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

1. The Securities and Exchange Board of India (hereinafter referred to as SEBI) issued notices dated August 23, 2004 to Har Sai Investments Limited (hereinafter referred to as HSIL) and RRB Securities Limited (hereinafter referred to as RRB) requiring them to show cause as to why suitable action, as specified under Sections 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the 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. The said show cause notices were issued in respect of their dealings in the shares of VXL Instruments Limited (hereinafter referred to as VXL) during the period between May 1999 and September 2000 (hereinafter referred to as the investigation period). The facts of the case as mentioned in the show cause notice are given below in brief. SEBI had initiated an investigation in the scrip of VXL on the basis of investigation reports received from the National Stock Exchange of India Limited (hereinafter referred to as NSE). It was alleged that HSIL had purchased and sold around 4,20,000 & 4,65,400 shares of VXL through the stock broker, HB Securities Limited at NSE during the investigation period. HSIL, as a seller, was alleged to have entered into seven instances of structured/matched transactions involving 10,844 shares wherein the counter party buyer was RRB, through the stock broker, Fincap Portfolio Limited. It was also alleged that, HSIL had purchased 11,600 shares through HB Securities Limited and the counter party seller was HB Stockholding Limited through the stock broker, Fincap Portfolio Limited. HSIL (as a seller) was also alleged to have involved in a cross deal in respect of 34,400 shares and that the said trade was executed through HB Securities Limited wherein the counter party client was UTI Securities Exchange Limited. It was also mentioned that RRB had traded through the stock brokers, HB Securities Limited, Rosy Blue Securities Private Limited and Fincap Portfolio Limited during the investigation period. The transactions of RRB, as mentioned in the show cause notice are given below:

a. purchased and sold around 38,700 & 13,000 shares, respectively, through HB Securities Limited, b. purchased and sold around 94,400 & 55,200 shares, respectively, through Rosy Blue Securities Private Limited and c. purchased 11,540 shares through Fincap Portfolio Limited.

2. In view of the above, it was alleged that HSIL and RRB 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 and therefore, the said entities were alleged to have contravened Regulation 4(b) 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). HSIL and RRB are hereinafter together referred to as entities and individually by their respective names.

3. Thereafter, the entities had made requests for various documents and subsequently, an opportunity of hearing was also afforded to them 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 a position to deal with the issues raised in the show cause notice and respond to them adequately in the absence of such documents. Another opportunity of hearing was granted to the entities on November 21, 2008 which was adjourned to December 11, 2008, on their request. Subsequently, an opportunity was given on January 30, 2009 pursuant to providing the documents. However, the entities requested for an adjournment of the said hearing so as to enable them to prepare their submissions. Accordingly, the said 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 of the entities dated March 6, 2009, filed during the course of the hearing. As the entities had been issued show cause notices by SEBI in certain other matters where the period of the alleged violations was more or less the same as that of the present matter, 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.

4. I have perused the show cause notices, the respective replies, the oral submissions made by Mr. H.S Chandoke (advocate) and Mr. Anil Goyal on behalf of HSIL and RRB, respectively and other material available on record. The issue to be decided is whether the entities by virtue of their trades in the shares of VXL during the investigation period had contravened Regulation 4(b) of the PFUTP Regulations, as alleged in the show cause notices. As per the notice, SEBI had initiated the investigation on the basis of three investigation reports submitted by NSE for different periods covering the entire investigation period. The observation of NSE for the relevant periods as stated in the show cause notices are reproduced below:

i. May 5, 1999 to June 22, 1999 “NSE during the period from May 05, 1999 to June 22, 1999 observed that certain parties namely M/s Harsai Investments Pvt. Ltd., M/s RRB Securities and HB Stock Holdings Ltd., M/s Harbinger Trading Company, Shriya Capital and M/s Aditi A. Dalal were among the major clients of various trading members in selected settlements. The above named parties are grouped into two viz. HB group consisting of M/s HB Securities, M/s Harsai Investments Pvt. Ltd., M/s RRB Securities and HB Stock Holdings Ltd and CFL group consisting of M/s Harbinger Trading Company, Shriya Capital and M/s Aditi A. Dalal. Both the groups played a major role in the increased trading activity in the scrip as they contributed to 30% of the net volume of the market for the scrip during settlements 1999019 to 1999023.”

ii. June 22, 1999 to June 22, 2000 “During the period from June 22, 1999 to June 22, 2000, NSE observed that the clients who traded through CFL Securities, HB Securities, Fincap Portfolio and Rosy Blue Securities Limited were trading heavily in the scrip. Further, clients belonging to the HB Group and CFL Group were found to be actively trading in the scrip and contributed to more than 20% of the Gross/Net traded quantity of the market in 25 settlements out of 52 settlements.”

iii. June 23, 2000 to September 2000. “During the period from June 23, 2000 to September 26,2000, NSE observed various instances of structured deals executed by CFL Securities Limited, DGP Securities Limited, Fincap Portfolio Limited and HB Securities Limited.”

5. In support of the allegations, the show cause notices also provided certain details of transactions in the form of Annexure-1 (Structured deals executed by CFL Securities Limited and DGP Securities Limited), Annexure-2 (Details of trades executed by HB Securities Limited during settlement nos. 2000026 to 2000028) and Annexure-3 (Details of structured deals between

Fincap Portfolio Limited and HB Securities Limited on September 26, 2000). In view of the above, it is to be examined whether the allegations in the show cause notices and the details mentioned in the annexures attached therein would establish the contravention of Regulation 4(b) of the PFUTP Regulations. The said Regulation is reproduced below for reference:

“Prohibition against Market Manipulation 4. No person shall – a. …….. b. indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market.”

6. The allegations leveled against the entities are that their trades ‘seems to have been done with an intention of creating artificial appearance of trading in the market’. The show cause notices indicate that RRB had bought and sold 1,44,640 shares and 68,200 shares of VXL (as mentioned in paragraph 1 above), respectively, through various stock brokers, during the investigation period i.e between May 1999 to September 2000. In the case of HSIL, it was alleged that the said entity had bought and sold 4,20,000 and 4,65,540 shares through HB Securities Limited. It was the common case of the entities that the show cause notices were based on inconclusive material. I find merit in the said submission for the following reasons. First of all, the details of transactions (allegedly executed by the entities) mentioned in the show cause notice does not match with corresponding figures mentioned in the annexures attached thereto. For instance, in the case of HSIL, it is alleged in the notice that it had traded through the stock broker, HB Securities Limited during the investigation period and “seen to have purchased and sold around 4,20,000 & 4,65,000 shares through M/s HB Securities”.

These figures are not supported by the annexures attached to the show cause notice. As stated earlier, Annexure-1 is the details of structured deals executed by CFL Securities Limited and DGP Securities Limited. Whether HSIL was a party to such said trades or not, cannot be ascertained from the said details. Even otherwise, the number of shares involved therein was 57,600 (one side). The contention of HSIL is that it had executed trades involving 56,844 shares which had accounted for a mere 3.4% of the total volume traded in the shares of VXL during May–June 1999. In the absence of any contrary figures, the submission of HSIL has to be accepted in this regard. In Annexure 2 (details traded executed by HB Securities Limited during settlement nos. 2000026 to 2000028), trades of HSIL involved only 47,200 shares. In Annexure-3 (details of structured between Fincap Portfolio Limited and HB Securities Limited on September 26, 2000), the trades mentioned therein involved only 10,844 shares. Even if, it is assumed that the trades mentioned in the aforesaid annexures were executed by HSIL, such trades involved only 1,15,644 shares (57,600+47,200+10,844).

The notice also mentioned that HSIL had sold 34,400 shares on June 21, 1999 and had bought 11,600 shares on June 22, 1999. The details of the said transactions (on June 21 and 22, 1999) are not mentioned in any of the annexures attached to the notice. Even if, the shares involved in those transactions are added, it would not reach the figures mentioned in the notice. In a such a situation, the allegation that HSIL had purchased and sold 4,20,000 and 4,65,000 shares is without any supporting material in the show cause notice. The case of RRB is also not different from that of HSIL. As per the show cause notice, RRB had purchased and sold 1,44,640 shares and 68,200 shares of VXL, respectively. As stated above, Annexure 1 contained trades involving 57,600 shares (one side). Whether RRB was a party or not in such trades cannot be ascertained from the said annexure. Further, it is the contention of RRB that it was not connected to the trades mentioned in Annexure-1. There is no material in the show cause notice to dismiss the said plea. In Annexure-2, the trade of RRB involved only 2,800 shares.

According to RRB, the said trade constituted only 0.79% of the market gross. In Annexure-3, the shares involved were 10,844. Thus, as per Annexures 2 and 3, the total shares allegedly transacted by RRB were 13,644. Therefore, the allegation that RRB had purchased and sold 1,44,640 shares and 68,200 shares of VXL, respectively is not in any way supported by the details given in the annexures to the show cause notice. Thus, the show cause notice is ambiguous even in respect of number of shares traded by the entities. Rather, the figures mentioned in the show case notice and the annexures are inconsistent with each other. The charge leveled against the entities is that they had violated Regulation 4(b) of the PFUTP Regulations. The exact volume traded is a vital requirement in a case like this where the allegation is that the trades were done with an intention of creating artificial appearance of trading in the market. In the absence of necessary details, it would be even difficult to examine the culpability of the entities in so far as the said charge is concerned. Further, the show cause notice is silent as to the total market volume in the shares of VXL for the investigation period.

This is another important factor for examining the impugned charge. Considering the ambiguous nature of the show cause notice in so far as the exact traded volume of the entities are concerned (as stated above) and in the absence of the total market volume during the investigation period, it would be primarily difficult to deal with the charge as it would not be possible to find as to whether the trades of the entities had created misleading appearance of trading in the securities market.

7. Besides, it was the allegation that, during May 5, 1999 to June 22, 1999 (first period of NSE investigation), HB group consisting of HB Securities Limited, HB Stock Holdings Limited and the entities and the CFL group consisting of Harbinger Trading Company, Shriya Capital and M/s Aditi A. Dalal had played a major role in the increased trading activity in the shares of the company and that they had contributed to 30% of the net volume of the market during settlements 1999019 to 1999023. Thus, as per the notice, the said 30% was a collective contribution of two groups consisting of various entities/persons which include the entities mentioned herein. The notice in the present proceedings is issued to the entities and not to the group. It was the contention of RRB that none of its trades in the above period had been imputed in the show cause notice and that the details of the same were also not given. I accept the submission of RRB in this regard. Neither, the trades of RRB nor the trades of HSIL were individually given in the show cause notice in respect of the said period. Apart from stating that the ‘CFL group’ and the ‘HB group’ contributed to 30% for settlement numbers mentioned, there was no allegation in the show cause notice as to whether the entities were involved :

i. in fraudulent activities; ii. in trade reversals; iii. in circular trades; or iv. in artificially increasing the share price of VXL.

8. Further, as stated above, it is the contention of HSIL that its trades involving 56,844 shares (during May-June 1999) had accounted for only 3.4% of the total volume traded in the shares of VXL. It is mentioned in the notice that on June 21, 1999, HB Securities Limited (stock broker) executed a cross deal for 34,400, wherein the clients were UTI Securities Exchange Limited (buyer) and HSIL (seller). It was also alleged that on June 22, 1999, the said stock broker had bought 11,600 shares on behalf of HSIL and the counter party client was Fincap Portfolio Limited trading through HB Stock Holdings Limited. Apart from such statements, nothing was mentioned in the show cause notice to impute manipulative intent on the part of HSIL in respect of the said transaction. With respect to the said trades, the show cause notice is totally silent about the price at which such trades were executed, volume of HSIL vis-à-vis the market volume etc. It was also silent as to whether the parties were transacting in a higher price with any manipulative intent. It was contended before me during the hearing that no action was taken against UTI Securities Exchange Limited.

It was the contention 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. The mere allegation that two groups collectively contributed 30% of the market volume in particular settlements without any specific details of the trades would not be sufficient to hold that the entities, who were allegedly belonging one of the groups, guilty of creating artificial volume. Even the volumes said to have been contributed by the alleged HB group has not been in the show cause notice. As stated above, the trades allegedly executed by RRB in the said period are not mentioned in the notice and that the trades of HSIL were only to the extent mentioned above. The said trade details did not contain the total market volume for the said period. The show cause notice could have given further details, such as the individual contribution of the entities and the influence of their trades on the traded volumes in the shares of VXL for the first period. In the absence of such necessary details, I am of the considered view that the show cause notice could not establish the charge leveled against the entities, in respect of the period May 5, 1999 to June 22, 1999. Therefore, the entities are entitled for a benefit of doubt in respect of the same.

9. The observation of NSE in respect of the second period (June 22, 1999 to June 22, 2000) was that the clients traded heavily through CFL Securities Limited, HB Securities Limited, Fincap Portfolio Limited and Rosy Blue Securities Private Limited in the shares of VXL. It was also alleged that the clients belonging to the HB group and CFL group were found to have actively traded in the scrip and contributed to more than 20% of the gross/net traded quantity of the market in 25 settlements out of 52 settlements. As per the notice, the said 20% was the total contribution of two groups. The entities were alleged to be belonging to one of the groups. Therefore, it is more so relevant to mention, atleast the traded volume of the group to which the entities belong, if not their individual contribution. Needless to say, the notice is silent as regards the individual contribution of the entities. Thus, as explained above in this order, the show cause notice has the same vagueness in respect of this period also. Considering the charge alleged against the entities, as stated above, the show cause notice should have contained the volume of the entities vis-a-vis the market volume. In the absence of necessary details, the entities are entitled for a benefit of doubt in respect of the said period also.

10. In respect of the third period (June 23, 2000 to September 2000), as per the show cause notice, NSE observed various instances of structured deals executed by CFL Securities Limited, DGP Securities Limited, Fincap Portfolio Limited and HB Securities Limited. With regard to the allegation of structured deals executed by CFL Securities Limited and DGP Securities Limited, RRB stated that it was not connected to the said trades in any manner. It was the case of RRB that as regards the trades of HB Securities Limited in Settlement Nos. 2000027 and 2000028 listed in Annexure 2 to the show cause notice, it had executed only a single trade (sale) for 2800 shares which constituted 0.79% of the market gross. In respect of the allegation of structured/cross deals as mentioned in paragraph 6 to the show cause notice, RRB stated that no such details are given and that in the absence of such details it would not be possible for it to offer any comments. In respect of the allegation of matched transactions executed on September 26, 2000 (Annexure 3), RRB stated that it had purchased 11,099 shares on the said date through the stock broker Fincap Portfolio Limited. According to it, the notice mentioned 10,844 shares which were found to be structured/matched transactions. RRB contended that if its intention was to carry out a structured transaction, it would have executed trades for the entire 11,099 shares in a matched manner. It further stated that, its purchase of 11,099 shares constituted a mere 0.77% of the total traded volume at NSE during the period June 23, 2000 to September 2000. In respect of the transactions mentioned in Annexure 3 to the show cause notice, HSIL stated that the said figures would clearly establish that the quantities were not at all matched. I note that the said annexure indicate seven transactions on September 26, 2000 involving 10,844 shares. As per the show cause notice, they were matched transactions. The allegation is that, HSIL (seller, through the stock broker HB Securities Limited) and RRB (buyer, through Fincap Portfolio

Limited) have entered into such transactions. From the said Annexure, I note that, in three trades, there was a difference of seven minutes in respect of the buy and sell orders. Further, in one trade, there was a difference of one minute between the buy and sell orders. It is not the case in the show cause notice that the entities manipulated the share price through such transactions. Further, the show cause notice does not explain as to how the said transactions of the entities had by itself created artificial appearance of trading even in respect of the third period. Thus, the entities are entitled for a benefit of doubt for this period also.

11. The show cause notice also alleged that the 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 not seen supported by 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.

12. It is pertinent to note the contention of the entities that, even according to NSE, there was no irregularity in the trading pattern of the scrip (VXL). Mr. H.S Chandoke, the counsel appearing for HSIL brought my attention to the following observation made by NSE in its Report submitted to SEBI in the matter:

“It has been observed that the dealing through the various shortlisted trading members has apparently not influenced the price movement as the dealing was mostly widespread in nature.”

“In view of the above, no apparent irregularities could be established in the trading pattern of the scrip.”

13. In view of the above reasons, I am of the considered view that the details mentioned in the show cause notice in respect of the trades of the entities, are not sufficient enough to find them guilty of the charge. Accordingly, they are entitled for a benefit of doubt in respect of the alleged contravention of Regulation 4(b) of the PFUTP Regulations. In view of the above finding, I do not consider it necessary to deal with the other submissions of the entities.

14. In view of the foregoing, I, in exercise of powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11 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 to Har Sai Investments Limited and RRB Securities Limited in the matter of VXL Instruments Limited, without any directions.

DR. K.M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA

PLACE: MUMBAI DATE: SEPTEMBER 24, 2010