CO/34/ISD/09/2004
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 S.S. Corporate Securities Ltd.
1.0 Facts
M/s. S.S. Corporate Securities Ltd. (hereinafter referred to as the said broker) is a member of the National Stock Exchange (hereinafter referred to as NSE) and a stock broker registered with Securities and Exchange Board of India (hereinafter referred to as SEBI).
Global Trust Bank (hereinafter referred to as GTB) is a banking company incorporated in 1993. The Reserve Bank of India (RBI) made a reference to SEBI stating that the price of the share of GTB had shown a rise from Rs.68.70 on 13.10.2000 to Rs.92.65 on 10.11.2000 on The Stock Exchange, Mumbai (BSE) whereas there was no corresponding increase in the index of bank shares of BSE SENSEX. Based on the said reference and also the report of BSE, SEBI conducted an investigation into the trades in the shares of GTB during the period 9.10.2000 to 24.11.2000 both on BSE and NSE. Thereafter, an investigation was also made into the trades done during the period November 1999 to February 2000 on the NSE.
The investigations into the trades on the NSE during the period November 1999 to February 2000 revealed that the said broker had indulged in manipulative practices while dealing in the scrip of GTB on 26.11.1999, 2.12.1999 and 25.1.2000.
The findings of the investigation are as under :
(a) During the period October 1999 to the first week of February 2000, the price of the share of GTB on NSE moved from Rs.34.20 to Rs.109.80. It was observed that the said broker accounted for more than 20% on the gross or net buy or net sale position during the said period.
(b) The said broker was one of the brokers having a prominent position during the said period. The dominant promoters of the said broker are Shakar Somani, Sunil K. Gupta and Manjit Jaju. The Directors of the broking entity are Shakar Somani, Sunil K. Gupta, Manjit Jaju, DD Singhal and Pradeep Maheshwari.
(c) The trading by the said broker during the said period was as under :
|
Client Name |
Client Buy Qty. |
Client Sell Qty. |
Client Gross Qty. |
Gross Mkt Qty. |
% Gross to Mkt Gross. |
|
Goel & Company |
3000 |
0 |
3000 |
3755204 |
0.08 |
|
New Age Securities |
21800 |
0 |
21800 |
3755204 |
0.58 |
|
Goel & Company |
3000 |
3000 |
6000 |
21131888 |
0.03 |
|
New Age Securities |
0 |
21800 |
21800 |
21131888 |
0.10 |
|
Own trades |
63568 |
20000 |
83568 |
21131888 |
0.40 |
|
Ramesh Kumar Goyal |
31000 |
0 |
31000 |
21131888 |
0.15 |
|
RKG Securities Ltd. |
31432 |
0 |
31432 |
21131888 |
0.15 |
|
Sangeeta Goel |
31000 |
0 |
31000 |
21131888 |
0.15 |
|
Goel & Company |
3000 |
3000 |
6000 |
16220826 |
0.04 |
|
New Age Securities |
3100 |
1700 |
4800 |
16220826 |
0.03 |
|
Own Trades |
242651 |
207219 |
449870 |
16220826 |
2.77 |
|
Sharmila Finvest Pvt. Ltd. |
35000 |
0 |
35000 |
16220826 |
0.22 |
|
Goel & Co. |
3000 |
3000 |
6000 |
8751034 |
0.07 |
|
New Age Securities |
3500 |
4800 |
8300 |
8751034 |
0.09 |
|
Own trades |
82439 |
96439 |
178878 |
8751034 |
2.04 |
|
Goel & Company |
6000 |
9000 |
15000 |
5783894 |
0.26 |
|
Own trades |
236929 |
243360 |
480289 |
5783894 |
8.30 |
|
Goel & Company |
5000 |
0 |
5000 |
4834270 |
0.10 |
|
New Age Securities |
1700 |
1700 |
3400 |
4834270 |
0.07 |
|
Own trades |
92160 |
64529 |
156689 |
4834270 |
3.24 |
|
Own trades |
8600 |
4650 |
13250 |
438918 |
3.02 |
|
Goel & Company |
5000 |
5000 |
10000 |
806060 |
1.24 |
|
Own trades |
101 |
73530 |
73631 |
806060 |
9.13 |
|
Goel & Company |
0 |
5000 |
5000 |
5559064 |
0.09 |
|
Own trades |
155875 |
169754 |
325629 |
5559064 |
5.86 |
|
Own trades |
44734 |
49169 |
94353 |
1730302 |
5.45 |
|
Own trades |
74531 |
42425 |
116956 |
2647432 |
4.42 |
|
RKG Securities Ltd. |
35000 |
0 |
35000 |
2647432 |
1.32 |
|
New Age Securities |
1000 |
1000 |
2000 |
7162306 |
0.03 |
|
Own trades |
164779 |
175059 |
339838 |
7162306 |
4.74 |
|
New Age Securities |
1200 |
1100 |
2300 |
7865538 |
0.03 |
|
Own trades |
151640 |
181140 |
332780 |
7865538 |
4.23 |
(d) The details of date wise trading for days 26.11.99, 2.12.99 and 25.1.2000 are as under :
26.11.99
The said broker had placed the buy order at Rs.47/- for 10000 shares at 14:43:12 hrs. This order was placed by the said broker when the price was moving from Rs.46 to Rs.47/-. Again at 14:46:55 hrs the said broker placed the buy order for 10000 shares at Rs.49.25 which was the Upper Circuit Filter (UCF) price. The said order was matched with corresponding sale orders and at 14:46:55 hrs the price got established at the UCF.
2.12.99
At 10:24:19, the said broker placed a buy order for Rs.5,000 shares at Rs.60/-. Again at 10:27:21, the said broker placed a buy order for 1000 shares at Rs.60.20. Thereafter, at 10:29:03, the said broker placed a buy order of 10,000 shares at Rs.62.50. Again at 10:48:41, the said broker placed a buy order at Rs.66/- for 10,000 shares. From the above, I observe that in a span of 45 minutes the said broker had placed 6 orders at increasing price.
25.1.2000
At 10:08:01, the said broker placed a buy order at Rs.73. 50 when the last price was Rs.73/-. Thereupon the price went up to Rs.73.50 but went down to Rs.73/- by 10:22:36. At 10:22:50, the said broker placed another buy order for 2000 shares at Rs.73.50. Thereafter, the following buy orders were placed by the said broker:
10:33:36 10000 74
10:33:46 5000 74
10:39:38 2000 74.5
10:39:47 10000 75
10:44:39 10000 76
10:48:14 5000 78
10:49:51 10000 78.5
2.0 Enquiry proceedings
In view of the findings of the investigation, an enquiry officer was appointed vide order dated 17.9.2003 to enquire into the alleged violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 (hereinafter referred to as “the FUTP Regulations, 1995”) and the SEBI (Stock broker and Sub broker) Regulations, 1992 (hereinafter referred to as “the Broker Regulations”) by the said broker while dealing in the securities of GTB.
The enquiry officer issued show cause notice to the said broker on 29.9.2003 and also gave opportunities for personal hearing on 24.11.2003. After considering the reply and submissions of the said broker, the enquiry officer came to the following findings:
(i) The said broker has not disputed the transactions as detailed in Annexure 1 to the show cause notice.
(ii) The manner and pattern of trading in the scrip by the said broker showed that they were placing orders at higher prices.
(iii) The actions of the said broker have led to interference with the fair and smooth functioning of the securities market and also price discovery mechanism of NSE.
(iv) The said broker has also violated clause A(4) of the Code of Conduct of Stock Brokers and thereby Regulation 7 of the Broker Regulations and also Regulation 4(a) of the FUTP Regulations, 1995
In the light of the above findings, in his report dated 25.3.2004, the enquiry officer recommended that the certificate of registration of the said broker be suspended for a period of 3 months.
3.0 Show cause notice and hearing
Pursuant to the submission of the report by the enquiry officer, show cause notice dated 31.3.2004 was issued to the said broker advising them to show cause why penalty including the penalty recommended by the enquiry officer should not be imposed on them.
The said broker submitted their reply vide letters dated 16.4.2004 and 11.5.2004. The following submissions were made by the said broker in their reply:
(a) The Broker submitted that the findings and recommendation to suspend the registration for a period of three months (legally not applicable to the Noticee and bad in law) has been arrived at by the Enquiry Officer without taking into account the reply of the Noticee dated October 18, 2003 and further the adverse findings are based on details not covered in the Investigation Report enclosed along with the earlier show cause notice dated September 29, 2003. The findings are based on presumptions and surmises and ignoring the material evidence on record with the SEBI, NSE and Depositories (NSDL and CDSL).
(b) The Broker submitted that the Enquiry Report discloses total non application of mind, ignoring relevant documents and facts and is malafide and with a view to protect the underwriters and others. The broker also submitted that there has been a failure to provide the documents relied upon in the Investigation Report by the Enquiry Officer thus violating the principles of natural justice and the entire Enquiry Proceedings therefore stand vitiated.
(c) The broker submitted that the Enquiry Officer issued a Show Cause Notice to them vide letter Ref:LAD/DOP/AB/2003/18689 dated September 29, 2003 enclosing the extract of the Investigation Report conducted by SEBI in the scrip of GTB. In reply to the said SCN they made detailed written submissions denying the allegations of violations and refuting the charges made in the Investigation Report. The broker contended that in the Enquiry Report, though the Learned Enquiry Officer has made cursory reference in para 3.1 about the reply dated November 18, 2003, there is no mention of the detailed submission made by them vide reply dated October 18, 2003 bringing about the facts and denying the allegations made in the earlier SCN. Broker stated that the Enquiry Officer merely repeated the oral submission made by their authorized representative during the personal hearing held on December 1, 2003. Hence they submitted that the adverse findings and recommendation made in the Enquiry Report by the Enquiry Officer have been arrived at without taking into account the material evidence, submissions, contrary to the Investigation Report of SEBI and is based on, presumptions, conjuctures and surmises and is bad in law.
(d) The broker submitted that the contents of the said paras are nothing but reproduction of the oral submission made by their authorized representative during the hearing and incorporated in the Enquiry Report from the minutes of the proceedings held on December 1, 2003. Broker contended that their submissions had been wrongly indicated in the Enquiry Report as being the contents of the reply furnished by them vide letter dated October 18, 2003. Broker contended that the enquiry officer had not at all taken into consideration the written submissions made by them vide the reply dated October 18, 2003 and this itself is evident and conclusively proves that the enquiry officer has arrived at the adverse findings without taking into account their reply and discloses non application of mind. Broker argued that the recommendation is bad in law and ought to be rejected in toto.
(e) The broker submitted that no hearing was held on November 24, 2003 as indicated by the enquiry officer in the enquiry report. The enquiry officer has wrongly recorded the date of personal hearing as November 24, 2003. In fact, the personal hearing was held on December 1, 2003.
(f) The broker submitted that their authorized representative made the oral submissions during the personal hearing held on December 1, 2004, but the enquiry officer has failed to record the fact about the documentary submissions made by the authorized representative during the personal hearing and also failed to record the minutes of hearing held on December 1, 2003 in the enquiry report. The enquiry officer has erred in not considering the minutes as their reply and recorded accordingly in para 3.1 of the enquiry report.
(g) The broker submitted that the enquiry officer made findings beyond the scope of the Investigation Report, not considered the reply dated October 18, 2003, merely reproduced the oral submissions made by their authorized representative during the personal hearing held on December 1, 2003. The enquiry officer has not at all evaluated the arguments put forth by them and has failed to give any justification while recording the findings in respect of the various trades of GTB at different periods of time in the enquiry report. Further the enquiry officer has failed to take into consideration the material evidence, the parameters / norms based on which the investigation has been carried out by SEBI, but merely made adverse findings based on presumptions, conjunctures and surmises which findings and recommendations are bad in law.
(h) The enquiry report, the broker submitted that the enquiry officer has just reiterated the statements made by them about the reference to the transactions being treated as cross deals and an inference cannot be drawn in respect of trades executed ranging from 24 seconds to 39 seconds as synchronized deals. Broker contended that though the enquiry officer narrated and reiterated the statements made by them, there are no findings and conclusions recorded by the enquiry officer. Further he has not even verified and examined in detail the material evidence such as the trade report then net delivery position and their clients in respect of the transactions that have been executed during the period from October 27, 1999 to February 2, 2000 i.e. during Settlement Nos. 1999043N to 2000006N to determine whether there are any malafide sequence of transactions appearing to be fraudulent and put through by them in the trading system with the intent to jack up the price of the scrip GTB. The enquiry officer has failed to take into account whether the transaction have resulted in ultimate delivery or not for arriving at the findings. The basic premise for selecting brokers and conducting the investigations was those who had done trades of “more than 20% on gross or net buy or net sell basis during any of the settlements under scrutiny…”. The enquiry officer has failed to consider / show whether the findings of the investigations indicate that there were instances of continuous volumes of trades of the broker in several settlements during the captioned period crossing the criteria set by SEBI.
(i) The broker further submitted that the table in para 6.4 on page 6 includes the list of trades of clients as well as that of Noticee calculating the gross / net position and the percentage vis a vis the total turnover in GTB. It would be observed that there is only one instance of the said broker or its clients having crossed the threshold limit of 20%. The said threshold limit was crossed in Settlement No.2000001 when the broker had sold 73,429 shares of GTB putting the client gross to Market Gross at 9.13% and client net to Market net at 27.10 percent. The broker submited that the said sale was a bonafide genuine transaction since the delivery of the said 73,429 shares was given at the end of the Settlement to NSE as part of completion of settlement obligation for the scrip GTB. They further submitted that the said 73,429 shares were purchased in a staggered manner in settlement nos from 9939 to 9952 during the period from October 1999 to December 1999 and taken as delivery and retained by the them. The same shares were sold and delivered in Settlement No.2000001.
(j) With reference to para 6.5 on page 6 and 7 of the Enquiry Report, the broker submited that the enquiry officer has recorded at the opening paragraph that “the details of trades executed by Noticee were enclosed as Annexure 1 to the findings of investigation to show cause notice. The broker has not disputed the said transactions, however denied the allegations of violations, etc stating that all deals have been done on market prices.” The broker submitted that the said inference of the enquiry officer is based on the table given in para 6.5. All the 18 transactions listed in this table have been wrongly attributed to them whereas save and except for the transaction dated December 8, 1999 all other transactions belong to other NSE brokers. In all other 17 transactions entities indicated as buy members and sell members are other brokers, they are not a party to any of the transactions. It is a matter of record and this fact was explained during the personal hearing by their representative. Despite this, the finding that “the findings shows that at the beginning of the day the first trades were done by notice in the scrip of GTB at a price substantially higher than the previous close price” made by the enquiry officer is without application of mind, erroneous and contrary to the hard facts. Further, the enquiry officer has not indicated the dates on which days they had done the trades at higher than the previous close price.
(k) The broker submitted that the enquiry officer has just copied paras 6.6, 6.7, 6.8, 6.9, 6.10 of the Investigation Report as it is. He has not evaluated either the Investigation Report or the broker’s reply to the various points raised in the Investigation Report and also ignored certain findings of the Investigation Report in the enquiry report which are in their favour and which have been reproduced at para 11 above. The enquiry officer has not at all applied his mind and merely relied upon only on parts of the Investigation Report submitted to SEBI.
(l) The Enquiry Officer has not followed the due procedure under Regulation 13(1) as mentioned above and has not considered the written reply dated October 18, 2003 and just merely mentioned at para 3.1 of the Enquiry Report the date of the said reply. Further, the enquiry officer has to give justification for the imposition of penalty under Regulation 13(1) based on the written submissions and oral submissions made by the Noticee. However, the officer has not at all given any detailed reasoning in the enquiry report.
(m) The broker submitted that the enquiry officer has summarily mentioned about the price discovery mechanism and misuse of the system and charged them with violation of clause (4) of the Code of Conduct under Schedule II of Stock Broker regulations but failed to give justification as to how the price discovery mechanism and misuse of the system by them had taken place. Broker contended that the violation of clause 4 of the Code of Conduct under Schedule II of the Stock broker regulations by them has been replied by them vide reply letter dated October 18, 2003; in respect of the said reply there is no whisper in the Enquiry Report submitted by the learned Enquiry Officer and totally ignored the submissions made by them.
(o) The broker further said that on perusal of the above regulation, it would be observed that the true test for applying the said regulation was to identify that there was fraud involved which has led to creation of a false market or has led to believe that the trading was appearing to be false. However, the enquiry officer has not conclusively proved that there was a fraud played by them which had made the investigation officers to believe that there was false and misleading market nor does the investigation report conclusively state that there was fraud played by them which had led to appearance of false and misleading appearance of the Market.
(p) The broker submitted that the enquiry officer has not at all quoted the regulation under which the suspension has been recommended. Broker stated that the said recommendation of suspension of registration of SS Corporate Services Ltd is not applicable to them since their name is M/s. SS Corporate Securities Ltd and not SS Corporate Services Ltd against which the suspension of recommendation is made. Broker, therefore, submitted that the said show cause notice Ref: IES/ID3/SR/SS/6309/2004 dated March 31, 2004 should be dropped against them.
An opportunity of personal hearing was granted to the said broker on 7.6.2004 in the course of which they made submissions. Thereafter, vide letter dated 26.3.2004, the said broker also forwarded written submissions which are as under :
(i) The broker submitted that they repeat, reiterate and confirm whatever was stated in the reply to the show cause notice dated April 16, 2004 and additional reply dated May 11, 2004, as well as all other correspondence and replies given by them from the comments addressed on investigation report onwards, i.e. from 29th September 2003. All these replies are to be treated as part of the present notes of arguments.
(ii) The broker submitted that the entire proceedings of the present show cause notice, which are initiated on the basis of the enquiry report of the enquiry officer being report dated 25th march, 2004, are without jurisdiction, without authority of law are liable to be forthwith dropped / withdrawn.
(iii) The broker submitted that the recommendation of the enquiry officer in the enquiry report is not applicable to them since the recommendation to suspend the registration is of SS Corporate Services Ltd and not of M/s.SS Corporate Securities Ltd, the Noticee herein.
(iv) The broker submitted that the enquiry report discloses total non application of mind, is perverse, ignoring relevant documents and facts. It was also submitted that there has been a failure to provide the documents relied upon in the Investigation report by the enquiry officer thus violating the principles of natural justice and the entire enquiry proceedings therefore stands vitiated.
(v) In the findings of the enquiry report, there is not even a whisper that any of the regulations stated in the regulations of 2002 have been allegedly contravened by the Noticee. Therefore, the issuance of the show cause notice and the holding of the inquiry by the inquiry officer and making of the inquiry report is without jurisdiction and without authority of law. It is further submitted that as the consequences of the enquiry may be penal, it is necessary to be clear and specific of the provision of law violated and not general regulation 4. Such a show cause notice is vague and unenforceable.
(vi) The broker contended that the earlier show cause notice dated September 29, 2003 issued to them was defective and bad in law since the learned officer has failed to indicate which sub–clause of sub-regulation (2) of Regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 / 2003 have been made applicable to the Noticee based on the Investigation Report. Further, Investigation Report itself is not concluding with the nature of violations that have been done by the Noticee but abruptly ends and an incomplete Investigation Report has been enclosed with the show cause notice dated September 29, 2003. Therefore they submitted that any action based on defective notice is void, invalid and unsustainable in law.
(vii)The broker submitted that the enquiry officer has merely copied the investigation report verbatim and reproduced in para 6.1 to para 6.10 of the inquiry report dated 25th March, 2004 and proceeded to give his conclusions by stating as ‘Violations’ at point no.7 of the inquiry report and made recommendations for suspension of the certificate of registration for a period of 3 months. There are no reasons given which itself makes the order vulnerable and defective.
(viii)The broker submitted that the enquiry officer has indicated about his appointment as enquiry officer on September 17, 2003 for enquiring into allegations of violations of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 /2003 and SEBI (Stock Broker and Sub Broker) Regulations, 1992 by them in their dealings in the scrip Global Trust Bank (GTB) and accordingly issued a show cause notice to them vide letter Ref: LAD/DOP/AB/2003/18689 dated September 29, 2003 enclosing the extract of the Investigation Report conducted by SEBI in the scrip of GTB. The broker submitted that the said show cause notice itself was bad in law since they have been charged under Regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 Regulations 1995 and also under 2003. They submitted that the said Regulation 4 has clauses (a) to (r). In the show cause notice dated September 29, 2003, the clause/s said have been violated by them has not been indicated. Hence the broker submitted that the adverse findings and recommendation made in the enquiry report by the enquiry officer has been arrived at without taking into account the material evidence, submissions, contrary to the investigation report of SEBI and is based on, presumptions, conjuctures and surmises and is bad in law.
(ix) The broker submitted that the enquiry officer has wrongly recorded the date of hearing as on November 24, 2003 whereas there was no hearing held on November 24, 2003. The Broker submitted that the personal hearing was initially fixed for November 19, 2003 which was postponed to December 1, 2003 upon their request by the enquiry officer and the same was confirmed by them vide letter dated November 11, 2003. Therefore, the broker submitted that the enquiry officer has not applied his mind and wrongly indicated the date of hearing as November 24, 2003 instead of December 1, 2003.
(x) The broker submitted that in para 4.2 to 4.4 on page 4 of the enquiry report, the learned enquiry officer failed to record in the minutes of hearing held on December 1, 2003 and the written submission made alongwith Annexure A submitted by their representative during the personal hearing.
(xi) The Broker contended that the enquiry officer has made findings beyond the scope of the investigation report, not considered the reply dated October 18, 2003 and merely reproduced the oral submissions made by their authorized representative during the personal hearing held on December 1, 2003. The broker contended that the enquiry officer had not at all evaluated the arguments put forth by them in their written submission and failed to give any justification under Regulation 13(2) of the SEBI (Enquiry Proceedings) Regulations, 2002 while recording the findings in respect of the various trades of GTB at different periods of time in the enquiry report. Further the enquiry officer has failed to take into consideration the material evidence, the parameters / norms based on which the investigation has been carried out by SEBI, but merely made adverse findings based on presumption, conjuctures and surmises which findings and recommendations are bad in law.
(xii) The broker submitted that in para 6.1 read with 6.4 on page 4,5 and 6 of the enquiry report, the enquiry officer has just reiterated the statements made by them about the reference to the transactions being treated as cross deals and an inference cannot be drawn in respect of trades executed ranging form 24 seconds to 39 seconds as synchronized deals. Further, though the enquiry officer narrated and reiterated the statements made by them, there are no findings and conclusions recorded by the enquiry officer. The broker further submitted that the enquiry officer has not even verified and examined in detail the material evidence such as the trade report, net delivery position of the Noticee and their clients in respect of the transactions that have been executed during the period from October 27, 1999 till February 2, 2000 i.e. during Settlement Nos 1999043N to 2000006N to determine whether there are any malafide sequence of transactions appearing to be fraudulent and put through by them in the trading system with the intent to jack up the price of the scrip GTB. The enquiry officer has failed to take into account whether the transaction have resulted in ultimate delivery or not for arriving at the findings.
(xiii) The broker submitted that in para 6.5 on page 6 and 7 of the enquiry report, the enquiry officer has recorded at the opening paragraph that “the details of trades executed by the broker, enclosed as Annexure 1 of the findings of investigation to the showcause notice were not disputed by the broker, however he stated that they denied the allegations of violations, etc stating that all deals have been done on market prices. The broker submitted that the said inference of the enquiry officer was based on the table given in para 6.5 of the enquiry report. The broker submitted that the said para 6.5 was not at all applicable to the present investigation and the Investigation Report, since the Investigation report covered trades on three dated viz. 26th November 1999, 2nd December 1999 and 25th January 2000. The broker contended that on the said given dates, there was no abnormal activity being carried out by them and the Investigation Report has not indicated any abnormal activity on the said above dates. Further, the Investigation Report has not made any charge against them having any connivance with any of the other trading members or any synchronized deals or series of such transactions being carried out by them during the said period. Despite this, the findings of the enquiry officer that at the beginning of the day the first trades were done by them in the scrip of GTB at a price substantially higher that the previous close price was without application of mind and erroneous and contrary to the hard facts. Further, the enquiry officer has not indicated the dates on which days they traded at a price higher than the previous close price.
(xiv) The broker submitted that in para 6.6, 6.7, 6.8, 6.9, 6.10 on pages 7 to 15 of enquiry report, the enquiry officer has just copied verbatim paras 6.6, 6.7, 6.8, 6.9, 6.10 of the investigation report. The broker contended that the enquiry officer has not evaluated either the investigation report or their reply to the various points raised in the investigation report and also ignored certain findings of the investigation report in the enquiry report which are in their favour. Other findings of the investigation report which have been similarly ignored by the enquiry officer were enclosed as Exhibit ‘A’ with their reply dated October 18, 2003. The Exhibit ‘A’ to the said reply dated October 18, 2003 shows that the enquiry officer has not at all applied his mind and merely relied upon only on parts of the investigation report submitted to SEBI. Further, the enquiry officer has also not at all considered their reply dated October 18, 2003 and oral submission made at personal hearing held on December 1, 2003 by the authorised representative Mr. Ajay Khandelwal while arriving at the adverse findings in the enquiry report.
(xv) The broker submitted that it was not correct to say that other brokers were putting buy orders at higher price did not reappear purchasing at higher price since the pattern of the orders in the market is not known to a broker. Moreover, there is no bar on putting multiple orders at higher or lower prices (buy or sell) in a trading system. It is the perception of the broker entity or the client to decide upon to buy / sell at a higher price or lower price. In any case trading was done by them or their clients within the framework of checks and balances prescribed and set out by NSE / SEBI in the shape of various surveillance measures / circuit breakers. The broker submitted that if all buy / sale orders in the trading system are placed at previous market rates then the rates of all the scrips will become constant for ever and proper price discovery will then be hindered. The trading at NSE is on a fully automated, electronic, order driven, trading platform. Price fluctuation, the basic characteristic of such a transparent capital market place, is experienced by the participants every moment. Price manipulation and interference with the price discovery mechanism, therefore, cannot be alleged simply by observing a price fluctuation. Price manipulation and interference with the price discovery mechanism can said to have taken place only when an intention and adverse motive is established and such motive is ascribed to the client / broker. In the present case neither the intention nor the motive has been established by the enquiry officer.
(xvi)The broker submitted that a single entity, be if a broker and / or client, on their own cannot achieve price manipulation and interference with the price discovery mechanism in the securities market. From a single trading work station only one side of a trade i.e. buy or sale can be put through (at a higher or lower price with a view to create a false market). Price manipulation can only be achieved if an opposite trade is put by a conniving counter party in a synchronized manner. In the present case no synchronized trading has been alleged / established or a conniving counter party has been identified and no relation ship has been established with any other broking entity. Further, the broker submitted that as stated in earlier paragraphs, the enquiry officer has failed to take into account the other factors such as whether there were any series of transactions, whether the trades that have been done by the Noticee have resulted in delivery or not.
(xvii)The broker submitted that in para 7.0 and 7.1 on pages 15 and 16 of the enquiry report, the enquiry officer has ignored their detailed written reply dated October 18, 2003 and oral submissions made at personal hearing held on December 1, 2003 by the authorized representative Mr. Ajay Khandelwal and instead mentioned that they have taken a plea that the orders have been executed on behalf of the clients in the trading system of the exchange at the market price, but that the pattern and manner of trading in these scrips showed that they were placing orders at higher prices as shown in para 6.8 and 6.10 above”.
(xviii)The broker submitted that the enquiry officer had not followed the due procedure prescribed under Regulation 13(1) as mentioned above and had not considered their written reply dated October 18, 2003 and just merely mentioned at para 3.1 of the enquiry report the date of the said reply. Further, the enquiry officer has not given any detailed reasoning in the enquiry report in para 7.1 under the head ‘violations’ but merely mentioned that their interference with the fair and smooth functioning of the market in the scrip of GTB and also price discovery mechanism and also misuse with the system which is in violation of clause (4) of the Code of Conduct under Schedule II of Stock Broker regulations which provides that a stock broker shall not indulge in any act which leads to inference with the fair and smooth functioning of the market and also Regulation 4(a) of SEBI(FUTP) Regulations which bars entering into any transactions directly or indirectly with the intention of artificially raising the prices of securities. The said cursory remark without any appraisal of facts and arguments put up by the notice cannot be construed as justification for imposition of penalty and without taking into account the written submission of the Noticee. The broker further submitted that neither the investigation report nor the enquiry report indicated that they were in connivance with the Ketan Parikh Group either directly or indirectly and there is no evidence adduced by the enquiry officer bringing out the details of the transactions and the analysis in detail showing that their trading pattern was such that there was manipulation of the scrip and they were part of the said manipulation.
4.0 Consideration of issues
I have considered the reply and oral submissions of the said broker and other material on record. The following issues arise for consideration :
a. Whether the said broker had indulged in manipulative transactions in the shares of GTB during the period under investigation.
I note that on NSE the price of the share of GTB has moved from Rs.34.20 to Rs.109.80 during the period 27.10.1999 to 8.2.2000. During the said period , the said broker had accounted for more than 20% of the gross and net buy and sell positions. Upon examination of the day to day trading in the shares of GTB, I observe on 26.11.1999 the said broker had placed the buy order at Rs.47/- for 10000 shares at 14:43:12 hrs. This order was placed by the said broker when the price was moving from Rs.46 to Rs.47/-. Again at 14:46:55 hrs the said broker placed the buy order for 10000 shares at Rs.49.25 which was the Upper Circuit Filter (UCF) price. The said order was matched with corresponding sale orders and at 14:46:55 hrs the price got established at the UCF.
On 2.12.1999 at 10:24:19, the said broker placed a buy order for Rs.5,000 shares at Rs.60/-. Again at 10:27:21, the said broker placed a buy order for 1000 shares at Rs.60.20. Thereafter, at 10:29:03, the said broker placed a buy order of 10,000 shares at Rs.62.50. Again at 10:48:41, the said broker placed a buy order at Rs.66/- for 10,000 shares. From the above, I observe that in a span of 45 minutes the said broker had placed 6 orders at increasing price.
On 25.1.2000 at 10:08:01, the said broker placed a buy order at Rs.73. 50 when the last price was Rs.73/-. Thereupon the price went up to Rs.73.50 but went down to Rs.73/- by 10:22:36. At 10:22:50, the said broker placed another buy order for 2000 shares at Rs.73.50. Thereafter, the following buy orders were placed by the said broker:
10:33:36 10000 74
10:33:46 5000 74
10:39:38 2000 74.5
10:39:47 10000 75
10:44:39 10000 76
10:48:14 5000 78
10:49:51 10000 78.5
Although, these were not the only orders on the said date, the quantity involved in these orders were much higher than other orders placed.
I note that it cannot be conclusively proven that the trades of the said broker alone can let to an increase in the price of the share of GTB on 26.11.1999, 2.12.1999 and 25.1.2000. However, the manner and pattern of trading by the said broker shows that they were placing buy orders in such a manner as to bring about an increase in the price. In fact, it is not disputed that on the said days, there has indeed been a rise in the price of the scrip.
b. Whether the said broker has violated Regulation 4(a) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 and Clause A(4) of the Code of Conduct for stock brokers and thereby Regulation 7 of the Broker regulations.
I note that Regulation 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 prohibits market manipulation. The said provision reads as under :
4. Prohibition against market manipulation – 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 I the market price of securities :
(e)…
I find that the said broker had placed buy orders at increasingly higher rates especially on 2.12.1999 and 25.1.2000. These trades by the said broker were undertaken with the intention of operating as a device to inflate and cause fluctuations in the market price of the share of GTB. I also find that these trades by the said broker were intended to create a false and misleading appearance of trading in the shares of GTB.
c Other issues
The said broker has in their reply repeatedly stated that the enquiry officer has failed to apply his mind and that the recommendation has been made by him without supporting evidence. In this regard, I am of the view that material evidence relied upon by the investigating authority while coming to a finding of irregularity / violation by the said broker has been furnished to him. The enquiry officer does not have the mandate to go beyond the enquiry and he has rightly restricted himself to the findings of the investigation. The reproduction of the findings of investigation in the enquiry report should not lead to an inference of non application of mind by the enquiry officer; rather the enquiry officer has endeavoured to produce a comprehensive report setting out all the facts of the matter and thereafter making a recommendation after duly considering the said facts and the representations made by the said broker. In view of the above, I am unable to find any merit in the submission of the said broker that there has been a non application of mind on the part of the enquiry officer while making his recommendation.
In view of the above, I agree with the findings of the enquiry officer and find that the said broker has violated Regulation 4 (a), (b) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995.
5.0 Order
Therefore, I, in exercise of powers conferred on him under Regulation 13(4) of the enquiry regulations and Section 4(3) of the SEBI Act, do hereby suspend the certificate of registration granted to S.S. Corporate Securities Ltd for a period of 3 months.
This order shall come into effect 21 days after date of the order.
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Place: Mumbai Date: 21.9.2004 |
G.N. Bajpai Chairman Securities and Exchange Board of India
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