Order in the matter of Purshottam Budhwani

WTM/MSS/ISD/98/2011 SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI CORAM: M. S. SAHOO, WHOLE TIME MEMBER IN THE MATTER OF IPO IRREGULARITIES - DEALINGS BY Mr. PURSHOTTAM G. BUDHWANI IN THE INITIAL PUBLIC OFFERS OF: 1. IL&FS LTD. (ILFS) 2. IDFC LTD. (IDFC) 3. GATEWAY DISTRIPARKS LTD. (GATEWAY) 4. SHOPPERS STOP LTD. (SHOPPERS) 5. MSP STEEL & POWER LTD. (MSP) 6. YES BANK LTD. (YBL) 7. SPL INDUSTRIES LTD. (SPL) 8. PROVOGUE LTD. (PROVOGUE) 9. GOKULDAS EXPORTS LTD. (GOKUL) 10. TATA CONSULTANCY SERVICES LTD. (TCS) 11. NECTAR LIFESCIENCES LTD. (NECTAR) 12. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SASKEN) 13. SUZLON ENERGY LTD. (SUZLON) Dates of Hearing: November 23, 2010, January 04, 2011, January 25, 2011, March 01, 2011 and March 07, 2011 Appearances: For Noticee: Mr. Purshottam G. Budhwani (appeared on November 23, 2010 and March 01, 2011) For SEBI: Mr. Kinjal Ghose, Legal Officer (Presenting Officer) Mr. B. J. Dilip, Deputy General Manager Mr. Vineet Kumar Biyani, Manager Ms. Kshama Wagherkar, Assistant Legal Adviser, and Mr. Amitesh Kumar, Assistant Legal Adviser. ORDER UNDER SECTIONS 11, 11 (4) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 1. On noticing certain irregularities in the transactions in the shares, that were issued through initial public offers (IPOs) during the period 2003-2005, before their listing on the stock exchanges, the Securities and Exchange Board of India (SEBI), pending investigations, vide ad interim ex-parte Orders dated January 12, 2006 and April 27, 2006, which were also the show cause notices, directed certain persons, including Mr. Purshottam G. Budhwani (‘noticee’) not to buy, sell or deal in the securities market, including in IPOs, directly or indirectly, till further directions.

The said notices offered opportunities of inspection of documents and personal hearing to the noticee. The noticee filed a reply and also took inspection of documents. However, no order was passed. 2. On completion of investigations, SEBI issued a show cause notice dated May 20, 2010 (SCN) under Sections 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992. The SCN alleges that the noticee cornered the shares meant for the retail individual investors (RIIs) in 13 IPOs by crafting an elaborate arrangement to engineer multiple applications in the retail category. He created a maze of persons (afferent persons) by permutation and combination of different parts of the full name of a person. For example, he created 10 afferent persons from the name of one person, namely, Mr. Anant Gunaji Gamre, as illustrated in Para 4.4 of the SCN. He opened 6,685 demat accounts (afferent accounts), in concert with depository participants (DPs), in favour of the afferent persons. All the afferent accounts carried his address. He paid the charges for the afferent accounts. He engineered and funded applications, in concert with financiers, in the retail category of several IPOs through the afferent accounts.

On receipt of shares on allotment in the afferent accounts, he got the shares transferred to his own demat accounts before listing. The afferent accounts were used only for making applications in IPOs, receiving shares on allotment in those IPOs and transferring the said shares to the noticee and no other transactions. He disposed of some of such shares directly and transferred the balance in off-market to others who sold the same subsequently. For example, the noticee engineered 1,834 applications from amongst 6,685 afferent accounts in the retail category of shoppers IPO which fetched an aggregate allotment of 45,850 shares. Before listing, he got the entire 45,850 shares transferred from the 1,834 afferent accounts to his own demat accounts in off-market and, in turn, disposed of the said shares directly or through the financiers. He repeated this modus operandi in 13 IPOs. In the process, he made an unlawful gain of Rs.7.78 crore and facilitated others to make an unlawful gain of Rs.0.87 crore. Table A presents the receipt of shares from afferent accounts and subsequent disposal of such shares by the noticee.

Table B presents the unlawful gains made on disposal of such shares by the noticee and others, as alleged in the SCN. Table A: Transactions by the Noticee IPO Receipt of Disposal of Shares by Noticee Shares by Market Sale Off-market Transfer to Balance with Noticee Sale Others Noticee TCS 44,994 8,200 36,794 0 0 GATEWAY 90,270 51,480 0 38,790 0

GOKUL 14,340 1,299 13,041 0 0 SHOPPERS 45,850 22,000 3,850 20,000 0 PROVOGUE 9400 680 0 8,000 720 YBL 1,69,940 57,518 1,12,245 0 177 MSP 51,000 30,000 0 20200 800 NECTAR 26,850 10,700 0 13,500 2,650 SPL 1,48,800 8,135 1,27,430 0 13,235 ILFS 40,450 15,750 21,900 0 2,800 IDFC 15,65,824 7,14,600 4,18,778 1,44,000 2,88,446 SASKEN 12,950 7,000 0 0 5,950 SUZLON 78,960 32,000 16,304 15,532 15,124 Table B: Unlawful gains made (Rs.) Name of IPO Unlawful gains of noticee from Unlawful gains of Total Market Off-market Balance with Others Sale Sale him 1 2 3 4 5 6 TCS 9,71,454 50,75,732 0 0 60,47,186 GATEWAY 20,61,774 0 0 25,00,185 45,61,959 GOKUL 2,65,775 26,68,189 0 0 29,33,964 SHOPPERS 29,61,200 32,10,210 0 26,92,000 88,63,410 PROVOGUE 8,50,206 0 70,524 7,83,600 17,04,330 YBL 9,08,784 17,73,471 2,796 0 26,85,051 MSP STEEL 1,59,000 0 4,240 1,13,322 2,76,562 NECTAR 2,15,070 0 53,265 3,80,703 6,49,038 SPL 2,71,302 42,49,791 4,41,387 0 49,62,480 ILFS 9,47,362 13,17,285 1,68,420 0 24,33,067 IDFC 2,04,00,100 49,69,885 1,02,54,255 0 3,56,24,240 SASKEN 14,31,850 0 12,17,073 0 26,48,923 SUZLON 51,95,000 29,81,186 27,65,423 23,08,464 1,32,50,073 Total 3,66,38,877 2,62,45,749 1,49,77,383 87,78,274 8,66,40,283 3. Based on the above, the SCN alleges that the noticee, in concert with depository participants, financiers and others, employed fraudulent, deceptive and manipulative practices and cornered the shares meant for RIIs in various IPOs. These acts of the noticee were in violation of Section 12A (a), (b) and (c) of the SEBI Act, 1992, regulations 3 (a), (b), (c) and (d) and 4 (1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations) and Guideline 1.2.1 (xxiva) read with Guideline 7.6.1.2.1 of the SEBI (Disclosure and Investor Protection) Guidelines, 2000. Accordingly, it called upon the noticee to show cause as to why suitable directions under Section 11(4) read with Sections 11 and 11B of the SEBI Act, 1992, including directions to restrain him from buying, selling or dealing in securities in any manner, disgorge ill-gotten gains made by him along with interest, and realize the shares in his frozen demat accounts should not be issued.

4. The noticee appeared for a personal hearing on November 23, 2010 and submitted that he had not received the complete SCN. After hearing the noticee and the SEBI, it was directed that SEBI would provide the complete SCN once again and also inspection of documents and the noticee would reply to the SCN by December 20, 2010. Accordingly the hearing was adjourned to January 4, 2011. The noticee did not appear for the hearing on January 4, 2011. He was offered another opportunity of hearing on January 25, 2011 which he did not avail. He was offered still another opportunity of hearing on March 01, 2011. He filed a reply to the SCN vide his letter dated February 28, 2011 and appeared for the hearing on March 1, 2011. At the hearing, he made preliminary submissions and sought time for filing a written submission. He also sought a short adjournment with a statement that if he did not turn up at the adjourned hearing, the matter may be disposed of based on written submission which he would make soon. Accordingly the hearing was adjourned to March 7, 2011. He did not avail the opportunity of hearing on March 7, 2011. He, however, filed a written submission dated March 7, 2011. Therefore, I proceed to dispose of the proceedings.

