ORDER
V.K. Chopra, Member
1. Millennium Cybertech Ltd was originally incorporated as Mercury Leasing and Properties Limited on September 04, 1986 and it changed its name to Brahma Capital & Securities Limited in 1995. The company was promoted by Shri Brahamanand Bindal & others. Initially, the company was engaged in investments, project counseling, corporate counseling, project report preparation and other advisory services etc. In April, 1996, the company came out with a public issue of 30,00,000 equity shares of Rs. 10 each and its shares got listed at BSE on August 19, 1996. The company changed its name to BCS Software Limited from May 26, 1999 and again in July 1999 it changed its name to the present name Millennium Cybertech Ltd (hereinafter referred to as “MCL”).
2. The scrip of MCL was listed at BSE, CSE and MPSE and during the period of investigation i.e. June 01, 2005 to September 30, 2005 it got traded at BSE only for 86 days when the quantity traded was 29,69,771 shares. In the meanwhile, the shareholders of MCL approved the stock split in the meeting held on July 08, 2005 and in an EGM held on August 08, 2005. The stock split of the company became effective from October 03, 2005.
3. Securities & Exchange Board of India (SEBI) conducted investigation in the price and market manipulation in the scrip of MCL during the period of June 01, 2005 to September 30, 2005 on observing a sharp increase in the price of the scrip. The scrip at BSE opened at Rs. 65.50 on June 01, 2005 which increased to Rs. 242 on September 20, 2005 and the average daily volumes traded in the scrip were 34,532 shares. In view of sudden and steep increase in price and volume of the scrip, during the short period i.e. June 1, 2005 to September 30, 2005 a preliminary examination of the dealings in the scrip was conducted.
4. The preliminary investigation revealed that the promoters of MCL (a small cap company) off loaded their holdings by way of off-market transactions through a set of entities who were found connected to each other either by common address or by common telephone number. It was also found prima facie that MCL had failed to disclose the reduction in promoters’ shareholding.
5. Pursuant to preliminary investigation an interim order dated January 24, 2006 was passed against the company MCL, directing it not to issue any equity shares or any other instrument convertible into equity shares, in any manner, or shall not alter its capital structure in any manner, till further directions. Interim order was also passed against the three promoter entities, four PCBs and 10 clients directing them not to buy sell or deal in securities of MCL till further directions. Interim order also directed 15 other interconnected clients not to deal in any securities directly or indirectly till further directions. Further, 6 brokers were directed not to buy, sell or deal in securities of MCL for the entities mentioned in the order till further directions and a separate order was issued against the broker Galaxy Broking Limited for its involvement in penny stocks.
6. In the said interim order, 15 days time had been given to all concerned parties to file their objections, if any and to avail themselves of an opportunity of personal hearing. The company MCL submitted its written objection dated March 16, 2006 and requested for a personal hearing in the matter. An opportunity of personal hearing was granted to MCL on August 30, 2006 which was not availed by them. Subsequently, upon request of MCL 2 more opportunities were granted to MCL on September 11, 2006 and September 18, 2006 but the company failed to respond and accordingly an ex-parte order dated September 26, 2006 confirmed the ad interim ex-parte order dated January 24, 2006, against them.
7. While passing the interim order, it was observed that MCL apparently violated SEBI (Prohibition of Insider Trading) Regulations, 1992. However, company in its reply dated March 16, 2006 and October 09, 2007 submitted that they have complied and made disclosures as required and based on information received from the concerned parties including promoters. However, investigations revealed that MCL facilitated the operation of manipulation in its own scrip through the promoter entities, Private Corporate Bodies (PCBs) and interconnected entities and violated Regulation 3(b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 (hereinafter referred to as “PFUTP Regulations”).
8. Show Cause Notices dated June 29, 2007 were issued to MCL advising them to show cause as to why action under Section 11, 11 B and 11(4) of SEBI Act, 1992 read with Regulations 11 of PFUTP Regulations including restraining them from accessing the securities market and prohibiting them from buying, selling or dealing in the securities in any manner whatsoever for a particular period should not be initiated against them for the possible violations under Regulation 3(b), (c) and (d) of PFUTP Regulations.
9. MCL in their reply to the show cause notice on October 09, 2007 denied the charges levelled against them and furnished the details of promoters and directors during 2004 and 2005, shareholdings, Annual Report of 2004 -2005 and the relevant papers pertaining to stock split etc. The submissions made by MCL in the reply in brief are given hereunder:
9.1 MCL and its Directors have not bought or sold a single share of MCL during the period of investigation and MCL is a separate, independent and distinct legal entity and is independent of its promoters. There are no common Directors in MCL and the promoter entities.
9.2 MCL had no role in the dealings of promoters in their scrip and hence the alleged irregularity of the promoters in their own and personal trading cannot be linked to the company.
9.3 MCL has not employed any device, scheme or artifice to defraud in connection with dealing in its own shares or used any manipulative or deceptive device in contravention of the provisions of SEBI and they had not engaged in any act, practice, course of business which operated as a fraud or deceit upon any person in connection with any dealing in MCL’s own scrip in contravention of the provisions of SEBI.
9.4 MCL was not concerned about the dealings of any of its shareholders, including its promoters and other entities and also alleged that their involvement in the matter has not been explained in the show cause notice.
9.5 The show cause notice was totally silent as to how and in what manner, MCL facilitated the operation of manipulations in its scrip and there are no adverse findings against them. Further the allegation is completely general and totally lacking in any particulars whatsoever and material facts. There are no substance or legal basis for the allegation levelled in the show cause notice and therefore it is inconceivable as to what basis the company has been roped in and charged for facilitating the operation of manipulation in its own scrip, through its promoters and others.
9.6 The volume after the post stock split has fallen and not increased.
10. Personal hearing was granted to MCL before me at SEBI’s Head Office at Mumbai on September 26, 2007 which was adjourned to October 11, 2007 at the request of MCL when Shri J.J.Bhatt, Advocate and Shri Ramesh Bagdi Practising Company Secretary attended the hearing on behalf of company and they reiterated the submissions made by them in their reply to the show cause notice.
11. I have carefully examined the investigation report, show cause notice and submissions of MCL.
12. First and foremost, I find that MCL vide its reply dated October 09, 2007 had furnished certain details which were not furnished during the course of investigation. From the said details, I find that Cornhill Trading Company Private Limited (CTCPL), Cute Productions Private Limited (CPPL) and Stardom Trading Company Private Limited (STCPL) were the promoters of MCL during 2004 and 2005 and the directors were Snehal Naik, Sanjeev Shukla, Asok Kadam, Nitin Bhalerao, Rajesh Salve and Rekha Sharma.
13. As stated above in the initial paragraphs, the price and volume in MCL shot up suddenly. Analysis of the quarter to quarter figures of the financial statements of the company as filed with the BSE revealed that the sales of MCL have been relatively moving within a narrow range of Rs. 94 lacs to Rs. 98 lacs between the quarters ending June 2005 and September 2005. The unaudited quarterly results indicate that MCL had shown a meagre profit of around Rs 20 lacs for the quarters ended September 2004 and December 2004. Profits of the company later declined sharply to Rs 2 lacs and later increased to between Rs 13 lacs to Rs. 18 lacs in the subsequent quarters. However, this performance of the company in 5 consecutive quarters ending September 30, 2005 hardly justified the sharp movement in price from Rs 65.50 to Rs. 242 (around 270%) during the period June 1, 2005 to September 30, 2005.
14. Investigations brought out that the transactions of the 3 promoter entities viz. Cornhill Trading Company Private Limited, Stardom Trading Company Private Limited and Cute Productions Private Limited, 2 Private Corporate Bodies (PCB’s) viz. Ampu Traders Private Limited and Rajput Textiles Private Limited, 17 interconnected clients viz. Shree Ambey Textiles Private Limited, Goldcity Exports Private Limited, Sharpline Trading Company Private Limited, Shri Santosh Krishna Pawar, Newleader Trading Company Private Limited, Fineline Mercantile Company Private Limited, Rightstar Trading Company Private Limited, Interlink Financial Services Limited, Ritedeal Trading Company Private Limited, Stockholm Mercantile Company Private Limited, Amar Yuvraj Adhav, Umesh B Choukekar, Deepak Todkar, Deepak Narvekar, Rajkishore Singh, Ramasudhkaran Menon, Rajendra Adukia and Abhayraj Rampher Shukla created huge artificial volume and sudden spurt in price. Apart from the entities mentioned in the said interim order, another group of nine entities viz. Vintel Securities Private Limited, Zenith Estates Limited, S J Securities Private Limited, Dhamaka Trading & Constructions Private Limited, Shri Amit Goel, Shri Ramesh Arora, Ms. Bimla Gupta, Shri Prashant Khankari and Shri Akhilesh Kamal Prasad Mishra also traded substantially in the scrip of MCL during the investigation period and all these entities were found connected to the above group of interconnected entities. The investigation brought out the inter-connection of 28 entities who bought and sold MCL shares substantially among themselves during the investigation period and which created volume and affected the price of the scrip. Connection was found among these entities either through common phone numbers or through common directors (in case of companies) or common address. Analysis of bank statement also revealed that there was fund transfer among some of these entities. Further, connections were also established through off market transactions among a few of these entities.
15. The above interconnected entities bought 18,47,341 shares (62.20% of the buy side volume of 29,69,771 shares) and sold 19,16,745 shares (64.54% of sell side volume of 29,69,771 shares) during the investigation period. Out of the aforesaid trading, these entities have executed 63 synchronized trades for 11,65,848 (purchase and sell) shares constituting 19.62% of the gross market volume of 59,39,542 shares (buy and sell) in the scrip. To execute these trades 35 buy orders and 33 sell orders were placed. The time difference between the orders of these trades was less than 1 minute and price difference was nil. It was observed that at a time when the inter-connected entities were selling, the counter parties were other inter-connected entities of the same group. Further some of these entities also received shares in the off-market from the promoter entities and PCBs. The trading details of the three promoter entities of MCL viz. CTCPL, CPPL and STCPL were examined and the findings are given hereunder:
16. CTCPL was holding 9,83,100 shares as on April 05, 2005 and received 17,000 shares on April 05, 2005 from STCPL and its holding increased to 10,00,100 shares. Out of these shares, CTCPL transferred 46,600 shares on April 26, 2005 to CPPL which were subsequently sold in the market by routing through inter connected entities. On July 04, 2005 CTCPL transferred balance 9,53,500 shares to the pool account of Galaxy Broking Limited and the same shares were returned by Galaxy Broking Limited to CTCPL on October 08, 2005.
17. Analysis of the demat account of CPPL revealed that it was holding 34,000 shares of MCL on April 01, 2005 and received 53,600 shares from Ampu Traders Private Limited (PCB), 46,600 shares from CTCPL and 4,37,770 shares from STCPL on April 26, 2005. On June 18, 2005 it also received 41,000 shares from one Shri Gautam Kamble and transferred all 6,12,970 shares to Galaxy Broking Limited on July 08, 2005. On August 30, 2005 CPPL received back all the shares from Galaxy Broking Limited and on the same day transferred 3,00,000 shares each to Goldcity Exports Private Limited and Shree Ambey Textiles Private Limited. These entities transferred shares to the interconnected entities which were sold by them in the market.
18. STCPL was holding 15,000 shares as on April 01, 2005 and it was observed from its demat account statement that it executed several off market transactions. It was also observed that STCPL received 12,08,470 shares through off-market from 7 entities and disposed all 12,23,470 shares through market and off-market transactions. Investigation revealed that STCPL traded in the scrip of MCL through 2 brokers and sold 4,23,000 shares (8.45% of the equity capital of company) during the period of investigation i.e. June 01, 2005 to September 30, 2005.
19. The role played by PCBs namely Ampu Traders Private Limited (ATPL) and Rajput Textiles Private Limited (RTPL) was examined by analysing demat account statement and it was observed that ATPL who was holding 3,600 shares of MCL as on April 01, 2005 received 50,000 shares in the off market on April 26, 2005 and transferred all 53,600 shares to CPPL (promoter entity) who in turn disposed the shares in the market by routing through some entities. It was observed from the above that ATPL colluded with promoter entity CPPL and aided and abetted in disposing the shares of MCL.
20. Rajput Textiles Private Limited (RTPL) was not holding any share of MCL till September 23, 2005. However, on September 23, 2005 it received 5,000 shares in the off-market from one entity Shri Santosh K Pawar and on September 29, 2005 received 1,10,387 shares from Stockholm Mercantile Company Private Limited. RTPL on September 30, 2006 transferred 50,000 shares to Shri Deepak Narvekar who sold the shares in the market.
21. The trading of these entities created huge volume and influenced the price of the scrip which in fact was not having any liquidity before their trading. This also created investor interest in the scrip since at the time when these entities were selling in the market the buyers were found scattered. During the period when the price went up the promoter STCPL started selling in the market and made unfair gains at the cost of the investors who were lured to invest in the shares on noticing artificial rise in the price and volume in the scrip.
22. The pattern of trading clearly points out that the transactions were carried out with the intention that the orders of particular entities and brokers match with each other since there was a prior arrangement with respect to these transactions. These transactions resulted in creation of artificial volume and influencing the price of the scrip which in turn facilitated off-loading of MCL shares as otherwise it would not have been possible without creating liquidity in the shares. Further, the pattern of trading indicates several instances when the time difference between buy and sell orders were negligible. Creation of artificial volume/market of the shares of MCL induced investors to buy the scrip at the prices which were not genuine. No unknown persons can trade continuously by putting orders in such pattern contributing significantly to total volume in the market. All this goes to show that all the entities referred above were related/connected to each other and were matching their trades which in fact were not bonafide.
23. The shareholding pattern filed by the company with BSE Ltd. for the quarters ended September 2004, March 2005 and September 2005 (Shareholding for the quarter ended December 2004 and June 2005 was not filed with BSE), shows that the shareholding of the promoters viz. CPPL and STCPL has been decreasing continuously between September 2004 to September, 2005. The investigation shows that a part of this decrease has been through off loading from the market and partly through off market transactions to various entities.
24. I note that sudden increase in the price of the scrip since June 2005, along with the off loading of promoters own holding through market as well as off- market transactions to a group of interconnected entities, who in turn dealt heavily in the market clearly proves well thought out plan and scheme by promoters to induce investors to participate in the trading of MCL shares for facilitating sale of their stake to such unsuspecting investors. The promoters took advantage of the price rise and off-loaded their shares in the market to make unfair gains in the process at the cost of common and innocent investors.
25. The promoters of MCL have offloaded a total of 15,23,470 shares (around 30.46% of the equity of the company) through market and off market transactions during the period of the price rise. This prima facie shows that creation of the artificial market was for the sole purpose of enabling promoters to off load their share holdings and to make unfair gains at the cost of the investors who may have been lured to these shares on noticing sudden rise in the price and trade volumes. The artifice employed by the promoters appears to have been a standard one followed in the case of several small cap companies viz. IFSL Ltd, Mega Corporation Ltd. and Karuna Cables Ltd. against whom SEBI has already passed orders. It has all the ingredients of a penny stock manipulation in all its sordidness.
26. MCL in its interim reply has taken a stand that the transactions of promoters are independent and the company has nothing to do with the said transaction. They have also stated that the company or its directors never purchased or sold any shares of MCL. The company can not absolve itself from the charges by merely pleading ignorance of trading by their own promoters and other entities who had control over it. During the course of investigation, MCL was summoned several times to furnish information like, details of promoters and directors, their shareholdings, corporate announcements, annual reports, shareholding patterns and details of market/off market transactions executed by promoters etc. Further, MCL was also summoned to appear before the investigating officer but it failed to submit any information in compliance to the summons. MCL also refused to accept the summons which SEBI tried to deliver through their Registrar and Transfer Agent. BSE also confirmed that MCL has not been filing its annual accounts with the exchange since 2005. The role of the company was obviously suspicious and it was also apparent that the company was wilfully not responding or complying with regulations. I note that adjudication proceeding was initiated against MCL in that regard. While considering the non compliance of MCL since it was never available to explain its role and particulars of promoters in the matter together with the manipulative device used by the promoters as explained in the preceding paragraphs, the interim orders dated January 24, 2006 and September 26, 2006 were issued against it which are still in force. However, MCL appeared before me and submitted the documents along with their reply and stated that they have complied with all the disclosure requirements by filing the same with BSE. Further, MCL in their reply dated October 09, 2007 has pleaded to relieve them from the interim order since they have already undergone the prohibition for almost two years and also requested to allow them to alter their capital structure since they are in need of funds to survive, grow, carry out day to day activities and future plans. In view of this and considering that MCL had undergone the prohibition for nearly two years in this matter, it would meet the ends of justice if MCL is relieved from further prohibition.
27. Therefore, taking into consideration facts and circumstances of the case and pending adjudication proceedings, I, in exercise of the powers conferred upon me under Sections 19 of the SEBI Act read with Sections 11(4) and 11B of SEBI Act, 1992 and Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, do hereby revoke interim orders dated January 24, 2006 and September 26, 2006 against Millennium Cybertech Ltd. (PAN No. AABCM8712D)
28. This is without prejudice to the Adjudication proceedings pending against Millennium Cybertech Ltd. Further, it is clarified that the findings recorded in this order are prima facie in nature. The Adjudicating Officer may conduct his proceedings and pass an appropriate order on merits and uninfluenced by this order.
29. This order shall come into force with immediate effect.