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BEFORE THE
SECURITIES AND EXCHANGE BOARD OF CORAM : V. K. CHOPRA,
WHOLE TIME MEMBER Against
M/s Media Investments, a registered sub-broker of BSE broker Joindre Capital Services Limited in the matter of Warner
Multimedia Limited DATE OF HEARING: 12.03.2007 APPEARANCES: FOR COMPANIES/ BROKERS:
FOR SEBI:
ORDER {Under
Regulation 13(4) SEBI (Procedure for Holding Enquiry by Enquiry Officer and
Imposing Penalty) Regulations, 2002 in the scrip of Warner Multimedia
Ltd} 1.0 Background 1.1 Warner Multimedia Limited
was originally incorporated as “Garima Commercial
Company Limited”, on 1.2 The company came out with
a public issue of 40 lac equity shares of Rs.10/-
each at a premium of Rs.5 each, aggregating to Rs.6 crores
in December 1994 to part-finance the setting up of wind power generation plants
at Kayathar, Tamilnadu.
Total project cost was estimated at Rs 16.5 crores. CGSL was
engaged in financial activities in the areas of capital restructuring, mergers,
amalgamations, taxation, legal matters, etc.
It also undertook appraisal of project reports of its clients and
assisted them in preparing technically and financially viable projects. It had also added a host of new activities to
its services list such as investment banking, management, advisory services,
market studies, capital restructuring etc.
1.3 The name of the company
was again changed to its present name i.e. Warner Multimedia Limited
(hereinafter referred to as “WML”) from December 24, 1999 and company informed
Bombay Stock Exchange Ltd (BSE) that the reason for change in name was for
diversification into Multimedia Entertainment and Tele-media Business. WML also informed BSE that it had changed its
main object in Memorandum of Association and the change in name will reflect
true nature of its business. It is noticed that during this time technology,
media, communication and entertainment scrips were in
limelight at the Stock Exchanges and WML was one of such companies which had
changed its objects and name. 1.4 SEBI received a complaint
dated January 24, 2001 against WML alleging that the its registrar had been
delaying the endorsement of share certificates with the new name pursuant to
the name change from Classic Global Securities Ltd. to WML. It was also alleged that the
dematerialisation agent had been delaying the demat
requests and such practices were being adopted by the management to create an
artificial shortage of shares in the market and thereby rig the share
price. 1.5 From the price volume data
in the scrip on BSE, it was observed that price of the scrip had moved up from Rs. 18/- on 1.6 In view of the above, SEBI
conducted investigation into the affairs relating to buying, selling and
dealing in the shares of WML.
Investigations revealed that all the major clients of all major trading
brokers in the scrip of WML during the investigation period i.e
from September 2000 to December 2000 were interconnected with each other and to
the promoters of WML. The trading done
by these connected entities accounted for 70% to 100% of settlement wise
purchases and sales done in the market during the investigation period. It was also found that volume of trade was
mostly concentrated at BSE and as such SEBI investigations was concentrated on
the BSE brokers. 1.7
Based on the analysis of the trading data of BSE in the scrip
for the period of 1.8
M/s Media Investments (hereinafter referred to as “Noticee”)
is a sub broker to Joindre Capital Services Limited,
broker of BSE. Shri Anil Gaggar is the Proprietor of
Noticee. Investigation revealed that the Noticee had executed trades for the
related entities of WML and the Noticee alone accounted for substantial volume
of trading in WML scrip at BSE. Investigation further revealed that the Noticee
facilitated price manipulation and creation of false market in WML scrip by
aiding and abetting entities and individuals associated with the promoters of
WML. 2.0 ENQUIRY PROCEEDINGS 2.1
On completion of investigation, SEBI
vide Order dated November 29, 2002, appointed an Enquiry officer to enquire
into the affairs of the Noticee in their dealings in the scrip of WML and
violations allegedly committed by them under the provisions of Regulation 4 (a)
and (b) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating
to the Securities Market) Regulations, 1995 (hereinafter referred to as “PFUTP
Regulations”) and clause D (4) and (5) of Code of Conduct
prescribed under the provisions of Regulation 15(1)(b) of SEBI (Stock
Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as “Stock
Brokers Regulations”). 2.2
The
Enquiry Officer issued a notice dated July 31, 2003 to the
Noticee communicating the violations alleged to have been committed by it in
terms of Regulation 6 (1) of the Securities and Exchange Board of India
(Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty)
Regulations, 2002 (hereinafter referred to in short as “Enquiry Regulation”). The
Noticee vide letter dated 2.3
The Enquiry Officer, after conducting
an enquiry in accordance with the provisions of Enquiry Regulations submitted a
report dated 3.0 SHOW CAUSE NOTICE 3.1 Pursuant to the receipt of
the said Enquiry Report, a show cause notice dated August 10, 2004 was issued to the
Noticee, along with a copy of the report thereof, advising it to show cause as
to why the action, as recommended by the Enquiry Officer or any other penalty
as deemed appropriate should not be imposed on it. 4.0 REPLY OF THE NOTICEE TO THE SHOW CAUSE
NOTICE. 4.1 The proprietor of the
Noticee filed a detailed reply to the show cause notice vide his letter dated 4.1.1 That the sole activity
of Noticee is broking business and they did not carry on any research based
activity in the business due to financial and other constraints. Hence, they had not given any advice to the
client. 4.1.2 That the
Noticee neither go into the antecedents of its clients or their relations to
any of the promoters of any company / corporate nor ask them about the scrip in
which they will be dealing / trading.
Accordingly, any new person / entity who wished
to be a client and satisfied the registration requirements were enrolled as a
client. He further added that he had executed
trades for four entities namely (i) Godawari Commerce Pvt. Ltd.
(GCPL), (ii) Vaishno Tradelink
P. Ltd. (VTPL), (iii) Success Merchant Pvt. Ltd.
(SMPL) & (iv) Shri. Gaje Singh Chahal. VTPL was introduced to him by Shri. Natwar Daga who is known to him and who does
not have connection with promoters of WML. Similarly, Shri. Govardhan Jain was also
introduced to him by Shri. Natwar
Daga. Further, Shri. Govardhan
Jain introduced GCPL and Shri Ashish
Chatterjee.
SMPL were introduced by Shri. Ashish Chatterjee. 4.1.3 That at any
point of time he did not have any knowledge or suspicion about the linkage of
the above clients with each other or with WML.
The new clients were registered in the normal course of business and he
executed their orders in the normal course of business. He stated that he is not responsible for the
act of the clients who had dealt with the WML scrip and whose activities led to
the increase in the value and volume of the scrip. 4.1.4 That he had not
violated any of the provisions of PFUTP or Code of Conduct of Sub-brokers. 5.0 HEARING 5.1 An opportunity for a personal hearing before
me was given to the Noticee on “i) Media Investments is not connected with either M/s Warner
Multimedia Ltd., or any other promoters of WML. ii)
At the time of
trade, we did not have any iota of doubts that the entities we dealt with are
any way interlinked or connected to Promoters of the Company. Even the client Registration form of all
these clients shows different addresses.
We have no reason to believe that they are all associates of promoters
of WML. iii)
We did all these
trades in regular business manner and for the sake of brokerage income
only. We were not benefited in any way
by executing these orders except to the extent of receiving brokerage, which is the bread and butter of Media Investments. iv)
We never traded
at all in this scrip for ourselves. v)
We are also not
recommending any buy or sell to the clients of any scrip whether fundamentally
strong or not. We are doing trade only
on the basis of the instructions of the client at their own risk. vi)
Further, in the
year 2000-01 market was in boom condition with good volumes. It was difficult to track the volume of each and every scrip due to large volume in overall market.
vii)
The person who
introduced the clients is Mr. Natwar Daga who is very well known to us for many years and has no
connection, whatsoever, with M/s WML. viii)
We have not
transferred the shares to the clients’ account till client had debit balance in
the books of accounts. Account settled
subsequently. ix)
We never had any
type of allegation from SEBI / BSE or any other regulatory authority. x)
We also undertake
that we will take proper care to ensure that such type of events does not re
occur in future.” 6.0 CONSIDERATION
OF ISSUES & FINDINGS 6.1 I have carefully examined
the enquiry report, show cause notice, reply of the Noticee and submissions
made at the time of hearing. 6.2
I find that the price of the scrip moved from Rs. 18 on (In Rs. crores)
6.3
The financial results of the company for two years ended 6.4
During the investigation, Enquiry Officer examined the role
of the Noticee. Shri
Anil Gaggar, Proprietor of Noticee is a sub broker to BSE broker, Joindre Capital Services Limited. It dealt on behalf of
three of the promoter associated entities, Godawari
Commerce Private Limited (hereinafter referred to as “GCPL”), Vaishno Tradelink Private Limited
(hereinafter referred to as “VTPL”), Success Merchant Private Limited
(hereinafter referred to as “SMPL”) and on behalf of Gaje
Singh Chahal who also appears to be linked to the
promoters, through the above mentioned two brokers and sub-broker M/s
Bang Securities Pvt. Ltd. of BSE broker and Nirmal
Bang Securities Pvt. Ltd. 6.5
As per the distribution schedule submitted by the company to
BSE, GCPL is a promoter of WML. The
telephone number of GCPL, as per the client details furnished by the Noticee is
registered in the name of the Managing Director of WML, Shri.
Jagdish Prasad Purohit. It is also observed that a letter of offer
for takeover of the company Som Construction &
Developers Ltd. had been filed with SEBI.
The company, Som Construction & Developers
Ltd was having its Corporate Office at the same address as that of the Promoter
Company of WML, GCPL i.e. 2, 6.6
As per the distribution schedule submitted by WML to BSE,
SMPL is a promoter of WML. Further, as
per the record submitted by the Noticee, Shri. Dhruv Narayan Jha
was the contact person for SMPL. Shri. Jha was the director of WML
as per the Distribution Schedule for the date of 6.7
The above linkage should be read together with the submission
of Noticee that VTPL was introduced to them by Shri. Natwar Daga. GCPL was introduced
to it by Shri. Govardhan
Jain who in turn was introduced by one Shri. Natwar Daga. SMPL was introduced
by Ashish Chatterjee who
was in turn introduced by Shri. Govardhan
Jain. Thus, it is established that all the clients were linked to each other.
Furthermore, all the above clients of the Noticee had not dealt in any scrip
other than WML. This also shows the clear intentions of the clients to
manipulate the price of WML scrip and to create false volumes. Media
Investments evidently aided and abetted these entities in this task. 6.8
The proprietor of the Noticee, Shri.
Anil Gaggar submitted that he was not aware of any relation of his clients
VTPL, GCPL, SMPL and Gaje Singh Chahal
to the promoters of WML. Shri. Gaggar also stated
that he neither went into the antecedents of the clients or their relations to
any of the promoters of any company nor asked them about the scrip in which
they would be dealing / trading. I find
that the manner of introduction of clients as explained in the preceding
paragraphs brings out clearly that Noticee was aware of the linkage of his
clients with the promoters of WML. I
have also noted that the said clients dealt initially in the scrip of WML only
through the Noticee, a fact which has not been disputed by him. 6.9
I find that the Noticee bought 2,95,463
shares (21.48%) and sold 3,19,320 shares (23.21%) and its day wise volume was
ranging from 0% to 47.42% during the period of investigation. The detail of transactions executed by
Noticee are as below (as given on the next page):
6.10
It can be observed from the above table that Noticee alone
accounted for quite substantial volume of trading in the scrip of WML at BSE.
All these transactions were on behalf of the entities related to the promoters
of WML. In this regard, the proprietor of Noticee submitted that during the
year 2000, the market was booming and it was difficult for him to monitor
volumes. This is not a convincing argument as even though he may not know the
trading volumes during the market time, the details of volumes at exchanges
were known to him after the market time. From the trading details, it is
observed that trading volumes in WML scrip by the Noticee was more than 20% of
the total trading volumes in most of the settlement. Sometimes it is observed
that the Noticee traded nearly 50% of the total traded volumes. 6.11 Further, analysis of the
client ledgers of Noticee revealed that it carried a debit balance of at least
Rs.1,77,960 since 6.12 Apart from the above, the Enquiry Officer
found that that the Noticee had executed trades through M/s Bang Securities
Pvt. Ltd. for its client Gaje Singh Chahal which is also an admitted fact. Hence, Noticee
acted as an unregistered sub-broker of M/s Bang Securities Pvt. Ltd. in
violation of Section 12 of SEBI Act. I
find that the provisions of Rule 3 of SEBI (Stock Brokers & Sub-brokers)
Rules 1992, Section 12 of SEBI Act, 1992 and the Circulars issued thereunder clearly prohibit a person from acting as a
sub-broker without holding a valid registration from SEBI. In this context, I
observe one of the recent decision of the Hon’ble SAT
in Appeal
No. 89
of 2005 - Dharamshi Capital Services Vs SEBI (Date of decision: 1.3.2007) “We have heard the learned counsel for the
parties. In view of the admission made
by the appellant in the grounds of appeal and also by his learned counsel at
the time of hearing as referred to above, the charge of aiding and abetting KFL
to purchase its own shares from the market stands established. The trades executed by the appellant as a
sub-broker also violated Regulation 4 of the aforesaid Regulations. He has also violated the code of
conduct. The violation committed is
rather serious and, therefore, the Board was justified in debarring him from
accessing the capital market for a period of five years. No fault can, thus, be found with this part
of the order.” 6.13 Considering
the fact that the fundamentals of the scrip were not strong and the scrip was considerably
illiquid, any prudent stock broker could have doubted the intention of the
clients and stopped trading for them.
Instead, the Noticee continued trading for number of settlements in such
big quantities which resulted in building up of artificial volumes and price in
the scrip of WML. In this connection, it
would be relevant to refer the following extracts of the order dated “Before executing series of
transactions for his client, any prudent broker would have gone a bit far to
ascertain the goings around and also would have normally assessed the financial capability of the
person for whom he was trading…….. ……The Appellant’s submission
that he had taken client registration form, entered into agreement etc. by
itself was not sufficient. Exercise of
due diligence in ongoing transactions is a continuous process and it is not a
one time measure to be adhered to while
taking up the first transaction. The
appellant’s submission that it was B’s dishonesty that created the problem did
not absolve him of his failure to discharge his duties as a prudent broker…….. ……..On the basis of the
material available on record, it was difficult to conclude that the appellant
had exercised due skill and care in dealing with ‘B’. It was not that the appellant had carried on
only few trade transactions for ‘B’ for a short period. He had transacted in huge volumes for ‘B’ and
the association dated back to August 2000.
If the appellant could not see any design or pattern in the transactions
which ‘B’ was executing through the appellant during the period, then the
appellant certainly deserved to be blamed for being indifferent and unconcerned
and for that reason he was at fault for the failure to exercise due skill and
diligence………. ………It is true that a broker
cannot act of his own against the instructions of the client. But no one can compel him to be a party to
manipulate the market. No doubt a broker
is supposed to protect the interest of his client, but he is also expected to
protect the interest of the securities market in which he operates. It is his duty to ensure not to be a party to
any market manipulation and that the market in which he operates is run on a
health and non-manipulative basis.” 6.14 I find that
the promoters of WML along with the entities and individuals associated with
them had dealt in the WML scrip in large quantities with a view to manipulate
the price and to create artificial and false volume in the scrip. These
entities/persons were responsible for about 70% of the total trading in the
scrip of WML on BSE and CSE during the investigation periods. The Noticee
trading on behalf of these entities facilitated price manipulation and creation
of false market in the scrip by aiding and abetting the promoters and entities
and individuals associated with them. This act of the Noticee would induce the
innocent investors to buy / sell their stocks by such false appearance of
trading in securities. This is
detrimental to the interest of investors and the orderly development of the
securities market. This aspect has already been discussed by the Hon’ble SAT in the matter of Ketan Parekh Vs SEBI. The relevant observation made by SAT in
this regard is reproduced as below: “When
a person takes part in or enters into transactions in securities with the
intention to artificially raise or depress the price he thereby automatically
induces the innocent investors in the market to buy / sell their stocks. The
buyer or the seller is invariably influenced by the price of the stocks and if
that is being manipulated the person doing so is necessarily influencing the
decision of the buyer / seller thereby inducing him to buy or sell depending
upon how the market has been manipulated. We are therefore of the view that
inducement to any person to buy or sell securities is the necessary consequence
of manipulation and flows therefrom. In other words,
if the factum of manipulation is established it will
necessarily follow that the investors in the market had been induced to buy or
sell and that no further proof in this regard is required. The market, as
already observed, is so wide spread that it may not be humanly possible for the
Board to track the persons who were actually induced to buy or sell securities
as a result of manipulation and law can never impose on the Board a burden
which is impossible to be discharged.” 6.15 In
view of what is stated above, I find that that the Noticee created artificial
price and volume and distorted equilibrium of the scrip of WML. This type of artificial price and volume
creation in illiquid scrips gives wrong message to
the investors and induces them to trade in the shares and face imminent loss.
Further, trades with malafide intention as stated
hereinabove tampers with price discovery mechanism of stock exchange. These
trades abetted in creating artificial volumes and false market in the scrip of
WML. These trades executed by the
Noticee are in violation of the provisions of Regulation 4 (a) and (b) of SEBI
(Prohibition of Fraudulent and Unfair Trade Practice relating to Securities
Markets) Regulations, 1995. Further, by entering such trades the Noticee
violated the provisions of Regulation Clause D (5) of code of conduct specified
under Regulation 15(1)(b) of SEBI (Stock Brokers and Sub brokers)
Regulations, 1992 and Section 12 of SEBI Act, 1992. Having considered all aspects of the matter, I find that the penalty of
suspension of certificate of registration granted to the Noticee for a period
of one month as against the two months, as suggested by the Enquiry Officer will
act a deterrent to such activities in future.
7.0 ORDER 7.1 Having
regard to all facts and circumstances of the matter and 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 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 minor penalty of suspension of
certificate of registration issued to M/s Media Investments, a sub-broker
to Joindre Capital Services Limited, broker of BSE (SEBI Registration no. INS010115710) for a period
of one month. 7.2
This order shall come into
force on the expiry of 21 days from the date of this order.
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