Order passed in respect of Mr. Bajrang Bafna

ORDER Under Sections 11 and 11B of the Securities and Exchange Board of India Act, 1992 read with Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, in respect of Mr. Bajrang Bafna (PAN: AJPPB1724N).

1. Securities and Exchange Board of India (“SEBI”) had conducted an investigation into the unusual price movement of several scrips during the period from April 01, 2008 to May 31, 2008 to ascertain any instances of contravention of provisions of SEBI Act, 1992 (“SEBI Act”) read with SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003 (“PFUTP Regulations”). The investigation revealed that Mr. Bajrang Bafna ("Noticee") the fund manager of DBS Chola Mutual Fund (Now known as L&T Mutual Fund [“DBS Chola”]), along with other persons had colluded with one Mr. Vikas Kumar Upadhyay ("V.K. Upadhyay")and his brother Mr. R.K.Upadhyay Kumar Upadhyay ("R.K. Upadhyay")(collectively referred to as "Upadhyay brothers") who allegedly traded ahead of the orders placed by DBS Chola on the basis of prior information given by the Noticee, thereby indulging in manipulative, fraudulent and unfair trade practice of front running and earned profit of `3.67 lakh.

2. Based on the findings of investigation, a Show Cause Notice ("SCN") dated August 06, 2010 was issued to the Noticee under sections 11 and 11B of the SEBI Act to show cause as to why appropriate action including restraining him from buying, selling or dealing in securities for a specified period, should not be issued against him for the violations alleged in the SCN viz., Section 12 A (e) of the SEBI Act read with Regulations 3 and 4 (1) of the PFUTP Regulations.

3. As per the SCN, it was inter alia alleged against the Noticee that – i. The Noticee along with another fund manager (Mr. Anant Deep Katatre) and dealer (Mr. Mayur Joshi) colluded with R.K. Upadhyay and his brother V.K. Upadhyay in front running DBS Chola thereby indulging in manipulative, fraudulent and unfair practices.

ii. The call details provided by DBS Chola and service provider, it was seen that during the investigation period i.e. from April 01, 2008 to May 31, 2008, the Noticee and R.K.Upadhyay had exchanged more than 120 calls from landline number 66574037 and 76 calls from mobile number 9967541495. Two calls were also found to be made between Noticee and V.K.Upadhyay. These telephone calls were made on number of days. Based on the numerous calls the SCN alleges that the Noticee was communicating with the Upadhyay brothers and passed on the information as to the trading strategy of DBS Chola. The SCN gave details of those telephone calls along with the days on which V.K.Upadhyay was allegedly front running DBS Chola.

iii. During the course of investigation, the Noticee vide statement dated March 11, 2010 denied knowing either V.K.Upadhyay or his brother R.K.Upadhyay. However, on being confronted with the call records showing the several calls exchanged with V.K.Upadhyay and R.K.Upadhyay, the Noticee admitted that the calls to R.K.Upadhyay was on account of investments that had been made in hedge equity fund which was managed by R.K.Upadhyay for several clients when he was in DBS Bank. The Noticee again reiterated that he did not know V.K.Upadhyay. The Noticee also did not clarify when confronted with the fact that R.K.Upadhyay was working with Societe Generale and not with DBS Bank during April-May 2008 period, when the alleged calls were made during the time V.K.Upadhyay executed trades ahead of DBS Chola.

iv. Mr. Sanjay Sinha, Chief Executive Officer (“CEO”) of DBS Chola, vide statement dated March 11, 2010 submitted that at the time of his joining (in September 2008), the fund managers (Noticee and Mr. Anant Deep Katare) and the dealer (Mr. Mayur Joshi) were operating from the same room. Further, the fund managers take the decision to invest in particular scrip and the same is conveyed to the dealer for execution. Hence, the persons privy to the trading strategy of DBS Chola were the Noticee, the other fund manager(Mr. Anant Deep Katare) and the dealer (Mr. Mayur Joshi).

v. The analysis of trading pattern of V.K.Upadhyay for the period from April 01, 2008 to May 31, 2008 clearly indicates that his average gross traded value on the days when he was observed to have placed on the basis of the alleged information regarding the order of DBS Chola was `34.31 lacs whereas for the rest of the days his average gross traded value was only `4.54 lacs. It is noted that V.K.Upadhyay had taken large positions on seven days ahead of DBS Chola and squared off almost his entire position on the same day. It is alleged that such large number of trades on certain days were executed on the basis of prior knowledge about DBS Chola trading strategy. In this process, V.K.Upadhyay earned an undue profit of `3.67 lakh.

vi. It was observed from the bank account statement and ledger account of V.K.Upadhyay and R.K.Upadhyay that funds moved from the account of R.K.Upadhyay to the account of V.K.Upadhyay just prior to the period when V.K.Upadhyay alleged to have indulged in front running activity.

vii. Thereafter, R.K.Upadhyay who had worked in DBS bank in the wealth management department used his contacts with the fund managers including the Noticee and dealers of DBS Chola to get information regarding the trading strategy of DBS Chola. It was admitted by R.K.Upadhyay that when he was working with DBS Bank Ltd, some of his clients invested in Hedge Equity Funds and opportunity fund in DBS Chola. So he used to call the Noticee, other fund manager and dealers for portfolio updates of the clients. On the basis of such interaction with the Noticee, it is alleged that he has used the contacts with Noticee and other entities to get the trading strategy of DBS Chola.

viii. It is also alleged that R.K.Upadhyay passed on the information about the trading strategy of DBS Chola to V.K.Upadhyay for front running DBS Chola and earned an undue profit of `3.67 lakh.

4. The Noticee filed reply to the SCN vide letter dated October 8, 2010 (received at SEBI on October 11, 2010). Thereafter, an opportunity of personal hearing was granted to the Noticee on June 19, 2013. Subsequently, the Noticee filed written submissions vide letter dated June 24, 2013. The Noticee vide abovementioned reply and during the aforesaid hearing inter alia made the following submissions:– i. At the outset the Noticee denied all the allegations brought out in the SCN. The SCN refers to the dealings in scrip by V.K.Upadhyay and Noticee was not aware of any action in regard to the same. There had been several other scrips in the month of April and May 2008 in which transactions were being carried out in the schemes handled by the Noticee independently and jointly with the other fund manager (Mr. Anant Deep Katare).

ii. It is admitted that the calls mentioned in the SCN were made and received by the Noticee. However, with regard to the calls exchanged with R.K.Upadhyay, said calls were made in relation to certain clients who had invested in DBS's funds, and the calls pertained to the market updates, fund details etc. With regard to the two calls exchanged with V.K.Upadhyay, the Noticee did not know V.K.Upadhyay. The Noticee assumes that the he would have called R.K.Upadhyay who had given V.K.Upadhyay's number as an alternate number.

iii. None of the calls were made during trading hours and the calls were made even on days when no transactions were carried out by V.K.Upadhyay. The calls were made on 46 days while trading was done on 20 days by V.K.Upadhyay, out of which only on 7 days, the transactions were considered to be executed ahead of the orders placed by DBS Chola. Calls were also exchanged between R.K.Upadhyay and another fund manager (Mr. Anant Deep Katare) and the dealer (Mr. Mayur Joshi). It was not possible to reveal trading strategy one day in advance. Decision involves lots of imponderables viz. opening price of various scrips, depth of the scrip in terms of total buyers and sellers in the scrip, developments in the market during trading hours etc.

iv. It is denied that the Noticee communicated any information regarding trading strategy of DBS Chola to R.K.Upadhyay. It is argued that the only persons privy to the information regarding trading strategy were the dealer (Mr. Mayur P. Joshi), the other fund manager (Mr. Anant Deep Katare), and Investment Analysts (Mr. Animesh Shah and Mr. Abdul Fateh).

v. The SCN did not provide the bifurcation as to order, place and by which fund manager (between the Noticee and one Mr. Anant Deep Katare) impugned trades were executed. Specific source of alleged leakage of information is relevant since serious allegations are being levelled against the Noticee. vi. No transcript/voice recording of the calls made and received from R.K.Upadhyay are presented. vii. In view of the decisions of the Hon'ble Securities Appellate Tribunal ("SAT") in the matters of Mr. Dipak Patel v. The Adjudication Officer, SEBI (SAT Appeal No. 216 of 2012 dated November 09, 2012) and Mr. Sujit Karkera v. The Adjudicating Officer, SEBI (SAT Appeal No. 167 of 2012 dated December 17, 2012), the Noticee cannot be charged for front running as he is not an intermediary.

5. Before moving forward I consider it appropriate to refer to the relevant provisions of SEBI Act and PFUTP Regulations which read as under:-

12A. No person shall directly or indirectly— (e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder; Prohibition of certain dealings in securities 3. No person shall directly or indirectly— (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any securities 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 thereunder; (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 thereunder. 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.

6. The SCN alleges that the Noticee, along with other persons {Mr. Anant Deep Katare (fund manager) and Mr. Mayur Joshi (Dealer)} had colluded with R.K.Upadhyay and V.K.Upadhyay who allegedly traded ahead of the orders placed by DBS Chola thereby indulging in manipulative, fraudulent and unfair trade practice of front running and earned a profit of `3.67 lakh.

Consideration of Issues and Findings

7. I have considered the SCN issued to the Noticee, his reply and the submissions made by his authorized representative during the personal hearing before me, the written submissions filed vide letter dated June 24, 2013 and all other relevant materials available on record. In light of the same, I shall now proceed to deal with the charges levelled against the Noticee in the SCN.

8. As per SCN, it is alleged that the Noticee along with other entities had colluded with V.K.Upadhyay and R.K.Upadhyay in front running DBS Chola, thereby indulging in manipulative, fraudulent and unfair trade practice.

In this regard, I note that-

8.1 The SCN alleges that the Noticee was in direct contact with V.K.Upadhyay on April 02, 2008 and that V.K.Upadhyay had also called Noticee on that day. This fact negates the Noticee’s statement that he did not know V.K.Upadhyay. Similarly, the Noticee initially denied knowing R.K.Upadhyay and later admitted the association when confronted with records of the calls made by him to R.K.Upadhyay. It is noted from the call records that during the investigation period i.e. from April 01, 2008 to May 31, 2008, there were numerous calls exchanged from landline number 66574037 to R.K.Upadhyay and mobile number 9967541495. It is noted that the official land phone was kept in the common room and used by other employees as well. It is not disputed that the Noticee used his mobile phone during the relevant period for communication with R.K.Upadhyay. It is also noted that there was no telephone calls from the mobile number of the Noticee to R.K.Upadhyay during the trading hours of 7 days when V.K.Upadhyay was allegedly indulged in front running DBS Chola.

8.2 It was observed from the call records that on April 16, 2008 there was a call from the landline number to R.K.Upadhyay at 18:17 hrs and on the very next day (i.e. on April 17, 2008) V.K.Upadhyay purchased 3176 shares of Unity Infraprojects Ltd between 11:16 to 13:58 hrs and sold 3176 shares at 14:20 hrs. On April 22, 2008 at 19:01 hrs there was a mobile phone call of Noticee to R.K.Upadhyay and the very next day (i.e. on April 23, 2008) V.K.Upadhyay purchased 45660 shares of Elgi Tyre between 11:59 to 13:19 hrs and sold 45660 shares at 13:41 hrs. There were no calls either from the landline or from the mobile during the trading of V.K.Upadhyay.

8.3 The Noticee contended that there was no nexus between the calls made and the trades executed by V.K.Upadhyay. It is noted that V.K.Upadhyay had taken positions on 7 days (out of the 40 days of the investigation period) ahead of DBS Chola and squared off almost his entire position on the same day. It is also observed that on most of the 7 days V.K.Upadhyay was the counterparty to the trades executed by DBS Chola. It is also noted that on April 30, 2008, V.K.Upadhyay has not completely squared off his position and shares sold by V.K.Upadhyay during the investigation period have matched with other market participants.

8.4 Now the question arises as to who gave the information to Upadhay brothers. It is also imperative to note that when confronted with the call records of Noticee with R.K.Upadhyay, Noticee stated that calls were made on account of investments that had been made in hedge equity fund which was managed by R.K.Upadhyay for several clients when he was in DBS Bank. As regards this contention, it is pertinent to note that R.K.Upadhyay vide his statement dated March 25, 2010, submitted that the calls were made in relation to investments made by his clients in Hedge Equity fund and Opportunity fund in DBS Chola when he was working in DBS Bank. R.K.Upadhyay stated that he had called the Noticee, Mr. Anant Deep Katare and Mayur Joshi for portfolio updates and also took them for client meeting. Though R.K.Upadhyay agreed to furnish the names of his clients for whom he was interacting with the Noticee, he failed to furnish the same except one client.

8.5 The important aspect to be noted is that as the fund manager, the Noticee was privy to the information regarding the trading strategy of DBS Chola and this fact has also been admitted by the Noticee in his reply dated June 24, 2014. It is also noted that Mr. Sanjay Sinha, CEO of DBS Chola, in his statement dated March 11, 2010, mentioned that he had joined DBS Chola in September 13, 2008. Mr. Sanjay Sinha also stated that at the time of his joining, the Dealer and Fund Managers were operating from the same room and there was no permanent CEO during the period April-May 2008. Subsequent to his joining the dealer and fund managers were separated. In this regard, proceedings were initiated against DBS Chola for the alleged failure to exercise due diligence and care by not taking adequate measures to ensure non-leakage of information pertaining to its trading strategy to Upadhyay brothers. The said proceedings were consented by SEBI vide order dated December 16, 2010 upon payment of settlement charges of `10 lakh.

8.6 Though there have been no calls exchanged with R.K.Upadhyay from the mobile of the Noticee during trading hours on the days when the alleged front running took place, the pattern of trades clearly indicate that the trades executed were on the basis of information given to V.K.Upadhyay who in turn indulged in front running.

8.7 The Noticee contended that he is not liable for front running as alleged in the SCN. In respect of his contention that no liability can be fastened on him for front running as he is not an intermediary, the Noticee has relied on the SAT decisions viz., Mr. Deepak Patel and Sujit Karkere matters. It is pertinent to mention that SEBI had preferred appeals before the Hon'ble Supreme Court challenging the said judgments and the matter is still Sub-judice.

8.8 In this regard, it is noted that the Hon'ble SAT has subsequently ruled in the matter of Vibha Sharma and another vs. SEBI – (SAT Appeal No. 27 of 2013 dated September 04,

2013) as follows: " A minute perusal of the judgment of Dipak Patel makes it evident that act of front running is always considered injurious be it an intermediary or any other person for that reasons. We would like to give a liberal interpretation to the concept of front running and would hold that any person, who is connected with the capital market, and indulges in front running is guilty of a fraudulent market practice as such liable to be punished as per law by the respondent. The definition of front running, therefore, cannot be put in a straight-jacket formula." Therefore, it becomes clear that the general provisions of the PFUTP Regulations would be applicable in respect of the violations committed by the Noticee.

8.9 The SCN alleges collusion of three persons viz., the Noticee, Mr. Anant Deep Katare (fund manager) and Mr. Mayur Joshi (Dealer) with Upadhyay brothers in the alleged front running. It is noted that apart from the telephonic records, details which have been discussed in the preceding paragraphs, no evidence has been brought on record to prove who had passed on the information of trading strategy of DBS Chola to Upadhyay brothers.

8.10 It is noted from the statement dated March 11, 2010 of Mr. Sanjay Sinha, CEO of DBS Chola, that during the impugned period the Dealer and Fund Managers were operating from the same room and there was no permanent CEO during the period April-May 2008 to oversee the execution of trades. Subsequent to his joining the dealer and fund managers were separated. This clearly indicates that the Noticee, Mr. Anant Deep Katare(fund manager) and Mr. Mayur Joshi(Dealer) were privy to the information of trading strategy of DBS Chola. Hence, it is imperative to prove who amongst the three persons had actually passed on the information to Upadhyay brothers.

8.11 It is pertinent to mention that the crux of the matter pertains to receipt of information (trading strategy of DBS Chola) by R.K. Upadhyay and its onward transmission to V.K. Upadhyay who in turn executed the trades on the basis of the said information. In this context, it is noted that though proceedings under Sections 11 and 11B of the SEBI Act were initiated against R.K. Upadhyay and V.K. Upadhyay, the said proceedings were consented by SEBI vide order dated April 13, 2012 upon payment of settlement charges of `10 lakh each. Similarly, the adjudication proceedings initiated against DBS Chola for the alleged violation of SEBI Act read with Regulations 25(2), (3) and 68 (h) of the SEBI (Mutual Fund)Regulations,1996 were also consented by SEBI vide order dated December 16, 2010 upon payment of settlement charges of ` 10 lakh.

8.12 The SCN provides the details of calls made by the Noticee. However, calls were seen on days before the impugned transactions took place as well as on subsequent days. On the basis of the evidence available on record, it is difficult to arrive at a finding that it was the Noticee who made the calls from the common telephone. Though there have been instances of phone calls from the mobile phone of the Noticee, in the facts and circumstances of the case, in respect of serious charge of front running, the evidence available is not sufficient enough to indicate that it was the Noticee who passed on the information to Upadhyay brothers. This is more so given the fact that proceedings initiated against DBS Chola and Upadhyay brothers were settled upon payment of charges of `10 lakh each. Taking into consideration of the facts and circumstances narrated above, I am inclined to give the benefit of the doubt to the Noticee in respect of the alleged violations.

Order

9. In view of the foregoing, I, therefore, in exercise of the powers conferred upon me by virtue of section 19 read with section 11 and 11B of the SEBI Act and regulation 11(1) of the PFUTP Regulations, 2003, issue a strong warning to the Noticee, to be careful and cautious as regards his conduct. Any future lapse shall invite stringent action.

10. The Show Cause Notice dated August 06, 2010 is disposed of accordingly.

Place: Mumbai S. RAMAN Date: September 24, 2014 WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA