Order in the matter of Kolar Sharex Pvt Ltd

BACKGROUND – 1. M/s. Kolar Sharex Private Limited (“Noticee”) is a SEBI registered stock broker. It was having membership of Bombay Stock Exchange (BSE) and Inter Connected Stock Exchange (ICSE) before it was expelled from the said exchanges with effect from October 20, 2014.

2. Pursuant to proceedings under the SEBI Intermediaries Regulations, 2008 (“Intermediaries Regulations”), SEBI vide order dated August 29, 2012 in the matter of Soundcraft Industries Limited, had found the Noticee guilty of violation of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations) and SEBI (Stock Brokers and Order in respect of M/s. Kolar Sharex Private Limited

Sub-brokers Regulations), 1992 (Stock Brokers Regulations) and had suspended the certificates of registration of the Noticee for a period of 3 months from the date of coming into effect of the said order.

3. Since the Noticee had kept itself away and had not co-operated with SEBI during the abovementioned proceedings, SEBI vide email dated February 25, 2014 advised BSE and ICSE to examine whether the Noticee fulfilled the ‘fit and proper person’ criteria to continue as a member of the said exchanges and to take suitable action, as deemed fit.

4. Subsequently, BSE vide letter dated October 20, 2014 informed SEBI that the Noticee had been expelled from the membership of BSE with effect from October 20, 2014. It was noted that the same was pursuant to a decision of the Disciplinary Action Committee (DAC) of the BSE, which had noted inter alia the following irregularities by the Noticee: (a) Noticee had submitted fraudulent documents purported to have been signed by a director who had actually resigned from the company as a director. (b) Board resolution was passed for change in designated directors, without seeking approval of the exchange prior to such change. Further, the documents were signed by the director who was yet to be approved by the Exchange.

(c) Noticee had not obtained prior/post approval from SEBI / BSE for change in control of the management. (d) Noticee had provided false and incorrect confirmation with respect to the regulatory action against it and its director. (e) The Noticee had failed to fulfill fit and proper person criteria (f) The Noticee had failed to maintain high standards of ethics, integrity and fairness in its conduct. (g) The debarment order dated December 15, 2010 issued by SEBI against the Noticee’s director, Shri Rajkumar Basantani, continued to be in force.

5. Further, ICSE, vide its email dated November 11, 2014 informed SEBI that since the Noticee had been expelled by BSE as a trading member, in terms of notification no. F.NO: 1/26/SE/91 dated August 12, 1991, ICSE would have to treat the Noticee as expelled.

6. Apart from the above, it was noted that various regulatory / enforcement actions had been by SEBI taken against the Noticee’s director, Shri Rajkumar C. Basantani, in the past. Shri Rajkumar C. Basantani, apart from being a director of the Noticee, was also a trading member of the National Stock Exchange (NSE). Such regulatory actions against Rajkumar C. Basantani included suspension of certificate of registration as trading member, debarment as an individual, imposition of monetary penalty in the capacity of proprietor and individual, prosecution proceedings for failure to pay the monetary penalty and recovery proceedings for recovering the amount of penalty due to be paid. A summary of the said regulatory, as per SEBI’s Action Taken Report (ATR) is as under: SEBI ATR (as on Dec 24, 2014) Sr. No. Date Nature of Action Details of Action Individual/Proprietor 1 Nov 07, 2001 Enquiry Suspension for Proprietor 6 months 2 Aug 22, Enquiry Suspension for Proprietor 2002 6 months 3 Sep 16, 2002 Section 11B of Debarment for 3 Individual the SEBI Act, years 1992 4 Oct 28, 2005 Adjudication Penalty of Rs. Proprietor 53 lacs 5 Apr 28, 2006 Adjudication Penalty of Rs. 5 Individual lacs 6 Nov 28, Adjudication Penalty of Rs. Individual 2008 15 crores 7 Dec 12, 2008 Enquiry Suspension for Proprietor 2 years 8 Dec 12, 2008 Section 11B of Suspension for Individual the SEBI Act, 5 years 1992 9 Oct 16, 2009 Section 11B of Debarment for 1 Individual the SEBI Act, year and 1992 Proprietor 10 Feb 03, 2010 Enquiry Suspension till Proprietor registration fees are paid 11 Apr 29, 2010 Adjudication Penalty of Rs. Individual 1.35 crores 12 Aug 29, Enquiry Suspension for Proprietor 2012 1 year

. Prosecution Proceedings

Prosecution Database (as on Sep 30, 2014) Sr. Name of Defaulter Amount of Date of AO No. Penalty Order 1 Rajkumar Basantani (Proprietor) Rs. 53 lacs Oct 28, 2005 2 Soundcraft Industries Ltd. (Director Rs. 10 lacs Mar 31, 2006 Rajkumar Basantani and others) 3 Rajkumar Basantani (Individual) Rs. 5 lacs Apr 28, 2006 4 Rajkumar Basantani (Individual) Rs. 1.35 Apr 29, 2010 Crore 5 Kolar Sharex Pvt Ltd. (Director Rs. 5 lacs May 15, 2006 Rajkumar Basantani) 6 Soundcraft Industries Ltd. (Director Rs. 5 lacs Mar 30, 2007 Shri. Rajkumar Chainrai Basantani) 7 Rajkumar Basantani (Individual) Rs 15 crores Nov 28, 2008

8 Rajkumar Basantani (Director of Rs. 1 lac Nov 29, 2008 Kalbadevi Finance Ltd.)

Recovery Proceedings

Recovery Proceedings (as on Jan 08, 2014) Sr. Name of Defaulter Amount of Date of Recovery Certificate No. Penalty 1 Rajkumar Basantani (Individual) 15 crores Jan 13, 2014 2 Rajkumar Basantani (Director of M/s. 1 lac Jul 16, 2014 Kalbadevi Finance Ltd.)

7. In view of the above, it was alleged that the Noticee had violated Regulation 9(a), (b) (c) and (f) of the Stock Brokers Regulations. Considering the same, SEBI initiated proceedings under the Intermediaries Regulations against the Noticee and appointed a Designated Authority (DA) to enquire into the aforesaid violations under Section 12(3) of the SEBI Act, 1992, read with Regulations 27(i), (viii), (xv) and (xvii) of the Stock Brokers Regulations and Regulation 24(1) of the Intermediaries Regulations. The DA issued a show cause notice to the Noticee and upon a consideration of the facts before him, found the Noticee to be in violation of the abovementioned provisions of the Stock Brokers Regulations. Accordingly, the DA, vide his report dated February 28, 2019 (DA Report), submitted under Regulation 27 of the Intermediaries Regulations, recommended that the Noticee’s certificate of registration as a stock broker be cancelled.

SHOW CAUSE NOTICE, REPLY AND PERSONAL HEARING – 8. Thereafter, a show cause notice dated March 12, 2019 (“post-enquiry SCN”) was issued to the Noticee, enclosing therewith a copy of the DA Report, calling upon the Noticee to show cause as to why action as recommended by the DA or any other penalty should not be imposed on it in terms of Regulation 28(1) and (2) of the Intermediaries Regulations, as deemed fit by the Competent Authority.

9. The SCN sent to the Noticee returned undelivered. Thereafter, a copy of the SCN was uploaded on the SEBI website under the section – “Unserved Summons / Notices that could not be served”. Further, a notice regarding the SCN was also published in newspapers on August 10, 2020. The said notice in the newspapers also contained an intimation about a personal hearing in the matter which was scheduled on September 23, 2020. However, even after the publication of the notice in newspapers, no response was received from the Noticee. Considering these facts and circumstances, I am constrained to proceed in the matter ex-parte, entirely on the basis of material available on record.

CONSIDERATION AND FINDINGS – 10. I have examined the facts of the case and the charges against the Noticee. I note that that since the Noticee is alleged to have violated Regulations 9 (a), (b) (c) and (f) of the Stock Brokers Regulations, it is imperative to have a look at those provisions. The same are quoted below: “Conditions of registration. 9. Any registration granted by the Board under regulation 6 shall be subject to the following conditions, namely,- (a) the stock broker holds the membership of any stock exchange; (b) he shall abide by the rules, regulations and bye-laws of the stock exchange which are applicable to him; (c) where the stock broker proposes change in control, he shall obtain prior approval of the Board for continuing to act as such after the change; (d) … … … (e) … … … (f) he shall at all times abide by the Code of Conduct as specified in Schedule II;”

11. A perusal of the provisions of Regulation 9(a) shows that any certificate of registration granted to a stock broker by SEBI is subject to the condition that he holds the membership of any stock exchange. I note that this requirement is sine qua non and is absolute in nature. In this regard, I note from records that the Noticee, which was having membership of BSE and ICSE, has already been expelled from the said exchanges with effect from October 20, 2014. Thus, I find that the Noticee does not meet even the basic criteria of holding a certificate of registration from SEBI as a trading member, thereby becoming non-compliant with the provisions of Regulation 9(a) of the Stock Brokers Regulations.

12. Even when a trading member holds a valid certificate of registration from SEBI by virtue of being a member of an exchange, Regulation 9(b) of the Stock Brokers Regulations stipulates that such registration is further subject to the condition that he shall abide by the rules, regulations and bye-laws of the stock exchange which are applicable to him. Further, under Regulation 9(c), it is obligatory that where the stock broker proposes change in control, he shall obtain prior approval of SEBI for continuing to act as such after the change. In this regard, I note from the records that the expulsion of the Noticee from the membership of BSE was pursuant to a proceeding by the DAC of the BSE. From the copy of the relevant extracts of the minutes of the DAC meeting of BSE, held on July, 31, 2014, as available on record, I note that the DAC had noted inter alia the following irregularities by the Noticee: (a) Board resolution was passed for change in designated directors, without seeking approval of the exchange prior to such change, which was in non-compliance with Rule 257A(iv) of the Rules, Bye-laws and the Regulations of the Exchange and the requirements of the Exchange. (b) Noticee had not obtained prior/post approval from SEBI / BSE for change in control of the management, which amounted to non-compliance with Rule 257A(iii) of the Rules, Bye-laws and the Regulations of the Exchange and violation of provisions of Stock Brokers Regulations.

13. Apart from the above, the DAC of the BSE had also observed the following: (a) Noticee had submitted fraudulent documents purported to have been signed by a director who had actually resigned from the company as a director. (b) Documents submitted by the Noticee were signed by the Designated Directors who were yet to be approved by the Exchange. (c) The confirmation given by the Noticee with respect to the regulatory action against it and its directors was false and incorrect. There were many regulatory actions against the Noticee and its directors, which it had failed to report in the confirmation.

(d) Vide order dated December 15, 2010 passed in the matter of Kolar Biotech Limited, SEBI had debarred Shri Rajkumar Basantani (a director of Kolar Biotech Limited) from accessing the securities market and prohibit him from buying, selling or otherwise dealing in securities, directly or indirectly, till all the pending investor grievances against the said company were resolved and the same was reported and confirmed by SEBI. The said debarment continued to be in force. Shri Rajkumar Basantani is also a director of the Noticee. (e) The Noticee had failed to fulfill the fit and proper person criteria. (f) The Noticee failed to maintain high standards of ethics, integrity and fairness in its conduct.

14. Further, I note from the DA Report that as per Action Taken Report (ATR) of SEBI, the following regulatory / enforcement actions have been taken against the Noticee in the past: Enquiry Proceedings S. Date of Action Nature of action Details of action NO. 1. December 12, 2008 Enquiry Suspension for six months 2. February 03, 2010 Enquiry Suspension till payment of outstanding registration fees 3. August 29, 2012 Enquiry Suspension for 3 months

Prosecution proceedings Name of Defaulter Name of the Case Amount of Date of AO order penalty (Rs.) Rajkumar Basantani, (SEBI Spl Case- 5 Lacs May 16, 2006 Director Kolar Sharex 317/2014) Ltd.

Recovery proceedings Name of In the Date of AO order No. Penalty Date of the matter of Issue order Defaulter M/s Kolar Adam IVD-ID- April 30, Sharex Pvt. Comsof 3/ACL/KSPL/AO/DRK/AS/EAD- 2010 Ltd. Ltd. 11/07/2014 3/142/09-45/2010 1200000 M/s Kolar Kolar July 22, Sharex Pvt. Biotech KBL/KSPL/AO/DRK/AS/EAD- 2010 Ltd. Ltd. 26/09/2014 3/177/09-80/2010 3000000 Kolar Soundcraft May 16, Sharex Pvt. Industries 2006 Ltd. Ltd 24/02/2015 NIL 500000

15. Besides the above, the ATR of SEBI shows that SEBI in the past has taken various enforcement actions against Shri Rajkumar Basantani (the designated director of the Noticee), who was also a trading member of the NSE. The details are as under:

Adjudication, Enquiry and 11B proceedings Sr. Date of Action Nature of action Details of action No. 1. November 07, Enquiry Suspension for 6 months 2001 2. August 22, 2002 Enquiry Suspension for 6 months

3. December 12, Enquiry Suspension for 2 years 2008 4. February 03, Enquiry Suspension till payment of 2010 registration fees 5. August 29, 2012 Enquiry Suspension for 1 year 6. October 28, 2005 Adjudication Penalty of Rs. 53 Lakhs 7. April 28, 2006 Adjudication Penalty of Rs. 5 Lakhs 8. November 28, Adjudication Penalty of Rs. 15 Crores 2008 9. April 29, 2010 Adjudication Penalty of Rs. 1.35 Crores 10. September 16, Section 11B of the Debarment for 3 years (period of 2002 SEBI Act, 1992 debarment revised to 6 months by the Hon’ble SAT vide order dated 21.05.2004 11. December 12, Section 11B of the Suspension for 5 years 2008 SEBI Act, 1992 12. October 16, 2009 Section 11B of the Debarment for 1 year SEBI Act, 1992

Prosecution proceedings Sr Nature of Name of the Action Amount of Date of AO No Violation case under penalty order Section 1. PFUTP, SAST Adam Comsof Sec 24(1) of …… NA Ltd & 19 SEBI Act others (SEBI Spl case- 259/2015)

2. Sec 24(1) of M/s Kolar Sec 24(1) of …… NA SEBI Act Biotech Ltd. & SEBI Act 34 Others (SEBI Spl Case- 61/2016) 3. Non Payment Kolar Sharex 24(2) of Rs. 5,00,000/- May 16, 2006 of Pvt. Ltd. & SEBI Act Penalty_24(2) Rajkumar of SEBI Act Basantani (SEBI Spl Case- 317/2014) 4. PFUTP, Rajkumar Sec 24(1) of …… NA SAST, Insider Basantani SEBI Act Trading (SEBI Spl Case- 266/2014) 5. 24(2) of SEBI Sound Craft 24(2) of Rs. 5,00,000/- March 30, 2007 Act Industries Ltd. SEBI Act And 1 another (SEBI Spl case- 190/2015) 6. 24(2) of SEBI Soundcraft 24(2) of Rs. 1,00,00,000 March 31, 2006 Act Industries Ltd. SEBI Act /- And 4 others (SEBI Spl Case- 313/2014) 7. 24(2) of SEBI Rajkumar 24(2) of Rs. 5,00,000/- April 28, 2006 Act Basantani and SEBI Act 1 another (SEBI Spl case- 316/2014)

Recovery proceedings Name of the Defaulter In the matter Date of AO order No. Penalty / Date of of Issue Fee order Rajkumar C Basantani November Kolar Biotech 28, 2008 Limited 13/01/2014 DSR/AO-32/2008 150000000 Mr. Rajkumar C IVD-ID- April 29, Basantani 3/ACL/RB/AO/ 2010 DRK/AS/EAD- Adam 3/139/09- Comsof Ltd. 11/07/2014 42/2010 13500000 Rajkumar Basantani November (Director of M/s 28, 2008 Kalbadevi Finance Ltd. Kolar Biotech ) Limited 16/07/2014 DSR/AO-33/2008 100000 Rajkumar C Basantani Soundcraft April 28, Industried 2006 Ltd 24/02/2015 NIL 500000 Rajkumar C Basantani April 1, Fees Payable 2015 to SEBI 26/06/2015 Not applicable 4,00,496

16. I find that by passing a board resolution for change in designated directors, without seeking approval of the exchange, and by proceeding with change in control of the management withour prior / post approval of SEBI / BSE, as referred to in para 12 above, the Noticee had violated the laws and bye-laws of the BSE, as reported in the abovementioned minutes of the DAC meeting of the BSE. The same amounts to violation of the provisions of Regulation 9 (b) and (c) of the Stock Brokers Regulations by the Noticee. Further, various enforcement actions taken by SEBI against the Noticee clearly show that the Noticee has not been maintaining high standards of integrity, promptitude and fairness in the conduct of its business, and had failed to act with due skill, care and diligence. Further, the various orders passed by SEBI against the Noticee, including the order dated August 29, 2012 as referred to in the opening paragraph of this order, clearly show that it has indulged in manipulation and malpractices and has failed to abide by the provisions of various securities laws applicable to it. These acts of the Noticee have resulted in violation of the provisions of Clauses A (1), (2), (3), (4) and (5) of the Code of Conduct for Stock Brokers prescribed under Schedule II of the Stock Brokers Regulations. This non-adherence to the provisions of Code of Conduct amounts to violation of the provisions of Regulation 9 (f) of the Stock Brokers Regulations. I note that the abovementioned violations are covered under Regulations 27 (i), (viii), (xv) & (xvii) of the Stock Brokers Regulations which make the Noticee liable for action as specified under Chapter V of the Intermediaries Regulations.

17. I note that while the Noticee, by virtue of having been expelled from the membership of BSE and ICSE, has become non-compliant with one of the basic conditions prescribed for holding a certificate of registration from SEBI as a stock brokers, the various enforcement actions taken against it by SEBI over the years are ample proof of the fact that the continuation of the Noticee as a registered intermediary is detrimental to the interest of the securities market and the investors at large. Considering all these factors in totality, I am in total agreement with the recommendation of the DA that the certificate of registration of the Noticee be cancelled.

18. I note that Regulation 28 of the Intermediaries Regulations has been omitted by the SEBI (Intermediaries) (Amendment) Regulations, 2021 with effect from January 21, 2021. Simultaneously, the provisions of Regulation 27 of the Intermediaries Regulations have been amended and passing of an appropriate order by the Designated Member is now provided under the provisions of Regulation 27(5) of the Intermediaries Regulations. ORDER – 19. In view of the above, I, in exercise of powers conferred on me under Section 12 (3) read with Section 19 of the SEBI Act, 1992 and Regulation 27 (5) of the Intermediaries Regulations, and upon consideration of the facts and circumstances as above, hereby cancel the certificates of registration of Kolar Sharex Private Limited, bearing nos. INB011105138 and INB241105130, as a stock broker.

Place: MUMBAI G. MAHALINGAM Date: FEBRUARY 18, 2021 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA