BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO. AP/AO-21/2005-06]
UNDER RULE 5 OF SEBI (PROCEDURE UNDER RULE 5 FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995, READ WITH SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992
In the matter of Investigations in
KWALITY DAIRY (INDIA) LTD.
AND
In respect of
SHRI CHIRAG PUJARA
1.0 Pursuant to the investigation in the scrip of Kwality Dairy (India) Ltd. (hereinafter referred to as “KDIL”), Securities and Exchange Board of India (SEBI) appointed Mr. K.R.C.V. Seshachalam, Dy. General Manager as the Adjudicating Officer under Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') read with Section 15 I of SEBI Act, 1992 to inquire into and adjudge the alleged practices of the Shri Chirag Pujara (hereinafter referred to as 'CP') that are prohibited under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred as 'PFUTP') for which penalty is imposable under Section 15-HA and 15HB of SEBI Act, 1992. The aforesaid appointment was conveyed vide order dated August 4, 2004 and vide order dated December 28, 2004, the matter was transferred to Mr. A.C. Rao. Subsequently vide order dated December 20, 2005, the matter was transferred to the undersigned.
2.0 A show cause notice (SCN) dated October 5, 2005 under Rule 4(1) of the said Rules was issued by AO, Mr. A C. S. Rao to CP, communicating the details of the charges levelled against him. In response to the SCN, CP did not file any reply to the SCN.
3.0 Under the aforesaid circumstances, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, a notice of inquiry was therefore issued to CP vide letter dated December 27, 2005, fixing the date of inquiry on January 10, 2006. Copy of the SCN and its annexures were also enclosed in this notice of inquiry, which was returned undelivered by the postal department with the comment, “unclaimed ”.
4.0 Notice of inquiry was issued to CP again on March 8, 2006 fixing the date of inquiry on March 22, 2006 at the address provided by Investigation Department. Copy of the SCN and its annexures were also enclosed in this notice of inquiry and was sent by courier as well as by registered post with acknowledgement due.
5.0 Shri Chirag Pujara appeared for inquiry on March 22, 2006 and made submissions. During the course of inquiry Mr. Pujara, submitted that his letter dated February 5, 2005 addressed to Shri KRCV Seshachalm, Dy. General Manager be treated as his reply to SCN and submissions for these adjudication proceedings. CP submitted that he was a day trader and was doing trading on square off basis in other scrips as well. In support of this CP vide letter dated March 27, 2006 filed a list of his trading in all the scrips during 1/3/2003 to 31/3/2004.
6.0 BACKGROUND:-
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%.
6.1 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:-
|
Name of the Client & Broker Buy Transaction
|
Name of the Client & Broker Sell Transaction
|
No. of Trades
|
|
Laxman Patel ( Ramaben Samani Finance Pvt.Ltd. )
|
Chirag Pujara ( Bonanza Stock Brokers Limited )
|
140
|
|
Laxman Patel ( Ramaben Samani Finance Pvt.Ltd. )
|
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 )
|
Chirag Pujara ( Bonanza Stock Brokers Limited )
|
588
|
|
|
T O T A L …………..
|
1653
|
6.2 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.
6.3 In view of the above inter se dealings among Chirag Pujara, Laxmanbhai Patel and Sayyed Mustafa, it is alleged that Chirag Pujara, has 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”).
7.0 REPLY: Mr Chirag Pujara, vide his reply dated February 5, 2005 addressed to then AO Mr. Seshachalam inter alia, made the following submissions:
7.1 Please note that I am a day trader and I normally undertake transactions the same day on square off basis in the scrips which are active. However, since I am a small investor, I can not trade in the scrips where prices are at par or below par or little below par, I observe the volume of the trade and times I decide to trade in the same.
7.2 Kindly note that transactions in M/s Kwality Dairy (India) Ltd. are similar transaction. I have transacted on the square off basis. There is not single day when I have carried forward purchase or sale proceeds and I have made small profits. I used to give instructions to the BOLT Operator of M/s Bonanza Portfolio Ltd. directly. They were acting as per my instructions and they have charged me nominal brokerage for the same. I have not acted in concert with Mr. Laxman Patel or Mr. Sayyed Mutaffa as set out in your Show Cause Notice.
7.3 Please also note that in the operative BOLT system it is impossible to trace the buyer and the seller parties. I have not entered into any circular transactions or reversal of trades as alleged. I have not entered into any fictitious transactions as alleged. I have also not dealt with any transactions used to go through. I used to watch the BOLT and undertake transactions when the shares were offered for sale. Subsequently, I used to sell them of and basically these transactions were more in the nature of Jobbing.
7.4 I would also like to inform you that my transactions have not affected the ultimate prices of the shares. The Broker has purely acted as per my transactions and have done purely brokerage business.
8.0 FINDINGS: I now proceed to deal with the reply of CP vis-à-vis allegations against CP, and record my observations/findings hereunder:
8.1 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. In the light of the said facts, I do not find any merit in the submissions of CP that the ultimate prices of the shares are not affected. The question whether his transactions are involved or not, is answered later in the order.
8.2 I further observe that out of the total volume of 3403923 shares, 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.
8.3 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.
8.4 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%.
8.5 The circular trades of the major member-brokers and their main clients are given as below:
|
Date
|
Bought Qty.
|
Bought by Client (Broker)
|
Bought From Client (Broker)
|
Sold Qty.
|
Sold by Client (Broker)
|
Sold to Client (Broker)
|
|
5/4/2003 to 6/6/2003
|
90427
|
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
|
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 )
|
8.6 I observe that, Shri Chirag Pujara had entered into reversal of trades with other clients, 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.
8.7 The analysis of the integrated Trade and Order Log – Reversal of trades by the members viz., Bonanza Stock Brokers Ltd. and Bharti Thakkar India Securities Pvt. Ltd. reveals that order quantity, price and timings of placing orders on both the buy and sell sides matched with each other. 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.
8.8 With regard to above, Mr Chirag Pujara submits that he was dealing in many other scrips on square off basis and in support of his contentions, he filed a list of such trades, vide letter dated 27/3/2006. From the perusal of this detail, it is observed that Mr. Pujara was indeed dealing in other scrips as well substantially on square-off basis.
8.9 I also observe from the records as mentioned in BSE report that office address of Mr. Chirag Pujara and Sayyed Mustafa is same as –10, Bora Masjid Street, Modi House, 4th Floor, Fort, Mumbai. From the said fact a clear cut inference is drawn that both the entities are operating from the same address and therefore it proves the nexus between these two entities, who are also found to be indulged in creating artificial volumes by squaring off the transactions.
8.10 I find such transactions wherein the buy and sell orders were 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. It is proved that there was a nexus between Mr. Chirag Pujara and Mr. Sayyed Mustaffa, and they executed 1120 trades out of total 1653 trades, amongst them on square off basis during the period of investigation. It is also observed that Mr. Pujara was a day trader and doing trading in other scrips on square off basis. But this fact cannot justify the conduct of Mr. Pujara in the present case where he is found to have executed majority synchronised trades, and created artificial volumes. It is also the fact that price of the shares of KDIL rose from Rs. 3.88/- to Rs. 44.87/- during the period from 3/4/03 to 6/6/03 when Mr. Pujara has dealt in the shares on square-off basis. Therefore, I find the said transactions are in violation of Regulation 4 of the FUTP Regulations, 1995 which inter-alia 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.
8.11 In view of the aforesaid observations, I am satisfied that this is a fit case to impose adjudication penalty against Mr. Chirag Pujara under Section 15HA of SEBI Act. The Section reads as under:
"Penalty for fraudulent and unfair trade practices.
15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher."
9.0 To determine the quantum of penalty under Section 15HA, the undersigned considered the following factors as provided in the Section 15J of SEBI Act, 1992 viz. (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default. It is now established that pattern of executing orders by Mr. Chirag Pujara has influenced the price of KDIL. However, from the material on record it is not possible to arrive at a figure of loss caused to the investors, but certainly the default by Mr. Pujara is repetitive in nature, as he has been found indulged in synchronized trading on continuous basis, and that to with an entity operating from the same address. The aforesaid defaults should be viewed seriously as it affects the normal price discovery mechanism of the securities market and in the process, investors suffer a lot. I have also taken into consideration the fact that the entity has been debarred for six months from dealing in securities vide SEBI Order dated 13/1/2006 for similar charges. This may however, be regarded as mitigating factor while disposing of this adjudication proceedings.
10.0 Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 3 Lacs (Three Lacs only) on Mr. Chirag Pujara under section 15HA of SEBI Act, 1992.
11.0 Mr Chirag Pujara shall pay the said amount of penalty by way of demand draft in favour of “SEBI- Penalties Remittable to Government of India”, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to Shri P K Nagpal, Chief General Manager, Investigation, ID-1, Mittal Court, 1st floor, B- Wing, 224, Nariman Point, Mumbai 400 021.
12.0 This order of adjudication is made and passed on 31st day of March 2006 at Mumbai.
AMIT PRADHAN
ADJUDICATING OFFICER