ORDER
G. Anantharaman, Member
1. Background
1.1 SEBI had found rampant price manipulation in the shares of companies with low market capitalization, commonly referred to as “small cap stocks” or “penny stocks” during the year 2005. SEBI had also taken action, including initiation of investigation against several such companies, their promoters, brokers and unscrupulous traders which are listed and traded on the Calcutta Stock Exchange (CSE) as well as against the promoters of these companies and brokers who had manipulated the prices on the shares of these companies, in order to protect the interest of investors and the integrity of the market. Shares of the following companies witnessed a sharp price variation ranging from 69% to 323% within a short period between April 2005 and November 2005.
1. Nageshwar Investment Ltd.
2. Adinath Bio-labs Ltd.
3. Globe Stocks & Securities Ltd.
4. Goenka Business & Finance Ltd.
5. Coronet Industries
1.2 The price movement of the shares of the above five companies during April, 2005 to November, 2005 is given below:
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Sr. Scrip Name Period Initial Last % Duration
No. traded traded increase/decrease
price Price
(in (in
Rs.) Rs.)
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1 Nageshwar 25/4/05
Investment to
Ltd. 24/11/05 12.70 45.50 258% 7 months
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2 Adinath Bio- 16/5/05
labs Ltd. to 6 months
24/11/05 20.80 88 323% 9 days
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3 Globe Stocks 15/7/07
& Securities to 4 months
Ltd. 24/11/05 19.10 77.65 307% 10 days
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4 Goenka 8/4/05
Business & to 7 months
Finance Ltd. 24/11/05 60.10 13.60 77% 17 days
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5 Coronet 4/4/05
Industries to 7 months
Ltd. 24/11/05 160.00 270 69% 21 days
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2. Trading in the scrip of Adinath Bio-Labs Private Limited
2.1 On the basis of material available on record, SEBI made the following preliminary findings with regard to the trading in the scrip of Adinath Bio-Labs Private Limited
2.2 Adinath Bio-labs Ltd. is a “small cap” listed compay at CSE which witnessed a significant price increase during the period under scrutiny. The share price of the company increased from Rs. 20.80 to Rs. 88, i.e. a rise of 323% in 6 months & 9 days.
2.3 It was observed from the latest annual report of the company received from CSE that in the year 2004-05, the share capital of the company was Rs. 5.52 crore against the company’s gross receipts of Rs. 20.01 crore which almost exactly accounted for meeting its expenditure (Rs.19.69 crore), leaving a net profit (PAT) for the year of Rs. 5 lakh. During the previous year also the company’s net profit (PAT) was Rs. 8 lakh.
2.4 As per the latest compliance report obtained from CSE, the company had failed to submit the following documents / reports with the exchange:
a) Share-holding pattern in respect of 1st and 4th quarter for the year 2002-03, 1st and 2nd quarter for the year 2003-04 and 2nd quarter for the year 2004-05.
b) Unaudited quarterly results in respect of 2nd quarter for the year 2005-06.
2.5 Thus, the available information indicated that the financial performance of the company has been consistently not so impressive and certainly not enough to generate a sudden burst of investor expectation to warrant a sharp rise in share price of 323% in six months. The fact that the company has not bothered to file the shareholding pattern since 2002-03 also reflected on the attitude of the company and its scant respect towards disclosures.
2.6 An analysis of the trading data revealed that primarily four brokers had traded in the scrip, the details of which are given below:
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Sl. Member Total % to No. Name Volume Scrip Total -------------------------------------------------------------------- 1 Pramod K Kothari -D475 164250 37.43 -------------------------------------------------------------------- 2 Purshottam Lal Kejdiwal - D739 82700 18.85 -------------------------------------------------------------------- 3 Santosh K Kejriwal Sec- D144 79500 18.12 -------------------------------------------------------------------- 4 Dinesh Kumar Lodha - D728 51950 11.84 --------------------------------------------------------------------
2.7 It was observed from the above that during April 2005 to May 2005 the price of the scrip fell from Rs. 80 to Rs. 20.75 and two brokers, i.e. Pramod K Kothari and Santosh K Kejriwal executed majority of the trades in the scrip during the said period. It was further observed from the above table that after May-June 2005 to October 2005 the price of the scrip again rose from Rs. 21 to Rs. 84.20 and this time the majority of trades were executed by two different brokers, i.e. Purshottam Lal Kejdiwal and Dinesh Kumar Lodha.
