ORDER UNDER SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992, READ WITH REGULATION 29(3) OF SEBI (STOCK BROKERS AND SUB BROKERS), REGULATIONS 1992 AGAINST KALPESH CHAWLA, IN THE CASE OF KAMAL OVERSEAS LTD.
Investigations were conducted by SEBI into the alleged market manipulations in the scrip of Kamal Overseas Ltd. (KOL). Investigations brought out that the shares of Kamal Overseas Ltd. were listed for trading on NSE w.e.f. 9th October 1996. The trading activity in the scrip was very thin and sporadic, so much so that, only 1200 shares of the company were traded between 9th October 1996 and 15th April 1997. Trades took place only on 6 days during this period and the share price moved in a narrow range of Rs.75 to Rs.81. It was observed that suddenly from 22nd April 1997 onwards (which was the last day of St.No.16/1997), trading activity picked up in the scrip and a volume of 10,200 shares were recorded and the price of the scrip moved upto Rs.82/-. The next two settlements viz.No.17/1997 (23-29 April 1997) and No.18/1997 (30th April – 6th May 1997) saw feverish trading activity in the scrip with a trading volume of 7,53,600 shares and 11,97,100 shares respectively.
It was seen during the course of investigations that there was only one net buyer namely, Kinglet Finlease & Securities Ltd. and there was only a handful of net sellers. Investigations brought out that Rahil Investments & Finance Ltd. (Rahil) was the client on whose behalf Kinglet had purchased these shares of KOL. Since Rahil failed to pay for its purchase obligations, Kinglet failed to honour its commitment to the exchange. Investigations conducted by NSE revealed that these trades were not genuine trades and, therefore, ordered annulment of these trades in accordance with their bye laws. There after the matter was sent to SEBI for further investigations.
Investigations of SEBI brought that the trading in the scrip of KOL in St.17 and 18 of 1997 were collusive. The buying and selling entities put trades with prior understanding in terms of quantity, rate and time of putting the buy and sell order which ensured that the orders matched and resulted in trade. The shares sold by one set of entities were picked up by a specific set of other entities only i.e. the trades were circular in nature. It appeared that the trading was with an intent to defraud the Clearing Corporation of NSE.
At the exchange, the total net deliverable position in Settlement No. 17 was 566200 shares and the entire receivable position was resting on Kinglet Finlease. Out of these 566200 shares delivered at the exchange, majority of the shares belonged to Amritmoya Projects, Block Buster and Ascon Exports. It was observed that later these entities claimed that shares were lost by them and these were sold in the market with their forged signatures. Thus, there were disputes/irregularities in respect of 4,40,100 shares, which accounted for more than 77% of the total deliverable position. The sellers as well as the buyers were acting in collusion with an intent to defraud and cheat the exchange and Clearing Corporation. The buyer had no intention to honour its purchase obligations to the exchange. The sellers and buyers put the orders in such a manner that the shares sold by the sellers were purchased only by Kinglet.
SEBI investigations further brought out that KOL being an illiquid scrip, such large volumes in St.17 and 18 were artificially created as buyers and sellers were operating in collusion. The buyer and the seller were putting matched trades with an intent to create a false market for the scrip and inducing others to buy and sell in this scrip. By way of these circular trades, an attempt was made to give a misleading appearance of trading in the securities. The trades in Settlement Nos. 17/1997 and 18/1997 of NSE were fraudulent as the entire net buying was done only through one member viz. Kinglet Finlease which did not intend to meet its pay-in obligations for the purchases and intended to defraud the Clearing Corporation of NSE.
Kalpesh Chawalla is a member of ASE. Sh.Chawlla stated that he knew Sh.Rakesh Sheth of Rahil Investments as a member of ASE. Rahil Investments and Anagram Securities approached him as they intended to acquire majority stake in a listed Company. Sh.Kalpesh Chawla, in turn, approached Piyush Avalani, who had earlier indicated to him that he knew about a listed company for take over. Sh.Kalpesh Chawlla then mediated between Sh.Piyush Avlani and Sh.Rakesh Sheth and once they started discussions, he was out of the picture.
Inquiries were made with Sh.Piyush Avalani who is a businessman in the field of iron & steel trading. According to him, he was approached by Kalpesh Chawalla and Rakesh Sheth in March 1997 with the intention to buy out a listed company and take-over its management. The reason stated for this was that Rakesh Sheth, alongwith Anagram Securities, was interested in setting up a pharmaceutical project. Piyush Avalani discussed the same with his friend Sh.Himanshu Mehta and later Dinesh Jojodia and was told that 3 parties having huge holdings in KOL viz. Amritmoya Projects, Blockbuster Resources and Ascon Exports, who wanted to dispose them off. It was stated that he had personal discussions with Milan Shah and Rakesh Sheth. According to Piyush Avalani, the agreement was that transaction of 375000 shares will take place on NSE and will be bought by Anagram Securities; 225000 shares duly transferred in the name of Rahil Investments (100000), Sheth Investments (50000) and Atul Chokshi (75000) will be delivered personally for which payment shall be made by Rakesh Sheth after two days and 600000 shares without transfer deeds will be handed over to Anagram Securities to prevent the sellers from selling off their stake in the open market. The price agreed upon was Rs. 75/- per share.
On instructions of Dinesh Jajodia, the 12 lac shares of the above mentioned 3 parties (Amritmoya Projects, Blockbuster Resources and Ascon Exports) were to be sold in the name of Prompt Investments. Prompt Investments was introduced to 3 NSE brokers viz. Alacrity Trading, Varren Financials and Motison Securities by Piyush Avalani for their sale transactions. Accordingly, the transaction of 3,75,000 shares was completed in last 3 days of Settl. No. 17/1997 and first day of Settl. No. 18/1997. Also, the balance 825000 (225000+ 600000) shares were delivered as agreed.
On 3/5/97 (middle of Settl. No. 18/1997), Piyush Avalani was informed by Rakesh Sheth that his finance arrangement with Anagram Securities had failed. He then contacted Rahil Investments and Kirit Shah. Piyush Avalani stated that from these discussions he gathered that all shares to be bought by Anagram Securities were bought by Kinglet Finlease. Further, Rahil Investments had sold shares, given to it, through GLFL on a spot basis. Sh.Piyush Avlani also stated that he had learnt that there were outstandings of Rs. 125 lacs from Rahil Investments and Rs. 80 lacs from Kirit Shah towards Anagram Securities and there was an agreement to buy out the card of Kinglet Finlease alongwith office premises for Rs. 280 lacs. Piyush Avalani has alleged a conspiracy between Milan Shah, Rakesh Sheth and Darshan Joshi (brother-in-law of Milan Shah) of Kinglet Finlease to meet the above liabilities towards Anagram through spot sale of these 12 lac shares of KOL given by him.
Investigations with Sh.Rakesh Sheth brought out a different version. Sh.Rakesh Sheth stated that he was introduced to Ketan Doshi and Piyush Avalani, both businessmen in the field of iron and steel trading, by Kalpesh Chawalla, a member of ASE. Rakesh Sheth has denied that he approached Kalpesh Chawalla on behalf of Anagram Securities with a proposal to buy out a listed company. According to Rakesh Sheth, since he was financially indebted to Kalpesh Chawalla, Kalpesh Chawalla approached him with a scheme wherein Sh.Rakesh Sheth was to arrange finance against pledging of KOL shares by some party known to him. Rakesh Sheth was told by Kalpesh Chawalla that the market value of the shares was Rs 7 cores but they could not be sold in market due to illiquidity and he has to arrange finance against these shares. Rakesh Sheth was offered half the amount that he could arrange by loan against shares or by selling the shares. Rakesh Sheth stated that he, in turn, approached Anagram Securities with the proposal and Anagram Securities agreed to finance upto Rs. 2.5 crores. For the balance, Rakesh Sheth had thought of approaching GLFL, Atul Chokshi and Rajesh Jhaveri.
According to Rakesh Sheth, Ketan Doshi and his associates were holding substantial equity shares of Kamal Overseas Ltd. Ketan Doshi and his associates were desirous of selling these shares but were unable to do so for want of liquidity and trading in the market for these shares. Rakesh Sheth has stated that Ketan Doshi handed over 900000 shares to him alongwith transfer deeds duly signed by shareholders as sellers to offload in the market.
Rahil Investments had transacted in the scrip of KOL through Kinglet Finlease & Securities Ltd. and Anagram Securities Ltd. In St, No.17, Rahil had sold 1,58,100 shares through Anagram. In St.No.17, Rahil group of companies (comprising of Rahil Investment, Sheth Investment and Ancient Investment) had bought 5,69,000 shares and sold 2,800 shares through Kinglet. In St.18, Rahil group had bought 6,03,000 shares through Kinglet. However, since Rahil could not meet its pay in liability for St.17, Kinglet, in turn, could not meet its pay-in liability for St.17 at the exchange. Hence, on the insistence of NSE, Kinglet reduced its exposure in St.18 by selling 5,27,700 shares.
Thus, SEBI Investigations have given rise to the allegation that :
The sudden spurt in volumes of trades in the shares of KOL in settlement No. 17 and 18 took place because of malafide intentions of a set of and not due to genuine investment interest in the scrip. The company has not declared any dividend in the last three years and its profits are very insignificant and it appears that the company did not command a market price of Rs.80/- per share. Majority of the volumes in these 2 settlements were concentrated in the hands of selected trading members. Whereas only one trading member on the buy side represented more than 75% of the total buy transactions, five trading members on the sell side represented more than 80% of the total sell transactions in Settlement No. 17.
Also in Settlement No. 18, all the above member had built up similar buy and sell positions. When the single buying broker had defaulted, on the advice of NSE, most of the broker squared off their outstanding positions in KOL shares before the end of the settlement on May 06, 1997. KOL is an essentially illiquid scrip and the fact that the transactions were squared off easily without murmur corroborates the fact that the buyers and sellers were operating in collusion by putting matching orders with an intent to defraud and cheat the exchange and Clearing Corporation.
Thus, prima facie it appears that Shri Kalpesh Chawla, Member, ASE had violated Clause A(1), A(2), A(3), A(4) and A(5) of the Code of Conduct specified in Schedule II of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 compliance of which is mandatory in terms of Regulation 7 of that Regulations. It is also alleged that the member had violated Regulation 4(a), 4(b), 4(c) and 4(d) specified in Chapter II of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995".
Pursuant to the submission of investigation report, Chairman, SEBI had appointed an Enquiry Officer vide order dated 9th March 2000. Accordingly, the Enquiry Officer issued a Show Cause Notice dated 29th May 2001. The member did not reply to the Show Cause Notice. Opportunity of personal hearing was given on 12th October 2001 which was attended by Shri Kalpesh Chawla who submitted that his role ended when he introduced Shri Rakesh Sheth and Piyush Avlani and he did not know what subsequently conspired between them. The Enquiry Officer, after taking all factors into consideration, concluded that Kalpesh Chawla, in order to recover his loan, made a plan to use the illiquid shares of KOL. Shri Kalpesh Chawla was aware of the conspiracy from the beginning to end and he was the planning member for the entire transactions. Sh.Chawlla laid the foundation stone for the entire transaction which resulted in the above mentioned irregularities/violations. The Enquiry Officer concluded that it is not possible to believe that Sh.Chawlla was not knowing the intention behind the irregular transactions and he was not a party to the transactions. Kalpesh Chawla aided Rahil Investments (a suspended member of NSE) in manipulating the trade transactions in the scrip of KOL. As a responsible member of ASE, Shri Kalpesh Chawlla should not indulge in such acts in adding other entities in manipulating the transactions in such illiquid scrip. The Enquiry Officer recommended the registration of the member be suspended for a period of six months.
Pursuant to the submission of the report by the Enquiry Officer, a Show Cause Notice was sent to the member on 28th March 2002. The member replied to the Show Cause Notice, through his Advocate & Solicitors – Adhia & Adhia, vide letter dated 9th May 2002. An opportunity of personal hearing was given before Chairman-SEBI on 25th July 2002 which was attended by Shri Kalpesh Chawla who made submissions. Subsequently, vide his letter dated 5th August 2002, the broker submitted that he had only introduced Sh.Rakesh Sheth of Rahil Investments, Sh.Piyush Avlani and Sh.Ketan Doshi and when the deal went through between them he was to get 0.25% brokerage. Sh.Chawlla also submitted that he has not done any transaction in the scrip of KOL directly nor through Sh.Piyush Avalani or Rakesh Sheth and hence requested a sympathetic view to be taken.
I have carefully examined the enquiry report, facts and documents available on record. I find that
Sh.Kalpesh Chawla had merely introduced Rakesh Sheth of Rahil Investments (a defaulted member of NSE) to Sh.Ketan Doshi and Piyush Avlani. Susbequently, these entities, along with Kinglet and Sh.Milan Shah of Anagram, had indulged in non-genuine trades with the intention of defrauding the clearing corporation of NSE. Thus, I find that Sh.Kalpesh Chawla had aided and abetted these entities in their operations.
Vide my Order dated 18th July 2002, Sh.Kalpesh Chawla was suspended for a period of six months in the case of Jyoti Resins & Adhesives Ltd. The order had come into effect from 12th August 2002 onwards. I hereby order that the registration of Kalpesh Chawla, Member – ASE, be suspended for a period of six months. However, this order would run concurrently with earlier order issued in the case of Jyoti Resins & Adhesives Ltd., which is force, with immediate effect.
Dated this 22nd day of August 2002
G.N.BAJPAI
CHAIRMAN
SECURITIES AND EXCHANGE BOARD OF INDIA
Place : Mumbai
Date: