Securities Appellate Tribunal
Sebi vs Sanjay Khemani on 29 March, 2007
ORDER
V.K. Chopra, Member 1.0 BACKGROUND 1.1 Ranbaxy Laboratories Ltd. (hereinafter referred to in short as "Ranbaxy") was incorporated in June 1961. Ranbaxy is engaged mainly in the business of manufacturing and marketing of pharma products. The price of the scrip of Ranbaxy moved up significantly from Rs. 270/- in January 1999 to about Rs. 1200/- in October 1999 accompanied with significant increase in volumes traded on the exchanges particularly on the Stock Exchange, Mumbai (BSE), National Stock Exchange (NSE) and Calcutta Stock Exchange (CSE).
1.2 Securities and Exchange Board of India (hereinafter referred to in short as "the Board") ordered an investigation into the dealings of many entities including Sanjay Khemani, in the shares of Ranbaxy. Sanjay Khemani is a member (hereinafter referred to as "the Broker") of Calcutta Stock Exchange (CSE) bearing SEBI Registration No. INB 030693921.
1.3 The Board after considering the Investigation Report, appointed an Enquiry Officer vide Order dated November 27, 2002 to enquire into the violations allegedly committed by the Broker under the provisions of Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 (hereinafter referred to in short as "PFUTP Regulations") Regulation 7 read with Clause A(3) and (4) of the Code of Conduct for Stock Brokers as specified in Schedule II of SEBI (Stock Brokers and Sub- Brokers) Regulations, 1992 (hereinafter referred to in short as "Stock Brokers Regulations") and Rules, Regulations and Bye-laws of Stock Exchanges.
1.4 The Enquiry Officer, after conducting an enquiry in accordance with the provisions of Regulation 6 of the Securities and Exchange Board of India (Procedure for holding Enquiry by Enquiry Officer and imposing penalty) Regulations, 2002 submitted a report dated December 23, 2003 where he observed that the Broker violated the provisions of Regulation 7 read with Clause A(3) and (4) of Code of Conduct as specified in Schedule II of SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992, Regulation 4(b) & (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995, SEBI circular No. SMDRP/POLICY/CIR-32/1999 dated September 14, 1999. He recommended suspension of registration of the Broker for a period of eight months.
2.0 SHOW CAUSE NOTICE 2.1 Pursuant to the receipt of the said enquiry report, a show cause notice dated January 12, 2005 was issued to the Broker, along with a copy of the said Enquiry Report, advising them to show cause as to why the action, as recommended by the Enquiry Officer should not be imposed on them. The Broker submitted its reply to the said show cause notice, vide letter dated January 24, 2005.
3.0 REPLY OF THE BROKER TO THE SHOW CAUSE NOTICE 3.1 The Broker submitted that all the transactions were done through C-star mechanism within the parameters of CSE at the prevailing market rates and they have not done any manipulation or breach of code of conduct. With regard to the finding of association of the Broker with the associates of Ketan Parekh group, the Broker submitted that all the transactions were done through C-star system where there is no scope to know with whom they are trading.
4.0 HEARING 4.1 The Broker has not sought for a personal hearing. However, as given in all other cases, an opportunity of personal hearing was granted and they were advised to attend the personal hearing before me at SEBI's Eastern Regional Office at Calcutta on September 13, 2006. The Authorized Representative Shri P. K. Harlalka attended the hearing and reiterated that all their transactions were executed through automatic C-star mechanism of CSE and in the said system, nobody can identify the counterparties. He also submitted that they had no intention to manipulate the price or volume of the scrip Ranbaxy.
5.0 CONSIDERATION OF ISSUES & FINDINGS 5.1 I have carefully examined the enquiry report, show cause notice, reply of the Broker and submissions made at the time of hearing.
5.2 I find from the Enquiry Report that the scrip of Ranbaxy traded around the price range of Rs. 270/- at the beginning of January 1999. The price of the scrip moved up to Rs. 320/-by the end of January 1999. Subsequently, price continued to move upward during February - March 1999 and reached to Rs. 650/- by end of March 1999. Further, the price of the scrip moved to Rs. 700/- during May 1999 and came down to Rs. 600/- during June 1999. The price subsequently moved upwards and touched Rs. 800/- during July 1999 and Rs. 1000/-during August 1999. The scrip was being traded in the range of Rs. 900/- to Rs. 1100/-during August - September 1999 and increased to Rs. 1200/- during October 1999. Effectively the price of the scrip moved up from Rs.267 on 01.01.99 to a high of Rs. 1215/- on 13.10.99. Later on the price started falling gradually and closed at Rs. 869 on 29.10.99 at BSE. The price of the scrip of Ranbaxy had moved significantly during the period from Rs. 270/- in January 1999 to about Rs. 1200/in October 1999. The price rise in the scrip was accompanied with significant increase in volumes.
5.3 I find that the Enquiry Officer has arrived at a conclusion in his enquiry report that the Broker has carried out 54 instances of synchronization of trades with a view to create misleading appearance of trading which tampers with price discovery mechanism of stock exchange.
5.4 I find the entire charge levelled against the Broker is on the basis of the aforesaid synchronized trades. The synchronized trade is a kind of transactions where the seller and buyer execute the trade for almost same quantity and price at substantially the same time. Synchronized deal per se is not illegal. On the other hand, the synchronized deal with fraudulent or deceptive intention to create misleading appearance of trading and to manipulate the price and volume of the scrip price to tamper the discovery mechanism of stock exchange with a view to get undue gain out of it, is no doubt a serious matter.
5.5 Hence, the issue to be decided in this case is whether the Broker has carried out any such synchronized trades and to take a decision as to whether the penalty recommended by the enquiry officer against the Broker is proper or not. In order to decide the said issue, I felt it necessary to analyze the details of synchronized trades executed by the Broker. (As given on next page)
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Buy Mem Name Trade Buy Order Buy Buy Sell Mem Name Sell Sell Sell Time Price
Date Time Order Order Order Order Order diffe diffe
Qty Rate Time Qty Rate rence rence
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AGBROS SECURITIES 3/23/1999 15:07:53 10000 675.00 SANJAY KHEMANI 15:07:53 10000 675.00 0:00:00 0.00 PVT. LTD.
PREM RATAN BAHETY 4/21/1999 15:16:52 5000 600.00 SANJAY KHEMANI 15:16:53 5000 600.00 0:00:01 0.00 SANJAY KHEMANI 4/21/1999 15:29:43 25000 610.70 AGBROS SECURITIES 15:29:42 25000 610.70 0:00:01 0.00 PVT. LTD.
SANJAY KHEMANI 4/23/1999 10:57:55 19600 558.70 KANODIA STOCK 10:57:55 19600 558.70 0:00:00 0.00 BROKING (P) LTD SANJAY KHEMANI 4/23/1999 15:05:57 50000 584.50 KANODIA STOCK 15:05:56 50000 584.50 0:00:01 0.00 BROKING (P) LTD ASHOK KUMAR PODDAR 5/3/1999 12:53:17 10000 567.40 SANJAY KHEMANI 12:53:17 10000 567.40 0:00:00 0.00 SANJAY KHEMANI 5/3/1999 15:23:24 30000 588.80 KANODIA STOCK 15:23:23 30000 588.80 0:00:01 0.00 BROKING (P) LTD M/S LOKNATH SARAF 5/4/1999 14:25:29 10500 614.20 SANJAY KHEMANI 14:25:29 10500 614.20 0:00:00 0.00 M/S LOKNATH SARAF 5/4/1999 14:25:47 9500 614.30 SANJAY KHEMANI 14:25:47 9500 614.30 0:00:00 0.00 SANJAY KHEMANI 5/5/1999 13:22:21 15000 666.50 ASHOK KUMAR PODDAR 13:22:21 15000 666.50 0:00:00 0.00 SANJAY KHEMANI 5/14/1999 13:38:46 5000 740.00 SANJAY KUMAR THARD 13:38:46 5000 740.00 0:00:00 0.00 SANJAY KHEMANI 5/25/1999 13:49:48 11000 649.70 M/S LOKNATH SARAF 13:49:48 11000 649.70 0:00:00 0.00 SHREE HARIVANSA 6/1/1999 11:06:25 50000 643.80 SANJAY KHEMANI 11:06:25 50000 643.80 0:00:00 0.00 SECURITIES PVT SHREE HARIVANSA 6/1/1999 12:19:18 50000 649.80 SANJAY KHEMANI 12:19:18 50000 649.80 0:00:00 0.00 SECURITIES PVT AGBROS SECURITIES 6/1/1999 12:20:48 50000 651.20 SANJAY KHEMANI 12:20:49 50000 651.20 0:00:01 0.00 PVT. LTD.
SANJAY KHEMANI 6/9/1999 14:53:03 75000 605.80 AGBROS SECURITIES 14:53:03 75000 605.80 0:00:00 0.00 PVT. LTD.
SANJAY KHEMANI 6/9/1999 14:53:21 75000 606.30 AGBROS SECURITIES 14:53:21 75000 606.30 0:00:00 0.00 PVT. LTD.
AGBROS SECURITIES 7/6/1999 15:08:23 25000 690.80 SANJAY KHEMANI 15:08:24 25000 690.80 0:00:01 0.00 PVT. LTD.
SANJAY KHEMANI 7/14/1999 15:17:35 5000 729.80 PRAKASH BAID 15:17:37 5000 729.80 0:00:02 0.00 SECURITIES PVT. L AGBROS SECURITIES 7/16/1999 13:39:48 50000 784.70 SANJAY KHEMANI 13:39:48 50000 784.70 0:00:00 0.00 PVT. LTD.
DINESH KUMAR 7/20/1999 15:16:49 5000 793.20 SANJAY KHEMANI 15:16:49 5000 793.20 0:00:00 0.00 MODI & CO AGBROS SECURITIES 7/27/1999 14:28:25 75000 872.70 SANJAY KHEMANI 14:28:24 75000 872.70 0:00:01 0.00 PVT. LTD.
AGBROS SECURITIES 7/27/1999 14:49:45 50000 874.30 SANJAY KHEMANI 14:49:45 50000 874.30 0:00:00 0.00 PVT. LTD.
AGBROS SECURITIES 8/3/1999 15:21:40 50000 882.00 SANJAY KHEMANI 15:21:40 50000 882.00 0:00:00 0.00 PVT. LTD.
SANJAY KHEMANI 8/13/1999 15:26:41 26500 994.50 KANODIA STOCK 15:26:41 26500 994.50 0:00:00 0.00 BROKING (P) LTD SANJAY KHEMANI 8/16/1999 15:12:59 13500 981.50 B L B SHARE & 15:12:59 13500 981.50 0:00:00 0.00 FINANCIAL SERVIC SANJAY KHEMANI 8/16/1999 15:14:32 6000 980.70 D. B. & CO. 15:14:32 6000 980.70 0:00:00 0.00 SANJAY KHEMANI 8/16/1999 15:26:20 15000 975.50 RAJESH & CO. 15:26:20 15000 975.50 0:00:00 0.00 SANJAY KHEMANI 8/18/1999 15:14:39 5000 1009.80 PRADEEP KAYAN & CO.15:14:39 5000 1009.80 0:00:00 0.00 SANJAY KHEMANI 8/25/1999 13:18:52 13000 1015.30 PRADEEP KAYAN & CO.13:18:52 13000 1015.30 0:00:00 0.00 SANJAY KHEMANI 8/25/1999 14:39:46 10000 958.20 SHANKAR LAL 14:39:41 10000 958.20 0:00:05 0.00 CHOKHANY SANJAY KHEMANI 9/1/1999 12:04:42 45000 1126.50 KANODIA STOCK 12:04:42 45000 1126.50 0:00:00 0.00 BROKING (P) LTD SANJAY KHEMANI 9/1/1999 13:26:13 25000 1126.00 AGBROS SECURITIES 13:26:12 25000 1126.00 0:00:01 0.00 PVT. LTD.
SANJAY KHEMANI 9/1/1999 13:52:51 6000 1130.80 TACKEL STOCK 13:52:50 6000 1130.80 0:00:01 0.00 BROKING SERVICES LALIT & CO. 9/27/1999 14:31:59 10000 1060.50 SANJAY KHEMANI 14:32:00 10000 1060.50 0:00:01 0.00 LALIT & CO. 9/28/1999 13:44:54 10000 1067.00 SANJAY KHEMANI 13:44:54 10000 1067.00 0:00:00 0.00 LALIT & CO. 9/28/1999 15:47:52 5000 1065.50 SANJAY KHEMANI 15:47:52 5000 1065.50 0:00:00 0.00 JHUNJHUNWALA BROS. 10/1/1999 14:21:37 6000 1037.20 SANJAY KHEMANI 14:21:37 6000 1037.20 0:00:00 0.00 MURARI SECURITIES 10/4/1999 12:36:00 5000 1006.50 SANJAY KHEMANI 12:36:00 5000 1006.50 0:00:00 0.00 LTD.
SHREE HARIVANSA 10/8/1999 12:08:11 25000 1134.40 SANJAY KHEMANI 12:08:11 25000 1134.40 0:00:00 0.00 SECURITIES PVT MURARI SECURITIES 10/8/1999 12:52:55 10000 1134.50 SANJAY KHEMANI 12:52:55 10000 1134.50 0:00:00 0.00 LTD SURENDRA KUMAR 10/11/1999 12:16:35 10000 1173.80 SANJAY KHEMANI 12:16:35 10000 1173.80 0:00:00 0.00 DUGAR & CO.
SURENDRA KUMAR 10/11/1999 12:16:35 10000 1173.80 SANJAY KHEMANI 12:16:36 10000 1173.80 0:00:01 0.00 DUGAR & CO.
SANJAY KHEMANI 10/15/1999 14:06:29 6500 1156.50 GYAN CHAND SHARMA 14:06:30 6500 1156.50 0:00:01 0.00 SANJAY KHEMANI 10/15/1999 14:18:08 15000 1144.80 RAJESH & CO. 14:18:08 15000 1144.80 0:00:00 0.00 SANJAY KHEMANI 10/15/1999 14:21:54 21700 1131.00 TACKEL STOCK 14:21:53 21700 1131.00 0:00:01 0.00 BROKING SERVICES SANJAY KHEMANI 10/15/1999 14:23:31 60000 1118.50 KANODIA STOCK 14:23:32 60000 1118.50 0:00:01 0.00 BROKING (P) LTD SANJAY KHEMANI 10/15/1999 14:28:04 5000 1126.20 S.K MERTIA & CO. 14:28:05 5000 1126.20 0:00:01 0.00 SANJAY KHEMANI 10/15/1999 14:32:28 25000 1132.50 Agbros Securities 14:32:28 25000 1132.50 0:00:00 0.00 Pvt. Ltd.
SANJAY KHEMANI 10/15/1999 14:36:33 18500 1132.10 ASHOK KUMAR PODDAR 14:36:32 18500 1132.10 0:00:01 0.00 SANJAY KHEMANI 10/15/1999 14:38:53 6500 1135.50 DINESH KUMAR 14:38:54 6500 1135.50 0:00:01 0.00 SINGHANIA & CO.
SANJAY KHEMANI 10/15/1999 14:57:44 10000 1138.70 ASHOK KUMAR PODDAR 14:57:44 10000 1138.70 0:00:00 0.00 SANJAY KHEMANI 10/15/1999 15:00:09 10000 1135.80 GAUTAM BAJORIA 15:00:09 10000 1135.80 0:00:00 0.00 DINESH KUMAR 10/15/1999 15:08:19 72000 1120.50 SANJAY KHEMANI 15:08:20 72000 1120.50 0:00:01 0.00 SINGHANIA & CO.
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5.6 I note that that the Broker had neither disputed the above price and volume rise nor denied entering into the above 49 synchronized deals in the scrip of Ranbaxy during the period January 01, 1999 to October 31, 1999. The Broker contented that they have no idea as to the parties opposite them.
5.7 I find that the Broker had executed synchronized/matching trades in the shares of Ranbaxy with the counter party members. Synchronized/matching trades are evident from the above table wherein order quantity and price are same with counter party order quantity and price. Orders were placed at the same time in most of the cases with counter party members while in few cases the orders were matched within a period of 1-5 seconds. It may be noted that the said transactions cannot be a mere coincidence, but are possible only if such trades are put in the system with prior understanding simultaneously to match. From the above table, one can assume that the prices and quantities have been negotiated outside the system and orders had been executed simultaneously.
5.8 I have also observed that order of 1,32,000 shares out of total of 12,56,800 shares (i.e. 10.5%) of the Broker were matched with the brokers who had dealt for entities connected or associated with Ketan Parekh group as per the details given hereunder:
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Buy Mem Name Trade Buy Order Buy Buy Sell Mem Name Sell Sell Sell Time Price
Date Time Order Order Order Order Order diffe diffe
Qty Rate Time Qty Rate rence rence
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ASHOK KUMAR PODDAR 5/3/1999 12:53:17 10000 567.40 SANJAY KHEMANI 12:53:17 10000 567.40 0:00:00 0.00 SANJAY KHEMANI 5/5/1999 13:22:21 15000 666.50 ASHOK KUMAR PODDAR 13:22:21 15000 666.50 0:00:00 0.00 DINESH KUMAR 7/20/1999 15:16:49 5000 793.20 SANJAY KHEMANI 15:16:49 5000 793.20 0:00:00 0.00 MODI & CO SANJAY KHEMANI 10/15/1999 14:38:53 6500 1135.50 DINESH KUMAR 14:38:54 6500 1135.50 0:00:01 0.00 SINGHANIA & CO.
SANJAY KHEMANI 10/15/1999 14:57:44 10000 1138.70 ASHOK KUMAR PODDAR 14:57:44 10000 1138.70 0:00:00 0.00 DINESH KUMAR 10/15/1999 15:08:19 72000 1120.50 SANJAY KHEMANI 15:08:20 72000 1120.50 0:00:01 0.00 SINGHANIA & CO.
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5.9 I find that 6 out of 54 synchronised trades were carried out with the KP related Brokers viz. Dinesh Kumar Singhania & Co. and Ashok Kumar Poddar. The Broker has not disputed the said finding. They only contended that they were not aware of any counter party brokers. It may be noted that order of 1,32,000 shares out of total of 12,56,800 shares (i.e. 10.5%) of the Broker were matched with the above mentioned KP related brokers in a synchronized manner where order quantity and price were exactly the same as also at the same time or with a maximum of one second difference. In this context, I observe that some other brokers against whom similar kind of proceedings were initiated had also executed two or three such trades with KP related entities and the same can be mere coincidence. However, in the instant case, the Broker executed 6 synchronised trades with the above KP related entities including a reversal trades with Dinesh Kumar Singania and Asok Kumar Podder as evident from the above table. These transactions can not be treated as mere coincidence. In this context, it is pertinent to note that the major clients of the Broker were Panther Fincap and Management Services, Panther Investrade, A.B Corporation, Ace Investments, Jayant Parekh etc, entities associated with Ketan Parekh.
5.10 Market Intermediaries are expected to observe due diligence to maintain harmony in the market. In the instant case, the Broker could have simply identified the continuous sell and buy orders in a synchronized manner and should not have entertained the clients who were having malafide intention to execute trades to hamper the market equilibrium.
5.11 I find that the Broker never disputed the said 54 synchronized trades. What they submitted before me is that they have no idea as to the parties opposite to them and no penalty should be imposed on them as the matter was not intentional rather it was co-incidental. It may be noted that synchronized deals with exact matching of price and quantity for 49 instances of trade are only possible if the trades are put in the system with prior understanding. In such cases prices and quantities have been negotiated outside the system and orders had been executed simultaneously. I find that the Broker executed more than one synchronised trades on the following days i.e. April 21, 1999 (2 trades), April 23, 1999 (2 trades), May 03, 1999 (2 trades), May 04, 1999 (2 trades), June 01, 1999 (2 trades), June 09, 1999 (2 trades), July 27, 1999 (2 trades), August 16, 1999 (3 trades), August 25, 1999 (2 trades), September 01, 1999 (3 trades), September 28, 1999 (3 trades), October 08, 1999 (2 trades), October 11, 1999 (2 trades) and October 15, 1999 (11 trades). It is also seen that the sale position of the Broker with another broker Agbros Securities on June 01, 1999 was reversed on June 09, 1999. All these transactions give an impression that these were all synchronized and executed intentionally to create artificial market and to get undue gain out of it, otherwise there was no possibility of such perfect matching of quantity and price etc. 5.12 The intention of the parties to execute such synchronized transactions could be inferred from the above attending circumstances especially execution of several synchronised transactions in a single day, circular trading and reversal of transactions etc. Further, I observe that the standard of proof required in a proceeding of this nature is at variance with the standard of proof required in criminal cases. It is sufficient if the preponderance of probabilities suggests towards the indulgence of the delinquent in the misconduct.
5.13 In view of these, I find that that Broker has put these trades with a view to create misleading appearance of trading. This synchronization of trades tampers with price discovery mechanism of stock exchange and is against the concept of transparency. The synchronized deals entered into by the Broker abetted in creating artificial volumes and false market in the scrip of Ranbaxy Laboratories Ltd. Further Broker through these dealings in the scrip of Ranbaxy has violated the provisions of Regulation 4(b) and (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, which provides that, (4) No person shall
(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;
5.14 Further, the Broker has violated Regulation 7 read with the Clause A (3) and (4) of Code of Conduct as specified in Schedule II of Stock Brokers Regulations, which provides that (3) Manipulation : A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains.
(4) Malpractices : 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.
5.15 I find that the certificate of registration of the Broker, Sanjay Khemani was suspended for a period of two years vide Order dated February 26, 2004 issued by the then Chairman, SEBI inter alia on account of serious violations of market manipulation including organizing a parallel stock exchange by way of large number of the off-the floor transaction ie., conducting large transactions in securities outside the stock exchange mechanism. Further, there was a finding in the said Order to the effect that the Broker concealed the dealings of the clients including the KP Group and had given wrong declarations to CSE so as to avoid compliance with the prudential exposure limits and margin requirements of CSE prevailing during the relevant period (1999-2000). The said order was in effect from the date of interim order dated January 21, 2003 upto January 20, 2005. In the instant case also, I find that the broker was involved in large number of synchronised deals which is intended to bypass the exchange mechanism. Considering the general conduct of the Broker including the repetitive violations, the instant matter can not be viewed in isolation. Hence, considering all aspects and circumstances of the case, I am satisfied that it is necessary to impose a penalty on the Broker. However, considering the volume of synchronised trades executed by the Broker in Ranbaxy when comparing market volume of Ranbaxy, I feel that the certificate of registration of the Broker be suspended for a period of 15 days so that it act a deterrent for similar transactions in future.
6.0 ORDER 6.1 Taking into account all facts and circumstances of the case and in exercise of the powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of SEBI Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby impose a minor penalty of suspension of certificate of registration issued to the Broker, Sanjay Khemani (SEBI Registration No. INB030693921) for a period of 15 days.
6.2 This order shall come into force immediately on the expiry of twenty one days from the date of this order.