Order in the matter of HFCL, TELCO, Infosys and SSI in respect of Mr. Dilip S. Pendse

WTM/PS/23/IVD/ID-10/DEC/2012 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER In the matter of Himachal Futuristic Corporation Limited, Tata Engineering and Locomotive Company Limited, Infosys Technologies Limited and Software Solutions India Limited In respect of Mr. Dilip S. Pendse Date of hearing: June 27, 2011 and July 19, 2011 Appearances For noticee: Mr. Dilip S. Pendse Mr. V. M. Singh, Advocate For SEBI: Mr. Krishnanand Raghavan, Deputy General Manager Ms. Anitha Anoop, Deputy Legal Adviser Mr. Jainendra Shandilya, Assistant General Manager Mr. Pradeep Kumar, Assistant Legal Adviser Ms. Vasudha Goenka, Assistant Legal Adviser ORDER Under Sections 11, 11B and 11(4) (b) of the Securities and Exchange Board of India Act, 1992 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigation into the dealings of one Inshaallah Investments Pvt. Limited (hereinafter referred to as 'Inshaallah') in the scrips of Himachal Futuristic Corporation Limited (hereinafter referred to as 'HFCL'), Tata Engineering and Locomotive Company Limited (hereinafter referred to as 'TELCO') (presently known as Tata Motors Limited), Infosys Technologies Limited (hereinafter referred to as 'Infosys') and Software Solutions India Limited (hereinafter referred to as 'SSI') (hereinafter collectively referred to as 'said scrips' and individually by their respective names) on receipt of a complaint dated October 16, 2002, from Tata Finance Limited (hereinafter referred to as 'TFL').

The complaint alleged certain illegal carry forward transactions in the aforesaid scrips at the behest of Mr. Dilip S. Pendse (hereinafter referred to as the 'noticee'). Further, the transactions were executed on behalf of Inshaallah, in which Niskalp Investment and Trading Company Limited (hereinafter referred to as 'Niskalp'), a subsidiary of TFL, had vital financial interest. It was stated in the complaint that the noticee was the director in both Niskalp and Inshaallah. It was further alleged in the complaint that the noticee in complicity with two brokers, namely, Jhunjhunwala Stockbrokers Pvt. Limited (hereinafter referred to as 'Jhunjhunwala'), member, Bombay Stock Exchange (hereinafter referred to as 'BSE') and Pratik Stock Vision Pvt. Limited (hereinafter referred to as 'Pratik'), member, National Stock Exchange (hereinafter referred to as 'NSE'), executed the said transactions. The directors/ authorized signatories of Jhunjhunwala and Pratik (hereinafter collectively referred to as the 'brokers' and individually by their respective names) were the same.

2. The investigation conducted by SEBI inter alia revealed that Inshaallah had purchased shares of various scrips like Global Telesystems Limited (hereinafter referred to as GTL), HFCL, TELCO, Infosys and SSI on a ‘Principal to Principal’ basis, contract notes were issued in 'Form- B' from the respective brokers, and later these transactions were carried forward. Based on the findings of investigation, SEBI inter alia issued a show cause notice dated April 27, 2009 (hereinafter referred to as ‘SCN’) to the noticee under Sections 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) read with Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003. The SCN alleged that during the month of February, 2001, Inshaallah issued letters to the brokers agreeing to buy specific quantity of shares of the said scrips at a stated price on ‘Principal to Principal’ basis. On the days when the said transactions were being undertaken, one Anjudi Property and Investments Pvt. Limited (hereinafter referred to as 'Anjudi Property'), an entity allegedly related to the noticee had also written letters to the said brokers, thereby unconditionally agreeing to sell the same quantity of shares at a specific price on Principal to Principal basis. It was alleged that the noticee had undertaken illegal carry forward transactions in the said scrips on behalf of Inshaallah in complicity with the said brokers in order to transfer possible losses from the account of Anjudi Property arising out of the open purchase carry forward positions to the account of Inshaallah through off-market transactions when the prices of the subject scrips were going down. It has also been alleged that such transactions had not resulted in the delivery of shares or in the payment of consideration and were mere book entries to transfer the losses from the account of Anjudi

