Order against Mukul Bhattacharjee, Member, CSE in the matter of Blue Print Securities Ltd

SECURITIES AND EXCHANGE BOARD OF INDIA

 

ORDER

 

UNDER REGULATION 13(4) OF THE SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002 AGAINST MUKUL BHATTACHARJEE, MEMBER – CALCUTTA STOCK EXCHANGE.

 

 

1.0 Background

 

1.1             Shri Mukul Bhattacharjee (hereinafter referred to as “the said broker “), is a member of the Calcutta Stock Exchange (hereinafter referred to as “CSE”) and is registered with the Securities and Exchange Board of India (hereinafter referred to as “SEBI”) vide Registration No. INB 030936018.

 

1.2             The shares of Blue Print Securities Ltd.( hereinafter referred to as “BPSL” ) were listed on CSE. There was a major spurt in price and volumes traded at the CSE during the period July and October, 2001 (hereinafter referred to as “the said period “ ) in the scrip of BPSL. An investigation was conducted by SEBI into buying, selling and dealings in the scrip of M/s. BPSL. The investigation revealed that between 5^th July,2001 and 31^st October,2001, the average price of the scrip BPSL at CSE shot up from Rs.4.45 during settlement no.2002115 to Rs.21.40 in settlement no.2002130. The price rise was against low trading volumes. Major volume of trading in the scrip was generated by two CSE brokers viz. M/s.J.T.Amirthasingh & Co. and Mukul Bhattacharjee. The investigation revealed many cross deals executed by the said broker from the same terminal in Settlement Nos.2002115,2002117 and 2002124. From Settlement No.2002126 onwards, there were a number of trades of the said broker which matched with that of another broker of CSE viz; M/s. J.T.Amirthasingh & Co. in terms of order, price and timing.

 

2.0 Enquiry proceedings :

2.1             On the basis of the above investigation, vide order dated 18/8/2003, SEBI appointed an Enquiry Officer to enquire into the irregularities/contraventions alleged to have been committed by the said broker while dealing in the scrip of BPSL and for possible violations of the provisions of the SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations,1992 (hereinafter referred to as “ the said Regulations “ ) and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market ) Regulations, 1995 (hereinafter referred to as “ the PFUTP Regulations “ ).

 

2.2             The Enquiry Officer, after conducting the enquiry as per the procedure prescribed under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations,2002 (hereinafter referred to as “ the said Enquiry Regulations “) submitted a report dated 16^th August, 2004 and recommended that a major penalty of suspension of certificate of registration for a period of six months against the said broker.

 

 

 

3.0 Show Cause Notice and Hearing :

 

3.1             A show cause notice dated 24^th August, 2004 was issued to the said broker along with a copy of the enquiry report, in terms of regulation 13(2) of the said Enquiry Regulations advising the said broker to show cause as to why appropriate penalty including the penalty as recommended by the Enquiry Officer should not be imposed on him. Vide the said notice, the broker was also asked to indicate his desire for a personal hearing before the Chairman/ Member. The broker was further advised to submit a reply within the stipulated period of 21 days of receipt of the said show cause notice. It was also stated in the show cause notice that if he failed to give a reply within the stipulated period then it would be presumed that he has nothing to say in the matter and SEBI would be free to take such action as deemed fit. However, the said notice returned undelivered. Attempts were made vide letter dated August 26,2004 to deliver the show cause notice by forwarding the same to CSE requesting them to deliver the said notice to the broker and to send the acknowledgement by the broker of receipt of the SCN. In that regard, CSE vide its letter dated October 8,2004 had stated that the Exchange had not received any acknowledgement from the Postal Authorities about the delivery of the said notice. It was further informed by CSE that as Shri Mukul Bhattacharjee was an in-active member of the Exchange since February,2002 as per Exchange’s record, the said show cause notice could not be delivered neither at the office nor at the home address of the said person as known to the Exchange. However, the said show cause notice was affixed on September 22,2004 at the official address of the broker. Despite this, the said broker failed to respond. Since the said broker failed to acknowledge the receipt of the said show cause notice and failed to reply to the same, I am convinced that ample opportunity has been granted to the broker, therefore, I shall proceed further based on the material available on record.

 

 

4.0 Consideration of Issues and Findings :

 

4.1             I have considered the facts of the case, the findings of the Enquiry Officer contained in the Report dated 16^th August, 2004, the show cause notice and other material on record.

 

4.2              I observe that between 5^th July,2001 and 31^st October,2001, the average price of the scrip of BPSL at CSE shot up from Rs.4.45 during Settlement No.2002115 to Rs.21.40 in Settlement No.2002130. I further observe that the price rise was against low trading volumes. The major volume of trading in the scrip was generated by two CSE brokers, namely; M/s. J.T.Amirthasingh & Co. and Mukul Bhattacharjee and that there were many cross deals executed by the said broker from the same terminal in Settlement Nos.2002115, 2002117 and 2002124. I also observe that from Settlement No.2002126 onwards, there were a large number of trades of the said broker which matched with that of another broker of CSE viz. M/s.J.T.Amirthasingh & Co. in terms of order, price and timing.

 

4.3              I observe that a series of `matched’ trades had taken place during 10^th July,2001 and 15^th October,2001 between the broker and J.T.Amirthasingh & Co. when the price of the scrip increased from Rs.4.20 to Rs.21.40 respectively. I find the same to be more than a coincidence that the trades of the said broker had matched in terms of order price, order quantity and time wherein the counter-party broker is M/s.J.T.Amirthasingh & Co. I further observe that these trades did not result in net-delivery obligation to the Exchange.

 

4.4             The details of such transactions (matching trades ) of the said broker with the counter-party broker Shri J.T.Amirthasingh & Co. are as per the Annexure to this order.

 

 The transaction-wise and settlement-wise details of the  said broker with the counter-party broker  M/s.J.T.Amirthasingh & Co. are as under:

 

 

4.5             I further observe that the above transactions were cross deals wherein both the buyer and the seller were the clients of the said broker. The orders were also executed through the same terminal. The ordered quantity, price and time were matched and there was no delivery obligation to the Exchange. I further observe that the value and volume of the impugned transactions were also quite high. The transactions were highly irregular and defeat the very purpose of the normal order matching mechanism in the price discovery process in the Exchange.

 

4.6             As regards due diligence, I observe that it was the duty of the said broker to exercise due diligence and he should have questioned the clients on such types of transactions. I note that there is no material to suggest that the clients were dealing with the said broker in any securities other than the BPSL and for how long they have been the clients of the said broker. I note that the said broker has not acted in good faith and failed to exercise due diligence before executing transactions in the aforesaid manner.

 

4.7             I further observe that the time lag between the punching of buy and sell orders was under a few minutes /seconds and almost the same in a number of transactions. In other words, there was a very thin line between the punching of buy and sell orders and the number of transactions entered into.

 

4.8 I note that In Appeal No.54 of 2002 – Nirmal Bang Securities Pvt. Ltd. vs SEBI, the Hon’ble Securities Appellate Tribunal has held as under with regard to the synchronised deals :-

 

 “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.”

 

 5.0 I observe such transactions wherein the buy and sell orders were entered as cross deals and matched in terms of order quantity, price and the time of punching orders are highly irregular and defeat the very purpose of normal order-matching system in the price discovery process in the exchanges. Therefore, I note the said transaction is in violation of Regulation 4 of the PFUTP Regulations which reads as under:-

 

Prohibition against market manipulation.

4 No persons shall

(a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person;

 

(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities markets;

 

(c) indulge in any act, which results in reflection of prices of securities based on transactions that are not genuine trade transactions;

 

(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuation in the market price of securities.

 

5.1 I note that regulation 7 of the said Regulations which provides as under :-

 

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 in Schedule II.

 

5.2 I also note that Schedule II of the said Regulations reads as under:-

 

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 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.

 

(5) Compliance with statutory requirements : 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.

 

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.

 

5.3 In view of my observations mentioned hereinabove, I am convinced that  the said broker has violated regulation 7 of the said Regulations read with clauses A(1),A(2),A(4),A(5) and B(4)(a) of the Code of Conduct prescribed for Stock Brokers under Schedule II of the said Regulations read with regulation 4(a),(b),(c) and (d) of the PFUTP Regulations. I have further noted that the said broker has violated regulation 9 of the PFUTP Regulations by non-cooperating with the investigating authority and also non-furnishing of information which was sought by the investigating authority.

 

5.4 I am satisfied that this is a fit case to impose a penalty of suspension and I do not see any reason to differ with the findings and the recommendation of the Enquiry Officer in this regard. I am also convinced that a major penalty of suspension of the Certificate of Registration of the said broker for a period of six months would be adequate and commensurate with the gravity of the violations committed by the said broker.

 

6.0 Order

 

Therefore, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act,1992 read with regulation 13(4) of the said Enquiry Regulations, hereby suspend the certificate of registration of Shri Mukul Bhattacharjee (SEBI Registration No.INB 030936018) for a period of six months.

 

This Order shall come into effect on the expiry of twenty one days from the date of this Order.

 

Place: Mumbai		MADHUKAR
Date : 23-12-2005		MEMBER
	SECURITIES AND EXCHANGE BOARD OF INDIA