BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: V.K CHOPRA, WHOLE TIME MEMBER
Against M/s Herald Equities Pvt. Ltd., Broker, Calcutta Stock Exchange in the matter of Ranbaxy Laboratories Limited
DATE OF HEARING 28.09.2006
APPEARANCES
- Shri. Jugal K Bajaj, Director of M/s Herald Equities Pvt. Ltd
- Shri. Sunil C Gangan, Advocate
- Shri. Gaurav Joshi, Advocate
FOR COMPANIES/ BROKERS:
FOR SEBI
- Mrs Barnali Mukherjee, DGM, SEBI
- Shri Deepesh M.U, 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 Securities and Exchange Board of India (hereinafter referred to in short as “the Board”) ordered an investigation into the dealings of M/s Herald Equities Pvt. Ltd, a broker (hereinafter referred to as “the Broker”) of Calcutta Stock Exchange(CSE) bearing SEBI Registration No. INB031049738, in the shares of Ranbaxy Laboratories Ltd (hereinafter referred to in short as “Ranbaxy”).
1.2 The price of the scrip of Ranbaxy had moved up significantly from Rs.270/- in January 1999 to about Rs.1200/- in October 1999 accompanied with significant increase in volumes. The Board initiated preliminary investigation into the scrip in August 1999 considering the above major spurt in price and volumes traded in the Exchanges particularly on the Stock Exchange, Mumbai (BSE), National Stock Exchange (NSE) and Calcutta Stock Exchange (CSE).
1.3 The Board after considering the interim Report of the aforesaid Investigation, appointed an Enquiry Officer vide Order dated November 27, 2002 to enquire into the violations allegedly committed by the Broker under the provisions of the Regulation 7, read with schedule II, clause A(3) and (4) of SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992 (hereinafter referred to in short as “Stock Brokers Regulations”) and the provisions of Regulation 4 (a),(b),(c) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995 ((hereinafter referred to in short as “PFUTP Regulations”) and Rules, Regulations and Byelaws of Stock Exchanges.
1.4 The Enquiry Officer, after conducting an enquiry in accordance with the provisions of Regulation 6 of the Securities and Exchange Board of India (Procedure for holding Enquiry by Enquiry Officer and imposing penalty) Regulations, 2002 (hereinafter referred to as ‘the Enquiry Regulations’), submitted a report dated November 14, 2003 wherein he observed that the broker has violated the provisions of SEBI circular No.SMDRP/POLICY/CIR-32/1999 dated September 14, 1999; Regulation 7 read with clause A(3) and (4) of Code of Conduct as specified in Schedule II of Stock Brokers Regulations and Regulation 4(b) & (c) of PFUTP Regulations 1995. He recommended suspension of registration of the broker for a period of 5 months and 15 days.
2.0 SHOW CAUSE NOTICE
2.1 Pursuant to the receipt of the said Enquiry Report, a Show Cause Notice dated December 05, 2003 was issued to the broker, enclosing therewith a copy of the said Enquiry Report and advising him to show cause as to why the action, as recommended by the Enquiry Officer or any other appropriate penalty should not be imposed on him. The Broker submitted its reply to the said show cause notice, vide letter dated January 23, 2004.
3.0 REPLY OF THE BROKER
3.1 The broker stated that 6 out of a total of 10 transactions took place prior to September 14, 1999, the date on which SEBI issued its circular prohibiting negotiated deals. Therefore, the alleged violation in respect of the said 6 trades is not sustainable.
3.2 The Broker stated that as per the findings in the Enquiry Report an order of 50,000 shares out of a total of 1,49,000 shares (34% of the broker) was matched with one Dinesh Kumar Singhania who was associated with Ketan Parekh Group. The broker further stated that out of the aforesaid 50,000 shares, an order of 40,000 shares was executed on August 24, 1999 and an order of 10,000 shares was executed on October 15, 1999. Both these transactions were carried out prior to SEBI Circular dated September 14, 1999. Further, the broker submitted that there is no finding in the Enquiry Report showing their connection or linkage with the Ketan Parekh Group.
3.3 The Broker further submitted that all the trades executed by them were strictly in compliance with the provisions of code of conduct contained in Schedule II of the Stock Broker Regulations and they came to know about the matching trades only during the proceedings.
3.4 The Broker stated that they had executed the trades immediately on the receipt of instructions from the client and all trades were carried out on the screen based system where it is not possible to know the identity of the counter-party. It is also stated in the reply that the screen based trading system essentially matches purchase and sale orders in terms of time and price priority.
4.0 HEARING
4.1 In the said reply to show cause notice, the Broker requested for personal hearing. The broker was accordingly advised to attend the personal hearing before me at Head Office SEBI at Mumbai on September 28, 2006, which he attended along with his Advocates and also filed written submission dated October 05, 2006. Therefore, I am proceeding in the matter on the basis of the submissions of the broker and the materials available before me.
5.0 CONSIDERATION OF ISSUES & FINDINGS
5.1 I have carefully examined the Enquiry Report, Show Cause Notice, Reply and Submissions of the broker and I observe as under:
5.2 I find that the scrip of Ranbaxy traded around the price range of Rs.270/- at the beginning of January 1999. The price of the scrip moved up to Rs.320/- by the end of January 1999. Subsequently, price continued to move upward during February – March 1999 and reached to Rs.650/- by the end of March 1999. Further, the price of the scrip moved to Rs.700/- during May 1999 and came down to Rs.600/- during June 1999. The price subsequently moved upwards and touched Rs.800/- during July 1999 and Rs.1000/- during August 1999. The scrip was being traded in the range of Rs.900/- to Rs.1100/- during August – September 1999 and the price increased to Rs.1200/- during October 1999. Effectively the price of the scrip moved up from Rs.267 on 01.01.99 to a high of Rs.1215/- on 13.10.99. Later on the price started falling gradually and closed at Rs.869 on 29.10.99 at BSE. The price of the scrip of Ranbaxy had moved significantly during the period from Rs.270/-in January 1999 to about Rs.1200/- in October 1999. The price rise in the scrip was accompanied with significantly high volumes.
5.3 The Enquiry Officer has found the broker guilty in violating SEBI Circular No. SMDRP/POLICY/CIR-32/1999 dated September 14, 1999 pertaining to negotiated deals. I find that such finding will not stand against the broker since the same was not covered under the Order dated November 27, 2002 while appointing the Enquiry Officer and as such the said finding was beyond the scope of Enquiry.
5.4 I find that the charge levelled against the broker is on the basis of the alleged aforesaid synchronized trades. A synchronised trade is a kind of transaction where the seller and buyer execute the trade for almost same quantity and price with orders placed at substantially the same time. I find that synchronised deal is per se not illegal. On the other hand, a synchronised deal with fraudulent or deceptive intention to create misleading appearance of trading, to manipulate the price and/or volume of the scrip and thereby tampering the price discovery mechanism of the stock exchange with a view to get undue gain out of it is, no doubt, a grave offence.
5.5 Hence the issue to be decided in this case is whether the broker has carried out any such synchronized trades and to take a decision as to whether the penalty recommended by the enquiry officer against the broker is proper or not. In order to decide the said issue, I felt it necessary to analyze the details of synchronized trades executed by the broker which are given below:
|
Buy Mem Name
|
Trade date
|
Buy Order time
|
Buy order Qty
|
Buy orderrate
|
Sell Mem Name
|
Sell Order time
|
Sell Order Qty
|
Sell order rate
|
Time Diffe rence
|
Price diffe rence
|
|
Agbros Securities Pvt. Ltd.
|
5/10/1999
|
12:52:54
|
10000
|
730.50
|
HERALD EQUITIES PVT. LTD.
|
12:52:55
|
10000
|
730.50
|
0:00:01
|
0.00
|
|
Agbros Securities Pvt. Ltd.
|
5/17/1999
|
11:35:42
|
25000
|
736.50
|
HERALD EQUITIES PVT. LTD.
|
11:35:42
|
25000
|
736.50
|
0:00:00
|
0.00
|
|
Agbros Securities Pvt. Ltd.
|
5/18/1999
|
13:43:01
|
15000
|
719.50
|
HERALD EQUITIES PVT. LTD.
|
13:43:01
|
15000
|
719.50
|
0:00:00
|
0.00
|
|
SUBHASH & CO.
|
6/23/1999
|
10:16:54
|
10000
|
630.50
|
HERALD EQUITIES PVT. LTD.
|
10:16:54
|
10000
|
630.50
|
0:00:00
|
0.00
|
|
Agbros Securities Pvt. Ltd.
|
6/28/1999
|
14:18:26
|
14000
|
676.80
|
HERALD EQUITIES PVT. LTD.
|
14:18:26
|
14000
|
676.80
|
0:00:00
|
0.00
|
|
DINESH KUMAR SINGHANIA & CO.
|
8/24/1999
|
13:52:30
|
40000
|
1037.50
|
HERALD EQUITIES PVT. LTD.
|
13:52:30
|
40000
|
1037.50
|
0:00:00
|
0.00
|
|
PDC SECURITIES PVT LTD.
|
10/13/1999
|
12:31:29
|
5000
|
1169.60
|
HERALD EQUITIES PVT. LTD.
|
12:31:29
|
5000
|
1169.60
|
0:00:00
|
0.00
|
|
LOHIA SECURITIES LTD.
|
10/15/1999
|
14:12:53
|
15000
|
1157.50
|
HERALD EQUITIES PVT. LTD.
|
14:12:52
|
15000
|
1157.50
|
0:00:01
|
0.00
|
|
DINESH KUMAR SINGHANIA & CO.
|
10/15/1999
|
14:14:11
|
10000
|
1154.60
|
HERALD EQUITIES PVT. LTD.
|
14:14:11
|
10000
|
1154.60
|
0:00:00
|
0.00
|
|
KANODIA STOCK BROKING (P) LTD
|
10/15/1999
|
14:26:56
|
5000
|
1122.10
|
HERALD EQUITIES PVT. LTD.
|
14:26:56
|
5000
|
1122.10
|
0:00:00
|
0.00
|
5.6 From the above table, I observe that the Broker during the period May 10, 1999 to October 15, 1999 had executed ten synchronised in the scrip of Ranbaxy comprising total volume of 1,49,000 shares. I note that 50,000 shares out of a total of 1,49,000 shares (34% ) were matched with CSE broker M/s Dinesh Kumar Singhania & Co who was associated with Ketan Parekh (KP) Group. The Broker in his reply to show cause notice stated that there is no findings of any linkage among them in the Enquiry Report. They stated that there is no means of any Broker knowing even the identity of the counter-party broker whose order may be matched by the automated screen based trading system. They also stated that at the time of dealing in issue, there was no classification as to who are the KP related brokers or KP entities. I also find that the said ‘KP brokers’ have been declared defaulters by CSE. SEBI has subsequently cancelled the registrations of these brokers as per Press Release dated October 22, 2001 and July 30, 2002. I find the said cancellation is subsequent to the transactions in issue. I find a gap of almost two months between the alleged synchronised trades of the Broker with M/s Dinesh Kumar Singhania & Co. This large gap between the trades suggests the possibility that the said trades could be a mere coincidence. Further, there was no other evidence supporting their relationship with M/s Dinesh Kumar Singhania & Co and / or KP Group. Hence, I am of the view that benefit of doubt can be given to Broker in this regard.
5.7 Now, the issue to be decided in this matter is as to whether the Broker has carried out synchronized trades which would ultimately affect the price discovery and artificial rise of price and volume. I am of the view that ten synchronized deals with the gap of number of days between trades which were spread over a period of almost 10 months may not affect the price discovery mechanism of the Exchange. Further, the total volume of the synchronised trades of the broker comes to only 1,49,000 which can be treated as miniscule volume compared to the huge market volume in the scrip of Ranbaxy. I find that in the above ten synchronised trades, there are five counter party brokers and these trades were spread over a long period. These trades do not establish any pattern that would suggest any intended manipulation. In the absence of any other adverse finding in the Enquiry Report regarding specific violation of code of conduct as stipulated in the Stock Brokers Regulation, I am of the view that the said charge is not tenable against the Broker M/s Herald Equity.
6.0 ORDER
6.1 Having regard to the facts stated hereinabove, I find that the Broker had not violated the provisions of 4 (b) and (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and Regulation 7 read with Section A (3) and (4) of Code of Conduct as specified in Schedule II of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. Considering this and all other facts and circumstances of the case, I am of the view that this is not a fit case to impose any punishment. Hence, I hereby exonerate the Broker from the charges leveled against it. Now, therefore, in exercise of the powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of the said Regulations, I hereby dispose of the show cause notice issued to the Broker without imposing any penalty or direction in terms of Regulation 13(4) of SEBI Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 on the Broker, M/s Herald Equities Pvt. Ltd (SEBI Registration No. INB031049738).
6.2 This order shall come into force immediately from the date of this order.
|
Mumbai
|
V. K. CHOPRA
|
|
December 15, 2006
|
WHOLE TIME MEMBER
|
|
|
SECURITIES AND EXCHANGE BOARD OF INDIA
|