BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI
       Appeal No. 23 of 2012

Date of Decision : 12.4.2012

Shivam Investments
(Prop. Mrs. Sushma Kapur)
801, International Trade Tower,
Nehru Place, New Delhi – 110 019. ….. Appellant

Versus

Securities and Exchange Board of India
SEBI Bhavan, C-4A, G Block,
Bandra Kurla Complex,
Bandra (East), Mumbai – 400 051. ..…Respondent

Mr. Sunil Kumar, Chartered Accountant for the Appellant.
Dr. Mrs. Poornima Advani, Advocate wi th Mr. Ajay Khaire and Ms. Rachita
Romani, Advocates for the Respondent.

CORAM : P. K. Malhotra, Member
S.S.N. Moorthy, Member
Per : S.S.N. Moorthy, Member

This order will dispose of three Appeals no.23, 24 and 26 of 2012.

2.These appeals are against imposition of penalty for violating the provisions of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (for short ‘FUTP Regulations ) and for violating the provisions of Code of Conduct of Stock Brokers contained in Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (for short ‘Stock Broker regulation). The adjudicating officer imposed penalties as under in respect of the above mentioned violations.

Shivam Investments – ` 50,000 for FUTP violation. (Appeal no. 23 of 2012)

Pee Dee Kapur Stock and Securities Ltd. – 1 lac for FUTP violation and 75,000 for violation of Code of Conduct. (Appeal No. 26 of 2012)

2. APM Financial Consultants P. Ltd. – 75,000/- for FUTP violation and 50,000/- for violation of Code of Conduct. (Appeal No. 24 of 2012)
3. The cause of action for the proceedings and consequent penalty arose from
   an investigation conducted in the trading in the scrip of Radico Khaitan Limited
   (RKL) by Securities and Exchange Board of India (for short the Board). The
   investigation revealed the involvement of, among others, Pee Dee Kapur Stock
   and Securities Ltd (PDKSS), Shivam Investments (SI) and APM Financial
   Consultants Pvt. Ltd. (APMFC) in the manipulation of the scrip. The above three
   entities were found to be connected to each other by way of common address,
   common contact number, association through companies of which the individuals
   are directors etc. The appellants were found to be involved in the manipulation of
   the scrip of RKL by way of self trades and cross trades. When there was a decline
   in the price of the scrip of RKL firs t trades were undertaken by PDKSS, the
   broker, on behalf of SI and another connected company DPK Stock and Securities
   (DPKSS). The modus operandi was to unde rtake first trades at a figure higher
   than the last traded price in smaller quantities of shares. It was noticed that, on
   most of the occasions, the counter party buyer and seller brokers were from the
   same group with SI on the one side and DPKSS on the other. Prima facie, it
   appeared that the trading pattern was an attempt to prop up the falling share price
   of RKL when the company was consider ing issuance of preference shares to
   financial institutions. The adjudicating officer inferred that the appellants were
   involved in the manipulation of the scrip th rough self trades and cross trades for
   creating artificial volumes and jack up the price of the scrip and so a show cause
   notice to the above effect was issued on November 24, 2009. It was also inferred
   by the adjudicating officer that PDKSS and APMFC were involved in violation of
   the Code of Conduct for stock brokers by way of using two client codes. The
   appellant filed replies to the show cause notice denying the allegations.

3  
 

4. We have heard the learned representa tive of the appellant and the learned
   counsel for the Board who took us through the records of the case. According to
   the appellant’s learned representative there is no abnormality in the trades in as
   much as the impugned trades consisted of only 0.01 per cent of the trades in the
   entire market. It is argued that the adjudicating officer has ignored the appellant’s
   trades on the Bombay Stock Exchange and if they were also taken into account
   the traded volume would be a miniscule portion as compared to the total market
   volume. It is very strenuously argued that there was no de liberate attempt to
   create artificial volumes or influence the market by propping up the price of the
   scrip in a manipulative manner. The matc hing of trades is represented to be
   incidental and not borne out of any mee ting of minds. The appellant’s learned
   representative submitted that any allegation of fraud cannot be sustained in the
   present case as there was no impact on the market and the charge regarding price
   manipulation has been dropped by the adjudica ting officer himself. In short, the
   appellant’s learned representative cont ended that manipulation of market or
   perpetration of fraud cannot be upheld in the absence of price manipulation and so
   the appellant should be absolved of penal consequences.
5. The learned counsel for the Board argued that manipulation of market
   through cross trades and self trades is hit by the definition of fraud as appearing in
   Regulation 2(1)(c) of FUTP Regulations. It is observed that manipulation of
   trades is writ large in the self trades and cross trades indulged in by the appellants.
   The absence of price manipulation is not material to the wrong doing committed
   by the appellants. With a reference to the trade logs which are annexed to the
   show cause notice it is point ed out that the appellants have attempted to register
   the trades in such a way that there was rise in volume on a day to day basis and
   this undoubtedly called for penal action. According to the learned counsel for the
   Board, the inter se connection of the appellants and the connected entities is very
   clearly set out in the impugned order a nd the appellants have indulged in the
   manipulation of trades through the connected entities. With regard to the volume
   of trades and the trades executed on the BSE it is observed th at the appellants’
   trades on the NSE clearly established manipulation and the comparison with over

4  
 

all trades in both the exchanges is not re levant in as much as the wrong doing in
the trades in NSE stands established.

6. We have considered the rival submissions. The allegation as contained in
   the show cause notice consists of two limbs (1) creation of artificial volumes in
   the scrip of RKL and (2) si gnificant rise in the share price of the scrip of RKL
   during the period from July 1, 2006 to August 22, 2006. The adjudicating officer
   concluded that the appellants indulged in cross trades and self trades with the
   above objective in mind and to create a false market. However, in the
   adjudication order, it was concluded th at there was no actionable material on
   record to prove the allegation of price ma nipulation. In other words, the charge
   regarding price manipulation was droppe d. However, the charge regarding
   creation of artificial volumes in the scri p of RKL stands established. We do not
   find any merit in the arguments of the appellants’ learned representative that
   creation of artificial volume through ma nipulative trades cannot stand by itself
   without price manipulation. In this respect it is necessary to refer to the definition
   of fraud as appearing in Regulation 2(1 )(c) of FUTP Regulations. It reads as
   under :
   “fraud includes any act, expression, omission or concealment
   committed whether in a deceitful manner or not by a person or by
   any other person with his connivan ce or by his agent while dealing
   in securities in order to induce another person or his agent to deal in
   securities, whether or not there is any wrongful gain or avoidance of
   any loss, and shall also include:……………”

The scope of the term ‘fraud’ as defined above is wide enough to take in its sweep
any act which disturbs the equilibrium of th e market. It is not necessary that the
fraudulent act should result in price manipulation. There are other several wrong
doings envisaged in the definition of fraud as mentioned above. So the contention
of the appellant’s learned re presentative that creation of artificial volumes in the
market cannot be regarded as a wrong doi ng is devoid of any s ubstance. In the
present case, the adjudicating officer anne xed the details of self trades executed
by PDKSS on behalf of SI and APMFC. The appellant’s learned representative
could not adduce any evidence to disprove the self trades. On the other hand, the
adjudicating officer has established the case of artificial volumes with the help of

5  
 

the details of trades listed out in the impugned order. To illustrate– on August 8,
2006 APMFC bought 15000 shares using the c lient code AP99 and sold exactly
the same quantity using different c lient code AP09. On August 8, 2006 the
buying and selling client for 3800 shares was the same entity namely APMFC.
Apart from self trades there were also 12 cross trades with PMPL for a total of
8,141 shares. Similar trades took place on August 9, 2006 and August 21, 2006.
The adjudicating officer has dealt with the manipulation done by the appellants
very succinctly in the following words:
“it is amply clear that PDKSS and his clients PMPL, SI and
APMFC which are inter-related ha d entered into cross trades
amongst each other. I also observe that APMFC had entered into
Self-trades during the period unde r investigation. From the
instances of cross trades executed amongst inter-related clients of
PDKSS I observe that each of the occasion i.e. APMFC had
contributed to 5.56% and 7.1% of total number of shares traded
on August 08, 2006 and August 21, 2006 respectively and SI had
contributed to 7.90% and 7.81% of total number of shares traded
on August 09, 2006 and August 21, 2006 respectively. Further
the quantum of self/cross deals by the broker as a percentage of
total transactions undertaken by him on these dates is also
significant (ranging from 45% to 100%) thus indicating that the
broker carried out its trades largely in the nature of self/cross
deals and thereby establishing th e volume creation done by the
broker/clients in the scrip.”
The only defence of the appellant’s learne d representative is that the trades
represent only those on the National Stoc k Exchange of India Limited and they
are a small percentage of the total volume traded in the market and there was no
adverse impact on the market. We are of the view that in the facts and
circumstances of this case, the volume of trades, as contended by the appellant, is
not relevant since the wrong doing stands established. The adjudicating officer
has brought on record a pattern in the trad ing registered by the appellant and this
points to deliberate manipulation by way of creation of artificial volumes. The
argument of the appellant that there was no meeting of minds in the transactions
cannot be accepted since the material on record is sufficient to establish the
connection among the parties and the pattern of trade which lead to deliberate
indulgence in self trades and cross trades.

7. The adjudicating officer has brought on record details of the trades
   executed by the appellant in which bot h buy and sell orders are of the same

6  
 

quantity and at the same price which has le d to creation of artificial volume. It
has also been noted by hi m that the parties to the transactions are connected
parties and they acted knowing fully well th e nature and pattern of the trades. So
the argument of the appellant that the matching of trades was incidental cannot be
accepted.

8. In view of the discussion above, we are of the view that the adjudicating
   officer has rightly roped in the provisi ons of regulations 3 and 4 of FUTP
   Regulations and held the appellants to be liable to pena lty. Since PDKSS,
   APMFC and SI are closely involved in the manipulative trades, penalty for
   violation of the provisions of regulations 3 & 4 of FUTP Regulations is upheld.
9. In the case of PDKSS it was observed that it had given its client APMFC
   two client codes i.e. AP09 and AP99. The adjudicating officer found this to be
   violative of SEBI circular SMDRP/Policy/CIR-39/2001 dated July 18, 2001. The
   above circular mandated all brokers to use unique client codes. The use of two
   client codes for the same client was in violation of the above mandate. It was
   contended before the adjudicating officer that a second client code was allotted to
   APMFC for carrying out share transactions in custodian code through IL & FC
   because settlement obligation of custodian trades are compulsorily required to be
   settled by custodian direc tly with NSCCL. It was pointed out before the
   adjudicating officer that code no.AP09 was exclusively allotted for custodian
   trades and code no.AP99 for non-custodi an trades. The appellant had not
   furnished any satisfactory explanation for the maintenance of two client codes.
   The appellant was not in a position to e xplain why transactions were undertaken
   through non custodian codes when custodian code has already been allotted. In
   view of the above violations, penalty was imposed on PDKSS and APMFC under
   15HB of the SEBI Act, 1992.
10. The contentions raised before the adjudicating officer are reiterated during
    appeal proceedings also. It is not in dispute that multiple client codes were
    allotted to APMFC and they were used fo r carrying out trades in the scrip of
    RKL. We cannot accept the stand taken by the appellant that due diligence was
    exercised in discharging its obligations. The use of two different client codes was

7  
 

admittedly against the relevant provisions of the SEBI circular and Code of
Conduct and the appellant could not bring forth any satisfactory explanation for
the same. It is expected of all brokers and sub-brokers to abide by the provisions
of the Code of Conduct and the relevant circulars issued by the Board. The
adjudicating officer has rightly concl uded that PDKSS and APMFC have not
exercised due diligence in the conduct of their business in their capacity as broker
and sub-broker by allotment of multiple clie nt codes. So, there is violation of
clause A(1) and (2) of Code of Conduc t for stock brokers as stipulated in
Schedule II under regulations 7 and 15 of the Stock Broker Regulations. In view
of the above, the imposition of penalty on PDKSS and APMFC has to be upheld.
In the result, the order of the adjudi cating officer is upheld and the appeal
dismissed with no order as to costs.

  Sd/- 
                                                                                                      P. K. Malhotra 
                Member 

Sd/-
S. S. N. Moorthy
Member
12.4.2012
Prepared & Compared by
RHN