Full Judgment
2. SEBI had conducted an investigation into the alleged price manipulation in the scrip of M/s. Superstar Leafin Ltd. (SSL) and into the possible 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) SEBI (Stock Brokers & Sub - brokers) Regulations, 1992, (hereinafter referred to as Stock Broker Regulations) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading) Regulations, 1992. The investigation pointed out that the Broker has contravened the provisions of FUTP Regulations and Stock Broker Regulations.
3. Pursuant to the above, vide order dated August 05, 2003, 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 said Regulations") to enquire into possible violations of Broker Regulations and FUTP Regulations committed by the Broker.
4. The enquiry officer, after conducting the enquiry as per the procedure laid down in the said Regulations submitted a report dated September 28, 2004.
5. The Enquiry Officer found that the Broker has violated Regulation 4 of FUTP Regulations, and has not exercised due care and caution and acted negligently while transacting in the scrip of SSL wherein he had contributed 100% of the trading volumes in the Exchange from settlement no. 126 to 130 when the price had shot up from Rs.3.60 on 10.07.2001 to Rs.56.70 on 15.10.2001 without there being any change in the fundamentals of the company. The conduct of the broker in executing large number of buy and sell transactions as cross deals wherein the order quantity, price and timings are matched is highly irregular and interferes with the normal price/order matching mechanism in the price discovery process at the exchange. There were also instances of churning of the same shares amongst few clients which gave false appearance of trading and large number of cross deals and matching transactions. In the light of the above, the Enquiry Officer recommended that the registration of the Broker be suspended for a period of six (6) months.
6. A Show Cause Notice (SCN) dated October 05, 2004 bearing the reference No. SEBI/ERO/JJ/2004/8254 was issued to the Broker along with a copy of the Enquiry Report, calling upon to show cause, in terms of regulation 13(2) of the said Regulations as to why action as considered appropriate should not be taken against him. The Broker was given a period of 15 days to submit his reply and was asked to indicate whether he desired a personal hearing in the matter.
7. The Broker replied to the above said SCN vide his letter dated 19.10.04 and stated that he had already filed his submissions vide his letter dated 03.01.04 and further stated that the findings of the Enquiry Officer are erroneous and the penalty recommended is grossly disproportionate. He further added that : a. the movements in the price of SSL were purely based on demand and supply equilibrium in the market; b. he only acted as broker to arrange transactions between buyers and sellers; c. all the transactions were culminating from placement of orders in the ordinary course of business in the screen based online trading system where the electronic trading mechanism automatically matches the trades; d. he has not defaulted in meeting out pay-in obligations to the stock exchange or to any of their clients; e. there has been no harm or prejudice caused to any of the clients or to the stock exchange or to any other party from any of their acts, which may at best be said be procedural deficiency; f. Penalty, if any, at all to be imposed, then monetary penalties are to be imposed rather than penalty of suspension of Certificate of Registration.
Since, the Broker has not sought for personal hearing before me despite notice, hearing did not take place.
8. I have considered the facts of the case, the findings of the Enquiry Officer and the reply of the Broker to the show cause notice.
9. I note that SSL's price moved from Rs.3.80 in settlement No.2002116 between 9/7/2001 and 13/7/2001 to Rs.45/-on 25/9/2001 with low trading volumes. It reached a high of Rs.57/- on 15/10/2001 with rise in trading volumes. The average price had moved up from Rs.8/- in Settlement No.119 to Rs.41.50 in Settlement No.125. With low volumes, the price had further increased to 57.50 in Settlement No. 130. The trades of the broker in the scrip were around 95% of the total trading volumes in the Exchange. The Broker stated that all these trades were executed as per the instructions of the clients at the prices dictated by them and denied that there were synchronized transactions as alleged. The Broker Vide letter dated 5/4/2004 submitted that he has acted only as a broker for the clients to earn some brokerage at the instructions of the clients without any malafide intentions. The Broker further contended that the price rise of the scrip between 30/7/2001 and 14/9/2001 was due to demand-supply mis-match. The high volume of transactions without resulting in delivery of shares was only incidental. Similarly in respect of churning of the same shares between a set of clients after 2 months was only with a view to earn brokerage and they were not aware of the intentions of the clients. To this I find that the average price of the scrip at CSE shot up from Rs.8 to Rs.41.50 between Settlement No 119 and 125 against low trading volumes and reached Rs.56.50 in Settlement No.130 with increase in volumes as detailed hereunder:- 10. Major volume of trading in the scrip was generated by the broker who contributed 95% of the total trading volumes at the Exchange. Most of the trades were squared off and did not result in delivery obligations to the Exchange as under:- 11. There were many cross deals executed by the broker in the aforesaid period. The broker while admitting the cross deals submitted that the orders were executed at the instance of the client. In settlement No.126 to 130, the broker contributed 100% of the trading volume of the Exchange in the scrip.
Settlement No. Period Buy Sale Total Av. Price Delivery % of Delivery to total 2002116 9/7/01 - 13/7/01 40500 40500 81000 3.80 0 0% 2002117 16.07.01-20.07.01 Nil Nil Nil Nil Nil Nil 2002118 23/7/01-27/7/01 41200 41200 82400 5.85 0 0% 2002119 30/7/01 -3/8/01 100 100 8.00 100 100% 2002120 06/08/01-10/08/01 100 100 200 11.05 0 0% 2002121 13/08/01-17/08/01 200 200 14.90 200 100% 2002122 20.08.01-24.08.01 Nil Nil Nil Nil Nil Nil 2002123 27/08/01-31/08/01 200 200 27.25 200 100% 2002124 03/09/01-07/09/01 300 300 35.45 300 100% 2002125 10/09/01-14/09/01 100 100 41.50 100 100% 2002126 17/09/01 21/09/01 25000 25000 50000 44.45 0 0% 2002127 24/09/01-28/09/01 27000 27000 54000 46.75 0 0% 2002128 01/10/01-05/10/01 1000 1000 2000 49.90 0 0% 2002129 08/10/01-12/10/01 113000 113000 226000 52.95 0 0% 2002130 15/10/01-22/10/01 43800 43800 87600 56.50 0 0% Total 291600 293300 584900 Date Buy Qty Buy Rate Sell Qty. Sell Rate 10/07/01 13000 3.6 13000 3.6 12/07/01 27500 3.9 27500 3.9 24/07/01 0 0.0 100 4.9 26/07/01 0 0.0 100 5.6 27/07/01 200 6.8 0 0.0 30/07/01 0 0.0 100 8.0 06/08/01 0 0.0 100 9.7 10/08/01 100 12.4 0 0.0 13/08/01 0 0.0 100 13.3 17/08/01 0 0.0 100 16.5 27/08/01 0 0.0 100 22.0 31/08/01 0 0.0 100 29.2 04/09/01 0 0.0 100 31.5 05/09/01 0 0.0 100 34.0 06/09/01 0 0.0 100 36.5 13/09/01 0 0.0 100 41.5 19/09/01 10000 44.0 10000 44.0 20/09/01 10000 44.8 10000 44.8 21/09/01 5000 45.0 5000 45.0 28/09/01 27000 45.7 27000 45.7 03/10/01 1000 49.9 1000 49.9 08/10/01 35000 51.4 35000 51.4 09/10/01 40000 53.3 40000 53.3 10/10/01 5000 54.0 5000 54.0 11/10/01 16000 53.1 16000 53.1 12/10/01 17000 53.3 17000 53.3 15/10/01 10000 56.7 10000 56.7 12. From the Settlement wise and transaction wise details of the trades executed by the broker, it is observed that there are a number of transactions which are cross deals wherein both the buyer and the seller belonged to the same broker. The order quantity, price and time were matched and there was no delivery obligation to the Exchange. The broker had entered buy and sell orders for the same quantity of shares almost simultaneously. The value and volume of such transactions are also quite high. Details of such matching transactions done by the broker are as follows: Order Date time Trade Date Time Order No Trade No Member Code Qty.
Price Buy/ Sell Counter Party Code 19/09/2001 1:26:03 PM 19/09/2001 1:26:22 PM 91376224 166 D0935 2500 44 B D0935 19/09/2001 1:26:22 PM 19/09/2001 1:26:22 PM 91376225 166 D0935 2500 44 S D0935 19/09/2001 1:26:03 PM 19/09/2001 1:26:22 PM 91376224 167 D0935 2500 44 B D0935 19/09/2001 1:26:22 PM 19/09/2001 1:26:22 PM 91376225 167 D0935 2500 44 S D0935 19/09/2001 1:26:38 PM 19/09/2001 1:26:53 PM 91376227 168 D0935 5000 44 B D0935 19/09/2001 1:26:52 PM 19/09/2001 1:26:53 PM 91376228 168 D0935 5000 44 S D0935 20/09/200111:01:48 AM 20/09/2001 11:02:05 AM 121121125 169 D0935 3000 45 B D0935 20/09/2001 11:02:05 AM 20/09/2001 11:02:05 AM 121121130 169 D0935 3000 45 S D0935 20/09/2001 11:01:48 AM 20/09/2001 11:02:05 AM 121121125 170 D0935 2000 45 B D0935 20/09/2001 11:02:05 AM 20/09/2001 11:02:05 AM 121121130 170 D0935 2000 45 S D0935 20/09/2001 11:02:30 AM 20/09/2001 11:03:01 AM 121121137 171 D0935 2500 45 B D0935 20/09/2001 11:03:01 AM 20/09/2001 11:03:01 AM 121121142 171 D0935 2500 45 S D0935 20/09/2001 11:02:30 AM 20/09/2001 11:03:01 AM 121121137 172 D0935 2500 45 B D0935 20/09/2001 11:03:01 AM 20/09/2001 11:03:01 AM 121121142 172 D0935 2500 45 S D0935 21/09/2001 11:59:39 AM 21/09/2001 11:59:56 AM 91380394 173 D0935 2500 45 B D0935 21/09/2001 11:59:55 AM 21/09/2001 11:59:56 AM 91380396 173 D0935 2500 45 S D0935 21/09/2001 11:59:39 AM 21/09/2001 11:59:56 AM 91380394 174 D0935 2500 45 B D0935 21/09/2001 11:59:55 AM 21/09/2001 11:59:56 AM 91380396 174 D0935 2500 45 S D0935 28/09/2001 1:27:09 PM 28/09/2001 1:27:09 PM 151469206 175 D0935 5000 46 B D0935 28/09/2001 1:26:56 PM 28/09/2001 1:27:09 PM 151469204 175 D0935 5000 46 S D0935 28/09/2001 1:27:09 PM 28/09/2001 1:27:09 PM 151469206 176 D0935 5000 46 B D0935 28/09/2001 1:26:56 PM 28/09/2001 1:27:09 PM 151469204 176 D0935 5000 46 S D0935 28/09/2001 1:27:54 PM 28/09/2001 1:27:54 PM 151469214 177 D0935 4000 46 B D0935 28/09/2001 1:27:42 PM 28/09/2001 1:27:54 PM 151469212 177 D0935 4000 46 S D0935 28/09/2001 1:29:20 PM 28/09/2001 1:29:20 PM 151469226 178 D0935 2500 46 B D0935 28/09/2001 1:28:59 PM 28/09/2001 1:29:20 PM 151469222 178 D0935 2500 46 S D0935 28/09/2001 1:29:20 PM 28/09/2001 1:29:20 PM 151469226 179 D0935 1500 46 B D0935 28/09/2001 1:28:59 PM 28/09/2001 1:29:20 PM 151469222 179 D0935 1500 46 S D0935 28/09/2001 1:31:13 PM 28/09/2001 1:31:13 PM 151469255 180 D0935 1500 46 B D0935 28/09/2001 1:29:47 PM 28/09/2001 1:31:13 PM 151469229 180 D0935 1500 46 S D0935 28/09/2001 1:31:13 PM 28/09/2001 1:31:13 PM 151469255 181 D0935 1500 46 B D0935 28/09/2001 1:30:03 PM 28/09/2001 1:31:13 PM 151469233 181 D0935 1500 46 S D0935 28/09/2001 1:31:13 PM 28/09/2001 1:31:13 PM 151469255 182 D0935 1500 46 B D0935 28/09/2001 1:30:19 PM 28/09/2001 1:31:13 PM 151469242 182 D0935 1500 46 S D0935 28/09/2001 1:31:13 PM 28/09/2001 1:31:13 PM 151469255 183 D0935 1500 46 B D0935 28/09/2001 1:30:59 PM 28/09/2001 1:31:13 PM 151469252 183 D0935 1500 46 S D0935 28/09/2001 1:34:36 PM 28/09/2001 1:34:50 PM 151469304 184 D0935 1000 46 B D0935 28/09/2001 1:34:50 PM 28/09/2001 1:34:50 PM 151469306 184 D0935 1000 46 S D0935 28/09/2001 1:37:01 PM 28/09/2001 1:37:01 PM 151469341 185 D0935 2000 48 B D0935 28/09/2001 1:36:41 PM 28/09/2001 1:37:01 PM 151469333 185 D0935 2000 48 S D0935 03/10/2001 03:26:26 PM 03/10/2001 03:26:42 PM 181198258 186 D0935 1000 50 B D0935 03/10/2001 03:26:41 PM 03/10/2001 03:26:42 PM 181198260 186 D0935 1000 50 S D0935 08/10/2001 12:21:32 PM 08/10/2001 12:21:33 PM 151488200 187 D0935 5000 51 B D0935 08/10/2001 12:21:11 PM 08/10/2001 12:21:33 PM 151488194 187 D0935 5000 51 S D0935 08/10/2001 12:21:32 PM 08/10/2001 12:21:33 PM 151488200 188 D0935 5000 51 B D0935 08/10/2001 12:21:11 PM 08/10/2001 12:21:33 PM 151488194 188 D0935 5000 51 S D0935 08/10/2001 12:22:21 PM 08/10/2001 12:22:22 PM 151488208 189 D0935 4000 51 B D0935 08/10/2001 12:22:04 PM 08/10/2001 12:22:22 PM 151488207 189 D0935 4000 51 S D0935 08/10/2001 12:22:21 PM 08/10/2001 12:22:22 PM 151488208 190 D0935 4000 51 B D0935 08/10/2001 12:22:04 PM 08/10/2001 12:22:22 PM 151488207 190 D0935 4000 51 S D0935 08/10/2001 12:22:21 PM 08/10/2001 12:22:22 PM 151488208 191 D0935 2000 51 B D0935 08/10/2001 12:22:04 PM 08/10/2001 12:22:22 PM 151488207 191 D0935 2000 51 S D0935 08/10/2001 01:18:09 PM 08/10/2001 01:18:27 PM 151488698 192 D0935 3000 52 B D0935 08/10/2001 01:18:27 PM 08/10/2001 01:18:27 PM 151488704 192 D0935 3000 52 S D0935 08/10/2001 01:18:09 PM 08/10/2001 01:18:27 PM 151488698 193 D0935 2000 52 B D0935 08/10/2001 01:18:27 PM 08/10/2001 01:18:27 PM 151488704 193 D0935 2000 52 S D0935 08/10/2001 01:18:09 PM 08/10/2001 01:18:41 PM 151488698 194 D0935 4000 52 B D0935 08/10/2001 01:18:41 PM 08/10/2001 01:18:41 PM 151488705 194 D0935 4000 52 S D0935 08/10/2001 01:18:09 PM 08/10/2001 01:18:41 PM 151488698 195 D0935 1000 52 B D0935 08/10/2001 01:18:41 PM 08/10/2001 01:18:41 PM 151488705 195 D0935 1000 52 S D0935 08/10/2001 01:51:49 PM 08/10/2001 01:52:05 PM 151489141 196 D0935 2500 52 B D0935 08/10/2001 01:52:05 PM 08/10/2001 01:52:05 PM 151489142 196 D0935 2500 52 S D0935 08/10/2001 01:51:49 PM 08/10/2001 01:52:05 PM 151489141 197 D0935 500 52 B D0935 08/10/2001 01:52:05 PM 08/10/2001 01:52:05 PM 151489142 197 D0935 500 52 S D0935 08/10/2001 01:51:49 PM 08/10/2001 01:52:18 PM 151489141 198 D0935 2000 52 B D0935 08/10/2001 01:52:18 PM 08/10/2001 01:52:18 PM 151489145 198 D0935 2000 52 S D0935 09/10/2001 02:03:23 PM 09/10/2001 02:03:23 PM 31701087 199 D0935 5000 53 B D0935 09/10/2001 02:03:07 PM 09/10/2001 02:03:23 PM 31701082 199 D0935 5000 53 S D0935 09/10/2001 02:03:23 PM 09/10/2001 02:03:23 PM 31701087 200 D0935 5000 53 B D0935 09/10/2001 02:03:07 PM 09/10/2001 02:03:23 PM 31701082 200 D0935 5000 53 S D0935 09/10/2001 02:04:18 PM 09/10/2001 02:04:19 PM 31701100 201 D0935 5000 54 B D0935 09/10/2001 02:04:04 PM 09/10/2001 02:04:19 PM 31701096 201 D0935 5000 54 S D0935 09/10/2001 02:04:18 PM 09/10/2001 02:04:32 PM 31701100 202 D0935 5000 54 B D0935 09/10/2001 02:04:32 PM 09/10/2001 02:04:32 PM 31701103 202 D0935 5000 54 S D0935 09/10/2001 02:06:12 PM 09/10/2001 02:06:12 PM 31701127 203 D0935 5000 54 B D0935 09/10/2001 02:05:37 PM 09/10/2001 02:06:12 PM 31701123 203 D0935 5000 54 S D0935 09/10/2001 02:06:12 PM 09/10/2001 02:06:12 PM 31701127 204 D0935 5000 54 B D0935 09/10/2001 02:05:37 PM 09/10/2001 02:06:12 PM 31701123 204 D0935 5000 54 S D0935 09/10/2001 02:08:20 PM 09/10/2001 02:08:20 PM 31701149 205 D0935 3000 53 B D0935 09/10/2001 02:07:32 PM 09/10/2001 02:08:20 PM 31701138 205 D0935 3000 53 S D0935 09/10/2001 02:08:20 PM 09/10/2001 02:08:20 PM 31701149 206 D0935 2000 53 B D0935 09/10/2001 02:07:43 PM 09/10/2001 02:08:20 PM 31701144 206 D0935 2000 53 S D0935 09/10/2001 02:08:20 PM 09/10/2001 02:08:20 PM 31701149 207 D0935 5000 53 B D0935 09/10/2001 02:08:07 PM 09/10/2001 02:08:20 PM 31701146 207 D0935 5000 53 S D0935 10/10/2001 02:12:55 PM 10/10/2001 02:12:56 PM 91423952 208 D0935 2500 54 B D0935 10/10/2001 02:12:35 PM 10/10/2001 02:12:56 PM 91423945 208 D0935 2500 54 S D0935 10/10/2001 02:12:55 PM 10/10/2001 02:12:56 PM 91423952 209 D0935 2500 54 B D0935 10/10/2001 02:12:35 PM 10/10/2001 02:12:56 PM 91423945 209 D0935 2500 54 S D0935 11/10/2001 12:56:46 PM 11/10/2001 12:56:58 PM 181215796 210 D0935 5000 53 B D0935 11/10/2001 12:56:58 PM 11/10/2001 12:56:58 PM 181215799 210 D0935 5000 53 S D0935 11/10/2001 12:56:46 PM 11/10/2001 12:56:58 PM 181215796 211 D0935 5000 53 B D0935 11/10/2001 12:56:58 PM 11/10/2001 12:56:58 PM 181215799 211 D0935 5000 53 S D0935 11/10/2001 12:57:30 PM 11/10/2001 12:57:30 PM 181215807 212 D0935 2500 53 B D0935 11/10/2001 12:57:18 PM 11/10/2001 12:57:30 PM 181215804 212 D0935 2500 53 S D0935 11/10/2001 12:57:30 PM 11/10/2001 12:57:30 PM 181215807 213 D0935 2500 53 B D0935 11/10/2001 12:57:18 PM 11/10/2001 12:57:30 PM 181215804 213 D0935 2500 53 S D0935 11/10/2001 02:26:54 PM 11/10/2001 02:27:07 PM 181216434 214 D0935 1000 54 B D0935 11/10/2001 02:27:07 PM 11/10/2001 02:27:07 PM 181216437 214 D0935 1000 54 S D0935 12/10/2001 11:39:36 AM 12/10/2001 11:39:36 AM 91428879 215 D0935 5000 53 B D0935 12/10/2001 11:39:25 AM 12/10/2001 11:39:36 AM 91428877 215 D0935 5000 53 S D0935 12/10/2001 11:39:36 AM 12/10/2001 11:39:36 AM 91428879 216 D0935 5000 53 B D0935 12/10/2001 11:39:25 AM 12/10/2001 11:39:36 AM 91428877 216 D0935 5000 53 S D0935 12/10/2001 11:40:06 AM 12/10/2001 11:40:07 AM 91428881 217 D0935 4000 53 B D0935 12/10/2001 11:39:54 AM 12/10/2001 11:40:07 AM 91428880 217 D0935 4000 53 S D0935 12/10/2001 11:40:36 AM 12/10/2001 11:40:36 AM 91428884 218 D0935 1000 54 B D0935 12/10/2001 11:40:20 AM 12/10/2001 11:40:36 AM 91428882 218 D0935 1000 54 S D0935 12/10/2001 12:19:53 PM 12/10/2001 12:19:53 PM 91429089 219 D0935 2000 55 B D0935 12/10/2001 12:19:40 PM 12/10/2001 12:19:53 PM 91429087 219 D0935 2000 55 S D0935 15/10/2001 11:37:30 AM 15/10/2001 11:37:55 AM 61517426 220 D0935 1000 56 B D0935 15/10/2001 11:37:55 AM 15/10/2001 11:37:55 AM 61517431 220 D0935 1000 56 S D0935 15/10/2001 11:38:44 AM 15/10/2001 11:38:59 AM 61517442 221 D0935 2500 57 B D0935 15/10/2001 11:38:59 AM 15/10/2001 11:38:59 AM 61517447 221 D0935 2500 57 S D0935 15/10/2001 11:38:44 AM 15/10/2001 11:38:59 AM 61517442 222 D0935 2500 57 B D0935 15/10/2001 11:38:59 AM 15/10/2001 11:38:59 AM 61517447 222 D0935 2500 57 S D0935 15/10/2001 11:39:26 AM 15/10/2001 11:39:42 AM 61517451 223 D0935 2000 57 B D0935 15/10/2001 11:39:42 AM 15/10/2001 11:39:42 AM 61517454 223 D0935 2000 57 S D0935 15/10/2001 11:39:26 AM 15/10/2001 11:39:42 AM 61517451 224 D0935 2000 57 B D0935 15/10/2001 11:39:42 AM 15/10/2001 11:39:42 AM 61517454 224 D0935 2000 57 S D0935 16/10/2001 11:27:40 AM 16/10/2001 11:27:40 AM 61521297 225 D0935 2000 60 B D0935 16/10/2001 11:27:27 AM 16/10/2001 11:27:40 AM 61521291 225 D0935 2000 60 S D0935 16/10/2001 11:28:24 AM 16/10/2001 11:28:51 AM 61521305 226 D0935 2000 60 B D0935 16/10/2001 11:28:50 AM 16/10/2001 11:28:51 AM 61521308 226 D0935 2000 60 S D0935 16/10/2001 11:28:35 AM 16/10/2001 11:29:01 AM 61521306 227 D0935 2000 60 B D0935 16/10/2001 11:29:01 AM 16/10/2001 11:29:01 AM 61521310 227 D0935 2000 60 S D0935 16/10/2001 11:28:35 AM 16/10/2001 11:29:12 AM 61521306 228 D0935 2000 60 B D0935 16/10/2001 11:29:11 AM 16/10/2001 11:29:12 AM 61521311 228 D0935 2000 60 S D0935 16/10/2001 11:29:45 AM 16/10/2001 11:29:45 AM 61521313 229 D0935 2000 59 B D0935 16/10/2001 11:29:31 AM 16/10/2001 11:29:45 AM 61521312 229 D0935 2000 59 S D0935 16/10/2001 2:08:56 PM 16/10/2001 2:09:09 PM 61522370 230 D0935 2000 59 B D0935 16/10/2001 2:09:09 PM 16/10/2001 2:09:09 PM 61522371 230 D0935 2000 59 S D0935 16/10/2001 2:09:39 PM 16/10/2001 2:09:39 PM 61522373 231 D0935 2000 59 B D0935 16/10/2001 2:09:28 PM 16/10/2001 2:09:39 PM 61522372 231 D0935 2000 59 S D0935 17/10/2001 12:10:46 PM 17/10/2001 12:11:13 PM 121156943 232 D0935 2000 59 B D0935 17/10/2001 12:11:13 PM 17/10/2001 12:11:13 PM 121156947 232 D0935 2000 59 S D0935 17/10/2001 12:10:46 PM 17/10/2001 12:11:13 PM 121156943 233 D0935 1800 59 B D0935 17/10/2001 12:11:13 PM 17/10/2001 12:11:13 PM 121156947 233 D0935 1800 59 S D0935 17/10/2001 12:10:46 PM 17/10/2001 12:11:13 PM 121156943 232 D0935 2000 59 B D0935 17/10/2001 12:11:13 PM 17/10/2001 12:11:13 PM 121156947 232 D0935 2000 59 S D0935 17/10/2001 12:10:46 PM 17/10/2001 12:11:13 PM 121156943 233 D0935 1800 59 B D0935 17/10/2001 12:11:13 PM 17/10/2001 12:11:13 PM 121156947 233 D0935 1800 59 S D0935 22/10/2001 3:20:41 PM 22/10/2001 3:20:51 PM 151514235 234 D0935 5000 55 B D0935 22/10/2001 3:20:50 PM 22/10/2001 3:20:51 PM 151514236 234 D0935 5000 55 S D0935 22/10/2001 3:20:41 PM 22/10/2001 3:20:51 PM 151514235 235 D0935 5000 55 B D0935 22/10/2001 3:20:50 PM 22/10/2001 3:20:51 PM 151514236 235 D0935 5000 55 S D0935 22/10/2001 3:22:41 PM 22/10/2001 3:22:41 PM 151514240 236 D0935 2000 55 B D0935 22/10/2001 3:22:31 PM 22/10/2001 3:22:41 PM 151514239 236 D0935 2000 55 S D0935 22/10/2001 3:23:12 PM 22/10/2001 3:23:13 PM 151514246 237 D0935 4000 59 B D0935 22/10/2001 3:22:59 PM 22/10/2001 3:23:13 PM 151514245 237 D0935 4000 59 S D0935 I note that the trades of the broker constituted almost 100% of volumes in all the settlements except Settlement No.117 and 122 and these are all cross deals where both the buyer and the seller were the clients of the broker and the transactions are squared off without delivery obligations to the Exchange. This pattern of trading in a major way in a scrip which is otherwise illiquid and has no history of investors interest and when there are no major company announcements or significant changes in the economic fundamentals of the company should have aroused the suspicion of the broker.
Under these circumstances, such transactions wherein the buy and sell orders were entered as cross deals and matched in terms of order quantity, price and time amongst few clients of the broker who are mostly closely related as seen earlier are highly irregular and defeat the purpose of normal order matching system in the price discovery process in the exchanges and would also be in violation of Regulation of 4 of SEBI FUTP Regulations which reads as under:- (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 markets; (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 fluctuation in the market price of securities; 13. From the foregoing, I note that the Broker has not exercised due care and caution which was expected out of him and has acted negligently while transacting in the scrip of SSL wherein the price has suddenly shot up from Rs.3.60 to Rs.56.70 within a short time span of 3 months without there being any change in the economic fundamentals of the company or major announcement by the company. The conduct of the Broker in executing large number of buy and sell transactions as cross deals wherein the order quantity, price and timings are matched is highly irregular and interferes with the normal price/order matching mechanism in the Exchange price discovery process. The instances of churning of the same shares amongst few clients gave false appearance of trading and large number of cross deals and matching transactions cannot be taken lightly and allowed to be entered into by the Broker.
14. As regards, the contention of the Broker that he has entered some transactions in respect of churning of the same shares between a set of clients after 2 months was only with a view to earn brokerage and they were not aware of the intentions of the client, I note that entering into transactions in large scale only with a view to earn brokerage is violative of clause B (4) (a) of the code of conduct as specified in schedule II of Stock Broker Regulations as stock brokers should not encourage sales or purchase of securities with the sole object of generating brokerage or commission.
15. As regards the contention of the Broker that all the transactions were culminating from placement of orders in the ordinary course of business in the screen based online trading system where the electronic trading mechanism automatically matches the trades, I note the decision of the Hon'ble Securities Appellate Tribunal (SAT) in appeal no. 54 of 2002 - Nirmal Bang Securities Pvt. Ltd. Vs SEBI and its observations in relation to synchronized deals.
"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." I note that the transactions, wherein the buy and sell orders were entered as cross deals and matched in terms of order quantity, price and time amongst few clients of the Broker who are mostly closely related, are highly irregular and defeat the purpose of normal order matching system in the price discovery process of the exchange and is in violation of Regulation 4 of FUTP Regulations read with Reg. 13 of SEBI (Prohibition of Fraudulent and unfair Trade Practices Relating to Securities Market) Regulations,2003.
16. As regards to the contention of the broker that, as per Regulartion26 of the Stock Broker Regulations, only monetary penalty can be imposed for the alleged violations, I note that Section 12(3) of SEBI Act, 1992 reads as follows: "The Board may, by order, suspend or cancel a certificate of registration in such manner as may be determined by regulations." I also note that Regulation 25 of Stock Broker Regulations as existed at the time of commission of the violation read, as follows: (a) fails to comply with any conditions subject to which registration has been granted; (b) contravenes any of the provisions of the Act, rules or regulations; (c) contravenes the provisions of the Securities Contracts (Regulation) Act or the rules made thereunder; (d) contravenes the rules, regulations or bye-laws of the stock exchange; shall be liable to any of the penalties specified in sub-regulation (2) (a) suspension of registration, after the inquiry, for a specified period; or 17. I further note that the saving clause mentioned in Regulation 23(1) of the said Regulations reads as follows: "23. (1) Notwithstanding amendment of the regulations as specified in regulation 21, anything done or any action taken including any proceeding for inspections or investigation or enquiry commenced or any notice issued under the said regulations before the commencement of these regulations shall be deemed to have been done or taken under the corresponding provisions of these regulations." By virtue of this saving clause, the operation of the said regulations is extended to the facts of this case. Hence the contention that only monetary penalty can be imposed is without substance, as the said regulation is applicable to the facts of this case. Since the power to pass an order suspending the certificate of registration of the intermediary is present in Section 12(3) of SEBI Act, 1992 r/w Regulation 13(4) and 23 of the "said Regulations", the suspension is in accordance with law. Therefore, I do not find any merit in the submissions made by the broker and am convinced that it is a fit case to impose a penalty of suspension of Certificate of Registration.
18 In view of the above and considering the gravity of the charges, a penalty of suspension of the certificate of registration of the Broker for a period of 6 (six) months would be adequate in the facts and circumstances of the case. Therefore, I, in exercise of the powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of said Regulations hereby suspend the certificate of registration of Dinesh Kumar Bubna as a stock broker for a period of 6 (six) months.
19. This order shall come into effect after the expiry of 21 days from the date of this order.