2007 (8) TMI 813 - Board - SEBI

Issues Involved:
1. Unusual movement in share price and volume of DSQ Software Ltd.
2. Fraudulent allotment and offloading of shares by the company's promoter.
3. Synchronized and circular trades by associates of the promoter.
4. Involvement of Accord Capital Markets Ltd. in executing synchronized trades.
5. Violations of SEBI regulations by Accord Capital Markets Ltd.
6. Appointment of Enquiry Officer and subsequent proceedings.
7. Consideration of issues and findings regarding the Broker's conduct.
8. Imposition of penalty on Accord Capital Markets Ltd.

Detailed Analysis:

1. Unusual Movement in Share Price and Volume of DSQ Software Ltd.
The shares of DSQ Software Ltd. experienced a significant price increase from Rs. 255 to Rs. 2631 between October 1, 1999, and March 31, 2000, followed by a sharp decline to Rs. 149 by March 31, 2001. This volatility was accompanied by high trading volumes, sometimes reaching 1,000,000 shares daily at NSE and BSE.

2. Fraudulent Allotment and Offloading of Shares by the Company's Promoter
SEBI's investigation revealed that the promoter fraudulently allotted 1.7 crore shares to group/associate entities, out of which 1.3 crore shares were offloaded in the market before listing. This generated Rs. 630 crores, calculated based on the average share price at the time. The promoter's associates sold these shares through synchronized trades, creating an artificial market.

3. Synchronized and Circular Trades by Associates of the Promoter
The investigation found that associates of the promoter engaged in synchronized and circular trades, significantly contributing to the trading volumes at NSE, BSE, and CSE. These trades were executed through various stock brokers, creating an artificial market without changing beneficial ownership.

4. Involvement of Accord Capital Markets Ltd. in Executing Synchronized Trades
Accord Capital Markets Ltd. (the Broker) was found to have executed substantial synchronized trades in the shares of DSQ Software Ltd. for its client Mehta & Ajmera, a partnership firm of its major shareholders and directors. The Broker's proprietary trades also showed synchronization with other brokers, indicating a prior understanding.

5. Violations of SEBI Regulations by Accord Capital Markets Ltd.
The Broker was alleged to have violated Regulation 4(b), (c), and (d) of the FUTP Regulations, Clauses A(1) to (4) of the Code of Conduct under the Broker Regulations, and SEBI circular dated September 14, 1999. The Broker's trades created a misleading appearance of trading, artificial volume, and price in DSQ Software Ltd.'s shares.

6. Appointment of Enquiry Officer and Subsequent Proceedings
SEBI appointed an Enquiry Officer to investigate the alleged violations by the Broker. The Enquiry Officer recommended a major penalty of suspension of the Broker's certificate of registration for 24 months. The Broker was issued a show-cause notice and given opportunities to present its case.

7. Consideration of Issues and Findings Regarding the Broker's Conduct
The Broker's arguments, including the claim that no enquiry could be initiated under the repealed FUTP Regulations, were dismissed. The investigation established the Broker's close business relationship with the promoter and its involvement in synchronized trades. The Broker's trades were found to be executed with prior understanding, contributing to market manipulation.

8. Imposition of Penalty on Accord Capital Markets Ltd.
Considering the Broker's involvement in creating a misleading market and violating SEBI regulations, a major penalty was imposed. The certificate of registration of Accord Capital Markets Ltd. was suspended for twelve months, effective 21 days from the date of the order.

Conclusion:
The judgment highlights the fraudulent activities and market manipulation by DSQ Software Ltd.'s promoter and associates, with significant involvement from Accord Capital Markets Ltd. The Broker's synchronized trades were found to violate multiple SEBI regulations, leading to the suspension of its registration. The decision underscores SEBI's commitment to maintaining market integrity and protecting investors.

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