Order in the matter of Pyramid Saimira Theatre Limited

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI), vide an ex-parte ad interim order dated April 23, 2009 (hereinafter referred to as the interim order), in the matter of Pyramid Saimira Theatre Limited (hereinafter referred to as PSTL), inter alia directed various persons/entities (as mentioned therein) not to buy, sell or deal in the securities market including in Initial Public Offerings (IPOs) directly or indirectly, till further directions as they were prima facie found to have played a key role in facilitating Mr. Nirmal Kotecha in carrying out suspicious banking transactions, carrying out and disguising his manipulative intent and gaining advantage from the forgery referred to in the order. Thereafter, Alka Diamond Industries Limited, Capetown Mercantile Company Private Limited, Faststone Trading Company Private Limited, Javda India Impex Limited, Kush International, Natasha Enterprises, Raghunandan Rayons Limited, Riddhi Siddhi Multitrade Private Limited, SBJ Trading (India) Private Limited, Vanguard Jewels Limited, Yash-V Jewels Limited, Ganesh Trading Company, Kunal Gems and Anchal Properties (P) Limited filed separate replies vide their letters dated July 2, 2009. The said entities had inter alia submitted: a. that the power to issue directions under Sections 11(1), 11B and 11(4) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as SEBI Act) has to be exercised judicially and cannot be invoked arbitrarily; the directions under Section 11B & 11(4) of the SEBI Act cannot be issued for penalizing the persons and that the order against them was neither preventive, remedial nor curative but penal in nature;

b. that they had no link/connection/nexus/relation either with Mr. Nirmal Kotecha, promoters of PSTL, Mr. Amol Kokane or any other entities linked/connected with them; that the charges leveled against them were because of their fund transfers to M/s. R. S. Enterprises, which had transferred funds to M/s. Om Associates and that there were transactions between Om Associates and Amol Kokane; that they had not transferred any funds to M/s. R.S. Enterprises prior to September 1, 2008 and denied being aware of any fund transfers between R.S. Enterprises and Om Associates and between Om Associates and Mr. Amol Kokane;

c. that they denied having any ‘connected accounts’ with the other entities who had provided/transferred funds;

d. that, as part of their business of trading in diamonds, they had purchased and sold diamonds with various parties including M/s. R. S. Enterprises; that the said activity was a commercial practice and that only in that context, there were transactions of sale and purchase of diamonds with M/s. R. S. Enterprises during the financial year ending March 31, 2009;

e. that the alleged fund transfers were for the purchase and sale of diamonds made with R. S. Enterprises in the ordinary course of business dehors ‘sinister intent’ or ‘design’; that the payments made which were reflected in the bank statements has been misconstrued as suspicious banking transactions;

f. that they did not provide funds directly or indirectly to Mr. Nirmal Kotecha or any other entity allegedly connected with him;

g. that the bank accounts opened by them were not deliberately opened for M/s. R. S. Enterprises and the same was used for transactions with various other entities;

h. that they did not provide any funds to the entities with the intent of routing the funds in the stock market and that they had traded only in diamonds with R. S. Emterprises in the ordinary course of business.

2. R.S Enterprises, vide letter dated nil (received by SEBI on July 14, 2009) made similar submissions. According to R.S Enterprises, the transfer of funds on September 1, 2008 to Om Associates was towards the payment for the purchase of diamonds from it. Lexus Infotech Limited and Sanjivani Enviro Protection Limited had filed their replies vide separate letters dated July 2, 2009. In the said replies, while making similar submissions like that of the entities mentioned supra, they had submitted that they had received funds from M/s. R. S. Enterprises as a loan in the ordinary course of business. It was submitted that the loan was in the nature of a ‘running account’ from M/s. R. S. Enterprises with an understanding that the same shall be repaid alongwith interest at the rate of 6% per annum. They had submitted that the funds received as loan were repaid within the stipulated time in the ordinary course of business and that the said loan repayment had been misconstrued as funds provided to M/s. R. S. Enterprises. The said entities denied providing funds directly or indirectly to Mr. Nirmal Kotecha or any other entity as alleged. They submitted that they were not aware of the fund transfers made by M/s. R. S. Enterprises to others. It was submitted that the relationship with M/s. R. S. Enterprises was limited to that of a lender to whom the loan was repaid by them. It was also submitted that bank accounts from where the funds were transferred to M/s. R. S. Enterprises were not opened for M/s. R. S. Enterprises as alleged and that they had transactions with others also through the said bank accounts.

3. Realgold Trading Company (P) Limited and Hema Trading Company Private Limited had also filed their objections to the interim order vide. Realgold

Trading Company (P) Limited, vide letter dated July 2, 2009, while making similar submissions as the others, had inter alia stated that it was not in any way connected with any of the entities as mentioned in the interim order. It stated that its main business activity was trading in diamonds and investment in securities. It further submitted that it had applied for 50,000 equity shares at the rate of Rs.10/- of Nirman Management Services Private Limited (hereinafter referred to as Nirman) on private placement during March 2008. It claimed that it had issued (on March 28, 2008) a cheque for Rs.50,00,000/- [it has to be 5,00,000 only as it had applied for 50,000 shares at Rs.10/- each] towards the purchase amount of the said 50,000 shares. It further claimed that since the allotment was not made, an amount of Rs.50,00,000/- was refunded (on July 16, 2008) by Nirman and that this genuine transaction was termed as “suspicious banking transaction” by SEBI. It was submitted that the transactions between itself and Nirman took place prior to September 16, 2008 when the alleged trades by Mr. Amol Kokane took place. It was submitted that, since the application money was refunded by Nirman, the question of its being misutilized for the fraudulent activities by Mr. Nirmal Kotecha or others would not arise. Similar objections and submissions were filed by Hema Trading Company Private Limited vide its undated letter (received by SEBI on July 10, 2009). Kush Hindustan Entertainment Limited did not file any objections to the interim order.

4. Thereafter, an opportunity of hearing was provided to the aforesaid entities including Kush Hindustan Entertainment Limited on August 25, 2009. Mr. Vinay Chauhan, Advocate represented the said entities and made his submissions which were on the lines of the objections filed by the parties, as stated above. The learned counsel while pleading the case on their behalf had categorized them into four groups. According to him, the first group comprised of entities having buy-sell transactions in diamonds with M/s R. S. Enterprises; second group comprised of entities having loan transactions with M/s R. S.

Enterprises; third group consisting M/s R. S. Enterprises and the last group comprised of entities who had applied for shares of Nirman. The learned counsel submitted that there were certain banking transactions between group I and group III during the period September 1, 2008 to September 10, 2008. He further submitted that the entities had no connection with Om Associates and that the only link with Om Associates was through M/s. R. S. Enterprises. According to the counsel, M/s. R.S. Enterprises was itself engaged in diamond and financing business. According to him, M/s. R.S. Enterprises had purchased diamonds on July 25, 2008 from Om Associates and that the money transactions between M/s. R S Enterprises and Om Associates were in respect of diamond business only. It was submitted that Mr. Amol Konkane had admittedly traded in the securities market between September 16, 2008 and November 17, 2008 and that the payment of Rs.50 lakhs transferred by M/s. R. S. Enterprises to Om Associates had taken place only on January 21, 2009. In respect of certain entries in the bank accounts (of M/s. R. S. Enterprises and Om Associates), the learned counsel submitted that the transfer of Rs.14.7 lakhs on September 1, 2008 was only in respect of the diamond trading transactions. In respect of the entities in group II (Lexus, Sanjivani etc), he submitted that their transactions with M/s. R.S. Enterprises were loan transactions for which tax deduction at source (TDS) had been deducted. It was submitted that prior to September 1, 2008, majority of entities had only received funds and not transferred funds to M/s. R. S. Enterprises. It was submitted that the majority of the entities had no connection with Mr. Nirmal Kotecha or his firms or relatives or with PSTL. It was submitted that they had not dealt in the shares of PSTL at all and that they had been charged only on the basis of fund flow. In respect of Realgold Trading Company (P) Limited and Hema Trading Company Private Limited, the learned counsel reiterated the submissions made by them in their respective replies.

5. For ease in referring, the 20 entities mentioned in the previous paragraphs would be collectively referred to as the parties and individually by their respective names. I have considered the respective replies/objections filed by the parties, the submissions made on their behalf during the personal hearing and the relevant material available on record. The limited issue to be considered in this Order is to decide whether, based on the available materials on record and after considering the submissions made by the aforesaid entities, the directions issued by SEBI vide the interim order needs to be continued, revoked or modified in any manner, in so far as it relates to the parties.

6. The main contention of the parties are that :

a. they had no connection with Mr. Nirmal Kotecha, promoters of PSTL, Mr. Amol Kokane and others in the whole manipulation; b. fund transfers and receipts (in respect of certain entities) were only in respect of the diamond trading they had with M/s. R. S. Enterprises; c. fund transactions were towards the repayment of the loan advanced to certain entities by M/s. R. S. Enterprises; d. refund of the application money for the proposed allotment of shares of Nirman. e. some of the entities had submitted that they had no direct relation with Om Associates as funds were transferred only by M/s. R.S. Enterprises to Om Associates and not by them.

7. I note that the parties have been prima facie identified in the interim order as having carried out suspicious banking transactions and have channeled those funds either directly or indirectly into the securities market. The prima facie role of Mr. Nirmal Kotecha, Mr. Amol Kokane and the others has been mentioned in detail in the interim order, which found that Om Associates had transferred a huge sum of money into the account of Mr. Amol

Kokane, who had traded substantially in the shares of PSTL. It was also found that prior to the impugned money transfer, Om Associates was in receipt of funds from certain entities including those from M/s. R.S. Enterprises. The funds were prima facie seem to have been channeled from the accounts of the parties. The preliminary finding of SEBI in the matter had observed that certain entities including the parties herein had money transactions with M/s. R. S. Enterprises. In this regard, I note that the entities, Lexus Infotech Limited and Sanjivani Enviro Protection Limited, have not produced any material to show that funds received by them from M/s. R.S. Enterprises were a ‘loan’. Besides, they failed to show with the help of relevant documents as to how the same were repaid. In the case of Realgold Trading Company (P) Limited and Hema Trading Company Private Limited, the said entities have failed to produce material in support their contention that they had applied for equity shares of Nirman. Incidentally, it may be noted that Nirman is a company related to Mr. Nirmal Kotecha and his family, who has been prima facie accused of being the master mind in the manipulation in the shares of PSTL.

8. The facts and circumstances which led to the passing of the interim order have been explained in detail in the said order. The investigation in the matter of PSTL, prima facie had revealed the operation of a widely distributed network of persons/entities who had joined hands in breaching market integrity by manipulating the shares of PSTL, forging a letter purported to be issued by SEBI to Mr. P.S. Saminathan (promoter of PSTL), publicizing its contents and the manipulators taking benefit of the artificial price rise caused by the said letter and selling of their substantial stake in the market, to their advantage and to the detriment of the unsuspecting investors. There are other persons/entities who appeared to have played their role in various capacities such as publicizing the contents of the forged SEBI letter, routing funds, offloading substantial shares at an artificial inflated price on December 22, 2008 etc. In a case like this, individual acts should not be isolated from the case; rather the focus should be on the case in its entirety and it is the ultimate goal of the manipulators that should be critically assessed.

Further, the objections/submissions made by the parties without supporting documents/records, are not convincing enough for me to revoke or modify the directions issued against them vide the interim order, at this stage. The investigation in the matter is in progress and only a detailed investigation would alone bring out their role, which as already mentioned above, is underway. Thus, at this stage, I am of the considered opinion that it would not be appropriate to give any conclusive findings as to any fact or submissions made by the parties. The objections made by the parties would be considered in detail by the investigation before coming to any conclusion in respect of them in the matter. Therefore, at this stage, where the investigation in the matter is in progress, I do not find it fit to modify or revoke the ad interim directions issued vide the interim order, till the completion of the investigation in the matter. I am fully convinced that the directions in the interim order in respect of the parties needs to continue, till further directions. The parties have argued that the directions under Sections 11(4) and 11B of the SEBI Act cannot be issued for penalizing the persons and that the order against them was neither preventive, remedial nor curative.

In this regard, I find that the interim order was issued after taking into consideration the prima facie fraudulent, abusive and manipulative activities committed by certain entities/persons identified in the said order. The interim order was passed to restore the confidence of lay investors and to prevent the manipulators from causing more harm to the securities markets. The order was preventive in nature and therefore, the said submission of the parties does not have any merit. In such circumstances, SEBI as a market regulator is duty bound to immediately intervene to restore investor confidence and prevent further harm befalling the securities market, as was done in this case. Besides, a post decisional hearing was also afforded to the parties as contemplated under Section 11(4) of the SEBI Act.

9. In view of the foregoing, I, in exercise of the 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) thereof, hereby confirm the directions issued vide the ex-parte interim Order dated April 23, 2009 of the Securities and Exchange Board of India in the matter of Pyramid Saimira Theatre Limited against Alka Diamond Industries Limited, Capetown Mercantile Company Private Limited, Faststone Trading Company Private Limited, Javda India Impex Limited, Kush International, Natasha Enterprises, Raghunandan Rayons Limited, Riddhi Siddhi Multitrade Private Limited, SBJ Trading (India) Private Limited, Vanguard Jewels Limited, Yash-V Jewels Limited, Ganesh Trading Company, Kunal Gems, Anchal Properties (P) Limited, Lexus Infotech Limited, Sanjivani Enviro Protection Limited, Realgold Trading Company (P) Limited, Hema Trading Company Private Limited, Kush Hindustan Entertainment Limited and M/s. R. S. Enterprises.

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

Place: Mumbai Date: December 9, 2009