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TMI Blog2007 (8) TMI 813X X X X Extracts X X X X X X X X Extracts X X X X ..... rice plummeted to ₹ 149/- on March 31, 2001 from ₹ 1499/- on April 1, 2000. The said price movements were also accompanied by large volumes (at times, the daily average volume reached 10, 00,000 shares) at BSE and NSE. 1.3 In the facts and circumstances, based upon prima facie findings, Securities and Exchange Board of India (hereinafter referred to as SEBI) vide an interim order dated July 20, 2001 inter alia prohibited the company and its promoter viz. Shri Dinesh Dalmia from accessing capital market for a period of one year or completion of investigation and action thereupon whichever is later. The said interim order was confirmed by SEBI, vide order dated December 20, 2001 after giving reasonable opportunity of hearing. 1.4 The investigation conducted by SEBI inter alia found that Shri Dinesh Dalmia had fraudulently allotted 1.7 crore shares of the company to its group/associate entities. Out of the above, around 1.3 crore shares of the company were off loaded in the securities market by the group/associate entities of Shri Dinesh Dalmia viz. Hulda Properties and Trades Ltd., Powerflow Holdings Ltd., DSQ Holdings Ltd. and DSQ Industries Ltd. etc. before the listin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in writing from SEBI". 1.6 The aforesaid order dated September 9, 2004 was challenged by the company and Shri Dinesh Dalmia before the Hon'ble Securities Appellate Tribunal (SAT). Vide order dated December 8, 2005, SAT upheld the aforesaid SEBI order inter alia with the following modification: The period of debarment shall be from the date when the interim order was passed by SEBI on 27.1.2001 and will run for a period of 10 years from that date and the order to that extent also is modified. 1.7 SAT, in the said order, has inter alia observed "I find that by its actions as outlined above, the company has acted in a fraudulent manner". "unlisted shares were sold to the unsuspecting investors way back in 2000-01 at a price of several hundred rupees for each share. 1.8 The investigation conducted by SEBI inter alia found that the associates of Shri Dinesh Dalmia viz. Hulda Properties and Trades Ltd., Powerflow Holdings Ltd., DSQ Holdings Ltd. traded heavily in the shares of the company among themselves and thereby created volumes by executing synchronized trades, circular trades etc. The details of the trades of the above entities through some of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities that are fraudulent and unfair and manipulative. ...the associated entities had entered into synchronized and circular deals wherein the buy order and sell orders were inputted in the trading system at the same time for same rate and same quantity. While one of the associated entities was selling, other entities were buying shares. By entering into such synchronized deals, they have facilitated trades where effectively there was no change in beneficial ownership and there was creation of artificial market. 1.12 Further, the investigation conducted by SEBI inter alia found that Accord Capital Markets Ltd., (hereinafter referred to as the Broker), Member NSE had dealt substantially in the shares of the company during October 1999 to January 2001. The Broker is also a member of Calcutta Stock Exchange Association Ltd. and BSE. The client of the Broker was Mehta & Ajmera, a partnership firm of Shri Himanshu Ajmera and Shri Girish S. Mehta. Shri Himanshu Ajmera and Shri Girish S. Mehta are the major shareholders and directors of the Broker. The Broker had also executed proprietary trading in the shares of the company. Majority of the aforesaid trades executed by the Broker wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished the Broker with the documents and records relied upon and that it had requested for the inspection of the relevant trade and order logs etc. The Broker submitted that refusal to disclose the original documents which formed basis of the charge were in breach of the principles of natural justice. The Broker contended that there was no arrangement/ understanding/ meeting of minds whatsoever either with the counterparty clients or the counterparty stock brokers. Without prejudice to the above contention, the Broker stated that, negotiated deals are permitted to be executed in the manner as prescribed in SEBI circular dated September 14, 1999. The Broker claimed that some of the trades were not synchronized in its strict sense as there were difference in the order time, price and quantity. It also stated that it had not funded in the transaction. It also claimed that merely because the selling clients availed funding from the selling brokers, it would not necessarily mean that the Broker was a party to any conspiracy to facilitate such funding. It added that only normal brokerage was charged by it from the clients in respect of the trades executed by it. The Broker has also p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oker stated that it had executed the trade as per the instructions of its client from time to time and that the beneficial ownership of shares was also changed. The Broker also contended that its trades constituted a very small percentage of the total market turnover. It also stated that there was no failure of due diligence on its part and that all its trades were executed in the normal course of its business on the screens of the exchange. It claimed that the trades executed by it were small considering the liquidity of the shares of the company and therefore, it could not have affected the price discovery mechanism. 