SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
Order under Regulation 13(4) of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalties) Regulations 2002 and Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 read with Section 4(3) of the Securities and Exchange Board of India Act, 1992 against Indsec Securities and Finance Ltd.
1.0 Background
Indsec Securities and Finance Ltd. (hereinafter referred to as the “said broker”) is a member of the Stock Exchange, Mumbai (hereinafter referred to as “BSE”) and of the National Stock Exchange of India (hereinafter referred to as “NSE”) and a stock broker registered with SEBI.
SEBI conducted an 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 observed that the prices of the share of GTB had moved very sharply during November 1999 to January 2000 and also during the period 01.04.2000 to 31.08.2000.
It was observed that on 11.04.2000 large volumes of the shares of GTB were traded both on BSE as well as on NSE. A total of 52,51,900 shares were traded on NSE and 50,86,363 shares were traded on BSE. This was the largest volume traded in this scrip during the period 01.04.2000 to 31.08.2000. It was further observed that M/s ICICI Brokerage Services Ltd. (hereinafter referred to as “IBSL”) was the major seller on that date and that they had sold a total of 1,00,00,000 shares – 50,00,000 shares each on BSE and NSE on behalf of their client Asian Development Bank (hereinafter referred to as “ADB”) . It was also observed that the entire quantity of shares sold by IBSL was purchased by many brokers including the said broker and entities associated with Shri Ketan Parekh in transactions that were matched / synchronized transactions.
Details of the purchase and sale of the shares of GTB on 11.04.2000 on both BSE and NSE are as under:
|
Date
|
Code
|
Price
|
Buy
|
Sell
|
Buying Client
|
Selling Client
|
|
11.04.00
|
Indsec Securities & Finance Ltd.
|
83
|
2000000
|
0
|
DKG Buildeon, HT Ferro, V. Impex
|
-
|
|
11.04.00
|
Triumph International Finance India Ltd.
|
83
|
1500000
|
0
|
Classic Credit
|
|
|
11.04.00
|
NH Securities Ltd.
|
83
|
1000000
|
0
|
Classic Credit
|
|
|
11.04.00
|
Woodstock Broking Pvt. Ltd.
|
83
|
500000
|
0
|
Suresh Jajoo
|
|
|
11.04.00
|
ICICI Brokerage
|
83
|
0
|
5000000
|
-
|
ADB
|
|
11.04.00
|
Woodstock Securities Pvt. Ltd.
|
-
|
1500000
|
0
|
Vimla and Suresh Jajoo
|
-
|
|
11.04.00
|
Milan Mahendra Securities
|
-
|
500000
|
0
|
Classic Credit
|
|
|
|
|
|
|
|
|
|
|
11.04.00
|
Latin Manharlal Securities
|
-
|
750000
|
0
|
Own Account
|
|
|
11.04.00
|
Triumph Securities Pvt. Ltd.
|
-
|
750000
|
0
|
Vinsan Trade
|
|
|
11.04.00
|
HEM Securities Ltd.
|
-
|
500000
|
0
|
Classic Credit
|
|
|
11.04.00
|
ICICI Brokerage
|
-
|
0
|
5000000
|
-
|
-
|
|
11.04.00
|
Indsec Securities & Finan
|
|
500000
|
0
|
DKG (4 lacs) Classic Credit 1 lac
|
|
|
11.04.00
|
Chandra J. Dalal
|
|
500000
|
0
|
Classic Credit
|
|
The details of the transactions entered into between IBSL and the said broker are as under:
BSE
|
Selling Broker
|
Rate
|
Sale Qty
|
Sell Order time
|
Buying Broker
|
Rate
|
Buy Qty
|
Buy order time
|
Diff. second
|
|
ICICI Brokerage
|
83
|
500000
|
13:19:15
|
Ind Sec Securities
|
83
|
500000
|
13:19:36
|
21
|
NSE
|
Date
|
Buy order time
|
Buy Broker
|
Buy order Qty
|
Buy order Price
|
Sell Broker
|
Sell order Qty
|
Sell order Time
|
Sell order Price
|
Diff. seconds
|
|
11-04-00
|
11:07:05
|
Indsec
|
250000
|
83
|
ICICI Brokerage
|
250000
|
11:06:43
|
83
|
22
|
|
11-04-00
|
11:07:15
|
Indsec
|
250000
|
83
|
ICICI Brokerage
|
250000
|
11:06:50
|
83
|
25
|
|
11-04-00
|
11:07:57
|
Indsec
|
250000
|
83
|
ICICI Brokerage
|
250000
|
11:07:29
|
83
|
28
|
|
11-04-00
|
11:08:11
|
Indsec
|
250000
|
83
|
ICICI Brokerage
|
250000
|
11:07:36
|
83
|
35
|
|
11-04-00
|
12:06:26
|
Indsec
|
250000
|
83
|
ICICI Brokerage
|
250000
|
12:06:16
|
83
|
10
|
|
11-04-00
|
12:06:43
|
Indsec
|
250000
|
83
|
ICICI Brokerage
|
250000
|
12:06:24
|
83
|
19
|
|
11-04-00
|
12:07:02
|
Indsec
|
250000
|
83
|
ICICI Brokerage
|
250000
|
12:07:03
|
83
|
1
|
|
11-04-00
|
12:07:11
|
Indsec
|
250000
|
83
|
ICICI Brokerage
|
250000
|
12:07:12
|
83
|
1
|
In view of the findings of the investigation that the said broker had indulged in synchronized trading in the shares of GTB as enquiry officer was appointed under Regulation 5(1) of the SEBI (Procedure for holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter called enquiry regulation) vide order dated 17.09.2003 to enquire into the alleged irregularities by the said broker.
2.0 Enquiry Proceedings
The enquiry officer after conducting enquiry in the manner provided in the enquiry regulations submitted his report on 14.01.04. The enquiry officer found as under:
(a) That the said broker has not disputed the transactions undertaken by him in the shares of GTB as shown in the findings of the investigation and that the said trades were executed on behalf of their clients in the normal course of business.
(b) That there were 6 synchronized trades in the scrip of GTB on different dated during the period 18.11.2000 to 03.12.2000. On first four occasions 5.2 lac shares of GTB were purchased by the member for his sub broker Shirish N Manihar. The client for the sub broker was Classic Credit Ltd. which is a Ketan Parikh Investment Company. In the last two instances the member broker had sold about 2 lakh shares of GTB and the purchasers were the Ketan Parikh entities eg. Classic Share & Stock Broking and Triumph International.
(c) That the trades executed by the said broker on 11.04.2000 were synchronized trades.
(d) That they buy and sell orders in respect of the shares of GTB on NSE and BSE on 11.04.2000 were placed within close proximity in time i.e. within a span of 1 to 39 seconds on NSE and 4 to 39 second on BSE. Further, all the buy and sell orders were for the same quantity and same price.
(e) That the said orders were not placed at an increasing price which was normally to be expected from a seller and that from the proximity of buy and sell orders and the fact that the trades were executed at a fixed price, it can be reasonably inferred that these trades were synchronized transaction at a pre determined price and between pre arranged parties.
(f) That the said transactions by the said broker interfered with the fair and smooth functioning of the market in the scrip of GTB and also with the price discovery mechanism on the stock exchange.
(g) That on 11.04.2000 the said broker bought 2,00,000 shares of GTB on behalf of DKG Buildcon, HT Ferro, V Impex on NSE at a price of Rs.83/- and 50,000 shares on behalf of DKG Buildcon and Classic Credit on BSE at Rs.83/-.
(h) That all buy and sell order have been placed within close proximity of each other i.e. within a gap of 1 to 39 seconds on NSE and 4 to 39 seconds on BSE. He further found that 78 out of 115 buy orders for the scrip of GTB placed by the said broker were at the same rate of Rs.83 and that this cannot be coincident.
(i) That the pattern and manner of trading in the scrips and synchronization of such large number of trades shows that the same was possible only with the active participation of the said broker.
(j) That such synchronization is not possible without prior understanding to place an order in the system and to match the order so placed.
In view of the above findings, the enquiry officer recommended that the Certificate of Registration of the said broker may be suspended for a period of four months.
3.0 Show Cause Notice and Hearing
A show cause notice under Regulation 13(2) of enquiry regulation was issued to the said broker on 05.02.2004 to which the said broker submitted their reply through their advocates M/s Wadia, Ghandy & Co. on 20.02.2004. In their reply the said broker made the following submissions:
(a) That the enquiry report is inherently erroneous, untenable in fact and in law and no action ought to be taken in respect thereof or pursuant thereto, inter alia, since-
(i) They were not given inspection of the relevant document, which were referred to and relied upon by enquiry officer and which formed the basis of the said enquiry report, despite numerous requests and reminders for such inspection as, inter alia, set out in their reply dated 03.12.2003.
(ii) They were not even given any opportunity to confront or cross – examine IBSL or their client namely, Asian Development Bank even though the so called investigation report and the said enquiry report purported to hold that they had entered into synchronized deals / trades with IBSL despite the fact that they repeatedly requested for an opportunity to do so as, inter alia, stated in their reply dated 03.12.2003.
That the enquiry report did not deal with their replies dated 20.10.2003 and 03.12.2003.
(iii) That the enquiry report purports to hold that even trading in the normal prescribed computerized trading system can be held to be “synchronized” trade and punishable just because buy and sell orders are alleged to be input by different unconnected brokers at the same rate with a gap of few seconds.
(iv) That the Enquiry Report completely ignored the indisputable documentary evidence which proved that all the investors got the price which they wanted as evidenced by the trade logs, which show that their orders were executed against more than a hundred sell offers of different parties.
(v) That the findings namely that impugned transactions were in violation of Circular dated 14.09.1999 is factually totally incorrect. It was contended that the said circular did not ban negotiated deals and that the said circular only provide that negotiated deals shall be executed only on the screens of the stock exchanges in the price and order matching mechanism of the stock exchanges, just like any other normal trades. That the transactions were done only on the screens of the stock exchanges in the price and order matching mechanism of the stock exchanges just like any other normal trades even as per the findings of the Enquiry Report. Therefore, the transactions are deemed to be negotiated deals which they were not, none the less they were permitted transactions and no question could arise of penalizing them for the same.
(vi) That the finding that the impugned transactions were synchronized trades is based on the documents of which no inspection was given (statements by IBSL and trade and order logs of the stock exchanges) and that they had been denied opportunity to confront IBSL and / or ADB, namely, the parties with whom they had allegedly synchronized / negotiated deals.
(vii) That by the enquiry report a virtual death sentence of a four months’ suspension is recommended by the Enquiry Officer on the false findings that they have tampered with the price discovery mechanism, transparency and the stock exchanges’ system completely ignoring the admitted facts that all their impugned transactions were done through the transparent stock exchange prescribed price discovery system of computerized screen based trading only. Nothing has been stated in the Enquiry Report as to how the Enquiry Officer jumped to such conclusions. There was nothing secret or non transparent about any of their transactions. None of their impugned transactions could be held to have defeated the stock exchange system, since they were done in and through the stock exchange system and the stock exchange records of the actual trades done by our clients prove that the transactions were in the price and order matching mechanism only.
(viii) That the “findings of investigation” which were enclosed with the show cause notice dated 29.09.2003, are unsupported by any evidence or documents. Though the said “findings of investigation” refers to documents such as “Trade and Order Logs” as being the basis thereof and though they have repeatedly requested for inspection thereof, no inspection. However, the enquiry report traded the said “findings of investigation” as sacrosanct and holds them guilty on the basis of alleged facts and data culled from without access to. This is a gross breach of the fundamental principles of natural justice.
(ix) That it is false and misleading to insinuate that they have not disputed the transactions “as shown in the findings of investigation” furnished with the said show cause notice dated 29.10.2003. That they have categorically and repeatedly stated that the said “findings of investigation” show the alleged details of transactions by them based on some other documents such as trade and order logs of the exchanges, which documents are not accessible by them and the enquiry officer did not give them inspection thereof despite repeated requests and therefore they could neither confirm nor positively dispute the alleged transactions details / data in the said “findings of investigation”. That they have specifically disputed that the said “findings of investigation” gives the true and correct picture of our client’s transactions. That the data and document available to them from the records of the stock exchanges themselves the details of their impugned transactions as shown in the “findings of investigation’ is totally incorrect. It was contended that the “findings of investigation” show as under :
(a) 9 purchase transactions, was in fact 126 different transactions;
(b) transactions at Rs.83/- per share; were in fact 126 different transaction at different rates ranging from Rs.79/- to Rs.83/- per share;
(c) the selling broker to all client’s transactions as being IBSL only, is obviously false since of the 126 transactions, at least 64 transactions were for odd quantities for which IBSL could not have been or at any rate is most unlikely to have been the selling broker.
(x) That all their transactions were within the price band of the day and were in the price and order matching mechanism only. All of the said transactions were genuine, valid and duly concluded by payment and delivery through the normal settlement system only. No question arises of any “synchronized trades”.
(xi) That The enquiry report alleges that :
“From the finding of investigation, I find that on 11.04.2000 the GTB scrip opened at Rs.74/- and till 10:29 it was hovering at around Rs.74-76. At 10:29 NH Securities, a Ketan Parekh broking company, placed buy order @ Rs.78/-for 5000 GTB shares which immediately took the price of Rs.78. At 10:30:56 NH Securities placed another buy order for 25000 GTB shares @ 78 our of which orders for around 15000 shares were executed. At 10:31:09 NH Securities placed another buy order for 25000 GTB shares @ Rs.80 per share which took the price to Rs.82 and 15 minute later NH Securities took price to Rs.83 per share by placing a buy order @ Rs.83/- per share for 25000 shares”.
With regard to finding in the enquiry regarding transactions on 11.4.2000, it was contended that the said allegations are totally new and were not part of the show cause notice dated 29.09.2003 or the “findings of investigation” annexed thereto. It is therefore obvious that full “findings of investigation” has been suppressed and withheld from them, which is totally contrary to natural justice. No documents have been disclosed on basis of which the said allegation were made, against the natural justice.
(xii) It was contended that the “findings of investigation” erroneously and incorrectly alleged that the purchase of GTB shares on 11.04.2000, IBSL was the selling broker. They reiterated that based on the stock exchange’s own records as aforesaid, they had 126 separate transactions of which at least 64 transaction could not have with IBSL as the selling broker since such transactions were for odd quantities.
(xiii) That no documents were revealed to them which could substantiate the allegation that IBSL was the selling broker for all their transactions in GTB shares on 11.04.2000 and the enquiry officer alleged that no such documents were available. It was contended that all their transactions were not at the rate of Rs.83 per share as falsely alleged, since their 126 separate transactions were at rates ranging from Rs.79 to Rs.83/- per shares.
(xiv) The enquiry report alleges that:
With regard to finding that the closing price for the day was Rs.84/- on the said dates.
There it was stated that no such statement in the copy of the “findings of investigation” and no document was revealed to them to support the said allegation. The allegation that the market price of GTB shares on 11.04.2000 ranged from Rs.74/- to Rs.84/- per share prove that their transactions which ranged from Rs.79 to Rs.83 per share as aforesaid were squarely within the price range of the day and were not at the top or bottom limit or the circuit filters.
(xv) The said enquiry report alleged that:
“Thus till IBSL traded on 11.04.2000 the price of the GTB scrip moved from Rs.74 to 83 with orders size varying from 5000 to 25000. In one order which was placed at 10:30:56 by NH Securities to 25000 shares @ 78 our of which on 15000 share were executed. However, in case of IBSL, I find that 1,00,00,000 shares of GTB were sold in BSE by placing sell order in lots of 25,0000 to 50,0000 and 75,0000 at Rs.83 and in NSE, similar trades at same price were in order lot of size mostly 250000 shares”
It was alleged that the findings of enquiry report are contradictory to the “findings of investigation”. Contrary to what is stated in the enquiry report, the “findings of investigation” alleged that –
1) All ISBL’s trades were at Rs.83/- per shares only (and not Rs.74 to Rs.83 as alleged in the Enquiry Report).
2) IBSL’s order sizes were between 2 lac to 7.5 lac shares (and not 5000 to 25000 as alleged in the enquiry report).
3) NH Securities placed buy order in NSE at 12:23:43 and 12:23:59 (and not at 10:30:56 as alleged in the enquiry report) and the said orders were for total of 5 lac shares at Rs.83 (and not for 25000 shares at Rs.78/- as alleged in the enquiry report)
4) IBSL’s sell orders in BSE were in lots of 2.5 lacs, 5 lacs and 7.5 lacs (and not 25000, 50000 and 75000 as alleged in the enquiry report).
It was further contended that the allegation, NH Securities had a transaction at 10:30:56, is a new allegation and is not contained in the show cause notice dated 29.09.2003.
(xvi) The said broker replied to the following finding in the Enquiry report:
“IBSL has stated that ADB had instructed them to sell entire 1 crore share at Rs.83. The above show that it is not possible to sell or buy a scrip at same price of Rs.83 except in case where such orders are placed simultaneously at same price and quantity with prior understanding or arrangement which is commonly known as synchronization of trades”.
The statement of IBSL regarding ADB had ever been revealed or disclosed to them. They have not been given any opportunity to confront or cross examine IBSL or ADB in this regard. The said broker stated that by implication, it is alleged that ADB is involved in the alleged synchronization of deals and it was on ADB’s directions and that such deals were synchronized but no opportunity to confront or cross examine ADB was given. It was contended that amounts to a gross breach of natural justice.
Broker contended that the instructions given by ADB to IBSL are totally irrelevant to the charge of “synchronization” between them and IBSL.
(xvii) Therefore broker submitted that it is obvious that the Enquiry Report is based on the factually false allegation that :
- all of their transactions were with IBSL.
- all of their transactions were at a price of Rs.83 per share.
Broker therefore contended that the of synchronization of trades between them and IBSL is false and untenable.
(xviii) Broker contended that reproducing a part from their reply and stating that they were aware of “such practice” does not establish any wrong doing on their part.
(xix) Broker reiterated that all their transactions in GTB shares on 11.04.2000 were not with IBSL nor were they all at Rs.83 per share. Broker contended that they are not aware of and do not admit the alleged transactions of the other third parties as therein stated.
(xx) Broker denied that on 11.04.2000 they bought only 2 lakh shares of GTB on the NSE and only 50,000 shares on BSE as incorrectly alleged. Broker stated that they bought 20 lakh shares of GTB on NSE and 5 lakh shares of GTB on BSE, for 5 clients as stated at page 18 of the Enquiry Report and not for 4 clients as incorrectly alleged.
(xxi) Broker denied ever stating that they had only 9 transactions in GTB. Broker contended that they had 126 separate transactions as proved by the trade log. Broker contended that the reproduction in the Enquiry Report of the trade logs submitted as Annexure 8 to their reply dated 03.12.2003 was incomplete and the last page thereof has been overlooked.
(xxii) With regard to the allegation that the trade logs submitted by them show that buy and sell orders were placed in the close proximity of one to 39 seconds on the NSE and 4 to 39 seconds on the BSE. Broker contended that there was total non application of mind. The said trade logs do not themselves show any details of time or otherwise of the buy and sell orders. They stated that they had not been given inspection of any documents to substantiate this allegation.
(xxiii) Broker contended that the finding of enquiry officer that 4 to 39 seconds is too close a proximity for placing orders and that 78 buy orders were placed at Rs.83 per shares “cannot be co-incident” shows that the Enquiry Officer is not conversant with the trading system and practice of the stock exchange. Broker contended that they were not aware as to what 78 buy orders are referred to the Enquiry Officer. Broker stated that they executed the trades instructed by their clients and that their traders in normal prudent manner first watched the market movement, range and depth. Order details were pre entered but were input in the system only at appropriate times keeping in view the sell offer rates and patterns. To hit the enter key on the trading terminal only take a fraction of a second. In fact a gap of 39 seconds is considered in the exchange to be too long for effective trading to clinch good offers in the normal trading system. Broker contended that considering the large number of their order, inputs are obviously mere co-incidence and cannot lead to any conclusion of synchronization. Broker further stated that in the computerized trading system the time and order matching mechanism cannot be defeated unless the buy and sell order are placed within less than 1/164th of a second. Broker further argued that in both of the said cases their buy order was alleged to be first in time and hence only IBSL can explain how its sell order was so soon after its buy order.
(xxiv) With regard to the finding of the Enquiry Officer that sellers should keep increasing their offer prices and buyers should keep reducing their offer prices, the broker contended as under:
(a) It is strange that if a broker pushes price up or down, then he is held guilty of manipulating the market. Yet they are being accused of not pushing the prices down.
(b) If the sellers keep increasing their offer prices and buyers keep reducing their offer prices, then no contracts would be concluded since contracts could only click in the Exchange’s computer system when buy and sell offer rates match.
(c) When large quantities are sold, prices become very flexible and may move up or down. A broker / dealer is required to constantly monitor the price and quantity movement and make a judgement call as to what rate to offer, keeping in mind that the paramount object is to fulfil the constituents order.
(d) On one hand, the Enquiry Officer alleges that NH Securities was guilty of raising the price from Rs. 74/- per share to Rs.83/- per share and on the other hand seems to hold that IBSL should have pushed the price further and is guilty of not increasing its offer prices.
(e) Their buy orders, as aforesaid, were limit orders, as per their constituent’s instructions and they resulted in 126 separate transactions at various different rates ranging from Rs.79 per share to Rs.83 per share. Even the trade logs which were down loaded from the stock exchange’s, as aforesaid, shows how each of their buy orders got executed in the price and order matching mechanism of the Exchanges.
(f) The Enquiry Officer’s total confusion and non application of mind is highlighted by his allegation that in our client’s said reply dated 03.12.2003 our clients had stated that our clients received order instructions from ADB.
4.0 Consideration of issues
I have considered the investigation report, the report of the enquiry officer the replies and submissions of the said broker and other material on record. I find that the following issues arise for consideration:
A. Whether the said broker had indulged in synchronized trading in the shares of GTB on 11.04.2000?
I note that on 11.4.2000, the said broker had entered into trades with IBSL in the scrip of GTB. I also note that in so far as the buy orders in respect of 20 lakh shares on NSE and of 500000 shares on BSE are concerned, the quantity and price offered by the said broker was the same as the quantity and price offered by IBSL and that the time difference between placement of buy order by the said broker and sell order by IBSL was only a few seconds. These facts were not disputed by the said broker. The above facts give rise to a strong suspicion that the said trades were synchronized with each other i.e. there was a meeting of minds between IBSL and the said broker prior to the execution of the said trades and that these were done with the intention of defeating the price and order matching mechanism of the stock exchanges in order to ensure that other investors did not have a fair chance to participate in the trading in the shares of GTB at that time on that day.
In their reply, the said broker has stated that:
(a) The said trades executed by them were in the ordinary course of business and upon instructions from their clients.
(b) The said trades were genuine transactions duly concluded by payment and delivery and done through the normal settlement system.
(c) Besides the trades with IBSL, they also had trades in the shares of GTB with other brokers and at prices that were in the range of Rs.79/- to Rs.84/-
(d) No documents have been furnished to them to prove that IBSL was the selling broker for all their transactions in the share of GTB on 11.4.2000.
(e) Statements of IBSL regarding instructions of ADB are unjustly being used against them.
(f) By implication, the client viz. ADB is involved in the alleged synchronization of the deals.
(g) It cannot be said that 4 to 39 seconds is too proximate a time for placing orders.
I note that the said broker merely carried out the instructions of his clients and that there is no direct evidence regarding meeting of minds between the said broker and IBSL. Therefore, I find that synchronized trading by the said broker with IBSL is improbable. However, I also note that the clients of the said broker on behalf of whom they purchased shares of GTB on 11.4.2000 included entities associated with and controlled by Shri Ketan Parekh. The said entities were found to have indulged in manipulative transactions in several scrips including that of GTB.
I also find no merit in the contention of the said broker that they have not been offered an opportunity to cross examine IBSL or ADB and that no documents have been furnished to them to show that IBSL was the counter party to their trades. The findings of the investigation have been communicated to them these include the trade and order logs in respect of GTB on 11.4.2000.
B. Whether the transactions by the said broker in the shares of GTB on 11.04.2000 constitute a violation of the SEBI Act or the Rules and Regulations framed thereunder?
I also 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
(1) Integrity…
(2) Exercise of due skill and care: A Stock broker shall act with due skill, care and diligence in the conduct of all his business
(3) Manipulation: A Stock broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains
(4) 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.
(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…”
I have noted the submissions of the said broker that they acted as per the instructions of their clients; however, in doing so, they were also required to comply with statutory requirements such as the Code of Conduct. As intermediaries in the stock market, a duty was cast on them to refrain from facilitating manipulative activities in the market. The manner and pricing of the transactions should have alerted the said broker to the possibility of market manipulation and they should have advised their clients against continuing the said transactions in the said manner; but they failed to do so. They have thus failed to comply with the provisions of the Code of Conduct for Stock Brokers and thereby also violated Regulation 7 of the Broker regulations which stipulates that all stock brokers shall abide by the code of conduct.
I note that there is no finding in the enquiry report that the said broker has violated any of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995. Further, the charge of synchronization was found to be improbable.
Whether the penalty recommended by the enquiry officer should be imposed on the said broker?
I note that the Enquiry Officer has recommended a penalty of suspension of certificate of registration for a period of 4 months. I have found supra and it is also the finding of the Enquiry Officer that the said broker has violated the Code of Conduct for stock brokers.
In the light of the above, I do not find any violation of clause A (4) which prohibits a stock broker from indulging in manipulative practices, rather, I find that the said broker in failing to exercise due diligence has violated Clause A (2) of the Code of Conduct which enjoins a stock broker to act with due skill, care and diligence. In the light of the findings supra, I am of the opinion that the recommendation of the enquiry officer is excessive.
In the facts and circumstances, I find that it would be sufficient to meet the interest of justice if a warning is issued to the said broker.
5.0 Order
Therefore, I, in exercise of powers conferred on me vide Regulation 13(4) of the enquiry regulations read with Section 4(3) of the SEBI Act do hereby warn M/s. Indsec Securities and Finance Limited to be more careful in future while undertaking transactions in securities on behalf of their clients. I also advise them to note that any future lapse on their part in complying with the requirements of the Code of Conduct for stock brokers would invite stringent action.
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G.N. Bajpai
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Date: 10 September. 2004
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Chairman
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| Place:MUMBAI |
SECURITIES AND EXCHANGE BOARD OF INDIA |