Order in respect of SPS Share Brokers Pvt. Ltd.

ORDER Under regulations 28(2) and 38(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 against SPS Share Brokers Pvt. Ltd. (SEBI Registration No. INB010979938, INB230979933) In the matter of Ravalgaon Sugar Farms Ltd. and Shrenuj & Company Ltd. Date of Hearing: June 4, 2013 For Noticee: Shri Gaurav Joshi, Advocate Shri Manish Chhangani, Advocate Shri Sandeep Shah, Director of the Noticee Shri Manish Dave, Director of the Noticee

For SEBI: Shri B. Rajendran, General Manager Shri S. Biju, Joint Legal Advisor Shri Siddhesh Lotlikar, Assistant General Manager Shri Parag Kumar Sinha, Assistant Legal Advisor Ms. Vanya Singh, Assistant Legal Advisor

1. The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) had conducted investigation into the dealings in the scrip of Ravalgaon Sugar Farms Limited (hereinafter referred to as ‘Ravalgaon’) for the period of May 04, 2001 to June 29, 2001 and in the scrip of Shrenuj & Co. Limited (hereinafter referred to as ‘Shrenuj’) for the period of April 30, 2001 to June 27, 2001. During the period of investigation, the scrips of Ravalgaon and Shrenuj were listed on Bombay Stock Exchange (hereinafter referred to as ‘BSE’) and the National Stock Exchange (hereinafter referred to as ‘NSE’). 2. During the relevant period, at the BSE, the Ravalgaon scrip opened at Rs. 3300 on May 16, 2001 and touched a high of Rs. 5555.30 on June 4, 2001 with fluctuating volumes. The scrip closed at the upper circuit price between May 25, 2001 to May 31, 2001. Thereafter, the price of the scrip fell to Rs 3925 on June 27, 2001. Volumes of 1012, 1001 and 950 shares in the said scrip were observed on May 8, 2001, May 21, 2001 and June 28, 2001 respectively.

3. Similarly, in Shrenuj, the price of the scrip at the BSE moved between Rs. 37.05 and Rs. 43.70 during the relevant period with fluctuating volumes. Large volumes of 52,310 and 18,332 shares were observed on May 3, 2001 and June 27, 2001 respectively.

4. The investigation revealed that SPS Share Brokers Pvt. Ltd. (hereinafter referred to as the "Noticee") had traded in the above mentioned scrips on BSE during the relevant period. These trades were undertaken by the Noticee on behalf of its client Ms. Aditi Asim Dalal. The Noticee is a member of both the BSE and the NSE and is also registered with SEBI bearing Registration Nos. INB010979938 and INB230979933.

5. Investigations revealed, inter alia, that the Noticee, while trading in the scrips of Ravalgaon and Shrenuj appeared to have aided and abetted its client Ms. Aditi Asim Dalal in the creation of artificial volumes in the scrips of Ravalgaon and Shrenuj with the counterparty broker Tropical Securities & Investments P. Ltd. (hereinafter referred to as "Tropical").

6. Based on the findings of the investigation, SEBI initiated enquiry proceedings against the Noticee in terms of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as the “Enquiry Regulations”’), by appointing an Enquiry Officer under Regulation 5(1) of the Enquiry Regulations vide two separate orders both dated January 21, 2004, to enquire into the alleged violation of provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the “PFUTP Regulations”) and the Code of Conduct for Stock Brokers specified in Schedule II of the SEBI (Stock Brokers and Sub-Broker) Regulations, 1992 (hereinafter referred to as the “Broker Regulations"). The Enquiry Officer submitted the Enquiry Report dated July 26, 2004, in terms of Regulation 13(1) of the Enquiry Regulations recommending thereby a penalty of suspension for a period of five months to be imposed on the Noticee for violating the provisions of Regulation 4 (b), (c) and (e) of the PFUTP Regulations and Clauses A(1), (2), (3) and (4) of the Code of Conduct prescribed for Stock Brokers in Schedule II read with Regulation 7 of the Broker Regulations.

7. Subsequently, a Show Cause Notice dated July 30, 2004 (hereinafter referred as the “SCN”) under Regulation 13(2) of the Enquiry Regulations was issued by SEBI to the Noticee asking it to show cause as to why action as may be considered appropriate should not be taken against the Noticee for allegedly having aided and abetted its client Ms. Aditi Asim Dalal in the creation of artificial volumes in the scrips of Ravalgaon and Shrenuj. The Noticee was advised to reply to the SCN within fifteen days from the date of receipt thereof. It was also informed that in case of failure, it would be presumed that it had no explanation to offer and SEBI shall be free to take action in the manner as it deemed fit. A copy of the Enquiry Report was also forwarded to the Noticee along with the SCN.

8. The Noticee replied to the SCN vide its letter dated August 30, 2004. Subsequently, vide letter dated August 21, 2009 the Noticee filed an application for settlement of proceedings through the consent mechanism in accordance with the SEBI Circular dated April 20, 2007. Subsequently, the proceedings initiated under the SCN were revived as the application for consent was rejected by SEBI. Accordingly, an opportunity of personal hearing was granted to the Noticee on June 4, 2013. On the date fixed for personal hearing, Directors of the Noticee viz. Shri Sandeep Shah and Shri Manish Dave, Shri Manish Chhangani, Advocate and Shri Gaurav Joshi, Advocate appeared for the Noticee and made oral submissions. Subsequently, SEBI has also received written submissions made by the Noticee vide its letter dated June 7, 2013.

9. The submissions of the Noticee, in brief, are:-  Its transactions constitute a high percentage of the total volumes because the scrip in question was illiquid. However, the said figures are of no consequence to sustain the charge of manipulation. As far as the price of sale transaction executed is concerned, the same was in conformity with the prevailing price.  It was acting pursuant to the instructions of the client. The trades were executed at the market rate and settled as per normal settlement procedure. At the time of execution it had no knowledge that its client for the sale transaction is an associate of the counter party broker and the counter party client and that they were placing orders with the intent to manipulate the scrip. Further, these are the only transactions it carried out at the behest of the client in the scrip of Ravalgaon and Shrenuj during the investigation period. There was no circular trading, no series of placement of orders at step up prices along with others to ramp up the prices of shares and there was no squaring off transactions done to create artificial volumes in the scrip.  For synchronized trading, essentially there has to be prior understanding among selling client, selling broker, buying broker and buying client.

Otherwise, the matched transactions are not possible. In the instant case, the Enquiry Report does not state that there was such prior understanding. At the relevant time it did not know that the client for the sale transaction is an associate of counter party broker and counter party client. On the screen based trading, it is not possible to know who the counter party broker is.  There is no question of creation of artificial volume as a result of its transactions, since all the transactions were delivery-based as opposed to square-off transactions.

CONSIDERATION OF ISSUES AND FINDINGS

10. I have carefully considered the Enquiry Report, reply of the Noticee, written submissions and the material available on record.

11. The legal provisions which have allegedly been violated by the Noticee are reproduced below for reference:-

Regulation 4 (b), (c) and (e) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995 – "4. No person shall – … (b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities market; (c) indulge in any act which results in reflection of prices of securities based on transactions that are not genuine trade transactions; … (e) pay, offer or agree to pay or offer, directly or indirectly, to any person any money or money's worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing, or causing fluctuations in the market price of securities."

Clause A (1), (2), (3) and (4) of the Code of Conduct for Stock Brokers in Schedule II of the SEBI (Stock-brokers and Sub-brokers) Regulations, 1992 – "A. General. (1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. (2) Exercise of due skill and care : A stock-broker shall act with due skill, care and diligence in the conduct of all his business. (3) Manipulation : A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains. (4) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness."

12. I note that the Noticee has not disputed the transactions in the scrip of Ravalgaon and Shrenuj as brought out in the Enquiry Report.

13. During the hearing the Noticee submitted that synchronization of trades has not been clearly brought out in the SCN or the Enquiry Report and hence cannot be commented upon. However, I observe from the statement of Shri Manish Dave, Director of the Noticee, that during the recording of his statement on November 11, 2003, the details of the Noticee's synchronised trading with Tropical Securities and Investment Pvt. Ltd. on June 27, 2001 were shown to him. I also note that the Noticee has sought cross-examination of Shri Milan Dalal (Director of counterparty broker Tropical during the investigation period) on the ground that his statement has been relied on by SEBI without providing the Noticee with an opportunity to cross-examine him. In this regard, I observe that the statement of Shri Milan Dalal is no longer being considered for establishing the charges vis-a-vis the Noticee. The Noticee's request for cross-examination of Shri Milan Dalal is being disposed of accordingly.

14. I have seen the trading details with respect to the Noticee in the scrip of Ravalgaon at BSE. I note that the Noticee had entered into structured/ matched transactions with its counter party broker, Tropical, on various days during the investigation period. A few instances thereof have been brought out below:-

Buy Sell Trade Total % to Date Brok Clie Tim Qt Price Broker Client Tim Qt Price Tim Qt Price Markmarket er nt e y e y e y et gross Volu me 31/05/01 Trop Harbing10:34:03 300 5075.00 SPS Aditi 10:34:02 300 5075.00 10:34:03 300 5075.00 338 91.72 ical er 18/06/01 Trop Own 02:28:33 450 4700.00 SPS Aditi 02:28:34 450 4700.00 02:28:34 450 4700.00 471 91.72 ical 22/06/01 Trop Own 03:13:06 100 4025.65 SPS Aditi 03:12:55 100 4025.65 03:13:06 100 4025.65 111 93.69 ical 28/06/01 Trop Globe 02:33:34 550 3950.00 SPS Aditi 02:33:36 550 3950.00 02:33:36 550 3950.00 950 57.90 ical x

15. In the above trades, as can be seen, the time differential between the placement of the buy and sell order in all transactions is negligible. Furthermore, the buy and sell quantities in all the four orders are same. Even the prices quoted by both the buy and sell client are the same. It is also observed that these trades have contributed more than 83% (approx.) to gross market volume.

16. In addition to the transactions mentioned above, the Noticee had executed certain structured deals of a similar nature in the scrip of Shrenuj. The following are the transactions seen to have been executed by the Noticee in the scrip of Shrenuj on behalf of its client Aditi Asim Dalal, where the counter party broker was Tropical:-

Date of Traded Traded Trade Buy Sell Buy Sell Buy Sell trade Time Qty Rate Member Member Client Client Time Time 27-Jun-01 14:29:13 1000 33.00 Tropical SPS Harbinger Aditi Dalal 14:29:12 14:29:13 27-Jun-01 14:29:13 1000 33.00 Tropical SPS Harbinger Aditi Dalal 14:29:12 14:29:13 27-Jun-01 14:29:13 1000 33.00 Tropical SPS Harbinger Aditi Dalal 14:29:12 14:29:13 27-Jun-01 14:29:13 1000 33.00 Tropical SPS Harbinger Aditi Dalal 14:29:12 14:29:13 27-Jun-01 14:29:13 1000 33.00 Tropical SPS Harbinger Aditi Dalal 14:29:12 14:29:13 27-Jun-01 14:29:13 1000 33.00 Tropical SPS Harbinger Aditi Dalal 14:29:12 14:29:13 27-Jun-01 14:29:13 1000 33.00 Tropical SPS Harbinger Aditi Dalal 14:29:12 14:29:13 27-Jun-01 14:29:13 1000 33.00 Tropical SPS Harbinger Aditi Dalal 14:29:12 14:29:13 27-Jun-01 14:29:13 1000 33.00 Tropical SPS Harbinger Aditi Dalal 14:29:12 14:29:13 27-Jun-01 14:29:13 1000 33.00 Tropical SPS Harbinger Aditi Dalal 14:29:12 14:29:13 27-Jun-01 15:10:51 1000 32.50 Tropical SPS Harbinger Aditi Dalal 15:10:50 15:10:50 27-Jun-01 15:10:51 1000 32.50 Tropical SPS Harbinger Aditi Dalal 15:10:50 15:10:50 27-Jun-01 15:10:51 1000 32.50 Tropical SPS Harbinger Aditi Dalal 15:10:50 15:10:50 27-Jun-01 15:10:51 1000 32.50 Tropical SPS Harbinger Aditi Dalal 15:10:50 15:10:50 27-Jun-01 15:10:51 1000 32.50 Tropical SPS Harbinger Aditi Dalal 15:10:50 15:10:50 27-Jun-01 15:10:51 1000 32.50 Tropical SPS Harbinger Aditi Dalal 15:10:50 15:10:50 27-Jun-01 15:10:51 1000 32.50 Tropical SPS Harbinger Aditi Dalal 15:10:50 15:10:50 27-Jun-01 15:10:51 1000 32.50 Tropical SPS Harbinger Aditi Dalal 15:10:50 15:10:50

17. From the above table, I note that the orders were entered simultaneously within close proximity of each other for the same price and quantity which ensured matching of orders.

18. In this regard, I note that synchronised deals are made possible when the trades are put in the system with prior understanding between the counterparty brokers and clients. In such cases, prices and quantities are negotiated outside the system and orders are executed simultaneously. I find that although the aforementioned transactions executed by the Noticee in the scrips of Ravalgaon and Shrenuj give an impression that these were all synchronised and traded in to create an artificial market, there is no other evidence on record to show that the Noticee was connected to the client Ms. Aditi Asim Dalal or the counterparty broker for the transactions in the relevant scrips during the investigation period, or that the Noticee was aware of the intention of its client or the counterparty broker to synchronise their trades.

19. The Noticee has submitted that no proprietary trades were executed by it during the investigation period in relation to the scrips of Ravalgaon or Shrenuj.

20. In view of the decisions of the Hon'ble Securities Appellate Tribunal in various cases including that of Networth Stock Broking Ltd. v. SEBI (decided on June 19, 2012), I observe that in the absence of any evidence on record to show that the Noticee was connected with the client or counterparty broker, or that the Noticee was aware of the latter's intention to synchronise trades in the abovementioned scrips, it would not be legally tenable to uphold the charges of violation of regulation 4 (b), (c) or (e) of the FUTP Regulations, 1995 or clause A (3) or (4) of the Code of Conduct for Stock Brokers in Schedule II of the Broker Regulations.

21. Further, I note that the Noticee has contended that in the same scrips with the same counterparty broker Tropical, for violation of Clauses A (1) to (4) of the Code of Conduct for Brokers specified in Schedule II of the Broker Regulations, brokers M/s. Lallubhai Ranchhoddas Share Brokers Pvt. Ltd. (Registration No. INB010983630) and Rosy Blue Securities P. Ltd. (Registration No. INB010721836) were awarded the penalty of 'censure' by SEBI and advised to be careful in the future, vide SEBI orders dated February 29, 2008.

22. Having considered the above, I agree with the findings of the Enquiry Officer that the Noticee failed to exercise due skill and care as a stock broker in failing to notice and take appropriate action with respect to the structured trades consistently executed by its client Ms. Aditi Asim Dalal and the counterparty broker Tropical in the scrips of Ravalgaon as well as Shrenuj during the investigation period. Therefore, the charge with respect to violation of clauses A (1) and (2) of the Code of Conduct for Stock Brokers in Schedule II of the Broker Regulations dealing with the broker's obligation to comply with due diligence and integrity stands established.

23. However, the Noticee has also submitted that – a. it has now put in place enhanced surveillance systems, b. it stopped trading in the trading account of Ms. Aditi Asim Dalal after becoming aware of synchronised trades alleged by SEBI to have been executed by her with the counterparty broker viz. Tropical.

24. In view of the foregoing, I, therefore, in exercise of the powers conferred upon me by virtue of Section 19 of the SEBI Act read with regulations 28(2) and 38(2) of Securities and Exchange Board of India (Intermediaries) Regulations, 2008, I hereby issue a warning to SPS Share Brokers P. Ltd. bearing SEBI Registration Nos. INB010979938 and INB230979933 and advise SPS Share Brokers P. Ltd. to be careful and cautious in the conduct of its stock broking activity and not to repeat similar violations, as the same may then result in higher penalty.

DATE: AUGUST 06, 2013 S. RAMAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA