Order against Anil Agarwal

ORDER UNDER SECTION 11 B OF THE SEBI ACT READ WITH REGULATION 11 OF THE SEBI (PROHIBITION OF FRAUDULENT & UNFAIR TRADE PRACTICES) REGULATIONS AGAINST SHRI ANIL AGARWAL IN THE CASE OF VERTEX MACHINERIES LTD.

1. Investigations were conducted by the Securities and Exchange Board of India (hereinafter referred as SEBI) into abnormal price and volume movement in the scrip of M/s. Vertex Machineries Ltd. (hereinafter referred as "VML"), on the Stock Exchange, Mumbai (hereinafter referred to as "BSE"). VML came out with a public issue of 2,05,00,000 equity shares at par, of which 78,40,000 equity shares were given to the promoters, their relatives & friends on firm allotment basis, while the balance 1,26,60,000 equity shares were offered to the public. The maiden public issue, which opened for subscription between 15/02/1996 and 19/02/1996, got subscription to the extent of 90.56% of the public offer Investigations revealed that there were irregularities in the public issue. Investigations brought out that group companies of VML directly and indirectly subscribed in the public issue of VML to the extent of around 89% of the total shares allotted. Thus, there was hardly any genuine subscription from the public and shares were cornered with promoters/their group entities. Investigations also revealed that promoters had not brought in their part of the contribution as shown in the prospectus shares worth Rs.8.18 crores were issued when contribution brought in by the promoters was only Rs.1.52 crores.

2. Investigations brought out that Shri. Suresh Sharma Managing Director of VML approached a group of persons /entities including Shri. Anil Agarwal for selling shares of VML. It was seen that 2,00,000 shares of VML which were standing in the name of Progressive Securities Pvt. Ltd. (hereinafter referred as ‘PSPL), an associate company of Vertex, were given to group of persons /entities (5) including Shri. Anil Agarwal for sale. A Memorandum of Understanding (hereinafter referred as ‘MOU’) was also entered between PSPL and each of the above mentioned person /entity of the group. As per the terms and conditions of MOU, Shri. Agarwal like the other four persons /entities were to be given 40,000 shares of VML along with duly signed transfer deeds for the purpose of selling them in the market with a view to maximise the profit earned there from. It was further agreed that Shri. Agarwal would submit all transaction particulars from time to time to the Director of PSPL. Minimum price for this transaction was fixed at Rs.12 per share and any profit earned above this value was to be distributed in the proportion of 60:40 among PSPL and Shri. Agarwal respectively. The terms and conditions were similar to terms and conditions of other four persons /entities of the group approached by Managing Director of VML.

3. After receiving the shares, Shri. Agarwal started trading in those shares through the counter of Shri. H. J. Choksi, Shri. Mukesh Mansukhlal Kothari, (all members-BSE). It was also seen that Shri. Mukesh Kothari dealt for Shri. Anil Agarwal through the counter of M/s. Libord Securities, member - BSE. Shri. Anil Agarwal also routed few trades through the Ishwar Trading & Investment who further transacted through the counter of M/s. Dahyabhai Shares, member-BSE. The details of Shri. Anil Agarwal’s transactions are as follows:

4. It was observed that Shri. Anil Agarwal resorted to trading through brokers Mukesh Kothari (which in turn dealt through Libord Securities) and H. J. Choksi in Settlement No.B03 and off loaded 40,000 shares. Shri. Anil Agarwal stated that at this juncture, he received instruction from Shri. Suresh Sharma not to off load the shares so fast. It was stated that he was asked to purchase back these shares and was assured that the prices would go up in the subsequent settlements. On the basis of instructions of Shri Sharma, it was claimed by Shri. Anil Agarwal that he again started dealing in the scrip of VML after settlement B03. His gross trading position was 2,68,800 shares in Settlement No.B05 and 3,38,300 shares in Settlement No.B06. The cumulative Gross & Net positions across all seven settlements was 8,39,900 & (-40,500) respectively. Continuous buying by Shri. Anil Agarwal along with other MOU participants during these settlements resulted in price being taken artificially to high of Rs.80/-

5. Mr.Agarwal stated that promoters of VML with a preplanned operation for rigging in mind entered into arrangement with various persons to deal in shares of VML and signed MOU with them. It was contended that the shares were cornered in the public issue by the promoters with the idea of using various market players to create a false market and rig the prices so that promoters could offload large quantities in the secondary market. It was stated that in order to achieve this dirty objective, promoters used brokers, market people, court and exchange.Mr.Agarwal claimed that after initial offloading, he was not interested to continue dealing in the shares, but was asked by the promoter of VML to continue trading. It was claimed that this trading done at the instructions of promoters of VML resulted in loss of around Rs.8.37 lacs to him. It was argued by Mr.Agarwal that if he was to be involved in price rigging, he would not have traded for making losses. Mr.Agarwal stated that the promoters of VML used the court to obtain stay and pressurised us(MOU participants) to part with money. It was claimed by Mr.Agarwal that the mechanism of getting delivery given by MOU participants declared as "bad" delivery and subsequently same being declared as "good" delivery, suspension of the scrip, book closure within 3 months of the issue when there were hardly any transfers during this period, cornering of stock with the promoters, clause in the agreement that new transfer deed was not be signed by MOU participants even after book closure; all showed that promoters wanted to rig the price of the scrip and to offload a large quantity in the market at the manipulated prices.

6. It was observed that during this period of trading, the total fully paid up shares of VML available for trading were only 4,50,000 . Out of these, 4,00,000 shares were in the name of PSPL and the rest were with the other people. From the fully paid up lot of shares of 4,00,000 PSPL gave 2,00,000 shares to MOU participants to trade in the market and earn profit as agreed in the MOU. These 2,00,000 shares were ultimately sold off in the market by the MOU participants.

7. It was observed during the course of investigations that approximately 2,80,000 shares were off loaded in the market during the impugned period and out of this shares sold by MOU participants were around 61% of traded quantity (in absolute numbers 1.7 lac shares). This clearly indicates that same shares were being churned and rotated in the market time and again by MOU participants and large volumes were result of creation of artificial market The price of the scrip also showed unusual movements and this artificial increase was on account of concerted trading by MOU participants and Shri Agarwal. This artificial market induced others to buy or sell or deal in the scrip. This creation of artificial market and manipulation of the prices maximised profits on sale of shares of VML which was envisaged in agreement between MOU participants and PSPL.

8. Show cause notice was issued to Shri Anil Agarwal and a reply was received to this show cause notice. An opportunity for hearing to present his case before me was also given to Shri Agarwal on 30/05/02. Shri Anil Agarwal also attended the hearing and reiterated the arguments given earlier as written submission.

9. I have considered the findings of investigations, material and evidence available on record, submissions made by Shri Agarwal from time to time, and I am satisfied that charges levelled in the show cause notice are substantiated. I find that promoters of VML entered into an arrangement with a group of persons/entities including Shri Agarwal to manipulate the market and offload the shares at the manipulative prices. The arrangement was reduced in writing as MOU between promoters and this group of persons/entities. Consequent to this, shares were given to MOU participants and were duly transferred within two to three days in the names of MOU participants. I find that Shri Agarwal alongwith other MOU participants indulged in large trading in the shares of VML and through the concerted trading, created artificial market and price manipulation in the scrip of Vertex. It is also observed that a dispute arose between promoters of VML and MOU participants. The promoters brought in stay from the Court and as a result, BSE declared shares sold by MOU participants as bad delivery. Later, a compromise took place between some of the MOU participants and promoters of VML. However, it is seen that Shri Agarwal has filed a claim against promoters of VML as he asserted that loss was caused due to purchases being done at higher price at the instance of promoters and promoters only should bear the loss.

10. Subsequently, Shri Agarwal has got favourable order from Court against PSPL. The earlier stay by Indore Court was vacated by the Court subsequently and delivery given by MOU participants was declared as good delivery. However, I am of the view that MOU participants including Shri Agarwal created artificial market in the scrip and manipulated the price of the scrip in collusion with promoters of VML. Though, Shri Agarwal has been able to successfully claim losses suffered in trading from the promoters of PSPL yet the fact remains that Mr. Agarwal was party to market manipulations. The plea that he acted at the behest of promoters of VML/PSPL, does not absolve him from his responsibilities and duties. Prohibition against manipulation applies to all. The contention of Mr.Agarwal that trading resulted in losses and was at the behest of someone else, is not tenable. Mr.Agarwal indulged in trading knowingly and is responsible for its consequences also. I find that Mr.Agarwal was involved in price manipulations in connivance with promoters of VML and other MOU participants. I therefore, in the interest of investors, under the powers conferred on me under Section 4 (3) read with Section 11 B of the Securities and Exchange Board of India Act, 1992 and Regulation 11 of SEBI (Prohibition of Fraudulent & Unfair Trade Practices) Regulations, direct that Shri Anil Agarwal is prohibited from dealing in securities for a period of one year. This order shall come into force with effect from 26^th August, 2002.
 
 

Ordered this _ day of August , 2002.
 
 

Place : Mumbai