A.K Batra, Member -
(1.) SMT. Shefali Khajanchi is a member of Madhya Pradesh Stock Exchange (hereinafter referred to as MPSE) and registered with Securities and Exchange Board of India (hereinafter referred to as SEBI) vide registration no. INB 070161318.
1.1 An enquiry officer was appointed vide Order dated 18.02.02 for conducting enquiry into the affairs of Shefali Khajanchi, member of MPSE, vis-ï¿½-vis her dealings in the scrip of Eonour Software Ltd (hereinafter referred to as ESL) and possible violation of the provisions of the following :-
(a) Rules, Bye-laws and Regulations of Madhya Pradesh Stock Exchange.
(b) Provisions of the Securities and Exchange Board of India Act, 1992, the Securities and Exchange Board of India (Stock Brokers and sub Brokers) Regulations, 1992.
(c) Provisions of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade practices relating to Securities Market) Regulations, 1995.
(2.) Background and investigation by SEBI :
2.1 ESL was originally incorporated on May 06, 1992 in the name of Mikugura Software Limited with its registered office located in Indore, Madhya Pradesh. The main object of the company was to develop system software and application software. In January 1996, ESL came out with a public issue of 12,50,000 shares of Rs. 10/- each at a premium of Rs.20/- per share aggregating to Rs. 375 lac. As per the prospectus, the shares of Mikugura Software Ltd. were proposed to be listed at M. P. Stock Exchange (MPSE) and Ahmedabad Stock Exchange (ASE).
2.2 ESL was taken over by Shri R. Karthik from its previous promoters in the month of November 1999. Shri R. Karthik in terms of Regulation 10 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 made an open offer to the shareholders of ESL and paid Rs. 33/- per share for the fully paid up shares and Rs. 8.25 per share for the partly paid up shares of ESL. These were evident from the open offer document made in line with the provisions of SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997. The name of Mikugura Software Ltd, following the takeover, was changed to Eonour Software Ltd. The shares of ESL are listed on Ahmedabad Stock Exchange (ASE), Madras Stock Exchange (MSE), The Stock Exchange, Mumbai (BSE) and M. P. Stock Exchange, which is the regional exchange of ESL. Listing of the shares at MSE and BSE was done after the takeover by the new management. After the takeover, the registered office of ESL changed from Indore to Chennai.
2.3 The public holding in ESL excluding Other Body Corporates is approximately 6.3 lac shares constituting approximately 21% of the paid up capital of ESL. Further, out of total 1248 shareholders, only 4 shareholders were holding approximately 79% of the equity capital. This shows that the shares of company are in limited hands.
2.4 It was observed that 5 shareholders collectively were holding 26,12,700 shares constituting approximately 87% of the paid up share capital of ESL as on February 10, 2000. It was also observed that Shri Karthik R. the main promoter of the company was holding 22,44,200 shares of ESL constituting approximately 75% of the paid up capital of ESL.
2.5 A perusal of the trading details from December 01, 1999 to July 31, 2000, shows that no trading was reported at ASE during the said period. However at M. S. E., the scrip was listed on February 28, 2000 and the trading permission was granted on February 29, 2000. The first trade on the exchange was reported on March 06, 2000 at a price of Rs. 419/-. The total quantity traded during the period under investigation, at the exchange was only 1,500 shares and the highest price it touched at the exchange was Rs. 492/-. The scrip of ESL was not traded at NSE during the period June 2000 to December 2000.
2.6 Substantial quantity of shares were traded at Madhya Pradesh Stock Exchange during the period December 01, 1999 to March 14, 2000. After March 14, 2000 no trades were reported at the exchange. Incidentally, it is observed that the scrip was listed on the Stock Exchange, Mumbai, on March 13, 2000. From the price volume details as submitted by MPSE, it is observed that the price of the scrip, which was Rs. 31.50 on December 01, 1999 rose to Rs. 401/- on March 09, 2000. Prior to November 1999, the scrip of ESL was not actively traded and the scrip was considered highly illiquid. In the Madhya Pradesh Stock Exchange, prior to December 1999, the scrip was thinly traded and the price was in the range of Rs. 18/- to Rs. 30/- per share.
2.7 At The Stock Exchange, Mumbai the first trade was reported on June 12, 2000 (although listed on March 13,2000) and the price was Rs. 520/- which went up to Rs. 634.75 on July 07, 2000. It was noticed that the clients were connected to each other. It is observed that a total of 2,22,600 shares were traded on the exchange. The maximum quantity traded on the exchange on a particular day during the period was 11,700 shares on June 22, 2000. It was observed that the total purchases/quantity traded during the aforementioned period were 2,22,600 shares.
2.8 At M. P. Stock Exchange, a total of 2,47,100 shares were traded during the period December 01, 1999 to March 14, 2000. It was observed that trading in the scrip was concentrated among 7 brokers of the exchange who have traded in the scrip during the period December 1999 to March 2000 and their names alongwith their positions are as under:
* Sharad Bhandari has also traded in the scrip prior to December 1999.
2.9 It is observed from the trading details collected that all the trading done in the scrip during the aforementioned period has been contributed by the above mentioned brokers only. The scrip price had moved from Rs. 31/- on December 01, 1999 to Rs. 402/- on March 09, 2000. These brokers, without actually taking or giving delivery, have jacked up the price of the scrip at M. P. Stock Exchange. They have also reversed the position amongst themselves and indulged in rampant "Circular Trading" in the scrip so as to register artificial volumes and also to jack up the price of the scrip. The brokers have done the trades in their own account.
Role of Smt. Shefali Khajanchi:
3.1 Smt. Shefali Khajanchi is a proprietary member of M. P. Stock Exchange. Shri Ravindra Khajanchi is the husband of Smt. Shefali. Shri Ravindra Khajanchi is also the member of MPSE and gave statement on behalf of his wife. During the course of investigation, both the members had traded in the scrip of Eonour Software Ltd. mainly in their own accounts and have also done some transactions in the account of clients. However, more than 95% of the transactions in the scrip were done in their own accounts and were of square off in nature.
3.2 Trading details of Shaifali Khajanchi are as follows :
3.3 The trading details of Shri Ravindra Khajanchi are as follows:
3.4 Apart from clientele business which was negligible (given delivery/received delivery from clients), all the other transactions were in the nature of square off. Shri Ravindra Khajanchi stated that he had transacted mainly for earning jobbing income arising out of price difference. He had also transacted in the name of his wife and this was also for the same reason. He was then confronted by the fact that many of the transactions were matched with that of his wife's card,. Shri Khajanchi stated that active members at the exchange were very few and it was possible that the "Saudas" may match with that of his wife as well. He added that he had no intention on his part to match the transactions with Shaifali Khajanchi.
3.5 During the course of investigation, Shri Ravindra Khajanchi was asked that the price of the scrip had moved up from Rs. 31/ in December 1999 to Rs. 400/- in March 2000 and why it should not be inferred that he alongwith other members of the exchange were responsible for creating artificial market. In reply to this, Shri Khajanchi stated that during the period under consideration many of the software companies were performing well and prices of almost all the software companies were going up continuously. They therefore did not notice any abnormal price rise in this scrip.
3.6 Shri Ravindra Khajanchi further added that performance of the company for the quarter ended December 1999 was excellent and profits had gone up by approx. 500%. Shri Khajanchi was also asked to give the amount of profit of both the firms (memberships) while dealing in the scrip, to which he stated that the details of their profit/loss has already been submitted alongwith the trading details. It is observed from the records submitted by him that the quantum of profit most of the time was less than Rs. 1000/- per settlement and in some settlements they have also incurred losses. It is clear that the consideration element in such cases have been adjusted outside the scope of the books.
3.7 Shri Ravindra Khajanchi was also confronted on the fact that almost 50% of the transactions in the scrip during the period under consideration was contributed by him alongwith the trading of his wife. In the light of above, it was asked during course of enquiry as to why it should not be inferred that he had created artificial volumes in the scrip and had jacked up the price of the scrip. Shri Khajanchi stated that though he is giving statement on behalf of his wife as well, but he is not related to day to day trading done in his wife's card.
3.8 Shri Ravindra Khajanchi submitted that at the time of executing the orders in the scrip he was not aware about the trading volume of the exchange. He was asked to comment on the fact that very few brokers were trading in the scrip and they were responsible for creating artificial market and entering the transactions, which were circular in nature. In reply to this, Shri Khajanchi stated that at MPSE, for the last few years, the business was more or less square off in nature in all the scrips. Further, only 10-12 brokers of the exchange were active at the time of executing the transactions in this scrip. He stated that it may look circular to investigating team but it was very common for them.
3.9 Shefali Khajanchi's trading in this scrip contributed to 26.53% of the trading on the stock exchange and Shri Ravindra Khajanchi's trading in the scrip constituted approximately 23.05% of the trading volume at the exchange and they together contributed to approximately 50% of the total trading in the scrip of the exchange and most of his transactions were matching either amongst themselves or with Shri Mohan Malpani. It was also noted and confirmed by Ravindra Khajanchi that the profit made by him was always in the range of Rs. 200/- to Rs. 1000/- per settlement and in many of the settlement they have incurred losses. However, the price of the scrip was continuously going up and touched Rs. 400/- in March 2000.
(3.) ENQUIRY REPORT AND RECOMMENDATION :
4.1 The enquiry officer, after conducting the enquiry as per the prescribed procedure submitted a report dated 31.7.03 and recommended a penalty of suspension of certificate of registration of the broker for a period of six months.;