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ORDER PASSED AGAINST M/S.LALKAR SECURITIES PVT.LTD. MEMBER-BSE, (FORMERLY S.J.THACKER) UNDER SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992, READ WITH REGULATION 29(3) OF SEBI (STOCK BROKERS AND SUB BROKERS), REGULATIONS 1992 IN THE CASE OF JYOTHI RESINS & ADHESIVES LTD.
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Jyothi Resins & Adhesives Ltd., was listed in BSE, ASE and VSE. The price of the scrip rose from Rs.17.50 to Rs.140 in VSE and in BSE the price rose from Rs.15/- on 22.8.95 to Rs.181.50 on 6.10.95. The substantial jump in the closing price was during the period 18.9.95 to 6.10.95 when it moved from Rs.50.50. to Rs.181.50. The volumes have been steadily hovering around an average of Rs.5 lakh shares per day. There was no positive announcement in respect of the working of the company which could have warranted such huge rise in the price of the scrip after listing. In settlement No.15B of BSE (25.09.95 - 6.10.95) there was a short delivery of 4,51,400 shares. Part of the outstanding position was auctioned and rest was closed out. SEBI in order to prevent the manipulators from getting undue benefits instructed BSE to freeze the proceeds of auction and close-out amounting to Rs.4.18 crore. In the context of these developments and in view of the steep hike in the price of the scrip of Jyoti Resins & Adhesives Ltd., which seems to be artificially created, investigations were initiated by Securities and Exchange Board of India (hereinafter referred to as SEBI) into the affairs relating to buying, selling or dealing in the shares of M/s Jyothi Resins & Adhesives Ltd.
Investigations revealed that majority of the brokers had dealt, in this scrip, on behalf of one client called M/s.Udita Inverted Pvt Ltd. (UIPL). Investigations further revealed that UIPL is connected with the Promoters/Management of Jyoti Resins. The shares were cornered by UIPL from 14.8.95 onwards.
Sh.Sunil K. Patel, Director of UIPL appeared, before SEBI, along with ledger and list of 299 clients and their addresses on behalf of whom they had dealt in the scrip. However, he didn’t submit any further details about the payments received from clients. In order to verify genuineness of transactions summons were served to 39 top dealing clients of UIPL. There was no response to most of the summons and in some cases the summons returned unclaimed. In absence of any response from majority of clients of UIPL, final summons were sent asking them to confirm the purchases and give details of payments. Again, there was no response from majority of the clients. Thereupon the Investigation Team visited at the addresses of 72 clients and recorded their statements. As per these statements none of them have dealt in the shares of Jyothi Resins through UIPL or otherwise. In view of this UIPL was summoned once again. It was admitted by Sh. Patel that the list of 299 client given by him previously to the investigation team is bogus. Further, Sh.Patel has stated that majority of orders for purchase and sale of shares of Jyoti Resins & Adhesives Limited were given by Sh.Devendra Kantilal Dalal, Ahmedabad. Shri Patel submitted that Sh.Devendra Kantilal Dalal never informed them nor consulted them in respect of the orders placed for purchase / sale of shares of Jyoti Resins nor consulted them in regard to orders placed for purchase / sale of shares of Jyoti Resins & Adhesives Limited. Sh.Patel submitted that UIPL has never received any delivery of shares from any of the brokers and sub-brokers nor they are aware as to who has received the delivery of shares. UIPL never asked Shri Devendra Kantilal Dalal as to who is receiving the delivery.
Raj Investments is a Bombay based sub broker. Raj Investments had dealt through five brokers at BSE. Raj Investments had submitted that they had dealt for various entities including UIPL. However, during investigations it was found that all the dealings shown in the name of various entities including UIPL were actually on behalf of Sh.Dalal. The shares were delivered to Sh.Dalal at the address of Vrushti Financial Services. This was confirmed by Sh.Chandrakant Shah Director of Raj Investments.
Investigations revealed that Sh.Dalal had financed UIPL for rigging the share prices of Jyoti Resins and used Vrushti Financial Services P Ltd. for routing the funds. This is clear from the fact that an amount of Rs.1 crore has been shown in the books of Vrushti Financial as loan to UIPL. Additionally an amount of about Rs.1 crore has been shown as secondary market loan given to various individuals through UIPL. Vrushti Financial Services had admitted to have dealt on behalf of Sh.D.K.Dalal and admitted that they had financed UIPL for secondary market purchases of shares of Jyoti Resins.
Investigations revealed that Shri Devendra Kantilal Dalal had manipulated the price of the scrip of M/s.Jyoti Resins Ltd. by purchasing and selling in the name of UIPL through different brokers. Thus, UIPL was acting as a front entity of Sh.Dalal. Shri Devendra Kantilal Dalal was a member of ASE and was declared a defaulter by the exchange in August 1989.
Investigations further revealed that Lalkar Securities Pvt Ltd., Member-BSE, has dealt with 48,800 shares on behalf of UIPL and Raj Investments. In the light of the above mentioned findings that UIPL was a front entity of Sh.Devendra Kantilal Dalal; the broker is alleged to have indulged to have carried out transactions for Sri Dalal, a defaulted member of ASE who manipulated the prices of the scrip of Jyoti Resins. The authorised representative of Raj Investments - another client of the broker - also stated that all the transactions were done on behalf of Sh.D.K.Dalal and the shares were delivered to Sh.Dalal at the address of Vrushti Financial Services.. Thus Lalkar Securities acted in the name of UIPL and Raj Investments though actually the broker had dealt for Sh.Dalal.
On completion of the investigations, an Enquiry Officer was appointed by SEBI vide order dated 5th May 1997 under Regulation 28 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 to enquire into the prima facie violations committed by the broker.
The Enquiry Officer, thereafter, proceeded with the enquiry and issued a Show Cause Notice to the member vide letter dated 28rd November 1997 alleging that Lalkar Securities Pvt Ltd., Member, BSE, had indulged in carrying out deceptive transactions by not disclosing Sh.Dalal as the client and abetted the market manipulators. Thus, it was alleged that the broker has violated Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 for not abiding by the code of conduct specified in Schedule 2 of that Regulations. The broker replied to the Show Cause Notice vide letter 22nd January 1998. Opportunities of personal hearing were also given by the Enquiry Officer on 10th February 1998, 16th May 2001 and 7th June 2001, which was duly attended by Sh.Janak Thacker, authorised representative.
The Enquiry Officer, on completion of enquiry process, concluded that the member dealt for their clients - Raj Investments and Udita Inverted Pvt Ltd. It was proved during the investigations that Sh.Devendra Kantilal Dalal had manipulated the price of the scrip of Jyoti Resins using UIPL as a front company and through Raj Investments. Sh.Chandrakant Shah of Raj Investments, in his statement before SEBI on 26.11.96, submitted that they have done all the transactions on behalf of Sh.Dalal. The Enquiry Officer found that the broker was not alert and did not exercise due diligence, skill and care. The Enquiry Officer found him guilty of violating the Code of Conduct (specified in Schedule 2) of SEBI (Stock Brokers & Sub Brokers) Regulations, 1992 and recommended that a warning be issued to the member.
Pursuant to the submission of Enquiry Report, a Show Cause Notice dated 25th July 2001, under Regulation 29(1) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 was
issued enclosing a copy of the Enquiry Report. The member replied to the Show Cause Notice vide letter dated 13th August 2001. An opportunity of personal hearing before Chairman SEBI was given to the broker on 20th June 2002. However, the broker did not attend the hearing and has sought adjournment. The member has been provided enough opportunities to present their case in the past and no further opportunity needs to be given. Therefore, I have decided to proceed on the basis of the facts available on record.
I have carefully examined the enquiry report, submissions made orally as well as in writing, material on record etc. I find that Lalkar Securities Pvt. Ltd. had dealt for UIPL and Raj Investments. I find that the broker was negligent and did not verify the antecedents of his clients - UIPL and Raj Investments - which were acting as a front/façade for Sh.Dalal. The investigation has brought out clearly that Sh.Dalal manipulated the prices in the scrip of Jyoti Resins Ltd. Considering the facts and circumstances in totality, I tend to agree with the recommendations of the Enquiry Officer. I am of the view that the broker be warned and directed to be more vigilant in future and exercise due skill, care and diligence in its dealings. I, also direct that Lalkar Securities Pvt. Ltd. should ensure that similar event does not recur in future and all the Rules, Regulations, Guidelines, etc issued by SEBI are adhered to strictly. Lalkar Securites Pvt Ltd., Member-BSE, is warned that a serious view would be taken of any violations are committed in future.
G.N.BAJPAI
CHAIRMAN
SECURITIES AND EXCHANGE BOARD OF INDIA
Place : Mumbai
Date