SEBI Vs. DILIP K BHANDARI
LAWS(SB)-2003-10-20
SECURITIES APPELLATE TRIBUNAL
Decided on October 29,2003

Appellant
VERSUS
Respondents

JUDGEMENT

A.K Batra, Member - (1.) SHRI Dilip K. Bhandari 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 070160710. 1.1 An enquiry officer was appointed vide Order dated 18.02.02 for conducting enquiry into the affairs of SHRI Dilip K. Bhandari, member of MPSE, vis-a-vis his 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: JUDGEMENT_536_TLSB0_20030.htm * 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 Shri. Dilip K Bhandari : 3.1 M/s. Dilip Bhandari is a proprietary member of M. P. Stock Exchange. The member has traded in the scrip of Eonour Software Ltd. mainly in his own account. All of his transactions were square off in nature. 3.2 The trading details of the Shri Dilip Bhandari in the scrip are given as under: JUDGEMENT_536_TLSB0_20031.htm 3.3 Shri Dilip Bhandari was squaring off his positions at the end of each settlement, which was confirmed by him. During the course of investigation / enquiry, Shri Dilip Bhandari was asked to confirm as to whether he had indulged in similar kind of transactions in other scrips as well, to which he stated that volumes in other scrips were almost nil and therefore his trading was restricted to the scrip of Eonour Software Ltd. He also stated that he did jobbing in the scrip of Eonour because there were very few scrip to trade on the exchange. 3.4 During the course of enquiry, Shri Dilip Bhandari 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 MPSE were responsible for creating artificial market and jacking up the price. In reply to this, Shri Dilip Bhandari stated, "During late 1999 and early 2000, there was great software boom and if the price of the scrip was going up, I failed to notice that. I definitely thought that this is one of those software scrips. I never had any intention of jacking up the price of the scrip or do any trading which may appear circular in nature." He was asked to comment on the fact that almost 12% of the exchange volumes in the scrip were contributed by him and why it should not be inferred that he was responsible for registering artificial price/volume in the scrip and also creation of artificial volumes at the exchange. In reply to this, Shri Dilip Bhandari stated that there was hardly any scrip which was traded on the exchange on regular basis and when he got the opportunity, he did jobbing transactions in the scrip and earned approximately Rs. 300/- per settlement. 3.5 Shri Dilip Bhandari's trading in the scrip constituted approximately 12% of the trading volume at the exchange and most of his transactions were matching with other brokers who were also trading in the similar manner. It was also noted and confirmed by the member that the profit made by him was always in the range of Rs. 200/- to Rs. 300/- per settlement and the price of the scrip was continuously going up and touched Rs. 400/- in March 2000. This clearly indicate that the transactions were entered into at successive higher prices by Shri Dilip Bhandari alongwith other members of the exchange. The price rise in the scrip was too steep to get unnoticed especially when the members involved were dealing in the scrip without much profit or loss. This should have alarmed the member and he should have stopped dealing in the scrip immediately. It was also observed that in spite of very little profit the member has chosen to deal over a period of time. It is evident that the broker has failed to exercise due skill, care and diligence as regards his dealings in the scrip. It was seen that all the other brokers were squaring off their positions on the same day and they have also traded in a manner wherein no one has made profit and still managed to jack up the price of the scrip. From the above, it can be concluded that Shri Dilip Bhandari has failed to exercise due skill and care.
(3.) ENQUIRY REPORT AND RECOMMENDATION : 4.1 The enquiry officer, after conducting the enquiry as per the prescribed procedure submitted a report dated 08.08.03 and recommended a penalty of suspension of certificate of registration of the broker for a period of four months.;


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