Order in the matter of IPO Irregularities - Dealings by Shri Dushyant Natwarlal Dalal[SAT Appeal No. 182/2009][SC Civil Appeal No.5677 of 2017]

ORDER UNDERSECTIONS 11, 11(4)AND11B OFTHESECURITIES AND EXCHANGE BOARD OFINDIA 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. Dushyant Natwarlal Dalal (Dushyant), Mrs. Puloma Dushyant Dalal (Puloma) [wife of Dushyant] (hereinafter collectively referred to as “noticees”), Mr. Natwarlal Thakordas (Natwarlal) [father of Dushyant], and Mrs. Rasila Natwarlal (Rasila) [mother of Dushyant], not to buy, sell or deal in the securities market, including in IPOs, directly or indirectly, till further directions. After providing an opportunity of inspection of relevant documents relied upon by SEBI,

1of 15 considering the written submissions to the show cause notice, and hearing the noticees on November 19, 2007, it confirmed the interim directions against the noticees vide order dated September 09, 2008. It did not pass any direction against Natwarlal and Rasila as they had passed away in the mean time. It, however, froze their demat accounts, which werejointly heldwith Dushyant, till the passingofthe final order.

2. The noticees challenged the confirmatory order of SEBI before the Hon’ble Securities Appellate Tribunal (SAT). While hearing the parties to the appeal (Appeal no. 135 of 2008) on November 14, 2008, the Hon’ble SAT noted that the investigation qua the appellant had concluded on November 11, 2008. It orally directed SEBI toissue show cause notice basedonconcludedinvestigationand disposeofthe matterexpeditiously.

3. Accordingly, SEBI issued a show cause notice dated November 28, 2008 (SCN) under Sections 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act). The SCN allegedthat Dushyantprovided finance to the key operators(KOs), namely, Mr. Purshottam Budhwani(Budhwani)and M/s.Sugandh Estates and Investment Pvt. Ltd. (SEIPL) to enable them to apply for shares in the retail category of 10 IPOs.On allotment, the applicants transferred the shares to the KOs, who, in turn, transferred the same to the demat accounts of Dushyant, Puloma, Natwarlal and Rasila. They also transferred the refund amounts in respect of those IPOs to the noticees. The SCN, therefore, alleged that the noticees, in collusion with the KOs, employed fraudulent, deceptive and manipulative practices to corner the shares meant for retail individual investors (RIIs) in 10 IPOs. They made unlawful gains of Rs.4,94,19,379 on sale of such shares. It also alleged that these acts were in violation of Section 12A (a), (b), (c) of the SEBI Act and Regulations 3 and 4(1) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (PFUTP Regulations). Accordingly, it called upon the noticees 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 them from buying, selling or dealing in securities in any manner for a suitable period of time and directions to disgorge Rs.4,94,19,379, be notissuedagainst them.

4. The noticees, vide letter dated December 17, 2008, sought inspection of documents. SEBI provided an opportunity of inspection of documents on January 14, 2009. During the inspection, the noticees asked for additional documents. SEBI provided

2of 15 those additional documents vide letter dated January 16, 2009. The noticees asked for further additional documents vide letter dated January 22, 2009. SEBI provided those additional documents also vide letter dated February 16, 2009. The noticees sought cross-examination ofMs.Nimisha Mayur Kadakia (Nimisha) and Budhwani, whohad submitted to SEBI that the profits on sale of IDFC shares were shared between them and the noticees. SEBI, vide letter dated February 19, 2009, informed the noticees that their request for cross examination would be dealt with by the competent authority at a subsequentstage of proceedings andadvised them to file their reply to SCN. However, no reply toSCNwasreceived.Vide letterdated February27, 2009,anopportunityofpersonal hearing was granted to the noticees on March 19, 2009 with an advice to submit reply, if any, to the SCN at the time of hearing. However, on the said date, the noticees failed to appear for the hearing. Nor was any reply to the SCN received. Vide letter dated March 20, 2009, another opportunity of hearing was granted to the noticees on April 02, 2009 with a reminder that they had not replied to the SCN despite lapse of four months.

A letter dated March 17, 2009 was receivedfrom the noticeeson March 20, 2009 seeking an adjournment of hearing till 2nd or 3rd week of April, 2009 on account of indisposition of their Advocate. Vide email dated March 30, 2009, the noticees requested to keep the proceedings in abeyance till the disposal of the appeal pending before Honb’le SAT, and also sought further additional information / documents to enable them to respond to the SCN. Vide letter dated April 11, 2009, the noticees once again reiterated their request for additional documents. SEBI, vide letter dated April 16, 2009, clarified that all relevant findings of investigation / examination report pertaining to the noticees had been incorporated in the SCN and the noticees hadinspected relevant documents and hadbeen provided copies of documents sought by them. It also made clear that no document shall be relied upon by SEBIunless a copy of the same was provided to them. It, however, did not accede to the request to keep the proceedings in abeyance as there was no valid reason and justification to do so. It advised the noticees to cooperate with SEBI in complying with the directions of Hon’ble SAT to conclude the proceedings expeditiously and urged them to filetheir reply tothe SCN.It offered a finalopportunity of hearingto the noticees on May 8, 2009 and specifically stated that no further extension of time shall be considered.

The noticees appeared in person before mefor hearing on the aforesaid date. At the time of hearing they filed their reply dated May 7, 2009 and sought time to file additional submissions, which was granted. They filed additional written submissions, including an affidavit,videletterdated May18, 2009.

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5. I have carefully considered the SCN, and the written submissions dated May 7, 2009 and May 18, 2009. Table A presents a summary of transactions, as borne out from the SCN, based on which allegations have been made therein. Dushyant provided exact amounts of finance from his bank account 0601000008876 with HDFC Bank to enable the KOs to make a set of applications for shares in different IPOs. The KOs transferred the shares received on allotment from applicants to four demat accounts, which are held jointly by Dushyant, as first/second/third holder, with his family members, namely, Puloma, Natwarlal and Rasila. They also transferred corresponding excess amounts, over and above the allotment money, toDushyant.For example, Dushyanttransferred a sum of Rs.5,46,87,500 by cheque to SEIPL towards application money for 1250 applications for Rs.43,750 each in the retail category of ILFS IPO. He received 19,650 shares of ILFS, valued at Rs.24,56,250 at issue price of Rs.125, from SEIPL on July 26, 2005, the day before its listing on July 27, 2005. He received a refund of Rs.46,31,250 through RTGS transfers. The balance amount of Rs.4,76,00,000 (Rs.5,46,87,500-Rs.24,56,250- Rs.46,31,250) was retained by SEIPL for use in IDFC IPO. Thus, Dushyant received back the entire money he had provided for ILFS IPO in the form of shares and cash. The noticees undertook similar transactions in respect of other IPOs and received shares around the listing date. The product of columns 6 and 9, which indicates utilization of fundsfor each IPO equals the sum of columns 11 to 14,which indicates return of money, which equals the money provided by Dushyant to KOs in Column 3 of table A, except in case of IDFC and Gateway, where the amount actually used for IPO applications are Rs.15,51,76,000 andRs.4,09,60,080 respectively.

6. Table B presents the unlawful gains made on saleof such shares. Since Dushyant, Puloma, Natwarlal and Rasila are members of the same family, and Dushyant, jointly with other three family members, holdsthe demat accounts, which were used toreceive and sell shares, the SCN has considered their dealings in these shares together for the purpose of calculating unlawful gains. In case of IDFC IPO, Budhwani transferred 1,44,000 IDFC shares to the noticees, who sold these and made a profit of Rs.49,03,200. At the instance of Dushyant, Budhwani sold 6,59,600 shares in the market and transferred 56,000 shares to Nimisha for sale, and the gains from sale of these shares were shared with Dushyant. Hence the calculation of unlawful gains takes into account the gains from transferof these IDFC sharesto the extent shared with Dushyant. In other IPOs, the calculation is simple, as transactions have happened directly between the noticees and the KOs. In the process, the noticeesmadea totalunlawful gain ofRs.4,94,19,379.

