Order in respect of M/s H.B. Securities Ltd. in the matter of VXL Instruments Ltd.

WTM/RKA/ IVD/ 05 / 2014

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER Under section 12(3) of the SEBI Act, 1992 read with regulations 28(2) and 38(2) of the SEBI (Intermediaries) Regulations, 2008 in respect of H.B. Securities Ltd. in the matter of VXL Instruments Ltd. Appearances: For Noticee: Mr. Praveen Gupta, Director Mr. Prashant Mishra, Advocate For SEBI: Mr. Santosh Kumar Shukla, Join Legal Advisor Mr. Santosh Kumar Sharma, General Manager Ms. Srishti Ambokar, Assistant General Manager Mr. Parag K. Sinha, Assistant Legal Advisor 1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") conducted investigation into trading and dealing in the shares of VXL Instruments Ltd. (hereinafter referred to as "VXL") during the period from May 1999 to September 2000 (hereinafter referred to as "investigation period"). During the investigation period, the shares of VXL were listed on National Stock Exchange of India Ltd. (hereinafter referred to as "NSE"), BSE Ltd. (hereinafter referred to as "BSE"), Delhi Stock Exchange Ltd., Ahmedabad Stock Exchange Ltd. and Bangalore Stock Exchange Ltd. 2. The investigation revealed that entities belonging to two groups, namely, HB Group and CFL Group were among the major clients of various trading members and that their trading activity in the scrip of VXL during settlement numbers 1999019 to 1999023 contributed to 30% of the net volume in the scrip, thereby showing that HB Group and CFL Group played a major role in the increased trading activity in the scrip. 3. The entities belonging to HB Group consisted of H.B. Securities Ltd. (hereinafter referred to as "the noticee"), member of NSE, having SEBI registration number INB230607337 and its four clients, namely, Har Sai Investment Ltd. ("Har Sai"), HB Stockholdings Ltd., HB Portfolio Ltd. and RRB Securities Ltd. ("RRB") who were allegedly related/connected to each other and also to the noticee. During the investigation period, entities belonging to HB Group executed buy and sale trades through different stock brokers. The noticee executed a cross deal while trading for its related/connected client and also executed structured/matched trades in the scrip on behalf of its related/connected client. The noticee also failed to undertake KYC formalities of clients properly.

4. Pursuant to the investigation, SEBI initiated proceedings against the noticee under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalties) Regulations, 2002 (hereinafter referred to as "Enquiry Proceedings Regulations") (since repealed) to enquire into the violations/contraventions alleged to have committed by the noticee. While the proceedings were pending, the Enquiry Proceedings Regulations were repealed on May 26, 2008, by the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 (hereinafter referred to as "the Intermediaries Regulations").Accordingly, the Enquiry Officer/Designated Authority (herein after referred to as "DA") continued with the proceedings and submitted his Report (hereinafter referred to as "the Report") dated December 30, 2009 in terms of regulation 27 read with 38(2) of the Intermediaries Regulations and regulation 13(1) of Enquiry Proceedings Regulations. 5. In the Report, the DA found that the trades of the noticee were executed with a preconceived notion to create false market and misleading appearance of trading.

The noticee along with its related/connected entities entered into purchase or sale of 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 in the nature of matched/structured deals. Thus, it appeared that the transactions were entered into with a purpose to create artificial volume in the scrip. 6. The DA also found that the noticee failed to capture financial details of its clients, which is vital information based on which exposure limit is generally given to the clients and noted that all the four clients of the noticee were direct clients. Further, in case of one of the clients of the noticee, namely, Har Sai, the copy of PAN card submitted by the noticee showed the date of incorporation to be January 2, 1995 while the details recorded by the noticee in its KYC form showed the date of incorporation to be April 7, 1999. 7. The DA found that the noticee had violated the provisions of regulation 4(b) and (d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred to as "the PFUTP Regulations, 1995") and also clause A(2) and (4) of Code of Conduct specified under Schedule II read with regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as "Stock Brokers Regulations") and recommended that the certificate of registration of the noticee as a stock broker and member of NSE be suspended for a period of one month.

8. After considering the Report, a show cause notice (hereinafter referred to as "the SCN") dated January 4, 2010, enclosing therewith a copy of the Report, was issued to the noticee under regulation 28(1) of the Intermediaries Regulations calling upon it to show cause as to why action as recommended by the DA should not be taken against it or a higher penalty as deemed fit by the Board should not be imposed upon it. The noticee submitted its reply to the SCN vide letter dated February 26, 2010. An opportunity of personal hearing was granted to the noticee on November 27, 2013 before me when authorised representative of the noticee appeared and made oral submissions. Vide letter dated December 10, 2013, the noticee made written submissions. The submissions of the noticee are inter alia as under: (a) The DA has disregarded the issues in the Report such as - i. Several crucial documents relied upon in the proceedings were not provided despite the noticee's various requests; ii. The investigation period has remained ambiguous, imprecise, unspecific and undefined till date. (b) Investigation Order and appointment of Enquiry Officer were not valid.

(c) The entire proceedings suffer from inordinate delays which are against the principles of natural justice. The show cause notice issued by the DA (pre-enquiry SCN) was completely incoherent, vague, imprecise, ambiguous and contradictory. The pre-enquiry SCN and proceedings commenced by the same were bad in law. (d) At the time of the transaction in question, the PFUTP Regulations, 1995 were existing and applicable. These regulations were repealed on July 17, 2003. Since no proceedings were initiated under the PFUTP Regulations, 1995 before its repeal, the present proceedings were not saved under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as "PFUTP Regulations, 2003"). Therefore, the present proceedings cannot proceed. (e) The relationship as alleged in the SCN and Enquiry Report is not established is unsustainable and hence cannot be relied upon. Allegations / conclusion of relationships between entities on the basis of common addresses / directors are totally devoid of facts and baseless and the said allegations of relationship / nexus between separate, independent entities have been made through conjectures and surmises, without any substantiation and are denied as being against the law.

All entities alleged to be having a nexus / relationship have independent boards, where decisions are taken purely on professional basis. Further, where there is holding-subsidiary relationship (as in case of HB Portfolio Ltd. And the noticee) the directors appointed on the boards of the subsidiary are professional employees and have no other relationships. Thus, decisions taken by the board of holding company are never known to the directors of the subsidiary company. (f) Cross deals in themselves are not violation of the regulations unless they are collusive manipulative or fraudulent Since the SCN and the Report fail to show any evidence of fraud manipulative intent or collusion with other parties or counter party brokers the allegation of entering into manipulative / fraudulent cross deals holds no water. (g) The trade of the noticee on June 22, 1999 is not the basis of allegation. It has been only recorded in the notice to say that the trade was carried out on that date. (h) The allegations of having conducted structured deals with Fincap Portfolio Ltd. (Fincap) are baseless and without substance.

There is no material on record to show any fraudulent / manipulative intent on the part of noticee or collusion / understanding with any of the entities listed out in the SCN. Further there is nothing in SCN/ Report or in any material on record to show that the noticee's trades resulted in a rise /fall in the price of the shares of VXL or that any price rise or fall was artificial. Further, there is no material on record to show that the intention behind effecting the impugned trades was to manipulate the prices or that such trades induced the sale or purchase in the scrip by any person or that any spurt in volume was triggered by trades conducted on behalf of the clients of the noticee. There is no charge of price manipulation against the noticee. (i) On all three days of the impugned trades, the client was Har Sai. The proceedings against Har Sai have been dropped in respect of those very trades for which the noticee has been charged. On one occasion, the noticee acted as buying broker for UTI and selling broker for Har Sai. With regard to the transactions in question, there have been no proceedings against counterparty stock broker Fincap and only an administrative warning has been issued to it.

SEBI has not taken any action against counterparty clients UTI and HB Stockholdings Ltd. Where the actions have been initiated against its connected clients RRB and Har Sai, both have been exonerated vide SEBI order dated September 24, 2010. (j) All trades of the noticee were genuine trades entered on the screen of stock exchange where all deliveries were made and taken and there was transfer of beneficial ownership. There was no reversal of trades, no self trade and no circular trade. (k) There is nothing on record to show that any person has been deceived by the alleged dealings in the scrip of VXL. (l) The noticee has fully complied with all the mandatory procedures prevalent at the time of the impugned transactions. The KYC form came into being pursuant to Prevention of Money Laundering Act, 2002 w.e.f. July 1, 2005, about 6 years after the transactions in question took place. The details of the KYC form are meant to identify persons / entities who beneficially own or control securities, in order to prevent fictitious / benami transactions, which factor is not in question here. (m) With regard to the date of incorporation of Har Sai shown on Non Individual Client Registration Form being different from the date as shown on the copy of the PAN card, it is submitted that January 2, 1995 is the date when the company was incorporated as ' Potential Portfolios Ltd.' and April 7, 1999 is the date when the name was changed from 'Potential Portfolios Pvt. Ltd.' to 'Harsai Investments Pvt. Ltd.' and new Certificate of Incorporation consequent upon change of name was issued.

9. I have carefully considered the Report, the SCN issued pursuant thereto, the oral / written submissions and the reply and other relevant material that are available on record. Before dealing with the charges against the noticee on merits, I note that in its replies to the SCN dated January 04, 2010, the noticee has reiterated its certain preliminary objections / contentions which it had made before the DA. I find that in another proceedings against the noticee in the matter of its trading in the scrip of Ceat Ltd. initiated pursuant to a show cause notice dated November 30, 2009 the noticee had raised similar contentions. I have already dealt with them in the order dated January 21, 2014 and do not deem it necessary to burden this order with the same findings again. I, accordingly, reject the preliminary objections/contention of the noticee in this case also. 10. I further note that the noticee has also contended that the facts taken into account by DA to conclude inter se connection between noticee and its clients are not sufficient and cannot be relied upon. In this regard, it is undisputed fact that during the investigation period, the noticee had traded in the scrip of VXL on behalf of the four clients, namely- (a) Har Sai; (b) HB Stockholdings Ltd.; (c) HB Portfolio Ltd.; and (d) RRB.

I note that all the said four clients share common address with the noticee. Har Sai, HB Stockholdings Ltd. and HB Portfolio Ltd. share common address. HB Stockholdings Ltd. and RRB also share common address. Mr. Lalit Bhasin is a common director in Har Sai, HB Stockholdings Ltd., RRB and the noticee. Mr. Anil Goyal is a common director in HB Portfolio Ltd., RRB and the noticee. Mr. H.C. Bhasin is a common director in HB Stockholdings Ltd., HB Portfolio Ltd. and the noticee. Mr. Praveen Gupta is a common director in Har Sai and the noticee. Mr. J.M.L. Suri is a common director in HB Stockholdings Ltd. and HB Portfolio Ltd. I further note from the submissions of the noticee that it has a holding-subsidiary relationship with HB Portfolio Ltd. These facts taken as basis to determine the inter se connection/relation amongst the above said clients of the noticee and connection of noticee with them are summarised as under:

Common address, directors HB Stockholdings Ltd. HB Portfolio Ltd. Common address, directors, holding- Common subsidiary relation Common Common address, address, Common address directors director address, Noticee Common director director C ommon address, Common directors address, directors Har Sai RRB Common director 11. I find that the above facts establish the connection between the noticee and its clients. In this regard, I note that Hon'ble SAT has, in many cases such as Classic Credit Ltd. vs. SEBI (SAT Appeal no. 68/2003, Order dated December 8, 2006), Classic Credit Ltd. vs. SEBI (SAT Appeal no. 76/ 2003, Order dated January 9, 2007) and Veronica Financial Services Ltd. Vs SEBI (SAT Order dated August 24, 2012), held that connection/relations can be established on the basis of factors including the common addresses, common directors/shareholders, etc. I therefore do not agree with the contentions of the noticee with regard to connections between noticee and its clients. 12. Now I proceed to deal with the merits of the case. I note from the Report that charge against the noticee is that it along with its related/connected entities entered into purchase or sale of 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 in the nature of matched/structured deals. Thus, it appeared to DA that the transactions were entered into with a purpose to create artificial volume in the scrip. Another charge against the noticee as per the Report is that it failed to undertake KYC formalities properly. The charges have been made out in the Report on the basis of following transactions/facts: A. Trades of the noticee (i) Cross deal executed by the noticee 13. I note from the Report that the noticee executed a cross deal on June 21, 1999 for 34,440 shares on behalf of its client, namely, UTI on buy side and its connected client, Har Sai on sell side as described in the following Table:

Buy Sell Traded Trade Trade Date Broker Client Broker Client quantity time rate 21/06/1999 HB Securities UTI HB Securities Har Sai 34,440 14:07:05 202.00 (ii) Trade executed by entities belonging to HB Group 14. The noticee executed a trade on June 22, 1999 for 11,600 shares on behalf of its connected client, namely, Har Sai on buy side with counterparty broker Fincap trading for the connect client of noticee, HB Stockholdings Ltd. on sell side as described in the following Table: Buy Sell Traded Trade Trade Date Broker Client Broker Client quantity time rate 22/06/1999 HB Securities Har Sai Fincap HB Stockholdings Ltd. 11,600 12:10:40 212.50 (iii) Structured / matched transactions 15. In the Report, 7 instances of matched trades on September 26, 2000 for 10,844 shares have been cited. In those trades, the noticee was selling broker for its connected client, Har Sai and the counterparty buying broker was Fincap for the client RRB on buy side. The trades are described in the following Table: Buy Sell Date Traded quantity Trade time Trade rate Broker Client Broker Client 26/09/2000 Fincap RRB HB Securities Har Sai 2,000 14:55 104.00 26/09/2000 Fincap RRB HB Securities Har Sai 2,000 14:55 104.00 26/09/2000 Fincap RRB HB Securities Har Sai 1,000 14:57 105.00 26/09/2000 Fincap RRB HB Securities Har Sai 1,525 15:03 105.00 26/09/2000 Fincap RRB HB Securities Har Sai 2,000 15:03 105.00 26/09/2000 Fincap RRB HB Securities Har Sai 345 15:03 105.00 26/09/2000 Fincap RRB HB Securities Har Sai 1,974 15:03 105.00 10,844

B. Details recorded in KYC of clients of noticee. 16. Another charge against the noticee that it failed to capture financial details such as annual income for the last 3 years of the clients, net worth of the client companies, annual reports of the client companies in the KYC form, which is vital information based on which exposure limit is generally given to clients. It has been alleged that in case of one of the clients of the noticee, namely, Har Sai, the copy of PAN card submitted by the noticee showed its date of incorporation as January 2, 1995 while in the KYC form it was shown to be April 7, 1999. 17. I note that the basis of charge against the noticee in respect of its trades is one cross deal executed by the noticee, one trade executed between entities belonging to HB Group wherein the noticee was one of the two brokers and 7 instances of structured/matched trades with a very small time difference executed by the noticee on behalf of its related/connected client. With regard to these trades it is pertinent to mention following material facts that are available on record and also mentioned by the noticee:- (a) In the trade of June 21, 1999, wherein the noticee was the buy as well as sell broker and executed said trade on behalf of its related/connected entity, Har Sai on buy side and on behalf of UTI on sell side, there is no allegation that the noticee and its clients were connected with counterparty broker Fincap or that the noticee and its connected client

Har Sai was connected with the counterparty client UTI. I further note that with regard to this trade, SEBI has discharged the connected client, Har Sai vide order dated September 24, 2010 and has not initiated any proceedings against the other client, UTI. (b) With regard to the trade of June 22, 1999, wherein Har Sai the connected client of the noticee trading through it was on buy side and HB Stockholdings Ltd. trading through Fincap was on sell side, I note that the noticee, its client and counterparty client belonged to the HB Group and were connected to each other. However, there is no allegation that the noticee, its client and counterparty client was connected to the counterparty broker Fincap. I further note that with regard to this trade, SEBI has discharged the connected client Har Sai vide order dated September 24, 2010 and has not initiated any proceedings against the other client HB Stockholdings Ltd. (c) With regard to the seven trades of September 26, 2000, I note that while the Report has mentioned that these seven trades were structured/matched with a very small time difference, there is no material in the Report to show how small the difference in time was.

I further note that the out of the four parties to the trades, three parties, namely, the noticee, its client Har Sai and counterparty client RRB were connected to each other. However, there is no allegation of connection between Fincap and the other three entities. I further note that with regard to these seven trades, SEBI has discharged both the clients, namely, Har Sai and RRB vide order dated September 24, 2010. 18. In my view, matching of trades between connected clients per se cannot be culpable. Similarly, the structured /synchronised trades on screen based order matching system are also per se not illegal. However, any attempt to manipulate the price or volume through pre-meditated and coordinated trading between transacting parties through such trades would be illegal being covered under the prohibitions contained under the SEBI Act and the PFUTP Regulations. Further, when the shares are transacted and circulated amongst the entities acting in a league under a premeditated manipulative plan without intending to transfer the beneficial ownership of shares traded, such transactions can be fraudulent.

Such fraudulent and manipulative intent can be ascertained on the basis of facts and circumstances, pattern of trading, relation amongst the parties, etc. 19. In this case, in absence of any connection between the noticee and its counterparty broker and on the basis of the material available on record, it is not established that the cross trade on June 21, 1999 was entered with a preconceived notion to create false market and misleading appearance of trading in the scrip as alleged in the Report. 20. I note that the trade of June 22, 1999 has been mentioned in the Report to show that parties belonging to HB Group were executing buy and sell trades through two different stock brokers. I further note that this trade is one of the basis of the charge that the noticee entered into such trades with preconceived notion to create false market and misleading appearance of trading in the scrip. However, I note that there is no allegation with regard to this trade that the noticee, its client and counterparty client who were connected to each other were also connected to the counterparty stock broker Fincap.

In absence of required connections as mentioned above and in view of the fact that no fault has been found against the counterparty clients or the counter party stock broker, it cannot be said that the noticee traded under the pre-meditated plan with counterparty stock broker and clients and traded without intending to transfer of beneficial ownership but with intent to operate a device to inflate, depress or cause fluctuations in the price of the scrip or for the purpose of creation of false market and misleading appearance of trading in the scrip as alleged in this case. I find that the information/data mentioned in the Report with regard to this trade does not establish any such plan while executing the said transaction. 21. As regards the seven alleged structured transactions, I note that the Report is silent regarding the time difference between the buy and sell orders and the quantity and price of the buy and sell orders each so as to determine synchronization amongst the orders. The Report is unclear as to how the above transactions were structured with fraudulent intentions and which transactions were executed without intention of genuinely transferring beneficial ownership.

I find that there is no sufficient evidence or material on record to clearly establish connivance or collusion of the noticee with counterparty broker or clients. In absence of any evidence and unambiguous findings in the Report in regard to any pre-mediated plan or device of the trading parties, it is difficult to hold the noticee guilty with regard to these transactions. 22. I further find that how the impugned trades of the noticee were intended to operate only as a device to inflate, depress or cause fluctuations in the market price of securities has not been examined in the Report at all. 23. It is also important to note that in order to prove the allegation of fraudulent or unfair trade practices higher degree of preponderance of probability is required. In this case, where the actions have been initiated against the connected clients of the noticee with regard to the impugned trades, they have been discharged vide order dated September 24, 2010. Further, in the order dated September 24, 2010, it has been clearly found that the material available on record does not establish that the trading clients were not taking deliveries.

It has been further found in the said order that the material available was not sufficient to establish either that the transactions were calculated to create false or misleading appearance of trading in the shares of VXL or that those transactions were not intended to effect the transfer of beneficial ownership. 24. Considering the above facts and circumstances, I am of the view that preponderance of probability, in this case, is in favour of the noticee. I, therefore, give the noticee the benefit of doubt with regard to the charge against it pursuant to its impugned transactions. 25. As regards the allegation of not fulfilling KYC formalities properly, I find merit in the submissions of the noticee. 26. In view of the above, I do not consider it necessary to take any action against the noticee as contemplated in the SCN. The show cause notice dated January 04, 2010 is accordingly disposed of.

DATE: JANUARY, 23rd 2014 RAJEEV KUMAR AGARWAL PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA