Order in them matter of M/s.Kruthika Portfolio Services Pvt. Ltd. and Its Directors in the scrip of color chips india ltd.

1. The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’ or ‘the Board’) received complaints during June 2001 about the role of promoters, directors and top officials of M/s. Color Chips India Limited (hereinafter referred to as ‘CCIL’ or ‘the company’) alleging that they have sold major quantity of shares that were registered in the names of various investors. The complainants had alleged that the name of the company was changed from Arham Fiscals Limited to CCIL and thereafter, the promoters and directors of the company sold shares in the market and siphoned off huge funds. After receiving comments relating to the said complaints from the Bombay Stock Exchange (‘BSE’), the SEBI conducted independent investigations into the affairs of CCIL; the investigation period being from January 2000 to March 2000.

2. As per the investigation report the brief facts of the case are as under: a. Color Chips Animation Park Limited (hereinafter referred to as ‘CCAPL’) was incorporated as a private limited company on August 5, 1999. It obtained a fresh certificate of incorporation on October 4, 1999 consequent to conversion into a public limited company. The registered office of the company was situated at Plot No. 16, Road No. 5, Jubille Hills, Hyderabad and it was promoted mainly to carry on the business of 2D & 3D animation, feature syndications and other related activities. The main promoter of the company was Shri Uttam P Kumar who is an artist and animator by profession and had experience in the field of animation and feature syndication.

b. Shri R. S. Sudish and Shri Y. Suryanarayana (presently directors of CCIL) approached Shri Uttam P Kumar with an offer to raise finances and increase the scale of operations of CCAPL. A memorandum of understanding (MoU) was signed on September 25, 1999, between Shri Sudish and Shri Suryanarayana on one hand and Shri Uttam Kumar and Dr. Pitamber (brother of Shri Uttam Kumar) on the other hand. The MoU specified the areas of activities of each of the individuals. It was agreed that Shri Sudish and Shri Suryanarayana shall be solely responsible for the arrangement of the required funds for the project which may be in the form of equity/debt or any other mode of finance available. Further, they were responsible for the corporate affairs of the parent Company viz. Financial, Legal and Administration.Shri Uttam Kumar and Dr. Pitamber were to extend all technical and marketing support required for the project. Shri Sudish and Shri Suryanarayana were then inducted onto the board of CCAPL by the said MOU. Thus, the Board of CCAPL comprised of S/Shri Uttam P. Kumar, Dr. P. Pitamber, R. S. Sudish and Y. Suryanarayana, as directors. As per the MoU, Shri Uttam Kumar was to be the managing director of the Company in which the said project was to be set up. The parties to the MoU agreed that CCAPL shall either go for an initial public offer and/or take over an existing and listed Company for setting up the project.

c. Shri Sudhish and Shri Suryanarayana then approached one Shri B. K. Sharma (said to be a known equity and financial consultant in Hyderabad) in the last week of September/ First week of October 1999 for the purposes of raising necessary funds. It was stated by Shri Suryanarayana that Shri B K Sharma had advised CCAPL to go for an IPO and started collecting money on private placement basis. Subsequently, Shri B K Sharma advised them to go for a reverse merger with a listed existing company and to refund the monies collected by way of private placements.

d. On the advice of Shri B. K. Sharma, a company named Arham Fiscals Ltd was identified. The target company was originally incorporated as M/s. Rusoday Mutual Fund Limited on 19.03.90 and obtained the certificate of commencement of business on 23.03.90. It changed its name to M/s. Rusoday Finance Limited on 04.06.96, M/s. Global Fiscals Limited on 06.06.96 and M/s. Arham Fiscals Limited on 28.04.97. The registered office of the company was situated at 8-2-473, Kummariguda, Secundarabad-500 003 and its paid up share capital was Rs. 6,27,75,700/- comprising of 49,69,900 fully paid up equity shares of Rs. 10 each and 51,34,800 partly paid up equity shares having a total amount paid up on them of Rs. 1,30,76,700 with the amount paid up per share ranging between Rs. 2.50 to Rs. 2.56 per share.

