Order against FMS Securities Limited

WTM/ PS/ 07/ IVD/ ID-2/ APR /2010 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER IN THE MATTER OF SAARC NET LTD. In respect of FMS Securities Ltd. (SEBI Registration No. INB 011079838 & INB 231144339) Date of Hearing: January 09, 2010 Appearances: For Noticee: Mr. Joby Mathew, Advocate For SEBI: Ms. Anita Kenkare, General Manager Mr. G. Ram Mohan Rao, Assistant General Manager Mr. Amitesh Kumar, Assistant Legal Adviser Mr. Kiriti Kumar Jadhav, Legal Officer ORDER Under Regulation 28(2) read with Regulations 38 (2) of Securities and Exchange Board of India (Intermediaries Regulations), 2008

1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigation into buying, selling and dealings in the shares of SAARC Net Ltd. (hereinafter referred to as ‘SNL’) for the period of during July 11, 2002 to September 11, 2002. During investigations the scrip of SNL was listed at Bombay Stock Exchange (hereinafter referred to as ‘BSE’), Madras Stock Exchange and Hyderabad Stock Exchange.

2. The trading details of the persons who had traded in the scrip were collected and analyzed along with the data of volumes contributed by these. During the relevant period, although the company was not performing well, the scrip of SNL was traded for 33 days during the investigation period and the price of the scrip went up from Rs.38.40/- as on July 11, 2002 and touched a high of Rs.163.50/- on August 23, 2002. The scrip closed at Rs.143.1/- on September 11, 2002. The total traded volume during the relevant period was about 44,096 shares with an average daily trading volume of 1,336 shares. It was revealed that no major corporate announcements were made in the scrip of SNL. The price of the scrip was found to have gone up despite fall in BSE Sensex during the relevant period.

3. The investigations, inter alia revealed that broker FMS Securities Ltd. (hereinafter referred to as ‘noticee’), registered with SEBI as stock broker, bearing registration no. INB 011079838 and INB 231144339 had dealt in the scrip for its client Ms. Harsha S. Jhaveri. Further, the noticee was found to have entered circular/ reversal/ synchronized trades for its client while trading in the scrip of SNL. The noticee while trading for its client purchased about 34% of total exchange volume and sold about 31% of total exchange volume in the scrip of SNL.

4. Based on the findings of the investigation, SEBI initiated Enquiry proceedings against the noticee in terms of SEBI (Procedure for holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as ‘Enquiry Regulations’), by appointing an Enquiry Officer under Regulation 5(1) of Enquiry Regulations vide order dated May 07, 2008, to enquire into the alleged violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (since repealed) read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as ‘PFUTP Regulations’) and the Code of Conduct specified under Schedule II of SEBI (Stock Brokers and Sub-Broker) Regulation, 1992 (hereinafter referred to as ‘Broker Regulations’). As the Enquiry Regulations were repealed with effect from the notification of SEBI (Intermediaries) Regulations, 2008 the Enquiry Officer/ Designated Authority (hereinafter referred to as Enquiry Officer) submitted his report dated September 18, 2009 in terms of Regulation 27 of SEBI (Intermediaries) Regulations, 2008 and recommended warning to noticee for violating the Regulations 4(a), (b), (c) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 read with Regulations 4(1), 4(2)(a), (b), (e), (g) and (n) of PFUTP Regulations, 2003 and the provisions of Regulation 7 read with Clause A(1) to (5) of Code of Conduct specified under Schedule II of the Broker Regulations.

5. Subsequently, a show cause notice dated October 08, 2009 (hereinafter referred as ‘SCN’), under Regulation 28 read with Regulation 38 of SEBI (Intermediaries) Regulations, 2008 was issued by SEBI 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. The noticee was advised to reply to the SCN, together with the documents that it may choose to rely upon in support of its reply within twenty one days of the receipt thereof. It was also informed that in case of failure, it would be presumed that it had no explanation to offer and SEBI shall be free to take such action in the manner as it deemed fit. A copy of the Enquiry Report was also forwarded to the noticee along with the SCN.

