ORDER
V.K. Chopra, Member
1. Securities and Exchange Board of India (hereinafter referred to in short as “SEBI”) conducted investigation into the alleged market manipulation in the scrip of M/s Mazda Fabrics & Processors Ltd. (hereinafter referred to as “MFPL”) during the period of May to August 1996.
2. M/s Libord Securities Ltd. (hereinafter referred to in short as “Noticee”) was a registered broker of BSE with SEBI registration No. INB010849536.
3. Investigation revealed that the Noticee was one of the broker who had actively traded in the scrip of MFPL at BSE on behalf of their client Subhash Trading Co. These trades were conducted in settlement nos. 6, 7, 8, 10, 11 and contributed to the creation of liquidity / volumes in the scrip.
4. Since the registration of the Noticee was cancelled by SEBI vide order dated June 12, 2003 under SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 , no useful purpose would have been served in proceeding with the Enquiry Proceedings as the noticee was no more an intermediary and therefore the instant proceedings were initiated under Section 11 & 11B of SEBI Act to inquire into the possible violations of the provisions of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred to in short as “PFUTP Regulations”) and Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to in short as “Stock Brokers Regulations”).
5. Accordingly, a Show Cause Notice dated June 09, 2004 was issued to the Noticee to show cause as to why suitable directions including directions to restrain Noticee from dealing in securities for a particular duration and also restrain them from associating with any corporate body in accessing the securities market for a suitable period should not be passed against the Noticee. However, no reply was received from the Noticee.
6. An opportunity of personal hearing was given to the Noticee before me at the Head Office SEBI at Mumbai on October 30, 2007. Shri Lalit Dangi, Chairman of the Noticee attended the hearing alongwith Shri J.J Bhat, Advocate. The Noticee filed written submission vide their letter dated October 29, 2007 which have been dealt in the succeeding paragraphs.
7. I have carefully examined the findings of investigation, show cause notice, and submissions of the Noticee and other materials available on record.
8. MFPL was incorporated in the year 1994 as a Private Limited Company and was converted into a Limited company in the year 1995. It had come out with a public issue in the year 1996 for 36,38,300 shares @ Rs 10/- per share at par. The issue opened on March 06, 1996 and closed on March 16, 1996. The said public issue was undersubscribed and the promoters of the MFPL allegedly got the public issue bailed out with the help of external financiers.
9. The equity shares of the company, MFPL were listed on the Stock Exchange Mumbai (BSE) w.e.f. May 29, 1996. The price of the scrip of MFPL at the time of listing was quoting around Rs 15 to Rs 16, and touched a high of Rs 112.50 on August 30, 1996 from a low of Rs 8.50 on June 06, 1996. The total volume in the scrip at BSE during the relevant period was 41,43,500 shares. The circuit filters in this scrip were revised from 25% to 10% on July 02, 1996 and again revised from 10% to 5% on July 22, 1996. BSE had suspended trading in the scrip of MFPL for one day on August 14, 1996 and then for 3 days from September 02, 1996 to September 04, 1996. Later, the said suspension was made absolute from September 09, 1996.
10. I find that the proceeds of the public issue of MFPL were routed through front entities of the promoters of MFPL to repay the financiers with interest and the concerted trading of the aforesaid front entities had resulted in rise in price and volume in the scrip of MFPL during the relevant period. The investigations revealed that there was rigging of the price and volume in the scrip of MFPL in a short span of time by the front entities who were clients of various brokers including the Noticee.
11. It is observed from the investigation report that the total volume of this scrip at the exchange during the period May 29, 1996 to August 30, 1996, was 41,43,500 shares. I find that out of many brokers, the top 6 brokers had contributed 53.59% of the total buy volume at the exchange and 49.71% of the total sell volume at the exchange. The Noticee was one of the six brokers who had actively traded in the scrip of MFPL at BSE on behalf of their client Subhash Trading Co during the period May 29, 1996 to August 30, 1996.
12. The Noticee informed the Investigating Authority that they had executed trades on behalf of Subhash Trading Co, but did not explain the background of this client viz. who is the Proprietor/Partner, who used to place orders, who used to make/receive deliveries and payments etc. on the ground that the data was very old and can not be retrieved. The Noticee in their statement given to the Investigating Authority on June 5, 2002 submitted that they were going to submit certain specific details which however were not provided till date in spite of reminders to them.
13. Investigation revealed that the proprietor of the Noticee’s client (Subhash Trading Co) was one Shri Subhash Parasmal Porwal who in his statement under oath recorded on June 29, 2002 stated that he had opened a bank account in the name of Subhash Trading Co on the insistence of Shri Bharat Kumar Jain who is his maternal uncle and Managing Director of MFPL. He further stated that he was not aware of any primary and secondary market purchases in the scrip of Mazda Fabrics in the name of Subhash Trading. It was further brought out that Shri Subhash Parasmal Porwal does not seem to have the capacity to handle such huge amount of funds nor has the capacity and understanding to deal in such huge quantity of shares.
14. During the course of hearing as well as in their reply dated October 29, 2007, Noticee submitted that Subhash Trading was introduced to them by one Shri Vardhan and at the relevant time in 1996, filling up of KYC forms was not required. They also stated that orders were placed from the office of Shri Subhash Porwal. The reason for non furnishing of at least these information to the Investigating Authority was not given by the Noticee. The failure to provide such data at the time of investigation shows that the Noticee did not take any steps to verify the bonafides and financial worthiness of their client and executed trades under instructions from the promoters. The reason to believe that the Noticee executed trades under instruction from the promoters are manifold including their associated company’s (Libord Finance) role as a Lead Manager to the public issue of MFPL and got allotted 1,81,900 shares on firm basis in the public issue. Further, Shri Lalit Dangi who was the Managing Director of Libord Finance Ltd was also the Chairman of the Noticee.
15. The Noticee vide their written submissions dated October 29, 2007 stated that they traded in the scrip of MFPL on behalf of their client in settlement nos 6,7, 8, 10,11 and 12 and the details of their trades were provided in the Annexure to the written submission. Summary of these trades are given hereunder.
St. No.
Position of the Broker
Position of Subhash Trading Co
Buy
Sell
Net
Buy
Sell
Net
06
39000
39000
0
39000
39000
0
07
55000
28100
26100
55000
55000
0
08
27900
10900z
17000
27900
10900
17000
10
9100
8100
1000
9100
8100
1000
11
3000
3000
0
3000
3000
0
12
1600
0
1600
1600
0
1600
16. In the same written submissions, the Noticee has furnished their trading volume in the scrip of MFPL vis-à-vis market volume which is reproduced hereunder:
Sch. No.
Settlement
Period
Bought
Qty
Sold
Qty
Net
Market
Volume
Percentage
of our volume compared to Market Volume
6
26.5.96
to 7.6.96
39,000
39,000
–
3,60,500
10.81%
7
10.6.96
to 21.6.96
55,000
28,100
+26,900
19,77,400
2.78%
8
24.6.96
to 5.7.96
27,900
13,900
+14,000
11,54,800
2.41%
9
–
–
–
–
2,97,000
Zero
10
22.7.96
to 2.8.96
9,100
8,100
+1,000
1,70,500
5.33%
11
5.8.96
to 16.8.96
3,000
3,000
–
76,100
3.92%
12
19.8.96
to 30.8.96
1,600
–
+1,600
68,900
2.32%
17. On the basis of the above figures, the Noticee argued that volume of their trading in the scrip of MFPL was ranged between 0% to 10.81% which was normal and no adverse pattern was noticed. From the above pattern of trades, I find that the total paid up capital of MFPL consisted of 60,94,300 shares after the public issue. Out of these shares, the promoters of MFPL had cornered 48,26,300 shares constituting 80% of the post issue paid up capital. This meant that the floating stock was only to the extent of about 20%. Hence, the contention of the Noticee that they had executed trading in MFPL in the range of 0% to 10.81% and this volume is miniscule compared to the total volume of the exchange during the relevant period is not tenable. It may be noted that the low volumes may absorb the liquidity of the scrip from the system and create artificial scarcity which would lead to the manipulation of the price and volume of the scrip.
18. I have also noted that that whenever the Noticee were buying shares on behalf of Subhash Trading, the counter party brokers were selling shares for clients who are related to the client of the Noticee and promoters of MFPL. Similarly when the Noticee was selling shares, these same set of brokers were the counter party brokers. They had created huge volumes among themselves and these clients had a net buy position at the end of most of the settlements. By trading among themselves and generating huge volumes, they had created a false illusion of genuine liquidity in this scrip. Thus, once the scrip was listed at BSE on May 29 1996, Rajesh Financial Services, Sneha Investments, Sikha Finance, Chirag Investments and Subhash Trading Co. started purchasing and selling heavily in this scrip, among themselves and were working in tandem, through brokers Saurashtra Capital Services, Bhagwandas Bhogilal & Co., SVS Securities, Active Finstock and the Noticee (Libord Securities) respectively. These purchases/sales of these entities led to an artificial rise in the price from a level of Rs.8.50 on June 6 1996 to a level of Rs.112.50 on August 30, 1996. This act of these entities also led to creation of artificial volume in this scrip which induced genuine unsuspecting investors also to trade in these scrips. Moreover, since the floating stocks was very less as the promoters had control of about 80% of the post issue capital, the short sellers got trapped as they were not able to deliver the shares. As a result, their sale position got auctioned and these above mentioned entities offered the shares, on which they had control, in the auction at manipulated prices. The auction details are given hereunder:
St. No.
Broker
Client
Net position
Delivery recd/given in payout
Adjusted against auction offer
Delivery received in auction
Quantity closed out
Other auction offer
6
BB
& Co
Sneha
(1200)
Wallfort
(4100)
Saurashtra
Rajesh
3500
7
BB
& Co.
Sneha
24100
19600
3400
100
1000
4700
SVS
Shika
28000
11700
8000
7000
1200
Saurashtra
Rajesh
31700
7400
3600
20700
Libord
Subhash
26900
20000
6900
5100
Active
Chirag
16000
10400
3400
2200
8
BB
& Co.
Sneha
51900
25700
26200
1000
SVS
Chirag
9200
Saurashtra
Sikha
6400
Libord
Active
Rajesh
Subhash
8000
14000
8000
2800
7200
4000
4700
9
BB
& Co.
Saurashtra
Sneha
Rajesh
7600
4500
2000
700
2000
10
BB
& Co.
Sneha
(6700)
(6500)
200
Saurashtra
Rajesh
5900
5900
800
Libord
Subhash
1000
1000
19. It is clear from the above table that in most of the settlements, the clients of the brokers including the Noticee’s client had major net buy position. On most of the occasions, the sellers were not able to deliver the shares due to low floating stock. Hence, the positions of these sellers were auctioned. In the auction, the buying clients including the Noticee’s client offered shares in the auction. Thus, their net receivable position was either being adjusted against the auction offer or they delivered the shares in auction. All the clients were related with the promoters of MFPL. Hence, these clients were aware of the low floating stock and that the sellers would not be in a position to deliver against their net sale position as there were hardly any stocks available with others. Hence, they were sure that the short sellers will be trapped as they will not be in a position to deliver the shares as a result of which the sale position will be auctioned. In the auction, these buying clients offered shares at manipulated prices. Thus, these clients first cornered the shares and later trapped the short sellers and took advantage of the high auction prices, which was 20% higher than the maximum price in the settlement, by offering the shares in which they had control. The Noticee vide their written submissions dated October 29, 2007 submitted that the short sellers are not genuine investors and the auction procedures are in the hands of stock exchanges and as such they can not comment on the auction prices etc. It is an admitted fact that the Noticee on behalf of their clients participated in the auction and the details thereof are given in the table above.
20. From the foregoing, I note that a small number of brokers including the notice herein and their clients had transacted in the scrip and jacked up the price and volume in an artificial market. They had executed circular trading. The Noticee in their reply stated that they were not aware of the counter parties to the transactions as the trades were executed in BOLT system of the BSE. This stand of the Noticee is not acceptable. Their associate company namely Libord Finance Ltd. were the Lead Managers to the issue of MFPL and therefore the noticee herein had good connection with the promoters of MFPL. The client of the Noticee was a front entity of the promoters of MFPL and whose maternal uncle, Shri Bharat Kumar Jain was the Managing Director of MFPL. It is a matter of record that Noticee was among the top six brokers who had transacted heavily in the scrip of MFPL at the time when there was a phenomenal increase in its price. As stated earlier, the scrip of MFPL quoting at Rs 15-16/- at the time of launch of the issue, rose to Rs 112.50 on August 30, 1996 from Rs 8.50 on June 06, 1996 i.e. just after a little more than 2 1/2 months. Realizing an undue rise in the price of the scrip, BSE had imposed margins and circuit filters in the said scrip and thereafter the trades in the scrip of MFPL itself were suspended w.e.f. September 09, 1996. In such situation, the Noticee should have been alerted while facilitating trading to a client who was trading only in MFPL scrip. Shri Lalit Dangi who has given statement on oath before the Investigation authority on June 05, 2002 failed to specify the introducer of the client, who placed the orders on behalf of the client/who received deliveries etc. Thus, the Noticee, by allowing the promoters to take huge positions in the name of their front entities including the client of the Noticee, failed to exercise due care and diligence in the conduct of their professional responsibility and the same is in violation of Clause A(2) of Schedule II read with Regulation 7 of Stock Brokers Regulations. In this context, I have also noted the decision of Hon’ble Securities Appellant Tribunal (SAT) in Appeal no. 282 of 2004 (Shrikant G. Mantri v. SEBI – date of Order : February 23, 2005) wherein the broker, Shrikant G. Mantri had traded on two days for their client, Shri. R. N. Jhaveri. In the said order, the Hon’ble SAT observed as hereunder:
We however find that there may have been some negligence on the part of the appellant and such negligence would be in violation of the code of conduct under Regulation 1992. The appellant ought to have noticed that there was something strange in the high volumes that have been traded with respect to the Sawaca scrip. In that view of the matter, we confirm that order of the respondent only in so far as the violation of Regulation 7 of the SEBI (Stock Brokers and Sub-Brokers) Regulation 1992.
21. I have also observed that the facts and circumstances with respect to the violation of code of conduct of the instant matter are more serious than the above case (Shrikant G. Mantri v. SEBI – date of Order : February 23, 2005) as evident from the foregoing paragraphs. With regard to the violation of PFUTP Regulation, evidence is available in the instant matter to come to a conclusion that the appellant had acted in concert with their clients to manipulate the price and volume of the scrip MFPL and thereby created false market.
22. In the light of above findings, it is clearly established that apart from violating the Code of Conduct prescribed under Clause A(2) of Schedule II read with Regulation 7 of Stock Brokers Regulations, the Noticee facilitated their client to create artificial market in the scrip of MFPL in violation of Regulations 4 (a) to (d) of PFUTP Regulations. As already noted, the registration of the Noticee as a broker has been cancelled by SEBI vide Order dated June 12, 2003 due to BSE declaring them as defaulter vide letter dated December 15, 2001. As the certificate of registration to the Noticee is no longer subsisting, no action under the Broker Regulations can be taken against the Noticee, in view of the fait accompli. However, this does not mean that the Noticee is prevented from applying for a fresh registration to act as an intermediary in securities market. There are instances where the intermediaries whose registrations were cancelled, had applied for fresh registration to act in different capacity in the securities market. Hence, the instant proceedings are initiated under the provisions of Section 11 B and 11(4) of the SEBI Act to restrain the Noticee from accessing the securities market in any capacity for particular period. The Noticee has taken a stand in their reply that provisions of Section 11 (4) cannot be applied with retrospective effect when there is no such express mention in the statute. I note that the provisions of Section 11 (4) inserted into SEBI Act, 1992 with effect from 29.10.02 is only an explanation or elucidation of the powers vested in SEBI under Section 11 of SEBI Act. Consequently, the power to take action under Section 11 (4) was already vested with SEBI under Section 11 of the SEBI Act. In any case, the show cause notice was issued under Section 11B also and it is now settled that SEBI may pass necessary preventive directions under Section 11B of SEBI Act. Considering all aspects of matter, I am of the view that this is a fit case to restrain Noticee from accessing the securities market which would act as a deterrent for similar actions in the securities market in future.
23. Taking into consideration the facts and circumstances of the case and I, in exercise of the powers conferred upon me under Sections 19 of the SEBI Act read with Sections 11 and 11B of Securities and Exchange Board of India Act, 1992 do hereby restrain the Noticee Libord Securities Ltd. (PAN No. AAACL0782D) from accessing the securities market and also prohibit them from buying, selling or otherwise dealing or associating with the securities market in any manner whatsoever for a period of one year.
24. This order shall come into force with immediate effect.