Order in respect of B. M. Gandhi Securities Private Ltd. in the matter of Sawaca Communication Ltd

WTM/PS/23/IVD/ID-9/AUG/2011 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER IN THE MATTER OF SAWACA COMMUNICATION LIMITED In respect of B. M. Gandhi Securities Private Limited (SEBI Registration No. INB010984835) Date of hearing: November 19, 2010 Appearances For noticee: Mr. Paresh Gandhi, Director Mr. Abdul Wahab A. H. Mukri, Advocate For SEBI: Mr. Siva Govindo Patra, Manager Mr. Pradeep Kumar, Legal Officer ORDER Under Regulation 28(2) read with Regulations 38 (2) of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigation into the dealings in the shares of Sawaca Communication Limited (hereinafter referred to as ‘SCL’) for the period of October 04, 1999 to December 30, 1999 (hereinafter referred to as ‘investigation period’). During the investigation period, the price of the scrip increased from `19.35 as on October 01, 1999 to `106 as on January 04, 2000 at BSE. The price rise was accompanied by significant increase in the volumes in the scrip of SCL.

2. During the course of investigation, it was inter alia revealed that B.M. Gandhi Securities Private Limited (hereinafter referred to as ‘noticee’), Member, BSE bearing SEBI Registration No. INB 010984835, while dealing for its sub broker Harvic Management Services (I) Limited (hereinafter referred to as ‘Harvic’) had aided and abetted it in the creation of artificial market in the scrip of SCL and thereby failed to exercise due care and diligence.

3. Based on the findings of the investigation, SEBI initiated enquiry proceedings against the noticee in terms of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as ‘Enquiry Regulations’), by appointing an Enquiry Officer under Regulation 5(1) of the Enquiry Regulations vide order dated May 13, 2003 read with subsequent order dated July 24, 2003. SEBI appointed the Enquiry Officer, to enquire into the alleged violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred to as ‘PFUTP Regulations’) and the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as ‘Broker Regulations’). The Enquiry Officer submitted his Report dated February 08, 2005, in terms of Regulation 13 (1) of the Enquiry Regulations recommending a penalty of suspension of the certificate of registration of the noticee for a period of two months for violating the provisions of Regulation 7 read with Schedule II of the Broker Regulations and Regulation 4 of the PFUTP Regulations.

4. Subsequently, a show cause notice dated March 22, 2005 (hereinafter referred to as ‘SCN’) under Regulation 13(2) of the Enquiry Regulations was issued to the noticee asking it to show cause as to why an appropriate action including the penalty recommended by the Enquiry Officer, should not be imposed. The noticee was advised to reply to the SCN, together with the documents that it may choose to rely upon in support of its reply within fifteen days of the receipt thereof. It was also informed that in case of failure, it would be presumed that it had no explanation to offer and that SEBI shall be free to take such action in the manner as it deemed fit. Vide this SCN, the noticee was also asked to explain as to why consequential action under Regulation 3(2) of the SEBI (Criteria for Fit and Proper Person) Regulations, 2004, should not be taken against it. A copy of the Enquiry Report was also forwarded to the noticee along with the SCN.

5. The noticee replied to the SCN vide its letter dated April 11, 2005 and requested for an opportunity of personal hearing. Accordingly, an opportunity of personal hearing was granted to the noticee on September 06, 2007. Due to change of the appropriate authority, a further opportunity of personal hearing was granted to the noticee on October 22, 2010. However, the noticee vide its letter dated October 21, 2010 requested for an adjournment on the ground of non-availability of its advocate. The request of the noticee was acceded to and the hearing was adjourned to November 19, 2010. On the scheduled date, Mr. Paresh B. Gandhi, Director of the noticee appeared along with Mr. Abdul Wahab A. H. Mukri, Advocate and made submissions.

6. I have carefully considered the findings of investigation, Enquiry Report, SCN issued to the noticee, reply received. The submission of the noticee, in brief are: - Harvic had never defaulted in payment and performed its pay-in obligation scrupulously. - There was no occasion to doubt the bonafide of the subject sub-broker. - It did not have the prior knowledge of the irregularity in the transactions, when it came to know about the same business of the said sub-broker was immediately stopped and applied for the cancellation of the certificate of registration issued by SEBI. - The trades were executed by Harvic from the terminal installed in its office and the noticee had no direct control over the said terminal.

7. I note that Enquiry officer has found the noticee guilty of the violation of the provisions of Regulation 4 of PFUTP Regulations and the Code of Conduct for stock brokers as stipulated in Schedule II under Regulation 7 of the Broker Regulations. I have seen the trading details of the noticee during the period of investigation in the scrip of SCL which contributed to about 12% of the total trading at BSE. I note that the noticee during the period of investigation had not traded in its own account and only a very few trades were executed on account of its direct clients. It is seen from the Enquiry Report that the trading by Harvic in the scrip of SCL had accounted for about 99% of the trades of the noticee during the period of investigation. Having considered this, I note that the charge of placing large orders by its sub-broker so as to influence the price of the scrip of SCL could not be proved. In absence of the material details like execution of the trades, etc. I am of the considered view that the charge of violation of PFUTP Regulations is not established as against the noticee.

8. Further, I note that the submission of the noticee that during the relevant time it had no direct control over its sub-broker Harvic, as the terminal was located at the premises of Harvic and the orders placed from there directly reflected on the exchange. This submission of the noticee appears to be a tactic to distance itself from Harvic. However, as a broker, the noticee had all the means to raise concern that Harvic was contributing more than 90% of its trades in the scrip of SCL and the noticee should have exercised all possible control over the affairs and trading pattern of its sub-broker.

9. The noticee has also argued that it had discontinued trading with Harvic pursuant to realizing the mischief. I note that the steps taken by the noticee were in the nature of preventing any further damage by its sub-broker to the market. However, had the noticee taken necessary precautions beforehand, then the same could have prevented Harvic from succeeding in its game plan. This leads to the conclusion that the noticee has failed to comply with its duties as a stock broker as specified under the provisions of the Broker Regulations. Thus, I hold that the noticee has failed to exercise due skill, care and diligence as specified in Regulation 7 read with Clause A (2) of the Code of Conduct as specified in Schedule II of the Broker Regulation.

10. In view of the above discussion, I do not consider this a fit case to impose the penalty as recommended by the Enquiry Officer. In the interest of justice and equity, I dispose of the present Enquiry proceedings as ordered herein below.

11. I note that pursuant to the notification of the Intermediaries Regulations, the Enquiry Regulations have been repealed and in terms of Regulation 38(2) of the Intermediaries Regulations, notwithstanding such repeal, any enquiry commenced under the Enquiry Regulations, shall be deemed to have been commenced under the corresponding provisions of intermediaries Regulations.

12. Accordingly, in exercise of the powers conferred upon 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 warn the noticee, B.M. Gandhi Securities Private Limited, (SEBI Registration no. INB 010984835) [PAN: AABCB 3557B] member, Bombay Stock Exchange to be more careful and cautious in the conduct of its business and to adhere to and comply with all the statutory provisions while carrying out its activities in the securities market.

DATE : 25/AUG/2011 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA