Order against SBM Investments Ltd

SECURITIES AND EXCHANGE BOARD OF INDIA 

ORDER

CO/61/ISD/10/2004

1.0             Background

1.1  M/s SBM Investments (hereinafter referred as “the said sub-broker”) is a sub broker registered with the Securities and Exchange Board of India (hereinafter referred to as “SEBI”) and affiliated to M/s Mukesh Babu Securities Ltd, a member of the Stock Exchange, Mumbai (hereinafter referred to as “BSE”) and the National Stock Exchange of India (hereinafter referred to as “NSE”).

1.2 SEBI Conducted investigation into the transactions in the shares of Global Trust Bank (hereinafter referred to as “GTB”) a Commercial Bank listed on NSE and BSE. In the course of investigation, it was noted that Mukesh Babu Securities Ltd. had entered into several synchronized transactions in respect of the scrip of GTB during the period 18.11.1999 to 3.12.1999. The details of the transactions are as under:

Trade Date	B Order Time	S Order Time	Trade Time	Buy & Sell Order Time	B memb Name	S mem name	Buy Order Price	Sell Order Price	Trade Price	Buy Order Qty	Sell Order Qty`
11/18/1999	12:28:35	12:28:36	12:28:36	0:00:01	Mukesh B	Classic S	39.25	39.25	39.25	100000	100000
11/18/1999	12:28:51	12:28:51	12:28:51	0:00:00	Mukesh B	Classic S	39.25	39.25	39.25	100000	100000
11/25/1999	15:09:53	15:09:52	15:09:53	0:00:01	Mukesh B	Classic S	45.65	45.65	45.65	125000	125000
11/22/1999	15:20:26	15:20:28	15:20:28	0:00:02	Classic S	Mukesh B	43.00	43.00	43.00	97584	97584

 

It was further observed that of the said trades, purchases for around Rs.5.2 lakhs were done by the said broker on behalf of the said sub broker and that the client of the said sub broker was Classic Credit Ltd., an entity controlled by / associated with Shri Ketan Parekh. The said broker had sold 2 lakh shares on behalf of the said sub broker and the purchasers were Classic Share and Stock Broking and Triumph International – entities associated with and controlled by Shri Ketan Parekh.

It was alleged that the above transactions were synchronized/matched transactions and that these were undertaken to manipulate the price of the scrip of GTB.

2.0             Enquiry Proceedings

2.1 In the light of the findings of the investigation that the said sub-broker had along with Mukesh Babu Securities Ltd, Classic Credit Limited and Triumph International entered into synchronized transactions, an enquiry officer was appointed vide order dated 17.09.2003 under the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalties) Regulations 2002 (hereinafter referred to as the “Enquiry Regulations”) to enquire into the alleged violations by the said sub-broker.

2.2             The enquiry officer issued show cause notice to the said broker on 29.09.2003 and thereafter also offered an opportunity for personal hearing to the said sub-broker. The enquiry officer after considering the reply and submissions of the said sub-broker submitted his report to SEBI on 06.05.2004.

2.3             In his report the enquiry officer has found that the said broker acted on behalf of Classic Credit Ltd. an entity associated with and controlled by Ketan Parekh. He has also found that the broker viz. Mukesh Babu Securities which the said sub-broker was affiliated has stated that all the transactions were done by them on behalf of the said broker. The enquiry officer has found that in six instances trades were synchronized and that the said broker had thereby violated Clause D (5) of the Code of Conduct for sub brokers stipulated in Schedule II to the SEBI (Stock Broker and Sub-Broker) Regulations, 1992 (hereinafter referred to as “the Broker Regulations”)

2.4             In view of the above finding, the Enquiry Officer recommended that the Certificate of Registration granted to the said sub-broker may be suspended for a period of four months.

3.0 Show Cause Notice

3.1 Pursuant to the submission of report by the enquiry officer, a show cause notice in terms of regulation 13(2) of the Enquiry Regulations was issued to the said broker on 26.05.2004. No reply was received to the same and hence a reminder was sent on 03.08.2004. No reply has been received from the said broker to the said notice or the reminder till date.

 

3.2 I find that adequate opportunity has been granted to the said broker to make submissions and therefore I proceed further in the matter.

4.0 Consideration of Issues

4.1             I have considered the report of the enquiry officer and other material on record and find that the following issues arise for consideration:

(a)   Whether the said broker has by the transactions referred to in paragraph 1.2 supra, violated the Code of Conduct for sub-brokers

I note that the transactions described in paragraph 1.2 were executed by Mukesh Babu Securities Ltd upon instructions of the said sub-broker. This has been confirmed by Mukesh Babu Securities. I also note that the client of the said sub-broker was Classic Credit Limited, an entity associated with and controlled by Shri Ketan Parkh.

I further note that the difference in time in buy and sell orders in respect of the said transactions range from 1 to 6 seconds and the quantity and price of these two orders are exactly the same in all the above transactions.

 

As observed by the enquiry officer the price and order matching mechanism of the stock exchange is a “blind” system wherein the identity of the counterparty to a transaction is not revealed. This is so in order to ensure that every investor gets a fair chance to participate in the stock market.

The fact that the quantity, price and time of placement of buy order and sell order is a clear indicator of meeting of minds between the buyer and seller and also a pointer towards an attempt by the parties to the above transaction to defeat the “blind” system of price and order matching.

In this regard, I note that a “smoking gun” may be hard to come by in case of offences such as synchronized trading. The plea of coincidence is taken by all those who are parties to the offence. Therefore, a conclusion or finding of violation can only be arrived at by examination of the trading patterns adopted by the entities involved. The analysis of the trading patterns and findings of guilt based on the same cannot be called surmises or inferences. There are clear indications of misdeeds by the said sub-broker. I find that the analysis of the trades in the present case clearly point finger at possible nexus between the parties involved in the transactions. I further find that upon analysis of the trade details, there is sufficient evidence of synchronized trading in the scrip of GTB.

In view of the above, I find that the said sub-broker has been a party to the synchronized trading in the scrip of GTB as mentioned in paragraph 1.2 supra.

I find that the Code of Conduct for sub-brokers provides that a sub broker shall not indulge in mal practices relating to the securities market. In this regard, Clause D(5)of the said Code of Conduct provides :

 

“Malpractices : A sub broker shall not create a false market either singly or in concert with others or indulge in any act detrimental to the public interest or which leads to interference with the fair and smooth functions of the market mechanism of the stock exchanges. A sub broker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness”.

 

Therefore, I find that the said sub broker by indulging in synchronized deals has violated Clause D(5) of the Code of Conduct, I also find the said sub brokers has not complied with Regulation 15(b) of the broker regulations which provides that a sub broker shall abide by the code of conduct.

 

(b)  Whether in view of the finding supra, the penalty recommended by the Enquiry Officer should be imposed on the said sub-broker.

 

I find that the enquiry officer has recommended imposition of a major penalty of suspension of registration for a period of four months. In this regard, it is necessary for proper regulation of the securities market and intermediaries operating therein that stringent penalties are imposed for violations that threaten the integrity and proper functioning of the market.

 

I note that the violations by the said sub broker are grave and it is necessary in the interest of the investors and the proper development of the securities market that appropriate penalty be imposed on the said sub broker.

 

I find that in the facts and circumstances of the case the penalty recommended by the enquiry officer is appropriate.

5.0             Order

In view of the above, I, in exercise of powers conferred on me in terms of Section 4(3) of the SEBI Act and Regulation 13 (4) of the Enquiry Regulations do hereby suspend the certificate of registration granted to SBM Investments as a sub-broker for a period of 4 months.

 

This order shall come into effect on expiry of 21 days from date of the order.

 

	G.N. Bajpai
Date: 14th Oct. 2004	Chairman
Place:MUMBAI	SECURITIES AND EXCHANGE BOARD OF INDIA