Order in the matter of enquiry proceedings against SPS Share Brokers Pvt. Ltd.

Order in the matter of enquiry proceedings against SPS Shares Brokers Pvt. Ltd.

WTM/AB/EFD-1/DRA-IV/32/2019-20 SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: ANANTA BARUA, WHOLE TIME MEMBER

ORDER Under Section 12(3) of Securities and Exchange Board of India Act, 1992 and Regulation 13 of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 read with Regulations 28 and 38 of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 - In the matter of Prudential Pharmaceuticals Ltd.

In respect of: S. No. Name of the intermediary Registration No.

1. SPS Share Brokers Pvt. Ltd. (Stock Broker of BSE) INZ000206136 (Previously INB010979938)

1. Securities and Exchange Board of India (hereinafter referred to as “SEBI”) conducted an investigation into the alleged irregularities in the trading of the shares of M/s. Prudential Pharmaceuticals Ltd. (hereinafter referred to as the “PPL”) and into the possible violation of the provisions of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act, 1992”) and various rules and regulations framed thereunder.

2. On prima facie satisfaction of violation of provisions of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act, 1992”)Securities Contracts (Regulations) Rules, 1957 (hereinafter referred to as “SCRR”), SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as “Stock Broker Regulations”) and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (since rescinded) (hereinafter referred to as “PFUTP Regulations, 1995”) by SPS Share Brokers Pvt. Ltd. (hereinafter referred to as “SPS”/“Noticee”), SEBI initiated enquiry proceedings on November 21, 2006 against the Noticee under SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (since rescinded) (hereinafter referred to as “Enquiry Regulations”) for finding out the possible violations of the provisions of SEBI Act, 1992, PFUTP Regulations, 1995, Stock Broker Regulations, 1992 and SCRR by the Noticee. A show cause notice dated June 14, 2007 (hereinafter referred to as “SCN-1”) was issued by the Enquiry Officer to Noticee, under Regulation 6 of the Enquiry Regulations. The allegations levelled against the Noticee in the SCN-1 are as under: “ 4. The trading details of your own account as well as that of your client i.e. Ms. Aditi A. Dalal in the scrip of PPL are shown as under: Sl. Name of Sett No./ Sett Period Gross Rate Gross Rate No. the client Purchase Sale 01 Trading a/c 11/2001 NIL NIL 1,90,000 25.10 02/06/01 to 09/06/01 02 Trading a/c 12/2001 NIL NIL 2,08,000 31.35 09/06/01 to 2,000 33.25 16/06/01 03 Trading a/c 13/2001 NIL NIL 2,00,000 44.00 16/06/01 to 23/06/01 04 Aditi A 14/2001 NIL NIL 1,00,000 45.27 Dalal 23/06/01 to 30/06/01 TOTAL 7,00,000

It was observed that you were the highest seller in the scrip and your gross sales stood at 7,00,000 shares which represented 44.08 % of the total gross sales in this scrip during the period of investigation. Out of these, 6,00,000 shares were sold by you on your own account and 1,00,000 shares were sold on behalf of your client, Aditi A. Dalal.

5. It is alleged in the investigation report, that you were involved in matched trades with Tropical Securities and Investment Pvt. Ltd. in the month of June. 2001 (June 06, 11, 18 and 26). It is further alleged from the trade and order log that, SPS used to place the sell order first which would be matched by a corresponding buy order from Tropical Securities, thus, violating Regulation 4(b), 4(c) and 4(d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets)Regulations ,1995 read with Clauses A(1), A(2), A(3) and A(4) of the Code of Conduct prescribed under Schedule II to Regulation 7 of SEBI(Stock Brokers and Sub-Brokers) Regulations, 1992.”

3. While the aforesaid enquiry proceedings were underway, the Enquiry Regulations came to be repealed on May 26, 2008 by SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as “Intermediaries Regulations”). The Enquiry Officer (titled as “Designated Authority” under the Intermediaries Regulations), appointed in the matter, submitted enquiry report dated March 28, 2018 (mentioned as March 28, 2017 in the enquiry report), with following recommendations:

“RECOMMENDATION

19. In conclusion, I am of the view from the facts/observations made above, including the fact that factual position w.r.t client trading details/information etc were not brought out in the SCN, it would not be appropriate to hold the Noticee guilty of violating the provisions of Regulation 4(b), 4(c) and 4(d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations ,1995 read with Clauses A(1), A(2), A(3) and A(4) of the Code of Conduct prescribed under Schedule II to Regulation 7 of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. At the same time, I cannot ignore the inconsistent practices followed by the Noticee in terming its director’s trades as its own trades and also making the payment from its account towards the obligation of its director. To this extent, Noticee has failed to exercise skill, care, diligence and promptitude in the conduct of its business as a stock broker. Therefore, I am of the view that a warning may be issued to the Noticee in the facts and circumstances of the case. In terms of the provisions of Regulation 27 of the Intermediaries Regulations, I recommend that a warning may be issued to the Noticee i.e. M/s SPS Share Brokers Private Ltd, Stock Broker, BSE (Reg.No. INB010979938) for its conduct as a stock broker in the scrip of PPL.”

4. On the basis of the aforesaid enquiry report, a show cause notice dated September 19, 2018 (hereinafter referred to as “SCN-2”) was issued under Regulation 28 (1) of the Intermediaries Regulations, calling upon the Noticee to show cause as to why action as recommended in the enquiry report or any other action as deemed fit by the competent authority should not be taken in terms of Regulation 28(1) and (2) of the Intermediaries Regulations.

5. The Noticee filed its reply dated October 26, 2018 to the SCN-2. The Noticee was also granted personal hearing on January 28, 2019 and February 11, 2019 when the hearing could not be held due to adjournment of hearing sought by the Noticee. Finally, the Noticee appeared for hearing on March 14, 2019 through its advocates.

6. Brief of the submissions made by the Noticee in its reply dated October 26, 2018 and during the personal hearing on March 14, 2019, is as under:

(i) The allegations in the Enquiry Report are made on the basis of acts which were alleged to have been committed over 17 years ago, i.e. in the year 2001 and in view of the inordinate delay in initiating and completing the proceedings, the present SCN-2 ought to be discharged and charges levelled ought to be dropped. (ii) The Enquiry Report travels beyond the charges contained in the SCN-1. The Enquiry Report also exceeds the scope of enquiry, as directed under the order dated November 21, 2006, wherein an enquiry was initiated on the presumption that the Noticee was the purchaser and seller of the shares of PPL whereas Enquiry Report found that the director of the Noticee was purchasing and selling the shares of PPL and such director was not a party to the proceedings. (iii) The acquisition of shares from Ms. Aditi Dalal was relevant only for the purposes of the allegations raised by SEBI in respect of violations of provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 which resulted into adjudicating proceedings and ultimately in an order dated August 22, 2013 passed by Hon’ble SAT.

Thus these allegations should not be considered for the present proceedings. (iv) All throughout the proceedings SEBI has maintained that shares were acquired by the Noticee. On this basis, SEBI had also initiated adjudicating proceedings which resulted into order dated December 19, 2012. Therefore, SEBI is now estopped from that the director of Noticee was purchasing and selling the shares of PPL, as found in the Enquiry Report. (v) SCN -2 does not explicitly set out the provisions of the SEBI Act and/or rules or regulations which stood violated by the act of Noticee. As no specific charge has been levelled against the Noticee it would be an arduous task for the Noticee to understand the same and provide an adequate reply. Thus the SCN – 2 is defective and the same be discharged and the charges levelled against the Noticee be dropped on this ground. (vi) The Noticee has faced many actions by SEBI on the basis that the Noticee was the acquirer of shares from Aditi Dalal. As it is now contended that the Noticee is in fact not the acquirer of these shares. All those actions were on wrong promises.

(vii) It was Noticee who had acquired these shares and had also defended these proceedings on that basis. At no point of time did the Noticee ever indicate that these shares had been acquired by any other third party but had always maintained that these shares were purchased for them. The allegations in the SCN-2 therefore are mere after thought and contrary to the record available with SEBI itself. (viii) The Contract Notes issued by Ms. Aditi Dalal were in the name of Noticee and not in the name of its Director. The Contract Notes are conclusive evidence of the modalities and details of the transactions and the same cannot be disregarded. (ix) Additionally, it is extremely pertinent to note that the shares were purchased from consideration paid by the Noticee not by its Director. Similarly, the proceeds of the transaction upon sale were solely received by Noticee and not its Director. It is extremely pertinent to note that Director of the Noticee had at no point in time, claimed that the shares belong to him. Therefore, it cannot be said that Noticees termed its Director’s trades as its own trades or that Noticees made payment from its account towards the obligations of its Directors.

(x) The consideration for purchase of the shares and the subsequent proceeds upon sale of the share was received by the Noticee and not its Director. Assuming without admitting for the sake of arguments that even if the shares were received in the account of the Director of the Noticee, the same in itself cannot be said to be a violation of the SEBI Act or the rules and regulations framed thereunder and no such violation has been alleged. In the aforesaid hypothetical scenario the shares would have merely been held in trust by the Director in a fiduciary capacity for an on behalf and the same ought not to be construed as an inconsistent practice particularly in view of the fact that the consideration for purchase of the shares and the subsequent proceeds upon sale of the share was not paid for or received by the Director. Thus even the aforesaid hypothetical scenario cannot be said to be inconsistent trade practices terming of its Director’s trades as its own trades or making payment from its account towards the obligations of its Director. (xi) A perusal of the SCN-2 issued now shows that it reiterates in large part, allegations made against our clients which allegations obviously have not been sustained in the inquiry which has been conducted by SEBI since no action whatsoever has been recommended in respect of the same.

7. I have gone through the SCN-1, enquiry report, SCN-2, reply dated October 26, 2018 of the Noticee and submissions made on behalf of the Noticee during the personal hearing. On perusal of all these documents, I find that SCN-1 issued by the Enquiry Officer/Designated Authority alleged that the Noticee was involved in matched trades with Tropical Securities and Investment Pvt. Ltd. in the month of June, 2001 (June 06, 11, 18 and 26), thus, violated Regulation 4(b), 4(c) and 4(d) of PFUTP Regulations, 1995 read with Clauses A(1), A(2), A(3) and A(4) of the Code of Conduct prescribed under Schedule II read with Regulation 7 Stock Broker Regulation. In the enquiry report, the Enquiry Officer/Designated Authority found that the Noticee is not guilty of violating these provisions as the allegation that Noticee sold 6 lakh shares of PPL was found to be incorrect.

8. However, Enquiry Officer/Designated Authority found the Noticee followed inconsistent practices in terming its directors trades as its own trades and also making the payment from its account towards the obligation of its director and thus failed to exercise skill, care, diligence and promptitude in the conduct of its business as stock broker for which Enquiry Officer/Designated Authority has recommended issue of warning to the Noticee. Based on the said recommendation SCN-2 was issued which resulted into present proceeding.

9. As can be noted from the above, SCN-2 has been issued on the basis of the recommendation made by the Enquiry Officer/Designated Authority, on the basis of an allegation which was not alleged in the SCN-1. I also find that shares of PPL were purchased/sold by the director and not the Noticee. Taking into account the finding in the Enquiry Report and submissions made by the Noticee, it is felt that issue of warning to the Noticee, as recommended, is not warranted in the facts and circumstances of the case. Accordingly, SCN-2 dated September 19, 2018 is disposed of.

6. This Order shall come into force with immediate effect.

7. A copy of this Order shall be forwarded to the Noticee.

-Sd- Place: Mumbai ANANTA BARUA Date: November 01, 2019 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA