Order in the matter of Petron Engineering Construction Ltd. in respect of M/s. Bipin R. Vora

WTM/PS/15/IVD/ID-03/MAY/2010 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: PRASHANT SARAN, WHOLE TIME MEMBER IN THE MATTER OF PETRON ENGINEERING CONSTRUCTION LTD. In respect of M/s. Bipin R. Vora (SEBI Registration No. INB 010004416) Date of hearing: February 22, 2010 Appearances For Noticee: Mr. Rajeev Kumar, Advocate For SEBI: Mr. G. Ramar, Deputy General Manager Mr. Jagannath Das, Manager Mr. Pradeep Kumar, Legal Officer ORDER Under Regulation 28(2) read with Regulation 38 (2) 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 or dealing in the scrip of Petron Engineering Construction Ltd. (hereinafter referred to as ‘PECL’) for the period October 20, 2003 to June 30, 2004. During investigation the scrip of PECL was listed at Bombay Stock Exchange (hereinafter referred to as ‘BSE’) and National Stock Exchange (hereinafter referred to as ‘NSE’). The investigations were conducted inter alia to ascertain possible violation of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’), SEBI (Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Market) Regulations, 2003 (hereinafter referred to as ‘PFUTP Regulations’) and SEBI (Stock Brokers and Sub-brokers) Regulation, 1992 (hereinafter referred to as ‘Broker Regulations’) by the persons who dealt in the scrip of PECL during the relevant period.

2. During the period of investigation, the price of the scrip had increased from Rs.30 as on October 20, 2003 to Rs.73.80 on March 03, 2004 at BSE. Thereafter the price of the scrip started falling from Rs.56.55 on May 05, 2004 to Rs.29 on June 24, 2004. At NSE, the price of the scrip opened at Rs.30.30, touched a high of Rs.88.60 and closed at Rs.31.65. The variation between high and low price was 200.34%. The average daily volume in the scrip of PECL was 17,933 shares with 70,415 shares being the highest and 950 shares being the lowest.

3. From investigation, it was inter-alia revealed that the broker viz. M/s Bipin R. Vora (hereinafter referred to as ‘noticee’), registered with SEBI as stock broker, bearing registration no. INB 010004416, had dealt in the scrip of PECL. Further, it was found to have aided and abetted its clients in creating artificial volumes in the scrip of PECL at the relevant point of time.

4. Based on the findings of the investigations, SEBI initiated enquiry proceedings against the noticee in terms of SEBI (Procedure for Holding Enquiry by the Enquiry Officer and Imposing Penalty) Regulations (hereinafter referred to as ‘Enquiry Regulations’), by appointing an Enquiry Officer under Regulation 5(1) of Enquiry Regulations vide order dated April 07, 2006 read with subsequent order dated November 23, 2007. SEBI appointed the Enquiry Officer, to enquire into the alleged violations of PFUTP Regulations and Broker Regulations. As the Enquiry Regulations were repealed with effect from the notification of SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as ‘Intermediaries Regulations’), the Enquiry Officer/ Designated Authority (hereinafter referred to as the ‘Enquiry Officer’) submitted his Report dated September 24, 2009, in terms of Regulation 27 of Intermediaries Regulations, recommending thereby a penalty of suspension for a period of 15 days to the noticee for facilitating, aiding and abetting Harish to carry out his nefarious design and violating the provisions of Regulation 3(a), 4(a),(b),(e) and (g) of PFUTP Regulations and Clause A(1),(2),(3),(4) and (5) of the Code of Conduct specified under Schedule II of the Broker Regulations.

5. Subsequently, a show cause notice dated November 04, 2009 (hereinafter referred to as ‘SCN’), under Regulation 28(1) of Intermediaries Regulations was issued by SEBI to the noticee, asking it to show cause as to why the appropriate penalty including penalty recommended by the Enquiry Officer should not be imposed. The noticee was advised to reply to the SCN, together with the documents that it may choose to rely upon in support of its reply within twenty one days of the 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 said SCN.

6. The noticee replied to the SCN vide its letter dated November 11, 2009 and sought a personal hearing. Accordingly, an opportunity of personal hearing was granted to the noticee before me on February 22, 2010. On the date fixed, Mr. Rajeev Kumar, Advocate appeared before me as its authorized representative and reiterated the submissions made vide letter dated November 11, 2009, along with other submissions. During hearing the representative of the noticee also filed written submission dated February 02, 2010, which were taken on record. The submissions of noticee in its reply and written submissions in brief, are: a. Trades cannot be said to be artificial as these were executed on the trading platform of exchange, through duly recognized market mechanism. If the trades not meant for delivery are stopped, the market will collapse, neither there will be any depth in the market nor the liquidity. b. Had not done any proprietary trading in the shares of PECL. c. Its clients had traded in small quantities, in comparison to the total volume in the shares of PECL. d. All the shares were duly bought and sold, differences in the prices were settled, wherein one party had made a profit of over Rs.24 lakhs, while other suffered corresponding losses. e. All buying and selling was done by its clients as per SEBI norms. Shares traded were duly honored by settling the obligations among themselves.

f. Broker would only come to know that the client does not have the shares only when he fails to deliver the shares at the time of payout. g. Ld. Whole Time Member, SEBI has no jurisdiction to hear and decide this SCN as his appointment is in violation of Constitution of India. h. SCN is void ab initio as has been issued by Deputy General Manager. i. The alleged acts had taken place during the years 2003 – 2004, and the Intermediaries Regulations came in effect from 2008. Hence no retrospective effective effect can be given to these regulations. j. The proceedings are suffered by unreasonable delay and latches. k. The Enquiry Report is based on no evidence, mistake of facts and law.

7. I have carefully considered the findings of the investigation, Enquiry Report, SCN issued to the noticee, reply to the SCN, written submissions filed by noticee and material available on record. I note that the noticee has not denied the trades entered by it in the scrip of PECL on behalf of its clients and further settlement of these trades at its end. It has also accepted that the credit facility was provided by it to Harish Khatri. I note that the Enquiry Officer has found the noticee guilty of violation of provisions of Regulations 3(a), 4(2)(a),(b),(e) and (g) of PFUTP Regulations and Clauses A (1),(2),(3),(4) and (5) of the Code of Conduct as specified in Schedule II of Brokers Regulations. Considering all this, the issues arise for my consideration are:

a) Whether the noticee had aided and abetted its client in creation of artificial liquidity/ false market in the scrip of PECL? b) Whether the noticee had failed to exercise due care and diligence?

8. Whether the noticee had aided and abetted its client in creation of artificial liquidity/ false market in the scrip of PECL?

a. I note that Mr. Harish Khatri, was one of the major client of the noticee during the period of investigation, who was introduced by Mr. Shitanshu B. Vora, son of the proprietor of noticee and also the compliance officer of noticee. Further, it is also noted that Harish was admittedly a friend of Shitanshu. During the relevant period Harish bought 3,184 shares and sold 1,63,184 shares while trading through the noticee. The details thereof are as under:

Sr. Settlement no. Date of transaction Purchase Sale No. 1. 148 27/10/03 2,000 2,000 2. 157 07/11/03 1,184 36,184 3. 158 10/11/03 0 25,000 4. 159 11/11/03 0 1,00,000 Total 3,184 1,63,184 b. It is interesting to note that there was no pay-in/ pay-out obligation to BSE in relation to these trades, done by the noticee for its clients which is the basic norm of market mechanism. As per the submissions of noticee, the reason for no pay-in/ pay-out obligation to BSE was that the trades were settled between the clients of noticee and these were settled at the end of broker iself. Hence, no net obligation of noticee arisen to the exchange.

c. I note that the noticee had knowingly tried to bypass the established procedure of trading mechanism in the securities market by settling the trades at its own end. I have seen the trading details of the clients of the noticee which were settled internally. The same has been bought out below for reference: Settl. No. Sell qty. Sell Sell Client Buy Buy Buy Client rate Qty. rate 158 (10/11/03) 25,000 41.30 Harish Khatri 25,000 41.43 Shitanshu B. Vora 159 (11/11/03 1,00,000 45.60 Harish Khatri 1,00,000 46.66 Shitanshu B. Vora & Shirdhar Iyer

From above, I note that the quantities had exactly matched with the counterparties at the broker level itself.

d. I note from the Enquiry Report that the noticee was asked to explain as to how these trades had been settled at its end, i.e. movement of shares from the seller’s account to buyer’s demat account through the pool account of the noticee alongwith the corresponding money transfer from purchaser to seller. I observe that the noticee has failed to explain this process from its trading pattern. Further, I note that the noticee in its statement before SEBI has admitted that no movement of shares had taken place, as there were no shares in the account of Harish. Hence, no delivery was given to the buyer. Keeping this admission of noticee in mind, I note that the broker has allowed to misuse the exchange mechanism by the persons who were closely connected with it. According to sound market practices first the shares should have come into the pool account of broker, but this was neglected by the noticee. Further, no margins had been collected by the noticee for the dealings of Harish as is commonly required by the normal market practices.

e. I note that the noticee should not have traded when the shares were not in the account of Harish. It is an undisputed fact that the noticee has not reported this fault of Harish to the exchange and had tried to put the entire system on risk. I have seen that this pattern of trading was also followed by the noticee prior to the period of investigation for its clients Harish and Shitanshu for their trades. However, these are not being taken into consideration as being beyond the period of investigation.

f. I also observe that the noticee was acting under the pre-arranged understanding with its clients wherein it had agreed to extend the credit facility of Rs.25 lakh to Harish for certain period on the strength of the personal friendship and for this admittedly no interest was charged by noticee. I have seen the statement of the noticee wherein it has admitted that as per the terms of understanding profit if any shall be given to Harish Khatri and in case of loss, the same shall be made good by its clients.

g. I have seen that the reasons provided by the noticee for such pattern of trading are not at all satisfactory. Further, the clients of noticee had contributed to major portion of the total volume in the scrip in the market. All this signifies that such pattern of trading cannot be done without the active participation and knowledge of broker. I note that by entering into trades of such nature wherein there is no net settlement obligation to the exchange, it becomes the responsibility of broker to ensure that there is proper movement of funds/ securities from/ to the buyer/ seller account.

h. To sum up, the noticee and its clients had created a fiction. A sum of money was advanced by noticee to one of the client i.e. Harish Khatri. Harish Khatri sold some shares to the son of noticee. For this sale no actual movement of either shares or money took place as admittedly there were no shares in the account of seller. Based on mere book entries in the books of noticee, trades of 25,000 shares, 1,00,000 shares, etc. were reported on the stock exchange at a price of Rs.41.43, Rs.46.66 respectively. Such acts of the noticee had surely resulted in artificial volumes in the scrip of PECL, which in turn had contributed to appearance of artificial liquidity in the scrip. Further, from the submissions made by the noticee it is reflected that it was assured that the trades will be settled at its own end and no pay-in/ pay-out obligation will arise.

i. In view of the discussion above, I agree with the findings of the Enquiry Officer as relating to the noticee. I note that the above sequence of facts had happened with the knowledge and active connivance of noticee and hence, the defense of the noticee that it was trading for its clients is not acceptable. It is clear that the noticee had aided and abetted its clients to trade in a manner detrimental to the interest of investors in the securities market giving misleading appearance of trading in the scrip of PECL.

9. Whether the noticee had failed to exercise due care and diligence?

a. From the above discussion and considering the nature of the trades, I note that the noticee instead of preventing the misuse of trading platform had facilitated Harish by providing the interest free credit facility.

b. In view of this, I note 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. It is the duty of the stock broker to maintain high standards of integrity, promptitude and fairness, further, it shall not inter alia indulge in manipulative transactions with a view to distort the market equilibrium. A registered intermediary is expected to have high level of compliance of the rules/ regulations and the directives issued by SEBI, which noticee had apparently neglected.

c. As per the facts already discussed above, it is clear that the noticee has failed to comply with its duties as expected of a registered intermediary and instead it has became a party to the manipulation. In view of this, I agree with the findings of Enquiry Officer and hold that the noticee has failed to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings. Further, it has also failed to exercise due diligence, care and skill while performing the functions as a registered broker. These acts of the noticee are in violation of Clauses A(1), (2), (3), (4) and (5) of the Code of Conduct for brokers specified in Schedule II read with Regulation 7 of Broker Regulations.

10. Now, I will deal with the technical submissions of the noticee, as stated in para 7 above, in seriatim:

a. As regards the contention of noticee regarding my jurisdiction and appointment, it is stated that the same has nothing to do with the present proceedings as the powers exercised herein are under Section 19 of SEBI Act.

b. As regards the submission that the SCN has not been issued by the competent authority in terms of Regulation 28 of Intermediaries Regulations, I note that the Board, functions through its officers and it is not practically possible that every document/ letter of Board is signed by the Chairman/ Members only. For administrative convenience, while keeping the decision making powers with themselves, Chairman/ Members do involve their officers, who help them in the working of the Board. In the present case also, due to administrative convenience, the SCN was issued under the signature of a Deputy General Manager, it has been mentioned in the SCN that he has been directed to issue a SCN. Further, it may also be stated that the Board in exercise of powers conferred upon it under Section 19 of the SEBI Act, has delegated the powers and had authorized an officer of the rank of Deputy General Manager to sign/ issue SCNs on behalf of the Board in Enquiry proceedings. In view of this, I find no merit in the arguments of noticee and same are liable to be rejected.

c. As regards the contention that the present proceedings under Intermediaries Regulations with respect to the acts of noticee taken place in the year 2003- 2004 are illegal, null and void. I find no merit in these submissions of noticee as the Intermediaries Regulations are of procedural in nature, which prescribes procedure for taking action against the registered intermediaries. I note that pursuant to the notification of the Intermediaries Regulations, 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 Intermediaries Regulations. In view of this, I find no merit in the argument of the noticee and the same is rejected.

d. As regards delay and latches, I note that there is no time limit on disposal of a proceeding of this nature nor the delay can justify exoneration.

e. As regards the contention that the Enquiry Report is without any evidence, I note that the Enquiry Officer has submitted its report after considering the submissions of the noticee and the material available on record.

11. In the facts and circumstances of the case, I find that the noticee had dealt in the scrip of PECL in a manner detriment to interest of investors, it had put the entire trading and settlement system at risk. Noticee aided and abetted its clients in entering of trades of a nature where there is no net settlement obligation to the exchange and thereby distorted the market integrity. It has failed to ensure effective delivery of shares of PECL from the sellers account to buyers account. I, therefore, conclude that the noticee employed fraudulent and unfair trade practices by not affecting the movement of shares from the sellers account to buyers account and has acted in contravention of the prescribed settlement mechanism and thereby violated Regulations 3(a), 4(2)(a),(b),(e) and (g) of PFUTP Regulations and Clauses A(1), (2), (3), (4) and (5) of the Code of Conduct for brokers specified in Schedule II read with Regulation 7 of Broker Regulations. Such acts of serious irregularities threaten the market integrity and orderly development of the market and call for regulatory intervention to protect the interest of investors.

12. Taking into consideration, the facts and circumstances of the case, I, in exercise of the powers conferred upon me in terms of Section 19 of the Securities and Exchange Board of India Act, 1992 read with Regulation 28(2) of Securities and Exchange Board of India (Intermediaries) Regulations, 2008, hereby suspend the certificate of registration of the stock broker, M/s. Bipin R. Vora, registered with SEBI as stock broker, bearing registration no. INB 010004416 [PAN: AABPV 1468Q] for a period of fifteen days.

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

Date: 24/MAY/2010 PRASHANT SARAN Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA