Order in respect of TCP Stock Brokers Ltd. (Now known as Pioneer TCP Stock Brokers Ltd.)

WTM/RKA/ID-6/10/2013

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: RAJEEV KUMAR AGRAWAL, WHOLE TIME MEMBER ORDER Under section 12(3) of the SEBI Act and read with regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008 against TCP Stock Brokers Ltd. (Now known as Pioneer TCP Stock Brokers Ltd.)

In the matter of dealing in shares of Orient Trade Link Ltd. 1. TCP Stock Brokers Ltd, (now known as Pioneer TCP Stock Brokers Ltd. and hereinafter referred to as "the noticee") a stock broker having SEBI Registration No. (INB010997832), and a member of the Bombay Stock Exchange Limited (BSE). The Securities and Exchange Board of India (SEBI) conducted investigations in respect of trading in the shares of M/s. Orient Trade Link Ltd.(hereinafter referred to as 'OTL') for the period from July 01, 2002 to October 28, 2002 (hereinafter referred to as "Investigation Period").

2. During the investigation period the scrip of OTL was illiquid. It was noted that the price of the scrip of OTL fell from `13 on July 1, 2002 to `3.45 on October 28, 2002. Large volumes were observed in the scrip from August 30 2002 to September 26, 2002 and October 16, 2002 to October 28, 2002. It was observed that Mr. Aushim Khetrapal, managing director of OTL and his company M/s. Vincomp Marketing Pvt. Ltd. (Vincomp) had raised loans from various persons including Mr. Gajinder Pal Dhody, director of M/s. Pramukh Securities Pvt. Ltd. (Pramukh), Mr. Ved Prakash Narula and M/s. GKK Capital Markets (GKK), a stock broker at Calcutta Stock Exchange. As Mr. Khetrapal and Vincomp were unable to make payments, they transferred or arranged transfers of huge quantities of shares of OTL to the creditors in September/ October, 2002 in lieu of the monies owed to them.

3. It was further observed that while Mr. Khetrapal’s creditors were selling shares in the market in order to recover the money, Mr. Khetrapal/ Vincomp were placing huge buy orders for the same. On most of the occasions the sell orders were placed first by one or the other creditors and then buy orders of huge quantities were entered by Mr. Khetrapal/Vincomp. At times, it was observed that Mr. Khetrapal entered his bulk buy orders first and then sell orders were placed by one or more of the other parties. There were large volume of matched trades and self trades executed by the major clients through their stock brokers/sub-brokers. The noticee was one of the major stock brokers having concentration of 17.14 % on gross purchase and 19.44 % on gross sales, respectively. The noticee mainly dealt on behalf of its registered sub-broker Shree Balaji and its clients namely, GKK and MLD Securities Pvt. Ltd.

(MLD). Shree Balaji and GKK dealt in the scrip on behalf of Mr. Khetrapal and Vincomp and MLD dealt on behalf of Mr. Dhody and his company 21st Century Media. While Shree Balaji was a registered stock broker, GKK and MLD dealt on behalf of their clients without being registered as sub-broker of the noticee. It was thus, alleged that noticee allowed its clients to act as unregistered sub-brokers.

4. It was also observed that GKK and MLD had executed several matched trades on behalf of their clients and MLD allowed third party delivery to its clients. It was thus alleged that the noticee acted in concert with its sub-brokers / clients and allowed delivery adjustments to its clients by accepting delivery against their pay-in obligations from third parties. Further, there were numerous matched trades executed between Mr. Khetrapal and M/s. Vinocomp Marketing Private LTd. (Vincomp), a company owned and controlled by Mr. Khetrapal, who were trading through GKK. In view of this, it was alleged that the noticee and its sub brokers/clients, who were related/known to one another and to the OTL, entered into trade transactions, in the illiquid scrip of OTL, that were not genuine but were only mirroring the financing transactions which had taken place outside the exchange between the concerned parties. It was, therefore, alleged that the noticee failed to exercise due care and diligence while dealing with its clients and violated clause A (1), (2) and clause D(4) of the code of conduct of for stock broker as specified in Schedule II read with regulation 7 of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the 'Stock Brokers Regulations'). The provisions of said regulation 7 and clause of the code of conduct are as under-

Stock Brokers Regulations- "7. The stock-broker holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II." SCHEDULE II Code of Conduct for Stock Brokers "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."

D. Agreement between sub-broker, client of the sub-broker and main broker:— A sub-broker shall enter into a tripartite agreement with his client and with the main stock

Manipulation: A sub-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.

5. Pursuant to the investigations, SEBI appointed a Designated Authority (DA) and initiated proceedings against the noticee under regulation 25 read with regulations 38 of SEBI (Intermediaries) Regulations,

2008 (hereinafter referred to as "Intermediaries Regulations").The DA submitted her Report dated October 29, 2010, in accordance with the provisions of the Intermediaries Regulations. In the report, the DA found that the charge, that the noticee carried out transactions which were not genuine, did not stand and allegation that the noticee violated clauses A(1) and D(4) of the Stock Brokers Regulations was not established. However, the DA found that the noticee allowed its clients to act as unregistered sub-broker and knowingly allowed third party delivery against the pay-in obligations of its client. In this regard, the DA found that the noticee has violated the provisions of clause A (2) of the code of conduct for stock brokers as specified under Schedule II read with regulation 7 of the Stock Brokers Regulations and recommended that the noticee may be warned in terms of regulation 27(vi) of the Intermediaries Regulations.

6. After considering the Report of the DA, a show cause notice (SCN) dated May 30, 2011, was issued to the noticee under regulation 28(1) of the Intermediaries Regulations calling upon it to show cause as to why the action as recommended by DA should not be taken against it or higher penalty should not be imposed on it as deemed fit by the Competent Authority. The noticee filed its reply to the aforesaid SCN vide its letter dated June 21, 2011 and also relied upon its reply dated March 29, 2010 submitted before the DA. The noticee has inter alia made following submissions in its reply: - (a) The alleged transactions are of 2002 when the regulatory regime was not that robust or strict. (b) It is correctly established in the proceedings that the noticee was not aware of GKK acting as unregistered sub-broker. However, the observation that the noticee 'was not unaware' of the fact that its client MLD was acting as sub-broker while dealing on behalf of others has been made simply on the premise that MLD had performed its pay-in obligations through demat account of a third party. The noticee has submitted that such pay-in from third party was allowed on the specific request of MLD at the account from which the pay-in was made was of its relative. Therefore, there was no lack of skill or due diligence on the part of the noticee in this regard. (c) The noticee is not connected with any of the clients or the OTL or the sub -broker. It had no financial interest in the trades except the brokerage that was nominal. Further, no transactions has been suggested in which both buyer and seller entered into trade on the same terminal or with the pre known broker. The amounts are not so huge to create suspicion. (d) As it had duly complied with KYC requirements and made personal verification of the clients and executed the clients' instructions, it would be harsh to infer that the notice knew that the clients were acting as unregistered sub-brokers or that the noticee failed to verify the credentials of the clients simply because of delivery from a third party account. (e) Therefore, the observation that the noticee knew that one of its client was acting as unregistered sub-broker and it allowed third party delivery should be deleted considering the facts and circumstances of the case and the warning may not be issued for the matter that pertains to 2002.

7. An opportunity of personal hearing was granted to the noticee on September 16, 2011 before the then Whole Time Member which the noticee had not availed despite receipt of the notice dated July 20, 2011 in that regard. Another opportunity of personal hearing was granted to the noticee on December 20, 2012 before me. The noticee, vide its letter dated December 15, 2012 and e-mail dated December 16, 2012 made further submissions. While reiterating its earlier reply, the noticee submitted that it had adequately replied to the SCN and the matter does not warrant increase of penalty although the DA had already recommended 'warning'. The noticee has further requested that the matter may be closed with the 'warning' already given by the DA which is sufficient for the cause. Vide email dated December 16, 2012, the noticee conveyed that it did not wish to attend the personal hearing in the matter.

8. In the facts and circumstances of the case, I am of the view that sufficient opportunities of being heard have been provided to the noticee and the matter can be proceeded with on the basis of the material available on record. Accordingly, I have considered the Report, the SCN, submissions made by the noticee and the relevant materials available on record. I note that in her Report ,the DA examined the following charges alleged against the noticee:- " (a) The Noticee allowed GKK and MLD, registered client of the Noticee to deal on behalf of their clients on BSE and thus GKK and MLD acted as an unregistered sub broker of the Noticee. (b) The Noticee allowed delivery adjustments to its clients by accepting delivery against their pay-in obligations from third parties. (c) From the trade and order log analysis, numerous matched trades were observed between Mr. Khetrapal and Vincomp who were trading through GKK, client of the Noticee. It is alleged that the Noticee and its sub brokers/clients, who were related/known to one another and to the Company, entered in trade transactions that were not genuine trade transactions but were only mirroring the financing transactions which had taken place outside the Exchange medium between the concerned parties and the Noticee failed to exercise due care and diligence while dealing with its clients."

9. I note that as regards the first charge, DA did not find any evidence to show that the noticee was aware that GKK was acting as unregistered sub-broker while dealing on behalf of its clients in the scrip of OTL as alleged and gave benefit of doubt to the noticee. As regards the allegation that MLD was acting as unregistered sub-broker while dealing for its clients, the DA observed that MLD had traded on behalf of its clients, Mr. Dhody and 21st Century Media on BSE. The gross purchases and sales of MLD for these clients during the investigation period was 4,08,449 shares and 8,39,905 shares, respectively. On October 17, 2002 and October 21, 2002 shares were transferred to the pool account of the noticee from the demat account of Pramukh, a company belonging to Mr. Dhody although neither Mr. Dhody nor Pramukh were clients of the noticee. In view of this, the DA observed that the noticee 'was not unaware' that its client MLD was dealing on behalf of others and found that the noticee allowed MLD to deal as unregistered sub-broker on BSE. The noticee has not disputed such transfer of shares to its pool account from the demat account of Pramukh. It has rather admitted that it had allowed such transfer from the third party. However, it had claimed that such transfer was allowed on specific request of MLD and the account from which the shares were transferred was of its relative. I find that the noticee has failed to establish its claim on the basis of any evidence.

10. I note, from the Report, that on October 17 and October 21, 2002, 40,000 shares (in settlement numbers 142) and 60,000 shares (in settlement number 143)were transferred from the demat account of Pramukh to the pool account of the noticee. It is established that the noticee was aware of third party deliveries received by its client, MLD.

11. Further, it is undisputed fact that the sub-broker of the noticee, Shree Balaji traded in the scrip of OTL during the investigation period as described in the following Table:-

Trades of Shree Balaji for its client Sl. No. Name of the Client Quantity Bought Quantity Sold 1. Mr. Khetrapal 10,100 shares 1,76,993 shares 2. Vincomp 54,000 shares 58,000 shares 3. Mr. Ved Prakash Narula 4,015 shares 33,204 shares

12. The DA has observed that the delivery of shares on behalf of Mr. Khetrapal had come from the accounts of Vincomp and the noticee has not disputed this fact. From the noticees own submissions it is clear that the noticee was aware of the third party deliveries being accepted by its sub-broker, Shree Balaji against the pay-in-obligation of its clients.

13. There is no dispute that during the investigation period the scrip of OTL was illiquid. The noticee was one of the major brokers through whom the clients had traded in the scrip during the investigation period. The clients of MLD had traded in huge volume. Since the substantial quantity of shares were transferred to the pool account of the noticee from the demat account of Pramukh, a company belonging to Mr. Dhody, the client of MLD with the knowledge of the noticee it can be safely inferred that MLD was dealing in the scrip on behalf of its clients Mr. Dhody and 21st Century Media Works. In my view, while so dealing, MLD was acting as an unregistered sub-broker. The facts and circumstances of this case clearly suggest that the noticee knew that MLD was dealing on behalf of other clients as with regard to the trades of MLD the shares were transferred to its pool account from the demat account of Pramukh. Further, the noticee knowingly allowed third party delivery as found by the DA and there is no material on record to infer or hold otherwise than what has been found by the DA.

14. In this case, the fact that the scrip in question was an illiquid scrip and huge volumes were traded by the noticee on behalf of its clients taken together with the fact of third party delivery, etc. should have undoubtedly alerted the noticee to suspect that something was amiss in the trades of its clients. It ought to have enquired with regard to the client/sub-broker for the third party delivery being received. To this extent the broker has not exercised its due diligence. The noticee was expected to be diligent and use required skill and care while acting as a stock broker for the trades of its clients/sub-broker, in which as found by DA, the noticee failed. I note that in the scheme of the Stock Brokers Regulations significant responsibilities are entrusted upon the stock brokers to exercise due skill, care and diligence in conduct of their business. The degree of skill, care and diligence expected of a registered intermediary like the noticee is more than any common investor or trader. In my view, the noticee has also failed to exercise due care, skill and diligence and has, thus, violated clause A (2) of Code of Conduct for stock brokers specified under Schedule II read with regulation 7 of the Stock Brokers Regulations.

15. With regard to the third charge, the DA has observed that the available material and documents do not show connection/relationship of the noticee with the other broker/sub-brokers, clients or the OTL. The DA has further observed that the materials available on record do not indicate, in any manner, as to how the noticee indulged in market manipulation. In this regard also, I do not find any material to hold otherwise against the noticee with regard to this charge and agree with the findings and observations of the DA the allegation of violation of clause A (1) and D (4) of the Stock Brokers Regulation does not stand against the noticee.

16. I note that the transaction in question relate to the year 2002. In my view, in the facts and circumstances of the case as found by the DA, the lapses by the noticee as found by the DA do not warrant any serious enforcement action against the noticee. However, the noticee, being a stock broker and supposedly having professional competence, should take due care and be more vigilant while executing trades on behalf of its clients in future.

17. The SCN is accordingly disposed of.

Date: March 25th, 2013 Rajeev Kumar Agarwal Place: Mumbai Whole Time Member Securities and Exchange Board of India