Order against A V. Shares And Stock Broking Private Limited

1. The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) had investigated into the price manipulation in the shares of companies with low market capitalization, commonly referred to as “penny stocks” listed on Calcutta Stock Exchange (‘CSE’) during the year 2005 and initiated action against such companies, their promoters, brokers and unscrupulous traders who were found to have manipulated the share prices. 2. M/s. Global Capital Markets Ltd. (‘Global’) was one such company whose shares had witnessed a sharp rise in their price between 17- 06-2005 and 20-09-2005 on the CSE. The average price of the scrip of Global on the CSE shot up from Rs.1.25 on 17-06-2005 to Rs.15.10 on 20-09-2005, a rise of around 1108% within 2 months without any change in the economic fundamentals of the company. Only three brokers - M/s. Sanju Kabra, A V Shares & Stock Brokers Pvt. Ltd. (the noticee herein) and Shivam Stock Broking had contributed 90.97% of the total turnover of the shares of Global at CSE. Most of the trades were executed as cross deals or synchronized trades amongst the brokers that matched in terms of price, order time and quantity.

Based on preliminary investigation, SEBI vide an ad-interim ex-parte order dated 29-09-2005 issued under Section 11B of the SEBI Act, 1992 had directed the noticee besides others not to buy, sell or deal in securities in any manner, till further orders. The trading in the shares of Global was also suspended till further directions. 3. Pursuant to the interim order dated 29-09-2005, the noticee had filed its written submissions dated 01-10-2005 and 24-10-2005. Upon careful examination of the submissions made by the noticee, SEBI found that there were no grounds to revoke the said interim order. Therefore, vide order dated 12-01-2006 it, inter alia, directed that the ex-parte interim order dated 29-09-2005 so far as it relates to the noticee shall continue till further orders. However, vide order dated August 11, 2008 the earlier orders restraining the noticee were revoked. 4. As SEBI was satisfied that there was prima facie case to enquire into the matter, an Enquiry Officer was appointed vide order dated 30-01-2008 against the noticee in accordance with the provisions of the SEBI (Procedure For Holding Enquiry By Enquiry Officer and Imposing Penalty) Regulations, 2002 (Enquiry Regulations).

5. The Enquiry Officer issued a show cause notice dated 10-03-2008 to the noticee in terms of Regulation 6 of the said Regulations enclosing a copy of the findings of the investigations. The noticee had replied to the said notice vide his letter dated 01-04-2008. The noticee had participated in the enquiry proceedings on 23-04-2008. After considering the submissions of the noticee and other material on record, the Enquiry Officer in his report had found that the noticee has contravened the provisions of clauses (a), (e) and (o) of sub-regulation (2) of regulation 4 of the PFUTP Regulations and Regulation 7 read with Clause A (1), (2), (3), (4) and B (4) (a) of the Code of Conduct stipulated in Schedule II of the Brokers Regulations. The Enquiry Officer had submitted his report dated 26-06-2008 and recommended that the certificate of registration of the noticee be suspended for a period of three months. 6. A copy of the Enquiry Report was sent to the noticee vide letter dated June 30, 2008 calling upon the noticee to submit its views on the findings and penalty recommended by the Enquiry Officer in terms of Regulation 13 (2) of the Enquiry Regulations.

The noticee vide its letter dated 02-07- 2008, submitted that it had nothing to say in the matter except its earlier letter dated April 01, 2008 and did not wish to avail the opportunity of personal hearing. 7. I have carefully examined the show cause notice, the replies of the noticee, the enquiry report and other material on record. The following issues arise for consideration: • Whether the noticee had violated the relevant provisions of the PFUTP Regulations while trading in the scrip of Global? • Whether the noticee had violated the relevant provisions of the Broker Regulations while dealing in the scrip of Global? 8. The Enquiry Officer noted that the trades of the noticee, Sanju Kabra and Shivam Stock Broking Pvt. Ltd. (Shivam) had constituted around 91% of the volumes in the scrip of Global at the CSE between 17-06-2005 to 20-09-2005. Details of the trades of the noticee & other 2 brokers as per Enquiry Officer Report are as under: Sl. Name of the Volume % w. r. t. the total Traded Traded No. Broker Buy/Sell volume traded at from Rs. upto Rs. CSE 1 Sanju Kabra 1524210 43.23 1.25 13.50 2 A. V. Shares 1114300 31.60 1.30 2.80 & Stock Brokers Pvt.

Ltd. 3 Shivam Stock 569140 16.14 4.25 13.50 Broking Pvt. Ltd. Total 3207650 90.97

9. The number of shares purchased and sold by the noticee on behalf of its clients are as under: Sl. Broker Trade data No. No. of % to No. of % to Total % to 1. A. V.Shares shares total shares total No. of total & Stock bought buy sold sell Shares buy Broker & Pvt. Ltd. sell 100 0.01 1114200 63.20 1114300 31.60

10. The Enquiry Officer noticed that during the period when the noticee has traded the stock price had gone up from Rs. 1.30 to Rs. 2.80

11. The Enquiry Officer has noted that 8,94,800 shares out of 11,14,300 shares sold by noticee comprised 80.3% volume and were synchronized trades that are matched in terms of order, time and quantity ordered. Salagar Stock Broking Ltd., one of the clients of the noticee has contributed 96% of broker’s volume in the scrip.

12. The Enquiry Officer at para 4.11 of his Report has observed as under with reference to the trades by the noticee:

• Most of the trades of the broker in the scrip of Global during the period under scrutiny are client to client trades which have been executed on a single terminal.

• The broker has allowed its clients to place simultaneously both buy and sale orders of same quantity at the same price in Global which led to price rise.

• Instances of matching trades between the selected brokers among themselves have also been noticed from the data provided by CSE. These trades have identical quantities and rates. Order time of these trades show that both buy and sale orders were given either in identical time or within a gap of few seconds.

13. From the report of the Enquiry Officer it can be concluded that selected brokers including noticee have followed a common modus operandi of artificially inflating the price and creating false volumes through continuous cross deals executed on the same terminal and synchronized deals amongst themselves, wherein the order time, price and quantity are matched which interferes with the normal price discovery process in the on-line system of the stock exchange.

14. Apart from the decisions cited by the Enquiry Officer in his Report, it is relevant to note that the Hon’ble SAT in Chirag Pujara V. SEBI (Appeal No. 175 of 2007) has observed that executing matching trades with a prior understanding is by itself a serious violation of the Regulations which jeopardizes the integrity of the market.

15. The Hon’ble SAT, in Nirmal Bang Securities Pvt. Ltd., V. SEBI (Appeal no.54-57/2001), observed as follows: - “BEB has been charged for synchronized deals with First Global. I have examined the data provided by the parties on this issue. I find many transactions between BEB and FGSB. There are many instances of such transactions. I find the scrip, quantity and price for these orders had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale can create false volumes. The argument that the parties had no means of knowing whether any entities controlled by the client is simultaneously entering any contra order elsewhere for the reason that in the online trading system, confidentiality of counter parties is ensured, is untenable. It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only a coincidence in some cases. Theoretically this is OK. But when parties decide to synchronize the transactions the story is different. There are many transactions giving an impression that these were all synchronized, otherwise there was no possibility of such perfect matching of quantity price etc. As the Respondent rightly stated it is too much of a coincidence over too long a period in to many transactions when both parties to the transaction had entered buy and sell orders for the same quantity of shares almost simultaneously. The data furnished in the show cause notice certainly goes to prove the synchronized nature of the transaction which is in violation of Regulation 4 of the FUTP Regulations. The facts on records categorically establish that BEB had indulged in synchronized trading in violation of Regulation 47 of the FUTP Regulations. In a synchronized trading intention is implicit”.

16. The Enquiry Officer in his report has found that the noticee by its acts has created false and misleading appearance of trading in the shares of Global and responsible for the market manipulation in the scrip. It is established that it has violated the provisions of clauses (a), (e) and (o) of sub-regulation (2) of regulation 4 of the PFUTP Regulations and Regulation 7 read with clauses A (1), (2), (3) and (4) of the Code of Conduct prescribed for stock brokers in the Broker Regulations.

17. A copy of the Enquiry Report was sent to the noticee vide letter dated June 30, 2008. The noticee did not avail another opportunity of hearing but reiterated his earlier submissions. I have carefully examined the Enquiry Report and agree with the findings of the Enquiry Officer.

18. With respect to the quantum of penalty, I note that the Enquiry Officer has recommended that the certificate of registration of the noticee be suspended for a period of three months. While recommending the said penalty, the Enquiry Officer stated that the period of debarment already undergone by the noticee may be considered.

19. It is noted that the noticee was restrained from dealing in securities in any manner from September 29, 2005 to August 10, 2008 in view of the interim orders of SEBI. Having regard to the above factors and also the facts and circumstances of the case, I am of the considered view that the matter calls for no further penalty against the noticee.

20. Now, therefore, in exercise of powers conferred under Section 19 of the SEBI Act, 1992 and Regulation 28 (2) of the SEBI (Intermediaries) Regulations, 2008, I do not deem it fit to impose any further penalty against the noticee.

21. The matter is disposed of accordingly.

22. This order shall come into force with immediate effect.

DATE: 9.1.2009 T. C. NAIR

PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA