MO/27/IVD/12/2005
SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
AGAINST M/s. PAWAN J CHAUDHARY, MEMBER, REGISTRATION No. INB010019411, THE STOCK EXCHANGE, MUMBAI UNDER REGULATION 13(4) OF SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002.
BACKGROUND
1. M/s Vision Technology India Limited (herein after referred as ‘VTIL’) was incorporated in 1992 as a public limited company. It has been promoted by Shri B.S. Ranga and B.Ranga Vasanth. The company came out with a public issue in 1994 and was listed on BSE on 10th May 1994. The company is involved in the business of processing of Cine and Television films, video films, etc. It owns and operates a full-fledged motion picture laboratory in Bangalore. The company is also involved in undertaking marketing support services for various companies and manufacturing and marketing various consumer goods and durables.
2. The scrip of VTIL is listed on The Stock Exchange, Mumbai (BSE), Madras Stock Exchange (MSE), Ahmedabad Stock Exchange (ASE) and Jaipur Stock Exchange (JSE) apart from Bangalore Stock Exchange (BgSE), being the regional exchange of the company.
3. Securities and Exchange Board of India received a complaint from one Shri A. K. Puri alleging inter-alia that the company, inter alia, is ignoring the provisions of Companies Act, 1956, Securities Contract (Regulations) Act, 1956, Listing Agreement executed with the exchanges. It also stated that the price of the scrip had gone up substantially. Based on the complaint, the exchanges were requested to furnish details relating to trading in the scrip and details about the preferential allotment made by the company.
4. The case was initiated by Securities and Exchange Board of India based on the investigation carried out by the stock exchanges for the time period December 01, 1999 to March 31, 2000. In that time period, a sudden spurt in the price and volume of the captioned company was observed by BSE. At the Stock Exchange, Mumbai, it was observed that the price of the scrip increased from Rs. 4.00 as on 12.10.1999 to a peak of Rs. 650.00 on 07.03.2000 and thereafter there was steep fall in the price of the scrip. Further from the price volume statement submitted by BSE, it was observed that between 12.10.1999 and 29.11.1999, there wasn’t any major price movement in the scrip. From 30.11.1999 to 07.03.2000, the price of the scrip increased from Rs.14.00 to Rs.650.00 and thereafter there was a fall in the price of the scrip. It can therefore be said that the scrip price witnessed movement mainly during the period end of November 1999 to March 2000 and the trading in the scrip during this period was observed mainly at BSE and BgSE. BgSE further informed that the exchange had imposed a special margin of 100% in the scrip of VTIL w.e.f. January 13, 2000 and the same was imposed till the end of investigation period i.e. March 31, 2000.
5. While carrying out preliminary investigation, SEBI observed that M/s. Vivenasri Financial Services Ltd. (herein after referred as ‘VFSL’) and M/s. Harsha Pranav Securities Pvt. Ltd. (herein after referred as ‘HPSPL’) were predominant traders in the scrip of VTIL during the period October 99 to March 2000. It is observed that these clients have enrolled themselves with many brokers of BSE and/or their sub-brokers and traded in the scrip of VTIL at the same point of time. M/s. Pawan J Chaudhary (herein after referred as ‘Pawan ’ or “the member” Regn. No. INB010019411) was one of the top members who dealt with the scrip on the basis of gross purchases and gross sales during the period December, 1999 to March 2000 on BSE.
ENQUIRY REPORT AND FINDINGS
6.Based on the above, SEBI vide order dated 21.12.2002 had ordered for an enquiry in respect of Pawan J. Chaudhary, member of BSE, for trading in the shares of VTIL. The Enquiry Officer had submitted his report on the above matter on 21.06.04. The conclusions of the enquiry officer in his report are as follows:
a. Pawan had placed large buy orders on behalf of VFSL and HPSPL
b. Pawan had acted on behalf of clients without collecting margins from them
In view of the above findings, the Enquiry Officer has found Pawan not adhering to the Code of conduct as prescribed in Schedule II of regulation 7 of the SEBI (Stock Brokers & sub-brokers) Regulations, 1992 and has recommended suspension of certificate of registration of Pawan for a period of thirty days.
