ORDER
V.K. Chopra, Member
1. BACKGROUND
1.1 Sureshchand S. Jain is a broker of National Stock Exchange (NSE) with SEBI Registration No. INB230650717 (hereinafter referred to as “the Broker”). Securities and Exchange Board of India (hereinafter referred to in short as “the Board”) had ordered an investigation into the affairs relating to buying, selling and dealing in the shares of Ranbaxy Laboratories Ltd (hereinafter referred to in short as “Ranbaxy”) on observing significant increase in the price and volume in the scrip of Ranbaxy particularly in the Stock Exchange, Mumbai (BSE), National Stock Exchange (NSE) and Calcutta Stock Exchange (CSE).
1.2 The Board after considering Investigation report, appointed an Enquiry Officer vide Order dated November 29, 2002 to enquire into the alleged violations committed by the Broker under the provisions of the Regulation 7, read with schedule II, clause A(3) and (4) of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to in short as “Stock Brokers Regulations”) and the provisions of Regulation 4 (a) to (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995 (hereinafter referred to in short as “PFUTP Regulations”) and Rules, Regulations and Bye-laws of Stock Exchanges.
1.3 The Enquiry Officer, after conducting an enquiry in accordance with the provisions of Regulation 6 of the Securities and Exchange Board of India (Procedure for holding Enquiry by Enquiry Officer and imposing penalty) Regulations, 2002 (hereinafter referred to as ‘the Enquiry Regulations’), submitted a report dated September 09, 2003 whereby he found the broker to have violated the provisions of 4 (b) and (c) of PFUTP Regulations and Regulation 4.6.2 of NSE Capital Market Regulations as well as Regulation 7, read with schedule II, clause A(3) and (4) of Stock Brokers Regulations. Accordingly, he recommended suspension of registration of the Broker for a period of four months.
2. SHOW CAUSE NOTICE
2.1 Pursuant to the receipt of the said Enquiry Report, a Show Cause Notice dated September 23, 2003 was issued to the Broker, along with a copy of the said Enquiry Report, advising them to show cause as to why the action, as recommended by the Enquiry Officer, should not be imposed on them. The Broker submitted its reply to the said show cause notice, vide letter dated October 23, 2003.
3. REPLY OF THE BROKER
3.1 The Broker stated that they have always taken care to meet the requirements of law, rules and regulations and there are no complaints against them before SEBI, Stock Exchanges or any other authorities in relation to their business dealing.
3.2 The Broker stated that they had traded in the scrip as jobbing and arbitrage between NSE/BSE, i.e taking benefit of the price difference between the NSE and the BSE, by buying particular scrip on one exchange and selling the same on the other exchange simultaneously or within a few seconds and very little trade was done on behalf of clients. They stated that the arbitrage business mainly depends on high turnover and not on high margins.
3.3 The Broker stated that occasionally the buy and sell orders within the organisation of the Broker may match as a part of its business and quoted an example that out of the 5,754 trades executed by the Broker on September 22, 1999, one trade took place by matching of the Broker’s own buy and sell orders for Ranbaxy.
3.4 The Broker stated that they had deployed about eight terminals each of both BSE and NSE. One dealer would buy from the exchange where the scrip price is low and the other dealer would sell it on the other exchange. They were allowed to deal and take decision themselves within the limits given to them.
3.5 The Broker stated that the allegation of 16 synchronised trades (“identified transaction”) carried out by them in Ranbaxy on 15 different identified days (i.e about one synchronised trade per day on 15 different days, spread over a span of nearly 9 months) is baseless. Further, the Broker has given a table showing comparison of the Broker’s own turnover and NSE turnover for all the identified days and stated that the total volume of the Broker (quantity – wise and value – wise) of Ranbaxy was only 1.93% and 1.85% of the total volume of Ranbaxy at NSE. The volume of the identified synchronized trades (quantity – wise and value – wise) was a meagre 0.14% of the total volume in respect of Ranbaxy at NSE. It is also stated that approximately 15 to 40 lakh shares of Ranbaxy were traded (buy or sell) at NSE on each of the identified days.
3.6 The Broker has given explanation for 7 out of 16 synchronised deals and stated that all the transactions were genuine transactions of arbitrage and jobbing and were carried out without any manipulative intent. They stated that the Enquiry Officer has referred to “synchronised deals” at different places in the Enquiry Report, but not explained its meaning. According to Broker, synchronised deal means a deal where an order is placed to buy and sell the same quantity of scrip, at the same time and at the same price and the order gets fully executed so as to increase the volume of the scrip in the market without incurring any loss or profit. On the basis of the explanation, Broker stated that none of the orders entered by him were synchronised order and were not fictitious in nature as most of these trades were partially executed.
3.8 The Broker stated that the identified transactions were very small as compared to the total volume carried out by them and therefore there is no basis to doubt that those transactions were not commensurate with its financial soundness. Accordingly it is submitted that they have not violated Regulation 7 r/w clause A(3) and (4) of the Code of Conduct as specified in Schedule II of Stock Brokers Regulations, as alleged in the Enquiry Report.
3.9 The Broker also stated that the orders for the alleged synchronized trades are not continuous and there are a number of orders placed in between these orders. Also, the order quantity was not the same. On these grounds, the Broker contented that their trades are not synchronised. The Broker has also contented that the motive for the alleged synchronized trades had not been established by the Enquiry Officer. The Broker has also explained certain transactions as correction trades.
3.10 The Broker stated that none of the dealings was a negotiated deal prohibited by SEBI by its circular dated September 14, 1999 and also stated that they have not violated the provisions of the Regulation 7, read with schedule II, clause A(3) and (4) of Stock Brokers Regulations and the provisions of Regulation 4 of PFUTP Regulations and byelaws of BSE/Regulations of NSE.
4. HEARING
4.1 The Broker was accordingly advised to attend the personal hearing before me at SEBI’s Head office at Mumbai on August 22, 2006 at 11 a.m, which they attended along with their Advocates. During the course of hearing, the Broker sought time to file written submission for which 7 days time had been granted. Accordingly written submission was filed by them on August 29, 2006.
5. CONSIDERATION OF ISSUES & FINDINGS
5.1 I have carefully examined the Enquiry Report, Show Cause Notice, Reply of the Broker and submissions made at the time of hearing and observe as under.
5.2 The scrip of Ranbaxy Laboratories Ltd. (hereinafter referred to as ‘Ranbaxy’) traded around the price range of Rs. 270/- at the beginning of January 1999. The price of the scrip moved up to Rs. 320/- by the end of January 1999. Subsequently, price continued to move upward during February – March 1999 and reached to Rs. 650/- by the end of March 1999. Further, the price of the scrip moved to Rs. 700/- during May 1999 and came down to Rs. 600/- during June 1999. The price subsequently moved upwards and touched Rs. 800/- during July 1999 and Rs. 1000/- during August 1999. The scrip was being traded in the range of Rs. 900/- to Rs. 1100/- during August – September 1999 and the price increased to Rs. 1200/- during October 1999. Effectively, the price of the scrip moved up from Rs. 267 on January 01, 1999 to a high of Rs. 1215/- on October 13, 1999. Later on the price started falling gradually and closed at Rs. 869 on October 29, 1999 at BSE. The price of the scrip of Ranbaxy had moved significantly during the period from Rs. 270/- in January 1999 to about Rs. 1200/- in October 1999. The price rise in the scrip was accompanied with significantly high volumes.
5.3 The Enquiry Officer has arrived at a conclusion in his enquiry report that the Broker had carried out 16 instances of synchronization of trades with a view to create misleading appearance of trading which tampers with price discovery mechanism of stock exchange .
5.4 I find that the entire charge levelled against the Broker is on the basis of the aforesaid synchronised trades. The synchronised trade is a kind of transactions where the seller and buyer execute the trade for almost same quantity and price at substantially the same time. It is pertinent to note that synchronised trade per se is not illegal. On the other hand, the synchronised deal with fraudulent or deceptive intention to create artificial market is a grave offence.
5.5 Hence, the issue to be decided in this case is whether the Broker has carried out any such synchronised trades and whether the penalty recommended by the enquiry officer against the Broker is warranted or not. In order to decide the said issues, I felt it necessary to analyse the details of synchronised trades executed by the Broker which is hereunder:
Trade Dt
Trd Time
Trd Pr
Trd Qty
Buy Order Entry Time
Buy Member Code
Buy Client Code
Buy Original Volume
Buy Limit Price
Sell Order Entry time
Sell Member Code
Sell Client Code
Sell Original Volume
Sell Limit Price
3/19/99
15:55:07
613.00
1194
15:54:31
6507
6507
2000
613.00
15:55:03
6507
6507
1500
613.00
3/22/99
11:39:21
652.00
3475
11:39:07
6507
6507
10000
652.00
11:39:21
6507
6507
5000
652.00
3/22/99
11:39:43
650.00
3495
11:39:43
6507
6507
5000
650.00
11:39:35
6507
6507
5000
650.00
4/21/99
11:35:40
604.00
1105
11:35:01
6507
S
3440
604.00
11:35:40
6507
6507
4000
604.00
5/4/99
12:33:20
611.00
1050
12:33:20
6507
6507
2000
611.00
12:33:12
6507
6507
1050
611.00
5/17/99
10:11:31
728.00
1000
10:11:17
6507
6507
2000
728.00
10:11:31
6507
6507
1000
728.00
7/7/99
12:19:04
702.00
3200
12:18:59
6507
CLI
10000
702.00
12:19:04
6507
6507
5000
702.00
7/21/99
14:08:00
855.80
2000
14:07:49
6507
6507
10000
855.80
14:08:00
6507
6507
2000
855.80
8/10/99
12:05:50
977.00
1196
12:05:50
6507
6507
2000
977.00
12:05:37
6507
6507
2000
977.00
8/12/99
11:53:15
1048.50
9800
11:53:15
6507
6507
20000
1048.50
11:53:06
6507
CLI
10000
1048.50
8/20/99
11:07:38
1039.00
3230
11:07:38
6507
6507
10000
1039.00
11:07:22
6507
6507
5000
1039.00
8/31/99
14:14:49
1125.50
9998
14:14:49
6507
6507
10000
1125.50
14:14:49
6507
6507
10000
1125.50
9/7/99
11:05:32
1091.50
1000
11:05:32
6507
6507
1000
1091.50
11:05:29
6507
V
1000
1091.50
9/22/99
10:34:41
1024.00
1112
10:34:41
6507
6507
2000
1024.00
10:33:52
6507
6507
2000
1024.00
9/23/99
12:06:50
1050.00
2953
12:06:29
6507
SS
10000
1050.00
12:06:50
6507
6507
3175
1050.00
9/24/99
12:30:38
1090.00
3910
12:30:38
6507
6507
4429
1090.00
12:30:28
6507
SS
10000
1090.00
5.6 I find that 16 instances of synchronization of trades have been carried out by the Broker on 15 different days. I note that that the Broker had neither disputed the above price rise nor denied entering into the synchronised deals in the scrip of Ranbaxy in NSE during the period January 01, 1999 to October 31, 1999. It is observed from the above table that the matching of transactions have taken place on number of days. I am of the view that the said transactions cannot be a coincidence, but is possible only if such trades are put in the system with prior understanding simultaneously to match. It is observed that on March 22, 1999, the Broker had placed both buy and sell order. The buy order was for 10,000 shares at the first instance at 11.39.21 and another buy order was placed for 5,000 shares at 11.39.43. These buy orders were matched with corresponding sale orders of Broker for 5000 shares each at 11.39.21 and 11.39.35 respectively. Out of this the order matched for the first buy and sell order was for 3475 shares of Ranbaxy and for the second buy and sell order, the shares matched were 3495 shares.
5.7 The Broker during the course of hearing submitted that the said 16 synchronised trades were carried out as a part of their arbitrage and jobbing business. I am not fully agreeing to the said contention of the Broker. Arbitrage generally means the simultaneous purchase and sale of shares in order to make profit from a difference in the price. This usually takes place on different exchanges or marketplaces. In the instant matter Broker himself carried out the aforesaid 16 synchronised trade in NSE and the same can not be treated as their arbitrage business. However, the same appears to be in the nature of jobbing.
5.8 I am of the view that 16 synchronized deals with the gap of number of days between trades which were spread over a period of almost 8 months may not affect the price discovery mechanism of the Exchange. I observe that there were time gaps ranging from zero seconds to 49 seconds in buy and sell orders in the alleged 16 synchronised trades. Out of these, 13 trades were executed with a time gap in order placing of more than 5 seconds. I also observe that total volume of the Broker (quantity – wise and value – wise) of Ranbaxy was only 1.93% and 1.85% of the total volume of Ranbaxy on the NSE and the volume of the identified trades (16 trades) was a meagre 0.14% of the total volume in respect of Ranbaxy on the NSE. These volumes can be treaded as minuscule compared to the large market volume in the scrip of Ranbaxy. In the absence of any other adverse finding in the Enquiry Report regarding specific violation of code of conduct as stipulated in the Stock Brokers Regulation, I am of the view that the said charge is not tenable against the Broker. Thus, I am inclined to grant benefit of doubt to the Broker.
6. ORDER
6.1 In view of the above facts and circumstances, in exercise of the powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of the said Regulations, I hereby dispose of the show cause notice issued to the Broker without imposing any penalty or direction in terms of Regulation 13(4) of SEBI Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 on the Broker, Sureshchand S Jain.