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SECURITIES AND EXCHANGE BOARD OF WTM/GA/MRD/DSA/890/05 ORDER ORDER
UNDER SECTION 12A OF SECURITIES CONTRACTS (REGULATION) ACT, 1956, SECTION 11(4)
AND 11B OF SEBI ACT, 1992 AND SECTION 19 OF DEPOSITORIES ACT, 1996 IN THE
MATTER OF TRANSACTIONS IN THE SCRIP OF BHORUKA FINANCIAL SERVICES LIMITED ON
MAGADH STOCK EXCHANGE ASSOCIATION 1. Magadh Stock Exchange Association (MSEA) was recognized as
a Stock Exchange under Section 4 of� Securities Contracts (Regulation) Act,
1956 �by Central Government vide Notification
no. SO 899(E) dated 2. Due
to breakdown of internal administration and persistent malfunctioning of the
Council of Management of MSEA, the Council of Management of MSEA was superseded
by SEBI vide Notification No. SO. No. 822(E) dated 3. SEBI
has granted renewal of recognition to MSEA for a period of 3
years vide notification No. SO 1107(E) dated (i)
Setting of Trade Guarantee� Fund /Settlement Guarantee Fund by the
Exchange after final approval by SEBI. (ii)
Trading shall commence only after setting up of Settlement
Guarantee Fund or Trade Guarantee Fund, duly approved by SEBI. (iii)
Payment of balance amount of Rs. 11,31,768 on or before 4. MSEA
failed to comply with the said conditions.�
It was however observed that some trades were conducted on the stock
exchange with a ��turnover of Rs.13.26 lakhs
in year 2003-04.� Since the turnover was
very negligible, though the exchange was not legally permitted to conduct such� trades on the
exchange without complying with the conditions of renewal , MSEA was counseled
and further renewal was granted for a period of one year� vide Gazette Notification No. SO 1354 (E)
dated (i) The Exchange shall set up Settlement Guarantee Fund in
compliance with SEBI Circular SMD/POLICY/SUB BROKER /Cir-12/97 dated (ii) Trading
shall commence only after setting up of Settlement Guarantee Fund, duly
approved by SEBI. (iii) The
Exchange shall repay the balance amount of RS 7, 50,000/-(Seven Lakhs fifty thousand only) towards refundable financial
support extended by SEBI to the Exchange.��
5. As
noted from the conditions stated above, MSEA cannot commence trading� until SGF is set up.� MSEA had sent a proposal vide a letter dated August 8, 2004 for setting up of SGF but the letter was
found to be inadequate with respect to risk management measures, adequacy of
corpus of SGF,� etc.
and the exchange was advised vide letter dated December 31, 2004 to submit the
proposal in conformity with our circular dated June 9, 1997. MSEA resubmitted
the proposal vide letter dated 6.� The officiating Executive Director (OED)
informed� telephonically on August 10,
2005 to a junior officer in SEBI in a casual manner about the commencement of
trading �during the course of a
conversation regarding Corporatisation and Demutualisation scheme. On further telephonic enquiry next
day, it was confirmed by the OED that trading had in fact started on 7. In
view of the above, �MSEA was advised during telecon on 8. It
is observed from the trading volume of MSEA that Exchange had witnessed �NIL�
trading in financial year 2004-05 and had negligible trading volume of Rs.13.26
lakhs in year 2003-04, Rs
18.27 lakhs in 2002-03 and only Rs1.12 lakhs in 2001-02. �It
is further observed that though MSEA had �NIL� volume in 2004-05 and negligible
volume in earlier years, there was a unusually high� trading volume of approximately Rs 109.71 crores in just 10
trading days in August 2005 since the commencement of trading by MSEA in
violation of the conditions of renewal as already stated. Further, it is also
observed that MSEA had the highest trading volume of �Rs. 39.31 crores on 9. From
the trading details furnished by MSEA, it was observed that trading was
concentrated mainly in the scrip of �Bhoruka Financial
Services Limited (BFSL),�� Out of trading
volume of Rs 109.71 crores
in August 2005, approximately Rs 108.87 crores was in scrip BFSL, which accounted for nearly 99% of
the trading volume. 10. It
is noted that BFSL is not listed on MSEA.�
It is� listed
only on Bangalore Stock Exchange Ltd. (BgSE). The
last trading in the scrip on BgSE was in year 1988
and the last traded price was Rs.5.00.�
MSEA, when enquired, admitted that this scrip was not listed on their
exchange but allowed it to be traded in the permitted category on their� Exchange only
in the month of August 2005 and the trading commenced immediately on the same
day. 11. On
examination of the trading details, it is observed that the entire volume of
trades noted above were through a common broker, namely Rajat
Share and Stock Broker Pvt. Ltd of �12. On verification of the records, it is
observed that the said DLF Commercial Developers Limited of Delhi (DLF) had
filed an application dated October 30, 2004 under Regulation 4(2) of SEBI
(Substantial Acquisition of Shares and Takeovers Regulations ) 1997 with SEBI
seeking exemption from making public announcement and from complying with other
formalities under Chapter III of Takeover Regulations in respect of an open
offer to be made under Section 10 & 12 of Takeover Regulations to the
balance public shareholders pursuant to the proposed acquisition of 1,98,850
equity shares / voting rights (98.73%) from the promoters of BFSL� @ Rs. 2400 per
equity share . The remaining 2550 equity shares amounting to 1.27 % shares of BFSL
are held only by 26 public shareholders. 13. As
recommended by the takeover panel under� Regulation 4 of SEBI (Substantial
Acquisition of Shares and Takeovers)�
Regulations �1997 (Takeover
Regulations), by an �order dated June 29,
2005, SEBI exempted the acquirer DLF from complying with the provisions of
Regulation 14, 15,16 and 18 of Takeover Regulations with regard to the proposed
offer to 26 public shareholders for the acquisition of 2550 equity shares. 14.� It is noted that the shares of� BFSL� which
were so far in the physical form were dematerialized for the first time on July
13, 2005 i.e immediately after passing of the said
order dated June 29, 2005 by SEBI.� It is
noted that� BFSL
entered into an agreement with Central Depository Services (I) Limited (CDSL)
and that CDSL admitted the securities for�
dematerialization on 15.� It is curious to observe that during the
period in August 2005, when the trading in the scrip of BFSL was permitted by
MSEA in violation of the conditions of renewal, the trading price of the scrip
was consistently at Rs. 4490/- for� all the trades which is almost double
the pre negotiated� price of Rs. 2400/- as stated in the said SEBI order dated June 29,
2005.� By deviating from the said order,
it is prima facie found that the acquirer, DLF has in effect violated the
takeover regulations.� 16.� It is further observed that the buyer DLF
Limited is a 17. Normally a scrip will be
admitted in a permitted category if the scrip is listed and traded in other
exchanges.� However in case of BFSL, as
noted earlier, the scrip was last traded in BgSE in
the year 1988 and there was no trading in the scrip, thereafter.� Hence allowing trading of such a scrip, highly illiquid and not traded for nearly 17 years,
in the permitted category by MSEA appears to be a colourable
action.� This is further accentuated by
the fact that a scrip which was last traded at Rs.
5.00, 17 years back in the exchange where it is listed was allowed to be traded
at a price of Rs. 4490/- without any demur and with
undue haste� by MSEA on 18. From the above, it appears
that the acquirer DLF and the seller, the promoters consciously and with pre
meditated design chose to execute the trades on MSEA in 19. The role of the officiating ED
in allowing trading of the scrip in MSEA is further exacerbated by the fact
that the resumption of trading was allowed by the Officiating ED without
obtaining the mandate of the council of management of MSEA as required under
the byelaws of the MSEA.� In fact the
last meeting of the council was held on 20. The concatenation of events as
brought out supra in vivid details, inexorably lead to the inference that DLF,
the promoters of BFSL and the officiating ED of the stock exchange along with
the common broker of MSEA were in cahoots to put through the transfer of shares
using the exchange mechanism with a view to artificially inflate the price for
collateral ends. 21. Under Section 19 of Securities Contracts (Regulation)
Act, 1956 , no person can act as a stock exchange
without proper recognition.� The said
section reads as under : �19. (1) No person shall, except with the
permission of the Central Government, organize or assist in organizing or be a
member of any stock exchange (other than the recognized stock exchange) for the
purpose of assisting in, entering into or performing any contracts in
securities.� (2) This section shall come into force in
any State or area on such date as the Central Government may, by notification
in the Official Gazette, appoint.� 22. It is noted from the above
facts that the conditional renewal granted to�
MSEA is not validly in force in view of the non compliance of the
conditions precedent to the renewal of recognition. The recognition granted to
MSEA is not a permanent one. Its recognition has to renewed
from time to time. In this case, the renewal was granted subject to certain
conditions.� When these conditions were
not complied with,�� the recognition is
deemed not to have been renewed. In the absence of renewal ,
the recognition was deemed to have lapsed.�
Therefore MSEA has acted illegally as a stock exchange without having
proper recognition. Hence the trades of BFSL on MSEA cannot be construed as
transactions on a recognized stock exchange or through members of recognized
stock exchange with all attendant consequences under various laws of the
country. 23. From the above facts and
circumstances, it is prima facie noted that there is clear case of acting in concert� to achieve an
illegal object by the officiating ED of MSEA, the acquirer, the seller and the
member mentioned above for ulterior motives abusing� the stock exchange which is a public inistitution set up under an act and which is also a State
under Article 12 of the Constitution of India.�
It is beyond anybody�s comprehension why persons of 24. These transactions have the
potential to disturb the integrity of the securities market and send wrong
signals to the market players and investors.��
Unless a stringent remedial action is taken immediately, the investors
will lose faith in the system.� The
above� transactions, the role of the
acquirer, the role of the promoter and the role of the stock exchange including
that of the Officiating ED and the member have to be thoroughly probed to find
out the� exact motive behind such
transactions and to set the system right. 25. In any case it is obvious that
the stock exchange mechanism of MSEA has been illegally used and that the stock
exchange had facilitated the trading in the scrip of BFSL illegally in violation
of Sections 13 and� 19 of Securities
Contracts (Regulation) Act, 1956.� It is
also in violation of the Notification dated 26. The SEBI has powers under� Section 12 A of
Securities Contracts (Regulation) Act, 1956�
to issue such directions .� The
said section reads as under: 12A. If, after making or causing to be made an inquiry,
the Securities and Exchange Board of (i) in the interest of investors,
or orderly development of securities market; or to
prevent the affairs of any recognised stock exchange
or clearing corporation, or such other agency or person, providing trading or
clearing or settlement facility in respect of securities, being conducted in a
manner detrimental to the interests of investors or securities market; or (ii)
to secure the proper management of any such stock
exchange or clearing corporation or agency or person, referred to in clause (b), it may issue such
directions,� (a) to any stock exchange or clearing corporation or agency or
person referred to in clause (b) or any person or class of persons associated with the
securities market; or �(c) to any company
whose securities are listed or proposed to be listed in a recognised
stock exchange, as may be appropriate
in the interests of investors in securities and the securities market. 27. Therefore by exercising powers
under Section 19 of the SEBI Act read with Section 12 A of Securities Contracts
(Regulation) Act, 1956 , in order to prevent the affairs of MSEA being
conducted in a manner detrimental to the interests of the investors and also to
secure proper management of the stock exchange, I hereby direct that MSEA which
acted as unrecognized stock exchange as above shall not assist , regulate or
control the dealings in securities in any manner whatsoever until further
directions or pending completion of final proceedings, whichever is earlier. 28.� Since it
is prima facie found that the member of the MSEA namely Rajat
Share & Stock Brokers Pvt. Ltd.� facilitated the above transactions illegally on the stock
exchange and without following Know Your Client criteria, they are directed not
to deal in securities. undertake any transactions in
securities as a broker registered with SEBI . 29.� SEBI has powers to impound and retain the
proceeds or securities in respect of any transaction which is under
investigation under section 11(4)(c) of SEBI Act, 1992
. The said section reads as under : �11
(4) Without prejudice to the provisions contained in sub-sections (1), (2),
(2A) and (3) and section 11B, the Board may, by an order, for reasons to be
recorded in writing, in the interests of investors or securities market, take
any of the following measures, either pending investigation or inquiry or on
completion of such investigation or inquiry, namely:- (a) suspend the trading of any security in a recognized stock
exchange; (b) restrain persons from accessing the securities market and
prohibit any person associated with securities market to buy, sell or deal in
securities; (c) suspend any office-bearer of any stock exchange or
self-regulatory organization from holding such position; (d) impound and retain the proceeds or securities in respect of
any transaction which is under investigation; (e)
attach, after passing of an order on an application made for approval, by the
Judicial Magistrate of the first class having jurisdiction, for a period not
exceeding one month, one or more bank account or accounts of any intermediary
or any person associated with the securities market in any manner involved in
violation of any of the provisions of this Act, or the rules or the regulations
made thereunder: Provided
that only the bank account or accounts or any transaction entered therein, so
far as it relates to the proceeds actually involved in violation of any of the
provisions of this Act, or the rules or the regulations made thereunder shall be allowed to be attached; direct
any intermediary or any person associated with the securities market in any
manner not to dispose of or alienate an asset forming part of any transaction
which is under investigation �. 30. As stated above, the scrip of
BFSL has been prima facie found manipulated on the floor of MSEA by the above
contrivance and deceptive attitude of the parties involved.� The acquirer preferred to pay Rs. 4490/- despite the fact that order dated 31. It is also necessary in the
interest of orderly development of securities market that the trading in the
scrip of BFSL is suspended until further orders.� Therefore by� deriving powers under Section 11 (4)
(a) read with Section 19 of SEBI Act; I hereby�
direct that the transactions in the scrip of BFSL be suspended on BgSE and any other stock exchange until further orders.� 32.� As a natural corollary of the above
directions, the acquirer is prohibited from dealing in the scrip of BFSL so
long as the above directions are in force.�
Since it is the seller i.e the promoters in
this case by name Shri Satyanarayan
Agarwal , Shri Viveek Agrawal, Umah Agrawal, Siddhartha Agrawal, Satyanarayanan Vivek Kumar HUF, M/s Prabhu
Securities Limited, M/s. Bhoruka Engineering Ind.
Ltd., who� have been prima facie found� to have gained unfairly, they are hereby
directed� under Section 11 B read with
11(4) to deposit the proceeds of these transactions in an escrow account� with a nationalised
bank opened exclusively for this purpose and they are further directed to take
prior approval of SEBI for dealing in this account.� 33. In view of the reckless and
unseemly conduct on the part of the OED of MSEA , Shri C M Pandey,� he is hereby suspended from acting as a OED
or in any capacity in MSEA or in any other institution related with the
securities market, till further orders. �34. I am of the considered view that, in view
of imminent urgency and in order to safeguard the integrity of the securities
market, the previous notice to show cause can be dispensed with and it will be
in the interest of justice�
to� pass an ex-parte order. The directions in this order will come into
force with immediate effect. 35.�� Any person aggrieved by this interim ex-parte order may approach SEBI within 30 days of this order
showing cause for reconsideration of the directions.
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