Order in the matter of Orissa Minerals Development Company Limited

Order in the matter of Orissa Minerals Development Company Limited

WTM/AB/EFD-1/DRA-1/11/ 2018-19

SECURITIES AND EXCHANGE BOARD OF INDIA

CORAM: ANANTA BARUA, WHOLE TIME MEMBER

FINAL ORDER

Under Sections 11(1), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 in the matter of Orissa Minerals Development Company Ltd.

In respect of:

Crosseas Capital Services Private Ltd. (PAN – AACCC5470H)

BACKGROUND:

1. Securities and Exchange Board of India (hereinafter referred to as "SEBI/ Board") had received a letter from Principal Director of Income Tax (Investigation), Kolkata alleging that various persons/ entities were involved in generating bogus long term capital gains through the mechanism of stock exchange in several scrips including the scrip of Orissa Minerals Development Company Ltd. (hereinafter referred to as “OMDCL”/”Company”).

2. In view of the above, SEBI conducted an investigation into the dealing in the scrip of OMDCL for the period July 24, 2012 to March 28, 2013 (hereinafter referred to as “investigation period”) to ascertain as to whether any person/ entity has contravened the provisions of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act, 1992”) and SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as PFUTP Regulation, 2003).

SHOW CAUSE NOTICE, REPLY AND HEARING :

3. It was noted that, during the investigation period, the shares of Company were traded at the Bombay Stock Exchange (“BSE”) for an average volume of 6514 shares per trading day with a total trading volume of 11,07,449 shares in 3,56,084 trades for a total of 170 days. Similarly, on the National Stock Exchange (“NSE”), the shares of company were traded for an average volume of 7794 shares per trading day and a total trading volume of 13,09,431 shares in 5,04,210 trades for a total of 170 days.

4. During the investigation period, there was a stock split in the ratio of 10:1 whereby the equity shares of the Company were sub divided from 1 equity share of face value Rs. 10 to 10 equity shares of face value Re. 1 each on October 29, 2012. As such, to verify price manipulation in the scrip of the Company, Last Traded Price (LTP) variation analysis was carried out for the trades executed on BSE and NSE in two patches i.e. pre-split (July 24, 2012 to October 26, 2012) and post-split (October 29, 2012 to March 28, 2013).

5. During the course of aforesaid LTP analysis, it was noted that the Noticee had contributed 12.95% of total market positive LTP in patch-1 at NSE. On further examination of trade details, the Noticee was noted to have executed 365 self-trades. Further, in patch-2 at NSE, the Noticee had contributed to 17.02% of the negative LTP wherein also the Noticee had executed 472 self-trades. Similarly, in patch-2 at BSE, the Noticee had contributed to 22.742% of the negative LTP wherein it had executed 672 self-trades. The details of the total self-trades executed by the Noticee along with self-trade quantity, number of days and the percentage of self-traded quantity with respect to total market volume, are as under:

Self-trade No. of No. of % of self-traded quantity self-trades days quantity to market volume NSE 9900 4719 134 0.64 BSE 13157 6744 144 1.19

6. From the above table, it was noted that the Noticee had entered into self-trades for 9900 shares which amounted to 0.64% of the market volume at NSE. Similarly, at BSE, the Noticee had entered into self-trades for 13,157 shares which amounted to 1.19% of the market volume.

7. It was, therefore, observed that the self-trades executed by the Noticee, both at NSE and BSE, created false and misleading appearance of trading in the scrip without intention of change of ownership of shares. As such, a show cause notice dated September 11, 2017 (hereinafter referred to as “SCN”) was issued upon the Noticee for alleged violation of the provisions of Regulations 3 (a), (b), (c), (d) and 4 (1), 4 (2) (a) & (g) of PFUTP Regulation, 2003 and Clause A(3), A(4) and A(5) of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 (now Regulation 9) of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter referred to as “Stock Broker Regulation”). The Noticee was asked to show cause as to why suitable directions under Sections 11(4)(b) and 11B of the SEBI Act, 1992 should not be issued against it.

8. The Noticee has filed its reply vide letter dated October 04, 2017, November 24, 2017, March 28, 2018 and November 26, 2018. I note that the Noticee had requested for inspection of documents and in this respect various letters were also exchanged between SEBI and the Noticee particularly SEBI letter dated October 11, 2017, Noticee’s letter dated October 17, 2017 and October 25, 2017. The opportunity for inspection of documents was provided to the Noticee on October 31, 2017 and thereafter, copies of some additional documents were also provided to the Noticee.

9. Subsequently, in compliance with the principles of natural justice, the Noticee was also provided an opportunity of personal hearing and for that purpose the matter was fixed for hearing on November 27, 2018. The Noticee was represented through Mr. Rajesh Baheti, director and Mr. Anand Vardhan Narayan, Advocate. The representatives made their submission mainly on the lines of reply filed by the Noticee. The Noticee has also filed written submission dated November 29, 2018, after availing the opportunity of personal hearing. The replies and the submissions made by the Noticee are summarised as under:

a. Referring to the SEBI letters dated June 08, 2017 and March 08, 2018 stated to be addressed to the Department of Economic Affairs, Ministry of Finance, the Noticee has stated that intention is sine qua non for establishing manipulation in case of self-trades and that accidental or unintentional self-trades are not covered under the PFUTP Regulations, 2003.

b. Investigation Report has noted merely occurrence of self-trades and there is no allegation of intention of manipulation. The Noticee has further submitted that in several matters, in the absence of any material to indicate fraudulent intention behind execution of self-trades, the charges have been dropped by SEBI. In this respect, the Noticee has referred to and rely upon the various SEBI Orders.

c. The Noticee has also referred to SEBI Enforcement Action Policy and stated that, after June, 2017, all the matters related to self-trade have been disposed of in favour of Noticees.

d. They could not have manipulated the market with negligible volume and could not have disturbed the market equilibrium because the self-trade executed by them were miniscule in quantity (taking total volume of the trade executed on both of the exchanges the Noticee has stated to have executed only 0.87% as self-trades) and that the same were purely unintentional.

e. All the self trades were spread over a large number of individual trader ids with different trader ids as the counter parties and that self trade matching within the same trader id is a negligible percentage of the total number of self trades that occurred.

f. Self matched trades are random in nature and are extremely small as compared to order size. Only a minuscule proportion of any given order has converted into self trades on account of system generated orders by the approved algo trading software because of the order pattern of other market participants. Orders on buy/sell legs are of different size and the price limits are also different in almost all the cases.

g. All the trades were executed on the approved algo trading software in an automated manner and that orders were never placed with an intent to do a self-trade. There is no charge relating to price manipulation, exit or entry provider etc. of any other kind against us other than mere occurrence of self trades.

h. The Noticee has referred to ten instances where SCN issued by SEBI against the Noticee, in difference matters relating to self-trades, were disposed of in its favour on account that the self-trades were executed without any fraudulent intention and/ or the matching of trades occurred due to algo trading software system.

i. The Noticee has submitted that if the charge for violations of PFUTP Regulations are dropped in respect of proprietary trades then the charge for failure of due diligence as a broker also to be dropped.

CONSIDERATION OF ISSUES AND FINDINGS:

10. I have perused the SCN, replies filed by the Noticee and other materials available on the record. I note that the SCN was issued upon the Noticee for execution of self-trades, in the scrip of OMDCL, allegedly without any intention of change of ownership of shares and the for creating false or misleading appearance of trading in the securities market.

11. I note that the Noticee in its reply has admitted the execution of the same number of self trades, in the scrip of OMDCL, as alleged in the SCN at each of the trading platforms of BSE and NSE, however, it has stated that only a minuscule proportion of any given order has converted into self-trades and the same were accidental and not intentional. The Noticee has submitted the details of self trade executed by it in the following table :

Self-trade Total market % of self-traded quantity volume quantity to market volume NSE 9900 1555142 0.64 BSE 13157 1107449 1.19 Total 23057 2662591 0.87

12. In the above table, the Noticee has calculated the percentage of self trade quantity considering the total market volume at both of the exchange and thereby stated/ shown to have executed only 0.87% self-trades comparing to the total market volume.

13. In view of the aforesaid allegations made in the SCN and the submissions made by the Noticee, the question now arises as to whether the Noticee, by executing the aforementioned self-trades, has violated the provisions of the Regulations 3 (a), (b), (c), (d) and 4 (1), 4 (2) (a) & (g) of PFUTP Regulations, 2003 and Clause A(3), A(4) and A(5) of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 (now Regulation 9) of Stock Brokers Regulations, 1992, which read as under:

PFUTP Regulations, 2003 Regulation 3. Prohibition of certain dealings in securities “No person shall directly or indirectly (a) buy, sell or otherwise deal in the securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.

Regulation 4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:— (a) including in an act which creates false or misleading appearance of trading in the securities market ………… (g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security; …..

Stock Broker Regulations Conditions of Registration. 9. Any registration granted by the Board under regulation 6 shall be subject to the following conditions, namely: - ……………. (f) He shall at all times abide by the Code of Conduct as specified in Schedule II

SCHEDULE II of Stock Broker Regulations A. General. (3) Manipulation : A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains. (4) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness. (5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.

14. In case of self-trades, both the buyer and the seller are the same entity and, therefore, execution of self-trade does not result in change of beneficial ownership, nonetheless, it may create a false or misleading appearance of trading in the securities market and may entice other investors to trade in that particular scrip or entities may enter into such trades with the intention of manipulating the price or volume of the scrip. As such, the execution of self trades falls within the purview of Regulation 4(2) (a) and (g) of PFUTP Regulations, 2003. However, orders placed through algo trading software by different dealers using different terminals through the same broker, may get matched accidentally or without such intention. As such, mere occurrence of self-trades may be accidental and it may attract the provisions of Regulation 4(a) and (g) of the PFUTP Regulations, 2003 if any additional material, evidence or circumstances are available to indicate manipulation of the price or volume of the scrip or creation of false or misleading appearance of trading in securities market resulting from such self-trades.

15. I note that during the course of investigation, on the trading platform of BSE, the scrips of OMDCL were traded for an average volume of 6514 shares per trading day with total volume of 11,07,449 shares in 3,56,084 trades for a total 170 days. Similarly, on the trading platform of NSE, the scrip of OMDCL were traded for an average volume of 7794 shares per trading day with total volume of 13,09,431 shares in 5,04,210 trades for a total 170 days. As such, I note that the said self-trades were taken place when the liquidity in the scrip of OMDCL was high. Further, the self-trades executed by the Noticee has contributed to 1.19% and 0.64% of the total market volume on BSE and NSE, respectively.

16. It would be relevant to note from the submissions made by the Noticee stating that that all the trades were executed on the approved algo trading software in an automated manner and there was no manual punching of trades. It was also submitted that only a minuscule proportion of any given order has converted into self-trades on account of system generated trading mechanism by using approved algo trading software because of order pattern of other market participants and that execution of said self-trades were accidental and unintentional.

17. The SCN has been issued upon the Noticee inter alia on the basis of execution of said number of self-trades in the scrip of OMDCL and no further material is available to indicate that such self-trades were manipulative or resulted into creation of false or misleading appearance of trading in the securities market or executed for manipulating the price or volume of the scrips. Taking into consideration the facts and circumstances of the case and also that self-trades contributed to 0.64% trades at NSE and 1.19% trades at BSE and the average of the self-trade executed on both of the exchanges, as submitted by the Noticee, has come down to 0.87% only comparing to the total market volume.

18. I, further, note that the second allegation made against the Noticee in the SCN i.e. violation of the code of conduct of Stock Broker Regulations, is presumably based upon the alleged charge of execution of self-trades and failure of the Noticee in exercising due skill and care which allegedly resulted into violation of code of conduct specified for stock brokers. In this respect, I note that since no material to establish that the said self-trades were manipulative or created false or misleading appearance of trading in the securities market or executed for manipulating the price or volume of the scrip. As such, there is no case to draw any adverse inference with regard to allegation of violation of code of conduct.

19. Accordingly, in view of the above facts and circumstances of the case, the show cause notice dated September 11, 2017 issued to Crosseas Capital Services Private Ltd. stands disposed of without any direction.

20. A copy of this Order shall be forwarded to the Noticee and all the recognised stock exchanges.

DATE: December 28, 2018 ANANTA BARUA PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA