(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.
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.
A Show cause notice dated September 27, 2002 was issued on Vinayak Investments, Shri Dharmendra Panchal and Shri Manish Radhanpura whereby they were alleged with violation of provisions of Regulation 4(a),(c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. They were also asked to show cause as to why directions including those prohibiting them from accessing the capital market should not be issued against them under Section 11B of SEBI Act read with Regulations 11 & 12 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. No reply was received from them.
(2.) 1 An opportunity of hearing was granted to Vinayak Investments, Shri Dharmendra Panchal and Shri Manish Radhanpura along with other entities who were alleged to have been indulged in the manipulation in the scrip of HJIL on April 30, 2003. No one represented the aforesaid entity/persons. They denied the charges leveled against them.
Have examined the findings of the investigation as also the submissions made by the respective entity / persons. M/s Vinayak Investments (hereinafter referred to as 'Vinayak') which dealt in different names was found to Have been involved in price manipulation of the scrip of HJIL. The different entities through whom 'Vinayak' was acting Have been grouped below & basis of their grouping is also mentioned therewith :
Group Associates Basis of Grouping Vinayak Investments Main Firm Vaibhav Laxmi Investments Fund Obligation met by Vinayak Harshad Gosalia Transacted on behalf of Vinayak and fund obligation was met by Viinayak Sheela Gosalia
3.1 I find that Shri Dharmendra Panchal was a proprietor of Vinayak who had given the power of attorney to Shri Manish Radhanpura who was carrying out all the activities on behalf of Vinayak including signing of cheques. Shri Panchal was found to Have been not co-operative with investigation. Shri Manish Radhanpura has been found to be a cousin of Devendra Patadia, Director of HJIL. Also, the staff of HJIL had stated that Shri Manish Radhanpura was working at HJIL as a Manager, although, Mr. Radhanpura had denied having any connection with HJIL / its directors.
Vinayak, was found during the investigation, to Have resorted to trade in the name of Harshad Gosalia, Sheela Gosalia, Nikunj Shah, Mahesh Doshi with Global Securities and Shriram investments, apart from the trading in its own account through Gazi Securities Ltd. Shri Ashwin Shah was found to be the contact person for trading done in the name of Shriram Investment and Harshad Gosalia. Investigations revealed that Shri Shah used to place orders in respect of HJIL with the brokers namely Mukesh brokerage, Prudential Capital and Punit Capital. The payment obligation of these entities / persons were found to Have been met by Vinayak. These facts indicate that Vinayak was dealing in HJIL in its own name as well as in the names of Shriram Investment, Harshad Gosalia, Vaibhav Laxmi Investments and Global Securities.
On an analysis of the trading particulars furnished by various NSE brokers and their clients w.r.t. the transactions in HJIL during Settlement no. 1996036 to Settlement no. 1997011, it was found that Vinayak had traded directly through Gazi Securities and West End Investment and also had traded in the names of Mahesh Doshi, Harshad Gosalia, Sheela Gosalia, Shriram Investment and Global Securities through Mukesh Brokerage, Prudential Capital and Punit Capital.
The details of the transactions entered into by Vinayak are as follows :
Therefore, from the above it is clear that during the period of Settlement 1996036 to Settlement no. 1997011, Vinayak had a net purchase of 5,92,800 shares of HJIL. Shri Manish Radhanpura the power of attorney holder of Vinayak had stated that Vinayak had purchased and sold the shares of HJIL on behalf of different clients. However, during the investigation Shri Radhanpura was unable to give the name of any client. No details regarding such clients was furnished by Vinayak, inspite of repeatedly asking for such details by way of letters / summons.
Thus, there appears to be no explanation available with Shri Radhanpura or Vinayak as to why trading was done in different names such as Gosalia, Shriram Investment, etc. and why payment obligation had been met by Vinayak on their behalf.
On examining the transactions particulars of financiers - Samy Enterprises, RD Shah Group, Farokh Pavri Group and Empire Group, it was found that they had purchased HJIL shares from Vinayak in spot deals. It was also observed that HJIL shares were first sold in the market by these financiers through their brokers and thereafter deducting the appropriate interest portion, they had made the payment to Vinayak. The loan had been disbursed under the garb of spot purchases of HJIL shares from Vinayak. The details of the HJIL shares purchased in spot deals from Vinayak by various financiers in Settlement no. 1996036 to Settlement no. 1997011, is given below :
Therefore, Vinayak is found to Have sold 5,26,600 shares of HJIL in Off market deals and on the other hand purchased 5, 92,800 net shares of HJIL from the market through exchange mechanism.
Investigations had brought out that financing transactions were put through the exchange as purchase and sale of shares. One group which was the borrower of funds, Vinayak and Gazi Associates was found to Have sold HJIL shares in spot deals to get the finance and the other group which was the financier group, Samy Enterprises, Empire Group, Farokh Pavri and RD Shah group, was found to Have 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 the exchange which would be purchased from the borrower in spot. Also, the financier would sell the shares firstly through his broker and 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. In this manner, 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 a later date. The borrower received funds till pay in date from the financier and made the delivery of shares to the financier so that he can meet his delivery obligation at the exchange. This arrangement 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 in 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, although Samir Zaveri, a financier had stated that he had been approached by Ashwin Shah of Vinayak with the investment scheme giving 2.5-3% return on his investment.
Investigation brought out the modus operandi of how financing transactions were 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 given by the financier to the borrower as purchase consideration for shares bought on spot basis on the day of sale while the financier received back the money from the exchange on pay out. The seller (borrower of the fund) who purchased shares by synchronizing the trade 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 was 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 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.
By way of circular trading, artificial volumes were found to Have been created by Vinayak and non-genuine & fictitious trades were seen being put in the system. By resorting to putting buy orders at successively higher rates, the price of the scrip of HJIL was found to Have been artificially raised to Rs.304/-. M/s Gazi Securities, Vinayak, etc. were found to be the borrowers of funds who had sold the shares to financiers comprising of Pavri group, RD Shah group, Empire group and Sameer Zaveri. Therefore, Vinayak was found to Have acted in connivance with Gazi Securities and Shri Munir Gazi was found to Have manipulated the price of the shares of HJIL through creation of artificial market and also by way of circular, fictitious and non-genuine trades with financiers. Also, Shri Gazi and Vinayak was found to Have acted in connivance with the financiers to put the settlement system of exchange to risk.
3.12 The nexus between Vinayak Investments and promoters of HJIL is evident from the following:
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.
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.
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 Vinayak from its various clients but failed to furnish the details.
The details of these clients. This shows that these shares were received from other sources, which investigations showed were from promoters of HJIL.
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
3.13 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.
3.14 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.
3.15 Therefore, Vinayak Investments was found to Have acted in connivance with Gazi Securities 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 Vinayak, Shri Dharmendra Panchal, and Shri Manish Radhanpura are 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 Vinayak, Shri Dharmendra Panchal, and Shri Manish Radhanpura.
3.16 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), 1995, I hereby direct Vinayak Investments, Shri Dharmendra Panchal, and Shri Manish Radhanpura 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.