Order in the matter of IPO irregularities against Shri Bhanuprasad Trivedi

WTM/MSS/ISD/09/2009 SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: M. S. SAHOO, WHOLE TIME MEMBER IN THE MATTER OF IPO IRREGULARITIES - DEALINGS BY MR. BHANUPRASAD D. TRIVEDI IN THE MATTER OF INITIAL PUBLIC OFFERS OF IDFC LTD. (IDFC) AND SASKEN COMMUNICATION TECHNOLOGIES LTD. (SASKEN)

Date of Hearing: July 17, 2009 Appearances: For Noticee: Mr. Pesi N. Modi, Advocate Mr. Ranjit R. Bhosale, Juris Matrix Advocates, and Ms. Poonam D. Gadkari, Juris Matrix Advocates. For SEBI: Mr. N. Murugan, Legal Officer (Presenting Officer) Mr. S. Ramann, Officer on Special Duty Mr. B.J Dilip, Deputy General Manager Mr. Sumit Agrawal, Legal Officer, and Mrs. Kshama P. Wagherkar, Legal Officer. ORDER UNDER SECTIONS 11, 11 (4) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 1. On noticing certain irregularities in the transactions in the shares, that were issued through initial public offers (IPOs) made during the period 2003-2005, before their listing on the stock exchanges, the Securities and Exchange Board of India (SEBI), pending investigations, vide an ad interim ex-parte order dated April 27, 2006, which itself was a show cause notice, directed certain persons, including Mr. Bhanuprasad D. Trivedi (hereinafter referred to as “noticee”), not to buy, sell or deal in the securities market, including in IPOs, directly or indirectly, till further directions. The noticee challenged the ex-parte interim order before the Hon’ble Securities Appellate Tribunal (SAT). As an interim measure, vide its order dated May 12, 2009, the Hon’ble SAT directed SEBI to dispose of the pending enquiry proceedings against the noticee by passing a final order on or before July 31, 2009 failing which the ex-parte order operating against him shall stand stayed qua him.

2. SEBI issued a show cause notice (SCN) on June 01, 2009 under Sections 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act) alleging that the noticee cornered shares meant for retail individual investors (RIIs) in the IPOs of IDFC and Sasken by acting in concert with key operator, Ms. Roopalben Panchal (Roopal), and financier, Mr. Jayesh

Khandwala (Jayesh) as per prior understanding. It also alleged that the noticee facilitated Jayesh to make ill-gotten gains by routing the funds and shares received from Roopal through his account. The SCN, therefore, alleged that the noticee employed fraudulent, deceptive and manipulative scheme and thereby violated Section 12A (a), (b), (c) of the SEBI Act and Regulations 3 and 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (PFUTP Regulations). Accordingly, it called upon the noticee to show cause as to why suitable directions under Section 11(4) read with Section 11 and Section 11B of the SEBI Act, including directions restraining him from buying, selling or dealing in securities in any manner for a suitable period of time and / or any other directions as deemed fit in the interest of the investors/securities market, should not be issued against him.

3. An opportunity of hearing before me was granted to the noticee on June 17, 2009. The authorised representatives of the noticee appeared before me on the said date and sought 15 days time for filing reply to the SCN and also an adjournment of hearing. Acceding to the request, the hearing was rescheduled on July 2, 2009. However, vide email dated June 22, 2009, the noticee sought further rescheduling of the hearing. Accordingly, the same was rescheduled on July 6, 2009. Due to administrative inconvenience, the hearing was rescheduled on July 10, 2009. The noticee again requested to reschedule the hearing due to pre-engagement of his counsel. Acceding to their request, a final opportunity of hearing was granted to the noticee on July 17, 2009 wherein the authorized representatives of the noticee appeared and made submissions. The noticee filed a reply to the SCN vide their letter dated July 16, 2009.

4. I have carefully considered the SCN dated June 01, 2009 and the reply dated July 16, 2009. It has been alleged in the SCN that Roopal cornered the RII shares of IDFC which was listed on August 12, 2005. In an off-market transaction, the noticee received 11,00,000 IDFC shares from Roopal on August 13, 2005. He received an amount of Rs.3,74,00,000 from Jayesh on the same day vide cheque no. 881331. He passed on the entire amount received from Jayesh to Roopal on the same day vide cheque no. 148688 towards purchase consideration of 11,00,000 IDFC shares. Thus he received shares on August 13, 2005 at issue price of Rs.34 per share, as against the closing market price of Rs.69.55 on the day before. He sold these 11,00,000 shares @ Rs.66.25 per share on August 16, 2005 in the market through Khandawala Integrated Financial Services Pvt. Ltd. (KIFSPL), a broker related to Jayesh, and received the sale proceeds of Rs.7,28,75,000 from the broker on August 17, 2005, before the pay-out from the exchange. He passed on the entire amount received from broker to Jayesh on the same day. This role of the noticee facilitated Jayesh to make an ill-gotten gain of Rs.3,54,75,000. Further, the noticee received a total of 14,275 (13,550 on September 9, 2005 and 725 on September 14, 2005) Sasken shares from Jayesh, who, in turn, had received these shares from three entities, including Roopal. The noticee sold these shares in the market through KIFSPL for Rs.70,45,343.75 on September 09, 2005 @ Rs.493.54 per share, against issue price of Rs.260 and passed on the entire sale proceeds to Jayesh. This role of the noticee facilitated Jayesh to make an ill-gotten gain of Rs.33,33,783.

5. The noticee, vide his reply dated July 16, 2009 as well as during the hearing, made the following submissions: i. He invests in shares of companies and trades in the market. He has running accounts with financiers who provide him short term finance for share business on orally agreed terms. ii. He bought 11,00,000 IDFC shares @ Rs.35.50 per share from Roopal on August 13, 2005 for a total consideration of Rs.3,90,50,000. He borrowed a sum of Rs. 3.74 crore from Jayesh on August 13, 2005 and transferred the entire amount to Roopal on the same day. He paid balance Rs.16,50,000 in June 2006. He sold said 11,00,000 IDFC shares @ Rs.66.18 on August 16, 2005 for a total consideration of Rs.7,28,00,520. He paid an amount of Rs.33,75,052 towards capital gains tax. He, however, paid Rs.7,28,75,000 to Jayesh towards his loan obligations. iii. He bought 14,275 Sasken shares @ Rs.300.40 per share from Jayesh on September 7, 2005 for a total consideration of Rs.42,88,210. He received the delivery of shares from Jayesh on September 9 and 14, 2005. He, however, sold the shares on September 9, 2005 @ Rs.493.54 per share for a total consideration of Rs.70,38,257.25. He paid a short term capital gain tax of Rs.2,75,000. He paid an amount of Rs.70,45,343.75 to Jayesh towards his loan obligations. iv. He was not aware of as to how Jayesh and / or Roopal obtained the shares or the shares were tainted with any fraud or mischief. He did not have any relationship or dealings with key operators. He purchased shares on his own account, although with finance from Jayesh. v. The copy of the investigation report or the documents pertaining to such investigation have not been furnished to him.

6. I find hardly any discrepancy about the facts as stated in the SCN and as stated in the reply by the noticee to the SCN regarding movement of funds and securities among Roopal, Jayesh and the noticee. The only discrepancies are: a. The noticee has stated that he bought 11,00,000 IDFC shares from Roopal for Rs.3,90,50,000 as against the allegation of Rs. 3,74,00,000. He has stated that he paid Rs.3,74,00,000 at the time of purchase on August 13, 2005 and the balance of Rs.16,50,000 in June 2006. I find that the noticee entered into an off-market spot transaction with Roopal. Such transactions need to be settled at the latest by next day. It is, therefore, difficult to believe that the noticee paid for the transaction after 10 months of the transaction. It is also important to note that the noticee paid the amount of Rs.16,50,000 in June 2006, 2 months after he was debarred by SEBI from undertaking transactions for his role in IPO irregularities. If he at all paid this after 10 months of the transaction, it is definitely an afterthought. Further, assuming that the noticee is right that he purchased the shares from Roopal for Rs.3,90,50,000, it does not make any difference to the allegation.

The essence of the allegation is that Roopal transferred the shares at a substantial discount to market price. When the market price was Rs. 69.50, the transfer took place at Rs.34 as alleged in the SCN, or at Rs. 35.50 as stated by the noticee. The difference of Rs.1.50 per share could be transaction costs and it is possible that Roopal recovered the same from the noticee. b. The SCN alleges that the noticee sold 11,00,000 IDFC shares for Rs.7,28,75,000. However, the noticee has submitted that he sold these for Rs.7,28,00,520. I find from the records (bank account) that he received a sum of Rs.7,28,75,000 from the broker, as alleged in the SCN, and not Rs.7,28,00,520, as claimed by the noticee. What is more important is that the noticee received the amount on the day following the transaction, that is, on August 17, 2005, but before the pay out by the Exchange. c. The noticee has stated that he received a total of 14,275 Sasken shares from Jayesh on September 9 and 14, 2005. He, however, sold these shares on September 9, 2005. Naturally he would have delivered these shares for T+2 rolling settlement.

It is difficult to believe that he could deliver the shares for settlement for trades executed on September 9, 2005 when he actually received those on September 14, 2005, that is, after the settlement. d. The noticee has stated that he sold 14,275 shares @ Rs.493.54 per share for a total consideration of Rs.70,38,257.25. I find that the sale proceeds work out to Rs.70,45,283.50 if 14,275 shares are sold @ Rs. 493.54 per share, and not Rs.70,38,257.25, as claimed by the noticee. From the above I find that the figures quoted by the noticee can’t be relied upon to arrive at findings. Further, the minor discrepancies noticed on account of wrong figures quoted by the noticee do not make any difference to the allegation.

7. The only issue that needs to be determined is: Did the noticee have a relationship of lender/borrower and seller/purchaser of shares with Jayesh and Roopal, or was he a party to prior understanding with Jayesh and Roopal. a. I note that a borrower borrows money against security and proper documentation and repays money with interest. In the instant case, the noticee received huge money without any security and documentation. He used the money for certain transactions and returned the entire proceeds from the transactions to the provider of money, without deducting even the transaction costs and short term capital gains that he suffered to carry out the transactions. He received the money on the day of purchase of shares from Roopal and returned immediately the entire proceeds from the sale of shares to Jayesh. The timing and manner of movement of shares and funds from and to Roopal / Jayesh, by no stretch of imagination, can be associated with normal lending of money. b. The noticee purchased the shares at issue price in off market after listing of the shares, when the seller had an option to sell the shares at a substantial higher price in the market. He received the payment for sale of shares from the broker, which is connected to Jayesh, much before the pay out by the Exchange. He transferred the entire sale proceeds to Jayesh and suffered the transaction costs and capital gains tax himself without any visible gain to him from the transactions. There were back-to-back transfer of exact quantity of securities and amount of funds among Jayesh, Roopal and the noticee. These do not happen in the absence of any prior understanding among the parties.

8. I note that SEBI has provided all the relevant documents relied upon along with the SCN. No other document is required to prove the charge in the SCN.

9. In the facts and circumstances of the case, I find that the noticee had a prior understanding with Jayesh and Roopal, which facilitated Jayesh to make ill-gotten gains. In the process, they deprived RIIs from their legitimate share in the allotment of these two IPOs. I, therefore, conclude that the noticee was part of the fraudulent, deceptive and manipulative scheme to corner the shares meant for RIIs in the aforesaid IPOs and facilitated Jayesh to make ill-gotten gains. Hence, I hold that the noticee violated Section 12A (a), (b) and (c) of the SEBI Act and Regulations 3 and 4(1) of the PFUTP Regulations.

10. The interest of the market and of the investors requires that such persons are not allowed to participate in the market and unjustly enrich themselves at the cost of investors. Such acts of serious irregularities threaten the market integrity and orderly development of the market and call for regulatory intervention to protect the interests of investors. Accordingly, in exercise of the powers conferred upon me under Section 19, read with Sections 11, 11 (4) and 11B of the SEBI Act, 1992, and after taking into account the period of prohibition already undergone by the noticee pursuant to the interim order, I hereby restrain Mr. Bhanuprasad D. Trivedi (PAN: ABTPT6882D) from buying, selling or dealing in the securities market in any manner whatsoever or accessing the securities market, directly or indirectly, for a period of one year from the date of this order.

11. This order shall be served on all recognized stock exchanges and depositories to ensure that the noticee is not allowed to undertake transactions as prohibited in Para 10 above.

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

PLACE: MUMBAI M. S. SAHOO DATE: July 30, 2009 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA