(1.) INVESTIGATIONS were conducted by SEBI into the alleged price manipulations and irregularities in the public issue of M/s Hitechi Jewellery Industries Ltd. (hereinafter referred to as HJIL), during the period from December 1996 to April 1997 in the National Stock Exchange, (NSE).
1.1 The company, HJIL had come out with a public issue of 23,33,700 equity shares of Rs.10 each for cash at par aggregating to Rs. 233.37 lacs. The issue had opened for subscription on 12th April 1994 and closed on 23rd April 1994. From the records the issue was shown to have been subscribed to the extent of 95.36% (22,25,580 equity shares). On application only Rs.1.25 was to be paid by the applicants as per the terms of the prospectus. Thus the total application money received was shown to be Rs. 27,81,975.
1.2 INVESTIGATIONS revealed that the shares of Hitechi Jewellery commenced trading at NSE on October 18, 1995 at Rs.174 with thin and sporadic volumes. The average daily volume of the scrip till first week of May' 96 was only 270 shares. The scrip, which was essentially illiquid, witnessed a surge in volumes during December 1996 - April 1997 especially in four settlements viz. Sett. Nos. 1996036, 1996041, 1996044 and 1996045 at NSE. Large delivery based trades during this period was also deviant from the general trend of deliveries associated with this scrip. It was observed that the trades were thin and volumes were poor on BSE during this period. The scrip which was quoting at Rs.150 during Sett. No. 1996044 moved to Rs.282 during Sett. No. 1997010 and touched a high of Rs.304 during Sett. No. 1997009. It was seen that Junior Nifty (based on Mid-Cap Stocks) showed an increase of 15.80% where as HJIL price showed an increase of 69% during the same period. It was also seen that approximately 70% of trades were concentrated with select brokers. On the basis of these, it appeared that trading at NSE were irregular and manipulative. INVESTIGATIONS were undertaken into this and it was observed that a set of entities had created artificial market in the scrip of HJIL and artificially increased its price.
(2.) A Show Cause Notice was issued by SEBI on September 27, 2002 to Shri Munir Gazi and Gazi Securities alleging them of having violated the provisions of Regulation 4 (a)(c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995.
A letter dated October 14, 2002 was received from Dr. Munir Gazi on behalf of Gazi Securities and Gazi Associate concerns asking for further time to file the reply to the show cause notice. Thereafter, a letter dated February 24, 2003 was received from G-Tech Info Training Ltd., (formerly the Gazi Securities Ltd.) signed by Munir Gazi. In the said letter he had denied any involvement in the price manipulation in the scrip of HJIL. He submitted that the transactions in the scrip were made by Gazi Securities Ltd. on behalf of their clients. It was also submitted that Gray Sky Equifin Pvt. Ltd., Khazana Investrade Pvt. Ltd., Numero Holding & Estate, Seawind Holding Pvt. Ltd., Shreshtha Leafin and Priority Finance Pvt. were the clients of Gazi Securities Ltd. and the transactions have been made on their behalf.
3.1 It also denied of having any association with the financing transaction put through the exchange as purchase and sale of shares of HJIL. It was stated that even without admitting, if it is assumed that clients of Gazi Securities and other parties referred in the show cause notice has done the financing transaction using the stock exchange mechanism, the transactions are only sale and purchase and that the same is not violative of law. It was also mentioned that the objectives of the transaction varies from person to person for eg. Investment, trading, speculation, financing, etc.
3.2 With respect to the nexus between Vinayak Investment an promoters of HJIL, Manish Radhanpura and Mayur Jewellers, it was submitted that they were not aware of the same and the same was not done in connivance with them. Therefore, they are alleged whether allegations were based on surmises and conjectures and without any proper evidence and is violative of natural justice and bad in law. Further, they denied the charges leveled against them in the show cause and submitted that all the trades effected by Gazi Securities Ltd. in the scrip of HJIL were genuine transactions entered on behalf of their clients which were supported by delivery and actual payments and done through the exchange mechanism.
3.3 An opportunity of hearing was granted to Shri Munir Gazi on April 30, 2003. Shri Munir Gazi had appeared and represented himself and as well as Gazi Securities / Gazi Associates Ltd. Although, it was submitted by them that they had entered into the deals without any intent for manipulation, no convincing argument was advanced to counter the allegations made in the show cause notice.
(3.) 0 I have examined the findings of the investigation, reply received and submissions made during the hearing. I have found that one of the person involved in price manipulation was Shri Munir Gazi who have dealt in the names of various entities detailed below, hereinafter referred to as 'Gazi group'
4.1 Mr. Munir Gazi was found to be the Managing Director of Gazi Securities Ltd. - NSE Member and Gazi Financial Services & Investment Ltd. - BSE Member. Apart from this, Gazi Capital Services, Gazi Financial Services, Gazi Consultancy Pvt. Ltd., Prof. Gazi Education Academy and Gazi Classes are the other associate concerns of Mr. Munir Gazi.
4.2 During the investigation, Shri Munir Gazi was found to have traded on behalf of various clients including Vinayak Investment, Associate Firms of Ramesh Shah, Farokh Pavri, Empire Group and Samy Enterprise, Gray Sky Equifin Pvt. Ltd., Khazana Investrade Pvt. Ltd., Numero Holding & Estate, Seawind Holding Pvt. Ltd., Shreshtha Leafin and Priority Finance Pvt. in HJIL shares. Also, it has been found that when the investigating authority tried to contact the clients Gray Sky Equifin Pvt. Ltd., Khazana Investrade Pvt. Ltd., Numero Holding & Estate, Seawind Holding Pvt. Ltd., Shreshtha Leafin and Priority Finance Pvt., these entities were not traceable and hence, they seem to be fictitious as the letters sent to these clients returned undelivered citing the reason that no such entity exist at the given address. Later, the copies of summons addressed to the aforesaid clients were given to Shri. Munir Gazi for the same to be forwarded to his respective clients. However, it was seen that Mr. Gazi neither was able to serve the summons nor he was able to produce his clients before the investigating authority.
4.3 Investigations revealed that the aforesaid clients had been introduced by Shailesh Shah, Joint Managing Director of Gazi Securities Ltd. who had left the organization after the default by Gazi Securities at NSE. It was further found that Mr. Munir Gazi, in his capacity as Proprietor of Gazi Classes had introduced the aforementioned clients while opening their Bank accounts at Development Credit Bank, Mumbai Main Branch. A scrutiny of accounts of these clients also showed that large number of credit/debit were from Gazi Securities Ltd. During the investigation the broker could not give any satisfactory reply to the queries raised by NSE as well as SEBI, especially the basic information regarding contact person on behalf of client, contract notes, client agreement, date of commencement of trading by the client, present status of the client, etc. Therefore, the aforesaid clients seems to be fictitious. Thus, the broker has been found to have traded on his own account in the names of aforementioned fictitious clients. The explanation given by Shri Gazi during the investigation that these clients were introduced by his erstwhile Joint Managing Director and him not knowing anything about them is not tenable.
4.4 Mr. Munir Gazi is found to have been asked repeatedly to furnish trading details of the clients such as Gray Sky, Khazana, Numero, Seawind, Shreshtha and Priority and also to produce them before the investigating authority. However, he neither furnished any of the trading particulars of these clients in HJIL scrip nor was he able to produce any of his clients.
4.5 According to the information gathered from the National Stock Exchange, the details of the secondary market transaction under taken by Gazi Securities in HJIL scrip during sett. No.1996036 to sett. No. 1997011 are as follows :
Thus, from the above, M/s Gazi Securities is found to have purchased 4,66,800 shares of HJIL for its clients including 2,06,300 shares in the names of Gray Sky, Khazana, Numero, Seawind, Shreshtha and Priority during the settlement no. 19960036 to Settlement No. 1997011. During the entire transaction, Vinayak Investment was found to be the major client of Gazi Securities. Mr. Manish Radhanpura who is a power of attorney holder of Vinayak Investment was introduced to Gazi Securities by Samir Zaveri of Samy Enterprises and they net purchased 2,32,700 shares of HJIL during the said period. Among the other clients, Samy Enterprises is found to be a proprietary concern of Samir Zaveri, Deepal Corporation, a proprietary concern of Ramesh Shah and Empire International to be a group company of Empire Group.
4.6 During the investigation, it was also observed that these fictitious six clients (Gray Sky, Khazana, Numero, Seawind, Shreshta and Priority) who had purchased 2,06,300 shares of HJIL from the stock market had sold part of these shares on spot basis to financiers (Shri RD Shah Group/ Empire Group, Shri Farokh Pavri, Shri Sameer Zaveri). However, the payment in respect to these sales was found to have being received by Gazi Securities. Shri Munir Gazi had claimed that this was on oral instruction of these clients. The details of spot transactions of Gazi Associates are as follows:
Thus during the entire transaction, these alleged clients of Gazi Securities (Gray Sky, Khazana, Numero, Seawind, Shreshtha and Priority) was found to have spot sold 1,45,100 shares of HJIL and the market had purchased 2,06,300 shares of HJIL through Gazi Securities. When probed about the payment received by Gazi Securities from R. D. Shah group, Pavri group, Empire group with respect to their purchases from various clients of Gazi Securities, Mr. Gazi had stated that since his clients were short of funds, he had directed them to borrow fund from R. D. Shah, Empire Group and Farokh Pavri as they were the known financiers in the market. Since last day of pay-in obligation had come, he (Mr. Gazi) had asked his clients to request their financiers to issue pay order directly in favour of Gazi Securities. Although, Mr. Gazi denied having any connection with these money lenders to finance its operation, he had stated that his role was only limited to help his defaulting clients to meet their pay in obligation by directing them to well known financiers in the market. When asked about the default at NSE in meeting the pay-in obligation by Gazi Securities towards the huge purchases by Vinayak Investment, Shreshta Investment and Priority Finance, Mr. Gazi had stated that his employee Mr. Shailesh Shah who was also a Jt. MD of Gazi Securities had wrongfully shown the credit entries in cash from Vinayak Investment towards their huge purchases without actual flow of fund in the account of Gazi Securities. Apart from this, Mr. Shailesh Shah had also transferred the sauda's on the names of Shreshta Investment and Priority Finance in order to safeguard his other client. Thus all these things had ultimately led to default by Gazi Securities at NSE.
4.7 The explanation given by Mr. Gazi who is a professional Chartered Accountant was not convincing as Mr. Gazi had not provided the basic details regarding these clients such as client agreement, name of the introducer, name of the contact person, date of commencement of business, name of the persons to whom the cheques / payment was made / received, and present whereabouts of these clients, etc. even when Mr. Gazi was the introducer to the bank account of these clients.
4.8 On a detailed examination of the transfer deeds and share certificates delivered during aforesaid period, it was revealed that 9,52,700 shares were delivered during aforesaid period out of which only 2152 number of share certificates were found to have been used for the purpose of delivery in this period and only 264 shares had been delivered once while the balance 1888 certificates were rotated time and again.
4.9 Investigations had brought out that financing transactions were put through the exchange as purchase and sale of shares. One group which is the borrower of funds (Vinayak Investment and Gazi Associates) had spot sold HJIL shares to get the finance and the other group which is financier group (Samy Enterprises, Empire Group, Farokh Pavri and RD Shah group) had lent the money under the garb of spot purchasing HJIL shares from borrower of funds. The understanding seems to be that the money would be recovered by the financier on selling the shares through the system of exchange, which would be purchased from the borrower in spot. Also, the financier and the brokers seems to have agreed to first sell the shares through his broker and that on the basis of sale contract note, the spot purchase price would be arrived at by deducting the requisite interest portion in respect of the shares already sold by the financier. By adopting this method, the borrower would get the immediate finance against spot sale of his shares and the financier would recover his dues through NSE pay out at the later date. The borrower was found to have received funds till pay in date from the financier and that the delivery of shares to the financier was made so that he can also meet his delivery obligation at the exchange. This arrangement also gave additional security to financier till pay out. To gain the confidence of the financiers, the first tranche of shares were found to have been transferred on their names by these borrowers. For the entire transaction, the interest rate of approx. 24% per annum was agreed upon between the borrowers and financiers. Shri Samir Zaveri who himself is a financier had stated that he was approached by Ashwin Shah of Vinayak Investment with the investment scheme offering 2.5-3% return on his investment.
4.10 Investigations had brought out the modus operandi of how financing transactions had been put in the system giving illusion of genuine trading at the exchange. Financiers (Pavri group, RD Shah group, Sameer Zaveri, Empire group) would first sell the shares of HJIL in the market and then once the sale is executed at the exchange, these shares would be purchased on spot basis from the borrowers to meet delivery obligations at the exchange. The funds were found to have been given by the financier to the borrower as purchase consideration for shares bought on spot basis on the day of sale while the financier had received back the money from the exchange on pay out. The seller (borrower of the fund) who had purchased shares by synchronizing the trade was found to have brought in the money at the time of pay in. It was observed that the purchase price (spot price) was less than the price at which the shares were sold in the exchange. This difference in sale price and purchase price is found to be on account of the interest on the funds lent (in the form of purchase consideration for spot purchases), which varied with number of days for which finance was used (interregnum between day of sale and day of pay out). Each trade at the exchange is guaranteed and in the event of buyer/its broker fails to meet their pay-in commitment, exchange make good to seller through Settlement Guarantee Fund. The financier was having the security of shares received by him from spot purchases till it got the payment from the exchange on pay out. The payment was ensured from the exchange on account of trade guarantee.
4.11 Thus, through circular trading in this manner, artificial volumes were found to have been created and non-genuine & fictitious trades were put in the system. By resorting to putting buy orders at successively higher rates, price of the scrip of HJIL was found to have been artificially raised to Rs.304/-. It was observed that M/s Gazi Securities, Vinayak Investment, etc. were the borrowers of funds who had sold the shares to financiers (Pavri group, RD Shah group, Empire group and Sameer Zaveri). Gazi Securities and Shri Munir Gazi was therefore found to have acted in connivance with Vinayak Investments to have manipulated the price of shares of HJIL through creation of artificial market and circular, fictitious & non genuine trades with financiers. It was also found that Mr. Gazi/Gazi Securities later had failed to pay for purchase of shares of HJIL in the name of its various clients and had put the settlement system of the exchange to risk. As stated above, each trade at the exchange is guaranteed and in the event of buyer /its broker failing to meet their pay-in commitment, exchange would make good to seller through Settlement Guarantee Fund. These entities therefore have misused exchange mechanism also. From the above, Mr. Gazi of Gazi Securities was found to have defrauded the Clearing Corporation.
4.12 The nexus between Vinayak Investments and promoters of HJIL is evident from the following:
i. In the course of investigations of Dharmendra Panchal, Proprietor - Vinayak Investment, his family members stated that Devendra Patadia, Director - HJIL was business partner of Dharmendra Panchal.
ii. Manish Radhanpura who is a Power of Attorney holder of Vinayak Investment and who exercises all the powers to do the business including the power to issue cheques and operate the bank account on behalf of Vinayak Investment, is a cousin of Devendra Patadia (Son of Narendra Soni's sister). It was also stated by the staff of HJIL that Mr. Rajanpura is an employee of HJIL.
iii. Manish Radhanpura admitting dealings with Samir Zaveri, Farokh Pavri and Ramesh D. Shah. He stated that these shares which Vinayak Investment spot sold to aforementioned entities were received by VI from its various clients but failed furnish
iv. The details of these clients. This shows that these shares were received from other sources, which investigations showed were from promoters of HJIL.]
v. All the three entities namely HJIL, Vinayak Investment and Manish Radhanpura maintain their bank account at Bombay Mercantile Co-Operative Bank, Kemp's Corner Branch. The details of the same are as follows,
CA - 2478 - HJIL
CA - 5278 - Vinayak Investment
CC - 9414 - Manish Radhanpura
4.13 The statement of accounts showed many credit and debit entries among the accounts of HJIL, Vinayak Investment and Manish Radhanpura and also transfer of funds among these entities on the same day. This clearly indicates that the account of Manish Radhanpura had been used just as conduit for transferring the fund from Vinayak Investment to HJIL and vice versa in order to show that there was no relation between Vinayak Investment and HJIL. The money so received in the account of Vinayak Investment was then found to have been used to make the payments to the various brokers through whom they purchased HJIL shares. When questioned about the fund flow between Manish Radhanpura and HJIL, it was stated by the promoters of HJIL that the fund flow between them is part of their business transaction as Manish Radhanpura was a proprietor of Mayur Jewellers which supplied raw material to HJIL.
4.14 On an analysis of bank account of Mayur Jewellers, it was found that it always credited an amount with HJIL. This transfer was shown as advance towards order for goods manufactured by HJIL. But this was actually not so and merely a faï¿½ade for transfer of funds as all such orders were found to have been cancelled at some later date and funds being given earlier as advance were found to have received back from HJIL's account. This clearly indicates that all these account entries were created to hide the actual relation between HJIL and Vinayak Investment. It is further observed that all the fund transactions in respect of alleged business transactions between HJIL & Mayur Jewellers (business concern of Manish Radhanpura) were routed through the personal account of Manish Radhanpura only and not through the account of Mayur Jewellers.
4.15 Mr. Farokh Pavri also is found to have stated that when he went to the office of Mr. Munir Gazi to recover his money, he overheard Mr. Narendra Soni, Chairman, HJIL asking Mr. Munir Gazi to return his shares which he had given to him or to give him equivalent amount of money.
4.16 In light of the above, Shri Munir Gazi, Gazi Associates and Gazi Securities are found to have acted in connivance with Vinayak Investments group and promoters of HJIL thus violating provisions of Regulation 4 (a) (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 1995. The violations committed by Shri Gazi and his associate firm is detrimental to the safety and orderly development of the securities market and it erodes the confidence of investors. Therefore, the same warrants regulatory interference to prevent repetition of such violations by Shri Munir Gazi, Gazi Associates and Gazi Securities.
4.17 Therefore, in exercise of powers conferred upon me under Section 4(3) read with Section 11 B of SEBI Act as also Regulations 11 and 12 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995, I hereby direct Shri Munir Gazi, Gazi Associates and Gazi Securities not to access the capital markets or deal in securities for a period of two years. This order shall come into force with immediate effect.;