EX-PARTE AD-INTERIM ORDER

Transcription

1 WTM/RKA/ ISD/105/2015 SECURITIES AND EXCHANGE BOARD OF INDIA EX-PARTE AD-INTERIM ORDER UNDER SECTIONS 11(1), 11(4) AND 11B OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 IN RESPECT OF MR. B. P. JHUNJHUNWALA IN THE MATTER OF FIRST FINANCIAL SERVICES LTD. 1. Securities and Exchange Board of India (SEBI) examined the dealings in the scrip of First Financial Services (hereinafter referred to as "First Financial or the company"), listed on the Bombay Stock Exchange (hereinafter referred to as BSE ) based on the sharp rise in price/volume in the scrip of the company. It was observed that during the period from May 15, 2012 to February 08, 2013 (Patch-1), the price of the scrip increased from 5/- to 263/-, i.e., an increase of 5160% (53 times) in 115 trading days when the average trading volume was only 26 shares per day. Thereafter, from February 11, 2013 to December 12, 2013 (Patch-2), the scrip traded with an average volume of 41,252 shares per day and total volume of 86,21,776 shares in 209 trading days. As compared to Patch-1, in Patch-2 the average volume increased by % (1793 times) and average price increased by 193%. 2. Upon preliminary examination, it was prima facie observed that First Financial and persons in charge of its affairs created a facade of preferential allotment of equity shares of around crores in order to provide fictitious Long Term Capital Gains ("LTCG") to the preferential allottees so as to convert their unaccounted income into accounted one with no payment of taxes as LTCG is tax exempt. It was observed that consequent to preferential allotment of equity shares in First Financial, price of the scrip was artificially increased by certain entities and after the expiry of the compulsory lock-in period, the preferential allottees were provided exit at a high price by the entities forming part of the First Financial Group. In the process, the First Financial Group and the preferential allottees artificially increased the volume and manipulated the price of the scrip thereby misusing securities market system for making illegal gains and to convert ill-gotten gains into genuine one so as to claim the LTCG benefit. 3. In the above backdrop, SEBI, vide an ad interim ex-parte order dated December 19, 2014 (hereinafter referred to as interim order ), restrained 151 entities, including First Financial and its promoters and directors from accessing the securities market and further prohibited them from buying, selling or dealing in securities in any manner whatsoever, till further directions. 4. During further inquiry it was observed that the erstwhile promoters of First Financial, namely, Mr. P. Natrajan, Ms. N. Jayanthi, Ms. N. Nithya, wife and daughter of Mr. P. Natrajan, respectively had sold their entire unencumbered shareholding of 34.92% (except Order in respect of Mr. B. P. Jhunjhunwala in the matter of First Financial Services Page 1 of 8

2 for 11% of the shares that were pledged) in First Financial to Mr. B.P. Jhujhunwala at `1 per share by way of a Memorandum of Understanding (MoU) dated May 27, As per the said MoU, Mr. B. P. Jhunjhunwala acquired a total of 58.08% of the share capital of First Financial from Mr. P. Natrajan, Ms. N. Jayanthi, Ms. N. Nithya, Ms. N. Neeraja and an entity First Financial alongwith all records, papers, documents and files of the company. Further, the nominees of Mr. B. P. Jhunjhunwala were to be appointed on the company's board. 5. Further, as evident from the two letters of Mr. B. P. Jhunjhunwala dated May 27, 2010, consideration was paid to the aforementioned sellers for the sale of shares of First Financial together with the management control in the following manner: Sr. No. Date Paid by Paid to Cheque no & Bank Details N. Nithya , Pvt. N. Jayanthi 05063, ICICI Bank P. Natarajan , Securities Pvt. 1 27/11/2010 Onesource Ideas 2 27/11/2010 Onesource Idea Pvt. 3 27/11/2010 Radhasoami Amount (`) /05/2010 B.P Jhunjhunwala N. Nithya , 1500 HDFC Bank 5 27/05/2010 Ruhi Jhunjhunwala N. Neeraja , HDFC Bank 6 27/06/2010 Mala Juhubjhunwala First Financial , HDFC Bank 7 27/06/2010 Skyed Network Pvt. First Financial , /06/2010 Anurodh First Financial , Merchandise Pvt. 9 27/06/2010 Nandlal Vypaar Pvt. First Financial , /06/2010 Radhasoami First Financial , Securities Pvt. HDFC Bank 11 27/06/2010 BPJ Holding Pvt. First Financial , /06/2010 Onesource Ideas Pvt. First Financial , Total It is further observed that soon after the acquisition of shares of First Financial by Mr. B. P. Jhunjhunwala, a board meeting was held on June 05, 2010 wherein Mr. P. Natrajan, resigned as its Chairman and Managing Director but continued as a director of the company. On the said date, other directors of First Financial, namely, Mr. K. Joshi and Ms. N. Jayanthi also resigned and Mr. S. Krishna Rao and Mr. S. G. F. Melkha Singh were appointed as the directors of the company. 7. It was also observed from the database of Ministry of Corporate Affairs (MCA) that Mr. B. Order in respect of Mr. B. P. Jhunjhunwala in the matter of First Financial Services Page 2 of 8

3 P. Jhunjhunwala, Mr. S. Krishna Rao and Mr. S. G. F. Melkha Singh were connected to each other by virtue of being common directors and/or shareholders in the following companies: Sr. Name of the No. companies 1 Skyed Network 2 BPJ Holding 4 Carewell Consultants 6 Radhasoami Securities 7 Onesource Techmedia 8 Chiraag Suppliers 9 Nandlal Vyapaar Address No-45, IInd Floor, Venkata Maistry Street, Mannady, Chennai No-45, IInd Floor, Venkata Maistry Street, Mannady, Chennai No-45, IInd Floor, Venkata Maistry Street, Mannady, Chennai pcschn1@gmail.com Sindur Pantheon Plaza, 346 Pantheon Road Egmore, Chennai , pcschn1@gmail.com Sindur Pantheon Plaza, 346 Pantheon Road Egmore, Chennai , pcschn1@gmail.com No-191, C R Avenue, Kolkata Bf-2, Sushma Castle,Rajarhat main Road, Kolkata , Director/Shareholder Mr. S Krishna Rao and Ms. Mala Jhunjhunwala w/o Mr. B.P. Jhunjhunwala are directors Mr. B.P. Jhunjhunwala and his family members are shareholders along with BPJ Holding Pvt. among others. Mrs. B. Venodhini and Mr. Kishan Kumar Jhunjhunwala are directors M/s Carewell Consultants, Skyed Network Pvt., Onesource Tech Media, M/s Anurodh Merchandise, M/s Nandlal Vyapaar, M/s Chiraag Suppliers, M/s Radhasoami Securities, Mr. B.P. Jhunjhunwala and his family members are shareholders among others Mr. S Krishna Rao and Ms. Mala Jhunjhunwala w/o Mr. B.P. Jhunjhunwala are directors Onesource Ideas Pvt., M/s Radhasoami Securities, B. Venodhini and Mr. B.P. Jhunjhunwala and his family members are shareholders Mr. S Krishna Rao and Mr. S.G.F. Melkhasingh were directors till January 2012 along with Ms. Mala Jhunjhunwala w/o Mr. B.P. Jhunjhunwala M/s Carewell Consultants, M/s Skyed Network Pvt., Onesource Tech Media, M/s Anurodh Merchandise, M/s Nandlal Vyapaar, M/s Global Infratech and Finance, Mr. B.P. Jhunjhunwala and his family members are shareholders among others Mr. S. Krishna Rao and Mr. S.G.F. Melkha Singh were directors along with Mr. Satyaprakash Baskaran Mr. S. Krishna Rao, Mr. S.G.F. Melkha Singh, Mr. B. P. Jhunjhunwala and his family were shareholders among others Mr. S. Krishna Rao and Mr. S.G.F. Melkha Singh were directors till Januray 2012 Mr. S. Krishna Rao, Mr. S.G.F. Melkha Singh, Onesource Techmedia, BPJ Holding Pvt., Chiraag Suppliers Pvt., B. Venodhini were shareholders among others Mr. S. Krishna Rao and Mr. S.G.F. Melkha Singh were directors till January 2012 Mr. S. Krishna Rao, Mr. S.G.F. Melkha Singh, Onesource Techmedia, BPJ Holding Pvt., Chiraag Suppliers Order in respect of Mr. B. P. Jhunjhunwala in the matter of First Financial Services Page 3 of 8

4 11 Anurodh Merchandise Pvt. No-191, C R Avenue, Kolkata Pvt. were shareholders among others Mr. S. Krishna Rao and Mr. S.G.F. Melkha Singh were directors Mr. S. Krishna Rao, Mr. S.G.F. Melkha Singh, Onesource Techmedia, BPJ Holding Pvt., Chiraag Suppliers Pvt. were shareholders among others 8. The above data reveals beyond doubt that Mr. S. Krishna Rao and Mr. S. G. F. Melkha Singh who were appointed as directors of First Financial in June 2010 pursuant to the acquisition of First Financial by Mr. B. P. Jhunjhunwala as mentioned hereinabove, are closely related/connected to Mr. B. P. Jhunjhunwala. These facts show that Mr. B. P. Jhunjhunwala acquired shareholding as well as management control of First Financial from the erstwhile promoters and was managing or controlling the affairs of the company through his two related/connected entities, namely, Mr. S. Krishna Rao and Mr. S. G. F. Melkha Singh. 9. Trading in the scrip of First Financial was suspended on BSE from June, 2000 to July 2011 for non compliance of the Equity Listing Agreements. On August 04, 2011, First Financial reduced its paid up capital from `3,74,76,000 (37,47,600 equity shares of `10 each) to `37,47,600 (3,74,760 equity shares of `10 each). Subsequently, the board of directors of First Financial brought out the scheme of preferential allotments in December 2011 and April 2012 by way of which 77,00,000 equity shares at the price `20 were allotted to 83 preferential allottees in total. As a result, the share capital of the company increased from `37,47,600 to `80,74,76,000 by the end of April Mr. P. Natrajan, Ms. N. Jayanthi and Ms. N. Nithya had sold their entire unencumbered shareholding and transferred management control in the company, as stated above, to Mr. B. P. Jhunjhunwala. However, they were continued to be disclosed as promoters in the shareholding pattern of the company filed on BSE till quarter ending June They were also disclosed to be holding 1,72,275 equity shares of the company (effective holding pursuant to capital reduction) till quarter ending March 2012 and thereafter 41,410 shares till quarter ending September 2013 and 4,14,100 shares (post split in December 2013) till quarter ending June Though Mr. B. P. Jhunjhunwala had acquired substantial shares and management control in First Financial, neither was he disclosed as its promoter nor was his shareholding. Thus, from June 2010 onwards, First Financial and person in charge of its affairs have been making false and misleading disclosures thereby wilfully and deliberately concealing the actual promoters and their true shareholding in the company from the stock exchange and investors. 11. It is observed that Mr. B. P. Jhunjhunwala who had acquired majority stake of 58.08% in First Financial and was managing the affairs of the company through its connected or related entities at the relevant time, orchestrated the scheme of preferential issue of equity shares of around `15.40 crores. It is strange to note that a company which was dormant or suspended Order in respect of Mr. B. P. Jhunjhunwala in the matter of First Financial Services Page 4 of 8

5 for 11 years with nil activity was able to garner funds near about 42 times of its share capital soon after its acquisition by Mr. B. P. Jhunjhunwala. Thus, investment of this magnitude by 83 preferential allottees at premium price in a company like First Financial that has hardly any credential in the market can only be possible if the preferential allottees had a nexus with First Financial and persons in control or charge of its affairs and the preferential allotments of shares were under a prior plan, device and arrangement between them for the ulterior motive or the end objective of the scheme that has been brought out explicitly in the interim order dated December 19, An examination of the trading pattern in the shares of the company post revocation of suspension revealed that from May 15, 2012, the scrip witnessed a sharp increase in price till February 08, During this period, price of the scrip increased continuously from `5.35 to ` by February 08, 2013 with an average volume of 23 shares per day and total volume of 2,653 shares in 115 trading days with an average of 1 trade per day. As on quarter ending June 2012, the total share capital of the company was 80,74,760 shares out of which 77,00,000 shares (comprising 95% of the share capital) were held by the said preferential allottees and were under lock-in during the said price increase period. Remaining 3,74,760 shares (comprising 5% of the share capital) held by Mr. B.P. Jhunjhunwala and his family (2,17,665 shares) and other investors (1,57,095 shares) were available for trading. Thus, out of the said 5% shares available for trading, large chunk of shares, i.e., 58.08% was with Mr. B.P. Jhunjhunwala and his family who was at the helm of affairs of the company during the relevant time period. 13. Upon further analysis of trading data pertaining to the price increase period (i.e., from May 15, 2012 February 08, 2013), it was observed that single sell orders of small quantities were placed at substantial time gap after buy orders of large quantity. The buy orders were placed in the trading system at upper circuit at the beginning of the trading session, i.e., between 9:15 a.m. to 9:30 a.m. It was also observed from the order book that there were total of 1707 buy orders for 18,44,536 shares as against 124 sell orders for 2653 shares during the said period. Mr. B.P. Jhunjhunwala and his family having substantial number of tradeable shares (2,17,665 shares- representing 58.08% of tradable shares) in First Financial chose to sell 620 shares, releasing through 89 orders/instances (i.e., 72% of 124 the sale orders executed during that period) with each sale order ranging 5-25 shares. These facts indicate that supply side was being intentionally restrained/ controlled by Mr. B.P. Jhunjhunwala and his family. 14. This type of trading pattern in illiquid scrip like First Financial, prima facie, indicates that the seller being in control of the tradable shares of this scrip played a major role in manipulating the price of the scrip. From the order book it appears that a facade of huge demand at upper circuit was created without which a scrip like First Financial with hardly any credential regarding its trading history, fundamentals, business or financial standing etc., could not have witnessed a sustained increase in the price (5160% or 53 times) for a continuous period of 9- Order in respect of Mr. B. P. Jhunjhunwala in the matter of First Financial Services Page 5 of 8

6 10 months. The only way the price of such scrip could have increased is by deploying manipulative trading pattern. 15. It has been aptly brought out in the interim order dated December 19, 2014 that preferential allotment was used as a tool for implementation of the dubious plan, device and artifice wherein preferential allottees acting in nexus with the First Financial Group misused the securities market system for making illegitimate gains by manipulating volume and price of the scrip in order to convert their unaccounted income into accounted one with no payment of taxes as LTCG is tax exempt under section 10(38) the Income Tax Act, Further, the role of Mr. B. P. Jhunjhunwala fits squarely into the scheme elucidated in the interim order when he, directly or indirectly; (a) acquired substantial shareholding (58.08%) alongwith the management control of the company; (b) caused to revive the trading in the scrip of the company after a decade; (c) orchestrated the scheme of preferential allotments; (d) actively concealed his shareholding as well as his control over the management of the company during the relevant time; (e) played a major role in manipulating the price of the scrip by intentionally restraining the supply of tradable shares of the scrip during the price increase period; and (f) facilitated preferential allottees to generate fictitious LTCG. 16. Based on the above facts and circumstances, I, prima facie, find that Mr. B. P. Jhunjhunwala who acquired the shares of First Financial from the erstwhile promoters constituting 58.08% of shareholding including management control of the company, plotted the scheme of preferential allotment along with directors of First Financial at the relevant time with an end objective to enable the preferential allottees to avail the LTCG benefit. He is also, prima facie, found to be playing a major role in manipulating the price of the scrip during the relevant period in the manner as mentioned above leading to abnormal increase in price of the scrip that resulted into hugely profitable exit to the preferential allottees while misusing the stock exchange system. 17. Considering the above, I am of the view that the acts and deeds of Mr. B. P. Jhunjhunwala are fraudulent as defined under regulation 2(1)(c) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 ( the PFUTP Regulations ) and are in contravention of the provisions of regulations 3(a), (b), (c) and (d) and 4(1), 4(2)(a), (b), (e) and (g) thereof and section 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, The said provisions are Order in respect of Mr. B. P. Jhunjhunwala in the matter of First Financial Services Page 6 of 8

7 reproduced hereunder:- SEBI ACT Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. "12A. No person shall directly or indirectly (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;" PFUTP Regulations "3. Prohibition of certain dealings in securities No person shall directly or indirectly (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. 4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely: (a) indulging in an act which creates false or misleading appearance of trading in the securities market; (b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss;. (e) any act or omission amounting to manipulation of the price of a security; Order in respect of Mr. B. P. Jhunjhunwala in the matter of First Financial Services Page 7 of 8

8 . (g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security;" 18. SEBI strives to safeguard the interests of a genuine investor in the Indian securities market. I am of the opinion that, while investigation in the matter is underway, allowing Mr. B. P. Jhunjhunwala who is prima facie found to be involved in such fraudulent, unfair and manipulative transactions to continue to operate in the market is inimical to the interests of participants in the securities market and would shake the confidence of the investors in the securities market. Since Mr. B. P. Jhunjhunwala is one of the promoters, and shareholder in two other listed companies, I have reasonable grounds to believe that unless restrained he may carry out similar fraudulent and manipulative transactions in other scrips. Considering the facts and circumstances of this case, I deem it a fit case where, pending investigation, effective and expeditious preventive action is required to be taken by way of ad interim ex-parte in order to protect the interests of investors and preserve the safety and integrity of the market. I, therefore, in exercise of the powers conferred upon me in terms of section 19 read with section 11(1), section 11(4) and section 11B of the SEBI Act, 1992, pending inquiry/investigation and passing of final order in the matter, hereby restrain Mr. B. P. Jhunjhunwala [PAN: ACVPJ5021H and its HUF PAN: AACHB0680D] from accessing the securities market and buying, selling or dealing in securities, either directly or indirectly, in any manner, till further directions. 19. This order shall come into force with immediate effect. The stock exchanges and the depositories are directed to ensure that all the above directions are strictly enforced. 20. This order is without prejudice to the right of SEBI to take any other action that may be initiated against the aforementioned entities in accordance with law. 21. Mr. B. P. Jhunjhunwala may file his objections, if any, within twenty one days from the date of this order and, if he so desires, avail an opportunity of personal hearing before the Securities and Exchange Board of India, on a date and time to be fixed on a specific request, received from him. DATE: AUGUST 11 th, 2015 PLACE: MUMBAI Sd/- RAJEEV KUMAR AGARWAL WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Order in respect of Mr. B. P. Jhunjhunwala in the matter of First Financial Services Page 8 of 8