Order in respect of M/s. V.R.M.Share Broking Pvt. Ltd. in the matter of M/s. Soundcraft Industries Ltd.

WTM/RKA/ID3/56 /2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER SECTION 12(3) OF THE SEBI ACT 1992 READ WITH REGULATION 28(2) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008. In respect of M/s V. R. M. Share Broking Pvt. Ltd. In the matter of M/s Soundcraft Industries Ltd. 1. SEBI noticed that the scrip of M/s Soundcraft Industries Limited (hereinafter referred to as "the company") witnessed sharp fluctuations in its price and volume at Bombay Stock Exchange Ltd. (hereinafter referred to as "BSE") and National Stock Exchange Ltd. (hereinafter referred to as "NSE") during the period July 02, 2001 to January 02, 2002. In view of the same SEBI conducted investigation into the dealing in the shares of the company for the period July 02, 2001 to January 02, 2002 (hereinafter referred to as "investigation period"). It was observed that during the investigation period the price of the scrip of the company at BSE had decreased from ₹ 506.50 on July 2, 2001 to ₹ 429.05 on January 2, 2002, i.e., a fall of 15.29%. During the same period, the BSE indices, Sensex had fallen from 3494 to 3305, i.e., a fall of 5.41%.

The traded volumes of the company at BSE had decreased from 15150 to 2010, i.e. a drop of 86.73%. At NSE, the price of the scrip decreased from ₹ 505.40 on July 2, 2001 to ₹ 428.00 on January 2, 2002, i.e. a fall of 15.31%. During the same period, NSE indices, Nifty had fallen from 1101 to 1061, i.e., by 3.63%. The trade volumes of the scrip at NSE had decreased from 15215 to 235, i.e., by 98.46% during the investigation period. 2. On analysis of the trades in the scrip of the company at NSE, it was observed that a group of related stock brokers at NSE, namely; Shri Rajkumar Chainrai Basantani (hereinafter referred to as "Shri Basantani") along with viz, H. Nyalchand Financial Services Ltd. ('Nyalchand'), Mekaster Securities Pvt. Ltd. ('Mekaster'), R. K. Global Shares & Securities Ltd. ('R. K. Global') and M/s. V. R. M. Share Broking Pvt. Ltd. (hereinafter referred to as ‘the noticee’ ) and their clients tried to establish the price in the scrip through circular trades. It was observed that Shri Basantani, who is an individual trading member of NSE, was also the Chairman and Managing Director (CMD) of the company.

During the investigation period, the trading of Shri Basantani along with related stock brokers and their clients contributed almost 96% and 65% of the trading in the company’s scrip on the BSE and NSE, respectively. 3. Pursuant to the investigations, SEBI initiated proceedings against the noticee under section 12(3) of SEBI Act read with regulation 5(1) of SEBI (Procedure for Holding Enquiry and Imposing Penalty) Regulations, 2002 (hereinafter referred to as 'the Enquiry Proceedings

Regulations') (since repealed) and vide an order dated December 12, 2008 suspended the registration of the noticee for a period of one month. In the appeal filed by the noticee against the said order, the Hon'ble Securities Appellate Tribunal (SAT) vide its order dated July 08, 2009 remanded the matter to SEBI to look into matter afresh. 4. Accordingly, the Designated Authority (DA) undertook fresh proceedings in the matter and submitted a Report dated May 11, 2011 in terms of SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as "Intermediaries Regulations"). In the Report, the DA inter alia found that: (a) The trades of Shri Basantani and related stock brokers including the noticee, contributed 65.25% of the total traded volume during investigation period, out of which noticee's trades for its connected client Dhanlaxmi Cotex Ltd. ('Dhanlaxmi') accounted for 7.29% of total traded volume and its proprietary trades accounted for 2.43% of the total traded volume as described in the following table:

Broker Client Gross trade Net buy % Rajkumar Chainrai Basantani Jaitra Estate Developers Pvt. 552578 -189426 22.30 Ltd. Rajkumar Chainrai Basantani Panna Agrofine Pvt. Ltd. 50000 -50000 6.05 Mekaster Securities Pvt. Ltd. Bharat H Jain 271913 -297 10.97 VRM Share Broking Pvt. Ltd. Dhanlaxmi Cotex Ltd. 180624 0 7.29 VRM Share Broking Pvt. Ltd. Proprietary Account 60326 8 2.43 H Nyalchand Financial Services Ashmita R Shah 195174 150 7.88 Ltd. H Nyalchand Financial Services Bharat H Jain 42950 0 1.73 Ltd. R K Global Shares & Securities AMS Finance & Securities Ltd. 163687 7 6.60 Ltd. Total 1517252 -239558 65.25 (b) Shri Basantani and related stock brokers and their clients were indulged in structured deals. In all these structured deals, sell and buy orders were placed by them either simultaneously or within the time period of less than 60 seconds. The prices at which the buy and sell orders were placed were also identical. Following are the details of structured deals by / through the said stock brokers at NSE:

Trading Member No. of structured deals Rajkumar Chainrai Basantani 651 H Nyalchand Financial Services Ltd 353 V R M Share Broking Private Limited 290 Mekaster Securities Pvt. Ltd. 385

R K Global Shares & Securities Ltd. 197 Total structured deals among 5 members 1876 (c) The noticee was trading for its client Dhanlaxmi, in the said 290 structured deals and out of these structured deals, 134 structured deals were with Shri Basantani as described in the following table:

Counter Party Trading Member of VRM as VRM as No. of Trades VRM for structured trades Buyer Seller Rajkumar Chainrai Basantani 65 69 134 H Nyalchand Financial Services Ltd. 30 35 65 Mekaster Securities Pvt. Ltd. 21 35 56 R. K. Global Shares & Securities Ltd 7 28 35 Total 123 167 290 (d) On July 02, 2001, in a large number of trades of Shri Basantani and related stock-brokers, buy orders and sell orders by the aforesaid related stock-brokers were modified simultaneously without any difference time. A similar pattern was observed on other days as well. This cannot be a mere coincidence. (e) While the screen based trading system maintains anonymity of the counterparty broker/client, it is an established fact that two parties with prior intent can match their trades with each other by placing / modifying orders simultaneously at the same price. In this case, execution of structured trades on so many days clearly indicates that the said trades were not genuine and the noticee was indulged in structured trades with other connected stotck brokers at NSE. (f) The DA has found that repetitive matching of trades in the aforesaid manner between the related entities cannot be a mere coincidence. The details of the trades of the noticee are sufficient to establish manipulative trades on their part. The relationship/connection amongst the entities further corroborates the manipulation. The DA found that related clients and stock brokers traded in the aforesaid manner to create a false appearance of trading in the scrip of the company and to create artificial volumes in the scrip. (g) The DA found the relationships / connection amongst the members of the group of stock brokers and their clients, in view of the following factors: i. Shri Basantani, a stock broker at NSE, is the director of Kolar Sharex Pvt. Ltd. and also the CMD of the company. ii. The old registered office address of one of the clients, namely; Jaitra Estate Developers P. Ltd. ('Jaitra Estate') is the same as the registered office address of Shir Basantani. Another client Panna Agrofine and Jaitra Estate have a common director, Nitin Sawant. Further, Ramesh Verma, director of Jaitra Estate is a dealer with Shri Basantani at NSE.

iii. Ramila B Jain, director of a client, Jain Investment, is the wife of another client Bharat H. Jain who is also the introducer of Asmita R Shah another client. Bharat H Jain has been a registered client with Shri Basantani at NSE for a long period of time. iv. Shri Dhiren Vora, the Director of H. Nyalchand Financial Services Ltd., member NSE is the brother of Shri Uday Vora, director of Park Light Investment Pvt. Ltd. v. The noticee, M. R. Share Broking Pvt. Ltd. ('MR'); a member BSE and Dhanlaxmi, a client are sister concerns. The three entities have a common director, Shri Ramautar Jhawar. vi. Shri Vinod Bagri is the director of AMS Stock Management Pvt. Ltd. ('AMS'). His wife, Smt. Alka Bagri is erstwhile director of AMS. Further, Shri Vinod Bagri’s brother-in-law, Shri Brij Mohan Binani is the Director of AMS. R K Bagchandka, director of R K Global, is introducer of AMS to R K Global. (h) The DA has noted that the company had passed 3 resolutions during the year 2001 for preferential allotment of its shares. However, the shares were not allotted pursuant to any such resolutions.

The company had informed SEBI that it was negotiating with some financial institution for subscription to its shares on preferential basis. As the negotiations were unsuccessful, the company was unable to allot the shares within the time prescribed limit. On examination of the facts and circumstances the DA has found that the deal between the financial institutions and the company did not succeed as the prices were not at the level on which the preferential allotment was sought to be made. The DA has further found that an attempt was made by Shri Basantani, CMD of the company, along with the above mentioned stock brokers including the noticee and their clients related to the company to maintain the price of the scrip at a desired level to attract investors at a price on which the preferential allotments were proposed. Thus, there was a constant endeavor of the aforesaid related/connected entities including the noticee to keep the price of the scrip at a specific level depicting attractiveness for price and liquidity in terms of volumes. 5. The DA found that the noticee traded among its related entities at NSE to create artificial volumes in the scrip with the intention of artificially manipulating the prices of the scrip and also failed to exercise due diligence while dealing with its clients in the scrip.

Thus, the noticee contravened the provisions of regulation 4(a), (b), (c) and (d) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred to as "PFUTP Regulations, 1995") read with regulation 13 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as "PFUTP Regulations, 2003") and clause A(2), A(3) and A(4) of the Code of Conduct for Stock brokers as specified in Schedule II under regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the "Brokers Regulations"). Based on the findings recorded in the Report, the DA recommended that the certificate of registration granted to the noticee be suspended for a period of one month.

6. After considering the Report, a show cause notice (SCN) dated May 20, 2011 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 DA should not be taken against it or a higher penalty as deemed fit by the Designated Member should not be imposed upon it. The noticee in its reply to the SCN inter alia requested for copy of investigation report, complete trade and order log and order book position. During the personal hearing granted to the noticee, it again requested for the said documents/data. Accordingly, SEBI provided to the noticee the abstract of trade and order log relevant to it and the details of noticee's orders. The noticee was also advised to submit its reply within 15 days from the receipt of the said details. The noticee, made further submissions in the matter and submitted day wise trade analysis. The submissions of the noticee inter alia are as under: i. The noticee has not been provided with a copy of the Investigation Report and complete 'trade and order log' and 'order book position' before and after each trade, which is in violation of principles of natural justice. ii.

The noticee has denied all the allegations and submitted that the allegations in the SCN are baseless, bald, sweeping, vague, unfounded, misconceived, speculative and self contradictory, based on assumptions, surmises and conjectures and are completely contrary to factual position on record. iii. The noticee, MR and Dhanlaxmi are sister concern and have a common director namely Mr. Ramutar Jhawar. The noticeee is not related to any other entities mentioned in the SCN. iv. One of the members of the alleged group was R. K. Global, in respect of which an order was passed by the Hon’ble SAT on September 16, 2010 setting aside the impugned order on account of no relationship was established between the group entities. v. All the trades were carried out in normal course of business for which pay-in and pay-out obligations were met by Dhanlaxmi. It is noteworthy to point out that Dhanlaxmi was not given any special facilities because of its connection with the noticee. vi. SEBI has merely stated the modified time matched with buy/sell modified time but the SCN fails to show as to why said order was modified.

Whether, it was modified to change the price of the order or the quantity of the shares was changed by the alleged modified order. Had it been provided or analyzed carefully, the rationale behind modification of the order would have been self explanatory. It is pertinent to note that merely the fact that the order was modified and the said order matched with one of the alleged entity, doesn’t prove that the alleged order was structured in nature. vii. The noticee was basically an intra day trader in the scrip and on almost all days during the investigation period, it was taking short position in the morning and whenever the price was less than morning price they were used to buy the shares back.

viii. Merely because there have been repetitive trades, it cannot be inferred that the noticee and the counterparty broker/client have acted in collusion with each other. In a situation where there are only limited number of clients interested in a particular scrip, the probability of matching of trades with each other is so high that one cannot escape from it, but this cannot be the reason alone to say that the same cannot be a mere coincidence. ix. Enquiry officer has made a finding that the company had passed 3 resolutions during the year 2001 for preferential allotment of shares and that all the three failed because the company was unable to allot the shares within the time limit. However, it is also pertinent to note that any company which has been continuously failing in raising funds clearly sends a signal that it is not prepared properly for such an allotment or there may be fundamental problems due to which it is constantly failing in achieving its target and in the process is incurring costs for the same and repetitive failures on the part of the company will clearly spoil the market sentiment pertaining to the scrip and will draw investors /traders away from it. x. Noticee submitted details no. of total orders placed by them; trades executed by them and also submitted that in most of the trades there was a time difference, price difference and quantity difference. xi.

It was betting on the price of the scrip of the company to fall and not to remain constant or rise. The trade strategy adopted by the noticee cannot be called as technique adopted for maintaining the price of the scrip as has been alleged in the SCN. xii. It has not put its orders above the last traded price of the scrip, rather, most of its trades were executed around the days' lowest price. xiii. It has suffered a combined loss of ₹ 35,718.70. xiv. Only fraction of its trades can be categorised as synchronised/structured trades. 7. I have considered the SCN, replies/submissions of the noticee and other material on record. The noticee has contended that it has not been provided with a copy of the investigation report in the matter. In this regard, I note that in these proceedings, the basis of charges and allegations against the noticee are narrated in the SCN and the Report of the DA. As per the procedure prescribed in regulation 28 of the Intermediaries Regulations, after considering the Report, the SCN is issued enclosing therewith a copy of the Report of the DA calling upon the noticee to submit its written representation.

In this case, the SCN has been issued to the noticee under the said regulation 28 enclosing therewith a copy of the Report that is a self contained document containing all the allegations and charges against the noticee. Since the procedure laid down in the regulation is strictly followed in this case, the grievance of violations of principles of natural justice is without any foundation as held by Hon'ble SAT in the case of Manoj Gaur Vs. SEBI ( Appeal Number 64 of 2012- order dated October 03, 2012). I, therefore, do not find violation of principles of natural justice in this case as contended by the noticee.

8. The other contention of the noticee is that it had not been provided with the complete trade and order log and order book position. In this regard, it is settled position that the principles of natural justice require that the relevant information/document/material relied upon in support of the charges / allegations should be furnished to the noticee. In this case, I note that the order log and trade log relevant to the noticee had been furnished to it by the DA during the proceedings before her and also along with the SCN. Nevertheless, as requested by the noticee during the personal hearing, it was again provided with all the relevant details with regard to its order log and trade log with all details as requested by it during the personal hearing. I, therefore, find that the principles of natural justice have been complied with in the present proceedings in this regard also and contention of the noticee is unfounded. 9. Coming to the merit of the case, I note that the Report in these proceedings is limited with regard to the trades of the noticee at NSE during the investigation period. The allegation against the noticee is that it had along with other connected stock brokers and clients fraudulently tried to maintain the price of shares of the company and created artificial volume in the scrip during the investigation period. This charge against the noticee has been levelled on the basis of the following:

i. the notiee's inter se connection with other four stock brokers, namely, Shri Basantani, H. Nyalchand, Mekaster and R. K. Global, and the clients for whom the transaction in question were undertaken; and ii. nature and pattern of transactions of the noticee in the scrip during the investigation period. 10. Admittedly, the noticee, its client Dhanlaxmi and MR are connected with each other. However, the noticee has denied its connection with any other stock brokers, clients and Shri Basantani as alleged in the SCN. I have examined the factors considered by the DA for coming to her findings in this regard and find that, except for the connection of noticee with its client Dhanlaxmi and MR those factors do not suggest any direct or indirect connection of the noticee with other entities, namely, Shri Basantani, Jaitra, Kolar, Jain Investment, Ashmita R Shah, Bharat H Jain, H Nyalchand, Park Light, AMS and R. K. Global, who are alleged to be connected with each other. The factors also do not suggest any connection of Dhanlaxmi (i.e. the entity connected with the noticee) with any other clients or stock brokers mentioned in the Report. 11. I note that the Report has impugned 290 trades of the noticee that it executed on behalf of its connected client Dhanalaxmi. The noticee has not disputed the correctness of those trades. Some of the trades of the noticee out of above stated 290 trades as recorded in the Report are as follows:

Trade Date: - July 04, 2001 Trade Trade No Trade Trad Buy Buy Last Sell Order Sell Sell Last time Time Price e Qty Order modified Entry Limit modified differenc Entry Time time Price Time e Time 13:04:57 200107040162532 503.00 500 13:04:57 13:04:57 13:04:45 503.00 13:04:57 0:00:00 13:16:05 200107040175009 503.25 350 13:16:05 13:16:05 13:15:50 503.25 13:16:05 0:00:00 13:16:18 200107040175245 503.50 230 13:16:18 13:16:18 13:16:12 503.50 13:16:18 0:00:00 13:55:10 200107040227878 502.50 500 13:55:10 13:55:10 13:55:05 502.50 13:55:10 0:00:00 14:40:17 200107040286014 502.25 500 14:40:17 14:40:17 14:40:07 502.25 14:40:17 0:00:00

Trade Date: - August 17, 2001

Trd Time Trade No Trd Pr Trd Buy Buy Last Sell Order Sell Sell Last time Qty Order modified Entry Limit modified difference Entry Time time Price Time Time 14:37:03 200108170466790 488.50 250 14:37:03 14:37:03 14:36:55 488.50 14:37:03 0:00:00 14:46:26 200108170486020 489.00 300 14:46:26 14:46:26 14:46:25 489.00 14:46:26 0:00:00 14:46:58 200108170487181 489.25 250 14:46:58 14:46:58 14:46:56 489.25 14:46:58 0:00:00 14:52:21 200108170496479 489.45 150 14:52:21 14:52:21 14:52:17 489.45 14:52:21 0:00:00 14:53:11 200108170498264 489.05 10 14:53:11 14:53:11 14:53:05 489.05 14:53:11 0:00:00 14:53:13 200108170498330 489.05 90 14:53:11 14:53:13 14:53:13 489.05 14:53:13 0:00:00 15:21:08 200108170571558 488.45 200 15:21:08 15:21:08 15:21:08 488.45 15:21:08 0:00:00 15:22:02 200108170574904 488.75 50 15:22:02 15:22:02 15:21:49 488.75 15:22:02 0:00:10

Trade Date September 26, 2012 Trd Time Trade No Trd Pr Trd Buy Buy Last Sell Sell Sell Last time Qty Order modified Order Limit modified difference Entry Time Entry Price Time Time time 13:10:06 200109260360500 493.95 100 13:10:06 13:10:06 13:09:36 493.95 13:10:06 0:00:00 13:10:06 200109260360501 493.95 200 13:10:06 13:10:06 13:10:01 493.95 13:10:06 0:00:00 13:10:19 200109260360980 493.95 150 13:10:19 13:10:19 13:09:36 493.95 13:10:19 0:00:00 15:46:36 200109260694928 491.95 200 15:46:36 15:46:36 15:46:32 491.95 15:46:36 0:00:00 15:46:51 200109260695758 491.00 195 15:46:51 15:46:51 15:46:51 491.00 15:46:51 0:00:00 15:46:51 200109260695759 491.55 5 15:46:51 15:46:51 15:46:44 491.55 15:46:51 0:00:00 15:47:18 200109260697311 491.55 150 15:47:18 15:47:18 15:46:44 491.55 15:47:18 0:00:00 15:49:45 200109260705790 492.50 300 15:49:45 15:49:45 15:49:43 492.50 15:49:45 0:00:00

12. It has been alleged that the above mentioned 290 trades of the noticee for its client Dhanlaxmi, were structured trades. The noticee has submitted that its trades were for arbitrage / jobbing. It has further submitted that on most of the trading days it had taken short position in the morning and then bought the shares back at the lower price in the evening. I find that the order and trade log do not suggest that the trades of the noticee were with an intention to manipulate the price of the scrip. 13. The noticee has contended that in the present matter limited number of clients and stock broker were interested in the scrip; therefore, the probability of matching of the said limited number of stock broker's order is high. From the order log and trade log of the noticee during the investigation period, I note repeated and continuous placing of such orders by the noticee for its connected client Dhannlaxmi. The trading pattern shows perfect matching of price and time wherein there is no difference modified sell order time and modified buy order time in all the trades that are impugned in the Report. In my view, such repeated matching of orders in the synchronized manner repeatedly and continuously for a connected client is too much of coincidence in the anonymous screen based trading system, even though only few brokers trade in the scrip.

14. It is settled principle that charge of fraudulent trading and market manipulation should be proved on a higher degree of probability. I further note that Hon’ble Securities Appellate Tribunal in the matter of M/s. Jagruti Securities Ltd. v. SEBI has clearly held that :-“ ………..in an artificial trade there has to be collusion between the buyer and the seller and in absence of any collusion, the trade cannot be termed as artificial.” Further, in the matter of Vikas Ganeshmal Bengani v. SEBI, Hon’ble SAT vide its order dated February 25, 2010 held that in order to establish the charge of synchronisation collusion between the buyer and seller is necessary.

15. In this case, I note that the pattern of trades impugned in the Report do not suggest that the noticee was part of premeditated plans or action of any counter party for creation of artificial volumes in this scrip. I, therefore, give benefit of doubt to the noticee in relation to this charge. I, however, note that the noticee has executed several trades for its connected client which are perfectly synchronised with respect to price, quantity and time. I am of the view that the noticee, being a stock broker and supposedly having professional competence, should take utmost care and be more vigilant while executing trades on behalf of its clients in future.

Date: December 20, 2013 RAJEEV KUMAR AGARWAL Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA