BEFORE THE ADJUDICATING OFFICER SECURITIES AND EXCHANGE BOARD OF INDIA [ADJUDICATION ORDER NO. IVD/KSERA/AO/DRK/ASG/EAD3-55/2009]

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1 BEFORE THE ADJUDICATING OFFICER SECURITIES AND EXCHANGE BOARD OF INDIA [ADJUDICATION ORDER NO. IVD/KSERA/AO/DRK/ASG/EAD3-55/2009] UNDER SECTION 15 I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5(1) OF SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 Against Kapil Bhuptani PAN No. ADDPB9755B (Residing at A-7, 2 nd Floor, Hari Darshan Co-operative Housing Society, Pendse Nagar, Road No. 4, Dombivli (East) Thane ) FACTS OF THE CASE IN BRIEF 1. K Sera Sera Productions Ltd. (hereinafter referred to as KSERA ) was incorporated in the year The company is in the business of motion picture production, motion picture distribution, television, broadband and wireless. The shares of the company are listed on Bombay Stock Exchange Ltd. (hereinafter referred to as BSE ) and National Stock Exchange of India Ltd. (hereinafter referred to as NSE ). The shares of KSERA were being traded in the S segment of BSE during the investigation period. 2. A snap investigation was conducted by BSE in the trading of the scrip for the period from June 01, 2004 to October 31, 2004 wherein it was observed that certain stock brokers and their clients may have entered into circular/ reversal trades among themselves. In view of the above, BSE vide its letter dated February 19, 2007 referred the matter to SEBI for consideration. Page 1 of 14

2 3. SEBI conducted investigation into the trading of the scrip of KSERA, during the period from June 01, 2004 to October 31, 2004 (hereinafter referred to as Investigation Period ). During this period, the shares of KSERA were listed only on BSE. The Investigation Report observed that during the Investigation Period the price of the scrip opened at Rs , reached period low of Rs on June 01, 2004, touched a high of Rs on October 28, 2004 and closed at Rs on October 29, During the period from June 1, 2004 to June 25, 2004 the scrip moved gradually from Rs to in 19 trading days. Thereafter the scrip registered a day high of Rs.130 on June 28, The price was moving in a range of Rs.105 to Rs.125 till July 14, Thereafter the price of the scrip sharply moved from Rs. 121 (opening price on July 15, 2004) to Rs. 149 (intra-day high on July 16, 2004) in two trading days. 4. The Investigation Report observed that a group of clients and a few stock brokers, trading on their own accounts, traded significantly in the scrip during the Investigation Period. The group aggregately purchased 93,29,344 shares and sold 92,59,474 shares, which constituted almost 51.73% of the gross volume on BSE during the period under investigation. Majority of the stock brokers appearing in the list of top ten stock brokers on gross purchases basis also appeared as top ten stock brokers in gross sales basis. This group consisted of namely S P J Stock Brokers Pvt. Ltd. (dealing on its own account), Vijay Bhagwandas & Company (dealing for clients Shri. Tejas Ghelani and Shri. Sunil Purohit), Harikishan Hiralal (dealing for client Victory Trading), Sanchay Fincom Ltd. (dealing for client Shri Sunil Purohit), Uttam Financial Services Ltd. (dealing on its own account), Shri Adolf Pinto ( dealing for clients Kenneth Pinto and Gillian Pinto) and Galaxy Broking Ltd., (dealing for Shri. Kapil Bhuptani, hereinafter referred to as the noticee ). This group is hereinafter referred to as the group. It was alleged that the trades executed among the group were synchronized/ circular in nature. Page 2 of 14

3 APPOINTMENT OF ADJUDICATING OFFICER 5. I was appointed as the Adjudicating Officer (subsequent to the transfer of Shri Biju S.) vide order dated December 10, 2008, under section 15 I of Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act ), read with Rule 3 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as Adjudication Rules ) to inquire into and adjudge under Section 15HA of the SEBI Act, the violations of Regulations 4(1) and 4(2) (a), (b) (e) and (g) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as the PFUTP Regulations ) alleged to have been committed by the noticee. SHOW CAUSE NOTICE, HEARING AND REPLY 6. A Show Cause Notice A&E/BS/ASG/ /2008 dated May 14, 2008 (hereinafter referred to as SCN ) was served on the noticee by Registered post Acknowledgement Due in terms of the provisions of Rule 4(1) of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, seeking reply of the noticee as to why an inquiry should not be held against the noticee in respect of the violations alleged to have been committed by the noticee. 7. In the SCN it was alleged that the group had traded significantly in the scrip of KSERA during the Investigation Period and on analyzing the trading pattern among the major stock brokers on the gross purchases and sales it was observed that the trades were synchronized/ circular in nature and that the majority of the trades among the group were through synchronized orders. These actions amounted to execution of nongenuine trades and misuse of the stock exchange mechanism and were in violation of Regulations 4(1) and 4(2) (a), (b) (e) and (g) of the PFUTP Regulations. Page 3 of 14

4 8. The noticee submitted a reply to the SCN dated August 22, 2008 denying all the charges. The noticee stated that he was a small investor. The reply submitted by the noticee stated the following: a. he was not aware of the alleged transactions in the scrip of KSERA and that he had instructed his stock broker Galaxy Broking Ltd. in good faith to deal in shares on his behalf b. the stock broker had never informed him about his buy and sell positions, not even given him any brokers note. c. he alleged that the stock broker had used his account to carry out fictitious trades and that when he had approached the noticee he had failed to get a satisfactory reply. The noticee had attached his bank account statement for the investigation period with his reply and requested for a personal hearing. 9. In view of the above denial and allegations made by the noticee against his stock broker, vide letter dated May 19, 2009, the stock broker was directed to provide its comments on the same. In response to the same the stock broker, vide its letter dated June 04, 2009 stated that the claims made by the noticee were false and it submitted the ledger confirmation for the year signed by the noticee in support of its defence. The stock broker submitted that the bills for the transactions done in the noticee s account were collected by his peon regularly. Moreover, it stated that the bank statement of the noticee clearly indicated the regular payments made by the noticee to the stock broker. Thus, the stock broker raised the question that if the client had not been receiving the broker note or contract bills, as alleged, then on what basis was he making regular payments to his stock broker. 10. As requested by the noticee, a hearing notice dated March 25, 2009, granting a personal hearing to the noticee on May 06, 2009 was issued by Registered Post Acknowledgment Due. The noticee failed to appear for the hearing without providing any reasons for the same. Therefore, a final hearing notice dated May 14, 2009, granting the noticee a personal hearing on June 08, 2009, was sent by hand delivery but the same could Page 4 of 14

5 not be delivered. Subsequently, the personal hearing notice was delivered through his stock broker Galaxy Broking Ltd. to the noticee. The noticee appeared for the hearing along with his Authorised Representative, Miss. Vandita Jogi and reiterated the submissions made in his reply dated August 22, The noticee stated that he is an insurance agent and had given his signed blank cheque book and Delivery Instruction Slips to one Shri Chirag Pujara, sub broker, who had been operating both the accounts. Thus, the noticee submitted that all the transactions were either carried out by the stock broker Galaxy Broking Ltd. or Shri Pujara, but not by the noticee. When the copy of the ledger confirmation submitted by his stock broker Galaxy Broking Ltd. was presented before him during the personal hearing, the noticee orally denied that he had signed the ledger confirmation of the stock broker Galaxy Broking Ltd., which the stock broker had submitted before the Adjudicating Officer. The noticee orally denied that the signature in the ledger confirmation was his signature. The noticee undertook to submit a detailed reply before June 15, However, the noticee submitted a reply dated June 25, 2009, received on June 30, 2009 stating that : a. The bank account details of which he had previously submitted, was opened on June 01, 2004 and closed on October 31, b. There was no balance in his bank account from the date it was opened. c. His stock broker Galaxy Broking Ltd. had not sent any demat account statement to him. To provide the noticee sufficient opportunity to defend himself, vide letter dated July 10, 2009, a copy of the letter of Galaxy Broking Ltd. dated June 04, 2009, along with the copy of the ledger confirmation (which had already been made available to the noticee for his perusal during the personal hearing) was sent to him by Registered Post Acknowledgment Due for his comments. This letter was returned undelivered by the Postal authorities with the comment person not staying there. This letter was sent to his stock broker Galaxy Broking Ltd., vide letter dated July 29, 2009 to deliver to its client. Galaxy broking Ltd. vide its letter dated August 20, 2009, stated that the noticee had refused to accept the envelope sent Page 5 of 14

6 by it by Registered Post Acknowledgment Due, a copy was submitted to the Adjudicating Officer. CONSIDERATION OF EVIDENCE AND FINDINGS 11. The Investigation Report has provided the following trade details regarding the trading among the group: Broker Name Galaxy Broking Ltd Adolf Pinto Vijay Bhagwandas & company Sanchay Fincom Ltd Harkishan Hiralal Client Name Total Buy Quantity Buy among these clients Buy among group of clients % of market volume Total Sell Quantity Sell among these clients Sell among group of clients % of market volume Kapil Bhuptani Kenneth Pinto Gillian Pinto Sunil Purohit Tejesh Ghelani Sunil Purohit Victor Trading Corporation M M Upadhyay Amit Pandya SPJ Stock Brokers Pvt. Ltd OWN Uttam Financial Services Ltd Own Grand Total The Investigation Report alleged that the noticee purchased 4,49,317 shares and sold 4,34,940 shares which accounted for 2.49% and 2.41% respectively of the total market volume. Within the group he purchased 3,03,279 shares and sold 2,74,674 shares amounting to 1.68% and 1.52% respectively. Page 6 of 14

7 13. The pattern of trading indicated in the Investigation Report revealed that it was usually among a group of stock brokers i.e. following the pattern A B C D A and same number of shares were rotated in a circular manner among stock brokers in the group on a daily basis so that the same number of shares go back to the original seller at the end of the day and net position of each stock broker remains nil. The Investigation Report alleged that the group had entered into circular trading over a period of 5 months and contributed to the major volume in the market and impacted the price. 14. Details of the trades among the whole group on the basis of time difference between entering of the buy and sell orders is provided in the following table. No of Buy Orders No of Sell Orders % contribution to Cir trades No of Time Difference Trades Quantity 0:00: :00: :00: :00: :00: :00: :00: :00: :00: :00: :00: More than 30 seconds Total among group clients From the above table, it may be observed that for 29, 063 trades amounting to a volume of 52,94,093 shares accounting for about 79.56% of volume of trades among the group, the time difference between the buy orders and the sell orders was less then or equal to 10 seconds. There were 2358 buy orders and 2247 sell orders. It is observed that for 25,99,468 shares, which accounted for 39.08% of the trading among the group, the buy and sell order quantities and rates were similar and the time difference between buy and sell order entered was less than or equal Page 7 of 14

8 to 30 seconds. Hence, the orders of most of these trades appear to be structured/ synchronized. And it may be derived that the orders were punched in/ placed with preconceived motive and with prior arrangement that the orders would be picked up by a particular client (s) and stock broker (s) on the opposite side. 16. From the trade log of the noticee, the synchronized/ circular nature of the trades executed by him during the Investigation Period is further revealed. This is similar to the pattern of trading of the group described in the Investigation Report as stated in the previous paras. In all the transactions it is observed that there is a time difference of only a few seconds between the placing of the buy order and the sell order. In some cases the buy and the sell orders are placed at exactly the same time. The buy order quantity as well as the sell order quantity is identical. Further, the prices at which the buy orders and the sell orders have been placed are also identical. The trade log shows that the noticee had undertaken such transactions on a total of 26 trading days in June and July, 2004 and on 6 trading days in August and 4 trading days in September, Thus, within a few seconds of the buy/ sell order being placed on the terminal by the noticee, the order got exactly matched in both price and quantity. In some instances, it got instantly matched. This did not happen on one or two occasions but on several occasions and on almost each and every trading day in the month of June and July, 2004 and on a few days in August and September, Finally, the bank statements of the noticee clearly show the regular payments that he made to his stock broker Galaxy Broking Ltd. The fact that he was making regular payments indicates that he was authenticating the transactions. His oral submission that both his bank account and demat account were being operated by one sub broker Shri Chirag Pujara has not been confirmed by him by way of any documentary proof. In fact, as per the records of SEBI, Shri Chirag Pujara is not a registered subbroker of Galaxy Broking Ltd. The noticee has not filed any criminal complaint/ police complaint against Shri Pujara or the stock broker Galaxy Broking Ltd. regarding the alleged activities in his trading account and the Page 8 of 14

9 ledger confirmation signed by him, even after the same was brought to his knowledge and sufficient time / opportunity was provided to defend himself during/ after the personal hearing, when the ledger confirmation was made available to him. The noticee has also not submitted any record of having filed any complaint against the stock broker with SEBI. The noticee has simply verbally stated that the signature on the ledger confirmation did not belong to him. Even in his written reply he has not mentioned this allegation. Further, he has not submitted any proof of having confronted the stock broker / sub broker, Shri Pujara regarding the same. Moreover, when the copy of the stock broker s letter was sent to him he refused to accept it. Thus, he did not even intend to file any complaint to defend himself. Thus, the entire episode of events discussed can lead to the conclusion that the noticee did not take any step to defend himself against the alleged misdeeds of his stock broker/ sub broker Shri Pujara. This proves that he was aware of the happenings in his trading/ demat / bank accounts. 18. Finally, it is noted from the reply of the noticee as well as the KYC form of the noticee submitted by his stock broker that the trading account of the noticee was opened on April 12, 2004 and the bank account was opened on June 01, 2004 and closed on October 31, 2004 i.e. exactly during the Investigation Period. Thus, both these accounts seem to have been opened for the specific purpose of carrying out the alleged trades in KSERA. It is observed from the KYC form of the noticee, that Chirag Pujara is the introducer of the noticee. This points towards collusion between the noticee and Shri Pujara and gives an indication that the two were hand in glove. 19. I have taken into consideration the facts and circumstances of the case, the submissions advanced by the noticee, and the material made available on record. The allegations against the noticee in the SCN is that he had executed synchronized / circular trades and indulged in nongenuine transactions in the scrip of KSERA along with certain other clients and stock-brokers during the Investigation Period. I have noted that there were numerous trades in the scrip with only a few counter parties on a Page 9 of 14

10 daily basis. From the Investigation Report it is observed that the noticee s trade quantities were also high. Hence the noticee s submission that it had no knowledge about the synchronized/ circular trades and its non- genuine nature, does not seem to have much ground. The fact that such transactions took place repeatedly over a period of 36 trading days reinstates the fraudulent nature of such trades. Thus, it can be concluded that the noticee was part of the group which executed synchronized / circular trades and indulged in non-genuine /fraudulent transactions in the scrip of KSERA. 20. In this case, it becomes necessary to quote the judgment of the Hon ble Securities Appellate Tribunal (hereinafter referred to as SAT ), in Nirmal Bang Securities Pvt. Ltd Vs SEBI (Appeal no /2002), wherein it was observed that: Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale can create false volumes There are many transactions giving an impression that these were all synchronized, otherwise there was no possibility of such perfect matching of quantity price etc.. In a synchronized trading intention is implicit. 21. Also the Hon ble SAT, in Ketan Parekh Vs. Securities and Exchange Board of India (Appeal No. 2 of 2004), observed as follows: A synchronised transaction will,however, be illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and is executed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium. Any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal. Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available. The nature of the transaction executed, the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn. Page 10 of 14

11 22. In the case of Ashok K Chaudhary Vs. SEBI, (Appeal No 69 of 2008), dated November 5, 2008, the Hon ble SAT observed that : such large number of reverse trades cannot take place through the mechanism of the system. These have obviously been manipulated. Moreover, reverse trades are fictitious trades meant to increase volumes on the screen of the trading system as there is no change of beneficial ownership in the traded shares. 23. In view of the above findings it can be concluded that the noticee has violated Regulations 4(1) and 4(2) (a), (b) (e) and (g) of the PFUTP Regulations. The text of the said provisions is as follows: 4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of Regulation 3 1, 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) indulging in an act which creates false or misleading appearance of trading in the securities market; (b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss; (e) any act or omission amounting to manipulation of the price of a security;. (g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security 1 Regulation 3: Prohibition of certain dealings in securities: 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 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. Page 11 of 14

12 24. It may be worthwhile to quote the judgment of the Hon ble Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual Fund [2006] 68 SCL 216(SC) wherein it was held that : once the violation of statutory regulations is established, imposition of penalty becomes sine qua non of violation and the intention of parties committing such violation becomes totally irrelevant. Once the contravention is established, then the penalty is to follow. 25. The said violations attract penalty under section 15HA of the SEBI Act which provides that: 15HA. Penalty for fraudulent and unfair trade practices- If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher. 26. In this regard, the provisions of Section 15J of the SEBI Act and Rule 5 of the Rules require that while adjudging the quantum of penalty, the adjudicating officer shall have due regard to the following factors namely; a. the amount of disproportionate gain or unfair advantage wherever quantifiable, made as a result of the default b. the amount of loss caused to an investor or group of investors as a result of the default c. the repetitive nature of the default 27. It is noted from the facts made available on record that the noticee had executed synchronized /circular trades in the scrip of KSERA and indulged in non-genuine/ fraudulent transactions during the investigation period in violation of the PFUTP Regulations. The noticee has also failed to prove his claim that these fraudulent transactions were carried out by someone else by misusing his trading account, as discussed above in para 17 and 18. He has not filed any criminal/ police complaint against the alleged perpetrator of the fraud, even after the same had been brought to his knowledge and after being given sufficient opportunity/ time to defend himself. Page 12 of 14

13 28. It is also to be noted that the Investigation Report has not quantified the profit/ loss for the nature of violations / transactions carried out by the noticee and no quantifiable figures are made available on record to assess the disproportionate gain or unfair advantage and amount of loss caused to an investor or group of investors as a result of the fraudulent practices and non-genuine transactions. 29. From the traded volume of the noticee it is seen that he had purchased 4,49,317 shares and sold 4,34,940 shares, which is a considerable volume to influence the price/ volume of the scrip as well as affect the market equilibrium. Further, it can be seen from the material made available on record that the volume of the noticee s trades in KSERA is more than Rs. 9 crores, therefore his claim of being a small investor is unacceptable. In fact, the objective of such synchronized/ circular / non genuine trades, as has been undertaken by the group, is to create a false impression about the value of the scrip/ demand for the scrip and then take advantage of it, since the common investors will be vulnerable to be misled by the falsely created high volume. In this case the group had indulged in this fraudulent activity and the noticee was an active member of the group. 30. In view of the above, I hereby impose a penalty of Rs. 15,00,000/- (Rupees Fifteen Lakhs ) only on the noticee under Section 15 HA of the Securities and Exchange Board of India Act, 1992, which is appropriate in the facts and circumstances of the case. ORDER 31. In exercise of the powers conferred under Section 15 I of the Securities and Exchange Board of India Act, 1992, and Rule 5 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995, I hereby impose a penalty of Rs. 15,00,000/- (Rupees Fifteen Lakhs ) only on the noticee Shri Kapil Bhuptani, (PAN No. ADDPB9755B, having address at A-7, 2 nd Floor, Page 13 of 14

14 Hari Darshan Co-Operative Housing Society, Pendse Nagar, Road No. 4, Dombivli (East) Thane ) in terms of the provisions of Section 15HA of the Securities and Exchange Board of India Act,1992 for his failure to abide by the provisions of Regulation 4(1) and 4(2) (a), (b) (e) and (g) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, In the facts and circumstances of the case, I am of the view that the said penalty is commensurate with the violations committed by the noticee. 32. The penalty shall be paid by way of demand draft drawn in favour of SEBI Penalties Remittable to Government of India payable at Mumbai within 45 days of receipt of this order. The said demand draft shall be forwarded to, Deputy General Manager, Investigation Department, ID-3, Securities and Exchange Board of India, Plot No. C4-A, G Block, Bandra Kurla Complex, Bandra (E), Mumbai In terms of the provisions of Rule 6 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995, copies of this order are being sent to Shri Kapil Bhuptani and also to the Securities and Exchange Board of India, Mumbai. Place: Mumbai Date: August 31, 2009 D. RAVI KUMAR CHIEF GENERAL MANAGER & ADJUDICATING OFFICER Page 14 of 14