BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[Adjudication Order No. AP/AO-17/2006-07]
{Under Rule 5 of SEBI (Procedure Under Rule 5 For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995, Read With Section 15-I of Securities And Exchange Board Of India Act, 1992}
In the matter of Investigations in
KWALITY DAIRY (INDIA) LTD.
AND
In respect of
SHRI SANJAY BIYANI, STOCK BROKER MPSE,
And,
SUNIL SHARES & STOCK BROKER LTD.,
STOCK BROKER, MPSE
1.0 Pursuant to the investigation in the scrip of Kwality Dairy (India) Ltd. (hereinafter referred to as “KDIL”), Securities and Exchange Board of India (SEBI) appointed Mr. K.R.C.V. Seshachalam, Dy. Legal Advisor as the Adjudicating Officer under Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') read with Section 15 I of SEBI Act, 1992 to inquire into and adjudge the alleged practices of the Shri Sunil Biyani, Broker, MPSE (hereinafter referred as ‘Noticee no.1’) and Sunil Shares & Stock Broker Ltd. (hereinafter referred to as 'Noticee no. 2'), that are prohibited under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred as 'PFUTP') and SEBI (Stock Broker and Sub Broker) Regulations, 1992, for which penalty is imposable under Section 15HA and 15HB of SEBI Act, 1992. The aforesaid appointment was conveyed vide order dated August 4, 2004 and vide order dated December 28, 2004, the matter was transferred to Mr. A. Chandrasekhar Rao. Subsequently vide order dated December 20, 2005; the matter was transferred to the undersigned.
2.0 The show cause notices (SCN) both dated October 5, 2005 under Rule 4(1) of the said Rules were issued by AO, Mr. A. Chandrasekhar Rao to the Noticees, communicating the details of the charges levelled against them. In response to the SCNs, Noticees did not file any reply.
3.0 Under the aforesaid circumstances, the undersigned thought it fit to hold an inquiry in the matter. Accordingly, the notices of inquiry were issued to Noticees vide letters dated December 27, 2005, fixing the date of inquiry on January 13, 2006. Copies of the SCNs and its annexures were also enclosed in this notice of inquiry, and the said notices were got served through the MPSE, Indore.
4.0 The Noticee no.1 Mr. Sanjay Biyani appeared for inquiry on January 13, 2006 and made submissions. During the course of inquiry Mr. Sanjay Biyani also filed reply dated January 10, 2006. He was also allowed to file details of his trading in other scrips to justify that trading in the scrip of KDIL was not the only trading on squaring off basis, which he was doing as broker/client. However, no such details are filed by him. On the other front, the Noticee no. 2 did not appear for the inquiry nor any reply or a request for adjournment is filed. It is observed that in respect of Noticee no. 2, the notice of inquiry was duly served through MPSE. In my opinion the Noticee no. 2 has failed to appear before me and in terms of Rule 4 (7) of Adjudication Rules, I think it proper to proceed with inquiry.
5.0 BACKGROUND:-
Investigations revealed that KDIL suffered loss for the years ended March 31, 2000, March 31, 2001, March 31, 2002 and March 31, 2003. KDIL earned a net profit of Rs.1.06 million on turnover of Rs.34.48 million during the quarter ended June 30, 2003. Investigations revealed that the total volume traded during the period of investigation was 3403923 shares. During the period February 5, 2003 to March 31, 2003, the scrip was infrequently traded with a very small volume and from April 2, 2003 there was a price rise with increasing volumes. From April 2, 2003 to April 11, 2003, there was price rise in the scrip from Rs.3.05 to Rs.11.25 and from April 29, 2003 to June 6, 2003 the price rose from Rs.11.70 to Rs.46.95. It was observed that the total volume of 3403923 shares were traded during the period April 23 to June 6, 2004 when some of the entities were involved in trading by entering into circular / reversal of trades. Investigation revealed that during the period April 23, 2003 to June 6, 2003, around 25% of the volume of trading was due to circular trades / reversal of trades among different groups of clients and brokers. The clients and the member-brokers of each of these groups including Noticee no.1 and 2, bought and sold the shares among themselves by squaring off the deals often the same day through the same brokers(s) in a circular manner.
5.1 In view of the above it was alleged that Noticees have acted in violation of the provisions of Regulation 4 (a), (b), (c) and (d) of the SEBI (Prohibition of Fraudulent & Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred to as “FUTP Regulations, 1995”) and Clauses A(1) to A (5) of Code of Conduct as prescribed under Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations 1992 (hereinafter referred as ‘Brokers Regulations), for which penalty is imposable under Section 15HA and 15HB of the SEBI Act, 1992.
6.0 I now proceed to record my observations/findings hereunder:
6.1 I observe that the total volume traded during the period of investigation was 3403923 shares. During the period February 5, 2003 to March 31, 2003, the scrip was infrequently traded with a very small volume and from April 2, 2003 there was a price rise with increasing volumes. I further observe that from April 2, 2003 to April 11, 2003, there was price rise in the scrip from Rs.3.05 to Rs.11.25 and from April 29, 2003 to June 6, 2003 the price rose from Rs.11.70 to Rs.46.95. In the light of the said facts, I do not find any merit in the submissions of Noticee no. 1 that the ultimate prices of the shares are not affected due to their trading in the scrip. The question whether their transactions are involved or not, is answered later in the order.
6.2 I further observe that out of the total volume of 3403923 shares, 3288016 shares were traded during the period April 23 to June 6, 2004 when some of the entities were involved in trading by entering into circular / reversal of trades.
6.3 I note from the analysis of trading that during the period 23rd April, 2003 to 6th June, 2003 around 25% of the total volume of trading was due to circular trades / reversal of trades among different groups of clients and brokers. I observe that the clients and the member-brokers of each of these groups bought and sold the shares among themselves by squaring off the deals often the same day through the same broker(s) in a circular manner.
6.4 I observe that the artificial volume generated through these circular deals / reversal of trades were mainly during April 23, 2003 to June 6, 2003 and this volumes on most of the days was around 20-25% of the day volume and on some days between 30-40%.
6.5 The circular trades of the major member-brokers and their main clients are given as below:
|
Date
|
Bought Qty
|
Bought by
Client (Broker)
|
Bought From Client (Broker)
|
Sold Qty
|
Sold by Client (Broker)
|
Sold To Client (Broker)
|
|
23.4.03 to
6.6.03
|
731764
|
Sanjay Biyani
(Sanjay Biyani)
(Noticee no. 1)
|
Abhishek Khare
(Sunil Shares and Stocks)
(Noticee no. 2)
|
731764
|
Sanjay Biyani
(Sanjay Biyani)
|
Abhishek Khare
(Sunil Shares and Stocks)
|
|
25.4.03 to 6.6.03
|
90427
|
Chirag Pujara
(Bonanza Stock Brokers Pvt. Ltd)
|
Sayyed Mustafa
(Bharti Thakkar)
|
98621
|
Chirag Pujara
(Bonanza Stock Brokers Pvt. Ltd)
|
Sayyed Mustafa
(Bharti Thakkar)
|
|
2.6.2003
to 6.6.03
|
46575
|
Laxman P Patel
(Ramaben Samani)
|
Chirag Pujara
(Bonanza Stock Brokers Pvt. Ltd)
|
27650
|
Laxman P Patel
(Ramaben Samani)
|
Chirag Pujara
(Bonanza Stock Brokers Pvt. Ltd)
|
|
2.6.2003
to 6.6.03
|
41775
|
Sayyed Mustafa
(Bharti Thakkar)
|
Laxman P Patel
(Ramaben Samani)
|
24497
|
Sayyed Mustafa
(Bharti Thakkar)
|
Laxman P Patel
(Ramaben Samani)
|
6.6 An extract of integrated trade and order log giving examples of these circular/ reversal of trades as given in the Annexure 1 and 2 of SCNs, shows that order quantity, price and timings of placing orders on both the buy and sell sides match with each other. I observe that, Noticee no.1 in his proprietary trading in the scrip had entered into reversal of trades with the client of Noticee no. 2, which resulted in creation of artificial volumes. The Noticees traded amongst them in a circular pattern intra-day i.e. the shares being bought / sold by one entity were sold / bought by another entity in the group through a number of buy and sell deals.
6.7 The substantial volume during the period from April 23, 2003 to June 6, 2003 was due to fictitious trades by the brokers of Madhya Pradesh Stock Exchange (MPSE), Sanjay Biyani (Noticee no.1) and M/s Sunil Shares and Stock Pvt. Limited (Noticee no.2 ), who traded through MPSE Securities Ltd. (Clg.No 296), a subsidiary of MPSE. The Noticee no. 1 also acted as a client and traded through his own broking firm and Noticee no. 2 traded for the ultimate client Abhishek Khare. Both these clients successively bought from and sold the shares to each other several times intra day, thus not taking or giving delivery during the period of investigation. These deals continued for 32 days and involved a total of 731764 shares. All the orders for the said trades were placed within 0 – 34 seconds of each other. Out of a total of 4239 trades of MPSE Sec. Ltd., 4116 trades were executed between the Noticees.
6.8 During the course of investigation, the Noticees who were given opportunity to offer their comments for entering into transactions which were apparently in the nature of circular trades/ reversal of trades and thus created artificial volume and violated the SEBI Regulations but no reply was received from them. The non-cooperation by the Noticees is found to be in blatant violation of the provisions of law concerning investigations, as set out in the SEBI Act. This is serious because the Noticees are registered intermediaries and one of them had indulged in proprietary trading on circular basis.
6.9 The analysis of the integrated Trade and Order Log – Reversal of trades by the Noticees reveals that order quantity, price and timings of placing orders on both the buy and sell sides matched with each other. I also observe that in a scenario where several other member-brokers were also found to be active during this period, the orders placed by the brokers trading on behalf of these clients matched with those of each other which are nothing but their concerted effort and manipulative intent. I observe the same to be more than a coincidence. The submission of Noticee no. 1 , that he was doing just a jobbing trading in the shares of KDIL and was not aware about who else are involved, can not be accepted since the nature of trading as observed in this case where trades were synchronised for a continuous period of 32 days involving a total of 731764 shares which got matched in 0 to 34 seconds, leaves no doubt about the manipulative intent of the parities.
6.10 I find such transactions wherein the buy and sell orders were matched in terms of order quantity, price and the time of punching orders are synchronised trades which are highly irregular and defeat the very purpose of normal order-matching system in the price discovery process in the exchanges. It is proved that Noticee no. 1 was placing orders for himself and the other side was always the client of the Noticee no. 2 and they executed total 4116 trades out of total 4239 trades through MPSE Securities Ltd., amongst them on square off basis during the period of investigation. It is also the fact that price of the shares of KDIL rose from Rs. 3.88/- to Rs. 44.87/- during the period from 3/4/03 to 6/6/03 when Noticees have dealt in the shares on square-off basis. The basis of holding these transactions as synchronised trades is in conformity with the principles as laid down by SAT in Nirmal Bang Securities Pvt. Ltd (SAT-Appeal no. 54-57/2001). In the said Order the Hon’ble SAT has enumerated the basis for establishing the charge of matched trades viz., complete matching of order time, order quantity and order rate over a period of time. Drawing from the said wording from SAT, the trading pattern should satisfy the following points in order to prove the trade as synchronized:
i. too many matched trades,
ii. over too long a period,
iii. too many transactions when both the parties enter buy and sell orders for the same quantity of shares at the same order price,
iv. orders placed simultaneously so as to leave no chance for any third party to intervene
v. nexus between the parities either by way of any connections or way of meeting of minds
6.11 Therefore, I find that the said transactions are in violation of Regulation 4 of the FUTP Regulations, 1995 which inter-alia reads as under:-
Prohibition against market manipulation.
4 No persons 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 markets;
(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 fluctuation in the market price of securities.
6.12 The contention of Noticee no. 1, that as the transactions were done in BOLT System they were not aware of the nature of transactions, is not acceptable especially when these transactions were carried out continuously from April 23, 2003 to June 6, 2003 and that to majority of which in synchronization. Out of a total 4239 trade through MPSE Securities Ltd., 4116 number of trades were executed between the Noticees. The volume undertaken by the Noticees was also very alarming. Even if, for a moment, the contention of the Noticee no.1 that the identity of the counter party can not be known is accepted, then the nature and the volume of the trading should have, in all probability, alerted the Noticees to the effect that trading activities are far from normal. In other words it is an omission on the part of the Noticees to check his self-dealings and the dealings of its client, which were being conducted in a deceitful and fraudulent manner. The said dealings should have raised suspicion in the mind of the broker and it should have taken steps to prevent the same. Definitely the Noticees being the brokers have failed to exercise due care and diligence in their dealings with the client and allowed its systems to be misused. There can not be any defence of Noticee no. 1 that they were not aware of the intention of their client since it was the Noticee no.1 himself, trading in his proprietary account. The findings can be stretched to the extent, although no nexus is found between the Noticee no. 2 and its client, that without its (Noticee no. 2) active involvement the trades of above nature would not have been possible. There is another point worth mentioning here that the Noticee no. 2 did not cooperate during the investigation carried out by SEBI and also during the present proceedings. There is a strong possibility that the Noticee no. 2 purposefully and in order to avoid the regulatory interrogation, did so. Otherwise also the nature of trading undertaken by the noticee no.2 for its client clearly indicates that it was with the knowledge of the broker. Knowledge has to be gathered from the circumstances, especially when the noticee is avoiding and hiding from the regulator, and the circumstances are so revealing, I have left with no doubt that Noticee no. 2 was acting in tandem with its client.
6.13 The aforesaid conduct of the noticees is also in violation of the provisions of Clauses A (1), A (2), A (4) & A (5) of the Code of Conduct under Schedule II, read with Regulation 7 of Brokers Regulations, which inter-alia provide as under:
Code of Conduct for Brokers – Schedule II
A. General
(1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business.
(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) ……
(4) Malpractices: 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 smith 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 rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.
6.14 In view of the aforesaid observations, I am satisfied that this is a fit case to impose adjudication penalty against the noticees under Section 15HA and 15HB of SEBI Act. The Sections read as under:
"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."
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.]
7.0 To determine the quantum of penalty under Section 15HA and 15HB, the undersigned considered the following factors as provided in the Section 15J of SEBI Act, 1992 viz. (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 and; (c) the repetitive nature of the default. However, from the material on record it is not possible to arrive at a figure of loss caused to the investors, but certainly the default by the noticees is repetitive in nature, as they have been found indulging in synchronized trading on continuous basis. The aforesaid defaults adversely affect the normal price discovery mechanism of the securities market and in the process, investors suffer a lot. Such default should be viewed seriously as it affects and interfere with the fair and smooth functioning of the market. The artificial volumes such as noticed in the present case, coupled with significant price movements/fluctuations, give an impression of trading which in fact is not real and the general investors at large get induced to deal in securities. In order to protect the interest of investors in the securities market, this type of activity should be curved and dealt firmly. A registered intermediary is expected to maintain high level of integrity and exercise due skill, care and due diligence while dealing in the market, which is found lacking in the instant matter.
8.0 Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a penalty of Rs. 10,00,000 (Ten Lacs only) each on Shri Sunil Biyani, Stock Broker, MPSE (‘Noticee no.1’) and Sunil Shares & Stock Broker Ltd., Stock Broker, MPSE ('Noticee no. 2') under section 15HA and 15HB of SEBI Act, 1992.
9.0 Shri Sunil Biyani, Stock Broker, MPSE (‘Noticee no.1’) and Sunil Shares & Stock Broker Ltd., Stock Broker, MPSE ('Noticee no. 2') shall each pay the said amount of penalty by way of demand drafts 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 Shri P K Nagpal, Chief General Manager, Investigation, ID-1, Mittal Court, 1st floor, B- Wing, 224, Nariman Point, Mumbai 400 021.
10.0 This order of adjudication is made and passed on 14th day of September 2006 at Mumbai.
AMIT PRADHAN
ADJUDICATING OFFICER