ORDER
G. Anantharaman, Member
1. BACKGROUND
1.1 It was observed that the price of the shares of M/s Prime Capital Markets Ltd. (hereinafter referred to as PCML) which were listed at the Calcutta Stock Exchange Association Limited (hereinafter referred to as CSE) had increased from Rs. 14.00/- on March 17, 2005 to Rs. 280.40/- on September 15, 2005 i.e an increase of 1903% within a period of 5 months and 28 days. It has been alleged that the financials of PCML were not strong enough for the aforesaid price increase and therefore it, appeared that the said price rise had occurred on account of manipulation by certain entities/stock brokers.
1.2 A preliminary analysis of the trading data for the said period at CSE revealed that certain stock brokers namely Shri. Sanju Kabra, Shivam Stock Broking Pvt. Ltd, and M/s. D.B & Co. (members of CSE) contributed substantially in the total volume of the shares of PCML during the above period. It was further revealed that the said stock brokers executed cross deals/synchronized trades among themselves and the same constituted a major portion (about 93%) of trading in the said shares. It was observed that the price movement and the share transactions in the said shares were prima facie artificial and designed to create a false market and artificial price.
1.3 The turnover contribution of the aforesaid three brokers in the shares of PCML is given below:
—————————————————————————————–
No Member Name |Trading Data
|—————————————————————–
| Buy % to Total Sell % to Total Total % to Total
| Buy Sell Buy & Sell
———————–|—————————————————————–
1 D B & Co 759252 41.68 759150 41.67 1518402 41.67
2 Shri Sanju Kabra 161601 8.87 920550 50.53 1082151 29.70
3 Broker 752950 41.33 15901 0.87 768851 21.10
—————————————————————————————–
Total 1673803 91.88% 1695601 93.07 3369404 92.47
—————————————————————————————–
1.4 In the facts and circumstances, Securities and Exchange Board of India (hereinafter referred to as SEBI) vide an ad interim order dated September 29, 2005 inter alia directed the aforesaid stock brokers not to buy, sell or deal in securities in any manner, either directly or indirectly till further directions. Pursuant to the receipt of replies from the aforesaid stock brokers and after granting them an opportunity of hearing, SEBI, vide order dated January 12, 2006 confirmed the said interim order inter alia against the said stock brokers.
1.5 SEBI also conducted investigations into the alleged market manipulation/irregularities of trading in the shares of PCML for the period between March 17, 2005 and September 15, 2005 to look into the possible violation of the provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as the FUTP Regulations) and Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations) by various entities/stock brokers. The investigation conducted by SEBI found that the stock brokers, namely Shri. Sanju Kabra, Shivam Stock Broking Pvt. Ltd, D.K Khandelwal and M/s. D.B & Co. had traded substantially in the shares of PCML and their trades accounted for more than 93% of the total volume of PCML at CSE during the above period. Shivam Stock Broking Pvt. Ltd. is hereinafter referred to as Broker for the purpose of brevity. It was found that most of the trades executed by the said stock brokers were client-to-client trades and were executed on a single terminal of the same stock broker. The stock brokers including the Broker had allowed their clients to place simultaneously both buy and sale orders of the same quantity at the same price in PCML, which led to the price rise and matched trades.
1.6 The investigation conducted by the SEBI observed the following trade details of the said stock brokers in the shares of PCML during the above period.
————————————————————–
Sl. Name of the Volume Buy/ Traded Traded
No. stock broker Sell( shares) from Rs. upto Rs.
————————————————————–
1 D K Khandelwal & Co. 22,100 18.00 159.00 2 Shri Sanju Kabra 10,82,151 73.00 280.60 3 Broker 7,68,851 199.80 280.60 4 D B & Co 15,18,402 229.00 281.00
————————————————————–
1.7 The buy and sell trade details of the Broker in the shares of PCML are as follows.
———————————————————————————
No. of shares % to Total No. of shares % to Total Total no. % to Total
bought Buy sold Sell of shares Buy & Sell
———————————————————————————
752950 41.33 15901 0.87 768851 21.10
———————————————————————————
1.8 It was observed that majority of the trades of the Broker were in the nature of cross deals/synchronized trades.
i) Out of the total trades (7,68,851 shares), trades for 25,600 shares were executed as cross deals at its own single terminal. i.e the buy and the sell orders were placed by the Broker itself. The details of such cross deals are mentioned below:
—————————————————————————————-
TradeDate Time OrderDate OrderTime MemberName Qty Price B/S Counter
Party Name
11-Jul-05 15:20:09 11-Jul-2005 15:17:34 Broker 200 232.00 S Broker
11-Jul-05 15:20:09 11-Jul-2005 15:20:09 Broker 200 232.00 B Broker
11-Jul-05 15:26:58 11-Jul-2005 15:22:15 Broker 200 231.50 S Broker
11-Jul-05 15:26:58 11-Jul-2005 15:22:24 Broker 200 231.50 S Broker
11-Jul-05 15:26:58 11-Jul-2005 15:22:32 Broker 200 231.50 S Broker
11-Jul-05 15:26:58 11-Jul-2005 15:22:41 Broker 900 231.50 S Broker
11-Jul-05 15:26:58 11-Jul-2005 15:22:41 Broker 1500 231.50 S Broker
11-Jul-05 15:26:58 11-Jul-2005 15:22:41 Broker 1500 231.50 S Broker
11-Jul-05 15:26:58 11-Jul-2005 15:22:41 Broker 100 231.50 S Broker
11-Jul-05 15:26:58 11-Jul-2005 15:22:47 Broker 400 231.50 S Broker
11-Jul-05 15:27:15 11-Jul-2005 15:22:47 Broker 1600 231.50 S Broker
11-Jul-05 15:27:15 11-Jul-2005 15:22:54 Broker 900 231.50 S Broker
11-Jul-05 15:27:15 11-Jul-2005 15:22:54 Broker 1100 231.50 S Broker
11-Jul-05 15:27:15 11-Jul-2005 15:25:05 Broker 1400 231.50 S Broker
11-Jul-05 15:27:15 11-Jul-2005 15:25:05 Broker 1500 231.50 S Broker
11-Jul-05 15:27:57 11-Jul-2005 15:25:05 Broker 1100 231.50 S Broker
11-Jul-05 15:26:58 11-Jul-2005 15:26:58 Broker 200 231.50 B Broker
11-Jul-05 15:26:58 11-Jul-2005 15:26:58 Broker 200 231.50 B Broker
11-Jul-05 15:26:58 11-Jul-2005 15:26:58 Broker 200 231.50 B Broker
11-Jul-05 15:26:58 11-Jul-2005 15:26:58 Broker 900 231.50 B Broker
11-Jul-05 15:26:58 11-Jul-2005 15:26:58 Broker 1500 231.50 B Broker
11-Jul-05 15:26:58 11-Jul-2005 15:26:58 Broker 1500 231.50 B Broker
11-Jul-05 15:26:58 11-Jul-2005 15:26:58 Broker 100 231.50 B Broker
11-Jul-05 15:26:58 11-Jul-2005 15:26:58 Broker 400 231.50 B Broker
11-Jul-05 15:27:15 11-Jul-2005 15:27:16 Broker 1600 231.50 B Broker
11-Jul-05 15:27:15 11-Jul-2005 15:27:16 Broker 900 231.50 B Broker
11-Jul-05 15:27:15 11-Jul-2005 15:27:16 Broker 1100 231.50 B Broker
11-Jul-05 15:27:15 11-Jul-2005 15:27:16 Broker 1400 231.50 B Broker
11-Jul-05 15:27:15 11-Jul-2005 15:27:16 Broker 1500 231.50 B Broker
11-Jul-05 15:27:57 11-Jul-2005 15:27:57 Broker 1100 231.50 B Broker
ii) Further, the Broker had also executed substantial number of synchronized trades in the shares of PCML with Shri Sanju Kabra and D.B. & Co. The Broker executed synchronized trades for 7,43,250 shares of PCML. The synchronized trades of the Broker accounted for 96.5% of its total volume in the shares of PCML. The details of such synchronized deals were already communicated to the Broker (by way of findings of investigation) vide show cause notice dated June 27, 2006. However, the details of some of the typically synchronized trades are mentioned below (for the sake of reference):
TradeDate
Time
OrderDate
OrderTime
MemberName
Qty
Price
B/S
CounterPartyName
15-Jul-05
15:28:45
15-Jul-2005
15:28:45
Shivam Stock Broking
10000
248.00
B
SanjuKabra
15-Jul-05
15:28:45
15-Jul-2005
15:28:00
SanjuKabra
10000
248.00
S
Shivam Stock Broking
15-Jul-05
15:28:54
15-Jul-2005
15:28:54
Shivam Stock Broking
1000
248.00
B
SanjuKabra
15-Jul-05
15:28:54
15-Jul-2005
15:28:09
SanjuKabra
1000
248.00
S
Shivam Stock Broking
15-Jul-05
15:28:54
15-Jul-2005
15:28:54
Shivam Stock Broking
2000
248.00
B
SanjuKabra
15-Jul-05
15:28:54
15-Jul-2005
15:28:35
SanjuKabra
2000
248.00
S
Shivam Stock Broking
19-Jul-05
15:05:14
19-Jul-2005
15:05:14
Shivam Stock Broking
2500
236.00
B
SanjuKabra
19-Jul-05
15:05:14
19-Jul-2005
15:05:14
SanjuKabra
2500
236.00
S
Shivam Stock Broking
19-Jul-05
15:08:36
19-Jul-2005
15:08:37
Shivam Stock Broking
1500
235.00
B
SanjuKabra
19-Jul-05
15:08:36
19-Jul-2005
15:08:37
SanjuKabra
1500
235.00
S
Shivam Stock Broking
19-Jul-05
15:08:58
19-Jul-2005
15:08:58
Shivam Stock Broking
200
235.00
B
SanjuKabra
19-Jul-05
15:08:58
19-Jul-2005
15:08:58
SanjuKabra
200
235.00
S
Shivam Stock Broking
19-Jul-05
15:18:25
19-Jul-2005
15:18:25
Shivam Stock Broking
200
235.05
S
SanjuKabra
19-Jul-05
15:18:25
19-Jul-2005
15:18:25
SanjuKabra
200
235.05
B
Shivam Stock Broking
20-Jul-05
15:04:57
20-Jul-2005
15:04:57
Shivam Stock Broking
1500
244.00
B
SanjuKabra
20-Jul-05
15:04:57
20-Jul-2005
15:04:13
SanjuKabra
1500
244.00
S
Shivam Stock Broking
20-Jul-05
15:04:57
20-Jul-2005
15:04:57
Shivam Stock Broking
1500
244.00
B
SanjuKabra
20-Jul-05
15:04:57
20-Jul-2005
15:04:28
SanjuKabra
1500
244.00
S
Shivam Stock Broking
20-Jul-05
15:04:57
20-Jul-2005
15:04:57
Shivam Stock Broking
4000
244.00
B
SanjuKabra
20-Jul-05
15:04:57
20-Jul-2005
15:04:43
SanjuKabra
4000
244.00
S
Shivam Stock Broking
20-Jul-05
15:06:20
20-Jul-2005
15:06:21
Shivam Stock Broking
950
244.20
B
SanjuKabra
20-Jul-05
15:06:20
20-Jul-2005
15:06:05
SanjuKabra
950
244.20
S
Shivam Stock Broking
20-Jul-05
15:06:26
20-Jul-2005
15:06:26
Shivam Stock Broking
850
244.20
B
SanjuKabra
20-Jul-05
15:06:26
20-Jul-2005
15:06:05
SanjuKabra
850
244.20
S
Shivam Stock Broking
20-Jul-05
15:09:33
20-Jul-2005
15:09:07
Shivam Stock Broking
200
245.00
S
SanjuKabra
20-Jul-05
15:09:33
20-Jul-2005
15:09:34
SanjuKabra
200
245.00
B
Shivam Stock Broking
22-Jul-05
15:17:20
22-Jul-2005
15:17:20
Shivam Stock Broking
4100
246.00
B
SanjuKabra
22-Jul-05
15:17:20
22-Jul-2005
15:17:19
SanjuKabra
4100
246.00
S
Shivam Stock Broking
4-Aug-05
14:49:19
4-Aug-2005
14:49:19
Shivam Stock Broking
5000
250.90
B
SanjuKabra
4-Aug-05
14:49:19
4-Aug-2005
14:49:19
SanjuKabra
5000
250.90
S
Shivam Stock Broking
4-Aug-05
15:00:54
4-Aug-2005
15:00:54
Shivam Stock Broking
4000
250.90
B
SanjuKabra
4-Aug-05
15:00:54
4-Aug-2005
15:00:55
SanjuKabra
4000
250.90
S
Shivam Stock Broking
4-Aug-05
15:03:42
4-Aug-2005
15:03:42
Shivam Stock Broking
3000
250.10
B
SanjuKabra
4-Aug-05
15:03:42
4-Aug-2005
15:03:43
SanjuKabra
3000
250.10
S
Shivam Stock Broking
5-Aug-05
14:41:16
5-Aug-2005
14:41:15
Shivam Stock Broking
2400
250.20
B
SanjuKabra
5-Aug-05
14:41:16
5-Aug-2005
14:41:15
SanjuKabra
2400
250.20
S
Shivam Stock Broking
5-Aug-05
14:54:50
5-Aug-2005
14:54:49
Shivam Stock Broking
2000
251.90
B
SanjuKabra
5-Aug-05
14:54:50
5-Aug-2005
14:54:50
SanjuKabra
2000
251.90
S
Shivam Stock Broking
5-Aug-05
14:55:15
5-Aug-2005
14:55:15
Shivam Stock Broking
1500
251.90
B
SanjuKabra
5-Aug-05
14:55:15
5-Aug-2005
14:55:15
SanjuKabra
1500
251.90
S
Shivam Stock Broking
5-Aug-05
14:55:31
5-Aug-2005
14:55:31
Shivam Stock Broking
6000
251.90
B
SanjuKabra
5-Aug-05
14:55:31
5-Aug-2005
14:55:31
SanjuKabra
6000
251.90
S
Shivam Stock Broking
5-Aug-05
14:55:45
5-Aug-2005
14:55:44
Shivam Stock Broking
2400
251.75
B
SanjuKabra
5-Aug-05
14:55:45
5-Aug-2005
14:55:44
SanjuKabra
2400
251.75
S
Shivam Stock Broking
10-Aug-05
14:50:06
10-Aug-2005
14:50:03
Shivam Stock Broking
1600
257.65
S
SanjuKabra
10-Aug-05
14:50:06
10-Aug-2005
14:50:06
SanjuKabra
1600
257.65
B
Shivam Stock Broking
23-Aug-05
15:08:22
23-Aug-2005
15:08:22
D B & Co
1000
266.50
B
SanjuKabra
23-Aug-05
15:08:22
23-Aug-2005
15:08:14
SanjuKabra
1000
266.50
S
D B & Co
2-Sep-05
14:49:09
2-Sep-2005
14:49:08
Shivam Stock Broking
3500
280.20
B
SanjuKabra
2-Sep-05
14:49:09
2-Sep-2005
14:49:08
SanjuKabra
3500
280.20
S
Shivam Stock Broking
9-Sep-05
15:14:27
9-Sep-2005
15:14:28
Shivam Stock Broking
100
279.10
B
SanjuKabra
9-Sep-05
15:14:27
9-Sep-2005
15:14:24
SanjuKabra
100
279.10
S
Shivam Stock Broking
16-Sep-05
15:21:45
16-Sep-005
15:21:45
Shivam Stock Broking
2000
280.00
B
SanjuKabra
16-Sep-05
15:21:45
16-Sep-2005
15:21:06
SanjuKabra
2000
280.00
S
Shivam Stock Broking
16-Sep-05
15:21:45
16-Sep-2005
15:21:45
Shivam Stock Broking
2000
280.00
B
SanjuKabra
16-Sep-05
15:21:45
16-Sep-2005
15:21:06
SanjuKabra
2000
280.00
S
Shivam Stock Broking
16-Sep-05
15:21:45
16-Sep-2005
15:21:45
Shivam Stock Broking
1000
280.00
B
SanjuKabra
16-Sep-05
15:21:45
16-Sep-2005
15:21:20
SanjuKabra
1000
280.00
S
Shivam Stock Broking
16-Sep-05
15:21:45
16-Sep-2005
15:21:45
Shivam Stock Broking
1000
280.00
B
SanjuKabra
16-Sep-05
15:21:45
16-Sep-2005
15:21:06
SanjuKabra
1000
280.00
S
Shivam Stock Broking
16-Sep-05
15:21:45
16-Sep-2005
15:21:45
Shivam Stock Broking
1500
280.00
B
SanjuKabra
16-Sep-05
15:21:45
16-Sep-2005
15:21:20
SanjuKabra
1500
280.00
S
Shivam Stock Broking
16-Sep-05
15:21:45
16-Sep-2005
15:21:45
Shivam Stock Broking
500
280.00
B
SanjuKabra
16-Sep-05
15:21:45
16-Sep-2005
15:21:26
SanjuKabra
500
280.00
S
Shivam Stock Broking
16-Sep-05
15:21:45
16-Sep-2005
15:21:45
Shivam Stock Broking
1500
280.00
B
SanjuKabra
16-Sep-05
15:21:45
16-Sep-2005
15:21:26
SanjuKabra
1500
280.00
S
Shivam Stock Broking
16-Sep-05
15:22:27
16-Sep-2005
15:22:27
Shivam Stock Broking
1800
280.00
B
SanjuKabra
16-Sep-05
15:22:27
16-Sep-2005
15:22:11
SanjuKabra
1800
280.00
S
Shivam Stock Broking
16-Sep-05
15:22:38
16-Sep-2005
15:22:37
Shivam Stock Broking
2000
280.00
B
SanjuKabra
16-Sep-05
15:22:38
16-Sep-2005
15:22:27
SanjuKabra
2000
280.00
S
Shivam Stock Broking
16-Sep-05
15:22:38
16-Sep-2005
15:22:37
Shivam Stock Broking
1600
280.00
B
SanjuKabra
16-Sep-05
15:22:38
16-Sep-2005
15:22:21
SanjuKabra
1600
280.00
S
Shivam Stock Broking
16-Sep-05
15:22:38
16-Sep-2005
15:22:37
Shivam Stock Broking
2000
280.00
B
SanjuKabra
16-Sep-05
15:22:38
16-Sep-2005
15:22:15
SanjuKabra
2000
280.00
S
Shivam Stock Broking
16-Sep-05
15:23:48
16-Sep-2005
15:23:48
Shivam Stock Broking
2000
280.00
B
SanjuKabra
16-Sep-05
15:23:48
16-Sep-2005
15:23:11
SanjuKabra
2000
280.00
S
Shivam Stock Broking
16-Sep-05
15:23:48
16-Sep-2005
15:23:48
Shivam Stock Broking
600
280.00
B
SanjuKabra
16-Sep-05
15:23:48
16-Sep-2005
15:23:15
SanjuKabra
600
280.00
S
Shivam Stock Broking
16-Sep-05
15:23:48
16-Sep-2005
15:23:48
Shivam Stock Broking
1400
280.00
B
SanjuKabra
16-Sep-05
15:23:48
16-Sep-2005
15:23:22
SanjuKabra
1400
280.00
S
Shivam Stock Broking
16-Sep-05
15:23:48
16-Sep-2005
15:23:48
Shivam Stock Broking
600
280.00
B
SanjuKabra
16-Sep-05
15:23:48
16-Sep-2005
15:23:11
SanjuKabra
600
280.00
S
Shivam Stock Broking
16-Sep-05
15:23:48
16-Sep-2005
15:23:48
Shivam Stock Broking
1400
280.00
B
SanjuKabra
16-Sep-05
15:23:48
16-Sep-2005
15:23:15
SanjuKabra
1400
280.00
S
Shivam Stock Broking
16-Sep-05
15:23:48
16-Sep-2005
15:23:48
Shivam Stock Broking
100
280.00
B
SanjuKabra
16-Sep-05
15:23:48
16-Sep-2005
15:23:22
SanjuKabra
100
280.00
S
Shivam Stock Broking
16-Sep-05
15:23:48
16-Sep-2005
15:23:48
Shivam Stock Broking
1900
280.00
B
SanjuKabra
16-Sep-05
15:23:48
16-Sep-2005
15:23:28
SanjuKabra
1900
280.00
S
Shivam Stock Broking
16-Sep-05
15:23:48
16-Sep-2005
15:23:48
Shivam Stock Broking
100
280.00
B
SanjuKabra
16-Sep-05
15:23:48
16-Sep-2005
15:23:28
SanjuKabra
100
280.00
S
Shivam Stock Broking
iii) On a perusal of the trades executed by the Broker, two distinct patterns emerge. One, of course, is the synchronized trade as commonly known, synchronized in time, quantity and price; the other one, as specially noticed in this case is a variant of synchronized response to a structured offer of buy or sell from the Broker. Such structured offers have been matched by the same counter party broker in terms of quantity and price, while there is a time lag. There are many such transaction with metronomic regularity involving the same counterparty broker, engendering artificial volume and price as noticed in typically synchronized trades. In so far as such transactions involving the same counterparty broker and common clients give rise to the same effect of artificiality in the securities market as synchronized trades, they are found to be ejusdem generis with synchronized trades in terms of the impact in the securities market. For example, Shri Sanju Kabra had given sell order for 4000 shares of PCML in two parts of 2500 and 1500 @ Rs. 247.50 at the same time viz.14.32.28. Counterparty order was given by the Broker later but at the same time viz. 15.22.39 for identical price and quantity. i.e for 4000 shares in two identical parts of 2500 and 1500 @Rs. 247.50. There are number of such instances and it shows a pattern through which certain trades were executed which were not real.
1.9 It was observed that most of the trades executed by the Broker in the shares of PCML at CSE were on behalf of its two clients, viz M/s Bhuwania Vinimay Pvt. Ltd. (hereinafter referred to as Bhuwania) and Ms. Zenser Merchandise Pvt. Ltd. (hereinafter referred to as Zenser). During the period when the Broker was actively trading, the share prices of PCML had gone up from Rs. 199.80/- to Rs. 280.60. The details of the trades of the Broker on behalf of the said clients in the shares of PCML are given below:
Sl. Name of the broker Client Code Buy/ Quantity % to the
Broker's buy
No. Sell transaction in
PCML
1. Bhuwania B005 Buy 380851 51%
2. Zenser Z002 Buy 223650 30%
Total 604501 81%
1.10 The positions of the clients of Shri Sanju Kabra, D.B. & Co. and the Broker are given below:
Name of the client
Name of
the stock brokers
DB
& Co
SanjuKabra
Broker
Qty.
% to
brokers total volume
Qty.
% to brokers total volume
Qty.
% to
brokers total volume
Bhuwania
675802
44.5%
83801
7.74%
380851
49.5%
Zenser
–
–
46100
4.26%
223650
29%
PravinKumar Jain
–
–
–
–
48750
6%
Fine Trade Mercantile Co. Pvt. Ltd.
–
–
–
–
39000
5%
Tara
80000
5.3%
–
–
–
–
1.11 It was observed that the total shares of PCML traded at CSE during the period mentioned above were 36,43,606 shares (both buy and sale) and the trades of the Broker were found to be to the extent of 21% to the total volume in the shares of PCML at CSE. It has been alleged that the trades made by the Broker had significantly facilitated for the market manipulation in the shares of PCML. It was noted that CSE had suspended the trading in the shares of PCML for various listing irregularities. PCML was also found to be notified as one of the vanishing companies and the said fact was brought to the notice of the general public by the Ministry of Company Affairs, Government of India vide notice dated October 14, 2005.
1.12 It was also found that, out of the total 7,52,850 shares bought position of the Broker in the shares of PCML at CSE during the period under investigation, Bhuwania had bought 3,80,851 shares and Zenser had bought 2,23,650 shares which comprised about 51% and 30% respectively of the total buy volume of the Broker in the shares of PCML.
1.13 The investigation conducted by SEBI, inter alia found that the Broker had prima facie violated the provisions of Regulations 4(2)(a), (e) & o of the FUTP Regulations and Clauses A(1),(2), (3),4 and B(4)(a) of the Code of Conduct specified in Schedule II of the Broker Regulations.
2. APPOINTMENT OF ENQUIRY OFFICER
2.1 On completion of the investigation, SEBI appointed an Enquiry Officer, vide order dated June 16, 2006, under Regulation 5(1) of 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) to enquire into the affairs of the Broker in respect of the alleged violations of the provisions of the FUTP Regulations and the Broker Regulations as mentioned above. Accordingly, a notice dated June 27, 2006 under Regulation 6 of the Enquiry Regulations was issued to the Broker asking it to show cause as to why appropriate actions should not be imposed against it for the aforesaid violations. The Broker was also provided with the copy of the findings of the investigation with the said show cause notice. The Broker furnished its reply to the above show cause notice. Though the Enquiry Officer provided an opportunity of personal hearing, the Broker informed that he was unable to attend the hearing because of various reasons.
2.3 The Enquiry Officer vide report dated November 30, 2006 had inter alia observed “Before giving any recommendation as regards the penalty to be levied in this case on the basis of the provisions reproduced above, I think it relevant to place on record the fact that as a consequence of the interim order of SEBI dated September 29, 2005, inter alia directing Shivam not to buy, sell or deal in securities in any manner either directly or indirectly, which order was subsequently confirmed in the order dated January 12, 2006, Shivam have not permitted to deal in the securities business either as a registered intermediary or even as a client. In effect since September 25, 2005, till date i.e. for around 13 months, there has been a total suspension of the trading activities of Shivam. The commensurate penalty that can be recommended for the acts of omission and commission of Shivam involving the violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 and the SEBI (Stock brokers and Sub-brokers) Regulations, 1992 as discussed in detail earlier, would entail a major penalty. However considering that the said entity has in any case been out of business for a significant period, I am of the considered opinion that it would be justifiable if the period of inactivity were to be treated as a mitigating factor to reduce the said penalty.”
2.4 The Enquiry Officer vide the said report recommended for the suspension of the certificate of registration of the Broker for a period of one month.
3. CONSIDERATION OF ISSUES AND FINDINGS
3.1 Based upon the recommendation of the Enquiry Officer, a notice dated December 11, 2006 was issued to the Broker under Regulation 13(2) of the Enquiry Regulations, asking it to show cause as to why the action should not be taken against it as recommended by the Enquiry Officer as may be deemed appropriate. A copy of the Enquiry Report was also forwarded to the Broker with the said notice. The Broker vide letter dated December 26, 2006 informed SEBI that it was unable to say anything in the matter. The Broker further requested not to impose any further suspension as it had already faced suspension since last 13 months.
3.2 While examining the Enquiry report, show cause notice dated December 11, 2006 and the aforesaid reply of the Broker, I observed that the alleged violations committed by the Broker prima facie call for a penalty higher than that recommended by the Enquiry Officer. Accordingly, a notice dated February 28, 2007 was issued to the Broker to show cause as to why the period of suspension as mentioned in the Enquiry Report should not be enhanced and an appropriate major penalty of suspension should not be imposed on it. In the said letter the Broker was expressly advised to indicate whether it wanted to avail the personal hearing. As no reply was received from the Broker, a reminder dated April 13, 2007 was also issued to the Broker by SEBI.
3.3 The Broker vide letter dated April 19, 2007 reiterated the submissions made by it in its earlier letter dated December 26, 2006.
3.4 Though the Broker was specifically advised by SEBI to indicate whether it wanted to avail the opportunity of personal hearing he had not done so in his aforesaid reply. In the facts and circumstances, I proceed further in the matter on the basis of the Enquiry Report, show cause notices dated December 11, 2006 and February 28, 2007 issued to the Broker and his reply vide letters dated December 26, 2006 and April 19, 2007 and other materials available on record.
3.5 The Broker has not disputed the trades executed by him in the shares of PCML. The Broker requested not to impose any further penalty as it had already faced suspension for the past 17 months.
3.6 SEBI observed that PCML had incurred a net loss of Rs. 4 lakh and Rs. 6 lakh for the years ended March 31, 2002 and March 31, 2003, respectively. Further during the year 2004-05, PCML had earned a profit of Rs. 5.46 lakh (unaudited) and for the three months period ending June 30, 2005 (unaudited), PCML had earned a profit of Rs. 68, 000 and had a negative reserve of Rs. 2.81 lakh. It stands to reason that the financials of PCML were not strong enough for its unusual price movement. SEBI had reason to observe in related orders that the price rise was artificial and occasioned by cross deals/synchronized trades of stock brokers viz. DB & Co. D.K Khandelwal & Co. Shri Sanju Kabra and the Broker.
3.7 The trades made by the stock brokers (as mentioned in para 1.6) including the Broker at CSE in the shares of PCML had contributed more than 93% of total volume of PCML between March 17, 2005 and September 15, 2005. I observe that the Broker had traded substantially in the shares of PCML and its trades accounted for 21% of the total volume in the said shares. It can be seen from the table at para 1.6, that out of the 36,43,606 shares of PCML traded (both buy and sale) at CSE, the trades (both buy and sale) of the Broker were found to be to the extent of 7,68,651 shares (21%), during the above period. Out of its total trades in the shares of the company, majority of the trades were executed as cross deals in its single terminal and by way of synchronized trades executed with stock brokers namely Shri Sanju Kabra and D.B. & Co. The cross deals and the synchronized trades executed by the Broker in the shares of PCML accounted for a major portion of its trading in the said shares.
3.8 It can be seen that the cross deals executed by the Broker comprised of 30 deals ( within a gap of 10 minutes) in just in 1 trading day. The series of trades in the form of cross deals, considering its numbers, quantity etc. will only lead to the finding that all the deals were done with the purpose of manipulating the price/volume in the shares of PCML and thereby the securities market to the detriment of the genuine investors. The cross deals were executed from the same terminal and almost at the same time. The said concerted level of activity, that too continuously for a period of four months, is only compatible with the purposes of manipulating the securities market on the part of the Broker. The synchronized trades of the Broker accounted for 96.5% of its total volume in the shares of PCML.
3.9 I note that at the time the Broker was actively executing transactions in the shares of PCML the share price had increased from Rs. 199.80 to Rs. 280.60 a rise of Rs. 81/-. The transactions executed by the Broker had increased the volume and price of the said shares artificially to induce the genuine investors to invest in the said shares. It is fairly established in the scheme and nature of transactions that the Broker was involved as a necessary party to the manipulation. The method and manner in which the said cross deals were executed will clearly establish that the same were meant for the purpose of manipulating the price and volumes in the shares of PCML, against the fundamentals of the functioning of the securities market. The said continuity with which the transactions (which were highlighted by the Broker’s presence on both sides) were executed cannot be taken lightly considering the nature of the transactions executed by it. The Broker had transacted for certain clients who were connected to PCML through cross deals which breaches the anonymity of screen – based trading by its pervasive presence on both sides and constitute a colourable device of volume/price manipulation. Further, every trade establishes the price of the scrip and accordingly it matters. Cross deals, per se, interfere with the fair price discovery process of the exchange.
3.10 In addition to the cross deals, the Broker had had also executed synchronized trades (including the variants) in the shares of PCML with the stock brokers, Shri Sanju Kabra and D B & Co. Some of the synchronized trade details are mentioned at para 1.8. I observe that the Broker and Shri Sanju Kabra shared the same office address i.e 2, India Exchange Place, Ist Floor, Room No.2, Kolkata- 700001.
3.11 It can be seen that most of the buy and the sell orders were placed almost at the same time (in majority of the cases), with the exception of variants which also contributed to artificial volume/price as already discussed. The said proximity in putting of orders at the same price and for the same quantity, resulted in the matching of the aforesaid transactions, with all the ingredients i.e. quantity, price and the time, required to conclude the trades. Above all it has to be seen that all the transactions (cross deals) were executed at the single terminal of the Broker.
3.12 From the transactions which took place in the shares of PCML at CSE, it was found that Bhuwania was a common client of Shri Sanju Kabra, the Broker and DB & Co. Further, the client registration forms of Bhuwania and Zenser (client of Shivam Stock Broking and the Broker), revealed that Shri Dhruv Narayan Jha and Shri Rajendra Kumar Kothari were their common directors. Shri Dhruv Narayan Jha was also the director of PCML from August 12, 2001 to December 15, 2005. In this context, I note that the investigation of SEBI was conducted for the period between March 17, 2005 and September 15, 2005. Shri Dhruv Narayan Jha had resigned from the directorship of PCML only on December 15, 2005 (after SEBI passed its interim order dated September 29, 2005). The client registration form of Bhuwania had also revealed that Shri. Sarbeshwar Parida (staff of PCML) was the Chief Executive of both Bhuwania and Zenser. Shri Sarbeshwar Parida was also stated to have placed buy and sell orders with the Broker on behalf of its clients. Bhuwania and Zenser had purchased 11,40,454 and 2,69,750 shares of PCML respectively. i.e a total of 14,10,204 shares of PCML out of 16,73,803 during the period of investigation.
3.13 I note from the letters dated May 24, 2006 submitted by Bhuwania and Zenser (to SEBI) that they carried the same address. i.e 37/7 Mirpara Road, Bhattanagar, Liluah, Howrah. In addition, I note that, both the above letters were signed by Shri Rajendra Kumar Kothari, common director of both the said entities. From the Know Your Client (KYC) form of Bhuwania, it is noted that the date of incorporation of Bhuwania (as a client) was March 7, 2005 i.e. just prior to the commencement of the relevant investigation period. The above instances would establish that both the entities i.e. Bhuwania and Zenser were just ‘front entities’ created by PCML. In its letter dated May 24, 2005 sent to SEBI, Bhuwania also described Shri Dhruv Jha as one of their directors who incidentally was seen to have the same address as that of PCML. The said details were explained elaborately in the Enquiry Report. I also note that financial gains were made out of the trades in the shares of PCML. The Broker has not disputed the said facts.
3.14 From the facts as set out above, it can be seen that there was a well established nexus between the Broker, its clients and the management of PCML. Such a connection is further evident in their concerted activities in executing trades among themselves purportedly on behalf of two major clients who were found to be the front entities. The positions taken by them, their overall turnover in the shares of PCML and the extent of the deals entered into by them, most of which were found to be in the nature of cross deals or synchronized including variants as well as their role in all the said deals as has been elaborated at length above clearly indicate that the transactions made by the Broker were for the purpose of manipulating the price of the shares of PCML and for the purpose of creating false and misleading appearance of trading in the shares of PCML. In this context, I note that any transaction executed with the purpose/intention to manipulate the market mechanism whether negotiated or not would be illegal.
3.15 As observed by the Hon’ble Securities Appellate Tribunal (SAT) in the matter of Ketan Parekh v. SEBI.
The word ‘synchronize’ according to the Oxford dictionary means “cause to occur at the same time; be simultaneous”. A synchronized trade is one where the buyer and seller enter the quantity and price of the shares they wish to transact at substantially the same time. This could be done through the same broker (termed a cross deal) or through two different brokers. Every buy and sell order had to match before the deal can go through. This matching may take place through the stock exchange mechanism or off market. When it matches through the stock exchange, it may or may not be a synchronized deal depending on the time when the buy and sell orders are placed…. As already observed ‘synchronisation’ or a negotiated deal ipso facto is not illegal. A synchronised transaction will, however, be illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and is executed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium…. Any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal. Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available…. The nature of the transaction executed the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.
3.16 Further, SAT, in the matter of in the case of Nirmal Bang Securities (P) Ltd. v. SEBI had inter alia observed:
BEB has been charged for synchronized deals with First Global. I have examined the data provided by the parties on this issue. I find many transactions between BEB and FGSB. There are many instances of such transactions. I find the scrip, quantity and price for these orders had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale can create false volumes. The argument that the parties had no means of knowing whether any entity controlled by the client is simultaneously entering any contra order elsewhere for the reason that in the online trading system, confidentiality of counter parties is ensured, is untenable. It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only a coincidence in some cases. Theoretically this is OK. But when parties decide to synchronize the transaction the story is different. There are many transactions giving an impression that these were all synchronized, otherwise there was no possibility of such perfect matching of quantity price etc. As the Respondent rightly stated it is too much of a coincidence over too long a period in too many transactions when both parties to the transaction had entered buy and sell orders for the same quantity of shares almost simultaneously. The data furnished in the show cause notice certainly goes to prove the synchronized nature of the transaction which is in violation of Regulation 4 of the FUTP Regulations. The facts on record categorically establish that BEB had indulged in synchronized trading in violation of Regulation 47 of the FUTP Regulations. In a synchronized trading intention is implicit.
3.17 Undoubtedly, the trades executed by the Broker inter alia created artificial volume and price in the shares of PCML. Artificial increase in the volumes of scrip attracts the innocent investors in the market who are trapped in buying such shares otherwise useless and such misrepresentation, besides cheating investors, create financial loss to them. In this context, SAT in the matter of Ketan Parekh v. SEBI has inter alia observed:
When a person takes part in or enters into transactions in securities with the intention to artificially raise or depress the price he thereby automatically induces the innocent investors in the market to buy/sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated the person doing so is necessarily influencing the decision of the buyer/seller thereby inducing him to buy or sell depending upon how the market has been manipulated. We are therefore of the view that inducement to any person to buy or sell securities is the necessary consequence of manipulation and flows therefrom. In other words, if the factum of manipulation is established it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so wide spread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose on the Board a burden which is impossible to be discharged.
3.18 In the given circumstances, it can not be said that the said transactions were genuine. The Broker, by becoming a necessary party to the transaction, has aligned himself with the promoters, thereby forsaking his role as a Registered Market Intermediary with the attendant obligations on him towards the securities market.
3.19 I note that the trades of the Broker undoubtedly created an artificial market to mislead the genuine investors and the said transactions created false volumes. It is too much of a coincidence over too long a period in too many transactions when the same stock broker had entered into synchronized trades with other stock brokers for the same quantity of shares almost simultaneously. I note that the Broker was a necessary party to the transactions giving rise to artificiality in the market. Instead of observing the code of conduct which is expected of him as a SEBI Registered intermediary, the Broker flouted the same by executing large number of cross deals/synchronized trades which in turn gave rise to false market, artificial volumes and price rise in the shares of PCML.
3.20 In the above facts and circumstances, it is fairly established that the trades of the Broker in the shares of PCML were done for the purpose of creating false/misleading appearance of trading in the shares of PCML and for the purpose of manipulating the price of the shares of PCML. The Broker has not given any satisfactory explanation in the matter.
3.21 Regulation 4(2)(a) of the FUTP regulations inter alia prohibits a person from indulging in an act which creates false or misleading appearance of trading in the securities market. Regulation 4(2)(e) of the FUTP regulations also prohibits a person from indulging in any act or omission amounting to manipulation of the price of the security. As specified above, the acts of the Broker clearly created false and misleading appearance in the shares of PCML and that he did not act in a bonafide manner. The facts of the case highlight the Broker’s involvement (by executing continuous cross deals and synchronized trades in a substantial manner) in the manipulation of price of the shares of PCML and the creation of artificial volume in the said shares on account of its collusive activities with the entities as discussed in the preceding paras, resulting in the violation of the provisions of Regulation 4(2)(a) and (e) of the FUTP Regulations.
3.22 The natural corollary to this issue is whether the Broker had maintained high standards of integrity, promptitude, fairness and exercised due skill, care and diligence in the conduct of its business. In terms of Clauses A 1 to 4 of the Code of Conduct prescribed under the provisions of the Broker Regulations, a stock broker shall not inter alia create false market or indulge in any act detrimental to the investors’ interest or which leads to the interference with the fair and smooth functioning of the securities market. The Broker shall also maintain high standards of integrity, promptitude and fairness and shall act with due skill, care and diligence in the conduct of his business. It is also a requirement that the Broker shall not inter alia indulge in manipulative transactions with a view to distort the market equilibrium. The trades (including the cross deals and the synchronized trades) of the Broker as explained in detail above would prove that the same created a misleading appearance of trading, artificial volume and price in the shares of PCML by vitiating the price discovery mechanism in the securities market. It further shows that the Broker had not exercised due skill, care and diligence and not maintained high standards of integrity, promptitude, fairness in the conduct of its business.
3.23 By executing such transactions, the Broker had not only failed to exercise due diligence and to maintain the conduct (specified above) as expected from a stock broker but also became a party to the aforesaid manipulation, to the detriment of the genuine investors as discussed in the above paras. A Stock broker is expected to protect the interest of the investors in the securities market in which he operates and it ill behoves him to become a party to any market manipulation. Being an intermediary operating in the securities market, the Broker is required to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings as specified in the Code of Conduct of the Broker Regulations (mentioned above). An intermediary who fails to perform such duties has to be punished in terms of the provisions of the Enquiry regulations. In view of the above, it is established that the Broker had violated the above clauses of the Code of Conduct prescribed under the Broker Regulations.
3.24 In the facts and circumstances, it is fairly established that the Broker had violated the provisions Regulation 4(2)(a) and (e) of FUTP Regulations and Clauses A(1), (2), (3) and 4 of the Code of Conduct specified in the Broker Regulations. The nature of the execution of the trades by the Broker in the shares of PCML in total disregard to the provisions of the FUTP Regulations and the Broker Regulations as set out above call for a higher penalty than recommended by the Enquiry Officer. Therefore, I decide to impose a major penalty of suspension of the certificate of registration of the Broker, as ordered herein under.
4. ORDER
4.1 In view of the foregoing, I, in exercise of the powers conferred vide Regulation 13(4) of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, hereby impose a major penalty of suspension of the certificate of registration of Shivam Stock Broking Pvt. Ltd. (registration no. INB 031051239), Member, Calcutta Stock Exchange Association Limited for a period of two years.
4.2 I further direct that the period of prohibition already undergone by Shivam Stock Broking Pvt. Ltd. vide SEBI order dated September 29, 2005 would be set off against the said period of two years.
4.3 This order shall come into force with immediate effect.