BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI

Appeal No. 83 of 2012
Date of Decision: 11.05.2012

Rahul H. Shah
66/C Motiwala Building, 2nd Floor,
August Kranti Marg, Nana Chowk,
Mumbai – 400 036.

                  …Appellant   

Versus

Securities and Exchange Board of India
SEBI Bhavan, Plot No.C4A, G Block,
Bandra Kurla Complex,
Bandra (East), Mumbai – 400 051.

                  …Respondent  

Mr. Jagdish J. Bhatt, Advocate with Mr. Pratham V. Masurekar, Advocate for the Appellant.
Dr. Poornima Advani, Advocate with Mr. Ajay Khaire, Advocate for the Respondent.
CORAM : P. K. Malhotra, Member & Officiating Presiding Officer (Offg.)
S.S.N. Moorthy, Member
Per : S.S.N. Moorthy

The present appeal has been filed against an order passed under section 11 of the
Securities and Exchange Board of India Act, 1992 (for short the Act) by the whole time
member restraining the appellant from buying, selling or dealing in the securities market or
accessing the securities market directly or indirectly for a period of one year from the date of
the impugned order. The appellant is an individual who applied for the allotment of
preferential issue of shares of Datas oft Application Software (India) Ltd. (the company).
The charge leveled against the appellant, in short, is name lending which resulted in
facilitating G.S. Sridhar and his group of companies in making an application in the
preferential allotment of the shares of the company. The whole time member concluded that
the appellant had violated regulation 6 of the Securities and Exchange Board of India
(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market)
Regulations, 1995 (hereinafter referred to as FUPT Regulations) and hence the above
mentioned directions were issued.

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2. The facts of the case are briefly the following. The Board conducted investigation s
   in the affairs of the allotment of preferential issue of equity shares of t he company for the
   period November 6, 2000 to January 25, 2011. During investigations it came to light that
   one Hemendra Shah and his family members lent their names to G.S. Sridhar group for
   making investments in the preferential issue of the company. I t was alleged that the name
   lending and consequent investment of funds was for the purpose of gaining control and
   management of the company by Sridhar group. 41 entities applied for preferential allotment
   of the shares of the company out of which 25 appli ed for a mere 1,50,000 shares and paid
   the application money of 4,05,000. The remaining 16 applicants applied for 1,18,50,000 shares paying 3,19,95,000 towards application money. Out of the above , application
   money in respect of 74,31,000 shares amounting to ` 2,00,63,700 was paid through cheques
   issued from the account of M/s. Shalibhadra Securities Ltd. Tracing the genesis of the funds
   relating to the cheques issued by M/s. Shalibhadra Securities Ltd it was noticed that

1,00,77,500 was issued from the account of M/s. Narven Finance and Investment s Ltd and 1,02,00,000 from that of M/s. Vision Technologies (India) Ltd. On enquiry, t he latter
amount of 1,02,00,000 was found to have originated from M/s. Burlington Financ e Ltd., Kolkata. The analysis of the source of funds revealed that Sridhar group had used the names of a few entities through Shalibhadra Securities Ltd. for making application for the allotment of preference shares . The appellant , Shri Rahul H. Shah, is one of them , who paid an amount of 19,98,000 through a cheque drawn on Central Bank of India, Fort, Mumbai. It
was noticed that applications made by 16 entities were forfeited by the company because of
default in payment of call money. The appellant i s one among them. However, the fact
remains that the appellant had made an application for allotment of 7,40,000 shares in the
preferential allotment. A common show cause notice was issued to the following entities on
December 31, 2009 – Shalibhadra Secu rities, Hem endra Shah, Lalit C. Mehta, Sulochana
Shah and Rahul H. Shah. The allegation, as set out in the show cause notice , is that
Shri Hemendra Shah and his family members lent their names to Sridhar group for making
investments in the preferential allotment of shares of the company , thus indirectly helping
Sridhar group to obtain control and management of the company. The appellant replied to
the show cause notice on February 16, 2010 denying the allegations. An opportunity of
personal hearing was also granted. After considering the contentions of the appellant the

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whole time member issued a direction under section 11 of the Act r estraining the appellant
from dealing in securities market in whatever form for a period of one year. The main thrust
of the order of the whole time member is that name lending is a fraudulent action and the
proceedings are meant to be an example for people who indulge in name lending.

3. The appellant’s learned counsel stoutly opposed the conclusion drawn by the whole
   time member. It was argued by him that the appellant did not involve himself consciously in
   making the application for the preferential issue since he was a student at the relevant time
   and his father had acted in whole episode directing him to apply for the shares in the
   impugned preferential issue. With reference to the preferential issue , per se, it is contended
   that it did not materialize on account of default in payment of application money and so
   there was no room for any manipulation. The appellant had not invested his funds with full
   knowledge of the consequences of the action and the mere application for shares did not
   have any impact on the market, let alone any fraud. The issue was never listed and so there
   was no possibility of control and management of the company by Sridhar group as alleged
   by the whole time member and so the role of the appellant in the alleged fraudulent ac tion is
   totally nil. According to the appellant , the whole scheme was masterminded by his father
   and he had no initiative or involvement in the process and he was not connected with any
   market operations. It is also submitted by the appellant’s learned counsel that there has been
   inordinate delay in the issue of show cause notice and on this count itself there is no
   justification for any penal action. It is also contended by him that provisions of section 11
   are not meant to be punitive in character and so the resort to the above provisions by the
   whole time member is not legally sustainable . In short , the appellant’s learned counsel
   would submit that the appellant’s role is very insignificant in the whole scheme of things
   compared to Sridhar, Shal ibhadra and Hem endra Shah and the impugned order is wholly
   unjustified.
4. The learned counsel for the Board defended the order of the whole time member
   holding the view that name lenders deserve appropriate punishment since they indirectly
   harm the purity of t he market. It is submitted by the learned counsel for the Board that
   ‘fraud’ as defined in FUTP regulations is of wide amplitude and the whole time member has
   taken a proper s tand in purifying the market of such elements and giving a warning so that
   future frauds of this nature are avoided. It is pointed out that the share application, which

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was characterized as innocent by the appellant , was in fact an action by a few front entities
and action against such front entities is fully justified since they are fraudulent in nature.
With reference to the transaction of funds it is pointed out that it is not a case of borrow al of
funds by the appellant , but routing of the funds of Sridhar group through circular
transactions and this was resorted only to avoid the normal process of law. It is submitted
that the appellant wa s 21 years old during the relevant period and he has personally signed
the application for preferential allotment. It was also mentioned that the application for
preferential allotment indicated the ‘occupation’ of the appellant as “ business” and so the
contention that he was and not conversant with commercial transactions is not justified.

5. We have considered the arguments of both the parties. As mentioned above , the
   only charge that is leveled against the appellant in this case is that of name lending. A
   perusal of the application for preferential allotment of shares clearly shows that the relevant
   application has been personally signed by the appellant. The application shows the
   ‘occupation’ of the appellant as ‘business’. These facts remain undisp uted. In the backdrop
   of the above facts, we cannot appreciate the contention of the appellant that he was made use
   of by his father and he had no knowledge of the facts of the case. The very fact that he was
   21 years old and he had personally signed the application form shows that he was involved
   in the process. So, the appellant cannot absolve himself of his responsibility by pleading
   that he was only a student and his name was used by his father. We fully appreciate the
   contention of the learned counsel for the Board that name lending is a fraudulent activity and
   it requires to be curbed for maintaining the sanctity of the securities market. In the instant
   case, the investigation into the flow of funds has established that Sridhar group, acting from
   behind the scene, was trying to obtain control and management of the company. So, the
   inference drawn by the whole time member as regards the role of the appellant and his
   family members cannot be faulted.
6. It was also contended by the learned counsel f or the appellant that in the grab of
   issuing a direction under section11 of the Act a penalty of debarring the appellant from
   accessing the securities market for a period of one year has been imposed. It was contended
   by him that section 11 of the Act doe s not empower the Board to impose any penalty. In
   support, he placed reliance on the order passed by this Tribunal in the case of Libord
   Finance Ltd. vs. Whole Time Member, Securities and Exchange Board of India (Appeal

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no.37 of 2008 decided on March 31, 2008) . We have perused this order. The said order
infact does not substantiate the argument advanced by the learned counsel for the appellant.
On the contrary, it is specifically observed in the said order that “If the nature of the
misconduct is such which is likely to affect adversely the securities market or the interest of
the investors in general, it is open to the Board to issue under section 11-B such directions as
may be necessary to protect the integrity of the market or the interests of the investors
including a direction to restrain the delinquent from accessing the capital market”. It was
further observed that “The directions may result in penal cons equences to the entity to
whom those are issued but that would be only incidental”. We are, therefore, unable to
accept this argument of the learned counsel for the appellant.

7. The only issue that remains to be considered is whether the restr aint imposed on the
   appellant for a period of one year is justified or not. As observed above , the role of the
   appellant in lending his name involves a fraudulent activity. But the role of other entities in
   the group namely Shalibhadra Securities Ltd., Hem endra Sha h etc is of a more serious
   nature. There is some merit in the argument of the appellant that he was not a market player
   and at the relevant point of time he was a student. It is to be noted that all the entities have
   been subjected to the same treatment in the impugned order. The role of the appellant vis -à-
   vis that of Shal ibhadra Securities and Hem endra Shah is less significant. Another vital fact
   which is to be considered in this case is that the preferential issue ultimately did not
   materalise. So, even though the appellant has acted in a fraudulent manner in lending his
   name, the impact on the market cannot be significant in the absence of the materialization of
   the allotment of preferential shares. Ultimately the issue did not get listed and Sridhar group
   did not get control and management of the company.
8. The delay in issuing show cause notice is also a factor to be considered in the facts of
   the case. The investigation related to the dealings in the shares during 2000 and 2001.
   Show cause notice was issued as late as December, 2009. The impugned order has been
   passed on March 5, 2012. In matters of this nature the Board could have taken timely action
   and the investigation completed and consequent orders issued within a reasonable period of
   time.
9. Taking into consideration the above facts we hold that the period of restraint of one
   year imposed on the appellant is excessive. In the facts of the case, the period of restraint

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can be reasonably reduced to two months. The above period of two months shall be
reckoned from the date of the impugned order and after the expiry of two months from the
date of the order the appellant shall be free to deal in the market without any prohibition.
In the result, the period of restraint in respect of the appellant is reduced to two
months and the appeal is partly allowed. No order as to costs.

                       Sd/-  
                P.K. Malhotra  
                   Member &  
  Presiding Officer (Offg.)  
                       Sd/-  

S.S.N. Moorthy
Member
11.5.2012
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