Order against M/s. Master Capital Services Limited in the matter of M/s. snowcem India Limited

SECURITIES AND EXCHANGE BOARD OF INDIA

Coram: Dr. T. C. Nair, Whole Time Member

 

Name of the noticee: M/s. Master Capital Services Limited

Date of hearing: 30-05-2006

 

Appearance of the parties

For the noticee : Shri Vinay Chauhan, Advocate,

 M/s. Corporate Law  Chambers

  Shri Harjeet S. Arora, Managing Director

 Shri V. P. Chhabra, Practicing Company Secretary

  Shri Aditya Bhansali, M/s. Corporate Law chambers

 

For SEBI : Shri P. K. Bindlish,

 Shri Pradeep Bhowmick

 

ORDER

UNDER REGULATION 13(4) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002 AGAINST M/S. MASTER CAPITAL SERVICES LTD., MEMBER – NATIONAL STOCK EXCHANGE – SEBI REGISTRATION NO. INB 230643634 IN THE MATTER OF M/s. SNOWCEM INDIA LIMITED.

 

WTM/TCN/IVD-3/96/02/2007

BACKGROUND

 

1.                  The National Stock Exchange (NSE) had conducted an internal investigation from June 3, 1999 to August 10, 1999 (herein after referred to as ‘the investigation period”) in the scrip of M/s Snowcem India Limited (hereinafter referred to as ‘SIL’) and submitted a copy of its report to SEBI. According to the report, there was a major spurt in the total traded volume in the scrip of SIL. From an average volume of 12,521 shares during the period March 1, 1999 to May 25, 1999, it recorded a five-fold increase to record volumes of 68,370 shares a day during the investigation period.

 

2.                  Thereafter, SEBI carried out a detailed investigation of the dealings in the scrip of SIL. The investigations, inter-alia, revealed that :

·        Kosha Investments Ltd (hereinafter referred to as ‘KIL’) was the predominant trader in the scrip during the period of investigation. SIL had re-issued forfeited shares and the same was allotted to one Shri Sourabh Bora. Shri Sourabh Bora was identified as one of the top clients who had traded in the scrip of SIL apart from KIL.

·        The money received by KIL from SIL was time and again utilised for the purpose of making payments to brokers. The timing of the fund transfers from the books of the company to the account of KIL and from KIL to the accounts of the brokers/sub-brokers suggested that there were clear-cut intentions on the part of the company to manipulate the scrip price of SIL. The fact that the company was not aware of the details of the funds utilisation by KIL is again without any conviction. In almost all the occasions it was observed that funds were transferred from the account of SIL and credited into the account of KIL prior to their placement of transactions in the scrip of SIL. Moreover, KIL is also the promoter group company of SIL and this has been confirmed by the management of SIL.

·        It is observed that KIL was the predominant buyer in the scrip and it was their trading in the scrip, which was responsible for the price movement in the scrip of SIL. From the trading details submitted by the exchanges it appeared that KIL had employed manipulative tactics either to maintain the scrip price and/or to increase the price drastically. In view of the fund transfers which occurred frequently, it appeared that the management of SIL was directly responsible for the price movement in the scrip during the aforementioned period.

·        SIL transferred the funds to the account of KIL, its promoter group company, and on the very same day, KIL transferred the funds to Shri Sourabh H Bora to enable him to make payments towards the allotment of forfeited shares. Shri Sourabh Bora accordingly made payments to SIL in respect of the forfeited shares allotted to him on the very same day. The fund transfers suggest that SIL was very well aware that it lent the money to KIL and in turn to Shri Bora for the purpose of making payments towards forfeited shares. It should also be borne in mind that although Shri Sourabh H Bora had given cheques during the first week of September 1999 these cheques were presented to the bank for realisation only in the last week of September, 1999 and the actual realisation of the cheques took place on October 1, 1999(after the bank account of Shri Sourabh Bora was credited with funds from SIL through KIL). In addition to the above, the records indicate that Shri Sourabh H Bora still owed more than Rs.6 crore to KIL, which in turn owed more than Rs.15 crores to SIL. It is clear that Shri Bora did not actually make any payment to the company towards the forfeited shares allotted to him but facilitated book entries thus getting shares allotted without actual infusion of funds.

3.                  KIL and Shri Bora indulged in trading in the scrip of SIL, through various members of BSE and NSE, including M/s Master Capital Services Ltd.

4.                  M/s. Master Capital Services Ltd. (hereinafter referred to as `MCSL’), a corporate member of NSE with SEBI Registration No. INB 230643634, traded in the scrip of SIL on behalf of KIL and Shri Sourabh Bora. It was revealed in the Order Log analysis that the member had placed big orders for KIL and Shri Sourabh Bora (hereinafter referred to as “SB”) when the average trading volume in the scrip was hovering around 40,000 shares a day.

The deals done by MCSL on behalf of SB over the various settlements are as under:

 

The extract of Trade Log of NSE, wherein MCSL has bought and sold in the scrip and has matched its own buy and sell orders are tabled below:

ENQUIRY REPORT AND RECOMMENDATION

5.                  An Enquiry officer was appointed vide order dated 10th July, 2002 for conducting enquiry into the affairs of MCSL for his dealings in the scrip of SIL and possible violation of the provisions of the Securities and Exchange Board of India (Stock Brokers and Sub Brokers) Regulations, 1992; and Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995.

 

6.                  The Enquiry Officer, after conducting the enquiry as per the procedure laid down under the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as `the Brokers Regulations’) submitted a report dated April 13, 2004. The Enquiry Officer concluded that MCSL aided and abetted Shri Sourabh Bora in price manipulation by executing orders on his behalf thereby violating the provisions of regulation 4(a) and (b) of the SEBI (PFUTP) Regulations, 1995 and the Code of Conduct for Stock Brokers specified in Schedule II read with Regulation 7 of SEBI (Stock Broker and Sub-broker) Regulations, 1992. In view of the above, the Enquiry Officer has recommended a minor penalty of suspension of the Certificate of Registration for a period of one month.

 

SHOW CAUSE NOTICE AND REPLY

 

7.                  Upon receipt of Enquiry Report, a notice dated 16^th April, 2004 was issued to MCSL asking it to show cause as to why action under the provisions of SEBI (Proceedure for Holding Inquiry by an Enquiry Officer and Imposing Penalty) Regulations, 2002, should not be initiated against them for the violations mentioned in the report. MCSL was directed to reply to the said notice within 15 days from the date of receipt of the notice.

8.                  In response to the notice, a reply was filed by MCSL vide letter dated May 17, 2005. Thereafter, MCSL was given an opportunity to appear and present its case before me on May 30, 2005. The member appeared before me and made its submissions and followed it up with written submissions dated June 05, 2006.

 

9.                  MCSL denied the charges of aiding or abetting Shri Saurabh Bora (hereinafter referred to as SB) in his fraudulent and manipulative transactions. MCSL submitted that SB’s trades through them during the said period constituted 3.58% of the total volume of the scrip of SIL during the relevant period.

 

10.             MCSL has reiterated that the total volume of their trades in the scrip of SIL during the relevant period was hardly 2,34,600 shares compared to the 65,58,100 shares being the combined volume of BSE and NSE during the investigation period. Therefore, MCSL submitted that the trades in the scrip of SIL through them forms negligible 3.58% of the total trades in the scrip during the investigation period. MCSL submitted that in respect of all trades SB had sold 1,45,000 shares more than what they had bought from them and stated that MCSL was actually receiving deliveries from SB’s demat account. By virtue of this MCSL believed that there was no scope for suspecting generation of any false, speculative or artificial volume.

 

11.             MCSL further stated that if a client systematically delivers shares for all the sales done from his own account, there could be no reason to doubt his bonafide. Nor would there be any reason to suspect that the trades could be artificial. SB was also trading through MCSL in various scrips viz. Satyam, Pentasoft, Infosys, Raymonds, etc. during the relevant period and the transactions made by SB through MCSL in some of those scrips was substantial. Though SB was trading through them in other shares, he had not traded in SIL shares through them in settlement nos.21 to 25 i.e. from May 26, 1999 to June 29, 1999 and after that SB’s trading in SIL shares had overall remained much lower as compared to his position in any other single share.

 

12.             MCSL submitted that the trading pattern wherein the component of trading in the scrip of SIL vis-à-vis the trading in other shares by SB was too meager did not indicate any abnormal trading in SIL scrip by SB to give rise to any suspicion on the part of MCSL. MCSL submitted that the selling of shares when the prices are high, may by itself not give any indication that sale is for maintaining and/or raising the prices or to undertake manipulative transactions.

 

13.             MCSL denied that they had any knowledge of SB’s manipulative intention/design and expressed ignorance about SB being directly associated with SIL and that SB was acting hand-in-glove with the management of SIL and KIL in the manipulation of the scrip. MCSL further denied having done any proprietary trades in the scrip of SIL and ruled out the question of their having matched their own buy and sell orders as alleged. In support of this argument MCSL cited the observations of SEBI in the matter of NVS Brokerage Ltd. in the same scrip.

 

14.             MCSL submitted that the enquiry is related to period from 01.06.99 to 17.08.99 i.e. from Settlement No. 21 to 32 and the shares of SIL were being traded regularly in the settlement No.21 to 25 i.e. prior to settlement no. 26 when SB started trading in SIL shares through them. The total volume of the scrip in Sett. No. 21 to 25 was 3,70,000 and further stated that the scrip was actually liquid when SB started trading through them. Even before the Sett. no. 21 also the scrip was being traded regularly.

 

15.             MCSL submitted that the total volume of SB in SIL shares with them was 2,34,600 shares against the total volume of 61,93,500 shares traded and  spread over 7 Settlements i.e. Settlement Nos.26 to 32, constituting 3.58%. MCSL further stated that SB was net seller of 1,45,000 and by any standard it cannot be considered huge.

MCSL denied that the shares of SIL were illiquid and in support of the same it submitted that the during the period 1^st January to 30^th June, 1999, the trading of SIL shares on BSE was 10,76,000 and on NSE was 9,08,400 shares which constituted an annualized turnover of 20.46% and 17.28% respectively (37.74% collectively) of the share capital of 1,05,08,100 shares. Order details as submitted by the entity in their reply dated 17-05-2004 has been reproduced below for perusal.

 

a)     TRANSACTIONS ENTERED ON 28/7/99

 

 

Date	Buy/Sell	Order No.	Order Time	Order Qty.	Price	Contracts executed with
						In house clients				Outside Brokers
						Qty.	Time	Price	Trade No.	Qty
28th July	Buy	76984		200		200	10:24:13	88.15	41351
28th July	Buy	81934	10:24:13	Day/ 20000	88:15	200	10:24:13	88.15	41351	19800

 

TOTAL TRADED QUANTITY OF SIL SHARES ON NSE & BSE 1,24,900 ON 28.07.1999

 

b)     TRANSACTIONS ENTERED ON 30/07/99

 

Date	Buy/Sell	Order No.	Order Time	Order Qty.	Price	Contracts executed with
						In house clients				Outside Brokers
						Qty.	Time	Price	Trade No.	Qty
30th July	Buy	4991646	14:49:39	Day/ 10000	99.80	1000   2700	15:24:15   15:24:15	99.80   99.80	328832   328840	6300
30th July	Buy	555469	15:25:02	Day/ 5000	97.50	2600	15:25:02	97.50	330350	20010
30th July	Buy	553620	15:242:15	Day/ 20000	97.50	1000 2700 2600	15:24:15 15:24:15 15:25:02	99.80 99.80 97.50	328832 328840 330350	13700

 

TOTAL TRADED QUANTITY OF SIL SHARES ON NSE & BSE 3,13,200 ON 30.07.1999

 

c)      TRANSACTIONS ENTERED ON 02/08/99

 

Date	Buy/Sell	Order No.	Order Time	Order Qty.	Price	Contracts executed with
						In house clients				Outside Brokers
						Qty.	Time	Price	Trade No.	Qty
2nd Aug	Buy	5292		100	105	100	10:01:41	105.00	1166
2nd Aug	Buy	4487		500		100	15:25:02	105.00	1166	400

 

TOTAL TRADED QUANTITY OF SIL SHARES ON NSE & BSE 4,02,900 ON 02.08.1999

 

d)     TRANSACTIONS ENTERED ON 09/08/99

 

Date	Buy/Sell	Order No.	Order Time	Order Qty.	Price	Contracts executed with
						In house clients				Outside Brokers
						Qty.	Time	Price	Trade No.	Qty
9th Aug	Buy	410598	13:35:32	10000	126.00	100	13:35:32	125.00	244785	9900
9th Aug	Buy	268533		100		100	13:35:32	125.00	244785

 

TOTAL TRADED QUANTITY OF SIL SHARES ON NSE & BSE 4,46,400 ON 09.08.1999

 

e)     TRANSACTIONS ENTERED ON 13/08/99

 

Date	Buy/Sell	Order No.	Order Time	Order Qty.	Price	Contracts executed with
						In house clients				Outside Brokers
						Qty.	Time	Price	Trade No.	Qty
13th Aug	Buy	295980 Modified	12:17:09 12:17:44	4000 4000	121.05 120.15	3700	12:17:55	120.15	147700	300
13th Aug	Sell	296955	12:17:55	10000	120.00	3700	12:17:55	120.15	147700	6300
13th Aug	Buy	304228 Modified Modified	12:23:09 12:24:27 12:25:00	10000 5100 4700	127.00 128.00 130.00	1100	12:28:52	130.00	156950	8900
13th Aug	Sell	312121 Modified Cancelled	12:28:52 12:29:28 12:33:45	300011800 1800	130.00 130.00	1100	12:28:52	130.00	156950	100

 

TOTAL TRADED QUANTITY OF SIL SHARES ON NSE & BSE 1,67,100 ON 13.08.1999

 

f)       TRANSACTIONS ENTERED ON 23/08/99

 

Date	Buy/Sell	Order No.	Order Time	Order Qty.	Price	Contracts executed with
						In house clients				Outside Brokers
						Qty.	Time	Price	Trade No.	Qty
23rd Aug	Buy	425312	12:55:15	10000	175.25	5000 4100	13:14:49 13:15:12	175.25 175.25	270854 271243	900
23rd Aug	Sell	458019	13:14:49	5000	175.00	5000	13:14:49	175.25	270854
23rd Aug	Sell	458638	13:15:12	5000	175.00	4100	13:15:12	175.25	271243	900
23rd Aug	Buy	461677 Modified Modified	13:17.09 13:43:28 13:56:21	5000	173.75 174.65 176.00	4900	13:56:21	176.00	311987	100
23rd Aug	Sell	441892	13:05:25	10000	176.00	4900	13:56:21	176.00	311987	5100

 

TOTAL TRADED QUANTITY OF SIL SHARES ON NSE & BSE 2,89,800 ON 23.08.1999

 

 

g)     TRANSACTIONS ENTERED ON 30/08/99

 

Date	Buy/Sell	Order No.	Order Time	Order Qty.	Price	Contracts executed with
						In house clients				Outside Brokers
						Qty.	Time	Price	Trade No.	Qty
30th Aug	Buy	357488		100		100	12:26:00	146.50	204123
30th Aug	Sell	366138	12:26:00	1000	145.25	100	12:26:00	146.50	204123	900

 

TOTAL TRADED QUANTITY OF SIL SHARES ON NSE & BSE 78,700 ON 30.08.1999

 

I note that the member has given the above information of the transactions entered into by them in order to show that the orders were not matched/synchronized as alleged by the investigations in the show cause notice.

16.             MCSL stated that the charge of manipulation cannot sustain against them. It further submitted that MCSL never had any knowledge, intention to manipulate the market and denied that it had the knowledge of KIL having received funds from SIL. MCSL further denied that they had nexus between KIL, SIL and SB, and denied the knowledge of KIL having advanced an amount of Rs.58,267,500/- between March 99 to December 99. MCSL agreed that they had executed few transactions on behalf of SB. MCSL had denied any relationship with either KIL or SIL and denied that MCSL was responsible for price manipulation.  In view of the above, MCSL pleaded for a lenient view in the matter.

CONSIDERATION OF ISSUES

17.             I have carefully considered the findings of investigation, enquiry and the oral and written submissions made by MCSL vide its letters dated 17.05.04 and 05.06.06. I find that KIL and SB indulged in trading in the scrip of SIL, through various members of BSE and NSE, including MCSL as detailed below:

Member Name	Exchange	Member Name	Exchange
Indraprastha Holdings Ltd.	NSE	M.J. Patel Share & Stock Brokers Ltd.	BSE
Triveni Management Consultancy Services Ltd.	NSE	Bishwanath M Jhunjunwala	BSE
Master Capital Services Ltd.	NSE	Kaynet Capital Ltd.	BSE
Kasat Sec. (P) Ltd.	NSE	NVS Brokerage (P) Ltd.	BSE
Nariman Finvest (P) Ltd.	NSE	Joindre Capital Services	BSE
		Sovereign Sec. (P) Ltd.	BSE

 

18.             The total order put in by the member on behalf of SB was about 2,34,600 shares resulting in net sales of 1,45,000 shares. This can be seen from the table below, which brings out the deals executed by MCSL on behalf of SB over various settlements.

This as the member has pointed out, amounts to about 3.58% of the total volumes in the scrip of SIL during the investigation period. This is a substantial volume in terms of the total market dealings in the scrip of SIL during the period of investigation. Also, this volume has been contributed over seven settlements out of the total twelve settlements that have been narrowed down for the investigation to be carried out by SEBI.

 

19.             I note that the Enquiry Officer has observed that the member has matched its own buy and sell orders on several occasions which were based on the trade log analysis. The extract of the trade log of NSE, wherein MCSL has bought and sold in the scrip is reproduced again, for reference.

But I find no strong material to substantiate the charge of synchronization of the trades by the member. Further, as detailed earlier, it does not appear that the orders were matched/synchronized. Thus I find that the charge of entering into synchronized trades cannot hold good in the light of the data available and the submissions made by the member.

20.             The final question that dwells to be answered is determining whether there has been any nexus between the member, its clients and the promoters and directors of KIL and SIL. I find that there has been no allegation to the effect that there was any nexus between the member and its clients or the promoters and directors of KIL and SIL. Also no instance has been brought out to show that the member had any knowledge of SB being associated with the management of SIL and KIL. Such a knowledge had it been brought out, would have added to the case against the member. In view of the above, the member could not be alleged to have been in the know of things relating to the transactions carried out by SB.

21.             Therefore, in the facts and circumstances of the case, I am not inclined to accept the recommendations of the Enquiry Officer levying a penalty of one month suspension upon the member.

ORDER

22.             Therefore, in exercise of the powers conferred upon me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992 read with regulation 13(4) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hold the view that no direction needs to be passed against M/s. Master Capital Services Ltd., a member of the National Stock Exchange of India Ltd. with SEBI Registration No. INB 230643634 in the matter.

 

 

 

Place: Mumbai	T. C. Nair
Date: 23.02.2007	Whole Time Member
Securities and Exchange Board of India