In the matter of investigation in

 

KLG Systel Ltd.

 

AND

 

In respect of

 

M/s Nelliyan Stocks, Proprietor Mr. V. Arunachalam, sub broker (SEBI Registration No. INS 230643715)

 

1.0             Background :

 

1.1             Vide order dated November 02, 2005 issued by Securities and Exchange Board of India (hereinafter referred to as “SEBI’), I was appointed as the Adjudicating Officer under Rule 3 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 to enquire into and to adjudge under Section 15HA and Section 15HB of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act”), the alleged violation of Regulations 4(1), 4 (2) (a), (b) & (g) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, Clause A(1), (2) & Clause D(1),(4) & (5) of Code of Conduct for sub brokers under Schedule II of regulation 15 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as “Broker Regulations”) and clauses A(1), (2), (3), (4) & (5) of Code of Conduct for brokers specified under Schedule II of Regulation 7 of Broker Regulations by M/s Nelliyan Stocks, Proprietor Mr. V. Arunachalam, sub broker (SEBI Registration No. INS 230643715) of M/s. ISE Securities and Services Ltd. and broker – Coimbatore Stock Exchange Ltd. (SEBI Registration No. INB 210539712) in the matter of trading in the shares of M/s KLG Systel Ltd.  NS has an office at 127, 1^st floor, D.B. Road, R.S. Puram, Coimbatore – 641 002.

 

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

 

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

 

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

 

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

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

2.0             Notice / Reply / Personal Hearing

 

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

 

2.2             NS vide letter dated February 08, 2006 submitted that VM was an absolute client and it had taken all requisite precautionary measures including due diligence, know-your-client details and risk mitigation / management measures. It was submitted that it is not possible for any broker / sub broker to know the counter-party or whether a particular order has been placed with honesty, integrity, fairness or whether there was any collusive arrangement with any other client or broker or sub broker and that NS executed all client orders in an impartial, judicial, honest and integral manner. It was also submitted that NS had never faced any significant delivery or payment default and that all orders had been unilaterally placed by VM. NS further submitted that therefore it had not infracted upon any Regulations as envisaged under Schedule II of Regulation of Clause A(1) and D(1), (4) and (5) of Broker Regulations.

 

It was submitted that the allegation of NS conniving with any other sub broker was merely an assumption which was circumstantial in nature and had not been proved beyond doubt. Therefore violations of PFUTP Regulations as mentioned in the SCN had also been denied.

 

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

 

2.4             On March 27, 2006, Mr. V. Arunachalam, proprietor of NS appeared before me and reiterated his earlier submissions made vide letter dated February 08, 2006. He further mentioned that a special inspection was conducted by Inter Connected Stock Exchange of India and a penalty of Rs.7000/- was imposed on NS.

 

2.5             Show cause notices were also issued to KC and VM on January 23, 2006 asking them to show cause as to why action should not be taken against them for the alleged violations as mentioned in the investigation report which was provided to them. It was alleged that KC had violated regulations 4(1), 4 (2) (a), (b) & (g) of PFUTP Regulations, Clause A(1), (2) & Clause D(1), (4) & (5) of Code of Conduct for sub brokers under Schedule II of regulation 15 and clauses A(1), (2), (3), (4) & (5) of Code of Conduct for brokers specified under Schedule II of regulation 7 of Broker Regulations. VM was alleged to have violated regulations 4(1), 4 (2) (a), (b) & (g) of PFUTP Regulations.

 

2.6             In response to the show cause notice, VM vide her letter dated February 04, 2006 submitted that she was a small investor, was doing the transactions in share market in the normal course of business and any distortion in market prices due to her trades, if any, was purely un-intentional. VM also sought to be forgiven if anything wrong had been done by her.

 

2.7             A hearing was also granted to VM and KC on March 27, 2006 in this regard.

 

2.8 Shri Velmuthukrishnan (also referred to as P.V. Krishnan / P. Velmurugakrishnan) appeared for hearing before me on March 27, 2006 as authorized representative of VM and submitted that they had not done this trading purposely and that if there was anything wrong, they would not do trading like this in future. He also submitted an authenticated copy of the daily transaction statement provided by NS in respect of transactions in KLG done on behalf of VM.

 

 (Certain variations have been observed in quoting the name and spelling thereof of husband of VM. While he has been mentioned as P.V. Krishnan in the authority letter given by VM, in the submission made by him before me, he has given his name as P. Velmurugakrishnan and Mr K. Gnanasekaran, proprietor of KC, has mentioned his name as Velmuthukrishnan. However, all the names pertain to the same person who has been mentioned in this order as” PVK” for brevity’s sake)

 

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

 

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

 

 The submissions made by KS on March 27, 2006 confirmed that these trades in KLG had been executed by PVK on behalf of KS while the counterparty was his wife VM, who was trading through NS. Thus there was a nexus between the trading entities.  

 

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

 

2.11 In response to my above letter, NS vide its letter dated May 04, 2006 submitted that it had no knowledge about these transactions and that it had executed the transactions in normal course of business with utmost good faith.

 

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

 

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

 

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

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

 

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

Entire amount I am sending you.”

 

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

 

Vide this letter dated May 03, 2006, VM has unequivocally admitted that these trades were done in an irregular manner with the aim of transfer of certain profits from KC to VM.

 

3.0 Consideration of Evidence and findings:-

 

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

 

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

 

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

 

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

 2. # -Outstanding shares

 

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

 

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

 

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

 

(c)         A pertinent observation is that VM has made a profit on all transactions done by her over a period of 56 days. It logically follows that in this situation VM’s counterparty would incur loss in all transactions.

 

The fact that the two parties trading with each other were actually related to each other confirms the nexus between them. Further the fact that the two parties repeatedly placed synchronized orders over a long period of time which resulted in a profit for VM and thereby a loss for counterparty, proves that there was collusion between the trading parties.

 

3.2             It has been alleged that NS has contravened Regulation 4(1), 4(2) (a), (b) and (g) of PFUTP Regulations in conducting the trades on behalf of VM in KLG shares. The aforesaid regulations state as under:-

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

 (1)   Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.

(2)   Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:-

(a) indulging in an act which creates false or misleading appearance of trading in the securities market;

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

( c)…

(d)…..

(e)……

(f)….

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

3.3 The submissions made by NS vide letter dated February 08, 2006 have been mentioned in para 2.2. above. It has further submitted that in the OELOB system followed by NSE, it is not possible to know the counter-party details of the trade. While commenting on the close proximating of order timings it has stated that it can not go into the minds of its clients to understand whether a particular order has been placed with honesty, integrity, fairness and without malfeasance.

 

The investigation report mentions that synchronized orders having a time gap of between 7 to 53 seconds were placed between NS and KC over a 56 day period. This indicates that there definitely existed a mechanism for placing orders on a synchronized basis. However, the investigation report and the other supporting documents do not bring out any specific evidence of VM colluding with NS in execution of her trades. I am therefore not inclined to hold NS guilty of violation of PFUTP Regulations.

 

3.4  The investigation report alleges that NS has violated Clauses A(1), (2), (3), (4) and (5) of Code of Conduct for brokers specified under Schedule II of Regulation 7 of Broker Regulations. NS is a broker-member of Coimbatore Stock Exchange having registration no. INB 210539712 and a sub-broker (SEBI registration no. INS 230643715) of ISE Securities and Services Ltd., trading member, NSE. The trades in KLG shares on behalf of VM have been executed on NSE with NS acting as sub-broker. Since it has traded only as a sub broker, I am of the opinion that it would not be proper to consider its violations under the category of violation of Code of Conduct for brokers specified under Regulation 7 of Broker Regulations.

 

3.5  The investigation report alleges violation of Clause A(1), (2) and D(1), (4) and (5) of Code of Conduct for sub-brokers under Schedule II of Regulation 15 of Broker Regulations by NS. As already mentioned in para 3.1, an analysis of trading details during the investigation period submitted by VM (through PVK) on March 27, 2006 reveals that whenever a particular transaction between them was squared off, NS (i.e. VM) made a profit. Considering the unpredictable and dynamic nature of the stock market, it is virtually impossible for any person to consistently make a profit over a long period of time and that too, in the same scrip. The fact that VM was making a profit on square up of each transaction itself over a long period should have alerted NS that something was irregular. The fact that NS did not notice this aspect of consistent profits made by VM in each squared up trade in same scrip over a long period of time proves lack of due diligence on its part and therefore violation of Clause A(2) of Code of Conduct for sub brokers under Schedule II of Regulation 15 of Broker Regulations is established.

3.6  Further almost all the transactions done on a particular day were reversed on the same day or on the next trading day so that the net holding was nil. This kind of circular trading continued between April 21, 2004 to June 15, 2004 and eventually resulted in a nil holding position for VM. As already mentioned, this collusive trading by NS ( for VM) happened for the benefit of VM. These trades resulted in creation of false market and are likely to have misled the general investing public about the market price and trading volumes of KLG shares. The lack of due diligence by NS resulted in creation of a false market which interfered with the market mechanism of stock exchanges. In this connection, it would be relevant to refer to the following extracts of the order dated September 18, 2003 passed by the Hon’ble Securities Appellate Tribunal in the matter of Madhukar Sheth Vs SEBI (Appeal No.46 of 2002):

 “ The Appellant’s submission that he had taken client registration form, entered into agreement etc. by itself was not sufficient. Exercise of due diligence in ongoing transactions is a continuous process and it is not a one time measure to be adhered to while taking up the first transaction. The appellant’s submission that it was Bajaj’s dishonesty that created the problem does not absolve him of his failure to discharge his duties as a prudent broker……..

 ……..On the basis of the material available on record, it is difficult to conclude that the appellant had exercised due skill and care in dealing with Shri Bajaj. It was not that the appellant had carried on only few trade transactions for Shri Bajaj for a short period. He had transacted in huge volumes for Shri Bajaj and the association dated back to August 2000. If the Appellant could not see any design or pattern in the transactions which Shri Bajaj was executing through the Appellant during the period, then the Appellant certainly deserves to be blamed for being indifferent and unconcerned and for that reason he is at fault for the failure to exercise due skill and diligence. ……….

 ………It is true that a broker cannot act of his own against the instructions of the client. But no one can compel him to be a party to manipulate the market. No doubt a broker is supposed to protect the interest of his client, but he is also expected to protect the interest of the securities market in which he operates. It is his duty to ensure not to be a party to any market manipulation and that the market in which he operates is run on a healthy and non-manipulative basis.”

    In view of the evidence on record, it is proved that NS has violated the Code of Conduct for sub brokers under Schedule II of Regulation 15 of Broker Regulations which states as under :

“A. GENERAL

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

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

B. ……

C……

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

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

(2) …..

(3)…..

(4) MANIPULATION : A sub-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains.

(5) MALPRACTICES : A sub-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the public interest or which leads to interference with the fair and smooth functions of the market mechanism of the stock exchanges. A sub-broker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness.”

 

 

 

3.7 The violations as stated above warrant the imposition of penalty on NS. I have noted that the provisions of Section 15HA and 15 HB have been invoked against NS for violation of regulation 4(1), 4(2) (a) (b) and (g) of PFUTP Regulations and Clauses A(1), (2), (3), (4) & (5) of Code of Conduct for brokers as specified in Schedule II of Regulation 7 of Broker Regulations and Clauses A(1), (2) and D (1), (4) and (5) of Code of Conduct for sub brokers as specified in Schedule II of Regulation 15 of Broker Regulations. The provisions of Section 15HA and 15 HB of SEBI Act, 1992 are mentioned below :

 

“[Penalty for fraudulent and unfair trade practices

 

15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher”.

 

 “Penalty for contravention  where no separate penalty has been provided

 

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

 

As already mentioned above, the evidence on record does not make out a case of NS having violated PFUTP Regulations. In view thereof, penalty cannot be imposed under Section 15HA of SEBI Act, 1992. However, NS would be liable to penalty in terms of provisions of Section 15HB of SEBI Act, 1992 for violation of Code of Conduct for sub-brokers as stipulated under Regulation 15 of Brokers Regulations.

 

3.8 Section 15J of SEBI Act, 1992 stipulates certain factors which are required to be considered by the Adjudicating Officer at the time of levying the penalty, viz. amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default, the amount of loss caused to an investor or group of investors as a result of the default and the repeated nature of default. As regards disproportionate gain or advantage, while the client, VM profited from these trades by an amount of Rs.71,000 approximately, no monetary advantage appears to have accrued to NS. All these synchronized trades have happened over a relatively long period in the shares of KLG resulting in loss to the counter-party. The general investors also stood to lose as there would have an impression that there is substantial trading in the shares. As numerous synchronized trades in KLG shares have been done by NS over a long period, I am of the opinion that NS has repeatedly failed to exercise the requisite due diligence.

 

3.9 During the hearing dated March 27, 2006, NS mentioned that in this regard a special inspection was conducted by Inter-Connected Stock Exchange of India at the behest of NSE and a penalty of Rs.7,000/- was imposed which had been duly recovered. The investigation report also mentions the inspection by Inter-Connected Stock Exchange of India. It however states that the penalty of Rs.7000/- was levied on NS for procedural lapses. I am therefore not considering the penalty imposed by Inter-Connected Stock Exchange of India while deciding this case.

 

4.0 Penalty

 

4.1 Considering the evidence on record, and upon a judicious exercise of powers conferred upon me under Rule 5 of SEBI (Procedure for Holding Enquiry and Imposing Penalties by the Adjudicating Officer), I think that it would be appropriate to impose a penalty of Rs. 50,000/- (Rupees Fifty thousand only) on M/s Nelliyan Securities, (proprietor, Shri V. Arunachalam) sub broker of ISE Securities and Services Ltd. under section 15HB of SEBI Act, 1992.

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

 

PLACE: MUMBAI	PIYOOSH GUPTA
DATE: SEPTEMBER 29,2006	ADJUDICATING OFFICER