SEBI Vs. PRABODH ARTHA SANCHAY PVT LTD
SECURITIES APPELLATE TRIBUNAL
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(1.) SEBI had conducted investigations into the dealings in the shares of Cyber Space Ltd. for alleged market manipulation. On analysis of the transaction pattern, a list of 26 entities has been named as related parties acting in concert with the promoters of Cyberspace Ltd. (CCL). Prabodh Artha Sanchay Pvt. Ltd. is one of them. In the investigation report submitted by BSE it has been stated that M/s Prabodh Artha Sanchay Pvt. Ltd. had contributed 0.34% to the gross purchases and 5.99% to the gross sales of the scrip during the period of the report. The investigations have revealed that transactions have been done by M/s Prabodh Artha Sanchay Pvt. Ltd. in extremely large quantities in the scrip of Cyberspace Ltd. The fact that M/s PAS have constantly bought and sold shares on a daily basis without holding the same makes it clear that their dealings were not in the nature of investment. M/s PAS had contributed more than 10% of the daily volume in the scrip on 57 out of 75 days on which they had sold the shares in the scrip and contributed 10% or more of the daily volume in 34 out of 60 days on which they purchased the shares on the Exchanges. Apart from the trades on the Exchanges, M/s PAS had also purchased shares directly from the front companies of the promoter of CCL in off market deals.
1.1. It was found in the course of investigations that at BSE, payments of M/s PAS at times had also not been made before the pay-ins for the purchases made through CCL. The investigations further reported that M/s PAS was acting in concert with Shri Arvind Johari to support the price of the scrip and create an artificial market in the scrip.
(2.) A show cause notice was issued to M/s PAS vide letter no:CMM/8211/2002 dated May 13, 2002 asking M/s PAS to explain why suitable direction under Regulation 11 of SEBI (FUTP) Regulations 1995 read with Section 11 and 11B of SEBI Act 1992 including a direction to prohibit them from dealing in securities for a particular duration should not be passed against them.
M/s PAS sent a reply to the show cause notice on 09.08.2002 wherein they denied all the allegations made out in the Show Cause Notice stating that the same was based on insufficient data / information or misinterpretation thereof. M/s PAS stated that the findings of SEBI investigation were in the nature of general assumptions "founded on bias, on part of the Exchanges like BSE". According to M/s PAS, theirs is a group mainly working for creation of wealth for social cause for which money is generated from various business like multicolour printing, manufacturing of special purpose machines, real estate and investment and trading in shares and stocks.
3.1. M/s PAS stated that the BSE investigation report had erroneously included their name in the Category of related parties of CCL. The submission of M/s PAS is that they are just the client of Century Consultant operating through them on the terminals of the Exchanges. M/s PAS also said that they were never associated with Century and had absolutely no relationship with Century other than that of a client. Nor are they associates of Century since they do not in any way fall within the circumference of the word 'associate'.
3.2. It is the case of M/s PAS that they are an investor company which undertakes share market activities like arbitrage between different stock exchanges, jobbing, buying and selling and trading in different shares. M/s PAS has also stated to have got a large turnover in share markets although they work on smaller margins and by dealing in larger volumes, they earn profits with lesser risks. M/s PAS have stated that they had traded in Cyberspace scrip since the same was known to be the upcoming company in Information Technology and also because the company had evolved joint projects with UP government, which declared that the policy of the government was to promote information technology in a big way. M/s PAS had started investing or trading in the scrip of M/s Cyberspace from November 2000. M/s PAS had also stated that in the year 2001 they had a turnover of about 1765 crores and had traded in a variety of scrips other than Cyberspace and the total turnover in Cyberspace was 61 crores i.e. 3.45% of their total turnover.
3.3. According to M/s PAS, they had been trading on short term basis for the purpose of investment and doing arbitrage business for small gains. Hence, they were buying and selling shares on a daily basis and do not have any motives other than earning legitimate profit. Therefore, M/s PAS stated that it is incorrect to allege that they were acting in concert with Johari to support the price and to create an artificial market in the scrip.
3.4. As regards the trade in the scrip of Cyberspace it is stated by M/s PAS that their share in the total volume of Cyberspace trade is just around 5.8 to 12.1 percent of the total traded turnover during 4 to 5 months of Cyberspace trading. It is the case of M/s PAS that in a computerised environment they are only distant investors whose orders were put through brokers' terminals and the shares could be purchased by anybody. Their volumes, M/s PAS said, are though sizable never mighty enough to influence the price of market sentiment. M/s PAS submitted that they were not aware of the buyers of the shares they sold and hence not a party to any irregularity by anybody and they were only victims of the non-payment by such buyers.
3.5. M/s PAS have further submitted that on an analysis of the delivery order over a period of four months against their sale they have found that their deliveries have gone to 32 to 35 different trading members and hence it is incorrect to say that they were working in concert with the Joharis. According to them, the prices of technology shares were unpredictable during December 2000 and first three months of 2001 and so was that of Cyberspace scrip. The prices were a bit steady in the month of January - February and had taken a dip after the buying broker defaulted on his payment in the first half of March 2001. According to M/s PAS, their trading in the scrip did not have any direction other than registering some profits over their purchases nor did it have any imposing volume to manipulate the price to suit somebody's intentions.
3.6. M/s PAS submitted that their purchases are regular market purchases done through Century Consultants as their NSE/BSE brokers. M/s PAS has been dealing in a variety of scrips like Global Tele, Himachal Futuristics, Hindustan Lever and Infosys through Century Consultants. M/s PAS submitted that they had regular contracts and bills for the Cyberspace deals from their brokers and they had also received delivery of quantities matching to purchases through the Depository Account of the brokers to show that most of their purchases are from markets only.
3.7. M/s PAS had admitted that 30% of their total purchases was done on spot basis which were purchased with the help of Mr. Ajay Gupta, an intermediary who worked as a liaisoning person who brought offers from sellers willing to sell at a small discount against spot payment. M/s PAS stated to have received the deliveries from the depository accounts of these parties and paid for the shares in their bank accounts only. According to M/s PAS, there had been no other payments or cases where they had not received deliveries / not backed by regular spot purchases. Such transactions were also completed within 48 hours as required under the law. M/s PAS also stated that there had been no unrelated payments or receipts amongst those five to six parties or Century and themselves. M/s PAS submitted that they were not aware of any employer / employee relationship between those 5 to 6 parties and Century Consultants. For M/s PAS, they were just clients with legitimate ownership and the desire to sell the scrip. It is their case that Century people cleverly kept this relationship under wraps and they were cheated into believing that such parties were independent businessman.
3.8. As regards the allegation of financing Century / Johari, M/s PAS stated that their transactions with Cyberspace do not reflect a constant, pre-decided, regular margin in between sale and purchase transactions and hence have been unduly accused of indulging in financing deal. According to them, theirs was only mere trading and arbitrage activity. It was stated that on most of the occasion they had bought Cyberspace shares on one exchange and have sold them on the other exchange; sometimes they had bought in a particularly rolling settlement, made payment to the broker, received delivery from the broker and then sold in subsequent settlement. Hence, it is stated by M/s PAS that their deals cannot be termed as financing and such allegation is without any cogent reason.
3.9. M/s PAS also submitted that they had never made payments to Century Consultants apart from regular market purchases and there is no basic document or receipt or promissory note or any such entry in the books of accounts to label them as financier.
3.10. In view of the above submissions, M/s PAS submitted that there is no apparent relation between M/s PAS and Joharis. It was stated by M/s PAS that CBI, in August 2001 had itself taken a probe into Cyberspace transactions on the Exchanges. In the process, they had called for all technical data, inquired at the Exchange, interviewed related parties and took statements of all concerned. After six months of their enquiry, CBI in their letter to SEBI had said that it has no objection to Exchanges releasing pay out of M/s PAS since their finding was that M/s PAS is an innocent party. Hence M/s PAS prayed that they should not be regarded as an accomplice of Joharis in stock market manipulations.
(3.) AFTER considering the reply, SEBI had asked M/s PAS to appear for a personal hearing before me on September 16, 2002 at 12.30PM vide letter dated September 9, 2002. Shri Mohan Gujarati, Director, Shri Ram Dimble, and Smt.Nalini Gujarati, directors of M/s PAS had appeared before me on the scheduled date and reiterated the submissions made in their reply dated 09.08.2002.;
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