Order in the matter of Karuna Cables Limited

WTM/RKA/IVD-ID1/6/2012 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: RAJEEV KUMAR AGARWAL, WHOLE TIME MEMBER ORDER Under Sections 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act) read with Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). In respect of the show cause notice No. IVD/ID1/MS/AC/KCL/26498/11 dated August 18, 2011 issued to Mr. Mahendra C. Shah and Mrs. Hasu M. Shah in the matter of Karuna Cables Limited. Appearances: Dates of For SEBI Hearing Name of Authorised Representatives the Noticees January 02, Mr. Mr. Anuj Narula, Advocate Ms. Medha Sonparote, Dy. General 2012 Mahendra Mr. Kamal Agrawal, Chartered Accountant Manager C. Shah Mr. Mahendra C. Shah Mr. Amitesh Kumar, Asst. Legal Adviser, and Mr. Avadhut Chavan, Asst. Manager January 18, Mr. Mr. Kamal Agrawal, Chartered Accountant Mr. Santosh Shukla, Joint Legal 2012 Mahendra Mr. Mahendra C. Shah Adviser C. Shah Mr. Prasanta Mahapatra, Deputy General Manager Mrs. Hasu Mr. Kamal Agrawal, Chartered Accountant Mr. Amitesh Kumar, Asst. Legal M. Shah Adviser, and Mr. Avadhut Chavan, Asst. Manager

1. By an ex-parte ad-interim order dated November 29, 2005, SEBI had directed inter alia the promoters of Karuna Cables Limited (‘the company’) including Mr. Mahendra C. Shah and Mrs. Hasu M. Shah, Mr. Sanjay B. Shah and Ceetee Trading and Leasing Private Limited (‘Ceetee Trading’) not to buy, sell or deal in securities of the company directly or indirectly till further directions. While the SEBI investigations were on-going, these directions were confirmed vide order dated July 25, 2006. In an appeal filed by the company and its promoters, Hon’ble Securities Appellate Tribunal modified the order dated July 25, 2006, to the limited extent of allowing few promoters of the company including Mr. Mahendra C. Shah and Mrs. Hasu M. Shah to pledge their shares with financiers/financial institutions in accordance with law.

2. After completion of the investigation in the matter, it was observed that - (a) The company and its Managing Director Mr. Mahendra C. Shah had indulged in making misleading and premature announcements, showing partly paid-up shares as fully paid-up shares without receiving allotment money, etc. The said false and misleading information had induced the innocent investors to purchase the shares of the company at high prices and also created false and artificial market for the scrip of the company. (b) Mr. Sanjay B. Shah was hand in glove with Mr. Mahendra C. Shah in the above acts, and transferred the shares of the company held by Ceetee Trading to a group of connected clients, who in turn used these shares for manipulation in the securities market.

3. Therefore, a show cause notice (SCN) dated October 16, 2007 was issued by SEBI to the company, its Managing Director Mr. Mahendra C. Shah, Ceetee Trading and its director Mr. Sanjay B. Shah. Pursuant to the proceedings initiated by this SCN, vide order dated June 15, 2009, SEBI restrained the company, Mr. Mahendra C. Shah, Ceetee Trading and Mr. Sanjay B. Shah from accessing the securities market and further prohibited them from buying, selling or dealing in the securities market, directly or indirectly, for a period of six months. By a separate order dated June 15, 2009, SEBI revoked the directions issued against Mrs. Hasu M. Shah vide orders dated November 29, 2005 and July 25, 2006.

4. In the proceeding that culminated in the passing of the order dated June 15, 2009 against the company, its Managing Director Mr. Mahendra C. Shah, Ceetee Trading and its director Mr. Sanjay B. Shah, all the parties to whom SCN was issued were represented by Mr. Prakash K. Shah, advocate during the hearing on March 17, 2009. Subsequently, while seeking information from SEBI under the Right to Information Act, 2005 about his representation in these proceedings Mr. Sanjay B. Shah claimed that he never appeared before any authority or signed any statement or authorized any person to appear during the proceedings before SEBI on his behalf. SEBI vide letter dated March 29, 2010 sought confirmation from Mr. Sanjay B. Shah as to whether he had authorized Mr. Prakash K. Shah, advocate to appear in the hearings before SEBI on his behalf. Mr. Sanjay B. Shah, vide letter dated March 30, 2010, informed SEBI that he had not authorized Mr. Prakash K. Shah, advocate to appear before SEBI in the matter. He claimed that he was not known to Mr. Prakash K. Shah and had not signed any authority letter. Further, the signatures on the authority letters submitted to SEBI were not of his.

5. In view of the above, the investigation in the matter of company with respect to Ceetee Trading and its director Mr. Sanjay B. Shah was again initiated in order to ascertain the identity of persons who were in charge of Ceetee Trading during the relevant period. Since Mr. Sanjay B. Shah had denied any authorisation of Mr. Prakash K. Shah, advocate, SEBI sought an opinion form the Government Examiner of Questioned Documents, Directorate of Forensic Science, at Hyderabad (hereinafter referred to as “the handwriting expert”). The handwriting expert vide letter dated May 18, 2010 opined that :

(a) With respect to signature of Mr. Sanjay B. Shah on the authority letters dated March 16, 2009 (questioned document) “I do not find any significant similarity between the questioned documents and the standard writings. On the other hand, they show considerably higher order of movement, skill and level of muscular co-ordination which is beyond the scope of the writer of the standard writings. Collective consideration of all those features, leads me to the opinion of their different authorship.”

(b) With respect to comparison of handwriting of Mr. Mahendra C. Shah with the signatures on the authority letters dated March 16, 2009 (questioned document) “I do not find any fundamental divergence between the questioned and the standard writings. On the other hand, they show natural variations within the scope of one and the same writer. The aforesaid similarities in writing are significant and sufficient and there is no possibility of their accidental coincidence. Collective consideration of all the features leads me to the opinion of their common authorship.”

6. Pending the investigation, SEBI, vide an ex-parte ad-interim order dated June 24, 2010, issued the following directions : – (a) Mr. Mahendra C. Shah and Mrs. Hasu M. Shah (hereinafter referred to as “the noticees”) were restrained “from accessing the securities market and prohibited from buying, selling or dealing in the securities market, including in Initial Public Offerings, in any manner, either directly or indirectly, till further directions”; (b) “As Dr. Mahendra C. Shah had allegedly forged the signatures of Mr. Sanjay B. Shah in authority letters, the Securities and Exchange Board of India considers him as not fit and proper person in the securities market. Therefore, he shall not hold any managerial position (including directorship) or any other key position in any listed company in India, or an intermediary registered with the Securities and Exchange

Board of India or with any securities market participant, in any capacity, till further orders.”

7. The noticees filed their objections vide separate letters dated August 23, 2010. An opportunity of cross examination of Mr. Mohinder Singh, the Government Examiner of Questioned Documents, Directorate of Forensic Science was also provided to Mr. Mahendra C. Shah on December 16, 2010.

8. SEBI, vide order dated July 18, 2011 revoked the first direction stated at para 6(a) and continued the second direction sated at para 6(b) qua Mr. Mahendra C. Shah. A Show Cause Notice (SCN) dated August 18, 2011 under regulation 11 of the PFUTP Regulations read with sections 11, 11(4) and 11B of the SEBI Act was issued by SEBI to the noticees. In this SCN, it was alleged that – (a) Mr. Mahendra C. Shah along with Mrs. Hasu M. Shah were only responsible for the activities of Ceetee Trading and were responsible for transferring the shares of the company held by Ceetee Trading to group of connected entities which were ultimately used for manipulating the shares of the company during the period from January 1, 2005 to September 30, 2005. Thus, the noticees had used Ceetee Trading and the name of “Sanjay B. Shah” as fronts to carry out the manipulative acts in the shares of the Company. (b) Mr. Mahendra C. Shah had forged the signatures on the authority letters dated March 05, 2009, March 14, 2009 and March 16, 2009 authorizing Mr. Prakash K. Shah, advocate to appear before Whole Time Member, SEBI on behalf of Mr. Sanjay B. Shah. (c) the above acts of the noticees were in violation of section 12A of SEBI Act and Regulation 3 (a), (b), (c), (d) and 4(1), (2) (a) and (e) of the PFUTP Regulations.

9. Mrs. Hasu M. Shah and Mr. Mahendra C. Shah filed their replies vide letters dated October 24, 2011 and November 01, 2011 respectively. An opportunity of personal hearing was granted to them before me on December 20, 2011. Mrs. Hasu M. Shah, vide her letter dated December 16, 2011 informed that she does not want to avail the personal hearing and her written reply be considered as her final submissions in these proceedings. Mr. Mahendra C. Shah vide email dated December 19, 2011 requested for adjournment of the hearing. On January 02, 2012 and again on January 18, 2012 Mr. Kamal Agrawal, chartered accountant, the authorised representative of Mr. Mahendra C. Shah made submissions on his behalf. On January 18, 2012, Mr. Kamal Agrawal requested that he has been instructed and authorised by Mrs. Hasu M. Shah to make submissions on her behalf also. He filed authority letter given by Mrs. Hasu Shah. This prayer was allowed. On January 18, 2012, the noticees also filed their written submissions.

