Order in respect of Mr. Vijay Thakkar in the matter of Somplast Leather Industries Limited

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) had conducted investigation into the alleged price manipulation in the shares of Somplast Leather Industries Limited (hereinafter referred to as the Company) for the period between January 2, 2002 and October 1, 2002 (hereinafter referred to as the investigation period). It was observed that, though the shares of the Company were illiquid, the share price had increased from Rs.283/- on January 2, 2002 to Rs.416.90/- on April 23, 2002. The share price further increased to Rs.426/- on September 30, 2002. During the period under investigation, the share price reached a high of Rs.482/- on September 13, 2002. It was also observed that the traded quantity during the investigation period followed an irregular pattern with traded volumes varying between 7,000 shares on January 31, 2002 to 5 shares on May 30, 2002. The average trading volume during the said period was 1,328 shares per day. As the findings of the investigation suggested that Mr. Vijay J. Thakkar (hereinafter referred to as the noticee), an investor, had entered into structured/synchronized/circular trades in the shares of the Company and created artificial volumes and price, a show cause notice dated September 23, 2005 was issued to him alleging that he had contravened the provisions of Regulation 4(a), (b), (c) and (d) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995.

2. The noticee, vide letter dated October 4, 2005 filed its reply to the show cause notice. The noticee inter alia stated that:

i) he is a sub broker of VSE Stock Services Limited and that he had not done any transactions in the capacity of a client and that he had acted as a sub broker. ii) In respect of the trades mentioned in the show cause notice (Annexure B), he stated that he had traded as per the instruction of his client, Mr. S. R. Patel. He also enclosed the copy of the client registration form of Mr. Suryakant R. Patel. iii) the quantity of transactions done by his client was negligible and could not have resulted in manipulation of the share price as seen from the average price of those transactions. iv) his client did not enter into any transactions when the share price had increased from Rs. 283/- (on January 2, 2002) to Rs. 416.90 (on April 23, 2002).

3. Thereafter an opportunity of hearing was granted by SEBI to the noticee on March 31, 2009. However, the noticee, vide letter dated March 30, 2009 requested for an adjournment of the said hearing. Accordingly, another opportunity was given him on July 14, 2009. However, vide letter dated July 14, 2009, inter alia sought time for the reasons stated therein and accordingly, the noticee was granted an opportunity of hearing on January 29, 2010. On the said date, the noticee appeared before me and submitted that the impugned trades were done on behalf of his client and not his own behalf.

4. Thereafter, SEBI vide letter dated May 14, 2010, advised the noticee to furnish the following: a. copy of contract notes issued by him to his client for all transactions pertaining to the shares of the Company, b. copy of ledger, c. copy of bank statements of stock broking account for payments/receipts made to the client for the said transactions and d. the client code assigned and entered by him in the system in connection with the trades.

5. The noticee, vide letter dated May 19, 2010 informed that, as he is a sub broker, he cannot issue contract notes to the clients. He has also stated that the assigned client code for reference was S04. Further, the noticee has furnished a letter dated August 12, 2004 written by it to VSE Stock Services Limited (acknowledged on August 14, 2004) informing it of the transactions in respect of the shares of the Company for the period January 1, 2002 to September 2, 2002. Subsequently, the noticee, vide letter dated June 14, 2010 while reiterating the submissions, inter alia stated that the transactions appearing in the statements of VSE Stock Services Limited for the client code ‘R06’ are the same as provided by him for the client code ‘S04’. According him, there could be a manual error on the part of the said stock broker or others in entering the code. He further stated that he is not able to confirm the client code ‘R06’ as his records had been destroyed due to floods in 2005. The noticee also stated that his back up computer was damaged in the floods of 2005 and had already filed a consumer compliant as he was awarded a lower amount in a claim filed against the insurance company. According to him, it would be unfair if the said transactions are considered to be carried out by him when neither the stock broker had objected to the details of the client ‘S04’ provided by him and nor the client (S04) had objected to the same.

6. I have considered the show cause notice, the oral as well as the written submissions of the noticee and other material available on record. The allegation against the noticee is that he had entered into structured/synchronized/circular trades in the shares of the company and created artificial volume and price. The following transactions were the basis for the aforesaid allegation- “2.2.a. VSE Securities Ltd (253) – M/s. Shripal B. Jain (646) :- The members have influenced the price of the scrip as shown in Annexure ‘B’ by Rs.25.50 on 12.7.2002 and 13.8.2002 on behalf of Shri Vijay J. Thakkar [TM-VSE Securities Ltd.] and M/s Shripal B. Jain on its own account. It is observed from Annexure ‘B’ that the order time difference was between 1 second, 3 seconds to 6 seconds. On 12.7.2002 100% of the orders punched by the members were executed, whereas on 13.8.2002 excluding execution of 94% of the buy orders of (Clg. No.646), 100% of the orders of the member were executed. 2.2.b VSE Securities Ltd. (253)– Parklight Investment Pvt. Ltd.(407) :- The members have traded on behalf of their clients Shri Vijay J. Thakkar and M/s Uttam Investment respectively and influenced the price of the scrip by Rs.1.75.

It is observed from Annexure ‘B’ that the order time difference on 14.8.2002 was 6 seconds, 1 minute 59 seconds and 2 minute and 13 seconds. 100% of the orders punched by the members were executed. Further, the orders punched by the members were the only valid orders punched on the day. Hence it is suspected that the clients of the member might have acted in tandem. 2.2.c VSE Securities Ltd. (253) – Bonanza Stock Brokers Ltd. (235) :- The trading member VSE Securities Ltd. dealt on behalf of Shri Vijay J. Thakkar while Bonanza Stock Brokers Ltd. dealt on behalf of Shri Chirag Pujara, proprietor of M/s. Om Gayatri Securities. The members have influenced the price of the scrip by Rs.32.85. It is observed from Annexure ‘B’ that the order time difference on various trading days are (a) on 26.8.2002 -32, 48 and 49 seconds in 20 trades; (b) on 5.9.2002- 1 minute 9 seconds, 45 seconds and 1 minute 19 seconds and c) 9.9.2002 – 44 seconds, 50 seconds and 2:54 seconds in 30 trades. Further, it can also be observed that 100% of the orders punched by the members were executed. Hence from the analysis of the orders it is suspected that the clients of the member might have acted in tandem” 7. In respect of the allegation of synchronized trade, it is stated in the show cause notice that “It is observed from Annexure ‘B’ that the order time difference was between 1 second, 3 seconds to 6 seconds”.

However, I note that Annexure B mentions the settlement wise buy-sell quantities of the noticee and the price. As regards the charge that the trades of the noticee had influenced the share price, I note from the annexure attached to the show cause notice that on July 12, 2002 (in settlement no. 78), the scrip had opened at Rs. 436.10/- and closed at Rs. 437/- after reaching the day’s high of Rs. 437.50/-. The noticee had executed the trades (buy) involving 250 shares of the Company at Rs. 436.25/-. It was also stated that the said trades were reversed at Rs. 436.35/- and the orders for the same placed within a time gap of 6 seconds. Though, it was alleged that the orders were placed within a gap of few seconds, the buy-sell order time and the trade time were not mentioned. Further, as per the show cause notice, the total volume at BSE was 2,000 and the volume of the noticee was 500 (both buy and sell). Further, from Annexure A (Price –Volume data) to the show cause notice, it is noted that on the said date, the total number of trades were 66. It is mentioned that the trades of the noticee had influenced the price and increased the same by Rs.12/- (close to previous close).

It was also mentioned that the opening price on July 12, 2002 was Rs. 436.10, which was higher than the previous day’s closing price of Rs. 425/-. It has not been alleged that the noticee had traded to establish the opening price at Rs.436.10/- It, therefore appears that the trades of the noticee were placed at Rs.436.25/- for 250 shares on the buy side, subsequent to the establishment of the price at 436.10. Similarly, sell orders were executed at a price of Rs.436.35/-. Further, the show cause notice does not specifically allege that the trades of the noticee were responsible for the artificial price at 436.10/-. This is more relevant in the light of the fact that the said trading day witnessed a total of 66 trades including that of the noticee. Besides, as per the show cause notice, the noticee started trading when the price had already reached Rs. 436/ and not during the period when the price had increased from Rs. 283/- to Rs. 416.90/-. Therefore, it would be difficult to establish that the trades of the noticee had influenced the share price. Further, in respect of settlement no. 100 (on August 13,3002), it has been indicated that the noticee had bought and sold 825 shares respectively.

The noticee had bought shares at Rs. 430.25/- and sold the same at Rs. 429.85/-. The opening and the closing price for the same day, as per the show cause notice was 425.25/- and 428.50/-, respectively. The intra-day high price was Rs. 432.90/-. The total number of trades for the said day was 113. On August 14, 2002, it was alleged that the price was influenced by Rs. 1.75/-. On the said day the noticee had purchased 550 shares at Rs. 430.25/- and sold the same quantity at Rs. 430/-. Incidentally, the opening price and the closing price for the day was Rs. 430/- and 430.25/-, respectively. In settlement no 108, the alleged trades took place on August 26, 2002. On the said day, the share price opened at Rs. 448.10/- and closed at Rs. 448.60/- and the noticee traded for 200 (in gross) buying 100 shares at Rs. 449/- and selling at Rs. 448.65. On September 5, 2002 (settlement no. 116), the share price opened at Rs. 462.35/- and closed at Rs. 463/-. The noticee purchased and sold 225 shares at Rs. 462.35 and Rs. 463, On September 9, 2002 (settlement no. 118), the share price opened at Rs. 460/- and closed at Rs. 464/-.

The noticee purchased 250 shares at Rs.455/-and sold the same quantity at Rs. 455.50/-. In all the aforesaid instances, the show cause notice does not allege that the opening price (which was marginally higher than the previous day’s closing price) for the said dates were established through the trades of the noticee. The show cause notice, having mentioned the buy-sell quantities and the price at which the trades were executed, has not mentioned the order (buy–sell) time. The same becomes relevant to understand whether the noticee had placed buy orders at higher prices or had placed his buy orders to match the pending sell orders which have been placed at marginally higher prices. The said details become more pertinent as it is noted that on a few days when the noticee had traded, the number of trades executed in the market was more than the trades executed by him. Though, the noticee had reversed his trades the foregoing reasons would make it difficult to establish that the noticee was a necessary party in artificially raising the share price. The substantial increase in the share price from Rs. 283/- to Rs. 416.90 happened between January 2, 2002 and April 23, 2002 and the noticee was found to have traded when the share price had already reached Rs. 436.10 (opening price on July 12, 2002).

As stated earlier, it is not the case in the show cause notice that the trades of the noticee were responsible for the price increase upto Rs. 436/-. Further, it is also not alleged that the noticee had influenced the opening price on the days when he had traded. In view of the above reasons, the noticee becomes eligible for the benefit of doubt, as regards the charges leveled against it in the show cause notice.

8. I note that, as the noticee had contended that he had traded as a sub-broker on behalf of one S.R.Patel and had placed orders with the client code “S04”, it was thought fit by SEBI to confirm with BSE as to who the actual client placing orders using the said code was. BSE, in its letter dated April 21, 2010 had informed that the orders have been entered with the client code “R06” and further informed that it was not able to ascertain as to whom the said code belonged as the Unique Client Code Database capturing the details of the clients was operational with effect from March 1, 2004. Vadodara Stock Exchange Limited, vide letter dated June 28, 2010 stated that the noticee had traded during the period January 2, 2002 to October 1, 2002 in his capacity as a sub-broker. The said letter also contained a copy of the letter of the noticee dated August 12, 2004 addressed to VSE Stock Services Limited (receipt acknowledged on August 14, 2004), wherein he had informed about the transactions of Mr. S.R. Patel in the shares of the Company. The said letter had mentioned the beneficiary account number of Mr. S. R. Patel, the client ID (S04) and his address. The buy–sell quantities mentioned in the said letter is the same as shown in Annexure B to the show cause notice. However, as the noticee is entitled to a benefit in respect of the charges, I do not fit it necessary to give a finding as to who was the beneficiary of the said client code or whether the noticee was dealing in the shares as a trader or as a sub-broker. In view of the foregoing, the show cause notice issued to the noticee is disposed of as ordered herein below.

9. For the reasons stated above, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11(4) and 11B thereof and Regulations 11 and 13 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 hereby dispose of the show cause notice dated September 23, 2005 issued to Mr. Vijay J. Thakkar, without any directions.

DR. K.M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: AUGUST 2, 2010