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Table A: TransactionDetailsbytheNoticees KO IPO Amount IssueDetails No.of ReceiptofSharesandRefundsbyDushyant/Puloma./ Balance (Rs.) Applica- Natwarlal/Rasila withKos provided by Issue Retail RetailAllotment ions ReceiptofShares Refund Roll over (Rs.) Dushyant Price ApplicationSize Size made (Rs.) (Rs.) for (Rs.) IDFC No.of Amount No.of Amount No.of Value of Shares (Rs.) Shares (Rs.) Shares Shares(Rs.) 1 2 3=(6*9)=(11+ 4 5 6=(4*5) 7 8=(4*7) 9 10 11=(4*10) 12 13 14 12+13+14) SEIPL ILFS 5,46,87,500 125 350 43,750 50 6,250 1,250 19,650 24,56,250 46,31,250 4,76,00,000 0 IDFC 4,76,00,000 34 1,400 47,600 266 9,044 1,000 1,98,968 67,64,912 4,08,35,088 0 0 Sasken 13,65,00,000 260 175 45,500 25 6,500 3,000 7,200 18,72,000 13,46,28,000 0 0 FCS 6,97,50,000 50 900 45,000 100 5,000 1,550 24,600 12,30,000 6,85,20,000 0 0 Budhwani Gateway 4,09,74,350 72 630 45,360 90 6,480 903 38,340 27,60,480 3,70,00,000 0 12,13,870 Provogue 12,90,72,000 150 320 48,000 40 6,000 2,689 8,000 14,16,000* 12,57,28,000 19,28,000 0 MSP 6,57,00,000 10 4,500 45,000 500 5,000 1,460 20,200 2,02,000 5,24,09,250 1,30,88,750 0 Nectar 7,20,00,000 240 200 48,000 25 6,000 1,500 13,500 32,40,000 2,10,36,110 4,77,23,890 0 IDFC 8,47,00,000 34 1,400 47,600 266 9,044 3,260 8,67,160# 2,94,83,440 12,56,92,560 0 15,42,750 +Rollovers= 15,67,18,750 Suzlon 8,64,14,400 510 96 48,960 16 8,160 1,765 15,532 79,21,320 7,90,00,000 0 -5,06,920@ *valuedatRs.177pershare;#includes7,23,160disposedofthroughBudhwani;@returnedtoBudhwanionFebruary13,2006

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TableB:Computationofunlawfulgainsby theNoticees IPO Dateof Issue ReceiptofSharesfromKOs SaleofShares Unlawful Listing Price Dateof No.of Valuation Dateof No.of Sale Gain(Rs.) (Rs.) Receipt Shares Price Sale Shares Price (Rs.) Sold (Rs.) 10=8*(9-6) 1 2 3 4 5 6 7 8 9 10 Gateway 31.03.05 72 31.03.05 38,340 72 11.04.05 675 125.87 36,362 12.04.05 2,000 127.72 1,11,440 26.04.05 30,000 142.85 21,25,500 5,665* 112.05 2,26,883 Provogue 07.07.05 150 07.07.05 7,160 150 07.07.05 8,000 247.95 7,83,600 08.07.05 840 MSP 18.07.05 10 18.07.05 20,200 10 18.07.05 20,200 15.61 1,13,322 Nectar 18.07.05 240 18.07.05 13,500 240 18.07.05 11,100 266.73 2,96,703 2,400* 275 84,000 ILFS 27.07.05 125 25.07.05 19,650 125 11.08.05 1,223 206.9 1,00,164 02.09.05 10,000 208.16 8,31,600 16.09.05 613 221.63 59,234 16.09.05 300 221.63 28,989 IDFC# 12.08.05 34 08.08.05 1,96,574 34 12.08.05 1,98,968 70.24 72,10,600 12.08.05 2,394 12.08.05 1,44,000 68.05 49,03,200 13.08.05 1,44,000 5,00,000 61.00@ 55,00,000 1,59,600 65.14@ 24,65,158 7,560* 69.5 2,68,380 56,000 67.85@ 18,96,000 2,39,400 37@ 88,57,800 Sasken 09.09.05 260 03.09.05 7,150 260 7,200 464.55 14,72,760 09.09.05 50 FCS 21.09.05 50 20.09.05 24600 50 24600 332 69,37,200 Suzlon 19.10.05 510 18.10.05 14120 19.10.05 5000 673.6 8,18,000 1412 24.10.05 1400 645.46 1,89,644 19.10.05 4000** 692.85 7,31,400 3600** 692.85 6,58,260 1412** 525 21,180 Shoppers 238 *** *** 238 23.05.05 15000 372.60 20,19,000 24.05.05 5000 372.60 6,73,000 Total Total 4,94,19,379 *sharesnotyetsoldandlyingindemataccounts,valuedattheclosingpriceonthelistingday; **Offmarketsale; ***MagnumEquity,brokerofDushyant, receivedsharesfromBudhwaniandthereaftersoldthesesharesinaccountofDushyant; @ProfitsonsaleofsharesbyBudhwaniandNimisha.

7. Asummaryofsubmissions made by thenoticees isasunder: i. They had extended loans to SEIPL and Bhudwani, who hadalways honoured their commitment to repay the loans, on commercially recognized and accepted terms, on principal to principal basis. The deployment of loan was at the discretion of borrowers and they did not have any control over or knowledge of the end use. They paid for the shares transferred by KOs to them atIPOprice(P-16 of theirreply dated May 7,2009). ii. It has been alleged that Budhwani sold 6,59,000 IDFC shares on the instruction ofDushyant. The document relied on for this allegation, that is, the letter dated May 16, 2006, no where states this. It has also been alleged that Budhwani transferred Rs.1.95 crore and Rs.55 lakh from the sale proceeds of 6of 15 the above shares. Budhwani paid the said amounts due on account of loans and not by way of sharing profits from sale of shares. These amounts can be added to the gains of the noticees only if Budhwani affirms on oath and supports by documentary evidence that he shared the gains with the noticees. They need tobe providedan opportunitytocrossexamineBudhwani. iii.

It has been alleged that Budhwani transferred 56,000 IDFC shares to Nimisha who, in turn, sold the shares for Rs.38 lakh and transferred the entire amount to the noticees. The noticees received the amount towards running account of Nimisha and not towards profit on sale of shares. The profits from sale of shares can be added to the gains of the noticees only if Nimisha affirms on oath and supports by documentary evidence that she shared the gains with the noticees. They need tobeprovided an opportunitytocrossexamine Nimisha. iv. It has been alleged that at the instructions of Dushyant, Budhwani transferred 2,39,400 IDFC shares @ Rs.37 to Chhadva family and passed on the entire sales consideration of Rs.88,57,800 to Dushyant.The sale proceeds include the cost of these shares @ Rs.34 amounting to Rs.81,39,600 and theentire amount ofRs.88,57,800 can’t, therefore,betreated astheir gain. v. In the interim order, the computation of unlawful gains was made based on closing price on listing day. However, in the SCN, actual prices have been used. Bythis,SEBI istransgressingthe authority of law. vi.

SEBI has declined to accede to their request to provide the information relating rules, regulations etc. of opening and operation of bank accounts, opening and operation of demat accounts, IPO applications, etc. The request for an adjournment of hearing fixed on May 8, 2009 was also not conceded. These amount toviolation ofprinciples ofnatural justice. vii. SEBI has erred in law by initiating adjudication and two Section 11B proceeding simultaneously. viii. SEBIhasnopowerstoinitiate disgorgementproceedings. ix. They are neither intermediaries registered with SEBI nor persons associated with the securitiesmarket and, therefore, SEBIhasnojurisdictionoverthem. x. The cause of action arose on October 19, 2005 when the Suzlon got listed. However the SCN was issued on November 11, 2008 beyond the limitation period of3 years. Therefore,the SCN isnotsustainable.

7of 15 xi. CBI did not find any fraudulent activity on the part of the noticees. SEBI shouldconclude itsproceedings based onthe CBIfindings. xii. A broad macro level view needs to be taken. The depositories, banks, merchant bankers, registrars to issue, etc. failed simultaneously and they have been let off lightly. The gains made by the noticees were not by design, but by default on the part of various agencies. In this frame of reference, holding the noticees responsible for alleged irregularities is unsustainable. The direction proposed in the SCN is disproportionate to the gravity of the matter and does nottake intoaccount mitigatingfactors. 8. I find that the noticees have not contested the basic facts about the transactions, as alleged in the SCN. While admitting the facts, they pointed out certain inaccuracies in the SCN regarding dates of disbursement of loan in IPOs and carry forward of refunds held with KOs from one IPO to another.I am not examining these as these do not disturb the essence ofthe factsand the resultantcharge.They have, however,raisedseriousobjections on inclusion of certain amounts in the gains made by them and the authority of SEBI to initiate the proceedings against them. I will, of course, be examining these. Subject to this, I conclude that the noticees undertook the transactions as stated in table A, made profits (or unlawful gains) as stated in table B, and such transactions deprived RIIs of their legitimate sharein allotmentof10 IPOs.

9. Theissuesthatrequire determination, therefore, are: a. Are the noticees mere money lenders? b. Arethe profits(unlawfulgains)ofthe noticees computedcorrectly? c. Isany principle ofnatural justice been violated? d. DoesSEBIhave authority toproceed with thisproceeding?

10. Are the noticees mere moneylenders? a) A money lender lends money against security and proper documentation and receives back money with interest. In the instant case, the noticees provided an aggregate of about Rs.85 crore for these IPOs without any security and documentation. They received back the money in kind (shares). The striking features of these transactions are: the money was provided to KOs around the closure of the IPO, the money provided exactly matched the amount payable on a set of applications under the retail category, most of the shares received on allotment were transferred in lots matching allotments to RIIs, the shares were transferred in off-market around the date of listing, the shares were 8of 15 transferred at the IPO price when the KOs had option to sell them at a substantial higher price in market, excess money over and above the allotment amount were transferred back to the noticees, etc. Thetiming and manner of movement of shares and funds from and to KOs, by nostretch ofimagination,can beassociatedwith normallendingofmoney. b) The precise timing of movement of the precise amounts of funds and of the precise number of shares between the KOs and the noticees occurring repeatedly across IPOs and KOs overtime, clearly suggests that noticeeshad control over the KOsand also the end use of funds and were aware of the modus operandi of the KOs.

The ledger produced by noticees explicitly recognizes the end use of the funds provided to the KOs. It has entries that acknowledge the name of the IPO in the header of the page itself. The noticees received IPOs shares at the issue priceeven after the date of listing. For example, Dushyant received 38,340 Gateway shares at the issue price of Rs.72 on the listing day i.e. March 31 2005, when the price opened and closed at Rs.90 and Rs.112.05 respectively. Such a pattern of dealings with the KOs can’t be undertaken unless there is a prior understandingwith them. c) There is a pattern in the receipt of shares by the noticees from the KOs. For example, Dushyant received 1,98,968 shares of IDFC from SEIPL. This corresponds to the allotment to 748 applications in the RII category. Had the noticees applied in individual capacity, they could have got an allotment of 266 IDFC shares each. However, they could get 1,98,968IDFC shares by financing 748 applications underthe RII category. The DIP Guidelines envisage an investor to apply for shares for a value up to Rs.1 lakh. These do not envisage an investor funding 748 applications each up to Rs.1 lakh, which defeats the solemn objectives of such provisions.

If a person does so, it deprives genuine RIIs from getting their fair share in allotment. Thenoticees did so bymaking available the finance to KOs for making multiple applications for an aggregate value in excess of Rs.1 lakh with the full knowledge of prohibition of the same. Had they not done this, these 1,98,968 IDFC shares would have been available for allotment to RIIs. Thus, the noticees clearly cornered the shares meant for RIIs and in the process, deprived them of their rightfulsharein allotmentin theseIPOs.

11. Are the profits(unlawful gains)ofthe noticees computedcorrectly? a) In nine of the ten IPOs in which unlawful gains have been allegedly made by noticees, there is no dispute onthe facts of amounts paid and shares received. Therefore, the profitsearnedin those IPOs would be deemedsuspectgiven my findingsabove.

9of 15 b) The noticees have vehemently contested transfers of Rs.1.95 crore and Rs.55 lakh from Budhwani towards sale proceeds of 6,59,000 IDFC shares and inclusion of corresponding profits of Rs.55,00,000 and Rs.24,65,158 in the profits made by them. Similarly, they have contested transfer of Rs.38 lakh from Nimisha towards sale proceeds of 56,000 IDFC shares and inclusion of corresponding profits of Rs.18,96,000 in the gains made by them. Asummaryofthesetransactionsis presentedbelow: Soldby No.of Sale Proceeds Profits ShareofNoticees in Sharessold (Rs.) (Rs.) Profits (Rs.) Budhwani 5,00,000 3,04,13,450 1,35,00,000 55,00,000 Budhwani 1,59,000 1,02,82,254 49,69,944 24,65,198 Nimisha 56,000 38,00,000 18,96,000 18,96,000 I find that the noticees provided Rs.15,67,18,750 to Budhwani. Out of this, Bidhwani used Rs.15,51,76,000 for making 3,260 applications for 1,400 IDFC shares each. Budhwani received 8,67,160(3,260*266) shares and refund of Rs.12,56,92,560 after allotment. He passed on the entire refund amount to the noticees. Of the shares received, he transferred 1,44,000 shares to the noticees and 56, 000 shares to Nimisha and sold 6,59,000 shares in the marketat the instance ofthe noticees.Thedetails ofthesetransactions are asunder: Fundsprovided byDushyant+ Roll over Rs.15,67,18,750 Less:Balance with Budhwani Rs.15,42,750 Balance Rs.15,51,76,000 No.ofIPOapplications made fromthismoney 3,260 Amountdepositedwith applications(3,260 *Rs.47,600) Rs.15,51,76,000 No.ofshares receivedbyBudhwanionallotment(3,260 *266 shares) 8,67,160 Allotted value ofshares(8,67,160 shares* Rs34 issueprice) Rs.2,94,83,440 Refundreceived byBudhwani(Rs.15,51,76,000–Rs.2,94,83,440) Rs.12,56,92,560 Amount returnedby BudhwanitoDushyant Rs.12,56,92,560 Disposal ofShares: Sold by Budhwani 6,59,000 Transferred toNoticees 1,44,000 Transferred toNimisha 56,000 Held byBudhwani 7,560 Total 8,67,160 The noticees have not contested the movement of money and shares relating to transactions in IDFC shares.

They have only contested the sharing of profit by Bhudwani and Nimisha with them. What is material is financing for allotment of 8,67,160 IDFC shares and the gains arising from disposal of these shares. Ifthe fact of sharing of profitis ignored, the entire gains from sale of such shares would be considered as the gains of the noticees. However, according to the SCN, the gains have been shared between the KOs and the noticees and, therefore, only the part of the profitstransferred to the noticeeshas been included in the gains made by them. I have, therefore, no reason to exclude these amounts from the gains made by the noticees. I, however, notice that notional gains in 10of 15 respect of someshares which are stillheld in demat account of the noticees have not been taken into account in the SCN. For example, 7514 ILFS shares are lying in the account of the noticees and the notional gains in respect of these have not included in the gains calculated in Table B. c) The noticees have sought exclusion of cost amounting to Rs.81,39,600 from sale proceeds of Rs.88,57,800 transferred by Chhadva family to them.

The SCN makes it clear that the noticees did not provide finance for these shares and hence the claim of the noticees is justified. Therefore, I am inclined to exclude this amount completely from the gains made by the noticees. d) In the interim order, closing prices on the listing day was used to arrive at the unlawful gain. The SCN, however, has calculated the unlawful gain based on the actual priceswhere shares have been disposed of. In case of a very small portion of shares which has not yet been disposed of, the closing price on the last trading day has been used. This approach leads to more accurate gain / loss and is most appropriate for disgorgement purpose. e) Taking the above into account, the unlawful gain of Rs.4,94,19,379, asestimated in the SCN, is reduced by Rs.88,57,800. Hence the noticees made an unlawful gain of Rs.4,05,61,579.

12. Isany principle ofnatural justice been violated? a) I find that the noticees have been provided an opportunity of inspection as well as a large number of documents sought by them, as elaborated in Para 4 above. SEBI, vide letter dated April 16, 2009, clarified that no document shall be relied upon by SEBI unless a copy of the same was provided to them. I find that all the information / documents relied upon by SEBI for the charges in the SCN have been provided to the noticees and that no document, which has not been provided, is relied upon in this proceeding. I note that the noticees made unreasonable demand for a large variety of documents. For example, they asked for a copy of authority vested in Mr. S. Ramann to issue the SCN. They also asked for rules and regulationsrelating to opening of bank accounts and demat accounts. These are not relevant for the issue in hand. Ialso find that the noticees sought repeated adjournment of hearings. It was postponed from March 19, 2009 to April 2, 2009 and then to May 8, 2009. The hearing could not have been postponed indefinitely. Therefore, I find that there is no violation of principles of natural justice, as contended by the noticees.

11of 15 b) I find that SEBI relied upon the statements of Budhwani and Nimishato arrive at the understanding between them and the KOs. Even without the statements, the understanding is clear from the movement of money and off-market transfers of shares. The statements are only corroborative. A careful examination of numbers indicatessharing of profits in many of the IPOs, though it has taken different forms. In case of IDFC shares, Budhwani transferred Rs.1.95 crore out of total sale proceeds of Rs.3.04 crore obtained from sale of 5,00,000 shares (Table under Para 11(b)). In case of ILFS, SEIPL obtained an allotment of62,500 shares from the funds provided by the noticees. However, it transferred 19,650 shares to the noticees and retained the balance 42,850. The noticees and SEIPL enjoyed profits from 19,650 and 42,850 shares respectively. Therefore, the statements relied upon in the SCN reduce the disgorgement liability of the noticees. In the absence of this statement, the noticeeswould have been liable for the entire profits on sale of all theshares purchased with the funds provided by them. Therefore, I find that there is noneed forcrossexamination ofBudhwaniand Nimisha.

13. DoesSEBIhave authority toproceed with thisproceeding? a) I note that SEBI Act empowers SEBI to initiate appropriate proceedings like 11B, enquiry, adjudication, prosecution etc., as may be warranted, to deal with the violationsof the provisions of SEBI Act, Rules and Regulations made there under. These proceedings have different objectives. For example, adjudication penalizes the accused by way of monetary penalty, while 11B proceedings enable directions in the interest of the investors and orderly development of securities market. In the instant case, SEBI has initiated two proceedings - 11B and adjudication - against the noticees. It has not initiated another 11B proceeding whenone 11Bproceeding ispending,asclaimed by thenoticees. b) I note that the noticees, in concert with the KOs, cornered IPO shares meant for RIIs by providing finance for IPO applications and thereafter receiving corresponding shares allotted in the IPOs in their demat accounts through off market transfers from KOs. Therefore, they are persons associated with the securities market and subject to enforcement actions underthe securities laws.In thisregard, I refer to the judgment of the Hon’ble High Court of Gujarat in the matter of KarnavatiFincapvs.SEBI(1996) 10 SCL 5 (GUJ)which hasheld - “….. In ordinary meaning, the persons associated with the securities market would include all andsundrywho have something to do with the securities market. …… The words “persons associated with the securities market” are of much wider import than intermediaries. ……It is inconceivable to think that a buyer or seller of a scrip is not a person associated with securities

12of 15 market, where or through which he transacts his business, whether as trader or as investor, of sellingorbuying the required scrip.” The words“allandsundry”above would include the noticees who have funded the KOs to corner the shares meant for RIIs. Further the fact that the noticees have received shares in their demat accounts fromKOs in consequence of the money provided to them cannot be ignored. After co-relating the facts of the case with the above judgment, it is very clear that the noticees are persons associatedwith the securities market as stated under Section 11 (4) (b) of SEBI Act. Further, it is preposterous for the noticees to argue that they should not suffer the liability for the unlawful activities just because they are not persons associated with securitiesmarket. c) I refer to the case of Bank of Baroda v. Securities and Exchange Board of India 2000 (038) CLA 226 SAT wherein it was held that the powers under Section 11B to issue directions are wide enough to include any measures in the interest of securities market, including disgorgement.TheSATheld asunder: “And it is also well settled that where legal rights have been invaded, and a statute provides for a general remedy as provided for in Section 11 read with 11 B of the SEBI Act, 1992 (“ the Act”), the regulator may use any available remedyto make good the wrong done.

Such remedial actions could include rescinding a fraudulent sale,securedisgorgementor order restitution. Since each of these remedies are remedial and equitable, it is open for the regulator to order these in the interest of the investing public and in the interestofa securecapital market". While disposing of the appeal No. 147/2006 in the matter of NSDL Vs. SEBI related to the IPOirregularities, Hon’ble SAT,vide itsorderdated November 22, 2007,observed: “We do not think that the Boardcoulddirecttheappellantstodisgorgethe aforesaid amount withoutfirst determining theirguilt and whethertheyhad made any illegal gains.” Thismakes itclear that SEBIcould direct the noticeestodisgorge, ifthey arefoundguilty. d) I note that SEBI and CBI are different agencies having different responsibilities and objectives. Their focus and scope of investigations are different. It is possible that these agencies arrive at different findings. If they were to arrive at the same finding, there would not be need for two agencies and separate investigations by them. Therefore, I do not agree with the noticees thatthe findings of CBI should be taken into account by SEBI for disposal of quasi-judicial proceedings under the SEBI Act, as much asthey would not like the findingsofSEBIto be taken intoaccountbyCBI. e) I do not agree with the argument of the noticees that the SCN issued in 2008 is not sustainable.

This SCN is in continuation of the proceedings that began with the 13of 15 interim order dated April 27, 2006. Further, I note that the noticees have partly contributed to the delay. In fact, they have major contribution to delay in disposal of this SCN.

14. The noticees have submitted in their affidavit that D. N. Dalal HUF extended the loan. However, I find that the money have moved from the account of Dushyant with HDFC Bank. I also find that the shares have been credited to and debited from the demat accounts which are held by Dushyant himself or by Dushyant jointly with other family members. The sale proceeds have been received in the accounts of Dushyantas well as of other family members. In some cases, the sale proceeds have moved to the account of Dushyant after its receipt in the accounts of the family members. This makes it clear that all the family members acted together in the game plan hatched by Dushyant. Therefore, the profitsmade fromthese transactionshave beentaken together.

15. In the facts and circumstances of the case, I find that the noticees manipulated the demand for shares in the RII category and thereby distorted the market integrity. They received the shares from theKOs as per the prior understanding with them. By doing this, they deprived the RIIsof their legitimate share in the allotment in the IPOs and made an unlawfulgain ofRs.4,05,61,579 tothe detrimentof the RIIs.I, therefore,conclude thatthe noticees employed fraudulent, deceptive and manipulative practices to corner the shares meant for RIIs in the aforesaid IPOs stated in tables above, and made unlawful gains by selling the shares so cornered. Hence, I hold that the noticees have violated Section 12A (a), (b)and (c)ofthe SEBIAct and Regulations3 and4 (1)ofthe PFUTPRegulations.

16. I note the mitigating factors brought up by the noticees and the proportionality rule for punishment. I do not find it relevant in this case which is not a penal proceeding. The interest of the market and of the investors requires that such entities 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 calls 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 the noticees pursuant to the interim order, I hereby issuethe followingdirections:

14of 15 a) The noticees [Mr. Dushyant Natwarlal Dalal (PAN AAAPD 5859Q) and Mrs. Puloma Dushyant Dalal (PAN AAEPD 2909B)] shall not buy, sell or deal in the securities market in any manner whatsoever or accessthe securities market, directly orindirectly, foraperiod 45 daysfromthe date ofthisorder;and b) The noticees shall disgorge the unlawful gain of Rs.4.05 crore (rounded off from Rs.4,05,61,579). c) The noticeesshall alsopay Rs.1.95crore (rounded off from Rs.1,94,69,558),being the simple interest at the rate of 12% per annum for 4 years (2005-09) on the unlawful gainRs.4,05,61,579. d) The noticees shallpay theabove amount ofRs.6 crore(Rupees sixcrore)within 45 (fortyfive) days fromthe date of this order by way of crossed demand draft drawn in favourof“SecuritiesandExchange BoardofIndia”, payableat Mumbai. e) In case the aforesaid amount Rs.6 crore is not paid within the specified time, the noticees shall be restrained from buying, selling or dealing in securities market in any manner whatsoever oraccessing the securitiesmarket, directly or indirectly, for a further period of seven years, without prejudice to SEBI’s right to enforce disgorgement.

17. This order shall be served on all recognized stock exchanges and depositories to ensure that the noticees are not allowed to undertake transactions as prohibited in Para16 above.

18. Thisorder shall come intoforcewith immediateeffect.

PLACE: MUMBAI M. S.SAHOO DATE: July 21,2009 WHOLE TIME MEMBER SECURITIES ANDEXCHANGE BOARDOF INDIA

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