Property to Inshaallah. The SCN, therefore, alleged that the acts of the noticee were in violation of Section 16 of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as 'SCRA'), Regulations 3, 6(a) and 6(d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995 (hereinafter referred to as PFUTP Regulations) as applicable at the relevant period. Accordingly, it called upon the noticee to show cause as to why action under Section 23 of the SCRA read with Sections 11, 11B and 11(4) of the SEBI Act, including restraining him from accessing the capital market and prohibiting from buying, selling or dealing in the securities in any manner whatsoever for a particular period should not be initiated against him.

3. An opportunity for the inspection of documents was granted to the noticee on July 17, 2009. Thereafter, copies of certain documents were provided upon request, to the noticee vide letter dated July 30, 2009. The Advocate for the noticee, vide his letter dated September 10, 2009 asked for further documents. SEBI vide its letter dated October 21, 2009 forwarded the relevant documents to the noticee. Thereafter, various correspondence took place between SEBI and the Advocate for the noticee, which included the reply of the noticee dated March 17, 2011. In the said reply, an opportunity of personal hearing was also sought by the noticee. Accordingly, an opportunity of personal hearing was granted to the noticee on June 17, 2011 and July 19, 2011. On the dates fixed for personal hearing, Mr. Dilip S. Pendse appeared along with Mr. V.M. Singh, Advocate and Mr. A.M. Bhor and made submissions. The noticee also sought four weeks' time to file his written submissions which was duly granted. The noticee filed his written submissions vide letter dated October 08, 2011. The submissions of the noticee in brief are:

- The SCN has been issued after a lapse of more than six years and the inordinate delay has led to breach of principles of natural justice. - The present SCN has been issued with a view to override/ overcome the order of Hon'ble Securities Appellate Tribunal (hereinafter referred to as 'SAT') dated November 20, 2008 wherein proceedings in respect of the show cause notice of SEBI dated March 12, 2003 were set aside. Though, show cause notices were issued to the brokers, the violation alleged therein inter alia was breach of Section 13 of the SCRA despite the allegation against the noticee that he acted 'in complicity' with the brokers in the violation of Section 16 of SCRA. - He is not an associate of Dr. Anjali Beke and Mr. Dilip Beke. He is not involved in any manner in the operations of Anjudi Property and not aware of the transactions undertaken by Anjudi Property as he has no access to its records. He has been singled out as the SCN has only been issued to him. - The noticee denied permitting the transactions to be illegally carried forward. It is submitted that the carry over/ carry forward transactions were permitted in the case of principal to principal transactions and were covered by the bye laws of the BSE Rules and Regulations at the relevant time.

Further, the transactions executed by Inshaallah fall under the categories permitted by the Government Notification dated June 17, 1969. - It is submitted that the bills submitted by Jhunjhunwala to Inshaallah shows that the purchase transactions have been carried over along with other purchase transactions till their squaring off/ delivery through the BSE carry over/ badla mechanism at the making-up prices fixed by BSE at the end of every settlement together with payment of margin on each scrip fixed by the BSE. Further, the transactions in the said scrips were on principal to principal basis and therefore these would not be reflected in the trade log details of the concerned stock exchange. - The stated transactions were relating to the transfer of a carry-over position and no physical delivery of shares was required. On the sale of carry-over position, the margin money was refunded subject to deduction of loss or along with a profit as the case may be. Inshaallah has accounted for the said transactions on the basis of contract notes and bills issued by Jhunjhunwala and made on account payments to it from time to time during the period under consideration. - There was a transfer of carry-over position between Anjudi Property and brokers, on the one hand and brokers and Inshaallah on the other hand.

The price consideration had also been paid since margin monies have been paid by brokers to the BSE/ NSE for the respective carry-over positions as fixed by BSE/ NSE at the end of each settlement and mark to market difference and other charges were paid by all the parties as per the then prevailing practice and BSE/ NSE Rules, bye laws and regulations.

4. I have carefully considered the SCN, reply and written submissions filed by the noticee and the material available on record. The noticee has submitted that the present SCN has been issued with a view to overide/ overcome the proceedings in respect of the show cause notice dated March 12, 2003 and the order of Hon'ble SAT dated November 20, 2008 wherein the appeal of the noticee was allowed and the SEBI order dated December 28, 2007 was set aside. However, I note that the said SEBI order dated December 28, 2007 deals with the illegal carry forward transaction in the scrip of GTL and it does not discuss anything about HFCL, TELCO, Infosys and SSI with which the present SCN deals with. Therefore, the instant proceedings are separate and independent. The noticee has been given sufficient opportunities to explain its case in response to the SCN. The noticee has also submitted that he has been singled out as the SCN has only been issued to him. This submission of noticee does not hold good, as appropriate proceedings have already been initiated as against all the entities that were prima facie found guilty in the investigation. The noticee has argued that the violation of Section 13 of SCRA was alleged as against the brokers and the same has been disposed of, with a consent order. It has been argued that the violation of Section 16 has not been alleged as against the said broker. I have considered this submission of the noticee. However, the reference to a wrong provision, even assuming that it was a mistake, could not absolve the charges that were leveled against them. It is not the case of the noticee that the brokers have been let off, as they were charged with a different provision for the same set of transaction. I have also perused the relevant order in respect of the brokers. The facts that constitute the violation in the case of brokers and that of instant case pertain to the same set of transaction. Thus, having addressed the preliminary objections raised by the noticee, I now proceed to the issues that arise for my consideration i.e.:

a. Whether the transactions executed by Inshaallah in the said scrips were in the nature of illegal carry forward transactions? b. If the transactions of Inshaallah are illegal carry forward transactions, whether the same were entered by the noticee on behalf of Inshaallah in order to transfer the losses of Anjudi Property?

5. Whether the transactions executed by Inshaallah in the said scrips were in the nature of illegal carry forward transactions?

a. It is an admitted fact that during the relevant period, the noticee was the director of Inshaallah. The noticee has not denied the off-market transactions executed by Inshaallah in the scrips of HFCL, TELCO, Infosys and SSI through brokers. However, he has denied the allegation of permitting the transactions to be illegally carried forward.

b. Before proceeding further on the issue, it is necessary that the transactions of Inshaallah in the respective scrips may be discussed, the details of which are also given in the SCN. The extracts of the same are as under: Scrip Purchase Sale Settlement Observation (Broker) transactions transactions HFCL Vide letter dated Vide letter dated On April 10, 2001, (through February 21, February 21, Inshaallah sold Jhunjhun 2001, Inshaallah 2001, Anjudi 499 shares at a wala at agreed to buy Property agreed price of 100.64 BSE) 3,000 shares on to sell 3,000 and rest 2,501 Principal to shares on shares were sold at Principal basis at Principal to a price of a price of 850. Principal basis 100.69. at a price of 845. The analysis of the Anjudi Property's TELCO Vide letter dated Vide letter dated On April 02, 2001, demat account statement for the (through February 28, February 28, Inshaallah sold period of January 01, 2001 to April Jhunjhun 2001, Inshaallah 2001, Anjudi 30,000 shares in 30, 2001, the bank account wala at agreed to buy Property agreed the price range of transactions of 1 lakh and above for BSE) 30,000 shares on to sell 30,000 60.90 to 62. the period of April 04, 2000 to June Principal to shares on 30, 2001 and the details of delivery Principal basis at Principal to a price of 106. Principal basis based share transaction for the period at a price of of April 04, 2000 to June 30, 2001, 105.50. did not reveal any demat transfer of Infosys Vide letter dated Vide letter dated On April 02, 2001, HFCL, TELCO, Infosys and SSI (through February 28, February 28, Inshaallah sold shares by Anjudi Property nor did it Jhunjhun 2001, Inshaallah 2001, Anjudi 500 shares at a show any money received from wala at agreed to buy 500 Property agreed price of 3846.15.

Jhunjhunwala in the relevant period. BSE) shares on to sell 500 Principal to shares on Principal basis at Principal to a price of 6,310. Principal basis at a price of 6300. SSI Vide letter dated Vide letter dated On April 02, 2001, (through February 28, February 28, Inshaallah sold Jhunjhun 2001, Inshaallah 2001, Anjudi 10,000 shares in wala at agreed to buy Property agreed the price range of BSE) 20,000 shares on to sell 20,000 601 to 618.10. Principal to shares on The rest 10,000 Principal basis at Principal to shares were taken a price of 1,285. Principal basis delivery on April at a price of 07, 2011 at a price

1,280. of 599.50. HFCL Vide letter dated Vide letter dated On April 10, 2001, The analysis of the Anjudi Property's (through February 21, February 21, Inshaallah sold demat account statement for the Pratik at 2001, Inshaallah 2001, Anjudi 500 shares at a period of January 01, 2001 to April NSE) agreed to buy Property agreed price of 100.20. 30, 2001, the bank account 10,000 shares on to sell 10,000 transactions of 1 lakh and above for Principal to shares on the period of April 04, 2000 to June Principal basis at Principal to a price of 850. Principal basis 30, 2001 and the details of delivery at a price of based share transaction for the period 845. of April 04, 2000 to June 30, 2001, did not reveal any demat transfer of HFCL shares by Anjudi Property nor did it show any money received from Pratik in the relevant period.

c. The noticee has not denied that Inshaallah had agreed to buy a specific quantity of shares of HFCL, TELCO, Infosys and SSI on ‘Principal to Principal’ basis (vide 'Form B' contract note) at specified prices, as stated in the letters issued by Inshaallah (signed by one Mr. Arun Verma on behalf of the noticee) on various dates, to the brokers. Interestingly, on the same days when Inshaallah was writing the said letters to the brokers, Anjudi Property has also written letters to the brokers and agreed to sell a similar quantity of shares of HFCL, TELCO, Infosys and SSI on Principal to Principal basis at a specified rate i.e., very close to the prices given by Inshaallah (the difference in the price ranged between 50 paise to 10). It is seen in all these cases that the brokers have issued 'Form B' contract notes to the respective parties and that the relevant transactions were executed. These very fact point towards prior meeting of minds towards the execution of the alleged transactions.

d. As mentioned in the 'observation column' in the above referred table, there was no demat transfer from the account of Anjudi Property of these shares nor is any proof available for receiving consideration in the aforesaid sale of shares. As per the SCN, Anjudi Property had an outstanding purchase carry forward position in the scrips of TELCO, Infosys and SSI on market as on February 16, 2001. Thus, it is clear that Anjudi Property did not have the shares of TELCO, Infosys and SSI in its demat account on the date of its writing the letters to the brokers. It is seen that instead of settling these carry forward positions on the market, the shares were sold by Anjudi Property to the brokers on ‘Principal to Principal’ basis. Such transaction cannot be said to be valid, as under the normal circumstances, the brokers should not have purchased the shares which were not in the possession of Anjudi Property. Further, I note that the brokers also should not have sold similar quantities of shares to Inshaallah as they were not in the possession of such number of shares. It is seen from the SCN that no purchase carry forward position was built on BSE through Jhunjhunwala on behalf of Inshaallah.

e. From the facts that are available on record, I note that the alleged transactions of Inshaallah and Anjudi Property were not executed on the exchange provided platform. However, these transactions being done on ‘Principal to Principal’ basis, the same should have been completed as per the norm applicable for a spot delivery contract. However, it is an admitted fact that Inshaallah had not taken delivery of such purchased shares. Further, no fund movement is reflected in the bank account statement of Anjudi Property. The brokers have also not informed these off-market trades in the said scrips to the stock exchanges.

f. The noticee in its submissions has argued that the above discussed transactions were the carry-over position which changed hands between the parties and no physical delivery of shares was required. Further, it has been submitted by the noticee that the carry forward principal to principal transaction were permitted at the relevant point of time at BSE. This argument of the noticee is untenable as the letters of Inshaallah and Anjudi Property specifically state that they wanted to buy and sell respectively a specific number of shares at a specific price and the same finds no mention of any carry-over of positions. The argument of the noticee that carry-over/ carry forward transactions were permitted in the case of Principal to Principal transactions, is devoid of merits for the following reasons:

- If a broker enters into a transaction on stock exchange and carries forward the settlement of the transaction, the same can be considered to be a regular transaction. However, if a broker does not enter into a transaction on the stock exchange and make only entries in his books of account and then carries forward the settlement of such transactions, then such transactions cannot be termed as legal. In this regard, I refer to the Section 16 of the SCRA and the notification and circular issued there under, which reads as under: "Power to prohibit contracts in certain cases. 16. (1) If the Central Government is of opinion that it is necessary to prevent undesirable speculation in specified securities in any State or area, it may, by notification in the Official Gazette, declare that no person in the State or area specified in the notification shall, save with the permission of the Central Government, enter into any contract for the sale or purchase of any security specified in the notification except to the extent and in the manner, if any, specified therein. (2) All contracts in contravention of the provisions of sub-section (1) entered into after the date of notification issued thereunder shall be illegal."

- Further, vide notification bearing number S.O. 2561 dated June 27, 1969 issued under the said Section 16(1) of the SCRA, the Government of India has placed certain restrictions. The relevant portion of the said notification reads as under: “In exercise of the powers conferred by sub-section (1) of Section 16 of the Securities Contract (Regulation) Act, 1956 (42 of 1956), the Central Government, being of opinion that it is necessary to prevent undesirable speculation in securities in the whole of India, hereby declares that no person, in the territory to which the said Act extends, shall, save with the permission of the Central Government, enter into any contract for the sale or purchase of securities other than such spot delivery contract or contract for cash or hand delivery or special delivery in any securities as is permissible under the said Act and the rules, bye-laws and regulations of a recognised stock exchange: ......" [Emphasis Supplied] Therefore, in terms of the aforesaid notification, any contract for sale or purchase of securities which is not a spot delivery contract, or contract for cash, hand delivery or special delivery in any securities as permitted under the SCRA, the rules, bye-laws and regulations of a recognized stock exchange are considered to be undesirable transactions in securities.

In the present case, it is thus clear that, the transactions between the parties, are those that are prohibited by the above said notification. - SEBI has issued certain directions under Section 16 of SCRA, vide another notification bearing number S.O. 184(E) dated March 01, 2000. The relevant portion of the same has been reproduced below: “no person in the territory to which the said Act extends, shall, save with the permission of the board (i.e. SEBI), enter into any contract for sale or purchase of securities other than such spot delivery contract or contract for cash or hand delivery or special delivery or contract in derivatives as is permissible under the said Act.” The said notification prescribes that any contract for sale or purchase of securities, which is not a spot delivery contract/ contract for cash/ hand delivery or special delivery or contract in derivatives as is permissible under the SCRA, could be entered into only with the permission of SEBI. However, there is no record to show that the contracting parties here had approached SEBI and obtained permission, as required in terms of the above notification, for entering into the impugned transactions.

g. The transactions as detailed in sub-para 'b' above were entered into for Inshaallah and Anjudi Property, by the brokers Jhunjhunwala and Pratik. Inshaallah and Anjudi Property have not taken deliveries or made any payments for such transactions and the settlement for the transactions were carried forward. On a combined reading of the aforementioned provisions, it is clear that the impugned transactions were not permitted at the relevant point of time and the said transactions are thus illegal.

h. The noticee in his reply has relied upon the bills of Jhunjhunwala to Inshaallah to show that the purchase transactions were carried forward at the 'making up' prices fixed by the BSE for time to time at the end of every settlement. However, respective positions ought to have been created by the concerned parties on the exchange to consider them as 'carry forward'. Such illegal transactions will not become plainly legal by issuing bills simpliciter and making payments. Therefore, I am unable to accept the argument of the noticee that the carry-over of the transactions for Inshaallah has been done by Jhunjhunwala on the BSE and at the 'making up' prices as fixed by the BSE from time to time at the end of every settlement.

6. If the transactions of Inshaallah are illegal carry forward transactions, whether the same were entered by the noticee on behalf of Inshaallah in order to transfer the losses of Anjudi Property?

a. Upon conclusion of the issue that the transactions entered by Inshaallah were illegal, the issue that now remains is whether the noticee had any role in avoiding losses to Anjudi Property.

b. I note from the SCN that the price of the said scrips were declining sharply during the period of February, 2001 to April, 2001. As discussed in Para 6(c) above, Anjudi Property had an outstanding purchase carry forward position in the scrips of TELCO, Infosys and SSI on market. The sequence of the facts in the case indicate that there were significant losses in the purchase carry forward position of Anjudi Property and Principal to Principal carry forward sell transactions were undertaken to cover its possible losses. Further, the impugned illegal carry forward transactions did transfer the possible losses to Inshaallah.

c. It is necessary to find out whether the noticee and Anjudi Property were connected or not in order to conclude that the noticee undertook the illegal transactions so as to avoid the losses to Anjudi The SCN also states that the noticee is a family friend of Dr. Anjali Beke, a director of Anjudi Property at the relevant point of time. However, the noticee in his reply, has denied association with Dr. Anjali Beke or his involvement in the operations of Anjudi Property. In this regard, reference is drawn to in the order of Hon'ble SAT dated October 26, 2006, which reads as under: "It is an admitted fact that Dr. Anjali Beke was well known to Shri Dilip Pendse for more than ten years and it is her own case that he carried on business in her name. Their closeness cannot, therefore, be in doubt."

This observation of SAT and a closer look at the bank statements of Anjudi Property showing instances of fund movement amongst Anjudi Property, the noticee and Inshaallah as well, indicates the connection between these entities. The common factor amongst these is undoubtedly the noticee himself.

d. The facts that Anjudi Property and Inshaallah wrote letters to the brokers on the same dates and interestingly the quantity of the shares requested for sale and buy respectively were the same which were carried forward. These facts cannot be said to be mere co-incidence and definitely these point to the meeting of minds of these concerned entities before issuing such letters to the brokers. The noticee, who was the Managing Director of TFL and the Director of Inshaallah at the relevant point of time had issued letters for the purchase of shares of the said scrips by Inshaallah from the brokers. On the other side, the related entity of the noticee, Anjudi Property issued letters to the brokers for the sale of shares of the said scrips. These positions were then illegally carried forward in order to give a picture that the losses in the trading of the said scrips were incurred by Inshaallah. Thus, the aforesaid acts of the noticee are in clear of violation of the provisions of Regulation 3 and 6(a) of the PFUTP Regulations. However, as regards the charge of violation of the provisions of Regulation 6(d) of the PFUTP Regulations, I note that the material on record falls short of proving the same.

7. The noticee in its submissions has stated that there has been an inordinate delay in the proceedings. In this regard, I note that the proceedings have been prolonged as the investigation had to deal with complex facts and records. After the issuance of SCN, the inspection of the documents also consumed time. However, delay cannot be a ground for exoneration.

8. In view of the foregoing, I, in exercise of the powers conferred upon me under Sections 19, 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 read with Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, hereby restrain Mr. Dilip S. Pendse from accessing the capital market and prohibit him from buying, selling or otherwise dealing in the securities market, directly or indirectly, for a period of two years, from the date of this order.

9. This order shall come into force with immediate effect.

10. The stock exchanges are hereby directed to enable Mr. Dilip S. Pendse to square off his existing open positions, if any, in Futures and Options segment, at the earliest.

11. This order shall be served on all recognized stock exchanges and depositories to ensure that Mr. Dilip S. Pendse is not allowed to undertake transactions as prohibited in Para 8 above.

DATE : 24/DEC/2012 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA