O R D E R
UNDER RULE 5 OF THE SEBI (PROCEDURE FOR HOLDING
ENQUIRY AND IMPOSING PENALTY BY THE ADJUDICATING OFFICER) RULES, 1995
AGAINST
PRAVIN SAWANT, DIRECTOR OF
M/S. MACHINDRA NATH MULTI TRADES PVT LTD.
1. There were reports of alleged market manipulation and irregularities in the trading of the shares of Prime Capital Market Limited, (for brevity’s sake, hereinafter referred to as PCML). On the said basis, the Securities and Exchange Board of India (SEBI) initiated an investigation into the said matter for the period between March 17, 2005 and September 16, 2005 so as to determine in the said process, the possible violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 and the SEBI (Stock brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as FUTP Regulations and the Broker Regulations, respectively) by various entities. The scrip of PCML was listed on the Calcutta Stock Exchange (CSE) at the time of investigation. In connection thereof, the trading details of various entities who had transacted in the scrip of PCML were collected and their trading patterns were analysed along with the data and the volumes contributed by them.
2. The preliminary investigation findings, inter alia revealed that the trades of these entities had largely contributed to the price
movement and the false appearance of liquidity and volumes in the said scrip. Shri Pravin Sawant (for brevity’s sake, hereinafter referred to as Pravin) was the common director of M/s Machindra Nath Multi Trades Pvt Ltd.(Machindra), M/s Silverflag Trading Co. Pvt. Ltd ( Silverflag), and Fine Trade Mercantile Co Pvt. Ltd.(Fine Trade), all of them being clients of the brokers, registered with SEBI and members of the CSE who had also traded extensively in the scrip of PCML through their respective clients and were thus alleged to have played a role in raising the price of the scrip of PCML at the CSE, thus facilitating the manipulation in the scrip of PCML and that most of them were inter related and acting in concert.
3. In view of these findings, and to confirm the veracity of these findings during the process of investigation, the various brokers i.e. DB & Co (DBC), Sanju Kabra (SK), Shivam Stock Broking Pvt. Ltd (Shivam) and D.K. Khandelwal and their respective clients and directors were summoned for examination of their books of accounts and other relevant documents including KYC norms and were also asked to produce other related information viz, trading details etc. Pravin as the common Director of Silverflag and Machindra was also summoned by the investigating officer to appear before him to produce the books of accounts with other required documents that he intended to rely upon in his defense. It was also made clear to Pravin that in case he failed to appear on the scheduled date before the investigating authority; necessary action would be initiated against him under the relevant provision of the Act. In this regard it has been alleged that Pravin failed to comply with the said summons not once but on different dates and thus violated the provisions of Regulation 8(1) of the FUTP Regulations, thereby making them liable for being proceeded against in terms of Section 15A of the SEBI Act, 1992 (Act).
4. Accordingly adjudicating proceedings were ordered against Pravin and in that context I was appointed as the Adjudicating Officer vide the order of SEBI dated June 16, 2006 to enquire into the alleged acts of omissions and commissions by Pravin.
NOTICE/REPLY/PERSONAL HEARING
5. A notice dated April 25, 2007 under Rule 4 of the SEBI (Procedure for holding inquiry and imposing penalties by Adjudicating Officer) Rules,1995 was issued to Pravin as a Director of Machindra along with relevant documents annexed thereto with an advice to show cause within 14 days of the receipt of notice, as to why proceedings should not be initiated against him in terms of the said Rules and why the penalty as prescribed therein should not be levied upon him.. However Pravin did not reply to the said notice. Hence a notice of hearing dated May 30, 2007 was issued to Pravin with an advice to appear before me on June 11, 2007. Pravin was also advised to note that no further extension would be offered to him and that in case he failed to appear for the said hearing, the matter would be proceeded with on the basis of the material available on record. The said notice was duly received by Pravin on June 02, 2007. However neither Pravin nor his authorized representative appeared on the scheduled date nor did he send any letter giving reasons for his failure to appear for the hearing.
6. From the above it is clear that there has been adequate service of notice on Pravin and that he has, despite the same, failed to reply to the notices issued to him or even participate in the present proceedings. Hence I consider it appropriate to proceed in the case based on the material available on record.
APPRECIATON OF FACTS
7. I have carefully examined the investigation report, the documents available on record and other facts and circumstances relevant to this case. While taking into account, the issues highlighted in the report as against Machindra as a client company in which Pravin is one of the Directors, I consider it necessary to recapitulate certain details of the case that gave rise to the present proceedings.
8. The average price of the scrip of 'PCML' at the CSE was Rs.14.00 on March 17, 2005 which then went up to Rs.280.40 on September 15, 2005. That is to say, the scrip of PCML witnessed a price rise of 1903% within a period of 5 months and 28 days. Incidentally the scrip of PCML was also suspended from trading at the exchange for various listing irregularities and the company is listed as one of the many vanishing companies, which fact was brought to the notice of the general public by the Ministry of Company Affairs vide Notice dated October 14, 2005.
9. In view of the same, vide an ad interim ex-parte order dated September 29, 2005 passed under Sections 19 read with 11(1), 11B, 11(4)(a) and 11(4)(b) of the SEBI Act, 1992, (Act), SEBI inter alia suspended trading in the shares of PCML on the CSE till further directions and also directed DBC, SK and Shivam not to buy, sell or deal in securities in any manner either directly or indirectly, pending further directions in this regard.
10. The interim order of SEBI dated September 29, 2005 was confirmed by SEBI in the order dated January 12, 2006. The said order also directed that the suspension on the trading in the shares of PCML on the exchange could be withdrawn, subject to the deletion of the name of PCML from the list of vanishing companies as appeared in the Public Notice dated October 14, 2005 issued by the Ministry of Company Affairs.
11. In this context, I have noted on record a letter dated March 9, 2006 addressed by PCML to the Ministry of Company Affairs, Kolkata and another letter dated January 13, 2006, to the Ministry of Company Affairs, Delhi, inter alia requesting for the deletion of the name of PCML from the list of vanishing companies. However there is no evidence on record to verify whether the name of PCML was deleted from the said list.
12. Be that as it may, the role of four brokers and their respective clients in the rise in the share price of PCML from Rs.14/- to Rs.280.40/- was a matter of suspect, primarily because of the nature of the trades executed by them in tandem and the fact that all of them were collectively found to have contributed to the majority of the volume of PCML at the CSE between March 17, 2005 and September 16, 2005. These brokers and their clients are listed below:-
a) DBC and their clients; M/s Bhuwania Vinimay Pvt Ltd (Bhuwania) and TDB;
b) SK and their clients; Bhuwania and Zenser Merchantile Pvt. Ltd. (Zenser);
c) Shivam and their clients; Bhuwania, Zenser, Pravin Kumar Jain and Fine Trade Merchantile Co Ltd;
d) DKK and their clients; Fine Trade Merchantile Co. Pvt. Ltd, Jain Stock & Share Brokers Ltd, Machindra Nath Multi Trade Pvt. Ltd and Silver Flag trading Co. Ltd.
13. A total of 36,43,606 shares of PCML (both buy and sale) were traded at the exchange. The major brokers were found to be DBC, SK and Shivam while the trades of DKK were found to be to the extent of 22,100 shares constituting 0.6 % of the total volume of PCML at the CSE during the period of investigation (the volume of others i.e. DBC being 41.67%, Shivam being 21.1% and that of SK being 30% of the total volume of PCML at the CSE). As can be seen from the table below, the transactions executed by these brokers together constituted more than 93% of the trading volume at CSE during the period under investigation:
|
Sl.
No.
|
Name of the broker
|
Volume
Buy/Sell
|
Traded from
Rs.
|
Traded upto
Rs.
|
|
1
|
D K Khandelwal & Co.
|
22,100
|
18.00
|
159.00
|
|
2
|
Sanju Kabra
|
10,82,151
|
73.00
|
280.60
|
|
3
|
Shivam Stock Broking
|
7,68,851
|
199.80
|
280.60
|
|
4
|
D B & Co
|
15,18,402
|
229.00
|
281.00
|
14. The trades of DKK were found to have been created through very thin trading volume at the exchange. Almost all the trades of DKK were executed as cross deals (wherein the buying and selling broker was the same). All the other mentioned members acted as the counter party of their own transactions. The extent of cross deals in the same terminal of DKK in the shares of PCML between March 17 2005 and September 15, 2005 and that with the other brokers is given below. The cross deals executed by DKK in the scrip of PCML constituted such a large portion of their trading that 22,000 shares out of 22,100 shares which comprised of 99.5% of the volume of their trades in the scrip of PCML were in the nature of cross deals and were created at their terminal alone.
|
Name of the broker
|
Cross and Matched transactions
|
|
D B & Co
|
Sanju Kabra
|
Shivam Stock Broking
|
D K Khandelwal & Co
|
|
Qty
|
%
|
Qty
|
%
|
Qty
|
%
|
Qty
|
%
|
|
D K Khandelwal & Co
|
0
|
0
|
100
|
0.5
|
0
|
0
|
22000
|
99.5
|
|
|
|
|
|
|
|
|
|
|
|
15. These trades by DKK were also singly found to have been responsible for raising the price of the scrip of PCML from a lower level of Rs.18/- to Rs.159/- through thin trading volumes and were executed such that the price of the scrip of PCML was raised by 7-10% on a daily basis. The details of such price rise are given below:
|
Date
|
Previous day’s closing price(Rs)
|
Opening price (Rs)
|
Exchange volume
|
Volume created by DKK
|
% of increase in share price
|
|
01.04.2005
|
18.40
|
19.90
|
200
|
200
|
8.15
|
|
04.04.2005
|
19.90
|
21.40
|
200
|
200
|
7.54
|
|
05.04.2005
|
21.40
|
23.30
|
500
|
500
|
8.88
|
|
06.04.2005
|
23.30
|
25.20
|
400
|
400
|
8.15
|
|
07.04.2005
|
25.20
|
27.10
|
300
|
300
|
7.54
|
|
19.04.2005
|
35.00
|
38.00
|
400
|
400
|
8.57
|
|
20.04.2005
|
38.00
|
41.00
|
500
|
500
|
7.89
|
|
21.04.2005
|
41.00
|
45.00
|
500
|
500
|
9.76
|
|
26.04.2005
|
49.00
|
53.00
|
1000
|
1000
|
8.16
|
|
27.04.2005
|
53.00
|
57.60
|
500
|
500
|
8.68
|
|
28.04.2005
|
57.60
|
61.00
|
500
|
500
|
5.90
|
|
29.04.2005
|
61.00
|
67.00
|
500
|
500
|
9.84
|
|
17.05.2005
|
87.00
|
95.00
|
2100
|
100
|
9.20
|
|
18.05.2005
|
95.00
|
103.00
|
100
|
100
|
8.42
|
|
09.06.2005
|
140.00
|
146.00
|
100
|
100
|
4.29
|
|
10.06.2005
|
152.50
|
164.00
|
500
|
500
|
7.54
|
16. The main entities found to have transacted through DKK and the details of their transactions in the scrip of PCML is as shown below:
|
Sl.
No.
|
Name of the client and address
|
Quantity
|
% to brokers volume of 22,100 shares
|
|
1
|
Silver Flag Trading Co. Ltd.(Silver)
|
7600
|
34%
|
|
2
|
Fine Trade Mercantile Co. Pvt. Ltd.(Fine trade)
|
3000
|
14%
|
|
3
|
Machindra Nath Multi Trade Pvt. Ltd (Machindra)
|
2100
|
10%
|
|
4
|
Jain Stock & Share Brokers Ltd.(Jain)
|
600
|
3%
|
17. Upon an analysis of the information given above, it appears that although DKK did not trade extensively in the scrip of PCML, their trades for their respective clients were so executed so as to ensure an apparent increase in the price of the scrip.
18. Due to the lack of information/details about Machindra and its directors, with a view to determine exactly the extent of their nexus between the various brokers, clients, their directors and the management/ employees/promoters of PCML as also their respective roles if any, in the manipulation in the scrip of PCML, on the basis of the information that would be obtained and the violations committed by them in the said process, the Investigating Officer of SEBI issued summons to Pravin as a Director of Machindra to reply and to appear before the investigation authority along with the information as called for, the details of which are as under.
|
Sl.No.
|
Date of Summons
|
To reply by/to appear on
|
Date of reply / appearance
|
|
1
|
May 04, 2006
|
May 12,2006
|
The summons was acknowledged on his behalf but Pravin neither replied nor did he submit any information
|
|
2
|
May 12 , 2006
|
May 19, 2006
|
The summons was acknowledged on his behalf but Pravin neither replied nor did he submit any information .
|
19. As is apparent from a reading of the table given above, summons were issued to Pravin by the investigating authority to appear personally before the investigation authority along with the information as called for on three occasions, all of which were not complied with.
20. The extent of the information sought for from Pravin is given below:
i. The address.
ii. Name and address of the promoter/director/partner, if the entity is not an individual.
iii. PAN No
iv. Demat Account Details.
v. Details of transactions in the scrip of PCML during the period from January 1, 2005 to September 30, 2005 with details of the date, quantity, rate of shares purchased/sold and the dates, if and when the shares were sold /bought during this period and also the holding statement if the shares were still on hold.
vi. Copy of the Contract Notes issued by the broker for his transactions in the scrip for the period January 1, 2005 to September 30, 2005.
vii. Copy of the relevant statement of accounts issued by the broker for his transactions in the scrip during the period January 1, 2005 to September 30, 2005.
viii. Statement of deliveries made to the broker and received from the broker for the transactions in the scrip during the period giving details of the date of transaction.
ix. Details of relevant bank transactions, evidencing the receipts and payments from/to the broker for the transactions pertaining to the scrip of PCML.
x. Details of all off market transactions, if any, in the scrip during the period from January 1, 2005 to September 30, 2005.
xi. Details of relationship with the promoters/directors of the company, if any.
xii. Details of relationship with the brokers dealing in the scrip, if any.
xiii. Reasons for trading in this scrip.
21. I have noted that fact that not only did Pravin fail to comply with the summons issued against him or provide the information sought for by the investigating authority but that he even failed to provide any reasonable explanation for the said failure. This non co-operation on the part of Pravin besides amounting to a blatant violation of the process of law was also capable of hampering the investigation initiated by SEBI which in turn was detrimental to the interests of investors and securities market.
22. I have however noted from the client registration forms on record, (as submitted by DKK in separate proceedings) that almost all their clients had common directors. Pravin Sawant; besides being the Director of Machindra Nath was also the director of Silverflag and Fine Trade. These clients i.e. Machindra Nath, Multi Trade Pvt. Ltd, Fine Trade and Silverflag shared common addresses. Fine Trade was also a client of Shivam; another broker who had traded extensively in the scrip of PCML.
23. I have also examined the details of the trades done by Machindranath as submitted by them. From the same I have noted that they started trading in the shares of PCML at the rate of Rs 61/- per share from April 28, 2005 which continued till September 28, 2005 at which time the shares were traded at the rate of Rs 279/- per share. As brought out earlier, all these trades were in the nature of cross deals and have contributed to the creation of artificial volume and the consequent artificial rise in the price of the scrip of PCML.
24. Apart from this information, I have also noted that Shri Dhruv Narayan Jha, who was found to be one of the two directors of M/s Jain Stock and Share Brokers Limited, another client of DKK, was also earlier a director of PCML for more that 4 years i.e. from August 12, 2001 to October 15, 2005 and was found to have resigned from PCML on personal grounds on December 15, 2005 soon after the interim order was passed by SEBI, suspending trading of the shares of PCML. Incidentally PCML and M/s Jain Stock and Share Brokers Limited were also found to share the same office address. Moreover the client registration forms of Bhuwania and Zenser, (common clients of SK and Shivam) who were found to have purchased 14,10,204 shares i.e. 1140454 and 269750 shares respectively out of 16,73,803 shares purchased in PCML during the period of investigation i.e. 84% of the combined bought position of the three brokers and 77% of the total bought quantity at the exchange, revealed that Dhruv Narayan Jha was also a director of Bhuwania and Zenser.
25. The facts above stated clearly bring out the nexus between the various brokers, clients, directors and the management/ employees/promoters of PCML which enabled all of them to act in concert while trading in the scrip of PCML. There was thus a specific reason for Pravin as the common director of various client companies to trade in the scrip of PCML and hence when SEBI issued summons to him, the same ought to have been complied with immediately to facilitate the timely conclusion of the investigation initiated by SEBI. However the same was not done.
26. It would also be relevant to mention here that for the years ended March 31, 2002 and March 31, 2003, PCML incurred a net loss of Rs.4 lakhs and Rs.6 lakhs respectively. However during the year 2004-05, PCML earned a profit of Rs.5.46 lakhs (unaudited) and for the three months period ending June 30, 2005 (unaudited), PCML earned a profit of only Rs.68, 000 and had a negative reserve of Rs.2.81 lakhs. It stands to reason that the financials of PCML were not strong enough to have boosted the share price from Rs.14/- to Rs.280.40/- without sufficient cause, clearly indicating that, but for the trading of all these entities, in some of which Pravin was the director, such a steep price rise in the said scrip would not have been witnessed.
27. In this context, I have examined the provisions of Section 11C(3) of the Act which read as under:
“The Investigating Authority may require any intermediary or any person associated with securities market in any manner to furnish such information to or produce such books, or registers, or other documents, or record before him or any person authorised by it in this behalf as it may consider necessary if the furnishing of such information or the production of such books, or registers or other documents, or record is relevant or necessary for the purposes of its investigation”.
Further 11C(5) of the Act reads as under:
“Any person, directed to make an investigation under sub-section (1), may examine on oath, any manager, managing director, officer and other employee of any intermediary or any person associated with securities market in any manner, in relation to the affairs of his business and may administer an oath accordingly and for that purpose may require any of those persons to appear before it personally”.
Further 8(1) of SEBI FUTP Regulation reads as under
1) It shall be the duty of every person in respect of whom an investigation has been ordered under regulation 7-
(a) to produce to the Investigating Authority or any person authorized by him such books, accounts and other documents and record in his custody or control and to furnish such statements and information as the Investigation Authority or the person so authorized by him may reasonably require for the purposes of the investigation;
(b) to appear before the Investigation Authority personally when required to do so by him under regulation 6 or regulation 7 to answer any question which is put to him by the Investigation Authority in pursuance of the powers under the said regulations.
28. Thus every entity connected with an investigation process is under an obligation to provide the information as sought for by the Investigating Authority. The decision to call for such information and the judgment as to its relevancy is completely the discretion of the investigating authority and is in furtherance of the discharge of its official duties. It is not for the noticee to question the relevance of the information sought for. The noticee under the summons is only obliged legally or morally, to cooperate with the Investigating Authority and furnish the required information.
29. From a perusal of the Annexure listing the information sought for from Pravin by the investigating authority, it is clear that this information was crucial and central to the investigation findings. Moreover the presence of Pravin along with the necessary documents was also essential, among other things, to examine the extent of his personal involvement in all the trades in the scrip of PCML. However, as Pravin did not provide the said information, the same thwarted the attempts of SEBI to effectively gather vital evidence for the timely conclusion of the investigation proceedings.
30. Taking into account the sensitivity of the securities market, an early conclusion of investigation is a very important objective. Although there is evidence on record that the said summons were acknowledged on his behalf, it is apparent that Pravin were not willing to provide the information sought for. In fact even in the present proceedings, Pravin did not avail the opportunity of being heard in person to come clean, which indicates that he was not willing to reveal any information about his or that of the companies in which he is the director.
31. These facts clubbed together indicate that Pravin was not totally unconnected with the manipulation of the shares of the PCML in the market and were in fact a willing accomplice to the management of PCML in the said exercise as is apparent from the findings of investigation.
32. As Pravin have failed to appear before SEBI or even before me to furnish the information as sought for and in the absence of any adequate explanation on their part as regards their non appearance even before me, it can be reasonably concluded that he has failed to comply with a regulatory directive. Such an act on the part of Pravin suggests blatant and deliberate non-cooperation clearly warranting severe action.
33. Any evasion of the regulatory provisions of the regulator issued in the interests of the investors or non-adherence to the same for any reason whatsoever is bound to affect the interests of such investors as also the sound and smooth functioning of the capital market. If no cognizance were to be taken of the same, and no liability fixed there upon, the entire purpose of incorporating the provisions in the said enactments would become redundant.
34. Hence, Pravin is liable for a penalty under Section 15A of the SEBI Act, 1992 for their failure to comply with summons issued by SEBI by failing to furnish the information as sought for and to appear in person before the investigating team. Section 15 A of the SEBI Act, 1992 inter alia provides that in case of failure to furnish any information to the Board, the same would invite a liability of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
35. At the time of levying penalty certain factors are also be taken in to account by the adjudicating officer, as is evident from the provisions of Section 15J of the Act which also find mention in Rule 5(2) of the SEBI (Procedure for holding enquiry and imposing penalty by the Adjudicating Officer) Rules, 1995 i.e. the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; the amount of loss caused to an investor or group of investors as a result of the default and the repetitive nature of the default.
36. These factors mentioned above, are to be relied upon with due discretion that is to be exercised judiciously, depending upon the facts and circumstances of each case as well as after analysing all the relevant material available on record. In the present case, manipulation is a serious issue and fraudulent activities such as these are per se illegal and are bound to affect a lot of parties in a way, not necessarily expressly highlighted at all times. Moreover it is difficult to arrive at any specific figure to compute the amount of loss caused to the investing public especially in a large country like India. However in a limited way, there is some record of the extent of gains made in this case by some entities.
37. From the information provided by PCML, it was gathered that Bhuwania had transferred 5,69,050 shares of PCML to various entities on September 20, 2005. During this period, the share price of PCML was around Rs.280/-. Bhuwania has sold these shares for Rs.15,93,34,000./-Therefore the gain made out of these transfers can be estimated to be Rs.1.1 crores (approx). This is because the acquisition price of 5,69,050 shares of PCML works out to Rs.14,74,06,372.43 i.e.
Rs.30,16,67,704.60 (total value of the purchase details of Bhuwanai)
11,64,563 (total purchase quantity of Bhuwania in PCML) x 5,69,050 (total shares of PCML transferred to various entities)
= Rs.14,74,06,372.43.
38. From the figures given above and keeping in mind the nexus between several entities as highlighted above, there can be no two opinions on the fact that Pravin enjoyed unfair advantage in the whole scenario to the detriment of thousands of innocent investors.
PENALTY:
39. Keeping in mind these facts, I am of the view that the imposition of a penalty is warranted and hence in exercise of the powers conferred upon me under Rule 5 of the SEBI (Procedure for Holding Inquiry and Imposing Penalty by the Adjudicating Officer) Rules, 1995, in the interest of justice, equity and good conscience, think it is appropriate to levy a penalty of Rs. 1,00,000/- (Rupees One lakh only ) on Pravin Sawant.
40. The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India and payable at Mumbai” which may be sent to Shri Jayanta Jash, Deputy General Manager, Securities and Exchange Board of India, L&T Chambers, 16, Camac Street, Kolkata 700017.
PLACE: MUMBAI G. BABITA RAYUDU
DATE: JUNE 21, 2007 ADJUDICATING OFFICER