Order against emerging Securities Private Limited

MO/63/IVD/12/2006

SECURITIES AND EXCHANGE BOARD OF INDIA 

CORAM: DR. T C NAIR, WHOLE TIME MEMBER

DIRECTIONS UNDER REGULATION 13(4) OF SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002, AGAINST M/s. EMERGING SECURITIES PRIVATE LIMITED (SEBI REGISTRATION NO. INB 230794535), MEMBER OF THE NATIONAL STOCK EXCHANGE, MUMBAI IN THE MATTER OF M/S. HAVELL’S INDIA LIMITED.

BACKGROUND

1. Havells India Ltd. (hereinafter referred to as HIL) was promoted by Shri Qimat Rai Gupta and Shri S. K. Gupta. HIL was incorporated as Havells Pvt. Ltd. in August, 1983 and converted into a public limited company in March, 1992. It started by producing miniature circuit-breakers and distribution boards in 1984. It entered into a technical collaboration with Christian Geyer, Germany to manufacture miniature circuit breakers in India. In 1991, it was amalgamated with Elymer Havells Pvt. Ltd. The shares of HIL are listed in The National Stock Exchange (NSE), The Stock Exchange, Mumbai (BSE) and Delhi Stock Exchange (DSE).

 

2. NSE based on a market alert received for the period October – December 2002, scrutinised the trading pattern in the scrip of HIL for Settlement nos. 2001141W to 2001151W (i.e. for the period October 15, 2001 to December 28, 2001) due to the high trading activity in an illiquid scrip.

 

3. Further investigations conducted by the Securities and Exchange Board of India (hereinafter referred to as SEBI) brought out that two NSE brokers – M/s. O. J. Financial Services Ltd. (hereinafter referred to as OJFSL) and M/s. Emerging Securities Private Limited (hereinafter referred to as ESPL) based at New Delhi had together contributed 96.70% of the gross traded quantity during the period October to December 2002 and two of their clients – M/s. Focus Portfolio Private Limited and M/s. Hind Comtel Limited (HCL) had contributed to nearly 100% of the volumes from their respective brokers.  

 

4. Based on the aforesaid findings of investigation, an Enquiry Officer was appointed to inquire into the violation of SEBI Act, 1992, SEBI (Stock Broker and Sub-brokers) Regulations, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 2003.  

ENQUIRY PROCEEDINGS

 

5. The Enquiry Officer issued a notice dated 19.10.04, in terms of Regulation 6(1) of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 was issued to the broker communicating the said allegations. The broker submitted a written reply and also reiterated its submissions during the personal hearing (wherein Mr. Shetty, Director of the broking company appeared) before the Enquiry Officer.

 

6. The Enquiry Officer after careful consideration of the charges made out in the show cause notice against ESPL, the reply submitted by the broker and the oral submissions made at the time of hearing, submitted a Report dated 03.10.05 wherein no penalty has been recommended against the broker. 

 

FINDINGS

 

7. I have perused the findings of the investigation, the charges made out against the broker in the show cause notice, the replies thereto and the recommendation of the Enquiry Officer in his report. The main issues for consideration in this case are:

 

·        whether ESPL had exercised proper care and diligence with respect to the transactions done on behalf of its client, and

·        whether the broker had aided and abetted its client in the synchronization of the trades in the scrip of HIL

 

8. The first issue for consideration is whether the broker has taken due diligence and proper care while transacting on behalf of its client, M/s. Hind Comtel. I note from the submissions of ESPL that it had complied with the ‘Know Your Client’ requirement, entered into an agreement with its client and have also collected the Memorandum of Association of their client, HCL. Also, the broker had discontinued dealing with HCL, even before NSE had advised them to review their relation. Taking into consideration the aforesaid, I am of the opinion that the broker has exercised due skill and care in carrying out the transactions on behalf of HCL in the scrip of HIL.

 

9. The other issue for consideration is with respect to the allegation of aiding and abetting with the client in synchronizing trades. I note that the scrip of HIL was extensively traded by HCL through ESPL and had contributed to about 47.99% of the gross traded volume during the period under scrutiny. But, as observed by the Enquiry Officer in his report, the price of the scrip had moved in a narrow range of Rs. 115 to Rs. 136 during the period 15.10.01 to 28.12.01 with a average volume of 1,875 shares, which by no means can be termed significant. Above all, no knowledge of the transactions has been attributed to ESPL which could lead to the presumption that ESPL was a party to the scheme carried out in the scrip of HIL. Also, there is also no material to show any nexus between ESPL and HCL or other parties who have dealt in the scrip of HIL. But on an analysis of the trade data it is very clear that there were indeed transactions which are synchronized. The Enquiry Officer has opined that the clients may be known to each other but this fact cannot establish any co-relation between the broker and the counterparty client. Thus in the absence of any evidence to the contrary, the broker cannot be said to have aided or abetted with the client, thereby no violation of Regulation 4 (b) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 1995.

 

10. In view of the aforesaid findings, I am inclined to agree with the recommendation of the Enquiry Officer that there is no need to levy a penalty upon ESPL under the present proceedings.

 

ORDER

 

11. Therefore, in exercise of powers conferred upon me by virtue 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 Inquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby direct that no penalty be levied upon M/s. Emerging Securities Private Limited, Member, The National Stock Exchange, (SEBI Registration No. INB 230794535) under the present proceedings.