Order in the matter of Jindal Steel and Power Ltd in respect of HB Stockholdings,Harsai Investments Ltd,RRB Sec Ltd

1. On the basis of the reports submitted by the National Stock Exchange of India Limited (hereinafter referred to as NSE) and the Bombay Stock Exchange Limited (hereinafter referred to as BSE) in respect of the dealings in the shares of Jindal Steel and Power Limited (hereinafter referred to as the company), the Securities and Exchange Board of India (hereinafter referred to as SEBI) had conducted an investigation in the matter for the relevant period. NSE in its report to SEBI inter alia stated that it had observed structured deals executed by RRB Securities Limited (hereinafter referred to as RRBSL) and Har Sai Investments Limited (hereinafter referred to as HSIL) in respect of 74, 900 shares of the company. NSE further stated that the share price of the company had increased from Rs.160/- on December 7, 2000 to Rs. 401/- on February 20, 2001 and that the trade volumes have gradually increased from December 7, 2000 onwards and significantly increased from 1,01,113 shares on January 5, 2000 to 6,62,969 shares on February 2, 2001. BSE, in its report had inter alia stated that, it had observed that the share price had moved up from Rs.147.25/-on December 1, 2000 to Rs.289.10/- on January 19, 2001. BSE had also noticed that HB Stockholdings Limited (hereinafter referred to as HBSL) had traded through the stock broker, UTI Securities Exchange Limited and HSIL while trading through the stock broker, ACK Capital Management Private Limited had bought 9,645 shares of the company. It was also observed that RRBSL had traded through the stock broker, Merwanjee Securities Limited and purchased 8,165 shares of the company. Based on the said reports, SEBI had conducted an investigation into the affairs of HBSL, RRBSL and HSIL for the possible violations of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act) and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the PFUTP Regulations) while dealing in the shares of the company during the relevant period. Hereinafter HBSL, RRBSL and HSIL would be collectively referred to as the noticees and individually by their respective names.

2. Thereafter, show cause notices dated April 7, 2004 were issued to the noticees by SEBI, alleging that they had created artificial volume in the securities market by executing structured deals and therefore contravened Regulation 4(b), (c) and (d) of the PFUTP Regulations. It was also alleged that the noticees were related and that they had placed large buy-sell orders which had eventually matched, as the order time, price and quantities were similar. Thereafter, various correspondence were exchanged between HSBL and SEBI in respect of former’s demand for documents. SEBI had provided the documents in so far as they were relevant to the case of HBSL along with the show cause notice or during the opportunities of inspection. The other documents as sought by HBSL were not provided to it as SEBI considered the same as not necessary or relevant to it. Thereafter, an opportunity of hearing was granted to the noticees on September 3, 2004 before my predecessor. The noticees were also advised to file their replies before the date of the hearing. Subsequently, HBSL, vide letter dated August 25, 2004 had requested for documents and for deferring the hearing so scheduled.

HSIL, vide letter dated August 28, 2004 inter alia stated that it did not receive the show cause dated April 7, 2004 and therefore requested to cancel the hearing. It also stated that all correspondence be sent to its address at H-72, Connaught Circus, New Delhi-110001. Thereafter, certain correspondence took place between the noticees and SEBI for copies of documents. In the meanwhile, the Hon’ble High Court of Judicature at Bombay on a writ petition filed by HBSL, vide order dated September 30, 2004 directed “We request the Member, SEBI to provide copies of the documents which are relevant for the petitioner to answer the show cause notice issued by the Board. No further directions are necessary in this writ petition. This writ petition is accordingly disposed of.” Thereafter, an opportunity of hearing was granted to the noticees on November 21, 2008 before me and the same was rescheduled to December 11, 2008 on the request of the noticees. On the said date, the noticees made further requests for documents. The photocopies of the reports of NSE and BSE and the soft copies (in a floppy diskette) of the trade and order logs mentioned in the show cause notice were forwarded to the noticees.

Pursuant to the same, an opportunity of hearing in the matter was again provided to the noticees on February 18, 2009, when Mr. H.S. Chandoke, Advocate made submissions on behalf of HBSL. Mr. Abdullah Hussain, Advocate was also present during the hearing. Written submissions/reply dated February 18, 2009 in respect of the show cause notice issued to HBSL, was also filed during the hearing. Mr. Anil Goyal, director of RRBSL represented RRBSL on the said date and submitted the reply to the show cause notice, during the hearing. Mr. P.K. Mittal, Advocate represented HSIL and made submissions on the lines of the reply dated January 30, 2009 (filed during the hearing). As SEBI had issued show cause notices to the noticees in respect of certain other matters alleged to have committed by them more or less during the same period, it was thought fit in the interest of justice to conclude all the hearings before proceeding with the individual cases.

3. As the noticees had filed their replies/written statements to the show cause notice dated April 7, 2004 and were also heard on the merits of the case, I proceed to decide the case on the basis of aforesaid replies/written submissions, the oral submissions made on their behalf during the hearing and other material available on record. The issue that arises for my consideration is whether the noticees had contravened Regulations 4(b), (c) and (d) of the PFUTP Regulations, while dealing in the shares of the company, as alleged in the show cause notice. The substance of the charge is mentioned in paragraphs 5 and 6 of the show cause notice and the same is reproduced below:

“5. In the above instances the large purchase orders and sale orders, which have eventually matched, were in close proximity in terms of the time, price and quantity. It reveals that there was a prior understanding among you as buying client and selling client before the orders were put into the system. Negotiated deals were put through the trading system of exchanges under the impression of purchase and sale of shares through trading mechanism of exchanges.

6. You have created artificial volume in the market by executing structured deals and violated regulations 4(b), 4(c) and 4(d) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995.”

4. The noticees have made elaborate submissions with respect to the charges levelled against them. In terms of the show cause notice, HBSL had sold shares of the company which constituted 83.06% of the market net volume in Settlement 2000039 at NSE and the shares bought by RRBSL in the same settlement also constituted 83.06% of the market net volume. However, no further details in respect of the said trades were mentioned in the show cause notice. Moreover, it was the contention of HBSL that, as per the extracts of the investigation report (as provided to it), the period of investigation was August 23, 2000 to October 10, 2000 whereas the show cause notice had given trade details from October 3, 2000 to January 2, 2001. According to HBSL, there were only seven common dates (October 3, 2000 to October 10, 2000) as per the investigation report and the show cause notice. HBSL also contended that in such a situation it would not be appropriate for SEBI to consider, at this stage, the transactions executed prior to the period mentioned in the show cause notice. It was also the contention that there was no allegation in the show cause notice that the trades of HBSL resulted in the price rise.

During the course of hearing, Mr. H.S. Chandoke, learned advocate appearing for HBSL contended that the trades mentioned in pages 2 to 6 of the show cause notice are insufficient to establish a violation of the PFUTP Regulations. He submitted that as per the show cause notice, HBSL had traded only on October 18, 2000, December 13, 2000 and December 28, 2000, selling 4,361, 15,521 and 7,128 shares respectively on NSE and that on BSE, it had traded on December 26, 2000, having sold 17,810 shares and contended that no artificial volumes could have been created by singular trades executed on four different dates. It was further contended that there was no circulation of shares between the entities and that actual delivery had taken place. The learned counsel further contended that the show cause notice does not provide details on orders given for exact same quantities and price and the matching of trades within a short span of time. According to him, the show cause notice should contain certain basic details such as order time, price and quantity. It was his argument that, without such details it cannot be concluded that HBSL was indulged in matching trades.

It was further contended that on October 18, 2000, a sale order for 5,500 shares was placed at Rs.145.35/- when 4,361 shares were purchased by an allegedly connected entity (HB Securities Limited) at a lower price of Rs.145/-. It was also contended that on December 13, 2000, HBSL had sold 20,000 shares of which 15,521 shares were purchased by HB Securities Limited and that there was a price variation between the price offered and the actual purchase price. Again, on December 28, 2000, HBSL had sold 15,000 shares in three tranches and that 7,128 shares were purchased by RRB Securities Limited at rates lower than that offered by HBSL. As regards the trades of HBSL on BSE on December 26, 2000, it was contended that the said sale was a single transaction by HBSL when shares were sold in bulk. One of the main contentions put forward by HBSL was that though, it was alleged that certain structured deals were undertaken by it, there was no allegation that the increase in price was the consequence of its transactions. It was also the contention of HBSL that the reports of BSE and NSE concede that the share price of the company was not manipulated and that all the transactions were made at market prices.

The learned counsel further contended that in order to maintain a charge under Regulation 4 of the PFUTP Regulations, the following essential requirements have to be established by SEBI:

i. the transactions of the parties resulted in the price rise of the shares; ii. such price was artificial; and iii. that there was a manipulative intention behind such transactions;

5. The learned counsel, during the hearing strenuously contended that the show cause notice failed to show that there was any intention to manipulate the market, which according to him was a pre-requisite for a charge to be made out under Regulation 4 of the PFUTP Regulations. The submissions of the learned counsel do merit consideration. HBSL has been charged of having violated Regulation 4(b), (c) and (d) of the PFUTP Regulations. The learned counsel vehemently contended that in order to establish violation of Regulation 4(c) and (d) of the PFUTP Regulations, SEBI has to prove that:

i) the trades resulted in the reflection of prices of the securities based on transactions which are not genuine. ii) the entity had entered into purchase or sale of any securities, not intended to affect the beneficial ownership but is intended to operate only as a device to inflate, depress or cause fluctuation in the market price of the securities.

According to the learned counsel, the aforesaid necessary ingredients were absent in the show cause notice. He also submitted that there was no mention in the show cause notice that the trades of HBSL had resulted in the reflection of prices of securities of the company during the relevant period. It was also not alleged that the transactions were carried out for the purpose of inflating, depressing or causing fluctuations in the market price of the securities. According to HBSL, even as per SEBI Circular dated September 14, 1999, negotiated deals were to be put through the stock exchange’s order matching mechanism and therefore if negotiated deals are put through the stock exchange, it cannot be held for manipulation. It was the argument of HBSL that in the absence of an allegation of fraudulent activity, it cannot be faulted for its trading volumes. Further, according to HBSL, there was nothing in the show cause notice or in the reports of NSE and BSE, to show any ‘calculated act’ on its part, which created false or misleading appearance of trading in the shares of the company. RRBSL and HSIL made similar submissions as that of HBSL.

RRBSL, vide its written statement/reply had inter alia contended that it had not traded in the shares of the company on February 20, 2001 when the share price as per the show cause notice had reached Rs.401/- and that its highest and last traded price was Rs.178/- on January 2, 2001. As regards it trades, RRBSL had stated that it was mentioned that it had sold 19,900 shares on October 9, 2000 at Rs.165/-, which according to it was factually incorrect as it actually bought 19,900 shares on October 9, 2000 at NSE for Rs.165/-. It admitted having bought 7,128 shares at NSE at a price of Rs.170/- on December 28, 2000 and further confirmed having bought 10,000 shares and sold 2,522 shares at NSE at a price of Rs.178/- on January 2, 2001, as mentioned in the show cause notice. It contended that its trades were on three days which were spread over a period of two and a half months (October 9, 2000 to December 28, 2000) with significant gaps between each date with the lowest traded price being Rs.165/-on October 9, 2000 and highest price being Rs.178/- on January 2, 2001 and that none of the trades were at circuit filter limits (lower/higher).

RRBSL further contended that its volume contribution at NSE was only 34,506 (19,900+7,128+10,000-2,522) which was 2.65% of the total volume of 13,03,685 in the said period at NSE. It further submitted that it did not trade on BSE on December 26, 2000, as mentioned in the notice. HSIL, vide written statement dated January 30, 2009 while making similar submissions as that of RRBSL, had inter alia stated that the inference drawn in respect of settlement numbers 2000040 and 2000041 is not borne out of the trades listed out in the tables (at pages 2-6 of the show cause notice). It admitted the purchase of 17,810 shares on December 26, 2000 at BSE and submitted that the trades constituted 4.61% of the total traded volume of 3,86,135 shares at BSE during the investigation period.

6. The noticees contended that there was no price manipulation on account of their transactions. According to them, their trades resulted in deliveries and the beneficial ownership was also transferred. The show cause notice did not attribute any manipulative intention to such trades. Apart from the allegation of ‘negotiated trades’, the show cause notice was silent as to how their trades contributed to the alleged manipulation. The only allegation was that the noticees had created artificial volume in the market by executing structured deals and violated Regulation 4(b), (c) and (d) of the PFUTP Regulations. As stated above, the trades of the noticees have to be seen in the background of the charge against them of entering into structured deals thereby creating artificial volumes. Though, the volume contribution by the noticees during the settlements 39, 40 and 41 may be substantial, there is neither an allegation in the show cause notice that the same were placed at a price higher than the market price nor there was any allegation that their trades resulted in the price rise. The trades were at the market prices. Further, there is also no allegation that the noticees had indulged in trade reversal or circular trades. The show cause notice (at pages 3 to 6) while giving the details of the trades of the noticees for the settlements 43,45,48,51 and 53, has failed to show how the said trades had resulted in volume creation. The volume generated by noticees for settlements 39 to 41 was mentioned in the show cause notice. However, their contribution for settlements 43, 45, 48, 51 and 53 have not been mentioned in the show cause notice. The said details are vital when dealing with the charge of artificial volume creation. The details given in the show cause notice is insufficient to establish the charges levelled against the noticees. Considering the submissions of the noticees and the facts and circumstances of the case, I am of the considered view that the noticees are entitled for a benefit of doubt in respect of the alleged violations of Regulation 4(b), (c) and (d) of the PFUTP Regulations. In view of the same, I do not find it necessary to deal with their other submissions. Accordingly, the show cause notice dated April 7, 2004 issued to the noticees is disposed of, as ordered hereinbelow.

7. In view of the foregoing, I, in exercise of powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11 and 11B thereof and Regulations 11 and 13 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade

Practices Relating to Securities Market) Regulations, 2003, hereby dispose of the show cause notices dated April 7, 2004 issued to HB Stockholdings Limited, Har Sai Investments Limited and RRB Securities Limited, without any directions.

DR. K.M. ABRAHAM WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA PLACE: MUMBAI DATE: JULY 27, 2010