Order in the matter of Bellary Steels And Alloys Ltd

CORAM: DR T C NAIR, WHOLE TIME MEMBER Name of the noticees: 1. M/s. Bellary Steels and Alloys Ltd. and its directors S/Shri S Madhav, S Parvati, Ram Narain Pandey and G J Prasad (nominee director) 2. M/s. S N Finance Ltd. and its directors S/Shri G H Patil, V R Gundannavar, P S Murali and S Harikrishna 3. M/.s Kodiganti Investments Ltd. and its directors S/Shri R Ranganathan and K C Kondaiah 4. Smt. K Meenakshi, wife of Shri K C Kondaiah, and 5. Ms/. Panchaloha Hotels Pvt. Lt. and its directors S/Shri S Madhav and Parvathi S Madhav

Date of hearing: 19-03-2008 Appearance of the parties For the noticees: 1. Shri M. V. V. Ramana, Advocate represented M/s. Bellary Steels and Alloys Ltd. and its directors Shri S Madhava and Smt. S Parvathi 2. Shri S. Venkatesan, Advocate represented Shri G H Patil, Shri V. R. Gundannavar, Shri S Harikrishna and Shri K C Kondaiah (Director of M/s. Kodiganti Investments Ltd. 3. Shri G J Prasad appeared for self For SEBI: 1. Shri A Sunil Kumar, General Manager 2. Shri Saravanan, Assistant General Manager 3. Shri T. Vinay Rajneesh, Legal Officer ORDER

DIRECTIONS UNDER SECTIONS 11(4) (b) READ WITH 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 IN THE MATTER OF BELLARY

STEELS AND ALLOYS LTD. AGAINST THE ABOVE NAMED NOTICEES

1. This order shall bring a finality to the ad-interim ex-parte order dated 01-02-2006 passed against the noticees and also conclude the proceedings initiated pursuant to the completion of investigations in the matter of Bellary Steels and Alloys Limited.

The facts of the case are that the Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) had received a complaint vide letter dated January 17th, 2006 from M/s. Karnataka State Financial Corporation, Bangalore (hereinafter referred to as ‘KSFC’) against M/s Bellary Steels and Alloys Ltd., Bangalore (hereinafter referred to as ‘BSAL’). In its complaint, KSFC, inter alia stated that they had subscribed to Rs. 150.00 lakhs redeemable non-convertible debentures of BSAL during May 1996 which were secured by the 21,50,000 shares of BSAL held by the following pledger entities/persons as per below:

No. of Date of Distinctive S. Certificate Name of the pledger shares pledge with Nos. of No. Nos. pledged KSFC Shares 014192201 - 96521 014692200 1. M/s. S.N. Finance Ltd. 15,00,000 26/06/1996 012692201 – 96519 013692200 M/s. Kodiganti 016642201 – 2. 5,50,000 27/03/1997 96338 Investments Ltd. 017192200 017392201 – 3. Mrs. K Meenakshi 1,00,000 27/03/1997 96340 017492200

2. The above stated 21,50,000 shares were pledged in favour of KSFC by way of an agreement entered into between KSFC and the above stated entities/persons namely M/s S N Finance Ltd., M/s Kodiganti Investments Ltd., and Mrs. K. Meenakshi. KSFC has further stated that BSAL has failed to redeem the non-convertible debentures (NCDs) and pay interests and that KSFC is unable to recover the present dues of Rs. 5,64,38,971.00. Owing to the above, KSFC had applied for transfer and demat of the impugned shares in their favour. However, Karvy had already dematted the shares after transferring to M/s Panchaloha

Hotels P Ltd. KSFC has stated that the Karvy had transferred the shares when the original share certificates were in their possession and alleged that pledger entities/persons in connivance with BSAL and Karvy have fraudulently transferred the shares with a malafide intention to cheat KSFC. In this regard, Karvy pleaded ignorance regarding pledging of shares with KSFC.

3. The preliminary findings in the matter were based on the available records and information and the same are as under:

There were two sets of physical shares certificates with identical details existed at the same point of time, that is one set of certificate was pledged with KSFC and the other set was lodged for transfer in the name of M/s Panchaloha Hotel P Ltd.,

In view of existence of 2 sets of physical share certificates at the same time bearing the same distinctive numbers, it stands to reason that at least one of them is fake.

It is observed that neither the share certificates lodged for transfer in favor of M/s Panchaloha Hotel P Ltd. nor the share certificates pledged with KSFC has any superscription to the effect that the certificates in question have been issued in lieu of the original certificates.

The Authroised Signatory namely, Shri Madhav, Chairman and MD of BSAL and a Director of Panchaloha Hotels Ltd., for transferor and transferee is same in respect of the shares held in the name of M/s S N Finance Ltd., Hence, the connivance of Bellary Steels & Alloys Ltd., S N Finance Ltd., & Panchaloha Hotel P Ltd., in the issuance of fake share certificates and its subsequent transfer/ dematerlisation, with a malafide intention to cheat the KSFC, is seen.

The aforesaid facts, hold the Company M/s Bellary Steels & Alloys Ltd., its directors, the pledgers viz., M/s S N Finance Ltd.., and its Directors, M/s Kodiganti Investments Ltd., and its Directors, Mrs. K Meenakshi and also the transferee M/s Panchaloha Hotel P Ltd., and its Directors in violation of Regulation 3 and Regulation 4(h) of SEBI (Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

4. Based on the prima-facie findings, it was felt that that allowing BSAL, the pledgers/transferors (M/s. S N Finance Ltd., Kodiganti Investments Ltd and Smt. K Meenakshi) and the transferee (M/s. Panchaloha Hotel P Ltd.) and their respective directors to continue in their dealings in the securities market without any restrictions would be prejudicial to the interests of the investors and the safety and integrity of the securities market. In view of such emergent situation and to save the securities market from further fraudulent acts of the concerned entities, pending investigations and passing final orders, the SEBI had passed an ad-interim ex-parte order dated 01-02-2006 with the following directions issued to various entities in the matter under Sections 11(4) (b) and 11B of the SEBI Act, 1992:

1. BSAL was directed not to issue any further shares or alter its share capital in any manner till further directions. BSAL and its directors, namely Shri S Madhav, Smt. S Parvati, Shri Ram Narain Pandey and Shri G J Prasad were prohibited from accessing the capital market or dealing in securities, in any manner, directly or indirectly, till further orders in this regard by SEBI.

2. M/s S N Finance Ltd., M/s Kodiganti Investments Ltd., and its directors and Mrs. K Meenakshi and M/s Panchaloha Hotel P Ltd., and its Directors were prohibited from accessing capital market or dealing in securities, in any manner, directly or indirectly, till further orders in this regard by SEBI.

3. KSFC, Bangalore was directed to retain all the original documents pertaining to the transaction including the share certificates and the debenture certificates in its possession, in a sealed and secure place. KSFC was directed not to tamper with or part with any of the aforesaid documents until further specific directions in writing in this regard by SEBI.

4. KARVY was directed that it should keep in a safe and secure location all the documents pertaining to the transaction including the original defaced certificate received by it for dematerialization from M/s Panchaloha Hotel P Ltd., and all correspondence and documents received from BSAL regarding the allotment of shares to M/s S N Finance Ltd., M/s Kodiganti Investments Ltd., and Mrs. K Meenakshi. Karvy should not tamper with or part with any of the documents pertaining to the transaction until further specific directions in writing in this regard by SEBI.

5. NSDL/CDSL were directed not to effect any transfer of shares from/to the beneficial account of M/s Panchaloha Hotel P Ltd., until further orders.

The entities were also given an opportunity to file their objections to the above said ad-interim ex-parte order, if any, within 15 days from the date of the order and if they so desire, avail themselves of an opportunity of personal hearing to be fixed.

5. The entities had filed their replies pursuant to the passing of the interim order and the details of the same are as under:

i. BSAL replied vide letters dated 14.2.2006 and 24.4.2006 that the pledgers had pledged the shares with an understanding that the promoters of BSAL would replace the shares as and when needed. It was also mentioned that BSAL had requested KSFC at a meeting, to release the share certificates. It was also mentioned that KSFC had misplaced the share certificates and had no objection for issuance of duplicate share certificates. Based on the indemnities signed by the pledgers BSAL Board issued duplicate share certificates and the fact of such issuance was also informed to KSFC so that KSFC should not act on the certificates reportedly misplaced. Shri Madhav and Smt Parvathy also endorsed the above reply of BSAL. But KSFC denied the above submissions of BSAL.

ii. Shri G J Prasad replied vide his letters dated 15.2.2006 and 21.2.2006 that he was only acting as nominee director on the Board of BSAL and was not involved in the day-to-day affairs of BSAL. He further mentioned that under Section 25 and 38A of IFCI Act 1948, nominee directors are protected against any proceedings for actions done in good faith.

iii. M/s. S. N. Finance Ltd. vide their reply dated “nil” (received on 20.2.2006) on its own behalf and on behalf of its Directors, had mentioned that they had no knowledge of the pledge transactions due to non-availability of documents. However, SN Finance vide its subsequent letter dated 1.4.2006 requested SEBI to treat the earlier letter as withdrawn in totality.

iv. None of the above entities have requested for personal hearing. However, since the role of BSAL is vital in the issuance of duplicate/ fake share certificates, opportunity of Personal Hearing was granted to BSAL and its directors on 23.02.07 on which date V Mahesh & Associates, practicing company secretary, appeared on behalf of BSAL and two directors viz.., Shri S Madhav and Smt. S Parvati. Also, Shri G J Prasad, Nominee Director of IFCI attended the hearing and made submissions.

v. Shri G J Prasad, reiterated submissions made by him in his earlier letter. From the copies of the agenda notes of the board meetings of BSAL as submitted by Shri G J Prasad, it was observed that in none of the board meetings he has attended, the issue relating to issuance of duplicate share certificates was placed.

vi. Shri V Mahesh was advised to submit documents in support of the contentions of BSAL. In reply, copies of the transfer deeds of the impugned shares were submitted for perusal.

6. Meanwhile, being aggrieved, BSAL and its directors had approached the Hon’ble Securities Appellate Tribunal challenging the interim order dated February 1, 2006 in Appeal No. 156 of 2007. The Hon’ble Tribunal while disposing the appeal had observed that it was too premature for them to record any finding on the issues raised by the appellants since the investigations were still pending and that any observation made by them may prejudice the case of either party. While dismissing the said appeal as premature, the Hon’ble Tribunal vide its order dated 19-11-2007 had directed SEBI to conclude the investigations expeditiously and decide the objections raised by the appellants finally before the end of March 2008.

7. Simultaneous with the passing of an ad-interim ex-parte order dated February 1, 2006, the SEBI had directed that a formal investigation be conducted in the matter. The Investigations revealed that:

BSAL had issued two sets of share certificates with identical numbers -while one set of share certificates were pledged by the Shareholders/Transferors viz., S N Finance Ltd., Kodiganti Investments Ltd., Mrs. K Meenakshi, with KSFC as security for their subscription to NCDs issued by BSAL and another set was used by the said shareholders/transfers for transfer in the name of Panchaloha Hotels Pvt. Ltd.,

BSAL had not obtained NOC from KSFC for the issuance of such duplicate share certificate nor had they given any intimation to KSFC in that regard but only made false statements.

One of the pleldgers/shareholders/transferors viz., S N Finance Ltd., had only made self-contradicting statements.

Company viz., BSAL, pledgers cum transferors viz., S N Finance Ltd., Kodiganti Investments Ltd., and Mrs.K Meenakshi and transferees viz., Panchaloha Hotels Pvt. Ltd., had connived with one another in the whole scheme of issuance of fake share certificates when share certificates with identical distinctive numbers remained under pledge with KSFC.

BSAL on its own had printed and issued the duplicate share certificates without reference to Karvy (whose scope the said activity falls) which is contrary to the contents of SEBI Circular No.1 (1994-95) dated 11-10- 1994.

Shareholders/transferors/pledgers as well as the transferees have failed to prove consideration involved in the impugned transactions, further complicated by the contradictory statements made by BSAL.

BSAL had in fact not complied with any procedures prescribed in the matter of issuance of duplicate share certificates and more particularly BSAL had not issued any public advertisement which otherwise would have put KSFC on alert.

Going by the various submissions made by the parties concerned and also various materials available on record, it is conclusively established that the certificates which were lodged by Panchaloha Hotels P Ltd., with Karvy were fake, and the parties concerned viz., BSAL, SN Finance Ltd., Kodiganti Investments Ltd., Mrs.K Meenakshi and Panchaloha Hotels P Ltd., have acted in connivance in the matter with an intention to deceive KSFC, in violation of Regulation 3 and Regulation 4(h) Securities and Exchange Board of India (Fraudulent and Unfair Trade Practices) Regulations, 2003.

8. Accordingly, a show cause notice dated 11/03/2008 was issued to: i. M/s. Bellary Steels and Alloys Ltd. and its directors Shri S Madhav, Smt. S. Parvati, Shri Ram Narain Pandey and Shri G J Prasad, ii. M/s. S N Finance Ltd. and its directors Shri G H Patil, Shri V R Gundannavar, Shri P S Murali and Shri S Harikrishna, iii. M/s. Kodiganti Investments Ltd. and its directors Shri R Ranganathan, Shri K C Kondaiah, iv. Smt. K Meenakshi and v. M/s. Panchaloha Hotels P Hotel and its directors Shri S Madhav and Smt, S. Parvati

All the above entities and individuals are collectively referred to as ‘noticees’ in this order for convenience sake. The above said show cause notice issued to the noticees alleged them of having violated the provisions of Regulations 3 and 4 (2) (h) of the SEBI (Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. The noticees were called upon to show cause as to why suitable directions under Section 11(4) read with Section 11 B of the SEBI Act, 1992 including directions debarring them from the capital markets/dealing in securities for a suitable period of time may not be issued against them for the above alleged violations committed by them. The noticees were also intimated that they can avail an opportunity of personal hearing before me and that 19.03.2008 was fixed as the date for personal hearing. The noticees were further informed that if no reply together with evidences, if any is received within the aforesaid period and/or if they fail to avail the opportunity of personal hearing on the appointed date, it would be understood that the noticees have no explanation to offer and further action would be taken that may deem fit without any further reference to them.

The said show cause notice was also uploaded in SEBI website at www.sebi.gov.in. On the date of the hearing M/s. Bellary Steels and Alloys Ltd. and its directors Shri S Madhava and Smt. S Parvath was represented by Shri M. V. V. Ramana, Advocate who also undertook to file written submissions. Shri G H Patil, Shri V. R. Gundannavar, Shri S Harikrishna and M/s. Kodiganti Investments Ltd.(through its directors Shri Kondaiah) were represented by Shri S. Venkatesan, Advocate who made his submissions. I note that written submissions dated 22-03-2008 were filed on behalf of BSAL through its legal counsel. I also note that Shri P S Murali had sent his reply dated 15-03- 2008 to the Southern Regional Office for my consideration. There was no representation for Shri Ram Narain Pandey, Shri R Ranganathan and Smt. K Meenakshi during the hearing. Written Submissions dated 25-03-2008 were filed by Shri Venkatesan, Advocate on behalf of M/s. S N Finance Ltd., G H Patil, V Gundannavar, Harikrishna, Kodiganti Investments and Meenakshi. I note that since Shri S. Madhav and Smt. S. Parvathi are also directors in Panchaloha, I consider that Panchaloha has been represented as Bellary, Madhav and Parvathi were represented by their legal counsel during the personal hearing.

9. I have carefully perused the ad-interim ex-parte order dated 01-02-2006, the show cause notice dated 11-03-2008, written and oral submissions made by the parties concerned along with other material available on record. After going through the above said documents, I find that the following issues arise for my consideration in the instant case:

a. Whether BSAL had issued counterfeit/fake share certificates in contravention of the provisions of Regulation of 3 and 4(2)(h) of the SEBI (Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003? b. Whether the S N Finance, Kodiganti, Meenakshi and Panchaloha had acted in connivance with BSAL in dealing in counterfeit/fake security in physical form thereby contravening the provisions of Regulation of 3 and 4(2)(h) of the SEBI (Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003?

10. I note that KSFC had subscribed Rs.150 lakhs towards redeemable non-convertible debentures (NCDs) of BSAL during May, 1996. These NCDs were secured by 21,50,000 shares of BSAL held by M/s. S N Finance, Kodiganti Investments Ltd. and Smt. K Meenakshi pledged by them with KSFC by way of an agreement. Since BSAL failed to redeem the NCDs and as the dues were to the tune of Rs.5,64,38,971/-, KSFC vide letter dated 14-11-2005 had approached Karvy for transfer and dematerialization of the said shares under pledge in its favour. Karvy vide its letter dated 03-01-2006 had informed KSFC that the shares in question had been lodged with them for transfer to M/s. Panchaloha Hotel Pvt.

Ltd. and since transfer deeds and the share certificates were in order, they had accordingly transferred the said shares to the transferee (Panchaloha) which were subsequently dematerialized by them. Therefore, those shares which were a security to the NCDs made available to KSFC had been transferred and dematerialized by the pledgors. This, I find that there were 2 sets of share certificates for the same shares, one set of share certificates were pledged as security under the pledge agreement with the KSFC and the other set of share certificates were utilized for the transfer to Panchaloha by S N Finance, Kodiganti and Meenakshi. I find the contention of BSAL that they had intimated KSFC regarding the issue of duplicate share certificates would not be tenable as the letter dated 22-06-2005 addressed to KSFC only mentions about replacement of existing shares pledged with them and not about the issue of duplicate shares allotted to the pledgors. To add to this, KSFC vide its letter dated 18-04-2006 had denied issuing any NOC for issuance of duplicate share certificates (of BSAL) held by the pledgers. Assuming for a while the contention of BSAL to be true, BSAL or the pledgers ought to have created a pledge in favour of KSFC of the new certificates or should have pledged other shares which BSAL had failed to do. I note that there is no whisper about replacing the shares with those of the promoters to KSFC in the letter dated 14-02-2006 sent by BSAL after passing of the ad-interim ex-parte order. Therefore, the above said submission made by BSAL would not hold good.

11. I note that that BSAL had requested KSFC in the month of June 2005, to return the original share certificates pledged with them, whereas as seen from the details of transfers furnished by Karvy, duplicate certificates bearing identical distinctive numbers had already been issued by BSAL to the pledgers earlier, on or before 24th March 2005.

12. Another finding which supports the case of the investigations is that the share certificates lodged for transfer in favour of M/s. Panchaloha Hotel Pvt. Ltd do not have any superscription that the certificates in question have been issued in lieu of the original certificates. Thus, there existed two sets of share certificates with identical numbers, both issued by the BSAL, at the same point of time where one of them is counterfeit and duplicate. I find that BSAL had issued two sets of share certificates with identical numbers - while one set of share certificates were pledged by the Shareholders/Transferors viz., S N Finance Ltd., Kodiganti Investments Ltd., Mrs. K Meenakshi, with KSFC as security for their subscription to NCDs issued by BSAL and another set was used by the said shareholders/transfers for transfer in the name of Panchaloha Hotels Pvt. Ltd.

13. With respect to the second issue as to whether the noticees were in collusion with each other, I find that shares of S N Finance, Kodiganti and Meenakshi pledged vide pledge agreements dated 26-06-1996 and 27-03-1997 with KSFC were utilized as security for the NCDs issued to KSFC by BSAL. This arrangement would imply that the above entities/individual were related to the management of BSAL and were done at the behest of the directors of BSAL. I further note that Shri Madhav and Smt. Parvathi Madhav are common directors in BSAL and in Panchaloha. Further, I find from the share transfer forms sent to Karvy Computershare that Shri Madhav is the signatory on behalf of S N Finance Ltd and Panchaloha.This proves that Shri Madhav is aware of the unfair and fraudulent act. Mr Madhav is a common authorized signatory on behalf of Panchaloha Hotels Pvt. Ltd. and S N Finance Ltd. Besides, Mr Madhav is also the Managing Director of BSAL. From the above relationship, it can be concluded that Panchaloha Hotels P Ltd was aware of the pledge of the shares with KSFC by the pledgers which only establishes the fact that the transferee was hand in glove with BSAL and other pledgers.

I also note that Shri K C Kondaiah (director in Kodiganti) and his group were the erstwhile promoters of BSAL Further, I find that the Directors of S N Finance Ltd., vide their undated letter received on 20th February 2006 had stated that they had no knowledge of a transaction pertaining to pledge of 15 lakh shares of M/s Bellary Steel and Alloys Ltd., by BSAL with KSFC, Bangalore. It may be noted that Shri Murali was also one of the signatories to the letter being the Executive Director of S N Finance Ltd. Further, vide letter dated 1st April 2006, received by us on 27th April 2006, S N Finance Ltd stated that they could trace out the transactions of pledge of shares and subsequent requests made by S N Finance for issue of duplicate certificates and has further requested us to treat their earlier letter as withdrawn in totality. Thus, by the second letter, SN Finance has on it own volition has admitted the impugned transactions. Though Shri Murali has stated in his present letter dated 15th March 2008 that he had resigned as Director of M/s S N Finance Ltd., on 30th April 2006, whereas the impugned transactions had taken place during the time he continued to hold the directorship in S N Finance.

However vide reply letter dated 15th March 2008, Shri Murali has made submissions that are contrary to the submissions made by SN Finance vide letter dated 1st April 2006. Therefore, his submissions do not convince me of his bonafides.

14. From the documents, I note that vide letter dated 10-03-2004, Smt. Meenakshi had addressed a letter to BSAL wherein she has stated thus “As required by you, these shares have been pledged to KSFC. We need our shares back very urgently and duly discharged. I therefore request you to release the pledged shares from KSFC by replacing your own securities.” Similar letters were also written by S N Finance and Kodiganti to BSAL. Thereafter, BSAL addresses letters dated 06-04-2004, 07-04-2004 and 08-04- 2004 to Meenakshi, Kodiganti and S N Finance respectively. Instead of replying to the pledgers appropriately, BSAL vide the above said letters has requested the pledgers to execute an indemnity bond for the purposes of indemnifying the company against any damage and to enable BSAL to issue duplicate certificate against the shares said to have been lost or misplaced. Pursuant to this, Smt. Meenakshi vide her ‘Indemnity Bond’ dated 28-04-2004 stated that “(2) It has been stated to the company that the certificates of their shares have been lost or misplaced and the same cannot be found”have applied for duplicate share certificates.

(3) Mrs. K. Meenakshi has/have applied to the company for duplicate share certificate(s). , I/we declare that I/we have not deposited the original share/debenture certificate (s) by way of security or otherwise, or transferred or sold, the said shares/debentures or any of them and I /we agree and confirm to return forthwith to the company for the purpose of cancellation the said original share/debenture certificate(s) in case, the shall be found” Further, the affidavit dated 28-04-2004 submitted by Smt. Meenakshi to BSAL states that she has not pledged the original certificate(s) by way of security or collateral or otherwise have not sold the above mentioned share(s) anytime to any person and that she has genuinely lost /misplaced the above mentioned shares. A reading of the letter addressed to BSAL and the indemnity bond and affidavit would make it clear that Smt. Meenakshi is making contrary statements. In the letter she mentions that shares were pledged with KSFC as required by BSAL, whereas in her indemnity bond and affidavit she states that she has not pledged the shares with anyone and that she has genuinely lost the same.

I find the same with respect to the others (Kodiganti and S N Finance) also. The pledgers had made false contrary statements and the company on the basis of such false indemnities and affidavits has issued duplicate share certificates. This would prove that all the above said entities are in collusion with each other and have acted fraudulently to defraud KSFC. It is also noted that on scrutiny of Indemnity Bonds stated to have been obtained by BSAL for the purpose of issuing the duplicate share certificates, the said indemnity bond stated to have been executed by M/s Kodiganti Investments Ltd., is dated 28/04/2004 which precedes the date of the stamp of the Sub-Registrar, Nelamangala which is dated July 26, 2004. Therefore, I find that such a document was created for the purposes of the case. Hence, the Indemnity Bond is invalid and such creation of the Indemnity Bond in support of their act of issuance of duplicate share certificates is an after-thought by BSAL and Kodiganti to show a seeming compliance with the rules prescribed in that regard.

15. I also note that the other two pledgers/shareholders/transferors viz., Kodiganti Investments Ltd., and Mrs.K Meenakshi had failed to furnish the specific details called for by the SEBI. Thus, from the facts and circumstances of the case, I find that BSAL, its directors, the pledgers cum transferors viz., S N Finance Ltd., Kodiganti Investments Ltd., and Mrs.K Meenakshi and Panchaloha are in collusion with each other in such malafide/nefarious activities. Therefore, the second issue also goes against the noticees.

16. I further note that in terms of SEBI Circular No.1 (1994-95) dated 11.10.1994, it is the duty of the share transfer to print new share/debenture certificates in lieu of misplaced, lost, mutilated certificates. In the present case, BSAL had chosen to print and issue the duplicate share certificates on its own, without making any reference to their Share Transfer Agent viz., Karvy. Thus, the very fact that BSAL had issued duplicate share certificates without any reference to the Share Transfer Agents viz., Karvy, under whose scope the said activity falls, only stands to prove the malicious intention of BSAL. I further note that the SEBI RTI Circular No.1 (2000-2001) dated 09.05.2001prescribes the procedure to be followed in cases where the share certificates are reported to be missing/lost/stolen by a third party claimant. In terms of the said Circular the persons seeking duplicate share certificate shall produce among others, a copy of First Information Report or a copy of acknowledgement of lodging a complaint obtained from a Police Station, and the company has to, inter alia, intimate to the stock exchanges regarding the loss reported by the shareholder, release a public advertisement to that effect.

However, BSAL had failed to comply with the said requirements as also been admitted by them in their letter dated 24.04.2006, wherein they stated that “……..keeping in view the exigencies of the pledgers……….. the Board had waived off all usual conditions for issue of duplicate certificates, such as news paper publication etc., and issued the certificates only on the strength of the indemnities given by them.” At this juncture I would also like to mention that the Companies (Issue of Share Certificates) Rules, 1960 has vide Rule 5 prescribed that when any share certificate is issued in any of the circumstances specified in Rule 4, sub-rule (3) [Rule 4(3) deals with issue of duplicate shares], it shall state on the face of it and against the stub or counterfoil to the effect that it is a "duplicate issued in lieu of share certificate No. ........................." Further, the word "duplicate" shall be stamped or punched in bold letters across the face of the share certificate. Thus, BSAL had overlooked all these provisions which are mandatory while issuing the duplicate share certificates.

A company cannot be casual to state that it had waived off all conditions and had issued them only based on the indemnities. Moreover, the companies cannot waive those conditions which are statute prescribed to suit their needs. In the present facts and circumstances of the case, non-adherence to the above said provisions would only worsen the case of the noticees.

17. I further note that M/s V.Mahesh & Associates, on behalf of BSAL, vide letter dated 1.3.2007, stated that by virtue of agreement dated 18.10.1997, the two of the three pledgers/transferors/transferors viz., Kodiganti Investments Ltd., and Mrs.K.Meenakshi had transferred their entire holding in BSAL to Panchaloha Hotels P. Ltd. Such being the case, the action of BSAL in having issued duplicate share certificates as aforesaid, purportedly on the strength of request letter/indemnity bond remains inexplicable.

18. I further note that vide submissions dated 01-03-2007 made by M/s.V Mahesh & Associates on behalf of BSAL, that as the shares were pledged with KSFC, the same were marked and kept with Panchaloha with a strict understanding / condition that these shares along with those pledged by S N Finance to KSFC should not be sold, hypothecated, pledged or encumbered in any manner by Panchaloha and that they should hold it in trust and on behalf of KSFC. It is very surprising to note that when the shares certificates in question were pledged with KSFC, how can the same be allowed to be transferred to Panchaloha. This act was made easy as Shri Madhav was the director in BSAL and in Panchaloha. Had the ad-interim ex-parte order had not been passed in time, the concerned entities would have off-loaded or encumbered them. I also note that it was admitted that there were some procedural and technical lapses on the part of BSAL in not marking pledge on the shares. I also find that the details of consideration received/paid with supporting documents were not produced by the parties concerned. It is also to be noted that Mr V Mahesh vide letter dated March 1, 2007 had mentioned that no consideration was paid for the above transfers, however, BSAL vide its reply dated May 9, 2007 had mentioned that the transfers were done for a valuable consideration but failed to produce evidence in support of their submissions till date. Thus the replies are self-contradictory.

19. With respect to Shri G J Prasad, nominee director (nominated by IFCI) on Board of BSAL, I have perused his letter dated 21-02-2006 which contained his letter of appointment as nominee director on the Board of BSAL along with other enclosures. He has submitted that the issuance of duplicate share certificates was not discussed in any of the Board meetings convened after his appointment as nominee director. He has further submitted that a nominee director was neither expected to perform nor interfere in the day to day affairs of the management of the company. I have also perused the relevant provsions of the IFCI Act 1948 and IFC (Transfer of Undertaking and Repeal) Act 1993 which were found enclosed to the above said letter. I have also perused the reply dated 18-03-2008 submitted by Shri G J Prasad and learn that he is no longer on BSAL’s board. He has also submitted that BSAL had issued duplicate share certificates on the strength of the indemnities given by the pledgers during 2004, whereas he was appointed a nominee to BSAL’s board only during 2005. Thus, at the relevant point in time, Shri Prasad was not on the board of BSAL. Therefore, it would be just to exonerate him of the charges contained in the show cause notice which I hereby do.

20. I find from the above that on one hand BSAL has been alleging that KSFC has claimed that the original share certificates have been lost, and that upon KSFC stating that they do not have any objection in issuing duplicate share certificates, BSAL has issued duplicate share certificates. However, KSFC has denied the same and remained in its stand that the original share certificates are still with them and that they have not issued any NOC for the issuance of duplicate share certificates. BSAL did not provide any documentary proof to show that KSFC have informed BSAL about the loss of share certificates and also to show that KSFC have given approval for issuance of duplicate share certificates, though BSAL has time and again been referring to a meeting allegedly took place at BSAL’s office. In the absence of any documentary evidence, the stand taken by BSAL cannot be accepted. Further even assuming that the stand taken by BSAL is correct, there is an onus on the part of BSAL to comply with the procedure relating to the issuance of duplicate share certificates which BSAL has failed to do. BSAL has stated that duplicate certificates have been issued after discussion with officials of KSFC. This is only as an afterthought. BSAL is trying to cover up its act of issuing duplicate certificates and is trying to find reasons to get out of the problems it is facing due to the complaint letter sent by KSFC. The foregoing thus establishes the mala fide intention on the part of BSAL, pledgers/shareholders/transferors and transferees in the matter of issuance of duplicate share certificate, only to deceive KSFC in the process.

21. I find that despite having knowledge of the pledge of the shares in favour of KSFC, the Board of BSAL has approved the issuance of duplicate share certificates though the original certificates continued to remain with KSFC and that too waiving the usual conditions prescribed for issue of duplicate share certificates. Had there not been an ad-interim ex-parte order, the transferee (panchaloha) could have disposed off the shares in question. I am in full agreement with the observations in the interim order that fake shares would reduce the value of the security held by genuine shareholders of a scrip. Moreover, the counterfeit securities would be instrumental in artificially increasing the volume of the shares of a company. Thus, by issuing duplicate share certificates when the original certificates were in possession of KSFC, BSAL has dealt in securities in an unfair and fraudulent manner. The transfer of shares to Panchaloha is void ab-initio, as the same has been done on the strength of the duplicate / counterfeit share certificate issue by BSAL. The act of issuing such duplicate share certificates by BSAL and its directors would tantamount to fraud or deceit on KSFC in particular and the investors in general, which is in contravention of clauses (a), (c) and (d) of Regulation 3 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. Further, since BSAL and its directors have been instrumental in issuing counterfeit security in physical form they have contravened Regulation 4(2)(h) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. In view of the above, I hold BSAL and its directors, Shri S Madhava, S Parvathi and Shri Ram Narain Pandey liable for having violated clauses (a), (c) and (d) of Regulation 3 and Regulation 4(2)(h) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. Further, since Panchaloha was the transferee of the said shares in question from S N Finance, Kodiganti and Meenakshi, it was aiding BSAL in its acts. Thus, I hold Panchaloha also of having violated clauses (a), (c) and (d) of Regulation 3 and Regulation 4(2)(h) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.

22. The transferors (pledgers), M/s. S N Finance, Kodiganti and Meenakshi who even after being fully aware of the pledge of their shares with KSFC had transferred the shares to Panchaloha. If there was any bonafides on their part they would have not transferred the shares. Further, I note that Kodiganti and Meenakshi have not furnished the specified details called for. Since the pledgers have colluded with BSAL and its directors, I hold M/s. S N Finance (and its directors Shri G H Patil, Shri V R Gundannavar, Shri P S Murali and Shri S Harikrishna), Kodiganti Investments Ltd. (and its directors Shri R Ranganathan and Shri K C Kondaiah) and Smt. K Meenakshi guilty of violating clauses (a), (c) and (d) of Regulation 3 and Regulation 4(2)(h) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003

23. During the personal hearing, Shri Ramana, Advocate appearing for BSAL and its directors had made his submissions with respect to ‘dealing in securities’ and Section 12 of the SEBI Act. He submitted that KSFC does not fall within the ambit and scope of Section 12 of the SEBI Act. I find that Section 12 speaks about the registration of entities with the SEBI if they want to operate as a intermediaries in the capital market. KSFC is a financial corporation formed under the State Financial Corporation Act for which Section 12 does not apply. He further submitted that SEBI is not the proper forum for redressal of the grievance of KSFC. It was also submitted that BSAL was referred to the BIFR and that rehabilitation is in progress. I find that though BSAL is under reference to the BIFR that does not in any manner preclude SEBI from passing any directions to BSAL or to its directors for their contraventions of the securities laws. Shri Venkatesan, Advocate representing few other noticees submitted vide his written submissions dated 25-03-2008 that the complainant (KSFC) had altered the terms of the non-convertible debentures twice without any notice to the noticees and that in view of the alteration, the original parties get discharged unless it is ratified by them and therefore KSFC cannot have any claim against them. He further submitted that the proceedings are barred by limitation. I find that since the issue in the case is only with respect to the counterfeit share certificates issued by BSAL, I find that there is no need to delve into the submissions any further.

24. In view of the violations committed by the noticees, I find that allowing BSAL, the pledgers/transferors viz. M/s S N Finance Ltd., M/s Kodiganti Investments Ltd., and Mrs. K Meenakshi and the transferee M/s Panchaloha Hotel P Ltd., and their respective directors to continue their dealings in the securities market without any restrictions would be prejudicial to the interests of the investors and the safety and integrity of the securities market. Further, the SEBI Act, 1992 casts upon the Board a duty to curb such malpractices that are detrimental to the growth and development of the securities market and also to prevent the ways by which such entities adversely affect the investors’ confidence. Thus, it becomes imperative that the noticees are issued suitable directions in the interests of investors and for the orderly development of the securities market.

25. In view of the above said, I in exercise of powers conferred in terms of Section 19 of the SEBI Act, 1992 hereby issue the following directions under Sections 11B and 11(4) of the SEBI Act, 1992: a) M/s. Bellary Steels & Alloys, and its directors namely, Mr S Madhav, Mrs S Parvathy, Mr Ram Narayan Pandey are restrained from accessing the securities market and further prohibited from associating with securities market to buy, sell or deal in securities either directly or indirectly for a period of 5 years. b) M/s. S. N. Finance Ltd, and its directors, Shri G. H. Patil, Shri V. R. Gundannavar, Shri P S Murali and Shri S. Harikrishna, M/s. Kodiganti Investments Ltd and its directors, Shri R Ranganathan, and Shri K C Kondaiah, Mrs K Meenakshi and M/s Panchaloha

Hotel P Ltd and its directors are restrained from accessing the securities market and further prohibited from associating with securities market to buy, sell or deal in securities either directly or indirectly for a period of 5 years. c) The period of debarment already undergone by the above said entites vide the ex-parte interim order shall be set-off. d) BSAL shall take immediate steps in co-ordination with NSDL and its share transfer agent (Karvy Computershare Private Ltd.) to rectify its register of members in accordance with the provisions of the Companies Act, 1956 after cancelling the duplicate shares of BSAL lying in the demat account of M/s. Panchaloha and report compliance to SEBI. Further, BSAL is directed that appropriate steps be taken to recognize the valid shares pledged with KSFC in the books of the company/STA/Depository. e) The show cause notice dated 11-03-2008 issued to Shri G J Prasad in the matter stands disposed of without any directions. f) This order shall come into force with immediate effect.

DATE: 28/03/2008 T. C. NAIR WHOLE TIME MEMBER PLACE: MUMBAI SECURITIES AND EXCHANGE BOARD OF INDIA