Adjudication Order In Respect of Ahilya Commercial Pvt. Ltd. in the matter of M.P. Investment and Consultancy Services Ltd

 BRIEF BACKGROUND

1.      It was observed that price of the scrip of M.P. Investment and Consultancy Services Ltd. (hereinafter referred to as ‘the company’ or ‘MPICSL’) had increased from Rs. 15.35 on 14/06/2004 to Rs. 250.00 on 19/01/2005 (1529% increase in 7 months and 5 days) and again went down to 60.75 on 07/03/2005 (75.7% decrease in 2 months and 16 days).

2.      MPICSL is a small cap company with an Authorised Capital of 1.10 crore shares and Issued & Paid-up Capital of 1,00,00,400 shares. The company had posted loss of Rs.3.30,769/- during FY 2002-03 and profit of Rs.1,61,170/-, 93,91,209/- and 71,18,852/- during FY 2003-04, 2004-05 and 2005-06 respectively. EPS of the company, as per the Auditor’s Report for the FYs 2003-04, 2004-05, and 2005-06 is Rs.0.02, Rs.0.86, and Rs.0.070 respectively. The equity shares of the company are listed at CSE.

3.      The transactions of three brokers, namely, P.K. Agarwal and Co., Bubna Stock Broking Services Ltd. and Ahilya Commercial Pvt. Ltd. (hereinafter referred to as ‘the noticee’) constituted 64.91% of the trading volume at CSE during the period under investigation:

4.      The period during which trades in the said scrip were executed by the above-mentioned brokers of CSE (including the noticee) is given below:

5.      An analysis of the trading data revealed the noticee had acted as counter party of its own transactions. The extent of such transactions is given in the following table. The percentage mentioned in the table is with respect to their total trades in the scrip during the relevant period (significant percentages shown in bold):

6.      Ahilya Commercial Pvt. Ltd. (hereinafter referred to as ‘the noticee’) was therefore alleged to have engaged in synchronised trades and cross deals and to have therefore contributed to the price fluctuations brought about in the scrip of the company.

7.      In view of the above, the noticee was alleged to have violated Regulations 3, 4(1), 4(2)(a), 4(2)(b), 4(2)(e), 4(2)(g), 4(2)(n) and 4(2)(o) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Markets) Regulation, 2003 (hereinafter referred to as ‘FUTP Regulations’) and Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as ‘Broker Regulations’) by contravening Clause A (1), A (2), A (3), A (4) and B(4)(a) of Code of Conduct stipulated in Schedule II of the said Regulations.

8.                                          Shri D. Sura Reddy was appointed as Adjudicating Officer vide order dated May 5, 2008 under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred as ‘said Rules’) to enquire into and adjudge upon the alleged violations committed by noticee. Pursuant to the transfer of D. Sura Reddy, I was appointed as Adjudicating Officer vide order dated December 10, 2008.

SHOW CAUSE NOTICE, REPLY AND HEARING

9.      A show cause notice dated February 27, 2009 was issued to the noticee in the matter wherein it was asked to show cause as to why an inquiry should not be held against it in terms of Rule 4 (3) of the SEBI (Procedure for Holding Enquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 read with Section 15 I of the SEBI Act, 1992. The trading details of the noticee were enclosed with the SCN.

10.  The noticee filed its reply vide letter dated March 10, 2009 wherein it submitted -

(i)                 that it denied the facts, validity and correctness of allegations made, save what would appear from the records;

(ii)              that the allegation regarding creation of volume in the scrip was just a matter of chance ;

(iii)            that it was not possible for the noticee to know who the buyer/seller was and how many brokers were involved;

(iv)            that it had traded only on behalf of clients;

(v)               that it had not involved in artificial inflation of price or in the creation of false volumes;

(vi)            that it had conducted itself diligently and carried out the instructions of its client and also complied with all the rules, regulations, provisions of law;

(vii)          that it had no other relationship with its clients apart from a professional one;

(viii)       that it had charged and received brokerage as entitled under law and that there was no unjust enrichment;

(ix)             that it had already been suspended for more than three years, leading to financial hardship and that this should be taken into account before any imposition of penalty;

(x)               that it had always done its job with due skill, care and diligence.

11.  Personal hearing in the matter was scheduled on November 24, 2009. The director of the noticee, Shri Rajiv Chaudhary, attended the hearing. He had nothing to add to the submissions made vide letter dated March 10, 2009.

CONSIDERATION OF ISSUES

12.  On perusal of the Show Cause Notice, the noticee’s submissions and other material available on record, I have the following issues for consideration, viz,

(1)   Whether the noticee has violated Regulations 3, 4(1), 4(2)(a), 4(2)(b), 4(2)(e), 4(2)(g), 4(2)(n) and 4(2)(o) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Markets) Regulation, 2003 and Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 by contravening Clause A (1), A (2), A (3), A (4) and B(4)(a) of Code of Conduct stipulated in Schedule II of the said Regulation.

(2)   Whether the noticee is liable for monetary penalty under sections 15 HA and 15HB of the Act?

(3)   What quantum of monetary penalty should be imposed on the noticee, taking into consideration the factors mentioned in section 15J of SEBI Act?

FINDINGS

ISSUE 1: Whether the noticee has violated Regulations 3, 4(1), 4(2)(a), 4(2)(b), 4(2)(e), 4(2)(g), 4(2)(n) and 4(2)(o) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Markets) Regulation, 2003 and Regulation 7 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 by contravening Clause A (1), A (2), A (3), A (4) and B(4)(a) of Code of Conduct stipulated in Schedule II of the said Regulations.

13.  The allegations against the noticee is that it was instrumental in causing steep fluctuations in the price of the scrip and manipulating the market and thereby alleged to have violated Regulations 3, 4 (1), 4 (2) (a), (b), (e), (g), (n) and (o) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 and the Clauses A (1), (2), (3), (4) and B (4) (a) of Code of Conduct for Stock Brokers as specified in Schedule II under Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.

14.  I note that the provisions of law alleged to have been violated by the noticee, read as follows:

Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market

 Prohibition of certain dealings in securities

3. No person shall directly or indirectly—

(a) Buy, sell or otherwise deal in securities in a fraudulent manner;

(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made thereunder;

(c) Employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;

(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made thereunder.

4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:—

(a) Indulging in an act which creates false or misleading appearance of trading in the securities market;

(b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss;

(c)…

(d)…

(e) Any act or omission amounting to manipulation of the price of a security;

(f)…

(g) Entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security;

(h)…

(i)…

(j)…

(k)…

(l)…

(m)…

(n) circular transactions in respect of a security entered into between intermediaries in order to increase commission to provide a false appearance of trading in such security or to inflate, depress or cause fluctuations in the price of such security;

(o) Encouraging the clients by an intermediary to deal in securities solely with the object of enhancing his brokerage or commission.

Schedule II

Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992

Code of Conduct for Stock Brokers

[Regulation 7]

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) Manipulation: 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 gains.

(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.

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.

15.  I now proceed to discuss the issue of noticee’s dealings in the scrip of the company which resulted in a steep increase followed by a steep decrease in the prices of the scrip and manipulating the market.

16.  After careful examination of the material on record, I observe that price of the scrip of ‘MPICSL’ had increased from Rs. 15.35 on 14/06/2004 to Rs. 250.00 on 19/01/2005 (1529% increase in 7 months and 5 days) and again went down to 60.75 on 07/03/2005 (75.7% decrease in 2 months and 16 days).

17.  It has also been observed that the noticee, together with the other two brokers had generated 64.91% of the trading volume at CSE which affected the share prices of the company during the period under investigation. The noticee’s contribution to the total trading in the scrip was 27.73%, i.e. 10,35,501 shares. Due to such concentrated position the share price had fluctuated erratically. The noticee’s trades were at prices ranging from Rs. 101/- (on 3/11/2004) to Rs. 67 /- (on 4/3/2005) with a high of Rs. 245/-. This is a distinct indication of manipulation on part of the noticee.

18.  It is evident from the trade/order log of the noticee that the noticee had entered both buy and sell orders in his own terminals at the same price and quantity within a gap of few seconds and such trades amounted to 45.02% (4,66,148 shares) of the total volume of the noticee. The details of the cross and synchronised deals are given in Annexure-A.

19.  A mere look at the trades executed by the noticee would show that they are on the face of it fictitious in as much as it executed trades as a broker in which it was itself the buyer as well as the seller. It was not as if it had executed a solitary trade or only a few of them. The order times of the abovementioned trades show that both buy and sale orders were given either in identical time or within a gap of few seconds to a few minutes. The same is evident from the order log and trade log. The noticee itself entered both buy and sale orders, therefore it obviously played an important role in manipulating the stock exchange mechanism to attain its own nefarious objectives.

20.  The method and the manner in which the trades are executed are the most important factors to be considered in these circumstances. The motive, thereafter, automatically falls in line. In trades like self trades, cross deals, reversed transactions, circular trades, and synchronized trades, the orders are placed so as to ensure a matching of the buy and the sell quantity and the buy and the sell price with the counter party, with whom a prior tacit understanding exists. The buy and the sell orders are placed at almost the same time between the counter brokers, with just a difference of a few seconds. This proximity in the inputting of orders at the same price and for the same quantity, results in getting them matched, such that there is almost perfect matching in all the trades, with all the three parameters, viz., quantity, price and most importantly, the time required to conclude the trades, which to a large extent indicates synchronization in the logging in of the orders, albeit executed on the screen of the stock exchange. In cases of cross trades, the intentional matching of orders becomes a matter of great simplicity as both the buy and sale trades are entered through the same broker, which is exactly the position in this instant case. This results in artificial appearance of trading at the stock exchange and also of artificial appearance of discovery of price, misguiding the general investors.

21.  The noticee has engaged in cross deals and synchronized trades, wherein the noticee was the counterparty broker and the time difference between the buy and sell orders ranged between few seconds to few minutes and such cross deals form 45.02% of the total transactions executed by the noticee. Further, noticee’s trades constituted 27.73% (10, 35,501 shares) of the total traded volume in the scrip of the company. Therefore, the noticee has undoubtedly created volumes at the CSE in the scrip of the company, thereby creating false or misleading appearance of trading in the securities market with respect to the scrip of the company. The noticee through synchronized trading had created an artificial fluctuation in the scrip of the company at the CSE and thus managed to manipulate the price of the scrip. The noticee was indeed instrumental in raising the price of the scrip of the company from Rs. 101/- to Rs. 245/- and then decreasing it to Rs. 67/- during the period from 3/11/2004 to 4/3/2005, which was certainly artificial in view of the financial performance of the company, and the nature of trading conducted by the noticee.

22.  It is observed that the company had posted loss of Rs. 3,30,769/- during FY 2002-03 and profit of Rs.1,61,170/-, 93,91,209/- and 71,18,852/- during FY 2003-04, 2004-05 and 2005-06 respectively. EPS of the company for the FYs 2003-04, 2004-05, and 2005-06 is Rs.0.02, Rs.0.86, and Rs.0.070 respectively. It is thereby evident that the aforementioned price movements and the volume of transactions in the shares of the company were artificial and were designed to create a false market, when the shares lack the fundamentals. It is observed that the abnormal fluctuation in price of the scrip of the company was not backed by any change in the fundamentals of the company and as such was artificial and designed to create false market. I find that the financial performance of the company was not at all impressive to warrant such trading and price fluctuations.

23.  I have considered the noticee’s submission that he had not done anything on his own account and all the transactions were on the account of clients as per their instructions and that all the transactions have been done on brokerage basis. I find that this submission can’t suffice for the noticee’s unawareness and non complicity in the aforesaid transactions and can’t establish that the noticee is not guilty of the violation of the aforementioned allegations. The trading by the noticee has continued for a long time period, that too in illiquid scrip with no change in the fundamentals of the company. The noticee had entered both buy and sell orders in his terminal at the same price and quantity within a gap of few seconds. The noticee has been instrumental in both price rise and price fall of the scrip of the company and noticee’s cross and synchronized deals with himself as counterparty broker, wherein the time difference between the buy and sell orders was few seconds, which form a substantial part of the transactions executed by the noticee, clearly establish that the noticee was indeed aware of the aforesaid transactions and that he can’t claim trading for clients as an excuse. The nature of the alleged transactions of the noticee only go on to prove that the noticee was very much aware of the pattern of the transactions and the price that such transactions were resulting in and this makes it difficult to believe that the noticee was not instrumental in the price fluctuations even if trades were carried out for clients by the noticee. It is of too much of coincidence that in most of the trades executed by the noticee, the buyer and seller were readily available with the noticee to facilitate the execution of such trades by the noticee in cross deal manner. Therefore, I don’t find the explanations of the noticee satisfactory.

24.  I further note that the Hon’ble SAT, in the matter of Triumph International Finance Ltd. v. SEBI, has observed,

“………The question that arises for consideration is - could it be said that the appellant was innocent and whether such large number of trades could have matched on the screen without the knowledge and active involvement of the appellant as a broker. The answer has to be in the negative. It is the broker who plays a pivotal role in synchronising the trades with the counter broker and matches the same through the exchange mechanism by punching the buy and sell orders simultaneously. It is true that the brokers act on the advice of their clients but it is they who actually implement the game plan………..”

25.  Furthermore, I find that in the present case, the noticee has synchronized about 45% of the trades with itself only as he has acted as his own counterparty broker in majority of his trades, wherein, both buy and sell orders were placed simultaneously with same price and quantity by the noticee himself. Therefore, this makes it very difficult to believe that the noticee is not guilty of the alleged violations.

26.  In view of the above, I do not find the contentions of the broker acceptable and I find these transactions were instrumental in creating artificial volume and manipulating the price.

27.  Regulation 3 of FUTP prohibits a person from buying, selling or dealing in securities in a fraudulent, manipulative or deceptive manner. In order to establish the fraudulent nature of trades indulged in by the noticee, reference may also be made to the definition of fraud laid down in regulation 2 (1) (c) of the FUTP, which reads as follows:

"2 (1) (c) "fraud" includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, … …”

28.  Regulation 4(2)(a) of FUTP, inter alia, prohibits a person from indulging in an act which creates false or misleading appearance of trading in the securities market. Regulation 4(2)(b) of FUTP, inter alia, prohibits dealings in a security intended to operate as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gains. Regulation 4(2) (e) of FUTP prohibits a person to act in a way to manipulate the price of the security. Regulation 4(2) (g) of FUTP prohibits a person from entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security. Regulation 4(2) (n) of FUTP prohibits circular transactions in respect of a security entered into between intermediaries in order to provide a false appearance of trading in such security. Regulation 4 (2) (o) of FUTP prohibits an intermediary to encourage the clients to deal in securities solely with the object of enhancing his brokerage or commission. As detailed above, the acts of the noticee clearly created false and misleading appearance in the shares of MPICSLand also that it did not act in a bonafide manner. The facts of the case highlight the noticee’s involvement, by executing continuous cross deals in a substantial manner, in the manipulation of price/volume of the shares of the company which led to the artificial fluctuation of price and misleading appearance of trading in the said shares. As the transactions executed by the noticee in the company were cross trades and also synchronized, there does not appear to be any genuine trading interest in the scrip.

29.   In terms of Clauses A1 to 4 and B4 (a) of the Code of Conduct prescribed under the provisions of Brokers Regulations, a stock broker shall not, inter alia, create false market or indulge in any act detrimental to the investors’ interest or which leads to the interference with the fair and smooth functioning of the securities market. The Broker shall also maintain high standards of integrity, promptitude and fairness and shall act with due skill, care and diligence in the conduct of its business. It also mandates that the Broker shall not, inter alia, indulge in manipulative transactions with a view to distort the market equilibrium. The trades of the noticee as explained hereinabove in detail would establish that the same created a misleading appearance of trading and artificial price in the shares of MPICSL. It further shows that the noticee had failed to exercise due skill, care and diligence and not maintained high standards of integrity, promptitude, fairness in the conduct of business as a stock broker. Moreover, the transactions of the noticee in MPICSL were cross deals and synchronised and there does not appear to be any genuine trading interest in the scrip.

30.  In view of the foregoing, I hold that the allegation of violation of provisions of regulations 3, 4 (1), 4 (2) (a), (b), (e), (g), (n), (o) of FUTP, A (1), (2), (3) and (4) and B (4) (a) of Code of Conduct for Stock Brokers as specified in Schedule II under Regulation 7 of Brokers Regulations stands established.

ISSUE 2: Whether the noticee is liable for monetary penalty under sections 15 HA and 15HB of the Act?

31.  As the allegations against the noticee stand established, he is liable for monetary penalty under Section 15 HA and 15HB of the SEBI Act, 1992, which read as follows:

“Penalty for fraudulent and unfair trade practices.

15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.”

“Penalty for contravention where no separate penalty has been provided

15HB. Whoever fails to comply with any provisions this Act, the rules or the regulations made or directions issued by the board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees. “

ISSUE 3: What quantum of monetary penalty should be imposed on the noticee, taking into consideration the factors mentioned in section 15J of SEBI Act?

32.  While deciding the quantum of penalty, the factors laid down under Section 15J of SEBI Act have to be given due regard, which are as follows –

(i)  the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of default,

(ii)  the amount of loss caused to an investor or group of investors as a result of the default and

(iii) the repetitive nature of default.

33.  In such cases, it is difficult to quantify exactly the disproportionate gains or unfair advantage enjoyed by an entity and the consequent losses suffered by the investors. I have noted that the investigation report also does not dwell on the extent of specific gains made by the broker. Suffice to state that keeping in mind the practices indulged in by the noticee, a pre-determined agenda of the noticee was achieved in that it traded in the scrip of MPICSL in a manner meant to create artificial price and volume, which is an important criterion capable of misleading the investors while making investment decisions. Besides, this kind of activity seriously affects the normal price discovery mechanism of the securities market and also erodes the confidence of the investors in the orderly behaviour of the securities market. Further, the noticee had acted as its own counter-party and had entered both buy and sale transactions from its own terminal. The motive of indulging in such a thing is clearly not bonafide. People who indulge in manipulative, fraudulent and deceptive transactions, or abet the carrying out of such transactions which are fraudulent and deceptive, should be suitably penalized for the said acts of omissions and commissions. In fact, nothing can be more serious for a stock broker than to execute fictitious trades and violate the code of conduct. Considering the continuous effort of the noticee in this aspect where the cross deals and synchronised trades was carried out over a period of time, it can safely be concluded that the nature of default was also repetitive.

34.  Considering the facts and circumstances of the case and the material available on record and the violation committed by the noticee, I find that penalty Rs. 3, 00,000/-(Rs. Three Lakhs Only) under Section 15 HA and Rs. 1, 00,000/- (Rs. One Lakh Only) under Section 15 HB of the SEBI Act will be commensurate with the violations committed by the noticee.

ORDER

35.  After taking into consideration all the facts and circumstances of the case, I hereby impose a penalty of Rs. 3, 00,000/-(Rs. Three Lakhs Only) under Section 15 HA and Rs. 1, 00,000/- (Rs. One Lakh Only) under Section 15 HB of the SEBI Act (i.e. total penalty of Rs. 4, 00,000/- (Rs. Four Lakhs Only) on the noticee, Ahilya Commercial Pvt. Ltd. for violation of Regulations 3, 4 (1), 4 (2) (a), (b), (e), (g), (n), (o) of PFUTP, A (1), (2), (3) and (4) and B (4) (a) of Code of Conduct for Stock Brokers as specified in Schedule II under Regulation 7 of Brokers Regulations.

36.  The noticee shall pay the said amount of penalty by way of demand draft in favour of “SEBI - Penalties Remittable to Government of India”, payable at Mumbai, within 45 days of receipt of this order. The said demand draft should be forwarded to Mr. Jayanta Jash, Regional Manager, Eastern Regional Office, SEBI, L&T Chambers, 3^rd Floor, 16, Camac Street, Kolkata – 700 017.

37.  In terms of rule 6 of the Rules, copies of this order are sent to the noticee and also to the Securities and Exchange Board of India.

Date: 22/1/2010  P. K. Bindlish

Place: Mumbai  Adjudicating Officer