Order in respect of Madhuvan Securities Private Limited

Under Regulations 28(2) read with Regulations 38 (2) of the SEBI (Intermediaries) Regulations, 2008 against Madhuvan Securities Private Limited (SEBI Registration No. INB 230823331) in respect of dealings in the scrip of Adani Exports Limited.

1. Madhuvan Securities Private Limited ("Madhuvan") is registered with Securities and Exchange Board of India ("SEBI") as a Stock Broker having SEBI Registration No: INB 230823331. Madhuvan is a member of the National Stock Exchange of India Limited ("NSE").

2. SEBI conducted an investigation into the alleged market manipulation and irregularities in the scrip of Adani Exports Limited (“AEL”) during the period January 1999 to March 1999 in order to ascertain the possible violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market) Regulations, 1995 read with the SEBI (Stock brokers and Sub-brokers) Regulations, 1992 by Madhuvan and other entities.

3. It is observed that during the investigation period the price of the scrip of AEL went up from Rs. 242/- to Rs. 498/- at NSE. On an analysis of trading patterns of members and clients who traded in the scrip of AEL during the relevant period, it was seen that the trading was concentrated among three brokers viz., JBS Securities Private Limited (‘JBS’), Moneycare Securities and Financial Services Limited (‘Moneycare’) and Madhuvan and their clients. Madhuvan had extensively executed trades in the scrip of AEL at NSE on behalf of its clients viz., Abhinav Investments Ltd. ('Abhinav') and Prerak Capital Services Pvt. Ltd. ('Prerak'). Investigation revealed manipulative trade practices by Madhuvan. In view of the same, Madhuvan has been alleged to have facilitated the manipulation in the scrip of AEL and violated the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (‘PFUTP Regulations’) and SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (‘Broker Regulations’).

4. Based on the findings of the investigation, SEBI vide order dated October 14, 2004, initiated Enquiry proceedings in terms of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (‘Enquiry Regulations’) to enquire into the alleged violations / contraventions mentioned above. On completion of the proceedings, the Enquiry Officer, vide Enquiry Report dated August 11, 2005 recommended a penalty of suspension of Certificate of Registration of Madhuvan for a period of one month.

5. Subsequently, SEBI issued a post enquiry Show Cause Notice dated August 18, 2005 (“SCN”) to Madhuvan under Regulation 13(2) of the Enquiry Regulations. Madhuvan was advised to reply to the SCN within fifteen days of the receipt thereof. A copy of the Enquiry Report was also forwarded to Madhuvan along with the SCN.

6. In response, Madhuvan vide letter dated September 28, 2005, inter alia, submitted as under: 1) "At the outset it is submitted that the show cause notice has been issued to Madhuvan Securities Private Ltd on the basis of assumptions, without taking into consideration the facts relating to the transactions put through Madhuvan. 2) The show cause notice issued to Madhuvan has not stated as to which provision of law has been violated by Madhuvan. A preliminary objection was taken before the Enquiry Officer that the show cause notice does not refer to specific Regulations which have been violated & therefore the show cause notice is vague and an opportunity given through a vague show cause notice is no opportunity in the eyes of law. 3) It is not factually correct for the Enquiry Officer to conclude that the volume increased from 7000 to 8000 shares while in fact the volume had increased from 4000 to 5000 shares. On the basis of the information given by Madhuvan, the Enquiry Officer on the basis of number of shares sold and the volume traded has come to a conclusion that the scrip of Adani Exports was being manipulated from January to March, 1999. 4) It is submitted that the provisions of (Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market) Regulations nowhere states that for manipulation in a scrip, number of trades and volumes are the essential elements of manipulation. In fact the (Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market) Regulations, 1995 provides for suggestio falsi (statement of a falsehood), suppressio veri (concealment of truth), deceit, fraud, non-performance, entering into transactions entered into, with the intention of artificially effecting the price, non-genuine transactions etc. In none of the provisions of FUTP

Regulations, volume and number of transactions entered into are considered as an important parameter in order to conclude that the transactions are manipulative transactions. Inspite of this, the Enquiry Officer has come to a conclusion that the scrip of Adani Exports Ltd. was being manipulated. The Enquiry Officer has rightly concluded that the transactions in the scrip of Adani Exports Ltd are being carried out by two clients which constituted 68% of the trades on NSE and BSE. There is no finding or evidence to suggest that directors or persons closely associated directly or indirectly connected with Madhuvan had entered into transactions of Adani Exports Ltd. It is only two clients who entered into transactions of Adani Exports Ltd. 5) It is submitted that no evidence has been supplied to us to indicate that Madhuvan has acted in concert with two clients and two other brokers. In fact Madhuvan has no dealings of its own particularly with JBS Securities Pvt Ltd (JBS) and Money Care Securities Pvt Ltd. (Moneycare). No director related or employed is connected or associated with either Moneycare or JBS.

It is submitted that Madhuvan has no personal or professional connection with either Moneycare or JBS. It is submitted that Madhuvan has no information regarding the fact that Abhinav and Prerak have been reversing their positions on the NSE and BSE so as to create illusory and artificial volumes. Madhuvan can have information of the reversal of the positions only if Madhuvan has acted in concert with Moneycare or JBS. In this case at no point of time has Madhuvan acted in concert with either Moneycare or JBS. 6) Abhinav has put in transactions through Madhuvan for the purpose of buying and selling securities of Adani Exports Ltd (AEL). However, it s not illegal for a client to buy and sell shares through same broker. 7) In this case the Enquiry Officer only because of reversal of position of the clients through JBS and Moneycare has come to a conclusion that there is violation of the provision of FUTP Regulations. It is respectfully submitted that it is impossible for a broker to know whether his client is reversing his position through other brokers or entering into transactions with other brokers.

In a screen based trading the clients’ identity is completely preserved. This system has been prescribed by SEBI. It is not permissible for a broker to have information or come to a conclusion as to whether his client is buying or selling shares through other brokers. 8) The Enquiry Officer has relied on the chart showing the trades of Abhinav through Madhuvan & JBS. On the basis of the chart the Enquiry Officer has erroneously come to a conclusion that trades have been entered into by Madhuvan while acting in concert with JBS and Moneycare for and on behalf of Prerak and Abhinav. It is submitted that when Abhinav and Prerak carried out transactions either of buy or sell through Madhuvan, Madhuvan was not at all aware that through JBS and Moneycare also, Prerak and Abhinav were simultaneously carrying on transactions in AEL and were the counter parties. In fact the trading platform provided by NSE does not permit or does not make it possible for any broker to have information regarding the name of the counter party, broker or their client. Even after the settlement is over, it is not possible for the broker to have information regarding the counter party, broker or these clients.

The Enquiry Officer has no evidence to conclude that Madhuvan had information regarding the names of the counter party, clients or broker. In the absence of evidence, the conclusion arrived at by the Enquiry Officer is erroneous. 9) On the basis of the chart, the Enquiry Officer has also come to a conclusion that there were structured and synchronized matching trades in the scrip of Adani Exports Ltd. With reference to the same, Madhuvan has not entered into matching, synchronized and structured trades. Madhuvan has only put in trades for on behalf of Prerak and Abhinav. It has no information regarding the matching of trades done by Abhinav or by anybody else. If at all SEBI wants to take any action on this transaction it only can seek information from Prerak as well as Abhinav. The Enquiry Officer has relied on judgment of Securities Appellate Tribunal in the case of Nirmal Bang Securities (P) Ltd. v/s. SEBI. In the fact of that case it appears that there was synchronized trading by the counter party brokers. However in this case, Madhuvan has not entered into any synchronized matching or non-systematic transactions with the same counter parties.

10) The Enquiry Officer has come to a conclusion that Abhinav and Prerak have entered into trades through Madhuvan with the tacit understanding of JBS and Moneycare. However, there is no evidence on record to indicate or to substantiate or to prove that there was tacit understanding, between Madhuvan with others. These were genuine transactions entered into by Madhuvan on the strength of the contracts entered into by Madhuvan with its clients. 11) The Enquiry Officer has erred in not appreciating our contention that our turn over in AEL was hardly 0.44% of the entire turn over. The Enquiry Officer comes to a conclusion that the scrip is less liquid even then it holds us guilty for market manipulation. 12) It is submitted that any person who carries on market manipulation does so with the intention of either making money or reducing the loss. In this case, the brokerage earned by us was merely around Rs. 17,731/-. The profit received by brokerage through transactions for Adani Exports is 1.27% of the total brokerage earned by us in 3 months and 0.33% of the total brokerage earned by Madhuvan in 12 months.

This miniscule brokerage is hardly an indicator or evidence of profits earned or losses avoided. 13) It is submitted that the Enquiry Officer has not taken into account our contention that the scrip of AEL rose to 125% after March. This fact the Enquiry Officer has discounted on the ground that in the month of March, the scrip of AEL rose to 47%. The Enquiry Officer has erred in coming to a conclusion that for the purpose of making market manipulation the price rise for a particular month in % is to be considered and not other parameters. It is submitted that the Enquiry Officer has not given credence to our submission that no transactions on behalf of Abhinav were carried out from March, 1999 i.e., the date from which Abhinav did not agree to pay margin money to us. 14) It may be mentioned that on behalf of Abhinav and Prerak, there has been no default on the Stock Market because of these transactions. Abhinav and Prerak have both given deliveries, when the transactions were delivery based. There has been no default in either pay in or pay out either by Abhinav or Prerak. Nor has been there any violation of the margin requirement from Abhinav and Prerak.

15) It is submitted that" our firm is a firm which believes in complying with all provisions of law. Therefore we have entered into the member client agreement with the clients. Abhinav and Prerak has taken from us the client agreement form for the purpose of entering into the member client agreement. Thereafter they informed us on January 27th 1999 and January 21st 1999 that they are in the process of signing the member client agreement with us. Since they had informed that they are signing and sending a cross the signed member client agreement form, we have permitted them to enter into transactions through our firm. However, in future we will ensure that no client is permitted to put in transactions without signing of the member client agreement form. 16) There is reliance by the Enquiry Officer on the fact that there was squaring of trades in 4 settlements i.e. 05 to 08. Squaring off is permitted by SEBI itself and therefore if a client has put in transactions which has been squared off than the broker is not carrying any activity which is prohibited by law. 17) On a perusal of the prices at which the transactions are carried out, it is apparent that the prices at which the transactions entered into are almost at the prevailing price for that day on the Stock Exchange.

In other words in the scrip of AEL no transactions have been put in on behalf of two clients at artificial prices. Enclosed and marked as Annexure-2 is a chart which contains the average price at which Abhinav and Prerak bought and sold securities. The enclosed chart also shows the total percentage of the quantity traded in by Abhinav and Prerak. It will be apparent that transactions have been carried out at market rates. The percentage of the transactions being carried out are also in reducing order. 18) It is submitted that on behalf of Abhinav and Prerak in 2 months 40 transactions have been put in i.e, around 20 transactions in a month. On the' basis of 40 transactions, it is not possible for anyone to come to a conclusion that there was market manipulation in this scrip. The Enquiry Officer has come to a conclusion that there is price manipulation on the ground that scrip doubled in a period of 2 months. This is because the rise in the scrip is to be viewed in the background of the stock market as a whole wherein the market sentiments may be bullish and the prices of majority of the scrips will increase. transaction was again below 1000 shares.

19) It may be mentioned that while coming to a conclusion that we are guilty of market manipulation the Enquiry Officer has also added and taken into consideration the gross volumes of JBS as well as Moneycare. This is not legally permissible and no person can be punished for transactions which are carried out by independent legal entities with whom we have absolutely no relationship either professional or personal. The Enquiry Officer has put reliance on the steady growth of volume in the month of February and March because of this fact the Enquiry Officer has come to a conclusion that there was market manipulation. This conclusion of the Enquiry Officer is completely erroneous as in a rising Index the prices of a particular scrip are bound to increase. The increase of the price in the scrip of AEL has also to be examined keeping in mind over all price rise in the market and the Indices all over India. 20) On Para 89 the Enquiry Officer really states that "the modus operandi of JBS to manipulate the scrip of AEL was affected in the following manner..." In other words the Enquiry Officer has come to a conclusion that JBS had adopted certain modus operandi to manipulate the scrip of AEL.

If JBS has manipulated the market, it is perfectly open for SEBI to initiate proceedings against JBS for market manipulation. However, if Madhuvan has not manipulated the market, it is not legally permissible for SEBI to initiate action against us for the transactions entered into by JBS. 21) The Enquiry Officer has come to a conclusion that we have perpetuated artificial trades and hence failed to exercise proper skill, care and diligence. We have not perpetuated any artificial trades. In fact, many trades are delivery based trades and the clients have entered into the trades through our terminals in a legal and justified manner. For each and every transaction, contract notes and notices have been issued by us to the clients. Supporting bills for each and every transactions entered into on behalf of the clients have also been issued. If the intention of Madhuvan was to carry out fraudulent and manipulative activities and not to transfer beneficial interest then we would not have promptly issued contract notes and bills. 22) It is submitted that the brokerage charge by Madhuvan is not excessive.

This brokerage is as per the limits permitted by the National Stock Exchange under its rules and regulations. The brokerage charged by Madhuvan is absolutely reasonable. In fact, the payment terms are also as per the requirements for SEBI and the National Stock Exchange. 23) The Enquiry Officer has come to a conclusion which is far beyond what is stated in the investigation report. The investigation report concluded that "Madhuvan has facilitated the manipulation in the scrip of AEL". However the Enquiry Officer instead of concluding that has gone beyond that and wrongfully concluded that we have facilitated the market manipulation.

24) The Enquiry Officer has in the enquiry report taken contradictory stands. In Para 84 of the report, the Enquiry Officer has come to a conclusion that "no blatant nexus between the entities involved in the case has been brought out" Inspite of these findings of fact the Enquiry Officer comes to a conclusion that Madhuvan has entered into transactions with tacit understanding and are also acting in concert with two other brokers. 25) With reference to our submission regarding absence of specific provisions in the show cause notice, they have simply been brushed aside by concluding that even a lay man can understand that the violation and charges pertain to the provisions of the FUTP Regulations. The Enquiry Officer has erred in not appreciating that it is an obligation cast on the organization to issue a show cause notice specifically mentioning the provisions of law which have been violated. If specific provisions of law are not mentioned then, the show cause notice suffers from the charge of vague and in accordance with the law. The Enquiry Officer has in Para 91 come to a conclusion that Madhuvan has failed to exercise proper skill, due care and diligence required of a broker on the grounds that Madhuvan has perpetuated artificial trades.

The meaning of the word perpetuated is "safe, maintain, sustain". There can be no question of market manipulation arising because of perpetuating artificial trades. Therefore the Enquiry Officer's conclusion that Madhuvan has not maintained standards of integrity, fairness required of a broker is not warranted. 26) It is submitted that the Enquiry Officer has come to a conclusion that JBS has not carried out their transactions in accordance with law and they are guilty of manipulating the market. After factually concluding this, the Enquiry Officer has thereafter erred in coming to a conclusion that we should be held responsible for the transactions of JBS and we should be punished for violating the provisions of the Regulations. 27) The show cause notice has been issued for the violation of the Provisions of (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995 as well as SEBI (Stock brokers and Sub-brokers) Regulations, 1992. It is submitted that the Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market, Regulations, 1995 have been repealed by Securities & Exchange Board of India in 2003. SEBI has thereafter been pleased to notify the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 (hereinafter known as FUTP Regulations).

28) As is apparent on a reading of the Provisions of Regulations 13, the Investigations which have been proceeded or undertaken under the Provisions of the SEBI FUTP Regulations, 1995 have been saved. It is against this provision of law that SEBI's investigation against Madhuvan has to be examined. Enclosed and marked as Annexure 4 is a copy of the summon which Madhuvan has received from SEBI in the year, 1999.

29) The opening lines of the summon dated 12th July, 1999 reads as follows:-"Whereas your attendance is required in connections with the investigations instituted by SEBI in the case of buying, selling or dealing in the shares of M/s. Adani Exports Ltd" The first lines of the summon makes it very clear that the investigation have been initiated by SEBI for buying, selling or dealing in shares of AEL. On reading of the summon, it is clear that Madhuvan was not under investigation. What was under investigation by SEBI was the dealing in shares of AEL. Madhuvan was summoned to give information to SEBI in the investigation of AEL. As Madhuvan was not under investigation, the provisions of Regulations 13 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market) Regulations, 2003 cannot be invoked vis-a-vis Madhuvan. It is not legally permissible for SEBI to invoke the provisions of Regulation 13, stating that investigation have already been initiated against Madhuvan and therefore the investigations have been initiated under the Regulations of 1995 SEBI cannot proceed against Madhuvan under the provisions of FUTP Regulations, 2003. 30) It is further submitted that the Enquiry Officer in her report has nowhere relied on the provisions of Regulation 13 of the FUTP Regulation of 2003. If SEBI and the Enquiry Officer both have not relied on provisions of Regulations, 13 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market) Regulations, 2003, then proceedings are bad in law and should not be proceeded ahead with as there is no other savings clause.

31) The Enquiry Officer has concluded that we are guilty of violating the provisions of Regulations 4(2) (a)&(b) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market) Regulations, 2003. It is submitted that Regulation, 2003 will have no applicability in the facts of the case. The said transactions have taken place in the year, 1999 when the Regulations of 2003 were not even notified. Therefore the Enquiry Officer has erred in holding us guilty of violating the provisions of Regulations, 2003. 32) Even assuming without admitting that the provisions of the Regulations, 2003 are applicable, then the Enquiry Officer has relied on clause (a) & (b) of Regulation 4(2). Clause (a) deals with a situation where an entity indulges in an act which creates a false or misleading appearance of trading. In almost all cases, the transactions are delivery based. In many cases the transactions have been squared off. The fact that the transactions have been squared off does not mean that these transactions are manipulative in nature. In the Stock Market squaring off transactions is a very normal activity and is a speculation which is permissible by law and also permitted by SEBI.

33) The Enquiry Officer has also relied on the provisions of Clause (b) of Regulation 4 (2) of the Regulations. The Regulation 4 (2) (b) deals with a situation where there is no transfer of beneficial ownership and a device which has been adopted with an intention to cause fluctuations in the price of security for gains or avoidance of losses. For this clause to be applicable, it is essential that there is a device with an intention to cause fluctuations in the prices of the Company with wrongful gains or avoidance of losses. However none of these elements are present in the transactions of Madhuvan. 34) Madhuvan has made no gains nor has Madhuvan avoided any losses. Further Madhuvan has not dealt in the securities with the intention of causing fluctuations in the prices. The transactions have been put in through Madhuvan because the clients were desirous of buying selling the securities. There has been no intention to cause fluctuations in the prices nor is there any evidence with Enquiry Officer to conclude that there was an intention of market manipulation. As a result of the above submissions, the provisions of Regulations 4 (2) cannot be made applicable or invoked in the case of Madhuvan.

35) In the show cause notice, Madhuvan has further been asked to explain as to why consequential action under Regulations 3 (2) of SEBI (Criteria for Fit and Proper Person) Regulations, 2004 should not be initiated against Madhuvan. It is submitted that these Regulations are applicable for the purpose of determining as to whether the intermediary is fit and proper person for grant of registration or renewal. Thereafter it is further submitted that Regulations 3 of the said Regulation deals with an application made by the intermediary seeking registration. In this case Madhuvan is not seeking registration at all and therefore the provisions of Regulations 3 will not be applicable in the facts of the case. It is not legally permissible for SEBI to invoke these Regulations at this stage. 36) It is submitted that we have presence in Stock Market since 1995, we have been taking margins from our clients as required by SEBI and NSE. We have abided by all the rules and regulations of SEBI. We have also paid fees as required by SEBI. Till today, we have not received a single letter from SEBI nor an enquiry as to whether we have complied with the law or not.

As a brokerage firm, we believe in complying with rules and regulations. In this case also, we have permitted 2 clients to enter into transactions though our terminals. As far as we are concerned we have no link with the entities nor do we have understanding with any of the entities. It is not a case where a penalty of 1-month Suspension should be imposed on us. We have not committed any offence what so ever. We have around 1000 clients spread over in Gujarat in Urban as well as Rural areas. Our terminal in the Rural area of Gujarat i.e, in Petlad is a terminal which though situated in a Rural area caters to persons who have tremendous appetite for the securities market as well as the money to be able to transact in the securities markets. This penalty will therefore affect the ability of the investors in the Rural area to carry out transactions in the securities market. We also have presence in Mumbai. Therefore, immense loss will be suffered by our clients if the penalty as proposed by the Enquiry Officer is imposed on us.

7. Subsequently, Madhuvan applied for consent during September 2007. However, the said application was rejected by SEBI on December 24, 2008. Thereafter, an opportunity of hearing was granted to Madhuvan on July 12, 2011 before the Whole Time Member of SEBI. Thereafter, an opportunity of personal hearing was granted before me on September 02, 2015 vide hearing notice dated August 19, 2014. Madhuvan vide letter dated September 01, 2015 sought extension of time for hearing. The same was allowed and another opportunity of hearing was granted to Madhuvan on October 07, 2015 vide hearing notice dated September 10, 2015. Mr. Vijay Ranjan, Advocate and Mr. Ashish Vyas, Director appeared before me and made submissions. Madhuvan was granted time upto October 16, 2015 to file written submissions, if any, and with its specific submissions on self trades by Abhinav executed through Madhuvan. Subsequently, Madhuvan filed written submissions vide letter dated October 14, 2015, inter alia, making submissions as under: During the course of hearing it was pointed out by the Officers representing SEBI that we had provided our platform for self trade to Prerak and Abhinav.

As can be seen from the table in none of the trades listed in the table, the clients have bought and sold the very same lot of shares through our platform. For example, in settlement no.1999005, in the first trade of the list Abhinav bought 10,000 shares through JBS and sold that 10,000 through us. As submitted by us during the course of hearing as well, in the settlement cycle of T +5 it was well neigh impossible for us to suspect the above mentioned sale. Similarly, in every other trade listed in the table, the shares have either been bought or sold through our platform but never the same lot has been bought and sold through us. It may kindly be appreciated that in the trades listed in the table there is nothing which can be alleged as a mis-conduct on our part. In this regard, Madhuvan relied on para-wise reply filed to SCN submitted earlier. The same is reproduced at paragraph 6(8) in this order. Madhuvan also relied on the following decisions: Khandwala Securities Limited. SEBI order no. WTM/PS/39/IVD/ID-04/FEB/10 dated 1.2.2010) Charge of executing 82 synchronized deals for 1,30,000 shares on NSE which allegedly created artificial volumes and price rise in the shares of Sunearth.

NO PENALTY IMPOSED on the ground that there was no evidence to show any link/collusion between the noticee and the counter party brokers involved in alleged synchronicsed /structured /reversal trades. There is no collusion between the noticee and the client and there was no instance of proprietary trade in scrip of Sunearth.

Note : The reasons why no penalty was imposed on the broker such as no evidence of collusion between the broker and the client and finally no instance of proprietary trade are all also present in the case of MSPL. GSB Capital Markets Limited. SEBI Order dated October 28, 2004- trading in the scrip of Morpen Hotels Ltd.- Sudden spurt in volume-mostly squaring of position during settlement-one client responsible for 90% of transaction in the shares of MHL-creation of artificial volume-total transaction 4,87,700 shares-net position 300 shares-client traded only in two scrips through the broker- Given the above context and considering also that the turnover of the client in MHL was insignificant as compared to a turnover of a broker, it does not appear to be fair to assume that the broker without undue difficulty and with ordinary diligence, would have been in a position to readily zero in on or segregate the transactions of the said clients and quickly establish their suspicious nature. Hence, I am of the view that suspension of certificate or registration granted to the said broker for a period of two months would be excessive. Considering the circumstances, imposition of penalty or warning would be adequate to meet the ends of justice. Note: The principle laid down in the above case to reduce the proposed penalty of suspension to mere warning is squarely applicable in the case of Madhuvvan. In normal course of business, with normal diligence, it was not possible to detect the “taint” attached to the transactions of Abhinav or Prerak. The volume in the shares of AEL was insignificant in the total turnover of Madhuvan and it would be unfair to assume that without undue difficulty and with ordinary diligence, Madhuvan would have been in a position to readily zero in on or segregate the transactions of Abhinav and Prerak and quickly establish their suspicious nature.

8. I note that Enquiry Regulations under which the instant proceedings were initiated were repealed and SEBI (Intermediaries) Regulations, 2008 (‘Intermediaries Regulations’) were notified. In this regard, reference is made to Regulation 38 (2)of the Intermediaries Regulations which reads as under: "Notwithstanding such repeal, anything done or any action taken under those regulations including an enquiry commenced or notice issued under the Securities and Exchange Board of India Procedure for Holding Enquiry by Enquiry Officer and imposing Penalty) Regulations, 2002, before the publication of these regulations in the Official Gazette, shall be deemed to have been done or taken or commenced under the corresponding provisions of these regulations".

In view of aforesaid provision, the proceedings has been continued against Madhuvan and the same is culminated under Regulation 38 (2) of the Intermediaries Regulations.

9. I have considered the facts of the case, the findings of the investigations, the observations and findings made by the Enquiry Officer, reply of Madhuvan and oral and written submissions made before me during the personal hearing and all other relevant material available on record. In the light of the same, I shall now deal with the charges levelled against Madhuvan.

10. The issue for consideration in this case is whether Madhuvan facilitated the manipulation in the scrip of AEL and violated Regulation 4(2) (a) and (b) of PFUTP Regulations 2003 read with corresponding provisions in Regulation 4(b) and (d) of the PFUTP Regulations 1995(repealed) and Regulation 7 of the Brokers Regulations.

11. 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: PFUTP Regulations 2003 4. Prohibition of manipulative, fraudulent and unfair trade practices (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:— (a) indulging in an act which creates false or misleading appearance of trading in the securities market; (b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss; PFUTP Regulations 1995(repealed) 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; (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; 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.

12. As regards the charges that Madhuvan facilitated the manipulation in the scrip of AEL, the dealings of Madhuvan in the scrip of AEL and the findings as regards the alleged violations are as under: i. SEBI's investigations revealed that during the investigation period i.e. from January to March 1999, the price of the scrip of AEL shot from Rs.242/- to Rs.498/- and the volume increased from 400 shares per day to 7000 – 8000 shares per day. The number of trades also increased from 4 – 9 trades per day to 40 - 60 trades per day. The price volume data of the scrip of AEL on NSE and BSE during the relevant period is as under:

NSE BSE Date Price(Rs.) Volume (No. Price (Rs.) Volume(No.of of Shares) Shares) 1999 High-Low High-Low 1/1-15/1 231-245 8600 235-250 4000 18/1-29/1 247-284 28800 250-305 36700 1 /2-5/2 285-295 59600 285-307 53800 16/2-27/2 280-335 67000 270-340 52300 1/3-15/3 361-427 60500 345-440 42700 16/3-31/3 428-498 42400 426-500 24900 ii. Upon analyzing the trading pattern as brought in the investigations, I find that the trading in the scrip during the relevant period was concentrated among three brokers viz., JBS Securities (JBS), Moneycare Securities and Madhuvan and three clients viz., Anand Investments, Abhinav and Prerak who had dealt through these three brokers. The trades done by these three clients were approx. 68% of the total trades in NSE and BSE. Details of the total trades are as under: Total (One Side - Purchase or sale) during Three Clients Combined the period January 1, 1999 to March 31, 1999 NSE 266900 164600 (61.7%) BSE 214400 165100 (77%) Total 481300 329700 (68.5%)

iii. The transactions of the aforementioned brokers as a whole during the relevant period are as under: Settlement Total Traded Total of three No. Quantity Members Gross Buy % of Total Gross Sell % of Total 9905 29700 27000 90.91% 25700 86.53% 9906 28100 25200 89.68% 21300 75.80% 9907 31200 26300 84.29% 23700 75.96% 9908 35300 32200 91.22% 23900 67.71% 9909 33600 11300 33.63% 8900 26.49% 9910 27100 13300 49.08% 6800 25.09% 9911 21800 8500 38.99% 6900 31.65% iv. The details of reversal trades of Prerak and Abhinav in the scrip of Adani executed through the brokers JBS, Moneycare and Madhuvan are as under: Members JBS Security Madhuvan Security Moneycare Settlement Buying Client Selling Client Buy Sell Buy Sell Buy Sell No (time period 1999005 Abhinav Abhinav 10000 10000 (3/2-9/2) Abhinav Abhinav 10500 10500 Abhinav Prerak 700 700 Abhinav Prerak 1500 1500 Prerak Abhinav 2000 2000 Prerak Abhinav 500 500 1999006 Abhinav. Prerak 1900 1900 (10/2-16/2) Abhinav Abhinav 7300 7300 Abhinav Abhinav 9400 9400 Prerak Abhinav 2000 2000 1999007 Abhinav Abhinav 7500 7500 (17/2-23/2) Abhinav Prerak 2500 2500 Abhinav Abhinav 9000 9000 Abhinav Prerak 1000 1000 Prerak Abhinav 2500 2500 1999008 Prerak Abhinav 1800 1800 (24/2- 1/3) Abhinav Abhinav 7300 7300 Abhinav Prerak 2000 2000 Abhinav Prerak 1500 1500 Abhinav Abhinav 6300 6300 1999009 Abhinav Abhinav 700 700 (3/03- 9/03 Abhinav Prerak 400 400 Abhinav Abhinav 2200 2200 Abhinav Prerak 400 400 v. From the investigation, I further find that the clients Abhinav and Prerak had indulged in self trades and reversal of their positions on NSE and BSE either during the same settlement itself or in succeeding settlements and thereby enhanced and created illusory volumes and misleading appearance in the market.

These transactions gave misleading appearance of volume and enhanced liquidity. Orders were entered into the system within a gap of few seconds /minutes. This ensured that the buyers got the desired sellers and vice versa. Hence, it is clearly established that there were synchronization of orders. vi. From the abovementioned table it is seen that in settlement number 1999005, Abhinav purchased 12,000 shares through Madhuvan and sold 12,000 shares through Madhuvan. In the same settlement number, Prerak had bought 2500 shares through Moneycare, while Abhinav sold the shares i.e. 500 shares through JBS Securities and 2000 shares through Madhuvan. Similarly when Prerak sold its 2200 shares through Moneycare, a total of 2200 shares were purchased by Abhinav i.e. 700 shares through JBS and 1500 shares through Madhuvan. In settlement number 1999006, there were reversal of trades between Prerak and Abhinav. Abhinav bought 1900 shares through JBS and Prerak sold 1900 shares through Moneycare. Similarly, when Prerak bought 2000 shares through Moneycare, it was Abhinav who sold the said shares through Madhuvan.

Transactions of similar nature were observed between Prerak and Abhinav in next settlements 1999007, 1999008 and 1999009. These dealings of clients executed through three brokers clearly establish the nature of manipulation done by the clients. vii. There were reversal of position between JBS and Madhuvan for the same client i.e. they were buying and selling for the same client. When JBS was buying, Madhuvan was selling and vice versa. viii. There were some trades executed by Madhuvan and JBS on behalf of Abhinav and Prerak, where there was proximity in the time of logging the buy and sell orders for the same price and same quantity. The details of such instances are as follows: Date Trade time Trade Qty Buying Selling Buy Buy Buy Sell Time Sell Sell Rate Time Price Broker Broker Time Qty Rate Qty diff 3.2.99 11:11:20 290.00 500 MADHUVAN JBS 11:11:20 500 290.00 11:10:25 500 290.00 0:00:53 3.2.99 11:11:33 291.00 500 MADHUVAN JBS 11:11:33 500 291.00 11:10:32 500 291.00 0:01:01 3.2.99 11:11:47 292.00 500 MADHUVAN JBS 11:11:47 500 292.00 11:10:38 500 292.00 0:01:09 4.2.99 11:55:57 290.15 500 MADHUVAN JBS 11:55:51 500 290.15 11:55:06 500 290.15 0:00:45 5.2.99 15:09:39 287.50 500 MADHUVAN JBS 15:09:34 500 288.00 15:08:29 500 287.50 0:01:05 8.2.99 14:51:26 289.00 500 MADHUVAN JBS 14:51:26 500 289.00 14:49:46 500 289.00 00:01:4 ix.

From the above table it is evident that there was a matching of the buy and the sell quantity and the buy and the sell price. The buy and the sell orders were placed at almost the same time between the two brokers on behalf of Abhinav and Prerak, with just a difference of a minute. This proximity in the inputting of orders at the same price and quantity, resulted in getting them matched. Hence, it is evident that these transactions were structured and synchronized. By doing so, Madhuvan facilitated its clients to create liquidity and volume of shares in the scrip of AEL. x. The details above show that while executing the above trades, there was some prior arrangement between the brokers and clients which had resulted in creation of higher volumes in the shares of AEL in the market.

13. Madhuvan has made various submissions and let me now deal with these: 13.1. Madhuvan has contended that it was not aware of the identity of the counter party and the reversal transactions done by its clients. This contention of Madhuvan is untenable as it cannot be a mere coincidence that there were perfect matching of the time, order and price in many instances as cited above. In all these occasions, it is interesting to note that the clients were the same. This clearly shows a concerted effort between these clients and brokers. i. In this regard, it is pertinent to mention that the Hon’ble Securities Appellate Tribunal in the matter of Galaxy Stock Broking Limited Vs. SEBI Appeal No. 3 of 2010 (decided on January 29, 2010) held that “it is a clear instance of reverse trades which cannot on the trading system unless the clients and the brokers are in league with each other. There are several trades executed by the appellant. Adjudication proceedings were initiated against the appellant and its client and they were both found guilty of synchronizing the trades and for executing circular and reverse trades.” ii. It would also be relevant to the following observations made by the Hon’ble Securities Appellate Tribunal in the matter of Jitendra Harijivandas Securities Pvt. Ltd Vs. SEBI Appeal No. 7 of 2013 (decided on March 06, 2014) “Appellant had acted in a manner, which was manipulative of securities market and had through his remisier and three clients of Mahesh Mistry Group had substantive share in purchase/sale i.e.

total trading volume in scrip of BGSL during investigation period, was instrumental in placing synchronised trades and self trades on behalf of his clients, he allowed his platform of trading in securities market, for being used by his clients to place orders at above Last Traded Price, which gave rise to increase in price of scrip based on false volumes being generated by circular/self/synchronised trades and by allowing one account of his one client being utilised for making payment to diverse members of Mahesh Mistry group….” “Accordingly, it is proved that Appellant was aiding and abetting a group of clients in placing circular/self/synchronized trades, which created volumes in an illiquid scrip and also placed order at higher than Last Traded Price to increase price of BGSL scrip, when there were no good results coming from BGSL or change in fundamental of BGSL to attract investors interest and hence Appellant has rightly been penalized for violation of PFUTP Regulations and SEBI (Stock Brokers and Sub-Brokers) Regulations.” 13.2. It is noted that Madhuvan has submitted that the pre-enquiry SCN was vague and did not mention the exact violation of the provisions of the law.

I have perused the pre-enquiry SCN and note that the said SCN alleges violation of Regulation 4 of the PFUTP Regulations 1995 and Regulation 7 of the Brokers Regulations in general. It is to be mentioned that the ingredients of the Regulations 4 (b) and (d) of the PFUTP Regulations, 1995 and Regulations 4 (2) (a) and (b) of PFUTP Regulations, 2003 are similar. In view of the same, I find that there is no ambiguity regarding the charges levelled against Madhuvan. 13.3. Madhuvan has raised an objection that enquiry proceedings were initiated for the violations of PFUTP Regulations 1995 which was repealed and continuation of proceedings hence bad in law. Madhuvan has also contended that the Enquiry Officer in the Enquiry Report has nowhere relied on the provisions of the Regulation 13 of the PFUTP Regulations 2003. I do not agree with the contentions of Madhuvan. It is noted that during the investigation period i.e. January 1999 to March 1999, the PFUTP Regulations, 1995 were in force. The PFUTP Regulations, 1995 were repealed with effect from July 17, 2003, PFUTP Regulations, 2003 were notified and came into effect.

The investigations in the matter continued till July 2004 and the Enquiry Officer was appointed on October 14, 2004 in terms of the Enquiry Regulations when PFUTP Regulations, 2003 were in force. By virtue of Regulation 13 of the PFUTP Regulations 2003, "any violation of regulations 3, 4, 5 and 6 of the PFUTP Regulations, 1995 shall be investigated and proceeded against in accordance with the procedure laid down in the Regulations 2003. Further, any investigation pending at the commencement of Regulations 2003 shall be continued and disposed of in accordance with the procedure laid down in the said regulations". Therefore, I am of the view that even if there is no reference to the power of SEBI to continue the proceedings under PFUTP Regulations 2003, it does not vitiate the instant enquiry proceedings. In this context, it would be relevant to refer to the observations made by the Hon'ble Supreme Court of India in its judgment dated February 01, 2001 in the matter of BSE Brokers Forum vs. SEBI ([2001] 30 SCL 31) “it is a well-established principle in law that so long as the impugned power is traceable to the concerned Statute, mere omission or error in reciting the correct provision of law does not denude the power of the authority of taking a statutory action so long as its action is legitimately traceable to a statutory power governing such action”.

In view of the above, I find that the instant proceedings are clearly saved by virtue of Regulation 13 of the PFUTP Regulations, 2003. Therefore, contentions of Madhuvan are untenable. 13.4. Madhuvan has also contended that “as per the summon dated 12th July, 1999 Madhuvan was summoned in connections with the investigations instituted by SEBI in the case of buying, selling or dealing in the shares of M/s. Adani Exports Ltd. On reading of the summon, it is clear that Madhuvan was not under investigation. What was under investigation by SEBI was the dealing in shares of AEL. Madhuvan was summoned to give information to SEBI in the investigation of AEL. As Madhuvan was not under investigation, the provisions of Regulations 13 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating the Securities Market) Regulations, 2003 cannot be invoked vis-a-vis Madhuvan”. I do not find any merit in this contention. SEBI initiated investigation in respect of the buying, selling and otherwise dealing in the shares of AEL. SEBI issued Summons dated July 12, 1999 to Madhuvan. The investigations clearly revealed that Madhuvan was one of the major trading members in the scrip of AEL during the investigation period.

Its clients Abhinav and Prerak accounted for the majority of the trades done in the scrip of AEL. In this context, SEBI issued summons dated July 12, 1999 to Madhuvan to investigate into its dealings in the scrip as a stock broker. Madhuvan was surely one of the entities who were under investigation and hence proceedings against it are saved under Regulation 13 of PFUTP Regulations 2003. 13.5. Madhuvan has contended that Regulation 4 (2) (b) is not applicable to the instant case as there were no elements of intention to cause fluctuations in the prices of the Company with wrongful gains or avoidance of losses. I do not find any merit in this contention. I find that the intention is manifest from the pattern of trades executed for the clients as detailed in the preceding paragraphs of this order. 13.6. Madhuvan has contended that Regulations 3 (2) of SEBI (Criteria for Fit and Proper Person) Regulations, 2004 is not applicable in the instant case. In this regard, it is noted that criteria of being fit and proper person to act as intermediary is a continuous requirement for intermediaries.

The same is reproduced hereunder for reference: “A person shall not be considered as a" fit and proper person" for the purpose of grant or renewal of certificate to act as an intermediary or to continue to act as an intermediary under any one or more of the relevant regulations, if he incurs any of the following disqualifications…” In view of this, I find that the contention of Madhuvan that Regulations 3 (2) is applicable only when seeking registration or renewal is incorrect. 14. Considering the facts and circumstances narrated above, I am of the view that Madhuvan has facilitated the clients to execute structured and self trades which created volume in the scrip of AEL. Hence, the violations of Regulation 4 (2) (a) and (b) of the PFUTP Regulations 2003 (corresponding to Regulation 4 (b) and (d) of the PFUTP Regulations 1995) against Madhuvan stands established. 15. As regards the violations of Brokers Regulations, I note that as a Stock Broker Madhuvan should have adhered to the mandatory provisions of SEBI Act and Regulations made thereunder. They should have been more careful and cautious to ensure that the transactions which were fraudulent and manipulative in nature were not executed through it.

Considering the same, I am of the view that Madhuvan has failed to exercise due care and diligence while executing trades on behalf of its clients and as such violated the provisions of Regulation 7 read with Code of Conduct for Stock Brokers specified in Schedule II of the Brokers Regulations. 16. I note that Madhuvan has been in business since 1995 and they have not been subjected to any disciplinary proceedings except in this case and that there have been no investor complaints against them till date. 17. The following facts are pertinent to be noted: i. This case pertains to the transactions which took place during January to March 1999. ii. Madhuvan had not executed any proprietary trades in the scrip of AEL. iii. Other than a broker-client relationship, no concrete connection between Madhuvan and its clients has been alleged in the Enquiry Report. iv. Proceedings under Section 11B of the SEBI Act initiated against the client of Madhuvan viz., Abhinav were disposed of vide SEBI's order dated October 24, 2007 by which Abhinav was debarred for a period of 6 months. Enquiry proceedings initiated against Prerak were disposed of vide order dated September 25, 2008 by which Prerak was suspended for a period of 5 working days. v. Enquiry proceedings were initiated against JBS and Moneycare for manipulation in the scrip.

While the enquiry against JBS was disposed of by a consent order dated October 8, 2008; the enquiry against Moneycare was disposed of by SEBI's order dated February 20, 2008 by which the certificate of registration of Moneycare was suspended for 1 day. vi. Madhuvan has been in business since 1995 and they have not been subjected to any disciplinary proceedings except in this case and that there have been no investor complaints against them till date.

18. All things considered, I am of the view that the matter may be allowed to rest with a prohibition to take up new assignments for a period of five working days.

Order

19. 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 prohibit Madhuvan Securities Private Limited to take up new assignments for a period of five working days.

20. The enquiry proceedings initiated against Madhuvan is disposed of accordingly.

21. This Order shall come into force on the expiry of 21 days from the date of this order.

February 15, 2016 S. RAMAN Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA