BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA

Coram: Dr. T.C. NAIR, WHOLE TIME MEMBER

Against N.J. Shares and Securities Pvt. Ltd. in the matter of

M/s. ASTRASENECA PHARMA INDIA LTD.

WTM/TCN/IVD ID1/74/07

Date of hearing : 14-07-2006

Appearance

For Noticee : N.J. Grover, Director, N.J. Shares and Securities Pvt. Ltd.

For SEBI : Mr. P.K. Nagpal, Chief General Manager.

ORDER

[Under Regulation 13(4) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002]

1.1 N.J. Shares and Securities Pvt. Ltd. (hereinafter referred to as NJS or broker), a company incorporated under the Companies Act, 1956, is a member of the National Stock Exchange (hereinafter referred to as NSE) registered with Securities and Exchange Board of India (hereinafter referred to as SEBI) as stock Broker, bearing registration No. INB 230814633.

1.2 SEBI conducted investigation into the price manipulation in the scrip Astraseneca Pharma India Ltd. (hereinafter referred to as Astra) inter alia, to ascertain whether there was any violation of the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as FUTP Regulations) and SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred as Broker Regulations). The trading details of the persons who had traded in the scrip were collected and analyzed along with the data of the volumes contributed by these entities. From these details it was found that NJS had traded on behalf of its client Ivory Securities Ltd. (hereinafter referred to as Ivory) and its counter party broker was Fincap Portfolio Ltd. (hereinafter referred to as Fincap) who traded on behalf of client Dinils Adhesives Pvt. Ltd. (hereinafter referred to as Dinils). The investigations found that NJS and Fincap had dealt for their clients only on two days i.e. August 06 & 07, 2001 in the scrip of Astra and the total quantity dealt by NJS was 8950 shares during the period of investigation. Investigations prima facie revealed that the above trading contributed towards an unusual spurt in the traded volumes and prices in the scrip.

1.3 The investigations found that director of Ivory, Mr. Vishal Suneja, was the director of Fincap. Ms. Bharti Suneja, wife of Mr. Vishal Suneja was one of the subscriber to the memorandum of Ivory. While another subscriber to the memorandum was Romesh Chandra Suneja (father of Vishal Suneja). Address of Ivory and Fincap were common and this was deduced that Ivory the client of NJS had relation with the Fincap.

1.4 Investigations found NJS guilty of violating the provisions of Clause A (3) and A (4) of the Code of Conduct specified in Schedule II read with Regulation 7 of Broker Regulations and Regulation 4 (a), (b), (c) and (d) of FUTP Regulations as applicable at the time when the alleged act was committed. The price of the scrip artificially raised from Rs. 266/- (closing price on august 3, 2001) to about Rs. 290/- (closing price on August 7, 2001) by trading on two days only. It was alleged that Ivory the client of NJS and Dinils had entered into purchase or sale of securities without any intention of taking delivery and did not intend to effect transfer of beneficial ownership. All these events were aided and abetted by NJS and Fincap to create false/artificial market in the scrip which resulted in transactions which were not genuine trade transactions.

1.5 In view of the above, an enquiry officer was appointed under Regulation 5(1) of SEBI (Procedure for Holding enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as the Enquiry Regulations) to enquire into the alleged acts of commissions and omissions of NJS while transacting in the above mentioned scrip.

2. Enquiry Proceedings

2.1 The Enquiry Officer, issued a Show Cause Notice (hereinafter referred to as SCN) dated April 30, 2004 under Regulation 6 (1) of Enquiry Regulations to NJS communicating thereby the allegations in respect of the transactions in the scrip of Astra. After considering the reply dated May 31, 2004 from NJS, the Enquiry Officer conducted the enquiry as per the procedure laid down in Enquiry Regulations and submitted a report dated August 31, 2004. The Enquiry Officer found that NJS had indulged in aiding and abetting its client and undertaking in transactions which were manipulative and fraudulent in nature. The Enquiry Officer had recommended the suspension of certificate of registration granted to NJS for a period of four months.

2.2 A copy of the Enquiry Report was issued to the broker along with a SCN dated September 17, 2004 in terms of Regulation 13(2) of the Enquiry Regulations calling upon it to show cause as to why appropriate action as recommended by the Enquiry Officer should not be taken against it. The broker had replied to the said SCN vide its letter dated November 6, 2004.

2.3 The broker was also given an opportunity of personal hearing before me on July 14, 2006. On the designated day Mr. N. J. Grover appeared and made submissions on behalf of NJS. Written submissions were also submitted by it, which were by and large reiteration of written reply dated November 06, 2006.

3. Consideration of Issues

3.1 I have carefully considered the facts of the case, the findings of the Enquiry Officer and the reply of the broker including the submissions made during the personal hearing. My findings are as under:

a) With regard to the finding that NJS on behalf of Ivory had executed series of structured/ synchronized trades in concert with Fincap Portfolio Ltd., the broker submitted that it is a Private Limited Company run under the directions/ superintendence of the board of directors and none of the directors or shareholders of the company are in anyway related or connected with Ivory. It further submitted that its relationship with Ivory is purely that of a broker and client.

The Enquiry Officer found that Ivory, the client of NJS was related to the counter party broker Fincap. The director of Ivory is Vishal Suneja, who is also the director of Fincap. Ms. Bharti Suneja, wife of Mr. Vishal Suneja was one of the subscriber to the memorandum of Ivory. Other subscriber of the memorandum was Romesh Chandra Suneja (father of Vishal Suneja). Further Bharti Suneja and Romesh Chandra Suneja were the first directors of Ivory. Even the addresses of Ivory and Fincap were common. I find that the broker has failed to explain its position as the submission made by it is that all this has no relevance with the working and affairs of NJS. In my view the broker has failed to consider the findings made in the Enquiry Report regarding putting of the synchronized orders etc. The Enquiry Officer specifically pointed to the instances where the orders were put simultaneously by NJS and Fincap more or less at the same time. The time of punching in the buy and sell orders were matched second by second on various occasions (more than 60 instances). In some instances the difference was of one or two seconds only. Also the quantity entered by both the brokers (i.e. NJS and Fincap) on behalf of their clients were the same on most of occasions.

I find that the broker has never explained the nature of the transactions entered into. The broker instead of explaining its role in transactions in question, tried to shift the burden on its client. By shifting the liability, the broker can not escape its responsibility with respect to the violation of legal provisions committed by it.

From all this it is clear that the trades entered by NJS and Fincap on behalf of their clients were synchronized and structured deals. I find that the broker in its reply has discussed at length about the nature of penalty but has not explained about matching of trades. At this juncture I find that the Enquiry Officer had rightly concluded that it is impossible for such matching of trades to happen in such accuracy without pre-understanding of both the clients and the executing brokers. Therefore, I, hold broker guilty on this count.

b) With regard to the finding that the trading pattern adopted by the NJS had given a false appearance of trading, the broker submitted that it had traded on the NEAT system of NSE, where the counter party cannot be determined. Further the broker stated that the orders were punched under the directions of its client, executed in normal course of operations and the broker cannot be aware of trend of the market or intentions of the client. It further submitted that it has no role to play in the price movement of the scrip and the rates for trading were dictated by the client, which were within the circuit breaker limit.

The submissions made by the broker, imply that it had no role to play in the screen based trading except putting of the orders. The short question that arises here is why the trades were matching again and again in between these two brokers only on the NEAT system? This can happen only when there is some linkage between the brokers, as the terminals are used only by them. The coincidence of matching trades can be once or twice but the pattern here shows that out of 68 buy orders placed by NJS, 64 orders matched with Fincap on the sell side converting into 64 trades. Of these 64 trades 63 trades were structured. In 24 instances orders were placed with the price higher than the last traded price. After considering the same, I have no hesitation in holding that NJS had traded in a manner which gives a false appearance of trading and is detrimental to the orderly development of the market and interest of investors.

c) With regard to the finding that the broker is guilty of creating false market and misusing screen based trading, the broker replied that has no connection with the execution of the transactions and it has not derived any benefit or incurred loss except the brokerage amount.

I note that Enquiry Officer has found that NJS and Fincap traded on two days i.e. on August 06, 2001 and August 07, 2001 and on these days their trades constituted 96 % and 91 % respectively of the total traded volumes of scrip in NSE. Prior to it this scrip was thinly traded. Prices moved from Rs. 266/- (closing price on August 03, 2001) to Rs. 290/- (closing price on August 07, 2001). The quantity, price and time of the orders were matched in such a manner that the price of the scrip declined to Rs. 278/- when both the parties did not trade. This fact needs to be considered. Further Enquiry Officer found that all these transactions were squared off transactions and there was no delivery of shares. All this pretends the culpability of NJS.

The defense of NJS that it was working for its brokerage can not be accepted as in the existing circumstances, I find that the broker has failed to have proper checks on the transactions of its clients. The broker is not supposed to create false market either singly or in concert with any others or indulge itself in acts detrimental to the investor’s interest.

I find that the trading in which the broker had indulged itself is misuse of screen based trading and is detrimental to the orderly development of the securities market and the interest of investors. I, further find that in the present matter the trading was carried out with an intention that the orders of particular client and broker match with each other. In light of submissions and findings made above, I agree with the Enquiry Officer and hold the broker guilty for indulging in manipulation activities.

d) With regard to the finding that stock broker was aiding and abetting the clients, the broker submitted that it was acting on the instructions from its clients. The Enquiry Officer on this charge discussed the available proof and stated that there were number of transactions executed by broker for its client. If one believes that the client was artificially raising or depressing the prices of the security on its own, it can not be convincing as the terminal used in such case is of broker only. It can not be said that the broker was not aware of the behavior of transactions of its client. The standard of proof in the circumstances is as

discussed by the Enquiry Officer viz “almost depends on inferences drawn from patterns of behaviour, from apparent irregularities and from trading data. Price leadership by the manipulator, domination and control of the market, and restricting the floating supply of stock are some of the factors which characterize attempts by manipulator to raise the price of a security” (Pagel Inc., 48 S.C.E.C. 223, 223 (1985), aff’d, 803 F2nd 942 (8^th Cir. 1986). U.S.

At this juncture it is also relevant to note the observation of the U.S. Courts in Hyne’s Case that “proof of manipulation is generally not based on a single activity but rather on a course of conduct showing an intentional interference with the normal functioning of the market for a security. Indeed the manipulation is usually the result of acts, practices and course of conduct that deceive the market place……”.

After considering the case in totality I find that the broker has aided and abetted Ivory its client in creation of artificial volume and entered into transactions which were not genuine trade transactions. I further find that the broker has failed to give convincing explanation in this regard. Hence I, find the broker guilty on this count.

e) The broker raised a contention that the penalty can only be imposed if ‘mens rea’ can be established and when there is any connection/ motive or benefit attached to it. In this regard I agree with the Enquiry Officer that the proceedings before the board are disciplinary proceedings and not criminal proceedings. Because of this reason mens rea is not applicable and preponderance of probabilities is adequate proof. In any case, the trading pattern itself reveals the intentions and motives of NJS and meets the element of mens rea.

I have gone through the findings of the Enquiry Officer regarding the pattern of trading and I rely on the case referred in this regard i.e. Nirmal Bang Securities (P) Ltd. Vs. SEBI , wherein Hon’ble SAT held that;

“…BEB has been charged for synchronized deals with First Global. I have examined the data provided by the parties on this issue. I find many transactions between BEB and FGSB. There are many instances of such transactions. 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. The facts on record categorically establishes that BEB had indulged in synchronized trading in violation of regulation 47 of the FUTP Regulations. In a synchronized trading intention is implicit.”

Taking consideration of this in the present case as reported by the Enquiry Officer, had the trades executed by NJS been genuine, the possibility of perfect matching would not have been possible. One or two deals on the exchange may be synchronized but trades to the extent of such large volumes, had some malafide intent. The greater the number of synchronized trades, the larger are their chances of not being genuine in nature. Therefore, I agree with the findings of the Enquiry Officer that these are quite implicit synchronized trades executed on the screen of the exchanges, have an inherent element of intent involved in them. Therefore, I, find broker guilty on this count.

f) As regards the contention of the broker that it had no intention to manipulate the market, I find from the above discussion that NJS had acted in concert with its client, to create an artificial/false market in the scrip of Astra. As per the Enquiry Report NJS had traded in the scrip of Astra during the period under investigation by carrying out substantial transactions in the scrip. This cannot be genuine as these were meant to serve the purposes other than that of ordinary trading in the market.

4.1 In view of the above factual conclusions arrived by me, I find that the broker has violated Regulation 4 (a), (b), (c) and (d) of FUTP Regulations as applicable at the time when the act was committed and Clause A (3) and A (4) of the Code of Conduct specified in Schedule II read with Regulation 7 of Broker Regulations. In the facts and circumstances of the case, and taking dimensions of violations in terms of volume of synchronized trading undertaken, I am of the view that a penalty of suspension of certificate of registration granted to N.J. Shares for a period of one month would be appropriate.

Order

5.1 Therefore in exercise of the powers conferred upon me by Section 19 of SEBI Act, 1992 read with Regulation 13 (4) of the Enquiry Regulations, I hereby impose a penalty of suspension of certificate of registration for a period of one month on N.J. Shares and Securities Pvt. Ltd., member, NSE Ltd., bearing SEBI Registration No. INB 230814633.

5.2 This order shall come into force immediately after expiry of 21 days from the date of this order.

Mumbai

Date: 04^th January, 2007 T.C. Nair

Whole Time Member

Securities and Exchange Board of India