Order against D. K. Khandelwal & Company In the shares of Prime Capital Markets Limited

WTM/GA/10/ERO/5/07

SECURITIES AND EXCHANGE BOARD OF INDIA

 

CORAM: G. ANANTHARAMAN, WHOLE TIME MEMBER

ORDER AGAINST D. K. KHANDELWAL & COMPANY, MEMBER, CALCUTTA STOCK EXCHANGE ASSOCIATION LIMITED UNDER REGULATION 13(4) OF SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002 IN RESPECT OF ITS TRANSACTIONS IN THE SHARES OF PRIME CAPITAL MARKETS LIMITED

 

 

1.0 BACKGROUND

 

1.1 It was observed that the price of the shares of M/s Prime Capital Markets Ltd. (hereinafter referred to as PCML) which were listed at the Calcutta Stock Exchange Association Limited (hereinafter referred to as CSE) had increased from Rs. 14.00/- on March 17, 2005 to Rs. 280.40/- on September 15, 2005 i.e an increase of 1903% within a period of 5 months and 28 days. It has been alleged that the financials of PCML were not strong enough for the aforesaid price increase and therefore it, appeared that the said price rise had occurred on account of manipulation by certain entities/ stock brokers.

 

1.2             A preliminary analysis of the trading data for the said period at CSE revealed that certain stock brokers namely Shri. Sanju Kabra, Shivam Stock Broking Pvt. Ltd, and M/s. D.B & Co. (members of CSE) contributed substantially in the total volume of the shares of PCML during the above period. It was further revealed that the said stock brokers executed cross deals / synchronized trades among themselves and the same constituted a major portion (about 93%) of trading in the said shares. It was observed that the price movement and the share transactions in the said shares were prima facie artificial and designed to create a false market and artificial price.

 

1.3             In the facts and circumstances, Securities and Exchange Board of India (hereinafter referred to as SEBI) vide an ad interim order dated September 29, 2005 inter alia directed the aforesaid stock brokers not to buy, sell or deal in securities in any manner, either directly or indirectly till further directions. Pursuant to the receipt of replies from the aforesaid stock brokers and after granting them an opportunity of hearing, SEBI, vide order dated January 12, 2006 confirmed the said interim order inter alia against the said stock brokers.

 

1.4             SEBI also conducted investigations into the alleged market manipulation/ irregularities of trading in the shares of PCML for the period between March 17, 2005 and September 15, 2005 to look into the possible violation of the provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as the FUTP Regulations) and Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations) by various entities/stock brokers. The investigation conducted by SEBI found that in addition to the aforesaid stockbrokers, M/s D K Khandelwal & Co (member, CSE) had also traded for 22,100 shares of PCML (which constituted 0.6% of the total volume), out of the total volume of 36,43,606 at CSE. D K Khandelwal & Company is hereinafter referred to as Broker for the purpose of brevity. It was found that most of the trades executed by the aforesaid brokers were client-to-client trades and were executed from the single terminal. The stock brokers including the Broker had allowed their clients to place simultaneously both buy and sale orders of the same quantity at the same price in PCML, which led to the price rise.

 

1.5             The investigation conducted by the SEBI observed the following transactions details made by the said stock brokers in the shares of PCML during the above period.

 

Sl. No.	Name of the stock broker	Volume Buy/Sell (shares)	Traded from Rs.	Traded upto Rs.
1	Broker	22,100	18.00	159.00
2	Shri Sanju Kabra	10,82,151	73.00	280.60
3	Shivam Stock Broking Pvt. Ltd.	7,68,851	199.80	280.60
4	D B & Co	15,18,402	229.00	281.00

 

1.6             The trade details of the Broker in the shares of PCML are as follows.

No. of shares bought	% to Total Buy	No. of shares sold	% to Total Sell	Total no. of shares	% to Total Buy & Sell
11100	0.3	11000	0.3	22100	0.6

 

1.7             It was observed that most of the trades executed by the Broker in the shares of PCML at CSE were on behalf of its clients, viz Fine Trade Mercantile Company Pvt. Ltd., Jain Stock & Shares Brokers Ltd., Machindra Nath Multi Trade Pvt. Ltd. and Silver Flag Trading Co. Ltd. During the period when the Broker was actively trading, the share prices of PCML had gone up from Rs. 18/- to Rs. 159/-.

 

1.8             The details of the trades of the Broker on behalf of the said clients in the shares of PCML are given below:

 

Sl. No.	Name of the client	Quantity	% to the volume of the Broker in the shares of PCML.
1	Silver Flag Trading Co. Ltd.	7600	34%
2	Fine Trade Mercantile Co. Pvt. Ltd.	3000	14%
3	Machindra Nath Multi Trade Pvt. Ltd	2100	10%
4	Jain stock & Share Brokers Ltd.	600	3%

 

1.9             The name and address of the aforesaid clients of the Broker (as revealed during the investigation) are given below:

 

Sl. No.	Name of the client and address	Name and address of the director
1	Fine Trade Mercantile Co. Pvt. Ltd. 2, Cornfield Road Kolkata-700 018.	1. Eknath Mandavkar G-21, Old Jarman Chawl Ground Floor, Room No.21 Tulsiwadi Road, Tardeo MUMBAI – 400 034.   2. Pravin Sawant C-9, Laxman Mhatre Colony Vijaynagar, Kalyan Mumbai – 421 306.
2	Jain stock & Share Brokers Ltd. P-27, Princep Street, Kolkata-700 072.	Dhruva Narayan Jha 203, D. H Road Behala Kolkata – 700 034
3	Machindra Nath Multi Trade Pvt. Ltd. 37/7, Mirpara Road Lilua , Howrah. West Bengal.	1. Pravin Sawant C-9, Laxman Mhatre Colony Vijaynagar, Kalyan (E) Mumbai – 421 306.   2. Eknath Mandavkar G-21, Old Jarman Chawl Ground Floor, Room No.21 Tulsiwadi Road, Tardeo MUMBAI – 400 034.
4	Silver Flag Trading Co. Ltd. 2E, Cornfield Road Kolkata – 700 019	Pravin Sawant C-9, Laxman Mhatre Colony Vijaynagar, Kalyan (E) Mumbai – 421 306.

 

1.10         It was revealed that PCML and M/s Jain Stock and Share Brokers Ltd. shared the same office address i.e., P-27, Princep Street Street, Kolkata – 700 072.  

 

 

1.11         The investigation conducted by SEBI revealed that the trades of the Broker had raised the share price of PCML by 7-10% on daily basis. The details of such price rise (with certain trades of the Broker) are given below:

Date	Previous day Closing price(Rs)	Opening Price (Rs)	Exchange volume	Volume created by the Broker	% Increase in share price
01.04.2005	18.40	19.90	200	200	8.15
04.04.2005	19.90	21.40	200	200	7.54
05.04.2005	21.40	23.30	500	500	8.88
06.04.2005	23.30	25.20	400	400	8.15
07.04.2005	25.20	27.10	300	300	7.54
19.04.2005	35.00	38.00	400	400	8.57
20.04.2005	38.00	41.00	500	500	7.89
21.04.2005	41.00	45.00	500	500	9.76
26.04.2005	49.00	53.00	1000	1000	8.16
27.04.2005	53.00	57.60	500	500	8.68
28.04.2005	57.60	61.00	500	500	5.90
29.04.2005	61.00	67.00	500	500	9.84
17.05.2005	87.00	95.00	2100	100	9.20
18.05.2005	95.00	103.00	100	100	8.42
09.06.2005	140.00	146.00	100	100	4.29
10.06.2005	152.50	164.00	500	500	7.54

 

1.12         It was observed that majority of the trades (99.5%) executed by the Broker were in the nature of cross deals. The details of such cross deals executed by the Broker are as follows:  

TradeDate	Trade Time	OrderDate	Order Time	Member Name	Qty	Price(Rs.)	B/S	Counter Party Name
31-Mar-05	15:29:26	31-Mar-05	15:29:09	Broker	200	18.4	B	Broker
31-Mar-05	15:29:26	31-Mar-05	15:29:26	Broker	200	18.4	S	Broker
1-Apr-05	13:33:22	1-Apr-05	13:33:06	Broker	200	19.9	B	Broker
1-Apr-05	13:33:22	1-Apr-05	13:33:21	Broker	200	19.9	S	Broker
4-Apr-05	12:41:40	4-Apr-05	12:41:20	Broker	200	21.4	B	Broker
4-Apr-05	12:41:40	4-Apr-05	12:41:40	Broker	200	21.4	S	Broker
5-Apr-05	12:41:48	5-Apr-05	12:41:32	Broker	500	23.3	B	Broker
5-Apr-05	12:41:48	5-Apr-05	12:41:48	Broker	500	23.3	S	Broker
6-Apr-05	13:12:40	6-Apr-05	13:12:24	Broker	400	25.2	B	Broker
6-Apr-05	13:12:40	6-Apr-05	13:12:39	Broker	400	25.2	S	Broker
7-Apr-05	12:29:31	7-Apr-05	12:29:17	Broker	300	27.1	B	Broker
7-Apr-05	12:29:31	7-Apr-05	12:29:31	Broker	300	27.1	S	Broker
11-Apr-05	14:28:14	11-Apr-05	13:44:21	Broker	1000	29.6	B	Broker
11-Apr-05	14:28:14	11-Apr-05	13:44:21	Broker	1000	29.6	S	Broker
13-Apr-05	13:28:32	12-Apr-05	13:48:18	Broker	1000	32.3	B	Broker
13-Apr-05	13:28:32	12-Apr-05	13:48:18	Broker	1000	32.3	S	Broker
18-Apr-05	15:14:33	18-Apr-05	15:14:24	Broker	1000	35	S	Broker
18-Apr-05	15:14:33	18-Apr-05	15:14:33	Broker	1000	35	B	Broker
19-Apr-05	14:09:16	19-Apr-05	14:08:53	Broker	400	38	B	Broker
19-Apr-05	14:09:16	19-Apr-05	14:09:16	Broker	400	38	S	Broker
20-Apr-05	15:15:42	20-Apr-05	15:15:28	Broker	500	41	B	Broker
20-Apr-05	15:15:42	20-Apr-05	15:15:42	Broker	500	41	S	Broker
21-Apr-05	13:36:27	21-Apr-05	15:18:23	Broker	500	45	B	Broker
21-Apr-05	13:36:27	21-Apr-05	15:18:23	Broker	500	45	S	Broker
25-Apr-05	14:53:37	25-Apr-05	14:53:10	Broker	500	49	B	Broker
25-Apr-05	14:53:37	25-Apr-05	14:53:37	Broker	500	49	S	Broker
26-Apr-05	14:42:51	26-Apr-05	14:42:37	Broker	1000	53	B	Broker
26-Apr-05	14:42:51	26-Apr-05	14:42:51	Broker	1000	53	S	Broker
27-Apr-05	15:23:09	27-Apr-05	15:22:56	Broker	500	57.6	B	Broker
27-Apr-05	15:23:09	27-Apr-05	15:23:09	Broker	500	57.6	S	Broker
28-Apr-05	13:59:59	28-Apr-05	13:59:31	Broker	500	61	B	Broker
28-Apr-05	13:59:59	28-Apr-05	13:59:59	Broker	500	61	S	Broker
29-Apr-05	15:12:11	29-Apr-05	14:12:13	Broker	500	67	S	Broker
29-Apr-05	15:12:11	29-Apr-05	14:12:13	Broker	500	67	B	Broker
16-May-05	15:01:33	16-May-05	15:01:17	Broker	100	87	S	Broker
16-May-05	15:01:33	16-May-05	15:01:33	Broker	100	87	B	Broker
17-May-05	14:44:02	17-May-05	14:32:20	Broker	100	95	S	Broker
17-May-05	14:44:02	17-May-05	14:32:20	Broker	100	95	B	Broker
18-May-05	15:01:38	18-May-05	15:01:30	Broker	100	103	S	Broker
18-May-05	15:01:38	18-May-05	15:01:37	Broker	100	103	B	Broker
19-May-05	12:45:24	19-May-05	12:45:09	Broker	100	112	B	Broker
19-May-05	12:45:24	19-May-05	12:45:24	Broker	100	112	S	Broker
26-May-05	12:58:31	26-May-05	12:58:19	Broker	100	119	B	Broker
26-May-05	12:58:31	26-May-05	12:58:32	Broker	100	119	S	Broker
9-Jun-05	14:33:34	9-Jun-05	13:59:49	Broker	100	146	B	Broker
9-Jun-05	14:33:34	9-Jun-05	13:59:49	Broker	100	146	S	Broker
10-Jun-05	13:53:43	10-Jun-05	13:53:27	Broker	200	150	B	Broker
10-Jun-05	13:53:43	10-Jun-05	13:53:43	Broker	200	150	S	Broker
10-Jun-05	13:58:25	10-Jun-05	13:53:43	Broker	300	152.5	B	Broker
10-Jun-05	13:58:25	10-Jun-05	13:53:43	Broker	300	152.5	S	Broker
13-Jun-05	13:31:51	13-Jun-05	13:22:08	Broker	700	159	B	Broker
13-Jun-05	13:31:51	13-Jun-05	13:22:08	Broker	700	159	S	Broker

 

1.13         The investigation conducted by SEBI, inter alia found that the Broker has prima facie violated the provisions of regulations 4(2) (a), (e) & o of the FUTP Regulations and Clauses A(1),(2), (3),4 and B(4)(a) of the Code of Conduct specified in Schedule II of the Broker Regulations.  

 

2.0 APPOINTMENT OF ENQUIRY OFFICER

2.1 On completion of the investigation, SEBI appointed an Enquiry Officer, vide order dated June 16, 2006, under regulation 5(1) of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as the Enquiry Regulations) to enquire into the affairs of the Broker in respect of the alleged violations of the provisions of the FUTP Regulations and the Broker Regulations as mentioned above. Accordingly, a notice dated June 27, 2006 under regulation 6 of the Enquiry Regulations was issued to the Broker asking it to show cause as to why appropriate actions should not be imposed against it for the aforesaid violations. The Broker was also provided with the copy of the findings of the investigation with the said show cause notice.

2.2  The Broker furnished its reply to the above show cause notice and made its submissions before the Enquiry Officer. The Enquiry Officer vide report dated December 6, 2006 recommended for the suspension of the certificate of registration of the Broker for a period of five days. The Enquiry Officer has inter alia observed that the activities of the Broker is in violation of the provisions of regulation 4(2) (a) and (e) of the FUTP Regulations.

 

 

 

3.0 CONSIDERATION OF ISSUES AND FINDINGS

 

3.1 Based upon the recommendation of the Enquiry Officer, a notice dated December 28, 2006 was issued to the Broker under regulation 13(2) of the Enquiry Regulations, asking it to show cause as to why the action should not be taken against it as recommended by the Enquiry Officer as may be deemed appropriate. A copy of the Enquiry Report was also forwarded to the Broker with the said notice. The Broker vide letter dated January 15, 2007 stated that its volume in the shares of PCML was only 0.6% of its total volume and that the trades were executed as per the instructions of its clients. The Broker clarified that there was no proprietary trading and all its transactions were delivery based and that the said trades were executed without any malafide intentions. It further assured that it would be more vigilant cautious and careful in all its dealings and transactions and would maintain high standards of integrity and professionalism in its business transactions. The Broker further undertook not to repeat such types of transactions in future.

 

3.2 While examining the Enquiry report, show cause notice dated December 28, 2006 and the aforesaid reply of the Broker, I observed that the alleged violations committed by the Broker prima facie call for a penalty higher than that recommended by the Enquiry Officer. Accordingly, a notice dated February 28, 2007 was issued to the Broker to show cause as to why the period of suspension as mentioned in the Enquiry Report should not be enhanced and an appropriate penalty of suspension should not be imposed on it. In the said notice, the Broker was specifically advised to indicate whether it wanted to avail the personal hearing. As no reply was received from the Broker, a reminder dated April 13, 2007 was also issued to the Broker by SEBI.

 

3.3             Thereafter, the Broker vide letter dated April 27, 2007 reiterated the submissions made by it in its earlier letter dated January 15, 2007.

 

3.4             Though the Broker was specifically advised by SEBI to indicate whether it wanted to avail the opportunity of personal hearing, it had not done so in its aforesaid reply. In the facts and circumstances, I proceed further in the matter on the basis of the Enquiry Report, show cause notices dated December 28, 2006 and February 28, 2007 issued to the Broker, its reply vide letters dated January 15, 2007 and April 27, 2007 and other materials available on record.

 

3.5             The Broker has not disputed the trades executed by him in the shares of PCML. The submission of the Broker is that its trades accounted only for 0.6% and the same were executed as per the instructions of the client and without any malafide intentions.

 

3.6             SEBI observed that PCML had incurred a net loss of Rs.4 lakh and Rs.6 lakh for the years ended March 31, 2002 and March 31, 2003, respectively. Further during the year 2004-05, PCML had earned a profit of Rs.5.46 lakh (unaudited) and for the three months period ending June 30, 2005 (unaudited), PCML had earned a profit of Rs.68, 000 and had a negative reserve of Rs.2.81 lakh. It stands to reason that the financials of PCML were not strong enough for its unusual price movement. SEBI had reason to observe in related orders that the price rise was artificial and occasioned by cross deals/synchronized trades of stock brokers viz. Shri Sanju Kabra, Shivam Stock Broking Pvt. Ltd., DB &Co and the Broker.

 

3.7             The trades made by the stock brokers (as mentioned at para 1.5) including the Broker at CSE in the shares of PCML had contributed more than 93% of total volume of PCML at CSE between March 17, 2005 and September 15, 2005. Though the Broker’s trades accounted only for 0.6% of the total volume in the said shares, it is noteworthy as per the Table in para 1.11 that some of these trades on the dates indicated therein were inter alia instrumental in pushing up the price from Rs.18/ to Rs.159/- in a short period of two months and ten days. Almost all the  trades executed by the Broker in the shares of PCML were cross deals in its single terminal and caused rise in the share price of PCML significantly, inter alia, as mentioned in para 1.12 above. It was also noticed that some of the clients of the Broker had common directors. i.e Shri Pravin Sawant and Shri Eknath Mandavkar were the common director of Machindra Nath Multi Trade Pvt. Ltd and Fine Trade Mercantile Co. Pvt. Ltd. (clients of the Broker). Shri Sawant was also a director of Silver Flag Trading Co. Ltd. Further, I note that Fine Trade Mercantile Co. Pvt. Ltd. and Silver Flag Trading Co. Ltd. shared the common addresses.

 

3.8             I also note that Shri Dhruva Narayan Jha (director of PCML from August 12, 2001 to December 15, 2005) was also the director of M/s Jain Stock and Share Brokers Ltd. (client of the Broker). I also note that PCML and the said client shared the same office address. The said client was prima facie responsible for raising share price of PCML from Rs. 18.40 to Rs. 21.40 within three consecutive trading days. During these three trading days, the share price of PCML had gone up by 16%. The details of trade log and order log of the said client are given below:

 

 

 

3.9             I note that, out of the 36,43,606 shares of PCML traded (both buy and sale) at CSE, the trades (both buy and sale) of the Broker were found to be to the extent of 22,100 shares (0.6%), during the above period. It can be seen from the above that the cross deals executed by the Broker comprised of 52 deals in just in 25 trading days. The series of trades in the form of cross deals, considering its numbers, quantity etc. will only lead to the finding that all the deals were done with the purpose of manipulating the price / volume in the shares of PCML and thereby the securities market to the detriment of the genuine investors. The cross deals were executed from the same terminal and almost at the same time in majority of the trades. The said concerted level of activity, that too continuously for a period of three months, is only compatible with the purposes of manipulating the securities market on the part of the Broker.

 

3.10         As observed by the Hon’ble Securities Appellate Tribunal (SAT) in the matter of Ketan Parekh Vs SEBI.

 

“The word ‘synchronize’ according to the Oxford dictionary means “cause to occur at the same time; be simultaneous”. A synchronized trade is one where the buyer and seller enter the quantity and price of the shares they wish to transact at substantially the same time. This could be done through the same broker (termed a cross deal) or through two different brokers. Every buy and sell order had to match before the deal can go through. This matching may take place through the stock exchange mechanism or off market. When it matches through the stock exchange, it may or may not be a synchronized deal depending on the time when the buy and sell orders are placed. ………… As already observed ‘synchronisation’ or a negotiated deal ipso facto is not illegal. A synchronised transaction will, however, be illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and is executed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium…….. Any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal. Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available. ……The nature of the transaction executed the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.”

 

3.11          I note that at the time when the Broker was actively executing transactions in the shares of PCML, the share price had increased from Rs.18/- to Rs.159/-, a rise of Rs.141/-. The transactions executed by the Broker had increased the volume and price of the said shares artificially to induce the genuine investors to invest in the said shares. It is fairly established in the scheme and nature of transactions that the Broker was involved as a necessary party to the manipulation. The series of trades involving clients closely connected with PCML can not be treated as ordinary transactions entered into the ordinary course of business. Further, the trades were executed from the same terminal. The method and manner in which the said cross deals were executed will clearly establish that the same were meant for the purpose of manipulating the price and volumes in the shares of PCML, against the fundamentals of the functioning of the securities market. The said continuity with which the transactions (which were highlighted by Broker’s presence on both sides) were executed cannot be taken lightly considering the nature of the transactions executed by it.

 

3.12          Undoubtedly, the trades executed by the Broker inter alia created artificial volume and price in the shares of PCML. Artificial increase in the volumes of scrip attracts the innocent investors in the market who are trapped in buying such shares otherwise useless and such misrepresentation, besides cheating investors, create financial loss to them. In this context, SAT in the matter of Ketan Parekh vs. SEBI has inter alia observed :

 

“When a person takes part in or enters into transactions in securities with the intention to artificially raise or depress the price he thereby automatically induces the innocent investors in the market to buy / sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated the person doing so is necessarily influencing the decision of the buyer / seller thereby inducing him to buy or sell depending upon how the market has been manipulated. We are therefore of the view that inducement to any person to buy or sell securities is the necessary consequence of manipulation and flows therefrom. In other words, if the factum of manipulation is established it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so wide spread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose on the Board a burden which is impossible to be discharged.”

 

3.13         I note that the trades of the Broker undoubtedly created an artificial market to mislead the genuine investors and the said transactions created false volumes. I note that the Broker was a necessary party to the transactions giving rise to artificiality in the market. Instead of observing the code of conduct which is expected of him as a SEBI Registered intermediary, the Broker flouted the same buy executing large number of cross deals which in turn gave rise to false market, artificial volumes and price rise in the shares of PCML.

 

3.14         In the above facts and circumstances, it is fairly established that the trades of the Broker in the shares of PCML were done for the purpose of creating false/ misleading appearance of trading in the shares of PCML and for the purpose of manipulating the price of the shares of PCML. The argument that its trades were miniscule considering the total volume in the shares of PCML can not be accepted in the facts and circumstances of the case, wherein the Broker had transacted for certain clients who were connected to PCML through cross deals which breaches the anonymity of screen - based trading by its pervasive presence on both sides and constitute a colourable device of volume/price manipulation. Further, every trade establishes the price of the scrip and accordingly it matters. Cross deals, per se, interfere with the fair price discovery process of the exchange. It is inconceivable that how the Broker was innocent of the game plan when he was present on both sides of the trades. It has to be further noted that when the Broker was actively trading, the share prices of PCML had gone up from Rs. 18/- to Rs. 159/-

 

3.15         Regulation 4(2)(a) of the FUTP regulations inter alia prohibits a person from indulging in an act which creates false or misleading appearance of trading in the securities market. Regulation 4(2)(e) of the FUTP regulations also prohibits a person from indulging in any act or omission amounting to manipulation of the price of the security. As specified above, the acts of the Broker clearly created false and misleading appearance in the shares of PCML and that he did not act in a bonafide manner. The facts of the case highlight the Broker's involvement, by executing continuous cross deals in a substantial manner, in the manipulation of price of the shares of PCML, creation of artificial volumes and misleading appearance of trading in the said shares on account of its collusive activities with the entities as discussed in the preceding paras, resulting in the violation of the provisions of Regulation 4(2)(a) and (e) of the FUTP Regulations.

 

3.16         The natural corollary to this issue is whether the Broker had maintained high standards of integrity, promptitude, fairness and exercised due skill, care and diligence in the conduct of its business. In terms of Clauses A (1 to 4 ) of the Code of Conduct prescribed under the provisions of the Broker Regulations, a stock broker shall not inter alia create false market or indulge in any act detrimental to the investors’ interest or which leads to the interference with the fair and smooth functioning of the securities market. The Broker shall also maintain high standards of integrity, promptitude and fairness and shall act with due skill, care and diligence in the conduct of his business. It is also a requirement that the Broker shall not inter alia indulge in manipulative transactions with a view to distort the market equilibrium. The trades (the cross deals) of the Broker as explained in detail above would prove that the same created a misleading appearance of trading, artificial volume and price in the shares of PCML by vitiating the price discovery mechanism in the securities market. It further shows that the Broker had not exercised due skill, care and diligence and not maintained high standards of integrity, promptitude, fairness in the conduct of its business.

 

3.17         By executing such transactions, the Broker had not only failed to exercise the due diligence and to maintain the conduct (specified above) as expected from a stock broker but also became a party to the aforesaid manipulation, to the detriment of the genuine investors as discussed in the above paras. A Stock broker is expected to protect the interest of the investors in the securities market in which he operates and it ill behoves him to become a party to any market manipulation. Being an intermediary operating in the securities market, the Broker is required to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings as specified in the Code of Conduct of the Broker Regulations (mentioned above). An intermediary who fails to perform such duties has to be punished in terms of the provisions of the Enquiry regulations. In view of the above, it is established that the Broker had violated the above clauses of the Code of Conduct prescribed under the Broker Regulations.

 

3.18         In the facts and circumstances, it is fairly established that the Broker had violated the provisions Regulation 4 (2)(a) and (e) of FUTP Regulations and clauses A(1), (2), (3) and 4 of the Code of Conduct specified in the Broker Regulations. The nature of the execution of the trades by the Broker in the shares of PCML in total disregard to the provisions of the FUTP Regulations and the Broker Regulations as set out above call for a higher penalty than recommended by the Enquiry Officer. Therefore, I decide to impose a major penalty of suspension of the certificate of registration of the Broker, as ordered herein under.

 

4.0 ORDER

 

4.1 In view of the foregoing, I, in exercise of the powers conferred vide regulation 13(4) of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, hereby impose a penalty of suspension of the certificate of registration of D.K. Khandelwal & Company (registration no. INB 030658016), Member, Calcutta Stock Exchange Association Limited for a period of four months.

 

4.2             This order shall come into force immediately on the expiry of 21 days from the date of this order.

 

  

  G. ANANTHARAMAN

   WHOLE TIME MEMBER

SECURITIES AND EXCHANGE BOARD OF INDIA

Place : Mumbai

Date: 17-5-07