TMI Blog2010 (7) TMI 1221X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 1996, and SEBI Circular No. D CC/FITTC/Cir-15/2002 : MANU/SDCD/0003/2002 dated 27 December, 2002, (2004) 9 Comp LJ 68 (St.) and (d) Clauses A(1), A(2), A(3), A(4) and A(5) of the Code of Conduct for Stock Brokers read with Regulation 7 of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. 1.1. The SCN called upon the noticees to show cause as to why directions in terms of section 11(4) and 11B of the SEBI Act, 1992, including debarment for an appropriate period, should not be issued. 2. Parsoli is a stock broker of NSE and BSE. It is also a depository participant of CDSL. Its shares are listed on BSE. Mr. Zafar Yunus Sareshwala and Mr. Uves Yunus Sareshwala are its managing director and joint managing director respectively. Pinnacle Shares Registry Private Ltd. (Pinnacle) is its Registrar and Share Transfer Agent (RTA).There was no reply to the SCN. The noticees, however, appeared for personal hearing on 24 May, 2010 when they made an unsigned written submission. I have carefully considered the SCN, oral as well as unsigned written submissions and other material available on records, and accordingly proceed to dispose of the proceedings. 3. The SCN makes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was substantial difference between the signatures on transfer documents and those on the specimen signature cards. (e) The alleged fraudulent transfers took place in 2005. Till date no shareholder of Parsoli, including the shareholders mentioned in the SCN, has ever made any complaint to Parsoli,(sic) SEBI, police or any judicial forum about any fraudulent transfer. (f) Parsoli is concerned with fake shares. It is aware that 80 people are holding fake shares and it has sent legal notices to them vide letters dated 30 December, 2008 and 16 June, 2009. It has lodged a police complaint on 8 September, 2008. (g) The alleged fraudulent transfers mentioned in the SCN do not pertain to the activities of Parsoli as a Broker or DP. 5. The noticees have not disputed the transactions. The undisputed fact is that the noticees verified transfer documents and approved transfers of 80,800 shares, belonging to 252 shareholders, in favour of 22 promoter/front entities even though there were severe deficiencies in transfer documents. Based on this fact and the evidences on record, the SCN alleges that the noticees introduced 80,800 fake shares and fraudulently transferred these. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for transfer in his favour. This means that the noticees only introduced and tendered fake shares for transfer in favour of 22 promoter/ front entities. If they were not to introduce fake shares, there was no need for them to assume the responsibility to scrutinise the genuineness of share certificates and to undertake to indemnify the persons aggrieved by transfer of shares. Further, I find from numerous instances cited in the SCN that the noticees transferred and dematted fake shares when they had in possession the genuine shares. For example, Parsoli received request for demat of 1500 genuine shares from Mr. Arab Ahmed Bharuchi on 14 July, 2005. While this demat request was kept pending the fake shares corresponding to the said 1,500 genuine shares of Mr. Bharuchi were transferred to promoter, Mr. Talha Yunus Sareswala on 19 July, 2005, and these fake shares were dematted on 13 August, 2005. After fake shares were dematted, the request for demat of genuine shares was rejected on 17 August, 2005 on the ground of 'signature mismatch'. The noticees would not transfer fake shares when they had genuine shares in possession unless such fake shares were introduced by them. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rifying signature for transfer of shares and scrutinising the shares certificates received for transfer for their genuineness. It did not hand over the specimen signature cards to its RTA, which had asked for the same. It refused to provide the same as they were in a torn condition. I, however, find from the records that SEBI officials visited the company and found these cards in good condition. Thus, the reason given by the noticees is not valid. In any case, if the law requires certain things to be done in a particular manner, it has to be done in that manner only. The noticees cannot carve out any exception on their own. Further, it is difficult to accept that the noticees could take better care of the torn documents than a SEBI registered RTA would. Therefore, I find that the noticees, by retaining the specimen signature cards with themselves, failed to consolidate all the matters and records related to share transfers at single point, which enabled them to undertake fraudulent transfer of shares as concluded in para 5 above. Thus, the noticees violated the provisions of regulations 53A of the SEBI (Depositories and-Participants) Regulations, 1996, and SEBI Circular No. D C:C/F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reholders by providing their own shares. Vide its letter dated 11 August, 2008, however, it submitted: 'Mr. Mukhtar Kothawala, Mr. Yunus Lokhandwala, Mr. Ashfaque Sareshwala and Mr. Abdul Kader Sareshwala were never involved in any compensation. They have only helped us during riot face of'2003-04.' However, the fact is that the accounts of four promoter/front entities, namely, Mr. Gulamrasul Mohiuddin Bombaywala, Mr. Talha Yunus Sareshwala, Mr. Mohammed Alibhai Kothawala and Mr. Iftekhar Mohammadyusuf Mansun, were debited to compensate the 252 genuine investors. 7.4. Pinnacle had asked for specimen signature cards from Parsoli. However, vide letter dated 16 August, 2005, Parsoli declined to provide the same stating: 'Signature record is with the company and as it is on torne condition and not properly maintained and as such it is difficult/problematic to hand over the same to R T'. Parsoli has reiterated this before me at the time of hearing. However, vide letter dated 11 August, 2008, Parsoli stated that it has no record of any letter received from Pinnacle asking for specimen signature cards. 7.5. The noticees did not provide information pertaining to n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... really counter the charges made against them. Nevertheless, I have examined the same in this paragraph. 8.1. The noticees have stated that they did not part with signature cards as those were in torn condition and it was at most an inadvertent error. I, however, find that neither the signature cards were in torn condition nor was it an inadvertent error. The investigation has found that these cards were not in torn condition. It was not an inadvertent error as Parsoli clearly refused to part with these cards even though it was asked to do so by the RTA and it undertook to compensate if any person suffers in the process of share transfers. 8.2. The noticees have submitted that there are no complaints from investors. I, however, find that the investigation was initiated based on complaints received from the shareholders of Parsoli regarding rejection of dematenalisation/share transfer requests by the company. As on 15 May, 2010, there were 13 complaints each pending with CDSL and NSDL. Further, as per the information provided by Pinnacle in respect of the said 252 shareholders, 176 shareholders did not get the dividend that was declared on 15 May, 2007 and 14 November, 2007. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of 'no mens rea, no penalty'. For breaches of provisions of SEBI Act and regulations, according to us, which are civil in nature, mens rea is not essential. On particular facts and circumstances of the case, proper exercise of judicial discretion is a must, but not on a foundation that mens rea is an essential to impose penalty in each and every breach of provisions of the SEBI Act. 8.5. The noticees have submitted that they compensated 252 shareholders to avoid lengthy and expensive legal process. I, however, find from records, which has not been disputed by the noticees, that they compensated the 252 shareholders only after satisfying themselves that they were genuine shareholders. I also find from records, which has not been disputed by the noticees, that they had undertaken to indemnify anybody who suffers loss on account of transfers made by Parsoli. Further, I note that the noticees did not compensate the genuine shareholders; they only arranged compensation from four entities. Why should these four entities oblige the noticees to enable the latter to avoid expensive legal process? They did so because they were beneficiaries of fake shares introduced and fraudu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fake shares is the worst kind of fraud that can be perpetrated in securities market as it converts the securities market to a market for fake shares. The fraudulent transfer of shares to promoter / front entities, that too, by a listed company, which is a registered intermediary, and its managing director and joint managing director, who are promoters of the company, by a carefully crafted strategy, is the worst damage to the integrity of securities market and the confidence of investors. Equally damaging is the deliberate non-cooperation and submission of false and misleading information by a listed company, which is a registered intermediary. The continued participation of the noticees poses a serious threat to orderly securities market and safety of investors. The ends of justice would be met if the noticees are restrained from causing any further damage to securities market and investors as well as the existing shareholders are given an opportunity by the promoters to exit the company. 12. In view of the foregoing, I, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11(4) and 11B thereo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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