Order in respect of RRB Master Securities Delhi Limited, in the matter of Alps Industries Limited

1. Securities and Exchange Board of India (hereinafter referred to as SEBI) had conducted an investigation into the trading in the shares of Alps Industries Limited (hereinafter referred to as the company) for the period December 6, 2000 to March 13, 2001 (hereinafter referred to as the investigation period). It is alleged on the basis of the findings of the said investigation that the stock broker, RRB Master Securities Delhi Limited (hereinafter referred to as the stock broker), member, Delhi Stock Exchange Limited (hereinafter referred to as DSE) had executed large number of synchronized transactions with associated entities namely RRB Securities Limited, Alaknanda Capital Services Private Limited, Chinar Financial Services Limited, Har Sai Investments Limited, Narmada Capital Services Limited and Gagan Financial Resources Private Limited (hereinafter collectively referred to as the entities and individually by their respective names) during the investigation period. It was inter alia alleged that the said trades of the stock broker had created artificial volume in the market and thereby contravening the provisions of the Securities and Exchange Board of India Act, 1992, Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations,1992 (hereinafter referred to as the Broker Regulations) and Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market)

Regulations, 1995 (hereinafter referred to as the PFUTP Regulations). Accordingly, SEBI, vide order dated March 3, 2004 read with subsequent orders, initiated an enquiry against the stock broker in terms of the provisions of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (since repealed) to enquire into the alleged violations committed by it. The Enquiry Officer, vide report dated October 31, 2006 while recommending the penalty of suspension of the certificate of registration of the stock broker for a period of three months found that the actions of the stock broker are in violation of Regulation 4(a), (b),(c) and (d) of the PFUTP Regulations and Clauses A(1) to (5) of the Code of Conduct for stock brokers specified in Schedule II of the Broker Regulations. Thereafter, a notice dated November 21, 2006 was issued to the stock broker with a copy of the Enquiry Report calling upon it to show cause as to why action should not be taken against it as recommended by the Enquiry Officer or as considered appropriate by SEBI. The stock broker, vide letter dated December 8, 2006 filed its reply and the same is being considered in the later part of this Order. Thereafter, an opportunity of hearing was provided to the stock broker on July 9, 2009. Mr. Rajesh Bhardwaj, advocate represented the stock broker before me and made submissions. Mr. Ashish Kapur, managing director of the stock broker was also present during the hearing. A written submission dated July 9, 2009 was also filed on behalf the stock broker during the course of the hearing. The submissions were on the lines of the reply and the written submissions.

2. I have considered the Enquiry Report, the oral as well as written submissions made on behalf of the stock broker and other material available on record. The stock broker raised a preliminary objection to the effect that Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 did not give an unrestricted or arbitrary power to the Chairman/Member, SEBI to commence an enquiry against anybody as per his/their own sweet will. According to the stock broker, it should appear to the Chairman/member that an intermediary has contravened any of the provisions of a regulation referred to in Regulation 4 of the aforesaid Regulations. The submission of the stock broker is liable to be rejected. Regulation 5(1) of the aforesaid Regulations, which is reproduced hereinbelow, empowers the Chairman/member, SEBI to appoint an Enquiry Officer for the purpose of holding an enquiry into the matter.

“5(1) Where, it appears to the Chairman or a member designated in this behalf that an intermediary has contravened any of the provisions of a Regulation referred to in Regulation 4, the Chairman or the member, as the case may be, may appoint an Enquiry Officer for the purpose of holding an enquiry into the matter.”

The Enquiry Officer, in the present case, was appointed in terms of the aforesaid regulation after fulfilling the requirements mentioned therein. In view of the above, I do not have any hesitation in holding that the appointment of the Enquiry Officer in the present matter was made in accordance with Regulation 5 of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.

3. According to the Enquiry Officer, the stock broker had executed trades on behalf of clients who are associated/connected and that the purpose of the trades executed by the stock broker was to create artificial volume in the shares of the Company and such findings of the Enquiry Officer is reproduced below:

“ 19. In view of the facts and circumstances of the case and on the basis of the evidence available on record it is concluded that the said traded are synchronized trades and considering the fact that the trades were executed on behalf of clients who are associated/connected and further it is seen that the purpose of the trades were to create artificial volume in the scrip. In view of the same, it is concluded that RRB violated 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.” (emphasis supplied)

In short, according to the Enquiry Officer, the trades of the stock broker were:

i. synchronized ii. executed on behalf of clients who are associated/connected iii. for the purpose of creating artificial volume.

4. It is observed by the Enquiry Officer that the stock broker had traded in the shares of the Company for the aforesaid clients and such trades involved 10,83,800 shares accounted for approximately 59% of the gross volume traded at DSE. In some trades, the stock broker was appearing both as the buying as well as the selling stock broker. Table 1 at paragraph 11 of the Enquiry Report mentioned the details of such trades. There are three more tables in the Enquiry Report as given below:

a. structured trades between the stock broker (seller stock broker) and HB Securities Limited (buyer stock broker) b. structured trades between the stock broker (buyer stock broker) and HB Securities Limited (seller stock broker) c. synchronized trades between the stock broker and HB Securities Limited

5. The stock broker has denied the fact that it had entered into synchronized transaction with associate entities. According to the stock broker, it is impossible to know the identity of the parties in a screen based transaction and that all its trades were well within the guidelines of SEBI Circular dated September 14, 1999. It was submitted that the Enquiry Officer rejected the contention of the stock broker that it was not acting under collusion for the simple reason that that entities were placing identical orders. Apart from the said observation made by the Enquiry Officer, there was no reference made by the Enquiry Officer with respect to the alleged connection between the entities involved in the trades. According to him, whatever conclusion arrived at by the Enquiry Officer was vague. It was the case of the stock broker that, in the facts and circumstances of the case, the placement of identical orders was not established, as the tables (except one) mentioned in the Enquiry Report in respect of the alleged structured trades executed with HB Securities Limited does not contain the order time.

The tables are details of structured deals executed between the stock broker and HB Securities Limited. Needless to say, none of the tables contained the name of the entities on whose behalf such orders were placed by the said stock brokers. One of the tables (without time) contained various trades involving 4,77,500 shares and one with time involved 5,90,000 shares. It is not clear whether the said trades were one and the same or different. It is pertinent to note that there is no allegation leveled against the stock broker that it was involved in trade reversals or circular trades. As per the table without time, the aforesaid stock brokers had executed the trades on December 22, 2000, December 23, 2000, December 24, 2000, December 29, 2000, January 5, 2001, January 12, 2001, January 19, 2001, February 16, 2001 and March 9, 2001. However, as per the table with time, the trade dates are January 5, 2001, January 12, 2001, January 19, 2001, February 16, 2001, February 23, 2001 and March 2, 2001. A perusal of the show cause notice indicates that some of the trades appearing therein are common.

However, there are no time wise details with respect to the trades executed on December 22, 2000, December 23, 2000, December 24, 2000, December 29, 2000 and March 9, 2001. Though, it is also alleged in the show cause notice that the stock broker had executed atleast 36 structured deals during the period January 2001 to March 2001 for the connected/related clients involving 5,90,000 shares, details of clients are not given therein. Even the table with the order time does not have the client name. The Enquiry Officer found the stock broker guilty of the charges as he found that the trades were synchronized and that the same were executed on behalf of clients who were associated/connected and that the purpose of the said trades was to create artificial volume in the scrip. The tables (except one) given in the Report was silent about the order time. In such circumstances, it would be difficult to hold that the clients were placing the orders in identical fashion. It was further contended that the trades of the stock broker were within the guidelines of SEBI circular dated September 14, 1999. The Enquiry Officer had placed heavy reliance on the ‘identical fashion in which the said entities were placing orders’.

However, I note that in none of the tables referred to in the Enquiry Report, the client’s name was mentioned. In all the tables, except one the order time details were also not given. There is no allegation in the notice that the trades executed by the stock broker affected the market price of the scrip. The notice is totally silent as to the price movement of the shares of the Company during the investigation period. Similar is the situation in the notice against the clients who had executed trades through the stock broker. There is no allegation that the clients had entered into trade reversals or circular trades. SEBI had also initiated proceedings against the entities for whom the stock broker had executed trades. The said proceedings were disposed of by SEBI, vide order dated September 28, 2010 and held that they are entitled for benefit of doubt as the notice issued to them were deficient in certain aspects. There is no finding in the Enquiry Report that the trades of the stock broker influenced the share price of the company artificially. Therefore, considering the case in its totality, it would be difficult to find fault with the trades of the stock broker which were executed on behalf of entities.

Therefore, the stock broker is afforded benefit of doubt in respect of alleged charges.

6. Therefore, in exercise of the powers conferred upon me under 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, I hereby dispose of the enquiry proceedings initiated against RRB Master Securities Delhi Limited (Registration No. INB050611330), Member, Delhi Stock Exchange Limited, in respect of its dealings in the shares of Alps Industries Limited during the period between December 6, 2000 and March 13, 2001, without any penalty.

DR. K. M. ABRAHAM WHOLE TIME MEMBER SECURITES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE : SEPTEMBER 28, 2010