ORDER
V.K. Chopra, Member
1. BACKGROUND
1.1 Securities and Exchange Board of India (hereinafter referred to in short as “the Board”) had ordered an investigation into the dealings of M/s Dalmia securities Private Ltd, a member (hereinafter referred to as “the Broker”) of National Stock Exchange (NSE) (SEBI Registration No. INB230645339), Stock Exchange, Mumbai (BSE) (SEBI Registration No. INB010684638) and Calcutta Stock Exchange (CSE) (SEBI Registration No. INB030684635) in the shares of Ranbaxy Laboratories Ltd (hereinafter referred to in short as “Ranbaxy”).
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 major spurt in price and volumes traded in the Exchanges particularly on the Stock Exchange, Mumbai (BSE), National Stock Exchange (NSE) and Calcutta Stock Exchange (CSE).
1.3 The Board after considering Investigation Report, appointed an Enquiry Officer vide Order dated November 27, 2002 to enquire into the violations allegedly 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 Regulation”) 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 Byelaws 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 (hereinafter referred to as ‘the Enquiry Regulations’), submitted a report dated December 23, 2003 wherein he observed that the Broker has 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 four 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 him to show cause as to why the action, as recommended by the Enquiry Officer or any other action deemed fit, should not be imposed on him. The broker submitted their reply to the said show cause notice, vide letter dated May 15, 2004.
3. REPLY OF THE BROKER TO THE SHOW CAUSE NOTICE
3.1 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 five transactions can not be levelled merely because a purchase order and a sale order happened to be entered at around the same time for the same price on screen based trading mechanism of the stock exchange.
3.2 With regard to the charge of negotiated trade, the Broker submitted that the Enquiry Officer has failed to show the basis on which prices and quantities have been negotiated outside the system.
3.3 The Broker stated that the finding of Enquiry report regarding rectification of time difference (i.e Enquiry Officer found that the trade executed with Shankarlal Chokhany, the time difference is one second only which was inadvertently mentioned as more than one minutes in the details of transactions) provided to the Broker is not proper as the same was arrived at without giving the Broker a chance to explain prior to the findings of the Enquiry officer.
3.4 The Broker stated that the Enquiry Officer has failed to apply his mind in the recommendation of the penalty and has erred in not accounting for a diluted charge. (i.e the Enquiry Officer has acknowledged that one out of five transactions date back to the period to September 14, 1999, the date on which SEBI issued its Circular prohibiting negotiated deal and therefore, violation in respect of gross trades of 50,000 shares of Ranbaxy is not sustainable) The Broker added that even in respect of remaining 75,000 shares, the Enquiry Officer has not brought out any material on record to demonstrate that there was any prior understanding, or that negotiations on price and quantities took place outside the screen based trading system of the stock exchange.
3.5 The Broker stated that the Enquiry Officer has failed to show that there was any tampering with the price discovery mechanism.
4. HEARING
4.1 In their reply to show cause notice, the Broker requested for personal hearing. The Broker was accordingly advised to attend the personal hearing before me at Head Office SEBI at Mumbai on September 28, 2006, which he attended along with his Advocates, when they filed written submission dated September 28, 2006. Therefore, I am proceeding in the matter on the basis of the submission of the Broker and the material 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 and proceed to deal with the same as under.
5.2 I find from the Enquiry Report that the scrip of Ranbaxy Laboratories Ltd. (herein after referred 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 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 five instances of synchronization of trades with a view to create misleading appearance of trading which tampers with price discovery mechanism of stock exchange .
5.5 I find that the other charges levelled against the Broker are on the basis of the aforesaid 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 is per se 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.
5.6 Hence the issue to be decided in this case is whether the Broker has carried out any such synchronized trades so as to hamper the price discovery mechanism of the exchange and to take a decision as to 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 analyze the details of synchronized trades executed by the Broker which are hereunder:
Buy Mem
Name
Trade
date
Buy
Order time
Buy
order Qty
Buy
order rate
Sell Mem
Name
Sell
Order time
Sell
Order Qty
Sell
order rate
Time
Diffe rence
Price
diffe rence
SHYAM
SUNDAR DALMIA
5/26/1999
11:27:34
50000
631.60
DALMIA
SECURITIES (P) LTD.
11:27:34
50000
631.60
0:00:00
0.00
SHANKAR
LAL CHOKHANY
9/14/1999
13:03:23
20000
1063.20
DALMIA
SECURITIES (P) LTD.
13:03:24
20000
1063.20
0:00:01
0.00
SHYAM
SUNDAR DALMIA
10/1/1999
14:07:08
20000
1034.60
DALMIA
SECURITIES (P) LTD.
14:07:09
20000
1034.60
0:00:01
0.00
SHYAM
SUNDAR DALMIA
10/25/1999
12:13:21
15000
1009.40
DALMIA
SECURITIES (P) LTD.
12:13:20
15000
1009.40
0:00:01
0.00
SHYAM
SUNDAR DALMIA
10/29/1999
13:48:59
20000
898.40
DALMIA
SECURITIES (P) LTD.
13:48:59
20000
898.40
0:00:00
0.00
5.7 The above table shows that the Broker had executed five synchronized/matching trades in the shares of Ranbaxy. I find that all these trades have been matched by the member with Shyam Sundar Dalmia, a CSE broker having the same address as that of the member. Synchronized/matching trades are evident from the fact that in all cases order quantity and price are same with counter party order quantity and price. Orders were placed at the almost same time for same quantity with counter party member Shyam Sundar Dalmia. I have also observed that the percentage of matching transactions of the member to his total transactions in the share of Ranbaxy during the period under consideration is 18%.
5.8 After having analysed trade details of the Broker in the scrip of Ranbaxy, I am of the view that five synchronized deals with the time gap of number of days in a period of almost six months may not affect the price discovery mechanism of the Exchange. Further, I do not find any reasonable evidence to confirm the charges levelled against the Broker under PFUTP Regulations and Stock Brokers Regulation. In view of this, I am of the view that the charges against the Broker are not tenable.
6. ORDER
6.1 Having regard to all aspects of this case, I find that the Broker had not violated the provisions of 4 (b) and (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and Regulation 7 read with Section A (3) and (4) of Code of Conduct as specified in Schedule II of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. Considering all facts and circumstances of the case, I am of the view that this is not a fit case to impose any penalty against the Broker. Accordingly, 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 Dalmia Securities (P) Ltd.