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Order Against Argus Stockbroking Ltd

Aug 31, 2004
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Orders : Orders of Chairman/Members

 

MO/72/IVD/08/04


SECURITIES AND EXCHANGE BOARD OF INDIA

ORDER

 

UNDER REGULATION 13 (4) OF SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002.

 

AGAINST M/S ARGUS STOCKBROKING LTD, MEMBER, DELHI STOCK EXCHANGE, IN THE MATTER OF VATSA WORLD LTD.

 

BACKGROUND

     
  1. Vatsa World Limited (hereinafter referred to as "VWL") was incorporated as a private company named as Ongoing Advertising and Packing Pvt Ltd, which was converted into a public company on 20th February 1996 and on 19th June 2001 the name was changed to VWL. Subsequently VWL acquired the business of Little Kingdom Edutech Ltd, an educational technology based company and adopted its name.

    2.  

  2. The shares of VWL are listed for trading on the Delhi Stock Exchange (hereinafter referred to as "DSE"). DSE, on observing a significant variation in the price of scrip of VWL, conducted an investigation and submitted a report to the Securities and Exchange Board of India (hereinafter referred to as "the SEBI"). DSE had inter-alia made the following observations:

    3.  

  3.  
    1. The price of the scrip increased from Rs.12.50 on April 9, 2001 to Rs.43.05 on July 10, 2001.

      2.  

    2. The increase in price was not accompanied by a corresponding increase in trading volume.

      3.  

    3. The entire trading was concentrated amongst 8 members of the exchange.

      4.  

    4. Most of the trades were squared off and there was only one instance of delivery during the entire trading period spread over 15 settlements.

      5.  

    5. The scrip of VWL was traded for 33 days with 26,700 shares being traded i.e an average of 810 shares per day.

      6.  

Some of the members or their clients were suspected to be related to the company. Hence, DSE suspected possible price manipulation and insider trading by the company, its promoters or associates.

 

3. Based on the investigation report of DSE, SEBI had ordered an investigation in May 2002, to look into the possible irregularities in the trading of the scrip of VWL. It was observed that one Shri Sunil Kumar had dealt in the shares of VML at prices ranging from Rs. 4.85 to Rs. 45.85 through M/s. Supreme Investments Ltd, a sub-broker (hereinafter referred to as "the Sub-broker") to M/s. Argus Stockbroking Ltd (hereinafter referred to as "the said broker").

 

4. During the course of investigations, it was observed that one Shri Sunil Kumar was a director on the Board of VML as well as on that of Sangam Portfolio Pvt. Ltd., one of the promoters of VML. It was suspected that the said director and Shri Sunil Kumar, the client of the said broker who had traded in the shares of VML, were one and the same.

     

  1. During investigation, when questioned about nature of contracts of Shri Sunil Kumar, authorized representatives of the said member and proprietor of the sub-broker stated that the transactions of their client did appear to be manipulative in nature. However, they denied any knowledge of manipulative intention of Shri Sunil Kumar, especially in the absence of procedure / systems while allowing clients to trade in illiquid scrips.

    2.  

  2. In view of the above, it was alleged that the said broker had violated clause A (2-5) of the Code of Conduct of specified in the Schedule II framed under regulation 7 of Securities and Exchange Board of India (Stockbroker and sub-broker) Regulations, 1992 (hereinafter referred to as "the Broker Regulations") and rule 4 (b) of Securities and Exchange Board of India (Stockbrokers and Sub-Brokers), Rules, 1992.

 

ENQUIRY PROCEEDINGS

 

7. In view of the above, SEBI, vide order dated 24th July 2003, appointed an Enquiry Officer (herein after referred to as the "Enquiry Officer") under Regulation 5 (1) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as "the Regulations") to enquire into possible violations, inter alia, of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as "Broker Regulations").

 

8. As required under regulation 6 of the Regulations, the Enquiry Officer issued a show cause notice dated 11th September 2003 to the said broker, advising them to show cause as to why action should not be initiated for the violations mentioned therein.

 

9. The said broker, vide letter dated 1st October 2003, replied to the show cause notice, inter-alia submitting as follows:

 

  1.  
    1. They had checked with Shri Sunil Kumar, the client who had done significant trading through their sub-broker, in the scrip of VWL, whether he is a major shareholder, a promoter, a director and Shri Sunil Kumar confirmed that he is not a major shareholder, not a promoter, nor a director of VWL.

      2.  

    2. They were not aware of the manipulative intention, if any, on the part of the said client.

      3.  

    3. Further, they pointed out that during the investigation, the question of Shri Sunil Kumar being a major shareholder, a promoter or a director of VWL was never raised.

      4.  

    4. The said broker also denied any connection with VWL, its directors, promoters or shareholders and submitted that it was not concerned with the price movement of the scrip of VWL.

      5.  

    5. The said broker also submitted that when clients place orders, they are in a hurry to get their orders executed and hence it is not possible to verify the directors, promoters etc., of the company whose shares the client is intending to trade. The said broker submitted that their sub-broker had purchased 3,800 shares and sold 3,400 shares, all of which were on the network of DSE and none of them were off market deals.

      6.  

10. With regard to trading in the scrip of VWL, the said broker further submitted that its sub-broker had purchased and sold shares wherein the first transaction was at Rs. 8.15 on 25.04.01 (when the last traded price was Rs. 9.55 on 12.04.01). The last transaction of the sub-broker was on 11.06.01 at Rs.11.09/10.91. Further, the sub-broker sold 100 shares at Rs. 46.30 on 11.07.01 on spot basis, at the prevailing market price of Rs. 43.05. The said broker submitted that apart from these transactions by their sub-broker, they were not concerned with the movement of low and high prices in the scrip of VWL.

 

11. During the course of the personal hearing granted before the Enquiry Officer, the said broker was asked to file a reconciliation of his trade data with that of DSE, as the data of the broker’s trades, as provided by DSE was substantially different from that provided by the broker. It was submitted that the discrepancy in data was due to difference in the method of recording transactions of shares traded during the no delivery period.

 

  1. The said broker, vide their letter dated 19.11.2003, submitted a reconciliation statement between the data provided by DSE and that they had provided to SEBI. They also submitted an affidavit of Shri Sunil Kumar stating that he was not a major shareholder, promoter or director of VWL. They submitted that they their sub-broker had collected margins for the trades done by their client.

    2.  

  2. The Enquiry Officer, after considering the submissions of the said broker, submitted his report dated February 13, 2004, recommending a minor penalty of warning to the Member.

    3.  

SHOW CAUSE NOTICE AND HEARING

 

 

14. A show cause notice dated 20th February 2004 was issued to the said broker, communicating the findings of Enquiry Officer and advising them to show cause as to why the recommendation of the Enquiry Officer should not be accepted. Member did not respond to the notice.

 

CONSIDERATION OF ISSUES

 

15. I have carefully considered the facts of the case and the findings of Enquiry Officer. I have observed that the said broker did not respond to the show cause notice dated 20th February 2004. In view this, the submissions made by the said broker in response to show cause notice served by Enquiry Officer, submissions made during personal hearing before Enquiry Officer and written submissions made pursuant to the hearing are taken as final. The hearing before me has been dispensed with in this case as the same was not considered necessary in the light of the facts and circumstances of the case. My findings with respect to the allegations against the member are as under.

 

  1. I find that during the period from April 9, 2001 to July 10, 2001, the scrip was traded only on 33 days and the total number of shares traded was only 26700. The average traded volume per day works out to about 810 shares. In many of the trading days there were only one or two trades in the scrip. Thus, it is clear that there was very little trading interest in the scrip.

    2.  

  2. During the said period, the price of the scrip increased from Rs. 12.50 on April 09, 2001 to Rs. 43/-on July 10, 2001. The increase in price was not accompanied by a corresponding increase in trading volume and the entire trading was concentrated amongst 8 members of the exchange. Most of the trades were squared off and there was only one instance of delivery during the entire trading period spread over 15 settlements.

    3.  

  3. I have observed that the scrip of VWL was illiquid and the said broker had executed trades on behalf of Shri Sunil Kumar for purchase of 3300 shares and sale of 2900 shares, during the period 25.04.01 to 11.06.2001. In addition they had also transacted in one spot deal of 100 shares on 11.07.2001. Most of these trades were squared off and there was net delivery of only 500 shares.

    4.  

  4. The said broker had traded in an illiquid scrip. While trading in an illiquid scrip the broker should have exercised more skill and care while acting on behalf of client, as trading in an illiquid scrip may induce innocent investors into trading in the scrip. Only one client trading in illiquid scrip, coupled with the fact that most of the trades were squared off, should have alerted the Member. This act of the broker is violation of clause A (2) to (5) of Code of Conduct of Securities and Exchange Board of India (Stockbrokers and sub-brokers) Regulations, 1992.

    5.  

  5. However, I have also observed that the client of the said broker namely Shri Sunil Kumar, was taken to be a major shareholder, promoter and director of VML and this apprehension had also contributed to the appearance that the said broker was involved in manipulation in the scrip of VWL. However, the said broker has shown that his client Shri Sunil Kumar was not related to VWL and has also filed an affidavit to this effect.

    6.  

  6. In addition, I have also observed that the price of the scrip had varied from Rs.5/- to Rs.43/- during the period 1st January 2001 to 11th July 2001. As against this, the said broker started trading at Rs. 8.15 on 25.04.01 and their last trade was on 11.06.01, at Rs.10.91. I find that the said broker had not traded for either long period or in substantial quantity, having bought only 3,300 shares and sold 2, 900 shares. Further, since no connection between Member and VWL has been established, submissions of the said broker need sympathetic consideration.

    7.  

  7. In view of the above, even though I find that though the Member has violated the Code of Conduct, the facts and circumstances of the case do not warrant any severe punishment. I am therefore in agreement with the recommendation of the Enquiry Officer.

    8.  

    ORDER

  8. Therefore, in exercise of powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with regulation 13 (4) of SEBI (Procedure for holding Enquiry by Enquiry Officer and imposing penalty) Regulations, 2002 I hereby impose a minor penalty of warning on M/s. Argus Stockbroking Ltd and direct it to be more diligent in complying with the SEBI Act, 1992 and the Rules and Regulations framed there under. I also direct the said broker to note that any instances of violations or non-compliance with the Act, Rules and Regulations in future shall be dealt with more stringently.

    9.  

 

 

A.K.BATRA

Date: August 31, 2004

 WHOLE TIME MEMBER
Place:MUMBAI  SECURITIES AND EXCHANGE BOARD OF INDIA