Orderagainst Shobha Investments in the matter of Home Trade Ltd

UNDER REGULATION 13(4) OF SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING ENQUIRY BY ENQUIRY OFFICER AND IMPOSING PENALTY) REGULATIONS, 2002 AGAINST M/S SHOBHA INVESTMENTS (PROPRIETOR SHRI AJAY SHAH), MEMBER, PUNE STOCK EXCHANGE LTD., IN RESPECT OF ITS DEALINGS IN THE SHARES OF HOME TRADE LTD. WTM/GA/43/ISD/12/07 1.1 Securities and Exchange Board of India (hereinafter referred to as SEBI) noticed unusual price movements in the shares of Home Trade Ltd. (for short HTL) which were listed at Pune Stock Exchange Ltd. (for short PSE) on November 15, 1999 at Rs 250/- and at Bangalore Stock Exchange Ltd. (for short BgSE ) on November 16, 1999 at Rs.275/-. There was a sharp rise in the price of the shares of HTL both at PSE and BgSE and the share price reached Rs.315/- within two weeks of its listing, i.e. by December 06, 1999. The subsequent rise in the price of the shares of HTL is as detailed below: Date Price (Rs.) December 30, 1999 525.00 January 31, 2000 735.00 March 31, 2000 809.00 April 10, 2000 825.25 1.2 The maximum rise in the price of the shares of HTL took place between November 16, 1999 and March 31, 2000, when it moved from Rs.275/- to Rs.815/-. In view of the unusual price movement noticed in the shares of HTL, SEBI conducted investigations to look into the possible violation of the provisions of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (hereinafter referred to as FUTP Regulations) and Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred to as the Broker Regulations). 1.3 The investigation conducted by SEBI found that M/s Shobha Investments (for short, the Broker), Member, PSE and registered with SEBI as a stock broker, inter alia traded substantially in the shares of HTL at PSE. It has been alleged that there were circular trading in the shares of HTL among the members of PSE viz. M/s Yatin D Shah, Shri Amin Mulani, Harish Kadam Securities and the Broker. The investigation conducted by SEBI observed that the price of the shares of HTL increased from Rs.320/- to Rs.720/- between December 10, 1999 and January 20, 2000. It has been observed that the aforesaid stock brokers by their alleged circular trades had contributed 82% of the gross purchases and sales and 90% of the volume in the shares of HTL during the above period at PSE. The trades of the aforesaid stock brokers (collectively) in the shares of HTL are as follows: M/s Yatin D. Shah Broker Shri. Amin Mulani Harish Kadam Securities Total of 4 brokers Total volume at PSE % of volume of

4 brokers vis-- vis PSE Set No. Buy Sell Buy Sell Buy Sell Buy Sell Buy Sell Buy Sell

39 3500 3800 0 0 2700 3600 100 100 6300 7500 9100 69.23 82.42

40 5200 4400 2500 3000 1500 600 2500 3000 11700 11000 13500 86.67 81.48

41 700 1600 1800 1800 2000 1900 1700 1700 6200 7000 9700 63.92 72.16

42 1600 1300 2300 1400 800 2600 1200 1200 5900 6500 9500 62.11 68.42

43 2600 2100 1800 2200 2600 2200 3900 4300 10900 10800 11900 91.60 90.76

44 1400 900 2100 2700 3400 2000 1900 2100 8800 7700 10100 87.13 76.24 49800 50500 63800 78.06 79.15 1.4 The Broker had executed transactions in the shares of HTL on behalf of various Mumbai based clients M/s Foresight Fragrance , Dinesh Jain, Hemlata Jain, Bharti Mehta, Naresh Mehta, Prabhavati Mehta, D.S.Investemtns, Jaganath Kabra, Vijay Chaprot, Navyodaya Agency , Channel East Distributors, Arihant Enterprises, Porwal & Co., Upendra Acharya and Pune based clients viz. J K Securities and Tulsidas& Sons. It has been alleged that the Broker had not received any margin money on the purchase transactions executed on behalf of the aforesaid clients, which was in violation of SEBI circular dated November 18, 1993. It has been further alleged that the Broker was not aware of the Mumbai based clients and that one Shri Veerkar (employee of HTL) placed orders on behalf of the aforesaid said Mumbai based clients, in violation of SEBI circular dated February 11, 1997. It has been observed that the member had not maintained the client registration form in respect of clients viz. Shri Naresh Mehta, Channel East Distributors, Arihant Enterprises and Upendra Acharya and thereby prima facie violated the SEBI circular dated April 11, 1997. The investigation conducted by SEBI observed that the trades of the Broker in the shares of HTL were apparently not genuine and the same created artificial price/volumes in the said scrip, prima facie in violation of Regulation 4 (a), (b) and (c) of the FUTP Regulations. The Broker was also alleged to have committed violation of the provisions of Rule 4(b) of the then Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules 1992 (since repealed with effect from September 07, 2006) and Clause A (1) to (5) of the Code of Conduct as specified in the Broker Regulations. 2.1 On completion of investigations, SEBI appointed an Enquiry officer vide order dated August 9, 2002 under regulation 5(1) of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (for short the Enquiry Regulations) to enquire into the alleged irregular transactions of the Broker in the shares of HTL. The details of the trades of the Broker in the shares of HTL were also furnished to it by the Enquiry Officer. The Broker made its submissions before the Enquiry Officer and pursuant to the same, vide report dated August 29, 2003, the Enquiry Officer, recommended to impose a major penalty of suspension of the certificate of registration of the Broker for a period of eighteen months in terms of the provisions of the Enquiry Regulations. 2.2 Pursuant to the submission of the Enquiry Report, a notice dated September 9, 2003 was sent to the Broker by SEBI asking it to show cause as to why the penalty as considered appropriate should not be imposed against it. A copy of the Enquiry Report was also forwarded to the Broker with the said show cause notice. The Broker vide letter dated September 24, 2003 inter alia stated that the enquiry was conducted in violation of the principles of natural justice. The Broker urged that the show cause notice alongwith the annexure was vague and general in character and did not set out the essential particulars such as the specific provisions of law violated by it. According to the Broker, SEBI could not establish anything on record against the Broker. The Broker also contended that the Enquiry Officer had not supplied the copy of the investigation report. The Broker urged that the finding of the Enquiry Officer that it had not collected the margin was not correct and added that it had never delayed the payment in any of the settlement and any loss (if any) was to the Broker. The Broker stated that it was Shri Veerkar who introduced all the clients to it. The Broker further inter alia added that it has not violated the provisions of the FUTP Regulations or the Broker Regulations and that a warning might be given to it looking into its transactions. In this context, the Broker had relied upon some of the orders passed by SEBI, wherein lesser penalty was imposed on similar set of facts. 3.1 SEBI granted opportunities of hearing to the Broker and finally, the matter was heard on August 29, 2006. Shri Bharat B. Merchant, Advocate, Thakordas and Madgavkar appeared before me on the said date and made submissions. Shri Ajay Shah, proprietor of the Broker was also present during the time of the hearing. The Learned advocate made submissions on behalf of the Broker on the lines of its reply as mentioned above. Pursuant to the said hearing , the Broker vide letter dated August 30, 2006 inter alia submitted the settlement (settlement no.

39 to 44) wise trade details of the Broker in the shares of HTL at PSE. 4.1 I have perused the Enquiry Report, show cause notice issued to the Broker, the oral as well as written submissions made on behalf of the Broker and other relevant materials available on record. At the outset, I note the preliminary objections of the Broker that the show cause notice issued by the Enquiry Officer was vague and did not specifically contain the charges leveled against it. In this context, I note that the Enquiry Officer in his show cause notice dated March 28, 2003 specifically mentioned the alleged violations leveled against the Broker. He had also explicitly mentioned the provisions of law which were allegedly violated by the Broker. Alongwith the aforesaid show cause notice, the Enquiry Officer had also forwarded the settlement wise/ daily trading volume of four stock brokers named above including the details of buy and sell orders of the Broker in the shares of HTL during December 1999 and January 2000. I note that the Broker has not disputed its trades as communicated to it by the Enquiry Officer. Further, an opportunity was granted by the Enquiry Officer to the Broker to give its explanation in respect of the charges leveled against it. In view of the above, the contention that the show cause notice was vague and did not reflect the specific charges is not tenable and accordingly the same is rejected. 4.2 The fact that the Broker had executed trades in the shares of HTL on behalf of his various clients is not disputed. I note that Shri Ajay Shah, (proprietor of the Broker) stated to SEBI that he had not met any of his clients introduced by Shri Veerkar (employee of HTL) and that the said Shri Veerkar used to place orders on behalf of the said clients in respect of their various trades. He also stated that he was not having the client registration form of some of the clients viz. Shri Upendra Acharya. The Broker added that it had not met most of its clients personally. 4.3 Thus, I note that the orders on behalf of most of the clients of the Broker were placed by Shri Veerkar (employee of HTL). It is an admitted fact that the Broker had not met most of its clients. Admittedly, the Broker had not entered into the client registration form in respect of some of the clients. 4.4 I note that, SEBI by its circular dated February 11, 1997 inter alia advised the stock brokers to maintain a database of their clients. Subsequently, vide circular dated April 11, 1997, it had once again advised the stock brokers to follow its earlier circular dated February 11, 1997. In its circular dated April 11, 1997, SEBI had further advised that the stock brokers might seek additional information, if any, so as to satisfy themselves about the antecedents of clients and that it would be the responsibility of the stock brokers to provide for client details as and when need arises. The said requirements had been made in compliance of the Know Your Clients (KYC) norms. 4.5 In the present matter, admittedly the Broker had not obtained client registration forms in respect of various clients for whom he had made transactions in the shares of HTL and instead traded at the behest of the employees of HTL. In some cases, the Broker was not even aware of the profession of its clients and still he executed orders on behalf of the said clients. It indicates that the Broker had executed the trades in the shares of HTL on behalf of various persons/ entities without their specific instructions (in majority cases) and without knowing them or their antecedents, but on the basis of the instructions received from third parties who were none other than the employees of HTL. It is one of the primary duties of a stock broker to ensure that his client is personally known to him or has been introduced to him by a person known to him so as to satisfy that his clients are genuine. The very purpose of such practice is to enable the stock brokers to evaluate the client before he takes up trading for the clients. It is noteworthy to state here that the Broker in its reply to the show cause notice issued by the Enquiry Officer stated that all the clients were introduced by Shri Veerkar. Shri Ajay Shah in his statement has reiterated that he acted on behalf of the clients introduced by Shri Veerkar on the guarantee given by Shri Ketan Sheth, member, PSE. Shri Ketan Sheth was also a director of HTL during the relevant time. Such act of the Broker is in violation of the provisions of SEBI circulars dated February 11, 1997 and April 11, 1997. Further, it has been alleged that the Broker had not obtained margin in respect of its transactions. I note that the Enquiry Officer observed in his report that the Broker had admitted that no margins were collected in respect of its clients viz. Bharti Mehta and Prabhavati Mehta, which was in violation of SEBI circular dated November 18, 1993. Though the Broker in his reply dated September 24, 2003 stated that the aforesaid finding of the Enquiry Officer was not correct and without any evidence on record, he could not produce any satisfactory evidence to rebut such findings of the Enquiry Officer. Therefore, it is fairly established that the Broker had violated the SEBI circular dated November 18, 1993. 4.6 As mentioned earlier, certain stock brokers including the Broker had contributed significantly to the volumes in the scrip of HTL during the period December 10, 1999 to January 20, 2000 wherein the share price had increased from Rs.280/- to Rs.720/- against low volumes. The aforesaid stock brokers had collectively contributed to 82% (gross purchase) and 90% (sales) of the volumes during the period November 15, 1999 to March 31, 2000. The price of the said scrip had also increased steeply during this period from Rs.270/- to Rs.815/- on average volumes of 2000 shares per day. It has been noted that till December 9, 1999, the scrip of HTL was trading in the range of Rs. 280/- Rs. 304/- with an average daily volume of 800 shares. The sudden spurt in the price and volume had taken place from settlement no.39 onwards. (December 10, 1999 till December 16, 1999). Incidentally, the Broker started trading in the scrip of HTL from December 17, 1999 (settlement no.39) onwards. Thereafter, the price had gone up substantially and reached Rs.728/- in settlement no.44, as described hereinunder: Settlement no. Period Share price Volume (Shares)

40 December 17, 1999 to December 23, 1999 Rs.420/- 2700

41 December 24, 1999 to December 30, 1999 Rs.525/- 1900

42 January 3, 2000 to January 6, 2000 Rs.609/- 1900

43 January 7, 2000 to January 13, 2000 Rs.647/- 2400 4.7 I note that the Broker had placed the purchase order on behalf of Shri B. N. Mehta (one of the clients of the Broker) on December 27, 1999 for

100 shares of HTL at Rs.460/- when the shares were available at Rs.452/- at that time. Shri Ajay Shah, proprietor of the Broker stated to SEBI that the quantity, rate and time of order in respect of the said trades were given by Shri Veerkar. Similarly, orders for purchase at a higher rate than the prevailing market price was placed by the Broker at the instance of Shri Veerkar. The details of which are given below : Date Time Sale/ Purchase No. of shares Rate (Rs.) Market rate at that time ( Rs.) Counter party stock broker* 21.12.1999 11:18 Purchase 300 364.25 351 77 21.12.1999 12:17 Purchase 400 268.25 364.25 77 21.12.1999 14:55 Purchase 200 376.50 372.50 77 22.12.1999 14:57 Purchase 300 387.75 384 77 22.12.1999 15:33 Purchase 100 393.75 392.00 77 27.12.1999 12:29 Purchase 100 416 452 222 28.12.1999 15:08 Purchase 100 416 452 222 03.01.2000 01:25 Purchase 100 560.25 550 222 03.01.2000 01:26 Purchase 200 562.50 560.25 222 03.01.2000 01:26 Purchase 100 565.50 562.50 222 03.01.2000 01:28 Purchase 100 569 565.50 222 03.01.2000 01:29 Purchase 300 569.70 569 222 and 77 05.01.2000 2:09 Purchase 300 593.50 590 222 06.01.2000 1:17 Purchase 200 607.50 607 222 13.01.2000 2:47 Purchase 200 658.50 656 222 13.01.2000 2:48 Purchase 300 659 658.50 222 14.01.2000 12:34 Purchase 300 664.50 660 222 14.01.2000 12:35 Purchase 300 668 664.50 222 18.01.2000 12:38 Purchase 300 693.50 691.25 77 18.01.2000 12:38 Purchase 200 695.75 693 77 18.01.2000 2:57 Purchase 200 702.50 699.50 222 *77 = Yatin Shah 222 = Amin Mulani & Co. 4.8 The above trades have to be viewed in the context of the statement of Shri Ajay Shah, that the details such as timing, price, order quantity etc. were used to be given by one of the employees of HTL. The said trades were executed at a fixed price and at a specific time as per the instructions of third parties. Admittedly, the trade orders on behalf of majority of the clients of the Broker were placed by third parties including the employees of HTL. Also, similar orders were given to counterparty broker viz. Shri Yatin D. Shah by Shri Veerkar. The consistency with which the said trades were executed by the Broker on behalf of its clients in the shares of HTL cannot be a matter of coincidence, considering its nature, wherein trades were executed as per the specific (with respect to price, quantity and time) instructions of the employees of HTL, at a price higher than the prevailing market price. The said concerted level of activity and that too repeatedly for a number of trades is only compatible with the purposes of manipulating the securities market. The fact that orders were placed at a higher rate when the shares were available in the market at a lower rate does not make an economic sense. The series of 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 HTL to the detriment of the genuine investors. Thus, it can be seen that the price of the scrip of HTL had gone up substantially during the above period against low volumes. Further, it shows the involvement of the Broker in manipulating the securities market by creating artificial price and misleading appearance of trading in the securities market. I note that, inter alia due to the said trades, the share price of HTL had gradually increased. 4.9 The fact that shares were purchased at a higher rate would establish the complicity of Broker in the manipulation of the securities market, since no genuine buyer would purchase the shares at a higher price when the shares were available at a lower rate. I find from the pattern amongst the stock brokers, that they had accounted for most of the trading undertaken in the scrip at PSE during the said period. Further, the Broker stated that he used to get instructions for executing the trade orders from Shri Veerkar (employee of HTL). 4.10 A cumulative analysis of the facts of the case, clearly indicate that the Broker did not act in a bonafide manner. On the contrary, the above facts highlight its complete involvement in the creation of misleading market in the shares of HTL and the creation of artificial volume and price in the said shares. Definitely it is a clear case of having congruence of interest with HTL and such an act could not be anything but compatible with a scheme of manipulation, to which the Broker is a privy. It is true that the stock brokers act on the advice of their clients. But in the present case highlighting how the Broker was acting at the behest of HTL employees, he happens to be the necessary party to the entire game plan. In the circumstances, it becomes increasingly evident that the trades involving the Broker with the help of people who were the employees of HTL were yet another step in manipulating the volume and price of the shares of the company. 4.11 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 vs. 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 been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so wide spread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose on the Board a burden which is impossible to be discharged. 4.12 Thus, by entering into such fictitious trades, the Broker created a misleading appearance of trading in the shares of HTL. The details of trades executed by the Broker in the shares of HTL, as mentioned above were not disputed. It can be seen that the Broker had executed various trades consistently for a period of time (December 1999 to January 2000) at a higher price than the prevailing market price with a set of stock brokers. The Broker has not refuted the manner of the trades executed as described above but confined his submissions to the fact that the trading system was computerized and that it had acted merely upon instructions of its clients. The explanation and submissions of the Broker fly in the face of his statements and materials available on record. During the period of the trades of the Broker, the share price of HTL had increased substantially as stated above without there being any significant change in the economic fundamentals of HTL. Hence, I find that the Broker had indulged in manipulative trading in the scrip of HTL. Therefore, I do not have any hesitation to hold that the Broker had violated the provisions of regulation 4 (a) to (c) of the FUTP Regulations. 4.13 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. In the present case, the trades of the Broker (as explained in detail above) created a misleading appearance of trading in the shares of HTL, artificial volume and price in the said shares by vitiating the price discovery mechanism in the securities market. It amply demonstrates that the Broker, instead of maintaining the Code of Conduct as expected of a SEBI Registered intermediary, virtually became a party to the manipulation in the shares of HTL to the detriment of genuine investors. Further, the trades were executed without obtaining the necessary requirement like client registration form. 4.14 A Stock broker is expected to protect the interest of the investors in the securities market in which he operates and it ill behoves him to become a party to any market manipulation. Being an intermediary operating in the securities market, a stock broker is required to maintain high standards of integrity, promptitude and fairness in the conduct of the business dealings as specified in the Code of Conduct of the Broker Regulations (mentioned above). An intermediary who fails to perform such duties has to be punished in terms of the provisions of the Enquiry regulations. In view of the above, it is established that the said stock brokers had violated the clauses A(1) to ( 4) of the Code of Conduct specified under the Broker Regulations. 4.15 In the facts and circumstances it is established that the Broker had violated Regulation 4 (a), (b) and (c) of the FUTP Regulations, Clause A(1) to (4) of the Code of Conduct prescribed under Schedule II of the Broker Regulations and the circulars of SEBI dated February 11, 1997, April 11, 1997 and November 18, 1999. The aforesaid violations committed by the Broker cannot be taken lightly and the same call for a major penalty as ordered hereinunder. 5.1 In view of the foregoing, I, in exercise of the powers conferred vide regulation 13(4) of Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002, hereby impose a major penalty of suspension of the certificate of registration of M/s Shobha Investments (Proprietor Shri Ajay Shah), Member, Pune Stock Exchange Ltd. (SEBI Registration no. INB110246011), for a period of eighteen months. This order shall come into force immediately on the expiry of 21 days from the date of this order. G. ANANTHARAMAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OFINDIA Place: Mumbai Date: December 5, 2007.