SECURITIES APPELLATE TRIBUNAL
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(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.
1.2 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 deviant from the general trend of deliveries was found 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 also found that Junior Nifty (based on Mid-Cap Stocks) had showed an increase of 15.80% whereas the price of HJIL had showed an increase of 69% during the same period. It was also seen that approximately 70% of trades were concentrated amongst select brokers. Therefore, the trading in the scrip of HJIL was found to be irregular and manipulative. INVESTIGATIONS were undertaken into this and it was found that a particular set of entities had created artificial market in the scrip of HJIL and artificially increased its price.
1.3 INVESTIGATIONS had revealed that Empire group was in the business of financing and that it had invested its surplus funds in the stock market operations. Empire Group was found to have dealt in the names of the following entities :
All the aforesaid firms are the group companies of Empire Group. Keith Hallis is a Finance Executive of the entire group. As stated by Keith Hallis during the investigation, the group invested its surplus fund in the stock market through its in-house agent Farokh Pavri.
1.4 INVESTIGATIONS brought out that modus operandi followed by the operator was that financier (Empire Group in this case) 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. The financier would receive the money later from the exchange on pay out. The seller (borrower of the fund) 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).
1.5 INVESTIGATIONS brought out 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 first sold the shares of HJIL in the market (through the exchange system) and borrower of the funds 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 sold these shares to the financiers on spot basis. 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.
1.6 Empire group was found to have created artificial volumes through circular trading and they were also found to have put non-genuine & fictitious trades in the system. By resorting to putting buy orders at successively higher rates, price of the scrip of HJIL was artificially raised to Rs.304/-. It was observed that M/s Gazi Securities, Vinayak Investment, etc. were the persons who had sold the shares to Empire Group and then indulged in the circular trade with the financiers with a view to create artificial market and artificially increase the price of scrip of HJIl. Empire Group was thus found to have aided, assisted and abetted Shri Munir Gazi and Vinayak Investment in price manipulations through creation of artificial market and circular, fictitious & non genuine trades. It was also noticed that Mr. Gazi had later failed to pay for his purchases and then put the settlement system of the exchange to risk. As stated above, each trade at the exchange is guaranteed and in the event of buyer/its broker failing to meet their pay-in commitment, exchange make good to seller through Settlement Guarantee Fund. These entities were found to have misused exchange mechanism also. Mr. Gazi of Gazi Securities and Vinayak Investments in connivance with these financiers had put the settlement system of the exchange to risk. It appears that Empire Securities and Capital Ltd., Empire Industries, Empire International and Randil Trading, had prima facie violated provisions of Regulation 4 (a)(c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 read with Section 11B of SEBI Act in creating artificial market in the scrip of HJIL through circular, fictitious and non genuine trades and thus manipulated the price of the scrip.
(2.) A show cause notice was issued to Empire Securities and Capital Ltd, Empire Industries, Empire International and Randil Trading (hereinafter referred to as Empire Group) on 23rd September, 2002. Vide the show cause notice Empire Securities and Capital Ltd, Empire Industries, Empire International and Randil Trading were asked to show cause as to why suitable directions including directions prohibiting access to capital market and dealing in securities should not be issued under section 11B of the SEBI Act, 1992 read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 1995 for market manipulation and creation of artificial market.
No reply was received to the said show cause notice from Empire Securities and Capital Ltd, Empire Industries, Empire International and Randil Trading.
(3.) AN opportunity of hearing was granted to Empire Securities and Capital Ltd, Empire Industries, Empire International and Randil Trading on February 27, 2003 which was communicated vide our letter dated February 06, 2003. The Chief Executive of Empire Group attended the hearing before me on their behalf.;
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