1.1 By an ad interim ex-parte Order dated April 27, 2006 (hereinafter referred to as the 'Order') under Section 19 read with Sections 11, 11b and 11(4) of the Securities and Exchange Board of India Act, 1992 and Section 19 of the Depositories Act, 1996 pending enquiry and passing final Order, certain interim directions were issued against various market participants including Anagram Securities Limited. (ASL).
1.2 ASL, a member of National Stock Exchange, was prima facie identified as one of the financiers of the master account holders and an ultimate beneficiary of the shares cornered by the key operators in various IPOs during the years 2003 to 2005. Pursuant to the preliminary finding, ASL was directed not to buy, sell or deal in securities market including in IPOs, directly or indirectly, till further directions. The above directions were applicable only in respect of proprietary dealings by ASL.
2.1 It was found that Shri Purushottam Budhwani, a key operator who had cornered the retail portion of TCS IPO, had transferred 3750 TCS shares to the demat account of ASL (10153985) on August 26, 2004. Therefore, ASL was prima facie identified as one of the financiers of Purushottam Budhwani.
2.2 The gain made by ASL from the aforementioned transaction was worked out to be Rs.5.17 lakhs reckoning the issue price of TCS shares i.e.
Rs. 850/- and the market price on the date of listing Rs. 987.95/-.
2.3 SEBI also found on examination of HDFC Bank Account no.
0602100001225, Fort Branch of Purushottam Budhwani for the year 2005 that he had received Rs. 20,026,460.43 from ASL and made payment of Rs. 32,781,000/- to ASL.
2.4 In view of the above transactions, ASL was identified as a financier of Purshottam Budhwani and ex-parte ad interim directions as mentioned above were issued against ASL.
2.5 ASL was given an opportunity for filing its objections, availing personal hearing and inspection of the relevant documents relied on by SEBI for the purpose of reaching prima facie findings against it, within a period of 15 days.
3.1 ASL filed written submissions dated April 28, 2006 and May 2, 2006.
Subsequently, ASL appeared for a personal hearing before me on May 11, 2006 through Advocate P.N Mody, Advocate Anil Shah, Director Maynak Shah and Compliance Officer Jinesh Shah and made further submissions.
a) ASL had never provided any kind of finance to anyone for subscription to any IPO. ASL had not subscribed to any IPO till date and therefore the question of being beneficiaries in the scheme of cornering retail allotment or forking out big gain on sale as alleged cannot arise.
b) Shri Purushottam Budhwani, a 'key operator' is ASL's client since September 24, 1999 and has been trading on NSE. He had initially opened a trading account with ASL in the name of his sole proprietary concern i.e. Vidya Investments. ASL had duly executed the requisite Client Registration Form and Agreement with him as per the applicable rules. On April 7, 2003, he opened another individual trading account with ASL and again all required formalities were duly complied, while later the earlier account in the name of Vidya investments was closed. On March 19, 2004, Shri Purushottam Budhwani duly executed another client Registration Form and Agreement to open an account with ASL to trade in the F&O segment. Shri Purushottam Budhwani did not at any time default in any of his obligations to ASL in relation to the trades executed through ASL.
c) Anagram Stock Broking Limited (ASBL) is a sister concern of ASL and is also a member of BSE and a DP of NSDL. On October 20, 2005, ASBL and ASL received an Order from Income Tax Department, inter alia, directing them not to remove, part with or otherwise deal with the articles mentioned in the Order without the permission of DDI. Consequently, ASL had frozen all the accounts of Shri Purushottam Budhwani. ASL received a further Order dated December 20, 2005 from Income Tax Department, partially withdrawing the prohibitory Order and directing ASL to sell certain shares mentioned therein and deposit the sale proceeds thereof in the specified bank account with HDFC. Accordingly, ASL sold shares and deposited Rs. 1,47,81,556.33/- in the said bank account with HDFC. d) Shri Purushottam Budhwani had lodged through off-market transactions 3750 shares of TCS with ASL as margin on August 26, 2004(i.e. after listing) for exposure towards trading in the F&O segment of the Exchange, Apart from the said 3750 shares, 5000 shares and 1250 shares of TCS were transferred to ASL's account by Shri Budhwani respectively on August 27, 2005 and December 9, 2005 as margin. A separate identified depository account (No 10153985 with NSDL) is maintained by ASL through the DP, ASBL exclusively for the purpose of holding shares of clients as margins. The said clients are regularly informed about the shares held by ASL as margin on their behalf. Shri Purushottam Budhwani on October 12, 2004 had sold 2000 shares out of the 3750 shares through ASBL and the sale proceeds were credited to the account of Shri Purushottam Budhwani. ASL and ASBL had charged only the regular brokerage for the same. ASL had not made any gain out of the said sale transaction. Further, the remaining 8000 shares of TCS were transferred back from the ASL's account to the BO account of Shri Purushottam Budhwani as per his instructions.
f) ASL had never paid any monies to Shri Purushottam Budhwani beyond what was due to him as credit in his running trading account. Shri Purushottam Budhwani had bought/sold shares for Rs.77.32 crores including the trades in the F&O segment through ASL.
3.3 As advised by me in the personal hearing, ASL submitted the reasons for maintaining more than one margin account vide its letter dated May 15, 2006. ASL submitted that originally ASL used to have separate city/region wise margin accounts since its erstwhile prescribed "COMTEK" back office software required maintenance of decentralized DP margin accounts. Since 2004, ASL changed over to new software called "Pradnya' maintained by Exchange Next, which required centralized margin accounts and thereafter the said decentralized accounts are not operated by ASL.
3.4 The 10 DP margin accounts enlisted in the enclosure to ASL's letter dated May 2, 2006 are its centralized margin accounts. The reasons for maintaining more than one such margin accounts were given as under: a) ASL is required by the applicable rules to maintain separate margin accounts for Cash and F & O segments of the exchange.
b) Both CDSL & NSDL require brokers to open a separate beneficiary account (CISA) along with pool account for quick movement of shares from the pool account.
c) A single DP is allowed to hold stock to the extent of a hundred times of its networth in all the demat accounts opened by it. ASBL, sister company of ASL is a DP member of NSDL. ASL maintains its DP accounts with ASBL. ASBL's net worth was Rs.3.76 crore as on 31st March 2004 and the maximum value of shares that ASBL could hold in all the DP accounts opened by ASBL was Rs.376 crores in 2004-05.
Further, in the event that the value of the stocks held in accounts any point of time during the year were to exceed 90% of the permitted limits, then no new accounts would be allowed to be opened by NSDL. ASL stated that there were some occasions when these limits were crossed. Since ASL's clients' shares towards margin were substantially higher, ASL was incapacitated for its day to day operations and hence it required additional DP beneficiary accounts, which were opened with other DPs to avoid repetition of such problems in future.
d) Other operational reasons such as ensuring smooth operation of settlement procedures of the NSE and compliance of pay in obligation on behalf of clients in terms of both cash and securities necessitated a number of margin accounts.
3.5 ASL further urged for appropriate relief since the interim order was affecting their business.
Whether ASL provided finance to Shri Purshottam Budhwani and was a beneficiary of the shares cornered by Shri Purshottam Budhwani.
Whether ASL had executed the transactions in TCS shares on behalf of its client Shri Purshottam Budhwani and not in its own account.
I have carefully considered the submissions made by ASL, the information provided by NSE regarding the dealings of ASL being not proprietary in nature and the material available on record. On the allegation of financing and cornering shares in the IPO, ASL has submitted that it had never funded or subscribed to any IPO. Further, ASL has clarified that its transactions in the shares of TCS were done on behalf its client Shri Purushottam Budhwani who had been dealing through the broker for the past 15 years. Further, ASL has produced KYC Forms, Client Agreements and Ledger Account.
4.2 ASL has also given the details of 10000 TCS shares which were transferred to its account (10093022) by Shri Budhwani. It is seen that on October 12, 2004, 2000 TCS shares were sold through ASL by Shri Purushottam Budhwani. Further, from the Account Transfer Instruction Report, I find that the remaining 8000 shares were transferred from ASL's Demat Account to the Demat Account of Shri Budhwani. The likely indications are that the trades in the scrip of TCS were not proprietary trades. NSE vide letter dated May 18, 2006 has also informed that ASL did not appear to have traded on proprietary account in the IPO's on the day of listing or 2 days thereafter.
4.3 With regard to the prima facie finding that ASL had been maintaining more than one such margin accounts with other DPs and that in one such account ASL had received the shares of TCS from Shri Purushottam Budhwani and ASL's submission in that connection that the same was done for the administrative convenience as referred in Para 3.4 above, I find that the same puts too simplistic a view on an issue, when there are other dimensions as under: a) Admittedly, ASL and Purshottam Budhwani had a broker-client relationship since 1999.
b) It is incredible that ASL did not know about the securities market activities of Purshottam Budhwani more particularly relating to sale of IPO shares immediately upon listing.
c) Sale of large number of IPO shares by a client should have alerted the broker, more so, when the client had his demat account with a sister concern giving rise to a prima facie inference that the nature of demat account transactions of Purshottam Budhwani might have been within the knowledge of ASL.
5.1 In view of the above, and having regard to the long association with Purshottam Budhwani, as a client, it remains a question how ASL was not aware of the credentials of Purshottam Budhwani. However for the limited purpose of this order, it transpires that ASL acted as a broker only for Purshottam Budhwani and not as financier. ASL has furnished the reasons for maintaining numerous margin accounts. Shri Purshottam Budhwani, its client and a key operator, had made delivery of shares to one of the many client margin accounts maintained by ASL and not to the pool account of the broker. I note that the normal course adopted by the clients having sale obligations is to deliver to the broker's pool account and therefore the transaction of ASL with Purshottam Budhwani wherein the client had delivered shares to broker's client margin account rather than to the pool account does not appear to be in the normal course. Further, I note that SEBI has already initiated adjudication proceedings against ASL in respect of the subject transactions.
6.1 Accordingly, I find there is no need to continue interim directions against ASL as in the ad interim Order dated April 27, 2006. It is clarified that the present order does not foreclose any further action against ASL or any other person/entity, as deemed fit.