Order against M/S Credit Suisse First Boston (India) Securities Pvt. Ltd., Member, Bombay Stock Exchange And The National Stock Exchange

SECURITIES AND EXCHANGE BOARD OF INDIA

ORDER

ORDER UNDER REGULATION 13 (4) OF SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002 AGAINST M/s CREDIT SUISSE FIRST BOSTON (INDIA) SECURITIES PVT. LTD., MEMBER, BOMBAY STOCK EXCHANGE AND THE NATIONAL STOCK EXCHANGE

MO/71/IVD/3/04

 

1. Credit Suisse First Boston (India) Securities Pvt. Ltd (hereinafter referred to as "the member") is a foreign broking firm and a corporate member of the Stock Exchange, Mumbai and the National Stock Exchange (for brevity’s sake referred to as the ‘BSE’ and ‘NSE’ respectively) and registered with the Securities and Exchange Board of India (hereinafter referred to as "SEBI") as a Stock Broker. Investigations were conducted, inter-alia, against the member with respect to its dealing in scrip of Ranbaxy Laboratories Ltd. during the period 1^st January 1999 to 31^st October 1999. 

    

2. Subsequently, SEBI vide order dated 29.11.2002 appointed an Enquiry Officer under Regulation 3 of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter called as "enquiry regulations") to enquire into the affairs of the member. The Enquiry Officer issued a show cause notice dated 20.02.2003 (SCN) to the member, inter-alia, alleging the following violations:

 

3.  That the member entered into synchronized deals with the members of Ketan Parekh ("KP") Group/associates in the scrip with a prior understanding and to influence the trading volumes in the scrip. The shares were being rotated among the KP entities without actual change in the beneficial ownership.

 

4. The member entered into synchronized deals and indulged in financing transactions which were given the colour of securities transactions.

 

 

5. That the member acting as a broker and also acting through its Proprietary Account aided and abetted the KP Group in indulging in fictitious, non-genuine and deceptive trades with a view to create a misleading appearance of trading. That the member also aided, assisted and abetted the said KP entities in creating artificial volumes and false market in the shares of Ranbaxy Laboratories Ltd.

 

6. That the member violated clauses A (3) and A (4) of Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as "the Brokers Regulations") and also Regulation 4.6.2 of NSE Regulations.

 

7. That the member through dealings in the scrip aided, assisted and abetted KP entities in violating Regulation 4 (a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 1995, (hereinafter called as ‘the FUTP Regulations’). Regulation 4 (a), (b), (c) and (d) of the FUTP Regulations, 1995 provide that

 

No person shall -

 

(a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person;

 

(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;

(c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions;

 

(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities;

 

8. FUTP Regulations of 1995 were repealed by notification of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) 2003, Regulation 13 (2) of the said 2003 Regulations reads as : "notwithstanding repeal of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, any violation of regulations 3, 4, 5 and 6 of the FUTP Regulations, 1995 shall be investigated and proceeded against in accordance with the procedure laid down in these regulations".

 

 

9. After conducting the enquiry as per Enquiry Regulations, the Enquiry Officer submitted his report on 12.06.2003 recommending suspension of certificate of registration of the member for a period of four months. Subsequently a show cause notice dated 07.07.2003, enclosing the Enquiry Report, was issued to the broker under regulation 13 (2) of the Enquiry Regulations requiring the member to show cause as to why actions as recommended by the Enquiry Officer should not be initiated against the member. The member was given fifteen days time to reply to the show cause notice and also asked it to indicate whether it desired a personal hearing.

 

10. The member vide letter dated 25.07.03 replied to the aforesaid show cause notice making the following submissions:
    1. The member submitted that the findings of the SEBI investigations into alleged price manipulation of shares of Ranbaxy Ltd. (the "said investigations") and the allegations that were leveled against it in the SCN are similar to the investigation carried out by SEBI for more than a year, and in relation to which, a final order dated 13 June 2002 was issued suspending the member for two years. The member contended that there are no fresh allegations or offences alleged by SEBI in the SCN, and SEBI had already taken punitive action. In view of this, the member stated that, there is no need to issue a separate enquiry process for the same allegations made against it, for which, it had already served suspension and in any event, all the impugned trades relate to the period prior to 1 April 2000, that is, before the period under investigation for which suspension period had been served. The member further contended that it was not SEBI’s case that CSFB India had continued to carry out such transactions even after the emergent order dated 18 April 2001 under Section 11B of the SEBI Act suspending CSFB India’s operations. 
       
       
        
    2. The member admitted that it synchronized a few transactions in the shares of Ranbaxy Ltd. with KP Group. The member submitted that there was no legal or regulatory bar on brokers entering into synchronized trades. The member further submitted that Negotiated Deals including Cross Deals, Bulk Deals, etc. were permitted to be entered into the trading system of the exchanges.

     

    3. The member submitted that the transactions mentioned in show cause notice were synchronized deals / Bulk Deals executed on the trading system of the exchange prior to 14 September 1999 in accordance with the then prevailing rules of the exchanges and as per the circulars of SEBI dated 4^th August, 1998 and 14^th January, 1999. Member further submitted that such transactions could only be executed if the two members place orders into the trading system in a coordinated manner. The member stated that the transactions which were executed after 14^th September, 1999 and that had been shown as synchronized transactions in the SCN were executed on the trading screens of the exchanges through the price and order matching mechanism of the exchanges. The member therefore stated that it did not violate the exchange rules in executing these transactions.

     

    4. Member while admitting that it entered into a few transactions in a synchronized manner submitted that it did not in fact know and had never admitted to knowing that the counter party broker was purchasing such shares on behalf of another set of KP entities and that it was not aware of the identity of the buying client. The member stated that it was also a widely prevalent market practice that bulk transactions were executed in a coordinated or synchronized manner. Member argued that very often a representative of the KP Group used to arrange for a purchaser for the shares sold through the member. The Member, however, submitted that this was not unusual, as KP enjoyed a unique position in the market as a leading intermediary and a bulge broker and that he was widely known to have significant holdings of a group of stocks popularly called as the "K10 stocks" and that the brokers would generally tend to enquire directly with him about the purchase and sale of stocks and therefore it was not unusual for him to have selected the buying broker. Member therefore argued that to infer that the transactions executed by it were not genuine is erroneous.

     

    5. Member submitted that it was only an executing instrumentality for such trades and not a party to an alleged "prior understanding" to influence the volume or market for the stock. Member further stated that there was no evidence to establish that the synchronized trades were executed with a prior understanding to influence the volume or trading in stock and that those were fictitious trades.

     

    6. Member submitted that the transactions referred to in the SCN as synchronized were executed in a matter of a few minutes. It was known to the market / investors from the number of trades executed that was shown on the screens of the exchange and in the print media that these were block executions. In case, the member contended that, if it had any intention to induce others to deal in these stocks, it would have put large bids and /or offers or put successively higher bids or offers or supported the stock prices consistently throughout the relevant period which is not the case here.

     

    7. Member stated that while it is true that these trades were synchronized, this alone cannot, in the absence of any other evidence, lead to an inference that it was a party to any manipulative trades or any non-genuine transactions allegedly carried out by KP Group. The member contended that there is no material on record to establish that it had any motive or intention in creating or abetting the creation of artificial volume and / or artificial market.

     

    8. Regarding financing transactions, member submitted that it entered into a very few transactions in this stock with / for KP Group, in which, it had provided the KP Group with "immediate payment facility". Member stated that it paid for the transactions on the day of transactions and receipt of the stock and on many occasions. Member explained that the purchase price was lower because of the size of transactions and payment terms. The member contended that there was no bar on this method of settlement of transactions either from BSE/NSE or SEBI and that providing immediate payment / spot delivery payment was not peculiar to the member, but was and is a widely prevalent practice with several leading foreign and domestic broking houses providing such facilities. Member in this regard cited the instances of Stock Holding Corporation of India and HDFC Bank Limited which offered services under which their client would sell the shares and these institutions would receive delivery of the shares in their demat account and pay to the client the sale proceeds on the same / next day of the transaction and then, in turn, receive the same from the Exchange on the Exchange pay out day. Member however agreed that although Stock Holding Corporation of India and HDFC Bank Limited, are not brokers themselves, but they have a panel of brokers who execute such transactions on their behalf. Member therefore stated that, there was no material difference between the practice followed by these institutions and the member and similarly, institutional delivery versus payment ("DVP") sale trades are also settled by brokers making payment to clients before the Exchange pay-out day. The member further submitted that there was no prohibition on brokers adopting such a practice and hence these sales could not be construed as being out of line with prevalent practice.

        

    9. Member further submitted that the above mode of payment could not be classified as lending monies as it was not a case of financing to purchase or to effect any short sales but only to enable its clients to get the selling price on the day of receipt of stock after execution of the transaction. Member stated that the funds received by the client / broker were not borrowed funds but funds which were legally and beneficially belonging to them. Member therefore argued that and none of the ingredients of funding or financing were present in as much as it was not advancing any monies against security of shares nor was the client / broker under any obligation to repay the member, the monies so received.

     

 
11. The trades were executed on the TT segment of NSE. Here KP Group would sell shares through the member for immediate payment. In this leg sometimes KP Group would sell the shares through their own group brokers namely V.N.Parekh Securities, KNP Securities and Triumph Securities etc. and the member would purchase these shares via synchronised deals. Kallar Kahar investments Ltd. (KK), a FII sub-account of CSFB, would purchase these shares and make payment to the member immediately.

 

12. The member’s Proprietary Account would sell an equal quantity of shares in the normal market in order to capture the spot discount rising out of Leg 1. This would act as the compensation for the above financing extended to the KP group.

 

13. In this leg Kallar Kahar would sell the shares which would be purchased by the member’s Proprietary Account. This would be a cross deal executed through the member either on the TT Segment or the Normal Segment.

 

14. "No Trading Member shall, for the purpose of creating or inducing a false or misleading appearance of activity in an eligible security or creating or inducing a false or misleading appearance with respect to the market in such security,

 

1. I find that the member had also admitted that for the second leg of the above mentioned cycle of trades, the counter party client to purchase the shares from the member was also identified by KP group and the deal also was coordinated by KP group. As per the submission, a representative of Ketan Parekh used to call the member asking it to enter the sell transactions on the screen of the Exchange at a particular time and the trade used to be executed immediately.

 

 

2. The Member also stated that it did not charge any brokerage for the above-mentioned deals from KP group but brokerage was charged from Kallar Kahar who is a FII sub-account of CSFB who acted as a buyer. The compensation for the member’s Proprietary Account was the difference in the prices in the Leg 2 and Leg 3. The compensation for Kallar Kahar was the difference in the prices in the Leg 1 and Leg 3. Accordingly, the benefits (profit) on these transactions were shared between Kallar Kahar and the member’s Proprietary account. The KP group was not charged any brokerage by CSFB. Thus it is clear that these were basically synchronized deals and financing transactions given the colour of securities transactions. This is in violation of Regulation 4.6.2 of NSE Capital Market Regulations, which provides as under:

 

(a) enter any order or orders for the purchase of such security with knowledge that an order or orders of substantially the same size, and at substantially the same price, for the sale of any such security, has been or will be entered by or for the same or different parties, or

 

(b) enter any order or orders for the sale of such security with the knowledge that an order or orders of substantially the same size, and at substantially the same price for the purchase of such security has been or will be entered by or for the same or different parties."

 

 

3. I find that the member admitted that it entered into synchronized deals. The member had entered into a number of synchronized deals with the members of Ketan Parekh Group / associates in the scrip. The shares were being circulated among the KP entities without actual change in the beneficial ownership this also amounts to circular trading. These acts of CSFB Securities are in violation of Circular No. SMDRP/POLICY/CIR-32/99 dated September 14, 1999 and Regulation 7 read with the Section A (3) and (4) of Code of Conduct as specified in Schedule II of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, which provides, interalia as under :

 

"(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."

 

 

4. The above facts and circumstances clearly bring out that the member and its Proprietary account aided and abetted KP Group in putting fictitious, non-genuine and deceptive trades with a view to create misleading appearance of trading. The member also aided, assisted and abetted KP entities and associates in creating artificial volumes and false market in the scrip of Ranbaxy through circular trades and synchronized trades.

 

5. Therefore, I find that CSFB through these dealings in the scrip aided, assisted and abetted KP entities in violation of provisions of Regulation 4 (a) (b) (c) & (d) of FUTP Regulations read with regulation 13(2) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. Clauses (a), (b), (c) & (d) of FUTP Regulations, 1995 provide that:

 

No person shall –

 

(a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person;

 

(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;

 

(c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions;

 

(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities;

 

 

6. Further, the Ketan Parekh Group entities / associates had entered into a large number of synchronized deals in the scrip within themselves and the other brokers such as the member etc. The instances and details of violations are given in the earlier paragraph at 6.4. It was further noticed that Ketan Parekh Group / associates had through their deals through viz. Triumph Securities Ltd., Mukesh Babu Securities, Milan Mahendra Securities, Chandravadan Dalal had influenced the prices of the scrip on a number of instances. Thus, these entities / associates of Ketan Parekh Group had also violated the provisions of 4(2) (a), (b), (c) and (d) of FUTP Regulations, 1995 read with regulation 13(2) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) regulations, 2003 and regulation 4.6.2 of NSE Capital Market Regulations as well as regulation 7 read with section A (3) and (4) of Code of Conduct as specified in Schedule II of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.

 

  

 

1. I have considered the submission of the member that it was only an executing instrumentality for such trades and not a party to an alleged "prior understanding" to influence the volume or market for the stock and that there was no evidence to establish that the synchronized trades were executed with a prior understanding to influence the volume or price of the stock or that those were fictitious trades. I find that in the case of synchronized trades, where the order is placed and the transaction is executed within seconds or at the same time, they clearly indicate that the same have been entered into with prior understanding to match the transaction. This is more than a preponderance of probability. In the present case, the member entering into a number of synchronized deals with the members of Ketan Parekh Group/associates in the scrip of Ranbaxy cannot be a matter of coincidence and it would be naïve to say that the member acted as an instrument for executing the trades or that it did not know who the counter party broker was or who was purchasing such shares on behalf of another set of KP entities. I do not accept and that it was not aware of the identity of the buying client.

 

2. Further, the member submitted that synchronized trades alone cannot, in the absence of any other evidence, lead to an inference that it was a party to any manipulative trades or any non-genuine transactions allegedly carried out by KP Group. The member contended that there was no material on record to establish that it had any motive or intention in creating or abetting the creation of artificial volume and / or artificial market. I do not find any merit in the member’s submission. When synchronized trades are of high volume and that too the shares are rotated among the KP entities without actual change in the beneficial ownership, then the motive or intention behind entering into such transactions becomes obvious. Since it is a case of ‘Res Ipsa Loquitur ’. The member failed to explain as to how the synchronized transactions and non-genuine transactions, where there is no change in beneficial of ownership, wouldn’t tamper price discovery mechanism and transparency and wouldn’t be in the nature of artificial formation of the price of scrip leading to manipulation.

 

3. Regarding financing transactions, the member submitted that it entered into a very few transactions in this stock with / for KP Group, in which, it had provided the KP Group with "immediate payment facility". The member stated that it paid for the transactions on the day of transactions and receipt of the stock and on many occasions, the purchase price was lower because of the size of transactions and payment terms. I have considered the submission of the member. As the member had entered into a very few transactions in this stock for KP Group, I am of the view that a lenient view can be taken on this ground.

 

4. However, I agree with the finding of the Enquiry Officer that entering into such synchronized deals not only tampers with the price discovery mechanism but also transparency. The said practice deprives the investors the benefit of the best possible price and militate against the basic concept of stock exchanges, which bring together a large number of buyers and sellers in an open manner. Thus I find that the member by entering such transactions has interfered with price discovery mechanism of the stock exchange.

 

5. I note that price and market manipulation shakes the confidence of investors in the fair and transparent working of stock exchanges and detrimental to the interest of securities market. Such act should be viewed seriously. However, I am of the view that it would meet the ends of justice if the member is suspended for a period of one month instead of four months as recommended by the Enquiry Officer since the member had already undergone suspension of 2 years though in respect of violations pertaining to other scrips. Therefore, in exercise of the powers conferred upon me by Section 19 of SEBI Act, 1992 read with sub-regulation (4) of Regulation 13 of the said Regulations, I hereby suspend the certificate of registration of M/s Credit Suisse First Boston India Pvt. Ltd., member NSE, for a period of one month.

 

6. This order shall come into force after 3 weeks from the date of the order.
   
   



	A K BATRA
Date: March 5, 2004	WHOLE TIME MEMBER
Place: MUMBAI	SECURITIES AND EXCHANGE BOARD OF INDIA