Securities Appellate Tribunal
Sebi vs Pursarth Trading Company Private Ltd. on 26 April, 2007
ORDER
V.K. Chopra, Member
1. BACKGROUND 1.1 M/s Prudential Pharmaceuticals Ltd. was originally incorporated in the name of Pharmasia Drugs and Chemicals Pvt. Ltd. on June 25, 1985. The company became a deemed Public Limited Company w.e.f. February 06, 1993 and converted into a Public Limited Company by a resolution on November 03, 1994. A fresh certificate of incorporation consequent on the conversion of the company was issued on February 15, 1995. The company's name was also changed to M/s Prudential Pharmaceuticals Ltd. (hereinafter referred to as "PPL") w.e.f. February 22, 1995.
1.2 Securities and Exchange Board of India (hereinafter referred to as "SEBI) conducted an investigation into the alleged manipulation in the scrip of PPL for the period from July 09, 2001 to March 06, 2002 on the basis of the investigation report submitted by BSE. BSE in its investigation report stated that the major buying broker M/s Tropical Securities and Investments Pvt. Ltd. (hereinafter referred to as "Tropical") had mostly bought shares of PPL for Pursarth Trading Company Pvt. Ltd. (hereinafter referred to as "Noticee") and it had bought almost 4.53% of the paid up capital of PPL.
1.3 Investigation revealed that the Noticee had entered into synchronised/structured deals with the clients of the counter party brokers UTI Securities Ltd and M/s Pawankumar Parmeshwarlal Choudhary with a pre-determined plan in order to tide over the financial difficulties faced by the Noticee and its group entities. For executing such artificial transactions, the Noticee used the stock exchange mechanism and the same had also resulted in creation of artificial volume. In view of this, it is prima facie found that the Noticee violated the provisions of Regulations 4(b) and 4(c) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the securities market) Regulations, 1995 and its corresponding provisions of Regulation 4(1), 4(2)(a) and (e) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the securities market) Regulations, 2003 (hereinafter referred to in short as "PFUTP Regulations").
2. SHOW CAUSE NOTICE 2.1 A Show Cause Notice dated July 07, 2006 was issued to Noticee whereby they were advised to show cause as to why the action under Section 11 B of SEBI Act, 1992 read with Regulations 11 and 13 of PFUTP Regulations including debarring the Noticee from accessing capital market should not be taken against them for the violations mentioned at paragraph 1.3 above. The Noticee submitted its reply to the show cause notice, vide letter dated July 29, 2006.
3. REPLY OF THE NOTICEE TO THE SHOW CAUSE NOTICE.
3.1 The Noticee submitted that the impugned transactions in the scrip of PPL were carried out on the BOLT system of BSE at the relevant time in the normal and ordinary course of business. Hence, there was no question of intentionally and deliberately entering any structured/synchronised deals in the scrip so as to create false volumes.
3.2 The Noticee submitted that they had been issued contract notes/bills in respect of trades in the scrip at the relevant time and all contractual obligations inter-se were fulfilled as required.
3.3 The Noticee submitted that their transactions for the relevant period were only on few days and that too at the prevailing market rates. Further, they submitted that they had not created any artificial volume and liquidity in the scrip as they had nothing to gain and that they had not gained from these transactions except having created the liquidity for their associate who was being pressurized by their banker. He added that they had resorted to temporary funding to clear the pressures in the valan account and to avoid default in the valan account in November and December 2001.
3.4 The Noticee denied that there was any interference with the fair and smooth functioning of the market and the creation of artificial volumes. They denied having executed matched/structured transactions and also stated that they had not violated any provisions of the PFUTP Regulations.
4. HEARING 4.1 The Noticee was given an opportunity of personal hearing before me at SEBI's Head Office at Mumbai on February 26, 2007. Shri. Milan Dalal, and Shri. Deepak Shah attended the hearing on behalf of the Noticee. They have also filed a written submission on the same day. During the course of hearing, they by and large reiterated the submissions they had already made in their reply to the Show Cause Notice as also in their written submission.
5. CONSIDERATION OF ISSUES & FINDINGS 5.1 I have carefully examined the enquiry report, show cause notice and written submissions of the Noticee.
5.2 The main charge levelled against the Noticee is that it had executed synchronised/structured trades in the scrip of PPL through its associate broker, Tropical and misutilised the stock exchange trading mechanism to tide over the financial difficulties of the Noticee and its associated group entities. I have noted that Tropical, CFL Securities Ltd. and Harbinger Trading Company Private Ltd. are also associated with the Noticee as Shri. Milan Dalal gave a statement before the Investigating Officer on behalf of the aforesaid four entities. I have also noted that the Accountant of Noticee, Shri Deepak Shah attended the personal hearing before me along with Shri Milan Dalal. They have not denied their connection/association with these entities.
5.3 The price of the scrip during the period from July 09, 2001 to March 06, 2002 has decreased from Rs. 54.20 to Rs. 8.00 and during this period 4,41,970 shares were traded at BSE. Further, it is observed from the details of trades executed in the PPL scrip that whenever the Noticee and its counterparties were not trading in the scrip, the price was falling. They have not traded in the scrip from July 18, 2001 to July 24, 2001 and during this period the price came down from Rs. 41 to Rs. 33.45 and during the period of August 01, 2001 to August 24, 2001 only 130 shares were traded and the price came down from Rs. 22.15 to Rs. 16.50. Therefore, it can be observed from the above that whenever they were not trading in the scrip of PPL price was falling.
5.4 I have also noted the financial performance of the company PPL for the financial years ended on March 31, 2001 and 2002 and quarters ended on December 31, 2001 and 2002. Though, the sales of the company increased by 28.46% from March 31, 2001 to March 31, 2002, the profit of the company decreased by 27% due to substantial increase in expenditure of the company from Rs. 8.27 crore to Rs. 10.75 crore. Further, EPS of the company declined by 21% during the financial year 2001-02 and the company declared dividend of 10% for the year ended March 31, 2001. From these figures, it is observed that the financial performance of the company was not satisfactory.
5.5 I observe that broker Tropical traded for 25 days during the period of investigation and it bought 2,48,075 shares (85.44%) out of 2,90,339 shares traded during these 25 days at BSE. Out of its total purchases of 2,48,075 shares, it bought 2,33,421 shares and sold 75 shares for Noticee. The broker, Tropical had also bought 14,629 shares in its own trading account and sold 25 shares in its own trading account and 25 shares were bought for its other client Ms. Veena M Dalal.
5.6 I observe that the Noticee had entered into synchronised/structured deals. The synchronized trade is a kind of transactions where the seller and buyer execute the trade for almost same quantity and price at the same time. Any synchronized deal with fraudulent or deceptive intention to create misleading appearance of trading and to manipulate the price and volume of the scrip price tampers with the price discovery mechanism of stock exchange. The issue to be decided in this case is whether the Noticee has carried out any such trades and to take a decision as to whether any penalty against the Noticee is warranted or not. In view of this, I felt it necessary to analyse the details of synchronised trades executed by the Noticee. (As given on next page) Details of synchronised trades of the Noticee with the client of the broker UTI Securities Ltd in the scrip of PPL Sell Member Code Sell Client Code Sell Order No Sell Order Date Sell Order Time Sell Order Price Sell Order Quantity Buy Member Code Buy Client Code Buy Order No. Buy Order Date Buy Order Time Buy Order Price Buy Order Quantity Trade No Traded Quantity Traded Price Trade Date Trade Time Time difference between buy and sell orders Price difference between buy and sell orders Quantity Difference between buy and sell orders D0767 UTICAP 76700100010009847 7/16/2001 10:11:57 51.25 50000 D0650 TT 65000200010012419 7/16/2001 10:11:54 51.25 50000 2 5000 51.25 7/16/2001 10:11:57 0:00:03 0 0 D0767 UTICAP 76700100010009847 7/16/2001 10:11:57 51.25 50000 D0650 TT 65000200010012419 7/16/2001 10:11:54 51.25 50000 3 5000 51.25 7/16/2001 10:11:57 0:00:03 0 0 D0767 UTICAP 76700100010009847 7/16/2001 10:11:57 51.25 50000 D0650 TT 65000200010012419 7/16/2001 10:11:54 51.25 50000 4 5000 51.25 7/16/2001 10:11:57 0:00:03 0 0 D0767 UTICAP 76700100010009847 7/16/2001 10:11:57 51.25 50000 D0650 TT 65000200010012419 7/16/2001 10:11:54 51.25 50000 5 5000 51.25 7/16/2001 10:11:57 0:00:03 0 0 D0767 UTICAP 76700100010009847 7/16/2001 10:11:57 51.25 50000 D0650 TT 65000200010012419 7/16/2001 10:11:54 51.25 50000 6 5000 51.25 7/16/2001 10:11:57 0:00:03 0 0 D0767 UTICAP 76700100010009847 7/16/2001 10:11:57 51.25 50000 D0650 TT 65000200010012419 7/16/2001 10:11:54 51.25 50000 7 5000 51.25 7/16/2001 10:11:57 0:00:03 0 0 D0767 UTICAP 76700100010009847 7/16/2001 10:11:57 51.25 50000 D0650 TT 65000200010012419 7/16/2001 10:11:54 51.25 50000 8 5000 51.25 7/16/2001 10:11:57 0:00:03 0 0 D0767 UTICAP 76700100010009847 7/16/2001 10:11:57 51.25 50000 D0650 TT 65000200010012419 7/16/2001 10:11:54 51.25 50000 9 5000 51.25 7/16/2001 10:11:57 0:00:03 0 0 D0767 UTICAP 76700100010009847 7/16/2001 10:11:57 51.25 50000 D0650 TT 65000200010012419 7/16/2001 10:11:54 51.25 50000 10 5000 51.25 7/16/2001 10:11:57 0:00:03 0 0 D0767 UTICAP 76700100010009847 7/16/2001 10:11:57 51.25 50000 D0650 TT 65000200010012419 7/16/2001 10:11:54 51.25 50000 11 5000 51.25 7/16/2001 10:11:57 0:00:03 0 0 D0767 UTICAP 76700100010009848 7/16/2001 10:12:33 51 50000 D0650 TT 65000200010012420 7/16/2001 10:12:35 51 50000 12 5000 51.00 7/16/2001 10:12:35 0:00:02 0 0 D0767 UTICAP 76700100010009848 7/16/2001 10:12:33 51 50000 D0650 TT 65000200010012420 7/16/2001 10:12:35 51 50000 13 5000 51.00 7/16/2001 10:12:35 0:00:02 0 0 D0767 UTICAP 76700100010009848 7/16/2001 10:12:33 51 50000 D0650 TT 65000200010012420 7/16/2001 10:12:35 51 50000 14 5000 51.00 7/16/2001 10:12:35 0:00:02 0 0 D0767 UTICAP 76700100010009848 7/16/2001 10:12:33 51 50000 D0650 TT 65000200010012420 7/16/2001 10:12:35 51 50000 15 5000 51.00 7/16/2001 10:12:35 0:00:02 0 0 D0767 UTICAP 76700100010009848 7/16/2001 10:12:33 51 50000 D0650 TT 65000200010012420 7/16/2001 10:12:35 51 50000 16 5000 51.00 7/16/2001 10:12:35 0:00:02 0 0 D0767 UTICAP 76700100010009848 7/16/2001 10:12:33 51 50000 D0650 TT 65000200010012420 7/16/2001 10:12:35 51 50000 17 5000 51.00 7/16/2001 10:12:35 0:00:02 0 0 D0767 UTICAP 76700100010009848 7/16/2001 10:12:33 51 50000 D0650 TT 65000200010012420 7/16/2001 10:12:35 51 50000 18 5000 51.00 7/16/2001 10:12:35 0:00:02 0 0 D0767 UTICAP 76700100010009848 7/16/2001 10:12:33 51 50000 D0650 TT 65000200010012420 7/16/2001 10:12:35 51 50000 19 5000 51.00 7/16/2001 10:12:35 0:00:02 0 0 D0767 UTICAP 76700100010009848 7/16/2001 10:12:33 51 50000 D0650 TT 65000200010012420 7/16/2001 10:12:35 51 50000 20 5000 51.00 7/16/2001 10:12:35 0:00:02 0 0 D0767 UTICAP 76700100010009848 7/16/2001 10:12:33 51 50000 D0650 TT 65000200010012420 7/16/2001 10:12:35 51 50000 21 5000 51.00 7/16/2001 10:12:35 0:00:02 0 0 D0767 UTICAP 76700100010009849 7/16/2001 10:13:04 51.25 50000 D0650 TT 65000200010012421 7/16/2001 10:13:04 51.25 50000 22 5000 51.25 7/16/2001 10:13:04 0:00:00 0 0 D0767 UTICAP 76700100010009849 7/16/2001 10:13:04 51.25 50000 D0650 TT 65000200010012421 7/16/2001 10:13:04 51.25 50000 23 5000 51.25 7/16/2001 10:13:04 0:00:00 0 0 D0767 UTICAP 76700100010009849 7/16/2001 10:13:04 51.25 50000 D0650 TT 65000200010012421 7/16/2001 10:13:04 51.25 50000 24 5000 51.25 7/16/2001 10:13:04 0:00:00 0 0 D0767 UTICAP 76700100010009849 7/16/2001 10:13:04 51.25 50000 D0650 TT 65000200010012421 7/16/2001 10:13:04 51.25 50000 25 5000 51.25 7/16/2001 10:13:04 0:00:00 0 0 D0767 UTICAP 76700100010009849 7/16/2001 10:13:04 51.25 50000 D0650 TT 65000200010012421 7/16/2001 10:13:04 51.25 50000 26 5000 51.25 7/16/2001 10:13:04 0:00:00 0 0 D0767 UTICAP 76700100010009849 7/16/2001 10:13:04 51.25 50000 D0650 TT 65000200010012421 7/16/2001 10:13:04 51.25 50000 27 5000 51.25 7/16/2001 10:13:04 0:00:00 0 0 D0767 UTICAP 76700100010009849 7/16/2001 10:13:04 51.25 50000 D0650 TT 65000200010012421 7/16/2001 10:13:04 51.25 50000 28 5000 51.25 7/16/2001 10:13:04 0:00:00 0 0 D0767 UTICAP 76700100010009849 7/16/2001 10:13:04 51.25 50000 D0650 TT 65000200010012421 7/16/2001 10:13:04 51.25 50000 29 5000 51.25 7/16/2001 10:13:04 0:00:00 0 0 D0767 UTICAP 76700100010009849 7/16/2001 10:13:04 51.25 50000 D0650 TT 65000200010012421 7/16/2001 10:13:04 51.25 50000 30 5000 51.25 7/16/2001 10:13:04 0:00:00 0 0 D0767 UTICAP 76700100010009849 7/16/2001 10:13:04 51.25 50000 D0650 TT 65000200010012421 7/16/2001 10:13:04 51.25 50000 31 5000 51.25 7/16/2001 10:13:04 0:00:00 0 0 D0767 UTICAP 76700100010009850 7/16/2001 10:13:37 51 25000 D0650 TT 65000200010012422 7/16/2001 10:13:38 51 25000 32 2500 51.00 7/16/2001 10:13:39 0:00:01 0 0 D0767 UTICAP 76700100010009850 7/16/2001 10:13:37 51 25000 D0650 TT 65000200010012422 7/16/2001 10:13:38 51 25000 33 2500 51.00 7/16/2001 10:13:39 0:00:01 0 0 D0767 UTICAP 76700100010009850 7/16/2001 10:13:37 5.7 I find that the Noticee had executed 126 synchronised trades through the broker Tropical and the counter parties were the clients of UTI Securities Ltd. and M/s Pawankumar Parmeshwarlal Choudhary. Out of these 126 trades, the Noticee executed 60 synchronized trades with UTI Securities Ltd. The Noticee bought a total of 1,96,000 shares of PPL in a single day i.e on July 16, 2001 within a time gap from 10:11:57 to 10:15:07. UTI Securities Limited sold 1,96,000 shares of PPL on behalf of UTI Bank Ltd. to the Noticee through structured deals through its broker Tropical. I however find that there was no repetition of such transaction by UTI Bank or UTI Securities Limited.
5.8 The Noticee had also entered into 66 synchronised/structured trades with the clients of BSE Member M/s Pawankumar Parmeshwarlal Choudhary. In this regard it is noted that M/s Choudhary has sold 82,534 shares and out of that 33,410 shares were bought by the Noticee. It is observed that 12,810 shares were bought by the Noticee through structured trades where the Noticee placed 6 buy orders for 13,150 shares and M/s Choudhary also placed 6 sell orders for 12,850 shares. Details of these trades are given hereunder (As given on next page).
Details of synchronised trades of the Noticee with M/s Pawankumar Parmeshwarlal Choudhary Trade No Buy Order No Buy Order Time Buy Order Price Buy Order Quantity Buy Member Code Buy Client Code Traded Quantity Trade Price Trade Date Trade Time Sell Order No Sell Order Time Sell Order Price Sell Order Quantity Sell Member Code Sell Client Code Difference between sell time and buy time order Difference between price of buy and sell order Difference between quantity of buy and sell order 99 65000100010009434 14:20:36 52.85 200 D0650 TT1 200 52.85 7/9/2001 14:20:36 55000100010005269 14:20:29 52.85 200 D0550 1108 0:00:07 0 0 168 65000200010012237 12:58:41 51.4 3000 D0650 TT1 300 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 169 65000200010012237 12:58:41 51.4 3000 D0650 TT1 200 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 170 65000200010012237 12:58:41 51.4 3000 D0650 TT1 100 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 171 65000200010012237 12:58:41 51.4 3000 D0650 TT1 300 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 172 65000200010012237 12:58:41 51.4 3000 D0650 TT1 100 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 173 65000200010012237 12:58:41 51.4 3000 D0650 TT1 200 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 174 65000200010012237 12:58:41 51.4 3000 D0650 TT1 300 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 175 65000200010012237 12:58:41 51.4 3000 D0650 TT1 300 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 176 65000200010012237 12:58:41 51.4 3000 D0650 TT1 200 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 177 65000200010012237 12:58:41 51.4 3000 D0650 TT1 100 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 178 65000200010012237 12:58:41 51.4 3000 D0650 TT1 300 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 179 65000200010012237 12:58:41 51.4 3000 D0650 TT1 100 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 180 65000200010012237 12:58:41 51.4 3000 D0650 TT1 200 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 181 65000200010012237 12:58:41 51.4 3000 D0650 TT1 300 51.40 7/10/2001 12:58:41 55000100010005287 12:58:38 51.4 3000 D0550 1003 0:00:03 0 0 271 65000200010012271 12:40:33 49.95 2000 D0650 TT 200 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 272 65000200010012271 12:40:33 49.95 2000 D0650 TT 200 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 273 65000200010012271 12:40:33 49.95 2000 D0650 TT 100 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 274 65000200010012271 12:40:33 49.95 2000 D0650 TT 100 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 275 65000200010012271 12:40:33 49.95 2000 D0650 TT 200 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 276 65000200010012271 12:40:33 49.95 2000 D0650 TT 200 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 277 65000200010012271 12:40:33 49.95 2000 D0650 TT 200 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 278 65000200010012271 12:40:33 49.95 2000 D0650 TT 200 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 279 65000200010012271 12:40:33 49.95 2000 D0650 TT 100 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 280 65000200010012271 12:40:33 49.95 2000 D0650 TT 100 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 281 65000200010012271 12:40:33 49.95 2000 D0650 TT 200 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 282 65000200010012271 12:40:33 49.95 2000 D0650 TT 200 49.95 7/11/2001 12:40:41 55000100010005300 12:40:40 49.95 2000 D0550 1003 0:00:07 0 0 5 65000200010013476 14:39:31 17.8 3000 D0650 TT1 300 17.80 8/28/2001 14:39:32 55000100010006035 14:39:28 17.8 2750 D0550 1104 0:00:03 0 250 6 65000200010013476 14:39:31 17.8 3000 D0650 TT1 300 17.80 8/28/2001 14:39:32 55000100010006035 14:39:28 17.8 2750 D0550 1104 0:00:03 0 250 7 65000200010013476 14:39:31 17.8 3000 D0650 TT1 300 17.80 8/28/2001 14:39:32 55000100010006035 14:39:28 17.8 2750 D0550 1104 0:00:03 0 250 8 65000200010013476 14:39:31 17.8 3000 D0650 TT1 300 17.80 8/28/2001 14:39:32 55000100010006035 14:39:28 17.8 2750 D0550 1104 0:00:03 0 250 9 65000200010013476 14:39:31 17.8 3000 D0650 TT1 300 17.80 8/28/2001 14:39:32 55000100010006035 14:39:28 17.8 2750 D0550 1104 0:00:03 0 250 10 65000200010013476 14:39:31 17.8 3000 D0650 TT1 300 17.80 8/28/2001 14:39:32 55000100010006035 14:39:28 17.8 2750 D0550 1104 0:00:03 0 250 11 65000200010013476 14:39:31 17.8 3000 D0650 TT1 300 17.80 8/28/2001 14:39:32 55000100010006035 14:39:28 17.8 2750 D0550 1104 0:00:03 0 250 12 65000200010013476 14:39:31 17.8 3000 D0650 TT1 300 17.80 8/28/2001 14:39:32 55000100010006035 14:39:28 17.8 2750 D0550 1104 0:00:03 0 250 13 65000200010013476 14:39:31 17.8 3000 D0650 TT1 300 17.80 8/28/2001 14:39:32 55000100010006035 14:39:28 17.8 2750 D0550 1104 0:00:03 0 250 14 65000200010013476 14:39:31 17.8 3000 D0650 TT1 50 17.80 8/28/2001 14:39:32 55000100010006035 14:39:28 17.8 2750 D0550 1104 0:00:03 0 250 4 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 5 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 6 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 7 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 8 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 9 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 10 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 11 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 12 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 13 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 14 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 15 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 16 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 17 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 18 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 19 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 20 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 21 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 22 65000200010014053 15:26:02 17 950 D0650 TT1 50 17.00 9/19/2001 15:26:03 55000100010006658 15:25:14 17 1000 D0550 1107 0:00:48 0 50 1 65000200010014215 15:58:38 16.9 4000 D0650 TT1 400 16.90 10/1/2001 15:58:38 55000100010006896 15:58:30 16.9 3910 D0550 1107 0:00:08 0 90 2 65000200010014215 15:58:38 16.9 4000 D0650 TT1 400 16.90 10/1/2001 15:58:38 55000100010006896 15:58:30 16.9 3910 D0550 1107 0:00:08 0 90 3 65000200010014215 15:58:38 16.9 4000 D0650 TT1 400 16.90 10/1/2001 15:58:38 55000100010006896 15:58:30 16.9 3910 D0550 1107 0:00:08 0 90 4 65000200010014215 15:58:38 16.9 4000 D0650 TT1 400 16.90 10/1/2001 15:58:38 55000100010006896 15:58:30 16.9 3910 D0550 1107 0:00:08 0 90 5 65000200010014215 15:58:38 16.9 4000 D0650 TT1 400 16.90 10/1/2001 15:58:38 55000100010006896 15:58:30 16.9 3910 D0550 1107 0:00:08 0 90 6 65000200010014215 15:58:38 16.9 4000 D0650 TT1 400 16.90 10/1/2001 15:58:38 55000100010006896 15:58:30 16.9 3910 D0550 1107 0:00:08 0 90 7 65000200010014215 15:58:38 16.9 4000 D0650 TT1 400 16.90 10/1/2001 15:58:38 55000100010006896 15:58:30 16.9 3910 D0550 1107 0:00:08 0 90 8 65000200010014215 15:58:38 16.9 4000 D0650 TT1 400 16.90 10/1/2001 15:58:38 55000100010006896 15:58:30 16.9 3910 D0550 1107 0:00:08 0 90 9 65000200010014215 15:58:38 16.9 4000 D0650 TT1 400 16.90 10/1/2001 15:58:38 55000100010006896 15:58:30 16.9 3910 D0550 1107 0:00:08 0 90 10 65000200010014215 15:58:38 16.9 4000 D0650 TT1 310 16.90 10/1/2001 15:58:38 55000100010006896 15:58:30 16.9 3910 D0550 1107 0:00:08 0 90 5.9 In all out of total of 126 synchronized trades, the Noticee executed 66 trades on six days (i.e on July 9, 2001 - one trade, July 10, 2001-14 trades, July 11, 2001-12 trades, August 28, 2001 10 trades, September 19, 2001 19 trades, October 01, 2001 10 trades) with M/s Pawankumar Parmeshwarlal Choudhary. All these trades were executed within a time gap of 3 to a maximum 48 seconds. Synchronized/matching trades are evident from the above tables and in all cases, there is no price difference between buy and sell orders as also the quantity difference between buy and sell orders. Through the above structured deals, M/s Pawankumar Parmeshwarlal Choudhary had sold 82,534 shares for his 5 clients viz. M/s P L Choudhary & Co. (37,100), Parmeshwarlal Pawankumar Choudhary (HUF) (26,234), Pawankumar Choudhary (HUF) (4,200), Ms. Sabitaridebi Choudhary (5,000) and Ms. Kanta Singhania (10,000). All of these clients are related to M/s Pawankumar Parmeshwarlal Choudhary as they all are members of the same family. All the above five entities were summoned by the Investigating Officer for recording their statement. Shri Pawankumar Parmeshwarlal Choudhary (Proprietor of M/s Parmeshwarlal Pawankumar Choudhary) appeared before the investigating officer on behalf of above entities and gave his statement. He submitted that the above entities belonging to M/s Pawankumar Parmeshwarlal Choudhary purchased 82,848 shares through off market from Harbinger Trading Company Private Limited (associate concern of Noticee) and sold 82,534 in the market. In the statement he has stated, All of the above entities are in the business of finance since very long and during this period they have done sell and cash type business with Harbinger Trading Company Private Limited. In this process the above entities have earned interest income.
5.10 In continuation to his statement he furnished the reply of his clients who submitted that, the parties interested in selln-cash usually transfer N quantity of shares and N number of scripts in our demat account. As per their need, they ask us to sell all or few out of these shares transferred. They give instruction to us to sell the shares in the market and ask them to pay after reducing their sell-n-cash charges approximately 1.5% to 2%. When they ask us to sell in the market, we ask M/s Pawankumar Parmeshwarlal Choudhary to sell N number of quantity in the market of particular scrip. They also submitted that, sometimes the other party is in so hurry and requires money so urgently that he can not wait for a long time, as some of their pay in or margin or high value cheques might be awaiting for clearance in the bank. In these circumstances or some that other party may want to continue to hold their holdings or any other such circumstances/reasons, which are better known to them only, they sometime arrange that the sell offer put by them is immediately executed.
5.11 From the above statement, the relationship of M/s Pawankumar Parmeshwarlal Choudhary and his clients with the Noticee and their intention to execute the trades in the scrip of PPL are clearly established.
5.12 I observe that Shri Milan Dalal in his statement recorded by the investigating Officer stated that the above transactions were executed to tide over the financial difficulties as group entities of the Noticee namely Tropical, CFL Securities Limited and Harbinger Trading Company Private Limited were facing financial difficulties to fulfill their commitments and therefore the Noticee and its group entities resorted to spot funding through brokers and banks. Shri Dalal further stated that the CFL Securities Limited pledged 2,50,000 shares with UTI Bank Limited against overdraft facility. To meet the shortage in its group entities account, UTI Bank Limited sold 1,96,000 shares which were in turn purchased by Noticee through the broker Tropical. UTI Bank Limited also confirmed that they extended overdraft facility of Rs. 30 crore to the Noticees associate concern CFL Securities Limited and CFL Securities Limited could not meet shortfall in their overdraft account. As such, UTI Bank Limited accepted 2,50,000 shares as pledge on July 12, 2001 and sold 1,96,000 shares on July 16, 2001 through UTI Securities Limited. Shri Dalal further stated that as the shares of PPL were illiquid and the Noticee alongwith group entities had commitments with the bank, Noticee bought these shares through Tropical and as the settlement of the same was few days later, payments were postponed by those days. This statement indicates their intention to execute synchronised trades in PPL so as to meet their funding requirements as also to derive undue benefit thereof. Further, Shri. Milan Dalal has not given any proper explanation for the trades executed by the Noticee with M/s Pawankumar Parmeshwarlal Choudhary. Therefore, it is evident that the Noticee alongwith its associated entities misused the stock exchange mechanism to tide over their financial commitments and thereby distorted the market equilibrium in the scrip.
5.13 I find that the Noticee had not disputed the execution of 126 synchronised trades. What they submitted before me is that they executed trades on the BOLT system of BSE at the relevant time in the normal and ordinary course of business and they had no intention to hamper the stock exchange mechanism. This submission however is contrary to their earlier statement before the Investigating Officer that the trades were executed to meet their financial difficulties.
5.14 The charge against the Noticee is misutilisation of stock exchange mechanism for executing synchronized / structured deals in the scrip of PPL and this is evident from the statement of the director of Noticee. When a broker uses the technique of synchronized trades, it obviously has its bearing on the price discovery mechanism of the exchange. The Noticee has failed to give an acceptable explanation for these trades. In fact synchronized deals are possible only if the trades are put in the system with prior understanding. In such cases prices and quantities are negotiated outside the system and orders are executed simultaneously. All the 126 transactions in this case give an impression that these were all synchronized and executed to create artificial market, or else there would have been no possibility of such perfect matching of quantity price, etc. The intention of executing the said trades has been clearly established. The stock exchange mechanism should not be utilized to execute a pre determined plan. The said issue was already discussed by the Honble Securities Appellate Tribunal (SAT) in Appeal Nos 54 to 57 of 2002 in the case of Nirmal Bang Securities (P) Ltd. v. SEBI. While examining the issue of synchronized trades, the Honble SAT observed as under:
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 establish that BEB had indulged in synchronized trading in violation of regulation 47 of the FUTP Regulations. In a synchronized trading intention is implicit.
5.15 Once the factum of manipulation is proved as discussed above, then as observed by SAT in the matter of Ketan Parekh Vs SEBI, the investors are affected by the said price difference. The relevant observation made by SAT in this regard is reproduced as below:
When a person takes part in or enters into transactions in securities with the intention to artificially raise or depress the price he thereby automatically induces the innocent investors in the market to buy / sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated the person doing so is necessarily influencing the decision of the buyer / seller thereby inducing him to buy or sell depending upon how the market has been manipulated. We are therefore of the view that inducement to any person to buy or sell securities is the necessary consequence of manipulation and flows therefrom. In other words, if the factum of manipulation is established it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so wide spread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose on the Board a burden which is impossible to be discharged.
5.16 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. The strict rules of Evidence Act and proof beyond reasonable doubt are not applicable to a proceeding of this nature. The Supreme Courts decision in Gulabchand vs Kudilal and the decision of the Special Court for trial of offences relating to transactions in securities in the matter of National Housing Bank v. ANZ Grindlays Bank, 1998 (2) LJ 153 is relied upon in this regard.
5.17 In view of what has been explained herein above, I find that that the Noticee misused stock exchange mechanism to tide over their financial commitments and distorted equilibrium of the PPL scrip. This type of artificial volume creation in illiquid scrips gives wrong message to the investors and induces them to trade in the shares and face imminent loss. Further, synchronization of trades with malafide intention as above tampers with price discovery mechanism of stock exchange and also militates against concept of transparency. These trades abetted in creating artificial volumes and false market in the scrip of PPL and are in violation of the provisions of Regulation 4 (b) and (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Markets) Regulations, 1995 and the corresponding provisions of 4(1), 4(2) (a) and (e) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003. Regulations 4 (b) and (c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 provides as follows:
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 transactions.
5.18 Apart from the above, the certificate of registration of the brokers M/s Pawankumar Parmeshwarlal Choudhary and Tropical were suspended for a period of one month vide Order dated April 10, 2007 in the same matter. Having considered all aspects of the matter, I feel that Noticee should be restrained from dealing or accessing the securities market in any manner for a period of one month.
6. ORDER 6.1 Having considered all aspects of the matter and in exercise of the powers conferred upon me under Sections 19 of the SEBI Act read with Sections 11(4) and 11B of SEBI Act, 1992 and Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, I hereby restrain the Noticee, M/s Pursarth Trading Company Private Ltd from buying, selling and dealing or accessing the securities market in any manner for a period of one month from the date of this order.
6.2 This order shall come into force with immediate effect.