Order in respect of M. Bhiwaniwala & Co. in the matter of G.R. Industries and Finance Ltd

WTM/RKA/ERO/15 / 2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: RAJEEV KUMAR AGARWAL, WHOLE TIME MEMBER ORDER UNDER REGULATION 28(2) READ WITH REGULATION 38(2) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (INTEMEDIARIES) REGULATIONS, 2008 IN RESPECT OF M/S M. BHIWANIWALA & CO., A STOCK BROKER (SEBI REG. NO. INB030049211), A MEMBER OF THE CALCUTTA STOCK EXCHANGE LIMITED (CSE). IN THE MATTER OF G .R. INDUSTRIES AND FINANCE LTD. Appearances: For Noticee: Mr. Mahesh Bhiwaniwala For SEBI: Mr. Santosh Shukla, Joint Legal Advisor Mr. Mrityunjaya Behera, Assistant General Manager Ms. P. L. Leena Shree, Assistant Legal Adviser 1. The Securities and Exchange Board of India ('SEBI') had conducted investigation, for the period January 1, 2004 to February 28, 2005 ('investigation period'), into the irregular trading in the scrip of G. R. Industries and Finance Limited ('Company') having its shares listed at the Calcutta Stock Exchange Limited ('CSE'). 2. During the investigation period, four stock brokers viz: Shyamlal Sultania, Bubna Stock Broking Services Ltd., Ashok Kumar Kayan and M. Bhiwaniwala & Co. ('the noticee') had traded substantially in the shares of the Company.

Their cumulative trades accounted for 83.30% of the total volumes traded in the scrip at CSE during the investigation period. The noticee had traded in 18, 59,901 shares of the Company during the investigation period. The noticee had also contributed in a significant way in raising the price of the scrip from `2 on daily basis to `170.20. 3. Pursuant to the investigations, the enquiry proceedings under the provisions of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (since repealed) read with Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (‘Intermediaries Regulations’) were initiated to enquire into the alleged violations of provisions of regulations 4(2) (a), (e) and (o) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (‘PFUTP Regulations’)and clauses A(1),(2),(3),(4) and B(4)(a) of the Code of Conduct of Stock Brokers specified in Schedule II read with regulation 7 of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (‘Stock Broker Regulations’) by the noticee.

4. After completing the proceedings, the Designated Authority (DA) submitted his Report dated March 14, 2011 ('Report') in terms of regulation 27 and 38(2) of the Intermediaries Regulations. In the Report the DA inter alia found that:- (a) Out of 18,59,901 shares (both buy and sell) traded by the noticee for its clients, trades in 10,65,598 shares (57.29% of the total trades executed by the noticee for its clients) were cross deals, wherein the noticee was both the buying stock broker as well as the selling stock broker. (b) The noticee had traded 30,100 shares in its own account during the initial period of the price rise in the scrip. After executing the trades in its own account, the noticee had transferred the same shares through off market deals to its clients. (c) The cross deals done by the noticee for its clients were reversed by the noticee between its set of clients on the same day at a higher price than the price at which the initial transactions took place. Thereby, the net obligations at the end of the day became nil which ultimately contributed to creation of artificial volumes and systematic price rise.

The following table illustrates such reversal of trades: Transaction Trade Buy Bought Rate Sell Sold Net Date No. Client Qty`  Client Qty` Obligation at (`) end of the day 552 5413 1600 6.20 5011 1600 14.10.04 558 5011 1600 6.25 5413 1600 Nil -do 553- 6919 1650 6.25 5011 1650 554 Nil 559 5011 1650 6.25 6919 1650 -do- 555 5368 600 6.15 5011 600 560 5011 600 6.25 5368 600 Nil -do- 556 5370 625 6.30 5011 625 561 5011 625 6.25 5370 625 Nil 557 5367 650 6.25 5011 650 562 5011 650 6.25 5367 650 Nil 18.10.04 573 1645 5000 6.50 5011 5000 575 5011 5000 6.70 1645 5000 Nil 574 1646 2500 6.50 5011 2500 576 5011 2500 6.70 1646 2500 Nil 25250 25250 (d) Both the buy and the sell orders were placed simultaneously and that while there was only a single client who was selling, the sell order was matched by a buy order from a set of clients. The clients codes of the clients placing the buy orders were also arranged in a seriatim in ascending order which is very unlikely until and unless it is pre arranged/premeditated. Such trading pattern has been illustrated as per the following table: Sl.No Trade Trade Buy Clients Qty' Sell Client Qty' Date Nos. Codes Bought Codes Sold From-To From – To 1. 14.10.04 555-557 5367- to 5370 1875 5011 1875 2. 18.10.04 573-574 1645- to 1646 7500 5011 7500 3. 2.11.04 704-712 1682- to 1689 19500 5033 19500 4. 9.11.04 760-766 1705- to 1709 32500 5011 32500 5. 12.11.04 802-820 1731- to 1744 38,600 5011 38600 6. 6.1.05 988-990 1568- to 1570 2100 2100 7. 7.1.05 1026-1028 1593- to 1595 3300 5300 3300 8. 14.1.05 1218-1222 2279- to 2282 20000 5300 20000 (e) This pattern of trading is not plausible in an online order matching system until and unless the sequence is fed specifically in the system manually.

The noticee had admitted such trading pattern and had submitted that it was not aware of this type of trading pattern being reflected in the system. (f) The trades of the noticee had significantly contributed in the progressive price rise of the scrip from ` 2.25 on a daily basis to ` 170.10. The following table illustrates such price rise of the scrip: Date Previous Opening Exchange Volume created % increase Day Price (`) Highest Volume By the broker in share price(`) Price at price which traded(`) B S 09.9.04 2.00 2.25 2.25 500 500 0 0.12% 10.9.04 2.25 2.60 2.60 10000 4200 0 15.5% 27.9.04 6.50 6.50 6.50 12700 6000 6000 - 29.9.04 6.40 0.00 6.20 51100 3250 3250 - 30.9.04 6.10 5.90 5.90 6800 0 6800 - 4.10.04 5.90 6.00 6.00 6800 3400 3400 1.69% 8.10.04 6.30 6.50 6.50 900 900 900 3.1% 12.10.04 6.50 6.50 6.50 78500 20000 20000 - 14.10.04 6.50 6.50 6.50 351450 10250 15250 - 18.10.04 6.50 6.50 6.75 64900 52500 52500 3.8% 26.10.04 6.50 6.20 6.25 9300 2500 2500 - 29.10.04 6.50 6.60 6.55 209300 16900 16900 0.76% 2.11.04 6.55 6.60 6.70 28500 19500 19500 2.29% 3.11.04 6.65 6.70 6.70 103400 100000 100000 0.75% 9.11.04 6.55 6.85 6.85 32500 32500 32500 4.5% 10.11.04 6.85 6.55 7.85 112200 6,650 6850 14.59% 12.11.04 7.85 0.00 9.40 79100 38600 38600 19.74%

19.11.04 9.00 8.20 8.60 250600 16000 16000 4.87% 7.12.04 24.35 0.00 29.20 300 200 0 19.91% 15.12.04 47.00 54.00 54.00 1000 1000 0 14.89% 24.12.04 85.00 95.10 95.10 3000 3000 3000 11.88% 27.12.04 95.10 105.10 105.10 20000 20000 20000 10.51% 28.12.04 105.15 95.20 98.90 2500 2500 2500 3.88% 30.12.04 108.40 115.40 115.40 10000 10000 10000 6.45% 31.12.04 115.40 125.40 125.50 25000 25000 25000 8.75% 3.1.05 125.50 137.00 137.00 10000 10000 10000 9.16% 5.1.05 151.90 167.75 169.10 27000 21000 21000 11.32% 6.1.05 169.05 170.00 169.70 73300 0 22100 0.38% 7.1.05 169.55 170.00 169.70 46500 3300 3300 0.08% 10.1.05 169.70 169.30 162.55 50800 0 4500 - 11.1.05 162.65 170.00 165.80 113950 19650 24500 1.93% 12.1.05 165.75 170.10 170.10 1132301 23800 23800 2.62% 14.1.05 170.05 170.00 170.10 77199 10200 10200 0.02% (g) The noticee helped its clients to off load shares at low rates and buy the shares at high rates. The noticee had also helped its clients to reverse the transactions at high rates and has enabled its clients to gain undue benefits/profits. Through this pattern of trading the noticee, its clients and some of directors of the Company have managed to retain their holdings in the Company.

In addition, the certain clients of the noticee, in connivance with it, had also booked loss to avail some tax benefits. (h) Nearly more than 50% of the trades done by the noticee were cross deals, therefore, in such large scale cross deals the noticee also acted as the counter party stock broker for the trades executed through its terminal. The noticee had executed pre-determined/ pre-mediated trades for its clients using the exchange mechanism to make them appear normal market trades thereby creating artificial volume in the scrip during the initial period of price rise by mere buy and sell transactions without taking any positions at the end of the day. (i) By executing such large volume of cross deals and indulging in manipulative transactions the noticee had distorted the market equilibrium and created false market in the scrip that affected normal price discovery mechanism in the stock exchange and had also failed to maintain high standards of integrity as a stock broker. (j) The noticee colluded with the directors of the Company and other stock brokers to facilitate price rise, creation of artificial volume and executing trades for its clients by providing them the facility of reversing their transactions subsequently, with same set of clients with whom the transactions were entered into initially, thereby enabling them to book profits/loss to avail some tax benefits.

(k) The noticee indulged in off market deals for its clients by transferring its own trades to its clients account at back office level and further issuing contract notes to its clients.

(l) The noticee dealt with its clients in spite of being aware of the inter linkages between its clients among themselves, with other stock brokers trading in the scrip and also with the directors of the Company. The noticee had deliberately colluded to indulge in large scale price manipulation and creation of artificial volume in the scrip using the exchange mechanism. (m) Admittedly, the noticee was unable to produce the KYC of its clients and could not substantiate its claim of loss of KYC records. (n) It is of too much of coincidence that in large volume of the trades executed by the noticee, the buyer and seller were readily available with the noticee to facilitate the execution of its trades. The trades of the noticee were clearly building up artificial volume in the scrip and the cross deals of the noticee impaired the genuine price discovery in the scrip thereby misleading genuine investors. 5. Based on his findings as recorded in the Report, the DA has found that the noticee violated the provisions of regulations 4(2) (a), (e) and (o) of the Securities and Exchange Board of India PFUTP Regulations and clauses A(1),(2),(3),(4) and B(4)(a) of the Code of Conduct of Stock Brokers specified in Schedule II read with regulation 7 of the Stock Broker Regulations and has recommended that the certificate of registration of the noticee be suspended for a period of three months.

6. After considering the Report, a Show Cause Notice ('SCN') dated March 18, 2011 was issued to the noticee under regulation 28(1) and regulation 38(2) of the Intermediaries Regulations enclosing therewith with a copy of the Report and calling upon it to show cause as to why the penalty recommended by the DA or as considered appropriate by the Board should not be imposed upon it. The noticee was also advised to inform whether it desired to avail an opportunity of personal hearing. The noticee did not respond to the SCN despite service thereof upon it. However, in the interest of natural justice, an opportunity of personal hearing was granted to the noticee on November 07, 2012 which was later postponed to December 04, 2012 on its request. On December 04, 2012 Mr. Mahesh Bhiwaniwala, authorised representative of the noticee appeared before me and submitted that the noticee was earlier debarred for a period of three years, hence, a lenient view may be taken in the matter. 7. I have carefully considered the Report, the SCN issued pursuant thereto, submissions of the noticee and other relevant materials available on record.

The noticee has not disputed the findings and observations of the Designated Authority as recorded in the Report dated March 14, 2011. I have perused the Report and note that the noticee was aware of the interlink amongst its clients themselves, with other stock brokers trading in the scrip and also with the directors of the Company and it had deliberately executed the cross trades for its clients that resulted in generation of artificial volume in the scrip of the Company and artificially raised the price of the scrip from `2.00 to `170.20 during the investigation period without any corresponding change in the fundamental of the Company. 8. I further note that the trading of the noticee continued for long time that too in scrip with no change in the fundamentals of the Company. The noticee had entered into both buy and sell orders in its terminal and those trades form large volume. The noticee was instrumental in the price manipulation of the scrip. The trades executed by the noticee and pattern of trading adopted by it as found in the Report were not genuine and the noticee deliberately colluded with the directors of the Company and other stock brokers and employed the device to facilitate price rise and creation of artificial volume in the scrip of the Company.

9. I have considered the oral submission made by the authorised representative of the noticee with regard to past actions taken against it. I note that with respect to noticee's dealings in several small cap stocks, SEBI, vide interim order dated September 29, 2005, restrained it from buying, selling and dealing in securities, in any manner, either directly or indirectly, till further directions. The said order was subsequently confirmed vide order dated January 12, 2006 and then vacated vide final order dated August 11, 2008. The proceedings initiated against the noticee for appropriate action under section 12(3) of the SEBI Act in respect of the said subject matter was disposed by SEBI, vide order dated July 7, 2009, without imposing any further penalty as the noticee had already been debarred in the matter in view of the interim order and the confirmatory order dated September 29, 2005 and January 12, 2006, respectively. I note that the subject matter of present proceedings is different from that of the earlier case. Therefore, the debarments undergone pursuant to the said interim and confirmatory order cannot mitigate the charges and allegations in the present case.

The enforcement action against the noticee in the earlier case also indicates that the noticee has committed repeated default. 10. In the facts and circumstances as found in the Report, I find no reason to interfere with the findings of the DA. I note that the noticee had indulged in fraudulent and unfair dealings and had not taken due care and diligence in observance and compliance of the statutory requirement in conduct of its business as a stock broker. I, therefore, find that the noticee has violated regulations 4(2) (a), (e) and (o) of the PFUTP Regulations and clauses A(1),(2),(3),(4) and B(4)(a) of the Code of Conduct of Stock Brokers specified in Schedule II read with regulation 7 of the Stock Brokers Regulations. 11. The prohibited activities and types of contraventions as found by the DA in this matter definitely have potential to disturb the market integrity and disturb the fair, equitable and efficient functioning of securities market. Such transactions pose threat to the market integrity and orderly development of security market. I, therefore, am satisfied that it is necessary to secure the proper management of the activity of the noticee.

In my view, considering the facts and circumstances of this case and taking into account the interests of the investors, suspension of certificate of registration of the noticee for three months as recommended by the Designated Authority will be commensurate with the contraventions found in this matter. 12. I, therefore, in exercise of the power conferred upon me by virtue of section 19 of the Securities and Exchange Board of India Act, 1992, read with regulations 28 (2) and 38(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby suspend the certificate of registration of the noticee, M/s M. Bhiwaniwala & Co. [Registration No. INB 030049211], Member, the CSE for a period of three months. 13. A copy of this order shall also be served upon the noticee and CSE in accordance with regulation 30 of the SEBI (Intermediaries) Regulations, 2008. 14. This order shall come into force immediately on expiry of twenty one days from the date of this order.

DATE: April 5th, 2013 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA