Order against M. Bhiwaniwala and Co. in the matter of Subh Laxmi Projects Ltd

1. In the wake of unusual price movement noticed in the shares of various companies (with low market capitalization) including one Subh Laxmi Projects Limited (hereinafter referred to as the company) listed on Calcutta Stock Exchange Association Limited (hereinafter referred to as CSE), Securities and Exchange Board of India (hereinafter referred to as SEBI) conducted a preliminary analysis of trading data in respect of buying, selling, dealing in the shares of the company for the period April 21, 2005 to July 07, 2005 (hereinafter referred to as the relevant period). It was inter alia observed that the average share price of the company increased from Rs.25.50/- on April 21, 2005 to Rs.249.90/- on July 07, 2005 (an increase of 880%). SEBI observed that various stock brokers prima facie violated the provisions of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as the PFUTP Regulations) and the provisions of Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations), while dealing in the shares of the company. Subsequently, in order to protect the interest of investors and also the integrity of the securities market, SEBI, vide an ad-interim ex-parte order dated September 29, 2005 inter alia directed various entities/stock brokers including

M/s M. Bhiwaniwala & Co. (for its dealings in the shares of Amluckie Investment Company Limited) not to buy, sell or deal in securities, in any manner, either directly or indirectly, till further directions. The said order was confirmed (as against the stock brokers), by SEBI, vide order dated January 12, 2006.

2. The major findings of the investigation were that most of the trades of certain stock brokers were client to client which have been executed on a single terminal of the same stock broker. The investigation conducted by SEBI had identified three stock brokers, namely, M/s Shyam Lal Sultania, Ahilya Commercial Private Limited and M/s M. Bhiwaniwala & Co. based on their pattern of trading and the volumes contributed by them in the shares of the company during the relevant period. These stock brokers were alleged to have allowed their clients to simultaneously place both buy and sell orders for the same quantity and price, which consequently, led to the price rise and manipulation in the shares of the company. Instances of matching trades between the said stock brokers among themselves have also been noticed. It was inter alia alleged that the trade practices of M/s. M. Bhiwaniwala & Co. (hereinafter referred to as the Broker), while dealing in the shares of the company were unfair and fraudulent and that it had prima facie violated Regulations 4(2)(a),4(2)(e) and 4(2)(o) of PFUTP Regulations and Clauses A(1) to A(4) and Clause B(4)(a) of the Code of Conduct specified in Schedule II of the Broker Regulations and SEBI Circular dated August 26, 2004 while dealing in the shares of the company. Thereafter, SEBI, vide order dated April 04, 2007 read with a subsequent order dated December 10, 2008 appointed an Enquiry Officer under the provisions of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as Enquiry Regulations) to enquire into the alleged violations committed by the Broker. Since, the Enquiry Regulations was repealed with effect from the notification of Securities and Exchange Board of India (Intermediaries) Regulations, 2008, the Designated

Authority (hereinafter referred to as the Enquiry Officer) submitted his report dated April 22, 2009 under the provisions of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 recommending the suspension of the certificate of registration of the Broker for a period of two months. The Enquiry Officer further recommended that the period of prohibition already undergone by the Broker in terms of SEBI orders dated September 29, 2005 and January 12, 2006 may be taken into account for the purpose of computing the recommended penalty. Subsequently, a notice dated April 27, 2009 was issued by SEBI to the Broker advising it to show cause as to why the penalty as recommended by the Enquiry Officer should not be imposed against it. The Broker was also advised to inform whether it would like to avail the opportunity of hearing. A copy of the Enquiry Report was also forwarded to the Broker along with the said notice. The Broker vide letter dated May 18, 2009 inter alia stated “I don’t have any objection against above order of enquiry officer, so please adjust the above recommended suspension from already suspension of three years”.

3. I have considered the Report of the Enquiry Officer, the show cause notice issued to the Broker, the letter of the Broker dated May 18, 2009 and other materials available on record. As the Broker had not indicated its wish to avail of the opportunity for personal hearing, I would not consider it to necessary to provide it an opportunity of hearing and the present proceeding is being considered on the basis of the available material on record. The issue for consideration in the present matter is whether the Broker violated the provisions of PFUTP Regulations, Broker Regulations and the SEBI circular dated August 26, 2004, as observed by the Enquiry Officer. The price increase in the shares of the company as mentioned at para 1 is not in dispute. The stock brokers (including the Broker) mentioned in para 2 above collectively executed trades involving 16,67,690 shares in the company which accounted for approximately 34.24% of the total volume in the shares of the company, during the relevant period. The Broker was found to have transacted in 4,04,840 shares of the company contributing to around 8.31% of the total trading volume in the said shares at CSE, details of which are given below.

Total no. % to No. of % to No. of shares of % to Total Buy & Total shares Total bought shares Sell Buy sold Sell traded 2,28,950 9.4% 1,75,900 7.22% 4,04,840 8.31%

4. The investigation conducted by SEBI observed that, out of the 4,04,840 shares traded by the Broker in the shares of the company, trading in 3,97,150 (98%) shares were in the nature of ‘synchronized deals’. The extent of cross and synchronized deals executed by the Broker are tabulated below:

Cross and Matched transactions Ahilya Name and M/s Shyamlal Commercial address of the Broker sultania Private stock broker Limited Qty % Qty % Qty % Broker 2000 0.5% 397150 98% -- --

The said trade details were further provided to the Broker by SEBI along with the show cause notice issued by the Enquiry Officer.

5. Since, the majority of trades of the Broker were in the nature of synchronized deals, the involvement of the Broker in the price movement in the shares of the company is strikingly evident. The Broker should not have volunteered to be a party to such trades. These trades cannot have been executed unless there was unity of minds of the entities involved in such transactions. The details of the orders which were placed by the Broker along with the time and quantity had been furnished to it, along with the show cause notice issued by the Enquiry Officer. Besides, the said trade details were explained elaborately by the Enquiry Officer in the Enquiry Report. The complicity of the Broker with regard to the synchronized trades is evident from its trading pattern. One more pertinent factor to vindicate the Broker in the manipulative trades is that it had not complied with the ‘Know Your Client’ (KYC) requirements in respect of certain clients namely, Shelter Vyapar Private Limited, Srijan Vyapar Private Limited, Success Vyapar Private Limited and Scope Vyapar Private Limited, for whom the Broker had executed majority of trades (50%) in the shares of the company during the relevant period. The deficiencies noted in the KYC norms had already been explained in detail in the Enquiry Report. The Enquiry Officer had also observed that the authorized representative of the Broker, during the course of hearing admitted the said mistakes in KYC forms, committed by the Broker. I am fully convinced that the Broker had executed trades by placing orders for the same quantity and price within little or no time difference between the corresponding orders, when such orders got matched by synchronization. The Enquiry Officer had given detailed findings in respect of the synchronized as well as other trades of the Broker. Though, the copy of the Enquiry Report was provided to the Broker, no effort was taken by it to controvert such findings. In the facts and circumstances, these trades were found to have been executed only with the intention of manipulating the share price of the company. These trades executed by the Broker were intended to create manipulation in the share price of the company. Needless to say, the trades of the Broker in the shares of the company created misleading appearance of trading.

6. The Broker had traded continuously in the shares of the company in both the buy and the sell positions. Such self trades were squared off without any delivery obligation to CSE. The fact that the majority of the trades of the Broker were synchronized deals indicates the level of involvement of the Broker in executing synchronized trades and in inflating the share price of the company. It is also not in dispute that when the Broker was trading, the share price of the company went up from Rs. 30/- to Rs. 249.50/- Thus, in the facts and circumstances of the case, it can be concluded that the Broker contravened the provisions of Regulation 4 (2)(a), 4(2)(e) of the PFUTP Regulations and the SEBI Circular dated August 26, 2004.

7. By entering into such deceptive transactions, the Broker did not uphold the expected standards of integrity and fairness in its conduct. It also did not exercise due care while executing such transactions. Further, by placing orders in the nature of self trades, the Broker had indulged in deceptive trade practices which are distortive of the market. Needless to say, the Broker failed to act with due skill, care and diligence in the conduct of its business in respect of the transactions in the shares of the company during the period of investigation. By doing so, the Broker had contravened the relevant provisions of law. I, therefore have no hesitation in holding the Broker guilty for having contravened the provisions of Regulation 7 of the Stock Brokers Regulations read with Clause A(1) to A(4) of the Code of Conduct prescribed for stock brokers under Schedule II of the Stock Brokers Regulations. Taking into consideration all the facts and circumstances of the case and the available material on record, I do not find any reason to disagree with the Enquiry Officer and the present proceedings is disposed as ordered herein under. I note that the present case has been initiated under the provisions of the Enquiry Regulations. Though, the Enquiry Regulations was repealed with effect from the notification of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 anything done and any action taken under the Enquiry Regulations before the publication of the 2008 Regulations (mentioned above) in the Official Gazette are deemed to have been done or taken or commenced under the corresponding provisions of the 2008 Regulations. Therefore, this order is being passed under the corresponding provisions of the Securities and Exchange Board of India (Intermediaries Regulations), 2008.

8. I, note that the Broker was prohibited from buying, selling or dealing in securities, in any manner, either directly or indirectly, as per the order of SEBI dated September 29, 2005 read with a subsequent order dated January 12, 2006 as mentioned in para 1 of this order. The said prohibition continued till August 11, 2008, when the directions imposed vide aforesaid orders was subsequently vacated by SEBI. Considering the totality of the facts and circumstances of the case, the recommendation made by the Enquiry Officer and the aforesaid orders, I dispose of the present proceeding as ordered hereinunder.

9. In view of the foregoing, I, in exercise of the powers conferred on me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby, do not deem it necessary to impose any further penalty on the stock broker, namely, M/s. M. Bhiwaniwala & Co, Member, Calcutta Stock Exchange Association Limited (Registration no. INB 030049211)

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Place: Mumbai Date: July 13, 2009