Khandwala Securities Ltd. vs Sebi

Order Reserved on: 1.2.2017 Date of Decision : 8.3.2017

Appeal No.283 of 2015

Khandwala Securities Ltd. Vikas Building, Ground Floor, Green Street, Fort, Mumbai - 400023. ...Appellant

Versus

The Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051. ...Respondent

Mr. P.N. Modi, Senior Advocate with Mr. Vinay Chauhan and Mr. Neville Lashkari, Mr. Ayush Agarwal and Mr. K.C. Jacob, Advocates i/b. Corporate Law Chambers for the Appellant.

Mr. Kumar Desai, Advocate with Mr. Saurabh Bachhawat and Mr. Vivek Rana, Advocate i/b. K. Ashar & Co. for the Respondent.

CORAM : Justice J.P. Devadhar, Presiding Officer Dr. C.K.G. Nair, Member

Per : Dr. C.K.G. Nair

1.

The present appeal is filed by M/s. Khandwala Securities Limited aggrieved by

the impugned order dated May 13, 2015 of the Whole Time Member of Securities and

Exchange Board of India ('SEBI' for short). By the said order the certificate of

registration of the appellant as a stock broker of the National Stock Exchange Ltd.

('NSE' for short) has been suspended for a period of one month for violating certain

provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent

and Unfair Trade Practices relating to Securities Market) Regulations, 1995 ('PFUTP

Regulations 1995' for short) read with Securities and Exchange Board of India

(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) 2

Regulations, 2003 ('PFUTP Regulations 2003' for short) and certain clauses relating

to the Code of Conduct under Securities and Exchange Board of India (Stock Brokers

and Sub-Brokers) Regulations, 1992 ('Stock Brokers Regulations' for short).

2. The facts relating to the matter are as follows:

a) SEBI conducted investigation on trading in the shares of M/s. Shree Rama

Multi-Tech Ltd., ('SRMTL' for short) for the period June 2000 to September

2000. This investigation revealed that M/s. Khandwala Finance Limited

alongwith M/s. Jayantilal Khandwala & Sons Pvt. Ltd. and a few clients had

indulged in cross deals and synchronised trading and placed buy and sell orders

far away from the last traded prices thereby creating artificial volumes in the

shares of SRMTL. During this period Khandwala Finance Limited was a

member of NSE while M/s. Jayantilal Khandwala & Sons Pvt. Ltd. was a broker

in the Bombay Stock Exchange ('BSE' for short). With effect from April 1,

2002 Khandwala Finance Ltd. merged with the appellant Khandwala Securities

Ltd. through an approved merger scheme whereby the liabilities of Khandwala

Finance Ltd. was also taken over by Khandwala Securities Ltd.

b) The appellant received a show cause notice dated January 27, 2004

directing to show cause as to why action should not be taken against the

appellant for the alleged violations of dealing in the scrip of SRMTL during

June, 2000 to September, 2000 under the provisions of the Securities and

Exchange Board of India Act, 1992 ('SEBI Act' for short) and SEBI (PFUTP)

Regulations. Show cause notice also contained the findings of the investigation

report as well as statements made by Shri Rajnish Rangari, authorised

representative of the appellant who appeared before the investigating officer of

SEBI in the matter. The appellant replied to the show cause notice on March 8,

2004. On August 30, 2006 the appellant received another show cause notice 3

alongwith a copy of the enquiry report issued under the SEBI (Procedure for

Holding Enquiry and Imposing Penalty) Regulations, 2002 whereby the enquiry

officer had recommended a major penalty of suspending the certificate of

registration granted to the appellant for a period of 2 years. The appellant

replied to the show cause notice on October 17, 2006.

c) On May 13, 2015 the impugned order was passed by the Whole Time

Member of SEBI suspending the certificate of registration of the appellant as a

stock broker in the NSE for a period of one month for violation of Regulation 3,

4(a) and (c) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices

relating to Securities Market) Regulations, 1995 read with SEBI (Prohibition of

Fraudulent and Unfair Trade Practices relating to Securities Market)

Regulations, 2003 and Clause A(1), (2), (3), (4) and (5) of the Code of Conduct

specified in Schedule II read with regulation 7 of the Stock Brokers Regulations.

d. Relying heavily on enquiry report the impugned order has held the

following.

i) The appellant had placed orders in the exchange trading system at prices far

away from the ruling price knowing that these orders will not be accepted with

the intention of creating artificial depth in the market.

ii) Clients of the appellant, with the involvement of the appellant, had

repeatedly executed cross deals in the scrip of SRMTL. The appellant's

connection to SRMTL was evident based on short term loan of Rs.1 crore

given by SRMTL during the investigation period.

iii) The clients of the appellant placed repeated buy orders at higher price than

the prevailing market price sweeping the pending sale orders. 4

iv) The clients of the appellant, through the appellant, were involved in

offloading large quantities of shares of UTI at an artificially raised price in a

synchronised manner with a premeditated understanding. The appellant and its

connected entity M/s. Jayantilal Khandwala & Sons Pvt. Ltd. acting in concert

adopted similar trading pattern at NSE and BSE respectively, for the common

clients for buying the shares and offloading the same to UTI.

v) The appellant allowed one of its clients to trade in large quantities without

collecting the dues and thereby exposed itself to huge risk.

vi) The appellant allowed some of its clients to trade before signing the broker

client agreement.

3. Before we proceed further the relevant regulations are reproduced for ease of

reference:

"PFUTP REGULATIONS, 1995 Prohibition against market manipulation.

4. No person shall -

(a) 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;

(b) indulge in any act, which is calculated to create a false or misleading appearance of trading in the securities market;

(c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions;

(d) enter into 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 ....."

"CODE OF CONDUCT UNDER THE STOCK BROKERS REGULATIONS 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.

5 (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."

4. We have heard the rival contentions made by the learned counsel.

5. Shri P.N. Modi, learned senior counsel for the appellant argued as follows:

i) The impugned order dated May 13, 2015 was issued by SEBI for an alleged

offence committed during June, 2000 to September, 2000 i.e. after a period of

almost 15 years.

ii) The first show cause notice was issued on June 27, 2004 and the second

show cause notice along with the enquiry report was issued on August 25,

2006. Therefore the impugned order was issued 11 years from the issue of the

first show cause notice and almost 9 years from the date of the enquiry report.

As such on the grounds of natural justice the impugned order deserved to be

quashed and set aside.

iii) The impugned order mentions 204 instances of cross deals. However, these

data were not provided to the appellant despite asking for it.

iv) Further, citing the SEBI communication to all stock exchanges dated

September 14, 1999 clarifying its earlier circulars issued in 1997, 1998 and

1999 regarding negotiated deals and cross deals, it was argued that cross deals

are not bad in law. To quote from the said circular "All negotiated deals 6

(including cross deals) shall not be permitted in the manner prescribed in

circulars mentioned above (i.e. earlier circulars referred to) and all such deals

shall be executed only on the screens of the exchanges in the price and order

matching mechanism of the exchanges just like any other normal trade."

Accordingly, unlike in the past where negotiated deals and cross deals were

allowed outside the exchange trading platform after September 14, 1999 such

deals also have to be executed through the exchange trading platform. As such

even if cross deals were entered into by the appellant there was no violation of

law, since the alleged offences were during June-September, 2000, and trades

were executed on the exchange platform.

v) The impugned order has held that the research report prepared by the

appellant had only made 'buy' recommendation of the SRMTL shares but did

not advice "sell" but the clients have still sold the shares. It was argued that

'buy' recommendation is not a recommendation to hold the shares forever.

Different clients would sell their shares at a price and time of their choice

depending on their own expectations and funding/finance requirement etc.

vi) On the charge that the appellant's clients placed orders at far away

prices from those of the prevailing market prices it was argued that the price at

which orders were placed were within the applicable range and when large

quantities are to be sold/bought quoting such high/low price is a usual trading

practice. Nothing more has to be read into such trading practices particularly

in the present context with all buying clients paid for and took delivery of the

shares and selling clients gave delivery and took the money and therefore all

transactions were legal and not manipulative.

vii) On the issue of synchronised trading with UTI it was argued that UTI

was not a client of the appellant and no information relating to UTI entering the 7

market was available to the appellant. Without such information no

synchronised trading was possible. It was also argued that neither UTI nor its

broker was charged with any violation though the clients of the appellant were

penalised by separate orders. Synchronised deals cannot be entered into from

one side just like two hands are needed to clap. On the contention that unique

client code was not given while placing the orders by the appellant it was

argued that the requirement of giving unique client code was mandated only

from October, 2002; not during the investigation period of June to September,

2000 in the instant matter. Therefore no violation is maintainable on this

regard.

ix) Regarding the charge of creating artificial depth by placing 24 orders

with quantities in the range of 25000 to 75000 it was argued that these are all

cash market trades and 24 orders were place over a period of 5 months within

the applicable circuit filter and in several instances price variation (from the

last traded price) was NIL or very insignificant and in some cases there was no

LTP; there was no objection raised by either NSE or SEBI at that time; the

trading screen shows only "the best 5 orders" and therefore even if a far away

price is placed in the system it will not be shown on the screen and since the

orders never fructified and neither the price nor the volume were impacted no

market manipulation charge is maintainable.

x) On allowing certain clients to trade even before signing the member

client agreement the senior counsel argued that it was a technical lapse

happened due to misplacing of these documents by the clients and may be

condoned. Further for the same over sight/lapse through an adjudication

proceedings SEBI had imposed a penalty of Rs.50,000/- on October 29, 2004

which has already been paid by appellant, though in similar cases vide orders

dated 13.1.2006 on Liquid Investments and Financial Investment Services 8

(India) Pvt. Ltd. and 30.12.2005 on Tower Capital and Securities Pvt. Ltd.

relating to non-signing of broker-client agreements prior to the initial date of

trading only a warning was given by SEBI.

xi) No undue exposure was made by the appellant because one of his clients

paid up part of her obligation after a few days since this particular client (Mrs.

Asha Patel) has been with the appellant for a very long period of time and her

financial condition has been very strong as is evident from the bank account

details produced before this Tribunal. She had even traded Rs.60 crore worth

of securities in certain financial years and as such payment due of a crore or

two for a few days is not a matter of concern or undue risk from the point of

view of the broker. It was also emphasised that during the time of the

impugned matter settlement was on T + 5 basis unlike the current T + 2 period.

xii) On the issue of short term loan of Rs.1 crore received from SRMTL it

was argued that it was only a loan for tiding over a temporary liquidity position

which was duly repaid with interest and the appellant produced audited

accounts and letter as evidence for repayment stating SEBI never sought for

any further document in this regard. Since such temporary bridge loan was a

normal business practice nothing much needs to be read on this transaction.

6. Shri Kumar Desai, learned counsel for the respondent, while reiterating the

contentions in the impugned order argued that while cross deals may not be bad in law

once placed on the trading platform of the exchanges it should not be done with the

intention to manipulate the market. In the instant case, placing considerable number

of orders at prices very far from the ruling market price/last traded prices is with a

clear intention of creating artificial depth in the scrip of the SRMTL and is clearly a

PFUTP violation.

9

7. It was further argued by the learned counsel for SEBI that the prices at which

orders were placed by the appellant were not just marginally different from the last

traded price but substantially different from the last traded price as given in the show

cause notice. Select instances are reproduced in the table below :

Order Date Order Order No. TM Code Client Nature Order Order Previous Time Code of quantity Price Trade order Price (B/S.) 05/09/2000 11:39:29 200009050386371 6000 KFL B 75000 68.50 78.20 07/07/2000 14:09:12 200007070569804 6000 CLI B 60000 57.90 66.1 20/06/2000 9:59:57 200006200031349 6000 BAL B 50000 60.00 65 20/06/2000 14:56:49 200006200753934 6000 BAL B 50000 61.00 67.3 21/06/2000 10:23:04 200006210155841 6000 CLI B 50000 63.90 70 23/06/2000 10:08:27 200006230073164 6000 BAL B 50000 63.00 67.95 05/07/2000 11:06:24 200007050311016 6000 CLI B 50000 56.90 63.1 05/09/2000 14:58:58 200009050799874 6000 CLI B 50000 69.00 79.05

08/08/2000 13:09:47 200008080565080 6764* 6153 S 30000 73.80 68 13/09/2000 14:53:03 200009130915792 8155** 4611 S 30000 92.75 80 11/09/2000 11:04:22 200009110352669 6000 CLI S 25000 96.00 89 11/09/2000 11:04:38 200009110353702 6000 CLI S 25000 95.90 89 12/09/2000 13:39:57 200009120667729 6000 CLI S 25000 94.40 92 18/09/2000 11:16:02 200009180332810 6000 CLI S 25000 89.10 80 B = Buy ; S = Sell *6764 Sunidhi Cons. The role explained in following paragraphs **8155 is not appearing in the top traded TM's list compared to KFL

8. Though as argued by the learned senior counsel for the appellant in some of the

instances the price differential between the order price and the last traded price may

not be substantial, the examples cited in the above table indicate substantial variation.

Further, even if the order prices are within the range of the circuit filters and not

necessarily visible on the trading screen, as argued, no rationale is forthcoming in

explaining such orders at far away prices particularly emanating from the regular

clients who deal with securities market on a continuous and regular basis. When large

quantities are traded, price variation in decimal points also are factored in by such

clients. Therefore the argument that placing buy orders at lower than last traded price

or sell orders at higher than last traded price is a normal trade is valid only when the

lower than and higher than prices are very close to the last traded price. However, in

the instant matter the substantial deviation between the order price and last traded 10

price juxtaposed alongwith other factors indicate an intention to manipulate the

market. Further, the argument made by the appellant that no details were given on

cross deals is only technical since the appellant did not dispute the cross deals in their

replies. The responsibility of the appellant relating to the deeds of the former

subsidiary Khandwala Finance Ltd has been settled both in terms of the undertaking

given by the appellant to SEBI on March 8, 2002 as noted and upheld by the Order of

this Tribunal dated 7.9.2012 in another appeal by the appellant. Argument of the

appellant that not signing the broker client agreement was a small omission on

account of misplacing certain documents cannot be accepted, because, perusal of the

documents show that the time gap between the date from which the clients started

trading and the date of the broker client agreement is substantial that is between 42 to

61 days.

9. All the entities who are involved in the instant matter namely Jayantilal

Khandwala & Sons Pvt. Ltd. and the 4 common clients had been penalised by SEBI

through separate proceedings. In the former case, order dated 17.9.2012 passed by

SEBI suspending the license of the party therein was not appealed against and in the

latter case vide order dated 31.7.2007 this Tribunal upheld the orders passed by SEBI.

Therefore, in all these matters the orders passed by SEBI have attained finality. As

such same/similar charges against the appellant in the instant matter have been already

proved and substantiated. On synchronised dealings with the UTI orders it is

admitted before the investigating officer that the appellant was aware of the existence

of a buyer for 2 lakh shares of SRMTL at a higher price than the price expected by

two of their clients. The authorised representative of the appellant had admitted

before the investigating officer of SEBI that "there was a buyer for 200000 shares of

SRMTL at a higher price than the price expected by two of our clients". Accordingly,

the appellant entered into a sell order of Rs.2.05 lakhs at the same rate of Rs.82.50 at

12:58:16 one second before the UTI order for buying 2 lakh shares was placed by 11

their broker on 15.9.2000. The charge is against the appellant in executing the trade

in a synchronised fashion and the charge is not against the UTI or broker who placed

a normal order in the market. As such taking against UTI or its broker does not arise.

10. Counsel for the respondent relied on the following orders to further support

their contentions of manipulation in trading and action taken by SEBI in respect of the

entities in the present appeal. SEBI order dated 6.6.2008 in respect of SRMTL and its

directors for violation of PFUTP Regulations and restrained them from dealing in

securities market for 5 years. The appellant herein acted as the lead manager to the

public issue of SRMTL. Jayantilal Khandwala & Sons Pvt. Ltd. was suspended for a

period of one month vide SEBI order dated September 7, 2012.

11. The counsel for SEBI relied on the Order of this Tribunal dated 28.11.2016 in

respect of Magnum Equity Broking Ltd.; Appeal no.393 of 2015 decided on

28.11.2016, relating to synchronised trading holding the broker responsible for

enabling the synchronised trades carried out by its clients. He also cited the Order of

the Hon'ble Supreme Court in respect of Kishore R. Ajmera, Civil Appeals No.2818

of 2008 with Nos.8769 of 2012, 6719 of 2013, 252 of 2014 decided on February 23,

2016 [(2016) 6 SCC 368] regarding the degree of evidence needed for upholding

PFUTP charges stating that in such cases the totality of the circumstances needs to be

relied on as direct evidence may not be forthcoming.

12. We have carefully considered the rival submissions made by the learned

counsel for both the parties. We do not find merit with the argument of the senior

counsel for the appellant that large number of cross deals made through the appellants

by his clients were just normal trades of buying and selling in the securities market

and as a broker he only placed orders in the trading system and obtained the

brokerage. Data given in para 7 clearly show that orders were placed at prices far

away from the prevailing market price and that too in many instances. While the 12

order price may be within the circuit filter range, the intention behind placing such

orders at far away prices is not normal. Similarly it is an admitted fact that the

appellant was aware of the impending order of the UTI as recorded by the

investigating officer of SEBI. We also note that the cross deals were all very

substantial ranging from 25000 to 75000, while the synchronised deals with the UTI

orders were for 2 lakh shares. Even if some of the orders placed by the clients did not

fructify because they were at far away prices very fact that orders were placed at far

away prices is sufficient to give a false picture to the investors in the scrip. Therefore

the argument of the appellant that non- fructified orders do not impact the market and

as long as the orders are within the range of the circuit filters there is no abnormality

in placing the orders cannot be accepted. Where the orders are found to have been

placed at far away prices to manipulate the market then it would amount to violating

the PFUTP Regulations. In the instant case, inference drawn by the WTM of SEBI

that placing high quantity orders repeatedly at prices far away from the market prices

constituted violation of PFUTP Regulations cannot be faulted. Above inference is

further fortified by the fact that there were synchronised trading of large quantities.

We also note that the enquiry officer had recommended suspension of the licence of

the appellant for a period of 2 years while the WTM of SEBI has ordered suspension

of certificate for a period of only one month.

13. Counsel for the appellant sought to distinguish the decision of this Tribunal in

the case of Magnum Equity Broking Ltd.(supra) on ground that in that case the clients

indulged in synchronised trades and were related entities where as in the present case

no such relationship is established or even alleged. Similarly, it is contended that the

decision of the Apex Court in case of Kishore R. Ajmera (supra) has no relevance to

the present case as that order deals with synchronised and structured deals while the

dispute in the present case relates mainly on cross deals which are not illegal perse.

We do not agree with these contentions as the basic thrust of the order in Mangnum is 13

that the broker is also liable for the PFUTP violations of its clients as in the present

appeal; relationship between the clients in Magnum is only incidental. The Apex

Court order on Ajmera (supra) deals with a host of situations whereby the role of the

broker/sub-broker in exercising due diligence under Code of Conduct and in partaking

or enabling PFUTP violations in the form of synchronised/structured/cross deals are

covered. The conclusion therein that the totality of the circumstances have to be taken

into account in proving such violations as in such cases direct evidence may not be

forthcoming is relevant in the present appeal also.

14 . For all the above we do not find any reason to interfere with the impugned

order. Appeal is dismissed with no order as to costs.

15. After the judgement was pronounced, counsel for the appellant sought

continuation of stay for a further period of 4 weeks so as enable the appellants to

move the Apex Court. In the facts and circumstances of the case SEBI is directed not

to enforce the impugned order dated 13.5.2015 for a period of 4 weeks from today.

Sd/-

Justice J.P. Devadhar Presiding Officer

Sd/-

Dr. C.K.G.Nair Member

8.3.2017 Prepared and compared by RHN