ORDER
G. Anantharaman, Member
1. Background
1.1 Trading and sharp rise in a short period in shares of companies with low market capitalization, commonly referred to as “small cap stocks” or “penny stocks” in the recent times have been engaging the attention of SEBI, the stock exchanges and the media. They have been under the surveillance of SEBI and the stock exchanges for some time. The following six companies are examples of such “small cap” companies, whose shares witnessed a sharp price variation ranging from 200% to 1900% within a short period between March 2005 to September 2005 on the Calcutta Stock Exchange (CSE):
1. Prime Capital Market Ltd.
2. Subh Laxmi Projects Ltd.
3. Global Capital Market Ltd.
4. Bankam Investments Ltd.
5. S. T. Services Ltd.
6. Amluckie Investment Co.
1.2 The price movement of the shares of the above six companies during March, 2005 to September, 2005 is given below:
S. Share Name Period Lowest Highest % Duration
No Price Price Price
(in Rs.) (in rise
Rs.)
1 Prime Capital 17/3/05 to 14.00 280.40 1903 5 months 28
Market Ltd. 15/9/05 days
2 Subh Laxmi 17/3/05 to 21.30 248.50 1067 3 months 27
Projects Ltd. 14/7/05 days
3 Global Capital 17/6/05 to 1.25 13.50 980 3 months
Market Ltd. 16/9/05
4 Bankam 9/6/05 to 2.10 16.85 702 3 months 7
Investments Ltd. 6/9/05 days
5 S. T. Services 18/3/05 to 12.10 96.50 698 5 months 28
Ltd. 16/9/05 days
6 Amluckie 1/4/05 to 95.00 298.50 214 4 months 22
Investment Co. 23/8/05 days
The steep increase in price of the above companies’ shares warranted an immediate examination of the dealings in the share, which was accordingly undertaken by SEBI. The major findings of the preliminary examination are given below:
2. Preliminary Findings
Prime Capital Market Ltd. (PCML)
2.1 Prime Capital Market Ltd. (PCML) is one of the listed companies at CSE which showed a steep price rise during the period of March, 2005 to September, 2005. The share price of the company rose from Rs.14 to Rs.280.40 between March 17, 2005 to September 15, 2005 i.e. a price rise of 1903% in a span of 5 months and 28 days. It is observed from the data available from the Capitaline Database that the company is into finance and investment business. The latest financial results available are only for the year ended March 2003. The company filed its financial results with the CSE also upto the period March 2003 only. It is observed from the financial statements filed by the company with the CSE for the years ended March 2002 and March 2003 that the company had no sales during the above period and had incurred net losses of Rs.4 lakh and Rs.6 lakh respectively indicating negative performance. The foregoing coupled with the fact that the company has not bothered to file any financial statements for the year ended March 2004 and March 2005 only confirms the belief that the company has scant interest in disclosing its financial results to the investors. In the absence of any details about the financial performance of the company to the investors in the past two years, the astronomical rise in the price of 1903% during March 17, 2005 to September 15, 2005 can only be artficial. An analysis of the trading data for the said period at the CSE revealed that only three brokers namely, M/s DB & Co., M/s Sanju Kabra and M/s Shivam Stock Broking have contributed around 92% of the total turnover of the PCML’s shares. The turnover contribution of these three brokers in the shares of PCML is given below:
Sl.No. Member Name Trading Data
Buy % to Total Sell % to Total Total % to Total
Buy Sell Buy & Sell
1 D B & Co 759252 41.68 759150 41.67 1518402 41.67
2 Sanju Kabra 161601 8.87 920550 50.53 1082151 29.70
3 Shivam 752950 41.33 15901 0.87 768851 21.10
Stock
Broking
Total 1673803 91.88% 1695601 93.07 3369404 92.47
2.2 A further analysis of the trading data revealed that most of the trades were executed as cross deals (wherein the buying and selling broker is the same) and the above members acted as counter party of their own transactions. The extent of such transactions is given in the following table. The percentage mentioned in the table is with respect to their total trades in the share during the relevant period (significant percentages shown in bold):
Cross and Matched transactions
Sl. Name of the D B & Co Sanju Shivam Stock
broker Kabra Broking1 D B & Co 1511702 3100 3000
(99.5%) (0.2) (0.2)
2 Sanju Kabra 3100 316400 740250
(0.2) (29.2) (68.4)
3 Shivam Stock 3000 740250 25600
Broking (0.3) (96.2) (3.3)It is seen that the cross deals executed by D B & Co and the transactions between Sanju Kabra and Shivam Stock Broking constituted a large portion of trading in the share. Hence, the price rise in the share can be attributed to the dealings by these brokers. This further fortifies the conclusion that the price movement and the transactions in the share was artificial and was designed to create a false market, when the shares lack the fundamentals.
Subh Laxmi Projects Ltd. (SLPL)
2.3 Subh Laxmi Projects Ltd. (SLPL) is one of the listed companies at CSE which had a steep price rise during the period of March, 2005 to July, 2005. The share price of the company rose from Rs.21.30 to Rs.248.50 between March 17, 2005 to July 14, 2005 i.e. a price rise of 1067% in a span of 3 months and 27 days. It is observed from the data available from the Capitaline Database that the company is into finance and investment business. The latest financial results available are that for the year ended March 2004. The company filed its financial results to the CSE only upto the period March 2004. It is observed from the financial statements filed by the company with the CSE for the year ended March 2004 that the company had a net sales of Rs.61 lakh and did not earn any profit. During the earlier year (i.e. 2003) the company did not have any income. The paid up capital of the company is Rs.7.52 crore. Thus, the available information indicates that the financial performance of the company is far from encouraging. The company has not filed any financial statements for the year ended March 2005 which indicates that the company is having scant interest in disclosing its financial results to the investors. In the absence of any details about the financial performance of the company to the investors in the past two years, the astronomical rise in the price of 1067% during March 17, 2005 to July 14, 2005 in this company also like in the previous case seems to be artificial and intended to create a false market.
2.4 An analysis of the trading data for the said period at the CSE revealed that only two brokers namely, M/s Ahilya Commercial Pvt. Ltd. and M/s Shyam Lal Sultania have contributed around 25.93% of the total turnover of the SLPL’s shares. The turnover contribution of these two brokers in the shares of SLPL is given below:
Sl. Member Trading Data
No Name
Buy % to Sell % to Total % to
Total Total Total
Buy Sell Buy &
Sell
1 Ahilya 33380 13.71 317900 13.06 651700 13.38
Commercial
2 Shyam 258550 10.62 352600 14.48 611150 12.55
Lal
Sultania
Total 59235 24.33% 670500 27.54 1262850 25.93
A further analysis of the trading data revealed that the pattern of trading and the modus operandi seems to be identical as in the previous case. Most of the trades were executed as cross deals (wherein the buying and selling broker is the same) and the above members acted as counter party of their own transactions. The extent of such transactions is given in the following table. The percentage mentioned in the table is with respect to their total trades in the share during the relevant period (significant percentages shown in bold):
Cross and Matched transactions
Sl. Name of the Ahilya Shyam Lal
broker Commercial Sultania1 Ahilya 626000 12800
Commercial (96%) (2%)
2 Shyam Lal 12800 171100
Sultania (2%) (28%)It is seen that the cross deals executed by M/s Ahilya Commercial Pvt. Ltd. and M/s Shyam Lal Sultania constituted a large portion of trading in the share. Hence, the price rise in the share can be attributed to the dealings by these brokers.
Global Capital Markets Ltd. (GCML)
2.5 Global Capital Markets Ltd. (GCML) is one of the listed companies at CSE which had a steep price rise during the period of June, 2005 to September, 2005. The company is also listed on the BSE where it was last traded on June 28, 2005 at Rs.3.55. Thereafter there has been no trading in the share on BSE. The share price of the company rose from Rs.1.25 to Rs.13.50 between June 17, 2005 to September 16, 2005 i.e. a price rise of 980% in a span of 3 months. It is observed from the data available from the Capitaline Database that the company is into finance and investment business. The latest financial results available are that for the year ended March 2004. The company filed its financial results to the CSE only upto the period March 2004. It is observed from the financial statements filed by the company with the CSE for the year ended March 2004 that the company had a net sales of Rs.45 lakh and a net profit of Rs.28 lakh. Thus, the financial performance of the company is not encouraging. The company has not filed any financial statements for the year ended March 2005 which indicates that the company is having scant interest in disclosing its financial results to the investors. In the absence of any details about the financial performance of the company to the investors in the past two years, the astronomical rise in the price of 980% during June 17, 2005 to September 16, 2005 seems to be artificial and designed to create a false market.
2.6 An analysis of the trading data for the said period at the CSE revealed that only three brokers namely, M/s Sanju Kabra, M/s A V Shares and Stock Brokers Pvt. Ltd. and M/s Shivam Stock Broking have contributed around 90.97% of the total turnover of the GCML’s shares. The turnover contribution of these two brokers in the shares of GCML is given below:
Sl.No. Member Trading Data
o Name
Buy % to Sell % to Total % to
Total Total Total
Buy Sell Buy &
Sell
1 Sanju 1168910 66.30 355300 20.15 1524210 43.23
Kabra
2 A V Shares 100 0.01 1114200 63.20 1114300 31.60
& Stock
Brokers
Pvt Ltd.
3 Shivam 322940 18.32 246200 13.97 569140 16.14
Stock
Broking
Pvt. Ltd.
Total 1491950 84.63% 1715700 97.32 3207650 90.97
A further analysis of the trading data once again revealed the identical modus operandi as in the previous two cases. Most of the trades were executed as cross deals (wherein the buying and selling broker is the same) and the above members acted as counter party of their own transactions. The extent of such transactions is given in the following table. The percentage mentioned in the table is with respect to their total trades in the share during the relevant period (significant percentages shown in bold):
Cross and Matched transactions
Sl. Name of the Sanju A V Shares & Shivam
broker Kabra Stock Brokers Stock
Pvt Ltd. Broking
1 Sanju Kabra —- 894800 568800
(58.7%) (37.3%)
2 A V Shares & 894800 — —-
Stock Brokers (80.3%)
Pvt Ltd.
3 Shivam Stock 568800 ---- ----
Broking (99.94%)
It is seen that the cross deals executed by M/s Sanju Kabra, M/s A V Shares and Stock Brokers Pvt. Ltd. and M/s Shivam Stock Broking constituted a large portion of trading in the share. Hence, the artificial price rise in the share can be attributed to the dealings by these brokers.
Bankam Investments Ltd. (BIL)
2.7 Bankam Investments Ltd. (BIL) is one of the listed companies at CSE which had a steep price rise during the period of June, 2005 to September, 2005. The share price of the company rose from Rs.2.10 to Rs.16.85 between June 09 , 2005 to September 06, 2005 i.e. a price rise of 702% in a span of 3 months and 7 days. It is observed from the data available from the Capitaline Database that the company is into finance and investment business. The latest financial results available are that for the year ended March 2004. The company filed its financial results to the CSE only upto the period March 2004. It is observed from the financial statements filed by the company with the CSE for the years ended March 2004 that the company had no income and had incurred a net loss of Rs.11 lakh. During the earlier year (ie. 2003) the company did not have any income. The paid up capital of the company is Rs.74 lakh. As in the previous three cases, the company has not filed any financial statements for the year ended March 2005 demonstrating that the company is having scant interest in disclosing its financial results to the investors. In the light of the poor performance of the company compounded by absence of any details about the financial performance of the company to the investors in the past two years, the astronomical rise in the price of 702% during June 9, 2005 to September 16, 2005 seems to be artificial and designed to create a false market.
