{"id":262795,"date":"2003-01-16T00:00:00","date_gmt":"2003-01-15T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/sebi-vs-m-k-securities-ltd-on-16-january-2003"},"modified":"2017-02-07T23:46:39","modified_gmt":"2017-02-07T18:16:39","slug":"sebi-vs-m-k-securities-ltd-on-16-january-2003","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/sebi-vs-m-k-securities-ltd-on-16-january-2003","title":{"rendered":"Sebi vs M.K. Securities Ltd. on 16 January, 2003"},"content":{"rendered":"
Securities Appellate Tribunal<\/div>\n
Sebi vs M.K. Securities Ltd. on 16 January, 2003<\/div>\n
Bench: G Bajpai<\/div>\n

ORDER <\/p>\n

G.N. Bajpai, Chairman<\/p>\n

1.1. Investigations were conducted by SEBI in the scrip of M\/s.Maruti Organics
\nLtd ( hereinafter referred to as MOL) into the alleged fraud and
\nmalpractices committed in the trades of MOL. Large purchase
\ntransactions had been placed with brokers in the said scrip across cities
\nand the persons who had placed the order had absconded. The
\ntransactions largely took place on the 3rd and 4th of July, 1996 which were
\npart of Settlement no.27 of NSE.\n<\/p>\n

1.2 Investigations revealed that Shri Mohan Rao, of M K Securities Ltd a
\nmember of Hyderabad Stock Exchange and registered with SEBI as a
\nstock broker (hereinafter referred to as MKSL) and associates ( M K & Co.
\n& Sharat Investment) were major sellers in Settlement no.27 through three
\nNSE brokers. Their transactions in Settlement No.27 are given below and
\nthese three members had accounted for 84% of net selling position in
\nMOL.\n<\/p>\n

Member
\n through whom shares were sold<\/p>\n

Clients<\/p>\n

No. of
\n shares<\/p>\n

Comments<\/p>\n

Merfin<\/p>\n

43 clients
\n allegedly referred by Mohan Rao<\/p>\n

150,500<\/p>\n

M K Securities
\n Ltd (MKSL)<\/p>\n

61,700<\/p>\n

MK &
\n Co<\/p>\n

30,400<\/p>\n

Sharat
\n Investment<\/p>\n

55,200<\/p>\n

Prop. Y Ravi
\n Prasad also director of MKSL<\/p>\n

Nagarjuna
\n Securities<\/p>\n

MK &
\n Co.\n<\/p>\n

1,28,800<\/p>\n

Classic Share
\n & Stock Broking Services<\/p>\n

M K
\n Securities Ltd<\/p>\n

18,700<\/p>\n

1.3 MKSL, MK & Co. and B R Securities are the firms with whom Mr.Mohan
\nRao or his relatives are directors. Sharat Investment is a proprietorship
\nfirm of Shri Y Ravi Prasad, MKSL’s another director. Investigations found
\nthat total net sale of this group through these 3 members were 3,89,400
\n(57% of the total sales).\n<\/p>\n

1.4 Pursuant to the investigation, an Enquiry Officer was appointed under
\nRegulation 28(1) of SEBI (Stock Brokers and Sub Brokers) Regulations,
\n1992 (hereinafter referred to as the ‘said Regulations’), to enquire into the
\nalleged violations committed by MKSL. The Enquiry Officer conducted the
\nenquiry in accordance with the provisions of the said Regulations and
\nsubmitted his Report on 10.8.2001. The Enquiry Officer found that Shri
\nMohan Rao is the kingpin in organizing the fraudulent transactions of
\nmanipulated sales in the scrip of MOL and that the sales transactions
\nhad been manipulated by Shri Mohan Rao alongwith his associates as
\nrevealed through investigation conducted by SEBI. The Enquiry Officer
\nalso observed that the same was done with an object of manipulating the
\nscrip of MOL and for creating an artificially high price in the scrip and that
\nShri Mohan Rao alongwith MKSL and associates perpetuated fraud on the
\ninvestors by making an apparent show of artificial demand in the scrip of
\nMOL. The Enquiry Officer also found that the fraud had been perpetrated
\nwith a view to induce innocent investors to make purchases in the scrip of
\nMOL with the make belief that the scrip was worthy, whereas in reality it
\ndid not command any real value. Therefore, the Enquiry Officer held that
\nShri Mohan Rao and MKSL are guilty of fraud and that they are liable for a
\npenalty of cancellation of registration of the stock broker viz.MKSL under
\nRegulation 26(2)(ii) of the said Regulations.\n<\/p>\n

2.1 A show cause notice dated August 27, 2001 was issued to MKSL in terms
\nof Regulation 29(1) of the said Regulations whereby it was communicated
\nthat the Enquiry Officer had found MKSL to be guilty of violating Clauses
\nA(1 to 5) of Schedule II of Regulation 7 and Regulation 26(2)(ii) of the said
\nRegulations. A copy of the Enquiry Report was also furnished to MKSL,
\nalongwith the show cause notice. Vide the aforesaid notice, MKSL was
\nasked to show cause as to why the penalty as recommended by the
\nEnquiry Officer should not be imposed against it. It was given 21 days
\ntime for furnishing its reply.\n<\/p>\n

3.1. A reply dated 16.5.2002 was furnished by MKSL to the said show cause
\nnotice stating that NSE had annulled the transactions relating to MOL and
\nthe same had been challenged by him by way of Writ Petitions before the
\nHigh Court of Andhra Pradesh. A Division Bench of Andhra Pradesh High
\nCourt had held that there was no proper material for such annulment or to
\narrive at a finding that MKSL had manipulated the share price of MOL.
\nHowever, the matter is referred to a full Bench in view of the special
\nimportance of the case. It was his objection that the matter would be subjudice
\nand it shall not be appropriate for SEBI to take a decision till the
\nHigh Court renders its final view.\n<\/p>\n

3.2 In his reply, MKSL had stated that the investigation conducted by SEBI
\nwas done without intimation to him. It was further stated that the factual
\ninformation collected from Telephone booth operators in Mumbai and
\nChennai has been relied on for the allegations leveled against him in the
\nshow cause notice. It has contended that the names of the persons and
\ntheir description have not been mentioned in the show cause notice. It
\nhad also said that the Report on which the show cause notice is based,
\nhas not been furnished to him and that an opportunity of cross
\nexamination is necessary for a proper enquiry and adjudication of the<\/p>\n

issue. It was also contended that the show cause notice was a repetition
\nof the Enquiry Report furnished by NSE before A P High Court and that
\nthere is no independent enquiry in the matter. It has also objected to the
\nbreak-up of the number of clients and maintained that the clients are that
\nof NSE Brokers and the availability \/ non-availability of these clients could
\nnot be a cause for suspending its membership. The extract of analysis of
\nthe telephone calls, according to MKSL is taken from the Enquiry Report
\nof NSE which is the subject matter of the Writ before A P High Court. His
\nobjections are that :\n<\/p>\n

i. the analysis based on information given by booth operators who are
\nsaid to have called M\/s.Yoha Securities Ltd to inquire about persons
\nwho had absconded without paying the STD bills, are far fetched and
\nappears to be set up by M\/s.Yoha Securities Ltd solely for the purpose
\nof creating a base for getting out of the transaction which was resulting
\nin a loss to them.\n<\/p>\n

ii. the reason for non-appearance before the Enquiry Officer was that
\nthey did not get proper intimation about the date of hearing.\n<\/p>\n

iii. the alleged deterioration of the financial position of the member is
\nclearly incorrect, this allegation according to him was to ensure that his
\nmembership is cancelled.\n<\/p>\n

iv. a copy of the investigation report was not furnished to him.\n<\/p>\n

v. that the non-availability of the client cannot be a ground for
\ncancellation of membership.\n<\/p>\n

Therefore, he requested for a personal hearing in the matter and also
\nprovide an opportunity for him to examine the persons who had made
\nstatements against him, the telephone booth operators and the
\nrepresentatives of Ms.Yoha Securities Ltd and M\/s.Somayajulu & Co. He
\nwanted the venue for hearing to be kept at Hyderabad for his
\nconvenience.\n<\/p>\n

4.1 Subsequently, an opportunity of hearing was granted to MKSL on
\n18.12.2002 which was communicated to him vide our letter dated July 30,
\n2002. However, no one appeared on behalf of MKSL during such hearing.\n<\/p>\n

5.1 I have carefully gone through the findings of the Investigation, the Enquiry
\nReport and the submissions made by MKSL and I find that MKSL and its
\nassociates (MK & Co. and Sharat Investment) were major sellers in
\nSettlement No.27 through three NSE brokers. Their transactions in the
\nsaid Settlement and these three members accounted for 84% of the net
\nselling position in the scrip of MOL. SEBI had tried to contact 64 clients of
\nthe three major selling members and 36 of the addresses were found
\nwrong and two of them had not offered replies. On 9.12.1998, SEBI
\ndespatched letters to 44 clients out of which 28 letters came back
\nundelivered mostly due to wrong address. Most of them had later replied
\nafter having obtained information from their broker. Letters were again
\nsent to the same set of client on 3.2.1999 and in some cases it was again
\nfound that clients had given wrong address. 35 out of 43 clients replied
\ndisclosing their source of MOL shares which were sold in the relevant
\ntime. However, only 21 clients produced some evidence to support the
\nsame. The brokers \/ sub-brokers with whom these clients were supposed
\nto have traded could not be traced. Whereas in cases where the brokers
\ncould be traced, the claims of the clients were found to be false as the
\nnames of the clients did not appear in the books of the member at the
\nrelevant time. Investigations also revealed that the total number of shares
\nat the hands of the selling client is around 19% of total shares bought by
\nthe absconded clients. The very existence of the clients who had
\nabsconded is doubtful.\n<\/p>\n

5.2 During the investigation, SEBI had obtained record of the telephone calls
\nmade by the absconding clients made from the public booths in Mumbai<\/p>\n

and Madras. One of the members from Madras, Yoha Securities Ltd had
\nreceived a call on 5th July, 1996, from Madras and it was found that the
\nperson who had made several telephone calls (both STD and local) from
\nsuch booth had vanished without paying the bill. The calls that were made
\nby the person who vanished is found to have been made to Yoha
\nSecurities Ltd and the description of that person matched with that of
\nMr.Madhav, one of the absconding buyer. It was also revealed that the
\nlocal calls made from the booth in Madras by such persons had included
\nthe telephone numbers of other NSE members from Madras and some
\ncalls were made to Hyderabad. Regarding the phone calls made from the
\nbooth at Fort, Mumbai, the person who had made the calls at the relevant
\ntime had absconded and the said person was identified to be
\nMr.Sadashiv, one of the absconding buyer, a client of M\/s.Somayajulu and
\nCo. (NSE Member).\n<\/p>\n

5.3 On an analysis of the telephone calls made by the absconded clients to
\nthe buying and selling members alongwith MKSL and its associates, it was
\nfound that Mr.Sadashiv (one of the absconding buyer who was a client of
\nNSE member Somayajulu & Co.) was connected to Shri.Mohan Rao.
\nMr.Sadashiv had come from Hyderabad and had been staying at Bombay
\nand he had been identifying the members through whom the transactions
\nwere to be routed during his stay at Mumbai. From the details of the calls
\nmade from Madras, it was seen that calls have been made to MKSL and
\nValueline Securities. It was also seen that Shri Mohan Rao had placed the
\norders with Merfin (I) Ltd from the office of Valueline Securities. The call
\ndetails indicated that the calls from Madras were made by Shri Madhav
\nthe absconding buyer from Madras, to Valueline Securities at such time
\nwhen Shri Mohan Rao, was at the office of Valueline Securities. This is
\nindicative of the connection between Shri Madhav and MKSL. Again
\nanother absconding client viz.Shri T Sriram had made calls from
\nAhmedabad which included calls to Valueline Securities.\n<\/p>\n

5.4 The overall analysis of the telephone calls made from Madras to Madras
\nNSE members (Premier Securities Ltd and Arvind Securities Ltd) and the
\noutstation calls to MKSL , Hyderabad from the same telephone booth was
\ndone and the same was matched with the timing of buy and sell orders on
\nNSE. A graphical representation of the analysis is given in the figure
\nbelow.\n<\/p>\n

From the figure, it is seen that calls were made to the members at Madras
\nand to MKSL at Hyderabad simultaneously. Subsequent to the call there
\nwas a buy order from the clients of (Premier \/ Arvind) and sell orders by
\nclients of Nagarjuna & Merfin. From the client list of Nagarjuna & Merfin, it
\nwas observed that majority of their sales were for M KSL\/ M K & Co.
\nFrom the sequence of events, it was clear that the buyer after placing the
\norder was informing MKSL which in turn was placing sell orders with<\/p>\n

Nagarjuna & Merfin. Another extract between 10.26 a.m. to 10.51 a.m on
\n4th July, was taken as a sample. There were six calls to Valueline
\nSecurities Ltd from the booth in Madras. The timings of the calls were
\n10.26, 10.34, 10.41, 10.43 and 10.51. The events that took place during
\nthe same period are as follows :\n<\/p>\n

4.7.96 MADRAS<\/p>\n

Order Time<\/p>\n

Name of Buying Member
\n Thru whom the clients placed the purchase order<\/p>\n

Qty Bought<\/p>\n

10.31<\/p>\n

Premier Securities<\/p>\n

20,000<\/p>\n

10.32\/7<\/p>\n

Zen Shares &
\n Securities<\/p>\n

20,000<\/p>\n

10.42\/3\/6\/7\/8<\/p>\n

Somayajulu & Co<\/p>\n

20,000<\/p>\n

10.51<\/p>\n

Chona Financial Services<\/p>\n

20,000<\/p>\n

It is clear that the orders for these purchases were placed from the same
\ntelephone booth.\n<\/p>\n

4.7.96 HYDERABAD<\/p>\n

Order Time<\/p>\n

Name of Buying Member
\n Thru whom the clients placed the purchase order<\/p>\n

Qty Bought<\/p>\n

10.29<\/p>\n

Nagarjuna Securities<\/p>\n

5,200<\/p>\n

10.29\/31\/32\/33\/38<\/p>\n

Merfin (I) Ltd<\/p>\n

34,000<\/p>\n

10.39<\/p>\n

Merfin (I) Ltd<\/p>\n

39,900<\/p>\n

10.41\/2<\/p>\n

Merfin (I) Ltd<\/p>\n

38,700<\/p>\n

10.44\/45<\/p>\n

Merfin (I) Ltd<\/p>\n

20,000<\/p>\n

10.45<\/p>\n

Classic Share &
\n Stock<\/p>\n

50,000<\/p>\n

It is found that, a major portion of the sales of shares of Nagarjuna
\nSecurities Ltd & Merfin (I) Ltd as also of Classic Share & Stock Broking<\/p>\n

Services are on account of their client MKSL\/ M K & Co. In the case of
\nClassic, SEBI has a written confirmation from them stating that most of the
\norders placed on behalf of their clients were by MKSL. The chain of
\nevents described above indicate a definite pattern between the buy and
\nsell orders.\n<\/p>\n

The buy orders for substantial quantity from other centres (other than
\nMadras) during this time, was also identified during the same period on
\n4\/7\/96 and the details are given below :\n<\/p>\n

Time<\/p>\n

Name of Buying Member<\/p>\n

City<\/p>\n

Client<\/p>\n

Qty. Bought<\/p>\n

10.37\/8<\/p>\n

Artistic Finance<\/p>\n

Delhi<\/p>\n

Rajkumar<\/p>\n

40,000<\/p>\n

10.44<\/p>\n

Blue Blends Stocks<\/p>\n

Mumbai<\/p>\n

Sadashiv<\/p>\n

10,000<\/p>\n

10.44<\/p>\n

Bhavana Investor Service<\/p>\n

\u00a0<\/p>\n

\u00a0<\/p>\n

10,000<\/p>\n

10.57\/8<\/p>\n

Artistic F inance<\/p>\n

Delhi<\/p>\n

Rajkumar<\/p>\n

30,000<\/p>\n

Both the major buying clients Shri Rajkumar and Shri Sadashiv are
\nabsconding. The sequence of events points out that Shri Mohan Rao is
\nlinked to Shri Rajkumar and Shri Sadashiv also.\n<\/p>\n

5.5 Investigations have revealed that there was nexus between the
\nabsconded buying and selling clients to create a false market \/ to offload
\nshares of MOL. The analysis of telephone calls and the trading pattern
\nindicate a strong circumstantial evidence of the link between MKSL and
\nthe absconded clients. It is also concluded that MKSL had done
\nmaximum transactions in MOL and had been net sellers in the particular
\nSettlement and their combined sales were 50% of the shares bought by
\nthe absconded buyers. Further, the selling clients had not produced the<\/p>\n

proof of the source of the shares which had been sold on 3rd and 4th of
\nJuly 1996. The address of the clients given by the broker was also wrong.\n<\/p>\n

5.6 MKSL had submitted to the Enquiry Officer that it was not connected in
\nany manner with the 43 clients who is said to have been referred by it to
\nMerfin. Also, M\/s.Sharat Investment was not connected to it or MK & Co.
\nShri Ravi Prasad (Director of MKSL) was a Member of HSE and was
\ndealing in shares on his own and he could not be a reason to link
\nM\/s.Sharat Investments either to Shri Mohan Rao or MKSL. Shri Y Ravi
\nPrasad was said to be a sub-broker of Mr.P Ramakrishna of Springfields
\nLtd who is a complaining member. According to MKSL, an attempt to
\ncontact the clients who is alleged to have committed the mischief after 2
\nyears cannot be made a ground for holding MKSL or its associates
\nresponsible for the same. Shri Mohan Rao represented that neither the
\nclient of the buying brokers did exist nor the buying brokers were
\ncriminally negligent in allowing absolute strangers to build up huge
\npositions in an inactive \/ illiquid scrip. MKSL had also objected to the
\nanalysis of the telephone call. It had stated that none of its clients had
\nabsconded and the case of the complaining member was that their clients
\nhad absconded.\n<\/p>\n

5.7 On the basis of complaints received from various brokers stating that
\nsome of the clients had created huge buy position in the scrip of MOL on
\n3rd and 4th July 1996 and had absconded without meeting their
\ncommitments, NSE had conducted investigations. Finding the complaint
\nto be genuine, NSE had annulled the trades executed in Settlement No.27
\nof 1996 in the scrip of MOL. Aggrieved by this decision of NSE, M K
\nSecurities alongwith other sellers filed a Writ Petition before the Hon’ble
\nHigh Court at Andhra Pradesh. NSE had conducted further investigations
\nas per the directions given by the Hon’ble High Court and vide their letter
\ndated 24.11.2000, a report was submitted to SEBI.\n<\/p>\n

5.8 In the report, it is observed that “The trades in MOL in St. No.27 of 1996
\nwere not executed in the normal course. The trades were not genuine
\nand a fraud has been perpetrated to enable the sellers to off load the
\nshares by creating a false market. A large false market was created by
\nthe large sellers by ensuring adequate buying interest through planting
\nbuying clients across the country – Hyderabad, madras, Mumbai,
\nBangalore, Ahmedabad and Delhi. These buying clients with huge net
\nbuy position had vanished from different cities. This suggests that there
\nwas an organized fraudulent attempt to defraud the buying members.
\nIn order to ensure that the persons involved in the fraud does not take the
\nbenefit of such fraudulent transactions and in the interest of the capital
\nmarkets, for healthy development thereof and in larger public interest,
\nthere was a need to send a strong signal to that effect to the fraudsters
\nthat no such activities will be acceptable in a fair market. Hence, the
\nExecutive Committee (constituted for this purpose) had decided that all
\ntrades executed in the shares of MOL in St. No.1996027 be annulled and
\nconsequential action taken.”\n<\/p>\n

5.9 Regarding the issue of small investors who are genuinely trapped, NSE in
\ntheir above report to SEBI had stated that “any genuine small investors
\nwho may be inadvertently affected by this decision of annulment and who
\nestablishes their bonafides may be compensated to the extent of purchase
\nvalue or the sale value, whichever is lower, subject to their satisfying the
\nexchange about the genuineness of the transactions… ”\n<\/p>\n

5.10 MKSL had not appeared before the Enquiry Officer although he was given
\nnotice for the same on two occasions. On one occasion the notice came
\nback with the endorsement ‘Refused to Accept’. Therefore, it is assumed
\nthat MKSL was not interested to cooperate with the Enquiry.\n<\/p>\n

5.11 Shri Mohan Rao had contended in his reply that the investigation had
\nbeen conducted by SEBI without intimation to him. However, I find that
\nthe investigation procedures are duly complied with. It is also noticed that
\nin the course of investigation, Shri Mohan Rao was summoned for taking
\nstatements by SEBI officials to which he had not responded or
\ncooperated. Regarding his allegation that the factual information collected
\nfrom telephone booth operators in Mumbai and Chennai has been relied
\non by SEBI, I find that such information which was circumstantial evidence
\nhad been supported by other corroborative facts and the timing of such
\ncalls have been matched with the Orders placed and therefore such
\ncontention do not hold good. Also, NSE had annulled the trades based on
\nthese facts. Again, the report on which the show cause notice is based i.e.
\nthe Enquiry Report was attached to the show cause notice and it is
\nincorrect on the part of Shri Mohan Rao, to say that the same was not
\nfurnished to him. Therefore, the contentions raised by Shri Mohan Rao in
\nhis reply are incorrect and do not have merits for the same to be
\nconsidered.\n<\/p>\n

5.12 It is found that MKSL has not been trading since 11.10.96 and its
\nmembership card at HSE is almost defunct. Again the Chief Judge of
\nCity Civil Court, Hyderabad had ordered attachment of movable and
\nimmovable properties of MKSL belonging to Shri Mohan Rao, Director of
\nMKSL vide Order dated 19th April, 2000 in O.S. 518 of 1999. It was found
\nthat the financial position of the stock broker has deteriorated to such a
\nlarge extent that his continuance in securities business will not be in the
\ninterest of investors and other stock brokers.\n<\/p>\n

5.13 In the light of the above, I find that Mr. Mohan Rao alongwith MKSL and
\nits associates, had acted in concert with the absconded clients in
\nperpetrating fraud on the investors as well as the Exchange and the
\nmarket. I, therefore, find that MKSL has violated Clauses A(1 to 5) of the
\nCode of Conduct laid down in Schedule II read with Regulation 7 of SEBI
\n(Stock Brokers and Sub Brokers) Regulations, 1992. The member is also
\nfound guilty of fraud and therefore liable for cancellation of certificate of
\nregistration in terms of Regulation 26(2)(ii) of the said Regulations.
\nMKSL’s conduct is highly detrimental to the interest of investors and the
\nsafety of the securities market. If these activities are allowed, they will
\npose a serious risk to the market system and its integrity.\n<\/p>\n

6.1 On a careful consideration of the facts and circumstances of the case and
\nin exercise of the powers conferred upon me under Section 4(3) of SEBI
\nAct read with Regulation 26(2)(ii) of SEBI (Stock Brokers and Sub-
\nBrokers) Regulations, 1992, I, hereby cancel the Certificate of Registration
\ngranted to M K Securities Ltd, as a stock broker. This order shall come
\ninto force with immediate effect.<\/p>\n","protected":false},"excerpt":{"rendered":"

Securities Appellate Tribunal Sebi vs M.K. Securities Ltd. on 16 January, 2003 Bench: G Bajpai 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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-262795","post","type-post","status-publish","format-standard","hentry","category-judgements"],"yoast_head":"\nSebi vs M.K. 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