Case: 1. SEBI, 2. In Re: Public Issue of Pyramid Saimira Theatre Ltd. Vs Mr. Kishore S. Jain and Ors.. Securities and Exchange Board of India

Party Name:1. SEBI, 2. In Re: Public Issue of Pyramid Saimira Theatre Ltd. Vs Mr. Kishore S. Jain and Ors.
Judges:M.S. Sahoo, Member
Issue:Company Laws
Judgement Date:June 25, 2009
Court:Securities and Exchange Board of India

Order:

M.S. Sahoo, Member

  1. Pyramid Saimira Theatre Ltd. (hereinafter referred to as "PSTL" or "the Company") made an initial public offer (IPO) of 84,44,000 equity shares through 100% book building. The issue opened on December 11, 2006 and closed on December 18, 2006. The allotment was made on January 02, 2007.

  2. Securities and Exchange Board of India (SEBI) conducted an investigation into allotment of 4,22,200 shares (5% of the issue size) reserved for the employees ('employee category'). The investigation inter alia revealed that a total of 13 persons had applied for shares under the employee category. Six persons applied for a total of 6,540 shares while seven others applied for a total of 4,26,060 shares. These seven others obtained 98.5% of the shares allotted under this category, received the shares in the demat accounts with the same depository participant, sold the shares through the same broker soon after listing and made a total unlawful gain of Rs. 2,31,94,612. The investigations also revealed that these seven persons, in collusion with PSTL, donned the cloak of 'employee' on the eve of the public issue for 4 to 6 months with the sole purpose of receiving shares under the employee category. Five of them abandoned the cloak after making applications but before the allotment, whereas two others did so immediately after the allotment. The details of shares applied for and received on allotment by these seven persons and the duration of their 'employment' are as under:

    Applicant

    No. of Shares

    Duration of 'Employment' (Months)

    Applied

    Allotted

    Mr. Kishore S. Jain

    50,040

    48,837

    4+

    Mr. Jayantilal R. Jain

    48,000

    46,846

    5+

    Mr. Shripal J. Shah

    18,000

    17,567

    5+

    Mr. Rajesh Prakashchandra Jain

    22,020

    21,490

    5

    Mr. Pravin Kumar Devichand Jain

    48,000

    46,846

    5+

    Mr. Dheeraj Jain

    1,20,000

    1,17,115

    5+

    Mr. Sanjay Jhabak

    1,20,000

    1,17,115

    5+

    Total

    4,26,060

    4,15,816

     

  3. Accordingly, vide notices dated February 22, 2008, SEBI called upon these seven persons and the Company to show cause as to why suitable directions under Sections 1 1B and 11(4) of the SEBI Act, 1992 read with regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter to be referred as "PFUTP Regulations"), including directions to disgorge the amount/profit made by them from sale of shares received under the employee category, should not be issued to them.

  4. I note that PSTL, two of the seven persons, namely, Mr. Sanjay Jhabak and Mr. Dheeraj Jain, and the remaining five persons applied to SEBI for the settlement of these proceedings through consent orders. While SEBI has settled the proceedings through consent orders in respect of the two persons, it declined to settle the proceedings against the remaining five persons and the Company. This Order, therefore, deals with the proceedings in respect of the following remaining five persons (hereinafter referred to as "the noticees"):

    1. Mr. Kishore S. Jain (Noticee 1)

    2. Mr. Jayantilal R. Jain (Noticee 2)

    3. Mr. Shripal J. Shah (Noticee 3)

    4. Mr. Rajesh Prakashchandra Jain, (Noticee 4), and

    5. Mr. Pravin Kumar Devichand Jain (Noticee 5).

  5. No replies to the show cause notices (SCNs) were received. SEBI sent reminders dated March 28, 2008 to the noticees requiring them to reply to the SCNs by April 5, 2008. In response, the noticees, vide separate letters dated April 4, 2008, sought time for filing replies to the SCNs. SEBI, vide separate letters dated April 17, 2008, granted time to the noticees up to April 25, 2008. The noticees sought further extensions of time vide their separate letters dated April 23 2008. SEBI once again granted an extension of time as sought, with a reminder, vide separate letters dated April 30, 2008, to furnish replies by May 6, 2008. However, the noticees vide their separate letters dated May 5, 2008, again sought extension of time. Vide letters dated September 12, 2008, SEBI advised them to submit the reply by September 25, 2008. The noticees filed separate replies dated September 29, 2008 broadly denying the charges.

  6. Mr. Jayantilal R. Jain, Mr. Shripal J. Shah and Mr. Rajesh Prakashchandra Jain attended the personal hearing on November 6, 2008 and Mr. Kishore S. Jain and Mr. Pravin Kumar Devichand Jain attended the personal hearing on November 12, 2008 before me. Their submissions were along the lines of their respective replies to the SCNs.

  7. After the hearing but before the order could be passed, the noticees, vide applications dated November 25, 2008, applied to SEBI for settlement of the pending proceedings through a consent order. SEBI, however, vide letter dated March 23, 2009 declined to settle the matter as the terms offered were not appropriate. The noticees, vide their separate letters dated April 9, 2009, offered revised consent terms. I note that the noticees had the option of seeking settlement through consent before the hearing. They did not do so. They did it after the hearing. They, however, did not offer appropriate terms. After SEBI declined to settle the matter on such terms, they have now offered revised terms. I think, quasi-judicial proceedings like this cannot be held in abeyance indefinitely to enable the noticees seek settlement of the matter by offering revised consent terms again and again. Therefore I, now proceed to dispose of the matter on merits.

  8. There is no disagreement about the allotment of shares under the employee category to the noticees and the profits made from sale of such shares. What needs to be determined is: did these five noticees don the cloak of 'employee' of the Company with a view to acquire shares under the employee category. This, in turn, requires determination of three issues, namely, the evidence of employment, the likelihood of their employment, the understanding between the Company and the noticees. I am proceeding to examine these three issues.

  9. Evidence of Employment: One normally looks at the records of attendance, salary, provident fund, etc., as evidence to determine if a person is an employee of an organization.

    (a) Attendance: The noticees No. 1 and 2 have stated that they never signed the register. The noticees No. 4 and 5 have stated that there was no attendance register. Noticee No. 3 has stated that he used to sign the attendance register daily. However, the on-site investigation of SEBI has found that the Bangalore office, where these noticees were stated to be posted, did maintain a register for recording attendance. The register did not even have the names of the noticees let alone their signatures. This makes it clear that none of the noticees ever attended the office.

    (b) Salary: The noticees have claimed that they were paid salary by cash from Bangalore office. The investigation has found that the employees of the Company were paid salary by cheques. The Company (Mr. Venkatakrishnan, Supervisor at Bangalore office) has stated in his statement dated October 23, 2007 that the salary was paid to the noticees in cash from the Chennai office of the Company. The vouchers indicating payment of salary by cash did not have serial numbers, dates or the names/initials of persons checking and approving such payments. I find it difficult to rely on such vouchers to conclude that the salary was actually paid to the noticees. I also find no justification for a special dispensation to pay salary in cash to the noticees only and, that too, from Chennai office. Thus, I find that the noticees did not receive salaries.

    (c) Provident Fund: Vide letter dated March 27, 2007, the Company requested Employee Provident Fund Organization (EPFO), Chennai to enroll the noticees as EPF members. I note that this followed SEBI's letter dated March 26, 2007 to the company seeking PF details for its investigation. I also note that the letters dated March 27, 2007 and April 25, 2007 of the Company to EPFO indicate two different sets of PF account numbers of the noticees. The noticees No. 2 and 5 have stated that since the money accumulated in PF was not so much, they did not seek refund. The noticees No. 1, 3 and 4 have stated that they asked for refund of PF on various occasions but the same was not paid. They, however, could not produce any evidence of having asked the company for refund of PF balance. Thus, I find that the Company did not apply for PF accounts for the noticees when they were in 'employment'. It started arranging PF accounts for the noticees after it received SEBI's letter. The two different sets of numbers for the same noticees cast doubt on reliability of the records of the Company in this regard. I find difficult to believe that the noticees who take up job for Rs. 7,500 per month can forgo their balances in PF accounts. Hence, I conclude that the noticees did not have PF accounts.

    (d) Location: All the noticees have claimed to have worked in Bangalore office and three of them have claimed to have stayed in the guest house of the Company at Bangalore. They have described the locations of office and guest house as under:

    Notice e No.

    Office Building

    Guest House

    1

    Building of total 5 floors, Office at 1st Floor

    Building of total 5 floors, Guest house at 5thfloor - total 6 rooms.

    2

    Building of total 3 floors, Office at 2nd Floor

    N.A. (Stayed with his friends).

    3

    Building of total 3 floors, Office at 2nd Floor

    Building of total 5 floors, 1 big hall and 1 small kitchen.

    4

    Building of total 3 floors, Office at 2nd Floor

    Guest house at 5th floor- 3 rooms, 1 kitchen. Distance between office and guest house is 5 kms.

    5

    Building of total 3 floors, Office at 1st Floor

    N.A. (Stayed with his friends).

    The on-site inspection by SEBI has revealed that the Bangalore office was located on the ground and first floors of the building. The guest house was situated at around 15 kms. away from the office. The contradiction in the statements as well as ignorance about the...

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