Order against Shyamlal Sultania

1. The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) had investigated into the price manipulation in the shares of companies with low market capitalization, commonly referred to as “penny stocks” during the year 2005. The Board, in order to protect the interest of investors and the integrity of the securities market had initiated investigation against several such companies which were listed on the Calcutta Stock Exchange Association Ltd.(‘CSE’) and had taken action against the said companies, their promoters, brokers and unscrupulous traders who were found to have manipulated the prices of the shares of those companies.

2. M/s. Subh Laxmi Projects Ltd. (‘SPL’) and M/s.Amluckie Investment Co. Ltd. (‘AICL’) were among the companies whose share prices had witnessed a sharp rise during the year 2005 on the CSE. SPL’s share price had shot up from a meagre Rs.21.30 on March 17, 2005 to Rs.249.50 on July 14, 2005, without any change in the economic fundamentals of the company. There was a price rise of 1067% in a span of three months and twenty seven days. It was alleged that the noticee and M/s Ahilya Commercials Pvt. Ltd., were involved in cross deals and were responsible for price manipulation in the shares of SPL. Similarly, AICL’s share price had shot up from Rs. 95 on April 01, 2005 to Rs.299.50 on August 23, 2005, an increase of 214% in a span of four months and thirty two days without any change in the economic fundamentals of the company. It was alleged that the noticee and M/s Bhiwaniwala & Co. were involved in cross deals and responsible for price manipulation in the shares of AICL. Based on prima facie, findings of the investigation, it was alleged that the noticee had violated SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 and Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 read with code of conduct as specified in Schedule II of the said Regulations. Vide ad-interim ex-parte order dated 29-09-2005 issued under Sections 11(4) (a), 11(4) (b) and 11(1) and 11B of the SEBI Act, 1992, SEBI had directed the noticee amongst others from buying, selling or dealing in securities in any manner, till further directions in this regard.

3. Pursuant to the aforesaid interim order dated September 29, 2005, the noticee had filed its reply dated October 10, 2005 in respect of the irregularities in SPL and reply dated October 8, 2005 in respect of the irregularities in the shares of AICL. It had also filed, its written submissions dated December 09, 2005 and December 13, 2005 in the matter of SPL and on December 10, 2005 in the matter of AICL. On being not satisfied with the explanation of the noticee and having found no mitigating or extenuating factors, SEBI, vide order dated January 12, 2006, inter alia, directed that the ex-parte interim order dated September 29, 2005, in so far as it relates to the noticee besides others shall continue till further orders. However, vide order dated August 11, 2008, the earlier orders restraining the noticee were revoked

4. On completion of the investigations SEBI had appointed an Enquiry Officer vide order dated December 07, 2006 for the purposes of conducting an enquiry against the noticee in accordance with the provisions of the SEBI (Procedure For Holding Enquiry By Enquiry Officer and Imposing Penalty) Regulations, 2002 (Enquiry Regulations). Vide order dated January 30, 2008 change of enquiry officer was communicated.

5. The Enquiry Officer had issued a show cause notice dated July 20, 2007 to the noticee in terms of Regulation 6 of the Enquiry Regulations separately, in both the scrips. The noticee had submitted his replies thereto to the Enquiry Officer who conducted the enquiry in accordance with the Regulations and submitted his report to the Board. The Enquiry Officer in his report had found that the noticee had contravened the provisions of clauses (a), (e) and (o) of sub-regulation (2) of Regulation 4 of the PFUTP Regulations 2003 and Regulation 7 read with Clause A (1), (2), (3), (4) and B (4) (a) of the Code of Conduct stipulated in Schedule II of the Brokers Regulations and recommended that the Certificate of Registration of the noticee be suspended for a period of six months in each of the proceedings, in the scrip of SPL and AICL. He further recommended that suspension period may be set off against the period of prohibition already undergone by the noticee vide SEBI interim order dated September 29, 2005.

6. I have perused the show cause notices issued by the enquiry officer, the replies of the noticee, the interim orders dated September 29, 2005 and January 12, 2006, the enquiry report and other material on record. On perusal of the said documents, the following issues arise for consideration a. Whether the noticee had violated the relevant provisions of the PFUTP Regulations while trading in the scrip of SPL and AICL? b. Whether the noticee had violated the relevant provisions of the Broker Regulations while dealing in the scrip of SPL and AICL?

7. It is observed from the Enquiry Report that the noticee had executed trades in the scrip of SPL amounting to 12.55% of the volumes traded in the scrip during the relevant period. The trades executed by noticee ranged from Rs.30 to Rs.249.5. It is noticed that Millenium Insurance Agents (P) Ltd., Swarnganga Trading Pvt. Ltd. and Anushree Tradelink Pvt. Ltd. were the three clients who had traded through the noticee.

8. The cross-deals of buy and sale orders in the scrip of SPL were observed to have been executed at same quantity and for the same price by different clients of the noticee on its terminal. These irregular and synchronized trades had raised the prices of the scrip. The details of such cross-deals are given in the Enquiry Report.

9. It is observed from the Enquiry Report that the trades executed between June 06, 2005 and August 22, 2005 between the price range of Rs.219.60 to Rs.249.50 were bought and sold by the noticee in cross deals.

10. Further, the Enquiry Officer found that the noticee had executed a large number of synchronized trades with Ahilya Commercial Pvt. Ltd. and M. Bhiwaniwala & Co. the details of which are contained in the Enquiry Report. The trades with counter party broker M. Bhiwaniwala & Co. were executed between April 26, 2005 and September 16, 2005 in the price range of Rs.30 and Rs.249.50 paise.

11. As per the Enquiry Report, the noticee has executed the trades with Ahilya Commercial Pvt. Ltd., and M. Bhiwaniwala & Co. on several dates at successively increasing price wherein the buy and sell orders were placed within a span of few seconds amounting to synchronized trades which resulted in manipulation of price and volume of the scrip.

12. In the scrip of AICL: Similarly, the noticee had executed trades amounting to 21.83% of the trades in the scrip of AICL at the exchange in a price range of Rs.95 to Rs.299.05. The Enquiry Officer had observed that the noticee had executed 34 cross deals between June 10, 2005 and September 16, 2005 in the price range from Rs.232 to Rs.295.90.

13. Further, the Enquiry Officer had observed that the noticee was involved in a large number of synchronized trades with M Bhiwaniwala & Co between the price range from Rs.99.2 and Rs.298.90 during the period from April 07, 2005 to September 16, 2005. With Ashok Kumar Kayan the noticee executed 93 synchronized trades between June 16, 2005 and August 18, 2005 in the price range of Rs.265 to Rs.298.

14. The clients of the broker namely, Swarnganga Trading Pvt. Ltd., Srijan Vyapaar Pvt. Ltd. and Anushree Tradelink Pvt. Ltd. had a common office. Avijit Dey and Abhiset Basu were found to be directors of Swarnganga Trading Pvt. Ltd. and Anushree Tradelink Pvt. Ltd. Abhiset Basu was a director of Srijan Vyapaar Pvt. Ltd.

15. Further, the Enquiry Officer observed that the noticee has allowed Gama Commerce Pvt. Ltd. to trade in the scrip of AICL without collecting the margin to the tune of one crore rupees. The clients had a combined buy position of 2,20,000 shares which comprised of 48.67% of the total volume of the noticee and the combined sell position of 34500 shares which comprised of 18.26% of the total sale quantity of the noticee.

16. I have also noted that the noticee had executed both buy and sell orders of same quantity at the same time and price which led to the price rise in the scrip of SPL and AICL. From the large trading data as detailed in the Enquiry Report, trades were matched and synchronized between the clients of the noticee or with the clients of the other three brokers (M Bhiwaniwala & Co, Ashok Kumar Kayan and Ahilya Commercial Pvt. Ltd.), in terms of order quantity, price and time.

17. I agree with the findings of the Enquiry Officer that the noticee had indulged in synchronized trades and cross deals in the scrip of SPL and AICL. As observed by the Hon’ble Securities Appellate Tribunal in Ketan Parekh V.SEBI (Appeal No. 2 of 2004), that ‘synchronization’ or a negotiated deal ipso facto is not illegal and that a synchronized 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. The Tribunal further observed that 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 Tribunal observed that the intention of the parties can be noted from various factors which may be 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 etc. In the present case against the noticee, the synchronized deals and the cross deals as brought above, the frequency of trades in the market and the fact that the price had shot up abnormally without any change in the economic fundamentals in an otherwise illiquid scrips and the attendent circumstances substantiates the violations against the noticee.

18. I also note that the Hon’ble SAT in Chirag Pujara v. SEBI (Appeal No.

175 of 2007) has observed that executing matching trades with a prior understanding is by itself a serious violation of the Regulations which jeopardizes the integrity of the market. The trade data tabulated in enquiry report would show that the noticee has matched and synchronized trades with M Bhiwaniwala & Co, Ashok Kumar Kayan and Ahilya Commercial Pvt. Ltd. Such matching and synchronizing would not happen unless and until there is a prior understanding and meeting of minds. I also place reliance on the observations of the Hon’ble SAT made in the matter of Triumph International Finance Ltd. V. SEBI (Appeal No. 35 of 2002). In the said appeal, the Hon’ble Tribunal had observed as below - “The question that arises for consideration is - could it be said that the appellant was innocent and whether such large number of trades could have matched on the screen without the knowledge and active involvement of the appellant as a broker. The answer has to be in the negative. It is the broker who plays a pivotal role in synchronizing the trades with the counter broker and matches the same through the exchange mechanism by punching the buy and sell orders simultaneously. It is true that the brokers act on the advice of their clients but it is they who actually implement the game plan.”

The Hon’ble SAT, in Nirmal Bang Securities Pvt. Ltd., Vs SEBI (Appeal no.54-57/2001), observed as follows:- “BEB has been charged for synchronized deals with First Global. I have examined the data provided by the parties on this issue. I find many transactions between BEB and FGSB. There are many instances of such transactions. I find the scrip; quantity and price for these orders had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale can create false volumes. The argument that the parties had no means of knowing whether any entities controlled by the client is simultaneously entering any contra order elsewhere for the reason that in the online trading system, confidentiality of counter parties is ensured, is untenable. It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only a coincidence in some cases. Theoretically this is OK. But when parties decide to synchronize the transactions the story is different. There are many transactions giving an impression that these were all synchronized, otherwise there was no possibility of such perfect matching of quantity price etc. As the Respondent rightly stated it is too much of a coincidence over too long a period in to many transactions when both parties to the transaction had entered buy and sell orders for the same quantity of shares almost simultaneously. The data furnished in the show cause notice certainly goes to prove the synchronized nature of the transaction which is in violation of Regulation 4 of the FUTP Regulations. The facts on records categorically establish that BEB had indulged in synchronized trading in violation of Regulation 47 of the FUTP Regulations. In a synchronized trading intention is implicit”.

19. Thus, I find that the noticee by his acts has created false or misleading appearance of trading in the shares of SPL and AICL along with the other brokers and clients, which was responsible for the market manipulation in the scrips. Therefore, I agree with the findings of the Enquiry Officer that the noticee has violated the provisions of clauses (a), (e) and (o) of sub-regulation (2) of regulation 4 of the PFUTP Regulations. Further, by its acts, the noticee has not maintained high standards of integrity, promptitude and fairness in the conduct of his stock broking business. The noticee has not acted with due skill, care and diligence in the conduct of his business. Also, as stated above, the noticee has indulged in manipulative and deceptive transactions with the other brokers and the clients which had distorted the market equilibrium and interfered with the fair and smooth functioning of the market. Therefore, I agree with the findings of Enquiry Officer that the noticee has contravened the provisions of Regulation 7 read with clauses A (1), (2), (3) and (4) of the Code of Conduct prescribed for stock brokers in the Broker Regulations.

20. Copies of the Enquiry Report were sent to the noticee and he was advised to submit his comments thereto, if any. Vide letter dated April 24, 2008, the noticee informed that he is facing financial problems and unable to maintain any staff also. However, he did not file any additional documents against the findings of the Enquiry Officer.

I have carefully examined the Enquiry Report and agree with the findings of the Enquiry Officer.

21. With respect to the quantum of penalty, I note that the Enquiry Officer has recommended that the certificate of registration of the noticee be suspended for a period of six months in each of the scrips in which the irregularities were established. While recommending the said penalty, the Enquiry Officer stated that the period of debarment already undergone by the noticee may be considered.

22. It is noted that the noticee was restrained from dealing in securities in any manner from September 29, 2005 to August 10, 2008 in view of the interim order of SEBI. Considering the above factors and also the facts and circumstances of the case, I am of the considered view that the matter calls for no further penalty against the noticee. 23. Now, therefore, in exercise of powers conferred under Section 19 of the SEBI Act, 1992 and Regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008, I do not deem it fit to impose any further penalty against the noticee.

24. The matter is disposed off accordingly.

25. This order shall come into force with immediate effect.

DATE: January 9, 2009 T. C. NAIR PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA