Securities Appellate Tribunal
Sebi vs Galaxy Broking Limited on 24 January, 2006
ORDER
G. Anantharaman, Member
1. Background 1.1 For quite sometime in the past, sharp rise in the prices of shares of companies with relatively small market capitalization, commonly known as penny stocks have been engaging the attention of SEBI and the stock exchanges namely BSE and NSE. Preliminary investigations into the rise in the share prices of some of these companies within a short period of time have also been conducted by SEBI, BSE and NSE. Based on the findings of these preliminary investigations SEBI has taken action under the powers vested in it under Sections 11B and 11(4)(b)of the SEBI Act 1992 in cases where the price rise was found to be artificial and false market was created in the shares. These actions have been directed against the companies, the promoters who may have enriched themselves by offloading their shares in the market during the period in which the share prices were artificially propped up, brokers who were found to have actively traded in shares of penny stock and against certain groups of inter-connected clients who were found to have aided and abetted the promoters in offloading their shares in the market through a web of off market/market transfers .
1.2 It was in the above context that SEBI had decided to conduct specially focused inspections against some of the brokers whose names frequently appeared in the trading of penny stocks and were suspected to have played a significant role in the artificial propping up of share prices. Galaxy Broking Ltd. (Galaxy) is one such broker whose inspection was taken up by a team of SEBI officials between October10, 2005 to October 18, 2005. Inspection covered the transaction of the broker in penny stocks for the period March 2005 to September 2005.The major findings of the inspection have been brought o ut in the following paragraphs:
Brief particulars of Galaxy:
1.3 Galaxy is a public limited company which has been a member of BSE since February 06, 1997 and has been trading in the cash segment only. The company has a paid up capital of Rs 34.859(approx) lakhs and its shareholders are as given in Table 1 and most of the shareholders as given in Table 1 are inter-related.
Table 1 - Shareholding of Galaxy S. Shareholder's Particulars No of shares % (approx) No. Name
1. Shri Zaveri Nil 1,90,000 5.451 Kishore Ratilal
2. Shri Sanjay M Director of 50,000 1.435 Sanghavi Galaxy
3. Smt.Shilpa Wife of Shri 50,000 1.435 Sanghavi Sanjay Sanghavi
4. Shri Sanjay M Director of 1,00,000 2.869 Sanghavi Galaxy(HUF)
5. Shri Anil Director's 4,61,300 13.236 Gandhi (HUF) HUF
6. Shri Anil Director of 4,800 0.138 Gandhi Galaxy
7. Smt Priti Anil Wife of Shri 4,95,000 14.203 Gandhi Anil Gandhi
8. Mrs. Sudhaben Mother of 50,000 1.435 Amrutlal Shri Anil Gandhi Gandhi
9. Shri Amrutlal Father of 1,00,000 2.869 Jivandas Shri Anil Gandhi Gandhi
10. Shri Arvind Director of 22,400 0.643 Mulraj Udeshi Galaxy
11. Shailesh D Ved Director of 11,200 0.321 Galaxy
12. Shri Subhash Director of 16,000 0.459 R Ashar Galaxy
13. Shri Yogesh G Director of 3,400 0.098 Pandya Galaxy
14. M/s B R Jalan Nil 1,55,700 4.467 Securities Pvt Ltd.,
15. M/s. Amrut Wife and 11,17,000 32.049 Securities father of Ltd., Shri Anil Gandhi are the director of this company
16. M/s. Chintamani Anil Gandhi is 1,43,000 4.103 Shares & the director of Broking Limited this company
17. M/s Presilco Anil Gandhi is 4,88,400 14.013 Impex Ltd., the director of this company
18. Others 27,100 0.770
19. Total 34,85,300 100.000 1.4 The directors of the company are Shri Sanjay Munhall Sanghavi, Shri Anil Amrutlal Gandhi, Shri Yogesh Girdharilal Pandya, Shri Arvind Mulraj Udeshi and Shri Subhash R Ashar.
1.5 As may be seen from the Table 1 the principal shareholders of Galaxy are also the directors of the broking firms or are the relatives of Shri Anil Amrutlal Gandhi (Director of the company).This is relevant information for the purpose of this order as would be seen from the ensuing paragraphs.
1.6 The total number of clients of Galaxy was seen to be around 1,226.
2. Major findings of inspection 2.1 The major findings of the inspection have been discussed in the following paragraphs :
2.2 During the period covered by the inspection i.e. from March 2005 to September 2005, Galaxy has traded in the shares of 2769 companies on behalf of clients as well as on proprietary basis. Of these, 897 (32.39% of total companies traded) companies could be classified as penny stocks and accordingly such penny stocks trades constitute a significant portion of business of Galaxy.
Turnover of Galaxy in penny stocks 2.3 The total turnover (buy + sell) in penny stocks by Galaxy accounted for 9% of the total turnover of the Galaxy. What is pertinent to note in this context is that although penny stocks appeared to be 9% of the Galaxy's turnover, as borne out by the following Table (See Table 2) the trading volume of Galaxy (buy + sell) has accounted for 6%(approx) of the total trading volume of these shares on the BSE and in some cases even higher. In the case of Global Boards, the Galaxy accounted for 11% of the turnover and in the case of Wellworth the broker accounted for 32%, for Swan Mills the broker accounted for 36% respectively of BSE's turnover in those scrips. Thus, the share of Galaxy in the total transactions on BSE in these shares can by no means be regarded as insignificant for a single broker:
Table 2: Turnover of Galaxy in 19 penny stocks (Turnover wise) S. Name of the Turnover of Galaxy No. company (No. of shares) Turnover on %of Sell Buy Total (3+4) BSE column 5% col. 6 1 2 3 4 5 6 7 1 Global Boards 10607120 3481098 14088218 12,37,23,080 11.38 2 Baffin 57,39,278 52,81,811 110,21,089 22,99,29,896 4.79 Engineering 3 Fast Track 20,94,129 75,68,991 96,63,120 12,82,42,598 7.53 Entertainment 4 Mega 20,40,655 33,58,225 53,98,880 12,24,08,704 4.40 Corporation 5 Prraneta 41,135 13,84,656 14,25,791 12,89,43,088 1.10 Industries 6 Shukun 1555074 64070 1619144 404,37,680 4.00 Construction 7 Millennium 607884 362826 970710 493,84,940 1.96 Cybertech 8 Birla Power 6,11,530 8,50,926 14,62,456 1,90,15,686 7.69 9 Karuna Cables 3,21,592 6,94,799 1,016,391 16,05,00,410 0.63 10 Kirti Finvest 4,86,444 7,17,200 12,03,644 3,14,72,381 3.82 11 Swan Mills 28,215 5,460 33,675 94,601 35.59 12 Intradeco 30,43,524 79,04,214 1,09,47,738 11,61,88,672 9.42 13 IQMS 40,68,474 35,78,106 76,46,580 36,21,90,057 2.11 14 Wellworth 1,85,95,755 1,75,94,2273,61,89,982 11,34,06,412 31.91 15 Gangotri 87,768 81,891 1,69,659 1,18,35,064 1.43 16 Landmark 2,05,41,386 16,20,528 2,21,61,914 22,05,78,881 10.04 Leisure 17 IFSL 2,32,230 1,83,804 4,16,034 63,81,12,075 0.06 18 Ventura 25,17,670 13,56,521 38,74,191 15,35,28,120 2.52 19 Robinson 3,96,300 6,74,600 10,70,900 64,88,200 16.50 It is clear from the above that Galaxy has been one of the major brokers trading in such penny stocks.
Artificial rise in prices of penny stocks traded by Galaxy 2.4 During the inspection period, the share prices of these companies had increased significantly and the increase ranged between 204% to 2150% as is evident from the following Table 3. The financial performance of these companies for the last year shows that all these companies had a none-too-impressive record of profitability, which could not have spurred a sudden spurt in prices of these shares. The fact that all these shares are currently trading at very low prices well below their artificial highs only substantiates the conclusion that the sudden price rise was artificial in nature and was a necessary incident to the creation of a false market. The following Table no. 3 illustrates the above findings.
Table 3: Movement in share prices of the 19 penny stocks during the inspection period S.No Name of the company Share prices on 30.9.20 05 Highest during the inspection period (date) Trading volume of BSE on that day Lowest Price during the inspection period Trading volume of BSE on that day Percenta ge change from Lowest price to Highest price(Ap prox.)
1. Global Boards 4.2 7.9 (29/8/2005) 24,07,902 2.82 (9/5/2005) 2,24,900 280
2. Baffin Engineering 2.96 5.61 (1/3/2005) 67,58,308 2.75 (2/5/2005) 3,94,936 204
3. Fast Track Entertainment 9.26 15.39 (16.9.2005) 5,33 ,320 6.45 (29/3/2005) 24,38,202 239
4. Mega Corporation (formerly known as Assam Im.) 34.25 44.45(19/9/ 2005) 44,14,106 11.05(1/3/2005) 16,25,255 402
5. Prraneta Industries 20.7 22.85 (21/9/2005) 13, 81,122 4.36 (22/3/2005) 97, 06,750 524
6. Shukun Construction 11.87 18.49 (15/6 /2005) 3, 24,700 7.77 (20 /4/2005) 1, 25,506 238
7. Millennium Cybertech 19.47 24 (20/9/2005) 2, 69,600 1.65(9/3/2005) 39,750 1454
8. Birla Power 47.4 67.65(25/7/ 2005) 6, 74,786 21.65 (24/3/2005) 19250 312
9. Karuna Cables 21.4 33.39(19/0 4, 76,595 3.43 (30 /03/2005) 37, 59,905 973
10. 11. 12.
Kirti Finvest Swan Mills IFSL 21.8 1407.9 5 21.95 27.5(6/9/20 05) 2015.1(21/ 9/2005) 35.2(15/9/2 005) 250 4,935 92,38,986 6.28(1/4/2005) 367(4/3/2005) 13.55(2/3/2005) 48,545 5 5,25,000 438 549 260
13. Ind Tra Deco 1.42 2.6(12/9/20 05) 27,93,310 0.3(28/04/2005) 57,440 830
14. IQMS 1.16 3.44(30/08/ 2005) 51,34,235 0.16(24/3/2005) 2,34,630 2150
15. Robinson 136 230.6(15/6/ 2005) 51,600 104.15(22/3/05) 2,65,800 221
16. Wellworth Overseas 1.4 3.9(30/8/20 05) 32,29,294 0.9(3/5/2005) 38,550 370
17. Landmark leisures 2.6 4.46(13/9/0 5) 36,79,277 0.59(21/4/2005) 45,500 756
18. Ventura Tex.
2.17 3.28(19/7/2 005) 34,81,7400 1.81(4/6/2005) 500 181
19. Gangotri Textiles 50.28 59.5(29/8/2 005) 4,74 ,784 19.5(28/3/2005) 14,200 305 Common clients of Galaxy trading in penny stocks 2.5 Galaxy has been trading in penny stocks both on behalf of its clients as well as on behalf of its promoter directors. The clients on whose behalf Galaxy has traded in these stocks are not an eclectic population as would have been expected in the case of a broker having a wide clientele. Instead one notices that most of the trading in penny stocks (more than 95% in certain cases) have been concentrated on a few clients only, some of whom such as Amrut Securities, Priti Anil Gandhi, and Anil Gandhi Trading are shareholders of Galaxy and related to the direc tors of Galaxy itself and other inter-related clients. This is amply elucidated by the following Table 4.
Table 4: Clients on whose behalf Galaxy traded in the shares of Penny stocks.
S. No. Name of the company Major clients on whose behalf Galaxy traded Total turnover of Galaxy in the shares of the company (in no. of shares) Turnover of the clients in the shares of the company (in no. of shares) Percenta ge of client turnover to total turnover (approx)
1. Baffin Engineering Anil Gandhi Group* 110,21,089 1,01,01,389 91.6 5
2. Global Boards Anil Gandhi 140,76,118 110,86,0 38 78.75
3. Shukun Construction Anil Gandhi Group 27,25,588 10,00,000 36.68
4. Birla Power Anil Gandhi Group 1,462,456 875,957 59.89 Chirag Shah 445,375 30.45
5. Fast Track Girdharbhai J 96,63,120 5043826 52.19 Entertainment Vagadia(8/16 ,MK Amin Marg,Patel Building,3rd Floor ,Office No.30 ,Bora Bazar ,Fort,Mumbai-
400001) Ritedeal 2493385 25.80
6. Mega Corporation Ganesh Raut and Group 53,98,880 1,733,025 32.09 Anil Gandhi 205,572 3.8 Group Vintel 2,887,133 53.47 Securities (402,Bluemoon Chambers,28/33 ,Nagindas Master Road,Fort ,Mumbai )
7. Prraneta Girdharbhai J.
14,25,791 13,97,491 98.01 Industries Vagadia**
8. Millennium Stardom 10,42,009 348700 33.46 Cybertech Trading *** Anil Gandhi 51,953 4.98 Group Vintel 2,23,795 21.47 Securities IFSL Group 47,867 4.59
9. Karuna Cables Suresh 1,016,391 721,116 70.94 Pukhraj Jain (Room No.3 ,Ground Floor,Nawab Manzil ,18,Wadia Street ,Tardeo,Mumbai-
400034 ) IFSL Group 90,830 8.93 Vintel 60,900 5.99 Securities
10. Kirti Finvest Anil Gandhi 1,203,644 473,154 39.31 Darshit Patel 506,186 42.05 (179-2140,Pratixa Apartt,Naranpura,Sa barmati Zone ,Ahmedabad-
380054) Chirag Shah 156,600 13.00 (2871/1 ,Patni Street ,Zaveriward, Relief Road ,Ahmedabad-
380001)
11. Dolphin Chirag Shah 924,732 4,62,165 49.97 Anil Gandhi 4,13,695 44.73 Group
12. Swan Mills Anil Gandhi 33675 4,320 12.82 Group Chirag Shah 2,000 5.93
13. IFSL DilipKumar Adukia 416,034 2,16,882 52.13 Anil Gandhi 1,64,450 39.52 Group
14. IQMS Chirag Shah 7,646,580 2,155,213 28.18 Darshit Patel 46,60,809 60.95 Anil Gandhi 3,46,040 4.52 Group
15. Robinson SureshKumar 1,070,900 2,54,100 23.72 P.Jain IFSL Group 90,300 8.43 Anil Gandhi 67,800 6.33 Group
16. Wellworth Anil Gandhi 36189982 1,95,01,557 53.8 8 Group Chirag Shah 91,08,875 25.16 Darshit Patel 72,84,050 20.12
17. Gangotri Troop Track 169,659 1,65,209 97.37 Electrodes (S-377 ,School Block,Shakarpur, New Delhi-110092)
18. Intradeco Chirag Shah 1,0947,738 69,95,563 63.89 Anil Gandhi 5,66,100 5.17 Group Darshit Patel 9,67,889 8.84
19. Landmark Leisure Rational Finvest (304.Chartered House ,Dr.CH Street,Near Marine Line Church,Mumbai 400002) 22,161,914 17,000,001 76.70 (Note: * Anil Gandhi director of Galaxy, his wife, and others been collectively referred to as the Anil Gandhi Group. Detailed relationship is given as per Table 4A. IFSL group includes Cardiod Marketing and others, their detailed relationship is given in Table 4B.
** The name of Girdharilal Vagadia has been included as he has been found to be one of the major clients to whose demat account large number of shares have been credited through off market transfers from a plexus of various clients).
*** Stardom Trading, Cornhill Trading, Cute Productions, Galaxy Broking Limited acted in concert in creating artificial volume in the Scrip Millennium Cybertech. Detailed relationship is given as per Table 4C ).
Table 4A: Anil Gandhi and Group Table 4B: IFSL Group S. No. Name of the client Address as per Galaxys books Connection
1. Prii Anil Gandhi 702 Sadguru vatika Wife of Shri Anil Amrutlal ,Airport Road Gandhi ,Rajkot
2. Amrut Securities (SEBI 822 ,Star Chambers Priti Anil Gandhi and registered sub -broker through Galaxy Broking ,Harihar Chowk Rajkot 366001 Amrutlal Gandhi are the directors of this company.
Limited (INS011723439) and SKSE Securities Limited (INS010581937)
3. Deepak Ashar /Manish Ashar 193,VP Road, Dayalal Building Shri Deepak Ashar and Manish Ashar are the Mumbai-400004 brother-in law of Shri Anil Gandhi.
4. Ganesh Raut Baburao Pahlwan Galaxy has received off Chawl Lane 20,1/13 ,Sahar Road market shares of IFSL in its BO account from ,Koldongri ,Andheri Ganesh Raut (E) Mumbai -400069
5. Chintamani Trading 108-B/109, 'Sampada' Mithakhali Six Group company of Galaxy. Anil Gandhi
-Common Directors Roads Navrangura Ahmedabad
6. Galaxy Share Trading 633/634 ,PJ Tower Galaxys trading account.
,Dalal Street ,Fort ,Mumbai 400001
7. Ritedeal Trading B,Wing, Flat No. 11 Phone Number of Ganesh Monami Appts. 2nd Floor, Near Raut and Rite deal is the same.
Chandan Talkies, Juhu Mumbai 400049
8. Sudha Amritlal Gandhi 702 Sadguru vatika ,Airport Road Mother of Shri Anil Amrutlal Gandhi ,Rajkot
9. Pooja Anil Gandhi 702 Sadguru vatika Daughter of Shri Anil ,Airport Road Amrutlal Gandhi ,Rajkot
10. Amrutlal Jivandas 702 Sadguru vatika Father of Shri Anil Amrutlal Gandhi ,Airport Road Gandhi ,Rajkot
11. Presilco Impex Ltd 315,Stock Exchange Building Sadar Bazar Anil Gandhi is the director of this company Rajkot-360001 Page 11 of 29 Sr. No 1.
Name of the client IFSL Address as per Galaxys books 202, C, Kanchan Sagar, 18/1, Old Polasia, A.B. Road, Indore, 400053 Connection Paras Chaplot, director of Cardiod Marketing is operating the account.
2. Cardiod Marketing 28,Lal Building 36 ,Goa Street Ballard Estate Mumbai 400038 Shri Paras Chaplot is operating this account along with IFSL account.
3. Ganesh Raut Baburao Pahlwan Chawl Lane 20,1/13 ,Sahar Road ,Koldongri ,Andheri (E) Mumbai -400069 Cardiod marketing had received shares of IFSL through off market transfers from Ganesh Raut
4. Ritedeal Trading B,Wing, Flat No. 11 Monami Appts. 2nd Floor, Near Chandan Talkies, Juhu Mumbai 400049 Phone Number of Ganesh Raut and Rite deal is the same.
Table 4C: Stardom Trading and Group Sr. No Name of the client Address as per Galaxys books Connection
1. Stardom Trading 603/B, Shree Vishal Complex, Narsing lane, Malad (West) Mumbai- 400064 Co- acquired Millennium Cybertech in 2003
2. Cornhill Trading
-B, Empire Building, Cumballa Hill, Kemps Corner, Mumbai- 400 036 Co- acquired Millennium Cybertech in 2003
3. Galaxy Broking 633/634 ,PJ Tower ,Dalal Street ,Fort ,Mumbai 400001 Received off market shares of Millennium Cybertech from Cornhill trading and Cute productions.
Page 12 of 292.6 It is worthwhile to mention at this stage, that SEBI has already passed orders under sections 11B and 11(4) (b) of the SEBI Act 1992 in the matter of price manipulation and creation of artificial market in shares of some of the aforementioned companies (viz. Mega Corp and Karuna Cables) wherein some of the entities including Galaxy were found to be dealing in these shares on behalf of its clients. In the case of Mega Corporation, SEBI has directed Rite deal Trading and Ganesh Raut (clients of Galaxy) not to deal in this scrip till further orders and in case of Karuna cables, SEBI has directed Vintel Securities (client of Galaxy) not to deal in this scrip till further orders and also directed Rite deal Trading not to deal in any scrip till further orders, SEBI has also directed Galaxy not to deal in the scrip of Karuna Cables on behalf of Vintel Securities and Rite deal Trading till further orders. Thus, Galaxy has come to the adverse of SEBI in a clutch of penny stocks cases.
Relationship between some of the companies and the directors of Galaxy 2.7 It has been noticed that in some of the companies in which Galaxy has traded either through the Anil Gandhi Group or through some of the inter-connected clients , besides the directors of Galaxy appear to have direct and indirect linkage with the promoters/employees of these companies. For example, all the correspondences on behalf of Baffin Engineering (Anil Gandhi Group has traded about 91% of Galaxy total turnover in this scrip) is signed by Shri Arvind Udeshi (Director of Galaxy) as the Authorised Signatory. He is the Compliance officer of Baffin Engineering, who is managing the shares department of the company. Another authorized signatory of Baffin Engineering, Shri Devji Parmar is also dealing through Galaxy. Ledger account of Shri Parmar reveals that Galaxy has funded most of his transactions and his client ledger shows continuous debit balance (debit balance to the tune of Rs 21 Lac at one point of time).
2.7.1 In the case of Millennium Cybertech, the company was taken over by Cornhill trading, Cute Productions and Stardom Trading (clients of Galaxy) in September 2003 through an open offer under SEBI (Substantial Acquisitions and Share Takeovers ) Regulation 1997.Galaxy has received shares of Millennium Cybertech from Cornhill Trading and Cute Productions to meet out its own and its clients pay-in obligations (specially for Stardom Trading) and has transferred borrowed shares of Millennium Cybertech back to the lenders approximately after two months.This smacks of blatant accommodation . It is amply clear that Galaxy was related to the group which has traded heavily in this scrip to create artificial volume and rig the price. By borrowing shares from one and lending to another without being registered as an approved intermediary as stipulated under clause 5 of Securities Lending Scheme, 1997, Galaxy has violated clause 5 of Securities Lending Scheme, 1997 Concentration of trading volumes in penny stocks among common clients of Galaxy and off market transfers 2.8 The Table 4 also clearly establishes the concentration of trading in the respective shares indicated against their names. What transform a suspicion into a prima facie conviction on the role of the clients referred to in the table are the direct and indirect connections of these clients both with Galaxy as well as the promoters of the various companies. All of these entities as illustrated in the Table 4A, 4B and 4C have obtained shares either from the promoters of some other companies or through a web of off market transfers, as are the normal incidents of a penny stock manipulation. This modus operandi seems to have been a well established one and is of a piece with typologies noticed by SEBI against some of these companies, clients as well as Galaxy in the interim order cited supra. Thus, the track record of Galaxy bristles with a plethora of deals in penny stocks, the manipulation of which species has been the forte of Galaxy with consummate ease and manipulative acumen.
2.9 Off Market transfers Description of the Off Market Transfers among Interconnected Clients diagram 1: Baffin Engineering Received 20,090 shares from one Sudha Bhupendra Vithlani Anil Gandhi Transferred 2, 17,834 shares to Amrut Securities Transferred 44,600 shares to one Dinesh Ved Received 2, 17,834 shares from Anil Gandhi Amrut securites Transferred 1,00,000 shares to one Amit Shantilal Mehta Received 66,000 shares from one Paresh Doshi Received 15,00,000 shares from Deepak S Todkar1 Transferred 4, 15,000 shares to one Received 7,00,000 shares from one Premkumar Transfered 3,00,000 shares to Ramdas Kshirsagar4 Received 77,340 shares from one Jayesh Shah Ganesh Raut3 Transferred 10, 17,176 shares to one Laxative Implex Pvt. Ltd.
Received 5,00,000 shares from one Sandeep Todkar Received 6,00,000 shares from Ajit Suryavanshi 1 Client found involved in the creation of artificial volume of IFSL and SEBI has directed him not to deal in this scrip till further orders.
2 Client found related to the promoter of the Mega Corporation and SEBI has directed him not to deal in this scrip till further orders and SEBI in its order of Karuna Cables directed him not to deal in any scrip till further orders on the basis of his huge concentration in this scrip.
3 Client related to Anil Gandhi and found involved in the creation of artificial volume in scrips like IFSL, Mega Corp and SEBI has directed him not to deal in scrip of Mega Corporation.
4 SEBI directed him not to deal in the scrip Mega Corporation till further orders because of his connection with the promoters of Mega Corporation, SEBI in its order of Karuna Cables directed him not to deal in any scrip till further orders because of his heavy concentration in this scrip Diagram 2: Prraneta Industries Transferred 2,01,000 shares to one DPS Shares..
Received 7, 12,000 shares from one Ravi Bhagwandas Shah Girdharbhai Vagadia Transferred 44,76,500 Vijay Bhagwandas Shah5 Transferred 2,00,300 shares to one Nayan Bhavsar Diagram 3: Shukun Construction Received 3,00,000 shares from RajKishore Singh Ganesh Raut Transferred 3,00,000 shares to Ramdas Kshirsagar Diagram 4: Mega Corporation Received 10,58,000 shares from one Rama Sudhakaran Menon Ganesh Raut Transferred 77,500 shares to Amrut Securities Ltd.
Transferred 60,000 shares to Jagdish Uttam Parab Transferred 25,000 shaes to Lokesh Inder Kapoor7 5 Member, BSE SEBI has directed him not to trade in the scrip of Karuna Cables till further orders because of his connection with the promoters of Karuna Cables.
6 SEBI in its order of Mega Corporation directed him not to deal in any scrip till further orders because of his connection with the promoters of this company 7 SEBI in its order of Mega Corporation directed him not to deal in this scrip because of his connection with the promoters of the company Diagram 5: Fast Track Entertainment Received 18,300 shares from one Bangaria Girdharbahi Vagadia Transferred 10,60,000 shares to one Bobby Finlease Received 9,240 shares from one Sicop Finlease Transferred 6,00,000 shares to Vijay Bhagwandas Shah Received 2,00,00 shares from one Kalpesh Babariya Transferred 1,29,000 shares to one Ajit Suryavanshi Transferred 707 shares to one Chetan Poddar Diagram 6: IFSL Received 10,000 Shares received from Vivekananda Dadi Patankar Ganesh Raut Transferred 11901 shares to Datta Aba Shitole Received 13,500 Shares received from Dattu Aba Shitole8 Transferred 1000 shares to Jayesh Vaghela 300 Shares received from Jagdish Uttam Parab3 Transferred 1645 shares to Jagdish Parab Received 795 Shares received from Sandeep Kadam Received 650 shares from Vijay S Suryavanshi8 Received 7,580 Shares received from Jayesh Waghela8 Received 477 Shares received from Rajkishor Singh Received 261 Shares received from Santosh R Jagtap Received 30,000 shares from Umesh B Chokekar 8 SEBI in its order of Mega Corporation directed all these clients not to deal in this scrip because of their connection with the promoters of the company.
Diagram 7: Millennium Cybertech Received from one Hitech M. Vora 2,94,990 STARDOM TRADIN Transferred 17,000 shares to Cornhills Trading Received from one Manherlal Fatehchand Vora 3,18,371 Transferred 4,20,000 shares to Vijay Bhagwandas Shah Received from one Pratap Ratilal Sanghvi 77, 734 Transferred 4,37,770 shares to Cute Productions 4,37,770 Received from one Sandeep Pravin Shah-57, 465 Received from Vijay Bhagwandas Shah 3, 45,700 Received from one Nimish C. Sheth 27,080 Received from Chandrakant Maganlal Sheth 87,130 Diagram 7A: Millennium Cybertech Received on 04/07/2005 from Cornhills Trading 9,53,500 shares GALAXY BROKING (NSDL Pool) Pay-in on various dates, 1,75,785 shares for Stardom Trading, Vintel Securities and Received on 08/07/2005 from Cute Productions 6,12,970 Transferred 17,39,385 to Galaxys Principal account a/c on July 12, 2005 1301190000010416(CDSL) Received on 04/07/2005 from Stardom Trading 348700 Transferred 16, 17,350 shares to Galaxy BO a/c 12038000000000059 on July 15, 2005 /\ / \ / \ Transferred to Corn Transferred to Cute Hill Trading Productions 9,53,500 6,12,970 shares on shares on 31/08/2005 30/08/2005 2.10 The above analysis makes it abundantly clear that Galaxy has been continuously indulging in pump priming the trading volumes in the penny stocks to create an artificial market either to enrich the promoters by off loading their shareholdings at the artificial price or enriching themselves at the cost of lay investors who might have been lured to trade in these shares on the make believe created in the market. As can be seen most of the clients who traded in the scrip of Baffin Engineering through Galaxy are related to one another and to the director of Baffin Engineering and Galaxy viz Arvind M Udeshi. Clients viz Vintel Securities and Ritedeal Trading (Ganesh Raut) are connected to the promoters of Karuna Cables . Receipt of shares of IFSL into Galaxy's BO account from Ganesh Raut seeks to suggest its off market dealings with Ganesh Raut/Ritedeal. Therefore, he is also a party to the group which has acted in concert to create artificial volume in the scrips like Mega Corporation, IFSL and Karuna Cables. Thus, in the maze of transactions, there is a pattern of nexus amongst the brokers (Galaxy), promoters, and inter-connected clients making it appear on the face of it that there was a coordinated effort to manipulate the penny stocks with the broker(Galaxy) actively intermediating.
Funding of transactions of certain clients by Galaxy 2.11 Galaxy not only was involved in the creation of artificial volumes but has also indirectly funded most of the clients who traded with them in penny stocks, by maintaining a continuous debit balance often running into several crores of rupees for a fairly long period as illustrated in Table 5.This is a clear violation of SEBI Circular No.SEBI/MRD/SE/Cir-15/2004 dated March 19, 2004 read with SEBI/MRD/SE/SU/Cir-16/04 dated March 31, 2004.
Table 5: Details of Funding by Galaxy to its clients (dealing heavily in penny stocks) S. No Name of the client Maximum debit Maximum period of balance(Rs.
in debit (approx) lakhs) (weeks) 01 Amrut Securities 208 18 02 Amrutlal Jivandas Gandhi 54 4 03 Anil Gandhi 238 8 04 Chirag Shah 358 4 05 Darshit Patel 258 26 06 Manish Ashar 24 30 07 Priti Anil Gandhi 184 6 08 Ritedeal Trading 57 26 09 SureshKumar Jain 60 8 10 Vintel Securities 337 17 11 Girdharbhai Vagadia 257 6 14 Troop Track 60 8 15 Cardiod Marketing 10 4 Other violations 2.12 Besides the above findings, the inspection report also brings out extensive violation on the part of Galaxy in several areas namely:
Non compliance of Know your Client (KYC) norms and lack of due diligence in opening of accounts:
2.12.1 Galaxy had entered into agreement with its clients before the client company authorizing its representative to open the account through a Board Resolution.
Table 6: Details of the non compliance of KYC norms (Difference in the date as per the Broker-Client Agreement and Board Resolution of the client company) S. No 1 Name Penny securities and Investments Private L imited Date of agreement 17/05/2005 Date of Board Resolution 28/06/2005
2. Rational Finvest Private Limited 11/07/2005 18/08/2005 3 Troop Track Electrodes Private limited 09/05/2004 29/06/2005 4 IFSL Limited 25/02/2005 25/07/2005 2.12.2 Galaxy has relied only upon board resolutions of companies on plain paper without the common seal of the company. (e.g. Rational Finvest Private Limited and IFSL Limited).
2.12.3 Galaxy opened a client account in the name of IFSL, a c ompany listed on BSE & MPSE and a Member of MPSE (SEBI Regn. No. INB070692530 Registered since February 07, 1995),Galaxy had accepted Board resolution of the company, authorizing Shri Paras Chaplot to operate the broking account on behalf of the company on a plain paper and not on the company's letter head and it was also not bearing common seal of the company. Shri Paras Chaplot also operates another account with Galaxy in the name and style of Cardiod Marketing Limited. SEBI has passed an order in the matter of IFSL on September 28, 2005 for apparent manipulation in the dealing in the scrip. The IFSL account with Galaxy is seen to have used mainly for dealing in penny scrips and huge transactions were noticed in the scrip of Millennium Cybertech. The account of Cardiod Marketing similarly used for trading in penny scrips and huge transactions were noticed in the scrip of Karuna Cables in which SEBI has issued directions to various entities/persons.
2.12.4 Six of the top 20 clients of Galaxy are private limited companies, and the telephone numbers of the companies given on the KYC forms does not belong to them and any of the officials of these companies was not available to answer the calls made on these numbers. Galaxy has not exercised due care and skill while opening of the client accounts. This is in violation of the Code of conduct for stoc k brokers as per schedule II Clause A (2) read with Regulation 7of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
Unauthorized Financing of Client Transactions:
2.12.5 Galaxy has not applied to the stock exchange for approval to extend margin trading facility to their clients. As already brought out in para 2.11 above, many of top clients trading in penny scrips were extended substantive funding. Many of client ledger accounts are showing continuous debit balances and were allowed to trade in spite of the debit balances. Some of the clients (see Table No.5) availed funding even to the extent of two to three crore rupees at certain points of time. This is in violation of SEBI Circular No SEBI/MRD/SE/Cir-15/2004 dated March 19, 2004 read with SEBI/MRD/SE/SU/Cir-16/04 dated March 31, 2004.
Unexplained credits in the books of Galaxy:
2.12.6 Galaxy has credited the ledger of one Chirag V Shah, who is the top client in terms of turnover of Galaxy, various amounts with the narration 'as per instruction'. There were no corresponding deals executed on behalf of Chirag Shah. Galaxy did not provide any satisfactory explanation for such credits. Instances of such transaction are placed in Table 7. Such continuous crediting of the accounts without any debits, definitely gives rise to the presumption of certain undisclosed transactions to which Galaxy is a party and such instances needs to be probed in determining the conduct of the broker "Galaxy".
Table 7: Unexplained credits in the books of Galaxy Sr.No. Date Amount 01 29/07/2005 26,75,000 02 29/07/2005 15,90,000 03 29/07/2005 25,85,000 04 29/07/2005 19,80,000 05 19/09/2005 30,00,000 06 23/09/2005 7,00,000 2.12.7 It is also observed that on April 7, 2005 Galaxy has debited the ledger account of Amrut securities by Rs 23, 56,414.74 and credited the same amount in the account of Darshit Patel. Galaxy could not give any reason for the same. Further, on September 28, 2005 the ledger account of Rite deal was debited by Rs.1, 80, 000 and the same was credited to Anil Gandhi Trading account with out any authority from the client. The above are in violation of B (6) of Code of conduct prescribed as per Regulation 7of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
No Tripartite Agreement 2.12.8 As per SEBI Circular SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004, a member of a Stock Exchange has to enter into a tripartite agreement with the clients (coming through sub-broker) and sub-broker. It is observed that Galaxy has not entered into tripartite agreement with any of the client trading through its sub-brokers. It is also observed that Galaxy has not maintained ledger of such clients. This is in violation of SEBI Circular SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004.
Trading Terminals:
2.12.9 As per SEBI Circular SMDRP/POLICY/CIR -49/2001 dated October 22, 2001 trading terminals can be located only at the registered office, branch offices and their registered sub-brokers' offices of the broker. It is observed that Galaxy has allotted trading terminals at Jamnagar which is neither its branch office nor its registered sub-broker's office. This is in violation of SEBI Circular SMDRP/POLICY/CIR-49/2001 dated October 22, 2001.
Un-Registered Remisiers:
2.12.10 Galaxy was found soliciting business from 20 un-registered Remisiers. This is in violation of the bye laws of the stock exchange and there in contravention of the Code of conduct prescribed for stock brokers as Schedule II Clause A (5) read with Regulation 7of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
Dealing with Un-Registered Sub-Brokers:
2.12.11 It was observed that Galaxy is dealing on behalf of M/s Vishvas Securities Limited (Member NSE and OTCEI) and Narendra Ganatra who in turn soliciting their own clientele business .DP account of M/s Vishvas Securities and Narendra Ganatra reveal that they are dealing on behalf of their clients in BSE through M/s Galaxy Broking as a sub-broker. This is in violation of Regulation 18B of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
Dealing In Cash:
2.12.12 It was observed that Galaxy has dealt in cash with its clients. Instances are placed as per Table 8.
Table 8: Details of Cash dealings S. No. Date Name of the client Received Paid
1. 05/01/2005 Narendra P Ganatra 1,50,000
2. 18/02/2005 Atul Chokshi 1,40,000
3. 30/03/2005 Pankaj Ashar 2,00,000 Investment
4. 30/03/2005 Amrut Securities 22,50,000
5. 31/03/2005 Chintamani Share 33,005
6. 15/04/2005 Jatin M Shah 1,80,000
7. 02/05/2005 Piyush Shah 6,00,000
8. 05/05/2005 Piyush Shah 2,00,000
9. 01/07/2005 Shailesh Ved 1,35,000
10. 14/07/2005 Sarang Bhagwanbha 10,00,000
11. 20/07/2005 Mukesh Chokshi 1,50,000
12. 10/08/2005 Piyush Shah 5,00,000
13. 17/08/2005 Piyush Shah 3,00,000 2.12.13 It is also observed that Galaxy has paid Rs 9, 50,000 in cash towards Medical Expenses of Shri Amrutlal Jivandas Gandhi. Upon discussion, Galaxy could not give satisfactory reply for the same. This is in violation of SEBI Circular No. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003.
Reports from BSE 2.13 The BSE had forwarded reports of trading by Galaxy in the shares of IFSL and Prraneta Industries and these reports also add up to the gravity of market misconduct of Galaxy:
2.13.1 In case of Prraneta Industries ,all first trades of Galaxy on behalf of Girdharbhai Vagadia were executed at a price higher by 2 % or more than its previous closing price, which established a new price. Although there were other market participants, the orders (buy or sell) resulting in the first trades, were mainly placed by Galaxy dealing on behalf of Girdharbhai Vaghadia Group. 39 trades executed at a price higher by Re. 1.00 or more than the previous traded price by Galaxy on behalf of its client Girdharbhai Vaghadia. Galaxy exec uted four o rders resulting in multiple trades and influencing the price by Re. 0.50 or more .
Galaxy also executed 31 trades at a price lower by Re. 1.00 or more than the previous traded price. Galaxy Broking executed all these trades on behalf of Girdharbhai Vaghadia.
2.13.2 In case of IFSL Galaxy appeared as a buyer / seller in more than 5 instances of incremental trades. Galaxy appeared as a buyer / seller in more than 10 instances of price influencing trades.
2.14 Action taken by BSE 2.14.1 Suspended Galaxy from tradin g for a period of three trading days with effect from. December 29, 2005 (Thursday) till January 02, 2006 (Monday).Prohibited Galaxy from trading in securities in 'Z', 'T' & 'TS' group for a period of three months effective from January 03, 2006 to April 02, 2006. The said prohibition shall be reviewed by the Surveillance Committee after three months. Further a penalty of Rs. 1, 00,000/-is also imposed on the Galaxy.
Conclusion 2.15 Galaxy has played a major role in generating artificial volumes and rise in the prices of large number of penny stocks. In two scrips viz Swan Mills Ltd and Wellworth Overseas, Galaxy had accounted for more then a third of the total turnover at BSE during the inspection period. The burgeoning volumes created through the artifice of a web of off market/market transfers and trading between a common set of interconnected clients, some of whom have also been funded by allowing them to maintain a large debit balances, and the tell-tale strands of inter-locking deals intermediate d by the broker speak volumes about the penny stock manipulation in the most brazen way, thereby vitiating the market. Generation of this large volume, through artificial demand and supply has also helped in ramping up prices of companies which otherwise had lackluster performance which did not justify the spurt in share prices. The promoters of these companies offloaded their shareholding at higher prices, a fact which has also been brought out in the order of SEBI in the cases of Mega Corporation and Karuna Cables.
In doing so, Galaxy has violated the following:-
a. Regulation 4 (2) (a) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
b. Regulation 18B, A (2), (3), (4), and (5 ), B (6) of Code of conduct prescribed as per Regulation 7of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.
c. SEBI Circular No SEBI/MRD/SE/Cir-15/2004 dated March 19, 2004 read with SEBI/MRD/SE/SU/Cir-16/04 dated March 31, 2004.
d. SEBI Circular No. SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003.
e. SEBI Circular SMDRP/POLICY/CIR-49/2001 dated October 22, 2001.
f. SEBI Circular SEBI/MIRSD/DPS-1/Cir-31/2004 dated August 26, 2004.
g. Clause 5 of SEBI (Securities Lending Scheme) 1997.
2.16 The details as set out above in all its starkness highlight the most unedifying role of Galaxy in creating false market in the shares of penny stocks and inveigling investors to trade in these stocks . Naturally, there is an immediate and imperative need not to allow such pernicious skullduggery to go unchecked, which would inflict a further, greater harm to the integrity of the market. In view of the above I am satisfied that pending inquiry by SEBI, it is necessary to issue an order against Galaxy and all the concerned entities under Section 11 (4) (b) read with Section 11 (1) under 11B of the SEBI Act in order to protect the interests of the investors and also the integrity of the securities market.
3. Order
3.1 On a conspectus of the total trades executed by the clients of Galaxy, I find that most of the clients dealing through Galaxy are inter-connected and mainly dealing in penny stocks. Moreover, the suspension of Galaxy by BSE for three days starting from December 29, 2005 to January 02, 2006 besides reinforcing the perspicuous analysis as detailed above, serves as an early warning signal to the clients of Galaxy.
3.2 Therefore, in exercise of the powers delegated to me by the SEBI Board in terms of Section 19 of the Securities and Exchange Board of India Act 1992 read with Section 11(1), 11B and 11(4) (b), pending inquiry and passing of final order, I hereby issue the following directions, by way of ad interim, ex-parte order, and suspend the certificate of registration of M/s Galaxy Broking Limited, Member BSE (SEBI Registration No. INB0108827390) and shall not buy, sell or deal in securities, in any manner, either directly or indirectly, till further directions in this regard .
3.3 That the clients viz., Anil Gandhi, Priti Anil Gandhi, Amrut Securities, Deepak Ashar, Manish Ashar, Chintamani Share and Broking Ltd., Sudha Amrutlal Gandhi, Pooja Anil Gandhi, Amrutlal Jivandas Gandhi, IFSL, Cardiod Marketing, Chirag Shah, Girdharbhai Vagadia, Suresh Pukhraj Jain , Darshit Patel, Dilip Kumar Adukia, Vintel Securities , Troop Track Electrodes and Rational Finvest are hereby directed not to buy, sell or deal in securities of companies indicated against their names in Table 4 above, directly or indirectly, till further directions in this regard.
3.4 The Depositories shall not give effect to any transfer of shares of the companies listed as per Table 4 above, lying in the beneficial owner accounts of clients mentioned in Para 3.3 above.
3.5 All the above directions shall take effect immediately and shall be in force until further orders.
3.6 Further, the entities against whom this direction is issued may file their objections, if any, to this order within 15 days from the date of this order and, if they so desire, avail themselves of an opportunity of personal hearing at the Securities and Exchange Board of India, Head Office, First Floor, Mittal Court B wing, Nariman Point, Mumbai 400 021 on a date and at a time to be fixed on a specific request, to be received in this behalf from the entities within 15 days from the date of this order.