3.6 The Broker contended that the Enquiry Officer had failed to follow the order of SEBI dated September 10, 2004 in the matter of ICICI Brokerage Services Ltd. It has been contended that the facts of SEBI v. Cabot International Capital Corporation and the present case had no correlation to each other. The Broker further stated in its reply that the reference made to certain case laws in the Enquiry Report were irrelevant. The Broker also claimed that it had not failed to act with due skill, care and diligence and its case is that it had not violated the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 24, 2003 is only a continuation of the proceedings already initiated against the Broker under the provisions of the Enquiry Regulations read with the provisions of the FUTP Regulations. Therefore, I do not accept the contention of the Broker that the appointment of the second Enquiry Officer is ultra vires of the Enquiry Regulations. Further, I note that no prejudice has been caused to the Broker as the second Enquiry Officer had granted sufficient opportunities to the Broker to make its submissions in respect of the charges leveled against it. 4.4 I note that the Broker has not disputed the trades executed by it in the shares of the company. The proprietary trades and the trades for Mehta & Ajmera (client of the Broker), in the shares of the company are also not disputed. Further, I note that the partners of the client of the Broker are Shri Girish Mehta and Shri Himanshu Ajmera. The said Shri Girish Mehta and Shri Himanshu Ajmera are the promoters/directors of the Broker and are also the major share holders (43.76% each) of the Broker as on October 31, 2001 and they continued to hold majority shares in the Broker. Their shareholding in the Broker as on March 31, 2006 was 48.62 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted company in the beginning of 1999. 4.7 Further, in his capacity as the director of the Broker Shri Nilesh Doshi had stated Q3. Who are the directors in Accord Capital Markets Ltd. and their residential address. Ans. In total there are 5 directors, including myself. The other directors are 1) Shri Girish Section Mehta, residing at 19, Mahendra Road, Kolkatta 25, 2) Shri Himanshu Ajmera-residing at 44/2 Sarat Bose Road, kolkatta - 700 020, 3) Shri Manoj Patel, residing at Ballygunge Circular Road, Kolkatta 19 and 4) Shri Kamlesh Pancholi residing at 5 Ashton Road, Kolkatta - 20. Q4a. Does Accord Capital or directors of Accord have any connection/relation with DSQ Software Ltd. or the directors / promoters of DSQ Software Ltd. Ans. As Accord, we do not have clients that are connected with directors/promoters of DSQ Software. However, 2 of our directors, Shri Girish Mehta and Shri Himanshu Ajmera were having business relations with Shri Dinesh Dalmia, Managing Director of DSQ Software. Q5. It is seen from the transaction details furnished by you that your client Mehta & Ajmera have transacted in large quantities in the shares of DSQ Software Ltd. How are they connected wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Mehta & Shri Himanshu Ajmera who are also the promoters/directors of the Broker. iii) Shri Girish Mehta & Shri Himanshu Ajmera are the substantial shareholders of the Broker. Collectively they were holding more than 85% as on October 31, 2001 and continue to hold the same. iv) The certificate of registration of Shri Girish Mehta & Shri Himanshu Ajmera as a stock broker (trade name Mehta & Ajmera) were suspended by SEBI in respect of their dealings in the shares of DSQ Industries Ltd. and the company. v) Mehta & Ajmera (trade name) as a member of CSE had executed 9.84% and 8.74% of the gross purchases and sales of the total trades of Hulda and DSQ Holdings Ltd. in the shares of the company. vi) Shri Girish Mehta & Shri Himanshu Ajmera were having business relationship with Shri Dinesh Dalmia. vii) Time Vinimay Private Ltd. is an investment vehicle incorporate by Mehta & Ajmera in the year 1999. Shri Nilesh Doshi and Shri Kamlesh Pancholi, the directors of the Broker were also the directors of Time Vinimay Private Ltd. viii)Time Vinimay Private Ltd was subsequently transferred to Shri Dinesh Dalmia and his group. 4.10 According to me, the foregoing facts with their t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y matching. The said synchronization cannot take place in the absence of any specific understanding/arrangement between the clients at the first instance, especially when the shares of the company were highly liquid at the time of the trades. 4.13 I note that during the relevant period, the shares of the company were highly liquid and that the liquidity in trading suggests the scale of activity in such shares wherein a considerably large number of buyers and sellers execute trades. In such a situation where the participants are numerous, it is almost improbable to get a stock broker's trades executed always with the same counter party stock broker, unless, the said stock broker has had certain arrangements/ understanding with the counter-party stock broker and the client. If there was no specific understanding / meeting of minds as contended by the Broker the orders of the Broker would have got matched with the orders placed by some other stock brokers. 4.14 Further, a higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in eit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (executed between connected people) per se, were synchronized in nature and the same could be possible only with prior meeting of minds. The trades of the Broker created artificial volume in the shares of the company and the conduct of the Broker needs to be judged in the attendant material circumstances of the case wherein the buy order and sell orders were inputted in the trading system almost at the same time, rate and quantity, to the detriment of genuine investors and the safety and credibility of the securities market. 4.18 The above instances would prove the direct participation of the Broker in the entire transactions that took place in the shares of the company for the purpose of giving a misleading appearance of trading in the shares of the company and thereby artificially increasing the volume of the said shares. It may be true that the Broker act on the advice of its client and that in a normal trade executed through the exchange mechanism, a stock broker may not be aware of the counter party. However, considering the facts and circumstances of the present case, wherein the trades in a highly liquid scrip were executed between common set of brokers and clients, consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a), Time Vinimay Private Ltd. (investment company incorporated by Mehta and Ajmera) and Shri Dinesh Dalmia as explained above in graphic details would only lead to the conclusion that the trades were executed with prior meeting of minds and any inference of exclusion of meeting of minds in the facts and circumstances would be inconsistent with the attendant circumstances of the case highlighting a vinculum amongst the participants. Further, I note that Time Vinimay Private Ltd. had received 50 crores from the company on March 22, 2000 and ₹ 4 crores on March 28, 2000 and it has been admitted by Shri Nilesh Doshi that part of the said funds were utilized to pay Mehta & Ajmera towards their dues and the other part was advanced to the said Mehta & Ajmera towards future trading in securities at the instance of Shri Dinesh Dalmia. Further Shri Nilesh Doshi had also admitted that the Broker had received ₹ 25 crores from the company on January 14, 2000. The series of trades in the form of synchronized trades would only lead to the finding that the said trades executed by the Broker were done with the purpose of manipulating the volume in the shares of the company to the detrim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were executed with the prior knowledge for the purpose of manipulation. Given the fact that there was manipulation in the scrip as borne out by the orders of SEBI, such manipulation could not have been possible by Shri Dinesh Dalmia and his associates alone without the stock brokers acting in concert. Further, it stands to reason that the Broker who had direct dealings with them can't escape its responsibility on the plea that it was not aware of its client's manipulative intentions in the market. 4.23 I note that, even in cases where direct evidence is not available in the context of market operations as to whether there was a constructive knowledge on the part of the Broker in respect of the manipulation, while dealing with its clients, the same has to be inferred from the attendant circumstances. In such a position which has come to stay, the role of the Broker can not be any different and has to be consistent with the overall scheme of market manipulation in the shares of the company as transpired, to which it was a necessary party, without which the trades would not be completed. In this connection, the observation of SAT in the matter of Triumph International Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest. Therefore, the hackneyed plea based on intentions in the market place can not pass muster in all circumstances, more so when such intentions are in the special/peculiar knowledge of the parties to the transactions. Also any suggestion attributing innocence to the parties involved in such transactions would give rise to an untenable situation where certain other third persons/entities alone would be responsible for the manipulation and none else. 4.26 In a quasi judicial proceeding like this turning on preponderance of probability, the standard of proof is prudent man's estimate as to the probabilities of the case. In this view also, any plea to delink the Broker from the collective nexus would be a travesty of facts. 4.27 In the present case, I note that the Broker knowingly executed the synchronized trades on behalf of its client (Mehta & Ajmera). It is the Broker who plays a pivotal role in synchronizing the trades with the counter broker and match the same through the exchange mechanism by punching the buy and sell orders simultaneously. Definitely it is a clear case of having congruence of interest and such an act could not be anything but compatible with a scheme o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale can create false volumes. The argument that the parties had no means of knowing whether any entity controlled by the client is simultaneously entering any contra order elsewhere for the reason that in the online trading system, confidentiality of counter parties is ensured, is untenable. It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only a coincidence in some cases. Theoretically this is OK. But when parties decide to synchronize the transaction the story is different. 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. As the Respondent rightly stated it is too much of a coincidence over too long a period in too many transactions when both parties to the transaction had ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties. 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. 4.31 Artificial increase in the volumes of scrip has the adverse effect on the innocent investors of the market who get induced to buy the shares. SAT in the matter of Ketan Parekh v. SEBI had observed: When a person takes part in or enters into transactions in securities with the intention to artificially raise or depress the price he thereby automatically induces the innocent investors in the market to buy/sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated the person doing so is necessarily influencing the decision of the buyer/seller thereby inducing him to buy or sell depending upon how the market has been manipulated. We are therefore of the view that inducement to any person to buy or sell securities is the necessary consequence of manipulation and flows therefrom. In other words, if the factum of manipulation is established it will necessarily follow that the investors in the market had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade transactions without intending to transfer the beneficial ownership. In the facts and circumstances, it is fairly established that the Broker has violated the provisions of Regulation 4(b), (c) and (d) of the FUTP Regulations. 4.35 The natural corollary to this issue is whether the Broker had maintained high standards of integrity, promptitude, fairness and exercised due skill, care and diligence in the conduct of its business. In terms of the provisions of the Clauses A(1) to (4) of the Code of Conduct prescribed under the provisions of the Broker Regulations, a stock broker shall not inter alia create false market or indulge in any act detrimental to the investors' interest or which leads to the interference with the fair and smooth functioning of the securities market. The stock broker shall also maintain high standards of integrity, promptitude and fairness and shall act with due skill, care and diligence in the conduct of his business. It is also a requirement that a stock broker shall not inter alia indulge in manipulative transactions with a view to distort the market equilibrium. 4.36 In the present case, the trades of the Broker (as explained in detail above) cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of beneficial ownership but to operate only as a devise to cause fluctuations in the price of the shares. The fictitious trades which resulted in the creation of artificial price and misleading appearance of trading cannot be treated as the one which are envisaged under the above circular. Therefore, it is established that the Broker had violated the SEBI Circular dated September 14, 1999. 4.41 In the facts and circumstances, it is fairly established that the Broker had violated Regulation 4(b), (c) and (d) of the FUTP Regulations, Clauses A(1) to (4) of the Code of Conduct as specified in Schedule II of the Broker Regulations and the SEBI Circular dated September 14, 1999. These violations are not trivial to be condoned, considering the nature of the trades executed by the Broker and its involvement in the said trades. The aforesaid violations committed by the Broker calls for a penalty and considering the facts and circumstances of the case, I, find that this is a fit case for imposing major penalty as ordered herein under. 5. ORDER 5.1 In view of the foregoing, I, in exercise of the powers conferred upon me in terms of Section 19 of the Securities and Exchange Board of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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