BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO. AP/AO-02 /2006-07]
UNDER RULE 5 OF SEBI (PROCEDURE UNDER RULE 5 FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995, READ WITH SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992
In the matter of Investigations in
KWALITY DAIRY (INDIA) LTD.
AND
In respect of
BONANZA STOCK BROKERS LTD.
1.0 Pursuant to the investigation in the scrip of Kwality Dairy (India) Ltd. (hereinafter referred to as “KDIL”), Securities and Exchange Board of India (SEBI) appointed Mr. K.R.C.V. Seshachalam, Dy. General Manager as the Adjudicating Officer under Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') read with Section 15 I of SEBI Act, 1992 to inquire into and adjudge the alleged practices of the Member Broker NSE and BSE; Bonanza Stock Brokers Limited (hereinafter referred to as ‘Broker or Bonanza'), that are prohibited under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred as 'PFUTP') and SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 for which penalty is imposable under Section 15-HA and 15HB respectively, of SEBI Act, 1992. The aforesaid appointment was conveyed vide order dated August 4, 2004 and vide order dated December 28, 2004, the matter was transferred to Mr. A.C. S. Rao. Subsequently vide order dated December 20, 2005; the matter was transferred to the undersigned.
2.0 A show cause notice (SCN) dated October 5, 2005 under Rule 4(1) of the said Rules was issued by AO, Mr. A C. S. Rao to Bonanza, communicating the details of the charges levelled against him. In response to the SCN, Bonanza filed a reply vide letter dated October 24, 2005.
3.0 Under the aforesaid circumstances, and after going through the submissions of Bonanza, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, a notice of inquiry was therefore issued to Bonanza vide letter dated December 27, 2005, fixing the date of inquiry on January 10, 2006.
4.0 Shri S P Goel, Director and Shri Hari Kohli, Compliance Officer of Bonanza appeared for inquiry on January 10, 2006 and made submissions. Pursuant to the said hearing, Bonanza filed additional details vide letters dated January 16, 2006 and January 27, 2006 informing the undersigned about dropping the proceedings before WTM, SEBI. Bonanza also filed details of its client Mr. Chirg Pujara.
5.0 BACKGROUND:-
Investigations revealed that KDIL suffered loss for the years ended March 31, 2000, March 31, 2001, March 31, 2002 and March 31, 2003. KDIL earned a net profit of Rs.1.06 million on turnover of Rs.34.48 million during the quarter ended June 30, 2003. Investigations revealed that the total volume traded during the period of investigation was 3403923 shares. During the period February 5, 2003 to March 31, 2003, the scrip was infrequently traded with a very small volume and from April 2, 2003 there was a price rise with increasing volumes. From April 2, 2003 to April 11, 2003, there was price rise in the scrip from Rs.3.05 to Rs.11.25 and from April 29, 2003 to June 6, 2003 the price rose from Rs.11.70 to Rs.46.95. It was observed that out of the total volume, 3288016 shares were traded during the period April 23 to June 6, 2004 when some of the entities were involved in trading by entering into circular / reversal of trades. Investigation revealed that during the period April 23, 2003 to June 6, 2003, around 25% of the volume of trading was due to circular trades / reversal of trades among different groups of clients and brokers. The clients and the member-brokers of each of these groups bought and sold the shares among themselves by squaring off the deals often the same day through the same brokers(s) in a circular manner. The artificial volume generated through these circular deals / reversal of trades was mainly during April 23, 2003 to June 6, 2003 and the volumes on most of the days was around 20-25% of the day volume and on some days between 30-40%.
5.1 Investigation further revealed that the clients viz., Shri Sayyed Mustafa, Shri Chirag Pujara and Shri Laxmanbhai Patel acting through the member-brokers viz., Bharati Thakkar India Securities (Clg.No.737), Bonanza Stock Brokers Ltd. ( Clg.No.235 ) and Ramaben Samani Finance Pvt. Ltd. (Clg.N0.101) respectively had entered into circular / reversal of trades which resulted in creation of artificial volumes. These clients traded amongst them in a circular pattern intra-day i.e. the shares being bought / sold by one entity were sold / bought by another entity in the group through a number of buy and sell deals. It was revealed by investigations that the clients traded in groups - Chirag Pujara and Sayyed Mustafa traded for 21 days, Chirag Pujara, Laxmanbhai Patel and Laxmanbhai Patel & Sayyed Mustafa for 5 days and the number of trades executed were large as tabulated under:-
Name of the Client & Broker Buy Transaction
|
Name of the Client & Broker Sell Transaction
|
No. of Trades
|
Laxman Patel ( Ramaben Samani Finance Pvt.Ltd. )
|
Chirag Pujara ( Bonanza Stock Brokers Limited )
|
140
|
Laxman Patel ( Ramaben Samani Finance Pvt.Ltd. )
|
Sayyed Mustafa ( Bharti Thakkar India Securities Limited )
|
119
|
Chirag Pujara ( Bonanza Stock Brokers Limited )
|
Laxman Patel (Ramaben Samani Finance Pvt. Ltd.)
|
111
|
Chirag Pujara ( Bonanza Stock Brokers Limited )
|
Sayyed Mustafa (Bharti Thakkar India Securities Limited )
|
532
|
Sayyed Mustafa ( Bharti Thakkar India Securities Limited )
|
Laxman Patel (Ramaben Samani Finance Pvt. Ltd.)
|
163
|
Sayyed Mustafa ( Bharti Thakkar India Securities Limited )
|
Chirag Pujara ( Bonanza Stock Brokers Limited )
|
588
|
|
T O T A L …………..
|
1653
|
5.2 Investigations revealed that the said trades were carried out for a number of days and the timings for the orders so placed also matched exactly at most instances, ranging between 0-60 sec.
5.3 In view of the above inter se dealings among clients Chirag Pujara, Laxmanbhai Patel and Sayyed Mustafa, it is alleged that brokers of the clients aided and abetted them to create artificial volumes and thereby violated the provisions of Regulation 4 of PFUTP Regulations and Code of Conduct prescribed under Brokers Regulations.
6.0 REPLY: Bonanza replied to the SCN vide letter dated October 24, 2005 and denied the charges levelled against it vide the adjudication show cause notice.
7.0 Bonanza has also filed a letter dated January 27, 2006 vide which a copy of the order dated January 23, 2006 passed by WTM, SEBI, was filed. It is stated by Bonanza that they have been exonerated by SEBI from all charges which were similar to the present proceedings. On this ground alone, Bonanza has requested for dropping of adjunction proceedings.
8.0 I have perused the order dated 23/1/2006 passed by the Board in respect of Bonanza, and observe that it is passed in pursuance to the enquiry proceedings conducted under SEBI (Stock Brokers and Sub Brokers) Regulations, 1992. From the perusal, it is also observed that the subject matter of the order dated January 23, 2006 and the present adjudication proceedings is identical.
9.0 I note and record my findings as under:-
9.1 Whether the trades were synchronized and circular.
It was alleged that during the period under investigation, approximately 25% of the day volume in the scrip of KDIL was due to circular trades among different groups of clients and brokers. It was alleged that each of the said brokers bought and sold the scrip amongst themselves by squaring off the deals often on the same day through the same brokers in a circular manner. I note that since there is no mention of the other trades in the scrip during the period under investigation, it is difficult to ascertain whether the matching of the said trades was a deliberate attempt to manipulate the market or was it that these were the only trades during the said period which made the matching inevitable. I also find that there were no trades done by the broker in its account and all these trades were executed on behalf of its client.
9.2 Whether the broker failed to exercise due diligence while dealing with his client.
It was alleged that the broker was involved in 1371 transactions. However, it is pertinent to note that each order placed by the broker has been split and executed in a number of transactions. The broker in its reply has stated that Chirag Pujara was their client and transacted from their branch office at Vashi. The broker has further stated that all the transactions in the above scrip were done by their client and they were not aware of any manipulation or circular trading done by their clients. I observe that the broker had not done any proprietary trading in the scrip and hence it cannot be presumed that the broker would have had any pecuniary gain in indulging in the alleged circular trading. Moreover, there is no evidence to prove that the broker had any connections with the counterparty brokers by which it can be established that the broker acted hand in glove with the client or for that matter other brokers for creating misleading appearance of trading. Further, there is no material evidence in the investigation report to prove that the broker had any nexus with the promoters/directors of the company. In view of this, it cannot be said that the broker had violated the PFUTP Regulations as alleged in the show cause notice.
9.3 The aforesaid findings are also in line with the order dated 23.1.06 of SEBI where in the similar situation the broker has been exonerated from all charges which were similar to the present proceedings. In view of the above, I do not see, in the facts and circumstances of the case, any reasons to differ with the findings of the SEBI as no new facts are before me. Also the Board being a superior authority, the undersigned is bound by the said order. Now in view of the said order being passed in authoritative jurisdiction, and I being under the sub-ordinate jurisdiction, can not travel beyond the scope and decision of the said order. I am convinced that, based on the facts and circumstances of the case, this is not a fit case for imposing adjudication penalty under the SEBI Act.
9.4 Therefore, in exercise of the powers conferred upon me in terms of Section 15-I (2) of the SEBI Act, 1992 read with Rule 5 of Adjudication Rules, I hereby order that adjudication proceedings against Bonanza Securities Limited, be dropped.
10.0 This order of adjudication is made and passed on 28th day of April 2006 at Mumbai.
AMIT PRADHAN
ADJUDICATING OFFICER