ORDER
A.K. Batra, Member
BACKGROUND
1. M/s Man Mohan Damani is registered with SEBI as a stock broker (hereinafter referred to as ‘member’) bearing SEBI registration no. INB 030766312 and is a member of Calcutta Stock Exchange Association Limited (CSE). An inspection of books of accounts, documents and other records of the member was conducted on June 17, 2002. During the inspection, it was found that the member had indulged in off market trades outside the price and order matching mechanism of CSE and that he had made payments/received funds from the other members of the exchange, which were not backed by any transactions in securities.
ENQUIRY PROCEEDINGS
2. The inspection report was forwarded to the member, advising him to file his comments, if any, on the findings of the inspection. On not being satisfied with the reply filed by the member, an Enquiry officer (EO) was appointed vide order dated 08.08.2002, to inquire into the irregularities noticed in the course of the inspection. The EO submitted his report on 22.01.2004, with the recommendation that the certificate of registration of the member be suspended for a period of six months.
3. SHOW CAUSE NOTICE AND MEMBER’S SUBMISSIONS
1. A show cause notice dated 04.02.2004, was issued to the member, in terms of regulation 13(2) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as ‘the said regulations’), advising him to show cause as to why the penalty, as recommended by the enquiry officer, should not be imposed on him. The member was advised to submit his reply, if any, within 15 days of the receipt of the show cause notice. The member was also asked to indicate whether he desired a personal hearing.
2. After seeking and availing of further time for submitting his reply to the show cause notice, the member finally made his submissions vide his letter dated 13.04.2004, as under:
i. With regard to indulgence in off-market trades, the member stated that all these trades were executed as proprietary trades in ‘Self Account’ and none of the trades were executed on behalf of any client. He further stated that since he was under the impression that only trades executed on behalf of clients, outside the trading terminal, need reporting to the exchange, he did not report these transactions to the exchange. He further stated that he had no intention to avoid transparency or to interfere with the price discovery process of the exchange or to defraud anybody.
ii. With regard to payments/receipt of funds from other members of CSE, the member stated that he did not carry any other business other than that of securities. He admitted that he had paid/received funds from member brokers of CSE and added that these payments/receipts were in the nature of business accommodation of funds to fellow brokers and no interest was charged on it. He stated that business accommodation of funds to fellow members is common and requested that it be viewed accordingly. He further reiterated that he had no intention of defrauding/depriving anybody and if these acts have violated the rules and regulations of SEBI, he asked for pardon and assured that he would be careful/ vigilant in future.
1. CONSIDERATION OF ISSUES
2. I have carefully examined the facts and circumstances of the case. I have also considered the Enquiry Report and the submissions of the member. I find that adequate opportunity had been given to the member in accordance with principles of natural justice. My findings on the allegation made against the member are as follows :
3. Off market transactions
4.2.1 I note that the member is alleged to have carried out transactions with D K Singhania, A K Poddar and Sanjay Khemani, members, CSE, outside the price and order matching mechanism of CSE. The enquiry officer has found that the member indulged in off market deals with the aforesaid members of CSE, as under:
Name of the Broker: D K Singhania Name of the Scrip: DSQ Software _________________________________________________________________ Date of Sett. No Member's Quantity Date of transaction Buy/Sell Delivery _________________________________________________________________ 5/4/2000 2001102 Buy 8000 5/4/2000 10/5/2000 2001107 Buy 6500 15/5/2000 10/8/2000 2001120 Buy 12000 12/8/2000 _________________________________________________________________ Name of the Scrip: SATYAM Name of the Scrip: Zee Tele: _________________________________________________________________ Date of Sett. No Member's Quantity Date of transaction Buy/Sell Delivery _________________________________________________________________ 12/4/2000 2001102 Buy 9000 13/4/2000 13/4/2000 2001103 Buy 2100 28/4/2000 _________________________________________________________________ _________________________________________________________________ Date of Sett. No Member's Quantity Date of transaction Buy/Sell Delivery _________________________________________________________________ 6/4/2000 2001102 Buy 25000 12/4/2000 25/4/2000 2001105 Buy 33000 24/4/2000 12/10/2000 2001128 Buy 10000 23/9/2000 _________________________________________________________________ Name of the Scrip: Global Tele: _________________________________________________________________ Date of Sett. No Member's Quantity Date of transaction Buy/Sell Delivery _________________________________________________________________ 30/10/2000 2001131 Buy 21500 16/10/2000 _________________________________________________________________ Name of the broker : A K Poddar Name of the Scrip: Himachal Futuristic _________________________________________________________________ Date of Sett. No Member's Quantity Date of transaction Buy/Sell Delivery _________________________________________________________________ 21/12/2000 2001138 Sell 10000 1/1/2001 9/12/1999 9900137 Buy 15000 14/12/1999 16/12/1999 9900138 Buy 5000 20/12/1999 _______________________________________________________________ Name of the Scrip: DSQ Software: _________________________________________________________________ Date of Sett. No Member's Quantity Date of transaction Buy/Sell Delivery _________________________________________________________________ 16/12/1999 2001138 Buy 3000 21/12/1999 _________________________________________________________________ Name of the Broker: Sanjay Khemani Name of the Scrip: Himachal Futuristic _________________________________________________________________ Date of Sett. No Member's Quantity Date of transaction Buy/Sell Delivery _________________________________________________________________ 20/4/2000 2001104 Buy 13800 25/4/2000 _________________________________________________________________
1. In this regard, the member has stated that all off market trades executed by him were proprietary trades in ‘Self Account’, and none of these trades were executed on behalf of any client and therefore he did not report the same to the stock exchange.
2. I note that SEBI had, vide circular SMDRP/POLICY/CIR-32/99 dated 14th September, 1999, directed that all negotiated deals, including cross deals, shall not be permitted then onwards and that all such deals shall be executed only on the screens of the exchange, as per the price and order matching mechanism of the exchange. This measure was taken to curb negotiated deals, as they lack transparency, do not contribute to price discovery, deny investors the benefits of the best possible price and militate against the basic concept of the stock exchange. The said circular did not provide for any exception, for proprietary trades or otherwise. Hence, the member cannot claim ignorance regarding the applicability of the circular to self trades. Moreover, I have also noted that the disciplinary action subcommittee of CSE had imposed a fine of Rs. 25,000 on the member, for indulging in off market transactions. I, therefore, do not accept the member’s contention and hold him guilty of indulging in off-market trades.
3. I find that by indulging in off market deals, the member violated the provisions of SEBI Circular No.SMDRP/Policy/Cir-32/99 dated September 14, 1999. Such transactions are also in violation of Regulation 4(a) and (b) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 as well as Clause A(1), A(4) and A(5) of the Code of Conduct, as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations 1992.
Indulging in transactions other than securities transactions
1. The enquiry officer found that the member received and paid funds to fellow brokers of the Exchange, without there being corresponding transactions in securities, details being as under:
2. I have also noted that the member admitted that he had received funds and made payments to other members of CSE, as shown above, explaining these transactions as being in the nature of business accommodation to fellow members, as per the business practices prevalent in the market. He has further stated that he has not carried out any business other than that of securities.
3. The member has not denied making payments/receiving funds from other members of CSE, without there being corresponding transactions in securities. The substantial quantum of funds transferred between the member and other members, coupled with an absence of any securities transactions between these entities, leads me to believe that the member was involved in transactions not in the nature of securities transactions. Thus, I find that the member has carried out business other than that of securities business, an act prohibited under Rule 8(1)(f) of the Securities Contracts (Regulation) Rules, 1957.
4. I therefore hold that the member had violated the provisions of Rule 8(1)(f) of SC (R) Rules, 1957.
5. Hence, I have no hesitation in agreeing with the findings of the Enquiry Officer, that the member :
No. Broker Date Paid/Recd Amount (in Rs)
1 D K Singhania 20/04/2000 959701 – HDFC 9,000000
2 D K Singhania 8/6/2000 030 – CitiBank 1,18,00,000
3 D K Singhania 17/6/2000 924347 – HDFC 2,25,00,000
4 D K Singhania 21/9/2000 924388 – HDFC 50,00,000
5 D K Singhania 25/1/2001 385402 – Citi Bank 1,25,00,000
6 Ashok K Poddar 1/9/2000 996326 – HDFC 33,00,000
7 Ashok Poddar 15/9/2000 924379 – HDFC 24,00,000
8 Ashok Poddar 9/11/2000 996519 – HDFC 31,00,000
9 Ashok K Poddar 21/12/2000 315496 – Citi Bank 17,00,000
10 Ashok K Poddar 15/2/2001 183527 – HDFC 5,00,000
i. indulged in large scale off-the-floor transactions, which would have interfered with the fair and smooth functioning of price discovery mechanism of the exchange.
ii. received and paid substantial amounts to fellow brokers without there being corresponding transactions in securities.
ORDER
1. I am satisfied that this is a fit case to impose a penalty of suspending the registration of the member.
2. Therefore, in exercise of the powers conferred upon me, by Section 19 of SEBI Act, 1992 read with sub-regulation (4) of Regulation 13 of the said Regulations, I hereby suspend the certificate of registration of Man Mohan Damani, member, Calcutta Stock Exchange Association Limited, having SEBI registration no. INB030766312, for a period of six months.
This Order shall come into effect on the expiry of 21 days from the date of this Order.