Order against Toss Financial Services Private Limited in the matter of Alembic Limited

1. Pursuant to an investigation conducted in respect of the dealings in the shares of Alembic Limited (hereinafter referred to as the Company) for the period between December 22, 1999 and March 14, 2000 (hereinafter referred to as period of investigation), the Securities and Exchange Board of India (hereinafter referred to as SEBI), vide Order dated August 4, 2006 read with a subsequent Order dated February 24, 2009 initiated an enquiry against the stock broker, Toss Financial Services Private Limited, Member, National Stock Exchange of India Limited (hereinafter referred to as NSE) for the alleged violation of Regulation 4(d) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the PFUTP Regulations) and Clauses A(2) and C(5) of the Code of Conduct for stock brokers as specified in Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations). Toss Financial Services Private Limited is hereinafter referred to as the stock broker. The Designated Authority (hereinafter referred to as the Enquiry Officer), vide Report dated October 30, 2009 while recommending suspension of the certificate of registration of the stock broker for a period of one month, found that it had contravened the aforesaid provisions charged against it.

2. Thereafter, a notice dated November 9, 2009 was issued to the stock broker enclosing therewith a copy of the Enquiry Report advising it to show cause as to why action should not be taken against it as recommended by the Enquiry Officer or higher penalty as deemed fit by the Competent Authority should not be imposed against it. As SEBI had not received any reply from the stock broker in respect of the aforesaid notice, reminders dated February 19, 2010, March 4, 2010 and October 8, 2010 were issued to it advising it to file its submissions, if any, to the notice. In the meanwhile, the stock broker had also filed an application for passing of a consent order in terms of the SEBI Circular dated April 20, 2007. Subsequent to the rejection of the said application, an opportunity of personal hearing was afforded to the stock broker on November 24, 2010 which was attended by Mr. Rehman, Managing Director of the stock broker who made submissions on behalf of the stock broker. Mr. Suganth Samuel of the stock broker was also present during the hearing. The representative of the stock broker submitted that it had not executed any proprietary trades and that the norms relating to the Know Your Client (KYC) were adhered to by it while executing transactions on behalf of its clients. It was submitted that all the trades were delivery based and that it had no control over the price movement in the market. The stock broker also denied the allegation that the trades executed by it were fictitious. It also requested SEBI to take a lenient view as the alleged violations happened in the year 1999-2000 and the enquiry was initiated six years thereafter.

3. I have considered the Enquiry Report, the oral submissions made on behalf of the stock broker and other material available on record. Before proceeding further, I would like to mention the facts of the case, as mentioned in the Enquiry Report in brief. SEBI initiated the case on the basis of a complaint received from a shareholder of the Company, a copy of the same was also sent to NSE and the Bombay Stock Exchange Limited (hereinafter referred to as BSE). NSE analysed the data for the relevant period and found a sharp fall in price from 714.95 (as on December 22, 1999) to 275.00 (as on March 10, 2000). In its report sent to SEBI, vide letter dated September 16, 2002, NSE observed that the client, Mr. Sulaiman Lakhani, one of the top 50 shareholders of the Company appeared to have influenced the share price. Further, it observed that the fall in the share price during the said period appeared to have been influenced by him. On the basis of the Investigation Reports/observations received from NSE and BSE and the trade and order log analysis conducted by BSE, four NSE stock brokers and four BSE stock Brokers were identified on the basis of gross position as well as net buy and sell position.

The stock broker was one among them. The gross purchases and sales of the stock broker across all the settlements during the investigation period were 49,900 shares and 53,400 shares respectively and it had done trading mainly for its clientele in the scrip. The stock broker has dealt in 12 settlements during the period. The percentage of traded quantity of the stock broker to the net quantity for the market ranged from 3.74% to 40.26% and as percentage to the net quantity for the market, it ranged from 71.75% to 49.05% for the respective settlements. The percentage of the total gross quantity of the stock broker to the total gross quantity traded in the market during the period under scrutiny was 17.54%. The major client of the stock broker who traded in the shares of the Company during the period was Mr. Sulaiman Lakhani (hereinafter referred to as the Client). As stated above, Mr. Sulaiman Lakhani was one of the top 50 shareholders of the Company as on June 14, 2000 and was holding 93,200 shares. It is to be noted here than the proceedings against the said client was disposed of by SEBI, vide a Consent Order dated October 31, 2008, on payment of 10,00,000/- as settlement charges.

4. The Enquiry Officer has observed in the Report that on the basis of the investigation report it was alleged that the stock broker had allotted two client codes to its client, one for delivery based trading (no. 3126) and the other one for speculative trading (no. 3131). It was also alleged that on perusal of the ledger account of the client (in respect of client code no. 3126) with the stock broker showed that no margins were taken by the stock broker before buying large quantity of shares on behalf of the client and that it appeared that the stock broker had used own funds for the purchases made on behalf of the client. The Enquiry Officer had also observed that the financing arrangement between the client and the stock broker as alleged in the show cause notice stands established. During the course of hearing, the stock broker submitted that it had financed the client as it did not want to lose the said client. The Enquiry Officer has also observed that the stock broker had failed to capture the financial details such as annual income for the last three years of the client in the Know Your Client (KYC) form.

This act of the stock broker is also highly objectionable. The price fluctuations took place in the shares of the Company are mentioned in detail in the Enquiry Report. The trades of the stock broker for the client are also mentioned in the Report. The details as to the manner of placing the orders on behalf of the client and how such trades had affected the share price of the Company during the investigation period are also mentioned therein. The findings of the Enquiry Officer have not been specifically refuted by the stock broker. Since, the facts of the case are not disputed, I do not consider it necessary to reproduce those details which are already mentioned in the Report. The main submission on behalf of the stock broker is that all the regulations were adhered to. In the facts and circumstances of the case, I do not have any hesitation to hold that the stock broker had contravened Regulation 4(d) of the PFUTP Regulations. The very fact that the KYC form in respect of the client was not properly filled up coupled with the nature of its trades for the client would establish that the stock broker had failed to act with due skill, care and diligence in the conduct of its business.

Further, the act of the stock broker in financing the client with the established fact that the interest outflow on the debit balance given to the client was significantly more than the brokerage income earned from the said client would indicate the unfair means practiced by the stock broker in inducing the clients from other stock brokers. The same would further strengthen the statement made by the stock broker during the course of hearing that it did not want to lose the client. Thus, the stock broker had also contravened Clauses A(2) and C(5) of the Code of Conduct for stock brokers specified under Schedule II of the Broker Regulations. The Enquiry Officer has recommended for the suspension of the certificate of registration granted to the stock broker for a period of one month. The alleged violations took place in the year 1999-2000 and the enquiry was ordered in the year 2006. Considering the case in its totality, justice would be served if the stock broker is warned in respect of its activities as observed in the Enquiry Report. Accordingly, the enquiry proceeding initiated against the stock broker is disposed of as ordered hereinbelow.

5. In view of the foregoing, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992, read with Regulations 28(2) and 38(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby warn the stock broker, Toss Financial Services Private Limited (Registration No. INB 230760236), Member, National Stock Exchange of India Limited, and direct it to strictly adhere to the rules and regulations governing its activities as a stock broker. Any deviation by the stock broker, in future, of the rules and regulations governing its business as a stock broker would be viewed seriously.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

PLACE: MUMBAI DATE: JULY 18, 2011