Order against Pramod Kumar Kothari in the matter of M/s Adinath Bio-Labs Ltd

Appearance: Mr. Pramod Kumar Kothari for M/s Pramod Kumar Kothari.

For Securities and Exchange Board of India : Mr. Jayanta Jash, General Manager Mr. Vijayakrishnan G, Assistant Legal Advisor Mr. Mrithyunjay Behera, Manager.

1. In the wake of unusual price movement noticed in the shares of various companies (with low market capitalization) including Adinath Bio-Labs 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, 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 such companies. It was inter alia found that the average share price of the company increased from Rs.20.80/- to Rs.88/- (an increase of 323%) during the period May 16, 2005 and November 24, 2005 (hereinafter referred to as the relevant period). It was prima facie observed that some of the stock brokers inter alia with the connivance of various clients executed substantial trades in the shares of the company and thereby prima facie created misleading appearance of trading in securities and ultimately resulted in the manipulation of the share price 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 FUTP Regulations) and Securities and Exchange Board of India (Stock Brokers and Sub- Brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations). Given the facts and circumstances, in order to protect the interest of investors, SEBI, vide an ad-interim ex parte order dated November 30, 2005 inter alia directed various stock brokers, including stock broker namely, M/s Promod Kumar Kothari (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 May 31, 2006, confirmed the directions passed vide ad-interim order dated November 30, 2005, as stated therein.

2. The investigation conducted by SEBI during the relevant period found that primarily five stock brokers namely, M/s Pramod Kumar Kothari, M/s Purshottam Lal Kejdiwal, M/s Santosh K. Kejdiwal, M/s Dinesh Kumar Lodha and M/s Sanju Kabra collectively executed substantial trades in the shares of the company at CSE during the relevant period and that their cumulative trades accounted for approximately 93% of the total volume in the shares of the company at CSE. The trades of M/s Pramod Kumar Kothari in the shares of the company involved 1,64,250 shares which accounted for 37.43% of the total volume in the shares of the company traded at CSE during the relevant period. M/s Pramod Kumar Kothari is hereinafter referred to as the Broker for the sake of brevity. It was observed that the Broker had executed synchronised trades and cross deals in the shares of the company, which accounted for 48% and 43% respectively of his total trades in the shares of the company. The Broker traded when the share price was ranging at around Rs. 20/- and at around Rs 87/-. The above trades of the Broker are prima facie in violation of the provisions of Regulation 4(2)(a),4(2)(e) and 4(2)(o) of the FUTP 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. Thereafter, vide order dated September 26, 2006 read with a subsequent order dated November 23, 2007, SEBI appointed an Enquiry Officer under the provisions of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (since repealed). In the meanwhile, SEBI, vide order dated August 11, 2008, for the reasons stated therein, vacated the directions passed vide interim orders dated November 30, 2005 and May 31, 2006, as against the stock brokers. The Enquiry Officer/Designated Authority (hereinafter referred to as the Enquiry Officer for the purpose of brevity) in his report dated October 24, 2008 found that the Broker violated the provisions of Regulation 4(2)(o) of the FUTP Regulations and clause A(2) and B(4) (a) of the Code of Conduct specified under Schedule II of the Broker Regulations. However, the Enquiry Officer observed that the violations of Regulation 4(2)(a) and 4(2)(e) of FUTP Regulations are not proved.

3. The Enquiry Officer recommended the suspension of the certificate of registration of the Broker for a period of two months. The Enquiry Officer, keeping in view the interim orders of SEBI (mentioned above), further recommended to set off the said period of two months against the period of prohibition already undergone by the Broker. Subsequently, SEBI, issued a notice dated October 30, 2008 to the Broker to show cause as to why action should not be taken against him as recommended by the Enquiry Officer or as it considered appropriate. A copy of the Enquiry Report was also forwarded to the Broker along with the said notice. The Broker was also advised to inform SEBI, whether he desired to avail an opportunity of hearing. The Broker vide letter dated November 13, 2008 inter alia stated that he had already made his submissions vide letters dated April 27, 2007 and March 24, 2008 (to the Enquiry Officer) and that he had nothing to state further in the matter.

4. I have considered the Enquiry Report, the show cause notice of SEBI dated October 30, 2008 issued to the Broker, the letter of the Broker dated November 13, 2008 and other materials available on record. The investigation conducted by SEBI observed that the trades of certain stock brokers (including the Broker) in the shares of the company accounted for approximately 93% of the total volume in the shares of the company at CSE during the relevant period. Out of this, the trades of the Broker alone stands at 1,64,250 shares accounting for 37.43% of the total volume for the corresponding period. Besides, the Broker had also executed large scale synchronized trades and cross deals in the shares of the company. The investigation conducted by SEBI further observed that majority of the trades of the Broker was on behalf of the client namely, Shree Tulsionline.com (hereinafter referred to as the client). Admittedly, the director of the said client was also the director of the company. Besides, the company as well as the said client shared a common address. The Broker who was in the know of all this had executed trades in the shares of the company.

These circumstances shows without doubt that there was a well established nexus between the company and the client of the Broker. Needless to say, there were number of trades executed by the Broker on behalf of the said client either by way of synchronized trades or by way of cross deals. However, the Enquiry Officer concluded that the violation of Regulation 4(2) (a) and 4(2) (e) of the FUTP Regulations are not proved. The facts of the case indicate that the substantial trades of the Broker on behalf of a client having connection with the company prima facie resulted in the creation of misleading appearance of trading in the said scrip and also artificially manipulated the share price. Thus, according to me, the trades of the Broker were prima facie in violation of Regulation 4(2)(a) and 4(2)(e) of the FUTP Regulations. Accordingly, a notice dated December 02, 2008 was issued to the Broker asking him to show cause as to why his trades should not be considered as prima facie in violation of the provisions of Regulation 4(2)(a) and 4(2)(e) FUTP Regulations. SEBI also granted an opportunity of hearing to the Broker on December 19, 2008. Mr. Pramod Kumar Kothari appeared on behalf of the Broker.

He inter alia stated that the Broker had not carried out the Know Your Client (KYC) requirements in respect of the client while dealing in the shares of the company.

5. I have considered the Enquiry Report, the show cause notice of SEBI dated October 30, 2008 issued to the Broker, the letter of the Broker dated November 13, 2008, oral submissions made on behalf the Broker on the date of personal hearing and other materials available on record. Accordingly, the present matter is being dealt with in terms of the provisions of Securities and Exchange Board of India (Intermediaries) Regulations, 2008. The following facts (pertaining to the relevant period) are not disputed before me:

i. Average share price of the company at CSE had increased from Rs.20.80- to Rs.88/- (a rise of 323%). ii. Five stock brokers including the Broker collectively executed trades involving 4,08,800 shares in the company which accounted for approximately 93% of the total volume in the shares of the company. iii. The Broker executed trades involving 1,64,250 shares of the company which accounted for 37.43% of the total volume of the shares of the company traded. iv. Out of 1,64,250 shares, trades involving 79,500 shares (48%) were executed by way of synchronized trades and 71,200 shares (43%) by way of cross deals. The client of the Broker in both the synchronized and cross deals was Shree Tulsionline.com The said client was purchasing the shares of the company through the Broker. v. The company, the client (Shree Tulsionline.com) of the Broker shared the common address i.e. 2, India Exchange Place, Ist Floor, Suit No. 18, Kolkata 700001. Further, one Abhishek Kumar Jain was a common director of the client and the company. vi. The Broker traded when the share price was in and around Rs.20/-and at Rs.87/-.

6. I note that the aforesaid client of the Broker started trading in the shares of the company, prior to the bonus issue of the company. It purchased 57,600 shares of the company (@ Rs.79.60/ to Rs.80/-) during pre–bonus issue period and 70,000 shares in the post-bonus period (@ Rs.20.75/- to Rs.20.80). The company declared the bonus issue in the ratio of 1:3. Therefore, the purchase of 57,600 shares of the company benefited the client with an additional 1,72,800 shares of the company. The said client had also purchased 70,000 shares of the company when the price was ranging between Rs.20/- to Rs.21/-. The said trades were executed by way of synchronized/cross deals. The Broker facilitated the said trades by his active role. Without the Broker’s necessary involvement in a timely manner, it would not have been possible for the client to execute such trades. Thus, the Broker facilitated the client in executing the said trades. Majority of the trades of the Broker in the shares of the company were either synchronized or cross deals in nature. Needless to say, the trades of the Broker created misleading appearance of trading in the securities market.

It also affected the share price of the company artificially. It is established on record that the company and his client shared a common address i.e. 2, India Exchange Place, Ist Floor, Suite No. 18, Kolkata 700001. Besides, even the person who was trading on behalf of the client namely, Mr. Binod Kumar Banthia was also located in the above address. The company as well as his client had a common director. One cannot therefore disregard the established nexus among the client, company and the person trading on behalf of the client. Considering the facts and circumstances as mentioned above in this order, the Broker’s plea that he was not aware of the relation between the company and his client does not merit credence. Executing trades in such a situation in the matter outlined above cannot be viewed as inconsequential in the facts of the case, as most of the trades (about 90%) of the Broker in the shares of the company were either synchronized or cross deals. The totality of the facts of the case and the modus operandi under which the Broker had executed his trades would only lead to the conclusion that they were the culmination of a pre-determined and well executed plan of action.

The foregoing facts are sufficient enough to establish that the Broker was a necessary party to the transactions which ultimately resulted in the creation of misleading appearance of trading in the securities market and manipulation in the shares of the company. Further, the Enquiry officer noted that the Broker in his statement to SEBI accepted the fact that he had not exercised due diligence in respect his client. Mr. Pramod Kumar Kothari during the course of hearing submitted before me that the Broker had not followed KYC requirements. This would fortify my conclusion that the Broker was a necessary and willing party to the series of transactions which inter alia resulted in the manipulation in the shares of the company. The Hon’ble Securities Appellate Tribunal (SAT) in the matter of Ketan Parekh Vs SEBI inter alia observed :

"............................ Any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal. Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available. ……The nature of the transaction executed the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.” (Underline supplied)

7. In the light of the above facts, I do not have any hesitation to hold that the Broker violated the provisions of Regulation 4(2) (a) and 4(2) (e) of FUTP

Regulations. Therefore, I am unable to accept the contrary findings made by the Enquiry Officer, in this regard. Besides, admittedly, the Broker executed trades in the shares of the company only for the purpose of earning brokerage. The said act of the Broker is in violation of Regulation 4(2)(o) of the FUTP Regulations. In the facts and circumstances and considering the materials available on record, it is established that the Broker violated the provisions of Regulations 4(2)(a), 4(2)(e) and 4(2) (o) of the FUTP Regulations. The above findings would also lead to the conclusion that the Broker had failed to comply with his duties as a stock broker as specified under the provisions of the Broker Regulations. In terms of the provisions of the Broker Regulations (Clause A(1) to A(4) of the Code of Conduct), 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. Further, it is the duty of the stock broker to maintain high standards of integrity, promptitude and fairness and shall act with due skill, care and diligence in the conduct of his business.

He shall not inter alia indulge in manipulative transactions with a view to distort the market equilibrium. Further, in terms of Clause B(4)(a) of the Code of Conduct specified in Schedule II of the Broker Regulations, a stock broker shall not encourage sales or purchases of securities with the sole object of generating brokerage or commission. In the present case, the Broker admitted before the investigating authority that it had traded for the client without due diligence and only for the purpose of earning brokerage. It is already established that the trades of the Broker in the shares of the company inter alia created a misleading appearance of trading in the securities market and thereby, violated the provisions of FUTP Regulations as mentioned above in this order. It is sufficiently obvious that the Broker had failed to comply with his duties as expected of a SEBI Registered intermediary and instead became a party to the manipulation in the shares of the company to the detriment of genuine investors. Thus, the Broker failed 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.

The Broker violated Clauses A(1) to (4) and B(4)(a) of the Code of Conduct specified in Schedule II of the Broker Regulations.

8. In the facts and circumstances, it is fairly established that the Broker violated 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 B4(a) of the Code of Conduct as specified in Schedule II of Securities and Exchange Board of India (Stock Brokers and Sub- Brokers) Regulations, 1992. He has not been able to controvert the above findings. He admitted the transactions. The aforesaid violations committed by the Broker call for deterrent penalty. In the present case, I, note that the Broker was prohibited from buying, selling or dealing in securities, in any manner, either directly or indirectly, in terms of the order 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 (against the stock brokers including the Broker), for the reasons stated therein. It is in this background, the Enquiry Officer recommended to set off the said period of prohibition (November 30, 2005 to August 11, 2008) against the recommended period of penalty. Therefore, I agree with this recommendation of the Enquiry Officer/Designated Authority.

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 M/s Pramod Kumar Kothari (Registration no. 030059818), Member, Calcutta Stock Exchange Association Limited beyond the thirty two months of prohibition already imposed on him in the interim orders of SEBI.

10. Accordingly, the present enquiry proceedings against M/s Pramod Kumar Kothari stands disposed of.

K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Place: Mumbai Date: December 26, 2008