Order against Sanju Kabra 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 (for short CSE), Securities and Exchange Board of India (for short 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. 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 (for short FUTP Regulations) and the provisions of Securities and Exchange Board of India (Stock Brokers and Sub- Brokers) Regulations, 1992 (for short

Broker Regulations), while dealing in the shares of the company. 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 not to buy, sell or deal in securities, in any manner, either directly or indirectly, till further directions. The said order was confirmed (as against the stock brokers), by SEBI, vide order dated May 31, 2006, as stated therein, after affording an opportunity of hearing to the aggrieved persons.

2. The investigation conducted by SEBI 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 period). The trades of Mr. Sanju Kabra (for short Broker) accounted for 6.90% of the total trades in the shares of the company at CSE during the relevant period. It was inter alia observed that the Broker had executed matched/synchronized trades in the shares of the company and created misleading appearance of trading and which ultimately resulted in the manipulation of the share price of the company and, thus, prima facie violated Regulations 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) against the stock brokers. Thereafter, the Enquiry Officer/Designated Authority (for short 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. The Enquiry Officer observed that the Broker was directed not to buy, sell or deal in securities in any manner either directly or indirectly by SEBI vide order dated September 29, 2005, inter alia in the matter of Global Capital Market Limited. In view of the said prohibition, the Enquiry Officer further recommended setting off the said period of six months against the period of prohibition already undergone by the Broker in terms of the ad-interim order dated September 29, 2005. Subsequently, SEBI, vide letter dated October 30, 2008 issued a show cause notice to the Broker with a copy of the Enquiry Report. The Broker was also advised to inform SEBI, whether he desired to avail of an opportunity of hearing. The Broker vide letter dated November 12, 2008 accepted the recommendation to set off the suspension period with the final order and that he had nothing to say in the matter.

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 12, 2008 and other materials available on record. 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 cumulative trades of the five stock brokers named above in this order accounted for 4,08,800 shares (approximately 93% of the total volume in the company) during the relevant period. The trade details of the Broker in the shares of the company at CSE during July 27, 2005 and September 23, 2005 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 15,200 6.9% 15,200 6.9% 30,400 6.9%

The said trades were executed in the price range of Rs. 29.30/- to Rs. 85.70/-

4. Most of the trades of the Broker in the shares of the company were matched/ synchronized with two other stock brokers namely Mr. Purshottam Lal Kejdiwal and Mr. Dinesh Kumar Lodha. The Broker also executed cross deals in the shares of the company. The details of such trades are given below:

Name of the Matched / Synchronized transactions (cross deals) Stock broker Mr. Purshottam Mr. Dinesh Kumar Lodha Lal Kejdiwal No. of % to the No. of % to the total volume vis a shares total shares vis to the Broker volume vis a vis to the Broker Broker 24,600 81.00% 3,300 11%

5. It indicates that most of the trades of the Broker in the shares of the company were either matched/synchronized transactions or cross deals. All the trades of the Broker were on behalf of his client namely Mr. Binod Kumar Banthia. It is pertinent to note that the address of Mr. Binod Kumar Banthia was 2, India Exchange Place, 1st Floor, Suite No.18, Kolkatta 700 001 which was incidentally the address of the registered office of the company. It was observed that, the son of Mr. Binod Kumar Banthia namely, Mr. Gaurav Banthia had also traded in the shares of the company through the stock broker namely, Mr. Dinesh Kumar Lodha. The investigation conducted by SEBI observed that the said stock broker had also executed trades on behalf of Mr. Debapriya Ghosh. Mr. Binod Kumar Banthia traded substantially in the shares of the company during the relevant period, through the Broker. Mr. Dinesh Kumar Lodha was one of the counter party stock brokers for the clients namely, Mr. Gaurav Banthia and Mr. Debapriya Ghosh, in respect of the trades of the Broker. As stated above, Mr. Gaurav Banthia is the son of the client of the Broker having the same residential address i.e Maina Kunj, D-66 Bangur Avenue, Kolkata- 700 055. Mr. Debapriya Ghosh was an employee of one M/s. Beekay & Associates, having its office premises at 2, India Exchange Place, 1st Floor, Suite No. 18, Kolkata-700 001 whose sole proprietor was the client of the Broker.

Further, the Broker and the client were situated at the same premises. Thus, there was interconnection amongst the clients of the Broker, his client and the clients of some of the other stock brokers through whom the Broker had executed matched/synchronized trades. I note that majority of the matched/synchronized trades of the Broker in the shares of the company were with the stock broker namely, Mr. Purshottam Lal Kejdiwal. The details of such matched/synchronized trades were forwarded to the Broker by the Enquiry Officer along with the show cause notice dated March 16, 2007. The trades of the Broker in the shares of the company were during the period July 27, 2005 and September 23, 2005. It is noted that Mr. Binod Kumar Banthia (client of the Broker) was executing both - buy and sell trades in the shares of the company on each day on which he traded and was constantly squaring off his daily trades so that his net trade in the said scrip on each day came to nil. The client was squaring off his trades after executing them by placing orders of the opposite nature within a gap of few seconds or minutes only.

Besides, the said client was constantly squaring off his trades at successively increasing prices, thereby resulting in increase in the price of the scrip with each trade. Some of the matched/synchronized trade details of the Broker were explained by the Enquiry Officer in his Report. Thus, the details of matched/ synchronized trades were not only provided to the Broker along with the show cause notice but also explained (some of the trades) in the Enquiry Report. However, the Broker failed to file any submissions in this regard. 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.

6. I note that the Broker facilitated his client to trade substantially in the shares of the company. Needless to say, most of his (Broker’s) trades were synchronized / matched. The factors such as, execution of matched trades in the shares of the company by the Broker, cumulative effect of his trades in the shares of the company (6.9% of the total volume), share price increase from Rs. 29.30/- to Rs. 85.70/- during the time of the trades would primarily indicate that the Broker was a necessary party in the creation of misleading appearance of trading in the securities market. Execution of such large number of matched/synchronized trades could have taken place only with the timely participation of the Broker. It is not in dispute that the price of the shares of the company increased regularly during the relevant period. The facts and circumstances would strengthen the inference that, the Broker was a necessary party to the said trades, which created misleading appearance of trading and manipulation in the share price of the company. Further, it gives rise to the inference that the trades of the Broker in the shares of the company (as stated above) were the culmination of a pre-determined and well executed plan of action. The Broker executed matched trades in the shares of the company sufficiently for a longer period. Considering the nature of the trades and the close nexus of his client and the company as established above in this order, it cannot be said that the Broker was unaware of the intention of his client while executing series of matched trades continuously and consistently for a long period. Various instances of synchronized trades executed by the Broker inter alia would prove 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. 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. 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 specified in Schedule II), 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. The Broker failed to submit any explanation to controvert the findings of the Enquiry Officer. I note the observation of the Enquiry Officer that the Broker had admitted (before the investigating authority of SEBI) that he had executed trades for his client without any due diligence on his part and the trades were executed only for brokerage.

8. In the facts and circumstances, it is established that the Broker violated Regulations 4(2)(a), 4(2)(e), 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 B(4)(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. The aforesaid violations committed by the Broker call for a 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, as per the ex-parte ad interim order of SEBI dated September 29, 2005, in the matter of Global Capital Market Limited. The said prohibition continued till July 2, 2008 when SEBI disposed of the enquiry proceedings against the Broker, as stated therein. Considering the totality of the facts and circumstances, I dispose of the present enquiry proceedings against the Broker, as ordered herein under.

9. In view of the foregoing, while finding that the Broker (Mr. Sanju Kabra) has violated the regulatory provisions mentioned above in this order, 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 Mr. Sanju Kabra {Member, Calcutta Stock Exchange Association Ltd. (Registration no. INB 031127419)}.

K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Place: Mumbai Date: December 4, 2008