Order in the matter of Karuna Cables Limited

For Karuna Cables limited, Mr. Mahendra C. Shah, Mr. Prakash K. Shah, Advocate, Ceetee Trading and Leasing Private Limited, Dr. Mahendra C. Shah, Mr. Sanjay B Shah

For Securities and Exchange Board of India: Dr. Pradnya Saravade, Officer on Special Duty Mr. Amol Hogade, Assistant General Manager.

1. Securities and Exchange Board of India (hereinafter referred to as SEBI) noticed sharp price variation in the shares of Karuna Cables Limited (hereinafter referred to as the company) at the Bombay Stock Exchange Limited (hereinafter referred to as BSE) and the National Stock Exchange of India Limited (hereinafter referred to as NSE) during the period between February 10, 2005 (Rs. 21.80) and September 16, 2005 (Rs.160.40), mostly in intermittent spells. It was also observed that, between July 08, 2005 and September 16, 2005, the share price increased from Rs.40.15 to Rs. 160.40. Thereafter, SEBI initiated an investigation in the matter and on the basis of the preliminary findings, pending investigation and passing of final order, SEBI, vide an ex-parte ad-interim order dated November 29, 2005, issued various directions, as stated in the said order. In terms of the said order, the promoters of the company and others were directed not to buy, sell or deal in securities of the company directly or indirectly till further directions. The company was further directed, not to issue any equity shares or any other instruments convertible into equity shares in any manner.

The entities mentioned in the said interim order were further given an opportunity of personal hearing and also for filing their objections. Pursuant to the receipt of the submissions received from the company and after affording an opportunity of hearing, SEBI vide order dated July 25, 2006 confirmed the directions against all the persons mentioned in the ad interim ex parte order dated November 29, 2005. Aggrieved by the aforesaid order dated July 25, 2006, the company and its promoters filed an appeal before the Hon’ble Securities Appellate Tribunal (hereinafter referred to as Hon’ble SAT) in Appeal No. 128 of 2006. While disposing of the said appeal, the Hon’ble SAT modified the impugned order of SEBI dated July 25, 2006, only to the limited extent of allowing the promoters of the company namely, Mr. Mahendra C Shah, Mrs. Hasu M Shah, Mr. Mit Shah, Mr. Akshat Shah, Mr. Kirit Shah and Mr. Jaswant C. Shah to pledge their shares with financiers/financial institutions in accordance with law. The Hon’ble SAT also directed that the monies received by the said promoters on creating the pledge shall be put in the account of the company to enable it to meet its financial requirements.

The Hon’ble SAT further observed “The auditors of the company shall carry out special audit of this money and submit a quarterly certificate/report to the Board certifying that the amount received against the pledge of shares was actually utilized for the purposes of the company.”

2. Thereafter, a notice dated October 16, 2007 was issued by SEBI to the company, its Managing Director viz. Mr. Mahendra C. Shah, Ceetee Trading and Leasing Private Limited (hereinafter referred to as Ceetee Trading) and its Director Mr. Sanjay B. Shah to show cause as to why suitable directions including restraining them from accessing the capital market and prohibiting from buying, selling or dealing in the securities in any manner whatsoever for a particular period should not be issued. It was inter alia, alleged that the company and its Managing Director Mr. Mahendra C Shah had indulged in making misleading and premature announcements, showing partly paid shares as fully paid shares without receiving allotment money etc. It was further alleged that 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 said scrip. It was also alleged that 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. It was alleged that the above acts of the company, Mr. Mahendra C. Shah, Ceetee Trading and Mr. Sanjay B. Shah were prima facie in violation of Regulation 3 (a), (b), (c), (d) and 4(1) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as the PFUTP Regulations). It was also alleged that the company and Mr. Mahendra C. Shah prima facie violated Regulation 4(2)(f) and 4(2)(r) of PFUTP Regulations and Ceetee Trading and Mr. Sanjay B. Shah also violated Regulation 4(2)(d) and 4(2)(e) of PFUTP Regulations.