e. CCAPL had entered into an agreement on January 17, 2000 with Piyush Finance & Inv. P.Ltd, Sumitra Securities Ltd and others to acquire 36, 00,000 fully paid up equity shares for cash at an average rate of Rs. 5.92 from the promoters of the company. In an Extra Ordinary General Meeting held on January 3, 2000 a special resolution was passed under Regulation 12 of SEBI (SAST), Regulations, 1997 by the members of CCAPL allowing for the acquisition of control and management by Shri Uttam P Kumar. Pursuant to this resolution, Shri Uttam Kumar acquired the control and management of the company. As per SEBI (SAST) Regulations, 1997, the acquirer company (CCAPL) made an announcement for open offer on January 20, 2000 to acquire 13,69,000 fully paid up equity shares at par value and 6, 51, 100 partly paid up equity shares at a price proportionate to the amount paid up on the shares. It was forming total of 20,21,000 shares representing 20% of the subscribed capital. The opening date of the open offer was February 23, 2000 and closing date of the offer was March 23, 2000. On the date of public announcement (i.e. January 20, 2000) by the CCAPL and as on February 10, 2000, i.e. the date of the Letter of Offer, there were only 13,69,900 fully paid up equity shares. Thus, there was less floating stock in the market.

f. It may be noted that consequent to the acquisition and take over of Arham Fiscals Limited by CCAPL, the name of M/s. Arham Fiscals Limited was changed to M/s. Color Chips India Limited (CCIL) during January, 2000.

g. As on the date of the public announcement (January 20, 2000), the Board of Directors of CCIL were S/Shri K. C. Rampuria, Binod Dugar, Rajendra Kanoonga and Uttam P. Kumar.

h. It has been observed from the BSE reports that the first trade in the scrip was at Rs.57/- on January 20, 2000 and on the same day it increased upto Rs. 290 and closed at Rs. 216.30. The lowest price recorded on this day was Rs. 50 and total quantity traded was 2, 30,800 shares. The trading quantity during the entire investigation period was 23, 00, 900 shares.

i. As stated earlier, the shares of the target company (Arham Fiscals Ltd., now called CCIL) were acquired by CCAPL at an average price of Rs.5.92. I note that during investigations when asked about this difference in the pricing, Shri Suryanarayana informed that that the difference in the pricing was due to the negotiations with the promoters of Arham Fiscals Ltd. The investigations alleged that CCAPL along with Shri B K Sharma acquired more shares from the promoters and existing shareholders of Arham Fiscal Ltd. than the 36 lakhs shares which was officially declared. The additional shares were alleged to have been acquired in the name of front companies like M/s. Kruthika Portfolio Services Pvt. Ltd. (‘noticee’ or ‘Kruthika’), Vijaya Durga Impex and individuals such as Shri Chanderiah.and others related to the acquirers.

j. The investigations revealed that pursuant to the acquisition of shares of M/s. Arham Fiscal (now called CCIL), Shri Sudish and Shri Suryanarayana along with Shri B K Sharma started placing the shares of CCIL by way of private placement with High Networth Individuals (HNIs) and Mutual Funds. Statements of Shri P. V. S. Raju, Shri V. Nagesh and Shri Amal Parikh (persons who had invested in the scrip of CCIL) revealed that Shri B K Sharma approached them with an investment proposal and asked them to invest in the shares of CCIL, painting a rosy picture of the company. These entities were earlier approached for investment in CCAPL with the promise that the company would go public in a few days. However after some time it was informed by Shri B. K. Sharma that he was returning the investment made by them as the idea of coming with an initial public offer was being dropped and then offered to give partly paid shares of the CCIL acquired by CCAPL. They were then offered partly paid shares of CCIL which were acquired by CCAPL. The payments for the shares given to these investors by Shri B K Sharma were made to the entities nominated by Shri B K Sharma. It can be seen that in the case of Shri P V S Raju, the payment was made to Kruthika, Vijaya Durga Impex and V S N Sharma. The shares were made fully paid up by making payment of remaining part of the money (by way of calls in arrears) directly to the company.

k. It was found that the Kruthika was a client of M/s Ohm Stock Broking Pvt. Ltd. (‘Ohm’). The said broker had stated that orders on behalf of Kruthika were placed by Shri B K Sharma. Shri Amal Parikh, Director of Ohm has stated that he had known Shri B K Sharma for more than 6 years. He had bought shares of CCIL from Shri Chanderiah and that Shri Chanderiah had been introduced to him by Shri B K Sharma. It was seen that Shri B K Sharma had approached Shri Amal Parikh and had offered the shares of CCIL, the payment of which was made to CCAPL. However, the payment was returned by Shri Sharma with a request to make payments to Shri Chanderiah. Shri V Nagesh in his statement to SEBI also stated likewise. In the case of Shri Nagesh, Shri B K Sharma had asked for the payments to be made to Kruthika only. In the case of shares offered to M/s. Kopran Ltd. the payments were made to an entity by the name of M/s. Akhil Ceramics Ltd.

l. It was alleged that the management of CCIL (Shri Sudish, Shri Suryanarayana, Shri Uttam Kumar and Dr. Pitamber) along with Shri B K Sharma had through a very well devised plan tried to off load the additional acquired shares to mutual funds and individual investors in the market by making substantial gains in the process and also enhancing the value of the holdings kept with them. It was alleged that their was an attempt on the part of the management of CCIL and Shri B K Sharma to defraud common investors and therefore all of them violated the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995.

m. It was alleged against the noticee and its directors, Shri G Sheshadri Vasan and Shri N venkata Sudhakar (collectively referred to as ‘noticees’ hereinafter), that they had played an important role in fulfilling the ulterior motives of the management of CCIL and Shri B. K. Sharma in off-loading the additionally acquired shares to mutual funds and individual investors in the market.

3. In view of the above allegations, a show cause notice dated 24-06-2004 was issued to the noticees intimating the allegations against them and requiring them to show cause as to why suitable directions under Section 11(4) read with 11B of the SEBI

Act, 1992 including directions debarring them from the capital markets/dealing in securities for a suitable period of time may not be issued against them.

4. The show cause notices which were sent to the last known addresses of the noticees returned undelivered. Efforts were taken to find out the present addresses of the noticees, which remained futile. The show cause notice and the hearing notices dated 09-10-2006, 13-11-2006, 18-01-2007 and 27-02-2008 were then pasted on the premises of the last known addresses of the noticees through the Hyderabad Stock Exchange Limited (HSE). The same were also uploaded in the SEBI website as substituted service on the noticees. I note that the noticees had failed to reply to the show cause or appear before me for the hearing scheduled on various dates, despite having pasted the show cause notices in the last known addresses and also posting the same in the website of the SEBI. Therefore, in the facts and circumstances of the case, I proceed with the case ex-parte based on the material on record.

5. I note that the show cause notice issued to the noticees alleged that Kruthika and its directors had played an important role in fulfilling the ulterior motives of the management of CCIL and Shri B K Sharma. I find that the case against the noticees would be established if the ulterior motives of the management of CCIL and Shri B K Sharma is proved.

6. Before proceeding further, I wish to find the connection / linkages between S/Shri Suryanarayana, Sudhish, Uttam Kumar, Dr. Pitamber, B K Sharma and Kruthika & its directors. In this regard, I note the following:

a. Shri Suryanarayana, director of CCIL, in his statement before the Investigating Officer had submitted that he was working on assignments with Shri B K Sharma, an equity and financial consultant in Hyderabad, and then he along with Shri Uttam Kumar and Dr. Pitamber approached Shri B K Sharma to raise necessary financial resources for the company.

b. Though Shri B K Sharma had denied that he was approached for raising finances, I find that his stand is negated by his own complaint made to the Panjagutta Police Station. In his complaint dated nil to The Station House Officer, Panjagutta PS, Hyderabad City, Shri B K Sharma has admitted that he was a merchant banker by profession and had interacted with the promoters of CCIL as its consultant and helped the company to raise resources by way of equity in the year 1999-2000. The said complaint was acknowledged by the Central Complaint Cell, CCS, Hyderabad on 15-09- 2003. By this complaint, Shri B K Sharma has admitted that it was he who had helped / assisted the company in raising its finances. Therefore, the connection between the promoters and Shri B K Sharma stands established. It is thus a fact that the promoters/directors of CCIL had approached Shri B K Sharma for the purpose of raising finances.

c. With respect to the connection between Kruthika and B K Sharma, I find that the same can be made out on account of the code ‘BK’ being used for the sale of two lakh shares of CCIL by Kruthika to the mutual funds. It is further fortified by the fact that Ohm Stock Broking (broker for kruthika) had submitted that Shri B K Sharma used to place the orders on behalf of Kruthika and has also delivered the shares to the broker. Though Shri B K Sharma has submitted that merely based on initials ‘BK’ used in the transactions and the statements of Amal and Suryanarayana, it cannot be said that Kruthika belonged to him, he has admitted that he introduced Sudish and Suryanarayana to Amal Parekh, Director in Ohm Stock Broking. He has further submitted that the letter of open offer does not state his name as advisor/consultant to the issue. Another strong point which needs to be noted is that Shri Sharma himself has admitted that he acted as the consultant to CCIL to raise resources.

d. With regard to the connection between Kruthika and the promoters of CCIL, I find that Shri G S Vasan, Director of Kruthika, in his submissions before the Income Tax Authorities on 15-10-2003 & 16-10-2003, (said copies of the depositions had been furnished to the representative of CCIL, Sudhish and Suryanarayana on 31-05-2007 during inspection) had stated that he was doing secretarial consultancy on retainer basis for few companies whose reverse mergers were handled by Shri B K Sharma, and such companies were Sriven Multitech Ltd., Danlaw Technologies Ltd. and CCIL. He also stated that he was one of the directors of Kruthika and that Kruthika was incorporated by him along with his friend, Shri N Venkata Sudhakar to make money from the shares of CCIL. He had then sold Kruthika to Shri Narsing Rao and his friend. It is noted that Shri Narsing Rao happened to be the brother in law of Shri Uttam Kumar. It may be noted here that Shri Uttam Kumar was the erstwhile director in CCIL and CCAPL. I further note that in the assessment order dated 11-03- 2004, in the later part of Para 6.6 of the said order, there is a mention that the assesse (Shri Sudhish) had got money withdrawn by Shri G S Vasanm, Director of Kruthika.

e. I further note that vide letter dated 10-02-2004, CCIL submitted that Shri B K Sharma and Associates along with Foray Fin Expo Pvt. Ltd. and Namitha Stock Broking Services Pvt. Ltd., were the advisors and consultants to the acquisition of additional shares of CCIL.

f. CCIL, Suryanarayana and Sudhish had denied any connection between the others. On the other hand, I find that the act of S/Shri Sudhish and Suryanarayana approaching Shri B K Sharma for the purposes of raising finances for the company, Shri B K Sharma admitting that he assisted in raising the finances and placing orders on behalf of Kruthika, the use of code ‘BK’ for the trades would support the contention that the parties/persons are known to each other. For the above reasons, I find that the promoters of CCIL (especially Shri Sudhish/Suryanarayana) were acquainted with Shri B K Sharma and Shri G S Vasan of Kruthika.

7. After having established that the parties are known to each other, the next step would be find if there was any malafide on the part of the noticees in the matter. I find that the investigations have observed that initially money was raised by the management of CCAPL (S/Shri Uttam Kumar, Dr.Pitamber, Suryanarayana and Sudhish) through private placements offering the investors the bait of an IPO or reverse merger. Subsequently, the idea of an IPO was dropped. I note that CCAPL then entered into an agreement on January 17, 2000 with Piyush Finance & Inv. P.Ltd, Sumitra Securities Ltd and others to acquire 36, 00,000 fully paid up equity shares for cash at an average rate of Rs. 5.92 from the promoters of the company. In an Extra Ordinary General Meeting held on January 3, 2000 a special resolution was passed under Regulation 12 of SEBI (SAST), Regulations, 1997 by the members of CCAPL allowing for the acquisition of control and management by Shri Uttam P Kumar. Pursuant to this resolution, Shri Uttam Kumar acquired the control and management of the company. As per SEBI (SAST) Regulations, 1997, the acquirer company (CCAPL) made an announcement for open offer on January 20, 2000 to acquire 13,69,000 fully paid up equity shares at par value and 6, 51, 100 partly paid up equity shares at a price proportionate to the amount paid up on the shares. It was forming total of 20,21,000 shares representing 20% of the subscribed capital. The opening date of the open offer was February 23, 2000 and closing date of the offer was March 23, 2000. On the date of public announcement (i.e. January 20, 2000) by the CCAPL and as on February 10, 2000, i.e. the date of the Letter of Offer, there were only 13,69,900 fully paid up equity shares.

8. I find that the shares of Arham Fiscals Ltd. had been listed on the stock exchanges for a considerable period of time but no trading had taken place. After the take over and change in the management of CCIL, the first trade in this scrip was only on the day of public announcement of open offer i. e. on 20/01/2000. It is very pertinent to note that there was nil trading in the scrip prior to 20-01-2000 on the BSE. The investigations revealed that Shri B K Sharma had negotiated with Birla and Sundaram (the two mutual funds) to place the orders for purchase of 1 lakh shares each through their designated broker. It was further found that he had then put sell orders on behalf of Kruthika for a sell order of more than 2 lakh shares (as can be seen from the order log trade log data of BSE). The total trade for the first day (ie 20/01/2000) was 230800 shares out of which this trade alone was for 2 lac shares.

9. I note that on January 20, 2000, the opening price of CCIL at the BSE was Rs.57/. Shri Sharma had tried to give a benchmark price of Rs.50/- in the market for the shares of CCIL. The two fund houses (Birla and Sundaram) bought 1 lakh shares each of CCIL on the first day of trading ie 20/01/2000. One of the funds had placed the order for 1 lakh shares with a broker (who was identified by the management of CCIL and Shri B K Sharma). Both the funds had placed their order at Rs. 50. It is pertinent to note that the orders at Rs. 50 were placed at a time when the prevailing orders at that time (top 5 orders seen on the screen) were above Rs. 80.

10. I find that as per the trade log and order log data for 20/01/2000 received from BSE and the statement of Ohm (the broker from whose terminal shares were sold) the counter party (selling party) to this transaction was Kruthika. Ohm in their statement to SEBI has submitted that Shri B K Sharma had placed the orders on behalf of Kruthika and had delivered the shares to them. The client code used by the broker was ‘BK’. Though Shri B K Sharma has maintained that he had no link with Kruthika, the statements of Ohm and the use of the code ‘BK’ for the transactions by the broker supports the belief that it was Shri B K Sharma who had placed the orders on behalf of Kruthika. The sell orders at Rs. 50 were placed at a time when the best buy orders showing on the screen at that point of time were much above Rs.50/-.

11. In this connection, I note that Shri Anand Radhakrishnan, then Fund Manager of M/s. Sundaram AMC Ltd. had stated that Sundaram Mutual Fund was approached by one Shri B K Sharma with a proposal to invest in CCAPL. He stated that as part of diligence they had visited the company at Hyderabad and got details about the company’s business plans. He stated that Sundaram Mutual fund was led to believe that the company will be reverse merged with an existing listed company. He further stated that an order to buy one lakh shares at Rs.50/- was placed on 20.01.2000 with M/s. Jardine Fleming India Ltd. (now known as JP Morgan India P Ltd.) in accordance with the request of the management of CCAPL and Shri B K Sharma. I, further note that Birla Mutual Fund had also placed an order for purchase of 1 lakh shares at Rs 50 per share with Jardine Fleming India Ltd. It was seen that both the orders (orders for Sundaram and Birla) were placed simultaneously by Jardine Fleming India Ltd. Because of these heavy purchase orders by the two mutual funds, the shares of CCIL got a good opening with good volumes. After these trades, the scrip got a lot of credibility in the market. I also find from the stock prices data of the BSE that on 20-01-2000, the low price of CCIL was Rs.50/- and the high price was Rs.90/-. From 20-01-2000, the price of the scrip went up substantially. The two mutual funds were subsequently warned by the SEBI for their conduct in dealing in the shares of CCIL in the manner aforesaid.

12. I find that Kruthika had sold shares to the extent of 2 lakhs through its broker, Ohm to the two mutual funds as seen above. The ‘sell’ order on behalf of Kruthika were placed by Shri B K Sharma. I find that Shri B. K. Sharma had denied knowing the noticees. But, from the statement of Shri Uday Shah, Director, Ohm, it is seen that the noticee has been introduced by Shri B. K. Sharma. The investigations have also found that Shri B. K. Sharma had already negotiated the purchase of these shares by two Mutual Funds. This has been brought out in the statement of Shri Anand - Fund Manager at Sundaram Mutual.

13. Therefore, by negotiating a deal with the mutual funds, the management of CCIL, B K Sharma along with Kruthika had entered into transactions with an intention of giving credibility and good opening to the scrip. After the said trade, the scrip got traded actively and the price rose substantially. Gradually, the price of the scrip came down from May, 2000. During the year 2007, the scrip of CCIL was quoting between Rs.6.98/- and Rs.14.79/- and was subsequently trading in the scrip was suspended. On the basis of the above, it is seen that Kruthika played an important role along with Shri B K Sharma.

14. Though it is found that the management of CCIL along with Shri B K Sharma and Kruhtika had entered into negotiated transactions with a view to give more credibility and good opening on the first day of trading (20-01-2000), I find that there are not enough evidence to substantiate the charge that the management of CCIL and Shri B K Sharma offloaded the shares at a high price and made profits in violation of the provisions of the PFUTP Regulations. Also, I find that there is no material to substantiate the claim that the entities had acquired shares in addition to the 36 lakh shares declared to be acquired by them. In the absence of enough material, the directors of CCIL and Shri B K Sharma cannot be held liable for the alleged violations of the provisions of PFUTP Regulations, 1995 and thus, the benefit of doubt has to be given to them. As the charges against the directors of CCIL and Shri B K Sharma in the matter are not proved, action against the noticees in the matter would also fail.

15. For the reasons above said, I hereby conclude the present proceedings without passing any directions against M/s. Kruthika Portfolio Services Pvt. Ltd., Shri G Sheshadri Vasan and Shri N Venkata Sudhakar. The show cause notices issued to them in the matter are accordingly disposed of.

DATE: 14.1.2009 DR. T. C. NAIR PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA