| ORDER UNDER REGULATION 29(3) OF THE SEBI(STOCK BROKERS AND SUB-BROKERS) REGULATIONS, 1992 AGAINST M/S MAHESHWARI TECHNICAL AND FINANCIAL SERVICES LIMITED, MEMBER-NSE, IN THE CASE OF MARUTI ORGANICS LTD. |
M/S Maheshwari Technical and Financial Services Limited (hereinafter referred to as MTFSL) is a member of National Stock Exchange registered with SEBI as a Stock Broker.
An investigation was conducted into alleged price manipulation in the scrip of M/S Maruti Organics Ltd. (Maruti). Investigations revealed that MTFSL dealt in the scrip of Maruti on behalf of his client Arun Kumar. The trading position of the client was as under :-
|
Date
|
Buy
|
Sell
|
Cumulative Net
|
|
24/06/96
|
4000
|
0
|
4000
|
|
25/06/96
|
0
|
4000
|
0
|
|
26/06/96
|
20000
|
0
|
20000
|
|
27/06/96
|
28000
|
0
|
48000
|
|
28/06/96
|
0
|
36800
|
11200
|
|
01/07/96
|
40000
|
46400
|
4800
|
|
02/07/96
|
0
|
4800
|
0
|
|
03/07/96
|
50000
|
0
|
50000
|
|
04/07/96
|
31600
|
0
|
81600
|
The margin money balance for the client is as follows:
|
Date
|
Amount
|
Mode of payment
|
|
24/06/96
|
50000/-
|
Cash
|
|
27/06/96
|
60000/-
|
Cash
|
|
28/06/96
|
50000/-
|
Cash
|
|
Settlement No. 25,26
|
81197/-
|
Profit settlement no. 25,26
|
Investigations brought out that the broker enrolled Shri Arun Kumar as client in June 1996 and at the time of enrolling, the broker entered into Member Constituent Agreement with Shri Arun Kumar but did not make any meaningful enquiries about the antecedents of his clients. It was observed that Shri Arun Kumar dealt with the broker as above and when the pay in time came Shri Arun Kumar absconded without paying for the purchase of 81600 shares of Maruti made by him. It appeared that a few brokers acting in concert were trying to defraud the National Clearing Corporation (NCCL). ). Settlement Guarantee Fund of NCCL guarantees settlement/payment for each trade entered at the Exchange. In view of this, in the event of failure of the buyer to pay, NCCL would have to pay the sellers. NSE, from its investigations, held that these transactions in MOL were collusive trades and ordered annulment of the same.
It was noticed that the broker was not careful while enrolling his client. The broker allowed position to be built up as above. The client built up a position of 48000 shares on June 27th and the margin money available with the broker was only Rs. 1.1 lacs. The position was reduced to nil by July 2nd . However on July 3rd , 1996 fresh purchase position of 50000 shares was allowed to be built up in the scrip of Maruti. The client increased his position by 31600 shares on the next day. The client eventually failed to pay for this purchase of 81600 shares and absconded.
It was prima facie felt that the broker allowed an unknown client to build up huge position in a volatile, illiquid scrip without taking sufficient margins and allowed the client to take position beyond its financial capacity. The broker thus did not take enough precaution to prevent risk to the safety and integrity of the market. This unprofessional conduct caused risk to smooth settlement of trading at the Exchange. On these facts, for the prima facie violation of SEBI (Stock Broker & Sub-Broker) Regulations, 1992, enquiry proceedings were initiated against the broker.
A show cause notice communicating the findings of the investigation was issued by the Enquiry Officer asking the broker to show cause why action should not be initiated for violating Clause A (1 to 5) and B(4a) of Code of Conduct read with Schedule II in terms of Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992.
The said show cause notice, was replied to by the broker vide its letter dated August 12, 2000. The broker in their reply has contended that they believed their client Shri Arun Kumar was a genuine client and was acting in good faith. They have also said that they ‘had collected margin from our client Shri Arun Kumar before starting starting any business on his account. It was claimed that it was at their instance that investigations were taken up by NSE and SEBI. They have filed an FIR against their client when they realised that they had been duped. The member had executed the member-constituent agreement with the client.
The Enquiry Officer after taking into account all the relevant facts and submissions made by the broker, in accordance with Regulation 28(7) of the said Regulations, submitted his report dated August 6, 2001 recommending that the Member may be asked to be careful in future with regard to such transactions. The enquiry officer has said that a warning may be issued for this purpose.
Consequent upon this, a show cause notice as required under Regulation 29(1) of SEBI (Stock Broker and Sub Brokers) Rules and Regulations, 1992, enclosing a copy of the enquiry report was issued to the broker. The broker was called upon to show cause as to why the action as recommended by the Enquiry Officer should not be taken against it.
The broker was also advised to submit their reply, if any, within 21 days of the receipt of the show cause failing which it will be presumed that it has no explanation to offer.
MTFSL replied to the show cause notice vide their letter dated September 12, 2001 contending that ‘the Enquiry Officer has not has not found it violative of any regulatory requirement in force at that time. The Enquiry report rather speaks of our having complied with all statutory requirements including payment of margin money to the NSE. The report infact has inferred that a fraud had been committed upon us by the absconding client and we became its victim. The broker has contended that even issuing of a warning in this may not appear to be reasonable as it would tantamount to punishing a victim. The broker also sought a personal hearing which was granted on 05/07/2002 and Shri. R C Maheshwari of the broker company appeared before me and made submissions.
On examination of material and evidence available on record, enquiry report, submissions made from time to time, I find that the broker had fulfilled the requirement of executing a member-constituent agreement. The member had also not defaulted in the payment of margin money to the Exchange. The member has become a victim of a planned fraud by the clients.
In view of the above I am of the view that the penalty as recommended by the Enquiry Officer is appropriate and that the member may be asked to be careful in future for which purpose a warning may be issued.
In exercise of the powers conferred upon me by Sub-Section (3) of Section 4 of SEBI Act, 1992 read with sub-regulation (3) of Regulation 29 of SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations 1992, I G N Bajpai, Chairman Securities and Exchange Board of India hereby pass an order issuing a warning to M/S Maheshwari Technical and Financial Services Limited to be cautious and diligent in future while dealing with its clients. It is further directed that the broker should refrain from indulging in any activity which may amount to violation of the provisions of SEBI Act, 1992 Securities Contracts Regulation Act, 1956 and Rules and Regulations made there under. It is further ordered that any violations in future in complying with SEBI Act, 1992, Securities Contracts Regulation Act 1956, the Regulations and the Guidelines framed/issued there under from time to time, would be viewed seriously.
G N BAJPAI
CHAIRMAN
SECURITIES AND EXCHANGE BOARD OF INDIA
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