Judgment:
1.1 Securities and Exchange Board of India (hereinafter referred to as SEBI) had received a complaint dated August 28, 2005 from Abohar Investor Forum (hereinafter referred to as AIF) Abohar, Firozepur District, Punjab in which it was inter alia alleged that one Shri Dheeraj Kumar Madaan (hereinafter referred to as DKM), Proprietor, M/s Digital Stocks (having its address at 3, Circular Road, Mawa Market, Abohar, Ferozepur District, Punjab) misappropriated shares and funds of various investors. It was informed that DKM was an associate of one M/s Ganpati Finsec Pvt. Ltd. (hereinafter referred to as GFPL) which in turn was found to be a franchisee of SAM Global Securities Ltd., (Member, BSE) and SMC Global Securities Ltd. {Member, National Stock Exchange of India Ltd. (NSE)}. The aforesaid stock brokers are hereinafter referred to as SAM and SMC respectively. SEBI had also received a similar complaint from one Smt Santosh Kumari, against DKM.It was further complained that DKM owed approx. Rs. 50 lacs to 59 investors. There were also widespread media reports in respect of the above misappropriation alleged to have been committed by DKM. It was also reported that DKM had absconded with investors' money on June 30, 2005. During the course of preliminary inquiry, it was found that DKM had transferred shares from his demat account on September 12, 2005 to September 14, 2005, when he was reportedly absconding.
1.2 In view of the above, SEBI examined the allegations made in the aforesaid complaints and also conducted a preliminary investigation in respect of the same. In the process, SEBI had inter alia obtained the comments/information from AIF as well as the aforesaid stock brokers.
The preliminary inquiries made by SEBI revealed that the clients at Abohar were not registered with SMC/SAM and that the cheques issued by the investors were in the name of Digital Stocks, a proprietorship firm of DKM and the payment was also received by them from the said Digital Stocks. It was further informed by AIF, that all shares sold by the investors were transferred to the demat account of DKM and similarly the delivery of shares was also received by them from his demat account. It was complained that DKM had defrauded small investors of their money and shares, which was prima facie in violation of Regulations 3(a), 3(c) & 4(1) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, (hereinafter referred to as FUTP Regulations). It was further complained that GFPL/ DKM acted as unregistered sub broker, prima facie in violation of Section 12(1) of Securities and Exchange Board of India Act, 1992 (Act).
1.3 In the facts and circumstances, in order to prevent the affairs of Digital Stocks and GFPL being conducted in a manner detrimental to the interests of the investors, SEBI vide an ad interim order dated October 5, 2005 inter alia passed the following directions: a. "Shri Dheeraj Kumar Madaan, Proprietor of M/s Digital Stocks, having its office at 3, Circular Road, Mawa Market, Abohar, District Ferozepur (Punjab) is prohibited, with immediate effect, from buying, selling or dealing in securities or being associated with the securities market in any manner. b. GFPL and its directors namely Shri Devender Mittal, Smt.
Ritu Mittal and Dr. K.C Mittal are prohibited, with immediate effect, from buying, selling or dealing in securities or being associated with the securities market in any manner whatsoever".
1.4 GFPL vide letter dated October 17, 2005 inter alia admitted that as DKM had vanished from the scene leaving several investors in the lurch and that it had settled the claims of the investors. An opportunity of hearing was also granted by SEBI to GFPL and its directors on March 3, 2006. Shri SD Irani, practicing company secretary along with Shri Devender Mittal, Dr. K C Mittal etc. appeared before me and made submissions. During the course of the said hearing, GFPL's directors had inter-alia admitted before me that all the shares held in the demat account of GFPL belonged to GFPL. However, subsequently vide its letter dated April 07, 2006 it contradicted its above stand stating that majority of the shares belonged to the clients. In support of the same, GFPL vide its letter dated June 17, 2006 provided the copies of affidavits received from various clients which sought to convey that clients had dealt with GFPL. It was also averred that as the clients did not have any demat account(s), they kept their shares in the account of GFPL for convenience.
1.5 The investigation conducted by SEBI further observed that GFPL acted as an unregistered sub broker to SAM / SMC and that it had received / transferred shares in / from its demat account even after the ad interim order dated October 5, 2005. It was further noticed that GFPL had acted in nexus with its family concern viz. M/s Ansh Bharati whose proprietor Shri Amit Mittal was none other than the brother of Shri Devender Mittal (director of GFPL), to ensure the continuance of their business as a franchisee of SAM/SMC, to circumvent the SEBI ad interim order dated October 5, 2005.
1.6 In the facts and circumstances, as the investigation/inquiries conducted by SEBI was completed, a notice dated February 1, 2007 was issued to GFPL including its directors viz. Shri Devender Mittal, Dr.
K.C. Mittal, Smt Ritu Mittal inter alia asking them to show cause as to why the order dated October 5, 2005 should not be confirmed for an appropriate period. A similar notice dated April 24, 2007 was also issued to DKM by SEBI. He was further asked to show cause as to why the amount available with his stock brokers should not be used to settle the claims of the investors who had dealt through him. SEBI had issued a notice dated February 1, 2007 to M/s Ansh Bharati including its proprietor Shri Amit Mittal asking them to show cause as to why they should not be debarred from associating with the capital market related activities, dealing in securities etc. for an appropriate period.
1.7 GFPL vide letter dated February 20, 2007 inter alia stated that as per the prevailing practice, it had forwarded the sub broker registration application form alongwith the relevant documents including the demand draft to its stock broker (SAM) in November 2004.
GFPL contended that SAM had allowed it to start the sub broking activities and the issue of the pendency of the application was never communicated to it. GFPL claimed that though it had entered into a franchisee agreement with SMC, it had not started any sub broking activity with SMC. It also contended that DKM had never informed to it that clientele trades were also routed through its account. GFPL stated that, pursuant to the receipt of the copy of the order, it had stopped the transfer of shares (from October 10, 2005) to its client's accounts from DP's accounts. It was the case of GFPL that, no restriction was imposed on M/s Ansh Bharati by SEBI vide its order dated October 5, 2005. GFPL further added that the business of Ansh Bharati could not be linked with its business and that the sale / purchase agreement entered into between GFPL and Ansh Bharati was clear and conclusive and that there was no suspicious action behind the said agreement. It further requested for the withdrawal / revocation of the prohibition imposed by the interim order dated October 5, 2005. GFPL, pursuant to the hearing on August 17, 2007, vide its letter dated August 24, 2007 inter alia stated that the transfers out of its demat account were only in relation to the actual trades executed on or before October 5, 2005 and that the said transfers out of the demat account took place only on two dates i.e. October 07, 2005 and October 10, 2005.
1.8 Shri Amit Mittal, proprietor of M/s Ansh Bharati vide letter dated February 13, 2007 inter alia stated that he was managing the affairs of M/s Ganpati Infoline P. Ltd., when SEBI passed its interim order dated October 05, 2005. He also stated that he was neither director nor employee of GFPL. He admitted having purchased computers and other electrical items belonging to GFPL. He further stated that he had not transferred any portion of proceeds received from SAM/SMC in favour of GFPL/ its directors. Pursuant to the hearing on August 17, 2007, S. K.Bhootra & Co, Chartered Accountants (on behalf of M/s Ansh Bharati), vide letter dated August 27, 2007, inter alia stated that M/s Ansh Bharati was appointed as the franchisee of SMC/ SAM pursuant to the prohibitory order passed by SEBI against GFPL and it had helped them (SMC/ SAM) to run their business.
1.9 DKM vide letter dated May 11, 2007 inter alia requested further time for its reply and also for inspection. As requested by DKM, SEBI granted an opportunity of inspection to DKM and the copies of documents as sought by the representative of DKM (Shri S. P. Sharma) at the time of the inspection were furnished to DKM by SEBI, vide letter dated May 18, 2007. Thereafter, DKM vide letter dated June 7, 2007 inter alia stated that the allegation of investors by AIF was not to be entertained as it was not a registered body. He further added that out of the total claim of Rs.54 lacs Rs.26 lacs had already been paid and Rs. 20 lacs were with GFPL. He contended that, he was never an authorised person of SAM/SMC. It has been stated by DKM that the trades were made in the account of GFPL. He added that he had traded as a client and not as a sub-broker and that he had not violated the provisions of FUTP Regulations. He also added that the 24 complainants (seeking non payment of complete dues) were parties to the arbitration award dated September 30, 2005. He urged that, though he might have introduced certain clients to GFPL/SAM/SMC, he had not dealt on their behalf in his account. In his reply he had also stated that the transactions entered into by the clients directly by GFPL were booked into his account though he had never authorized GFPL to do so without his instructions. Subsequent to the hearing, DKM vide letter dated August 30, 2007 inter alia reiterated his inability to explain each of the transactions in his bank account during the period from April 2005 to December 2005.
1.10 The opportunity of hearing was granted to M/s Digital Stocks and its proprietor DKM, M/s Ansh Bharati and its proprietor Shri Amit Mittal, GFPL and its directors viz. Shri Devender Mittal, Smt. Ritu Mittal and Dr. KC Mittal on August 17, 2007. The said opportunity was availed by them either personally or through their authorised representatives and submissions made on the lines of written replies.
2.1 I have considered the investigation / inspection report, the ad-interim order dated October 5, 2005, the oral as well as written submission made on behalf of GFPL including its directors, M/s Ansh Bharati and its proprietor and Digital Stocks and its proprietor and other relevant materials available on record. In the facts and circumstances, the following issues emerge for consideration: I) Whether DKM/ M/s Digital Stocks had defrauded investors in connivance with GFPL.
II) Whether DKM/ M/s Digital Stocks and GFPL had acted as an unregistered sub broker.
III) Whether GFPL in connivance with its associate M/s Ansh Bharati had circumvented the compliance of SEBI order dated October 5, 2005.
2.2 At the out set, I note that the present proceedings had been initiated by SEBI on receipt of the complaint lodged by AIF against DKM and GFPL followed by their submissions. The allegations levelled against DKM and GFPL, in the said complaint/submissions, in brief, are as follows: a) DKM operated the trading terminal of SAM/SMC at Abohar and executed transactions in the shares of various investors through the client account of GFPL (code number 99G606).
b) DKM had without informing the investors, run away on June 30 2005 with their money/ shares.
c) The said investors thereafter formed an association in the name of AIF to get their dues. 59 investors have made a claim of around Rs. 50 lacs with AIF. d) AIF had initially contacted Shri Devender Mittal, director of GFPL, but he had refused to acknowledge investors' claim.
2.3 I note that the investigation conducted by SEBI revealed that DKM was not an employee of SAM/SMC/GFPL. He was also not found to be a sub broker registered with SEBI. It was found that NSE, vide letter dated October 25, 2002 (addressed to SMC) approved the user identification No. 619 in the name of DKM in the Futures & Option segment and he was given a user type of "BM" ( Branch Manager).
2.4 I find, as per the copies of NSE letters (provided by SMC), following terminals were operated by SMC from Abohar: 2.5 During the course of investigation, it was found that GFPL had entered into a franchisee agreement dated September 19, 2002 with SMC which inter alia provide for various clients affiliated with the franchisee to deal though the member of the stock exchange (in the present case, SMC). In terms of the said agreement, the franchisee (GFPL) had to carry on the business from the address specified therein i.e 37-K Block, Sri Ganga Nagar , Rajasthan. GFPL was further refrained from appointing any sub agent or enter into any arrangement which would tantamount to sub agency. It has been admitted by Shri Rakesh Gupta, director of SAM/SMC that its terminals at Abohar were managed by GFPL.
However, I note that SMC had requested NSE to approve the usage of its terminal by DKM and the same was approved by NSE vide its letter dated October 25, 2002. Admittedly, neither GFPL nor DKM was registered with SEBI at the time of transaction of shares of clients by DKM through the account of GFPL, as required under the provisions of Section 12 of the Act.
2.6 I further, note that in terms of SEBI circular dated October 22, 2001, the stock exchanges were advised to grant trading terminals only at the registered/ branch/ registered sub broker's office of its members. The exchanges were further advised to withdraw immediately, the trading terminals which were granted earlier in places other than those mentioned above. In the said circular, SEBI had also advised stock exchanges to amend their bye laws accordingly and to take action against the stock broker who mis-utilised or allowed the mis-utilisation of their trading terminals for unregistered sub broking activities.
2.7 The place where the terminals of SMC situated at Abohar was alleged to be its branch office, though in fact it was not. Incidentally, I also note that the alleged branches of SMC at Shri Ganganagar and Abohar were not in accordance with the norms laid down by SEBI in its circular number dated October 22, 2001 as stated above, though NSE has allowed it as a Branch Office. This was the beginning for a series of unauthorised activities to follow, resulting in the system being put to enormous risk and jeopardy. The issue germane to these proceedings is not whether the terminal at Abohar was at an authorised branch or not, but how such a relaxation happened to be the thin end of wedge.
2.8 Admittedly, GFPL was not a registered sub broker of SMC during the period of the said transactions. The unique client code issued by the stock broker (SMC) to a client (GFPL) is not transferable and only the transactions of the said client shall be routed through the said code.
In terms Section 12 of the Act, no sub broker shall buy sell or deal in securities except under and in accordance with the certificate of registration. GFPL should not have traded as a sub broker without obtaining the certificate of registration from SEBI. The very purpose of the requirement of obtaining certificate of registration from SEBI is to ensure that the concerned intermediary acts as per the regulatory requirements put in position to protect the interest of the investors and the securities market. Admittedly, GFPL was a SEBI registered sub- broker to the stock brokers viz. Suresh Rathi Securities, K& A Securities and TCP Stock Brokers (prior to the transactions in question) and the same was an indicative of the fact that it was aware of the statutory requirements. Even otherwise, ignorance of law can not be an excuse.
2.9 Further, I note that GFPL had transferred shares from its demat account, even after the interim order dated October 05, 2005. GFPL in its reply had admitted that it had transferred certain shares after the interim order dated October 05, 2005. By transferring shares, after the prohibitory order, GFPL had violated the directions imposed in the said order. 2.10 The investigation conducted by SEBI observed that pursuant to the interim order dated October 05, 2005, M/s Ansh Bharati, proprietorship firm of Shri Amit Mittal, brother of Shri Devender Mittal had entered into a franchisee agreement with SMC on October 6, 2005. It is an admitted fact that Shri Amit Mittal had stepped into the business of GFPL after the interim order dated October 5, 2005 and it was observed that SAM/SMC were sharing brokerage earned from clients pertaining to the terminal at Abohar with M/s Ansh Bharati. The brokerage shared by SAM/SMC with GFPL and M/s Ansh Bharati as observed during the course of investigation is as under: 2.11 The sharing of brokerage by SAM/ SMC with Ansh Bharati is an indication that the latter is nothing but the creation of GFPL for the purpose of continuing its business even after the SEBI order dated October 05, 2005. Therefore, it is fairly established that the directors of GFPL acted in nexus with their other family member viz.
Shri Amit Mittal, the brother of Shri Devender Mittal to ensure the continuance of the business as a franchisee of SAM/SMC. Apparently, Ansh Bharati /its proprietor by its acts facilitated GFPL/ its directors in circumventing the compliance of SEBI order dated October 05, 2005.
2.12 The Abohar case history is replete with all the ingredients of how a series of unauthorised activities starting from setting up of the so-called branch office of the stock-broker (SMC) till the culmination of enticing and entrapping of the investors in a web could virtually wreck the integrity of the securities market, under-mine the system and provide for a fertile ground for unauthorised entities to wangle unfair gains. The entire edifice of such egregiousness was built on the unbridled business greed of the players who espied a great opportunity in getting a market share at Abohar through means at once questionable and violative of regulatory norms. The entities acting in concert with SAM/SMC turned out to be DKM, proprietor of M/s Digital Stocks and GFPL which did not have a modicum of authority to transact through NSE terminal at the so called branch office at Abohar. The Show Cause Notice refers to them as unregistered sub-brokers; in my view they were unauthorised players, pure and simplicitor. By their reckless conduct, they brought the investors at Abohar to grief. In the entire game plan, there is a conscious attempt to invest the process with a semblance of legitimacy, whether it be the setting up of a branch office at Abohar or the putative application seeking to get recognition for GFPL as registered sub-broker. The position of DKM, proprietor of M/s Digital Stocks is equally tenuous in as much as it would appear that he was projected as an authorised person and Branch Manager at Abohar, representing SAM/SMC, when he was acting as unregistered sub-broker.
2.13 As per the records, it is seen that DKM was authorised by NSE as user under user type 'BM'for F & O segment at Abohar terminal. It is not clear whether DKM had necessary authority to be a dealer in the cash market. Further, he was essentially dealing with the investors at Abohar by accepting cheques, buying shares and transmitting the same to them through his demat account and issuing refunds/payments wherever necessary. There were no contract notes, no agreements with clients, no filling-up of Know Your Client (KYC) forms for client verification etc.
Also, DKM was providing un-signed account statements to the investors periodically. As a matter of fact, in his written submissions to SEBI, DKM had stated that he was never an authorised person of SAM/SMC.Additionally, none of the investors of Abohar who came through him was registered with broker SAM/SMC. As a matter of fact, Shri Rakesh Gupta, director of SAM/SMC had testified that there were only 7 or 8 clients in Abohar, registered with them. Every activity of DKM including his access to the unique client code of GFPL was not only unauthorised but posed a serious threat to the integrity of the market and investor protection. The acme of the distortions at Abohar came to pass when DKM suddenly absconded on June 30, 2005 perhaps in the wake of pressure from beleaguered investors, leaving them totally in the lurch with a large number of unsettled claims. He resurfaced nearly after a year after the damages were contained to some extent.
2.14 GFPL is located at Shri Ganganagar, Rajasthan and had a franchisee agreement with SAM/SMC with reference to operations at Shri Ganganagar only. GFPL's application for registration as sub-broker of SAM/SMC never materialised. Therefore, the contention that SAM had allowed it to start sub-broking activities is neither here nor there. It further transpires that GFPL was reportedly managing the affairs of so called branch at Abohar at the behest of the SAM/SMC, when DKM was already on record as Branch Manager at Abohar in the application submitted to NSE for User ID. There is no documentary evidence to support that SAM/SMC has appointed GFPL as Branch Manager or In- charge of the alleged branch at Abohar.
2.15 As per the records available, the only connection GFPL had with SAM/SMC in support of the activities at Abohar is that it was given a client status in Client ID Number 99G606. That status does not empower GFPL to do anything other than transacting business in its name. The Unique ID issued by the broker SMC to GFPL is not transferable and only the transactions of the said client can be routed through said code.
The fact remains that GFPL allowed its client code to be abused by DKM who, in turn, operated through the said account for a host of clients based at Abohar. This is nothing but a subversion of the system, in as much as GFPL allowed its client code to be used by others who are not registered as clients with the broker. In so far as GFPL either on its own or at the behest of the broker has allowed the safeguards to be breached for obvious personal gains to the detriment of the integrity of the market and investors, its conduct appears to have aligned with the interest of the broker in expanding business to new areas for mutual benefit. GFPL cannot plead ignorance that it was not aware of the happenings in its account, in as much as the said account witnessed substantial volumes of transactions on account of investors coming through DKM. What more, all the transactions at Abohar went through the account of GFPL excepting for the 7-8 clients registered with SAM/SMC.2.16 In the wake of ad-interim order on October 5, 2005 barring GFPL and DKM from any securities market related activities, M/s. Ansh Bharati was created on October 6, 2005 as a proprietary concern of Shri Amit Mittal who is the brother of Shri Devender Mittal (director of GFPL). Also, hurriedly a franchisee agreement was entered on the same day viz. October 06, 2005 between SMC/SAM and M/s.Ansh Bharati to ensure continuity of business and also to tide over the rigors of the ad-interim order. To suggest that M/s. Ansh Bharati is an independent entity, unaffected by ad-interim order of SEBI is at once facile and facetious, since circumstances in which M/s. Ansh Bharati had its genesis are telltale enough to establish that it was set up to circumvent ad-interim order of SEBI and carry on business unhindered.
It is a flagrant violation through a devious arrangement and cannot be countenanced. What is more in evidence is the felt anxiety and need of SMC/SAM to continue the business in some form or other to retain the hold, in gross dis-regard of the directions in the ad-interim order meant for the protection of investors at Abohar.
2.17 In the present case, I note that, in order to increase their business, SAM/SMC have allowed their terminals at Abohar and closed their eyes for the misuse of the same by DKM and GFPL which had ultimately resulted in the defrauding of the genuine investors. Even after the interim order dated October 05, 2005, SMC had entered in to a franchisee agreement with M/s Ansh Bharati and it had continued the business of GFPL with SMC from October 06, 2005. The above instances would undoubtedly establish the fact that the all the parties (SMC/GFPL/ M/s Ansh Bharati/DKM) were hand in glove in the in the entire transactions and allowed the misuse of the terminals of SMC at Abohar which had resulted in the defrauding of the unsuspected investors. It is also felt that the regulatory concerns were overlooked by SMC/ GFPL/ DKM/ M/s Ansh Bharati in their unhindered expansion of their business. By doing so, they put the stock exchange mechanism at a risk. In view of the above, the replies/submissions of DKM/ GFPL/ M/s Ansh Bharati are devoid of any merits and thus can not be accepted.
2.18 Thus, the entire gamut of happenings has to be appraised in the context and circumstances in which they happened, so that the under-pinning factors highlighting the commonality of the shared interest among the constituents in expanding business with scant regard for regulatory concerns and norms and that too with impunity is not lost sight of.
2.19 In the facts and circumstances, it is fairly established that M/s Digital Stocks and its proprietor, Shri Dheeraj Kumar Madaan had violated the provisions of Regulations 3(a), 3(c) & 4(1) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. They also violated the provisions of Section 12 of Securities and Exchange Board of India Act, 1992. It is also established that M/s Ganpati Finsec Pvt.
Ltd. and its directors viz. Shri Devender Mittal, Smt. Ritu Mittal and Dr. K.C Mittal, have violated the provisions of Section 12 of Securities and Exchange Board of India Act, 1992. It is also established that M/s Ansh Bharati and its proprietor Shri Amit Mittal is found to have facilitated M/s Ganpati Finsec Pvt. Ltd. in circumventing the SEBI order dated October 05, 2005.
2.20 In view of the above, I hereby dispose off the present proceedings against M/s Ganpati Finsec Pvt. Ltd. including its directors viz. Shri Devender Mittal, Smt. Ritu Mittal and Dr. K.C Mittal and M/s Digital Stocks and its proprietor, Shri Dheeraj Kumar Madaan and M/s Ansh Bharati and its proprietor, Shri Amit Mittal with the following directions.
3.1 In view of the foregoing, I, in exercise of the powers conferred upon me by virtue of Section 19 read with Section 11(1), 11(4) and 11B of Securities and Exchange Board of India Act, 1992 and read with regulation 11 of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 2003 hereby pass the following directions: a) M/s Ganpati Finsec Pvt. Ltd. and its directors viz. Shri Devender Mittal, Smt. Ritu Mittal and Dr. K.C Mittal, M/s Digital Stocks and its proprietor, Shri Dheeraj Kumar Madaan and M/s Ansh Bharati and its proprietor, Shri Amit Mittal are restrained from accessing the securities market and they are also prohibited from associating with the securities market to buy, sell or deal in securities either directly or indirectly for a period of three years. The period of prohibition already undergone by M/s Ganpati Finsec Pvt. Ltd. and its directors viz. Shri Devender Mittal, Smt. Ritu Mittal and Dr.
K.C Mittal, M/s Digital Stocks and its proprietor, Shri Dheeraj Kumar Madaan vide Securities and Exchange Board of India order dated October 05, 2005 would be reduced from the said period of three years.
b) I also direct National Stock Exchange of India Ltd. (NSE) to settle the claims of investors of Abohar by utilising i) The funds lying in the account of M/s Digital Stocks/ Shri Dheeraj Kumar Madaan with M/s Indiabulls Securities Ltd., Member NSE. ii) The securities lying in the account of M/s Digital Stocks/ Shri Dheeraj Kumar Madaan already frozen by National Securities Depository Ltd./ Central Depository Services (India) Ltd., vide Securities and Exchange Board of India order dated October 5, 2005.
c) Central Depository Services ( India) Ltd. further directed to verify the ownership of shares lying in the demat account of Ganpati Finsec Pvt. Ltd. (having its demat account no. 1201911100000332 with SAM Global Securities Ltd., Depository participant of CDSL) and on satisfaction to ensure that the said shares are transferred in the demat account of respective clients.