10. I have considered the show cause notice dated August 18, 2011, the replies and oral as well as written submissions of the noticees and other material available on record. Mrs. Hasu M. Shah has essentially submitted as under:

(a) She is no way connected with the company except that she is wife of Mr. Mahendra C. Shah who the main promoter of KCL. Except the acquisition of 3,32,735 equity shares of the company, she has not executed any sale or purchase transaction in the shares of the company. (b) Even SEBI has not made any allegation against her in the investigation report or in the first order dated November 29, 2005. Only because she is wife of Mr. Mahendra C. Shah, her name was shown as promoter of the company in its prospectus and because of that she was covered in the said order. (c) In the SCN issued thereafter as well as in the final order dated June 15, 2009 passed by SEBI, there was no allegation or finding against her into the trading in the shares of the company or otherwise. (d) She was director of Ceetee Trading since its inception in 1985 till December 15, 2005 during which she was not involved in day to day affairs of Ceetee Trading. Only on some exceptional circumstances when other directors in -charge of day-to -day affairs were not available in the office, she had signed some documents including cheques and two blank Delivery Instructions Slips (DIS) for giving the same to one Mr. Vijay Bhagwandas Shah (Mr.

V. B. Shah) for arranging the loan for business purposes and transferring shares to proposed financier against cheque by creating pledge. She has no knowledge that Mr. V.B. Shah instead of transferring the shares to financier will misuse the same by transferring those shares in his own demat account and then to other investors to misuse the same for other purposes as alleged. Further, immediately after realizing that Mr. V.B. Shah has fraudulently transferred shares of the company in his own account, Ceetee Trading had filed a complaint with the Consumer Redressal Forum and during the pendency of complaint Mr. V. B. Shah expired. (e) The restraint on her from buying and selling in shares of the company imposed by the interim order dated November 29, 2005 continued till the order dated June 15, 2009 was passed and the restraint imposed on her by order dated June 24, 2010 continues against her till date. Even if SEBI holds that she was in charge of the affairs of Ceetee Trading and was responsible for transfer of shares of the company to persons who had manipulated its price, no further penalty should be imposed upon her since she has already served disproportionate penalty imposed by SEBI orders.

Therefore, the charges in the SCN should be dropped and proceedings against her initiated by the SCN should be closed.

11. Mr. Mahendra C. Shah has submitted as under:

(a) The charge that he transferred the company’s shares from Ceetee Trading to other persons/entities who used them for the purpose of manipulation was decided by the Ld. WTM vide his order dated June 15, 2009 whereby the Ld. WTM imposed restraint on him. He has already served the restraint/ debarment as per the said order. Therefore, the charge that was subject matter of order dated June 15, 2009 can’t be looked into again only because Mr. Sanjay B. Shah is disputing his signatures on authority letters. (b) He was director of Ceetee Trading since its inception in 1985 till June 26, 1994. After he had resigned from the directorship of Ceetee Trading, he had no connection of whatsoever nature in the business of Ceetee Trading. (c) From day one when he had acquired 1, 64,250 equity shares of the company, he has not executed any sale or purchase transaction in the shares of the company. Therefore, there can’t be any violation of any of the provisions of SEBI Act or the PFUTP Regulations. Further, SEBI has not established any nexus/relationship between him and the persons who had executed transactions in the shares of the company which according to SEBI were contrary to SEBI Act and PFUTP Regulations. (d) On enquiry with his wife, he was informed that at the request of office of Ceetee Trading, Mrs. Hasu M. Shah had signed two blank DIS for handing over the same to one Mr. V. B. Shah for arranging the loan for business purposes and transferring shares to proposed financier against cheque by creating pledge. However, Mr. V.B. Shah instead of transferring the shares to financier misused the same by transferring those shares in his own demat account and then to other investors to misuse the same which according to SEBI were contrary to SEBI Act and PFUTP Regulations.

