IN THE SECURITIES APPELLATE TRIBUNAL

MUMBAI

Appeal No.276/2004

In the matter of:

Coram:

          Justice Kumar Rajaratnam, Presiding Officer

          Dr. B. Samal, Member

Per:  Dr. B. Samal, Member

1.       Appeal is taken up for disposal with consent of both parties.

2.       The appeal is  against the impugned order dated 8^th October, 2004 of the Respondent which inter alia reads as under: 

          “Therefore, in exercise of powers conferred upon me in terms of      Section 19 of the Securities and Exchange Board of India Act,       1991, 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 penalty of cancellation of certificate of registration of   M/s. Rajesh N. Jhaveri, member, Ahmedabad Stock Exchange,      having SEBI registration number INB 20123415.

            This order shall come into effect on the expiry of three weeks         from the date of this order.”

3.       The brief facts of the case is that the appellant is a registered Broker with the Ahmedbad Stock Exchange.

3.1               The shares of Sawaca Business Machines Ltd., (earlier known as Sawaca Finance Ltd.,) (SFL) were lised on the stock exchanges Mumbai and Ahmedabad.  The Respondent conducted an investigation into the alleged price manipulation in the scrip of SFL during the period  October – December, 1999.  It was seen that there was unusual upward price movement in the shares of SFL, during the period, the price having moved from Rs.8/- to Rs.38/-.  Similarly it was also seen that the volumes in the shares which were traded a total of 7 times in the full year prior to 26/10/1999 went off significantly during the investigation period.

3.2               It was found during the investigation that one Mr. Mahendra Shah who was subsequently appointed as Managing Director of the company was the largest seller during the investigation period.  It was also observed that Shri Shah along with M/s. Rajesh N. Jhaveri (the appellant) among others had created artificial volumes in the shares of SFL and had then offloaded a large quantity of shares in the market. It was also seen that Shri Shah had put in large buy orders to influence the price of the scrip and had created false/misleading appearance of demand/interest in the shares of SFL, thereby influencing the share price of the scrip.

3.3     The appellant a member of the Ahmedbad Stock Exchange had traded in the scrip of SFL, for their client Shri Mahendra Shah.  Investigation conducted by the Respondent  revealed that the appellant while trading in the shares of SFL had acted as sub broker to Shri Mahendra Shah.  Investigation conducted y the Respondent also revealed that the appellant while trading in the shares of  SFL had acted as sub broker to M/s. Shrikant G. Mantri a member of Bombay Stock Exchange and also traded through the entity Shri Parshwa Finance  who had acted as a client to M/s. Jyotish Bhogilal Stock Brokers Pvt. Ltd.   It was also alleged that the appellant had acted as an unregistered stock broker and had failed to submit full information to SEBI and hence failed to exercise proper skill and diligence which is a violation of Clause A(2) of Code of Conduct given in Schedule  II read with Regulation 7 of SEBI  (Stock Brokers and sub brokers) Regulations, 1992.    The second allegation against the appellant was that he aided and abetted the ultimate client Shri Mahendra Shah in creation of false market in the shares of SFL which is a violation of Regulation 4 (a)(b) & (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995.

3.4     The respondent conducted enquiry in accordance with the Securities and Exchange Board of India (Procedure for holding Enquiry by Enquiry Officer and imposing penalty) Regulations, 2002.

3.5     On receipt of the enquiry report a show cause notice dated 16^th March, 2004 was issued to the appellant which was replied to by him vide letter dated 20/4/2004.

3.6     The following two issues require consideration by us:

          (i) creation of artificial market of the scrip of SFL by the         appellant.

          (ii) Aided and abetted  Shri Shah in market manipulation.

3.7     Regarding the allegation of artificial  market the learned counsel for the appellant submitted that the appellant had maintained high standard of integrity and fairness in conduct of all investment business.  He submitted that there was no violation of Code of Conduct as alleged.  He stated that they had duly filled in the client registration   form.  The appellant had only a business relationship with Shri Mahendra Shah.  The appellant had traded only 54 lac shares of SFL which amounts to 2% of total volume averaging just 2800 shares per day during the transaction period.

3.8     The appellant had admitted to having dealt for Shri Mahendra Shah acting as client to the following entities:

          (1) M/s. Shrikant G. Mantri, Member, BSe

          (2) Parshwa Finance the client of M/s. Jyotish Bhogilal Stock Brokers Pvt. Ltd. An unregistered sub broker to M/s. Prabhudas Liladhar Pvt. Ltd., member BSE.

3.9     The appellant submitted that they have only sold the shares and not bought as alleged.  In fact the appellant has dealt as under for Shri Shah:

          Thus the volume of trading done through the appellant compared to the total volume of  trading in the scrip during the period complained of, is extremely small and insignificant.

4.       The learned counsel for the appellant also submitted that they have never been allotted 2 lac shares in the preferential issue of shares by SFL in January, 2000.  It was, therefore, pleaded that the penalty which has been imposed upon the appellant being cancellation of certificate of registration is too harsh and if not quashed or withdrawn, is likely to ruin not only him but all the persons working with him and going to completely ruined and  going to be out of business.

5.       We have perused all the records and submissions submitted by both the parties.

6.       The appellant submitted the following statement indicating that

the other persons who were involved in the trading of the above scrip have not been given such a harsh punishment though the charges against them are either of similar nature or serious than the appellant himself. 

7.       We also saw the statement to find out whether the shares of Sawac Finance Ltd., has been allotted to Mr. Gautam N. Jhaveri the proprietor of the appellant.  In the impugned order it has been stated that Mr. Gautam N. Jhaveri proprietor of the appellant company is shown to have been allotted 2 lacs shares in the preferential issue of shares by SFL in January, 2000.  The appellant has claimed that they had neither made any application nor received any shares in the said allotment.  It is also stated in the impugned order of the Respondent that no evidence has been produced by the Appellant to substantiate its claim apart from a mere denial particularly as allottees’ list of SFL contains the appellant’s name.  It  is also stated in the impugned order that a company would not show the name of a person as allottee without there being adequate explanation for the same, the most obvious being that the person was indeed an allottee. 

8.       We observe from the show cause notice dated 16^th March, 2004 issued by the Investigation department of SEBI under sub regulation 2 of regulation 13 of Securities and Exchange    Board of India (Procedure for holding Enquiry by Enquiry      Officer and imposing penalty) Regulations, 2002, as under:

            “SFL had made preferential allotment to various           entities/individuals of           52,00,000 shares @ 10/- per share on       January 05, 2000.  SFL had made    allotment to the following     entities/individuals:

          SFL confirmed that the money towards the preferential         allotment was brought in properly.  On verification of the bank         statements of SFL, it was observed that as on 5^th January 2000       there were both debit and credit entries appearing in the      account for the same amount signifying that the money    towards the preferential allotment did not come in at all.  They          were shown as brought in by means of “fictitious book entry”.         The bank statement of the company for the preferential issue     indicates that there was no genuine inflow of money into the          account of the company.  The balance in the account of the           company which was approx. Rs.11,905/- before the start of the      credit and debit entries has remained the same even after the     last entry.  SFL only resorted to book entries for showing           subscription.  Thus, shares were fraudulently created without        infusion of funds,  SFL, in one of its letter, had informed SEBI  that Satish R. Shah, Shetal R. Shah Vishal S. Shah and        Jyotsna S. Shah were the directors on the board  of SFL and           they were coming under the definition of directors/friends and      relatives as per Section 6 of the Companies Act, 1956.”

9.       The above observation  in the show cause notice issued by the Respondent does not clearly substantiate that  Mr. Gautam N. Jhaveri has really been allotted 2 lacs shares as the show cause notice itself says that the bank statement of the company for the preferential issue indicates that there are no genuine flow of money

into the account of the company.  The balance in the account of the company which was approximately  Rs.11,905/- before the start of the credit and debit entries has remained the same even after the last entry.  SFL only resorted to book entries for showing subscription.  These shares were fraudulently created without infusion of funds.  We have no hesitation in accepting the appellant’s plea that 2 lacs shares were in fact not allotted to the appellant.

9.       Taking all the facts into account and circumstances of the case we hold the appellant guilty of negligence in trading in the security of SFL.  Taking into account the parity of penalty imposed on other entities, which are extracted at para 6 of this order, we feel that the penalty imposed on the appellant must re-relate to the others similarly placed.  We find also that two brokers of the BSE viz. Shri R. D. Shah and Prabhudas Wiladhar,   who were found to be guilty in trading of the same securities at the relevant time, only  a warning has been given.  Taking all these facts into account and in the facts and circumstances of this case, we are inclined to reduce the penalty for a period of 4 months including the period already undergone.

10.     The impugned order stands modified to this extent.  The appeal is disposed of accordingly.

          No order as to costs.

                                                                                                             Sd/-

Place: Mumbai

Date: 18/02/2005

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