SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
UNDER SECTIONS 11, 11B and 11(4) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH REGULATIONS 11 AND 13 OF THE SEBI ( PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO SECURITIES MARKET ) REGULATIONS, 2003 AGAINST LAXMANBHAI PATEL, CHIRAG PUJARA AND SAYYED MUSTAFA IN THE MATTER OF KWALITY DAIRY (INDIA) LIMITED.
1.0 BACKGROUND
1.1 Securities and Exchange Board of India (hereinafter referred to as “SEBI”) conducted investigations in the scrip of Kwality Dairy (India) Limited (hereinafter referred to as “KDIL”) for the period from February 5, 2003 to June 6, 2003. The scrip of KDIL is listed on the Madhya Pradesh Stock Exchange (hereinafter referred to as “MPSE”).
1.2 Investigations revealed that KDIL suffered loss for the years ended
March 31, 2000, March 31, 2001, March 31, 2002 and March 31, 2003. KDIL earned a net profit of Rs.1.06 million on turnover of Rs.34.48 million during the quarter ended June 30, 2003. Investigations revealed that the total volume traded during the period of investigation was 3403923 shares. During the period February 5, 2003 to March 31, 2003, the scrip was infrequently traded with a very small volume and from April 2, 2003 there was a price rise with increasing volumes. From April 2, 2003 to April 11, 2003, there was price rise in the scrip from Rs.3.05 to Rs.11.25 and from April 29, 2003 to June 6, 2003 the price rose from Rs.11.70 to Rs.46.95. It was observed that out of the total volume, 3288016 shares were traded during the period April 23 to June 6, 2004 when some of the entities were involved in trading by entering into circular / reversal of trades. Investigation revealed that during the period April 23, 2003 to June 6, 2003, around 25% of the volume of trading was due to circular trades / reversal of trades among different groups of clients and brokers. The clients and the member-brokers of each of these groups bought and sold the shares among themselves by squaring off the deals often the same day through the same brokers(s) in a circular manner. The artificial volume generated through these circular deals / reversal of trades was mainly during April 23, 2003 to June 6, 2003 and the volumes on most of the days was around 20-25% of the day volume and on some days between 30-40%.
1.3 Investigation further revealed that the clients viz., Shri Sayyed Mustafa, Shri Chirag Pujara and Shri Laxmanbhai Patel acting through the member-brokers viz., Bharati Thakkar India Securities (Clg.No.737), Bonanza Stock Brokers Ltd. ( Clg.No.235 ) and Ramaben Samani Finance Pvt. Ltd. (Clg.N0.101) respectively had entered into circular / reversal of trades which resulted in creation of artificial volumes. These clients traded amongst them in a circular pattern intra-day i.e. the shares being bought / sold by one entity were sold / bought by another entity in the group through a number of buy and sell deals. It was revealed by investigations that the clients traded in groups - Chirag Pujara and Sayyed Mustafa traded for 21 days, Chirag Pujara, Laxmanbhai Patel and Laxmanbhai Patel & Sayyed Mustafa for 5 days and the number of trades executed were large as tabulated under :-
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Name of the Client & Broker Buy Transaction
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Name of the Client & Broker Sell Transaction
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No. of Trades
|
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Laxman Patel ( Ramaben Samani Finance Pvt.Ltd. )
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Chirag Pujara ( Bonanza Stock Brokers Limited )
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140
|
|
Laxman Patel ( Ramaben Samani Finance Pvt.Ltd. )
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Sayyed Mustafa ( Bharti Thakkar India Securities Limited )
|
119
|
|
Chirag Pujara ( Bonanza Stock Brokers Limited )
|
Laxman Patel (Ramaben Samani Finance Pvt. Ltd.)
|
111
|
|
Chirag Pujara ( Bonanza Stock Brokers Limited )
|
Sayyed Mustafa (Bharti Thakkar India Securities Limited )
|
532
|
|
Sayyed Mustafa ( Bharti Thakkar India Securities Limited )
|
Laxman Patel (Ramaben Samani Finance Pvt. Ltd.)
|
163
|
|
Sayyed Mustafa ( Bharti Thakkar India Securities Limited )
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Chirag Pujara ( Bonanza Stock Brokers Limited )
|
588
|
|
|
T O T A L …………..
|
1653
|
1.4 Investigations revealed that the said trades were carried out for a number of days and the timings for the orders so placed also matched exactly at most instances, ranging between 0-60 sec.
1.5 In view of the above inter se dealings among Chirag Pujara, Laxmanbhai Patel and Sayyed Mustafa, the investigations revealed that Chirag Pujara, Laxmanbhai Patel and Sayyed Mustafa have acted in violation of the provisions of Regulation 4(a), (b), (c) and (d) of the SEBI (Prohibition of Fraudulent & Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred to as “FUTP Regulations, 1995”).
2.0 SHOW-CAUSE NOTICE & REPLY
2.1 In view of the above and with due regard to the principles of natural justice, a Notice No.IVD/ID1/PKN/AP/17818/04 dated August 12,2004 was issued to Mr. Laxmanbhai Patel, Mr.Chirag Pujara and Mr.Sayyed Mustafa to show cause as to why suitable directions including issuing such directions under Section 11(4) and Section 11 and 11B of the SEBI Act,1992 read with Regulation 11 of the SEBI ( Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as “FUTP Regulations, 2003”) restraining them from accessing the capital market and prohibiting from buying, selling or dealing in the securities in any manner for a particular period should not be initiated. It was mentioned in the said notice to furnish their “ reply within 21 days of receipt of the said notice failing which it would be presumed that they have no explanation / submission to offer and SEBI may take action as deemed fit under the SEBI Act,1992 and Regulations framed thereunder ”. However, Mr.Chirag Pujara and Mr.Sayyed Mustafa failed to reply to the said Show Cause Notice. Mr.Chirag Pujara and Mr.Sayyed Mustafa were afforded enough opportunity to offer their comments.
2.2 Further, in terms of the said show cause notice the said entities were asked as to whether they would prefer a personal hearing before me. However, Mr. Chirag Pujara and Mr. Sayyed Mustafa failed to respond and Mr. Laxmanbhai Patel did not seek personal hearing.
2.3 Mr.Laxmanbhai Patel vide his reply dated August 30, 2004 to the said show cause notice, inter alia, made the following submissions:
- I have traded only between 2/6/2003 to 6/6/2003.
- My total volume during the period is total 121872 and total market volume is about 10 lakhs and is only 12% of the total volume.
- During my transaction I have not participated in price manipulation on 2/6/2003 the price was about Rs.44/- and on 6/6/2003 the price was about Rs.43/- and high low is 48.95 and 42 respectively.
- I have placed my orders in less disclosed quantity on screen.
- As example on 02/06/03 I have placed one order for 7000 in disclosed of 700 on the screen and there are 16 transaction of this 7000 quantity (as per your annexure IX trade no.1033-1048) so there is only one order and trades are 16.
- It may be a coincidence that my trades are matching with other trader Chirag and Sayyed. I clearly say that I don’t know these persons and also their brokers.”
Further, Mr. Laxmanbhai Patel has denied to have done 533 trades and denied his intention of any circular trading or creating any artificial volume or influence the price.
3.0 CONSIDERATION OF ISSUES AND OBSERVATIONS
3.1 I am convinced that ample opportunities have been granted to Mr.Chirag Pujara, Mr. Laxmanbhai Patel and Mr.Sayyed Mustafa to make submissions and my observations, on the basis of the material available on record, are as under:
3.2 I observe that the total volume traded during the period of investigation was 3403923 shares. During the period February 5, 2003 to March 31, 2003, the scrip was infrequently traded with a very small volume and from April 2, 2003 there was a price rise with increasing volumes. I further observe that from April 2, 2003 to April 11, 2003, there was price rise in the scrip from Rs.3.05 to Rs.11.25 and from April 29, 2003 to June 6, 2003 the price rose from Rs.11.70 to Rs.46.95.
3.3 I further observe that out of the total volume, 3288016 shares were traded during the period April 23 to June 6, 2004 when some of the entities were involved in trading by entering into circular / reversal of trades.
3.4 I note from the analysis of trading that during the period 23rd April, 2003 to 6th June, 2003 around 25% of the total volume of trading was due to circular trades / reversal of trades among different groups of clients and brokers. I observe that the clients and the member-brokers of each of these groups bought and sold the shares among themselves by squaring off the deals often the same day through the same broker(s) in a circular manner.
3.5 I observe that the artificial volume generated through these circular deals / reversal of trades were mainly during April 23, 2003 to June 6,2003 and this volumes on most of the days was around 20-25% of the day volume and on some days between 30-40%.
3.6 The circular trades of the major member-brokers and their main clients are given as below:
|
Date
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Bought Qty.
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Bought by Client (Broker )
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Bought From Client (Broker )
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Sold Qty.
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Sold by Client (Broker )
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Sold to Client (Broker )
|
|
5/4/2003 to 6/6/2003
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90427
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Chirag Pujara (Bonanza Stock Brokers Pvt.Ltd. )
|
Sayyed Mustafa
(Bharti Thakkar )
|
98621
|
Chirag Pujara ( Bonanza Stock Brokers Pvt. Ltd. )
|
Sayyed Mustafa ( Bharti Thakkar )
|
|
2/6/2003 to 6/6/2003
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46575
|
Laxman Patel ( Ramaben Samani )
|
Chirag Pujara ( Bonanza Stock Brokers Pvt.Ltd. )
|
27650
|
Laxman Patel ( Ramaben Samani )
|
Chirag Pujara ( Bonanza Stock Brokers Pvt. Ltd. )
|
|
2/6/2003 to 6/6/2003
|
41775
|
Sayyed Mustafa (Bharti Thakkar)
|
Laxman Patel ( Ramaben Samani )
|
24497
|
Sayyed Mustafa
(Bharti Thakkar )
|
Laxman Patel ( Ramaben Samani )
|
3.7 I observe that, Shri Sayyed Mustafa, Shri Chirag Pujara and Shri Laxmanbhai Patel respectively had entered into circular / reversal of trades which resulted in creation of artificial volumes. These clients traded amongst them in a circular pattern intra-day i.e. the shares being bought / sold by one entity were sold / bought by another entity in the group through a number of buy and sell deals.
3.8 I have also considered the integrated Trade and Order Log – Reversal of trades by the members viz., Bonanza Stock Brokers Ltd. and Bharti Thakkar India Securities Pvt. Ltd. which indicate that order quantity, price and timings of placing orders on both the buy and sell sides matched with each other, as was annexed to the show cause notice as Annexure VI. I also observe that in a scenario where the several other member-brokers were also found to be active during this period, the orders placed by the brokers trading on behalf of these clients matched with those of each other which are nothing but their concerted effort and manipulative intent. I observe the same to be more than a coincidence.
3.9 I note that the clients were given opportunity to offer their comments for entering into transactions which were in the nature of circular trades/ reversal of trades and, thus, created artificial volume and violated the SEBI Regulations. However, besides Shri Laxmanbhai Patel who claimed to have entered into genuine transactions, the other two clients viz. Mr.Chirag Pujara and Mr.Sayyad Mustafa failed to offer their comments for the same.
3.10 I note that in Appeal No.54 of 2002 – Nirmal Bang Securities Pvt. Ltd. vs SEBI, the Hon’ble Securities Appellate Tribunal has held as under with regard to the synchronised deals :-
“BEB has been charged for synchronized deals with First Global. I have examined the data provided by the parties on this issue. I find many transactions between BEB and FGSB. There are many instances of such transactions. I find the scrip, quantity and price for these orders had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale, can create false volumes. The argument that the parties had no means of knowing whether any entity controlled by the client is simultaneously entering any contra order elsewhere for the reason that in the online trading system, confidentiality of counter parties is ensured, is untenable. It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only a coincidence in some cases. Theoretically this is OK. But when parties decide to synchronize the transaction the story is different. There are many transactions giving an impression that these were all synchronized, otherwise there was no possibility of such perfect matching of quantity price etc. As the Respondent rightly stated it is too much of a coincidence over too long a period in too many transactions when both parties to the transaction had entered buy and sell orders for the same quantity of shares almost simultaneously.”
3.11 I find such transactions wherein the buy and sell orders were entered as cross deals and matched in terms of order quantity, price and the time of punching orders are highly irregular and defeat the very purpose of normal order-matching system in the price discovery process in the exchanges. Therefore, I find the said transactions are in violation of Regulation 4 of the FUTP Regulations, 1995 which reads as under:-
Prohibition against market manipulation.
4 No persons shall
(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 markets;
(c) indulge in any act, which results in reflection of prices of securities based on transactions that are not genuine trade transactions;
(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuation in the market price of securities.
(e)……..
3.12 In view of the aforesaid observations, I am satisfied that this is a fit case to initiate action against Mr. Laxmanbhai Patel, Mr.Chirag Pujara and Mr.Sayyed Mustafa.
4.0 ORDER:
4.1 Therefore, in exercise of the powers conferred upon me by virtue of Section 19 read with Section 11, 11B and 11(4) of the SEBI Act, 1992, read with regulation 11 and 13 of the FUTP Regulations, 2003, I, hereby pass an order restraining Mr. Laxmanbhai Patel, Mr.Chirag Pujara and Mr.Sayyed Mustafa from accessing the securities market and prohibiting them from buying, selling or dealing in securities, directly or indirectly for a period of six months. I am convinced that this would commensurate with the defaults committed by Mr. Laxmanbhai Patel, Mr.Chirag Pujara and Mr.Sayyed Mustafa in the facts and circumstances of the case.
4.2 This order shall come into force with immediate effect.
| DATE :13-1-2006 |
MADHUKAR |
| PLACE : MUMBAI |
WHOLE TIME MEMBER |
| |
SECURITIES AND EXCHANGE BOARD OF INDIA |