(1.) S.No. 398 (E) 1. The Securities and Exchange Board of India (hereinafter referred to as the SEBI) conducted an investigation into the listing and price-rise of securities of M/s. Home Trade Limited (formerly M/s. Euro Asian Securities Limited) [for brevity's sake referred to as 'HTL']. SEBI also carried out the annual inspection of the Pune Stock Exchange, (hereinafter referred to as 'PSE') during March 2002, with particular reference to the surveillance mechanism of PSE and serious allegations against the Ex-President of PSE, Shri P.C Mutha. The aforesaid investigation and inspection conducted by SEBI revealed that the general functioning and administration of PSE, by the governing board which took over on September 29, 2001 was not carried out in accordance with the provisions the Securities Contracts (Regulation) Act, 1956 (for brevity's sake referred to as the Act) and the Rules made there under. It was also observed that the various circulars / directives/ instructions issued by SEBI under the provisions of the SEBI Act 1992, (hereinafter referred to as the SEBI Act) had not been complied with by the PSE. Further the inspection of the PSE Securities Limited (hereinafter referred to as PSESL) which is the subsidiary of PSE, was conducted in March 2002. The inspection revealed serious irregularities and interference of members of governing board of PSE in finding of PSESL.
(2.) The serious irregularities / lapses found during the said investigation and inspection are briefly mentioned below:
In the matter of the listing of the securities of Home Trade Ltd.
(i) The offer for sale of the shares of Euro Asian Securities Ltd. (name subsequently changed to Home Trade Ltd.) did not receive the minimum public subscription of 25% of post - issue paid up equity capital.
(ii) PSE failed to exercise due diligence in eliminating the applications made by the promoters Shri Sanjay Agarwal and Shri Subodh Bhandari in the public category in the issue of the offer of sale of the shares of HTL and instead continued to accept the holding by these promoters in the category of Indian Public when the same should have been shown under the category 'promoters holding'. Thus the consideration of the holdings of the promoters under the "public category' was erroneous.
(iii) In terms of Clause 40A of the Listing Agreement, the company is required to maintain on a continuous basis, the minimum level of non-promoters holding at the level of public shareholding, as required at the time of listing and in case, the same is lesser than the limit at the time of initial listing, the company is required to raise the same to the level of ten percent within one year of the issuance of the SEBI Circular dated May 2, 2001. The PSE failed to ensure the compliance of Clause 40A by HTL which had a public holding of around 3%.
Thus the listing permission granted by PSE was not in accordance with Securities Contract (Regulations) Act, its Rules and listing agreement in as much as the PSE granted permission to HTL for the listing of its shares on the exchange in spite of the irregularities, mentioned above.
Abnormal Price rise of securities of Home Trade Ltd.
(i) Investigations carried out with regard to the transactions on the PSE, prima-facie revealed that the trading in the scrip of HTL which was listed on PSE, started on November 15, 1999 at a rate of Rs. 250/- and rose to Rs. 800/- during March 2000 i.e. within in a period of 4 1/2 months, which indicated that the price rise was very abnormal. It was further noted that, the price of the scrip during the period December 10, 1999 to January 20, 2000 increased from Rs. 320/- to Rs. 720/- within in a span of 40 days i.e. 27 trading days in six settlements of PSE.
(ii) The order Log and Trade Log analysis for the period mentioned above revealed that certain brokers of PSE namely, Yatin D. Shah (Clg. No. 77), Shobha Investments ( Clg. No. 91), Amin Mulani & Co. ( Clg. No. 222) and Harish Kadam ( Clg. No. 247) had entered orders in the scrip of HTL on PSE with a view to establish a higher price for the scrip during the above period. The transactions by these brokers together constituted around 79- 80% of the total purchase as well as total sell transactions in the scrip in PSE, which indicated that only a few brokers mentioned above were actively transacting in the scrip of HTL on the PSE. Thus there was neither a significant number of market participants on the exchange nor was there the possibility of true discovery of price in the scrip.
(iii) Several instances of counter-party matching system were noticed between the above mentioned brokers. It was noted that, these brokers put buy orders at rates which were higher than the prevailing market price or last traded price in the scrip at the time of entering the orders. It was also seen that the price had moved up significantly with very low volumes.
(iv) Enquiries conducted with PSE revealed that PSE did not take any risk containment measures such as imposition of special margin, putting the scrip on spot basis, suspension of trading in the scrip, indefinite suspension to curb/check this artificial price rise, etc. PSE did not conduct any inspection of books of any of the aforesaid brokers, with a view to ascertain the genuineness of the transactions of the brokers and their clients in the scrip of HTL.
(i) The inspection team was informed that the elected of members of the council indulged in daily interference with the surveillance function, in violation of the SEBI Circular LKS/236/2000 dated May 25, 2000.
(ii) Trades in HTL on the specific day of inspection indicated the possibility of creation of artificial volumes and circular trading. No steps were taken by PSE to monitor the trading in the scrip or ascertain whether manipulation or circular trading had taken place. This is in violation of SEBI Circular LKS/236/2000 dated May 25, 2000.
(iii) There was no exclusive staff for surveillance since the surveillance staff was carrying out other activities also. This resulted in the Surveillance Department not having adequate time to carry on the surveillance activities. The same is in violation of SEBI Circular ref IEMI/LKS/MI/2990/95 dated August 8, 1995.
(iv) There were no restrictions for entry into the surveillance room. As a result everybody including brokers were being given easy access to the surveillance room.
(v) PSE did not provide training and certification programme to its surveillance staff in accordance with SEBI Circular ref. no. LKS/236/2000 dated May 25, 2000.
(vi) PSE had not complied with SEBI's circular dated 25.5.2000 regarding benchmarking and prioritisation of alerts generated under the Stock watch system.
(vii) No proper documentation of surveillance functions as required in accordance with SEBI's circular ref. no. LKS/236/2000 dated 25.5.2000 was done.
(viii) PSE had not defined any procedure to prevent leakage of information/misuse of information. Further, surveillance department did not monitor the trades related to specific instances like takeovers, insider trading, preferential offers, etc.
Other charges specifically observed in the inspection
(i) Margin money was collected by way of cheques. There was no documentation for cheque receipt, realization, etc. making it difficult to monitor the receipt and realization of the same. This also resulted in the delay in realisation of the margins. Further the exposures available to a broker were increased the moment the cheque was deposited in the exchange and not when it was realised, leading to a gap of two days and more if the cheque was dishonored. The said practice was contrary to their claim of having introduced direct debit of member accounts for margins vide circular dated September 20, 2002.
(ii) Maintenance of Base Minimum Capital was not as per SEBI SMD Circular no. 19 dated July 2,1999. The Fixed Deposits were not fully discharged. Instead a "no objection certificate" of the member was required before the same could be realised by the PSE. As a result the PSE only had a piece of paper, in the event of a member refusing to give the "no objection certificate".
(iii) PSE did not monitor the compliance by the various companies as regards the conditions for continual listing on account of the lack of staff.
(iv) There was sharing of staff with PSE Securities Ltd. (subsidiary of PSE). The staff was withdrawn from vital regulatory functions of PSE such as margin collection, monitoring of the compliance by the companies with the conditions of the listing agreement, inspection of members' books and the follow up action thereto. These staff of exchange were deployed for the work of PSESL. Thereby compromising with the regulatory role of the Stock Exchange.
(v) The scope and functions of the Disciplinary Action Committee had not been finalised. PSE had failed to implement the suggestions and observations made in the SEBI Inspection Reports of 1999-2000, which again were mentioned in the inspection report of 2000-2001. The PSE confirmed vide their letter dated January 9, 2001 that the practices followed at other Stock Exchanges would be considered and suitable decision would be taken in this regard. Despite the same, the did not take any action in this regard till date.
(vi) PSE had not maintained a separate account for the implementation of arbitration awards as required by SEBI circular on the grounds of seeking clarification from SEBI. This was a violation of SEBI Circular no. SMDRP/POLICY/CIR-22/99 dated July 1999 and SEBI Circular no. SMDRP/POLICY/CIR-06/2002 dated March 27, 2002
(vii) The defaulter's cards had not been auctioned off in the chronological order.
(viii) It was observed that some of the amendments in the articles, bye-laws and regulations as directed by SEBI had not been incorporated.
(ix) Profits on account of close outs were not credited to the Investors Protection Fund as stipulated in SEBI circulars. This was a violation of SEBI Circular no. SMDRP/POLICY/10/99 dated May 4, 1999.
(x) The SEBI restriction on short sales imposed pursuant to events in March 2001 were not implemented by PSE, in violation of SEBI Circular no. 13 dated March 07, 2001.
(xi) The post of the ED is vacant since 2001.
(xii) The reports of the inspected members had not been processed for follow up action citing lack of staff as the reason for the same. Action had not been taken against the members who had violated the rules and Bye-laws of PSE.
(xiii) One of the sub brokers (Sanjay Mantri Securities Pvt. Ltd.) of PSE Securities Limited was allowed to trade as sub broker between august 09, 2001 till October 22, 2001 without SEBI registration certificate which was subsequently obtained only on April, 15, 2002.
(xiv) No deposit / BMC (for brevity's sake referred to as BMC) was collected from sub-brokers for granting exposures till August 25, 2001.
(xv) Prior to August 25, 2001 there was no basis for allowing trading exposures amongst the sub brokers.
Allegations Against The Ex-President Shri P.C. Mutha:
(i) As regards the issue of orders regarding allowing exposure / trading limit and margins to different members, parity was not maintained in exposure/ margin collection. Different exposures were permitted by the said President to different brokers on an arbitrary basis.
(ii) Trading limits had been fixed by said President issuing a letter to the surveillance dept. , BMC of the members had been shown to have a capital of Rs. 1 lakh, though the said capital had not been actually brought by the member. The exposure limit of different members had been arbitrarily fixed.
(iii) Directions were given by the President to the effect that margin need not be collected from the members of the PSE Securities Limited. This exemption, upto Rs. 10,000/- towards the mark-to-market margin was granted vide note dated July 6, 2001.
For the allegations against the Ex-President mentioned above, a separate show cause notice was issued vide SEBI letter dated September 27, 2001, and the same is being processed separately.
MAJOR OBSERVATIONS OF THE INSPECTION OF PSE SECURITIES LTD, SUBSIDIARY OF PSE (hereinafter referred to as PSESL) :
(i) A resolution was passed to the effect that the retiring directors be not reappointed and the vacancies thus caused may be filled by the Board of Directors as they deem fit. The validity of the above resolution, in light of the provisions of the Companies Act, 1956 was found to be invalid. Further, it was resolved that " the directors of PSE and PSE Securities should be same ". this resolution was not implemented (nominated directors of PSE have not been nominated as directors of PSESL)
(ii) Several discrepancies were observed in the contract notes like not issuing them within the stipulated time, while some of the contract notes issued by PSESL showed a single trade twice and some of the contract notes showed the transactions in single scrip in two different names.
(iii) With respect to deposits/capital contribution, it was observed that one of the members Mr. A. P. Trimbake, sub-broker no. 86, had not paid up his entire contribution towards the capital and had paid up only Rs.1.00 lakh against Rs.2.00 lakhs. Further several Instances of cheques issued towards deposit being dishonored was observed for which the intimation was being received by PSESL after a period of one month or even more than a month, during which period the sub-brokers terminal were kept active.
(iv) With respect to, trading and settlement etc., it was observed that one of the sub-brokers (Sanjay Mantri Securities Pvt. Ltd.) of PSESL was not registered with the SEBI as a sub-broker between August 9, 2001 to October 22, 2001 but was allowed to trade as the sub-broker, although the certificate of registration was obtained on August 15, 2002. It was also observed that members registered with SEBI in corporate names were trading in their individual names. Dividends received on behalf of the clients amounting to Rs. 3328/- had not been passed on to the clients.
(v) Regarding activation of trading terminals the following violations were observed :
The sub-brokers terminals were activated before getting their SEBI registration, no Deposit/Base Minimum Capital was collected from Sub-Brokers for granting exposures till August 25, 2001. Prior to August 25, 2001, there was no basis for allowing trading exposures amongst the sub-brokers, two of the members, Jade Capital Services Pvt. Ltd. and S S Dhamankar have been trading inspite of not bringing in the BMC, the decision regarding reduction in Deposit/BMC was not being taken in any of the Board Meetings. PSESL had taken Security Deposit of Rs.50,000/- from a member who wanted to trade as sub-broker with it and the same was thereafter reduced to Rs.25,000/- for some of the members.
(vi) There was no formal system of changing the trading/exposure limits of the sub-brokers. The sub-brokers directly deposited the cheques for additional capital with the Surveillance Department for which no record was maintained.
(vii) It was observed that no margin was collected in case the margin obligation was upto Rs.1.00 lakhs. Margins were collected by way of cheques also. There are instances wherein cheques had been dishonored and the amount was yet to be collected.
(viii) No formal procedure was in place for intimation of the securities paid in before the settlement day to the surveillance department for release of the margins. The early pay-in statement was sent to the surveillance department on a plain paper without any authorization/signature of the concerned official.
(ix) In case of default where the obligation was between the sub-brokers themselves there was no system of auction. PSES followed a practice of closing out the deal between the sub-brokers at the highest price for the scrip as on the day of the auction, i.e. the settlement day. This process did not automatically penalize the defaulting sub-broker.
In view of the irregularities mentioned above, SEBI issued a notice dated August 22, 2002 under Section 11 of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as SCRA) to the Governing Board of the PSE (here after referred to as "the Governing Board") advising them to show cause as to why the Governing Board should not be superseded in view of the above mentioned instances of mismanagement and irregularities in the functioning of the exchange. The Governing Board was called upon to submit their reply to the show cause notice within 15 days from the date of the receipt of the notice and they were given an opportunity for personal hearing on September 14, 2002.
(3.) THE Governing Board vide its letters dated August 24, 2002 and September 2, 2002 sought time of one month to submit their reply and for appearing before the SEBI Chairman for a personal hearing. THEreupon SEBI, vide its letter dated September 3, 2002 granted extension of time upto September 11, 2002 for submitting the reply and also advised the governing board to be present for a personal hearing before the Chairman, SEBI on September 16, 2002.;