the tune of Rs. 24,00,000/- they would require 5 to 7 days prior intimation and there would be some more formalities; e. That it was for this reason that the amount was divided into three tranches of Rs. 8,00,000 each and that the amount so withdrawn was utilized by his grandson Mr. Nirmal Kotecha for various expenses of his marriage and renovation etc.; f. That out of the said amount of Rs. 24,00,000/-, an amount of Rs. 2,00,000/- was also given back by his grandson Mr. Nirmal Kotecha to him, which was utilized by him for meeting his own personal expenditure; g. That the money received by him is taxed in the hands of his grandson. h. That in the absence of any material to show that the said money was utilized for carrying out transactions in securities market, no negative inferences can be drawn against him for withdrawal and use of the money received from legitimate sources; i. That he has denied the allegation in the said order that the withdrawals of Rs. 8,00,000/- each were made to avoid triggering of rules framed under the Prevention of Money Laundering Act, 2002. He has in his reply submitted that if his intention was to escape any regulatory trail, he would have refrained from withdrawing money in series of transactions of Rs. 8,00,000/-each which could arouse suspicion of any prudent banker; j. That he is not aware if any reporting of his transactions was made by his banker and that had the banker found the transaction to be suspicious, they would have themselves reported the transactions carried out by him. k. That no negative inference can be drawn against him on the basis that he is related to a person against whom various allegations had been alleged against in the ex parte order. l. That he denied of having violated the provisions of Regulation 3 and 4 of the PFUTP Regulations.

8. Before dealing with the submissions of Mr. Manilal Kotecha in respect of his banking transactions, it may be appreciated that the ad interim ex-parte order dated April 23, 2009 in the matter of PSTL was issued to prevent a total failure of the regulatory apparatus, which would have in turn exposed investors to unjustifiable levels of risk. The investigation in the matter of PSTL, prima facie has revealed a widely distributed network of persons/entities had joined hands in breaching market integrity. The investigation in this case has been atypical in that the discovery of this network brings more sharply into light the fragility of the market system, and the risks of it being derailed by a few hundred persons/ entities colluding for this purpose. It has prima facie emerged that Mr. Nirmal Kotecha had transferred monies to the tune of Rs. 1,25,00,000/- (including self withdrawal) in lots of Rs.25,00,000/- each to the accounts of his relatives (Ms. Veena Kotecha, Mr. Manilal Kotecha. etc.) and his associate companies. (M/s. Nirman Management Services Private Limited, M/s. Nishwet Management Services Private Limited etc.). It was followed by individual cash withdrawal below Rs.10,00,000/- by the concerned persons/entities. Almost the entire money withdrew by the said person/entities was given back to Mr. Nirmal Kotecha. Further, as has been explained in the said ex-parte order, the same modus operandi prima facie also appeared in some of the connected persons/ entities accounts, from where the money was directly or indirectly transferred to Mr. Amol Kokane’s account, and ultimately found its way into the stock market through the stock broker, India Capital Markets Private Limited. Vide the said ex-parte order, it was prima facie found that Mr. Amol Kokane had facilitated Mr. Nirmal Kotecha in carrying out fraudulent, manipulative and illegal activities, detrimental to the interests of investors and to the integrity of the securities market.

9. The fact that Mr. Manilal Kotecha had received Rs. 25,00,000/- in his bank account from his grandson, Mr. Nirmal Kotecha as well as the subsequent withdrawal of Rs. 8,00,000/- each on August 22, 25 and 26, 2008 is not disputed. The reason for such receipt of funds, according to him was that the HDFC Bank, Matunga Branch, had intimated that for withdrawing cash to the tune of Rs. 24,00,000/-, they would require 5 to 7 days prior intimation and there would be some more formalities. The said contention is contrary to the information provided by the aforesaid bank to SEBI. In response to a specific query by SEBI as to whether the branch prohibits withdrawal of cash by an individual account holder in a day above a certain limit, the aforesaid bank has in fact confirmed to SEBI that regarding cash payments, the bank does not prohibit customers from withdrawing any amount of cash, and that neither is there any limit per day for withdrawal from individual account, however, an intimation is required for withdrawals and that necessary due diligence is done. The bank has further stated that if the branch is unable to give the cash immediately, then, the branch arranges by same day or latest by next day. The claim of Mr. Manilal Kotecha that “there would be some more formalities” for withdrawing the amount is contrary to facts as observed from the information provided by the aforesaid bank. Therefore, the contention of Mr. Manilal Kotecha that the amount was divided into three tranches of Rs. 8,00,000/- each because of the requirements imposed by the bank, is not acceptable.

10. Further, I find that Mr. Manilal Kotecha has submitted that the amount so withdrawn was used by Mr. Nirmal Kotecha for various expenses of his marriage and renovation etc. Besides, I find that the same explanation has also been given by all of the other related/ associated persons/entities to whom Mr. Nirmal Kotecha had transferred funds from his account in lots of Rs. 25,00,000/-each and who had withdrawn Rs. 24,00,000/- in three tranches of Rs. 8,00,000/- each during the period between August 22, 2008 and September 15, 2008. During the personal hearing, the learned counsel for Mr. Manilal Kotecha had submitted that ‘own money’ was transferred between the accounts and withdrawn and such transfers are not wrong. I am unable to accept such a plea. If the cash so withdrawn was meant for use by Mr. Nirmal Kotecha himself, there does not appear any necessity for transferring the funds to related/ associated persons/entities account, and, for their withdrawing cash and retransferring back to him. As the records show, Mr. Manilal Kotecha too did not withdraw the cash in a day. The cash amount of Rs.24,00,000/- was withdrawn by him over a period of 5 days (August 22 to August 26, 2008). In fact, it is seen that Mr. Nirmal Kotecha himself as well as his related/ associated persons/ entities each withdrew the cash amount of Rs. 24,00,000/-,in three tranches of Rs. 8,00,000/- spread over different individual time spans, broadly ranging between August 22, 2008 to September 15, 2008. In the facts of the case, the only prima facie inference that can be drawn is that Mr. Nirmal Kotecha may have wanted to conceal his direct identity in the huge cash withdrawal operation and, hence, may have transferred funds to his related/associated persons/entities accounts. In fact, I observe that it needed an investigation of this scale to unearth the trail of funds and bring to focus the series of connected transactions that resulted in withdrawal of Rs.1,25,00,000/- by Mr. Nirmal Kotecha in a short time span ranging from August 22, 2008 to September 15, 2008. In view of the same, it was inter alia observed in the ex-parte order that the related/associated persons/ entities including the Mr. Manilal Kotecha would have played a key role in facilitating Mr. Nirmal Kotecha in the alleged manipulation.

11. Mr. Manilal Kotecha has denied the suggestion in the ex parte order that the withdrawals of Rs. 8,00,000/- each may have been made in order to avoid triggering of Rules framed under the Prevention of Money Laundering Act, 2002. It has been submitted that, if his intention was to escape any regulatory trail, he would have refrained from withdrawing money in series of transactions of Rs. 8,00,000/- each, which could have aroused suspicion of any prudent banker. However, HDFC Bank has clarified that the bank does not prohibit customers from withdrawing any amount of cash, and that, neither is there any limit per day for withdrawal from individual account. Despite the same, it has been observed that the cash withdrawal was not done in one tranche, but, was withdrawn in three tranches of Rs.8,00,000/- each. Besides, it is not only that Mr. Manilal Kotecha had withdrawn the cash in three tranches of Rs.8,00,000/-each. All of the relatives/ associated entities to whom Mr. Nirmal Kotecha had transferred the money during that period, including Mr. Nirmal Kotecha himself, had withdrawn the cash amount in three tranches of Rs. 8,00,000/- each. In view of the above, the admitted banking transactions of Mr. Manilal Kotecha are prima facie suspicious in the given facts and circumstances and for the reason discussed above as well. On the other hand, SEBI had all the reasons to prima facie believe that Mr. Nirmal Kotecha carried out manipulative transactions in the securities market, subsequent to the said cash withdrawal transaction, detrimental to the interest of the investors and to the integrity of the securities market, as stated in the ex parte order dated April 23, 2009, and, for achieving the said objective, he made use of various entities/persons, one of whom was his grandfather Mr. Manilal Kotecha.

12. Besides, it prima facie appeared that the bank account of Mr. Manilal Kotecha, who is a senior citizen aged about 85 years, was found to have high value money transfers from the account of Mr. Nirmal Kotecha. Furthermore, high value funds received in the account of Mr. Manilal Kotecha were transferred to the account of Mr. Nirmal Kotecha. Further, Mr. Nirmal Kotecha in his statement to SEBI had stated that mobile number 9820116575, among other numbers, belonged to him. This number is, however, actually registered in the name of Mr. Manilal Kotecha. There were number of high value transfers (in the range of Rs.10,00,000/- to Rs. 2,00,00,000/-) from the account of Mr. Nirmal Kotecha to the account of Mr. Manilal Kotecha. All these facts further strengthens SEBI’s prima facie belief that Mr. Manilal Kotecha facilitated his grandson Mr. Nirmal Kotecha in carrying out suspicious banking transactions, carrying out and disguising his manipulative intent and gaining advantage from the forgery.

13. Mr. Manilal Kotecha has contended that except for the receipt of money from Mr. Nirmal Kotecha’s account and cash withdrawal by him, there was no allegation in the entire order to draw any inference against him and no negative inference could be drawn against him solely on the basis that he is related to a person against whom various allegations have been alleged in the order. I cannot accept the plea of Mr. Manilal Kotecha that he was implicated in the order, for the reason that he is the grandfather of Mr. Nirmal Kotecha. The action of SEBI is prima facie justified on the basis of the material available on record as on the date of the order. The suspicious nature and timing of the banking transactions seen in the account of Mr. Manilal Kotecha, as indicated above, would prima facie indicate his role in the scheme of the things. The said prima facie view is further fortified by the fact that Mr. Manilal Kotecha was unable to properly explain the cash withdrawals which took place in his account. On the basis of the available material on record, as the investigation in the matter is ongoing, I can only prima facie conclude that Mr. Manilal Kotecha would have facilitated Mr. Nirmal Kotecha in his alleged manipulative scheme. Besides, Mr. Manilal Kotecha, it appears, tried to mislead SEBI by stating that HDFC Bank officials had intimated that for withdrawing cash to the tune of Rs. 24,00,000/- they would require 5 to 7 days prior intimation and that there would be some more formalities From the reply received by SEBI from HDFC Bank,

Matunga Branch, the same does not appear to be correct. In view of the above, the plea that Mr. Manilal Kotecha had not violated the provisions of Regulation 3 and 4 of PFUTP Regulations does not prima facie hold good. The manner of fund transfers to his account by Mr. Nirmal Kotecha and the subsequent cash withdrawals which were admittedly given back to Mr. Nirmal Kotecha before and during the period when the alleged manipulation had taken place casts doubts on his bonafides in this regard. In the facts and circumstances, as brought out in the ex-parte order, I do not have any hesitation to hold here that Mr. Manilal Kotecha may have prima facie aided Mr. Nirmal Kotecha in allowing him to use his bank account as a conduit for routing of funds for his ulterior motives.

14. In view of the above, it would be prudent to further investigate into the money trail of the cash amount withdrawn by Mr. Manilal Kotecha. Further, it is not that only Rs.25,00,000/- was transferred by Mr. Nirmal Kotecha to his grandfather’s account and that he withdrew the money in three tranches of Rs.8,00,000/- on three different dates. In order to appreciate the gravity of the situation, it is necessary to have a holistic picture of the cash withdrawals done by Mr. Nirmal Kotecha and by related/associate persons/ entities at his behest, in the scheme of things. This view is further substantiated by the fact that during the same period (i.e. the period when about Rs.1,25,00,000/- was withdrawn by Mr. Nirmal Kotecha in cash, from his own account and also by transferring the funds to his related/ associate persons/ entities accounts and then withdrawing cash from these accounts), high value cash had been seen deposited in certain accounts out of the 230 accounts which were prima facie identified in the preliminary investigation (also mentioned in the ex-parte order) and these funds may then have been used either directly or indirectly into the stock markets.

15. I would now proceed to deal with the other submissions of Mr. Manilal Kotecha. He contended that not even a prima facie case has been made against him to warrant the issuance of such an ex-parte order of serious consequences to him. I can only reject the said contention outright, in view of the findings made above in this order. Besides, the prima facie case against him which warranted the issuance of the ex-parte order had been explained in the said order. The only inference which can be drawn from the sequence of events narrated above is that Mr. Manilal Kotecha has prima facie aided Mr. Nirmal Kotecha. Though, he took efforts to ‘legitimize’ the banking transactions, under the cover of the ‘withdrawal restriction of HDFC’’, it has turned out to be a false or unproved claim. Besides, only after being prima facie satisfied that his banking transactions and the accommodative manner in which the same was done, Mr. Manilal Kotecha was restrained from dealing in securities vide the ex-parte order. He further contended that there was no emergent situation warranting such an ex-parte order, that simply stating that the order is issued as an emergent measure is not adequate and that the order should demonstrate that the situation was emergent warranting an ad interim order. As pointed out earlier, the ex-parte order dated April 23, 2009 has already made a prima facie case against Mr. Manilal Kotecha. The immediate need for passing of such an ex-parte order was explained in detail in the interim order. One of the objectives of SEBI is to protect the interests of investors in securities. Considering the large public participation in the securities market, investors’ confidence in market integrity can only be sustained by ensuring that they are adequately protected. To achieve the said objective, SEBI had to urgently intervene whenever such market irregularities happen to stop or prevent such manipulators from causing damage or to prevent further harm. Considering the unusual scheme adopted to manipulate the market in the present case, SEBI was justified in passing the said ex-parte order. Therefore, the said contentions of Mr. Manilal Kotecha are without any merit.

16. Mr. Manilal Kotecha has also argued that the interim order was in total disregard to the mandatory provision of Section 11 (4) of the Act that SEBI shall either before or after passing such orders give opportunity of hearing to such intermediaries or persons concerned. There is no merit in this contention. Needless to say, SEBI has to regulate and ensure orderly transactions in the securities market, and to deal with exigencies that may arise in the market. It has been empowered with the duty to protect the investors’ interest. The interim directions issued in the present matter have been issued invoking the powers of Sections 11, 11(4)(b) and 11B of the Act and Regulation 11 of the PFUTP Regulations. The said directions in the matter have been issued pending investigations and passing of a final order. Further, in accordance with the Proviso to Section 11(4) of the Act, an opportunity of hearing has been afforded to Mr Manilal Kotecha after passing of the ex parte order. Section 11(4) empowers SEBI to take any of the measures stated therein, either pending investigation or inquiry or on completion of such investigation or inquiry. Therefore, SEBI is statutorily authorized to pass such interim orders and to afford a post-decisional hearing, as was done in this case. Further, he has contended that ‘investigation’ and ‘enquiry’ are two separate proceedings under the SEBI Act and not one and the same seems to be misconceived. The ex parte order dated April 23, 2009 was based on the preliminary findings made by SEBI in the matter. In this regard, I note the following observation of the Hon’ble Securities Appellate Tribunal in the matter of Karvy Stock Broking Limited Vs. SEBI:

“As is clear from the language of sub section (4) the measures that the Board may take or the orders that it may pass would be “either pending investigation or enquiry or on completion of such investigation or enquiry”. The word ‘investigation’ as used in section 11(4) has not been defined. It obviously refers to the investigation as ordered under section 11-C of the Act because sections 11-C and 11(4) were introduced simultaneously in the year 2002 when Parliament found that the Board prior to their introduction did not have statutory power to investigate.

The word ‘inquiry’ too has not been defined in the Act though it finds mention in Sections 11, 11B, 11D and 15I. Under section 12(3) of the Act also, the Board holds an inquiry under the inquiry regulations for imposing major or minor penalties including the penalty of suspension or cancellation of a certificate of registration. It is, thus, clear that an inquiry is held under sections 11, 11B and 11D, it is also held under section 12(3) and also under section 15I. Having regard to the scheme of the Act, the rules and regulations made thereunder we are clearly of the view that even though the inquiries contemplated by the Act may be held under different set of provisions, their object is one and the same viz. to help the Board to promote the development of and to regulate the securities market and protect the interests of investors. The inquiry under section 11 of the Act is held by the Board to find out what measures it needs to take to protect the interests of the investors and what steps it needs to take to promote the development of and to regulate the securities market…………….

As already observed, the Board also causes an inquiry to be made by an inquiry officer under the inquiry regulations and/or by an adjudicating officer under Chapter VIA. It is during the pendency of any of these inquiries or on their completion that the Board may pass appropriate order – interim or final. This is clear from the language of section 11(4).”

17. As seen above, the conduct of Mr. Manilal Kotecha in receiving funds from his grandson Mr. Nirmal Kotecha and withdrawing the same in cash to give it back to Mr. Nirmal Kotecha, the role played by Mr. Nirmal Kotecha in perpetrating of the fraud and manipulation in the securities market, does not justify any revocation of the ad interim directions passed against Mr. Manilal Kotecha as he prima facie appears to have accommodated and aided Mr. Nirmal Kotecha who has played a key role in the acts which resulted in the manipulation of the share price of PSTL. While judging the conduct of parties alleged to be involved in a market manipulation, the case has to be seen in its whole and individual conduct cannot be viewed in isolation. Furthermore, when multiple entities are linked together in a well orchestrated scheme of manipulation, it would give rise to an absurd situation if one or two entities central to this plot alone would be held responsible for the manipulation.

18. Taken the peculiar way in which a letter was forged and purported to have been sent by SEBI to Mr. P. S. Saminathan directing him to make an open offer, publicizing the contents of the forged letter in the media, would itself indicate that the case is very serious indeed. Further, as the investigations in the matter are on going, it would be just and reasonable to continue with the ex-parte directions passed against Mr. Manilal Kotecha till the completion of the investigations. While, doing so, I, place reliance in the following observation of the Hon’ble Securities Appellate Tribunal in the matter of Ketan Parekh [Appeal No. 2 of 2004, decided on July 14, 2006] - “Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available. The nature of the transaction executed, the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.” [Bold supplied]

19. The modus operandi adopted by the alleged manipulators in the present case is one of its kind. They planned their action so meticulously that each one involved in the series of entire events in the said manipulation had a specific independent/combined role to play. The investigation conducted by SEBI so far prima facie revealed that Mr. Nirmal Kotecha Kotecha was one of the major beneficiaries of the said manipulation and has masterminded the forgery. One of the forged letters was in the nature of a direction from SEBI to Mr. P.S. Saminathan to make an open offer at the rate of Rs.250/- per share. The market price of the shares of PSTL on December 19, 2008 (the date of the forged letters) was very low at Rs. 75.45/- as compared to the price of Rs.250/-per share. This indicates that the letters may have been forged only in order to manipulate the market price of the shares of PSTL. The very nature of such forgery would indicate the manipulative intent of the parties involved therein. It is also brought out in evidence that the said forged letter (sent to Mr.P. S. Saminathan) was couriered to him on December 20, 2008 (Saturday) with a specific instruction to deliver it only on December 22, 2008 (Monday).

Those who anchored the entire episode also ensured that the news about such letters were published to the media on Saturday and Sunday so that on Monday, when the market opened up, there would be a substantial increase in share price of PSTL. Thus, the alleged manipulators ensured that the forged letter to Mr. P.S. Saminathan was delivered only on the next trading day (Monday) after affording time for themselves to sufficiently publicise the contents of the forged letter through the media so as to attract investor interest. Needless to say, when such a price sensitive information (open offer @ Rs.250/-) is made public, the unsuspecting investors may purchase shares in the hope that they can offer such shares in the open offer and reap benefits. These investors would not be aware of what was actually happening in such a situation, as had transpired in the present matter. Mr. Nirmal Kotecha, prima facie exploited the lack of information of such genuine investors. Prima facie, Mr. Nirmal Kotecha and others not only undermined the faith of investors but also tried to mislead the Regulator by forging letters as stated above in this order.

It is also brought by the investigation that Mr. Nirmal Kotecha sold substantial shares of PSTL on December 22, 2008. More pertinently, he sold substantial shares before 10.30 a.m. on the said date before the denial made by Mr. P. S. Saminathan in respect of the receipt of the forged letter. As a Regulator of the securities market, it is the endeavour of SEBI to prevent market manipulation and to act proactively and ensure that the damage is controlled and further damage is prevented, whenever any manipulations happen. In his plan of execution, Mr. Nirmal Kotecha appears to have made use of various entities/persons including his close relatives (grandfather, mother and wife), his companies/associate entities (Kotecha Capital Services Private Limited/Nirman Management Services Private Limited/Nishwet Management Services Private Limited) and persons like Mr. Rakesh Sharma, Mr. Rajesh Unnikrishnan, Mr. Amol Kokane etc. Prima facie, the specific role of those individuals had been designed by Mr. Nirmal Kotecha and he appears to have steered the scheme of things to achieve his desired objective of manipulation.

For banking transactions, Mr. Nirmal Kotecha appears to have made use of the bank accounts of his grandfather, mother, wife and others and prima facie appears to have utilized their accounts for channeling the funds obviously with their active involvement. Though, Mr. Manilal Kotecha has contended that the transactions carried out by Mr. Nirmal Kotecha are independent of him, it is evidently seen from his bank account that there were frequent high value transfers from the account of Mr. Nirmal Kotecha to the account of Mr. Manilal Kotecha. This prima facie arouses suspicion. Even if he might not have been directly involved in the other events in the manipulation, that by itself will not absolve him of his responsibility, given the entire picture. There are other persons/entities who appeared to have played their role in various capacities such as publicizing the contents of the forged SEBI letter, routing funds, offloading substantial shares at an artificial inflated price on December 22, 2008 etc. In a case like this, individual acts should not be isolated from the case; rather the focus should be on the case in its entirety and it is the ultimate goal of the manipulators that should be critically assessed.

Otherwise, it may lead to an unacceptable situation where every player may take a plea that his or her role did not extend to any overt act which ultimately resulted in the alleged manipulation. Therefore, at this stage, where the investigation in the matter is in progress, I do not find this a fit case to revoke the ad interim directions till the completion of investigation. I am convinced that the interim order against Mr. Manilal Kotecha needs to continue. His role or involvement in the whole manipulation will, needless to say, be reviewed again after the investigation is over.

20. In view of the foregoing, I, in exercise of the powers conferred upon me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992, hereby confirm the ex-parte interim order dated April 23, 2009 in the matter of Pyramid Saimira Theatre Limited, against Mr. Manilal Kotecha.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Place: Mumbai Date: July 28, 2009