I have carefully considered the SCN, the reply dated February 28, 2011 and written submission dated March 7, 2011 and other materials available before me. 5. The noticee has raised the following preliminary issues, which were partly heard on March 1, 2011: a. The noticee is not a person associated with the securities market either as an intermediary or otherwise as any person on whom powers under Sections 11 and 11B can be invoked. SEBI lacks jurisdiction to issue the SCN to him. b. SEBI or its delegate does not have power to hold any investigation or inquiry under Sections 11, 11(4) and 11B of the SEBI Act, 1992. The SCN, which is issued under these Sections, is bad in law as it contemplates to investigate or inquire into allegations leveled in the SCN. c. The matter is pending before the Adjudicating Officer for inquiry. Before the inquiry is over, SEBI cannot initiate a parallel inquiry under Section 11, 11(4) and 11B of the SEBI Act, 1992 and pass orders of disgorgement. d. SEBI does not have power of disgorgement under section 11, 11(4) or 11B of the SEBI Act. This is already built in ‘three times the profits’ in Section 15HA and hence if required, disgorgement could only be made under that Section.

If the power of disgorgement is assumed under Sections 11 and 11B, it would result in double jeopardy.

e. Section 11B / 11(4) (b), which are not penal provisions, cannot be used to impose penalty on the noticee. f. The same authority should have issued the SCN as well as the directions under Sections 11 and 11B. In the instant case, the directions would be issued by the WTM, while the SCN has been issued by an OSD, which is not permissible. g. Principles of natural justice have not been complied with as inspection of various documents and cross examination have been denied. 6. Let me deal with the aforesaid preliminary issues in seriatim: 6a. It is not in dispute that the noticee created and used thousands of afferent accounts for making IPO applications in retail category of IPOs, arranged money for these applications, received the shares on transfer in off-market from thousands of demat accounts after allotment in IPOs and disposed of the said shares. These activities obviously make the noticee a person associated with the securities market. I rely on the observations of the Hon’ble High Court of Gujarat in the matter of Karnavati Fincap Ltd. and Alka Spinners Ltd. Vs SEBI1: “….. In ordinary meaning, the persons associated with the securities market would include all and sundry who 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 market, where or through which he transacts his business, whether as trader or as investor, of selling or buying the required scrip.” The phrase “all and sundry” above would include the noticee and co-relating the facts before me with the above judgment, it is very clear that the noticee is a person associated with the securities market as stated under Sections 11 and 11B of the SEBI Act.

6b. The Hon’ble SAT had opportunity to visit this issue in the matter of Karvy Stock Broking Ltd. v. SEBI2, where it observed: “As is clear from the language of sub section (4) the measures that the Board may take or the orders that it may pass would be “either pending investigation or enquiry or on completion of such investigation or enquiry”. The word ‘investigation’ as used in section 11(4) has not been defined. It obviously refers to the investigation as ordered under section 11-C of the Act because sections 11- C and 11(4) were introduced simultaneously in the year 2002 when Parliament found that the Board prior to their introduction did not have statutory power to investigate. The word ‘inquiry’ too has not been defined in the Act though it finds mention in Sections 11, 11B, 11D and 15I. Under section 12(3) of 1 SCA Nos. 2692 and 2694 of 1996 dated 06.05.1996 2 Appeal No. 92/2006 dated 08.01.2007 the Act also, the Board holds an inquiry under the inquiry regulations for imposing major or minor penalties including the penalty of suspension or cancellation of a certificate of registration.

It is, thus, clear that an inquiry is held under sections 11, 11B and 11D, it is also held under section 12(3) and also under section 15I.” Further, I find that Section 11B very explicitly enables SEBI to issue suitable directions after making an enquiry. Thus, the contention of the noticee that SEBI or its delegate does not have power to hold any investigation or inquiry under section 11, 11(4) or 11B of the SEBI Act, 1992 is devoid of merit. 6c. I note that SEBI Act empowers SEBI to initiate appropriate proceedings like 11B, adjudication, prosecution, etc. or any combinations of these, as may be warranted in the circumstances, to deal with the violations of the provisions of SEBI Act, Rules and Regulations made there under. These proceedings undergo the prescribed process for determination of violation and result in the measures required to deal with such violation. The conclusion of one proceeding does not have to wait for the conclusion of another. For example, a Section 11B proceeding does not have to wait till the conclusion of the related criminal proceeding or adjudication proceeding, as they are not expected to result in exactly the same finding or the same directions.

The law contemplates these proceedings to be concluded independently, but as expeditiously as possible. 6d. It is a well settled principle that a person, who unjustly enriches himself by unlawful means should be required to give up the unjust enrichment. The Hon’ble SAT has upheld SEBI’s power to do so and also upheld SEBI’s orders directing disgorgement. In the matter of Karvy Stock Broking Ltd. Vs. SEBI3, the Hon’ble SAT held: “5. … Disgorgement is a monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment nor is it concerned with the damages sustained by the victims of the unlawful conduct. Disgorgement of ill-gotten gains may be ordered against one who has violated the securities laws/regulations but it is not every violator who could be asked to disgorge.….” In the matter of Dhaval Mehta Vs. SEBI4, the Hon’ble SAT held: “Disgorgement is a monetary equitable remedy to prevent a wrong doer from unjustly enriching himself as a result of his illegal conduct. Disgorgement of illegal gains are ordered against those who violate the securities laws and make unlawful gains.

The amount should not exceed the total profits realized as a result of the unlawful activity and the amount ordered to be disgorged should be approximately equal to the amount of unjust enrichment. In the instant case, the whole time

3 Appeal No. 6 of 2007 dated 02.05.2008 4 Appeal No. 155 of 2008 dated 08.09.2009 member has worked out the amount from the prices that were available and we find no ground to interfere with the order in this regard.” Similarly, in the matter of Shri Shadilal Chopra Vs. SEBI5, the Hon’ble SAT held: “Disgorgement is the forced giving up of profits obtained by illegal or unethical acts. It is a repayment of ill-gotten gains that is imposed on wrong doers. It is a monetary equitable remedy that is designed to prevent a wrong doer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment. In this view of the matter, no fault can be found with the impugned order passed by the whole time member.” Recently in the matter of Dushyant N. Dalal, Ms. Puloma D. Dalal Vs. SEBI6, the Hon’ble SAT held: “Since disgorgement is not a punishment but only a monetary equitable remedy meant to prevent a wrong doer from unjustly enriching himself as a result of his illegal conduct, we are of the view that there need be no specific provision in the Act in this regard and this power to order disgorgement inheres in the Board.” I, therefore, cannot agree with the noticee that Sections 11, 11(4) and 11B do not empower SEBI to seek disgorgement of unlawful gains.

The argument of the noticee that the disgorgement is included in the penalty under Section 15HA is amusing. As stated earlier, disgorgement is not a penalty, but an equitable remedy and the penalty under Section 15HA is designed to have also deterrent effect on potential offenders of law. 6e. It follows from the above observations of the Hon’ble SAT that disgorgement is not a penalty, but a monetary equitable remedy. The instant proceedings are not being used to impose a penalty on the noticee, though there is no prohibition to do so under Sections 11, 11(4) and 11B. This clarity has been provided by Hon’ble SAT in the matter of Karvy Stock Broking Ltd. v. SEBI7: “…. Even under section 11(1) and thereafter with the introduction of section 11B in the year 1995, the power of the Board was very wide and it could take every measure that a situation would demand and issue such directions that it considered necessary….Yet to put everything beyond the shadow of doubt, even the implicit has been made explicit by adding sub-section (4) in Section 11 which now expressly authorizes the Board to issue various kinds of orders. ….

The power to take preventive or punitive measures was implicit. Now it has been expressly extended to taking even the preventive or punitive measures. Without doubt, these, too, are ultimately aimed at achieving the basic objectives of investor protection and promotion of the development and regulation of the securities market as contained in the preamble.”

5 Appeal No. 201 of 2009 dated 02.12.2009 6 Appeal No. 182 of 2009 dated 12.11.2010 7 Appeal No. 92/2006 dated 08.01.2007

6f. I do not find any illegality, or even irregularity, in this. The SCN has been issued under directions of a whole time member. Further, the SCN and the directions are issued by the functionaries who have been delegated powers to do so. In fact, it is desirable that the allegations are made by a functionary lower in Grade while the determination of the allegations is made by a functionary higher in Grade, which has happened in this case. Further, SEBI follows a practice that a whole time member, who does not supervise the Department which has issued SCN, determines the allegations made in the SCN. This brings in higher objectivity to quasi-judicial proceedings. 6g. The noticee has sought cross-examination and not justified its need. Further, I find that the allegations in the SCN are based on the transactions in the bank and demat accounts of the noticee and not on any statement of any person. Hence the demand for cross examination is misplaced. As regards inspection, I find that no document, which has not been provided to the noticee, is being relied on in this proceeding. Further, he is seeking inspection of documents which have no bearing in the matter.

I am, therefore, of the considered view that the principles of natural justice have been adequately complied with by SEBI. 7. The noticee has not disputed any of the activities / transactions attributed to him in the SCN. He has, however, made the following submissions on merits: a. He had mentioned the same correspondence address in all the applications for subscription in IPOs. The registrar / issuer could have used the address field to reject multiple applications. b. No retail investor has grievance against him. c. While calculating the profit / unlawful gain for the purpose of disgorgement, the actual expenses incurred on interest (Rs.70 lakh), income tax liability (Rs.125 lakh) and other expenses (Rs.4 lakh) need to be excluded. d. In the absence of any express provision, doctrine of joint and several liabilities can’t be invoked and the noticee can’t be held liable for benefits accrued to third parties. e. The amount to be disgorged has been wrongly calculated. It should be Rs.5,09,34,014, and not Rs.7,78,62,010, as alleged in the SCN. 8. Let me deal with these issues in seriatim: 8a.

The registrar / issuer is expected to exercise due diligence as expected in normal circumstances. It is not expected to have a level of due diligence that would detect all kinds of fraud, including the one perpetrated by the noticee. Even assuming that the registrar/issuer could have rejected the multiple applications having the same address, it does not absolve the noticee of the manipulative charge alleged in the SCN. The noticee can’t take the plea that his activities, which are otherwise illegal, become legal, just because the multiple applications were not rejected by the registrar/issuer. 8b. SEBI is entrusted with the responsibility to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. In discharge of these responsibilities, it is required to supervise the operations in the securities market and take appropriate measures. It does not have to wait for a complaint from an investor to discharge its mandated responsibilities. Further, the absence of any complaint with SEBI does not mean that the noticee has done nothing wrong.

He illegally cornered the shares which would have otherwise been available to RIIs. 8c. I do not agree with the contention to deduct from the disgorgement amount the expenses incurred exclusively to make the unlawful gain. It is preposterous to allow set off for the expenses incurred on illegal activities. 8d. I find that the SCN makes the noticee liable for his illegal gains of Rs.7.78 crore. It has not asked him to disgorge the illegal gains of Rs.0.87 crore which he facilitated others to make. I, however, note that the noticee has transferred some shares in off-market to others (col.3 of Table B under Para 2). He has contested his liability in respect of some such shares on the ground that the gains from such shares have accrued to others. He has not produced any evidence in support of the accrual of gains to others. In the absence of such evidence and the knowledge as to how gains from such shares have been shared between the noticee and others, I consider it appropriate to make the noticee liable for 50% of the gains from such shares. 8e. The noticee has disputed an amount of Rs.2,69,27,996 out of the total amount of unlawful gain of Rs.7,78,62,010 sought to be disgorged from him.

Table C presents the relief that should be available to the noticee in respect of Rs.2,69,27,996. Table C: Relief to the Noticee in respect of the amount disputed by him In respect of Shares of Amount disputed by Noticee Relief to Noticee Liability of Noticee TCS 10,63,457 5,31,729* 5,31,728 Gokul 16,13,680 8,06,840* 8,06,840 Suzlon 34,08,324 34,08,324** 0 SPL 34,64,240 17,32,120* 17,32,120 Shoppers 33,97,977 16,98,989* 16,98,988 IDFC 115,42,579 97,53,869*& 17,88,710

ILFS 13,14,278 6,57,139* 6,57,139 Yes Bank 11,23,461 5,61,731* 5,61,730 Total 2,69,27,996 1,91,50,741 77,77,255 * 50% relief in view of explanation in Para 8d. ** Counted twice in the SCN & Relief of Rs.79,65,158 which is sought to be disgorged from Mr. Dushyant Dalal. Thus, the noticee has made an unlawful gain of Rs.5,87,11,269, i.e., (Rs.5,09,34,014 + Rs.77,77,255). 9. In view of the above, I find that the noticee acted in concert with financiers and DPs to make applications under the retail category of 13 IPOs. He opened thousands of afferent accounts in favour of afferent persons, arranged finance for making applications in the retail category of IPOs from the afferent accounts, transferred the shares received in afferent accounts on allotment to his own demat accounts and thereby cornered shares meant for RIIs. In the process, he deprived the RIIs of their legitimate share in the allotment in 13 IPOs and made unlawful gains of Rs.5,87,11,269. Therefore, the noticee employed fraudulent, deceptive and manipulative practices to corner the shares meant for RIIs in 13 IPOs and distorted the market integrity and made unlawful gains by selling the shares so cornered.

Hence, I hold that the noticee has violated Section 12A (a), (b) and (c) of the SEBI Act and Regulations 3(a), (b), (c) and (d) and 4 (1) of the PFUTP Regulations and Guideline 1.2.1 (xxiva) read with Guideline 7.6.1.2.1 of the SEBI (Disclosure and Investor Protection) Guidelines, 2000. 10. These acts of serious irregularities enriched the noticee at the cost of RIIs and threatened the market integrity and orderly development of the market and call for regulatory intervention in 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 noticee pursuant to the ad interim orders, I hereby issue the following directions: a. Mr. Purshottam G. Budhwani (PAN ADGPB8380B ) shall not buy, sell or deal in the securities market in any manner whatsoever or access the securities market, directly or indirectly, for three months from the date of this Order. b. Mr. Purshottam G. Budhwani shall disgorge a total amount of Rs.9,39,38,030 (Rupees nine crore thirty nine lakh thirty eight thousand thirty only) comprising of Rs.5,87,11,269 towards unlawful gain made by him and Rs.3,52,26,761 towards simple interest at the rate of 10% per annum for 6 years (2005-11) on the unlawful gains, within 45 (forty five) days from the date of this Order by way of crossed demand draft drawn in favour of “Securities and Exchange Board of India”, payable at Mumbai. c. In case the aforesaid amount is not received by SEBI within the specified time, Mr. Purshottam G. Budhwani shall be restrained from buying, selling or dealing in securities market in any manner whatsoever or accessing the securities market directly or indirectly for a further period of nine years, without prejudice to SEBI’s right to enforce disgorgement.

Until the said amount is realized by SEBI, the securities in the demat accounts of the noticee shall remain frozen. 11. This Order shall supersede all the directions issued against noticee vide ad interim Orders dated January 12, 2006 and dated April 27, 2006. 12. This Order shall be served on all recognized stock exchanges and depositories to ensure that the directions issued against Mr. Purshottam G. Budhwani at Para 10 above are strictly complied with. 13. This Order shall come into force with immediate effect.

Date: May 23, 2011 M. S. SAHOO Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA