ORDER
V.K. Chopra, Member
1. BACKGROUND
1.1 M/s Somani Stock Broking Pvt. Ltd, is Broker (hereinafter referred to as “the Broker”) of Calcutta Stock Exchange (CSE) bearing SEBI Registration No. INB030757339 and OTCEI bearing SEBI Registration No. INB200757333. 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”) including the dealings of the Broker.
1.2 The price of the scrip of Ranbaxy had moved up significantly from Rs. 270/- in January 1999 to about Rs. 1200/- in October 1999 accompanied with significant increase in volumes. The Board initiated preliminary investigation into the scrip in August 1999 considering the above major spurt in price and volumes traded in the Exchanges particularly on the Stock Exchange, Mumbai (BSE), National Stock Exchange (NSE), Calcutta Stock Exchange (CSE) and Delhi Stock Exchange (DSE).
1.3 The Board after considering the Investigation Report appointed an Enquiry Officer vide Order dated November 27, 2002 to enquire into the violations allegedly committed by the Broker under provisions of Regulation 4(a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 (hereinafter referred to in short as “PFUTP Regulations”), Regulation 7 read with Clause A(3) & A(4) of Schedule II of the Code of Conduct for stockbrokers of the SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992 (hereinafter referred to in short as “Stock brokers Regulations”) and Rules, Regulations and Bye-laws of Stock Exchanges.
1.4 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 submitted a report dated December 23, 2003 wherein he observed that the Broker violated the provisions of SEBI circular No. SMDRP/POLICY/CIR-32/1999 dated September 14, 1999; Regulation 7 read with Clause A(3) and (4) of Code of Conduct as specified in Schedule II of Stock brokers Regulations; and Regulation 4(b) & (c) of PFUTP Regulations. He recommended suspension of registration of the Broker for a period of six months.
2. SHOW CAUSE NOTICE
2.1 Pursuant to the receipt of the said Enquiry Report, a Show Cause Notice dated April 28, 2004 was issued to the Broker, along with a copy of the said Enquiry Report, advising the Broker to show cause as to why the action, as recommended by the Enquiry Officer or any other penalty deemed appropriate, should not be imposed on them. The Broker submitted its reply to the said show cause notice, vide letter dated May 19, 2004.
3. REPLY OF THE BROKER TO THE SHOW CAUSE NOTICE
3.1 The Broker stated that the recommendation made by the Enquiry Officer is not commensurate with the purported findings and hence the same is unsustainable.
3.2 The Broker stated that they did not execute any synchronized trades in the scrip of Ranbaxy. They further stated that the charge of artificial matching of trade by executing nineteen transactions can not be levelled merely because a purchase order and a sale order happens to be entered at around the same time for the same price and that too in a screen based trading mechanism of the stock exchange.
3.3 The Broker submitted that the Enquiry Officer has failed to show the basis on which prices and quantities have been negotiated outside the system.
3.4 The Broker stated that eight out of a total of nineteen transactions took place prior to September 14, 1999, the date on which SEBI issued its circular prohibiting negotiated deals. Therefore, the Enquiry Officer has acknowledged that the allegation of a violation in respect of gross trades of 1,71,500 shares of Ranbaxy is not sustainable, and that such allegations, if any, ought to be restricted only to 86,000 shares.
3.5 The Broker stated that there was an observation in the Enquiry Report that out of 1,71,500 shares, 20,000 shares were matched with brokers associated with one Mr Dinesh Kumar Singhania, who is associated with Ketan Parekh Group. The Broker stated that the rationale behind such a purported finding is inexplicable. Further, there is not even an allegation in the Enquiry Report that they were aware of any linkage between the said brokers and Ketan Parekh Group.
3.6 The Broker stated that the Enquiry Officer has failed to show any reason for his finding regarding the tampering of price discovery mechanism.
4. HEARING
4.1 In the said reply to show cause notice, the Broker requested for personal hearing. The Broker was accordingly advised to attend the personal hearing before me at SEBI’s Head Office at Mumbai on September 28, 2006. Mr Somashekhar Sundaresan, Advocate and Mr. Rakesh Somani Director of Somani Stock Broking Pvt. Ltd. attended the hearing. Therefore, I am proceeding in the matter on the basis of the submission of the Broker and the materials before me.
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.
5.2 I find from the Enquiry Report that the scrip of 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 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 increased to Rs. 1200/- during October 1999. Effectively the price of the scrip moved up from Rs. 267 on 01.01.99 to a high of Rs. 1215/- on 13.10.99. Later on the price started falling gradually and closed at Rs. 869 on 29.10.99 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 significant increase in volumes.
5.3 I find that the Enquiry Officer has arrived at a conclusion in his enquiry report that the Broker has carried out 19 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 charges levelled against the Broker are on the basis of the aforesaid 19 synchronized trades. The synchronized 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. I find that synchronized deal per se is not illegal. On the other hand, the synchronized deal with fraudulent or deceptive intention to create misleading appearance of trading and to manipulate the price and volume of the scrip price to tamper the price discovery mechanism of stock exchange with a view to get undue gain out of it, is no doubt a grave offence.
5.5 Hence, the issue to be decided in this case is whether the Broker has carried out any such synchronized trades so as to take a decision as to whether the penalty recommended by the Enquiry Officer against the Broker is warranted. I find that the Broker executed 19 synchronized/matching trades in the shares of Ranbaxy. Synchronized/matching trades are evident in all the cases as order quantity and price is same with counter party order quantity and price. Orders were placed at the same time in most of the cases with counter party brokers while in few cases the orders were matched within a period of 1-2 seconds. I also find that the percentage of matching transactions of the member to his total transactions in the share of Ranbaxy during the period under consideration is 40.38%.
5.6 The Enquiry Officer observed that order of 20,000 shares out of total of 1,71,500 shares (i.e. 12%) of the Broker were matched with the broker Dinesh Kumar Singhania, who had dealt for entities connected or associated with Ketan Parekh group. The Enquiry Officer also observed that Dinesh Kumar Singhania had been declared defaulter by CSE and SEBI had subsequently cancelled his registration as per Press Release dated October 22, 2001. I find that only one synchronised trade was executed by the Broker with Dinesh Kumar Singhania and that too among the trades within a period of 6 months. This large gap suggests the possibility that the said trades could be a mere coincidence. Further, there was no other evidence supporting their relationship with Dinesh Kumar Singhania & Co and / or KP Group.
5.7 The Broker has also not disputed the said 19 synchronized trades. What they submitted before me is that they have no intention to get the transaction artificially matched since they had traded in the screen based system where the automated trading server matches purchase orders and sale orders without human intervention. The Broker during the course of hearing and in his written submission dated September 28, 2006 submitted that there is no discussion on price throughout the proceedings and there is no indication of whether the price was manipulated upwards or downwards. It may be noted that 19 synchronized deals with the gap of number of days between trades which were spread over a period of almost 6 months may not affect the price discovery mechanism of the Exchange.
5.8 They also submitted before me that their transaction were a minuscule percentage of total trades in shares of Ranbaxy in the market on the relevant date, and could have had no impact on price. They also pleaded that the Enquiry Officer was wrong in computing the percentage of the transactions by the Broker in Ranbaxy against the total transaction by them in Ranbaxy. They submitted that the real comparison should be against the total volume in the market across all the stock exchanges and in that case, percentage of transaction was less than half a percentage of the total volumes on each of the day on which transaction in question took place. Considering this aspects and the other trading details as stated above, I do not find any pattern that would suggest any intended manipulation. 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 or PFUTP Regulations, benefit of doubt can be given to the Broker. Considering this and all other facts and circumstances of the case, I am of the view that this is not a fit case to impose any punishment.
6. ORDER
6.1 Having regard to the facts stated hereinabove and in exercise of the powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of SEBI Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby dispose of the show cause notice issued to the Broker without imposing any penalty or direction on the Broker, M/s Somani Stock Broking Pvt. Ltd.