BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. AP/AO- 06/2006-07]

 

In the matter of Investigations in

AFTEK INFOSYS LTD

 

AND

In respect of

PRAVIN V SHAH STOCK BROKING PVT. LTD.

1)      Pursuant to the investigation in the scrip of Aftek Infosys Ltd. (hereinafter referred to as �AIL�), Securities and Exchange Board of India (hereinafter, SEBI) appointed Mr. K.R.C.V. Seshachalam, as the Adjudicating Officer under Section 15 I of SEBI Act, 1992 read with Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') to inquire into and adjudge the alleged practices, of certain entities including Pravin V Shah Stock Broking Pvt. Ltd., a member broker of BSE (hereinafter referred as �PVS� or �Broker�), that are prohibited under Regulation 4 (1), (2)(a), (b), (e) and (n) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter PFUTP Regulations, 2003), and Clauses A (1) to A (5) of Code of Conduct under Schedule-II, read with Regulation 7 of SEBI (Stock Broker and Sub Broker) Regulations, 1992 (hereinafter referred as �Brokers Regulations�) for which penalty is imposable under Section 15HA and 15HB of SEBI Act, 1992 respectively. The aforesaid appointment dated August 03, 2004 was conveyed vide order dated August 11, 2004 and vide order dated December 28, 2004, the matter was transferred to Mr. A. Chandrasekhar Rao. Subsequently vide order dated December 20, 2005, the matter was transferred to the undersigned.

 

2)      Show cause notice (SCN) dated September 27, 2005 under Rule 4(1) of the said Rules was issued by then AO, Mr. A. Chandrasekhar Rao to the broker, communicating the details of the charges leveled against it, as under:

 

a)      SEBI conducted investigation into the scrip of AIL for the period September 01, 2003 to October 08, 2003 which was divided into the following three periods.

i)       First period (pre period) - September 01, 2003 to September 23, 2003

ii)     Second period (interim period) - September 24 & 25, 2003

iii)  Third period (post period) - September 26, 2003 to October 08, 2003

Table � 1

 

b)     The clients of brokers namely, Chandravadan J. Dalal (CJD) and Pravin V. Shah (PVS) traded in the scrip of AIL in BSE, as follows.

Table � 2

 

 

c)      It is alleged that the clients generated artificial volumes in the scrip of AIL by acting in concert and further by reversing the trades the next day, also through matched trades through the same set of brokers, resulting in the generation of artificial volumes. The volumes of the entities constituted very high volumes to the total traded quantity. The specifics in this regard are covered in the findings. The aforesaid allegation was leveled in the background of the inter relationships amongst the noticees.

 

3)      In response to the SCN, PVS filed its reply vide letter dated 11/10/05 and also filed written submissions dated 02/06/06 during the course of inquiry as under:

a)      At the outset we would like to inform you that apart from adjudication proceedings, Enquiry proceedings are also being executed against us in the matter of Aftek Infosys Ltd for the same period of declines 26/09/2003 to 08/10/2003.

 

b)     M/s. Phulchand Sons & Investments P. Ltd was our regular client and we were doing business with them for the last 2 to 3 years. Apart from Aftek Infosys we have done transactions with them in many scrips. All the transactions were placed on telephone during market hours and there was never any predicided or predetermined or coordinated transaction with them. All the transactions with them were in our regular course of brokerage business, through Stock exchange and in the same manner as we do our brokerage business with other clients.

 

c)      We emphatically State, that our transaction in Aftek Infosys Ltd was done only on behalf of our client Phulchand Sons & Investments P. Ltd and not with the other entities, or brokers mentioned in your findings. Also if you see the total volume of Aftek Infosys during the period mentioned, and compare it with our volume the percentage is very low. We as a broker would never come to know about the counter party broker or who are his clients, when a transaction is entered and executed in bolt system. How are we to be made responsible for the transactions of our client or other alleged entities, when we have just been intermediaries for the trades of our client and executed them in our normal course of broking business.

 

d)     We had also taken all the due diligence procedure that is required by rules for executing the deals with M/s. Phulchand Sons P. Ltd as we undertake for our other clients. We further State that we had no position or never executed any trades in Aftek Infosys Ltd in our own proprietary accounts or on account of our family members.

 

e)      As far as matching of transaction within few seconds is concerned, we were never informed by our clients that the trades would get matched or executed as soon as we enter them in system. We have acted as per the instructions of our Client as to rate, quantity and scrip, in similar manner as we used to transact with them in other scrips.

 

f)       We pledge on oath, that we never had slightest inkling or doubt about the genuiness of these transactions and that they would get executed immediately once we enter them in system. As far as reversal of transaction on the subsequent days is concerned, we would like to State that there are thousands of transactions on a daily basis where Shares are purchased on a particulars day and sold off in the subsequent day. Therefore, that particular issue in itself was not sufficient to raise doubts.

 

g)     Apart from the above said explanations, we have, out of curiosity, and after receiving your specific letter went into the details of the price movement of the said Scrip. The price of the Scrip during the period in which we have done business of our client, hardly range Rs.10/-to Rs.15/-up or down. Under these circumstances, we fail to understand how the above said transaction of ours with M/s. Phulchand Sons & Investments could result into creating any artificial price upheavals. As a matter of fact, the stock market from July, August, 2003 onward has started moving up and up in almost all the scrips and in that comparison, if we compare the movement of price of the above said Scrip, it cannot be concluded that there has been any price upheavals in the said Scrip especially during the period dealt in by us as a broker of M/s. Phulchand Sons & Investments.

 

h)     Under these circumstances, we most humbly put on record and bring to your kind notice that we have not contravened, disobeyed, disregarded or/and willfully evaded any bye-laws and regulations, any resolutions, any Order, Notices, direction, decision or any ruling thereunder in general and/or particularly addressed to us either by the Exchange or the governing Board. Under these circumstances, we most respectfully bring to your kind notice and put on record that there is no breach of whatsoever kind under the circumstances narrated hereinabove as envisaged in Section 355 of the Rules, Bye-laws and Regulations of the Exchange. Please note that we have not dealt with any disreputable or in any fraudulent transaction or dealings with any person.

 

i)       We also most respectfully and vehemently mention that we have never assisted or knowingly made dealings with any party directly or indirectly who is carrying out any plan or scheme by making any purchase or sale or offer of any purchase or sale in shares and securities by which there has ever been any upsetting of market equilibrium nor we ever taken/done any transactions which may create the condition of demoralization in the market or in price of shares and securities. Thus there is no violation of doing any prejudicial as envisaged in Section 357(III) of the Rules, Bye-laws and Regulations of the Exchange.

 

 

4)      I was of the view that an inquiry should be held in the matter and accordingly a notice dated 29/03/06 fixing April 25, 2006 as a date of inquiry, was issued to the broker.� Vide letter dated April 5, 2006, the broker sought adjournment to the personal hearing, which was granted.� A fresh notice of inquiry dated April 26, 2006 was issued to the broker requiring it to appear for making submissions on May 22, 2006.

 

5)      Mr. Dhitesh M Shah, Director of PVS appeared before me for the inquiry on May 22, 2006 and filed authorization in his favour by PVS.� Mr. Shah reiterated the contents of their reply dated 11/10/05 and in addition requested for leave to file consolidated written submissions.� The same was allowed and the Director, Mr. Shah again appeared on 06/06/06 and filed the consolidated submissions dated 02/06/06.

 

6)      Findings: I have perused the material available before me and I now proceed to record my findings. �From the records and the show cause notice, I observe as under:

 

a)      Deepak Dalal was director of Phulchand Sons Pvt. Ltd., at the relevant period (i.e. during September- October 2003).

b)     Deepak Dalal and Anita Dalal are husband and wife and are partners in Add Investments.

c)      The address of Anita Dalal is the same as that of Maruti Securities Ltd. ��

d)     Phulchand Sons Pvt. Ltd. (who traded through broker PVS), Add Investments (who traded through CJD) and CJD have the same addresses.

e)      Deepak Dalal was an authorized signatory of CJD. �It may be highlighted that in his reply dated November 10, 2005, he has not disputed this fact.

 

7)      Given the aforesaid incestuous interrelationship amongst and between the clients of the brokers namely CJD and PVS, their trades during the period of investigation are examined, details of which are given in table below:

 

Table �3

 

 

 

a)      I find that Anita Dalal, the wife of Deepak Dalal and partner of Add Investments traded a gross volume of 199,794 shares of AIL; notwithstanding the high volumes, her net position at the end to the period was -5,000 shares. She traded through broker CJD, with client code ZA001.

b)     I find that Deepak Dalal, the husband of Anita Dalal and a partner of Add Investments and also a Director of Phulchand Sons, traded a gross volume of 181,860 shares of AIL; notwithstanding the high volumes, his net position at the end to the period was nil shares. He traded through broker CJD, with client code ZD001 and was also an authorized signatory of CJD.

c)      I find that Add Investment, whose partners are Deepak Dalal and Anita Dalal, traded a gross volume of 1,465,436 shares of AIL; notwithstanding the high volumes, its net position at the end to the period was just 5,000 shares. It traded through broker CJD, with client code ZA247 and had the same address as that of CJD.

d)     I find that Maruti Securities, which has the same address as that of Anita Dalal, traded a gross volume of 314,483 shares of AIL; its net position at the end to the period was 48,117. It traded through broker CJD, with client code ZM254.

e)      I find that Phulchand Sons, whose director was Deepak Dalal, traded a gross volume of 740,995 shares of AIL; notwithstanding the high volumes, its net position at the end to the period was just -6,511 shares. It traded through broker PVS, with client code P043 and had the same address as that of CJD.�

f)       From the aforesaid trading pattern it is clear that, other than Maruti Securities, the other entities have done deals majority of which have been squared off. However, squaring off per se does not constitute artificial trade; all jobbers do that. It is the intention and nexus of the parties which establishes whether the trades are artificial or not. In the present case, we have a person, who has traded through multiple identities through multiple entities, which makes the intentions self evident. Deepak Dalal is the key person behind all the aforesaid trades and has traded through other entities viz. his partnership firm, Add Investments, Phulchand Sons, in which he was a director at that time and also through his wife Anita Dalal. The trades of Deepak Dalal, Anita Dalal, Add Investments and Phulchand Sons surely do not appear to be real.

g)     Maruti Securities is on a slightly different footing as it has a net position of 48,177 shares, which gives a picture that it was not part of the nexus for these artificial trades. ��But after examining further, it is found that Anita Dalal and Maruti Securities share the same address.� It is sufficient to prove a nexus between the parities especially when they are trading between themselves.�

h)     To ascertain the facts in this regard, I now examine the trades of all these entities in the third period, as the SCN contains specific allegation pertaining to this period. The details in this regard are given in table below:

Table � 4

 

	Anita Dalal		Deepak Dalal		Add Investments		Maruti Securities		Phulchand Sons
	�Buy 'Qty	Sell Qty	�Buy 'Qty	Sell Qty	�Buy 'Qty	Sell Qty	�Buy 'Qty	Sell Qty	�Buy 'Qty	Sell Qty
26-Sep-03						����� 3,785		��� 58,000	��� 61,642
30-Sep-03	� 1,025	�1,025					��� 41,830			��� 61,642
1-Oct-03									��� 10,000
3-Oct-03	������ 28	���� 978			� 24,554					��� 10,000
6-Oct-03	���� 950					26,500		��� 43,000	��� 79,500
7-Oct-03							�� 79,500			��� 79,500
8-Oct-03					��� 1,979			�� 32,153	��� 20,000
Total	���� 2,003	�� 2,003	�������� -��	�������� -��	��� 26,533	���� 30,285	� 121,330	� 133,153	� 171,142	� 151,142
Gross		�� 4,006		�������� -��		���� 56,818		� 254,483		� 322,284
Cumulative		��������� -��		�������� -��		���� (3,752)		� (11,823)		��� 20,000
Grand Cumulative		���� 4,425

 

i)       I find that Maruti Securities and Add Investment together sold 61,785 (58,000 and 3,785 shares respectively) shares of AIL on September 26, 2003. Phulchand Sons bought 61,642 shares. These trades constituted 70.8% of the gross traded volume of that day and amongst these entities, the net traded quantity was just 143 shares. On September 30, 2003, Phulchand Sons reversed its transaction by selling 61,642 shares which were bought by Maruti Securities, to an extent of 41,830 shares, thereby (partly) reversing Maruti�s trade on the previous day. These trades and that including Anita Dalal�s trades, constituted 71.8% of the gross traded volume of that day.

j)        After that Phulchand Sons bought and reversed the transaction the next day to an extent of 10,000 and 79, 500 shares on October 1^st and 6^th, 2003, respectively. Similarly, Add Investments is seen nearly squaring off transaction on October 1^st and 3^rd, 2003. Maruti�s trading pattern does not fully fit in with the allegation that these entities collectively indulged in reversal of trades, thereby generating artificial volumes. Notwithstanding the aforesaid, there are two important factors i.e., the collective volumes of all these entities was high in period three � it was 33.8%, 47.7% 75.5% 92.2% and 56.1 % on October 1^st, 3^rd, 6^th, 7^th and 8^th, 2003 respectively and secondly, the aggregate net position of all these entities together was just 4,425 although their gross volumes traded were 383,108 shares. �Following table will describe the % of total volume traded by the clients (period 26/9/03-8/10/03) :-

 

Table � 5

Date	Percentage of total volume traded (for the period 29/9/03 � 8/10/03)
26-Sep-03	70.8%
29-Sep-03	0.0%
30-Sep-03	71.8%
1-Oct-03	33.8%
3-Oct-03	47.7%
6-Oct-03	75.5%
7-Oct-03	92.2%
8-Oct-03	56.1%

 

8)      I now proceed to examine whether the aforesaid artificial trades were done through synchronization. The Hon�ble SAT in its order dated October 31, 2003 in the Appeal no. 54-57 of 2001 in the matter of Nirmal Bang Securities Pvt. Ltd Vs SEBI, enumerated the basis for establishing the charge of matched / synchronized trades viz., complete matching of order time, order quantity and order rate over a period of time. The data in this regard, presented in Annexure to the SCN is examined, to ascertain whether the trades were synchronized or not. I find that the data in the annexure is in concurrence with the allegation in the SCN, which is sufficient to establish the charge that the trades in the period three were synchronized. �The specific instances are pointed out below:

 

a)      Specific to Maruti, who traded through CJD, its (sell) order price, quantity and time broadly matched (buy) with that of Phulchand Sons, trading through PVS on September, 26, 2003. The traded quantity through synchronization was 53,202 shares out of total 87,222 shares.

b)     Maruti�s buy order price, quantity, and time broadly matched (sell) with that of Phulchand Sons, trading through PVS on September, 30, 2003. The traded quantity through synchronization was 35,719 shares out of total 73,520 shares.

c)      Add Investment�s buy order price, quantity and time, through CJD broadly synchronized with (sell) that of Phulchand Sons, trading through PVS on October 03, 2003. The traded quantity through synchronization was 10,000 shares, out of total 37,284 shares.

d)     Maruti and Add Investment�s sell order price, quantity and time, totally match (buy) with that of Phulchand Sons, trading through PVS on October 06, 2003. The traded quantity through synchronization was 69,255 shares out of total 99,327 shares.

e)      Maruti�s buy order price, quantity and time, totally matched (sell) with that of Phulchand Sons, trading through PVS on October 07, 2003. The traded quantity through synchronization was 79,500 shares out of total 86,195 shares.

f)       Maruti�s sell order price, quantity and time, totally matched with (buy) that of Phulchand Sons, trading through PVS on October 08, 2003. The traded quantity through synchronization was 20,000 shares out of total 48,268 shares.

 

9)      From the aforesaid analysis of trading pattern of the clients through broker CJD and PVS, it is concluded that these clients reversed their respective positions on the immediate next trading day.� Further PVS dealt on behalf of Phulchand Sons and Investments Pvt. Ltd., in which Shri Deepak Dalal was a Director and on some days M/s C J Dalal dealt on behalf M/s Add Investments in which Shri Deepak Dalal was a partner. During the period from 26/9/03 to 8/10/03 the total trading volume in the scrip of AIL was 4,54,221 shares, PVS�s contribution to the same along with M/s C J Dalal was around 75%.

 

10)  The contention of PVS that they were not aware of the nature of transactions is not acceptable especially when these transactions were carried out continuously from 26/9/03 to 8/10/03 and that to majority of which in synchronization.� The volume undertaken by the clients of the broker was also very alarming and which should have, in all probability, given signals to the broker to the effect that activities of the clients are far from normal.� In other words it is an omission on the part of the broker to check the dealings in securities of its client, which were being conducted in a deceitful and fraudulent manner.� The said dealings of the clients should have raised suspicion in the mind of the broker and it should have taken steps to prevent the same.� Definitely the broker has failed to exercise care and diligence in its dealings with the client and allowed its systems to be misused.� The findings can be stretched to the extent, although no nexus is found between the broker and the client, that without its active involvement the trades of above nature would not have been executed but as per the number of rulings of the SAT and SEBI this will not be possible since nexus is important to prove a charge under PFUTP Regulations.� Some of the said rulings are discussed below:

�

a)      Indsec Securities & Fin. Ltd (Order dated 10/9/2004 of SEBI) - SEBI observed � �I note that the said broker merely carried out the instructions of its client and that there is no direct evidence regarding meeting of minds between the said brokers and IBSL.� Therefore, I find that synchronized trading by the said broker with IBSL is improbable.�

 

b)     Nirmal Bang Securities Pvt. Ltd (SAT-Appeal no. 54-57/2001) �In the said Order the Hon�ble SAT has enumerated the basis for establishing the charge of matched trades viz., complete matching of order time, order quantity and order rate over a period of time. Drawing from the said wording from SAT, the trading pattern should satisfy the following points in order to prove the trade as synchronized:

i.                    too many matched trades,

ii.                 over too long a period,

iii.               too many transactions when both the parties enter buy and sell orders for the same quantity of shares at the same order price,

iv.               orders placed simultaneously so as to leave no chance for any third party to intervene

v.                  nexus between the parities either by way of any connections or way of meeting of minds

 

c)      ICICI Brokerage Pvt. Ltd (Order dated 10/9/04 of SEBI) - It is held that synchronized trading per-se is not illegal unless it has an impact on the price of the scrip.�

 

d)     Srikant Mantri V/s SEBI (SAT Appeal no. 282/2004) - In order to establish a charge under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 Viz. circular/synchronized trading, it is a fundamental requirement that nexus is proved between the client and the broker or the counter party broker/client and also they acted in concert with the management of the company whose shares have been manipulated.� The said position has been confirmed by the SAT in the aforesaid Appeal wherein SAT has held that �in the absence of such a finding (i.e. nexus) it would be difficult to hold the entity guilty of violating the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 which requires strong proof.� (paragraph 7).

 

e)      Vissaria Securities V/s SEBI (SAT Appeal no. 281/2004) � SAT has held that it is necessary to prove that the broker had worked along with other broker to influence the price.� In the absence of any such evidence on the nexus with the other broker the charges of manipulation are difficult to sustain.

From the aforesaid findings on the synchronized trades, it is now confirmed that all the clients of the brokers generated artificial volumes, through synchronized trades in the period three of the investigation.

11)  The broker has thus violated the provisions of Clauses A (1), A (2), A (4) & A (5) of the Code of Conduct under Schedule II, read with Regulation 7 of Brokers Regulations.� The said provisions are reproduced as under:

 

Code of Conduct for Brokers � Schedule II

 

A. General

 

(1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business.

 

(2)� Exercise of due skill and care:� A Stock-broker shall act with due skill, care and diligence in the conduct of all his business.

 

(3) ��

 

(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 smith 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.

 

(5) Compliance with statutory requirements:� A stock-broker shall abide by all the provisions of the Act and rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.�

�

The aforesaid violations attract the adjudication penalty in terms of Section 15HB of the SEBI Act, 1992, as under:

Provisions of 15HB of SEBI Act, 1992

 

Penalty for contravention where no separate penalty has been provided

 

15HB.� Whoever fails to comply with� any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.]

 

12)  To determine the quantum of penalty under Section 15HA and 15HB, the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz. (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default. It is now established that the broker did not exercise due skill, care and diligence and allowed its client to generate artificial volumes in BSE. From the material on record it is not possible to arrive at a figure of loss caused to the investors and the gains made by the broker. Considering the continuous efforts of the client of the broker to create artificial volumes through synchronization, it can be said that the nature of default is repetitive as the synchronized trades were done from September 26, 2003 to October 08, 2003. The aforesaid artificial trades through synchronization only relates to period three of the investigations, whereas there are other artificial trades done in period one and two, by these entities taking advantage of the lack of diligence by the broker.

 

13)  The aforesaid default should be viewed seriously as it affects and interfere with the fair and smooth functioning of the market.� The artificial volumes such as noticed in the present case, though not coupled with significant price movements/fluctuations, give an impression of trading which in fact is not real and the general investors at large get induced to deal in securities. In order to protect the interest of investors in the securities market, this type of activity should be curved and dealt firmly. �A registered intermediary is expected to maintain high level of integrity and exercise due skill, care and due diligence while dealing in the market.� A stock broker can not take the trades of its clients lightly and it would not be open for the broker to plead that they were just following the instructions of the clients.� However, I have also considered the following submission of PVS:- (i) no proprietary dealings in AIL, (ii) no nexus of them with their client and (iii) no fluctuation in the price of AIL.� These factors, according to me can not be a complete defence of PVS but can be considered as mitigating factors. ���I therefore find it to be a fit case for imposition of penalty.

 

14)  �Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 5,00,000 (Rupees Five lakhs) �on Pravin V Shah Stock Broking Pvt. Ltd. under Section 15HB of SEBI Act, 1992.

 

15)  M/s Pravin V Shah Stock Broking Pvt. Ltd. shall pay the said amount of penalty by way of demand draft in favour of �SEBI- Penalties Remittable to Government of India�, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to, Shri P. K. Nagpal, Chief General Manager, Investigation, ID-1, Mittal Court, 1st floor, B- Wing, 224, Nariman Point, Mumbai 400 021.

 

16)  This order of adjudication is made and passed on 14^th day of June 2006 at Mumbai.

 

 

 

 

AMIT PRADHAN

ADJUDICATING OFFICER