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Order against Rajesh Jhaveri

Jul 14, 2006
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Orders : Orders of AO

ORDER UNDER THE SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY THE ADJUDICATING OFFICER) RULES, 1995. 

 

AGAINST

 

M/s. RAJESH N. JHAVERI

 

1.                 On the basis of stock market alerts issued by the National Stock Exchange (NSE), the Securities and Exchange Board of India (SEBI) had taken up the investigation of the alleged market manipulation and irregularities in the trading of the shares of Radaan Mediaworks India Limited (for brevity’s sake, hereinafter referred to as RMIL) for the period between March 3 2003 and July 7, 2003, as also the possible violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market) Regulations, 1995 (FUTP Regulations 1995) at the relevant time and corresponding provisions of Regulations 4(1), (2) (a), (b), (e) and (n) of the FUTP Regulations, 2003 and the SEBI (Stock brokers and Sub-brokers) Regulations, 1992 (Broker Regulations) by various entities. RMIL was listed on the NSE at the time of investigation. The trading details of various entities that had traded in the scrip of RMIL were collected and their trading patterns analysed along with the volumes contributed by them, whereafter it was inter alia observed that the rise in the price of the scrip of RMIL accompanied with increased trading volume, was primarily on account of the trades executed by these entities.

 

2.                 M/s. Rajesh N. Jhaveri (RNJ), client of M/s Grishma Securities Pvt. Ltd. (GSPL) broker- NSE and registered with SEBI, was found to be one of the clients that had traded extensively in the scrip of RMIL at the NSE which was found to have significantly facilitated the market manipulation in the scrip of RMIL and were thereby held to have contravened the provisions of the FUTP Regulations. Incidentally RNJ is a proprietary firm whose sole proprietor is Gautam Nanubhai Jhaveri. RNJ is also a member of the Ahmedabad Stock Exchange and a registered sub broker in ASE Capital Markets Limited.

 

3.                 In view of the same, adjudicating proceedings were ordered by SEBI on December 27, 2004, to enquire into the alleged acts of omissions and commissions of RNJ while transacting in the scrip of RMIL.

 

NOTICE / REPLY / PERSONAL HEARING

 

4.                 A notice dated August 10, 2005 under Rule 4 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by the Adjudicating Officer) Rules, 1995 was issued to RNJ along with relevant documents annexed thereto with an advice to show cause within 14 days of the receipt of the notice, as to why proceedings should not be initiated against them in terms of the said Rules and why the penalty as prescribed therein should not be levied upon them.

 

5.                 In their reply dated August 29, 2005, RNJ drew reference to their letter dated March 14, 2005 sent in reply to a notice dated January 24, 2005 issued by SEBI (copies of which were enclosed for perusal) in which all the charges leveled against them were categorically denied. Thereafter, RNJ were advised to appear for the personal hearing scheduled on September 12, 2005. However, as their authorized representative, the hearing was on their request adjourned to October 27, 2005 and then to October 25, 2005. On the said date, Mr. Anish Kharidia, appeared and reiterated their non involvement in the case. Subsequently the details of the trades of RNJ in RMIL through GSPL were forwarded. The gist of the submissions made on behalf of RNJ both in writing and during the course of the personal hearing has been summarized below:

a) They had earlier received from SEBI another notice dated January 24, 2005 under Regulation 11 of the FUTP Regulations 2003 read with Sections 11, 11B and 11(4) of the SEBI Act, 1992. Hence it was unlawful to order an inquiry in the said matter when the investigation was in progress.

b) The investigation in question was confined to the period between February 5, 2003 and June 6, 2003, while the opinion was formed and concluded on the basis of data available on record even after June 6, 2003.

c) RNJ had traded during the period between May 27, 2003 and July 7, 2003 and as far as the period of investigation was concerned, had traded for merely 8 days i.e. from May 27, 2003 to June 6, 2003, between the price range of Rs.88/- to Rs.112/ and not traded during the entire period of investigation commencing from February 5, 2003.

d) RNJ had not traded for 29 settlements during the investigation period, which ended on June 6, 2003.

e) RMIL had a reasonably good volume on both the exchanges and as such, the day trading in the price range of meager 0.05 paisa, in all the circumstances, neither affected the liquidity nor the price volatility of the said scrip.

f) If the net delivery ratio was taken into consideration in the scrip, it appeared to be very low during the entire period of its trading. Even if, for the sake of argument without admitting the same, the gross volume of 10.65% on both the side of trade was taken into consideration, the allegation sought to be leveled against RNJ should have been leveled against the persons who had contributed to the rest of the 90% volume, particularly when the delivery in the scrip was very low.

g) Day trading in the range of 10% of volume on both the sides of trade within the limited price range would hardly affect the volume or price of the scrip when the scrip is traded regularly with a reasonably good volume at both the exchanges.

h) The Investigating Officer had failed to establish how the 10% volume has adversely affected the volume in the ordinary course or created volume in the scrip.

i) Merely because Mr. Nrupesh Shah was known to RNJ was not a ground to hold them responsible or liable for any kind of alleged activity in the secondary market. What was required to be seen was their role in the dealing, if at all, which would ultimately prove detrimental to the interests of the investors or the securities market.

j) RNJ had first traded in the scrip on May 27, 2003 i.e. almost on or about 4 months of investigation period and traded for only 8 days during the period instead of 150 days as alleged. The day trading carried out by them was based on the analysis of price volume delivery ratio in the scrip for over 2 or 3 months period.

k) RNJ had traded in the scrip for meager price difference of 0.5 paise on most occasions and had earned approximately Rs.14000/- only for their entire dealings in the scrip on the computerized online trading system and hence had no means to know the identity of the counter party.

l) The scrip of RMIL had very low delivery turnover ratio. The data mentioned in the Annexure–1 annexed with the notice did not reconcile fully with the data available and transacted by them through GSPL and it would have been appreciated if the same was confined with the data for the period ended on June 6, 2003.

m) Such day trading activity constituted almost 99% of total volume in the scrip during the relevant period.

n) The rise in the volume as well as prices of the shares was based on market sentiments and other market forces or factors beyond them or their broker’s control.

o) RNJ had transacted between May 27, 2003 and July 5, 2003, during which period, there was a price rise from Rs.88/- to Rs.120/.

p) During the said period, 90% of the volume was below the price of Rs.95 and they had traded at the average purchase price of Rs.81.43 and sold at Rs.81.46 i.e. with the price difference of Rs.0.03 paise only.

q) During the period between May 27, 2003 and July 2, 2003, the normal delivery ratio was a meager 5% of the total trades i.e. 95% of the volume consisted of day trading and during the period between July 3, 2003 and July 5, 2003, the delivery ratio was 22%. The rise in price from Rs.95 to Rs.120 was due to the high percentage of delivery during the period.

r) They had not traded during the time when there was major price fluctuation, i.e. between Rs.65 and Rs.33 and between Rs.33 and Rs.88/.

s) None of the transactions had attained price discovery on any occasion and all the transactions were below or neared the average price of the scrip of RMIL for the day.

t) RNJ did not have any personal or professional relationship with Anil Mistry though they knew Nrupesh Shah personally.

 

APPRECIATION OF EVIDENCE

 

 6. I have carefully examined the oral and documentary evidence placed before me. The facts in brief giving rise to the present proceedings are thus.

 

7. RMIL, incorporated as a private limited company on 15 Sept, 1999 and then converted into a public limited company with effect from June 6, 2002, is a television content provider in South India and currently produces television serials in three languages i.e. Tamil, Telegu and Kannada.

 

8.                 At the relevant point of time, the promoters of RMIL were holding 81,33,808 shares which is 75.08% of the total share capital of RMIL and the public holding was only 13.29% amounting to 14,40,200 shares. The paid up equity share capital was 1064.77 lakhs and face value of the share was Rs10/. The trading in the partly paid up equity shares (Series E1/X1) of RMIL was suspended w.e.f. April 03, 2003 for acceptance of allotment of money on the equity shares. The Gross Quantity Traded in the scrip on the EQ Segment during the period under scrutiny was 1, 30, 81,318 shares. The Gross Quantity Traded in the scrip on the E1 Segment during the period under scrutiny had 33, 89,284 shares. Lowest price of Rs. 33.00 was observed on March 31, 2003 with a traded quantity of 26,933 shares while the highest price of Rs.119.85 with a volume of 1,43,701 shares was observed on July 7, 2003. The period of investigation with regard to the dealings of several entities in the scrip of RMIL that have been impugned, ranged between March 3, 2003 and July 7, 2003. During this period, the scrip price of RMIL initially fell to Rs. 33.00 from Rs. 62.05 on March 03, 2003 and then rose to Rs. 119.85 on July 07, 2003.

 

9.  Due to the volatile movements associated with the said scrip, the role of the following entities and the clients who were found to have traded substantially in the scrip of RMIL were scrutinized during the course of investigation.

   (A) Trading Members of NSE:

1.           Sanchay Finvest Limited (SFL)

2.           ISE Securities & Services Limited (through M/s Anil Mistry)

3.           Haven Financial Services Pvt. Ltd. (Haven)

4.           Grishma Securities Pvt. Ltd.(GSPL)

5.           Bonanza Portfolio Limited(BPL)

 (B) CLIENTS

1.           M/s Rajesh Jhaveri

2.           Nrupesh Shah

3.           Shravan Kumar Goyal

4.           Kishan Agarwal

5.           AK Agarwal

6.           Chirag Pujara

7.           Ashok Sharma

 

10. Upon analysis of the trading details of the above mentioned members and clients, the following major issues were noted:-

·          The major trading members in the scrip of RMIL during the period under scrutiny were SFL (accounting for 17.89%), BPL (accounting for 17 %) ISE Securities, through M/s Anil Mistry (accounting for 12.09%) Haven (accounting for 11.74%) and GSPL (accounting for 10.86% of the market gross during the investigation period). These trading members mainly traded on behalf of one or two clients each and were involved in a series of deals found to be structured in nature.

·               M/s Rajesh Jhaveri was the largest client dealing in the scrip during the period under scrutiny, accounting for 10.85% of the gross quantity traded. They were the only client trading through GSPL in the said scrip. Out of 10.85% of the gross quantity traded, 10.65% of the market gross quantity traded by the said client was done through structured deals executed with the trading member; ISE Securities and Services Limited for their client; Nrupesh Shah trading through Sub-broker, Anil Mistry.

·          Shrawan (trading through Haven) and Kishan Agarwal along with A K Agarwal (Kishan and Anil) trading through SFL, had executed a series of structured deals among themselves. Shrawan had also executed structured deals with Ashok Sharma and Chirag Pujara (Ashok and Chirag) trading through BPL. In turn, Ashok and Chirag had executed structured deals with Kishan and Anil. Through these structured deals, amongst themselves and by certain other clients, this group of clients traded for a total of 17,99,392 shares representing 13.75% of the total quantity traded during the entire period under scrutiny.

  •  No major cross deals were observed during the period under scrutiny.

11.  Apart from these facts, some of the statements made by the entities in question merit reiteration:

 

 (A) Statement of Shri Paresh Vinchhi, Compliance Officer, GSPL dated June 17, 2004

 

a)     They had traded in the scrip of RMIL on behalf of their client; M/s Rajesh N Jhaveri

b)      M/s Rajesh N Jhaveri was their client since January 2001 i.e. last four years

c)      Anil Mistry was an ex-director of GSPL and resigned on April 2001.

d)     They were not aware of the latest profession of Anil Mistry

 

(B) Statement of Shri Saumil Bhavanagari, authorized representative of M/s Rajesh N Jhaveri dated June 17, 2004

 

a)     M/s Rajesh N Jhaveri was a proprietary firm whose sole proprietor was Gautum Nanubhai Jhaveri,

b)      M/s Rajesh N Jhaveri was also the member of ASE, with SEBI Regn No. INB020123415 and sub broker of ASE Capital Markets Ltd. INS010949811

c)      They hade traded in the scrip of RMIL during the period of investigation.

d)     Nrupesh Shah was not related to their firm but an individual friend of their proprietor.

e)     They had a broker- client relationship with RNJ.

 

 

 (C) Statement of Shri Nrupesh Shah dated July 21, 2004

 

a)     He traded as an individual in the scrip of RMIL from May 27, 2003 to July 14, 2003

b)      He knew Anil Mistry through a friend; Kirit Pandya. He worked as a client of Anil Mistry

c)      He knew M/s Rajesh N Jhaveri as the broker of ASE.



 (D ) Statement of Shri Anil Mistry dated June 17, 2004

 

a)     M/s Anil Mistry was a proprietary concern and member of ISE Securities & Services Ltd. with SEBI Regn No. INS239639911/23-10777.

b)      They had applied for cancellation of SEBI Registration since September 2003 and had surrendered the trading rights in ISE but continued to be the member.

c)      They had traded in the scrip of RMIL during the period under investigation for their client; Shri Nrupesh Shah

d)     He knew Nrupesh Shah since 1994-95. The client was trading through them since 2001.

e)     He was a director of GSPL and for the last three years did not have any business relationship with them

f)       After his resignation, he did not know what GSPL were doing

g)      He was a Chairman of the disciplinary committee in ISE

h)     He suffered losses due to client debts and hence had stopped his business.

 

 Introduction of the clients

12.             From the facts on record, it is clear that RNJ was the main and in fact the only client of GSPL who traded extensively in the shares of RMIL. Their counter party in most of the trades executed in the scrip of RMIL was Nrupesh, the client of M/s Anil Mistry (AM) who traded extensively in the shares of RMIL through ISE; their main broker.

 

13. The member-client agreement entered into between GSPL and RNJ is dated May 26, 2003 while the client code offered to RNJ is R004. The proprietor of RNJ is shown as Gautum Jhaveri. I have also perused a letter stated to have been issued by RNJ to GSPL requesting them to register RNJ as their client. The same is dated May 26, 2003. Co-relating this with the statement made by Paresh Vinchhi, Compliance Officer, GSPL on June 17, 2004, that RNJ was their client since January 2001, it is evident that no credence could be attached to the submission advanced on behalf of GSPL. In fact it would also appear that RNJ commenced trading with GSPL, prior to entering into an agreement with them and that the same was permitted by GSPL without the necessary documentation. This would stand to reason considering that admittedly the director of GSPL; Ketan Shah knew RNJ for more than 15 years.

 

14. As regards the client registration form and the sub-broker/client agreement of Nrupesh, I have noted the introducer to be one Kirit Pandey, which fact was confirmed by Nrupesh during the recording of his statement before SEBI on July 21, 2004. The client registration form is dated April 22, 2003, while the sub-broker client agreement is undated.

 

15. Admittedly all these entities in question belonged to Ahmedabad. Anish Kharidia, Company Secretary, appearing on behalf of RNJ during the course of the proceedings before me, confirmed knowing Nrupesh Shah personally. During the course of his hearing proceedings, Nrupesh Shah too had admitted knowing RNJ well. AM had also admitted knowing RNJ and Nrupesh Shah very closely. It is a matter of record that Nrupesh was known to AM since 1994-95 although he traded through them only since 2001. It is also a matter of record that the proprietor of AM; Anil Mistry was the director of GSPL till the time he resigned on April 2001.

 

 

Synchronised trades

 

16. The close association of all the concerned entities in the instant case is not in dispute. RNJ have however contended that knowing each other to some extent cannot be construed as them acting in concert. Although that reasoning is true, the issue before me is that the entities in question were known to each other (whether it was AM and GSPL, Nrupesh and Rajesh or AM/ GSPL and their respective clients) both professionally and to a certain extent even personally, and had traded in the same scrip (RMIL) during the same period such that the time, price and quantity matched with each other almost every point of time. There was total synchronization in all the trades, (327 such trades) entered into between RNJ (acting through GSPL) and Nrupesh whose deals were executed by AM, through ISE.

 

17. The details of thes trades (constituting more than 75 pages) have been annexed as Annexure 2 to the notice dated August 10, 2005 issued to RNJ in the present proceedings and are hereinafter referred to as Table A.. As per the data contained therein, the said series of synchronised trades which began from May 27, 2003 and ended on 7 July, 2003, were executed by RNJ through GSPL with Nrupesh being the counterparty client and the only client for AM.

18. The summary of such structured deals is as revealed in the table below:

 Table B

SN

No. of Structured Deals

Average price

Trd. Qty

% to MKT Gross for the SN

% to MKT gross for the Period

2003100

10

88.59

50000

17.72

0.38

2003101

10

88.78

50000

22.91

0.38

2003102

9

89.28

45000

14.89

0.34

2003104

8

86.03

40000

17.73

0.31

2003105

10

81.02

49000

21.16

0.37

2003106

9

81.19

40000

27.76

0.31

2003107

11

80.05

50000

40.70

0.38

2003108

10

75.57

50000

20.15

0.38

2003109

8

78.73

40000

19.73

0.31

2003110

10

87.16

50000

18.89

0.38

2003111

10

83.96

50000

17.92

0.38

2003112

9

82.07

45000

16.59

0.34

2003113

10

80.00

50000

18.68

0.38

2003114

10

79.98

50000

15.58

0.38

2003115

10

80.26

47450

17.69

0.36

2003116

10

79.48

50000

17.95

0.38

2003117

9

79.24

50001

22.76

0.38

2003118

10

77.60

41000

16.28

0.31

2003119

22

79.01

49000

18.67

0.37

2003120

24

77.19

50000

20.17

0.38

2003121

18

75.52

47955

22.86

0.37

2003122

10

81.10

50000

9.78

0.38

2003123

10

80.25

50000

13.14

0.38

2003124

10

78.21

50000

18.92

0.38

2003125

10

81.56

49795

18.13

0.38

2003126

10

85.49

49975

10.20

0.38

2003127

10

95.35

50000

15.57

0.38

2003128

10

112.24

50000

13.91

0.38

2003129

20

123.10

49400

17.19

0.38

 

The summary reveals that RNJ traded through GSPL in all the settlements from 2003100 to 2003129 with the average price ranging between Rs 75.57/- to Rs 123.10/- while the total quantity so traded was 13,93,576 shares of RMIL.

 

19. As regards the trades brought out in Table A, I have noted the fact that while the orders were placed in a synchronized manner, there was a great deal of reversal of positions also happening i.e. the buy entity became the sell entity and the sell entity became the buy entity and vice versa. This trend continued between the same set of clients and the same set of brokers: i.e. 2 brokers and 2 clients. Reversal of trades reflects the transactions being entered into in a circular fashion, without the actual change of beneficial ownership taking place.

 

20. RNJ have however denied any manipulation on their part on various grounds, the most important being that they had no relationship with any of the counter parties and that all the impugned trades were placed, co-incidentally and unintentionally in an anonymous screen based trading system, where the identity of the counter party is never known.

 

21. The interrelationship between the entities in question has been brought out earlier in unambiguous terms. Besides when a peculiar pattern of trading between a set of clients/brokers is deciphered, it is not necessary to build up or establish a set relationship between them. What is more important to consider then is the method and the manner in which such trades are executed. The motive thereafter automatically falls into line, i.e. the evidence that such trades throws, adds to the findings of investigation, about such a nexus, whether direct or indirect.

 

22. As far as the issue of the deals being executed in the anonymous screen based system is concerned, a trade can be executed on the screen and still be manipulative in nature since although the essence of screen based computerized trading is that it enables investors to transact in a fair and transparent manner and ensures the matching of the orders through the impersonal screen, on the basis of “best offer price” wherein the sellers would realize the true price of their securities within the circuit filters prescribed by SEBI, synchronized transactions can be executed on the screen of the exchange, at the price and order matching mechanism of the exchange, as in the present case, through inputting of trades on the screen of the exchange which are structured in nature, with a prior understanding entered into by the concerned parties as was done by all the above discussed clients, duly facilitated by the respective brokers.

 

23. Trades like cross deals, reverse transactions, circular trades, and synchronized trades are all executed on the screen and with proper delivery versus payment system. Clearly in almost all the deals, 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 i.e. 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 exchange.

 

24.             This is what transpired in the present case. Although the matching of these trades has been attributed to coincidence, this trend was not noted in a solitary incident or two. Instead a huge number of synchronized trades got matched regularly, that too only between the same set of brokers and the same set of clients in the same scrip, during the same period even when there are more than a few thousand investors through their brokers, spread over more than 300 cities in the country.. The phenomenal regularity with which these clients and their brokers were counter-parties, leads one to conclude, that these transactions were effectively meant to be synchronized. It is my considered belief that frequency of such trades ensured consistent matching of the orders (where one entity got themselves as the seller and vice versa) purely for the purpose of projection of the volumes of the shares of RMIL in a way that was not the market determined volumes, possibly to induce other persons to invest in the said scrip.

 

25.             The argument that the identity of the other trading client in such cases is not known should also be disregarded when one considers the frequency of the trades and the perfect matching of the time, order and price in all such trades, which cannot be a mere coincidence, that too, when the trades are executed in only one scrip and all the trades involve the same parties time and again. This is too much of a coincidence.

 

26. While examining the issue of synchronized trades, the Hon’ble Securities Appellate Tribunal (SAT) in Appeal Nos 54 to 57 of 2002 in the case of Nirmal Bang Securities (P) Ltd. vs SEBI observed as under:

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. The data furnished in the show cause notice certainly goes to prove the synchronized nature of the transaction which is in violation of regulation 4 of the FUTP Regulations. The facts on record categorically establish that BEB had indulged in synchronized trading in violation of regulation 47 of the FUTP Regulations. In a synchronized trading, intention is implicit.

 Keeping in mind the dicta of the SAT as reproduced above; I see no reason to take a different view in the present case.

 

27. This view is further reinforced by the finding that the matching of mind between the set of clients /brokers was such that although the “disclosed quantity” as defined by NSE was undoubtedly different, the total traded quantity between the said clients/ brokers involving the traded time and the price were matched at every point in time.

 

28. In this context, a better elaboration is required.

 

29. An order with a Disclosed Quantity (DQ) condition allows the trading member to disclose only a part of the order quantity to the market. For example, an order of 1000, with a disclosed quantity condition of 200 would mean that 200 alone is displayed to the market at a time. After this is traded, another 200 is automatically released and so on till the full order is executed. Most often, the Exchanges set a minimum disclosed quantity criteria, from time to time.

 

30. This situation can be exemplified by referring to the trades executed between RNJ and Nrupesh through GSPL and AM respectively and for this I consider it sufficient to refer to one of the trades in the series of further transactions that were executed between them. As pointed out to the trades in Table A, the first synchronized trade between two entities was of the total traded quantity of 5000. However the disclosed quantity of RNJ/GSPL was 500 i.e. “the original buy volume” was 5000 shares of RMIL. Although the disclosed quantity of Nrupesh/ AM was 500, the “original buy volume” was also 5000 shares of RMIL. It is true that the quantity of the orders so disclosed on the screen could be matched with the one disclosed by the other broker and it is also true that the disclosed quantities may not be the same for both of them. Ultimately, however, it is the original buy volume of one broker that should be compared with that of the original buy volume of the other broker for the purpose of perceiving the element of synchronization between them. In the present case, 500 shares of RNJ/GSPL. would first get matched with 500 shares of Nrupesh/AM. The other 500 shares of RNJ/GSPL would then automatically be sucked out of the remaining i.e. (5000-500 i.e. 4500) and this process would continue, till all the deals are executed. However, what is more important is the total traded quantity and the behind the scene “buy original volume” so put forth by them. In the present case, both the brokers continued to put the same ‘buy original volumes’ but the disclosed quantities projected were different for almost all the trades as pointed out earlier in Table A. Thus, while the total traded quantity remained the same (as the original buy volumes with the completion of trades were done at the same time and same price) the said original buy volume which was the same for both the clients/brokers was not displayed on the screen. This went on consistently and thus enabled the two parties to present a façade of ignorance of the identity of the counter party, which was in reality not the case.

 

31. The fact that at every point of time, the original buy volume was the same, while putting different disclosed quantities in the system, is indicative of the prior tacit understanding existing between the two clients and their members. In fact no justification for this aspect has been provided by RNJ, despite being provided with all the documents pertaining to the said trades, apart from stating that their trades were genuine and that there was no manipulative intent on their part. The very fact that the total number of structured deals entered into between RNJ and Nrupesh through GSPL and AM respectively were 327 and involved around 14 lakh shares, which represented around 10.65% of the gross traded quantity on the exchange in the same scrip during the entire period, speaks volumes about the level of concerted activity of the entities.

 

32. RNJ have sought exoneration of their involvement in the present proceedings on various other grounds, which I propose to discuss hereunder:-

i)       RNJ had traded in the scrip for meager price difference of 0.5 paise on most occasions and had earned only about Rs.14000/- on these trades.

 

RNJ is effectively trying to state that they had traded without any gains. No prudent person would have executed 327 trades in the same scrip, consistently for almost a month, merely for the minimal profit aforementioned. The act of RNJ went beyond rigging of prices and also involved building up volumes, which was obviously meant to induce other investors to show trading interest in the said scrip. All their transactions were squared off at the end of the day by them and the counter party; through the respective brokers. Not even at a single point of time, during the execution of these 327 synchronized trades was the broker / client different i.e. the same set of clients traded through the same set of brokers and almost all the trades were reversed i.e. buy client acted as a sell client and vice versa resulting in the squaring of almost all the trades. Thus the grave men of the matter for which action was initiated against RNJ is manipulation of the scrip of RMIL and not merely the gains allegedly made by them out of the impugned trades. Thus profits should not be and cannot be gauged only as the sum earned on the share price. In any case, these issues cannot be treated as mitigating factors to seek absolvement of their culpability. Sufficient evidence has been placed on record to suggest their guilt in this case.

 

ii) Although the investigation in question was confined to the period between February 5, 2003 and June 6, 2003, SEBI had formed an opinion and concluded their investigation on the basis of data available on record even after June 6, 2003.

 

The period between March 3 2003 and July 7, 2003 was the highlighted period of price manipulation by various entities who had executed trades in the scrip of RMIL. However SEBI has the mandate to take into consideration all issues related to the investigation, on the basis of the evidence available on record, which may have impacted the securities market. If the events during the investigation period have a bearing on subsequent developments, the action of the entities during the said period also has to be considered to decide the issue in its entirety.

 

Furthermore, it is not necessary that all the parties would trade for the entire period of manipulation. What is important to consider is the details and the method of trades executed by various parties, who had traded at different times and the contribution made by each of these entities towards such a manipulation. One such set of clients and brokers found to have traded in the scrip of RMIL was RNJ and Nrupesh through GSPL and AM, at different but certain points of time, during which time about 327 structured deals, involving almost 14 lakh shares of RMIL were executed. The fact that RNJ may not have traded during the opening or closing session in the said scrip would not make a difference to the outcome, when the trades were executed in a concerted manner.

 

iii) RNJ had earlier received another notice under Regulation 11 of the FUTP Regulations 2003 read with Sections 11, 11B and 11(4) of the SEBI Act, 1992. Hence apart from the said proceedings, it was unlawful to order an inquiry in the said matter when the investigation was in progress.

 

Upon a cumulative reading of the provisions of Regulation 11 of FUTP Regulations, 2003 and Sections 11, 11(B) and 11(4) of the Act, it is apparent that operational directions can be issued by SEBI against the entity found to be guilty of fraudulent practices. It is common ground that such directions are initiated more as a preventive / corrective action against the entities for the alleged acts of omissions or commissions or any other fraud pertaining to such acts, so as to send a warning signal to other investors who deal in such scrips through such intermediaries or any other entity.

 

On the other hand adjudication/ enquiry proceedings are a parallel set of proceedings that are initiated against the entity only after the completion of the investigation. Accordingly the present set of proceedings was initiated only upon the completion of investigation based on the findings therein. These proceedings are more deterrent in nature. Hence the initiation of action in the present proceedings, does not in any way preclude SEBI from initiating other proceedings, as it may deem appropriate, since the scheme of the Act inter alia involves the issuance of such directions as it may deem fit, to persons associated with the securities market

 

iv) The trades of RNJ were executed in the scrip of RMIL from May 27, 2003 to July 7, 2003 and not prior to the said period. Moreover during the period between February 5, 2003 to June 6, 2003 (mentioned as the investigation period in the notice dated January 24, 2005 issued to them earlier by SEBI) RNJ had traded for only 8 days and not in 29 settlements.

 

While there may have been a typographical error about the period of investigation, as pointed out in the notice dated January 24, 2005, no justification has been provided for the trades executed during the period of investigation, pointed out in the notice issued by me. During the said period, undoubtedly various entities had executed trades in the scrip of RMIL. It is not necessary that all the parties would trade for the entire period of manipulation. What is important is the method and manner of trades of the various parties who had traded at different times and the contribution made by each of these entities to such a manipulation. One such set of clients and brokers found to have traded within the highlighted period was RNJ for Rajesh and Anil for Nrupesh. They had in effect traded for 29 trading days and on just one trading day i.e. May 30, 2003, they had not traded. This aspect has not been dealt with by them. RNJ have in fact not disputed executing 327 structured deals or the very nature of the trades which were found to be in sync with those of Nrupesh Shah. They have in fact even agreed subtly to having traded after June 6, 2003. It is clear that they did not merely trade for only 8 days but for 29 trading days.

 

v) Assuming without admitting that there was a gross volume of 10.85% on both the sides of trade, the allegation leveled against RNJ should have also been leveled against the persons who had contributed to the rest of the 90% volume particularly when the delivery turn outs in the scrip was very low.

 

Investigations had brought out the finding that the trades of RNJ had contributed to 10.85% of the total traded quantity on the Exchange during the period of investigation and that 90% of the remaining volume was contributed by certain other entities against whom necessary action has been initiated. This percentage was based on the actual period of investigation which is from March 3, 2003 to July 7, 2003, while considering the entire market traded quantity during the relevant period. The fact that a single entity had contributed volumes to the extent of 1/10th of the total traded quantity on the exchange, in a country with a population of 1 billion or more and only one person had contributed 10% of the gross traded quantity in the market during the specified period, while trading for 29 days only when the total trading period was spread over across 5 months, speaks volumes.

 

vi) Investigations had failed to establish as to how this 10% volume could have adversely affected the volume in the ordinary course or created volume in the scrip of RMIL. Moreover RNJ had transacted between May 27, 2003 and July 5, 2003, when the price rose from Rs.88/- to Rs.120/.

 

As brought out by the investigation findings, the total shares traded between RNJ and Nrupesh Shah were 13,93,576 and the total market volume during the period of investigation i.e. from March 3, 2003 to July 7, 2003 was 130,81,318 shares which amounted to 10.65% of the gross traded quantity by RNJ on the exchange. The period between March 3, 2003 and July 7, 2003 has 126 days. Admittedly the trades of RNJ were executed in the scrip of RMIL from May 27, 2003 to July 7, 2003. Thus RNJ had traded for 42 days out of the total of 126 days including the non trading days i.e. they effectively traded on 29 trading days. Hence, the period of trading of RNJ, though in the later part of the investigation period, was 42/126 which is equal to 33.33% of the days and during those 33.33% of the days, the contribution of RNJ was 10.65% which is quite huge.

 

Even if one were to consider the extent of the trading of RNJ based on the information provided by them as also their own numerical submissions, the same would work out as follows ;-

 

For the period from May 27, 2003 to July 2, 2003.

 

Total turnover of RNJ    = 12,58,064 = 37.67%

__

 

3339016 + 585244 3924260

 

 

  In view of the above, there is no dispute in the finding that 10.85% was the gross percentage contribution of RNJ during the entire period of investigation with 35.88% being the volume/ gross traded quantity of RNJ, while considering the gross market volume during RNJ’s relevant trading days. This amounts to a contribution of more than 1/10th of the volume during the investigation period and more than 1/3rd of the market volume during the relevant trading days i.e. from May 27, 2003 to July 7, 2003. Hence though the price may have risen from 88/- to 119/- during the time when RNJ traded, the volume of contribution was more than 1/3rd of the market volume due to trades executed in a circular / reverse fashion, squaring of the trades/ structured trades.

 

vii) RNJ had not traded during the time when there was major price fluctuation, i.e. between Rs.65 and Rs.33 and between Rs.33 and Rs.88/.and hence had no role in the manipulation of the scrip of RMIL.

 

 Even if this contention were to be accepted, it would be relevant to note that RNJ acting along with specific entities build up volumes and trades in the scrip of RML to the extent of 10.65 % in a structured manner as discussed above, for the entire period, which by itself is sufficient to charge them for manipulation of the scrip of RMIL.

 

viii) During the period between May 27, 2003 and July 2, 2003, the normal delivery ratio was a meager 5% of the total trades i.e. 95% of the volume consisted of day trading.

 

  The delivery ratio was indeed quite less during the entire period of investigation. This was due to the fact there the transactions were squared off at the end of the day by RNJ and Nrupesh Shah through their respective brokers. Not even at a single point of time, during the execution of 327 synchronized trades, was the broker / client different i.e. the same set of clients traded through the same set of brokers and almost all the trades were reversed i.e. the buy client acted as a sell client and vice versa resulting in the squaring of almost all the trades. Under these circumstances, such kind of trading cannot be termed as day trading. A day trader is one who buys and sells in the space of a single day, on the expectation that the stock will continue climbing or falling in value, for the short period that he owns the stocks. This short period of fluctuations allows him to lock in quick profits. Hence in such trades there is a remote possibility of finding the same counter party for very trade that is executed, which was the case in the trades executed between RNJ and Nrupesh.

 

ix) The rise in the volume as well as prices of the shares if at all, was based on market sentiments and other market forces or factors beyond them or their broker’s control.

 

 In view of the discussion above, it is clear that the rise in volumes was not based on market sentiments and other market forces or factors beyond RNJ or their broker’s control.

 

x). The charges leveled against RNJ are based on assumptions, surmises and conjectures.

 

In view of the elaborate discussion above, there does not appear to be any merit in this contention. Sufficient evidence has been placed on record to evidence their involvement in the manipulation in the scrip of RMIL.

 

xi.) There was regular and consistent volume in the scrip of RMIL prior, during or after the investigation and hardly an occasion of sudden rise in the volume of the scrip.

 

The facts state otherwise. Reports indicate that there was an abnormal increase or decrease in the prices of the securities and creation of artificial volume during the investigation period which no doubt would have resulted in the inducement of sale and purchases by a third party. The facts stated hereafter give a clearer picture.

 

The scrip of RMIL was listed on the NSE only on February 27, 2003 i.e. a Thursday although the trading in the said scrip actually commenced from March 3, 2003 i.e. for the first two days, the trading did not take place. The said scrip was listed in the EQ and E1 series.

From the historical scrip-wise price- volume data of the scrip of RMIL during the period of investigation i.e., March 3, 2003 to July 7, 2003 in the EQ segment, the following facts are noted

  The trading in the EQ series commenced on March 3, 2003 on which date, the total traded quantity was 3258 shares. These shares continued to be traded merely in thousands till the last week of March. Thereafter there was a steady rise such that by the end of March, the total traded quantity was around 27,000 shares of RMIL. In April, the largest total quantity traded was 2,71,368 which was on April 28, 2003. From the details of the trades, it is clear that from April 28, 2003 onwards the synchronized trades in huge volumes were executed by the respective clients of BPL and SFL through them.

  During May, the largest traded quantity was recorded on May 14, 2003 being 5,32,621 shares. Coincidentally other entities through their brokers; SFL with Haven started executing large scale synchronized trades from May 13, 2003 while the clients of BPL with Haven started executing large scale synchronized trades from May 14, 2003 onwards amongst themselves. The clients of GSPL and AM were found to have entered into the synchronized dealings through them from May 27, 2003 onwards.

  The volumes which were in mere thousands at that time then shot to lakhs from April 28, 2003 and after May 22, 2003 the volumes were consistently found to be in lakhs, during which time, all the entities as discussed above were found to have entered into the arena where trades were taking place in sync with a set of common entities. Thereafter the trades which were in lakhs declined and ran into thousands after July 7, 2003.

33.  On the basis of these facts and figures, the involvement of the impugned entities in the manipulation cannot be denied. It would also be relevant to bring out the fact that the findings of investigation revealed that these entities accounted for 94.37% of the gross quantity traded in the scrip of RMIL during the period under scrutiny.

 

34. To sum up the facts, it is clear that the modus operandi of RNJ to manipulate the scrip of RMIL in a concerted manner was effected in the following manner:

 

a) Trading extensively in the same scrip i.e. RMIL through the same broker (GSPL) with their trades getting matched with just one client; Nrupesh Shah all the time acting through AM.

b) The counter party sub broker being a former director of their main broker.

c) Both the clients known to each other.

d) Involvement in large scale synchronized trades

e) Executing trades which led to a reversal of positions at the end of the settlement resulting in no actual transfer of beneficial ownership

f) Clients well known to each other.

 

35. For the said acts RNJ have been charged under the penal provisions of Sections 15HA and 15HB of the Act which inter alia provides as follows:

Section 15HA

Penalty for fraudulent and unfair trade practices

 

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.

Section 15HB

Penalty for contraventions where no separate penalty has been provided

Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

36. RNJ have also been charged under the following provisions of Regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 which read as under:

Regulation 4 of 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;

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

(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;

37. In order to establish the fraudulent nature of trades indulged in by RNJ through their broker; GSPL, reference may also be made to the definition of fraud laid down in Regulation 2 (c) of the FUTP Regulations, 2003 which provides as follows:

"2 (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, ………"

 

38. Section 15HB is a generalized penal provision and takes into account those acts which have not been separately dealt with. In my viewpoint, the facts of the present case, clearly bring out the element of fraud and unfair trade practices indulged in by RNJ through GSPL and the counter parties, since by way of generating artificial volumes, they have along with the said entities created a false impression amongst the general investors as regards the trading activity in the scrip of RMIL.

 

39. As a clear cut violation of the provisions of the above cited FUTP Regulations has been established, the provisions of Section 15HA of the SEBI Act, 1992 alone would be attracted. Therefore, for the purpose of considering the imposition of an appropriate penalty, the provisions of Section 15HA of the Act alone ought to be considered.

 

40. Persons 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.

 

41. However Section 15J of the Act enumerates certain factors to be taken into account while adjudging the quantum of penalty to be levied and these include the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the said default, the amount of loss caused to the investors and the repetitive nature of default.

 

42. Apart from my views given earlier, it is clear that in cases of such nature, it is difficult to quantify the disproportionate gains or unfair advantage enjoyed by an entity consequent to manipulation. It is also difficult to arrive at any specific figure to compute the amount of loss caused to the investing public, especially in a large country like India. Accordingly the investigation report also does not dwell on the extent of specific gains made by RNJ or the losses suffered by the investors. Suffice to state that keeping in mind the practices indulged in by them, investors were bound to have suffered losses in that trades were executed in the scrip of RMIL, clearly in a manner meant to create volumes which is an important criterion, apart from price, capable of misleading the investors while making an investment decision, in as much as liquidity/volumes in a particular scrip, raises the issue of ‘demand’ in the securities market. The greater the liquidity, the higher is the investors’ attraction towards investing in that scrip. Besides, this kind of activity seriously affects the normal price discovery mechanism of the securities market. Considering the continuous effort in this aspect by all the entities in question, it can be said that the nature of default was repetitive as the synchronized trades were carried out over a considerable period of time.

 

PENALTY

 

 43. On analyzing the material available on record, on a judicious exercise of the powers conferred upon me in terms of Rule 5 of SEBI (Procedure for holding inquiry and Imposing penalties by the Adjudicating Officer) Rules, 1995, I am of the considered view that for the violations as discussed earlier, it would be appropriate to impose upon M/s Rajesh N. Jhaveri, a penalty of Rs. 5,00,000/- (Rupees Five Lakhs only).

 

44. The penalty amount shall be paid within a period of 45 days from the date of receipt of this order through a cross demand draft drawn in favour of “SEBI- Penalties remittable to the Government of India” and payable at Mumbai which may be sent to Shri P.K. Nagpal, Chief General Manager, Securities and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai – 400021.

 

PLACE: MUMBAI G. BABITA RAYUDU
DATE: JULY 14, 2006 ADJUDICATING OFFICER