Order in the matter of Shilpa Stock Brokers Private Limited

Aug 26, 2005

Orders : Orders of AO

ORDER UNDER RULE 5 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 IN THE MATTER OF ADJUDICATION PROCEEDINGS AGAINST SHILPA STOCK BROKERS PVT. LTD.

1. Vide order dated September 30, 2004 issued by the Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’), I was appointed as the Adjudicating Officer to inquire into and adjudge under Section 15I read with Section 15 A and 15 G of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the ‘SEBI Act’), the violations alleged to have been committed by Shilpa Stock Brokers Pvt. Ltd. (hereinafter referred to as SSB) by not complying with the summons issued by SEBI seeking information regarding its dealings in the scrip of Sun Infoways Ltd. (hereinafter referred to as SIL) and allegedly indulging in insider trading in the scrip of SIL on the basis of unpublished price sensitive information.

2. SEBI conducted investigation into the trading in the scrip of SIL during the period February 2000 to December 2000 in view of the unusual price rise in the scrip. During the investigation, it was observed that a group of entities / individuals executed many trades in the scrip. Investigation indicated that many such trades were based on unpublished price sensitive information in relation to the company. It is noted that SSB executed many trades on behalf of its clients. Many such trades were executed by Adhunik Finance Pvt. Limited, the sub-broker of SSB. As it prima facie appeared to the Investigating Authority of SEBI that such trades were executed on the basis of unpublished price sensitive information regarding impending merger of Sun Infoways Limited with another company Zap Infotech Limited. In view of the role played by SSB, Investigating Authority issued a summons dated October 30, 2002 requiring SSB to submit certain information in respect of its dealings in the scrip of SIL and also to personally appear before the investigating authority of SEBI on December 13, 2002 at 2.30 p.m. It is alleged that SSB did not appear before the Investigating Authority as required by SEBI. In view of the alleged non compliance of summons issued by SEBI, Adjudication Proceedings were initiated against SSB. It is further alleged that SSB indulged in insider trading in the scrip of SIL on the basis of unpublished price sensitive information which makes SSB liable to the penalty under Section 15G of the SEBI Act.

NOTICE AND REPLY

3. A notice no. A&E/BS/35855/2005 dated March 11, 2005 was issued to SSB in terms of Rule 4 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as the “Rules”) seeking reply as to why an inquiry should not be held for the violation alleged to have been committed by SSB.

4. SSB did not reply to the show cause notice, however in view of the facts of the case it was decided to conduct an inquiry in the matter. Shri Gopal Maliwal, director of SSB attended the personal hearing on August 11, 2005 and made the following submissions:

a) We have not received the summons stated to have been issued to us. Hence we are not aware that our presence was required before the investigating authority.

b) We were not aware of any such information pertaining to merger and as such we have not traded on behalf of clients on the basis of any such price sensitive information.

c) The details regarding the trades executed by us on behalf of the client in the said scrip during the relevant period (2000 – 2001) shall be forwarded to you shortly.

d) Adhunik Finance Pvt. Limited was a sub-broker and we had dealt with them for about four years. The details of the trades executed in the scrip SIL through the said sub- broker shall be submitted to you. Further, it is submitted that we are aware that Smt.Sadhana Nabera, wife of Shri Dilip Nabera was the Director of Adhunik Finance P. Limited.

5. Subsequently SSB vide letter dated August 19, 2005 submitted the following:

a) Details of transaction in the scrip of SIL executed by SSB on behalf of its client / sub broker during the period January 2000 to March 2001

b) SSB has not traded a single share in its own account.

c) Following were the clients of SSB for the said period

i. Bhansali Securities (R011)

ii. Hindustan Securities (H003)

iii. Nagendra Bhutra (B006)

iv. Kamdhenu Share & Stock Brokers Pvt. Ltd (K013)

v. Maya Financial Services Pvt. Ltd. (M015)

vi. Shitij Enterprises (S017)

vii. Adhunik Finance Pvt. Ltd. (A023)

viii. Ambica Capital Market (A006)

ix. Bhansali Equity Services Pvt. Ltd. (B017)

CONSIDERATION OF EVIDENCE AND FINDINGS

6. One of the charges levelled against SSB is that SSB failed to comply with the summons issued by SEBI. It is noted that the investigating authority of SEBI issued summons dated October 30, 2002 requiring SSB to appear in person before the Investigating Authority on December 13, 2002 at 2.30 pm.

7. In this regard SSB has submitted that it did not receive the summons dated October 30, 2002. No evidence is available on record to establish service of the said summons on SSB. Further it is noted that SSB had shifted from the premises earlier occupied by them. SSB had submitted that they had shifted to the new address prior to the date of the summons i.e. October 30, 2002. In the absence of any proof of service of summons, the submissions made by SSB in this regard is accepted. It is also pertinent to note that as per records SEBI issued only one summons to SSB and no further summons was issued to it after October 30, 2002. Hence on the basis of the evidence available on record it cannot be concluded that SSB failed to comply with the summons issued by SEBI.

8. It is further alleged that SSB indulged in insider trading in the scrip of SIL on the basis of unpublished price sensitive information which makes SSB liable to the penalty under Section 15G of the SEBI Act.

9. It is alleged that a group of individuals / entities including the promoters of SIL entered into large volume of trading in the shares wherein they were the buyers as well as the sellers and large number of structured deals / matched deals were executed by the group at successively higher prices.

10. It is further alleged that prior to the said trades the promoters of the company were in the process of merging an unlisted company i.e. Zap Infotech Ltd, with SIL for an unrealistic and manipulated consideration of Rs.475/- Crores through issue of shares as consideration. It is alleged that this was with the view to give artificial valuation to the company shares and to manipulate company’s books of accounts and resultant share prices. The information regarding proposed merger of SIL with Zap Infotech was not in public domain and hence amounts to unpublished price sensitive information.

11. In this context it is necessary to examine whether SSB had access to that unpublished price sensitive information. It is noted that SSB was amongst the top 5 brokers in terms of percentage trades in the scrip during the period January 2000 to March 2001. The trading details of SSB are as follows :

GROSS PURCHASE	% TO MARKET VOLUME
110830	3.684585
*GROSS* *SALE*	% TO MARKET VOLUME
242824	8.07277546

12. It is noted in the investigation that SSB executed sale / purchase orders for its clients Adinath Propcon Pvt. Ltd., Apoorv Fincap Ltd., Concept Institute Pvt. Ltd. and the counterparty clients were Great Eastern Mercantile Private Limited and Shri. Ashok Kumar Chaudhary. It is alleged that the said trades were executed on the basis of unpublished price sensitive information. As held by the Hon’ble Securities Appellate Tribunal in Appeal No :50/ 2003 in DSQ Holdings Ltd Vs SEBI, in respect of a charge of insider trading against any entity, it is necessary to prove that the said entity being an insider and by virtue of its connection with the company had access to price sensitive information. However in the instant case it is noted that no connection is seen between SSB and the company. Further on the basis of the evidence available on record, no connection is established between the clients who traded in the scrip and SSB except broker – client relationship.

13. It is noted that some of the trades were put up by Adhunik Finance Pvt. Ltd. which is a sub-broker of SSB. It appears from the submissions of SSB that the said trades were routed through it in the normal course of business. It is further noted that SSB did not trade on its own account. Further no evidence is available indicating that SSB had received or had access to the unpublished price sensitive information regarding the merger of the company. In this regard it is pertinent to note that SSB had not executed any trades for itself. Further, no evidence is available indicating that SSB dealt in the scrip of the company on its own behalf or own behalf of any other person on the basis of the unpublished price sensitive information. It is also seen that no adequate evidence is available to establish the nexus between the clients and the broker. In view of the facts and circumstances of the case and on the basis of the evidence available in the matter, it cannot be concluded that SSB had indulged in insider trading in the scrip of SIL so as to make it liable to the penalty prescribed under Section 15G of the SEBI Act.

14. In view of the above, as it is found that the contravention of law by Shilpa Stock Brokers Pvt. Limited has not been established, no penalty is imposed on Shilpa Stock Brokers Pvt. Limited in terms of the provisions of Section 15A(a) and Section 15G of the SEBI Act.

15. In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, copies of this order are sent to Shilpa Stock Brokers Pvt. Ltd. and to Securities and Exchange Board of India.

PLACE: MUMBAI BIJU. S

AUGUST 26, 2005 ADJUDICATING OFFICER