Order against Dinesh Kumar Lodha in the matter of M/s Adinath Bio-Labs Ltd

1. In the wake of unusual price movement noticed in the shares of various companies (with low market capitalization) including Adinath Bio- Labs Limited (for short, the company) listed on Calcutta Stock Exchange Association Limited (CSE), 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, for the period April 5, 2005 to November 24, 2005 (for short, relevant period). It was inter alia observed that the average share price of the company increased from Rs.20.80/- to Rs.88/- (an increase of 323%) during the period May 16, 2005 and November 24, 2005. It was prima facie observed that some of the stock brokers executed substantial trades in the shares of the company with the connivance of various clients and thus, created misleading appearance of trading and ultimately resulted in the manipulation of the share price of the company. SEBI 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 FUTP Regulations) and the provisions of Securities and Exchange Board of India (Stock Brokers and Sub- Brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations). In the facts and circumstances, in order to protect the interest of investors, SEBI, vide an ad-interim ex parte order dated November 30, 2005 inter alia directed various entities/stock brokers, including the stock broker namely, Mr. Dinesh Kumar Lodha (Member, CSE) not to buy, sell or deal in securities, in any manner, either directly or indirectly, till further directions. SEBI, after affording an opportunity of hearing to the aggrieved persons, vide order dated May 31, 2006, confirmed directions passed vide ad interim order dated November 30, 2005, as stated therein.

2. The investigation conducted by SEBI found that primarily five stock brokers namely, Mr. Pramod Kumar Kothari, Mr. Purshottam Lal Kejdiwal, Mr. Santosh K. Kejdiwal, Mr. Dinesh Kumar Lodha and Mr. Sanju Kabra collectively executed substantial trades in the shares of the company at CSE during the relevant period and that their cumulative trades accounted for approximately 93% of the total volume in the shares of the company at CSE (during the relevant period). Mr. Dinesh Kumar Lodha is hereinafter referred to as the Broker for the sake of brevity. The investigation conducted by SEBI inter alia observed that the Broker had executed matched/synchronized trades in the shares of the company and further created misleading appearance of trading and ultimately resulted in the manipulation of the share price of the company. SEBI, found that the Broker prima facie violated Regulations 4(2)(a), 4(2)(e) and 4(2)(o) of the FUTP 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. Thereafter, vide order dated September 26, 2006 read with a subsequent order dated November 23, 2007, SEBI appointed an Enquiry Officer under the then existing provisions of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as Enquiry Regulations).

In the meanwhile, SEBI, vide order dated August 11, 2008, for the reasons stated therein, vacated the directions passed vide interim orders dated November 30, 2005 and May 31, 2006, as against the stock brokers. Thereafter, the Enquiry Officer/Designated Authority (hereinafter referred to the as the Enquiry Officer), vide report dated October 24, 2008 recommended the suspension of the certificate of registration of the Broker for a period of six months. However, the Enquiry Officer, further recommended to set off the said period of six months against the period of prohibition already undergone by the Broker in terms of the above mentioned interim orders of SEBI. Subsequently, SEBI, vide letter dated October 30, 2008 issued a notice to the Broker to show cause as to why action should not be taken against him as recommended by the Enquiry Officer or as it considered appropriate. A copy of the Enquiry Report was also forwarded to the Broker along with the said notice. The Broker was also advised to inform SEBI, whether he desired to avail an opportunity of hearing. The Broker vide letter dated November 10, 2008 inter alia stated that he had executed trades in the shares of the company on behalf of the clients and that he had not benefited out of the said trades except the normal brokerage.

The Broker contended that he was not related to the promoters of the company and that he was not holding any shares of the company. He further pleaded to take a lenient view in the matter. In the said letter, the Broker further informed that he was not interested in availing the opportunity of hearing before SEBI.

3. I have considered the Report of the Enquiry Officer, the show cause notice issued to the Broker, the letter of the Broker dated November 10, 2008 and other materials available on record. The issue for consideration in the present matter is whether the Broker violated the provisions of FUTP Regulations and the Broker Regulations, as observed by the Enquiry Officer. It is not in dispute that the average share price of the company at CSE had increased from Rs.20.80- to Rs.88/- (a rise of 323%) during the relevant period. The stock brokers namely Mr. Pramod Kumar Kothari, Mr. Purshottam Lal Kejdiwal, Mr. Santosh K. Kejdiwal, Mr. Dinesh Kumar Lodha and Mr. Sanju Kabra collectively executed trades involving 4,08,800 shares in the company during the relevant period. The said trades accounted for approximately 93% of the total volume in the shares of the company (during the relevant period). The trade details of the Broker in the shares of the company at CSE during the relevant period are as follows:

No. of % to No. of % to Total no. % to total shares total buy shares total sell of shares buy and bought volume sold volume sale at CSE at CSE 25,900 11.84 26,050 11.90 51,950 11.86

4. The investigation conducted by SEBI observed that the trades of the Broker had substantial effect in raising the share price of the company from Rs. 21.80/- to Rs. 86.90/- in the period May 18, 2005 to October 31, 2005. The investigation conducted by SEBI observed that majority of the trades of the Broker was matched/ synchronized with three other stock brokers namely Mr. Pramod K. Kothari, Mr. Purshottam Lal Kejdiwal and Mr. Sanju Kabra. The details of such matched / synchronized trades are given below:

Name Matched / Synchronized transactions of the Stock broker Mr. Purshottam Mr. Sanju Kabra Mr. Pramod Kumar Lal Kejdiwal Kothari No. of % to the No. of % to the No. of % to the Broker shares total shares total shares total volume volume vis volume vis a vis to a vis to the vis a vis the Broker Broker to the Broker 46000 88.55% 3300 6.35% 300 0.58%

5. It indicates that about 95% of the trades of the Broker in the shares of the company were matched/synchronized transactions. Besides, 95% of the trades of the Broker in the shares of the company were on behalf of two clients namely Mr. Gaurav Banthia and Mr. Debapriya Ghosh {an employee (during the relevant period) of one Binod Kumar Banthia, father of Mr. Gaurav Banthia}. Mr. Binod Kumar Banthia had also traded substantially in the shares of the company during the relevant period, through Mr. Sanju Kabra, one of the stock brokers through whom the Broker had executed matched/synchronized trades. What is more important is that Mr. Binod Kumar Banthia, Mr. Gaurav Banthia and Mr.

Debapriya Ghosh shared the same office premises at 2, India Exchange Place, 1st Floor, Suite No.18, Kolkatta 700 001, which in turn was the address of the registered office of the company. Thus, there was interconnection amongst the clients of the Broker and the clients of some of the other stock brokers through whom the Broker had executed matched/synchronized trades. The execution of trades by the Broker in the shares of the company during the relevant period has to be viewed in the above background. I note that the clients of the Broker squared off their trades at a higher price with every successive trade, during the relevant period. Moreover, most of the trades of the Broker in the shares of the company were matched/ synchronized with various stock brokers. The majority of the matched / synchronized trades of the Broker were executed with the counterparty stock broker, Mr. Purushottam Lal Kejdiwal. The details of the matched/synchronized trades were forwarded to the Broker by the Enquiry Officer along with the show cause notice dated March 16, 2007. One such trade was executed on July 26, 2005, on behalf of Mr. Gaurav Banthia. I note that Mr. Gaurav Banthia had placed a buy order at 14:16:55 for 300 shares of the company and immediately after, at 14:17:45, the same client placed a sell order for 300 shares. Similar trades were executed by the Broker on behalf of his clients in the shares of the company on various occasions. The specific details of some of the matched / synchronized trades of the Broker were mentioned by the Enquiry Officer in his Report dated October 24, 2008. Though, such details were given to the Broker, he failed to file any submissions in this regard. In the facts and circumstances of the case, I do not think it necessary to reiterate the specific details of his matched / synchronized trades in this order. The Broker executed trades in the shares of the company on behalf of his clients, consistently from May 18, 2005 to October 31, 2005 and was executing both buy and sell trades on each day during the said period. It was also found that the said clients were regularly squaring off their daily trades in such a way that their net trades at the end of each day become nil.

6. I note that the Broker facilitated the clients to trade (including synchronized / matched deals) substantially in the shares of the company. The trades were on behalf of certain clients who appear to have closely connected with each other. The factors such as, execution of matched trades in the shares of the company by the Broker, cumulative effect of his trades in the shares of the company (11.84% of the total volume), share price increase from Rs. 21.80/- to Rs. 86.90/- during the time of the trades would primarily indicate that the Broker was a necessary party in the creation of misleading appearance of trading in the securities market. However, the Broker failed to make any submissions in respect of his matched/synchronized trades. His main submission was that he was not a beneficiary of his trades, except the normal brokerage. The close connection existed amongst the clients of the Broker and the counterparty clients (during the relevant period) and the consistency and regularity under which matched/synchronized trades were executed by the Broker would strengthen the inference that, the Broker was a necessary party to the said trades.

Execution of such large number of matched/synchronized trades could have taken place only with the timely participation of the Broker. The role of the Broker, in the circumstances of the case, cannot be considered trivial to merit a lenient view. It is not in dispute that the price of the shares of the company increased regularly during the relevant period. The totality of the facts of the case and the modus operandi under which the said matched trades were executed, leads to a clear inference that the said trades were the culmination of a pre-determined and well executed plan of action. The Broker executed matched trades in the shares of the company sufficiently for a longer period. In the process, he allowed his clients to trade substantially in the shares of the company which ultimately resulted in the creation of misleading appearance of trading in the securities market. The said trades also created manipulation in the share price of the company. Considering the nature of the trades and the close nexus of various entities as mentioned above in this order, it cannot be said that the Broker was unaware of the intention of his clients while executing series of matched trades continuously and consistently for a long period.

7. According to me, the foregoing facts are sufficient enough to establish that the Broker had executed trades in the shares of the company with a prior understanding and with an ulterior motive. Various instances of synchronized trades executed by the Broker inter alia would prove that the Broker was a necessary party to the transactions which ultimately resulted in the creation of misleading appearance of trading in the securities market. The Hon’ble Securities Appellate Tribunal (SAT) in the matter of Ketan Parekh Vs SEBI inter alia observed :

"............................ As already observed ‘synchronisation’ or a negotiated deal ipso facto is not illegal. A synchronised transaction will, however, be illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and is executed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium…….. Any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal. Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available. ……The nature of the transaction executed, the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.”

8. The above findings would also lead to the conclusion that the Broker had failed to comply with his duties as a stock broker as specified under the provisions of the Broker Regulations. The issue is whether the Broker had maintained high standards of integrity, promptitude, fairness and exercised due skill, care and diligence in the conduct of his business. In terms of the provisions of the Broker Regulations (clauses A(1) to (4) of the Code of Conduct specified in Schedule II), a stock broker shall not inter alia create false market or indulge in any act detrimental to the investors’ interest or which leads to the interference with the fair and smooth functioning of the securities market. Further, it is the duty of the stock broker to maintain high standards of integrity, promptitude and fairness and shall act with due skill, care and diligence in the conduct of his business. He shall not inter alia indulge in manipulative transactions with a view to distort the market equilibrium. It is already established that the trades of the Broker in the shares of the company inter alia created a misleading appearance of trading in the securities market and thereby, violated the provisions of FUTP Regulations as mentioned above in this order. It is sufficiently obvious that the Broker had failed to comply with his duties as expected of a SEBI Registered intermediary and instead became a party to the manipulation in the shares of the company to the detriment of genuine investors. Thus, the Broker failed to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings as specified in the Code of Conduct of the Broker Regulations. An intermediary who fails to perform such duties deserves to be punished in accordance with law. The Broker failed to submit any explanation to controvert the findings of the Enquiry Officer. The Broker, while requesting to take a lenient view in the matter, vide letter dated November 10, 2008, inter alia stated that he had not benefited or gained anything except the normal brokerage and that no loss was caused to any investor out of the trades executed.

9. In the facts and circumstances, it is established that the Broker violated Regulations 4(2)(a) and 4(2)(e) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 and Clauses A(1) to A(4) of the Code of Conduct as specified in Schedule II of Securities and Exchange Board of India (Stock Brokers and Sub- Brokers) Regulations, 1992. However, in the absence of sufficient supporting evidence, I am unable to enter into a finding in respect of the violation of Regulation 4(2) (o) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 and clause B(4)(a) of the Code of Conduct specified in Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub- Brokers)

Regulations, 1992. The aforesaid violations committed by the Broker call for a deterrent penalty. 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 November 30, 2005 read with a subsequent order dated May 31, 2006. The said prohibition continued till August 11, 2008, when the directions imposed vide aforesaid orders was subsequently vacated by SEBI (against the stock brokers), for the reasons stated therein.

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, Mr. Dinesh Kumar Lodha, Member, Calcutta Stock Exchange Association Ltd. (Registration no. INB 030671718)

11. Accordingly, the present enquiry proceedings against Mr. Dinesh Kumar Lodha, is disposed of.

K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Place: Mumbai Date: November 28, 2008