(1.) 0 Background
1.1 On observing sudden spurt in the trading volumes in the scrip of M/s Zodiac Clothing Company Ltd. (Zodiac) National Stock Exchange (NSE) conducted investigations into the trading in the scrip from July 05, 2000 to August 22, 2000 and submitted its report to SEBI on January 10, 2001. It was observed in the NSE report that M/s. Vivenasri Financial Services Ltd. was the major net seller and M/s. Harsh Pranav Securities Pvt. Ltd. and M/s. Newfin Financial Services Pvt. Ltd. were major net buyers during the said period. It was also observed that these clients were associated with one another.
1.2 NSE conducted another investigations into the trading in the scrip of Zodiac for the period October 25, 2000 to February 27, 2001. In its report submitted to SEBI on April 30, 2002 , NSE observed that the three clients M/s. Vivenasri Financial Services Ltd. (VFSL), M/s. Newfin Financial Services Pvt. Ltd. (NFSPL) and M/s. Harsh Pranav Securities Pvt. Ltd. (HPSPL) were the major traders in the scrip during the said period and they have executed structured deals and cross deals among themselves.
(2.) INVESTIGATION BY SEBI
2.1 In the light of the findings of the aforesaid investigations conducted by NSE, Securities And Exchange Board of India (hereinafter referred to as the SEBI) conducted its own investigation into the affairs relating to buying, selling and dealings in the shares of Zodiac for alleged market manipulation in the scrip during July 05, 2000 to February 27, 2001.
Indings OF INVESTIGATION BY SEBI
1. Zodiac is having its registered office at Mumbai and the shares of the company are listed on Mumbai Stock Exchange (BSE), National Stock Exchange (NSE) and Ahmedabad Stock Exchange (ASE).
2. During the period from July 05, 2000 to February 27, 2001 (hereinafter referred to as the "relevant period") the scrip Zodiac recorded a volume of 4,05,551 shares on BSE and 14,55,151 shares on NSE.
3. During the said period, the closing price of the scrip touched a low of Rs. 68.60 on August 04, 2000 and a high of Rs. 95.00 on September 12, 2000 on BSE whereas at NSE the scrip touched the lowest price of Rs. 67.40 on August 08, 2000 and a high of Rs. 96.15 on September 06, 2000.
3.4 On the basis of the trading details obtained from M/s Shailbhadra Securities Ltd., then broker member of NSE (hereinafter referred to as Broker), it is observed that broker has done trading in the scrip of Zodiac on NSE for its clients namely M/s Vivenasri Financial Services Ltd. (VFSL), M/s Newfin Financial Services Pvt. Ltd. (NFSPL) and M/s Harsh Pranav Securities Pvt. Ltd. (HPSPL). The details of the trading done by these clients are as under :
3.5 From the details gathered during the investigations, it was observed that VFSL, NFSPL and HPSPL are having common directors and are thus associate entities and therefore stated hereinabove as one group.
3.6 The total market volume traded in the said scrip at NSE during the relevant period was 14,55,151 shares. The Broker purchased shares in the said scrip for the above mentioned three entities viz. VFSL, NFSPL and HPSPL totaling to 12,06,627 shares and sold 1,54,50or VFSL during the said period.
3.7 From the order log-trade log details in the scrip of Zodiac, it is observed that the Broker had executed structured deals on NSE for its clients namely NFSPL and HPSPL. It was further observed that the Borker had purchased 8,02,360 shares of Zodiac for HPSPL out of which 187800 shares were executed as structured deals and always the counter party was one of the above mentioned clients. Some of the structured deals are given below :
a) On July 12, 2000, VFSL sold 60000 shares of Zodiac on NSE, which was the total volume of the said shares on NSE on that date, through B R Khandahar Share & Stock Brokers P Ltd. (member NSE) out of which 59500 shares were purchased by HPSPL by way of 6 Structured deals @ Rs. 74.5 to 76.00 through the Broker as shown below.
It may be mentioned here that 9216 was the client code of HPSPL and 19902 was the client code of VFSL.
b) On August 02, 2000, 25100 shares of Zodiac were traded on NSE. Out of which VFSL sold 25,000 shares through Integrated Master Securities Pvt. Ltd. (member NSE) and HPSPL bought these shares through the Broker by way of structured deal @ Rs. 72.50 and 73.00 as shown below:
c) On August 18, 2000, 15,100 shares of Zodiac were traded on NSE. Out of these VFSL sold 15,000 shares through Integrated Master Securities Pvt. Ltd. (member NSE) and HPSPL bought through the Broker by way of structured deal as shown below:
d) On August 21, 2000, 10,200 shares of Zodiac were traded on NSE. Out of these, VFSL sold 10,000 shares through Integrated Master Securities Pvt. Ltd. (member NSE) and HPSPL bought through the Broker by way of structured deal as shown below :
e) On October 25, 2000, 24050 shares of Zodiac were traded on NSE. Out of these NFSPL sold 23,750 shares through Canara Securities Ltd. (member NSE) and HPSPL bought through the Broker company by way of structured deal @ Rs. 73.40 and Rs. 73.50 as shown below :
f) On January 31, 2001, 35,205 shares of Zodiac were traded on NSE. Out of these, VFSL sold 15,000 shares through Namah Capital Resources Ltd. (member NSE) and HPSPL bought through the Broker by way of structured deal @ Rs. 73.40 as shown below:
g) Similarly, the Broker purchased 2,38,567 shares of Zodiac for NFSL out of which 6,200 shares were executed as structured deal wherein the counter party was one of the above mentioned client company as shown below :
On August 14, 2000, 6500 shares of Zodiac were traded on NSE. Out of these, VFSL sold 6200 shares through Ghalla Bhansalli Stock Brokers Pvt. Ltd. (member NSE) and NFSPL bought through Broker by way of structured deal @ Rs. 73.30 to 73.50 as shown below :
3.8 It is also observed during the investigation that the Broker had executed the trades in Zodiac during the relevant period, for group companies namely NFSL and HPSL (having common directors) which resulted in structured deals and that the Broker was instrumental in allowing such deals.
3.9 From the order log-trade log details it is observed that the Broker had executed cross deals on NSE for the clients NFSPL and VFSL as shown below :
a) On November 9, 2000, 10,150 shares of Zodiac were traded on NSE. Out of these, Broker purchased 10,000 shares for NFSPL and sold 10,000 shares to VFSL, a group company of NFSL, executing a cross deal @ Rs. 80.50 -81.00, as shown below :
b) On 10th November 2000, 25,010 shares of Zodiac were traded on NSE. Out of these, the Broker purchased 25,000 shares for NFSPL and sold 24,910 shares to VFSL, a group company of NFSL which were executed as cross deal for 24,910 shares @ Rs. 79.00 -81.00 as shown below :
3.10 The Broker thus found to be a party to the irregular trades of its clients which were not intended to effect the transfer of beneficial ownership but were intended to operate only as a device to cause fluctuations in the market. These trades were not genuine trade transactions and hence I find that the Broker created a false and misleading appearance of trading in the scrip in violation of the provisions of Regulation 4 (a), (b), (c) and (d) of the SEBI (SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the "said Regulations").
3.11 It was also noted during the investigations that NSE declared the Broker as a defaulter. Pursuant to this, the certificate of registration of the Broker was cancelled by SEBI on April 30, 2001.
(3.) 0 SHOW CAUSE NOTICE
4.1 On the basis of the aforesaid finding of the Investigations conducted by SEBI, a detailed show cause notice dated April 28, 2003, was issued to Shri Hemendra V. Shah, Chairman, Shri Rahul H Shah and Ms. Nimisha H Shah, Directors of M/s. Shailbhadra Securities Ltd., the erstwhile broker member of NSE, as the directors of a company are responsible for the acts of omissions of the said company.
4.2 Vide said show cause notice these persons were directed to show cause as to why appropriate direction under Regulation 11 of the Regulations read with Section 11(4) and 11B of the Securities and Exchange Board of India Act, 1992, including restraining them from accessing the securities market and prohibit them from buying, selling or dealing in the securities market in any manner whatsoever for a particular period should not be passed.;