Order against M/s Rajendra Prasad Shah in the matter of Bankam Investment Ltd

1. Pursuant to the unusual price movement noticed in the shares of various companies (with low market capitalization) including Bankam Investment Limited (hereinafter referred to as the company) listed on Calcutta Stock Exchange Limited (hereinafter referred to as CSE), during June 2005 to September 2005, the Securities and Exchange Board of India (hereinafter referred to as SEBI) conducted a preliminary analysis of the trading data in respect of buying, selling, dealing in the shares of such companies. It was inter alia found that the average share price of the company increased from Rs. 2.10/- to Rs.16.85/- between June 9, 2005 and September 16, 2005 (hereinafter referred to as the investigation period). It was prima facie observed that some of the stock brokers had allowed their clients (who in some cases were they themselves) to place simultaneous buy and sell orders of same quantity at the same price to facilitate the matching transactions. 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).

Thereafter, SEBI, vide an ad-interim ex parte order dated September 29, 2005 inter alia directed various stock brokers, including the stock broker namely, M/s Rajendra Prasad Shah (Member, CSE) not to buy, sell or deal in securities, in any manner, either directly or indirectly, till further directions. Subsequently, SEBI, after affording an opportunity of hearing to the aggrieved persons, vide order dated January 12, 2006, confirmed the directions passed vide ad-interim order dated September 29, 2005, as stated therein. The investigation conducted by SEBI found that primarily two stock brokers namely, M/s Rajendra Prasad Shah (hereinafter referred to as the Broker) and M/s Badri Prasad & Sons collectively executed substantial trades in the shares of the company at CSE during the investigation period and that their cumulative trades accounted for more than 98.70% of the volume of the shares of the company at CSE. Out of that, the trades of the Broker involved 1,53,500 shares which accounted for 53.40% of the total volume. It was observed that the Broker had executed synchronised trades and cross deals in the shares of the company, which accounted for 21.82% and 78.18% respectively of its total trades in the shares of the company.

It was alleged that the Broker had contravened 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 B(4)(a) of the Code of Conduct specified in Schedule II of the Broker Regulations.

2. Accordingly, SEBI, vide order dated January 4, 2007 read with a subsequent order dated November 19, 2007 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 (since repealed) to enquire into the aforesaid alleged violations. The Enquiry Officer, submitted the Report dated July 10, 2009 in terms of the provisions of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 recommending the suspension of the certificate of registration of the Broker for a period of six months. The Enquiry Officer further recommended that the suspension period may be set off against the period of prohibition already undergone by the Broker, in terms of SEBI orders dated September 29, 2005 and January 12, 2006. Pursuant to the submission of the Enquiry Report, a notice dated July 16, 2009 was issued by SEBI to the Broker requiring it to show cause as to why the penalty as recommended by the Enquiry Officer or as considered appropriate should not be imposed against it.

The Broker was also advised to inform whether it would like to avail an opportunity of hearing. Though, the notice was acknowledged by the Broker on the same date, no reply was received from it. Therefore, a reminder was sent by SEBI to the Broker on August 20, 2009. The said letter was also acknowledged by the Broker on August 24, 2009. Subsequently, the Broker vide letter dated September 15, 2009, stated that it would be filing the reply after October 5, 2009, for the reasons stated therein. In view of the failure of the Broker to file the reply as stated above, a reminder was again issued to the Broker, on October 14, 2009. Thereafter, the Broker, vide letter dated October 29, 2009 informed SEBI, that it had misplaced the show cause notice and requested for a copy of the same so as to enable it to file the reply. In view of the said request, a copy of the show cause notice dated July 16, 2009 was sent to the Broker, which was acknowledged by the Broker on February 20, 2010. Despite the receipt of the show cause notice, no reply was sent by the Broker till date. I note that sufficient opportunities were provided to the Broker by SEBI to enable it to make its submissions.

However, the Broker chose not to respond. In view of the above, I do not consider it necessary to provide another opportunity to the Broker and the present proceeding is being considered on the basis of the available material on record.

3. It is not in dispute that the average share price of the company at CSE had increased from Rs.2.10/- to Rs.16.85/- (a rise of 702%) during the investigation period. The trades of the Broker had accounted for 53.40%, as given below:

No. of shares % to total No. of shares % to total sell Total no. of % to total buy and sale bought buy volume sold volume at shares at CSE CSE 93,500 65.05% 60,000 41.74% 1,53,500 53.40%

It was also noted that majority of the trades of the Broker was crossed/synchronized, the details of which are given below:

Cross and Match 0.transactions Name of the stock Broker M/s Badri Prasad & Sons broker Qty % Qty % Broker 1,20,000 78.18% 33,500 21.82%

The details of such trades were provided to the Broker by the Enquiry Officer. Besides, the same were examined and considered in detail by the Enquiry Officer while giving his findings. The trades of the Broker created misleading appearance of trading in the securities. By executing number of cross deals (from the same terminal at the same time, price and quantity), the Broker distorted the price matching mechanism of the stock exchange. Needless to say, the trades of the Broker had impacted the price of the shares of the company during the investigation period. Such acts of the Broker pose serious threat to the functioning to the securities market, which SEBI, as a Regulator, cannot allow. The Enquiry Officer had given detailed findings in respect of the violations committed by the Broker. Though, the copy of the Enquiry Report was provided to the Broker along with the show cause notice dated July 16, 2009, it had not taken any efforts to controvert such findings. I also note that the Broker did not participate in the enquiry. Thus, the Broker did not dispute the execution of its trades in the shares of the company and also the findings of the Enquiry Officer in respect of such transactions. It would be pertinent to note that most of the trades of the Broker were cross deals. As both buy and sell orders were placed through its own terminals, the Broker was a necessary party in the execution of such pre-planned trades. Besides, the Broker had also executed synchronised trades in the shares of the company. Execution of large number of cross/synchronised trades, as has happened in the present case, cannot be possible without a prior meeting of minds. The same would, in the facts and circumstances of the case, establish the level of involvement of the Broker in the manipulation of the share price of the company. The Broker was very much a necessary party in the execution of such cross/synchronised trades which had conveyed a misleading appearance of trading and resulted in the manipulation of the share price of the company. Further, it has to be inferred that the Broker had encouraged the clients to deal in the securities solely with the object of enhancing his brokerage. Thus, it can be concluded that the Broker contravened the provisions of Regulations 4(2)(a), 4(2)(e) and 4(2)(o) of the PFUTP Regulations.

4. In terms of the provisions of the Clauses A(1) to (4) of the Code of Conduct prescribed under the provisions of the Broker Regulations, a stock broker shall not inter alia create false market or indulge in any act detrimental to the investors’ interest or which leads to the interference with the fair and smooth functioning of the securities market. The stock broker shall also maintain high standards of integrity, promptitude and fairness and shall act with due skill, care and diligence in the conduct of his business. It is also a requirement that a stock broker shall not inter alia indulge in manipulative transactions with a view to distort the market equilibrium. In the present case, the trades of the Broker (as explained in detail above) created a misleading appearance of trading in the shares of the company. It also manipulated the share price of the company by vitiating the price discovery mechanism in the securities market. This would further establish that the Broker, instead of maintaining the Code of Conduct, became a party to the manipulation in the shares of the company to the detriment of genuine investors. A Stock broker is expected to protect the interest of the investors in the securities market and he is required to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings as specified in the Code of Conduct of the Broker Regulations. An intermediary who fails to perform such duties has to be penalised in accordance with law. By indulging in manipulative transactions, as stated earlier, the Broker did not uphold the expected standards of integrity and fairness in its conduct. Further, it has to be inferred that that the Broker had encouraged sales/purchases of the securities with the sole object of generating brokerage/commission. Thus, the violation of Clauses A(1) to (4) and B(4)(a) of the Code of Conduct in Schedule II of the Broker Regulations stands established. The involvement of the Broker in the manipulation of the shares of the company, in the facts and circumstances cannot be viewed leniently.

5. 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. The said prohibition continued till August 11, 2008, when the directions imposed, vide the aforesaid orders were vacated by SEBI, as stated therein. Taking into account 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. As, the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations,2002 has been repealed, I dispose of the present proceeding under the provisions of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, as ordered hereinbelow:

6. 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 suspend the certificate of registration of the stock broker, M/s Rajendra Prasad Shah (Registration No. INB 030054010), Member, The Calcutta Stock Exchange Limited, for a period of six months.

7. In view of the fact that the aforesaid stock broker was prohibited to deal in securities, vide orders of Securities and Exchange Board of India dated September 29, 2005 and January 12, 2006 till the same was vacated vide order dated August 11, 2008, I hereby direct that the penalty as ordered above in paragraph 6 is set off against the aforesaid period of prohibition and need not be undergone separately by the said stock broker.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

PLACE: MUMBAI DATE: JUNE 16, 2010