Order against Mukesh Babu Securities Ltd for its dealings in the shares of HFCL, ZTL and GTL

1.1 Securities and Exchange Board of India (hereinafter referred to as “SEBI”) conducted investigations into the affairs related to buying, selling and dealing in the shares of Himachal Futuristic Communications Ltd.

(hereinafter referred to as HFCL), Zee Telefilms Limited (hereinafter referred to as Zee) and Global Telesystems Ltd., (hereinafter referred to as GTL) during the period April 01, 2000 to March 31, 2001.

1.2 Investigations revealed that the orders placed by Mukesh Babu Securities Ltd. (hereinafter referred to as “MBSL”) member, Bombay Stock Exchange Limited (hereinafter referred to as “BSE”) and the National Stock Exchange of India Limited (hereinafter referred to as “NSE”) on behalf of the entities connected or controlled by Shri Ketan V. Parekh and Shri Kartik K. Parekh (hereinafter referred to as “KP/Ketan Parekh entities”) got matched with select counterparty brokers who also acted on behalf of KP entities. It was observed that such matched orders of the counterpart brokers were put on behalf of either same KP entity or different set of KP entities thereby resulting in circular trading.

1.3 MBSL was found to have failed to exercise due skill and care in its dealings on behalf of its client which were related to Ketan Parekh and it was alleged that MBSL aided and abetted KP entities in circular trading thereby creating artificial market. It was therefore alleged that MBSL while executing fictitious deals in the scrips mentioned above, violated Regulation 4 (b),(c) (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred to as “PFUTP Regulations”) and clause A (1)and (2) of the Code of Conduct specified in Schedule II under Regulation 7 of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as the “Stock Brokers Regulations”)

1.4 Accordingly, an Enquiry Officer was appointed vide order dated October 20, 2004 under Regulation 5 (1) 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 violations alleged to have been committed by MBSL. The Enquiry Officer conducted the enquiry in terms of the Enquiry Regulations and found that the actions of MBSL were violative of Regulation 4 (b), (c) and (d) of the PFUTP Regulations and clause A (2) of the Code of Conduct specified under Schedule II read with Regulation 7 of Stock Brokers Regulations. The Enquiry Officer submitted his report dated May 24, 2005 recommending a penalty of suspension of certificate of registration of MBSL for a period of one month.

1.5 Based on the recommendations of the Enquiry Officer, a show cause notice dated June 7, 2005 along with a copy of the enquiry report was forwarded to MBSL in terms of Regulation 13(2) of the Enquiry Regulations advising it to show cause as to why action as recommended by the Enquiry Officer should not be taken against them.

1.6 MBSL vide letter dated June 24, 2005 replied to the said show cause notice inter alia stating as under: i. On perusal of the trade logs, it was found that the same is beyond the ambit of investigation as it takes into account the transactions executed during the period October 1999 – March, 2000 whereas the Investigation Order is limited to trade done between the period of April 2000 to 31st March 2001. ii. MBSL purely acted as a broker on the instructions of its clients to earn its legitimate brokerage. Further, while executing trades, MBSL had duly discharged the obligations enjoined upon it by the Rules and Regulations of SEBI/ BSE.

iii. MBSL had no connection or relationship of any nature either with KP or any of the KP entities. It had executed the transactions through its sub-brokers and it did not have any direct relationship with the clients (KP entities). iv. All the transactions of MBSL including the transactions done on behalf of KP entities were done through the trading system of BSE i.e. (BOLT) and NSE (NEAT). In screen based transactions, it is highly impossible to ascertain the counter party broker. As required by the Rules, Regulations and Bye–Laws, contract notes / Bills were issued in support of the transactions and there has been effective transfer of beneficial ownership in the shares. v. MBSL has done only 29 trades in HFCL and GTL during the period under investigation i.e. 6 trades in the scrip of GTL and 23 trades in the scrip of HFCL. With regard to the trades in the GTL, the Enquiry Officer himself has not recommended any penalty against MBSL on the ground that there few number of trades (6) cannot be regarded as sufficient proof to hold that the member had executed synchronised deals in the said scrip. It was further submitted that MBSL had done only 23 trades in this scrip of HFCL and it was ensured that the beneficial ownership was effectively transferred. vi. The trade time and order time indicated in the show cause notice does not show difference of even one second which was apparently impossible. vii. The provisions of Rule 3(2) of SEBI (Criteria for Fit and Proper Person) Regulations 2004 are not applicable or attracted in the present case.

2.1 An opportunity of personal hearing was granted to MBSL before me on September 8, 2006 wherein Shri S.H. Merchant, Advocate and persons mentioned on first page of this order appeared and made submissions on behalf of MBSL. MBSL further submitted its written submissions dated September 13, 2006 which are similar to its submissions dated June 24, 2005.

3.1 I have carefully examined the investigation report, enquiry report, the show cause notice and the submissions of MBSL and other material on record and my findings are as under:

3.2 At the outset, I note that MBSL has raised the contention that the Enquiry Report is predetermined and beyond the scope of show cause notice as regards the investigation period. From the documents available on record and taking them on their face value, and perusal of Annexure B to the show cause notice dated November 8, 2004, I find that the trades executed by MBSL in the scrip of HFCL during the period October 1999 – March 2000 were provided as annexures to the show cause notice which forms part of the show cause notice. MBSL was put on guard as to the material proposed to be relied upon by SEBI while giving an opportunity to rebut the charges. Therefore, this technical objection is not sustainable.

3.3 I find that the shares of HFCL and GTL were sold by the entities associated with Shri Ketan Parekh namely, Classic Credit Ltd. (Classic Credit), Luminant Investment Pvt. Ltd. (Luminant) and Panther Fincap & Management Services Ltd. (Panther Fincap) through the brokers CSFB Securities Ltd. (CSFB) and DKB Securities Ltd. (DKB). These shares were bought through different brokers including MBSL either by the same KP entities namely, Classic Credit and Panther Fincap or by other KP entities namely, Saimangal Investrade Ltd. (Saimangal), NH Securities Ltd. (NH Securities – proprietary account), Classic Shares and Stock Brokers Ltd. (Classic Shares – proprietary account) and Chitrakut Computers Pvt. Ltd. (Chitrakut).

3.4 On perusal of the trade log and order log, I observe that apparently buy and sell brokers had put orders with prior understanding with a view to ensure that sell order of one set of KP entities matched with the buy order of other set of KP entities / same set of KP entities. By entering into these synchronised deals, shares sold by KP entities were again purchased back by KP entities which resulted in circular trading.

3.5 I find that the transactions of KP entities were financing transactions but given the colour of purchase and sale of shares. It is observe that all these transactions were merely being passed from one KP entity to same or another KP entities. In fact KP entity executed such non-genuine transactions to cover up financing transactions, which resulted in misuse of stock exchange mechanism. MBSL was a counterparty broker for some synchronised/structured deals executed by KP entities in the scrip of HFCL. In this regard, I note that there was some typographical error regarding timings of trade mentioned in the table given in the show cause notice as well as the Enquiry Report which has been pointed out by the noticee also. From the factual verification of the trade and order logs obtained from the stock exchanges, I note that though there was a zero time difference between the placing of buy and sell orders with respect to some trades as alleged, there were some orders wherein there was very negligible time difference. In this regard, it may be mentioned that a broker does have the record of time of placing of this order and also actual time of its execution. From the said details (revised table given below) it is very clear that the broker had a role in synchronisation of few trades done by the KP entities.

Settlem Trade Trade Trade Order Order Time Buy/ Member Counter Client Qty Price ent No. Date No Time Number Time diff. Sell Name Party Name Name betwe en buy & sell order 1999035 16-Nov-99 19614 11:22:19 85040040 11:22:18 0:00:00 S C J Dalal Mukesh CCL 11600 356.85 Babu Sec

Settlem Trade Trade Trade Order Order Time Buy/ Member Counter Client Qty Price ent No. Date No Time Number Time diff. Sell Name Party Name Name betwe en buy & sell order 16-Nov-99 19614 11:22:19 450030160 11:22:18 B Mukesh C J Dalal CCL 11600 356.85 Babu 1999036 26-Nov-99 37989 12:13:06 85040044 12:13:03 0:00:03 B C J Dalal Mukesh CCL 21200 409.50 Babu Sec 26-Nov-99 37989 12:13:06 450030357 12:13:06 S Mukesh C J Dalal CCL 21200 409.50 Babu Sec 2000012 16-Jun-00 149931 11:30:55 850040000 11:30:55 0:00:00 B C J Dalal Mukesh CCL 35000 1503.50 0000510 Babu Sec 16-Jun-00 149931 11:30:55 450003000 11:30:55 S Mukesh C J Dalal CCL 35000 1503.50 00001400 Babu Sec (17400) 2000030 16-Oct-00 19167 14:09:49 248003000 14:09:48 0:00:00 S Hem Sec Mukesh PFMS 21460 1081 10001600 Babu Sec 16-Oct-00 19167 14:09:49 450003000 14:09:48 B Mukesh Hem Sec PFMS 21460 1081 10006100 Babu Sec (15000) 2000032 27-Oct-00 30494 15:28:17 248003000 15:28:16 0:00:00 S Hem Sec Mukesh PFMS 19063 1179 10001800 Babu Sec 27-Oct-00 30494 15:28:17 450003000 15:28:16 B Mukesh Hem Sec PFMS 19063 1179 10006700 Babu Sec 2000032 03-Nov-00 171447 13:36:52 850040001 13:36:52 0:00:01 B C J Dalal Mukesh PFMS 59732 1320.5 0002680 Babu Sec 03-Nov-00 171447 13:36:52 450003000 13:36:51 S Mukesh C J Dalal PFMS 59732 1320.5 10007100 Babu Sec 2000035 21-Nov-00 46450 14:08:39 405046000 14:08:38 0:00:01 S Latin Mukesh PFMS 24394 1294.3 00001200 Manharl Babu Sec al 21-Nov-00 46450 14:08:39 450003000 14:08:39 B Mukesh Latin PFMS 24394 1294.3 10008000 Babu Sec Manharlal 2000016 10-Jul-00 8656 12:38:17 850040000 12:38:16 0:00:01 S C J Dalal Mukesh PFMS 19208 1337.00 0000970 Babu Sec 10-Jul-00 8656 12:38:17 450003000 12:38:17 B Mukesh C J Dalal PFMS 19208 1337.00 00002100 Babu Sec 2000018 27-Jul-00 165513 14:46:13 850040000 14:46:05 0:00:07 B C J Dalal Mukesh PFMS 18540 1368.00 0001230 Babu Sec 27-Jul-00 165513 14:46:13 450003000 14:46:12 S Mukesh C J Dalal PFMS(50 18540 1368.00 00002800 Babu Sec 00) 2000020 11-Aug-00 190437 15:08:54 850040000 15:08:54 0:00:00 B C J Dalal Mukesh PFMS 29950 1439.00 0001440 Babu Sec 11-Aug-00 190437 15:08:54 450003000 15:08:54 S Mukesh C J Dalal PFMS 29950 1439.00 00003200 Babu Sec 2000023 29-Aug-00 49567 14:06:47 450003000 14:06:47 0:00:00 B Mukesh Milan PFMS 28510 1422.50 10004000 Babu Sec Mahendra Sec 29-Aug-00 49567 14:06:47 460012000 14:06:47 S Milan Mukesh PFMS 28510 1422.50 10000700 Mahendr Babu Sec a Sec

Settlem Trade Trade Trade Order Order Time Buy/ Member Counter Client Qty Price ent No. Date No Time Number Time diff. Sell Name Party Name Name betwe en buy & sell order 2000026 22-Sep-00 195914 10:44:13 450003000 10:44:13 0:00:00 S Mukesh Milan PFMS 11554 1390.00 10005100 Babu Sec Mahendra Sec 22-Sep-00 195914 10:44:13 460012000 10:44:13 B Milan Mukesh PFMS 11554 1390.00 10001000 Mahendr Babu Sec a Sec 2000043 19-Jan-01 192496 10:17:46 850040001 10:17:46 0:00:00 B C J Dalal Mukesh PFMS 60000 1188.5 0003730 Babu Sec 19-Jan-01 192496 10:17:46 450003000 10:17:46 S Mukesh C J Dalal PFMS 60000 1188.5 10011100 Babu Sec 2000043 19-Jan-01 200949 11:31:45 405046000 11:31:45 0:00:00 B Latin Mukesh PFMS 14410 1193.5 00001700 Manharl Babu Sec al 19-Jan-01 200949 11:31:45 450003000 11:31:45 S Mukesh Latin PFMS 14410 1193.5 10011100 Babu Sec Manharlal 2000044 25-Jan-01 133188 14:46:39 405046000 14:46:39 0:00:01 B Latin Mukesh PFMS 45550 1237.5 00001900 Manharl Babu Sec al 25-Jan-01 133188 14:46:39 450003000 14:46:38 S Mukesh Latin PFMS 45550 1237.5 10011700 Babu Sec Manharlal 2000045 02-Feb-01 163829 11:28:30 248003000 11:28:29 0:00:00 B Hem Sec Mukesh PFMS 21650 1073 10003200 Babu Sec 02-Feb-01 163829 11:28:30 450003000 11:28:29 S Mukesh Hem Sec PFMS 21650 1073 10012100 Babu Sec 2000045 02-Feb-01 168919 12:21:53 248003000 12:21:52 0:00:01 B Hem Sec Mukesh PFMS 10000 1077.8 10003200 Babu Sec 02-Feb-01 168919 12:21:53 450003000 12:21:53 S Mukesh Hem Sec PFMS 10000 1077.8 10012200 Babu Sec 2000046 09-Feb-01 209865 14:47:23 405046000 14:47:23 0:00:00 B Latin Mukesh PFMS 91473 990 00002100 Manharl Babu Sec al 09-Feb-01 209865 14:47:23 450003000 14:47:23 S Mukesh Latin PFMS 91473 990 10012900 Babu Sec Manharlal 2000046 09-Feb-01 209922 14:47:55 405046000 14:47:54 0:00:01 B Latin Mukesh PFMS 46709 990 00002100 Manharl Babu Sec al 09-Feb-01 209922 14:47:55 450003000 14:47:55 S Mukesh Latin PFMS 46709 990 10012900 Babu Sec Manharlal 2000047 16-Feb-01 150213 11:49:14 248003000 11:49:13 0:00:00 B Hem Sec Mukesh PFMS 98224 970 10003500 Babu Sec 16-Feb-01 150213 11:49:14 450003000 11:49:13 S Mukesh Hem Sec PFMS 98224 970 10013400 Babu Sec

3.6 In addition to the above, MBSL was involved in following synchronised trades in HFCL, where counterparty brokers were DKB or CSFB and the clients were KP entities who had traded on both buy as well as the sell side as per the following table:

Sell Sell Buy Sell Buy Memb Exchan Trade Trade Trade Buy Member Buy Sell Sell Order Buy Order Order Order Order Order Trade Date ge Time Price Qty Name client er client Sell order No. Buy order No. Time Time qty qty price price CSFB Prop. 03-Aug-00NSE 10:16:11 1483.50 18512Mukesh Babu PFMS CSFB A/c 200008100108677 200008100108700 10:15:26 10:16:11 25000 25000 1483.50 1483.50 11-Dec-00BSE 13:54:31 1515.00 55311Mukesh Babu PFMS DKB CCL 27600200010019175 45000100010016467 13:54:27 13:54:31 150000 60000 1515.00 1515.15 26-Dec-00BSE 14:47:10 1129.00 43859Mukesh Babu PFMS DKB CCL 27600100010000936 45000300010009928 14:47:09 14:47:08 50000 50000 1129.00 1129.00

3.7 From the above, it is observed that all these transactions were executed almost at the same time. Summary of the time difference between the buy /sell orders of the said transactions is as follows :

Time difference between buy Number of trades and sell orders (in seconds) Nil 12 1 7 3 1 7 1 4 1 45 1 Total 23 3.8 From the pattern of these trades, it appears orders were put with prior understanding to ensure that the sell order of one KP entity matched with the buy order of same or other set of KP entities. In this process, the shares sold by KP entities were bought back by KP entities.

3.9 From the analysis of the trade and order log in GTL, I observe that at 6 occasions, the buy and sell orders were put almost at the same time with the same price and quantity. Further the buying and the selling client was the same viz., Panther Fincap, except in one instance where the buying client was Classic Credit. The buy and sell order of Panther

Fincap were apparently put with prior understanding with a view to ensure that the buy and sell orders of Panther Fincap matched amongst themselves. In this process, the shares sold by Panther Fincap were purchased back by Panther Fincap thereby creating artificial volume without any change in beneficial ownership.

3.10 Regarding the relationship of MBSL with KP entities, I note that Shri Mukesh Babu, Chairman of MBSL in his statement dated December 23, 2003 to the investigating officer of SEBI admitted that it had traded on behalf of Classic Credit and also entered into certain loan transactions with Panther Fincap purportedly for providing temporary accommodation to them. The orders on behalf of these clients were entered into by Shri Maniar, sub broker of MBSL who introduced Classic Credit to MBSL. Mukesh Babu further admitted that they did not collect margin money specifically for the trades executed on behalf of the KP entities as they had been dealing with them since 1991 and the KP entities were having their DP accounts with MBSL. In this context, I refer to the circulars dated November 18, 1993 and May 17, 2002 issued by SEBI in mandating the collection of margin by brokers. A broker who is a registered intermediary is required to maintain market integrity and is expected to follow rules laid down in this regard, which MBSL has failed to observe.

3.11 The purpose of collecting margin from the client is primarily to minimise the risk of default and for ensuring efficient functioning of the securities market. Admittedly Rs. 16 lakh were due on account of margin from Classic Credit as on the date of statement i.e. December 23, 2003. In any case, primarily, the submissions of the broker that it was comfortable dealing with the clients without collecting specific margins as it had been dealing with them since 1991, is not acceptable as the said omission was potentially risky apart from being in violation of SEBI Circular referred above and Code of Conduct prescribed for a Broker.

3.12 The above transactions for KP entities were in the nature of circular and fictitious trades which created artificial volume and artificial markets in the scrips. I therefore concur with the findings of Enquiry Officer that these transactions were non-genuine and involved no change in the beneficial ownership of shares as such i.e. the shares were merely rotating from one KP entity to same or other KP entities. The transactions executed by MBSL on behalf of KP entities created false and artificial volume in the market in the scrip of HFCL and I have no doubt in concluding that these actions of are violative of Regulation 4 (b), (c) and (d) of the PFUTP Regulations.

3.13 Further, from the analysis of order log and trade log of transactions made by Classic Credit, Luminant and Panther Fincap through CSFB, I find that in as many as 23 instances entire quantity or almost entire quantity of sell order of Classic Credit, Luminant and Panther Fincap put through CSFB matched with buy orders of KP entities placed through MBSL.

3.14 I have noted the submission of MBSL that the said trades were executed by them based on the orders from their clients who had good reputation in the market at that point of time and all necessary requirements like broker-client agreement were entered into. MBSL further stated that in all the transactions it ensured that the beneficial ownership was effectively transferred. I find this contention of MBSL incorrect as the trades executed by MBSL in the scrip of HFCL on behalf of KP entities which are discussed earlier show that the buying and the selling clients are the same i.e either Classic Credit or Panther Fincap which indicates that there is no change in beneficial ownership. Moreover by synchronizing the orders the brokers ensured that the trades were executed amongst KP entities.

3.15 As regards relationship between MBSL and KP entities, in light of the facts recorded in para 4.10 (supra), it is established that the relationship between MBSL and KP entities was more than that of the broker-client relationship considering the financial accommodation provided to the clients and non-collection of margins.

3.16 The defense with regard to anonymity of the counter party broker on a screen based computerized system is also not always acceptable because the fact as to whether there was a deliberate attempt to synchronize or not, can only be made out from the peculiar facts and circumstances of each case. In the present case, admittedly MBSL was aware that his clients were belonging to the KP group at the time of executing the transactions. MBSL allowed them to trade in the shares of HFCL substantially without collecting any margin.

3.17 Further, the large number of synchronized transactions over a period of time and non collection of margin from the KP entities clearly indicate that MBSL failed to exercise due skill and care as mandated under the provisions of clause A(2) of Schedule II read with Regulation 7 of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992. In view of the same it is found that MBSL violated the provisions of Clause A(2) of the Code of Conduct for Stock Brokers enumerated under Schedule II under

Regulation 7 of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.

3.18 Taking an overall view of the present matter, it is observed that MBSL executed 23 synchronised trades in the scrip of HFCL for KP entities in the span of 17 months. Apparently, this may not be very significant considering the large number of synchronised trades executed by KP entities in various scrips including HFCL during the relevant period. However, all who have knowingly or unknowingly/ directly or indirectly assisted KP entities in their market manipulation, have to take blame to the extent of their acts of omissions or commissions. To that extent, I do not have any hesitation to hold that the broker failed to exercise due diligence mandated in clause A (2) of the Code of Conduct as per Schedule II of the Stock Broker Regulations.

3.19 I note that pursuant to some enforcement action (for similar violations) SEBI vide order dated September 10, 2004 had suspended the certificate of registration of MBSL for a period of one year. The appeals filed against this order is pending before the Hon’ble SAT. In any view of the matter it is made clear that the present order is independent of the earlier proceedings/ order and MBSL is liable to undergo the penalty imposed vide this order independently.

3.20 Therefore in facts and circumstances of the case, in exercise of the powers conferred upon me in terms of Section 19 of the SEBI Act, 1992 read with Regulation 13(4) of the Enquiry Regulations, I hereby impose a penalty of suspension of certificate registration for a period of one day on Mukesh

Babu Securities Limited, member of BSE (SEBI Regn no.010598234) and NSE (SEBI Regn no. INB01093056 (PAN No AAACM6030F)

This order shall come into force immediately on the expiry of twenty one days from this order.

PLACE: MUMBAI T.C. NAIR DATE: 20/02/2008 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA