Securities Appellate Tribunal
Sebi vs Shri Latesh Chheda, Shri Viren Kenia, ... on 3 September, 2007
ORDER
G. Anantharaman, Member
1. BACKGROUND 1.1 Securities and Exchange Board of India (hereinafter referred to as SEBI) noticed that the prices of certain stocks have witnessed dramatic upsurges on the day of listing, or soon thereafter. On a preliminary analysis of the trading of the shares on the first day of listing, SEBI found that certain clients had placed abnormally large orders of shares at prices much below prevailing market prices. The aforesaid orders, prima facie, raised serious doubts about the intentions of the entities placing such orders. In view of the aforesaid abnormalities as indicated by the Integrated Market Surveillance System (IMSS) of SEBI, an immediate examination in the matter was undertaken.
1.2 SEBI found that certain clients had placed abnormally large orders of shares at prices much below prevailing market prices besides unusually revealing their large order quantities in full, while dealing in the shares of certain companies mentioned below:
Client Name SYMBOL Exch Listing Date Total Buy Order Qty %Off-spec Large Order (below prevailing mkt price) % of Off-spec Large Order Qty to Total Buy Qty price range for off-spec Large Order (Rs) Prevailin g Market Price (PMP) range (Rs) % Variatio n off- spec large order to PMP % of Total large off-spec Buy Order Qty that was deleted or Unexecuted Bhavin Chheda AICHAMP BSE 14-Feb-07 100000 100000 100 80 217.4 63.20 100/ 0 Chetan Rathod.
CTE BSE 7-Feb-07 1300000 1100000 84.6 45 76.50-99.80 41.18 100/ 0 Chetan Rathod.
POCHIRAJU BSE 9-Feb-07 200000 200000 100 28 56 50.00 100/ 0 Dhiren Pajwani PSTL NSE 5-Jan-07 2580144 2280011 77.00- 141.40- 100/ 0 88.37 100.00 161.45 45.54 Dhiren Pajwani SHREEASTHA NSE 10-Jan-07 863000 660000 120.00- 194.40- 100/ 0 76.48 122.00 236.30 28.27 Latesh Chheda PSTL NSE 5-Jan-07 634139 250004 153.25- 100/ 0 39.42 80 153.65 47.80 Latesh Chheda CTE NSE 7-Feb-07 2497819 1050000 42.04 40.00-45.00 83.50-106.50 52.10 100/ 0 Latesh Chheda POCHIRAJU NSE 9-Feb-07 5875318 4750000 28.00- 46.55- 96.5/ 3.5 80.85 30.00 57.80 39.85 Latesh Chheda AICHAMP NSE 14-Feb-07 857985 680000 218.55- 100/ 0 79.26 80.00 224.00 63.4 Latesh Chheda CTE BSE 7-Feb-07 1600000 1600000 100 40 83.50-103.10 42.10 37.5/ 62.5 Latesh Chheda MINDTREE BSE 7-Mar-07 80000 30000 37.5 320 622 48.55 0/ 100 Latesh Chheda POCHIRAJU BSE 9-Feb-07 1800000 1800000 100 28 46.4-57.40 39.57 83.3/ 16.67 Latesh Chheda PSTL BSE 5-Jan-07 500000 500000 100 80 153.7 47.95 100/ 0 Neptune Fincot P AICHAMP BSE 14-Feb-07 150000 150000 214.0- 66.67/ 33.33 Ltd 100 100 235.20 53.27 Neptune Fincot P POCHIRAJU BSE 9-Feb-07 600000 600000 100/ Ltd 100 30 59.65 49.71 0 Neptune Fincot P SHREEASTHA BSE 10-Jan-07 200000 200000 239.10- 100/ 0 Ltd 100 125 244.5 47.72 Neptune Fincot P CTE NSE 7-Feb-07 6576592 5850000 30.00- 77.00- 100/ 0 Ltd 88.95 45.00 107.00 61.04 Neptune Fincot P POCHIRAJU NSE 9-Feb-07 11284059 10710000 25.00- 46.60- 100/ 0 Ltd 94.91 30.00 59.90 46.35 Neptune Fincot P AICHAMP NSE 14-Feb-07 630815 445000 213.05- 100/ 0 Ltd 70.54 100.00 234.0 53.06 R SS Invest. P. PSTL NSE 5-Jan-07 6691745 6645540 100/ 0 Ltd 99.31 79 147.45 46.42 R SS Invest. P. SHREEASTHA NSE 10-Jan-07 5412364 5412364 100/ 0 Ltd 100 120 203.8 41.12 Viren Kenia AICHAMP BSE 14-Feb-07 100000 100000 239.0- 100/ 0 100 100 242.70 58.16 Viren Kenia CTE BSE 7-Feb-07 1350000 1350000 79.20- 100/ 0 100 45 88.50 43.18 Viren Kenia MINDTREE BSE 7-Mar-07 100000 100000 320.00- 633.00- 100/ 0 100 340.00 640.00 49.45 Viren Kenia POCHIRAJU BSE 9-Feb-07 1450000 1450000 25.00- 57.6- 100/ 0 100 30.00 58.65 56.60 Viren R Kenia CTE NSE 7-Feb-07 1427000 1080000 85.80- 100/ 0 75.68 45 87.20 47.55 Viren R Kenia PSTL NSE 5-Jan-07 178300 146.80- 100/ 0 140000 78.52 80 147.25 45.51 Viren R Kenia POCHIRAJU NSE 9-Feb-07 493547 59.35- 100/ 0 360000 72.94 25-30 59.60 57.88 Viren R Kenia AICHAMP NSE 14-Feb-07 300981 240.10- 100/ 0 150000 49.84 100 240.90 64.69 1.3 It was observed from the above table that in all cases of placement of large off-spec buy orders resulted in zero traded quantity. It was revealed that the aforesaid clients had placed large orders which were subsequently deleted within a few minutes or remained unexecuted due to the off-spec order price. It was inter alia found that that the value of the orders placed at off- spec prices by the aforesaid clients was disproportionate to the income as shown in the Know Your Client (KYC) forms.
2. INTERIM ORDER 2.1 In the facts and circumstances, it was prima facie found that the intention of placing such orders was for artificially enhancing the levels of demand, which constituted a manipulative practice in the market and therefore, the clients mentioned in the table at para 1.2 above were prima facie found to have violated Regulation 4 (2) (a), (b) & (g) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (FUTP Regulations). SEBI vide an ad interim, ex-parte order dated April 26, 2007 passed inter alia the following directions:
a. that the identified entities viz. Latesh Chheda, Viren Kenia, Bhavin Chheda, Chetan Rathod, Neptune Fincot P Ltd, Dhiren Pajwani and RSS Investment Ltd shall hereby cease and desist from dealing in shares in the manner described in the order as would impart artificiality to the order book with the concomitant impact on the market, in violation of Regulation 4 (2) (a) (b) & (g) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 b. that the identified entities viz. Latesh Chheda, Viren Kenia, Bhavin Chheda, Chetan Rathod, Neptune Fincot P Ltd, Dhiren Pajwani and RSS Investment Ltd are hereby directed not to buy, sell or deal in securities, directly or indirectly, on the day of listing of any securities on the stock exchanges, till further directions in this regard.
c. The brokers viz., RSS Investments, Maniput Investments Pvt ltd, Magnum Equity Broking Ltd. and Prashant Jayantilal Patel through whom the identified entities have dealt in the shares of the companies in the manner described above are directed to be cautious and exercise due diligence while dealing on behalf of their clients.
2.2 The entities/persons mentioned in the said order were also granted an opportunity to file their objections, if any, within 15 days from the date of the said order.
2.3 SEBI also ordered for investigations in to the affairs relating to placement of large quantity of off-spec buy orders by the persons mentioned in the aforesaid interim order.
3. REPLY OF THE CLIENTS
3.1 Shri Viren Kenia vide letter dated May 24, 2007 inter alia stated that he was intra day trader and his order were placed at the price calculated on the basis of fundamental and technical analysis of the company. He further stated that he had been dealing with two trading members of NSE and BSE viz. M/s Magnum Equity Broking Ltd. and Maniput Investments Pvt. Ltd. He submitted that the intra day trading was a legitimate activity and that the same could not be deemed to be a fraudulent and unfair trade practice and that the same were not meant to operate only as a device to inflate, depress or cause fluctuation in the price of the scrips for any wrongful gain or avoidance of loss. Shri Chetan Rathod vide letter dated May 23, 2007 inter alia echoed the same defence. He further stated that none of his actions/ transactions fell into the category of fraud as defined in the provisions of FUTP Regulations. Shri Bhavin Chheda vide letter dated May 9, 2007 inter alia stated that he was an intra day trader and carried out intra day trading in the course of his business. He stated that he had placed large orders without any malafide intention or to mislead any investors. Neptune Fincot Pvt. Ltd. vide letter dated May 9, 2007 inter alia stated that the orders were placed by it within the permissible price range of the stock exchange and the size of the said orders was also with its financial capabilities. It further stated that none of its activities would fall under the category of fraudulent activities as mentioned in the provisions of FUTP Regulations. Shri Latesh Chheda in his letter dated May 9, 2007 inter alia stated that during the period October 2006 March 2007 he had dealt in various scrips in a similar way.
4. HEARING 4.1 SEBI inter alia granted an opportunity of hearing to Shri Latesh Chheda, Shri Viren Kenia, Shri Bhavin Chheda, Shri Chetan Rathod, M/s Neptune Fincot P Ltd, Shri Dhiren Pajwani and M/s RSS Investment Ltd. on August 30, 2007. Shri Dhiren Pajwani and M/s RSS Investment Ltd requested SEBI to grant a fresh date of hearing.
4.2 Shri Latesh Chheda, Shri Viren Kenia, Shri Bhavin Chheda, Shri Chetan Rathod appeared before me in person and made their submissions. On behalf of Neptune Fincot P Ltd., its directors viz. Shri Tushar K. Chheda and Shri Nilesh K Chheda made submissions before me. Shri Prakash K Shah, Authorised Representative of the aforesaid clients was also present at the time of the hearing. It was inter alia submitted that the price of the respective scrips had not moved up or down substantially at the time of placement of their orders. Further, they submitted that they were having sufficient net worth at the time of the impugned placement of orders. In addition, it was urged that the intra day trading was a market practice and that they were taking a chance in case the price fell. Also it was vehemently contended that their trades had not contributed to market manipulation and that they had not made any undue gains out of the said transactions.
5. CONSIDERATION OF ISSUES AND FINDINGS 5.1 I note that Shri Latesh Chheda, Shri Viren Kenia, Shri Bhavin Chheda, Shri Chetan Rathod and M/s Neptune Fincot Pvt. Ltd. (hereinafter collectively referred to as the said entities) have placed large buy orders much below the prevailing market price on the fist day of listing of the shares of certain scrips as mentioned in the table at para 1.2. Day trading, as an observed market practice, entails buy and sell of a scrip at the prevailing market price sans the element of delivery. In the instant case, involving the said entities as gleaned from the table at para 1.2, the order placement at off-spec price did not fructify into trades. Additionally, such large buy orders were off-spec, in as much as they were well below the prevailing market price. In that view of the matter, the ingredients of day trading are totally absent in the instant case and hence features noticed are abnormal. I note that, if the said entities had any intention of carrying out day trading activity involving squaring up of the transactions, they would have placed the buy order somewhere close to the prevailing market price which would have been followed by a sell order or vice- versa. On the contrary, the said entities have placed buy orders much below the market price as mentioned above, without even placing sell orders.
5.2 On the first day of listing, the stock exchanges do not apply circuit filters in order to facilitate price discovery through its order matching mechanism. Therefore, it is expected that on the first day of listing the price of the scrip is discovered through the interplay of demand and supply. In the present case, I note that the entities had placed large orders much below the prevailing market price and subsequently the entire quantity of the said order was either completely deleted or downsized to nugatory proportions.
5.3 In normal practice, the market picture window on the trading terminal, reveals the best five orders based on price as well as the total depth of order book in respect of trading in a scrip. These are the major determining factors required for genuine investors for making an investment decision for buying or selling securities. The demand and the supply forces determine the market price of the scrip. By placing a large buy order quantity and disclosing the entire quantity in one instance, the said entities have attempted prima facie to create artificial demand in the respective scrips. The demand created by the said entities was artificial as the price quoted by these entities was much below the prevailing market price i.e. 30% to 60% below the market price. I note that all the offspec orders placed by the said entities have not resulted in to trades as they were much below the prevailing market price. However, as narrated above, the said orders certainly made an impact on the lay investors in making an investment decision. It is pertinent to mention that all the scrips, where the said entities were found to be dealing on the day of listing had substantial price rise during the day. The price movement of these scrips on the day of listing at NSE is given below:
Name of the Company Date of listing Issue price Closing price Cambridge Technology Enterprise Ltd 7-Feb-07 38 100.9 Mindtree Consulting Ltd 7-Mar-07 425 621.2 Pochiraju Industries Ltd 9-Feb-07 30 49.65 Pyramid Saimita Theatre ltd 5-Jan-07 100 157.7 Shree Astavinayak Cine Vision Ltd 10-Jan-07 160 225.4 AI Champdany Industries Ltd 14-Feb-07 Re-listing 233.65 5.4 I note that the stock exchange trading system gives the priority to the orders on the basis of best price quoted by the investor. In the present case, it is observed that the prices quoted inter alia by the said entities were much below the prevailing market prices. Therefore, the question of disclosure of large order quantity for getting preference does not arise, as argued before me by the said entities. It is naive on the part of the said entities to suggest that since the system permits the disclosure of the entire quantity, they have done so to get the order preference. It is obvious that the orders placed by the said clients would not get executed as the price quoted by them was much below (by 30% to 60%) the prevailing market price, thereby precluding the possibility of the order entering the best five orders displayed on the market picture window. Therefore, the only reason for placing such buy orders (disclosing the entire quantity) was prima facie to create an artificial demand in the respective scrips. In the facts and circumstances, it is prima facie observed that the act of the said entities created false or misleading appearance of trading in the securities market and the placement of order was without any intention of performing it.
5.5 I also note that the said entities had placed orders which were not in proportion to declared income in Know Your Client (KYC) form. These declared income levels of Rs 1 to 5 lacs are clearly insufficient to support the large buy orders placed by the said entities in those identified scrips. As on date, no evidence of updated KYC has been produced before me to substantiate the plea that they had sufficient income at the time of order. The assessment on the financial capabilities of the clients viz-a-viz their exposure in particular scrip was solely based on the information provided to the broker by the said clients as it constitutes a valuable documentation to the brokers to decide on clients exposure.
5.6 It was argued by the said entitles that they had placed orders in installments which have been aggregated in the interim order of SEBI. Even if a single installment of buy order is taken into account for each of the clients, the same would necessarily be considered as a large buy order in the trading system. Additionally, it was observed that the said entities were successively deleting the orders and placing fresh orders all of which were at much below the prevailing market price This prima facie demonstrates that they have repeatedly and knowingly placed large orders much below the market prices even though their earlier order had not been executed. Further such a process of deletion of successive orders and placing of fresh orders in that place is prima facie bound to misinform the lay investors that the earlier large orders placed in the system had been executed. This dimension of the game plan lends necessary support to the prima facie findings in the interim order dated April 26, 2007. If they had any genuine intention of buying or selling they would have placed orders at prevailing market prices, instead of a devious pattern as noticed. By adopting this strategy, the said entities have managed to generate an impression in the securities market that there exists a huge demand for the scrip. It is pertinent to mention that in terms of NSEs Capital Market and F&O Regulations Part A 4.5.4. c (i), a trading member is prohibited from making bids and/or offer for securities with an intention of creating a false or misleading appearance with respect to the market for, or the price of any security. This has been further confirmed by NSE by its circular dated March 23, 2007 and the members were advised to exercise due diligence and caution at the time of entering orders which are away from the market price. The members were also advised to put in place appropriate internal systems and procedures for ensuring that such orders were not entered. Similar guidelines were also issued by BSE to its member vide its notice dated March 23, 2007. This would prima facie establish that the buy orders of the said entities at off-spec price were against the instructions issued by the stock exchanges from time to time. In the facts and circumstances, as discussed above, none of the ingredients adduced by the said entities command any acceptance.
5.7 Though seemingly innocuous, the entire pattern is prima facie a subtle ruse to vitiate the process of price discovery system on a day when the market is set on a free course without even a price filter. The market sensitivities on the first day of listing do not brook any form of artificiality or artifice which is market-antagonistic and also a contaminant needing to be totally purged. That is the reason why there is no price filter on the first day of listing, providing for free interplay of genuine market forces. Further, the interim order is meant to be a signal to those indulging in such undesirable practices on the first day of listing, seeking to queer the pitch.
5.8 In view of the above, it is prima facie established that Shri Latesh Chheda, Shri Viren Kenia, Shri Bhavin Chheda, Shri Chetan Rathod, M/s Neptune Fincot Pvt. Ltd have prima facie violated the provisions of Regulation 4 (2) (a), (b) and (g) of the FUTP Regulations.
6. DIRECTIONS
6.1 In the facts and circumstances of the case, in exercise of the powers conferred upon me in terms of Section 19 read with section 11B, 11 (4) (b) and 11D of the Securities and Exchange Board of India Act, 1992, I hereby confirm the ad interim order dated April 26, 2007 against Shri Latesh Chheda, Shri Viren Kenia, Shri Bhavin Chheda, Shri Chetan Rathod, M/s Neptune Fincot Pvt. Ltd.