Order against Prudential Stock and Securities Ltd

ORDER AGAINST M/S PRUDENTIAL STOCK & SECURITIES LTD. MEMBER, 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 undertaken 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 Prudential Stock and Securities Limited (PSSL) was one of such brokers. The broker mainly transacted in the scrip of Hitechi on behalf of its client Mahesh Doshi. However, it was found during the course of investigations that the ultimate client of the broker was Vinayak Investment. In the said period the broker's gross volume in the shares of HJIL was1,00,400 shares with a net buy of 86,200 shares. It was further observed that the broker aided and abetted a set of entities in creating artificial market for the scrip and manipulating the price of the scrip of HJIL. It was also observed that same share certificates were being churned out from the terminal of the broker.

Investigations brought out that financing transactions were put in the system as purchase and sale of shares. It was seen that a set of financiers purchased shares in spot and later same shares were sold by financiers by synchronizing the trade through exchange mechanism to the same set of persons who had sold these shares earlier to them 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.

On the basis of prima facie findings of involvement of the broker in price manipulations, as discussed above, enquiry proceedings were initiated by SEBI vide order dated 18^th 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. AED/30647/2001 dated 14^th June, 2001 alleging that PSSL failed to exercise due diligence and care while dealing in the scrip of HJIL on behalf of its client and was involved in price manipulation. A reply was sent vide letter dated July 9, 2001, to the aforesaid show cause notice. Personal hearing was also given by Enquiry Officer which was duly attended by authorized representative of PSSL, Shri Ashok Dey on 29^th October 2001 at SEBI's - ERO, Kolkata.

 It was contended before the Enquiry Officer that PSSL had already surrendered the membership of NSE and that it was not interested in continuing broking business at NSE. Enquiry Officer thereupon, recommended that registration of PSSL should be cancelled.

 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 the broker. A copy of the report of the enquiry officer was also enclosed with this show cause notice. The broker was asked to show cause why appropriate action as deemed fit by the Board should not be taken against it. However, no reply was received in response to this show cause notice. Again a reminder dated February 26, 2002 was issued to PSSL. However, the broker failed to reply to the show cause notice this time also. Another letter dated May 24, 2002 was issued giving PSSL an opportunity of personal hearing before me on 05-07-2002. However, PSSL failed to avail of this opportunity and neither the broker appeared on the appointed day, nor did it seek an adjournment. I, therefore, proceed to decide on the basis of material and evidence available on record.

I have carefully examined the enquiry report, submissions made from time to time and material and evidence available on record. I find that allegations made in the show cause notice are substantiated. I find that the broker was negligent while dealing with the client. I am also of the view that the broker could have observed that same share certificates are being churned if it had been diligent and prudent, as it could have observed from the stamp of the introducing broker at the back of transfer deed accompanying the share certificate that same share certificate is being rotated from the terminal of the broker time and again. The broker should have satisfied itself about the antecedents of clients before dealing with them. It is therefore, clear that the broker was not diligent and careful while discharging its duties as a broker and aided and abetted market manipulations in the scrip of HJIL. I therefore, agree with the findings and recommendation of the Enquiry Officer. In light of the above, I am of the view that registration of the broker as NSE member need to be cancelled. However, since Prudential have surrendered membership of NSE, I direct that the above mentioned facts showing violations on the part of Prudential be kept on records of SEBI for consideration, if the directors of Prudential or Prudential itself approaches in future for registration as intermediary.