In the matter of Ramaben Samani Finance Pvt. Ltd

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA  

[ADJUDICATION ORDER NO. AP/AO-03/2006-07]

 

In the matter of Investigations in  

KWALITY DAIRY (INDIA) LTD.

 

AND

 

In respect of

 

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 BSE; Ramaben Samani Finance Private Limited (hereinafter referred to as ‘Broker or RSFPL'), 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 RSFPL, communicating the details of the charges levelled against him. In response to the SCN, RSFPL filed a reply vide letter dated October 20, 2005.

 

3.0       Under the aforesaid circumstances, and after going through the submissions of RSFPL, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, a notice of inquiry was therefore issued to RSFPL vide letter dated December 28, 2005, fixing the date of inquiry on January 10, 2006.

 

4.0       Mr. Ashok Jain, Mr Junaid and Smt. Sudha Vithlani appeared for inquiry on January 10, 2006 on behalf of RSFPL and made submissions. During the said hearing, RSFPL filed letter dated 28.3.05 of SEBI enclosing therewith a copy of the enquiry report where the main charges against RSFPL were dropped and a minor penalty of censure was recommended.

 

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: RSFPL replied to the SCN vide letter dated October 20, 2005 and denied the charges levelled against it vide the adjudication show cause notice:

 

6.1         The broker submitted that they had not undertaken ay proprietary transaction in the shares of Kwality Dairy (India) Ltd. They submitted that their client Mr. Laxman Patel was introdicued to them by their client Mr. Ramesh Jain who had been dealing with them since September 2000. They further submitted that the transactions of their client were jobbing transactions generally looking to the volume of the shares traded. Broker contended that they were carrying on purely brokerage business and the transactions were squared off by the client every day. There was no outstanding at the end of the day.

 

6.2         Broker further submitted that the net bill of their client during 02.06.2003 to 06.06.2003 was of a very minimal amount not exceeding Rs. 10,000/- per settlement. Broker stated that there was no default by the client in payment and that the client had entered into transactions with them only from 02.06.2003 when the shares of Kwality Dairy (India) Ltd. was traded at the rate of Rs. 44 to Rs. 45.  The highest rate upto 04.06.2003 was Rs. 50.10 which stood at Rs.46.30 at the close of 06.06.2003. It is stated that its client merely traded for 5 days. They stated that the transactions were within the price band. Therefore, the transaction undertaken through them by their client can hardly be said to have affected market equilibrium.

 

6.3         Broker pointed out that they obtained the broker client agreement and client registration form from their client Mr. Laxamn Patel, who was properly introduced to them. Broker further submitted that the size of the transaction was not very large. Their daily turnover was Rs. 75 lakhs and therefore that the value of the volume of the client Mr. Laxman Patel in the scrip of Kwality Dairy was negligible. Broker reiterated that they were already penalized for it by BSE and they have paid penalty in addition to the suspension for a period of one week. They submitted that they should not be punished again since they have been already punished and punishing them twice would amount to double jeopardy.

 

6.4         Broker further submitted that they were not aware about financial conditions of the company. They were not aware about the circular nature of the transaction or increase in the volume of transactions. They were not aware about any reversal of the trades. Broker contended that their trades were on square off basis which normally a jobber does at the end of the day. Broker stated that they had not undertaken any transactions in the said shares on behalf of Mr. Laxman Patel prior to 02.06.03 and therefore, that they were not aware about any facts at all. They have not undertaken any proprietary trades in the said shares prior thereto. They were also not aware of the contents of the table mentioned in the show cause notice except the transactions of Mr. Laxman Patel. They were not aware of any counter party transactions as same were never displayed on the BOLT terminal by undertaking the said transactions. They submitted that they have noting to do with Bonanza Share & Stock and Bharati Thakkar India Securities Pvt. Ltd. on commercial basis. Broker stated that co-incidentally is that Mrs. Bharti Thakkar happens to be the sister of Mrs. Sudha Vithalani. Broker reiterated that the transactions were undertaken at the instructions of their client and that they were not part of the conspiracy not did they participate in the steep price rise of the company. Broker contended that they have not allowed their systems to be misused or manipulated. Broker argued that they have exercised due care and diligence in the matter.

 

6.5         The broker denied that the acts on their part were in violation of Clause A (1), (2), (3), (4) and (5) of Code of Conduct as specified in Schedule II under Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations 1992 and Regulation 4 (a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 1995 as alleged. Broker further denied that they have committed violation of Regulation 4(1) and 2 (a), (b), (e), (g) and (n) of the revised PFUTP Regulations 2003.

 

7.0         RSFPL also filed a copy of the enquiry report in the proceedings based on identical charges where only a minor penalty of censure was recommended by Enquiry Officer.

 

8.0         I have also perused the order dated 23/1/2006 passed by the Board in respect of RSFPL, 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 said order dated January 23, 2006 and the present adjudication proceedings is identical.

 

9.0         ISSUES FOR CONSIDERATION AND OBSERVATIONS

I have considered the facts of the case and identified the issues which arose for consideration as follows:

10.0  Whether the broker entered into synchronized and circular trades?

10.1 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 these 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.

 The details of such trades are given below.

Date	Bought Qty	Bought by Client (Broker)	Bought From Client (Broker)	Sold Qty	Sold by Client (Broker)	Sold To Client (Broker)
25.4.03 to 6.6.03	90427	Chirag Pujara (Bonanza Stock Brokers Pvt. Ltd)	Sayyed Mustafa (Bharti Thakkar)	98621	Chirag Pujara (Bonanza Stock Brokers Pvt. Ltd)	Sayyed Mustafa (Bharti Thakkar)
2.6.2003 to 6.6.03	46575	Laxman Patel  Ramaben Samani)	Chirag Pujara (Bonanza Stock Brokers Pvt. Ltd)	27650	Laxman Patel  (Ramaben Samani)	Chirag Pujara (Bonanza Stock Brokers Pvt. Ltd)
2.6.2003 to 6.6.03	41775	Sayyed Mustafa (Bharti Thakkar)	Laxman Patel  (Ramaben Samani)	24497	Sayyed Mustafa (Bharti Thakkar)	Laxman Patel (Ramaben Samani)

 

10.2 I observe from the trade and order log that the broker had on behalf of its client placed one order for purchase of 3600 shares on 2.6.03 which got split and executed as 10 trades, the number of shares in each transaction being 360 shares. This buy order of the client got matched with the sell order placed by Mr.Chirag Pujara, client of Bonanza Stock Brokers Pvt. Ltd. Again, on the same day i.e. 2.6.03, the broker once again placed a sell order for 7500 shares through four different order Nos. for sale of 4000, 2000, 1000 and 500 shares. This order got matched with the buy order of Chirag Pujara and got split and executed as 35 different transactions.

10.3 Again on the same day i.e. 2.6.03, the broker placed on behalf of the client another order for purchase of 9200 shares through 2 different order nos. of 2200 and 7000 shares each which again got matched with the sell order of Mr. Chirag Pujara, client of Bonanza Stock Brokers. These three orders too got split and executed as 35 different transactions ranging from 5 to 700 shares per trade.

10.4 On 03.06.03, the broker on behalf of client placed one sell order for 5000 shares which got matched with the buy order placed by Sayyed Mustafa, client of Bharti Thakkar. This order was split into 18 trades. Again on 3.6.03, the broker placed a buy order for 4447 shares which got matched by the sell order placed by Sayyed Mustafa. This order was split into 11 trades. Again on the same day, the broker placed a sell order for 6875 shares which were again purchased by Sayyed Mustafa in 22 transactions.

10.5 On 04.06.03, the broker placed on behalf of client sell order for 5000 shares which were bought by Chirag Pujara. Again on the same day the broker placed a buy order for 5000 shares which were matched with the sell order placed by Sayyed Mustafa. Again on the same day, the broker placed a sell order for 4450 shares which were once again matched by the buy order of Sayyed Mustafa.

10.6 On the same day, i.e. 4.6.03, the broker again placed a buy order for 5000 shares which were matched by the sell order of Chirag Pujara. Once again on the same day the broker placed another buy order for 4000 shares which got matched with the sell order placed by Sayyed Mustafa. The broker then placed on the same day, a sell order for 4000 shares which were bought by Chirag Pujara.

 10.7 On 5.6.03, the broker placed a buy order for 5700 shares which were matched by the sell order placed by Sayyed Mustafa. On the same day, the broker once again placed a buy order for 5500 shares and this got matched with the sell order placed by Chirag Pujara. Then the broker on the same day sold 5500 and 4000 shares vide two different orders which were bought by Sayyed Mustafa.

 10.8 On 6.6.03, the broker again placed another buy order for 5600 shares and the same got matched once again by the buy order placed by Chirag Pujara. Again on the same day the broker, placed 2 sell orders for 4800 and 6350 shares (11150 shares) which got matched by 2 buy orders placed by Chirag Pujara for the same quantity of shares which got executed as 38 transactions.

 10.9  On 6.6.03, the broker placed one single buy order for 5350 shares which got matched with the sell order placed by Sayyed Mustafa for the same amount of shares. This single order got executed as 38 trades. On the same day, the broker again placed a sell order for 4000 shares which got matched with 2 orders for purchase of 3980 and 20 shares placed by Sayyed Mustafa. This order also got split into 21 trades.

10.10  I, therefore, observe that the broker traded only on 5 days and placed 11 buy orders purchasing in all 53397 shares. Similarly, the broker placed 14 sell orders and sold 62725 shares. It is also apparent from the above table that the counterparties to the trades were Chirag Pujara or Sayyed Mustafa. Thus it appears that the shares were traded circuitously. I note that since there is no mention of other trades in the scrip during the period of investigation, it is difficult to ascertain whether the matching was deliberate attempt to manipulate the market or was it that these were only trades during the said period which made the matching inevitable. It is also possible that there is matched trading by the client. It is however, to be established whether the broker is a party to the same and that the broker had any connections with the client or the company (KDIL) or its directors. In view of this, it can not be said that broker had violated PFUTP Regulations as alleged in the show cause notice.

11.0  Next issue for consideration is whether the broker failed to exercise due diligence and violated Code of Conduct of Stock Broker Regulations.

 11.1  It is further alleged that the broker was involved in 533 transactions. However, it is pertinent to note that broker had placed apparently for their client 14 sell orders and 10 buy orders on 5 trading days and that each order placed by the broker had been split and executed in a number of transactions and hence the broker cannot be held responsible for voluminous transactions. The clients Sayyed Mustafa and Chirag Pujara, the client of Bonanza share the same address. Hence it can well be assumed that they are known to each other. However, there is nothing on record to prove that broker had the knowledge of counter party client at the time of trading.

 11.2  I have further noted that the price of the scrip at the time broker placed orders for the client was around Rs.44 to Rs.45 whereas the price rose from Rs.11 to Rs.45 during the period of investigation as per the show cause notice. I have further noted that the volume of the client of the broker was only 8% of the total volume traded. Therefore, it is difficult to hold that the broker was responsible for price manipulation.

11.3  I note that the broker had obtained ‘Know Your Client’ document from the client. The client was properly introduced. But I have noted that the client joined the broker from 02.06.2003 only.

 

12.0  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 identical 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 brought before me. Also the Board being a superior authority, the undersigned is bound by 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 SE BI Act.

13.0  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 Ramaben Samani Finance Private Limited, be dropped.

14.0 This order of adjudication is made and passed on 28^th day of April 2006 at Mumbai.

 

 

AMIT PRADHAN

ADJUDICATING OFFICER