ORDER AGAINST M/S MUKESH BROKERAGE & FINANCIALS (INDIA) LTD. BROKER, NSE UNDER SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992, READ WITH REGULATION 29(3) OF SEBI (STOCK BROKERS AND SUB BROKERS), REGULATIONS 1992 IN THE CASE OF HITECHI JEWELLERY INDUSTRIES LTD.
Investigations were started in the context of abnormal increase in prices and volumes in the scrip of M/s Hitechi Jewellery Industries Ltd. (hereinafter referred to as HJIL), during the period from December 1996 to April 1997 in The National Stock Exchange, (NSE). Investigations revealed that the shares of Hitechi Jewellery commenced trading at NSE on October 18, 1995 at Rs. 174 with thin and sporadic volumes. The average daily volume of the scrip till first week of May '96 was 270 shares. Subsequently, large volumes were noticed especially in four settlements viz. Sett. Nos. 1996036, 1996041, 1996044 and 1996045 at NSE. The scrip which was quoting at Rs. 150 during Sett No. 1996044 moved to Rs. 282 during Sett. No. 1997010 and touched a high of Rs. 304 during Sett. No. 1997009. The investigation brought out that approximately 70% of trades were concentrated with select brokers. M/s Mukesh Brokerage Brokerage and Financial (India) Limited was one of the select brokers which had large trading volumes. The broker mainly transacted in the scrip of Hitechi on behalf of his clients Harshad Gosalia, Sheela Gosalia and Nikunj Shah, however, it was found that the ultimate client of the broker was Vinayak Investment. In the impugned period, the broker's gross volume in the shares of HJIL was 2,91,600 shares with a net buy of 2.00,500 shares. It was further observed that the broker aided and abetted a set of entities in creating artificial market for the scrip and rigging the price of the scrip upwards.
Investigations brought out that financing transactions were given colour of purchase and sale of shares were put through the trading system of the exchange. It was seen that a set of financiers purchased shares in spot and later same shares were sold by financiers by synchronizing the trade to the same set of persons who had sold these shares earlier to the financiers on spot basis. Thus through circular trading artificial volumes were created and non-genuine trades were put in the system. By resorting to this modus-operandi prices were artificially raised to Rs. 304/-. It was observed that M/s Gazi Securities, Vinayak Investment, Sameer Zhaveri, etc. were the persons who were indulging in the circular trade with the financiers.
Based on the findings mentioned above, enquiry proceedings were initiated by SEBI vide order dated 18th January, 2001, under Regulations 28(1) of SEBI (Stock Brokers and Sub Brokers) Rules and Regulations, 1992 to enquire into these prima facie violations. The enquiry officer thereafter proceeded with the enquiry and issued a show cause notice vide letter No. OTW/30648/2001 dated 14th June, 2001 alleging that the broker failed to exercise due diligence and care while dealing in the scrip of HJIL on behalf of its client. In response to this show cause notice, a reply dated October 4, 2001 was sent. Personal hearing was also given to the broker on October 8, 2001, which was duly represented by the authorized representative Shri Pankaj J. Shah.
As regards allegation of third party payments, it was contended before the Enquiry Officer that third party payment can be due to; when the client does not have sufficient balance; or the client is building positions on behalf of the person funding him or it is merely a temporary arrangement pending clearance of cheques to meet deadline of pay in. The Enquiry Officer noticed that the broker had accepted third party payments on many occasions. Even if it is assumed that third party payments were accepted to meet pay in deadlines, the large number of instances clearly indicate that broker was not acting diligently and should have stopped dealing with such client. The Enquiry Officer felt that broker did not insist on getting the payments from the account of the client, which showed that either the broker was aware of the hidden intentions of the client, and acquiesced with it or was careless and did not act diligently.
As regards allegation that you failed to identify that the same shares were being repeatedly circulated by the clients; you accepted the lapse. As a delivering broker, the broker has to put his rubber stamp on the back of the transfer deeds accompanying the shares to be delivered to the exchange. In doing so, you should have noticed that the same shares were repeatedly being circulated. If you were diligent, you could have found that clients were churning the same shares and indulging in creating artificial volumes.
In view of these, the Enquiry Officer recommended that the registration should be suspended for a period of one month.
Pursuant to the submission of enquiry report a show cause notice dated February 01, 2002 under Regulation 29(1) of SEBI (Stock Broker and Sub-Brokers) Rules and Regulations, 1992 was issued to you enclosing a copy of the report of the enquiry officer asking you to show cause why appropriate action as deemed fit by the Board should not be taken. An opportunity of personal hearing was also given to you on 24-07-2002 which was duly attended. It was contended that presently a new and entirely different management is in control of the broking company (Mukesh Brokerage). The shareholding as well as directors are completely changed and this transfer was duly approved by SEBI and the new Certificate of Registration was issued to broking entity by SEBI. NSE had directed the company to open a new Current Account. Further, SEBI is charging higher turnover fee only due to the reason that their registration is being considered new and not continuation of the old registration. In other words, for all practical purposes, SEBI as well as NSE are treating the broking entity as a new entity. It was
pleaded that a new management should not be punished for the faults of earlier management. It was argued that the earlier management had just started the business and the employee in the back office failed to supervise that some of the shares were coming back in subsequent settlement. However, there was no malafide even on the part of earlier management. Considering the fact that large volumes were to be handled in physical form, this slip up was always possible unless the employees were highly experienced. As admitted, the broker was new to the business that is the reason for non detection of same shares being circulated time and again by the clients. It was therefore, contended that lenient view be taken and new management should be let off, as there was no malafide or involvement of the new team of shareholders and directors.
I have carefully examined the enquiry report, submissions made from time to time and material and evidence available on record. I agree with the findings of the enquiry officer. I find that the broker was negligent in dealing with its clients and should not have continued to deal with a client who was not in a position to meet its pay in obligations for the purchases made by it and had to meet the deadlines of pay in through third party cheques. I also find that the broker also failed to check the repeated circulations of same set of shares. If the broker had acted in careful and prudent manner, it could have detected by examining the transfer deed accompanying the share certificates which bears the introducing stamp of the broker that the same share certificates were being delivered through your terminal time and again. I find no merit in the argument that the new management took over from the old management as broking entity remains same. Mukesh Brokerage and Financials (I) Ltd was the company existing earlier and is the company continuing business. Directors and share-holders may come and go, but the company continues. I agree with the recommendation of Enquiry Officer and I, therefore, in exercise of powers conferred on me under SEBI Act read with SEBI (Stock Brokers and Sub-Brokers) Regulation direct that Mukesh Brokerage and Financials (India) Ltd be suspended for a period of one month. The order shall come into force with effect from September 20,2002.
G. N. BAJPAI
CHAIRMAN
SECURITIES AND EXCHANGE BOARD OF INDIA
Place: Mumbai
Date: 22nd August, 2002