MO/146/IVD/01/06
SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
UNDER REGULATION 13(4) OF SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002, AGAINST KAYNET CAPITAL LTD., MEMBER, BSE WITH SEBI REGISTRATION NO. INB 011056737 IN THE CASE OF SNOWCEM INDIA LTD.
BACKGROUND:
1. Kaynet Capital Limited (hereinafter referred to as “the member”) is a member of Bombay Stock Exchange (hereinafter referred to as “BSE”) and registered with Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’).
2. An internal investigation was conducted from June 3, 1999 to August 10, 1999 by the National Stock Exchange of India Limited (hereinafter referred to as ‘NSE’) in the scrip of M/s Snowcem India ltd (hereinafter referred to as ‘SIL’) and submitted 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, which is from June 1999 to August 1999.
3. 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 agreed by the management of SIL.
· It is observed that KIL was the predominant buyer in the scrip and it was their trading 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 two other transactions were taken place i.e. one wherein KIL transferred the funds to Shri Sourabh H Bora to enable him to make payments towards the allotment of forfeited shares and second transaction being Shri Sourabh Bora making payments to SIL in respect of the forfeited shares allotted to him. The fund transfers suggest that SIL was very well aware that it has lent the money 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 99 and the actual realisation of the cheques took place on October 1, 1999(after the bank account of Shri Sourabh Bora was adequately capitalized by way of transfer of funds from SIL). In addition to the above, the records indicate that Shri Sourabh H Bora still owes more than Rs.6 crores to KIL, which in turn owes more than Rs.15 crores to SIL. It is clear that Shri Bora has not made the payments to the company towards the forfeited shares allotted to him and the whole matter was just a book entry and the company has managed to create shares without actual infusion of funds.
4. KIL and Shri Bora indulged in trading in the scrip of SIL, through various members of BSE and NSE, including M/s Kaynet Capital Ltd.
|
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
|
5. The member had traded in the scrip of SIL mainly on behalf of M/s. Kasat Sec. (P) Ltd., Shri Rajesh Kasat, Shri Sourabh H Bora, Shri Pravin Panchal and Kaynet Finance Ltd. M/s. Kasat Sec. (P) Ltd. is a trading member of NSE and they have traded in the scrip at NSE on behalf of KIL, Shri Sourabh Bora, Shri Rajesh Kasat and on own account.
ENQUIRY REPORT AND RECOMMENDATION:
6. Pursuant to the investigation, an enquiry officer was appointed and who after conducting the enquiry as per the procedure laid down under SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 submitted a report. The enquiry officer recommended that the registration of the member be suspended for a period of four months.
SHOW-CAUSE NOTICE:
7. Pursuant to the above, a show cause notice dated 25.03.2004 was issued to the member along with a copy of the enquiry report. The member submitted a reply vide letter dated 27.04.2004. I proceed to examine the issues as under:
ISSUES FOR CONSIDERATION:
Allegations
8. It is alleged that:
a. The member along with, Mr. Rajesh Kasat, Director of the member broker and group companies Kasat Securities Ltd, Kaynet Finance Ltd. have indulged in fraudulent, manipulative transactions in the scrip along with KIL and Shri Sourabh Bora and has not exercised due skill and care in the transactions of its clients in the scrip of SIL thereby violating the provisions of 4(a) & (b) of SEBI (Prohibition of Fraudulent and Unfair trade Practices relating to securities market) Regulations, 1995 (hereinafter referred to as the said Regulations) read with of the Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as broker Regulations)
b. The member has failed to collect initial margin from its clients namely, Rajesh Kasat, Kaynet Finance Ltd., Shri Sourabh Bora and Pravin Panchal, which is in violation of SEBI Circular SMDRP/Policy/Cir-35/98 dated 4th December 1998.
c. The client introduction form was dated November 1999, whereas the client started trading through the member even in June 1999.
Reply
9. The member while denying the above allegations submitted that there was no evidence brought on record to show that they had violated the provisions of schedule II of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The member further submitted that SEBI had passed an order dated 4/12/2003 prohibiting Shri Rajesh Kasat from operating in the capital market for a period of one year, which was stayed by the Hon’ble Securities Appellate Tribunal. The member further submitted that the order against Shri Sourabh Bora was passed by SEBI in November 2003, which was also stayed by the Hon’ble Securities Appellate Tribunal. Therefore, the member submitted that the said orders qua Shri Rajesh Kasat and Shri Sourabh Bora were not in operation during the period of investigation, hence, the allegation of failure to exercise due skill and care and also violation of code of conduct is unsustainable. The member also submitted that the allegation of aiding and abetting Shri Sourabh Bora in price manipulation was not the subject matter of enquiry/investigation and this charge was levied for the first time and also submitted that there was no evidence shown suggesting aiding and abetting.
10. The member vide his reply dated 27/4/2004 denied the allegation and submitted that the question of obtaining margin from Shri Sourabh Bora and Pravin Panchal does not arise since they were sellers. As far as Shri Rajesh Kasat is concerned, he had given pre-commencement margin and was punctual in pay-in obligations. As far as Kaynet Finance is concerned, there was never a default in pay-in obligations.
11. The member vide its reply dated 27.04.04 submitted that through inadvertence, the date had been wrongly entered at the time of filling the client registration from and when noticed, the said defect was rectified.
Findings
12. I note that Clause A (2), (3) and (4) of Code of Conduct of Broker Regulations reads as under:
“A. General
(1) ………………
(2) Exercise of due skill and care: A stock-broker shall act with due skill, care and diligence in the conduct of all his business.
(3) Manipulation: A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains.
(4) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investor’s interest or which leads to interference with the fair and smooth functioning of the market. A stock-broker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness.
(5) ……………………..”
I also note that the regulation 4 (a) and (b) of the said regulations reads as under:
“4. Prohibition against market manipulation – No person shall buy, sell or otherwise deal in securities in a fraudulent manner.
(a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person;
(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market.”
13. I am not convinced with the contentions of the member. I note that the Trading details of M/s. Kasat Securities Pvt. Ltd. through the member are as under:
|
Sett. #
|
Purchases
|
Sales
|
Gross
|
Net
|
|
16
|
2,200
|
1,00,000
|
1,02,200
|
- 97,800
|
|
21
|
-
|
30,000
|
30,000
|
- 30,000
|
|
Total
|
2,200
|
1,30,000
|
1,32,200
|
-1,27,800
|
Trading details of Shri Rajesh Kasat through the member are as under:
|
Sett. #
|
Purchases
|
Sales
|
Gross
|
Net
|
|
16
|
2,000
|
2,000
|
4,000
|
-
|
|
17
|
4,400
|
4,400
|
8,800
|
-
|
|
18
|
3,900
|
3,900
|
7,800
|
-
|
|
19
|
21,600
|
31,100
|
52,700
|
- 9,500
|
|
20
|
33,300
|
31,800
|
65,100
|
1,500
|
|
21
|
17,600
|
17,600
|
35,200
|
-
|
|
22
|
19,000
|
19,000
|
38,000
|
-
|
|
23
|
1,000
|
1,700
|
2,700
|
- 700
|
|
24
|
-
|
1,100
|
1,100
|
- 1,100
|
|
Total
|
1,02,800
|
1,12,600
|
2,15,400
|
-9,800
|
Trading details of Shri Sourabh H Bora through the member are as under:
|
Sett. #
|
Purchases
|
Sales
|
Gross
|
Net
|
|
16
|
100
|
23,500
|
23,600
|
- 23,400
|
|
19
|
-
|
16,500
|
16,500
|
- 16,500
|
|
Total
|
100
|
40,000
|
40,100
|
-39,900
|
Trading details of M/s Kaynet Finance Ltd. through the member are as under:
|
Sett. #
|
Purchases
|
Sales
|
Gross
|
Net
|
|
16
|
700
|
4,500
|
5,200
|
- 3,800
|
|
19
|
2,600
|
2,600
|
5,200
|
-
|
|
20
|
-
|
500
|
500
|
- 500
|
|
21
|
400
|
500
|
900
|
- 100
|
|
22
|
800
|
1,700
|
2,500
|
- 900
|
|
Total
|
4,500
|
9,800
|
14,300
|
-5,300
|
14. The member has traded in the scrip knowing fully well that Shri Sourabh H Bora, who is directly associated with the company, was trading in the scrip. The member was also aware that M/s Kasat Securities Pvt. Ltd. and Shri Rajesh Kasat were also trading in the scrip. It was observed that the Client Introduction Form was dated November 1999 whereas the client stated trading in June 1999. It is further observed that the member had not collected initial margin from its clients. Further, it has entered into transactions for big quantity of shares for its clients through the system. It is pertinent to note that at that time the average daily volume in the scrip was almost equivalent to its order quantity. It was therefore not possible to match such a big quantity in one stroke unless there is a tacit understanding between the two parties concerned. Further, Kaynet Finance Ltd, Kasat Securities P Ltd and M/s Rajesh Kasat (all entities directly or indirectly connected to Kaynet Capital Ltd.) have traded in the scrip in substantial quantities during the investigation period.
15. I am convinced that the member along with Mr. Rajesh Kasat, Director of the member broker and group companies Kasat Securities Ltd, Kaynet Finance Ltd. have indulged in fraudulent, manipulative transactions in the scrip along with KIL and Shri Sourabh Bora and also failed to exercise due skill and care in the transactions of its clients in the scrip of SIL.
16. I note that SEBI had passed an order dated 04/12/2003 restraining Shri Rajesh Kasat, Proprietor of Rajesh Kasat & Co., from buying, selling or dealing in securities, directly or indirectly, for a period of one year for violating the provisions of the said Regulations. I also note that SEBI had passed an order dated 21/11/2003 restraining Shri Sourabh Bora from buying, selling or dealing in securities, directly or indirectly, for a period of 18 months for violating the provisions of the said Regulations. The said orders were passed for their role in the price manipulation in the scrip of SIL. The argument that the said orders were not in operation during the period of investigation will not anyway help the member inasmuch as the role of the member in violating the provisions of clause A(2), (3) and (4) of Code of Conduct as specified in Schedule II read with Regulation 7 of the said broker regulations read with the provisions of Regulation 4 (a) and (b) of the said Regulations during the period of investigation is established.
17. I am not convinced with the contention of the member and I note that as per the SEBI’s circular no.SMDRP/POLICY/CIR-35/98 dated 11/12/98, it shall be mandatory for member to collect margins from clients in all cases where the margin in respect of the client in the settlement would work out to be more than Rs.50,000/-. The margin so collected shall be kept separately in the client bank account and utilized for making payment to the clearing house for margin and settlement with respect to that client.
18. I am not convinced with the reply of the member in as much as the broker is required to sell securities on behalf of client only on receipt of a minimum margin of 20% on the price of securities proposed to be sold, unless the member has received the securities to be sold with valid transferred documents to his satisfaction prior to such sale as per the circular no.SMD/SED/CIR/93/23321 dated November 18, 1993. Therefore, I hold the member guilty on this count as he has failed to collect margin from Shri Sourabh Bora, Shri Pravin Panchal, Rajesh Kasat and Kaynet Finance Ltd., which is contrary to the provisions of the SEBI’s circular no.SMD/SED/CIR/93/23321 dated November 18, 1993 and the circular no.SMDRP/POLICY/CIR-35/98 dated 04/12/98.
19. I am not conviced with the contention of the member that the earlier date has been wrongly entered at the time of filing the client registrations and hold the member guilty of trading for a client before entering into a KYC agreement as required.
20. The Broker while replying to the show cause notice had sought for a personal hearing. However, there is no provision for personal hearing under SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. I have noted that the Enquiry Officer had already heard the Broker in person. In addition, the Broker has been given opportunity to file written submissions to the show cause notice issued along with a copy of enquiry report. Therefore, I find that natural justice requirement has been met with. I do not find any substantive reason / justification furnished by the Broker warranting a personal hearing again.
ORDER:
21. I am satisfied that it is necessary to secure the proper management of the stock broker and also in the interest of the securities market that a major penalty of suspension of certificate of registration of the Member for a period of four months as recommended by the enquiry officer is reasonable. 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 regulation 13(4) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby order that the certificate of registration of M/s Kaynet Capital Limited be suspended for a period of four months.
This order shall come into force after the expiry of three weeks from the date of passage of the order.
| PLACE: MUMBAI |
MADHUKAR
|
|
DATE:25-01-06
|
WHOLE TIME MEMBER
|
| |
SECURITIES AND EXCHANGE BOARD OF INDIA
|