INVESTIGATION, ENFORCEMENT AND SURVEILLANCE DEPARTMENT

In the wake of sudden payment crisis in the month of June 1998, on BSE and NSE and allegations of manipulation in the scrips of BPL, Videocon and Sterlite, investigations were conducted by SEBI. Investigations prima facie revealed that some brokers acting in a concerted manner for common set of clients built up unusually large positions in these scrips resulting in distortion of the market equilibrium and creation of artificial market. The investigations also brought out that these common set of clients were acting as a front for Shri Harshad S. Mehta, a suspended broker of BSE and an accused in the securities scam of 1992. 
 
Based on these investigations, enquiry proceedings were initiated against the brokers involved and actions were taken including issuing directions to some of the brokers under Section 11B of the SEBI Act directing them not to undertake any fresh broking activity till the enquiry proceedings were completed. Out of those brokers against whom enquiry proceedings were initiated, enquiry proceedings have now got completed in respect of the following:

1. Digital Leasing & Finance Ltd., member of NSE and;

2. M/s. Bharat J. Patel, member of BSE

It may be mentioned that the trading terminal of Digital Leasing & Finance Ltd. was switched off by the National Stock Exchange from June 10, 1998 on account of failure to meet pay-in liability to the exchange. The trading terminal M/s. Bharat J. Patel was deactivated by the Stock Exchange, Mumbai pursuant to the Order u/s. 11 read with section 11 B of SEBI Act with effect from November 2, 1998.
 
After considering the recommendations of the enquiry officer, submissions made by these brokers, i.e. Digital Leasing & Finance Ltd. and M/s. Bharat J. Patel and the materials and evidences available on record, it was found that these brokers were involved in the manipulations in the scrips of BPL, Videocon and Sterlite. These brokers dealt for common set of clients i.e. Damayanti Group for the first time who did not have any professional expertise in the securities market and financial soundness to deal at such large scale. They did not charge any upfront margins also from these clients. These brokers acting in concert with other brokers cornered a very large quantity of shares of BPL, Videocon and Sterlite and created artificial market & manipulated the prices of these scrips and upset the equilibrium of the market. It was also found that the above members made purchases, which were excessive and beyond their client’s means & financial resources. It was also found that Digital Leasing & Finance Ltd. had not reported the spot transactions entered by it to the exchange in time. Further, in the case of M/s. Bharat J. Patel, it was found that the member had through one of its group companies provided finance to Damayanti group entities in the garb of spot purchase of shares. 
 
These brokers were thus, guilty of violating the provisions of SEBI Act, 1992 read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 1995, SEBI (Stock brokers and sub-brokers) Regulations, 1992 and its Code of Conduct and Bye-laws of the Exchange where they are members. 
 
In view of the above, SEBI has ordered the suspension of the registration of these brokers. Suspension has been ordered for a period of 3 years for Digital Leasing & Finance Ltd. i.e. till June 9, 2001. In the case of M/s. Bharat J. Patel, the member was suspended for a period of 18 months i.e. till May 1, 2000. This period of suspension has been reckoned after taking into account the period of suspension of the trading terminals of the members by the respective exchanges.