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SECURITIES AND EXCHANGE BOARD OF WTM/TCN/ /IVD/ /06 CORAM:
Dr T.C. NAIR, WHOLE TIME MEMBER
In
the matter of trading in securities by
M/s. Rakesh Jhunjhunwala, Rekha Jhunjhunwala and Ra Re
Enterprises. DATE
OF HEARING: 12.07.2006 Appearances: For
noticee: Shri Rakesh Jhunjunwala Shri
R P Chitale Shri
R K Jhunjunwala Shri
Utpal Seth Shri
Satish Kumar For
SEBI: Shri
Sanjeev Dutt, CGM Shri
Praveen Trivedi, DLA Ms.
Rajani Agadi, Manager. Shri
Amitesh Kumar, LO ORDER Under
Sections 11 and 11B read with Section 19 of the Securities and Exchange Board
of India Act, 1992 and Regulation 11 of the SEBI (Prohibition of Fraudulent and
Unfair Trade Practices Relating to the Securities Market) Regulations, 2003. 1.0 Facts 1.1 Shri Rakesh Jhunjhunwala is a director
of M/s. RKJ Share Brokers Pvt. Ltd., a member of The
Bombay Stock Exchange Limited (BSE) and an active investor in stock
markets. Smt. Rekha Jhunjhunwala is the wife of
Shri Rakesh Jhunjhunwala
and both of them are partners in M/s. RaRe
Enterprises. Shri Rakesh
Jhunjhunwala also holds 33 1/3% shares in M/s.
Alchemy Share and Stock Brokers Pvt. Ltd. The said
three entities are hereinafter collectively referred to as “the RKJ Group”. 1.2 The Securities
and Exchange Board of India (hereinafter referred to as “SEBI”) conducted a
preliminary investigation into volatility in the securities market during the
period July to August, 2002. In the
course of investigation, it was observed that during the said period, the RKJ
Group had traded through a number of brokers across stock exchanges and that
they had taken concentrated positions in certain scrips. It was also observed that the trading of these
brokers during the relevant time was concentrated in the scrips in which the
RKJ Group had substantial exposure and that RKJ Group had borrowed substantial
amounts from various NBFCs and used the amounts so
borrowed for the purpose of trading in securities. Based on the findings of the
said preliminary investigation, SEBI vide order dated 8.11.2002, directed a
detailed investigation into the buying, selling and dealing in shares by RKJ
Group. 1.3
The findings of the investigations were as
under: (a)
During the period 3.6.2002 to 6.8.2002 the RKJ
Group was trading on a daily basis resulting in considerable gross volumes and
very low net volumes. (b)
During the period 23.7.2002 to 2.8.2002, the RKJ
group were large sellers. There were no purchases or miniscule purchases during
this period. Further most of the sales
were on 30.7.2002 and 31.7.2002. (c)
The RKJ group had sold shares amounting to Rs.25
crore on 30th and (d)
The BSE SENSEX declined by nearly 6% during the
period in which the RKJ group made substantial sales; further in the case of
NIIT, the price of the scrip declined by 17.88% on (e)
The RKJ group had traded through a number of
brokers of NSE and BSE. Most of the
brokers had substantial dealings on behalf of the group and further they also
dealt in the same scrips where the group had exposure during the period
June-August 2002. (f)
The RKJ group had borrowed funds from several
non banking finance companies such as IL&FS, Cholamandalam
Investment & Finance Ltd, Citicorp Finance ( (g)
It was also observed that the group had
transferred shares from its Demat accounts to the Demat accounts of Shri Lashit Sanghvi, Shri Amal Parek, Shri Hemang Dharmashi & Shri Kalparaj Dharmashi, Shri Rajiv Gupta and Shri BL Agarwal. It was also noted that these persons had lent
funds to the group and in turn had pledged the shares transferred by the group
to them with financial institutions such as Citicorp Finance India Ltd. (h)
Shri Rakesh Jhunjhunwala had in his interactions with the media
recommended purchase of a few scrips. It was observed that while making the
recommendations he had substantial holdings in the said scrips and the price of
the scrip as well as trading volumes increased soon after the recommendation
was made. It was further noted that
after the said increase in the price, Shri Rakesh Jhunjhunwala liquidated his holdings. (i)
It was observed that Shri Rakesh
Jhunjhunwala sold 100 shares of Gujarat Gas Ltd
through broker M/s Alchemy Share and Stock Brokers Pvt
Ltd on 2.0 Show
Cause Notice and Hearing: 2.1 In the light of the above findings of investigation, show cause notice dated 17.7.2003 was issued to RKJ group advising them to show cause as to why directions including directions prohibiting them from accessing the capital markets and dealing in securities be not issued. The RKJ group submitted their reply to the said show cause notice vide their letter dated 28.8.2003. An opportunity of personal hearing was also granted to them on the said date by the then Whole Time Member Shri A K Batra. 2.2
Based on
certain additional observations, an additional show cause notice was issued to
the group on 20.1.2004. The group
submitted its reply to the second show cause notice on 28.2.2004 and also
availed a personal hearing before the then Whole Time Member Shri A K Batra
on 7.4.2004. 2.3
Shri A.
K. Batra, the then Whole Time Member however resigned
before concluding the proceedings. When the matter was placed before me for
consideration, having perused the Investigation Report, the show cause notices,
replies and submissions available on record, I granted a personal hearing to
RKJ Group on 12.07.2006, which was attended by the representatives of the RKJ
Group. During the personal hearing, the
representatives of RKJ Group, while denying the charges, by and large
reiterated the submissions already available on record. Consideration of issues and findings 2.4
Having perused the show cause notices and the
replies received from the RKJ Group, I note that in brief, the group has made
the following submissions in its replies, submissions and in the course of
personal hearing: (A)
Reply dated The
18 scrips mentioned in the show cause notice form 29.75% of the aggregate
investments of the group on a book value basis. The average holding period in
respect of the scrips mentioned in the notice ranged from 4 months to 55 months
and specifically in respect of NIIT it was 10 months. In
respect of the scrip of NIIT, the trades of the group on 30.7.2002 as a
percentage of the aggregate transactions in the said scrip were only
3.86%. Further it was not possible for
any individual or any group of individuals to determine the direction of
movement of the price of a scrip in a market that was
spread over 400 cities. In
respect of market behaviour during the period June to July 2002, the global
markets had fallen and even the Indian Stock Indices had fallen by 15% to
18%. Prices of the scrips that were not
indicated in the show cause notice had also fallen. Therefore, it was not possible to establish a
cause and effect relationship between the movement of the price of the scrip
and the trading by the group. Moreover,
institutions such as FIIs and Mutual Funds had made
gross sales of approximately Rs.10,000 crore whereas the total of the gross sales of the group were
to the extent of only Rs. 38 crore
during the relevant period. The
promoters of NIIT had sold 7.73% stake in the company immediately preceding the
announcement of results on 30.7.2002.
This combined with a review of the accounting practices by the company
were the reasons for sale by the group. 86%
of the trading by the group was done through RKJ Share Brokers Pvt. Ltd. and Alchemy Share & Stock Brokers Pvt. Ltd. The
remaining brokers accounted for only 14% of the trading. It was not possible to camouflage trading in
an electronic trading system such as the one prevalent today. In
respect of the address of Shri Sonthalia being the
same as that of RKJ Share Brokers Pvt. Ltd., the same
was shown as a local address in Mumbai for the purposes of clearing and
delivering while Shri Sonthalia obtained membership
of NSE. It
was a market practice to borrow and invest and the same has not been
prohibited. On the other hand, banks are
permitted to lend against shares. In
respect of borrowings by individuals, the group was not privy to any end use
declaration and were not liable for violation of the same by the borrowers. The
conference by capitalideasonline.com was closed door conference with mutual
fund managers, to which only a select audience was invited. The general public did not have access to the
proceedings of the conference till 3.6.2002 when the transcripts were posted on
capitalideasonline.com. Further, full disclosure was made as to the ownership
of the scrips in respect of which recommendations were made. In respect of the particular recommendation
mentioned in the SCN, it was submitted that the transcript was incomplete and
the mandate mentioned in the transcript was regarding strategic sale of NIIT
and not the price at which the scrip was to be sold after a period of 3 months. The
price of the scrip had actually gone down after the recommendations were made
and Rakesh Jhunjhunwala had
added the scrip to his portfolio after the recommendations were made. They were thus, net
buyers after the recommendation was made and not net sellers as would be
expected of a person who seeks to make a statement with a view to induce
purchase of shares. (B) Reply dated Rakesh Jhunjhunwala, Rekha Jhunjhunwala & RaRe Enterprises and RKJ Share Brokers Private Limited are
independent legal entities and any inter-se transactions between them are
genuine trade transactions. The
inter-se transfers among the members of the group in the 4 scrips namely Tata Info Media, Polaris, NIIT and Geometric Software were
only one each. The
sale of 2,50,000 shares of Tata Info Media by Rakesh Jhunjhunwala and purchase
of the same by Rekha Jhunjhunwala
was undertaken as a measure to restructure their portfolios. The said transactions did not result in any
changes in the price deviant from normal price discovery. The transactions in the scrips of Geometric
Software and Polaris were also done with a view to restructure the portfolios. In
respect of the transactions in the scrip of Gujarat Gas, their share of the
trade on 2.5 In the light
of the aforesaid submissions the issues that arise for consideration are dealt
with as under: (a) Whether
there was any irregularity in the trading by the RKJ Group during the period
July to August 2002. (i) Market Manipulation I
note that during the period June to August 2002, the RKJ Group was trading on a
daily basis resulting in considerable gross volumes and very low net
volumes. The period 23.7.2002 to
2.8.2002 also witnessed large selling by the said group. I further note that during the periods in
which the RKJ Group made substantial sales, the BSE SENSEX fell by 6%;
specifically, in the case of the scrip of NIIT, the price of the scrip had
declined by 17.88% on 30.7.2002 when the group sold nearly 5 lakh shares. In
their reply dated 28.8.2003, the group submitted that 18 scrips
mentioned in the SCN formed only 29.5% of their aggregate investments. In the case of the fall in price, the group
submitted that on 30.7.2002, the sales by the said group were only 3.86% of the
aggregate transactions in the scrip of NIIT.
Further, the sales have not led to any price movement. They also submitted that no specific pattern
emerges or has been pointed out which leads to a conclusion of market
manipulation. They further submitted
that during the period under consideration, prices of scrips which were not
mentioned in the SCN had also fallen.
They mentioned that during the said period FIIs
and MFs had made gross sales of around Rs.10,000/- crore, whereas their gross
sales amounted to only Rs.38 crore. In
the light of the above, I find that the reply of the group is satisfactory and
that the material and evidence on record are not sufficient to establish that
the group had indulged in manipulation of the prices of shares. (ii) Creation of artificial Trading I
note that the RKJ Group has traded in several scrips through a number of
brokers who are members of the NSE and BSE.
Most of the said brokers had substantial dealings with the group and
also dealt in the shares that the group had invested in. Further, Rakesh Jhunjhunwala is a director of RKJ Share Brokers Pvt. Ltd and also holds 33-1/3 % share in Alchemy Share
& Stock Brokers Pvt Ltd through holding
companies. The scrips in which the group
traded through the brokers were mid-cap scrips. I
note that in their reply dated 28.8.2003, the group
submitted that 3 of the brokers through whom business was said to have been
done by them were not actually given any business. On the other hand, four of
the brokers through whom they had transacted were not mentioned in the
notice. They further submitted that 86%
of the trading by the group was done through M/s. RKJ Share Brokers Pvt. Ltd and M/s. Alchemy Share & Stock Brokers Pvt. Ltd. They
further submitted that the scrips mentioned in the notice were not mid-cap scrips, they were rather large cap scrips. In
the light of the submissions as above, I find that the submissions of the group
are satisfactory and that the evidence on record is not sufficient to prove
that the RKJ Group had created an artificial market through their trading. (iii) Borrowing &
Leverages I
note that the RKJ Group had obtained funds from several NBFCs
against pledge of shares. The manner in
which the funds were borrowed and the shares transferred to the dematerialized
accounts showed that the RKJ group had circumvented the lending limits imposed
by the RBI on banks and NBFCs. Further, since the
borrowers were directors of brokers through whom the group was dealing in
securities, they were running an additional risk beyond permissible limits. In
their reply, the group submitted that there was no prohibition on them from
borrowing and it cannot be said that there was any attempt to defraud
anybody. In fact loan agreements were
entered into with individuals from whom they had borrowed money and they were
not privy to the source of funds of the individuals who lent money to them. I
find that the reply of the group does not address the issue of violation of
directives of the RBI. But it is not
within the jurisdiction of SEBI to take cognizance of any such violation unless
it has impacted the securities market.
From the information made available on record, I am unable to observe
any detrimental effect of the said irregular borrowing on the securities
market. The matter may however be
brought to the notice of RBI for their appropriate action, if any. (iv) Recommendations in respect of
certain scrips I
note that in the course of investigation, it was observed that Rakesh Jhunjhunwala interacted
extensively with the media and was recommending many stocks in public forums.
Shri Jhunjunwalla had attended conference of
investors and fund managers conducted at the It
was observed that immediately after the comments of Jhunjhunwala
at the conference, the price of the scrip rose from Rs.230/- on 8.4.2002 to Rs.350/-
on 18.4.2002. It was also noted that the
shareholdings of the RKJ Group subsequent to the conference went upto 11,29,069 shares as on
1.7.2002. It
is alleged that the broker had made the statement while he held substantial
position in the scrip of NIIT and with intention of raising the price. In
this regard, the group submitted that the conference organised by M/s.
Capitalideasonline.com was a closed door conference and the general investing
public were not invited nor did they have access to the proceedings in the
conference till 3.6.2002. They further
submitted that full disclosure was made regarding the scrips owned by Shri Rakesh Jhunjhunwala when he made
the recommendation. In respect of the
particular recommendation mentioned in the SCN, the group submitted that Shri Rakesh Jhunjhunwala had made the
recommendation in view of the high leverage that NIIT had over the profits that
they made and considering that the company would fetch a substantial price in
the event of a strategic sale. They further
submitted that in respect of the four scrips upon whose performance the
recommendations were made, the price had actually gone down. The group also submitted that they were net
buyers when the transcript of the proceedings of the conference were posted on
the website and not net sellers as would be expected of a person who attempted
to manipulate the price of the scrip through recommendations. I
note that stock brokers and other intermediaries who indulge in manipulation
make recommendations based on performance of a scrip. A recommendation to purchase is made by such
intermediaries when they wish to offload shares. Investors who believe in their
recommendations purchase the shares they recommend thereby creating a demand
and increasing the price of the shares.
The intermediaries then sell their shares at an increased price.
Similarly, when such intermediaries want to buy shares, they recommend sale so
that the price of the scrip falls owing to sell pressure and these
intermediaries then pick up the shares at a reduced price. I
find that the submissions made by RKJ Group are acceptable and effectively
address the allegation of price manipulation through the recommendations made
by Shri Rakesh Jhunjhunwala. The recommendation made by Shri Jhunjhunwala was to purchase the shares and they were not
net sellers. Rather they were net buyers after the recommendation was made. (b)
Whether the RKJ Group had violated the provisions of the SEBI Act, rules
or regulations through their trading during the period July to August 2002. In
view of the findings in (a) supra, I find that the materials and evidence
available on record are not sufficient to establish that the RKJ group have
violated any of the provisions of the Act, Rules or Regulations of SEBI. (c) Whether
in the light of the above findings, any penalty needs to be imposed on the RKJ
Group. I
find that the evidence available on record is not sufficient to prove that the
RKJ group through their transactions during the period July to August, 2002, had manipulated the
price of shares dealt by them. I further
find that although in respect of borrowing of funds there may have been
irregularities on the part of the group, it is not in the jurisdiction of SEBI
to adjudicate upon the same. SEBI may however bring this aspect to the notice
of RBI for appropriate action, if any. I
do not agree with the contention of RKJ Group that the second show cause notice
suffers from legal infirmities and I find that the group have been given appropriate
opportunity to meet the allegations levelled against them. Therefore, I am not agreeable with the contention of the RKJ Group that the show cause notice suffers from legal infirmities. However, in the light of the explanations submitted by them, I find that there is no ground made out to pass any directions against them. Therefore, I am of view that no action needs to be taken against the RKJ Group. 3.0
Order 3.1 In view of the above, I, in exercise
of the powers under section 19 of the SEBI Act read with sections 11 and 11B of
the said Act and Regulation 11 of FUTP Regulations 2003 do hereby hold that the
no direction needs to be passed against Rakesh Jhunjhunwala, Rekha Jhunjhunwala & Ra Re Enterprises on the basis of the
two show cause notices dated 3.2 Order
accordingly. Date: 07.08.2006 T.C. NAIR Place:
Mumbai
WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF |
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