Order in the matter of Malvica Engineering Ltd in resect of Shri Darshan Desai, Shri Sumit Desai, Smt. Devi Desai, Shri Manoj H Mehta and M/s. Shagufta Investments Private Limited

In respect of Shri Darshan Desai, Shri Sumit Desai, Smt. Devi Desai, Shri Manoj H Mehta and M/s. Shagufta Investments Private Limited

Date of hearing: September 11, 2009

Appearances For Shagufta Investment Private Limited: Shri Pankaj Desai, Director For Other Noticees: None For SEBI: Mr. Amol Hogade, Assistant General Manager Mr. Rajeev Rastogi, Legal Officer Ms. Vasudha Goenka, Legal Officer

ORDER Under Section 11, 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 read with Regulation 11 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003

1. Securities and Exchange Board of India (hereinafter referred as ‘SEBI’) had conducted investigation into the buying, selling and dealing in the shares of Malvica Engineering Ltd. (hereinafter referred as ‘MEL’) for the period June 27, 2003 to November 24, 2003 (hereinafter referred to as the ‘investigation period’), inter alia, to ascertain whether there was any violation of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as ‘PFUTP

Regulations’), since repealed hence corresponding SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as ‘FUTP Regulations’). During the period of investigations the scrip of MEL was listed on Bombay Stock Exchange (hereinafter referred to as ‘BSE’), Ahmedabad Stock Exchange (hereinafter referred to as ‘ASE’) and Vadodara Stock Exchange (hereinafter referred to as ‘VSE’).

2. Investigations revealed that during the period June 27, 2003 to August 27, 2003, the scrip opened with a price of Rs. 3.90 on June 27, 2003 and closed at Rs. 15.62 on August 27, 2003 (‘rise period’). This rise was followed by a fall in price to Rs. 5.10 till September 24, 2003 and thereafter further to Rs.2.70 on November 06, 2003 (‘fall period’). Shagufta Investments Pvt. Ltd., Darshan Desai, Sumit Desai, Devi Desai and Manoj H Mehta allegedly traded among themselves for 479060 shares during the rise period, that is, between June 27, 2003 and August 27, 2003. The circular trading in the scrip resulted in creation of artificial volume and price in the scrip.

3. Accordingly, a notice dated July 05, 2006 (hereinafter referred to as ‘SCN’) was issued to Shagufta Investments Pvt. Ltd., Darshan Desai, Sumit Desai, Devi Desai and Manoj H Mehta (hereinafter referred to as ‘noticees’) alleging that the acts of the noticees were in violation of the Regulation 4 (a), (b), (c) and (d) of PFUTP Regulations since repealed hence corresponding Regulations 4(1) and 4(2)(a), (b), (e), (g) and (n) of FUTP Regulations. Accordingly, the SCN called upon the noticees to show cause as to why suitable directions under Sections 11, 11(4) and 11B of SEBI Act read with Regulation 11 of FUTP Regulations including restraining them from accessing the capital market and prohibiting them from buying, selling or dealing in securities in any manner should not be issued against them.

4. The SCNs were duly served on the noticees. All the aforementioned noticees duly replied to the SCN. Pursuant to this, in order to proceed with the matter an opportunity of personal hearing was granted to the noticees before me on September 03, 2009. The hearing, however, was rescheduled for September 11, 2009. Notice issued to Manoj H. Mehta regarding the revised hearing scheduled was returned undelivered. Hence, an advertisement regarding the undelivered notice was published in Hindustan Times, a national daily, on August 13, 2009. Shri Pankaj Desai appeared before me on behalf of Shagufta Investments Pvt. Ltd. The other noticees did not appear for the personal hearing.

5. I have carefully considered the SCN and other material available on record. The noticees, inter alia, submitted that the transactions executed by them were delivery based and genuine transactions. Further, the noticees contended that during the investigation period they sold shares at price less than Rs.5 per share, and were not at all involved in the transactions in the shares of MEL resulting into price fluctuation of Rs. 3.90 to Rs.15.62.

