(1.) Shri Mohan Malpani 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 070523619.
1.1 An enquiry officer was appointed vide Order dated 18.02.02 for conducting enquiry into the affairs of Shri Mohan Malpani, member of MPSE, vis---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.) 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 Corporate 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 MSE., 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 MPSE, 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 along with their positions are as under:
* 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.
Ole OF SHRI MOHAN MALPANI -
3.1 Mohan Malpani 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 and for three clients who have traded 200-400 shares on delivery basis. All the transactions which were executed on behalf of his own trading account were squared off.
3.2 The trading details of Shri Mohan Malpani are as under :-
3.3 Shri Mohan Malpani was squaring off his positions at the end of each settlement, which was confirmed by him. In his sworn statement, Shri Malpani stated that apart from clientele business which was negligible ( where he had given delivery/received delivery from clients), all the other transactions were squared off. During the course of investigation / enquiry, the member 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 at MPSE 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 scrips to trade on the exchange.
3.4 During the course of investigation / enquiry, Shri Mohan Malpani was asked that the price of the scrip had moved up from Rs. 31/ in December 1999 to Rs. 400/- by March 2000 and why it should not be inferred that he along with the other members of the exchange were responsible for creating artificial market. In reply to this, Shri Mohan Malpani stated, "I agree to the fact that I have done jobbing transactions in the scrip. However, it was not my intention to either create false market or do trading which is circular in nature. All my transactions were done only to earn some jobbing differences arising in the scrip. I have submitted the settlement wise pay-in/pay-out details, which clearly indicates that most of the time my pay-out was in the range of Rs. 500/- or so, which was my profit in the scrip. Further, I have always maintained integrity in my dealings as a member of the stock exchange and have always complied with the regulatory requirements."
3.5 During the course of investigation / enquiry, the member was asked to comment on the fact that most of the time his counter party was Smt. Shaifali Khajanchi and Shri Ravindra Khajanchi as per the information provided by the exchange. The member was asked as to whether he noticed any abnormality in this regard. Shri Malpani stated that there were hardly 10-15 brokers who were active at MPSE in a true sense and most of the time the counter-party brokers in other scrips as well, were same. The member further submitted that he did not notice that most of his trades were matching with Khajanchis as he used to square off his position on daily basis.
3.6 It was observed that some cash was deposited with his bank account in the month of November 1999. On being asked to explain the source of the same, Shri Malpani stated that he had given advances to few parties by cheques which were paid back by them in cash and furnished the proof of advance made to the parties.
3.7 Shri Mohan Malpani's trading in the scrip constituted approx. 25% of the trading volume at the exchange and most of his transactions were matching with Khajanchis. 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. 1000/- per settlement and the price of the scrip was continuously going up and touched Rs. 400/- in March 2000. The member has entered transactions at successive higher prices along with other members of the exchange. The member has contributed to the price rise at MPSE. The price rise in the scrip was too steep for it to go unnoticed especially when profit or loss in the dealings never exceeded Rs. 1000/- in any settlement. 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 in almost all the settlements in which the stock was traded.
3.8 The volumes in the scrip were generated by Shri Mohan Malpani along with other members of the exchange who have acted in concert and have created artificial volumes. It may, therefore, be concluded that the member has created a false and misleading appearance of trading in the scrip. The member is also responsible for artificial rise in the price of the scrip, along with other members of the exchange.
(3.) 0 ENQUIRY REPORT AND RECOMMENDATION :
4.1 The enquiry officer, after conducting the enquiry as per the prescribed procedure submitted a report dated 07.08.03 and recommended a penalty of suspension of certificate of registration of the broker for a period of six months.;