Securities Appellate Tribunal
Sebi vs Shri Anil G. Bhandari on 29 October, 2003
ORDER
A.K Batra, Member
1. Shri Anil G. Bhandari is a member of Madhya Pradesh Stock Exchange (hereinafter referred to as MPSE) and registered with Securities and Exchange Board of India (hereinafter referred to as SEBI) vide registration no. INB 070523619.
1.1 An enquiry officer was appointed vide Order dated 18.02.02 for conducting enquiry into the affairs of Shri Anil G. Bhandari, member of MPSE, vis--vis his dealings in the scrip of Eonour Software Ltd (hereinafter referred to as ESL) and possible violation of the provisions of the following :-
(a) Rules, Bye-laws and Regulations of Madhya Pradesh Stock Exchange. (b) Provisions of the Securities and Exchange Board of India Act, 1992, the Securities and Exchange Board of India (Stock Brokers and sub Brokers) Regulations, 1992. (c) Provisions of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade practices relating to Securities Market) Regulations, 1995. 2. Background and investigation by SEBI :
2.1 ESL was originally incorporated on May 06, 1992 in the name of Mikugura Software Limited with its registered office located in Indore, Madhya Pradesh. The main object of the company was to develop system software and application software. In January 1996, ESL came out with a public issue of 12,50,000 shares of Rs. 10/- each at a premium of Rs.20/- per share aggregating to Rs. 375 lac. As per the prospectus, the shares of Mikugura Software Ltd. were proposed to be listed at M. P. Stock Exchange (MPSE) and Ahmedabad Stock Exchange (ASE).
2.2 ESL was taken over by Shri R. Karthik from its previous promoters in the month of November 1999. Shri R. Karthik in terms of Regulation 10 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 made an open offer to the shareholders of ESL and paid Rs. 33/- per share for the fully paid up shares and Rs. 8.25 per share for the partly paid up shares of ESL. These were evident from the open offer document made in line with the provisions of SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997. The name of Mikugura Software Ltd, following the takeover, was changed to Eonour Software Ltd. The shares of ESL are listed on Ahmedabad Stock Exchange (ASE), Madras Stock Exchange (MSE), The Stock Exchange, Mumbai (BSE) and M. P. Stock Exchange, which is the regional exchange of ESL. Listing of the shares at MSE and BSE was done after the takeover by the new management. After the takeover, the registered office of ESL changed from Indore to Chennai.
2.3 The public holding in ESL excluding Other Body Corporates, is approximately 6.3 lac shares constituting approximately 21% of the paid up capital of ESL. Further, out of total 1248 shareholders, only 4 shareholders were holding approximately 79% of the equity capital. This shows that the shares of company are in limited hands.
2.4 It was observed that 5 shareholders collectively were holding 26,12,700 shares constituting approximately 87% of the paid up share capital of ESL as on February 10, 2000. It was also observed that Shri Karthik R. the main promoter of the company was holding 22,44,200 shares of ESL constituting approximately 75% of the paid up capital of ESL.
2.5 A perusal of the trading details from December 01, 1999 to July 31, 2000, shows that no trading was reported at ASE during the said period. However at M. S. E., the scrip was listed on February 28, 2000 and the trading permission was granted on February 29, 2000. The first trade on the exchange was reported on March 06, 2000 at a price of Rs. 419/-. The total quantity traded, during the period under investigation, at the exchange was only 1,500 shares and the highest price it touched at the exchange was Rs. 492/-. The scrip of ESL was not traded at NSE during the period June 2000 to December 2000.
2.6 Substantial quantity of shares were traded at Madhya Pradesh Stock Exchange during the period December 01, 1999 to March 14, 2000. After March 14, 2000 no trades were reported at the exchange. Incidentally, it is observed that the scrip was listed on the Stock Exchange, Mumbai, on March 13, 2000. From the price volume details as submitted by MPSE, it is observed that the price of the scrip, which was Rs. 31.50 on December 01, 1999 rose to Rs. 401/- on March 09, 2000. Prior to November 1999, the scrip of ESL was not actively traded and the scrip was considered highly illiquid. In the Madhya Pradesh Stock Exchange prior to December 1999, the scrip was thinly traded and the price was in the range of Rs. 18/- to Rs. 30/- per share.
2.7 At The Stock Exchange, Mumbai the first trade was reported on June 12, 2000 (although listed on March 13,2000) and the price was Rs. 520/- which went up to Rs. 634.75 on July 07, 2000. It was noticed that the clients were connected to each other. It is observed that a total of 2,22,600 shares were traded on the exchange. The maximum quantity traded on the exchange on a particular day during the period was 11,700 shares on June 22, 2000. It was observed that the total purchases/quantity traded during the aforementioned period were 2,22,600 shares.
2.8 At M. P. Stock Exchange, a total of 2,47,100 shares were traded during the period December 01, 1999 to March 14, 2000. It was observed that trading in the scrip was concentrated among 7 brokers of the exchange who have traded in the scrip during the period December 1999 to March 2000 and their names alongwith their positions are as under:
Name of Broker Purchases %age of Total Sales %age of Total Gross Mohan Malpani, President, MPSE 65,900 26.67 66,300 26.83 132200 Shaifali Khajanchi 65,600 26.55 65,500 26.50 131100 Ravindra Khajanchi 57,100 23.10 56,800 22.99 113900 Dilip Bhandari 30,100 12.18 30,100 12.18 60200 Vijay Vyas 23,100 9.34 23,100 9.34 46200 Anil G. Bhandari 4,000 1.61 4,000 1.61 8000 Sharad Bhandari* 1,300 0.52 1,300 0.52 2600 Total 2,47,100 100.00 2,47,100 100.00 494200 * Sharad Bhandari has also traded in the scrip prior to December 1999.
2.9 It is observed from the trading details collected that all the trading done in the scrip during the aforementioned period has been contributed by the above mentioned brokers only. The scrip price had moved from Rs. 31/- on December 01, 1999 to Rs. 402/- on March 09, 2000. These brokers, without actually taking or giving delivery, have jacked up the price of the scrip at M. P. Stock Exchange. They have also reversed the position amongst themselves and indulged in rampant "Circular Trading" in the scrip so as to register artificial volumes and also to jack up the price of the scrip. The brokers have done the trades in their own account.
3. Role of Shri. Anil G Bhandari :
3.1 M/s. Anil G. Bhandari is a proprietary member of M. P. Stock Exchange. Shri Bhandari has traded in the scrip of Eonour Software Ltd. mainly in his own account. The trading pattern in the scrip by Shri Bhandari was square off in nature. The trading of the Shri Anil G. Bhandari in the scrip of Eonour Software is given as under:
Name of Broker Sett.
Purchases Sales Net Gross Anil G. Bhandari 48 600 600 0 1200 49 1200 1200 0 2400 50 2200 2200 0 4400 Total 4000 4000 0 8000 3.2 Shri Bhandari was squaring off his positions at the end of each settlement, which was confirmed by him. During the course of investigation / enquiry, Shri Anil Bhandari was asked to give the reasons for his trading in the scrip, to which he stated that the trading in Eonour Software Ltd was going on for quite sometime and he therefore decided to do some trading in the scrip. He also stated that he did jobbing in the scrip of Eonour Software because there were very few scrip to trade on the exchange.
3.3 During the course of investigation / enquiry, Shri Anil Bhandari was asked that the price of the scrip had moved up from Rs. 31/ in December 1999 to Rs. 400/- in March 2000 and why it should not be inferred that he alongwith other members of the exchange were responsible for creating artificial market and jacking up the price. In reply to this, Shri Anil Bhandari stated, "Almost all the software stocks were going up during the period December 1999 to March 2000. Further, he had done transactions in the scrip, when the prices were already high. Therefore, the price rise in the scrip should not be attributed to his trading. He also stated in his statement that in retrospect, the trading done by him may appear to be circular in nature however at the time of entering the transaction the member added that they were not aware of this fact. Further, he has traded only in three settlements, whereas there has been continuous trades in the scrip during the year 1999- 2000.
3.4 It is observed from the records submitted by Shri Bhandari that he has traded only in the last three settlements of the trading in the scrip at MPSE and the quantity traded by him were also less than 1% of total quantity traded on the exchange. However, it appeared from the trading pattern employed by Shri Bhandari that he was one among the cartel who were involved in Circular trading in the scrip along with other members named above.
4. ENQUIRY REPORT AND RECOMMENDATION :
4.1 The enquiry officer, after conducting the enquiry as per the prescribed procedure submitted a report dated 07.08.03 and recommended a penalty of suspension of certificate of registration of the broker for a period of two months.
5. SHOW-CAUSE NOTICE, HEARING AND BROKER'S REPLY 5.1 Pursuant to the submission of enquiry report, a show cause notice dated 18.8.03 was issued to the broker along with a copy of the enquiry report. The broker submitted a reply vide letter dated 07.10.2003. An opportunity of personal hearing was granted to the broker on 10.10.03. The representatives of the broker appeared before me and submitted that he had traded for six days only and after that stopped dealing in that scrip of Eonour Software Ltd. The broker also submitted letters dated 07.10.2003 and 10.10.2003.
5.2 The broker vide his letter dated 10.10.2003 inter alia submitted that he had traded in the scrip of Eonour Software Ltd on jobbing basis only and the same is not an offence. He also submitted that his trading volume in the said scrip was less than 1% of the total volume of the scrip in MPSE and such a thin volume cannot inflate / depress the market price of a security and denied having indulged in manipulative, fraudulent or deceptive transaction with a view to distorting market equilibrium. The broker also pleaded for a lenient view in the matter. The broker vide his letter dated 10.10.2003 also reiterated his submissions made in letter dated 07.10.2003.
6. CONCLUSIONS 6.1 I have carefully considered the material available on record and also the submissions made by the broker vide his letters dated 07.10.2003 and 10.10.2003 and also the submissions made during the course of hearing held on 10.10.2003. My findings are as follows :-
6.2 Shri Anil Bhandari had traded in the scrip of ESL on his own account. Shri Bhandari executed a total purchases of 4,000 shares and sale of 4,000 shares from Settlement No.48 to 50 without any delivery of shares.
6.3 Shri Anil Bhandari has submitted that trading in the scrip was going on for quite some time and he therefore decided to do some jobbing because there were very few scrips to trade on the Exchange. He had not executed any transactions for the clients. He further submitted that he used to square off the transactions in the same settlement and he executed similar transactions in other scrips as well. However, he admitted that he was aware that trades were being executed by some other brokers in the same scrip and active members at the exchange were very few.
6.4 Shri Anil Bhandari submitted the rising trend of the market and software boom that time attracted him to trade in the scrip and therefore he did not notice any abnormal price rise in the scrip as compared to other software scrips. Shri Bhandari also submitted that he had done transactions in the scrip when the prices were already high and therefore the price rise cannot be attributable to his trading. He stated that the trading done by him may appear to be circular in nature however at the time of entering the transactions he was not aware of this fact.
6.5 Shri Anil Bhandari further submitted that he has traded only in three settlements with less than 1% of total volume in the Exchange and he was not a part of the cartel as alleged. He stated that there were five to six members to trade with in the MPSE in these settlements.
6.6 I find that the submissions of Shri Anil Bhandari are not convincing in as much as he had traded mainly on his own account in the scrip of ESL alongwith few other brokers of MPSE. The scrip price has moved from Rs.31/- in December 1999 to Rs.400/- in March 2000. Prior to November 1999 the scrip was not actively traded and the scrip was highly illiquid. A set of brokers, who without actually taking or giving delivery have artificially created the volumes and raised the price of the scrip to an abnormal level by indulging in circular trading. It is significant to note that all these brokers have executed transactions on their own account.
6.7 The investigation report has brought out that many of the transactions of these brokers have matched with that of other brokers. Though Shri Bhandari has stated that he was trading in the scrip of ESL on the basis of its fundamentals, it is observed that the quantum of profit was hardly Rs 285/- for his trades in the scrip.
6.8 The scrip has been made liquid by putting artificial volumes and price by few brokers including Shri Anil Bhandari. These brokers have entered into continuous speculative transactions without any genuine interest in giving or taking delivery of shares. This has resulted in creation of artificial volumes and price rise in the scrip which has otherwise attracted no interest from the general investors.
6.9 I find that only few brokers in concert indulged in circular trading i.e. buy and sell transactions with each other, squaring off positions and reversing trades either on the same day or same settlement, making the net receivables and deliverable positions either nil or in negligible quantities and created a false and misleading appearance of trading on the securities market in the scrip of ESL. Since there were very few active brokers in MPSE and the price of the scrip which is illiquid had been rising phenomenally, Shri Bhandari was aware that the price was moving up because of the jobbing done by few brokers including himself and not because of any enthusiasm from the general investors. Therefore, he should have stopped doing jobbing in the said scrip immediately.
7. The conduct of Shri Anil Bhandari is detrimental to the interest of investors and also to orderly development of the securities market. I find that Shri Anil Bhandari has therefore, failed to exercise due skill and care and violated Clause A(1) to (4) of the Code of Conduct as prescribed, in Schedule II in terms of Regulation 7 of Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992. The said clauses A(1) to (4) reads as follows :
A(1) A stock broker, shall maintain high standards of integrity, promptitude, and fairness in the conduct of all his business.
A(2) A stock broker shall act with due skill, care and diligence in the conduct of all his business.
A(3) A stock broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains.
A(4) A stock broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stock broker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness.
8. Shri Bhandari has also indulged in acts calculated to create a false and misleading appearance of trading in the scrip of ESL and entered into purchases and sale of securities not intended to effect transfer of beneficial ownership but to inflate the price of the scrip. Conduct of the broker is in violation of Regulation 4(b) and 4(d) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995. Regulations 4(b) and 4(d) read as under :-
"4. No person shall -
(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market.
(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the market price of securities."
8.1 I find that Shri Anil Bhandari has traded only in three settlements and the same was done by him after liquidity and high price was established in the scrip.
8.2 Regulation 7 of the said Regulations provides that the stock broker holding the certificate shall at all times abide by the Code of Conduct as specified in Schedule II. Further, Clause A (5) of Schedule II provides that a stock broker shall abide by all the provisions of the Act and the Rules, Regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him. In view of my conclusions mentioned hereinabove, I am convinced that the said broker is guilty of having violated,
(a) the provisions of clauses A(1) to A(4) of the Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992,
(b) the provisions of Regulation 4(b) &(d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995.
In view of the above, I do not find any reason to differ with the findings of the enquiry officer except the quantum of penalty. I am also convinced that the said broker is liable for action under regulation 13(1)(b) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.
8.4 Under section 11 of the SEBI Act, SEBI can take measures to protect the interests of investors and to regulate the securities market, inter alia by registering and regulating the working of stock brokers. Further, the Code of Conduct specified in Schedule II of the said Regulations also provides for the minimum standards for the working of the stock brokers. If the regulatory requirements are violated by the stock brokers without attracting any action, the measures taken by SEBI for regulation of the stock brokers would be rendered nugatory and the regulatory function would be jeopardized. It is to be noted that indulgence of the said broker in the transactions which are prohibited can not be allowed especially when such transactions are likely to have a detrimental effect on regulation of the securities market.
9. ORDER :
9.1 I find that the said broker has committed violations as observed above and has not exercised due care and diligence in the observance and compliance of the statutory requirements pertaining to the conduct of his business as a stock broker. Looking to the aforestated violations committed by the said broker, I am convinced that, in the interests of the securities market and in order to safeguard its integrity, penal action is warranted. I am satisfied that a penalty of suspension of certificate of registration for a period of one month would be adequate and would meet the ends of justice.
Therefore, in exercise of the powers conferred upon me by virtue of section 19 of the Securities and Exchange Board of India Act, 1992 read with regulations 13 (4) and 13 (6) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby order that the certificate of registration no. INB 070523619 of Shri Anil G. Bhandari, a member of the Madhya Pradesh Stock Exchange be suspended for a period of one month.
This order shall come into force on the expiry of three weeks from the date of this order.