ORDER
V.K. Chopra, Member
1. Background
1.1 M/s Wall fort financial services Ltd., is a broker of National Stock Exchange (SEBI Registration No. INB230852430), Stock Exchange Mumbai (SEBI Registration No. INB 010852433), Calcutta Stock Exchange with (SEBI Registration No. INB030852439). Securities and Exchange Board of India (hereinafter referred to in short as “Board”) had conducted 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 sudden spurt in the price and volumes of Ranbaxy traded in the Exchanges particularly on the Stock Exchange, Mumbai (BSE), National Stock Exchange (NSE), Calcutta Stock Exchange (CSE). The price of the scrip of Ranbaxy had moved up significantly during the period from Rs. 270/- in January 1999 to about Rs. 1200/- in October 1999 accompanied with significant increase in volumes.
1.2 The Board, after considering the Investigation Report, appointed an Enquiry Officer vide Order dated February 11, 2003 to enquire into the violations allegedly committed by M/s Wall fort financial services Ltd (hereinafter referred to in short as “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), (b), (c) and (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 the Stock Exchange.
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 in short as “Enquiry Regulations”) submitted a report dated August 11, 2004 under Regulations 13(1) of the Enquiry Regulations. The Enquiry Officer in his report observed that the broker had generated artificial volume in the scrip of Ranbaxy which amounts to misuse of trading system in terms of Regulation 4(b) of PFUTP Regulations and Clause A(4) of Stock Brokers Regulations. He recommended a minor penalty of warning to the broker.
2. Show cause notice
2.1 Pursuant to the receipt of the said Enquiry Report, a show cause notice dated September 24, 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 action should not be imposed on it. In the said show cause notice, it was specifically stipulated that the broker’s explanation should be reached in SEBI within 15 days from the date of receipt of the said show cause notice and also advised it to indicate as to whether the broker is desirous of attending for personal hearing. The broker neither submitted its reply to the said show cause notice nor sought for a personal hearing.
3. Consideration of issue
3.1 I have carefully considered the findings in the Enquiry Report. I find that the Enquiry Officer has dealt with the issue as to whether the broker has violated SEBI Circular No. SMDRP/POLICY/CIR-32/1999 dated September 14, 1999. I find that the said issue is beyond the scope of enquiry since the same were not covered under the Order dated November 29, 2002 appointing the Enquiry Officer.
3.2 The Enquiry Officer has also examined as to whether the trades executed by Wallfort are illegal and/or manipulative. He held that trades executed by the broker are in the nature of jobbing. During the enquiry proceedings, the broker has stated that in all except in one case, buy order has been placed first. The reason given by the broker for such manner of execution is that since NSE system was very slow for cancelling the part of buy orders, they entered trades for unexecuted quantity of shares so as to reduce losses. However, the Enquiry Officer rejected the said contention of the broker and held that once an order for buy is put in the trading system and the broker does not want to get the buy order matched, it only has the option to cancel the trades and should not enter into an opposite transaction which would generate artificial volumes. In view of this finding, Enquiry Officer held that the act of the broker had generated artificial volume in the scrip of Ranbaxy and misused the trading system which are in violation of Regulation 4(b) of PFUTP and Clause A(4) of Stock Brokers Regulations.
3.3 Further, I find that the entire charge levelled against the broker is on the basis of the structured/synchronised trades. I find that structured/synchronised deal is per se not illegal. On the other hand, such deal with fraudulent or deceptive intention to create misleading appearance of trading and to manipulate the price or volume of the scrip, is a grave offence.
3.4 Hence the issue to be decided in this case is, whether the broker has carried out any such trades and whether the penalty recommended by the Enquiry Officer against the broker is warranted or not. In order to decide the said issue, 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 Order No
Buy Member Name
Buy Client Code
Buy Original Volume
Buy Limit Price
Sell Order Entry time
Sell Order No
Sell Member Name
Sell Client Code
Sell Original Volume
Sell Limit Price
Price diff
Time Diff
11-Mar-99
13:52:55
511.00
15202
13:52:17
9903110344023
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
511.00
13:52:55
9903110344761
WALLFORT
FINANCIAL SERVICES LTD
8524
20000
511.00
0
0:00:38
17-Mar-99
13:00:31
559.55
25000
13:00:09
9903170284556
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
559.55
13:00:30
9903170285077
WALLFORT
FINANCIAL SERVICES LTD
8524
25000
559.55
0
0:00:21
17-Mar-99
13:00:31
559.55
7465
13:00:09
9903170284556
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
559.55
13:00:31
9903170285096
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
559.55
0
0:00:22
19-Mar-99
12:44:07
610.00
13241
12:43:33
9903190254251
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
610.00
12:44:07
9903190255130
WALLFORT
FINANCIAL SERVICES LTD
8524
30000
610.00
0
0:00:34
12-Apr-99
11:22:41
582.00
13782
11:22:05
9904120149906
WALLFORT
FINANCIAL SERVICES LTD
8524
40000
582.00
11:22:41
9904120150756
WALLFORT
FINANCIAL SERVICES LTD
8524
25000
582.00
0
0:00:36
29-Apr-99
12:40:13
545.00
3949
12:39:25
9904290232932
WALLFORT
FINANCIAL SERVICES LTD
8524
25000
545.00
12:40:13
9904290233733
WALLFORT
FINANCIAL SERVICES LTD
8524
10000
545.00
0
0:00:48
30-Apr-99
14:44:01
574.00
5000
14:43:44
9904300333395
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
574.00
14:44:01
9904300333666
WALLFORT
FINANCIAL SERVICES LTD
8524
5000
574.00
0
0:00:17
30-Apr-99
14:44:01
574.00
10000
14:43:44
9904300333395
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
574.00
14:43:35
9904300333260
WALLFORT
FINANCIAL SERVICES LTD
8524
10000
574.00
0
0:00:09
30-Apr-99
14:44:09
574.00
24319
14:43:44
9904300333395
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
574.00
14:44:09
9904300333822
WALLFORT
FINANCIAL SERVICES LTD
8524
30000
574.00
0
0:00:25
5-May-99
11:24:18
648.00
32518
11:23:55
9905050183214
WALLFORT
FINANCIAL SERVICES LTD
8524
40000
648.00
11:24:18
9905050183840
WALLFORT
FINANCIAL SERVICES LTD
8524
35000
648.00
0
0:00:23
7-May-99
10:30:26
695.00
9670
10:29:43
9905070106192
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
695.00
10:30:26
9905070107835
WALLFORT
FINANCIAL SERVICES LTD
8524
15000
695.00
0
0:00:43
7-May-99
10:30:26
695.00
20476
10:29:43
9905070106192
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
695.00
10:30:26
9905070107836
WALLFORT
FINANCIAL SERVICES LTD
8524
30000
695.00
0
0:00:43
7-May-99
10:32:07
698.00
9891
10:31:52
9905070111145
WALLFORT
FINANCIAL SERVICES LTD
8524
25000
698.00
10:32:07
9905070111762
WALLFORT
FINANCIAL SERVICES LTD
8524
25000
698.00
0
0:00:15
7-May-99
14:43:48
689.00
26406
14:43:35
9905070448381
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
689.00
14:43:48
9905070448629
WALLFORT
FINANCIAL SERVICES LTD
8524
30000
689.00
0
0:00:13
12-May-99
15:29:41
725.00
13168
15:28:26
9905120602145
WALLFORT
FINANCIAL SERVICES LTD
8524
30000
725.00
15:29:08
9905120603231
WALLFORT
FINANCIAL SERVICES LTD
8524
20000
725.00
0
0:00:42
19-May-99
10:27:03
729.00
28001
10:26:32
9905190096743
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
729.00
10:27:03
9905190098116
WALLFORT
FINANCIAL SERVICES LTD
8524
50000
729.00
0
0:00:31
19-Jul-99
14:36:59
818.00
2326
14:36:29
199907190490256
WALLFORT
FINANCIAL SERVICES LTD
8524
25000
818.00
14:36:59
199907190490890
WALLFORT
FINANCIAL SERVICES LTD
8524
10000
818.00
0
0:00:30
7-Oct-99
10:31:30
1075.00
18340
10:31:13
199910070176306
WALLFORT
FINANCIAL SERVICES LTD
8524
35000
1075.00
10:31:30
199910070177147
WALLFORT
FINANCIAL SERVICES LTD
8524
25000
1075.00
0
0:00:17
3.5 I find from the above table that the broker had executed 18 synchronised transactions during the course of investigation period i.e. between January 01, 1999 to October 31, 1999. The broker executed sell and buy order ranging from 5,000 shares to 50,000 shares. Further, the broker executed four trades in March 1999, five trades in April 1999, seven trades in May 1999, one trade in July 1999 and one trade in October 1999. These transactions can be treated as minuscule percentage of total market volume in the scrip of Ranbaxy.
3.6 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 during the period January 01, 1999 to October 31, 1999. The broker contented before the Enquiry Officer that such synchronised trades are part of their jobbing business.
3.7 I find that the matching of transactions has taken place in a number of days. I am of the view that the said transactions cannot be coincident, but is possible only if such trades are put in the system with prior understanding simultaneously to match. The reason given by the broker for such trade is that since NSE system was very slow for cancelling the part of buy orders, they enter trades for unexecuted quantity of shares so as to reduce losses. This is not an acceptable reason and the Enquiry Officer has already discussed the said issue and rejected this contention as stated supra. I do agree with the said finding of the Enquiry Officer. Further, the broker had not given any other sufficient reason for such transactions.
3.8 In view of these, I find that that broker has put these trades with a view to create misleading appearance of trading. These trades tamper with price discovery mechanism of stock exchange. The broker had entered into a number of synchronized deals. These trades abetted in creating artificial volumes and false market in the scrip of Ranbaxy and are in violation of the Regulation 7 read with the Clause A(4) of Code of Conduct as specified in Schedule II of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, which provides that,
(4) Malpractices : A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stock-broker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness.
3.9 Further broker through these dealings in the scrip of Ranbaxy has violated the provisions of Regulation 4(b) of PFUTP, which provides that,
• No person shall –
4(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;
4. ORDER
4.1 Therefore, I find that the broker had violated the provisions of 4(b) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and Regulation 7 read with Section A(4) of Code of Conduct as specified in Schedule II of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. At the same time, I also observe that the broker has carried out a minuscule volume in the scrip of Ranbaxy. Considering the said aspects and all other facts and circumstances of the case, I am of the view that a penalty of censure is sufficient.
4.2 Now, therefore, 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 impose a minor penalty of ‘censure’ in terms of Regulation 13(4) of SEBI Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 on M/s Wall fort financial services Ltd.
4.2 This order shall come into force with immediate effect.