Order in respect of RRB Securities Limited and Har Sai Investments Limited in the matter of Ceat Limited

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) had conducted an investigation into the dealings in the shares of Ceat Limited (hereinafter referred to as the Company) for the period-January to March 2000 and March to May 2001, pursuant to a report submitted by the National Stock Exchange of India Limited (hereinafter referred to as NSE). The findings of the said investigation inter alia alleged that certain entities including RRB Securities Limited (hereinafter referred to as RRB) and Har Sai Investments Limited (hereinafter referred to as HSIL), allegedly related and associated with the stock broker, HB Securities Limited, had aided and assisted in the creation of volume by rotating the same set of shares, settlement after settlement and had structured their transactions. In view of the findings of the investigation, SEBI issued show cause notices dated August 23, 2004 to RRB and HSIL, alleging that they had violated Regulations 4(b) & (d) and 9 of the 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).

The said notices required the aforesaid entities to show cause as to why suitable action under Sections 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act) read with Regulation 11 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, should not be taken against them. Hereinafter, RRB and HSIL would be collectively referred to as the entities and individually by their respective names. Thereafter, the entities had requested for various documents and subsequently, an opportunity of hearing was also afforded to the entities before my predecessor on July 10, 2006. The entities had again requested for the documents, vide letter dated July 6, 2006 and stated that they were not in position to deal with the issues raised in the show cause notice and respond to them adequately in the absence of such documents. Thereafter, another opportunity of hearing was granted to them on November 21, 2008 which was adjourned to December 11, 2008, on their request.

Subsequently, another opportunity was given on January 30, 2009 pursuant to providing the documents. However, the entities requested for an adjournment of the said hearing and accordingly, the hearing was postponed to March 6, 2009. On the said date, Mr. H.S. Chandoke, advocate, as authorized by HSIL made elaborate submissions before me. Mr. Abdulla Hussain, Advocate was also present during the hearing. RRB was represented by its director, Mr. Anil Goyal who made submissions on its behalf. The representatives made their submissions on the lines of the respective replies dated March 6, 2009, filed during the course of the hearing on behalf of the entities. As the entities had been issued show cause notices by SEBI in respect of their alleged involvement in certain other matters where the period was more or less the same when the alleged violations in the present matter had taken place, it was thought fit in the interest of justice, to conclude all the hearings in those other matters also before proceeding with the individual cases.

2. I have considered the show cause notices issued to the entities in the matter, the oral as well as written submissions made by them and other material available on record. The issue that arises for my consideration is to find whether the entities had violated Regulations 4(b) & (d) and 9 of the PFUTP

Regulations, as alleged in the show cause notice, while dealing in the shares of the Company during the relevant period. As per the show cause notices, SEBI had investigated the matter on the basis of the investigation report submitted by NSE. The investigation period covered from January to March 2000 and from March to May 2001. In terms of the notice, NSE during the period from January to March 2000 had observed that: - “….certain parties namely, M/s Harbinger Trading Company, S. Ramdas and M/s Pursarth Trading Company, M/s Harsai Investments Pvt. Ltd., M/s RRB Securities, HB Stock Holdings Ltd. and Share Shoppee were observed to be trading heavily and accounted for 42% of the gross traded quantity of the market in Sett. No. 2000007 and 40% in Sett. No. 2000008. The above mentioned parties are grouped into two viz. CFL Group comprised of M/s Harbinger Trading Company, S. Ramdas and M/s Pursarth Trading Company and HB Group comprised of M /s Harsai Investments Pvt. Ltd., M/s RRB Securities, HB Stock Holdings Ltd. and Share Shoppee.”

It was also mentioned that NSE, during the period between March and May 2001, had observed the following:

“………………..various instances of Structured/Matched transactions between the trade member M/s HB Securities Ltd on one side and M/s CFL Securities Limited, M/s UTI Securities Exchange Limited, M/s HDFC Securities Limited, M/s Fincap Portfolio Ltd. and M/s UBS Warburg Securities India Pvt. Limited on the other side. The total of the structured deals executed by M/s HB Securities accounted for 13.99% to the overall market gross for the period under scrutiny. The details are presented as Annexure 1 to 5”.

3. RRB inter alia contended that there is no allegation in respect of its trades during the first period of investigation (January to March 2000) in the entire show cause notice and submitted that it had purchased 20,450 shares during the aforesaid period which constituted 0.62% of the market gross of 3,09,000 shares. RRB also contended that it did not have any association with the stock brokers namely, UTI Securities Exchange Limited, HDFC Securities Limited and UBS Warburg Securities India Private Limited or was associated with M/s. B.K. Khullar & Co., S Ramdas, CFL Securities Limited, Harbinger Trading Company Private Limited, Pursarth Trading Company Private Limited etc. According to RRB, the alleged linkages with Chinar Financial Services Private Limited and Alakananda Capital Services Private Limited were not brought out in the show cause notice and were only based on conjectures and surmises. Further, RRB stated that there was no material available on record to substantiate the allegations in the show cause notice that it was aiding the group for tiding over the financial commitment to the exchanges.

With respect to the allegation of circulation of shares amongst the group, RRB contended that even as per the diagram mentioned in the show cause notice (at page 2) there was only one rotation. According to RRB, there was nothing in the show cause notice to show that HB Securities Limited was postponing the pay-out/pay-in obligations or to show that the shares were circulated settlement after settlement. RRB contended that there was no finding of any gain having accrued to it by the imputed trades in the shares of the Company and that there was no finding of collusion or game plan with the other entities and there is no allegation of any price manipulation. RRB also submitted that, if its intention was to carry out structured transactions, it would have executed trades for the entire 1,15,000 shares and not in parts. According to RRB, all its trades were backed by delivery of shares bought/sold, payments made/received and there was change in the beneficial ownership. RRB has also contended that the show cause notice or the investigation report fails to show that the net outflow of monies in the trades of the alleged group was spread over many settlements.

It is the submission of RRB that no material was brought to show a correlation between the nature of the transactions and the price movements and that no pattern has been drawn to show that the transactions were designed to influence the market. As regards the allegation of delayed submission of documents/information, RRB submitted that whenever any document was sought, the same was submitted by it to the investigating authority. HSIL had made similar submissions as that of RRB, in respect of the show cause notice issued to it. According to HSIL, its trades (except one with UBS AG A/c Long

Term India Investement Fund Limited) constituted only less than 10% of the market volume and cannot said to have affected the market volumes.

4. I have considered the show cause notice issued to RRB and find that its submissions are with merit and deserves to be noted. In respect of the first period of investigation (January to March 2000), I note that the allegation in the show cause notice was that the trades of ‘HB Group’ and ‘CFL Group’ had contributed 42% and 40% in two settlements, as stated above in this order. Neither the traded volume of RRB nor that of the group to which RRB allegedly belonged to, was provided in the show cause notice. One of the charges leveled against RRB is that it had violated Regulation 4(b) of the PFUTP Regulations. In a case like this, where the allegation is that the trades of RRB were done with an intention of creating artificial appearance of trading in the market, the vital requirement is to mention its traded volume. I note that in this case, even the traded volume of the group as a whole to which RRB allegedly belonged to was not given in the notice. The total traded volume during the entire investigation period is also not mentioned in the notice. In the absence of such necessary details, it would be difficult to examine the role of RRB in so far as the said charge is concerned.

There is one more reason for giving benefit to RRB. I find that in the show cause notice, apart from merely stating that the two groups had contributed 42% and 40%, it failed to provide even the transaction details of RRB for such period. In short, for the period January to March 2000, the show cause notice is totally silent about the trades of the parties covered therein, apart from making the above allegations. In the absence of trade details, it would be difficult to find RRB guilty of violating Regulation 4(b) of the PFUTP Regulations. Further, there is nothing in the show cause notice to examine (for first period) whether the transfer of beneficial ownership was effected. This is because no trade details were given for such period. Without such trade details and the parties involved in such trades, it is difficult to see how one could ascertain whether the beneficial ownership in those shares were transferred. Further, it is pertinent to mention here that there is no allegation in the show cause notice that the trades of the entities created artificial price increase for the said period.

These are necessary requirements for sustaining a charge of violating Regulation 4(d) of the PFUTP Regulations. Therefore, according to me, the material in the show cause notice issued to RRB would not be sufficient enough to find it guilty of violating Regulation 4(b) and (d) of the PFUTP Regulations, in respect of the alleged trades during the first period. Since, the allegation against HSIL is also similar to that of RRB, it would also be entitled for a benefit of doubt for the aforesaid reasons, for the said period.

5. In respect of the second period (March to May 2001), it is alleged in the show cause notice that NSE had observed various instances of structured/matched transactions between the stock brokers, M/s HB Securities Limited, on one side and CFL Securities Limited, UTI Securities Exchange Limited, HDFC Securities Limited, Fincap Portfolio Limited and M/s UBS Warburg Securities India Private Limited on the other side. The structured deals executed by HB Securities Limited, as per the show cause notice had accounted for 13.99% to the overall market gross for the period under scrutiny. Such details are given in Annexure 1 to 5 to the notice. RRB denied that it had indulged in structured deals and according to it, there was no document on record to suggest that any fraudulent or manipulative intend or any collusion/ understanding with any of the entities mentioned in the show cause notice. It was the contention of RRB that there is also no material on record to prove that:- a. its trades resulted in rise or fall in the price of the shares; b. the intention behind effecting such trades was to manipulate the prices; and c. such trades induced the sale or purchase in the scrip by any person.

Further, RRB while referring to the investigation report, has submitted that no action was taken against M/s. B.K. Khullar & Co., Chinar Financial Services Private Limited or UTI Securities Exchange Limited, who were either the counter parties or the trading member of its imputed trades and contended that if a transaction is not structured qua one party, the same cannot be held as structured against the other party to the same transaction.

6. The allegation in the show cause notice with respect to the second period is that various stock brokers executed matched/structured transactions in the shares of the Company. The said details are given in Annexures 1 to 5 to the show cause notice. I have perused the said annexures. All the trades of RRB contained in Annexure 1 to 5 are summed up in Annexure 6. I note that three transactions have been mentioned in the said annexure, executed on March 15, 2001 in settlement no. 2001011. In all the three transactions, the buying client was Chinar Financial Services Private Limited, through HB Securities Limited and the selling client was RRB, through UTI Securities Exchange Limited. The details of the said trades are as follows:

TIME PRICE (`) % CHANGE FROM LTP* TRADE QUANTITY (No. of shares) 12:57:07 22.00 0 39,393 12:59:30 22.00 0 24,543 13:00:05 21.50 0 44,543

TOTAL 1,08,479 * LTP – Last Traded Price

In note that, on March 15, 2001, the scrip opened at ` 23.30/- and closed at ` 22.95/-. The high and low price for the day was ` 23.60/- and ` 21.50/-. The said trades had also involved Chinar Financial Services Private Limited (as a client) and UTI Securities Exchange Limited (as a stock broker). It was the submission of RRB that no action was taken against them. According to RRB, in a case of structured deal all the parties involved have to be treated on par. It was the submission that SEBI cannot allege violation only against one party and say otherwise in respect of the others involved in the very same transaction. Though, the show cause notice alleged that RRB had indulged in structured deals, it failed to bring out as to how the trades of RRB had influenced the market volumes traded during the relevant period. Further, the show cause notice had also not explained as to how the impugned trades of RRB had impacted the share price. Even as per the aforesaid annexure, it is clearly mentioned that the trades of RRB were not higher or lower than the last traded prices for the respective trades.

There is no material to show that the beneficial ownership of the shares had not passed on to Chinar Financial Services Private Limited. It was contended before me that the transactions of RRB were genuine and that the beneficial ownership of the shares had been transferred. Further, it was the case that Chinar Financial Services Private Limited was not proceeded against. The show cause notice fails to establish the manipulative intent of RRB in respect of the said trades and how the entities had colluded to indulge in fraudulent and unfair trade practices in the shares of the Company. In short, the allegation against RRB is that it had indulged in structured deal with another entity without change in the beneficial ownership in respect of the shares traded between them. As stated above, the parties involved in such trades were Chinar Financial Services Private Limited and the stock brokers, UTI Securities Exchange Limited and HB securities Limited. RRB traded through UTI Securities Exchange Limited. There was no action against Chinar Financial Services Private Limited and UTI Securities Exchange Limited.

In view of the above reasons and in the facts and circumstances of the case, it would not be proper to fix liability on RRB. Therefore, it would be difficult to find RRB guilty of contravening Regulation 4(b) and (d) of the PFUTP Regulations in respect of its trades for the second period.

7. As regards HSIL, the details of its structured transactions as mentioned in Annexures 1 to 5 to the show cause notice, have been summarized in Annexures 6 to 8. Annexure-6 provides the details of the alleged structured deals between HB Securities Limited and UBS Warburg Securities Limited. All the trades mentioned in the said annexure were executed on April 10, 2001 during settlement no. 2001014. A total of 4,92,090 shares were sold by HSIL and purchased by UBS A/c Long Term India Investment Fund Limited. The trades were executed at ` 24/-. The said annexure clearly mentioned that there was no percentage change (increase) in the share price of the Company because of the said trades, from the last traded price. Annexure-7 provided the details of the alleged structured/matched trades executed between HB Securities Limited and UTI Securities Exchange Limited. It is mentioned in the said annexure that, on March 14, 2001 (in settlement no. 2001011), HSIL had sold 35,000 shares to Alaknanda Capital Services Private Limited at ` 23.25/-. Further, on April 27, 2001, HSIL had purchased 24,000 shares at ` 20.25/-.

Annexure-8 provides the details of the trades between HB Securities Limited and Fincap Portfolio Limited. It was mentioned that, on March 20, 2001 (in settlement no. 2001011), HSIL trading through Fincap Portfolio Limited had purchased 55,000 shares. It also purchased 1,000 shares on April 17, 2001 (in settlement no. 2001015). HSIL had contended that the data in the show cause notice shows that it had traded five times during the second period (March-May 2001) of investigation. It submitted that the transactions were either one time purchase or sale in bulk and that shares were not sold and repurchased on the same day or even within the same week. HSIL has contended that for the trades on April 10, 2001 and April 27, 2001, the show cause notice does not even allege any connection with the counterparties or the counterparty stock brokers. As regards the other three trades, it was contended that it did not have any connection with ‘UTI Securities’ and ‘Fincap Portfolio’. HSIL submitted that its trades (except for the shares sold on April 10, 2010) constituted less than 10% of the market volume traded in the shares of the Company.

It further submitted that the shares sold on April 10, 2001 was a bulk sale to a completely unrelated entity (UBS AG Long Term India Investment Fund Limited) which had purchased through its own stock broking entity (UBS Warburg Securities India Private Limited). As stated above, the counter party clients to the trades of HSIL, as per annexures 6 to 8 to the notice, were UBS A/c Long Term India Investment Fund Limited, Alaknanda Capital Services Private Limited, Chinar Financial Services Private Limited and UTI Bank Limited (Capital Market

Division). It was the contention of Mr. H.S. Chandoke, the counsel for HSIL that SEBI cannot allege violation only against one party to a structured deal and not hold the others liable for the very same transaction. He further submitted that since SEBI had not proceeded against all other parties to the impugned trades, it would not be justified in taking action only against his client. Besides, according to him, it is not alleged in the show cause notice that the share price of the Company had increased due to the trades of HSIL. The show cause notice has failed to mention whether there was any regular trading pattern by HSIL in executing structured trades or how the trades of HSIL had impacted the share price during the relevant period. Further, as in the case of RRB, the show cause notice issued to HSIL did not allege that the trades of HSIL did not result in change of beneficial ownership of the shares or provided any material to support the said charge. HSIL has also categorically submitted that its trades resulted in deliveries. Further, there is also no material to show that the entities were merely shifting their positions and were not taking the deliveries. Thus, the show cause notice and the material enclosed with it are not sufficient to establish that the trades of the entities were calculated to create false or misleading appearance of trading in the shares of the Company and that they were not intended to effect the transfer of beneficial ownership and caused fluctuations in the share price of the Company during the relevant period. In view of the above reasons, HSIL is also entitled for a benefit of doubt in respect of violation of Regulation 4(b) and (d) of the PFUTP Regulations in respect of its trades executed in the second period.

8. Further, the show cause notice has also failed to establish how RRB and HSIL had indulged in rotating the same set of shares and helped their group company in delaying its pay-in/pay-out obligations. I note that, the show cause notice alleged that the said entities had aided and assisted their group company for tiding over the financial commitment to the stock exchange so as not to default payment and utilized the stock exchange mechanism to fulfill their objective. This allegation is without any material in the notice. The notice is silent as to the identity of such group company that had a financial commitment to the stock exchange and how the entities had aided and assisted it in tiding over such financial commitment. Therefore, in the absence of any details in the notice, I am unable to examine the said allegation. Further, the transactions mentioned in the diagram at page 2 of the show cause notice are already examined above in this order, and found that the material in the show cause notice in respect of the said transactions could not substantiate the charge of violating the PFUTP Regulations, as alleged in the notice.

The show cause notice had further alleged that the entities had violated Regulation 9 of the PFUTP Regulations. It was also mentioned in the notice that RRB had submitted certain details, but the same were not adequate. It was the submission of RRB that it had provided documents whenever the same were sought by the investigating authority. There was no material in the show cause notice to indicate that RRB was informed about the deficiencies in the information which were already submitted by it. In view of the above, RRB is entitled for a benefit of doubt in this regard also. It was alleged against HSIL that, it had delayed in submitting the required information during the investigation and thus violated Regulation 9 of the PFUTP Regulations. It was submitted on behalf of HSIL that there was no delay on its part. A reading of the show cause notice indicates that the said details were required in respect of certain transfers made by the entities to the demat account of HB Securities Limited. As stated above, HSIL cannot be made liable for contravening the provisions of the PFUTP Regulations.

This observation was pursuant to the examination of independent trade details of HSIL, as given in the notice. The other parties (as mentioned in the diagram at page 2 of notice) to the alleged circular trades have not been proceeded against. The counter parties involved in the alleged matched trades were also not proceeded against it. During the course of hearing, it was submitted on behalf of HSIL that in the absence of action against other parties, SEBI is not justified in proceeding against HSIL on one or other grounds. It was also submitted that the notice is silent about the transfers for which the information was required by SEBI. According to him, the notice is silent as to whether the trades of HSIL have created artificial price rise and that the charge of entering into circular trade would not sustain as there was no action against other parties to such trades. As stated above, the transactions of HSIL cannot be faulted for the reasons in this order. In the facts and circumstances of the case, HSIL is also entitled for a benefit of doubt in respect of the said charge.

9. For the foregoing reasons, I, in exercise of powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 and 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 notices dated August 23, 2004 issued in the matter of Ceat Limited, to RRB Securities Limited and Har Sai Investments Private Limited, without any directions.

DR. K.M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: SEPTEMBER 24, 2010