SEBI Vs. RAMESH SHAH
LAWS(SB)-2003-7-21
SECURITIES APPELLATE TRIBUNAL
Decided on July 16,2003

Appellant
VERSUS
Respondents

JUDGEMENT

G.N.Bajpai, - (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), for the period from December 1996 to April 1997 in the National Stock Exchange, (NSE). 1.1 The company, HJIL came 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.
(2.) Investigations revealed that the shares of Hitechi Jewellery had 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 had 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 deviant from the general trend of deliveries was found to be 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 had touched a high of Rs.304 during Sett. No. 1997009. It was seen that Junior Nifty (based on Mid-Cap Stocks) had showed an increase of 15.80% whereas HJIL price had 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 the trading in HJIL at NSE were irregular and manipulative. Investigations were undertaken into this and it was found that a set of entities had created artificial market in the scrip of HJIL and artificially increased its price. Pursuant to the detailed investigations conducted by SEBI, a show cause notice was issued on Shri Ramesh Shah, Masitia Capital Services Ltd., Pina Steels Pvt. Ltd., Praj Finance Ltd., R.R. Investment, Deepal Corporation, Satuma Finvest and Krishna Steel in which they were alleged for the violation of Regulation 4 (a) (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. Further, vide the show cause notice, the aforesaid entities were asked to show cause as to why directions including prohibiting them from dealing in securities for a suitable period, in the interest of investors and capital market, should not be issued under Section 11 B of SEBI Act, 1992 read with Regulations 11 & 12 of Securities and Exchange Board of India (Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. No reply was received from any of them.
(3.) AN opportunity of hearing was granted to Shri Ramesh Shah, Masitia Capital Services Ltd., Pina Steels Pvt. Ltd., Praj Finance Ltd., R.R. Investment, Deepal Corporation, Satuma Finvest and Krishna Steel on 30th April 2003. No one represented any of the aforesaid entities / persons. I have carefully examined the findings of the investigation and I find that Shri Ramesh Shah was in the business of financing and had been investing his surplus funds in the stock market operations. Shri Ramesh Shah was found to have dealt in the scrip of HJIL through the following group entities. JUDGEMENT_436_TLSB0_20030.htm 4.1 Shri. Ramesh Shah himself is found to be the Director of Masitia Capital Services Ltd., Pina Steels Pvt. Ltd., Praj Finance Ltd. and also a partner in R. R. Investment. While the other firms namely Deepal Corporation, Satuma Finvest and Krishna Steel are found to be the partnership concerns of Ramesh Shah's father and uncle. As stated by the authorised representative of Ramesh Shah, some transactions of his had been routed through Deepal Corporation, Satuma Finvest and Krishna Steel due to scarcity of fund. 4.2 From the transaction details furnished by group companies of Ramesh Shah, namely Masitia Capital Services Ltd., Pina Steels Pvt. Ltd., Praj Finance Ltd., R. R. Investment, Deepal Corporation, Satuma Finvest and Krishna Steel, it is observed that they had transacted through the counters of KJMC, V- Care and Gazi Securities, all NSE members. Their trading particulars had further revealed that they had only sold HJIL shares through the counters of aforesaid brokers. Their total net sale during Sett. 1996036 to Sett. 1997011 was found to be 2,56,100 shares of HJIL, of which 15,100 shares had been sold through Gazi Securities. 88,000 shares were seen as sold through KJMC and 1,53,000 shares seen sold through V-care and 28,000 having sold through PRP Financial. The details of the shares that have been sold through the above mentioned brokers were as under : JUDGEMENT_436_TLSB0_20031.htm 4.4 Investigation was held into the source of delivery of such huge quantity of HJIL shares by the Ramesh Shah Group. Shri Ramesh Shah had stated that he had purchased the shares on a spot basis from various clients of Munir Gazi, Vinayak Investments and Samy Enterprises. It was found that the purchases from the various clients of Munir Gazi were done on the basis of instructions received from Shri Munir Gazi. However, the payments in respect of such purchases done on spot basis were found to have been made to Gazi Securities only. The details of purchases made on spot basis are as under : JUDGEMENT_436_TLSB0_20032.htm 4.5 From the above transactions, it is found that during Sett. No.1996036 to Sett. No. 1997011 (4/9/96 to 18/3/97), Ramesh Shah group had purchased total 2,87,600 shares from Munir Gazi group, Vinayak Investment and Samy Enterprises on spot basis and out of this, Ramesh Shah and his group had sold 2,84,100 shares of HJIL through various broker network namely PRP Financial, KJMC, V-care and Gazi Securities. The payments in respect of spot purchases from clients of Gazi were made directly to Gazi Securities. The understanding seems to be that the money so lent would be recovered by selling these shares which had been purchased in spot in the open market i.e. through the exchange system. It was also found that the purchase price was less that the price at which the shares had been sold. The difference in purchase and sale price was found to be on account of the interest on the funds lent in the form of purchase consideration for spot purchases. 4.6 Investigations had brought out that modus operandi which had been followed by the operator . The financier Shri Ramesh Shah and his 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 be given by the financier to the borrower as purchase consideration for shares bought on spot basis. The financier was found to have received the money from the exchange on pay out. The seller, i.e., borrower of the fund had 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 had been sold in the exchange. The difference in sale price and purchase price was found to be on account of the interest on the funds lent in the form of purchase consideration for spot purchases, which had varied with the number of days for which finance was used during the interregnum between day of sale and day of pay out. 4.7 I find that financing transactions were given colour of purchase and sale of shares and were put through the trading system of the exchange. It was seen that financiers had first sold the shares of HJIL in the market (through the exchange system) and borrower of the funds had purchased these shares by synchronizing the trade. Once the sale was completed at the exchange, the same set of persons who had purchased these shares earlier in the exchange through synchronized deal was found to have sold these shares to the financiers on spot basis. Each trade at the exchange was 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. 4.8 The price of the scrip of HJIL was found to have been artificially raised to Rs.304/by resorting to putting buy orders at successively higher rates. M/s Gazi Securities, Vinayak Investment, etc. were the persons who were found to have sold the shares to Shri Ramesh Shah group. Shri Ramesh Shah and his group were found to have indulged in circular trade with the financiers with a view to create artificial market thereby increasing the price of the scrip of HJIL. Shri Ramesh Shah and his group is thus found to have aided, assisted and abetted Shri Munir Gazi and Vinayak Investment in the price manipulations of HJIL through creation of artificial market and circular, fictitious & non genuine trades. It is also noticed that Mr. Gazi had later failed to pay for his purchases and then put the settlement system of the exchange to risk. 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 the seller through Settlement Guarantee Fund. These entities were found to have misused exchange mechanism also. I find that Mr. Gazi of Gazi Securities and Vinayak Investments in connivance with these financiers were found to have put the settlement system of the exchange to risk. Shri Ramesh Shah, Masitia Capital Services Ltd., Pina Steels Pvt. Ltd., Praj Finance Ltd., R.R. Investment, Deepal Corporation, Satuma Finvest and Krishna Steel were found to have violated provisions of Regulation 4 (a), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. 4.9 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 Ramesh Shah, Masitia Capital Services Ltd., Pina Steels Pvt. Ltd., Praj Finance Ltd., R.R. Investment, Deepal Corporation, Satuma Finvest and Krishna Steel 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.;


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