BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO. PG/AO- 62/2010]
____
UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995
In respect of
Kishan Agarwal
(PAN: N.A.)
In the matter of
Rajesh Exports Ltd
FACTS OF THE CASE IN BRIEF
1. Securities and Exchange Board of India (hereinafter referred to as “SEBI”) conducted investigation into trading in the scrip of M/s Rajesh Exports Limited (hereinafter referred to as ‘REL/scrip’) for the period from September 2002 to February 2003 (hereinafter referred to as ‘first period of investigation’) and from June 2, 2003 to August 29, 2003 (hereinafter referred to as ‘second period of investigation’), due to sharp rise in price and volume of the scrip on National Stock Exchange of India Ltd. (hereinafter referred to as ‘NSE’) and Bombay Stock Exchange Ltd. (hereinafter referred to as ‘BSE’).
2. Analysis of Price Volume data:
Ø First Period: (September 2002-February 2003):
At BSE, price of the scrip opened at `89.00 on September 02, 2002 and moved in a narrow range and closed at `70.00 on January 09, 2003. In the month of September 2002 and October 2002, the scrip was traded for 14 days and 21 days. In the months of November and December 2002, trading took place only on two days and four days respectively. Later in January 2003, except for one day, there was no trading in the scrip till 15/1/2003.
From January 16, 2003 onwards, the price started rising from `75.50 and increased to `108.75 on January 30, 2003. Thereafter the price decreased and closed at `84.15 on February 25, 2003. During the said period, BSE Sensex opened at 2976 in the month of October 2002 and increased to 3284 by the end of February 2003.
The volumes in the scrip were erratic with highest volumes of 40,000 shares on December 26, 2002 and lowest volume of 1 share on as many as eight trading days in February 2003. Similar pattern was observed at NSE also. Total volume executed at BSE and NSE was 2.43 lacs and 1.32 lacs shares respectively.
Ø Second Period (June 2, 2003 to August 29, 2003):
At BSE, the price opened at `70.50 on June 06, 2003 and closed at `115.15 on August 29, 2003. During the period, BSE Sensex opened at 3176 in the month of June 2003 and increased to 4244 by the end of August 2003. Average daily volume in the scrip was around 25,000 shares during the said period. Total volume executed at BSE and NSE was 16.50 lacs and 11.18 lacs shares respectively.
3. It is alleged that Kishan Agarwal, resident of A/201, Kasabalnka Bldg., Old Raviraj Complex, Jassi Park, Bhayander (E) (hereinafter referred as ‘Noticee’) executed structured trades and also reversal /circular trades resulting in creation of artificial volume in the shares of REL.
4. It is alleged that the Noticee executed structured trades in violation of regulations 4(a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 read with regulation 4(1), 4(2) (a), (b), and (g) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Markets) Regulations, 2003 (both the above regulations are hereinafter referred to as “PFUTP Regulations”)
APPOINTMENT OF ADJUDICATING OFFICER
5. The undersigned had been appointed as Adjudicating Officer vide order dated March 16, 2006 under rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘Rules’) to inquire into and adjudge under Section 15HA of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’), the alleged violations of the provisions of SEBI Act and PFUTP Regulations.
6. Pursuant to transfer of undersigned, Mr. V S Sundaresan was appointed as Adjudicating Officer vide order dated November 19, 2007. Consequent upon the transfer of Mr. V. Sundaresan, the undersigned was appointed as Adjudicating Officer vide order dated November 12, 2009.
SHOW CAUSE NOTICE, HEARING AND REPLY
7. Show Cause Notice dated August 10, 2007 (hereinafter referred to as “SCN”) was issued to the Noticee under rule 4 of the Rules to show cause as to why an inquiry should not be held against the Noticee and penalty be not imposed under section 15HA of SEBI Act for the alleged violations specified in the said SCN. However, the SCN returned undelivered with the remark ‘left address’.
8. Accordingly, an advertisement regarding the aforesaid SCN was published in the newspapers, Hindustan Times, Sakal, Damini & Sandesh on April 10, 2010. It was informed in the newspapers that the SCN has been made available on the SEBI website (www.sebi.gov.in) under the heading “Unserved Summons/Notice”. Moreover, the Noticee was also given an option to collect the same from SEBI, Head office, Mumbai.
9. In the interest of natural justice and in order to conduct an inquiry in terms of rule 4(3) of the Rules, the Noticee was granted an opportunity of personal hearing on June 16, 2010, vide notice dated May 7, 2010. An advertisement with regard to the same was also published in national newspapers on June 11, 2010. Further, the notice was also available on the SEBI website. The said notice was sent to the Noticee through hand delivery, published in a national newspaper and was made available on SEBI website (www.sebi.gov.in) under the heading “Unserved Summons/Notice”. Further, the Noticee was also given an option to collect the same from SEBI, Head office, Mumbai. The Noticee neither appeared for the aforesaid hearing nor made any submissions.
10. However, in the interest of natural justice, one more opportunity of hearing was granted to the Noticee vide notice dated October 4, 2010 on October 22, 2010. As the Noticee was not found , the same was affixed at the last known address of the Noticee. The Noticee neither appeared for the aforesaid hearing nor made any submissions.
11. I am of the view that ample opportunities have been given to the Noticee to explain his case. As per rule 4(7) of the Rules, if any person fails neglects or refuses to appear as required by sub-rule (3) before the Adjudicating Officer, he may proceed with the inquiry in the absence of such person after recording the reasons therefor. Despite having been given ample opportunities as stated above, the Noticee has failed to avail the opportunity of personal hearing. I am, therefore, compelled to proceed with the matter ex-parte based on the material available on record.
CONSIDERATION OF ISSUES AND FINDINGS
12. The issues that arise for consideration in the present case are :
a) Whether the Noticee had violated the said provisions of PFUTP Regulations mentioned in para 4?
b) Does the violation, if any, on the part of the Noticee attract monetary penalty under section 15HA of SEBI Act?
c) If so, what would be the monetary penalty that can be imposed taking into consideration the factors mentioned in section 15J of SEBI Act?
13. Before moving forward, it will be appropriate to refer to the relevant provisions of PFUTP Regulations, which read as under:
SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995
“Prohibition against Market Manipulation
4. No person shall -
(a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person;
(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market;
(c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions;
(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities;……….”
SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Markets) Regulations, 2003
“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 the minimum subscription to such issue;
(c) …
(d) …
(e) …
(f) …
(g) entering into a transaction in securities without intention of performing or without intention of change of ownership of such security;”
(h) …
(i) …
(j) ……………………
(k) ……
(l) ……
(m) ……
(n) circular transactions in respect of a security entered into between intermediaries in order to increase commission to provide a false appearance of trading in such security or to inflate, depress or cause fluctuations in the price of such security;”
Findings
14. Upon perusal of the documents available on record, I find the following:
15. The Noticee (Client no – K031) has traded in the shares of REL through his brokers Sanchay Fincom Ltd. (Clearing Code- 204) at BSE and Sanchay Finvest Ltd. (Clearing Code- ) at NSE.
16. The investigation period is divided in two periods viz. September 2002 – February 2003 (First Period) and June 2003 - August 2003 (Second Period). The Noticee has not traded in REL shares during the first period of investigation. Therefore, the allegations against the Noticee pertain only to the second period.
17. It was alleged that during the period June 25, 2003 to July 15, 2003 (13 days) at BSE and during June 6, 2003 to August 29, 2003 at NSE, the clients viz. the Noticee, A K Agarwal, Ashok Sharma, Bhavesh Pabari, Naresh N Shah and Shrawankumar Goyal (Shrawan) had executed structured transactions in REL shares.
18. The aforesaid clients were known to each other due to the following facts:
· Bhavesh Pabari had introduced Naresh Shah and Shrawan Kumar Goyal to the trading member/ broker, Haven Financial Services Pvt. Ltd.
· Shrawankumar Goyal in turn introduced Kishan Agarwal to the trading member Sanchay Finvest Limited.
· All these clients are located at Bhayander (E).
Trading at BSE
19. As regards the trading done by the Noticee at BSE, it was observed that during June 25, 2003 to July 15, 2003 (13 days), trades happened between Noticee through broker Sanchay Fincom Ltd. (Clearing Code- 204) and Shrawankumar Goyal through his broker, Jitendra Bhabera (clearing code - 303). The details of transactions are as given below:
|
Date
|
Shares bought by (204) and sold by (303)
(A)
|
Shares bought by (303) and sold by (204)
(B)
|
Total shares traded between them
(A+B)
|
Market Vol.
|
% Of Market Vol.
|
|
25-Jun-03
|
3700
|
3700
|
7400
|
29045
|
25.48
|
|
26-Jun-03
|
4750
|
4750
|
9500
|
23150
|
41.04
|
|
27-Jun-03
|
4750
|
4750
|
9500
|
20800
|
45.67
|
|
30-Jun-03
|
4395
|
4395
|
8790
|
22945
|
38.31
|
|
02-Jul-03
|
2250
|
2250
|
4500
|
13800
|
32.61
|
|
03-Jul-03
|
2400
|
2400
|
4800
|
15951
|
30.09
|
|
04-Jul-03
|
2400
|
2400
|
4800
|
13255
|
36.21
|
|
08-Jul-03
|
2500
|
2500
|
5000
|
12210
|
40.95
|
|
09-Jul-03
|
5000
|
5000
|
10000
|
18511
|
54.02
|
|
10-Jul-03
|
2500
|
2500
|
5000
|
15510
|
32.24
|
|
11-Jul-03
|
3000
|
3000
|
6000
|
17214
|
34.86
|
|
14-Jul-03
|
1300
|
1300
|
2600
|
26009
|
10.00
|
|
15-Jul-03
|
2150
|
2150
|
4300
|
22785
|
18.87
|
|
Total
|
41095
|
41095
|
82190
|
251185
|
32.72
|
20. From the above table, it was observed that the aforesaid two clients had executed circular/reversal trades for 13 days and contributed 32.72 % of the daily turnover during those 13 days. Further I also find that the buy and sell orders for these trades were placed within seconds of each other and also instances were noticed where time gap was zero seconds. A sample of the trade order log is given below :
|
Trade Date
|
Qty
|
Price
|
Buy Member
|
B client
|
BO Time
|
BO Rate
|
BO Qty
|
Sell Member
|
S client
|
SO Time
|
SO Rate
|
SO Qty
|
diff in time
|
|
25-Jun-03
|
550
|
84.55
|
D0303
|
S1046
|
14:32:46
|
84.55
|
8250
|
D0204
|
K031
|
14:32:42
|
84.55
|
8250
|
0:00:04
|
|
25-Jun-03
|
500
|
85.05
|
D0303
|
S1046
|
13:04:33
|
85.05
|
5000
|
D0204
|
K031
|
13:04:28
|
85.05
|
5000
|
0:00:05
|
|
25-Jun-03
|
500
|
85.10
|
D0204
|
K031
|
13:58:33
|
85.10
|
5000
|
D0303
|
S1046
|
13:58:34
|
85.10
|
5000
|
0:00:01
|
|
25-Jun-03
|
250
|
85.15
|
D0303
|
S1046
|
13:04:44
|
85.15
|
250
|
D0204
|
K031
|
13:04:41
|
85.15
|
250
|
0:00:03
|
|
25-Jun-03
|
1000
|
85.20
|
D0204
|
K031
|
14:22:33
|
85.20
|
10000
|
D0303
|
S1046
|
14:22:33
|
85.20
|
10000
|
0:00:00
|
|
25-Jun-03
|
850
|
85.25
|
D0204
|
K031
|
12:51:33
|
85.25
|
15300
|
D0303
|
S1046
|
12:51:33
|
85.25
|
15300
|
0:00:00
|
|
25-Jun-03
|
350
|
85.25
|
D0204
|
K031
|
13:58:44
|
85.25
|
6650
|
D0303
|
S1046
|
13:58:46
|
85.25
|
6650
|
0:00:02
|
|
25-Jun-03
|
750
|
85.30
|
D0303
|
S1046
|
13:39:58
|
85.30
|
11250
|
D0204
|
K031
|
13:39:56
|
85.30
|
11250
|
0:00:02
|
|
25-Jun-03
|
750
|
85.50
|
D0303
|
S1046
|
11:02:49
|
85.50
|
11250
|
D0204
|
K031
|
11:02:49
|
85.50
|
11250
|
0:00:00
|
|
25-Jun-03
|
900
|
85.75
|
D0303
|
S1046
|
12:00:29
|
85.75
|
16200
|
D0204
|
K031
|
12:00:31
|
85.75
|
16200
|
0:00:02
|
|
25-Jun-03
|
1000
|
86.65
|
D0204
|
K031
|
11:40:43
|
86.65
|
16000
|
D0303
|
S1046
|
11:40:43
|
86.65
|
16000
|
0:00:00
|
|
26-Jun-03
|
1200
|
78.90
|
D0204
|
K031
|
15:20:10
|
78.90
|
12000
|
D0303
|
S1046
|
15:20:10
|
78.90
|
12000
|
0:00:00
|
|
26-Jun-03
|
550
|
79.45
|
D0204
|
K031
|
15:03:17
|
79.45
|
6600
|
D0303
|
S1046
|
15:03:18
|
79.45
|
6600
|
0:00:01
|
|
26-Jun-03
|
850
|
82.45
|
D0303
|
S1046
|
14:43:50
|
82.45
|
15300
|
D0204
|
K031
|
14:43:49
|
82.45
|
15300
|
0:00:01
|
|
26-Jun-03
|
550
|
82.50
|
D0303
|
S1046
|
12:37:23
|
82.50
|
8250
|
D0204
|
K031
|
12:37:20
|
82.50
|
8250
|
0:00:03
|
|
26-Jun-03
|
500
|
82.50
|
D0303
|
S1046
|
14:43:59
|
82.50
|
5000
|
D0204
|
K031
|
14:43:57
|
82.50
|
5000
|
0:00:02
|
|
26-Jun-03
|
1000
|
82.55
|
D0303
|
S1046
|
11:19:55
|
82.55
|
12000
|
D0204
|
K031
|
11:19:55
|
82.55
|
12000
|
0:00:00
|
|
26-Jun-03
|
750
|
82.60
|
D0204
|
K031
|
14:35:02
|
82.60
|
7500
|
D0303
|
S1046
|
14:35:03
|
82.60
|
7500
|
0:00:01
|
|
26-Jun-03
|
650
|
82.60
|
D0303
|
S1046
|
12:37:15
|
82.60
|
6500
|
D0204
|
K031
|
12:37:11
|
82.60
|
6500
|
0:00:04
|
|
26-Jun-03
|
1000
|
82.60
|
D0303
|
S1046
|
15:14:14
|
82.60
|
12000
|
D0204
|
K031
|
15:14:12
|
82.60
|
12000
|
0:00:02
|
|
26-Jun-03
|
500
|
82.65
|
D0204
|
K031
|
12:28:34
|
82.65
|
5000
|
D0303
|
S1046
|
12:28:36
|
82.65
|
5000
|
0:00:02
|
|
26-Jun-03
|
200
|
82.65
|
D0303
|
S1046
|
15:14:23
|
82.65
|
2000
|
D0204
|
K031
|
15:14:24
|
82.65
|
2000
|
0:00:01
|
|
26-Jun-03
|
450
|
82.70
|
D0204
|
K031
|
12:28:44
|
82.70
|
6300
|
D0303
|
S1046
|
12:28:45
|
82.70
|
6300
|
0:00:01
|
|
26-Jun-03
|
500
|
82.70
|
D0204
|
K031
|
14:35:11
|
82.70
|
5000
|
D0303
|
S1046
|
14:35:12
|
82.70
|
5000
|
0:00:01
|
|
26-Jun-03
|
500
|
82.75
|
D0204
|
K031
|
10:56:05
|
82.75
|
5000
|
D0303
|
S1046
|
10:56:06
|
82.75
|
5000
|
0:00:01
|
|
26-Jun-03
|
300
|
82.85
|
D0204
|
K031
|
10:56:13
|
82.85
|
3000
|
D0303
|
S1046
|
10:56:14
|
82.85
|
3000
|
0:00:01
|
|
27-Jun-03
|
1000
|
79.50
|
D0204
|
K031
|
14:47:28
|
79.50
|
10000
|
D0303
|
S1046
|
14:47:29
|
79.50
|
10000
|
0:00:01
|
|
27-Jun-03
|
250
|
79.55
|
D0204
|
K031
|
14:47:58
|
79.55
|
2500
|
D0303
|
S1046
|
14:47:57
|
79.55
|
2500
|
0:00:01
|
|
27-Jun-03
|
950
|
79.60
|
D0204
|
K031
|
14:47:42
|
79.60
|
12350
|
D0303
|
S1046
|
14:47:41
|
79.60
|
12350
|
0:00:01
|
|
27-Jun-03
|
500
|
79.60
|
D0303
|
S1046
|
15:05:38
|
79.60
|
5000
|
D0204
|
K031
|
15:05:36
|
79.60
|
5000
|
0:00:02
|
|
27-Jun-03
|
550
|
79.65
|
D0303
|
S1046
|
14:16:13
|
79.65
|
5500
|
D0204
|
K031
|
14:16:10
|
79.65
|
5500
|
0:00:03
|
|
27-Jun-03
|
400
|
79.65
|
D0303
|
S1046
|
15:05:46
|
79.65
|
4000
|
D0204
|
K031
|
15:05:46
|
79.65
|
4000
|
0:00:00
|
|
27-Jun-03
|
600
|
79.70
|
D0303
|
S1046
|
14:16:24
|
79.70
|
6000
|
D0204
|
K031
|
14:16:23
|
79.70
|
6000
|
0:00:01
|
|
27-Jun-03
|
1000
|
79.75
|
D0204
|
K031
|
13:20:35
|
79.75
|
10000
|
D0303
|
S1046
|
13:20:37
|
79.75
|
10000
|
0:00:02
|
|
27-Jun-03
|
500
|
79.90
|
D0204
|
K031
|
13:20:44
|
79.90
|
5000
|
D0303
|
S1046
|
13:20:44
|
79.90
|
5000
|
0:00:00
|
|
27-Jun-03
|
900
|
80.60
|
D0303
|
S1046
|
13:06:12
|
80.60
|
16200
|
D0204
|
K031
|
13:06:14
|
80.60
|
16200
|
0:00:02
|
|
27-Jun-03
|
750
|
80.75
|
D0204
|
K031
|
11:03:53
|
80.75
|
7500
|
D0303
|
S1046
|
11:03:54
|
80.75
|
7500
|
0:00:01
|
|
27-Jun-03
|
500
|
80.75
|
D0303
|
S1046
|
13:06:23
|
80.75
|
5000
|
D0204
|
K031
|
13:06:22
|
80.75
|
5000
|
0:00:01
|
|
27-Jun-03
|
300
|
80.80
|
D0204
|
K031
|
11:04:01
|
80.80
|
3000
|
D0303
|
P1032
|
11:04:02
|
80.80
|
3000
|
0:00:01
|
|
27-Jun-03
|
500
|
80.85
|
D0303
|
S1046
|
11:56:10
|
80.85
|
5000
|
D0204
|
K031
|
11:56:09
|
80.85
|
5000
|
0:00:01
|
|
27-Jun-03
|
800
|
80.90
|
D0303
|
S1046
|
11:56:20
|
80.90
|
12800
|
D0204
|
K031
|
11:56:17
|
80.90
|
12800
|
0:00:03
|
|
30-Jun-03
|
1000
|
78.75
|
D0303
|
S1046
|
12:24:31
|
78.75
|
12000
|
D0204
|
K031
|
12:24:30
|
78.75
|
12000
|
0:00:01
|
|
30-Jun-03
|
995
|
78.85
|
D0303
|
S1046
|
15:23:53
|
78.85
|
4975
|
D0204
|
K031
|
15:23:50
|
78.85
|
5750
|
0:00:03
|
|
30-Jun-03
|
1345
|
78.90
|
D0204
|
K031
|
15:07:47
|
78.90
|
16500
|
D0303
|
S1046
|
15:07:51
|
78.90
|
16500
|
0:00:04
|
|
30-Jun-03
|
155
|
78.90
|
D0204
|
K031
|
15:09:04
|
78.90
|
1650
|
D0303
|
S1046
|
15:07:51
|
78.90
|
4500
|
0:01:13
|
|
30-Jun-03
|
395
|
78.90
|
D0204
|
K031
|
15:09:04
|
78.90
|
4950
|
D0303
|
S1046
|
15:09:03
|
78.90
|
11250
|
0:00:01
|
|
30-Jun-03
|
950
|
79.00
|
D0303
|
S1046
|
10:42:43
|
79.00
|
9500
|
D0204
|
K031
|
10:42:43
|
79.00
|
9500
|
0:00:00
|
|
30-Jun-03
|
950
|
79.05
|
D0303
|
S1046
|
14:15:56
|
79.05
|
12350
|
D0204
|
K031
|
14:15:56
|
79.05
|
12350
|
0:00:00
|
|
30-Jun-03
|
1000
|
79.10
|
D0204
|
K031
|
14:04:50
|
79.10
|
10000
|
D0303
|
S1046
|
14:04:51
|
79.10
|
10000
|
0:00:01
|
|
30-Jun-03
|
500
|
79.10
|
D0303
|
S1046
|
14:16:10
|
79.10
|
5000
|
D0204
|
K031
|
14:16:09
|
79.10
|
5000
|
0:00:01
|
|
30-Jun-03
|
1000
|
79.20
|
D0204
|
K031
|
11:19:41
|
79.20
|
10000
|
D0303
|
S1046
|
11:19:42
|
79.20
|
10000
|
0:00:01
|
|
30-Jun-03
|
500
|
79.30
|
D0204
|
K031
|
11:19:50
|
79.30
|
5000
|
D0303
|
S1046
|
11:19:50
|
79.30
|
5000
|
0:00:00
|
|
2-Jul-03
|
1000
|
80.10
|
D0204
|
K031
|
12:40:08
|
80.10
|
10000
|
D0303
|
S1046
|
12:40:09
|
80.10
|
10000
|
0:00:01
|
|
2-Jul-03
|
750
|
80.45
|
D0303
|
S1046
|
13:32:21
|
80.45
|
11250
|
D0204
|
K031
|
13:32:20
|
80.45
|
11250
|
0:00:01
|
|
2-Jul-03
|
750
|
80.50
|
D0204
|
K031
|
11:26:37
|
80.50
|
6750
|
D0303
|
S1046
|
11:26:35
|
80.50
|
6750
|
0:00:02
|
Note : Kishan Aggarwal (Client code – K031), ShrawanKumar Goyal (client code- S1046),
Sanchay Fincom Ltd. (Clearing Code- 204), Jitendra Bhabhera (clearing code : D 0303)
Ø On 25.06.2003, the Noticee placed a buy order at 13:58:33 for 5000 shares of REL @ ` 85.10 through its broker D0204. At 13:58:34, Shrawan placed a sell order for 5000 shares of REL @ ` 85.10 through its broker Jitendra Bhabhera. These orders resulted in trade of 500 shares @ `82.95. The time difference between placement of these two orders was only 1 second and the order price & quantity also matched.
Ø On 25.06.2003, Kishan Agarwal placed a buy order at 14:22:33 for 10000 shares of REL @ ` 85.20 through his broker Sanchay Fincom. At 14:22:33, Shrawan placed a sell order for 10000 shares of REL @ ` 85.20 through his broker Jitendra Bhabhera. These orders resulted in trade of 1000 shares @ `85.20. The time difference between placement of these two orders was only 0 second and the order price & quantity also matched.
Ø On 25.06.2003, Kishan Agarwal placed a buy order at 12:51:33 for 15300 shares of REL @ ` 85.25 through his broker Sanchay Fincom. At 12:51:33, Shrawan placed a sell order for 15300 shares of REL @ ` 85.25 through his broker Jitendra Bhabhera. These orders resulted in trade of 850 shares @ `85.25. The time difference between placement of these two orders was only 0 second and the order price & quantity also matched.
21. The Noticee had purchased 41,095 shares through 57 trades and sold 41,095 shares through 56 trades. Further, Out of 113 trades executed by the Noticee, 26 trades were executed with a time difference of 0 seconds in order placement. 45 trades were executed where the time difference between buy and sell order was 1 seconds. In 17 trades the time difference was 2 seconds and in 13 trades the time difference was 3 seconds. Hence, in 89% of the trades the time difference was 0 to 3 seconds. The detailed trade order log is attached as Annexure A.
Trading at NSE
22. As regards the trading done by the Noticee at NSE, it was observed that during June 9, 2003 to July 21, 2003 the broker Sanchay Finvest Ltd. traded on behalf of clients viz. Noticee (client code: K031), Bhavesh Pabari (client code: B039) & A K Agarwal (client code: A026) and broker Haven Financial Services Pvt Ltd. (Haven Financial) on behalf of clients viz. Bhavesh Pabari (client code: P0132), Shrawankumar Goyal (client code: S1046) and Naresh N Shah (client code: N1051) and broker Bonanza Portfolio Ltd. (Bonanza) on behalf of client Ashok Sharma (Client code: A221).
23. Upon perusal of the trading details, I find that during June 9, 2003 to July 21, 2003, a total of 127 structured deals were executed between the broker Sanchay Finvest Ltd. and broker Haven Financial for 95,700 shares of REL across 23 days. These transactions contributed 24% of the total traded quantity (411750 shares) during the said period. Details of trades are given below :
i. Naresh N. Shah acting as buying client executed structured deals for 7500 shares through broker Haven Financial with Bhavesh Pabari 6,500 shares and Kishan Agarwal (1000 shares), the selling clients on the opposite side who dealt through Sanchay Finvest.
ii. Shrawankumar Goyal acting as buying client executed structured deals for 41675 shares through broker Haven Financial which matched with orders of Shri A K Agarwal (2900 shares) and Kishan Agarwal (38775 shares) the selling clients who dealt through Sanchay Finvest.
iii. Shri A K Agarwal acting as buying client executed structured deals for 2850 shares through Sanchay Finvest with Shri Shrawankumar Goyal the selling client on the opposite side who dealt through Haven Financial.
iv. Shri Bhavesh Pabari acting as buying client executed structured deals for 7500 shares through Sanchay Finvest with Shri Naresh Shah (6500 shares) and Bhavesh Pabari (1000 shares) the selling clients on the opposite side who dealt through Haven Financial.
v. Shri Kishan Agarwal acting as buying client executed structured deals for 34275 shares through Sanchay Finvest with Shri Shrawankumar Goyal the selling client on the opposite side who dealt through Haven Financial.
vi. On 12.06.2003, Shrawankumar Goyal placed a sell order at 12:56:10 for 1000 shares of REL @ `78.40 through his broker Haven Financial. At 12:56:11, Noticee placed a buy order for 1000 shares of REL @ `78.40 through his broker Sanchay Finvest. These orders resulted in trade of 1000 shares @ `78.40. The time difference between placement of these two orders was only 0 second and the order price & quantity also matched.
vii. On 12.06.2003, Shrawankumar Goyal placed a sell order at 14:17:17 for 1000 shares of REL @ `78.75 through his broker Haven Financial. At 14:17:21, Noticee placed a buy order for 1000 shares of REL @ `78.75 through his broker Sanchay Finvest. These orders resulted in trade of 1000 shares @ `78.75. The time difference between placement of these two orders was only 4 second and the order price & quantity also matched.
24. The sample trade and order log showing the structured synchronized circular / reversal trades between Sanchay Finvest Ltd. and Haven Financial Services Pvt Ltd is attached as Annexure B.
25. Out of 127 trades executed between Sanchay Finvest Ltd. and Haven Financial Services Pvt Ltd, 101 trades were executed on behalf of the Noticee by its broker Sanchay Finvest Ltd. Out of these 101 trades, 27 trades were with a time difference of 0 seconds in order placement. 42 trades were executed where the time difference between buy and sell order was 1 seconds. In 15 trades the time difference was 2 seconds, in 4 trades the time difference was 3 seconds. Hence, out of 101 trades, 88 trades were executed where order time difference was 0 to 3 seconds (88 % of total).
26. Further, during June 9, 2003 to June 26, 2003, a total of 57 structured deals were observed between Sanchay Finvest Ltd. and Bonanza Portfolio Limited for 34240 shares across 10 days. These transactions contributed 18% of the total traded quantity (187758 shares) during the said period. During the said period Sanchay Finvest Ltd traded on behalf of the Noticee & AK Agarwal and Bonanza Portfolio Ltd. traded on behalf of Ashok Sharma. Details of trades are as given below:
i. Ashok Sharma acting as buying client executed structured deals for 16670 shares through broker Bonanza Portfolio Ltd. with Shri A K Agarwal (3450 shares) and the Noticee (13220 shares) the selling clients on the opposite side who dealt through Sanchay Finvest Ltd..
ii. Noticee and A K Agarwal acting as buying client executed structured deals for 3250 shares and 14320 shares respectively through Sanchay Finvest Ltd with Ashok Sharma the selling client on the opposite side who dealt through Bonanza Portfolio Ltd.
27. The sample trade and order log showing synchronized circular / reversal trades between Sanchay Finvest and Bonanza Portfolio Limited is attached as Annexure C.
28. Out of 57 trades executed between Sanchay Finvest and Bonanza Portfolio Ltd., 48 trades were executed on behalf of the Noticee by its broker Sanchay Finvest Ltd. Out of the 48 trades, 18 trades were executed with a time difference of 0 seconds in order placement. 17 trades were executed where the time difference between buy and sell order was 1 seconds. In 4 trades the time difference was 2 seconds and in 5 trades the time difference was 3 seconds. Hence, out of 48 trades, 44 trades were executed where order time difference was 0 to 3 seconds ( 91.6 % of total).
29. I find that in most of the aforesaid trades, order quantity and rate matched and the time difference between the orders was negligible. Instances were also noticed where time gap between purchase and sale order was zero seconds. These transactions prima-facie appear to be in the nature of creating artificial / false volumes.
30. It is also observed that during June 9, 2003 to June 26, 2003, a total of 60 structured deals were observed between broker Haven Financial Services Pvt Ltd and Bonanza Portfolio Limited for 47100 shares across 13 days. These transactions contributed 25% of the total traded quantity (187758 shares) during the said period. However, the trades between the aforesaid two entities are not analyzed here as they do not pertain to the Noticee. Nevertheless, in my view, the trading patterns of all the aforesaid brokers and clients indicate that all of them were connected to each other and were executing synchronized circular/reversal trades with each other with an intention to artificially raise the price and volume of the scrip. It is evident from the above that the Noticee and the other alleged entities followed a common modus operandi of creating artificial volume in the market and thereby inflating the price by trading with each other. This indicates that the Noticee and the other alleged entities were not interested to invest in the shares but were only interested in increasing the share price. To the extent of the trades reversed, it can also be said that the Noticee has created false trading volumes. The transactions of the Noticee were in the nature of matched and synchronized order placement which ensured matching of orders between the group entities. These orders were put simultaneously or within close proximity of each other for same price and quantity in the same scrip.
31. Hon’ble Securities Appellate Tribunal (SAT) in Ketan Parekh Vs. Securities & Exchange Board of India (Appeal No. 2 of 2004) held that in order to find out 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. In the case of Ashok K Chaudhary v SEBI, Appeal No 69 of 2008, dated November 5, 2008, Hon’ble SAT observed that large number of reverse trades raises a presumption of manipulative transactions. In Nirmal Bang Securities Pvt. Ltd Vs Chairman, SEBI, Appeal No. 54-57/2002, dated October 31, 2003, Hon’ble SAT observed that where there are too many transactions over a period of time giving an impression that these were all synchronized, 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.
32. The method and the manner in which these trades were executed are the most important factors to be considered in these circumstances. The motive, thereafter, automatically falls in line. Clearly in almost all the deals, the orders were placed in a manner so as to ensure matching of the buy and the sell quantity and price with the counterparty, with whom a prior tacit understanding existed. The buy and the sell orders were placed at almost the same time between the counter brokers, with difference 0 to few seconds. This proximity in the inputting of orders at the same price and for the same quantity, resulted in getting them matched, such that there was almost perfect matching in all the trades, which to a large extent indicates synchronization in the placement of the orders, albeit executed on the screen of the stock exchange.
33. This is what has transpired in the present case. A large number of synchronized trades got matched regularly, that too only between the same set of brokers and the same set of clients in the same scrip, during the same period. The phenomenal regularity with which these clients and their brokers were counter-parties leads one to conclude that these transactions were effectively meant to be synchronized. It is my considered belief that synchronized order placement and circular trades resulted in projection of the volumes of the shares of REL in a way that was not the market determined volumes, possibly to induce general investors to invest in the said scrip.
34. The fact is that had the aforesaid discussed trades been executed in the normal course of business, the possibility of such perfect matching would not have been possible. The transactions were definitely done with some inbuilt component of ‘intent’ involved. Greater the number of synchronized trades, larger the chances of trades not being genuine in nature, which is bound to affect the market equilibrium. It is also to be stated that “intention” is inherent in all cases of synchronized trading involving large scale price manipulation and the same was also brought out in the earlier cited case of Nirmal Bang Securities (P) Ltd. vs. SEBI by the Hon’ble SAT whereby it was observed that “Intention is reflected from the action of the Appellant. Choosing selective time slots does not appear to be an involuntary action.” Thus, the very act of manipulation of the scrip of REL on the part of the Noticee is revealed in its acting in tandem with other entities through the brokers which reveals the inherent intention of manipulating the said scrip. It is quite evident that these trades were entered into due to the concerted effort of the related counterparties through their brokers, which resulted in semblance of normal trading activity.
35. Further, the trades as discussed earlier were in the nature of synchronized and circular trades with the same set of clients on both sides, trading through the same set of brokers. Furthermore, when a client reveals a clear and set pattern/behavior in a particular scrip, such as, execution of a large number of trades, on the same day, in the same scrip, consistently throughout the period and with the same set of brokers, then the same is indicative of a concerted level of activity and an element of intent while executing the said deals, precipitated due to a mutual understanding. The acts of the entities speak of their intentions. In case an entity is alleged to have manipulated the market or distorted the market equilibrium in violation of the PFUTP Regulations and its acts are corroborated up to a certain extent by the investigation findings, then the underlying intention of the said entity is brought out. Furthermore, manipulation does not only involve manipulation in the price of the scrip but also includes building up of volumes.
36. On a cumulative analysis of the facts mentioned above, it is clear that the modus operandi of the Noticee, to manipulate the trading in the scrip of REL in a concerted manner was effected in the following manner:
· Synchronization in order placement such that both buy and sell orders were placed at identical time or within a gap of few seconds.
· Both buy and sale orders were mostly for same quantity of shares and at the same price.
· The counterparties were the same set of clients on both sides, trading through the same set of brokers.
· Artificial volume created due to the synchronized and circular trades along with price rise.
37. It cannot be a mere coincidence that every time, the Noticee acted in complete ignorance. The Noticee by participating in the trading in this manner involved in the execution of synchronized circular transactions created artificial liquidity in the scrip and played a role in the manipulation of the trading. In my view, the Noticee through the said artificial trades interfered with the market equilibrium and thereby affected the manipulation of price and volume of the said scrip. The trades executed herein by the Noticee were not the real trades as there was no intention to change the beneficial ownership. When the trades were inherently non genuine, I do not feel that it is necessary to prove that investors had, in fact, got induced and bought and/or sold on the basis of these trades. Similar views were expressed by the Hon’ble SAT in its order dated 14.7.2006 in Ketan Parekh Vs. SEBI wherein it had observed that “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. This, in our view, clearly flows from the plain language of Regulation 4(a) of the Regulations.
38. As per regulation 2 (1) (c) of PFUTP Regulations, "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 while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss….”
39. Regulation 4(a) of PFUTP Regulations, 1995 prohibits a person to effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person. Regulation 4(b) of PFUTP Regulations, 1995 prohibits a person from indulging in any act, which is calculated to create a false or misleading appearance of trading on the securities market. Regulation 4(c) of PFUTP Regulations, 1995 prohibits a person from indulging in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions. Regulation 4(d) of PFUTP Regulations, 1995 prohibits a person from entering into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities. Regulation 4 (2) (a) of PFUTP Regulations, 2003 prohibits a person from indulging in an act which creates false or misleading appearance of trading in the securities market. Regulation 4 (2) (b) of PFUTP Regulations, 2003 prohibits dealings in a security intended to operate as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gains. Regulation 4 (2) (g) of PFUTP Regulations, 2003 prohibits entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security. As detailed above, the acts of the Noticee clearly created false and misleading appearance of trading in the shares of REL and it did not act in a bonafide manner. The facts of the case highlight Noticee's involvement, who regularly executed synchronized circular / reversal trades in a substantial manner which led to creation of artificial volume and misleading appearance of trading in the said shares. As the transactions executed by the Noticee in the said scrip were synchronized circular/reversal trades, he does not appear to have any genuine trading interest in the scrip. All these resulted in violation of the PFUTP regulations as stated above.
40. In view of foregoing, I find that the charges leveled against the Noticee are proved and that the allegation of violation of provisions of 4(a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 read with regulation 4(1), 4(2) (a), (b) and (g) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Markets) Regulations, 2003 stands established.
41. The Hon’ble Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual Fund [2006] 68 SCL 216(SC) held that “once the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant. Once the contravention is established, then the penalty is to follow”.
42. The aforesaid violations of PFUTP Regulations by the Noticee make it liable for penalty under Section 15HA of SEBI Act, 1992 which reads as follows:
“15HA. Penalty for fraudulent and unfair trade practices.
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.”
43. While determining the quantum of penalty under Section 15HA of SEBI Act, it is important to consider the factors stipulated in section 15J of SEBI Act, which reads as under:-
“15J - Factors to be taken into account by the adjudicating officer
While adjudging quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, namely:-
(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.”
44. It is difficult, in cases of such nature, to quantify exactly the disproportionate gains or unfair advantage enjoyed by an entity and the consequent losses suffered by the investors. I have noted that the investigation report also does not dwell on the extent of specific gains made by the clients or the brokers. Suffice to state that keeping in mind the practices indulged in by the Noticee, gains per se were made by the Noticee in that he traded in the scrip of REL in a manner meant to create artificial volumes and liquidity which is an important criterion, apart from price, capable of misleading the investors while making an investment decision. In fact, liquidity/volumes in particular scrip raise the issue of ‘demand’ in the securities market. The greater the liquidity, the higher is the investors’ attraction towards investing in that scrip. Hence, anyone could have been carried away by the unusual fluctuations in the volumes and been induced into investing in the said scrip. Besides, this kind of activity seriously affects the normal price discovery mechanism of the securities market. People who indulge in manipulative, fraudulent and deceptive transactions, or abet the carrying out of such transactions which are fraudulent and deceptive, should be suitably penalized for the said acts of omissions and commissions. Considering the continuous activity of the Noticee in this aspect where the synchronized circular / reversal trades were carried out over a period of time, it can safely be surmised that the nature of default was also repetitive.
ORDER
45. After taking into consideration all the facts and circumstances of the case, I impose a penalty of ` 2,00,000/- (Rupees two lacs only) on Kishan Agarwal under Section 15HA of SEBI Act which will be commensurate with the violations committed by him.
46. The Noticee shall pay the said amount of penalty by way of demand draft in favour of “SEBI - Penalties Remittable to Government of India”, payable at Mumbai, within 45 days of receipt of this order. The said demand draft should be forwarded to Ms. Anita Kenkare, General Manager, Investigation Department –ID 2, SEBI, SEBI Bhavan, Plot No. C – 4 A, “G” Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.
47. In terms of rule 6 of the Rules, copies of this order are sent to the Noticee and also to SEBI.
|
Date: October 29 , 2010
|
Piyoosh Gupta
|
|
Place: Mumbai
|
Adjudicating Officer
|
Encl.: Annexure A, B & C.