3. The company and Mr. Mahendra C. Shah, instead of making their submissions, applied for a consent order in terms of SEBI circular dated April 20, 2007, vide their application dated November 21, 2007. In view of the said application, the present proceedings against them were kept in abeyance till the disposal of the said application, in terms of the circular dated April 20, 2007.

The High Powered Advisory Committee (constituted in terms of the above circular) in its meeting held on March 10, 2008 rejected the application as it was not a fit case for a consent order. The said decision was communicated to them by SEBI, vide letter dated May 07, 2008. Thereafter, vide letter dated January 5, 2009, Mr. Mahendra C. Shah made submissions on his behalf and also on behalf of the company in respect of the show cause notice dated October 16, 2007. Their submissions in brief are the following:

a) Ceetee Trading was never included in the promoter category right from inception and was not shown as promoter in the offer document issued in May 1996 as vetted by SEBI. Mr. Mahendra C Shah resigned as director thereof in the year 1994 and in September 1996, he and his family members transferred the entire shareholding of Ceetee Trading to his nephew Mr. D. C. Shah. Mr. D. C. Shah also exited the company in 2003 and the same was taken over by Mr. Sanjay B. Shah who is not related to either the company or its promoters. Thus, Ceetee Trading was not a promoter and was not acting in concert with the promoters. b) The company was not directly involved in the procedures, at the time of finalizing of allotment of shares in its public issue. c) Cheques were received from shareholders towards the payment of balance call money and therefore the same were reflected in the reported increase in share capital. However, some of the payments received were by post dated cheques and/ or the party concerned had requested to deposit the same after some time to enable them to arrange funds. The partly paid shares were shown as fully paid only after clearance of the cheques and even demat of shares was done strictly after subsequent to the clearance of cheques. No partly paid shares were traded or dematerialized until realization of full call money. The entire allotment money had been actually received and a certificate of an auditor in that regard was enclosed.

d) The announcements were made based on actual events/orders and there was no exaggeration in the announcements made. The announcements were required to be made in terms of the listing agreement. The delay of 2 months in making announcements was normal time lag. They had no role to play in the off-market deals and the off-market deals cannot lead to any sudden rise in trading volumes or price. e) The transactions carried out by the other entities were not known to them and those entities were neither promoters nor entities connected with the promoters of the company. They had not either directly or indirectly bought, sold or otherwise dealt in securities in a fraudulent manner.

4. Ceetee Trading vide letter dated December 10, 2007 inter alia made the following submissions: a) The off-market transfers of shares were made merely as collateral security (pledge) under assignment of syndication and arrangement of loan and not meant for trading in the market. The return of 4,80,000 shares of the company by Mr. Bipin Shah and Mrs. Bhavna Shah in March/June 2005 were pursuant to their failure to arrange loan for Ceetee Trading. The transfer of 4,06,300 shares of the company to Mr. Vijay Bhagwandas Shah (hereinafter referred to as VBS) was as collateral security for raising funds for Ceetee Trading. However, VBS had unauthorisedly and without their knowledge transferred the said shares to various entities. For the above act of dishonesty, they had initiated legal proceedings before the appropriate redressal forums including consumer courts against VBS. b) They had no link/nexus/connection with VBS or any of his associates. Ceetee Trading and its promoters/directors were not having any relationship with the company or its directors and associate companies. The off-market transactions carried out by them should not have any impact on the market price or its volume since they were not on the trading terminal of the stock exchange. They had not done any proprietary trading in the shares of the company during the investigation period. c) It denied violating any provisions of the Securities and Exchange Board of India Act, 1992 and the Rules/Regulations framed thereunder.

5. In support of their contentions, Ceetee Trading had cited the decisions in Sanman Consultants Limited Vs SEBI (Hon’ble Securities Appellate Tribunal), Swadeshi Cotton Mills, Nand Kishore Prasad Vs State of Bihar and Union of India Vs H.C. Goel (Hon’ble Supreme Court of India).

6. Mr. Sanjay B. Shah vide letter dated December 10, 2007, inter alia submitted that the show cause notice was issued in the name of four entities but failed to disclose his role and involvement in the present case. He submitted that the shares of the company were never transferred to the alleged group of connected clients. He denied being hands in glove with Mr. Mahendra C.Shah. He further denied having traded in the shares of the company during the investigation period.

7. Thereafter, an opportunity of hearing was granted to the company, Mr. Mahendra C. Shah, Ceetee Trading and Mr. Sanjay B. Shah on March 12, 2009 which was later adjourned to March 17, 2009, as per their request. On March 17, 2009, Mr. Prakash K. Shah, Advocate appeared before me on behalf of the above mentioned four entities and made submissions on the lines of the replies received from them, as stated above. Mr. Mahendra C. Shah was also present during the hearing.

8. I have considered the show cause notice, the oral as well as written submissions made on behalf the persons/entities and other material on record. According to me, the issues for consideration are the following:

a) Whether the company and Mr. Mahendra C. Shah had indulged in making any misleading and pre mature announcement, which was responsible for manipulation and artificial market for the shares of the company?

b) Whether Ceetee Trading and Mr. Sanjay B. Shah had any role in the alleged manipulation in the shares of the company?

9. It is not in dispute that the company came out with a public issue in May 1996 (total issue size was Rs.10.60 crore representing 106.00 lakhs shares). Subsequent to the public offer, out of the total issued capital of the company, 60,76,000 shares were fully paid and 66,95,800 shares were kept as partly paid shares. Against the partly paid shares, the company received Rs.2.50 per share towards share application money and the balance allotment money of Rs.7.50 was outstanding. The investigation conducted by SEBI observed that partly paid shares were converted to fully paid shares after a gap of 8-9 years of the public issue without receiving the allotment money. It was noted that, during the year 2004-05, the company had converted 54,54,600 (43% of equity) partly paid shares to fully paid shares. On the basis of the documents submitted by the company, it is seen that there was a difference between the increase in the share capital reported through the quarterly results and the actual receipt of money (as per the bank statements), as stated below:

Quarter Increase in the share Actual receipts as per bank Difference (Actual capital as per Quarterly statements (Rs in Lakhs) amount received – Reports (Rs in Lakhs) Amount shown in Quarterly reports) Apr 04 to Jun 04 28.6 0.80 -27.8 July 04 to Sep 04 130.7 5.0 -125.7 Oct 04 to Dec 04 12.4 13.52 1.12 Jan 05 to Mar 05 236.0 364.19 128.19

10. It can be noticed that during the period April-June, 2004 and July- September, 2004, though the company converted partly paid shares to fully paid shares amounting to Rs.28.6 lakh and Rs.130.7 lakh respectively, it received only Rs. 80,000/- and Rs. 5 lakh respectively. Thus, it can be seen that the company did not receive even 5% of the balance allotment money in respect of the partly paid shares converted into fully paid up shares during the said periods. In this regard, I note that the company, vide letter dated January 5, 2009 submitted that the shares were shown as fully paid only after clearance of the cheques and that the shares were dematerialized, subsequent to the clearance of the said cheques. It would be pertinent to note that the company had submitted that some of the payments towards the balance call/allotment money were either by way of post dated cheques or the allottees had requested to deposit the cheques after some time to enable them to arrange the funds. This submission would imply that at the time of conversion of the partly paid shares into fully paid shares, the company was not in receipt of the balance money which it should have received before the conversion. The conduct of the company and Mr. Mahendra C.Shah in accepting post dated cheques from the allottees and/or acceding to the request of certain allottees for presenting the cheques later was irregular. Though, the company had submitted an auditor’s certificate dated February 02, 2006 certifying that the company had received Rs.4,09,09,500/- towards the arrears in call on 54,56,600 shares during the year (April 01, 2004 to March 31,2005), it was not supported by bank statements showing the proof of receipt of the said amount. In the absence of such documents, I am inclined to hold that the company did not receive the call on arrears in full.

11. It was alleged that some applicants to the public issue of the company shared common addresses. Some of the instances noticed are given in Annexure I to the show cause notice which is reproduced herein below:

Address No. of No. shares applicants applied 1 Dharmendra Society G Flr, Haji Bapu Road, Malad (E), 40 20,000 Mumbai 400 096 1/1/60/7 Azamabad, Hyderabad, 500 020 8 30,000 1-18 Narayan Bldg, Dubhash Lane, V P Road, Bombay – 400 229 1,14,500 004 10 Indian Mercantile Mansion, 1st Floor, Opp Regal Cinema, 24 12,000 S.P. Chowk, Bombay – 400 039 104 Dayal Bhavan, 2nd Floor, R.No.6, New Chinch Bunder, 40 20,000 Mumbai 400 009 13/B Shanti Nagar, 2nd Sector, Sama Sadan, Borivali (E), 104 52,000 Bombay – 400 092 188 Mansukhnivas, B/5, 1st Flr, Khetwadi Back Road, Opp 11th 39 19,500 Lane, Mumbai 400 004 19 Zankadi Bhadawani Street, Vardham Complex, Bhavnagar – 44 44,000 364001 2/10 Vidhya Villa, Old Nagardas Road, Andheri (E), Bombay – 80 43,700 400 069 TOTAL 608 3,55,700

The allotment of shares to multiple applicants, who had the same address, suggested that the company had allotted shares to these applicants who were apparently benami or fictitious persons, to fulfill the requirement of minimum number of shareholders as per SEBI Circular no. SMD/RCG/JJ/1819/96 dated May 15, 1996. The company contended that its public issue was handled by renowned lead managers and it was not directly involved in the process of allotment of shares in the public issue. According to the said circular, it was necessary for a body corporate making a public issue to have at least 5 public shareholders for every Rs. 1 lakh of net capital offer made to the public. Thus, the company has to ensure that the condition mentioned above is complied with. The company cannot make the lead manager/registrar solely responsible for such lapses. Besides, it is already established that the company had converted partly paid shares into fully paid shares without the receipt of full consideration.

12. The company was also alleged of making misleading and premature announcements, regularly during the year 2005. The details of such announcements are as below:

Date & Time Major Announcements The company bagged orders of 75 million (Orders worth Rs 48.70 million (approx) Monday, March from Central Distribution Power Limited (CPDCL) and further orders of Rs 30 07, 2005 10:53:31 million (approx) from Northern Power Distribution Limited. This was possible AM because of very conducive climate & potential growth in power sector. Continuing the same climate company expects orders of Rs 250-300 million for current financial year. Further the company informed that to complement to the orders, it was considering its expansion plans of acquiring new machinery & renovation of the old machinery for that negotiation were on with couple of Banks for capital investment & Working Capital requirement & company expects to receive financial assistance for the same from the Bank. The present manufacturing activities are carried out at its plant at Hyderabad. The Company is also thinking of setting-up a plant in the state of Maharashtra considering the potential in the power sector & the growth prospects for the year 2006-2007. The company informed BSE on the order position that, out of 3 orders the Tuesday, July 12, Company had received two orders -from Northern Power Distribution Company 2005 11:13:46 AM Limited (NPDCL) and from Eastern Power Distribution Company Limited (EPDCL) respective is being executed.

The other one from Central Power Distribution Company Limited (CPDCL) has been cancelled since the company could not arrange the required working capital when required. However the Company is continuing its efforts for arranging the requisite funds for executing the said orders. The Company is confident that as soon as the requisite funds are arranged it shall be able to procure the orders once again from CPDCL The company informed BSE that a meeting of the Board of Directors of the Tuesday, August company will be held on September 05, 2005, inter alia, to : 30, 2005 10:33:20 AM Consider the Increasing Authorised Share Capital and Reclassification of Equity Share Capital. Decide the ratio of Splitting shares of the Company. Make Preferential Allotment of equity shares to the Promoters of the Company. The company informed BSE that, its Board of Directors at its meeting held on Monday, September 05, 2005, inter alia, has approved the following: September 12, 2005 11:46:32 AM To sub-divide 1 equity shares of Rs 10/- each into 5 equity shares of Rs 2/- each.

Date & Time Major Announcements To reclassify the authorized capital of the company from Rs 14,00,00,000/- divided into 1,40,00,000 equity share of Rs 10/- each to Rs 14,00,00,000/- divided into 7,00,00,000 equity shares of Rs 2/- each. To increase the authorized capital of the company from Rs 14,00,00,000/- divided into 7,00,00,000 equity shares of Rs 2/- each to Rs 30,00,00,000/- equity shares of Rs 2/- each by addition of 8,00,00,000 equity shares of Rs 2/- To amend the Memorandum and Articles of Association in respect of the Capital clause. Further the company informed that the Board has deferred the allotment of equity share on preferential basis to the promoters for the time being.

13. The announcements made by the company on March 7, 2005 and July 12, 2005 are not in dispute. The contention of the company is that the said announcements were based on actual events which took place within a short span of time. The company further submitted that the announcement regarding the order (worth Rs. 48.70 million) from CPDCL dated December 27, 2004 was made only on March 7, 2005. Therefore, according to the company, the announcement made on July 12, 2005 regarding the cancellation of the aforesaid order on April 2005 by CPDCL was thus normal and that no intention could be imputed against it. Thus, admittedly, the order received by the company from CPDCL was subsequently cancelled by the latter on April 25, 2005. I note that the order from CPDCL was cancelled as the company could not arrange the required working capital to execute the orders. It is also substantiated by the fact that the company made very little profit over the years. However, the company made an announcement regarding the cancellation only on July 12, 2005 i.e. after a period of two months. Having made an announcement about the order received from CPDCL, the company had a duty to inform the shareholders/investors about the cancellation of the said order, immediately on receipt of the same, as the said information had a bearing on the share price of the company.

However, the company failed to do so. This gains significance as the announcement in respect of the cancellation of the order was made only after two months. The company does not have a case that, it had received the information regarding the cancellation of the order (from CPDCL) in the month of July 2005. This is further supported by the fact that the company, in its reply dated January 5, 2009, stated “The cancellation was on or about 25th April 2005 and the announcement was made on 12th July 2005 (also about 2 months later)…..” The announcement (being an order as stated above) made by the company on March 7, 2005 could clearly have impacted its share price. Any such announcements made by a company would certainly attract genuine investors and the same would further induce them to deal in the shares of such company. If the investors are not informed about the cancellation of such a huge order, immediately, they may continue to deal in the shares, keeping in mind the announcement made by the company on March 7, 2005. The submission of the company that, since it delayed the announcement about the order of CPDCL, it is a normal thing to delay the announcement about its cancellation cannot be acceptable.

The intention of the company in delaying the information regarding the cancellation seems to be that it would have expected that the share price would fall by making such announcement. In view of the above, the submission of the company that ‘no intention can be imputed’ would not hold good. The company by concealing the said cancellation for a fairly long period had acted fraudulently, in terms of Regulation 2 (c) of the PFUTP Regulations. I further note that the company on August 30, 2005 had informed BSE that a meeting of the Board of Directors would be held on September 05, 2005 to consider increase in the authorized share capital and reclassify equity share capital, decide the ratio of splitting shares and making preferential allotment of equity shares to the promoters of the company. Later, the company on September 12, 2005 informed BSE that its Board of Directors, in the meeting held on September 05, 2005 had approved the aforesaid items except allotment of equity shares on preferential basis to the promoters, which was deferred. The company contended that, the announcements on August 30, 2005 was to convey the holding of the Board Meeting on September 05, 2005 and the announcement on September 12, 2005 conveyed various decisions taken by the Board in the said Meeting.

I note that, on March 7, 2005, the company had also announced that it was thinking of setting up a plant in the state of Maharashtra. However, as per the records available, the company did not make any further announcement in respect of the same. Besides, on the same day (March 7, 2005), the company had also announced that it expected orders to the tune of Rs.25-30 crore for the current financial year, when the financial performance of the company for the subsequent year (2005-06) did not reflect that it had actually received orders as expected by it.

14. In view of the foregoing discussion, I do not have any hesitation to hold the company and Mr. Mahendra C.Shah liable for contravening the provisions of Regulation 3(a), 3(b), 3(c) & 3(d), Regulation 4(1) and Regulation 4(2)(f) & 4(2)(r) of the PFUTP Regulations.

15. In respect of the second issue, admittedly, Ceetee Trading was one of the major shareholders in the company, holding 11.09 lakh shares. A scrutiny of the Depository Participant Account Opening Form of Ceetee Trading revealed that Mr. Mahendra C Shah and his wife Mrs. Hasu Mahendra Shah were the first directors of Ceetee Trading. Further, it was observed that, on June 14, 2003, Ceetee Trading authorized its directors Mrs. Hasu M Shah and Mr. Sanjay B Shah to operate the depository account. This would indicate that the company and Ceetee Trading had common directors.

16. Admittedly, Ceetee Trading was in requirement of funds and towards the said purpose, it had an arrangement with Mr. Bipin Shah (appears to be connected to the promoters of the company) and Mrs. Bhavna Shah against the collateral security of its investments in 3,20,000 equity shares (valued at Rs.10/-per share) of the company. It is also not in dispute that Mr. Bipin Shah and Mrs.

Bhavna Shah could not arrange the loan for Ceetee Trading. I note that they had returned 4,80,000 equity shares (@ Rs.10/- each) of the company in demat form and in the said transaction, Ceetee Trading had received an additional 1,60,000 equity shares @ Rs.10/- per share. The investigation observed that, Ceetee Trading had transferred 3,80,000 shares (from the lot received from Mr. Bipin Shah) on March 15, 2005 to VBS. Ceetee Trading had also transferred 26,300 shares of the company to VBS on March 21, 2005. Ceetee Trading had submitted that 4,06,300 equity shares were transferred to VBS as a collateral security for loans, for starting business activity, to be arranged by VBS. VBS transferred the said shares received from Ceetee Trading in off-market deals to a group of connected clients, who subsequently sold the shares in the market. Ceetee Trading had submitted that VBS failed to provide loan and instead of returning 4,06,300 shares to it, VBS had fraudulently used the blank inter-depository delivery instructions (Serial No. 964241 and 964242) having client ID 10551602 for transferring the same to his personal demat account in off-market and then again transferred the shares from his demat account to that of his agents, who in turn sold them in market.

However, it was not able to provide any documentary proof to show that the shares were transferred to VBS for arranging loans. The shares transferred by Ceetee Trading had contributed to the manipulation of the shares of the company in the market. From the trade history, it is noticed that the shares of the company were infrequently traded till June 2000 within the price range of Rs.4.00 to Rs.13.55. There was no trading during the period between June 2000 and May 2003. Between June 2003 and February 2005, the shares were quoted at prices ranging from Rs.2.96 to Rs.18.00 and the average monthly volume was around 6,64,910 shares. The share price of the company went up from Rs.22.40 on February 10, 2005 to Rs.159.50 on September 16, 2005 in 153 trading days representing a colossal rise of 636% and the average monthly volume of the shares during this period was around 42,50,555 shares. The unusual rise in the volumes and price was mainly because of the wide spread manipulation in the shares of the company. Later, the share price started falling sharply from September 20, 2005 and closed at Rs.7.90 on October 31, 2005 in 30 trading days.

An analysis of the Depository Participant Account Opening Forms of various clients, the off-market transactions, the trade data and the trading by the clients of the top stock brokers during the period February 10, 2005 to September 16, 2005 revealed that some of the clients including Ceetee Trading and VBS were connected to each other in terms of common address, common contact numbers or association of clients (companies) through common directors. Amongst these, some clients appeared to have some linkages to the promoters. The details of which have been explained in Annexure IV to the show cause notice dated October 16, 2007. During the period February 10, 2005 to September 16, 2005, those clients had transferred shares of the company among themselves in off market and dealt in the shares in the market. Details of such market and off market transactions done by the said group of clients during the investigation period, were also provided along with the show cause notice. The said group purchased 71,34,458 shares accounting for 21.51% of gross purchases and sold 52,65,233 shares accounting for 15.88% of gross sales in the market.

This group was also observed to be involved in 228 trades, which were executed at a price difference of 0.5% or more than the last traded price or last closing price (said details were provided along with the show cause notice). The said clients traded for 6,24,166 shares among themselves (when one of the connected clients was buying, the counter-party was another connected client) out of which trades for 1,49,836 shares were synchronized (the time difference between buy and sell orders were less than a minute). Such trading pattern had induced other investors to trade in the scrip and as a result, the traded volumes and the share price increased substantially.

17. Ceetee Trading had submitted that the shares were transferred to VBS as collateral security for the funds to be arranged by VBS. It had further submitted that the entities to whom shares were transferred for the purpose of keeping them as collateral security, had in turn without its permission, transferred to other entities. Though, Ceetee Trading had submitted that it had initiated legal proceedings against the entities before appropriate redressal forums including consumer courts, no proof for the same have been submitted. Mr. Sanjay B. Shah submitted that, beyond the transfer of shares to VBS for raising funds, he was not aware of anything that was mentioned in the show cause notice. The said submissions by Ceetee Trading and Mr. Sanjay B. Shah would not hold good as they have not submitted any documentary evidence to show that the transfer of shares to VBS, Mr. Bipin Shah and Mrs. Bhavna Shah were for the purpose of securing loans from them. It is an admitted position that VBS failed to arrange loan to Ceetee Trading, as promised. In such event, any prudent person would have demanded back the shares transferred to VBS. But this did not happen in the present case. Therefore, in the facts and circumstances of the case, it is inferred that Ceetee Trading and Mr. Sanjay B. Shah were hand in glove with the entities who had indulged in fraudulent and unfair trade practices. In this connection, I place reliance on the following observation of the Hon’ble SAT in the matter of Ketan Parekh Vs SEBI:

“……………….Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available. ……The nature of the transaction executed, the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.”

18. In view of the above findings, it is clear that premature and misleading announcements were made by the company and Mr. Mahendra C. Shah, showing partly paid shares as fully paid shares without receiving allotment money. This false and misleading information had induced unsuspecting investors to purchase the shares at high prices and this had created false and artificial market for the scrip. Mr. Sanjay B. Shah acted hand in glove with Mr. Mahendra C. Shah and transferred the shares of the company held by Ceetee Trading to the group of connected clients, who used those shares for manipulation in the market. The aforesaid entities/persons had dealt in securities of the company in a fraudulent and unfair manner. In view of the above, the case laws cited by Ceetee Trading may not be applicable to the facts of the present case.

19. In view of the above discussions, I do not have any hesitation to hold Karuna Cables Limited, Mr. Mahendra C. Shah, Ceetee Trading and Leasing Private Limited and Mr. Sanjay B Shah liable for violating Regulation 3 (a), 3 (b), 3 (c) & 3 (d) and 4(1) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. Karuna Cables Limited and Mr. Mahendra C. Shah have also violated Regulation 4(2)(f) and 4(2)(r) of the aforesaid Regulations. Ceetee Trading and Leasing Private Limited and Mr. Sanjay B Shah have also violated Regulation 4(2)(d) and 4(2)(e) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.

20. In view of the foregoing, I, in exercise of powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11, 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 and Regulation 11 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, hereby restrain Karuna Cables Limited and Mr. Mahendra C. Shah, Ceetee Trading and Leasing Private Limited and Mr. Sanjay B Shah from accessing the securities market and further prohibit them from buying, selling or dealing in securities market, directly or indirectly, for a period of six months.

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

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

PLACE: MUMBAI DATE: JUNE 15, 2009