Order in respect of Khandwala Securities Limited

WTM/SR/SEBI/EFD/198/12/2015 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: S RAMAN, WHOLE TIME MEMBER ORDER Under Regulations 28(2) read with Regulations 38 (2) of the SEBI (Intermediaries) Regulations, 2008 in respect of Khandwala Securities Limited (earlier known as Khandwala Finance Limited)(SEBI Registration No. INB 230600030) in the matter of DSQ Biotech Ltd.

1. Securities and Exchange Board of India ( 'SEBI') conducted investigation into the trading in the scrip of M/s DSQ Biotech Ltd. (hereinafter referred to as ‘DSQ' / 'Company’) for the period from December 1999 to January 2001 ('investigation period')to ascertain any instances of irregularity in the preferential allotment of shares by the company, price manipulation in the scrip and subsequent off-loading of the unlisted shares in the securities market by DSQ and related entities. The shares of DSQ were listed on the Ahmedabad Stock Exchange ("ASE"), BSE Ltd ("BSE"), Calcutta Stock Exchange Association Ltd.("CSE"), Delhi Stock Exchange Ltd.("DSE"), Madras Stock Exchange ("MSE")and National Stock Exchange of India Limited ("NSE") during the relevant time.

2. It was noticed that DSQ had increased the share capital through a preferential issue during the investigation period. It was observed that prior to and after the period of the said issue i.e., between December 1999 and January 2001, abnormal trading activity in the scrip was noticed at NSE and BSE. The price and the volume in the scrip during the above mentioned period were attributed to the alleged synchronized trades and fictitious trades executed by certain entities through several stock brokers.

3. It was observed that M/s Khandwala Securities Limited ('the Noticee'), a stock broker of NSE had dealt in the scrip of DSQ for up to 33 clients at NSE during the period December 1999 to April 2000 (12 clients) and September 2000 to January 2001 (21 clients). The scrip of DSQ was available for trading on the weekly account period settlement as well as the rolling settlement segments during the investigation period. The total quantity traded during the period December 01, 1999 to May 02, 2000 on the account segment was 37,62,400 shares. Investigation prime facie revealed that the Noticee had executed structured/synchronized trades and various cross deals in the scrip on behalf of its clients, and, thereby, aided and abetted its clients in the creation of false market in the scrip. It was also observed that the Noticee had given advance pay-out of the sales proceeds to the clients who were related to DSQ and also led to the creation of false market in the scrip by executing transactions without the intention to transfer the beneficial interest in the security.

4. In view of the findings of investigation, SEBI vide order dated July 07, 2005 initiated enquiry proceedings against the Noticee in terms of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 ('Enquiry Regulations'). Subsequently, as the Enquiry Regulations were repealed and SEBI (Intermediaries) Regulations, 2008 (‘Intermediaries Regulations’) were notified, in terms of Regulation 24 of the Intermediaries Regulations another Designated Authority ('DA') was appointed vide order dated February 23, 2012 to enquire into the alleged violations mentioned above.

5. In the enquiry proceedings the following allegations were levelled against the Noticee vide SCN dated March 30, 2012 a. Noticee executed cross deals for its clients who were alleged to be DSQ related entities, b. Noticee made advance pay outs of the sale proceeds to the clients who were related to DSQ, c. Noticee executed synchronized trades/matched orders/structured trades for its clients who were DSQ related entities and there was no change in beneficial ownership thereby created artificial liquidity in the scrip of DSQ, d. Noticee failed to exercise due care and diligence in following KYC norms, e. Noticee thus allegedly aided and abetted its clients in creation of artificial trading.

6. It is also further alleged that by doing the above acts the Noticee had violated Clause A (1),(2),(3),(4) and (5) of Schedule II of the Regulation 7 of the SEBI (Stock brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as 'Brokers Regulations') and Regulation 4 (b), (c), (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 1995(hereinafter referred to as 'PFUTP Regulations'). It was also alleged that Noticee had violated SEBI Circular no. SMD-1/23341 dated November 18, 1993, SMD/POLICY/IECG/1-97dated February 11, 1997 and SMD/POLICY/CIRCULAR/5-97 dated April 11, 1997 by not following the necessary procedures for client registration.

7. On completion of the proceedings, DA vide Report dated July 31, 2013 recommended suspension of the certificate of registration of the Noticee for a period of one week for the alleged violations of the provisions of Regulation 4 (b), (c), (d) of PFUTP Regulations and Clause A (1),(2),(3),(4) and (5) of Schedule II of the Regulation 7 of the Brokers Regulations read with SEBI Circular no. SMD-1/23341 dated November18, 1993, SMD/POLICY/IECG/1-97 dated February 11, 1997 and SMD/POLICY/CIRCULAR/5-97 dated April 11, 1997.

8. Subsequently, SEBI issued Show Cause Notice dated August 23, 2013 ('SCN') under Regulation 28(1) of the Intermediaries Regulations to the Noticee "to show cause as to why the action should not be taken against the Noticee as recommended by the DA or higher penalty as deemed fit". The Noticee was advised to reply to the SCN within twenty one days of the receipt thereof. A copy of the Enquiry Report was also forwarded to the Noticee along with the SCN.

9. The Noticee vide letter dated September 13, 2013, replied to the SCN and sought the following documents: i. Copy of Investigation Report, ii. Copy of Trade log- Order Log for the investigation period in the scrip of DSQ on both NSE and BSE, iii. Copy of correspondence by and between DSQ, SEBI and the Stock Exchanges, iv. Details of shareholding and List of Allottees of the said preferential allotments, v. Copy of disclosures by DSQ or its Promoters to SEBI and Stock Exchanges (where its shares were listed), on Group companies prior to investigation period, vi. Copy of all evidences/ data collected/ procured by SEBI during investigation and till date, pertaining to the present proceedings.

10. As regards the documents mentioned above at Sl. No. (ii) to (vi), it is noted that DA has furnished the documents relied upon in the enquiry to the Noticee. Vide letter dated November 26, 2013, relevant extract of the investigation report was also provided to the Noticee. Vide letter dated January 01, 2014, the Noticee sought for a personal hearing in the matter and the same was granted on February 12, 2014. Mr. Paresh Khandwala, Managing director, Mr. Pranav Khadwala, Director, Mr. Vinay Chauhan, Advocate and Mr. Prashant Ingle, Advocate appeared for the Noticee and made oral submissions. The Noticee was also directed to submit additional written submissions, if any, by February 19, 2014. The Noticee vide letters dated February 21, 2014 and March 12, 2014 submitted inter alia as under: a) "At the outset, we deny all the allegations levelled against us in the Notice. It is categorically denied that we have violated the provisions of Regulation 4 (b), (c), (d) of PFUTP Regulations and Clause A (1),(2),(3),(4) and (5) of Schedule II of the Regulation 7 of the Brokers Regulations read with SEBI Circular no. SMD-1/23341 dated November 18, 1993, SMD/ POLICY/ IECG/ 1-97 dated February 11, 1997 and SMD/ POLICY/CIRCULAR/5- 97 dated April 11, 1997 as alleged.

We have not indulged in any fraudulent and unfair trade practices relating to the securities so as to warrant any kind of punitive directions. The findings in the Enquiry Report are totally unfounded and a product of confused reasoning. b) We specifically repeat, reiterate and confirm the submissions made by us in our various replies/submissions including reply dated December 03, 2012 to the enquiry Notice dated March 30, 2012 issued by the Designated Authority in the proceedings and the same may be read as part and parcel of this reply. Preliminary Submissions: Before giving para-wise reply to the findings in the Enquiry Report, we would like to raise the issue of jurisdiction and inordinate delay in conducting of the reference proceedings, which goes to the root of the matter and vitiate the whole proceedings. Jurisdiction: c) It is pertinent to point out that the Show Cause Notice has been issued without jurisdiction and thus it is legally untenable, violative of the provisions of the law and ultra vires. The alleged transactions pertain to the year 1999-2001. In the same matter and same scrip for the same investigation period and for the same alleged violations, an Enquiry officer was duly appointed by SEBI and Show Cause Notice dated October 25, 2005 was issued to us.

We had already replied to the said Show Cause Notice of October 25, 2005 vide our letter dated February 10, 2006 and attended personal hearing on March 21, 2006. Evidently, nothing further happened in the said matter till date. In this background, appointment of another Enquiry Officer/Designated

Authority to enquire into the same matter is in excess of jurisdiction and powers available with SEBI under the SEBI Act... Inordinate Delay: d) Admittedly, SEBI has appointed DA on February 23, 2012 under SEBI (Intermediaries) Regulations, 2008, for conducting enquiry proceedings against us for certain transactions executed by us on behalf of our clients in the scrip of DSQ Biotech Ltd (DSQ) during December 1999 to April 2000. Thus the Enquiry Officer was appointed virtually after the lapse of 12 years from the date of execution of the impugned transactions. Ex-facie, the delay in initiation of the enquiry is exceedingly inordinate and the proceedings are liable to be quashed on this ground alone.  In this regard, your attention is invited to the order passed on March 31, 2008 by the Hon'ble Securities Appellate Tribunal in the matter of Libord Finance Ltd Vs. SEBI. "...we cannot resist observing that there has been an inordinate delay in initiating action against the Appellant. It is alleged to have committed the irregularities in the earlier part of the year 1996 and the show cause notice was admittedly issued in June 2004. How could anyone file a proper reply after a lapse of more than eight years.

This long delay itself causes grave injustice to the delinquent and results in the violation of principles of natural justice..."  Further, your attention is also invited to the order passed on August 27, 2013 by the Hon'ble Securities Appellate Tribunal in the matter of H B Stockholding Ltd. Vs. SEBI (SAT Appeal No. 114 of 2012). "... in the instant case admittedly the alleged trades took place in the year 2000. The first show cause notice itself was issued by the Respondent on September 2, 2005 i.e. after a period of more than five years had already lapsed... Even after the conclusion of hearings in April and May 2011, the Respondent took a period of around one year to pass the impugned order in question on May 9, 2012. This unnatural delay of about 11 to 12 years in initiation and completion of the proceedings against the Appellants has caused definite prejudice to them. ... Thus, the existence of unnatural and unexplained delay of more than a decade is writ large in the matter. Therefore, the impugned order deserves to be quashed on this ground as well." e) There is no allegation of jacking up the price of the scrip while trading on behalf of the clients.

Allegation is limited to aiding and abetting the clients in creation of false market. Significantly, it has been completely ignored and overlooked that the impugned trades were delivery based, wherein beneficial ownership has changed. In the absence of any allegation/finding that the beneficial ownership has not changed, charge of creation of false volume cannot survive. f) Admittedly, the investigation period span from December 1999 to January 2001i.e. around 26 months involving around 272 trading days. Fact is that the impugned trades, which have allegedly resulted in creation of false market have taken place only of 13 days... At the relevant time, the main promoter of DSQ group was not a tainted person. It was only somewhere around 2003, when SEBI passed orders against him, information regarding the fraudulent and manipulative activities came in public domain and limelight... g) At the relevant time, there were no alerts or warnings issued either by the exchanges or SEBI or any other regulatory body regarding something suspicious in trading of the scrip or in the DSQ Group. Thus, in the absence of anything to excite our suspicion as to something amiss either in the DSQ or its related entities who were their clients, we had traded bonafide on behalf of our clients in the ordinary course of business. h) Admittedly, at the relevant time there were 33 different clients who had dealt through us in the scrip of DSQ.

It may be noted that the said 33 clients were dealing through us in the various scrips and their trading was not restricted to scrip of DSQ only. Structured Trades between Noticee and Credit Suisse First Boston (I) Securities Pvt. Ltd i) The allegation of executing structured trades is based only on one stray trade executed by us on behalf of our client F.R.M.A.N Investments PTE Limited on 24/02/2000. We point out that F.R.M.A.N Investments PTE Limited was an offshore fund/entity who had traded through us during relevant time in hundred of crores in various scrips including DSQ. Admittedly, F.R.M.A.N Investments PTE Limited is not related to DSQ in any manner. Even there is no allegation to this effect. j) We are not aware of the trading of Credit Suissee First Boston (I) Securities Private Limited or that it had traded in the weekly account segment. It is denied that any structured deal was executed by us with Credit Suissee First Boston (I) Securities Private Limited as alleged. It is submitted that we do not have any kind of relationship with Credit Suissee First Boston (I) Securities Private Limited or its client C. Mackertich Limited or any of their directors/promoters/officers. k) We had transacted at the instruction of our client F.R.M.A.N Investments PTE Limited as per the instructions given by it and at price, quantity and time instructed by them as per the Rules/Regulations framed by SEBI/Stock Exchanges.

At the relevant time we did not have knowledge of the fact that the quantity traded by us would be 7.79% of the total quantity traded through us and that C. Mackertich Limited was the selling client through Credit Suissee First Boston (I) Securities Private Limited as the same is not possible to know on the prudent screen based trading mechanism of the Stock Exchange.... Further, the transactions were Payment & delivery based and there is no allegation that transactions did not result in change in beneficial ownership. There was no significant change in the price. Cross Deals by KSL on the Account period Segment: l) All the transactions (the alleged 14 cross deals carried out on 6 different days viz., 24/02/2000, 06/03/2000, 7/3/2000, 21/3/2000 and 24/3/2000) carried out by us were in the normal course of business and in good faith. It is submitted that all the trades were carried out on screen based trading system over which we had no control except for punching the orders and same have resulted delivery and payments. m) It is further submitted that we had received both buy and sell orders from various clients and we had simply executed the same on the terminals as per the instruction of the clients at a price, time and quantity instructed by them.

It is further submitted that we had no role whatsoever in determining the price of the transactions entered into by us as the price and quantity instructed by the clients. It may be noted that all the said cross deals were delivery based and payment based which resulted in change in beneficial ownership. n) In so far as allegations arising out of LTP variations, ranging from 0.06% to 5.20% is concerned, it may be noted that out of the 14 cross deals, there is no (0%) LTP variation in 7 cases, marginal +ve LTP variation (less than 1%) in 4 cross deals, +ve LTP variation of 1.53% in 1 cross deal, +ve LTP variation of 5.20% in 1 cross deal and -ve LTP variation of 0.06% in 1 cross deal. Further, it may be noted that in the Notice dated 30.3.12 the Designated Authority had itself stated that "the % change to LTP due to this deal is not significant". o) Here it may be appreciated that the allegation is based on 14 cross deals executed on behalf of clients pursuant to their instructions, over a period spreading over 5 months (i.e. December 1999 to April 2000) wherein we had executed several trades in the scrip on behalf of the various clients.

Admittedly, the quantum of the alleged cross deals was negligible1.31% only. p) It may be noted that, as per the table there are only 3 trades executed by us in our own account, on 3 different days viz., 21/2/00, 1/3/00,22/3/00. We executed all the 3 trades in the ordinary course of business based on our commercial wisdom de hors sinister motives. Further, all these trades were delivery based. No fault was found with the proprietary trades per se viz., that the said 3 trades are structured, or have resulted in price escalation or the trade is artificial etc.

q) Merely because trading done by us in the rolling segment during December 1999 to April 2000 accounted for 99.83%, no adverse inference can be drawn against us. It is reiterated that the trading was on behalf of the clients in the ordinary course pursuant to their instructions& all such trades effected in to Delivery & Payments through Exchange norms... Further, it is nobody's case that the execution of trades in the rolling segment resulted in increase in price in any manner(since all the trades were executed at prevalent market prices in both the segments) or resulted in creation of artificial volumes (since all the trades were delivery based wherein beneficial ownership had changed). r) All the cross deals have been executed pursuant to instructions of various clients. It may be noted that DSQ related clients were sellers as well as major buyers. Cross deals have been executed on behalf of various clients and it is not restricted t alleged DSQ group entities. Admittedly, the alleged cross deals executed by us on behalf of clients on 1/3/2000, 14.3/2000 and 22/3/2000 pertain to clients who do not belong to alleged DSQ group entities. s) As a result of alleged cross deals, the percentage change in price is between the ranges of -16.48% to 3.3%.

There was no jacking up of prices of the scrip as a result of cross deals. t) In so far as execution of cross deals on behalf of clients are concerned it is stated that all the deals were in the nature of negotiated deals and the same were executed by us on behalf of the clients in accordance with the Board's circular dated September 14, 1999...in order to implement a negotiated deal through the trading system of a stock exchange, the buy and sell orders have to be synchronized by the parties and put into the system simultaneously and therefore, in negotiated deals parties also agree as to the time of orders. u) In this context we invite your attention to Order dated August 17, 2010 passed by the Hon'ble Securities Appellate Tribunal in the matter of M/s Prashant J Patel Vs. SEBI (Appeal No. 150 of 2006), wherein the Hon'ble Tribunal, inter alia, held that: " ...In the case before us, it is the appellant's own case that he executed negotiated deals/trades on behalf of his clients whose details were furnished by him to the Board in the reply to the show cause notice. The motive with which the appellant's clients executed negotiated deals can best be explained by the clients themselves and not by the appellant who was only a broker.

It is really surprising that the Board did not question the clients in this regard. Since negotiated trades are legal and the appellant was the broker on both the sides, he had no reason to suspect any foul play and it was no part of his due diligence to question his clients as to why they were executing such trades. A stock broker is required to execute faithfully the instructions of his clients if they are not in conflict with any rules, regulations or circulars issued by the Board..." Advance pay out of sale proceeds: v) In so far as pay-out made for transaction on 21.2.2000 is concerned, it may be noted that the advance payment was made on 24.2.2000 by us to Square D post sale of shares by it. Prior to payment of the said amount of Rs. 23,62,55,167/- to Square D on 24.2.2000, we had on 23.2.2000 received an amount of Rs. 12,96,95,000/- and Rs. 10, 00,00,000/- from its buyers towards purchase of shares of DSQ. The receipt of said amount is also borne out by our Bank Statement...and ledger statement of clients... Thus from the aforesaid it is clear that we have not funded Square D as alleged.

All that we had done was that out of the funds received from the clients towards purchase of shares of DSQ we had made the advance pay-out to Square D at its request. w) Admittedly, on 21.2.00 Square D Textile & Exports Ltd has sold 500,000 shares. Said shares have been sold as follows: (a)250,000 shares on Rolling segment and (b) 250,000 shares on Account period segment. In the trades carried out in the Rolling segment, counter party buyers to the trades of Square D were not part of alleged DSQ related clients. Further, in so far as trades on Account period segment are concerned, on 21.2.2000, none of the alleged DSQ related clients have bought 250,000 shares. Same is evident from the total bought quantity of all the alleged DSQ related clients...Therefore, the whole theory that "in this fashion the client has also ensured that the beneficial interest in the securities so transacted also does not change and it remains within the entities in the group" collapses since there was no relationship between Square D and the counter party to its trades. x) It is denied that we have aided the clients in carrying out their objectives as alleged.

If we had aided the clients (which were 33 in number) as alleged, which we strongly deny, what is the action SEBI has taken against the said 33 clients. y) It is denied that we were direct recipient of 15 lakh shares as alleged. In fact the said shares were transferred to us by the client, which it had sold in the market through us. It is nobody's case that the said shares were owned by us or sold by us in our proprietary account. z) A stock broker cannot be held responsible for the transactions of the clients unless it is established that the broker was aware of the intention of the clients. In this regard, it is submitted that Hon'ble Tribunal in the matter of Kasat Securities Pvt. Ltd Vs. SEBI(Appeal no. 27/2006) wherein Hon'ble Tribunal has clearly held that to hold a broker in violation of any regulations or to make it liable to any penalty sufficient material on record is to be placed to establish that he was aware of the nature of the transaction. aa) It is submitted that no penalty is warranted. Suspension restricts the intermediary from carrying out its business, thus affecting its livelihood.

Further, we also invite your attention to the Order dated 12.11.2012 passed by the Hon'ble Tribunal in the matter of M/s Prashant J Patel Vs. SEBI (Appeal No. 150 of 2006) that " We have held hereinabove that the finding of the Whole time member with regard to the wrong doing of the appellant is upheld. However, considering the significant mitigating factor of delay in finalization of proceedings, we find that suspension of certificate of registration of the appellant belatedly for a period of one week is not justifiable. Considering the facts on record, we are of the view that a warning to the appellant to be cautious in future would meet the ends of justice."... 11. The Noticee submitted that the allegations in the captioned Show Cause Notice are against Khandwala Finance Ltd. (hereinafter referred to as 'KFL') in its capacity as a Stock broker registered with SEBI. Noticee submitted that at the relevant time when the alleged violations took place i.e. December 1999 to April 2000 and September 2000 to January 2001, the Noticee was not a broker registered with SEBI and Khandwala Finance Ltd. got merged with the Noticee only on October 17, 2001. Considering this, the Noticee contended that it cannot be held liable for any act committed by Khandwala Finance Ltd before the merger.

12. It is noted that the Hon’ble Securities Appellate Tribunal had already dealt with this issue in another similar case (KSL's dealings in the scrip of Kopran Limited) viz., Appeal No. 19/ 2012 in Khandwala Securities Ltd. Vs. SEBI. The Hon’ble Securities Appellate Tribunal vide order dated September 7, 2002 had upheld the decision of SEBI that the action can be taken against Khandwala Securities Ltd for the wrong doings committed by KFL before merger. Hon’ble Securities Appellate Tribunal while reaching this conclusion had relied upon the following clause of the approved scheme of Amalgamation as mentioned in the scheme of amalgamation The said clause 5.1 of the scheme states as under: "If any suit, appeal or other legal proceedings of whatsoever nature by or against KFL is pending, the same shall not abate or be discontinued or in any way be prejudicially affected by reason of the amalgamation and by anything contained in this scheme, but the said suit, appeal or other legal proceedings may be continued, prosecuted and enforced by or against KSL in the same manner and to the same extent as it would or might have been continued, prosecuted and enforced by or against KSL in the same manner and to the same extent as it would or might have been continued, prosecuted and enforced by or against KFL as if this scheme had not been made."

13. Hon’ble Securities Appellate Tribunal also relied upon the undertaking given by the Noticee vide letter dated March 08, 2002 to SEBI. Their undertaking stated as under: “We hereby undertake that all notices and correspondences from the SEBI on the matter of pending investigation and enquiry against KFL or any of its directors or any other matter, shall be addressed to KSL and its directors as the case may be and further that such correspondences and notices shall be received and acted upon by KSL and also further that all actions that may be taken against KFL shall be taken against KSL who shall not at any point of time raise any jurisdictional issue." 14. Since the issue as to whether KSL is liable for the wrong doings of KFL has already been decided by the Hon’ble Securities Appellate Tribunal, I find that the Noticee is indeed liable for the actions of KFL. 15. As regards the issue of jurisdiction raised by the Noticee, SEBI has the power to appoint another Designated Authority ('DA') in this case in terms of Regulation 24 of the Intermediaries Regulations in view of the fact that the earlier Enquiry Regulations (under which the earlier enquiry proceedings were initiated) were repealed and SEBI (Intermediaries) Regulations, 2008 (‘Intermediaries Regulations’) were notified in its place.

The present proceedings do not therefore suffer from lack of jurisdiction as contended by the Noticee.

Consideration of Issues and Findings: 16. I have considered the material available on record i.e. Enquiry report dated July 31, 2013, the SCN dated August 23, 2013 and the replies filed by Noticee and submissions made during the course of personal hearing before me. 17. It is noted that DA in his Report found that that the Noticee had violated the provisions of Clause A (1),(2),(3),(4) and (5) of Schedule II of the Regulation 7 of the Brokers Regulations and Regulation 4(b), (c), (d) of PFUTP 1995, SEBI Circular no. SMD-1/23341 dated November 18, 1993, SMD/ POLICY/ IECG/ 1-97dated February 11, 1997 and SMD/ POLICY/ CIRCULAR/ 5-97 dated April 11, 1997.

18. Before dealing with the aforesaid violations, the relevant legal provisions, the contravention of which have been alleged in this case may be reproduced hereunder for the purpose of reference:

Brokers Regulations: Stock-Brokers to abide by Code of Conduct. Regulation 7. The stock-broker holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II. SCHEDULE II- Code Of Conduct For Stock Brokers 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 stock-broker 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.

PFUTP Regulations. Prohibition against Market Manipulation 4. No person shall- (b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market; (c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions;

(d)enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuations in the market price of securities;

19. In this context the issue for consideration is whether the Noticee aided and abetted its clients to fraud, manipulate and unfair trade practice, while dealing in the shares of DSQ?

Investigation revealed that company had made a preferential issue in March, 2000 to its related entities to the tune of 80,30,000 equity shares priced at `275/- (`10/- face value) including overseas corporate bodies and FIIs. Further, all these shares were offloaded into market through several brokers including the Noticee. The dealings of the Noticee in the scrip of DSQ and the findings as regards the alleged violations are as under:

i. It is noted from the enquiry report that during the investigation period one structured deal took place with Credit Suisse First Boston (I) Securities Pvt. Ltd. (Sell side broker) and Noticee (Buy side broker). The total quantity traded through this deal was 1,00,000 shares, representing 2.26% of the gross quantity traded during the entire period and 7.79% of the gross quantity traded during the settlement. F.R.M.A.N. Investments PTE Limited was Noticee’s client on the buy side and C. Mackertich Limited was the selling client with Credit Suisse First Boston (I) Securities Pvt. Ltd as the counterparty broker to this deal. The percentage change to Last Traded Price (“LTP”) due to this deal was 0.04%.

ii. It is noted that the Noticee vide its reply dated February 21, 2014 stated that the said structured deal was executed on behalf of its client F.R.M.A.N. Investments PTE Limited on February 24, 2000. F.R.M.A.N. Investments was the Offshore entity and they had traded through the Noticee during the investigation period in large volumes and in various scrips and was not related to DSQ. The Noticee further submitted that they had no relationship with Credit Suisse First Boston (I) Securities Pvt. Ltd. or C. Mackertich Ltd. or any of their directors/promoters/officers. The Noticee submitted that it had transacted at the instruction of the client and it is a coincidence that the trades matched with that of C. Mackertich. It is not possible to know the counterparty in screen based trading. It is also stated by the Noticee that the transactions were payment and delivery based. So there were changes in beneficial ownership and there was no significant change in the price.

iii. It is noted from the enquiry report that the Noticee executed 14 cross deals in 6 days for 4,92,600 shares, representing 1.31% of the gross quantity traded during the entire period on accounting period segment. These deals were executed at LTP variations ranging from -0.06% to 5.20%. Out of 14 cross deals in as many as 11 times the Noticee was the selling side which accounted 2,41,400 shares.

iv. In this regard, it is noted from the submissions of the Noticee that all these trades were carried out on screen based trading system over which they had no control except for punching the orders and its delivery and payments which resulted in change in beneficial ownership. Further, in relation to LTP variation, the Noticee submitted that in 7 cross deals there were no LTP variation, positive LTP variation (less than 1%) in 4 cross deals, positive LTP of 1.53% in 1 cross deal, positive LTP variation of 5.20% in 1 cross deal and negative LTP variation of 0.06% in 1 cross deal.

v. It is noted from the enquiry report that quantity traded during December 1999 to April 2000 in the scrip of DSQ, in the rolling segment was 32,00,652 shares. During this period, the Noticee traded for 31,95,066 shares (approx.99%) in the scrip of DSQ. It is also noted that the following DSQ related entities had sold shares in rolling segment through the Noticee and the details are as under:

Entity name No. of shares sold DSQ Industries Ltd. 6,05,010 Pilliyar Pattiyar Textiles Ltd. 4,00,000 Square D Textiles & Exports Ltd 5,00,000

Total 15,05,010 vi. It was noticed that major sellers in the market were DSQ related entities and the Noticee had also sold 75,000 shares and bought 3,75,000 shares in the rolling segment.

vii. The Noticee submitted that there were only 3 trades executed by them in its own account and all these trades were delivery based trades and which are in the normal course of business. The Noticee further submitted that there is no embargo in law that a stockbroker cannot invest or trade in its own account and proprietary trading is legally permissible and well recognized. It is also contended by the Noticee that though the trading done by it in the rolling segment during December 1999 to April 2000 amounted to 99.83% of the entire quantity of trades, all such trades were delivery and payment based.

viii. The Noticee has also submitted that it trades on behalf of the clients on the platform provided by the exchanges. When a client wants to trade on a particular segment, the Noticee as a stock broker cannot refuse to trade on their behalf. The broker simply has to execute the transaction as per the instructions of the client on the platform provided by the exchange. Quantum of trading cannot be the solitary factor for alleging mala-fides against its trading. Further, the Noticee contended that it was executing trades at the instructions of clients at the price quantity, time and the platform as instructed by them.

ix. It was observed in the investigation that Noticee was the largest trading member on the rolling segment. Out of the total traded quantity of 32,00,652 shares, Noticee accounted for 31,95,066 shares, representing 99.83% of the gross quantity traded on the rolling segment during the period under scrutiny. Out of this, a total of 31,89,964 shares i.e. 99.67% of the market gross quantity was traded by the Noticee through 35 cross deals in 5 days. It was noticed that in 9 cross deals DSQ related entities appeared in both sell and buy side and in 7 cross deals the Noticee bought 3,50,000 shares from the DSQ Industries Ltd. As a result of these deals, the percentage of LTP ranged from -16.48% to 3.33%. It is noted that trades were in the nature of cross deals and the orders were entered for same price, quantity and almost at the same time between the DSQ related entities and the Noticee also.

x. It is noted that out of 35 cross deals executed on rolling segment, 9 cross deals were between the DSQ related entities and 7 cross deals were between the Noticee and DSQ related entities on February 21, 2000. Through these cross deals they had accounted 16 lacs shares in the market in one day.

xi. The Noticee submitted that the allegation is based on execution of 35 cross deals on behalf of its various clients on 5 different days. All the said transactions were carried out by it in the normal course of business and in good faith. All these trades were carried out on screen based trading system over which it had no control except for punching the orders and all the trades resulted in delivery and payment. The Noticee had also stated that cross deals were executed on behalf of various clients and it was not restricted to alleged DSQ group entities. It is also submitted by the Noticee that out of the 35 alleged cross deals, there was 0% LTP variation in 29 cross deals, +ve LTP variation (less than 4%) in 2 cross deals and -ve LTP variation in 3 cross deals. Thus, there has been no jacking up of the price as a result of the alleged cross deals.

xii. The Noticee has submitted that execution of cross deals on behalf of the clients were in the nature of negotiated deals and which involve consensual bargaining in which the parties agree on the scrip to be traded, the quantity to be bought /sold and the price at which the scrip will be bought/sold. Further, Noticee submitted that in order to implement a negotiated deal through the trading system of an exchange, the buy and sell orders will necessarily have to be synchronized by the parties and put into system simultaneously.

xiii. It is noted that there has been an attempt to synchronise the punching of the time of the buy and sell orders for DSQ related entities. The regular frequency with which the trades were being executed i.e. the shares were moving between a select few entities and also the orders were placed with minimum time difference between the said entities on many occasions cannot be called coincidence. The further fact that the Noticee itself is the counter party in seven cross deals further belies the version of the Noticee that it was only executing the instructions of the negotiated deal. Hence the submissions of the Noticee as given above is devoid of any merit, hence, not acceptable.

xiv. As regards the allegation of advance pay-out, it is noted from the enquiry report that the client Square D Textiles & Exports Ltd. had sold 5,00,000 shares on February 21, 2000. With respect to this transaction scheduled pay-in/ pay-out date as per exchange was February 28, 2000. The sale proceeds of `37,25,05,167.00 were due from the exchange on the scheduled pay-out date. Investigation revealed that Noticee had made advance pay-out of `23,62,55,167 on February 23, 2000 (by way of Book entry date and actual credit date was February 24, 2000), `9,62,06,000 on February 26, 2000 and remaining amount `4,00,44,000 on March 01, 2000 i.e. after pay-out declared by the exchange. On the basis of the said facts, it is alleged that the Noticee has funded the client to the extent of the advance pay-out.

xv. In this regard, the Noticee submitted that they were the broker for both buy and sell side. So, they had received money from the buyer and which was further transferred to the Square D Textiles(seller) at their request. The details of the same as submitted by the Noticee is as under: The Noticee received an amount of `12,96,95,000 from Bajaj Auto Ltd and `10,00,00,000 from Niche Financial Services Ltd. on February 23, 2000 towards purchase of shares of DSQ prior to the payment to Square D Textiles (Seller) on February 24, 2000.

xvi. In the ordinary course of settlement the proceeds of the sales would be due to be paid by the broker to the client only on the pay-out declared by the exchange, while on the buy side the payment for the buy position has to be made before the pay-in, which always precedes the pay-out. However, it is not so in the present case. The Noticee has provided sale proceeds of the shares to Square D Textiles & Exports Ltd received from the client in advance. xvii. It is noted from the statement of Shri Devang Dhruv, Asst. Vice President of the Noticee recorded on November 03, 2004 that the clients were introduced by Shri Paresh Khandwala (one of the promoters of the Noticee)and there was no other relationship with the clients. It is also stated by the Noticee that they were not aware of the trading strategy of the clients and did not ask the clients about the same. The Noticee submitted that the trades were done in good faith hence, no due diligence was done for the clients. It is noted from the KYC forms and the agreements of certain clients with Noticee that Client Registration forms were incomplete.

With regard to the deficiency in the client agreement form and lack of exercise of due diligence, the Noticee did not submit any credible explanation. The Noticee merely stated that it had no reasons to question the motives of the clients. Further, the Noticee submitted that it had complied all statutory compliances from time to time. This contention is unacceptable. It is noted from the Member-Client Agreement that the Noticee was duty-bound to know the investment objective, genuineness and financial soundness of its clients. In view of its failure to adhere to the requirements of KYC norms, I note that the Noticee had failed to exercise due skill, care and diligence expected from a prudent stock broker who had a duty not only towards its client but also towards the securities market. xviii. In view of the foregoing and considering the facts of the case and the evidence available on record, I find that the Noticee has violated the provision of regulation 4(b), (c), (d) of PFUTP 1995. Further, the Noticee had bypassed the settlement mechanism of the Stock Exchanges and also failed to adhere to the requirements of KYC norms thereby violated Clause A (1),(2),(3),(4) and (5) of Schedule II of the Regulation 7 of the Brokers Regulations and, SEBI Circular no. SMD-1/23341 dated November 18, 1993, SMD/ POLICY/ IECG/1-97dated February 11, 1997 and SMD/ POLICY/ CIRCULAR/5-97 dated April 11, 1997.

xix. It is noted that the Noticee has been in business for more than 20 years and registered with SEBI as Stock Broker, Merchant Banker and Portfolio Manager having various retail as well as institutional clients (viz., Banks, Financial Institutions, FIIs, Mutual Funds, etc.

xx. However, the following facts are also pertinent to be mentioned:  It is noted that this case pertains to transactions which took place during December 1999 to January 2001.  It is noted that the Noticee had indeed executed several synchronized trades and various cross deals in the scrip, however, no concrete connection with the clients can be seen from the material available on record.  There was no significant price variation in the scrip due to the trades executed by the Noticee. 20. All things considered, I am of the view that the matter may be allowed to rest with a strong warning to the Noticee to be more cautious in future.

Order

21. I, therefore, in exercise of the powers conferred upon me by virtue of Section 19 of Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of the Intermediaries Regulations, hereby warn the Noticee to be 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. Any future lapse on its part in complying with the said provisions shall invite stringent action.

22. The enquiry proceedings initiated against the Noticee is disposed of accordingly.

S. RAMAN Place: Mumbai WHOLE TIME MEMBER Date: December 30, 2015 SECURITIES AND EXCHANGE BOARD OF INDIA