Order in respect of Mr. Gautam Jhaveri in the matter of Accurate Exports Limited

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) had issued a notice dated April 25, 2005 to Mr. Gautam Jhaveri advising him to show cause as to why action under Sections 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act) should not be initiated against him in respect of the alleged violation of Regulation 6(a) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the PFUTP Regulations). Brief facts as mentioned in the show cause notice (hereinafter referred to as the notice) are as follows. The investigation conducted by SEBI in respect of the buying, selling and dealing in the shares of the Company observed that during the period from January 1, 2001 to March 31, 2002, the price of the scrip ranged between `2 to `0.10 at a time when substantial quantity of shares of the Company was offloaded through select stock brokers. It was further observed that the Company had issued two different notices dated April 3, 2001 signed by the Managing Director, Mr. Dinesh Sharma, calling for an Extra-Ordinary General Meeting (EGM) on April 30, 2001. The following proposals were made in the first notice: I. An increase in authorised capital from `25 crores to `156 crores, divided into 15.60 crore equity shares of `10 each II. To issue 15.60 crore preferential shares on a swap basis in proportion to 10 shares of the Company for every one share held by the shareholders of Sanidhya Holiday Resorts and Estate Developers Limited and Tissue and Floritac India Limited. III. Resolution to invest in the equity shares of Sanidhya Holiday Resorts and Estate Developers Limited and Tissue and Floritac India Limited on swap basis to acquire total shareholding in the said companies and IV. Shifting of registered office of the Company from Ahmedabad to Vadodara.

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

2. However, it was observed from the certified true copy of the resolution passed in the EGM held on April 30, 2001, as submitted by the Company to the Ahmedabad Stock Exchange Limited (ASE), that the only resolution passed in the said EGM was regarding the shifting of office to Vadodara. Inspite of the resolution not being approved, on May 11, 2001 and September 11, 2001, the Company had made a listing application to ASE for listing of 6,00,00,000 equity shares and 7,50,00,000 equity shares of `10 each respectively. Subsequently, vide letters dated September 19, 2001 and September 24, 2001, the Company had written to ASE informing that the said allotments were null and void as various regulatory compliances under the SEBI Act and the Companies Act 1956 had not been met. However, substantial quantity of shares had been dematerialised and transferred to various entities during the period between the preferential allotment and the application for listing. The shares issued by the Company were dematerialized by the allottees, who then transferred those shares to certain other entities and they in turn, transferred the shares to other set of entities who offloaded the same in the market, without the shares being listed on the stock exchange. The notice had mentioned that Mr. Gautam Jhaveri was the proprietor of the stock broking firm M/s. Rajesh N. Jhaveri and alleged that on a scrutiny of the demat account, it was found that huge quantity of shares were transferred to/from his demat account from/to the pool account of the stock brokers for trading done by various clients. It was further stated that instructions had been given to the stock brokers by the clients for delivery/receipt to/from his account. The details of such transactions were given in the notice. The notice had therefore alleged that from the details mentioned therein, Mr. Gautam Jhaveri had colluded with various parties to offload shares that were fraudulently issued, in contravention of Regulation 6(a) of the PFUTP Regulations.

3. M/s. Rajesh N. Jhaveri (proprietor, Mr. Gautam Jhaveri) had filed a reply dated May 28, 2005 to the notice. The contents of the said reply are considered in the later part of this Order. Thereafter, opportunities of hearing were also granted to Mr. Gautam Jhaveri. He had also filed an application for passing of a consent order. Subsequent to the rejection of the said application, various opportunities of hearing were afforded to him and Mr. Gautam Jhaveri finally appeared in a hearing held on May 11, 2011, wherein he was represented by Mr. Deepak Shah, Advocate, who made submissions. The learned counsel reiterated the submissions made by Mr. Gautam Jhaveri in his aforesaid reply. As it was alleged that Mr. Gautam Jhaveri had transferred shares to one Nrupesh C Shah, he was advised to provide an affidavit from Mr. Nrupesh Shah stating the source of shares which were credited in his demat account and also to affirm that he was acting as per the instructions of Mr. Nrupesh Shah. Mr. Gautam Jhaveri, vide letter dated June 4, 2011 provided the required documents.

4. I have considered the notice issued to Mr. Gautam Jhaveri, the written as well as oral submissions made on behalf of Mr. Gautam Jhaveri, the subsequent documents provided by him and other material available on record. The charge against Mr. Gautam Jhaveri is that he had colluded with various other persons in offloading the fraudulently issued shares of the Company. The notice had mentioned “These entities in turn transferred these shares off-market to another group of entities. The main recipients of these shares were Ashish P Shah, Anil Kantilal Shah, Rajesh Jhaveri and Gautam Jhaveri among others. They in turn off-loaded these shares in the market without their being listed on the Exchange, mainly through Mr. Parshwa Finance (Sub Broker of P Suryakant Share and Stock Brokers Pvt (Ltd), Parklight Investment Pvt Ltd and Equisearch Broking Pvt. Ltd.” Prior to the said averment in the notice, the notice nowhere else explains the role of Mr. Gautam Jhaveri in the alleged scheme of things. It is also silent as to from whom he had received the impugned shares. The tables shown in page 3 and 4 of the notice mentions the names of various persons/entities who had subsequently transferred the shares to various other entities.

The name of Mr. Gautam Jhaveri does not figure in any of the said tables. In his reply, Mr. Gautam Jhaveri has inter alia submitted that he had not been allotted shares by the Company nor had any contractual obligations with any of the persons alleged to be associated or connected with the promoters of the Company. The notice is silent about the number of shares received by him for the purpose of offloading in the market. He further submitted that Mr. Nrupesh Shah was his client on whose behalf shares were received and transferred through his demat account and that the shares were received from third time transferors. According to Mr. Gautam Jhaveri, Mr. Nrupesh Shah was his employee at the relevant point of time and that he used to have dealings with him in other matters also. He further submitted that as Mr. Nrupesh Shah wanted to secure and settle the sums owed to Mr. Gautam Jhaveri, requested him to receive the shares of the Company in his demat account on his behalf. It was also submitted that the purchases by the said Mr. Nrupesh Shah were more than the sales and submitted that he did not inquire into the dealings between Mr. Nrupesh Shah and the other persons.

In this connection, I note that SEBI had initiated proceeding against Mr. Nrupesh Shah and the same was disposed of by SEBI, vide an Order dated January 14, 2009. In the said Order, while observing that the charges leveled against him could not be established, it was observed “However, it would be inappropriate to allege that the noticee violated the provisions of Regulation 6(a) of the PFUTP Regulations, merely due to his large dealings in the scrip of AEL. This is so because, as an individual investor, the notice would not be in a position to know of the misdeeds of the company management. More so, as submitted by the noticee, he relied on the mechanism of the stock exchange, share transfer agency and the Depository and did not default in either Pay in or Pay out or delivery of shares.” The client, Mr. Nrupesh Shah has been given a benefit as it was found that he was not in a position to know of the wrong committed by the Company. Therefore, the same treatment has to be extended to Mr. Gautam Jhaveri, who admittedly received shares from third parties, on behalf of Mr. Nrupesh Shah.

5. Further, as directed in the personal hearing, Mr. Gautham Jhaveri submitted an affidavit from Mr. Nrupesh C. Shah wherein the following was inter alia affirmed: “ …… Since I didn’t have any Demat Account, I instructed those persons to deposit the shares of Accurate Exports Limited (AEL) in to the Demat account of Mr. Guatam N. Jhaveri in DP Account No. 10002352 with H. Nyalchand Fin. Ser. Ltd. Since Mr. Guatam N. Jhaveri is known to me for more than 15 years and since he is a broker of repute of Ahmedabad Stock Exchange Ltd. I was dealing through him. ………… It was also understood that as and when I sale the shares through the Stock exchange through other Brokers, he will deliver the shares as per my instruction and will replace the payment towards amount due to him. ………… The shares of AEL sold by me were through the Brokers like M/s PIPL or M/s Parshwa Finance but not through Mr. Gautam N. Jhaveri. However, I instructed him to deliver the shares as per my instruction from time to time and after receiving the payment from exchange, paid the sum to Mr. Gautam N. Jhaveri”. [Emphasis supplied]

6. The notice has not alleged that Mr. Gautam N. Jhaveri had any role in the fraudulent allotment of shares by the Company. He was neither an allottee nor a first level transferor. There is no allegation that he was connected to the Company, its directors/promoters or the allottees. The notice only mentions that certain entities had transferred the shares of the Company off-market to another group of entities which includes Mr. Gautam N. Jhaveri also. It was also alleged that they in turn off-loaded these shares in the market without there being listed on the stock exchange, through various stock brokers. It is not clear as to whether he had received the shares from any of the allottees. It does not specify the name of the person from whom he had received the shares of the Company. It has been brought out by Mr. Gautam Jhaveri that he had received shares on the instructions from Mr. Nrupesh Shah and had delivered the same on the instructions of the said individual. I also note the submission that the shares which were received and delivered on behalf of Mr. Nrupesh Shah were having the same ISIN and were never treated as “bad delivery” by the clearing system of the stock exchange where the transactions have been performed and executed. Therefore, taking into consideration the submissions made by Mr. Gautam Jhaveri and the affidavit of Mr. Nrupesh Jhaveri furnished by him and in the absence of material to find him guilty of contravening Regulation 6(a) of the PFUTP Regulations, I am persuaded to afford a benefit of doubt in respect of the said charge. Accordingly, I dispose of the present proceeding as ordered hereinbelow.

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

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