Order with respect to Shailesh Merchant Stock Brokers P. Ltd. in the matter of ETC Networks Ltd.

WTM/SR/ IVD/ID4/ 10 /06/2013 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: S. RAMAN, WHOLE TIME MEMBER ORDER Under Regulation 28(2) of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 in respect of M/s. Shailesh Merchant Stock Brokers Pvt. Ltd. [SEBI Registration No. INB INB010882533] [PAN: AACPM9685R] In the matter of M/s. ETC Networks Ltd.

1. The Securities and Exchange Board of India (hereinafter referred to as "SEBI") had conducted an investigation into the buying, selling and dealing in securities of M/s ETC Networks Ltd. (hereinafter referred to as ‘ETC’) during the period from January 01, 2001 to April 06, 2001 (hereinafter referred to as the "investigation period"). The investigation revealed that a stock broker viz. M/s. Shailesh Merchant Stock Brokers Pvt. Ltd. (hereinafter referred to as the "Noticee") had allegedly violated Regulation 4 (a) of the SEBI (Prohibition of Fraudulent and Unfair trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as the “PFUTP Regulations”) and Clause A (2), (3) and (4) of Code of Conduct as laid down in Schedule II of the SEBI (Stock Brokers & Sub Brokers) Regulations, 1992 (hereinafter referred to as the “Broker Regulations”). It is alleged that during the investigation period, the Noticee regularly placed buy orders for its client M/s Stellar Fiscal Services Pvt. Ltd. (hereinafter referred to as "Stellar") at a higher rate in the scrip of ETC.

2. On the basis of the findings of investigation, SEBI vide order dated August 06, 2009 appointed Smt. Ruchi Chojer as the Designated Authority (hereinafter referred to as the "DA") under Section 19 of the SEBI Act, 1992 read with Regulation 24(1) of SEBI (Intermediaries) Regulations, 2008 (hereinafter referred to as ‘Intermediaries

Regulations’) to inquire into the alleged violations of Regulation 4 (a) of the PFUTP Regulations and Regulation 7 read with Clause A (2), (3) and (4) of the Code of Conduct specified in Schedule II of the Broker Regulations. The DA issued a Show Cause Notice dated December 15, 2009 to the Noticee in terms of the provisions of Regulation 25 (1) of Intermediaries Regulations, to show cause as to why appropriate recommendations should not be made against it under Regulation 27 of Intermediaries Regulations. The Noticee vide letter dated January 15, 2010 replied to said Show Cause Notice. Subsequently, SEBI vide order dated January 04, 2012 appointed Shri P.K. Kuriachen as the DA. After considering the reply of the Noticee, the DA vide letter dated May 15, 2012 granted an opportunity of personal hearing to the Noticee on May 22, 2012.

3. After taking into consideration all the facts and circumstances of the case the DA concluded that:- (i) the Noticee was closely associated with its client Stellar as well as the company ETC; (ii) the Noticee aided and abetted Stellar by placing buy orders at the end of the trading hours in order to provide buying support to, and raise the closing price of, the scrip of ETC; (iii) the Noticee failed to exercise due skill, care and diligence while dealing in the shares of ETC.

4. Therefore, the DA recommended that the certificate of registration granted to the Noticee may be suspended for a period of one week.

5. Subsequently, a show cause notice (hereinafter referred to as ‘SCN’) dated July 19, 2012 was issued by SEBI to the Noticee under Regulation 28(1) of the SEBI (Intermediaries )Regulations, 2008, asking it to show cause as to why appropriate penalty including penalty as recommended by the DA should not be imposed upon it. 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 to reply, it would be presumed that the Noticee had no explanation to offer and that SEBI shall be free to take such action as it deems fit. A copy of the report of the DA was also forwarded to the Noticee along with the SCN.

6. It was alleged in the SCN that the price, volume and number of trades in the shares of ETC fluctuated widely during the investigation period. The scrip of ETC opened at Rs.121.25 on January 01, 2001 reached a high of Rs. 129 on January 02, 2001 and touched a low of Rs. 22 on April 06, 2001. Volumes in the scrip ranged from 25 shares to 27,850 shares and the number of trades ranged from 6 to 2250. The Noticee purchased on behalf of Stellar, a total of 29,050 shares constituting 38.26% of the total volume of the scrip during the investigation period. The Noticee was observed to be regularly placing buy orders at a higher rate towards the end of the trading hours so as to establish the closing price of the day and made repeated attempts to provide buying support to ETC. In this regard, it is also alleged that that the Noticee had not taken any margins from Stellar and payments for the purchases were received by the Noticee after a gap of 7-12 days of the respective settlements. Further, the Noticee employed its own funds for the purchases of the client. These facts indicated that the Noticee is closely associated with the ETC and its related entity Stellar.

The information obtained from various sources during investigation brought out that Stellar was connected to ETC in the manner described below:- a) One of the addresses of Stellar i.e. Gala No.4 Kherani Road, Indian Granite (Marble) Lane, Saki Naka, Andheri (E) Mumbai matched with that of M/s Encore Holding & Trading Pvt. Ltd., which appeared under the category of persons acting in concert with the promoters as per the shareholding pattern of ETC for the quarter ended June 30, 2001 (Source : RoC, Mumbai, shareholding pattern of ETC and the bank account address given by Stellar for its account number (001105000671) maintained by ICICI Bank Ltd.) b) Directors of Stellar i.e. Shri. Jogish Naresh Mehta and Shri Rakesh H. Dharawat were the Auditor and CFO, respectively, of ETC (Source: Annual report of the company for the FY 2000-01). Further, Shri. Nikhil Pravinchandra Shah and Shri Arvind Raman Nair were directors with Stellar as well as M/s Encore Holding & Trading Pvt. Ltd.( Source: RoC, Mumbai) c) Stellar's address given as “386 – Yatrik, Near Congress House, V. P. Road, Grant Road, Mumbai- 400 004” is same as that of M/s Jogish Mehta & Co., Chartered Accountants of the company (Source: Letter head of the C.A. and the address of Stellar available for its bank account no. 0311-0000-001560 opened with Bank of Maharashtra). d) M/s Encore changed its address from Gala No. 4 Kherani Road, Indian Granite (Marble) Lane, Saki Naka, Andheri (E) Mumbai to 7-B Shah Industrial Estate, off Veera Desai Road, Andheri (W) Mumbai on 1/2/2000 and the latter address is the registered office address of ETC. e) Shri Nikhil Pravinchandra Shah, one of Stellar's directors, in his statement before the Investigating Authority on November 21, 2005 brought out the relationship/association of Stellar, with ETC and its related entities.

Further when he was asked to state the reason for M/s Encore Holding & Trading Pvt. Ltd. and Stellar having the same addresses, telephone numbers and even the same fax number, he admitted in his deposition that ETC, Stellar and Encore had business relations and that Mr. Yogesh Shah was one of the common directors in Encore Holding & Trading Pvt. Ltd. and ETC.

7. In view of the facts brought out in the SCN, it was alleged that the Noticee aided and abetted its client, Stellar, to prevent the decline in the price of the scrip by placing buy orders at the end of the trading hours. It was also alleged that the Noticee also failed to exercise due skill, care and diligence while dealing with its client. Thus, the Noticee was charged with alleged violation of the PFUTP Regulations and the Broker Regulations.

8. The Noticee replied to the SCN vide its letter dated August 19, 2012 submitting that:- (i) the contention of the DA that orders were placed at end of the day are devoid of merit, and (ii) the association between Stellar and ETC is no ground to allege market manipulation charges on the Noticee as it acted as the bonafide broker for Stellar as per the instructions given by the client

9. Vide letter dated March 07, 2013 the Noticee requested for an opportunity for personal hearing in the matter. Accordingly, an opportunity for personal hearing was granted on April 30, 2013 to the Noticee, who appeared for the same and, inter alia, made the following submissions in the course of the hearing.:- (i) That it has been associated with BSE for 23 years and has not been show-caused for any serious violation or a repeat violation. The Noticee has had a spotless career and an impeccable track record. No arbitration cases have gone against the Noticee in all these years. (ii) That it has not violated any provisions of the SEBI Act, Regulations framed thereunder, and the Rules, By-Laws and Regulations of BSE. (iii) That the Noticee was merely proceeding as "instructed by the client". (iv) That the price of the scrip had in fact fallen during the period of investigation, so the conclusion that buying support was provided by the Noticee while placing buy orders for Stellar in order to raise the closing price in the scrip of ETC is not correct. (v) That it be exonerated of the charges levied against it.

10. The Noticee reiterated its submissions vide letter dated May 01, 2013.

CONSIDERATION OF ISSUES AND FINDINGS 11. I have considered the report of the Designated Authority, the SCN issued to the Noticee, the oral and written submissions made by the Noticee and the material available on record. Having considered the above, the issues which arise for my consideration are:-  Whether the Noticee has violated Regulation 4 (a) of the PFUTP Regulations, 1995 read with Regulation 13 (3) of the PFUTP Regulations, 2003 and Regulation 7 read with Clause A (2), (3) and (4) of Code of Conduct specified under Schedule II of the Broker Regulations?  If yes, what would be the appropriate penalty that can be imposed under Regulation 28 of Intermediaries Regulations?

12. It would be appropriate at this stage to refer to the relevant provisions of law the violation of which violation has been alleged in the SCN. These legal provisions have been reproduced below for reference.

Regulation 4 (a) of the FUTP Regulations, 1995 - "4. No person shall - (a) effect, take part in, or enter into, either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person;"

Clauses A (2), (3) and (4) in Schedule II of the Stock Broker Regulations, 1992- "(2) Exercise of due skill and care : A stock-broker shall act with due skill, care and diligence in the conduct of all his business. (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."

13. 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. Also, as per Regulation 13 of the FUTP Regulations, 2003 "Notwithstanding repeal of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, any investigation pending, at the commencement of these regulations shall be continued and disposed of in accordance with the procedure laid down in these regulations".

14. The DA in his report has examined evidence available and concluded that the Noticee was closely associated with ETC and Stellar, with Stellar being the major buying client in the scrip of ETC during the investigation period, and also being related to ETC. The Enquiry Report has also mentioned that Stellar opened its trading account with the Noticee solely for the purpose of trading in the scrip of ETC and it had not traded in any other scrip through the Noticee. The Enquiry Report has also mentioned at para. 21 on page 12 that Rs. 17, 00, 000/- were transferred from ETC's current account (No. 367) maintained with the Samata Sahakari Bank Ltd. on March 19, 2001 and March 20, 2001 for making payments to the Noticee. The Enquiry Report details how the Noticee was the major buyer in settlement numbers 42, 43, 44 and 45, and that the Noticee regularly entered buy orders at the end of the day. The Enquiry Report concluded that the Noticee aided and abetted its client by placing buy orders at the end of the trading hours in order to establish the closing price with the sole intention of providing buying support to ETC and prevent it from declining.

15. It is observed from the material available on record that the Noticee has admitted that it knew some of the directors on the Board of ETC. Further it is noted that Stellar was the only buying client for ETC during the investigation period. It can also be seen from the order and trade logs that the Noticee entered buy orders for Stellar at prices which were substantially higher than the prevailing market price and towards the end of the trading hours. It also appears that the Noticee omitted to take note of the pattern of trading activity of its client Stellar during the investigation period, when the Notice's purchases on behalf of Stellar constituted 38.26% of the total volume of the scrip during the investigation period, and Stellar was seen to be placing buy orders at higher rates towards the end of the trading hours.

16. The manner in which Stellar traded by placing buy orders consistently towards the end of the trading day and also the fact that Stellar traded only in the scrip of ETC through its trading account with the Noticee, should have alerted the Noticee with respect to Stellar's transactions. Thus, in failing to detect anything unusual in Stellar's trading activity, the Noticee failed to exercise due diligence and thus violated Clauses A (2) in Schedule II read with regulation 7 of the Broker Regulations, 1992. In view of the above, I find that the Noticee failed to act with due skill, care and diligence when it executed buy orders for Stellar in the scrip of ETC (both entities having been known to the Noticee) during the investigation period. It is further alleged that there has been a flow of funds from ETC to the Noticee. In this regard, it is pertinent to note that Rs. 17 lakh were transferred from ETC's current account (account no. 367) maintained with the Samata Sahakari Bank Ltd., on March 19, 2001 and March 20, 2001 respectively for making payments to the Noticee. In response to such allegation the Noticee contended that the allegation regarding the Noticee having a role to play in the flow of funds which were transferred to the account of Stellar so that it would be invariably transferred to the Noticee is far fetched. The Noticee also contended that it neither had any control over the affairs of ETC nor Stellar and it could never be deemed to have knowledge of the flow of funds to the account of the client. During the course of the hearing, with regard to a specific query on the flow of funds from ETC to the Noticee, the Noticee stated that as the matter pertained to 2001, it does not recollect how the payment was made in respect of the trades. Further, it was also contended by the Noticee that the allegation of the Noticee being aware of the nexus between Stellar and ETC is not tenable as knowing a client and the company does not mean that the trading decisions would be influenced by the Noticee. Further, it was also contended by the Noticee that awareness of association between the parties is no ground to allege abetting and aiding the client.

17. In the facts and circumstances of the case, though the nexus between the company ETC and the client Stellar is writ large in the factual background of the case, the Noticee's nexus with the client Stellar appears to be that of broker client relationship. Considering the same, I am inclined to accept the contention of the Noticee that it was only acting as a broker for its client.

18. The Noticee has also submitted that in one instance on January 9, 2001 the Noticee placed an order at Rs. 110.50 while the closing price in the scrip was Rs. 120/-, and that in this case the price actually closed lower than the previous day's closing. In addition, vide its reply dated May 01, 2013 the Noticee had, inter alia, submitted that the Noticee has been associated with the BSE for 23 years and has not been show-caused for any serious violation or repeat violation. I also note that the transactions in question pertain to the year 2001.

19. In the light of the facts and circumstances of the case as found by the DA, I observe that the Noticee being a stock broker and supposedly having professional competence, should take due care and be more vigilant while executing trades on behalf of its clients in future. However, the material and evidence available before me is insufficient to show that the Noticee was aware of the intentions of Stellar, or that the Noticee was related to Stellar in any capacity other than that of broker and client. In the absence of adequate evidence made out against the Noticee, the charges of violation of regulation 4 (a) of the FUTP Regulations, 1995 as well as clauses A (3) and (4) of the Code of Conduct as laid down in Schedule II of the Broker Regulations, 1992 with respect to manipulation and creation of false market do not stand established.

20. In view of the foregoing, I, in exercise of the powers conferred upon me under section 11B and section 19 of the Securities and Exchange Board of India Act, 1992, hereby issue a warning to the Noticee. The Noticee is warned to be careful and cautious in the conduct of its stock broking activity and comply with all the statutory provisions while carrying out its activities in the securities market. Any such lapses in future will be viewed seriously.

Date: June 28, 2013 S.RAMAN Place: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOAD OF INDIA