Full Judgment
2. A case was initiated by SEBI on January 11, 2001, based on an investigation report submitted by NSE, wherein the trading pattern of SRL for the time period July 26, 2000 to September 05, 2000 was examined. However, in view of large trading volumes prior to this period, NSE was requested to extend the scope of their investigation and forward a comprehensive report. NSE conducted another investigation for the period May 17, 2000 to September 05, 2000 (earlier period included) and submitted the report to SEBI on August 31, 2001. Since the scrip was also listed and traded on BSE, it was also requested to investigate the matter and submit its report to SEBI. BSE submitted its investigation report to SEBI on June 10, 2002.
3. For the same time period i.e. from May 17, 2000 to September 05, 2000, Bangalore, Ahmedabad and Madras Stock Exchange reported nil trading; the trading details received from DSE showed trading to have taken place only on one day i.e. April 18, 2000.
4. Based on the identification of brokers by NSE and BSE in their reports, the trading details of 8 brokers, including M/s. Tropical Securities and Investment Pvt. Ltd. (hereinafter called as 'Tropical'), were examined. It was seen that Tropical had dealt extensively in the shares of SRL.
ENQUIRY REPORT AND FINDINGS 5. An enquiry was initiated into the involvement of Tropical in trading in the shares of SRL. The Enquiry Officer submitted his report on the above matter on 27.01.04. The violations as put forth by the Enquiry Officer in his report are asfollows: a. Tropical Created Artificial volumes (that Contributed more than 80.0% volume on BSE on gross basis) and also aided and abetted its related clients.
b. Tropical acted in concert with related client(s) in the: 1. Creation of false market or misleading appearance of trading in the market, and, 2. Execution of transactions that are not genuine trade transactions.
6. The Enquiry Officer concluded that Tropical had thus violated the provisions of Regulation 4 (b) and 4 (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and Clause A (2) & A(4) of Regulation 7 of the SEBI ( Stock Brokers & Sub-Brokers ) Regulations,1992 and hence recommended suspension of certificate of registration of Tropical for a period of two months.
SHOW CAUSE NOTICE AND REPLY 7. Pursuant to the receipt of the enquiry report, a notice dated 11.02.04, was issued to Tropical asking them to show cause as to why their certificate of registration should not be suspended for a period of two months. Tropical had replied vide its letter dated 27.02.04 to the said show cause notice. The primary contentions put forth by Tropical in its reply are as follows: a. There was no intention at any time to create artificial volumes, price rigging, misleading the trading pattern, structural dealing etc.
b. The methodology adopted for funding was only a temporary funding arrangement to meet their pay-in obligation in time, as part of the efforts to survive in the midst of hardships.
c. Their BSE terminal had been deactivated since November, 2001 and no business had been conducted since then.
d. The violations of provisions of SEBI, if any, were unintentional.
8. In view of the facts and circumstance of the matter and taking into account the submissions made by the said broker in response to the show cause notice issued to them, it was not deemed necessary to grant a personal hearing to the said broker.
ISSUES FOR CONSIDERATION 9. I have examined the material available on record, including the contents of the enquiry report, the show cause notice and the reply to the show cause notice. My findings with respect to the said matter are as under.
10. I understand that the trades executed by the said broker for their clients are as under: Name of the client Sett. No. /Spot Buy Harbinger Trading Co. Pvt. Ltd. 8 9 10 11 12 13 14 16 17 18 19 20 21 22 5300 67000 50000 40000 35000 7500 85000 16000 12/7/2000 100000 12/7/2000 84000 12/7/2000 155000 10000 100000 50000 80000 35000 20000 1644901 C. T. Sidhwani 8 Globex Financial Ser. L.
8 10 17 18 125450 Shashank Patel (HUF) 8 10 100800 Shashank C. Patel 8 9 10 19 445500 Bhavna Corporation 19 20 40550 Purusarth Trading Co. Pvt. Ltd. 3/7/2000 4/7/2000 0 0 11. On BSE, large volumes were observed on 25 trading days during the period under investigation. On such days, majority of the volume was due to matched deals. A comparison of the day volume and volume due to such matched deals on each of these 25 days is as follows: Date Qty traded through matched deals %age of total volume 15.05.2000 130700 19.05.2000 242500 23.05.2000 240313 25.05.2000 13500 26.05.2000 227200 29.05.2000 13800 30.05.2000 226800 31.05.2000 18400 01.06.2000 79000 02.06.2000 280000 06.06.2000 51300 08.06.2000 40300 13.06.2000 35300 28.06.2000 85850 12.07.2000 100011 19.07.2000 10486 21.07.2000 10801 25.07.2000 110000 28.07.2000 10400 01.08.2000 241600 04.08.2000 117850 07.08.2000 40882 09.08.2000 50000 17.08.2000 80025 23.08.2000 35700 25.08.2000 20000 12. Most of these matched transactions were executed by M/s. Tropical and were either cross deals (Broker code : 650 and shown in Bold format in the table below) i.e. deals taking place at the office of M/s.
Tropical for two of its clients or matching it with other brokers. I have also noted that a large portion of the matched transactions with other brokers has taken place with a broker M/s. Pawankumar Parmeshwarlal (Broker code : 550 and shown in Italics format.).
Buy Order Qty Rate 5/15/2000 650 650 650 650 650 650 130700 5/19/2000 650 650 650 239200 5/23/2000 650 650 650 650 239800 5/25/2000 650 5/26/2000 650 5/29/2000 650 5/30/2000 650 5/31/2000 650 650 650 18300 650 650 650 650 650 650 650 79000 650 650 650 650 650 650 279700 650 650 50000 650 650 14:52:14 650 650 650 650 Total 40000 6/13/2000 650 650 650 35000 6/28/2000 650 650 650 650 650 650 650 650 650 650 85000 7/12/2000 650 650 650 650 650 650 650 100000 7/19/2000 650 7/21/2000 650 650 10000 7/25/2000 650 650 650 650 650 650 650 650 650 110000 7/28/2000 650 650 650 650 650 650 650 240900 650 650 650 97350 650 650 650 50000 8/17/2000 650 650 650 650 650 650 650 80000 8/23/2000 650 650 650 35000 3/25/2000 650 650 20000 13. It is clear from the above table that the transactions were a result of orders that were introduced into the system at the same time or with a difference of a few seconds, the price and quantity being the same in each case.
14. I have observed that the above transactions were a part of an exercise undertaken by Tropical, on behalf of its related entities, namely, M/s CFL Securities Ltd., M/s Harbinger Trading Co. Pvt. Ltd. and M/s Aditi Dalal, who were in need of funds. The modus operandi followed by the involved entities are as under: a. Tropical would sell shares on spot/off market basis to various entities and would receive funds immediately.
b. The entities, who bought the shares on spot/off market basis, would in turn sell them on the exchange through other broking entities- M/s. Pawankumar Parmeshwarlal, M/s Lallubhai Ranchoddas, M/s. PNR Securities Ltd. etc. to Tropical itself, by way of matched transactions (as detailed above at para 12) immediately, in order to safeguard the financing made available by these entities to Tropical.
c. Thus, these entities would sell the shares bought from Tropical, to Tropical itself, on the stock market, through various brokers, ostensibly to create an obligation on the part of Tropical to return the monies financed. Therefore, the shares, originally bought from Tropical on a spot basis, would revert to Tropical, through the stock exchange settlement system. This cycle of financing and thereafter entering into matched transactions to safeguard own interest continued settlement after settlement, during the period of investigation.
d. The trading that took place on the exchange would thus mirror the financing arrangements crystallised outside the exchange as spot/off market deals, resulting into matched/structured transactions, as shown above.
e. A scrutiny of the Demat account statement furnished by Tropical showed that demat credits were made to entities who were not its clients. It appears that Tropical was making adjustment for its related client as far as delivery of shares was concerned.
15. Thus, Tropical has mis-utilised and put to risk the stock exchange mechanism by transferring/mirroring its/its clients' off-the-market financing transactions, on to the exchange system, in an inappropriate manner and in doing so, they have also created artificial volumes in the market.
16. An analysis of the above said facts and the submissions lead me to the following conclusions regarding the transactions of Tropical in the scrip of SRL: a. Acting in concert with the clients and aiding and abetting them in executing transactions that are not genuine.
b. Being a party to creation of artificial volumes in the scrip of SRL.
17. By virtue of the above, I conclude that Tropical has contravened the provisions of Regulation 4 (b) and 4 (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 and Schedule II Clause A (2) & A(4) of Regulation 7 of the SEBI ( Stock Brokers & Sub-Brokers ) Regulations,1992 which read as under: "4. No person shall a) ......... ..
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) ............" Schedule II Clause A 1. ...............
2. A stock-broker shall act with due skill, care and diligence in the conduct of all his business.
3. ...............
4. 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.
Thus, the said broker is liable for action under regulation 13(1)(a) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.
18. Under section 11 of the SEBI Act, SEBI can take measures to protect the interests of investors and to regulate the securities market inter alia by registering and regulating the working of stock brokers. If the regulatory requirements are violated by the stock brokers without attracting any action, the measures taken by SEBI for regulation of the stock brokers would be rendered nugatory and the regulatory function would be jeopardized. It is to be noted that indulgence of the Tropical in the transactions which are prohibited can not be allowed as such transactions are likely to have a detrimental effect on the functioning of the securities market.
19. I find that Tropical has been responsible in creating artificial volumes in the shares of M/s Surya Roshni Ltd., as observed above and has not taken due care and diligence in observance and compliance of the statutory requirement in conduct of its business as a stock broker.
Looking into the violations committed by the said broker, I am satisfied that it is necessary to impose a penalty on the said broker.
Hence, I agree with the recommendation of the Enquiry Officer that the registration of Tropical be suspended for a period of two months.
ORDER 20. Therefore, in exercise of the powers conferred upon me by virtue of Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulations 13 (4) of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby order that the certificate of Registration of M/s. Tropical Securities and Investments Pvt. Ltd., member, BSE, be suspended for a period of two months.
21. This order shall come into force immediately on expiry of three weeks from the date of the order.