BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

Transcription

1 BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Appeal No. 146 of 2010 Date of decision: ) Parsoli Corporation Limited 2) Zafar Sareshwala 3) Uves Sareshwala All having office at , 4 th Floor, 325, Amba Sadan, Linking Road, Khar (W), Mumbai Appellants Versus Securities and Exchange Board of India SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (East), Mumbai. Respondent Ms. Sonal, Advocate with Ms. Anjali Bhargava, Advocate for the Appellants. Mr. Darius Khambatta, Additional Solicitor General with Ms. Daya Gupta and Ms. Harshada Nagare, Advocates for the Respondent. CORAM : Justice N. K. Sodhi, Presiding Officer P. K. Malhotra, Member Per : P. K. Malhotra, Member Fraud of the worst kind was perpetrated by Parsoli Corporation Ltd. (hereinafter referred to as Parsoli) and its promoters/directors on the shareholders of this company who were deprived of their shares and when caught, the directors compensated the shareholders by crediting shares in their demat accounts through off market transactions. The blatant violations of the regulatory mechanism by the appellants resulted in the passing of four different orders against Parsoli and its directors/related entities and these orders have been challenged in this set of five Appeals no.112, 113, 145, 146 and 150 of 2010 which are being disposed of together. Since the main arguments were addressed in Appeal no.146 of 2010, the facts are being noticed from this case. Reference to the facts of other cases shall be made wherever necessary.

2 2 2. Parsoli is a public limited company and its shares are listed, among others, on the Bombay Stock Exchange Ltd., Mumbai (BSE). Zafar Yunus Sareshwala and Uves Yunus Sareshwala are its managing director and joint managing director respectively. It carries on the business of non-banking finance company and is also a stock broker on the National Stock Exchange Ltd. and BSE. Parsoli is also a depository participant affiliated to the Central Depository Services (India) Ltd. and is providing depository services to its clients. Every listed company is required to have a share transfer facility either in house or through a share transfer agent registered with the Securities and Exchange Board of India (for short the Board). Parsoli appointed Pinnacle Shares Registry Pvt. Limited as its share transfer agent for handling the share transfer work and it shall be referred to hereinafter as RTA. 3. The Board carried out investigations, inter-alia, in the matter of fraudulent transfer and demat of shares of Parsoli on the basis of forged documents. Investigations revealed that very large number of shares which were held by the shareholders in physical form had been transferred in the names of persons who belonged to the promoter group on the basis of fake share certificates and forged signatures of shareholders. Investigations further revealed that Parsoli and its directors were transferring the shares even when there were deficiencies in the transfer documents. The modus operandi adopted by Parsoli and its directors, as found during the course of the investigations, was that they had retained the specimen signature cards of shareholders with them and did not furnish the same to the RTA and that they were verifying the signatures of the transferors and also the genuineness/correctness of the share certificates and after approving the transfers, the RTA was formally effecting those transfers. Parsoli directed the RTA to effect transfer of shares on the basis of signature verification done by the former and assured the latter that in case of any complaint, Parsoli would take the responsibility and that the shareholders making the complaints would be compensated. On conclusion of the investigations, the appellants were served with a show cause notice dated June 10, 2009 alleging violation of Section 11 C of the of the Securities and Exchange Board of India Act, 1992 (for short the Act) and also Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade

3 3 Practices relating to Securities Market) Regulations, 2003 (for short the FUTP Regulations) and Regulations 53A and 54(5) of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 (for short the Depositories and Participants Regulations). It was further alleged that they also violated the code of conduct prescribed for the stock brokers. The appellants did not file any reply to the show cause notice but made written submissions at the time of personal hearing granted to them by the whole time member of the Board. On a consideration of the entire material collected during the course of the investigations and the enquiry, the whole time member found that the charges levelled against the appellants stood established. He was also of the view that the fraud committed by the appellants was the result of a carefully crafted strategy and had caused damage to the integrity of the securities market and to the confidence of the investors. By his order dated July 27, 2010, he restrained Parsoli and its two directors who are the appellants before us from accessing the securities market directly or indirectly for a period of seven years from the date of the order. The managing director and the joint managing director of Parsoli have also been restrained from holding the position of a Director in any listed company for a period of seven years. These two directors are also required to make a public offer through a merchant banker to acquire shares of Parsoli from the public shareholders after paying them the value as determined under the Delisting Regulations. BSE has also been directed to delist Parsoli in case its public shareholding after the public offer falls below the minimum required to be maintained. It is this order which is under challenge in Appeal no.146 of Parsoli had also been directed to remove the RTA and appoint another one and it failed to comply with this direction. For this failure, Parsoli has, by order dated July 22, 2010, been restrained from accessing the securities market for a period of six months. Appeal no.150 of 2010 is directed against this order. Parsoli had also failed to furnish to BSE the shareholding of persons belonging to the category of promoter and promoter group. This is in violation of clause 35 of the Listing Agreement. Besides, Parsoli also did not furnish the information sought from it by the investigating officer. This failure on its part is violative of Section 11 C of the Act. For these defaults, Parsoli has been restrained from accessing the securities market for a period of one year by order dated

4 4 June 28, This order has been impugned in Appeal no.145 of Adjudication proceedings had also been initiated against Parsoli and its directors for all the aforesaid defaults including non furnishing of the specimen signature cards of the shareholders to the RTA. The adjudicating officer by his order of May 5, 2010 has, among others, imposed a penalty of Rs.25 lacs on Parsoli and its managing director and joint managing director and another penalty of Rs.3 crores on the promoters family of Sareshwalas. Appeals no.112 and 113 of 2010 are directed against this order. 4. We have heard the learned counsel for the parties who have taken us through the record. The fact that after appointing the RTA, Parsoli did not furnish the specimen signature cards of its shareholders to it (RTA) and that Parsoli was verifying the signatures of the shareholders at its own level through an in-house committee of directors on the basis of which RTA was formally effecting transfers is not in dispute. It is also not in dispute that all the shares were transferred by the directors to their own names or their front entities and got them dematerialized and later when the shareholders applied for the dematerialization of the shares held by them in physical form, the directors compensated them by crediting shares from their demat accounts to the accounts of the shareholders. According to the Board, the shares were transferred by the directors on the basis of forged signatures of the shareholders and also on the basis of duplicate share certificates. This fact, too, could not be disputed on behalf of the appellants when we confronted their learned counsel with the record before us. Ms. Sonal, Advocate appearing for the appellants vehemently challenged the findings recorded in the impugned orders and contended that the appellants did not handover the specimen signature cards to the RTA as they were in torn condition and this, according to her, could only be an inadvertent error. She also urged that the shareholders had been compensated to avoid lengthy and expensive litigation and that no shareholder has made any complaint in this regard. She contended that the appellants did not have any motive to transfer the shares fraudulently. The learned counsel for the appellants further argued that the alleged fraudulent transfers as referred to in the impugned order do not pertain to the activities of Parsoli as a broker or as a depository participant and, therefore, the whole time member was not justified in restraining Parsoli from carrying on such activities.

5 5 The learned senior counsel appearing for the respondent Board, on the other hand, referred to the record and strenuously contended that the findings recorded in the impugned orders were correct and supported by the record collected during the course of the investigations and the enquiry and could not be challenged. He took us through some of the transfer documents on the basis of which the shares were transferred by the directors of Parsoli to their own names/accounts which were based on forged signatures. He also pointed out that despite several deficiencies in the transfer documents, the shares were transferred by the directors to their own account and that they defrauded the shareholders. 5. The short question that we need to decide is whether the shares were fraudulently transferred as alleged. We have no doubt that they were. This is an open and shut case and the charge of fraudulent transfer of shares stands established on the appellants own showing. We have perused a few share transfer documents on the basis of which the shares were transferred from the account of the shareholders to the account of the promoters/directors/front entities of Parsoli and this is what they reveal. One Dipakbhai S. Shah purchased on October 13, 1995, 100 shares of Parsoli from Indulal Shah and Shashankbhai Indulal Shah who were then the joint holders. These shares were transferred in the name of Dipakbhai S. Shah on December 5, 1995 and it is common case of the parties that Dipakbhai S. Shah has been holding these shares since then in physical form. The share transfer form on the basis of which the shares were transferred to him bears his signatures which are not in dispute. By a share transfer form dated July 29, 2005, the shares held by Dipakbhai S. Shah were transferred in the name of Mohammed A. Kothawala who is, admittedly, an associate of Parsoli and its directors. This form also purports to have been signed by Dipakbhai S. Shah as a transferor. The signatures have been verified by Parsoli with its official stamp and initials. One doesn t need to go to a handwriting expert to say that the signatures on the two transfer deeds one, where Dipakbhai S. Shah is signing as a transferor and the earlier one which he signed as a transferee in the year 1995 do not match. The two forms were shown to the learned counsel for the appellant and, to be fair to her, she did not dispute that the signatures on the two forms are not the same. It is, thus, clear that the share transfer form

6 6 of July 29, 2005 on the basis of which the shares were transferred from the name of Dipakbhai S. Shah to an associate of Parsoli had forged signatures of the transferor. It is for Parsoli and its directors to explain as to who signed as transferor and on what basis did they verify his signatures. No explanation has been furnished in this regard. Again, shares in the physical form could not be transferred without the original share certificates being attached to the share transfer form(s). The original share certificate(s) were with Dipakbhai S. Shah as will be seen hereafter. Then which were the share certificates accompanying the share transfer forms on the basis of which Parsoli transferred the shares. They cannot but be duplicate/forged share certificates. Here also Parsoli and its directors owe an explanation but there is none. It is interesting to note that the form dated July 29, 2005 does not record the date of approval nor does it record the transfer number as entered in the register of members/transfers. We are satisfied that Parsoli and its directors transferred the shares not only on the basis of forged signatures of the transferor but also on the basis of forged/duplicate share certificates. The findings recorded by the whole time member in this regard are affirmed. After the shares were transferred in the name of Mohammed A. Kothawala on the basis of the share transfer form dated July 29, 2005, these were dematerialized on September 21, 2005 in his name. 6. Now comes the compensation to the genuine shareholder which will bring the cat out of the bag. Dipakbhai S. Shah who was holding the original share certificate(s) in the physical form applied on September 22, 2005 to Parosli for the dematerialisation of his shares. His request was rejected by the RTA on the ground Certificate received is already stands dematerialized in our system. Interestingly, Parsoli decided to compensate him and sent a communication to him dated May 31, 2006 in this regard, the relevant part of which reads as under:- We have taken necessary steps to compensate you considering that your request seems to be genuine. We have already credited above referred account by off market transaction. Xerox copy of delivery slip is enclosed and request you to verify with your DP. Hence your problem is resolved. It is clear that when Dipakbhai S. Shah approached Parsoli for the dematerialisation of his shares, the latter found his request to be genuine. If his request was genuine, then the earlier transfer on the basis of the share transfer form dated July 29, 2005 was obviously

7 7 based on forged signatures and documents. It is also clear from the aforesaid reply that was furnished by RTA to Dipakbhai S. Shah that duplicate shares had been issued on the basis of which they were transferred in the name of Mohammed A. Kothawala in a fraudulent manner as discussed above. The fraudulent conduct of the appellants is writ large from the fact that the directors of Parsoli had themselves verified the forged signatures of the transferor and then transferred the shares to their own entities. Their fraudulent conduct is further established when they compensated Dipakbhai S. Shah by transferring shares to his demat account in off market transaction. If the shares had earlier been transferred bonafide in the name of Mohammed A. Kothawala, then where was the need to compensate Dipakbhai S. Shah. He was compensated because the directors were conscious that they had deprived him of his shares fraudulently. On a perusal of the share transfer forms and the correspondence between the shareholders, Parsoli and RTA, we cannot but conclude that Parsoli and its directors created duplicate shares when the originals were held by the genuine shareholders and forged their signatures as transferors and after verifying those signatures transferred the shares to their own accounts. It was only when the genuine shareholder either made a complaint or applied for dematerialisation that he was compensated by transferring the shares in off market transactions to his demat account. Silence of Dipakbhai S. Shah and other similarly situated shareholders was, thus, purchased by compensating them. In this view of the matter, the argument of the learned counsel for the appellant that no shareholder made any complaint to the Board holds no water. We are in agreement with the whole time member that this was a carefully crafted strategy by the appellants in transferring the shares of genuine shareholders fraudulently to their own accounts. The case of transfer from Dipakbhai S. Shah to Mohammed A. Kothawala is not a solitary instance. There are large number of such instances and we have perused some of those documents. In an identical manner, shares were transferred from the name of one M.M. Chaus who was a genuine shareholder of Parsoli to the account of Mohammed A. Kothawala, a front entity of Parsoli. Similar is the case of transfer of shares from Arbab A. Bharuchi to Talha Sareshwala. Arbab A. Bharuchi was a genuine shareholder whose shares were fraudulently transferred in the name of one of the directors of Parsoli. Interestingly, we

8 8 have some other instances as well where shares were fraudulently transferred in the accounts of the directors of Parsoli on the basis of share transfer forms which do not bear any signature of the transferee. We have on record share transfer form no transferring shares from the name of one Prabhudas P. Prajapati in the name of Mohammed A. Kothawala and the transferee has not signed the form. There are several instances of this type. We are satisfied that transfer deeds with no signatures at all and with single signature in case of joint signatures were cleared for transfer by the committee of directors set up by Parsoli and all this was done to defraud the shareholders. 7. The carefully crafted strategy of the appellants is further borne out from the fact that even after appointing the RTA, Parsoli did not handover to it the specimen signature cards of the shareholders for verification of their signatures and instead retained the same with itself. Having appointed the RTA, it was no business of Parsoli and its directors either to retain the specimen signature cards with them or to verify the signatures of the transferors through an in-house committee. They did this only to verify the signatures of the transferors which they were themselves forging. A share transfer agent is an intermediary of the securities market and is registered with the Board and its activities are regulated by the Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, The primary duty of a share transfer agent is to maintain the records of holders of securities issued by a body corporate and he has to deal with all matters connected with the transfer and redemption of its securities. The appellants connived with the RTA and did not allow the latter to perform its primary duty by retaining with them the specimen signature cards and thereby violated the provisions of Regulations 53A and 54(5) of the Depositories and Participants Regulations. It may be mentioned that separate proceedings were initiated against the RTA as well and by order dated October 14, 2009, its certificate of registration was cancelled which order has since been upheld by this Tribunal. To justify the retention of specimen signature cards, the appellants have taken contradictory stands. Before the whole time member, their stand was that these cards had not been furnished to the RTA as they were in torn condition. The learned counsel for the appellants took the same plea before us during the course of the hearing. However, in paragraph 6.85 of the memorandum of appeal, the appellants

9 9 also state that the specimen signature cards were not handed over to the share transfer agent for better operational and administrative control. Both these reasons cannot go together. Be that as it may, if the specimen signature cards were in torn condition, we wonder how the signatures of the transferors were being verified by the transfer committee and, if it could verify the same on the basis of the torn cards, the same could well have been done by the RTA also which was meant to carry out that work. As already observed, once the RTA was appointed, retention of specimen signature cards for better operational and administrative control or for any other reason was in violation of the statutory provisions. The more we look into the conduct of the appellants, the more we are satisfied that they acted fraudulently right from the word go. In the result, we find no infirmity in the order of July 27, Since Parsoli and the RTA had connived to defraud the shareholders, the Board by its order dated February 20, 2009 directed Parsoli to remove the RTA and appoint another one within six months from the date of the order. Parsoli did not carry out this direction and, therefore, it has been restrained from accessing the securities market for a period of 6 months. The fact that the RTA had not been replaced by another share transfer agent within the stipulated period is not in dispute before us. If Parsoli had any genuine reason for not removing the RTA, it should have approached the Board which it did not do. The whole time member is, therefore, justified in restraining Parsoli from accessing the securities market for a period of 6 months on account of this default. 9. The learned counsel for the appellants did not dispute before us that Parsoli had failed to furnish to BSE the shareholding of persons belonging to the category of promoter and promoter group. Furnishing of such information is the requirement of clause 35 of the Listing Agreement which has a statutory force. Parsoli also did not cooperate with the investigating officer and failed to furnish the information that was sought from it during the course of the investigations. This violated section 11 C of the Act. There is yet another fraudulent act which Parsoli committed. Its board of directors had recommended dividend to the shareholders which decision was reversed in the meeting held on December 31, The earlier decision of the board of directors recommending dividend was sent to BSE so that the same could be disseminated to the

10 10 public at large. When the decision was reversed on December 31, 2005, the reversal was not communicated to BSE. Declaration of dividend is a price sensitive information which is mandatorily required to be furnished to the stock exchange at the earliest. Reversal of such a decision is equally price sensitive and Parsoli should have informed BSE. It did not do so as it wanted the investors to remain under the impression that dividend was being paid. We agree with the whole time member that Parsoli violated the provisions of Regulations 3 and 4 of the FUTP Regulations. The order restraining Parsoli from accessing the securities market for a period of one year cannot, therefore, be faulted. 10. This brings us to Appeals no.112 and 113 of 2010 both of which are directed against the same order of the adjudicating officer holding Parsoli and its directors and front entities guilty of the aforesaid violations and imposing monetary penalties on them. For the violation of the aforesaid provisions, the adjudicating officer has imposed monetary penalties on Parsoli and its directors and their front entities as under:- (i) a consolidated penalty of Rs. 25 lakhs on Parsoli Corporation Limited, Mr. Zafar Sareshwala, Managing Director and Mr. Uves Sareshwala, promoter / Director under Section 15A(a) of the SEBI Act, 1992 for the violation of Section 11C(2) and (3) of SEBI Act. (ii) (iii) (iv) a consolidated penalty of Rs. 3 crores on the promoters family of Sareshwalas comprising of (a) Mr. Zafar Sareshwala, Managing Director (b) Mr. Uves Sareshwala, (c) Mr. Talha Yunus Sareshwala and (d) Mr. Saleha Mohammed Yunus Sareshwala under Section 15HA of SEBI Act, 1992 for the violation of Regulations 3(a) to (d), 4(1) and (2)(h) of the SEBI (FUTP) Regulations, 2003 and under Section 19G of the Depositories Act, 1996 for the violation of Regulation 53A of the SEBI (DP) Regulations. a consolidated penalty of Rs.70 lakhs on the Kothawalas family comprising of (a) Mohammed Alibhai Kothawala (b) Amena Maksud Kothawala (c) Fatema Mukhtar Kothawala (d) Maksud Yusufbhai Kothawala (e) Mariam Yusuf Kothawala (f) Mukhtar Yusufbhai Kothawala (g) Yusufbhai Umarbhai Kothawala under Section 15HA of SEBI Act, 1992 for the violation of Regulations 3 (a) to (d), 4(1) and (2) (h) of the SEBI (FUTP) Regulations, a penalty of Rs.10 lakhs each on (a) Gulam Rasool Mohiuddin Bombaywala (b) Iftekhar Mohammed Yusuf Mansoori (c) Aslamkhan Rehmatkhan Pathan (d) Abdul Hameed Abdul Gaffer Memon (e) Abdulsamad Abdul Gaffer Memon under Section 15HA of SEBI Act, 1992 for the violation of Regulations 3 (a) to (d), 4(1) and (2) (h) of the SEBI (FUTP) Regulations, 2003.

11 11 It is not in dispute that the Act permits imposition of monetary penalties in addition to the action taken under sections 11 and 11 B of the Act. Since all the allegations against the appellants which have been discussed hereinabove stand established, the adjudicating officer was justified in imposing the penalties. The only argument of the learned counsel for the appellants is that the amounts of penalties imposed are highly excessive in the circumstances of this case. We do not agree with her. Having regard to the heinousness of the conduct of the appellants which has adversely affected the interest of the investors/shareholders and the integrity of the securities market, we do not think that any amount of penalty could be excessive. We are not inclined to reduce the amounts. For the reasons recorded above, all the appeals fail and they stand dismissed with no order as to costs. Sd/- Justice N. K. Sodhi Presiding Officer Sd/- P. K. Malhotra Member Prepared and compared by RHN