Mr. Yogesh B. Parekh & Another vs Securities and Exchange Board of India on 15 December 2010

1. Mr. Yogesh B. Parekh

2. Ms. Trupti B. Parekh 1013, Shreeniketan, 16, Sanyas Ashram Road (Vithalbhai Road), Vile Parle (West), Mumbai – 400 056.

…Appellants

Versus

Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai – 400 051.

…Respondent

Mr. Shyam Mehta, Advocate with Ms. Megha Thakkar, Advocate for the Appellants. Mr. R.S. Loona, Advocate with Mr. Abhishek Borgikar, Advocate for the Respondent.

CORAM : Justice N.K. Sodhi, Presiding Officer Samar Ray, Member P.K. Malhotra, Member

Per : Justice N.K. Sodhi, Presiding Officer (Oral)

This order will dispose of five connected Appeals no. 108 & 118 to 121 of 2010 all of which are directed against a common order dated May 10, 2010 passed by the whole time member of the Securities and Exchange Board of India (for short the Board) by which the appellants have been restrained from accessing the securities market directly or indirectly for a period of one year from the date of the order. The appellants have been found guilty of violating Regulation 6(a) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter called the Regulations). Since arguments have been addressed in Appeal no. 108 of 2010, the facts are being taken from this case and the counsel for the parties are agreed that the

decision in this appeal shall govern the other appeals a well. Facts giving rise to these appeals may now be noticed.

2. Andhra Pradesh Power Tools Ltd. (now known as Consortex Karl Doelitzsch (I) Ltd.) (hereinafter referred to as the company) came out in the year 1996 with a public issue of 1,68,80,500 equity shares of ` 10 each for cash at par. The issue opened on January 22, 1996 and closed on February 1, 1996. The Board carried out investigations into the alleged irregularities in the public issue and found that the issue was subscribed only to the extent of 47 per cent. In other words, the issue was undersubscribed to the tune of 53 per cent. The offer document prescribed a minimum subscription amount of 90 per cent of the issue amount including devolvement of the underwriters and deficiency in the subscription, if any, could be made up by the underwriters within 60 days from the date of closure of the issue. There was also a recital in the offer document that in case the company does not receive the minimum subscription of 90 per cent, it would refund forthwith the entire subscription amount received from the applicants. Since the issue was undersubscribed, the deficiency in the subscription could be made up within 60 days from the date of closure, that is, by April 1, 1996. March 31, 1996 was a Sunday and 1st and 2nd April, 1996 were bank holidays. This being the position, the deficiency in the subscription could be made up by April 3, 1996. It is the case of the appellants that M/s. Volkskas Merchantile Ltd. (VML) approached them to apply for 10 lac shares each worth ` 50 lacs in the public issue of the company. The appellants entered into an undated Memorandum of Understanding (MoU) with VML which reads as under:

“MEMORANDUM OF UNDERSTANDING BETWEEN M/s. VOLKSKAS MERCANTILE LTD. (Investor) AND YOGESH PAREKH (Applicant)

We M/s. Volkskas Merchantile Ltd. is interested in applying shares worth Rs. 50.00 Lacs (10,00,000 shares) in the coming public issue of Andhra Pradesh Power Tools Ltd. opening on (date) and request Yogesh Parekh to manage for applying in this public issue. Investor will pay fixed interest @ 36% p.a. for this issue to Yogesh Parekh.

On mount invested in the application for the above public issue for a period of days, in respect of this application (Applicant) will handover the shares allotted in proportionate manner to him/her in favour of (Investor) or his nominees on payment of full amount payable (on application as well as on allotment). Such payment will be made within 7 days from the allotment intimation date. “Capital gain tax or any other tax like I.T. and other liabilities accruing consequent to the above transfer of shares will be borne by (Investor)”. Expenses for this transaction incurred by (Applicant’s name) will be reimbursed by (Investor’s). Dispute if any shall be referred to sole arbitrator decided by both the parties.

Interest will be charged for the actual days of Stock Invest / F.D. subject to minimum of 15 days. Excess interest collected by the financer in excess of 15 days shall be refunded in full at the time of payment of amount financed. If amount financed is used for more than 15 days in that case interest will be calculated for day to day basis for the number of days exceeding above minimum of 15 days.”

Even though the MoU is undated, a reading thereof leaves no room for doubt that it had been signed between the parties prior to the opening of the public issue. Admittedly, each of the appellants signed the MoU separately and the same has also been signed by a representative of VML who, according to the Board, is K.K. Prabhakaran Pillai, a promoter director of the company. In pursuance to the MoU, the appellants applied for the requisite number of shares on April 4, 1996 which were allotted to them by the company. It is also the case of the appellants that after the allotment was made to them they transferred the shares to VML and received back in accordance with the MoU the subscription amount alongwith interest at the rate of 36 per cent per annum from the date of allotment till payment. It is again not in dispute that the appellants had borrowed a sum of ` 4.5 crores from Virtuous Finance Ltd. (for short the finance company) for subscribing to the shares. Investigations further revealed that VML was an associate of the company and that it had received a credit of ` 4.5 crores from the company’s bank account which was subsequently paid to all the 9 applicants who are the appellants before us in this group of appeals. It is in this background that the Board felt that the appellants had

violated Regulation 6(a) of the Regulations and accordingly issued a notice dated January 17, 2007 calling upon the appellants to show cause why action be not taken against them under Sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 for violating the aforesaid provision. The appellants filed their reply dated February 24, 2007 denying the allegations. During the course of the investigations the appellants were summoned to appear and they took the stand that the object of their investment in the public issue of the company was only to finance VML on whose behalf they had purchased the shares with a view to earn some revenue in the form of interest. The whole time member considered the reply filed by the appellants and also the material collected during the course of the investigations and the enquiry and he came to the conclusion that the investment made by the appellants in the public issue was not a genuine investment and that they connived with the promoters of the company to bail out the issue which would have otherwise failed for want of minimum subscription. He concluded that the act of the appellants was fraudulent and adversely affected the investors who got trapped in the issue. This conduct of the appellants, according to the whole time member, was violative of Regulation 6(a) of the Regulations and accordingly, by his order of May 10, 2010 he debarred the appellants from accessing the securities market for a period of one year. Hence this appeal.

3. We have heard the learned counsel for the parties who have taken us through the record. There is no gainsaying the fact that the appellants invested in the public issue of the company only on the asking of VML which is an associate of the issuer company and that they were the front entities for VML. The learned counsel appearing for the appellants admitted during the course of the hearing that the appellants had no intention of investing in the scrip of the company but applied for allotment on behalf of VML in the public issue only by way of a financing transaction. It is also an admitted fact that for the purpose of making applications for allotment in the public issue, the appellants had taken a loan of ` 4.5 crores from the finance company. It is established on the record that a sum of ` 4.5 crores was

transferred by the company from its bank account to VML. The fraudulent conduct of the appellants is clear from the fact that after the shares were allotted to them they transferred those to VML as per the MoU and received back the subscription money from VML which, in turn, had earlier received the same amount from the company. It is, thus, clear that the company through its associate was purchasing its own shares and the associate (VML) had put the appellants in the front to hide its identity and in the process saved the public issue from collapse. Another fact that establishes the link between the company, VML and the appellants is that MoU on which the appellants are relying has been signed by one K.K. Prabhakaran Pillai on behalf of VML and he is a promoter director of the company as is clear from the offer document. We are, therefore, satisfied that the appellants acted as willing conduits for the company and its associate VML. We are in agreement with the whole time member that the appellants acted fraudulently in connivance with the company and in the process, the genuine investors got trapped. We cannot lose sight of the fact that the public issue was undersubscribed to the extent of 53 per cent and the appellants made good this deficiency without really subscribing to the issue. Had the appellants not made up this deficiency in connivance with the company and VML, the issue would have failed and the company would have been obliged to refund the amounts to the remaining 43 per cent genuine investors. In this view of the matter, we find no infirmity in the impugned order.

4. Before concluding, we may notice an argument raised by the learned counsel for the appellant. He strenuously contended that the finding of collusion as recorded in the impugned order goes beyond the show cause notice as there is no such allegation therein. We are unable to accept this argument. The show cause notice has stated all the facts which have been duly established on the record and the obvious inference that can be drawn from those facts is that the appellants had colluded with the company and VML in bailing out the public issue without which it would have failed. The word ‘collusion’ may not have been used specifically in the show cause notice but in the background of the facts as stated therein, the message is loud and

clear when it alleges that the appellants violated Regulation 6(a) of the Regulations. This Regulation prohibits a person in the course of his business to knowingly engage in any act or practice which would operate as a fraud upon any person in connection with the purchase or sale of, or any other dealing in securities. If the appellants had not connived as aforesaid, 43 per cent genuine investors would have got their money back. Today, they are stranded and we are informed during the course of the hearing that the scrip of the company is trading below ` 1. The conduct of the appellants has, thus, led to the genuine investors being defrauded.

In the result, all the appeals fail and they stand dismissed with no order as to costs.

Sd/-

Justice N.K. Sodhi

Presiding Officer

Sd/-

Samar Ray Member

Sd/- P.K. Malhotra

Member

15.12.2010 Prepared and compared by: msb