Order in respect of Complaint of Mr. Verinder Mehta in the matter of Delhi Stock Exchange Limited

1. Securities and Exchange Board of India (“SEBI”) received a complaint dated October 28, 2010 from Mr.Verinder Mehta (“Complainant”) against Delhi Stock Exchange Limited (hereafter referred to as 'DSE') alleging certain irregularities in the functioning of DSE at the time of demutualization.

2. SEBI conducted an investigation into the alleged irregularities and based on the findings of the investigation, a show cause notice ("SCN") dated May 10, 2013 was issued to DSEL under the provisions of Section 12A of the Securities Contracts (Regulation) Act, 1956 read with Section 11 of the Securities and Exchange Board of India Act, 1992. After granting an opportunity of personal hearing on December 30, 2013 and considering the material available on record, SEBI withdrew the recognition granted to Delhi Stock Exchange Limited vide order dated November 19, 2014

3. Being aggrieved, DSE filed appeal (Appeal No. 85 of 2015) before the Hon’ble Securities Appellate Tribunal (“SAT”). Since DSE’s application dated May 24, 2014 for voluntary exit was under consideration of SEBI, Hon’ble SAT vide Order dated June 24, 2016 directed “SEBI to complete the voluntary de-recognition process within a period of five months from today by determining the quantum amount payable and the time within which the said payment is to be made.” If DSE fails to pay the consequential payments then SEBI would be entitled to complete de-recognition under the order dated November 19, 2014.

4. Thereafter, the Complainant vide letter dated December 17, 2014 stated “SEBI has concluded that frauds have been committed as well as misappropriation and siphoning of funds of DSE have taken place, however the order having said so has not gone any further to pronounce punishments for the crimes/violations committed.” 4.1 The Complainant further stated "Now, when it has been clearly established by SEBI and stated in its order of 19th Nov, 2014 that violations were committed under various sections of SEBI Act, some of which are given below for your ready reference: a) Section 15HA: Penalty for Fraudulent and Unfair Trade Practices b) Section 15G (ii) : Penalty for Insider Trading c) Section 628 : Penalty for False Statements d) Violation of SEBI's Code of Conduct for Merchant Bankers e) Violation of SEBI's Code of Conduct for Brokers."……. 4.2 Vide the said letter, the Complainant requested the following from SEBI: a) "Declare all the offenders, as "Not Fit and Proper Persons" because of their criminal acts, so as to disallow them from participating or conducting any activity in the money market. b) Cancel licenses of the Merchant Bankers. c) Cancel their membership of all stock exchanges, if any, held by them. d) Direct Delhi Stock Exchange Ltd. to initiate necessary legal proceedings for recovery of all amounts misappropriated/siphoned off from DSE by the offenders. e) Till such time the funds are not recovered, all the beneficial interest of such offenders in the Delhi Stock Exchange Ltd. and/or other known assets/beneficial interest in other stock exchanges and/or anywhere in the money market be confiscated and deposited with SEBI against amounts due and recoverable from them. f) For such above recoveries, it is very essential that the police/CBI should be asked to immediately register FIRs against all the persons involved so as to ensure that their properties and other assets are seized for recovery of the amounts returnable to DSE Ltd."

5. The Complainant filed an appeal (Appeal No. 332 of 2015) before the Hon’ble SAT seeking an order directing SEBI to consider and pass an order on his letter dated December 17, 2014 and thereby modify the order passed by SEBI on November 19, 2014 against DSE.

6. The Hon’ble SAT vide order dated January 29, 2016 held "By this appeal, the appellant seeks an order directing SEBI to consider and pass an order on the Appellant's letter dated December 17, 2014 and thereby modify the order passed by SEBI on 19th November, 2014 against the Delhi Stock Exchange. Whether SEBI can pass such an order or not is a question for SEBI to consider. In any event, since the Appellant by the said letter dated December 17, 2014 apart from seeking withdrawal of de-recognition granted to the Delhi Stock Exchange, has sought several other reliefs, SEBI may consider the said letter dated December 17, 2014 and pass appropriate order thereon as expeditiously as possible and preferably within a period of two months from today."

7. After due consideration of the issues raised in the complaint filed by the Complainant, SEBI vide letter dated May 25, 2016 communicated to the Complainant “pursuant to the order of the Hon’ble SAT, SEBI examined afresh your letter dated December 17, 2014. All relevant issues raised in the above referred letter have already been dealt with by SEBI in its order dated November 19, 2014. There are no new issues warranting any fresh considering or passing of any further or modified order.”

8. Thereafter, SEBI received another letter dated June 20, 2016 from the Complainant requesting SEBI to initiate action against the Directors of DSE. The Complainant submitted that de-recognition of DSE cannot be the punishment awarded to the Directors of DSE for their siphoning off/misappropriation of funds of DSE and also for various other serious offences as pointed out by his earlier letter dated December 17, 2014. The Complainant has requested that fines/penalties be awarded to the Directors of DSE and matter be referred to CBI/Police (EOW) for their action under the Indian Penal Code.

9. Considering the various representations made by the complainant, an opportunity of personal hearing was granted to the Complainant on November 29, 2016. The Complainant appeared in person before me and made submissions. Considering the submissions of the Complainant that he had complained to various authorities regarding the irregularities in the functioning of DSE, the Complainant was advised to file additional written submissions if any, along with the following documents:- i. Copy of the F.I.R. registered by the Economic Offences Wing of the Delhi Police, against DSE and others for the various offences, illegalities committed by them. ii. Copies of communications, if any sent by the Complainant to SEBI prior to lodging of the complaint of August 24, 2011. iii. Issues which in the opinion of the Complainant were raised by him but were not addressed in the SEBI’s order dated November 19, 2014.

10. The Complainant vide letter dated December 15, 2016 (received on December 22, 2016) submitted the following: 10.1 Copy of the F.I.R. registered by the Economic Offences Wing of the Delhi Police, against Delhi Stock Exchange and others for commission of various offences i.e. Cheating, Fraud, Siphoning off / Misappropriation of funds and Breach of Trust.

10.2 The complainant furnished the copies of the following communications between Complainant and SEBI:  letter dated June 19, 2007 addressed to SEBI  SEBI’s letter No MRD/DSA/DSE/100721/2007 dated August, 2007 in reply to the said letter,  letter dated October 28, 2010 and  letter No DSECOM/20103 dated January 7, 2011. 10.3 As regards issues not addressed in the SEBI order dated November 19, 2014, the Complainant submitted as under:  “despite the various findings about DSE / its directors having committed the various illegalities / offences i.e [a]. Money Laundering. [b] Issuing false certificate to SEBI, claiming completion of demutualization. [c] Issue of Right shares to Non shareholders during the Right issue & repeatedly issuing of bogus shares to Non shareholders, for almost 15 months after the closure of the Right issue [d] Shady underhand dealings by the directors for introduction of benami/farzi applications for purchase of shares, during the demutualization process of DSE. [e] Offences of cheating, fraud, misappropriation / Siphoning off of funds of more than Rs 12 crores of DSE.

[f] Insider trading / planting false & misleading news which may induce sale or purchase of securities, no action has been taken against them / no punishment has been awarded to them.  All the above violations / offences clearly fall within the definition of Fraud, as defined under the SEBI [Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market] Regulations, 2003 and are also specifically prohibited under the said Act.  M/s Mefcom had Misappropriated the funds of DSE, by making bogus claims of commission amounting to Rs 58.79 lacs, in respect of applicants who had made direct application to DSE and where even though Mefcom had played no role in the said investors /applicants acquiring the shares of DSE [as stated in the SEBI order of November 19, 2014], but because the Chairman of Mefcom, Mr Vijay Mehta, was also a Director of DSE as well as also a member of the DSE’s demutualization committee, it enabled him to have the ‘inside confidential information’ in respect of the applicants who had directly approached DSE for purchase of shares, during its demutualization process and misusing his official position as well as misusing the confidential inside information available with him, raised bogus claims of commission, through his Co, Mefcom, and in conspiracy with other directors of DSE, misappropriated the funds of DSE.  Mr B.B.Sahny, the chairman of DSE as well as of its demutualization committee, in complete contravention of the “SEBI [Prohibition of Fraudulent and unfair trade practices relating to the securities market] Regulations, 2013, implanted/gave out false and misleading statement to the press/ media, by wrongly claiming the networth of DSE to be Rs 600 crores, even though as per the valuation report, already available with the directors, the actual networth was infact much lower.

The said false/ misleading statement of Mr B. B. Sahny was timed to appear in the Newspapers intentionally, alongwith on the same day when the DSE’s advertisement inviting “Expression of Interest” from the prospective strategic investors inviting them to participate in the DSE’s demutualization program had appeared, with the malafide intention of inducing prospective investors into wrongly believing that the investment in DSE’s shares was many times more attractive than its actual value.  SEBI’s investigations into the affairs of DSE, not only unearthed the commission of various violations / illegalities, but in certain cases even identified the above mentioned persons / entities who had committed the same and whose names have been clearly spelt out in the SEBI’s order of November 19, 2014 in the matter of DSE, yet no action has been taken against Mefcom, B.B. Sahny and other directors/DSE officials.” 10.4 The Complainant further quoted paragraph 9 of the SEBI’s Order dated November 19, 2014 which reads “The above directions are without prejudice to the right of SEBI to take any other appropriate action for the violations found in this case or to initiate any action in case of failure to comply with the above directions by Delhi Stock Exchange Limited” 10.5 In view of the above, the Complainant has requested the following:  “Direct The Delhi Stock Exchange to create, issue and allot 14,82,000 shares equity shares of Rs 1/- each, at par against payment, in compliance / fulfillment of the special resolution passed u/s 81(1A) of the Co’s Act 1956, to certain shareholders, including myself (the complainant), was not implemented by the directors of DSE by adoption of fraudulent means.  Take action against all the concerned directors of DSE, specifically Mr Vijay Mehta and Mr B.B.

Sahny, who have been identified and named in the SEBI’s order and others, for various acts of Fraud as well Insider trading, in contravention of the SEBI [Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market] Regulations, 2003, as well as in contravention of the SEBI’s guidelines on Insider trading, under various sections where punishment for having committed the said fraudulent acts have been specified and specifically under sections stated below: a. Section 15HA: Penalty for Fraudulent and Unfair Trade Practices. b. Section 15G(ii): Penalty for Insider Trading.

 Declare all the then Directors of DSE as, “Not Fit and Proper Persons”, because of the fraudulent acts committed by them, so as to disallow them from participating or conducting any activity in the money markets.  Take action, by Cancelling licenses / recognition of all the Merchant Bankers, involved in the conspiracy for introducing benami / farzi applicants /applications for the share purchases and various other wrong doings, at DSE, during and after its demutualization process and specifically against Mefcom for Misappropriating sum of money amounting to Rs 58.79 lacs or maybe even more, from DSE, by making bogus claims of commission, when non were due to them, but were able to misappropriate the same only due to its chairman Mr Vijay Mehta, also being a director of DSE.  Cancel the membership of all erstwhile Directors and Merchant Bankers, if any held by them, of any of the Stock / commodity exchanges, under your purview.  Direct the Present management to initiate immediate steps / necessary legal proceedings, for recovery of all amounts Siphoned off / Misappropriated from DSE, by the erstwhile Directors in conspiracy with others, amounting to Rs 11.37 crores + 58.79 lakhs = Rs 11.96 crores with penal interest @ 24% p.a.  Till such time that the funds so swindled from DSE are not recovered back by DSE, all the shares /beneficial interest of such offenders in DSE and or their other assets / beneficial interests in any other stock exchanges and or any other interests anywhere should be ordered to be confiscated and deposited with SEBI, against amounts due and recoverable from such persons / entities.” 11. I have considered the material available on record such as complaints filed by the Complainant along with the documents contained therein, the Complainant’s correspondence with SEBI and other authorities, submissions made by the Complainant during the personal hearing before me and the written submissions made subsequent to the personal hearing, etc. On an examination, I find the following: 11.1 As regards the allegations of the Complainant against DSE regarding irregularities in the allotment of Rights issue prior to demutualization of DSE, I note that the same has been dealt in detail in paragraph 6(a) of the SEBI’s Order dated November 19, 2014. The relevant paras are reproduced as under: “…I observe that one Mr. C.B.

Jaggi, a member of DSE had resigned from the membership of exchange in the year 1969 and thereafter sold two of his membership rights (i.e. ticket no. 160 and 190) on DSE, which were ultimately transferred by DSE to the companies namely Relan

Industrial Finance Limited and Jai Ambey Share Broking Limited. Accordingly, DSE registered the names of Relan Industrial Finance Limited and Jai Ambey Share Broking Limited as members of DSE. Thereafter, DSE came up with the rights issue in May 2007 and C.B Jaggi, Relan Industrial Finance Limited and Jai Ambey Share Broking Limited had applied for rights shares and deposited Rs.1,56,000 (for two tickets), Rs.78,000 and Rs.78,000 respectively. DSE upon consideration that the appeal filed by it was sub-judice before the Hon’ble High Court of Delhi, in the meeting of its Board dated May 31, 2007, decided to keep the matter of allotment of shares to C.B. Jaggi, Relan Industrial Finance Limited and Jai Ambey Share Broking Limited in abeyance. Meanwhile, C.B. Jaggi approached DSE for the settlement of disputes and offered for surrendering one of his ticket inclusive of the trading right. As per his terms for settlement, DSE in return had to withdraw the appeal pending before the Hon’ble High Court of Delhi and allot 78,000 rights shares to C.B. Jaggi which were kept in abeyance. As per the SCN, on the claims of Relan Industrial Finance Limited and Jai Ambey Share Broking Limited of having bonafide title of membership, the matter was subsequently placed before the ‘default committee’ (of DSE) in its meeting held on June 02, 2008, which recommended for restoration of their membership and allotment of 2,000 shares (as part of its demutualization process) along with 78,000 right shares to each of them.

The recommendations were then discussed by the Board of DSE in its meeting held on June 05, 2008 and it was decided to allot 2,000 fresh equity shares and right shares (i.e. 78,000 shares) to each of the entities namely Relan Industrial Finance Limited and Jai Ambey Share Broking Limited. However, the offer of Mr. C.B. Jaggi dated May 31, 2008, for settlement of dispute was considered by the ‘default committee’ (of DSE) in its meeting held only on July 16, 2008. On consideration, it recommended that he should surrender one ticket inclusive of trading right and shares, DSE should withdraw the appeal pending before the Hon’ble High Court of Delhi and allot him 78,000 rights shares. The Board of DSE in its meeting held on September 01, 2008, approved the allotment of 78,000 shares to C.B. Jaggi. Thereby, DSE for one surrendered ticket of C.B. Jaggi, created two tickets of Relan Industrial Finance Limited and Jai Ambey Share Broking Limited without following the due process of law. DSE in its reply has submitted that Relan Industries Finance Limited and Jai Ambey Share Broking Limited were registered as members from August 05, 1969 till December 18, 2002. They ceased to be the members of the exchange on the date when the Local Commissioner appointed by the Court substituted the name of C.B.

Jaggi as a member in place of Relan

Industries Finance Limited and Jai Ambey Share Broking Limited and no new membership was created. It has also been said that as no membership of Mr. C.B. Jaggi was transferred to either of these two companies, they were neither entitled to 2,000 shares nor to 78,000 shares in rights issue. DSE itself in its written submissions dated July 17, 2013, has submitted that "such action of issuing shares to them was not validly taken". Therefore, there is a clear admission by DSE that it had created membership rights without following the due process of law. I note that the name of C.B. Jaggi has been entered in the register of members of DSE, pursuant to the order of Court. Later, C.B. Jaggi has surrendered one membership right. In view of the above, it is observed that DSE at best could have transferred the membership rights to one of the said companies. In view of the discussion above, the new membership rights created by DSE are invalid and void ab-initio. I note that as per Section 81(1A) of the Companies Act, 1956, further issue of shares to any person is permissible only after passing of a special resolution in general meeting. In the instant case, it is noted that no such special resolution has been passed for allotting shares either to Relan Industrial Finance Limited or to Jai Ambey Share Broking Limited.”