(e) In the SCN, SEBI has alleged forgery of Mr. Sanjay B. Shah’s signature on authority letters dated March 05, 2009, March 14, 2009 and March 16, 2009. However, only the letters dated March 16, 2009 was given to the handwriting expert for opinion. So the allegation of forgery on the authority letters dated March 05, 2009 and March 14, 2009 is based on no evidence. (f) During cross -examination of handwriting expert Mr. Mohinder Singh, he has contradicted his opinion which also shows that even the handwriting expert was not sure as to the forgery by him as he only had doubt. (g) The Hon’ble Supreme Court in various cases has decided that an allegation of forgery can’t be decided only on the basis of opinion given by the handwriting expert. (h) Mr. Sanjay B. Shah had confirmed by way of an affidavit filed with SEBI that he had authorized Mr. Prakash K. Shah, advocate to represent him before SEBI. When the author of letter has confirmed his writing on authority letters, the matter should now be closed by SEBI without further investigation and the order dated June 24, 2010 should be revoked/withdrawn with immediate effect. (i) The restraint on him from buying and selling in shares of the company imposed by the interim order dated November 29, 2005 continued till order dated June 15, 2009 was passed by SEBI whereby he was restrained from accessing the securities market and prohibited from buying, selling or dealing in the securities market for a period of six months i.e. till December 15, 2009. The restraint of not accessing the securities market in any manner, either directly or indirectly imposed on him by order dated June 24, 2010 continued till July 18, 2011 when SEBI vide its order dated July 18, 2011 revoked the restraint. (j) The direction passed vide order dated June 24, 2010 prohibiting him from holding any managerial post in any listed company is without any authority as under the SEBI Act and the Regulations framed thereunder, SEBI has no power of any nature to debar a person from holding any managerial post in a listed company. This direction is still in force. (k) Even if it is admitted for the sake of argument that he was involved in all the alleged activities, then also imposing any penalty as mentioned in SCN is unwarranted as he had already served disproportionate penalty imposed by SEBI orders.

12. I note that authority letters dated March 5, 2009 and March 14, 2009 were not included as part of the questioned documents sent to the handwriting expert because SEBI had received those letters only through fax. I am of the view that the charge of forgery on authority letters do not get diluted merely because the authority letters dated March 05, 2009 and Mach 14, 2009 were not sent for opinion of handwriting expert. Mr. Sanjay B. Shah had denied signing all the authority letters i.e. March 05, 2009, March 14, 2009 and Mach 16, 2009. The handwriting expert has clearly given the opinion that signatures on letters dated March 16, 2009 and the writings of Mr. Mahendra C. Shah were of common author. Mr. Sanjay B. Shah had himself complained in writing to SEBI that the signatures on these authority letters were not his signatures. This expert opinion is further corroborated by the statement of Mr. Prakash K. Shah, advocate recorded on April 29, 2010 wherein he stated that he had not met Mr. Sanjay B. Shah. He had also stated that he represented Mr. Sanjay B. Shah based on the replies and the authority letters that were given to him by Mr. Mahendra C. Shah. These facts suggest that Mr. Mahendra C. Shah had forged the signatures on the authority letters authorizing Mr. Prakash K. Shah, advocate to appear before the Whole Time Member, SEBI on behalf of Mr. Sanjay B. Shah and subsequent affidavit dated July 09, 2010 filed by Mr. Sanjay B. Shah does not lead to disbelieve the expert opinion.

13. I note that DIS which were used to transfer the shares of the company held by Ceetee Trading in it’s demat account (Client ID 10551602) held with Sharekhan Ltd. were signed by Mrs. Hasu M. Shah and not by Mr. Sanjay B. Shah, the other authorized signatory. I note that these two DIS were the only DIS issued from this demat account during the period from January 1, 2005 to September 30, 2005. Further, Ceetee Trading had given details of bank account No. 40558 held with Punjab & Sind Bank in the account opening form for its demat account with Sharekhan Ltd. Punjab & Sind Bank has confirmed vide its letter dated February 15, 2011 that Mr. Sanjay B. Shah was not authorized signatory for any period of time since the bank account No. 40558 of Ceetee Trading was opened at its Malabar Hill, Mumbai branch. The bank also provided copies of four cheques issued from the said account for amount more than Rs.1, 00, 000 during the period January 1, 2005 to September 30, 2005 and it is observed that all of them were signed by Mrs. Hasu M. Shah. During the period from January 1, 2005 to September 30, 2005, Mr. Sanjay B. Shah and Mrs. Hasu M. Shah were the only directors of Ceetee Trading. These facts clearly indicate that Mrs. Hasu M. Shah was involved in the operations of the Ceetee Trading. The facts and circumstances of this case, particularly that Mr. Mahendra C. Shah forged the signature of Mr. Sanjay B. Shah on authority letters and his claim that Mrs. Hasu M. Shah was not qualified to run or manage Ceetee Trading and she was just a namesake director of Ceetee Trading lead to the inference that Mrs. Hasu M. Shah was acting on behalf of or on instructions from Mr. Mahendra C. Shah.

