Order in respect of Coverage and Consultants Limited in the matter of Accurate Exports Limited

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) issued a notice dated April 20, 2005 to Coverage and Consultants Limited (hereinafter referred to as the entity) advising it to show cause as to why action under Sections 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act) should not be initiated against it for its alleged violation of Regulation 6(a) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the PFUTP Regulations). Brief facts as mentioned in the show cause notice (hereinafter referred to as the notice) are as follows. The investigation conducted by SEBI in respect of the buying, selling and dealing in the shares of the Company observed that during the period from January 1, 2001 to March 31, 2002, the price of the scrip ranged between `2 to `0.10 at a time when substantial quantity of shares of the Company was offloaded through select stock brokers. It was further observed that the Company had issued 2 different notices dated April 3, 2001 signed by the Managing Director, Mr. Dinesh Sharma, calling for an Extra-Ordinary General

Meeting (EGM) on April 30, 2001. The following proposals were made in the first notice: i. An increase in authorised capital from `25 crores to `156 crores, divided into 15.60 crore equity shares of `10 each ii. To issue 15.60 crore preferential shares on a swap basis in proportion to 10 shares of the Company for every one share held by the shareholders of Sanidhya Holiday Resorts and Estate Developers Limited and Tissue and Floritac India Limited. iii. Resolution to invest in the equity shares of Sanidhya Holiday Resorts and Estate Developers Limited and Tissue and Floritac India Limited on swap basis to acquire total shareholding in the said companies and iv. Shifting of registered office of the Company from Ahmedabad to Vadodara.

The proposals of the second notice are:

i. Increase in authorised capital from `25.00 crores to `81.00 crores, divided into 8.10 crore equity shares of `10 each ii. To issue 6 crore preferential shares on a swap basis in proportion to 10 shares of the Company for every one share held by the shareholders of Sanidhya Holiday Resorts and Estate Developers Limited iii. Resolution to invest in the equity shares of Sanidhya Holiday Resorts and Estate Developers Limited on swap basis to acquire total shareholding in the said Company

2. However, it was observed from the certified true copy of the resolution passed in EGM held on April 30, 2001, as submitted by the Company to the Ahmedabad Stock Exchange Limited (ASE), the only resolution passed was regarding the shifting of office to Vadodara. Inspite of the resolution not being approved, on May 11, 2001 and September 11, 2001, the Company had made a listing application to ASE for listing of 6,00,00,000 equity shares and 7,50,00,000 equity shares of `10 each respectively. Subsequently, vide letters dated September 19, 2001 and September 24, 2001, the Company had written to ASE informing that the said allotments were null and void as various regulatory compliances under the SEBI Act and the Companies Act 1956 had not been met. However, substantial quantity of shares had been dematerialised and transferred to various entities during the period between the preferential allotment and the application for listing. The shares issued by the Company were dematerialized by the allottees and had transferred those shares to certain other entities and they in turn, transferred the shares to other set of entities who offloaded the same in the market, without being listed on the stock exchange. It was alleged that the entity had traded through the stock broker, Equisearch Broking Private Limited and Active Finstock Private Limited (through its sub-broker Pinnacle Finstock). It was stated in the notice that the entity had purchased 88,81,050 shares and sold 93,72,965 shares through the stock brokers and that the shares purchased by almost all the clients during the period through the stock broker, Equisearch Broking Private Limited were found to have been transferred to the account of the entity from the personal account of the said stock broker. The notice mentioned the details of the trades of the entity done through Equisearch Broking Private Limited. The notice also mentioned that since the shares could not be sold, they were transferred to various entities including Mr. Rajesh C Talsania, Shri Parshwa Finance and Gautam Jhaveri. The notice alleged that the entity had colluded with various persons to offload shares that were fraudulently issued and dematerialized by the Company in excess of its authorized capital, in violation of Regulation 6(a) of the PFUTP Regulations.

3. The entity, vide letter dated September 9, 2005 made its submissions to the notice issued to it. The entity was thereafter afforded opportunities of hearing and it finally appeared on May 11, 2011 through its Advocate, Mr. Rajesh Kandelwal, who made submissions.

4. I have considered the show cause notice issued to the entity, its written as well as oral submissions and other material on record. The charge against the entity is that it had colluded with various persons to offload the fraudulently allotted shares of the Company in violation of Regulation 6(a) of the PFUTP Regulations. From the notice, I find that nowhere it has been alleged that the entity was an allotee or had received shares directly from an allottee. The notice had only stated that it had traded in the shares of the Company-buying 88,81,050 shares and selling 93,72,965 shares. Clearly the said transactions were on the stock exchange. The notice had also stated that the entity had transferred

4,82,72,751 shares to Nokia Finance International Private Limited (Nokia Finance), which was transferred to various other entities. In this regard, the entity has submitted that it received the shares of the Company in demat mode from Nokia Finance and that since the shares were in demat mode, it had considered them to be safe to deal. It had sold shares in demat mode and returned the balance shares back to Nokia Finance. It is the entity’s submission that it did transactions in the shares of the Company in good faith and in a bonafide manner as was permissible. The entity contended that its dealing was in the normal course and its trading did not have any co-relation with the issue of capital by the Company. According to it, its transactions were through registered stock brokers in compliance with the bye-laws of the stock exchange and there was no complaint. The entity submitted that it did not collude with any party to offload shares that were allegedly fraudulently issued and dematerialized by the Company in excess of its authorized capital and that it was not aware about any such alleged wrongdoing by the Company.

It was the submission that to the best of its knowledge no stock exchange declared any alleged shares of the Company that was allegedly fraudulently issued and dematerialized as bad delivery or taken any penal action against any stock broker who delivered such alleged shares in demat form. The entity further stated that there were no specific allegations of any wrongdoing on its part and that the finding of collusion in the offloading of the unlisted shares of the Company was bereft of details and evidences as far as it was concerned. Having considered the aforesaid submissions, I find the same to have some merit. As per the notice, certain entities had dematerialized more than 10,00,000 shares of the Company and that they had transferred the shares to various other entities. The entity was not figuring in both the lists. However, it was mentioned that the second list of entities had transferred the shares to various entities and that the main recipients had in turn offloaded the same in the market. The name of the entity is not found in the said layer also. However, the notice had given the quantity of shares purchased and sold by the entity in the market.

When the said entity has been alleged to have offloaded, what was the reason for it to purchase shares from the market.

The said question perplexes me. There is no allegation that the counter parties to such trades were connected to the entity. The notice has mentioned that the entity had transferred shares to Nokia Finance and the same was a return of balance shares. Further, the notice is silent about the source of the shares and the number of shares received by the entity. It is the allegation in the notice that shares purchased by almost all the clients during the period through the stock broker, Equisearch Broking were found to have been transferred to the account of the entity from the personal account of the said stock broker. The notice is silent about the identity of such clients. The notice at one place alleged that the entity was one among the various entities which had received shares and on the other hand, it is mentioned that shares purchased by almost all the clients during the period through the stock broker were found to have been transferred to the account of the entity from the personal account of the said stock broker. Therefore, on the basis of the averments and the material present in the notice, I am, on the basis of the show cause notice, unable to come to a conclusion on the participation of the entity in the whole scheme. Therefore, it would only be reasonable to afford the entity a benefit of doubt and accordingly, I dispose of the present proceeding, as ordered herein under.

5. In view of the foregoing, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11 and 11B thereof and Regulation 11 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, hereby dispose of the show cause notice dated April 25, 2005 issued to Coverage and Consultants Limited in the matter of Accurate Exports Limited, without any directions.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: JULY 19, 2011