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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 M/S.ALACRITY SECURITIES LIMITED, IN THE CASE OF KAMAL OVERSEAS LTD.
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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 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 which means that the trades were circular in nature. It appeared that the trading was with an intent to defraud the Clearing Corporation of NSE.
During investigations it was gathered that Alacrity Securities Pvt. Ltd. was a major seller in the scrip of KOL. Alacrity had dealt for their client – Prompt Investments. Prompt Investments was a member of UPSE but this fact was not disclosed by them to Alacrity at the time of signing the member-constituent agreement. Prompt had commenced dealings with Alacrity only in Settlement No. 17 and was acting on behalf of its clients viz. Amritmoya Projects Pvt. Ltd., Block Buster and Ascon Exports, which are Group Companies of KOL.
In Settlement No.17/1997, Alacrity had bought 20,000 shares and sold 76,1000 shares. The above sales were made at an average rate of Rs.80/- per share. Thus their net obligation was 56,100 shares deliverable which constituted 9.91% of the total deliverable position. Alacrity had a pay-out of approximately Rs. 45 lacs. However, no payment was made by Alacrity to Prompt Investments since NSE had withheld the funds and securities pay-out of Settlement No. 17.
In Settlement No.18/97, Alacrity had bought 1,01,000 shares and sold 1,01,000 shares. Initially, the broker had sold large quantities of shares (1,01,000 shares) in this settlement but had squared off on the insistence of NSE. Hence, they did not have any net obligation to deliver.
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.
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.
It was seen that shares sold by Alacrity were further circulated in the system through Anagram and K.R.Choksey. When confronted shares being put in the system which were claimed by the owner to be stolen, Alacrity stated that its rubber stamp was forged on transfer deeds of shares sold by Anagram Securities and K R Choksey and they came to know about it only through NSE officials.
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 intent to meet its pay-in obligations for the purchases and intended to defraud the Clearing Corporation of NSE.
On the basis of these findings, prima-facie it appeared that Alacrity, Member, NSE, 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 and also 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.
On completion of the investigations, an Enquiry Officer was appointed by SEBI vide order dated 9th March 2000 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 29th May 2001 alleging that Alacrity Securities had Undertaken transactions in St.17 and 18 which were fraudulent, aided and abetted certain entities with intentions to create false market in this scrip with a view to induce unsuspecting investors to buy and sell in this scrip and defraud the Clearing Corporation of NSE.
A reply to the Show Cause Notice was received from the broker vide letter 14th June 2001. Opportunity of personal hearing was also given by the Enquiry Officer on 10th August 2001 which was duly attended by Sh.R.Chandrasekaran, Incharge of Alacrity Securities. The broker made further submissions vide letter dated 29th August 2001.
The Enquiry Officer, on completion of enquiry process, concluded that the claim of the member that they had verified the genuineness of the shares delivered by their client cannot be accepted, as the broker did not give the bank’s certificate as proof. Since the shares were not in the name of their clients (Promot Investments) and as the shares were in third party’s name, the member should have taken enough precaution before delivering them. The Enquiry Officer found the broker guilty of violating Cl. A(1) and A(2) 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 one month.
Pursuant to the submission of Enquiry Report, a Show Cause Notice dated 28th March 2002, under Regulation 29(1) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 was issued enclosing a copy of the Enquiry Report. Vide letter dated 29th April 2002, the member replied to the Show Cause Notice.
An opportunity of personal hearing before Chairman SEBI was given to the broker on 25th July 2002 which was duly attended by Ms.Nalini Prabhu who submitted that Alacrity was new to the business at that point of time and in order to get business, they had dealt with Prompt
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 the broker had delivered the shares (on behalf of their clients) which were in the name of third parties (in the name of group companies of KOL). The broker submitted that they had identified that these are third party shares and verified the genuineness of the shares by obtaining a bank certificate. However, the bank certificate has not been produced by the broker till date.
SEBI investigations had clearly brought out that 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 broker viz. Kinglet Finlease which did not intent to meet its pay-in obligations for the purchases and intended to defraud the Clearing Corporation of NSE.
Considering the facts and circumstances in totality, I find that the broker was not careful and vigilant enough while dealing with their clients. Hence, 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 one month. This order shall come into force with effect from 6th September 2002.
Dated this 22nd day of August 2002
G.N.BAJPAI
CHAIRMAN
SECURITIES AND EXCHANGE BOARD OF INDIA
Place : Mumbai
Date: