ORDER
Madhukar, Member
1. BACKGROUND
1.1 Manashvi Securities Ltd. ( hereinafter referred to as “the broker” ) is a member of the Stock Exchange, Mumbai (hereinafter referred to as “BSE”) and is registered with Securities and Exchange Board of India (hereinafter referred to as “SEBI”) vide registration No. INB 010982034.
1.2 SEBI conducted an investigation into the affairs relating to buying, selling and dealing in the scrip of Mangalya Exports Ltd. (hereinafter referred to as “MEL”) for the period 17.05.2000 to 21.07.2000. Investigation revealed that MEL had been a continuously loss incurring company with a very small volume of turnover. The price of the scrip went up from Rs.96/- to Rs.194/- in a month’s time in May-June, 2000 and then declined to the same level of Rs.96/- in June-July, 2000.
1.3 Investigation revealed that the broker had executed orders put by sub broker M/s. S J Securities Ltd. for the client Shri Nimesh Manharlal Shah. The total shares purchased were 1,900 shares and sold were 1,900 shares of the said scrip. Investigation revealed that Nimesh Manharlal Shah had executed these trades through two sub-brokers viz. M/s. S J Securities Ltd. – (broker M/s. Manashvi Securities Ltd.) and Kirtikumar K Shah (presently known as M/s. V & U Securities Pvt. Ltd.) – broker M/s. M P Vora Shares & Securities Pvt. Ltd. by putting the buy and sell orders for same total quantity at same rates with minimum time difference ranging from 1 minute to 4 minutes in most of the trades. As Nimesh Manharlal Shah was the counter broker client, these trades were fictitious in nature and led to circular trading and accounted for 100% of the market volume of the respective days and as such inflated the price of the scrip from Rs.157 to Rs.176 and then deflated the price of the scrip from Rs. 194 to 185, within a very short period of time.
2. APPOINTMENT OF ENQUIRY OFFICER AND ENQUIRY REPORT
2.1 SEBI vide order dated 12.03.2004 appointed an Enquiry Officer under the provisions of Regulation 5 (1) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as the “said Regulations”) to enquire into the alleged violation committed by the broker of the provisions of Regulation 7 read with clause A(2) of the SEBI (Stock Brokers & Sub – Brokers) Regulations, 1992 (hereinafter referred to as “Stock Broker Regulations”) while trading in the scrip of MEL.
2.2 The Enquiry Officer, after conducting the enquiry as per the procedure laid down in the said Regulations, submitted a report dated 29.10.2004 and recommended that it was not a fit case for imposing any penalty.
3. CONSIDERATION OF ISSUES AND OBSERVATIONS
3.1 I have considered the facts of the case, the findings of the Enquiry Officer. The issue which arose for consideration and my observations are as follows:
3.2 I observe that the broker had executed orders in the scrip of MEL on behalf of its sub-broker S. J. Securities Pvt. Ltd. who traded for its client Nimesh Manharlal Shah. The details of buy and sell position of the broker is as under:
SN Date Buy Sub Broker Qty Price Sell Sub Broker Qty Price
Client -broker Client broker
12 12.6. Nimesh KK MP 3 orders 165 Nimesh SJ Manas 3 172
00 orders
Shah Shah Vora Of 300, 168, Shah Sec. Hvi Of 200, 168
N004 (V& 200, 172 200, 165
U Sec) 200 300
Nimesh SJ Sec Manashy 3 orders 162 Nimesh KK MP Vora 3 163
Shah of 200 165 Shah Shah Orders 169
2609 300, 169 (V & U) of 165
200, 200
200
300
Nimesh SJ Sec Manashy 3 orders 157 Nimesh KK MP Vora 3 159
Shah Ji of 200 158 Shah Shah orders 158
2609 each 159 N004 (v & of
U) 200
each
Nimesh KK Shah MP Vora 4 orders 169 Nimesh SJ Sec Manashy 5 169
Shah (V&c) of 300 170 Shah orders 170
N004 U Sec) 100 172 2609 of 300 173
100, 173 100,
100 100 174
100
100
12 13.6.0 Nimesh KK Shah MP Vora 4 orders 162 Nimesh SJ Sec Manashy 5 162
Shah (V& of 100 165 Shah Ji orders 165
0 N004 U Sec) 300, 100, 168 2609 of 168
300,
100, 170
100
100
Nimesh SJ Sec. Manashy 2 ordres 172 Nimesh KK Shah MP 3 172,
Shah Ji 200 176, Shah (V&U Vora orders 176
2609 300 Sec.) of 200, 177
300
and
200
12 16.6.0 Nimesh SJ Sec. Manashy 1 ordres 185 Nimesh KK Shah MP 1 185,
Shah Ji of 100 Shah (V&U Vora orders
2609 300 Sec.) of 100
3.3 I observe, from the above table that during Settlement No.12 on 12.06.00, the client Nimesh N Shah under client code 2609 sold 700 shares @ Rs.165-172 through SJ Securities, sub broker to the broker and purchased the same under client code N004 through V & U Securities Pvt. Ltd. (formerly Kritikumar K Shah) sub broker to another broker M/s. M P Vora Shares & Securities Pvt. This trade was reversed @ Rs.162 -169 through the same sub brokers on the same day. Again Nimesh Manharlal Shah under client code N004 through V & U Securities Pvt. Ltd. sub broker to another broker M/s. M P Vora Shares & Securities Pvt, sold 600 shares @ Rs.157 – 159 and the same were purchased by Nimesh M Shah himself under client code 2609 through S J Securities, sub broker to the broker. Thus at the end of the day, this trade was reversed by Nimesh Manharlal Shah @ Rs.169-173 through the same brokers.
3.4 I also observe that on 13.06.00, the client Nimesh N Shah under client code 2609 sold 600 shares @Rs.162-169 through S J Securities, sub broker to the broker and the same were purchased by him under client code N004 through V & U Securities Pvt. Ltd., Sub broker to another broker M/s. M P Vora Shares & Securities Pvt. These transactions for 600 shares were reversed for 500 shares @ Rs.172-176 on the same day and 100 shares @ Rs.185 on the last day of settlement i.e. 16.06.00. Thus, the client squared off his positions through the same brokers.
3.5 Whether the broker had violated code of conduct prescribed for Stock Brokers.
I observe that the transactions in the scrip of MEL through the broker are very insignificant. A client of its sub broker purchased 1900 shares and sold 1900 shares on three trading days. These transactions are very insignificant to create any artificial market in the scrip. I also do not find any material in the show cause notice to find that the broker was aware of the trades done by Nimesh Shah through its sub-broker. I agree with finding of the Enquiry Officer that it was not possible for the broker to know that the same ultimate client is indulging in circular trading by himself being the counter party through another broker. I further note that the broker has not done any proprietary trading in the scrip of MEL.
3.6 I also observe that, after noting the pattern of trading by the client, the broker had on their own stopped trading in the scrip. Thus, I observe that the broker has taken corrective measures as soon as it realized that the trading was fictitious.
3.7 I noted that there was nothing on record to show that the broker was guilty of dereliction of code of conduct or that the broker was habitually not exercising due diligence in its transactions. I, therefore, agree with the finding of the Enquiry Officer that the charge of non-exercise of due diligence was not proved in this case. I am, therefore, convinced that it is not a fit case to impose any penalty as recommended by the Enquiry Officer.
4. ORDER
4.1 Therefore, in exercise of the powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of said Regulations in the facts and circumstances of the case, I hereby order that further proceedings against Manashvi Securities Ltd be dropped.