Case: 1. SEBI, 2. In Re: Its Dealings in The Shares of Radiant Financial Services Vs 1. Subh Stock Broking Private Limited. Securities and Exchange Board of India
| Judges | K.M. Abraham, Member |
| Issue | Company Laws |
| Judgement Date | October 28, 2009 |
| Court | Securities and Exchange Board of India |
Order:
K.M. Abraham, Member
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It was brought to the notice of Securities and Exchange Board of India (hereinafter referred to as SEBI) that shares of some illiquid companies listed at Calcutta Stock Exchange Association Limited (hereinafter referred to as CSE), were traded in a circuitous route among certain members of a group operating collusively and the same were later on sold at highly inflated prices during the period January 1, 2004 to February 28, 2005 (hereinafter referred to as the investigation period). Thereafter, SEBI initiated investigation into the dealings in the shares of such companies which included Radiant Financial Services Limited (hereinafter referred to as the company). The investigation conducted by SEBI inter alia observed that the share price of the company had witnessed a sharp rise between January 1, 2004 and February 28, 2005. The average price of the shares of the company was Rs. 1.95/- on February 16, 2004 which went up to Rs. 225/- on February 25, 2005, an increase of 11,438%. It was noticed that stock brokers viz. M/s Dinesh Kumar Lodha, Subh Stock Broking Private Limited (hereinafter referred to as the Broker), M/s S. Jhunjhunwala & Co. and M/s Deepak Jhunjhunwala & Co. traded substantially in the shares of the company and that their cumulative trades accounted for 98.23% of the total (buy and sell) transactions in the said shares at CSE during the investigation period. It was inter alia alleged that the transactions of the Broker, were not genuine and were inter alia designed to create false and misleading appearance of trading in the shares of the company. The Broker was alleged to have contravened the provisions of Regulations 4(2)(a), 4(2)(e) and 4(2)(o) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as the PFUTP Regulations) and clauses A(1), A(2), A(3), A(4) and B(4)(a) of the Code of Conduct prescribed for stock brokers under Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations). Thereafter, SEBI, vide order dated November 12, 2007 appointed an Enquiry Officer under the provisions of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (since repealed) to enquire into the alleged violations committed by the Broker. The Enquiry Officer/Designated Authority (hereinafter referred to as the Enquiry Officer) submitted the Enquiry Report dated January 28, 2009 under the provisions of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 and found the Broker guilty of contravening the provisions of the PFUTP Regulations and the Broker Regulations as alleged against it, except Clause B(4)(a) of the Code of Conduct. The Enquiry Officer recommended the suspension of the certificate of registration of the Broker for a period of four months. Pursuant to the submission of the Enquiry Report, a notice dated January 28, 2009 was issued by SEBI to the Broker calling upon it to show cause as to why the penalty as recommended by the Enquiry Officer or as considered appropriate by SEBI should not be imposed against it. A copy of the Enquiry Report was also forwarded to the Broker with the said show cause notice. In reply, the Broker, vide letter February 11, 2009 inter alia stated that in respect of some of the sell trades, since its clients had already identified purchasers for their shares and since the said purchasers happened to be its clients, it had executed cross deals in respect of such trades. In respect of the cross deals executed on March 4, 2004, the Broker stated that the seller was Mr. Binay Kayan (1,26,000 shares) and the buyers were Mangalam Equity Management Private Limited, Sunflower Commerce Limited, Ms. Kavita Kayan and Shreemata Finance Private Limited. The Broker also submitted the photocopies of contract notes issued in favour of its clients. The Broker contended that, though it had executed cross deals, the same were on behalf of different clients who had physically sold and purchased shares and taken delivery of shares in demat and further settled their respective payment obligations. According to the Broker, it had also executed cross deals on other occasions during the investigation period on behalf of the following clients namely:
i. P.K.C. Commodities Limited
ii. Covered Sell Transactions
iii. Jaydeep Barter
iv. South India Private Limited
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Thereafter, an opportunity of hearing was granted to the Broker on May 8, 2009. On the said date, Mr. Pawan Kayan, director of the Broker appeared before me and made submissions on the lines of the reply of the Broker. I note that, Mr. Pawan Kayan, in his statement on oath to the investigating authority of SEBI admitted that he was also a director of the company. The contention of the Broker was that the most of the cross deals executed by it on March 4, 2004 were on behalf of its clients. The Broker had also provided the copies of the contract notes in order to substantiate the said claim. As the name of scrip mentioned in the said contract notes bears Rohan Finance instead of the company, the Broker was further advised to give its clarification in the matter. There was also delay in delivery of shares. The Broker, vide letter dated May 12, 2009 while admitting the error in the name of the scrip mentioned in the contract notes, inter alia stated that except the scrip name, other details appearing in the contract notes are exactly matching with CSE records, in respect of the trades. According to the Broker, the name of Rohan was erroneously mentioned instead of the company's name in the contract note. The Broker also submitted photocopies of confirmatory letters received from the respective clients stating that they had traded in the shares of the company and not in Rohan Finance. The Broker contended that during the relevant period 2003-2004, it had no transactions in the shares of Rohan Finance. In respect of the delay, the Broker stated that the shares were delivered to the clients after 5 to 6 days.
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As, I was prima facie not satisfied with the findings of the Enquiry Officer in respect of the alleged matched trades of the Broker, for which a benefit of doubt was given by the Enquiry Officer, a subsequent notice dated June 16, 2009 was issued to the Broker by SEBI advising it to show cause as to why the cross/matched deals executed by are not prima facie in violation of Regulations 4(2)(a), 4(2)(e) and 4(2)(o) of the PFUTP Regulations. The Broker, vide letter dated June 23, 2009...
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