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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 ..... a) iv. Krishnum Investments Private Limited (Krishnum) v. Lakhi Packaging Private 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Among the several scrips in which Dangi group was trading, their role was 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 Bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 Million, with a conversion price of ` 565 per share. As per 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 befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing promoters of MIL. 14. It was observed from the demat 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 Numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Apartment, Gandhi X Ray, Gandi Putla, Nagpur -8 (Address of late Deepti Raja, wife of Amit Raja CA) Kamalkishore Bhattad IDBI Bank a/c opening form of Krishnum Krishnum Fortis a/c opening form; IDBI demat a/c opening form Common e mail address 1 [email protected] (e-mail address of Amit Raja CA) Krishnum Guiness Securities a/c opening form; ROC Filings Simple Guiness Securities a/c opening form; ROC Filings Taitan Guiness Securities a/c opening form; ROC Filings Lakhi Guiness Securities a/c opening form; ROC Filings 16. It was observed that all the dummy companies had used the services of Bhagwati Commercial and Financial Services Private Limited (promoters/directors of Bhagwati Commercial & Financial Services Pvt. Ltd. were Jayantilal V Raja, Lata J Raja and Deepti A Raja) for accounting consultancy and ROC work. It was also observed that Mr. Amit Raja, CA, was the auditor of the dummy companies since the incorporation of each of the companies. 17. It was observed that the 10 dummy companies had a common auditor, common consultant (which incidentally was run by the family members of Mr. Amit Raja, CA), bank accounts in the same branch of IDBI Bank Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer vide order dated March 30, 2012 and the said appointment was conveyed vide proceedings of the Whole Time Member dated April 11, 2012 to inquire and adjudge under Section 15A(a) of the SEBI Act, 1992 alleged violations of provisions of Section 11C(2) & 11C(3) of SEBI Act, 1992 committed by SFPL. SHOW CAUSE NOTICE, HEARING & REPLY 23. Show Cause Notice (SCN) in terms of the provisions of Rule 4(1) of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (Adjudication Rules) was issued to SFPL on January 04, 2013, calling upon it to show cause as to why an inquiry should not be held against it under Rule 4(3) of the Adjudication Rules for the alleged violations. 24. The aforesaid SCN was duly delivered by Speed Post on January 09, 2013. It was observed that vide letter dated January 15, 2013, Lucky Holdings Private Limited (LHPL) submitted its reply and inter alia made the following submissions: * SFPL had been merged and amalgamated with LHPL, pursuant to scheme of amalgamation sanctioned by the Hon'ble High Courts at Calcutta and Cuttack by orders passed on March 16, 2011 and June 24, 2011. Subsequently appropriate orders have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Pvt. Ltd. pursuant to a change in management in April 2009. The Company has provided all information as available from the records and would endeavour to assist SEBI in every possible manner. * The delay in providing all possible required information to SEBI occasioned due to circumstances wholly beyond the reasonable control of the Company and its officers. There has been no wilful or deliberate neglect or withholding of any information or documents that was in the domain of the Company. * As the delay was inadvertent, no adverse inference should be drawn against the Company or its officers and they ought to be reasonably excused. It is reiterated that the Company has provided all possible assistance and information as available with the Company to SEBI and would continue to provide all possible assistance as is reasonable feasible. * The Company has also provided the names and addresses of the erstwhile directors of Sagar Fintrade Pvt. Ltd. (pre-change in management) who may be of more valuable assistance to SEBI in its ongoing investigation and inquiry. * The Company urges the Honble Adjudicating Officer to kindly assess and view the reply and documents that has been s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration the factors mentioned in Section 15J of the SEBI Act, 1992? FINDINGS 31. On perusal of the material available on record and giving regard to the facts and circumstances of the case, I record my findings hereunder. ISSUE 1: Whether SFPL has violated provisions of Section11C(2) and 11C(3) of the SEBI Act, 1992? 32. The provisions of Section 11C(2) and 11C(3) of the SEBI Act, 1992 read as under: Section 11C(2) and Section 11C(3) of the SEBI Act, 1992 11C(2): Without prejudice to the provisions of sections 235 to 241 of the Companies Act, 1956 (1 of 1956), it shall be the duty of every manager, managing director, officer and other employee of the company and every intermediary referred to in section 12 or every person associated with the securities market to preserve and to produce to the Investigating Authority or any person authorised by it in this behalf, all the books, registers, other documents and record of, or relating to, the company or, as the case may be, of or relating to, the intermediary or such person, which are in their custody or power. 11C(3): The Investigating Authority may require any intermediary or any person associated with securities market in any mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elivered on November 03, 2011. However, no response was received to the said summons. 37. Thereafter, another summons dated December 22, 2011 was issued to SFPL asking it to submit information by December 28, 2011. This summons was also duly delivered and vide letter dated nil received on January 16, 2012, SFPL submitted only the list of its shareholders as on December 31, 2009. I further note that all the summonses clearly stated that in case of default by SFPL, SEBI will initiate adjudication proceedings against SFPL under Section 15A of SEBI Act and may also launch prosecution under section 11C (6) of SEBI Act. 38. A table depicting summons issued and response of SFPL there to is as follows: Serial No. Date of Summons Nature of Information Sought Response of SFPL (in brief) 1. September 06, 2011 Details of promoters/directors and key officials of SFPL; 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 loans availed by SFPL and/or its promoters; relation/connection and also financial dealings betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12/2009. 39. It is observed that all the summonses were issued after the date of merger i.e. June 2011. However, neither SFPL (original entity) nor LHPL (merged entity) brought the fact of change of management and merger to the notice of the IA. Consequent to the merger/amalgamation, all the assets, rights, duties, entitlements, obligations and liabilities of SFPL are now vested with LHPL and the Adjudication Proceedings are accordingly proceeded with. 40. I note that LHPL has neither denied nor disputed the receipt of the aforesaid summonses dated September 06, 2011; September 22, 2011, October 12, 2011, November 01, 2011 and December 22, 2011 issued to it. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts shareholders as on December 31, 2009. 44. SFPL did not furnish the required bank statements and details of shareholders on a quarterly basis; rationale for investment in Ramji and Krishnum; who approached SFPL for investment in Ramji and Krishnum; etc. Further, SFPL did not submit the names of other private limited companies in which it had made investments and also about its connections with certain other entities. Had such information been provided, the IA would have been in a better position to ascertain the nature of the companies in which SFPL was investing and whether there were any relation between SFPL and other entities who were also shareholders 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time SEBI summonses were issued cannot be accepted as a plausible reason for not submitting complete details/information in response to SEBI summonses. Despite receiving the five summonses SFPL did not bother to furnish detailed information as required by the IA which hampered the investigation process to a great extent, as discussed above. Also, keeping in mind the ample time and repeated opportunities given to SFPL by the IA, information such as details of shareholders, bank account statements for the relevant period, details of investments in Ramji and Krishnum, details of investment in other private limited companies, etc. as required vide 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether SFPL is liable for monetary penalty under Section 15A(a) of the SEBI Act, 1992? 50. The provisions of Section 15A(a) of the SEBI Act, 1992 read as under: Penalty for failure to furnish information, return, etc.: Section 15A If any person, who is required under this Act or any rules or regulations made there under,- (a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less 51. In the matter of SEBI Vs. Shri Ram Mutual Fund [2006] 68 SCL 216 (SC), the 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 SEB ..... X X X X Extracts X X X X X X X X Extracts X X X X
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