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. KINGLET FINLEASE & SECURITIES LTD., IN THE CASE OF KAMAL OVERSEAS LTD.
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.
In Settlement No.17/1997, Kinglet had bought 5,69,000 shares and sold 2,800 shares. Thus their net obligation was 5,66,200 shares receivable which constituted 100% of the net receivable position. The above purchases were made at an average rate of Rs. 80/- per share. Hence, in Settlement No. 17, Kinglet had a pay-in liability of approximately Rs. 425 lacs. However, Kinglet failed to discharge its funds pay-in obligation in respect of Settlement No. 17.
In Settlement No.18/97, Kinglet had bought 6,03,000 shares. Since, Kinglet failed to discharge its pay-in obligations of St.17, at the insistence of NSE, Kinglet reduced its exposure in St.18 by selling 5,27,700 shares. Thus, Kinglet had a net buy obligation of 75,300 shares, which constituted 98.69% of the net receivable position.
Kinglet Finlease & Securities Ltd., Member-NSE, was the only member who had net buy obligations. Thus, SEBI investigations found that while Kinglet was purchasing the shares in their card, they had sold through Anagram Securities Ltd. and GLFL Securities Ltd. Kinglet had carried out these transactions on behalf of their clients - Rahil Investments and Finance Ltd., Sheth Investments Pvt. Ltd. and Ancient Investments Pvt. Ltd. SEBI noticed that all the three clients have the same address. Rahil Investments, is a disabled trading member of NSE.
It was claimed that Kinglet had incurred huge liabilities to the tune of Rs. 2.7 crores towards Anagram Group of Companies viz. Anagram Securities Ltd. and Anagram Finance Ltd. Anagram had proposed to Kirit Shah (Chairman of Kinglet) that he should hand over the operations of Kinglet to Anagram Securities Ltd. in lieu of all his debts or else face winding-up proceedings against Kinglet Finlease & Securities Ltd. Kinglet agreed to the proposal and was informed by Sh.Milan Shah of Anagram that till the time certain formalities regarding the take-over, including NSE’s approval, were obtained, all operations on Kinglet’s NSE terminal will be as per Anagram’s instructions. It was also stated by Sh.Milan Shah of Anagram that he would appoint three Directors on the board of Kinglet in place of the existing Directors. Accordingly, Kiriti Shah signed Form No. 29 and Form No. 32 for appointment of Haresh J. Bhavsar, Balwantsingh Parmar and Pravin Giri Bava as Anagram’s representatives and Additional Directors on the board of Kinglet. Amongst the directors who resigned from the board of Kinglet was Darshan Joshi who is also the brother-in-law of Milan Shah, whole-time Director of Anagram. The relevant formalities in this regard were completed with the Registrar of Companies at Ahmedabad between April 21 and April 23, 1997. A new bank account in the name of Kinglet was opened at Dena Bank, Ashram Road Branch, and the operating authority for this lay with the newly appointed Directors of Kinglet.
It was further contented that, Anagram took over the operations of Kinglet’s NSE terminal from April 23, 1997, which was also the first day of Settlement No. 17. During this settlement, Anagram issued instructions to Kinglet to buy shares of Kamal Overseas Ltd. (KOL). As the volumes were very high, Kinglet inquired about Anagram’s holdings in the scrip and was informed that all purchases will either be squared up or Anagram would take the entire liability on themselves. Before the settlement ended, NSE called upon Kinglet to deposit additional margin of Rs. 90 lacs as their exposure in the scrip of KOL was very high. This was informed to Sh.Milan Shah of Anagram by Kinglet and Sh.Milan Shah, in turn, made a payment of Rs. 90 lacs by way of 2 cheques No. 86592 dated 28.04.97 for Rs. 15 lacs and No. 86598 dated 30.04.97 for Rs. 75 lacs both drawn on Anagram’s HDFC Bank account at Ahmedabad. The payment to NSE was routed through Kinglet’s account at HDFC Bank at Ahmedabad. At the end of Settlement No. 17, Kinglet had a net buy obligation of 566200 shares of KOL.
It was further stated that in Settlement No. 18 too, Sh.Milan Shah of Anagram continued giving instructions to Kinglet to purchase shares of KOL in huge quantities. However, before the settlement ended, the pay-in for previous Settlement No. 17 fell due on May 05, 1997. Kinglet’s pay-in liability for Settlement No. 17 was approximately Rs. 4.67 crores. Although, Anagram had paid Rs. 1.5 crores to Kinglet vide Cheque No. 84341 dated May 03, 1997 drawn on HDFC Bank, Ahmedabad, they had failed to bring in the additional requisite funds towards pay-in. As a result, Kinglet failed to discharge its pay-in obligations to NSE for Settlement No. 17. Further, in Settlement No. 18 too, Kinglet had built up a huge purchase position of 603000 shares. However, subsequent to its default in Settlement No. 17, Kinglet was asked by NSE to square up all transactions in Settlement No. 18. This was communicated by Kinglet to Sh.Milan Shah of Anagram and accordingly majority of the trades were reversed. At the end of Settlement No. 18, Kinglet had a net buy obligation of 75300 shares.
It was observed during the course of investigations that Anagram had sold 258100 shares of KOL in Settlement No. 17 out of which 100000 shares were sold on behalf of Kinglet. Kinglet, when confronted with this fact, stated that these sale of shares by Anagram in their name were made without their knowledge and also the deliverable shares were given to Anagram directly by Rahil Investments and that no shares passed through the hands of Kinglet.
It was also seen that GLFL (Member, NSE) has sold 110000 shares of KOL in Settlement No. 17 out of which 85000 shares were sold in the name of Kinglet. Kinglet has stated that these sale of shares in their name were made without the knowledge of Kinglet and that these shares were sold on behalf of Kinglet pursuant to the instructions of Haresh Bhavsar, newly appointed director of Kinglet as nominee of Sh.Milan Shah of Anagram. As regards the board resolution of Kinglet, which was signed by Sh.Kirit Shah duly authorising Haresh Bhavsar to deal on behalf of Kinglet, it was contented that this resolution bears forged signature of Kirit C. Shah and Kinglet had, vide a board resolution, authorised Rajesh Sonawalla only to deal with GLFL on its behalf. It was contended by Sh.Kirit Shah that the sale proceed of 85000 shares of KOL sold by GLFL in the name of Kinglet were discounted through them for spot finance and a payment of approximately Rs. 66 lacs was deposited into the newly opened bank account of Kinglet at Dena Bank, Ashram Road Branch, which was being operated by the newly appointed Directors of Kinglet, as nominee of Sh.Milan Shah of Anagram. The 85000 shares in question were registered in the name of Block Buster who have alleged that these shares were lodged for safe custody and that the transfer deeds bearing signature of their Directors are forged.
In short, Kinglet has submitted that all their operations in Settlement Nos. 17 and 18 were at the behest of Anagram and hence Anagram was responsible for all trades conducted during this period. However, investigations found that this argument of Kinglet does not inspire confidence because Kinglet was all along aware of payments being routed through its bank account. The fact that Rs.150 lakhs received by Kinglet from Anagram, toward pay-in of St.17, was never transferred to NSE settlement account but was used to pay-off the creditors of Kinglet clearly show manipulative and malafide intentions of Kinglet.
Since, Kinglet failed to meet its obligation of St.17, NSE asked the members to square off their position. In spite of the fact that KOL was highly illiquid scrip and such large quantities cannot be purchased and sold easily and the fact that all the positions were squared off, corroborates the fact that the buyers and sellers were operating in collusion. Further, complete matching of buy and sell orders on each occasions between Kinglet on the one side and other associates of Rahil on the other side clearly indicates that the above transactions were not done on the basis of genuines sales and purchases.
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.
Thus, prima-facie, it was found that Kinglet, 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. 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.
Based on the findings of the investigations, an Enquiry Officer was appointed by Chairman of SEBI, vide order dated 9th March 2000. Pusuant to this order of the Chairman, the Enquiry Officer issued a Show Cause Notice vide letter No.OTW/255/2001 dated 29th May, 2001. The member replied to this show Cause Notice vide letter dated 29th June 2002. An opportunity of personal hearing was given by the Enquiry Officer on 30th August 2001 which was attended by Shri Kirit Shah who made submissions. Subsequent to the hearing the broker made further submissions vide letter dated 18.9.2001.
On completion of the enquiry proceedings, the Enquiry Officer concluded that there was an attempt on the part of the member, in collusion with other brokers, to create false market for the scrip by making sales and purchases through the counters of various brokers and their clients and with the sole purpose of inducing interest in the scrip. By way of circular trading, an attempt was made to give a misleading appearance of trading in the securities. In these two settlements, the entire net buying obligation was on Kinglet Finlease. Amongst the major sellers in these two settlements were Anagram Securities. Further, Kinglet Finlease was also a selling client of Anagram Securities. Also, Rahil Investments, an already suspended member of NSE was buying shares through Kinglet Finlease and selling them through Anagram. The Enquiry Officer found that the member took position on behalf of an NSE Member who had defaulted at the exchange; undertaken transactions in St.17 and 18 which were irregular and fraudulent; did not have requisite control over their operations (trading/back office) and hence did was not professional in their business; aided and abetted Anagram and Rahil with malafide intentions to create false market in this scrip
The Enquiry Officer also held that Kinglet is a party to the plan to defraud the Clearing Corporation of NSE. The Enquiry Office recommended that the registration of the member be suspended for a period of one year.
Pursuant to the submission of the report by the Enquiry Office, a Show Cause Notice dated 28th March 2002 was issued to the member. The member replied to this Show Cause Notice vide letter dated 18th April 2002. An opportunity of personal hearing before Chairman-SEBI was granted to the member on 25th July 2002 which was attended by Shri Kirit Shah, Chairman and Sh.Kalpesh Zhaveri, Advocate. . The member also submitted a letter dated 23rd July 2002 wherein they had submitted that a settlement between Kinglet, Anagram and GLFL Securities have already been arrived in the High Court of Gujarat and no payment is to be made by Kinglet to Anagram and GLFL; a settlement has been arrived with Indus Bank Ltd. and all money due has been paid for which the bank guarantee was evoked by NSE; the MOU between GLFL and Angram suggest that Kinglet was not the prime accused but it was at the instance of Anagram they have agreed to cancel the sauda of Kamal Overseas & a Power of Attorney in favour of Mr.Pinakin Shah of GLFL was also executed to collect the margin money from NSE & distribute amongst GLFL and Anagram; Kinglet has been suspended for 5 ½ months by NSE and a heavy penalty of Rs.29 lakhs has already been paid to NSE; Anagram has been let off with a warning and the same stand may be taken with them also.
I have carefully examined the enquiry report, submissions made from to time, facts and documents available on record. I find that the broker had dealt for Rahil Investments who was a disabled trading broker of NSE and was suspended in May 1996 and later declared a defaulter from 1/7/97 onwards. The argument that Anagram controlled the operations of Kinglet and Kinglet only acted at the behest of Anagram, while putting the buy orders, is not tenable. This also does not absolve Sh.Kirit Shah of Kinglet from his obligations, duties and responsibilities as manipulation by any entity is prohibited by SEBI. Whenever any immovable property is transferred or any company is taken over, elaborate procedures are required to be followed. Thus, the contention of Sh.Kirit Shah that Anagram was dealing through the terminal of Kinglet is not very convincing. Moreover, Kinglet was aware that Rahil Investments is a defaulted broker of NSE and purchase of shares on its accounts and its associates shows that Sh.Kirit Shah was aware of this fact and had dealt for a defaulted broker. Further, payment were being routed through its bank account and this shows the intentional participation of Kinglet in circular non genuine trades. The fact that, Rs.150 lakhs received from Anagram towards pay-in liability of St.17 was never transferred to NSE settlement account, by Kinglet, but was used to pay-off the creditors of Kinglet shows that Kinglet never had the intentions to honour it pay-in commitments at the exchange.. This clearly establishes malafide intentions of Kinglet to defraud the Clearing Corporation of NSE.
As regards comparing the facts of the case of Kinglet with the case of Anagram, I find that the facts of both the cases are different and hence cannot be compared. It was seen that Sh.Milan Shah, who was incharge of the operations, had acted beyond his scope of employment and has perpetrated a fraud on the company. He was not authorized to takeover Kinglet and to give further funds to Kinglet (Rs.90 lakhs and Rs.1.50 crores), especially when large amounts were to be recovered from Kinglet. Anagram had initiated criminal and civil proceedings against Sh.Milan Shah. Appropriate action is also being taken by SEBI against Sh.Milan Shah separately.
The Disciplinary Action Committee had imposed a penalty of Rs.29 lakhs on Kinglet and deactivated its terminal for 5 ½ months. since NSE found that there was prima facie attempts of market manipulation and defrauding the clearing corporation by Kinglet. The contention that Anagram was dealing through the terminal of Kinglet is also not very convincing. It was seen that, Kinglet was buying on the one side on behalf of Rahil Investments and selling on the other side through Anagram and GLFL Securities. Moreover, GLFL securities had discounted the payment due to Kinglet and had made the payment to Kinglet well before the pay-out date. Investigations have brought out clearly that the transactions in the scrip of KOL were not done on the basis of genuine sales and purchases and were done with a intent to create false and misleading appearance of trading in an illiquid scrip and to defraud the clearing corporation of NSE.
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 one year. 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: