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SECURITIES
AND EXCHANGE BOARD OF ORDER UNDER
REGULATION 13(4) OF SECURITIES AND EXCHANGE BOARD OF AGAINST HARVIC
MANAGEMENT SERVICES LTD, SUB-BROKER TO M/S B M GANDHI SECURITIES PVT. LTD., MEMBER,
THE STOCK EXCHANGE, MUMBAI, IN THE MATTER OF SAWACA BUSINESS MACHINES LTD.
(EARLIER KNOWN AS SAWACA FINANCE LTD) BACKGROUND 1.
The shares of
Sawaca Business Machines Ltd (earlier known as ‘Sawaca Finance Ltd’ and
hereinafter referred to as ‘SFL’) were listed on The Stock Exchange, 2.
Securities and
Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted an
investigation into the alleged price manipulation in the scrip of SFL, during
the period October – December, 1999. It was seen that there was unusual upward
price movement in the shares of SFL during this period, the price having moved
up from Rs. 8 to a high of Rs. 38. Similarly, it was also seen that the volumes
in the shares, which were traded a total of 7 times in the whole year, prior to
26.10.99, went up significantly during the investigation period. 3.
Investigations
revealed that one Shri Mahendra Shah, who was subsequently appointed the
Managing Director of the company, was the largest seller during the
investigation period. It was observed that Shri Shah, along with Harvic
Management Services Ltd. (hereinafter referred to as ‘HMSL’), among others, had
created artificial volumes in the shares of SFL and had then offloaded a large
quantity of shares in the market. It was also seen that Shri Shah had put in
large buy orders to influence the price of the scrip and had created
false/misleading appearance of demand/interest in the shares of SFL, thereby
influencing the share price of the scrip. 4.
HMSL, registered
as a sub-broker to BM Gandhi Securities Pvt. Ltd, (hereinafter referred to as
“BMGSPL”), a corporate member of BSE, had traded in the scrip of SFL on behalf
of Sri Mahendra Shah (hereinafter referred to as “Shri Shah”). The details of
trading done by HMSL on behalf of Shri Shah are as under:
5. In addition, HMSL had placed large orders on behalf of Shri
Shah on several occasions, details of which are given as under:
5.
It was alleged
that the trades done by HMSL, through BMGSPL, on behalf of Shri Shah, were in
violation of Securities and Exchange Board of India (Prohibition of Fraudulent
and Unfair trade practices relating to securities market) Regulations, 1995 (hereinafter
referred to as “FUTP Regulations”). 6.
It was further alleged
that HMSL, having dealt with Shri Shah, who was one of the entities responsible
for manipulation in the shares of SFL, had violated the Code of Conduct
prescribed for sub-brokers laid down under the Securities and Exchange Board of
India (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred
to as “Brokers Regulations”). ENQUIRY
PROCEEDINGS 7. Having considered the investigation report, Chairman, SEBI,
vide order dated 8. As per the provisions of Securities and Exchange Board of
India (Procedure for holding Enquiry by Enquiry Officer and imposing penalty)
Regulations, 2002 (hereinafter referred to as “the Regulations”), the Enquiry
Officer, having given an opportunity of hearing to HMSL, submitted a report
dated 25th February 2004, to SEBI, with the recommendation that a major
penalty of cancellation of certificate of registration of HMSL be imposed on
HMSL. SHOW
CAUSE NOTICE AND REPLY 9.
On receipt of
the Enquiry Report, a show cause notice dated 10.
HMSL did not
respond to the said show cause notice. CONSIDERATION OF ISSUES AND FINDINGS 11.
I have carefully
considered the facts of the case, the findings of the Enquiry Officer and other
material on record. My findings with respect to the allegations against HMSL
are as under. 12.
As already
stated at para 2 above, SEBI had observed unusual price movement in the shares
of SFL during the period October-December, 1999. Investigations revealed that
Shri Mahendra Shah, along with HMSL, among others, were predominant traders in
the shares of SFL and their trading had largely contributed to the price rise
in the scrip. It was observed that once investor interest was created in the
shares of SFL, Shri Shah and other connected entities had offloaded the shares
held by them. 13.
HMSL was one of
the entities responsible for the sudden price rise in the scrip of SFL, along
with Mayekar Investment Private Limited (hereinafter referred to as “MIPL”), Shri
Pankaj Desai, (who had introduced Sri Shah to HMSL) and Shri Shah himself. HMSL
had put in large buy orders to influence the price of the scrip and also
created artificial/false appearance of market in the scrip. SFL was more or
less dormant till September 1999 and volumes had started to pick up only when Shri
Shah and others (HMSL & MIPL) had started trading in the scrip. All the
trades of HMSL, as reproduced at para 4 above, were on behalf of Shri Shah. 14.
