Order against M/s. Arvind Securities Ltd.

M/S Arvind Securities Ltd. ( hereinafter referred to as ASL) is a member of National Stock Exchange registered with SEBI as a Stock Broker.

An investigation was conducted into alleged price manipulation in the scrip of M/S Maruti Organics Ltd. (Maruti). Investigations revealed that ASL dealt in the scrip of Maruti on behalf of his client Shri.Madhav Narla. The trading position of the client was as under :-

The margin money received from the client is as follows:

Investigations brought out that the broker enrolled Shri Madhav Narla as client in June 1996 but at the time of enrolling, the broker did not enter into Member Constituent Agreement with Shri Madhav Narla and did not make any meaningful enquiries aout the antecedents of his clients.. It was observed that Shri Madhav Narla dealt with the broker as above and when the pay in time came Shri Madhav Narla absconded without paying for the purchase of 45000 shares of Maruti made by him. It appeared that a few brokers acting in concert were trying to defraud the National Clearing Corporation (NCCL). Settlement Guarantee Fund of NCCL guarantees settlement/payment for each trade entered at the Exchange. In view of this, in the event of failure of the buyer to pay, NCCL would have to pay the sellers. NSE, from its investigations, held that these transactions in MOL were collusive trades and ordered annulment of the same.

It was noticed that the broker was not careful while enrolling his client. The broker allowed large position to be built up as above. The client built up a position of 10000 shares on June 26^th and as against this the margin money available with the broker was only Rs. 49000. The position was reduced to nil by June 28^th. However on July 3^rd , 1996 fresh purchase position of 30000 shares was allowed to be built up in the scrip of Maruti. The client increased his position by 15000 shares on the next day (July 4^th) without having brought in any more margin money. The client eventually failed to pay for this purchase of 45000 shares and absconded.

It was prima facie felt that the broker allowed an unknown client to build up huge position in a volatile, illiquid scrip without taking sufficient margins and this position was beyond its financial capacity. The broker thus did not take enough precaution to prevent risk to the safety and integrity of the market. This unprofessional conduct caused risk to smooth settlement of trading at the Exchange. On these facts, for the prima facie violation of SEBI (Stock Broker & Sub-Broker) Regulations, 1992, enquiry proceedings were initiated against the broker.

A show cause notice communicating the findings of the investigation was issued by the Enquiry Officer asking the broker to show cause why action should not be initiated for violating Clause A (1 to 5) and B(4a) of Code of Conduct read with Schedule II in terms of Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992.

The said show cause notice, was replied to by the broker vide its letter dated August 30, 2000. The broker in its reply has contended that they believed their client Shri Madhav Narla was a genuine client and was acting in good faith. They have also said that ‘there was sufficient margin as there was no regulatory norms regarding collection of margins and we were collecting margins based on the reasonable prudence and risk assessment of the client’ . It was claimed that it was at their instance that investigations were taken up by NSE and SEBI. They had also filed a case in the court at Madras and had lodged an FIR with the police.

The Enquiry Officer after taking into account all the relevant facts and submissions made by the broker, in accordance with Regulation 28(7) of the said Regulations, recommended that the Registration Certificate of the broker be suspended for a period of 7 days vide its report dated August 6, 2001, as broker was not found to be diligent and careful while dealing with its clients.

Consequent upon this, a show cause notice as required under Regulation 29(1) of SEBI (Stock Broker and Sub Brokers) Rules and Regulations, 1992, enclosing a copy of the enquiry report was issued to the broker. The broker was called upon to show cause as to why action as recommended by the Enquiry Officer should not be taken against it.

The broker was also advised to submit their reply, if any, within 21 days of the receipt of the show cause failing which it will be presumed that it has no explanation to offer.

ASL replied to the show cause notice vide their letter dated September 9, 2001 contending that ‘they were clear victims of the well planned fraud having taken place throughout India and the same has also been found correct after detailed investigations by NSEIL.’ The broker has also contended that they ‘ were instrumental in going to the root and bringing evidence like phone bills from STD booth before sub-committee of NSEIL in 1996.’ The Broker therefore requested for taking a lenient and sympathetic view. The broker also sought a personal hearing. Pursuant to this request a personal hearing before me was granted. However no one from the broker member turned up for the hearing.

On examination of material and evidence available on record, enquiry report, submissions made from time to time, I find that the broker was negligent and allowed the client to build positions in the scrip of Maruti which was illiquid and volatile without taking proper margins. The carelessness of the broker put the settlement system of the Exchange at risk. The broker did not verify the antecedents of their client, bank a/c or address etc. and also did not have any reference about its client. I also find that broker did not act in careful and diligent manner. The broker allowed the client to build up a fresh position after the earlier position had been squared up. I find that the conduct of the broker was unprofessional which facilitated the client to build up position in an illiquid and volatile scrip, which was beyond the financial capacity of its client. The client failed to meet its pay in obligation exposing the Exchange settlement system to risk. I tend to agree with the recommendation of the Enquiry Officer that the Registration Certificate of the broker be suspended for a period of 7 days.

In exercise of the powers conferred upon me by Sub-Section (3) of Section 4 of SEBI Act, 1992 read with sub-regulation (3) of Regulation 29 of SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations 1992, I hereby direct that registration of M/S Arvind Securities Limited, as Broker, be suspended for a period of 7 days. The order shall come into effect from 14/08/2002..

G N BAJPAI

CHAIRMAN

SECURITIES AND EXCHANGE BOARD OF INDIA

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