Order against Puroshattam Lal Kejdiwal in the matter of M/s Adinath Bio-Labs Ltd

1. In the wake of unusual price movement noticed in the shares of various companies (with low market capitalization) including Adinath Bio-Labs Limited (for short, the company) listed on Calcutta Stock Exchange Association Limited (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 such companies, for the period April 5, 2005 to November 24, 2005 (for short, relevant period). It was inter alia observed 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. It was prima facie observed that some of the stock brokers executed substantial trades in the shares of the company with the connivance of various clients and thus, created misleading appearance of trading and ultimately resulted in the manipulation of the share price of the company. 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 FUTP 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). In 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 entities/stock brokers, including the stock broker namely, Mr. Purshottam Lal Kejdiwal (Member, CSE) not to buy, sell or deal in securities, in any manner, either directly or indirectly, till further directions. SEBI, after affording an opportunity of hearing to the aggrieved persons, vide order dated May 31, 2006, confirmed 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, Mr. Pramod Kumar Kothari, Mr. Purshottam Lal Kejdiwal, Mr. Santosh K. Kejdiwal, Mr. Dinesh Kumar Lodha and Mr. 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 during the relevant time. The trading of Mr. Purshottam Lal Kejdiwal accounted for 18.85% of the total volume in the shares of the company at CSE during the relevant period. Mr. Purshottam Lal Kejdiwal is hereinafter referred to as the Broker for the sake of brevity. The investigation conducted by SEBI inter alia observed that the Broker had executed matched/synchronized trades in the shares of the company and thus the Broker prima facie violated 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 then existing provisions of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as Enquiry Regulations).

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. Thereafter, the Enquiry Officer/Designated Authority (hereinafter referred to as the Enquiry Officer), vide report dated October 24, 2008 recommended the suspension of the certificate of registration of the Broker for a period of six months. However, the Enquiry Officer, further recommended to set off the said period of six months against the period of prohibition already undergone by the Broker in terms of the above mentioned interim orders of SEBI. Subsequently, SEBI, vide letter dated October 30, 2008 issued a notice 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 10, 2008 inter alia stated that he had already submitted his submissions vide letters dated May 7, 2007 and January 14, 2008 (to the Enquiry Officer) and that he had nothing to state further in the matter.

Further, the Broker undertook that he would be more careful in future.

3. I have considered the Report of the Enquiry Officer, the show cause notice issued to the Broker, the letter of the Broker dated November 10, 2008 and other materials available on record. The only issue for consideration in the present matter is whether the Broker violated the provisions of FUTP Regulations and the Broker Regulations, as observed by the Enquiry Officer. It is not in dispute that the average share price of the company at CSE had increased from Rs.20.80- to Rs.88/- (a rise of 323%) during the relevant period. The stock brokers namely Mr. Pramod Kumar Kothari, Mr. Purshottam Lal

Kejdiwal, Mr. Santosh K. Kejdiwal, Mr. Dinesh Kumar Lodha and Mr. Sanju Kabra collectively executed trades involving 4,08,800 shares in the company during the relevant period. The said trades accounted for approximately 93% of the total volume in the shares of the company (during the relevant period). The trade details of the Broker in the shares of the company at CSE during the relevant period are as follows:

No. of % to No. of % to Total no. % to total shares total buy shares total sell of shares buy and bought volume sold volume sale at CSE at CSE 41,350 18.85% 41,350 18.85% 82,700 18.85%

4. The investigation conducted by SEBI observed that majority of the trades of the Broker were matched / synchronized with two other stock brokers namely Mr Dinesh Kumar Lodha and Mr. Sanju Kabra. The details of such matched/ synchronized trades are given below:

Name Crossed and Matched / Synchronized transactions of the Stock broker Mr. Dinesh Kumar Mr. Sanju Kabra Broker ( Cross Lodha deals) No. of % to the No. % to the No. % to the share total of total of total s volume of share volume share volume of the Broker s of the s the Broker

Broker Broker 46000 56.00% 24,60 30.00% 200 0.24% 0

5. It indicates that about 86% of the trades of the Broker in the shares of the company were matched/synchronized transactions. What is more important is that about 99% of the trades of the Broker in the shares of the company were his proprietary trades. The counter party in respect of the said trades was one Binod Kumar Banthia, through the stock broker viz. Mr. Sanju Kabra. Besides, the son of Mr. Binod Kumar Banthia namely Mr. Gaurav Banthia had executed trades in the shares of the company through the stock broker namely, Mr. Dinesh Kumar Lodha, during the relevant period. Further, one of the other counter party clients of the Broker was one Debpriya Ghosh, an employee of Mr. Binod Kumar Banthia. It is also very pertinent that Mr. Binod Kumar Banthia, Mr. Debpriya Ghosh and the registered office of the company shared same address i.e 2, India Exchange Place, 1st Floor, Suite No.18, Kolkatta 700 001. Thus, there was inter connection amongst the counter party clients and the Broker was inter alia executing matched/synchronized proprietary trades with the said counter party clients. The Broker had executed trades in the shares of the company when its price was ranging between Rs.27.00/- to Rs. 86.90/- The execution of trades by the Broker in the shares of the company has to be viewed in the context of interconnection that existed between the counter party clients.

What makes it more important is that the Broker was executing self trades in the nature of matched/synchronized trades. From the investigation conducted by SEBI it was observed that the Broker was squaring off on a daily basis thereby increasing the price of the shares of the company and that the said trades were the only trades on the date of their execution at CSE. Incidentally, most of the counter party clients were closely connected to each other. It was also noted that the trades were executed successively at higher rates and, in the process, the share price of the company increased about 4% on daily basis, during the period July 25, 2005 and October 31, 2005. The majority of the matched / synchronized trades of the Broker were executed with the counterparty stock broker, Mr. Dinesh Kumar Lodha or Mr. Sanju Kabra. The details of the matched/synchronized were forwarded to the Broker by the Enquiry Officer along with the show cause notice dated March 16, 2007. The specific details of some of the matched / synchronized trades of the Broker were mentioned by the Enquiry Officer in his Report dated October 24, 2008. Though, such details were given to the Broker, he failed to file any submissions in this regard.

The details of some of the individual matched / synchronized trades were also mentioned in the Enquiry Report. In the facts and circumstances of the case, I do not think it necessary to reiterate the specific details of his matched / synchronized trades in this order. The trades of the Broker facilitated in the price rise in the shares of the company and the same created misleading appearance of trading in the said shares. The Broker failed to explain the said trades satisfactorily. Further, I also note that the Broker in his reply to the Enquiry Officer, failed to make any submissions in respect of his trading except a vague denial of the charges.

6. The nexus amongst the Broker and the counterparty clients during the relevant period and the consistency and regularity with which matched/synchronized trades were executed would inter alia fortify the inference that trades executed, arose from this rather obvious relationship. Executing matched trades (99% of the trades being proprietary) cannot be taken lightly, given the facts and circumstances. It is not in dispute that the price of the shares of the company increased regularly during the period of trades executed by the Broker. The overall facts of the case and the modus operandi of creation of the said matched trades, would only lead to the conclusion that the said trades were the culmination of a pre-determined and well executed plan of action for the purpose of creating misleading appearance of trading and manipulation in the shares of the company. The intention of the Broker is clear from the method and manner of the trades executed. He executed a series of matched trades continuously and consistently for a long period. The Enquiry Officer observed number of instances wherein buy/sell orders were placed within a gap of few of seconds. No effort was taken by the Broker to controvert such findings. The foregoing facts are sufficient enough to inter alia establish that the Broker was a necessary party to the entire transactions which ultimately resulted in the creation of misleading appearance of trading in the securities market and 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:

"............................ As already observed ‘synchronisation’ or a negotiated deal ipso facto is not illegal. A synchronised transaction will, however, be illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and is executed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium…….. 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.”

7. In the facts and circumstances and considering the materials available on record, it is established that the Broker had violated the provisions of Regulations 4(2) (a) and 4(2)(e) 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. The issue is whether the Broker had maintained high standards of integrity, promptitude, fairness and exercised due skill, care and diligence in the conduct of his business. In terms of the provisions of the Broker Regulations (clauses A(1) to (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. 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. An intermediary who fails to perform such duties deserves to be punished in accordance with law. Various provisions of the Broker Regulations and the FUTP Regulations are put in place in the interest of investors in securities market. The main submission of the Broker in his letter dated November 10, 2008 was to treat his case sympathetically.

8. In the facts and circumstances, it is fairly established that the Broker violated Regulations 4(2)(a) and 4(2)(e) 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) of the Code of Conduct as specified in Schedule II of Securities and Exchange Board of India (Stock Brokers and Sub- Brokers) Regulations, 1992. 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 were subsequently vacated by SEBI (against the stock brokers including the Broker), for the reasons stated therein.

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, Mr. Purshottam Lal Kejdiwal (Registration no. INB 030488114), Member, Calcutta Stock Exchange Association Ltd.

10. Accordingly, the present enquiry proceedings against Mr Purshottam Lal Kejdiwal, is disposed of.

K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Place: Mumbai Date: November 28, 2008