BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI

Appeal No.97/2002

                                                            Date of Hearing: 28th April, 2004

                                                            Date of decision: 21st May, 2004

In the matter of

Mr. Rajkumar Chainrai                     Appellant – Represented by

Basantani                                           Shri S. K. Sen, Advocate

           

Versus

Securities and Exchange Board        Respondent – Represented by

 of India                                              Shri Kumar Desai, Advocate

Coram:

            Justice Shri Kumar Rajaratnam, Presiding  Officer

            Dr. B. Samal, Member

            Shri N. L. Lakhanpal, Member

Per :    Dr. B. Samal, Member

            The present appeal is against the impugned order of SEBI on 16th September, 2002  whereby the Respondent in exercise of the powers conferred  under  section 11B of the SEBI Act, 1992 read with sub regulation 12 of  the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 1995 has restrained the Appellant   from dealing in securities for a period of three years for his purported involvement in the manipulation of the scrip of Sound Craft Industries Ltd., during the period September, 98 to December, 98.

2.         The appellant is an individual who is the proprietor of a sole proprietary concern carrying on the business of shares and stock broking in the name and style of Rajkumar C. Basantani operating on the capital market segment  of the National Stock Exchange.  The appellant  is also the Chairman of a company viz. Sound Craft Industries Ltd., (SIL)  listed on the Bombay Stock Exchange as well as National Stock Exchange. The appellant is also Member of the Board of Directors and also promoter of the said company SIL. 

 3.        M/s. Sound Craft Industries Limited (SIL) was incorporated on 22nd January, 1985 with its Registered  and Corporate Office at Narayan Building, 23, Lakhamshi Napoo Road, Dadar (East), Mumbai – 400 014.   Shri Rajkumar C. Basantani is the Chief Promoter of SIL along with his wife Ms. Seema Basantani.  Shri Rajkumar C. Basantani is also the sole proprietor of M/s. Rajkumar C. Basantani (Hereinafter referred to as “the Member”) individual trading member operating on the Capital Market Segment of the National Stock Exchange of India.  Upon enquiry, as the Respondent found that Shri Rajkumar C. Basantani  has indulged in manipulative trading by creating artificial volumes and price in the scrip of SIL and interfered with the smooth functioning of the market in the interest of investors and the securities market  and in exercise of the powers conferred upon the Respondent under sub  section (3) of section 4 of the SEBI Act, 1992 read with section 11B and Regulation 12 of the said Regulations,  Shri Rajkumar C. Basantani was restrained from dealing in securities for a period of 3 years.  The Respondent found that  Shri Rajkumar C. Basantani has violated the provisions of regulation 4 (a) (b) and (d) of the Regulations.  We now reproduce the relevant provisions of Regulation 4(a) (b) and (d) hereunder:

4. Prohibition of manipulative, fraudulent and unfair trade practices

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:-

(a) indulging in an act which creates false or misleading appearance of trading in the securities market;

(b) dealing in a security not intended to effect transfer of  beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss;

(d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money or money’s worth for inducing such person for dealing in any security with the object of inflating, depressing, maintaining or causing fluctuation in the price of such security;

4.         The Respondent, after enquiry has found that at BSE the top 5 members who were very active in the scrip of SIL had generated 90% to 95% of the total  volume during the reference period.  At NSE     the combined volume generated by the top 5 trading members in the scrip was around 96% of the total trading volume recorded in the scrip at the exchange.  The trading in the scrip of SIL was concentrated among top 5 members, prominent traded broking entity being the Member i.e. M/s. Rajkumar C. Basantani with an average trading volume of around 35% of total volume traded at NSE in the settlements covered during the period under investigation.   Shri Rajkumar C. Basantani being the promoter of SIL had sole inexplicable interest in the scrip during the period under considieration.  The Respondent also found the volumes recorded at these exchanges abnormal in view of the fact that at both the exchanges the scrip was not very active prior  to December, 98.  In some of the settlements a  set  of brokers contributed 100% volume at the exchange.  According to the Respondent, there was no general market interest in the scrip and the volumes generated in the scrip  by a few set of brokers appear to be artificial.  The transactions were squared off either by the end of the day or by the end of the settlement period.  On  an average the overall net delivery obligations of the brokers at the exchange was hardly 1% of the total volume at the exchange.

5.         The clients who had traded in the scrip of SIL through the BSE and NSE Members have furnished their contact telephone number  as 6481335.  This telephone number incidentally  is also the telephone number of the Member.  Even in the acknowledgement given to the courier authorities in respect of the letters/summons issued to them these clients have furnished this telephone number as their contact number.  When the Member was asked on the subject matter the Member stated that he did not wish to comment.  The Respondent found this as an indication about the role played by the clients in the subject matter and their relationship with Shri Basantani.  The Respondent also established in its enquiry that  the funds flow/bank accounts submitted by the clients reveal that in respect of the dealings in the scrip of SIL have come from the account none other than that of Shri Basanthani. On an analysis of the order logs in the scrip of SIL it was observed by the Respondent that the Member used to place orders with huge volume at a substantially lower price in comparison with the ruling price / last traded price at the NSE.  The Member also used to place sell orders of huge volume at substantially higher rate than the ruling price/ last traded price.  This was consistently observed in respect of  the  orders placed by the Member in the scrip during the period under reference.  The Respondent stated that the purpose behind such transactions was to create artificial liquidity/volume in the scrip of SIL which is substantiated from  the manner in which the orders were executed.  The scrip price was conveniently managed by employing the above exercise.

6.         Analysing in the trading pattern of the scrip the Respondent had brought out the fact  that top 5 brokers of BSE and NSE had formed a Cartel and indulged in circular trading in the scrip so as to create artificial market in the scrip and also to maintain the price quote. Circular Trading is established if commonality of clients and their nexus with the promoters is proved.  In this case there was ample evidence including funds flow from the account of Shri Basantani to the account of the clients to suggest that circular trading in the scrip had taken place.  The Respondent submitted that the Member is clearly guilty of indulging in circular trading  by quoting examples.  The persons/entities who have offered the shares in the auctions were the same clients who had traded in the scrip of SIL  viz. Nagraj Kunder and Yogesh Panchal, Suhas Patil, and Shri Dinesh Patel etc.   The Respondent stated that there is no difference between the Member and Shri Basanthani as far as the transactions covered  are concerned as it is the concerted action.  The Member also being the Chief Promoter of SIL is very much vitally interested in the promotion of the scrip of this company.

7.         The appellant submitted that the Respondent has considered some arbitrary dates and trades.  According to the order the closing price on 22/12/98 was Rs.265/- with average volume  of   6171 shares.  The price moved up to RS.291/- on 31..12.1998.  According to the order the price moved in a narrow band of Rs.290/- to

Rs.309/- between 1st January, 1999 to 9th February, 1999.  From 9th February, 1999 the price moved steadily upwards until 5th March, 1999 when it touched Rs.339/-.  The Respondent’s allegation that the appellant acted in concert with other 4 persons viz.  Shri Dinesh Patel, Subhas Patil, Nagraj Kunder and Yogesh Panchal, is not correct as the appellant has never met them.  Out of the above four persons only Shri Dinesh Patel is an employee who traded through the Stock Broking Concern of the appellant but is not known personally to the appellant.  Others traded elsewhere but had some transactions/dealings  not related to trading with employees of the said concern.  The appellant submitted that it has been wrongly alleged by the Respondent that these persons carried on trades on behalf of the Appellant.  It was, therefore, stated by the appellant that it was necessary for the Respondent to allege and prove that all payouts of these persons had been funded by the appellant, that all paying had been received by the appellant, that all deliveries had been made by  and taken by the appellant.  The Respondent has only taken some bank account entries relating to minor accommodation, no deliveries at all and arrived at unfounded allegation that these persons were fronts for the Appellant for the alleged circular trading.  The appellant submitted that this allegation is unfounded. 

 

8.         After hearing the counsel for both the parties we find that there is evidence  of  violation of regulations as stated by the Respondent.  However, taking into account the fact that on the basis of the same facts, the penalty imposed on the brokerage firm of the appellant is suspension of registration for six months only, considerations of equity requires that the period of restraint in the present case also be reduced from three years to six months.  This is because the proprietor can indulge in fraudulent practices only through his brokerage firm and the penalty on the firm can not be less severe than that on its sole proprietor.

 

9.         The impugned orders stands accordingly modified with the period restraint on the appellant dealing in securities being reduced from three years to six months.

                       

No order as to costs.

 

(Pronounced in Court)

 

 

 

Sd/-

Justice Kumar Rajaratnam

            Presiding officer

 

 

Sd/-                                                                                Sd/-

Dr. B. Samal,                                                     N. L.  Lakhanpal,

Member                                                                         Member                   

        

Place: Mumbai

Date: 21st May, 2004.

smn