SEBI Vs. M K SECURITIES LTD
SECURITIES APPELLATE TRIBUNAL
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(1.) 1. Investigations were conducted by SEBI in the scrip of M/s.Maruti Organics Ltd ( hereinafter referred to as MOL) into the alleged fraud and malpractices committed in the trades of MOL. Large purchase transactions had been placed with brokers in the said scrip across cities and the persons who had placed the order had absconded. The transactions largely took place on the 3rd and 4th of July, 1996 which were part of Settlement no.27 of NSE.
1.2 Investigations revealed that Shri Mohan Rao, of M K Securities Ltd a member of Hyderabad Stock Exchange and registered with SEBI as a stock broker (hereinafter referred to as MKSL) and associates ( M K & Co. & Sharat Investment) were major sellers in Settlement no.27 through three NSE brokers. Their transactions in Settlement No.27 are given below and these three members had accounted for 84% of net selling position in MOL.
1.3 MKSL, MK & Co. and B R Securities are the firms with whom Mr.Mohan Rao or his relatives are directors. Sharat Investment is a proprietorship firm of Shri Y Ravi Prasad, MKSL's another director. Investigations found that total net sale of this group through these 3 members were 3,89,400 (57% of the total sales).
1.4 Pursuant to the investigation, an Enquiry Officer was appointed under Regulation 28(1) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as the 'said Regulations'), to enquire into the alleged violations committed by MKSL. The Enquiry Officer conducted the enquiry in accordance with the provisions of the said Regulations and submitted his Report on 10.8.2001. The Enquiry Officer found that Shri Mohan Rao is the kingpin in organizing the fraudulent transactions of manipulated sales in the scrip of MOL and that the sales transactions had been manipulated by Shri Mohan Rao alongwith his associates as revealed through investigation conducted by SEBI. The Enquiry Officer also observed that the same was done with an object of manipulating the scrip of MOL and for creating an artificially high price in the scrip and that Shri Mohan Rao alongwith MKSL and associates perpetuated fraud on the investors by making an apparent show of artificial demand in the scrip of MOL. The Enquiry Officer also found that the fraud had been perpetrated with a view to induce innocent investors to make purchases in the scrip of MOL with the make belief that the scrip was worthy, whereas in reality it did not command any real value. Therefore, the Enquiry Officer held that Shri Mohan Rao and MKSL are guilty of fraud and that they are liable for a penalty of cancellation of registration of the stock broker viz.MKSL under Regulation 26(2)(ii) of the said Regulations.
(2.) 1 A show cause notice dated August 27, 2001 was issued to MKSL in terms of Regulation 29(1) of the said Regulations whereby it was communicated that the Enquiry Officer had found MKSL to be guilty of violating Clauses A(1 to 5) of Schedule II of Regulation 7 and Regulation 26(2)(ii) of the said Regulations. A copy of the Enquiry Report was also furnished to MKSL, alongwith the show cause notice. Vide the aforesaid notice, MKSL was asked to show cause as to why the penalty as recommended by the Enquiry Officer should not be imposed against it. It was given 21 days time for furnishing its reply.
A reply dated 16.5.2002 was furnished by MKSL to the said show cause notice stating that NSE had annulled the transactions relating to MOL and the same had been challenged by him by way of Writ Petitions before the High Court of Andhra Pradesh. A Division Bench of Andhra Pradesh High Court had held that there was no proper material for such annulment or to arrive at a finding that MKSL had manipulated the share price of MOL. However, the matter is referred to a full Bench in view of the special importance of the case. It was his objection that the matter would be subjudice and it shall not be appropriate for SEBI to take a decision till the High Court renders its final view.
3.2 In his reply, MKSL had stated that the investigation conducted by SEBI was done without intimation to him. It was further stated that the factual information collected from Telephone booth operators in Mumbai and Chennai has been relied on for the allegations leveled against him in the show cause notice. It has contended that the names of the persons and their description have not been mentioned in the show cause notice. It had also said that the Report on which the show cause notice is based, has not been furnished to him and that an opportunity of cross examination is necessary for a proper enquiry and adjudication of the issue. It was also contended that the show cause notice was a repetition of the Enquiry Report furnished by NSE before A P High Court and that there is no independent enquiry in the matter. It has also objected to the break-up of the number of clients and maintained that the clients are that of NSE Brokers and the availability / non-availability of these clients could not be a cause for suspending its membership. The extract of analysis of the telephone calls, according to MKSL is taken from the Enquiry Report of NSE which is the subject matter of the Writ before A P High Court. His objections are that :
i. the analysis based on information given by booth operators who are said to have called M/s.Yoha Securities Ltd to inquire about persons who had absconded without paying the STD bills, are far fetched and appears to be set up by M/s.Yoha Securities Ltd solely for the purpose of creating a base for getting out of the transaction which was resulting in a loss to them.
ii. the reason for non-appearance before the Enquiry Officer was that they did not get proper intimation about the date of hearing.
iii. the alleged deterioration of the financial position of the member is clearly incorrect, this allegation according to him was to ensure that his membership is cancelled.
iv. a copy of the investigation report was not furnished to him.
v. that the non-availability of the client cannot be a ground for cancellation of membership.
Therefore, he requested for a personal hearing in the matter and also provide an opportunity for him to examine the persons who had made statements against him, the telephone booth operators and the representatives of Ms.Yoha Securities Ltd and M/s.Somayajulu & Co. He wanted the venue for hearing to be kept at Hyderabad for his convenience.
(3.) 1 Subsequently, an opportunity of hearing was granted to MKSL on 18.12.2002 which was communicated to him vide our letter dated July 30, 2002. However, no one appeared on behalf of MKSL during such hearing.;
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