Securities Appellate Tribunal
Sebi vs Dresdner Kleinwort Benson Securities ... on 29 April, 2004
ORDER
A.K. Batra, Member
1. During the preliminary investigations conducted by the Securities and Exchange Board of India (hereinafter referred to as 'SEBI') in the transactions of Shri Ketan Parekh and entities connected with him it was revealed that Dresdner Kleinwort Benson Securities (India) Ltd. (hereinafter referred to as 'DKB'), a foreign brokerage firm registered with SEBI having NSE and BSE brokership, had indulged in large transactions on behalf of entities connected / associated with Ketan Parekh. It was also revealed that DKB was making payments to them on the date of transactions itself, without waiting for pay-out of funds from the exchange in lieu of sale of securities. These investigations of transactions executed by DKB prima facie brought out that trades executed by DKB Securities are structured/synchronised and were put with the prior understanding with the counter party broker to ensure that trades put through DKB Securities matched with select brokers. This matching of trades was found to be done with a view to create artificial volume without any intention of effecting genuine trades. It was found that the transactions on behalf of Ketan Parekh entities (hereinafter referred to as KP entities) are, prima facie, financing transactions but were given the colour of purchase and sale of shares at the exchange. Accordingly, formal detailed investigations were conducted.
1.1 Pursuant to the above investigations, SEBI appointed an Enquiry Officer under Regulation 28(1) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 by an Order dated 22nd January, 2002 for enquiring into the possible violations 'interalia' of the provisions of SEBI Act, 1992, SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 and SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995, by DKB.
1.2 The Enquiry Officer conducted the enquiry in accordance with the above Regulations and submitted his report dated 25th March, 2003. The Enquiry Officer found DKB guilty of having violated the provisions of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995. Accordingly, in terms of sub-regulation 7 of Regulation 28 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 read with the provisions of Regulation 13(1) and Regulation 23 of the SEBI (Procedure of Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, the Enquiry Officer recommended a penalty of suspension of certificate of registration granted to DKB for a period of two years.
2. A show cause notice was issued on April 21, 2003, whereby DKB was called upon to show cause as to why appropriate penalty under Regulation 29(1) of SEBI(Stock Brokers and Sub-Brokers) Regulations, 1992 read with Regulation 13(2) of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 should not be imposed on DKB. A copy of the Enquiry report was also enclosed along with the aforesaid show cause.
2.1 DKB submitted its reply to the showcause vide its letter dated June 10, 2003. Subsequently, an opportunity of hearing was granted to it on August 06, 2003. Chamber of ZiaMody represented the DKB. Submissions of DKB in reply dated June 10, 2003 and in the oral hearing, are as follows :
3. By executing the Relevant Trades on behalf of KP entities viz. Classic Credit Ltd. (hereinafter referred to as CCL) and Panther Fincap and Management Services Ltd. (hereinafter referred to as PFMS), DKB has not breached any securities laws of India. It was also said that DKB had not entered into transactions on behalf of CCL and PFMS with the specific intent and purpose of artificially raising or depressing prices or creating false market and volumes in securities. It was also stated that at the time of the Relevant Trades, DKB had no knowledge of the fact that these were circular trades and not genuine trades.
3.1 DKB also submitted that there had been substantial market volume during the relevant period, including the trading days on which DKB had not traded in the respective shares. Further, the market volumes during the relevant period were not at substantial variance to the daily market volumes when DKB had not executed trades in the relevant stocks. Thus, the deliberate intent to manipulate the prices of such stocks cannot be imputed to DKB. According to DKB the allegations made by SEBI in the show cause notice with regard to the circular and fictitious nature of trade transactions executed by DKB, were based on hindsight coupled with access to information not then available to DKB. DKB submitted that it was only an executing agency on behalf of CCL and PFMS and had no knowledge about the circular and fictitious trades. Moreover, the impersonal nature of the screen based trading system made it impossible for DKB to be aware of the identity of counter party buying broker or its client. It was also argued that the total volume of trades done by DKB on behalf of CCL and PFMS in the relevant stocks were not so significant as to inflate, depress or cause fluctuations in the market price of the securities.
3.2 It was submitted by DKB that it had dealt in only nine stocks on behalf of CCL and PFMS, out of which DSQ Software, Tips Industries, Silverline Industries, Shonk Technologies and Mascon Global, DKB had executed only one single client order in each of the stocks during the relevant period. According to DKB, this was insufficient to adversely effect the market volume or price of a stock. Further the trade volumes executed by them, according to DKB, were below 5% of the total volume of trades in the market in the relevant stocks. Furthermore, such trades were executed at prevalent market price and these trades, had not substantially impacted the price movement in the relevant stocks. It was submitted that there was no intention to defeat the 'best offer price' principle in the order matching mechanism of the screen based trading system. The payment of funds by DKB to CCL and PFMS was in accordance with the securities laws, and if the same is construed as a financial activity, this was pursuant to the legal and valid contractual obligations of DKB and the said activity was incidental and consequential to the securities business. DKB also stated that the price movement in the relevant stocks was in consonance with the recognized indices i.e. BSE Sensex and NSE Nifty.
3.3 Regarding the Enquiry Report and the allegations therein that trades were entered into by DKB effectively excluding others from KP group's sell offer and ensuring exact matching of the price and quantity of the sell offer, it states that 506 sale orders were placed by CCL and PFMS through DKB resulting in 4, 766 executions, which indicate that negotiated trades did not exclude other market participants from trading in the relevant scrips. It also stated that there was no evidence to demonstrate that there had been any pre-determination or content between DKB on the one hand and the counter party buying broker / client on the other hand while executing such trades. DKB also mentioned that the circular of SEBI dated 14.09.99 does not prohibit negotiated deals per se and it interpreted the circular to mean that negotiated trades are valid only if they are conducted like any other normal trades. According to DKB, when they entered into the relevant trades, they believed the same to be just like any other normal trade. DKB stated that it did not know that such trades were circular in nature. Further, DKB admitted that trades were executed by it as told by Mr. Kartik Parekh at a specific price quantity. However, it stated that it was not aware that scrips were being purchased by KPG entities. DKB submitted that the primary feature of the impersonal trading mechanism through screen based system does not permit the broker to know the identity of the buying client and therefore there was no fault on its part.
3.4 DKB also stated that they had done limited trading in the illiquid scrips, which cannot be alleged to be abnormal or unusual. Regarding illiquid scrips, DKB submitted that executions by them were in the range of 2.38% to 42.81% of the combined market volume in NSE and BSE on the respective trade dates. It further emphasized that illiquid scrips do not witness high volumes in the ordinary course and trading would normally be limited to a few major shareholders in such cases. With respect to liquid scrips, the limited volume of trade executed by DKB (i.e. less than 5% of the day's combined market volume of the said stock in NSE and BSE) would not affect the market. They also alleged that the findings of the enquiry officer were based on the principles of probability that DKB should have known about the fact that it was dealing with KP group entities on both sides. They submitted that the report did not contain evidence to suggest that DKB had known such transactions to be circular in nature. They also cited the judgment of the Securities Appellate Tribunal in Sterlite case that mere probability would not be sufficient to establish the offence of market manipulation.
3.5 As to the finding by the Enquiry Officer that settlement obligation at the stock exchange was later discharged by DKB instead of seller it was submitted by DKB in their reply that it had executed on sale trades for CCL and PFMS and accordingly the settlement obligation in the stock exchange comprised only its obligation to make delivery of the stocks to be sold and there was no payment obligation as part of the settlement process. DKB further said that the settlement obligations of making deliveries was discharged by it pursuant to its receipt of stocks from CCL and / or PFMS, prior to their making any payment to CCL /PFMS. It states that the settlement obligation for any trade executed on the stock exchanges is with the stock broker. The circular of SEBI dated 07.05.97 regarding borrowing and lending of funds was also referred to. While DKB admitted that it had paid the sale consideration for the shares sold by CCL and PFMS prior to the respective stock exchange pay out, it stated that the same was within the scope of the above mentioned circular of SEBI dated 07.05.97.
3.6 With respect to the finding by the Enquiry Officer that DKB was ensuring repayments of funds advanced by it to CCL and / or PFMS and that it had been using the exchange mechanism (which guaranteed the trades), by putting sales transaction on the stock exchange it was submitted by DKB that it had made payments to CCL and /or PFMS only after the stocks were credited to the depository account and after the relevant stocks were sold in the market. DKB also said that there was no possibility of it and CCL or PFMS defaulting in the settlement obligation pursuant to the execution of the relevant trades and thus the finding by the Enquiry Officer was incorrect. DKB submitted that it had no knowledge about the identity of the buying broker and hence, it cannot be said that it was a party to the arrangement which contemplated a 'deliberate default' to take advantage of the exchange mechanism. It also stated that payment of funds to the client prior to the pay-out day of the exchange was a common practice amongst institutional clients. DKB further submitted that the transactions entered into by it were genuine and not intended to take benefit of the trade guarantee fund of the respective stock exchange and it cannot be said that such transactions were camouflaged for the actual funding by DKB to the KPG entities. It was also submitted that the money paid to KPG entities were strictly in accordance with the prevailing laws. Regarding the charge of aiding and abetting the creation of false market, DKB submitted that an essential ingredient for the same was 'knowledge' and the Enquiry Officer had not demonstrated any evidence to show that DKB had 'knowledge' about the creation of such false market. In the light of the above submissions, DKB requested for absolving them from the charges alleged by the Enquiry Officer in his report.
