Order in respect of HB Securities Ltd in the matter of DCM Shriram Consolidated Limited

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) had initiated enquiry proceedings, vide Order dated August 2, 2004 read with a subsequent Order dated November 8, 2004, under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (since repealed) against HB Securities Limited (hereinafter referred to as the stock broker), a stock broker registered with SEBI and a member of the National Stock Exchange of India Limited (hereinafter referred to as NSE), to enquire into the alleged violations said to have been committed by it while dealing in the shares of DCM Consolidated Limited (hereinafter referred to as the Company) for the period between March 12, 2001 and April 24, 2001 (hereinafter referred to as the investigation period). The Enquiry Officer, vide Report dated March 16, 2006, while finding the stock broker guilty of violating Regulation 4(a),(b),(c) and (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(1) to (5) of the Code of conduct specified for stock brokers under the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as the Stock Brokers Regulations), had recommended that its certificate of registration be suspended for a period of three months.

Thereafter, a notice dated March 24, 2006 was issued to the stock broker requiring it to show cause as to why action as recommended by the Enquiry Officer or any other action as considered appropriate by SEBI should not be taken against it. The said notice also required the stock broker to explain why consequential action under Regulation 3(2) of the Securities and Exchange Board of India (Criteria for Fit and Proper Persons) Regulations, 2004 (since repealed), should not be taken against it. A copy of the Enquiry Report was also forwarded to the stock broker along with the said notice. Thereafter, the stock broker had responded to the said notice, vide reply dated April 25, 2006, wherein it had made elaborate submissions. The stock broker, subsequently filed additional submissions, vide letter dated March 5, 2007 and was also heard on July 16, 2009, when it was represented by Mr. Abdullah Hussain, Advocate, who made submissions on the lines of the aforesaid replies. Mr. Praveen Gupta, whole time director of the stock broker was also present in the hearing.

2. I have considered the Enquiry Report, the show cause notice, the written as well as the oral submissions made on behalf of the stock broker and other material available on record. On a perusal of the Enquiry Report, I note that the primary charge against the stock broker is that it had entered into structured deals and cross deals and the Enquiry Officer found that it had contravened Regulation 4(a),(b),(c) and (d) of the PFUTP Regulations and Clauses A(1) to (5) of the Code of conduct for stock brokers specified under Schedule II of the Stock Brokers Regulations. The Enquiry Officer, in paragraph 22 of the Report had observed, with respect to the alleged structured deals that in all such transactions, the time of the order placement, price etc. are almost identical and that the said characteristics indicated that the said transactions are structured trades. As regards the cross deals, the Enquiry Officer had observed that the stock broker was buying and selling for its clients and in all transactions the time of the orders placed are identical, which according to him, appeared to have been executed pursuant to a pre-determined plan. The Enquiry Officer has further observed “…..Simultaneous placing of the orders between the parties or entities connected with each other in an identical fashion points out to the arrangement between the parties……..” (Emphasis supplied). Further, in paragraph 25 of the Enquiry Report, it is inter alia observed “It is pertinent to note that the trades were executed for other entities belonging to the HB Group. This fact establishes the nexus between the broker and the client.” Therefore, at the outset, it is to be find out as to whether the parties were connected with each other, as alleged and whether they had any arrangement between them, as observed by the Enquiry Officer.

3. I find that paragraph 15 of the Enquiry Report mentions “It is alleged from the findings of investigation that the above entities are related/connected to one another. It is stated that the trading member HSL and Fincap Portfolio Ltd. and their clients Taurus Mutual Fund, HB Stockholdings Ltd., HB Portfolio Ltd., Shri Lalit Bhasin, H.C. Bhasin & Sons (HUF), Ms Mamta Kapoor, Ms Anju Bhasin, RRB Securities Ltd. Harsai Investments, Alaknanda Capital Services P. Ltd. and Ivory Securities Ltd. are all related / connected directors etc. as detailed in the show cause notice and it is referred to as the HB Group.” Further, it is also mentioned in paragraph 17 of the Enquiry Report “It is observed in the investigation that in one of the statements given by Shri Milan Dalal to SEBI, he admitted that his family and Bhasin family (HB Group) know each other for three decades and thereby it is alleged that HB Group and CFL Group are interconnected.” The stock broker has contended that its relationship with the client companies is formal and that of a client and stock broker and further contended that none of the relationship as interpreted by the Enquiry Officer holds good.

The stock broker further submitted that, it does not have any company of CFL group as its client and does not have any other relation with any of them. The stock broker has contended that, it is a settled statutory and judicial position that a company is regarded as an identity different from its shareholders and directors and any two companies are apparently independent entities in the eyes of law. It was also submitted that it is wrong to interpret and presume that simply because a director is common in two companies, the said two companies become related companies and their due transactions become artificial or could be regarded as unfair and fraudulent, more so, when all compliance had been made as regards delivery and payment by all the registered clients. The stock broker has also contended that the doctrine of mutuality of interest clearly spells out that for two persons to be regarded, as related persons, there must be interest, direct or indirect, in the business of each other. I also note that the stock broker had made similar submissions as regards the alleged connection, before the Enquiry Officer, which has been mentioned in the Enquiry Report.

The submissions of the stock broker, as mentioned in paragraph 10 of the Enquiry Report are reproduced below:

“d. It is unjustifiable and groundless to say that two entities are related because they have common director/address/promoter. It is a settled statutory and judicial position that a company is regarded an identity different from its shareholders and directors and any two companies are apparently independent entities in the eyes of law. Our relation with the client companies is formal and that of a client and stockbroker………..” 4. I also note that paragraph 11.d. of the Enquiry Report also records the submission of Mr. Praveen Gupta, director of the stock broker made by him during the hearing on January 27, 2006 before the Enquiry Officer, which states “We have dealt for the following companies which are group companies/ associate companies under the provisions of Companies Act, 1956. HB Portfolio Limited is our holding company besides being a client. The group companies/associate companies are HB Stockholdings Limited, Har Sai Investments Limited, RRB Securities Limited, HB

Financial Consultants Pvt. Limited and HB Leasing and Finance Company Limited. The following individual clients have also dealt with us who are the relatives of our one of the Director namely, Mrs. Anju Bhasin, Shri H.C. Bhasin (erstwhile Director of the company), Shri Lalit Bhasin (Director of the company) and Mrs. Mamta Kapoor.”

From the above statement, it can be noted that HB Portfolio Limited, HB Stockholdings Limited, Har Sai Investments Limited, RRB Securities Limited, HB Financial Consultants Private Limited and HB Leasing and Finance Company Limited are the group companies/associate companies of the stock broker for whom it had traded in the shares of the Company. Further, it is also noted that the stock broker had traded on behalf of Mrs. Anju Bhasin, Mr. H.C. Bhasin and Mrs Mamta Kapoor, the relatives of Mr. Lalit Bhasin (a director of the stock broker). However, the trading in the shares of the Company has not been confined to the aforesaid entities or the individuals alone. It can be seen from the Enquiry Report that certain others have also traded during the relevant period. In paragraph 13 of the Enquiry Report, it is mentioned that Taurus Mutual Fund, CFL Securities Limited, Gloria Investments Limited, HB Stockholdings Limited, Ivory Securities Limited, Penwell Traders Limited, HB Portfolio Limited, Alaknanda Capital Services Limited and Har Sai Investments Limited, had purchased 8,21,069 shares which accounted for 93.82% of the market volume.

Further, in paragraph 14 of the said Report, it is mentioned that Tropical Securities and Investments Private Limited, Har Sai Investments Limited, CFL Securities Limited, Gloria Investments Limited, HB Stockholdings Limited, HB Portfolio Limited, Ivory Securities Limited, Penwell Traders Limited, Alaknanda Capital Services Private Limited, RRB Securities Limited, Mr. Lalit Bhasin, H C Bhasin & Sons HUF, Ms. Anju Bhasin and Ms. Mamta Kapoor, had sold 8,37,293 shares which constituted 95.68% of the market volume. From paragraphs 18 and 19 of the Enquiry Report, I note that Gloria Investments Limited and Alaknanda Capital Services Private Limited had also traded through the stock broker. Though, it has been specifically alleged in the Enquiry Report in paragraph 15, that the entities (as mentioned in paragraphs 13 and 14 of the Report), including Gloria Investments Limited and Penwell Traders Limited are related/connected to one another, there has been no examination of the same in the Enquiry Report. This allegation has also not been examined in detail in the light of the submissions made by the stock broker and a reasoned finding has not been arrived in the Enquiry Report.

This is crucial as the Enquiry Officer observed that the stock broker had executed structured/cross deals for connected clients.

5. I also note that paragraph 16 of the Enquiry Report mentions that the trading members, CFL Securities Limited and Tropical Securities and Investments Private Limited had a common director in Mr. Milan Dalal. The said entities have been grouped as the CFL Group. Paragraph 17 of the Enquiry Report alleges that the HB Group (to which the stock broker allegedly belonged to) and the CFL Group are interconnected. In this regard, the stock broker had denied having any relation with the CFL Group and submitted that the relationship and connection had been alleged only on the basis of the statement of Mr. Milan Dalal. I note that in the said statement, to a question “Does any of your Directors/relative personally know any Director/Promoter of the HB group? If so, give details.” Mr. Milan Dalal has replied “Yes, we know them personally and we have three generations of friendship and business as we are a three generations old broker from Mumbai and they are three generation in broking from Delhi”. It is the contention that, the said statement was broad and vague and cannot be held to establish any sort of business connection between the groups.

It has also contended that merely being a friend on the basis of being well known and respected stock brokers for many years does not establish any sort of business connection between the groups. It has been contended that the conclusion of the Enquiry Officer in respect of the connection between CFL and HB group, is devoid of any merit and contrary to all principles of evidence and interpretation. I note that even before the Enquiry Officer, the stock broker had denied having any relationship with CFL Group. The stock broker submitted before the Enquiry Officer (as mentioned in the Enquiry Report) “We deny any relationship with CFL group and further we have no connection with Taurus Mutual Fund as it is not our client nor we have traded on its behalf or for it.” I also note that the stock broker in its reply to the Enquiry Officer inter alia stated that the veracity of the statement of Mr. Milan Dalal is doubtful and that no opportunity had been provided for cross examination to verify the contents of the statements. Further, the stock broker reiterated the said submissions before me also.

It is the submission of the stock broker that, despite taking such contentions regarding the alleged connection with CFL group, the Enquiry Officer had failed to place on record even a single piece of material to establish the connection between the groups. The Enquiry Officer should have examined the contention of the stock broker and should have arrived at a finding as to whether they are connected and if so, how the same is established. Nothing of that sort is present in the Enquiry Report. The Enquiry Report does not contain any finding as regards the alleged connection between the groups even when the stock broker had specifically made submissions to the contrary. Admittedly, besides the statement of Mr. Milan B. Dalal, the show cause notice dated August 19, 2004 issued for the enquiry does not have any other material to support the alleged connection between the CFL and HB groups. The Enquiry Report merely gives a finding that the placing of simultaneous orders between the parties in an identical fashion pointed out to their arrangement. In this view of the matter, I am not convinced that the alleged linkages or connections between the entities inter se or with the stock broker (except for the linkages admitted between the group companies of the stock broker) is established.

In paragraph 25 of the Enquiry Report, it has been accepted that the stock broker had not traded for Taurus Mutual Fund. For the reasons stated supra, I am persuaded to examine the alleged trades executed by the stock broker for its clients in the background that the alleged connections between the entities had not been established (except for the linkages admitted between the group companies of the stock broker).

6. The Enquiry Officer has taken note of the structured and cross deals said to have been executed by the stock broker and had given adverse findings in respect of the same. The specific findings from the Enquiry Report are reproduced herein below:

“22. ………………….Simultaneous placing of the orders between the parties or entities connected with each other in an identical fashion points out to the arrangement between the parties. It is further pertinent to note that the structured trades by HSL amount to 39.45% of total market volume during the said period and the cross deals executed by HSL amounted to 7.14% of the total market volume during the investigation period.” “25. …………………In a similar factual situation, the contention of HSL that there is no evidence to show any intention on the part of it for the alleged fraud or unfair trade practice is devoid of merit. It is pertinent to note that the trades were executed for other entities belonging to the HB Group. This fact establishes the nexus between the broker and the client……...” 26. The manner of execution of large number of transactions (i.e. as many as 102) in the scrip in an identical fashion and the fact that these trades constitute significant portion of total market trades give the impression that these trades were all synchronized (structured deals and cross deals), otherwise there was no possibility of such perfect matching of orders between the said entities……………..In view of the above and on analysis of the trading data, it is concluded that HSL entered into synchronized transactions on behalf of its clients. It is further pertinent to note that many of the clients are group entities of HSL as admitted by it. “27. In view of the large number of synchronized transactions executed by HSL on behalf of the select group of clients who belong to the same group on the buy side as well as sell side in the scrip of DCM, it is concluded that the broker had aided and abetted these clients to execute synchronized trades to create false and misleading appearance of trading in the said scrip, to execute transactions which are not genuine and also trades without transfer of beneficial ownership for the purpose of causing fluctuations in the market price of the securities. In view of the same, it is found that HSL had violated the provisions of Regulation 4(a),4(b),4(c)and 4(d)of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995………….”

7. I have perused the details of the alleged structured transactions of the stock broker mentioned in Table 1 at pages 10-12 of the Enquiry Report. The table provides the following particulars: Trade Date and time; Buy Order Time; Sell Order Time; Buy Order Quantity; Sell Order Quantity; Buy Order Rate (`) and Sell Order Rate (`). However, the names of the clients and the counterparty stock broker have not been mentioned. I note that in some of the trades, the time difference between the buy and sell orders were more than one minute. Only in one instance, the buy and sell order time had been exactly the same. The details as to the alleged cross deals said to have been executed by the stock broker were mentioned in Table 2 at paragraph 21 of the Enquiry Report. The said table gives the following details: Trade date and time; Trade quantity; Buy order time and Sell order time. The table does not provide the names of the clients who were involved in the said trades. The price also is absent in the said table. In respect of the said trades, SEBI had already initiated proceedings under Section 11 B of the Securities and Exchange Board of India Act, 1992. In the show cause notice issued in the said proceedings, SEBI had enclosed the trade/order log in respect of the alleged 49 structured trades and 53 cross deals said to have been executed through the stock broker. The said proceedings have been disposed of by SEBI, vide Order dated October 8, 2010. The impugned trades were examined in detail in the said proceedings and found that the clients involved therein are entitled for a benefit of doubt as the said show cause notice could not establish the violations alleged against them in respect of the trades. As per Table I in paragraph 20 of the Enquiry Report, the stock broker had allegedly executed structured trades on the following dates: i. March 21, 2001, ii. April 9, 2001, iii. April 10, 2001, iv. April 11, 2001, and v. April 17, 2001 8. The stock broker did not dispute the execution of such trades. I have perused the trade and order log for the respective trades and my findings in respect of such trades are as below:

i. Trades on March 21, 2001

On the said day, the stock broker had purchased 1,05,000 shares of the Company on behalf of Gloria Investments Limited (GIL). It was alleged that Har Sai Investments Limited (HSIL) had pledged 1,10,000 shares with HDFC Bank Limited and the said bank had sold such shares through HDFC Securities Limited on March 21, 2001. GIL had purchased 1,05,000 shares. The parties to such trades as can be inferred from the averments in the notice, were HDFC Bank Limited, HDFC Securities Limited, the stock broker and GIL. I also note that GIL had placed various buy orders for 1,05,290 shares on March 21, 2001 and the counter party client, HDFC Bank Limited had placed various sell orders for 2,00,000 shares. In the proceedings against the clients involved in the dealings in the shares of the Company, it was the contented that no malafides had been attributed to HDFC Securities Limited and HDFC Bank who were the counterparty stock broker and the client to the transactions and that no action was taken against them. In the order dated October 8, 2010, it has been concluded that the said show cause notice could not establish the alleged connection between GIL and HSIL. Further, it was also found that the said notice could not establish that the said trades were executed with manipulative intent. Therefore, considering the totality of the facts and circumstances of the present case, I am unable to find any manipulative intent in respect of the trades which were executed by the stock broker on behalf of GIL on March 21, 2001 and therefore, the stock broker is entitled for a benefit of doubt.

ii. Trades on April 9, 2001

The stock broker had sold 34,900 shares on behalf of HB Portfolio Limited (HBPL) and the counterparty stock broker was ABN Amro Securities India Private Limited, buying on behalf of Taurus Mutual Fund (TMF). The stock broker has also sold 49,900 shares on behalf of HBPL and GIL. The counterparty stock broker was HSBC Securities Limited, buying on behalf of TMF. The stock broker had also sold 50,000 shares on behalf of HB Stock Holdings Limited (HBSL) and GIL. The counterparty stock broker was J M Morgan Stanley Securities Private Limited, buying on behalf of TMF. The stock broker had also sold 30,000 shares on behalf of HBSL for which the counterparty stock broker was Orbis Securities Limited, buying on behalf of TMF. Further, the stock broker had also sold 4500 shares for HBSL and the counterparty stock broker was IL&FS, buying for TMF. I note that in respect of the aforesaid, it has been the common submission that the counterparty stock brokers, namely, ABN Amro Securities India Private Limited, HSBC Securities Limited, J M Morgan Stanley Securities Private Limited, Orbis Securities Limited and IL & FS, have not been proceeded against by SEBI.

It has been contended that in a synchronized/structured deal, all the parties to a transaction have to be made liable and it cannot be said that one party is responsible for indulging in structured deals while the others are not. According to the stock broker, no action against the said stock brokers would presumably mean that they have not been found to be responsible for indulging in the alleged structured deals. No price manipulation has been alleged in the notice in respect of the said transactions. In such circumstances, it is difficult to establish any unfair trade practice or fraudulent trade practice by GIL. It is not clear from the notice as to whether the sale of shares to TMF was at a price higher than the prevailing market price. Further, the show cause notice issued in the proceedings against the clients involved in the transactions had not been able to establish the manipulative intent of the parties or how the trades had impacted the price-volumes of the scrip in the securities market. The said submissions were examined in detail and found to be convincing and accordingly, I had given benefit of doubt to the parties concerned of the aforesaid transactions in the Order dated October 8, 2010. In view of the same, it would be just and reasonable to afford the same benefit to the stock broker also in respect of the aforesaid trades.

iii. Trades on April 10, 2001

The stock broker had purchased a total of 49,882 shares for its client, HBSL. The counterparty stock broker was Rosy Blue Securities Limited, selling for its client Tropical Securities and Investments Private Limited. On a perusal of the trade-order logs for the said transactions, I note that there were two sell orders for 25,000 shares each, which were matched with various buy orders of 5,000 each. One sell order involved only 300 shares. It is noted that the time difference between such buy and sell orders varied from 36 seconds to 2 minutes and sixteen seconds. HBSL and Tropical Securities and Investments Private Limited had entered into thirteen trades on that day. Out of that in respect of eight trades, the time difference between buy and sell orders was about 1 minute and more than that. The time difference was more than 2 minutes in respect of two trades. As held above in this Order, the notice or the Enquiry Report could not sufficiently establish the connection between the HB Group and the CFL Group (of which Tropical Securities and Investments Private Limited allegedly belonged to). It has also been noted that the trades were executed at the prevailing market prices for the day and that no material is on record to establish that the parties had placed orders higher than the last traded prices. Further, no price manipulation has been alleged in the notice in respect of the said transaction and the said notice failed to explain how the trades had affected the overall trading in the shares of the Company during the investigation period. The notice issued to the clients was unable to establish any malafides in respect of the role of HBSL. As the stock broker had executed trades for its clients who have been afforded benefit of doubt, vide Order dated October 8, 2010, in respect of the trades executed on April 10, 2001, the stock broker would also be entitled for the same benefit.

iv. Trades on April 11, 2001

On the said date, HBPL had sold 9,300 shares through Birla Sun Life Securities Limited and the counterparty was the stock broker trading for Alaknanda Capital Services Private Limited (ACSPL). In the proceedings against the HBPL and ACSPL, it had been contended that the counterparty stock broker Birla Sun Life is an institutional stock broker who was not remotely connected with them. It was further contended that no action has been taken against the said stock broker and submitted that in a structured deal, each and every party involved in the deal must be punished equally. No action/proceedings had been initiated against Birla Sun Life Securities Limited in the matter. Further, the show cause notice could not establish as to how the aforesaid trades had artificially impacted the trading of the scrip or material to suggest that the trades were fictitious and therefore, benefit of doubt was afforded to HBPL and ACSPL. In view of the same, the stock broker who had executed trades for its client, ACSPL on the said date, would also be entitled for the same benefit.

v. Trades on April 17, 2001

On the aforesaid date, ACSPL trading through the stock broker had sold 11,754 shares of the Company to TMF trading through Birla Sun Life Securities Limited. It has been observed in the Order dated October 8, 2010, issued in respect of the clients that the notice had failed to explain as to how the impugned trades had affected the price-volume of the shares during the relevant period. Further, the Birla Sun Life Securiites Limited has not been proceeded against for the said trades. As the stock broker’s client, ACSPL has been afforded a benefit of doubt for the transactions discussed above, it would not be reasonable to find the stock broker guilty of any manipulation for the said trades.

9. As stated above, the stock broker had executed cross deals on April 4 and 10, 2001. It was alleged that that the stock broker had entered into 53 cross deals for 62,526 shares. It has been alleged against the clients involved in the said trades that the time differences between the buy and sell orders were in the range of 7 seconds to 5 minutes. The said cross deals constituted about 7.14% of the total market volume of 8,75,137 shares during the period of investigation. I have perused the trade/order log in respect of the said cross deals and note that they were executed on April 4, 2001 for 39,306 shares and on April 10, 2001 for 23,220 shares. On April 4, 2001, the sellers were Ms. Mamta Kapur, Mr. Lalit Bhasin, H C Bhasin & Sons HUF, Ms. Anju Bhasin and RRB. In the proceedings against the said clients, some of the clients had submitted that they were holding such shares for a long time, before the impugned trade. It was also submitted that their trades constituted a very small percentage of the total traded volumes and the same was enough to rule out any market manipulation in terms of creation of artificial price or volume.

They had also submitted that the said trades were executed at the prevailing market price and that their transactions were genuine trades settled by delivery and payment. I also note that no charge has been levelled in the show cause notice against the said clients that the share price was artificially increased due to the said trades. There is no material in the said notice to allege that the parties concerned had placed orders at prices higher that the last traded prices and that no malafide intent could be borne out from the details contained in the show cause notice. In view of the same, I was unable to find any malafide in respect of the said trades and accordingly had afforded benefit of doubt to the clients involved in the said trades. Since, the said trades were executed by the stock broker (in its capacity as a stock broker) for its clients, the same treatment has to be extended to the stock broker also. I would also like to observe that there is no finding in the Enquiry Report as to whether the trades of the stock broker had artificially increased the share price or that the same were executed with manipulative intent.

Therefore, at the most, from the documents on record, it can only be inferred that the stock broker had executed orders for connected clients.

10. It is the submission of the stock broker that the important ingredients to make a person liable for offence under Regulation 4 are absent in its case. The stock broker has contended that there is no evidence at all in the case against it. It is the submission of the stock broker that the conclusions on synchronised and cross deals of the Enquiry officer are against the well settled principles of law and deserves to be set-aside. The stock broker has further contended that, since, the Enquiry Officer has not come to the conclusion that the market has been affected, the alleged charges would fail and that the enquiry proceedings should have been dropped. It is further submitted that all the said transactions were made on the screen of NSE and that delivery and payments were settled by it. The stock broker further denied that:

i. it had aided or abetted its clients to execute synchronised deals to create false or misleading appearance of trading in the scrip, ii. it executed transactions which were not genuine iii. it executed trades without transfer of beneficial ownership for the purpose of causing fluctuations in the market, iv. its trades constituted significant portion of the total market trades, v. the trades gave an impression that they were synchronised trades (structured or cross deals), vi. the trades were executed on behalf of select group of clients who belonged to the same group,

11. The stock broker has also submitted that no substance or proof has been placed on record to the effect as to what fraud or unfair trade practice has been observed. It has also contended that there was not a shred of evidence to show that there was any intention on its part to have indulged in the alleged fraud or unfair trade practice.

12. I have considered the aforesaid submissions of the stock broker in the background of the facts and circumstances of the case and find that the same has to be accepted for their merits. The nexus between the some of the clients and the stock broker is not established, as stated above in this Order, except for an observation in the Enquiry Report (paragraph 22). Secondly, simultaneous placing of orders by itself cannot be said to be fraudulent on the face of it and that synchronised trades/structured deals are per se not illegal. In order to attribute manipulation and fraud, other attendant factors and circumstances including price rise, circular trading, trade reversals, unfair trade practices and the like, over a period of time between the parties have to be alleged and established. Even if, it is established that the parties concerned have indulged in synchronised/structured deals, the other attending circumstances would need to be seen for finding a transaction fraudulent or unfair. The inference of the Enquiry Officer that “…………….the broker had aided and abetted these clients to execute synchronized trades to create false and misleading appearance of trading in the said scrip, to execute transactions which are not genuine and also trades without transfer of beneficial ownership for the purpose of causing fluctuations in the market price of the securities.” would be difficult to be accepted in the absence of supporting material, as only an assertion of the same has been made in the said Enquiry Report.

The stock broker has specifically contended that the trades executed by it were genuine trades which resulted in deliveries and payment. No material is brought on record in the Enquiry Report to show that the parties were merely changing positions without actually buying or selling the shares. As stated above, the Enquiry Report failed to establish the connection between some of the clients of the stock broker as well as their connection with the stock broker. Thirdly, there has been no allegation in the notice issued for enquiry or finding in the Enquiry Report that the share price had artificially increased because of the impugned trades of the stock broker. Apart from a mention in paragraph 12 of the Enquiry Report that the share price had increased from `49.50/- on March 14, 2001 to `64.50/- on April 20, 2001, there is no finding in the Enquiry Report or in the notice that the said price rise is attributable to the trades of the stock broker. I also note that the said allegation was also not present in the show cause notice issued to the clients. In this regard, I also note that the share price was more or less the same during the period prior to the investigation period.

The share price had increased to a maximum of `77.85/- (on February 12, 2001), pre-investigation period. I note that the share price was increasing during the pre-investigation period with very low volumes. There is no case that the stock broker was involved in the trades which were executed during such period. As there is no supporting material to establish that the trades of the stock broker had artificially influenced the price discovery mechanism and satisfy the ingredients of Regulation 4(a),(c) and (d) of the PFUTP Regulations, it cannot be held to be violative of the said provisions. As stated above, the Enquiry Officer has not given any finding with supporting material to conclude that the trades of the stock broker were intended to create artificial volumes and thereby create misleading appearance of trading in the shares of the Company during the relevant period. It was also pointed out from the Enquiry Report that the stock broker had traded on March 21, 2001, April 4, 2001, April 9, 2001, April 10, 2001, April 11, 2001 and April 17, 2001. The counsel for the stock broker contended that during the period of investigation, the volume traded was high even without the participation of the stock broker, on few days such as April 18, 19 and 24, 2001. According to him, the same would indicate that the volumes were not solely contributed by the stock broker even during the investigation period and that there were many others who had traded.

In view of the above reasons, even the charge of violating Regulation 4(b) of the PFUTP Regulations could not be sufficiently established. I also note that SEBI, while disposing of the enquiry proceedings against the stock brokers namely, Fincap Portfolio Limited and Aman Portfolio Private Limited had observed that there was no material by which it could be concluded that the said stock brokers had colluded with other stock brokers and clients for executing the transactions. In view of the above reasons, the stock broker is entitled for a benefit of doubt in respect of the alleged violations of Regulation 4(a),(b), (c) and (d) of the PFUTP Regulations.

13. As regards the violation of the provisions of the code of conduct for stock brokers, the Enquiry Officer has observed in paragraph 28 that “………. The large number of transactions and also the synchronized manner of execution of the trades over a period of time, clearly indicate that HSL violated the provisions of Clause A(1), (2), (3), (4) and (5) of the Code of Conduct for Stock Brokers enumerated under Schedule II under Regulation 7 of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.” Apart from making such observation, the Report was silent as to how the violation of the aforesaid provisions was established. Further, in view of my aforesaid findings in respect of the alleged violations of the PFUTP Regulations, the contravention of the code of conduct for stock brokers as found by the Enquiry Officer would also not be maintainable. Therefore, the stock broker is entitled for a benefit of doubt in respect of the charges levelled against it. In this view of the matter, I do not find it necessary to consider and deal with the other submissions and judgments cited by the stock broker in its reply. In this view of the matter, the consequential action contemplated in the show cause notice dated March 24, 2006 (as stated above) would not arise. I note that the present proceedings had been initiated under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 which has been repealed by the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. While repealing the said Regulations, the actions initiated under the erstwhile Regulations have been saved. Therefore, the present matter is disposed of under the relevant provisions of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

14. In view of the foregoing, I, in exercise of powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 and Regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby dispose of the enquiry proceedings initiated against the stock broker, HB Securities Limited (Member, National Stock Exchange of India Limited), in respect of its transactions in the shares of DCM Shriram Consolidated Limited for the period between March 12, 2001 and April 24, 2001, without imposing any penalty.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: OCTOBER 8, 2010