Page 1 of 54 WTM/PS/70/ISD/JAN/2014 BEFORE THE ... - SEBI

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WTM/PS/70/ISD/JAN/2014

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER

ORDER

Under Regulation 28 (2) read with Regulation 38 (2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 IN THE MATTER OF IRREGULARITIES IN INITIAL PUBLIC OFFERING In respect of Karvy Stock Broking Limited, Depository Participant [SEBI Registration Nos. IN-DP-NSDL-247-2005 and IN-DP-CDSL-305-2005] ___________________________________________________________________________

1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted a

preliminary examination, upon noticing certain irregularities with respect to the Initial

Public Offerings (hereinafter referred to as 'IPO') of different companies. A few

individuals/ entities (referred to as 'the key operators') had opened various demat accounts

(hereinafter referred to as 'afferent accounts') in fictitious/ benami names and made large

number of applications in the IPOs in the category of retail investors in fictitious/ benami

names (each of the applications being of small value as to make it eligible for allotment under the retail

category). These key operators were found to have cornered/ acquired the IPO shares by

making fictitious applications in the retail category through various fictitious/ benami

applicants. Pursuant to the allotment, the shares were transferred to the demat account of

these key operators. Further, it was also revealed that these key operators had transferred

the shares through off-market deals to ultimate beneficiaries, who were the financiers in the

process. The preliminary examination inter alia revealed that the depository participant

namely Karvy Stock Broking Limited (hereinafter referred to as the 'Karvy DP') had

opened various demat accounts in the fictitious/ benami names and aided and abetted

various key operators to corner the shares in the IPO.

2. Pursuant to the preliminary investigation, SEBI issued the order dated December 15, 2005

in the IPO of Yes Bank and inter alia directed NSDL to undertake a comprehensive

inspection of Karvy DP. Vide this order, Karvy DP was directed to fully co-operate with

NSDL in the above inspection. NSDL was directed to submit a report to SEBI detailing

the findings of its inspection in a time-bound manner. Further, SEBI issued another order

dated January 12, 2006, in the IPO of Infrastructure Development Finance Company

Limited (hereinafter referred to as 'IDFC') directing inter alia Karvy DP to complete the

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process of verifying the identity and address of the dematerialized account holders and to

close/ freeze the dematerialized accounts where they are unable to do the verification not

later than January 31, 2006; to put in place systems and procedures to ensure that in future

no non-genuine dematerialized accounts are opened by them. Karvy DP vide the said order

was asked to submit a detailed report to SEBI narrating the actions taken by them in this

regard and further not to open new dematerialized accounts till the submission of the said

report. Karvy DP was also asked to submit an undertaking to SEBI and obtaining a no-

objection from SEBI for accepting fresh business as a DP.

In the meantime, SEBI had issued another interim order on April 27, 2006 inter alia directing

Karvy DP as under:

"17.4. ... The following financiers of the master account holders are hereby directed not to buy, sell or deal in securities market including in IPOs, directly or indirectly, till further directions: 1. ... 2. .. ... 84. Karvy Stock Broking Limited 85. ... ... 17.7. … I direct that Karvy DP and Pratik DP shall not carry on the activities as DP till the completion of enquiry and passing of final order, excepting for effecting transfer of BO account to another SEBI registered DP on request. Notwithstanding this direction, Karvy DP and Pratik DP shall continue to be governed by the SEBI (Depositories and Participants) Regulations, 1996 and other applicable legal provisions in other respects. 17.8. Since the other business groups of Karvy have appeared to have acted in concert in the gamut of the IPO manipulations, I further direct Karvy Stock Broking Ltd., Karvy Computershare Pvt. Ltd., Karvy Investor Services Ltd. and Karvy Consultants Ltd. not to undertake fresh business as a Registrar to Issue and Share transfer agent, excepting those businesses already contracted as on date."

Subsequent to the personal hearing to Karvy DP, SEBI passed the order dated May 26,

2006, wherein Karvy DP was directed not to act as a DP, pending enquiry and passing of

final orders, except for acting on the instructions of existing beneficial owners (hereinafter

referred to as 'BO'). Karvy DP was also directed to transfer the demat account of an

existing BO to another SEBI registered DP, on request.

3. In the meantime, SEBI had initiated Enquiry proceedings against Karvy DP, being a

registered intermediary, in terms of the Enquiry Regulations, by appointing an Enquiry

Officer under Regulation 5(1) of the Enquiry Regulations vide orders dated May 25, 2006 and

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September 18, 2006. The Enquiry Officer enquired into the alleged violation of the Securities

and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the SEBI

(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market)

Regulations, 2003 (hereinafter referred to as the 'PFUTP Regulations'), SEBI (Depositories

and Participants) Regulations, 1996 (hereinafter referred to as 'DP Regulations') and the

provisions of the SEBI (Criteria for Fit and Proper Persons) Regulations, 2004 (hereinafter

referred to as 'Fit and Proper Regulations').

4. The Enquiry Officer in his report dated March 30, 2007, found that Karvy DP had

contravened the provisions of Section 12 A(a), (b) and (c) of the SEBI Act, Regulations 3,

4(1) and 4(2)(p) of the PFUTP Regulations, Regulations 19, 42, 43, 46 and 52 of the DP

Regulations read with Clauses 3, 9, 12, 16, 19, 20 and 22 of the Code of Conduct as specified

in the third schedule under Regulation 20A of the DP Regulations and the provisions under

the Depositories Act, 1996 (hereinafter referred to as the 'DP Act') and SEBI (Disclosure and

Investor Protection) Guidelines, 2000 (hereinafter referred to as 'DIP Guidelines') and

recommended that Karvy DP be prohibited from acting as a DP for a period of 18 months.

The Enquiry Officer later clarified that the prohibition of 18 months recommended by him

against Karvy DP was in respect of taking up new assignment/ fresh business as a DP. The

Enquiry Officer also recommended that the period of prohibition already undergone by the

DP as per the interim orders of SEBI be considered, for the purpose of computing the period

of prohibition recommended by him.

5. Pursuant to the Enquiry Report, SEBI issued a Show Cause Notice (hereinafter referred to

as 'SCN') dated May 04, 2007 to Karvy DP along with a copy of the Enquiry Report,

advising it to show cause as to why the penalty recommended by the Enquiry Officer may

not be enhanced as considered fit by SEBI. Karvy DP sent a reply vide its letter dated May 19,

2007.

6. SEBI had initiated enquiry proceedings against two other entities of the Karvy group, viz.,

Karvy Stock Broking Limited (in the capacity as a Stock Broker) (hereinafter referred to as

'KSBL') and Karvy Computershare Pvt. Limited (Registrar to an Issue) also. On June 22, 2007,

SEBI passed a common order (hereinafter referred to as 'earlier SEBI order') in respect of all

Karvy entities including Karvy DP containing the following directions:

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Table A

Entity Direction With effect from Karvy DP Prohibition from opening fresh demat

accounts till December 31, 2007 Immediate effect.

KSBL, member, NSE and Hyderabad Stock Exchange

Suspension for a period of three months On the expiry of 21 days from the date of the order.

Karvy Computershare Pvt. Ltd., the Registrar to the Issue

Prohibition from acting as Registrar to an Issue for a period of nine months.

As the period has already been undergone, no further effect

7. Separate appeals were filed by Karvy DP, KSBL and Karvy Computershare Private Limited

against the aforesaid SEBI order. The said appeals were disposed off by the Hon’ble SAT

vide an order dated June 30, 2008, with the following directions :

"..... remand the cases to the respondent Board with a direction to pass three separate orders on the three show cause notices issued by the learned wholetime member. It is, however, made clear that while passing the fresh orders the wholetime member shall take into account only the material that is already on the record and will not permit either party to produce any fresh material or file fresh replies or written submissions. He will, however, grant a fresh oral hearing to the parties and take into consideration the replies and written submissions already filed. The parties will however be at liberty to cite case law in support of their respective submissions. The wholetime member while passing the fresh orders shall not be influenced by any observation or finding recorded in the impugned order. We also make it clear that we have not decided any issue on merits and, therefore, all the issues raised by the parties remain open to be decided afresh by the learned wholetime member in accordance with law. In case the final order(s) were to go against the appellant(s), the same shall not be given effect to for a period of four weeks from the date of receipt thereof by the appellant(s)." (emphasis supplied)

8. Pursuant to the order of Hon'ble SAT, Karvy DP filed an application for the settlement of

proceedings through a consent order. The application filed by Karvy DP was dealt in

accordance with the SEBI Circular dated April 20, 2007 and after the rejection of the said

application, the present proceeding against Karvy DP was revived. Opportunities of

personal hearing were afforded to Karvy DP on December 07, 2012 and January 30, 2013,

Mr. Somasekhar Sundaresan, Advocate, represented the entity and made submissions on

behalf of Karvy DP. Mr. C. Parthasarathy, Chairman and Managing Director, Mr.

Muthuswamy Iyer, Vice President - Compliance, Mr. V. Mahesh, Authorized Person, were

also present in the hearings.

9. Karvy DP is admittedly a part of the Karvy group of companies comprising of Karvy Stock

Broking Limited (Stock Broker, DP and Portfolio Manager), Karvy Computershare Pvt.

Limited (Registrar and Share Transfer Agents) (hereinafter referred to as 'KCPL'), KCL

(formerly Non Banking Finance Company), Karvy Insurance Broking Pvt. Limited, Karvy

Investor Services Limited (Merchant Banker, Underwriter and Debenture Trustee), Karvy

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Comtrade Broking Limited, Karvy Global Services Limited, Karvy Financial Services

Limited and Karvy Inc. (Broker dealer of NASDAQ, USA).

10. Before discussing the charges leveled against Karvy DP in the SCN, let me deal with the

preliminary arguments of Karvy DP:-

a. Action against KCL and not against Karvy DP

The alleged violation in the instant case pertains to the period 2003-2005, when KCL was

the registered DP. Karvy DP in its submissions before SEBI has argued that it cannot be

held liable for the violations committed by KCL. The responsibility, if any, is for the acts

done by KCL in its capacity as a DP and not as a Non Banking Financial Company

('NBFC'). It also said that only the business obligations of KCL was taken over by it and

not the proceedings in connection with any alleged violation committed by KCL.

In this regard, I note that KCL was acting as a DP till September 10, 2005 in NSDL and till

November 29, 2005 in CDSL. Majority of the accounts of the key operators were opened

in NSDL, by August 05, 2005 and in CDSL, by September 22, 2005 and this was during the

period when KCL was a DP. I note that NSDL vide its letter dated June 16, 2005, had also

informed SEBI about the intention of KCL to transfer its DP business to Karvy DP.

Karvy DP has inter alia stated that KCL was one of its group companies and pursuant to

the transfer arrangement, the infrastructure of KCL would be used by Karvy DP.

Thereafter, Karvy DP had started the business of DP by taking over the DP business from

KCL.

I note from the Enquiry Report that the transfer of DP business from KCL to Karvy DP

was approved by SEBI, subject to the covenant for taking over all the assets and liabilities/

obligations, including pending disputes/ grievances of the investors holding DP accounts

with KCL by Karvy DP. Karvy DP in its written submissions has relied upon the judgment

of the Hon'ble High Court of Judicature at Bombay in the matter of SEBI Vs. SKDC

Consultants Limited and argued that it cannot be held liable for the alleged violations

committed by KCL. However, in the instant case, the facts differ, in view of the covenant

discussed above. Therefore, Karvy DP is responsible for the past acts of KCL in view of

the important covenant with Karvy DP about taking over all the assets and liabilities/

obligations, including pending disputes/ grievances of the investors holding DP accounts

with KCL.

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Karvy DP has said that the charges in the SCN pertain to financing done by KCL in the

IPO as an NBFC. I would like to emphasize that the present SCN is in respect of the

activities as a DP. As the DP activities of Karvy were handled by KCL prior to the transfer

of business to Karvy DP, the names, KCL and Karvy DP are interchangeably referred/

used in the present order.

b. Enhancement of penalty from that recommended by the Enquiry Officer

With respect to the issue of enhancement of penalty from that recommended by the

Enquiry Officer, the submissions of Karvy DP were that:-

(i) by deciding that the case warrants a higher penalty than what is recommended by the

Enquiry Officer, the principles of natural justice have been discarded.

(ii) SEBI cannot consider any fresh allegations at such stage based on thenew materials

supplied along with the SCN.

In this regard, my observations are as under: the designated member need not restrict

himself to the penalties recommended by the designated authority/ Enquiry Officer. The

powers of the Chairman/ Member while considering the Enquiry Report are sufficiently

wide. Further, the penalty recommended by the Enquiry Officer can either be enhanced or

reduced, depending on the specific facts and circumstances of the case. Regulation 28(1) of

the SEBI (Intermediaries) Regulations, 2008 read with SEBI (Procedure for Holding

Enquiry) Regulations, 2002 (now repealed) empowers the designated member to arrive at a

conclusion different from that of the Enquiry Report. Whenever SEBI is of the view that

the role of the entity under enquiry is serious and that the recommended penalty has to be

enhanced in order to make it commensurate with the violation, a fair opportunity of

defence to the noticee shall precede the contemplated action.

With respect to the allegation of having brought in fresh material post enquiry, I note that

the Enquiry Officer in his report has referred to the material that is alleged to be new by

Karvy DP. However, in the current proceedings, no material is being relied upon which has

not been provided to Karvy DP. Subsequently, Karvy DP has replied to the SCN vide its

letter dated May 19, 2007 and further on June 06, 2007, the written submissions were filed.

Therefore, the principles of natural justice have been duly complied with as Karvy DP has

got the opportunity to defend itself against the allegations leveled in the SCN.

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11. In exercise of the quasi-judicial power conferred on me under Section 19 of the SEBI Act,

1992, I, now proceed to consider the SCN, replies/ written submissions and the material

relied upon in the SCN. The SCN dated May 04, 2007, alleged that:-

a. Karvy group companies were acting in concert with each other and were fully aware of

the fictitious/ benami nature of the applicants to whom finance was extended after the

closure of the IPOs.

b. There was no arms' length distance maintained between the group companies of Karvy

which had acted in concert in aiding and abetting the key operators in opening fictitious

demat accounts and providing finance in the name of fictitious/ benami applicants with

the manipulative, deceptive and fraudulent intent to corner the shares in IPOs.

Therefore, the important issues that need to be considered and decided by me in the instant

order are the following:

a. Whether Karvy DP had aided and abetted the key operators in opening of the afferent

accounts and cornering of the shares in the IPO?

b. Whether Karvy DP has failed to maintain arm's length distance between the different

activities of its group entities and in its failure to do so, it acted in complicity with the

other entities of the Karvy group?

12. Whether Karvy DP had aided and abetted the key operators in the opening of the

afferent accounts and cornering of the shares in the IPO?

A broader picture of the role of Karvy DP in the alleged irregularities in the IPO process is

described below. It is an admitted fact that Karvy group entities were associated in various

IPOs, in different roles that are required to be performed in relation to an IPO application.

Starting with the role of DP who opened demat accounts, that of the NBFC who arranged

finance, the stock broker/ syndicate member who undertook the bidding in IPOs and also

that of the Registrar to Issue (hereinafter referred to as 'RTI') who prepared refunds and

further, transferred the shares from the demat account of allottees to the demat account of

the key operator again in the capacity of DP and sale of shares through its stock broking

arm, one is able to identify the presence of Karvy group entities in the entire scheme of

activities of the IPOs.

The different roles of Karvy group are discussed elaborately here, in the sequence of the

events that followed. To begin with, KCL, the financier belonging to the Karvy group

(KCL was also a DP at such point of time) had floated an IPO financing scheme in association

with BhOB, as evident from the copy of the "Idea Paper and Process Flow for Funding

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Options for Maruti IPO by Bharat Overseas Bank and Karvy Services" (hereinafter

referred to as 'Idea Paper'), released during June, 2003. I have perused the 'Idea Paper' and

note that the same contains the process flow which starts from the IPO applications, the

opening of demat accounts, bank accounts, procedure for refunds etc. It also states about

the safeguards like marking of lien on the shares until the loan is cleared. I note that as per

the process flow explained in the 'Idea Paper', IPO applications would be filled in by the

investor and a cheque/ DD in favour of the bank towards the margin amount shall be

deposited. The investor would need to open the demat account with Karvy DP with the

bank as joint holder. Karvy DP would then place a lien on the shares deposited into the

investor's account until the investor clears the loan with the bank. The client would deposit

the payment instrument and bid form with the bank along with the account opening

document and documents for the loan. Further, the bank would issue the pay order for the

amount of the application by debiting such amount from the loan account, while taking

into account the amount of margin money of the respective applicants. If the investor is

not allotted shares against the IPO application, refunds would be made to investor by the

RTI through the bank and the refund will be credited to the account, after liquidating the

loan. On allotment, the investor should bring in the required amount if there is shortfall

and fulfil the obligation to the bank after which the lien is released by the bank and the DP

is accordingly informed.

In this context, Karvy DP has argued in its reply that 'Idea Paper' was only a proposal and

that it was not followed in its entirety. However, the facts of the present case show that the

different steps perceived in the 'Idea Paper' did actually materialize, till the end, as seen

from the details that are discussed hereunder:

a. Role in the opening of bank accounts

i. SEBI has noticed that different Karvy entities such as KCL and KSBL had a role in the

opening of the bank accounts for availing finance and making application in the IPOs.

The SCN alleges that the Karvy group entities have introduced certain account holders

at Bharat Overseas Bank (hereinafter referred to as 'BhoB'), Ahmedabad, which were

subsequently used for opening the demat accounts and thereafter to apply in the IPO.

In this regard, I refer to the letter of BhOB dated March 07, 2006 addressed to SEBI,

wherein a particular bank account bearing number 50795 has been discussed. It is

mentioned in this letter of BhoB that the account bearing no: '50795' was opened on

June 17, 2003 for the purpose of availing finance in the IPO of Maruti Udyog Limited

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and that the same was closed on October 27, 2003. Later, large number of applications

were found manually attached to this account. BhOB in its said letter also mentioned

that the accounts were introduced by Karvy Securities Limited and Karvy Investor

Services Limited, signed by one Mr. Vyomesh Pandya. It was also said that at the time

of opening of the account Mr. Vyomesh Pandya used to bring all the account opening

forms that were duly filled in. The additional applications added to this account bearing

no: '50795' (as shown in the above letter of BhOB) have been detailed as under:

- 50795/1 to 50795/ 2 - 50795/ 5 - 50795/14, - 50795/16 - 50795/18 to 50795/24 - 50795/26 to 50795/60 - 50795/ 62 to 50795/ 64 - 50795/ 67 to 50795/127 - 50795/130 to 50795/131 - 50795/137 to 50795/150 - 50795/152 to 50795/153

I note that the said bank accounts were thereafter used for opening the demat accounts

with Karvy DP in the month of June, 2003, as evident from the sample analysis given

below:

Table B

S.No. Demat Client ID

Name of client Address Bank A/c no.

Bank Date of opening demat A/c

Date of closing demat A/c

1. 12312963 PANCHAL AYUSHI N 402-403 SHASHWAT 50795/67 BHOB, Ahmedabad 6/27/2003 11/15/20052. 12312970 PANCHAL NATVARLAL 402-403 SHASHWAT 50795/67 BHOB, Ahmedabad 6/27/2003 11/15/20053. 12312989 PANCHAL RAMABEN N 402-403 SHASHWAT 50795/67 BHOB, Ahmedabad 6/27/2003 11/15/20054. 12312998 KHALAS VIJAY G 402-403 SHASHWAT 50795/68 BHOB, Ahmedabad 6/27/2003 11/15/20055. 12313005 KHALAS SANJAY G 402-403 SHASHWAT 50795/68 BHOB, Ahmedabad 6/27/2003 11/15/20056. 12313013 KHALAS SANDIP G 402-403 SHASHWAT 50795/68 BHOB, Ahmedabad 6/27/2003 11/15/20057. 12313039 KHALAS GOVINDBHAI N 402-403 SHASHWAT 50795/69 BHOB, Ahmedabad 6/27/2003 11/15/20058. 12313048 MODI NIKUNJ B 402-403 SHASHWAT 50795/69 BHOB, Ahmedabad 6/27/2003 11/15/20059. 12313056 MODI HETAL N 402-403 SHASHWAT 50795/70 BHOB, Ahmedabad 6/27/2003 11/15/200510. 12313064 MODI MADHU BALA B 402-403 SHASHWAT 50795/70 BHOB, Ahmedabad 6/30/2003 11/15/200511. 12313072 MODI BABULAL S 402-403 SHASHWAT 50795/70 BHOB, Ahmedabad 6/27/2003 11/15/200512. 12313089 PARMAR NATVARLAL N 402-403 SHASHWAT 50795/71 BHOB, Ahmedabad 6/27/2003 11/15/200513. 12313097 PARMAR USHABEN N 402-403 SHASHWAT 50795/71 BHOB, Ahmedabad 6/27/2003 11/15/200514. 12313100 PARMAR KIRITBHAI N 402-403 SHASHWAT 50795/71 BHOB, Ahmedabad 6/27/2003 11/15/200515. 12313119 PARMAR RAMILABEN K 402-403 SHASHWAT 50795/72 BHOB, Ahmedabad 6/27/2003 11/15/200516. 12313128 PARMAR AMIT K 402-403 SHASHWAT 50795/72 BHOB, Ahmedabad 6/27/2003 11/15/200517. 12313136 PARMAR MONIKA K 402-403 SHASHWAT 50795/72 BHOB, Ahmedabad 6/27/2003 11/15/200518. 12313144 PARMAR SONIKA K 402-403 SHASHWAT 50795/73 BHOB, Ahmedabad 6/27/2003 11/15/200519. 12313152 PARMAR YUVRAJ K 402-403 SHASHWAT 50795/73 BHOB, Ahmedabad 6/27/2003 11/15/200520. 12313169 PARMAR ASHVIN N 402-403 SHASHWAT 50795/73 BHOB, Ahmedabad 6/27/2003 11/15/200521. 12313177 PARMAR BHANUBEN A 402-403 SHASHWAT 50795/74 BHOB, Ahmedabad 6/27/2003 11/15/200522. 12313185 PARMAR PRIYANSHU A 402-403 SHASHWAT 50795/74 BHOB, Ahmedabad 6/27/2003 11/15/200523. 12313193 PARMAR MADHUSUDAN M 402-403 SHASHWAT 50795/74 BHOB, Ahmedabad 6/27/2003 11/15/200524. 12313208 PARMAR KARTIK N 402-403 SHASHWAT 50795/75 BHOB, Ahmedabad 6/27/2003 11/15/200525. 12313216 PARMAR DONIKA N 402-403 SHASHWAT 50795/75 BHOB, Ahmedabad 6/27/2003 11/15/200526. 12313224 PARMAR DEVENDRABHAI K 402-403 SHASHWAT 50795/75 BHOB, Ahmedabad 6/27/2003 11/15/200527. 12313232 RAVAL KRISHNABEN D 402-403 SHASHWAT 50795/76 BHOB, Ahmedabad 6/30/2003 11/15/200528. 12313249 RAVAL VISHAKHA D 402-403 SHASHWAT 50795/77 BHOB, Ahmedabad 6/30/2003 11/15/2005

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29. 12313257 RAVAL KOMAL D 402-403 SHASHWAT 50795\77 BHOB, Ahmedabad 6/30/2003 11/15/200530. 12313265 RAVAL DIPAK N 402-403 SHASHWAT 50795\77 BHOB, Ahmedabad 6/30/2003 11/15/200531. 12313273 SHAH LATA D 402-403 SHASHWAT 50795\78 BHOB, Ahmedabad 6/30/2003 11/15/200532. 12313280 SHAH NEELAM D 402-403 SHASHWAT 50795\78 BHOB, Ahmedabad 6/30/2003 11/15/200533. 12313299 SHAH SONAM D 402-403 SHASHWAT 50795\78 BHOB, Ahmedabad 6/30/2003 11/15/200534. 12313304 SHAH ZEEL D 402-403 SHASHWAT 50795\79 BHOB, Ahmedabad 6/30/2003 11/15/200535. 12313312 SHAH BHARAT K 402-403 SHASHWAT 50795\79 BHOB, Ahmedabad 6/30/2003 11/15/200536. 12313329 SHAH BHAGVANTI B 402-403 SHASHWAT 50795\79 BHOB, Ahmedabad 6/30/2003 11/15/200537. 12313337 SHAH NIPA B 402-403 SHASHWAT 50795\80 BHOB, Ahmedabad 6/30/2003 11/15/200538. 12313345 SHAH NIHIR B 402-403 SHASHWAT 50795\80 BHOB, Ahmedabad 6/30/2003 11/15/200539. 12313353 SHAH MUNJAL B 402-403 SHASHWAT 50795\80 BHOB, Ahmedabad 6/30/2003 11/15/2005

The aforesaid analysis of 39 samples is part of 297 demat accounts linked to the similar

bank account numbers. These demat accounts continued to be operative till November

15, 2005, though the bank account was closed on October 27, 2003. I note that these

demat accounts were closed by Karvy DP pursuant to the verification in the wake of

SEBI examination into the irregularities in the IPOs. However, Karvy DP in its defence

has submitted that unless the demat account holder intimates the status of the account,

it would not be aware of the same.

ii. I also note from the findings of investigations, forwarded to Karvy DP that Karvy

Securities Limited had also introduced another bank account bearing no. 54119 to

BhOB, Ahmedabad on December 04, 2003, which was subsequent to Maruti IPO. This

bank account was in the name of "Devangi Dipakbhai Panchal - Group", who is also a

key operator and such account was later closed on April 27, 2004. The address in this

account was 402, Shaswat Opp. Gujarat College, Ellisbridge, Ahmedabad, which is the

address mentioned for the underlying accounts opened for '50795', details of which are

discussed in previous paragraph. This shows that the arrangement between Karvy DP

and BhOB (as evident from the account introduction and the subsequent developments described in the

paragraph above) was followed even after the IPO of Maruti Udyog Limited.

iii. Similar arrangement appears to have existed with respect to the bank accounts opened at

Indian Overseas Bank (hereinafter referred to as 'IOB') also. I have seen the account

opening form of Savings Bank (hereinafter referred to 'SB') account bearing number

'12140' with IOB, Thaltej Branch, Ahmedabad (copy provided to Karvy DP as a

sample) and note that this account is introduced by another Karvy group entity, i.e.,

KSBL (who was a stock broker at the relevant point of time). An analysis of the SB account

bearing number 12140 with IOB shows that the same was opened on March 09, 2005

and was in the name of Ms. Roopal Nareshbhai Panchal (a key operator) and Devangi

Panchal. Attached to this application form was a list of 50 other persons which was

certified by KSBL by affixing their stamp. The address for this account was 402,

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Shashwat Opp. Gujarat College, Ellisbrdige, Ahmedabad – 380006, which is the same

address mentioned for the other discussed accounts i.e. 50795 and 54119 with BhOB as

discussed above.

It is strange to note that the list of 50 names attached with the account opening form

for the bank account bearing no. 12140 bear a common surname i.e. "SETH", starting

from 'SURESH SETH' and ending with 'ADITI SETH', and that the signatures of

these 50 are in English, Hindi and Gujarati and appear to have been signed by the same

person in similar manner. Further, the signature of the representative of KSBL on the

main bank account introduction column and that in the attached list of 50 names of one

Mr. Mayur Modi. On comparing the signature of Mayur Modi in the KYC form with

respect to account no. 12140 and the signature present in the list of 50 names attached

to that account, it is difficult to say that the signatures are different. Further, the same

Mayur Modi had signed on the introduction column (in the account opening form with respect

to bank account no. 12004 with IOB) on behalf of both KCL (now Karvy DP) and KSBL. I

have perused the affidavit dated June 02, 2007 of Mayur Modi filed before SEBI,

wherein he has denied that the signatures in the lists of 50 names appended to the

account opening forms pertaining to the savings bank account nos. 12140, 12149, 12150

and 12004 are not his. I have also perused the copy of his PAN card annexed with the

affidavit and the signature contained therein and the signatures in the lists containing the

50 names. On perusal, it can be said that in all these the signatures are done by Mayur

Modi with the normal variations in signatures of a person. It is important to bear in

mind that these 50 names in the attached list had their demat accounts with Karvy DP

in the same sequence (as that in the bank account opening form), the demat accounts

starting with BOID IN300394 13130266 - 'SURESH SETH' and ending with BOID

IN300394 13130776 - 'ADITI SETH', all of which were opened on January 05, 2004.

iv. I note that IOB had financed in the IPO of IDFC. The list of the names of the IPO

applicants starting from 'SURESH SETH' to 'ADITI SETH' in the allotment muster in

the IPO of IDFC is identical to the list of names attached to the IOB Thaltej branch

account opening form no. 12140. From an analysis of the demat account opening forms

of such persons at NSDL as submitted by Karvy DP, I note that the BhOB bank

account number 54119 is appearing as their bank account number. The details of the

observation have been tabled below:

Page 12 of 54

Table C

Demat A/c No.

Name of the applicant

Address Bank Account

POI/ POA(Observations OfSEBI in bracket)

13130303 GULJAR SETH 402, Shashwat Opp Guj College, Ellisbridge, Ahmedabad

54119/1253 Letter from BHOB(No photograph affixed)

13130475 ABHILASH SETH

402, Shashwat Opp Guj College, Ellisbridge, Ahmedabad


13130506 GUNISH SETH 402, Shashwat Opp Guj College, Ellisbridge, Ahmedabad


13130539 YATNA SETH 402, Shashwat Opp Guj College, Ellisbridge, Ahmedabad


13130547 NIRVI SETH 402, Shashwat Opp Guj College, Ellisbridge, Ahmedabad


13130570 ABHISHEK SETH



13130598 DEVANDR A SETH



13130650 DEPARV SETH



The above said BhOB bank account number 54119 had been introduced by Karvy

Securities Limited, one of the Karvy group entities, during December, 2003, (as

discussed in sub paragraph 'ii' above). The bank account bearing no. 54119 was later

closed on April 24, 2004. However, the demat accounts opened on the basis of this,

continued to exist with Karvy DP even after the closure of the respective bank

accounts.

Subsequently, demat accounts were opened with Karvy DP on NSDL in the month of

December, 2003/ January, 2004 indicating the above bank details of BhOB. Such

NSDL demat accounts include the 50 names beginning from 'SURESH SETH' to

'ADITI SETH'. Later on, Karvy DP introduced these names to IOB, Thaltej branch in

a list certified by KSBL during March, 2005 which was found used for the purpose of

availing IPO finance from IOB.

The introduction of these bank accounts by the different Karvy group entities, which

subsequently formed the basis for opening demat accounts with its DP arm leads one to

infer that Karvy DP has a clear nexus with the genesis of these accounts. The

subsequent re-appearance of the similar names in the bank accounts with IOB in March,

2005 in the list of applicants who availed IPO finance in another IPO is also relevant to

note here. This clearly contradicts the submission of Karvy DP that the demat accounts

were opened subsequent to the opening of the bank accounts.

v. Karvy DP, in its reply dated May 19, 2007, has contended that the list of 50 names

appears to be a separate document as there is no basis for connecting the savings

Page 13 of 54

account opening form with the list containing 50 additional names. The argument of

Karvy DP that the list is not part of the account opening form, is not tenable as the

account opening form and the list attached with it, forms a complete set of account

opening form submitted by the respective bank. Further, the names added to the said

bank accounts were in the same order as that in which the demat accounts were held

with Karvy DP and such details were privy to Karvy DP.

vi. The other samples as provided to Karvy DP wherein 50 names were added are as under:

Table D

S.No

Name of the bank Account Holder Bank A/c No.

Date of opening Bank A/c

Introducer Remark

1. Kelan Atul Doshi and 50 others List of 50 applicants attached starting with DARPAN RAJESH SHAH To NEHA MANILAL THAKKAR

12004 N.A. KCL KCL had identified the list of name by affixing a signature and rubber stamp

2. ROOPAL N PANCHAL DEVANGI DIPAKBHAI PANCHAL List of 50 applicants attached starting with SURESH SETH to ADITI SETH

12140 09/03/2005 KSBL KSBL had identified the list of name by affixing a signature and rubber stamp

3. ROOPAL N PANCHAL& DEVANGI DIPAKBHAI PANCHAL list of 50 applicants attached starting with TVATA DABHI to BHAGYESH DABHI


4. ROOPAL N PANCHAL& DEVANGI DIPAKBHAI PANCHAL list of 50 applicants attached starting with DHIREN DABHI to TISHADABHI


I have seen from the instances cited above that the 50 names added to each bank

account number were sharing common surnames. The names added to the bank

accounts were in the same order as that in which the demat accounts were held with

Karvy DP. It is seen that all the signatures (of the individual account holders) appear to

be made by one person at one time, in the documents pertaining to the bank account. I

also note that all the names contained in the list attached to the application forms (for

opening bank accounts) had demat accounts with Karvy DP. While Karvy DP has

submitted that the demat accounts were opened after the bank accounts were opened

and may have been in the same serial number as the applications were submitted by the

IPO sub brokers, I am of the opinion that the appearance of names in the same

sequence is too much of a co-incidence and points towards a definite role of Karvy DP

in the IPO manipulation. Additionally, Karvy DP (at the relevant point of time KCL

was both a DP and financier) was actively involved in providing the financial package

through its financial arm as discussed in the later part of the order, to such persons/

account holders who were later found to be fictitious.

At this stage, I refer to the submission of the representative of BhOB that they had a

corporate tie up with KCL (now Karvy DP) and financed the IPO only through it. The

Page 14 of 54

representative of BhoB, i.e., Mr. Devi Dutt, Chief Manager, BhOB, Ahmedabad has

submitted that out of the list of 12,257 demat accounts of Karvy DP in the IPO of Yes

Bank, only 4-5 demat accounts holders had accounts in BhOB, Ahmedabad and for

operative convenience of the bank, instead of opening individual savings bank account,

a number of individual names were added to a single account by BhOB. It has also been

submitted by him that BhOB has funded 9,327 demat accounts out of the said total of

12,257 demat accounts.

In this context, reference may be drawn to the contention of Karvy DP that the 'Idea

Paper' was just a note on process. However, the contents of this paper does

demonstrate the enthusiasm of Karvy group in charting out a clear plan to handle the

business of IPO process, eager to assume roles in all the areas of the IPO. I note from

the bank forms submitted by IOB and the list attached that Karvy DP had extended the

same scheme to IOB, Thaltej Branch, Ahmedabad. Incidentally, the above discussed

submission of Mr. Devi Dutt and the 'Idea Paper' refers to the same scheme of

arrangement. As a regulator, SEBI is not against the business plans/ arrangements of

various corporates. However, it is SEBI's mandate to ensure that the market players are

rolling out their activities well within the limits of law and keep the securities market

free of fraudulent activities.

On careful examination of the facts, I note that the introduction of the main bank accounts

and the addition of 50 fictitious names to each account paved the way for opening of the

afferent accounts. Karvy DP facilitated the opening of demat accounts for the additional

fictitious names. Therefore, the above discussed conduct of Karvy DP and other entities of

Karvy group can be said to have facilitated the key operators to procure IPO finance from

the banks and hence, it had aided and abetted the key operators in cornering the shares in

various IPOs.

b. Role in the opening of dematerialized accounts

Karvy DP had opened a large number of afferent demat accounts. As can be seen from the

analysis of the total number of demat accounts closed at NSDL and CDSL pursuant to the

SEBI's intervention, out of 37,240 afferent accounts found closed at NSDL, 29,309

afferent accounts were those that were held at Karvy DP, which constitutes 79% of the

total afferent accounts. Similarly at CDSL, out of the 21,698 afferent accounts found

Page 15 of 54

closed, 20,399 afferent accounts (about 94% of the afferent accounts) were held with

Karvy DP.

From the above, it can be seen that 90% of the CDSL accounts held with Karvy DP were

closed during the course of verification of genuineness of the account holder. This shows

that Karvy DP had a very high percentage of afferent accounts. The details pertaining to

the demat accounts closed by Karvy DP at NSDL and CDSL are as under:

Table E

S. No.

Address No. of demat account holders sharing the

address

Name of theDepository

Comment

1 C O SEIPL, 804 Abhijeet I,Mithakhali Circle, Ahmedabad- 380009

5,793 NSDL This address is same as that of SEIPL*

2 402 403 Shaswat, Opp Gujarat College, Ellisbridge,Ahmedabad - 380006

5,492 NSDL This address is same as that of the Panchals

3 402 403 Shashwat, Opp Gujarat College, Ellisbridge,Ahmedabad - 380006


4 402-403 Shashwat, OppGujarat College, Ellisbridge,Ahmedabad - 380006


5 C/0 SEIPL, 804 Abhijeet I, Mithakhali Circle Ellisbridge, Ahmedabad-380006

1,472 NSDL This address is same as that of SEIPL

6 402 403 Shashwat, Opp Gujarat College, Ellisbridge, Ahmedabad - 380006


7 68 Samshta B Society, Opp Pinakin Society, Paldi, Ahmedabad-380007

1,293 NSDL This address is same as that of Kelan Atulbhai Doshi

8 C/O SEIPL, 804 Abhijeet I, Mithakhali Circle, Ellisbridge, Ahmedabad- 380006


9 803 Abhijit, Mithakhali Circle, Ellisbridge, Ahmedabad-380006


10 406, Shashwat, Opp. Gujarat College, Ellisbridge, Ahmedabad, 380006

4,998 CDSL This address is same as that of the Panchals

11 307, Shashwat, Opp. Gujarat College, Ellisbridge, Ahmedabad, 380006


12 Office No.403, Shashwat Bldg., Nr. Hotel Kanak, Ellisbridge, Ahmedabad, 380006


13 Himalaya B-2, Asalfa, Ghatkopar W, Mumbai 400084

3,814 CDSL This address is same as that of Purshottam Bhudwani

14 C/o. SEIPL, G-1, Devpath Complex, B/h. Lal Bunglow, Navrangpura, Ahmedabad, 380009

2,500 CDSL This address is same as that of SEIPL

15 Niketan Maheshwar 33, Peddar Road 5B, Mumbai - 400026

1,120 CDSL This address is same as that of Manoj Seksaria

16 Maheshwar Niketan 33,Pedd, Mumbai, 400026 822 CDSL This address is same as that of Manoj Seksaria

Total 45,858

* Sugandh Estate Investment Pvt. Limited (SEIPL)

An important observation about these demat accounts is that although they were opened in

separate names, they had common addresses as mentioned above. These accounts were

admittedly opened for the IPO sub brokers of Karvy DP who are also referred to as key

operators namely Grace Consultancy, Dipak Panchal (who is the husband of Ms. Devangi

Panchal and brother-in-law of Ms. Roopalben Panchal), Arth Realty Pvt. Limited (an entity

related to SEIPL), Purshottam Bhudwani, Manoj Seksaria etc.

Here again, the model of business operations of Karvy DP assumes significance at this

juncture. Karvy DP received applications for opening demat accounts in bulk, which were

Page 16 of 54

initially procured by IPO sub brokers. In so far as Karvy DP is concerned, the process of

account opening started from preliminary scrutiny of the applications along with the

verification of documents, capturing the data such as name, address, bank details, etc. of

the applicants, verification of the data based on the documents, the scanning of signatures

and finally, the activation of the accounts. According to Karvy DP, the aforesaid process

has to be followed one after the other in the same sequence. Most of the sub brokers are

stated to have captured the data in the required format and submitted the same to Karvy

DP, along with the DP account opening application forms, so that data is uploaded easily

thereby saving time for the DP.

A scrutiny of the details pertaining to the demat accounts opened by Karvy DP exposes

several unusual features in the functioning of the DP that are inconsistent with the normal

market practices. Demat accounts were seen opened on the same day or even within an

interval of one or two days of filing of applications for such account-opening. Additionally,

large number of accounts are seen to have been opened by Karvy DP which had common

addresses (which were that of key operators) as mentioned above, common photographs,

strange combinations of repetitive names and surnames, etc. Thus, it is strange that Karvy

DP did not notice these irregularities, till the time of intervention of SEBI. Multiple

anomalies that were noticed in respect of these demat accounts are detailed under separate

headings below:-

i. Demat accounts having common features opened on the same day or within a gap

of few days from that of application

Karvy DP had argued that the IPO sub brokers had made a request for opening demat

accounts on the same day of filing of the applications, on behalf of their clients.

Following the same, a large number of accounts with common addresses were opened

with Karvy DP on a single day or within a gap of few days. For e.g.- On July 15, 2005,

Karvy DP opened 5,000 demat accounts at CDSL, with the common address of Roopal

Panchal, one of the key operators. On the very next day i.e. July 16, 2005, Karvy DP

opened 5,500 demat accounts at CDSL again with the common address of Roopal

Panchal. Other instances of similar nature have been brought out below:

Table F

S. No. Date of account opening

Address (pertaining to) CDSL (no.)

NSDL (no.)

1 February 16, 2004 C/o Karvy 754 - 2 April 20, 2004 803, Abhijeet I Mithakhali Circle, Ellisbridge, Ahmedabad (Sugandh Estates) - 1,097 3

August 16-17, 2004 402 403, Shashwat, Opp. Gujarat College, Ellisbridge, Ahmedabad 38006 (Roopal Panchal) - 2,385 C/o SEIPL, G-1, Devpath Complex, B/h Lal Bungalow, Ahmedabad (Sugandh Estates) - 4,241

Page 17 of 54

4 October 15-25, 2004 C/o SEIPL , G-1, Devpath Complaex B/h Lal Bungalow, Ahmedabad (Sugandh Estates) - 5,776 5 July 15, 2005 Office No. 403, Shashwat Bldg, Nr. Hotel Kanak, Ellisbridge Ahmedabad (Roopal Panchal) 5,000 - 6 July 16, 2005 307, Shashwat Opp. Gujarat College , Ellisbridge, Ahmedabad (Roopal Panchal) 5,000 -

406, Shashwat Opp. Gujarat College, Ellisbridge, Ahmedabad (Roopal Panchal) 500 - 7 July 19, 2005 402 403, Shashwat, Opp. Gujarat College, Ellisbridge, Ahmedabad 380006 (Roopal Panchal) - 1,004 8 July 20, 2005 402 403, Shashwat, Opp. Gujarat College, Ellisbridge, Ahmedabad 38006 (Roopal Panchal) - 1,532

9 July 21, 2005 402 403, Shashwat, Opp. Gujarat College, Ellisbridge, Ahmedabad 38006 (Roopal Panchal) - 755 10 July 22, 2005 B/2 Himalaya Asalaya Ghatkopar, W, Mumbai (Purshottam Bhudwani) 1,800 -

Niketan Maheshwar, 33, Peddar Road, 5B (Manoj Seksaria) 1,025 - 11 July 25, 2005 Niketan Maheshwar, 33, Peddar Road, 5B( same as Manoj Seksaria ) 522 - 12 August 5, 2005 68, Samashta B. Society, Opp. Pinakin, Soc., Paldi, Ahmedabad (Ketan Atul Bhai Doshi) - 618

3, Payal Complex, Sayajigunj Paldi, Baroda, 3900053 (Biren Kantilal Shah) - 387 13 August 17, 2005 B/2 Himalaya Asalaya Ghatkopar, W, Mumbai (Purshottam Bhudwani) 5,504 - 14 Auugst 27, 2005 C/o SEIPL , G-1, Devpath Complex, B/h Lal Bungalow, Ahmedabad (Sugandh Estates) 2,500 - 15 September 22, 2005 Office no. 402, Shashwat Bldg, Nr. Hotel Kanak Elisbridge, Ahmedabad (Roopal Panchal) 10,000 - Total 37,105 17,795

The details of these accounts opened on the dates mentioned below at the appropriate

column, also assume significance in this context:

Table G

On an analysis of these details, it is seen that these accounts had various things in

common. It is evident that the different combination of identical names and surnames

were used. However, the addresses were common i.e., of Ms. Roopalben Panchal, one

of the key operators.

A few samples of the demat accounts opened with Karvy DP on a single day i.e., July

19, 2005, has been brought out below:

S. no.

Surname No. of afferent

demat A/c

Address Date of Opening Date of Closure

1. Daksha Luhar (13015876) to Induben Luhar (13021863)

600 402 403 Shashwat, Opp Gujarat College, Ellisbridge, Ahmedabad, 380006

16-18 December, 2003 Nov. -Dec., 2005

2. Daksha Pari (13040728) to Induben Pari (13046715)


16-18 December, 2003 Nov. -Dec., 2005

3. Daksha Mistri (13139789) to Induben Mistri (13145777)


5-6 January, 2004 Nov. 16 - 17, 2005 (one account closed in Jan. 2006)

4. Daksha Shroff (13145785) to Induben Shroff (13151778)


5-6 January, 2004 Nov.-Dec. 2005 (one account closed in Jan. 2006)

5. Daksha Soni (14243715) to Induben Soni (14249666)


16-18 August, 2004 Nov. 2005 (two accounts closed in Jan. 2006)

6. Daksha Suthar (14249674) to Induben Suthar (14255448)


16-18 August, 2004 Nov. 2005 (four accounts closed in Jan. 2006)

7. Daksha Patel (14255456) to Induben Patel (14261229)


16-18 August, 2004 Nov. - Dec. 2005 (four accounts closed in Jan. 2006)

8. Daksha Joshi (14349790) to Induben Joshi (14355564)


16-18 August, 2004 Nov. - Dec. 2005

9. Daksha Dapki (15457926) to Induben Dapki (15463820)


20-21 July 2005 Nov. 28, 2005

10. Daksha Panchal (12912969) to Ayushi Panchal (12915969)


6 / 24 Nov. 2003 Nov. - Dec. 2005

11. Daksha Kadia (14261238) to Samik Kadia (14263753)


16 Aug. 2004 Nov. 23 - 24, 2005

12. Daksha Rami (15463839) to Naymesh Rami (15467905)


20-21 July 2005 Nov. - Dec. 2005

13. Dasharath Seth (13162815) to Badri Seth (13163300)


20-21 July 2005 Nov. - Dec. 2005

14. Kunal Seth (13129788) to Babita Seth (13139770)

1,000 402 403 Shashwat, Opp Gujarat College, Ellisbridge, Ahmedabad, 380006

5-6 January 2004 (two accounts opened on 12.04.04)

Nov. - Dec. 2005

Page 18 of 54

Table H

S. No.

Source Client ID

Source DP ID

Source DP Name

Name Of Source Client

Address Of Source Client

Date of Opening of Demat Account

Date of Closure of

Demat

Accountstatus

1. 15442390 IN300394 Karvy DP SURESH JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

2. 15442406 IN300394 Karvy DP ABHAY JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

3. 15442414 IN300394 Karvy DP DEVANSHI JANI

402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

4. 15442422 IN300394 Karvy DP GULJAR JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

5. 15442439 IN300394 Karvy DP JENNY JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

6. 15442447 IN300394 Karvy DP LABDHA JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

7. 15442455 IN300394 Karvy DP YASHI JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

8. 15442463 IN300394 Karvy DP NIRU JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

9. 15442470 IN300394 Karvy DP NITA JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

10. 15442489 IN300394 Karvy DP UTPALL JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

11. 15442498 IN300394 Karvy DP ABHIGNA JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

12. 15442502 IN300394 Karvy DP BALWANT JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

13. 15442519 IN300394 Karvy DP DEVARSHI JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

14. 15442527 IN300394 Karvy DP GUMAN JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

15. 15442535 IN300394 Karvy DP JHANKI JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

16. 15442543 IN300394 Karvy DP LAGNI JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

17. 15442550 IN300394 Karvy DP YASHU JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

18. 15442569 IN300394 Karvy DP NIRUPAMA JANI


19/7/2005 24/11/2005 CLOSED

19. 15442578 IN300394 Karvy DP NITANSH JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

20. 15442586 IN300394 Karvy DP SWATI JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

21. 15442594 IN300394 Karvy DP ABHILAS JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

22. 15442609 IN300394 Karvy DP BALVIR JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

23. 15442617 IN300394 Karvy DP DEVASYA JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

Page 19 of 54

24. 15442625 IN300394 Karvy DP GUNISH JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

25. 15442633 IN300394 Karvy DP JIGAR JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

26. 15442640 IN300394 Karvy DP LAHAR JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

27. 15442659 IN300394 Karvy DP YATNA JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

28. 15442668 IN300394 Karvy DP NIRVI JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

29. 15442676 IN300394 Karvy DP NITIN JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

30. 15442684 IN300394 Karvy DP TRUSHIT JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

31. 15442692 IN300394 Karvy DP ABHISHEK JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

32. 15442705 IN300394 Karvy DP BANJUL JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

33. 15442713 IN300394 Karvy DP DEVENDRA JANI


19/7/2005 24/11/2005 CLOSED

34. 15442720 IN300394 Karvy DP GUNJAK JANI


19/7/2005 24/11/2005 CLOSED

35. 15442739 IN300394 Karvy DP JIGISH JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

36. 15442748 IN300394 Karvy DP LAJJA JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

37. 15442756 IN300394 Karvy DP YATRI JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

38. 15442764 IN300394 Karvy DP NISAR JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

39. 15442772 IN300394 Karvy DP DEPARV JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

40. 15442789 IN300394 Karvy DP TUKHAR JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

41. 15442797 IN300394 Karvy DP ADIP JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

42. 15442800 IN300394 Karvy DP BANKIM JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

43. 15442819 IN300394 Karvy DP DEVI JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

44. 15442828 IN300394 Karvy DP JIMESH JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

45. 15442836 IN300394 Karvy DP LAKENDRA JANI


19/7/2005 24/11/2005 CLOSED

46. 15442844 IN300394 Karvy DP YAVAN JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

47. 15442852 IN300394 Karvy DP MIYA JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

48. 15442869 IN300394 Karvy DP ROHINI JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

Page 20 of 54

49. 15442877 IN300394 Karvy DP TURANG JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 24/11/2005 CLOSED

50. 15442885 IN300394 Karvy DP ADITI JANI 402 403 Shaswat, Opp Gujarat College,Ellisbridge, Ahmedabad, 380006

19/7/2005 1/3/2006 CLOSED

In addition to the fact that the above accounts were opened on a single day i.e., July 19,

2005, the other common features noted about them are as follows:

- all the account holders had same surname (Jani),

- all of them had the same address i.e., 402 403, Shaswat, Opp. Gujarat College,

Ellisbridge, Ahmedabad-380006. (The address has been found to be that of a key operator

namely Mr. Roopalben Panchal),

- the names of the account holders run in the series from 'Suresh' to 'Aditi', same as

that contained in the list of 50 names added to the IOB bank account bearing

number '12140',

- all these accounts were closed pursuant to the preliminary investigation by SEBI.

I note that Karvy DP in its submission has not disputed the fictitious nature of the

afferent accounts as pointed out in the orders of SEBI. It has not denied the opening of

such demat accounts also. On the contrary, it has said that it ensured that the demat

accounts are opened and activated in the shortest span of time so that investors could

use the said accounts for applying in the IPOs. Karvy DP has argued that it had no role

to play in the opening of demat accounts on the same day, as the applications were not

received on the same date and that there was indeed a time difference between the date

of request and the date of activation of the demat account. They also submitted that the

applications were processed in batches.

I note that while applications for opening the demat accounts are processed in batches,

large numbers of applications are verified, uploaded and activated simultaneously. Even

if, one accepts the argument of Karvy DP that the applications were not received on a

single day, the fact still remains that all these were received and processed within a short

interval, considering the IDs allotted.

The Enquiry officer has cited the instances at page 32 of the Enquiry Report to show

that applications were received and accounts were opened on the same day. Karvy DP

has denied the same and it has submitted a table in its support with heading 'Panchal

Accounts Captured/ Scanned/ Activated Date Wise Control - NSDL'. Although, it has

Page 21 of 54

said that the dates of receipt of the applications and the activation thereof were

different, there is no mention of the relevant dates in the table submitted by Karvy DP.

Though the demat account once opened cannot be used till the same is activated and

there is a possibility that different processes in account opening can happen on different

dates, in my opinion, details of specific dates of opening and activation thereof are

crucial for deciding the credibility of the submission of Karvy DP. In the absence of

such details, the reply of Karvy DP fails to convince me that there was any difference

between the time of receipt of the application and the activation of the demat account.

I, therefore, concur with the finding of the Enquiry Officer that these accounts

mentioned at Table F, were opened on the same date/ within a few days of receipt of

application.

ii. Demat accounts having common address and photographs

Karvy DP had opened several demat accounts having common addresses, as seen from

the instances in the Tables G and H above. Karvy DP has argued that there was no rule

that prevented the DP from opening demat accounts with common addresses. It is also

said that the requirement of an address for the DP account is for the purpose of

obtaining a correspondence address.

A further allegation against Karvy DP is that the demat account opening forms of Ms.

Roopalben Panchal and SEIPL do not contain the details of the permanent address on

the application forms. Karvy DP in its reply has submitted that the demat accounts were

opened in the ordinary course of business, after complying with the KYC requirements

applicable at the relevant point of time. It has also said that obtaining the permanent

address on the application form was not legally required as per the then prevailing rules.

According to Karvy DP, as the correspondence address was certified by the banks, there

was nothing to excite its suspicion that something could be amiss. Further, it said that

the IPO sub brokers gave their own addresses, at times, for all their clients, for the

purpose of operational convenience.

I note the specific admission of Karvy DP that in certain demat account opening

applications, the addresses used by the applicants were that of the sub-brokers/ key

operators, which addresses were also supported by a letter from the bank. This suggests

that Karvy DP was aware of the fact that different accounts were being opened with the

same address of the sub brokers.

Page 22 of 54

For the regulator, this is a matter of serious concern when a registered intermediary like

Karvy DP opens thousands of accounts for different names having the same address

(knowing that it is not theirs rather belongs to key operators), by merely relying on the

bank's letter and does not bother to undertake necessary verification of their identities.

According to me, a prudent intermediary would have paused at such instances of

opening of demat accounts with common addresses, instead of rushing through the

application and thus it acted as a conduit to the manipulative designs of fraudsters. It

ought to have noted that numerous applications having same addresses were being

received and it should have realized that these were indicative of aberrations in the

market practices and ought to have undertaken the necessary reporting. KYC

compliance for registered intermediaries is sacrosanct and ought to be performed with

extreme caution.

Now, let me analyse the instances of common photographs appearing in more than one

demat application form submitted to Karvy DP. The table below gives the details of the

demat accounts opened with Karvy DP having same photograph:

Table I

S.No Name BO lD Name BOlD Name BO lD

1 Bhagyesh Vania 78034 Abhilash Rathi 126968 Abhilash Desai 116966

2 Dami Verma 145379 Karina Desai 122049 Aarti Zala 56681

3 Agat Pathak 187451 Bhadresh Vala 177937 — —

4 Aanshi Pandya 106487 Aanshi Rathi 126480 — —

5 Bablu Pathak 195861 Aakash Verma 136385 — —

6 Abhishek Rathi 127066 Abhishek Desai 117064 — —

7 Agni Pathak 187656 Badren Barot 176141 — —

8 Akshar Bhatt 198501 Bablu Patil 95869 — —

9 Bhadresh Desai 117936 Bhadresh Rathi 127938 — —

10 Aditya Pandya 107351 Aakash Patil 86383 — —

11 Abhilash Venna 136961 Agat Pandya 107457 — —

12 Agat Rathi 127450 Agat Desai 117459 — —

From the above, I note the instance that Bhagyesh Vania, Abhilash Rathi and Abhilash

Desai had same photographs in their application forms for opening demat accounts.

In the case of bank accounts also, strangely enough, it is seen that different bank

accounts were opened for the same group of persons, using same photograph,

different names and similar addresses. The details of such bank accounts are

mentioned below:-

Page 23 of 54

Table J

S. No. Name A/c no. with BhOB Name A/c no. with BhOB Name A/c no. with BhOB1 Bhagyesh Vania 9550-12175 Abhilash Rathi 9550-2068 Abhilash Desai 9550-1068

2 Darni Verma 9550-3909 Karina Desai 9550-1576 Aarti Zala 9550-10040

3 Agat Pathak 9550-8117 Bhadresh Vala 9550-7165 — —

4 Aanshi Pandya 9550-20 Aanshi Rathi 9550-2020 — —

5 Bablu Pathak 9550-8958 Aakash Verma 9550-3010 — — 6 Abhishek Rathi 9550-2078 Abhishek Desai 9550-1078 — —

7 Agni Pathak 9550-8137 Badren Barot 9550-6986 — —

8 Akshar Bhatt 9550-9222 Bablu Patil 9550-13958 — —

9 Bhadresh Desai 9550-1165 Bhadresh Rathi 9550-2165 — —

10 Aditya Pandya 9550-107 Aakash Patil 9550-13010 — —

11 Abhilash Verma 9550-3068 Agat Pandya 9550-117 — —

12 Agat Rathi 9550-2117 Agat Desai 9550-1117 — —

The argument of Karvy DP here is that the applications were received in bulk and that

the same were processed in different lots. Further, it says that, the identification of the

applicant by a DP as per the applicable KYC norms, was based on the verification of

the POI/ POA documents, which was duly done by it. Karvy DP has also stated that as

the banks had certified the identity and addresses of the person, Karvy DP had no

reason to suspect that the photographs were not of the real persons. It is admitted by

Karvy DP that it was impossible for it to verify whether the same set of photographs

were affixed in more than one set of demat application forms. Karvy DP also stated that

it had no electronic system available to store and match the photographs of the

applicants and that the processing personnel at the time of opening of the demat

accounts, only scrutinizes the application form so as to ensure the availability of the

requisite KYC documents. It has also submitted that it is practically impossible for the

person verifying the applications to focus on the photographs and identify the common

photographs. It has also been said that at the relevant time, identification was based on

the verification of the documents certifying the identity of the person and there was no

mandatory requirement of doing in-person verification before opening of the account. I

have considered the submission of Karvy DP that there were no systems to

electronically store and match the photographs in different names.

After having examined these instances in the light of the submissions of Karvy DP, I

am of the considered view that Karvy DP could not have missed the pattern of identical

photographs, similar address and common surnames in the application forms. It is

difficult to accept that it missed their attention. Had common photograph been an

isolated instance, one could believe that it was missed. However, not being able to spot

Page 24 of 54

even one instance among at least a dozen, is a matter of concern. In the case of

common addresses, Karvy DP has admitted that it was aware of the fact that different

accounts were being opened with the same address of the sub broker. It is quite strange

that the processing personnel, employed by Karvy DP, did not sense something amiss

when applications with similar names were coming in front of them through a handful

of key operators. If such a lapse is found in several cases, the obvious conclusion would

be that there was a deliberate omission. Under these circumstances, I am constrained to

conclude that Karvy DP ought not to have ventured into the humongous task of

accepting such number of applications. Further, the admitted failure to have an

appropriate system in place for authentic verification of the applicants, itself leads the

regulator to conclude that Karvy DP was giving leeway to the key operators to open

more and more demat accounts.

iii. Opening of demat accounts with different combination of identical names and

surnames

- In a previous discussion about the introduction of bank account bearing no: 12140 with

IOB, a list of 50 names certified by KSBL, starting with 'SURESH' and ending with

'ADITI' which was attached along with the account opening form, was analysed.

Queerly enough, I note that the demat accounts were also opened with Karvy DP on

CDSL in a similar manner for the 50 names starting from 'SURESH' and ending with

'ADITI' with 25 different combinations of surnames. The first name in the list annexed

with bank account number 12140 i.e. 'SURESH' has been used with 25 different

combinations of surnames as mentioned in the table below:

Table K

S. No Name of the A/c holder Demat A/c number Date of opening of A/c Status

1 SURESH ZALA 1301440000056768 July 15, 2005 Closed 2 SURESH RATHOD 1301440000066761 July 15, 2005 Closed 3 SURESH VANIA 1301440000076761 July 15, 2005 Closed 4 SURESH PATIL 1301440000086763 July 15, 2005 Closed 5 SURESH RANKA 1301440000096765 July 15, 2005 Closed 6 SURESH PANDYA 1301440000106761 July 16, 2005 Closed 7 SURESH DESAI 1301440000116761 July 16, 2005 Closed 8 SURESH RATHI 1301440000126763 July 16, 2005 Closed 9 SURESH VERMA 1301440000136765 July 16, 2005 Closed 10 SURESH TRIVEDI 1301440000156769 July 16, 2005 Closed 11 SURESH GANDHI 1301440000146767 July 16, 2005 Closed 12 SURESH BAROT 1301440000166760 July 16, 2005 Closed 13 SURESH VALA 1301440000176762 July 16, 2005 Closed 14 SURESH PATHAK 1301440000186764 July 16, 2005 Closed 15 SURESH BHATT 1301440000196766 July 16, 2005 Closed 16 SURESH TATED 1301440000410188 September 22, 2005 Pending for activation 17 SURESH KELA 1301440000420181 September 22, 2005 Pending for activation 18 SURESH SEN 1301440000430181 September 22, 2005 Pending for activation 19 SURESH ROY 1301440000440183 September 22, 2005 Pending for activation 20 SURESH IRANI 1301440000450185 September 22, 2005 Pending for activation

Page 25 of 54

21 SURESH JHA 1301440000460187 September 22, 2005 Pending for activation 22 SURESH KAPUR 1301440000400186 September 22, 2005 Pending for activation 23 SURESH MEHTA 1301440000470189 September 22, 2005 Pending for activation 24 SURESH DAS 1301440000480180 September 22, 2005 Pending for activation 25 SURESH PRASAD 1301440000490182 September 22, 2005 Pending for activation

Similarly the last name in the list i.e. 'ADITI' has been used with 25 different

combinations of surnames while opening the demat accounts on CDSL as mentioned

below:

Table L

S. No Name of the A/c holder Demat A/c number Date of opening of A/c Status

1 ADITI ZALA 1301440000057250 July 15, 2005 Closed 2 ADITI RATHOD 1301440000067252 July 15, 2005 Closed 3 ADITI VANIA 1301440000077254 July 15, 2005 Closed 4 ADITI PATIL 1301440000087256 July 15, 2005 Closed 5 ADITI RANKA 1301440000097258 July 15, 2005 Closed 6 ADITI PANDYA 1301440000107252 July 16, 2005 Closed 7 ADITI DESAI 1301440000117254 July 16, 2005 Closed 8 ADITI RATHI 1301440000127256 July 16, 2005 Closed 9 ADITI VERMA 1301440000137258 July 16, 2005 Closed 10 ADITI TRIVEDI 1301440000157251 July 16, 2005 Closed 11 ADITI GANDHI 1301440000147251 July 16, 2005 Closed 12 ADITI BAROT 1301440000167253 July 16, 2005 Closed 13 ADITI VALA 13014400001772525 July 16, 2005 Closed 14 ADITI PATHAK 1301440000187257 July 16, 2005 Closed 15 ADITI BHATT 1301440000197259 July 16, 2005 Closed 16 ADITI TATED 1301440000410671 September 22, 2005 Pending for activation 17 ADITI KELA 1301440000420671 September 22, 2005 Pending for activation 18 ADITI SEN 1301440000430673 September 22, 2005 Pending for activation 19 ADITI ROY 1301440000440675 September 22, 2005 Pending for activation 20 ADITI IRANI 1301440000450677 September 22, 2005 Pending for activation 21 ADITI JHA 1301440000460679 September 22, 2005 Pending for activation 22 ADITI KAPUR 1301440000400678 September 22, 2005 Pending for activation 23 ADITI MEHTA 1301440000470670 September 22, 2005 Pending for activation 24 ADITI DAS 1301440000480672 September 22, 2005 Pending for activation 25 ADITI PRASAD 1301440000490674 September 22, 2005 Pending for activation

From the above, it is seen that Karvy DP went on opening demat accounts for names

having different combinations of identical names and surnames. I note that KCL had

also provided finance in the IPO of IDFC to individuals who had similar set of names

starting with 'SURESH' to 'ADITI' out of the above discussed set of demat accounts

opened at CDSL during July 15 - 16, 2005.

Given below is the table which contains the details of the applications made, refunds

and allotment in respect of these names 'SURESH to 'ADITI' with the surname

'PANDYA' (although this forms part of the discussion under separate charge i.e. 'role in

the opening of the bank accounts', however, it is being referred at this stage to show the

charges w.r.t. the demat accounts of 'SURESH' and 'ADITI' in the relevant perspective):

Table M

Mode of financing

Place of Bidding

Appl No. Name of Applicant Bid Amt (₹)

Amt of Refund (₹)

Refund Order No.

No. of shares allotted

DIS No.

RTGS HYDERABAD 32985831 SURESH PANDYA 47600 38556 690001 266 74919 RTGS HYDERABAD 32985830 ABHAY PANDYA 47600 38556 690001 266 74920 RTGS HYDERABAD 32985829 DEVANSHI PANDYA 47600 38556 690001 266 74921

Page 26 of 54

RTGS HYDERABAD 32985828 GULJAR PANDYA 47600 38556 690001 266 74922 RTGS HYDERABAD 32985827 JENNY PANDYA 47600 38556 690001 266 74923 RTGS HYDERABAD 32985826 LABOHA PANDYA 47600 38556 690001 266 74924 RTGS HYDERABAD 32985825 YASHI PANDYA 47600 38556 690001 266 74925 RTGS HYDERABAD 32985824 NIRU PANDYA 47600 38556 690001 266 74926 RTGS HYDERABAD 32985823 NITA PANDYA 47600 38556 690001 266 74927 RTGS HYDERABAD 32985822 UTAPLL PANDYA 47600 38556 690001 266 74928 RTGS HYDERABAD 32985821 ABHIGNA PANDYA 47600 38556 690001 266 74929 RTGS HYDERABAD 32985820 BALWANT PANDYA 47600 38556 690001 266 74930 RTGS HYDERABAD 32985819 DEVARSHI PANDYA 47600 38556 690001 266 74931 RTGS HYDERABAD 32985818 GUMAN PANDYA 47600 38556 690001 266 74932 RTGS HYDERABAD 32985817 JHANKI PANDYA 47600 38556 690001 266 74933 RTGS HYDERABAD 32985816 LAGNI PANDYA 47600 38556 690001 266 74934 RTGS HYDERABAD 32985815 KASHU PANDYA 47600 38556 690001 266 74935 RTGS HYDERABAD 32985554 NIRUPAMA PANDYA 47600 38556 690001 266 74936 RTGS HYDERABAD 32985553 NITANSH PANDYA 47600 38556 690001 266 74937 RTGS HYDERABAD 32985552 SWATI PANDYA 47600 38556 690001 266 74938 RTGS HYDERABAD 32985776 ABHILASH PANDY 47600 38556 690001 266 74939 RTGS HYDERABAD 32985771 BALWIR PANDYA 47600 38556 690001 266 74940 RTGS HYDERABAD 32985770 DEVASPA PANDYA 47600 38556 690001 266 74941 RTGS HYDERABAD 32985769 GUNISH PANDYA 47600 38556 690001 266 74942 RTGS HYDERABAD 32985768 JIGAR PANDYA 47600 38556 690001 266 74943 RTGS HYDERABAD 33016532 LAHAR PANDYA 47600 38556 690001 266 74944 RTGS HYDERABAD 32985766 YATNA PANDYA 47600 38556 690001 266 74945 RTGS HYDERABAD 32985765 NIRVI PANDYA 47600 38556 690001 266 74946 RTGS HYDERABAD 32985764 NITIN PANDYA 47600 38556 690001 266 74947 RTGS HYDERABAD 32985763 TRUSHIT PANDYA 47600 38556 690001 266 74948 RTGS HYDERABAD 32985813 ABHISHEK PANDYA 47600 38556 690001 266 74949 RTGS HYDERABAD 32985812 BANJUL PANDYA 47600 38556 690001 266 74950 RTGS HYDERABAD 32985811 DEVENDRA PANDYA 47600 38556 690001 266 74951 RTGS HYDERABAD 32985810 GUNJAK PANDYA 47600 38556 690001 266 74952 RTGS HYDERABAD 32985809 JIGISH PANDYA 47600 38556 690001 266 74953 RTGS HYDERABAD 32985808 LAJJA PANDYA 47600 38556 690001 266 74954 RTGS HYDERABAD 32985789 YATRI PANDYA 47600 38556 690001 266 74955 RTGS HYDERABAD 32985788 NISAR PANDYA 47600 38556 690001 266 74956 RTGS HYDERABAD 32985787 DEPARV PANDYA 47600 38556 690001 266 74957 RTGS HYDERABAD 32985807 TUKHAR PANDYA 47600 38556 690001 266 74958 RTGS HYDERABAD 32985805 ADIP PANDYA 47600 38556 690001 266 74959 RTGS HYDERABAD 32985804 BANKIM PANDYA 47600 38556 690001 266 74960 RTGS HYDERABAD 32985803 DEVI PANDYA 47600 38556 690001 266 74961 RTGS HYDERABAD 32985802 JIMISH PANDYA 47600 38556 690001 266 74962 RTGS HYDERABAD 32985801 LAKENDRA PANDYA 47600 38556 690001 266 74963 RTGS HYDERABAD 32985800 YAVAN PANDYA 47600 38556 690001 266 74964 RTGS HYDERABAD 32985799 MIYA PANDYA 47600 38556 690001 266 74965 RTGS HYDERABAD 32985798 ROHINI PANDYA 47600 38556 690001 266 74966 RTGS HYDERABAD 32985797 TURANG PANDYA 47600 38556 690001 266 74967 RTGS HYDERABAD 32985796 ADITI PANDYA 47600 38556 690001 266 74968

I also note that pursuant to the allotment, the money has been returned vide a single

consolidated refund order for all these applicants and the Delivery Instruction Slips

(hereinafter referred to as 'DIS') which were used for transfer of shares (allotted to them in

the IPO) to the key operators were also found to be in the same sequence (as referred in

last column of the table M above).

- I note that another set of applications for opening 10,000 demat accounts with Karvy

DP coincided with the IPO of Suzlon Energy Limited. The data for such accounts were

uploaded on the system of CDSL and the same were 'pending activation'. An analysis of

the details of these 10,000 demat accounts shows that these account holders had ten

Page 27 of 54

common surnames in the sets of 1,000 each. Further, these account holders had bank

accounts with IOB. The details of such demat accounts are as under:

Table N

S. No.

Starting Name Last Name No. of demat A/c

Date of opening

IOB Bank A/c No. Remarks

1. KUNAL KAPUR RITU KAPUR 1,000 22/09/2005 2611-15001 to 2611-16000 Account opening forms returned

2. KUNAL TATED RITU TATED 1,000 22/09/2005 2611-16001 to 2611-17000 Account opening forms returned

3. KUNAL KELA RITU KELA 1,000 22/09/2005 2611-17001 to 2611-18000 Account opening forms returned

4. KUNAL SEN RITU SEN 1,000 22/09/2005 2611-18001 to 2611-19000 Account opening forms returned

5. KUNAL ROY RITU ROY 1,000 22/09/2005 2611-19001 to 2611-20000 Account opening forms returned

6. KUNAL IRANI RITU IRANI 1,000 22/09/2005 2611-20001 to 2611-21000 Account opening forms returned

7. KUNAL JHA RITU JHA 1,000 22/09/2005 2611-21001 to 2611-22000 Account opening forms returned

8. KUNAL MEHTA RITU MEHTA 1,000 22/09/2005 2611-22001 to 2611-23000 Account opening forms returned

9. KUNAL DAS RITU DAS 1,000 22/09/2005 2611-23001 to 2611-24000 Account opening forms returned

10. KUNAL PRASAD RITU PRASAD 1,000 22/09/2005 2611-24001 to 2611-25000 Account opening forms returned

Total 10,000

From the above table, it is seen that 1,000 demat accounts were opened with the

surname 'Kapoor' and the first name starting with 'Kunal' and ending with 'Ritu', and a

similar pattern with different surnames has been followed for other 9 sets. I note that

these demat accounts were opened on the same date and all these had their bank

accounts in consecutive numbers. Although, Karvy DP has said that these applications

were not supported by the relevant documents and were hence returned, such

explanation of Karvy DP is merely an afterthought and it is difficult to accept the same

as the data pertaining to such accounts were already uploaded on CDSL.

c. Special treatment to the key operators

Having discussed the role of Karvy DP in the opening of demat accounts and bank

accounts, the next issue to be addressed is whether Karvy DP was giving special treatment

to its IPO sub brokers who were also found to be the key operators.

i. Manner of opening demat accounts for key operators

- Karvy DP had opened a few demat accounts which were having the address of Manoj

Seksaria (an IPO sub broker). These accounts are found to have been opened in an

uncanny manner. Karvy DP had accepted the letters issued by HDFC Bank dated

August 17, 2005, as the proof of address for the account opening forms for these demat

accounts, whereas the date of opening of such accounts with HDFC Bank and the date

of demat account opening with Karvy DP are the same, i.e., August 17, 2005. This again

has to be read in the background of the facts that, though the demat account opening

Page 28 of 54

process of Karvy DP is centralized at its registered office at Hyderabad and the

applicants for the said demat accounts were located in Mumbai, the process of opening

of the demat account was completed on the same day. Further, the client DP

agreements for such applications were also found to have been dated August 17, 2005

(same date as that of account opening) and the same were entered at Hyderabad.

The Enquiry Officer in his report has noted that the account opening process could not

have been completed on the same day, when the process of opening of the demat

account is centralized at Karvy House, Hyderabad and the applicants for the said demat

accounts were located in Mumbai. Interestingly, the date of franking affixed on the

client DP agreements was October 04, 2005, i.e., six weeks later to the opening of

accounts. Samples of the details of these applicants who had the same addresses as that

of Manoj Seksaria are given below:

Table O Client BO ID Applicant Date of HDFC letter &

opening of demat a/c Date of franking as per the DP-

client agreement 1301440000318441 Borhade S. D 17/08/2005 04/10/2005 1301440000318547 Mansukh N.H. 17/08/2005 04/10/2005 1301440000318585 N.S. Katavankar 17/08/2005 04/10/2005 1301440000318488 Vilas B. Pokarakar 17/08/2005 04/10/2005 1301440000318682 P.P. Pawar 17/08/2005 04/10/2005

Similar instances were discussed by the Enquiry Officer in respect of the demat

accounts having the address of Purshottam Budhwani, another key operator. In this

regard, Karvy DP has said that the demat account opening forms were provided to the

applicants at its Mumbai office and the data required to be filled in the account opening

forms were provided in soft form by the key operators to Karvy DP. On completion of

the initial scrutiny of the applications at Mumbai, the data was electronically forwarded

to Hyderabad, from where the data was uploaded into the CDSL Depository

Participants Module (hereinafter referred to as 'DPM').

As regards the date of franking being late as in October 04, 2005, when the accounts are

said to have been opened on August 17, 2005, Karvy DP has submitted that as the

number of accounts opened during the relevant period was sizeable, it did not have the

requisite number of stamp papers. Karvy DP also said that it had opened the demat

accounts based on the assurance that as soon as the stamp papers are procured, the

agreements will be executed with the respective account holders. Karvy DP said that it

had ensured the execution of the agreements and also that the signatures in the demat

application form and the agreements tallied.

Page 29 of 54

In my view, the very fact that same date appeared on account opening form, the

introduction letter issued by the HDFC Bank and on the agreement shows that Karvy

DP had facilitated the key operators in furtherance of their objective of the opening of

the afferent accounts to corner the shares in the IPOs. At this stage, I also note that

August 17, 2005, was the last date of closure of the IPO of Sasken Communications

Limited and Karvy DP was hastening the process in order to help key operators to

make applications in the said IPO. Karvy DP has argued that for every transaction,

maker-checker concept has been religiously implemented and it uses the DPM provided

by the depositories. I note that Regulation 20AA (16) of the SEBI (Depositors and

Participants) Regulations, 1996 requires that a participant shall follow the maker-checker

concept in all its activities in order to ensure accuracy of the data and as a mechanism to

check unauthorized transactions.

A brief discussion about the maker-checker concept in the words of Karvy DP is given

below. It is a process whereby one person with limited access to capture the details

alone as provided in the application, captures the data. Another person having access

only to activate the account, shall verify the details captured in the system and activate

the account only after confirming that the data captured matches with the details

furnished in the application. In case of any discrepancy in the data captured, the

application is returned back to the person having access to capture the details for

rectification. The rectified details in the system are again scrutinized by the person

having permission for activation before the account is activated.

However, the discussion in the foregoing paragraphs about opening of demat accounts

by Karvy DP with the data captured by the sub brokers and uploading the same in their

system suggests that while opening the demat accounts, Karvy DP had not checked the

applications or the details filled in the application forms. All these instances thus

reiterate that Karvy DP has not followed the maker-checker concept as required under

the DP Regulations.

Further, I am unable to accept the explanation given by Karvy DP for the special

treatment extended by them to the key operators. The law governing the opening of the

demat accounts and the ‘Know Your Customer’ (KYC) norms at the relevant time was

laid down by SEBI vide circulars bearing numbers SMDRP/Policy/CIR-36/2000 dated

August 4, 2000 and MRD/DoP/Dep/Cir-29/2004 dated August 24, 2004. SEBI

circular dated August 4, 2000 has prescribed detailed procedure to be followed by all

Page 30 of 54

DPs at the time of opening beneficiary account. SEBI vide circular dated August 24,

2004, stipulated that an identity card/ document issued by Scheduled Commercial

Banks containing the applicant's photo/ address may be accepted as POI and POA. The

circular further clarifies that 'the aforesaid documents are the minimum requirement for

opening a BO Account'. I note that while opening a BO Account, the DPs are required

to exercise due diligence in establishing the identity of the person to ensure the safety

and integrity of the depository system.

- Additionally, the dates of opening of the demat accounts in certain cases were found to

be much earlier than the date of letter of introduction by the bank (taken as the proof of

identity and the proof of address). Such details are as under:

Table P

BO ID Date of demat account opening

Date of POI and POA

390669 27/08/2005 8/9/2005 389826 14/07/2005 8/9/2005 390181 17/08/2005 8/9/2005 30329 17/08/2005 8/9/2005 390293 17/08/2005 8/9/2005 390071 17/08/2005 8/9/2005 390196 17/08/2005 8/9/2005 290202 17/08/2005 8/9/2005 390221 17/08/2005 8/9/2005 389923 17/08/2005 8/9/2005 390240 17/08/2005 8/9/2005 391170 27/08/2005 8/9/2005

Karvy DP in its reply has submitted that it is only in 27 cases that the date of

introduction letter is subsequent to the date of opening of the beneficiary account. It

has been said that due to the deficiencies in the original documents identified at the time

of scrutiny, fresh documents were sought for, which were subsequently received and

attached along with the original application form.

From the above, it can be inferred that when the demat accounts were opened there

were no valid documents for PoI and PoA. It was definitely the responsibility of the DP

to ensure that statutory requirements in terms of proof of address and agreements are

complied in its letter and spirit. A registered intermediary who is examining the KYC

details is expected to check how long these applicants have been residing at the

mentioned address. Karvy DP has therefore clearly deviated from the statutory norms

and opened demat accounts while relying on the POI and POA of same date/

subsequent dates. The only possible reason behind these deliberate deviations is that

Karvy DP gave special treatment to the key operators. This corroborates the allegation

of collusion with the key operators.

Page 31 of 54

ii. I further note that the IPO of IDFC was a book-built issue and it was compulsory to

have bank account in order to submit the applications in the IPO and the details

of the demat account. On July 22, 2005, i.e., the last date of the closure of the IPO of

IDFC, the demat accounts of the key operators namely one Purshottam Budhwani (for

2,000 applications) and Manoj Seksaria (for 2,000 applications) with Karvy DP were

used for the purpose of making applications in the IPO. It has been found that the bank

account details of such demat accounts were not available with the Depository and

KCPL, the RTI amongst the Karvy group appears to have taken the bank account

details from the database of Karvy DP. This is clear deviation from the normal practice

wherein the data has to be taken from the depository. In addition to these, KCPL had

issued refund orders to the very same 4,000 applicants (having the address of above mentioned

Purshottam Bhudwani and Manoj Seksaria) which are in continuous serial numbers.

Karvy DP has argued that there is nothing wrong or illegal in the activation of demat

accounts on the date of closure of the issue. It has been said that the application for

opening of the demat accounts of Manoj Seksaria and Purshottam Bhudwani were

received prior to the date of activation of demat accounts i.e., on July 22, 2005. I note

that the facts available on record do not clearly bring out as to how the bank account

details were available with KCPL when the same were not in existence/ were not with

the Depositories. Having seen the above paragraphs as to how the Karvy group entities

were acting complementary to each other in the entire IPO manipulation, I am

constrained to infer that the said details could only have been obtained by KCPL from

Karvy DP.

The absence of the necessary bank account details in the case of said 4,000 applicants

coupled with the fact of single refund orders to these applicants by KCPL, do tell that it

is not mere oversight of compliance, but Karvy DP was an actor who had fairly good

knowledge of the script of the fraud played by the key operators.

iii. Discounted rates to key operators

The Enquiry Report has observed that Karvy DP had extended discounted rates to the

key operators for opening demat accounts for the purpose of IPO. Thus, Karvy DP had

encouraged opening of large number of demat accounts. Further, the Enquiry Officer

has noted that Karvy DP had extended special treatment to the key operators by

accepting cash.

Page 32 of 54

Karvy DP in its reply has submitted that offering of discounted rates and providing

special schemes to the investors for opening demat accounts were done in the ordinary

course of their business. Karvy DP also said that the discounted rates were not

specifically given to the clients of the sub brokers/ key operators, but were given to all

such clients/ investors who wanted to avail any such scheme at that point of time.

Further, it has been said that the fee applicable towards the charges would be anywhere

between ₹ 50-₹ 100 and it was a standard market practice that the DP clients remit this

fee in cash. Therefore, Karvy DP said that the acceptance of payment in cash under

such circumstances cannot be construed as a special treatment.

Given the background of the entire scheme, the manner and haste with which process

of opening of the demat accounts were undertaken by Karvy DP, it is difficult to accept

the above submission of Karvy DP regarding the discounted rates given to the key

operators. Having considered the above, now let me examine the delivery instruction

slips (hereinafter referred to as 'DIS') issued by Karvy DP.

iv. Delivery Instruction Slip

SEBI had found during its inspection at Karvy DP that the welcome kit issued to the

IPO clients referred through the IPO sub brokers of Karvy DP had contained only

single DIS along with the DIS booklet requisition slip. Further, the welcome kit was

sent to the correspondence address of the demat account holders, which was that of the

sub-brokers only.

It is also seen that the DIS issued to various BO accounts introduced by the IPO sub-

brokers under the IPO scheme were in continuous serial numbers though the account

numbers are in a different order. These DISs were later used for making off-market

transfers from the afferent demat accounts to the demat accounts of the key operators.

It is important to note that the material details in the DIS, such as the account number,

name of account holder, ISIN number, company name, quantity, DIS serial number,

target account number, etc. were pre-printed. A sample of the details contained in DIS

used by SEIPL, one of the key operators has been discussed below:

Table Q Sr. no.

DIS Sr. No.

Instructi on No.

Source Client ID

Source Client name

Sourc e DP

Target Client ID

Target DP

Name of Security

Quantity

Date of Execution

1. 200190918 1956033 14544833 Gandhi Roshan M Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 2. 200190917 1956032 14544825 Gandhi Trishul M Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 3. 200190916 1956031 14544817 Gandhi Payal M Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 4. 200190915 1956030 14544809 Sheth Hitendra H Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 5. 200190914 1956029 14544794 Sheth Mauli H Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 6. 200190913 1956028 14544786 Sheth Vasu H Karvy DP 14405199 Karvy DP IDFC 266 08.08.05

Page 33 of 54

7. 200190912 1956027 14544778 Sheth Vasu H Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 8. 200190911 1956026 14544769 Doshi Vatsal G Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 9. 200190910 1956025 14544750 Doshi Kajri G Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 10. 200190909 1956024 14544743 Mistry Bokshi P Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 11. 200190908 1956023 14544735 Mistry Kalpen P Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 12. 200190907 1956022 14544727 Mistry Vibhut P Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 13. 200190919 1956034 14544840 Mistry Mohan R Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 14. 200190901 1956016 14544663 Sheth Chirag S Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 15. 200190902 1956017 14544670 Sheth Samrat S Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 16. 200190903 1956018 14544689 Sheth Kanjari S Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 17. 200190904 1956019 14544698 Gandhi Chetak R Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 18. 200190905 1956020 14544702 Gandhi Akshar R Karvy DP 14405199 Karvy DP IDFC 266 08.08.05 19. 200190906 1956021 14544719 Gandhi Anali R Karvy DP 14405199 Karvy DP IDFC 266 08.08.05

From the above, it can be seen that the DIS were in continuous serial numbers and the

target client ID were same. I note that the details like the target client ID in the DIS

were not hand written, rather printed on the form using the same font characters. All

these show that the shares were transferred to the same client, on a single day in a pre-

planned manner.

Another instance is that pursuant to the allotment of shares in the IDFC IPO on

August 06, 2005, the shares were then transferred from the demat accounts of the

allottees (including SURESH SETH till ADITI SETH) to the demat accounts of Ms.

Roopal Panchal (client ID: 11920868) on August 08, 2005 through off-market

transactions. For such transfers also, Karvy DP had issued loose DIS slips which had

continuous serial numbers. The details of the off market transfers in the IPO of IDFC

in respect of these transactions are given in the table below:

Table R

Client ID Name of the demat a/c holder

Target client name

Date of execution

No. of shares

Slip no.

13130266 SURESH SETH Roopal Panchal August 8, 2005 266 200167245 13130274 ABHAY SETH Roopal Panchal August 8, 2005 266 200167246 13130299 DEVANSHI SETH Roopal Panchal August 8, 2005 266 200167248 13130329 LABDHA SETH Roopal Panchal August 8, 2005 266 200167249 13130338 YASHI SETH Roopal Panchal August 8, 2005 266 200167250 13130346 NIRU SETH Roopal Panchal August 8, 2005 266 200167251 13130354 NITA SETH Roopal Panchal August 8, 2005 266 200167252 13130362 UTPALL SETH Roopal Panchal August 8, 2005 266 200167253 13130379 ABHIGNA SETH Roopal Panchal August 8, 2005 266 200167254 13130387 BALWANT SETH Roopal Panchal August 8, 2005 266 200167255 13130395 DEVARSHI SETH Roopal Panchal August 8, 2005 266 200167256 13130409 GUMAN SETH Roopal Panchal August 8, 2005 266 200167257 13130418 JHANKI SETH Roopal Panchal August 8, 2005 266 200167258 13130426 LAGNI SETH Roopal Panchal August 8, 2005 266 200167259 13130434 YASHU SETH Roopal Panchal August 8, 2005 266 200167260 13130442 NIRUPAMA SETH Roopal Panchal August 8, 2005 266 200167261 13130459 NITANSH SETH Roopal Panchal August 8, 2005 266 200167262 13130467 SWATI SETH Roopal Panchal August 8, 2005 266 200167263 13130475 ABHILASH SETH Roopal Panchal August 8, 2005 266 200167264 13130483 BALWIR SETH Roopal Panchal August 8, 2005 266 200167265 13130490 DEVASYA SETH Roopal Panchal August 8, 2005 266 200167266 13130506 GUNISH SETH Roopal Panchal August 8, 2005 266 200167267 13130514 JIGAR SETH Roopal Panchal August 8, 2005 266 200167268 13130522 LAHAR SETH Roopal Panchal August 8, 2005 266 200167269 13130539 YATNA SETH Roopal Panchal August 8, 2005 266 200167270 13130547 NIRVI SETH Roopal Panchal August 8, 2005 266 200167271 13130555 NITIN SETH Roopal Panchal August 8, 2005 266 200167272 13130563 TRUSHIT SETH Roopal Panchal August 8, 2005 266 200167273

Page 34 of 54

13130570 ABHISHEK SETH Roopal Panchal August 8, 2005 266 200167274 13130589 BANJUL Roopal Panchal August 8, 2005 266 200167275 13130598 DEVENDRA SETH Roopal Panchal August 8, 2005 266 200167276 13130602 GUNJAK SETH Roopal Panchal August 8, 2005 266 200167277 13130619 JIGISH SETH Roopal Panchal August 8, 2005 266 120204845 13130627 LAJJA SETH Roopal Panchal August 8, 2005 266 200167278 13130635 YATRI SETH Roopal Panchal August 8, 2005 266 200167279 13130643 NISAR SETH Roopal Panchal August 8, 2005 266 200167280 13130650 DEPARV SETH Roopal Panchal August 8, 2005 266 200167281 13130669 TUKHAR SETH Roopal Panchal August 8, 2005 266 200167282 13130678 ADIP SETH Roopal Panchal August 8, 2005 266 200167283 13130686 BANKIM SETH Roopal Panchal August 8, 2005 266 200167284 13130694 DEVISETH Roopal Panchal August 8, 2005 266 200167285 13130717 JIMISH SETH Roopal Panchal August 8, 2005 266 200167287 13130725 LAKENDRA SETH Roopal Panchal August 8, 2005 266 200167288 13130733 YAVAN SETH Roopal Panchal August 8, 2005 266 200167289 13130740 MIYA SETH Roopal Panchal August 8, 2005 266 200167290 13130759 ROHINI SETH Roopal Panchal August 8, 2005 266 200167291 13130768 TURANG SETH Roopal Panchal August 8, 2005 266 200167292 13130776 ADITI SETH Roopal Panchal August 8, 2005 266 200167293

As per the details obtained from CDSL, it is seen that hundreds of the DISs used by the

key operators are in continuous serial numbers. A sample from the IPO of IDFC is as

under:

Table S

Sr. No. Name of the Group DIS Serial no. (from and to) No. of DIS

1 Manoj Seksaria 40,001 – 42,000 1,999

2 Purshottam Bhudwani 32,001 ‐ 32,130

32,141 ‐ 32,300

32,311 ‐ 32,845

61,001 ‐ 61,100

61,201 ‐ 62,600

65,401 ‐ 66,200

129

159

534

99

1,399

799

3 Roopal Panchal 70,001 ‐ 84,807 14,806

4 Dhaval A. Mehta 19,679 – 20,018 339

5 Dharmesh B. Mehta 20,405 – 21,106 701

6 Dhaval A. Katakia 21,172‐ 22,283 1,111

7 Dharmesh K. Katakia 21,586 ‐ 21,711 125

8 Dhaval A. Mehta 19679 ‐ 20,018

22541‐22,612

339

71

Total 22,610

Karvy DP in its reply before the Enquiry Officer had submitted that the account

holders while filling up their details like ISIN number, number of shares, target account

number, etc., prior to the submission of the same to it for execution, had used a similar

printer which in turn resulted in, matching of font, font size, etc.

It has been further found that DIS slips were purportedly signed by one person in bulk

and the same were processed in a single day. The Enquiry Report also discusses about

the processing of DIS which does not bear the signature of the clients. Upon

consideration of these factors, the Enquiry Officer has noted that it is highly improbable

Page 35 of 54

that all the different account holders have used the same printer and the same font to fill

the said details.

In this regard, I note that Karvy DP in its reply has submitted that different types of

DIS were submitted by the clients, viz., printed, rubber stamped and handwritten. It has

been said that similar printer might have been used by the IPO sub broker for servicing

its clients. It has been argued that CINs (Credit Instruction number) were not

mentioned on the DIS. These were filled in by the clerical staff at the time of providing

these instruction slips to the CDSL officials. Karvy DP has also submitted that as per

the DP Rules and Regulations, a DP cannot withhold the transfer of shares, if a valid

and duly executed DIS is submitted by the clients. It has also said that the execution of

DIS requires entry of only a few numeric fields and Karvy DP has the necessary

infrastructure and resources to handle high volume transactions. Karvy DP has also

argued that the instructions have been executed following the maker-checker concept as

per the DP guidelines. They have stated that the submission of instructions by a broker/

sub-broker to the DP of their clients for the shares to be received by them is a general

practice. Karvy further said that given the scale of operations, there was nothing

abnormal in the processing of the so called large number of DISs in a day. They also

stated to have ensured that the signatures in the DIS were tallying with the signatures in

the demat application forms and that the signatures in all the DISs were not the same.

As regards the seven cases wherein it was alleged that the respective DIS were received

without signature, it has been submitted that these were rejected and retained by Karvy

DP and fresh DIS were called from the clients. Subsequently, a fresh set of DIS were

received by Karvy DP duly signed by the BO holders for execution of transfer and

accordingly the DIS was executed.

I note that the DIS were issued in continuous serial numbers whereas demat account

numbers of the afferent accounts are not continuous. The submissions of Karvy DP

does not appear to be convincing to me as the continuous serial number of DIS is

possible only if loose DISs which is part of one booklet is issued to various clients.

Therefore, I conclude that the DIS slips had been issued by Karvy DP to one or a few

persons controlling the said group. Further, it cannot be said to be a mere coincidence

that so many (14,806) account holders based at Ahmedabad could have given

instructions to DP on a single day and that such instructions went unnoticed. The pre-

Page 36 of 54

printing of all the relevant columns in the DIS definitely points to the collusion of

Karvy DP and key operators in furtherance of their game plan.

Further, Karvy DP seems to have known that the DISs would be issued to the clients at

the address available on records and that these were finally reaching to the key

operators, as the correspondence address of these accounts is the same as that of key

operators. Under these circumstances, it can be said that Karvy DP had the knowledge

of the operations relating to the key operators and had facilitated the transfer of shares

from thousands of afferent accounts to the demat accounts of the key operators. Thus,

by accommodating the key operators, Karvy DP deliberately facilitated, aided and

abetted these key operators to make large scale off market transfers in furtherance of

the common objective of cornering of the shares, which is a matter of serious regulatory

concern.

In my opinion, the events starting from opening of bank accounts, afferent demat accounts

and the manner in which they were operated along with the special treatment afforded to

the very same key operators have to be considered as a comprehensive plan in which Karvy

group was an important participant.

d. Third Party cheques

I note that Karvy DP had accepted third party cheques for the dues payable by various

BOs and had issued a single receipt to key operators whereas the amount was paid on

behalf of various demat accounts. In fact, it is found to have accepted single consolidated

cheque in respect of 225 accounts and 1,276 accounts. This practice definitely shows that

Karvy DP was giving special treatment to the key operators.

Karvy DP in its reply has submitted that the IPO sub-brokers were procuring the

applications from the investors and they used to collect the fees applicable from them.

They have also said that as the amounts collected from the clients towards fees were small,

the same were remitted by investors to the sub-brokers in cash. The fees so collected in

cash by the sub-brokers was then remitted to Karvy DP by way of consolidated cheques. It

is submitted that as it was the IPO sub-brokers, who were bringing the applications for

opening demat accounts on behalf of the investors, Karvy DP was accepting the single

consolidated cheque toward payment and issuing single receipt.

Karvy DP vide its letter dated June 08, 2007, submitted certain details showing

consolidated payments from sub brokers/ key operators towards AMC (Annual

Page 37 of 54

Maintenance Charges) and transaction charges of numerous demat accounts held with the

DP. The details thereof are as under:

Table T

CHEQUE COLLECTION AMOUNT (PANCHAL)

Total AMC Charges Transactions Charges

S. No.

Chq. No Date Bank Name No. of A/c Amount No. of A/c

Amount No. of A/c

Amount

1 627986 12-May-03 HDFC 4 2743 4 2743

2 907406 12-May-03 HDFC 3 2449 3 2449

3 907407 12-May-03 HDFC 780 780

4 984761 12-May-03 HDFC 1589 1589

5 6278986 12-May-03 HDFC 192 192

6 774641 12-May-03 ICICI 324 324

7 780184 12-May-03 ICICI 371 371

8 749833 12-May-03 VIJAYA 316 316

9 417618 22-Aug-03 HDFC BANK 146 146

10 766900 09-Sep-03 VIJAYA 150 150

11 273329 24-0ct-03 HDFC BANK 225 11250 225 11250

12 699328 24-Dec-03 HDFC BANK 1277 63850 1277 63850

13 699329 24-Dec-03 HDFC BANK 600 30000 600 30000

14 815625 24-Mar-04 BANK OF BARODA

119.32 1 119.32

15 144388 31-Mar-04 BOBL 1334 200000 1334 200000

16 394242 10-Jun-04 HDFC BANK 2600 2600

17 774588 24-Jul-04 ICICI 319.62 319.62

18 907683 24-Jul-04 ICICI 439.03 439.03

19 941364 24-Jul-04 ICICI 883.58 883.58

20 955211 24-Jul-04 ICICI 926 100000 926 100000

21 853131 24-Jul-04 SCB 966.12 966.12

22 853128 24-Jul-04 SCB 191.64 191.64

23 853129 24-Jul-04 SCB 110.43 110.43

24 853130 24-Jul-04 SCB 256.83 256.83

25 865238 24-Jul-04 SCB 198.06 198.06

26 984167 24-Jul-04 SCB 124.20 124.20

27 984168 24-Jul-04 SCB 135.34 135.34

28 984171 24-Jul-04 SCB 1162.14 1162.14

29 984172 24-Jul-04 SCB 477.36 477.36

30 985719 24-Jul-04 SCB 254.89 254.89

31 986122 24-Jul-04 SCB 526.72 526.72

32 984169 24-Jul-04 SCB 126.24 126.24

33 984170 24-Jul-04 SCB 316.45 316.45

34 749844 24-Jul-04 VIJAYA 180.49 180.49

35 955249 19-Aug-04 ICICI BANK 2507 300000 2507 300000

36 152462 25-Aug-04 BOBL 566 56600 566 56600

37 151219 19-Nov-04 SCB 428 295500 428 295500

38 623168 21-Jan-05 HDFC Bank 171 45000 171 45000

39 774593 25-J an-05 ICICI 211.58 211.58

40 907688 25-Jan-05 ICICI 380.19 380.19

41 936348 25-J an-05 ICICI 928.99 928.99

42 940881 25-Jan-05 ICICI 232.52 232.52

43 941368 25-J an-05 ICICI 631.45 631.45

44 943874 25-J an-05 ICICI 1078.78 1078.78

45 962365 25-J an-05 ICICI 1147.18 1147.18

46 940692 25-J an-05 ICICI 3389.79 3389.79

47 984188 25-Jan-05 SCB 284.32 284.32

Page 38 of 54

Thus, Karvy DP is found to have accepted consolidated cheques/ payments for the

dues payable. Karvy DP, at different junctures, in its replies/ written submissions has

talked about its large scale of operations and that it has the infrastructure for handling

peak volumes during the IPOs. Karvy DP has also taken an argument that the number

of accounts opened at its end, have to be viewed against the backdrop of the scale of

the operations and the infrastructure available with it. In this regard, I note that the

charge against Karvy DP is not one pertaining to inadequacy of infrastructure or

inefficiency. Karvy DP is charged with complicity with the key operators in perpetrating

manipulative and fraudulent transactions. Karvy DP had misused its infrastructure to

further the interests of the key operators. I am of the considered view that Karvy DP

cannot shrug off the responsibility on the note that its scale of operation is large and

that IPO sub broker have exploited the loopholes. In my view, larger the scale of

operation, the greater, the degree of responsibility is. If one were to accept the argument

that loopholes existed in the system and that IPO sub brokers had misled the DP, the

very presence of the intermediaries in the securities market becomes meaningless. In my

view, a registered intermediary is not just expected to remain alert and keep vigil while

performing its duties but also not become a party to the scheme of manipulation plotted

by the manipulators.

e. IPO financing

Having examined the manner in which Karvy DP had been involved in the opening of

bank accounts, afferent demat accounts and how it accommodated the key operators,

overlooking the set norms and procedures, I would now deal with the financing activities

of KCL1 so as to comprehend the larger scheme of operations indulged by 'Karvy' as a

business group.

i. Financing Ms. Roopalben Panchal without verifying her creditworthiness

1 KCL was the NBFC arm of Karvy group and had acted as financier, during the relevant period of time. KCL was the registered DP during the relevant period of time.

48 749850 25-J an-05 VIJAYA 160.89 160.89

49 64640 28-Mar-05 SBI 327 327

50 815633 29-Mar-05 BOB 495.40 495.40

51 35625 09-Jun-05 VIJAYA 414.00 414.00

52 983781 12-Jul-05 ICICI 2778 300000.00 2778 300000

53 426709 10-Nov-05 SBI 586.70 586.70

54 40553 29-Nov-05 CITI BANK 520 520

55 80498 29-Nov-05 CITI BANK 500 500

56 41747 22-Dec-05 VIJAYA 496 496

Total 10,869 14,32,433.25 10,213 10,61,700 656 3,70,733.25

Page 39 of 54

KCL is found to have extended large finance to various key operators including Ms.

Roopalben Panchal, with whom it has denied any interaction. KCL had financed Ms.

Roopalben Panchal to the extent of ₹ 18.56 crores for making 5,200 applications in the

IPO of IDFC. It was said that all its dealings were with Mr. Dipak Panchal, the brother-

in-law of Ms. Roopalben Panchal. Further, it has been alleged that KCL had extended

finance to the key operators without verifying their creditworthiness.

In this regard, Karvy DP has argued that the measurement of credit worthiness of an

individual is subjective and depends on many variables. It has been said that in the

products like IPO, the margin money collected would be sufficient to cover the amount

payable towards the shares allotted. Karvy DP had said that KCL had collected post

dated cheques as security towards the loan amount and Ms. Roopalben Panchal and

family had demat accounts with KCL (in its capacity as DP), in which they had

substantial holdings equivalent to the amount financed. Karvy DP has submitted that

Ms. Roopalben Panchal had underwritten the loan of ₹ 18.56 crores to each of the 5,200

applicants, who were informed to be the clients of Grace Consultancy (one of the key

operators), at the instance of KCL. It has been submitted that KCL had received

individual loan agreements from each of the individual investor.

I have considered the submission of Karvy DP and note that it has not produced any

document in support of its submissions. Karvy DP by its own admission did not know

Ms. Roopalben Panchal personally. A perusal of the Income Tax Return of Ms.

Roopalben Panchal shows that she had a total income of ₹ 76,760 for the financial year

2003-04 and ₹ 1,08,420 for the financial year 2004-05 and it is incomprehensible that

any financier would provide finance to the tune of ₹ 18.56 crores to her, be it IPO or

not. Under such circumstances, it is difficult to believe that KCL issued cheques for

such large amount to Ms. Roopalben Panchal.

Further, KCL had obtained the repayments of loans from 5,200 IDFC IPO applicants

directly from BhOB through the consolidated refunds credited to the bank by KCPL

(the RTI arm of Karvy group) and not from the respective demat account holders to

whom the loans were said to be extended. The same appears to be the outcome of a

prior understanding of Karvy DP/ KCL with KCPL and BhOB. Thus, from the above,

KCL is seen to have conveniently continued with its loan procedure knowing that

thousands of demat accounts were being controlled and managed by Ms. Roopalben

Page 40 of 54

Panchal, one of the key operators. These are valid proof to conclude that Karvy DP

aided the key operators in the IPO manipulation.

I have seen the sample loan agreement relied upon by Karvy DP to show that loans

were disbursed to individual applicants. I note that Karvy DP has not produced copies

of the individual loan agreements and has produced only a sample loan agreement. I

have seen the details of the loans extended to the key operators. I note that the amounts

so disbursed by KCL to the key operators are equivalent to the number of applications

made by the applicants/ key operators in the IPOs. In respect of the allotment of shares

to 5,200 applicants in IDFC IPO (who were financed by KCL), the total number of

shares allotted were 13,83,200 shares (5,200x226 shares each).

ii. It is also seen from certain instances cited in the Enquiry Report that KCL was collecting

interests on loans, in advance at the time of disbursal of loan itself, which was unusual.

For e.g:- KCL had made a total disbursement of ₹ 24.75 crores to Ms. Roopalben

Panchal, which is equivalent to the application money of ₹ 47,600 for 5,200 applications

in the IPO of IDFC (each application of 1,400 shares at ₹ 34 each). The last date of the

closure of the issue of IDFC was July 22, 2005. The refund amount of ₹ 20.04 crores

corresponds to the refund money of 5,200 applications (refund amount ₹ 38,556 x

5,200). In this regard, the margin money of ₹ ₹6,18,80,000 and the interest of 36,40,000

were received by KCL from Roopalben Panchal in the IDFC IPO on July 21, 2005 vide

single cheque bearing no. 484887. Such payment of the interest on the loan availed is

normally payable at the time of allotment/ sale of the shares allotted in the IPO or

refund of the application money after such allotment, which in the present sample was

August 08, 2005. However, in the instant case, I note that the interest is paid along with

the margin money on July 21, 2005 itself and I find this practice to be unusual. Karvy

DP in its reply has submitted that the practice of collecting interest on the loan amount

in advance is not unusual as the period of IPO financing was very short and that the

manner of collection of the interest on the loan amount is solely within the discretion of

the financier.

All these only show that each entity belonging to Karvy group had gone out of its way

to ensure that the entire scheme materializes the way it had been pre-designed.

iii. Regarding the issue of financing by KCL after the closure of the IPO, it has been

discussed by the Enquiry Officer that at the time of making applications for 4,000

Page 41 of 54

applications in the IPO of IDFC, neither Purshottam Bhudwani and Manoj Seksaria had

funds available in their accounts. The funds were advanced/ disbursed to them by KCL

only on July 28, 2005. I note that the issue of IDFC closed on July 22, 2005. I have

considered the submission of Karvy DP in this regard, wherein it has argued that it is

wrong to take date of disbursal, as there is always a time lag between issuance of

cheques and encashment thereof. However, I agree with the findings of enquiry officer,

wherein he has noted that KCL has not provided the dates of cheques by which the

loans were provided by it to the key operators viz., Manoj Seksaria and Purshottam

Bhudwani, despite SEBI having asked for the same. Such dates are necessary in order to

accept the argument of Karvy DP that the funds were not provided after the closure of

the IPO.

iv. Financing the Key Operators without margins

In IPO financing, the financier normally enters into an agreement with the borrower/

applicant and then collects the margin money. Subsequently, it issues a cheque favouring

the IPO escrow account for the full application money. The release of the loan by way

of cheque to the escrow account ensures that the loan money is used for applying in the

IPO and is not being diverted by the borrower for any other purpose. In addition, a lien

is required to be marked in the demat account of the borrower to ensure that IPO

shares allotted are available as security for the loan and respectively a lien is noted in the

bank account to ensure that refund money is available for adjustment against the loan.

Karvy DP in the capacity of financier at the relevant point of time is alleged to have

provided finance to key operators/ sub brokers, viz. Manoj Seksaria and Purshottam

Bhudwani without taking sufficient margin, that too after the closure of the issue in

certain cases. Karvy DP in its reply has admitted that KCL had disbursed the loan

amounts in the names of Manoj Seksaria and Purshottam Bhudwani respectively.

However, at the relevant time it was not aware that Purshottam Bhudwani was a key

operator and that he was abusing the IPO process by making fictitious/ benami

applications. Karvy DP submitted that as the loans were to be released only after receipt

of margin money amount, Manoj Seksaria and Purshottam Bhudwani had stated to it

that they had made temporary arrangement of funds for clearance of the cheques issued

against the application and therefore, the payment be made directly to them. It has been

said that the individual cheque towards the application money against each application

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was issued by Manoj Seksaria and Purshottam Bhudwani. KCL had lien over the total

amount that was disbursed by it at all points of time and that the interest of KCL was

always secured. Karvy DP has also submitted that the loans were given to the individual

concerned and not issued to be credited to the escrow account of IPO. Further, the

cheques issued by KCL were in favour of the persons who had applied for the loan.

In addition to the above, I also note the observation of the Enquiry Officer that in the

IPO of Sasken, the loan amount was disbursed to the loanees without the margin

amount. Karvy DP had stated that only in the IPO of Sasken, margin was not collected,

otherwise in all the IPOs wherever finance was provided by it, margin was collected. It

also said that IPO applications lodged by these sub-brokers were accompanied by

individual cheques, which were not the cheques issued by KCL and the margin amount

payable was paid directly to the escrow account by the borrowers.

Thus, in view of the above facts, KCL is found to have deviated from its normal

practice involved in the disbursement of loans, having extended loans without taking the

margin money. I fail to appreciate the claim of KCL that it has a lien over the total

amount, when the money was already transferred to the so called loanees. It has not

been explained as to how it recovered the money later on. The non-collection of margin

definitely indicates that Karvy DP has accommodated the key operators and had

extended special benefits to these.

Karvy DP in its submission has argued that Purshottam Bhudwani and Manoj Seksaria

had requested KCL to make the payment directly to them. However, Karvy DP has

failed to place on record any such request of the key operators. It is an admission of

Karvy DP that the IPO applications lodged by these sub-brokers were accompanied by

individual cheques, which were not the cheques issued by KCL.

The sequence of events pertaining to IPO financing, starting with the disbursal of the

amount directly to the key operators, making individual applications on behalf of

fictitious accounts in the retail category of IPO along with cheques from the key

operators and shows that Karvy DP was aware of the game plan of the key operators

regarding fictitious applications and cornering of shares in the IPO.

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f. Refunds from KCPL

KCPL is the RTI within the Karvy group company. KCPL has been alleged to have played

a crucial role in the refund process, especially in the IPOs wherein the finance was

extended by KCL.

The submission of Karvy DP in this connection is that the key operators were IPO sub-

brokers and that had availed finance from other institutions such as banks/ NBFCs etc. as

well. It has been submitted that KCPL had issued single consolidated refund order as a

matter of business practice, to facilitate the settlement process and for administrative

convenience in the cases where the applications were either managed by POA holders

(being banks/ brokers) or financed by an IPO financier (NBFC/ a bank). Such single

consolidated refund order in favour of the financier was based on the express instructions

of the respective IPO applicants, authorizing the respective institutions which had

financed, to collect the refunds directly.

I note that Karvy DP has also argued that consolidated refund order was a systemized

practice in respect of all applications which were financed by all reputed institutions. The

decision to issue single consolidated refund orders was of KCPL only based on the

respective instructions. Karvy DP has submitted that the applicants had authorized KCL to

collect its dues from the bank by debiting their respective bank accounts. It has been said

that KCL is not a bank and the loan agreement had to provide as to how the refunds get

credited and the amount due to the company is debited from the bank account and are

paid in favour of KCL. It was in this background that, it had requested BhOB, which was

maintaining the savings account of the loanees for single refund. Based on the discussed

facts in the previous paragraphs and the instances of refund from KCPL to BhOB and

thereafter to KCL, in a continuous serial number, one can infer that there was certain

understanding among these entities.

g. The Enquiry Report has found that Karvy DP had not affixed the stamp 'verified with

original', while opening the demat accounts of Roopal Panchal and SEIPL and other key

operators, which leads to the presumption that they have not verified the originals of their

POI and POA. Karvy DP in its reply has submitted that as the documents were received

for KYC documentation in original in the form of bank introduction letters, there was no

necessity to stamp the same as 'verified with original'. I have considered the submission of

Karvy DP and agree with the explanation.

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h. Fabrication of bank introduction letters

It has been alleged that the bank introduction letters which were taken as PoI and PoA (at

the time of opening of the demat accounts in respect of benami/ fictitious accounts of key

operators like Ms. Roopalben Panchal, SEIPL etc.) were fabricated, as some of the banks

have denied issuing of such introduction letters. Further, the key operators have also

denied submitting the bank introduction letters. It has been observed that the details of the

clients in the relevant bank introduction letters are identical with that in the CDSL

depository system including characters like capital letter, space, comma, full stop etc. From

the same, it has been inferred that client details were downloaded by Karvy DP from

CDSL after the demat account was opened and used these details in forging the said

introduction letters. I note that BhOB has denied issuing the said bank introduction letters

and stated that the stationery was materially different from their bank stationery and there

was no official by the name of the purported signatory. Further, the photographs appearing

in the introduction letter and in the corresponding bank records do not match. Further,

RBI vide its letter dated June 21, 2006 forwarded the findings of the inspection conducted

by BhOB wherein it was concluded that the documents obtained by Karvy DP and

purportedly issued by BhOB as proof of identity and proof of address for the purpose of

opening demat accounts have been found to be forged.

Karvy DP in its reply has submitted that the allegation of fabrication against Karvy was

levelled on the basis of mere surmises and conjectures and these are not supported by

evidence. It has also been submitted that Karvy DP is victim of the fraud perpetrated by

the key operators by exploiting the loopholes in the system. As regards the observation of

RBI, Karvy DP has not disputed the findings and has submitted that the bank introduction

letters were given to it by the IPO sub-brokers and Karvy DP had no reasons to suspect

that the same were forged. It has been contended that the fabrication had taken place at the

end of key operators or bank officials. It has also been said that the facility of mail merge

was available to many people including IPO sub-broker, clients, banks etc.

The Enquiry Officer has observed that the circumstantial evidence available indicated that

the introduction letters were fabricated; however, the same cannot conclusively establish

that Karvy DP has fabricated these. In the absence of any conclusive evidence to find

Karvy DP liable for the fabrication of the bank introduction letters, I do not find any

reason to differ with the Enquiry Officer in his finding in this regard.

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i. Karvy DP obtained the individual pay orders from BhOB/ IOB

Karvy DP is alleged to have obtained the individual pay orders from BhOB/ IOB and

annexed them with IPO applications in respect of the demat accounts opened with them

which includes afferent accounts of the key operators. In this regard, the Reserve Bank of

India in its order dated January 23, 2006 in the case of IOB has noted that “The branch has

handed over the payment orders towards subscription to IPOs to KCL (in its capacity as a

DP) without obtaining any authorization from the individual borrowers clearly establishing

the nexus between DP provider and bank officials for thwarting the regulatory guidelines

prescribed by Securities and Exchange Board of India”. I observe from the statement of

Mr. Avinash Shukla, DGM, KSBL, Mumbai and Mr. S.V. Rajan, the then Branch Manager,

BhOB, Worli branch that the pay orders in respect of fictitious applications were collected

by Karvy DP directly from the bank (BhOB). The Enquiry Officer has found that Karvy

DP had not verified the identity of the persons for whom pay orders were collected by it

directly from the bank, which gives an impression that it was aware of the large number of

fictitious accounts opened by the key operators.

Karvy DP in its reply has submitted that it was appointed as a syndicate/ sub-syndicate

member and the bidding of application forms can only be done by the syndicate/ sub-

syndicate member for the issue. It has been said that BhOB had financed various

customers in the IPO and on the request by the bank, Karvy DP had collected the pay

orders and application forms for the purpose of bidding and subsequently deposited these

with the bank. Karvy DP has argued that there is no guideline by any regulatory authority

which requires that the identity of the person who makes an application in the IPO has to

be verified.

However, the enthusiasm shown by Karvy DP in ensuring that the applications and the pay

orders pertaining to afferent accounts were reaching the issuer is demonstrated through the

sequence of events discussed above. Having considered the argument of Karvy DP, I note

that the services provided by Karvy DP in obtaining the individual pay orders from

BhoB/IOB cannot be termed either as an activity incidental to its work or that done in the

normal course of business. Thus, I find that obtaining individual pay orders from BhoB/

IOB also indicates that Karvy DP was acting hands in glove with key operators.

j. Transfer of cornered shares from afferent accounts to Ms. Roopalben Panchal

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At this stage, I refer to the previous discussion about the finance given by KCL to Ms.

Roopalben Panchal, allotment of shares to 5,200 applications in the IDFC IPO (financed

by KCL) and that the total of 13,83,200 shares (5,200x226 shares each) were allotted. I note

that the cornered shares were transferred pre-listing in the off-market deals from 5,200

afferent accounts to the demat account of Ms. Roopalben Panchal with Karvy DP, which

were then transferred to the financiers or sold in the market. Further, over 70 lakh shares

of IDFC were transferred from various afferent accounts to the demat account of Ms.

Roopalben Panchal. When large number of shares moved from the afferent accounts to the

demat account of Roopalben Panchal, it is unbelievable that the DP did not get alerted

(each retail investor could get allotment of only 226 shares in the IDFC IPO). The

movement of shares in this manner indicates complicity of Karvy DP with the key

operators.

As regards the credit of shares received by Roopalben Panchal from various accounts,

Karvy DP has submitted that it had executed the transfer instructions based on valid DIS.

At the relevant time, there was no legal bar on the transfer of shares post allotment and

pre-listing. As a DP, it had a very limited role to play.

I note the argument of Karvy DP that in the retail category of IDFC IPO, each applicant

had received only 226 shares. It is unusual that Karvy DP did not suspect any mischief,

when there was movement of large number of shares from different demat accounts to the

single account of Ms. Roopalben Panchal, to the extent of 70 lakh shares. I note that Karvy

DP has argued that it cannot question the account holders as to why they were transferring

the shares from their accounts to another account or why they were receiving the shares in

their accounts from other accounts etc., as all the said matters strictly fall within the

domain of the demat account holders and Karvy DP has no role to play in it. However, I

disagree with this submission of Karvy DP. Even if, it felt (rightly or wrongly) that it could

not question the unusual flow of shares, it could have brought the phenomenon to the

notice of SEBI. In my considered opinion, Karvy DP ought to have raised certain

suspicion on the transfers or accumulations of shares in the demat account of the key

operators. It is for these purposes that market intermediaries are given such specific

responsible roles in the securities market. I note that the market intermediaries act as the

first level regulators in the securities market and it is their primary responsibility to check all

the details properly. The fact that DP turned a blind eye to such instances suggests that it

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was hand in-glove with the key operators. Therefore, what happened was not ignorance/

negligence but collusion of Karvy DP with the key operators.

k. Delegation of DP activities without approval of depository It has been alleged that Karvy DP had delegated its activities such as verification and

scrutiny to the key operators who were also its sub brokers. Karvy DP in its reply has

admitted that the data in respect of various demat account opening forms were submitted

by its sub brokers to it in soft form. I note from the Enquiry Report that Karvy DP had

lodged criminal complaints against certain sub brokers for criminal breach of trust.

However, these complaints find a mention that Karvy DP has not done any KYC related

verification, while opening demat accounts and relied on the sub-brokers for the same.

Karvy DP in its reply has submitted that for the purpose of procuring demat accounts

through the sub-brokers, no approval was required from the depositories/ any other

regulator, as per the then applicable guidelines. It has been said that only in the case where

a DP wants to appoint a franchisee; the approval of depository is required to be taken as

per Regulation 52 of the DP Regulations. Karvy DP had not delegated the activities, duties

and responsibilities, to the sub brokers.

I note that the Enquiry Officer could not find any condition/ terms of appointment for the

sub brokers in the letter (of appointment of the sub broker) submitted by Karvy DP. In

this context, Karvy DP also stated that there are no specific terms and conditions specified

in such letter, as the activity of the sub broker is only procurement of applications and

there is no delegation of any authority in terms of the processing of any application form.

It has been explained that a sub broker is an associate in the procurement of the

application forms. Karvy DP had relied on the sub-brokers with regard to the applications

procured by them. Karvy DP has argued that it has verified all the documents with the

originals and that it had not delegated its depository activities such as verification and

scrutiny to the key operators who were also sub brokers as alleged.

At this stage, I refer to the criminal complaint filed by Karvy DP against its sub-brokers

who have been found to be key operators namely Grace Consultancy, Arth Realty Pvt.

Limited, Purshottam Bhudwani and Manoj Seksaria. Certain relevant paragraphs of the

same are extracted as under:

“These associates are either provided special rates for opening depository accounts for their clients or are paid remuneration on each account for processing the application. These Business Associates,

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have collected applications for opening depository accounts from various applicants. Since they had direct contact with the applicants, they are required to verify credentials of the applicant, including verification of documents like proof of address, identity proof, Bank account details etc. of the person who intends to open the account after filling up the prescribed form as per the norms of SEBI and submit the same to our branches. With regard to the accounts under reference, these associates or their friends / relatives have also acted as introducer for each of the accounts.

The Complainant states that they believed that all the accounts forwarded by the associates are true and correct and are eligible to open the depository accounts. The accused have fraudulently opened fictitious accounts to defraud and cheat the Company. The Complainant herein states that consequent to the order issued by Securities and Exchange Board of India (SEBI), National Securities Depository Limited (NSDL) had, vide their letter dated 17th December 2005, directed the Company as Depository Participant to verify the cases. On such verification, the Company came to know that the associates have committed breach of trust with the intention to cheat genuine investor. These associates on demand by the company have failed to produce their customers for identification which has lead the company to suspect that they have opened accounts of non existing persons and got lot of shares allotted to them. Thus they have cheated the genuine investors, Company and committed criminal breach of trust as the Company totally depended on the information and scrutiny of the sub-brokers." (emphasis supplied)

A reading of the above paragraphs from the complaint filed by Karvy DP, would indicate

that Karvy DP had delegated the verification of the credentials of the applicant, including

verification of documents like proof of address, identity proof, bank account details etc. of

the person who intends to open the account. This is a clear indication of the departure

from its stand that Karvy DP had conducted independent verification of all the applicants.

Further, this delegation by Karvy DP of its functions and duties as a DP, is in

contravention of Regulation 52 of the DP Regulations.

Now, to conclude with, I find that different Karvy group entities are involved in the IPO

irregularities and acted out their pre-planned roles, as per the scheme perceived under the

'IDEA Paper'. The most significant part is that Karvy group remained as a common

element, be it the circulation of the 'IDEA Paper' or the opening of afferent accounts by

DP or the financing of the key operators/ their benami applicants or accepting the IPO

applications on their behalf.

Karvy DP, a registered intermediary had opened various afferent accounts. Finance was

provided by KCL to thousands of similar set of fictitious names. KSBL had entered the

bids for these applicants through its system and KCL/ Karvy DP facilitated off-market

transfer of the shares allotted to these applicants to key operators. Further, KCPL issued

consolidated refund orders to the same set of entities. Therefore, in the entire chain of

events, one entity or the other belonging to Karvy group is present. Coming to the core of

the allegations against Karvy DP specifically, the manner in which the processing of

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applications for opening of demat accounts was handled definitely indicates that it

overlooked the procedures and norms. Although it tenders the argument that everything

were done by the IPO sub brokers/ the key operators, I am convinced that Karvy DP had

deviated from its own described set of procedures. Instead of undertaking a scrutiny by

itself, Karvy DP simply relied on the data captured by the sub broker/ afferent account

holders in the eagerness to process more and more application in the shortest span of time.

The process explained by Karvy DP admittedly suggests that it had relied on the

information uploaded by the IPO sub broker. Now the question arises, as to whether it

overlooked the procedures/norms negligently or due to the fact that it was a party to the

scheme of manipulation. It is here that the entire sequence of events starting from the

opening of accounts, ending with the consolidated refunds that assumes significance.

Given the series of events that are detailed above, one is forced to conclude that Karvy DP

has aided and abetted the manipulative scheme of the key operators. Having gone through

the details discussed in the preceding paragraphs, such as Karvy DP introducing the bank

accounts, opening the afferent accounts and accommodating the key operators, I have no

doubt in concluding that Karvy DP had aided and abetted the key operators in the

cornering of the shares.

13. Whether Karvy DP has failed to maintain arm's length distance between the

different activities of its group entities?

I note that the pattern of financing by KCL in the IPOs of IDFC, Suzlon and Sasken

(wherein KCPL was the RTI) was a conscious and deliberate design to extend finance to

key operators for the purpose of making thousands of applications in IPOs. Karvy DP and

its associates were alleged to have played roles that supported each other's activity. The

manner in which the funding was done, even after the closure of the issue and the amount

of loan extended to key operators like Purshottam Bhudwani and Manoj Seksaria hints that

Karvy DP was aware that large number of fictitious applications have been made by the

key operators. I agree with the findings of the Enquiry Officer that the extent of

involvement of Karvy DP and its associate entities in the whole gamut of the IPO process

indicate that on many instances, the activities of Karvy DP and its associates were

complementary and supporting each other. Similarly, Karvy DP at the relevant point of

time had implicit arrangements with certain banks like BhOB for offering finance to the

key operators who also happened to be its IPO sub-brokers. Large scale financing was

extended by KCL to the said IPO sub-brokers. The various Karvy group entities, i.e., KCL,

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KSBL, Karvy Investor Services and Karvy Securities Limited had introduced the said key

operators to open bank accounts. Further, KCPL issued consolidated refund orders and

KSBL, the broking arm of Karvy group sold the shares for the key operators.

Karvy DP in its reply has submitted that each of their group entity was acting in their

respective businesses. Karvy DP has also submitted that they maintain arms length distance

between all the Karvy group entities. It has been said that the 'Idea Paper' was only a

concept note submitted to BhOB envisaging the process flow that could be put in place to

provide finance for making applications in IPO. However, BhOB has never responded on

the said concept note and there was no arrangement/ agreement entered into by KCL with

BhOB for the purpose of extending IPO finance. BhOB while financing an IPO applicant

had wanted the applicant to have a DP account with Karvy for the purpose of the bank to

have a lien on the shares so credited to the successful allottees. There had been no sharing

of the income or no commission paid out by BhOB or for that matter by any institution. It

has been said that the Karvy group entities had not introduced the key operators to open

the bank accounts. The single refund order by KCPL was in the ordinary course of

business for which necessary authorization from the applicant was available in favour of

the financing institutions. Karvy DP was not aware that the shares so sold by the key

operators were actually shares which were alleged to have been cornered in the IPOs. It

had broking accounts of only three key operators viz., Purshottam Bhudwani, Manoj

Seksaria and D.B. Mehta. Only the sale of shares carried out by it on behalf of D.B. Mehta

has been found to be in question, for which it has appropriately replied. There was never a

conflict of operations as alleged.

I have considered the submissions of Karvy DP in the light of the discussions in the earlier

paragraphs. From the bank account opening forms, I note that a single person has signed

on behalf of KCL and KSBL. Considering the fact that the bank accounts, as discussed

above, were introduced by one of the Karvy group entities and that subsequently 50

fictitious names were added to each of these accounts, there is a definite conclusion that

Karvy DP as a registered intermediary was acting in concert with other Karvy group

entities. I note that KCL had provided finance to thousands of such similar set of fictitious

names. KSBL (the stock broking arm of Karvy group) had entered the bids for these

applicants through its system and KCL/ Karvy DP facilitated off-market transfer of the

shares allotted (to these applicants) to key operators. Further, KCPL issued consolidated

refund orders to the same set of entities. In addition to this, I note that KSBL had bid the

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applications without obtaining the application money and further, the money was

transferred by RTGS in certain instances on subsequent dates. The money transferred by

RTGS was that funded by KCL. It is also found that KCPL being the RTI of the issue had

issued a consolidated refund in respect of such applicants. Also, Karvy DP facilitated

transfer of the IPO shares from the demat accounts of the fictitious/ benami entities to the

demat accounts of the key operators by supplying pre-printed DISs.

From the entire sequence of events, brought out in the previous paragraphs, the only

logical conclusion is that each one of Karvy group entity had a pre-assigned role and that

all had knowledge about each other's role. Thus, I conclude that the Karvy group entities

has not maintained arm's length distance between its different businesses in the securities

market, starting with the DP, financier, RTI and ending with the stock broker. Rather, the

chain of events and the manner in which they have occurred, demonstrate that all these

entities were hand in glove with each other and were supplementing the activities of each

other.

14. Further, I note that thousands of dematerialized accounts were opened with Karvy DP on

the same date. The name of account holders were generated by precise mathematical

formula from a given number of names and the addresses of such thousands of demat

accounts had the addresses of the key operators. In various instances, the Karvy group

entities had introduced the bank accounts of the demat account holders. Karvy DP had

accepted consolidated payments from the key operators towards the numerous demat

accounts maintained with it. As discussed, Karvy DP had executed synchronized off-

market transfers from the afferent demat accounts to the demat accounts of the key

operators by using pre-printed DIS and in certain cases even without the DIS. Even the

DIS was distributed one each to the account holders and not given a full booklet as would

usually have been done. Pursuant to the verification conducted with the intervention of

SEBI, Karvy DP closed these demat accounts. I note that Karvy DP has relied upon the

data provided by its sub brokers in soft form and uploaded the same without scrutiny. I

note that KCL had provided finance for the afferent demat account holders which was

released to the key operators. Similarly the refund money also went to the bank accounts of

the key operators only.

It is interesting to note that a registered intermediary like Karvy DP chooses to give its own

interpretation of the existing law such that it suits its own case. While coming to the

incident of common addresses, it says that the rule does not say that common addresses are

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not to be permitted; regarding address for opening demat accounts, its explanation is that

the same is required only for correspondence purpose. As a responsible intermediary,

Karvy DP should have prevented any such unusual happenings rather than offering an

explanation that it chose to shut its eyes, because no regulation disallowed such state of

affairs.

In my considered opinion, if Karvy DP was working in normal circumstances, it ought to

have raised certain suspicion on such transfers/ accumulations in the demat account of the

key operators. It is for these purposes that market intermediaries are given specific

responsible roles in the securities market. Therefore, the detailed discussions in the

paragraphs above only demonstrate the collusion of Karvy DP with the key operators. I

note that the market intermediaries act as first line of regulator in the securities market and

it is their primary responsibility to keep an eye on all what happens in its domain. A

regulator expects that an intermediary would make every effort in order to make the market

more safe and secure for the investors, and thus eliminate fraud or unfair practice from the

market.

15. I note that the Karvy group as a whole appeared to have favoured an extremely aggressive

approach to business leading to their direct involvement in the IPO manipulation. Karvy

DP has tried to disown the responsibility. I note that the entire case revolves around the

unusual business practices adopted by Karvy group entities. The only way Karvy DP could

have been absolved of all responsibilities, would be by proving that it had nothing to do

with the key operators, opening of bank accounts, refunds etc. It is a binary situation;

whether Karvy DP was associated with the group of wrong doers or not. If it was

associated, then the shortcomings and discrepancies in documentation mentioned by Karvy

DP does not help in it getting a clean chit or even a benefit of doubt. Karvy DP has tried

to distance itself from the activities of the other Karvy entities and the key operators,

however, the discussion above makes it clear that the operations of the Karvy group

entities were supplementary to their roles and complementary to each other. This gives a

strong presumption that Karvy group entities had acted in close coordination and the

whole group should be viewed as one, irrespective of the separate legal identity of different

entities.

16. I note that the shares meant for subscription in the retail category have been cornered in

the IPOs by the key operators which included the IPO sub-brokers of Karvy DP. The said

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act was prejudicial to the interests of the investors and the retail applicants in such IPOs.

After cornering the shares meant for retail investors, the key operators sold them to make

large profits. I note that in the entire chain of events, the Karvy group entities were

involved, which clearly suggest that all of them had acted in concert and facilitated

cornering of the shares and by no stretch of imagination can the role of Karvy DP be

considered independent to the scheme of cornering of shares. Karvy DP has submitted

that the IPO sub-brokers were the ones who opened the afferent accounts and that it was

not aware that such demat accounts were benami/fictitious accounts and opened for the

purpose of cornering shares in the IPO. Even if, I were to accept the said submission of

Karvy DP, the fact that would remain is that it had turned a blind eye to the unusual

situation where names and surnames appear in hundreds of accounts with mathematical

regularity and points to much more than merely not exercising proper diligence and

prudence.

17. In view of my observations above, the acts and conduct of Karvy DP are unfair and

fraudulent within the scope of the PFUTP Regulations. In terms of Regulation 3 of the

PFUTP Regulations, no person shall directly or indirectly buy, sell or otherwise deal in

securities in a fraudulent manner; use or employ, in connection with issue, purchase or sale

of any security listed or proposed to be listed in a recognized stock exchange, any

manipulative or deceptive device or contrivance in contravention of the provisions of the

Act or the rules or the regulations made there under; employ any device, scheme or artifice

to defraud in connection with dealing in or issue of securities which are listed or proposed

to be listed on a recognized stock exchange; engage in any act, practice, course of business

which operates or would operate as fraud or deceit upon any person in connection with

any dealing in or issue of securities which are listed or proposed to be listed on a

recognized stock exchange in contravention of the provisions of the Act or the rules and

the regulations made there under. Regulation 4(1) of the PFUTP Regulations prohibits a

person from indulging in a fraudulent or an unfair trade practice in securities. Further,

clauses 3, 9, 12, 16, 19, 20 and 22 of the code of conduct as specified in Regulation 20(A)

of the DP Regulations inter alia stipulates that a participant should maintain high standards

of integrity in the conduct of its business and should be responsible for the acts or

omissions of its employees and agents in respect of the conduct of its business. In view of

the foregoing observations/findings, I find that Karvy DP by its commissions and

omissions had violated the provisions of Section 12 A (a), (b) and (c) of the SEBI Act,

Regulation 3(a), (b), (c) and (d) and 4(1) of the PFUTP Regulations and also Regulation 19,

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42(2) and (3), 43, 46, 52 of the DP Regulations. Further, by actively facilitating key

operators, it is established that Karvy DP had violated the code of conduct specified in

clause 3, 9, 12, 16, 19, 20 and 22 of the code of conduct specified in the DP Regulations.

18. I note that the Enquiry Officer has recommended that Karvy DP be prohibited from

opening fresh demat accounts for a period of eighteen months. The Enquiry Officer has

further recommended that the period of prohibition already undergone by Karvy DP may

be taken into account for the purpose of computing the said eighteen months period.

19. I note that pursuant to the notification of the Intermediaries Regulations, the Enquiry

Regulations have been repealed and in terms of Regulation 38(2) of the Intermediaries

Regulations, notwithstanding such repeal, any enquiry commenced under the Enquiry

Regulations, shall be deemed to have been commenced under the corresponding

provisions of Intermediaries Regulations.

20. Having regard to the above discussion, I find no reason to differ with the

recommendations of the Enquiry Officer. Accordingly, in exercise of the powers conferred

upon me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992

read with Regulations 28 and 35 of the Securities and Exchange Board of India

(Intermediaries) Regulations, 2008, hereby prohibit the Karvy Stock Broking Limited,

Depository Participant (SEBI Registration Nos. IN-DP-NSDL-247-2005 and IN-DP-

CDSL-305-2005) from taking up any new assignment (i.e. not to take up any new clients)

for a period of Eighteen (18) months. However, I note that Karvy Stock Broking Limited,

the Depository Participant has already undergone such prohibition for 18 months and 26

days. In view of the same, there need not be any further penalty.

DATE: January 28th, 2014 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

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