Order against Vishal Vijay Shah in the matter of Maharashtra Polybutenes Limited[SAT Appeal No.:225/2020]

WTM/GM/EFD/ 17 /2020–21 SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI FINAL ORDER UNDER SECTION 12(3) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH REGULATION 28(2) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008. IN THE MATTER OF ALLEGED IRREGULARITIES IN TRADING IN THE SCRIP OF MAHARASHTRA POLYBUTENES LIMITED – IN RESPECT OF – NOTICEE SEBI REGISTRATION NO. VISHAL VIJAY SHAH INB011277614

BACKGROUND –

1.1 Securities and Exchange Board of India (“SEBI”) had initiated Enquiry Proceedings against Vishal Vijay Shah (“Vishal Shah”), a registered Stock Broker, in terms of the SEBI (Intermediaries) Regulations, 2008 (“Intermediaries Regulations”). SEBI vide an Order dated June 11, 2015 under Section 19 of the SEBI Act, 1992 (“SEBI Act”) read with Regulation 24(1) of the Intermediaries Regulations appointed a Designated Authority (“DA”) to enquire into the violations alleged against the Noticee and submit the report in accordance with the provisions of the Intermediaries Regulations. Upon completion of the enquiry, an Enquiry Report dated May 31, 2017, was submitted by the DA to the Designated Member (“DM”).

1.2 In the Enquiry Report, the DA had noted that:

A. The Noticee is alleged to have entered into circular and synchronized trades with 115 front entities in the scrip of Maharashtra Polybutenes Limited (“Maharashtra Polybutenes”).

Order against Vishal Vijay Shah in the scrip of Maharashtra Polybutenes Limited

As a result of the aforementioned, the Noticee is alleged to have created false or misleading appearance of trading in an otherwise illiquid scrip. Further, the Noticee is alleged to have entered into transactions in the aforesaid scrip without any intention of changing the ownership of shares thereby manipulating the price of the scrip. B. Further, in a large number of buy transactions, the Noticee is alleged to have given wrong instructions to the Clearing House for direct pay–out to 92 front entities, on dates when such entities had not traded, made demat transfer of shares to front entities (and not actual clients), misutilized client securities. C. The Noticee is alleged to have falsified records and issued fictitious contract notes to 20 front entities who had received shares through demat transfer/direct pay–out.

1.3 In view of the above, the DA had observed that the Noticee had violated the following provisions of securities law:

A. Sections 12A(a), (b) and (c) of the SEBI Act and Regulations 3(a), (b), (c) and (d) and Regulations 4(1), 4(2)(a), (b), (d), (e), (g) and (p) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Market) Regulations, 2003 (“PFUTP Regulations 2003”). B. SEBI Circular no. SEBI/MRD/SE/Cir–33/2003/27 dated August 27, 2003 and SEBI Circular no. MRD/DoP/SE/Cir–11/2008 dated April 17, 2008 through misutilization of clients’ funds and securities. C. Clauses A(1), (2), (3), (4) and (5) of the Code of Conduct for Stock Brokers as specified in Schedule II of Regulation 9 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (“Stock Brokers Regulations”), for failure to adhere to the prescribed Code of Conduct in respect of high standard of integrity, due skill, care and compliance with statutory requirements, etc.

1.4 In light of the above and in accordance with Regulation 27 of the Intermediaries Regulations, the DA recommended that the Certificate of Registration granted to Vishal Shah as a Stock Broker (INB011277614), be cancelled.

1.5 Thereafter, a post–enquiry Show Cause Notice (“SCN”) dated July 4, 2017 was issued to the Noticee enclosing a copy of the Enquiry Report submitted by the DA and calling upon him to show cause in terms of Regulation 28(1) and 28(2) of the Intermediaries Regulations as to why action as recommended by the DA or that of a higher nature should not be imposed on him, as deemed fit by the DM.

1.6 Subsequent to the issuance of SCN, the Noticee had replied vide a letter dated September 23, 2017 submitting that “in the matter of Maharashtra Polybutenes, we were penalized by SEBI for the amount of ₹18,23,028 so we feel we should be pardoned by you. And as such, the matter is very old and the staff who used to handle the day to day activities at that time are not with us now. So we are unable to answer your questions for that the penalty was levied on us with interest and we obliged it. And we promise that such mistakes will not be repeated in future. … Furthermore, we once again request you that as we have paid the penalty and given assurance of not repeating such mistakes in future, we should be let off with anymore punishments.”

1.7 Thereafter, an opportunity of personal hearing was granted to the Noticee on various occasions and such dates along with details of appearances/responses are listed out hereunder:

i. March 6, 2019 – The Noticee requested for an adjournment of the hearing to March 13, 2019 on account of a personal emergency. Accordingly, the Noticee was granted an opportunity of hearing on March 13, 2019.

ii. March 13, 2019 – The Noticee appeared in person for the hearing and requested for an adjournment to the 2nd week of April 2019, for enabling him to engage an appropriate representative for appearing on his behalf in the matter. The Noticee also submitted that a detailed reply to the aforementioned SCN would be filed. The Noticee was granted another opportunity of hearing on April 9, 2019.

iii. April 9, 2019 – The Noticee appeared for the hearing through his authorised representatives, viz. Advocate Vikas Bengani and Saurabh Bachhawat. The Noticee was granted one weeks’ time to tender written submissions. Thereafter, vide a letter dated April 18, 2019, the Noticee tendered written submissions.

1.8 Vide his written submissions, the Noticee had submitted as under:

i. “SEBI had initiated another proceeding against the Noticee under Regulation 25 of the Intermediaries Regulations in the scrip of Maharashtra Polybutenes for the period from September to December 2009 alleging violation of Clauses A(1), (2), (3), (4) and (5) of the Code of Conduct under the Stock Brokers Regulations along with the SEBI Circular no. SEBI/MRD/SE/Cir–33/2003/27 dated August 27, 2003. On the basis of some vague logic, SEBI has divided the investigation in the scrip of Maharashtra Polybutenes into two periods and thereafter, issued two different SCNs (post–enquiry SCN dated July 4, 2017 and pre– enquiry SCN dated January 9, 2019) and would now be issuing two different recommendations on the Noticee in a single scrip. It is prayed that the learned WTM should wait for the Enquiry Report by the DA under the pre–enquiry SCN dated January 9, 2019 and should adjudicate on both the recommendations in one single proceeding.

ii. As regards the allegation of executing circular and synchronized trades, the trades in the scrip of Maharashtra Polybutenes were executed on behalf of the clients who had given proper power of attorney to execute such trades and while executing such trades, the Noticee was unaware as to the counter parties of such trades. As a stock broker, the Noticee’s job was to execute the trades as instructed by the clients and not to question the genuineness of the trades executed by the clients. The entities who were part of the purported Vipul Group were the Noticee’s clients for more than 5 years and there were no such acts because of which any doubt would arise in the Noticee’s mind as to the intentions of those parties while executing trades in the scrip of Maharashtra Polybutenes. The trades were executed on the screen–based trading platform as provided by the Stock Exchange and the party selling or buying is not aware as to who is the counter party to its trade. Further, no action has been taken by SEBI against the Brokers of the counter parties. If the allegation is of synchronized and circular trading, it is settled principle that without meeting of minds or collusion these types of trades cannot be executed by any entity, however, in the present case, no such allegation has been made against any of the counter parties including the Brokers to the counter parties. Reliance is placed on the SEBI Adjudicating Officer’s Order dated April 16, 2019, passed against Vinod Shares in the matter of Maharashtra Polybutenes. Therefore, the violations of PFUTP Regulations cannot be alleged against me.

iii. The Noticee has placed reliance on the judgment of the Hon’ble Supreme Court in SEBI vs. Kishore R. Ajmera, CA No. 2818 of 2008, and has contended that the ratio as laid down in the aforesaid judgment squarely applies to the present matter since the Noticee’s clients were known to each other and were related entities and the said fact was also known to the Noticee and that the said clients executed the circular and synchronized trades in the scrip of Maharashtra Polybutenes. Apart from the said facts, there were no other facts in the present proceedings which makes the Noticee liable as a broker under the Code of Conduct and therefore, the SCN may be dropped against the Noticee.

iv. As regards the failure to comply with SEBI Circulars dated August 27, 2003 and April 17, 2008, the Noticee submitted that the relevant information was not available with him and if any violations were committed by him, it would be on account of certain inadvertence which will not be repeated in future.

v. Further, SEBI vide an Order dated September 14, 2015 had imposed a penalty of ₹15 Lakhs on the Noticee in the same matter in the scrip of Maharashtra Polybutenes for the same investigation period, which has been paid by him. The Noticee has submitted that no such violations will be repeated in future and the business will now be conducted in a very fair manner without causing any harm to the integrity of the securities market in any manner whatsoever.

vi. In view of the above, the Noticee has requested SEBI to take a lenient view as the cancellation of his Certificate of Registration would affect the Noticee’s livelihood and future business opportunities. The Noticee’s stock broking registration is already suspended for a period of 6 months vide an Order dated December 12, 2018.”

Findings on the preliminary objection raised by the Noticee:

2.1 In his submissions, the Noticee has stated that SEBI has initiated two enquiry proceedings under Regulation 25 of the Intermediaries Regulations, in the scrip of Maharashtra Polybutenes. The Noticee has submitted that SEBI should adjudicate on both the recommendations that has been made under the post–enquiry SCN dated July 4, 2017 (read with the Enquiry Report dated May 31, 2017) and will be made under the pre–enquiry SCN dated January 9, 2019, in one single proceeding. It is noted that the instant proceedings have arisen on account of enquiry proceedings initiated against the Noticee for the alleged violation of the provisions of the SEBI Act read with the PFUTP Regulations 2003 and also the Code of Conduct violations read with SEBI Circular no. SEBI/MRD/SE/Cir–33/2003/27 dated August 27, 2003 and SEBI Circular no. MRD/DoP/SE/Cir–11/2008 dated April 17, 2008, concerning alleged irregularities in trading of shares of Maharashtra Polybutenes for the period February–July 2009. Accordingly, the violations alleged in the instant proceedings are different from the violations in the proceedings referred to by the Noticee under the pre–enquiry SCN dated January 9, 2019 since therein the violations sought to be enquired upon are limited to the alleged violation of Clauses A(1), (2), (3), (4) and (5) of the Code of Conduct under the Stock Brokers Regulations along with the SEBI Circular no. SEBI/MRD/SE/Cir–33/2003/27 dated August 27, 2003. Having regard to the aforementioned, I am of the considered view that SEBI may proceed with the determination of charges alleged against the Noticee in the instant proceedings based on the Enquiry Report submitted by the DA independent of any other proceedings that may be pending against the Noticee. I therefore find no merit in the contention advanced by the Noticee.

CONSIDERATION OF ISSUES AND FINDINGS:

2.2 I have carefully considered material available on record including the Enquiry Report, SCN and reply/submissions received from the Noticee. The issues that arise for consideration in the instant proceedings are as under:

I. Whether the Noticee has violated Sections 12A(a), (b) and (c) of the SEBI Act and Regulations 3(a), (b), (c) and (d) and Regulations 4(1), 4(2)(a), (b), (d), (e), (g) and (p) of the PFUTP Regulations 2003? II. Whether the Noticee who is a SEBI registered Stock Broker, violated Clauses A(1), (2), (3), (4) and (5) of the Code of Conduct of Stock Brokers as specified in Schedule II of Regulation 9 of the Stock Brokers Regulations, for failure to adhere to the prescribed Code of Conduct in respect of high standard of integrity, due skill, care and compliance with statutory requirements, etc.? III. Whether Noticee has violated SEBI Circular No. SEBI/MRD/SE/Cir–33/2003/27 dated August 27, 2003 and SEBI Circular No. MRD/DoP/SE/Cir–11/2008 dated April 17, 2008 through misutilization of clients’ funds and securities?

2.3 As per the SCN read with the Enquiry Report dated May 31, 2017 (“Enquiry Report”), the Noticee is alleged to have entered into circular and synchronized trades with 115 front entities in the scrip of Maharashtra Polybutenes. As a result, the Noticee is alleged to have created false or misleading appearance of trading in an otherwise illiquid scrip. In his submissions, the Noticee has contended that “the trades in the scrip of Maharashtra Polybutenes were executed on behalf of the clients who had given proper power of attorney to execute such trades and while executing such trades, the Noticee was unaware as to the counter parties of such trades. As a stock broker, the Noticee’s job was to execute the trades as instructed by the client and not to question the genuineness of the trades executed by the clients… If the allegation is of synchronized and circular trading, it is settled principle that without meeting of minds or collusion these types of trades cannot be executed by any entity, however, in the present case, no such allegation has been made against any of the counter parties including the Brokers to the counter parties. … Therefore, the violations of PFUTP Regulations cannot be alleged against me.”

2.4 In this context, the following is noted from the Enquiry Report:

i. The price and volume of the scrip of Maharashtra Polybutenes before, during and after the investigation period was as under:

TABLE I – PRICE, VOLUME DATA PERIOD PRICE MOVEMENT AVG. TRADED DAILY (RANGE) VOLUME Pre–Investigation period – January 1, 2009 to January 31, ₹58 to ₹54 25,752 2009 Investigation period – February, 2009 to July 2009 ₹53.35 to ₹79.95 44,599 Post–Investigation period August 1, 2009 to August 31, ₹81.45 to ₹108.60 38,741 2009 ii. The Noticee had the highest concentration of 54.27% in the scrip of Maharashtra Polybutenes at BSE in gross purchases (29,04,692 shares) and had traded for only 3 clients, viz. Vipul Bhagwandas Shah, Kamlesh Lalitkumar Nagarsheth and Rahul Ratailal Raghvan. The summary of the trading details during the period is given below.

TABLE II – SUMMARY OF TRADING DETAILS CLIENT NAME BUY TQ SELL TQ BUY % TO MARKET SELL % TO MARKET Vipul Bhagwandas Shah 14,16,815 10,300 26.47 0.19 Kamlesh Lautkumar Nagarsheth 12,99,043 10,975 24.27 0.21 Rahul Ratailal Raghvan 1,88,834 249 3.53 0.00 TOTAL 29,04,692 21,524 54.27 0.40 iii. Vipul Group: Vijay Bhagwandas Shah & Co., was the sole proprietorship concern of Vijay Bhagwandas Shah. On demise of Vijay Bhagwandas Shah, the registration was transferred to his son Noticee, Vishal Vijay Shah. Vijay Bhagwandas Shah and Vipul Bhagwandas Shah are sons of Bhagwandas Bhogilal Shah. Hence, the Broker Noticee and the client Vipul are related to each other. Vide a letter dated April 19, 2010, the Noticee had admitted that all the three clients viz. Vipul Bhagwandas Shah, Kamlesh Lalitkumar Nagarsheth and Rahul Ratailal Raghvan were all connected and related entities (These three entities are hereinafter referred to as “Vipul Group”). Accordingly, the Noticee and Vipul group are related to each other. In addition to the aforementioned, it is noted that the Noticee had not provided any documents to support that all trades executed in the trading accounts of the Vipul Group were actually as per clients’ instructions. Further, most of the shares bought on behalf of the Vipul Group were transferred to 115 clients/front entities by the Noticee and the Vipul Group had only received a few shares in their respective demat accounts.

2.5 A summary of the artificial volumes created by the Noticee during the period February–July 2009, is as under:

TABLE III – DETAILS OF ARTIFICIAL VOLUMES CREATED BY THE NOTICEE CLIENT NAME BUY TQ (THROUGH CIRCULAR CIRCULAR TRADES CIRCULAR TRADES VISHAL) TRADE VOLUME % W.R.T. OWN % W.R.T. MARKET TRADES Vipul Bhagwandas Shah 14,16,815 12,02,744 84.89 22.47 Kamlesh Lautkumar 12,99,043 11,15,120 85.84 20.84 Nagarsheth Rahul Ratailal Raghvan 1,88,834 1,51,176 80.06 2.82 TOTAL 29,04,692 24,69,040 85.00 46.13 i. The Noticee had transferred 26,33,376 shares of Maharashtra Polybutenes to a total of 115 front entities through direct pay-out from Clearing House or demat transfers (The aforementioned 115 entities and Vipul group are hereinafter referred to as “Vishal Group”), which was subsequently sold in the securities market. Out of the aforementioned 26,33,376 shares, the Noticee had bought 24,69,040 shares on behalf of the Vishal Group, thereby creating a false and misleading appearance of trading in the scrip of Maharashtra Polybutenes. Most of the aforementioned 115 entities did not have any other transaction in the scrip of Maharashtra Polybutenes other than a solitary sell transaction during the Investigation Period i.e. February 2009 to July 2009. The details of the aforementioned transactions are discussed in the subsequent paragraphs.

a. Transfer of shares of Maharashtra Polybutenes to the Vishal Group through direct pay–out from Clearing House under wrong/incorrect instructions given by the Noticee: It is noted that there were 136 instances wherein the Noticee had given wrong/incorrect instructions to the Clearing House for direct pay–out to 92 entities for 16,00,097 shares of Maharashtra Polybutenes. Of the aforementioned 92 entities, only Rahul Raghvan had traded through the Noticee during the Investigation Period; however, Rahul Raghvan had not traded on those days when he had received shares of Maharashtra Polybutenes through direct pay–out i.e. March 4, 6, and 12, 2009. Upon a consideration of the aforementioned, it is noted that the entire transfer of shares of Maharashtra Polybutenes by the Noticee were third party transfers i.e. shares were transferred to 92 entities other than clients of the Noticee as noted below:

b. Further, the shares (1.9 Lakh shares) which were earlier received by Rahul Raghvan in March 2009 were transferred back to the Noticee. Subsequently, the shares were transferred by the Noticee to the front entities mentioned above through off–market transfers.

c. Transfer of shares of Maharashtra Polybutenes to the Vishal Group from the Noticee’s demat accounts: It is also noted that the Noticee had transferred a total of 10,33,279 shares of Maharashtra Polybutenes to 47 front entities from its 3 demat accounts, viz. IN30107180063672, 1205480000009822 and 1205480000009837, as under: TABLE V – DETAILS OF DEMAT TRANSFERS SR. NO. CLIENT NAME PAN TRADED QUANTITY 1. KETAN HASMUKHLAL DOSHI AAAPD8373R 221000 2. SONI RAMNIWAS BANKATLAL HUF AADHS0187H 106000 3. ASHOK MOTILAL SUTHAR BGLPS3711C 100000 4. NISHA N SHAH AASPS3544H 85000 5. J. K PRASAD (HUF) AAGHS9010Q 81192 6. RAMNIWAS BANKATLAL SONI AFHPS4429K 62000 7. RACHITA ROHIT SONI AHWPM2634F 30000 8. PRAVEEN KUMAR AOVPP7890G 30000 9. PAPAL GOENKA ALIPG0081A 24000 10. NIMISH H SHAH AMTPS1676D 22000 11. DHIRENDRAKUMAR R.KHOKHANI ACMPK1948B 22000 12. APOORVASHREE KANORIA AOFPK7326C 20000 13. KANTILAL P CHHAHER ADDPK6179L 20000 14. DIMPLE PARAG MADHANI AKMPM0281D 15600 15. SURESH VRAILAL SHAH (HUF) AAPHS29178 13000 16. OMPRAKASH GYARSILAL GARG HUF AAAH05090E 12400 17. BIJALJINESH SHAH AAEPS2772F 12000 18. MANJUBEN SURESHBHAI SHAH AEAPS3797Q 11900 19. PIYUSH PRAFULCHANDRA AVLANI AABPA1996N 11800 20. SNEHLATA AGRAWAL ABEPA90293 11634 21. DEEPAK KESHAVLAL THAKKER AACHD5555M 11000 22. VIMLA DEVI BADJATYA ADSPB194OR 10000 23. HARISH KUMAR ACOPK2768D 10000 24. VINODKUMAR AGARWAL AABPA3586G 9000 25. LAUTA SHARMA AVRPS8053P. 6600 26. SHASHI SHARMA AVRPS8051R 6321 27. BHARATHKUMAR R. KHOKHANI ACMPK1947Q 6000 28. NEETA PRAMOD ABZPA2505Q 5500 29. VANDANA AGARWAL ACAPA6320P 5500 30. KALA DINESH PATEL ADAPP7045H 5000

31. PRAMOD AAAPA8435F 5000 32. DHARAMSI RAM AKBPP9575E 5000 33. RUPA B. GUDI ACAPG8692C 500 34. ALKA AJAYPRAKASH AASPK9806A 4070 35. SANTOSH SUWALAL CHANGEDIA AAKPC1858N 4000 36. DURGA DEVI KOGTA ABFPK1047H 4000 37. BADAMBAI F AAUP81718L 4000 38. SURESH VRAJLAL SHAH AAKPS1346P 4000 39. VIPUL BANKA AJAPI33954D 3200 40. AMIT VIJAY BHATEWARA ACMPB9579R 3000 41. ANUJ SANJEEV AKGPG0504M 2206 42. LATA B JAIN ABBPL2241E 1000 43. NEHA JITENDRA KOTHARI AQTPK9132C 850 44. SUNITA GARG ABTPG7470Q 596 45. MOHD SAMIM KHAN AHPPK0385C 456 46. TRILOK CHAND DEEWAN ABIPD4875D 354 47. JINESH SURESH SHAH AAVPS8893E 100 Total 10,33,279 d. Upon a consideration of the aforementioned transfer of shares of Maharashtra Polybutenes as discussed at paragraphs 2.5(a) and (c), it is noted that a total of 115 front entities had received 26,33,376 (16,00,097 + 10,33,279) shares of Maharashtra Polybutenes from the Noticee. The aforementioned 115 entities had sold the aforesaid shares of Maharashtra Polybutenes in the securities market. Out of the 26,33,376 shares, 24,69,040 shares were bought by the Vishal Group (discussed in the subsequent paragraphs). Thus, the Noticee had created false and misleading appearance of trading in the scrip of Maharashtra Polybutenes.

2.6 Out of the above mentioned 24,69,040 shares sold by the aforementioned 115 entities, trades with respect to 23,82,687 such shares were executed within the Vishal group with a buy and sell order time difference of less than 60 seconds. Further, 15,91,179 shares were synchronized in terms of the buy and sell order quantity, rate and order time difference of less than 60 seconds, as detailed below:

ii. The Noticee had earlier received 1 Lakh shares of Maharashtra Polybutenes on February 2, 2009, from its Promoter i.e. Brijmohan Rathi, out of which it transferred 99,000 shares to 5 entities (three of whom belonged to the Vishal Group). Out of the said shares, the Vishal Group had received 75,000 shares and had in turn sold 86,000 shares (11,000 shares were received directly from the Noticee’s pool account) in the securities market. The Noticee bought 85,481 such shares from three entities of the Vishal Group, viz. Bijal Jinesh Shah, Suresh Vrajlal Shah HUF and Ramniwas Bankatlal Soni, during the period February 4–17, 2009.

2.7 The Noticee had created artificial volume and misleading appearance of trading in the scrip of Maharashtra Polybutenes through the aforesaid transactions involving circular trades as explained below:

a. Circular trades with Bijal Jinesh Shah: The Vipul Group had bought 8,000 shares on February 4, 2009 and 4,000 shares on February 5, 2009 from Bijal Jinesh Shah in the market. In total, 12,000 shares were bought by Vipul Group from Bijal Jinesh Shah. The Noticee had transferred 12,000 shares to Bijal Jinesh Shah on Feb 5, 2009. Bijal Jinesh Shah had transferred 12,000 shares to its Broker, Kirti R. Shah Shares & Stock Brokers Private Limited’s pool account for pay–in of securities of shares sold on February 4 and February 5, 2009. Since the Noticee had bought shares on behalf of the Vipul Group, the Noticee had received these 12,000 shares back as part of pay–out of securities. In this manner, circular trades of 12,000 shares were executed between Noticee–Bijal Jinesh Shah–Noticee.

b. Circular trades with Suresh Vrajlal Shah–HUF: Vipul Group had bought 6000 shares on February 5, 2009 and 6000 shares on February 10, 2009 from Suresh Vrajlal Shah HUF in the market. In total, 12,000 shares were bought by Vipul Group from Suresh Vrajlal Shah. The Noticee had transferred 12,000 shares to Suresh Vrajlal Shah–HUF on February 6, 2009. Suresh Vrajlal Shah–HUF had transferred 12,000 shares to its Broker, Kirti R Shah Shares & Stock brokers Private Limited’s pool account on February 6 and 11, 2009 for pay–in of securities of shares sold on February 5 and 10, 2009. Since the Noticee had bought on behalf of Vipul Group, the Noticee had received 12,000 shares as part of pay–out of securities. Hence, 12,000 shares of the circular trades executed between Noticee–Suresh Vrajlal Shah HUF–Noticee. These shares were again transferred to different entities for further creation of artificial volumes.

c. Circular trades with Ramniwas Bankatlal Soni: Vipul Group had bought 21,981 shares on February 6, 2009, 36,000 shares on February 9, 2009 and 3,500 shares on February 10, 2009, from Ramniwas Bankatlal Soni in the securities market. In total, Vipul Group had bought 61,481 shares from Ramniwas Bankatlal Soni out of 62,000 shares sold by him. The Noticee had transferred 62,000 shares to Ramniwas Bankatlal Soni on February 5, 2009, who in turn had transferred these shares to its Broker, Motilal Oswal Securities Private Limited’s pool account for pay–in of securities for the shares sold on February 6, 2009 and February 10, 2009. Since the Noticee had bought on behalf of Vipul Group, the Noticee had received 61,481 shares as part of pay–out of securities. In this manner, Circular Trades of 61,481 shares were executed between Noticee–Ramniwas Bankatlal

Soni –Noticee. These securities were again transferred to different entities for further creation of artificial volumes.

d. The above 3 instances are the first level circular trades started from the shares provided by the Promoter of Maharashtra Polybutenes, to the Noticee. The above cycles were continued by the Noticee and in total, the Noticee had transferred shares to 115 front entities as detailed in the preceding paragraphs and bought from the same entities thereby creating artificial volume of 24,69,040 shares by way of circular trades. These entities sold the shares received from the Noticee in the securities market.

2.8 The day-wise analysis of circular trades is given below.

i. An analysis of above mentioned table shows that:

a) On more than 20 trading days, the Noticee Group had traded more than 90% of the traded volume in the market. Out of these, more than 90% were circular trades. b) On more than 50 trading days, the Noticee Group had traded more than 50% of the traded volume in the market. Out of these, more than 50% were circular trades. c) Out of 120 trading days, the Noticee Group had traded on 108 days and had executed circular trades on 100 days.

2.9 The circular traded volume created for more than one lakh shares is discussed below:

i. The circular trades chart is given below.

ii. Prasad K. J. (HUF) / Jai Kishore Prasad – HUF: Prasad K. J. (HUF) (“Prasad”) had sold 2,25,000 shares through the broker Doha Brokerage and Financial Services Limited (formerly known as Select Securities Ltd.) (“Doha Brokerage”). Out of 2,25,000 shares, 2,24,399 shares were bought by Vipul Group, viz. Kamlesh – 1,32,000 shares and Vipul – 92,399 shares i.e. except 601 shares, the entire sell shares were bought by Vipul Group through the Noticee.

(a) Shares received from the Noticee, by Prasad: Prasad had received 2,25,000 shares from the Noticee on May 14, 2009 and the same quantity of shares was transferred to meet the pay-in obligation of Prasad. The entire quantity of these shares were received by Prasad from Noticee on May 14, 2009 and transferred to the broker Doha Brokerage’s pool account by Prasad on May 16, 2009 for the sell trades executed on May 15, 2009. (b) Shares received back by the Noticee, from Prasad: Out of 2,25,000 shares sold by Prasad during the period May 15–June 25, 2009, 2,24,399 shares were bought by Vipul Group, viz. Kamlesh – 1,32,000 shares and Vipul – 92,399 shares i.e. except 601 shares, the entire sell shares were bought by Vipul Group through the Noticee. Accordingly, out of the 2,25,000 shares sold by Prasad, 2,24,399 shares were received back by the Noticee as part of pay–out obligation. Hence, 2,24,399 shares of circular trades were executed between Noticee–Prasad–Noticee.

iii. Piyush Prafulchandra Avlani and Ketan Hasmukhlal Doshi: Piyush Prafulchandra Avlani (“Piyush”) and Ketan Hasmukhlal Doshi (“Ketan”) had sold 3,14,900 shares through Sunidhi Securities & Finance Ltd. (“Sunidhi”). Out of 3,14,900 shares, 3,14,000 shares were bought by Vipul Group, viz. Kamlesh –1,44,500 shares, Rahul – 84,900 shares and Vipul – 99,600 shares.

(a) Shares received from the Noticee, by Piyush: Piyush had received 1,94,900 shares from the Noticee on March 17–20, 2009 and March 25–26, 2009, to meet the pay-in obligation. (b) Shares received back by the Noticee from Piyush: Out of 1,94,900 shares sold by Piyush during the period March 17–26, 2009, 1,94,700 shares were bought by Vipul Group. Accordingly, out of 1,94,900 shares transferred by the Noticee to Prasad, 1,94,700 shares were received back by the Noticee as part of pay–out obligation. Hence, 1,94,700 shares of the circular trades were executed between Noticee–Piyush– Noticee. (c) Shares received from the Noticee, by Ketan: Ketan had received 1,20,000 shares from the Noticee on March 23, 2009 and March 25, 2009, to meet the pay-in obligation. (d) Shares received back by the Noticee from Ketan: Out of 1,20,000 shares sold by Ketan during the period March 23–24, 2009, 1,19,300 shares were bought by Vipul Group. Accordingly, out of 1,20,000 shares transferred by the Noticee to Prasad, 1,19,300 shares were received back by the Noticee as part of pay–out obligation. Hence, 1,19,300 shares of the circular trades were executed between Noticee–Ketan– Noticee.

iv. Rameshwar Shaw and Mahendra Kumar: Rameshwar Shaw (“Rameshwar”) and Mahendra Kumar (“Mahendra”) had sold 2,85,000 shares through BGSE Financials Ltd. (“BGSE Financials”). Out of 2,85,000 shares, 2,83,996 shares were bought by Vipul Group, viz. Kamlesh – 58,999 shares and Vipul – 2,24,997 shares.

(a) Shares received from the Noticee, by Rameshwar: Rameshwar had received 1,55,000 shares from the Noticee during the period July 6–30, 2009, to meet the pay-in obligation. (b) Shares received back by the Noticee from Rameshwar: Out of 1,55,000 shares sold by Rameshwar during the period July 6–29, 2009, 1,54,996 shares were bought by Vipul Group. Accordingly, out of 1,55,000 shares transferred by the Noticee to Rameshwar, 1,54,996 shares were received back by the Noticee as part of pay–out obligation. Hence, 1,54,996 shares of the circular trades were executed between Noticee–Rameshwar–Noticee. (c) Shares received from the Noticee, by Mahendra: Mahendra had received 1,35,000 shares from the Noticee during the period June 3–July 14, 2009, to meet the pay-in obligation. (d) Shares received back by the Noticee from Mahendra: Out of 1,25,000 shares sold by Mahendra during the period June 3–July 13, 2009, 1,24,000 shares were bought by Vipul Group. Accordingly, out of 1,25,000 shares transferred by the Noticee to Mahendra, 1,24,000 shares were received back by the Noticee as part of pay–out obligation. Hence, 1,24,000 shares of the circular trades were executed between Noticee–Mahendra–Noticee.

2.10 Synchronized Trades: Out of 24,69,040 shares bought by Vipul Group from 115 front entities, Vipul Group had synchronized trades with 90 entities for the quantity 15,23,647 shares i.e. equal buy and sell order quantity, equal buy and sell order rate and order time difference of buy and sell order of less than 60 seconds (also refer to the Table at page 15). The summary of synchronized trades of the Vipul Group is given below.

TABLE IX – SUMMARY OF SYNCHRONIZED TRADES OF THE VIPUL GROUP BUY CLIENT SYNCHRONIZED SYNCHRONIZED TRADES BUY % TO COUNT OF COUNT OF CP COUNT NAME TQ % WITH OWN BUY MARKET ORDER ORDER OF TRADE TRADE NUMBER NUMBER NUMBER Vipul 7,33,255 51.75 13.70 150 150 150 Bhagwandas Kamlesh 7,48,516 57.62 13.99 138 138 138 Lalitkumar Nagarsheth Rahul Ratailal 41,876 22.18 0.78 5 5 5 GRAND TOTAL 15,23,647 28.47 293 293 293 i. 28.47% of the market trades were synchronized trades with more than 50% of the owned shares being synchronized (two clients).

2.11 Upon a consideration of the trade and order log of the aforesaid trades, it is observed that the same had resulted in circular trades and synchronized trades, which were structured in terms of time difference of less than 60 seconds in majority cases, buy and sell order quantity and rates were also matched in substantial quantities.

2.12 As noted from the preceding paragraphs, the Noticee had transferred 26,33,376 shares to 115 front entities. Out of these 26,33,376 shares, the Noticee had bought 24,69,040 shares through the Vishal Group. The Noticee had repeatedly traded with the same set of entities in a circular and synchronized manner. The Noticee's trading pattern over many days appears not for genuine trading but only to create demand through manipulative means to induce lay investors into believing that there existed a large demand in the scrips. Herein, it may be noted that the Hon’ble Securities Appellate Tribunal (“SAT”) in the matter of Nirmal Bang Securities Pvt. Ltd. vs. SEBI (Appeal No. 54 of 2002 – Order dated 31, 2003), had observed: “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 transaction 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 too 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.” Further, the Hon’ble SAT in the matter of Ajmera Associates Pvt. Ltd. vs. SEBI (Appeal No.190 of 2010 – Order dated December 13, 2010), had observed: “One has to look to the trading pattern and if the trades match too often or if the matching was done not by the system but by manipulating the same. Similarly, if two or more market players start trading in circular and do not allow the shares to go out of the circle, it could reasonably be inferred that both trades and their brokers are colluding to execute such artificial trades which give a misleading appearance in the market without change in beneficial ownership in the traded scrip. Such an inference can be drawn more readily when the circle consists of a larger Group of entities. In the absence of prior meeting of minds and knowing the mechanism of the trading system… The intention of the parties and the brokers will have to be gathered from the surrounding circumstances looking at the trading pattern, the frequency of trades, their volumes and such other circumstances as may be relevant for such determination.” Further, the Hon’ble Supreme Court in the matter of SEBI vs. Kishore Ajmera (Civil Appeal No. 2818 of 2008), had observed: “In these cases the volume of trading in the illiquid scrips in question was huge, the extent being set out hereinabove.

Coupled with the aforesaid fact, what has been alleged and reasonably established, is that buy and sell orders in respect of the transactions were made within a span of 0 to 60 seconds. While the said fact by itself i.e. proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume of trading can reasonably point to some kind of a fraudulent/manipulative exercise with prior meeting of minds… When over a period of time such transactions had been made between the same set of brokers or a Group of brokers a conclusion can be reasonably reached that there is a concerted effort on the part of the concerned brokers to indulge in synchronized trades the consequence of which is large volumes of fictitious trading resulting in the unnatural rise in hiking the price/value of the scrip(s)... The conclusion has to be gathered from various circumstances like that volume of the trade effected; the period of persistence in trading in the particular scrip; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors.

The fact that the broker himself has initiated the sale of a particular quantity of the scrip on any particular day and at the end of the day approximately equal number of the same scrip has come back to him; that trading has gone on without settlement of accounts i.e. without any payment and the volume of trading in the illiquid scrips, all, should raise a serious doubt in a reasonable man as to whether the trades are genuine. The failure of the brokers/sub-brokers to alert themselves to this minimum requirement and their persistence in trading in the particular scrip either over a long period of time or in respect of huge volumes thereof, in our considered view, would not only disclose negligence and lack of due care and caution but would also demonstrate a deliberate intention to indulge in trading beyond the forbidden limits thereby attracting the provisions of the FUTP Regulations. Upto an extent such conduct on the part of the brokers/sub-brokers can be attributed to negligence occasioned by lack of due care and caution. Beyond the same, persistent trading would show a deliberate intention to play the market.

The dividing line has to be drawn on the basis of the volume of the transactions and the period of time that the same were indulged in. In the present cases it is clear from all these surrounding facts and circumstances that there has been transgressions by the respondents beyond the permissible dividing line between negligence and deliberate intention.” Having regard to the aforementioned observations of the Hon’ble Supreme Court and SAT in light of the facts in the instant proceedings, the pattern of synchronized order placement and circular trades with select parties in a thinly traded scrip clearly points out that the transactions were carried out with the intention that the order of the Noticee with other entities should match and there was a prior meeting of minds with respect to these transactions. The trading pattern indicates that the time difference between buy and sell order was approximately close to or less than a minute. Further, on more than 20 trading days, Vishal Group had traded more than 90% traded volume in the market. Out of these, more than 90% were circular trades as detailed in the preceding paragraphs.

These trades among themselves resulted in the creation of artificial volumes in the scrip of Maharashtra Polybutenes. Further, out of 120 trading days, the Vishal Group had traded on 108 days and had executed circular trades on 100 days. The Noticee had dealt in the scrip of Maharashtra Polybutenes along with other connected/front entities in a fraudulent manner by entering into transactions that were not genuine, resulting in a misleading appearance of trading and artificial price manipulation.

2.13 Sections 12A(a)–(c) of the SEBI Act read with Regulations 3(a), (b), (c) and (d) of the PFUTP Regulations, 2003 inter alia prohibit employment of any manipulative/deceptive device, scheme or artifice to defraud in connection with dealing in securities; engaging in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with dealing in securities. Regulation 4(1) of the PFUTP Regulations, 2003, provides for prohibition on indulging in fraudulent or unfair trade practices in securities while Regulations 4(2)(a), (b), (d), (e), (g) and (p) inter alia states that dealings in securities by a person shall be deemed as fraudulent if it involves ‘fraud’ including (a) indulging in an act which creates false or misleading appearance of trading in the securities market, (b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss, (d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money for inducing such person for dealing in any security with the object of causing fluctuation in the price of the security, (e) any act or omission amounting to manipulation of the price of a security, (g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security and (p) an intermediary predating or otherwise falsifying records such as contract notes.

The Hon'ble Securities Appellate Tribunal in Ketan Parekh vs. Securities & Exchange Board of India (Appeal No. 2 of 2004 dated 14.07.2006) had held that: “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.” Therefore, in view of the aforementioned discussions, it is established that the Noticee by entering into circular trades and synchronized trades, perpetrated fraud in the securities market using as many as 115 front entities and created false or misleading appearance of trading in an otherwise illiquid scrip, entered into transactions without intention of change of ownership of security, manipulated the price of scrip of Maharashtra Polybutenes.

The aforementioned actions of the Noticee clearly resulted in ‘fraud’ under the PFUTP Regulations, 2003, being committed, which in turn affected the interests of investors in the securities market. Accordingly, upon a consideration of the preceding paragraphs, I find that the Noticee had violated Sections 12A(a), (b) and (c) of the SEBI Act and Regulations 3(a), (b), (c), (d) read with Regulations 4(1), 4(2)(a), (b), (d), (e), (g) & (p) of the PFUTP Regulations 2003.

3.1 Pay–out irregularities: As per the SCN read with the Enquiry Report, in a large number of buy transactions, the Noticee is alleged to have given wrong instructions to the Clearing House for direct pay–out to 92 front entities, on dates when such entities had not traded, made demat transfer of shares to front entities (and not actual clients), misutilized client securities. During the hearing and in its additional written submissions, the Noticee has submitted that “if any violations were committed, it would be on account of certain inadvertence which will not be repeated in future.”

3.2 As noted from the preceding paragraphs, the Noticee had given incorrect/wrong instructions to Clearing House in a large number of buy transactions, for direct payout to 92 front entities who did not trade on the respective trade dates, for 16,00,097 shares, which is highly irregular (refer to Table at page 12 of this Order). It is observed that SEBI Circular No. SEBI/MRD/SE/Cir- 33/2003/27 dated August 27, 2003, clearly indicates that a Stock Broker had to transfer the securities to the respective clients. There is no satisfactory explanation from the Noticee for third party transfers of shares to entities/third parties other than clients, considering that the same quantity of shares were received back after honoring pay–out obligation of others. Hence, it can be reasonably inferred that Noticee had transferred the shares for creating artificial volumes through circular and synchronized trades. I therefore agree with the DA’s findings that all the aforementioned instances of mis–utilisation of client securities were clearly in violation of the following provisions of the SEBI circular no. MRD/DoP/SE/Cir–11/2008 dated April 17, 2008 with respect Collateral deposited by clients with brokers and SEBI Circular No. SEBI/MRD/SE/Cir– 33/2003/27/08 dated August 27, 2003:

“SEBI Circular No. MRD/DoP/SE/Cir–11/2008 dated April 17, 2008 – Brokers should have adequate systems and procedures in place to ensure that client collateral is not used for any purposes other than meeting the respective client’s margin requirements/pay-ins. Brokers should also maintain records to ensure proper audit trail of use of client collateral.

SEBI Circular No. SEBI/MRD/SE/Cir–33/2003/27/08 dated August 27, 2003 – In the case of securities also giving/taking delivery of securities in “demat mode” should be directly to/from the “beneficiary accounts” of the clients except delivery of securities to a recognized entity under the approved scheme of the stock exchange and/or SEBI.”

3.3 Further, it is the responsibility of the Stock Broker to ensure that shares are transferred to relevant clients and not third parties. Since the Noticee is a registered Broker, it is required to adhere to the Code of Conduct prescribed for Stock Brokers under the Stock Brokers Regulations. The conduct of the Noticee in this case clearly exhibited complete lack of skill, care and diligence, etc. Thus, I agree with the DA’s findings that in addition to the violation of the aforementioned SEBI Circulars dated August 27, 2003 and April 17, 2008, the Noticee has also violated the provisions of Clauses A (1), (2), (3), (4) and (5) of the Code of Conduct of Stock Brokers as provided in Schedule II under Regulation 9 of the Stock Brokers Regulations, which are reproduced below:

“Conditions of registration. 9. Any registration granted by the Board under regulation 6 shall be subject to the following conditions, namely,- … (f) he shall at all times abide by the Code of Conduct as specified in Schedule II; and … Schedule II SEBI (Stock Brokers and Sub-brokers) Regulations, 1992

Code of Conduct for Stock Brokers [Regulation 9] A. General. (1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business (2) Exercise of due skill and care: A stock-broker, shall act with due skill, care and diligence in the conduct of all his business. (3) Manipulation: A stock broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains. (4) Malpractices: A stock broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors’ interest or which leads to interference with the fair and smooth functioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness.

(5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.”

4.1 Issuance of Contract Notes for fictitious trades: As per the SCN read with the Enquiry Report, the Noticee is alleged to have falsified records and issued fictitious contract notes to 20 front entities who had received shares through de-mat transfer/Direct pay-out. During the hearing, the Noticee has submitted that “if any violations were committed, it would be on account of certain inadvertence which will not be repeated in future.”

4.2 The Noticee had issued contract notes to 20 entities with fictitious transactions for the quantity of 2,88,000 shares. These entities were part of Vishal Group (115 entities who had received shares). The following modus operandi was adopted by the Noticee:

a. The Noticee had transferred Maharashtra Polybutenes shares through demat transfer / Direct pay–out to the entity. b. The Noticee had issued contract notes for the quantity of shares which was transferred by it mentioning the fictitious transactions. The purchase rate mentioned in the contract note was very low compared to the prevailing market price when the share was transferred to the entity. These contract notes were issued back dated and mostly a year back so that the client could claim for the long term benefits. c. The entity made the payment to the Noticee for the amount mentioned in the contract note (as observed from the concerned entity’s bank account statement). d. The entity sold these shares in the market and obtained the contract note.

e. Since the entity had purchased at very low rate (as per the fake transactions contract note) and sold in the market (higher price compared to earlier), the entity had earned the profit. Further, since the periods between the two contracts notes were more than a year, the entity had claimed the long term benefits in most of the cases as mentioned in the income tax return submitted by the entity as per the Investigation Report.

4.3 However, the trade details mentioned in the contract notes, viz. trade date, trade time, trade no., quantity, etc. did not appear in the trade details submitted by/available with the Stock Exchange.

4.4 It is, therefore, established that Noticee has falsified records and issued fictitious contract notes, and dealt in securities in a fraudulent manner in violation of the provisions of Regulations 4 (1), 4 (2) (a), (b), (d), (e) & (p) of the PFUTP Regulations 2003.

5.1 As regards the plea for leniency in lieu of the Adjudicating Officer’s Order dated September 14, 2015, against the Noticee, I note from the material on record that SEBI had imposed the monetary penalty of ₹15 Lakh for failure by the Noticee to comply with the summons issued by the Investigating Authority, SEBI. As a result, the investigation conducted by SEBI in respect of alleged irregularities in the trading in the scrip of Maharashtra Polybutenes was stalled on account of failure by the Noticee to furnish vital information and also information withheld by it including demat statements and bank account statements for the year 2009, copy of contract notes issued to the clients, complete set of KYC of clients, details of payments made/received by Noticee to its clients, etc. Further, in its submissions, the Noticee has merely stated that “no such violations will be repeated in future and the business will now be conducted in a very fair manner without causing any harm to the integrity of the securities market in any manner whatsoever.” Upon a consideration of the aforementioned submissions in light of the facts in the instant proceedings and having regard to the aforementioned

Adjudicating Officer’s Order, I note that the violations committed by the Noticee are of a serious nature and do not warrant any leniency. I am therefore, not inclined to accept the Noticee’s plea.

6.1 For the reasons mentioned in the preceding paragraphs, I find myself in agreement with the findings of the DA that the Noticee had violated the aforementioned provisions of the SEBI Act, PFUTP Regulations 2003, Stock Brokers Regulations and the SEBI Circulars. Having regard to the facts and circumstances of the instant proceedings, I accept the recommendation of the DA that the Certificate of Registration of the Noticee be cancelled.

ORDER –

7.1 I, in exercise of the powers conferred upon me under Section 19 read with Section 12(3) of the SEBI Act read with Regulation 28(2) of the Intermediaries Regulations, hereby cancel the Certificate of registration granted to the Noticee, i.e. Vishal Vijay Shah, (Member, BSE having SEBI Registration No. – INB011277614), as a Stock Broker.

7.2 This Order shall come into force on expiry of twenty one days from the date of this Order. This Order disposes of the enquiry proceedings initiated against the Noticee following the investigation conducted by SEBI into the alleged irregularities in the trading in the scrip of Maharashtra Polybutenes for the period February–July, 2009.

7.3 A copy of this Order shall be served on the Noticee immediately. A copy of this Order shall also be served on the recognized Stock Exchanges and Depositories for ensuring compliance of this Order.

Place: Mumbai G. MAHALINGAM Date: July 8, 2020 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA