ORDER

UNDER SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 AGAINST ASK HOLDINGS PVT. LTD., SHRI ASHOK KUMAR JAIN, SHRI R.R.BOHRA AND RAMABEN SAMANI FINANCE PVT. LTD., IN THE MATTER OF RASHEL AGROTECH LIMITED.

 Facts of the case:

1.         Securities and Exchange Board of India (hereinafter referred to as SEBI) conducted an investigation in the scrip of the Rashel Agrotech Limited (hereinafter referred to as ‘RAL’) in respect of transactions during the period i.e. 24.9.02 to 7.1.03.  It is observed that during the period of investigation, the price of the said scrip varied from lowest of Rs. 165 as on 4.11.02 to the highest of Rs. 209.75 as on 16.12.02. The maximum volume traded was of the highest of 2,57,500 shares as on 24.9.02 to the lowest of 10 shares on 3.10.02, 1.11.02, 8.11.02 and 6.12.02. Investigation revealed that some of the major trades were in the nature of synchronized deals and negotiated deals.  Investigation further revealed that the client ASK Holdings Pvt. Ltd. (hereinafter referred to as ‘ASKL’) had dealt in the scrip through two different stock brokers viz., R. R. Bohra (hereinafter referred to as ‘RRB”) and Ramaben Samani Finance Pvt. Ltd. (hereinafter referred to as ‘RSFL’).  In all, ASKL had purchased 5,41,800 shares and sold 2,85,500 shares that constituted 33.44% and 17.62% of the total shares bought and sold during the period of investigation. 

Appointment of Adjudicating Officer:

2.                  I was appointed as an Adjudicating Officer under Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as Adjudication Rules) by SEBI, vide order dated December 3, 2004 in place of Shri. J. Ranganayakulu (since proceeded on study leave) to enquire into and adjudge the alleged contraventions of the provisions of law as mentioned in the original order dated June 8, 2004.

Show cause Notice, Reply and Personal Hearing

3.                  A show cause notice dated July 19, 2005 was issued to (1) ASKL, (2) Shri A K Jain, Director, ASKL (3) RRB 4) RSFL.  ASKL vide letter dated 8.8.2005, requested for extention of time to avail the personal hearing and further submitted that it would file reply at the time of personal hearing.   ASKL vide its another letter dated 12.08.2005 submitted that since the company and directors were in deep financial trouble and in order to overcome the same, it was forced to enter into such deals with the help of brokers and tried to come out of financial crisis and pleaded for lenient view in the matter.  Shri. A K Jain, appeared, on his behalf and on behalf of ASKL before me on August 17, 2005 and submitted that he was a registered sub broker.  He further admitted the violation of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter to be referred as FUTP Regulations, 1995) and requested for a lenient view in the matter since he had indulged in those transactions to overcome financial troubles. He further requested that his certificate of registration as a sub-broker may be suspended instead of imposing monetary penalty because of his financial troubles.

4.                  Now, I shall proceed to examine the allegations, replies of ASKL, Shri A K Jain, RRB and RSFL and my findings thereof are as under;

5.                  Allegation No: 1: ASKL without intention of transferring the beneficial ownership of 2.37 Lakh shares in the scrip of RAL, entered into 29 fictitious transactions in the nature of synchronized trades, by placing buy orders from the terminal of RSFL and simultaneously placing sell orders at the same price from the terminal of RRB.

(a)   Reply: ASKL represented by Shri A K Jain admitted the violations charged against it in the show cause notice and requested for a lenient view in the matter since he had indulged in those transactions to overcome financial troubles.

(b)   Finding: Since Shri A K Jain on his own behalf and on behalf of his company has admitted the violations, I am convinced that ASKL and Shri A K Jain without intention of transferring the beneficial ownership about 2.37 Lakhs of the shares of RAL, entered into 29 fictitious transactions in the nature of synchronized trades, by placing buy orders from the terminal of RSFL and simultaneously placing sell orders at the same price from the terminal of RRB during the period of the investigation. I also don’t find any merit in the submission of ASKL and Shri A K Jain that their certificate of registration as a sub broker may be suspended instead of monetary penalty in the matter inasmuch as the adjudicating proceedings under chapter VI A of SEBI Act, as per scheme of the Act, can result in monetary penalties only and the same cannot be substituted with the suspension of certificate of registration of an intermediary. In view of the above, I hold that ASKL is guilty of violating the provisions of FUTP Regulations, 1995 read with FUTP Regulations, 2003 and Section 15 HA of SEBI Act, 1992.

1. Allegation No. 2: Shri A K Jain is a Director of ASKL and is related to Shri. D.K Jain, Company Secretary of RAL and it is Shri A K Jain who used to give buy and sell orders to RRB and RSFL there by Shri A K Jain violated the provisions of Section 15HA of the SEBI Act, 1992 and FUTP Regulations, 1995 read with FUTP Regulations, 2003.

(a)   Reply: Shri A K Jain admitted the violations charged against him in the show cause notice.   Shri A K Jain while availing the personal hearing requested for a lenient view in the matter since he had indulged in those transactions to over come financial troubles. None of the alleged facts was denied by Shri A K Jain.

(b)   Finding: Since, Shri A K Jain has admitted the charges made against him, I hold him guilty of violating the provisions of FUTP Regulations, 1995 read with Section 15 HA of SEBI Act, 1992 and FUTP Regulations, 2003.

7.                  Allegation No.3: The RRB and RSFL were fully aware of the fictitious nature of trade of 2.37 lakh shares ordered to be executed by ASKL and Shri A K Jain and thereby helped ASKL and Shri A K Jain in creation of artificial volume of trading in the scrip of RAL, thereby influencing the price of the scrip and violated the provisions of Regulation 4(a), (b), (C) and (d) of the FUTP Regulations, 1995 read with FUTP Regulations, 2003 and Regulation 26(XI), Regulation 7 read with clauses A(1), (2), (3), (4) and (5) of the Code of Conduct under Schedule II of  the SEBI (Stock Broker and Sub-Broker) Regulations, 1992 (hereinafter referred to as ‘Stock Broker Regulations’).

8.                  Reply of RSFL, personal hearing and my findings:  RSFL submitted its reply vide letter dated August 6, 2005 and again filed another additional reply dated 11^th August, 2005 making some additional contentions. An opportunity of personal hearing was granted to RSFL on August 8, 2005. Mr. Pawan Mahajan, the authorized representative appeared on behalf of RSFL and reiterated the submissions already made vide letter dated August 6, 2005. He further submitted that only a brokerage of 23,750/- was earned by them out of the alleged transactions. He also submitted a letter dated August 11, 2005, wherein they, inter alia, contended that they had not violated the provisions of FUTP Regulations, 1995 and also Stock Broker Regulations.  They also submitted an annexure containing the statement of the details of brokerage earned and also contended that relation of  price to volume in a given scrip in the stock market is governed by the basic principle of demand and supply which would mean that in a state of increased off loading or selling of a scrip, the prices of the said scrip should fall and inverse should happen in case of excessive buying in the scrip and whereas the said effect  is not exhibited in the transactions done by them on behalf of their client viz., ASKL.  They further submitted that their sale of 12500 shares in the said scrip on 21-11-2002, the price of the scrip on the following day i.e. 21-11-2002 was 209 rupees which was higher than their selling price of Rs.203.75.  The price on the next day of their transaction i.e. 26-11-2002 was still higher than what they had traded last i.e. Rs.203.75.  When they sold 10000 shares in the said scrip at Rs.199.75 on 27-11-2002, the shares were still traded at Rs.205 on 28-11-2002 which was again higher.  Therefore, they submitted that their transactions do not fall under the net of FUTP Regulations, 2003 and Stock Broker Regulations inasmuch as their transactions did not affect the normal market behavior and requested that they be exonerated from the charges alleged against them in the SCN dated 19-07-2005.  RSFL further contended that adjudication proceedings ought not to have been initiated against them since the paragraph no.1 of SCN dated 19-07-2005 mentions about the noticee no.1 & 2 viz., ASKL and Shri A K Jain only.  Further RSFL contended that they had not been provided with the copy of the SEBI Investigation Report, Copy of BSE Investigation Report etc. The RSFL also contended that there is no evidence to suggest that their client ASKL was a client registered with any other Broker. RSFL also submitted that there is no evidence that it had the knowledge of the fact that the trades entered through it by its client ASKL, the counter client was none other than ASKL itself and further submitted that there is no evidence that it was aware of the identity of the counter party broker and pleaded ignorance of any connivance of its client with the counter party broker with respect to the dealings in the scrip of RAL by its client ASKL.  RSFL further submitted that there is no evidence that it had the intention of artificially raising or depressing the prices of securities or had the effect of artificially raising or depressing the prices of the scrip RAL or that the transactions entered into on behalf its client has actually induced the sale and purchase of securities by any person. It further submitted that there was no evidence to show that transactions were in fact a calculated step to create a false or misleading appearance of trading on the securities market and it had no reason to suspect the acts or intentions of its client ASKL at the time of executing transactions.  

9.                  Finding: I find no merit in the contention that adjudication proceedings ought not to have been initiated against RSFL inasmuch as SCN dated 19-07-2005 was issued pursuant to the communication of the proceedings of Whole Time Member dated 08-06-2004 appointing the Adjudicating Officer and also proceedings of the Chairman dated 03-12-2004 appointing the Adjudicating Officer.  The said proceedings mention about the provisions of law alleged to have been violated by ASKL, Shri A K Jain, RRB and RSFL. Further, para no.2, 3, 4, 5, 6, 7, 8, 9, 11 of the said SCN contain the allegations made against RSFL also.  Para no.12 of the SCN, inter alia, calls upon RSFL also to show cause against the said allegations mentioned in the SCN. I also do not find any merit in the contentions of RSFL that they had not been supplied with a copy of the investigation report etc., inasmuch as relevant facts, information / data in the form of Annexures has been served along with the SCN.  As regards the argument that there is no evidence that their client ASKL was a client registered with any other Broker, RSFL did not produce the client registration form of ASKL wherein such information is provided. I note that RSFL has deliberately failed to produce the Client Registration Form, production of which would have clearly disproved their argument on this count.

10.              I also find no merit in the contention of  RSFL that they had no means to know the counter parties and brokers on the other side of the transaction in view of the Hon’ble Securities Appellate Tribunal’s observations,  in its order dated 31/10/2003 in Nirmal Bang Securities Pvt. Ltd. & Ors. Vs SEBI, which are as follows.

“I find the scrip, quantity and price for these orders had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale, can create false volumes. 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. It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only a coincidence in some cases. Theoretically this is OK. But when parties decide to synchronize the transaction the story is different. There are many transactions giving an impression that these were all synchronized, otherwise there was no possibility of such perfect matching of quantity price etc. As the Respondent rightly stated it is too much of a coincidence over too long a period in too many transactions when both parties to the transaction had entered buy and sell orders for the same quantity of shares almost simultaneously. The data furnished in the show cause notice certainly goes to prove the synchronized nature of the transaction which is in violation of regulation 4 of the FUTP Regulations 1995. The facts on record categorically establish that BEB had indulged in synchronized trading in violation of regulation 4 of the FUTP Regulations 1995. In a synchronized trading intention is implicit”.  

11.              Reply of RRB, personal hearing and findings:  RRB submitted its reply vide letter dated 17^th August, 2005 and availed of the opportunity of personal hearing through its authorized representative viz., Mr. Manish R Bohra and submitted that they would be filing a reply before 16-8-2005 and accordingly filed a reply dated 17-8-2005, inter alia, contending that they had not been given copy of the investigating report of BSE in the scrip of RAL purported to have been relied upon by SEBI.  They also submitted that they had executed the orders placed by the clients without being aware that the client had placed similar orders with some other broker also inasmuch as it was not possible to know either the broker or the client at the other end of the transaction on the screen based trade and they were not aware of any alleged fictitious trade being carried out by ASKL and Shri A K Jain. They also submitted that none of the trade details indicate that they had the intention to inflate the market price of the scrip mentioned in the SCN.   The SCN does not show that there was any change in the market price solely due to the transactions done by them.  They also submitted that they did not do any proprietary trading in that scrip and they had stopped carrying out transactions with ASKL and Shri A K Jain as soon as it became clear to them from the manner of dealings of the said clients.  ASKL and Shri A K Jain failed to clear their credit balance due to them to the extent of approximately Rs.75 lacs which corroborates that they did not indulge in any manipulative practices with ASKL and Shri A K Jain.  They pleaded that no further action be taken against them in the matter.

12.              The RRB vide reply dated 17^th August, 2005 stated that it simply carried out the trades on behalf of the clients in the regular course of business and stated that it was not aware that its client simultaneously placed similar orders with some other broker since the transaction being screen based transaction.  Further it submitted that ASKL was placing only one or two orders in the scrip of RAL and that too not everyday thereby not giving cause for suspicion of any malpractice on the part of the client. It further submitted that there was no major fluctuation in the price of the scrip and no investor was induced to trade in the scrip and enclosed  Annexure ‘A’ in support of its claim that there was comparatively high volume in the scrip prior to and after the investigation period.  The annexure A is the price and volume data of the scrip in BSE for the period from 1.4.2002 to 31.3.2003. RRB further denied that it was aware of the relationship of Shri A K Jain with Shri. D.K. Jain, company secretary of RAL. It further denied that ASKL and Shri A K Jain were helped by it for creation of artificial volume of trading. It was further submitted that the show cause Noticee did not allege the necessary intention to inflate the market price of the scrip on the part of it.

13.              Findings:  I do not find any merit in the contentions of RRB that they had not been supplied with a copy of the investigation report etc., inasmuch as  relevant facts, information / data in the form of Annexures has been served along with the SCN.  The contention of RRB does not stand to reason inasmuch the transactions entered through the screen based mechanism, in the facts and circumstances of this case, cannot be considered to be genuine. Further, the contentions of RRB do not sustain in view of the Hon’ble Securities Appellate Tribunal’s observations in its order dated 31/10/2003 in Nirmal Bang Securities Pvt. Ltd. & Ors. Vs SEBI which were reproduced in paragraph no.16 of this order and the same are not repeated here for the sake of brevity.

14.              I note that the details of corresponding buy and sell orders of fictitious trades of ASKL and  its Director Ashok Jain are as under;

TABLE ‘B’

Details of fictitious transactions above 7500 shares done by ASKL through RRB, RSFL and the percentage contribution to the quantity traded on those days.

15.              The Bombay Stock Exchange (BSE) vide its letter dated 13/1/04 informed SEBI that ASKL traded through RRB (Member code 577) with the client code AA10, AK01, SA01 and BD05.  It is further observed that ASKL had traded through RSFL (Member code 101) with the client code 4225.  The Table ‘A’ indicates the total number of transactions carried out by ASKL through RRB and RSFL during the period 21/11/02 to 7/1/03.  The said table also indicates the time difference between buy and sell orders executed by the brokers RRB and RSFL on behalf of ASKL.  The transactions mentioned in Table ‘A’ are nothing but synchronized and fictitious trades.  It is further observed from Table ‘B’ that ASKL had entered into the fictitious transactions above 7500 shares on 12 days.  It is further observed that on 26/11/02, 20/12/02 and 26/12/02, the contribution to the total quantity traded  was 100 percent.  It is also observed that on 27/11/02, 2/12/02, 24/12/02, 30/12/02, 7/1/03 the contribution was 58.14%, 42.07%, 34.7%, 48.72%, 43.4% respectively.  Since these were fictitious trades with no transfer of beneficial ownership and there was no other investor interest in the scrip and the scrip being illiquid scrip, it can be concluded that these transactions only led to an increase in volumes of the scrip presenting a misleading appearance of trading  in the scrip .

16.              I, further  note that  regulation 4 of FUTP Regulations, 1995 reads as under ;

“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;

17.              Finding : By indulging in synchronized trading, ASKL, Shri A K Jain, RRB and RSFL have violated the provisions of Reg.4 (a),(b), (c ) and (d) of FUTP Regulations, 1995  inasmuch as the said transactions are calculated to create a false or misleading appearance of trading on the securities market, which are not genuine trade transactions.

18.              Reply: With respect to the charge of violation of   Regulation 7 read with  clauses A(1), (2), (3), (4) and (5) of the Code of Conduct under Schedule II of  ‘Stock Broker Regulations’, both RRB and RSFL denied the allegations altogether.

19.              At this juncture, I note that the Code of Conduct as mentioned under Schedule II of Stock Broker Regulations reads as follows;

        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) 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) 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 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.

20.        Finding: I have already held that the  RRB and RSFL have violated  the provisions of Regulation 4(a), (b), (C) and (d) of the FUTP Regulations 1995, and I am also convinced that by indulging in the said market manipulation both the stock-brokers failed to act with due skill, care and diligence in the conduct of their business. Further both the stock brokers have   indulged in manipulative, fraudulent or deceptive transactions and had created false market in concert with ASKL, Shri A K Jain and interfered with the fair and smooth functioning of the market. The conduct of RRB and RSFL is detrimental to the interest of investors and affect the integrity of the securities market.  Therefore, I hold that the RRB and RSFL have also violated the provisions of Regulation 7 read with clauses A(1), (2), (3), (4) and (5) of the Code of Conduct under Schedule II of  ‘Stock Brokers  Regulations’.

21.        I note  that Section 15HA of the SEBI Act, 1992 reads as follows;

“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”.

22.          I also note that the Section 15J of SEBI Act reads as follows:

                      Factors to be taken into account by the adjudicating officer.

                                 While adjudging quantum of penalty under section 15J, 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.

23.              There are no quantifiable figures available on record to indicate the amount of disproportionate gain or unfair advantage made as a result of the default. The said transactions ought to have resulted in loss to the genuine investors, as the price was increased by way of synchronized transactions. ASKL, Shri A K Jain, RRB and RSFL had indulged repetitively 29 times in the fictitious trades which can be observed from Table A. 

In view of the above provisions of law and also my findings mentioned hereinabove, I am, therefore, convinced that it is a fit case to impose monetary penalties against ASKL, Shri A K Jain, RRB and RSFL.

24.               ORDER:

25.              Therefore, in exercise of the powers conferred under section 15-I read with Sec. 15HA of the SEBI Act, 1992 and Rule 5 of the Adjudication Rules, I hereby impose monetary penalties as under;

1.      Rs. 10,00,000 on  ASK Holding Pvt. Ltd., and Shri Ashok Kumar Jain, Director, ASK Holding Pvt. Ltd., 

2.       Rs. 10,00,000 on Shri. R.R.Bohra and 

3.      Rs. 10,00,000  on Ramaben Samani Finance Pvt. Ltd.  

In my view, the above penalties are commensurate with the defaults committed by ASKL, Shri A K Jain, RRB and RSFL in the facts and circumstances of the case.

26.              They should pay the amount of penalties by way of demand draft drawn 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, CGM, Investigations Department (ID-I),  Securities and Exchange Board of India,  Mittal court ‘B’ Wing,  First Floor,  224, Nariman Point, Mumbai- 400 021.

Copies of this order are forwarded to the noticees and also SEBI in terms of Rule 6 of the Adjudication Rules.

Date:  May 25, 2006.

Mumbai                                                                                              D. Sura Reddy

                                                                                                  Adjudication Officer.