Order against HB Securities Limited

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) had conducted an investigation into the trading in the shares of Alps Industries Limited (hereinafter referred to as the company) for the period between December 6, 2000 and March 13, 2001 (hereinafter referred to as the investigation period). It is alleged on the basis of the findings of the said investigation that the stock broker, HB Securities Limited (hereinafter referred to as the stock broker), member, National Stock Exchange of India Limited (hereinafter referred to as NSE) and Delhi Stock Exchange Limited (hereinafter referred to as DSE) had executed large number of synchronized transactions with associated entities namely RRB Securities Limited, Alaknanda Capital Services Private Limited, Chinar Financial Services Limited, Har Sai Investments Limited, Narmada Capital Services Limited and Gagan Financial Resources Private Limited (hereinafter collectively referred to as the entities and individually by their respective names) during the investigation period. It was inter alia alleged that the said trades of the stock broker had created artificial volume in the market and thereby contravening the provisions of the Securities and Exchange Board of India Act, 1992, Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations,1992 (hereinafter referred to as the Broker Regulations) and Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the PFUTP Regulations).

Accordingly, SEBI, vide order dated March 3, 2004 read with subsequent orders, initiated an enquiry against the stock broker in terms of the provisions of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (since repealed) to enquire into the alleged violations committed by it. The Enquiry Officer, vide report dated October 31, 2006 while recommending the penalty of suspension of the certificate of registration of the stock broker for a period of three months found that the actions of the stock broker are in violation of Regulation 4(a), (b), (c) and (d) of the PFUTP Regulations and Clauses A(1) to (5) of the Code of Conduct specified in Schedule II of the Broker Regulations. Thereafter, a notice dated November 21, 2006 was issued to the stock broker with a copy of the Enquiry Report calling upon it to show cause as to why action should not be taken against it as recommended by the Enquiry Officer or as considered appropriate by SEBI. The stock broker, vide letter dated December 8, 2006 filed its reply and the same is being considered in the later part of this Order.

In the meanwhile, the stock broker filed an application for passing of a consent order in terms of SEBI Circular dated April 20, 2007. Pursuant to the rejection of the said application, an opportunity of hearing was provided to the stock broker on July 9, 2009. Mr. Abdullah Hussain, advocate represented the stock broker before me and made submissions. The learned advocate made elaborate submissions on the lines of the aforesaid reply and the written submissions dated July 9, 2009 filed during the course of the hearing. Mr. Praveen Gupta, director of the stock broker was also present during the hearing.

2. I have considered the Enquiry Report, the oral as well as written submissions made on behalf of the stock broker and other material available on record. According to the Enquiry Officer, the stock broker had executed trades on behalf of clients who are associated/connected and that the purpose of the trades executed by the stock broker was to create artificial volume in the shares of the Company. The specific finding of the Enquiry Officer made in this regard is reproduced below:

“ 21. In view of the facts and circumstances of the case and on the basis of the evidence available on record it is concluded that the said traded are synchronized trades and considering the fact that the trades were executed on behalf of clients who are associated/connected and further it is seen that the purpose of the trades were to create artificial volume in the scrip. In view of the same, it is concluded that HB violated the provisions of Regulation 4(a), (b),(c) and (d) of the SEBI(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995.” (emphasis supplied)

In short, according to the Enquiry Officer, the trades of the stock broker were:

i. synchronized ii. executed on behalf of clients who are associated/connected iii. for the purpose of creating artificial volume.

3. The stock broker has denied the fact that it had entered into synchronized transaction with associate entities. It further specifically denied the alleged connection in respect of certain entities. I note that, the stock broker in its reply dated October 24, 2005 (to the Enquiry Officer) had denied the allegation that it was related or connected to any entity for the purpose of which the show cause notice (hereinafter referred to as the notice) was issued. According to the stock broker, it was impossible to know the identity of the parties in a screen based transaction and that all its trades were well within the guidelines of SEBI Circular dated September 14, 1999. The specific contention of the stock broker was that it was not connected to certain entities and that it had not executed the trades with such an intention. The counsel during the course of hearing submitted that there was no reference made by the Enquiry Officer with respect to the alleged connection between the entities involved in the trades. According to him, whatever conclusion arrived at by the Enquiry Officer was vague. According to him, it is not clear from the Enquiry Report as to whether the clients are connected to each other or the stock broker was connected to the clients on behalf of which the trades were executed. It is the case that there was nothing in the Enquiry Report to show that the stock broker and its clients are connected to each other. The allegation against the stock broker is that it had matched the orders of the other group entities which were placed at the same price and at the same time or almost the same time “with a view to create false or misleading appearance of trading in the scrip”. With this allegation in the background, if the submission of the stock broker is found to be correct, without admitting, that some of its clients were not connected to it (other than having a stock broker-client relation), then it cannot be said to have colluded with such clients for the purpose of ‘volume creation’. Then, in the facts and circumstances of the present case, the volume of the stock broker would have to be reduced to such extent. In respect of the trades of the stock broker, the observations of the Enquiry Officer are as follows:

a. 52 structured trades, involving 1,47,600 shares, executed on December 26, 2000, which had accounted for more than 55% of the volume in the said shares on the same day. (The trade details were given at Table 1 of paragraph 10 of the Enquiry Report). b. 150 structured trades involving 11,02,200 shares executed during the period of investigation. The said trades accounted for 17.21% of the gross quantity traded at NSE during the corresponding period. (The trade details were given at Table 2 of paragraph 11 of the Enquiry Report). c. 16 cross deals involving 3,95,000 shares during the period of investigation (The trade details were given at Table 3 of paragraph12 of the Enquiry Report). d. Structured trades between the stock broker and RRB Master Securities Delhi Limited (member, DSE) during the period of investigation, involving 4,92,000 shares which had accounted for 27% of the gross volume traded at DSE (The trade details were given at Table 4 of paragraph 14 of the Enquiry Report). e. Cross deals executed by the stock broker on March 28, 2001 (The trade details were given at Table 4 of paragraph 15 of the Enquiry Report).

f. Structured trades between the stock broker and RRB Master Securities Delhi Limited during the period of investigation, involving 5,90,000 shares. (The trade details were given at Table 4 of paragraph 16 of the Enquiry Report).

The trades mentioned at (a) to (c) above were executed at NSE and the remaining (d to f) were executed at DSE.

4. It was contention of the stock broker that it had bought 8,43,300 shares and sold 5,60,800 shares of the company during the entire period of investigation in the normal and ordinary course of its business and as per the instructions of its clients, at the then ruling market price. The net quantity thus, was 2,83,500 shares as compared to the total quantity traded of 32,01,800 shares. The stock broker also submitted that on December 26, 2000, it had purchased 200 shares and sold 1,56,100 shares as per the orders given by its clients and that it had at no point of time, traded either on highest or on lowest price. According to the stock broker, all its trades were executed through the terminals of NSE and that the same were in accordance with the rules and regulations of NSE. It is the case of the stock broker that the necessary ingredients to make a person liable for an offence under Regulation 4 of the PFUTP Regulations are not present in the present case.

5. In respect of the trades of the stock broker in the shares of the Company at DSE, the Enquiry Report had mentioned two tables. One at paragraph 14 (as mentioned at 5(d) above) and the other at paragraph 16 (as mentioned at 5(f) above). Both the tables are details of structured deals executed between the stock broker and RRB Master Securities Delhi Limited. One table is without time and the other contained the time also. Needless to say, the both the tables do not contain the name of the entities on whose behalf such orders were placed by the said stock brokers. The table without time contained various trades involving 4,77,500 shares and one with time involved 5,90,000 shares. Though, it is mentioned in paragraph 13 of the Report that the trades of the stock broker had involved 4,92,000 shares, the corresponding table only refers to 4,77,500 shares. As per the table without time, the aforesaid stock brokers had executed the trades on December 22, 2000, December 23, 2000, December 24, 2000, December 29, 2000, January 5, 2001, January 12, 2001, January 19, 2001, February 16, 2001 and March 9, 2001. However, as per the table with time, the trade dates are January 5, 2001, January 12, 2001, January 19, 2001, February 16, 2001, February 23, 2001 and March 2, 2001. A perusal of the show cause notice indicates that some of the trades appearing therein were common.

However, there are no time wise details with respect to the trades executed on December 22, 2000, December 23, 2000, December 24, 2000, December 29, 2000 and March 9, 2001. It is not clear whether the clients were involved in both sets of transactions i.e. one involving 4,77,500 shares and the other involving 5,90,000 shares. Though, it is also alleged in the notice that the stock broker had executed atleast 36 structured deals during the period between January 2001 and March 2001 for the alleged connected/related clients involving 5,90,000 shares, details of clients are not given therein. Further, the clarity in respect of the volume traded is important in the context of the case where the allegation is that the trades of the stock broker created artificial volume. Therefore, in the absence of such details it would be difficult to establish that the trades of the stock broker created artificial volume in the shares of the company. The notice is totally silent as to the price movement of the shares of the company during the investigation period. Similar is the situation in the notice against the clients who had executed trades through the stock broker.

There is no allegation that the clients had entered into trade reversals or circular trades. SEBI had also initiated proceedings against the entities for whom the stock broker had executed trades. The said proceedings were disposed of by SEBI, vide order dated September 28, 2010 and held that they are entitled for benefit of doubt as the notice issued to them was deficient in certain aspects. There is no finding in the Enquiry Report that the trades of the stock broker influenced the share price of the company artificially. Therefore, considering the case in its totality, it would be difficult to find fault with the trades of the stock broker which were executed on behalf of entities at DSE. Therefore, the stock broker is afforded benefit of doubt in respect of alleged charges.

6. As regards the trades at NSE, there is not even a finding that the trades of the stock broker had artificially influenced the share price of the company. This has not even been alleged in the notice issued to the stock broker. In an overall consideration of the matter, various tables provided in the Enquiry Report would only indicate that the stock broker executed various trades involving number of shares. The counsel submitted that the only allegation in the notice is that the trades of the stock broker were “…..with a view to create false or misleading appearance of trading in the scrip”. According to the counsel, the said allegation would not sustain in the eye of law for the following reasons. While adopting similar submissions made by Har Sai Investments Limited (one of the clients of the stock broker) in respect of its dealings in the shares of the company, it was pointed out that the volume in the shares of the company started increasing even before the period of investigation. According to the counsel, there were so many days during the investigation period, where the volume traded was very high at NSE even without the participation of the stock broker.

Some of such days and the volume, as per the price volume analysis chart are, December 18, 2000 (1,96,000 shares), December 22, 2000 (1,42,700 shares), December 27, 2000 (1,62,800 shares), January 3, 2001 (1,48,400 shares), January 12, 2001 (61,100 shares), January 18, 2001 (50,000 shares), January 24, 2001 (83,500 shares), January 31, 2001 (79,900 shares), February 7, 2001 (92,900 shares), February 19, 2001 (50,000 shares), February 21, 2001 (85,000 shares), February 28, 2001 (50,100 shares) and March 1, 2001 (1,00,000 shares). All such trades were during the period of investigation. Thus, some of the days during the investigation period had witnessed huge volume, as stated above. It was not the case that the stock broker was involved in those trades in addition to the trades mentioned in the Enquiry Report. Such The volume contributed by other parties, during the investigation period was around 13,00,000 shares. No adverse finding was recorded against those parties. This was submitted by the counsel to rebut the finding that the trades of the stock broker were intended to create artificial volume in the shares.

It was also submitted that nowhere it is alleged that the volume was created only by the trades of the entities mentioned. It was the contention of the stock broker that its trades had resulted in delivery and payment and that its trades did not influence the securities market in any way. It is not the allegation in the notice that they were involved in trade reversals. They were also not involved in circular trades. The only incriminating factor in the Enquiry Report is that the structured deals of the stock broker during the investigation period accounted for 17.21% of the gross quantity traded in the shares of the Company. It was also contended before me that SEBI had not even initiated proceedings against the entities who were involved in the trades during the investigation period and in the absence of such proceedings, SEBI would not be justified in proceeding only against a particular group leaving out some of the entities involved in such trades. It was further submitted that the net purchase position of the stock broker was only about 2,80,000 shares. In short, I note the following: a. No client wise details are given in the tables given in the notice or in the Enquiry Report in respect of the trades executed by the stock broker at DSE. b. The volume traded in the shares of the company (on certain days) during the investigation period was higher than that of some of the days during the investigation period, at NSE.

It was not the case that stock broker was involved in those days also. Thus, the volume was high even without the participation of the stock broker. c. The volume started increasing much prior to the period of investigation. d. There is no allegation made against the stock broker that : i. its trades created artificial increase in the share price.

ii. it was involved in trade reversals or circular trades. iii. it was placing orders at a higher price than the previous traded price.

7. In view of the above, though, the stock broker was involved in number of trades in the shares of the company during the period of investigation, I am of the view that the material particulars mentioned in the Enquiry Report are not sufficient to establish the charge of violating Regulation 4(a), (b), (c) and (d) of the PFUTP Regulations and Clauses A (1) to (5) of the Code of Conduct specified in Schedule II of the Broker Regulations. Therefore, the stock broker is entitled for a benefit of doubt in respect of such charges.

8. Therefore, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, I, hereby dispose of the enquiry proceedings initiated against HB Securities Limited, Member, National Stock Exchange of India Limited and Delhi Stock Exchange Limited, in respect of its dealings in the shares of Alps Industries Limited, during the period between December 6, 2000 and March 13, 2001, without any penalty.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE:SEPTEMBER 28, 2010