WTM/39/12/2005/IVD

SECURITIES AND EXCHANGE BOARD OF INDIA

ORDER

Under regulation 13 (4) of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 against M/s. Shilpa Stock Broker Pvt. Ltd, Member, INB 011057438 The Stock Exchange, Mumbai, in the matter of M/s. Eonour Software Ltd

1.0 Background

1.1 In January 1996, M/s. Eonour Software Limited (hereinafter referred to as “ESL”) had come out with a public issue of 12, 50, 000 shares of Rs. 10/- each at a premium of Rs.20/- per share aggregating to Rs.375 lac. Shares of ESL were listed at The Stock Exchange, Mumbai (hereinafter referred to as “BSE”), Madras Stock Exchange, Madhya Pradesh Stock Exchange, and Ahmedabad Stock Exchange.

1.2 The scrip of ESL was listed at BSE on 13^th March 2000 and the first trade was reported only on 12^th June 2000 at a price of Rs.520/- which went up to Rs.634.75 by 7^th July 2000. A total of 2, 22, 600 shares were traded at BSE during 1^st December 1999 and 31^st July 2000. The maximum quantity traded on an exchange on a particular day during the said period was on 22^nd June 2000 with number of shares traded being 11, 700 shares.

1.3 Securities and Exchange Board of India (hereinafter referred to as “SEBI”) had conducted an investigation into the trading of the scrip of ESL.

1.4 Brokers mentioned in following Table-1 were the top ten brokers in terms of gross quantity traded during the period June 2000 to December 2000 at BSE. These brokers were selected on the basis of their Gross Purchases, Gross sales and Gross position.

Table -1

1.5 From the records submitted by the brokers of BSE mentioned in Table - 1, it was seen that most of the clients of these brokers were linked to each other in some way or the other and had predominantly traded in the scrip of ESL and that most of these clients had not paid margin/deposits to the brokers for the trades executed by them but had traded through them in substantial quantities. Further, they were squaring off their positions not only at the end of settlement but also almost on the same day. It was observed during 1^st June 2000 and 31^st December 2000 that deliveries in the scrip were less than 5% of the total trading volume of the scrip of ESL on BSE. The total quantity traded by the clients / entities is given in Table -2 as under

Table -2

1.5 It can be seen from table – 1 that the gross quantity traded i.e., buy and sell in the scrip at BSE during June 2000 to December 2000 was 4, 45, 200 lac shares, out of which 3, 67, 700 lac shares were traded by the entities named in the table - 2, which constituted approximately 83% of the trading in the scrip.

1.6 Investigations revealed that M/s. Shilpa Stock Broker Pvt. Ltd (hereinafter referred to as “SSBPL”) traded in the scrip of ESL on behalf of two clients mentioned in the above Table - 2 i.e., M/s. K N Traders (hereinafter referred to as KNT”) and M/s. Hakeem Auto Ltd (hereinafter referred to as “HAL”).

1.7 SSBPL not showing due skill, care and diligence while dealing with KNT and HAL was alleged to be in violation of Code of Conduct as specified under Schedule II read with regulation 7 of Securities and Exchange Board of India (Stockbrokers and sub-brokers) Regulations, 1992 (hereinafter referred to as “Brokers Regulations”). Further, the trades done by SSBPL on behalf of KNT and HAL were alleged to be in violation of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as “FUTP Regulations”) and SSBPL by trading on behalf of KNT and HAL had aided and abetted market manipulation done by KNT and HAL which is a violation of regulation 4 (b) and (d) of FUTP Regulations.

2.0 Enquiry Proceedings

2.1 In view of the above irregularities committed by SSBPL, Chairman, SEBI vide order dated 18^th February 2002, appointed an Enquiry Officer to enquire into the affairs of SSBPL. Enquiry Officer after conducting enquiry, submitted a report dated 31^st March 2004 finding SSBPL guilty of violating Clause A (2) of Code of Conduct laid down under Schedule II of Broker Regulations and recommended that a minor penalty of warning be imposed on SSBPL.

3.0 Show cause notice and hearing

3.1 Subsequent to the said Enquiry Report, as per regulation 13 (2) of Securities and Exchange Board of India (Procedure for Holding Enquiry By Enquiry Officer and Imposing Penalty) Regulations, 2002, a show cause notice dated 13^th April 2004 was issued to SSBPL. SSBPL vide letter dated 17^th June 2004 responded to the show cause notice inter alia as follows

3.1.1 “More than 85% volumes were in the normal scrips such as Tisco, Infosys, Global Tele, Zee etc., and therefore we could not suspect.

3.1.2 The BSE had send us the letter about the investigation into the transaction of ESL and we have stopped the business and discontinued the terminal immediately.

3.1.3 We have not done any single transaction in out proprietary account or in any personal account of Directors.

3.1.4 However, after going through the SEBI and BSE we have taken various steps to improve our vigilance and we assure you that we are taking all necessary steps so that such thing does not occur in future.”

4.0 Consideration of issues and findings

4.1 I have carefully considered the Enquiry Report, show cause notice issued to SSBPL and submissions made by SSBPL in response to the show cause notice.

4.2 As admitted by SSBPL had traded on behalf of KNT and HAL and these clients were involved in market manipulation. SSBPL not being diligent enough allowed KNT and HAL in indulging acts calculated to create a false and misleading appearance of trading in the scrip of ESL, which resulted in building up of artificial volumes and price in the scrip of ESL.

4.3 I note that number of clients connected to each other were able to indulge in circular trading i.e., buy and sell transactions with each other, squaring off positions and reversing trades either on the same day or same settlement, making the net receivables and deliverable positions either nil or in negligible quantities and created a false and misleading appearance of trading on the securities market in the scrip of ESL which include that clients of SSBPL was very few and specific and as such it was not difficult for SSBPL to watch carefully their trading style.

4.4 Being a registered intermediary, SSBPL is under positive obligation to be more diligent while dealing with clients, which SSBPL failed in the instant case resulting in violation of clause A (2) of Code of Conduct specified for brokers under Schedule II read with regulation 7 of Brokers Regulations.

5.0 Order

5.1 Therefore I agree with recommendation of enquiry officer and in exercise of powers conferred upon me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992 read with regulation 13 (4) of Securities and Exchange Board of India (Procedure for holding Enquiry by Enquiry Officer and imposing penalty) Regulations, 2002, I hereby impose a minor penalty of warning on M/s. Shilpa Stock Broker Pvt. Ltd. I direct it to be more diligent in complying with the Securities and Exchange Board of India Act, Rules and Regulations framed there under. I further direct M/s. Shilpa Stock Broker Pvt. Ltd to note that any instances of violations or non-compliance of the Act, Rules and Regulations in future shall be dealt with more stringently.