6. I note that during the period from June 27, 2003 to August 13, 2003, Shri Darshan Desai, Shri Sumit Desai, Smt. Devi Desai, Shri Manoj H Mehtra, Shagufta Investments Pvt. Ltd. and a certain Mayekar Investments Pvt. Ltd. purchased 1686313 shares and sold 1710380 shares accounting for 57.61% and 58.43% of gross purchase and gross sales in the market respectively. Their trading accounted for up to 92% of the respective daily market volume. A total of 479060 shares were traded in 1216 trades for 240 buy orders and 178 sell orders in the price range of Rs.2.52 to Rs.5.30 over a period of 30 days from June 27, 2003 to August 13, 2003 as observed from the table below. These trades accounted for up to 55% of the respective daily market volume and 18.22% of the total market volume of 26,29,363 for these 30 days. It was observed that from June 27, 2003 to July 9, 2003 the shares were traded between Darshan Desai and Shagufta Investments P. Ltd, from July 8, 2003 to July 17, 2003 the shares were traded between Manoj H. Mehta and Shagufta Investments P. Ltd, and from July 18 to August 13, 2003 the shares were traded between Manoj H. Mehta and Mayekar Investments Pvt. Ltd.

Darshan Shagufta Mayekar Manoj Sumit Devi Date Buy Sell Buy Sell Buy Sell Buy Sell Buy Sell Buy Sell 27.6.03 13000 13000 27.6.03 30000 30000 27.6.03 11850 11850 30.6.03 10000 10000 1.7.03 41850 41850 1.7.03 42090 42090 2.7.03 5000 5000 2.7.03 34390 34390*

8.7.03 13090 13090 8.7.03 2051 2051 9.7.03 6300 6300 9.7.03 4210 4210 9.7.03 3000 3000 9.7.03 2690 2690 10.7.03 2300 2300 10.7.03 3900 3900 11.7.03 400 400 14.7.03 12200 12200 14.7.03 4500 4500 14.7.03 3000 3000 14.7.03 5000 5000 14.7.03 1510 1510 15.7.03 18400 18400 15.7.03 4266 4266 15.7.03 1650 1650 16.7.03 1700 1700 16.7.03 2100 2100 16.7.03 12076 12076 16.7.03 6024 6024 16.7.03 9900 9900 17.7.03 450 450 17.7.03 7000 7000 17.7.03 15400 15400 17.7.03 1000 1000 17.7.03 1210 1210 17.7.03 200 200 18.7.03 9000 9000 21.7.03 3000 3000 21.7.03 12800 12800 21.7.03 4450 4450 22.7.03 10500** 10500 22.7.03 400 400 23.7.03 200 200 23.7.03 10000 10000 23.7.03 9100 9100 23.7.03 1000 1000 24.7.03 2000 2000 24.7.03 650 650 25.7.03 3000 3000 25.7.03 2400 2400 28.7.03 14319 14319

29.7.03 4000 4000 29.7.03 220 220 30.7.03 1800 1800 30.7.03 4000 4000 30.7.03 8150** 8150 31.7.03 3000 3000 31.7.03 2500 2500 1.8.03 6990 6990 1.8.03 500 500 1.8.03 500 500 4.8.03 4450 4450 5.8.03 6352 6352 6.8.03 3000 3000 7.8.03 2122 2122 11.8.03 5000 5000 11.8.03 6000 6000 11.8.03 600 600 12.8.03 2400 2400 13.8.03 950 950 Total 76390 11850 194154 137743 86153 113750 122363 159527 0 34390 0 21800

* alongwith Darshan Desai ** Mayekar as sub-broker Mayekar- Mayekar Investments Pvt. Ltd; Manoj- Manoj H Mehta; Shagufta- Shagufta Investments Pvt. Ltd; Darshan- Darshan Desai; Sumit- Sumit P. Desai; Devi- Devi D. Desai

7. I further note that the above trades included structured deals for 523 trades for 212636 shares. These were deals where related / group entities had entered into transactions by putting buy and sell orders almost at the same time or with minimum gap of time, of the same price and quantity so that these were matched with each other. There were 38 structured deals for 26090 shares between Shagufta Investments Pvt. Ltd. and any of these persons - Mayekar Investments Pvt. Ltd., Darshan Desai, Sumit Desai or Devi Desai. Also, there were 203 structured deals for 85004 shares between Shagufta Investments Pvt. Ltd. and Manoj H Mehta and 282 structured deals for 101542 shares between Manoj H Mehta on one side and Darshan Desai, Sumit Desai, Devi Desai and Mayekar Investments Pvt. Ltd on the other. The time difference between these buy and sell orders were between 0-29 seconds. I observe that the scrip of MEL was illiquid, and the matching of orders of these entities with each other indicates that the said trades were not genuine.

8. I further note that Mayekar Investments Pvt. Ltd. and Shagufta Investments Pvt. Ltd. had a common director, Pankaj Desai. Further, Darshan Desai is Pankaj Desai’s son, Sumit P. Desai is his nephew and Devi D. Desai is his sister-in-law (Wife of his brother Dilip A. Desai). Thus, it is clear that they were related entities.

9. The frenzied trading activity which accounted for 55% of the total volume happened between these six entities. While the screen based trading system is faceless in nature and maintains anonymity of the counterparty broker/client, it is also an established fact that two parties with prior intent can match their trades with each other by placing orders simultaneously at the same price. And in this case the circular trading on so many days clearly reveals manipulative intent.

10. The said issue has also been dealt by the Hon’ble SAT in Appeal Nos. 54 to 57 of 2002 in the case of Nirmal Bang Securities (P) Ltd. v. SEBI wherein the Tribunal observed that, “Synchronized trading is in violation of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale can create false volumes… In synchronized trading intention is implicit.” (Emphasis added.)

11. SAT in Appeal No.2 of 2004 in the case of Ketan Parekh v. SEBI also observed that a synchronized transaction would be illegal if, “It is executed with the intention to manipulate the market or if it results in circular trading or is dubious in nature and … does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium.” SAT also noted that the intention to manipulate the market can be inferred from the attending circumstances including the nature of transaction executed, frequency with which the transactions are undertaken, value of the transactions, whether they involve circular trading, real change of beneficial ownership, the conditions then prevailing in the market etc.

12. Moreover, as a group, the noticees made a net sale of 567347 shares of MEL during the entire investigation period, that is, purchased and sold 1754188 and 2321535 shares respectively. Thus, from June 27, 2003 to October 30, 2003 the noticees indulged in circular trading among themselves in the illiquid scrip of MEL creating a false appearance of trading in the scrip and luring in innocent and unsuspecting investors. Following this, they offloaded shares of MEL to unwary participants.

13. In view of the above, I find that Shagufta Investments Pvt. Ltd., Darshan Desai, Sumit Desai, Devi Desai and Manoj H Mehta indulged in circular trading in connivance with other clients, and thus were instrumental in creating artificial volumes in the scrip which distorted market equilibrium of the shares. Nonetheless, I find that during the investigation period the noticees sold shares of MEL at prices less than Rs.5 per share, and are, therefore, not accountable for the fluctuation in the price from Rs. 3.90 to Rs.15.62. Thus, the alleged violation of Regulation 4 (a) and (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 since repealed hence corresponding Regulation 4(2)(b), (e) and (n) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 does not stand established against the noticees. However, I find Shagufta Investments Pvt. Ltd., Darshan Desai, Sumit Desai, Devi Desai and Manoj H Mehta are in violation of Regulation 4 (b) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 since repealed hence corresponding Regulations 4(1) and 4(2)(a) and (g) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 for the creation of artificial volumes in the scrip of Malvica Engineering Ltd.

14. Therefore, taking into consideration the facts and circumstances of the case, I, in exercise of the powers conferred upon me under Sections 19 of the SEBI Act read with Section 11, 11(4) and 11B of SEBI Act, 1992 read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, do hereby restrain the noticees Shagufta Investments Pvt. Ltd., Darshan Desai, Sumit Desai, Devi Desai and Manoj H Mehta from buying, selling or dealing in securities market whatsoever or accessing the securities market, directly or indirectly, for a period of one year from the date of this order.

15. This order shall be served on all recognized stock exchanges and depositories to ensure that the noticees are not allowed to undertake transactions as prohibited in Para 14 above.

16. Further, the stock exchanges are hereby directed to permit the respective members dealing for the aforesaid entities to square off their existing open positions, if any, at the earliest in the F&O segment. They must strictly ensure that no fresh positions are created for any of these two entities.

17. This order shall come into force with immediate effect.

DATE: July 15, 2010 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA