SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: G. ANANTHARAMAN, WHOLE TIME MEMBER
IN THE MATTER OF IPO INVESTIGATIONS
JHAVERI SECURITIES PRIVATE LIMITED
WTM/GA/68/ISD/05/06
DATE OF HEARING: 04.05.2006
APPEARANCES:
FOR NOTICEES:
Shri Somasekhar Sundaresan, Advocate
Shri Hemang Mehta, Advocate
Shri V.J.Jhaveri, Managing Director, Jhaveri Securities Pvt. Ltd.
Shri B.J.Jhaveri, Director
Shri U.J. Trivedi, Legal Advisor
FOR SEBI : Shri Ravichandran, Chief General Manager
Shri Manoj Kumar, Deputy General Manager,
ORDER
(UNDER SECTIONS 11 AND 11B OF SEBI ACT, 1992)
1.1 By an ad interim ex-parte order dated April 27, 2006 (hereinafter referred to as the ‘order’) under section 19 read with sections 11, 11b and 11(4) of the Securities and Exchange Board of India Act, 1992 and section 19 of the Depositories Act, 1996 pending enquiry and passing final Order, certain interim directions were issued against various market participants including Jhaveri Securities Private Limited. (JSPL).
1.2 Jhaveri Securities Private Ltd , member of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) was prima facie identified as one of the key operators in respect of the shares cornered in various IPOs during the years 2003 to 2005. In view of the above preliminary finding, JSPL was directed not to buy, sell or deal in securities including in IPOs, directly or indirectly, till further directions. Further since more that 500 afferent accounts were held with the JSPL, JSPL was directed not to open fresh demat accounts till further directions.
2.0 Findings regarding JSPL in SEBI’s Ex Parte Interim Order
2.1 The focus of the SEBI investigations has been on entities indulging in off-market transactions prior to listing and commencement of trading on the stock exchanges.
2.2 At paragraph 5.7 of the order, the IPOs in which the dematerialized account-holders received credit of IPO shares from 500 or more dematerialized accounts were identified. It was prima facie found that in the case of NSDL there were 21 IPOs in which 23 dematerialized account-holders received off-market credit of shares from 500 or more dematerialized account-holders having certain commonalities. As regards JSPL, the facts are that it had received 27667 shares of Suzlon Energy Limited from 1009 demat transferors in its demat account ID 10010005806(DP-JSPL) during the relevant period. Hence, JSPL was identified as one of the key operators.
2.3 At paragraph 8.3 of the order, it was mentioned that out of 37240 afferent accounts in NSDL as many as 598 afferent accounts were held with the Depository Participant JSPL.
2.4 Further, at Para 9.11 of the order, it was mentioned that in respect of DP JSPL as many as 686 demat account holders were sharing common addresses.
2.5 In view of the above findings in the order, directions as mentioned as Para 1.2 above were issued to JSPL.
2.6 JSPL was given an opportunity for filing its objections, availing personal hearing and inspection of the relevant documents relied by the SEBI against it within a period of 15 days.
3.0 Oral hearing and submissions of JSPL.
3.1 JSPL filed written submissions on 4.5.06, 8.5.06 and 15.05.06. JSPL also appeared for personal hearing before me on 4.5.06 through its Directors and Mr. B.J. Trivedi, Legal Advisor. JSPL made submissions as under:
3.2 JSPL clarified in connection with the IPO of Suzlon Energy Ltd that the basis of allotment was finalized on October 11, 2005. Shares were credited to the IPO allottees between October 13 and 14, 2005. Suzlon shares were listed on the stock exchanged on October 19, 2005. Many of its retail clients in Vadodara and other parts of Gujarat had applied for and had been allotted shares of Suzlon. It did not engage in any off-market transactions in Suzlon.
3.3 All off-market transfer of shares of Suzlon to JSPL’s account were purely deliveries on behalf of retail clients who sold their allocated shares in Suzlon through JSPL on the stock exchange immediately upon listing. The clients had given delivery of the shares through off-market transactions from various Depository Participants viz. Stock Holding corporation, HDFC Bank, IDBI Bank, UTI Bank etc.
3.4 As advised by me during the course of the personal hearing, JSPL furnished the details of off market transfers by its clients (wherein 500 or more transfers had taken place) in any of the 21 IPOs mentioned in the order. It is seen that in respect of 20 IPOs, the shares were received in JSPL’s pool account. Only in the case of Suzlon Energy Ltd’s IPO, it is seen that JSPL had received 27767 shares in its BO account:10257608 through off market credits from 1009 demat account holders.
3.5 It was submitted by JSPL that it has paid proper consideration to its retail clients upon receipt of funds from the stock exchange after pay-out in respect of all the off-market transactions mentioned in the order. It was further submitted that JSPL was not a beneficiary in any of these off-market transactions and it had conducted these transactions purely on the basis of brokerage and these were not its proprietary trades. It had obtained full delivery of shares in the aforesaid instances before selling on the stock exchange. In this regard, JSPL has filed a statement for the period 1.9.05 to 31.3.06, inter alia, indicating the client code number, cheque number, date of transaction, date of payment, amount, name of client, quantity sold and net amount of the contract credited / debited as the case may be to the account holders.
3.6 JSPL further submitted that with respect to transactions in Suzlon referred to in Para 5.7 of the order, all receipts of shares of Suzlon were from genuine account holders who had been transacting with it over a long period of time. It was further informed that these were JSPL’s clients who sold on listing.
3.7 JSPL has stated that its Bhavnagar Branch has a huge retail investor business. A large number of investors of the said branch had participated in the retail category of Suzlon IPO and each of these investors in Bhavnagar Branch were allotted 16 or 32 shares. It has also submitted a summary statement showing the transactions done on behalf of such investors indicating the client code, date of receipt and transaction reference number of the investors who had traded in Suzlon Energy Ltd. JSPL stated that no new demat account was opened at the time of Suzlon IPO and the 1009 transactions referred in Para 8.3 of the order have no nexus or connection between them.
3.8 JSPL has submitted that it had taken the complete KYC documentation in respect of the 686 BOs having common addresses.
4.0 Consideration of the issues
4.1 Pursuant to the receipt of above submissions from JSPL, SEBI forwarded JSPL’s replies to BSE and NSE seeking verification. In reply thereto NSE vide letter dated May15, 2006 has informed that in respect of the 21 IPOs identified in the order , proprietary trading by JSPL was observed in NTPC IPO only. Further, NSE has provided the client details in respect of JSPL’s transactions in the shares of Suzlon Energy Ltd thereby indicating that these transactions in Suzlon shares by JSPL were not proprietary trades. BSE vide letter dated May, 22, 2006 has also informed that JSPL had no proprietary dealings in the shares of Suzlon Energy Limited during the relevant period.
4.2 SEBI had also forwarded JSPL’s replies to NSDL advising it to verify the genuineness of it’s demat clients. In reply thereto NSDL conducted physical verification in respect of 154 randomly selected demat clients of JSPL and informed that except for seven demat clients, all the other demat clients(either on their own or through representatives) presented themselves before NSDL for physical verification.
4.3 With regard to the KYC documentation in respect of 686 demat clients of JSPL sharing common addresses, NSDL indicated that 25 persons had opened 534 demat accounts with the address "23, Payal Complex, Sayajigang, Vadodara-390 005". This address belongs to Shri Biren Kantilal Shah who is identified in the order as a key operator.
4.4 With regard to the submissions of JSPL regarding off market credits of Suzlon shares received in its BO account, it is seen that from December 14, 2000, JSPL has been maintaining a separate beneficial ownership account for its branches to receive securities from clients for their sales. The same is purportedly being maintained for better internal control and clear audit and administrative trail and after verification and reconciliation, the securities are moved to the pool account for delivery to the exchange. JSPL submitted that this is the reason why shares of Suzlon were shown as off market deliveries in the date analysis referred in the Order.
5.0 Conclusion
5.1 In view of the prima facie findings as above, I accept the contention of JSPL (Broking entity) that it had merely acted as broker on behalf of its retail clients and the shares received in its BO account were delivered by its clients towards their sale obligations.
5.2 As regards JSPL’s (DP) demat clients sharing common addresses, It is seen that 25 persons have apparently opened 534 demat accounts indicating the address of Shri Biren Kantilal Shah as their address. In respect of the bank accounts held by the above demat account holders, the first holder was Biren Kantilal Shah and the other holders’ names were handwritten in the Bank Pass Book. Hence, the genuineness of the demat clients of JSPL need to be further enquired into.
6.0 Order
6.1 In view of the above conclusions with regard to the activities of JSPL as a DP, it is prima facie seen that the DP had failed to exercise due diligence by opening many demat accounts for a few persons sharing the address of a key operator. I also note that NSDL has, pursuant to the KYC verification of JSPL’s demat clients, indicated certain irregularities relating to the demat accounts opened by JSPL such as opening of 534 demat accounts by 25 persons in the address of Shri Biren Kantilal Shah who is identified in the order as a key operator. In view of the above, the other directions against JSPL including that at para 17.9 of the order relating to opening of fresh demat accounts shall continue to be applicable till completion of enquiry proceedings and passing of final Order. However, considering the findings of BSE and NSE that JSPL (Broking entity) had merely acted as a broker on behalf of its retail clients and the shares received in its BO account were delivered by its clients towards their sale obligations, there is no need to continue interim directions against JSPL (Broking entity) as in para 17.2 of the ad interim order dated April 27, 2006.
6.2 It is clarified that the present order gives only a prima-facie finding as to the necessity of passing the above directions at this stage and accordingly all contentions are left open to be decided by the Enquiry Officer and in subsequent proceedings pursuant to his report.
6.3 This order shall come into force with immediate effect.
PLACE: MUMBAI
DATE: 26.05.2006 |
G ANANTHARAMAN
WHOLE-TIME MEMBER
SECURITIES AND EXCHANGE BOARD OF INDIA |