Order in the matter of Complaint filed by Hopgage Limited

WTM/MPB/MIRSD/ 13 / 2017

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER IN THE MATTER OF COMPLAINT DATED OCTOBER 20, 2015 MADE BY HOPGAGE LIMITED Appearance: For Hopgage Limited: Ms. Purti Minawala, Advocate Ms. Poornima Subramanian, Advocate Mr. Satvi Mithbackar Mr. Kunal Mehta For RKDK Capital Market Limited: Mr. Rishav Dutt, Advocate 1. Securities and Exchange Board of India (“SEBI”) received a complaint in SCORES on October 28, 2015 from an entity named Hopgage Limited (“Hopgage/complainant“) against another entity named RKDK Capital Market Ltd. (“RKDK”) which is a member of Calcutta Stock Exchange(CSE). Mr. Praful Patel who is the 100% shareholder of Hopgage was its representative in the said matter. The complainant, inter-alia, stated that Hopgage was allotted 18,000 shares (9000 base shares + 9000 bonus shares) of Reliance Industries Ltd. (“RIL”). These shares were transferred allegedly to a stock broker named ‘Puja Stock Brokers & Services Ltd.’ (now known as RKDK Capital Market Ltd.) on August 18, 2000 to hold the said shares in trust on its behalf and/or to sell the shares on the instruction of authorised signatory of Hopgage i.e. Mr. Praful Patel. The complainant further stated that it had been following up with Mr. Deepak Chaudhary (Director of RKDK Capital Market Ltd.) to return the said 18,000 shares of RIL with all corporate benefits on the same. However, it did not receive any concrete reply from RKDK/ Mr. Deepak Chaudhary. In this backdrop, the complainant requested SEBI to look into this matter and take appropriate action in this regard.

2. The complaint was taken up as per SCORES mechanism of handling the complaint and accordingly it was referred to CSE to resolve the grievance of the complaint. CSE was advised to get the requisite records and also to arrange a meeting with RKDK.

Order in the matter of complaint filed by Hopgage Limited

Subsequently, a meeting of CSE’s officials was held on December 23, 2015 with RKDK which was represented by Mr. Deepak Chouhdary and Mr. Ramesh Kumar Agarwal Chief Executive of RKDK. It was submitted by the representatives of RKDK that they wish to resolve the issue by meeting Mr. Patel in the 2nd week of January, 2016 and a date be fixed after consent from Mr. Patel. CSE sent an email on December 24, 2015 informing the above mentioned details to Mr. Patel. Vide email dated December 29, 2015, Mr. Patel replied to CSE requesting CSE to follow up with RKDK to ensure that all the information pertaining to the transaction is sent to CSE by January 15, 2016. He further stated that in the meantime, he is having wide ranging discussions with the experts/advocates and till then, he will refrain from commenting further on CSE’s email. He also stated that he will respond after getting full details from RKDK. Around the same time, the complainant filed a writ petition before Hon’ble High Court of Calcutta(W.P. No. 344/ 2017) on the same subject matter. Upon becoming aware of the said writ petition, CSE informed that in view of pendency of litigations, it could not proceed in the matter. Accordingly, as the matter was sub-judice, it was disposed of in SCORES.

3. The above mentioned writ petition filed by Hopgage before Hon’ble High court of Calcutta (WP No. 344/2017) was disposed of by the Hon’ble Court vide an order dated June 21, 2017 wherein the Hon’ble Court observed, inter-alia, as under: :

“It appears from the records made available to Court that, the writ petitioner had made a complaint to Sebi by the writing dated October 20, 2015 against RKDK Capital Market Limited alleging violations of rules and regulations of Sebi. Such complaint has not been decided till date. There are two suits pending between the parties in this Hon’ble Court as brought to the notice of this Court. CS No.70 of 2016 is a suit filed by the broker against the writ petitioner and others. In such suit, the broker claims compensation on account of alleged defamation. The title to the shares is not in dispute in such suit. However, the title to the shares is in dispute in CS No.160 of 2016 filed by the writ petitioner before this Hon’ble Court. Both the suits are pending. The Court is informed that, the written statements in the two suits have been filed by the respective defendants. However, the complaint made to Sebi is in relation to the dealings and transactions by a recognised broker acting in a recognised stock exchange in terms of rules and regulations of Sebi. Such complaint is required to be looked into by Sebi. Sebi has the jurisdiction to do so.

In such circumstances, Sebi is requested to consider and decide the complaint dated October 20, 2015 made to it, in accordance with law, after affording a reasonable opportunity of hearing to the writ petitioner and to the parties against whom the complaint has been made. Sebi authorities will also be at liberty to hear such other parties and consult such documents as they deem necessary, for the purpose of disposal of the complaint. It is expected that the proceedings are disposed of by Sebi within a period of eight weeks from the date of communication of this order to them.”

4. In pursuance of the directions of Hon’ble High Court, an opportunity of personal hearing was granted to the concerned parties i.e. Hopgage and RKDK on August 10, 2017. The said hearing was re-scheduled on August 14, 2017 on the adjournment requests of both the parties.

5. On August 14, 2017, respective authorized representatives on behalf of Hopgage and RKDK appeared and made their submissions. During the course of hearing, both the parties agreed upon the following points: a. 18000 shares of RIL were transferred to the personal demat account of Mr. Deepak Chaudhary by Hopgage to be held in trust for and on behalf of Hopgage. b. Title of shares is in dispute before Hon’ble High Court, Calcutta in C.S. No.160/2016 c. Both the parties submitted that due diligence was carried out in terms of RBI guidelines while transferring of shares by Hopgage (an Overseas Corporate Body) to the demat account of Mr. Deepak Chaudhury, director of RKDK. d. Praful Patel was the non-executive director of RKDK from August 03, 1994 till July 20, 2015. e. Both the parties submitted that they are in the process of amicably settling the matter.

6. Pursuant to hearing, written submissions were filed by Hopgage vide letter dated August 18, 2017 and RKDK vide letter dated August 21, 2017 (received by SEBI through email on August 21, 2017). The submissions of Hopgage and RKDK are inter alia as under:

Hopgage i) It has signed the consent terms with RKDK represented by Mr. Deepak Chaudhary which were filed before the Learned Chief Metropolitan Magistrate at Calcutta in P.S Case No. 481/2016, on August 17, 2017. Under the terms of settlement, Hopgage has undertaken to withdraw the complaint made before SEBI on fulfilment of commitment made by RKDK represented by Mr. Deepak Chaudhary under the Settlement agreement. Accordingly, Hopgage requested SEBI to refrain from passing any order/direction in the matter until November 17, 2017 which is last date of the cheque towards full and final settlement of the dispute between them. ii) Without prejudice to the settlement proceedings, Hopgage made the following submission- a. The father of Deepak Chaudhary i.e. Mr. Ram Kishore Chaudhary, has been a close trusted friend of Mr. Patel since 1980. In view of the close family relationship between Mr. Patel and Mr. Ram Kishore Chaudhary, Mr. Deepak Chaudhary was treated like a son by Mr. Patel and accordingly enjoyed full trust and faith of Mr. Patel. b. Around the year 2000, Mr. Deepak Chaudhary, in his capacity as managing director of RKDK and a close acquaintance of Mr. Patel approached Mr. Patel with a proposal to transfer the RIL shares held by Hopgage subject to the understanding that the RIL shares shall be held in trust by RKDK for and on behalf of Hopgage Ltd. and be sold at the best ruling market price determined on the floor of the exchange in accordance with the instructions from our company and only after discussion with Mr. Patel. The understanding has also been confirmed by RKDK vide its letter dated September 05, 2000. c. Thereafter, the company entered into an arrangement with RKDK, through its director and managing director, for transferring the RIL shares under such terms and conditions as stipulated under the letter dated August 28, 2000. These terms and Conditions were duly acknowledged, accepted and confirmed by the RKDK vide its letter dated September 05, 2000. d. During the term of Mr. Patel’s appointment as Non-executive director, he was never been actively involved in the day-to-day affairs, management, administration and decision making of RKDK. This position was held by him only on a pro bono basis as a result of long standing friendship with Mr. Ram Kishore Chaudhury and Mr. Deepak Chaudhury.

e. With regard to reporting to RBI at the time of transfer to RKDK, Hopgage stated that there was no requirement in the year 2000 to make declaration at RBI for transferring the shares to broker for sale purposes. It had the general permission dated March 30, 1999 for sale of shares from RBI required by OCBs under direct investment scheme on the floor of the stock exchange.

RKDK i) Both the parties have arrived at an amicable settlement on all disputes arising out of the 18000 shares of RIL together with all benefits attached thereto. It also provided a copy of Terms of Settlement which were filed before Learned Chief Metropolitan Magistrate at Calcutta. As per the terms of settlement total claim of Hopgage and Mr. Praful Patel as against Mr. Deepak Chaudhury and RKDK stands settled at Rs. 4,71,00,000/- payable as per the schedule enumerated in said Terms of settlement. Out of such settlement, Mr. Deepak Chaudhury has already made a payment of Rs. 1,00,00,000/- by pay order no. 189590 dated 02.08.2017 drawn on HDFC Bank Ltd. As agreed between the parties, Schedule of Settlement is given below:

Cheque /Pay Dated Amount (Rs.) Drawn on order no. 189673 11.08.2017 15,00,000/- HDFC Bank Ltd. Central Plaza Branch, Kolkata 189680 11.08.2017 10,00,000/- -do- 180190 16.08.2017 46,00,000/- -do- 180186 17.09.2017 1,00,00,000/- -do- 180187 17.10.2017 1,00,00,000/- -do- 180188 17.11.2017 1,00,00,000/- -do- Total 3,71,00,000/-

7. I have considered the complaint of Hopgage, subsequent submissions by Hopgage and RKDK and other material available on record. The issue for consideration before me is whether facts and circumstances highlighted by Hopgage in its complaint and subsequent communications show that RKDK as a registered stock broker was in violation of any rule or regulations which is being administered by SEBI.

8. In order to address the issue under consideration, I find it pertinent to note certain facts which are noted from the complainant’s complaint and subsequent submissions: - i. Hopgage, vide letter dated August 28, 2000 addressed to Mr. Deepak Choudhury, Puja Stock Brokers & Services Ltd. stated that ‘we are holding 18000 equity shares of M/s Reliance Industries Limited in Demat form which has been transferred to you to be held in trust on our behalf. You will hold these shares for us and naturally before any sale you will discuss the transaction with Mr. Praful Patel.’ ii. 18000 shares of RIL were transferred (off -market) from Demat A/c no.10066616 of Hopgage held with Indbank Merchant Banking Services Ltd. to the Demat A/c no. 10022126 of Mr. Deepak Choudhury held with HDFC Bank. Thus, the shares were transferred to the personal account of Mr. Deepak Choudhury and not to the account of RKDK Capital Market Ltd. iii. Mr. Deepak Choudhury vide letter dated September 05, 2000 confirmed the receipt of shares. iv. Vide letter dated April 19, 2004, Mr. Deepak Choudhury again confirmed the following to Hopgage Ltd.: a) 18000 shares of RIL are held on behalf of Hopgage Ltd. for selling purpose. b) Said shares are transferred in my Demat Account. (Client id 10022126 held in the name of Deepak Choudhury) c) I undertake to follow your instructions to sell the shares of RIL and send the gross proceeds to your State bank of India account (having account no. 01092/063139). d) I undertake to send the proceeds of Reliance Dividend cheques to you vide Bankers draft in the name of ‘Hopgage Ltd.’ e) I confirm that I have received the RIL dividend cheques for the year 2000-2001, 2001-2002 and 2002-2003. Should we receive any further Dividend Cheques, we will remit such amounts to you. f) Needless, to add that you will be taking care of the tax deduction once you receive the proceeds in your Mumbai account. We will send you the sale note, and other relevant details as and when shares are sold under your instructions. v. All communications from Mr. Deepak Chaudhury were done on the letter head of RKDK/Puja Stock Brokers & Services Ltd. and were signed by him as director of RKDK.

vi. Hopgage demanded said 18000 shares back from RKDK vide letter dated June 16, 2015.

9. It is an undisputed fact that Mr. Praful Patel and Mr. Deepak Choudhury have known each other for more than 20 years. It is also not in dispute that Mr. Patel has been holding the 100% shareholding of Hopgage. Further, Mr. Patel was a director of RKDK from August 03, 1994 till July 20, 2015. In the year 2000, when the 18000 shares of RIL were transferred by Hopgage to the personal account of Mr. Deepak Choudhury, Mr. Patel was also a director of RKDK. These facts indicate that the transaction forming the subject matter of the compliant of Hopgage was a transaction pursuant to understanding between two persons known to each other.

10. It is noted that Hopgage in its complaint dated October 20, 2015 has mentioned that on August 18, 2000, it had transferred 18000 shares of RIL to a broker named “Puja Stock Brokers & Services Ltd.”. However, it is noted from the documents including Accounts Transfer Instruction Report and Transaction statement of DP of Hopgage, submitted along with the complaint dated October 20, 2015 and subsequent communication of Hopgage that the shares were transferred to the personal account of Mr. Deepak Chaudhary.

11. It is noted that the transfer of shares from Mr. Praful Patel to the personal account of Mr. Deepak Choudhury was done off-market and the registered broker – RKDK was not involved as such in the transaction. It is also pertinent to note that at all times Mr. Deepak Choudhury was communicating with Hopgage and in a span of approximately 17 years no other director of RKDK was involved in the communications with Hopgage. In fact, Mr. Patel himself was also a director of RKDK when most of the communications to his company (Hopgage) were made by Mr. Deepak Choudhury. Considering the above, it becomes clear that the dispute forming the subject matter of Hopgage’s complaint is between two entities namely, Hopgage (of which Mr. Praful Patel is 100% shareholder) and Mr. Deepak Chaudhary. Also, the registered stock broker of CSE i.e. RKDK Capital Market Ltd. had no role in the initial transfer of shares from Hopgage to Mr. Deepak Chaudhary or thereafter.

12. It is also noted from the record that Hopgage was never registered as a client of RKDK. From the above, it is clear that Hopgage was at all times communicating with Mr.

Deepak Chaudhary to whom it had transferred its shares, and there is no material to indicate that RKDK as a registered stock broker was involved in the transaction.

13. Even in the case of payment of monetary settlement term agreed between the respective parties, the entire settlement term of Rs. 4,71,00,000/- has been agreed to be paid by Mr. Deepak Choudhary only and not by RKDK Capital Market Ltd indicating that contested transaction was in his personal capacity.

14. In light of the above, the question of any violation of the Rules and Regulations applicable to stock brokers which are being administered by SEBI on part of the registered stock broker (i.e. RKDK Capital Market Ltd.) does not arise in this matter as the contested transactions are the private dispute between Hoppage and Mr. Deepak Chaudhary. In view of this, the prayers sought by Hoppage in its letter dated August 18, 2017 are not maintainable.

15. Having observed as above, I note that both Hopgage and RKDK in their submissions have stated that they have amicably arrived at a settlement and have also filed the settlement agreement before Chief Metropolitan Magistrate Calcutta in P.S Case No. 481/2016. Hopgage in its submissions has however requested SEBI to refrain from passing any order/direction in the matter until November 17, 2017 which is last date of the cheque towards full and final settlement of the dispute between it and RKDK. In this regard, it is noted that Hon’ble High Court of Calcutta vide its order dated June 21, 2017 has directed SEBI to consider and decide the complaint dated October 20, 2015 made to it, vis-a-vis SEBI’s rules and regulations, in accordance with law. Further, the Hon’ble Court in this regard has also fixed a timeline of eight weeks from the date of communication of this order and the said timeline is expiring on August 24, 2017. Thus, in view of the direction of Hon’ble High Court, I cannot accede to the request of Hopgage to postpone the passing of order to November 17, 2017.

16. Without prejudice to the above findings, I find that in the present case admittedly, Mr. Deepak Chaudhary received the shares from Hopgage in his personal demat account. In this regard, he wrote two letters dated September 5, 2000 and April 19, 2004 to Hopgage whereby he confirmed the receipt/holding of 18000 shares of RIL to Hopgage. It has been observed that both these letters were sent by Mr. Deepak Chaudhary on the letterheads of RKDK (earlier known as Puja Stock Brokers & Services Ltd.). While he had received the shares in his personal capacity he ought not to have utilized the letterheads of RKDK (the registered stock broker). This act of misusing the letterhead of a registered market intermediary needs to be viewed seriously and therefore Mr. Deepak Chaudhary is liable to be warned for this mis-deed committed by him.

17. In view of the foregoing, I hereby warn Mr. Deepak Chaudhary to refrain from indulging in acts as has been found in this case and advise him to maintain a clear segregation in his personal and professional role.

18. Since the contested transactions are the private dispute between Hoppage and Mr. Deepak Chaudhary, the question of any violation by RKDK Capital Market Ltd. of the Rules and Regulations applicable to stock brokers being administered by SEBI does not arise. Accordingly, the complaint filed by Hopgage dated October 20, 2015 and the subsequent communications filed by Hopgage and RKDK in that regard are disposed of.

Sd/- DATE: August 24, 2017 MADHABI PURI BUCH PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA