SEBI Vs. NEWFIN FINANCIAL SERVICES PVT LTD
LAWS(SB)-2003-8-9
SECURITIES APPELLATE TRIBUNAL
Decided on August 25,2003

Appellant
VERSUS
Respondents

JUDGEMENT

G.N.Bajpai, - (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 it 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 within themselves.
(2.) 0 INVESTIGATION BY SEBI 2.1 In 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 related 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 3.1 During the period from July 05, 2000 to February 27, 2001 (hereinafter referred to as the "relevant period") the scrip of Zodiac clocked a volume of 4,05,551 shares on BSE and 14,55,151 shares on NSE. 3.2 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. 3.3 On the basis of the trading details obtained from M/s. Newfin Financial Services Pvt. Ltd.(NFSPL) having its registered office at 411, Kubera Towers, Narayanguda, Hyderabad, 500 029, it is observed that NFSPL had purchased 1,26,000 shares of Zodiac from the market before July 2000 i.e. prior to the relevant period. Further NFSPL has done trading in the scrip of Zodiac on NSE and BSE during the relevant period. The details of the trading done by NFSPL are as under : JUDGEMENT_458_TLSB0_20030.htm 3.4 It was also noted that NFSPL has entered into following off market deals with its another group company namely M/s Vivenasri Financial Services Ltd. (VFSL) : JUDGEMENT_458_TLSB0_20031.htm 3.5 From the above, it is observed that during the relevant period NFSPL bought 3,85,417 shares and sold 1,47,850 shares from the market making net market purchases of 2,37,567 shares. Further NFSPL bought 46,279 shares from VFSL and sold 2,68,346 shares to VFSL in off deals during the relevant period making net off market sales of 2,22,067 shares. 3.6 From the details gathered during the investigations, it was observed that NFSPL, along with VFSL and HPSPL are having common directors and are thus associate entities and therefore stated hereinabove as one group. 3.7 Following are the details of trading done by NFSPL, VFSL and HPSPL as a group : JUDGEMENT_458_TLSB0_20032.htm 3.8 From price volume data of the scrip of Zodiac it is observed that the total market volume traded on BSE and NSE was of 18,60,702 shares (4,05,551 shares on BSE and 14,55,151 shares on NSE ) during the relevant period. Out of this, NFSPL along with VFSL and HPSPL had purchased a total number of 17,96,093 shares of Zodiac, which account for 96.53% of shares traded. Further, this group sold a total number of 17,00,507 shares of Zodiac which account for 91.39% of shares traded on BSE and NSE. As a matter of fact NFSPL's group has a gross turnover of 34,96,600 shares on BSE and NSE which account for 93.96% of the gross turnover of NSE and BSE (37,21,404 shares) in the scrip of Zodiac. 3.9 From the order log-trade log details in the scrip of Zodiac, it is observed that NFSPL had executed structured deals on NSE and BSE and cross deal on NSE where the counter party client was one of NFSPL's group company. Some of the structured deals are given below : a) On July 11, 2000 on BSE, NFSPL sold through M/s Integrated Master Securities Ltd (IMSL) 12,000 shares @ Rs. 75.54 of Zodiac by way of structured deal. The counter party was VFSL which bought these shares through JGA Shah Share Brokers Pvt. Ltd. (member BSE) as shown below. JUDGEMENT_458_TLSB0_20033.htm It may be mentioned here that N024 was the client code of NFSPL and 19902 was the client code of VFSL. b) On October 25, 2000, 24,050 shares of Zodiac were traded on NSE only. Out of these, 23,750 shares were traded by way of Structured deal. NFSPL sold through Canara Securities (member NSE) while HPSPL bought through SSL. The deals took place @ Rs. 73.40-50 as shown below : JUDGEMENT_458_TLSB0_20034.htm c) On November 10, 2000, 25,010 shares of Zodiac traded on NSE. NFSPL bought 24,910 shares of the said scrip through SSL and VFSL sold 24,910 shares of the said scrip through SSL by entering into cross deal @ Rs. 79.00 -81.00 as shown below : JUDGEMENT_458_TLSB0_20035.htm It was observed that NFSPL's aforesaid trades in the said scrip executed within its group companies viz. VFSL and HPSPL by way of structured deals and cross deal had hampered the true price discovery mechanism of the market price of the said scrip. 3.10 NFSPL was thus found to be a party to the irregular trades as aforesaid 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 it was noted that NFSPL 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 (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 1995 (hereinafter referred to as the "said Regulations"). 3.11 From the transactions details and demat details submitted by NFSPL and its other group companies viz. VFSL and HPSPL it is observed that NFSPL along with its two group companies was also involved in circular trading in the scrip of Zodiac in the following manner : a) Circular Trading between NFSPL, VFSL and HPSPL during SN 48 of NSE. (i) During the settlement no 48 (from November 23 to November 28, 2000), a total no. of 59,443 shares were traded at NSE. Out of this, 49,006 shares were traded on November 23, 2000 and 10,300 shares on November 28, 2000. While on November 24, and November 27, 2000 only 12 and 125 shares were traded. NFSPL received 34930 shares from Shalibhadra Securities Ltd. (SSL) on November 22, 200or the purchases done during the SN 46 of NSE. On November 23, 2000 NFSPL sold 34,900 shares to VFSL in off market transaction. In the demat statement of NFSPL 34,900 shares are debited to HDFC Bank Ltd. for client Id 10466221 which is the client Id is of VFSL. From the demat statement of VFSL, it is found that VFSL received 34,90rom HDFC Bank Ltd. from client Id 10464234. This client Id is of NFSPL. (ii) This means VFSL purchased and received 34900 shares from NFSP (and 7000 shares from HPSPL totaling to 41,900 shares ) in off market transaction on 23 November 2000. (iii) On November 23, 2000 VFSL sold 25,000 shares through Integrated Master Securities Ltd. (IMSL) on NSE. On the same day i.e. on November 23, 2000, another 15,000 shares were sold and purchased by NFSPL through SSL. NFSPL purchased another 8100 shares @ Rs. 78.72 through Sony Securities Ltd. on NSE on November 23, 2000. HPSPL purchased 17,000 shares @ Rs. 79.59 through SSL on NSE on November 23, 2000. (iv) From the demat statement of VFSL it is observed that 25,000 shares are debited on November 23, 200or SN 48 of NSE by IMSL. Further, from the demat statement of NFSPL 8100 shares are credited by Sony Securities on December 18, 200or SN 48 of NSE. Further, on December 20, 2000 NFSPL sold 8100 shares to VFSL ( Client Id 10466221) in off market transaction. From the demat statement of HPSPL 8100 shares are credited by SSL on December 06, 200or SN 48 of NSE and on December 07, 2000 HPSPL sold 17075 shares @ Rs. 78.00 to VFSL( client Id 10466221) in off market transaction. (v) In the demat account of VFSL it is observed that VFSL has received 17,075 shares on December 07, 200rom HDFC Bank Ltd. client Id. 12482988 (client Id of HPSPL) and 8100 shares on December 20, 200rom HDFC Bank Ltd. client Id. 10464234 ( client Id of NFSPL ). b) Circular Trading done between your company and VFSL during SN 45 of NSE. (i) During the settlement no 45 (from November 01 to November 07, 2000) a total no. of 41,720 shares were traded at NSE. Out of this, 30200 shares were traded on November 01, 2000 and 9,700 shares were traded on November 02, 2000. On November 01, 2000 NFSPL sold 39400 shares of ZCCL at the rate of Rs. 75.30 to VFSL in off market transaction. On the same day VFSL sold on NSE 30,000 shares and on November 02, 2000 sold 9400 shares at an average rate of Rs. 73.68 through IMSL and the same were purchased by NFSPL through SSL. (ii) From the demat account statement maintained by VFSL with HDFC Bank Ltd. it is seen that 30,000 shares were debited to IMSL on November 01, 200or NSE settlement no. 34. It is observed that IMSL has taken one day in advance 9400 shares from VFSL which VFSL has traded on NSE through it on November 02, 2000. (iii) NFSPL was maintaining demat account with HDFC Bank Ltd. having client Id no. 10464234. From the demat statement it is observed that 39,400 shares purchased by NFSPL from VFSL during SN 34 of NSE were received by it on November 15, 2000 ( 38,000 shares ) and on November 17, 200 ( 1,400 shares ) through SSL. These 38,000 shares received by NFSPL from VFSL on November 15, 2000 and 1,400 shares received from VFSL on November 17, 2000 were again sold to VFSL in off market deal - 38,000 shares on November 16, 2000 and 1,400 shares on November 17, 2000 at average rate of Rs. 76.40. It was observed that trades executed within its group companies have resulted in circular trading in the scrip of Zodiac and have hampered the true price discovery mechanism of the market price of the scrip. It was also observed that aforesaid trades executed within the group companies have resulted in circular trading in the scrip of Zodiac and have created volumes in the scrip. Further, it is observed that these trades were not intended to effect the transfer of beneficial ownership but intended to operate only as a device to cause fluctuations in the market thereby reflecting the prices of the scrip which were based on non genuine trade transactions and hence created a false and misleading appearance of trading in the scrip by trading among your group companies through different set of broke Rs. 3.12 NFSPL was thus found to be a party to the irregular trades as aforesaid 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 it was noted 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 (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 1995 (hereinafter referred to as the "said Regulations").
(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 M/s. Newfin Financial Services Pvt. Ltd. 4.2 Vide said show cause notice NFSPL was directed to show cause as to why appropriate direction under Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 1995 read with Section 11(4) and 11B of the Securities and Exchange Board of India Act, 1992, including restraining it from accessing the securities market and prohibiting it from buying, selling or dealing in the securities market in any manner whatsoever for a particular period should not be passed.;


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