Order in the matter of Credential Stock Brokers Ltd in the scrip of Vatsa Music Ltd

ORDER UNDER REGULATION 13(4) OF SEBI (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002 READ WITH REGULATION 28 (2) OF SEBI (INTERMEDIARIES) REGULATIONS, 2008.

1. This order will dispose of the Enquiry Proceedings initiated by Securities and Exchange Board of India (hereinafter referred to as “SEBI”) against Credential Stock Brokers Ltd. (hereinafter referred to as “CSBL”) to enquire into the trading conducted by CSBL in the scrip of Vatsa Music Ltd. (hereinafter referred to as “VML”).

2. The shares of VML were listed at National Stock Exchange of India Ltd. (hereinafter referred to as “NSE”) and The Bombay Stock Exchange Ltd. (hereinafter referred to as “BSE”). Between January 7, 1998 and June 30, 1998, substantial price movements were observed in the shares of VML at NSE consequent to which SEBI asked NSE to conduct an investigation in the scrip and submit a report.

3. NSE conducted the investigation and submitted its report to SEBI in September 1998. Based on its findings for the period January 7, 1998 to June 30, 1998, NSE concluded that the spurt in prices was for reasons other than strong fundamentals of the company. During the investigation period, while trading in the scrip of VML was infrequent and negligible, the prices of the scrip showed manifold increase. The trades resulting in the upward price movement were in the nature of cross trades, with majority of the transactions being undertaken by a set group of brokers. NSE also observed that entities allegedly associated with the Vatsa group had dealt in the scrip during the above periods.

4. The price volume data for VML at NSE for the relevant investigation period i.e. January 7, 1998 to June 30, 1998 is furnished below:

TABLE A Date Opening High Low Closing Price Traded Quantity Price Price Price January 7, 1998 440 448 440 448 700 January 8, 1998 485 485 443 443 3100 January 9, 1998 486 486 444 446 5600 January 12, 1998 445.9 452 441 451 8000 January 13, 1998 451 451 445 445 3300 January 14, 1998 448 458 418.5 418.5 1200 January 15, 1998 424 424 424 424 1000 January 16, 1998 424 424 424 424 1000 January 19, 1998 436 439 436 437 5000 January 20, 1998 429 434 410 410 1600

January 22, 1998 451 451 418 418 1600 January 23, 1998 416 459 416 459 600 January 27, 1998 450 500 450 500 1300 January 28, 1998 545 545 545 545 100 January 30, 1998 573 573 573 573 100 February 2, 1998 576 576 576 576 900 February 3, 1998 576 576 530 549.25 5500 February 5, 1998 506 506 506 506 1000 February 6, 1998 556 556 556 556 100 February 9, 1998 605 605 605 605 100 February 10, 1998 602 602 602 602 100 February 17, 1998 602 602 602 602 200 February 24, 1998 604 604 604 604 500 February 25, 1998 647.2 647.2 545 545 5600 March 2, 1998 596 596 596 596 100 March 3, 1998 625 640 625 640 200 March 19, 1998 577 577 577 577 100 April 17, 1998 590 590 590 590 600 April 21, 1998 595 595 595 595 600 April 30, 1998 565 565 565 565 400 May 20, 1998 621 621 621 621 600 May 21, 1998 625 625 625 625 300 June 24, 1998 685 685 660 660 500 June 25, 1998 705 705 705 705 500

5. It can be observed from the aforesaid trading pattern of the scrip that it was highly illiquid. During the entire investigation period, there were three instances wherein there was a gap of nearly one month between two trades in the scrip.

6. While a total 52,100 shares of VML were traded over the entire investigation period, actual trading took place only on 34 days. Accordingly, the average traded volume per day works out to 1,530 shares. However of these 34 days, on 20 days, less than 1,000 shares were traded in each session. As against this marginal trading, the price of the scrip of VML increased from Rs. 440/- to Rs. 705/- i.e. an increase of 60% in 34 trading days. Furthermore, of these 52,100 shares, trades in 37,600 shares were executed as cross trades.

7. As mentioned above, during the investigation period, VML was listed both at the BSE and NSE. Typically, for a scrip listed simultaneously on both NSE and BSE, there is a congruence in the trading pattern of the scrip i.e. if there is trading interest in a scrip at NSE, similar trading interest is also reflected in the scrip at BSE. However, in the present case while the scrip of VML reflected high movement on one exchange (i.e. NSE) there was negligible/ no trading on the other exchange (i.e. BSE) during the relevant period.

8. The Investigation Report submitted by BSE in October 1998 reflects that for the period under investigation, while there was trading in the shares of VML at NSE, there were no corresponding trades at BSE. Trading in the scrip of VML on BSE took place on July 16, 1998 and July 17, 1998 at prices significantly lower than those reflected at NSE. Whereas the last traded price at the NSE was Rs.705 on June 25, 1998; the scrip was traded at BSE on July 16, 1998 at Rs. 376 and on July 17, 1998 at Rs.379.75. Thus, it was reasonably concluded therein that the prices of VML at NSE were not genuine but set up prices.

9. Vide order dated November 27, 1998 SEBI initiated a formal investigation into the dealings in the scrip of VML. During the investigation, it was found that four trading members of NSE namely Credential Stock Brokers Ltd., Narayan Securities Pvt. Ltd., Dimensional Securities Pvt. Ltd. and Prabhat Financial Services Ltd. had a cumulative trading volume of 76,800 shares out of the total 1,04,200 shares which accounted for 73.70% of the total trading in the scrip of VML at NSE. It was further found that CSBL, (SEBI Registration No. INB230903331) individually dealt in 42,800 shares out of the aforesaid 76,800 shares which accounted for 41.07% of the total trading at NSE. On the basis of the investigation, it was inter alia alleged that the scrip of VML was manipulated by these four brokers of NSE.

10. On the basis of the Investigation Report, an Enquiry Officer was appointed under the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as the “Enquiry Regulations”) to enquire into the involvement of CSBL in the alleged manipulation in the scrip of VML and possible violations of SEBI Act, 1992, SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the “PFUTP Regulations”) and SEBI (Stock Brokers and Sub brokers) Regulations, 1992 (hereinafter referred to as “Stock Broker Regulations”.)

11. Based on the evidence and materials available on record, the Enquiry Officer found CSBL guilty of violating Regulations 4(a), 4(b) and 4(c) of PFUTP Regulations and Clauses A(2) to A(5) of the Code of Conduct for Brokers specified in Schedule II read with Regulation 7 of the Stock Brokers Regulations. On the basis of the aforesaid findings, the Enquiry Officer, vide his report dated January 31, 2005 recommended that the registration of CSBL be suspended for a period of 2 months.

12. Pursuant to the Enquiry Report, a Show Cause Notice under Regulation 13(2) of the Enquiry Regulations was issued to CSBL on February 25, 2005 enclosing therewith a copy of the Enquiry Report. Vide the said Show Cause Notice, CSBL was inter alia advised to show cause as to why action, as considered appropriate should not be taken against them.

13. CSBL vide its reply dated April 18, 2005 submitted as under:

a) During the investigation period from January 1, 1998 to June 30, 1998, CSBL had executed transactions of sale and purchase in the scrip of VML on behalf of its clients. The clients who sold shares of VML during the said period through them were registered shareholders and had delivered the share certificates along with transfer deeds duly executed by them as holders. Also the entities/ individuals who had bought shares of VML had taken deliveries and had paid for the same.

b) It had issued contract notes/bills in the manner and procedure prescribed under NSE byelaws and Stock Broker Regulations.

c) It had not entered into any transaction in the scrip of VML with the intention of artificially raising or depressing the prices or to create false or misleading impression of trading or to induce any person to purchase or sell shares of VML.

d) It had not indulged in any transactions which were not genuine.

e) The allegations in the notice do not flow out of the factual position and therefore cannot be legally sustained and deserve to be dropped forthwith.

14. An opportunity of personal hearing was granted to CSBL on October 26, 2006 wherein CSBL was represented by its Managing Director Shri D. K. Agarwal. Shri Agarwal made oral and written submissions at the time of the personal hearing, reiterating the earlier submissions made by CSBL.

15. I have carefully considered the findings of the investigation, Enquiry Report, Show Cause Notices, charges levied, replies received, oral as well as written submissions and other relevant material available on record. I note that the main issues for consideration are as follows:

a. Whether CSBL has violated the PFUTP Regulations while dealing in the shares of VML duing the relevant period? and b. Whether CSBL has violated the Code of Conduct specified for Stock Brokers under the Stock Broker Regulations when undertaking the dealings in the shares of VML?

16. As states earlier, I note that during the entire investigation period, four trading members namely Credential Stock Brokers Ltd., Narayan Securities Pvt. Ltd., Dimensional Securities Pvt. Ltd. and Prabhat Financial Services Ltd. had a cumulative trading volume of 76,800 shares out of the total 1,04,200 shares traded which accounted for 73.70% of the total trading in the VML scrip at NSE. It was further found that CSBL individually dealt in 42,800 shares (Settlement No.1- 1998001 to 1998006) of these 76,800 shares accounting for 41.07% of the total trading at NSE. The details of trading are given below:

TABLE B Sr. Trading member name Buy Sell Gross Net % of total No. Qty. Qty. Qty. Qty. trading at NSE 1. Credential Stock Brokers Ltd. 21400 21400 42800 0 41.07 2. Narayan Securities P. Ltd. 8700 7800 16500 900 15.83 3. Dimensional Securities P. 5600 5600 11200 0 10.75 Ltd. 4. Prabaht Fin. Services Ltd. 4100 2200 6300 1900 6.05 Total 76800 73.70%

17. An examination of the trade and order logs obtained from NSE reveal that CSBL placed orders for shares of VML at set up price and even indulged in cross trades on several days. The details of cross trades executed by CSBL are mentioned in the table below:

TABLE C

Buy Member Buy Sell Name Client Sell Member Client Date Time Trade No. Price Qty (Code) Code Name (Code) Code January Credential Credential 7, 1998 11:58:34 9801070089258 448 500 (9271) CAGR (9271) CG12 January Credential Credential 9, 1998 13:40:36 9801090138081 445 800 (9271) CAGR (9271) CV15 January Credential Credential 12, 1998 13:23:39 9801120100239 450 800 (9271) CSIB (9271) CR19 January Credential Credential 12, 1998 13:24:56 9801120100539 452 1300 (9271) CRGC (9271) CR20 January Credential Credential 13, 1998 15:18:57 9801130145916 446 1000 (9271) CAGR (9271) CA16 January Credential Credential 15, 1998 13:02:02 9801150084338 424 500 (9271) CAGR (9271) CH11 January Credential Credential 15, 1998 13:03:30 9801150084466 424 500 (9271) CAGR (9271) CD14 January Credential Credential 16, 1998 11:23:50 9801160049371 424 1000 (9271) CAGR (9271) CD15 January Credential Credential 19, 1998 12:05:18 9801190063305 436 1000 (9271) CJER (9271) CA33 January Credential Credential 19, 1998 12:05:32 9801190063340 436 1000 (9271) CJK1 (9271) CA34 January Credential Credential 19, 1998 14:41:04 9801190108629 439 1000 (9271) CAGR (9271) CS39 January Credential Credential 20, 1998 14:14:00 9801200105677 434 400 (9271) CAGR (9271) CS37 January Credential Credential 20, 1998 14:14:58 9801200114993 410 1000 (9271) CS24 (9271) CJ14 January Credential Credential 23, 1998 13:06:26 980123006021 416 500 (9271) CAGR (9271) CH11 February Credential Credential 2, 1998 14:10:01 9802020094068 576 200 (9271) CS24 (9271) CS38 February Credential Credential 2, 1998 14:10:37 9802020094224 576 200 (9271) CSGR (9271) CP17 February Credential Credential 2, 1998 14:42:55 9802020094685 576 200 (9271) CS24 (9271) CP18 February Credential Credential 3, 1998 15:23:54 9802030112857 576 500 (9271) CS24 (9271) CA33 February Credential Credential 3, 1998 15:26:20 9802030113978 576 500 (9271) CS24 (9271) CV17

February Credential Credential 3, 1998 15:28:17 9802030114873 570 500 (9271) CAGR (9271) CA33 February Credential Credential 3, 1998 15:31:50 9802030116203 564 500 (9271) CAGR (9271) CV17 February Credential Credential 3, 1998 15:35:28 9802030118801 560 1000 (9271) CR12 (9271) CV17 February Credential Credential 3, 1998 15:54:26 9802030136374 550 1000 (9271) CAGR (9271) CA33 February Credential Credential 3, 1998 15:56:52 9802030139782 540 1000 (9271) CAGR (9271) CM17 February Credential Credential 3, 1998 15:59:18 9802030142781 530 500 (9271) CJK1 (9271) CM17 February Credential Credential 5, 1998 15:24:09 9802050107620 506 1000 (9271) CAGR (9271) CM18 February Credential Credential 17, 1998 13:40:07 9802170090585 602 200 (9271) CAGR (9271) C112

18. The details concerning the contribution of CSBL to the total trading in the scrip of VML through cross trades is mentioned in the table below:

TABLE D Date Total Traded Quantity traded by Cross Trades as % Quantity in the CSBL through of Market Volume Market Cross Trades January 7, 1998 700 500 71 January 9, 1998 5600 800 14 January 12, 1998 8000 2100 26 January 15, 1998 1000 500 50 January 16, 1998 1000 1000 100 January 19, 1998 5000 3000 60 January 20, 1998 1600 1400 88 January 23, 1998 600 500 83 February 2, 1998 900 600 67 February 3, 1998 5500 5500 100 February 5, 1998 1000 1000 100 February 17, 1998 500 200 40

19. As can be seen from Table D, on January 7, 1998 CSBL entered into cross trade for 500 shares at Rs.448/- which was the highest price for VML on that day. On January 12,1998 CSBL again entered into two cross trades at Rs.450/- and Rs.452/- for 800 and 1,300 shares respectively. The opening and the highest price on January 12, 1998 was Rs.445.90/- and Rs.452/- respectively. Similarly on February 2, 1998 and February 3, 1998 also CSBL entered into three and eight cross trades respectively.

20. I further note that on February 2, 1998 the three cross trades that were executed by CSBL were at prices which were pre determined by two NSE broker-members namely Prabhat Financial Services Ltd. (hereinafter referred to as “PFSL”) and Priyash Meven Financial Ltd. (hereinafter referred to as “PMFL”). This lead to sustenance of the set up price of VML. The details of the cross trades executed by CSBL on the said day are as below TABLE E Price Buy Member Buy Sell in Name Client Sell Member Client Date Time Trade No. Rs. Qty (Code) Code Name (Code) Code February 2, 1998 13:15:23 9802020076608 576 300 Prabhat M001 Priyash 26011 February Credential Credential 2, 1998 14:10:01 9802020094068 576 200 (9271) CS24 (9271) CS38 February Credential 2, 1998 14:10:37 9802020094224 576 200 (9271) CSGR Credential 9271) CP17 February Credential Credential 2, 1998 14:42:55 9802020094685 576 200 (9271) CS24 (9271) CP18

21. From the foregoing, it can be reasonably inferred that the trades entered into by CSBL were not genuine and were executed only to sustain the pre determined price of the VML scrip.

22. I also note that according to the statements of Managing Director of CSBL, Shri D. K. Agarwal recorded on April 8, 1999 and April 9, 1999 CSBL had dealt with large number of small clients across the country. I note that these clients dealt only in the shares of VML. However CSBL was not in possession of any member-client agreement. Further, even after repeated opportunities, CSBL failed to produce the member-client agreement. Further, it is noted that Shri D. K. Agarwal contradicted his own statement given to the investigation authorities that the client introduction forms could not be submitted by them due to an Income Tax Raids. But in his statement given to the investigating team by the member on April 08, 1999 and in reply to a specific question on client introduction forms, the member has replied that the client introduction forms would be made available to the investigating team by April 09, 1999.

23. I also note that majority of the clients of CBSL were introduced by Shri S.K. Gupta, Chartered Accountant. According to his statement recorded on April 8, 1999, Shri S. K. Gupta is a friend and Chartered Accountant of Shri D. K. Agarwal, Managing Director of CSBL.

24. I note that CSBL has taken a plea that non-execution of member client agreement cannot be treated as evidence of their involvement in any fraudulent trade practices requiring suspension of their trading membership right for a period of two months. In this regard, I wish to state that non availability of the member-client agreement is only corroborative evidence giving the strength to the findings of Enquiry Officer while upholding the charges against CSBL. The charges of fraudulent trade practices were upheld by the Enquiry Officer against CSBL after careful analysis of the trading pattern of the scrip and investigations conducted therein.

25. I also note that CSBL had entered into off-market deals in 1,000 shares of VML each for Citi Construction and Dinesh Kumar. CSBL submitted that the off-market transactions were not reported to NSE as it was not aware of such practice. This appears to be an excuse as in any case a SEBI registered entity and member-broker of NSE, CSBL cannot be allowed to take the plea that it was unaware of the acts, rules, regulations of SEBI and the rules, regulations and bye-laws of the Stock Exchange.

26. Though CSBL rejected the charge of alleged circular movement of share certificates by its clients the fact that such circular movement of share certificates took place is indicated as under: TABLE F Sett. Cert. No. Delivering Delivering Receiving Buying Client No. TM Client TM 1998002 111272 Credential Sanjay Credential Radhey Shyam Agarwal Pani 1998003 111272 Credential Harish Credential Agarwal & Co. Bhutani

27. From the above I note that the Share Certificate Number 111272 was delivered in Settlement No.1998002 by client Sanjay Agarwal to Radhashyam Pani. The same certificate was then delivered in the next settlement i.e. Settlement No. 1998003 by another client Shri Harish Butani to Sanjay Agarwal, suggesting that the movement of share certificates among the clients of CSBL took place without any corresponding trades. It can be inferred from this circular movement of shares that there is a close connection between the clients of CSBL. Though CSBL denied these trades as ‘clerical error; it never produced any document to support its claims. Instead, it just took the excuse that all the relevant documents, floppies and books of accounts were seized during an Income Tax search at their premises.

28. Be that as it may, the other trades referred above in Tables C, D and E clearly establish the involvement of CSBL in market manipulation and violation of the Code of Conduct as prescribed for Brokers. Transactions that fall within the purview of Regulation 4(a) must be with the intention of distorting the prices of securities so as to induce any other person to sell or purchase the securities. The element of deceit is an underlying factor in the transaction.

29. In this regard, the Hon’ble SAT has noted in Appeal No.2 of 2004 in the case of Ketan Parekh v. SEBI that under Regulation 4(a) once the factum of market manipulation is established, it will necessarily follow that the investors in the market have been induced to buy or sell and no further proof is required in this regard. This is because in a system of screen based trading, investors track the scrips through the screens of the exchanges only to see whether a particular scrip is active or not, whether it is trading in large volumes and whether the price is going up or down. Having regard to these factors he makes up his mind to invest or disinvest in the securities. When a person takes part in or enters into transactions in securities with the intention to artificially raise or depress the price he thereby automatically induces the innocent investors in the market to buy / sell their stocks.

30. In view of the foregoing findings and observations, I find that the trading by CSBL in the scrip of VML generated substantial volumes and created artificial market in the scrip of VML. By entering into cross trades and indulging in trades at set up prices, CSBL was able to create a false and misleading appearance of trading in the shares of VML. I thus find that CSBL was in violation of Regulation 4 (a), (b) and (c) of the PFUTP Regulations.

31. I am also in agreement with the findings of the Enquiry Officer that CSBL, by indulging in synchronized and cross deals and creating a misleading appearance of trading in the scrip of VML, failed to exercise due skill and care as a stock broker. CSBL has thus violated Clauses A(2) to A(5) of the Code of Conduct for Brokers as specified in Schedule II of the Stock Brokers Regulations read with Regulation 7 of Broker Regulations 1992.

32. The aforesaid violations committed by the Broker calls for a penalty and considering the facts and circumstances of the case, I, find that imposing a penalty of suspension as ordered herein under would be appropriate.

33. In light of the fact that the Enquiry Regulations have since been repealed, now in exercise of the powers conferred under Section 19 of SEBI Act, 1992 read with Regulation 28(2) of SEBI (Intermediaries) Regulations, 2008, I hereby impose a penalty of suspension of the certificate of registration of CSBL having SEBI Registration No. INB INB230903331 for a period of 2 months.

34. This order shall come into force on the expiry of 21 days from the date of passing of this order.

DATE: 13.01.2009 T. C. NAIR PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA