Order against Vargin Finance Pvt. Ltd. in the case of Design Auto Systems Ltd

WTM/TCN/53/ID3/OCT/2008 SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: T.C. NAIR, WHOLE TIME MEMBER ORDER UNDER SECTIONS 11 AND 11B OF THE SEBI ACT, 1992 AGAINST VARGIN FINANCE PVT. LTD. FOR ITS ROLE AND DEALINGS IN THE SCRIP OF DESIGN AUTO SYSTEMS LTD. 1.0 Background 1.1 The Securities and Exchange Board of India (SEBI) conducted investigations into dealings in the shares of Design Auto Systems Ltd. (DASL) for the period between August 2001 and January 2002 pursuant to a preferential allotment made by the said company to another company called Bonanza Biotech Ltd. (BBL) on swap basis in the ratio of 1:1. Both DASL and BBL shares were listed on various stock exchanges. DASL shares were listed on the Bombay Stock Exchange Ltd (BSE), Madhya Pradesh Stock Exchange (MPSE) and Ahmedabad Stock Exchange (ASE). BBL shares were listed on BSE and MPSE. The broad course of events in the matter is as under:

a) DASL made a preferential allotment of 10 crore of its shares (said shares) to BBL on October 29, 2001 which was about 14 times of the pre-issue paid up capital of DASL. The consideration was another preferential allotment of 10 crore shares made by BBL to DASL on the same date which was about 5 times of the pre-issue paid up capital of BBL before the allotment. There was no exchange of cash between the two.

b) DASL made application for listing the said shares allotted to BBL to MPSE and later to BSE. The MPSE granted listing permission albeit with undue haste and without exercising due diligence. However, it did not grant trading permission. The listing application which was made subsequently to BSE was kept pending by it, as it apprehended that DASL would have committed certain violations of law in the process.

c) On the basis of listing permission given by MPSE, the Central Depositories Services Ltd. (CDSL), a registered depository, dematerialized these DASL shares and credited them to the beneficial owner account of BBL.

d) After the allotments were made, a major chunk of the shares allotted by DASL to BBL were offloaded by BBL through a network of entities including Coverage & Consultants Ltd. (C&C) in the trading platform of the BSE even though these shares were not listed on BSE. Such offloading was contrary to provisions of the BSE bye-laws and constituted bad delivery on the exchange. However, neither the BSE Clearing House nor any of the other parties to the trade could detect this illegality, since the shares were in the dematerialized form and thereby fungible with other legally allotted shares. As a result, a number of innocent investors who purchased such unlisted shares on the BSE were defrauded and saddled with shares which could not be legally sold on the BSE.

e) When this came to the notice of SEBI and BSE, the demat account of BBL was frozen after recovering a portion of the shares that were offloaded by it.

f) Upon the above coming to its notice, BSE suspended trading in the DASL’s shares from January 14, 2002. Upon instructions from SEBI, BSE also annulled all transactions in DASL shares allotted to BBL which had taken place on the exchange till that date. The annulment was subsequently set aside by the Mumbai High Court by an order passed on February 28, 2003 in W.P. No. 209 of 2003 and connected matters (a batch of Writ Petitions filed by aggrieved stock brokers of BSE), mainly on the ground of innocent third party interests which were already created and the matter was remanded to BSE’s Governing

Board for deciding the same afresh after giving a hearing to the Petitioners. The annulment order was subsequently reversed by the Governing Board itself as they found that the interest of innocent third parties i.e investors would otherwise be affected.

g) Subsequently, investigations were initiated by SEBI to probe into the alleged malpractices committed by DASL, BBL, Vargin Finance Pvt. Ltd. (for short ‘VFPL’) and other entities.

1.2 During the course of the aforesaid investigations, summonses were issued to DASL and BBL to appear before the Investigating Authority. However, BBL challenged it before the Hon’ble High Court of Madhya Pradesh, Indore Bench by filing a writ petition, raising various objections to SEBI’s jurisdiction (WP No. 150/2004). DASL had also challenged a similar summons issued by SEBI before the same Court (WP No. 673/2004). Both the writ petitions were dismissed by the Hon’ble Court by orders dated March 04, 2005 and the court directed SEBI to ensure expeditious completion of investigation. Further, DASL and BBL were also directed to co-operate in the investigation so as to enable the Investigating Authority to complete the same expeditiously.

1.3 The findings of investigation pointed to various violations including that of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices in the Securities Market) Regulations, 1995 (“the PFUTP Regulations”) by DASL, BBL and other entities. VFPL was also found to be instrumental in offloading these unlisted shares of DASL into the market. Pursuant to this, SEBI issued show cause notices (SCN) to DASL, BBL, VFPL and other entities suspected to be involved in the transactions requiring them to show cause as to why appropriate directions should not be passed against them. The common show cause notice issued to DASL and its directors was dated June 30, 2005. The same SCN was also addressed to VFPL, which allegedly acted as a conduit for off-loading the unlisted shares in the market.

1.4 DASL, instead of replying to the show cause notice, raised certain objections challenging SEBI’s jurisdiction and further sought inspection of certain documents vide its letters dated July 21, 2005 and August 31, 2005. SEBI, thereupon replied vide letters dated August 22, 2005 and September 19, 2005 that the jurisdictional objections, if any, might be raised before the authority conducting proceeding in relation to SCN dated June 30, 2005 issued to DASL, i.e., Whole Time Member, SEBI.

1.5 DASL challenged the aforesaid letter dated September 19, 2005 of SEBI by filing another writ petition before the Hon’ble High Court of Madhya Pradesh, Indore Bench. The Hon’ble Court disposed of the writ petition by an order dated February 13, 2006 with a direction that Competent Authority shall take into consideration the preliminary objection regarding jurisdiction as raised by the petitioner and shall pass a reasoned Order after giving an opportunity of hearing to the petitioner.

1.6 In compliance with the directions of the Hon’ble Court, SEBI had disposed of DASL’s preliminary objections, including the jurisdictional question, by an order dated June 22, 2006, after granting an opportunity of hearing to DASL. It was held that SEBI had jurisdiction in the matter and that the preliminary objections raised by DASL were not sustainable. It accordingly directed that the proceedings initiated by show cause notice dated June 30, 2005 should be continued in accordance with law and that DASL shall file its reply to the show cause notice within 15 days.

1.7 Instead of complying with the said direction, DASL again filed a writ petition before the Hon’ble High Court of Madhya Pradesh, Indore Bench challenging the said order dated June 22, 2006 (WP No. 4479 of 2006). The writ petition came up for hearing before the Hon’ble Court on October 17, 2006 when SEBI was granted time to file its reply. The Hon’ble Court also passed an interim order on October 17, 2006 permitting SEBI to continue the proceedings but restrained it from passing any final order in the matter.

Subsequently, the Hon’ble Court dismissed the writ petition vide an order dated February 20, 2007 holding that the proper course would be to allow SEBI to pass the final order.

1.8 Accordingly SEBI passed final order against DASL on March 6, 2007. On the same date SEBI passed order against BBL also wherein BBL was found to have violated Regulation 3 and 4 of PFUTP Regulations, 1995. The present proceedings against VFPL are inextricably linked with the roles of DASL and BBL in the alleged transactions.

2.0 Notice, hearing and reply

2.1 The followings are the main allegations made in the common show cause notice dated June 30, 2005 issued to VFPL along with other related entities:

(a) Preferential allotment of 10 crores shares was made by DASL to BBL on a swap basis on October 29, 2001. These shares were not granted listing permission in BSE, though they were listed in MPSE. No listing application was made to ASE. However, trading permission was not granted by any exchange.

(b) During the period of investigation i.e. August 2001 to January 2002, though there was no substantial price movement in the shares of DASL, there was a spurt in volumes. The fall in price and the spurt in volumes were due to continuous off-loading of the unlisted shares of DASL allotted to BBL.

(c) The allotment made by DASL contravened SEBI Circular dated March 8, 2001 and also clause 24(a) of the Listing Agreement read with section 21 of the Securities Contracts (Regulation) Act, 1956, as no in-principle approval was taken by DASL before making the swap allotment of shares to BBL.

(d) The allotment of 10 crores shares of DASL to BBL in exchange for shares of BBL was further not based on any prudent commercial sense. Mr. Sarvesh Garg, the Chairman and Managing Director (CMD) of DASL made a statement dated January 28, 2004, to the Investigating Authority that BBL was coming up with a biotech project and it was in that context that the allotment was made, and he undertook to provide copy of the Board minutes of DASL regarding this. DASL had also undertaken to file a copy of the project report of BBL with SEBI. However, no such minutes or project report was produced and it is seen that no mention was made about the biotech project of BBL either in the available Board minutes, or in the Extraordinary General Meeting (EGM) notice or explanatory statement u/s 173(2) of the Companies Act or in the alleged MOU entered into between DASL and BBL. The same was also not mentioned in the Annual Report of DASL for the year 2001-2002.

(e) The swap allotment between DASL and BBL was therefore only a conduit to enhance the number of shares to loot innocent investors by off-loading these unlisted shares of DASL in the market.

(f) DASL also tried to create fraudulent documents to cover up their lapses. It produced a copy of a resolution purportedly passed in EGM held on October 25, 2001 under section 372A of the Companies Act. However, this resolution was not featuring as an agenda item in the notice to the EGM and also did not figure in any earlier correspondence with SEBI or the stock exchanges. Thus, it can be concluded that the document was fabricated.

(g) DASL filed Form 2 and Form 5 with the ROC on December 21, 2001 and February 11, 2002 respectively after considerable delay. The forms had not been filed at the time of filing the listing application with MPSE. While filing the listing application with MPSE, DASL confirmed to MPSE by their letter dated October 31, 2001 that all the legal and statutory formalities have been complied with and no formalities are pending for issue / allotment of these securities as well as no authority has restrained the company for making the above allotment and the securities issued are now eligible for listing on stock exchanges. They had also given undertaking to MPSE to file Form 5 within the stipulated time, which as seen above, they did not fulfill.

(h) The management of DASL was also involved in off-loading these unlisted shares to innocent investors and actively assisting BBL in its nefarious designs, as seen from involvement of Mr. Sarvesh Garg, MD of DASL, Mr. Prashant Rajgarhia, Director of DASL and VFPL, Mr. Murali Nair, Executive Officer (Secretarial) of DASL and Mr. Arvind Vaswani, employee of DASL.

(i) The Directors of BBL included Mr. Sharad Gujrati, Mr. Amit Patel, Mr. Rakesh Pandya and Smt. Druma Vaghela during the period of investigation as per the information supplied by BBL vide their letter dated 14.11.2003. It has also been mentioned that Mr. Deep Trivedi was also the director of BBL upto 10.10.2000 i.e prior to the period of investigation. Mr. Deep Trivedi was stated by Shri Parshwa Finance to be the person dealing on behalf of C&C. Besides, Mr. Sharad Gujrathi was the Director of C&C also. C&C was one of the major clients instrumental in selling the unlisted shares of DASL through the stock exchange mechanism. It may also be noted that BBL and C&C shared the same address at Indore. The detail of Directors as provided by BBL appears to be completely false as from the Form No. 2 and Form no. 23 submitted by the company to ROC vide their letter dated 18.01.2002 it has been seen that the papers were presented by one Mr. Arvind Vaswani as Director of BBL. The copies of these papers have been forwarded by BBL only vide their letter dated 14.11.2003. In addition to that Mr. Sarvesh Garg, Managing Director of DASL has also mentioned in his statement recorded by SEBI on 28.01.2004 that Mr. Arvind Vaswani had joined BBL as a professional Director sometime in November 2001. However, his appointment in BBL did not materialize and he resigned from the Board of BBL in January 2002. The name of Mr. Arvind Vaswani is not appearing in the list of Directors as submitted by BBL and the information submitted by BBL in this regard is false.

(j) From the client registration form entered into between BBL and CD Equisearch Pvt. Ltd, it was found that the agreement was signed by one Mr. Manish Ganeriwala as Director of BBL. BBL vide its Board Resolution dated June 05, 2001 (copy enclosed with member Client Agreement Form), authorized Mr. Manish Ghaneriwala, Director, to sell the shares of DASL on behalf of the company i.e. BBL. The Agreement is dated October 11, 2001. From the aforementioned facts it was concluded that Mr. Manish Ganeriwala was also the Director of BBL. The copy of Resolution has been signed by Mr. Arvind Vaswani as Director. Hence the information supplied by BBL cannot be relied upon. Mr. B P Inani, Authorised Representative of CD Equisearch P Ltd in his statement has also confirmed that Mr. Manish Ganeriwala was on the Board of BBL.

(k) From the demat account of BBL, whereto 10 crores equity shares of DASL were credited, 6 crore shares were transferred to various entities for off-loading in the market. The details of the transfer from demat account of BBL are as under:

Table A Sr. No. Date DP ID Client ID Quantity (No. of shares) 1 13.11.2001 IN300888 13162987 – Manoj 50,00,000 Ghaneriwala 2 13.11.2001 IN300888 14171657 – DG Goenka 50,00,000 Equities Pvt. Ltd. 3 19.11.2001 IN301485 10000677 – Pinnacle 50,00,000 Finstock Pvt. Ltd. 4 28.11.2001 IN300351 10008759 – Shyam & Lata 2,00,000 Parwaney

5 06.12.2001 IN301485 10029747 – Coverage & 1,00,00,000 Consultants 6 27.12.2001 IN301983 10005042 – Ujjwal Shende 1,33,00,000 7 27.12.2001 IN301983 10005059 – Ashutosh 1,50,00,000 Kothari TOTAL 5,35,00,000 Table B - I Sr. No. Date BO ID Quantity (No. of shares) 8 13.11.2001 1302120000000363 – 50,00,000 Muralidharan Nair Table B - II Date CMBP ID Quantity (No. of shares) 9 11.12.2001 IN651178 – CD Equisearch Pvt. Ltd. 5,00,000 10 12.12.2001 IN651178 – CD Equisearch Pvt. Ltd. 5,00,000 – to CD Equisearch Pvt. Ltd. 11 18.12.2001 IN651178 – CD Equisearch Pvt. Ltd. 5,00,000 – to CD Equisearch Pvt. Ltd. TOTAL 65,00,000 GRAND TOTAL 6,00,00,000 shares The remaining 4 crore shares have been frozen by CDSL on January 8, 2002

Details of transactions in DP a/c of BBL during the relevant period is as below: Date Recd. from Transferred to No. of Balance shares 27.12.2001 4,00,00,000 10.01.2002 Ujwal Shende 1,33,00,000 10.01.2002 Ashutosh Kothari 1,50,00,000 6,83,00,000 11.01.2002 Murali Nair 39,00,000 7,22,00,000 16.01.2002 Coverage & 58,83,151 7,80,83,151 Consultants 18.01.2002 Coverage & 5,05,000 7,85,88,151 Consultants 18.01.2002 Pinnacle Finstock 22,09,816 8,07,97,967 14.03.2002 Manoj H 41,14,500 8,49,12,457 Ganeriwala

15.03.2002 D.G. Goenka 42,66,459 8,91,78,926 Murali Nair 10,00,000 9,01,78,926 (l) Further movement of the unlisted shares were given as under: i. (IN300888/ 13162987): Manoj H Ganeriwala and Madhu M Ganeriwala. (Manoj H Ganeriwala is a Director of the broker DG Goenka Equities Pvt. Ltd. Address: Shankerdeep, Flat No.1, Tagore Road, Santacruz (W), Mumbai 400 054

Date Recd. from Transferred to No. of Balance shares 13.11.2001 BBL 50,00,000 50,00,000 22.11.2001 Pinnacle 50,00,000 Nil Finstock 12.12.2001 Murali Nair 10,00,000 10,00,000 29.01.2002 Coverage & 2,78,180 Consultants Pinnacle 47,11,320 59,89,500 Finstock 05.03.2002 Arihant Capital 8,75,000 Markets 14.03.2002 BBL 41,14,500 14.03.2002 Murali Nair 10,00,000 Nil ii. (IN300888/ 14171657): Account belongs to DG Goenka Equities Pvt. Ltd., member BSE (Address: PS9, Rotunda Building, Bombay Samachar Marg, Fort, Mumbai 400 023). Date Recd. from Transferred to No. of shares Balance 13.11.2001 BBL 50,00,000 12.12.2001 Murali Nair 1,00,000 51,00, 000 13.12.2001 Delivered in 23,100 Market 12.01.2002 CDSL a/c of 76,900 50,00,000 DG Goenka 12.01.2002 Delivered in 5,16,541 market 14.01.2002 Delivered in 2,17,000 42,66,459 market 15.03.2002 BBL 42,66,459 Nil iii. (IN301485/ 10000677): Account belongs to Pinnacle Finstock Pvt. Ltd. (Address: B-81, Pariseema Complex, CG Road, Ellisbridge, Ahmedabad 380 006), sub broker to Active Finstock Pvt. Ltd.

Date Recd. from Transferred to No. of shares Balance 19.11.2001 BBL 50,00,000 22.11.2001 Manoj 50,00,000 Ganeriwala 18.01.2002 BBL 22,09,816 29.01.2002 Manoj 47,11,320 30,78,864 Ganeriwala iv. (IN301485/ 10029747): Account belongs to Coverage & Consultants Ltd. (Address: 203, Apollo Towers, 2 MG Road, Indore, MP 452 001). Date Recd. from Transferred to No. of shares Balance 06.12.2001 BBL 1,00,00,000 18.01.2002 Manoj 2,78,180 Ganeriwala 16.01.2002 BBL 58,83,151 18.01.2002 BBL 5,05,000 33,33,669 v. (IN301983/ 10004669): Account belongs to Murali Nair (Address: 108- B, Vardha Vihar, Lalaram Nagar, Indore, MP 452 001) Date Recd. from Transferred to No. of shares Balance 13.11.2001 BBL 50,00,000 12.12.2001 Manoj 10,00,000 Ganeriwala 12.12.2001 DG Goenka 1,00,000 29.12.2001 BBL 39,00,000 NIL 14.03.2002 Manoj 10,00,000 Ganeriwala BBL 10,00,000 NIL (m) A reconciliation of the transfer of 10 crore unlisted shares from BBL’s demat account was also worked out in the SCN from the available data, which is as under:

Reconciliation of transfer of 10 crore shares of BBL Total shares credited - 10,00,00,000 Shares frozen in the DP a/c - 9,01,78,926 Shares delivered in the market/ Unaccounted for - 98,21,074

Coverage & Consultants 33,33,669 Pinnacle Finstock 30,78,864 CD Equisearch 15,00,000 Shyam Parwaney 2,00,000 Manoj Ganeriwala 8,75,000 D.G. Goenka 8,33,541 98,21,074 (n) Mr. Murali Nair, who was an employee of DASL, had played instrumental role in the alleged off-loading of unlisted shares by BBL. It was observed that one DG Goenka Equities P Ltd., a stock broker to whom 50 lakh shares were transferred by BBL had stated to SEBI that the transfer was made pursuant to instructions of Mr. Murali Nair and VFPL Mr. Manoj Ganeriwala, a person to whom BBL transferred another 50 lakh shares had also given the name of Mr. Murali Nair, as being responsible for the transfer. Further, Mr. Murali Nair had himself transferred 10 lakh shares to Mr. Ganeriwala, which the latter claimed to be a mistake. The said shares were eventually returned to Mr. Nair. It was concluded that BBL was assisted by DASL through its employee Mr. Murali Nair in the process of off-loading of unlisted DASL shares in the market.

(o) Besides giving electronic credit on November 10, 2001 to BBL’s demat account, DASL also issued a jumbo share certificate for 10 crore shares to BBL on October 29, 2001 and a copy of this certificate was enclosed along with listing application made on December 20, 2001 to BSE. The registrar of DASL, Ankit Consultancy Ltd. denied that any physical certificate was issued to BBL and they stated that DASL approached them for dematerializing the said 10 crore shares by their letter dated November 07, 2001. Thus, it was concluded that electronic credit was done with fraudulent intent to facilitate off-loading unlisted shares of DASL by BBL, even though the jumbo physical certificate was issued earlier. This fact also points to the nexus between BBL and DASL in the alleged off-loading.

(p) As regards the present noticee VFPL, it was observed that the noticee was an associate of DASL on account of common directors in Ms. Rita Garg (wife of Mr. Sarvesh Garg, MD of DASL) and Mr. Prashant Rajgarhia (brother-in-law of Mr. Sarvesh Garg, MD of DASL).

(q) It was noted that the VFPL had sold DASL shares through two brokers CD Equisearch Pvt. Ltd. (CD Equisearch) and DG Goenka Equities P. Ltd. as below:- Date Sales Broker 02.11.2001 230000 CD Equisearch P. Ltd. 30.11.2001 1400 CD Equisearch P. Ltd. 10.12.2001 28203 CD Equisearch P. Ltd. 14.12.2001 500000 CD Equisearch P. Ltd. 04.01.2002 300000 CD Equisearch P. Ltd. 08.01.2002 75300 CD Equisearch P. Ltd. 10.01.2002 516541 DG Goenka Equities P. Ltd.

(r) The noticee had sold 1,78,540 shares of DASL through off-market to one Mr. MM Kela through CD Equisearch and 33,443 shares were auctioned on January 16, 2002. Thus, its total sales amount to 18,63,427 shares. It was stated that the shares were sold to raise the funds for the company. (s) The information supplied by VFPL and their demat accounts have been analyzed. A total of 17,69,200 shares were dematerialized by VFPL out of shares allotted to them in the public issue during May 1994 and preferential allotment in December 1999. Besides, 5 lac shares out of the demat account no. 10004597 with Arihant Capital Markets Ltd. had been transferred to the demat account of M/s. Pinnacle Finstock Pvt. Ltd. the receipt of which has been claimed on the account of C&C. In addition to that 3 lac shares were transferred to one Mr. Sanjay Zalani having demat account no. 14573983 with SHCIL. These shares have also found way in the account of Pinnacle Finstock Pvt. Ltd. on account of C&C. (t) The noticee has claimed that 5,16,541 shares were sold through DG Goenka Equities Pvt. Ltd. No delivery from the demat account of VFPL has been noticed to the account of DG Goenka Equities P Ltd. The delivery was made by the broker from his DP Account no. 14171657 with SHCIL wherein the credit has come from the account of BBL.

In the case of the shares sold through CD Equisearch Pvt. Ltd. also the delivery of 8 lac shares was made from the account of BBL and 1 lac each from the account of Shri Sarvesh Garg and Smt. Rita Garg, the Directors of DASL. It is noted that the representative of DG Goenka Equities Pvt. Ltd. has stated in his statement that the shares from the BBL account to their account was made on the instructions of Shri Murali Nair and VFPL. (u) On the basis of the same, it was alleged that VFPL was hand in glove with BBL in their nefarious designs to offload the unlisted shares of DASL in the market and cheat the investors and thereby violating regulations 3 and 4(a), (b), (c), & (d) of the SEBI (PFUTP) Regulations, 1995. In view thereof, VFPL was called upon to show cause as to why suitable directions including restraining it from accessing the capital market and prohibiting it from buying, selling or dealing in securities for a specified period should not be issued against it under sections 11(4) (b) and 11B of the SEBI Act read with regulation 11 of the SEBI (PFUTP) Regulations, 2003.

2.2 After issuance of SCN, VFPL engaged in prolonged correspondence with SEBI, inter alia objecting to SEBI’s jurisdiction in the matter. A hearing was scheduled on May 8, 2006, when the representatives of VFPL sought further time to file written submissions. The written submissions were received on June 8, 2006. A further hearing was afforded to VFPL on July 10, 2006, when Mr. K.R. Khata, Counsel and Mr. Sachin N. Kaikini, Advocate appeared on behalf of VFPL and made submissions. The main submissions made on behalf of VFPL are as follows:

(a) That the transactions in the DASL shares were done with a view to realize the proceeds to clear the outstanding dues to DASL. They did not know BBL or its directors directly and cannot be said to be hand in glove with them.

(b) It was submitted that the statement given by Mr. Prashant Rajgarhia during the course of investigation should also be considered as part of their submission.

(c) That they have raised some objections to the effect that all relevant documents have not been tendered to them with the SCN.

(d) That the noticee company was engaged in the business of investment in securities and is presently not doing any business. Earlier it had two common directors with DASL. It had commercial dealings with DASL and its directors.

(e) That It held around 17, 69, 200 shares of DASL in demat form and 15, 700 shares in physical form as on 7.11.2001. It was further stated that the noticee had to repay its outstanding to the tune of Rs. 95, 33, 813/- and that when demand was made by DASL to repay the same, the noticee had DASL shares as the only major assets which was to be realized to repay to the DASL. Accordingly, VFPL opened its demat account with Arihant and HDFC and dematerialized 17, 69, 200 shares.

(f) It was further stated that the noticee sold off the DASL shares with a view to pay the outstanding to DASL and with no other intention, as alleged. It was admitted that total 1, 78, 540 shares were sold to one Mr. M M Kela, on the instance of CD Equisearch Pvt. Ltd., through off market transaction and 33, 443 shares were sold through auction, (g) The number of total shares sold by the noticee, as mentioned in the SCN, was disputed on that the shares sold through auction were included in the total sale. It was stated that 17, 69, 200 shares were transferred to the accounts of Arihant and HDFC prior to the dematerialization of the 10 crore of equity shares of DASL allotted to BBL.

(h) It was denied that besides 17, 69, 200 shares, another 8 lakh shares were also sold by VFPL. It was stated that on suggestion of BBL the noticee transferred 11, 98, 700 shares to one Sanjay Zhalani and Pinnacle Finstock, who failed to pay the consideration to the noticee. Accordingly, the noticee called upon BBL, to make good the payment which instructed C D Equisearch to sell the shares in their demat account and forward the consideration to the noticee.

(i) It was stated that as per instruction of BBL, CD Equisearch could have sold 8.5 lakh shares and forward the consideration to the noticee and similarly 5, 16, 541 shares held by BBL were sold through D G Goenka for the credit of the noticee. Therefore, it had to repay/ transfer the balance 1, 67, 841 shares {(8.5 lakh + 5, 16, 541 shares sold through DG Goenka) – (11, 98, 700 shares given to Sanjay Zalani and Pinnacel)} to BBL. It was further submitted that the noticees were not aware of the fact that the 8.5 lakh shares delivered on behalf of VFPL were unlisted and so untreadable and as such it was wrong to conclude that the noticee was hand in glove with BBL in offloading of unlisted shares of DASL.

(j) That the noticees were under bonafide belief that the shares dematerialized were tradable and that as soon as the noticee came to know the suspension of trading of DASL shares by BSE, it made an effort to recover those shares.

(k) That Mr. Prashant Rajgarhia was a director of DASL primarily looking after manufacturing activities of DASL and therefore he was not aware of the administrative functions of DASL.

(l) It was admitted that Mr. Murali Nair’s services were used by the noticee to transfer shares from physical form to dematerialized form as he was an employee of DASL and known to the two directors of the noticee. However, it was contended that the noticees were not aware that Mr. Murali Nair was instrumental in effecting transfer of unlisted shares of DASL held by BBL to various entities.

(m) It was further contended that if the shares would not have been dematerialized by the authority then the entire trading of the said shares could have been averted and that they had no reason to know that the shares it traded were not tradable once they were demated by CDSL.

(n) It was denied the noticees had committed any violation of SEBI PFUTP Regulations and therefore submitted that the SCN against the noticee be withdrawn and no penalty or fine to be levied or any other action be taken against the noticee.

3.0 Consideration of issues

3.1 I have taken into consideration the SCN, the reply thereto and other materials on record. My findings are as under: Preferential allotment and surrounding events

3.2 Pursuant to an alleged MOU entered between DASL and BBL on September 15, 2001, they made preferential allotment of 10 crores shares to each other on swap basis. The allotment made by DASL to BBL was huge with reference to its existing capital, as seen from the table showing details of equity capital of DASL, as given below:

Till 11.07.1994 – 62.25 lakh shares at Rs 10 per share = Rs.6.225 crores On 06.12.1999 – Allotment of 11 lakh shares at Rs 10 per share on a preferential basis to its promoters and associates namely Vargin Finance Pvt. Ltd., Sarvesh Garg and Rita Garg. = Rs. 1.10 crores On 29.10.2001 – Allotment of 10 crore shares at Rs. 10 per share on a preferential basis to Bonanza Biotech Ltd. = Rs. 100 crores Rs. 107.325 crores

Whereas 62.25 lakh shares are listed at all the stock exchanges named above, the remaining 10.11 crore shares issued on a preferential basis were not granted listing permission at BSE though they are listed at MPSE. No listing application in that regard was made with ASE.

3.3 The allotment made to BBL on October 29, 2001 amounted to about 14 times the pre-issue capital of DASL. It was seen that DASL did not have any passable commercial reason for making this huge allotment to BBL. In view of the irregularities in allotment, BSE had withheld listing permission to the shares so allotted to BBL. However, at the instance of DASL, CDSL proceeded to dematerialize the said shares and gave demat credit to the account of BBL. Once the credit was given, BBL and other entities including VFPL took advantage of the fact that the shares became fungible with and indistinguishable from other validly listed DASL shares and offloaded a part of it in the BSE, even though they were not supposed to do so in terms of the BSE Bye-laws.

3.4 Having regard to all relevant factors, SEBI passed orders on March 6, 2007 against DASL and BBL, the principal parties to the primary transaction of swap allotment made on October 29, 2001. Both of them were found guilty of violation of regulations 3 and 4 of the PFUTP Regulations, 1995. In the order passed against DASL, it was held that it had no passable commercial reason for making the huge allotment of 10 crore shares and the allotment was only a ruse to cover the offloading of unlisted shares to innocent investors. It was also found that DASL had fabricated some documents and cooked up imaginary reasons for giving false commercial colour to the allotment. It was also found that DASL issued the same 10 crore shares both physically by way of a jumbo certificate and in the demat form to BBL. It was further found that DASL and BBL had close links through Mr. Murali Nair and Mr. Arvind Vaswani. It would be pertinent to note that DASL had applied under the consent schemes, wherein the directors of DASL inter alia agreed to acquire 98, 21, 074 shares of DASL, and the same has been settled. However, BBL had preferred appeal before the Securities Appellate Tribunal (SAT) against the aforesaid order dated March 06, 2007. The Hon’ble SAT vide its order dated June 16, 2008 uphold the direction passed by the SEBI and dismissed the appeal.

3.5 In the order passed against Mr. Murali Nair dated December 27, 2007 it was found that he was closely involved at both stages that of preferential allotment and dematerialization by DASL and in subsequent offloading of unlisted shares of DASL by BBL, VFPL and other entities.

3.6 As regards the present noticee, from the table place above in para 2.1 (q), it is evident that it had sold total 11, 34, 903 shares through M/s CD Equisearch Pvt. Ltd. while 5,16,541 shares were sold through DG Goenka Equities Pvt. Ltd. On perusal of the demat statement of the VFPL it is found that out of 2, 30, 000 shares sold by the noticee through CD Equisearch Pvt. Ltd. on 02. 11. 2001, 1 lakh shares had come from the account of Shri sarvesh Garg, Director of DASL, and another 1 lakh shares had come from the account of Smt. Rita Garg, director of VFPL and DASL and also wife of Shri Sarvesh garg. I further find that the 5 lakh shares and 3 lakh shares, sold on 14.12.2001 and 04.01.2002 respectively through the broker CD Equisearch Pvt. Ltd., were delivered from the demat account of BBL while 5, 16, 541 shares sold through M/s D G Goenka Equities Pvt. Ltd. on 10.01.2002 for which also no delivery was made from the demat account of the noticee to the account of DG Goenka Equities Pvt. Ltd rather the delivery was made by the broker from its DP account no. 14171657 with SHCIL wherein the credit had come from the account of BBL.

3.7 It is noted that apart form the above transactions the noticee had sold 1,78,540 DASL shares off-market to one Mr. MM Kela, through CD Equisearch Pvt. Ltd and another 33,443 DASL shares were auctioned on 16.01.2002. I note that the 1, 78, 540 shares were sold for the consideration of an amount approximately Rs. 15 lakh. I find that these facts have also been admitted by the noticee in its written reply, wherein, it was contended that the shares were sold to Mr. M M Kela with a view to raise finance and repay the outstanding due to DASL.

3.8 I note that in the SCN dated June 30, 2005 issued to the noticee it was observed that 5 lac shares out of the demat account no. 10004597 with Arihant had been transferred to the demat account of M/s. Pinnacle Finstock Pvt. Ltd. the receipt of which was claimed on the account of C&C and subsequently 3 lac shares were transferred to one Mr. Sanjay Zhalani having demat account no. 14573983 with SHCIL. However, in the written reply filed by the noticee it has been stated that total 11, 98, 700 lakhs share were transferred to Sanjay Zhalani and M/s Pinnacle Finstock. In this regard, upon the perusal of demat statement of VFPL, I find that from the account of noticee 5 lakhs share were transferred to the account of M/s Pinnacle Finstock Ltd. on 05.11.2005; 3, 98, 700 shares and 3, 60, 000 shares were transferred to the account of Sanjay Zhalani on 07.11.2001 and 08.11.2001 respectively. Thus, in total 12, 68, 500 shares were transferred from the account of noticee to M/s Pinnacle Finstock and Sanjay zhalani.

3.9 The transactions in this account have to be seen in conjunction with the sequential developments relating to the DASL scrip, which may be outlined as follows:

Date Event 29.10.2001 Allotment of 10 crores DASL shares made to BBL on swap basis. Jumbo share certificate issued by DASL to BBL for the said shares. 01.11.2001 DASL makes listing application to MPSE in relation to said shares. 01.11.2001 VFPL dematerialized 9, 50, 000 shares with Arihant 02.11.2001 VFPL has sold 2, 30, 000 shares through market transaction 05.11.2001 MPSE grants listing permission for the said shares. 05.11.2001 VFPL has transferred 5 lakh shares to the account of M/s Pinnacle Finstock Ltd. 07.11.2001 VFPL has transferred 3, 98, 700 shares to the demat account of Mr. sanjay Zhalani 07.11.2001 VFPL dematerialized 1, 49, 400 shares with Arihant while 6, 69, 800 shares were dematerialized with HDFC 08.11.2001 VFPL has transferred 3, 60, 000 shares to the account of Mr. Sanjay Zhalani 10.11.2001 CDSL credits 10 crores DASL shares to the demat account of BBL 13.11.2001 BBL makes substantial off-market transfers of DASL shares to three parties, i.e. 50 lakhs shares to Mr. Murali Nair, 50 lakhs shares to the joint account of Mr. and Mrs. Ganeriwala and 50 lakhs shares to one M/s DG Goenka Equities Pvt. Ltd. 30.11.2001 VFPL has sold 1, 400 shares through market transaction 10.12.2001 VFPL has sold 28, 203 shares through market transaction 11.12.2001 CD Equisearch has received 5 lakh shares from the account of BBL 12.12.2001 Out of the 50 lakhs shares so transferred, Mr. Murali Nair transfers 10 lakhs shares to the joint account of Mr. and Mrs. Ganeriwala. He also transfers 1 lakh shares to DG Goenka Equities Pvt. Ltd., which was a stock broker in which Mr. Ganeriwala was a director. 12.12.2001 CD Equisearch has received 5 lakh shares from the account of BBL 14.12.2001 VFPL has sold 5 lakh shares through market transactions for which delivery was made by BBL. 18.12.2001 CD Equisearch has received 5 lakh shares from the account of BBL 20.12.2001 DASL makes listing application to BSE. 29.12.2001 Mr. Murali Nair returns 39 lakhs shares to BBL. 04.01.2002 3 lakhs shares were sold by VFPL through market transactions

08.01.2002 CDSL freezes BBL’s demat account. 08.01.2002 VFPL has sold 75, 300 shares were sold through market transactions 10.01.2002 5, 16, 541 shares were sold by VFPL through market transactions for which deliver had come from the account of BBL. 14.01.2002 BSE suspends trading in the DASL shares. 16.01.2002 VFPL has sold 178, 450 shares to Mr. M M kela through off market transaction and 33, 443 shares through auction. Subsequently, various parties return the shares transferred to them with a view to eventually return them to the account of BBL. However, as mentioned in para 2.1(d) a total of 98,21,074 shares remained unaccounted for. In line with this general trend, Mr. Murali Nair took back 10 lakh shares from Mr. and Mrs. Ganeriwala on 14.03.2002 and there after returned them to BBL.

3.10 From the above transactions it may be noted that VFPL has dematerialized 9, 50, 000 shares on 1.11.2001 and on the very next date i.e. 02.11.2001 it has sold 2, 30, 000 shares through CD Equisearch Pvt. Ltd. BBL has credited 15 lakh shares to the account of CD Equisearch on three dates i.e. on 11.12.2001, 12.12.2001, and 18.12.2001 5 lakh in each transactions. The shares so delivered to the account of CD Equisearch were utilized to honor the delivery liability of shares sold by the noticee. Out of total 11, 34, 903 shares sold by the noticee through CD Equisearch 8 lakh shares have been delivered from the account of BBL. 178540 shares were sold to Mr. MM kela off market transaction through CD Equisearch. In total 12, 68, 500 shares were transferred from the account of noticee to M/s Pinnacle Finstock and Sanjay Zhalani between 5.11.2001 and 8.11.2001.

Nexus of the noticee with DASL, BBL and their associate

3.11 Out of the total 11, 34, 903 shares sold through CD Equisearch, the delivery of 8 lakh shares was made from the account of BBL while 1 lakh each from the account of Shri Sarvesh Garg and Smt. Rita Garg. However, the noticee in their written submission has submitted that on suggestion of BBL 11, 98, 700 shares were transferred to M/s Pinnacle Finstock and Sanjay Zhalani, who were associated with the BBL. It was further submitted that since M/s. Pinnacle Finstock Pvt. & Mr. Sanjay Zalani failed to pay the consideration amount, the noticee called upon BBL to make good the payment or return the shares, upon which BBL instructed CD Equisearch to sell the shares in its account and forward the consideration to the noticee.

3.12 I find that in para 14 of the written reply the noticee itself has admitted that it had transferred 11, 98, 700 shares to M/s Pinnacle Finstock Pvt. Ltd. and Mr. Sanjay Zhalani on the suggestions of BBL. The admission made by the noticee establishes its inextricable relationship with the BBL and DASL. It will also not be out of context to mention that in 1st para of the written reply it has been stated that the noticee have not known BBL or its Directors directly and so can not be said to have hand in glove with them. Such contradictory statements made by the noticee raises question on reliability of their whole reply and submissions. I, further, note that the representatives of DG Goenka Equities Pvt. Ltd., through which 5, 16, 541 shares were sold by VFPL, has stated that the delivery of shares were made from BBL’s demat account on the instructions of Mr. Murali Nair and the noticee. This being so, it is crystal clear that the noticee was acting in concert with BBL, DASL and their other associate in offloading of unlisted shares of DASL.

3.13 In para 20 of the written reply it has been admitted that the services of Mr. Murali Nair were used by the noticees to transfer shares from physical form to dematerialized form since he was known employee of the DASL and known to their two directors. As noted above, Mr. Murali Nair has been found as instrumental in dematerialization and thereafter transfer of unlisted shares of DASL from the account of BBL to various entities and for this he had contacted several persons. All these facts, when taken together, leads to an irresistible conclusion that the noticee was hand in glove with the BBL, DASL and their other associate in the nefarious purpose of offloading of the unlisted shares of DASL.

3.14 In para 8 of the written reply it has been admitted that upon introduction of Mr. MM Kela by CD Equisearch, 1, 78, 540 shares of DASL were sold to him through off market. I find that the relationship between noticee, CD Equisearch and BBL has already been made out. I observe that this off market transaction can not be seen in isolation and when taken together with other transactions and their relationship it is evident that the said off market transaction was a part of their common design of offloading of the unlisted shares of DASL to the innocent investors.

Other submissions made by VFPL in reply to SCN

3.15 With reference to the submission made by the noticee that all relevant documents were not made available to them with the SCN, upon perusal of the list of enclosures I find that the documents pertaining to their transaction and the allegation made in SCN were forwarded to the noticee. I further observe that no documents, other than those made available to the noticee have been produced before me.

3.16 With reference to the submission made by the noticee that 33,443 shares were auctioned and thus the same can not be considered as part of the total net sales it may be noted that auction is another method of sale where things are sold to the person who offers the most money for them and hence the shares sold through auction can not be kept out of the total shares sold by the noticee. I do not find any merit in the issue raised in this regard, by the noticee.

3.17 With regard to submission made by the noticee that Mr. Prashant Rajgarhia was a director of DASL primarily looking after manufacturing activities of DASL and therefore was not aware of the administrative functions of DASL, I note that the noticee in its written reply to SCN has admitted that the services of Mr. Murali Nair was taken for dematerialization of the shares as he was known to the two of its Directors. In this view the argument that Mr. Prashant

Rajgarhia was not aware with the administrative functions of DASL seems an afterthought to camouflage their involvement in offloading of the unlisted shares of DASL. I further note that Smt. Rita Garg, wife of Mr. Sarvesh Garg, was Director of both VFPL and DASL.

3.18 The noticee has submitted that had the shares were not dematerialized by BSE authorities the entire trading of the said shares could have been averted. In this regard I find that the argument of the noticee would have sustained had the transactions been done in normal course, which is not the case. As noted above, the noticee was acting in concert with BBL, DASL and other entities involved in their crafty design to offload the unlisted shares of DASL to the innocent investors. This being so I do not find any merit in the contention of the noticee.

3.19 The next question which arises is as to whether the conduct of VFPL falls within the prohibition of the PFUTP Regulations, 1995. As regards whether the above conduct violates regulations 3 or 4 of the PFUTP Regulations, 1995, as alleged in the SCN, it is felt necessary to refer to the provisions [and to regulation 2(1)(c) which is required to understand regulation 3], which are as under:

“Definitions 2.(1) In these regulations, unless the context otherwise requires - ****** (c) "fraud" includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:- (1) the suggestion, as to a fact, of that which is not true, by one who does not believe it to be true; (2) the active concealment of a fact by one having knowledge or belief of the fact; (3) a promise made without any intention of performing it; (4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent; and "fraudulent" shall be construed accordingly. Explanation: Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech. ********

Prohibition of certain dealings in securities 3. No person shall buy, sell or otherwise deal in securities in a fraudulent manner.

Prohibition against Market Manipulation 4. No person shall - (a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person; (b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market; (c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions; (d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities; (e) pay, offer or agree to pay or offer, directly or indirectly, to any person any money or money's worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing, or causing fluctuations in the market price of securities.”

3.20 VFPL, BBL, DASL and other entities who were part of the grand design to offload the unlisted shares on the trading floor of BSE, impliedly gave an impression that those were listed shares which could be validly traded in the market. As noted above, since the unlisted shares were in the dematerialized form, they were indistinguishable from other validly listed shares of DASL. Further, the close nexus found between VFPL, BBL and DASL goes to establish that VFPL was acting in concert with DASL, BBL and other entities to defraud investors by offloading of the unlisted shares to the innocent investors for their unjust and unfair gains. Thus, the act of the noticee is fraudulent within the meaning of regulation 2 (1)(c)(1) and (2) of the PFUTP Regulations. The defrauded parties are the numerous investors who were counter parties to the transactions. Accordingly, I hold that the noticee is guilty of violating regulation 3 of the PFUTP Regulations, 1995.

3.21. The act of offloading has also resulted in incidental violation of regulation 4 of the PFUTP Regulations, 1995 in as much as the offloading of DASL shares in bulk resulted in spurt in volumes.

4.0 Order

4.1 The general course of events following the swap allotments made by DASL have undermined investor confidence in the demat system and in the integrity of the securities market in general. As seen above, VFPL has played an important part in the subsequent off-loading of the unlisted shares of DASL in BSE and is an integral part of the massive fraud played on innocent investors.

4.2 As noted above, VFPL has violated regulations 3 and 4 of the PFUTP Regulations, 1995. I, therefore, in the exercise of power conferred upon me by sections 11 and 11B of the SEBI Act, 1992 hereby direct that VFPL shall not access the capital market, or buy, sell or deal in securities in any manner directly or indirectly for a period of three years from date of this order.

4.3 This order shall come into force immediately.

Mumbai T.C. NAIR October 13, 2008 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA