In the matter of Jagruti Securities Limited

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA  

[ADJUDICATION ORDER NO. AP/AO- 20 /2005-06]

 

In the matter of Investigations in

 

JIK INDUSTRIES LTD

AND

In respect of

JAGRUTI SECURITIES LIMITED  

 

1.0        Pursuant to the investigation in the scrip of JIK Industries Ltd. (hereinafter referred to as “JIK”), Securities and Exchange Board of India (SEBI) appointed Mr. K.R.C.V. Seshachalam, as the Adjudicating Officer under Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') read with Section 15 I of SEBI Act, 1992 to inquire into and adjudge the alleged practices of the member of BSE and NSE, Jagruti Securities Ltd. (hereinafter referred to as 'JSL') that are prohibited under Regulation 4 (a) & (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter SEBI PFUTP Regulations, 1995) and in violation of provisions of Regulation 7 of SEBI (Stock broker and sub broker) Regulations, 1992, for which penalty is imposable under Section 15-HA of SEBI Act, 1992. The aforesaid appointment was conveyed vide order dated July 26, 2004 and vide order dated December 28, 2004, the matter was transferred to Mr. A.C. S. Rao. Subsequently vide order dated December 20, 2005, the matter was transferred to the undersigned.  

 

2.0        A show cause notice (SCN) dated May 11, 2005 under Rule 4(1) of the said Rules was issued by then AO, Mr. A. C. S. Rao to JSL, communicating the details of the charges leveled against it. In response to the SCN, JSL filed its reply vide letter dated June 21, 2005. The contents of the reply are discussed in the findings.

 

3.0        The then AO, Mr. A C Rao was of the view that an inquiry should be held in the matter and a notice of inquiry was therefore issued to JSL vide letter dated June 24, 2005, fixing the date of inquiry on July 20, 2005. In order to comply with the principles of natural justice, the undersigned thought it fit to grant JSL an another opportunity to JSL for personal hearing or to file written submission vide letter dated December 28, 2005. JSL conveyed its desire to avail both, vide its letter dated January 06, 2006. A notice of inquiry was therefore issued to JSL vide letter dated February 13, 2006, fixing the date of inquiry on March 03, 2006. Mr. Vineet Jagtap, Advocate, appeared on behalf of JSL and made oral submissions and also filed written submissions dated March 03, 2006. The details of the submissions are dealt in the findings.

 

4.0        I now deal with the background and submissions of JSL and also record my findings as under:-

 

4.1        SEBI investigated the trades in scrip of JIK for the period January 23, 2003 to April 01, 2003, hereinafter referred to as the period of investigation. The shares of JIK were listed in BSE and NSE and the holding with public was a meager 5.11% and promoter’s holding at 72.82% of JIK’s equity. The trade statistics relevant to the investigation are as follows:

Table – 1

*during the period of investigation

 

4.2 JSL is a member of both BSE and NSE. Mrs. Jagruti Parikh, director of JSL, is the wife of Mr. R.G. Parikh, director of JIK. Besides, JSL and JIK share the same office premise. The details of the trades done by JSL for its client in the scrip of JIK during the period of investigation is as under:

Table - 2

 

4.3        It is observed from the above that none of the trades in the scrip of JIK during this period was on JSL’s own account or for its directors/employees.

 

4.4        It is alleged that JSL placed buy orders for its client Ameet Parikh in NSE in small lots at a price higher than the last traded price (LTP) in all the settlements during the period of investigation. In BSE also JSL placed buy orders for the same client at rates higher than the previous closing price before the start of the trading session. It is alleged that this was done to increase the price of JIK scrip / or to support the price of JIK at a level higher than what it would otherwise been. It is alleged that the aforesaid activity is prohibited under the SEBI (PFUTP) Regulations, 1995.

 

4.5        I find 71 instances (as given in annexure I to the SCN) wherein JSL placed buy orders for its client Ameet Parikh in NSE at a price higher than the last traded price (LTP). These orders have been placed in a range of 0.218% to 18.81% higher than the LTP during the period February 04, 2003 to April 01, 2003. In a screen based trading system, buyers key in their bids (buy orders) and seller key in their offers (sell orders) and a trade gets executed only when the bid and offer matches, subject to price time priority. The top bids and offers are visible on the trading screen in real time, which enables the investors to take a view. In order to make bid and offers match, i.e. for a trade to be executed, a seller may lower his offer or a buyer may increase his bid. This is the heart of the auction driven secondary market trading in securities.

 

4.6        To establish the charge of artificial trades, the nexus of the parties needs to be established. There is no allegation of nexus among these entities namely Axtel and Ameet Parikh with JSL and JIK. The only inference from the aforesaid information that can be drawn is that, JSL possibly has not executed the orders for its client at best available market price. Had JSL placed the buy orders of Ameet Parikh at LTP, his orders may or may not have got executed. Pondering over this, in the absence of data, will be an exercise in speculation and hence I refrain from doing so.

 

4.7        There is similar charge pertaining to BSE also (annexure – III to the SCN). Obviously it constitutes violation of the provisions of Clause B (1) of the Code of Conduct as specified in Schedule II read with Regulation 7 of SEBI (SB&SB) Regulations, 1992, for which penalty cannot be imposed under this proceeding as this Adjudication is under 15HA of SEBI Act, 1992, which deals with penalty for fraudulent and unfair trade practices. The above provisions are reproduced below:

 

Provisions of 15HA of SEBI Act, 1992

"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."

 

Provisions of B (1) of Schedule II -Code of Conduct for Stock Brokers

"B. Duty to the Investor. 

(1) Execution of Orders: A Stock-broker, in his dealings with the clients and the general investing public, shall faithfully execute the orders for buying and selling of securities at the best available market price and not refuse to deal with a Small Investors merely on the ground of the volume of business involved. A stock-broker shall promptly inform his client about the execution or non-execution of an order, and make prompt payment in respect of securities sold and arrange for prompt delivery of securities purchased by clients".

 

4.8  I find from the data in annexure II to the SCN that in BSE, JSL has placed buy orders on behalf of Ameet Parikh before the start of the trading session continuously and repeatedly. I find that JSL placed buy orders in small quantities for its client before the start of the trading session at rates higher than the previous days closing price on 1,391 instances over a period of 28 days. The details in this regard are given in table below:

Table - 3

 

4.9        I also find that the JSL has placed 1,391 buy orders (for 104,013 shares) before the start of trading session as against 332 buy orders (for 75,238 shares) during the session. The following are the details in this regard:-

 

Table – 4

 

4.10    From the aforesaid trading pattern, the conduct of JSL does not appear to be innocent. Firstly, for the trades in BSE, JSL has not given the best market rate to its client. Besides, there is clearly an element of manipulation of price of JIK scrip, as seen from the pattern of buy orders placed. The opening price of a scrip is a significant information in secondary market trading of securities; it has the potential to influence the mood of the market for that day. Reflecting its importance, all financial dailies publish this opening price of listed scrips along with the other data like day’s highest price, lowest price, closing price, volume trades etc. When such a key indicator of the market is tampered continuously for many days repeatedly, the intention of the party gets self-evident.

 

4.11    As per the statement of Mr. Jayant Karia, dealer of JSL, recorded on June 23, 2004, the client Ameet Parikh had placed open order (ie. An order without any ceiling on quantity) to buy JIK scrip against the credit balance lying with JSL. Mr. Karia also stated that the orders of Ameet were unintentionally placed before the start of trading session as the order was an open one and the dealer wanted to complete the trade on priority basis and concentrate on other orders. It is with the same motive that the orders were placed at higher rates to attract sellers, stated Mr. Karia. Having examined this statement of Mr. Karia, which is part of the SCN, I am not impressed with his story. It is difficult to believe that in 1,391 instances during the period between January 23, 2006 and April 01, 2003, the dealer had put order before the trading session by mistake. What is done unintentionally a few times is a mistake or error, what is repeated on majority of times is deliberate and intentional. It is obvious that JSL was desperate and does not, at any cost, want to miss the first ticket of the first bus on every day of their trading in JIK. This is no doubt to ensure that nobody else could punch the order before it.

 

4.12    The pattern of the orders placed by JSL, as given in Annexure II is examined in detail. On January 23, 2003, JSL placed 182 orders to buy 100 shares from 9:53:31 to 9:55:06 at a price of Rs. 37.6, which is 18.6% higher than the previous day’s closing price. All these orders were rejected by the system as they were keyed in prior to the start of the trading session. Finally, JSL’s order at 9:55:08 at Rs. 37.6, which is 18.6% higher than the previous day’s closing price, got executed, thereby the opening price was artificially fixed by JSL at Rs. 37.6. The importance of opening price in the markets has been already discussed. Therefore, while JSL’s contention that the trades that have been rejected by the system cannot be viewed by the other participants is true, but, it clearly reflects to the persistent attempts by JSL to artificially fix the opening price of JIK. The same pattern to fix the opening price of the scrip is repeated in the following days, which is captured in table below:

 

 

 

Table – 5

 

4.13    It is evident from the content of the table-5 that the pattern of placing orders by JSL is manipulative as it has supported and prevented the price of JIK from falling. It is found from the records that prices of shares of JIK went down from Rs. 31.45 to Rs. 24.85 during investigation period. If the intention of the dealer was to finish of the trade at the earliest, he ought to have placed a larger order instead of placing order in small lots. It is difficult to accept the contention of JSL that the orders were placed as per instruction of the client as the pattern of orders placed, was clearly not in the best interest of the client, even though the orders were within the price band. Given the fact that Director of JSL is linked with the director of JIK, more so when JIK and JSL are sharing the same office premise and given the peculiar pattern of placing order in BSE, I am of the opinion that the cited buy orders were indeed manipulative and mainly for the purpose of preventing the natural fall of the price of the scrip.

 

4.14    JSL contented that they and JIK are separate legal entities, quoting section 370 (1) B of the Companies Act, 1956. In this context, the Hon’ble Supreme Court decision in Delhi Development Authority vs Skipper Construction Co. Pvt Ltd. (1996) 4 Comp LJ 233 (SC) … AIR 1996 SC 2005 that (para 27 at page 247 of COMP LJ) may be referred to:

 

 “The concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for the purpose of committing illegality or defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. The fact that an individual and members of his family have created several corporate bodies would not prevent the court from treating all of them as one entity belonging to and controlled by that individual and family. If it is found that these corporate bodies are merely cloaks behind which lurks the individual and /or members of his family and that the device of incorporation was really a ploy adopted for committing illegalities and /or to defraud people” (underlining supplied).

4.15    The aforesaid ruling of the Hon'ble Supreme Court washes out the objection raised by JSL that they cannot be termed as group or associate entities. Further the idea is not to declare JSL and JIK as group or associate entities; it is the nexus which is drawn from the fact that wife of one of the director of JIK, is the director in JSL and also both the entities are operating from the same address. The aforesaid inference is enough to reasonably conclude that these two entities are related. Even thought there is no mention of any nexus between the client Ameet Parikh on one hand JSL/JIK on the other hand, I find it strange that how a normal client could accept the trades executed by his broker by continuously punching buy orders at just below the upper limit of the price band and higher price than previous day’s closing price over a long period (as given in table 4 & 5) and that too in a scrip of an associate and related company of the broker. This leads to a strong suspicion that the client Ameet Parikh was being used as front by JSL to manipulate the price of its associate company, namely JIK and hence the client registrations and client agreements of its clients Axtel Industries Ltd and Ameet Parekh furnished by JSL while the statement of Pankaj V. Shah, director of JSL, was recorded on June 17, 2004 by SEBI, is of no avail.

 

4.16    Therefore, JSL has carried out activities that are prohibited under Regulation 4 (a) of SEBI (PFUTP) Regulations, 1995, which inter-alia provides as under:

4. 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;

 

The aforesaid violation attracts adjudication penalty in terms of Section 15HA of SEBI Act, 1992.

 

4.17    To determine the quantum of penalty under Section 15HA, the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz. (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default. It is now established that pattern of placing orders by JSL has influenced the price of JIK by supporting it at a higher level. It would be a mere conjecture to arrive at what price JIK would have traded in the absence of the orders placed by JSL. From the material on record it is not possible to arrive at a figure of loss caused to the investors, but certainly the default by JSL is repetitive in nature, as given in table 4 & 5.

 

4.18    The aforesaid defaults should be viewed seriously as it affects the normal price discovery mechanism of the securities market and in the process, investors suffer a lot. A registered intermediary is expected to maintain high level of integrity and due diligence while dealing in the markets. The level of integrity and due diligence is expected to be of a higher order when dealing with the scrip of an associated or connected company. Instead, JSL is seen supporting the price of JIK, which is an entity related to it, thereby compromising the integrity of the price discovery mechanism in the scrip of JIK. Therefore, I am of the considered view that JSL being a Stock Broker should meet with a deterrent penalty.

5.0        Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 10 Lacs (Ten Lacs only) on Jagruti Securities Limited under section 15HA of SEBI Act, 1992.

 

6.0        Jagruti Securities Ltd. 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 Shri P K Nagpal, Chief General Manager, Investigation, ID-4, Mittal Court, 1st floor, B- Wing, 224, Nariman Point, Mumbai 400 021.

 

7.0        This order of adjudication is made and passed on 28^th day of March 2006 at Mumbai.

AMIT PRADHAN

ADJUDICATING OFFICER