4.1 I have carefully examined the Enquiry Report and the submissions made by DKB in reply to the show cause notice dated April 21, 2003. From the aforesaid, the following issues emerge for consideration, in the facts and law involved in the instant case.
a)Whether the finding of the Enquiry Officer that DKB had indulged in circular trades is correct in view of the submission of DKB that there is no proof for 'pre-determination' on their part?
b) Whether the finding of the Enquiry Officer regarding market manipulation by DKB is valid against the argument by DKB that the trade volumes executed by it in the relevant stocks were below 5% of the total volume of trades in the market in the relevant stocks and it has executed only one single client order in most of the stocks during the relevant period, and hence, this could not adversely affect either the market volume or prices of the said stocks can be accepted?
c) Whether the activities indulged by DKB would constitute misuse of Exchange mechanism against the SEBI circular dated 07.05.97 and DKB's claims that the negotiated trades did not exclude other market participants and that such trades were done on the basis of 'best offer price' is correct?
d) Whether the circular or negotiated deals are banned or are allowed to be done in the same manner as that of the normal market trades?
e) Whether the finding of Enquiry Officer that the trades executed by DKB on behalf of CCL and PFMS in illiquid scrips for which generally there was no ready market is correct in view of the submission of DKB that it had executed only a few trades in such illiquid scrips and that the majority of the trades were liquid scrips for which a ready market always existed?
Before I proceed to deal with the issues raised by DKB with reference to findings of Enquiry proceedings, it is pertinent to refer to the trades of DKB executed on behalf of KP entities wherein the shares sold by one KP entities through DKB were again purchased by same/different KP entities through other brokers.
From the material on record, I find that DKB had conducted mainly sale transactions on behalf of KP entities at NSE and BSE. I have found that entire quantity or almost entire quantity of sale orders put by DKB on behalf of KP entities viz. CCL and PFMS got matched with the buy order of certain select brokers shares put on behalf of other set of KP entities or same selling KP entity. Order log and trade log showed that buy and sell orders were put at the same time or almost at the same time i.e. within a gap of few seconds of putting in of buy / sell order and that there was almost exact matching in the order quantity and the order rate.
I have also found that DKB had made payment to KP entities on the date of transactions itself, without waiting for pay-out of funds from the exchange in lieu of sale of securities. DKB had charged a varying rate of brokerage on each transaction. The analysis of varying rate of brokerage charged from the same client revealed that rate of brokerage charged was largely related to the period between date of payment to the client and date of receipt of funds from the exchanges on pay-out. Longer the period of advance payments, higher was the brokerage charged. Needless to say that these are transactions, which were confronted to DKB at the time of investigations as well as by the Enquiry Officer. I will refer to two such instances in detail, as under:-
I. On 07-Dec-00, DKB Securities has sold 500,000 shares of DSQ Bio-Tech @ Rs. 186.25 on behalf of PFMS in the Physical segment of NSE.
Order log and trade log show that sell order placed by DKB Securities on behalf of PFMS for sale of 500000 shares of DSQ Bio-Tech matched with buy order of proprietary account of Classic Shares & Stock Broker Ltd. (CSSB) and NH Securities Ltd. (NH Sec.). Both these brokers are connected with Ketan Parekh. These "matched" buy and sell orders are as discussed below.
1. On 7-Dec-00 DKB Securities placed an order for sale of 100000 shares of DSQ Bio on behalf of PFMS @ Rs. 186.25 at 10:37:16. This sale order got matched with the buy orders of NH Sec, which was placed through broker NH Sec for 50000 shares @ Rs. 186.25 at 10:37:16 and the buy order of Classic Share & Stock Brokers (CSSB), which was placed through broker CSSB for 50000 shares @ Rs. 186.25 at 10:37:17. The buy and sell orders were placed either at the same time or within a space of few seconds.
2. On 7-Dec-00 DKB Securities placed an order for sale of 100000 shares of DSQ Bio on behalf of PFMS @ Rs. 186.25 at 10:37:32. This sale order got matched with the buy order of CSSB, which was placed through broker CSSB for 100000 shares @ Rs. 186.25 at 10:37:30. The buy and sell orders were placed within a space of two seconds.
3. On 7-Dec-00 DKB Securities placed an order for sale of 100000 shares of DSQ Bio on behalf of PFMS @ Rs. 186.25 at 10:37:42. This sale order got matched with the buy order of NH Sec, which was placed through broker NH Sec for 100000 shares @ Rs. 186.25 at 10:37:42. The buy and sell orders were placed at the same time.
4. On 7-Dec-00 DKB Securities placed an order for sale of 100000 shares of DSQ Bio on behalf of PFMS @ Rs. 186.25 at 10:37:52. This sale order got matched with the buy order of NH Sec, which was placed through broker NH Sec for 100000 shares @ Rs. 186.25 at 10:37:52. The buy and sell orders were placed at the same time.
5. On 7-Dec-00 DKB Securities placed an order for sale of 100000 shares of DSQ Bio on behalf of PFMS @ Rs. 186.25 at 10:38:06. This sale order got matched with the buy order of CSSB, which was placed through broker CSSB for 100000 shares @ Rs. 186.25 at 10:38:05. The buy and sell orders were placed within a space of one second(s).
The above details show that buy orders of proprietary account of brokers Classic Shares & Stock Broker Ltd. and NH Securities Ltd. and sell orders of PFMS were put at the same time or almost at the same time, there was almost exact matching in the order quantity and the same buy and sell rate.
I find that on 07-Dec-00, i.e. date of transaction itself, DKB has made payment to PFMS for the shares sold without waiting for pay-out of funds from the exchange. It is seen that difference of days between the date when payment was made to PFMS and the date when the amount was to be received by DKB Securities from the exchange, was 13 days. It is also seen that the brokerage charged by DKB Securities for this transaction was 1.00%. I also find that sell transaction of DKB Securities constituted 37.38% of the total quantity traded in DSQ Bio-Tech in the Physical Segment of NSE on December 7, 2000. There is no change in the beneficial ownership of shares as such, (i.e. shares were sold by one KP entity through DKB Securities were again purchased back by other KP entities through other brokers through synchronized deals at the market) II. On 14-Feb-01, DKB Securities has sold 1000000 shares of HFCL @ Rs. 984.74 on behalf of CCL in the Physical segment of NSE.
Order log and trade log show that sell order placed by DKB Securities on behalf of CCL for sale of 1000000 shares of HFCL matched with buy orders of KP entities viz. PFMS, Panther Investrade Ltd. (PIL), Chitrakut Computers Pvt. Ltd. (CCPL), CCL, proprietary account of broker Classic Shares & Stock Broker Ltd. (CSSB) placed through other brokers. These "matched" buy and sell orders are as discussed below.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.986.00 at 12:01:54. This sale order got matched with the buy order of PFMS, which was placed through broker Keynote for 40000 shares @ Rs.986.00 at 12:01:55. The buy and sell orders were placed within a space of one second.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.986.25 at 12:02:57. This sale order got matched with the buy order of PFMS, which was placed through broker Keynote for 40000 shares @ Rs.986.25 at 12:02:07. The buy and sell orders were placed at the same time.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.00 at 12:02:36. This sale order got matched with the buy order of PFMS, which was placed through broker Keynote for 40000 shares @ Rs.985.00 at 12:02:36. The buy and sell orders were placed at the same time.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.986.00 at 12:02:18. This sale order got matched with the buy order of PFMS, which was placed through broker Keynote for 40000 shares @ Rs.986.00 at 12:02:18. The buy and sell orders were placed at the same time.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.984.00 at 12:03:10. This sale order got matched with the buy order of PFMS, which was placed through broker Keynote for 40000 shares @ Rs.984.00 at 12:03:10. The buy and sell orders were placed at the same time.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.00 at 12:03:32. This sale order got matched with the buy order of PIL, which was placed through broker NH Sec for 40000 shares @ Rs.985.00 at 12:03:32. The buy and sell orders were placed at the same time.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.984.50 at 12:03:48. This sale order got matched with the buy order of PIL, which was placed through broker NH Sec for 40000 shares @ Rs.984.50 at 12:03:46. The buy and sell orders were placed within a space of 2 seconds.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.984.50 at 12:03:57. This sale order got matched with the buy order of PIL, which was placed through broker NH Sec for 40000 shares @ Rs.984.50 at 12:03:55. The buy and sell orders were placed within a space of 2 seconds.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.984.50 at 12:04:04. This sale order got matched with the buy order of PIL, which was placed through broker NH Sec for 40000 shares @ Rs.984.50 at 12:03:55 and the buy order of PIL, which was placed through broker NH Sec for 40000 shares @ Rs.984.50 at 12:04:04. The buy and sell orders were placed at the same time.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.00 at 12:04:14. This sale order got matched with the buy order of PIL, which was placed through broker NH Sec for 40000 shares @ Rs.985.00 at 12:04:13. The buy and sell orders were placed within a space of one second * On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.50 at 12:04:24. This sale order got matched with the buy order of PIL, which was placed through broker NH Sec for 40000 shares @ Rs.985.50 at 12:04:23. The buy and sell orders were placed within a space of one second * On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.00 at 12:04:56. This sale order got matched with the buy order of CSSB, which was placed through broker CSSB for 40000 shares @ Rs.985.00 at 12:04:54. The buy and sell orders were placed within a space of 2 seconds * On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.00 at 12:05:02. This sale order got matched with the buy order of CCPL, which was placed through broker CSSB for 40000 shares @ Rs.985.00 at 12:05:01. The buy and sell orders were placed within a space of one second * On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.00 at 12:05:09. This sale order got matched with the buy order of CCPL, which was placed through broker CSSB for 40000 shares @ Rs.985.00 at 12:05:07 and the buy order of CCPL, which was placed through broker CSSB for 40000 shares @ Rs.985.00 at 12:05:07. The buy and sell orders were placed within a space of 2 seconds * On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.00 at 12:05:15. This sale order got matched with the pending buy order of CCPL, which was placed through broker CSSB for 40000 shares @ Rs.985.00 at 12:05:07 and the buy order of CCPL, which was placed through broker CSSB for 40000 shares @ Rs.985.00 at 12:05:14.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.00 at 12:05:22. This sale order got matched with the pending buy order of CCPL placed through CSSB @ Rs.985 for 40000 shares at 12:05:14 and the buy order of CCPL, which was placed through broker CSSB for 40000 shares @ Rs.985.00 at 12:05:20.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.00 at 12:05:29. This sale order got matched with the buy order of CCPL, which was placed through broker CSS for 40000 shares @ Rs.985.00 at 12:05:28. The buy and sell orders were placed almost at the same time. Since the buy and sell order were put at almost at the same time, there is almost exact matching in the quantity and the rate also.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.985.00 at 12:05:35. This sale order got matched with the buy order of CCPL, which was placed through broker CSSB for 40000 shares @ Rs.985.00 at 12:05:34. The buy and sell orders were placed within a space of one second * On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.982.50 at 12:07:02. This sale order got matched with the buy order of PFMS, which was placed through broker Visaria Sec for 40000 shares @ Rs.982.50 at 12:07:03. The buy and sell orders were placed within a space of one second.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.982.50 at 12:07:11. This sale order got matched with the buy order of PFMS, which was placed through broker Visaria Sec for 40000 shares @ Rs.982.50 at 12:07:12. The buy and sell orders were placed within a space of one second * On 14-Feb-01 DKB Securities placed an order for sale of 20000 shares of HFCL on behalf of CCL @ Rs.982.50 at 12:07:31. This sale order got matched with the buy order of CCL, which was placed through broker Toshniwal for 20000 shares @ Rs.982.50 at 12:07:38. The buy and sell orders were placed within a space of seven seconds. Since the buy and sell order were put at almost at the same time, there is almost exact matching in the quantity and the rate also.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.983.00 at 12:08:12. This sale order got matched with the buy order of CSSB, which was placed through broker CSSB for 40000 shares @ Rs.983.00 at 12:08:12. The buy and sell orders were placed at the same time.
* On 14-Feb-01 DKB Securities placed an order for sale of 40000 shares of HFCL on behalf of CCL @ Rs.983.00 at 12:08:20. This sale order got matched with the buy order of CSSB, which was placed through broker CSSB for 40000 shares @ Rs.983.00 at 12:08:19. The buy and sell orders were placed within a space of one second * On 14-Feb-01 DKB Securities placed an order for sale of 25000 shares of HFCL on behalf of CCL @ Rs.986.00 at 13:22:20. This sale order got matched with the buy order of PFMS, which was placed through broker Woodstock for 25000 shares @ Rs.986.00 at 13:22:20. The buy and sell orders were placed at the same time * On 14-Feb-01 DKB Securities placed an order for sale of 25000 shares of HFCL on behalf of CCL @ Rs.986.00 at 13:22:29. This sale order got matched with the buy order of PFMS, which was placed through broker Woodstock for 25000 shares @ Rs.986.00 at 13:22:28. The buy and sell orders were placed within a space of one second * On 14-Feb-01 DKB Securities placed an order for sale of 25000 shares of HFCL on behalf of CCL @ Rs.986.00 at 13:22:42. This sale order got matched with the buy order of PFMS, which was placed through broker Woodstock for 25000 shares @ Rs.986.00 at 13:22:44. The buy and sell orders were placed within a space of two seconds * On 14-Feb-01 DKB Securities placed an order for sale of 25000 shares of HFCL on behalf of CCL @ Rs.986.00 at 13:22:56. This sale order got matched with the buy order of PFMS, which was placed through broker Woodstock for 25000 shares @ Rs.986.00 at 13:22:52. The buy and sell orders were placed within a space of four seconds I find that buy orders of KP entities viz. PFMS, Panther Investrade Ltd (PIL), hitrakut Computers Pvt. Ltd (CCPL), CCL, proprietary account of broker Classic Shares & Stock Broker Ltd (CSSB) and sell order of CCL were put at the same time or almost at the same time, there was almost exact matching in the order quantity and the same buy and sell rate.
I find that on 14-Feb-01, i.e. date of transaction itself, DKB has made payment to CCL for the shares sold without waiting for pay-out of funds from the exchange. It is seen that difference of days between the date when payment was made to CCL and the date when the amount was to be received by DKB Securities from the exchange, was 14 days. The brokerage charged by DKB Securities for this transaction was 1.11%. The sell transaction of DKB Securities constituted 16.60% of the total quantity traded in the scrip of HFCL in the Physical Segment at the Exchange on February 14, 2001. This volume would be a very high percentage of deliverable quantity.
I have seen that there are around 73 such instances (45 instances in NSE and 28 instances in BSE) where DKB had conducted only sale transactions on behalf of KP entities at NSE and BSE. In these entire instances, I have noticed that trades were executed in the manner mentioned above. During the period from August 2000 to March 2001, DKB had put around total 470 sell orders (380 orders at NSE + 95 orders at BSE) on behalf of KP entities which got matched with around 490 buy orders of same KP entity or other set of KP entities put through other brokers.
In the light of facts on the record and submissions made during the proceedings and the issues arising are being as under:
5. Whether the finding of the Enquiry Officer that DKB had indulged in circular trades is correct in view of the submission of DKB that there is no proof for 'pre-determination' on their part?
5.1 On an analysis of the order log and trade log obtained from BSE and NSE, I find that though there were more than a few thousand brokers spread over more than 300 cities, almost all sell orders put by DKB on behalf of KP entities had matched every time with only select group of brokers such as, Triumph Securities, Triumph Intl Finance, Classic Shares & Stock Brokers, NH Securities, C. J. Dalal, Milan Mahendra, Hem Securities, Latin Manharlal, Visaria Securities, Woodstock, Vyomit Shares, Keynote Capitals etc. 5.2 Analysis of the client details obtained from these brokers named above also revealed that buy and sell clients of the brokers were KP entities . Investigation brought out that one set of Ketan Parekh entities had sold through DKB and simultaneously other set of entities purchased these shares through the brokers above. Analysis of the details of matched sell orders of DKB and buy orders of other brokers showed that buy and sell orders were put at the same time or almost at the same time. There was almost exact matching in the order quantity and the order rate, which indicated that these orders were synchronised and were put with prior understanding to get matched. Hence, by synchronizing the buy and sell orders, the shares sold by KP entities through DKB Securities were again purchased back by KP entities through other brokers.
5.3 The argument of DKB that while entering into such trades, they had not known the same to be circular in nature do not hold good. The fact that trades have been entered into are evidenced by the trade log and order log. The sale order of DKB was found to have been matching precisely with select brokers of KP group every time. This cannot be a coincidence to be happening in a market which comprises of large number of players unless the selling broker and buying broker put their orders with prior understanding. The fact that orders have been matched continuously is sufficient in itself to prove the charge of having indulged in circular trades. The trades between connected or related parties where sale and purchase of securities are matched with each other in terms of price, volume and time of execution , which are called the 'wash trades' in U.S. markets are known to DKB which is a foreign broker and it is well aware that such trades are not permitted as they interfere with the fair price discovery and mislead the market. DKB while admitting negligence on its part in executing such trades argued that it could not suspect that its clients were indulging in circular trades.
5.4 During investigations of SEBI, the authorised representative of DKB had stated on oath that either Mr. Kartik Parekh or Ketan Parekh used to give sale orders specifying the number of shares to be put for sale and the rate in an order. Authorised representative of DKB had also stated that they were not aware of the counterparty buying broker and counter-party buying client. They also claimed that their group did not indulge in any syncronised or matched trading and they genuinely felt that scrips were being purchased by institutions/market forces and they did not put sale orders with a view to synchronise. When asked how large sell order were getting executed within seconds of in-putting of orders and in single transche, especially in illiquid scrip, DKB has admitted that they were told by Mr. Kartik Parekh that if they put the order at the specific price and quantity given by him, the order would be executed. Therefore, DKB cannot claim any ignorance of the nature of such matched trades and the adverse impact of the same on the market and the investors. In view of this, DKB cannot argue that it had no prior knowledge about the matching of trades.
Investigations also revealed that, from the order log and trade log, during the period from August 2000 to March 2001, DKB had put around total 470 sell orders (380 order at NSE + 95 order at BSE) on behalf of KP entities which got matched with around 490 buy orders. As a broker of repute claimed by DKB, this fact should have alerted it to ascertain the intentions of the clients. This shows that DKB was grossly negligent in continuously executing sale orders for Ketan Parekh entities, who had indulged in manipulation of the market. Though there were reasonable circumstance to suspect the clients, DKB failed to exercise due care, skill and diligence as required in terms of the code of conduct laid down by SEBI for registered Stock Brokers.
6. Whether the finding of the Enquiry Officer regarding market manipulation by DKB is valid against the argument by DKB that the trade volumes executed by it in the relevant stocks were below 5% of the total volume of trades in the market in the relevant stocks and it has executed only one single client order in most of the stocks during the relevant period, and hence, this could not adversely affect either the market volume or prices of the said stocks can be accepted?
6.1 The following table shows the volume executed by DKB.
Sr.No. Exchange Tax Date Client Name Scrip Name Sold Qty Total Traded Qty Percent of selling to the total market 1 BSE 1-Feb-01 CCL SHONKH TECH 500,000 1167950 42.81 2 NSE 7-Dec-00 PFMS DSQ BIO TECH LT 500,00 1337557 37.38 3 BSE 4-Dec-00 PFMS DSQ BIO TECH LT 200,00 608463 32.87 4 BSE 20-Nov-00 PFMS DSQ BIO TECH LT 400,000 1230046 32.52 5 BSE 27-Oct-00 CCL ZEE TELEFILM 1,500,000 4562628 27.46 6 NSE 3-Jan-01 CCL DSQ BIO TECH LT 1000000 3793853 26.36 7 BSE 26-Dec-00 CCL TIPS INDUS.
100,000 409208 24.44 8 NSE 2-Mar-01 CCL ZEE TELEFILM 3000000 17135892 17.51 9 BSE 1-Feb-01 CCL MASCON GLOBAL 500,000 2971621 16.83 10 NSE 14-Feb-01 CCL HIMACHAL FUT 1000000 6023314 16.60 11 NSE 13-Dec-00 CCL DSQ BIO TECH LT 500,00 3513378 14.23 12 BSE 27-Oct-00 CCL HIMACHAL FUT 410,000 3212548 12.76 13 NSE 24-Nov-00 CCL DSQ BIO TECH LT 525,000 4413122 11.90 14 NSE 23-Nov-00 CCL GLOBAL TELE 500,000 4371010 11.44 15 BSE 11-Dec-00 CCL HIMACHAL FUT 250,000 2196284 11.38 16 NSE 4-Jan-01 CCL DSQ BIO TECH LT 750000 6669885 11.24 17 NSE 27-Sep-00 CCL HIMACHAL FUT 620,000 5998605 10.34 18 NSE 22-Dec-00 CCL ZEE TELEFILM 2,000,000 19573780 10.22 19 NSE 23-Aug-00 CCL HIMACHAL FUT 450,000 4571057 9.84 20 BSE 1-Jan-01 CCL ZEE TELEFILM 1,500,000 15876901 9.45 21 NSE 27-Oct-00 PFMS GLOBAL TELE 256,000 2780342 9.21 22 BSE 17-Oct-00 CCL ZEE TELEFILM 1.100.000 12449568 8.84 23 BSE 20-Nov-00 CCL HIMACHAL FUT 400,000 4651080 8.60 24 NSE 7-Dec-00 CCL HIMACHAL FUT 400,000 4814524 8.31 25 NSE 13-Oct-00 CCL SILVERLINE I 450,000 5597119 8.04 26 BSE 15-Jan-01 PFMS ZEE TELEFILM 1,380,000 17552839 7.86 27 BSE 15-Jan-01 CCL ZEE TELEFILM 1,375,000 17552839 7.83 28 BSE 1-Jan-01 PFMS ZEE TELEFILM 1,150,000 15876901 7.24 29 NSE 9-Feb-01 CCL ZEE TELEFILM 1000000 15486405 6.46 30 NSE 11-Oct-00 CCL GLOBAL TELE 415,000 6436071 6.45 31 NSE 11-Jan-01 PFMS DSQ BIO TECH LT 145000 2280748 6.36 32 BSE 19-Sep-00 CCL ZEE TELEFILM 1,000,000 15939818 6.27 33 BSE 13-Feb-01 CCL HIMACHAL FUT 500,000 8088221 6.18 34 NSE 12-Oct-00 PFMS HIMACHAL FUT 600,000 9781679 6.13 35 BSE 20-Nov-00 CCL ZEE TELEFILM 620,000 10257963 6.04 36 BSE 26-Dec-00 CCL DSQBIOTECHLT 75,000 1367613 5.48 37 BSE 4-Dec-00 PFMS HIMACHAL FUT 230,000 4448536 5.17 38 BSE 15-Jan-01 CCL GLOBAL TELE 275,000 5378016 5.11 39 NSE 11-Jan-01 CCL HIMACHAL FUT 487000 9601181 5.07 40 NSE 17-Aug-00 CCL HIMACHAL FUT 300,000 6278052 4.78 41 NSE 7-Sep-00 CCL ZEE TELEFILM 750,000 15992496 4.69 42 NSE 8-Feb-01 CCL ZEE TELEFILM 1000000 21370724 4.68 43 NSE 28-Sep-00 CCL HIMACHAL FUT 342,000 732813611 4.67 44 NSE 15-Feb-01 CCL HIMACHAL FUT 195000 4259513 4.58 45 NSE 16-Nov-00 CCL HIMACHAL FUT 500,000 11206825 4.46 46 NSE 13-Dec-00 PFMS DSQ BIO TECH LT 150,000 3513378 4.27 47 BSE 13-Feb-01 CCL ZEE TELEFILM 500,000 12385052 4.04 48 NSE 13-Oct-00 PFMS HIMACHAL FUT 400,000 9939098 4.02 49 NSE 4-Jan-01 CCL DEQ SOFTWARE 275000 6837720 4.02 50 BSE 22-Dec-00 CCL ZEE TELEFILM 500,000 12704538 3.94 51 NSE 7-Sep-00 CCL HIMACHAL FUT 300,000 7712381 3.89 52 NSE 20-Dec-00 PFMS HIMACHAL FUT 260,000 8315161 3.13 53 BSE 1-Jan-01 PFMS HIMACHAL FUT 135,000 4353363 3.10 54 NSE 13-Dec-00 CCL HIMACHAL FUT 150,000 5377146 2.79 55 BSE 26-Dec-00 CCL HIMACHAL FUT 250,000 10782212 2.32 56 NSE 4-Jan-01 CCL HIMACHAL FUT 171500 7599681 2.26 57 NSE 20-Sep-00 CCL HIMACHAL FUT 250,000 11315033 2.21 58 NSE 20-Sep-00 CCL ZEE TELEFILM 300,000 14148306 2.12 59 NSE 6-Dec-00 CCL HIMACHAL FUT 145,000 7160349 2.03 60 NSE 11-Oct-00 CCL HIMACHAL FUT 100,000 5525152 1.81 61 NSE 6-Dec-00 PFMS HIMACHAL FUT 125,000 7160349 1.75 62 NSE 27-Sep-00 CCL GLOBAL TELE 100,000 6841795 1.46 63 NSE 27-Sep-01 CCL HIMACHAL FUT 191000 13647100 1.40 64 BSE 17-Oct-00 CCL HIMACHAL FUT 85,000 6215119 1.37 65 NSE 17-Oct-00 CCL ZEE TELEFILM 200,000 14741564 1.36 66 BSE 1-Jan-01 PFMS GLOBAL TELE 70,000 5326495 1.31 67 NSE 24-Nov-00 CCL HIMACHAL FUT 100,000 8129014 1.23 68 BSE 19-Sep-00 CCL HIMACHAL FUT 80,000 6869846 1.16 69 NSE 27-Dec-00 CCL HIMACHAL FUT 90,000 9127607 0.99 70 BSE 26-Dec-00 CCL HIMACHAL FUT 106,000 10782212 0.98 71 NSE 16-Feb-01 CCL HIMACHAL FUT 105000 11887237 0.88 72 NSE 7-Dec-00 PFMS HIMACHAL FUT 30,000 4814524 0.62 73 NSE 28-Sep-00 CCL ZEE TELEFILM 75,000 16806957 0.45 6.2 The above table demonstrates that the argument of DKB that it had executed only 5% of total volume of trades in the market is not correct. For example., DKB's trades on behalf of CCL in the scrip of Shonk Technologies were 42% of the total volume traded at BSE on 1st February, 2001. Similarly in the scrip of DSQ Biotech, the trades on behalf of PFMS were around 38% of the total volume. The figure of 5% has been computed by DKB on the basis of cumulative trading in the stocks in all the exchanges whereas an ideal calculation is to be done exchange wise. The figures mentioned above indicate that the volumes executed by DKB were sufficient to make impact on the market.
7. Whether the activities indulged by DKB would constitute misuse of Exchange mechanism against the SEBI circular dated 07.05.97 and DKB's claims that the negotiated trades did not exclude other market participants and that such trades were done on the basis of 'best offer price' is correct?
7.1 It was revealed from the records of the DKB that its clients had done only sale transactions through them at NSE and BSE. The accounts of these clients with DKB reveal that the broker was making payments to them on the date of transactions itself, without waiting for pay-out of funds from the exchange in lieu of sale of securities. These are as below:
1 2 3 4 5 6 7 8Exchange Scrip Name Sold Qty Transaction Date Date on which settlement amount paid by DKB Securities to KP entities Date of Exchange Funds Payout Period of advance payment by DKB Securities Securities (no. of days (6-5) Percentage of Brokerage charged by DKB Securities BSE ZEE TELEFILM 500,000 22-Dec-00 22-Dec-00 29-Dec-00 7 0.760 BSE MASCON GLOBAL 500,000 1-Feb-01 01-Feb-01 08-Feb-01 7 0.797 NSE ZEE TELEFILM 200,000 17-Oct-00 17-Oct-00 25-Oct-00 8 0.709 BSE SHONKH TECH 500,000 1-Feb-01 01-Feb-01 09-Feb-01 8 0.800 BSE HIMACHAL FUT 500,000 13-Feb-01 13-Feb-01 23-Feb-01 10 0.918 BSE ZEE TELEFILM 500,000 13-Feb-01 13-Feb-01 23-Feb-01 10 0.919 BSE TIPS INDUS 100,000 26-Dec-00 26-Dec-00 05-Jan-01 10 0.932 BSE HIMACHAL FUT 106,000 26-Dec-00 26-Dec-00 05-Jan-01 10 0.932 BSE DSQ BIOTECH LT 75,000 26-Dec-00 26-Dec-00 05-Jan-01 10 0.932 BSE HIMACHAL FUT 250,000 26-Dec-00 26-Dec-00 05-Jan-01 10 0.933 BSE HIMACHAL FUT 85,000 17-Oct-00 17-Oct-00 27-Oct-00 10 1.018 BSE ZEE TELEFILM 1,100,000 17-Oct-00 17-Oct-00 27-Oct-00 10 1.049 BSE ZEE TELEFILM 1,000,000 19-Sep-00 19-Sep-00 29-Sep-00 10 1.104 BSE HIMACHAL FUT 80,000 19-Sep-00 19-Sep-00 29-Sep-00 10 1.105 BSE HIMACHAL FUT 250,000 11-Dec-00 11-Dec-00 22-Dec-00 11 0.933 BSE DSQ BIOTECH LT 400,000 20-Nov-00 20-Nov-00 01-Dec-00 11 0.988 BSE ZEE TELEFILM 1,500,000 1-Jan-01 01-Jan-01 12-Jan-01 11 0.989 BSE HIMACHAL FUT 400,00 20-Nov-00 20-Nov-00 01-Dec-00 11 0.990 BSE ZEE TELEFILM 1,150,000 1,Jan-01 01-Jan-01 12-Jan-01 11 0.990 BSE HIMACHAL 135,000 1-Jan-01 01-Jan-01 12-Jan-01 11 0.990 BSE HIMACHAL FUT 230,000 4-Dec-00 04-Dec-00 15-Dec-00 11 0.990 BSE GLOBAL TELE 70,000 1-Jan-01 01-Jan-01 12-Jan-01 11 0.991 BSE DSQ BIO TECT LT 200,000 4-Dec-00 04-Dec-00 15-Dec-00 11 0.992 BSE ZEE TELEFILM 620,000 20-Nov-00 20-Nov-00 01-Dec-00 11 0.992 NSE HIMACHAL FUT 400,000 13-Oct-00 13-Oct-00 25-Oct-00 12 0.940 NSE SILVERLINE I 450,000 13-Oct-00 13-Oct-00 25-Oct-00 12 0.940 NSE HIMACHAL 100,000 24-Nov-00 24-Nov-00 06-Dec-00 12 0.940 NSE GLOBAL TELE 256,000 27-Oct-00 27-Oct-00 08-Nov-00 12 0.940 NSE ZEE TELEFILM 2,000,000 22-Dec-00 22-Dec-00 03-Jan-01 12 0.941 NSE DSQ BIOTECH LT 525,000 24-Nov-00 24-Nov-00 06-Dec-00 12 0.942 NSE ZEE TELEFILM 3000000 2-Mar-01 02-Mar-01 14-Mar-01 12 0.983 NSE HIMACHAL FUT 105000 16-Feb-01 16-Feb-01 28-Feb-01 12 0.987 BSE ZEE TELEFILM 1,380,000 15-Jan-01 15-Jan-01 27-Jan-01 12 1.038 BSE ZEE TELEFILM 1,375,000 15-Jan-01 15-Jan-01 27-Jan-01 12 1.039 BSE GLOBAL TELE 275,000 15-Jan-01 15-Jan-01 27-Jan-01 12 1.040 NSE ZEE TELEFILM 1000000 9-Feb-01 09-Feb-01 21-Feb-01 12 1.048 NSE ZEE TELEFILM 75,000 28-Sep-00 28-Sep-00 11-Oct-00 13 0.996 NSE HIMACHAL FUT 30,000 7-Dec-00 07-Dec-00 20-Dec-00 13 0.997 NSE HIMACHAL FUT 300,000 7-Sep-00 07-Sep-00 20-Sep-00 13 0.997 NSE HIMACHAL FUT 342,000 28-Sep-00 28-Sep-00 11-Oct-00 13 0.998 NSE HIMACHAL FUT 400,000 7-Dec-00 07-Dec-00 20-Dec-00 13 0.998 NSE HIMACHAL FUT 600,000 12-Oct-00 12-Oct-00 25-Oct-00 13 0.998 NSE HIMACHAL FUT 500,000 16-Nov-00 16-Nov-00 29-Nov-00 13 0.998 NSE ZEE 750,000 7-Sep-00 07-Sep-00 20-Sep-00 13 0.998 NSE DSQ BIOTECH LT 500,000 7-Dec-00 07-Dec-00 20-Dec-00 13 0.999 NSE GLOBAL TELE 500,000 23-Nov-00 23-Nov-00 06-Dec-00 13 1.000 NSE DSQ BIO TECH LT 750000 4-Jan-01 04-Jan-01 17-Jan-01 13 1.045 NSE DSQ BIO TECH LT 145000 11-Jan-01 11-Jan-01 24-Jan-01 13 1.046 NSE HIMACHAL FUT 191000 22-Feb-01 22-Feb-01 07-Mar-01 13 1.047 NSE HIMACHAL FUT 171500 4-Jan-01 04-Jan-01 17-Jan-01 13 1.047 NSE HIMACHAL FUT 487000 11-Jan-01 11-Jan-01 24-Jan-01 13 1.047 NSE HIMACHAL FUT 195000 15-Feb-01 15-Feb-01 28-Feb-01 13 1.048 NSE DSQ SOFTWARE 275000 4-Jan-01 04-Jan-01 17-Jan-01 13 1.048 NSE HIMACHAL FUT 300,000 17-Aug-00 17-Aug-00 30-Aug-00 13 1.058 NSE ZEE TELEFILM 1000000 8-Feb-01 08-Feb-01 21-Feb-01 13 1.112 NSE DSQ BIO TECH LT 500,000 13-Dec-00 13-Dec-00 27-Dec-00 14 1.054 NSE DSQ BIO 150,000 13-Dec-00 13-Dec-00 27-Dec-00 14 1.054 NSE HIMACHAL FUT 450,000 23-Aug-00 23-Aug-00 06-Sep-00 14 1.055 NSE HIMACHAL FUT 260,000 20-Dec-00 20-Dec-00 03-Jan-01 14 1.055 NSE HIMACHAL FUT 620,000 27-Sep-00 27-Sep_00 11-Oct-00 14 1.055 NSE HIMACHAL FUT 90,000 27-Dec-00 27-Dec-00 10-Jan-01 14 1.055 NSE HIMACHAL FUT 150,000 13-Dec-00 13-Dec-00 27-Dec-00 14 1.055 NSE HIMACHAL FUT 145,000 6-Dec-00 06-Dec-00 20-Dec-00 14 1.055 NSE HIMACHAL FUT 125,000 6-Dec-00 06-Dec-00 20-Dec-00 14 1.055 NSE GLOBAL TELE 100,000 27-Sep-00 27-Sep-00 11-Oct-00 14 1.055 NSE HIMACHAL FUT 250,000 22-Sep-00 20-Sep-00 04-Oct-00 14 1.055 NSE HIMACHAL FUT 100,000 11-Oct-00 11-Oct-00 25-Oct-00 14 1.060 NSE ZEE TELEFILM 300,000 20-Sep-00 20-Sep-00 04-Oct-00 14 1.060 NSE GLOBAL TELE 415,000 11-Oct-00 11-Oct-00 25-Oct-00 14 1.060 NSE DSQ BIOTECH LT 1000000 3-Jan-01 03-Jan-01 17-Jan-01 14 1.107 NSE HIMACHAL FUT 1000000 14-Feb-01 14-Feb-01 28-Feb-01 14 1.108 BSE HIMACHAL FUT 410,000 27-Oct-00 27-Oct-00 10-Nov-00 14 1.278 BSE ZEE TELEFILM 1,500,000 27-Oct-00 27-Oct-00 10-Nov-00 14 1.278 7.2 I find that DKB had charged a differential rate of brokerage on each transaction from KP entities. The analysis of this variable rate of brokerage showed that brokerage was related to the period between date of payment to the client and date of receipt of funds from the pay-out. Longer the period of advance payments, higher was the brokerage charged. This is also evident from column 7 & 8 in the above table.
7.3 I find that SEBI's circular dated 07.05.97, cited by DKB is not applicable in the instant case as it permits advancing of funds by way of lending and borrowing only, which are consequential and incidental to the transactions in securities. Hence, it has rightly been not factored in the Enquiry Report. The nature of transactions that had been entered into by DKB is different. DKB had been funding/financing KP group in their purchase/sale of relevant stocks under the garb of regular sale transactions, which is clear from the data in the table given above. What is intended by the SEBI's circular mentioned above is the financing transaction which is done as part of the securities business would not be disqualified and not the transactions that are entered into by DKB. The same was a clear misuse of the exchange mechanism which is intended to provide 'best offer price' to all the investors uniformly. DKB had indulged in financing of transactions for KP group, which were manipulative. Hence, the plea taken by DKB that SEBI's circular dated 07.05.97 permits borrowing and lending of funds and hence, its transactions/advancing funds was legal is not tenable. Such voluminous repeated matched transactions, cannot by any stretch be regarded as genuine even for the purpose of lending and borrowing. A Stock broker can not lend to the clients, who indulge in artificial volumes and price.
7.4 Regarding the orders on behalf of single client, it may be true that DKB has executed orders on behalf of a single client i.e. KP group. But the fact is that large volumes of trades had taken place which was sufficient to affect the market in a considerable manner. The fact that the scrips were liquid in nature and that such huge volumes have been transacted by DKB itself casts doubt on its conduct. The details of volumes traded are given below:-
7.5 During the period from August 2000 to March 2001 in the scrip of DSQ Software, I find that CCL had sold a total of 209484 shares out of which 207484 shares got matched with the buy orders of proprietary account of Classic Share and Stock Broking. Hence, 99.04% of shares of DSQ Software sold by CCL were again purchased by another KP entity i.e. proprietary account of Classic Share and Stock Broking. Similarly in the scrip of Silverline, CCL has sold a total of 417643 shares, which completely matched with the buy orders of PFMS and proprietary account of CSSB. Hence, 100% of shares of Silverline sold by CCL were again purchased by another KP entities i.e. PFMS and proprietary account of CSSB. Following table gives the scripwise details of names of KP entities selling through DKB and names of corresponding buying client, for the period from August 2000 to March 2001 at NSE.
Name, of the sell client of DKB Securities Trade Qty Value (Lacs) Name of the corresponding buy client of other brokers DSQSOFTWARE CCL 207484 833.360 CSSB CCL 2000 8.050 Shree Harivansha Sec P Ltd Grand Total 209.184 841.410 99.04% of the shares sold by KP entitles were again purchased back by Ketan Parekh entities GLOBALTELE CCL 617974 8469.447 CSSB CCL 140283 1469.464 NH SECURITIES PFMS 132010 1400.626 CSSB PFMS 109659 1165.240 PFMS CCL 98437 1031.128 HKG Capital Services CCL 64008 672.084 Mahendra U Shah CCL 15752 165.081 Maruti Securities CCL 13744 144 112 Hemant Sarvaiya CCL 2241 23.329 MILAN MAHENDRA SEC PVT LT Grand Total 1194108 12540.512 83 % of the shares sold by KP entities were again purchased back by Ketan Parekh entities HFCL CCL 2044410 26274.999 CSSB CCL 1169237 15908.730 NH SECURITIES CCL 1025711 13193.459 PFMS PFMS 558652 6050.263 PFMS PFMS 439763 4764.020 NH SECURITIES GCL 356059 3793.979 Chitrakut CCL 344937 3419.974 PIL PFMS 154087 2088,878 CSSB CCL 70337 1064442 Hindun Sales Pvt Ltd PFMS 65693 991.307 Hindun Sales Pvt Ltd CCL 68408 917.009 Lopez Finvest Ltd PFMS 63999 816.242 Chitrakut CCL 62822 745.363 OIL CCL 24900 395.661 NIKKO CAPITAL MKT PVT LTD CCL 3000 39.465 MILAN MAHENDRA SEC PVT LT CCL 1298 21.054 Udey Dutt and Associates CCL 1481 20.467 TIFIL Chennai PFMS 1155 14.680 Satya Impex Grand Total 6455949 80519.992 96 % of the shares sold by KP entities were again purchased back by Ketan Parekh entities SILVERLINE CCL 128234 392.077 CSSB CCL 289409 883.072 PFMS Grand Total 417643 1275.150 100 % of the shares sold by KP entities were again purchased back by Ketan Parekh entities SOUAREDBIO CCL 1105277 1968.457 NH SECURITIES CCL 676515 1281.663 PFMS CCL 668088 1278.225 CSSB PFMS 461291 883947 CSSB PFMS 248660 463,129 NH SECURITIES PFMS 80051 168258 PFMS Grand Total 3239882 6043.680 100 % of the shares sold by KP entities were again purchased back by Ketan Parekh entities Name of the sell client of DKB Securities Trade Qty Value (Lacs) Name of the corresponding buy client of other brokers ZEETELE CCL 3030946 9819.913 CSSB CCL 1356493 3180.668 NH SECURITIES CCL 1343435 2686.283 PFMS CCL 955611 2286.921 PIL CCL 589981 797.949 A B Corporation CCL 196402 553.238 Chitrakut CCL 399882 540.840 M M Shah Grand Total 7872750 19865.812 95 % of the shares sold by KP entities were again purchased back by Ketan Parekh entities I I (CCL-Classic Credit Ltd, CSSB-Classic Share and Stock Brokers, PIL-Panther Investment Ltd.) 7.6 I also find similar pattern of execution of trades in BSE. For instance, during the period from August 2000 to March 2001 in the scrip of DSQ Bio-Tech, PFMS has sold a total of 593210 shares, of which 593110 shares got matched with the buy orders of PFMS. Hence, 99.98% of shares of DSQ Software sold by PFMS were again purchased by the same entity i.e. PFMS. Similarly in the scrip of Mascon, CCL has sold total 500000 shares, which completely matched with the buy orders of PFMS (for 400000 shares) and CCL (for 100000). Hence, 100% of shares of Mascon Global sold by CCL were again purchased by another/same KP entity i.e. PFMS and CCL. Following table gives the scripwise details of names of Ketan Parekh entities selling through DKB and names of corresponding buying client, for the period from August 2000 to March 2001 at BSE.
Name of the sell client of DKB Securities Traded Qty Value (Lacs) Name of the corresponding buy client of other brokers DSQBIOTECH PFMS 593110 1125.09 PFMS CCL 75000 105.38 PFMS PFMS 100 0.19 Amit Finance Grand Total 668210 1230.66 99.98% of the shares sold by KP entities were again purchased back by Ketan Parekh entities GLOBALTELE CCL 270617 1818.41 PFMS PFMS 69941 557.78 PFMS Grand Total 340558 2376.19 100% of the shares sold by KP entities were again purchased back by Ketan Parekh entities HFCL CCL 1804982 21583.99 PFMS PFMS 342017 4728.36 PFMS CCL 75000 847.13 Maniar Financial Services Pvt Ltd CCL 4180 46.86 Paresh Doshi Trading A/c CCL 2976 45.92 OCL CCL 1100 14.32 Growever Investment Pvt Ltd CCL 280 3.30 Milan Mahendra Securities Pvt Ltd CCL 200 2.64 Piyush R Shah Trading a/c CCL 25 0.33 Laxmi Enterprises CCL 1 0.01 Shreenidhi Stock & Broking Grand Total 2230761 27272.86 96.37% of the shares sold by KP entities were again purchased back by Ketan Parekh entities MASCON GL CCL 400000 1329.60 PFMS CCL 100000 332.40 OCL Grand Total 500000 1662.00 100% of the shares sold by KP entities were again purchased back by Ketan Parekh entities SHONKH CCL 500000 1175.00 PFMS Grand Total 500000 1175.00 100% of the shares sold by KP entities were again purchased back by <etan Parekh entities ZEETELE CCL 7424283 22017.87 PFMS PFMS 2475489 6112.34 PFMS CCL 192775 877.13 Maniar Financial Services Pvt Ltd CCL 296298 846.18 COL CCL 22889 76.63 Regulas Freight Forw CCL 4200 19.03 Bang Venugopal CCL 4310 10.18 Roopshri Finvest Pvt Ltd CCL 2300 7.51 Ajay Natwarlal Securities Pvt Ltd PFMS 600 1.53 M Jain & Co CCL 500 1.38 Economic Securities CCL 284 0.78 Ketan Bhiman Trading A/C PFMS 300 0.77 Narendra S Tanna CCL 220 0.74 Milan Mahendra Securities Pvt Ltd CCL 100 0.28 Laxmi Enterprises CCL 25 0.11 D K Securities CCL 25 0.07 Vihar Investment Pvt Ltd PFMS 25 0.06 Ajay Natwarlal Securities Pvt Ltd CCL 10 0.03 Nakoda Securities Grand Total 10424631 29972.59 98% of the shares sold by KP entities were again purchased back by Ketan Parekh entities 7.7 Details of matched trades (sell orders of KP entities put through DKB which matched with buy orders of KP entities through other brokers) show that buy and sell orders were put at the same time or almost at the same time i.e. within a gap of few seconds of putting in of buy / sell order. It was also seen that there was almost exact matching in the order quantity and the order rate, which indicated that these orders were synchronised and were put with prior understanding with a view to ensure that sell order of one set of KP entities matched with the buy order of the other set of KP entities / same set of KP entities namely CCL, LIPL, PFMS, Classic Infin Limited, Panther Investrade Ltd. and proprietary account of Classic Share and Stock Broking Services Ltd (CSSB), NH Securities. By such synchronization of the buy and sell orders, the shares sold by one KP entity through DKB were again purchased back by same/other KP entities through other brokers. The shares did not change hands and were merely rotating from one entity belonging to KP to other entity of / connected with Ketan Parekh. This synchronisation would not have been possible unless both buying client and selling client put buy order and sell order with prior understanding and with a view to match. If KP entities really wanted to sell the shares, then there was no need by these entities to buy the same shares through other brokers. I find from the order log and trade, during the period from August 2000 to March 2001, DKB Securities have put around total 470 sell orders (380 order at NSE + 95 order at BSE) on behalf of KP entities which got matched with around 490 buy orders of other KP entities and almost all these orders resulted in matched trades. This demonstrates market manipulation indulged in by the KP entities through various brokers including DKB.
7.10 SEBI had directed the Stock Exchanges to put in place screen based computerized trading which would enable investors to transact in a fair and transparent manner. This mechanism also ensured matching of the orders through the impersonal screen, on the basis of "best offer price". The sellers also realise true price of their securities within the circuit filters prescribed by SEBI. To reinforce confidence in the bourses, Exchanges under the initiative of SEBI guaranteed settlement of the trades and also put in place Trade Guarantee Fund to back up this assurance. However, analysis of trades of Ketan Parekh routed through DKB revealed that this very purpose of impersonal trading was defeated through execution of synchronised trades. These arranged artificial deals put by KP entities defeated the principle of ensuring best price more so when there was synchronised trades / trades with the prior understanding executed by DKB and counter party brokers for their respective clients. Structured and synchronised nature of trades is evidenced by the proximity of timing of in -putting of buy and sell orders, exact matching of price and quantity of shares resulting in matching of trades almost on every occasion between brokers dealing for KP entities even when there are more than a few thousand brokers spread over more than 300 cities in the country. These instances cannot be said to be a mere coincidence that there has been matching of trades as there has been numerous repeated instances of such transactions and these uncanny matches are not isolated transactions.
7.11 Statistically, around 470 orders were put as agency trades by DKB for KP entities and almost all these orders resulted in matched trades. The analysis of these trades show that almost entire quantity of sale orders of one set of KP entities matched with the buy orders of same/different KP entities. This large matching cannot be explained on the basis of 'theory of probability' which is a scientifically accepted mathematical proposition.
7.12 Even though DKB has contended that they did not put the order with a view to synchronize it with other orders and that they were not aware of the counterparty buying broker and counter-party buying client, yet their tacit admission that they were told by Mr. Kartik Parekh that if they put the order at the pecific price and quantity given by him, the order would be executed, implies that they were aware or atleast could have known with diligence that buying client was pre-arranged by seller. This is evident from the fact that the sell order for such large quantities get executed within seconds especially in scrips like Mascon Global, Tips Industries, Shonkh Tech etc. 7.13 It is seen from the order log and trade log, during the period from August 2000 to March 2001, DKB have put around a total of 470 sell orders (380 orders at NSE + 95 orders at BSE) on behalf of Ketan Parekh entities which got matched with around 490 buy orders. As a broker of repute claimed by DKB, this fact should have alerted it to doubt the intentions of the clients.
7.14 In order to ensure the repayment of sale consideration which was being given in advance to KP entities before pay out for the sale made through DKB, shares were sold through the trading and settlement mechanism of the stock exchange. As the trades executed at the exchange are guaranteed by the Clearing Corporation/Exchange, the sale through the exchange mechanism ensured that in the eventuality of Ketan Parekh entities defaulting on their obligation to pay for purchases made by them, DKB would have got the money out of settlement guarantee fund of the exchange.
7.15 During the period from April, 2000 to March, 2001, KP entities have transacted around 470 synchronized sale transactions through DKB in respect of scrips, which included illiquid scrips namely--such as DSQ Bio-Tech, Shonkh Tech, Mascon etc. These synchronised/structured/matched/washed trades created large artificial volumes especially in the scrips like DSQ Bio-Tech, Shonkh Tech, Mascon etc. which are otherwise not very liquid stocks. The table given below shows as an illustration that if these circular transactions are excluded from the volumes traded at the exchanges on the given day, then there are hardly any genuine volumes. This shows that the only liquidity on the given day in the scrip is on account of circular transactions of KP entities.
Exch Trade Date Client Name Scrip Name Selling by DKB Securities Total Traded Qty at the exchange Percent of selling to the total market BSE 2/1/2001 CCL MASCON GLOBAL 500,000 2971621 16.83 BSE 2/1/2001 CCL SHONKH TECH 500,000 1167950 42.81 BSE 12/26/2000 CCL TIPS INDUS.
100,000 409208 24.44 NSE 11/24/2000 CCL DSQ BIO TECH LT 525,000 4413122 11.90 BSE 11/20/2000 PFMS DSQ BIO TECH LT 400,000 1230046 32.52 BSE 12/4/2000 PFMS DSQ BIO TECH LT 200,000 608463 32,87 NSE 12/7/2000 PFMS DSQ BIO TECH LT 500,000 1337557 37.38 NSE 1/4/2001 CCL DSQ BIO TECH LT 750000 6669885 11.24 NSE 12/13/2000 CCL DSQ BIO TECH LT 500,000 3513378 14.23 NSE 1/3/2001 CCL DSQ BIO TECH LT 1000000 3793853 26.36 7.16 The above table gives instances where volumes were artificially created in the illiquid scrips such as DSQ Bio-Tech, Shonkh Tech, Mascon etc. through circular trading. These artificial volumes were created with a view to induce others to invest in the scrip at prices bench marked by KP entities who had put such large buy orders. These scrips are not tradable in such large quantities. The trades got executed within seconds of in-putting of the sale orders. The trades matched for almost whole quantity put for sale in one go and not in small tranche which would have been the case if the deal was genuine.
8. Whether the circular or negotiated deals are banned or are allowed to be done in the same manner as that of the normal market trades?
8.1 The allegation against DKB is only that having entered into circular trades with the purpose of financing KP group, it had executed fictitious and non-genuine trades with a view to create misleading appearance of trading. The circular mentioned above permits deals that are similar to normal trades. Such repeated circular transactions cannot be construed as normal trades. Its conduct helped KP entities in creating artificial volumes and market in certain scrips by way of such circular trades. Shares were found to have been rotated from one entity belonging to Ketan Parekh to other entities belonging to him. There was no change in beneficial ownership also. In view of this, I find that the circular dated 14.9.1999 of SEBI would not protect DKB.
9. Whether the finding of Enquiry Officer that the trades executed by DKB on behalf of CCL and PFMS in illiquid scrips for which generally there was no ready market is correct in view of the submission of DKB that it had executed only a few trades in such illiquid scrips and that the majority of the trades were liquid scrips for which a ready market always existed?
9.1 Considering the fact that illiquid scrips were involved, size of transactions, and KP group being the selling as well as buying clients (same/different entity within the group), it can reasonably be concluded that DKB was providing immediate funds to KP group and to secure repayment of funds by KP group, DKB was putting in the sale transactions on their behalf through stock exchange mechanism which were matched with same/ other KP group entity by synchronization of trades. Further DKB was charging the rate of interest in the form of brokerage, which was related to the period for which such funds were being provided by DKB. DKB admittedly charged varying rates of amount which was relatable to the period between the date of payment to the client and date of receipt of funds from the pay out at the stock exchanges. Actually, the rate of interest varied in accordance with the period for which the funds were provided. In view of the findings made above and as per these facts it is clear that the transactions executed by DKB on behalf of KP group were not the genuine sale transactions (as KP group was the selling client and KP group itself was the buying client on the other hand) and these transactions were put through in the stock exchange mechanism just to camouflage the actual funding / financing to KP group.
9.2 The aforesaid type of transactions which are funding/financing in nature but artificially given a different color are not permissible under law. BSE, vide its Circular no. 5638/96 dated 01.10.96, taking note of the transactions which were basically in the nature of funding / financing transactions, advised its member brokers that such transactions are not considered genuine trade / commercial transactions between the members and mentioned that such transactions would also fall within the ambit of fictitious transactions. Vide said Circular, BSE while referring to the practice of raising funds by certain members by sale of scrips on spot delivery basis, collecting sale proceeds and then the buying member in turn selling the same scrip to selling member in the settlement and that the difference in buying and selling rate of the scrips representing interest, advised members not to enter into such transactions and it also stated that members found to be involved in such transactions or transactions of similar nature with other members, a serious view in the matter shall be taken and the same will also attract strict disciplinary action against the concerned members. Further, BSE vide its subsequent notice no. 80626/2001 dated 17.3.01, while reiterating the directions given vide its circular dated 01.10.96, once again advised its members, not to enter into such transactions and has warned the members concerned of strict disciplinary action in case of any such violation besides, annulment of such transactions and non availability of Trade Guarantee Fund cover etc. for such transactions. DKB having provided finance to KPG entities under the garb of trading / sale transactions, has therefore violated the above said directives of BSE and as per the said circular, the transactions executed by DKW on behalf of KP entities, amounted to "fictitious transactions".
10. In the light of the above, I conclude that DKB has committed the following violations:-
10.1 By virtue of its indulgence in funding the KP group, DKB has violated bye law 357 (ii) of BSE Bye-Laws read with bye-law 355, which prohibit and provide for action / penalty against a member if found to be guilty of un-business like conduct. Bye law 357 defines unbusiness like conduct and clauses (ii) of the said bye law provides that a member shall be deemed guilty of unbusinesslike conduct::-
(ii) fictitious dealings - If he makes a fictitious transactions or gives an order for the purchase or sale of securities, the execution of which would involve no change of ownership or executes such an order with knowledge of its character. Bye law 355 provides for the penalty of expulsion, suspension or withdrawal of all or any of the membership rights of the broker, fine, censure etc. in case of breach of bye laws and Regulations by the member broker or for misconduct, unbusinesslike conduct or unprofessional conduct on the part of the broker member.
The aforesaid conduct of DKB was, therefore, in violation of the above said directions of the stock exchange issued vide BSE circulars dated 01.10.96 and 17.3.01 and the transactions amount to fictitious transactions. By virtue of violating the said circulars DKB is guilty of misconduct as defined under bye- law 356. Further such fictitious dealings on the part of DKB amount to unbusiness like conduct on their part as defined in clauses (ii) of Bye law 357 of BSE as reproduced above. DKB, therefore, is guilty of violation of the said circular and consequently guilty of unbusinesslike conduct in terms of bye law 357 of BSE Bye-laws.
10.2 The aforesaid conduct of DKB is also violative of Rules 4(b) and 4(e) of NSE Rules and Regulation 4.5.4 (c) and 4.6.2 of NSE Regulations. The said Rules read as under :
i.Rule 4(b): Fictitious Dealings - If it makes a fictitious transaction or gives an order for the purchase or sale of securities the execution of which would involve no change of ownership or executes such an order with knowledge of its character.
ii.Rule 4(e): Market Manipulation and Rigging - If it, directly or indirectly, alone or with other persons, effects series of transactions in any security to create actual or apparent active trading in such security or raising or depressing the prices of such security for the purpose of including purchase or sale of such security by others.
iii.Regulation 4.5.4 (c): A Trading Member shall not:
1. make bids and/or offers for securities with an intention of creating a false or misleading appearance with respect to the market for, or the price of any security or;
2. make a transaction or give an order for the purchase or sale of securities, the execution of which would involve no change of beneficial ownership, unless the Trading Member had no knowledge that the transaction would not involve a change in the beneficial ownership of securities.
iv. Regulation 4.6.2: No Trading Member shall,
(a) for the purpose of creating or inducing a false or misleading appearance of activity in an eligible security or creating or inducing a false or misleading appearance with respect to the market in such security.
(b) enter any order or orders for the sale of such security with the knowledge that an order or orders of substantially the same size, and at substantially the same price for the purchase of such security has been or will be entered by or for the same or different parties.
It is seen that DKB has executed huge transactions in illiquid scrips on behalf of KP group which created an illusion of active trading in the said illiquid scrips and led to creation of false volumes and false market in the said scrips. Therefore, in view of the above findings DKB's abovesaid conduct is in violation of Rule 4(d) & (e) of NSE Rules and Regulations 4.5.4 (c) and 4.6.2 of NSE Regulations.
10.3 I also find that DKB has also violated Regulation 7 read with clauses A (1) (2) (3) (4) & (5) and Clause B 4(a) of Section B of the Code of Conduct as specified in Schedule II of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. Regulation 7 of the said regulations lays down that -
"The stock broker holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II".
Clauses A (1) (2) (3) (4) & (5) and Clause B 4(a) of the Code of Conduct read as under :-
Section A
1. Integrity : A stock broker, shall maintain high standards of integrity promptitude and fairness in the conduct of all his business.
2. Exercise of Due Skill and Care :- A stock broker shall act with due skill, care and diligence in the conduct of all its business.
3. Manipulation : A stock broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumors 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. Compliance with Statutory Requirements : A stock broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the stock exchange from time to time as may be applicable to him Section B (4)(a) A stock broker shall not encourage sales or purchases of securities with the sole object of generating brokerage or commission.
DKB by indulging in financing transactions which created false volumes/ market and price in various scrips assisted KP group and thus DKB is guilty of not maintaining high standards of professionalism, integrity and fairness in the conduct of its business. It has also failed to act with due skill, care and diligence as expected from a stock broker. The said transactions interefered with fair and smooth functioning of the market. DKB has thus violated SEBI Circular dated 14.9.99, the abovesaid notice/ Circulars dated 2/9/1999, 1/10/1996 17/3/2001, bye law 357 of BSE and the rule 4 of NSE Rules and accordingly guilty of failing to comply with statutory requirements. In view of the above DKB is also guilty of violation of Clauses A(1) to (5) of Code of Conduct.
Further, DKB having provided funds under the garb of carrying out the above said sale transactions, has executed such transactions with the objective of funding KP group with a view to earn interest which created false volumes. Therefore, DKB 's conduct may not fall within Clause B (4)(a) of the Code of Conduct.
10.4 I further find that having executed "non genuine" trade transactions on behalf of KP group, DKB assisted KP group in trading, which is in violation of Regulations 4(a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995. The said Regulations provide as follows :
Regulation 4(a): No person shall 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.
Regulation 4(b): No person shall indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market.
Regulation 4(c): No person shall indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions.
Regulation 4(d): No person shall 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 fluctuations in the market price of securities.
10.5 In view of my findings above, I conclude that the sale transactions executed by DKB on behalf of KP group were mere financing transactions given the color of sale and purchase of shares through the trading system of the stock exchanges and the said transactions executed in huge quantities led to creation of artificial volumes. These transactions also created false and misleading appearance of trading in the securities and the said transactions were executed without any intention of effecting genuine trade transactions. These circular transactions had not resulted in actual transfer of beneficial ownership as the selling and buying entities belonged to the same group. This has created artificial volumes and bench marking of prices. So far as violations of clause (b) of regulation 4 is concerned, the same requires that the act must be "calculated" to create a false or misleading appearance of trading in securities market. It is established from the facts found above that DKB was actually funding KP group and the trades/sale transactions executed on their behalf on the stock exchanges were just a camouflage. The said transactions were, therefore, non genuine transactions which led to creation of false volumes/ false market and also resulted in reflection of prices which were based on non genuine transactions. I find that the above said sale transactions executed by DKB which were to ensure repayment of funds lent to KP group, led to creation of artificial volumes. Thus, DKB helped KP group and violated the provisions of Regulations 4(a), (c) and (d) of the SEBI (FUTP) Regulations, 1995.
10.6 However I find that DKB has not traded on its own account. It had only executed transactions for its clients CCL and PFMS. Further, it had only executed sale transactions and that too after receiving the Securities from the clients. I find that the payment was made immediately on receipt of the securities and after executing the sale from the clients without waiting for the settlement in the Exchange. But DKB repeatedly executed transactions which were got matched by the clients through counter party brokers. DKB argued that at the time when the transactions were executed, which is through screen based confidential trading system, there is no way to know the counter party to suspect the trading. Matching of trade among KP group were known only after revealing the findings of SEBI investigations. DKB submitted that if client manipulate the trades without the knowledge or the involvement of the Stock broker, the Stock broker cannot be blamed. DKB had admitted that Mr. Kartik Parikh, brother of Mr. Ketan Parikh, told it that if DKB puts the order at specific price and quantity, the order would be executed. This should have alarmed DKB on the intentions of its clients. I find total complacency and negligence on the part of DKB, which it eventually admitted during the hearing. By its negligent conduct it has aided the KP entities to manipulate the market.
10.7 In the light of the above discussion, the submissions made by DKB and on the basis that DKB had not traded on its own account, I am of the view that suspension of its certificate of registration as a stock broker, for a period of eighteen months is sufficient and the same meets the ends of Justice. I have also noted that DKB has surrendered on its own its certificate of registration of SEBI, which has not been accepted because of the pending enquiry proceedings against it.
11. Therefore, in exercise of the powers conferred upon me in terms of Section 19 of SEBI Act, 1992 read with Regulation 13(1) and Regulation 23 of the SEBI (Procedure of Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, I hereby direct that the certificate of registration of Dresdner Kleinwort Benson Securities (India) Ltd. (hereinafter referred to as 'DKB') be suspended for a period of eighteen months.
This order shall come into force with immediate effect.