Order against India Capital Markets Private Limited in the matter of Pyramid Saimira Theatre Ltd

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI), vide an ad interim ex-parte Order dated April 23, 2009 (hereinafter referred to as the Order) had amongst other directions, restrained India Capital Markets Private Limited (hereinafter referred to as the stock broker) from entering into any fresh agreements with new clients, in its operations as a stock broker, till further directions. Thereafter, the stock broker vide letter dated May 22, 2009 filed its objections to the order. The stock broker was also afforded an opportunity of hearing on June 26, 2009 when Mr. P.N. Modi, Advocate appeared on its behalf and made submissions. Mr. Joby Mathew, Advocate was also present in the hearing. During the course of hearing, a letter dated June 26, 2009 was submitted, which contained the submissions and clarifications of the stock broker. Pursuant to the hearing, the stock broker vide letter dated July 2, 2009, filed additional submissions along with certain documents. 2. The stock broker vide reply dated May 22, 2009 submitted that only on the instructions of Mr. Nirmal Kotecha, Mr. Amol Kokane and Mr. Raju G. Shah, it had placed sell orders in the shares of PSTL.

With regard to trades mentioned at paragraphs 7 and 8 of the Order, it contended that those trades were done at the instructions of its clients and that on December 22, 2008, it had traded on behalf of clients other than those mentioned above. The stock broker submitted that its trading in the three time slots in both the stock exchanges did not constitute a significant position, especially in the first time slot when Mr. Nirmal Kotecha had off loaded the largest portion of his stake. The stock broker further contended that in the Client Registration Form submitted to it, the mobile telephone number of Mr. Amol Kokane was shown as 9967838402 and not 9819988816, as mentioned in the Order and that his address was verified from the Pass Book issued by the Bank of India. It was also submitted that Mr. Amol Kokane was introduced by Ms. Priyanka Desai who was its Remisier at its Borivali Branch. As regards the ‘income’ of Mr. Amol Kokane, the stock broker stated that, Mr. Amol Kokane, besides contending that he had an annual income of Rs.1,00,000/- to 5,00,000/- (declared in the KYC form), had also declared a stock portfolio of around Rs.5 lakhs and that his occupation was “service”.

It was therefore the contention of the stock broker that the purported statements of Mr. Amol Kokane that he had no personal income and that he was not familiar with investment in shares is belied by his own declarations. The stock broker also submitted that Mr. Amol Kokane, vide letter dated September 15, 2008, requested Mr. Darshan Desai to accept the instructions of late Shri Sandeep Gavhane and accordingly, Mr. Darshan Desai carried out the instructions of late Shri Sandeep Gavhane till October 16, 2008, on which date Shri Sandeep Gavhane met with an accident and was not able to issue instructions thereafter. The stock broker contended that as the debit balance in the account of Mr. Amol Kokane was more than Rs.12,60,000/- as on October 16, 2008 and since he had shown no interest in trading after the accident and the subsequent death of his brother in law, the branch (Borivali branch) was forced to sell some shares in his account so as to bring down the debit balance. The stock broker further submitted that it was not aware of the fact that Mr. Nirmal Kotecha had operated the account of Mr. Amol Kokane and that to the best of its knowledge, and as represented to it, it was Mr. Darshan Desai, who had traded in the account of Mr. Amol Kokane purely in his personal capacity.

It was the submission of the stock broker that it only acted as stock brokers to Mr. Amol Kokane and the actions of Mr. Darshan Desai in his personal capacity were not in its knowledge during the relevant time. The stock broker submitted that it had initiated action against Mr. Darshan Desai and has suspended its operations at the Borivali branch. It was contended that Mr. Nirmal Kotecha did not place any orders on December 19, 2008, through it. It was further submitted that as per its records and as per the trade and order logs provided by SEBI, the sell orders placed by Mr. Nirmal Kotecha and the buy orders placed by Mr. Raju G. Shah through it, did not have the same trade numbers, thereby indicating that none of the orders placed by Mr. Nirmal Kotecha had matched with the orders placed by Mr. Raju G. Shah trading through it. In respect of the purported adjustment of credit/debit balances across accounts, it was submitted that all such actions are done by the head office and not by any of its branches and therefore contended that the statement of Mr. Darshan Desai that he had traded in Mr. Amol Kokane’s account and/or other accounts by debiting other client’s account that had credit balances, was therefore false.

3. The stock broker submitted that it had a system of allotting Unique Client Codes which are a combination of the branch code, the remisier code and additional numeric code. It is the submission of the stock broker that the mere absence of the name of the introducer on few account opening forms, does not compromise the Control and System parameters laid down by SEBI. With reference to paragraph 60 of the Order, it submitted that as the branch managers are reluctant and dissatisfied with a monthly salary, prefer to be compensated on the basis of their performance, which is measured in terms of turnover and income generated by the branch headed by them. The stock broker denied being aware of the transactions in the bank account of Mr. Raju G. Shah and of the credit of Rs.5,00,000/- therein or the source of the said funds and are not concerned with the same. As regards the income declaration of Mr. Raju G.Shah, the stock broker submitted that in the KYC Form, his personal income was mentioned as Rs.1-5 lakhs per year and contended that that since he had not defaulted, it had no reason to disbelieve his representation regarding his ability to meet the financial requirements.

As regards the statement of Mr. Harsh Shah, it was submitted that Mr. Harsh Shah was not the competent and proper authority to answer questions pertaining to its Human Resources Department including the appointment of Branch Managers. The stock broker vide letter dated June 26, 2009 further submitted that the reference to the “Branch Head” in its reply was to be construed as its ‘Remisier’, who is paid commission on a brokerage sharing basis normally at the end of every month. It was contended that if a client permits a trader or one of the Branch Managers to trade in his account at the discretion of the such trader or Branch Manager, it would be impossible for it to ever discover such permission or trading no matter how high the level of due diligence or ability as there would be no document or other material which would, or could give rise to such a discovery. Further, the stock broker, vide letter dated July 2, 2009 had submitted that Mr. Darshan Desai never made any statement that he had traded in the account of Mr. Amol Kokane ”… by debiting other clients accounts that had credit balances” as stated in the Order.

In this regard, the stock broker clarified that since the branch of which he was Branch Manager had a overall credit balance, he had permitted the said debit balance in Mr. Amol Kokane’s account until the point where he decided to square off the same by selling the shares therein.

4. I have considered the submissions of the stock broker made vide letters dated May 22, 2009, June 26, 2009 and July 2, 2009, the oral submissions made during the hearing and other material available on record. The limited issue for consideration at this stage is whether, based on the available material on record and after considering the submissions made by the stock broker, the directions issued vide the Order need to be continued, revoked or modified in any manner, in so far as it relates to the stock broker. The circumstances which led to the passing of the Order has been mentioned in detail therein. The investigation in the matter of Pyramid Saimira Theatre Limited (hereinafter referred to as PSTL), prima facie revealed the operation of a widely distributed network of persons/entities who had joined hands in breaching market integrity by manipulating the shares of PSTL, forging a letter purported to be issued by SEBI to Mr. P.S. Saminathan (promoter of PSTL), publicizing its contents and the manipulators taking benefit of the artificial price rise caused by the said letter and selling of their substantial stake in the market to their advantage and to the detriment of unsuspecting investors. There were other persons/entities who appeared to have played their role in various capacities such as publicizing the contents of the forged SEBI letter, routing funds through various layers and indulging in suspicious banking transactions, offloading substantial quantities of shares at an artificial inflated price on December 22, 2008, etc.

5. The preliminary findings of the investigation had revealed that the stock broker had traded in the shares of PSTL during the relevant period for its clients, including Mr. Nirmal Kotecha, Mr. Raju G Shah and Mr. Amol Kokane. The trading accounts of Mr. Raju G. Shah, Mr. Amol Kokane and Mr. Nirmal Kotecha were opened at the same branch of the stock broker and around the same period. Mr. Amol Kokane and Mr. Nirmal Kotecha had opened client accounts with the stock broker on the same date (September 12, 2008). As mentioned in the Order, the preliminary findings of the investigation in the matter revealed that Mr. Amol Kokane, an engineering student and having no personal income, had opened an account with the stock broker on the recommendation of his late brother-in-law (Mr. Sandeep Shripati Gavhane), who was working for Kotecha Capital Services Private Limited. It was also observed that Mr. Raju G. Shah had traded in the shares of PSTL through the stock broker on December 19 and 22, 2008, on the Bombay Stock Exchange Limited (BSE). His client account was opened in the Borivali (Mumbai) branch of the stock broker during July 2008. It was also found that the orders of Mr. Raju G. Shah in the shares of PSTL had matched with the sell orders of Mr. Nirmal Kotecha, as mentioned in detail in paragraph 29 of the Order.

A total of 47,542 shares bought by Mr. Raju G. Shah matched with the sell orders of Mr. Nirmal Kotecha on December 19 and 22, 2008. The stock broker had contended that Mr. Nirmal Kotecha did not place any orders on December 19, 2008 through it and that as per their records and as per the trade and order logs furnished by SEBI, the sell orders placed by Mr. Nirmal Kotecha and the buy orders placed by Mr. Raju G. Shah through it did not have the same trade numbers thereby indicating that none of the orders placed by Mr. Nirmal Kotecha through it matched with the orders placed by Mr. Raju G. Shah trading through it. In this regard, it needs to be noted that the buy orders of Mr. Raju G. Shah placed through the stock broker on December 19, 2008 matched with the sell orders of Mr. Nirmal Kotecha placed through IL & FS Investmart Securities Limited on BSE and National Stock Exchange of India Limited (NSE). The same is evident from the trade log extract provided to the stock broker. Thus, the orders of Mr. Nirmal Kotecha and Mr. Raju G. Shah had matched in the shares of PSTL. From the preliminary findings of the investigation, it is found that Mr. Nigam Vinod Shah was introduced by Mr. Nimesh Chitalia, who is the Head (Business Development) of the stock broker, where Mr. Raju G. Shah had opened his trading account during July 2008. Mr. Darshan Desai (the Branch Head of the Borivali (West) branch of the stock broker) had stated that one of the peons by the name Siddhartha, had introduced him to Mr. Sandeep Gavhane, who in turn, introduced Mr. Amol Kokane and Mr. Nirmal Kotecha to him.

He further informed that before November 3, 2008, Mr. Sandeep Gavhane used to place orders on behalf of Mr. Amol Kokane and that he (Mr. Darshan Desai) himself subsequently traded in the account of Mr. Amol Kokane by debiting other client accounts that had credit balances and that the trade confirmations were automatically transmitted by ‘SMS’ to Mr. Amol Kokane on his mobile number 9967838402 (reflected in the record with India Capital

Market). Mr. Darshan Desai also stated that his wife Ms. Priyanka Desai was a remisier of BSE and that the Borivali branch of the stock broker was registered in his wife’s name. Further, I find, from the documents submitted by Mr. Raju G. Shah at the time of opening of the bank account in November 2006 that his annual family income was Rs. 30,000/- only. The investigation also found that the details of Reference/Introducer, were left blank in the Client Registration Forms of few clients registered with the stock broker. In view of the various acts of commission and omission, as found by the preliminary investigation in the matter, the stock broker was found to have prima facie contravened the Code of Conduct prescribed for stock brokers under Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992.

6. It is observed that Mr. Amol Kokane, an engineering student without any personal income had traded in the securities market and had huge exposure. It is pertinent to note that he was registered as a client with the stock broker. The stock broker has contended that the mobile number of Mr. Amol Kokane was shown as 9967838402 and not 9819988816 as mentioned in the Order. However, I note that in the Order it was mentioned that the number (9819988816) was never used by Mr. Amol Kokane. Further, as regards the income of Mr. Amol Kokane, the stock broker had contended that Mr. Amol Kokane had an annual income of Rs.1,00,000/- to 5,00,000/- (as declared in the KYC Form) and had also declared a stock portfolio of around Rs.5 lakh and his occupation was ‘service’. However, I find that the details regarding the employment were not filled in the KYC Form of Mr. Amol Kokane maintained by the stock broker. Further, Mr. Amol Kokane had only one demat account maintained with the stock broker (also a Depository Participant), which was opened on September 15, 2008 i.e. subsequent to the opening of the trading account.

Therefore, the aforesaid contentions of the stock broker do not hold good. It is prima facie observed that the stock broker had failed to exercise due diligence and care while enrolling such clients. It would establish that the stock broker was allowing huge exposures to clients when their annual income would not support such exposure. In this regard, I note that one of the primary allegations in the matter of investigation in respect of PSTL was suspicious banking transactions and channeling of those funds into the securities market. In such a scenario and considering the income vis-à-vis the turnover details of the clients, it was improper on the part of the stock broker to have traded for them in such large quantities. The very fact that a client makes huge payment not commensurate with his disclosed income in the KYC form should alert a prudent stock broker. The submission that Mr. Darshan Desai was dealing in the account of Mr. Amol Kokane in his personal capacity and that the stock broker was not responsible for the same would be considered in the ongoing investigation which is in an advanced stage.

Regarding the contention of the stock broker that the debit balance in the account of Mr. Amol Kokane was more than Rs.12,60,000/- as on October 16, 2008 and since he had shown no interest in trading after the accident and the subsequent death of his brother-in-law, the branch was forced to sell some shares in his account so as to bring down the debit balance, I note that, as explained in the Order, the stock broker had also bought 4,19,084 shares and 73,509 shares of PSTL on BSE and NSE, respectively, after October 16, 2008. As substantial purchases were made when the debit balances in the account of Mr. Amol Kokane were high, the contention of the stock broker that it had sold some shares in the said account so as to bring down the debit balance does not have any merit. The investigation in the matter prima facie revealed that there were several persons who were involved in the manipulations. In such circumstances, I am of the considered view that the role played by an individual should not be seen in isolation and that the case needs to be seen in its entirety in the light of the large scale market abuse, which has been explained in detail in the Order.

In view of the same, I am not convinced at this stage to review the directions issued against the stock broker. It goes without saying that, if the role of the stock broker in the manipulation is not brought out in definite terms by the ongoing investigation, necessary directions would be issued at an appropriate stage.

7. In view of the foregoing, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11, 11(4) and 11B thereof, hereby confirm the directions issued against India Capital Markets Private Limited, vide the ex-parte interim Order dated April 23, 2009 in the matter of Pyramid Saimira Theatre Limited.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

PLACE: MUMBAI DATE: JULY 20, 2010