2.8 A further analysis of the trading data revealed that the pattern of trading and the modus operandi wherein the above members not only acted as counter party of their own transactions, they also have matched the transactions among themselves, creating artificial volumes. The extent of such transactions is given in the following table;
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Sl Name of P K S K P L D K No the Kothari % Kejriwal % Kejdiwal % Lodha % Member ------------------------------------------------------------------------------- 1 Pramod K 71200 43.35 79500 48.4 0 0 300 0.18 Kothari- D475 ------------------------------------------------------------------------------- 2 Santosh 79500 100 0 0 0 0 0 0 K Kejriwal Sec- D144 ------------------------------------------------------------------------------- 3 Purshottam 0 0 0 0 200 0.24 46000 55.62 Lal Kejdiwal - D739 ------------------------------------------------------------------------------- 4 Dinesh Kumar 300 0.58 0 0 46000 88.55 0 0 Lodha - D728 -------------------------------------------------------------------------------
(The percentage mentioned in the table is with respect to their total trades in the scrip during the relevant period (significant percentages shown in bold))
2.9 It was also found that the transactions executed between P.K.Kothari and S.K.Kejriwal and between P.L.Kejdiwal and D,K,Lodha constituted a major portion of trading in the scrip and helped in creating an artificial market in the scrip.
2.10 In view of the above, which prima facie indicated possible manipulation in the price of the scrip and in order to safeguard the interest of investors and protect the securities market, SEBI had passed an ad interim ex parte order dated November 30, 2005 pending investigation with the following directions among others;
A) Santosh K Kejriwal Securities (P) Ltd., stock broker of CSE shall not buy, sell or deal in securities, in any manner, either directly or indirectly, till further directions in this regard:
B) The trading in the following company Adinath Bio-labs Private Limited shall remain suspended till further directions in this regard.
2.11 Santosh K Kejriwal Securities (P) Ltd, (hereinafter referred to as the ‘broker’) and the company were given an opportunity to file their objections, if any, within 15 days from the date of the interim order and to avail an opportunity of personal hearing, if they desire. Further, an opportunity for inspection of documents relied on by SEBI for arriving at the findings in the captioned order was given to the broker on December 28, 2005.
3. Reply of Santosh K Kejriwal Securities (P) Ltd
3.1 The broker vide letters dated January 5, January 16 and March 6, 2006 submitted as follows;
3.2 In trading in the shares of ABL, he had acted as a bonafide investor and he had not in any manner manipulated the prices of the scrip or created artificial volumes or abetted in such irregularities.
3.3 He had no role whatsoever to play in the fall in price of the scrip during the period April 2005 to May 2005. The fall in price of the scrip was on account of the declaration of bonus by the company in their board meeting held on 23rd February 2005 in the ratio of 3:1 viz. three bonus shares for every one existing equity share. The said bonus issue was approved in the extra ordinary general meeting of the company held on 28th March 2005, for the same purpose.
3.4 When a company declares bonus, the opening price of the shares on the day after the shares become ex-bonus is adjusted by the exchange by an adjustment factor which in turn is determined by the ratio of the bonus. In the case of Adinath Bio-labs, the adjustment factor was 4 (circular of The National Stock Exchange of India Ltd bearing No. NSE/F&O/0046/2004 dated June 30, 2004 explaining the calculation of adjustment factor for bonus is enclosed) and hence the price of the scrip was reduced from 87 to 21.75 by the exchange.
3.5 The shares of Adinath Bio-labs were last traded cum-bonus on Thursday, May 5, 2005 and the price was adjusted for bonus on Friday, May 13, 2005. Thus the price reduction was on account of adjustment by the exchange and not on account of any trades on the exchange. In effect, if the adjustment was to be removed the sale price for the shares sold on May 16,2005 would have been Rs. 83.10 i.e(20.78 x 4 = 83.10.4) being the bonus adjustment factor. The broker submitted that till date he has retained the bonus shares issued by the Company to him. The official report and quotations of CSE also reflect this change in price on account of the bonus issue.
3.6 He had traded in the scrip only for two days during the said period viz. on April 5, 2005 and May 16, 2005 with a gap of more than a month between them. The price difference between the trades on both the days (after removing the adjustment of bonus) is Rs. 3.10 approximately. Therefore ,he contended that he was not influential in changing the price of the scrip nor he was involved in any manner in either reducing the price of the scrip or in increasing the price of the scrip. He further submitted that on both the days he had only sold the said shares on the CSE. The sale position on both the days has been settled by effecting proper delivery of the demat shares to the clearing house of the CSE.
3.7 During the period under question, he had not purchased any shares of Adinath Bio-labs. He intended to reduce his exposure in Adinath Bio-labs and as such sold part of his original holding in Adinath Bio-labs at the then available price. On both the days he entered the sell orders on the online trading platform of the CSE in order to offload his position in Adinath Bio-labs. The bonus shares which were issued to him by the company consequent to his original holding is still held by him in his demat account. He has merely acted as bonafide investor and that executing transactions on two days does not amount to artificial trading or generating huge volumes, let alone creation of any type of a false market.
3.8 With regard to the price rise that SEBI had mentioned in the order, the price of the scrip has risen by 323% from Rs. 20.80 to Rs. 88 in 6 months and 9 days viz. from May 16, 2005 to November 24, 2005. As per the documents relied on by SEBI, the broker had not traded after May 16, 2005 and as such he is not involved in any way with respect to the rise in price of the shares of Adianth Bio-labs.
3.9 In the light of the above, he submitted that he has not either by himself or in concert with others manipulated the price of the scrip or created an artificial market for the scrip of ABL. His trades were bonafide trades and duly settled by delivery and payment.
4. Oral Hearing.
4.1 The broker was given an opportunity for oral hearing on April 7, 2006. The broker appeared for oral hearing and made submissions.He was represented by the directors Shri Pawan Kumar Kejriwal and Vijay Kumar Kejriwal.
4.2 The broker submitted that he is registered as a stock broker since August 8, 1995 with The Calcutta Stock Exchange Association Ltd and since September 14, 1995 with the National Stock Exchange of India Ltd – Capital Market Segment and since January 08, 2001 with the National Stock Exchange of India Ltd – Derivatives Segment and also with exchanges such as the OTC Exchange of India Ltd and the Inter Connected Stock Exchange of India Ltd. Till date except for the said order, he has never been subjected to any regulatory action nor even had a client complaint since inception in either of the exchanges. He further submitted that he had always followed the derivatives of SEBI and also the provisions of the Code of Conduct for Stock Brokers while carrying on the said trades.
4.3 It was submitted that the prohibition imposed on him is causing a great financial loss and the loss of a reputation built over years. He had been executing trades on behalf of his clients which not only include private organizations but also consist of Financial Institutions such as Life Insurance Corporation of India, State Bank of India, Industrial Development Bank of India among many others. His stock broking business has led to the payment of Service Tax of more than Rs. 7 lacs for the period from April 2005 to November 2005. In the same period he had paid more than Rs. 42 lacs towards Securities Transaction Tax on behalf of his clients and on his own trades, for the period from April 2005 to November 2005 to the stock exchanges. More than 95% of his trades are executed on the National Stock Exchange of India Ltd. It was submitted that the charges leveled against him were not pertaining to the operations on the National Stock Exchange of India Ltd. Therefore, he requested SEBI for allowing him to operate on the National Stock Exchange of India Ltd. in order to retain his existing clientale and save his business from doom.
5. Consideration of the submissions and findings
5.1 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 prima facie conclusions;
a) Adinath Bio-labs Private Limited had poor track record which does not warrant sharp price variation in a relatively short period.
b) Adinath Bio-labs Private Limited had not made the necessary financial disclosures to the stock exchange, including submission of annual/quarterly reports. There is therefore no information about these companies available to the market.
c) The trading volumes in the shares of Adinath Bio-labs Private Limited had invariably been created by a few brokers including Santosh K Kejriwal Securities (P) Ltd. trading among themselves and through matched transactions (i.e. clients allowed to place simultaneously both buy and sale orders of same quantity at the same price in the selected shares), often executed on a single terminal of the broker. There were sharp rise in share prices and sharp decline. The brokers including Santosh K Kejriwal Securities (P) Limited appears to be involved in creating a false market in the shares of the companies. It is relevant in this point to note that the broker had executed a bulk deal which had a triggering effect on the price rise on May 16, 2005.
d) As the variation in the price of the scrip rose significantly, there is a possibility that investors without having proper information about the company might be lured to these illiquid scrips and get trapped in the process, which is highly detrimental to the interest of the investors.
Clearly, the ultimate objective behind the creation of a false market in these shares, was either to lure investors, or perhaps to legitimising the gains.
5.2 In short, it is evident from the above analysis of the company’s record which is listed in CSE, that the brokers trading in the scrip appears to have followed a common modus operandi of artificially inflating 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 and Santosh K Kejriwal Securities (P) Ltd had also traded in large quantity in the scrip during the relevant period . Besides the company itself had recorded lack lustre financial performance and has not bothered to file up to date financial statements with CSE. Such acts 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 vested interests 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.
5.3 The findings of the preliminary investigation as detailed above established 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 scrip of Adinath Bio-labs Private Limited are being carried out in a manner detrimental to the investors and securities market.
5.4 In view of the above, the broker shall be restrained from trading in CSE in order to protect the interests of investors and the safety and integrity of the securities market. SEBI had initiated formal investigations into the matter. Based on the findings of investigation, appropriate proceedings will be initiated against the broker as provided under the SEBI Act and the Rules and Regulations made thereunder. In the meantime, the interim order need to be continued.
6. Order
6.1 Therefore, in exercise of the powers delegated to me in terms of Section 19 read with Section 11 and 11 B of the SEBI Act, 1992 , I hereby confirm the ad interim order dated November 30, 2005 against the broker with all the directions mentioned therein. Further, the restriction imposed in the said ad interim ex parte order will operate with respect to the broker’s dealings in CSE, as the ex parte order was in the context of manipulation of penny stocks traded in CSE.
6.2 This order shall come into force with immediate effect.