CHIEF GENERAL MANAGER IVD/ID1/PKN/AH/84692/07
INVESTIGATION DEPARTMENT January 18, 2007
|
Ms. Suniti N Shah
Dhootpapeshwar Bldg.,
3rd Floor, Block-18,
Mangalwadi, Girgaum,
Mumbai – 400 004
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Dear Sirs,
Sub: Show Cause Notice under Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 read with Section 11, 11B and 11(4) of the SEBI Act, 1992 in the case of Database Finance Limited.
Securities and Exchange Board of India conducted investigation in the scrip of Database Finance Limited. Findings of investigation relevant to you are given below.
During the period from April 10, 2001 to August 31, 2001, the price of the scrip having face value of Re.1 rose from a low of Re.1.00 to a high of Rs.14.45. Subsequently, during the short period from April 01, 2002 to June 30, 2002, the price of the scrip rose sharply from Rs.42.35 to a high of Rs.83.90 on June 26, 2002 and closed at Rs.82.90 on June 28, 2002. The price–volume details are given in Annexure 1.
It can be observed from the annual results that the net profit of the company was the negligible amount at Rs.3.6 lac for the year ended July 2001 and Rs.3.7 lac for year ended July 2002. In subsequent two quarters ending October 31, 2002 and January 31, 2003, the company incurred losses of Rs.5.8 lac and Rs. 0.2 lac respectively. In the year ended July 2003, net profit of the company was only Rs.0.9 lac. Thus, the company has shown negligible profits over the years and the scrip was quoted 84 times of the face value i.e. the market price was not backed by fundamentals of company.
A group of clients including you indulged in circular trading i.e. buying and selling among themselves and contributed to significant volume and aforesaid rise in the price of the scrip (Relationship between the clients is given in Annexure 2 and 2A). During the period April 10, 2001 to August 31, 2001, the group aggregately purchased 840779 shares and sold 850790 shares constituting 77.24% on gross purchase basis and 78.16% on gross sale basis on the exchange. About 70% of trading by this group was among themselves and the volume in the scrip in the market was mainly because of this group.
During the period April 01, 2002 to June 30, 2002, another group (some members of the above mentioned group and this group were common) aggregately purchased 558579 shares and sold 403955 shares constituting 44.15% on gross purchase basis and 31.93% on gross sale basis on the exchange. Also, from the table below it is clear that 70.79% of purchases made by these clients are from related clients and 97.89% of the sales made by these clients are to related clients. The details of counterparty concentration between the brokers and the day-wise trading amongst these brokers are given in Annexure 3 and 4.
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Broker
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Client
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Total Buy Qty
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Total Sell Qty
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Buy among these clients
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Sell among these clients
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% of Trade with related clients
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% of Trade with related clients
|
|
1
|
Vijay Bhagwandas Shah
|
Ridhi K Shah
|
32638
|
31570
|
29806
|
31570
|
91.32%
|
100.00%
|
|
2
|
Unique Stock Bro
|
Hitesh Shah
|
80287
|
49651
|
44837
|
47650
|
55.85%
|
95.97%
|
|
3
|
Networth Stock
|
Indumati Goda
|
75567
|
44379
|
45951
|
41420
|
60.81%
|
93.33%
|
|
4
|
G. R Pandya
|
Manu Sonate
|
53850
|
42980
|
46330
|
42980
|
86.04%
|
100.00%
|
|
5
|
Bhavesh R Mehta
|
Nimish U Goda
|
49620
|
28720
|
35102
|
26663
|
70.74%
|
92.84%
|
|
6
|
Narendra Tanna
|
Baban Sonate
|
52432
|
38282
|
44482
|
38282
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84.84%
|
100.00%
|
|
7
|
Deepak Bhogilal Shah
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Rajubhai U Goda
|
6780
|
10900
|
3700
|
9800
|
54.57%
|
89.91%
|
|
8
|
M. P. Vora Shares
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Chandrakant K Shah
|
5950
|
8188
|
4950
|
8188
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83.19%
|
100.00%
|
|
9
|
Action Financial
|
P B Chandrasekhar
|
82520
|
62570
|
61975
|
62170
|
75.10%
|
99.36%
|
|
10
|
Rajchandra Capital Services
|
Suniti K Shah
|
39650
|
24350
|
25090
|
24350
|
63.28%
|
100.00%
|
|
11
|
Mangal Keshav
|
Samir N Shah
|
2600
|
1755
|
2600
|
1755
|
100.00%
|
100.00%
|
|
12
|
Sushil Finance
|
Ajay Goda
|
1225
|
1500
|
1155
|
1500
|
94.29%
|
100.00%
|
|
13
|
Bharati Thakkar
|
S Thirunavukarasu
|
75460
|
59110
|
49460
|
59110
|
65.54%
|
100.00%
|
|
|
Total
|
558579
|
403955
|
395438
|
395438
|
70.79%
|
97.89%
|
From the monthly totals taken it can be observed that their purchases and sales constituted 99% of total traded volumes in the month of April 2002. During the month of April 2002, the price of the scrip increased from Rs.42.35 to Rs.63.75. Thereafter in the month of May 2002 their purchases constituted 42% and sales constituted 36% and the price had increased from Rs. 62.65 to Rs.71.85. Hence the major concentration of these members was in the period of significant price rise in the scrip.
The pattern of circular trading indicates that it was usually among a group of 3-4 clients / brokers i.e. A→B→C→D→A and the same number of shares were rotated in a circular manner among clients / brokers in the group on daily basis so that the same number of shares go back to the original seller at the end of the day and net position of each client / broker remains nil. It shows that this trading operation was planned very carefully to avoid any easy detection. This group entered into circular trades almost on all days they traded in the market. Such pattern of circular trading amongst the above clients on a few days selected on sample basis are given in annexure 5 and details of all transactions of the group which are very voluminous are given in soft copy as annexure 6.
On many instances, the buy and sell order quantities and rates were similar and time difference between the buy and sell order entered was negligible (mostly less than 1 minute). It is observed that during the period April 01, 2002 to June 30, 2002, for 3704 trades with volume of 194105 shares accounting for about 49.05% of volume of trades among group clients, the time difference between 396 buy orders and 396 sell orders was less than or equal to 1 minute. Hence, the orders of most of these trades were structured / synchronized. It suggests that the orders were punched in with a preconceived motive that the orders would be picked up by a particular client on the opposite side, which also indicates that there was a prior arrangement with respect to these brokers and clients to execute such transactions. Such types of transactions do not appear to be genuine transactions. It can therefore be said that the aforesaid connected / related clients in connivance with the brokers have influenced the price of the scrip substantially along with creating artificial volumes.
The occurrence of such circular trades persistently cannot be a co-incidence. While the screen based trading system is faceless in nature and maintains anonymity of the counterparty broker/client, it is also an established fact that two parties with prior intent can match their trades with each other by placing orders simultaneously at the same price. And in this case the circular trading on so many days clearly reveals manipulative intent.
Such type of transactions, apart from creating artificial volume of trading, also influence the prices as happened in this case, by giving the impression to others that the scrip is being actively traded at prevailing prices which are genuine prices, but actually this is not the case. There can be different motives for such type of trading operations. The stock exchange mechanism is meant for genuine trades and not to misuse for different purposes. Such type of trading induces others also to trade in the scrip and innocent investors suffer losses and the manipulators exit the market after achieving their objectives.
The said acts of yours are in violation of Regulation 4(a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Markets) Regulations, 1995 as applicable at the time when the act was committed [Regulations 4(1), (2) (a), (b), (e), (g) and (n) of the revised and notified SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Market) Regulations, 2003]
In view of the above, you are required to show cause as to why action under Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations 2003 read with Section 11, 11B and 11(4) of the SEBI Act, 1992 including restraining you from accessing the capital market and prohibiting from buying, selling or dealing in the securities in any manner whatsoever for a particular period should not be initiated.
Your reply may be furnished within 21 days of receipt of this notice, failing which, it would be presumed that you have no explanation/submissions to offer and SEBI may take action as deemed fit under the SEBI Act, 1992 and Regulations framed thereunder. While replying, please also indicate whether you would prefer personal hearing before the Board.
Yours faithfully,
P K NAGPAL