Order in respect of Transparent Shares and Securities Private Limited

Under section 12(3) of the SEBI Act, 1992 and regulation 28 (2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 in respect of Transparent Shares and Securities Private Limited, Member, NSE (SEBI Registration No. INB231221335), Member, BSE (SEBI Registration No. INB011221331). In the matter of Edserv Softsystems Limited. 1. SEBI had conducted investigation in respect of the Initial Public Offer (hereinafter referred to as 'IPO') of shares by Edserv Softsystems Limited (hereinafter referred to as 'ESL’) which was listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) on March 02, 2009. 2. Investigation inter alia revealed that M/s. Transparent Shares and Securities Private Limited (hereinafter referred to as 'the noticee'), which is a registered stock broker having membership with the BSE (SEBI Registration No. INB011221331) and the NSE (SEBI Registration No. INB231221335), had applied for 1,60,000 shares in the IPO of ESL in its own name on behalf of its four clients viz. Jigisha Vadodaria (16,000 shares), Kiran Ramkrishna Chaudhary (16,000 shares), Anurag S. Saboo (1,10,000 shares) and Sandeep Satish Saboo (18,000 shares).

It was found that the IPO was open for subscription from February 05, 2009 till February 09, 2009 and the request letters from the said clients to the noticee to apply for IPO were dated February 12, 2009 i.e. after the closure of the issue. It was noted from the demat account transaction statement (DP ID: IN300126; Client ID: 11188557) of the noticee that the 85,294 shares that were allotted in response to the applications made by the noticee were credited in the noticee’s beneficiary account. The ledger accounts of the said clients with the noticee revealed that their ledger accounts were debited against the applications made by the noticee in the IPO of ESL. The said clients had traded during the period March 02, 2009 to March 05, 2009 and were net sellers of 85,294 shares in the market and the delivery was made from the beneficiary account of the noticee. 3. It was also revealed during investigation that the delivery of the shares by the noticee on behalf of the respective clients was at the discretion of the noticee and not in the ratio of their application size. The clients Jigisha Vadodaria as well as Kiran Chaudhary both had agreed for application of 16,000 shares on their behalf but delivery on their behalf were given for 8,000 shares and 9,500 shares, respectively by the noticee.

4. Based on the findings of investigation, SEBI initiated proceedings against the noticee in terms of SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as 'the Intermediaries Regulations') and appointed the Designated Authority ('DA') to inquire into the alleged violation of the provisions of regulations 3 (a), (b), (c), (d) and 4 (1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as ‘PFUTP Regulations’) and regulation 7 read with clauses A(1), A(3), A(4) and A(5) of the Code of Conduct for stock brokers as specified in Schedule II of the SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as ‘Stock Brokers Regulations’). 5. The DA submitted his report (Report) dated April 30, 2012, finding the noticee guilty of violating the provisions of regulations 3 (a), (b), (c), (d) and 4 (1) of the PFUTP Regulations and clauses A(1), A(4) and A(5) of the Code of Conduct for stock brokers as specified in Schedule II read with regulation 7 of the Stock Brokers Regulations and recommended that the noticee be prohibited to take up any new assignment for a period of one week.

6. After considering the Report, a show cause notice dated May 16, 2012 (‘SCN’) enclosing therewith a copy of the Report in terms of regulation 28 (1) of the Intermediaries Regulations was issued to the noticee, asking it to show cause as to why action should not be taken against it as recommended by the DA or higher penalty should not be imposed upon it, as deemed fit by the Competent Authority. The noticee replied to the SCN vide its letter dated June 19, 2012. Opportunity of personal hearing was granted to the noticee on September 05, 2012 when Shri Ankur Choksi, director of the noticee appeared before me and made submissions. The submissions of the noticee are inter alia as following: (a) It denies that it violated provisions of law as alleged. It repeats, reiterates and reconfirms the contents made vide its reply dated November 02, 2011. (b) It had applied on behalf of its clients upon specific instructions and request from them. It has submitted that the said clients were keen on applying in the IPO of ESL, however, the decision to apply in the IPO was taken by them very late i.e. on February 06, 2009 and because of paucity of time, they were not in a position to apply themselves and requested the noticee to make application of shares of ESL on their behalf and debit their respective accounts.

If the said clients were to apply directly when they decided on February 06, 2009 complying with the formalities would have consumed 4 working days and the clients would have missed investing in the IPO of ESL as the bidding terminals would have closed by then. The said clients were known to the noticee and were trading with it since long. The noticee had received oral instructions from the said clients to invest on their behalf in the IPO on February 06, 2009 and the written request letters were issued by them on February 12, 2009. Therefore, the noticee had applied for 1,60,000 shares of ESL on behalf of the said clients and later taken delivery of the shares for them. The credits were also transferred to the respective client's account. This itself establishes that there was no mala fide intent. The noticee acted in good faith so that its clients do not lose the opportunity of subscribing in the IPO. (c) The above act of the noticee was not manipulative or fraudulent and there was no manipulative intent in applying in the IPO of ESL. The noticee had indulged in such transaction for the first time and was not aware that such practice was wrong.

It had complied with all other applicable regulations. The noticee earned a total of `7700 only by executing the said transaction. Had it been known that such transaction was wrong, it would not have done so for earning `7700. The noticee was ignorant and applied in the IPO of ESL for the benefit and interests of its clients. (d) The noticee has requested that a lenient view may be taken and if at all it is decided that the act of the noticee was wrong, a warning may be issued to it. 7. I note that the consent application filed by the noticee in the matter on January 23, 2012 has been rejected and communicated to it on December 11, 2012. I, therefore, proceed to deal with the case on merit. I have considered the Report of the DA, the evidence relied upon by him, the submissions of the noticee and other material available on record. The relevant provisions of Regulations under which the DA has charged the noticee are reproduced hereunder: PFUTP Regulations “Prohibition of certain dealings in securities 3. No person shall directly or indirectly— (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made thereunder; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made thereunder.

4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities Stock Brokers Regulations Regulation 7.

The stock-broker holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II. Code of Conduct (Schedule II) - A. General (1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. (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 stock broker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness. (5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him. 8. I note that the facts alleged in the SCN have not been disputed by the noticee except that it has denied the charge of violation of the regulations as described in the SCN.

The noticee has submitted that its clients had taken the decision to apply in the IPO of ESL on February 06, 2009 but there was paucity of time with the clients to apply in the IPO as it could have taken 4 days for the clients to apply themselves in the IPO. I note that the IPO of ESL was open for subscription from February 05, 2009 till February 09, 2009. In my view, the clients of the noticee had reasonable time to apply in the IPO themselves till February 09, 2009, even though February 07 and 08 were Saturday and Sunday. 9. Now coming to the issue whether the noticee made applications in IPO with the connivance of its clients in a fraudulent or manipulative manner, I am of the view that the charge in that regard needs to be established on the basis of a higher degree of probability. I note that though the DA in his Report has raised various concerns that may arise on account of the methods adopted by the noticee, no material has been brought on record to indicate that the noticee had dealt in the securities of ESL in a fraudulent and manipulative manner or has used any manipulative or deceptive device or contrivance to defraud in the IPO.

10. I agree with the observations of the DA that by making applications in IPOs by pooling applicants from one category of investors and applying in another, the allocation of shares may be fraudulently obtained, depending upon the subscription level of the issue. I, however, note from the findings of the DA that category of applications has not changed or manipulated by the applications made by the noticee in HNI category since even the individual application by those four clients would have been made in the HNI category, had they individually applied themselves in the IPO. This is evident from the fact that the accounts of all the four clients were debited by the noticee for more than ` one lac (highest limit for an individual to apply in retail investor at the relevant time).

11. I note that 85,297 shares of ESL were allotted to the noticee in response to its application for 1,60,000 shares. On receipt of credit of these shares in its demat account, the noticee did not transfer them to the accounts of its respective clients. The DA has found that the clients of the noticee net sold 85,297 shares of ESL in the market during March 02 to 05, 2009 and the noticee met the delivery obligation of the clients from its demat account. Considering the allotment of 85,297 shares in response to application for 1,60,000 shares in the HNI category, the client wise break -up of shares applied by noticee, allotted to noticee on behalf of respective client and sold by respective client is given in the following Table:-

S.No. Name of the Client Number of shares Number of Number of shares applied shares allotted net sold 1. Jigisha Vadodaria 16,000 8,529 8,000 2. Kiran Ramkrishna 16,000 8,529 9,500 Chaudhary 3. Anurag S. Saboo 1,10,000 58,640 58,794 4. Sandeep Satish Saboo 18,000 9,596 9000 Total 1,60,000 85,294 85,294

12. From the above table it is noted that the noticee had delivered entire 85,294 allotted shares to meet the delivery obligation of respective clients and each client sold either more or less than the shares that he /she was supposed to get from the noticee on allotment. From these observations, it can reasonably be inferred that the noticee made adjustment in the shares received and held by it for one client to settle delivery obligation of the other. 13. In the facts and circumstances of this case and taking into account the findings of the DA, I find merit in submission of the noticee that it did not intend to defraud in the IPO process and corner shares in the IPO of ESL. I, therefore, do not hold noticee guilty of violation of regulation 3 of the PFUTP Regulations. I, however, agree with the observations of the DA that manner of making application in the IPO as found in this case raises concerns particularly when neither the issuer nor the merchant banker will be able to know the actual beneficiaries of the allotment. Such practice may facilitate multiple applications as the broker may apply on behalf of clients by hiding their identity and the clients may also apply separately. It may also entail avoidance of KYC process and enable banned entities to apply or use the illicit money for making investments in the IPOs. It is expected from an intermediary such as a stock broker to carry on his business in a manner which is fair, transparent and compliant with provisions of law. I am of the view that the modus operandi adopted by the noticee pose threat to the market integrity and interferes with fair and smooth functioning and orderly development of the securities market. I, therefore, find that while applying in the IPO for its clients the noticee indulged in non-genuine, unfair and unaccepted market practice that is detrimental to the investors' interest and interferes with the fair and smooth functioning of the securities market. Further, the noticee showed scant regard to statutory code of conduct applicable to it. In view of these findings and observations, I find that the noticee contravened the provisions of regulation 4(1) of the PFUTP Regulations, clauses A (1), A(4)and A(5) of the Code of Conduct for stock brokers as specified in Schedule II read with regulation 7 of the Stock Broker Regulations.

14. I note that the IPO of ESL opened at the price of ` 60 and it had touched intra-day high of `147. It is the clients of the noticee who gained by selling the shares and the noticee merely earned its brokerage. Further, the noticee is not found to be indulged in defrauding anyone, either the applicants/investors or issuer in the IPO. I, however, find that the noticee being a registered intermediary was expected to be more diligent and should not have indulged in unfair practices as found in this case. Hence, in order to secure proper management of the noticee, the action by way of prohibition to take up any new assignment for a period of one week from the date of this order, in my view, will be commensurate with the contraventions found in this case. 15. I, therefore, in exercise of powers conferred upon me under section 19 read with section 12(3) of the SEBI Act, 1992 and regulation 28(2) of the SEBI (Intermediaries) Regulations, 2008, hereby prohibit M/s. Transparent Shares and Securities Private Limited, Member of the BSE (SEBI Registration No. INB011221331) and the NSE (SEBI Registration No. INB231221335 to take up any new assignment for a period of one week from the date of this order. 16. This order shall come into force immediately from the date of this order. 17. A copy of this order shall also be forwarded to NSE, BSE and the Depositories to ensure compliance.

DATE: April 4th, 2013 RAJEEV KUMAR AGARWAL PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA