Order in respect of Karvy Stock Broking Limited

WTM/PS/89/ISD/MAR/2014

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER ORDER Under regulation 28(2) read with regulation 35 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 In the matter of irregularities in the Initial Public Offerings In respect of Karvy Stock Broking Limited, a stock broker with SEBI Registration Nos. INB 230770138 and INB 010770130

1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") had conducted an investigation into the alleged irregularities in the transactions in the shares that were issued in the Initial Public Offerings ("IPOs") by 21 companies during the period 2003 - 2005. During the investigation, it was observed that many individuals/entities (hereinafter referred to as "the key operators") had opened various demat accounts (hereinafter referred to as "afferent accounts") in fictitious/benami names and made large number of applications in the IPOs in the category of retail investors (each of the applications being of small value as to make it eligible for allotment under the retail category). These key operators were found to have cornered/acquired the shares issued in the IPOs by using these fictitious accounts. On allotment of shares under the retail category, the same were transferred to the demat accounts of the key operators who subsequently transferred the shares in off-market to ultimate beneficiaries who were the financiers in the IPOs. The investigations prima facie observed that the "Karvy Group" comprising of - Karvy Stock Broking Limited ("KSBL"), Karvy Consultants Limited ("KCL"), Karvy Computershare Private Limited ("KCPL"), Karvy Securities Limited ("KSL") and Karvy Investor Services Limited ("KISL"), had allegedly assisted, aided and abetted the key operators in cornering the shares issued in the IPOs.

2. Pending investigation, SEBI had passed ex-parte interim orders dated December 15, 2005, January 12, 2006 and April 27, 2006, wherein directions were issued against various persons, entities and intermediaries including entities of the Karvy Group. The said Orders also served as show cause notices to those entities. Pursuant to the passing of the Order dated April 27, 2006, SEBI had afforded an opportunity of personal hearing inter alia to KSBL (in its capacity as a stock broker) [hereinafter this entity shall also be referred to as "the noticee"] and thereafter passed the Order dated May 26, 2006, directing KSBL (in its capacity as a stock broker) not to undertake any proprietary trades in securities, either off-market or on market, pending enquiry and passing of final orders.

3. SEBI initiated enquiry proceedings under the SEBI (Procedure for Holding Enquiry and Imposing Penalty) Regulations, 2002 (“the Enquiry Regulations”) against the noticee. A show cause notice dated September 22, 2006 (“the pre-enquiry SCN”) was issued by the Enquiry Officer. Thereafter, on completion of the enquiry, the Enquiry Officer found that the noticee had contravened the provisions of regulations 3 and 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as "the PFUTP Regulations"), Clause A (1), (3) and (4) of the Code of Conduct prescribed for stock brokers under schedule II of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as “the Stock Broker Regulations”) read with regulation 7 thereof and the provisions of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (hereinafter referred to as "the DIP Guidelines"). In view of his findings, vide Report dated March 15, 2007, the Enquiry Officer recommended that the certificate of registration granted to KSBL (in its capacity as a stock broker) be suspended for a period of three months.

4. Thereafter, SEBI issued a show cause notice dated May 04, 2007 (“the SCN”), which enclosed a copy of the Enquiry Report, advising the noticee to show cause as to why appropriate penalty including the penalty as recommended by the Enquiry Officer should not be imposed on it. The noticee submitted its reply dated May 19, 2007 and written submissions dated June 06, 2007. Meanwhile, Enquiry Reports were also submitted in the proceedings initiated against KSBL (in its capacity as a depository participant) and KCPL (Registrar to an Issue). After considering all the three Enquiry Reports, SEBI disposed off such proceedings vide a common Final Order dated June 22, 2007, wherein the following directions were issued : (i) The certificate of registration of KSBL (in its capacity as a stock broker) was suspended for a period of three months. The said direction was to come into force immediately on expiry of 21 days from the date of the Order. (ii) KSBL (in its capacity as a depository participant) was prohibited from opening fresh demat accounts till December 31, 2007, with immediate effect.

(iii) KCPL was prohibited from acting as a registrar to an issue for a period of nine months. As KCPL had already undergone the prohibition vide directions issued vide the SEBI Order dated April 27, 2006, there were no further directions against KCPL.

5. KSBL filed two appeals (one in its capacity as a depository participant and other as a stock broker) -nos. 75 and 111 of 2007 and KCPL filed an appeal (no. 153 of 2007) against the aforesaid common Order dated June 22, 2007 before the Hon'ble Securities Appellate Tribunal ("Hon'ble SAT"). The appeals were disposed off by the Hon'ble SAT vide Order dated June 30, 2008, whereby the matters were remanded to SEBI with a direction to pass three separate orders on the three show cause notices issued. The following were also observed/directed by the Hon'ble SAT:

"..... It is, however, made clear that while passing the fresh orders the wholetime member shall take into account only the material that is already on the record and will not permit either party to produce any fresh material or file fresh replies or written submissions. He will, however, grant a fresh oral hearing to the parties and take into consideration the replies and written submissions already filed. The parties will however be at liberty to cite case law in support of their respective submissions. The wholetime member while passing the fresh orders shall not be influenced by any observation or finding recorded in the impugned order. We also make it clear that we have not decided any issue on merits and, therefore, all the issues raised by the parties remain open to be decided afresh by the learned wholetime member in accordance with law. In case the final order(s) were to go against the appellant(s), the same shall not be given effect to for a period of four weeks from the date of receipt thereof by the appellant(s)." [Emphasis supplied]

6. As directed by the Hon'ble SAT, three separate orders had to be issued in the proceedings initiated against KSBL (in its capacity as a stock broker), KSBL (in its capacity as a depository participant) and KCPL in the matter. This order would dispose off the enquiry proceedings initiated against KSBL (in its capacity as a stock broker) in the matter.

7. Pursuant to the order of the Hon'ble SAT, the noticee filed an application to settle the instant enforcement proceeding by way of a consent order. However, the application was rejected and the same was accordingly informed to the noticee. Thereafter, the instant proceeding initiated against the noticee was resumed.

8. When this matter was placed before me, I had afforded opportunities of personal hearing to the noticee on December 07, 2012 and January 30, 2013, when Mr. Somasekhar Sundaresan, Advocate, appeared on its behalf and made submissions. Mr. C. Parthasarathy, Chairman and Managing Director, and Mr. Muthuswamy Iyer, Vice President-Compliance of the noticee were present amongst other representatives, during the personal hearings. The learned advocate inter alia submitted that - a) Any suspension of the noticee's stock broking activity would cause wanton damage which is not desirable. The noticee has a large market share and that its size and scale of operations are also enormous. b) There have been regulatory changes by SEBI with respect to the manner of opening of demat accounts and that the ISIN is now activated only on the trading day, and therefore a lot of what had happened in the matter cannot happen again. c) As far as financing by KCL was concerned, the same is not a subject matter of violation of the securities laws. The noticee had relied upon the persons who collected forms, the commission agents and that it was the key operators who took it ‘for a ride’. d) There was nothing for SEBI to have any regulatory concern as far as the stock broking role of the noticee was concerned. He further submitted that a bunch of persons cornered the shares and sold them through stock brokers including the noticee and that nothing remains in the matter to charge the noticee as a stock broker. 9. Before proceeding to consider the alleged violations, the submissions of the noticee are noted and summarised in a few paragraphs below :

10. The noticee inter alia made the following submissions (vide reply dated May 19, 2007) with respect to the allegation that it had introduced bank accounts of the key operators : (i) KSBL denied that the Karvy group assisted the key operators in opening the bank accounts with BhOB. (ii) It is factually incorrect to state that Mr. Pradeep Bhogle of KSBL, Mumbai was the introducer of several bank accounts with BhOB, Worli as the said person had introduced only a few accounts where requisite KYC documents including copy of PAN card were available. (iii) It is denied that Mr. Pradeep Bhogle introduced many accounts at BhOB, Goregaon. From the seven bank account opening forms (received along with pre-enquiry SCN dated September 22, 2006), six accounts were introduced by one D.K.Katakia, who was one of the key operators. (iv) As regards, the observation that Mr. Vyomesh Pandya was acting on behalf of KSL and KISL, it is submitted that only one sample bank account opening form pertaining to Hemal Hetal Parikh has been provided. On scrutiny of this form, it is observed that Mr. Vyomesh Pandya has signed as the introducer wherein the stamp of KSL has been affixed in the space provided for the address of the introducer.

The account was opened in June 2003, where all the relevant KYC documents were provided including the copy of the PAN card of the account holder. The PAN details of the applicant were found to be genuine on verification from the website of Income Tax Department. Hemal Hetal Parikh held a demat account with the noticee since 2003, wherein required documents were provided towards KYC. No shares from the said account had been transferred to any afferent account or to the accounts of the Key Operators. Mr. Devi Dutt (bank official), in his statement had stated that there are not more than 4-5 bank accounts at BhOB, Ahmedabad. Based on this statement, the question of introducing large number of accounts by Vyomesh Pandya, Ahemdabad does not arise. Therefore, the observation that Vyomesh Pandya had introduced many bank accounts with BhOB, Ahmedabad, is incorrect. (v) With respect to the observation made in regard to the BhOB letter dated March 7, 2006, it submitted that apart from the copy of one application form (which was in the name of Hemal Hetal Parekh) no copies of sample account opening forms have been provided.

The account opening form of Hemal Hetal Parikh is valid in all respects. Though, at this stage it cannot be proved as to when the application form was signed, there is sufficient proof on record that the person so introduced by Mr. Vyomesh Pandya was genuine. (vi) The observation that Ashish Chiplar, Amos Baid and V.H. Bhatt have introduced several accounts in BhOB, Goregaon branch is factually incorrect. (vii) As regards the observation that the bank account of Mr. Doshi Devang was introduced by Ashish Chiplar and bears the stamp of KSBL, it was submitted that the address column of the introducer bears the stamp of KCL and not the stamp of KSBL as observed. (viii) The letter dated March 4, 2007 from Indian Overseas Bank ("IOB") suffers from the following factual inconsistencies: a. While the letter stated that there were 37 saving accounts and all the said accounts contained 50 additional names, the bank had given copies of only 9 saving account opening forms. Further, out of the said 9 accounts, with respect to three saving accounts viz., A/c nos. 11954, 12001 and 12004 it has given the list of 50 additional names as the part of the account only.

Therefore, there is an apparent contradiction in the contents of the letter. b. The letter states that IOB had funded 3118 individual applicants and that KCL had certified that all 3118 individuals had demat accounts with it. Assuming that there were 37 saving accounts and each had 50 additional names, even then the total number of applications which could have been financed by IOB cannot exceed 1850. Therefore, it cannot be understood as to on what basis the bank stated that KCL had certified that all 3118 demat accounts were held with it. Further, there is no mention with regard to the documents pertaining to the savings accounts of the other 1268 (3118 - 1850) individuals to whom IOB have financed. c. It is also not understood as to how the Enquiry Officer had presented the details of 50 additional names in respect of 3 saving accounts viz., 12140, 12149 and 12150 when the same does not appear in respect of the said savings accounts as per the bank's letter. The same also raises doubts as to the veracity and authenticity of the data relied upon. d. Though it has been alleged that these accounts were introduced by KSBL, a close scrutiny of the documents clearly show that the KYC forms provided along with the account numbers 12140, 12149 and 12150 do not pertain to the said accounts but pertain to another account bearing no. 11983. KSBL cannot be held liable for the bank or the account holder using the KYC documents originally submitted for one account and subsequently used for opening other accounts. e. With respect to account no. 12004, the name has been subsequently changed to include the words "& 50 others" which was not the case in the first place. f. The forms cannot become the basis for drawing any conclusion for the following reason : • The list of 50 accounts seems to be separate document as there is no basis for connecting the savings account opening form with the list containing 50 additional names.

The main account opening form nowhere mentions that there is an annexure to it in the form of a list containing 50 additional names. • The unusual serial numbering on the list purported to be a part of main savings account opening form raises a question about its credibility. The starting serial numbers of the list are as follows: A/c no. 12150 – Sl. Nos. from 9101 to 9150; A/c no. 12149 – Sl Nos from 9051 to 9100; A/c no. 12140 – Sl. Nos. from 3251 to 3300, which is extremely abnormal.

• Only based on a rubber stamp of KSBL on a sheet of paper containing 50 names and signatures, it has been alleged that KSBL has introduced the said persons to the bank. The bank has failed to collect the required KYC documents pertaining to these individuals and failed to do physical verification to identify the genuineness of the applicants. • With respect to the purported stamp of KSBL along with signature, it is submitted that the signature in the list annexed do not tally with the signature of the person who introduced the main saving account holder. Nowhere it has been stated as to for what purpose the stamp has been fixed. • In the light of the findings in the Enquiry Report that even bank introduction letter have been found fabricated, there is also a possibility that the key operator might have himself prepared the document, affixed the stamp and given the same to the bank. g. The submissions of IOB cannot be taken on face value since its involvement with key operators in terms of opening bank accounts with additional 50 names without following the KYC requirements is quite evident and the bank has tried to shift the blame on KSBL. KSBL, additionally pointed out the following - • The bank included 50 additional names of individuals who were not apparently related. • The bank has not collected the KYC documents [(Photographs, Proof of Identity (POI) and Proof of Address (POA)] of 50 additional persons. • The person who introduced the main savings account holder and the person who purportedly signed in the list of 50 additional names is different. The signature of the introducer on the account opening form and in the purported list differs significantly. h. The Enquiry Officer has referred to SB A/c no. 11954 and made observations on the same. However, copies of the documents were not made available to it. Further, sweeping generalisations have been made that "instances cited above are only few of many such instances where employees of KSBL introduced the bank accounts in large numbers" without any basis and documentary proof, simply based on the letter of the Bank.

i. Simply because employees of KSBL had introduced the accounts and put the address or stamp of the company on forms, it cannot be concluded that the company was aware of the activities of the employees. Wherever accounts have been introduced by the employees, such accounts were supported by requisite KYC documents including copy of PAN card. Just because the employee of the company had introduced one saving account on the basis of KYC document and subsequent to the introduction, such person (whose account was introduced by its employee) has in connivance with the bank opened more accounts by adding names or by introducing others as brought out in the case of Dhaval Katakia (who had introduced several accounts after his account was opened with the bank) KSBL cannot be alleged to have facilitated the opening of large number of bank accounts, which facilitated the large number of demat accounts as alleged. j. KSBL denied that it had in any manner facilitated the key operators to open many accounts. At the relevant time KSBL was not aware that the demat accounts opened through IPO sub brokers were benami/fictitious accounts and were opened for the purpose of cornering shares in the IPO.

The alleged afferent accounts have been opened by IPO sub-brokers. k. There has been a substantial role of sub-brokers in opening demat accounts not only with KSBL (in its capacity as a depository participant) but also with various other DPs. The IPO sub-brokers used to market the public issues by procuring large number of applications and the same is a widely prevalent market practice. KSBL has over 18,000 IPO sub-brokers and some of them, apart from procuring applications, had also procured demat accounts for the clients. Therefore, no adverse conclusions can be drawn against KSBL, simply because of the procurement of applications by such sub-brokers. Some of the entities alleged as key operators were registered as sub-brokers with itself and were procuring both IPO applications as well as demat applications. l. In retrospect, KSBL realises that some of the IPO sub-brokers who were the alleged key operators, have exploited the loopholes in the system and have used KSBL (in its capacity as a depository participant) as one of the DPs amongst others for carrying out their manipulative designs.

The problem is a systemic one since the same is not peculiar to KSBL (in its capacity as a depository participant) alone but there were other DPs who have been exploited by the Key Operators.

m. The number of accounts opened by KSBL (in its capacity as a depository participant) has to be viewed against the backdrop of the company's scale of operations and infrastructure. The company has invested and built up huge infrastructure and has also employed enough man power to cope with huge volumes in this business. There are occasions when the company has activated large number of accounts on a single day and those accounts did not pertain only to the accounts procured by the IPO sub-brokers. The IPO sub-brokers procure applications from various applicants on a daily basis and submit the same in bulk at the office of the DP. During submission, most IPO sub-brokers also capture the data in the required format and submit the same along with the account opening application forms. The process of collecting the data in the form of soft copy is resorted to by most of the DPs as the same facilitates easy upload and saves time. This process is followed to ensure that the demat accounts are opened and activated in the shortest span of time. n. Based on the assumption that the date of activation is also the date of receipt of application, the Enquiry Officer has erroneously come to a finding that large number of demat accounts were opened by the noticee on a single day. All the accounts were opened after following the prescribed procedure and after obtaining the requisite KYC documents.

11. The following were inter alia the submissions of the noticee with respect to the observations of the Enquiry Officer with respect to the caption "Nexus with Key operators and their facilitation by various Karvy entities" :

a. KSBL was not aware of the basis on which KCL funded the alleged key operators. Simply because it had a limited relationship viz., IPO sub-broker and broker or of a DP and an account holder, and as the IPO sub-broker used to procure large number of applications, it cannot be concluded that it was aware of the financing arrangement between KCL and the key operators viz., Roopalben Panchal, Manoj Seksaria and Purshottam Bhudwani. b. The quantum of financing has no relation with the knowledge on the company's part as to whether KCL was financing the alleged key operators or not. Simply because the company had provided services including collection of pay orders of the applicants in the ordinary course as a syndicate member, the same cannot be made the basis for attributing knowledge to it about financing of KCL to the key operators. The loan amount given by KCL to Roopalben Panchal, Manoj Seksaria and Purshottam Bhudwani corresponding to the number of applications made by them is of no consequence. Based on the same, it cannot be concluded that the company had knowledge of KCL financing the key operators. c. Based on the premise that KCPL was aware that the finance was extended to Roopalben Panchal for making 5200 applications in fictitious/ benami names, it cannot be concluded that the noticee was aware of the activities of the key operators in cornering shares in various IPOs.

The Enquiry Officer has concluded that the company was aware of large number of fictitious applications made by Roopaben Panchal on the basis of the letter dated March 4, 2006 of IOB. KSBL has contended that based on the alleged certification of the bank accounts, it cannot be concluded that the company was aware about the finances provided by KCL to Roopalben Panchal or that she made large number of fictitious applications. d. With respect to the finance extended to Manoj Seksaria and Purshottam Bhudwani in the IPO of IDFC, it was submitted that such loans given by KCL, as an NBFC, was in the ordinary course of business and such loans were disbursed by KCL after completing the requisite loan documentation formalities. The key operators were the sub-brokers of KSBL and availed finance not only from KCL but also from other institutions such as banks and NBFCs. It is pointed out that funding, through KCL, to Manoj Seksaria was done in 4 IPOs and to Purshottam Bhudwani in 3 IPOs, whereas the said operators allegedly received finance and lodged similar applications in all 21 IPOs which were investigated by SEBI. e. With respect to the finance extended to Manoj Seksaria and Purshottam Bhudwani in the IPOs of Sasken Technologies and Suzlon Energy, it was submitted as follows : • With respect to the disbursement of loan by KCL to the alleged key operators after the closure of issue, it was submitted that loan applications were executed by Manoj Seksaria and Purshottam Bhudwani in their names or executed by their family members.

As loans would be released after receipt of margin money, the parties had requested that the payment be made directly to them. In respect of all applications made by these sub-brokers, individual cheques towards the application money against each application were made by them. These parties stated that they have made arrangements on temporary basis for clearance of cheques issued against these applications. The loans were basically given to the individuals concerned and not issued to be credited to the escrow of the IPO. KCL was informed that the loan taken by Purshottam Bhudwani and Manoj Seksaria (the sub-brokers) was for funding their clients. The disbursement of the loan amount directly to the sub-brokers concerned cannot be construed to imply that KSBL (in its capacity as a depository participant) was aware of the sinister motives for making large number of applications. • In all the book built issues, the bidding by the applicants is permissible till 24:00 hrs of the closing day of the issue. It is impractical to expect that applications that are received and bid on the last date are deposited with the bank on the same day itself by the syndicate/sub-syndicate member.

All applications which are bid on the last date of the issue will be required to be listed/scheduled and then submitted to the Bankers to the Issue only subsequent to the closure of the issue. Therefore, the assumption that all applications should be remitted to the bank prior to the closure to the issue or alternatively that no applications can be remitted to the banks post closure to the issue is not in sync with the extant regulatory mechanism and also ignores the ground realities prevalent in the system. It is not the banking of the applications but the bidding of the applications in the terminals of NSE/BSE that is important as only such applications shall be considered for allotment. • It is denied that the company being a syndicate member or KCPL being the Registrar to the Issue, facilitated the activities of the key operators as alleged. • The sale of shares by KSBL in the ordinary course of business pursuant to the instructions of Purshottam Bhudwani and Manoj Seksaria cannot lead to an inference that the company was aware that the said shares were cornered by the Key Operators.

Such awareness cannot also be attributed to the company just because the key operators sold shares of IDFC through it and made huge profits. • The amount received by Purshottam Bhudwani from the noticee with respect to the trading done by him through the noticee in the ordinary course, cannot lead to an inference that the noticee sold the shares knowing very well that the same were illegally cornered by Purshottam Bhudwani.

12. As regards the observations of the enquiry officer with respect to "activities of the Karvy group entities in the manipulation in the matter", the noticee inter alia made the following submissions :

a. With respect to the observations in paragraph 9.2.0 of the Enquiry Report, it was submitted that Karvy Group Companies maintain arm’s length distance between them. There is clear division of operation between itself and other Karvy entities. Its day to day activities are performed by personnel who function exclusively for it and none of them are common to any of the other Karvy entities. Its operations are located at addresses which are separate and distinct from the other Karvy entities. b. In so far as its relation with the key operators are concerned, it was limited to that between a broker and an IPO sub-broker or that of a DP and account holder. Simply because the alleged key operators were its IPO sub brokers, it cannot be penalised for actions committed by them without its knowledge. c. At the relevant time, when these key operators had opened demat accounts, it was not aware that the same were fictitious. d. With respect to the observations made in respect of the averments of its complaint, the Enquiry Officer has erroneously interpreted the terms of the complaint out of context in order to draw adverse inferences.

It submitted that a sub-broker is an associate of the broker in procurement of application form and hence terming them as business associate does not necessarily entail him to perform the activities of the franchisee. Further, the sub-brokers who have been termed as 'business associates', were required to collect application forms together with the requisite KYC documents and submit the same to it as a DP for further processing. The allegation, made by the noticee against the sub-brokers in its complaint is that they had not provided applications and related KYC documents which are genuine and required as per the prescribed norms. e. With respect to the observations in paragraph 9.2.1 of the Enquiry Report, it was submitted that KSBL (in its capacity as a depository participant) did not verify the individual applicants in person as there was no such requirements under the then existing rules and guidelines. The identification of the individuals was based on document verification. KSBL (in its capacity as a depository participant) had relied on the sub-brokers with respect to the applications procured by them.

KSBL (in its capacity as a depository participant) had verified all the documents with the originals wherever required before opening the demat accounts. f. With respect to the observations in paragraph 9.2.2. of the Enquiry Report, it denied that the company was aware of the finances extended by KCL to the key operators. g. On the basis of introduction of bank accounts, collection of pay orders, KCPL issuing common refund order, communication sent by its employee, sale of shares by it, the Enquiry Officer has concluded that it was aware of the illegal activity perpetrated by the key operators. The said conclusion is baseless and contrary to the facts. Because a few employees had allegedly introduced bank accounts, the noticee having collected pay orders from the bank, KCPL issued single consolidated refund orders as per the instructions issued by the financing institutions, it cannot be construed that it was aware of the illegal activities of the key operators who were its sub-brokers. h. As regards the observation that its employee Mr. Vincent, had communicated with BhOB, it was submitted that it had acted as part of the syndicate distributing the IPO.

As part of its syndication activities, it procures/solicits the IPO applications and bids the same on the NSE and BSE systems for further processing. In order to efficiently service the IPO applicants, specifically with respect to the service being offered to institutions for bidding of applications funded by them, it had appointed Mr. Vincent Paul as the central co-ordinating officer. Being the co-coordinating officer for such activities, it is natural that Mr. Vincent would communicate with institutions such as banks. Accordingly, in the course of refund process also, Mr. Vincent Paul, as a co-coordinator in the syndicate arrangement and not as an employee or agent of the RTI, had communicated with institutions in respect of the refund process. Thus, the communication sent by him was in the normal course of business. i. The sale of shares executed by it in the capacity as broker on behalf of the key operators, who were its clients, in the ordinary course of business, cannot also be a ground for attributing awareness about the illegal activities of the key operators. j. With respect to the signing of the inspection report of KCPL by V. Mahesh, it was submitted that the said person was the compliance officer for KSBL (in its capacity as a depository participant).

Mr. V.Mahesh was a co-ordinator for NSDL/CDSL operations. The inspection report in question was signed by him as an authorised signatory of KCPL. Merely because the said report was signed by Mr. V. Mahesh, it would not make him the compliance officer thereof. Further, the signing of the inspection report would not in any manner denote that the entities were complementing and supplementing each other’s activities as alleged.

13. With respect to the findings by the Enquiry Officer on the violations allegedly committed by the noticee in the matter, the noticee inter alia made the following submissions : a. As regards the observations in paragraph 10.1. of the Enquiry Report, the noticee denied that it had facilitated the key operators in their devious scheme of cornering the retail portion in the IPOs.

b. Regarding the observations in paragraph 10.2 of the Enquiry Report, it reiterated that the Karvy Group entities were not supplementing the noticee's actions as alleged. Business by Karvy Group Companies in the related area cannot be held against it and the other entities cannot be alleged to be supplementing its actions. Each entity of the group has performed its respective business activities and there is no conflict of interest across its business activities. It is pertinent to note that as per the existing rules and regulations, for an entity to qualify to become a Depository Participant, SEBI requires that such entity should be registered with SEBI as a broker or Registrar or should be registered with RBI as a Bank or an NBFC. c. The noticee denied that it actively facilitated, assisted or abetted the key operators in cornering the shares in manipulative, deceptive and fraudulent manner. While denying that it violated the provisions of section 12 A (a), (b) and (c) of the SEBI Act, it submitted that the said violation was levelled for playing an active role in facilitating the key operators in their alleged devious schemes of cornering the retail portion in the IPOs. d. With respect to the observations in paragraph 10.3 of the Enquiry Report, it denied violating the provisions of Regulations 3 and 4(1) and contended that it has not been specified as to which limb of the said regulations was violated.

It also denied violating the provisions of clauses A(1), (3) and (4) of the Code of Conduct for stock brokers. As regards, the alleged violation of the DIP Guidelines, KSBL while denying the violations contended that the charge was vague. e. With respect to the recommended penalty of suspension of the certificate of registration for a period of three months, KSBL submitted that the same is harsh and imposed without adequate justification. The recommended penalty is totally unwarranted in the instant case as it did not cause loss to investors and did nothing to hurt the integrity of the market. f. KSBL also submitted the following, which according to it were extenuating and mitigating factors : (i) The allegations covered by the notice under reference are also the subject matter of adjudication which is pending and therefore any penalty involving suspension of registration is unjustified. (ii) KSBL is a stock broker as well as a depository participant. The charges in the notice are flowing against it based on the premise that it had allegedly facilitated, assisted and abetted the key operators who have abused the IPO process.

Action has already been taken against it as it was restrained from opening fresh demat accounts since January 01, 2006. Further, as a stock broker, it was restrained from carrying out proprietary trades since April 27, 2006. The company has already suffered the said restraint for 17 months as a result it has lost substantially. (iii) Pursuant to the order dated January 12, 2006, KSBL as a DP, had closed all the alleged afferent accounts, severed the relationship with the alleged key operators and put its systems and procedures in place. Vide letter dated January 30, 2006, the company submitted a detailed report to SEBI. As on date (date of the reply), there are no afferent accounts with it, as pursuant to the directions of the Depositories, it had undertaken exhaustive verification exercise and had closed the demat accounts of those persons who were not in a position to present themselves. (iv) As a stock broker, KSBL carried out straight sale transactions in the shares of IDFC on behalf of Manoj Seksaria and Purshottam Budhwani in the ordinary course of business and pursuant to their instructions.

(v) It is not the case that KSBL had indulged in manipulation of a scrip or rigged the price or carried out trades in the stock market with a view to distort the market equilibrium. (vi) Its business focus is heavy retail and imposition of suspension will be highly detrimental not only to it but also to its 3.4 lakh clients. It executes over 1.6 lakh trades daily and on an average about 25,000 clients trade through it on the NSE and BSE. Its investors are spread across 300 cities and towns and in some, KSBL is the only service provider. Suspension of its broking operations would therefore result in tremendous inconvenience to these customers. (vii) KSBL has not derived any undue pecuniary benefit and there has been no unjust enrichment on its part through sale of shares on behalf of Manoj Seksaria and Puroshttam Budhwani. Except a legitimate brokerage, it has not earned anything. (viii) KSBL has filed criminal prosecution against four sub-brokers viz., Grace Consultancy, Arth Realty Pvt. Ltd., Purshottam Bhudwani and Manoj Seksaria in the Court of the III Additional Chief Metropolitan Magistrate at Hyderabad for Criminal Breach of Trust.

14. As regards the recommended penalty, the submissions of the noticee are summarised as follows: KSBL is registered as a stock broker and as a DP. The persons in charge of the operations of these two activities were completely different and independent of each other. Though the same entity performs two different functions, in practice there is complete segregation of functions and operations. All the findings in the enquiry report relate to the period prior to September 2005 i.e. during the period when KCL was acting as a DP. Therefore, in such circumstances the purported actions of KCL as a DP cannot be held against KSBL in its capacity as a stock broker. Save and except for a finding in paragraph 7.3.8 of the enquiry report, all the other findings do not pertain to the activities of KSBL as a stock broker. As regards, the finding against KSBL in paragraph 7.3.8, the same hinges on the assumption that KSBL was aware that the shares were cornered by Purshottam Bhudwani and Manoj Seksaria and no material has been placed on record to show that the operating team handling broking operations was aware of the same. KSBL as a stock broker has not committed any violation. The proposed penalty of suspension of the certificate of registration for a period of three months is extremely harsh disproportionate and not commensurate with gravity of the alleged violation. Moreover, once it is found that the purported actions of KCL cannot be treated as the actions of KSBL as a stock broker, all that remains is two transactions of sale of shares on the same day on behalf of two key operators. The same is not sufficient to warrant suspension of the certificate of registration for any period.

15. I have considered the pre-enquiry SCN, the Enquiry Report, the SCN, and the material enclosed thereto, the submissions made by the noticee vide its replies/submissions dated May 19, 2007 and June 06, 2007 and the oral submissions made by its advocate during the personal hearings.

16. The alleged violations in the present matter pertain to the period – 2003 to 2005. During the relevant period, the noticee was registered as a stock broker with SEBI and was a trading member of the NSE and the BSE. Another entity of the Karvy Group, namely, KCL was a registered depository participant and its depository participant business/activity was taken over by KSBL during the year 2005. Pursuant to the same, KSBL, in addition to its stock broking business was also acting as a depository participant (from the relevant date) in the securities market.

17. The findings of the investigations were that the Karvy Group was at the hub of the activity having control over the whole process of an IPO from the conception of the "IDEA PAPER" (arrangement between Karvy and BhoB, which is explained in the subsequent paragraphs) to the final execution through key operators through the afferent accounts. It was alleged that the Karvy Group of companies, who were acting in various capacities in the IPOs, joined hands with other entities and facilitated the cornering of shares in the IPOs. KSBL (in its capacity as a depository participant) was alleged to have opened thousands of demat accounts including those with common addresses in substantial numbers and with same photographs in certain cases in league with the key operators. It is alleged that KSBL in its capacity as a stock broker along with its associate entities such as KCPL, KCL etc, facilitated the key operators and their financiers in cornering the shares in the IPOs by acting as introducer for opening of bank accounts, by way of collection of pay orders, by dealing with the banks in respect of common refund orders and finally by selling the shares for the key operators – Purushottam Budhwani and Manoj Seksaria.

18. I also note from the observations in the Enquiry Report that the Karvy group entities were associated in various IPOs, in different roles that are required to be performed in relation to an IPO application. Their presence can be observed, starting with that of the role of a DP who opened demat accounts, that of the NBFC who arranged finance, the stock broker/ syndicate member who undertook the bidding in IPOs and also as an Registrar to Issue ('RTI') who prepared refunds and further, on the allotment of the shares transferred the shares to the demat account of the key operator again in the capacity of DP and sale of shares through its stock broking arm.

19. As regards the noticee, the charges levelled against it broadly in this proceedings are - Irregularities committed while introducing the bank accounts of the benamies/key operators; Bidding of IPO applications of the benamies/key operators; and Sale of cornered shares through the noticee.

20. Before proceeding to consider the specific charges, it would be appropriate to discuss about the "IDEA PAPER" in brief. KCL, which was an NBFC and also a Depository Participant of the Karvy Group at the relevant point in time, had floated an IPO financing scheme, as evident from the copy of "Idea Paper and Process Flow for Funding Options for Maruti IPO by Bharat Overseas Bank and Karvy Services" (hereinafter referred to as "Idea Paper") which was circulated during June, 2003. The 'Idea Paper' contains the process flow which starts from the IPO applications, the opening of demat account, bank account, procedure for refunds etc. It also states about the safeguards like marking of lien on the shares until the loan is cleared. I note that as per the process flow explained in the 'Idea Paper', IPO applications would be filled in by the investor and a cheque/DD in favour of the bank towards the margin amount shall be deposited. The investor would need to open the demat account with KSBL (in its capacity as a depository participant) with BhoB as the joint holder. KSBL (in its capacity as a depository participant) would then place a lien on the shares deposited into the investor's account until the investor clears the loan with the bank. The client would deposit the payment instrument and bid form with the bank, along with the account opening document and the documents for the loan. Further, the bank would issue the pay order for the amount of the application by debiting such amount from the loan account, while taking into account the amount of margin money of the respective applicants. If the investor is not allotted shares against the IPO application, refunds would be made to investor by the RTI through the bank and the refund will be credited to the bank account, after liquidating the loan. In case of allotment, the investor should bring in the required amount if there is shortfall and fulfil the obligation to the bank after which the lien is released by the bank and the DP is accordingly informed.

21. I also refer to the statement of the representative (Mr. Devi Dutt, Chief Manager, BhOB, Ahmedabad Branch) of BhOB that they had a corporate tie up with KCL and financed the IPO only through KCL. The representative of BhoB had stated that out of the list of 12,257 demat accounts of KSBL (in its capacity as a depository participant) in the IPO of Yes Bank, only 4 - 5 demat accounts holders had bank accounts in BhOB, Ahmedabad and for operational convenience, instead of opening individual savings bank accounts, a number of individual names were added to a single account by BhOB. It has also been said in the statement that BhOB has funded 9,327 demat accounts out of the said total of 12,257 demat accounts.

22. Having noted the broad process flow outlined in the Idea Paper, I now proceed to consider the charges against the noticee and record my observations on the violations. The charges are being discussed under the following heads : (i) Introduction of bank accounts for the key operators and fictitious names/benamis by the noticee; (ii) Bidding of IPO applications by the noticee; and (iii) Sale of shares (which were cornered by the key operators in the IPOs) through the noticee.

Introduction of bank accounts for the key operators and fictitious names/benamis by the noticee:

23. SEBI had noticed that different Karvy group entities such as KCL and KSBL had played a role in the opening of the bank accounts for various persons/fictitious names for the purposes of availing finance and making application in the IPOs and also for opening demat accounts. The noticee is alleged to have committed irregularities while introducing the key operators and fictitious names/benamis with respect to the opening of bank accounts for them.

24. While referring to annexure 3 of the pre-enquiry SCN, which is the letter of BhOB dated March 7, 2006, I note that the Enquiry Officer had observed that the said document is a testimony to the fact that many accounts were introduced by 'Karvy'. It was also observed from the said letter that all accounts opened with the bank for the purpose of financing in the IPO of Maruti Udyog Limited, were introduced by KSL and KISL and signed by Vyomesh Pandya representing the companies. It was also observed that Mr. Vyomesh Pandya used to bring all savings bank account opening forms duly filled in and that the signatures of the applicants were filled in at the time of submission of the forms and that none of the applicants were present in the bank for affixing their signatures at the time of submission of their respective applications.

25. In this regard, I note that the pre-enquiry SCN had enclosed certain account opening forms (as samples) and the letter of BhoB dated March 07, 2006 (to SEBI) as Annexures 2 and 3 respectively. The SCN alleges that the Karvy group entities have introduced certain persons for opening bank accounts at BhoB, which were subsequently used for opening the demat accounts and thereafter for applying in the IPOs. The letter of BhOB addressed to SEBI dated March 07, 2006 mentions about a particular bank account bearing number 50795. It is mentioned in this letter of BhoB that the account bearing number 50795 was opened on June 17, 2003 for the purpose of availing finance in the IPO of Maruti Udyog Limited and that the same was closed on October 27, 2003. Later, large numbers of applications were found manually attached to this account. The letter of BhOB also states that the accounts were introduced by KSL and KISL, signed by one Mr. Vyomesh Pandya. The additional accounts added to this account bearing number 50795 (as shown in the letter of BhoB) are mentioned below : - 50795/1 to 50795/2 - 50795/5 - 50795/14 - 50795/16 - 50795/18 to 50795/24 - 50795/26 to 50795/60 - 50795/62 to 50795/64 - 50795/67 to 50795/127 - 50795/130 to 50795/131 - 50795/137 to 50795/150 - 50795/152 to 50795/153

I note that the above bank accounts were then used for opening demat accounts with KSBL (in its capacity as a depository participant) in the month of June, 2003. Such demat accounts continued to be operation till November 15, 2005, though the corresponding bank account was closed on October 27, 2003. The demat accounts were closed by KSBL (in its capacity as a depository participant) only pursuant to a verification in the wake of examination by SEBI into the alleged IPO irregularities. A sample of 39 demat accounts opened with the additional accounts added to bank account no. 50795 has been mentioned in the Order January 28, 2014 passed with respect KSBL (in its capacity as a depository participant) in the matter. The crucial point to be noted here is that such additional accounts were introduced by none other than the entities of the Karvy group based on which afferent demat accounts were opened and operated for cornering shares.

26. With respect to the bank accounts opened with Indian Overseas Bank ("IOB") which were introduced by the Karvy Group entities including the noticee, it is noted that vide letter dated March 4, 2006, IOB had forwarded copies of account opening forms along with KYC forms in respect of the following bank accounts :

(a) SB A/c no. 12150 - Roopal Nareshbhai Panchal and Devangi Dipakbhai Panchal (b) SB A/c no. 12140 - Roopal Nareshbhai Panchal and Devangi Dipakbhai Panchal (c) SB A/c no. 11954 - Roopal Nareshbhai Panchal and 50 others as per list (d) SB A/c no. 12149 - Roopal Nareshbhai Panchal and Devangi Dipakbhai Panchal (e) SB A/c no. 12001 - Kantilal J Shah and Roopal Nareshbhai Panchal and 50 others as per list. (f) SB A/c no. 12004 - Ketan Atul Doshi and 50 others as per list (g) SB A/c no. 11406 - Panchal Dipakbhai Jaswantlal and Panchal Devangi Dipakbhai (h) SB A/c no. 11407 - Devangi Dipak Panchal and Dipak Jaswantlal Panchal (i) Current A/c no. 1008 - Steelart Engineering Pvt. Ltd. 27. It was observed that the respective account opening forms also contained a 'list' of names of 50 persons. On perusal of the documents, it was noticed that all the 50 names (applicants) had signed in the respective list (of 50 names) and that such signatures appears to have been made by one person. It is also noticed that such lists of 50 names were certified by an employee (the authorised signatory) of KSBL. The Enquiry Officer while referring to the letter dated March 04, 2006 (forwarding copies of the account opening forms along with KYC forms in respect of 9 accounts) from IOB has found that KSBL (in its capacity as a stock broker) has introduced bank accounts, which facilitated the opening of demat accounts and thereby cornering of shares in the IPOs.

28. I have perused the letter of IOB dated March 04, 2006 whereby the Bank had forwarded the copies of account opening forms along with KYC forms in respect of nine accounts including Roopanben Panchal, to SEBI. I note that the noticee has been furnished with account opening forms/documents with respect to the following four bank accounts (out of the list mentioned in the letter of IOB) as samples. This has been acknowledged by the noticee also in its reply. The said sample accounts also contained the list of additional 50 names attached to those accounts :

S.N Name of the Bank Account Holder IOB Date of Introducer Remark o Bank opening A/c Bank A/c No. 1. Kelan Atul Doshi and 50 others - List of 50 12004 N.A. KCL KCL had identified the applicants attached starting with Darpan list of name by affixing Rajesh Shah to Neha Manilal Thakkar a signature and rubber stamp 2. Roopal N. Panchal and Devangi Dipakbhai 12140 09/03/2005 KSBL KSBL had identified Panchal - List of 50 applicants attached the list of names by starting with Suresh Seth to Aditi Seth affixing a signature and rubber stamp 3. Roopal N. Panchal and Devangi Dipakbhai 12149 10/03/2005 KSBL KSBL had identified Panchal - List of 50 applicants attached the list of name by starting with affixing a signature and Tvata Dabhi to Bhagyesh Dabhi rubber stamp 4. Roopal N. Panchal and Devangi Dipakbhai 12150 10/03/2005 KSBL KSBL had identified Panchal - List of 50 applicants attached the list of name by starting with Dhiren Dabhi to Tisha Dabhi affixing a signature and rubber stamp

29. I have perused the account opening forms pertaining to the aforesaid four bank accounts and also the list of 50 names appended to each of such account. My observations are as under :

a) As per the account opening form pertaining to account no. 12149, it is seen that the account was opened in the names of Roopal Panchal and Devangi Panchal at IOB. The account opening form also encloses a list of 50 additional names which has been introduced/certified by KSBL. The seal of KSBL has been affixed and signed by a person on behalf of KSBL. The said list of 50 persons starts with the name Tvata Dabhi and ends with Bhagyesh Dabhi. All the names have the same surname, i.e. ‘Dabhi’.

b) The same is also the case with account no. 12150 (account of Roopal Panchal and Devangi Panchal). A list of 50 additional names were added to this bank account opening form, starting with 'Dhiren Dabhi' (first additional name) and ending with 'Tisha Dabhi' (fiftieth additional name ).

c) As regards account no. 12140, I note that this joint account was held in the names of Roopal Nareshbhai Panchal and Devangi Dipakbhai Panchal and opened on March 9, 2005. In the space provided for "Introduction" in the 'Know Your Customer' form, one person (Mayur Modi) had signed (as the authorized signatory for KSBL) as the Introducer. It is pertinent to note that the list of 50 names attached with the account opening form for the bank account bearing no. 12140 had a common surname i.e. "SETH" starting from 'SURESH SETH' and ending with 'ADITI SETH', and that the signatures of these 50 names are in English, Hindi and Gujarati and appear to have been made by the same person in a similar manner. The said list has been certified under the seal and stamp of KSBL by an authorised signatory of KSBL.

d) With respect to the bank account no. 12004 (Ketan Atul Doshi and 50 others as per list) opened with IOB, I note that the 50 additional persons were found to be introduced by KCL (now KSBL - in its capacity as a depository participant) under its seal and signature. In the account opening form/KYC documentation, it is seen that the said client was introduced by KSBL wherein the signature of Mr. Mayur Modi is present.

e) With respect to the introduction column of account opening forms of IOB, I have noted that the stamp of the noticee is affixed as “for Karvy Stock Broking Ltd” uniformly, which indicates that the noticee has introduced such fictitious/benami accounts. I further note from its appeal memorandum (Appeal No. 92 of 2006) filed by KSBL before Hon'ble SAT against the orders of SEBI dated April 27, 2006 and May 27, 2006, that it had admittedly introduced a few saving bank accounts to BhoB and IOB on the request of the banks. The short point that is being made is that the noticee had introduced the accounts and the list of 50 additional names under its seal and signature.

30. The noticee has contended that the signature of the introducer on the account opening form (for account no. 12004) and that in the purported list of 50 names differs. I have perused such documents. On comparing the signature of Mayur Modi in the KYC form with respect to account nos. 12004 and the signature present in the list of 50 names attached to that account, it could be difficult to say that the signatures are different. Further, the said signature is similar to the signatures found in the list of 50 names found attached with others account nos. like 12140, 12149 and 12150. I have also perused the affidavit dated June 02, 2007 of Mr. Mayur Modi, wherein he has denied the signatures in the lists of 50 names appended to the account opening forms pertaining to the savings bank account nos. 12140, 12149, 12150 and 12004. I have perused the copy of his PAN card annexed with the affidavit and the signature contained therein and the signatures in the lists containing the 50 names. The said person has not disputed his signatures in the KYC forms of the said bank accounts. On perusal, it can be said that the signatures are done by one person with the normal variations in signatures of a person.

Further, the same Mr. Mayur Modi had signed on the introduction column on behalf of both KCL and KSBL in IOB. To me, the said affidavit is a means of defense taken by the noticee to distance itself from the alleged abuse of the systems noticed in the investigations in the matter and is an afterthought. Therefore, the noticee cannot claim that it had nothing to do with such introductions or shift the blame on the concerned bank. Further, the submission that its employees had done the same and that as an entity the noticee cannot be made liable for the same may hold good if such introductions and opening of a demat account had been a solitary instance. However, the same is not the case. Large numbers of bank accounts were added to one primary account number. Such additional account numbers were as per the list of 50 names, which were introduced/certified by the noticee/group entities. Additionally, there is always a presumption that the acts of an employee are done at the instance of the employer. Its submissions could have also been relevant if it was not, in any manner, related with such accounts and the additional names (list of 50 names).

However, the same is again not the case here.

31. The contention of the noticee that the list of 50 names appears to be a separate document as there is no basis for connecting the savings account opening form with the list containing 50 additional names, according to me, is not tenable. It is to be noted that the account opening form, the documents, if any, and the list attached with it forms the complete set of documents pertaining to that account/s. Further, such documents were furnished by none other than the concerned banks. It is important to note that the names added to the bank accounts were in the same order as that in which the demat accounts were held with KSBL (in its capacity as a depository participant) and such details were privy to KSBL only. In view of the above, there is no merit in the submission of the noticee that the allegation has been made on the basis of "a rubber stamp of KSBL on a sheet of paper containing 50 names and signatures ".

32. The noticee has also contended that the Enquiry Officer has based his observations with respect to the documents pertaining to account no. 11954, but no copies pertaining to that account was furnished to it. As already stated, documents pertaining to the bank accounts were furnished as samples to the noticee. This according to me would neither be an impediment nor infringe the rights of noticee or violates the natural justice. Moreover, I have based the observations and findings on the documents (samples) which have been furnished to the noticee.

33. The noticee has also contended that the KYC forms provided along with a/c nos. 12140, 12149 and 12150 do not pertain to the said accounts but pertains to an account bearing no. 11983 and that the noticee cannot be held liable for the bank or the account holder using the KYC documents originally submitted for one account and subsequently the same being used for opening other accounts. The charge or the allegation in this regard is that the noticee had introduced the account holders (key operators) while opening the bank accounts and also the persons (the fictitious names) in the list of 50 names which was attached to those bank accounts, and not the adequacy or correctness of the KYC documents submitted to the bank for those accounts.

34. The noticee has further contended that though the letter of IOB stated 37 accounts with 50 additional names, the Bank had given copies of only 9 accounts to SEBI and that the 50 additional names were part of only three saving accounts, namely, 11954, 12001 and 12004. In this regard, I refer to paragraph 4 thereof stated as follows :

"4. List of 37 savings account nos. and names of savings accounts of Roopalben Panchal group is enclosed herewith. To this each account, 50 additional names were added, which were introduced by Karvy Stock Broking Ltd. and these names are attached with the respective account opening form."

I note that the annexure contains the names of all 37 account holders and 50 others, the account numbers and also description of accounts i.e., 12140 - Roopal N Panchal / Devangi Panchal and 50 others. Further, at paragraph 5 of the letter, it has stated that copies of 9 account opening forms are enclosed along with the letter. From the records, I note that four account opening forms and KYC documents with respect to the account nos. 12004, 12140, 12149 and 12150 were provided to the noticee as samples. The details such as account numbers, the names of the account holders have already been mentioned above. From the discussions above, it is seen that the 'list of 50 names' is attached with all the accounts mentioned in the IOB letter including the four sample accounts of which documents were shared with the noticee. The noticee has submitted that from the list of 9 savings bank accounts, only three saving accounts (11954, 12001 and 12004) have the list of 50 additional names as part of the account. This submission has been made on account of the fact that as per the application forms of those three accounts, the respective name and "50 others as per list" is mentioned. For other accounts (out of the nine mentioned by IOB), "50 others as per list" has not been mentioned along with the name. It is a fact that the SB A/c nos. 12004, 12140, 12149 and 12150 (for which account opening forms and the list of 50 names certified by KSBL, were provided to the noticee) had the list of 50 names attached to the account, though the name of the account did not specifically state that it had '50 others as per list'. According to me, just because the said terms were not mentioned in the application forms and the bank's letter, it need not necessarily mean that the noticee was totally unaware of these 50 others. Going by the pattern, it appears more to be a case of omission to mention "50 others as per list" rather than a total ignorance.

35. With respect to the account no. 12140, I also note that the 50 names in the list attached to this account had their demat accounts with KSBL (in its capacity as a depository participant) in the same sequence, the demat accounts starting with BOID IN300394 13130266 - 'SURESH SETH' and ending with BOID IN300394 13130776 - 'ADITI SETH', all of which were opened on January 05, 2004. The address for this account was 402, Shashwat Opp. Gujarat College, Ellisbridge, Ahmedabad – 380006, which is the same address mentioned for the other accounts i.e. 50795 and 54119 with BhOB, belonging to one Roopalben Panchal, identified as a key operator. The names in the list of 50 names as introduced by the noticee have opened demat accounts with KSBL (in its capacity as a depository participant) in the very same sequence as they appear in the list. The same cannot be a coincidence and would lead one to infer that the noticee was also involved in the manipulation.

36. IOB vide its letter dated March 04, 2007 has stated that the bank had funded 3118 applicants and that KCL has certified that all the applicants had demat accounts with it (i.e., KCL). The noticee has contended that assuming there were 37 accounts and each having a list of 50 accounts, then the total of such demat accounts would only be 1850 and there was no basis for the bank to state that KCL had certified that 3118 accounts were held with it. In this regard, it needs to be stated that the number of afferent accounts ran into thousands and therefore the figure of 3118 was only a small sample of the total afferent demat accounts. I note that IOB provided finance of ₹23,800 to each of the 3,118 such applicants, including 50 entities starting from SURESH SETH to ADITI SETH, aggregating ₹7.42 crore. All these entities shared the same address as that of Roopal Panchal, who also held a demat account with KSBL (in its capacity as a depository participant), another Karvy group entity. As mentioned above, the list of the names of the IPO applicants starting from 'SURESH SETH' to 'ADITI SETH' in the allotment muster in the IPO of IDFC is identical to the list of names attached to the IOB Thaltej branch account opening form no. 12140.

37. I note that the savings bank account of Roopal Panchal and others were introduced by noticee in the year 2004, during which period the noticee was only a stock broker and not a DP i.e., KSBL did not have the license to carry out the DP operations (as this was subsequently taken over from KCL). Therefore, it can be inferred that introduction was done by the noticee in the capacity of a stock broker, when there was no obligation to do so. Though one could argue that if there is no obligation then there is also no bar for introducing the persons for whom such bank accounts were opened, the consequence assumes much importance. It is noted that such bank accounts were the basis for the opening of demat accounts which were later found to be afferent demat accounts. The manner in which the same was done has been explained in the Order issued with respect to KSBL (in its capacity as a depository participant).

38. I also note that KSBL (in its capacity as a stock broker) has admitted that it had initially introduced the bank accounts. Even if one were to presume that IOB failed to take KYC documents, the fact remains that many bank accounts have been introduced by the noticee and a list of 50 persons was attached to each of those accounts. The list was also certified by the noticee and the names were added to those accounts making them as joint holders of the accounts. Therefore, the submission of the noticee that the bank has conveniently tried to shift the blame on it, when noticee itself introduced the bank account of the key operators and those of the fictitious names, does not have merit. The noticee has contended that based on a rubber stamp of KSBL on a sheet of paper containing 50 names and signatures, it has been alleged that KSBL has introduced the said persons to the bank. However, I note that bank accounts were opened on the basis of such documents and the noticee thereby facilitated the opening of afferent accounts (demat accounts), which were used for cornering of shares in the IPO. I note that the key operators like Purshottam Bhudwani and Manoj Seksaria, were also the sub-brokers of KSBL. The said sub-brokers had opened demat accounts with KSBL (in its capacity as a depository participant) and were also marketing the IPOs and procuring large number of applications. Further, a stock broker is responsible for the actions of its sub-brokers while operating within its ambit and scope of work.

39. The noticee has also submitted that it cannot be made responsible for the acts of its employees and its sub-brokers and that its operations are large. The noticee has also submitted that the KCL had financed Manoj Seksaria and Purushottam Bhudhwani only in 3 out of 21 IPOs where they participated and that the noticee cannot be made responsible for the acts of KCL in financing them. I have considered such submissions. In this regard, it may be noted that for presuming 'complicity', it need not be shown that KCL had financed all IPOs. Three or four such instances could be sufficient to conclude on the 'complicity'. Further, the entire set of transactions starting from the introduction of bank accounts of key operators, opening of demat accounts of key operators, IPO funding to key operators etc, through various Karvy group entities including the noticee further corroborates the charge of its collusion in the IPO manipulation. The above sequence of events seems to be seamless and conceived to achieve the ultimate – cornering shares meant for retail category and to profit from the same.

It also needs to be recalled that in majority of the cases where list of 50 names were appended to the account forms, the names in such lists had the same surnames. It is seen that all the signatures were made by one person at one time, in the documents pertaining to the bank account. Most importantly, it was observed that all the names contained in the list attached to the application forms had demat accounts with KSBL (in its capacity as a depository participant), another entity of the Karvy Group, and those have been identified as afferent accounts. The names in the 'list of 50 names' were in the same sequence as that of the demat accounts opened in the names of such persons. It will be quite a coincidence if fifty persons with the same surnames get introduced by one group entity to open their bank accounts and also open demat accounts with another entity from the same group. This could be possible only if there was collusion among the group companies who were involved in the IPO process. Additionally, KCL (an entity of the Karvy group who extended finance to the key operators), at the relevant point of time was actively involved in providing finance to such persons/ account holders who were later found to be fictitious.

Therefore, this artifice of having the 50 names added to the main bank account, each happening with a mathematical formula of names and surnames should have alerted any intermediary who should have brought it to the notice of the regulator. The noticee has failed to do so. This silence or inaction on the part of the noticee would, in the facts and circumstances of the case, is proof of its complicity. In view of the facts and circumstances, as explained above, the noticee cannot take a stand that it was the key operators who manipulated using the loopholes in the system and that it is also a victim. The noticee is therefore found to have played its role in introducing the bank accounts for the list of persons/additional names which in turn paved the way for opening afferent accounts in the depository system in order to corner the shares meant for retail category in the IPOs. The same would be a proof of the notice's complicity, along with the other entities of the Karvy group, in the manipulation.

Bidding of IPO applications by the noticee :

40. It is a fact that the noticee had placed bids for the applications of Manoj Seksaria and Purshottam Bhudwani, the key operators, and applications made in the fictitious names/benamis in the IPOs. While placing bids, it is the duty of the noticee, as a syndicate member, to obtain the duly filled in application forms along with the cheques/DDs. After bidding, the syndicate member forwards the application form along with the cheque/DD to the banker to the issue, who detaches the instrument and sends the same for collection. I also note that KCL had funded large amounts to Manoj Seksaria and Purshottam Bhudwani for applying in the IPOs. The noticee had submitted that, loan applications were executed by Manoj Seksaria and Purshottam Bhudwani in their names or executed by their family members. Manoj Seksaria and Purshottam Bhudwani had requested that payments be made directly to them. It was also submitted that in respect of all applications made by these sub-brokers, individual cheques towards the application money against each application were made by the loanees (Manoj Seksarai and Purshottam Bhudwani). Therefore, it becomes clear that the 'IPO application forms' had enclosed payment instruments not from the original applicants but were from the key operators. By accepting such applications with cheques/DDs coming from the key operators, the noticee had definitely accommodated the key operators in making fictitious applications for cornering shares in the IPOs. The very facts such as (i) the loan amount was disbursed directly to the key operators, (ii) that it was then divided for making individual applications on behalf of fictitious accounts in the retail category of IPO and (iii) that KCL/the noticee was in the knowledge of these, show that Karvy group entities including the noticee, were aware of the game plan of the key operators regarding fictitious applications and cornering of shares in the IPO.

Sale of shares (which were cornered by the key operators in the IPOs) through the noticee:

41. The noticee has been alleged to have sold the shares cornered by the key operators. In this regard, the Enquiry Officer had observed that : a) the noticee had sold the shares on behalf of Purshottam Bhudwani and Manoj Seksaria, knowing that the same were cornered by such key operators.

b) 5,32,000 shares were cornered by Purshottam Bhudwani and Manoj Seksaria each, in IDFC IPO. c) Out of the said quantity, Manoj Seksaria sold 4,77,500 shares through the noticee at the rate of ₹61.67/- on the listing day i.e. August 12, 2005. Further, Purshottam Bhudwani sold 5,00,000 shares on August 12, 2005 through the noticee at the rate of ₹61.25/-. d) Both the said key operators had made huge profits out of such transactions. e) Mr. Purshottam Bhudwani had received (in his account no. 0602100001225 maintained with HDFC Bank Ltd., Fort Branch) a sum of ₹3,05,76,060.80/- from the noticee.

42. I have considered the observations/findings of the Enquiry Officer and the submissions of the noticee made in this regard. The sale of shares by the noticee on behalf of Purshottam Bhudwani and Manoj Seksaria is a matter of record. The noticee has not disputed the same and has in fact admitted that such sale of shares was done pursuant to the instructions of such persons and in the ordinary course of business. Manoj Seksaria and Purshottam Bhudwani were the key operators who had abused the system and the IPO process. The contention of the noticee is that the fact of trading by such key operators through it cannot lead to an inference that it was aware that they were selling shares that were cornered. In dealing with this subject, it is important to keep in mind the entire set of transactions involving various Karvy group entities including noticee. Further, it is a matter of record that the key operators had sold substantial number of shares allotted in the IPOs through the noticee. The noticee, as a registered intermediary, cannot be ignorant of the facts that such shares were allotted in the IPOs at the relevant period; and its clients (i.e. the key operators), as retail category allottees, would not be allotted such huge quantities in the IPOs. The noticee should have been alerted by such factors. However, the noticee did not raise any alarm nor reported such unusual events to SEBI. Therefore, considering the facts and circumstances of the case, I am inclined to infer that the noticee had complied with the request of such key operators for sale of shares as it was aware of their manipulative and devious scheme of cornering shares and profiteering from the sale of the same.

Observations and conclusions :

43. According to the Enquiry Officer, the actions of the noticee and the other Karvy Group entities were complementary and supplementing the activities of its associates and therefore the Enquiry Officer had concluded that KSBL failed to maintain arm’s length distance with other

Karvy Group entities. I note that the entities of the Karvy Group had their presence in almost all spheres of activity in the IPOs. The same can be seen as discussed below : a. Bank savings accounts were introduced by Karvy group entities, namely, KCL, KSBL, KSL and KISL, pursuant to an arrangement with banks - BhoB and IOB, as discussed above; b. Demat accounts were opened with KCL/KSBL (in its capacity as a depository participant) on the basis of the bank accounts opened with the banks; c. Financing in the IPOs by KCL (in its capacity as an NBFC); d. IPO applications were bid by the noticee who was also a syndicate member; e. Refunds and allotments were handled by KCPL (the RTI); f. Shares were transferred in off-market through KCL/KSBL (in its capacity as a depository participant); and g. Sale of shares through the noticee.

44. Shares meant for subscription in the retail category have been cornered in the IPOs by the key operators which included the noticee's sub-brokers. The said act was prejudicial to the interests of the investors and the retail applicants in such IPOs. After cornering the shares meant for retail investors, the key operators and perpetrators of this market abuse sold them to make large profits. I note that in the entire chain of events, one or more of Karvy group entities were involved, which clearly suggest that they acted in concert and facilitated cornering of shares and by no stretch of imagination can the role of the noticee be considered independent to the scheme of cornering of shares. The noticee has submitted that the IPO sub-brokers were the ones who opened the afferent accounts and that the noticee was not aware that such demat accounts were benami/fictitious accounts and opened for the purpose of cornering shares in the IPO. Even if I were to accept the said submission of the noticee, the fact that would mean that the noticee had turned a blind eye to the unusual situation where names and surnames appear in hundreds of accounts with mathematical regularity and points to much more than merely exercising proper diligence and prudence. On careful examination of the facts, I note that it is the introduction of the bank accounts which paved the way for opening of afferent accounts. At this juncture, I refer to the discussion about the 'Idea Paper' and the statement of Mr. Devi Dutt on 'corporate tie up' and infer that the 'corporate tie-up' would refer to the scheme of arrangement/process flow as conceived in the Idea paper. Therefore, one could come to an opinion, based on the facts and circumstances of the case, that the process flow conceived in the Idea paper was actually put to practice without ensuring the checks and safeguards it supposedly envisaged therein. Thus, from the above, I conclude that Karvy group including the noticee had played a crucial role in the opening of bank accounts of key operators and introducing a list of 50 fictitious names to each of the relevant bank accounts.

45. As regards the submission that the date of activation of the demat accounts could be on one particular day, the accounts flowed on different dates, I note that the same pertains to the depository participant activities of KSBL and that the Order in respect of the same passed on January 28, 2014 had dealt with such submissions pertaining to that activity. Therefore, I do not wish to reiterate such observations in this Order.

46. I notice that the Karvy Group as a whole appeared to have favoured an extremely aggressive approach to business which points out towards their direct involvement in the IPO scam. The noticee has tried to disown responsibility by pointing out toward unusualness in documentation, discrepancies among various documents. The entire case revolves around unusual business practices adopted by various players including the noticee. The only way the noticee could have been absolved of all responsibility, would be by proving that it had absolutely nothing to do with the financiers, key operators, bank accounts, refunds etc. It is a binary situation; whether the noticee was associated with the group of wrong doers or not. If it was associated, then the shortcomings and discrepancies in documentation mentioned by the noticee does not help it in getting a clean chit or even a benefit of doubt.

47. The noticee has tried to distance itself from activities of the other Karvy entities, the financiers and the key operators by saying that the Karvy entities acted in an arm's length manner while it contradicts itself by stating in para 17.7 of its reply dated May 19, 2007 "With regard to signing of inspection report of KCPL by V Mahesh, it is submitted that Mr. V Mahesh was compliance officer for KSBL DP. ….. The inspection report in question has been signed by Mr. V Mahesh as an Authorised Signatory of KCPL. Furthermore, Mr. V Mahesh was a coordinator for NSDL/CDSL operations. …… ". Further, the noticee has stated in its submissions that KCL had advanced loans in the 'ordinary course of business' and 'after verifying the documents'. It is surprising to note that this submission is contrary to its contention that the Karvy group entities operate independently. Though it could be accepted that the finance and legal functions of the different entities could be separate, the operations of the entities seem to supplement their roles and complement each other. It is noteworthy that copies of the loan agreements executed between KCL and the key operators – Manoj Seksaria and Purshottam Bhudwani were not submitted and instead only a sample agreement for loan was submitted.

48. The noticee has submitted that in order to efficiently service the IPO applicants, specifically with respect to the service being offered to institutions for bidding of applications funded by them, it had appointed Mr. Vincent Paul as the central co-ordinating officer. It is the argument of the entity that being the co-coordinating officer for such activities, it is natural that Mr. Vincent would communicate with institutions such as banks. Accordingly, in the course of refund process, Mr. Vincent Paul, as the co-coordinator of the syndicate arrangement and not as an employee or agent of the RTI, communicated with institutions in respect of the refund process. It is the contention of the noticee that the communication sent by Mr. Vincent Paul to BhoB was in the normal course of business. I have considered such submissions and note that in the refund process, there is no role to be played by the syndicate member. In this case, the noticee was a syndicate member with respect to the IPOs for which it had placed bids. The registrar to the issue and the banker to the issue would co-ordinate for the purposes of making the refunds. Therefore, by admitting that in the refund process, the noticee's employee Mr. Vincent Paul had co-ordinated with the concerned institutions, it becomes clear that the noticee and other Karvy entities/KCPL did not maintain arm's length and were in turn complementing each other's role. The noticee cannot state that the same was in the normal course as this 'course' would mean that there was no operational independence between the entities. Further, the activities of the Karvy entities are intertwined. The employees are working for various entities in one capacity or other. Being under the same group, there is a strong presumption that the entities are acting in consonance.

49. The noticee has contended that as per the existing rules and regulations, SEBI requires that an entity who wishes to qualify to be Depository Participant, it should be registered with SEBI as a broker or Registrar or should be registered with RBI as a Bank or an NBFC and therefore there has to be commonality. In terms of regulation 19(a) of the SEBI (Depositories and Participants) Regulations, 1996, for grant of a certificate of registration as a depository participant, an applicant should belong to certain categories which include a stock broker. The same is one of the conditions. The objective in prescribing such condition is to allow credible institutions to take up the participant business in the securities market. By no means it implies that an entity handling two functions – say stock broking and depository participant activity, uses its functions to complement each other in activities that are detrimental to the securities market.

SEBI does expect that such synergies be utilised in a positive sense. However, if these are used to the detriment of the securities market, SEBI has to take due notice and take appropriate action.

50. Considering all these factors and applying the rule of preponderance of probabilities, I am unable to agree with the submissions made by the noticee and arrive at a conclusion that the noticee had a nexus with such key operators and facilitated their game plan of cornering of shares in the various IPOs which were meant for the retail category and the sale of those shares. Further, on noticing the various activities of the concerned entities of the Karvy Group including the noticee and the manner in which their activities and roles were complemented and supplemented by each other, it can be said that the noticee had an active participation with the other intermediaries in the cornering of shares in the IPOs. This leads to a strong presumption that Karvy Group entities acted in close coordination and the whole group should be viewed as one, irrespective of the separate legal identity of different entities.

51. In this regard, I note that the proof of manipulation always depends on the inferences drawn from a mass of factual details. Findings must be gathered from patterns, nature of the transactions, etc. The evidence, direct or circumstantial should be sufficient to raise a presumption in its favour with regard to existence of a fact sought to be proved. It is exceedingly difficult to prove the facts especially within the knowledge of the party proceeded against and under such circumstances findings would be inferential based on the conduct of the parties. The legal proof in such circumstances partakes the character of prudent man’s estimate as to the probabilities of the case. The Hon’ble SAT in the matter of Ketan Parekh vs. SEBI has observed "Whether 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 attending circumstances because direct evidence in such cases may not be available.”

52. In view of the foregoing, I find that the noticee played an active role in aiding and abetting key operators in their devious scheme of cornering of shares. The noticee has also contended that it did not cause loss to the investors and did nothing to hurt the integrity of the market. In view of my observations made above, this submission seems to be fallacious.

Finding/observations on the violations and on the appropriate penalty : 53. In view of my observations above, the acts and conduct of the noticee becomes unfair and fraudulent within the scope of the PFUTP Regulations. In a case like the present one, when one isolates the individual role of an entity, the impact may be too less or negligible. However, when the roles of all the entities are seen together, the magnitude of such abuse would strikingly come to be noticed. In terms of regulation 3 of the PFUTP Regulations, no person shall directly or indirectly buy, sell or otherwise deal in securities in a fraudulent manner; use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. Regulation 4 (1) of the PFUTP Regulations prohibits a person from indulging in a fraudulent or an unfair trade practice in securities. Further, clauses A(1), (3) and (4) of the code of conduct for stock brokers stipulates that a stock broker should maintain high standards of integrity and should not indulge in manipulation and malpractice. In view of the foregoing observations/findings, I find that the noticee by its commissions and omissions had violated the provisions of section 12 A (a), (b) and (c) of the SEBI Act and also regulations 3 and 4 (1) of the FUTP Regulations, 2003. By actively facilitating key operators, it is established that the noticee had failed to maintain high standards of integrity and further indulged in manipulation and malpractices and thereby violated the code of conduct specified in clause A (1), A (3)and A (4) of Schedule II of the code of conduct specified in the Broker Regulations.

54. Having come to the conclusion as regards the violations, the next part would be to decide the nature and the period of penalty. The Enquiry Officer has observed that the violations committed by the noticee have to be viewed seriously. Taking into account the facts and circumstances of the case and the gravity of the violations committed by the noticee, the Enquiry Officer recommended that its certificate of registration be suspended for a period of three months.

55. I have noted the submissions made by the noticee with respect to the recommended penalty. During the hearing, it was submitted that the alleged irregularities occurred in the noticee's Ahmedabad Office and there were no findings in respect of other branches and that all their other branches had been conducting their business in compliance with the rules, regulations laid out and therefore any restraint on the entire operations would not be proper. In this regard, it needs to be noted that the certificate of registration granted to a stock broker is for his stock broking business and therefore any violation or misdemeanor on its part would attract penalty, if required, against its business as a whole. Given the large scale of abuse of the market and the role of the entities of the Karvy Group including the noticee, as discussed above, I do not find it appropriate to only restrain the stock broking business of the noticee in a particular branch.

56. I note that while the Enquiry Officer has exonerated KSBL from the charge that it is not a fit and proper entity, the Enquiry Officer has recommended that the certificate of registration of the noticee as a stock broker be suspended for a period of three months. As stated above, in a case were there has been widespread market abuse, the role of one entity should not be seen in isolation and that the collective roles and activities of all the entities concerned should be seen. I also note the submission that the noticee was restrained from indulging in proprietary trading for a period of 14 months. On considering the totality of the facts and circumstances, the interest of securities market, the market participants and my observations/findings and the restrictions on proprietary trading already suffered by the noticee, I am of the considered view that the following order would meet the ends of justice.

57. 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 regulations 28 and 35 of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby prohibit the noticee, Karvy Stock Broking Limited, from taking up any new assignment or contract or launch a new scheme (i.e., not to take new clients/customers) for a period of 6 months in respect of its business as a stock broker.

58. As directed by the Hon'ble Securities Appellate Tribunal vide Order dated June 30, 2008, this Order shall not be given effect for a period of four weeks from the date of receipt thereof by the noticee, i.e., Karvy Stock Broking Limited (in its capacity as a stock broker).

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Date : March 14, 2014 Place: Mumbai