14. Mrs. Hasu M. Shah has also submitted that the shares were given to Mr. V.B. Shah as collateral security for the funds to be arranged by him. Mr. V.B. Shah instead of transferring the shares to financier misused the same by transferring those shares in his own demat account and then to other investors to misuse the same for other purposes as alleged. She has claimed that a complaint was filed with the Consumer Redressal Forum against Mr. V.B. Shah. In this regard, she has filed a copy of a notice dated March 06, 2006, along with copy of proof of dispatch of the same, purported to have been sent by Ceetee Trading to Mr. V.B. Shah. From these documents it is observed that the said notice, though dated March 06, 2006, was dispatched on March 08, 2007. It is unclear why the dispatch of the notice to call back the shares was so much delayed. Further, this notice does not establish that the complaint was even filed after March 2007. I also find that no evidence has been produced to show that the shares were given to Mr. V.B. Shah for the purpose of arranging fund. In my view, no prudent person would hand over the shares along with DIS without any receipt from the recipient. I am, therefore, not inclined to agree with this claim of Mrs. Hasu M. Shah.

15. I note that SEBI order dated June 15, 2009 had dealt with the role of Mr. Mahendra C. Shah with respect to transfer of shares of the company held by Ceetee Trading to a group of connected clients, who used those shares for manipulation in the market. Since new facts that Mrs. Hasu M. Shah was involved in the operations of Ceetee Trading and she was acting on behalf of or on instructions of Mr. Mahendra C. Shah have been revealed in the later investigation, the present SCN was issued. Besides, in the order dated June 15, 2009, the finding was that Mr. Sanjay B. Shah along with Mr. Mahendra C. Shah transferred the shares of the company held by Ceetee Trading to a group of connected clients, who in turn used these shares for manipulation in the securities market. In the present SCN, the allegation is that Mr. Mahendra C. Shah along with Mrs. Hasu M. Shah were responsible for transferring the shares of the company held by Ceetee Trading to group of connected entities which were ultimately used for manipulating the shares of the company and that they had used Ceetee Trading and the name of “Sanjay B. Shah” as fronts to carry out the manipulative acts in the shares of the Company.

16. I note that vide order dated November 29, 2005 Mr. Mahendra C. Shah and Mrs. Hasu M. Shah were directed not to buy, sell or deal in securities of the company directly or indirectly which continued till June 15, 2009. Vide order dated June 15, 2009, Mr. Mahendra C. Shah was further restrained from accessing the securities market and prohibited from buying, selling or dealing in the securities market for a period of six months. SEBI vide order dated June 24, 2010 again restrained Mr. Mahendra C. Shah and Mrs. Hasu M. Shah from accessing the securities market and prohibited her from buying, selling or dealing in the securities market, including in Initial Public Offerings, in any manner, either directly or indirectly, till further directions. This direction was revoked qua Mr. Mahendra C. Shah on July 18, 2011 but is continuing qua Mrs. Hasu Shah. In respect of Mr. Mahendra C. Shah, an additional direction was passed in the order dated June 24, 2010 that he will not hold any managerial position (including directorship) or any other key position in any listed company in India, or an intermediary registered with SEBI or with any securities market participant, in any capacity, till further orders. This direction is in force till date.

17. In view of the penalties as detailed above, I find that the noticees have already suffered sufficient penalty for the violations they have committed. Considering the facts and circumstances of the case as well as the quantum of penalty already undergone by the noticees, I am of the view that it would be in fairness of things to dispose of the SCN without passing any further directions against them, as contemplated in the SCN.

18. Therefore, in exercise of the powers conferred upon me by virtue of Section 19 read with sections 11, 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 and Regulation 11 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, I, hereby dispose off the Show Cause Notice No. IVD/ID1/MS/AC/KCL/26498/11 dated August 18, 2011 issued to Shri Mahendra C. Shah and Mrs. Hasu M. Shah in the matter of Karuna Cables Limited.

19. A copy of this order shall be served on all recognized stock exchanges and depositories to ensure that the direction given in para 18 above are complied with.

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

RAJEEV KUMAR AGARWAL DATE: February 14, 2012 WHOLE TIME MEMBER PLACE: MUMBAI SECURITIES AND EXCHANGE BOARD OF INDIA