Order against Equisearch Broking Pvt Ltd in the matter of Design Auto Systems Ltd

Date of hearing: April 24, 2012 Appearances: For M/s. Equisearch Broking Pvt. Ltd.: 1. Mr. Prakash Shah, Advocate 2. Mr. Hitesh Katariya, Authorized Representative For the Securities and Exchange Board of India : 1. Mr. Jeevan Sonparote, General Manager 2. Mr. N. Sunil, Assistant General Manager, and 3. Mr. Amitesh Kumar, Assistant Legal Adviser 1. Securities and Exchange Board of India ('SEBI') had conducted investigation into the buying, selling and dealing in the scrip of Design Auto Systems Ltd. ('DASL') for the period of August, 2001 and January, 2002 ('investigation period') pursuant to a preferential allotment made by it to another company namely Bonanza Biotech Ltd. (‘BBL’) on swap basis in the ratio of 1:1. During the investigation period, the scrip of DASL was listed at the Bombay Stock Exchange (‘BSE’), Madhya Pradesh Stock Exchange (‘MPSE’) and Ahmedabad Stock Exchange (‘ASE’). 2. The broad course of events that led to investigation in the case are as under: a) DASL made a preferential allotment of 10 crore of its equity shares (said shares) to BBL on October 29, 2001 which was about 14 times of the paid up equity capital of DASL before the allotment. The consideration for such allotment was another preferential allotment of 10 crore equity shares made by BBL to DASL on the same date which was about 5 times of the paid up equity capital of BBL before the allotment. There was no money consideration paid in respect of either of the preferential allotments.

b) DASL made application for listing of the shares allotted to BBL at MPSE and BSE. The MPSE granted listing permission but did not grant trading permission. The BSE kept the listing application pending, as it apprehended that DASL would have committed certain irregularities in the allotment process. No application for listing of those hares was made by DASL to ASE. c) Eventually, the listing application of DASL was rejected by BSE. However, on the basis of listing permission given by MPSE, the Central Depositories Services Ltd. (CDSL), a registered depository, dematerialized these shares and credited them to the beneficial owner account of BBL. d) BBL offloaded substantial portion of these unlisted shares on the trading platform of BSE through a network of entities, including one Coverage & Consultants Ltd. (‘CCL’ or ‘the client’). This was not permissible in terms of BSE Bye-laws and constituted bad delivery thereunder. BSE Clearing House or any other parties to the trades could not immediately detect the irregularity as these shares were in the dematerialized form and fungible with the already existing listed shares of DASL.

As a result, a number of innocent investors who purchased those shares were defrauded and saddled with unlisted shares which could not be legally transacted on the BSE. e) When this came to the notice of SEBI, it initiated investigations to probe into the alleged malpractices committed by DASL, BBL and other entities. BSE reversed many transactions that had taken place in the scrip and the demat account of BBL was frozen after recovering a portion of the shares that were offloaded by it. f) BSE suspended trading in the shares of the DASL on and from January 14, 2002. Upon instructions from SEBI, BSE also annulled all transactions in DASL shares allotted to BBL which had taken place on the exchange till that date. The annulment was subsequently set aside by the Hon'ble Bombay High Court by an order passed on February 28, 2003 in Writ Petition No. 209 of 2003, mainly on the ground that third party interests were already created. Vide the said order the matter was remanded to BSE’s Governing Board for deciding the same afresh after giving a hearing to the Petitioners. The annulment order was subsequently reversed by the Governing Board itself as they found that the interest of innocent third parties i.e. investors would otherwise be affected adversely.

3. The findings of SEBI investigation pointed to various violations including that of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices in the Securities Market) Regulations, 1995 (“the PFUTP Regulations”) by DASL, BBL and other entities. CCL was also found to be instrumental in offloading the unlisted shares of DASL into the market. The trading details of various entities who had traded in the scrip of DASL were collected and analyzed. M/s. Equisearch Broking Private Limited ('noticee/EBPL') a stock broker registered with SEBI and a member of BSE was found to be one of the entities who had also indulged in the manipulation in the scrip of DASL by facilitating the transfer of unlisted shares of DASL on behalf of its client CCL and was thereby alleged to have contravened the provisions of SEBI Act, 1992 ('SEBI Act'), the PFUTP Regulations and the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 ('Broker Regulations'). 4. Based on the findings of investigation, SEBI initiated enquiry proceedings against the noticee in terms of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (‘Enquiry Regulations’), by appointing an Enquiry Officer under Regulation 5 thereof.

The Enquiry Officer enquired into the alleged violation of the provisions of PFUTP Regulations and Broker Regulations. The Enquiry Officer submitted report dated October 14, 2005 in terms of regulation 13 (1) (b) of Enquiry Regulations recommending thereby that certificate of registration of the noticee be suspended for a period of one working day for failing to exercise due care and diligence while dealing with its client CCL who was involved in introducing unlisted shares of DASL into the market thereby violating the provisions of Code of Conduct contained in regulation 7 of the Broker Regulations. 5. A show cause notice dated October 21, 2005 ('SCN’) under regulation 13(2) of the Enquiry Regulations was issued to the noticee, asking it to show cause as to why the appropriate penalty including penalty as recommended by the Enquiry Officer should not be imposed. Further it was also indicated in the SCN that in the event of any action being taken under this SCN, consequential action may also follow under SEBI (Criteria for Fit and Proper Person) Regulations, 2004. A copy of the Enquiry Report was also forwarded to the noticee along with the SCN.

6. The noticee filed its reply vide letter dated November 21, 2005 and submitted that : i. Its reply dated August 04, 2005 submitted to the Enquiry Officer may be treated as part of this reply and considered accordingly. ii. The transactions in DASL were carried out during investigation period in the normal and usual course of stock broking business as per instructions of the constituents.

iii. Enquiry after more than three years from the dates of obtaining discharge from its clients and after completing settlements in this scrip as per rules and regulations at the BSE is clearly a case of great delay for initiation of any proceedings against it and on this ground alone the notice is liable to be dismissed. iv. Transactions in DASL were for its client CCL whose orders were carried out on BOLT. They issued contract notes and contractual obligations were fulfilled. There was no proprietary trading in DASL scrip and its gain was confined to only brokerage income, which is its main business. v. It had no knowledge that its client CCL was dealing through some other broker in concert with clients of other brokers. vi. The volume of alleged synchronized trades is comparatively very negligible in terms of their clients volume of business with it. vii. There is no finding of fact against it as to the aiding and abetting their clients in manipulating the DASL scrip price on the basis of any cogent evidence. viii. They were already penalized once by BSE for dealing in DASL shares vide letter dated September 13, 2005. 7. Based upon the findings of the Enquiry Officer as laid down in the Enquiry Report, the competent authority was, prima facie, of the opinion that the act of noticee had also resulted into violations of provisions of regulations 3 and 4 (a), (b) & (c) of PFUTP Regulations and felt that the penalty recommended by the Enquiry Officer was not commensurate with the alleged violations committed by the noticee as brought out in the Enquiry Report.

This position was conveyed to the noticee when it appeared for the personal hearing before the competent authority (the then WTM) on June 01, 2006. Thereafter, it was decided that orders with respect to principal parties viz., DASL and BBL to be passed first, the present case against the noticee was kept pending after affording the opportunity of personal hearing. However, the orders in respect of principal parties were delayed on account of stay granted by Indore Bench of the Hon'ble Madhya Pradesh High Court. These orders against principal parties were eventually passed on March 06, 2007. The order against principal offloading party CCL was passed on October 22, 2007. Thereafter, a supplementary SCN dated January 08, 2008 ('SSCN') under regulation 13(2) of the Enquiry Regulations was issued against the noticee calling upon it to show cause as to why an appropriate penalty under regulation 25 of the Broker Regulations as it stood at the time of the alleged violations, including a penalty higher than that recommended by the Enquiry Officer should not be imposed on the noticee. The noticee was directed to file its replay within 15 days of receipt of the SSCN.

8. The noticee did not reply to the SSCN, so a reminder letter dated October 08, 2008 was sent to the noticee directing it to reply by October 17, 2008. In response to this reminder letter, the noticee vide its letter dated October 15, 2008 requested for one month time to prepare its defense and file the reply. Again, no reply was received from the noticee. Another reminder letter July 02, 2009 was sent to the noticee asking it to file its reply within 3 days of receipt of this letter. In response to this, the noticee informed SEBI vide its letter dated July 07, 2009 that they wish to avail the consent process in the matter. The noticee had applied for consent order vide its Consent Application dated September 01, 2009 that was considered in terms of SEBI's consent guidelines prevailing at that time. The consent proposal of the noticee was rejected by SEBI and the same was intimated to it on March 04, 2010. Thereafter, an opportunity of personal hearing was provided to the noticee before me on March 15, 2012. The noticee was also given last opportunity to file its reply in the matter within 15 days from the date of receipt of the communication of date of hearing.

9. The noticee vide its letter dated March 09, 2012 replied that "the said supplementary show cause notice raises substantive questions of law and is prima facie illegal, perverse and in gross violation of the SEBI Act, 1992 and regulations made there under. This calls for rulings on certain very important preliminary issues at the outset, before proceeding in the matter on merits. We are making an application separately on those various preliminary issues seeking rulings on the same. The said application will be filed within a week from today''. Thereafter, the noticee vide its letter dated March 15, 2012 sought rulings on preliminary issues raised therein. 10. The opportunity of personal hearing granted to the noticee on March 15, 2012 was rescheduled to April 12, 2012 which was further adjourned to April 24, 2012 on its request. On the date fixed for personal hearing, Mr. Prakash Shah and Mr. Hitesh Katariya, authorized representatives of the noticee appeared and reiterated the submissions of the noticee regarding ruling on the preliminary issue raised by it in its letter dated March 15, 2012. The authorized representatives also submitted that noticee has already made its submissions on merits of the case during the enquiry proceedings and no additional submissions were to be made by it.

While raising the preliminary issues the noticee has also demanded for ruling thereon before the matter is decided on merit. 11. I note that these proceedings have been initiated under the Enquiry Regulations which had been framed by the Board under section 30(2)(d) read with section 19 of the SEBI Act to carry out the purposes of section 12(3) of the SEBI Act thereof. The scheme of the SEBI Act and the Enquiry Regulations is very clear with regard to the procedure and manner to be followed while deciding a case under section 12(3) of the SEBI Act read with 13 of the Enquiry Regulations. Section 12(3) of the SEBI Act requires that no order should be passed under that section unless the noticee has been given a 'reasonable opportunity of being heard'. Regulation 13 of the Enquiry Regulations provides detail procedures in that regard. There is no requirement of giving separate rulings on the preliminary issues before deciding the case as raised by the noticee during the proceedings either under the SEBI Act or the Enquiry Regulations. Principles of natural justice also does not contemplate so.

As per the procedure prescribed in SEBI Act and Enquiry Regulations, the Chairman or Member has to pass order after considering the written or oral reply/ replies of the noticee. All issues / defenses raised/ submitted by the noticee can be decided by the order contemplated under section 12(3) of the SEBI Act read with regulation 13 of the Enquiry Regulations. The noticee was clearly informed during the hearing that the all issues raised by it shall be dealt in the final order and that no separate ruling shall be issued with respect to preliminary issues. 12. Relying upon SEBIs order dated December 15, 2010 in the matter of M/s Price Waterhouse, Bangalore and Ors., the noticee has submitted that a ruling on the preliminary issues raised by it should be given first before proceeding in the matter on merits. I note that the matter of Price Waterhouse was decided on different set of facts and circumstances and under different proceedings. Further, this was decided pursuant to an order dated August 13, 2010 of Hon'ble High Court of Bombay. I have already held that in the present proceedings all issues raised by the noticee can be decided in this order itself.

13. Now, I proceed to first deal with the preliminary issues raised by the noticee before going into the merits of the case. I note that the noticee has raised many questions inviting answers rather than making a contention. a) The noticee has submitted that as per Enquiry Regulations the Chairman or member (WTM) should consider the enquiry report and process the same. However, as per the SSCN in the instant case, the Board was of the opinion to impose a higher penalty. Presumably the Enquiry Report was considered by the Board. Whether the Board has such powers ? I note that the powers of the Board under section 12(3) of the SEBI Act can be exercised by Chairman/WTM by virtue of section 19 of the SEBI Act. Regulation 13 (2) of the Enquiry Regulations provides for consideration of the Enquiry Report by Chairman/WTM pursuant to section 19 of the SEBI Act. Further, in terms of section 4(3) of the SEBI Act, the Chairman can exercise all the powers of the Board. Thus, whatever the Board can do under section 12(3) of the SEBI Act, the Chairman/WTM can also do. I note that in the present case, the SSCN was issued while considering the Enquiry Report by the then WTM, who was exercising the power of the Board.

Thus, the opinion of the Board mentioned in the SSCN was the opinion of the then WTM while exercising the power of the Board. b) The noticee has further asked as to whether the Board/Chairman/WTM can conduct enquiry himself or act independent of the Enquiry Report and arrive at a finding different from that of Enquiry Officer and propose a penalty different from what recommended by him while issuing a show cause notice? In this regard, I note that the Enquiry Report is only recommendatory in nature. I also note that the Enquiry Regulations were repealed on May 26, 2008 by the SEBI (Intermediaries) Regulations, 2008 ('Intermediaries Regulations'). By virtue of regulation 38 of Intermediaries Regulations, the present proceedings has to be continued under the corresponding provisions of that Regulations. As per regulation 13(2) of the Enquiry Regulations read with regulation 28(1)of the Intermediaries Regulations, on receipt of the report from the Enquiry Officer/designated authority (DA), the designated Member shall consider the same and issue a show-cause notice to the noticee enclosing a copy of the report submitted by the Enquiry Officer/designated authority calling upon the noticee to submit its written representation as to why the action, including passing of appropriate direction, as the designated member considers appropriate, should not be taken.

The expressions "consider the same" and “appropriate direction” clearly suggest the mechanism of independence of WTM/ designated member from the Enquiry Officer / designated authority and exercise of discretion by him while deciding the case. c) I also note that section 12(3) of the SEBI Act, regulation 13 of the Enquiry Regulations and regulation 28 of the Intermediaries Regulations give wide discretion to Chairman/WTM. In my view, while considering the case under regulation 13 of the Enquiry Regulations read with section 12(3) and section 19 of the SEBI Act, the Chairman/WTM can accept, reject or remand the Enquiry Report and are wide enough to include "any direction which may be different/higher than the recommended direction of the designated authority". The only cornerstone for the same is that the designated member has to satisfy himself about the sufficiency of the evidence(s) while issuing such direction. He can reduce or increase the penalty recommended by the Enquiry Officer or exonerate the noticee. Such discretions can be exercised by the Chairman/WTM at any stage of the proceedings.

Therefore, while considering the Enquiry Report and/or the reply/replies of the noticee if the WTM is of the opinion that the penalty recommended is not commensurate with the gravity of violations found in the Enquiry Report, he may cause an additional / supplementary SCN to be issued requiring the noticee to show as to why penalty higher than what is recommended by the Enquiry Officer should not be imposed. In the present case as noted above, the SSCN was issued after receipt of the reply to the SCN and hearing of the noticee. Thus, the SCN has merged into the SSCN and the proceedings have continued for the purpose of conclusion thereof as per law. d) The noticee has also submitted that the Chairman/WTM is required to pass order as expeditiously as possible and to make best effort to pass such order within 120 days and has asked whether the proceedings remain open if the order is not passed within 120 days or within a reasonable time or indefinitely? In this regard, I note that the regulation 13(4) of the erstwhile Enquiry Regulations required that endeavour should be made to pass the order within 120 days from the date of the receipt of the reply.

The instant proceedings have continued under regulation 28 of the Intermediaries Regulations. The regulation 28(2) of the Intermediaries Regulations requires that order shall be passed as expeditiously as possible and endeavour shall be made to pass the order within 120 days from the date of receipt of reply of the notice or hearing. Thus, if the order could not be passed within the contemplated time despite best endeavour made in that regard, the proceedings would not be vitiated so as to make the order illegal or non est. e) The noticee has further submitted that the SSCN was issued after 585 days of the hearing on the SCN and has asked whether the proceedings remain open for ever to enable issue of SSCN at any time in future. I note that this is a case involving peculiar facts and circumstances involving multiple parties. As noted above, in view of the facts and circumstances of the case, the present proceedings were kept pending till the proceedings against the principal parties viz., DASL and BBL were concluded. Further, the proceedings in respect of principal parties got delayed on account of stay granted by Indore Bench of the Hon'ble Madhya Pradesh High Court.

I also note that SSCN was issued on January 08, 2008 but the noticee replied that it wishes to avail the consent process only on July 07, 2009 that too only after two reminders were sent in this regard. Subsequently, the noticee had filed a consent application in the matter disposal of which also took time. Hence the delay in the present proceedings, if any, is explicable.

f) The noticee has further submitted that SCN was heard by one WTM and the SSCN is proposed to be heard by another WTM and has asked whether the proceedings can be disposed of by the latter WTM alone ? I am of the view that the present case is not the one where the hearing has been granted by one person and the decision has been taken by another. In the proceedings the final decision has to be taken by the designated member after affording a reasonable opportunity of being heard to the noticee, which has been duly done in this case. The prescribed procedure and the principles of natural justice have been fully followed in the matter and there is no infirmity of any sort in this regard. g) The noticee has submitted that Enquiry Report concludes that there is no violation of the PFUTP Regulations and has asked whether the SSCN can require the noticee to explain how it has not violated the PFUTP regulations? I note from the records that the then WTM noted various observations in the Enquiry Report indicating violations of PFUTP Regulations which could impact the recommendation/ imposition of the penalty though the Enquiry Report was silent about finding on allegation of violation of PFUTP Regulations.

He, therefore, caused the SSCN to be issued and the SSCN mentioned the allegation of violation of PFUTP Regulations on the basis of observations in the Enquiry Report in that regard. I, therefore, find that the SSCN does not require the noticee to explain how it has not violated the PFUTP Regulations as comprehended by the noticee; rather it requires the noticee to show cause on the allegation of that violation. The SSCN provides an opportunity to the noticee to rebut the allegations, based on countervailing evidence as well on any other information that it may desire to submit in these proceedings. 14. Having dealt with the preliminary issues / questions raised by the noticee as above, I now proceed to deal with the merits of the case. I have carefully considered the Enquiry Report, the SCN, the SSCN, the written and oral replies of the noticee and the materials/documents available on record. Before dealing with charges alleged against the noticee, it is necessary to refer to the relevant regulations the contravention of which has been alleged in this case. The said regulations are reproduced hereunder:- PFUTP REGULATIONS, 1995 " Prohibition of certain dealings in securities.

3. No person shall buy, sell or otherwise deal in securities in a fraudulent manner. “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 on 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; …..” 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. (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."

15. The issue to be determined now is whether the noticee had violated the PFUTP Regulations and had not exercised due care and diligence while dealing for its client (CCL), who was one of the entities responsible for dealing and offloading unlisted shares of the DASL in the market. Before going into the issues involved in the matter, I would like to reiterate here the following important and vital facts of the case :- (a) Because of the intervention by the BSE by suspending trading in the scrip of DASL, 9,01,78,926 shares out of 10,00,00,000 unlisted shares of DASL were frozen. By that time, the remaining 98,21,074 shares were already sold to unsuspecting investors in the market.

Reconciliation of transfer of 10 crore shares of DASL received by BBL is as under: Total shares credited 10,00,00,000 Shares frozen in the DP a/c 9,01,78,926 Shares delivered in the market/ 98,21,074 unaccounted for Details of shares delivered in the market/unaccounted for Coverage & Consultants 33,33,669 Pinnacle Finstock 30,78,864 CD Equisearch 15,00,000 Shyam Parwaney 2,00,000 Manoj Ganeriwala 8,75,000 D.G. Goenka 8,33,541 Total 98,21,074 (b) After completing the proceedings, SEBI vide its order dated March 6, 2007, under sections 11 and 11B of the SEBI Act, 1992, restrained, among others, DASL and its directors from accessing the capital market for a period of 7 years from the date of the order and they were also restrained from buying, selling or dealing in securities in any manner directly or indirectly during the said period. (c) SEBI had also passed an order dated March 06, 2007, whereby BBL and its directors were inter alia restrained from accessing the capital market and from buying, selling or dealing in securities in any manner directly or indirectly for a period of 7 years.

While upholding the SEBI order and dismissing the appeals filed by BBL and its directors, the Hon’ble Securities Appellate Tribunal observed that it was inconceivable that BBL was unaware that the ten crore shares of DASL allotted to them were not listed. (d) BBL had traded in the shares of the DASL through many related entities. One such entity was CCL, which had sold the shares inter alia through the noticee. (e) Vide order dated October 22, 2007 against CCL, SEBI has found that CCL and its directors had played an important role in offloading of the unlisted shares of DASL on the BSE and hence were part of the fraudulent design to cheat the innocent investors. The Order found them of having violated regulations 3 and 4 of the PFUTP Regulations, 1995. In view of the said violations, they were restrained under sections 11 and 11B of the SEBI Act from accessing the securities market and also prohibited from buying, selling or dealing in securities either directly or indirectly for a period of 7 years. 16. Thus, the issue of introducing unlisted shares of DASL in the market is abundantly proved in the matter and it has also been established that DASL, BBL, CCL and other related entities had played fraud on the investors by off-loading unlisted shares in the market thereby entrapping them.

17. I note that the noticee has refuted all the allegations leveled against it by inter alia contending that : a) The noticee was unaware of the transfer of the unlisted shares of DASL to CCL from BBL and that its relationship with CCL was that of a mere broker-client relationship. b) As a registered corporate member of the BSE, it had carried out buy and/or sale transactions in the scrip of DASL as an agent for its client (CCL) on the BOLT trading system as per client's instructions. c) It had met all its settlement obligations in terms of shares and money in respect of the trades executed in the said scrip and had also obtained discharge from its client; CCL at the relevant time. d) All its trades were delivery based and there was no proprietary trading in the scrip of DASL. Its benefit or gain was confined only to brokerage income, which was its main business. e) It had no knowledge of any unlisted shares of DASL scrip and it was difficult to conceive or imagine that there could be unlisted shares in demat form which could create problems and complications at a later stage as is in the present case. f) There was not a single complaint or arbitration case against it at the relevant time. g) It did not buy, sell or otherwise deal in the DASL scrip in a fraudulent manner and did not enter into off market trades.

Its transactions were bona fide, for value and without any notice of any defeat. h) There was no specific finding with details against it, as to prior knowledge or any knowledge about matched transactions of CCL attempting to perpetuate and propagate the fraud of offloading unlisted shares in the market. i) It was not aware about creating a false and misleading market in DASL scrip nor was there any allegation of taking and/or allowing to take the deliveries in the scrip beyond the financial capacities of CCL. j) No nexus was established with facts, as to its role, involvement and participation in any schematic design in the scrip. k) Neither BSE nor DASL had ever declared officially any share (listed or unlisted) as a bad delivery in the market. l) Assuming (but without admitting) that some unlisted shares of DASL in demat mode were sold/delivered in the market, the same by itself did not or could not result in a violation of any legal provision. 18. It is admitted position that total 23.79 lac shares of DASL were transferred from demat account of CCL to the demat account of the noticee and on a net basis CCL had sold 14,78,349 shares of DASL through the noticee.

As a matter of fact, all these shares were unlisted when they were traded by noticee on behalf of CCL. These shares were transferred by the noticee to unknown buyers, resulting in the introduction of these unlisted shares into the market. 19. I note that in the Enquiry Report, the Enquiry Officer has observed that "A close reading of all the deals evidences the fact that there was a matching of the buy and the sell quantity and the buy and the sell price in almost all the trades such that the said orders were placed, almost within a minute. This proximity in the in putting of orders at the same price and for the same quantity, resulting in almost perfect matching in all the trades, with all the three parameters i.e. quantity, price and most importantly, the time, required to conclude the trades to the extent of two decimal places to a very large extent, indicated synchronization in the logging in of the orders, albeit executed on the screen of the exchange.' Based on these observations and other facts found in the Enquiry Report, the noticee has been charged in the SSCN of executing several synchronized trades in the scrip of DASL for its client CCL, wherein the sell orders were placed by it for the same quantity, same price and almost at the same time as that of the buy orders and vice versa.

The noticee has not disputed its transactions as found in the Enquiry Report. I note that buy and sell orders have been placed by the noticee and the counterparty broker within close proximity of time and time gap in most of the buy and sell orders had been almost one minute. The Enquiry Officer has noted the details of traded quantity and traded price in the Enquiry Report and has given finding as mentioned above. I find that though buy / sell quantity and buy/sell price have not been separately mentioned in the Enquiry Report, the trades of the noticee being synchronized cannot be ruled out in peculiar facts and circumstances of this case. One can't lose sight of the fact that in a matter of just 4 days, 31 transactions were executed by the noticee in just one scrip, for just one client CCL wherein the buy and sell orders were placed almost within a minute, albeit executed on the screen of the BSE. One could accept it as a coincidence in case of a solitary instance or two. However, the same cannot happen regularly in short span of time in huge quantity of shares as mentioned in the Enquiry Report unless there is some mala fide intention.

In this regard the following observations of Hon'ble Securities Appellate Tribunal (SAT) in its order dated December 13, 2010 in Appeal no. 190/2010 - Ajmera Associates Pvt. Ltd. Vs. SEBI is worth mentioning: "... It is not in dispute that the trading system that we have on the stock exchanges is a blind trading system which maintains complete anonymity of the persons trading. The broker while executing an order (buy or sell) cannot possibly know at the time of placing the order through the system as to who the counter party is or even the counter party broker. In other words, the trading system does not permit the buyers and the sellers to have any interaction between them except through the trading system. A buy order placed on the system matches with a sell order and a trade comes to be executed and this matching is done by the system on a price time priority basis. Despite the anonymity of the system, we have seen market players and the intermediaries like the brokers executing manipulative trades by defeating the system and this is usually done by placing the buy and sell orders simultaneously for the same amount and at the same price.

Such matching orders usually result in trades in comparatively less liquid scrips. This being the system, it sometimes becomes difficult to find out whether the brokers who execute the trades of their clients and who are expected to carry out their directions are also a party to the mischief. If the broker knew at the time of executing the trade what the client was upto, then obviously he is a party to the mischief. Since the trading system maintains complete anonymity, brokers always plead that they were ignorant about the counter party or his broker. In such a situation one has to look to the trading pattern and if the trades match too often or if the matching of the trades is noticed day after day and trade after trade, one can infer that the matching was done not by the system but by manipulating the same....." 20. I am of the opinion that the trades executed by the noticee on behalf of its client CCL are of too much of a coincidence in anonymous screen based trading system. Such transactions are possible only through coordinated and deliberate synchronization of orders by the involved parties.

I find that such repeated matching of time in anonymous screen based trading could be possible only with the involvement of the noticee. I find that by entering into such synchronized trades is a misuse of the stock exchange mechanism and the same tampers with the free, fair and transparent price discovery system of the stock exchange. Such practices where the transactions are put in with a premeditated understanding, in effect, distort and interfere in the price mechanism of the stock exchange. 21. Showing foolproof evidence in such cases would not be possible as the intention of the parties concerned would be within their special knowledge. In the screen based trading the manipulative or fraudulent intent can be inferred from various factors such as conduct of the party, pattern of transactions, etc. Such intention may be demonstrated from the attending circumstances as observed by Hon'ble SAT in Ketan Parekh Vs. SEBI, Appeal no. 2/2004 decided on July 14, 2006 in the following words- "The nature of transactions executed, the frequency with which such transactions are undertaken, the value of the transactions, ........., 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." 22. Also any suggestion attributing innocence to the parties involved in such transactions would give rise to an untenable situation where only one set of entities (in the instant case DASL,

BBL and CCL) would be responsible for the misconduct and none else. The involvement of others has to be inferred from the attendant circumstances of the case, more so, when there is a strong demonstration of uncommonness in the manner of execution of the transactions as already detailed above. In the facts and circumstances as described above, I find that the noticee was also involved in the scheme of offloading of unlisted shares of DASL in the market in a fraudulent, manipulative and unfair manner. 23. The Enquiry Officer has also found that CCL who has also executed trades through the noticee and Active Finstock Pvt. Ltd.( 'Active'), another member of the BSE had entered into self trades acting as both the buying and selling client. I have perused the details of the trades executed by the noticee and Active on behalf of CCL where CCL was both the buying and selling client as mentioned in the Enquiry Report. These trades were self trades done by CCL on two days i.e. December 6 2001 and December 7, 2001 through the noticee and Active. In all these trades the noticee acted as buying broker of CCL and Active acted as counter party (selling) broker of CCL.

I also note that there were trades other than above stated synchronized and self trades executed by the noticee for CCL. As regards relationship between the noticee and CCL the Enquiry Officer has observed that "As far as EBPL (noticee) is concerned, the only point noteworthy of considerations is that C&C (CCL) was the only client of EBPL (noticee) who used to trade through them in the scrip of DASL ." Though CCL had done self trades as found in the Enquiry Report and there is no dispute that CCL was client of the noticee, this observation is not sufficient to establish any connection or relation of the noticee with Active, the counter party broker. In absence of any material on record to suggest relation or connection of the noticee with Active, I give benefit of doubt to the noticee so far as dealings in self trades CCL is concerned. 24. In the instant case, BBL and CCL along with other entities had offloaded the unlisted shares on the trading floor of BSE, impliedly representing that these were listed shares which could be validly delivered in the BSE as per its bye-laws. The clearing house of BSE and various counter parties to the transactions, being innocent investors didn't suspect and took delivery of such 98,21,074 shares.

Out of this, 33,33,669 shares were introduced by CCL itself, out of which the noticee had dealt in 23.79 lac shares on behalf of CCL. The noticee has contended that transactions in 23.79 lac shares of DASL were carried out by it in the normal and usual course for the purpose of meeting the settlement obligations with respect to trades of CCL. I note that the issue is not that of meeting the settlement obligations. If the noticee had placed orders for CCL, the obvious consequence would be to meet its settlement obligation. In this case, the issue is offloading unlisted shares of DASL in the market through fraudulent, manipulative and unfair transactions as observed herein above. I note that the trading activity of CCL through the noticee swelled from merely 100 shares during October 2001 to 23.79 lac shares in December 2001. This is 38.21% of 62.25 lac listed shares of DASL which were tradable. This ought to have made the noticee more vigilant and take proper care in its dealings as any person of ordinary prudence would do in such situation. I further note that SEBI had taken note of the problem of getting freshly issued unlisted shares bearing the common ISIN number with already listed shares being delivered in the market and advised the exchanges vide press release no. PR16/2001 dated January 17, 2001 and Circular No. SMDRP/POLICY/Cir-15/2001 dated March 8, 2001 advising them to insist the issuer to obtain 'in principle' approval from them before making further issue of shares.

Thus, the concerns relating to the situation as arose with respect to preferential allotment of DASL in this case was already in public domain. The noticee being a registered stock broker is expected to exercise its professional judgment and due diligence to ensure that it does not indulge in dealing with unlisted shares and enable those shares to be offloaded by its client CCL in the market through fraudulent, manipulative and unfair scheme. Hence, the argument of the noticee is not tenable. 25. The noticee has further emphasized that it transacted in the DASL scrip only in the demat mode and received/tendered shares only in the demat mode, through demat accounts, details of which had already been furnished to SEBI. Further, no one could be aware of the difference between the listed and unlisted shares of DASL since CDSL had issued identical ISIN numbers for all shares of DASL. It has also contended that at that time, there was nothing to suspect the demat shares received from the client since demat shares were regarded safe, good and valid deliveries. It has claimed ignorance of CCL being an accomplice to the management of BBL and DASL in attempting to offload unlisted shares in the market and has submitted that had it known this fact, it would not have dealt in any shares of DASL for CCL.

In this context, the noticee has relied upon the observation in the investigation report, wherein there was no allegation of noticee having the knowledge about CCL being an accomplice to the management of BBL and DASL. I note that the significant point of consideration is that CCL was the only client of the noticee to have dealt extensively in the scrip of DASL. More importantly, CCL was the major operator in the scrip of DASL. When the trades for CCL increased from 100 shares in October 2001 to 23,00,000 shares in December 2001 i.e., within two months, considering the quantum of shares being transacted, that too, by one person, in one scrip ought to have evoked a response out of the ordinary from the noticee. 26. The noticee has also raised the issue that all depositories are entitled to hold unlisted securities in dematerialized form and hence the sale/delivery of such securities by itself, would not result in the violation of any legal provision. This issue is not under dispute. The point under consideration is, however, that all securities held in a dematerialized form, are not eligible for being transacted on the stock exchange unless they are listed and permitted by the exchange, which in this case the exchange had not permitted.

The essence of an unlisted security is not that it cannot be dematerialized or held in a dematerialized form but that they can be traded on the exchange if they are listed/permitted for trading. The introduction of unlisted shares in the stock exchange system would defeat the market integrity and affect the smooth functioning of the securities market. 27. In view of the above facts being as they are, the noticee can't escape liability with regard to the transactions executed in the scrip of DASL for CCL. In the facts and circumstances as discussed above, the noticee had executed synchronized trades on behalf of CCL and it did facilitate CCL in trading in the unlisted shares of DASL and thereby offloading them in the securities market. In my view, these acts of the noticee are fraudulent, manipulative and unfair and attract prohibition contained in regulation 3 and 4(b) of the PFUTP Regulations, 1995. I find that under the facts and circumstances of the case the charges of violation of regulation 4(a) and (c) are not made out. 28. The noticee has also not exercised due care diligence and skill in its dealings on behalf of CCL.

Had the necessary due diligence been exercised by the noticee while executing transactions in the scrip of DASL, the ensuing problem of offloading unlisted shares in the market could have been avoided. In this connection, it would be relevant to refer to the order of the Hon’ble SAT in Madhukar Sheth Vs SEBI (Appeal No.46 of 2002) decided on September 18, 2003:

''............The Appellant’s submission that he had taken client registration form, entered into agreement etc. by itself was not sufficient. Exercise of due diligence in ongoing transactions is a continuous process and it is not a one time measure to be adhered to while taking up the first transaction. The Appellant’s submission that it was Bajaj’s dishonesty that created the problem does not absolve him of his failure to discharge his duties as a prudent broker.........." 29. In view of the foregoing, the allegation of violation of provisions of regulations 3 and 4 (b) of PFUTP Regulations 1995 and Clauses A (1) to A (4) of Code of Conduct for Stock Brokers as specified in Schedule II under regulation 7 of Brokers Regulations by the noticee stands established. 30. I note though there is no material on record to quantify loss to the investors or gain to the noticee, the noticee had indulged in fraudulent and unfair dealings and had not taken due care and diligence in observance and compliance of the statutory requirement in conduct of its business as a stock broker. The prohibited activities and types of irregularities as found in this matter definitely have potential to disturb the market integrity and disturb the fair, equitable and efficient functioning of securities market.

These types of transactions pose threat to the market integrity and orderly development of security market. I am satisfied that it is necessary to secure the proper management of the activity of the stock broker. In my view, considering the facts and circumstances of this case and taking into account the interests of the investors, suspension of certificate of registration of the noticee, M/s Equisearch Broking Private Limited, for seven working days will be commensurate with the violations as found above. 31. I, therefore, in the exercise of power conferred upon me by virtue of section 19 of the Securities and Exchange Board of India Act, 1992, read with regulation 28(2) Securities and Exchange Board of India (Intermediaries) Regulations, 2008, and regulation 13 of SEBI (Prohibition of Fraudulent and Unfair trade Practices relating the Securities Market) Regulations, 2003 hereby suspend the certificate of registration of the noticee i.e., M/s Equisearch Broking Private Limited as stock broker at BSE (SEBI Registration No. INB010992338), for a period of seven working days. 32. A copy of this Order shall also be served upon the noticee and BSE in accordance with regulation 30 of the Intermediaries Regulations.

33. This Order shall come into force immediately on the expiry of 21 days from the date of this Order.

DATE: SEPTEMBER 07, 2012 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA