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Judgment
Securities and Exchange Board of India (SEBI) conducted an investigation into the dealings in the scrip of Divine Entertainment Ltd., (earlier known as Denim Enterprises Ltd., hereinafter referred to as DEL/ company) for the period from November 1, 1999 to March 30, 2000 (hereinafter referred to as Investigation Period).
The shares of DEL were listed on the Bombay Stock Exchange (BSE) and Ahmedabad Stock Exchange (ASE).
Investigation revealed that some entities related to promoters/ directors of DEL, in association with some of the brokers and sub brokers of Ahmedabad and Mumbai, had offloaded large number of shares in the market. There was no trading in the scrip on ASE during the investigation period. During the investigation period, the price of the scrip increased from ₹7 on to reach a high of ₹290.45 on BSE.
Investigation inter-alia revealed Wallfort Shares & Stock Brokers Pvt. Ltd. (hereinafter referred to as "Wallfort/ the Noticee") allegedly placed huge buy orders aggregating above 77 lakh shares during the early trading hours during Investigation Period without any intention to purchase the shares of DEL, as its repeated buy orders resulted in actual purchase of only 200 shares of the Company.
Summary of the orders placed by the Noticee in the scrip of DEL during the Investigation period and the trades executed is as follows:
Description
No. of orders
No. of shares
Total orders placed
288
77,03,600
Total buy orders
281
76,98,500
Total sell orders
7
5,100
Total orders rejected
275(3)
75,35,600
Total orders rejected due to "Error 101" Error code 101 denotes orders placed before the opening of the Trading Session at BSE and hence rejected
264
75,00,000
Total orders rejected due to "Error 262" Error code 262 denotes orders placed at rates which are not within circuit limits and hence rejected by BSE
11(3)
1,35,600(2100)
Total orders accepted by the BOLT
13(4)
1,68,000(3000)
Total orders deleted by the Noticee
3
35,000
Total Trades
3(1)
300(100)
Total Pending orders
10
1,32,700
*data in bracket for sell orders/ trades
Based on the above finding in the course of investigation, it was alleged that Wallfort had violated various provisions of SEBI Act, 1992 (hereinafter referred to as SEBI Act), SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as "Stock Broker Regulations) and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market, Regulations, 1995 (hereinafter referred to PFUTP Regulations r/w SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market), Regulations, 2003. Therefore, Enquiry proceedings were initiated against Wallfort.
To enquire into the alleged violations by Wallfort with respect to their trades and its alleged misconduct in trading or placing trades in the scrip of DEL, SEBI, appointed a Designated Authority ("DA") vide order dated August 13, 2008 under the provisions of Section 19 of the SEBI Act read with Regulation 24(1) of SEBI (Intermediaries) Regulations, 2008 ("Intermediaries Regulations"). Subsequent to the transfer of the DA, vide order dated December 10, 2008, another DA was appointed. The DA, issued show cause notice dated January 07, 2010 to Wallfort. Summary of the allegations made against Wallfort in the SCN is as follows:
that it is observed from the order log that Wallfort placed numerous huge buy orders each ranging from 100 to 30,000 shares during early trading hours in the months of November and December, 1999.
that the total day wise volume of such orders aggregated to 10 lacs, 38 lacs, 12 lacs shares approx. even though the traded quantity of shares during this period ranged from 100-6000 shares
that Wallfort bought only 200 shares and sold 100 shares on the own trading account during the investigation period
that Wallfort is linked/ associated with related to promoters/ directors of DEL
Subsequently, pursuant to the resignation from the services of SEBI by the DA, another officer was appointed as DA, vide order dated June 22, 2015, in terms of Regulation 24 of the Intermediaries Regulations. The DA, in due compliance of the procedure and principles, completed the proceedings and submitted a Report dated February 28, 2018, recommending "warning order" against Wallfort. The DA had inter-alia observed that the noticee placed and deleted 3 orders for a total of 35,000 shares in DEL and considering the low floating stock, the noticee should have exercised proper skill, care, diligence and promptitude in the conduct of its business as a stock broker.
After considering the DA Report, a Show Cause Notice (SCN) dated July 23, 2018, under regulation 28(1) of the Intermediaries Regulations was issued calling upon Wallfort to show cause as to why action as recommended by the DA or that of a higher nature should not be imposed on it, as deemed fit by the Designated Member.
Wallfort filed its reply vide letter dated September 7, 2018, inter-alia explaining the following:
that SEBI has erroneously misconstrued normal trading transactions undertaken by them as fraudulent and manipulative.
that they have been provided with order logs showing buy orders only.
that entering orders prior to the opening of the market on BSE was a commonly adopted strategy at that time to get priority in the market.
that as evident from the error codes, most of the orders were rejected and therefore it is erroneous to state that these orders impacted the market especially since these orders, which were entered prior to opening of the market, would not have been visible to the market.
that in their proprietary account they have traded only on 3 days and only for 300 shares (bought 200 shares and sold 100 shares) and trading in such insignificant quantity of shares was not required to justified by any corporate announcements or news.
that it is erroneous on the part of the designated authority to have come to a finding that they did not exercise proper skill, care, diligence and promptitude in the conduct of our business as a stock broker.
Consideration of issues:
I have considered the report of the DA, the SCN issued to the Noticee, the oral and written submissions made by the Noticee and material available on record. Having considered the above, the issues which arise for my consideration are:
I. Whether Wallfort indulged in an act calculated to create false or misleading appearance of trading in securities in violation of Regulations 4(a) and (b) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995 read with Clauses A(1), A(2), A(3) and A(4) of Code of Conduct laid down in Schedule II under regulation 7 of the SEBI (Stock brokers and Sub brokers) Regulations, 1992?
II. If yes, what would be the appropriate penalty that can be imposed under Regulation 28 of Intermediaries Regulations?
It would be appropriate at this stage to refer to the relevant provisions of the law of which has been alleged to have violated. The relevant legal provisions are reproduced below:
Prohibition against Market Manipulation
Regulation 4(a) & (b) of the FUTP Regulations, 1995 "4. No person 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 market;
Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations, 2003.
Repeal and savings
(1) The Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 is hereby repealed.
(2) Notwithstanding repeal of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995, any violation of regulations 3, 4, 5 and 6 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 shall be investigated and proceeded against in accordance with the procedure laid down in these regulations.
Regulation 7
Code of Conduct for Stock Broker under Schedule -II of the Stock Broker Regulations
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) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness.
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.
Based on the above, I proceed to examine the findings recorded by DA as to whether the Noticee is connected with the management of the DEL and its trading in the scrip of DEL resulted in violations of the charges framed at para 9 above and issuance of appropriate direction, in case the examination results in affirmation.
It is not disputed by the Noticee that M/s Wallfort Financial Services Limited (hereinafter referred to as WFSL), is a group /associate company of the Noticee. It is also not disputed that as per shareholding details disclosed by DEL for the quarter ended September 1998, WFSL and V&U Securities were shown as promoter related entities of DEL and were holding 2,50,000 shares amounting i.e. 3.23% shares of DEL by each of them. It is also found that Shri Vaibhav J Shan, one of the director of the Noticee till April 01, 1998 was related to one of the directors, Shri Hinanshu J Shah, of V&U Securities as brother and both of them were related as brother to Shri Bankim J Shah, who was one of directors of DEL. Further, Shri Ashok Bhardia, one of the directors of the Noticee was holding 7.43% stake in SEL as on September 2008. In view of the same I find that the Noticee was related/connected to the management / board of DEL during the relevant period.
The next question arises for consideration is to whether the manner of placing orders in the scrip of DEL by the Noticee can be considered to be fraudulent and not in compliance with the Code of Conduct as laid down under Schedule -II of the Stock Broker Regulations. I find that Wallfort placed numerous buy orders each ranging from 100 to 30,000 shares of DEL during early trading hours in the months of November and December, 1999 and the total day wise volume of such orders aggregated to 10 lacs, 38 lacs, 12 lacs shares. I find that the total actually traded quantity of shares during this period ranged from 100-6000 shares.
In this regard the DA has observed that almost 96% of the orders of Wallfort placed in the scrip of DEL during the investigation period were rejected by BSE due to reasons such as "disallowed in the system-error code 101-rejected due to invalid session" or Rate not within the circuit limits-error code 262". Since these orders were rejected by the BSE system due to above mentioned reasons/ error codes, the investors in the scrip of DEL would not be in a position to view the orders in the order book. Therefore, the question of them being induced to invest in the scrip of DEL due to the numerous orders placed by Wallfort does not arise. In this regard, I further note that the DA has sought confirmation from the exchange regarding the rejection of the orders placed by the Noticee and recorded its impact on the pending order book. In this regard, exchange confirmed that rejection of the trades due to reasons such as "Disallowed in the system-error code 101-rejected due to invalid session" or "Rate not within the circuit limits-error code 262" did not form part of the pending order book and could not be seen as pending order/s on the screen of the exchanges, hence could not have impacted/induced the decision making of investors. While agreeing with the reasons recorded by DA, I agree that based on the material available on record, the allegations pertaining to violation of provisions of PFUTP regulations cannot sustain in the facts and circumstances of the case.
I, further, find that the Noticee had placed large buy orders on several occasions in the scrip of DEL. It is not disputed that such trades were placed by the Noticee on its proprietary account and none of these orders were placed on behalf of any of the clients of the Noticee. Most of the orders were placed by the Noticee before the opening of the trading session on the exchange but the orders placed by the Noticee were rejected by the mechanism of the exchange with remarks 'disallowed in the session'. I further note that some of the trades placed by the Noticee during the period of investigation got rejected with remark ' Rate not within circuit limits'. It is found that Noticee had placed 288 orders for 77,03,600 shares on different dates during the Investigation Period and the majority of the orders placed were for the shares ranging upto 30,000. However, only 13 orders for 1,68,000 shares were found to be validly placed and rest of the 275 orders for the shares of 75,35,600 were rejected for the reasons state above. From the records, it is also noted that majority of the orders placed by the Noticee were buy orders with only few in the category of sell orders.
The DA has observed that Wallfort has entered 13 buy orders for a total of 1,68,000 shares of DEL on 7 trading days, which were valid orders. Although 96% of the buy orders of Wallfort were rejected due to reasons mentioned above, but the remaining valid orders on 7 trading days also formed a substantial quantity of the order book of DEL considering low daily trading volume in the scrip. Wallfort has explained the reason for entering large buy orders prior to the opening of the market to get priority in the market. However, I find that the total traded quantity of Wallfort during the investigation period was only 300 shares of DEL (purchase of 200 shares and sell of 100 shares). There appears to be no orders placed or executed by the Noticee after the commencement of the trading session matching the quantity of trades placed before the opening of the trading session. This shows that the said act of the Noticee of placing orders in large quantity before the start of the trading session is not followed up by executing any transactions by the Noticee after the start of the trading session. Thus there was no interest/keenness to buy the scrip of DEL was shown by the Noticee after the start of the trading session on the exchanges. The apparent interest to buy the scrip by placing large quantity orders well before the start of the trading session on continuous basis does not reflect in the Noticees' actions after the start of the trading session. The Noticee is a registered intermediary and it must know that placing of such orders without any real intention to buy would result in creation of artificial volume and would be misleading to the investor of the market. Such practice of the placing orders before the trading session under the plea that it may not be visible to the investors at large or it may be liable to be rejected as being not in conformity with the rules governing the trading on the platform of the exchange, does not reflect good conduct on the part of an Intermediary. Had these orders not been rejected by the exchange trading system, these would have inducing impact on the innocent investors in the scrip of DEL. I note the observations of the Hon'ble Supreme Court in the matter SEBI v. Kishore R. Ajmera (2016) 6 SCC 368, dealing with the importance of SEBI in the economy of the country are as under; " The SEBI Act and the Regulations framed thereunder are intended to protect the interests of investors in the Securities Market which has seen substantial growth in tune with the parallel developments in the economy. Investors' confidence in the capital/securities market is a reflection of the effectiveness of the regulatory mechanism in force. All such measures are intended to pre-empt manipulative trading and check all kinds of impermissible conduct in order to boost the investors' confidence in the capital market. The primary purpose of the statutory enactments is to provide an environment conducive to increased participation and investment in the securities market which is vital to the growth and development of the economy."
In view of the above, it is expected that any person accessing the mechanism of stock exchange must deal with it in all fairness and should not resort to practices which have potential to be detrimental to the interest of the securities market. The level of expectation would be higher, in case, it is related to an intermediary duly registered with SEBI. The mechanism of exchange is not permitted to be used for experiment, entertainment or adventurism. Therefore, the reasons provided by Wallfort for entering such orders does not appear to be satisfactory. A registered intermediary, being a registered stock broker, the noticee was under obligation to exercise due diligence and care while executing trades, more particularly in it's proprietary account. There is no justifiable reason provided by the Noticee for entering large buy orders before the trading session or with rate not within the circuit limit, knowing very well that they are going to be rejected. These acts, spread over a period of 7 days, indicate that Wallfort has not exercised due skill and care while dealing in the scrip of DEL. The Noticee has not acted with due responsibility as an intermediary and its acts are not in conformity with the Code of Conduct laid in SEBI (Stock brokers and Sub brokers) Regulations, 1992.
The DA has found that since Wallfort has deleted three orders for 35,000 shares of DEL and considering the low floating stock of DEL, Wallfort should have exercised proper skill, care and diligence and promptitude in the conduct of its business as a stock broker. I find that the Noticee has not exercised due skill, care, diligence and promptitude while placing trades in the scrip of DEL and therefore hold it accountable for not being diligent while placing orders in the scrip of DEL.
I find that Wallfort, vide letter dated November 6, 2018, has submitted that they had applied for voluntary surrender of membership at BSE vide letter dated September 27, 2010 and surrendered all connectivity. Wallfort also provided a copy of Circular dated September 29, 2010 informed all the trading members of the exchange regarding such voluntary closure of business and that Wallfort would cease to do business w.e.f. October 4, 2010. Wallfort has stated that they had "Nil" turnover on the stock exchanges since the day of voluntary surrender of membership.
ORDER
Without prejudice to the aforesaid observations, considering the facts and circumstances of the case and the fact that the Noticee has ceased to do business as stock broker since October 2010, I am of the view that issue of Warning would meet the end of justice.
I, therefore, in exercise of the powers conferred upon me under section 11B and section 19 of the Securities and Exchange Board of India Act, 1992, read with the Regulation 28(2) of Intermediaries Regulations, hereby issue a warning to the Noticee to be careful in future.