SHOW CAUSE NOTICE AND REPLY
7. Pursuant to the above, a notice dated 28.06.04 was issued to Pawan J. Chaudary asking them to show cause as to why its certificate of registration should not be suspended for a period of thirty days. Pawan had replied vide its letter dated 12.07.04 to the said show cause notice. The submissions made by Pawan in its reply are as follows:
7.1.1 I vehemently deny the allegations of the Enquiry Officer to the extent the Enquiry Officer has held me guilty of the alleged charge. Please note that we had sufficient securities by way of margin and no separate margin was required. Thus, the allegation is not correct.
7.1.2 I have already pointed out in my earlier reply that both the said constituents were introduced to me by one Mr. Dilip N. Shah, who is known to me for last about 10-15 years and also has been effecting transactions with me. Both the said constituents had agreed to indulge only in delivery based transactions, as such the risk involved was very narrow and was restricted only to the extent of bad deliveries. Apart from that to minimize the risk of bad deliveries I had obtained confirmations regarding genuineness and title of the shares introduced by the said two constituents, and only after confirmation by the company the said shares were introduced in the market. Moreover, the securities were kept with us by way of margin.
7.1.3 The said two constituents had effected transactions in various scrips on large scales similar to the transactions in the scrip of VTIL. Moreover, the said VFSL had effected only one transaction for purchase of 8100 shares in settlement no. 51, amongst various other transactions, that too the said 8100 shares were taken delivery by the said VFSL. Both the said constituents were prompt in observing their respective pay-in obligations.
7.1.4 From the above, merely because I have not taken initial margin, one cannot come to the conclusion that I have failed to exercise the due diligence as alleged. I vehemently deny that I have failed to exercise due diligence, I further deny that I have violated the provision of SEBI Circular SMDRP/Policy/Cir-35/98 and/or the code of conduct as specified in Schedule II of Regulation 7 of the SEBI ( Stock Brokers & sub-brokers) Regulations, 1992.
ISSUES FOR CONSIDERATION
8. I have considered the recommendations in the Enquiry report and have also noted the submissions of Pawan J. Chaudary pursuant to the said report. I have noted that the Enquiry officer has not found the member guilty of violating the provisions of Regulation 4(a), (b) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 1995.
9. The issue that needs to be considered and decided upon is whether the member has committed any violation by not having collected any initial margins from the clients.
10. SEBI had vide its press release dated 18.11.93 specified that a member shall collect a minimum margin of 20 percent of the price of securities proposed to be bought/sold. So also, SEBI Circular SMDRP/Policy/Cir-35/98 dated 11.12.98 specifies that it shall be mandatory for member-brokers to collect margins from clients in all cases where the margin in respect of the client in the settlement, would work out to more than Rs.50,000/-. Pawan J. Chaudary in the present case, by its own admission, has not collected initial margins from its clients. But it has submitted that the securities offered for sale were kept with it as a margin, thereby obviating the need for a separate initial margin. The circular as cited above makes it mandatory for Pawan J. Chaudary to collect initial margins from its clients to the extent specified. There is no discretion allowed to Pawan J. Chaudary in deciding to collect/not to collect any margins from its clients.
ORDER
11. Taking in to account the observation in relation to the trades carried out by Pawan J. Chaudary, I am of the view that the penalty of thirty days recommended by the Enquiry Officer is warranted in the facts and circumstances of the present case. Therefore, in exercise of the powers conferred upon me by virtue of Section 19 of the Securities and Exchange Board of India Act, 1992 read with regulations 13 (4) and 13 (6) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby direct that certificate of registration of the Pawan J Chaudhary, Member, Registration No. INB010019411, The Stock Exchange, Mumbai, be suspended for a period of thirty days.
The order shall come into force after the expiry of three weeks from the date of passage of the order.
PLACE : MUMBAI MADHUKAR
DATE : 26-12-2005 WHOLE TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA