Order in the matter of IPO Irregularities - dealings by Mr. Biren Kantilal Shah in Initial Public Offer Of IDFC Ltd. and Suzlon Energy Ltd

WTM/MSS/ISD/62/2010 SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: M. S. SAHOO, WHOLE TIME MEMBER IN THE MATTER OF IPO IRREGULARITIES - DEALINGS BY MR. BIREN KANTILAL SHAH IN INITIAL PUBLIC OFFER OF IDFC LTD. AND SUZLON ENERGY LTD. Date of Hearing: July 6, 2010 Appearances: For Noticee: Mr. Nitin H. Parikh, Practising Company Secretary Mr. Biren Kantilal Shah For SEBI: Mr. Varun Shivhare, Legal Officer (Presenting Officer) Mr. S. Ramann, Officer on Special Duty Mr. B. J. Dilip, Deputy General Manager Ms. Kshama Wagherkar, Assistant Legal Adviser, and Mr. Sisir Mondal, Manager. 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 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. Biren Kantilal Shah (Biren) not to buy, sell or deal in the securities market, including in the IPOs, directly or indirectly, till further directions. It offered an opportunity of inspection of documents as well as hearing. Biren did not file reply to the show cause notice. Neither did he avail inspection of documents, nor did he appear for personal hearing.

2. On completion of the investigations, SEBI issued a show cause notice dated November 20, 2009 (SCN) under Sections 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act), alleging that Biren engineered applications in the retail category of IPOs of IDFC Ltd. (IDFC) and Suzlon Energy Ltd. (Suzlon) through 829 and 888 demat accounts respectively and extended finance for these applications. The shares received in these demat accounts on allotment in the two IPOs were transferred to Biren on or before the respective dates of listing. The refunds in excess of allotment money received from issuers against these applications were also transferred to Biren. Biren, in turn, transferred some of these shares to financiers and made unlawful gains from sale of the balance shares. Based on these transactions, the SCN alleges that Biren employed fraudulent, deceptive and manipulative practices to corner the shares meant for retail individual investors (RIIs) in the IPOs and made an unlawful gain of Rs.59,27,066 by selling some of the shares so cornered. These acts are in violation of Section 12A (a), (b) and (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) and Guideline 1.2.1 (xxiva) read with Guideline 7.6.1.2.1 of the SEBI (Disclosure and Investor Protection) Guidelines, 2000. Accordingly, the SCN called upon Biren 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 or selling or dealing in securities in any manner and to disgorge an amount of Rs.59,27,066, not be issued against him. The SCN offered opportunities for inspection of documents and personal hearing.

3. Biren replied to the SCN vide letter dated April 14, 2010. Along with his authorised representative, he appeared for hearing on July 6, 2010 and made submissions. I have carefully considered the SCN, the reply, and the submissions made at hearing and proceed to dispose of the proceedings.

4. Biren has made the following submissions: a. He lent money to demat account holders to enable them to apply for shares in IPOs of IDFC and Suzlon with the understanding that the loan would be repaid by shares received on allotment, at issue price, and the balance amount of the loan by cash. The law permits the commercial transactions in cash and kind. b. He merely acted as a pass through between the demat account holders and the financiers. Cash and shares were routed through his bank and demat accounts. c. The IDFC shares were not sold at Rs.101, as alleged in the SCN. Hence, the gain mentioned in the SCN is not correct. d. The gain belongs to the group (demat account holders, financiers and Biren). He alone may not be held liable for the same. e. The alleged violation took place in 2005, while the SCN has been issued in 2009. The proceedings under the SCN are, therefore, barred by the law of limitation.

5. There is no dispute about the transactions. Biren provided money to demat account holders to enable them to make applications in the two IPOs. He received all the shares allotted to these demat accounts in the two IPOs, through off-market transfers from the allottees, on or before the respective dates of listing. He also received the corresponding refunds from each of the demat account holders. Based on these facts, the issues to be determined are: a) Did Biren corner the shares reserved for RIIs? b) Did the acts of Biren amount to violation of any law? c) What is the total ill-gotten gain made by Biren?

6. I examine the above issues seriatim: 6.1 It is the charge of SEBI and admission of Biren that he extended finance to demat account holders to enable them to make 829 and 888 applications for shares in the IPOs of IDFC and Suzlon respectively. It is also admitted that Biren extended finance with a clear understanding that the shares received by the demat account holders on allotment would be passed on to him at issue price. In compliance with this understanding, the demat account holders transferred all the shares received on allotment at issue price on or before the date of listing. They also transferred all the refunds received by them from issuers to Biren. These are not features of a loan transaction. This rather establishes that Biren had full control over the demat account holders who were mere name lenders and who acted as pass through on the dictates of Biren. These demat account holders did not bring a paisa for the entire transaction. Nor did they benefit a paisa, as all the shares allotted to them and the refunds were transferred to Biren. They had the option to sell the shares in market, but they transferred the same in off-market to Biren at issue price.

Why should they transfer shares to Biren at the issue price without making profits unless they are under influence of Biren? They acted as pass through and transferred shares and refunds fully to Biren as per their prior understanding with him. This is evident further from the statement of Biren that the gain belonged to the entire group. This indicates that the group, of which Biren is the master mind, acted in a premeditated manner to corner the shares in the retail category of IPOs. Thus, Biren de facto made applications in the retail category. Had Biren applied in individual capacity under RII category, he could have got an allotment of 266 IDFC shares and 16 Suzlon shares only. However, he managed to corner 2,20,514 IDFC shares and 14,320 Suzlon shares by engineering 829 applications for IDFC and 888 applications for Suzlon in the RII category. Had he not done so, these shares would have been available for allotment to RIIs. Thus, Biren clearly cornered the shares meant for RIIs in a deceitful manner and in the process deprived RIIs of their rightful shares in allotment in IDFC and Suzlon IPOs.

6.2 Biren filed 829 and 888 applications in IDFC and Suzlon IPOs respectively in a fraudulent manner to corner larger number of shares than the number which he would otherwise have been entitled to had he filed a single application in his name. I note that regulation 3 of PFUTP regulations prohibits a person from buying, selling or otherwise dealing in securities in a fraudulent manner. It also prohibits a person from employing any device, scheme or artifice to defraud in connection with dealing in or issue of securities. Regulation 4(1) of PFUTP regulations prohibits a person from indulging in a fraudulent or unfair trade practice in securities. A design to engineer 829 applications in IDFC IPO and 888 applications in Suzlon IPO in the RII category for an aggregate value of Rs.8,29,36,880 is clearly fraudulent. Therefore, the conduct of Biren amounts to mischief prohibited under regulation 3 and 4 (1) of PFUTP regulations and Section 12A (b) and (c) of the SEBI Act. This design manipulated the market for securities in the RIIs segment in the IPOs of IDFC and Suzlon and, being in contravention of the provisions of regulation 3 and 4(1)of PFUTP regulations, violated Section 12A (a) of the SEBI Act.

Further, the then DIP Guidelines of SEBI reserved a certain percentage of the issue size for RIIs. It defined a RII to mean an investor who applied or bid for securities of or for a value of not more than Rs.1,00,000. These two provisions aimed at ensuring equitable distribution of shares in the retail segment among RIIs and prevent non-RIIs from getting allotment in this category. These envisaged an investor to apply for shares for a value up to Rs.1,00,000. These did not envisage an investor making 829 or 888 applications each up to Rs.1,00,000, which defeats the solemn objectives of such provisions. If a person does so, he deprives genuine RIIs from getting their fair share in allotment. Therefore, so many applications for securities for an aggregate value of more than Rs.1,00,000 in the retail segment are clearly prohibited. Further, the prospectus, which is a statutory document issued under the Companies Act and the securities laws and contains the statutory disclosures and covenants, carried this prohibition. The prospectus clearly prohibited more than one application by a person.

Hence, the prospectus read with the DIP Guidelines clearly prohibited multiple applications in retail segment of IDFC and Suzlon IPO as that would subvert the very process of reservation and allotment. Biren, however, made multiple 829 and 888 applications in the IPO of IDFC and Suzlon respectively for an aggregate value Rs. 8,29,36,880. 6.3 At the hearing, Biren submitted that the sale price of IDFC shares stated in the SCN was not correct. Upon verification of the contract notes submitted by Biren, it was found that the average sale price of IDFC shares was Rs.59.83447, and not Rs.101. Hence, the ill-gotten gains made from IDFC IPO works out Rs.22,06,729. Accordingly, Biren made a total ill-gotten gains of Rs.24,10,789 from the IPOs of IDFC and Suzlon. Biren has further argued that the gains were made by the group, not by him alone. I find that the SCN has attributed that much of gains to Biren as much made by him from sale of shares retained by him. The gains from sale of shares passed on to financiers have not been included in the gains of Biren. Further, if Biren is right in his assertion that the profit was made by the group, his argument that he was a pass through is not correct.

7. At the hearing, Biren argued that SCN was issued in 2009 and the alleged violation took place in 2005. The SCN is issued after 4 years. Hence it is barred by the law of limitation. I note that SEBI had, pending investigations, passed an ad interim exparte order dated April 27, 2006 interalia against Biren with certain directions. Pursuant to completion of investigations, SEBI had issued the SCN to him. The SCN is in continuation of the proceeding that began with the interim order dated April 27, 2006 and, therefore, is not barred by the law of limitation.

8. Biren cornered the shares meant for RIIs in a deceitful manner and in the process, deprived RIIs of their rightful share in allotment in IDFC and Suzlon IPOs. He, along with the financiers, benefited out of this deceptive scheme. He had full control over demat accounts, refunds, shares, bank accounts, and he master-minded and executed the chain of transactions to camouflage his identity and to obtain allotment of shares in the RII category at the cost of RIIs. He, therefore, manipulated the demand for shares in the RII category of IPO and distorted the market integrity. In the process, he enriched himself with an unlawful gain of Rs.24,10,789. I, therefore, find Biren guilty of employing a manipulative and deceptive device to corner the shares in the RII category of the IDFC and Suzlon IPOs to the detriment of RIIs. I find that by these activities, he violated Section 12A (a), (b) and (c) of the SEBI Act, 1992, and regulations 3 and 4 (1) of PFUTP regulations and the relevant DIP Guidelines.

9. The interest of the market and of the investors requires that such a person is not allowed to participate in the market and unjustly enrich himself at the cost of RIIs. Such acts threaten the market integrity and orderly development of the market and call for regulatory intervention to protect the interest 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 Biren pursuant to the ad interim ex-parte Order, I hereby issue the following directions: a) Mr. Biren Kantilal Shah (PAN: AVZPS0368P) be restrained 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; and b) Mr. Biren Kantilal Shah shall disgorge the unlawful gain of Rs.24,10,789 (Rupees twenty four lakh ten thousand seven hundred and eighty nine only). He shall also pay the interest on this unlawful gain at the rate of 6% (six percent) per annum for 4 ½ years amounting to Rs.6,50,913.

He shall thus disgorge a total amount of Rs.30,61,702 within 45 (forty five) days from the date of this Order by way of crossed demand draft drawn in favour of “Securities and Exchange Board of India”, payable at Mumbai. In case the aforesaid amount is not paid within the specified time, he shall be restrained from buying, selling or dealing in securities market in any manner whatsoever or accessing the securities market, directly or indirectly, for a further period of three years without prejudice to SEBI’s right to enforce disgorgement along with further interest till actual payment is made.

10. The directions issued in this Order shall supersede the directions issued vide the ad interim ex-parte Order dated April 27, 2006.

11. This Order shall be served on all recognized stock exchanges and depositories to ensure that Mr. Biren Kantilal Shah is not allowed to undertake transactions as prohibited in Para 9 above.

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

PLACE: MUMBAI M. S. SAHOO DATE: August 11, 2010 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA