Securities Appellate Tribunal
Sebi vs Dagliya Consultants Pvt. Ltd. on 29 September, 2005
ORDER
G. Anantharaman, Member 1.0 BACK GROUND 1.1. M/s Dagliya Consultants Pvt Ltd (hereinafter referred to as the ' said broker') is a member of the Bangalore Stock Exchange (hereinafter referred to as 'BgSE') and is registered with the Securities and Exchange Board of India (hereinafter referred to as 'SEBI') as a Stock broker under Section 12 of SEBI Act, 1992 with Registration Number INB 081033533.
1.2. The scrip of Home Trade Ltd.(HTL) was listed at Pune Stock Exchange(PSE) and Bangalore Stock Exchange(BgSE). The scrip was listed at Pune Stock Exchange on November 15, 1999 at Rs 250/- and at BgSE on November 16, 1999 at Rs. 275. There was a very sharp price rise in the scrip both at PSE and BgSE. The prices reached Rs. 315 within two weeks i.e. by December 06, 1999. Thereafter, there has been a burgeoning increase in the prices of the scrip as under:
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Date Price in Rupees ---------------------------------------- December 30, 1999 525.00 January 31, 2000 735.00 March 31, 2000 809.00 April 31, 2000 825.25 ----------------------------------------
The maximum rise in the price of the scrip took place between 16th Nov 1999 and 31st March 2000 when the price moved from Rs. 275 to Rs. 815/-. Thereafter the price fell to Rs. 640/- in September 25, 2000. Subsequently, the face value of the shares changed to Rs. 2/- and the price went up from a level of Rs. 123/- on September 26, 2000 to Rs. 171/- during February 2001. The scrip continued to trade at around Rs. 150/- till September 14, 2001 and thereafter in the range of Rs. 170/- till January 2002.
1.3 Thus during the period of investigation i.e. November 1999 to March 2001 (hereinafter referred to as the period under consideration), three different periods of trading were identified as follows:
a. November 16, 1999 - March 31, 2000.
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Member Name Gross Gross Sales % to the total % to the total
Purchase buy volume at sell volume at
the exchange the exchange
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Sakurthi Finvest 46,800 48,200 24.50 25.24 Swagath Sec. 34,300 34,100 17.96 17.85 Dagaliya Consultants 26,700 29,500 13.98 15.45 ICDS Sec. 23,800 23,700 12.46 12.41 M's Sec. 16,800 16,200 8.80 8.48 First Sec. 15,800 15,700 8.27 8.22
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Total 1,64,200 1,67,400 85.97 87.65
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The above six brokers contributed more than 85% of the total volume in the scrip of HTL during the above period when there was a maximum rise in the price of the scrip from Rs. 275/- to Rs. 815/-.
b. April 01, 2000 - March 31, 2001
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Broker Buy Qty % buy to total Sell qty % Sell to total
vol. at exchange qty at exchange
Sales
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M's Securities 161940 18.89 163450 19.07 Sakurthi Finvest 137200 17.31 132950 16.85 Harikrishna Stocks 119450 15.09 122250 15.36 Swagath Securities 119350 14.71 116250 14.32 Gayathri Securities 99600 13.01 99800 13.03 Dagaliya Consultants 77600 9.24 77850 9.25 Eco Stock Wyscare 33000 4.07 33000 4.13 Uday Stocks 30500 4.11 31400 4.17 Marlecha Securities 23300 2.72 23300 2.72
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849840 99.15% 847620 98.89%
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During the above period, the above nine brokers contributed more than 99% trading volume in the scrip of HTL at BgSE.
c. April 01, 2001 - December 31, 2001 During the period, the above ten brokers contributed more than 98% of the trading volume in the scrip of HTL at BgSE.
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Broker Buy Qty % buy to total Sell qty % sell to total
vol. at qty at exchange
exchange
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Ganesh Stocks 48120 16.52 47370 16.26 Nereyeth Securities 46550 45950 15.77 Prasidhi Marketing 37850 13.00 37950 13.03 Indavra Securities 34950 12.00 34851 11.96 Hexagon Capital 34850 11.96 34801 11.94 M's Sec. 22900 7.86 23090 7.93 Dagaliya Consultants 18450 6.33 18700 6.42 Sakurthi Finvest 16985 5.83 14650 5.03 Gayathri Sec 14600 5.01 14600 5.01 Swagath Sec. 119000 4.08 11900 4.08
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Total 98.57 97.43
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1.4 Investigation was conducted by SEBI into the affairs of buying, selling and dealings in the scrip of HTL by the members of PSE and BgSE including the said broker under the provisions of SEBI Act and its regulations. Investigations revealed that a set of brokers at PSE and BgSE including the said broker were involved in creation of abnormally high volumes, circular trading, price manipulation and false markets thereby contravening the provisions of SEBI Act and regulations including SEBI (Stock Brokers and Sub-brokers) Regulations, 1992. Investigation brought out the role played by these brokers including the said broker in price rise during the period of investigation through a phalanx of clients introduced by the itinerant and trusted employees of HTL. It was also alleged that the broker failed to observe the 'Know Your Client' norms.
2.0 APPOINTMENT OF ENQUIRY OFFICER
2.1 On completion of investigations, enquiry officer was appointed vide order dated November 27, 2002 under Regulation 5(1) of SEBI (Procedure for Holding enquiry by enquiry officer and imposing penalty) Regulations, 2002 to enquire into the alleged irregular transactions of the broker in the scrip of HTL.
2.2 I have noted that a Show Cause Notice encompassing alleged violation of Clause A(2), A (3-4) and B(1)of Schedule II under Regulation 7 of SEBI(Stockc Brokers and Sub Brokers) Regulations 1992; Clauses (a), (b), and (c) of Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair trade Practices relating to Securities Market) Regulations 1995 was issued to the Broker under Regulation 6 (1) of the regulation, payment not being made and received by the clients, by the enquiry officer and that the broker submitted his reply and appeared for personal hearing. The enquiry officer conducted the enquiry in terms of the regulation and the broker was given a fair and reasonable opportunity to make his submissions.
2.3 After considering the reply and the submissions made, the Enquiry officer submitted his report dated October 20, 2004. The Enquiry Officer observed that the broker contributed significantly to the traded volumes during the period under consideration in the scrip of HTL for clients viz. Prakash Patil, Dharmesh Sheth, Axiz Financial Services and Ashok Taleshra from Mumbai, who were strangers and were introduced for the first time by Mr. Rajneesh an employee of HTL. Further, the broker did not assess their financial capabilities and networth while failing to exercise due diligence in admitting the clients. The Enquiry Officer recommended a minor penalty of 'suspension of Certificate of Registration for a period of two months under regulation 13(1) (a) (iv) of the regulation.
3.0 CONSIDERATION OF THE ENQUIRY REPORT 3.1 After considering the Enquiry report, a Show Cause notice dated October 29, 2004 under regulation 13(2) of the regulation was issued to the Broker enclosing therewith a copy of the Enquiry Report. The broker submitted his reply and comments on the enquiry report vide letter dated November 13, 2004 and further appeared for personal hearing on February 11, 2005 and made oral submissions.
3.2 The details of purchase and sale by the broker in the scrip of HTL are given as under:
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Period Gross Gross Sales % to the total % to the total sell
Purchases buy volume at volume at the
the Exchange Exchange
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16-11-99 to 31-3-00 26,700 29,500 13.98 15.45
1-4-00 to 31-3-01 77,600 77,850 9.24 9.25
1-4-01 to 31-12-01 18,450 18,700 6.33 6.42
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There was no dispute that the broker executed trades for the following clients in the scrip of HTL. 1) Prakesh Patil 2) Dharmesh Sheth 3) Axis Financial Services 4) Shri Ashok Taleshra.
The trading details of these clients for the period from Nov'99 to March'00 when the price rise was rapid are as under:
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Client Gross buy %gross buy to Gross sell % gross sell to
the total buy the total sell
position of the position of the
broker broker
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Prakash Patil 3,700 13.86 3,700 12.54
Dharmesh Sheth 5,200 19,48 5,700 19.32
Axis Financial 4,900 18.35 4,900 16.61
Ashok Taleshra 8,800 32.96 8,800 29.83
Own account 2,400 8.99 2,400 8.14
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The trading details of these clients for the period from April '00 to March'01 are as under:
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Client Gross buy Gross sell ----------------------------------------------- Prakash Patil 11,200 11,200 Dharmesh Sheth 14,300 14,000 Axis Financial 32,000 31,750 Ashok Taleshra 11,300 11,300 -----------------------------------------------
For Axis Financial Services, the broker had purchased 18,450 shares and sold 18,700 shares from April'01 to December'01.
3.3 From the statement dated 3.9.02 of Shri Avinash Dagliya; Director of the M/s Dagliya Consultants, it transpires that :
1) The clients called up from Mumbai.
2) They wanted to deal only in the scrip of HTL.
3) The clients were not known to the broker except for Shri Ashok Taleshra, who was the brother of his neighbour Shri Hemendra Taleshra. It was stated by the broker that Hemendra Taleshra was accompanied by Shri Rajneesh at his residence. It is relevant to note that Shri Rajneesh is the employee of HTL.
4) The broker obtained the client introduction forms after commencing the trades. 5) There was no evidence to suggest that the clients have traded in any other scrip. It was not disputed that all these clients were outstation clients (viz. Mumbai), and that they traded only in the scrip of HTL. On perusal of some of the KYC forms, subsequently obtained by the broker, lots of deficiencies were noticed in the said forms particularly, with regard to introduction and the networth of the clients. The introduction column was blank in all the forms. It, therefore, cannot be said that the broker had acted in good faith and with due diligence before the commencement of trading for these clients. The client's trades appear to be in excess of their financial capabilities. Obtaining client registration form, in itself, is not a sufficient proof to suggest that the broker had acted diligently. Before executing series of transactions for his clients, any prudent broker would have ascertained the credentials and antecedents including the circumstances of their coming to trade at BgSE and further would have assessed the financial capabilities for whom he is trading. Further, before giving exposure to the client, a broker is bound to ensure the capacity of his client through parameters such as financial networth etc. 3.4 In this connection, it would be relevant to refer to the order of the Hon'ble SAT in Madhukar Sheth v. SEBI (Appeal No. 46 of 2002). The following is extracted from the said order dated 18th September 2003:
"Before executing series of transactions for his client, any prudent broker would have gone a bit far to ascertain the goings around and also would have normally assessed the financial capability of the person for whom he was trading....
The Appellant's submission that he had taken client registration form, entered into agreement etc.by itself was not sufficient. Exercise of due diligence in ongoing transactions is a continuous process and it is not a one time measure to be adhered to while taking up the first transaction. The appellant's submission that it was B's dishonesty that created the problem did not absolve him of his failure to discharge his duties as a prudent broker....
...On the basis of the material available on record, it was difficult to conclude that the appellant had exercised due skill and care in dealing with 'B'. It was not that the appellant had carried on only few trade transactions for 'B' for a short period. He had transacted in huge volumes for 'B' and the association dated back to August 2000. If the appellant could not see any design or pattern in the transactions which 'B' was executing through the appellant during the period, then the appellant certainly deserved to be blamed for being indifferent and unconcerned and for that reason he was at fault for the failure to exercise due skill and diligence....
... It is true that a broker cannot act of his own against the instructions of the client. But no one can compel him to be a party to manipulate the market. No doubt a broker is supposed to protect the interest of his client, but he is also expected to protect the interest of the securities market in which he operates. It is his duty to ensure not to be a party to any market manipulation and that the market in which he operates is run on a health and non-manipulative basis."
3.5 From the materials on record, it emerges that all the clients were relatively new and hailed from far off place like Mumbai. Further, these clients traded significantly only in the scrip of HTL and contributed almost 14% of the volume traded at BgSE accompanied with a huge surge in price. Thus the trades executed by the broker for his clients are exorbitant and appear to be not innocuous transactions but one meant to rig the market as would be evident from the concentrated volume and sharp movement of price. It, therefore, cannot be said that the broker acted in good faith and with due diligence before considering of trading for these clients.
3.6 Considering the materiality of circumstances in their pith and essence and also in the context of what was happening in the market contemporaneously in relation to the scrip of HTL, the plea of innocence is not open to the broker, as he was fully aware of the goings on in the market and the manner in which the clients from a far away Mumbai were planted by the itinerant and the trusted employees of HTL in a manifest bid to jack up the price of HTL shares at Bangalore Stock Exchange. The sequence of material happenings as adumbrated supra clearly establishes that the broker was part of the tout ensemble operating in the market to create a make believe volume and equally ensnaring price rise in the scrip. The factual matrix of the present case has to be appraised in the back drop of what was happening in the market in its murky dynamics as captured above and not in isolation, in as much as the named brokers allowed themselves to be used as a cat's paw by the wily employees of HTL for obvious market manipulation and this thread runs through and underpins the entire gamut of transactions that took place in Bangalore Stock Exchange in the course of creating artificial market for HTL shares. In the brood of such material circumstances with their insightful portents as to the conduct of the market intermediaries playing the game at the behest of HTL employees, giving a short shrift to the time-tested and mandated requirements of KYC norms, due diligence, verification of financial capabilities and net worth of clients and a host of other reality checks meant to impart transparency and integrity to the market operations against any manipulative assemblage, the inexorable downside cannot be conjured away on the specious plea that the trade executed by the broker constituted a small proportion of the total trade. Any truncated view in such an extraordinary situation detracts a great deal from the gravity of irregularity, when the entire crafty and deceptive exercise of creating artificial market is seen as a whole, in all its manifestations, and with all the attendant consequences.
3.7 The trades by the broker constituted a significant percentage of the volumes at the exchange immediately after listing and during the period when there was unusual price rise in the scrip without change in economic fundamentals of the company.
The standard of proof required in a proceeding of this nature is at variance with the standard of proof required in criminal cases. It is sufficient if the preponderance of probabilities suggests towards the indulgence of the delinquent in the misconduct. The strict rules of Evidence Act and proof beyond reasonable doubt are not applicable to a proceeding of this nature. The Supreme Court's decision in Gulabchand v. Kudilal AIR, 1966, SC 1734 and the decision of the Special Court for trial of offences relating to transactions in securities in the matter of National Housing Bank v. ANZ Grindlays Bank, 1998 (2 ) LJ 153 is relied upon in this regard.
3.8 I note that the broker has executed off market trades in violation of SEBI circular No. SMDRP/POLICY/Cir-32/99 dated 14.09.1999 whereby all the trades shall be routed through the screen of the exchange in the price and order matching mechanism. The broker has admitted that the undermentioned off-market trades were done outside the normal exchange mechanism.
3.9 The broker vide his reply dated 13.11.2004 reiterated his earlier submissions before the Enquiry Officer as follows:
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Date Buyer Seller Qty
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18.01.00 Swagath Securities Ashok Kumar Khandelwal 100 31.01.00 Rajkamal Dagliya Swagath Securities 100 31.01.00 Ashok Kumar Khandelwal Swagath Securities 100 01.02.00 Swagath Securities Rajkamal Dagliya 100 01.02.00 Swagath Securities Ashok Kumar Khandelwal 100 07.02.00 Ashok Kumar Khandelwal Swagath Securities 100 07.02.00 Rajkamal Dagliya Swagath Securities 100 08.02.00 Swagath Securities Rajkamal Dagliya 100
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a) Broker's trades in the scrip of HTL amounts only 1% of his total business.
b) Broker has no proof to establish that the clients called up from Mumbai.
c) The broker did not suspect the client's intention in trading through him in Bangalore since HTL scrip was not listed in BSE and NSE and the volumes traded were negligible. Clients did not trade in other scrip due to the same reason that those other scrips were listed in BSE and NSE.
d) It is admitted that the broker did not know his clients except Sri Ashok Taleshra, who was personally known to the broker.
e) Broker denied the finding that there had been delay in obtaining client introduction forms in all cases, it was stated that delay occurred in case of only two clients and during the period of delay the broker did only minuscule transactions for the clients.
f) The broker denied that there were deficiencies in the KYC forms.
g) Broker admitted that 700 shares were transferred by off market trades and the trade was not reported to the exchange since broker considered the same as a small volume.
During the personal hearing held on 11-02-2005 the broker contended that the finding regarding deficiencies in the KYC forms are not correct. But when it was specifically pointed out to the broker that in KYC form columns provided for PAN, address of the client and column details of the introducer were left blank, the broker admitted that the findings are correct. The broker also admitted the finding in the Enquiry Report that he undertook prohibited transactions in the off market and further assured that he would comply with the regulations in future.
3.10 I note that while recommending the minor penalty of suspension of certificate of registration for a period of two months, the enquiry officer has considered the submissions made by the broker during the course of hearing. Therefore, I agree with the recommendations of the Enquiry Officer that the trades executed by the broker for the clients, who were introduced by an employee of HTL, resulted in abnormally high volumes of over 14% traded at BgSE during the period under consideration. This led to the creation of false market in the scrip of HTL coupled with surge in price of HTL. Further, failure of the broker to exercise due care and diligence in his dealings with the clients, who were introduced by the employees of HTL, allowed excessive speculation and creation of false market in the scrip of HTL. Thus broker has violated the provisions of Clause A(2), A (3-4), B(1) of Schedule II under Regulation 7 of SEBI(Stock Brokers and Sub Brokers) Regulations 1992; Clauses (a), (b), and (c) of Regulation 4 ofSEBI (Prohibition of Fraudulent and Unfair trade Practices relating to Securities Market) Regulations 1995, besides, SEBI circular No. SMDRP/POLICY/Cir-32/99 dated 14.09.1999 whereby all the trades shall be routed through the screen of the exchange in the price and order matching mechanism.
4.0 ORDER Now, therefore, in exercise of powers conferred vide Regulation 13(4) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby impose a minor penalty of suspension of certificate of registration for a period of 2 months in terms of Regulation 13(1)(a)(iv) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 on M/s Dagliya Consultants Pvt Ltd (INB081033533), member Bangalore Stock Exchange.
This order shall come into effect on expiry of 21 days from the date of the order.