1. M/S Artistic Finance Private Ltd. (hereinafter referred to as AFPL) is a member of National Stock Exchange registered with SEBI as a Stock Broker.

2. An investigation was conducted into alleged price manipulation in the scrip of M/S Maruti Organics Ltd. (Maruti). Investigations revealed that AFPL dealt in the scrip of Maruti on behalf of its client Shri. Raj Kumar. The trading position of the client was as under :-

Date Buy Sell Cumulative Net



24/06/96 5000 0 5000



25/06/96 0 5000 0



26/06/96 28000 0 28000



27/06/96 43000 0 71000



28/06/96 1100 56400 15700



01/07/96 40000 17300 38400



02/07/96 0 38400 0



03/07/96 100000 0 100000



04/07/96 50000 40000 110000



3. The margin money balance for the client is as follows:

Date Amount Mode of payment



22/06/96 50000/- Cash



27/06/96 50000/- Cash



Settlement No. 25,26

138399/-

Profit settlement no. 25,26

4. Investigations brought out that the broker enrolled Shri Raj Kumar as client in June 1996 and at the time of enrolling, the broker entered into Member Constituent Agreement with Shri Raj Kumar. It was observed that Shri Raj Kumar absconded later without paying for the purchase of 110000 shares of Maruti made by him. It appeared that a few brokers acting in concert were trying to defraud the National Clearing Corporation (NCCL). Settlement Guarantee Fund of NCCL guarantees settlement/payment for each trade entered at the Exchange. In view of this, in the event of failure of the buyer to pay, NCCL would have to pay the sellers. NSE, from its investigations, held that these transactions in MOL were collusive trades and ordered annulment of the same.

5. It was noticed that the broker was not careful while enrolling his client. The broker allowed large position to be built up position as above. The client built up a position of 71000 shares on June 27th and the margin money available with the broker was only Rs. 1.0 lacs. The position was reduced to nil by July 2nd . However on July 3rd , 1996 fresh purchase position of 100000 shares was allowed to be built up in the scrip of Maruti. The client increased his net position by 10000 shares on the next day. The client failed to pay for this purchase of 110000 shares and absconded.

6. It was prima facie felt that the broker allowed an unknown client to build up huge position in a volatile, illiquid scrip without taking sufficient margins and this position was beyond its financial capacity. The broker thus did not take enough precaution to prevent risk to the safety and integrity of the market. This unprofessional conduct caused risk to smooth settlement of trading at the Exchange. On these facts, for the prima facie violation of SEBI (Stock Broker & Sub-Broker) Regulations, 1992, enquiry proceedings were initiated against the broker.

7. A show cause notice communicating the findings of the investigation was issued by the Enquiry Officer asking the broker to show cause why action should not be initiated for violating Clause A (1 to 5) and B(4a) of Code of Conduct read with Schedule II in terms of Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992.

8. The said show cause notice, was replied to by the broker vide its letter dated August 11, 2000. The broker in its reply has contended that they had visited personally the office of their client Shri Raj Kumar to verify his address. They have also said that they had collected margin from their client Shri Raj Kumar before starting any business on his account. It was claimed that it was at their instance that investigations were taken up by NSE and SEBI. The member had executed the member-constituent agreement with the client.

9. The Enquiry Officer after taking into account all the relevant facts and submissions made by the broker, in accordance with Regulation 28(7) of the said Regulations, submitted his report dated August 6, 2001 recommending issue of a warning and that the Member may be asked to be careful in future with regard to such transactions.

10. Consequent upon this, a show cause notice as required under Regulation 29(1) of SEBI (Stock Broker and Sub Brokers) Rules and Regulations, 1992, enclosing a copy of the enquiry report was issued to the broker. The broker was called upon to show cause as to why action as recommended by the Enquiry Officer should not be taken against it.

11. The broker was also advised to submit their reply, if any, within 21 days of the receipt of the show cause failing which it will be presumed that it has no explanation to offer.

12. AFPL replied to the show cause notice vide their letter dated September 12, 2001 contending that the Enquiry Officer has not has not found it violative of any regulatory requirement in force at that time. The broker further contended that the Enquiry report rather spoke of their having complied with all statutory requirements including payment of margin money to the NSE. The broker also said that the report infact has inferred that a fraud had been committed upon them by the absconding client and that they had become a victim. The broker has contended that even issuing of a warning in this may not appear to be reasonable as it would tantamount to punishing a victim. Pursuant to this request a personal hearing before me was granted. Shri. Ajay Bansal from the broker company appeared before me on 05/07/2002 and made submissions. Shri Ajay Bansal reiterated the submissions made by the broker earlier in writing.

13. On examination of material and evidence available on record, enquiry report and the submissions made from time to time, I find that the broker had executed a member-constituent agreement with his client and did not default in the payment to the Exchange. Though the broker met the payment obligation to the Exchange from its own resources it is also true that the broker allowed the client to build up a position which was beyond its financial capacity. In view of the above I tend to agree with recommendation of the Enquiry Officer that the broker be warned and asked to be careful in future.

14. In exercise of the powers conferred upon me by Sub-Section (3) of Section 4 of SEBI Act, 1992 read with sub-regulation (3) of Regulation 29 of SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations 1992, I hereby issue a warning to M/S Artistic Finance Private Ltd. and direct them to be cautious and diligent in future while dealing with its clients. It is further directed that the broker should refrain from indulging in any activity which may amount to violation of the provisions of SEBI Act, 1992 Securities Contracts Regulation Act, 1956 and Rules and Regulations made there under. It is further ordered that any violations in future in complying with SEBI Act, 1992, Securities Contracts Regulation Act 1956, the Regulations and the Guidelines framed/issued there under from time to time, would be viewed seriously.