Order in respect of Ramanlal D Shah in the matter of Sawaca Communication Ltd

Date of Hearing: November 23, 2010 Appearances For Noticee: Mr. Kamlesh R. Shah, Proprietor Mr. Ketan Shah, Compliance officer Mr. Arvind Panchal, Adviser Mr. Prakash Shah, Advocate Mr. Robin Shah For SEBI: Mr. G. Ramar, General Manager Mr. Siva Govindo Patra, Manager Mr. Pradeep Kumar, Legal Officer ORDER Under Regulation 28(2) read with Regulation 38 (2) of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigation into the dealings in the shares of Sawaca Communication Limited (hereinafter referred to as ‘SCL’) for the period of October 04, 1999 to December 30, 1999 (hereinafter referred to as ‘investigation period’). During the investigation period, the price of the scrip increased from `19.35 as on October 01, 1999 to `106 as on January 04, 2000, at the Bombay Stock Exchange (hereinafter referred to as the ‘BSE’). The rise in the price of the scrip of SCL was accompanied by significant increase in the volumes.

2. Investigation, inter alia revealed that Ramanlal D. Shah (hereinafter referred to as the ‘noticee’), member, BSE while trading in the scrip of SCL on behalf of Mayekar Investment Pvt. Limited (hereinafter referred to as ‘MIPL’) had executed huge orders. It was also found that MIPL was not a registered sub-broker during the relevant period and the noticee had allowed it to trade in the scrip of SCL in the capacity as a sub-broker.

3. Based on the findings of the investigation, SEBI initiated enquiry proceedings against the noticee in terms of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as ‘Enquiry Regulations’), by appointing an Enquiry Officer under Regulation 5(1) of the Enquiry Regulations. The Enquiry Officer enquired into the alleged violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred to as ‘PFUTP Regulations’) and the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as ‘Broker Regulations’). The Enquiry Officer submitted his Report dated February 08, 2005, in terms of Regulation 13 (1) of the Enquiry Regulations recommending a penalty of suspension of the certificate of registration of the noticee as a broker for a period of two months for violating the provisions of Regulation 4 of the PFUTP Regulations and the Code of Conduct prescribed for the brokers under Schedule II read with Regulation 7 of the Broker Regulations.

4. Subsequently, a show cause notice (hereinafter referred to as ‘SCN’) dated March 22, 2005 under Regulation 13(2) of the Enquiry Regulations was issued to the noticee asking it to show cause as to why an appropriate action including the penalty recommended by the Enquiry Officer, should not be imposed. The noticee was advised to reply to the SCN, together with the documents that it may choose to rely upon in support of its reply within fifteen days from the receipt thereof. It was also informed that in case of failure, it would be presumed that it had no explanation to offer and that SEBI shall be free to take such action in the manner, as it deemed fit. A copy of the Enquiry Report was also forwarded to the noticee along with the SCN.

5. The noticee replied to the SCN vide its letter dated April 25, 2005. Before proceeding further, an opportunity of personal hearing was granted to the noticee on September 06, 2007. However, the noticee requested for adjournment. Pursuant to the change in appropriate authority, another opportunity of personal hearing was granted to the noticee before me on October 22, 2010. The noticee requested for postponement of the date of hearing, vide its letter dated October 12, 2010. The request of the noticee was acceded to and the matter was adjourned to November 12, 2010. The date of hearing was further postponed to November 23, 2010 due to certain administrative reasons. On the date fixed, Mr. Kamlesh R. Shah, Proprietor, Mr. Ketan Shah, Compliance officer, Mr. Arvind Panchal, Adviser, Mr. Prakash Shah, Advocate, Mr. Robin Shah appeared and sought ten days’ time to file the written submissions. However, no written submissions are received from the noticee till date.

6. The noticee also filed an application for the settlement of proceedings through a consent order. The application filed by the noticee was dealt in accordance with the SEBI Circular dated April 20, 2007. Subsequently, the proceedings initiated by SEBI pursuant to the SCN were revived against the noticee, as the application for consent was rejected by SEBI.

7. I have carefully considered the Enquiry Report, the SCN issued to the noticee and its reply. The main submission of the noticee, in brief are:

- The transactions were done in normal course of business at the market price. It had not carried out any proprietary trading in the scrip of SCL. There was a change in beneficial ownership. It had more than 100 clients trading in approximately 5,000 scrips, at the relevant point of time. Therefore, it was not practically feasible for the noticee to get into the details as to why a particular client was trading in particular scrip. - MIPL was its existing client since the year 1998 and, it had applied at BSE for registration as a sub-broker vide an application dated June 18, 1999. MIPL received the certificate of registration to act as sub-broker, on May 24, 2000.

- It was under bonafide belief that they could allow MIPL to act as their sub-broker during the pendency of application of registration. It had also entered into broker-sub-broker agreement on June 10, 1999 with MIPL before permitting it to act as sub-broker and collected proper margin for trades executed by MIPL. It had not funded MIPL for the execution of trades in the scrip of SCL. - Given the background of MIPL in terms of payment and delivery, they had no reasons to suspect any oblique motives. It had no common understanding/ nexus with MIPL for indulging in manipulation. There is no evidence on record to establish its intention for manipulation. - It had taken adequate and remedial measures upon noticing repetitive nature of transactions in SCL by MIPL by asking it to stop business through it from December 05, 2003. Subsequently, it had submitted letter for cancellation of certificate of MIPL, vide letter dated January 07, 2004. - All documents relied upon by SEBI have not been supplied to it.

8. At the outset, I consider the submission of the noticee that it has not been provided with various documents relied upon by SEBI. However, I note that all the documents relied upon by SEBI have been provided to the noticee. No document, which has not been provided to the noticee, is being relied upon in the present proceedings. I note that the Enquiry Officer has found the noticee guilty of the violation of the Regulation 4 of the PFUTP Regulations and the Code of Conduct prescribed for the brokers in Schedule II read with Regulation 7 of the Broker Regulations.

9. I have seen the trading details of the noticee in the scrip of SCL and note that it had purchased and sold 2,75,400 shares and 3,19,700 shares, during the period of investigation. The settlement wise details of trades executed by the noticee in the scrip of SCL during the period of October 04, 1999 to December 30, 1999 is as under: Settlement No. Purchase Sale Gross Net 31 0 25,000 25,000 -25,000 32 45,100 91,000 91,000 -45,900 33 20,000 68,800 68,800 -48,800 35 0 6,300 6,300 -6,300

36 23,500 10,000 33,500 13,500 37 18,600 10,000 28,600 8,600 38 10,400 10,000 20,400 400 39 25,800 27,500 53,300 -1,700 40 21,500 29,000 50,500 -7,500 42 22,500 0 22,500 22,500 43 36,500 0 36,500 36,500 44 51,500 39,900 91,400 11,600 45 0 2,200 2,200 -2,200 Total 2,75,400 3,19,700 5,95,100 -44,300 From the above table, I note that the trades of the noticee had contributed approximately 7% of the gross volume of shares traded in the scrip. It is seen from the Enquiry Report that MIPL had accounted for over 80% of the total trades of the noticee in the scrip of SCL. However, there is nothing on record to prove any suspicious trading pattern followed by the noticee. In the absence of crucial details such as order time, quantity, etc. I am of the considered view that the charge of the violation of PFUTP Regulations is not established as against the noticee.

10. I note that MIPL was not a registered sub-broker during the relevant point of time, and the noticee had allowed it to trade in the scrip as a sub-broker. The noticee has submitted that MIPL was its client since the year 1998 and that it had applied for the certificate of registration for acting as sub-broker on June 18, 1999 and the registration was received on May 24, 2000. The noticee has further submitted that it was under the bonafide belief that it could allow MIPL to act as their sub-broker, during the pendency of the application for registration. I note that MIPL was a client of the noticee and after making an application for registration, it started to act as a sub-broker. I have seen Rule 3 of SEBI (Stock Brokers and Sub-brokers) Rules, 1992 which reads as under:

“3. No stock broker or sub-broker shall buy, sell, deal in securities, unless he holds a certificate granted by the Board under the Regulations:

Provided that such person may continue to buy, sell or deal in securities if he has made an application for such registration till the disposal of such application.”

The above rule makes it clear that the proviso is not applicable for the clients of brokers who have made an application for registration as sub-broker. In view of this, I agree with the finding of the Enquiry Officer that the provision was meant for the sub-brokers who were operating before the requirement of registration was prescribed.

11. From the available details, I note that MIPL was contributing substantially to the trading volume in the scrip of SCL, while trading through the noticee. The Enquiry Officer in his report has stated that there is no clear evidence on record to hold the noticee liable for aiding and abetting MIPL actively but they have aided and abetted MIPL at least passively to put huge orders and finds that the noticee has failed to exercise due care and diligence. The Enquiry Officer does not elaborate as to what was the unlawful activity of MIPL that noticee aided and abetted. The charge as against the noticee of aiding and abetting MIPL is also not proved.

12. The only charge that is proven as against the noticee is that it allowed MIPL to act as an unregistered sub-broker and thereby violated the provision of Regulation 7 read with Clause A (2) of the Code of Conduct as specified in Schedule II of the Broker Regulation. Therefore, I note that the penalty of suspension of the certificate of registration for a period of two months as recommended by the Enquiry Officer would be excessively harsh. In the interest of justice and equity, I dispose of the present Enquiry proceedings as ordered herein below.

13. I note that pursuant to the notification of the SEBI (Intermediaries) Regulations, 2008 the Enquiry Regulations have been repealed and in terms of Regulation 38(2) of the SEBI (Intermediaries) Regulations, 2008. Notwithstanding such repeal, any enquiry commenced under the Enquiry

Regulations, shall be deemed to have been commenced under the corresponding provisions of the SEBI (Intermediaries) Regulations, 2008.

14. I, therefore, in exercise of the powers conferred upon me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby prohibit the noticee, Ramanlal D. Shah, member, Bombay Stock Exchange (SEBI Registration no. INB 010949411) from taking up new clients for a period of one month.

15. This order shall come into force on expiry of twenty one days from the date of this order.

DATE : 13/OCT/2011 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA