In the matter of investigation in

 

KLG Systel Ltd.

 

AND

 

In respect of

 

M/s Krishna & Co, Proprietor Mr. K. Gnanasekaran , sub broker (SEBI Registration No. INS 239333710)

 

1.0       Background :

 

1.1       Vide order dated November 02, 2005 issued by Securities and Exchange Board of India (hereinafter referred to as “SEBI’), I was appointed as the Adjudicating Officer under Rule 3 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 to enquire into and to adjudge under Section 15HA and Section 15HB of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act”), the alleged violation of Regulations 4(1), 4 (2) (a), (b) & (g) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, Clause A(1), (2) & Clause D(1),(4) & (5) of Code of Conduct for sub brokers under Schedule II of regulation 15 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as “Broker Regulations”) and clauses A(1), (2), (3), (4) & (5) of Code of Conduct for brokers specified under Schedule II of Regulation 7 of Broker Regulations by M/s Krishna & Co., Proprietor Mr. K. Gnanasekaran, sub broker (SEBI Registration No. INS 239333710) of M/s. ISE Securities and Services Ltd. and broker – Coimbatore Stock Exchange Ltd. (SEBI Registration No. INB 210545011) in the matter of trading in the shares of M/s KLG Systel Ltd.  M/s Krishna & Co. has an office at 162, Race Course, Coimbatore – 641 018.

 

1.2       In view of sudden rise and fall in the price of shares of KLG Systel Ltd. (hereinafter referred to as “ KLG”) during April 21, 2004 to June 15, 2004, an investigation was conducted by SEBI into the trading in the shares of KLG. The main focus of investigation was to ascertain violation, if any, of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003 (hereinafter referred to as “PFUTP Regulations”). The share price of KLG fell from Rs.34.50 on April 21, 2004 to Rs.27.75 on May 17, 2004. Subsequently the price rose to Rs.40.35 on May 26, 2004 and again fell to Rs.33.75 on June 15, 2004.

 

1.3       The investigation revealed that the major trading member during this period was ISE Securities and Services Ltd. (trading member-National Stock Exchange of India Ltd.[hereinafter referred to as “NSE”]) whose trades had constituted 36.36% of gross traded quantity on NSE during April 21 to May 17, 2004, 12.87% of gross traded quantity during May 18, 2004 to May 26, 2004 and 32.52% of gross traded quantity during May 27, 2004 to June 15, 2004. The investigations revealed a large number of cross deals between M/s Nelliyan Stocks, Proprietor- Sh V. Arunachalam (hereinafter referred to as ‘NS’ ) and M/s Krishna & Co. (hereinafter referred to as ‘ KC ’) both brokers of Coimbatore Stock Exchange and sub brokers of ISE Securities and Services Ltd. (hereinafter referred to as “ISE”), trading member, NSE. The trading during the period under scrutiny was done by NS on behalf of its client, Mrs. V. Megala (hereinafter referred to as ‘VM’) while KC traded on own account.

 

1.4       As per investigation report, during the investigation period, 49 cross deals were executed between VM and KC in KLG shares. In these trades when VM was buying, KC was selling and when KC was buying, VM was selling. The cross deals have happened as both sub brokers KC and NS (on behalf of VM) have placed orders on a synchronised basis. The order synchronization details are as under :

 

Time difference between placement of sale and purchase orders (in seconds)	Number of trades
7-10	9
11-20	12
21-30	14
31-40	9
41-53	5

1.5 The investigation report also mentions that ISE had appointed a chartered accountant to inspect the books of KC. As KC had refused to co-operate with the inspection team, the disciplinary action committee of the parent stock exchange viz. Inter-connected Stock Exchange of India Ltd. directed the suspension of trading terminals of KC.

1.6 In view of the above inter se dealings among KC and NS (on behalf of VM ) it was alleged that KC had acted in violation of the provisions of Regulation 4(1), 4(2) (a), (b) and (g)  of PFUTP Regulations. It was also alleged that KC had violated Clauses A(1), (2), (3), (4) & (5) of Code of Conduct for brokers as specified in Schedule II of Regulation 7 of SEBI (Stock Brokers and Sub Brokers Regulations) 1992 (hereinafter referred to as “Broker Regulations”) and Clauses A(1), (2) and D (1), (4) and (5) of Code of Conduct for sub brokers as specified in Schedule II of Regulation 15 of Broker Regulations.  

2.0       Notice / Reply / Personal Hearing

 

2.1       A show cause notice dated January 23, 2006 was issued to KC asking it to show cause as to why action should not be taken against it for alleged violation of Regulation 4 (1), 4 (2) (a), (b) and (g) of PFUTP Regulations, Clause A(1), (2) & Clause D(1), (4) & (5) of Code of Conduct for sub brokers under Schedule II of regulation 15 and Clause A(1), (2), (3), (4) & (5) of Code of Conduct for brokers specified under Schedule II of Regulation 7 of Broker Regulations and penalty be not imposed under Section 15HA and Section 15HB of SEBI Act. A copy of the investigation report detailing the specific violations was enclosed with the notice. The integrated trade and order log in respect of trades during the investigation period was also enclosed.  KC was advised to make its submissions, if any, within 14 days from the date of receipt of the notice.

 

2.2       In response to the said notice, Mr K Gnanasekaran, proprietor –KC vide its letter dated February 06, 2006, inter-alia, made the following submissions: -

 

“1) In the NSE trading system, it is not possible at all for a broker to know the identity of the counter party either at the time of trade execution or at the time of download of trade data, since the system provides that the counter party is always NSE.

 

2)      If two parties (i.e. buying side and selling side) are residents of the same city, it is purely coincidental and beyond the control of either party.

 

3)      Further in the order matching system of NSE, when an order is placed, it is possible for any person in India to complete the same and therefore order execution is beyond the control of the party placing the order.

 

4)      In addition, I also wish to state that I have no beneficial interest in company referred by you.”

 

2.3       Having considered the charges levied and the reply submitted, I decided to conduct an inquiry in the matter and accordingly issued letter dated March 10, 2006 fixing March 27, 2006 as the date of hearing.

 

2.4       On March 27, 2006, Mr. K. Gnanasekaran, proprietor of KC appeared before me and made further submissions as mentioned hereunder:-

 

 

“ Subsequent to submission of my reply dated 06.02.2006, certain new facts have come to my knowledge. These trades were done through my terminal and in my account by my employee Shri Velmuthukrishnan who was operating the trading terminal. He is no longer in service with me as he had left in October 2004. He has agreed to me that these trades were done by him for his personal benefit without my knowledge. The counter party to the trades is the wife of my above mentioned ex-employee which fact has come to my knowledge recently during my discussions with him. I have no association or link with the counter party. In the process of doing these trades I have not made any gain whatsoever. Hence I wish to state that I have not purposefully did these trades in violation of Regulations 4(1), 4(2) and 4(a,b,g) of SEBI (PFUTP) Regulations and also acted against the Regulation 15 Schedule II read with Clause A(1)(2) and D(1)(4)(5) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 . Considering the above facts I request you to condone my mistakes and I assure you I will act by provisions of the Law in future and will not cause any act which will affect the regular functioning of the market.”

 

2.5       KC has also made following submissions vide its subsequent letter dated April 04, 2006 :

 

“As mentioned earlier, I have not made any monitory benefits out of these trades and infact I have lost approximately a sum of Rs. 66,000/-(Rupees Sixty Six Thousand only).

 

Hence please taking the above facts into consideration, I request you to condone my lapse for not supervising my staff and allowing these trades, to take place in my terminal.”

 

2.6       Show cause notices were also issued to NS and VM on January 23, 2006 asking them to show cause as to why action should not be taken against them for the alleged violations as mentioned in the investigation report which was provided to them. Thereafter hearing was also granted to them on March 27, 2006.

 

2.7       In response to the show cause notice, VM vide her letter dated February 04, 2006 submitted that she was a small investor, was doing the transactions in share market in the normal course of business and any distortion in market prices due to her trades, if any, was purely un-intentional. VM also sought to be forgiven if anything wrong had been done by her. During the hearing granted on 27.03.2006, Mr. P.V. Krishnan, husband of VM appeared and made submissions on her behalf. It was submitted that this trading was un-intentional in nature and if there was anything wrong, they would not do trading like this in future. He also submitted an authenticated  copy of the daily transaction statement of VM in respect of transactions in KLG done through NS.

 

2.8 During the hearing, KC submitted that these trades in KLG had been executed by Mr. P.V. Krishnan / P. Velmurugakrishnan / Velmuthukrishnan (hereinafter referred to as “PVK”) on behalf of KC while the counterparty was his wife VM, who was trading through NS. Thus there was a nexus between the trading entities. (Certain variations have been observed in quoting the name and spelling thereof of husband of VM. While he has been mentioned as P.V. Krishnan in the authority letter given by VM, in the submission made by him on 27.03.2006 he has given his name as P. Velmurugakrishnan and Mr. K. Gnanasekaran, proprietor, KC in his statement has mentioned his name as Velmuthukrishnan. However, all the names pertain to the same person who has been mentioned in this order as ‘PVK’).

 

2.9       As the fact of relationship between the trading entities came to light during the course of inquiry, I was of the view that it would be appropriate to share the new facts with the charged entities and seek their views / submissions in the matter. Accordingly, vide letter dated April 25, 2006, the submissions dated 27.03.2006 and 04.04.2006 of KC and submissions dated 08.02.2006 and 27.02.2006 of NS were forwarded to VM for her comments. Similarly copy of submissions dated March 27, 2006 & April 04, 2006 of KC and copy of letter dated March 24, 2006 from VM & submissions dated March 27, 2006 on behalf of VM were forwarded to NS vide letter dated April 25, 2006. Vide these letters, VM and NS were asked to submit their comments within 7 days of receipt of letter. They were also offered an opportunity of hearing on May 05, 2006 which was not availed by either party.

 

2.10                                                                                                                           In response to my letter dated April 25, 2006, VM vide her letter dated May 03, 2006 submitted as under:-

 

“Sir I wish to inform you that I have not any intention aly did these trades in violation of Regulations4(1), 4(2) and A,B,G of SEBI.

 

Sir I have not purposefully did any thing against SEBI Regulations.

My husband made some profit in Mr. K. Gnanasekaran trading account that was transferred to our account through KLG Systel Ltd.

 

Sir I request you to condone my mistake and I assure you that I will not do this type of trading in future. I am sending here with Rs.70000 (seventy thousand) demand draft in favour of Hon.Securities Exchange Board of India. Payable at Mumbai. Indian Bank DD No.148313. Already I submitted transactions statement in KLG Systel which indicates profit made by me sum of Rs 70000.

Entire amount I am sending you.”

 

Alongwith her letter she enclosed Indian Bank, Trichy Road, Coimbatore demand draft no. 148313 dated May 03, 2006 for Rs.70,000/- favouring SEBI being the profit made by her through these transactions.  

 

3.0       Consideration of Evidence and findings:- I now proceed to deal with the evidence and replies filed before me vis-à-vis allegations against KC, and record my observations / findings hereunder :

 

3.1 During the course of hearing held on March 27, 2006, PVK, the authorized representative of VM, submitted the daily transaction statement of VM through NS in KLG shares.  The transaction statement which has been recast to incorporate average transaction rates, square up of positions and profit / loss made is given below :

 

Settlement No.	Purchase Quantity	Avg Rate (Rs) *	Purchase Value	Sale Quantity	Avg Rate (Rs) *	Sale Value	Net Quantity	Profit/ Loss (-)
2004076	2500	34.937	87342.50	1500	35.75	53625.00
2004077	500	36.028	18014.80	1500	36.65	54970.00
	3000		105357.30	3000		108595.00	0	3237.7
2004078	1000	33.1	33100.00	1000	34.438	34437.50
	1000		33100.00	1000		34437.50	0	1337.5
2004079	2500	31.814	79535.00	1309	32.675	42772.55
2004080	0		0.00	1151	33.229	38247.10
	2500		79535.00	2460		81019.65	40 #	1484.65
2004081	1000	31.65	31650.00	1000	33.35	33350.00
	1000		31650.00	1000		33350.00	0	1700
2004083	1000	30.595	30595.00	100	32.95	3295.00
2004084	100	33.05	3305.00	1000	33.4	33400.00
	1100		33900.00	1100		36695.00	0	2795
2004085	500	32.05	16025.00	500	33.5	16750.00
	500		16025.00	500		16750.00	0	725
2004086	600	31.325	18795.00	600	32.691	19615.00
	600		18795.00	600		19615.00	0	820
2004087	1000	31.45	31450.00	1000	33.95	33950.00
	1000		31450.00	1000		33950.00	0	2500
2004088	1000	29.612	29612.50	1000	32.95	32950.00
	1000		29612.50	1000		32950.00	0	3337.5
2004090	1500	31.6	47400.00	1500	34.85	52275.00
	1500		47400.00	1500		52275.00	0	4875
2004091	3000	30.65	91950.00	3000	31.66	95000.00
	3000		91950.00	3000		95000.00	0	3050
2004092	2500	27.47	68675.00	2500	29.33	73325.00
	2500		68675.00	2500		73325.00	0	4650
2004093	2598	26.647	69229.40	2598	30.198	78456.10
	2598		69229.40	2598		78456.10	0	9226.7
2004096	1000	32.25	32250.00	1000	32.85	32850.00
	1000		32250.00	1000		32850.00	0	600
2004097	1500	35.6	53400.00	1500	36.9	55350.00
	1500		53400.00	1500		55350.00	0	1950
2004098	1250	37.062	46377.50	1250	38.34	47925.00
2004099	0		0.00	40	41.6	1664.00
	1250		46377.50	1290		49589.00	(-)40 #	3211.5
2004102	2000	35.3	70600.00	2000	36.8	73600.00
	2000		70600.00	2000		73600.00	0	3000
2004104	1000	34.85	34850.00	0	0	0.00
2004105	0	0	0.00	1000	37.235	37235.00
	1000		34850.00	1000		37235.00	0	2385
2004106	1000	34.2	34200.00	1000	35.05	35050.00
	1000		34200.00	1000		35050.00	0	850
2004107	1000	33.45	33450.00	1000	34.9	34900.00
	1000		33450.00	1000		34900.00	0	1450
2004108	1500	33.65	50475.00	1500	35.3	52950.00
	1500		50475.00	1500		52950.00	0	2475
2004109	2000	33.85	67700.00	2000	35	70000.00
	2000		67700.00	2000		70000.00	0	2300
2004110	2500	34.1	85250.00	2500	35.15	87875.00
	2500		85250.00	2500		87875.00	0	2625
2004111	2500	34.15	85375.00	2500	36.45	91125.00
	2500		85375.00	2500		91125.00	0	5750
2004113	2900	31.97	92740.00	2900	33.79	98005.00
	2900		92740.00	2900		98005.00	0	5265
Grand Total	41448		1343346.70	41448		1414947.25	0	71600.55

 

Note : 1. *- Average rate derived by dividing purchase / sales value by purchase / sale quantity

 2. # -Outstanding shares

 

On an analysis of the statement, I observe as under :

 

(a)         Almost all the transactions done on a particular day were reversed on the same day or the next trading day. There is only one instance of 40 shares remaining outstanding out of a purchase of 2500 shares in settlement no 2004079. However, even these 40 shares were squared off within a short time during settlement no. 2004099.

 

(b)         Overall VM has purchased 41448 shares and sold 41448 shares. In other words, the total quantity purchased by her was sold.

 

(c)         A pertinent observation is that VM has made a profit on square up of all transactions done by her over a period of 55 days. It logically follows that in this situation VM’s counterparty would have incurred loss in all transactions.

 

3.2       KC has submitted that these trades in KLG had been done through his terminal and on his account by his employee PVK who was operating the trading terminal. It is further submitted that these trades were done by him for his (PVK’s) personal benefit without KC’s knowledge. The counterparty to the trades was VM, wife of PVK. As mentioned above, the orders for the trades were entered simultaneously from both ends with a difference in time ranging from 7 to 53 seconds and over a period of 56 days.

 

3.3 An analysis of trading details during the investigation period submitted by VM (through PVK) on March 27, 2006 reveals that whenever a particular transaction between them was squared off, KC incurred a loss and VM made a profit. The fact that KC was incurring a loss on each transaction itself should have alerted KC that something was amiss. Considering the unpredictable and dynamic nature of the stock market, it is virtually impossible for any person to consistently make a loss (or profit) over a long period of time in the same scrip. However, if an entity / person continues to trade in the same scrip despite incurring losses consistently, it indicates either collusion or negligence or both. KC has contended that the transactions were done by PVK without his knowledge and that he incurred a loss of Rs 66,000/- in these transactions in KLG. But even if it was so, it does not change or reduce KC’s responsibility. As the principal, it has to take responsibility for the conduct of its employee / agent, PVK. Another aspect which is to be  considered is that of settlement of trades. Surely at the time of issuance of cheques for meeting pay-in liability (for funds), authorised signatory of KC would have seen the details of trades which resulted in losses. Similarly delivery of KLG shares would also have been given from the depository participant (DP) beneficiary account of KC from time to time. The delivery instructions are also required to be signed. If the sales had been done without authorization, this would have come to light when authorised signatory of KC / K Gnanasekaran was signing the delivery slips. Normally shares are kept in investors’ DP beneficiary accounts and not in brokers’ DP account. In the present case, since K Gnanasekaran is the proprietor of KC and the trades have happened on day to day basis in his own account, it is possible that the shares were retained in KC’s DP account. Even in this case it would require signatures of K Gnanasekaran or any other authorized signatory of KC. The fact that settlement is on a daily basis implies that there were many occasions for the ‘unauthorized’ trading by PVK to come to light as these trades happened over a 56 day period. The fact that this did not happen indicates that these trades were premediated and deliberate. This proves collusion between the trading entities and a virtual absence of internal control systems at KC.

 

3.4       Any person is expected to execute / conduct his affairs prudently. In the current situation, KC had a double responsibility. As a sub broker / broker, it is expected that he would maintain high standards of integrity, promptitude, fairness and act with due skill, care and diligence in conduct of all investment business. His responsibility gets enhanced when he is operating both as an investor and the intermediary. It is expected that in his own case he would exercise further care and prudence by limiting his losses.  As per evidence on record, it is a fact that KC was incurring loss on each squared up transaction in KLG right from the beginning. However, he continued to trade in the same scrip and incurred further losses. Such behaviour cannot be considered as prudent or diligent. It leads one to feel that this behaviour / activity was deliberate. By placing / permitting placement of synchronized orders with VM in the shares of KLG Systel Ltd. over a long period of time,  my view that KC has colluded with VM is further strenghtened.

 

3.5       I am of the opinion that placement of orders which match with a specified counterparty in terms of name of scrip, quantity, price and time of placement of order are synchronized orders and these adversely affect the price discovery mechanism at the stock exchange. In this connection, it would be relevant to refer to the following extracts of the order dated October 31, 2003 passed by the Hon’ble Securities Appellate Tribunal in the matter of Nirmal Bang Securities Pvt. Ltd. (SAT – Appeal No. 54-57/2002): -

“The scrip, quantity and price for these orders had been synchronised by the counter party brokers resulting in circular trades, which were highly irregular in nature and violative of all prudential and transparent norms of trading in securities. BEB and FGSB were artificially shifting position which did not involve change of ownership and thereby creating false volumes resulting in upsetting the market equilibrium…….

………Enquiry Officer has found that it is too much of a coincidence over too long a period in too many transactions where both the parties to the transaction (BEB on behalf of Shri Shankar Sharma and FGSB on behalf of Vriddhi) had entered buy and sell orders for the same quantity of shares almost simultaneously. The total amount of such transaction during the period January to March of 2001 was Rs.200 crores. In most of the instances, the gap between the order placement and its matching is too narrow and the complete order quantities got matched. In view of the close proximity of the order time punched by both the parties in the system, these transactions between BEB and FGSB can be termed as synchronized transactions. Both the parties to the transactions had entered buy and sell orders for the same quantity of shares almost simultaneously. There is no transfer of title in these shares since purchase and sale quantity is exactly the same and by the same party. In view of the above it is clear that FGSB and BEB were acting in concert with each other and entered into in the synchronised deals between the period 1^st January, 2001 and 31^st March, 2001 aggregating to approximately Rs.200 crores which did not involve change of ownership and thereby created a false volumes resulting in upsetting the market equilibrium. Such transactions are per se manipulative and are regarded as such not only in India but world over.”

3.6  This kind of trading raises serious doubts about the actual motive of trading. It is also evident that this circular trading has resulted in artificial trading volumes with no change in the ownership of the shares. In view of the fact that KC entered into collusive, synchronized trades with VM as detailed above, I am convinced that KC has violated regulations 4(1), 4(2) (a), (b) and (g) of PFUTP Regulations.  The relevant provisions of PFUTP Regulations are mentioned below for ready reference:-

“4.Prohibition of manipulative, fraudulent and unfair trade practices

 (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;

(b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss;

( c)…

(d)…..

(e)……

(f)….

(g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security;”

 In order to establish the fraudulent nature of trades conducted by KC, reference may also be made to the definition of fraud laid down in regulation 2 (c) of FUTP Regulations which provides as follows :

"2 (c) "fraud" includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, ………"

3.7 Although KC is a registered broker of Coimbatore Stock Exchange, it has traded in the shares of KLG Systel as a sub broker of ISE Securities and Services Ltd. Since he has traded only as a sub broker, I am of the opinion that it would not be proper to consider his violations under the category of violation of Code of Conduct for brokers specified under Regulation 7 of Broker Regulations.

3.8 By placing synchronized orders with specified counterparty over a long period, KC has compromised on the high standards of integrity expected out of a sub broker. These trades resulted in creation of false market and are likely to have deceived the general investing public about the market price and trading volumes of KLG shares. I therefore hold that KC has violated the  Code of Conduct for sub brokers under Schedule II of regulation 15 of Broker Regulations. The various regulations of Broker Regulations, which have been violated by KC are reproduced below :-

“A. GENERAL

(1) Integrity : A sub-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all investment business.

(2) Exercise Of Due Skill And Care : A sub-broker, shall act with due skill, care and diligence in the conduct of all investment business.

B…..

C…..

D. SUB-BROKERS VIS-A-VIS REGULATORY AUTHORITIES

(1) General Conduct : A sub-broker shall not indulge in dishonourable, disgraceful or disorderly or improper conduct on the stock exchange nor shall he wilfully obstruct the business of the stock exchange. He shall comply with the rules, bye-laws and regulations of the stock exchange.

(2)…..

(3) …..

(4) Manipulation : A sub-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.

(5) Malpractices : A sub-broker shall not create 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.”

3.9 My findings are further strengthened by the fact that the noticee, KC has also admitted its mistakes in its submissions before me which are reproduced below once again for reference:-

  

a. KC has admitted its lapses during the submission made before me on March 27, 2006, extract of  which is given below:-

 

“Hence I wish to state that I have not purposefully did these trades in violation of Regulations 4(1), 4(2) and 4(a,b,g) of SEBI (PFUTP) Regulations and also acted against the Regulation 15 Schedule II read with Clause A(1)(2) and D(1)(4)(5) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 . Considering the above facts I request you to condone my mistakes and I assure you I will act by provisions of the Law in future and will not cause any act which will affect the regular functioning of the market.”

 

b.      He has also admitted his lapse vide his letter dated April 04, 2006, extract of which is given below:-

 

“Hence please taking the above facts into consideration, I request you to condone my lapse for not supervising my staff and allowing these trades, to take place in my terminal.”

 

3.10 My findings in respect of the investigation report and the evidence on record themselves prove that KC has colluded with VM in respect of trades in KLG and thus violated the provisions of PFUTP Regulations and Code of Conduct for sub brokers as stipulated in Broker Regulations. These violations make KC liable for penalty under Section 15HA and 15HB of SEBI Act which are quoted below:-

 

“[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”.

 

 “Penalty for contravention  where no separate penalty has been provided

 

15HB. Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.]”.

 

3.11 However, while considering imposition of penalty, the adjudicating officer is required to give due regard to the following factors mentioned in Section 15J of SEBI Act:-

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

c) the repetitive nature of the default

 

3.12 KC vide his letter dated April 04, 2006 mentioned that he did not make any monetary gains out of these trades and in fact lost an amount of approximately Rs.66,000/-. However, this statement is of no consequence as the purpose of these transactions was to incur a loss in KC’s account. While this may be the loss to a particular entity, the loss to the investing public who were misled by the artificial volumes and prices cannot be ascertained. The sole purpose of these trades was only to make profit by VM and not investment in the shares of KLG which is evident by the fact that most of the trades were squared off on the same day or on the next trading day. However the general investors would get an opinion that there is more trading in the shares and thus they would form a wrong opinion with regard to trading volumes and the prices. Thus this trading has also misled the general investors. These manipulated trades continued over a period of 56 days. I would therefore conclude that there are repeated instances of default.

 

3.13 A registered intermediary is expected to maintain high level of integrity and due diligence while dealing in the markets. The level of integrity is expected to be higher when dealing on proprietory account. Instead, K Gnanasekaran, proprietor of KC has been a party to the malpractice of placing synchronized orders and circular trading with a view to pass on certain gains to VM thereby compromising the integrity of the securities market.  The facts have also been admitted by KC in his various submissions before me. Such malpractices have serious consequences for the integrity of the market. If such malpractices are allowed to go unpunished, it would not only encourage KC to repeat this kind of offence but may also result in a graver consequence of loss of faith of general investors in the integrity of the securities market. It is therefore necessary that deterrent penalty be imposed on KC.

4.0 PENALTY

4.1 Therefore in exercise of the powers conferred under section 15 I (2) read with section 15 HA and 15 HB of Securities and Exchange Board of India Act, 1992 and Rule 5 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, I hereby impose a penalty of Rs. 7,50,000 /- (Rupees seven lacs fifty thousand only) on M/s Krishna & Co, Proprietor Mr. K. Gnanasekaran , sub broker (SEBI Registration No. INS 239333710). In my view, the quantum of the above penalty is proportionate to the default of M/s Krishna & Co. in the facts and circumstances of the case.

4.2 The penalty amount shall be paid through a crossed demand draft drawn in favour of “SEBI - Penalties remittable to the Government of India” and payable at Mumbai within a period of 45 days from the date of receipt of this order. The draft may be sent to Mrs. Barnali Mukherjee, Deputy General Manager (IVD), Securities and Exchange Board of India, Mittal Court, B Wing, 224 Nariman Point, Mumbai – 400021.

 

PLACE: MUMBAI	PIYOOSH GUPTA
DATE: OCTOBER 06, 2006	ADJUDICATING OFFICER