Order against Ishita Consultancy Private Ltd in respect of dealings in the scrip of Riba Textiles Limited

WTM/SR/SEBI/EFD-DRA4/24/03/2016 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA S. RAMAN, WHOLE TIME MEMBER ORDER Under Regulations 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 against Ishita Consultancy Private Limited (SEBI Registration No. INS013262238 and PAN: AABCI2654Q) in respect of dealings in the scrip of Riba Textiles Limited. 1. Securities and Exchange Board of India (“SEBI”) conducted an investigation into the trading in the scrip of Riba Textiles Limited (‘RTL’) in BSE Ltd for the period from January01, 2009 to August 31, 2009 (‘Investigation Period’)to ascertain any possibleviolation of the SEBI Act, 1992 and Regulations made thereunder.

2. During the investigation, it was observed that a group of 23 connected entities were involved in the synchronized and circular trading in some scrips viz., Riba Textiles Ltd., Supertex Industries Ltd., Bridge Securities Ltd., Aarey Drugs and Pharmaceuticals Ltd. and Winsome Textile Industries Ltd. The price and volume in the scrips increased significantly during the investigation period as compared to pre investigation period. The details of increase in price and volume of RTL is as under: Riba Textiles Ltd. Pre Investigation Period Open 46.65 (1.10.2008 – 31.12.2008) (1.10.2008) High 46.8 (1.10.2008) Low 20.5 (25.11.2008) Close 25.4 (31.12.2008) Average Volume 8,858 Investigation Period Open 25.75 (1.1.2009 – 31.8.2009) (1.1.2009) High 77.15 (28.5.2009) Low 20.45 (12.1.2009) Close 39 (31.8.2009) Average Volume 69,934

3. Ishita Consultancy Private Limited (“Ishita Consultancy”) is a SEBI registered Sub Brokerhaving Registration Number INS013262238 and affiliated to Stock Broker,ASE Capital Markets Limited. It was observed that during the investigation period, Ishita Consultancy had executed self trades on its own account in the scrip of RTL for 34,596 shares which is 23.38 % of Ishita’s total traded quantity in the scrip of RTL. In view of the same, it was alleged that Ishita Consultancy contravened Clauses A(1), D(4) and D(5) of the Code of Conduct specified in Schedule II of Regulation 15 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (“Brokers Regulations”).

4. In view of the above, SEBI vide order dated April 12, 2013 appointed Designated Authority in terms of SEBI (Intermediaries) Regulations, 2008 (“Intermediaries Regulations’) to enquire into the alleged violations of Ishita Consultancy.

5. On completion of proceedings, Designated Authority vide Report dated March 24, 2014 recommended that Ishita Consultancy may be prohibited from taking up any new assignment for a period of one month for the alleged violations of Brokers Regulations.

6. Subsequently, SEBI issued Show Cause Notice dated March 28, 2014('SCN') under Regulation 28(1) of the Intermediaries Regulations to Ishita Consultancy “to show cause as to why action should not be taken against you as recommended by the Designated Authority or higher penalty should not be imposed on you as deemed fit by the Competent Authority”.Ishita Consultancy Pvt. Ltd (“The Noticee”) was advised to reply to the SCN within twenty one days of the receipt thereof. A copy of the Report was also forwarded to the Noticee along with the SCN.

7. The Noticee vide letter dated April 24, 2014 forwarded an unsignedreply (received on May 08, 2014). Though the said letter mentioned enclosures, the same were not enclosed.Therefore, SEBI vide letter dated July 22, 2015 advised the Noticee to file suitable authenticated/signed reply along with enclosures, if any.(A compilation of enclosures was submitted by the Noticee on October 16, 2015 and reply wasauthenticated by the Noticee vide email dated January 21, 2016). The submissions of the Noticee, inter alia, are as under:

i. “We rely upon and reiterate what has been stated in all our earlier submission and request to pay heed to earlier submission for arriving at proper and justifiable conclusion in the matter ... ii. At the further outset, we say and submit that the report placed by the learned Designated Authority severely suffers from the vices of illegality and irregularities and non-application of mind in as much as the learned Designated Authority has overlooked various provisions of law as well as facts and more particularly the fact that Investigating Officer has not found our role as sub broker guilty or violative of synchronized trade as part of group entities… The Designated Authority has not found the alleged trades attracting unsuspecting investors as has been observed by the Investigating Authority as well as false and misleading appearance on account of alleged self trades as has been alleged in Show Cause Notice and therefore has not only misread various provisions of the Rules, Regulations and relevant laws but has also ignored the substantial evidence like Demat Statement establishing the change of beneficial ownership in case of all alleged self trades as also BSE Order Matching Rules while finding to not have appropriate system to ensure prevention of unfair trade practices while imposing a penalty as imposed in the report placed by the learned Designated Authority. iii.

The company Ishita Consultancy Pvt. Ltd. has largely undertaken investment / trading in the scrip Riba Textiles Ltd. We have traded for 2,20,257 buy shares consisting of 200 trades and 2,20,257 sell shares consisting of 161 trades aggregating 4,40,514 shares consisting of 361 trades in the scrip since December 2008 till December 2009 i.e. for almost 12 months. The statement substantiating the said trading is annexed herewith as an Enclosure C to this submission, for your necessary perusal and kind consideration to view our conduct on the basis of total participation in the scrip in its entirety andnot in isolation of the alleged trades for just 3 days consisting of 34,596 shares corresponding to 11 trades. The total trading in the scrip during the entire period of 12 months, took place between the price ranges from Rs. 25.00-55.00-15.00. iv. It is further submitted that the alleged trade for 3 days shall also be viewed in its entirety with what has taken place on BSE during those 3 days. v. On plain reading of the data contained in the Bhav Copy of BSE enclosed herewith as an Enclosure C, it can be seen that the total volume during the alleged period of 3 days was 2,23,494 shares consisting of 521 trades.

While comparing the above alleged trades with the data of BSE, it constitutes 15% of the shares with corresponding 2% of total trades that took place in the market. Such miniscule trades, in our humble view, can hardly attract any unsuspecting investors to trade in the scrips and therefore it appears to us that the alleged trades have not been viewed to have created artificial volume in the scrip. vi. From amongst the trade during the period of Investigation, it appears that the alleged self trade quantity of 34,596 shares constitutes meagre 11% of total quantity of 2,95,904 shares and 7% of our total trading in the scrip. The corresponding alleged no. of trades being 11 trades also constitutes meager 4% of total trades during the period of investigation and 3% of our trading in 12 months. Therefore, the quantum of 34,596shares with corresponding 11 trades are considerably very low and virtually insignificant compared to our total trading during the period of investigation. vii. On further reading of the data contained in BSE Bhav Copy and more particularly in the column “% Deli. Qty to Traded Qty”, it can be seen that “100” is found suggesting that the entire trading in the scrip was delivery based and every trade including the impugned alleged trades were delivery based trading reflected in the demat statement of the company. viii.

The company is operating its sub-broker activity through Ahmedabad Capital Market Ltd (ACML) member of BSE. The company has substantially traded in many other scrips in addition to the trading in the scrip of Riba Textiles Ltd; during the period of investigation including the trading on alleged days i.e. 19th 23rd and 24th March, 2009. ix. The company was not getting requisite quantity of shares against its purchase order and the purchase orders which were found to have been executed were in very small quantity corresponding to one order for large quantity. Due to such prevailed position, the buy position in pending order book was demonstrating quantity in increasing manner. Against that, attempts were made to cancel the pending buy orders. However, to cancel the order, it consumes little more time in imputing the order in the system and the technical difficulty being faced was that while imputing such orders, if any matching occurred with respect to pending order in the intervening period of few seconds, the order for cancellation did not get accepted in the system. Unfortunately, against the sale order of 10,000 shares, 6,459 shares and 2,541 shares found to have got matched with the first two orders pending in the order book by the anonymous BOLT and 1,000 shares in the market leaving a pending order of 4,905 shares. x. It is evident that every trade of purchase took considerably long time for its execution, large number of corresponding trades in small quantities and every trade not fully exhausted at a time, it is evident that there was not sufficient sellers in the market corresponding to our trades.

Therefore the question of alleged trades created false and misleading appearance does not arise at all. xi. The Designated Authority has not appreciated the limitation expressed with respect to operating system while imputing trade and the insufficient quantity available for trade in the scrip leading to execution of alleged self trades. xii. There is not a single transaction on its part where it has failed to honour market obligation and settlement commitments for which it could be blamed or made responsible for integrity, manipulation or malpractice in trades. xiii. The Designated Authority while coming to conclusion at para 9 of the impugned order dated March 28, 2014 that “In my opinion a registered intermediary such as a Noticee should have appropriate system to ensure that unfair market practices like self trades in such high volumes in its own account should not take place” has appeared to have substantially ignored, overlooked or not appreciated the total trading history and attendant circumstances appertaining to each trade in the scrip and the corresponding conduct of 12 months in the scrip as well as total conduct during the period of investigation consisting of 8 months as is evident therefrom and merely jumped to the conclusion on the basis of data of 3 days finding to be “considerably high” compared to those days volume observed from BSE website in complete isolation of the attendant circumstances appertaining to each trade and the market depth at the time of Order matching by anonymous online trading system.

Therefore the learned Designated Authority has erred in concluding the violation of alleged provision of Code of Conduct specified in Schedule II of Regulation 15 of SEBI (Stock Broker and Sub Brokers) Regulation, 1992 on our part merely on the basis of trading history of just 1 day on the basis of “considerably high”. xiv. In view of the totality of the facts and circumstances, the documents on record, it can be seen that the penalty recommended to be imposed by the Designated Authority against it could never be imposed and it is required to be exonerated from all charges leveled against it.”

8. Thereafter, vide notice dated October 10, 2015 an opportunity of personal hearing before me was granted to the Noticee on October 16, 2015. The Noticee vide e-mail dated October 14, 2015 sought extension of time for hearing and requested a copy of the SCN along with the Report of Designated Authority. The same was allowed and a copy of SCN and Report was also furnished to the Noticee. The Noticee was granted another opportunity of hearing before me on December 14, 2015. Mr. Nilesh Shah, Director of the Noticee along with Mr. Manish Shah, Assistant appeared before me and submitted that they rely on their reply dated April 24, 2014 submitted to SEBI and that they do not wish to make further submissions in the matter.

9. I have considered the facts of the case, the findings of the investigations, the observations and findings made by the Designated Authority, replies of the Noticee submitted before Designated Authority and before me along with the documents contained therein and oral and written submissions made before me during the personal hearing and all other relevant material available on record. In the light of the same, I shall now deal with the charges levelled against the Noticee.

10. The issue for consideration in this case is whether the Noticee, had executed self trades on its own account and violated the provisions of Clauses A(1), D(4) and D(5) of the Code of Conduct specified in Schedule II of Regulation 15 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (Sub-Broker Regulations).

11. Before dealing with the aforesaid violations, the relevant legal provisions, the contravention of which have been alleged in this case may be reproduced hereunder for the purpose of reference: The SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 General obligations and inspection 15. (1) The sub-broker shall— (b) abide by the Code of Conduct specified in Schedule II; Code of Conduct for Sub-Brokers "A. General (1) Integrity: A sub-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all investment business. D. Sub-Brokers vis-a vis Regulatory Authorities (4) Manipulation: A sub-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to disturbing market equilibrium or making personal gains. (5) Malpractices: A sub-broker shall not create a false market either singly or in concert with others or indulge in any act detrimental to the public interest or which leads to interference with the fair and smooth functions of the market mechanism of the stock exchanges. A sub-broker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness.”

12. Let me now deal with the charges that the Noticee executed self trades on itsown account in the scrip of RTL, the findings are as under: I. As per the investigation report the Noticee executed the following trades from its own account: Scrip (Self Trade) No. of No. of LTP Quantity of Quantity Trades Days Difference Synchronized (%) Trades out of Self Trade Riba 34,596 11 3 -3.12 to 0 21026 Textiles Ltd.

II. As per the Report of Designated Authority, the Noticee executed self trades for three days. The details are as under:

On March 19, 2009 the Noticee had executed self trades for 18,998 shares which was 30.35% of the market volume, On March 23, 2009 the Noticee had executed self trades for 6,098 shares which was 5.39% of the market volume and On March 24, 2009 the Noticee had executed self trades for 9,500 shares which was 19.8% of the market volume. III. It is also noted from the Report of Designated Authority thatout of the 34,596 self trades executed by the Noticee,trades for 21026shares of RTL were synchronized trades. A few instances of the Noticee’s synchronized trades are as under:

Scrip Trade Trade Buy Client Buy Buy Buy Sell Client Sell Sell Sell Name Date Time Name Order Order Order Name Order Order Order Time Qty Price Time Qty Price Riba 23/03/09 12:59:29 Ishita 12:59:24 4,000 38.75 Ishita 12:59:28 4,000 38.75 Textiles Consultancy Consultancy Ltd. Pvt. Ltd. Pvt. Ltd. Riba 24/03/09 15:45:26 Ishita 15:45:26 2,000 41.15 Ishita 15:45:12 2,000 41.15 Textiles Consultancy Consultancy Ltd. Pvt. Ltd. Pvt. Ltd. Riba 24/03/09 15:45:04 Ishita 15:45:04 2,500 41.15 Ishita 15:44:57 2,500 41.15 Textiles Consultancy Consultancy Ltd. Pvt. Ltd. Pvt. Ltd. Riba 24/03/09 15:44:49 Ishita 15:44:48 5,000 41.15 Ishita 15:44:45 5,000 41.15 Textiles Consultancy Consultancy Ltd. Pvt. Ltd. Pvt. Ltd.

IV. Contentions of the Noticee and the findings are as under: a) The Noticee contended that they were trading in the scrip of RTL prior to and post investigation period. The Noticee contended that after it placed the buy orders, it was not getting requisite quantity of sale orders hence, it attempted to cancel the pending buy orders. However, due to technical difficultythe order for cancellation did not get accepted in the system and the anonymous BOLT system matched its own sale orders with the pending buy orders. This contention of the Noticee is not acceptable. If the Noticee wanted to cancel the shares, it ought to have cancelled the order. Even otherwise, the contention of the Noticeeand its conduct of placing orders are contradictory. For instance, the Noticee placed a buy order for 24750 shares on March 19, 2009 at 14:32:24and 18,291 shares were bought by it at 14:43:31.It took almost 11 minutes to execute the trades leaving6459 shares pending. This clearly shows that the Noticee had enough time to cancel the buy order of 24750 shares. The Noticee neither put any cancellation order norplaced any sell order immediatelyas contended by it.

Instead, the Noticee again placed a buy order for 10,000 shareson the same day i.e. March 19, 2009 at 14:43:36. Therefore, it is clear that the defense of technical difficulty in inputting the cancellation order is an afterthought and contradicts its own arguments. Further,on 19th March, 2009, while the Noticee’s buy order for 2206 shares and 4905 shares were pending, the Noticee placed a sell order of 5000 shares which eventually matched with its own buy orders shows that the Noticee deliberately placed the sell order. The Noticee was fully aware that the said sell order could match with its own buy order especially when the market has no depth as contended by the Noticee. It is noted that the Noticee has not placed a single cancellation order in any of thethree days, viz., on March 19, 2009 March 23, 2009 and March 24, 2009. In any case, the difficulty in cancelling the Orders already placed cannot be accepted. The trading pattern mentioned above, falsifies the reply of the Noticee that they came to know about matching of their own buy orders and sell orders only after issuance of SCN by SEBI.

The Noticee contended that there was no market depth by way of sellersfor the scrip and hence the Noticee had to place sell order to cancel its own buy order. From the pattern of trades executed by the Noticee, it is however, observed that the Noticee placed buy orders while earlier buy orders placed by the Noticee werestill pending. This apparently is a contradiction and hence, the said contention is untenable in view of the facts of the case.

b) The Noticee submitted that all the trades were delivery based. The fact that there was actual delivery in self trades executed by the Noticee does not mean that there was actual change of beneficial ownership. In respect of the impugned trades, as the same person is buying and selling the shares, the beneficial ownership remained with the same person.

c) The Noticee contended that the Designated Authority has exceeded his authority by travelling beyond the scope of enquiry. It is noted that the pre enquiry SCN clearly makes an allegation of false/misleading appearance of trading and violations of code of conduct prescribed to the Brokers. In view of the same, I do not agree with the contention of the Noticee. d) The Noticee’s submissions that the self trades are to be seen in the backdrop of their total trade in the scrip during the investigation period cannot be accepted. In the facts and circumstances of the case, the trades during the investigation period are to beconsideredin totality.

e) It is observed from the Report of Designated Authority and the table mentioned above that out of self-trades of 34,596 shares, 21,026 shares were synchronized and which took place on consecutive days. Therefore, I find that the trades cannot be viewed as executed inadvertently.

V. Considering the facts and circumstances narrated above, I find that the Noticee as a sub-broker executed self trades in its own account which resulted in no change in beneficial ownership and such trades had given a false and misleading appearance of trading in the scrip of RTL.

VI. In any case, selftrades perse are illegal and hence fictitious. The Hon'ble Securities Appellate Tribunal (“SAT”) has held in several cases that self trades call for punitive action since they are illegal by their very nature (In re Appeal No. 85/2011- M/s Marwadi Shares and Finance Limited Vs. SEBI 2012 Indlaw SAT 114).It is also relevant to note that the Hon'ble Supreme Court in Civil Appeal No. 11899 of 2014 in the matter of Angel broking Pvt. Ltd. Vs. SEBI (SAT Appeal No. 46 of 2014) upheld SAT’s order of dismissing the appeal filed by the entity on the ground of execution of self trades.

VII. In view of the foregoing, I find that the Noticee has violated the provisions of Clauses A(1), D(4) and D(5) of the Code of Conduct specified in Schedule II of Regulation 15 of Broker Regulations.

13. The following facts are also to be mentioned: The Noticee was trading in the scrip before and after the investigation period. No nexus with any of the group of 23 connected entities has been found. The net Last TradedPrice(LTP) impact of trades of the Noticee was negative.Considering that they are not part of the group of 23 connected entities and the LTP impact as above, no adverse inference is drawn on their contribution to price manipulation.

14. All things considered, I am of the view that the matter may be allowed to rest with a prohibition to take up any fresh assignments for a period of fifteen (15) days.

Order

15. I, therefore, in exercise of the powers conferred upon me by virtue of Section 19 of Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of the Intermediaries Regulations, hereby prohibit Ishita Consultancy Private Limited (SEBI Registration No. INS013262238 and PAN: AABCI2654Q)from taking up any fresh assignments for a period of fifteen (15) days.

16. The enquiry proceedings initiated against Ishita Consultancy Private Limited is disposed of accordingly.

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

Place: Mumbai S. RAMAN Date: March 31, 2016 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA