BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: V. K. CHOPRA, WHOLE TIME MEMBER
Against M/s Tropical Securities and Investments Pvt. Ltd, a registered broker of BSE and in respect of its dealings in the scrip of Prudential Pharmaceuticals Ltd.
DATE OF HEARING: 26.02.2007
APPEARANCES:
FOR COMPANIES/ BROKERS:
- Shri. Milan Dalal, Director, M/s Tropical Securities and Investments P Ltd.
- Shri. Deepak Shah, Accountant, M/s Pursarth Trading Company P Ltd.
FOR SEBI:
- Mrs Barnali Mukherjee, DGM, SEBI
- Shri. Vir Sahib Singh, Manager, SEBI
- Shri. Mohamed Rahaz P.M., Legal Officer, SEBI
ORDER
Under Regulation 13(4) of SEBI (Procedure for Holding Enquiry
by Enquiry Officer and Imposing Penalty) Regulations, 2002
1.0 BACKGROUND
1.1 M/s Prudential Pharmaceuticals Ltd. was originally incorporated in the name of Pharmasia Drugs and Chemicals Pvt. Ltd. on June 25, 1985. The company became a deemed Public Limited Company w.e.f. February 06, 1993 and converted into a Public Limited Company by a resolution on November 03, 1994. A fresh certificate of incorporation consequent on the conversion of the company was issued on February 15, 1995. The company’s name was also changed to M/s Prudential Pharmaceuticals Ltd. (hereinafter referred to in short as “PPL”) w.e.f. February 22, 1995.
1.2 Securities and Exchange Board of India (hereinafter referred to as “SEBI) conducted an investigation into the alleged manipulation in the scrip of PPL for the period from July 09, 2001 to March 06, 2002 on the basis of the investigation report submitted by BSE. BSE in its investigation report stated that the major buying broker Tropical Securities and Investments Pvt. Ltd. (hereinafter referred to in short as “Noticee”) bearing SEBI Registration No. INB010993738, had mostly bought shares of PPL for Pursarth Trading Company Pvt. Ltd. who had bought almost 4.53% of the paid up capital of PPL. It is also observed from the analysis of trade log and order log that the Noticee had entered into synchronised / structured deals with UTI Securities Ltd and M/s Pawankumar Parmeshwarlal Choudhary.
1.3 SEBI after considering the Investigation Report appointed an Enquiry Officer vide Order dated June 02, 2006 to enquire into the violations allegedly committed by the Noticee under the provisions of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as “Stock Broker Regulations”) and Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulation, 1995 (hereinafter referred to as “PFUTP Regulations”) as also Securities and Exchange Board of India Act, 1992(hereinafter referred to as “SEBI Act”).
2.0 ENQUIRY PROCEEDINGS
2.1 The Enquiry Officer issued notice vide letter no. IVD/ID8/BM/SS/PPL/71361/2006 dated July 13, 2006 communicating the violations alleged to have been committed by it in terms of Regulation 6 (1) of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to in short as “Enquiry Regulation”).
2.2 The Noticee replied to the show cause notice vide letter dated July 29, 2006 and submitted the following:
· The transactions were executed through BOLT system at BSE
· Our transactions for the relevant period were only on a few days and that too at the prevailing market rates.
· We sold the shares and bought it back on the exchange. This was resorted for temporary funding to clear the pressure in the valan account and avoid default.
· We have no connection / association whatsoever with the company or its promoters or its directors.
2.3 The Enquiry Officer granted an opportunity of hearing in the matter on August 23, 2006. Shri. Milan Dalal, authorized representative of the Noticee attended the hearing before the Enquiry Officer. The Enquiry Officer, after conducting an enquiry in accordance with the provisions of the Enquiry Regulations, submitted a report dated August 31, 2006 whereby he observed that the Noticee violated the provisions Regulation 4(b) & (c) of PFUTP and Regulation 7 read with clause A(1) to (5) of Code of Conduct as specified in Schedule II of Stock Broker Regulations. He recommended suspension of registration of the Noticee for a period of one month.
3.0 SHOW CAUSE NOTICE
3.1 Pursuant to the receipt of the said Enquiry Report, a Show Cause Notice dated September 08, 2006 was issued to Noticee, along with a copy of the said Enquiry Report, advising them to show cause as to why the action, as recommended by the Enquiry Officer, should not be imposed on it. The Noticee submitted its reply to the said show cause notice, vide letter dated October 09, 2006.
4.0 REPLY OF THE NOTICEE TO THE SHOW CAUSE NOTICE.
4.1 The Noticee submitted that the impugned transactions in the scrip of PPL were carried out on the BOLT system of BSE at the relevant time in the normal and ordinary course of business. Because of the said nature of transactions, the Noticee submitted that there was no question of intentionally and deliberately entering deals in the scrip so as to hamper the stock exchange mechanism. They also submitted that they are voluntarily out of business for almost five years and they had already been penalized for their transactions in some other scrips. On this ground, the Noticee requested to cancel the recommendation of the Enquiry Officer and also requested for a personal hearing.
5.0 HEARING
5.1 Accordingly, the Noticee was advised to attend the personal hearing before me at SEBI’s Head Office at Mumbai on February 26, 2007 which they attended and reiterated the submissions as they had already made in their reply to the Show Cause Notice. Therefore, I am proceeding in the matter on the basis of the submissions of the notice and the material before me.
6.0 CONSIDERATION OF ISSUES & FINDINGS
6.1 I have carefully examined the enquiry report, show cause notice, reply of the Noticee and submissions made at the time of hearing.
6.2 The Enquiry officer found that the Noticee executed synchronised trades in the scrip of PPL and thereby misutilised the stock exchange trading mechanism. In order to reach the said conclusion, he has examined the trading details including price and volume data and the transactions of major brokers during the investigation period from July 09, 2001 to March 06, 2002. During the said period, the Noticee purchased 2,48,075 shares of PPL (56.13%) and its counterparties sold 2,78,584 shares of PPL (63.02%).
6.3 The price of the scrip during the period from July 09, 2001 to March 06, 2002 has decreased from Rs. 54.20 to Rs. 8.00 and during the same period 4,41,970 shares were traded at BSE. Further, it is observed from the details of trades executed in the scrip PPL that whenever the Noticee and its counterparties viz. UTI Securities Limited and M/s Pawankumar Parmeshwarlal Choudhary were not trading in the scrip, the price was falling. These members have not traded in the scrip from July 18, 2001 to July 24, 2001 and during this period the price came down from Rs. 41 to Rs. 33.45 and during the period of August 01, 2001 to August 24, 2001 these brokers traded for 130 shares only and the price comes down from Rs. 22.15 to Rs. 16.50. Therefore, it can be observed from the above that whenever these brokers were not trading in the scrip of PPL price was falling and hence the brokers were supporting the price of the scrip.
6.4 I have also noted the financial performance of the company PPL for the financial years ended on March 31, 2001 and 2002 and quarters ended on December 31, 2001 and 2002. Though, the sales of the company increased by 28.46% from March 31, 2001 to March 31, 2002, but the profit of the company decreased by 27% due to substantial increase in the expenditure of the company from Rs. 8.27 crore to Rs. 10.75 crore. Further, EPS of the company declined by 21% during the financial year 2001-02 and the company declared dividend of 10% for the year ended on March 31, 2001. It can also be observed that the financial performance of the company was not satisfactory.
6.5 I find that the major client of Noticee was Pursarth Trading Company Private Limited (hereinafter referred to in short as “Pursarth”) who was an associate concern of Noticee. I have noted that CFL Securities Ltd. and Harbinger Trading Company Private Ltd. are also associated with the Noticee as Shri. Milan Dalal is the Director of all these entities and he even gave a statement before the Investigating Officer on behalf of the aforesaid four entities. I have also noted that the Accountant of Pusarth one Shri Deepak Shah attended the personal hearing before me along with Shri Milan Dalal, Director of Noticee. They have not denied their connection/association.
6.6 I observe that Noticee traded for 25 days during the period of investigation and it bought 2,48,075 shares (85.44%) out of 2,90,339 shares traded during these 25 days at BSE. Out of its total purchases of 2,48,075 shares, it bought 2,33,421 shares for Pursarth and 14,629 shares it bought in its own trading account and sold 25 shares in its own trading account and 25 shares were bought for its client Ms. Veena M Dalal.
6.7 The Enquiry Officer has found that the Noticee had entered into synchronised / structured deals. The synchronized trade is a kind of transactions where the seller and buyer execute the trade for almost same quantity and price at substantially the same time. I find that synchronized deal per se is not illegal. On the other hand, the synchronized deal with fraudulent or deceptive intention to create misleading appearance of trading and to manipulate the price and volume of the scrip price to tamper the price discovery mechanism of stock exchange is no doubt a serious matter.
6.8 Hence, the issue to be decided in this case is whether the Noticee has carried out any such trades and to take a decision as to whether the penalty recommended by the Enquiry Officer against the Noticee is warranted or not. In order to decide the said issue, I felt it necessary to analyse the details of synchronised trades executed by the Noticee. (As given on next page)
6.11 I find that the Noticee executed 66 instances of synchronised trades with M/s Pawankumar Parmeshwarlal Choudhary within a period of 6 days (i.e on July 9, 2001 - one trade, July 10, 2001-14 trades, July 11, 2001-12 trades, August 28, 2001 – 10 trades, September 19, 2001 – 19 trades, October 01, 2001 – 10 trades). All these trades were executed within a time gap of 3 to a maximum 48 seconds. I find that synchronized/matching trades are evident from the above tables and in all cases, there is no price difference between buy and sell orders as also the quantity difference between buy and sell orders. Through the above structured deals, M/s Pawankumar Parmeshwarlal Choudhary had sold 82,534 shares for his 5 clients viz. M/s P L Choudhary & Co. (37,100), Parmeshwarlal Pawankumar Choudhary (HUF) (26,234), Pawankumar Choudhary (HUF) (4,200), Ms. Sabitaridebi Choudhary (5,000) and Ms. Kanta Singhania (10,000). All of these clients were related to M/s Pawankumar Parmeshwarlal Choudhary as they all are family members. All the above five entities were summoned by the Investigating Officer for recording their statement. Shri Pawankumar Parmeshwarlal Choudhary (Proprietor of M/s Parmeshwarlal Pawankumar Choudhary) appeared before the investigating officer on behalf of above entities and given his statement. He submitted that the above entities belonging to M/s Pawankumar Parmeshwarlal Choudhary purchased 82,848 shares through off market from Harbinger Trading Company Private Limited (associate concern of Tropical Securities and Investments Private Limited) and sold 82,534 in the market. In the statement he has stated,
“All of the above entities are in the business of finance since very long and during this period they have done sell and cash type business with Harbinger Trading Company Private Limited. In this process the above entities have earned interest income.”
6.12 In continuation to his statement he furnished the reply of his clients who submitted that,
“the parties interested in sell–n-cash usually transfers “N” quantity of shares and “N” number of scripts in our demat account. As per their need, they ask us to sell all or few out of these shares transferred. They give instruction to us to sell the shares in the market and ask them to pay after reducing their sell-n-cash charges approximately 1.5% to 2%. When they ask us to sell in the market, we ask M/s Pawankumar Parmeshwarlal Choudhary to sell “N” number of quantity in the market of particular scrip.” They also submitted that, “sometimes the other party is in so hurry and requires money so urgently that he can not wait for a long time, as some of their pay in or margin or high value cheques might be awaiting for clearance in the bank. In these circumstances or some that other party may want to continue to hold their holdings or any other such circumstances/reasons, which are better known to them only, they sometime arrange that the sell offer put by them is immediately executed.”
6.13 From the above statement, the relationship of M/s Pawankumar Parmeshwarlal Choudhary and its client and their intention to execute the trades in the scrip of PPL are established.
6.14 I observe that Shri Milan Dalal Director of the Noticee in his statement recorded by the investigating Officer stated that the above transactions were executed to tide over the financial difficulties as group entities of the Noticee namely Pursarth, CFL Securities Limited and Harbinger Trading Company Private Limited were facing financial difficulties to fulfill their commitments and therefore the Noticee and its group entities resorted to spot funding through brokers and banks. Shri Dalal further stated that the CFL Securities Limited pledged 2,50,000 shares with UTI Bank Limited against overdraft facility. To meet the shortage in its group entities account UTI Bank Limited sold 1,96,000 shares which were in turn purchased by Pursarth through the Noticee. UTI Bank Limited also confirmed that they extended overdraft facility of Rs. 30 crore to the Noticee’s associate concern CFL Securities Limited and CFL Securities Limited could not meet shortfall in its overdraft account therefore, UTI Bank Limited accepted 2,50,000 shares as pledge on July 12, 2001 and sold 1,96,000 shares on July 16, 2001 through UTI Securities Limited. Shri Dalal further stated as the shares of PPL were illiquid and the Noticee alongwith group entities had commitments with the bank therefore Pursarth bought these shares through the Noticee and as the settlement of the same was few days later therefore payments were postponed by those days. This statement indicates their intention to execute synchronised trades in PPL so as to meet their fund requirements and to derive undue benefit. Further, he has not given any proper explanation for the trades executed by them with M/s Pawankumar Parmeshwarlal Choudhary. Therefore, it is evident that the Noticee alongwith its associated entities misused the stock exchange mechanism to tide over their financial commitments and thereby distorted the market equilibrium in the scrip.
6.15 I find that the Noticee executed a total of 126 instances of synchronised trades and this has not been disputed by them. What they submitted before me is that they executed trades on the BOLT system of BSE at the relevant time in the normal and ordinary course of business and they had no intention to hamper the stock exchange mechanism. This submission is contradictory to their earlier statement i.e the trades were executed to meet their financial difficulties and fund requirements as recorded by the Investigation Officer.
6.16 I find that the charge against the Noticee is misutilisation of stock exchange mechanism for executing synchronized / structured deals in the scrip of PPL as is evident from the above statement of the director of Noticee and the 126 instances of synchronised trades. I am of the view that one broker intending to use the technique of synchronization of trade, will definitely affect the price discovery mechanism of the exchange and it will also reflect in the market. I find that the relevant details of the said synchronized trades had been furnished to the Noticee in pre-enquiry stage itself and he failed to give an acceptable explanation for the above mentioned trades either before the Enquiry Officer or before me. I am of the view that synchronized deals are possible if the trades are put in the system with prior understanding. In such cases prices and quantities are negotiated outside the system and orders are executed simultaneously. I find that all the 126 transactions in this case give an impression that these were all synchronized and executed to create artificial market, or else there would have been no possibility of such perfect matching of quantity price, etc. The said issue was already discussed by the Hon’ble Securities Appellate Tribunal (SAT) in Appeal Nos 54 to 57 of 2002 in the case of Nirmal Bang Securities (P) Ltd. vs. SEBI. While examining the issue of synchronized trades, the Hon’ble SAT observed as under:
“BEB has been charged for synchronized deals with First Global. I have examined the data provided by the parties on this issue. I find many transactions between BEB and FGSB. There are many instances of such transactions. I find the scrip, quantity and price for these orders had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale can create false volumes. The argument that the parties had no means of knowing whether any entity controlled by the client is simultaneously entering any contra order elsewhere for the reason that in the online trading system, confidentiality of counter parties is ensured, is untenable. It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only a coincidence in some cases. Theoretically this is OK. But when parties decide to synchronize the transaction the story is different. There are many transactions giving an impression that these were all synchronized, otherwise there was no possibility of such perfect matching of quantity price etc. As the Respondent rightly stated it is too much of a coincidence over too long a period in too many transactions when both parties to the transaction had entered buy and sell orders for the same quantity of shares almost simultaneously. The data furnished in the show cause notice certainly goes to prove the synchronized nature of the transaction which is in violation of regulation 4 of the FUTP Regulations. The facts on record categorically establish that BEB had indulged in synchronized trading in violation of regulation 47 of the FUTP Regulations. In a synchronized trading intention is implicit.” (emphasis not supplied)
6.17 Once the factum of manipulation is proved as discussed above, then as observed by SAT in the matter of Ketan Parekh Vs SEBI, the investors are affected by the said price difference. The relevant observation made by SAT in this regard is reproduced as below:
“When a person takes part in or enters into transactions in securities with the intention to artificially raise or depress the price he thereby automatically induces the innocent investors in the market to buy / sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated the person doing so is necessarily influencing the decision of the buyer / seller thereby inducing him to buy or sell depending upon how the market has been manipulated. We are therefore of the view that inducement to any person to buy or sell securities is the necessary consequence of manipulation and flows therefrom. In other words, if the factum of manipulation is established it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so wide spread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose on the Board a burden which is impossible to be discharged.”
6.18 Further, I observe that the standard of proof required in a proceeding of this nature is at variance with the standard of proof required in criminal cases. It is sufficient if the preponderance of probabilities suggests towards the indulgence of the delinquent in the misconduct. The strict rules of Evidence Act and proof beyond reasonable doubt are not applicable to a proceeding of this nature. The Supreme Court’s decision in Gulabchand vs Kudilal AIR, 1966, SC 1734 and the decision of the Special Court for trial of offences relating to transactions in securities in the matter of National Housing Bank versus ANZ Grindlays Bank, 1998 (2) LJ 153 is relied upon in this regard.
6.19 In view of these, I find that that the Noticee misused stock exchange mechanism to tide over the financial commitments and distorted equilibrium of the scrip of PPL. This type of artificial volume creation in illiquid scrips gives wrong message to the investors and induces them to trade in the shares and face certain loss. Further, synchronization of trades with malafide intention as stated hereinabove tampers with price discovery mechanism of stock exchange and also militates against concept of transparency. These trades abetted in creating artificial volumes and false market in the scrip of PPL and thus the trades executed by the Noticee are in violation of the provisions of Regulation 4 (b) and (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Markets) Regulations, 1995 and the corresponding provisions of 4(1), 4(2) (a) and (e) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003. Regulations 4 (b) and (c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 provides as follows:
4 No person shall
(b) Indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market.
(c) Indulge in any act, which results in reflection of prices of securities based on transactions that are not genuine transactions.
6.20 Further by entering such trades the Noticee violated the provisions of Regulation 7 read with Clause A (1) to (5) of code of conduct specified under Schedule II of the SEBI (Stock Brokers and Sub brokers) Regulations, 1992 which is extracted hereunder:
A (1): A Stock Broker shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business.
A (2): A Stock Broker shall act with due skill, care and diligence in the conduct of all his business.
A (3): 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 gain.
A(4): 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.
A (5): A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.
6.21 Apart from the above, I also find that the Noticee had committed similar violations in the scrip of M/s Surya Roshni Ltd. by executing synchronised / structured deals with M/s Pawankumar Parmeshwarlal Choudhary, which culminated into suspension of its registration for a period of two months vide order dated September 29, 2004 passed by the then Whole Time Member of SEBI. Having considered all aspects of the matter, I find that the penalty of suspension of certificate of registration granted to Noticee for a period of one month recommended by the Enquiry Officer is reasonable.
7.0 ORDER
7.1 Taking into consideration all facts and circumstances of the matter and in exercise of the powers conferred upon me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 13(4) of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby impose a minor penalty of suspension of certificate of registration issued to M/s Tropical Securities and Investments Pvt Ltd bearing SEBI Registration no. INB010993738 for a period of one month.
7.2 This order shall come into force on the expiry of 21 days from the date of this order.
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Place: Mumbai
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V. K. CHOPRA
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Date: April 10, 2007
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WHOLE TIME MEMBER
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SECURITIES AND EXCHANGE BOARD OF INDIA
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