Order in the matter of IPO Investigations-Ashmi Financial Consultancy P Ltd

1.1 Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’), as a part of ongoing surveillance activity, had initiated a probe and advised Bombay Stock Exchange Ltd. (hereinafter referred to as ‘BSE’) and National Stock Exchange (hereinafter referred to as ‘NSE’) to look into the dealings in the shares issued through Initial Public Offerings (hereinafter referred to as ‘IPOs’) before the shares were listed on the Stock Exchanges. SEBI had also received from Investors/ Investors Associations, certain complaints and requests for investigation relating to irregularity in IPOs. SEBI appointed an Investigating Authority under Section 11C of the SEBI Act, 1992 and the Investigating Authority thereafter, carried out a detailed investigation by calling for data from various entities such as Depository Participants, Banks, Issuer Companies, the Depositories and the Registrars to the Issues etc. During the investigation, it was found that large numbers of multiple dematerialized accounts with common addresses were opened in the name of benami or fictitious entities and/or persons by a few operators who have played major role in cornering the shares meant for retail investors.

1.2 SEBI found that certain entities had cornered IPO shares reserved for retail applicants by making applications in the retail category through the medium of thousands of fictitious/benami IPO applicants with each of the application being for small value so as to be eligible for allotment under the retail category. Subsequent to the receipt of IPO allotment, it was suspected that these fictitious/ benami allottees had transferred shares to their principals who in turn were suspected to have transferred the shares to the financiers who had originally made available the funds for executing the game-plan.

1.3 On the basis of data obtained from National Securities Depository Ltd. (hereinafter referred to as ‘NSDL’) and Central Depository Services (India) Ltd., (hereinafter referred to as ‘CDSL’), it was suspected that 24 key operators had made off-market transfers to various entities during the pre-listing period. These entities who received shares through off-market transfers from the 24 key operators would have provided finance to the key operators which were used for cornering the retail portion of the IPO shares. Since the financiers had received the shares from the key operators, it was suspected that these financiers were the ultimate beneficiaries of the IPO abuse committed by the key operators. As observed in the cases of Yes Bank and IDFC, it would be seen that many of the financiers might have sold the shares immediately on listing and commencement of trading on the stock exchanges thereby profiting from the higher listing price as compared to the issue price. Even in a few cases where the financiers may not have actually sold the shares in the market, made notional gains from the higher listing price.

1.4 It was suspected that Ashmi Financial Consultancy Pvt. Ltd. (hereinafter referred to as ‘Ashmi’) was financier to the key operators Shri Dhaval A. Mehta (hereinafter referred to as ‘Shri Mehta’), Shri Dhaval K. Katakia (hereinafter referred to as ‘Shri Katakia’) and Shri Dharmesh Bhupendra M (hereinafter referred to as ‘Shri Dharmesh’). The details of off market transfer of shares to Ashmi are tabled below: Table – 1 Client Client Company Name of DP Name Cleint Id No.of Date of Id Name Name receiving Shares transact A/C holder ion 10139886 Dhaval A IDFC Ashmi Khandwala 10148913 146832 August Mehta Financials Int. Fin. Ser. P. 11,2005 Ltd. 40080719 Dhaval K IDFC Ashmi Khandwala 10148913 39900 August Katakia Financials Int. Fin. Ser. P. 10,2005 Ltd. 40080719 Dhaval K Shopper’s Ashmi Khandwala 10148913 9250 May Katakia Stop Financials Int. Fin. Ser. P. 24,2005

Client Client Company Name of DP Name Cleint Id No.of Date of Id Name Name receiving Shares transact A/C holder ion Ltd. 40081967 Dharmesh Shopper’s Ashmi Khandwala 10148913 12700 May Bhupendra Stop Financials Int. Fin. Ser. P. 24,2005 M Ltd. 40080719 Dhaval K Shopper’s Ashmi Khandwala 10148913 150 June Katakia Stop Financials Int. Fin. Ser. P. 10,2005 Ltd.

1.5 It was found that Shri Mehta, Shri Katakia and Shri Dharmesh, Key operators made off-market transfers during the pre-listing period to Ashmi. SEBI worked out preliminary estimate of the profits made (real or notional) by the financiers involved in these IPOs by comparing the closing price (on NSE) on the first day of listing in respect of each of the above IPOs with the issue price of the respective IPOs. The calculation are given below: Table - 2 Client Name Company Name of No. of Closing Issue Notional Name Financier Shares price on price Gains (Rs.) the date of listing Dhaval A IDFC Ashmi 146832 69.50 34.00 52,12,536.00 Mehta Financials Dhaval K IDFC Ashmi 39900 69.50 34.00 14,16,450.00 Katakia Financials Dhaval K Shopper’s Ashmi 9250 372.60 238.00 12,45,050.00 Katakia Stop Financials Dharmesh Shopper’s Ashmi 12700 372.60 238.00 17,09,420.00 Bhupendra M Stop Financials Dhaval K Shopper’s Ashmi 150 372.60 238.00 20,190.00 Katakia Stop Financials

1.6 The above mentioned data, prima facie demonstrated the involvement of Ashmi in the irregularities relating to IPOs and goes to show that it had violated the provisions of SEBI Act, Rules and Regulations framed there under for protecting the interest of investors and the integrity of the securities market.

1.7 In view of these findings, SEBI vide ad interim ex-parte order dated April 27, 2006 under section 19 read with sections 11 and 11B of the SEBI Act, 1992 and Section 19 of the Depositories Act, 1996 issued certain interim directions against various market participants including Ashmi for violation of Regulation 3 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003 (hereinafter referred to as ‘FUTP Regulations’) pending enquiry and passing final order. Ashmi was directed not to buy, sell or deal in the securities market including in IPOs, directly or indirectly, till further directions.

1.8 Para 17.18 of the ad interim ex-parte order dated April 27, 2006, further stated that the said order shall be treated as show cause notice against the concerned entities named therein including Ashmi. These entities were given an opportunity for filing their objections, if any, to the order within 15 days from the date of the order and if they so desire, avail themselves of an opportunity of personal hearing at the SEBI Head Office, Mumbai within 15 days from the date of the order. They were also given an opportunity to avail inspection of the relevant documents relied upon by SEBI against them, prior to hearing.

1.9 Aggrieved by the aforesaid ad-interim ex-parte order, Ashmi had filed a Special Civil Application (hereinafter referred to as ‘SCA’) before the Hon’ble Gujarat High Court at Ahmedabad. The matter was heard at length along with other connected matters by the Hon’ble High Court on various dates and vide order dated July 17, 2006 dismissed the SCA.

2.0 Pursuant to the above, Ashmi filed its reply vide letter dated January 25, 2007 and inter alia submitted as under:

Legal Issues: (i) The provisions of Section 11B and 11(4) of the SEBI Act and section 19 of the Depositories Act do not give power or authority to pass the ex-parte order. (ii) Powers available under section 11B of the SEBI Act are not available to SEBI for the reason that a direction there under can be issued only “after making or causing to be made an enquiry”. Investigation and enquiry are two distinct and separate legal proceedings under the SEBI Act and not synonymous as could be seen from SEBI Act. In the instant case, no enquiry as contemplated as under section 11B has either been made or caused to be made by the Board so as to warrant issuance of directions against Ashmi under section 11B. (iii) From the order it is clear that no enquiry has been initiated or is pending or is completed. Further in so far as investigation is concerned it is not clear from the order as to whether investigation in terms of section 11C of the SEBI Act has been initiated by the SEBI or not. If the investigation conducted by the Board as referred to in the order is not in consonance with section 11C of the SEBI Act, then the directions issued to Ashmi under section 11(4)(b) are also without jurisdiction.

(iv) Ashmi is not an intermediary registered with SEBI and also not associated with the securities market. The scope of expression “person associated with the capital market” as used in section 12 of the SEBI Act has to be understood following the principal of ejusdem generis. (v) An ad-interim ex parte order is justified only if circumstances so warrant. There was no such emergent situation warranting such an ex-parte order. The order should demonstrate that the situation was emergent warranting an ad-interim order. (vi) The impugned order is vitiated by gross violation of principles of natural justice in as much as no opportunity was ever provided to Ashmi to explain its version and circumstances as stated in the ex-parte order do not justify dispensing of pre decisional hearing of the noticee. Post decisional hearing provided under section 11(4) is an exception, that pre decisional hearing is the general rule. (vii) The law does not recognize show cause cum penal orders in the matters like the one under reference. The directions under Section 11B and 11(4) can be issued for safeguarding the markets and it cannot be issued for penalizing the person. In the light of punitive directions, the so called show cause notice is façade and a mockery of justice. The order issued against Ashmi is neither preventive, remedial nor curative but is penal in effect. Factual Issues: (viii) It is submitted that Ashmi is in the business of providing finances to various entities/persons as commercial lenders. In the course of the business, they used to lend the surplus money in their possession not required for their immediate business purpose, to the people in need of funds for their business so that idle funds will earn some returns. Dhaval K Katakia, Dhaval Mehta & Dharmesh Bhupendra M are such entities, who approached them for seeking funds for investing in the capital market. In this context they had given loan to Dhaval K Katakia, Dhaval Mehta & Dharmesh Bhupendra M. It is submitted that granting a loan to Dhaval K Katakia which was approved by the Board of Directors of their company. They had no role in taking the investment decisions by Dhaval K Katakia, Dhaval

K Katakia, Dhaval Mehta and Dharmesh Bhupendra M. Investment decision was exclusively by the borrower. (ix) Their role was limited to and restricted to lending money and ensuring that the same was repaid to them. The financing done by them was done in good faith and in normal course of business, they were not aware of designs of the borrowers and they had plans to corner the shares in the retail category in the IPOs. (x) It is further submitted that they do not fulfill the requirement of the definition of the term “financier” as given in para 4 of the said order for the reason that they were not ultimate beneficiaries in the scheme of cornering retail allotment nor at any point of time indulged in any activity for cornering retail allotment of shares. This basic requirement of definition of term “financier” not having been fulfilled, it is submitted that the said order, in so far as their company is concerned, does not stand legal scrutiny. (xi) They deny that they had cornered/acquired shares in the IPO of IDFC & Shoppers Stop by financing the borrowers as alleged. Simply because the y have sold the shares, received by them from the borrowers towards part payment of loan and earned some profit, they have been alleged to be the beneficiaries and have been accused of being principal the borrowers, which is absurd. (xii) With regard to the transfer of 146832 shares of IDFC by Dhaval Mehta to them it is submitted that: (i) They had given a loan of Rs. 2,98,25,000 to Mr. Dhaval Mehta. The said loan was to be repaid in cash by Mr. Dhaval Mehta. (ii) According to the mutually agreed terms they would get the money back or failing which delivery of shares bought by Mr. Dhaval Mehta as a security and the same would be sold in the market at the time, price and quantity instructed by him without deducting any profit or charge on the same.

(iii) For this arrangement interest at the rate of 12% was charged and the same would be deducted by Ashmi from the sale proceeds before refunding the balance back to him. (iv) Accordingly Dhaval Mehta had transferred the shares of IDFC to their demat account, which were sold in the market on August 12, 2005 and the balance sale proceeds after deducting their interest were refunded back to him. (xiii) With regard to transfer of 39900 shares of IDFC by Dhaval Katakia & 12700 shares of Shoppers Stop by Dharmesh Bhupendra M to them it is submitted that: (i) They had given lo loan of Rs. 71,40,000 & Rs. 2,51,56,250 to Dhaval K Katakia, Dharmesh Bhpendra M respectively on July 22, 2005 & May 04, 2005 for investing in capital market. The said loan was to be repaid either in cash or in kind i.e. in the form of shares or marketable securities. (ii) Since Dhaval K Katakia did not have adequate funds to pay back our loan amount, they made part payment of loan of Rs. 71,40,000 by transferring 39900 shares of IDFC which were valued at Rs. 34.19 i.e the issue price in the IPO plus 19 paise as stated by Dhaval Katakia, to our demat account on August 11, 2005 and issued a cheque for the balance amount of Rs. 57,83,400. (iii) Thereafter 39900 shares of IDFC were sold in the market. (iv) The said sale of 39000 shares were sold in the market in four tranches as follows: Date Quantity August 12, 2005 12140 September 26, 2005 764 September 26, 2005 25360 September 26, 2005 1636 (v) Since Dharmesh Bhupendra M did not have adequate funds to pay back their loan he made part payment of loan of Rs. 2,51,56,250 by transferring 12700 shares of Shoppers Stop which were value at Rs/ 240.26 i.e the issue price plus Rs.

2.26 in the IPO as stated by Dharmesh Bhupendra M to their demat account on May 23, 2005 and issued a cheque for the balance amount of Rs. 2,21,33,650. On May 23, 2005 Ashmi sold the shares of Shoppers Stop in the market. (vi) Thus, the transfer of 146832 shares of IDFC by Daval Mehta, 39900 shares of IDFC from Dhaval Katakia and 12700 shares of Shoppers Stop from Dharmesh Bhupendra M to Ashmi was in normal course of business. 3.1 Ashmi was given an opportunity of personal hearing before me on February 02, 2007. On the designated day Shri Vinay Chauhan, Advocate appeared on behalf of Ashmi and made submissions. Vide letter dated March 19, 2007 written submissions were made which were reiteration of earlier submissions made vide letter dated January 25, 2001.

4.1 I have carefully considered the prima facie findings made against Ashmi in the ad-interim ex-parte order dated April 27, 2006, reply of Ashmi, including the submissions made by it during the personal hearing and its written submissions. The sole question arises is to whether the interim order dated April 27, 2006 shall not be confirmed as against Ashmi.

4.2 Ashmi has contented that the provisions of sections 11B and 11(4) of the SEBI Act and section 19 of the Depositories Act do not give power or authority to SEBI to pass the ex-parte order. In this regard, it would be pertinent to refer to para 17.1 of the ex-parte order, which enumerates the sections under which the ex-parte order was passed. As may be seen from the said para, that the order was passed with a view to protect the interests of investors and securities market from further acts by the manipulators such as manipulation in IPOs. The order was passed by the Whole Time Member, SEBI in exercise of the powers delegated to him by the SEBI Board in terms of Section 19 of the SEBI Act read with sections 11, 11B and 11 (4) (b) of the SEBI Act and Section 19 of the Depositories Act, 1996. The power to pass an ex-parte order, is derived from Section 11 (4) of the SEBI Act. The proviso to Section 11 (4) clearly empowers SEBI to pass ex-parte orders in emergent situations and a post decisional hearing can be granted thereafter. The contention of Ashmi, therefore, is devoid of merit.

4.3 Ashmi contended that powers available under section 11B of the SEBI Act are not available to SEBI for the reason that a direction there under can be issued only “after making or causing to be made an enquiry”. It is true that “investigation” and “enquiry” are two distinct and separate legal processes under the SEBI Act as contented by Ashmi. However, I note that SEBI had collected numerous factual findings from various sources during the course of its investigation into the dealings in shares issued through IPOs. The order was passed after a comprehensive examination of the factual findings, detailed reasons of which are mentioned in the order. I am of the view that this process amounts to an “enquiry” within the meaning of section 11B of the SEBI Act. I assert that “enquiry”, as contemplated under section 11B, is different from “enquiry” as provided for under the SEBI (Procedure for Holding Enquiry by an Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as Enquiry Regulations). To support my assertion, I would like to lay forth the observations made by the Hon’ble Bombay High Court in the Writ Petition of Anand Rathi v. SEBI (2002) 110 Com Cas 837, challenging a similar interim Order of SEBI against the President of a Stock Exchange:

“the power which has been conferred by section 11B to issue direction are of widest possible amplitude and are exercisable in the interests of investors and in order to prevent inter alia a broker from conducting his business in a manner detrimental to the interests of investors or the securities market. The said power to issue directions under section 11B must carry with it by necessary implication, all powers and duties incidental and necessary to make the exercise of these powers fully effective including the powers to pass interim orders in aid of the final orders. The provision of section 11B it is to be noted has been introduced by an amendment brought about in 1995 and the same seeks to confer additional power on the board by way of interim measures, pending inquiry. The same is intended for the protection of the interests of the investors and the securities market”. I further note that action under the Enquiry Regulations are applicable to intermediaries registered under section 12 of the SEBI Act. In case of non intermediaries the enforcement proceedings are taken up under Section 11 and 11 B and the word “enquiry” therein denotes compliance to natural justice. From the above, I note that recording of prima facie findings based on material showing necessity for passing the interim order would be construed as enquiry under Section 11B and no formal enquiry as in an accusatorial proceeding is required.

I have further noted that the Hon’ble Securities Appellate Tribunal has vide its order dated January 8, 2007, in the matter of Karvy Stock

Broking Limited v. SEBI, upheld the power of SEBI in issuing directions under section 11 and 11B of the SEBI Act, pending investigation and enquiry.

4.5 I note that the ex-parte order was passed after substantive completion of investigation conducted under section 11C of the SEBI Act and pending further enquiry. The provisions of Section 11 (4) of the SEBI Act empowers SEBI to pass an order in the interest of investors or securities market, either pending investigation or enquiry or on completion of such investigation or enquiry which also includes power to restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities.

The Hon’ble SAT in the matter of Karvy Stock Broking Ltd. v. SEBI, observed as under: “As is clear from the language of sub section (4) the measures that the Board may take or the orders that it may pass would be “either pending investigation or enquiry or on completion of such investigation or enquiry”. The word ‘investigation’ as used in section 11(4) has not been defined. It obviously refers to the investigation as ordered under section 11- C of the Act because sections 11-C and 11(4) were introduced simultaneously in the year 2002 when Parliament found that the Board prior to their introduction did not have statutory power to investigate. The word ‘inquiry’ too has not been defined in the Act though it finds mention in Sections 11, 11B, 11D and 15I. Under section 12(3) of the Act also, the Board holds an inquiry under the inquiry regulations for imposing major or minor penalties including the penalty of suspension or cancellation of a certificate of registration. It is, thus, clear that an inquiry is held under sections 11, 11B and 11D, it is also held under section 12(3) and also under section15I. Having regard to the scheme of the Act, the rules and regulations made thereunder we are clearly of the view that even though the inquiries contemplated by the Act may be held under different set of provisions, their object is one and the same viz. to help the Board to promote the development of and to regulate the securities market and protect the interests of investors. The inquiry under section 11 of the Act is held by the Board to find out what measures it needs to take to protect the interests of the investors and what steps it needs to take to promote the development of and to regulate the securities market………………. .As already observed, the Board also causes an inquiry to be made by an inquiry officer under the inquiry regulations and/or by an adjudicating officer under Chapter VIA. It is during the pendency of any of these inquiries or on their completion that the Board may pass appropriate order – interim or final. This is clear from the language of section 11(4).” Therefore the contention of Ashmi that if the investigation conducted by SEBI as referred to in the ex-parte order is not in consonance with section 11C of the SEBI Act, then the directions issued to Ashmi under section 11(4) (b) are also without jurisdiction is not tenable.

4.6 I note that a plain reading of section 11 of the SEBI Act shows that it is the duty of SEBI to protect the interest of investors in securities and to promote the development of and to regulate the securities market by taking such measures as it thinks fit. Reference is drawn to para 17.1 of the ex-parte interim order which states as under :

“In the wake of the interim orders in the case of Yes bank and IDFC IPOs there has been a spate of public complaints alleging manipulation in IPO’s and urging immediate action from SEBI for protecting the retail investors. Also there is a heightened investors’ concern on the IPO’s as reflected in the tenor of demands made on SEBI and the same calls for a timely response from SEBI as regulator to restore the confidence of the retail investor. Amidst such public expectations, coupled with due regard to the fact that a number of IPO’s are in the wait for entry into the securities market, which need to be insulated from the manipulations of the various entities as mentioned in this order by suitably restraining them from participation in the ensuing IPO’s which has acquired a sense of urgency and which cannot brook the normal delay of quasi judicial proceedings for taking a decision, there is an imperative need to pass the present interim order to protect the market particularly the IPO’s from being preyed on by predatory manipulators. Further if the entities, as prima facie found to be instrumental in tilting the IPO allotment process to their favour by the intricate modus operandi as clearly seen in the findings of this order, are allowed to operate in the market any more, the same is fraught with immense mischief and incalculable damage to IPO allotment process besides undermining the confidence of the retail investors who are urging for a fair deal in the market free of such manipulators”. From the above, I find that the ex-parte order, was passed in exercise of powers under section 11 (4) and 11B of SEBI Act to protect the interest of investors and securities market pending investigation and passing of final orders. Therefore the contention of Ashmi that the order should demonstrate urgency warranting an ad-interim ex-parte order is fairly addressed in para 17.1 of the ex-parte order.

4.7 Ashmi has also raised the contention that ad interim ex-parte order was passed in violation of principles of natural justice. As is evident from the above mentioned provisions of the SEBI Act, SEBI has power to pass such an order in the interest of investors even before giving an opportunity of hearing to the person concerned. When the statute itself confers powers upon SEBI to pass appropriate ad-interim ex-parte order, there is no question of violation of principles of natural justice. I state that in certain circumstances, application of principles of natural justice could be modified and even excluded. It is well established that where a right to a prior notice and an opportunity to be heard before an order is passed would obstruct taking of prompt action or in emergent situations, such a right could be excluded. Further, it could also be excluded where the nature of the action to be taken, its object and purpose and the scheme of the relevant statutory provisions warrant its exclusion. Reference is drawn to the matter of Liberty Oil Mills case wherein Supreme Court observed as under: “We do not think that it is permissible to interpret any statutory instrument so as to exclude natural justice, unless the language of the instrument leaves no option to the court.

Procedural fairness embodying natural justice is to be implied whenever action is taken affecting the rights of parties. It may that the opportunity to be heard may not be predecisional; it may necessarily have to be post decisional where the danger to be averted or the act to be prevented is imminent or where the action to be taken can brook no delay.…….In such situation, it may be enough to issue post decisional notices providing for an opportunity. It may not even be necessary in some situations to issue such notices, but it would be sufficient but obligatory to consider any representation that may be made by the aggrieved person and that would satisfy fairness and natural justice. ……Ad interim orders may always be made ex parte and such orders may themselves provide for an opportunity to the aggrieved party to be heard at a later stage. …….. Natural justice will be violated if the authority refuses to consider the request of the aggrieved party for an opportunity to make his representation against the ex-parte ad interim order.” The Hon’ble Bombay High Court in the matter of Anand Rathi v. SEBI held, “it is thus clearly seen that pre decisional natural justice is not always necessary when ad interim orders are made pending investigation or enquiry, unless so provided by the statue and rules of natural justice would be satisfied if the affected party is given post decisional hearing…………. it is not always necessary to grant prior opportunity of hearing when ad-interim orders are made and principles of natural justice will be satisfied if post decisional hearing is given if demanded……..Thus it is settled position that while ex-parte interim orders may always be made without a pre decisional opportunity or without the order itself providing for a post decisional opportunity, the principles of natural justice which are never excluded will be satisfied if a post decisional opportunity is given, if demanded”.

4.8 I find that the order only places a temporary prohibition on Ashmi for the reasons explained therein and cannot be construed as a punitive direction. The ex-parte order was passed on a prima facie finding and the same has been treated as a show cause notice for complying with the natural justice. Therefore the contention of Ashmi is not acceptable and the proceedings cannot be construed as a façade and mockery of justice. As stated earlier the ex-parte order has been passed not by way of punishment or penalty but only by way of an interim measure, pending enquiry in the interest of the investors and the securities market.

4.9 Ashmi has further contended that it is not an intermediary registered with SEBI and also not associated with the securities market. In this regard, it is pertinent to note and rely on the observations of the Hon’ble High Court of Gujarat at Ahmedabad in the matter of Karnavati Fincap Ltd. v. SEBI wherein it was held as under:

“The words other persons associated with the securities market; whether the persons associated with the securities market takes it colour from person enumerated in clause (ba). If one has to go by the literal meaning, the interpretation which restricts the meaning of “persons associated with the securities market” the persons enumerated in clause (ba) is not acceptable. In ordinary meaning, the persons associated with the securities market would include all and sundry who have something to do with the securities market……..It is to be noted that the securities market in the sense not confined the stock exchange only. The words “persons associated with the securities market” are of much wider importance than intermediaries.“Person associated with” denotes a person having connection or having intercourse with the other. Though securities market has not been defined, definition of ‘Stock Exchange’ under section 2(i) of the Securities Contract (Regulation)Act means any body of individuals whether corporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Security has been defined under section 2(h) to include shares, scrips, stocks, debentures debenture stock or other marketable securities of like nature in or of any incorporated company or other body corporate etc. What is noticeable in it refers to “marketability” of it. Stock Exchange is more than mere selling, buying or dealing place for securities, but adorns the role of an assisting agency in smooth conduct of securities business by suitable regulating or controlling authority. None the less a market cannot be conceived without a seller or buyer who are primary persons for whose purpose the market exists. All activities of business of selling and buying are related to seller or buyer. It is inconceivable to think that a buyer or seller of a scrip is not a person associated with securities market, where or through which he transacts his business, whether as trader or as investor of selling or buying the required scrip”. The plea of Ashmi that he is not associated with securities market is therefore, not tenable.

4.10 Ashmi in its reply has specifically denied that it was not a ‘financier’ as per the definition of the term given in the ex-parte order. I note that the term ‘financier’ is defined in the ex-parte order as “a person who either on his own or alongwith others provided the finance for IPO subscription and are the ultimate beneficiaries in the scheme of cornering retail allotment and forking out a big gain on sale immediately after listing.”

4.11 Based on the submission made by Ashmi to SEBI, it is noted that Ashmi admitted having financed to Shri Mehta, Shri Katakia and Shri Dharmesh on purely commercial transactions to earn interest on the amounts so financed and some shares were received by it as a security. From the submissions made by Ashmi, and on the perusal of table 2 above, I have noted that Ashmi had received large number of shares in off market transactions. These shares were sold in the open market on the subsequent to such transfers and the profits were pocketed by Ashmi.

4.12 In order to examine the charge leveled against Ashmi, and to ascertain whether the charge of financier leveled against it holds good, I proceed to examine the dealings of Ashmi with the key operators in the IPO of IDFC and Shopper Stop Ltd. As per the findings of interim order, Ashmi was identified as financier for three Key operators i.e. Dhaval K Katakia, Dharmesh Bhupendra and Dhaval Mehta, in the IPO of IDFC and Shopper Stop Ltd.

4.13 Dealings with Dhaval K Katakia in the IPO of IDFC 4.13.1 As per the charge leveled against Ashmi as per interim order dated April 27, 2006, it was alleged that in the IPO of IDFC Ashmi received 39,900 shares of IDFC from Dhaval K Katakia, key operator before the date of listing i.e. on August 10, 2005. In reply to these charges, Ashmi submitted following: (i) Ashmi had given loan of Rs. 71,40,000 to Dhaval K Katakia, on July 22, 2005 for investing in capital market. The said loan was to be repaid either in cash or in kind i.e. in the form of shares or marketable securities. (ii) Since Dhaval K Katakia did not have adequate funds to pay back our loan amount, they made part payment of loan of Rs. 71,40,000 by transferring 39900 shares of IDFC which were valued at Rs. 34.19 i.e the issue price in the IPO plus 19 paise as stated by Dhaval Katakia, to our demat account on August 11, 2005 and issued a cheque for the balance amount of Rs. 57,83,400.

(iii) Thereafter 39900 shares of IDFC were sold in the market.

4.13.2 From the above submissions, I note that Ashmi had given a loan to Dhaval K Katakia on commercial terms and the said loan was to be repaid in cash or in kind. However, it was also admitted that no formal loan agreement was entered between them to that effect. In this regard, Ashmi also submitted bank statements and corresponding ledgers in support of his claim. I have carefully gone through the submissions and based on the various events starting from disbursement of money till the final sale of shares, it clearly suggests that it is not a commercial transaction as made out to be but a pre-agreed arrangement to corner the shares. The same is demonstrated as under: Before I proceed further, I wish to examine the process involved in any IPO. In any Book Building IPO, a retail applicant will be required to bid his application during the currency of IPO along with corresponding application money. Thereafter, upon allotment of shares, allotted shares will be electronically transferred to demat account of applicants and corresponding refund money will be refunded after adjustment of allotment money. For example, in IPO of IDFC, under the category of retail segment, application monies for bidding 1400 shares at the cut off price of Rs. 34/- works out to be Rs 47,600/-. It is noted that maximum allotment under retail category for each applicant was 266 shares and thus corresponding allotment money would be Rs. 9,044 (when allotment is 266 shares at Rs 34/-). The refund money would be Rs. 38,556/- which is difference between the application money and allotment money. Thus, the application money made under retail category is reconciled in the form of refund money and allotment money. Besides, corresponding shares allotted will also be credited in the demat account.

4.13.3 On the above lines, in the instant case, the loan given by Ashmi has been examined and I note that the first step in the loan transaction is disbursement of loan. It is seen that Ashmi had given loan of Rs. 71,40,000/- to Dhaval Katakia on July 27, 2005. I noted that the disbursement to Dhaval Katakia exactly corresponds to 150 applications at the rate of Rs. 47,600/- each (150 * 47,600). The timing of the loan coincides during the currency of IPO (The IPO of IDFC was opened on July 22, 2005 and closed on July 27, 2005.) which suggests that it was specifically given to Dhaval for making 150 IDFC IPO applications in the retail category.

4.13.4 I have noted that repayment of Rs. 57,83,400/- vide cheque no. 51867 by Dhaval to Ashmi on August 11, 2005 exactly corresponds with the refund money for 150 applications at the rate of Rs. 38,556 /-each application which works out to be Rs. 57,83,400/-.

4.13.5 Thus, from the above, it is clearly seen the application money of Rs. 71,40,000 and the corresponding refund money Rs. 57,83,400 exactly corresponds for 150 applications of Rs. 47,600 each and the timing of the disbursement and repayment also corresponds with the timing of the IPO and also refund date. Such a coincidence cannot be considered merely accidental as such coincidence can be possible only when it is coordinated and pre-planned or with prior understanding. In light of the two parameters already reconciled, the question would be regarding the allotted shares. As corresponding allotment money has also been paid by the Ashmi as could be seen from the disbursement, it is quite but natural that Ashmi will have right / claim over such shares and therefore as a part of the scheme, the share will go to Ashmi. Thus, the entire loan of Rs. 71,40,000 /- can be reconciled as under: Refund Money = Rs. 57,43,400 /- Allotment Money = Rs. 13,96,500/- Total = Rs. 71,40,000/-

4.13.6 From the above, it is seen that Rs. 13,96,500/- corresponds for allotment money for 39,900 shares at the rate of Rs. 34 (which is the issue / cut off price). The same can be corroborated from the fact that off market transfers received by Ashmi was also 39,900 shares which is share allotment for 150 applications (150 * 266 shares). Thus, as per the entire scheme, all the parameters exactly matched and the transfer of 39,900 shares also is seen as execution of the game plan.

4.13.7 Keeping in view of the above, the submissions made by Ashmi that 39,900 shares were received in part settlement of the loan is not acceptable as they do not support their argument that they are pure commercial transaction. Ideally, when securities are given towards the part fulfillment of loan, the question of valuation of shares would be fair and transparent and acceptable to both the parties. However, in this case, I find that valuation of 39,900 shares were shown at the rate of Rs. 34.19 which works out to be Rs. 13,64,181/-including the interest of Rs. 7581/-. I consider that such valuation is not fair and transparent and do reflect the true picture as they are merely a book entry in the ledger as corresponding payment for these shares were already made through application money for making application in the IPO as mentioned above.

4.13.8 Besides, the above, I also noted Ashmi submitted that 39,900 shares were accepted instead of money as Dhaval did not have sufficient funds to pay. However, it is seen that Dhaval had sufficient funds available with him on the date when the shares were transferred to Ashmi. i.e on August 10, 2005 as could be noted that very next day Dhaval made a payment of Rs 57,83,400 /- on August 11, 2005. Further, there is no such correspondence received from Dhaval as per records. Thus, the explanation of Ashmi is not acceptable as the above transactions are part of the game plan to corner shares wherein finance was available by to key operators who thereafter transferred corned (allotted) shares and corresponding refund money to Ashmi.

4.13.9 In the above paragraphs, the dealing of Ashmi as financier of Dhaval K Katakia, in the IPO of IDFC have been examined and in light of various coincidences as stated above, the preponderance of probability clearly indicates that Ashmi had extended finance as part the pre-arrangement and game plan to corner the shares.

4.13.10 As per the findings of interim order, Ashmi was identified as financier of Dhaval Mehta in the IPO of IDFC for receiving 1,46,832 shares from Dhaval Mehta, a key operator. Based on the submissions made by Ashmi, I observe that it had given loan of Rs. 2,98,25,000 to Dhaval Mehta and thereafter received 1,46,832 shares on August 11, 2005 (before listing). Thereafter, these shares were sold at the instruction of Dhaval through Unique Stockbroker Pvt. Ltd. on August 12, 2005 i.e. on the date of listing at the average rate of Rs. 68.17/- with the total sale consideration of Rs. 1,00,09,537/-. Accordingly, as per the agreed terms, the sale consideration was transferred to Dhaval A. Mehta after adjustment of interest and loan amount. I am not inclined to accept the explanation of Ashmi as the transaction stated above does not appear to have any commercial sense as Dhaval A. Mehta could have as well sold the shares in the market instead of transferring the shares before listing and then giving instructions to Ashmi to sell the shares on the date of listing.

4.13.11 Further, I also observe that the money given as loan to Dhaval almost corresponds with application money for 552 applications at the rate of Rs. 47,600/- per retail application and thereafter 1,46,832 shares received from Dhaval Meha also corresponds with allotment for 552 applications at the rate of 266 shares per applications. It is also interesting to note that corresponding application money in respect of shares received from Ashmi is also included in the total money disbursed by Ashmi to Dhaval.

Therefore, receipt of shares and its valuation at issue price is not surprising. Further, these shares were sold on the date of listing at Rs. 68.17 almost twice the price of issue price clearly indicates that it is pre-arranged and part of the game plan to corner shares and thereafter sharing profits between themselves.

4.13.12 Besides, it is also observed that the explanation and reasoning given by Ashmi and the modus operandi observed in respect of their dealing with Dharmesh B Mehta and Dhaval Katakia are also similar and it is highly unlikely that it could be merely a coincidence.

4.14. Dealings with Dharmesh B. Mehta in the IPO of Shoppers Stop Ltd. 4.14.1 In respect of dealing with another key operators i.e. Dharmesh B Mehta, similar such observations as stated above were also noted. As per the finding of interim order, Shri Dharmesh transferred 12,700 shares of Shoppers Stop Ltd. to Ashmi on May 24, 2005 and corresponding notional gains made in the process was Rs. 17,09,420. In this regard, Ashmi submitted that it had lent Rs. 2,51,56,250/-vide cheque no. 103882 on May 06, 2005 to Shri Dharmesh on commercial terms. Accordingly, this amount was repaid by Dharmesh in three trenches first being Rs. 2,20,00,000 vide cheque no. 66676 on May 20, 2005, second one in the form of 12,700 shares transferred on May 24, 2005 valued at Rs. 30,51,350/- and final payment made on May 28, 2005 for Rs. 1,33,650/- vide cheque no. 66690 towards full payment of loan.

4.14.2 The IPO of Shoppers Stop Ltd opened on April 28, 2005 and closed on May 4, 2005. The shares were listed on May 23, 2005. At the outset, I find that disbursement of Rs. 2,51,56,250/- vide cheque no. 103882 on May 06, 2005 to Shri Dharmesh. Further, money was made available by Ashimi on May 6, 2006 i.e. one day after the closure of IPO. It is generally seen that it takes 2 to 3 working days for the individual cheques to be realized therefore the money advanced is seen well within the currency of IPO. In the instant case, it is seen that the money disbursed corresponds to 508 applications at the rate of Rs 49,500 per applications.

4.14.3 Further, the coincidence does not end here. As stated above, 25 shares were allotted for each application in the retail category at the issue price of Rs. 238/- per share. Thus, the allotment money per application worked out to be Rs. 5950 (25*238) and corresponding refund amount per application worked out to be Rs.43, 550 (Rs.49500 – Rs. 5950). The total allotment and refund money in respect of 508 applications works out to be Rs. 30,22,600/- (508 * 5,950) and Rs. 2,21,23,400/- (43,550 * 508) respectively. The said refund amount was received from Shri Dharmesh in Ashmi’s HDFC Bank A/c no. 0602320009311 vide Cheque no.0066676 for Rs. 2,20,00,000 /- on May 20, 2005 and vide Cheque no.0666690 for Rs.1,33,650 /- on May 28, 2005. Thus, the amount received back by Ashmi stood at Rs. 2,21,33,650/- which broadly corresponds to the total amount of refund due i.e. Rs.2,21,23,400/-. As regards the allotment money, the allotment in retail category was 25 shares per application in the retail category. Taking into consideration the allotment of 25 shares per applications, total number of shares for 508 applications will work out to be 12,700 shares. It is seen that 12,700 shares were transferred to Ashmi on May 24, 2005.

4.14.4 Thus, above sequence cannot be considered a mere coincidence as the application money (money disbursed) and corresponding refund money exactly matches with 508 applications as stated above. Further, allotment of shares received also exactly matches with the allotment in the retail category in respect of 508 applications (508 * 25). To demonstrate the entire loan of Rs. 2,51,56,250/- is reconciled as under: Refund Money = Rs 2,21,23,400/- Allotment Money = Rs 30,22,600/- Total = Rs2,51,56,000/-

4.14.5 It is noted from the submissions made by Ashmi that 12,700 shares were received in part settlement of the loan and it was submitted that these shares were valued at Rs. 30,51,302/- at the rate of Rs. 240.26 per share as on May 24, 2005 (date of off market transfer). In this regard, I noted that the shares of Shopper Stop Ltd. were listed on May 23, 2005 and therefore the valuation of shares as submitted by Ashimi does not seem to be reasonable and defies commercial logic as valuation has not been done at the market rate when the shares were already listed on stock exchange on the date of transfers. However, it is rather surprising to note that these shares were sold by him at average price of Rs. 393.23/- through Unique Securities on May 24, 2005 whereas valuation of same shares for adjustment of so called loan was made at issue price i.e. 240.26. Thus, the difference of Rs. 19,42,719 has not been adjusted or reflected in the ledger. Even if the above sale of shares by Ashmi is not considered, it is observed that closing price of Shopper Shop Ltd. on May 24, 2005 (which is date of off market transfer) is Rs. 349.70 whereas the shares were valued at Rs 240.26. Therefore, valuation of shares at a price of Rs. 109.44 less than the closing market price on May 24, 2005 also completely defies the prudent commercial logic, as no prudent borrower (Dhaval) would forgo Rs. 13,89,888/- unless there is a part of the pre-arrangement / prior understanding. Thus, the explanation of Ashmi clearly strengthens our charge that it is part of game-plan and pre-arrangements and shares were transferred as per the said arrangement

4.14.6 In view of the above, I consider that valuation of shares is not fair and transparent and confronts commercial logic and therefore valuation of the shares is merely a book entry in the ledger. Further, I note that corresponding application money in respect of 12,700 shares was included in the disbursement of Rs. 2,51,56,250/- on May 6, 2005 for making 508 applications. This shows that Ashmi was having a pre-arrangement or prior understanding with key operators Dhaval Mehta, Dhaval Katakia, and Dharmesh Bhupendra about the modus operandi of cornering of shares under the retail category in various IPOs. 4.15 It is also relevant to note that at the time of making application in the IPO, the likelihood of number of shares to be allotted per application in the retail category is not possible to be ascertained or known till the basis of allotment is finalized. Therefore, it is implicit that any pre-arrangement between key operators and financiers can be only application-wise and shares allotted for each application would naturally be transferred to the financier as part of the pre-arrangement/ understanding at the issue price.

4.16 From the records available, I observe that Ashmi had not applied for the IPOs stated above. It is a fact that for the purpose of making applications for IPOs, demat account is mandatory. In view of this, had Ashmi been a genuine investor, it would have directly made an application to the said IPOs and would have been allotted shares under respective category. However, in this manner, it would have got very few shares as compared to what it actually received through the modus operandi stated above. For instance, had Ashmi made application worth Rs. 4,37,50,000 in the IPO of Shopper Stop Ltd. directly, he would have got allotment of approx. 3,835 shares whereas through the modus operandi stated above he managed to corner 22,100 shares which is around 5.72 times of the likely allotment.

4.17 Based on the submission made by Ashmi, it has been observed that shares received from Key operators were sold in the market and in the process made huge gains (more than notional gains as indicated in the interim order) along with Dhaval Mehta, Dhaval Katakia and Dharmesh Bhupendra who were all part of the entire game plan to corner shares. For example as per the findings of interim order, in the IPO of Shopper Stop Ltd, Ashmi had received 12,700 shares from Dharmesh Bhupendra and 9,250 shares from Dhaval Mehta on May 24, 2005. Based on the submission made by Ashimi, I find that 20,000 shares were sold through Unique Securities in settlement no. 2005/097 on May 23, 2005 at an average price of Rs.393.23/-. Thus, the actual profits made was Rs. 19,71,421 as against notional profit of Rs. 17,09,420 as indicated in the interim order.

4.18 Thus, it is evident that Ashmi, in concert with Mehta, Katakia and Dharmesh has executed a game plan of cornering allotment in IPO shares and making undue gains at the cost of retail investors by adopting the modus operandi stated above. Such a practice is not only unhealthy for capital market but also deceptive and fraudulent.

4.19 Considering the above facts and circumstances of the case, the complicity of Ashmi in the larger game plan is demonstrated by the manner in which it had financed and got shares from the key operators. Had Ashmi been a genuine investor, it might have subscribed to the IPO directly as an applicant for maximum number of shares. Instead, it financed Dhaval Mehta, Dhaval Katakia and Dharmesh Bhupendra, key operators who opened fictitious demat accounts and made multiple applications with a view to cornering shares. The key operators have subsequently transferred the shares allotted through off market deals to Ashmi. It is uncommon that a financier receives shares instead of money with interest. Even if he receives shares they will be at corresponding market price. Whereas in this case, shares were transferred at the issue price. As is seen, the entire convergence of transactions as discussed above and particularly off market transfers received from Dhaval Mehta, Dhaval Katakia and Dharmesh Bhupendra who are the kingpins in opening of fictitious accounts exposes the adverse role played by Ashmi. It was a well orchestrated role played by Ashmi in cornering the shares meant for retail investors in the garb of financing. Ashmi has failed to satisfactorily explain that it was a genuinely providing finance to Dhaval Mehta, Dhaval Katakia and Dharmesh Bhupendra in normal course of business. In the facts and circumstances of the case, I am inclined to hold that Ashmi has violated SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 by cornering the shares of retail investors and thereby Ashmi is responsible for the legal consequences.

4.20 The standard of proof required in a proceeding of this nature is at variance with the standard of proof required in criminal cases. It is sufficient if the preponderance of probabilities suggests towards the indulgence of the delinquent in the misconduct. The strict rules of Evidence Act and proof beyond reasonable doubt are not applicable to a proceeding of this nature [Gulabchand Vs. Kudilal (AIR, 1966, SC 1734), National Housing Bank Vs. ANZ Grindlays Bank (1998 (2) LJ 153)]. In this connection it is relevant to note Hon’ble Supreme Courts decision in Collector of Customs Vs. D. Bhoormull (AIR 1974 SC 859), wherein it was held that: “…..The prosecution or the department is not required to prove its case with mathematical precision to a demonstrable degree; for, in all human affairs absolute certainty is a myth, and-as Prof. Brett felicitously puts it - “all exactness is a fake”. El Dorado of absolute proof being unattainable, the law, accepts for it probability as a working substitute in this work-a-day world. The law does not require the prosecution to prove the impossible. All that it requires is the establishment of such a degree of probability that a prudent man may, on its basis, believe in the existence of the fact in issue.

Thus, legal proof is not necessarily perfect proof; often it is nothing more than a prudent man’s estimate as to the probabilities of the case.…….Since it is exceedingly difficult, if not absolutely impossible, for the prosecution to prove facts which are especially within the knowledge of the opponent or the accused, it is not obliged to prove them as part of its primary burden”. 4.21 The above evidence on record establishes the role of Ashmi in the entire plan of cornering the shares meant for the retail investors. At this juncture I refer to the Regulation 3 of FUTP Regulations, 2003 which reads as follows: “Prohibition of certain dealings in securities No person shall directly or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.”

4.22 Considering the activities of Ashmi in light of its reply, I am of the view that the factual information provided by Ashmi has not diminished the intensity of the charges against it. Based on the material on record, there is a greater preponderance that Ashmi was involved in the larger game plan of cornering the shares meant for retail investors and is, therefore, liable to be proceeded against for violation of Regulation 3 of FUTP Regulations, 2003.

4.23 To recapitulate, the findings recorded in the ad interim ex-parte order dated April 27, 2006 were based on the findings of a detailed investigation which revealed large scale off market transfers from afferent accounts to key operators and thereafter to financiers before the date of listing. Further, the financiers in concert with key operators have made ultimate gains through the modus operandi stated above. Such practices are deceptive, manipulative and fraudulent and not in the interest of investors and securities market. SEBI, being the regulatory body for capital market is cast with the responsibility to protect the interest of investors and securities market. I have noted that for violation of Section 12A of SEBI Act, 1992, Regulations 3, 4, and 6 of FUTP Regulations 1995, Regulations 3 and 4 of FUTP Regulations, 2003, adjudication proceedings have been initiated against Ashmi and the same are in progress. There is however the need for taking steps to insulate IPOs from manipulators especially as it is the duty of SEBI to uphold and protect the interests of investors.

5.0 Order 5.1 In view of the above, I, in exercise of the powers conferred upon me in terms of section 19 read with section 11 and 11B of SEBI Act, 1992, hereby confirm the interim order dated April 27, 2006 against Ashmi Financial Consultancy Pvt. Ltd.

5.2 It is clarified that this order is passed for a limited purpose of finalizing the ad interim ex-parte order dated April 27, 2006 against Ashmi Financial Consultancy Pvt. Ltd. and the same shall not in any way influence the proceedings pending before the Adjudicating Officer, who may pass orders in its adjudication proceedings.

Place: Mumbai T .C. Nair Date: 23.09.2008 Whole-Time Member Securities and Exchange Board of India