I have also
observed that SFL had allotted shares on a preferential basis to HMSL and its related
entities, namely, Havmore Financial Services (P) Ltd., Aroma Fashions Ltd.,
Kalpesh Chawla and Kirtida P Desai, on 05.01.2000. I have noted that HMSL had
denied having received any shares from SFL on preferential basis. However, they
have not submitted any proof to the contrary (despite follow-up by SEBI), particularly
as the allottee list of SFL contains all these names. It also seems unlikely
that a company would show names of companies/persons as allottees, without
there being an adequate explanation for the same, the most obvious being that
these persons were indeed the allottees. 15.
I have observed
that HMSL had had a gross position 57000 shares and net sale position of 10200
shares in 7 settlements, during the period under consideration. I have also
noted that it had put major buy orders, one of the buy order being to the tune
of 30,500 shares. If the intention was just to earn brokerage, as claimed by HMSL,
there was no need to have put such orders (which are quite opposite to their
net position), an act that raises lot of questions. The actions of HMSL are
contrary to its claimed intentions. 16.
Taking into
consideration the low liquidity in the scrip and lack of fundamental reasons
for any interest in the scrip, it can be assumed that such large orders would
have influenced the price of the scrip. There is no merit in the contention of
HMSL that their trades accounted for 1% of the total equity of SFL. I have also
observed that the orders entered by HMSL were not executed. Thus, it appears
that the intention was not to execute the orders but to merely show artificial
depth in the market, which might persuade other investors to invest in the
scrip. As such, the submission of HMSL that the trading was done only to earn brokerage
on the transactions done for the clients is not acceptable. 17.
Shri Shah,
client of HMSL, had traded only in the shares of SFL, which was an illiquid
scrip. I find that HMSL had traded in the shares of SFL in seven settlements,
gross volume being 57000 shares, in a scrip which was largely illiquid before
the relevant period, having been traded only 7 times in the year, before
26.10.99. The scrip of SFL had been made liquid by putting artificial volumes
and price by certain connected clients, including Shri Shah, client of HMSL, who
had entered into continuous speculative transactions without any genuine
interest in giving or taking delivery of shares. This had resulted in creation
of artificial volumes and price rise in the scrip which otherwise had no
interest from the general investors. The conduct of HMSL amounts to aiding and
abetting the market manipulation, which is a violation of regulation of 4 (b)
of FUTP Regulations. 18.
In view of the
circumstances surrounding the trades in SFL, any prudent sub-broker should have
doubted the intentions of the client and stopped trading for them. In having
allowed Shri Shah to trade in the shares of SFL across eight settlements, in
significant quantities, HMSL has facilitated Shri Shah in creation of false
market in the scrip of SFL. Thus, HMSL had aided and abetted Shri Shah in the
price manipulation of SFL’s shares. By dealing with such clients, HMSL has
violated the provisions of regulation of 4 (b) of FUTP Regulations. 19.
Unsuspecting
innocent investors would be trapped by such false appearance of trading in
securities. This manner of trading, resulting in artificial volumes, is
detrimental to the interest of investors and the orderly development of the
securities market. Being a registered
intermediary, HMSL is under positive obligation to be more diligent while
dealing with clients. Having failed to check the manipulative trading of Shri
Shah in SFL’s shares, I find that HMSL failed to exercise due skill and care as
required under Clause A (2) of the Code of Conduct prescribed for sub brokers,
in Schedule II in terms of Regulation 7
of Securities and Exchange Board of India (Stock Brokers and Sub-brokers)
Regulations, 1992. 20.
In view of the
above findings, I do not have any hesitation in agreeing with the
recommendations of the Enquiry Officer. ORDER 21. Therefore, in exercise of powers conferred upon me in terms of
Section 19 of the Securities and Exchange Board of India Act, 1992, read with
regulation 13 (4) of Securities and Exchange Board of India (Procedure for
holding Enquiry by Enquiry Officer and imposing penalty) Regulations, 2002, I
hereby impose a penalty of cancellation of certificate of registration of Harvic
Management Services Ltd., sub-broker to M/s B M Gandhi Securities Pvt. Ltd.,
broker, BSE, having SEBI registration number INS010496938. 22. This order shall come into effect on expiry of three weeks
from the date of this order.
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