2.8 An analysis of the trading data for the said period at the CSE revealed that only two brokers namely, Rajendra Prasad Shah and Badri Prasad and Sons have contributed around 98.70% of the total turnover of the BIL’s shares. The turnover contribution of these two brokers in the shares of BIL is given below:
Sl. Member Trading Data
No Name
Buy % to Sell % to Total % to
Total Total Total
Buy Sell Buy &
Sell
1 Rajendra 93500 65.05 60000 41.74 153500 53.4
Prasad 0
Shah
2 Badri 46500 32.35 83730 58.26 130230 45.3
Prasad & 0
Sons
Total 140000 97.40% 143730 100.00 283730 98.7
0
A further analysis of the trading data revealed that the pattern of trading and the modus operandi seems to be identical as in the previous cases. Most of the trades were executed as cross deals (wherein the buying and selling broker is the same) and the above members acted as counter party of their own transactions. The extent of such transactions is given in the following table. The percentage mentioned in the table is with respect to their total trades in the share during the relevant period (significant percentages shown in bold):
Cross and Matched transactions
Sl. Name of the Rajendra Prasad Badri Prasad &
broker Shah Sons1 Rajendra 120000 33500
Prasad Shah (78.2%) (21.8)
2 Badri Prasad & 33500 93000
Sons (25.7%) (71.4%)It is seen that the cross deals executed by Rajendra Prasad Shah and Badri Prasad and Sons constituted a large portion of trading in the share. Hence, the artificial price rise in the share can be attributed to the dealings by these brokers.
S T Services Ltd. (STSL)
2.9 S T Services Ltd. (STSL) is one of the listed companies at CSE which had a steep price rise during the period of March, 2005 to September, 2005. the company is also listed on ASE and JSE. The share price of the company rose from Rs.12.10 to Rs.96.50 between March 18, 2005 to September 16, 2005 i.e. a price rise of 698% in a span of 5 months and 28 days. It is observed from the data available from the Capitaline Database that the company is into finance and investment business. The latest financial results available are that for the year ended March 2004. The company filed its financial results to the CSE only upto the period March 2004. It is observed from the financial statements filed by the company with the CSE for the years ended March 2004 that the company had sales of Rs.39 lakh (Rs.88 lakh during 2003) and had incurred a net profit of only Rs.1 lakh (Rs.1 lakh profit in 2003). The paid up capital of the company is Rs.4.96 crore. Thus, the available information indicates that the financial performance of the company is poor. No data on shareholding pattern and promoter holdings is available. On top of it as in the earlier cases, the company has not filed any financial statements for the year ended March 2005 which indicates that the company is having scant interest in disclosing its financial results to the investors. In the light of the poor performance of the company compounded by the absence of any details about the financial performance of the company to the investors in the past two years, the astronomical rise in the price of 698% during March 18, 2005 to September 16, 2005 is artificial and designed to create a false market.
2.10 An analysis of the trading data for the said period at the CSE revealed that only two brokers namely, Ram Mohan Sarda and S. Jhunjhunwala & Co. have contributed around 53.86% of the total turnover of the STSL’s shares. The turnover contribution of these two brokers in the shares of STSL is given below:
Sl. Member Trading Data
No Name
Buy % to Sell % to Total % to
Total Total Total
Buy Sell Buy&
Sell
1 Ram Mohan 736595 37.68 893500 45.70 1630095 41.69
Sarda
2 S. 244305 12.50 231700 11.85 476005 12.17
Jhunjhunw
ala & Co.
Total 980900 50.18% 1125200 57.55 2106100 53.86
A further analysis of the trading data revealed that the pattern of trading and the modus operandi to be identical as in the previous cases. Most of the trades were executed as cross deals (wherein the buying and selling broker is the same) and the above members acted as counter party of their own transactions. The extent of such transactions is given in the following table. The percentage mentioned in the table is with respect to their total trades in the share during the relevant period (significant percentages shown in bold):
Cross and Matched transactions
Sl. Name of the Ram Mohan S. Jhunjhunwala &
broker Sarda Co.
1 Ram Mohan Sarda 1232990 174455
(75.63%) (10.7%)
2 S. Jhunjhunwala 174455 24000
& Co. (36.6%) (5%)
It is seen that the cross deals executed by Ram Mohan Sarda and S. Jhunjhunwala & Co. constituted a large portion of trading in the share. Hence, the artificial price rise in the share can be attributed to the dealings by these brokers.
Amluckie Investment Co. Ltd. (AIML)
2.11 Amluckie Investment Co. Ltd. (AIML) is one of the listed companies at CSE which had a steep price rise during the period of April, 2005 to August, 2005. The share price of the company rose from Rs.95 to Rs.298.50 between April 1, 2005 to August 23, 2005 i.e. a price rise of 214% in a span of 4 months and 32 days. It is observed from the data available from the Capitaline Database that the company is into finance and investment business. The latest financial results available are that for the year ended March 2004. The company filed its financial results to the CSE only upto the period March 2004. It is observed from the financial statements filed by the company with the CSE for the years ended March 2004 that the company had sales of Rs.9 lakh (Rs.3 lakh during 2003) and had earned a net profit of Rs.3 lakh (Rs.1 lakh profit in 2003). The paid up capital of the company is Rs.20.16 crore. The EPS for the year 2004 works out to 0.01 and at a market price of Rs.298.50, the P/E ratio works out to 29850. The company has not declared any dividend during the past 3 years. Thus, the available information indicates that the financial performance of the company is far from encouraging and the share price is not justified by the fundamentals of the company. The company has not filed any financial statements for the year ended March 2005 which indicates that the company has very little interest in disclosing its financial results to the investors. In the absence of any details about the financial performance of the company to the investors in the past two years, the astronomical rise in the price of 698% during April 1, 2005 to August 23, 2005 seems to be artificial and designed to create a false market.
2.12 An analysis of the trading data for the said period at the CSE revealed that only two brokers namely, Shyam Lal Sultania and M. Bhiwaniwala & Co. have contributed around 39.43% of the total turnover of the AICL shares. The turnover contribution of these two brokers in the shares of AICL is given below:
Sl. Member Trading Data
No Name
Buy %to Sell % to Total % to
Total Total Total
Buy Sell Buy &
Sell
1 Shyam Lal 567900 30.41 247300 13.24 815200 21.83
Sultania
2 M 214999 11.51 442300 23.69 657299 17.60
Bhiwaniwa
la & Co
Total 782899 41.92% 689600 36.93 1472499 39.43
A further analysis of the trading data revealed that the pattern of trading and the modus operandi seems to be identical as in the previous cases. A further analysis of the trading data revealed that most of the trades were executed as cross deals (wherein the buying and selling broker is the same) and the above members acted as counter party of their own transactions. The extent of such transactions is given in the following table. The percentage mentioned in the table is with respect to their total trades in the share during the relevant period (significant percentages shown in bold):
Cross and Matched transactions
Sl. Name of the Shyam Lal M Bhiwaniwala
broker Sultania & Co1 Shyam Lal 92600 543100
Sultania (11.3%) (66.6%)
2 M Bhiwaniwala & 543100 11000
Co. (82.6%) (1.6%)It is seen that the cross deals executed by Ram Mohan Sarda and S. Jhunjhunwala & Co. constituted a large portion of trading in the share. Hence, the price rise in the share can be attributed to the dealings by these brokers.
3. Summary of the findings
3.1 The facts brought out in the foregoing paragraphs and the analysis of the trade and order log as given in the tables above lead to the following conclusion –
a) Significant number of trades in the selected shares of the above brokers during the period under scrutiny are apparently client to client trades which have been executed on a single terminal of the same broker, acting as counter party, successively at a higher price thereby jacking up the price.
b) These brokers have allowed their clients who in some cases are themselves to place simultaneously both buy and sale orders of same quantity at the same price in the selected shares to facilitate matching of transactions and creation of volume.
c) Order time of these trades show that both buy and sale orders were given either in identical time or within a gap of few seconds. More than 70% of the trades of these brokers in the above mentioned six companies’ shares were either between the said brokers among themselves having identical quantities and rates or through cross-deals.
d) Through matched and cross deals, there has been significant rise in the above mentioned six companies’ share price ranging from 200% to 1900%.
e) A group of two or three of the above mentioned brokers have transacted in the above shares and those transactions have an upward impact on price.
f) Apparently, the artificial price rise in the above shares resulted into gains to some set of brokers and loss to other set brokers, which may be instrumental in legitimizing certain financial gains .
g) As the price of the above shares have gone up significantly there is a possibility that investors without having proper information about the concerned companies may be lured to these illiquid shares and may get trapped in the process, which is highly detrimental to the interest of the investors.
3.2 In sum, it is evident from the above analysis of the six companies, all of which are listed in CSE, and one of which is listed also in BSE, and another listed additionally in Jaipur and Ahmedabad Stock Exchanges the brokers have followed a common modus operandi of artificially jacking up the price and creating false volumes through continuous self deals executed on the same terminal and cross deals amongst themselves, thereby not only enriching themselves but also aiding and abetting the process of legitimizing the gains. Besides the companies themselves have recorded poor or negative financial performance and have not bothered to file up to date financial statements with CSE. Such acts by the brokers pose a serious risk to the stability and settlement system of the stock exchange besides raising the spectre that innocent investors may get drawn by the artificial trading volumes generated by these brokers and may in the process be beguiled into investing in the shares of these
fundamentally weak companies at unjustifiable market prices, only to be left adrift.
3.3 The findings of the preliminary inquiry as detailed above also establishes a prima facie case of violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 and Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 read with code of conduct as specified in Scheduled II of the said Regulations. There is a reasonable ground to believe that the transactions in the above securities are being dealt in a manner detrimental to the investors and securities market. SEBI is initiating formal investigations into the matter.
3.4 In view of the above, I am satisfied that pending inquiry by SEBI, it is necessary to issue an order under Section 11 (4) (b) read with Section 11 (1) under 11B of the SEBI Act in order to protect the interests of the investors and also the integrity of the securities market.
4 ORDER
4.1 In exercise of the powers conferred upon me by virtue of Section 19 read with Section , 11 (4) (a), 11(4)(b) and Section 11 (1) and 11 B of the SEBI Act it is hereby directed, pending inquiry, that :
A) the following eleven stock brokers of CSE shall not buy, sell or deal in securities, in any manner, either directly or indirectly, till further directions in this regard:
1. Sanju Kabra
2. Shivam Stock Broking Pvt. Ltd.
3. D B & Co.
4. Rajendra Prasad Shah
5. Badri Prasad & Sons
6. M Bhiwaniwala & Co.
7. Ram Mohan Sarda
8. A V Shares & Stock Brokers Pvt. Ltd.
9. Shyam Lal Sultania
10. Ahilya Commercial Pvt. Ltd.
11. S Jhunjhunwala & Co.
B) The trading in the following companies shall remain suspended till further directions in this regard.
1. Prime Capital Market Ltd.
2. Subh Laxmi Projects Ltd.
3. Global Capital Market Ltd.
4. Bankam Investments Ltd.
5. S. T. Services Ltd.
6. Amluckie Investment Co.
The above directions shall take effect immediately and shall be in force until further orders. The stock brokers and the companies may file their objections, if any, to this order within 15 days from the date of this order and, if they so desire, avail themselves of an opportunity of personal hearing at the Securities and Exchange Board of India, Head Office, First Floor, Mittal Court, ‘B’ Wing, Nariman Point, Mumbai 400021 on a date and at a time to be fixed on specific request, to be received in this behalf from the stock brokers within above 15 days from the date of this order.