WTM/SR/EFD/DRA-4/112. Case: In Re: Trading Activity in the Scrip of Rotam Commercials Limited Vs. Securities and Exchange Board of India

Case NumberWTM/SR/EFD/DRA-4/112
JudgesS. Raman, Whole Time Member
IssueSecurities And Exchange Board of India Act, 1992 - Sections 11 (4), 11(4), 11B, 12 A (a), 12A(a), 19
Judgement DateJune 11, 2015
CourtSecurities and Exchange Board of India

Order:

S. Raman, Whole Time Member

  1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") conducted investigation in respect of the trading in the scrip of Rotam Commercials Limited (hereinafter referred to as "RCL") for the period January 20, 2010 to May 17, 2010. During the period under investigation, the price of the scrip increased from ` 82.15 (opening price) on January 20, 2010 to ` 153/- on April 12, 2010 and then decreased to ` 69.90 (closing price) on May 17, 2010.

  2. Investigation inter alia revealed that the promoters and promoter group entities of RCL and their connected entities namely Shamanjwali Metals Pvt. Ltd. (Shamanjwali) and S.B. Malani & Sons (SBMS) (collectively referred to as 'Malani group') wanted to liquidate their holdings and exit from RCL. However, the scrip of RCL was an illiquid scrip. On most of the days prior to February 25, 2010, there was no trading while on other days the trading volumes were very low. The modus operandi adopted' by the Malani group to exit RCL is stated below.

  3. The former Directors of RCL diverted the funds of RCL to another connected/related group commonly referred to as the 'Krupa Soni group' in this order. The investigation conducted by SEBI revealed that Krupa Soni group purchased 2,49,966 shares (26.04% of the total capital) and sold 2,10,343 shares (21.91% of the total capital) during the period under investigation. The trading details of Krupa Soni group in the scrip of RCL during the period January 20, 2010 to May 17, 2010 are as under:

  4. Out of the total shares traded by the group as stated in the table above, 46,901 shares were traded amongst Krupa Soni group of entities. It was also observed that trades for 17,607 shares were in the nature of self trades, mostly by two Krupa Soni group entities viz., Krupa Soni and Sanjay Soni. Krupa Soni group of entities purchased and sold in the scrip thereby created momentum and volume of trading in the scrip of RCL. Further, Sanjay Soni and Krupa Soni also indulged in price manipulation in the scrip of RCL. On account of the above trading conducted by the Krupa Soni group, the scrip of RCL attained momentum and at this juncture, other investors also started trading in the said scrip. It is alleged that in the wake of the artificial interest created in the scrip, the promoter group (Malani group) could make an exit by selling their stake in the company. Malani group sold a total of 2,47,125 shares (25,74% of the total share capital) during the period under investigation. Out of 2.47 lakh shares sold by Malani group, 69,661 shares (approx. 28.19% of all the sales by the Malani group) were purchased by Krupa Soni group and the remaining shares were purchased by other entities. In this regard, Krupa Soni group were the counter-parties for more than 50% of the sales by Malani group of entities on two days (February 25, 2010 and April 06, 2010).

  5. Investigation revealed that the entities in the Krupa Soni group as mentioned in the below table are connected/related to each other:

  6. Investigation revealed that a total of 46,901 shares were traded amongst the Krupa Soni group of entities. Further, trades for 17,607 shares were self trades, mostly by two Krupa Soni group entities, Sanjay Soni and Krupa Soni. The group of entities purchased and sold in the scrip and created momentum to the scrip. Further, Sanjay Soni and Krupa Soni also indulged in price manipulation in the scrip of RCL. Once the scrip got its momentum, other investors also started trading in the scrip and the promoters/promoter group of RCL and connected entities could easily make an exit by selling their stake in the company. Out of 2.47 lakh shares sold by Malani group, 69,661 shares (approx. 28.19% of all the sales by the Malani group) were purchased by Krupa Soni group and the remaining shares were purchased by other entities. Further, Krupa Soni group were the counter-parties for more than 50% of the sales by Malani group of entities on 2 days.

  7. The date-wise trading details of Malani group of entities and the counter-party details for the sales by Malani group are as below:

  8. Investigation further revealed that one of the Krupa Soni group entities, J M Soni Consultancy received ` 42 lakh from RCL during April - May 2010 (` 25 lakh on April 7, 2010 and ` 17 lakh on May 7, 2010). Further, some of the entities of Krupa Soni group provided funds to other entities of their group at various points of time for trading in the market. The directors of RCL during April - May, 2010 sold their entire stake in RCL and all the promoter group entities and their connected entities had subsequently made an exit from RCL. Hence, it is alleged that the said directors had used the funds of RCL for financing Krupa Soni group for creating volumes in the scrip and thereby facilitating an exit to the promoters from the company.

  9. A pictorial depiction of the modus operandi is as under;

  10. The total buy and sale value of Kiupa Soni group during the period was ` 3.09 crores and ` 2.66 crores respectively. Therefore the net payment obligation by Krupa Soni group to its brokers (excluding brokerage charges and taxes) was approximately ` 43 lakh. Considering these facts as well as the transfer of ` 42 lakh to the Krupa Soni group by RCL led to the conclusion that the said transfer of ` 42 lakh could be in respect of the fund requirement of approximately ` 43 lakh by Krupa Soni group in respect of their trading in the scrip.

  11. The promoter entities viz., Mr. Chandrakant S. Malani, Mr. Jagdish S. Malani, Mr. Hasmukh S. Malani and Mr. Mukesh N. Malani also resigned as Directors of RCL and moved away from the management and RCL came in control of new management on March 24, 2011. Thus, it emerged that Krupa Soni group acted fraudulently and their purpose for trading was only creation of momentum so as to facilitate an exit to the promoters and promoter group of RCL.

  12. Based on the above findings of investigation, a Show Cause Notice (SCN) dated December 18, 2012 was issued to Mr. Dhirenkumar Dharamdas Agarwal ("Noticee") along with other Noticees under Section 11(4) and 11B of Securities and Exchange Board of India Act, 1992 alleging that the Noticee had violated the provisions of Section 12 A (a), (b) and (c) of SEBI Act, 1992 read with Regulations 3(a), (b), (c), (d), 4(1) and 4 (2) (a), (d) and (e) of the PFUTP Regulations, 2003.

  13. In view of the above, the Noticee was called upon to show cause as to why suitable directions under Section 11 (4) and 11B of the SEBI Act, 1992 including a direction to debar them from accessing the securities market and prohibit them from buying, selling or dealing in securities for a particular duration should not be passed against them.

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  14. The Noticee vide letter dated January 28, 2013, sought additional time of 10 days to file reply to the SCN. A reminder letter dated March 12, 2013 was sent to the Noticee. The Noticee submitted his reply vide his letter dated February 08, 2013 (received by SEBI on March 18, 2013), and made the following submissions:

    • He was neither aware about any fund transfer from company to Sanjay Soni, use of funds by him nor was he concerned with it.

    • The investigating authority has not even established his connection with other alleged Krupa Soni group entities viz., Krupa Sanjay Soni, Ashlesh Shah and Krunal G. Rana.

    • He had bought 19,437 shares and sold 15,412 shares, resulting into net delivery of 4,025 shares. Hence it is incorrect to infer that he along with Krupa Soni group acted as buyer for a large part of sales trades of Malani group.

    • Not a single financial transaction/fund transfer can be attributed to him as per bank account statement of JM Soni Consultancy (Annexure V of SCN), details of funds transfer by Sanjay Soni, Krupa Soni and JM Soni Consultancy (Annexure VI of SCN) and joint bank statement of Krupa Soni and Sanjay Soni (Annexure VII of SCN). Hence it is incorrect to say that he got the alleged finance from the promoters of RCL for creating volumes in the scrip and providing exit to the promoters.

    • On deleting/removing the intra-day transactions, the group was counterparty for only about 19%, and not 28.19%, of sales by Malani group.

    • For funding the group, the money would have been a huge amount (and not ` 42 lakh) and were required to be brought upfront, and not toward the fag end. Further, certain shares remained with the Krupa Soni group, which have not been factored in.

  15. The Noticee had also sought trade log/order log in the matter and clarification regarding differences in 'beneficiary position statement' and 'order log and trade log' statement. The Noticee was accordingly...

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