6. The noticee replied to the SCN vide its letter dated November 22, 2009 and requested for an opportunity of personal hearing. Accordingly, an opportunity of personal hearing was granted to the noticee before me on December 24, 2009. The noticee vide fax received by SEBI on December 18, 2009 requested for adjournment as its advocate was not available on the designated day. The request of the noticee was acceded and another opportunity of personal hearing was granted to the noticee on January 06, 2010. On the date fixed, Mr. Joby Mathew, Advocate appeared before me as the authorized representative of the noticee and reiterated the submissions made vide letter dated November 22, 2009. The noticee further sought ten days time for filing written submissions, which was allowed. The noticee filed written submissions vide its letter dated January 18, 2010, which has been taken on record. The submissions of the noticee in brief are:

- Transactions in the scrip were carried out in the normal course of business and the orders were entered in good faith. - No connection/ link/ relation between it and the client/ counterparty client/ broker.

- Had not done any proprietary trading in the scrip of SNL. - Orders for the trades in the scrip were placed on the instructions of the client. These transactions of its client were delivery based transaction and the client was dealing in other scrips also. - Had neither aided/ abetted nor aware of the intention of its client. - Had exercised due skill, care and diligence while acting as a stock broker. - No action has been initiated by SEBI against the counterparty broker.

7. I have carefully considered the Enquiry Report, the SCN issued to the noticee, the reply and the written submissions. I note that the Enquiry Officer has found the noticee guilty of violating the provisions of PFUTP Regulations and Broker Regulations.

8. I have seen the trades entered and the pattern followed by the client of the noticee while trading in the scrip of SNL, which appears to be structured in nature. I note that during the relevant point of time the total buy quantity of noticee being part of circular/ reversal trades was 13,660 shares, while the counterparty (P. Suryakant Share and Stock Brokers) of noticee sold 13,660 shares, which amounts to 30.97% of the total market volume. Similarly, the total sell quantity of the noticee being part of circular/ reversal trades was 13,000 shares, while the counterparty (P. Suryakant Share and Stock Brokers) exactly sold 13,000 shares, which amounts to 29.48% of the total market volume. Instances of such reversal/ circular trades between the noticee and counterparty has been brought below for ready reference:

Table A Date Buy Broker Buy Qty. Sell Broker Sell Client Client Code Code 18, July 02 P. Suryakant Share R002 500 FMS Securities Ltd. CH003 25, July 02 FMS Securities Ltd. CH003 1,000 P. Suryakant Share R002 26, July 02 P. Suryakant Share R002 500 FMS Securities Ltd. CH003 29, July 02 FMS Securities Ltd. CH003 500 P. Suryakant Share R002 30, July 02 FMS Securities Ltd. CH003 500 P. Suryakant Share R002 31, July 02 P. Suryakant Share R002 500 FMS Securities Ltd. CH003

01, Aug 02 FMS Securities Ltd. CH003 500 P. Suryakant Share R002 02, Aug 02 P. Suryakant Share R002 500 FMS Securities Ltd. CH003 05, Aug 02 FMS Securities Ltd. CH003 400 P. Suryakant Share R002 07, Aug 02 P. Suryakant Share R002 1,000 FMS Securities Ltd. CH003 09, Aug 02 FMS Securities Ltd. CH003 510 P. Suryakant Share R002 12, Aug 02 P. Suryakant Share R002 1,000 FMS Securities Ltd. CH003 12, Aug 02 FMS Securities Ltd. CH003 2,000 P. Suryakant Share R002 12, Aug 02 P. Suryakant Share R002 500 FMS Securities Ltd. CH003 13, Aug 02 P. Suryakant Share R002 2,000 FMS Securities Ltd. CH003 13, Aug 02 FMS Securities Ltd. CH003 1,500 P. Suryakant Share R002 14, Aug 02 FMS Securities Ltd. CH003 1,750 P. Suryakant Share R002 14, Aug 02 P. Suryakant Share R002 1,500 FMS Securities Ltd. CH003 16, Aug 02 FMS Securities Ltd. CH003 1,750 P. Suryakant Share R002 16, Aug 02 P. Suryakant Share R002 1,250 FMS Securities Ltd. CH003 19, Aug 02 P. Suryakant Share R002 1,250 FMS Securities Ltd. CH003 19, Aug 02 FMS Securities Ltd. CH003 750 P. Suryakant Share R002 20, Aug 02 FMS Securities Ltd. CH003 1,250 P. Suryakant Share R002 20, Aug 02 P. Suryakant Share R002 750 FMS Securities Ltd. CH003 21, Aug 02 P. Suryakant Share R002 750 FMS Securities Ltd. CH003 21, Aug 02 FMS Securities Ltd. CH003 250 P. Suryakant Share R002 23, Aug 02 FMS Securities Ltd. CH003 250 P. Suryakant Share R002 23, Aug 02 P. Suryakant Share R002 750 FMS Securities Ltd. CH003 26, Aug 02 FMS Securities Ltd. CH003 750 P. Suryakant Share R002 26, Aug 02 P. Suryakant Share R002 250 FMS Securities Ltd. CH003 Total 26,600 *CH003 - client code of Harsha S. Jhaveri *R002 - client code of Gautam N. Jhaveri From the table, it is noted that out of the total volume of 28,660 shares contributed by the noticee in the scrip, 26,600 shares were reversed with the same broker i.e. P. Suryakant Share and Stock Broker. Further, this volume of 26,660 shares constituted about 93.02% of the total volume of the noticee in the scrip of SNL. I note that such reversal/ circular trading by the client of the noticee has contributed to the artificial volume and also influenced the share price in the scrip.

9. I note that the noticee has not done any proprietary trading in the scrip of SNL during the relevant period of time. However, it is a fact that the client of the noticee had dealt in the scrip substantially to the total traded quantity, which was compounded with an additional fact that the scrip was thinly traded, all this would have alerted the noticee on the dealings of its client. I note that it was the responsibility of the noticee to verify the transactions of its clients and was expected to ensure that no malpractice is taking place on its terminals by exercising proper skill, care and diligence. In view of this, the explanations given by the noticee are not convincing.

10. I note the submission of the noticee that it has taken various corrective steps for operating its business by appointing two whole time company secretaries to look after the compliance as well as surveillance functions and trading in illiquid scrips are being allowed only to a selective set of clients and activities in such scrips are being monitored on a regular basis. Further, it has been informed that noticee has terminated its relations with Ms. Harsha, the client of noticee, to trade on its platform. Considering this, the fact remains that during the relevant point of time, as discussed above, the noticee failed to perform its duties as specified in the code of conduct for stock brokers in the Broker Regulations.

11. Taking in consideration the above, I agree with the findings of the Enquiry Officer and conclude that the noticee had failed to act with due skill, care and diligence in the conduct of his business. In view of this, I dispose the present Enquiry Proceedings as ordered herein below:

12. I note that pursuant to the notification of the intermediaries Regulations, the Enquiry Regulations have been repealed and in terms of Regulation 38(2) of the Intermediaries Regulations, notwithstanding such repeal, any enquiry commenced under the Enquiry Regulations, shall be deemed to have been commenced under the corresponding provisions of Intermediaries Regulations.

13. Taking into the facts and circumstances of the case, I, in exercise of the powers conferred upon 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 warn the noticee, FMS Securities Ltd. (SEBI Registration Nos. INB

011079838 and INB 231144339) [PAN: AAACF 6462E], to be careful and cautious in the conduct of its business and to adhere to and comply with all the statutory provisions while carrying out its activities in the securities market.

DATE : APRIL 26, 2010 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA