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. VARREN FINANCIAL SERVICES LIMITED,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 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.
It was found that Varren was a major seller in the scrip of KOL and had dealt for a client Prompt Investments. Prompt had commenced dealing with Varren only in St.17. Prompt was introduced to the member by Sh.Ketan Doshi and Sh.Piyush Avlani. The member did not meet the proprietor of Prompt Investments (Sh.Mahesh Bansal) and Sh.Ketan Doshi and Sh.Piyush Avlanihad brought the constituent agreement forms signed by Sh.Bansal. Prompt was a member of UPSE and the member submitted that this fact was not disclosed to them at the time of introduction. All the orders were placed by Piyush Avlani and Ketan Doshi, on behalf of Prompt. Investigations found that Prompt had further dealt for amritmoya Projects Pvt Ltd., Block Buster and Ascon Exports (all group companies of KOL).
In St.17, it was seen that Varren had bought 25,000 shares and sold 70,000 shares on behalf of Prompt at a average rate of Rs.80/- per share. The average payout was approx.Rs.36 lakhs. However, NSE had withheld the payout for St.17.
In St.18, Varren had initially sold 90,000 shares on behalf of Prompt. However, they had squared off the position on the insistence of NSE. Thus, Varren did not have any net obligation at the exchange.
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.
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 Varren 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. No reply was received to this Show Cause Notice. Opportunity of personal hearing was given on 27/8/2001 and 5/9/2002. The member did not attend the hearings on both these dates. Accordingly, the Enquiry Officer concluded that the member is not interested in attending the Enquiry Proceedings and decided the matter ex-parte. The Enquiry Officer found that the member had executed the client agreement and executed the orders of the client. Also no penalty was levied by NSE on the member. Hence, the Enquiry Officer found that the member should have been more careful in the circumstances of the case. However, it was seen that the member had surrendered the card to NSE and NSE had approved it on 20th February 1999 after retaining an amount of Rs.5,00,000/- pending disposal of this case by SEBI. In view of the fact the member has surrendered the card, the Enquiry Officer has recommended that the membership of the broker may be cancelled with a warning.
Pursuant to the submission of the report by the Enquiry Officer, a Show Cause Notice was sent to the member on 28th March 2002. However, no reply has been received from the member. I find that enough opportunities have been given to the member. Hence, I decide to proceed on the matter without giving any further opportunity.
I have carefully examined the enquiry report, facts and documents available on record. I find that the broker should have been more careful while dealing for Prompt Investments. I find that the broker had indulged in matches and collusive trades with Kinglet. They have not met the Proprietor of Prompt Investments and instead accepted orders from third parties. However, since the broker has surrendered the card, I agree with the recommendation of the Enquiry Officer and direct that the membership of the broker be cancelled with immediate effect.
Dated this 22nd day of August 2002
G.N.BAJPAI
CHAIRMAN
SECURITIES AND EXCHANGE BOARD OF INDIA
Place : Mumbai
Date: