CHIEF GENERAL MANAGER IVD/ID1/PKN/AH/81521/06
INVESTIGATION DEPARTMENT November 24, 2006
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Dishank Shah
508, Churchgate Chambers,
Marine Lines,
Mumbai 400 021
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Dear Sir,
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 Karuna Cables Limited.
Securities and Exchange Board of India conducted investigation in the scrip of Karuna Cables Limited. Findings of investigation relevant to you are given below.
The price of the scrip rose by 110.5% from an opening price of Rs.9.50 on July 01, 2004 to Rs.20.00 on October 28, 2004 and closed at Rs.17.09 on October 29, 2004. The average daily volume traded during this period was 48,621 shares. The price –volume details are given in Annexure 1.
In the quarter ended June 30, 2004, sales and net profit of the company were Rs. 1.41 crore and Rs.9.8 lac only. In subsequent two quarters net profits declined marginally. Further for the full year from April 2004 to March 2005, net profit of the company went down by 70.2% to Rs. 67.6 lac on equity base of Rs.11.93 crore as compared to Rs.2.27 crore in the year from April 2003 to March 2004 on equity base of Rs.7.84 crore.
The details of concentration among the top ten member brokers and their clients on the basis of gross purchases, gross sales, net purchases and net sales for the period July 1, 2004 to October 29, 2004 are given in Annexure 2. The top ten member brokers aggregately constituted 86.4% gross purchases and 84.4% of gross sales respectively. You have traded through the broker Vijay Bhagwandas & Co. There were 42 instances when the price difference over last traded price was in the range of Rs.0.50 to Rs.2.75 (Annexure 3). It is observed that on majority of the instances the buy and sell brokers/ clients comprise one of the top ten brokers / their clients.
You were observed to be a part of group of clients / brokers involved in circular trading contributing to the volumes and price rise in the captioned scrip. Most of group’s volume contribution was by way of circular trading only. It can be observed from the following table that this group of clients / brokers aggregately purchased 3534831 shares and sold 3534681 shares which constituted almost 84.5% of the gross volumes on the exchange during the aforesaid period. Trading among these brokers / clients contributed about 78.45% of total market volume. The details of counterparty concentration between the clients and day-wise trading amongst these clients are given in Annexure 4 and 5.
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Member Name
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Client Name
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Total Buy Quantity
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Buy among these clients
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Buy among group of clients % of market volume
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Total Sell Quantity
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Sell among these clients
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Sell among group of clients % of market volume
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Adolf Pinto
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Kenneth Pinto
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39150
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38850
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0.93
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39150
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39150
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0.93
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Vijay Bhagwandas & Co
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Dipank Shah
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62050
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61578
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1.47
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62450
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60850
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1.47
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|
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Sunil Purohit
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428567
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421650
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10.08
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427567
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413004
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10.08
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|
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Tejas Ghelani
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249673
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243506
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5.82
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249273
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240868
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5.82
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Peninsular Capital Market Ltd
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Haresh Posnak
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185935
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176680
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4.23
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185935
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185935
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4.23
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Sanchay Fincom Ltd
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Sunil Purohit
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76215
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70364
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1.68
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76215
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76215
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1.68
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Vijay J Thakkar
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Mehul Shah
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158770
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158020
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3.78
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158770
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157798
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3.78
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M/s Harikishan Hiralal
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Mahesh Bissa
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225150
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213050
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5.1
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225150
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218308
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5.1
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|
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Vasantkumar Bissa
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117240
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116940
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2.8
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118090
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117455
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2.8
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Galaxy Broking Ltd
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Kapil Bhuptani
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269430
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218706
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5.23
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269430
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221906
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5.23
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S. P. Jain Securities Pvt. Ltd.
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Sunil Kuril
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155835
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151935
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3.63
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155835
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151235
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3.63
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SPJ Stock Brokers Pvt. Ltd.
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Shripal Jain (Own)
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996711
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849689
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20.32
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996711
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848249
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20.32
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P. J. Chaudhary
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Own
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381165
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376245
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9
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381165
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373865
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9
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Uttam Financial Services Ltd
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Own
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170465
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164795
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3.94
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170465
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157170
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3.94
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ISJ Securities Pvt. Ltd.
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Vijay Rathod
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18475
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18475
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0.44
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18475
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18475
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0.44
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Total
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3534831
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3280483
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78.45
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3534681
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3280483
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78.45
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The pattern of circular trading indicates that it was usually among a group of 3-4 brokers / clients i.e. A→B→C→D→A and the same number of shares were rotated in a circular manner among brokers / clients 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 broker/ client remains nil. It shows that this trading operation was planned very carefully to avoid any easy detection.
During the period of 4 months, out of 382 instances of circular trading (Completed circles among the group entities) observed among the group, you were involved in 23 instances. Such instances of circular trading amongst the above clients on a few days selected on sample basis are given in annexure 6 and details of all instances of circular trading among the group which are very voluminous are given in soft copy as annexure 7. Out of 3484 buy orders and 2478 sell orders entered by these group entities, 2181 buy orders and 1837 sell orders resulted in 24492 trades (one order resulting into many trades because of putting different disclosed quantity) among group entities and created volume of 3280483 shares accounting for 78.45% of the total trading volume of 41,81,409 shares. You entered 37 buy orders and 28 sell orders out of which 33 buy orders and 25 sell orders matched with the orders of the aforesaid group entities resulting into 392 buy trades and 433 sell trades. You were observed to be trading on 9 days and traded among group entities on 8 days.
It was observed that for 12779 trades with volume of 1798672 shares accounting for about 49.72% of volume of trades among group entities, time difference between 1071 buy orders and 1076 sell orders was less than or equal to 10 seconds. Out of these, you were involved in 473 trades with volume 76105 shares. Hence, the orders of most of these trades appeared to be 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 type of transactions does 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 along with creating artificial volumes.
Since circular trading continued for a period of four months, 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 10 seconds), it cannot be accepted to be a co-incidence. Moreover, in a scenario where several other member clients / brokers (totally 97 brokers) were also found to be active during this period, your orders matched with those of others in the group indicates concerted effort and manipulative intent. Further, you entered into circular trades almost on all days you traded in the market.
It can be said that you acted in connivance with other clients / brokers as the successful execution of circular trades for a large number of days could be possible only with the active involvement of the clients / brokers. While the screen based trading system is faceless in nature and maintains anonymity of the counterparty client / broker, 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 Regulations 4 (1), 4 (2) (a), (b), (e) and (g) of SEBI (PFUTP) 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 or 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/submission 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