11.2 As regards allegations of the Complainant against DSEL regarding Issuing of false certificate regarding the completion of demutualization process by the ‘Appointed Date’, I note that the same has been dealt in detail in paragraph 6(b) of the SEBI’s Order dated November 19, 2014. The relevant paras are reproduced as under:  “…The holding of trading member shareholders on the 'appointed date' was more than the prescribed limit. Further, the beneficial ownership of such shares was not available with public shareholders as on the 'appointed date'.  As on the 'appointed date' i.e. August 28, 2007, DSE had not received the full consideration from the applicants in the 'cash escrow account' of DSE. As certain applications were without any application amount and a few of the applicants paid only 10% of the application money.  As the shareholding of LFP DSE Limited was not approved by SEBI during the period of October 18, 2007 to April 01, 2008, the DSE was not compliant with the requirement of continuous holding of 51% of share capital of DSE with public shareholders.  Having considered the above and the admission of DSE in its reply dated July 17, 2013 that a false certificate has been issued by DSE to show that demutualization exercise has been completed, it can safely be concluded that DSE had not completed the demutualization process as on the 'appointed date' i.e. on August 28, 2007, in terms of the SEBI order dated August 29, 2005 in violation of the provisions of Section 4A, 4B(8) of SCRA and Regulation 4(b) and 11(1)(b) of the MIMPS Regulation. I note that the facts such as rejecting the allotments, non payment of consideration on the appointed date and transfer of shares were not brought to the notice of SEBI by either the earlier Governing Board of DSE or the existing Governing Board of DSE. It is noted that the present Governing Board of DSE has not initiated any action against the erstwhile directors of the Governing Board of the stock exchange who according to it had submitted the false certificate of completion of demutualization process.”

11.3 As regards allegations of the Complainant against DSEL regarding discrepancies in appointment of certain Merchant Bankers and commission paid to them, I note that the same has been dealt in detail in paragraph 6(c) of the SEBI’s Order dated November 19, 2014. The relevant paras are reproduced as under:  “…I note that the entity namely LFP DSE Limited had itself applied to DSE for the allotment of shares and had not approached through any Merchant Banker. In such circumstances, no commission was required to be paid to any Merchant Banker and further Mefcom Capital Market Limited was not at all entitled for the commission of Rs.58,79,235 and the payment of such amount is irregular.  At this stage, I also refer to the discussion in sub paragraph 'b' above, that the applicants namely Ms. Vibha Gupta, Mr. Vinod Gupta, Amardeep Financial Corporation Limited, Nikki Global Finance Limited and Dev Features Private Limited were arranged by Mr. Vijay Mehta for the purpose of meeting with the shortfall in divestment of shareholding to public for the purpose of completing the demutualization process before August 28, 2007. The sequence of events, as discussed above suggests that the said five persons/ entities, Mefcom Capital Market Limited and Mr. Vijay Mehta were acting in concert for meeting with the shortfall in divestment of the shareholding to public.”

11.4 As regards allegations of the Complainant against DSEL regarding siphoning of funds as well as and misappropriation of funds by way of advertisement contracts awarded to three Media companies during the period of August, 2007, I note that the same has been dealt in detail in paragraph 6(d) of the SEBI’s Order dated November 19, 2014. The relevant paras are reproduced as under:  “…Having considered the above, I find that the application monies received from the media companies for allotment of the shares of DSE have been returned to them under the garb of making payments for advertising contracts. Thus, in the light of the admission of the Governing Board of DSE, I conclude that the media companies were allotted the shares either free of cost or at substantially lower prices. Therefore, the shareholding of such media companies cannot be considered as public shareholding as the shares were made available to them for almost free as a part of the device created to give an impression that demutualization process was completed. Such acts of the then Governing Board of DSE are in violation of the clause 408 (a), (c) and (d) of the code of ethics for the directors and functionaries of the exchange.  From the available facts, it is noted that had the said three media companies not applied for the shares, DSE would have fallen short of mandatory divestment of 51% of share capital for completing the demutualization process. DSE entered into an arrangement with such media companies for three years and in turn, returned them the approximate amount (out of the exchange fund). The discussed facts suggests that DSE had siphoned off the fund of the exchange under the guise of achieving the divestment target.  I note that DSE in its reply has not denied this allegation, rather said that the media contracts to these companies were awarded in an unfair manner, in order to obtain personal benefits through the process of demutualization. I observe that DSE, even on becoming fully aware of all the said facts, has not taken any action against the erstwhile directors/ governing board.”

11.5 As regards allegations of the Complainant against DSEL regarding violation of norms for Insider Trading such as passing of sensitive confidential information by the then Directors of DSEL Shri B.B.Sahny to the Media, I note that the same has been dealt in detail in paragraph 6(b) of the SEBI’s Order dated November 19, 2014. The relevant paras reproduced as under:  “…I note that Mr. B.B. Sahny was the Chairman of the 'demutualization committee' and the 'Trading Member Director' of the then board of DSE. Due to his position, it is clear that he was involved right from the stage of decision to value DSE, appointment of valuer, receipt of valuation report, etc. The 'demutualization committee' of DSE, in its meeting held on June 19, 2007 took note of the valuation report of DSE submitted by valuer and decided that the valuation of the exchange should be taken as Rs.500 crores. Subsequently, the Board of DSEL had deliberated the valuation report as submitted by 'demutualization committee' by which the 'price sensitive information' came in the possession of all the Board members of DSE. Such information was not officially published by DSE through any press release or otherwise. From the same, it can be said that Mr. B.B. Sahny was always in possession of the 'price sensitive information' regarding the valuation of DSE before the publication of the said article in the newspaper.  I note that Mr. B.B. Sahny, was not authorized by the Board of DSE to share any information, however, he being aware of the 'price sensitive information' has shared the details with the media which would have influenced the decision of the prospective applicants applying in the shares of DSE. Such acts of his are against the provisions of the code of conduct as mentioned in the bye-laws of exchange which states that no 'price sensitive information' should be divulged to any person unless and otherwise authorized by the Board. Therefore, by divulging the 'price sensitive information' to media Mr. B.B. Sahny has violated clause 418 (iii) and (iv) of the Code of Ethics for Directors and Functionaries of Exchange.”

11.6 I also note that the issues raised by the complainant pertain to irregularities that took place at the time of demutualization of DSE which happened under the previous management of DSE. As seen from the above discussions, SEBI has dealt with the issues raised by the Complainant in his various communications. It is only on the basis of the findings by SEBI, that SEBI decided to withdraw the recognition granted to DSE. Further SEBI also held that the present management of DSE had failed to take any action against the erstwhile governing Board of DSE for various violations. It is in this context that SEBI passed the Order dated November 19, 2014. The order passed by SEBI was challenged by DSE before the Hon’ble SAT. In this regard, the Hon’ble SAT in the matter of DSE v. SEBI Appeal No. 85 of 2015 held that ““…. SEBI is not justified in holding that the present management of the appellant has failed to take action against the erstwhile directors of the appellant. In this view of the matter, we expunge the remarks made in the impugned order to the extent it is held that the appellant has failed to take action against the erstwhile directors of the appellant.” It is clear from the aforesaid order of the Hon’ble SAT that the present management of DSE cannot be held liable for the acts or omissions of the past management of DSE.

11.7 I also note that the Hon’ble SAT vide Order dated June 24, 2016 in the matter of DSE v. SEBI Appeal No. 85 of 2015 directed SEBI “to complete the voluntary de-recognition process within a period of five months from today by determining the quantum amount payable and the time within which the said payment is to be made.” Further, as per the order, if DSE fails to pay the consequential payments then SEBI would be entitled to complete de-recognition under the order dated November 19, 2014. It is evident from the said order that the Hon’ble SAT has not interfered with the de-recognition order and has only directed SEBI to complete the process of voluntary exit of DSE within the specified time.

11.8 I also note that the Complainant has already lodged FIR with Economic Offences Wing, Delhi against DSE and others for various offences, committed by them. In the facts and circumstances of the case and since SEBI has passed the order dated November 19, 2014 in the matter, the complainant is at liberty to pursue his claims before appropriate authorities.

12. Considering the facts that (i) no new facts have been brought on record by the Complainant and (ii) the issues raised by the Complainant have already been addressed by SEBI in its Order dated November 19, 2014, no further interference by SEBI in the issues raised by the Complainant is required at this juncture.

13. The complaint filed by Mr. Verinder Mehta is accordingly disposed of.

JANUARY 20, 2017 S.RAMAN MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA