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Order against Visaria Securities Ltd in the scrip of Global Trust Bank

Oct 11, 2004
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Orders : Orders of Chairman/Members

SECURITIES AND EXCHANGE BOARD OF INDIA

 

ORDER

Order under Section 4(3) of the Securities and Exchange Board of India Act, 1992 read with Regulation 13(4) of the SEBI (Procedure for holding inquiry by enquiry officer and imposing penalty) Regulations 2002 against Visaria Securities Ltd. in the scrip of Global Trust Bank

 

CO/59/ISD/10/2004

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    1. Visaria Securities Pvt. Ltd. (hereinafter referred to as the said broker) is a member of The National Stock Exchange of India (hereinafter referred to as "NSE") and of The Stock Exchange, Mumbai (hereinafter referred to as "BSE") and the stock broker is registered with Securities and Exchange Board of India (hereinafter referred to as SEBI).
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    2. SEBI conducted an investigation into the rise in price of the scrip of Global Trust Bank (hereinafter referred to as GTB), a Scheduled Commercial Bank incorporated under the Companies Act and promoted by Shri Ramesh Gelli and Others. The investigation by SEBI resulted in the following findings:
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    2.  
  2. Background
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  1. There was a rise in the price of the scrip during the period November 1999 to February 2000 and the said price rise was on account of manipulation through methods such as synchronized trading.

    2.  

  2. Several brokers had traded in the scrip during the period under investigation and the said broker is one of them. It was also noted that the said broker had done proprietary trades during the said period.

    3.  

  3. On 19.11.1999 the said broker placed orders at the end of the day at a price very near to the upper circuit filter price. At 15:16:12, M/s Dharmshi Securities Ltd. placed a buy order for 10,000 shares at Rs.41/- whereas the previous traded price was Rs.40.50. Immediately thereafter the said broker placed a buy order for 5000 shares at Rs.41/- and at 15:28:52 modified this order at Rs..42.80 for 1299 shares. This price of Rs.42.80 was the upper circuit filter price for the day.

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  4. On 26.11.99 the said broker placed orders as below:
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    Time 

    		  

    Buy / Sell 

    		  

    Price 

    		  

    Quantity 
     

    10:58:56

    		  

    Buy

    		  

    45.50

    		  

    20000
     

    11:00:20

    		  

    Buy

    		  

    45.65

    		  

    5000
     

    11:00:36

    		  

    Buy

    		  

    45.75

    		  

    5000
     

    11:01:58

    		  

    Buy

    		  

    46.00

    		  

    10,000

     

    Before these orders were placed the last traded price of the scrip was Rs.45.50.

     

  5. On 07.12.99 the said broker placed a buy order for 50000 shares at Rs.54 and the said order matched with all pending sell orders for a price below Rs.62.90. Further, this order also established a new price of Rs.62.90 compared to the last traded price of Rs.59.

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In view of the above, it was alleged that the said broker had acted in a manner so as to manipulate the price of the scrip to a higher level on the said three days.

 

2.0 Enquiry Proceedings

 

2.1 In view of the findings of investigation an enquiry officer was appointed under SEBI (Procedure for holding inquiry by enquiry officer and imposing penalty) Regulations 2002 (hereinafter referred to as "the Enquiry Regulations") the vide order dated 17.09.2003 to enquire into the alleged violations by the said broker. The Enquiry Officer issued show cause notice to the said broker on 29.09.2003 and thereafter conducted enquiry proceedings in accordance with the enquiry regulations.

 

2.2 In his report dated 06.05.2004 the enquiry officer found that the said broker has entered into transactions that ultimately led to manipulation in the price of the scrip of GTB. The enquiry officer found that the by this act the said broker has violated Clause A(4) of Code of Conduct for stock brokers contained in the Schedule II to the broker regulations.

 

In view of the above the enquiry officer recommended that the certificate of registration granted to the said broker may be suspended for a period of three months.

 

     
  1. Show Cause Notice and Hearing
    2.

      

3.1 Pursuant to the submission of the report by the enquiry officer a show cause notice was issued to the said broker on 26.05.2004. The said broker submitted their reply vide letter dated 10.06.2004 making the following submissions.

 

  1. In respect of the buy orders placed by them on 19.11.1999 the said broker stated that the enquiry report itself mentions that the price of Rs.41/- had already been established by another member before they placed the buy order for 5000 shares. The said transactions were within the permissible limit of Rs.42.80 and the same was a genuine and valid transaction. Further, only their buy order for 5000 shares out of a total volume of 1,33,895 shares is being called in the question.

    2.  

  2. With regard to modification of price from Rs.41 to Rs.42.8 for 1,299 shares the said broker submitted that their orders were not culminating in trades in view of the large demand for the scrip and therefore they modified the said order. They submitted that the order placed by them were in consonance with the market trend prevailing in the scrip on the said day. The said broker further submitted that the reference by the enquiry officer in respect of high liquidity in the scrip was for transactions done on 07.12.99 and not for the transactions on 19.11.99 and there is no relation between the transactions on the said two days.

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  3. With respect to the observation on the enquiry report regarding placing of orders at various rates within the time span of three minutes, the said broker submitted that not all of the orders placed by them got converted into trades. They had placed orders at various prices in order to ensure that all their orders got converted into trades.

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  4. With regard to the trade on 07.12.99 the said broker submitted that order was placed by them at Rs.64 instead of Rs.61 on account of a genuine mistake in punching. The said broker further submitted that the purpose of requesting a trade cancellation on the NEAT system of NSE was only for the purpose of insurance claims. In the instant case although they had intended to placed the order at Rs.61 since their average acquisition price on that day was only Rs.60.97 and hence no loss was suffered by them for which a claim could be raised on the insurance company. Hence, they did not make request of cancellation of trade.

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  5. The said broker submitted that they had not acted to create a false market either singly or in concert with others and further submitted that the enquiry report does not find any collusion by them with any other person or entity in order to create a false market.

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  6. The said broker submitted that penalty recommended by the enquiry officer is gross disproportionate to the violations which are inadvertent and on account of human error.

    7.  

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    1. An opportunity for personal hearing was granted to the said broker on 26.07.2004. The said broker appeared on the said day and reiterated the submissions made by them in the reply on the show cause notice.

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4.0 Consideration of Issues

 

 

4.1 I have considered the facts of the matter, the report of the enquiry officer, the reply and submissions of the said broker and other material on record. I find that the following issues arise for consideration:

 

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    1. Whether the said broker had violated the provisions of Code of Conduct for Stock Brokers.

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I note that on 19.11.1999, the said broker placed an order at the end of the day and thereafter modified the order to a price near the prevailing Upper Circuit Filter (UCF) price and thereby established a new UCF price. The said broker in their reply submitted that they modified the order since their orders were not resulting in trades and the revised price was in keeping with the market trend. In this regard, I note that the price at which the shares of GTB were traded prior to placing of the order by the said broker was Rs.40.50 Thereafter orders were placed at a price of Rs.41 by Dharamshi Securities and thereafter by the said broker. The said broker then modified the order price to Rs.42.80.

 

I note that even after the order was modified, the pending orders (which were below 1000 in number) could not be fulfilled. Therefore, I accept the contention of the said broker that the order was modified in accordance with market trends.

 

I note that on 26.11.1999, the said broker placed 4 orders within a time span of 3 minutes at different prices ranging from Rs.45.50 to Rs.46.00. Further, though orders were placed for a total of 40000 shares, the actual number of shares traded was only 20000. I am unable to accept the reply of the said broker that this was a legal and permissible practice. No activity in the market that aims to increase the price can be considered as a legal one. The price discovery through a transparent and anonymous trading system has been insisted upon to prevent such manipulation. Thus, I find that the said broker had placed the orders in the aforementioned fashion with intent to increase the price of the scrip.

 

I note that on 7.12.1999, the said broker had through a single order of 50000 shares at a price of Rs.64/- wiped out all the pending orders and established a new price of Rs.62.90 from Rs.59.00. The said broker has submitted that the said order resulted from an error in punching keys and that they had actually intended to place the order at Rs.61. They have also submitted that they did not take up the matter with the stock exchange for cancellation of trade since such requests are made for insurance claims where they suffer a loss. I am unable to accept the explanation of the said broker. I find that if the said broker had made a mistake while punching the order especially at a higher price, in the normal course, they would have immediately taken up with the exchange for cancellation of trade. The submissions made by the said broker are only an afterthought. Therefore, I find that the said broker had placed the order for 50000 shares at Rs.64/- with intent of establishing a higher price and thereby manipulated the price of the scrip.

 

I find that the code of conduct for stock brokers laid down in Schedule II to the SEBI (Stock Broker and Sub Broker) Regulations, 1992 (hereinafter referred to as "Broker Regulations") provide for such care and diligence on the part of stock brokers. Part A of the said code reads as under:

 

"A. General

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    1. Integrity…
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    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
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    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
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    4. Malpractice: 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.
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    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…"
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In view of the above I find that the said broker has violated Clause A (4) of the Code of Conduct and thereby violated Regulation 7 of the Broker Regulations which stipulates that a stock broker shall abide by the code of conduct. 

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    1. Whether the penalty recommended by the enquiry officer should be imposed on the said broker.

 

As I have found supra, the said broker had indulged in practices that were aimed at manipulating the price of the scrip of GTB and also which was to the detriment of the securities market. The violations by the said 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 broker.

 

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

 

5.0 Order

Therefore, I, in exercise of powers conferred on me in terms of Section 4(3) of the SEBI Act read with Regulation 13(4) of the Enquiry Regulations do hereby suspend the Certificate of Registration granted to M/s Visaria Securities Pvt. Ltd. for a period of 3 months.

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

  

 

G.N. Bajpai

Date: 11th Oct. 2004

Chairman
Place:MUMBAI  SECURITIES AND EXCHANGE BOARD OF INDIA