(1.) ORDER made by the Respondent No. 1 (SEBI) on 29.11.2002 under section 11B of the Securities and Exchange Board of India Act, 1992 (the SEBI Act) read with regulation 12 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (the FUTP Regulations) debarring Shri S. K. Gupta, Shri Ashok Chawla, Shri J. B. Gupta, Shri Gopal Khadaria and KSL & Industries Ltd., (the Appellant herein - formerly known as Krishna Texport and Capital Market Ltd., ) "from accessing and being associated with the capital market for a period of five years" from 29.11.2002, is under challenge in the present appeal. Though the order is directed not only to the Appellant but to 4 individuals also, none other than the Appellant has so far filed any appeal against the said order.
(2.) The facts based on which SEBI passed the order have been stated in the order itself. Briefly those facts are as follows:
Manu Finlease Ltd., (MFL) a public limited company issued a Prospectus on 5.9.1995 whereby 21, 00, 000 equity shares of Rs. 10/- each were offered for public subscription. Out of the same 9, 20, 000 shares were reserved for preferential allotment - i.e. 4, 20, 000 shares to Indian Mutual Funds and 5, 00, 000 shares to Non Resident Indians. In that context net offer to the resident Indian public was only 11, 80, 000 shares. The issue was found oversubscribed by 50.54 times, though the said company had no sound financial track records. In that context, on 2.8.1996 SEBI ordered an investigation. Investigation revealed manipulation of the public issue made by MFL and also grey market operations and secondary market manipulations in the shares of the company. Pursuant to the investigation report, show cause notices were issued on 6.8.98 to the persons found involved including the Appellant. They responded to the notice by sending replies and making oral submissions. Thereafter SEBI passed the impugned order. The order deals with charges against each one of the noticees separately. Since the present appeal is confined to the findings and the decision relating to the Appellant it is not considered necessary to go into the charges against others in this order. However, since Shri Gopal Khadaria's role has a bearing on the charges levelled against the Appellant it is felt that it would be advantageous to know the charges against him and also the findings thereon as per the impugned order. The relevant portion from the order is extracted below:
"1. As per the investigation report, Shri Gopal Khadaria having an address of 1-A, Hillview Apartment, JP Road, Andheri (W), Mumbai entered into an arrangement with M/s. Nathji Enterprises Pvt. Ltd., an associate concern of MFL operating from the same premises and having common directors for providing finance through six multiple applications of 10 lac shares of Rs. 1.00 crore each in the Public Issue of MFL. Shri Gopal Khadaria in turn entered into an agreement dated 7.10.95 with M/s. Krishna Texport and Capital Market Ltd., also for receiving financial accommodation to enable him to apply for 60 lac shares in the Public Issue of MFL by way of six multiple applications of 10 lac shares each.
Shri Gopal Khadaria was allotted 97, 800 shares of MFL (i.e. 16, 300 shares against each of the six applications). The delivery of these allotments was not received by him but was taken directly by M/s. Nathji Enterprises P Ltd., an associate of MFL. The promoters of MFL thus obtained allotment of 97, 800 shares of MFL through this arrangement.
Since all the applications were made on behalf of Shri Gopal Khadaria, a single application for 60 lac shares should have been made instead of six multiple applications of 10 lac shares each. As the net offer to the public in this case was for 11, 80, 000 shares, Shri Gopal Khadaria who was acting on behalf of M/s. Nathji Enterprises P. Ltd., an associate concern of MFL, could not have applied for more than 11, 80, 000 shares being the size of the Public Issue. Since the application was for 60, 00, 000 shares, this was conveniently sub-divided in six multiple applications of 10, 00, 000 shares each. This act resulted in irregular allotment of MFL shares to its promoters.
Shri Gopal Khadaria resorted to financing of irregular subscription to the Public Issue of MFL, resulting in irregular allotments.
In his reply to the Show Cause Notice, Shri Gopal Khadaria stated that he had entered into a purely financial arrangement with M/s. Nathji Enterprises Pvt. Ltd., and M/s. Krishna Texport and Capital Market Ltd., to arrange finance for the Public Issue of MFL which was done by him at a spread of 2% as financing charges. He stated that an agreement dated 30.9.95 was entered into with M/s. Nathji Enterprises Pvt. Ltd., who was introduced to him by Shri S. N. Daga of D.B.India Securities Ltd., for financing 60, 00, 000 equity shares in the Public Issue of MFL at interest of 26% p.a. He denied knowledge of the fact that M/s. Nathji Enterprises Pvt. Ltd., was an associate concern of MFL having common directors and operating from the same premises. Shri Gopal Khadaria entered into another agreement on 7.10.95 with KTCML for financial arrangement of 6 applications of 10, 00, 000 equity shares of Rs. 10/- each at interest of 24% p.a. He stated that the applications were by 6 different parties and denied that these applications were multiple. It was for MFL to accept or reject the application. He stated that the shares were allotted to the applicants and not to him. He denied knowledge of the ulterior motive of M/s. Nathji Enterprises Pvt. Ltd. and management of MFL and stated that he was not a party to the irregular subscription and irregular allotment of MFL shares.
He denied the charges made out against him and contented that no directions u/s. 11B of SEBI Act, 1992 read with Regulation 12 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 could be issued against him. He further stated that the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 were applicable w.e.f. 25.10.95 as notified by SEBI, whereas he had entered into an agreement with M/s. Nathji Enterprises Pvt. Ltd., and M/s. Krishna Texport and Capital Market Ltd. prior to this date.
The purported agreement entered into by Shri Gopal Khadaria with M/s. Nathji Enterprises Pvt. Ltd., was neither dated nor signed and, therefore, has limited credibility. Shri Gopal Khadaria has not responded to the allegation that the delivery of 97, 800 shares was not received by him but was taken directly by M/s. Nathji Enterprises Pvt. Ltd. from MFL. This arrangement certainly could not have been possible without the knowledge and consent of Shri Gopal Khadaria.
Shri Gopal Khadaria has not denied his involvement in arranging finance for 6 applications for 60, 00, 000 shares in the Public Issue of MFL. The beneficial interest of Shri Gopal Khadaria or of M/s. Nathji Enterprises Pvt. Ltd., was not disclosed in these applications. Shri Gopal Khadaria provided finance for irregular subscription to the Public Issue of MFL leading to irregular allotments which facilitated artificially rise in the prices of MFL shares on the secondary market and thereby inducing the sale or purchase of shares by the investing public.
Even if the purported agreement were entered into by Shri Gopal Khadaria with M/s. Nathji Enterprises Pvt. Ltd., and M/s. Krishna Texport and Capital Market Ltd., prior to 25.10.95, the implementation the terms of agreements i.e. delivery of shares and payments/receipts of funds were effected subsequent to the notification of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 which would therefore be applicable.
I thus hold Shri Gopal Khadaria guilty of the charges levelled against him".
What the SEBI has stated about the Appellant in the order is also extracted below:
"I As per the investigation report, M/s. Krishna Texport & Capital Market Ltd., (KTCML) provided finance to Shri Gopal Khadaria for six multiple applications of 10 Lac shares of Rs. 1.00 crore each to the Public Issue of MFL made in the names of its nominees. For this purpose, stockinvests of Rs. 1 crore each were obtained from State Bank of Indore, Dadar (W) Mumbai, in the names of these nominees against deposits of KTCML with the bank. The share applications were made in the names of KTCML nominees and allotments obtained. The beneficial ownership of these applications was not disclosed. The realisation proceeds of stockinvests against allotment of MFL shares were adjusted in the Current Account of KTCML and not in the bank accounts of the allottees.
By indulging in falsification of its books, accounts and records, KTCML resorted to financing of irregular and late subscriptions to the Public Issue of MFL, resulting in irregular allotments.
II In its reply, KTCML contended that it provided financial accommodation on interest to Shri Gopal Khadaria. All the stockinvests were taken against deposits of M/s. Krishna Texport and Capital Market Ltd., from State Bank of Indore, Dadar and after allotment the shares were handed over to Shri Gopal Khadaria. It was also stated that no shares were sold to any associate concerned of MFL directly by KTCML and that they had no knowledge of Shri Gopal Khadaria acting of behalf of any other person.
KTCML has not responded to the query that the 6 applications financed by it in the names of its nominees were in fact multiple applications. During the personal hearing the representative of KTCML had acknowledged that the beneficial interest of Shri Gopal Khadaria was not disclosed in the applications. KTCML thus financed irregular subscriptions to the Public Issue of MFL, resulting in irregular allotments and their subsequent sale to the associate concerns of MFL. These irregular allotments thus facilitated an artificial rise in prices of MFL shares on the secondary market, thereby inducing the sale or purchase of shares by the investing public.
I thus hold Krishna Texport & Capital Market Ltd., guilty of charges levelled against them."
(3.) WHEN the appeal was taken up for disposal, Shri D. J. Khabatta, learned Counsel appearing for the Appellant explained the background in which the Respondent SEBI had passed the order and stated that SEBI has ignored vital facts, that would show non involvement of the Appellant in the pre public issue and post public issue developments. He submitted that the Appellant's involvement in the matter is only as a professional financier, that it had advanced money in the normal course of its business to Shri Gopal Khadaria to earn interest after providing adequate safeguards, and it was in no way connected or associated with the promoters of MFL and not a party to the alleged manipulation in any manner. In this context he referred to the copy of the Agreement dated 7.10.1995 (the Agreement) entered into between the Appellant and Gopal Khadaria (Respondent No. 2) and submitted that from the Scheme of the agreement it is clear that it is essentially a funding agreement and such agreements are normally entered into by financiers while advancing money to persons who seek funds for subscribing the shares offered in public issues, that it has been made clear in the Agreement that the BORROWER (i.e. Gopal Khadaria) was desirous of applying for 60 lakhs equity shares of Rs. 10/- each for an amount of Rs. 6 crores out of the public issue of MFL, that since he did not have liquidity to pay the application money he requested the INVESTOR (i.e. the Appellant) to provide him financial accommodation to the extent of Rs. 6 crores to enable him to apply for the said shares and for the said financial accommodation, he agreed to pay interest at the rate of 24% per annum from the date of stockinvest to the date of allotment and also agreed to pay interest @ 30% p.a. from the date the stockinvest gets debited into the bank to the date of final payment made by him, that in the event of funds not refunded to the Appellant within seven days after intimation to take delivery of the shares, he was required to pay interest @ 36% p.a. In this context learned Counsel referred to clause (f) of the Agreement which stipulated that "To ensure repayment of Financial Accommodation BORROWER has offered to pledge in favour of the INVESTOR the shares to be allotted by Manu Finlease Ltd., and for this purpose has suggested that the INVESTOR apply for the said shares in own name or in the name of its nominees" Learned Counsel in support of his contention that the financial arrangement with Gopal Khadaria was a purely financial arrangement and nothing more than that, referred to the following terms and conditions of the Agreement dated 7.10.1995.
"1. The INVESTOR shall provide Financial Accommodation of Rs. 6, 00, 00, 000/- to BORROWER from the date of the Stock Invest till the receipt of Share Certificates on allotment.
2. In consideration of the INVESTOR providing the said Financial Accommodation to BORROWER, BORROWER shall pay to the INVESTOR interest at the rate mentioned in para (d) & para (e) on page No. 2 (exclusive of the return on stock invest) for the said period.
3. On or before the earliest closing date the INVESTOR shall submit application for the said Equity Shares at the instance of BRROWER together with the application amounts agreed to be provided to BORROWER as Financial Public Issue of Manu Finlease Ltd.
4. In the event allotment of the Shares is not made or partly made by Manu Finlease Ltd. such moneys are refunded by Manu Finlease Ltd. to the INVESTOR shall be treated as repayment/part repayment of the Financial accommodation.;