M.S. Sahoo, Member

1. On noticing certain irregularities in the transactions in the shares that were issued through initial public offers (IPOs) made during the period 2003-2005, before their listing on the stock exchanges, the Securities and Exchange Board of India (SEBI), pending investigations, vide an ad interim ex-parte order dated April 27, 2006, which itself was a show cause notice, directed certain persons, including Mr. Dushyant Natwarlal Dalal (Dushyant), Mrs. Puloma Dushyant Dalal (Puloma) [wife of Dushyant] (hereinafter collectively referred to as "noticees"), Mr. Natwarlal Thakordas (Natwarlal) [father of Dushyant], and Mrs. Rasila Natwarlal (Rasila) [mother of Dushyant], not to buy, sell or deal in the securities market, including in IPOs, directly or indirectly, till further directions. After providing an opportunity of inspection of relevant documents relied upon by SEBI, considering the written submissions to the show cause notice, and hearing the noticees on November 19, 2007, it confirmed the interim directions against the noticees vide order dated September 09, 2008. It did not pass any direction against Natwarlal and Rasila as they had passed away in the mean time. It, however, froze their demat accounts, which were jointly held with Dushyant, till the passing of the final order.

2. The noticees challenged the confirmatory order of SEBI before the Honble Securities Appellate Tribunal (SAT). While hearing the parties to the appeal (Appeal No. 135 of 2008) on November 14, 2008, the Honble SAT noted that the investigation qua the appellant had concluded on November 11, 2008. It orally directed SEBI to issue show cause notice based on concluded investigation and dispose of the matter expeditiously.

3. Accordingly, SEBI issued a show cause notice dated November 28, 2008 (SCN) under Sections 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (SEBI Act). The SCN alleged that Dushyant provided finance to the key operators (KOs), namely, Mr. Purshottam Budhwani (Budhwani) and M/s. Sugandh Estates and Investment Pvt. Ltd. (SEIPL) to enable them to apply for shares in the retail category of 10 IPOs. On allotment, the applicants transferred the shares to the KOs, who, in turn, transferred the same to the demat accounts of Dushyant, Puloma, Natwarlal and Rasila. They also transferred the refund amounts in respect of those IPOs to the noticees. The SCN, therefore, alleged that the noticees, in collusion with the KOs, employed fraudulent, deceptive and manipulative practices to corner the shares meant for retail individual investors (RIIs) in 10 IPOs. They made unlawful gains of Rs. 4,94,19,379 on sale of such shares. It also alleged that these acts were in violation of Section 12A(a), (b), (c) of the SEBI Act and Regulations 3 and 4(1) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (PFUTP Regulations). Accordingly, it called upon the noticees to show cause as to why suitable directions under Section 11(4) read with Section 11 and Section 1 1B of the SEBI Act, including directions restraining them from buying, selling or dealing in securities in any manner for a suitable period of time and directions to disgorge Rs. 4,94,1 9,379, be not issued against them.

4. The noticees, vide letter dated December 17, 2008, sought inspection of documents. SEBI provided an opportunity of inspection of documents on January 14, 2009. During the inspection, the noticees asked for additional documents. SEBI provided those additional documents vide letter dated January 16, 2009. The noticees asked for further additional documents vide letter dated January 22, 2009. SEBI provided those additional documents also vide letter dated February 16, 2009. The noticees sought cross- examination of Ms. Nimisha Mayur Kadakia (Nimisha) and Budhwani, who had submitted to SEBI that the profits on sale of IDFC shares were shared between them and the noticees. SEBI, vide letter dated February 19, 2009, informed the noticees that their request for cross examination would be dealt with by the competent authority at a subsequent stage of proceedings and advised them to file their reply to SCN. However, no reply to SCN was received. Vide letter dated February 27, 2009, an opportunity of personal hearing was granted to the noticees on March 19, 2009 with an advice to submit reply, if any, to the SCN at the time of hearing. However, on the said date, the noticees failed to appear for the hearing. Nor was any reply to the SCN received. Vide letter dated March 20, 2009, another opportunity of hearing was granted to the noticees on April 02, 2009 with a reminder that they had not replied to the SCN despite lapse of four months. A letter dated March 17, 2009 was received from the noticees on March 20, 2009 seeking an adjournment of hearing till 2nd or 3rdweek of April, 2009 on account of indisposition of their Advocate. Vide email dated March 30, 2009, the noticees requested to keep the proceedings in abeyance till the disposal of the appeal pending before Honble SAT, and also sought further additional information / documents to enable them to respond to the SCN. Vide letter dated April 11, 2009, the noticees once again reiterated their request for additional documents. SEBI, vide letter dated April 16, 2009, clarified that all relevant findings of investigation / examination report pertaining to the noticees had been incorporated in the SCN and the noticees had inspected relevant documents and had been provided copies of documents sought by them. It also made clear that no document shall be relied upon by SEBI unless a copy of the same was provided to them. It, however, did not accede to the request to keep the proceedings in abeyance as there was no valid reason and justification to do so. It advised the noticees to cooperate with SEBI in complying with the directions of Honble SAT to conclude the proceedings expeditiously and urged them to file their reply to the SCN. It offered a final opportunity of hearing to the noticees on May 8, 2009 and specifically stated that no further extension of time shall be considered. The noticees appeared in person before me for hearing on the aforesaid date. At the time of hearing they filed their reply dated May 7, 2009 and sought time to file additional submissions, which was granted. They filed additional written submissions, including an affidavit, vide letter dated May 18, 2009.

5. I have carefully considered the SCN, and the written submissions dated May 7, 2009 and May 18, 2009. Table A presents a summary of transactions, as borne out from the SCN, based on which allegations have been made therein. Dushyant provided exact amounts of finance from his bank account 0601000008876 with HDFC Bank to enable the KOs to make a set of applications for shares in different IPOs. The KOs transferred the shares received on allotment from applicants to four demat accounts, which are held jointly by Dushyant, as first/second/third holder, with his family members, namely, Puloma, Natwarlal and Rasila. They also transferred corresponding excess amounts, over and above the allotment money, to Dushyant. For example, Dushyant transferred a sum of Rs. 5,46,87,500 by cheque to SEIPL towards application money for 1250 applications for Rs. 43,750 each in the retail category of ILFS IPO. He received 19,650 shares of ILFS, valued at Rs. 24,56,250 at issue price of Rs. 125, from SEIPL on July 26, 2005, the day before its listing on July 27, 2005. He received a refund of Rs. 46,31,250 through RTGS transfers. The balance amount of Rs. 4,76,00,000 (Rs. 5,46,87,500-Rs.24,56,250- Rs. 46,31 ,250) was retained by SEIPL for use in IDFC IPO. Thus, Dushyant received back the entire money he had provided for ILFS IPO in the form of shares and cash. The noticees undertook similar transactions in respect of other IPOs and received shares around the listing date. The product of columns 6 and 9, which indicates utilization of funds for each IPO equals the sum of columns 11 to 14, which indicates return of money, which equals the money provided by Dushyant to KOs in Column 3 of table A, except in case of IDFC and Gateway, where the amount actually used for IPO applications are Rs. 1 5,51,76,000 and Rs. 4,09,60,080 respectively.

6. Table B presents the unlawful gains made on sale of such shares. Since Dushyant, Puloma, Natwarlal and Rasila are members of the same family, and Dushyant, jointly with other three family members, holds the demat accounts, which were used to receive and sell shares, the SCN has considered their dealings in these shares together for the purpose of calculating unlawful gains. In case of IDFC IPO, Budhwani transferred 1,44,000 IDFC shares to the noticees, who sold these and made a profit of Rs. 49,03,200. At the instance of Dushyant, Budhwani sold 6,59,600 shares in the market and transferred 56,000 shares to Nimisha for sale, and the gains from sale of these shares were shared with Dushyant. Hence the calculation of unlawful gains takes into account the gains from transfer of these IDFC shares to the extent shared with Dushyant. In other IPOs, the calculation is simple, as transactions have happened directly between the noticees and the KOs. In the process, the noticees made a total unlawful gain of Rs. 4,94,1 9,379.

Table A: Transaction Details by the Noticees

KO

IPO

Amount (Rs.) provided by Dushyant

Issue Details

No. of Applicat ions made

Receipt of Shares and Refunds by Dushyant/Puloma./Natwarlal/Rasila

Balance with Kos (Rs.)

Issue Price (Rs.)

Retail Application Size

Retail Allotment Size

Receipt of Shares

Refund (Rs.)

Roll over (Rs.) for IDFC



No. of Shares

Amount (Rs.)

No. of Shares

Amount (Rs.)

No. of Shares

Value of Shares (Rs.)

1

2

3=(6*9)=

(11+12+13+14)

4

5

6 = (4*5)

7

8 =(4*7)

9

10

11=(4*10)

12

13

14

SEIPL

ILFS

5,46,87,500

125

350

43,750

50

6,250

1,250

19,650

24,56,250

46,31,250

4,76,00,000

0

IDFC

4,76,00,000

34

1,400

47,600

266

9,044

1,000

1,98,968

67,64,912

4,08,35,088

0

0

Sasken

13,65,00,000

260

175

45,500

25

6,500

3,000

7,200

18,72,000

13,46,28,000

0

0

FCS

6,97,50,000

50

900

45,000

100

5,000

1,550

24,600

12,30,000

6,85,20,000

0

0

Budhwani

Gateway

4,09,74,350

72

630

45,360

90

6,480

903

38,340

27,60,480

3,70,00,000

0

12,13,870

Provogue

12,90,72,000

150

320

48,000

40

6,000

2,689

8,000

14,16,000*

12,57,28,000

19,28,000

0

MSP

6,57,00,000

10

4,500

45,000

500

5,000

1,460

20,200

2,02,000

5,24,09,250

1,30,88,750

0

Nectar

7,20,00,000

240

200

48,000

25

6,000

1,500

13,500

32,40,000

2,10,36,110

4,77,23,890

0

IDFC

8,47,00,000 + Roll overs = 15,67,18,750

34

1,400

47,600

266

9,044

3,260

8,67,160#

2,94,83,440

12,56,92,560

0

15,42,750

Suzlon

8,64,14,400

510

96

48,960

16

8,160

1,765

15,532

79,21,320

7,90,00,000

0

-5,06,920@

* valued at Rs. 177 per share; # includes 7,23,160 disposed of through Budhwani; @ returned to Budhwani on February 13, 2006

Table B: Computation of unlawful gains by the Noticees

IPO

Date of Listing

Issue Price (Rs.)

Receipt of Shares from KOs

Sale of Shares

Unlawful Gain (Rs.) 10=8*(9-6)

Date of Receipt

No. of Shares

Valuation Price (Rs.)

Date of Sale

No. of Shares Sold

Sale Price (Rs.)

1

2

3

4

5

6

7

8

9

10

Gateway

31.03.05

72

31.03.05

38,340

72

11.04.05

675

125.87

36,362













12.04.05

2,000

127.72

1,11,440













26.04.05

30,000

142.85

21,25,500















5,665*

112.05

2,26,883

Provogue

07.07.05

150

07.07.05

7,160

150

07.07.05

8,000

247.95

7,83,600







08.07.05

840











MSP

18.07.05

10

18.07.05

20,200

10

18.07.05

20,200

15.61

1,13,322

Nectar

18.07.05

240

18.07.05

13,500

240

18.07.05

11,100

266.73

2,96,703















2,400*

275

84,000

ILFS

27.07.05

125

25.07.05

19,650

125

11.08.05

1,223

206.9

1,00,164













02.09.05

10,000

208.16

8,31,600













16.09.05

613

221.63

59,234













16.09.05

300

221.63

28,989

IDFC#

12.08.05

34

08.08.05

1,96,574

34

12.08.05

1,98,968

70.24

72,10,600







12.08.05

2,394



12.08.05

1,44,000

68.05

49,03,200







13.08.05

1,44,000





5,00,000

61 .00@

55,00,000















1,59,600

65.14@

24,65,158















7,560*

69.5

2,68,380















56,000

67.85@

18,96,000















2,39,400

37 @

88,57,800

Sasken

09.09.05

260

03.09.05

7,150

260



7,200

464.55

14,72,760







09.09.05

50











FCS

21 .09.05

50

20.09.05

24600

50



24600

332

69,37,200

Suzlon

19.10.05

510

18.10.05

14120



19.10.05

5000

673.6

8,18,000









1412



24.10.05

1400

645.46

1,89,644













19.10.05

4000**

692.85

7,31,400















3600**

692.85

6,58,260















1412**

525

21,180

Shoppers



238

***

***

238

23.05.05

15000

372.60

20,19,000













24.05.05

5000

372.60

6,73,000

Total







Total

4,94,19,379

* shares notyet sold and lying in demat accounts, valued at the closingprice on the listing day;

** Off market sale;

*** Magnum Equity, broker ofDushyant , received sharesfrom Budhwani and thereafter sold these shares in account ofDushyant; @ Profits on sale of shares by Budhwani and Nimisha.

7. A summary of submissions made by the noticees is as under:

i. They had extended loans to SEIPL and Bhudwani, who had always honoured their commitment to repay the loans, on commercially recognized and accepted terms, on principal to principal basis. The deployment of loan was at the discretion of borrowers and they did not have any control over or knowledge of the end use. They paid for the shares transferred by KOs to them at IPO price (P-16 of their reply dated May 7, 2009).

ii. It has been alleged that Budhwani sold 6,59,000 IDFC shares on the instruction of Dushyant. The document relied on for this allegation, that is, the letter dated May 16, 2006, no where states this. It has also been alleged that Budhwani transferred Rs. 1.95 crore and Rs. 55 lakh from the sale proceeds of the above shares. Budhwani paid the said amounts due on account of loans and not by way of sharing profits from sale of shares. These amounts can be added to the gains of the noticees only if Budhwani affirms on oath and supports by documentary evidence that he shared the gains with the noticees. They need to be provided an opportunity to cross examine Budhwani.

iii. It has been alleged that Budhwani transferred 56,000 IDFC shares to Nimisha who, in turn, sold the shares for Rs. 38 lakh and transferred the entire amount to the noticees. The noticees received the amount towards running account of Nimisha and not towards profit on sale of shares. The profits from sale of shares can be added to the gains of the noticees only if Nimisha affirms on oath and supports by documentary evidence that she shared the gains with the noticees. They need to be provided an opportunity to cross examine Nimisha.

iv. It has been alleged that at the instructions of Dushyant, Budhwani transferred 2,39,400 IDFC shares @ Rs. 37 to Chhadva family and passed on the entire sales consideration of Rs. 88,5 7,800 to Dushyant. The sale proceeds include the cost of these shares @ Rs. 34 amounting to Rs. 81,39,600 and the entire amount of Rs. 88,57,800 cant, therefore, be treated as their gain.

v. In the interim order, the computation of unlawful gains was made based on closing price on listing day. However, in the SCN, actual prices have been used. By this, SEBI is transgressing the authority of law.

vi. SEBI has declined to accede to their request to provide the information relating rules, regulations etc. of opening and operation of bank accounts, opening and operation of demat accounts, IPO applications, etc. The request for an adjournment of hearing fixed on May 8, 2009 was also not conceded. These amount to violation of principles of natural justice.

vii. SEBI has erred in law by initiating adjudication and two Section 1 1B proceeding simultaneously.

viii. SEBI has no powers to initiate disgorgement proceedings.

ix. They are neither intermediaries registered with SEBI nor persons associated with the securities market and, therefore, SEBI has no jurisdiction over them.

x. The cause of action arose on October 19, 2005 when the Suzlon got listed. However the SCN was issued on November 11, 2008 beyond the limitation period of 3 years. Therefore, the SCN is not sustainable.

xi. CBI did not find any fraudulent activity on the part of the noticees. SEBI should conclude its proceedings based on the CBI findings.

xii. A broad macro level view needs to be taken. The depositories, banks, merchant bankers, registrars to issue, etc. failed simultaneously and they have been let off lightly. The gains made by the noticees were not by design, but by default on the part of various agencies. In this frame of reference, holding the noticees responsible for alleged irregularities is unsustainable. The direction proposed in the SCN is disproportionate to the gravity of the matter and does not take into account mitigating factors.

8. I find that the noticees have not contested the basic facts about the transactions, as alleged in the SCN. While admitting the facts, they pointed out certain inaccuracies in the SCN regarding dates of disbursement of loan in IPOs and carry forward of refunds held with KOs from one IPO to another. I am not examining these as these do not disturb the essence of the facts and the resultant charge. They have, however, raised serious objections on inclusion of certain amounts in the gains made by them and the authority of SEBI to initiate the proceedings against them. I will, of course, be examining these. Subject to this, I conclude that the noticees undertook the transactions as stated in table A, made profits (or unlawful gains) as stated in table B, and such transactions deprived RIIs of their legitimate share in allotment of 10 IPOs.

9. The issues that require determination, therefore, are:

a. Are the noticees mere money lenders

b. Are the profits (unlawful gains) of the noticees computed correctly

c. Is any principle of natural justice been violated

d. Does SEBI have authority to proceed with this proceeding

10. Are the noticees mere money lenders

a) A money lender lends money against security and proper documentation and receives back money with interest. In the instant case, the noticees provided an aggregate of about Rs. 85 crore for these IPOs without any security and documentation. They received back the money in kind (shares). The striking features of these transactions are: the money was provided to KOs around the closure of the IPO, the money provided exactly matched the amount payable on a set of applications under the retail category, most of the shares received on allotment were transferred in lots matching allotments to RIIs, the shares were transferred in off-market around the date of listing, the shares were transferred at the IPO price when the KOs had option to sell them at a substantial higher price in market, excess money over and above the allotment amount were transferred back to the noticees, etc. The timing and manner of movement of shares and funds from and to KOs, by no stretch of imagination, can be associated with normal lending of money.

b) The precise timing of movement of the precise amounts of funds and of the precise number of shares between the KOs and the noticees occurring repeatedly across IPOs and KOs over time, clearly suggests that noticees had control over the KOs and also the end use of funds and were aware of the modus operandi of the KOs. The ledger produced by noticees explicitly recognizes the end use of the funds provided to the KOs. It has entries that acknowledge the name of the IPO in the header of the page itself. The noticees received IPOs shares at the issue price even after the date of listing. For example, Dushyant received 38,340 Gateway shares at the issue price of Rs. 72 on the listing day i.e. March 31 2005, when the price opened and closed at Rs. 90 and Rs. 1 12.05 respectively. Such a pattern of dealings with the KOs cant be undertaken unless there is a prior understanding with them.

c) There is a pattern in the receipt of shares by the noticees from the KOs. For example, Dushyant received 1,98,968 shares of IDFC from SEIPL. This corresponds to the allotment to 748 applications in the RII category. Had the noticees applied in individual capacity, they could have got an allotment of 266 IDFC shares each. However, they could get 1,98,968 IDFC shares by financing 748 applications under the RII category. The DIP Guidelines envisage an investor to apply for shares for a value up to Rs. 1 lakh. These do not envisage an investor funding 748 applications each up to Rs. 1 lakh, which defeats the solemn objectives of such provisions. If a person does so, it deprives genuine RIIs from getting their fair share in allotment. The noticees did so by making available the finance to KOs for making multiple applications for an aggregate value in excess of Rs. 1 lakh with the full knowledge of prohibition of the same. Had they not done this, these 1,98,968 IDFC shares would have been available for allotment to RIIs. Thus, the noticees clearly cornered the shares meant for RIIs and in the process, deprived them of their rightful share in allotment in these IPOs.

11. Are the profits (unlawful gains) of the noticees computed correctly

a) In nine of the ten IPOs in which unlawful gains have been allegedly made by noticee s, there is no dispute on the facts of amounts paid and shares received. Therefore, the profits earned in those IPOs would be deemed suspect given my findings above.

b) The noticees have vehemently contested transfers of Rs. 1 .95 crore and Rs. 55 lakh from Budhwani towards sale proceeds of 6,59,000 IDFC shares and inclusion of corresponding profits of Rs. 55,00,000 and Rs. 24,65,158 in the profits made by them. Similarly, they have contested transfer of Rs. 38 lakh from Nimisha towards sale proceeds of 56,000 IDFC shares and inclusion of corresponding profits of Rs. 1 8,96,000 in the gains made by them. A summary of these transactions is presented below:

Sold by

No. of

Sale Proceeds

Profits

Share of Noticees in



Shares sold

(Rs.)

(Rs.)

Profits (Rs.)

Budhwani

5,00,000

3,04,13,450

1,35,00,000

55,00,000

Budhwani

1,59,000

1,02,82,254

49,69,944

24,65,198

Nimisha

56,000

38,00,000

18,96,000

18,96,000

I find that the noticees provided Rs. 15,67,18,750 to Budhwani. Out of this, Bidhwani used Rs. 15,51,76,000 for making 3,260 applications for 1,400 IDFC shares each. Budhwani received 8,67,1 60 (3,260*266) shares and refund of Rs. 12,56,92,560 after allotment. He passed on the entire refund amount to the noticees. Of the shares received, he transferred 1,44,000 shares to the noticees and 56, 000 shares to Nimisha and sold 6,59,000 shares in the market at the instance of the noticees. The details of these transactions are as under:

Funds provided by Dushyant + Roll over Less: Balance with Budhwani

Balance

Rs.1 5,67,18,750 Rs.15,42,750 Rs.15,51 ,76,000

No. of IPO applications made from this money

3,260

Amount deposited with applications (3,260 * Rs.47,600)

Rs.15,51 ,76,000

No. of shares received by Budhwani on allotment (3,260 *266 shares)

8,67,1 60

Allotted value of shares (8,67,160 shares * Rs 34 issue price)

Rs.2,94,83,440

Refund received by Budhwani (Rs.15,51,76,000Rs.2,94,83,440)

Rs.12,56,92,560

Amount returned by Budhwani to Dushyant

Rs.12,56,92,560

Disposal of Shares:



Sold by Budhwani

6,5 9,000

Transferred to Noticees

1,44,000

Transferred to Nimisha

56,000

Held by Budhwani

7,560

Total

8,67,160

The noticees have not contested the movement of money and shares relating to transactions in IDFC shares. They have only contested the sharing of profit by Bhudwani and Nimisha with them. What is material is financing for allotment of 8,67,160 IDFC shares and the gains arising from disposal of these shares. If the fact of sharing of profit is ignored, the entire gains from sale of such shares would be considered as the gains of the noticees. However, according to the SCN, the gains have been shared between the KOs and the noticees and, therefore, only the part of the profits transferred to the noticees has been included in the gains made by them. I have, therefore, no reason to exclude these amounts from the gains made by the noticees. I, however, notice that notional gains in respect of some shares which are still held in demat account of the noticees have not been taken into account in the SCN. For example, 7514 ILFS shares are lying in the account of the noticees and the notional gains in respect of these have not included in the gains calculated in Table B.

c) The noticees have sought exclusion of cost amounting to Rs. 81 ,39,600 from sale proceeds of Rs. 88,57,800 transferred by Chhadva family to them. The SCN makes it clear that the noticees did not provide finance for these shares and hence the claim of the noticees is justified. Therefore, I am inclined to exclude this amount completely from the gains made by the noticees.

d) In the interim order, closing prices on the listing day was used to arrive at the unlawful gain. The SCN, however, has calculated the unlawful gain based on the actual prices where shares have been disposed of. In case of a very small portion of shares which has not yet been disposed of, the closing price on the last trading day has been used. This approach leads to more accurate gain / loss and is most appropriate for disgorgement purpose.

e) Taking the above into account, the unlawful gain of Rs. 4,94,1 9,379, as estimated in the SCN, is reduced by Rs. 88,57,800. Hence the noticees made an unlawful gain of Rs. 4,05,61 ,579.

12. Is any principle of natural justice been violated

a) I find that the noticees have been provided an opportunity of inspection as well as a large number of documents sought by them, as elaborated in Para 4 above. SEBI, vide letter dated April 16, 2009, clarified that no document shall be relied upon by SEBI unless a copy of the same was provided to them. I find that all the information / documents relied upon by SEBI for the charges in the SCN have been provided to the noticees and that no document, which has not been provided, is relied upon in this proceeding. I note that the noticees made unreasonable demand for a large variety of documents. For example, they asked for a copy of authority vested in Mr. S. Ramann to issue the SCN. They also asked for rules and regulations relating to opening of bank accounts and demat accounts. These are not relevant for the issue in hand. I also find that the noticees sought repeated adjournment of hearings. It was postponed from March 19, 2009 to April 2, 2009 and then to May 8, 2009. The hearing could not have been postponed indefinitely. Therefore, I find that there is no violation of principles of natural justice, as contended by the noticees.

b) I find that SEBI relied upon the statements of Budhwani and Nimisha to arrive at the understanding between them and the KOs. Even without the statements, the understanding is clear from the movement of money and off-market transfers of shares. The statements are only corroborative. A careful examination of numbers indicates sharing of profits in many of the IPOs, though it has taken different forms. In case of IDFC shares, Budhwani transferred Rs. 1 .95 crore out of total sale proceeds of Rs. 3.04 crore obtained from sale of 5,00,000 shares (Table under Para 11(b)). In case of ILFS, SEIPL obtained an allotment of 62,500 shares from the funds provided by the noticees. However, it transferred 19,650 shares to the noticees and retained the balance 42,850. The noticees and SEIPL enjoyed profits from 19,650 and 42,850 shares respectively. Therefore, the statements relied upon in the SCN reduce the disgorgement liability of the noticees. In the absence of this statement, the noticees would have been liable for the entire profits on sale of all the shares purchased with the funds provided by them. Therefore, I find that there is no need for cross examination of Budhwani and Nimisha.

13. Does SEBI have authority to proceed with this proceeding

a) I note that SEBI Act empowers SEBI to initiate appropriate proceedings like 1 1B, enquiry, adjudication, prosecution etc., as may be warranted, to deal with the violations of the provisions of SEBI Act, Rules and Regulations made there under. These proceedings have different objectives. For example, adjudication penalizes the accused by way of monetary penalty, while 1 1B proceedings enable directions in the interest of the investors and orderly development of securities market. In the instant case, SEBI has initiated two proceedings - 1 1B and adjudication - against the noticees. It has not initiated another 1 1B proceeding when one 11B proceeding is pending, as claimed by the noticees.

b) I note that the noticees, in concert with the KOs, cornered IPO shares meant for RIIs by providing finance for IPO applications and thereafter receiving corresponding shares allotted in the IPOs in their demat accounts through off market transfers from KOs. Therefore, they are persons associated with the securities market and subject to enforcement actions under the securities laws. In this regard, I refer to the judgment of the Honble High Court of Gujarat in the matter of Karnavati Fincap v. SEBI (1996) 10 SCL 5 (GUJ) which has held -

....In ordinary meaning, the persons associated with the securities market would include all and sundry who have something to do with the securities market. The words "persons associated with the securities market" are of much wider import than intermediaries. It is inconceivable to think that a buyer or seller of a scrip is not a person associated with securities market, where or through which he transacts his business, whether as trader or as investor, of selling or buying the required scrip.

The words "all and sundry" above would include the noticees who have funded the KOs to corner the shares meant for RIIs. Further the fact that the noticees have received shares in their demat accounts from KOs in consequence of the money provided to them cannot be ignored. After co-relating the facts of the case with the above judgment, it is very clear that the noticees are persons associated with the securities market as stated under Section 11(4)(b) of SEBI Act. Further, it is preposterous for the noticees to argue that they should not suffer the liability for the unlawful activities just because they are not persons associated with securities market.

c) I refer to the case of Bank of Baroda v. Securities and Exchange Board of India 2000 (038) CLA 226 SAT wherein it was held that the powers under Section 1 1B to issue directions are wide enough to include any measures in the interest of securities market, including disgorgement. The SAT held as under:

And it is also well settled that where legal rights have been invaded, and a statute provides for a general remedy asprovidedfor in Section 11 read with 11B of the SEBI Act, 1992 (" the Act"), the regulator may use any available remedy to make good the wrong done. Such remedial actions could include rescinding a fraudulent sale, secure disgorgement or order restitution. Since each of these remedies are remedial and equitable, it is open for the regulator to order these in the interest of the investing public and in the interest of a secure capital market.

While disposing of the appeal No. 147/200 6 in the matter of NSDL v. SEBI related to the IPO irregularities, Honble SAT, vide its order dated November 22, 2007, observed:

We do not think that the Board could direct the appellants to disgorge the aforesaid amount withoutfirst determining their guilt and whether they had made any illegal gains.

This makes it clear that SEBI could direct the noticees to disgorge, if they are found guilty.

d) I note that SEBI and CBI are different agencies having different responsibilities and objectives. Their focus and scope of investigations are different. It is possible that these agencies arrive at different findings. If they were to arrive at the same finding, there would not be need for two agencies and separate investigations by them. Therefore, I do not agree with the noticees that the findings of CBI should be taken into account by SEBI for disposal of quasi-judicial proceedings under the SEBI Act, as much as they would not like the findings of SEBI to be taken into account by CBI.

e) I do not agree with the argument of the noticees that the SCN issued in 2008 is not sustainable. This SCN is in continuation of the proceedings that began with the interim order dated April 27, 2006. Further, I note that the noticees have partly contributed to the delay. In fact, they have major contribution to delay in disposal of this SCN.

14. The noticees have submitted in their affidavit that D. N. Dalal HUF extended the loan. However, I find that the money have moved from the account of Dushyant with HDFC Bank. I also find that the shares have been credited to and debited from the demat accounts which are held by Dushyant himself or by Dushyant jointly with other family members. The sale proceeds have been received in the accounts of Dushyant as well as of other family members. In some cases, the sale proceeds have moved to the account of Dushyant after its receipt in the accounts of the family members. This makes it clear that all the family members acted together in the game plan hatched by Dushyant. Therefore, the profits made from these transactions have been taken together.

15. In the facts and circumstances of the case, I find that the noticees manipulated the demand for shares in the RII category and thereby distorted the market integrity. They received the shares from the KOs as per the prior understanding with them. By doing this, they deprived the RIIs of their legitimate share in the allotment in the IPOs and made an unlawful gain of Rs. 4,05,61 ,579 to the detriment of the RIIs. I, therefore, conclude that the noticees employed fraudulent, deceptive and manipulative practices to corner the shares meant for RIIs in the aforesaid IPOs stated in tables above, and made unlawful gains by selling the shares so cornered. Hence, I hold that the noticees have violated Section 12A(a), (b) and (c) of the SEBI Act and Regulations 3 and 4 (1) of the PFUTP Regulations.

16. I note the mitigating factors brought up by the noticees and the proportionality rule for punishment. I do not find it relevant in this case which is not a penal proceeding. The interest of the market and of the investors requires that such entities are not allowed to participate in the market and unjustly enrich themselves at the cost of investors. Such acts of serious irregularities threaten the market integrity and orderly development of the market and calls for regulatory intervention to protect the interest of investors. Accordingly, in exercise of the powers conferred upon me under Section 19, read with Sections 11, 11(4) and 11B of the SEBI Act, 1992, and after taking into account the period of prohibition already undergone by the noticees pursuant to the interim order, I hereby issue the following directions:

a) The noticees [Mr. Dushyant Natwarlal Dalal (PAN AAAPD 5859Q) and Mrs. Puloma Dushyant Dalal (PAN AAEPD 2909B)] shall not buy, sell or deal in the securities market in any manner whatsoever or access the securities market, directly or indirectly, for a period 45 days from the date of this order; and

b) The noticees shall disgorge the unlawful gain of Rs. 4.05 crore (rounded off from Rs.4,05,61 ,579).

c) The noticees shall also pay Rs. 1.95 crore (rounded off from Rs. 1,94,69,558), being the simple interest at the rate of 1 2% per annum for 4 years (2005-09) on the unlawful gain Rs. 4,05,61,579.

d) The noticees shall pay the above amount of Rs. 6 crore (Rupees six crore) within 45 (forty five) days from the date of this order by way of crossed demand draft drawn in favour of "Securities and Exchange Board of India", payable at Mumbai.

e) In case the aforesaid amount Rs. 6 crore is not paid within the specified time, the noticees shall be restrained from buying, selling or dealing in securities market in any manner whatsoever or accessing the securities market, directly or indirectly, for a further period of seven years, without prejudice to SEBIs right to enforce disgorgement.

17. This order shall be served on all recognized stock exchanges and depositories to ensure that the noticees are not allowed to undertake transactions as prohibited in Para 16 above.

18. This order shall come into force with immediate effect.