Confirmatory Order against JMP Securities in the matter of Market Manipulation using GDR issues.

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) had, pending investigation and passing of further orders, vide an interim ex-parte Order dated September 21, 2011 (hereinafter referred to as the Order), amongst others, directed JMP Securities Private Limited (hereinafter referred to as the entity), not to deal in securities or instruments with Indian securities as the underlying in the capacity of a client to other intermediary or in proprietary account, in any manner whatsoever, until further orders. Subsequently, an opportunity of hearing was afforded to the entity on October 4, 2011, when Mr. Vinay Chauhan, Advocate represented the entity and made submissions. The directors of the entity, Mr. Mahesh Vora, Mr. Kashyap Vora and Mr. Jackie Vora were also present during the hearing. Written submissions dated October 4, 2011 were also filed during the course of the hearing. I have considered the submissions made by the learned counsel on behalf of the entity during the course of hearing, which were on the lines of the written submissions dated October 4, 2011. I have also considered the letter dated October 5, 2011 received from the entity and other material available on record.

2. Before proceeding further, it would be necessary to note the background of the matter, as mentioned in the Order. SEBI was alerted by its surveillance systems of the large scale off-market transactions in certain scrips, namely, IKF Technologies Limited, Avon Corporation Limited, CAT Technologies Limited, Asahi Infrastructure

Limited, Maars Software International Ltd and K Sera Sera Limited and a revelation in the preliminary examination that certain Foreign Institutional Investors/ Sub- Accounts (hereinafter referred to as FIIs/ Sub-Accounts) namely, India Focus Cardinal Fund (India Focus), KII Limited (KII), Mavi Investment Fund (Mavi) and Sophia Growth (Sophia), were converting the Global Depository Receipts (hereinafter referred to as GDRs) underlying the shares of the aforesaid companies held by them into equity shares to sell in the Indian markets and that most cancellations happened within a short period of time of their issue and on noticing that a few entities were repeatedly appearing as counterparties to 33% to 75% of those shares sold by FIIs in the scrips, had conducted an examination into the same. The prima facie findings of the said examination pointed out to the various aspects of the GDR issues like the large size of the issue vis-à-vis the existing size of the issuing company, unimpressive financials of the company, common initial investors, high proportion of cancellation of GDRs repeatedly by a set of FII/Sub-Accounts, sale in Indian stock exchanges and a major portion being bought by a constant group of clients, the trading amongst the said clients and subsequent off-loading by them.

The preliminary findings had pointed towards an elaborate scheme to manipulate the securities market. One of the entities which was found to have acted as counterparties to the sell transactions of the FIIs was the entity and the others being Alka India Limited (Alka), Basmati Securities Private Limited (Basmati), SV Enterprises and Oudh Finance & Investments Limited (Oudh). The Order had classified the FIIs/Sub- Accounts as “Sub-Accounts” and the clients appearing as their counterparties as “Group”. The period taken up for the examination was between January 1, 2009 and May 31, 2010 (hereinafter referred to as the investigation period). The entity, trading in its proprietary account had acted as one of the counterparties to the sale of shares by the Sub-Accounts in the scrips, as detailed in the Order. The entity was also found to have significant trading while inter se trading with other Group members, prima facie leading to creation of artificial volumes in those scrips. Further, there were several instances where Basmati, SV, Oudh, Alka and the entity have indulged in synchronised trading with one another.

In view of the prima facie findings, the Order had alleged that the dealings of the Group members (including the entity) with the Sub-Accounts and amongst themselves were in violation of the provisions of the Securities and Exchange Board of India Act, 1992 and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, as mentioned therein

3. In the scrip of Asahi Infrastructure Limited, it was observed that out of the total 2,82,71,646 shares sold by India Focus, 1,69,62,954 shares were purchased by the Group. The entity, allegedly being part of the Group, had purchased 19,00,000 shares. Subsequent to their purchase, the Group was observed to be selling their shares in the securities market and the counterparties to those trades included the other entities of the Group, the details of which were given in a table at page 6 of the Order. The entity had sold 21,00,500 shares in the market, of which 3,29,159 shares (15.67% of shares sold by the entity) were purchased by two other entities (Basmati and SV) of the Group. A summary of the buy-sell quantities and the buy-sell values along with the profits made by the Group including that of the entity was given in a table at page 7 of the Order. The entity submitted that it started trading in the shares of the aforesaid company from December 17, 2009 when the volume in the scrip was already high (at 65,50,685 shares) and had traded for 12 days during the investigation period.

According to the entity, its total purchase and sale was 21,00,500 shares i.e 1.21% on net basis of the market volume for the investigation period. The entity also stated that it had traded in the shares of the said company post the investigation period also, purchasing and selling 34,48,621 shares. It was further submitted that its employees (executing trades at the relevant time) cannot be expected to know by any reason who the counter party sellers were and that its trades with India Focus were matched in the screen based matching system of the stock exchange. The entity further submitted that during the period-November 30, 2009 to January 11, 2010, it purchased shares only on December 17, 2009 and December 30, 2009 and sold from December 17, 2009 till January 7, 2010, when the volumes were considerably high. The entity also stated that during the period January 12 2010 to May 31, 2010, it traded in the scrip only on April 9, 2010 and April 19, 2010 and squared off its position suffering loss. The entity denied acting as counterparty to the Sub-Accounts and submitted that during the investigation period, it had purchased only on four days and all its purchases were made only when the volumes were considerably high.

It was observed in the Order that the counterparties to the trades of the FIIs were mostly the group entities and that Basmati, SV and the entity had together purchased 60% of the total shares sold by India Focus. In respect of the trades in the shares of Avon Corporation Limited, it is seen that India Focus and KII had sold 1,23,58,611 and 17,00,000 shares, respectively in the securities market, of which 56.23% shares had been purchased by the members of the Group. The entity had not bought shares of the said company from any of the selling Sub-Accounts/FIIs. It was observed that subsequent to the purchase of shares by the other entities of the Group from the aforesaid Sub-Accounts, the Group entities were selling in the market and that the entities of the Group (including the entity) were trading amongst themselves. The entity had sold a total of 18,38,026 shares of Avon Corporation Limited of which 12,05,178 (approximately 66%) shares were purchased by four of the entities in the Group, namely, Alka, Basmati, Oudh, SV and the entity itself (in respect of 39,226 shares). The entity had submitted that it started trading in the shares of Avon Corporation Limited on July 3, 2008 i.e. prior to the investigation period, when the volume was substantially high and before the GDRs of the said company had come out in June 19, 2009. The entity also submitted that it had traded on 31 days and its total purchase and sale was 18,38,026 shares which was only 1.40% on net basis of the market volume for the investigation period.

The entity submitted that it was, at no point, aware of the counterparties to its trades and denied being part of the Group. It also submitted that its trades in the scrip were much less than 0.5% of its total trades during the same period. It further contended that it did not trade to create volume, as alleged or volumes increased because of its trade, as it traded in the scrips only when the volumes increased and when liquidity reached a desired level.

5. In the shares of CAT Technologies Limited, Sophia, Mavi and India Focus the entity (sub – accounts) have sold a total of 37,55,001 shares of which 12,19,639 shares were purchased by three of the Group members. In terms of the Order, the entity did not receive any shares of CAT Technologies Limited from the selling Sub- Accounts. However, like in the case of trading in the shares of Avon Corporation, the entity was found to have traded with the other entities of the Group. The entity, while selling a total of 25,79,298 shares of the scrip had sold 21,51,294 shares (83.41% of its total sell during the relevant period) to the other entities of the Group. The shares sold by the entity were purchased by Alka, Basmati, Oudh, SV and the entity itself (for 1,38,102 shares). The entity submitted that it had started trading in the said scrip on March 28, 2008, i.e. prior to the investigation period, when the volume was substantially high. It was further submitted that the entity had traded on 21 days and its total purchase and sale was 25,79,298 shares, which was only 3.06% on net basis of the market volume for the investigation period. It was stated that the entity also traded in the scrip during the period other than the investigation period also.

6. In the scrip of IKF Technologies Limited, it was observed that India Focus, after getting the GDRs converted into equity shares, had sold 1,96,07,456 shares of which trades for 1,48,35,662 shares matched with the entities of the Group. Approximately 76% of the shares sold by the said FII were purchased by the Group including the entity. The entity had purchased 18,61,726 shares from India Focus ( 12.54% of India Focus sale to the Group). In this scrip also, the entities of the Group while selling, had traded amongst themselves. It was observed that out of the total of 6,33,22,661 shares sold by the Group, 1,68,94,582 shares (approximately 27%) were traded amongst the Group. The entity was found to have sold 1,80,30,802 shares of which 58,06,270 shares (includes 24,70,663 shares purchased by the entity itself) were purchased by the Group members. It was also noticed that certain trades between the entities of the Group had been executed through synchronisation. The Order, at pages 16 and 17 tabulated such synchronised trades. The entity was found to have indulged in synchronised trades on August 26, 2009, August 31, 2009, September 7, 2009, October 30, 2009, November 6, 2009, March 5, 2010 and March 11, 2010. In respect of such averments and allegations in the Order, the entity submitted that it started to trade in the scrip from March 28, 2008, i.e. prior to the investigation period, when the volume was substantially high. It denied being part of the Group and contended that while executing trades on the screen based mechanism of stock exchanges, it could not be aware of the counterparties to its trades. It contended that its trades were neither pre-arranged nor synchronized in nature and denied having any link or connection with the alleged entities/group. The entity submitted that it traded on 110 days and its total purchase and sell quantity was 1,82,09,685 shares, which was only 5.64% on net basis of the market volume for the investigation period.

7. In the matter of K Sera Sera Limited, it has been noticed that India Focus had sold a total of 1,35,45,000 shares of the said company. Out of the said quantity, trades for 80,10,347 shares had matched with the buy orders placed by the entities of the Group. Further, the buy and sell orders which culminated into trades for 68,78,171 shares (out of 80,10,347 shares matched) had been entered at the same rates. Few trades between the Group and Sub-Accounts were also found to be synchronised. KII Limited had also sold 1,17,81,430 shares of which trades for 34,82,476 shares were matched with the Group. It was also observed that Basmati, Oudh, SV and the entity have together purchased 59.13% of the total shares sold by India Focus and that Basmati, Oudh, SV and the entity had purchased 29.56% of the total shares sold by KII Limited. The entity had purchased 48,523 shares from India Focus and 54,000 shares from KII. The Order had also mentioned that when an entity of the Group was selling shares in the market, the others were purchasing the shares and that they have in turn sold the shares of the said company in the securities market. The entity had sold a total of 42,90,779 shares, of which 18,05,472 shares were purchased by Basmati (6,17,548 shares), the entity itself (38,906 shares), Oudh (20,475 shares) and SV (11,28,543 shares). In this scrip, it was also noticed that out of the 36 days when the Sub-Accounts have sold shares of the said company, the Group entities were trading on 32 days. Further, on certain days, the shares traded between the Sub-Accounts and the Group entities were as high as 100% of the total shares sold by the Sub-Accounts on the said days. It was also observed that the number of shares traded between the Group entities and the Sub- Accounts were upto 96.84% of the total shares bought by the Group on any particular day. With respect to these averments, the entity submitted that it started trading in the shares of K Sera Sera Limited on April 10, 2008 when the volume was substantially high. It was also submitted that it had traded on 86 days and its total purchase and sell quantity was 42,25,382 shares, which is only 1.11% on net basis of the market volume for the investigation period.

8. As regards the trading in the shares of Maars Software Limited was concerned, it was observed that India Focus, Sophia and Mavi, had after converting their GDRs into equity shares, sold a total of 1,52,18,242 shares. Of the shares sold by the said Sub-Accounts, the entity had purchased 9,21,540 shares from India Focus, 25,000 shares from Mavi Investment and 50,000 shares from Sophia Growth. It was also noticed that the trades inter alia between Mavi Investment and the entity were prima facie synchronised. The entity had sold a total of 59,31,322 shares of which the counterparties in respect of trades for 27,87,266 shares were the other Group entities (Basmati-1202995 shares, to self-176667 shares, Oudh-1850 shares and SV-14,05,754 shares). The entity has submitted that it started trading in the shares of said company on April 2, 2008 when the volume was substantially high. It was further submitted that the entity had traded on 58 days and its total purchase and sell quantity was 59,31,322 shares, which was only 4.41% on net basis of the market volume for the investigation period. As regards the entity’s trades in the shares of Cals Refineries Limited was concerned, the entity has submitted that its trading was a matter on record and that it had traded prior to the investigation period, during the investigation period and also post the investigation period, and that all its trades were in the ordinary course.

9. I have noted the submissions of the entity in respect of its trading in the identified scrips. In almost all the scrips, a major portion of the shares sold by the Sub-Accounts have been bought by the Group entities including the entity. The Group entities after trading amongst themselves have later on off-loaded the shares in the securities market. The very high percentage of the trades of the Sub-Accounts matching with the Group entities as counterparties across various companies identified in the Order, prima facie raised a suspicion of a pre-arrangement between the Group and the Sub-Accounts. From the preliminary findings of the investigation, as also mentioned in the Order, I note that the seven companies had issued GDRs which were hugely in excess of its existing equity size. The size was found to be in the range of 61% (in IKF Technologies Limited) to 13,133% (in Cals Refineries Limited) compared to the equity size at the time of the GDR issues. Such details were mentioned in page 25 of the Order. SEBI had also examined the financials of the issuer companies for the years 2007-2010.

A summary of financials of the said companies were provided in the Order at page 26 thereof. The profit after tax (PAT) for the years 2007-2009 (the period of issuance of the GDRs) were in the negative for some of the companies and the highest was `4,00,00,000/- for IKF Technologies Limited for the year 2009. It was observed that PAT when compared with the trend of sales during the period leading upto the GDR issue may not generally provide adequate reassurance to an investor to subscribe to the shares of such companies. In such a scenario, the conduct of the companies in issuing large sized GDRs as compared to the existing equity capital and the issues being subscribed, leads to a prima facie view that the same could be arranged. The financials of the said companies may not readily attract investors to subscribe to such large sized issues and the successful subscription of these GDR raised possible doubts about the genuineness of subscribing investors or the actual motives of the promoters or directors of companies issuing them. The facts that the same lead manager, Pan Asia (except in the case of Cals Refineries Limited) and the same set of selling FIIs/sub-accounts and a common set of counter parties trading in the shares of such companies, strengthens the prima facie observation that issuer companies, the FIIs/sub-accounts who had converted GDRs and sold the underlying securities in the Indian securities market and the alleged Group entities were involved in the entire scheme of things, as alleged in the Order.

Further, issue proceeds were deposited in European American Investment Bank AG, Austria (Euram Bank), (except for Cals Refineries Limited), which has a joint venture with Mr. Arun Panchariya led Pan Asia which is known as Euram Bank Asia Limited, located in Dubai.

10. The trades of the Sub-Accounts and the Group entities were found to have contributed substantially to the volumes of such scrips. I also note the following observation from the Order “14. The inference that can be drawn from the trading of Group vis-à-vis FII is that the Group entities have been successful in buying large chunks of shares from the Sub-Accounts and then disposing it off in the markets. Group have maintained volumes in the market but not held on to the shares of companies examined, therefore it is clear that the Group entities have not bought the shares from Sub-Accounts with a view of long term investment. The buyers to the shares sold by Group are either Group members or in majority are scattered investors. Prima facie overall trading by these suspected entities have given a false impression to the market of high volume probably done so in order to keep genuine and unsuspecting investors interested in the scrip over the period of activity before the Group finally off-loaded shares……”. The Sub-Accounts have sold shares which were the underlying to the GDRs earlier issued by the identified companies. The Order has also mentioned that the financials of the identified companies would not readily attract investors to subscribe to such large sized issues and that the same cast a suspicion on the genuineness of the subscribing investors or the actual motives of the promoters/directors of the companies issuing such GDRs.

11. During the course of personal hearing the entity submitted that the observed pattern of trading in Asahi wherein large quantity of shares were purchased and then sold off over next few days was a routine trading strategy followed by them. The entity was advised to show any instance of trading in support of its aforementioned argument. Thereafter, the entity provided SEBI, the trade details of 14 scrips during the relevant period where similar trading pattern was said to exist. However, on examination of the trade details provided by the entity, it doesn't appear that the trading pattern of the entity in these 14 scrips is similar to that in Asahi.

12. The entity further submitted that it had placed buy orders for 5,00,000 shares of Asahi on December 17, 2009 and 5,00,000 shares and 10,00,000 shares on December 30, 2009. For the trades executed on December 30, 2009, it was submitted that the buy order for 5,00,000 was executed in four trades for 50,000 shares, 50,000 shares, 3,64,551 shares and 35,449 shares and that the order for 10,01,000 shares was executed as three trades for 5,00,000 shares, 5,00,000 shares and 1,000 shares. The entity also submitted that the said three trades were done by different jobbers from its different terminals.

13. I also note that the volumes of the scrips had increased significantly after the conversion of GDRs into equity shares and the subsequent sale in the stock exchanges. The details of the same were provided in a table in the Order at page 27. Further substantial quantities of the GDRs (approximately 18% to 79%) issued by the identified companies were converted into equity shares. The preliminary investigation has observed that a repetitive pattern emerged as the same set of Sub-Accounts sold most of their holdings to the same set of counterparties, most of the GDRs being issued during the year 2009, the same bank (Euram Bank Ag) being utilised to deposit the proceeds of the GDRs and the GDR issue being managed by Pan Asia Advisors Limited (Pan Asia). The submissions of the entity has primarily been that its transactions in the identified scrips were in the normal course and that its orders had matched with the Sub-Accounts and the others of the alleged Group entities through the screen based trading systems of the stock exchanges and that it has no connection with the others. Whether the entity had actually colluded with the entities alleged to be the Group and with the GDR issuer companies and the Sub-Accounts would be a question which the investigation would throw light on.

15. Considering the similarity of trading carried out by the entity in other scrips, as submitted by it and also total trading of the entity in these scrips as compared to his total trading in cash market, in the interest of justice, I feel it appropriate to modify the said directions to certain extent. The entity, an intermediary functioning in the securities market has already undergone debarment as stated in the ex parte order since 21st September, 2011. The case against the entity would be reviewed on completion of the investigation and appropriate course of proceedings would be taken, as deemed fit, in accordance with law. I also note that the Honourable Securities Appellate Tribunal (Hon’ble SAT) in the matter of Appeal No. 193 of 2011- India Focus Cardinal Fund vs. SEBI], vide Order dated November 21, 2011 inter alia had allowed the appellant therein, to sell all the securities held by it as enlisted in Exhibits G and J to the said appeal and the sale proceeds were directed to be deposited in a fixed deposit with ICICI Bank Limited earning interest. The Hon’ble SAT also observed that the appellant therein shall not be allowed to withdraw monies from that account including interest without the prior permission of SEBI and that in case it wants to utilize any or whole of the sale proceeds, it shall seek the permission of SEBI. The direction regarding sale of securities has been given by the Hon’ble SAT in view of the falling markets to avoid further erosion in the value of the portfolio held by the entity. Considering the above and in the interest of justice, I find that a similar direction can be issued in this case also.

12. In view of the foregoing reasons, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11(1), 11(4) and 11B thereof, hereby modify the directions issued vide the ad interim ex-parte Order dated September 21, 2011 in the matter of market manipulation using GDR issues against JMP Securities Private Limited, to the limited extent of allowing it to sell the securities held by it in its demat accounts. JMP Securities Private Limited shall deposit sale proceeds, in case of any sale, in a bank fixed deposit earning interest. JMP Securities Private Limited shall not be allowed to withdraw monies from the said account including interest without the prior permission of Securities and Exchange Board of India and in case it wants to utilize any or whole of the sale proceeds, it shall seek the permission of Securities and Exchange Board of India.

PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: MAY 11, 2012