BEFORE THE ADJUDICATING OFFICER SECURITIES AND EXCHANGE BOARD OF INDIA

Transcription

1 BEFORE THE ADJUDICATING OFFICER SECURITIES AND EXCHANGE BOARD OF INDIA [ADJUDICATION ORDER NO.IVD-ID-1/BPE/AO/DRK/VB/EAD-3/725/ ] 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 In respect of B.P Equities Private Limited Stock Broker BSE & NSE SEBI Registration No. INB , INB /26,Cama Building Dalal Street, Fort Mumbai In the Scrip of EssDee Aluminium Ltd. FACTS IN BRIEF 1. Securities and Exchange Board of India (hereinafter referred to as SEBI ) conducted an investigation into the trading in the scrip of Ess Dee Aluminium Ltd. (hereinafter referred to as EAL ) on BSE Limited (hereinafter referred to as 'BSE') and National Stock Exchange of India Ltd (hereinafter referred to as 'NSE') during the period September 01, 2012 to June 30, 2013 (hereinafter referred to as Investigation Period ). It is noted from the findings of the investigation report (hereinafter referred to as IR ) that the scrip of EAL rose from ` to a high of ` 617 and closed at ` during the Investigation period. APPOINTMENT OF ADJUDICATING OFFICER 2. I was appointed as Adjudicating Officer and the same was communicated vide proceedings of the Whole Time Member appointing Adjudicating Officer dated February 05, 2014 under Section 15 I of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as SEBI Act ) read with Page 1 of 10

2 Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as Rules ) to inquire into and adjudge under Section 15HB of the SEBI Act for failure to exercise due skill and care in terms of Clause A(2) of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations,1992 (hereinafter referred to as Stock Broker Regulations ) alleged to have been committed by B.P Equities Pvt. Ltd. (hereinafter referred to as BPEL / noticee ). SHOW CAUSE NOTICE, REPLY AND HEARING 3. A Show Cause Notice (herein after referred to as SCN ) dated March 18,2014 was served on the noticee by Hand Delivery Acknowledgement Due (hereinafter referred to as 'HDAD') in terms of the provisions of Rule 4 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 requiring the noticee to show cause as to why an inquiry should not be held against it and why penalty, if any, should not be imposed on it under Section 15HB of the SEBI Act for failure to exercise due skill and care in terms of Clause A(2) of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, In the said notice, it was alleged that noticee had acted as stock broker and counterparty stock broker for its client Gajanan Enterprises Ltd (Gajanan) who executed self trades during the investigation period leading to false and misleading appearance of trading in the scrip of EAL. The details of said self trades are given as below : Entity Name Stock Exchange Stock Broker On Both Buy and Sell Side Total Self Trade Volume No. of self trades executed No. of Self Trade from the same terminal No. of days on which self trades done % of Self Traded Quantity to market Volume Net LTP Contribut -ion by self trades (in `) Gajanan Enterprises Ltd. BSE BP Equities Pvt. Ltd. 23, Gajanan Enterprises Ltd. NSE BP Equities Pvt. Ltd. 21, Page 2 of 10

3 4. The noticee vide its letter dated April 07,2014 had submitted its reply to the SCN wherein it has given the following details with regard to its client Gajanan - 1. It is one of leading clients and has a large trading and investment portfolio. They trade in multiple securities in large quantities and their trading activity is regularly monitored to ensure that the trading is within the framework of laws. 2. The dealers of noticee trade on behalf of Gajanan as per its predefined strategy. The trades in ESSDEE were a result of one such trading strategy called the momentum strategy, where they enter the scrip if it shows a strong one side movement. 3. The transactions of client is regularly monitored and have not observed any reason to believe that this client has intentionally executed selftrades with an intention of false and misleading appearance of trading. 4. The following characters of the trading of the client have been taken account by us while analyzing the trading pattern: a) The client carries out trades in large number of securities and does not have a concentrated volume in ESSDEE. b) The trading is carried out on selected days and not on all days covered under the investigation period. c) On most days the client has not executed large amount of transactions and the quantity of trades has been frequently changing. d) The volume of client in ESSDEE compared to the market-wide volume is not material and such small volume cannot be said to have created false and misleading appearance of trading. e) The volume of self-trades comprises of extremely negligible quantity as compared to the market volume of ESSDEE and the clients own volume which strengthens our belief that there was no reason for the client to intentionally indulge into any practice as alleged. f) The self-trades are extremely random and there is absolutely no consistency with regards to quantity, rate, timing or any other applicable parameter, which makes us believe that these are coincidental and unintentional. Page 3 of 10

4 g) The client has carried out a substantial amount of delivery trades, which have been settled by us on the exchange, clearly substantiating that these were executed with an intention of transfer of beneficial interest in the shares to them and for no other purpose. 5. With regard to the allegation of violation of Clause A(2) of the Code of Conduct for Stock Brokers under Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992.The noticee has submitted the following All the transactions are carried out on behalf of the client as per their instructions. The obligation arising out of the trades have been fulfilled and have also maintained a strict vigil over the transactions of the client. With regards to the self-trades, based on the facts and circumstances and taking into account the size and nature of business, it is noted that the same are co-incidental and unintentional. The quantity of self trades is extremely miniscule to have created any false or misleading appearance of trading. It has acted in full integrity with clients and other market participants at large. It has exercised required skill, care and diligence by ensuring that the client has adequate balance with us and the trades carried out are within the framework of law 6. As requested, vide personal hearing notice dated May 08, 2014, the noticee was granted an opportunity of hearing on May 19, 2014 at SEBI Bhavan Mumbai. However, the noticee vide its letter dated May 14, 2014 sought an adjournment of personal hearing stating that the concerned person was not available on the said date. Further vide its letter dated May 14, 2014,the noticee submitted the following in continuation to its reply dated April 07, The Hon'ble SAT in its Order dated January 24, 2014 in the matter of Smt. Krupa Sanjay Soni vs SEBI held that "a few instances of self trades in themselves would not, ipso facto, amount to an objectionable trades." In a similar matter of Gayatri Projects Limited, the AO, vide its order dated April 30, 2014 concluded that the charges levelled against the Page 4 of 10

5 noticees in the SCN do not stand established and the matter was disposed off on the grounds that when the percentage of self trades is negligible, the self trades are not capable of creating artificial volume. 7. Subsequently, vide final hearing notice dated May 23, 2014 the noticee was granted another personal hearing on June 25, 2014 at 12:00 noon at SEBI Bhavan, Mumbai. However the noticee vide letter dated June 19,2014 submitted that the concerned official shall be attending a matter before Hon'ble SAT and sought the hearing to be rescheduled to 5.00 PM on the same date. Accordingly, the said hearing was held and attended by Mr Dinesh Mange, AVP, Legal & Compliance of BPEL and CA.Ravi Ramaiya, (hereinafter referred to as 'ARs'). During the personal hearing the ARs reiterated the submissions made in its reply dated April 07, 2014 and May 14, 2014 and did not add anything to the submissions already made. CONSIDERATION OF EVIDENCE AND FINDINGS 8. I have taken into consideration the facts and circumstances of the case and the material made available on record. 9. The Investigation report observed that the noticee had acted as stock broker and counterparty stock broker for its client Gajanan who executed self trades during the investigation period leading to false and misleading appearance of trading in the scrip of EAL. 10. Before moving forward with the reply of the noticee, I would like to quote the following Orders of the Hon'ble Securities Appellate Tribunal (hereinafter referred to as 'SAT') with respect to 'self trades' wherein it was held as follows : i. Order in the matter of Chirag Tanna Vs The Adjudicating Officer dated June 16, 2011 Self trades have been defined by the Hon ble SAT as "..trades in which both the buyer and the seller are the same entity." Further in the same order, Hon ble SAT also held that:..we have on record the trade and order logs from which it has been pointed out by the learned counsel for the respondent Board Page 5 of 10

6 that the appellant had executed self trades i.e. trades in which he was both the buyer and the seller. Such trades are, admittedly, fictitious and create artificial volumes in the traded scrip.. ii. Order in the matter of Triumph International Finance Ltd Vs. SEBI dated May 04, The buyer and the seller were also the same. It is obvious that these trades were fictitious to which the appellant was a party. They were fictitious because the buyer and the seller were the same.. iii. Order in the matter of Systematix Shares & Stocks (India) Limited Vs. SEBI dated : "..It has been held in several cases by this Tribunal that self trades are fictitious and reprehensible. Trades, where beneficial ownership is not transferred, are admittedly manipulative in nature..." iv. Order in the matter of Anita Dalal Vs. SEBI dated : "..The appellant has been found guilty of self trade as well. Self trades admittedly are illegal. This Tribunal has held in several cases that self trades call for punitive action since they are illegal in nature. In M/s. Jayantilal Khandwala & Sons Pvt. Ltd. vs. Securities and Exchange Board of India (Appeal no. 24 of 2011 decided on June 8, 2011) this Tribunal has held that one cannot buy and sell shares from himself. Such transactions are obviously fictitious and meant only to create false volumes on the trading screen of the exchange..." v. Order in the matter of H.J. Securities Pvt. Ltd Vs. SEBI dated May 11, Appellants are free to adopt any business model, but has to ensure that whatever model is adopted, is in conformity with regulatory framework. 11. From the above cited orders of the Hon'ble SAT, I also note that - a) Self Trades are trades wherein beneficial ownership is not transferred; b) Self trades are fictitious, manipulative, create artificial volume in the market and are reprehensible; c) Whatever be the business model, it should ensure that such model complies with the regulatory framework. 12. In addition to its submissions made in pre para 4, the noticee has quoted the Order of Hon'ble SAT in the matter of Smt. Krupa Sanjay Soni Vs SEBI Page 6 of 10

7 wherein it was observed that "a few instances of self trades in themselves would not, ipso facto, amount to an objectionable trades." 13. I note that the client of noticee had indulged in self trades on BSE & NSE during the investigation period for 703 & 1886 instances, out of which on 453 & 419 instances the self trades had been executed from the same terminal of the noticee resulting into 64.43% & 22.21% of Self trades from the same terminal on BSE & NSE respectively. Therefore the submission of noticee that there were few instances of self trades is factually incorrect / does not have any merit. 14. With respect to the submission of the noticee quoting the AO order dated April 30, 2014 in the matter of Gayatri Projects Limited, matter was disposed off on the grounds that when the percentage of self trades is negligible, the self trades are not capable of creating artificial volume. It is further submitted by the noticee that the volume of self trades is extremely negligible. 15. In this regard, it is pertinent to quote the Hon ble SAT order dated May 11,2012 in the matter of H.J. Securities Pvt. Ltd, wherein It was held that "Simply because the number of such self trades is not large by itself cannot justify execution of self trades". In the instant case, the total self trade volume is extremely high i.e. 23,898 shares and 21,446 shares on BSE & NSE respectively which is not miniscule by any stretch of imagination and cannot be co-incidental as contended by noticee. 16. With respect to the submission of the noticee that its client has adopted a strategy called momentum strategy, I would like to add that whatever be the trading strategies employed by the noticee, the same should be within the regulatory parameters to ensure that it complies with the full regulatory framework, including not resulting into / avoidance of self trades and for that purpose appropriate checks and balances should be there. 17. In my opinion, a registered intermediary such as the noticee should have appropriate systems to ensure that unfair market practices like self trades / fictitious trades in such high volumes should not take place from its own Page 7 of 10

8 terminals. It may also be added that the activities that are prohibited should be avoided. The same has also been emphasised by the Hon'ble SAT in the case of H.J. Securities Pvt. Ltd. As a stock broker, the noticee has a duty to preserve the integrity and equilibrium of the securities market. 18. It is submitted by the noticee that transactions of client were regularly monitored and did not have any reason to believe that client has intentionally executed self-trades with an intention of false and misleading appearance of trading. The noticee had also submitted that the self-trades are co-incidental and unintentional. The number of self trades executed particularly from same terminal i.e. 453 trades in BSE and 419 trades in NSE itself shows that the fact was different from the submissions of the noticee. Further, the number of Self trades executed in BSE is 703 and in NSE is 1886 which in my opinion cannot be a mere coincidence as contended by noticee. 19. In view of the aforesaid discussion / observations / Hon'ble SAT Orders, it can be concluded that the noticee has executed Self Trades on behalf of its client in such high volumes and the number of self trades from the same terminal is also very high which resulted in false and misleading appearance of trading thereby failed to adhere to the Code of Conduct prescribed for Stock brokers and has violated Clause A(2) of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 of Stock Broker Regulations. The text of the said provisions is as follows: Stock Broker Regulations 7. The stock broker holding a certificate shall at all times abide by the Code of Conduct as specified in Schedule II. A. General. (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. 20. The said violations attract penalty under Section 15HB of the SEBI Act which provides that: 15HB. Penalty for contravention where no separate penalty has been provided. Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees. Page 8 of 10

9 21. 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 22. With regard to the above factors to be considered while determining the quantum of penalty, it is noted that the disproportionate gain or unfair advantage made by the noticee or loss caused to the investors as a result of violations committed by the noticee are not available on record. Further, it may also be added that it is difficult to quantify the unfair advantage made by the noticee or the loss caused to the investors in a default of this nature. 23. In view of the abovementioned conclusion, I hereby impose a penalty of ` 11,00,000 (Rupees Eleven Lakhs Only) on the noticee under Section 15 HB of the Securities and Exchange Board of India Act, 1992, for failure to exercise due skill and care in terms of Clause A(2) of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 which is appropriate in the facts and circumstances of the case. ORDER 24. 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 ` 11,00,000 /- (Rupees Eleven Lakh only) on the stock broker B.P Equities Pvt. Ltd. having SEBI Registration No. INB ,INB in terms of the provisions of Section 15HB of the Securities and Exchange Board of India Act,1992 for failure to exercise due skill and care in terms of Clause A(2) of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 of SEBI (Stock Brokers and Sub Brokers) Regulations, In the facts and circumstances of the case, I Page 9 of 10

10 am of the view that the said penalty is commensurate with the failure committed by the noticee. 25. 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 Chief General Manager, Enforcement Department, 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 B.P Equities Private Limited. Stock Broker BSE & NSE having office at 24/26,Cama Building, Dalal Street, Fort, Mumbai and also to the Securities and Exchange Board of India, Mumbai. Place: Mumbai Date: March 30, 2015 D. RAVI KUMAR CHIEF GENERAL MANAGER & ADJUDICATING OFFICER Page 10 of 10