Order against FMS Securities Ltd. in the matter of Aditya Infosoft Ltd

WTM/RKA/ID-6/ 29 /2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: SHRI RAJEEV KUMAR AGARWAL, WHOLE TIME MEMBER ORDER Under section 12(3) of the SEBI Act read with regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. In respect of M/s FMS Securities Ltd., SEBI Registration number (INB011079838) (presently known as Share India Securities Ltd.) In the matter of trading in the shares of M/s Aditya Infosoft Limited. 1. SEBI conducted investigation in respect of the trading in the shares of M/s Aditya Infosoft Ltd. ("AIL") for the period December 03, 2003 to January 23, 2004 ("investigation period"). During the investigation period, M/s. FMS Securities Ltd. (presently known as Share India Securities Ltd. and herein after referred to as '' the noticee") a stock broker of Bombay Stock Exchange Ltd. (BSE Ltd.) had allowed its client Smt. Bela H. Kayashtha ("Bela") to execute self trades and synchronised trades in substantial volume which resulted in manipulation of price of the shares of AIL, creation of artificial volume and misleading appearance of trading in the scrip.

2. Pursuant to the investigations, SEBI initiated proceedings against the noticee under regulation 6(1) of SEBI (Procedure for Holding Enquiry and Imposing Penalty) Regulations, 2002 ("Enquiry Proceedings Regulations") (since repealed) the proceedings continued under SEBI (Intermediaries) Regulations, 2008 ("Intermediaries Regulations"). After repeal of Enquiry Proceedings Regulations, 2002 on May 26, 2008. The Designated Authority ("DA") submitted his Report dated May 29, 2012 in terms of Intermediaries Regulations. In the Report, the DA inter alia found that:- i. AIL, in its unaudited quarterly financial results dated January 17, 2004 for the quarter ending December 2003 had declared many fold improvement in its performance. The results were disseminated on BSE website on January 19, 2004 and were published in the financial daily, Business Line on January 20, 2004. In the notes to the accounts of the said quarterly financial results, AIL had stated that Share Incorporation Limited, a multinational company, will purchase 10 lakh shares of AIL at ` 16 to ` 18 per share. ii. It was observed that the scrip of AIL was illiquid and it was not traded for more than a month before trading in the scrip resumed on December 04, 2003. The price of the scrip increased from ` 4.32 to ` 10.51 during the period of investigation and touched a high of ` 11 on January 5, 2004. During December 10, 2003 to January 02, 2004, the price of the scrip was continuously hitting upper circuit filter of 5%.

Thereafter, the price of the scrip started falling from ` 10.27 (on January 5, 2004) to ` 6.85 (on January 16, 2004) almost hitting lower circuit filter every day. When AIL declared un-audited results for the quarter ended December 2003 on Saturday, 17th January, 2004, again the price of the scrip touched upper circuit filter of 5% on January 19 and January 20, 2004. From January 19, 2004 till January 23, 2004 the scrip price moved in the range of ` 7.0 - ` 7.55. The scrip price closed at ` 7.04 on January 23, 2004. iii. AIL had published false quarterly financial results. AIL was not in function for the last 8 years from the investigation period. It had no staff and its registered office and corporate office were seized by banks and financial institutions. AIL had incurred heavy losses and its entire capital was eroded. Further, there was no such company in the name of Share Incorporation Limited in existence and there was no board resolution to the effect that AIL would sell its shares to Share Incorporation Ltd. iv. One Mr. Atul Shah had orchestrated the plan to manipulate the share price of AIL.

He had asked Mr. Anil Patel, promoter and director of AIL to transfer shares to Mr. Viral V. Mewada (employee of Mr. Atul Shah), Mr. Kulwinder Singh Walia, Mr. Ramesh K. Patel and Mr. Hari Ballabh Aggarwal. He had also planned and advised the dissemination of false quarterly financial results of AIL. v. Parshwa Finance (Proprietor-Mr. Piysuh Jhaveri) is a sub broker of P. Suryakant Share & Stock Brokers Pvt. Ltd. Bela is wife of Mr. Piyush Jhaveri, Proprietor of Parshwa Finance. vi. Before the declaration of the results and advertisement of AIL, Parshwa Finance, along with its clients and Bela acted as a group (hereinafter referred to as Parshwa Group) and created the artificial market in the scrip to mislead the investors by trading amongst themselves and transferring or circulating the shares amongst themselves. vii. The trading in the scrip was not linked to the fundamentals of AIL. Price of the scrip was increased by establishing and maintaining its price by Parshwa Group. Subsequently, Parshwa Group offloaded shares of AIL in the market at the time when AIL had declared its false results along with the advertisement. viii.

The noticee had bought 31,500 shares and sold 76,999 shares of AIL for its clients. The major client of the noticee was Bela who purchased 25,500 shares (i.e. 4.88% of the total traded volume) and sold 72,999 shares (i.e.13.98% of the total traded volume) of AIL during the investigation period that is around 90.78% of the noticee’s total traded volume in AIL during the investigation period. Details of Bela's these market transactions are as follows-

Details of the market transactions of Bela H Kayashtha for the Period from 04/12/2003 to 23/01/2004 Date Sett. No. Buy Qty. Sale Qty.

04/12/2003 176 5000 32000 11/12/2003 181 1700 Nil 30/12/2003 193 nil 12699 31/12/2003 194 9000 Nil 01/01/2004 195 nil 9000 02/01/2004 196 9800 Nil 05/01/2004 197 nil 9800 19/01/2004 207 nil 9500 Total 25,500 72,999 ix. Bela had bought 72,999 shares through off market which is exactly the same quantity which the noticee had sold on her behalf in the market. However, these 72,999 shares were transferred directly to the demat account of the noticee by Parshwa Finance from its demat account. Parshwa Finance had already received these shares from its clients. From this, it has been inferred that delivery obligation for sale of the said 72,999 shares sold by Bela were fulfilled by clients of Parshwa Finance. x. Similarly Bela had sold 25,500 shares through off market to the various clients of Parshwa Finance and it is exactly the same quantity which the noticee had bought on her behalf from the market. xi. The off-market transactions between clients of Parshwa Finance and Bela are shown in the table below:-

Details of the off market transactions carried out by Parshwa Finance Period from 04/12/2003 to 23/01/2004 Date Sett. Seller Client Sale Sale Rate Buyer Buy Buy No. Name Qty. Client Qty. Rate Name 4.12.03 176 Dinesh 32000 4.48 Bela 32000 4.49 Bela 5000 4.52 Dinesh 5000 4.53 11.12.03 181 Bela 1700 5.44 Dinesh 1700 5.46 30.12.03 193 Viral 12699 9.04 Bela 12699 9.07 31.12.03 194 Bela 9000 9.57 Viral 9000 9.59 1.1.04 195 Viral 9000 9.91 Bela 9000 9.94 2.1.04 196 Bela 9800 10.54 Viral 9800 10.56 5.1.04 197 Viral 9800 10.67 Bela 9800 10.7 19.01.04 207 Viral 9500 7.15 Bela 9500 7.16 xii. From Belas's off market as well as on market transaction details, it is observed that delivery obligations of Bela was met through the clients of Parshwa Finance and shares bought by Bela were again sold to the clients of Parshwa Finance. Thus, the shares of AIL, a defunct company, were being circulated amongst client of the noticee i.e. Bela and the clients of Parshwa Finance.

xiii. It is noted that for sale transaction of 50,800 shares the major counter party of the noticee was Parshwa Finance. Similarly on the buy side, the major counter party to the trades of the noticee was again sub broker Parshwa Finance dealing for its various clients. These trades of noticee for Bela, wherein the counter party was her connected sub-broker Parshwa Finance (stock broker Suryakant Share & Stock Brokers Pvt. Ltd.), had generated huge volume in the illiquid scrip of AIL as given in the following Table: Date P.Suryakant Share & Stock FMS Market % to Brokers (P) Ltd. Securities Volume Market Ltd. Volume 30.12.03 Buy-10,000 Sell-10,000 18,199 54.95% 31.12.03 Sell-9,000 Buy-9,000 37,800 23.81% 01.01.04 Buy-9,000 Sell-9,000 16,700 53.89% 02.01.04 Sell-10,000 & Buy-200 Buy-9,800 91,100 10.76% xiv. It is also noted that the noticee had executed self/fictitious trades on behalf of its client Bela details of which are shown in the following Table-

Date Trade Qty Price Buyer Buyer Seller Seller Buyer Seller No CL CL machine machine no. no. 4. 12. 03 11 1000 4.5 226 CB008 226 CB008 1 1 4. 12. 03 12 1000 4.5 226 CB008 226 CB008 1 1 4. 12. 03 13 1000 4.5 226 CB008 226 CB008 1 1 4. 12. 03 14 1000 4.5 226 CB008 226 CB008 1 1 4. 12. 03 15 1000 4.5 226 CB008 226 CB008 1 1 4. 12. 03 16 1000 4.5 226 CB008 226 CB008 1 1 4. 12. 03 17 1000 4.5 226 CB008 226 CB008 1 1 4. 12. 03 18 1000 4.5 226 CB008 226 CB008 1 1 4. 12. 03 19 1000 4.5 226 CB008 226 CB008 1 1 4. 12. 03 20 1000 4.5 226 CB008 226 CB008 1 1 xv. It was alleged that on December 04, 2003, the noticee had placed sell order for a total quantity of 10,000 shares for Bela at the rate of ` 4.50 per share at 11:29:48 and the buy order was placed by it for 10,000 shares for the same client at the rate of ` 4.70 per share at 11:30:24. The noticee had executed 10 such self trades for a total quantity of 10,000 shares at the rate of ` 4.50 per share at 11:30:24 on December 04, 2003. In these trades, Bela was selling as well as buying client and the noticee was the common broker and both orders were placed through the same machine of the noticee (machine no. 1).

The orders were synchronized self trades. The noticee had contended that out of the alleged self trades a buy order for 5000 shares was wrongly punched in Bela's account and the noticee had immediately taken corrective steps and intimated the same to BSE and the trades for the remaining quantity resulted into the delivery of shares. Considering these submission of the noticee, the DA has found that - "the fact still remains that the sale of 5000 shares and buy of 5000 shares in her (Bela's) account were in the nature of self trades executed by the noticee for its client Bela from the same machine i.e. machine no. 1". xvi. The DA has further found that the previous traded price was ` 4.32. All the above self trades were carried at a price of ` 4.50 up by 4.16% from the previously traded price. These self trades were done to create artificial liquidity and to maintain the price of the scrip unnaturally to the detriment of the innocent investors. xvii. The noticee had also executed synchronized trades for its client Bela on buy side and her connected counter party client Mr.Viral V. Mewada trading through Parshwa Finance on sell side as under :- a. On December 31, 2003, 3000 shares were traded with time difference 2 minutes 58 seconds between buy and sell order.

Further, for 2500 shares were traded with time difference of 3 minutes 32 seconds between buy and sell order. b. On January 2, 2004, 9500 shares were traded with a time difference of 22 seconds between buy and sell order. c. On January 2, 2004, 300 shares were traded with a time difference of just 15 seconds between buy and sell order. 3. In view of the above, the DA has concluded that :- a. The noticee has allowed its client Bela to execute self trades and synchronized trades in substantial volume which resulted in manipulation of price which led to creation of artificial volume and misleading appearance of trading in the market. b. The delivery of shares for Bela’s pay in obligations were made from the demat account of Parshwa Finance which is in violation of SEBI circular no. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 which states that any stock broker giving/taking delivery of securities in "demat mode", the same should be directly to/from the "beneficiary accounts'' of the clients. 4. Based on the above, the DA has found that the noticee has contravened the provisions of regulation 3(a), (b), (c) and 4(1), 4(2) (a), (b) & (e) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations) and clause A(2), A(3) and A(4) of Code of Conduct for stock brokers as specified in Schedule II under regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (the Stock Brokers Regulations).

The DA has recommended that the certificate of registration granted to the noticee as a stock broker be suspended for a period of two weeks. 5. After considering the Report, a show cause notice (SCN) dated July 31, 2012 was issued to the noticee calling upon it to show cause as to why action as recommended by DA should not be taken against it or a higher penalty as deemed fit by the Designated Member should not be imposed upon it. Vide letter dated September 15, 2012, the noticee filed its reply to the SCN. An opportunity of personal hearing was granted to the noticee before me on January 03, 2013 and April 03, 2013 wherein the authorized representatives of the noticee, namely, Mr. Prakash Shah, Mr. Prabhakar Kengar and Mr. Vikas Agrawal appeared and made submissions on behalf of the noticee. Noticee vide letter dated April 05, 2013, filed its written submissions wherein it reiterated its earlier submissions. 6. The noticee has raised the following preliminary objections:- a) The SCN has been issued under regulation 27 read with regulation 38(2) of the Intermediaries Regulations, 2008. A perusal of the provisions makes it clear that these do not contemplate issue of any SCN. b) The SCN has called upon the noticee to show cause as to why action should not be taken against the noticee as recommended by the DA or a higher penalty should not be imposed as deemed fit.

The noticee has been asked to show cause as to why either of these two, namely action as recommended by the DA or a higher penalty should not be levied. The term "higher penalty'' in the SCN is ambiguous, it could mean suspension, prohibition of new business, cancellation etc. and is therefore ''open ended'' it is not possible to respond to such a SCN which is not precise. The SCN has failed to explain as to how the noticee's alleged activity violated each of the provisions alleged. This kind of a vague SCN deprives the noticee of a reasonable opportunity to defend itself. Further, the language of the SCN indicate that the competent authority has already made up his mind to impose at least the penalty recommended by the DA and reserves its right to impose a higher penalty. This has been done even before the issuance of SCN, considering the reply and hearing the noticee in the matter. This reflects bias on the part of the competent authority and violates the principles of natural justice. c) SEBI usually undertakes adjudication or section 11B proceedings for the kind of violations, as alleged in the SCN.

However, only the noticee has been singled out by initiating an enquiry proceeding. In fact, the client who did the alleged irregular trades through the noticee did similar trades in many other securities. In all cases, she was subjected to adjudication proceedings. Even, in the instant case, SEBI initiated 11B proceeding against her. While Mr. Atul Shah and Mr. Anil Patel are the main accused and the noticee's client facilitated them, the noticee's alleged role is limited to executing the client's instructions, the noticee is facing enquiry proceeding.

d) SEBI has passed at least 13 orders against Parshwa Finance in the last five years, and several orders against the noticee's client. Despite that Parshwa Finance and the noticee's client are not prohibited by SEBI to participate in the market. e) The allegation against the noticee emanate from the premise that the trading in the scrip of AIL was not linked to the fundamentals of the company. However, the SCN is silent about what is fundamental and how trading is not linked to it. 7. The noticee has inter alia made following submissions on merit:- a) It has been stated that there was an elaborate arrangement between Mr. Anil Patel and Mr. Atul Shah to manipulate the prices of AIL. This has been confirmed by SEBI in its orders dated May 11, 2011. It has been stated in the said order that Bela aided Mr. Atul Shah and Mr. Anil Patel to materialize their game plan. There is no allegation either in the SCN or in the aforesaid order that the noticee was associated with Mr. Atul Shah and Mr. Anil Patel or Bela or played any role in connivance with any of them. The noticee had no relationship with AIL or client or with any person of the Parshwa Group.

Bela was only a client of the noticee. b) The noticee had not done any proprietary account trading in the shares of AIL. At the relevant time, the noticee was only a member of BSE. Presently it is a member of BSE, NSE, MCX-SX, USE and DP of CDSL. Hence any penal action will have far reaching consequences. c) The allegation of synchronized trades by the client, Bela is with regard to an aggregate of 15,300 shares which took place only on 2 days during the entire investigation period covering 34 trading sessions and the alleged trades arose in 3 orders only out of so many orders placed by the client. In all these alleged trades, the three fundamental attributes i.e. price, quantity and time of synchronised trades were not met. The order quantities of the trading parties were significantly different. Further, as alleged in the Report, in each such trades the time difference between order placements by the parties was between 15 seconds to 212 seconds. All these trades resulted into delivery in respect of which the pay-in obligations had been duly fulfilled. The noticee did not have any information that the client is executing synchronized trades.

Further, synchronized trades are not per se illegal. The quantity of alleged self trades and synchronized trades are too insignificant to warrant even admonition. d) Synchronized trades per se are not illegal as observed by Honb’le SAT in its order dated December 13, 2010 in Appeal no. 190/2010 (Ajmera Associataes Pvt. Ltd. Vs. SEBI) held “Since the trading system maintains complete anonymity, brokers always pleas 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, once can infer that the matching was done not by the system but by manipulating them.” e) Buy order of 5,000 shares was wrongly punched in Bela's account. On realizing the bona fide mistake, the noticee had written a letter to BSE on December 5, 2003 reporting the client modification in the noticee's back office as statutorily required. The allegation of self trades is based on only one solitary instance involving 5,000 shares and the consequential contribution of these trades to total volume was too insignificant (i.e. less than 1%).

The noticee did not have any information about such trades of Bela. Further, since the scrip was in trade-for-trade category and the client settled the trade by delivery, the noticee had no reason to suspect. The difference between LTP and the price at which the self trade got executed was a meagre ` 0.18, which is not significant. Self trades are not prohibited and per-se not illegal. f) It has been alleged that the noticee has accepted deliveries from client's husband's account which is alleged to be a third party account, and has not fully complied with the circular dated August 27, 2003. The default was only on four occasions and the said third party was not an unrelated entity but the husband of the client. In any case, there were confirmation letters procured in each case from the client's husband before crediting such receipts to the client's account. The noticee has always ensured to pay/transfer the funds/securities arising out of pay-out obligations, to client's own bank/demat account only. At the time of investigation period (December 3, 2003 to January 23, 2004), the circular dated August 27, 2003 was a relatively recent development.

It must be appreciated that a new law takes a little time for implementation. The investigation period immediately follows the circular and hence the circular could not be implemented during the investigation period. g) The client Bela had opened her account with the noticee in April 2003 and during the period from April 2003 till January 2004, she had traded in more than 30 scrips including AIL through the noticee. Bela had executed all delivery based transactions in the shares of AIL. The noticee had stopped trading for the client since February 23, 2004. h) A broker has a very limited role in trading. It is legally bound to execute the orders in accordance with the instructions of the client. It is the prerogative of the client to place the order and specify the time, quantity and the price and the broker has no locus in the said decisions except to execute the orders. This is substantiated in various orders passed by SEBI, such as Shital Securities Pvt. Ltd. and Bonanza Stock Brokers Ltd. i) A client, who manipulates the market, undertakes a large number of transactions every day to create appearances and maintenance of artificial market and this is not the case here as Bela had traded only on 8 days over the entire investigation period.

Generally, clients manipulating the market undertake more or less the same volume of transactions on both buy and sell side. It is not possible to create artificial market by undertaking one-sided transactions. The volume of sales of the particular client was three times her volume of purchases. Such conduct does not ring any bell. The particular client traded in several scrips during the investigation period. Her trading volume during the year 2003-2004 was ` 81.93 crores. Her trading volume in the shares of AIL was ` 0.07 crore only, constituting less than 0.01% of her total trading volumes. Such an insignificant volume can not alert any broker. j) Generally artificial markets are created by squaring up volumes which do not carry any obligation to pay or deliver. However, this was not possible in case of AIL which was under trade for trade category requiring settlement of each trade by discharging obligations emanating from the trade. k) The noticee had innocently placed orders of its client and traded as per her instructions. The noticee would like to cross-examine its client. l) There is no allegation that the noticee has benefited from the alleged transactions.

The noticee’s interest/gains were strictly limited to brokerage. m) The matter pertains to 2003-2004 and the noticee has put systems and practices to prevent recurrence of the alleged irregularity. In the matter of Shubkam Securities Pvt. Ltd. vs. SEBI, while noting that SEBI had taken twelve years to complete the proceedings, the Honb'le SAT observed that inordinate delay in conducting inquiries and in punishing the delinquent has demoralizing effect on the market players. The instant matter relates to an alleged violation in 2003 and the SCN is issued in 2012. A suspension of the certificate as proposed after a decade of the alleged violation does not serve any purpose. 8. I have carefully considered the Report, the SCN issued pursuant thereto and other relevant material available on record. 9. Before dealing with the merits of the case, I proceed to deal with the preliminary objections raised by the noticee. The first contention of the noticee is that the SCN in the matter has been wrongly issued under regulation 27 of the Intermediaries Regulations which does not contemplate issuance of SCN.

In this regard, I note that the proceedings commenced, in this case, before the DA under the Enquiry Proceedings Regulations had been continued before him under the Intermediaries Regulations after repeal of the former on May 26, 2008 by the later. As per the procedure specified in Chapter V of the Intermediaries Regulations, the DA is required to submit the Report under regulation 27. On receipt of Report and recommendation of the DA, the Designated Member considers the case under regulation 28 and decides as to whether to issue SCN under the said regulation if he considers the case appropriate for passing appropriate direction. In this case I note that though the caption of the SCN refer to regulation 27, the content thereof clearly suggest that the same has been considered by the Designated Member. Thus, the procedure specified in regulation 28 has been followed in this case. I note that the substantive power to take appropriate action lies with the Designated Member under regulation 28 and the said power cannot be vitiated merely because the caption of the SCN refers to a wrong regulation.

In this regard it is noted that the Hon'ble Bombay High Court in the case of BSE Brokers Forum Bombay vs. SEBI (decided on February 1, 2001) has held that " It is a well established principle in law that so long as the impugned power is traceable to the concerned Statute, mere omission or error in reciting the correct provision of law does not denude the power of the authority of taking a statutory action so long as its action is legitimately traceable to a statutory power governing such action''. I, therefore, am of the view that a mere misquoting of a particular regulation number in the SCN cannot vitiate the proceedings since the substantive power to issue the SCN is traced in regulation 28. I, therefore, do not agree with the noticee's argument. 10. The other argument of the noticee is that the term ''higher penalty'' in the SCN is vague and open ended and it could mean any direction against the noticee. Further, the SCN does not explain as to how the noticee's alleged activity violated the alleged provisions. I note that under the scheme of the SEBI Act and the Intermediaries Regulations, the power to take final decision on the appropriate action under section 12(3) of the SEBI Act and Chapter V of the Intermediaries Regulations lies with the Whole Time Member (designated member).

Under the provisions of section 12(3) and regulation 28 the designated member is fully competent to deviate from or disagree with the findings and/or recommendations of the DA and may reduce /enhance the recommended measure/action. However, while deciding the case on receipt of the Report the Designated Member has to follow the principles of natural justice and issue the SCN as required under regulation 28. In this regard, I note that Hon'ble Securities Appellate Tribunal in the matter of Naman Securities and Finance Pvt. Ltd. decided on August 22,2012 has held that the designated member is competent under the provisions of the Act to deviate from the Report of the DA and observed as under- 'We are conscious of the fact that the whole time member has every right under the provisions of the SEBI Act to deviate from the report of the designated authority and impose a higher penalty. But it requires recording of proper and valid reasons which would justify a higher penalty as compared to the one already imposed by the adjudicating officer. ………..' 11. In this case, the SCN merely indicates the authority of the Designated Member and does not conclude to impose higher penalty.

The basis of allegation and charges are explained in the Report which had been enclosed with the SCN. I, therefore, find that the SCN has been issued within the scope of regulation 28 and there is no infirmity therein as sought to be contended by the noticee. 12. The noticee has further argued that SEBI usually undertakes adjudication or 11B proceedings for the kind of violations mentioned in the SCN and the noticee has been singled out in this matter and enquiry proceeding has been initiated against it. I note that it is the discretion of SEBI to decide the nature of action to be initiated against an entity depending on facts and circumstances of the case. I further note that the choice of action under section 12(3) of the SEBI Act read with Chapter V of the Intermediaries Regulations is available only against the persons who are granted certificate of registration by SEBI under the SEBI Act. This action cannot be initiated against the clients or other traders. I therefore, reject the contentions of the noticee in this regard. 13. I note that in this case, the action under section 12(3) of the SEBI Act and Chapter V of the Intermediaries Regulations has been taken against Parshwa Finance and its certificate of registration to act as a sub-broker has been cancelled vide order dated March 25, 2013. Further, by an order dated May 11, 2011 passed under section 11 and 11B of the SEBI Act, the noticee's client Bela has been prohibited from dealing in the securities market in any manner for a period of six months.

I, therefore, reject this argument of the noticee too. 14. In this case, it has been established that the scrip in question was highly illiquid and was that of a non performing company. It has also been established that the quarterly financial results of AIL for the period ending December, 2003 that were filed with BSE on January 19, 2004, contained false disclosures about improvement in its performance. The disclosures also falsely projected that Share Incorporation Limited (claimed to be a multinational company which never existed) would buy its 10 lakh shares at ` 16 to `18 per share though the market price of the scrip at that time was far less than the projected price. Further there was no Board Resolution, that AIL would sell its shares to Share Incorporation Ltd. and there was no such company as Share Incorporation Ltd. in existence. It is also established that AIL was not in operation and not functional for last 8 years from the investigation period. Its registered as well as corporate office were seized by banks and financial institutions. It had incurred heavy losses and its entire capital was eroded.

I, therefore, do not find any fault in the findings of the DA, in this regard as contended by the noticee. 15. Having dealt with the preliminary objections raised by the noticee, I now proceed to deal with the merits of the case. The brief facts of the case, as noted from the Report, are as follows:- One Mr. Atul Shah had orchestrated a plan to manipulate the share price of AIL in connivance with entities of Parshwa Group and others. Before declaration of the results along with false disclosures and advertisement by AIL, Parshwa Group including Bela created artificial market in the scrip by transferring or circulating the shares amongst themselves. The price of the scrip was increased by establishing and maintaining the price by Parshwa Group. Out of the shares of AIL bought and sold by the Parshwa Group amongst themselves, Bela had bought 25,500 shares and sold 72,999 shares as client of the noticee. Later, the Parshwa Group off-loaded their shares of AIL when it declared its false results and disclosures.

16. It is alleged that the noticee had allowed its client Bela to execute synchronized trades and self trades in substantial volume which resulted in manipulation of price of shares of AIL and which also had led to creation of artificial volume and misleading appearance of trading in the market. Another allegation against the noticee is that noticee accepted the delivery of securities against delivery obligation of Bela from the beneficiary account of a third party and violated SEBI Circular No. SEBI/MRD/SE/Cir-33/2003/27/08 dated August 27, 2003 and, in this regard, it failed to act with due care and diligence. 17. I note that there is no allegation that the noticee had any connection or relation with any entity in the Parshwa Group including its client Bela. The materials available on record also do not suggest any such connection or relation. There is no direct evidence of collusion or connivance or involvement of the noticee with the AIL, its management, Mr. Atul Shah, Mr. Anil Patel and other entities of Parshwa Group. Further, there is no allegation that the noticee was aware of or involved in the off-market transactions of Bela involving Parshwa Finance and its clients.

I note that the allegation of involvement of the noticee by allowing Bela in the alleged manipulative transactions is based on the circumstantial evidence i.e. pattern of trading of Bela through the noticee in the scrip of AIL. 18. From the Report, I note that allegation with regard to the synchronized transactions has been made against the noticee on the basis of its four transactions, in two trading days involving 15300 shares, for Bela as buying client wherein selling client was Mr. Viral V. Mewda trading through Parshwa Finance, a sub-broker of P. Suryakant Share and Stock Brokers Pvt. Ltd. While the noticee has not disputed these trades of Bela, it has contended that they were not synchronised since the fundamental attributes of synchronization did not meet as there was huge quantity difference and time difference in those trades. Further, the noticee was not aware of any plan of its client, the counter party sub-broker and counter party client. It has also submitted that it was not having any information that Bela is placing synchronized trades with related counter party client/broker.

19. I note from the Report, only one of the fundamental factors of synchronized trades; i.e. the time difference has been taken into account in the Report for holding those trades as synchronized trades and the price and quantity has not been discussed at all in the Report. As per Report, the trades on December 31, 2003 for 3000 shares and 2500 shares were executed with a time difference of 2 minutes 58 seconds and 3 minutes 32 seconds, respectively. The two trades on January 02, 2004 for 9500 shares and 300 shares were executed with a time difference of 22 seconds and 15 seconds, respectively. In my view, the charge of manipulative synchronized trading by the noticee would pre-suppose prior understanding between it and other trading parties, which is not established on the basis of even preponderance of probability in the facts and circumstances of this case. In the facts and circumstances of this case, I find it difficult to infer manipulative intention of the noticee to assist or abet its client

Bela in her such non-genuine trades and give it the benefit of doubt with regard to this charge. 20. I further note that Bela had done self trades wherein the noticee was the buying broker as well as the selling broker. In the self/fictitious trades that were matter of inquiry in this case, the noticee had placed sell orders for 10,000 shares and buy orders for 10,000 shares for Bela. The noticee has submitted that buy order for 5000 shares was mistakenly placed and it had taken corrective steps and intimated the same to BSE on December 05, 2003. I note that this argument has already been dealt with by the DA in the Report and I agree with the same. 21. I find that these trades were done by Bela without effecting any change in the beneficial ownership of the shares and thus were undoubtedly fictitious and meant to only create false appearance of trading in the scrip and maintain the price of the illiquid scrip of AIL. With regard to self trades, I note that the Honb'le Securities Appellate Tribunal (SAT) in Anita Dalal vs. SEBI (Appeal no. 211 of 2012 decided on December 3, 2012) has held that: " Self trades admittedly are illegal. This Tribunal has held in several cases that self trades call for punitive action since they are illegal in nature. In M/s. Jayantilal Khandwala & Sons Pvt. Ltd. vs. SEBI (Appeal no. 24 of 2011 decided on June 8, 2011) this Tribunal has held that "one cannot buy and sell shares from himself. Such transactions are obviously fictitious and meant only to create false volumes on the trading screen of the exchange".

22. In this case, I note that the buy and sell orders both were punched from the same terminal of the noticee (i.e. machine no. 1). The fact that the same stock broker was punching both buy and sell order for the same client in highly illiquid and thinly traded scrip clearly indicates involvement of the noticee by allowing its client Bela to execute self trades. I, therefore, am unable to accept the argument of the noticee that it did not have information about these self trades of Bela and it was merely executing instructions of Bela. In support of this contention, the noticee has expressed its willingness to cross examine its client. Since, in these proceedings, except the impugned trades, no other evidence such as statement of any person involved in the alleged trades has been relied upon in the SCN, in my view, the question of cross examining the client does not arise. The argument that the self trades were settled by delivery can also not help the noticee for its non-compliances particularly when these self trades were illegal and fictitious. 23. The noticee has further contended that the difference between the last traded price and the price at which the self trades were executed was a meagre ` 0.18 and the volume contribution through miniscule quantity of shares traded in these trades was too insignificant.

It is noted that all these self trades were executed by Bela on December 04, 2003 and before that date there was no trading in the scrip for more than a month. The previous traded price of the scrip on this date was ` 4.32 per share whereas the noticee executed these self trades at the price of ` 4.50 per share. The difference of ` 0.18 (4.16%) when seen in the context of trading in illiquid scrip as in this case, in my view, is not insignificant. I further note that though these self trades executed by the noticee contributed 1.29% of the total traded volume (5,20,231 shares) during the investigation period, these trades were executed on the day when the trading had resumed in the scrip after a long gap of more than a month and when the Parshwa Group including Bela started manipulative trading in the scrip. Such trading pattern of Bela clearly suggests intention to create the artificial liquidity and maintain the price in illiquid and thinly traded scrip. 24. I am of the view that being a registered stock broker and supposedly having professional competence, the noticee should have taken utmost care and exercised professional judgement and must not have executed such illegal and fictitious self trades for its client Bela especially when the scrip in question was illiquid scrip.

In the facts and circumstances of this case, I find that the noticee allowed its client Bela to execute self trades that were intended to manipulate the price and to create artificial volume and misleading appearance of trading in the scrip. 25. The DA has further found that for the sell transactions of trades of Bela in the scrip, the noticee had accepted delivery of shares from husband of Bela, Mr. Piyush Jhaveri -Proprietor of Parshwa Finance the counter party sub-broker. In this case, it is established that with respect to all sell transactions of Bela through noticee that are in question in these proceedings the counter party was Parshwa Finance a proprietary concern of her husband. The fact that for the most of the repeated sell transactions (admittedly 4 out of 5) of Bela the delivery obligations were fulfilled by a third party who himself was the counter party sub-broker, could definitely alert any prudent stock broker that there was something amiss. In my view, therefore, the noticee should have exercised due care and diligence when shares towards delivery obligations of Bela were repeatedly received by it from the demat account of her husband who was a counter party sub-broker to her transactions.

I further, find that these requirements had come into force three months before such non-compliance occurred. In my view, noticee had sufficient and reasonable time to understand these requirements. I, therefore, concur with the findings of the DA in this regard that the noticee violated SEBI circular no. SEBI/MRD/SEC/Cir-33/2003/27/08 dated August 27, 2003 and clause A (2), A(3) and A(4) of Code of Conduct for stock brokers as specified in Schedule II under regulation 7 of the Stock Brokers Regulations. 26. I note that though the transaction in question relate to the year 2003-2004, the fact remains that the noticee had allowed its client to execute illegal self trades. Given that as it may be, I, however, note that the quantity of shares (10,000 shares) involved in the self trades, as compared to the total traded shares (25,500 shares bought + 72,999 shares sold) by Bela on behalf of noticee, was not substantial. Further, the allegation of involvement of noticee in synchronized transactions of Bela for 15300 shares has not been established and it has been found to be involved in the self trades on one day during the investigation period.

There is no charge that the noticee is either connected or acted in connivance or collusion with the Parshwa Group or involved in the off-market transactions that were part of the strategy/plan of the Parshwa Group. In my view, the facts and circumstances along with the mitigating factors of the case do not warrant suspension of certificate of the noticee as recommended by the DA. Considering the facts and circumstances of the instant case, I am of the view that a warning to the noticee would be reasonable and commensurate with violations committed by it in this case. 27. I, therefore, in exercise of powers conferred upon me by virtue of section 19 read with section 12(3) of the Securities and Exchange Board of India Act, 1992 and regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008, hereby warn the stock broker M/s FMS Securities Ltd. (presently known as Share India Securities Ltd.) having SEBI Registration number (INB011079838), a member of the BSE to be careful and cautious in the conduct of its stock broking activity and to adhere to and comply with all the statutory provisions while carrying out its activities in the securities market.

Date: July 23rd, 2013 RAJEEV KUMAR AGARWAL Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA