ORDER
G.N. Bajpai, Chairman
1.1. Investigations were conducted by SEBI in the scrip of M/s.Maruti Organics
Ltd ( hereinafter referred to as MOL) into the alleged fraud and
malpractices committed in the trades of MOL. Large purchase
transactions had been placed with brokers in the said scrip across cities
and the persons who had placed the order had absconded. The
transactions largely took place on the 3rd and 4th of July, 1996 which were
part of Settlement no.27 of NSE.
1.2 Investigations revealed that Shri Mohan Rao, of M K Securities Ltd a
member of Hyderabad Stock Exchange and registered with SEBI as a
stock broker (hereinafter referred to as MKSL) and associates ( M K & Co.
& Sharat Investment) were major sellers in Settlement no.27 through three
NSE brokers. Their transactions in Settlement No.27 are given below and
these three members had accounted for 84% of net selling position in
MOL.
Member
through whom shares were sold
Clients
No. of
shares
Comments
Merfin
43 clients
allegedly referred by Mohan Rao
150,500
M K Securities
Ltd (MKSL)
61,700
MK &
Co
30,400
Sharat
Investment
55,200
Prop. Y Ravi
Prasad also director of MKSL
Nagarjuna
Securities
MK &
Co.
1,28,800
Classic Share
& Stock Broking Services
M K
Securities Ltd
18,700
1.3 MKSL, MK & Co. and B R Securities are the firms with whom Mr.Mohan
Rao or his relatives are directors. Sharat Investment is a proprietorship
firm of Shri Y Ravi Prasad, MKSL’s another director. Investigations found
that total net sale of this group through these 3 members were 3,89,400
(57% of the total sales).
1.4 Pursuant to the investigation, an Enquiry Officer was appointed under
Regulation 28(1) of SEBI (Stock Brokers and Sub Brokers) Regulations,
1992 (hereinafter referred to as the ‘said Regulations’), to enquire into the
alleged violations committed by MKSL. The Enquiry Officer conducted the
enquiry in accordance with the provisions of the said Regulations and
submitted his Report on 10.8.2001. The Enquiry Officer found that Shri
Mohan Rao is the kingpin in organizing the fraudulent transactions of
manipulated sales in the scrip of MOL and that the sales transactions
had been manipulated by Shri Mohan Rao alongwith his associates as
revealed through investigation conducted by SEBI. The Enquiry Officer
also observed that the same was done with an object of manipulating the
scrip of MOL and for creating an artificially high price in the scrip and that
Shri Mohan Rao alongwith MKSL and associates perpetuated fraud on the
investors by making an apparent show of artificial demand in the scrip of
MOL. The Enquiry Officer also found that the fraud had been perpetrated
with a view to induce innocent investors to make purchases in the scrip of
MOL with the make belief that the scrip was worthy, whereas in reality it
did not command any real value. Therefore, the Enquiry Officer held that
Shri Mohan Rao and MKSL are guilty of fraud and that they are liable for a
penalty of cancellation of registration of the stock broker viz.MKSL under
Regulation 26(2)(ii) of the said Regulations.
2.1 A show cause notice dated August 27, 2001 was issued to MKSL in terms
of Regulation 29(1) of the said Regulations whereby it was communicated
that the Enquiry Officer had found MKSL to be guilty of violating Clauses
A(1 to 5) of Schedule II of Regulation 7 and Regulation 26(2)(ii) of the said
Regulations. A copy of the Enquiry Report was also furnished to MKSL,
alongwith the show cause notice. Vide the aforesaid notice, MKSL was
asked to show cause as to why the penalty as recommended by the
Enquiry Officer should not be imposed against it. It was given 21 days
time for furnishing its reply.
3.1. A reply dated 16.5.2002 was furnished by MKSL to the said show cause
notice stating that NSE had annulled the transactions relating to MOL and
the same had been challenged by him by way of Writ Petitions before the
High Court of Andhra Pradesh. A Division Bench of Andhra Pradesh High
Court had held that there was no proper material for such annulment or to
arrive at a finding that MKSL had manipulated the share price of MOL.
However, the matter is referred to a full Bench in view of the special
importance of the case. It was his objection that the matter would be subjudice
and it shall not be appropriate for SEBI to take a decision till the
High Court renders its final view.
3.2 In his reply, MKSL had stated that the investigation conducted by SEBI
was done without intimation to him. It was further stated that the factual
information collected from Telephone booth operators in Mumbai and
Chennai has been relied on for the allegations leveled against him in the
show cause notice. It has contended that the names of the persons and
their description have not been mentioned in the show cause notice. It
had also said that the Report on which the show cause notice is based,
has not been furnished to him and that an opportunity of cross
examination is necessary for a proper enquiry and adjudication of the
issue. It was also contended that the show cause notice was a repetition
of the Enquiry Report furnished by NSE before A P High Court and that
there is no independent enquiry in the matter. It has also objected to the
break-up of the number of clients and maintained that the clients are that
of NSE Brokers and the availability / non-availability of these clients could
not be a cause for suspending its membership. The extract of analysis of
the telephone calls, according to MKSL is taken from the Enquiry Report
of NSE which is the subject matter of the Writ before A P High Court. His
objections are that :
i. the analysis based on information given by booth operators who are
said to have called M/s.Yoha Securities Ltd to inquire about persons
who had absconded without paying the STD bills, are far fetched and
appears to be set up by M/s.Yoha Securities Ltd solely for the purpose
of creating a base for getting out of the transaction which was resulting
in a loss to them.
ii. the reason for non-appearance before the Enquiry Officer was that
they did not get proper intimation about the date of hearing.
iii. the alleged deterioration of the financial position of the member is
clearly incorrect, this allegation according to him was to ensure that his
membership is cancelled.
iv. a copy of the investigation report was not furnished to him.
v. that the non-availability of the client cannot be a ground for
cancellation of membership.
Therefore, he requested for a personal hearing in the matter and also
provide an opportunity for him to examine the persons who had made
statements against him, the telephone booth operators and the
representatives of Ms.Yoha Securities Ltd and M/s.Somayajulu & Co. He
wanted the venue for hearing to be kept at Hyderabad for his
convenience.
4.1 Subsequently, an opportunity of hearing was granted to MKSL on
18.12.2002 which was communicated to him vide our letter dated July 30,
2002. However, no one appeared on behalf of MKSL during such hearing.
5.1 I have carefully gone through the findings of the Investigation, the Enquiry
Report and the submissions made by MKSL and I find that MKSL and its
associates (MK & Co. and Sharat Investment) were major sellers in
Settlement No.27 through three NSE brokers. Their transactions in the
said Settlement and these three members accounted for 84% of the net
selling position in the scrip of MOL. SEBI had tried to contact 64 clients of
the three major selling members and 36 of the addresses were found
wrong and two of them had not offered replies. On 9.12.1998, SEBI
despatched letters to 44 clients out of which 28 letters came back
undelivered mostly due to wrong address. Most of them had later replied
after having obtained information from their broker. Letters were again
sent to the same set of client on 3.2.1999 and in some cases it was again
found that clients had given wrong address. 35 out of 43 clients replied
disclosing their source of MOL shares which were sold in the relevant
time. However, only 21 clients produced some evidence to support the
same. The brokers / sub-brokers with whom these clients were supposed
to have traded could not be traced. Whereas in cases where the brokers
could be traced, the claims of the clients were found to be false as the
names of the clients did not appear in the books of the member at the
relevant time. Investigations also revealed that the total number of shares
at the hands of the selling client is around 19% of total shares bought by
the absconded clients. The very existence of the clients who had
absconded is doubtful.
5.2 During the investigation, SEBI had obtained record of the telephone calls
made by the absconding clients made from the public booths in Mumbai
and Madras. One of the members from Madras, Yoha Securities Ltd had
received a call on 5th July, 1996, from Madras and it was found that the
person who had made several telephone calls (both STD and local) from
such booth had vanished without paying the bill. The calls that were made
by the person who vanished is found to have been made to Yoha
Securities Ltd and the description of that person matched with that of
Mr.Madhav, one of the absconding buyer. It was also revealed that the
local calls made from the booth in Madras by such persons had included
the telephone numbers of other NSE members from Madras and some
calls were made to Hyderabad. Regarding the phone calls made from the
booth at Fort, Mumbai, the person who had made the calls at the relevant
time had absconded and the said person was identified to be
Mr.Sadashiv, one of the absconding buyer, a client of M/s.Somayajulu and
Co. (NSE Member).
5.3 On an analysis of the telephone calls made by the absconded clients to
the buying and selling members alongwith MKSL and its associates, it was
found that Mr.Sadashiv (one of the absconding buyer who was a client of
NSE member Somayajulu & Co.) was connected to Shri.Mohan Rao.
Mr.Sadashiv had come from Hyderabad and had been staying at Bombay
and he had been identifying the members through whom the transactions
were to be routed during his stay at Mumbai. From the details of the calls
made from Madras, it was seen that calls have been made to MKSL and
Valueline Securities. It was also seen that Shri Mohan Rao had placed the
orders with Merfin (I) Ltd from the office of Valueline Securities. The call
details indicated that the calls from Madras were made by Shri Madhav
the absconding buyer from Madras, to Valueline Securities at such time
when Shri Mohan Rao, was at the office of Valueline Securities. This is
indicative of the connection between Shri Madhav and MKSL. Again
another absconding client viz.Shri T Sriram had made calls from
Ahmedabad which included calls to Valueline Securities.
5.4 The overall analysis of the telephone calls made from Madras to Madras
NSE members (Premier Securities Ltd and Arvind Securities Ltd) and the
outstation calls to MKSL , Hyderabad from the same telephone booth was
done and the same was matched with the timing of buy and sell orders on
NSE. A graphical representation of the analysis is given in the figure
below.
From the figure, it is seen that calls were made to the members at Madras
and to MKSL at Hyderabad simultaneously. Subsequent to the call there
was a buy order from the clients of (Premier / Arvind) and sell orders by
clients of Nagarjuna & Merfin. From the client list of Nagarjuna & Merfin, it
was observed that majority of their sales were for M KSL/ M K & Co.
From the sequence of events, it was clear that the buyer after placing the
order was informing MKSL which in turn was placing sell orders with
Nagarjuna & Merfin. Another extract between 10.26 a.m. to 10.51 a.m on
4th July, was taken as a sample. There were six calls to Valueline
Securities Ltd from the booth in Madras. The timings of the calls were
10.26, 10.34, 10.41, 10.43 and 10.51. The events that took place during
the same period are as follows :
4.7.96 MADRAS
Order Time
Name of Buying Member
Thru whom the clients placed the purchase order
Qty Bought
10.31
Premier Securities
20,000
10.32/7
Zen Shares &
Securities
20,000
10.42/3/6/7/8
Somayajulu & Co
20,000
10.51
Chona Financial Services
20,000
It is clear that the orders for these purchases were placed from the same
telephone booth.
4.7.96 HYDERABAD
Order Time
Name of Buying Member
Thru whom the clients placed the purchase order
Qty Bought
10.29
Nagarjuna Securities
5,200
10.29/31/32/33/38
Merfin (I) Ltd
34,000
10.39
Merfin (I) Ltd
39,900
10.41/2
Merfin (I) Ltd
38,700
10.44/45
Merfin (I) Ltd
20,000
10.45
Classic Share &
Stock
50,000
It is found that, a major portion of the sales of shares of Nagarjuna
Securities Ltd & Merfin (I) Ltd as also of Classic Share & Stock Broking
Services are on account of their client MKSL/ M K & Co. In the case of
Classic, SEBI has a written confirmation from them stating that most of the
orders placed on behalf of their clients were by MKSL. The chain of
events described above indicate a definite pattern between the buy and
sell orders.
The buy orders for substantial quantity from other centres (other than
Madras) during this time, was also identified during the same period on
4/7/96 and the details are given below :
Time
Name of Buying Member
City
Client
Qty. Bought
10.37/8
Artistic Finance
Delhi
Rajkumar
40,000
10.44
Blue Blends Stocks
Mumbai
Sadashiv
10,000
10.44
Bhavana Investor Service
10,000
10.57/8
Artistic F inance
Delhi
Rajkumar
30,000
Both the major buying clients Shri Rajkumar and Shri Sadashiv are
absconding. The sequence of events points out that Shri Mohan Rao is
linked to Shri Rajkumar and Shri Sadashiv also.
5.5 Investigations have revealed that there was nexus between the
absconded buying and selling clients to create a false market / to offload
shares of MOL. The analysis of telephone calls and the trading pattern
indicate a strong circumstantial evidence of the link between MKSL and
the absconded clients. It is also concluded that MKSL had done
maximum transactions in MOL and had been net sellers in the particular
Settlement and their combined sales were 50% of the shares bought by
the absconded buyers. Further, the selling clients had not produced the
proof of the source of the shares which had been sold on 3rd and 4th of
July 1996. The address of the clients given by the broker was also wrong.
5.6 MKSL had submitted to the Enquiry Officer that it was not connected in
any manner with the 43 clients who is said to have been referred by it to
Merfin. Also, M/s.Sharat Investment was not connected to it or MK & Co.
Shri Ravi Prasad (Director of MKSL) was a Member of HSE and was
dealing in shares on his own and he could not be a reason to link
M/s.Sharat Investments either to Shri Mohan Rao or MKSL. Shri Y Ravi
Prasad was said to be a sub-broker of Mr.P Ramakrishna of Springfields
Ltd who is a complaining member. According to MKSL, an attempt to
contact the clients who is alleged to have committed the mischief after 2
years cannot be made a ground for holding MKSL or its associates
responsible for the same. Shri Mohan Rao represented that neither the
client of the buying brokers did exist nor the buying brokers were
criminally negligent in allowing absolute strangers to build up huge
positions in an inactive / illiquid scrip. MKSL had also objected to the
analysis of the telephone call. It had stated that none of its clients had
absconded and the case of the complaining member was that their clients
had absconded.
5.7 On the basis of complaints received from various brokers stating that
some of the clients had created huge buy position in the scrip of MOL on
3rd and 4th July 1996 and had absconded without meeting their
commitments, NSE had conducted investigations. Finding the complaint
to be genuine, NSE had annulled the trades executed in Settlement No.27
of 1996 in the scrip of MOL. Aggrieved by this decision of NSE, M K
Securities alongwith other sellers filed a Writ Petition before the Hon’ble
High Court at Andhra Pradesh. NSE had conducted further investigations
as per the directions given by the Hon’ble High Court and vide their letter
dated 24.11.2000, a report was submitted to SEBI.
5.8 In the report, it is observed that “The trades in MOL in St. No.27 of 1996
were not executed in the normal course. The trades were not genuine
and a fraud has been perpetrated to enable the sellers to off load the
shares by creating a false market. A large false market was created by
the large sellers by ensuring adequate buying interest through planting
buying clients across the country – Hyderabad, madras, Mumbai,
Bangalore, Ahmedabad and Delhi. These buying clients with huge net
buy position had vanished from different cities. This suggests that there
was an organized fraudulent attempt to defraud the buying members.
In order to ensure that the persons involved in the fraud does not take the
benefit of such fraudulent transactions and in the interest of the capital
markets, for healthy development thereof and in larger public interest,
there was a need to send a strong signal to that effect to the fraudsters
that no such activities will be acceptable in a fair market. Hence, the
Executive Committee (constituted for this purpose) had decided that all
trades executed in the shares of MOL in St. No.1996027 be annulled and
consequential action taken.”
5.9 Regarding the issue of small investors who are genuinely trapped, NSE in
their above report to SEBI had stated that “any genuine small investors
who may be inadvertently affected by this decision of annulment and who
establishes their bonafides may be compensated to the extent of purchase
value or the sale value, whichever is lower, subject to their satisfying the
exchange about the genuineness of the transactions… ”
5.10 MKSL had not appeared before the Enquiry Officer although he was given
notice for the same on two occasions. On one occasion the notice came
back with the endorsement ‘Refused to Accept’. Therefore, it is assumed
that MKSL was not interested to cooperate with the Enquiry.
5.11 Shri Mohan Rao had contended in his reply that the investigation had
been conducted by SEBI without intimation to him. However, I find that
the investigation procedures are duly complied with. It is also noticed that
in the course of investigation, Shri Mohan Rao was summoned for taking
statements by SEBI officials to which he had not responded or
cooperated. Regarding his allegation that the factual information collected
from telephone booth operators in Mumbai and Chennai has been relied
on by SEBI, I find that such information which was circumstantial evidence
had been supported by other corroborative facts and the timing of such
calls have been matched with the Orders placed and therefore such
contention do not hold good. Also, NSE had annulled the trades based on
these facts. Again, the report on which the show cause notice is based i.e.
the Enquiry Report was attached to the show cause notice and it is
incorrect on the part of Shri Mohan Rao, to say that the same was not
furnished to him. Therefore, the contentions raised by Shri Mohan Rao in
his reply are incorrect and do not have merits for the same to be
considered.
5.12 It is found that MKSL has not been trading since 11.10.96 and its
membership card at HSE is almost defunct. Again the Chief Judge of
City Civil Court, Hyderabad had ordered attachment of movable and
immovable properties of MKSL belonging to Shri Mohan Rao, Director of
MKSL vide Order dated 19th April, 2000 in O.S. 518 of 1999. It was found
that the financial position of the stock broker has deteriorated to such a
large extent that his continuance in securities business will not be in the
interest of investors and other stock brokers.
5.13 In the light of the above, I find that Mr. Mohan Rao alongwith MKSL and
its associates, had acted in concert with the absconded clients in
perpetrating fraud on the investors as well as the Exchange and the
market. I, therefore, find that MKSL has violated Clauses A(1 to 5) of the
Code of Conduct laid down in Schedule II read with Regulation 7 of SEBI
(Stock Brokers and Sub Brokers) Regulations, 1992. The member is also
found guilty of fraud and therefore liable for cancellation of certificate of
registration in terms of Regulation 26(2)(ii) of the said Regulations.
MKSL’s conduct is highly detrimental to the interest of investors and the
safety of the securities market. If these activities are allowed, they will
pose a serious risk to the market system and its integrity.
6.1 On a careful consideration of the facts and circumstances of the case and
in exercise of the powers conferred upon me under Section 4(3) of SEBI
Act read with Regulation 26(2)(ii) of SEBI (Stock Brokers and Sub-
Brokers) Regulations, 1992, I, hereby cancel the Certificate of Registration
granted to M K Securities Ltd, as a stock broker. This order shall come
into force with immediate effect.
