ORDER
UNDER RULE 5(1) OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 READ WITH SECTION 15I AND SECTION 15HA OF THE SECURITIES AND EXCHANGE BOARD OF INDIA,1992 AGAINST M/s. JMP SECURITIES PVT. LTD., MEMBER, BSE, IN THE MATTER OF M/s. GLOBAL TELESYSTEMS LTD.
1.0 BACKGROUND:
1.1 Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted an investigation into the alleged irregularities in the trading in the scrip of M/s. Global Telesystems Ltd. (GTL) and also to find out the possible violation of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (hereinafter referred to as ‘the FUTP Regulations’) and SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as ‘the Broker Regulations’).
1.2 The investigation revealed that during the month of September 2003, M/s. JMP Securities Pvt. Ltd. (hereinafter referred to as ‘JMP’) had entered into self trades of 8,44,978 shares. Out of these self trades, 4,23,970 shares were fictitious in nature as the buy and sell client codes were the same. These fictitious trades were done for the clients viz. Bijal S Shah (client code B8), Purvi P Shah (client code P9), Chetna B Parmar (client code C2) and Sheetal H Gandhi (client code H3).
1.3 It was found that during the period from September 01, 2003 to October 8, 2003 the four jobbers of JMP had done 8 trades with their respective clients and reversed orders on the same day for the same quantities with the same clients. These trades were spread over 4 different days for 7,88,830 shares and accounted for 1.68% of the total market volume of 470,81,353 on BSE during this period. It was also found that the 8 trades individually accounted for 3.4% to 8.9% of the market volume of the respective days (September 11,16,17,19, 2003). Out of these 8 trades (50,000 shares each) 7 were reversed at a loss in the range of Re.1.00 to Rs.2.50 per share and one trade was reversed at a profit of Rs.0.90 per share. It was alleged that the transactions of jobbers of JMP were done in a synchronized manner by reversing with the same clients, who were known to JMP, were not genuine jobbing transactions.
2.0 APPOINTMENT OF ADJUDICATING OFFICER:
2.1 SEBI vide order dated June 06, 2004 appointed Shri J. Ranganayakulu, Joint Legal Advisor of SEBI as Adjudicating Officer to inquire into and adjudge the violations allegedly committed by JMP. Since Shri J. Ranganayakulu proceeded on study leave, vide order dated November 08, 2004, SEBI appointed me as the Adjudicating Officer in the matter in place of Shri J. Ranganayakulu.
3.0 NOTICE , REPLY AND HEARING:
3.1 A Show Cause Notice (SCN) dated July 25, 2005 was issued in accordance with Rule 4 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as “Adjudication Rules”) was issued asking it to show cause as to why an inquiry can not be held and why monetary penalty in terms of Rule 5 of the said Rules read with Section 15I and 15HA of the SEBI Act, 1992 should not be imposed against them. JMP was also given an opportunity of personal hearing on August 17, 2005.
3.2 JMP replied to the said SCN vide letter dated August 9, 2005 and requested for extension of 15 days to submit their reply. JMP also requested for extension of the date of personal hearing by the same duration on the ground that their final tax audit was on due to which their staff was occupied. Vide letter dated August 12, 2005 ,they were asked to submit reply along with documentary evidence on or before September 02, 2005 and attend personal hearing on September 2, 2005. Again vide letter dated September 02, 2005 JMP requested for further extension on the ground of Jain week of Parushan.
3.3 Finally, JMP submitted a letter dated September 12, 2005 in reply to the SCN dated July 25, 2005 and denied all the charges mentioned in the show cause notice. Further a request was made for personal hearing in the matter. Accordingly, opportunity of personal hearing was granted on September 28, 2005 and Shri Kashyap Vora authorized representative of JMP appeared and reiterated the submissions already made in their reply dated September 12, 2005. He also submitted that they had incurred a loss of around Rs.3 lakhs in the said transactions and he would be filing additional reply before October 5, 2005. Vide letter dated October 05, 2005 Shri. Vora submitted additional reply mentioning therein the amount of loss incurred in the alleged transactions.
3.4 JMP contended that Bijal Shah, Purvi P. Shah, Chetna Parmar and Sheetal Gandhi were jobbers of JMP and they were doing jobbing in various scrips. Mangalaben Masalia, Asha Masalia, Kashmira Masalia, Subhdraben Shah, Kokila Mehta, Kavita Jain were their clients. The said jobbers used to do jobbing on their behalf and used to share profits with them at the end of the day. It was submitted that the said practice was not uncommon in the market and was a commonly accepted market practice and was also legally permissible. At the relevant time all the said four persons were doing jobbing transaction in the scrip of GTL. It was submitted that jobbing inter alia involves continuous placement of orders (both buy and sell) and consequent modifying and canceling in order to make profit out of price difference in the scrip at various points of time. Further in the normal course, jobbers square off their position and do not leave their position open at the end of the day and in the instant case also the said four jobbers had invariably squared off their positions at the end of the day.
3.5 It was further submitted that it was just a sheer coincidence that all the said four jobbers were trading in the scrip of GTL at the relevant time. At times their trades got matched with one another or at times with their other client’s viz. Mangalaben Masalia, Asha Masalia, Kashmira Masalia, Subhdraben Shah, Kokila Mehta, Kavita Jain. It was submitted that all the trades were carried out through the screen based mechanism provided by stock exchange, wherein it was not possible to know who the counter party broker or client was. At the relevant time there were around 22 terminals through which the trades were being executed. It was also submitted that the said jobbers had dealt not only in the scrip of GTL but also in various other scripts including Royal Airways (Modiluft), Ispat Industries, Essar Steel, Himachal Futuristic etc. They denied that they were responsible for spurt in the volume of trading during the period i.e. September 01, 2003 to October 8, 2003 and reiterated that the said trades were done in the normal course of business.
4.0 RELEVANT PROVISIONS OF LAW.
4.1 Before I proceed further, it would be pertinent to reproduce the relevant provisions of the FUTP Regulations, the Broker Regulations and the SEBI Act, 1992 as alleged to have been contravened by JMP.
4.2 Regulations 3(b), 4(1), 4(2)(a) of the FUTP Regulations read as follows:
3. Prohibition of certain dealings in securities
No person shall directly or indirectly-
(a) …………………………………
(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under;
…………………………………………………………………………………..
………………………………………………………………………………….
Prohibition of manipulative, fraudulent and unfair trade practices
4. (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;
………………………………………………………………………………..
…………………………………………………………………………………
4.3 Regulation 7 and clauses A(1), A(2), A(3), A(4) and A(5) of Schedule II of the Broker Regulations read as under:
Stock-Brokers to abide by Code of Conduct, etc.
7. The stock-broker holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II.
Code of Conduct for Stock Brokers as provided in schedule II read as under:
A. GENERAL
(1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business.
(2) Exercise Of Due Skill And Care: A stock-broker, shall act with due skill, care and diligence in the conduct of all his business.
(3) Manipulation: A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains.
(4) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investor’s 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.
(5) Compliance With Statutory Requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the stock exchange from time to time as may be applicable to him.
4.4 Section 15HA of the SEBI Act, 1992 reads as follows;
Penalty for fraudulent and unfair trade practices 15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.
5.0 CONSIDERATION OF ISSUES AND FINDINGS:
5.1 It was alleged that JMP indulged into self trades of 8,44,978 shares during month of September, 2003 and out of these self trades 4,23,970 shares were fictitious in nature as the buy and sell client codes were same. These fictitious trades were done for the clients viz. Bijal S. Shah (client code B8), Purvi P Shah (client code P9), Chetna B Parmar (client code C2) and Sheetal H Gandhi (client code H3). In reply to this charge, JMP has submitted that these four persons were their jobbers and transactions were done in normal course of jobbing business. It was a sheer coincidence that the trades of these jobbers had got matched inter se and no sinister motives should be attributed to such trades. The details are as follows.
5.2 Bijal S. Shah (Client code B8) - On September 11, 2003 Bijal Shah placed buy order of 50,000 shares at 11:53:00 @ Rs.85.15 per share and Asha Poddar placed sell order the same quantity at the same time and rate. In the evening Bijal Shah and Asha Poddar placed reverse orders for the same quantity @ Rs.83.65 at 14:51:53 and 14:51:54 respectively. Again on September 19, 2003 Bijal Shah placed sell order for 50,000 shares at 13:07:55 @ Rs.76.15 and Manglaben Masalia placed buy order for 50,000 shares @ 13:07:55 @ Rs.76.15. This trade got matched for 50000 shares. In the evening Bijal Shah and Mangalaben Masalia placed reverse orders for the same quantity @ Rs.77.15. These orders got matched for 50000 at 15:26:26.
5.3 The arguments of JMP, that these transactions took place in normal course of jobbing transaction and all the trades carried out by them were as per instructions of their clients and it was sheer coincidence that the trades got matched, are untenable. Coincidence may happen once but these transactions are repetitive in nature. The orders were placed at the time difference of 0 to 1 seconds. These transactions took place from two specific terminals of JMP viz. Terminal Nos. 007 and 018. It is also alleged that so called clients are known persons of JMP. In this regard statement on behalf of JMP is contradictory. At the time of investigation they had submitted that these clients were known persons either to the jobber or them. But in written submissions before me they have denied that they have any relationship/nexus with the said clients except that of a broker and client. The contradictory submissions militate against the credibility of the submission itself, therefore, the argument that clients were not known to them cannot be relied upon. Further, the very nature of these transactions do not support the arguments of JMP. Totality of facts and circumstances lead to the conclusion that these transactions are not genuine jobbing transactions.
5.4 Purvi P. Shah (Client P9)- On September 16, 2003 Purvi P. Shah placed sell order of 50000 shares at 12:31:04 @ Rs.79.35 and Asha Masalia placed buy order for 50000 shares @ 12:31:05 at the same rate. This trade got matched for 49535 shares. In the evening Purvi P. Shah and Asha Masalia placed reverse orders for the same quantity of 50000 shares the same time 15:17:43 and at the same rate of Rs.81.30. These orders got matched for 50000 at 15.17.43. Again on September 17, 2003 Purvi P. Shah placed 3 buy orders of 50000 shares each @ Rs.81.6 at 12:59:04, 12:59:11 and 12:59:22. Kasmira Masalia and Subhadaraben Shah placed 2 sell orders of 50000 shares and one sell order of 50000 shares at 12:59:04, 12:59:11 and 12:59:21 respectively @ Rs.81.6. These orders got matched for 50000 each. After about more than one hour Purvi P Shah and the 2 clients Kasmira Masalia and Subhadaraben Shah placed reverse orders. Purvi P Shah placed 3 sell orders of 50000 shares each two @ Rs.80.3 and one @ Rs.79.8 at 14:10:54, 14:11:07 and 14:13:29. Kasmira Masalia and Subhadaraben Shah placed 2 buy orders of 50000 shares and one buy order of 50000 shares at 14:10:53, 14:11:07 and 14:13:28 respectively @ Rs.80.3 and Rs.79.8 respectively. These orders got matched for 50000, 48495 and 41775, respectively.
5.5 The explanations of JMP that these transaction took place in normal course of jobbing transaction and all the trades carried out by them were as per instructions of their clients and it was sheer coincidence that the trade got matched, are not tenable. On both days i.e., September 16, 2003 and September 17, 2003, Purvi P. Shah had entered into reverse trading with three clients in 4 different transactions. Coincidence can happen once but these transactions are repetitive in nature. These orders were placed at the time difference of 0 to 1 seconds. These transactions took place from two specific terminals of JMP viz. Terminal Nos. 007 and 018. It is also alleged that so called clients are known persons of JMP. In this regard , submissions of JMP are contradictory in nature. At the time of investigation they had submitted that these clients were known persons either to the jobber or them. But in written submissions before me they have denied that they have any relationship/nexus with the said clients except that of a broker and client. The contradictory contentions militate against the credibility of the contention itself, therefore, the argument that clients were not known to them cannot be relied upon. Thus taking into account totality of facts and circumstances it is obvious that these transactions are not genuine jobbing transactions.
5.6 Chetna B. Parmar (Client Code C2) - On September 17, 2003 Chetna B. Parmar placed buy order of 50000 shares at 11:57:54 @ Rs.82.15 per share and Kokila Mehta placed sell order of the same quantity at the same time and rate. In the evening Chetna B. Parmar and Kokila Mehta placed reverse orders for the same quantity @ Rs.79.65 at 14:14:09 and 14:14:10 respectively. These orders got matched for 49975 shares.
5.7 These orders were placed at the time difference of 0 and 1 second. These transactions took place from two specific terminals of JMP viz. Terminal Nos. 004 and 010. Taking into consideration that the client was known and other jobbers entered into reverse trading with the clients it can be concluded that this transaction was not a genuine jobbing transaction.
5.8 Sheetal H. Gandhi (Client Code H3) - On September 19, 2003 Sheetal Gandhi placed sell order for 50000 shares at 12:57:57 @ Rs.76.45 and Kavita Jain placed buy order of same quantity at the same rate and time. This trade got matched for 50000 shares. In the evening Sheetal Gandhi and Kavita Jain placed reverse orders of the same quantity of 50000 shares at the same time 15:26:26 and at the same rate of Rs.77.35. These orders got matched for 50000 shares
5.9 These orders were placed at the same time. These transactions took place from two specific terminals of JMP viz. Terminal Nos. 004 and 022. Taking into consideration that the client was known and other jobbers entered into reverse trading with the clients it can be concluded that this transaction was not a genuine jobbing transaction.
5.10 From the findings recorded in the foregoing paragraphs, it is evident that JMP through their four jobbers had entered into transactions in the scrip of GTL which were not genuine jobbing transactions. An isolated incident of transaction in synchronized manner by reversing with the same client may be accepted but the same had happened time and again. By entering into these transactions, JMP had created volumes leading to false and misleading appearance of trading in the securities market. These eight trades were spread over four different days and individually accounted for 3.4% to 8.9% of the market volume of the scrip for the respective days. The mechanism of stock exchanges is meant for genuine transactions and the same cannot be used for creating artificial volumes which would entice the gullible investors to trade in the scrip. The above transactions, entered into by four jobbers of JMP in a synchronized manner by reversing with the same clients who were known to them, cannot be said to be genuine jobbing transactions. I am convinced that JMP by entering into these transactions has violated the provisions of Regulation 3(b), 4(1) and 4(2)(a) of the FUTP Regulations.
5.11 I also note that the Hon’ble Securities Appellate Tribunal in its order dated 31/10/2003 in Nirmal Bang Securities Pvt. Ltd. & Ors. Vs SEBI has, inter alia, observed as follows; “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 4 of the FUTP Regulations. In a synchronized trading intention is implicit”.
5.12 In view of my above findings, I hold that JMP by transacting in such a manner also violated the provisions of clauses A(1), (2), (3), (4) and (5) of the Code of Conduct as specified in Schedule II under regulation 7 of the Broker Regulations. The explanations provided by JMP in this regard are not convincing in view of the fact that they used their terminals for creating artificial volumes. It is apparent that JMP has failed to maintain integrity and also not exercised due skill and care in conduct of their business by creating false market had indulged into manipulative transactions which are detrimental to the investor’s interest and also securities market as a whole. I am convinced that it is a fit case to impose monetary penalty.
5.13. while deciding the quantum of penalty, the factors laid down under Section 15J of SEBI ACT have to be given due regard which are as follows – the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of default; the amount of loss caused to an investor or group of investors as a result of the default and the repetitive nature of default.
5.14 JMP vide letter dated October 5, 2005 had submitted additional reply mentioning the amount of loss of Rs.5,88,991/- incurred by their jobbers in these transactions. According to them they have suffered the loss while executing the transaction in the scrip. The contention of the JMP is not convincing inasmuch as that these clients were known to JMP or their jobbers, their intention was to create volumes and the losses shown by JMP were not supported by any authentic documentary evidence. The amount of disproportionate gain or unfair advantage to JMP and amount of loss caused to the investors as a result of the default can not be quantified in the present case in view of the absence of availability of any data/material on record in this regard. However, violations could be treated as repetitive in nature because there were eight trades spread over four different days.
Adherence to regulatory legal framework is a sine qua non for healthy growth and safety of the securities market. Albeit, in the instant case, there are no figures or data available on record to quantify the amount of disproportionate gain or unfair advantage or loss caused to the investors as a result of the breach of the provisions of law, the noticee cannot go scot-free inasmuch as the violations of the provisions of law stand proved. Therefore, in the light of this, imposition of quantum of penalty has to be decided keeping these factors also in mind, in addition to the factors laid down under Section 15 J of SEBI Act.
6.0. ORDER
6.1.Keeping in mind the factors enumerated above as well as after taking into consideration the facts and circumstances of the present case and material available on record, I, in exercise of powers conferred upon me under Rule 5 of the Adjudicating Rules read with Section 15I and Section 15HA of the SEBI Act, 1992 impose a penalty of Rs.1,00,000/- (Rupees One Lakh Only) on JMP Securities Pvt. Limited for violating the Provisions of Regulations 3(b), 4(1) and 4(2)(a) of the FUTP Regulations read with Clauses A (1), (2), (3), (4) and (5) of Code of Conduct as specified in Schedule II under Regulation 7 of the Broker Regulations while dealing in the scrip of GTL in the aforesaid manner.
6.2.JMP should pay the aforesaid amount of penalty by way of demand draft in favour of “SEBI – Penalties Remittable to the 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, Securities and Exchange Board of India, Mittal Court ‘B’ Wing, 224, Nariman Point, Mumbai – 400021. In my view, the above penalty is commensurate with the defaults of the JMP, in the facts and circumstances of the case.
In terms of Rule 6 of the Adjudication Rules, a copy of this order is sent to the Noticee and also to Securities and Exchange Board of India.
Date: November 30, 2005. D. Sura Reddy
Place: Mumbai Adjudicating Officer