Order against M/s Basant Periwal and Co. in the matter of Nageshwar Investment Ltd

1. In the wake of unusual price movement noticed in the shares of various companies including Nageshwar Investment Limited (hereinafter referred to as the company) listed on Calcutta Stock Exchange Association Limited (hereinafter referred to as CSE), during April 2005 to November 2005 (hereinafter referred to as the investigation period), Securities and Exchange Board of India (hereinafter referred to as SEBI) conducted an investigation into the buying, selling and dealing in the shares of such companies. It was inter alia, observed that some of the stock brokers with the connivance of various clients executed substantial trades (in the form of cross deals/synchronised trades) in the shares of the company which prima facie resulted in the manipulation of the shares of the company. SEBI, inter alia, 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 Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations).

On the basis of the preliminary analysis of trading data, SEBI, vide an ad-interim ex-parte order dated November 30, 2005 inter alia directed various stock brokers, including M/s Basant Periwal & Co. (Member, CSE) not to buy, sell or deal in securities, in any manner, either directly or indirectly, till further directions. Subsequently, the said ex-parte order was confirmed by SEBI, vide order dated May 31, 2006. The investigation had identified certain stock brokers, including M/s Basant Periwal & Co. (hereinafter referred to as the Broker), based on their pattern of trading and the volumes contributed by them in the shares of the company during the investigation period. It was further observed that most of the trade of the said stock brokers were ‘client to client’ and were executed on a single terminal of the same stock broker and the same inter alia led to the manipulation in the shares of the company. It was inter alia alleged that the trade practices of the Broker were prima facie in contravention of the provisions of Regulations 4(2)(a), 4(2)(e) and 4(2)(o) of the 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.

2. Thereafter, an enquiry proceeding was initiated by SEBI 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 aforesaid alleged violations committed by the Broker. Since the aforesaid Regulations was repealed with effect from the notification of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (hereinafter referred to as the Intermediaries Regulations), the Designated Authority (hereinafter referred to as the Enquiry Officer), submitted the Report dated March 20, 2009 in terms of the provisions of the Intermediaries Regulations, recommending the suspension of the certificate of registration of the Broker for a period of six months. The Enquiry Officer further recommended that the period of prohibition already undergone by the Broker in terms of the aforesaid orders of SEBI be considered while imposing the aforesaid penalty. Pursuant to the submission of the Enquiry Report, a show cause notice dated March 25, 2009 was issued by SEBI to the Broker. A copy of the Enquiry report was also forwarded to the Broker alongwith the said show cause notice. The Broker was also advised to inform whether it would like to avail of an opportunity for hearing. Though, the said notice was acknowledged by the Broker, it failed to submit any reply. Thereafter, SEBI granted various opportunities to the Broker, vide letters dated June 23, 2009 and August 24, 2009. However, even after the receipt of the said letters, the Broker chose not to respond. Though, the Broker was specifically advised to inform in case, it wished to avail of a hearing, no response was received from it. In view of the deliberate act on the part of the Broker in not responding to the aforesaid notice/letters, I do not consider it necessary to grant another opportunity to the Broker and therefore, proceed with the matter on the basis of the Enquiry report, the show cause notice dated March 25, 2009 (including the subsequent letters) issued to the Broker and other material available on record, in terms of the provisions of the Intermediaries Regulations.

3. The findings of the SEBI investigation which are not disputed before me are given below, in brief: a. the average share price of the company increased from Rs.12.70/- to Rs.42.95/-. b. the trades of the stock brokers, namely, M/s Binoy Poddar, M/s Shyam Lal Sultania, M/s P K Agarwal & Co. and the Broker accounted for around 57% of the total trading in the shares of the company at CSE. c. The Broker was found to have transacted in 31,61,955 shares of the company at CSE, as given below:

% to % to Total Total no. No. of % to Total No. of shares Total Buy & of shares shares Buy at CSE sold Sell at Sell at traded bought CSE CSE 26,43,151 83.60% 5,18,804 16.40% 31,61,955 19.62% d. Out of the above 31,61,955 shares traded by the Broker, trades for 21,18799 shares resulted out of cross/synchronised trades, as mentioned below:

Cross and Matched transactions Name of the stock M/s Shyam M/s P.K Agarwal & Co. broker Broker Lal Sultania Qty % Qty % Qty % Broker 2,22,798 7% 1,87,951 6% 17,08,050 54%

4. From the extracts of the trade log received from CSE in respect of the trades of the Broker, I note that the cross/synchronised trades of the Broker in the shares of the company had an impact in increasing the share price of the company. The Broker executed cross deals (which accounted for 7% of the total volume in the shares of the company at CSE) between the price range of Rs. 14.10 to Rs. 51.10 and that its synchronised trades witnessed the prise rise from Rs. 12.40 to Rs.54/-. Further, as observed by the Enquiry Officer, the Broker had close nexus with some of its major clients which had dealt in the shares of the company during the investigation period, apart from the stock broker–client relationship. A few of such links are given below:

a. Mr. Ram Chandra Singh, director of Delton Exim Private Limited and Gateway Computer Private Limited (clients of the Broker)], shared the same address as that of Mr. Naba Kumar Pal who was the director of Tricon Business Private Limited (one of the clients) and also the director of the company. b. Gateway Computer Private Limited shared the address as that of the registered address of the company.

5. The Broker was found to have placed both buy and sell orders of identical quantity and price in such a way that its buy orders matched with its corresponding sell orders resulting in trades. Though, the details of the matching transactions of the Broker in the shares of the company were provided to the Broker it did not controvert the findings of the Enquiry Officer with regard to the same. It is pertinent to note that there was close nexus between the Broker, its clients and the company and the substantial trades executed by the Broker were the outcome of such close relationship. The Broker had also executed trades for a client which had direct connection with the company by way of common director. Besides, one of its clients shared the registered office address of the company itself. These undisputed factual positions are more than sufficient to establish the malafide intention of the Broker while trading in the shares of the company during the investigation period. Some of its trades were cross deals/self trades. In a cross deal, the stock broker would be aware of both the clients (buy and sell) and the execution of trades would be pursuant to such knowledge.

The large number of synchronised/cross deals executed by the Broker in the shares of the company cannot have been done without a prior meeting of minds before its execution. The Broker had traded continuously in the shares of the company in both the buy and the sell positions during the investigation period. The fact that the Broker had executed various cross deals/synchronised trades in the shares of the company would indicate the level of its involvement in manipulating and inflating the share price of the company. These trades have to be seen in the backdrop of the undisputed close relationship that existed among the Broker, clients and the company. 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. Thus, the Broker was a necessary party in the execution of such pre planned trades. It cannot absolve itself from the liability. Needless to say, the said trades inter alia created misleading appearance of trading in the market and resulted in the manipulation in the share price of the company and artificial price increase in the shares of the company.

The Enquiry Officer had given detailed findings in respect of the violations committed by the Broker. The Broker has not taken any effort to controvert such findings.

6. Besides, the violation of the provisions of the PFUTP Regulations, by entering into such deceptive transactions which distorted the market mechanism, the Broker did not uphold the standards of integrity and fairness in its conduct expected of a prudent intermediary functioning in the securities market. It also did not exercise due care while executing trades in the shares of the company. 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. In the facts and circumstances, I do not have any hesitation in concurring with the findings of the Enquiry Officer that the Broker violated the provisions of Regulations 4(2)(a), 4(2)(e) and 4(2)(o) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 and Clauses A(1) to A(4) and Clause B(4)(a) of the Code of Conduct prescribed for stock brokers specified under Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992, while dealing in the shares of the company during the investigation period. The said violations call for a deterrent penalty. I note that the Broker was prohibited from buying, selling or dealing in securities, in any manner, either directly or indirectly, as per the orders of SEBI dated November 30, 2005 read with a subsequent order dated May 31, 2006. The said prohibition continued till August 11, 2008, when the directions imposed vide aforesaid orders was subsequently vacated by SEBI as stated therein. Taking into consideration, all the facts and circumstances of the case and the period of prohibition already undergone by the Broker, I do not find any reason to disagree with the recommendation of the Enquiry Officer and accordingly, the present enquiry proceeding initiated against M/s. Basant Periwal & Co. in respect of its dealings in the shares of Nageshwar Investment Limited during the period April 2005 to November 2005, is disposed of is disposed of as ordered hereinbelow, in terms of the provisions of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

7. In view of the foregoing, I, 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 Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby impose a penalty of suspension of the certificate of registration of the stock broker namely, M/s. Basant Periwal & Co. (Registration No. INB030050513), Member, Calcutta Stock Exchange Association Limited, for a period of six months. However, the same is set off against the period of prohibition already undergone by the said stock broker and no further penalty would be required to be undergone by the said stock broker.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Place: Mumbai Date: October 26, 2009