ORDER
G. Anantharaman, Member
1. BACKGROUND:
1.1 Securities and Exchange Board of India (hereinafter referred to as SEBI) vide an ex parte ad interim order dated January 24, 2006 under Section 11(1), 11B and 11(4)(b) of SEBI Act, 1992, pending enquiry and passing final order, suspended the certificate of registration of Galaxy Broking Limited (hereinafter referred to as ‘Galaxy), member of the Bombay Stock Exchange Limited (hereinafter referred to as BSE) and a stock broker registered with SEBI with registration No : INB010882739.
1.2 The said interim order was passed as the name of Galaxy was frequently appearing in the trading of penny stocks and was suspected to have played a significant role in the creation of artificial price of such shares. In the said order, SEBI had also directed the clients of Galaxy, namely Shri Anil Gandhi, Smt Priti Anil Gandhi, Amrut Securities, Shri Deepak Ashar, Shri Manish Ashar, Chintamani Share and Broking Ltd., Smt Sudhaben Amrutlal Gandhi, Ms. Pooja Anil Gandhi, Shri Amrutlal Jivandas Gandhi, IFSL, Cardioid Marketing, Shri Chirag Shah, Shri Girdharbhai Vagadia, Shri Suresh Pukhraj Jain, Shri Darshit Patel, Shri Dilip Kumar Adukia, Vintel Securities, Troop Track Electrodes and Rational Finvest not to buy, sell or deal in securities of companies indicated against their names (in the said order), directly or indirectly, till further directions. SEBI vide said order, further directed the depositories not to give effect to any transfer of shares of the companies (listed in the said order) lying in the respective beneficial owner accounts of the clients of Galaxy.
1.3 In the above order, it was inter alia observed that Galaxy had played a major role in generating artificial volumes and rise in the prices of large number of penny stocks. It was also observed that some of the companies in which Galaxy had traded either through the Anil Gandhi Group or through some of the inter-connected clients, besides the directors of Galaxy, appear to have direct and indirect linkage with the promoters/employees of the said companies whose scrips were traded. It was also found that Galaxy not only was involved in the creation of artificial volumes but had also indirectly funded most of the clients who traded with them in penny stocks, by maintaining a continuous debit balance often running into several crores of rupees for a fairly long period. Further, it was found that Galaxy had not exercised due care and skill while opening of the client accounts, as six of the top twenty clients of Galaxy were private limited companies, while the telephone numbers of the said companies given on the KYC forms did not belong to them and any of the officials of the said companies were not available to answer the calls made on the said numbers. It was observed that Galaxy had violated the following provisions:
a) Regulation 4(2)(a) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
b) Regulation 18B, A(2), (3), (4), and (5), B(6) of Code of conduct prescribed as per Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
c) SEBI Circular No SEBI/MRD/SE/Cir-15/2004 dated March 19, 2004 read with SEBI/MRD/SE/SU/Cir-16/04 dated March 31, 2004.
d) SEBI Circular No. SEBI/MRD/SE/Cir33/2003/27/08 dated August 27, 2003.
e) SEBI Circular SMDRP/POLICY/CIR-49/2001 dated October 22, 2001.
f) SEBI Circular SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004.
g) Clause 5 of SEBI (Securities Lending Scheme) 1997.
1.4 The aforesaid persons/entities were given an opportunity for filing their objections, if any, within fifteen days of the said order. Accordingly, SEBI received objections from some of the aforesaid persons/entities as mentioned below.
2. Reply received by SEBI
2.1 Pursuant to the aforesaid interim order, SEBI had received replies from some of the persons/entities against whom such order was passed. The replies received by SEBI from such persons/entities are mentioned below:
a) Rational Finvest Private Ltd. (client of Galaxy) filed its reply pursuant to the above interim order dated January 24, 2006; vide its letter dated February 03, 2006. It was, inter alia, stated that, it had sold only the shares of Landmark Leisure, which were allotted to them at the time of Initial Public Offer in the year 1999. As regards the deficiency in the KYC, it was clarified that it was not aware that documentation was not proper. And further it was stated that there were no intimations from Galaxy regarding such discrepancies in the KYC.
b) Shri. Anil Gandhi (client, shareholder and director of Galaxy) vide letter dated February 10, 2006 inter alia, stated that he was an investor and further denied the allegation that the transactions entered into by him were intended to transfer the beneficial ownership. He had also stated that Shri Deepak Aashar was not related to him and he was only a client of Galaxy. It was also stated that the transactions entered into by him were on the BOLT system of BSE and that the deliveries were effected and payments were made or received as the case may be. He had also enclosed the details of transactions made by him in various scrips.
c) Smt. Priti A. Gandhi, wife of Shri Anil Gandhi (client and shareholder of Galaxy) vide letter dated February 8, 2006 filed her objections which is more or less similar to the reply of Shri Anil Gandhi filed subsequently. She explained that she had no interest in the business of Galaxy and of Shri Anil A. Gandhi. She further clarified that she had worked with Galaxy as a client and met all pay-in obligations and the brokerage charged by Galaxy.
d) Ms. Pooja A. Gandhi (client of Galaxy) vide letter dated February 8, 2006 reiterated the submissions made by Smt. Priti A. Gandhi and enclosed the details of transactions entered into by her. Ms. Pooja A. Gandhi is the daughter of Shri Anil A. Gandhi and Smt Priti A. Gandhi.
e) Smt Sudhaben A. Gandhi, mother of Shri Anil A. Gandhi (client of Galaxy) vide letter dated February 7, 2006 filed her objections which are of a piece with the replies received from the other members of the Gandhi family. She clarified that she was an investor and all the transactions done by her were on the BOLT system of BSE and further the deliveries were effected and payments were received by her. She had also enclosed the details of transactions entered into by her.
f) Shri. Amrutlal Jivandas Gandhi, father of Shri Anil A. Gandhi (client and shareholder of Galaxy) vide letter dated February 7, 2006 reiterated the reply made by Smt. Sudhaben A. Gandhi and enclosed the transaction details.
g) Amrut Securities Ltd., (client and shareholder of Galaxy) a stock broker (member of Saurashtra Kutch Stock Exchange Ltd.) and also a sub broker (affiliated through Galaxy) registered with SEBI, vide letter dated February 10, 2006 submitted its reply on the similar lines as that of the above and stated that they were an independent company and not connected with the day to day management and affairs of Galaxy and that it had no control over Galaxy.
h) Chintamani Share and Broking Ltd., a stock broker registered with SEBI and a member of NSE (client, shareholder of Galaxy) vide letter dated February 10, 2006 more or less made the same submission as that of Amrut Securities Ltd. and stated that its transactions were on the BOLT system of BSE.
i) IFSL Limited (client of Galaxy) vide letter dated February 20, 2006 inter alia stated that its income was mainly from the securities business. It was also stated it was not aware of any personal company of Shri Paras Chaplot. IFSL had further requested for the removal of its name from the interim order.
2.2 Some of the clients (mentioned in the order dated January 24, 2006) viz. Shri Chirag Shah, Shri Ganesh Raut, Shri Girdharbhai Vagadia, Ritdeal, Vintel Securities Ltd., Stardom Trading Ltd, Suresh Pukhraj Jain, Shri Darshit Patel, Shri Dilip Kumar Adukia, and Troop Track Electrodes Ltd had not filed their objections. I observe that despite giving sufficient opportunities, the said parties had failed to file their objections. In the facts and circumstances, I am of the considered view that the said persons/entities (clients of Galaxy) do not have anything to offer by way of objections and in that view there is no need to give them any more opportunity.
2.3 Shri Anil A. Gandhi, Smt Priti A Gandhi, Ms. Pooja A. Gandhi, Smt. Sudhaben A. Gandhi, Shri Amrutlal J. Gandhi, Amrut Securities Ltd., Chintamani Share and Broking Ltd., Rational Finvest Pvt. Ltd. had sought an opportunity of personal hearing. In view of the above, SEBI had granted an opportunity of hearing to the aforesaid persons/entities on April 18, 2006. However the said hearing was rescheduled to September 6 and 7, 2006. As the aforesaid persons/entities (except Rational Finevest) had requested SEBI for the adjournment of the said hearing, another opportunity was granted to them on October 31, 2006.
3. Hearing
3.1 Shri Pesi Modi, advocate filed the written submissions on behalf of Galaxy. The learned advocate made submissions on the basis of the above written submissions. At the outset, reference was made to its previous letters dated May 8, 2006, May 15, 2006 and July 14, 2006. It was interalia submitted that the word ‘penny stocks’ as mentioned in the interim order dated January 24, 2006 has not been defined either in the Act or in the Regulations framed thereunder. It was submitted that the trades carried out by Galaxy on behalf of the clients were done on the screens of the stock exchange and the said trades were duly settled by payment and delivery without any default. It was further submitted that there was a substantial market interest in penny stocks and the returns were substantial in such penny stocks. It was submitted that Galaxy was not responsible for any artificial rise nor created or assisted in creating a false market. It was also explained that a mere rise in price cannot prove any manipulation by it, specially when the market was moving up.
3.2 It was interalia stated that the clients of Galaxy were not interrelated as observed by SEBI. In fact, only some of the parties named in the interim order were relatives of Shri. Anil A. Gandhi. It was also stated that Smt Priti A. Gandhi and Shri Amrutlal J. Gandhi were directors of Amrut Securities Ltd. However, they had resigned from the directorship of the said company with effect from February 25, 2004. Galaxy claimed that Shri Anil Gandhi had resigned as a director of Presilco Impex Ltd. (shareholder of Galaxy) with effect from October 20, 2000. In view of the above, it was contended that during the period under investigation (from March 2005 to September 2005) Mr. Anil A. Gandhi, Smt. Priti A. Gandhi and Shri Amrutlal J. Gandhi were not directors of Amrut Securities Ltd and Presilco Impex Ltd. It was also stated that Shri Anil A. Gandhi and his relatives, held only about 32% of the issued capital of Galaxy. As regards M/s Chintamani Shares & Broking Ltd. it was submitted that Shri Anil Gandhi had resigned as a director thereof on January 25, 2006 and that neither Shri Anil Gandhi, nor his relatives held any shares in the said company either in the past or currently.
3.3 As far as the turnover of Galaxy in the 19 scrips stated in the order, it was stated that its actual turnover was only 5.6% of its total turnover. It was therefore submitted that merely because the said scrips prices (19 scrips) went up and then came down could not be the foundation for any conclusion that the same was manipulated or artificial. It was also stated that Chintamani Shares & Broking Ltd Trading was not an entity known to Galaxy and therefore could not be classified as a group company of Galaxy, merely because Anil Gandhi used to be a director of Chintamani Shares and Broking Ltd also. Furthermore, Chintamani Shares and Broking Ltd. held only 4.103% of the capital of Galaxy and Galaxy held no shares of Chintamani Shares and Broking Ltd. It was also submitted that Galaxy had not borrowed or lent any securities and therefore, it cannot be said that it had violated the provisions of Securities Lending Scheme, 1997. It was also further urged that there was a maximum debit balance of Rs. 10 lakhs for 4 days in the case of Cardioid Marketing, when the said debit of Rs. 10 lakhs arose on Friday the 5th August 2005 and was cleared on Monday the 8th August 2005, with the intervening days being Saturday and Sunday. As regards the exercise of due care and skill, it was contended that it had taken reasonable care which an ordinary person in the normal circumstances does. In the facts and circumstances Galaxy stated that it had not violated any of the provisions of the Acts or Regulations as alleged.
3.4 Shri R.R Bhonsale, advocate made submissions on behalf of Gandhi family. It was inter alia submitted that they were not involved in the creation of artificial market and that the transactions entered into by them were in the course of their business. It was further stated that Shri Anil Gandhi had resigned as a director from Chintamani Trading and Broking Ltd. with effect from January 25, 2006 and from the directorship of Presilco Impex Ltd. on October 20, 2000. It was also submitted that he had resigned as a director from Amrut Securities Pvt. Ltd. on September 19, 2004. Similar submissions were made on behalf of Gandhi family. More or less similar contentions were also raised by Amrut Securities Pvt. Ltd. and Chintamani Share Broking Ltd. In short Shri Anil Gandhi, Smt Priti A. Gandhi, Ms. Pooja A. Gandhi, Smt Sudhaben A. Gandhi, Shri Amrutlal J. Gandhi, Amrut Securities Ltd., Chintamani Shares and Broking Ltd., Rational Finvest Pvt. Ltd. denied the allegations in to two while seeking revocation of the interim order.
4. Consideration of Issues and Findings.
4.1 I have considered the findings of preliminary investigation, findings of the inspection report, replies filed by Galaxy, Gandhi Family, Amrut Securities Ltd., IFSL, Chintamani Share Broking and the oral as well as written submissions made on behalf of the above persons and other materials available on record. Galaxy had taken a preliminary contention that the term ‘penny stocks’ has not been defined in the Act or in the Regulations framed thereunder. Galaxy had further contended that, unless it was made clear to them what constituted ‘penny stocks’, it could not comprehend the allegations leveled against it. In this context, though the term ‘penny stocks’ has not been defined either in the Act or in the Regulations framed thereunder, such shares which are being traded in T, TS and Z groups of BSE during the period (March 2005 to September 2005) covered under inspection, have been categorized in the nomenclature of ‘penny stocks’, as understood in common parlance. Above all, as the names of the said shares with the details of the transactions made by Galaxy were specifically mentioned in the interim order dated January 24, 2006, I observe that no prejudice has been caused to Galaxy merely for the reason that such scips were categorized as penny stocks and that such term has not been defined in the Act or in the Regulations framed thereunder.
4.2 The next contention raised by Galaxy was that it was not connected to its clients in any manner whatsoever. Before considering the said issue, I would like to mention the companies in which Galaxy had executed trades on behalf of its clients as per the interim order herein under (Table I):
S.
No.
Name of the company
Major clients on whose behalf Galaxy
traded
Total turnover of
Galaxy in the shares of the company (in no. of shares)
Turnover of the
clients in the shares of the company (in no. of shares)
Percentage of client
turnover to total turnover (approx)
1.
Baffin Engineering
Anil
Gandhi Group
110,21,089
1,01,01,389
91.65
2.
Global Boards
Anil
Gandhi Group
140,76,118
13833068
98.27
3.
Shukun Construction
Anil
Gandhi Group
1619194
10,00,000
61.75
4.
Birla Power
Anil
Gandhi Group
1,462,456
875,957
59.89
Chirag
Shah
445,375
30.45
5.
Fast Track Entertainment
Girdharbhai
J Vagadia
(8/16, MK Amin Marg, Patel Building, 3rd Floor,
Office No.30, Bora Bazar,Fort, Mumbai-400001)
96,63,120
5043826
52.19
Ritedeal
2493385
25.80
6.
Mega Corporation
Ganesh
Raut and Group
53,98,880
1,733,025
32.09
Anil
Gandhi Group
205,572
3.8
Vintel
Securities
(402, Bluemoon Chambers, 28/33, Nagindas Master Road, Fort
Mumbai)
2,887,133
53.47
7.
Prraneta Industries
Girdharbhai
J. Vagadia
14,25,791
13,97,491
98.01
8.
Millennium Cybertech
Stardom
Trading
970710
348700
35.92
Anil
Gandhi Group
51,953
5.35
Vintel
Securities
2,23,795
23.05
IFSL
Group
47,867
4.93
9.
Karuna Cables
Suresh
Pukhraj Jain
(Room No. 3, Ground Floor, Nawab
Manzil, 18, Wadia Street, Tardeo, Mumbai-400034 )
1,016,391
721,116
70.94
IFSL
Group
117065
11.51
Vintel
Securities
60,900
5.99
10.
Kirti Finvest
Anil
Gandhi Group
1,203,644
473,154
39.31
Darshit Patel
(179-2140, Pratixa
Apartt, Naranpura, Sabarmati Zone, Ahmedabad-380054)
506,186
42.05
Chirag
Shah
(2871/1, Patni Street,
Zaveriward,
Relief Road, Ahmedabad-380001)
156,600
13.00
11.
Dolphin
Chirag
Shah
924,732
4,62,165
49.97
Anil
Gandhi Group
4,13,695
44.73
12.
Swan Mills
Anil
Gandhi Group
33675
4,320
12.82
Chirag
Shah
2,000
5.93
13.
IFSL
DilipKumar
Adukia
416,034
2,16,882
52.13
Anil
Gandhi Group
1,64,450
39.52
14.
IQMS
Chirag
Shah
7,646,580
2,155,213
28.18
Darshit
Patel
46,60,809
60.95
Anil
Gandhi Group
3,46,040
4.52
15.
Robinson
SureshKumar
P.Jain
1,070,900
2,54,100
23.72
IFSL Group
90,300
8.43
Anil
Gandhi Group
67,800
6.33
16.
Wellworth
Anil
Gandhi Group
36189982
1,95,01,557
53.88
Chirag
Shah
91,08,875
25.16
Darshit
Patel
72,84,050
20.12
17.
Gangotri
Troop
Track Electrodes
(S-377, School Block, Shakarpur,
New Delhi-110092)
169,659
1,65,209
97.37
18.
Intradeco
Chirag
Shah
1,0947,738
69,95,563
63.89
Anil
Gandhi Group
5,66,100
5.17
Darshit
Patel
9,67,889
8.84
19.
Landmark
Leisure
Rational
Finvest
(304.Chartered House, Dr.CH
Street, Near Marine Line Church, Mumbai 400002)
22,161,914
17,000,001
76.70
4.3 I note that Shri Anil Gandhi, the director of Galaxy was holding 0.138% of equity shares of Galaxy. He as well as his family members (parents, wife and daughter) were the clients of Galaxy. Shri Anil Gandhi and his family members were associated with some of the other clients of Galaxy as mentioned below (Table II):
S. No.
Name of the client
Address as per Galaxys books
Connection
1.
Priti
Anil Gandhi
702
Sadguru vatika, Airport Road, Rajkot
Wife of
Shri Anil Amrutlal Gandhi
2.
Amrut
Securities (SEBI registered sub-broker through Galaxy Broking Limited
(INS011723439) and SKSE Securities Limited (INS010581937)
822, Star
Chambers, Harihar Chowk,
Rajkot
366001
Priti
Anil Gandhi and Amrutlal Gandhi are the directors of this company.
3.
Deepak
Ashar /Manish Ashar
193,VP
Road, Dayalal
Building Mumbai-400004
Shri
Manish Ashar is the brother-in law of Shri Anil Gandhi.
4.
Chintamani
Share and Broking Ltd.
108-B/109,
‘Sampada’ Mithakhali
Six Roads,
Navrangura,Ahmedabad
Group
company of Galaxy. Anil Gandhi -Common Directors
5.
Galaxy
Share Trading
633/634,
PJ Tower, Dalal Street, Fort, Mumbai 400001
Galaxys
trading account.
6.
Sudhaben
Amrutlal Gandhi
702
Sadguru vatika, Airport Road, Rajkot
Mother
of Shri Anil Amrutlal Gandhi
7.
Pooja
Anil Gandhi
702
Sadguru vatika, Airport Road, Rajkot
Daughter
of Shri Anil Amrutlal Gandhi
8.
Amrutlal
Jivandas Gandhi
702
Sadguru vatika, Airport Road, Rajkot
Father
of Shri Anil Amrutlal Gandhi
9.
Presilco
Impex Ltd (shareholder of Galaxy)
315,Stock
Exchange Building
Sadar Bazar,
Rajkot-360001
Anil
Gandhi- director and shareholder of the company
Table III Shareholding of Galaxy
S. No.
Shareholder’s Name
Particulars
No of shares
% (approx)
1.
Shri
Zaveri Kishore Ratilal
Nil
1,90,000
5.451
2.
Shri
Sanjay M Sanghavi
Director
of Galaxy
50,000
1.435
3.
Smt.Shilpa
Sanghavi
Wife of
Shri Sanjay Sanghavi
50,000
1.435
4.
Shri
Sanjay M Sanghavi (HUF)
Directors
HUF
1,00,000
2.869
5.
Shri
Anil Gandhi (HUF)
Directors
HUF
4,61,300
13.236
6.
Shri
Anil Gandhi
Director
of Galaxy
4,800
0.138
7.
Smt
Priti Anil Gandhi
Wife of
Shri Anil Gandhi
4,95,000
14.203
8.
Mrs.
Sudhaben Amrutlal Gandhi
Mother of
Shri Anil Gandhi
50,000
1.435
9.
Shri
Amrutlal Jivandas Gandhi
Father of
Shri Anil Gandhi
1,00,000
2.869
10.
Shri
Arvind Mulraj Udeshi
Director
of Galaxy
22,400
0.643
11.
Shailesh
D Ved
Director
of Galaxy
11,200
0.321
12.
Shri
Subhash R Ashar
Director
of Galaxy
16,000
0.459
13.
Shri
Yogesh G Pandya
Director
of Galaxy
3,400
0.098
14.
M/s B R
Jalan Securities Pvt Ltd.,
Nil
1,55,700
4.467
15.
M/s.
Amrut Securities Ltd.,
Wife
and father of Shri Anil Gandhi are the director of this company
11,17,000
32.049
16.
M/s.
Chintamani Shares & Broking Limited
Anil
Gandhi is the director of this company
1,43,000
4.103
17.
M/s
Presilco Impex Ltd.,
Anil
Gandhi is the director of this company
4,88,400
14.013
18.
Others
27,100
0.770
19.
Total
34,85,300
100.000
4.4 The contention of Galaxy is that Shri Amrutlal Jivandas Gandhi and Smt. Priti A Gandhi (father and wife of Shri Anil A Gandhi respectively) were the directors of Amrut Securities Ltd. However, they had resigned from the directorship with effect from February 25, 2004. In this context, I note that the said Amrut Securities Ltd. is a major shareholder of Galaxy with a holding of 32.049% of shares of Galaxy. Though, it was submitted that they had resigned as the directors of Amrut Securities Ltd., I note that Amrut Securities (member of SKSE and a sub broker of Galaxy) had not informed SKSE and SEBI about the resignation of Priti Anil Gandhi and Amrutlal J. Gandhi from the directorship of Amrut Securities. The fact that Shri Amrutlal Jivandas Gandhi and Smt. Priti A. Gandhi continues to be the directors of Amrut Securities (a registered intermediary with SEBI and also a member of SKSE) duly supported by the Annual Return submitted by the practicing company secretary on behalf of Amrut Securities for the financial year ended March 31, 2005 would discredit the claim that they have resigned from Amrut Securities with effect from February 25, 2004. In a matter like this, the presumptive evidence of contemporary records would prevail over the ipse dixit of the entity based on the tenuous support of their communication in Form 32 submitted to Registrar of Companies which by itself would not effectuate change unless the records in public office are correspondingly changed to confirm their resignation. If they (Shri Amrutlal Jivandas Gandhi and Smt. Priti A. Gandhi) had resigned from the directorship with effect from February 25, 2004, their names would not have been mentioned as the directors of Amrut Securities, in the annual return for the year 2004-05 submitted by Amrut Securities during September 2005. The same constitutes a conclusive proof, on their own admission.
4.5 Further, I also note that Shri Anil Gandhi was a director in Chintamani Shares and Broking Limited and admittedly he had resigned only after the date of the interim order dated January 24, 2006. In the facts and circumstances, the contention that Shri Anil Gandhi resigned as a director of Chintamani Shares and Broking Limited has no relevance as far as the present proceedings are concerned.
4.6 I also note from the submissions of Galaxy made at the time of inspection that Shri Anil Gandhi was the director of Preslico Impex Ltd. Also the same is borne out by the records of Saurashtra Kutch Stock Exchange Ltd (SKSE). It is further noted as per the records of SKSE that shareholders of Galaxy namely Amrut Securities, Arvind Udeshi, Anil Gandhi and his HUF, Yogesh Pandya and Priti Anil Gandhi were holding shares of Preslico Impex to the extent of 30% as on February 14, 2001. Admittedly they were the shareholders of Galaxy and therefore it can be seen that Galaxy and Preslico Impex were inter connected. Even if, Shri Anil Gandhi had resigned from the directorship of Presilco Impex Ltd. (for argument sake and without admitting), I note that he was holding 10% in the said company. Therefore, it stands to reason that Shri Anil Gandhi and family through Presilco Impex Ltd. also accounts for significant shareholding of Galaxy.
4.7 Though, Anil Gandhi and his family hold (as per the latest available records of BSE) only 5.33% of the issued capital of Galaxy, I find that Anil Gandhi together with Amrut Securities, Chintamani Shares and Broking Limited and Preslico Impex Ltd., holds 51.37% (approx) in Galaxy. The fact remains that Shri Anil Gandhi is in fact the person in control of Amrut Securities, Chintamani Shares and Broking Limited and Preslico Impex Ltd. for all practical purposes. It can be seen from the Table No. 1 that the Anil Gandhi Group made substantial transactions in the shares of penny stocks.
4.8 In the facts and circumstances, it is fairly established that the majority of the clients of Galaxy were interrelated. As regards the contention of Galaxy that the factual position set out in the interim order dated January 24, 2006 was incorrect, I note that the said details were set out as per the replies received from Galaxy through e-mails and letters in connection with the inspection and thereafter. It is not open to Galaxy to deny such information at this juncture and the same redounds to their discredit. Regarding the contention of Galaxy that its total turnover in penny stocks was 5.6%, I note that the total turnover mentioned in the interim order at 9% was based on the reckoning of its total turnover in all 897 penny scrips. As regards the contention of Galaxy that it had traded only 2223 scrips instead of 2769 scrips as mentioned in the interim order, I note that the same was mentioned in the order as per the details submitted by Galaxy.
4.9 I also note that Galaxy had entered into agreement with its client companies without such companies having proper authorization through their board resolution to open account with Galaxy. Further, I also note that Galaxy had allowed its clients to trade despite having continuous debit balance in their ledger account which means that Galaxy has funded such trades. This puts the system in risk in case of default and accordingly such practices by the brokers are injurious to the market. In this connection the contention of Galaxy that there were some credits in between in these accounts is not correct in as much as the debit balances sums up the positions at the end of the day on various days, and in my view, that alone is material. I also note that during the inspection, Galaxy itself had given the address of locations where trading terminals were located viz. Girgaon, Dahisar, Borivali, Kandivali, VP Road, Vikhroli, Mumbai Central, Fort, Bangur Nagar, Mumbai, Dombivali (Thane) Gondal. These locations were neither its branch office nor its registered sub-brokers’ office. On the basis of its own reply, I note that except the terminal at Jamnagar, the rest do not qualify as authorized in terms of SEBI circular dated October 22, 2001. In the interim order it is mentioned that the two clients of Galaxy viz. Vishwas Securities and Narendra Ganatra had acted as unregistered sub brokers of Galaxy. The explanation of Galaxy that they were only clients is not acceptable for the reason that they have received shares from the DP account of third parties into their DP account and thereafter transferred such shares to the pool account of Galaxy. This confirms that these entities were having their own clientele on whose behalf they were dealing on BSE through Galaxy as unregistered sub brokers.
5. SUBMSSION FROM THE CLIENTS DURING THE HEARING:
5.1 The clients of Galaxy as mentioned above inter alia submitted that they had not acted in concert with anyone to create an artificial market to offload shares of such penny stocks as alleged in the interim order. They had also denied the allegation of funding of their transactions by Galaxy. They had also requested to allow them to trade at least in those scrips, where they have not traded. In this connection, I note that the turnover of Galaxy in 07 penny stocks out of 17 (Swan and Landmark Leisure Ltd. excluded) is reasonably significant (the turnover of 7 of the scrips being above 5%) and sufficient to influence the market price. In addition the overall percentage trading in penny scrips was 9% of its total turnover. Thus there is material to indicate their role in price rise. This has to be read in conjunction with other serious deficiencies as brought out by the interim order.
5.2 Shri Amrutlal J. Gandhi in his letter to SEBI has informed that shares of Swan Mills was received by him as a pledge against the loan given to one Tirupati Agencies Private Limited, Mumbai on 19th August 2005. Shri Amrutlal Gandhi has produced all the correspondences he had with Tirupati Agencies Private Limited which shows that Tirupati Agencies Private Limited is ready to repay its loan for getting their shares back from Shri Amrutlal Gandhi. I note that pursuant to SEBI’ interim order, Depositories had frozen the account of Shri Amrutlal Gandhi. I note that there is merit in his contention.
5.3 I find that Rational Finvest is not related to Galaxy, and that all its transactions were sell transactions and shares so sold were held by it since the time of public issue of Landmark Leisure Limited. In the 19 scrips traded which is under consideration, the transaction of Rational Finvest as above appears to be solitary transaction with a reasonable explanation thereof.
5.4 In view of the above conclusions with regard to the activities of Galaxy and its clients, it is prima facie seen that they had played a major role in generating artificial volumes and rise in the prices of large number of penny stocks. Galaxy had also failed to exercise due diligence, care and skill while dealing with his clients while dealing in penny stocks.
6. ORDER
6.1 Therefore, in exercise of the powers delegated to me in terms of Section 19 of the Securities and Exchange Board of India Act 1992 read with Sections 11(1), 11B and 11(4)(b) of SEBI Act, 1992, I hereby confirm the ad interim order dated January 24, 2006, subject to the modifications as in 6.1. (A) hereinbelow. Further, an Enquiry Officer is being appointed to enquire into the violations committed by Galaxy Broking Limited. It is clarified that the present order gives only a prima facie findings as to the necessity of passing the directions at this stage. Accordingly, all contentions are left open to be decided by the Enquiry Officer and in subsequent proceedings pursuant to his report.
6.1 (A) The restrictions imposed by SEBI vide interim order dated January 24, 2006 is not applicable against Rational Finvest Pvt. Ltd. In the case of Shri Amrutlal Jivandas Gandhi, the restrictions imposed by SEBI vide interim order dated January 24, 2006 would apply excepting the shares relating to Swan Mills Limited.
6.2 The Depositories shall not give effect to any transfer of shares of the companies listed as per Table 1 above, lying in the beneficial owner accounts of clients (excepting the relaxation as specified in 6.1A)
This order will come into force with immediate effect.