Mukul Bhattacharjee, In Re (Non-Compliance With The Statutory Requirements)

1.0 Background

1.1 Shri Mukul Bhattacharjee (hereinafter referred to as “the said broker”), is a member of the Calcutta Stock Exchange (hereinafter referred to as “CSE”) and is registered with the Securities and Exchange Board of India (hereinafter referred to as “SEBI”) vide Registration No. INB 030936018.

1.2 The shares of Offshore Finvest Limited (hereinafter referred to as “OFL”) were listed on CSE. There was a major spurt in price and volumes traded at the CSE during the period July and October, 2001 (hereinafter referred to as “the said period”) in the scrip of OFL. An investigation was conducted by SEBI and it was observed that:—

i) Between July, 2001 and October, 2001, the price of the scrip OFL at CSE shot up from Rs. 15.70 during settlement no. 2002117 to Rs. 50.95 in settlement no. 2002121. The price increased to Rs. 70.50 with substantial volumes in settlement no. 2002127. The total volume of Offshore Finvest Ltd. traded at CSE between settlement nos. 2002115 and 2002129 was 15,49,400 shares. Out of this 14,44,400 shares, constituting 93.22% of the volumes were traded through three members, including the said broker.

ii) Investigations revealed that the said broker had traded in 2,40,400 shares of OFL between settlement no. 2002115 and No. 2002128 constituting 15.52% of the total volumes. It was further revealed that the entire volumes of transactions were executed by way of matching transactions in his own terminal by which the order quantity, price and time were matched with both buying and selling clients of the said broker. These cross deals were executed through the same terminal.

2.0 Enquiry Proceedings:

2.1 On the basis of the above investigation, vide order dated 4/8/2003, SEBI appointed an Enquiry Officer to enquire into the irregularities/contraventions alleged to have been committed by the said broker while dealing in the scrip of OFL and for possible violations of the provisions of the SEBI (Stock Brokers and Sub-Brokers) Rules and Regulations, 1992 (hereinafter referred to as “the said Regulations”) and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as “the PFUTP Regulations”).

2.2 The Enquiry Officer, after conducting the enquiry as per the procedure prescribed under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (hereinafter referred to as “the said Enquiry Regulations”) submitted a report dated 22 July, 2004 and recommended that a major penalty of suspension of certificate of registration for a period of four months against the said broker.

3.0 Show Cause Notice and Hearing:

3.1 A show cause notice (SCN) dated 30 July, 2004 was issued to the said broker along with a copy of the enquiry report, in terms of regulation 13(2) of the said Enquiry Regulations advising the said broker to show cause as to why appropriate penalty including the penalty as recommended by the Enquiry Officer should not be imposed on him. The said SCN returned undelivered. Since the first SCN dated 30 July, 2004 was returned undelivered, a second SCN dated 24 August, 2004 was forwarded to the said broker through CSE requesting them to deliver the said SCN to the broker and send the acknowledgement of receipt of the SCN. Vide the said SCN, the broker was also asked to indicate his desire for a personal hearing before the Chairman/Member. The broker was further advised to submit a reply within the stipulated period of 21 days of receipt of the said SCN. It was also stated in the said SCN that if he failed to give a reply within the stipulated period then it would be presumed that he has nothing to say in the matter and SEBI would be free to take such action as deemed fit. CSE vide its letter dated October 8, 2004 has stated that the Exchange had not received any acknowledgement from the Postal Authorities about the delivery of the said notice. It was further informed by CSE that as Shri Mukul Bhattacharjee is an in-active member of the Exchange since February, 2002 as per Exchange's record, the said show cause notice couldn't be delivered neither at the office nor at the home address of the said person as known to the Exchange. However, the said SCN dated 30 July, 2004 was affixed on September 22, 2004 at the official address of the broker. Despite this, the said broker failed to respond. Since the said broker failed to acknowledge the receipt of the said second SCN and failed to reply to the same, I am convinced that ample opportunity has been granted to the broker, therefore, I shall proceed further ex-parte based on the material available on record.

4.0 Consideration of Issues and Findings:

4.1 I have considered the facts of the case, the findings of the Enquiry Officer contained in the Report dated 22 July, 2004, the show cause notice and other material on record.

4.2 I observe that between July, 2001 and October, 2001, the said broker along with other brokers of CSE generated maximum volumes in the scrip of OFL. In all, 15,49,400 shares of OFL were traded at CSE during the said period and the said broker had transacted 2,40,400 shares between Settlement No. 2002115 to 2002128 constituting 15.52% of the volumes at CSE. I observe that the entire volumes of transactions were executed by way of matching transactions by which the order quantity, price and time were matched with both buying and selling client of the said broker. Those cross deals were executed through the same terminal.

These entire volumes were through matching transactions in his own terminal which are as under:

Order No. Qty. Price Buy/Sell Trade Date Trade time Member Name Settlement no. 2002115 (2/7/2001 - 6/7/2001) 121058625 300 9 S 4/7/2001 3:10:10 PM M. BHATTACHARJEE 121058627 300 9 B 4/7/2001 3:10:10 PM M. BHATTACHARJEE 121059815 300 10 B 5/7/2001 10:49:59 AM M. BHATTACHARJEE 121059812 300 10 S 5/7/2001 10:49:59 AM M. BHATTACHARJEE 121060975 300 11 B 5/7/2001 2:36:02 PM M. BHATTACHARJEE 121060973 300 11 S 5/7/2001 2:36:02 PM M. BHATTACHARJEE Settlement no. 2002116 (9/7/2001 - 13/7/2001) 151370521 300 11.8 B 10/7/2001 11:47:48 AM M. BHATTACHARJEE 151370516 300 11.8 S 10/7/2001 11:47:48 AM M. BHATTACHARJEE 121068752 300 12.7 S 12/7/2001 11:37:55 AM M. BHATTACHARJEE 121068755 300 12.7 B 12/7/2001 11:37:55 AM M. BHATTACHARJEE 121070620 300 13.6 B 13/07/2001 12:33:58 PM M. BHATTACHARJEE 121070616 300 13.6 S 13/07/2001 12:33:58 PM M. BHATTACHARJEE Settlement no. 2002117 (16/7/2001 - 20/7/2001) 91310796 300 14.6 B 17/07/2001 11:13:07 AM M. BHATTACHARJEE 91310792 300 14.6 S 17/07/2001 11:13:07 AM M. BHATTACHARJEE 61390940 300 15.7 S 18/07/2001 12:12:54 PM M. BHATTACHARJEE 61390941 300 15.7 B 18/07/2001 12:12:54 PM M. BHATTACHARJEE Settlement no. 2002118 (23/7/2001 - 27/7/2001) 181110044 300 18.1 B 24/07/2001 11:36:52 AM M. BHATTACHARJEE 181110042 300 18.1 S 24/07/2001 11:36:52 AM M. BHATTACHARJEE 61398725 400 19.5 S 25/07/2001 1:37:36 PM M. BHATTACHARJEE 61398726 400 19.5 B 25/07/2001 1:37:36 PM M. BHATTACHARJEE 61401285 100 19.6 B 26/07/2001 2:06:30 PM M. BHATTACHARJEE 61401280 100 19.6 S 26/07/2001 2:06:30 PM M. BHATTACHARJEE Settlement no. 2002125 (10/9/2001 - 14/9/2001) 121114602 500 70 S 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114614 500 70 B 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114614 500 70 B 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114603 500 70 S 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114614 500 70 B 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114605 500 70 S 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114606 500 70 S 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114614 500 70 B 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114614 1000 70 B 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114608 1000 70 S 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114614 1000 70 B 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114609 1000 70 S 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114612 1000 70 S 14/09/2001 12:10:29 PM M. BHATTACHARJEE 121114614 1000 70 B 14/09/2001 12:10:29 PM M. BHATTACHARJEE Settlement no. 2002126 (17/9/2001 - 21/9/2001) 31635096 5000 70 B 17/09/2001 1:10:36 PM M. BHATTACHARJEE 31635098 5000 70 S 17/09/2001 1:10:36 PM M. BHATTACHARJEE 61455732 3000 70 B 18/09/2001 1:35:33 PM M. BHATTACHARJEE 61455731 3000 70 S 18/09/2001 1:35:33 PM M. BHATTACHARJEE 61455736 4000 70 S 18/09/2001 1:35:56 PM M. BHATTACHARJEE 61455733 4000 70 B 18/09/2001 1:35:56 PM M. BHATTACHARJEE 61455744 3000 70 B 18/09/2001 1:36:13 PM M. BHATTACHARJEE 61455740 3000 70 S 18/09/2001 1:36:13 PM M. BHATTACHARJEE 61455746 4000 70 B 18/09/2001 1:36:34 PM M. BHATTACHARJEE 61455747 4000 70 S 18/09/2001 1:36:34 PM M. BHATTACHARJEE 61455749 4000 70.2 S 18/09/2001 1:37:03 PM M. BHATTACHARJEE 61455754 4000 70.2 B 18/09/2001 1:37:03 PM M. BHATTACHARJEE 61458112 4000 70.2 B 19/09/2001 2:00:09 PM M. BHATTACHARJEE 61458109 4000 70.2 S 19/09/2001 2:00:09 PM M. BHATTACHARJEE 61458114 4000 70.2 B 19/09/2001 2:00:43 PM M. BHATTACHARJEE 61458113 4000 70.2 S 19/09/2001 2:00:43 PM M. BHATTACHARJEE 61458116 3000 70.2 S 19/09/2001 2:01:10 PM M. BHATTACHARJEE 61458117 3000 70.2 B 19/09/2001 2:01:10 PM M. BHATTACHARJEE 151450887 4000 70.3 B 20/09/2001 1:37:32 PM M. BHATTACHARJEE 151450886 4000 70.3 S 20/09/2001 1:37:32 PM M. BHATTACHARJEE 151450893 4000 70.3 B 20/09/2001 1:37:56 PM M. BHATTACHARJEE 151450891 4000 70.3 S 20/09/2001 1:37:56 PM M. BHATTACHARJEE 151450897 2000 70.3 S 20/09/2001 1:38:24 PM M. BHATTACHARJEE 210897009 2000 70.3 B 20/09/2001 1:38:24 PM M. BHATTACHARJEE Settlement no. 2002127 (24/9/2001 - 28/9/2001) 61464622 4000 70.3 S 24/09/2001 12:07:17 PM M. BHATTACHARJEE 61464625 4000 70.3 B 24/09/2001 12:07:17 PM M. BHATTACHARJEE 61464629 2000 70.3 B 24/09/2001 12:07:48 PM M. BHATTACHARJEE 61464627 2000 70.3 S 24/09/2001 12:07:48 PM M. BHATTACHARJEE 61464633 4000 70.3 B 24/09/2001 12:08:14 PM M. BHATTACHARJEE 61464631 4000 70.3 S 24/09/2001 12:08:14 PM M. BHATTACHARJEE 121130189 4000 70.2 B 26/09/2001 11:55:18 AM M. BHATTACHARJEE 121130187 4000 70.2 S 26/09/2001 11:55:18 AM M. BHATTACHARJEE 121130191 3000 70.2 B 26/09/2001 11:55:54 AM M. BHATTACHARJEE 121130190 3000 70.2 S 26/09/2001 11:55:54 AM M. BHATTACHARJEE 121130193 3000 70.2 S 26/09/2001 11:56:25 AM M. BHATTACHARJEE 121130194 3000 70.2 B 26/09/2001 11:56:25 AM M. BHATTACHARJEE 121130197 4000 70.3 B 26/09/2001 11:57:07 AM M. BHATTACHARJEE 121130196 4000 70.3 S 26/09/2001 11:57:07 AM M. BHATTACHARJEE 121130201 3000 70.3 B 26/09/2001 11:57:33 AM M. BHATTACHARJEE 121130200 3000 70.3 S 26/09/2001 11:57:33 AM M. BHATTACHARJEE 121130202 3000 70.3 S 26/09/2001 11:57:59 AM M. BHATTACHARJEE 121130203 3000 70.3 B 26/09/2001 11:57:59 AM M. BHATTACHARJEE 121131526 6000 70.4 B 26/09/2001 2:15:05 PM M. BHATTACHARJEE 61475711 5000 70.2 B 27/09/2001 12:00:36 PM M. BHATTACHARJEE 61475705 5000 70.2 S 27/09/2001 12:00:36 PM M. BHATTACHARJEE 61475721 5000 70.2 S 27/09/2001 12:01:05 PM M. BHATTACHARJEE 61475727 5000 70.2 B 27/09/2001 12:01:05 PM M. BHATTACHARJEE 61475734 5000 70.2 B 27/09/2001 12:01:27 PM M. BHATTACHARJEE 61475731 5000 70.2 S 27/09/2001 12:01:27 PM M. BHATTACHARJEE Settlement no. 2002128 (1/10/2001 - 5/10/2001) 151474241 4000 70.5 S 1/10/2001 1:49:48 PM M. BHATTACHARJEE 151474243 4000 70.5 B 1/10/2001 1:49:48 PM M. BHATTACHARJEE 151474259 3000 70.5 B 1/10/2001 1:50:24 PM M. BHATTACHARJEE 151474254 3000 70.5 S 1/10/2001 1:50:24 PM M. BHATTACHARJEE 151474268 3000 70.5 B 1/10/2001 1:50:52 PM M. BHATTACHARJEE 151474265 3000 70.5 S 1/10/2001 1:50:52 PM M. BHATTACHARJEE 61490296 4000 70.3 B 3/10/2001 1:40:07 PM M. BHATTACHARJEE 61490294 4000 70.3 S 3/10/2001 1:40:07 PM M. BHATTACHARJEE 61490302 1000 70.3 S 3/10/2001 1:40:49 PM M. BHATTACHARJEE 61490304 1000 70.3 B 3/10/2001 1:40:49 PM M. BHATTACHARJEE 181202161 2000 70.4 B 4/10/2001 2:14:56 PM M. BHATTACHARJEE 181202172 2000 70.4 B 4/10/2001 2:15:15 PM M. BHATTACHARJEE 181202181 3000 70.4 B 4/10/2001 2:15:58 PM M. BHATTACHARJEE 181202188 3000 70.4 B 4/10/2001 2:16:13 PM M. BHATTACHARJEE

4.3 I observe that the above transactions were cross deals wherein both the buyer and the seller were of the said broker. The orders were also executed through the same terminal. The ordered quantity, price and time were matched and there was no delivery obligation to the Exchange. From the above table, I find that the said broker had transacted in the scrip by way of matching cross deals from 2 July, 2001 to 5 October, 2001 when the price had shot up from Rs. 9/- to Rs. 70.40

4.4 Both the buying and selling clients of the said broker who had entered into buy and sell orders for the same quantity of shares almost simultaneously. The value and volume of such transactions was also quite high.

4.5 I further observe that the time lag between the punching of buy and sell orders was under a few minutes/seconds and almost the same in a number of transactions. In other words, there was a thin line between the punching of buy and sell orders and the number of transactions entered into.

I observe that the average price of the scrip of OFL had increased sharply from Rs. 15.70 to Rs. 50.95, an increase of more than @ 218.75% in Settlement No. 2002117 and 2002121. Further, the price increased to Rs. 70.50 an increase of more than 40% in Settlement No. 2002127 along with increase in volumes also. The value and volume of the impugned transactions were also quite high.

4.6 I note that in Appeal No. 54 of 2002 - Nirmal Bang Securities Pvt. Ltd. v. SEBI, the Hon'ble Securities Appellate Tribunal has held as under with regard to the synchronised deals:—

“BEB has been charged for synchronized deals with First Global. I have examined the data provided by the parties on this issue. I find many transactions between BEB and FGSB. There are many instances of such transactions. I find the scrip, quantity and price for these orders had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is viollative 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 entered buy and sell orders for the same quantity of shares almost simultaneously.”

4.7 I observe that such transactions wherein the buy and sell orders were entered as cross deals and matched in terms of order quantity, price and the time of punching orders are highly irregular and defeat the very purpose of normal order-matching system in the price discovery process in the exchanges. Therefore, I note the said transaction is in violation of Regulation 4 of the PFUTP Regulations which reads as under:

Prohibition against market manipulation.

4 No persons 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;

(b) indulge in any act, which is calculated to create a false or misleading appearance of trading on the securities markets;

(c) indulge in any act, which results in reflection of prices of securities based on transactions that are not genuine trade transactions;

(d) enter into a purchase or sale of any securities, not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress, or cause fluctuation in the market price of securities.

4.8 I note that regulation 7 of the said Regulations which provides as under:—

Stock Brokers to abide by Code of Conduct

7. The stock broker holding a certificate shall at all times abide by the Code of Conduct as specified in Schedule II.

4.9 I also note that Schedule II of the said Regulations reads as under:—

A. General

(1) Integrity: A stock broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business.

(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) ………..

(5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him.

B. Duty to the Investor

(4) Business and Commission:

(a) A stock broker shall not encourage sales or purchases of securities with the sole object of generating brokerage or commission.

4.10 In view of my observations mentioned hereinabove, I am convinced that the said broker has violated regulation 7 of the said Regulations read with clauses A(1), A(2), A(3), A(5) and B(4)(a) of the Code of Conduct prescribed for Stock Brokers under Schedule II of the said Regulations read with regulation 4(a), (b), (c) and (d) of the PFUTP Regulations. I have further found that the said broker has violated regulation 9 of the PFUTP Regulations by non-co-operating with the investigating authority and also non-furnishing of information which was sought by the investigating authority.

4.11 I am satisfied that this is a fit case to impose a penalty of suspension and I do not see any reason to differ with the findings and the recommendation of the Enquiry Officer in this regard. I am also convinced that a major penalty of suspension of the Certificate of Registration of the said broker for a period of four months would be adequate and commensurate with the gravity of the violations committed by the said broker.

5.0 Order

Therefore, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with regulation 13(4) of the said Enquiry Regulations, hereby suspend the certificate of registration of Shri Mukul Bhattacharjee (SEBI Registration No. INB 030936018) for a period of four months.

This Order shall come into effect on the expiry of twenty one days from the date of this Order.