Interim Order in respect of Trading Members in the matter of Illiquid Stock Options[SAT Appeal No.:18/2016]17/2016]16/2016]15/2016]14/2016]12/2016]11/2016]13/2016]

WTM/RKA/ISD/ 25/ 2016 SECURITIES AND EXCHANGE BOARD OF INDIA EX-PARTE AD INTERIM ORDER Under sections 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 in respect of Trading Members in the matter of Illiquid Stock Options 1. As part of ongoing surveillance, Securities and Exchange board of India (“SEBI”) came across several instances/internal alerts wherein a set of entities were consistently seen incurring trading loss by executing reversal trades in options on individual stocks (“stock options”) in Equity Derivative Segment. Accordingly, examination of trading in stock options segment was done for the period April 1, 2014 to March 31, 2015 from the perspective of examining trading of these entities. Pursuant thereto, an ex-parte ad interim order in the matter of illiquid stock options was passed on August 20, 2015 (hereinafter referred to as "interim order"). 2. The following was, inter alia, observed in the interim order: a) The loss-making entities were trading mainly in options on individual stocks which were thinly traded. The trades by these loss-making entities, in many cases, contributed to 70% to 100% of total traded volume for the contracts on those days. b) On majority of occasions, the quantity of stock options bought and sold by the loss-making entities for a contract was identical, however, there was a significant difference in the sell value and the buy value of the transactions resulting into significant loss to the loss-making entities. c) Substantial number of transactions were squared up and a major percentage of transactions thereof were trade reversals i.e. if the stock options were sold first to an entity, they would be bought back in exact quantity from the same entity or vice-versa. d) As the first leg of these reversal trades, these loss-making entities were mainly seen selling stock options without any corresponding offsetting position in the underlying scrip.

In many cases, these options were sold at unreasonably low prices, even below the intrinsic value of the option. Theoretically, the price of an option is a combination of its intrinsic value and time value. The former is a function of difference between option strike price and the underlying price and the latter being a function of time remaining till expiry of the option contract. It is well understood that in normal conditions, the minimum price which the option seller would demand to take the risk of writing the option would be equivalent to the intrinsic value of the Order in respect of Trading Members in the matter of Illiquid Stock Options option, but here the loss-making entities were selling options much below their intrinsic value. e) In the second leg of the reversal trades, the options once sold by an entity at unreasonably low prices were subsequently bought back on the same day or on the next trading day at substantially higher prices when compared to the first leg sell price. f) In certain instances, variations to the above pattern were seen which inter-alia included loss-making entities incurring loss by buying the options first instead of selling them. g) Further, during the period when stock options‟ position was kept open, there was no significant change in the price of the underlying scrip to justify the difference between the prices of the two legs of the reversal trade. h) The trading done by loss-making entities in stock options in the above manner, accounted for significant proportion of their overall trading on that segment. i) The loss-making entities as well as the profit-making entities were seen trading repeatedly in deep in-the-money options and deep out-of-the-money options on individual stocks, which were thinly traded.

3. The illustration of a typical reversal trade execution in stock options segment and the corresponding stock price movement for the scrip of Axis bank Ltd. on March 11, 2015 from 1 PM to 2PM in BSE cash segment is explained hereunder with the help of following graph:

Order in respect of Trading Members in the matter of i. On March 11, 2015, on BSE stock options segment, on behalf of their clients, two trading members entered synchronized trades wherein a client sold 621,500 units of put options of contract AXIS15MAR680.00PEW2 (i.e. a put option on the scrip of Axis Bank Ltd. with a strike price of ₹ 680) at ₹ 58.1 each to a single entity. It is to be noted that both buy and sell orders were punched in at 13:25:36. At the time of punching of these orders, the underlying price was around ₹ 582. This signified that the put options were deep in the money with an intrinsic value of nearly ₹ 98 each. ii. Thereafter, the Trading members entered orders to reverse the open positions of their clients between 13:30:52 to 13:34:09 on the same day. This was done through a series of synchronized transactions at the average buying price of ₹ 97.37 resulting into a loss of ₹ 2.44 crore to one client and profit of same to another. iii. It is noteworthy that the position was kept open for less than 10 minutes and even during this period, there was not much change in the price of the underlying to warrant the rise in premium of put options i.e. from ₹ 58.1 to ₹ 97.37 (both legs of the reversal trade and the underlying price movement are highlighted in the graph above). iv.

The reversal trades as explained above, formed 94.69% of day's turnover for the contract AXIS15MAR680.00PEW2 referred above. v. Likewise, several reversal transactions were executed by the Trading Member across scrips / contracts on different days which resulted into net trading loss to loss-making entities and net profit to another set of entities mentioned as profit-making entities in the said interim order. 4. SEBI undertook preliminary examination of the Trading Members (TMs) through whom the loss-making entities and profit-making entities were executing reversal trades. From the preliminary examination of the trades entered by these TMs on behalf of their clients on BSE Stock options segment, it prima-facie appeared that majority of the trading members executed reversal trades for majority of clients who traded through them and the reversal trades accounted for significant proportion of the total turnover done by these trading members on stock options segment on BSE. The Examination of trades executed by these trading members on behalf of their clients was done for the period April 1, 2014 to September 30, 2015 (herein after referred as "Examination Period").

5. For this examination, the TMs through which the 59 entities had executed trades were further examined on the basis of the following criteria: Order in respect of Trading Members in the matter of a) Reversal Turnover in BSE stock options segment to be more than ₹ 50 cr. b) Turnover due to the Reversal Transactions to be at least 50% of total turnover done by the TM in stock option segment of the exchange c) Of the total clients for which the trades were executed by TMs, at least 50% to have done reversal trades d) At least 50% of transactions forming part of the reversal trades to be reversed within 60 minutes of entering the first leg of the trade e) At least 50% of turnover forming part of the reversal trades to be reversed within 60 minutes of entering the first leg of trade 6. A representation of transactions of all the TMs who met conditions mentioned in the point 5 above for the examination period are mentioned in the table below:

Table 1: Turnover Level Viewfor TM Stock Turnover Reversal TO as TO across equity Options (TO) of % of Total TO cash and equity S. BSE Total Reversal in the Stock TM NAME derivative No. TM ID Turnover Transactions Option segments (₹ cr.) (₹ cr.) (₹ cr.) segment (C) (A) (B) (D)** Mousumi Deb 1 5156 1,335.8 1,238.3 1,402.8 93% Roy Odyssey Securities 2 4029 1,109.0 998.9 1,109.5 90% Pvt. Ltd Geometry Vanijya 3 4036 774.8 713.8 782.9 92% Pvt. Ltd. Kayan Securities 4 6566 673.8 613.0 742.0 91% Pvt. Ltd. Aryav Securities 5 6493 695.2 577.6 722.2 83% Pvt. Ltd. Giriraj Stock 6 6551 563.4 489.9 785.6 87% Broking Pvt. Ltd. Ns Broking Pvt. 7 4041 496.4 425.4 496.6 86% Ltd. Concord Vinimay 8 6587 485.0 422.9 680.8 87% Pvt. Ltd. Mkb Securities Pvt 9 4035 388.7 376.5 389.2 97% Ltd Bahubali Forex 10 4034 404.2 307.3 406.7 76% Pvt Ltd 11 6513 Sunstar Securities 276.3 275.8 366.1 100% Order in respect of Trading Members in the matter of Stock Turnover Reversal TO as TO across equity Options (TO) of % of Total TO cash and equity S. BSE Total Reversal in the Stock TM NAME derivative No. TM ID Turnover Transactions Option segments (₹ cr.) (₹ cr.) (₹ cr.) segment (C) (A) (B) (D)** Msb E-Trade 12 6395 264.8 263.1 591.4 99% Securities Ltd. Best Bull Stock 13 3135 267.3 246.3 1,197.4 92% Trading Pvt.Ltd. Skung Tradelink 14 6372 202.9 200.6 819.4 99% Ltd Lalit Kumar 15 5155 256.5 164.6 340.6 64% Tulshyan Subh Stock 16 M0681* 217.8 160.8 305.0 74% Broking Pvt. Ltd. R.K.Stock 17 3052 147.7 143.0 1,108.8 97% Holding Pvt.Ltd. Basan Equity 18 6122 176.9 139.9 480.5 79% Broking Limited Abans Securities 19 3287 102.6 101.2 129.9 99% Pvt. Ltd. Mauzampuria 20 4032 Securities Broking 101.0 100.1 103.2 99% Pvt Ltd Achintya Securities 21 6468 72.4 72.2 472.8 100% Pvt. Ltd. Guiness Securities 22 3027 117.2 71.0 749.7 61% Ltd. *The TM ID represents CSE sub broker ID. ** All percentage calculations in this order have been rounded off to the nearest whole number 7. It is observed from the table above that: a) For the examination period, significant proportion of the turnover done by the TMs is attributed to the reversal transactions in stock options segment (Column A,B). b) Further, for majority of the trading members, this turnover due to the reversal transactions for the clients accounts for significant proportion of total turnover done by these trading members for their clients (Column B, C, D).

Order in respect of Trading Members in the matter of 8. Further, an examination of total clients who traded through the TM vis-a-vis those who did reversal transactions in stock option segment was done. The same is presented in the table below :

Table 2: Client Level View for TMs

Total Total Total clients clients who trades BSE who traded did reversal Total forming S. Reversal Reversal TM TM NAME through the through the Trades part of No. Client % Trade % ID TM in the TM in the (C) Reversal segment (A) segment Trades (B) (D) 1 5156 Mousumi Deb Roy 485 472 98% 12,076 11,365 94% Odyssey Securities 2 4029 898 834 93% 10,867 9,771 90% Pvt. Ltd Geometry Vanijya 3 4036 958 946 99% 10,337 9,930 96% Pvt. Ltd. Kayan Securities 4 6566 1349 1,307 97% 10,174 9,438 93% Pvt. Ltd. Aryav Securities 5 6493 433 322 75% 9,412 5,499 58% Pvt. Ltd. Giriraj Stock 6 6551 1,512 1,457 96% 7,923 7,255 92% Broking Pvt. Ltd. Ns Broking Pvt. 7 4041 157 134 85% 4,471 3,775 84% Ltd. Concord Vinimay 8 6587 1,082 1,051 98% 6,019 5,581 93% Pvt. Ltd. Mkb Securities Pvt 9 4035 556 538 97% 4,819 4,585 95% Ltd Bahubali Forex Pvt 10 4034 791 593 75% 7,232 4,542 63% Ltd 11 6513 Sunstar Securities 256 256 100% 9,150 9,118 100% Msb E-Trade 12 6395 185 182 98% 5,093 5,044 99.0 Securities Ltd. Best Bull Stock 13 3135 725 655 90% 6,928 6,005 87% Trading Pvt.Ltd. Skung Tradelink 14 6372 184 183 99% 7,671 7,543 98% Ltd Lalit Kumar 15 5155 912 512 56% 5,030 3,035 60% Tulshyan Order in respect of Trading Members in the matter of Total Total Total clients clients who trades BSE who traded did reversal Total forming S. Reversal Reversal TM TM NAME through the through the Trades part of No. Client % Trade % ID TM in the TM in the (C) Reversal segment (A) segment Trades (B) (D) M06 Subh Stock 16 641 519 81% 9,006 6,225 69% 81 Broking Pvt. Ltd. R.K.Stock Holding 17 3052 351 335 95% 2,232 2,126 95% Pvt.Ltd. Basan Equity 18 6122 215 164 76% 2257 1,655 73% Broking Limited Abans Securities 19 3287 31 31 100% 1,110 1,044 94% Pvt. Ltd. Mauzampuria 20 4032 Securities Broking 338 338 100% 3,226 3,185 99% Pvt Ltd Achintya Securities 21 6468 79 79 100% 1,827 1,817 100% Pvt. Ltd. Guiness Securities 22 3027 446 320 72% 4,004 2,661 66% Ltd.

9. For instance, as shown in the above table, the trading member at S. No. 1 (Mousumi Deb Roy),executed 12,076 trades for 485 clients. Of which 11,365 trades were forming part of reversal trades for 472 clients.

10. It is observed from the table above that:

i. All the TMs have executed reversal trades for majority of the clients who traded through them. (Column A, B)

ii. With reference to the total number of trades executed by the TMs for their clients, there are not many trades which are not part of reversal trades (Column C, D)

11. Within the gamut of reversal trades executed by TMs, further examination was done to assess net impact in terms of profit and loss generated for the clients out of such trades. It was observed that such clients of TMs were divided into 2 sets – one which would, by and large, get series of trading profit from reversal transactions and another which would get a series of trading loss from such transactions. The details of these 2 sets of entities which ended up getting net reversal profit and net reversal loss along with the Order in respect of Trading Members in the matter of number of instances which resulted into profit/loss and quantum of net profit/loss are provided in Table 3 and Table 4.

Table 3: Profit Impact View for Clients

Total reversal Total % of No. of instances for Reversal trading clients to Net Profit BSE Instances instanc Summation S. whom Net making TM TM Name for Net es of Reversal No. reversal clients in ID Profit resulti profit (₹ cr.) profit which the making ng into provided clients made Clients profit profits Mousumi Deb 1 5156 273 1095 981 90% 158.9 Roy Odyssey 2 4029 Securities Pvt. 701 1725 1598 93% 171.4 Ltd Geometry 3 4036 726 2054 2012 98% 132.8 Vanijya Pvt. Ltd. Kayan Securities 4 6566 1,057 2,167 2,109 97% 102.4 Pvt. Ltd. Aryav Securities 5 6493 202 588 565 96% 46.2 Pvt. Ltd. Giriraj Stock 6 6551 1,207 2,061 1,936 94% 81.9 Broking Pvt. Ltd. Ns Broking Pvt. 7 4041 103 175 169 97% 8.8 Ltd. Concord Vinimay 8 6587 845 1,598 1,529 96% 74.1 Pvt. Ltd. Mkb Securities 9 4035 432 901 868 96% 55.3 Pvt Ltd Bahubali Forex 10 4034 454 955 930 97% 54.8 Pvt Ltd 11 6513 Sunstar Securities 212 822 807 98% 24.7 Msb E-Trade 12 6395 138 1,094 1,065 97% 31.0 Securities Ltd. Best Bull Stock 13 3135 584 1,750 1,689 97% 72.7 Trading Pvt.Ltd. Skung Tradelink 14 6372 162 2,117 1,941 92% 43.7 Ltd 15 5155 Lalit Kumar 397 659 648 98% 61.0 Order in respect of Trading Members in the matter of Total reversal Total % of No. of instances for Reversal trading clients to Net Profit BSE Instances instanc Summation S. whom Net making TM TM Name for Net es of Reversal No. reversal clients in ID Profit resulti profit (₹ cr.) profit which the making ng into provided clients made Clients profit profits Tulshyan M068 Subh Stock 16 397 1,266 1,242 98% 66.0 1 Broking Pvt. Ltd. R.K.Stock 17 3052 302 609 591 97% 25.2 Holding Pvt.Ltd. Basan Equity 18 6122 80 242 236 98% 25.6 Broking Limited Abans Securities 19 3287 9 346 340 98% 20.2 Pvt. Ltd. Mauzampuria 20 4032 Securities 326 1,006 992 99% 15.8 Broking Pvt Ltd Achintya 21 6468 Securities Pvt. 57 397 386 97% 9.4 Ltd. Guiness 22 3027 255 586 574 98% 21.2 Securities Ltd.

Table 4: Loss Impact View for Clients

Total reversal % of Total instances No. of trading Reversal for Loss Summa BSE clients to instanc S. Instances making tion of TM TM Name who reversal es No. for Loss clients in Reversa ID loss resultin making which the l loss (₹ provided g into Clients clients cr.) loss made Losses Mousumi Deb 1 5156 199 1,109 1,036 93% (155.9) Roy Odyssey 2 4029 Securities Pvt. 132 478 445 93% (67.8) Ltd Order in respect of Trading Members in the matter of Total reversal % of Total instances No. of trading Reversal for Loss Summa BSE clients to instanc S. Instances making tion of TM TM Name who reversal es No. for Loss clients in Reversa ID loss resultin making which the l loss (₹ provided g into Clients clients cr.) loss made Losses Geometry 3 4036 220 2,643 2,607 99% (133.4) Vanijya Pvt. Ltd. Kayan Securities 4 6566 250 2,146 2,111 98% (96.9) Pvt. Ltd. Aryav Securities 5 6493 120 1,219 1,188 98% (112.9) Pvt. Ltd. Giriraj Stock 6 6551 Broking Pvt. 250 1,373 1,308 95% (74.1) Ltd. Ns Broking Pvt. 7 4041 30 1,002 959 96% (66.3) Ltd. Concord 8 6587 Vinimay Pvt. 206 1,059 1,032 98% (73.3) Ltd. Mkb Securities 9 4035 106 846 829 98% (51.3) Pvt Ltd Bahubali Forex 10 4034 139 1,189 1,129 95% (57.5) Pvt Ltd Sunstar 11 6513 44 3,440 3,420 99% (81.5) Securities Msb E-Trade 12 6395 44 1,099 1,078 98% (32.3) Securities Ltd. Best Bull Stock 13 3135 71 808 797 99% (36.5) Trading Pvt.Ltd. Skung Tradelink 14 6372 20 537 530 99% (15.1) Ltd Lalit Kumar 15 5155 115 546 532 97% (42.3) Tulshyan Subh Stock 16 M0681 Broking Pvt. 122 1,110 1,068 96% (42.7) Ltd.

Order in respect of Trading Members in the matter of Total reversal % of Total instances No. of trading Reversal for Loss Summa BSE clients to instanc S. Instances making tion of TM TM Name who reversal es No. for Loss clients in Reversa ID loss resultin making which the l loss (₹ provided g into Clients clients cr.) loss made Losses R.K.Stock 17 3052 33 422 402 95% (24.9) Holding Pvt.Ltd. Basan Equity 18 6122 84 481 474 99% (65.0) Broking Limited Abans Securities 19 3287 22 111 111 100% (8.1) Pvt. Ltd. Mauzampuria 20 4032 Securities 12 409 387 95% (6.7) Broking Pvt Ltd Achintya 21 6468 Securities Pvt. 22 326 324 99% (8.6) Ltd. Guiness 22 3027 65 512 504 98% (19.7) Securities Ltd.

12. For instance, as seen in the Table 2, 3 & 4, the Trading Member Mousumi Deb Roy, in all executed reversal trades for 472 clients of which 273 clients ended up getting net profit when payoff from all their reversal transactions was added and similarly 199 clients got net loss by their reversal transactions. Further, the trades executed by these 273 entities in all consisted of 1,095 reversal instances of which in 981, the entities have made profit (Table 3). Similarly, the trades executed by these 199 entities in all consisted of 1,109 reversal instances of which in 1,036 instances, the entities have made loss (Table 4).

13. It was observed from Table 3 & 4 that :

i. For majority of the TMs, reversal transactions resulted into consistent trading profit (in terms of number of instances) for one set of clients and consistent trading loss (in terms of number of instances) for another set of clients.

Order in respect of Trading Members in the matter of ii. For majority of the TMs, reversal transactions resulted into consistent trading profit (in terms of net amount) for one set of clients and consistent trading loss (in terms of net amount) for another set of clients.

14. Further examination of time for which a position was kept open after executing the first leg was done for all reversal trades executed by above TMs. Such trades are bucketed in the table below on the basis of mean time taken to reverse an originally entered trade.

