Order against Badri Prasad and Sons in the matter of Bankam Investment Ltd

1. Unusual price movement was noticed in the shares of various companies (with low market capitalization) including Bankam Investment Limited (hereinafter referred to as the company) listed on Calcutta Stock Exchange Association Limited (hereinafter referred to as CSE), during June 2005 to September 2005. Therefore, Securities and Exchange Board of India (hereinafter referred to as SEBI) conducted a preliminary analysis of trading data in respect of buying, selling, dealing in the shares of such companies. It was inter alia found that the average share price of the company increased from Rs. 2.10/- (on June 09, 2005) to Rs.16.85/- (on September 16, 2005), an increase of 702%. The period between June 09, 2005 and September 16, 2005 is hereinafter referred to as the investigation period. It was prima facie observed that some of the stock brokers inter alia with the connivance of various clients executed substantial trades in the shares of the company and thereby prima facie created misleading appearance of trading in securities and ultimately resulted in the manipulation of the share price of the company. SEBI, inter alia, observed that various stock brokers prima facie violated the provisions of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as the PFUTP Regulations) and Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations). Given the facts and circumstances, in order to protect the interest of investors, SEBI, vide an ad-interim ex parte order dated September 29, 2005 inter alia directed various stock brokers, including the stock broker namely, M/s Badri Prasad & Sons (Member, CSE) not to buy, sell or deal in securities, in any manner, either directly or indirectly, till further directions. Subsequently, SEBI, after affording an opportunity of hearing to the aggrieved persons, vide order dated January 12, 2006, confirmed the directions passed vide ad-interim order dated September 29, 2005, as stated therein.

2. The investigation conducted by SEBI found that primarily two stock brokers namely, M/s Rajendra Prasad Shah and M/s Badri Prasad & Sons collectively executed substantial trades in the shares of the company at CSE during the investigation period and that their cumulative trades accounted for more than 98.70% of the volume of the shares of the company at CSE. The trades of M/s Badri Prasad & Sons in the shares of the company involved 1,30,230 shares which accounted for 45.30% of the total volume in the shares of the company traded at CSE during the investigation period. M/s Badri Prasad & Sons is hereinafter referred to as the Broker. It was observed that the Broker had executed synchronised trades and cross deals in the shares of the company, which accounted for 28.60% and 71.40% respectively of its total trades in the shares of the company. The Broker had started trading in the shares of the company from Rs.2.25/- to Rs 14.05/-. It was alleged that the Broker had prima facie contravened the provisions of Regulation 4(2)(a),4(2)(e) and 4(2)(o) of the PFUTP Regulations and Clauses A(1) to A(4) and B(4)(a) of the Code of Conduct specified in Schedule II of the Broker Regulations.

3. Accordingly, SEBI, vide order dated January 04, 2007 read with a subsequent order dated November 19, 2007 appointed an Enquiry Officer under the provisions of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as Enquiry Regulations) to enquire into the alleged violations committed by the Broker. The Enquiry Regulation was since repealed with effect from the notification of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. The Designated Authority (hereinafter referred to as the Enquiry Officer), after considering the facts and circumstances of the case and the materials available on record, submitted the Enquiry Report dated July 10, 2009 and recommended that the certificate of registration issued by SEBI to the Broker be suspended for a period of six months. The Enquiry Officer further recommended that the suspension period may be set off against the period of prohibition already undergone by the Broker, in terms of SEBI orders dated September 29, 2005 and January 12, 2006.

4. Pursuant to the submission of the Enquiry Report, a notice dated July 16, 2009 was issued by SEBI to the Broker asking it to show cause as to why the penalty as recommended by the Enquiry Officer or as considered appropriate should not be imposed against it. The Broker was also advised to inform whether it would like to avail the opportunity of hearing. The Broker vide letter dated July 27, 2009 inter alia submitted that ‘……….I agree with recommendation of DESIGNATED AUTHORITY about set off proposed suspension with earlier prohibition by SEBI order in SEP, 2005”. Though, the Broker was specifically advised to inform in case it wished to avail a hearing, no response was made by it in respect of the same. Therefore, I do not consider it necessary to provide an opportunity of hearing to the Broker and the present proceeding is being dealt on the basis of the Enquiry report, the show cause notice dated July 16, 2009 issued to the Broker, its reply dated July 27, 2009 and other material available on record.

5. It is not in dispute that the average share price of the company at CSE had increased from Rs.2.10/- to Rs.16.85/- (a rise of 702%) during the investigation period. The stock brokers namely M/s Rajendra Prasad Shah and M/s Badri Prasad & Sons collectively executed trades involving 2,83,730 shares in the company during the above period. The said trades accounted for approximately 98% of the total volume in the shares of the company. The trade details of the Broker in the shares of the company at CSE during the investigation period are as follows:

No. of % to No. of % to Total no. % to total buy shares total buy shares total sell of shares and sale bought volume sold volume at CSE at CSE 46,500 32.35% 83,730 58.26% 1,30,230 45.30%

6. The investigation conducted by SEBI observed that the trades of the Broker had substantial effect in raising the share price of the company during the investigation period. The investigation conducted by SEBI observed that majority of the trades of the Broker was crossed/synchronized, the details of which are given below:

Cross and Matched transactions Name of the M/s Rajendra Broker M/s Purshottam Lal stock broker Prasad Shah Kejdiwal Qty % Qty % Qty % Broker 33,500 25.70% 93,000 71.40 3,730 2.90% %

It indicates that about 71% of the trades of the Broker in the shares of the company were crossed deals. The cross deals were executed in 28 transactions on a single day i.e. on July 13, 2005. The details of such trades were provided to the Broker by the Enquiry Officer. Besides, the same were examined and considered in detail by the Enquiry Officer while giving his findings. Even, the copy of the Enquiry Report was provided to the Broker along with the show cause notice dated July 16, 2009. However, the Broker did not choose to controvert the findings of the Enquiry Officer. On the other hand, the Broker accepted the recommendation of the Enquiry Officer. I also note that the Broker had raised the share price of the company by a thin margin during the investigation period. Some of such trades of the Broker are given below:

Date Previous Opening CSE Volume % Increase day Price volume created by in share Closing (Rs) the Broker price price(Rs) 01.09.2005 2.85 3.40 1000 500 19.3 02.09.2005 3.40 4.05 1000 500 19.1 07.09.2005 4.05 4.80 6000 3000 18.5 08.09.2005 4.80 5.75 1000 500 19.8 09.09.2005 5.75 6.85 600 300 19.1 12.09.2005 6.85 8.20 2000 1000 19.7 13.09.2005 8.20 9.80 1000 500 19.5 14.09.2005 9.80 11.75 400 200 19.9 15.09.2005 11.75 14.05 460 230 19.6

7. As the Broker did not dispute the execution of its trades in the shares of the company and also the findings of the Enquiry Officer, I do not consider it necessary to reiterate the said trade details in this order. Besides, such details were mentioned in the Enquiry Report. Needless to say, the trades of the Broker had impacted the price of the shares of the company during the investigation period. The Broker was found to have placed both buy and sell orders of identical quantity and price in such a way that its buy orders matched with its corresponding sell orders resulting in trades. It would be pertinent to note that most of its trades were cross deals. In a cross deal, the stock broker would be aware of both the clients (buy and sell) and the nature of orders placed by them. Besides, in the present matter, the Broker was executing trades at a price higher than the previous day’s closing price. Thus, the Broker was a necessary party in the execution of such pre planned trades. The large number of synchronised/cross deals executed by the Broker in the shares of the company cannot be considered as one where there was no prior meeting of minds before its execution. The Broker was very much a necessary party in the execution of such crossed/synchronised trades which had conveyed a misleading appearance of trading and resulted in the manipulation of the share price of the company. The fact that the Broker had executed various cross deals (as stated above in this order) in the shares of the company would indicate the level of its involvement in the manipulation of the share price of the company. Thus, it can be concluded that the Broker contravened the provisions of Regulation 4(2)(a) and 4(2)(e) of the PFUTP Regulations.

8. By entering into such deceptive transactions, the Broker did not uphold the expected standards of integrity and fairness in its conduct. It also did not exercise due care while executing such transactions. Further, by placing orders in the nature of self trades, the Broker had indulged in deceptive trade practices which distorted the market. Needless to say, the Broker failed to act with due skill, care and diligence in the conduct of its business in respect of the transactions in the shares of the company during the period of investigation. By doing so, the Broker had contravened the relevant provisions of law. I, therefore have no hesitation in holding the Broker guilty for having contravened the provisions of Clause A(1), A(2), A(3) and A(4) of the Code of Conduct prescribed for stock brokers under Schedule II of the Broker Regulations. Taking into consideration all the facts and circumstances of the case and the available material on record, I do not find any reason to disagree with the Enquiry Officer. I note that the present case has been initiated under the provisions of the Enquiry Regulations. Though, the Enquiry Regulations was repealed with effect from the notification of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 anything done or any action (including enquiry) commenced under the Enquiry Regulations before the publication of the 2008 Regulations (mentioned above) in the Official Gazette are deemed to have been done or taken or commenced under the corresponding provisions of the 2008 Regulations. Therefore, this order is being passed under the corresponding provisions of the Securities and Exchange Board of India (Intermediaries Regulations), 2008.

9. In the present case, I, note that the Broker was prohibited from buying, selling or dealing in securities, in any manner, either directly or indirectly, as per the order of SEBI dated September 29, 2005 read with a subsequent order dated January 12, 2006. The said prohibition continued till August 11, 2008, when the directions imposed vide aforesaid orders was subsequently vacated by SEBI, as stated therein. The Broker accepted the recommendation of the Enquiry Officer.

10. In view of the foregoing, I, in exercise of the powers conferred on me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby, do not deem it necessary to impose any further penalty on the stock broker, namely, M/s Badri Prasad & Sons (Registration No. INB 030046410), Member, The Calcutta Stock Exchange Association Limited.

11. Accordingly, the present enquiry proceeding is disposed of.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

Place: Mumbai Date: August 17, 2009