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TMI Blog2013 (2) TMI 833X X X X Extracts X X X X X X X X Extracts X X X X ..... e Limited (Lakhi) vi. Ramji Agri Business Private Limited (Ramji) vii. Ramkrishna Fabrication and Machineries Private Limited (Ramkrishna) viii. Runicha Alloys and Steel Private Limited (Runicha) ix. Simple Mining and Power Private Limited (Simple) x. Taitan Management Services Private Limited (Taitan) 2. The reference made by the ITD stated that none of the dummy companies had proper offices and that the directors of these dummy companies were of no means to carry out huge transactions running into millions of rupees. As per the said reference, ITD conducted survey under Section 133A of the Income Tax Act, 1961 at the premises of the dummy companies and found that the companies were not traceable at their given addresses. The original documents relating to the ten dummy companies and their directors (bank statements, demat statements, correspondence from brokers, dividend vouchers, contract notes, correspondence with shareholders, tax invoices, income tax returns filed, income tax acknowledgements, copies of PAN applications, correspondence with lenders, blank pledge creation forms, etc.) were found at the premises of Mr. Amit Raja and were impounded by ITD, wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as taken up for examination in their dealings in the shares of Hubtown Ltd. (Hubtown) (earlier known as Ackruti City Ltd.); Welspun Corp Ltd. (earlier known as Welspun Gujarat Stahl Rohren Ltd.) (WCL), Brushman (India) Ltd. (BIL) and RPG Transmission Ltd. (RPG). 6. In view of the above findings in various scrips and noticing that such operations were possibly continuing in the market to the detriment of the investing public, SEBI vide ad-interim ex-parte order dated December 2, 2010, (interim Order) (available on SEBI website www.sebi.gov.in) issued directions against, inter alia, Mr. Sanjay Dangi, his associates promoter entities of 4 companies i.e. MIL, Hubtown, WCL BIL. In the said interim Order, 10 Dangi entities and 14 Ashika entities were restrained from accessing the securities market and further prohibited from buying, selling or dealing in securities in any manner whatsoever, till further directions. 7. The entities were grouped as Ashika entities since they were all clients of broker Ashika Stock Broking Ltd. (ASBL). Apart from these clients, five entities belonging to Dangi group i.e. Amit Business Ltd. (ABL), Mentor Capital Ltd. (MCL), Ivory Consultants Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the announcement made by MIL, the bonds would have a maturity period of five years and one day and shall be convertible. In view of the prima facie finding that certain dummy companies were incorporated to deal in the scrip of MIL and the reference from ITD pointing out to possible manipulation by Dangi/ Ashika group entities for influencing the FCCB pricing, SEBI conducted detailed investigations in respect of dealings in the scrip of MIL. 11. From the bank statements of Ramji, Runicha, Ambaji, Kanhaiya and Inco it was observed that these companies had availed loans from SICOM Limited (SICOM) to make the payments to MIL for conversion of the share warrants allotted to them. The loans were provided to these companies against, inter alia, comfort letter of MIL and postdated cheques towards principal and interest from Shri Nandlal Maloo (promoter/ MD of MIL). From the information furnished by the dummy companies, MIL, bank transaction counterparties of dummy companies, etc., it was observed that many customers of MIL had given huge unsecured loans to the dummy companies immediately after their incorporation and even before these companies had set up any business infrastructure. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emat account opening forms of the promoters of MIL that for the accounts held with ICICI the email id furnished by Mahesh Maloo, Lalchand Maloo HUF, Murli S Maloo, Bajranglal Maloo HUF, Nandlal Maloo HUF, Sunilkumar Sobhagmal Maloo, Lalchand Bankatlal Maloo and Bajranglal Bankatlal Maloo was also [email protected]. 15. It was observed that in the bank account opening form of Taitan, the address of one of its directors, i.e., Poonamchand Bhattad was mentioned as 102, Jai Bhawani Society, Wardhaman Nagar, Nagpur (address of MIL being 101, Jai Bhawani Society, Wardhaman Nagar, Nagpur ) and his phone number was 2738634 (same phone number as mentioned in Kamalkishore Bhattad s account with IL FS Securities Services Limited). It was observed that Poonamchand Bhattad was also a director of Ambaji. It was further observed that the address in the driving license (issued in March 2004) of Lalit Loya, who was a director of Krishnum and Ramji, was C/o M/s. Murli Agro Products Limited, MIDC, Dhurkheda Tah, Umrer . The connection between the dummy companies arising out of common contact details was as follows: Common Telephone Number 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nicha IDBI Demat a/c opening form Ramji Guiness Securities a/c opening form; IDBI Demat a/c opening form Common Address 1 C/o M/s. Murli Agro Products Limited, MIDC, Dhurkheda Tah, Umrer Lalit Loya Address in Driving Licence 2 Plot 142, East Wardhaman Nagar, Behind Akash Apartment, Nagpur 8 (Address of Amit Raja CA) Ramji IDBI Demat a/c opening form Runicha IDBI Demat a/c opening form Lakhi IDBI Demat a/c opening form Taitan IDBI Demat a/c opening form Kanhaiya IDBI Demat a/c opening form; Guiness Securities a/c opening form Inco IDBI Bank a/c opening form; Guiness Securities a/c opening form Simple IDBI Demat a/c opening form Krishnum I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the promoters of MIL were known well to the directors. The only income for the various dummy companies and their directors appeared to be the dividend paid by MIL as seen from their respective bank statements. It was also observed that none of the dummy companies had invested in any scrip other than MIL since their incorporation. It was observed that all the 10 dummy companies were incorporated during the same time period (April May, 2005). It was also observed that four dummy companies, namely, Krishnum, Lakhi, Simple and Taitan had actively traded in the scrip of MIL. The dummy companies incorporated with a capital of not more than a couple of lakhs of rupees had invested in the warrants of MIL in which a payment close to ₹ 5 Crore was required to convert the warrants. Yet no business activity was undertaken by any of these companies to generate income. 19. During investigation it was observed that customers of MIL (corporate entities not based in Nagpur, but clients of MIL) had paid lakhs of rupees as either advance or share application money to one or more of the dummy companies immediately after their incorporation. The offices of these dummy companies were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeks may be granted to them, to enable them to give appropriate reply. Along with this letter LHPL also enclosed copies of the orders from the abovementioned Hon ble High Courts. 25. A reply dated January 19, 2013 was also received from SFPL enclosing three letters and copies of bank statements and other documents comprising the information sought for vide the various summonses. 26. A reply dated February 11, 2013 was received from LHPL wherein it has been submitted that there was a change in management of SFPL in 2009 and in 2011, SFPL merged with LHPL in terms of the orders of the Hon ble High Courts of Calcutta Orissa (Cuttack). It has been submitted that SFPL could not respond to the summons properly and timely as it was preoccupied with Search Seizure proceedings. It has also been submitted that as the present management was not responsible for the alleged violations, no proceedings may be initiated against them. 27. Thereafter, an opportunity of personal hearing was granted to LHPL vide Notice of Inquiry dated February 07, 2013 and LHPL was advised to attend the hearing on February 22, 2013. This Notice of Inquiry was duly delivered by Speed Post on February ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from SFPL, the representative of LHPL submitted as under: The letter dated January 19, 2013 alongwith its enclosures were taken inspection during the hearing and on inspection it is submitted that the said letter was not issued by the Noticee, i.e., Lucky Holdings Pvt. Ltd. nor was the same issued under the instructions or advice of the Noticee. The Noticee disowns the letter dated January 19, 2013 completely and does not wish to offer any comment on the veracity of the contents of the said letter. It is also submitted that the email id [email protected] is also not created or authorised to be created by the Noticee and thus the attachment and letter sent through the above stated email id is also disowned. It is submitted that on the dissolution without winding up of Sagar Fintrade Pvt. Ltd. pursuant to Order passed by the Hon ble Calcutta High Court on September 04, 2012 which has also been duly filed in the Office of the Registrar of Companies, West Bengal, Sagar Fintrade Pvt. Ltd. lost all its identity and existence as the merger stood culminated by the Order of September 04, 2012 and accordingly no letter could have been issued by Sagar Fintrade Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, or other documents, or record is relevant or necessary for the purposes of its investigation. 33. In view of the submissions made by LHPL during the course of hearing, disowning the letter dated January 19, 2013 sent by SFPL, I am not considering the said letter and the enclosures submitted therewith. Further, in view of the merger I am considering these proceedings against LHPL as it is the entity into which SFPL has merged/amalgamated. 34. From the material available on record, I note that summons dated September 06, 2011, was issued to SFPL by the IA asking it to furnish certain information by September 14, 2011. Vide letter dated September 14, 2011, SFPL submitted partial information and inter alia, stated that it had paid ` 40,00,000 as share application money to Ramji. SFPL also requested for 30 days time to submit certain other information. Thereafter, another summons dated September 22, 2011 was sent to SFPL asking it to furnish the information by September 30, 2011. I also note that vide letter dated September 22, 2011, SFPL was informed by the IA that the Hon ble Securities Appellate Tribunal (SAT) vide its order dated July 11, 2011 had asked SEBI to complete in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies / promoters of MIL/ certain Dangi group entities and Ashika group entities; etc. Partial reply vide letter dated September 14, 2011. SFPL did not furnish bank account statements, shareholder details, etc. Partial reply vide letter dated October 15, 2011 (received by SEBI on October 31, 2011). SFPL furnished reply only about source of funds for investing in the dummy companies and list of other companies in which it had invested. Details of investments and copy of bank statements for the required period not provided. 2. September 22, 2011 Details of bank accounts (including account statements) of SFPL and its promoters / directors for 01/04/2005 to 31/12/2009; details of shareholders of SFPL on quarterly basis for 01/04/2005 to 31/12/2009; details of investments made in all private limited companies in the given format; rationale for investing / becoming a shareholder in Ramji; etc. Summons delivered. No reply received. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, I note that SFPL failed to submit complete information as required vide the aforesaid summonses. For instance, I note that vide summons dated September 06, 2011, SFPL was asked to submit details of all bank accounts alongwith bank statements of those accounts and details of its shareholders on a quarterly basis from April 01, 2005 to December 31, 2009. However, SFPL vide letter dated September 14, 2011, inter alia, requested for 30 days time for compliance with the summons and had only mentioned the name of the Bank, branch and account number of SFPL. But it neither submitted the bank statements nor gave the details of its shareholders for the required period. 41. Subsequently, vide summons dated September 22, 2011, SFPL was, inter alia, asked to submit details of all bank accounts alongwith bank statements of those accounts and details of its shareholders on a quarterly basis; details about its investments in Ramji including rationale for investment, and also details of SFPL s shareholding in other private limited companies, in the given format. However, as no reply was received, one more summons dated October 12, 2011 was sent to SFPL asking information, inter alia, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders of dummy companies. 45. In regard to the summonses issued by the IA, I observe that the information sought would have enabled the IA to draw precise conclusions in the matter. I now proceed to discuss, as to how essential and important the information was in the instant matter which was not provided by SFPL. In view of the prima facie finding that certain dummy companies were incorporated to deal in the scrip of MIL and the reference from ITD pointing out to possible manipulation by Dangi/Ashika group entities for influencing the FCCB pricing, the IA was conducting detailed investigations in respect of dealings in the scrip of MIL. Since, as per SFPL s own admission it had invested in two of the aforesaid ten dummy companies (paid ` 28,50,000/- and ` 40,00,000/- as share application money to Krishnum and Ramji respectively), it was imperative that SFPL provided detailed information regarding these investments in Ramji and Krishnum, in other private limited companies, connections with other entities, etc. on time. Had the information with regard to the rationale for investing and who approached SFPL for the investment, etc. been provided, then the IA would have been in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the summonses could have been easily submitted by SFPL. Hence, I find that SFPL has failed to comply with summons dated September 06, 2011, September 22, 2011, October 12, 2011, November 01, 2011 and December 22, 2011 thereby violating Section 11C(2) 11C(3) of the SEBI Act, 1992. Admittedly, SFPL has merged into LHPL who has taken it over with all the obligations and liabilities of SFPL. Thus, LHPL would be legally liable for the consequences of any proceedings against SFPL. 47. I note that alongwith reply to the SCN dated February 11, 2013; LHPL has also enclosed certain annexures containing information/documents in reference to the SEBI summonses. I also note that LHPL has attempted to submit certain information for the first time such as SFPL s bank account statements, shareholder lists, annual reports etc. However, I am of the considered opinion that these documents/information ought s to have been submitted during the stage of the investigation in compliance with the summons dated September 06, 2011, September 22, 2011, October 12, 2011, November 01, 2011 and December 22, 2011. This also shows that required information was not submitted on time. 48. At this juncture, I r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Supreme Court of India has held that In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the regulation is established and hence the intention of the parties committing such violation becomes wholly irrelevant . 52. As already observed, SFPL failed to comply with the summons dated September 06, 2011, September 22, 2011, October 12, 2011, November 01, 2011 and December 22, 2011. Therefore, I find that SFPL is liable for monetary penalty under Section 15A(a) of the SEBI Act, 1992. ISSUE 3: What quantum of monetary penalty should be imposed on SFPL/LHPL taking into consideration the factors mentioned in Section 15J of the SEBI Act, 1992? 53. While imposing monetary penalty it is important to consider the factors stipulated in Section 15J of the SEBI Act, 1992, which reads as under: 15J - Factors to be taken into account by the adjudicating officer While adjudging quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, namely:- (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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