BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA
CORAM: V. K. CHOPRA, WHOLE TIME MEMBER
ORDER
{Under Regulation 13(4) SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 against Shri. Rajendra Kumar Chokhany, Broker, Calcutta Stock Exchange in the scrip of Ranbaxy Laboratories Limited}
1.0 BACKGROUND
1.1 Securities and Exchange Board of India (hereinafter referred to in short as “the Board”) ordered an investigation into the affairs relating to buying, selling and dealing of many entities in the shares of Ranbaxy Laboratories Ltd (hereinafter referred to in short as “Ranbaxy”) including Shri Rajendra Kumar Chokhany, (hereinafter referred to as “Broker”) member Calcutta Stock Exchange (hereinafter referred to as “CSE”) bearing SEBI Registration no. INB030035019.
1.2 The price of Ranbaxy scrip 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 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 Investigation Report, appointed an Enquiry Officer vide Order dated November 27, 2002 to enquire into the violations allegedly committed by the Broker under the provisions of Regulation 4(a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 (hereinafter referred to in short as “PFUTP Regulations”) Regulation 7 of the SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992 read with clause A(3) and (4) of Schedule II of the Code of Conduct for Stock Brokers issued under SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992 (hereinafter referred to in short as “Stock Brokers Regulations”) and Rules, Regulations and Bye-laws 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 in short as “Enquiry Regulations”) submitted a report dated October 31, 2003 wherein he observed that the Broker had 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. He recommended suspension of registration of the Broker for a period of four months.
2.0 SHOW CAUSE NOTICE & REPLY
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 penalty deemed appropriate should not be imposed on them.
2.2 The Broker submitted their reply to the said show cause notice, vide letter dated December 24, 2003. In the said reply, Broker stated that he had not indulged in synchronized/matching trades, which tampers with price discovery mechanism of the concerned exchange and also the smooth functioning of the market.
2.3 In the above reply, the Broker submitted that their reply dated July 28, 2003 which was filed in the enquiry proceedings may be considered in this proceeding and also informed that he did not want any personal hearing in the matter. Nevertheless, as in other cases, an opportunity of personal hearing was granted to the Broker on September 13, 2006 at ERO. However, the Broker informed SEBI vide their letter sent by fax dated September 08, 2006 that they would not be attending the personal hearing. Therefore, I am proceeding in the matter on the basis of the materials on record before me.
3.0 CONSIDERATION OF ISSUES & FINDINGS
3.1 I have carefully examined the enquiry report, show cause notice, and reply of the Broker. I have carefully considered the findings in the enquiry report.
3.2 The scrip of Ranbaxy Laboratories Ltd. (hereinafter referred to in short as “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 and it continued to move upward during February – March 1999 and reached Rs.650/- by the end of March 1999. The price of the scrip thereafter moved to Rs.700/- during May 1999 and came down to Rs.600/- during June 1999. The price subsequently 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 its price increased to Rs.1200/- during October 1999. Effectively the price of the scrip moved up from Rs.267/- on January 01, 1999 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.
3.3 The Enquiry Officer has arrived at a conclusion in his enquiry report that the Broker has carried out 11 instances of synchronization of trades with a view to create misleading appearance of trading which tampers with price discovery mechanism of stock exchange. The charges levelled against the Broker are on the basis of the aforesaid synchronized trades. 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. The 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 with a view to get undue gain out of it, is a serious matter.
3.4 Hence the issue to be decided in this case is whether the Broker has carried out any such synchronised trades and to take a decision as to whether the penalty recommended by the enquiry officer against the Broker is proper or not.
3.5 I find that the Broker had executed 11 instances of synchronized trades in Ranbaxy with the counter party members. Synchronized trades are evident from the fact that in all cases order quantity and price are same with counter party order quantity and price. Orders were placed at the same time in most of the cases with counterparty members while in few cases the orders were matched within a period of 1-3 seconds. I have also observed that the percentage of the matching transactions of the member to his total transactions in the share of RLL during the period under consideration is 5%.
3.6 I find that only one order of 20,000 shares out of total of 1,29,640 shares (i.e. 15%) of the Broker were matched with another Broker Dinesh Kumar Singhania, who had dealt for entities connected or associated with Ketan Parekh group. Subsequently, SEBI cancelled their registration and published the same vide Press Release dated October 22, 2001 and this was noticed to be subsequent to the transaction in issue. It is observed that the Broker executed only one synchronised trade with Dinesh Kumar Singhania and that too within a period of almost five months and this could be a mere coincidence. Further, there was no other evidence supporting their relationship with Dinesh Kumar Singhania or KP Group.
3.7 I have examined the reply of the Broker submitted before the Enquiry Officer. The Broker mainly contented that they are not aware that the counter parties and the tradings were done on “ONLINE” where no body knows the name and identity of the counter party. The Broker also submitted before the Enquiry Officer that they had dealt in approximately 11 lakhs shares of Ranbaxy during the investigation period and a negligible part of 1.25 lac shares had been found to be synchronized or matching trades. They stated that it is not a deliberate attempt from them.
3.8 The Enquiry Officer pointed out that in one instance the order quantity is not the usual quantity like 100/1000/5000/100000 shares, etc. and this order quantity is matched by the Broker with a counter party member simultaneously. The details of the said transactions are reproduced hereunder also:
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Mem. Code
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Member Name
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Order Date
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Time
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Qty.
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Price
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B/S
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Order no.
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D0149
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Shankar Lal Chokhany
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7/28/99
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13:43:54
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14640
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866.80
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B
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540160
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D0536
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Rajendra Kumar Chokhany
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7/28/99
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13:43:54
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14640
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866.80
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S
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540159
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3.9 On the basis of the above transaction, the Enquiry Officer held that such matching and synchronised deals are possible if the trades are put in the system with prior understanding. In such cases prices and quantities have been negotiated outside the system and orders had been executed simultaneously. However, I do not find any such pattern in other trades of the Broker. Further, the Broker had executed six trades with another Broker Shanker Lal Chokhany and two trades with Harivansha Securities Pvt. Ltd. and one trade each with Syam Sundar Dalmia, Dinesh Kumar Singania & Co, and Suresh Kumar Almal. In view of this, it would appear that these trades also do not establish any pattern suggesting 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 above charge is also not tenable against the Broker.
4.0 ORDER
4.0 Having regard to all aspects of this case and in exercise of the powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of SEBI Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby dispose of the show cause notice issued to the Broker without imposing any penalty or direction on the Broker.
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Place: Mumbai
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V. K. CHOPRA
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Date: February 12, 2007
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WHOLE TIME MEMBER
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SECURITIES AND EXCHANGE BOARD OF INDIA
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