JUDGMENT
G.N. Bajpai, Chairman
1. Jyothi Resins & Adhesives Ltd., was listed in BSE, ASE and VSE. The price of the scrip rose from Rs.17.50 to Rs.140 in VSE and in BSE the price rose from Rs.15/- on 22.8.95 to Rs.181.50 on 6.10.95. The substantial jump in the closing price was during the period 18.9.95 to 6.10.95 when it moved from Rs.50.50. to Rs.181.50. The volumes have been steadily hovering around an average of Rs.5 lakh shares per day. There was no positive announcement in respect of the working of the company which could have warranted such huge rise in the price of the scrip after listing. In settlement No.15B of BSE (25.09.95 – 6.10.95) there was a short delivery of 4,51,400 shares. Part of the outstanding position was auctioned and rest was closed out. SEBI in order to prevent the manipulators from getting undue benefits instructed BSE to freeze the proceeds of auction and close-out amounting to Rs.4.18 crore. In the context of these developments and in view of the steep hike in the price of the scrip of Jyoti Resins & Adhesives Ltd., which seems to be artificially created, investigations were initiated by Securities and Exchange Board of India (hereinafter referred to as SEBI) into the affairs relating to buying, selling or dealing in the shares of M/s Jyothi Resins & Adhesives Ltd.
2. Investigations revealed that majority of the brokers had dealt, in this scrip, on behalf of one client called M/s.Udita Inverted Pvt Ltd. (UIPL). Investigations further revealed that UIPL is connected with the Promoters/Management of Jyoti Resins. The shares were cornered by UIPL from 14.8.95 onwards.
3. Sh.Sunil K. Patel, Director of UIPL appeared, before SEBI, along with ledger and list of 299 clients and their addresses on behalf of whom they had dealt in the scrip. However, he didn’t submit any further details about the payments received from clients. In order to verify genuineness of transactions summons were served to 39 top dealing clients of UIPL. There was no response to most of the summons and in some cases the summons returned unclaimed. In absence of any response from majority of clients of UIPL, final summons were sent asking them to confirm the purchases and give details of payments. Again, there was no response from majority of the clients. Thereupon the Investigation Team visited at the addresses of 72 clients and recorded their statements. As per these statements none of them have dealt in the shares of Jyothi Resins through UIPL or otherwise. In view of this UIPL was summoned once again. It was admitted by Sh. Patel that the list of 299 client given by him previously to the investigation team is bogus. Further, Sh.Patel has stated that majority of orders for purchase and sale of shares of Jyoti Resins & Adhesives Limited were given by Sh.Devendra Kantilal Dalal, Ahmedabad. Shri Patel submitted that Sh.Devendra Kantilal Dalal never informed them nor consulted them in respect of the orders placed for purchase / sale of shares of Jyoti Resins nor consulted them in regard to orders placed for purchase / sale of shares of Jyoti Resins & Adhesives Limited. Sh.Patel submitted that UIPL has never received any delivery of shares from any of the brokers and sub-brokers nor they are aware as to who has received the delivery of shares. UIPL never asked Shri Devendra Kantilal Dalal as to who is receiving the delivery.
4. Investigations revealed that Shri Devendra Kantilal Dalal had manipulated the price of the scrip of M/s.Jyoti Resins Ltd. by purchasing and selling in the name of UIPL through different brokers. Thus, UIPL was acting as a front entity of Sh.Dalal. Shri Devendra Kantilal Dalal was a member of ASE and was declared a defaulter by the exchange in August 1989.
5. As per the statement of Kalpesh Chawalla, Director, Havmore Financial Services Pvt. Ltd., the dealings in the shares of Jyoti Resins & Adhesives Pvt. Ltd. were done on behalf of Devendra Kantilal Dalal. He further stated that Havemore Financial Services had purchased 85,100 shares out of which 65,200 shares were purchased on behalf of Sh.D.K.Dalal in the name of UIPL. It was also admitted that the orders for purchase and sale were given by Sh. Dalal on telephone and the shares deliveries received were passed on to Devendra Kantilal Dalal at the address of Vrushti Financial Services Pvt. Ltd. The payment for these shares was received from Sh. Devendra Kantilal Dalal.
6. Apart from above, Kalpesh Chawalla had introduced the Bank Accounts of JJ Enterprises, Gullav Finance & Investment (P) Ltd. and Jadeja Finstock in Central Bank of India Gandhi Road Branch, Ahmedabad – the same branch in which Companies of Devendra Kantilal Dalal have their accounts. As per Kalpesh Chawalla’s statement these accounts were introduced by him at the behest of Devendra Kantilal Dalal. Further, he has stated that whatever money has flown through the accounts of J.J. Enterprises, Gallav Finance & Investment (P) Ltd. and Jadeja Finstock is for the price manipulation by Sh.Devendra Kantilal Dalal and only Sh.Devendra Kantilal Dalal can explain about the debits and credits in these accounts.
7. It was noticed during investigations that Vrushti Finance had financed UIPL for the secondary market purchases of shares of Jyoti Resins. Vrushti received most of these funds from Jadeja Finstock, Gallav Finance & Investment Pvt Ltd. and JJ Enterprises.
8. Moreover, it was found during investigations that, Raj Investments and Manyog Investments Pvt Ltd., are two Bombay based sub brokers and have dealt through various brokers of BSE in the scrip of Jyoti Resins. As confirmed by these two sub brokers, they had dealt for UIPL and the shares were delivered to Sh.Dalal at the address of Vrushti Financial Services Pvt Ltd.
9. The authenticity of Kalpesh Chawalla’s statement is confirmed by the statements of Vrushti Financial Services (P) Ltd., Raj Investments and Manyog Investments.
10. Statements of these entities clearly imply that J.J. Enterprises, Gallav Finance & Investment Pvt, Ltd and Jadeja Finstock are from entities of Devendra Kantilal Dalal.
11. Pursuant to investigation it was alleged that Kalpesh Chawalla, Member, ASE had had dealt with Shri Devendra Kantilal Dalal. (Sh.Dalal was a member of ASE and was declared a defaulter by the exchange in August 1989); a defaulted member of ASE who manipulated the prices of the scrip of Jyoti Resins.
12. On completion of the investigations, an Enquiry Officer was appointed by SEBI vide order dated 5th May 1997 under Regulation 28 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 to enquire into the prima facie violations committed by the broker.
13. The Enquiry Officer, thereafter, proceeded with the enquiry and issued a Show Cause Notice to you vide letter dated 28rd November 1997 alleging that Kalpesh Chawla, Member, ASE, had indulged in carrying out deceptive transactions by not disclosing Sh.Devendra Kantilal Dalal as his client and had abetted the market manipulators. Thus, it was alleged that the broker has violated Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 for not abiding by the code of conduct specified in Schedule 2 of that Regulations. A reply to the Show Cause Notice was received from the broker vide letter 24th January 1998. Opportunities of personal hearing was also given by the Enquiry Officer on 28th January 1998 and 22nd May 2001, which was duly attended by Sh.Kalpesh Chawla.
14. The Enquiry Officer, on completion of enquiry process, concluded that the broker had given contradictory statements to SEBI and to the Enquiry Officer. The Enquiry Officer did not accept the denials of the broker on the grounds that the denials lacked credibility as he had made contradictory statements. The Enquiry Officer concluded that, in view of the fact that the broker confirmed the facts that the orders were placed by Sh.Dalal in the name of UIPL, the deliveries were passed on to Sh.Dalal at the address of Vrushti Financial Services Pvt Ltd. and the payment was received from UIPL on behalf of sh.D.K.Dalal, there is enough material to show the nexus between the broker and Sh.Devendra Kantilal Dalal. Hence, the enquiry officer found that the broker has violated provisions of Cl.A(3) and A(4) of Code of Conduct for Stock Brokers (Regulation 7) of SEBI (Stock Brokers and Sub brokers) Regulations 1992 and recommended that the registration of the broker be suspended for a period of six months.
15. Pursuant to the submission of Enquiry Report, a Show Cause Notice dated 25th July 2001, under Regulation 29(1) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 was issued enclosing a copy of the Enquiry Report. The member had replied to the Show Cause Notice vide letter dated 20th August 2001. An opportunity of personal hearing before Chairman SEBI was given to the broker on 20th June 2002 which was duly attended by Sh.Kalpesh Chawla who presented his arguments.
16. I have carefully examined the enquiry report, submissions made orally as well as in writing by the broker, other material on record etc. I find that Kalpesh Chawla, Member, ASE had dealt for Sh.D.K.Dalal in the name of UIPL. Sh.Kalpesh Chawla was aware of the fact that Sh.D.K.Dalal was the effective client who was operating through his front entity UIPL. I also find that Sh.Kalpesh Chawla has given contradictory statement before SEBI investigation team and before the Enquiry Officer, probably to wriggle out of the admissions made earlier. However, Sh.Chawla accepted dealing for Sh.D.K.Dalal in the course of hearing before me. It is not expected from a prudent and reasonable broker to deal for some one and show the transactions in some other name.
17. I find that the investigation has brought out clearly that Sh.Dalal manipulated the prices in the scrip of Jyoti Resins Ltd. I find that the broker had consciously aided Sh.Dalal in this manipulative activity. Considering the facts and circumstances in totality, I tend to agree with the recommendations of the Enquiry Officer. I am of the view that the registration of the broker should be suspended for a period of six months. This order shall come into force with effect from 12th August 2002.
