Order in the matter of G.G. Automotive Gears Ltd. in respect of DPS Shares and Securities Pvt. Ltd

IN THE MATTER OF G. G. AUTOMOTIVE GEARS LIMITED In respect of DPS Shares and Securities Pvt. Limited (SEBI Registration No. INB 010986539) ORDER Under Regulation 28(2) read with Regulation 29 of Securities and Exchange Board of India (Intermediaries) Regulations, 2008 1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigation into the buying, selling and dealings in the scrip of G.G. Automotive Gears Ltd. (hereinafter referred to as ‘GGAGL’) for the period of August 01, 2002 to October 16, 2002, inter alia to ascertain any violation of SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Markets) Regulations, 1995 (hereinafter referred to as ‘PFUTP Regulations’).

2. The trading details of the persons who had traded in the scrip were collected and analyzed along with the data of the volumes contributed. During the period, the price of the scrip increased from `23 as on August 01, 2002 to `115.30 as on October 16, 2002. A sharp fluctuation in volumes were also observed in the scrip i.e. from 16,847 shares as on August 01, 2002 to 1,05,776 shares as on September 17, 2002 and from 77,041 shares as on September 18, 2002 to 19,962 shares as on October 16, 2002. The total volume traded during the investigation period was 22,75,804 shares. The price rise in the scrip was not justified by the fundamentals of company as it had not declared any dividend in the past three years.

3. The investigation prima facie revealed that circular trading by two groups of brokers and clients contributed to an unusual spurt in the traded volumes of the scrip. Out of these two groups, the group consisting of four brokers namely DPS Shares and Securities Pvt. Limited (hereinafter referred to as noticee), Unique Stockbro Pvt. Limited (hereinafter referred to as Unique), Networth Broking Limited (hereinafter referred to as Networth) and Action Financial Services (I) Limited (hereinafter referred to as Action) and their clients were found trading intra-day for 40 days in circular manner during the relevant period in the scrip. The total volume generated by way of such circular trades was 4,28,749 shares i.e. about 19% of the total quantity traded during the period under investigation. The contribution of these trades investigation revealed that through collusion, the brokers and their clients have indulged in circular and synchronized trading and transacted in the shares of GGAGL in such a manner which led to creation of artificial volumes in market leading to significant price movement in the scrip.

4. Based on the findings of investigation, SEBI initiated enquiry proceedings as 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 January 09, 2006, read with subsequent order dated November 19, 2007. SEBI appointed the Enquiry Officer, to enquire into the alleged violation of provisions of the PFUTP Regulations and the Code of Conduct specified under Schedule II of SEBI (Stock Brokers and Sub-Broker) Regulations, 1992 (hereinafter referred to as ‘Broker Regulations’). As the Enquiry Regulations were repealed with effect from the notification of SEBI (Intermediaries) Regulations, 2008, the Enquiry Officer/ Designated Authority (hereinafter referred to as the ‘Enquiry Officer’) submitted his Report dated January 22, 2009, in terms of Regulation 27 of SEBI (Intermediaries) Regulations, 2008, recommending thereby a penalty of suspension for a period of one month to the noticee for violating the provisions of Regulation 4(a), (b), (c) and (d) of PFUTP Regulations and Clauses A (1), (2), (3), (4) and (5) of the Code of Conduct prescribed for Stock Brokers in Schedule II under Regulation 7 of Broker Regulations.

5. Subsequently a show cause notice dated March 16, 2009 (hereinafter referred as SCN’) under Regulation 13(2) of Enquiry Regulations read with Regulation 28(1) and Regulation 38(2) of the SEBI (Intermediaries) Regulations, 2008, was issued by SEBI to the noticee, asking it to show cause as to why the appropriate penalty including penalty as recommended by the Enquiry Officer should not be imposed. The noticee was advised to reply to the SCN, within twenty one days from the date of receipt thereof. It was also informed that in case of failure, it would be presumed that it had no explanation to offer and SEBI shall be free to take such action in the manner as it deemed fit. A copy of the Enquiry Report was also forwarded to the noticee along with the SCN.

6. The SCN issued to the noticee returned undelivered with remark ‘office shifted’. The SCN was again issued on the new address of noticee. However, no reply was received from the noticee. Before proceeding further in the matter an opportunity of personal hearing was granted to the noticee on May 14, 2010. In the mean time, it came to light that a few details relevant to the case have not been provided to the noticee. In compliance of the principles of natural justice these details were also forwarded to the noticee vide letter dated May 19, 2010. On the date fixed noticee failed to turn up for the personal hearing without any intimation. In the interest of justice one more opportunity of personal hearing was granted to the noticee before me on June 14, 2010. This time again, the noticee did not turn up for the personal hearing in spite of due intimation thereof. Further, no communication was received from the noticee. I have seen that sufficient opportunities have been given to noticee to explain its case. In view of this, I am compelled to proceed with the matter ex-parte, on the basis of material available on record, having complied with the principles of natural justice.

7. I have carefully considered the Enquiry Report, SCN issued to the noticee and the material available on record. After having examined the said details, the issues arise for my consideration is: a. Whether the noticee in collusion with other brokers created artificial liquidity/ false market in the scrip of GGAGL? b. Whether the noticee had failed to exercise due care and diligence while dealing with its clients?

8. Whether the noticee in collusion with other brokers created artificial liquidity/ false market in the scrip of GGAGL?

a. I note that noticee had traded for its clients (i.e. Anju Gandhi, Atul Gandhi, Harshad, Soham Securities and clients with client code S and S012) in the scrip of GGAGL. It is observed from the Enquiry Report that the noticee along with other brokers namely Networth, Unique and Action traded among themselves, contributing thereby a volume of 4,28,749 shares (details as shown in Table A), constituting 19% of the total quantity traded during the relevant period in the scrip of GGAGL. As already noted above, this group of brokers had traded in the scrip of GGAGL on 40 days during the investigation period. Table – A S. No. Broker Client Name and code Shares Bought Shares Sold 1. DPS 1. Anju Gandhi 3,500 5,000 2. Atul Gandhi 28,000 30,850 3. Harshad 8,125 8,125 4. Soham Securities 40,000 48,999 5. S 2,500 2,500 6. S012 18,230 18,250 2. Unique 1. Hitesh Shah 66,775 67,825 2. Trusha Goda 29,890 37,750 3. Networth I.U. Goda 1,11,250 98,420 4. Action P.B. Chandrashekhar 1,20,479 1,11,030 Total 4,28,749 4,28,749 b. From the table A above, I note that total number of shares on buy and sell side of the group as a whole has remained same i.e. 4,28,749 shares. Out of this total noticee had purchased 1,00,355 shares and sold 1,13,724 shares while trading for its clients. It is seen that the Enquiry Report has brought out the analysis of order/ trade log in the scrip of GGAGL which reveals transaction of noticee as under: Table – B Trades of Trading period Counterparty No. of % to trades noticee From To Member Client shares synchronized 5-Aug-02 30-Sept-02 Action Chandrasekharan 26,855 26.76 Buy side 1-Aug-02 18-Sept-02 Unique Hitesh Shah 30,250 30.14 2-Aug-02 27-Sept-02 Networth I.U. Goda 18,000 17.94 19-Sept-02 16-Sept-02 Unique Trusha Goda 25,250 25.16

Total 1,00,355 100.00 1-Aug-02 26-Sept-02 Action Chandrasekhran 56,199 49.42 Sell side 2-Aug-02 03-Sept-02 Unique Hitesh Shah 13,900 12.22 7-Aug-02 19-Sept-02 Networth I.U. Goda 37,375 32.86 27-Sept-02 -- Unique Trusha Goda 6,250 5.50 Total 1,13,724 100.00

From a perusal of table B above, it is clear that the total purchase and sale of noticee in the shares of GGAGL were made from only three brokers as named above.

c. The other details available on record shows a pattern of circular trading that was being followed by the noticee and other brokers in the group, while trading in the scrip of GGAGL. The instances thereof as also brought out in the Enquiry Report are being reproduced below for reference: Table – C Date Seller Buyer/ seller Buyer/ seller Buyer/ seller Buyer Qty. 1-Aug-02 Networth Unique Noticee Action Networth 1,250 2-Aug-02 Action Networth Noticee Unique Action 1,250 5-Aug-02 Noticee Unique Networth Action Noticee 750 6-Aug-02 Unique Networth Noticee Action Unique 750 7-Aug-02 Noticee Networth Unique Action Noticee 1,250 8-Aug-02 Unique Networth Noticee Action Unique 1,250 9-Aug-02 Noticee Networth Unique Action Noticee 1,125 12-Aug-02 Unique Action Noticee Networth Unique 1,250 13-Aug-02 Noticee Networth Unique Action Noticee 1,250 14-Aug-02 Noticee Networth Unique Action Noticee 1,250 16-Aug-02 Unique Networth Noticee Action Unique 1,250 19-Aug-02 Noticee Unique Action Networth Noticee 1,250 20-Aug-02 Noticee Unique Action Networth Noticee 1,250 21-Aug-02 Unique Networth Noticee Action Unique 2,500 22-Aug-02 Unique Networth Action Noticee Unique 2,500 23-Aug-02 Networth Unique Action Noticee Networth 3,750 26-Aug-02 Action Noticee Unique Networth Action 2,500 27-Aug-02 Unique Networth Action Noticee Unique 2,500 28-Aug-02 Unique Networth Noticee Action Unique 2,500 30-Aug-02 Action Networth Unique Noticee Action 2,500 2-Sep-02 Action Noticee Networth Unique Action 2,500 4-Sep-02 Noticee Action Networth Unique Noticee 2,500 5-Sep-02 Unique Networth Noticee Action Unique 2,500 6-Sep-02 Unique Noticee Networth Action Unique 2,500 9-Sep-02 Action Unique Noticee Networth Action 2,500 11-Sep-02 Unique Noticee Networth Action Unique 2,500 12-Sep-02 Networth Action Unique Noticee Networth 3,750 13-Sep-02 Unique Noticee Networth Action Unique 3,750 16-Sep-02 Action Networth Unique Noticee Action 3,500 17-Sep-02 Networth Action Unique Noticee Networth 2,500 18-Sep-02 Action Networth Unique Noticee Action 2,500

19-Sep-02 Networth Action Unique Noticee Networth 3,500 20-Sep-02 Action Networth Unique Noticee Action 3,500 23-Sep-02 Action Networth Unique Noticee Action 3,890 24-Sep-02 Action Networth Unique Noticee Action 3,750 25-Sep-02 Action Networth Unique Noticee Action 4,250 26-Sep-02 Action Networth Unique Noticee Action 4,750 27-Sep-02 Unique Action Networth Noticee Unique 3,500

From above details, I note that all the four brokers had followed the common pattern of circular trading. It is seen that on any given day, if one broker starts selling a particular quantity of shares the second broker buys it, who in turn sells it to the third broker and this third broker sells it to fourth broker, who finally sells it back to the first broker and completes the circle. As on August 02, 2002, it is seen that Action sold 1,250 shares to Networth, who further sold the same quantity to DPS, who in turn sold it to Unique, finally the same quantity was sold by it to Action.

d. From Table C, I note that the shares were being rotated in a circular manner among the group of brokers on daily basis. It is seen that the trades were so well organized as the same number of shares went back to the original seller at the end of the day. It is observed that similar pattern of circular trading was observed on 38 trading days and on all the said 38 days, all the four brokers had participated in the circular trading. Out of the said 38 days, the circular trading was started by noticee on 8 days. Having seen all this, I am of the considered view that matching of quantities entered by the entities was not accidental and shows some concerted efforts to get the orders matched with each other. The total contribution of noticee and other brokers in the group to the circular trades is as under: Table – D Name of the broker DPS Action Networth Unique No. of trades 1,864 1,863 2,053 1,710 e. I note that orders of most of the trades entered by the noticee were entered with startling proximity in the timings of entering of orders at the almost same price and quantity resulting into matching of orders. This clearly indicates synchronization in the logging of the orders, as these appears to have been punched with preconceived motive and prior arrangement that the orders would be picked up by a particular client of the group on the opposite side. The total purchase of 1,00,355 shares and sale of 1,13,724 shares of GGAGL by the noticee was synchronized with the same set of entities. I note that large number of trades were got matched regularly. The said trades were carried out for number of days and the timing for the orders so placed also matched at most instances ranging from 0-60 seconds. The occurrence of such structured and synchronized deals in circular manner persistently cannot be a co-incidence because the shares were rotated intraday within a closed group of clients and there was no change in beneficial ownership of shares. The execution of circular trading in synchronized manner repeatedly for several days by noticee and the group reveals that they were having some nexus with each other and were acting in tandem as a group.

f. I observe from the enquiry report that the circular trading in the scrip by the group was started on August 01, 2002 with a quantity of 1,250 shares, gradually the quantity increased to 4,750 shares as on September 26, 2002. I note that such circular trading also increased the price of the scrip from `23.60 per share as on August 01, 2002 to `98.25 per share as on September 27, 2002. I also note the following facts:

- A total of 7,490 trades were executed among the group of brokers and a volume of 4,28,749 shares was created accounting for 19% of the total trading volume. - Time difference between buy orders and sell orders ranged from 0-60 seconds at most instances. - The net delivery of noticee remained very less compared to the total trading. - The total intra-day volume contributed by the group ranged from 13% to 53.38%.

g. All these facts points to the active connivance of noticee with clients as it has failed to prevent such trading of its client or aroused any suspicion on the pattern of their trading and entered the trades with regularity. I note that even though the screen based trading system is faceless in nature and maintain anonymity of the counterparty broker/ client, it is also an established fact that two parties with prior intent can match their trades with each other by placing orders simultaneously at the same price. I observe that the trading pattern followed by noticee and the group is clearly in the nature of circular trades since they were the main entities who traded amongst themselves by executing synchronised trades with the intention that the orders of a particular entity get matched with the other. In the present case, the circular trading on so many days clearly reveals manipulative intent. These transactions, apart from creating artificial volume of trading, also influenced the prices, by giving an impression to others that the scrip is being actively traded at prevailing prices. I note that unknown persons cannot trade continuously by putting orders in such a pattern and contribute significantly to the total volumes in the market.

h. The above discussed role of the noticee shows that it played a vital role in the sinister game plan of manipulation of the trading in the scrip of GGAGL. The noticee by carrying out synchronized transactions and circular trading, created artificial liquidity in the scrip of GGAGL and rigged the price upwards. Thus, from the aforesaid acts of noticee, I am of the view that the charge of violation of provisions of Regulation 4(a),(b),(c) and (d) of PFUTP Regulation stands established as against it.

9. Whether the noticee had failed to exercise due care and diligence while dealing with its clients?

a. From the above discussion and considering the nature of the trades, I note that noticee should have acted vigilantly and should not have indulged in the pattern of trades which were not genuine or manipulative as discussed above.

b. According to me, the noticee should have raised some suspicion on the trading pattern of its clients in the scrip of GGAGL. Thus, I find that the noticee has failed to perform its duties which are expected from a prudent stock broker who has a duty not only towards its client but also towards the securities market. A registered intermediary is expected to have high level of compliance of the rules/ regulations and the directives issued by SEBI.

10. In view of the discussion above, I find noticee guilty of violation of said provisions of PFUTP Regulation and the Code of Conduct prescribed for stock brokers as contained in Regulation 7 of the Broker Regulations.

11. 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.

12. I, therefore, in the exercise of power conferred upon me by Section 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, DPS Shares and Securities Pvt. Limited, having SEBI Registration no. INB 010986539 for a period of one month.

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

DATE : 13/JAN/2011 PRASHANT SARAN PLACE: MUMBAI WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA