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 Mukesh Babu Securities Ltd.

Mukesh Babu Securities Ltd. (hereinafter referred to as the “said broker”) is a member of the Stock Exchange, Mumbai (hereinafter referred to as “BSE”) and of the National Stock Exchange of India (hereinafter referred to as “NSE”) and a stock broker registered with SEBI.

SEBI Conducted investigation into the transactions in the shares of Global Trust Bank (hereinafter referred to as GTB) a Commercial Bank listed on NSE and BSE. In the course of investigation, it was noted that the said broker had entered into several synchronized transactions in respect of the scrip during the period 18.11.1999 to 3.12.1999.

It was further observed that of the said trades, purchases for around Rs.5.2 lakhs were done by the said broker on behalf of their sub broker

viz. Shirish N. Manihar and the client of the said sub broker was Classic Credit Ltd., an entity controlled by / associated with Shri Ketan Parekh. The said broker had sold 2 lakh shares on behalf of their sub broker viz. SBM Investment and the purchases again were Classic Share and Stock Broking and Triumph International – entities associated with Shri Ketan Parekh.

In view of the findings of the investigation that the said broker had indulged in synchronized trading in the shares of GTB an enquiry officer was appointed under Regulation 5(1) of the SEBI (Procedure for holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 vide order dated 17.09.2003 to enquire into the alleged irregularities by the said broker.

The Enquiry Officer considered the reply and submission of the said broker and submitted his report on 29.1.2004. In his report the enquiry officer came to following findings:

(a) That the said broker had not disputed the transactions undertaken by him in the shares of GTB as shown in the findings of the investigation and that the said trades were executed on behalf of their clients in the normal course of business.

(b) That there were 6 synchronized trades in the scrip of GTB on different dated during the period 18.11.2000 to 03.12.2000. On first four occasions 5.2 lac shares of GTB were purchased by the member for his sub broker Shirish N Maniar. The client for the sub broker was Classic Credit Ltd. which is a Ketan Parikh Investment Company. In the last two instances the member broker had sold about 2 lakh shares of GTB and the purchasers were the Ketan Parikh entities eg. Classic Share & Stock Broking and Triumph International.

(c) That the quantity of shares traded was far more than the normal per trade volume. It was also observed that the sub broker did not have a terminal of the member broker with him and he used to place the orders over telephone.

(d) That the trade log and order log submitted showed that all the buy as well as sell orders were placed within close proximity of each other i.e. a gap of 1-6 seconds at same quantity and at the same price. This is not a co-incident but a prior understanding by putting the order simultaneously so as to synchronize trades.

(e) That the orders were being put in a pre determined manner and pre – determined prices with prior understanding.

(f) That such synchronization is not possible without prior understanding to place an order in the system and to match the order so placed.

In view of the above findings, the enquiry officer recommended that the Certificate of Registration of the said broker may be suspended for a period of one year.

Show cause notice was issued as per Regulation 13(2) of enquiry regulations to the said broker on 05.02.2004 to which the said broker submitted their reply on 20.02.2004.

(a) The broker submitted that the penalty recommended is one that would infringe upon the fundamental right under the Constitution of India to practice any profession, carry on any occupation, trade or business. The broker contended that the Enquiry Officer had pre judged the entire matter against them even before the show cause notice was issued to them. He further reiterated that even before receiving an explanation from them and even before calling upon them to give any explanation the Enquiry Officer had pre judged the matter and held them guilty of violation of Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (Hereinafter referred to as “SEBI (FUTP) Regulations”) and corresponding regulations mentioned therein. In the circumstances the entire report of the Enquiry officer is contrary to the principles of natural justice and on this ground alone the entire report ought to be set aside.

(b) The broker further submitted that there had been non application of mind by the Enquiry officer at the time of issuing the show cause notice.

(c) The broker submitted that the Enquiry Report dated 29.01.2004 was based on incorrect presumptions of facts and that the report was based on conjectures and hypothesis that are without any basis.

(d) The broker further submitted that the entire report was prepared with pre-conceived notions with the sole intention to penalize them at any cost because without their knowledge SEBI registered sub broker SBM Investments has placed the order of sale and purchase on them for a Ketan Parikh entity which was doing synchronization and they had no knowledge of the same.

(e) The broker further submitted that there was nothing in the investigation report that showed that (a) they had intentionally or artificially raised or depressed the prices of any security (b) indulged in any act which is calculated to create a false or misleading appearance of trade on the securities market (c) indulged in any act which resulted in reflection of prices of securities based on transactions that are not genuine trade transactions (d) acquired shares of GTB entered 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 or depress or cause fluctuations in the market by such securities (f) pay, offer or agree to pay any person any money or moneys worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing or cause fluctuation in the market prices of securities (g) indulge in any fraudulent or unfair trade practice in securities or dealt in securities which shall be deemed to be a fraudulent or unfair trade practice. They further submitted that the enquiry report states that “This may have been done by KP to create interest of investors into the scrip”. It does not say anywhere that they synchronized the trades, therefore, they are not guilty. Further the client for sub broker was Classic Credit Ltd. which is a KP entity. The sub broker SBM Investments was also the sub broker for KP entities. It is also admitted in the investigation report that all the transactions were done on our behalf by the sub broker SBM Investments and sub broker has also admitted that he used to place orders with them on telephone. Hence no synchronization was done by them.

(f) The broker further mentioned that in the finding of the investigation it is stated that “ synchronization of trades may happen for the small quantities of shares traded. Synchronization of the trades of huge quantities can happen once or twice”. But there is no explanation as to why synchronization is possible only for small quantities of shares traded and for large quantities only once or twice. There is no basis to say this. Moreover, the broker contended that there is no allegation in the show cause notice or findings of investigation that they have been unusually benefited by the trades in question.

(g) The broker contended that the six trades, were dealt solely with SBM Investments. Mr. Shirish Maniar of SMB Investments instructed us over telephone to place the buy or sell order, as the case may be, for the quantities required by him. Based on that they placed the buy order on their terminal. So far as they are concerned the customer who is buying or selling from them, is SMB Investments who is a SEBI registered sub-broker. They had been dealing with SBM Investments for over 10 years at that point of time. They were not aware whether SBM Investment was buying on its own behalf or who was the ultimate buyer. The said broker contended that it was only in January 2003, they came to know that Classic Credit Limited was the ultimate buyer when SEBI by its letter dated 09.01.2003 followed by a telephonic request asked them to find out who was the ultimate client of SBM Investments. The said broker argued that neither in the findings of investigation nor in the show cause notice is there even an allegation, leave along categorical finding that they were aware at relevant time as to who was the ultimate client on whose behalf SBM Investments had purchased or sold shares.

(h) The broker further submitted that their dealers through NEAT trading system of NSE did the entire trading in the scrip and that while executing the order they would not be able be aware as to who were the buyers and sellers as the case may be on the other side of the trade terminal and settlement are done through the Exchange. The broker contended that only the stock exchange and the Regulatory Authority i.e. SEBI and in this case SBM Investments know as to who was the counterparty.

(i) The broker submitted that it was impossible to know as to who was at the other end of the terminal. The broker stated that at the relevant time, they used to trade daily in almost all the scrips and in large volumes, both in terms of quantity and value, so was impossible for them to know who was at the other end of the terminal. Broker argued that if they were to check who were at the other end of the terminal and then do the trading then their entire activity and that of the broking community would come to stand still.

(j) The broker further submitted that all the orders received from SBM Investment were executed immediately and that they issued the contract notes and bills for the same on SBM Investments and charged brokerage. The broker contended that the allegation that all the trades executed by the member broker were in the synchronized manner is bald and an open ended allegation

(k) The broker submitted that the Investigating Officer accepted the fact that 5.2 lakh shares of GTB that were purchased on 4 occasions were purchased by them for sub broker Shirish N Maniar and that the client for the sub broker was Classic Credit Limited. The broker contended that enquiry officer contradicted himself by stating that the sale and purchase by them was for KP entities and stated that the client for whom they purchased or sold the shares was SBM Investments of which Shirish Maniar was the sole proprietor. The broker contended that it was for the enquiry officer to prove beyond doubt that they were involved in synchronization and that they knew when the scrip was traded that the seller and buyer was a KP entity. The broker argued that there was no such conclusive finding and in the absence of any such findings no penalty would be imposed on them.

(l) The broker submitted that the purpose for which SEBI provides for enquiry to meet the principles of natural justice. The enquiry officer’s observation in the show cause notice that they were guilty of violation of SEBI’s guidelines without evidence to show the same indicated that the Enquiry was conducted in violation of regulations and guidelines.

(m) The broker denied that it cannot be a coincidence that the buy as well as sell orders were placed within the close proximity of each other for the same quantity and at the same price but is a result of prior understanding as alleged or at all. Since it is contrary to the findings of the investigation. The broker stated that the enquiry report and the investigation report were silent as to the basis for stating that synchronization of trades is possible only in small quantities of shares and for large quantities once or twice.

(n) The broker denied that the buy and sell orders were placed by Classic with themselves. Broker stated that the buy and sell orders were being given to them by SBM Investments and not Classic. There was not an iota of evidence to support the view that this would show that the orders were being put in a pre determined manner or pre determined price with prior understanding with Classic. The broker further contended that suppositions or probabilities or conjectures were not enough and that it has to be proved beyond doubt when a penalty that would infringe constitutional right to practice any profession or to carry on any occupation or business or trade is being recommended.

(o) The broker denied that the pattern and manner of placing order at the same price and same quantity at the same time or synchronization of such trades was possible only with their active participation. Further, they denied that they issued contract notes to the client of sub broker.

(p) The brokers denied that such synchronization was not possible without prior understanding or that it cannot be a coincidence or it is a deliberate act or it is not possible without the active participation of the member. Broker contended that there was no allegation in the show cause notice that they had any understanding with anybody. They denied that synchronization of trades hampers efficient price discovery and militates against transparency and is in violation of SEBI circular dated 01.04.99.

(q) The broker submitted that synchronization of trade is possible only by prior understanding of brokers. They however, denied that entering the order for same quantity for same price to match in highly liquid scrip cannot be a coincidence. They denied having committed any act that led to interference with the fair and smooth functioning of the market in the scrip of GTB or price discovery mechanism or misused the system or that they have violated Clause A (4) of Code of Conduct under Schedule II of Stock Broker Regulations read with Regulation 7 of stock broker or that they are guilty of violation of Clause A of Schedule II as alleged or at all. They contended that the expression A(4) was not used anywhere in the show cause notice.

(r) The broker submitted that just because the investigation of SEBI had revealed that the seller and the purchaser were KP entities, it cannot by any stretch of imagination make them guilty. Broker further contended that just because they placed buy and sell order on the basis of orders received from their sub broker, who is also their client, in the scrip of GTB, it does not by any stretch of imagination prove that they indulged in an act calculated to create a false or misleading appearance of trade which is in violation of Regulation 4(b) of FUTP regulation.

The said broker asked for a personal hearing which was held on 18.03.2004. The broker vide letter dated 30.03.2004 also forwarded written submissions which is as under:

(a) The said broker submitted that their fundamental right under the Constitution of India Under Article 19 (1) (g) of the Constitution to practice any profession or to carry on any occupation trade or business cannot be taken away on the basis of surmises, suppositions, conjectures and preponderance of probabilities.

(b) The said broker submitted that the enquiry officer has pre judged the entire matter against them even before the show cause notice was issued. In paragraph 2 of the show cause notice dated 29.09.2003, the enquiry officer has observed that they are guilty even before calling upon them to give an explanation and even before issuing the show cause notice to them.

(c) The said broker submitted that the show cause notice dated 29.09.2003 has been issued without application of mind by the Enquiry Officer. Broker contended that paragraphs 1 to 5 of findings of investigation have nothing to do with the matter in issue. It shows his non application of mind while issuing the show cause notice.

(d) The said broker submitted that there was absolutely nothing in the investigation report to show that they (i) have intentionally or artificially raised or depressed the prices of any security; or (ii) indulged in any act which is calculated to create a false or misleading appearance of trade on securities market; or (iii) indulged in any act which results in reflection of prices of securities based on transactions that are not genuine trade transaction; or (iv) acquired shares of GTB; or (v) entered 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 or depress or cause fluctuations in the market by such securities; or (vi) pay, offer or agree to pay any person any money or moneys worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing or cause fluctuations in the market price of securities; or (vii) indulge in any fraudulent and unfair trade practices in securities or dealt in securities which shall be deemed to be a fraudulent or unfair trade practice.

The broker contended that the investigation report state that “This (synchronization) may have been done by KP to create interest in investors into the scrip” and that it does not say anywhere that they synchronized the trades. Broker contended that all the transactions were done by them on behalf by SBM Investments and its sole proprietor had also admitted that he used to place orders with them over telephone and hence they were unable to explain how the synchronization was made. It was stated that this inability to explain, by any stretch of imagination, cannot be violation of any of the SEBI Regulations.

(e) The said broker submitted that the Enquiry officer has made factual errors in the enquiry report. They contended that at para 6.3 the enquiry officer has accepted the fact that the shares of GTB were purchased by them for sub broker Mr. Shirish Maniar (SBM Investments) and that the client for the sub broker was Classic Credit Limited. In the same breath he contradicts himself by stating that the sale and purchase by them was for KP entities. At paragraph 6.8, the enquiry officer has further stated that they issued contract notes to the client of the sub broker. They stated that it was incorrect.

The said broker relied on order dated 31.10.2003 in the matter of Nirmal Bang Securities Pvt. Ltd. passed by Hon’ble SAT which extensively dealt with the extent of evidence required to hold a party guilty of price manipulation and to take way their fundamental rights to carry on trade or occupation or business. The said broker stated that in the said order, the SAT held that evidence merely probabalising and endeavoring to prove that the fact on the basis of preponderance of probability is not sufficient to establish such a serious offence of market manipulation. Mere conjectures and surmises are not adequate to hold a person guilty of such a serious offence.

I have considered the investigation report, the report of the enquiry officer the replies and submissions of the said broker and other material on record. I find that the following issues arise for consideration:

A. Whether the said broker had indulged in synchronized trading in the shares of GTB?

I note that the said broker had entered into several transactions during the period 18.11.1999 to 25.11.1999 with entities associated with or controlled by Shri Ketan Parekh. The details of the said transactions are already mentioned above. Enquiry officer considered the said transactions and also came to a conclusion that the said trades were synchronized ones. The said broker had not denied the execution of the above trades but has merely contended that these were genuine trades intended to transfer beneficial ownership.

I do not accept the above contention of the said broker. A perusal of the details of the transactions given above would indicate that the buy order and the sell order in respect of the said transactions were placed in close proximity with each other. The difference in time in buy and sell order ranges from 1 to 6 seconds and the quantity and price of these two orders are exactly the same in all the above transactions.

As observed by the enquiry officer the price and order matching mechanism of the stock exchange is a “blind” system wherein the identity of the counterparty to a transaction is not revealed. This is so in order to ensure that every investor gets a fair chance to participate in the stock market.

The fact that the quantity, price and time of placement of buy order and sell order is a clear indicator of meeting of minds between the buyer and seller and also a pointer towards an attempt by the parties to the above transaction to defeat the “blind” system of price and order matching. In their reply the said broker has merely submitted that it is impossible to know the identity of the counterparty and that they did not have the time to verify the counterparty before making the transaction. The said broker has in their reply referred to several decisions of the Supreme Court and of the Securities Appellate Tribunal to contend that the standard of proof required to hold a person guilty of a serious offence such as synchronized trading is to be very strict which with some degree of definiteness points to the guilt of the delinquent. The said decisions have also been relied upon to contend that mere conjectures and surmises are not sufficient to hold a person guilty.

In this regard, I note that a “smoking gun” may be hard to come by in case of offences such as synchronized trading. The plea of coincidence is taken by all those who are parties to the offence. Therefore, a conclusion or finding of violation can only be arrived at by examination of the trading patterns adopted by the entities involved. The analysis of the trading patterns and findings of guilt based on the same cannot be called surmises or inferences. They are clear indications of misdeeds by market participants. I find that the analysis of the trades in the present case clearly point finger at possible nexus between the parties involved in the transactions. I further find that upon analysis of the trade details, there is sufficient evidence of synchronized trading in the scrip of GTB.

With regard to the culpability of the said broker, I note that the said broker has submitted that these transactions were done on behalf of their sub brokers Shirish N Manihar and SBM Investments. In this regard, they have also submitted that they have merely acted upon the instructions of their clients and in fact came to know the identity of their counter party. I do not accept the explanation of the said broker that they had merely acted on behalf of their clients without any intention to indulge in synchronized trading. I further find that the said broker failed to exercise due diligence while executing the said transactions. A stock broker is expected to have adequate knowledge of the dynamics of the stock market and take necessary steps to prevent the commission of irregularities / violations by their constituents / sub brokers. The said broker has failed to do this and thereby violated Clause A(4) of the Code of Conduct of Stock brokers.

I find that in his report the enquiry officer has observed that the said broker has entered into transactions of high volume wherein entities associated with /controlled by Shri Ketan Parekh were buyers and sellers. Since entities that were part of the same group were on both sides of the transaction it is rather difficult to accept the contention of the said broker that these transactions were genuine transactions wherein there was a transfer of beneficial ownership. The intention behind trades between the members of the same group in the manner detailed above was to create an artificial market for the shares of GTB. Thus, I find that the said broker has acted on behalf of entities who had indulged in fraudulent and unfair trade practices. On this count also I find that the said broker has failed to exercise due diligence and thereby violated Clause A(4) of the code of conduct.

I am unable to accept the contention of the said broker that the enquiry proceedings are vitiated by bias. The enquiry has been conducted in the manner stipulated in the enquiry regulations and there is no material on record to show that the enquiry officer has acted in an irregular manner which points towards bias.

The said broker has pointed out in their reply that their fundamental right under Article 19(1)(g) of the Constitution to carry on the profession of stock broking was being taken away on the basis of surmises and conjectures. It has been made clear by the Supreme Court in several judements that the fundamental right to carry out a profession is subject to Regulation by the State or its agencies. SEBI regulates the profession of stock broking by virtue of the mandate given to it under Section 11 of the SEBI Act and through the SEBI (Stock broker and sub broker) Regulations, 1992. The right of the said broker which is so regulated is being suspended only after following the due process of law under the enquiry regulations and therefore it cannot be said that the fundamental right of the said broker has been violated.

B. Whether the penalty recommended by the enquiry officer should be imposed on the said broker?

I have found in the above paras that the said broker had violated the code of conduct of stock brokers which requires a stock broker to exercise due diligence while transacting in securities. I have also agreed with the finding of the enquiry officer that the said broker has violated Regulation 4(b) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995, in view of what has been stated above.

I have noted that member had not denied the execution of these transactions. I have further noted that the sellers and purchasers in these transactions are Ketan Parekh entities. As noted above, the broker had traded for Classic Credit Ltd. Therefore, I have no hesitation to agree with the enquiry officer that these trades were fictitious and deceptive. I am of the considered view that these trades were not intended to change the beneficial ownership but to create artificial volume in the scrip of GTB.

In view of the above, I agree with the findings of the enquiry officer to impose a penalty of suspension of 1 year which is a major penalty.

5.1 Therefore, I, in exercise of powers conferred on me vide Regulation 13(4) of the enquiry regulations read with Section 4(3) of the SEBI Act do hereby suspend the registration of the broker for a period of One year. This order will come into force on expiry of three weeks.