Table 5: Mean Reversal Time view for TMs – No. of Trades reversed

% Of No. of Reversed within reversal trades BSE Instanc S. Reversal reverse TM TM Name es Abo No. Instances d 0-10 10-30 30-60 ID within 1 ve 60 within 1 min. min. min. hour min. hour Mousumi Deb 1 5156 2,204 1,593 351 193 67 2,137 97% Roy Odyssey 2 4029 Securities Pvt. 2,204 1,001 645 384 174 2,030 92% Ltd Geometry 3 4036 Vanijya Pvt. 4,697 4,314 305 66 12 4,685 100% Ltd. Kayan 4 6566 Securities Pvt. 4,313 3,281 679 279 74 4,239 98% Ltd. Aryav Securities 5 6493 1,807 130 972 534 171 1,636 91% Pvt. Ltd. Giriraj Stock 6 6551 Broking Pvt. 3,434 3,355 71 8 0 3,434 100% Ltd. Ns Broking Pvt. 7 4041 1,178 240 506 300 132 1,046 89% Ltd. Concord 8 6587 Vinimay Pvt. 2,657 2,592 61 3 1 2,656 100% Ltd. Mkb Securities 9 4035 1,747 702 633 296 116 1,631 93% Pvt Ltd Bahubali Forex 10 4034 2,144 1,654 139 147 204 1,940 91% Pvt Ltd

Order in respect of Trading Members in the matter of % Of No. of Reversed within reversal trades BSE Instanc S. Reversal reverse TM TM Name es Abo No. Instances d 0-10 10-30 30-60 ID within 1 ve 60 within 1 min. min. min. hour min. hour Sunstar 11 6513 4,262 4,250 8 0 4 4,258 100% Securities Msb E-Trade 12 6395 2,193 2,185 7 0 1 2,192 100% Securities Ltd. Best Bull Stock 13 3135 Trading 2,558 818 962 484 294 2,264 88% Pvt.Ltd. Skung 14 6372 2,656 2,618 14 3 21 2,635 99% Tradelink Ltd Lalit Kumar 15 5155 1,205 214 315 288 388 817 68% Tulshyan Subh Stock M068 16 Broking Pvt. 2,376 187 884 852 453 1,923 81% 1 Ltd. R.K.Stock 17 3052 Holding 1,031 772 184 57 18 1,013 98% Pvt.Ltd. Basan Equity 18 6122 Broking 723 169 231 160 163 560 77% Limited Abans 19 3287 Securities Pvt. 457 268 150 26 13 444 97% Ltd. Mauzampuria 20 4032 Securities 1,415 1,406 1 0 8 1,407 99% Broking Pvt Ltd Achintya 21 6468 Securities Pvt. 723 719 4 0 0 723 100% Ltd. Guiness 22 3027 1,098 426 347 189 136 962 88% Securities Ltd.

Order in respect of Trading Members in the matter of Table 6: Mean Reversal Time view for TMs – Turnover reversed

% Reversed within Turnov Turnov er BSE er S. Reversal reverse TM TM Name Abo reverse No. Turnover 0-10 10-30 30-60 d ID ve 60 d min. min. min. within min. within 1 hour 1 hour Mousumi Deb 1 5156 1238.3 854.3 226.2 121.6 36.3 1,202.1 97% Roy Odyssey Securities 2 4029 998.9 636.4 215.6 90.9 55.9 942.9 94% Pvt. Ltd Geometry Vanijya 3 4036 713.8 680.9 25.6 5.6 1.6 712.1 100% Pvt. Ltd. Kayan Securities 4 6566 613.0 470.2 108.6 27.2 7.1 605.9 99% Pvt. Ltd. Aryav Securities 5 6493 577.6 53.4 323.2 165.0 36.0 541.6 94% Pvt. Ltd. Giriraj Stock 6 6551 489.9 476.6 12.8 0.5 0.0 489.9 100% Broking Pvt. Ltd. Ns Broking Pvt. 7 4041 425.4 142.6 172.4 72.3 38.1 387.3 91% Ltd. Concord Vinimay 8 6587 422.9 413.6 8.4 0.5 0.3 422.6 100% Pvt. Ltd. Mkb Securities Pvt 9 4035 376.5 122.0 179.7 60.5 14.4 362.1 96% Ltd Bahubali Forex 10 4034 307.3 273.8 12.9 8.1 12.5 294.8 96% Pvt Ltd 11 6513 Sunstar Securities 275.8 274.8 0.5 0.0 0.5 275.3 100% Msb E-Trade 12 6395 263.1 262.1 0.9 0.0 0.1 263.0 100% Securities Ltd. Best Bull Stock 13 3135 246.3 98.1 91.7 37.0 19.5 226.8 92% Trading Pvt.Ltd. Skung Tradelink 14 6372 200.6 198.0 0.7 0.1 1.8 198.9 99% Ltd Lalit Kumar 15 5155 164.6 26.4 59.3 31.8 47.2 117.5 71% Tulshyan M068 Subh Stock 16 160.8 21.0 59.2 46.4 34.3 126.6 79% 1 Broking Pvt. Ltd. R.K.Stock Holding 17 3052 143.0 114.1 20.2 6.8 1.9 141.0 99% Pvt.Ltd.

Order in respect of Trading Members in the matter of % Reversed within Turnov Turnov er BSE er S. Reversal reverse TM TM Name Abo reverse No. Turnover 0-10 10-30 30-60 d ID ve 60 d min. min. min. within min. within 1 hour 1 hour Basan Equity 18 6122 139.9 24.1 49.6 29.4 36.9 103.0 74% Broking Limited Abans Securities 19 3287 101.2 78.8 18.7 3.3 0.5 100.7 100% Pvt. Ltd. Mauzampuria 20 4032 Securities Broking 100.1 99.7 0.0 0.0 0.4 99.7 100% Pvt Ltd Achintya Securities 21 6468 72.2 71.5 0.7 0.0 0.0 72.2 100% Pvt. Ltd. Guiness Securities 22 3027 71.0 33.6 18.9 10.2 8.3 62.7 88% Ltd.

15. For instance, as observed in Table 5 & 6, for Trading Member at S. No. 1 (Mousumi Deb Roy), 2,204 instances of trade reversal happened during the examination period. Of which, in 97% of instances the trade was reversed within 60 minutes of entering the first leg of the trade. In terms of turnover of reversal trades, the said TM did a turnover of ₹1,238.3 cr. by executing reversal turnovers for its clients of which 97% of turnover was reversed within 60 minutes of entering first leg of trade.

16. It was observed from Table 5 & 6 that:

i. Majority of TMs reversed significant proportion of the trades within minutes of entering the original trade. Further since these very trades resulted into significant profit for one set of entities and significant loss to another (Table 3 & 4), it can be inferred that the two legs of the trade happened at substantially different prices.

ii. A very large proportion of turnover in this segment for the examined TMs is through Reversal transactions (Table 1). Even within that, a large proportion of turnover is attributed to transactions which are reversed within few minutes (Table 6).

Order in respect of Trading Members in the matter of 17. For reversal trades, time difference between orders entered for clients and the corresponding counterparties was examined for identified TMs. The details of the same is provided in Table 7 below: Table 7: For Reversal Trades – Order Entry Time Line Analysis

% of Time difference between orders entered for orders clients and the corresponding counterparties entere Total d S. Revers BSE within N TM Name al TM ID Less 2 to 5 to 10 to 60 sec 5 sec o. 1 to 2 Trades than 1 5 10 60 and of sec (G) sec sec sec sec above each (B) (A) (C) (D) (E) (F) other (H) Mousumi Deb 1 5156 8,328 2,347 163 102 218 207 11,365 95% Roy Odyssey Securities 2 4029 7,525 1,775 109 88 206 68 9,771 96% Pvt. Ltd Geometry Vanijya 3 4036 8,920 366 76 29 81 458 9,930 94% Pvt. Ltd. Kayan Securities 4 6566 7,053 801 263 120 418 783 9,438 86% Pvt. Ltd. Aryav Securities 5 6493 2,269 834 112 87 586 1,611 5,499 58% Pvt. Ltd. Giriraj Stock 6 6551 6,665 407 91 49 28 15 7,255 99% Broking Pvt. Ltd. Ns Broking Pvt. 7 4041 3,302 379 40 11 20 23 3,775 99% Ltd. Concord Vinimay 8 6587 5,182 271 77 33 10 8 5,581 99% Pvt. Ltd. Mkb Securities Pvt 9 4035 2,361 475 143 61 379 1,166 4,585 65% Ltd Bahubali Forex 10 4034 3,325 153 35 34 213 782 4,542 77% Pvt Ltd 11 6513 Sunstar Securities 8,187 771 119 26 11 4 9,118 100% Msb E-Trade 12 6395 4,252 707 50 17 16 2 5,044 99% Securities Ltd. Best Bull Stock 13 3135 1,667 638 518 291 664 2,227 6,005 47% Trading Pvt.Ltd. Skung Tradelink 14 6372 6,807 609 101 17 5 4 7,543 100% Ltd

Order in respect of Trading Members in the matter of % of Time difference between orders entered for orders clients and the corresponding counterparties entere Total d S. Revers BSE within N TM Name al TM ID Less 2 to 5 to 10 to 60 sec 5 sec o. 1 to 2 Trades than 1 5 10 60 and of sec (G) sec sec sec sec above each (B) (A) (C) (D) (E) (F) other (H) Lalit Kumar 15 5155 751 603 188 73 388 1,032 3,035 51% Tulshyan Subh Stock 16 M0681 1,415 440 107 80 450 3,733 6,225 32% Broking Pvt. Ltd. R.K.Stock Holding 17 3052 1,706 133 39 27 104 117 2,126 88% Pvt.Ltd. Basan Equity 18 6122 666 357 91 38 118 385 1,655 67% Broking Limited Abans Securities 19 3287 641 185 7 12 43 156 1,044 80% Pvt. Ltd. Mauzampuria 20 4032 Securities Broking 2,973 163 26 8 11 4 3,185 99% Pvt Ltd Achintya Securities 21 6468 1,490 295 23 4 4 1 1,817 100% Pvt. Ltd. Guiness Securities 22 3027 535 313 190 81 352 1,190 2,661 39% Ltd.

18. For instance, as observed in Table 7, for Trading Member at S. No. 1 (Mousumi Deb Roy), there were 11,365 trades (Column G) that formed part of reversal trades. This was also highlighted earlier in Table 2. Of these 11,365 trades, in 8,328 trades, the time difference between orders entered for clients and the corresponding counterparties was less than 1 second (Column A). It was between 1 to 2 seconds in 2,347 trades (Column B), between 2-5 seconds in 163 trades (Column C), between 5 to 10 seconds in 102 trades (Column D), between 10 to 60 seconds in 218 trades (Column E) and greater than or equal to 60 seconds in 207 trades (Column F). Column H represents the summation of instances wherein the time difference between orders entered for clients and the corresponding counterparties were punched in within 5 seconds of each other (Columns A, B and C ) as percentage of total reversal trades Column G.

Order in respect of Trading Members in the matter of 19. It was observed from the above table that, in majority of instances, the client and the counterparty orders forming part of reversal trades were entered within few seconds of each other.

20. In view of the foregoing, I note the following with respect to the identified TMs for the examination period: A. Significant proportion of the turnover done by the TMs is attributed to the reversal transactions in stock options segment B. Further, for majority of the trading members, reversal turnover constitutes a significant proportion of total turnover done by these trading members for their clients. C. With reference to the total number of clients who have traded through the TMs, there are not many clients for whom the TMs have not executed reversal trades. D. With reference to the total number of trades executed by the TMs for their clients, there are not many trades which are not part of reversal trades. E. For majority of the TMs, reversal transactions resulted into consistent trading profit (in terms of number of instances) for one set of clients and consistent trading loss (in terms of number of instances) for another set of clients. F. For majority of the TMs, reversal transactions resulted into consistent trading profit (in terms of net amount) for one set of clients and consistent trading loss (in terms of net amount) for another set of clients. G. Majority of TMs reversed significant proportion of the turnover within minutes of entering the first leg of the reversal transaction. H. Majority of TMs reversed significant proportion of the trades within minutes of entering the first leg of the reversal transaction. Further since these very trades resulted into significant profit for one set of entities and significant loss to another, it is inferred that the two legs of the trade happened at substantially different prices. I. In majority of instances, the client and the counterparty orders forming part of reversal trades were entered within few seconds of each other. J. Outside of such trades, there was not much activity by these TMs in the stock options segment implying that the TMs prima-facie carried out business of registered stock broker in this segment mainly to facilitate such trades i.e. dummy book entries/artificial profit-loss generation for various entities. K. The aforesaid trading members through reversal trades for their clients, have generated a total loss to the tune of ₹1272.8 crore and total profit to the tune of ₹1303.1 crore.

Order in respect of Trading Members in the matter of 21. In my view, the misuse of stock options as shown above not only displays an unreal picture of market activity to other investors but also defeats the basic premise of screen based electronic trading system and price discovery mechanism by repeated execution of pre-decided reversal trades. Such activity deliberately or otherwise damages Market Integrity apart from presenting wrong picture of liquidity to gullible investors which could affect their trading/investment decisions. The impact of such trades and possible rationale of the clients indulging into such trades were brought out in the interim order in the matter of Illiquid Stock Options.

22. Options as financial instruments, ordinarily, provide hedging avenues to investors. In my view, the large-scale abuse of such financial instruments, which are made available to the investors for the purpose of protection of their investment portfolios from the risks of adverse price movement, cannot be tolerated and needs to be dealt with strictly.

23. The magnitude in which these stock brokers have facilitated the trading to their clients and the facts and circumstances in the instant matter prima-facie suggest that it is not only a matter of negligence on the part of stock brokers but also of their connivance to be a part of the scheme to facilitate their clients to make loss or profit as per their desire. By the sheer number of reversal instances at each Trading Member level, I am also not willing to accept that thousands of trades entered by trading members ended up becoming reversal trades 'by chance' or because of the 'illiquid nature of the contract'.

24. In my view, the acts of the stock brokers to facilitate the loss-making entities and the profit–making entities discussed hereinabove prima-facie show a scheme, plan, device and artifice on their part for some ulterior motive. These brokers have, prima-facie, facilitated their clients to use and employ a pre-meditated manipulative device or contrivance while dealing in securities market and indulged in non-genuine and deceptive transactions. The act of the stock broker to be part of the scheme by facilitating execution of non-genuine and deceptive transactions for their clients is, prima-facie, covered under the definition of 'fraud' and their dealings as discussed herein above are „fraudulent’ as defined under regulation 2(1)(c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”) and prohibited under the provisions of section 12A(a), (b) and (c) of the SEBI Act, 1992 and regulations 3(a), (b), (c) and (d) and 4(1) and 4(2)(a) thereof. I therefore, prima-facie find that find that these stock brokers have contravened these provisions which are reproduced hereunder:-

Order in respect of Trading Members in the matter of SEBI Act, 1992 ―12A. No person shall directly or indirectly— (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;”

PFUTP REGULATIONS, 2003 ―Prohibition of certain dealings in securities

3. No person shall directly or indirectly— (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- (a) Indulging in an act which creates false or misleading appearance of trading in the securities market;”

Order in respect of Trading Members in the matter of 25. I find that the behavior of these TMs is also not in compliance with General Code of Conduct listed in Schedule II of SEBI (Stock-Brokers and Sub-Brokers) Regulations, 2015. The relevant part of the regulation is presented below:

A. GENERAL (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 his business. (3) MANIPULATION: A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains. (4) MALPRACTICES: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stock-broker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness. (5) 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.

26. As per the above laid down code of conduct for the stock brokers, it is clear that the role of stock broker, being the registered intermediary, is also to act as a gatekeeper so as to ensure that the stock exchange platform is not misused. It is obligatory for a registered intermediary to exercise due diligence and care to prevent such trades to take place on the exchange platform.

27. While ascertaining the exact reasons for such abnormal behavior of the TMs remains the subject matter of detailed investigation, maintaining market integrity, protecting interest of investors and ensuring that the registered intermediaries don't take the regulator/exchange systems for granted are my main concerns right now. In my view, a detailed investigation of the entire scheme employed in this case is necessary to find out the rationale for trading members and entities to facilitate/execute such artificial/reversal trades including tracing the fund trail, and role of trading members and involvement of any other group of entities to bring such scheme to fruition. The examination shall also cover any other trading member indulging in such suspicious transaction. Order in respect of Trading Members in the matter of 28. In view of the foregoing, in order to protect the interest of the investors and the integrity of the securities market, I, in exercise of the powers conferred upon me in terms of section 19 read with section 11(1), 11(4) and section 11B of the SEBI Act, 1992, pending investigation and passing of final order in the matter, hereby issue the following directions:

a) The following trading members are restrained from buying, selling or dealing in the securities markets, either directly or indirectly, in any manner, except as a stock broker for their existing clients in the cash segment. S. No. BSE TM ID SEBI Regn ID TM Name 1 5156 INF011490713 Mousumi Deb Roy 2 4029 INZ010013332 Odyssey Securities Pvt. Ltd 3 4036 INZ270002934 Geometry Vanijya Pvt. Ltd. 4 6566 INZ010011831 Kayan Securities Pvt. Ltd. 5 6493 INF011426039 Aryav Securities Pvt. Ltd. 6 6551 INZ010004836 Giriraj Stock Broking Pvt. Ltd. 7 4041 INE261331537 NS Broking Pvt. Ltd. 8 6587 INE271431137 Concord Vinimay Pvt. Ltd. 9 4035 INZ000002030 MKB Securities Pvt Ltd 10 4034 INZ000006833 Bahubali Forex Pvt Ltd 11 6513 INZ010008522 Sunstar Securities 12 6395 INF011278836 MSB E-Trade Securities Ltd. 13 3135 INB011265734 Best Bull Stock Trading Pvt.Ltd. 14 6372 INB011428837 Skung Tradelink Ltd 15 5155 INF011486711 Lalit Kumar Tulshyan M0681 16 INB030707437 Subh Stock Broking Pvt. Ltd. (CSE code) 17 3052 INF011167139 R. K. Stock Holding Pvt. Ltd. 18 6122 INF011296432 Basan Equity Broking Limited 19 3287 INZ010012235 Abans Securities Pvt. Ltd. Mauzampuria Securities Broking Pvt 20 4032 INZ000001834 Ltd 21 6468 INB011330231 Achintya Securities Pvt. Ltd. 22 3027 INB011146033 Guiness Securities Ltd.

Order in respect of Trading Members in the matter of b) These trading members /stock brokers shall not accept registration of any new client.

29. I further direct the concerned stock exchanges to conduct a focussed inspection of these Trading Members, take corrective, if any, action and submit a report to SEBI within six months of this order.

30. This order shall come into force with immediate effect. The Stock exchanges and the depositories are directed to ensure that all the above directions are strictly enforced.

31. This order is without prejudice to the right of SEBI to take any other action that may be initiated against the aforementioned entities in accordance with law.

32. The persons/entities against whom this Order is passed may file their objections, if any, within twenty one days from the date of this order and, if they so desire, avail themselves of an opportunity of personal hearing before the Securities and Exchange Board of India, on a date and time to be fixed on a specific request, received from the said persons/entities.

Sd / DATE: February 17, 2016 RAJEEV KUMAR AGARWAL PLACE : MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Order in respect of Trading Members in the matter of