Order against J B Jhaveri, Member - VSE

Jyothi Resins & Adhesives Ltd., was listed in BSE, ASE and VSE. The price of the scrip rose from Rs.17.50 to Rs.140 in VSE and in BSE the price rose from Rs.15/- on 22.8.95 to Rs.181.50 on 6.10.95. The substantial jump in the closing price was during the period 18.9.95 to 6.10.95 when it moved from Rs.50.50. to Rs.181.50. The volumes have been steadily hovering around an average of Rs.5 lakh shares per day. There was no positive announcement in respect of the working of the company which could have warranted such huge rise in the price of the scrip after listing. In settlement No.15B of BSE (25.09.95 - 6.10.95) there was a short delivery of 4,51,400 shares. Part of the outstanding position was auctioned and rest was closed out. SEBI in order to prevent the manipulators from getting undue benefits instructed BSE to freeze the proceeds of auction and close-out amounting to Rs.4.18 crore. In the context of these developments and in view of the steep hike in the price of the scrip of Jyoti Resins & Adhesives Ltd., which seems to be artificially created, investigations were initiated by Securities and Exchange Board of India (hereinafter referred to as SEBI) into the affairs relating to buying, selling or dealing in the shares of M/s Jyothi Resins & Adhesives Ltd.

Investigations revealed that majority of the brokers had dealt, in this scrip, on behalf of one client called M/s.Udita Inverted Pvt Ltd. (UIPL). Investigations further revealed that UIPL is connected with the Promoters/Management of Jyoti Resins. The shares were cornered by UIPL from 14.8.95 onwards.

Sh.Sunil K. Patel, Director of UIPL appeared, before SEBI, along with ledger and list of 299 clients and their addresses on behalf of whom they had dealt in the scrip. However, he didn’t submit any further details about the payments received from clients. In order to verify genuineness of transactions summons were served to 39 top dealing clients of UIPL. There was no response to most of the summons and in some cases the summons returned unclaimed. In absence of any response from majority of clients of UIPL, final summons were sent asking them to confirm the purchases and give details of payments. Again, there was no response from majority of the clients. Thereupon the Investigation Team visited at the addresses of 72 clients and recorded their statements. As per these statements none of them have dealt in the shares of Jyothi Resins through UIPL or otherwise. In view of this UIPL was summoned once again. It was admitted by Sh. Patel that the list of 299 client given by him previously to the investigation team is bogus. Further, Sh.Patel has stated that majority of orders for purchase and sale of shares of Jyoti Resins & Adhesives Limited were given by Sh.Devendra Kantilal Dalal, Ahmedabad. Shri Patel submitted that Sh.Devendra Kantilal Dalal never informed them nor consulted them in respect of the orders placed for purchase / sale of shares of Jyoti Resins nor consulted them in regard to orders placed for purchase / sale of shares of Jyoti Resins & Adhesives Limited. Sh.Patel submitted that UIPL has never received any delivery of shares from any of the brokers and sub-brokers nor they are aware as to who has received the delivery of shares. UIPL never asked Shri Devendra Kantilal Dalal as to who is receiving the delivery.

Investigations revealed that Shri Devendra Kantilal Dalal had manipulated the price of the scrip of M/s.Jyoti Resins Ltd. by purchasing and selling in the name of UIPL through different brokers. Thus, UIPL was acting as a front entity of Sh.Dalal. Shri Devendra Kantilal Dalal was a member of ASE and was declared a defaulter by the exchange in August 1989.

J.B.Jhaveri, Member-VSE, has dealt with 1,10,600 shares on behalf of UIPL. The shares were delivered to Sh.Dalal at the address of Vrushti Financial Services. Investigation revealed that Vrushti had financed UIPL for secondary market purchases of shares of Jyoti Resins. In the light of the above mentioned findings that UIPL was a front entity of Sh.Devendra Kantilal Dalal, the broker is alleged to have indulged in carrying out transactions for Shri Dalal, a defaulted Member of ASE who manipulated the prices of the scrip of Jyoti Resins.

On completion of the investigations, an Enquiry Officer was appointed by SEBI vide order dated 5^th May 1997 under Regulation 28 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 to enquire into the prima facie violations committed by the broker.

The Enquiry Officer, thereafter, proceeded with the enquiry and issued a Show Cause Notice to the broker vide letter dated 28^th November 1997 alleging that J.B.Jhaveri, Member, VSE, had carried out deceptive transactions by not disclosing Sh.Devendra Kantilal Dalal as his client and has abetted the market manipulators. Thus, it was alleged that the broker has violated Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 for not abiding by the code of conduct specified in Schedule 2 of that Regulations. A reply to the Show Cause Notice was received from the broker vide letter 3^rd January 1998. Opportunities of personal hearing was also given by the Enquiry Officer on 28^th January 1998 and 15^th May 2001, which was duly attended by Sh.Kamlesh Jhaveri, authorised representative of the member.

The Enquiry Officer, on completion of enquiry process, concluded that, in view of the fact that the broker had admitted that the orders were placed and delivery received and taken by Sh.Devendra Kantilal Dalal (though the transactions were shown in the name of UIPL), there is a nexus between the broker and Sh.Dalal and the broker had indulged in deceptive transactions by not disclosing Sh.D.K.Dalal as the client. The Enquiry Officer found the broker guilty of violating Cl. A(3) and A(4) of Code of Conduct for Stock Brokers (Regulation 7) of SEBI (Stock Brokers & Sub brokers) Regulations, 1992 and

has, therefore, recommended that the registration of the broker be suspended for a period of four months.

Pursuant to the submission of Enquiry Report, a Show Cause Notice dated 25^th July 2001, under Regulation 29(1) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 was issued enclosing a copy of the Enquiry Report. Vide reply dated 10^th August 2001, the Member had sought two months time to reply to the Show Cause Notice. However, no reply was received within the two months period sought by the broker. It was seen that later a reply was received from, Thakordas & Madgavkar, Advocates (on behalf of the broker) vide letter dated15th June 2002 wherein it was submitted that :

1. The transacted volume was very low
2. The broker did not participate in any auction
3. There is no personal trading of the broker in the scrip
4. They have merely acted as a broker at the instance of Sh.D.K.Dalal who represented their client M/s.UIPL.
5. They had no reason to believe that Sh.Dalal had any such scheme to manipulate the price or otherwise. The clients had been the buyer and made payment and discharged their obligations as a buyer.
6. They had transacted in the range of Rs.30-Rs.95 which is much below the cut off price of Rs.181/-.
7. Mere giving delivery to Vrushti Financial Services Pvt Ltd. would not amount to dealing with D.K.Dalal as Vrushti was acting as a delivery point for transactions by various brokers.

An opportunity of personal hearing before Chairman SEBI was given to the broker on 20^th June 2002 which was duly attended by Sh.Kamal Jhaveri who reiterated these arguments. It was pleaded that his track record with VSE was excellent and there was no investor complaint against him and he had never indulged in any manipulative activities.

I have carefully examined the enquiry report, submissions made orally as well as in writing by the broker and other material on record etc. I find that M/s.J.B.Jhaveri has admitted that the orders, on behalf of UIPL, were placed by Sh.D.K.Dalal and the deliveries were handed over at the address of Vrushti Financial Services. This aspect clearly shows that M/s.J.B.Jhaveri was not acting with due skill, diligence and care. He transacted for Sh.D.K.Dalal (a defaulted member of ASE) but showed the transactions in the name of UIPL. It is not expected from a prudent and reasonable broker to deal for some one and show the transactions in some other name. The volume and the period of transaction were considered by the Enquiry Officer at the time of recommending the penalty. I find that the investigations had clearly brought out that Vrushti Financial Services was another front company for the activities of Shri Dalal and all deliveries meant for Shri Dalal were handed over to the address of Vrushti Financial Services, where Shri Dalal had kept an office. I find that the investigation has also brought out clearly that Sh.Dalal manipulated the prices in the scrip of Jyoti Resins Ltd. In view of

this, there is no merit in the arguments of the broker that he was not involved in manipulation but only acted for his client.

I find that the broker was negligent and did not verify the antecedents of his client - UIPL- which was acting as a front/façade for Sh.Dalal – a defaulted broker. Considering

the facts and circumstances in totality, I tend to agree with the recommendations of the Enquiry Officer. I am of the view that the registration of the broker should be suspended for a period of four months. This order shall come into force with effect from 12^th August 2002.

Dated this ___ 2002

G.N.BAJPAI

CHAIRMAN

SECURITIES AND EXCHANGE BOARD OF INDIA

Place : Mumbai

Date: