Order against Keynote Capitals Limited

Order No. WTM/VKC/ID5/30/07

 

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA

 

CORAM: V. K CHOPRA, WHOLE TIME MEMBER

 

Against M/s Keynote Capitals Ltd., Broker, Stock Exchange, Mumbai

in the matter of Dagger Forst Tools Limited.

 

DATE OF HEARING: 29.09.2006

 

APPEARANCES

 

FOR BROKER:

 

1. Shri. Joby Mattew, Advocate
2. Shri. Suraj Soragi, Director, M/s Keynote Capitals Ltd.

 

 

FOR SEBI

 

1. Shri. Sanjiv Dutt, CGM, SEBI
2. Shri. Rishikesh T, Manager, SEBI
3. Shri Mohamed Rahaz, Legal Officer, SEBI

 

 

 

ORDER

 

Under Regulation 13(4) of Securities and Exchange Board of India

(Procedure for Holding Enquiry by Enquiry Officer

and Imposing Penalty) Regulation 2002

 

1.0              Background

 

1.1 M/s Keynote Capitals Ltd. (hereinafter referred to as the ‘Broker’) is a broker of the Stock Exchange Mumbai (hereinafter referred to as BSE) and is registered with the Securities and Exchange Board of India (hereinafter referred to as SEBI) with registration number INB 080926534.

 

1.2 The shares of Dagger Forst Tools Limited (hereinafter referred to as ‘DFTL’) were listed at BSE. The price of the scrip of DFTL had moved up significantly from Rs.10.50 on November 06, 2000 and continuously increased thereafter along with substantial increase in volumes and ultimately closed at Rs.49.45 on January19, 2001. Subsequently, the scrip opened at Rs. 46.25 on January 22, 2001 and traded in the price range of Rs. 36 to Rs. 55 till May 08, 2001. The price of the scrip thereafter started falling drastically and ultimately closed with a price of Rs. 11.25 on October 31, 2001 with trading volumes having dipped to 25 shares.

 

1.3 SEBI conducted an investigation into the dealings of the Broker in the shares of DFTL for the period November 06, 2000 to October 31, 2001. The investigation revealed that the Broker has violated the code of conduct and also assisted, aided and abetted both Scimitar Investment & Trading Company Pvt. Ltd (herein after referred to as “Scimitar”) and Shri Sharad Rathi (hereinafter referred to as “Rathi”) in cornering the floating stock and for creating an artificial high price in the scrip.

 

1.4 The Board after considering the findings of the investigation, appointed an Enquiry Officer to enquire into violations of the provisions of Regulation 3, 4(a) and 4(b) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Markets) Regulations, 1995 alongwith clauses A(1), (2), (3), (4) and (5) of Schedule II of the Code of Conduct for Stock Brokers under Regulations 7 of SEBI (Stock Brokers and Sub-Brokers) Regulation, 1992.

 

1.5 The Enquiry Officer, after conducting an enquiry in accordance with the provisions of Regulation 6 of Securities and Exchange Board of India (Procedure for holding enquiry by Enquiry Officer and imposing penalty) Regulation 2002 submitted a report dated November 29, 2005 wherein he observed that Broker has violated the provisions of Regulation 3 and 4(a) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Markets) Regulations, 1995 and Clause A(1) to A(5) of Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulation, 1992 and based on his findings recommended suspension of registration of Broker for a period of 3 months.

 

2.0 Show Cause Notice

 

2.1 Pursuant to receipt of the aforesaid enquiry report, a Show Cause Notice dated December 20, 2005 was issued to the Broker along with a copy of the said enquiry report, advising them to show cause as to why punishment, as recommended by the Enquiry Officer should not be imposed on it. The Broker submitted its reply to the said Show Cause Notice vide letter dated January 18, 2006.

 

3.0 Reply of the Broker to the Show Cause Notice

 

3.1 The Broker stated that they have not manipulated the scrip of DFTL and the trades done by them in the said scrip were in the ordinary course of business under the instructions of their client.

 

3.2 The Broker stated that they were not aware of any financing done by Scimitar to Rathi. They credited the cheque received from the client to his account in the normal course of business and they are not required to ascertain the identity of the drawer of the cheques.

 

3.3 The Broker stated that they were unaware that Rathi had traded through them alone and his trades through them constituted 50.37% of gross volume and 71.09% of net volume of the scrip DFTL traded on BSE.

 

 3.4 Broker while admitting the fact of substantial increase in price and the trades on behalf of the two clients, Scimitar and Rathi, submitted that merely because the said clients purchased substantial number of shares, cannot be the ground to infer that they have committed any violation.

 

3.5 With regard to the finding of the Enquiry Officer on their placing of buy orders for substantial quantities at upper circuit prices, they submitted that the client who is not able to purchase the number of shares that he wanted on a particular day, by placing order even up to the upper circuit of the price band, tends to continue buying on the next day also up to the upper price band.

 

3.6 The Broker also submitted that the price of the scrip of DFTL, was hovering around Rs.11/- but with very small volumes indicating thereby that at that price, there was very little interest from sellers. Therefore if a buyer wanted to buy more shares he had no choice but to buy them at a higher price which would find favour with sellers. This could have been the reason for the clients placing orders at successively higher prices.

 

4.0 Hearing

 

4.1 In the reply to Show Cause Notice, the Broker requested for a personal hearing. Accordingly, the Broker was advised to attend a personal hearing before me at Head Office of SEBI at Mumbai on September 29, 2006 at 12.30 p.m. Shri Suraj Sarogi, Director of Broker along with Shri Joby Mattew, Advocate attended the hearing. They were granted 1 week’s time to file written submissions in the matter. They have filed written submissions on October 12, 2006. Therefore, I am proceeding in the matter on the basis of materials before me.

 

5.0 Written Submission of the Broker

 

5.1 The Broker in its written submission submitted that they are the members of BSE since last 10 years. The clients Scimitar and Rathi have been registered with them for several years and they had no occasion to doubt their integrity. The clients had traded in several other scrips also. The Broker further submitted that they have acted as per the instructions of the client and as such they are not responsible for any malafide acts of the clients. The Broker stated that there are no allegations of proprietary trades against them. The Broker was not aware of the intentions of the clients and also the deposit of cheques by the clients in their accounts. Further, the trading system of BSE does not permit a Broker to be aware of the identity of the counter party Broker or client.

 

5.2  The Broker also submitted that the Enquiry Officer has failed to show how their trades resulted in artificially raising price of the scrip. There was no monetary or other benefit out of the said transactions. The Broker submitted that the Brokerage earned by them was in a few thousand rupees against an average daily turnover of Rs. 50 to Rs 60 crores.

 

5.3  The recommendation of the Enquiry Officer is disproportionate to the facts and alleged violation. The Broker is having an excellent market reputation with regard to integrity and honesty. Further, the Broker is having several banks, insurance companies, mutual funds and foreign institutional investors as client in addition to 3000 retail clients. The Broker employs a staff of 40 persons and its average monthly business run into 100 Crores. The Broker also submitted that they have not been penalized by SEBI prior to this investigation.

 

6.0 Consideration of Issue

 

6.1 I have carefully examined the Enquiry Report, Show Cause Notice, reply and submission of the Broker.

 

6.2  The scrip of DFTL during November 2000 to January 2001 observed a sudden spurt in the price along with substantial increase in volume. The trading during settlement no. 33/2000-01 to 43/2000-01 revealed that price of the scrip which opened at 10.50 on November 06, 2000 continuously increased accompanied with substantial increase in volumes and subsequently it closed at Rs 49.45 on January 19, 2001. In between, the scrip touched a high of Rs 55.90 on January 19, 2001, showing a rise of about 450%. The gross traded volume in the scrip was observed to be 4,32,950 shares during this period.

 

 

6.3  The Enquiry Officer found that the purchase at trading member level in the above period was highly concentrated with Broker who had a gross purchase of 265,650 shares accounting for 61.36% of market gross volume and a net purchase of 225,250 shares accounting for 90.17% of market net purchase. During the period of steep rise, the top clients of the noticee and their trading are hereunder

 

 

6.4  The above table shows that the major purchases of the Broker have been done on behalf of its clients Scimitar and Rathi. While, Scimitar has gross purchased 199,800 shares, constituting 46.15% of market gross volume and net purchased 196,700 shares, constituting 78.74% of market net volume, the other client, Rathi, gross purchased 61,500 shares and net purchased 51,700 shares, contributing 14.20% & 20.70% of the market gross & net traded volumes, respectively.

 

6.5  The Broker in its reply dated January 18, 2006 to the show cause notice submitted that merely since the said clients purchased substantial number of shares, cannot be enough reason to infer that they had committed any violation. In this context, the findings of Enquiry Officer at Paragraph No 7.9 is reproduced hereunder;

 

·        “Investigation further brought out the fact that Scimitar has financed the trading done through KCL in the name of Shri Sharad Rathi in DFT scrip, by making payments directly to KCL through cheques, for a total amount of Rs. 1,01,89,000/- Again it is observed that KCT had given the shares purchased in Sharad Rathi’s name directly to Scimitar, as security. However, when asked during the personal hearing, the director of KCL was ignorant and not sure about the said fact, but he also did not deny the said fact. From the evidence (annexure 2 of SCN) on record it is clear that around Rs 101,89,000/- worth cheques and DD’s were issued by Scimitar Investment to KCL on behalf of Mr. Sharad Rathi. Ignorance, as pleaded by KCL, of the said arrangement cannot be accepted in view of the payments being made through cheques and DD’s.”

 

6.6 The Broker has not given any satisfactory reply to the aforesaid finding either in its reply dated January 18, 2006 or in the written submission dated October 12, 2006. The Broker has taken the same stand of ignorance in its reply dated January 18, 2006 wherein he has stated that they were not required to enquire into the identity or bonafide of the drawer of the cheque deposited by their clients. The said contention of the Broker is against the code of conduct as stipulated under Regulation 7 of SEBI Stock Brokers and Sub-Brokers Regulations, 1992.

 

6.7 The Enquiry Officer has also held that there were almost 22 trading days at BSE between November, 2000 to January, 2001, when the prices of the scrip closed at more than 7% above the previous day’s close. The Broker has put buy orders on behalf of clients Scimitar and Rathi for substantial quantities at these upper circuit prices. The day to day analysis of the price volume statement showing the days when the price of the scrip closed 7% above the previous day’s close had been furnished in the Show Cause Notice and the same is also reproduced hereunder

 

 

6.8 The Broker submitted that a client who is not able to purchase the number of shares that he wanted on a particular day, by placing order even up to the upper circuit of the price band, tends to continue buying on the next day also up to the upper price band. This plea of the broker can not be accepted since there were series of such transactions on 22 days. These transactions cannot be termed as normal transactions in the ordinary course of business and were evidently done by the Broker with knowledge of the clients’ intention to manipulate the market.

 

6.9 I find that a detailed trade and order log analysis has been done for the above days when the price of the scrip closed 7% above the previous day’s close to identify the buy orders which influenced the increase in the price of the scrip. In the table given below, BSE trading details for the above mentioned 22 trading days is shown alongside the trading details of the Broker’s clients viz. Scimitar and Rathi along with the price paid by them. Both clients observed to have traded, on majority of days, when the scrip had hit the upper circuit which clearly shows the upward price influence as a result of these concentrated purchases. The said details are hereunder

 

 

 

6.10 I find that the details as far as it relates to Broker have also been furnished in the Show Cause Notice for the Enquiry proceeding. I have perused the said Show Cause Notice and find that the transactions explained therein were executed by the Broker for the aforesaid clients. As stated by the Enquiry Officer, it is evident from each day’s transactions of the Broker that there was significant buying interest in the scrip at the circuit price. There were buy orders for 1,09,750 shares and sell orders for 51,650 shares at the circuit price and the Broker had a major concentration with buy orders for 1,00,000 shares at the circuit price. The Broker has not furnished any reply to the above finding.

 

6.11 I observe from the subsequent Settlement no. 044/2000-01 to 152/2001-02 that the scrip opened at Rs 46.25 on January 22, 2001 and was traded in the range of Rs 36 to Rs 55 till May 08, 2001. Ultimately, it closed at Rs. 11.25 on October 31, 2001 with a corresponding trading volume of only 25 shares. In this period the market gross and net traded volumes were of 6,52,639 shares and 2,35,842 shares, respectively and broker had the highest concentration at the trading member level and had gross purchased 391,680 shares accounting for 60.01% of market gross purchase and net purchased 221,681 shares accounting for 94% of market net purchase. I find that Rathi alone had gross purchased 328726 shares through the Broker which was around 50.37% of the gross market volume. This clearly shows that, Rathi has once again done substantial trading in the scrip. Further, his net purchase of 1,67,674 shares constituted 71.09% of the net traded volume at BSE. I don’t find any reply or submission from the Broker to explain and defend the above findings with any rationale.

 

6.12 I also observe that the Broker during January 22 to July 24, 2001 had executed a large number of incremental/ decremental trades on behalf of Rathi. The Broker had placed 140 buy orders on behalf of Rathi at a price higher by Rs 2 or more than the previous traded price. Out of this, on 125 instances, the Broker had placed buy orders after the sell orders were placed, which shows that they had placed buy orders at higher rates in tandem with the previous sell orders. Again in 35 instances, the Broker placed sell orders on his behalf and which resulted in execution of trades and influenced the price fall by Rs.2 or more, than the previous traded price. The incremental trades executed by them were primarily responsible for maintaining the price in the range of Rs.36 to Rs.55 from January 22 to May 08, 2001. I don’t find any satisfactory explanation to the above finding in their post show cause notice reply. I observe that the Broker was well aware about the connection of Scimitar and Rathi with the company DFTL. It is an admitted fact that DFTL and Scimitar belong to the Yash Birla Group. Further, Rathi, a qualified Chartered Accountant is well connected with various Yash Birla Group companies. It is clear from the client registration form filed by Rathi with the Broker that Rathi had been introduced by Shri L.R.Daga, Joint President of Zenith Ltd (a Yash Birla Group company) to the Broker. Therefore, both these clients are well connected with the company circle of DFTL and the said fact is very well known to the Broker also. The Broker submitted that the said finding is illogical and can only be treated as a conjecture. The said plea of the Broker cannot be accepted because of

 

a)      Payment of Rs.101,89,000/- made by Scimitar on behalf of Rathi and

b)      Broker having given shares purchased in Rathi’s name directly to Scimitar as security.

 

In view of these facts, Broker can not take a stand that they were not required to enquire into the identity of the said clients or bonafide of the drawer of the cheque deposited with them by its client Scimitar for the purchase of DFTL shares by its another client Rathi.

 

6.13 In view of the above, it is established that the majority of Brokers trading were on behalf of Scimitar which was an investment and trading company of Yash Birla Group, having promoter’s holding in DFTL. The other major client of the Broker Shri Rathi who is a Chartered Accountant by profession is also well connected with the Yash Birla Group companies and had traded in the scrip with funds provided by Scimitar. The Broker is very well aware about their connection. Further, The cheques and demand drafts were deposited in the account of the Broker by Scimitar on behalf of Rathi for his purchase of DFTL shares and the shares purchased by Rathi were given to Scimitar as security for its money. In view of these, it can reasonably be concluded that the Broker has failed to observe and comply with the Regulation 7 read with Section A (1) to (5) of Code of Conduct as specified in Schedule II of SEBI Stock Brokers Regulations.

 

6.14 Further, having considered all the facts and findings stated herein above, I find that the Broker had done substantial trading in the scrip at the trading member level, with highest concentration during the entire period under investigation. The act of the Broker in accepting cheques and demand draft continuously and transferring the shares which were purchased by Rathi, to Scimitar reveals their fraudulent intention and they assisted, aided and abetted both Scimitar and Rathi in cornering the low floating stock of DFTL scrip and thus creating artificially high price. Thus, the Broker violated the provisions of Regulation 3 and 4(a) of PFUTP Regulations.

 

7.0 ORDER

7.1 Considering all aspects and circumstances of the case, I am of the view that suspension of certificate of registration issued to the Broker for a period of one month is sufficient to have a deterrent effect on the Broker. Accordingly, in exercise of the powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of the said Regulations, I hereby impose a minor penalty of suspension of certificate of registration issued to the broker M/s Keynote Captials Ltd (SEBI Registration No. INB 080926534) for a period of one month from the date of this order in terms of Regulation 13(4) of SEBI Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002..

7.2 This order shall come into force immediately on the expiry of twenty one days from the date of this order.