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O
R D E R UNDER
RULE 5 OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY
AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995 READ
WITH SECTION 15A OF THE SEBI ACT, 1992 AGAINST
M/s SILVERFLAG TRADING COMPANY PRIVATE LIMITED 1.
There were reports of alleged market manipulation
and irregularities in the trading of the shares of Prime Capital Market
Limited, (for brevity’s sake, hereinafter referred to as PCML). On the said
basis, the Securities and Exchange Board of India (SEBI) initiated an investigation
into the said matter for the period between March 17, 2005 and September 16,
2005 so as to determine in the said process, the possible violation of the
provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices)
Regulations, 2003 and the SEBI (Stock brokers and Sub-brokers) Regulations,
1992 (hereinafter referred to as FUTP Regulations and the Broker Regulations,
respectively) by various entities. The scrip of PCML was listed on the Calcutta
Stock Exchange (CSE) at the time of investigation. In connection thereof, the trading details of
various entities who had transacted in the scrip of PCML were collected and
their trading patterns were analysed along with the data and the volumes
contributed by them. 2. The preliminary
investigation findings, inter alia revealed that the trades of these entities
had largely contributed to the price movement and the false appearance of
liquidity and volumes in the said scrip. M/s
Silverflag Trading Company Private Limited (for brevity’s sake, hereinafter
referred to as Silverflag) one of the clients of M/s D K Khandelwal & Co (DKK) registered with the SEBI as a broker and member
of CSE, was along with their broker; alleged to have played a role in raising
the price of the scrip of PCML at the CSE, thus facilitating the manipulation
in the scrip of PCML. Incidentally the investigation findings also revealed
that three other members of CSE i.e. DB
& Co (DBC), Sanju Kabra (SK) and Shivam Stock Broking Pvt. Ltd (Shivam);
had traded extensively in the scrip of PCML) through their respective clients
and that most of them were inter related and acting in concert. 3.
In
view of these findings, during the process of investigation, the various
brokers and their respective clients were summoned for examination of their
books of accounts and other relevant documents including KYC norms as were also
asked to produce other related information viz, trading details etc. Silverflag, being the client of DKK was also
summoned by the investigating officer to appear before him and to produce the
required documents and books of accounts on certain dates. It has been alleged
that the said entity failed to comply with the said summons and thereby violated the
provisions of Section 11C(6)(c) of the Act and Regulation 8(1) of the FUTP
Regulations, thereby making them liable for being proceeded against in terms of
Section 15A of the SEBI Act, 1992 (Act).
4.
Accordingly
adjudicating proceedings were ordered against Silverflag and in that context I was appointed as
the adjudicating officer vide the order of SEBI dated NOTICE/REPLY/PERSONAL HEARING 5. A notice dated January 02, 2007 under Rule 4 of the SEBI (Procedure for Holding Inquiry and Imposing
Penalties by the Adjudicating Officer) Rules, 1995 was issued to Silverflag along with relevant documents annexed
thereto with an advice to show cause within 14 days of the receipt of the
notice, as to why proceedings should not be initiated against them in terms of
the said Rules and why the penalty as prescribed therein should not be levied
upon them. However
the notice sent by registered post acknowledgement due was returned undelivered
by the postal authorities with the remark “not known”. 6. Hence the
notice was sent to the eastern regional office of SEBI at Kolkota (ERO) vide
letter dated 7.
From the above, it is clear that Silverflag were
granted sufficient opportunities to appear before me and present their case.
Despite the same, they failed to avail the said opportunities. 8.
Thereafter
a notice of hearing dated APPRECIATON OF FACTS: 9.
I have carefully examined the investigation report,
the documents available on record and other facts and circumstances relevant to
this case. While taking into account, the issues highlighted in the report as
against Silverflag, I consider it necessary to recapitulate certain details of
the case that gave rise to the present proceedings. 10. The
average price of the scrip of 'PCML' at the CSE was Rs.14.00 on 11. In view of the same, vide an ad interim ex-parte order
dated September 29, 2005 passed under Sections 19 read with 11(1), 11B,
11(4)(a) and 11(4)(b) of the SEBI Act, 1992, (Act), SEBI inter alia suspended
trading in the shares of PCML on the CSE till further directions and also
directed DBC, SK and Shivam not to buy, sell or deal in securities in any
manner either directly or indirectly, pending further directions in this
regard. 12.
The
interim order of SEBI dated 13. In this context, I have noted on record a
letter dated 14. Be
that as it may, the role of four
brokers and their respective clients in the rise in the share
price of PCML from Rs.14/- to Rs.280.40/-
was a matter of suspect, primarily because of the nature of the trades executed
by them in tandem and the fact that all of them were collectively found to have
contributed to the majority of the volume of PCML at the CSE between March 17,
2005 and September 16, 2005. These brokers and their clients are listed below:-
a)
DBC
and their clients; M/s Bhuwania Vinimay Pvt Ltd (Bhuwania) and TDB; b)
SK and their clients; Bhuwania and Zenser
Merchantile Pvt. Ltd. (Zenser); c)
Shivam
and their clients; Bhuwania, Zenser,
Pravin Kumar Jain and Fine Trade Merchantile Co Ltd; d)
DKK
and their clients; Fine Trade Merchantile Co. Pvt. Ltd, Jain Stock & Share
Brokers Ltd, Machindra Nath Multi Trade Pvt. Ltd and Silver Flag trading Co. Ltd. 15. A total of 36, 43,606 shares of PCML (both
buy and sale) were traded at the exchange. The major brokers were found to be
DBC, SK and Shivam while the trades of DKK were found to be to the extent of
22,100 shares constituting 0.6 % of the total volume of PCML at the CSE during
the period of investigation (the volume of others i.e. DBC being 41.67%, Shivam
being 21.1% and that of SK being 30% of the total volume of PCML at the CSE).
As can be seen from the table below, the transactions executed by these brokers
together constituted more than 93% of the trading volume at CSE during the
period under investigation:
16.
The
trades of DKK were found to have been created through very thin trading volume
at the exchange. Almost all the trades
of DKK were executed as cross deals (wherein the buying and selling broker was
the same). All the other mentioned members acted as the counter party of their
own transactions. The extent of cross deals in the same terminal
of DKK in the shares of PCML between March 17 2005 and September 15, 2005 and
that with the other brokers is given below. The cross deals executed by DKK in the scrip of PCML
constituted such a large portion of their trading that 22,000
shares out of 22,100 shares which comprised of 99.5% of the volume of their
trades in the scrip of
PCML were in the nature of cross deals
and were created at their terminal alone.
17. These trades by DKK were also singly found
to have been responsible for raising the price of the scrip of PCML from a
lower level of Rs.18/- to Rs.159/- through thin trading volumes and were executed such that the price of the scrip of
PCML was raised by 7-10% on a daily basis. The details of such price rise are
given below:
18. The main entities found to have transacted
through DKK and the details of their transactions in the scrip of PCML is as
shown below:
19. Upon an analysis of the information given
above, it appears that although DKK did not trade extensively in the scrip of
PCML, their trades for their respective clients were so executed so as to
ensure an apparent increase in the price of the scrip. 20. Due to the lack of
information/details about Silverflag and with a view to determine exactly the extent of their nexus
between the various brokers, clients and the management/ employees/promoters of
PCML as also their respective roles if any, in the manipulation in the scrip of
PCML, on the basis of the information that would be obtained and the violations
committed by them in the said process, the investigating officer of SEBI also
sent summons to Silverflag, to reply and to appear before the investigation
authority along with the information as called for.
21. As is apparent from a reading of the table
given above, summons were issued to Silverflag by the investigating authority
to appear personally before the investigation authority along with the
information as called for on two occasions. The first summons were ignored and
upon SEBI persisting, only part of the said information was submitted, that too
only after the due date. 22. The extent of the information sought for
from Silverflag and the details if any as provided by them is given below: - i.
The
address of Silverflag. The same was provided. ii.
Name and
address of the promoter/director/partner, if the entity is not an individual.
The names and addresses of two directors i.e Pravin Sawant and Eknath Mandavkar
was provided. iii.
PAN No
which was provided. iv.
Demat
Account Details, which was provided. v.
Details
of transactions in the scrip of PCML during the period from January 1, 2005 to
September 30, 2005 with details of the date, quantity, rate of shares
purchased/sold and the dates, if and when the shares were sold /bought during
this period and also the holding statement if the shares were still on hold,
which was provided. vi.
Copy of
the Contract Notes issued by the broker for the transactions in the scrip for
the period vii.
Copy of
the relevant statement of accounts issued by the broker for the transactions of
Silverflag. in the scrip during the period viii.
Statement
of deliveries made to the broker and received from the broker for the
transactions of Silverflag. in the scrip during the period giving details of
the date of transaction, quantity of shares bought/sold, dates of delivery i.e.
received from and made to the broker and quantity received and delivered. The
same was provided. ix.
Details
of relevant bank transactions, evidencing the receipts and payments from/to the
broker for the transactions of Silverflag pertaining to the scrip of PCML. The
same was provided. x.
Details
of all off market transactions, if any, in the scrip during the period from xi.
Details
of relationship with the promoters/directors of the company, if any. It was
stated that there was no
relationship with the promoters/directors of the company. xii.
Details
of relationship with the brokers dealing in the scrip, if any - It was stated
that there was no relationship with
the brokers. xiii.
Reasons
for trading in this scrip. Silverflag stated that there were no specific
reasons. 23. I have perused the information
submitted by Silverflag and have noted that although the information furnished
is indeed quite comprehensive, some of it is not entirely correct. This
incorrect information capable of hampering the process of investigation appears
to have submitted by Silverflag to deliberately mislead SEBI. 24. I have listed out a few
instances where incomplete information appears to have been provided by them
which could be discerned based on the information received from certain
other sources; which is
noteworthy of repetition. 25. From the client
registration forms submitted by DKK, it was noted that almost all their clients
had common directors. Pravin Sawant and Eknath Mandavkar, directors of
Silverflag were also found to be the directors of Machindra Nath Multi Trade
Pvt. Ltd and Fine Trade Mercantile Co. Pvt. Ltd. Machindra Nath Multi Trade
Pvt. Ltd, Fine Trade Mercantile Co. Pvt. Ltd and Silverflag shared common
addresses. Fine Trade Mercantile Co. Pvt Ltd was also a client of Shivam. 26. Apart from this information, there are
other relevant details which require to be highlighted. (i)
Shri
Dhruv Narayan Jha, who was found to be one of the two directors of M/s Jain
Stock and Share Brokers Limited, another client of DKK, was also found to be
earlier a director of PCML for more that 4 years i.e. from August 12, 2001 to
October 15, 2005 and was found to have resigned from PCML on personal grounds on
December 15, 2005 soon after the interim order was passed by SEBI, suspending
trading of the shares of PCML. (ii)
Incidentally PCML and M/s Jain Stock and Share Brokers
Limited were also found to share the same office address. (iii)
Moreover the client registration forms of
Bhuwania and Zenser, (common clients of SK and Shivam) who were found to have
purchased 14,10,204 shares i.e. 1140454 and 269750 shares respectively out of
16,73,803 shares purchased in PCML during the period of investigation i.e. 84%
of the combined bought position of the three brokers and 77% of the total
bought quantity at the exchange, revealed that Dhruv Narayan Jha was also a
director of Bhuwania and Zenser. 27. Thus clearly, there exists a nexus between the various brokers, clients
and the management/employees/promoters of PCML and this nexus enabled all of
them to act in concert while trading in the scrip of PCML. There was thus a
specific reason for Silverflag to trade in the scrip of PCML, which was never
revealed by them. It would also be relevant to mention
here that for the years ended 28. In this context, I have examined the provisions
of Section 11C(3) of the Act which read
as under: “The Investigating Authority may require any
intermediary or any person associated with securities market in any manner to
furnish such information to or produce such books, or registers, or other
documents, or record before him or any person authorised by it in this behalf
as it may consider necessary if the furnishing of such information or the
production of such books, or registers or other documents, or record is
relevant or necessary for the purposes of its investigation”. 29. Further
11C(5)
of the Act reads as under: “Any person, directed to make an
investigation under sub-section (1), may examine on oath, any manager, managing
director, officer and other employee of any intermediary or any person
associated with securities market in any manner, in relation to the affairs of
his business and may administer an oath accordingly and for that purpose may
require any of those persons to appear before it personally”. 30. Further
8(1) of SEBI FUTP Regulation reads as under 1) It shall be the duty of every person in
respect of whom an investigation has been ordered under regulation 7- (a) to produce to the Investigating Authority or any
person authorized by him such books, accounts and other documents and record in
his custody or control and to furnish
such statements and information as the Investigation Authority or the person so
authorized by him may reasonably require for the purposes of the investigation; (b) to appear before
the Investigation Authority personally when required to do so by him under
regulation 6 or regulation 7 to answer any question which is put to him by the
Investigation Authority in pursuance of the powers under the said regulations. 31. Thus every entity connected with an
investigation process is under an obligation to provide the information as
sought for by the Investigating Authority. The decision to call for such
information and the judgment as to its relevancy is completely the discretion
of the investigating authority and is in furtherance of the discharge of its
official duties. It is not for the noticee to question the relevance of the
information sought for. The noticee
under the summons is only obliged legally or morally, to cooperate with the
Investigating Authority and furnish the required information. 32. From a perusal of the Annexure listing the
information sought for from Silverflag by the investigating authority, it is
clear that this information was crucial and central to the investigation
findings. Moreover the presence of Silverflag along with the necessary
documents was also essential, among other things, to examine the veracity of
the entity in question. However, as Silverflag did not provide the said
information accurately, the same thwarted the attempts of SEBI to effectively
gather vital evidence for the timely conclusion of the investigation
proceedings. 33. Taking into account the
sensitivity of the securities market, an early conclusion of investigation is a
very important objective. Although
there is evidence on record that the said summons were acknowledged by them on
their behalf, it is apparent that Silverflag were not willing to and in fact
delayed sending the information sought for. In fact even in the present
proceedings, Silverflag could have availed of the opportunity of being heard in
person and come clean, but they failed to do so which indicates that they were
not willing to reveal any information about their role in this case. 34.
These
facts clubbed together indicate that Silverflag were not totally unconnected
with the manipulation of the shares of the PCML in the market and were in fact
a willing accomplice to the management of PCML in the said exercise as is
apparent from the findings of investigation. 35.
As Silverflag have failed
to appear before SEBI or even before me to furnish the correct information as
sought for and in the absence of any adequate explanation on their part as
regards their non appearance even before me, it can be reasonably concluded
that they have failed to comply with a regulatory directive. Such an act on the
part of Silverflag suggests
blatant and deliberate non-cooperation clearly warranting severe action. 36.
Any
evasion of the regulatory provisions of
the regulator issued in the interests of the investors or non-adherence to the
same for any reason whatsoever is bound to affect the interests of such
investors as also the sound and smooth functioning of the capital market. If no
cognizance were to be taken of the same, and no liability fixed there upon, the
entire purpose of incorporating the provisions in the said enactments would
become redundant. 37. Hence, Silverflag is liable for a penalty
under Section 15A of the SEBI Act, 1992 for their failure to comply with
summons issued under section 11C(3) of the SEBI Act, 1992, by failing to
furnish the timely and at times inaccurate information and also to appear in
person before the investigating team.
Section 15 A of the SEBI Act, 1992 inter alia provides that in case of
failure to furnish any information to the Board, the same would invite a liability
of one lakh rupees for each day during which such failure continues or one
crore rupees, whichever is less. 38. At the time of levying penalty certain
factors are also be taken in to account by the adjudicating officer, as is
evident from the provisions of Section 15J of the Act which also find mention
in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by
the Adjudicating Officer) Rules, 1995 i.e. the amount of disproportionate gain
or unfair advantage, wherever quantifiable, made as a result of the default;
the amount of loss caused to an investor or group of investors as a result of
the default and the repetitive nature of the default. 39. These factors mentioned above, are to be
relied upon with due discretion that is to be exercised judiciously, depending
upon the facts and circumstances of each case as well as after analysing all
the relevant material available on record. In the present case, manipulation
is a serious issue and fraudulent activities such as these are per se illegal
and are bound to affect a lot of parties in a way, not necessarily expressly
highlighted at all times. Moreover it is difficult to arrive at any
specific figure to compute the amount of loss caused to the investing public
especially in a large country like 40. From the information provided by PCML, it
was gathered that Bhuwania had transferred 5,69,050 shares of PCML to various
entities on Rs.30,16,67,704.60 (total value of the
purchase details of Bhuwanai)
_________________________________________________________________ 11,64,563 (total purchase quantity of
Bhuwania in PCML) x 5,69,050 (total
shares of PCML transferred to various entities) =
Rs.14,74,06,372.43. 41. From the figures given above and keeping in
mind the relationship between Silverflag and the others as highlighted above,
there can be no two opinions on the fact that Silverflag too made disproportionate
gains and enjoyed unfair advantage in the whole scenario to the detriment of
thousands of innocent investors. This is because Silverflag traded in the scrip
of PCML in a manipulative manner, so as to create volumes which in turn affected
the normal price discovery mechanism of the securities market and gave rise to an appearance of volumes
and liquidity in a particular scrip which is an important criterion, apart from
price, capable of misleading the investors while making an investment decision.
Moreover the nature of offence in this case is repetitive in nature. PENALTY: 42. Keeping in mind these facts, I am of the
view that the imposition of a penalty is warranted and hence in exercise of the
powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding
Enquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, in the
interest of justice, equity and good conscience, think it is appropriate to
levy a penalty of Rs. Two Lakhs only (Rupees
2,00,000/-only ) on M/s Silver Flag Trading Company
Private Limited. 43. The penalty amount shall be paid within a
period of 45 days from the date of receipt of this order through a cross demand
draft drawn in favour of “SEBI- Penalties remittable to the Government of India
and payable at Mumbai” which may be sent to Shri Jayanta Jash,
Deputy General Manager, Securities and Exchange Board of India, L&T
Chambers, 16, Camac Street, Kolkata 700017.
PLACE: MUMBAI G. BABITA RAYUDU
DATE:
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