SECURITIES
[ADJUDICATION
ORDER NO. BM/AO- 10/2011]
__________________________________________________
UNDER SECTION 15-I OF SECURITIES
In respect of
N. M. Lohia & Co
Member,
SEBI Registration No:
(PAN. AAWPL5838K)
In
the matter of Sangotri Constructions Limited
FACTS OF THE CASE IN BRIEF
1.
Securities and
Exchange Board of India (hereinafter referred to as �SEBI�) conducted investigation in trading in the scrip of M/s Sangotri
Constructions Limited (hereinafter referred to as �
2.
On analysis of
the trading data obtained from CSE it was observed that the transactions of six
brokers viz: Mukesh Dokania & Co., Rajendra Prasad Shah, Ahilya Commercial
Pvt. Ltd., Bubna Stock Broking Services Ltd., N.M. Lohia & Co. (hereinafter
after referred to as the �Noticee�),
�and Shyam Lal Sultania, constituted 62%
of the volume in the scrip of
3.
It was alleged
that that the Noticee created artificial volume and influenced the price of the
scrip and violated the provisions of regulations 3, 4 (1), 4 (2) (a), (b), (e),
(g), (n) and (o) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices
Relating to Securities Markets) Regulations, 2003 (hereinafter referred to as �PFUTP�) and clauses A (1), (2), (3)
and (4) and B (4) (a) of Code of Conduct for Stock Brokers as specified in
Schedule II under Regulation 7 of SEBI (Stock Brokers and Sub Brokers)
Regulations (hereinafter referred to as �Brokers
Regulations�). Consequently, in respect of the alleged charges, the Noticee
would be liable for monetary penalty sections 15HA and 15 HB of SEBI Act.
APPOINTMENT
OF ADJUDICATING OFFICER
�
4.
Shri V.S.
Sundaresan was appointed as Adjudicating Officer vide order dated March 27,
2008 under section 15 I of Securities and Exchange Board of India Act, 1992
(hereinafter referred to as �SEBI Act�)
read with rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties
by Adjudicating Officer) Rules, 1995 (hereinafter referred to as �Rules�) to inquire into and adjudge the
alleged violations of provisions of PFUTP and Brokers Regulations committed by
the Noticee.
5.
Subsequent to
the transfer of Shri. V. S. Sundaresan, the undersigned was appointed as the
Adjudicating Officer vide order dated
6.
Show Cause Notice
No. EAD-5/VSS/SS/136162/2008 dated August 27, 2008 (hereinafter referred to as �SCN�) was issued to the Noticee under
rule 4(1) of the Rules to show cause as to why an inquiry should not be held
against the Noticee and penalty be not imposed on the Noticee under sections
15HA and 15 HB of SEBI Act for the alleged violation specified in the said
SCN.�
7.
The Noticee vide
letter dated
�
We had
carried out all transactions on behalf of our various clients. A few trades
were done only on 13.03.2003 at 2.80. Some transactions were done from
23.09.2003 � 14.10.2003 where the prices were 26.60 � 63.20, but we were not
instrumental in the fluctuations in the prices. Please note that there were no
transactions by us from 13.03.2003� -
22.09.2003 and 18.10.2003 � 12.11.2003. Therefore,� we cant be blamed for the movement in share
prices during this period. Most of our trades were done during the period
13.11.2003 � 14.12.2004 where the prices of the said scrip were 85 � 128.90, as
per client�s instructions. However, we had done some transactions from
16.12.2004 and 24.12.2004 and 15.03.2005 � 31.03.2005where the price was 81.7 �
68.40 and 68 � 89.90 respectively. But we were not instrumental in the movement
of prices. Further, we would like to state that we have not traded in the scrip
during the period 25.12.2004 � 14.03.2005. All the trades were placed as close
to the last traded price prevailing at that time.
�
We carried
out all the transactions on the online trading system of CSEA for our various
clients as per their instructions. In few cases orders were placed in self code
due to unintentional error of the operator, but these transactions were duly
rectified in the back office system of the firm.
�
The client
trades at his/her own sweet will and the reason for trading in the scrip is
also not disclosed as a matter of trade secrecy. Therefore, we have no direct
influence in the trading of the scrip.
8.
In the interest
of natural justice and in order to conduct an inquiry as per rule 4 (3) of the
Rules, the Noticee was granted an opportunity of personal hearing on January 11,
2010 at SEBI, Eastern Regional Office, Kolkata (hereinafter referred to as �ERO�) vide notice dated December 14,
2009. Mr. Sudip Ray, Authorized
Representative appeared on behalf of the Noticee (hereinafter referred to as �AR�). During the hearing, the AR
submitted that he will file further written reply on or before
9.
Subsequent to
the hearing held on
10.
A copy of the
revised trading data of the Noticee was forwarded to the Noticee vide letter
dated
CONSIDERATION
OF ISSUES
11.
I have carefully
examined the SCN, the reply of the Noticee and the documents available on
record. I observe that the allegations against the Noticee are as follows:
i.
85% of the
transactions executed by the Noticee matched with itself.
ii.
The Noticee
executed cross deals and was increasing the price of the scrip in the process.
These cross deals formed 85% of its volume at the exchange in the scrip and the
price of the scrip increased from ` 2.80 to ` 128.90.
iii.
Both buy and
sell orders were done either in identical time gap or within a gap of few
seconds. Further the clients were allowed to place buy and sell orders of same
quantity and at the same price simultaneously which led to creation of
artificial volume resulting in the sudden price rise in the scrip of
iv.
77% of the
Noticee�s trades were executed in the code �SELF�.
v.
The Noticee was
aiding and abetting the clients in their manipulative trades.
In view of the above it has been alleged
that the Noticee has violated the provisions of regulations 3, 4 (1), 4 (2)
(a), (b), (e), (g), (n) and (o) of SEBI (Prohibition of Fraudulent and Unfair
Trade Practices Relating to Securities Markets) Regulations, 2003 (hereinafter
referred to as �PFUTP�) and clauses
A (1), (2), (3) and (4) and B (4) (a) of Code of Conduct for Stock Brokers as
specified in Schedule II under Regulation 7 of SEBI (Stock Brokers and Sub
Brokers) Regulations (hereinafter referred to as �Brokers Regulations�).
12.
Now the issues
that arise for consideration in the present case are :
a) Whether the Noticee has violated regulations 3, 4
(1), 4 (2) (a), (b), (e), (g), (n), (o) of PFUTP and A (1), (2), (3) and (4)
and B (4) (a) of Code of Conduct for Stock Brokers as specified in Schedule II
under Regulation 7 of Brokers Regulations?
b) Does the violation, if any, on the part of the
Noticee attract monetary penalty under sections 15 HA and 15 HB of SEBI Act?
c)
If so, what
would be the monetary penalty that can be imposed taking into consideration the
factors mentioned in section 15J of SEBI Act?
13.
Before moving
forward, it will be appropriate to refer to the relevant provisions of PFUTP
and Brokers Regulations, which reads as under:
3. Prohibition
of certain dealings in securities
No person shall directly or indirectly-
(a) buy, sell or otherwise deal in
securities in a fraudulent manner;
(b) use or employ, in connection with issue,
purchase or sale of any security listed or propose to be listed in a recognized
stock exchange, any manipulative or deceptive device or contrivance in
contravention of the provisions of the Act or the rules or the regulations made
thereunder;
(c) employ any device, scheme or artifice to
defraud in connection with dealing in or issue of securities which are listed
or proposed to be listed on a recognized stock exchange;
(d) engage in any act, practice, course of
business which operates or would operate as fraud or deceit upon any person in
connection with any dealing in or issue of securities which are listed or
proposed to be listed on a recognized stock exchange in contravention of the
provisions of the Act or the rules and the regulations made thereunder.
4. Prohibition
of manipulative, fraudulent and unfair trade practices
(1) Without prejudice to the provisions of
regulation 3, no person shall indulge in a fraudulent or an unfair trade
practice in securities
(2) Dealing in securities shall be deemed to
be a fraudulent or an unfair trade practice if it involves fraud and may
include all or any of the following, namely: -
(a) indulging in an act which creates false or
misleading appearance of trading in the securities market;
(b) dealing in a security not intended to effect
transfer of beneficial ownership but intended to operate only as a device to
inflate, depress or cause fluctuations in the price of such security for
wrongful gain or avoidance of loss;
(c) �
(d) �
(e) any act or omission amounting to manipulation
of the price of a security;
(f) �
(g) entering into a transaction in securities
without intention of performing it or without intention of change of ownership
of such security.
(h) �
(i) �
(j) �
(k) �
(l) �
(m) �
(n) circular transactions in respect of a
security entered into between intermediaries in order to increase commission to
provide a false appearance of trading in such security or to inflate, depress
or cause fluctuations in the price of such security;
(o) encouraging the clients by an intermediary
to deal in securities� solely with the
object of enhancing his brokerage or commission.
Stock-Brokers
to abide by Code of Conduct.
7. The stock-broker
holding a certificate shall at all times abide by the Code of Conduct as
specified at Schedule II.
SCHEDULE
II
Code Of Conduct For
Stock Brokers
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
(3)
MANIPULATION: A stock-broker shall not indulge in manipulative, fraudulent or
deceptive transactions or schemes or spread rumours with a view to distorting
market equilibrium or making personal gains.
(4)
MALPRACTICES: A stock-broker shall not create false market either singly or in
concert with others or indulge in any act detrimental to the investors interest
or which leads to interference with the fair and smooth functioning of the
market. A stock-broker shall not involve himself in excessive speculative
business in the market beyond reasonable levels not commensurate with his
financial soundness.
B. DUTY TO THE INVESTOR
(4) Business
and Commission:
(a) A stock
broker shall not encourage sales or purchases of securities with the sole
object of generating brokerage or commission.
14.
It is observed
that the price of the scrip increased from ` 2.40 on
15.
It is also
observed that the six brokers viz: Mukesh Dokania & Co., Rajendra Prasad
Shah, Ahilya Commercial Pvt. Ltd., Bubna Stock Broking Services Ltd., Noticee
and Shyam Lal Sultania, had traded for 2,39,26,812 shares which indeed
constituted 62% of the total market volume in the scrip of
|
Sl. No. |
Name of the broker |
Volume Buy/Sell |
Traded from (Rs.) |
Traded up to (Rs.) |
|
1 |
Rajendra
Prasad Shah |
71,03,280 |
18.00 |
125.30 |
|
2 |
Ahilya
Commercial Pvt. Ltd. |
56,79,980 |
17.80 |
115.00 |
|
3 |
Mukesh
Dokania & Co. |
32,56,152 |
2.70 |
124.50 |
|
4 |
Bubna
Stock Broking Services Ltd. |
32,22,640 |
17.80 |
124.70 |
|
5 |
N M Lohia
& Co. |
30,18,322 |
2.80 |
128.90 |
|
6 |
Shyam Lal
Sultania |
16,46,438 |
17.90 |
110.60 |
16.
The analysis of
the trading data obtained from CSE revealed that the Noticee had executed 8% of
the total trades (both buy and sell) in the said scrip at the exchange during
the aforesaid period, details of which are given below:
|
Sl.
No. |
Member
Name |
Trading Data |
|||||
|
No.
of shares bought |
% to
Total Buy at CSE |
No.
of shares sold |
% to
Total Sell at CSE |
Total
no. of shares |
% to
Total Buy & Sell |
||
|
1 |
M/s N
M Lohia & Co. |
13,27,036 |
7% |
16,91,286 |
9% |
30,18,322 |
8% |
17.
It was observed
that 42.5% of the transactions executed by the Noticee had matched with itself as given
below :
|
����������� Sl No |
Name and address of the broker |
|
||
|
N. M. Lohia & Co. |
||||
|
Qty |
% |
|||
|
1 |
N. M.
Lohia & Co. |
12,83,434 |
42.5% |
|
18.
Further from the
analysis of the order and trade log of the Noticee, it is observed that the
Noticee had entered buy and sell orders in its terminal at the same price and
quantity with a gap of few seconds. Details of cross deals are given in
Annexure A. The pattern of its synchronized trades is shown in table below.
|
Order No. |
Order date |
Order time |
Trade no |
Member Name |
B/S |
Quantity |
Price |
Counterparty |
|
181468854 |
|
|
490 |
N. M. Lohia |
B |
500 |
97.30 |
N. M. Lohia |
|
181468853 |
|
|
490 |
N. M. Lohia |
S |
500 |
97.30 |
N. M. Lohia |
|
181471745 |
|
|
651 |
N. M. Lohia |
B |
2500 |
98 |
N. M. Lohia |
|
181471744 |
|
|
651 |
N. M. Lohia |
S |
2500 |
98 |
N. M. Lohia |
19.
The above
pattern of trading by the Noticee continued for a number of days. It is also
observed that the Noticee raised the price of the scrip from `2.80 to `128.90
during the period April 2003 to October 2004 and as stated above 42.5% of its
transactions were cross deals, wherein the buy orders and sell orders were
entered by the Noticee in it�s own terminal. The time difference between the
buy and sell orders were few seconds. In 77% of the cases the client code
showed �SELF�. The Noticee in its reply submitted that it was due to
unintentional error of the operator. This explanation of the Noticee cannot be
accepted as it happened not in solitary case but in number of instances.
20.
The Hon�ble
21.
The method and
the manner in which the trades are executed are the most important factors to
be considered in these circumstances. The motive, thereafter, automatically
falls in line. Trades like cross deals, reverse transactions, circular trades,
and synchronized trades are all executed on the trading screen of a stock
exchange. Clearly in almost all the deals, the orders are placed so as to
ensure a matching of the buy and the sell quantity and the buy and the sell
price with the counter party, with whom a prior tacit understanding exists. The
buy and the sell orders are placed at almost the same time between the counter
brokers, with just a difference of a few seconds. This proximity in the inputting
of orders at the same price and for the same quantity, results in getting them
matched, such that there is almost perfect matching in all the trades, with all
the three parameters, viz., quantity, price and most importantly, the time
required to conclude the trades, which to a large extent indicates
synchronization in the logging in of the orders, albeit executed on the screen
of the stock exchange.
22.
This is what has
transpired in the present case. The matching of these trades was not noted in a
solitary incident or two, instead, a large number of synchronized trades got
matched regularly. It is my considered belief that frequency of such trades
ensured consistent matching of the orders purely for the purpose of projection
of the volumes of the shares of
23.
In case an
entity is alleged to have manipulated the market or distorted the market
equilibrium in terms of the PFUTP and their acts are corroborated up to a
certain extent by the investigation findings, then the underlying intention of
the said entity is brought out. Furthermore, price manipulation does not only
involve manipulation in the prices of the scrip but also includes building up
of volumes. This is evident from the finding that the Noticee had executed transactions
for 30,18,322 shares (both buy and sell) out of which 42.5% for 12,83,434
shares were found to be synchronized and cross deals.
24.
I have noted the
submissions of the Noticee denying the allegations and attributing the trades
for the clients and not its proprietary account. Although, the Noticee has
traded for the clients and there are no proprietary trades, however this submission
can�t suffice for the Noticee�s unawareness and no complicity in the aforesaid
transactions and can�t establish that the Noticee is not guilty of the
violation of the aforementioned allegations. By indulging in such manipulative
trading, the Noticee raised the price of the scrip from as low as `2.80 to `128.90 per
share.
The Noticee by participating in the trading in this manner involved in the
execution of such transactions created artificial liquidity in the scrip and
played a role in the manipulation of the trading. Therefore I don�t find the
explanations of the Noticee satisfactory.
25.
In terms of Clauses A1 to 4 and B4 (a) of the Code of
Conduct prescribed under the provisions of Brokers 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 also mandates 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)
of the Noticee as explained hereinabove in detail would establish that the same
created a misleading appearance of trading, artificial volume and price in the
shares of
26.
In view of the
foregoing, the allegation of violation of provisions of regulations 3, 4 (1), 4
(2) (a), (b), (e), (g), (n) and (o) of PFUTP, A (1), (2), (3) and (4) and B (4)
(a) of Code of Conduct for Stock Brokers as specified in Schedule II under
Regulation 7 of Brokers Regulations by the Noticee stands established.
27.
The Hon�ble
Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual Fund [2006]
68
28.
Thus, the aforesaid violations by the Noticee make it liable for
penalty under Sections 15HA and Section 15 HB of SEBI Act, 1992 which read as
follows:
Penalty for fraudulent and unfair trade
practices
15HA. If any person indulges in fraudulent
and unfair trade practices relating to securities, he shall be liable to a
penalty of twenty-five crore rupees or three times the amount of profits made
out of such practices, whichever is higher.
Penalty for contravention where no
separate penalty has been provided
1HB. 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.]�.
29.
While
determining the quantum of penalty under sections 15HA and 15HB, it is
important to consider the factors stipulated in section 15J of SEBI Act, which
reads as under:-
�15J� Factors
to be taken into account by the adjudicating officer
While adjudging quantum of penalty under
section 15-I, the adjudicating officer shall have due regard to the following
factors, namely:-
(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;
����������� (c)
the repetitive nature of the default.�
30.
It is difficult,
in cases of such nature, to quantify exactly the disproportionate gains or
unfair advantage enjoyed by an entity and the consequent losses suffered by the
investors. I have noted that the investigation report also does not dwell on
the extent of specific gains made by the clients or the brokers. Suffice to
state that keeping in mind the practices indulged in by the Noticee, gains per
se were made by the Noticee in that it traded in the scrip of
ORDER
31.
After taking
into consideration all the facts and circumstances of the case, I impose a
penalty of `1,50,000/- (Rupees One Lakh Fifty
Thousand only) under section 15HA and `50,000/- (Rupees Fifty Thousand only) under section 15HB of SEBI Act, {i.e. a total penalty of `2,00,000/- (Rupees Two Lakh only) } on the Noticee which will be commensurate with the
violation/s committed by him.�
32.
The Noticee
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 Mr.
Jayanta Jash, General Manager, SEBI, Eastern Regional Office, L&T Chambers,
3rd Floor, 16, Camac Street,�
Kolkata � 700 017.
33.
In terms of rule
6 of the Rules, copies of this order are sent to the Noticee and also to the
Securities and Exchange Board of India.
|
Date: |
BARNALI MUKHERJEE |
|
Place: Mumbai |
ADJUDICATING
OFFICER |