Order against G R Pandya Share Broking Ltd. in the matter of Database Finance Ltd

1. The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) had initiated an enquiry vide Order dated October 9, 2006 under Regulation 5(1) of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (since rescinded, hereinafter referred to as the ‘Enquiry Regulations’) against G R Pandya Share Broking Ltd. (hereinafter referred to as ‘the stock broker’/ ‘the noticee’), a trading member of the Bombay Stock Exchange (hereinafter referred to as the ‘BSE’) and a stock broker registered with SEBI. The said enquiry was directed on the basis of the findings of an investigation conducted by SEBI into the dealings, inter alia, of the stock broker in the shares of Database Finance Ltd. (hereinafter referred to as ‘Database’ or ‘the company’ or ‘DFL’) during the period from April 1, 2002 to June 30, 2002 (hereinafter referred to as the ‘period of investigation’/ ‘investigation period’). The Enquiry Officer, on completion of the enquiry found that the stock broker had contravened Regulation 4(1), 4(2)(a), (b), (e), (g) & (n) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (hereinafter referred to as the ‘PFUTP Regulations, 2003’) and clauses A(1),(2),(3),(4) and (5) of Code of Conduct as specified in schedule II under Regulation 7 of the SEBI(Stock Broker and Sub Broker) Regulations, 1992 (hereinafter referred to as the ‘Broker Regulations’) and vide Report dated January 29, 2010 recommended that the certificate of registration of the stock broker be suspended for a period of four months.

The stock broker was found to have been involved in circular transactions, without intending change of ownership of the shares of DFL, thereby creating artificial volume and false appearance of trading in the scrip of DFL. Thereafter, SEBI vide notice dated February 02, 2010 (hereinafter referred to as the ‘SCN’) called upon the stock broker to show cause as to why the appropriate penalty including penalty as recommended by the Enquiry Officer/ Designated Authority (hereinafter referred to as the ‘Enquiry Officer’) should not be imposed on it. The noticee did not respond to the SCN notice despite several reminders. The opportunities of personal hearing, granted on August 17, 2010 and December 21, 2010 before me, were also not availed of by the noticee. In the absence of any submission/reply from the noticees, I am of the considered view that we may proceed with the matter ex parte, having complied with the principles of natural justice.

2. I have carefully considered the Enquiry Report and other material available on record. I note that the price of shares of Database went up from Rs.42.35 to Rs.82.90 (par value Re.1) during the period of investigation. Though the company had a total paid up capital of 5.33 crores, for the year that ended in July 2001 the net profit of the company was a negligible amount of Rs.3.6 lac, and for the year that ended in July 2002 the profit was Rs.3.7 lac. In the subsequent two quarters that ended on October 31, 2002 and January 31, 2003, the company had incurred losses to the tune of Rs.5.8 lac and Rs. 0.2 lac respectively. In the year that ended in July 2003, the net profit of the company was only Rs.0.9 lac. Thus, the company had shown a profit of hardly a few lac of rupees over the years, whereas the share price of the company was quoted 83 times the face value, which was unjustifiable.

3. I further note that the Enquiry Officer had observed that a group of entities, including a client Manu Sonate trading through the noticee, indulged in circular trading i.e. buying and selling among themselves, and contributed to significant rise in the volume and price of the scrip. During the investigation period, the group aggregately purchased 5,58,579 shares and sold 4,03,955 shares constituting 44.15% on gross purchase basis and 31.93% on gross sale basis on the exchange. Also, 70.79% of the purchases and 97.89% of the sales of the group entities were confined to themselves. The details pertaining to the trades within the group of entities during the investigation period are given in the chart below:- Buy Sell Buy % of Sell % of Total Total among among Trade with Trade with Buy Sell these these group group Broker Client Quantity Quantity clients clients clients clients 1 Vijay Bhagwandas Shah Ridhi K Shah 32638 31570 29806 31570 91.32% 100.00% 2 Unique Stock Bro Hitesh Shah 80287 49651 44837 47650 55.85% 95.97% 3 Networth Stock Indumati Goda 75567 44379 45951 41420 60.81% 93.33% 4 G. R Pandya Manu Sonate 53850 42980 46330 42980 86.04% 100.00% 5 Bhavesh R Mehta Nimish U Goda 49620 28720 35102 26663 70.74% 92.84% 6 Narendra Tanna Baban Sonate 52432 38282 44482 38282 84.84% 100.00% 7 Deepak Bhogilal Shah Rajubhai U Goda 6780 10900 3700 9800 54.57% 89.91% 8 M. P. Vora Shares Chandrakant K Shah 5950 8188 4950 8188 83.19% 100.00% 9 Action Financial P B Chandrasekhar 82520 62570 61975 62170 75.10% 99.36% 10 Rajchandra Capital Services Suniti K Shah 39650 24350 25090 24350 63.28% 100.00% 11 Mangal Keshav Samir N Shah 2600 1755 2600 1755 100.00% 100.00% 12 Sushil Finance Ajay Goda 1225 1500 1155 1500 94.29% 100.00% 13 Bharati Thakkar S Thirunavukarasu 75460 59110 49460 59110 65.54% 100.00% Total 558579 403955 395438 395438 70.79% 97.89%

4. The purchases and the sales of the group constituted 99% of the total traded volumes during the month of April 2002. In April 2002, the price of the scrip increased from Rs.42.35 to Rs.63.75. Thereafter, in the month of May 2002 their purchases constituted 42% and sales constituted 36% of the market volume and the price increased from Rs. 62.65 to Rs.71.85. Thus, an increased volume by the group of entities is seen during the above period of significant price rise in the scrip.

5. I note that the noticee was the broker for Manu Sonate, one among the group entities, and traded during the period of investigation. The noticee had purchased 53,850 shares and sold 42,980 shares of DFL on behalf of Manu Sonate during the period of investigation. As mentioned above, the trading pattern amongst the group entities during the period of investigation was circular in nature. Thus, the noticee was also found to be a part of such circular transactions that led to price manipulation in the scrip of DFL. The instances of the trades in circular pattern wherein the noticee had also traded are given below:

May 6, 2002 Total no. of shares traded during the day were 13,040 shares, out of which 13,000 shares were traded among the group clients. Instance 1: Date Time Buy Member Buy Client Sell Member Sell Client Total Time Code difference between buy and sell order 5/6/2002 10:08:13 Networh Stock Indumati Goda Vijay Ridhi Shah 400 0:01:14 Broking Bhagwandas Shah 5/6/2002 10:10:53 Rajchandra Suniti Shah Vijay Ridhi Shah 350 0:03:35 Bhagwandas Shah 5/6/2002 10:40:02 G R Pandya Manu Sonate Action Financial P B 750 0:00:12 Chandrasekhar 5/6/2002 10:53:21 Vijay Ridhi Shah G R Pandya Manu Sonate 750 0:00:06 Bhagwandas Shah 5/6/2002 11:06:46 Action Financial P B Networh Stock Indumati Goda 400 0:01:20 Chandrasekhar Broking 5/6/2002 11:08:34 Action Financial P B Rajchandra Suniti Shah 350 0:00:19 Chandrasekhar

Ridhi Shah (Mem-77) 350 shares 400 shares Indumati Suniti Shah Goda (Mem- 750 shares (Mem-452) 197) Manu Sonate (Mem-222) 400 shares 350 shares 750 shares

P.B.Chandra (Mem-444)

The above table and chart clearly depict that Manu Sonate, trading through the noticee, sold 750 shares to Ridhi Shah. Ridhi Shah has sold a total 750 shares, with 350 shares to Sunita Shah and 400 shares to Indumati Goda. Sunita Shah and Indumati Goda in turn have transferred 350 and 400 shares respectively to PB Chandra, amounting to a total of 750 shares. Manu Sonate, trading through the noticee, has purchased 750 shares from PB Chandra. In this manner, the shares were passed amongst the group entities in a circular manner.

Instance 2: Time Date Time Buy Member Buy Client Code Sell Member Sell Client Total difference Bharati 5/6/2002 13:37:43 G R Pandya Manu Sonate Thakkar S Thirunavukarasu 2500 0:00:42 Action 5/6/2002 13:56:42 Financial P B Chandrasekhar Unique Stock Hitesh Shah 2500 0:00:46 Bharati Action 5/6/2002 14:14:47 Thakkar S Thirunavukarasu Financial P B Chandrasekhar 2500 0:00:44 5/6/2002 14:22:08 Unique Stock Hitesh Shah G R Pandya Manu Sonate 2500 0:00:20

S. Thiru (Mem-737)

2500 shares 2500 shares

P.B.Chandra Manu Sonate (Mem-444) (Mem-222)

2500 shares 2500 shares

Hitesh Shah (Mem-170)

From the above, it is clear that Manu Sonate trading through the noticee has sold 2500 shares to Hitesh Shah. Hitesh Shah has sold 2500 shares to PB Chandra, who sold 2500 shares to S. Thiru. S. Thiru has sold 2500 shares to Manu Sonate, who was trading through the noticee. The shares were thus circulated amongst the group with no intention of transferring the beneficial ownership.

May 15, 2002 Total no. of shares traded during the day were 36,025 shares, out of which 12,000 shares were traded among the group clients as under:

Instance 3: Time Date Time Buy Member Buy Client Code Sell Member Sell Client Total difference S 5/15/2002 10:12:39 Rajchandra Suniti Shah Bharati Thakkar Thirunavukarasu 500 0:02:02 Networh Stock 5/15/2002 10:19:01 Broking Indumati Goda G R Pandya Manu Sonate 1000 0:00:02 P B 5/15/2002 11:02:55 Action Financial Chandrasekhar SKSE Securities Baban Sonate 1500 0:00:07 Networh Stock 5/15/2002 11:19:03 SKSE Securities Baban Sonate Broking Indumati Goda 1000 0:00:07 5/15/2002 11:33:45 SKSE Securities Baban Sonate Rajchandra Suniti Shah 500 0:01:09 P B 5/15/2002 11:48:29 G R Pandya Manu Sonate Action Financial Chandrasekhar 1000 0:00:26

5/15/2002 11:51:15 Bharati Thakkar Thirunavukarasu Action Financial Chandrasekhar 500 0:03:12

P.B.Chandra (Mem-444) 500 shares 1000 shares

1500 shares Manu Sonate S. Thiru (Mem-222) (Mem-737) Baban Sonate (Mem-258) 500 shares 1000 shares 500 shares 1000 shares

Suniti Shah Indumati (Mem-452) Goda (Mem- 197)

The above chart and table show another instance of circular trading amongst the group entities. 1000 shares were sold by PB Chandra to Manu Sonate, who was trading through the noticee, and by Manu Sonate to Indumati Goda. Indumati Goda has sold the same number of shares to Baban Sonate. Further, 500 shares were sold by PB Chandra to S. Thiru and by S. Thiru to Sunita Shah. Sunita Shah has sold the 500 shares to Baban Sonate. Baban Sonate, thus received a total of 1500 shares. I note that PB Chandra had purchased 1500 shares from Baban Sonate, thus completing the circle of trades.

Instance 4: Date Time Buy Member Buy Client Code Sell Member Sell Client Total Time difference 5/15/2002 12:17:45 Action Financial P B Bharati S Thirunavukarasu 1500 0:00:22 Chandrasekhar Thakkar 5/15/2002 13:09:03 G R Pandya Manu Sonate Unique Stock Hitesh Shah 1000 0:00:23 5/15/2002 13:09:03 G R Pandya Manu Sonate SKSE Nimesh Goda 500 0:03:02 Securities 5/15/2002 13:34:31 SKSE Securities Nimesh Goda Action P B Chandrasekhar 500 0:01:15 Financial 5/15/2002 13:34:40 Unique Stock Hitesh Shah Action P B Chandrasekhar 1000 0:01:24 Financial 5/15/2002 13:43:16 Bharati Thakkar S G R Pandya Manu Sonate 1500 0:00:05 Thirunavukarasu

S. Thiru (Mem-737)

1500 shares 1500 shares

P.B.Chandra Manu Sonate (Mem-444) Hitesh Shah 1000 shares (Mem-222) 1000 shares (Mem-170)

500 shares 500 shares

Nimish Goda (Mem-258)

The above flow chart indicates that S Thiru has sold 1500 shares to PB Chandra. PB Chandra has sold 1000 shares to Hitesh Shah and 500 shares to Nimish Goda. Hitesh Shah and Nimish Goda have sold 1000 shares and 500 shares respectively to Manu Sonate, who was trading through the noticee. Manu Sonate has completed the circular trade by selling 1500 shares to S. Thiru.

6. On examination of the data relating to the trades of the group entities during the period of investigation, it is seen that the buy and sell order quantities and rates were almost similar and time difference between the buy and sell orders was negligible. The time difference between 396 buy orders and 396 sell orders was less than or equal to 1 minute. These orders accounted for 3,704 trades, a volume of 1,94,105 shares and amounted to approximately 49.05% of the volume of trades among the group clients. Hence, most orders placed by the group entities were structured/ synchronized.

7. I further note that, during the investigation period, the noticee had placed 82 buy and 98 sell orders on behalf of Manu Sonate. Out of these orders, 73 buy and 67 sell orders resulted in trades among the group entities only. Further, the counter-party in 840 out of 898 buy trades and all the 750 sell trades of the noticee was one among the group entities.

8. I observe that the above pattern of trading suggests that the orders were punched in with a preconceived motive that the orders shall be picked up by a particular client on the opposite side, and indicates that there was a prior arrangement within the group to execute such transactions. Such type of transactions, especially when they occur repeatedly, cannot be mere coincidence. The trades do not appear to be genuine. Therefore, it can be said that the aforesaid group of clients, in connivance with the brokers, including the noticee herein, created artificial volume in the scrip thereby influencing the price of the scrip.

9. During the investigation proceedings, the noticee did not reply to the investigating authority. While making a submission before the Enquiry Officer, the noticee only stated that it had not carried out any trading in the scrip of DFL in its proprietary account, that there were no restrictions in trading in the scrip of DFL and it had traded only for its client. I agree with the opinion of the Enquiry Officer that the above submissions of the noticee are not sufficient to absolve from its responsibility as a broker.

10. The Hon’ble Securities Appellate Tribunal (SAT) in the Appeal No. 190 of 2010, Ajmera Associates Vs. SEBI (decided on December 13, 2010) also observed that “ 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.”

11. I also agree with the view of the enquiry officer that in the securities market, it is not quite possible for a single entity to inflate or deflate the scrip price as well as the trading volume in any scrip. Therefore, the role of the entire group has to be taken into consideration in a holistic manner to arrive at any conclusion. In the instant matter, the trading volume was created by certain entities, including the noticee herein, by way of trading among themselves. In view of the above, I find that the noticee has violated the provisions of Regulation 4(1), 4(2)(a), (b), (e), (g) & (n) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003.

12. The stock broker by indulging in non-genuine transactions in the shares of the company during the investigation period, failed to maintain high standards of integrity and fairness in the conduct of its business. As already noted, the stock broker involved itself in manipulation and malpractices and failed to act in compliance with the SEBI Act, 1992 and the Rules and Regulations framed thereunder. Thus, I agree with the finding of the Enquiry Officer that the noticee has contravened Clause A(1), (2), (3) and (4) of the Code of Conduct for stock brokers in the Stock Brokers Regulations. Further, by not abiding with the statutory provisions in this regard, the stock broker has also contravened Clause A (5) of the Code of Conduct for stock brokers in the Stock Brokers Regulations.

13. However, considering the volume generated, the number of circular/ synchronized trades of the noticee and the violation found to have been committed by the noticee, I observe that the penalty of suspension of the certificate of registration of the noticee for a period of four months as recommended by the Enquiry Officer, would be a little too harsh. In the interest of justice and equity, I dispose of the present Enquiry proceedings as ordered herein below.

14. 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.

15. In view of the foregoing, I, in exercise of powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulations 28(2) and 38(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby suspend the certificate of registration of the stock broker, G R Pandya Share Broking Limited (Registration No. INB010997538), member, Bombay Stock Exchange, for a period of one month.

16. This Order shall come into force immediately on expiry of twenty one days from the date of this Order.

Place: Mumbai PRASHANT SARAN Date: April 07, 2011 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA