Order In the matter of Design Auto Systems Ltd in respect of D. G. Goenka Equities Pvt Ltd

IN THE MATTER OF DESIGN AUTO SYSTEMS LIMITED In respect of D.G. Goenka Equities Pvt. Limited (SEBI Registration No. INB 011105633) Date of hearing: August 13, 2010 Appearances For Noticees: Mr. Yogesh Kedia, Director, D.G. Goenka Equities Pvt. Ltd. For SEBI: Mr. Kinjal Ghose, Presenting Officer Mr. G. Ramar, General Manager Mr. N. Sunil, Assistant General Manager Mr. Pradeep Kumar, Legal Officer ORDER Under Regulation 28 (2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008

1. This case has been referred to me pursuant to the order dated July 13, 2010, passed by the Hon’ble Securities Appellate Tribunal (hereinafter referred to as ‘SAT’) in Appeal No. 235 of 2009.

2. I note that Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) had passed an Order dated October 29, 2009, under Regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, in respect of D.G. Goenka Equities Pvt. Limited (hereinafter referred to as ‘noticee’) registered with Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) as a stock broker bearing SEBI registration No. INB 011105633), in the matter of Design Auto Systems Limited (hereinafter referred to as ‘DASL’). Vide this Order of SEBI the certificate of registration of noticee was suspended for a period of two months.

3. This Order of SEBI was challenged by noticee before the Hon’ble SAT in Appeal no. 235 of 2009. The Hon’ble SAT, while disposing of this appeal observed as under: “One of the primary documents on which the learned counsel for the respondent Board is heavily relying upon to attribute knowledge of the aforementioned fact to the appellant is a notice dated January 09, 2002 issued by the Bombay Stock Exchange furnishing information to its members regarding the listed and unlisted securities of the company. Admittedly, this notice is not on the record of the appeal paper book nor was it before the whole time member when the impugned order was passed and there is no mention of this notice in the investigation report not a copy of it was furnished to the appellant along with the show cause notice. In other words, the document now sought to be relied upon has seen the light of the day today and the appellant was never confronted with this document and, therefore, it had no opportunity to offer its response thereto. Since this document has some bearing on the question that arises for our consideration in this appeal, we deem it appropriate to set aside the impugned order and remit the case to the whole time member to examine the issue in the light of this document and also in the light of the other material that is available on the record. A copy of this notice has been furnished to the appellant through its counsel and the WTM shall provide an opportunity to the appellant to file its response, thereto and thereafter, proceed to decide the case after affording an opportunity of hearing. The appellant may file his response on or before August 02, 2010 whereafter the WTM shall proceed to decide the matter in accordance with Law.” 4. Pursuant to this, the noticee has replied vide its letter dated July 30, 2010. In compliance of the order of Hon’ble SAT an opportunity of personal hearing was afforded to the noticee on August 13, 2010. On the date fixed Mr. Yogesh Kedia, Director of the noticee appeared for the personal hearing and made oral submissions. Having complied with the principles of natural justice now, I proceed with the matter taking into consideration the material available on record.

5. I note that the earlier order of SEBI dated October 29, 2009, had extensively dealt with the matter and the only new evidence is the BSE notice dated January 09, 2002. Considering this, my findings as regards the rest of matter remains same and are being reiterated below.

6. I note that SEBI had conducted investigation into the buying, selling and dealing in the scrip of DASL for the period of August, 2001 and January, 2002, pursuant to a preferential allotment made by it to another company namely Bonanza Biotech Ltd. (hereinafter referred to as ‘BBL’) on swap basis in the ratio of 1:1. During the period of investigation the scrip of DASL was listed at the Bombay Stock Exchange (hereinafter referred to as ‘BSE’), Madhya Pradesh Stock Exchange (hereinafter referred to as ‘MPSE’) and Ahmedabad Stock Exchange (hereinafter referred to as ‘ASE’). Investigation report states that DASL had made a preferential allotment of 10 crore shares (hereinafter referred to as ‘said shares’) to BBL on October 29, 2001, which was about 14 times of the pre-issue paid up capital of DASL. The consideration for this was another preferential allotment of 10 crore shares made by BBL to DASL on the same date which was about 5 times of the pre-issue paid up capital of BBL before allotment. No exchange of cash was found between the two companies. Pursuant to this, DASL first made an application for listing of the said shares allotted to BBL to MPSE and later on to BSE also. MPSE granted listing permission albeit with undue haste and without exercising due diligence. However, no trading permission was granted in respect of the said shares. The listing application which was made subsequently to BSE was kept pending, upon apprehension of commission of certain violations in the process by DASL. No application for listing was made to ASE by DASL. On the basis of listing permission given by MPSE, the Central Depositories Services Ltd. (hereinafter referred to as ‘CDSL’), a registered depository, dematerialized the said shares of DASL and credited them to the beneficial owner account of BBL.

After allotment, a major chunk of shares allotted by DASL to BBL were offloaded by BBL through a network of entities including the noticee, Coverage and Consultants, Pinnacle Finstock Pvt. Ltd., C.D. Equisearch, Mr. Shyam Parwaney and Mr. Manoj Ganeriwala on the trading platform of BSE, even though these shares were not listed on BSE. Such offloading was contrary to the provisions of BSE bye-laws and constituted bad delivery on the exchange. However, neither the BSE Clearing House nor any of the other parties to the trade could detect this illegality, since the shares were in the dematerialized form and thereby fungible with other legally allotted shares. As a result, a number of innocent investors who purchased such unlisted shares on BSE were defrauded and saddled with shares which could not be sold legally on BSE.

7. When this illegality came to the notice of SEBI and BSE, the demat account of BBL was frozen, after recovering a portion of the shares that were offloaded by it. A reconciliation of the transfer of 10 crore unlisted shares from BBL’s demat account was also worked out and the same stood as under:

Reconciliation of transfer of 10 crore shares of DASL received by BBL Total shares credited - 10,00,00,000 Shares frozen in the DP a/c - 9,01,78,926 Shares delivered in the - 98,21,074 market/ unaccounted for Details of shares delivered in the market/ unaccounted for Coverage & Consultants 33,33,669 Pinnacle Finstock 30,78,864 CD Equisearch 15,00,000 Shyam Parwaney 2,00,000 Manoj Ganeriwala 8,75,000 D.G. Goenka 8,33,541 Total 98,21,074

BSE suspended trading in the shares of DASL from January 14, 2002. Upon instructions from SEBI, BSE also annulled all transactions in DASL shares allotted to BBL which had taken place on the exchange till that date. The annulment was subsequently set aside by the Hon’ble High Court of Judicature at Mumbai by an order passed on February 28, 2003 in W.P. No. 209 of 2003 and connected matters (a batch of Writ Petitions filed by aggrieved stock brokers of BSE), mainly on the ground of intervention of innocent third party interests and the matter was remanded to BSE’s Governing Board for deciding the same afresh after giving a hearing to the petitioners in the said matter. The annulment order was subsequently reversed by the Governing Board itself as they found that the interest of innocent investors would otherwise be affected.

8. The investigation inter-alia revealed that the noticee while trading substantially in the scrip of DASL during the period of August, 2001 to January, 2002, sold 8,33,541 shares of DASL on behalf of its clients Virgin Finance Pvt. Ltd. (hereinafter referred to as ‘VFPL’) and Murali Nair. It was observed that both VFPL and Murali Nair were related to/ associated with DASL.

9. Based on the findings of the investigations, SEBI initiated enquiry proceedings against the noticee in terms of SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as ‘Enquiry Regulations’), by appointing an Enquiry Officer under Regulation 5(1) of Enquiry Regulations vide order dated February 03, 2005. SEBI appointed the Enquiry Officer, to enquire into the alleged violation of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (hereinafter referred to as ‘PFUTP Regulations’) and Code of Conduct prescribed for stock brokers as contained in Regulation 7 of the SEBI (Stock Broker and Sub-brokers) Regulations, 1992 (hereinafter referred to as ‘Broker Regulations’). The Enquiry Officer submitted her report dated December 06, 2006, recommending thereby a penalty of suspension of certificate of registration of the noticee for a period of twenty days. The major observations made by the Enquiry Officer in her report are as follows:

i. Out of around 6 crore unlisted shares transferred by BBL to various entities, the noticee received 51,00,000 shares for the purpose of future transactions and margin obligations (50,00,000 shares directly from BBL and 1,00,000 shares from Murali Nair, an employee of DASL). The receipt and transfer of shares of DASL, from and to the demat account of noticee (account no.: IN300888 14171657) has been detailed in the following table: Date Recd. from Transferred to No. of shares Balance 13.11.2001 BBL 50,00,000 12.12.2001 Murali Nair 1,00,000 51,00, 000 13.12.2001 Delivered in Market 23,100 12.01.2002 CDSL a/c of DG Goenka 76,900 50,00,000 12.01.2002 Delivered in market 5,16,541 14.01.2002 Delivered in market 2,17,000 42,66,459 15.03.2002 BBL 42,66,459 Nil ii. The noticee aided and abetted the management of BBL and DASL in propagating the fraud of off-loading unlisted shares of DASL. In the said process, the noticee executed numerous matched transactions of large quantities while trading on behalf of Murali Nair, an employee of DASL.

iii. The noticee, VFPL, Murali Nair, DASL and BBL are related/ connected/ associated with each other on the basis of observations as under:

a. The directors of VFPL, Prashant Rajgarhia and Smt. Rita Garg (Smt. Rita Garg is sister of Prashant Rajgarhia) are also the directors of DASL. Smt. Rita Garg is wife of Sarvesh Garg, the Chairman & Managing Director of DASL. As on March 31, 2001, VFPL held 17,84,900 shares of DASL which decreased to 9,65,700 shares as on March 31, 2002. b. As per the Annual Report of DASL for the year 2001-02, Murali Nair was Executive Officer (Secretarial) of the company. c. From the certified copy of the resolution passed in the Board of Directors meeting of BBL held on June 05, 2001, it was observed that Manish Ganeriwala, director of BBL, was authorized to sell the shares of DASL held by BBL, through recognized brokers. d. VFPL used to contact Manoj Ganeriwala, director of noticee, to place orders. Incidentally, Manoj Ganeriwala and Manish Ganeriwala are cousins. Further, Manoj Ganeriwala (in the demat account jointly held with his wife) received 60,00,000 shares through off-market from BBL and Murali Nair before the trading in the shares of DASL was put under suspension. The receipt and transfer of shares of DASL from and to the demat account of Manoj Ganeriwala (account no.: IN300888 13162987), is detailed in the following table:

Date Recd. from Transferred to No. of shares Balance 13.11.2001 BBL 50,00,000 50,00,000 22.11.2001 Pinnacle Finstock 50,00,000 Nil 12.12.2001 Murali Nair 10,00,000 10,00,000 29.01.2002 Coverage & Consultants 2,78,180 Pinnacle Finstock 47,11,320 59,89,500 05.03.2002 Arihant Capital Markets 8,75,000 14.03.2002 BBL 41,14,500 14.03.2002 Murali Nair 10,00,000 Nil e. The client account of Murali Nair was opened on July 15, 2001. Murali Nair was introduced by Prashant Rajgarhia, the director of DASL and VFPL to the noticee. The fact that the introducing authority is directly linked to DASL, could not have escaped its notice. f. Murali Nair was sole in-charge of the transfer of shares in physical form to the Share Transfer Agent, Ankit Consultancy Services Ltd., for dematerialization on behalf BBL, DASL, VFPL and Sarvesh Garg. g. DASL, BBL, VFPL and Murali Nair all shared the same contact address, i.e. 3A, Ratlam Kothi, AB Road, Saket Tower, Indore. h. The client account of VFPL with noticee, opened on June 28, 2000, shows Smt. Rita Garg as authorized signatory. i. The preferential allotment of 10 crore shares of DASL amounting to `100 crores to BBL took place on October 29, 2001. On November 13, 2001, just after 15 days of the said allotment, 50 lakh unlisted shares each were transferred to the demat accounts of Manoj Ganeriwala, Murali Nair and that of noticee. j. The noticee had furnished two letters dated November 11, 2001 and November 30, 2001. The letter dated November 11, 2001 addressed by Murali Nair to the noticee speaks about the acceptance of 50 lakhs shares of DASL to be transferred to the demat account of the noticee by BBL on behalf of Murali Nair for future transactions and margin obligations.

The other letter dated November 30, 2001, addressed by BBL to the noticee, states that BBL is the original holder of these shares of DASL transferred to the account of noticee, towards security and margin obligations, on behalf of Murali Nair. k. The noticee and one of its directors received large number of shares of DASL, just a few days after the preferential allotment. It is apparent from the manner of credit/ debit of these shares from the respective accounts of the said entities that there were reasons beyond what has been stated by the entities, emanating due to nexus existing between these or otherwise there is no reasonable explanation for the transfer of such shares in bulk, to any unknown entity or even an entity barely acquainted to them. Even if, the contention of the noticee, claiming total ignorance of the underlying reason of transfer of shares were to be accepted or considered that the noticee was not known to BBL, the transfer of shares to one of its directors (Manoj Ganeriwala) simply to deal in the market is implausible, especially, considering that these were the shares coming directly from the account of BBL. l. Manoj Ganeriwal had stated that the shares were erroneously transferred to his demat account and had also furnished a letter from BBL dated November 11, 2001, stating that the transfer so made into his demat account was due to oversight and that the said shares were supposed to be transferred to Pinnacle Finstock Pvt. Limited.

Even if, one were to accept this explanation an important point of consideration is that the transfer had taken place on November 13, 2001, while the said letter is dated November 11, 2001. This leads to the reasonable conclusion that the transfer of shares had already taken place, before the receipt of the letter. Furthermore, unless Manoj Ganeriwal, especially, his demat account details was known to BBL, such transfer even by mistake was not possible. m. On November 13, 2001, the noticee received 50 lakh shares of DASL from BBL. The next transfer of 1 lakh shares of DASL was a month later, from the account of Murali Nair on December 12, 2001. There does not appear to be any plausible reason for noticee to hold such a huge quantity of shares i.e. 50 lakhs for a month, without executing even a single transaction on anybody’s behalf. The noticee had however contended that the said shares were towards margin and future requirements and that certain transactions did take place. Incidentally, the first transfer took place only on December 13, 2001, that too for a meager quantity of 23,100 shares.

The second transfer of 5,16,541 shares of DASL took place after a month later i.e. on January 12, 2002. On the same day a transfer of 76,900 shares was made from one demat account of the noticee to another demat account of it. n. From the whole gamut of activities, it appears that only one major transfer in the scrip i.e. of 5,16,541 shares, took place after 2 months. In the mean time 50 lakh shares of DASL continued to remain in the account of the noticee for more than 2 months. Murali Nair transferred shares to the tune of 10 lakh shares of DASL into the account of Manoj Ganeriwala on the same date as that of the date of transfer to noticee i.e. on December 12, 2001. From a close study of the transactions of noticee and Manoj Ganeriwala as brought out in the tables above, it is apparent that 42,66,459 shares and 51,14,500 shares of DASL were lying in their respective demat accounts, which were then transferred back to BBL and Murali Nair almost at the same time i.e. while Manoj Ganeriwala transferred the said shares on March 14, 2002 to BBL and Murali Nair, the noticee transferred the said shares on March 15, 2002, into the account of BBL.

iv. Noticee indulged in matched trades. The findings made by the Enquiry Officer in this regard are as follows:

a. Eleven trades, executed between the noticee and other counter parties related in one way or the other with BBL/ DASL were found to be synchronized in nature, were. Details of such trades are as under: Membe Buy Client Buy Order Counterparty Sell Order Count Trade Price Trade r Code Time time er Qty. Time D0171 Murali Nair 14:31:29 H.B. Stock Hold 14:32:31 D0486 100000 5.70 14:32:32 D0171 Murali Nair 15:15:29 R.S. Capital 15:15:52 D0785 15700 5.70 15:15:52 D0171 Murali Nair 15:15:29 R.S. Capital 15:15:52 D0785 9300 5.70 15:15:52 D0171 Murali Nair 15:15:29 R.S. Capital 15:16:15 D0785 20700 5.70 15:16:15 D0171 Murali Nair 15:15:29 R.S. Capital 15:16:39 D0785 25000 5.70 15:16:39 D0087 Vargin/Bonanza 11:05:16 Murali Nair 11:04:43 D0171 100000 5.40 11:05:16

D0087 Vargin/Bonanza 11:05:49 Murali Nair 11:04:53 D0171 98200 5.45 11:05:49 D0171 Murali Nair 14:39:36 NA 14:40:07 D0291 8949 5.50 14:40:08 D0171 Murali Nair 10:18:10 NA 10:17:03 D0006 9500 5.20 10:18:11 D0171 Murali Nair 10:18:40 NA 10:17:03 D0006 6700 5.20 10:18:41 D0171 Murali Nair 10:18:43 NA 10:17:03 D0139 10000 5.20 10:18:43 b. A close reading of the above table shows that there was a matching of buy/ sell quantity and price in almost all the trades, the orders were placed almost within a minute. This proximity in entering orders at the same price and for the same quantity, resulting in almost perfect matching in all the trades, indicates synchronization in the logging in of the orders, albeit executed on the screen of the exchange. One could accept it as a coincidence in case of a solitary incident or two. However, the same happened regularly.

c. Considering the relationship among the entities as detailed earlier, the element of predetermination between the entities stands established. Further, all the 11 synchronized trades were only for their client Murali Nair.

v. Noticee played crucial role in the introduction of unlisted shares of DASL into the market. The observations made by Enquiry Officer in this regard are as under:

a. The Disciplinary Action Committee (hereinafter referred to as ‘DCA’) of BSE, vide its order dated August 07, 2002, held the noticee to be responsible to some extent, in facilitating the trading in the unlisted shares of DASL, between November 10, 2001 and January 11, 2002 and accordingly penalized them by suspending their membership rights for a period of three months w.e.f. August 08, 2002 and warned the noticee to desist in entering into such transactions in future. Importantly, the noticee was represented before the DAC by its director, Manoj Ganeriwala.

The noticee challenged the decision of the DAC, before the Hon’ble High Court of Bombay by filing a writ petition. The High Court, vide its order dated October 01, 2002, stayed the direction issued by the DAC against the noticee. In the meantime, the noticee appealed before the Governing Board of BSE which in its order dated December 05, 2002 reduced the period of suspension and limited it to the duration, for which the member had remained suspended i.e. September 08, 2002 to October 01, 2002.

b. Furthermore, BSE had annulled all the transactions in the scrip of DASL, of all entities for the period from November 10, 2001 and January 11, 2002. This matter was however brought before the Governing Board of BSE for fresh consideration. The Governing Board of BSE after considering submission of all concerned entities passed a speaking order dated April 10, 2003. While discussing the issue of annulment of trades in the scrip of DASL, the Governing Board of BSE in its cited order, directed that those transactions would not be annulled where the settlements were already completed and as it would not be possible to restore shares quo ante in all respects. In this respect the exchange administration was directed to return the shares and the money to the buying and the selling members in respect of their dealings in the scrip of DASL, inter-alia on the ground that selling brokers, who might have acted bonafide, must not be necessarily penalized.

However, considering the peculiarities of the case, the view taken by the Governing Board of BSE that all the brokers, in question, had acted in the normal course of the business and in good faith, is not fully acceptable. Had this been true, the noticee would not have indulged in synchronization of trades or carried out off-market trades, that too particularly in the scrip of DASL, or trade for entities connected with DASL directly/ indirectly viz. Murali Nair of DASL and VFPL. The same might not have been co-incidental but prompted by reasons borne out of a common objective between them and the said entities. This is perhaps the reason that very rightly; the DAC suspended the membership rights of the noticee for a period of 3 months which was subsequently reduced to two months by the Governing Board of BSE.

c. It has also been contended on behalf of noticee that their clients were not aware of the fact that the shares of DASL were unlisted. The argument is based on the contention that no one could be aware of the difference between both the listed and unlisted shares of DASL, considering that CDSL had issued identical ISIN numbers to both such shares. Such an argument could have been accepted, but for the following factors:

- The noticee had executed synchronized/ matched trades on behalf of its clients. - Off-market transfer of 50,00,000 shares of DASL each to the noticee and Manoj Ganeriwala (one of the directors of the noticee), on the same date i.e. November 13, 2001. Both the entities disposed off the balance shares of DASL in and around the same time (i.e. within a gap of one day) in the month of March. - Manish Ganeriwala, cousin of Manoj Ganeriwala, was on the Board of BBL. - Routing of all the transactions in the scrip of DASL by Murali Nair through Manoj Ganeriwala. - The shares for Murali Nair, employee of DASL, came from the demat account of BBL. - For the proceedings before the DAC of BSE, the noticee was represented by Manoj Ganeriwala.

10. However, SEBI felt that the penalty recommended by the Enquiry Officer was not commensurate with the alleged violations committed by the noticee as brought out in the Enquiry Report. Subsequently, a Show Cause Notice (hereinafter referred to as ‘SCN’) dated May 10, 2007, under Regulation 13(2) and 13(5) of the Enquiry Regulations was issued by SEBI to noticee, asking it to show cause as to why a penalty higher than the penalty recommended by the Enquiry Officer should not be imposed on it. Noticee was advised to reply to SCN, together with the documents that it may choose to rely upon in support of its reply within fifteen days of the receipt thereof. It was also informed that in case of failure, it would be presumed that it has no explanation to offer and SEBI shall be free to take such action in the manner as deemed fit. A copy of the Enquiry Report was also forwarded to the noticee along with the said SCN.

11. Noticee, vide its letter dated June 11, 2007 replied to the SCN and asked for an opportunity of personal hearing. Accordingly, an opportunity of personal hearing was granted to the noticee on August 18, 2009. On the date fixed noticee appeared through its authorized representative and made submissions. Noticee also filed written submissions dated August 18, 2009. The contentions of the noticee in its reply and written submissions, in brief, are:

a. Had no links with the promoters of DASL, BBL and VFPL. Had no knowledge that the shares were unlisted as these were in demat form and there were no restriction of any sort on trading of the shares of DASL. Further, the announcement (financial result) put up on the BSE website also reflected the enhanced capital base. b. Had not traded in its proprietary account or in the account of its directors. Trading through it had been on a couple of days only. There was nothing to draw the attention of the noticee as the trading was at a steady price of around `5.50. c. The clients in question had a long relationship with the noticee, transactions had been regular, their payments and deliveries being on time and there was nothing that would arouse its suspicion. d. It was submitted that the two clients namely, Murali Nair and VFPL, approached for sale of certain shares of DASL, in the ordinary course of business. They were trading through the noticee since 1997 and 1999 (VFPL and Murali Nair, respectively). They regularly carried on trading with the noticee since such years and complied with their obligations regularly and on time. They traded in fairly large quantities in blue chip scrips and other shares.

e. The 50 lakhs shares received from BBL on November 13, 2001, were in the form of advance pay-in and margin requirement on behalf of the client Murali Nair. The amount was received in client principle account on the instruction of both the parties namely BBL and Murali Nair. The letter dated November 11, 2001, addressed by Murali Nair to noticee speaks about the acceptance of 50 lakhs shares of DASL to be transferred to the demat account of noticee by BBL on behalf of Murali Nair for future transactions and margin obligations. Vide letter dated November 30, 2001, BBL informed noticee that it was the original holder of 50 lakh shares which had been transferred to the demat account of noticee towards security margin or future obligation on behalf of Murali Nair. f. The shares were delivered in the normal course to their account for the benefit of its clients. Shares are regularly taken by brokers as margin for trading of clients and indeed this is permitted and approved by SEBI and BSE directives. This was one of the objectives of noticee while taking such shares (50,00,000 shares in question) as delivery in their account so that they could use these to meet deficits, if any, of the concerned clients. Another objective of taking shares was that the noticee would be able to give delivery of the shares to the exchange immediately on sale without waiting for the client to deliver it to the noticee. No misuse of such shares could be possible merely because the shares were lying in the noticee’s account. g. As the things became clear about the fraud, noticee was advised to return back the balance shares to the original holder and hence they returned the shares to BBL. No intention of carrying out any price manipulation, fraud, etc. and no extra benefit derived out of the transactions. h. At the relevant point of time any notice issued by exchange would be made public and made available to brokers through a printed bulletin, which was released and circulated the following day. The notice of January 09, 2002 was circulated on January 10, 2002. Had not off-loaded any share of DASL on or after January 10, 2002. The transfers made after January 10, 2002 were made to facilitate deliveries to the stock exchange and these were not fresh sales.

i. Mr. Manoj Ganeriwala was the paid director of noticee. Noticee can neither be held liable for negligence of its employee nor can the noticee be said to have participated or abetted the alleged irregularities by him. Manoj Ganeriwal had taken delivery of 50 lakh shares of DASL in his personal capacity and without informing/ taking prior approval from the management of noticee. The receipt of shares by one of its directors in his personal capacity does not prove that the noticee was a part of the scheme of off-loading of unlisted shares. However, Manoj Ganeriwal has been removed from the office. j. No fixed counter parties in the trades and these were highly scattered. There were at least fifty counter party broker involved in all the trades executed by the noticee in the scrip of DASL during the relevant period. Most of the trades were executed within a small price range of around `5.50. The noticee had carried out order instructions received from its clients. It had no knowledge about the counter parties. k. The noticee also submitted that the Enquiry Officer in her report has erroneously calculated the period of suspension undergone by it as 23 days i.e. from September 08, 2002 to October 01, 2002. However, in reality the noticee had under gone suspension for a period of 54 days i.e. from August 08, 2002 to October 01, 2002. In this regard the noticee provided copies of the directions/ communications dated August 07, 2002 and December 20, 2002 issued by BSE to the noticee. l. The unilateral suspension by BSE had not been viewed in its proper context and reality. BSE had ordered suspension for three months. The noticee after making basic attempts to resolve the issue through BSE, filed a writ petition before the Hon’ble High Court of Bombay. However, before the final order of the Court for such petition, BSE agreed with the noticee in an out of court settlement and the suspension was lifted with immediate effect from the date of such agreement and thus the suspension ended after about two months. There was no adverse finding against the noticee and it was an agreement reached by mutual consent.

m. Certain authorities failed to carry out their duties and there were certain lacunae in law.

12. I have carefully considered the Enquiry Report, SCN, reply of the noticee, written submissions dated August 18, 2009 and July 30, 2010 and the material available on record. My findings thereof are as under:

a. I note that the noticee had mainly transacted in the scrip of DASL on behalf of two of its clients namely, Murali Nair and VFPL. It has been submitted by the noticee that the said clients were trading through it since 1997 and 1999 (VFPL and Murali Nair, respectively) and complied with their obligations regularly and on time. It has also been stated that they traded in fairly large quantities in blue chip scrips and other shares. During the Enquiry proceedings noticee had submitted the copies of know-your-client (hereinafter referred to as ‘KYC’) agreement form of VFPL and Murali Nair. From the same, I observe that the client account of VFPL was opened on June 28, 2000, while the account of Murali Nair was opened only on July 15, 2001. Therefore, the submission made by the noticee that the said two clients were their long standing clients is not correct as seen from their own documents. The noticee has argued that at the relevant point of time the KYC documentation were not mandatory but was optional. I find no merit in this argument of noticee as the SEBI circular bearing no. SMD/Policy/Circular/5 - 97 dated April 11, 1997, had set the date of completing the client registration as May 31, 1997.

b. Further, from the transaction statements of the said two clients of noticee for the period from April 01, 2001 to March 31, 2002, as provided by it, I note that Murali Nair had transacted only in two scrips namely, DASL and Reliable Plastics Ltd. It would be pertinent to note that BBL was originally incorporated as Reliable Plastics Ltd. on June 04, 1981. The company changed its name to BBL on June 08, 2001. Murali Nair had bought 7,19,562 shares of DASL and sold 6,89,662 shares of DASL during the year 2001-02. Out of the total transaction value of `73,46,183, trading in the shares of DASL accounted for `69,05,777. The balance accounting for trading in the shares of BBL. During the period August, 2001 and January, 2002, the noticee bought 6,05,900 shares and sold 5,76,000 shares of DASL on behalf of Murali Nair. The net position on behalf of the said client being a buy of 29,900 shares. VFPL on the other hand had transacted in few other scrips through the noticee. During the year 2001-02, VFPL had sold 5,36,941 shares of DASL. Out of the total transaction value (buy plus sale) of `30,76,033 (sales consideration being `19,89,447.15), trading in the shares of DASL accounted for `8,74,178. During the period August, 2001 and January, 2002, the noticee sold 5,16,541 shares of DASL on behalf of VFPL.

In view of the discussion above, the argument put forward by the noticee that the transactions were in normal course of trading of the said clients and accounted for a small part of their overall transactions does not hold water.

c. Further, the noticee has argued that 51 lakh shares of DASL were transferred to its account towards security margin/ future trading obligation on behalf of Murali Nair. However, I find that these shares were used by noticee to meet market obligations of VFPL for which no authorization appears to have been granted to it. It is important to note here that no shares were received either from VFPL directly or from any other entity on its behalf. A perusal of the letter dated November 30, 2001, from BBL to noticee (submitted by the noticee) shows that the transfer of 50 lakh shares were towards security margin of future market obligation on behalf of Murali Nair.

Therefore, the submission made by the noticee that they acted in the normal course of their business and had no knowledge that huge number of unlisted shares of DASL was being off-loaded by various entities, especially their clients namely, Murali Nair and VFPL, is not correct.

d. Further, the receipt of 60 lakh shares of DASL [from BBL (50 lakh) and Murali Nair (10 lakh)] by Manoj Ganeriwal, one of the directors of noticee, in his personal account shows the extent to which the noticee and one of its official, in his personal capacity, was involved in the whole scheme. Noticee has submitted that Manoj Ganeriwal has been removed from its office. To this, I note that even if, Manoj Ganeriwal has been removed from the office of noticee, the acts committed by him during the tenure with the noticee are binding upon noticee and it cannot escape its liability for such acts. I note that in a separate order dated November 07, 2007, passed by SEBI, Manoj Ganeriwala has been directed to restrain from accessing the securities market and been prohibited from buying, selling or dealing in securities either directly or indirectly for a period of three years.

e. With regards to the alleged synchronized/ matched trades executed by the noticee on behalf of its clients, it has been argued that the trades were scattered and the counter party broker/ clients were well dispersed. I note that the Enquiry Report has not brought out any relation/ connection/ association among the noticee and/ or its clients with the counter party broker and/ or clients to show that they were acting in concert. Having seen this, I am of the view that the supporting details provided by the Enquiry Officer in this regard falls short of establishing the charge that the referred 11 trades were outcome of synchronization of orders

13. Now, the issue remains is about the BSE notice dated January 09, 2010. I note the argument of noticee that at the relevant point of time any notice issued by exchange would be made public and made available to brokers through a printed bulletin, which was released and circulated the following day. The notice of January 09, 2002, was circulated on January 10, 2002 and after this it had not off-loaded any share of DASL on or after January 10, 2002. It has been stated that the transfers made after January 10, 2002, were made to facilitate deliveries to the stock exchange and these were not fresh sales.

I have carefully considered the argument of noticee and note that the notice dated January 09, 2002, specifically bears the name of BBL, which was enough for the noticee to arouse some suspicion on the shares received from its client and BBL and it should have confirmed at least about the status of shares from the exchange as per the BSE notice. It is seen that noticee has not placed any record to show that they raised any doubt/ sought any clarification/ taken any precaution to prevent the delivery of the fictitious shares in the market.

14. Having considered the above discussion, I note that the noticee while transacting in the scrip was having imputed knowledge of the fraud being committed by BBL and other entities, it offloaded the unlisted shares on the trading floor of BSE and impliedly represented that these were listed shares which could be validly delivered in BSE as per its bye-laws. The clearing house of BSE and various counter parties to the transactions, were unsuspecting and took delivery of such shares (as the shares were in the demat form) aggregating in number to 98,21,074 out of which 8,33,541 shares were introduced by the noticee on behalf of its clients.

Further, the close nexus observed between noticee and BBL shows a preponderance of probability that the noticee was part of the scheme to defraud investors by palming off the unlisted shares for unjust and unfair gains at the cost of lay investors which shows that the noticee had knowingly aided its clients.

15. The findings made above clearly indicates the noticee of being guilty of having facilitated the introduction of the unlisted shares of DASL into the market on account of their collusive activities with the entities as detailed earlier. Thus, I find that the Enquiry Officer has rightly held it guilty of violating the provisions of Code of Conduct prescribed for stock brokers as contained in Regulation 7 of the Broker Regulations.

16. As regards the contention of noticee that some authorities have failed to carry out their duties and there were certain lacunae in law, I note that it has not been made clear which authority failed to carry out what duties and what were the lacunae in law which induced the noticee to act in the manner he did. Hence, I find no merit in this argument of noticee.

17. At this stage, I note that the noticee has relied upon various precedents of Hon’ble SAT for strengthening its arguments of awarding of no further punishment. I have considered the case law and find that the facts of the case are different from the present case. As detailed above, the charges leveled in the present case are more serious than the other violations committed in the securities market and the same needs to be viewed seriously.

18. While concluding the matter, I summarize my findings as under:

- Noticee received large number of shares as argued for future trades and margin purposes. However, from the records available it is seen that noticee has not shown any trade for which said shares could have been given in margin. Considering this, I note that noticee should not have accepted these shares which were lying idle with it for a considerable period of time.

- Receipt of large number of shares by the director of noticee namely Manoj Ganeriwala in off-market from BBL and his close relationship with one of the director of BBL straight give away of complicity. He was surely aware about preferential allotment of 14 times of the pre-issue capital of the company. A director of a company binds the company by his actions, it is immaterial whether he was paid a salary or not. Even if, Manoj Ganeriwala would have been just an employee, then also the company could not have been absolved of all the responsibility. Thus to sum up, I am of the considered opinion that the actions of Manoj Ganeriwala as director of noticee binds the noticee in no uncertain manner.

- From a perusal of the BSE notice, it is seen that only 62.25 lakh shares of DASL were listed prior to the preferential allotment. The receipt of 51,00,000 shares by noticee and 60,00,000 shares by its director should have definitely aroused a doubt with the noticee. There is no evidence that the noticee took any action to seek any explanation for deposit of such unusually large number of shares.

- The argument of noticee of not having traded after the BSE ban, in my opinion is no proof of innocence as the wrong was already done. Noticee has conveniently closed its eyes to such huge receipt of DASL shares by it and its director.

19. In view of the discussion above, I find noticee guilty of violation of Regulation 3 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 1995 read with Regulation 13 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003 and the Code of Conduct prescribed for stock brokers as contained in Regulation 7 of the SEBI (Stock Broker and Sub-brokers) Regulations, 1992.

20. I find that the Enquiry Officer, in her report, has mentioned that the business operation of the noticee was effectively suspended for a period of 23 days i.e. from September 08, 2002 to October 01, 2002. However, the noticee has submitted that it had under gone suspension for a period of 54 days i.e. from August 08, 2002 to October 01, 2002. In this regard the noticee provided copies of the directions/ communications dated August 07, 2002 and December 20, 2002 issued by BSE to the noticee. Having gone through the aforementioned directions/ communications issued by BSE, I find that the contention of the noticee in this regard is correct. However, it would be pertinent to note here that considering the gravity of violations and the nature of charges against the noticee, the Board (SEBI) felt that the penalty recommended by the Enquiry Officer was not commensurate with the alleged violations committed by the noticee as brought out in the Enquiry Report and a higher penalty requires to be imposed on the noticee and the SCN was issued accordingly.

I have considered the nature of violations brought out in the show cause notice, recommendation made by the Enquiry Officer, the view taken by the Board (SEBI) on the recommendation of the Enquiry officer, which was communicated to the noticee through the SCN and submissions made by the noticee. I find that the general course of events following the swap allotments made by DASL have undermined investor confidence in the demat system and in the integrity of the securities market in general. As seen above, the noticee had played an important role in the subsequent off-loading of the unlisted shares of DASL in BSE.

21. I note that pursuant to the notification of the SEBI (Intermediaries) Regulations, 2008, the Enquiry Regulations have been repealed and in terms of Regulation 38(2) of the SEBI (Intermediaries) Regulations, 2008, notwithstanding such repeal, any enquiry commenced under the Enquiry Regulations, shall be deemed to have been commenced under the corresponding provisions of SEBI (Intermediaries) Regulations, 2008.

22. I, therefore, in the exercise of power conferred upon me by Sections 19 of the Securities and Exchange Board of India Act, 1992, read with Regulation 28(2) Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby suspend the certificate of registration of the stock broker, D.G. Goenka Equities Pvt. Ltd., having SEBI registration no. INB 011105633 [PAN: AABCD 1447Q] for a period of two months.

23. This order shall come into force on expiry of twenty one days from the date of this order.

DATE : 4/1/2011 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA