BEFORE THE ADJUDICATING · PDF fileBEFORE THE ADJUDICATING OFFICER SECURITIES AND EXCHANGE BOARD OF INDIA ... Packaging Limited, Vadilal Industries Limited, Jagatjit Industries

Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.

Page 1 of 21 April 20, 2010

BEFORE THE ADJUDICATING OFFICER

SECURITIES AND EXCHANGE BOARD OF INDIA

[ADJUDICATION ORDER NO. NB/AO - 26 /2010]

UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING

PENALTIES BY ADJUDICATING OFFICER) RULES, 1995

In respect of

M/s Krunal Finvest

(Prop: Mr. Nilesh Natwarlal Sheth)

PAN – AGYPS1051P

In the matter of Gujarat Hotels Limited, Jindal Hotels Limited, Scooters India Limited,

Relaxo Footwears Limited, Tulsyan NEC Limited, Archies Limited, Karur K.C.P.

Packaging Limited, Vadilal Industries Limited, Jagatjit Industries, Ahlcon Parenterals

Limited, Linc Pens & Plastics Limited, Machino Plastics Limited, JJ Exporters

Limited, Hindustan Tin Works Limited, Vamshi Rubber Limited and Artson Engg.

Limited

FACTS OF THE CASE IN BRIEF

1. The Securities and Exchange Board of India (hereinafter referred to as “SEBI”)

conducted an investigation into the trading in the scrips of Gujarat Hotels Ltd, Jindal

Hotels Ltd, Scooters India Ltd, Relaxo Footwears Ltd, Tulsyan NEC Ltd, Archies Ltd,

Karur K.C.P Packaging Ltd, Vadilal Industries Ltd, Jagatjit Industries, Ahlcon

Parenterals Ltd, Linc Pens & Plastics Ltd, Machino Plastics Ltd, JJ Exporters Ltd,

Hindustan Tin Works Ltd, Vamshi Rubber Ltd, Hind Industries limited and Artson Engg.

Ltd (hereinafter referred to as “identified scrips”) during the period June 2007 to

September 2007 (hereinafter referred to as “period under reference” or

“investigation period”). These scrips were selected for detailed investigation based on



the alerts generated by Integrated Market Surveillance System of SEBI showing

unusual sharp uptrend in volume and price of the scrips in a short time ranging from 1 to

30 days during June 2007 to September 2007.

2. Trade logs and order logs of the identified scrips were analyzed for the period under

reference and an attempt for price manipulation along with synchronized deals and

trade reversals was observed amongst some of the members/clients during the

investigation period. The Investigation Report (hereinafter referred to as „IR‟) observed

that a group of clients and a few stock brokers traded significantly in the scrip during the

investigation period. Krunal Finvest (Proprietor Mr. Nilesh Natwarlal Sheth) (hereinafter

referred to as “the Noticee”) forms part of a group that seem to have synchronized

their orders for creating false volumes and while offloading ensured that their sell orders

are not matched with the buy order of entities connected with them during the period

under reference. The IR alleged that during the period, the Noticee as a part of

interconnected group placed large orders, only very small part of which were actually

executed leading to creation of false market.

3. It was alleged that the Noticee as a part of interconnected group had entered into

synchronized trades and trade reversals and had thereby indulged in the price

manipulation and creation of false market in the identified scrip by way of order book

manipulation and thus violated provisions of 3 (b), (c), (d), 4 (1), 4 (2) (a), (b), (e), (g) of

SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market)

Regulations, 2003 (hereinafter referred to as “PFUTP Regulations”) and therefore was

liable for monetary penalty under Section 15HA of Securities and Exchange Board of

India Act, 1992 (hereinafter referred to as “SEBI Act”).



APPOINTMENT OF ADJUDICATING OFFICER

4. I was appointed as the Adjudicating Officer vide order dated February 20, 2009 under

Section 15 I of Securities and Exchange Board of India Act, 1992 (hereinafter referred

to as the “SEBI Act”), read with Rule 3 of Securities and Exchange Board of India

(Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules,

1995 (hereinafter referred to as “Adjudication Rules”) to inquire into and adjudge

under Section 15HA of the SEBI Act, the violations of Regulations 3 (b), (c), (d), 4 (1), 4

(2) (a), (b), (e), (g) of PFUTP Regulations alleged to have been committed by the

Noticee.

SHOW CAUSE NOTICE, HEARING & REPLY

5. A Show Cause Notice (hereinafter referred to as „SCN‟) dated November 24, 2009 was

served on the Noticee under rule 4 (1) of the Rules, seeking reply of the Noticee as to

why an inquiry should not be held and penalty not imposed on the Noticee under

sections 15HA of the SEBI Act for the alleged violations specified in the SCN. In the

interest of natural justice and in order to conduct an inquiry in terms of rule 4 (3) of the

Rules, the Noticee was granted an opportunity of personal hearing at SEBI, Mumbai.

The details of replies received from the Noticee and the date of hearing are as under:

Noticee Date(s) of Reply Date of Hearing Represented by

Krunal

Finvest

December 7, 2009

December 30, 2009

February 13, 2010

February 4, 2010 Mr. Bhaskar Patel and Mr.

Nilesh N Seth

6. The SCN alleged that the Noticee, through its broker Ajay Natavarlal Securities Pvt Ltd

(hereinafter referred to as “ANSPL”) and along with other interconnected clients of

ANSPL, viz. Bhayani Investments, Nisharg Trading Co (Jayesh Natavarlal Sheth), Jeet



Securities (Kashmira Bhavesh Kumar Sheth), Amay Finance (Komal Ajay Sheth) and

Disha Finlease (Kajal Jayesh) (hereinafter referred to as “other identified entities”)

had executed several synchronized trades and trade reversals in the scrip of Gujarat

Hotels, Jindal Hotels, Scooters India, Relaxo Footwears Ltd, Tulsyan NEC Ltd, Archies

Ltd, Vadilal Industries Ltd, Ahlcon Parenterals Ltd, Linc Pens & Plastics Ltd, Machino

Plastics Ltd, JJ Exporters Ltd, Vamshi Rubber Ltd and had indulged in the creation of

artificial volume and price rise in the said scrips.

7. The SCN issued alleged that the Noticee, along with other identified entities, had

created large volumes in the identified scrips by placing large orders through ANSPL,

which also resulted in buying pressure and price rise. Further, a very small ratio of the

total order put into the system was actually traded. The order book concentrations of the

Noticee alongwith other identified entities, in the identified scrips, indicating the trading

methodology is tabulated as under:

Scrip Name

Concentration Large

Buy

Order /

their total

buy order

(%)

Actual

Buy /

Their

total Buy

order (%)

Concentration Large

Sell

Order /

their

total

sell

order

(%)

Actual

Sell /

Their

total

Sell

order

(%)

Buy

Order

(%)

Large

Buy

Order

(%)

Sell Order

(%)

Large Sell

Order (%)

Ahlcon 84.95 95.00 99.45 3.75 61.09 88.85 99.18 11.16

Archies 64.87 77.80 99.46 6.90 37.01 63.36 99.98 26.22

Artson 64.94 80.26 99.64 8.31 20.58 32.85 99.26 29.29

Gujarat

Hotels 76.30 84.80 98.31 3.92 54.75 81.28 99.20 14.37

Hind

Industries 75.13 87.38 99.07 3.88 43.07 66.00 98.81 15.98



8. Based on the above table it was alleged that several large orders were entered by

ANSPL on behalf of the Noticee and the other identified entities, comprising 70% -

100% of their total buy order quantity. It was also observed that the concentration of

large buy-orders was also very high of about 67% - 97% in many cases. It was

however noted that most of the identified entities had actually bought very small part of

the order quantity or had not bought even a single share, since these were deleted later

on.

9. The aforesaid SCN also mentioned that whenever ANSPL undertook the subject

transactions on the behalf of the Noticee and other identified entities, there was a

Hind Tin

Works 59.54 72.84 99.71 1.39 3.48 6.14 99.29 41.11

Jagatjit

Industries 75.08 86.88 99.86 5.75 33.03 60.86 99.30 35.35

Jindal

Hotel 85.78 92.06 99.66 3.65 51.59 73.47 99.76 18.05

JJ Exporter 3.77 5.29 96.32 48.31 2.07 5.22 98.40 100

Karur Kcp

Pk 78.34 88.63 98.24 5.51 47.68 70.86 99.64 24.44

Linc Pen 45.27 57.34 99.46 11.56 17.59 26.01 99.58 41.73

Machino

Plastics 73.65 86.03 99.09 4.63 39.84 61.86 99.61 19.09

Scooters

India 42.18 49.22 99.06 7.82 19.21 25.21 99.59 21.43

Tulsyan 89.28 97.45 98.82 3.55 64.01 88.68 97.92 12.97

Vadilal

Industries 48.74 67.23 97.30 9.68 16.22 30.01 98.64 51.71

Vamshi

Rubber 70.81 85.68 99.36 6.00 33.33 57.90 99.95 34.76



significant increase in the price and volumes of the scrip but immediately after the

transactions / their exit, the share price / trading volume fell. This impact was noticed on

various days during the period under reference in the identified scrips. For instance, the

trading activity in one of the identified scrips, viz. Gujarat Hotels, has been tabulated

below:

Date Time of activity of

broker Ajay

Natavarlal (Total

Duration – hr : min)

Price

movement(Rs)/

Volume during

their activity (no.

of shares)

Time, before or after the

activity of broker Ajay

Natavarlal

Price movement

(Rs)/volume before or

after their activity (no. of

shares)

23/7/2007 14:15:38 hrs to

15:30:00 hrs / 1 hr 15

min

Rose from 53.20 to

65.55 / 54,545

9:55 hrs 14:15:37 hrs / 4

hr 20 min

Rose from 53.10 to 54.55

/ 4,385 shares

24/7/2007 9:55:00 hrs to

11:10:02 hrs / 1 hr 15

min

Rose from 62 to

75.50 / 3,39,381

11:10:03 hrs to 15:30 hrs /

6 hr 20 min

Declined from 70.80 to

67.90 / 41,444

13/8/2007 13:12:00 hrs to

13:18:01 hrs / 6 min

Rose from 58.05 to

64.80 / 7,086

9:55 hrs to 13:11:59 hrs /

3 hr 17 min

Moved between 55 to

59.30 / 2,177

31/8/2007 14:30 hrs to 15:30 hrs

/ 1 hr 0 min

Price rose from

69.30 to the high of

81.75 / 2,56,947

9:55 hrs to 14:29:59 hrs /

4 hr 34 min

Moved between Rs 68.25

to 72.00 / 69,295

3/9/2007 10:09:08 hrs to 15:30

hrs / 5 hr 20 min

Price rose from

76.30 to the high of

Rs 86.45 / 3,34,154

9:55 hrs to 10:09:07 hrs /

14 min

Fell from the high of 80 to

76.50 / 18,795

10. It was further noted that the trades in the identified scrips undertaken by ANSPL on

behalf of the Noticee and the other identified entities, were synchronised with those put

by the clients of Shree Parasram Holdings Private Limited, such that most of the buy

and sell orders were entered within a short span of time (less than 1 minute) and further

reversal has also been observed within 5 minutes of the trades between the same. The

details of such synchronized trades were provided as an appendix issued along with the

SCN.



11. Further, the concentration of orders by the Noticee along with the identified entities was

found to be large when compared to the total market volume traded, as is further

demonstrated in the following tables –

A: Order Book Activity by Identified Entities in the identified scrips

Scrip

Name

Activity

period

(in days)

Average Daily Market Buy Order Volume (Lakh shares) Market

buy-

order

concentr

ation

during

period

of

activity

% Large

Buy

order to

total buy

orders

of

clients

% Actual

trade to

total buy

order of

identified

entities

one

month

before

activit

y

During

period

of

activity

% rise

increase

during

the

period

One

month

after the

activity

%

decrease

after the

period

(A) (B) (C) (D)=(C-

B)/B (E) (F)=(C-E)/C (G) (H) (J)

Archies 13 0.732 3.038 315.03 0.649 78.64 67.76 99.46 8.15

Gujrat

Hotels 18 0.179 7.183 3912.85 0.322 95.52 79.75 98.49 4.67

Hindusta

n Tin

Works

4 0.338 9.4 2681.07 1.093 88.37 59.54 99.71 1.39

Hind

Industrie

s

10 0.204 5.377 2535.78 0.489 90.91 79.49 98.55 5.48

Jagatjit

Industrie

s

2 0.497 9.394 1790.14 3.93 58.16 75.08 99.86 5.75

Jindal 6 0.177 26.926 15112.43 0.392 98.54 88.37 99.59 4.04

JJ

Exporter

s

2 0.266 1.306 390.98 0.356 72.74 20.71 97.13 59.78

Karur 2 0.459 17.269 3662.31 0.873 94.94 84.99 97.10 7.48

Linc 24 0.336 2.129 533.63 1.329 37.58 60.71 99.57 20.01

Machino 6 0.23 11.714 4993.04 0.926 92.09 76.11 98.72 5.82

Relaxo 5 0.371 27.085 7200.54 0.735 97.29 88.64 98.79 3.78

Scooters 7 0.28 19.219 6763.93 0.692 96.40 76.58 99.35 7.69



India

Tulsyan

Nec 3 0.293 29.416 9939.59 1.835 93.76 89.32 98.82 3.58

Vadilal 3 0.468 5.751 1128.85 0.802 86.05 49.72 97.36 11.47

Vamshi 5 0.273 6.876 2418.68 0.307 95.54 71.57 99.37 7.00

Ahlcon 2 0.651 19.863 2951.15 0.852 95.71 85.56 99.45 4.44

Artson 6 1.412 23.025 1530.67 3.639 84.20 64.94 99.64 8.31

B: Trading domination of identified entities in the identified scrips

Scrip Name

No.

of

Days

Total Traded

Volume of the

scrip (Lakh

Sahes)

Actual trade

Qty of identified

entities (Lakh

shares)

% Actual Trade Qty of

entities to total Trade Qty

during investigation

period

Archies 13 933075 523556 56.11

Gujrat Hotels 18 2518301 1644687 65.31

Hindustan Tin

Works 4 367371 36144 9.84

Hind Industries 10 1270580 666547 52.46

Jagatjit Industries 2 544573 221090 40.60

Jindal 6 3459004 2377689 68.74

JJ Exporters 2 81668 20326 24.89

Karur 2 756634 534571 70.65

Linc 24 1974553 1115427 56.49

Machino 6 2048244 1194308 58.31

Relaxo 5 2081502 1354684 65.08

Scooters India 7 3296975 2135895 64.78

Tulsyan Nec 3 1333020 923462 69.28

Vadilal 3 627835 197374 31.44

Vamshi 5 674763 329135 48.78

Ahlcon 2 765191 450347 58.85

Artson 6 1259285 428372 34.02

12. Based on the data as represented in the table above, it was noted that –



The Noticee, alongwith the other identified entities, had dominated the trading activity,

having around 30% to 70% of market volume traded in most of the scrips under

observation (last column of Table B)

Contribution to total buy orders thereby revealing the Noticee‟s domination in buying

interest along with that of other identities entities or order book concentration thereof

range from 50% to 89 % in most of the scrips (Table A, column G).

More than 90% of the buy orders of the Noticee along with the identified entities were in

form of large orders i.e. order quantity greater than twice the average buy order size

(Table A, column H)

As against a range found for other clients in respect of trading volume to orders quantity

of 62-70%, for the Noticee, alongwith other identified entities, this ratio falls to as low as

10% (Table A, column J), raising doubts about motives of order placement.

13. The Noticee vide the reply letters mentioned at para 5 above, inter- alia, submitted the

following:

a. ―I am independent of the said entities in all my business transactions and decisions. I

deny acting in concert with the said entities. I further submit that no off-market trades/or

transactions were carried out by me with any of the identified entities.

b. I had carried out trades in the scrips of Gujarat Hotels, Hindustan Tin, Hind Ind, Jindal

Hotels, J J Exports, Linc Pen, Machino Plast, Relaxo Footwear, Scooters India, Vamshi

Rubber and Artson Engg.

c. To your charge that I conducted synchronized trades with identified entities, let it be

clarified that all the trades were input in the open market and very much within the limit

permissible by the stock exchanges.


Page 10 of 21 April 20, 2010

d. as to your contention that I entered orders at prices marginally above the market prices,

my stand is that volume traders often resort to the practice of inputting heavy orders at

the maximum threshold of price limits with a view to bringing liquidity into the market.

e. As a rapid fire trader, doing trades in all the segments of the market I would not know

who I am getting matched with and even otherwise in an anonymous order driven

system, counter party to every trade is the clearing corporation.

f. With reference to para no. 3.1 of the SCN, I deny having any business relationship with

the said identified entities. I state that the allegation against me has been probably made

out on the basis of my sharing same office address with Disha Finlease or because I am

related to some of the said entities as a family(except for Bhayani Investment with whom

I have no family relationship or any dealings whatsoever). I state that there is nothing

unusual about family members having a common office arrangement and/or telephone

numbers. This cannot lead to the presumption of common intent just on the basis of

sharing of office and/or telephone. Such presumptions are untenable in law.

g. I am a zealous large scale trader trading voluminous quantities at tiny price differentials

in any scrip in which I sense a profit opportunity.

h. As to your charge that a very small ratio of total order actually resulted in trades, I have

to clarify that order matching is a function of market liquidity and cannot be controlled at

the client level.

i. As a zealous trader if I don’t get my order-fill in particular scrip, I delete that order and

input another order in another scrip.


Page 11 of 21 April 20, 2010

j. With reference to para no. 3.5 of the SCN, I deny the allegations in toto. I state that the

example of Gujarat Hotels does not apply to me because my trades in the same have

amounted to a miniscule percentage of 25% of the total market volume. I could not have

therefore caused the price movement in Gujarat Hotels as depicted by you. In any event

I deny of having created any purported price movements in the scrip of Gujarat Hotels

and am unaware of the same.

k. Out of total volume of 96,94,594 shares traded by me, the alleged matched quantities of

shares in all the scrips with the clients of the said Shree Parasram Holdings Ltd is

16,50,784 which is only 17.03% of my total traded volume for the reference period since

June 2007 to September 2007. Therefore even for sake of assumptions, the alleged

matched trades form a very miniscule percentage to merit any adverse inference by

you.

l. Sharing of facilities cannot be a ground for presumption of being in cahoots in a

particular act.

m. As a jobber, we both buy and sell in heavy quantities.

n. I deny having acted in concert with other entities/other brokers to create false market in

the identified scrips. I reiterate having traded only in 11 of the said identified scrips, I

deny having created any such false market.

o. We do share our address with Disha Finlease and same telephone number with Nisharg

Trading Company and Amay Finance. We do not share the same address and

telephone number with all the identified entities as is made out by you in the SCN. Your

assumption of having acted in concert seemed to have sprung from the address and

telephone number shared by us as aforesaid. We have in our reply pointed out in length

that sharing of facilities cannot be a ground for presumption of being in cahoots in a


Page 12 of 21 April 20, 2010

particular act and thereafter hitting us with provisions of law having penal

consequences.

p. We are in the wont of jobbing in all such scrips in which we sense price volatility. While

we are in jobbing, we both buy and sell in heavy quantities. We, therefore, do not

undertake one-sided deals and contribute to price movement either way. In fact, as

jobber, we lend two way liquidity to the scrip. Your contention in SCN that our trading

has contributed to price rise in all the identified scrips is rather farfetched

q. While entering any scrip for jobbing, we carry out an analysis of price and volume

history in the scrip dating back to two years. Only if we have an inkling of a rally or a

derally in any stock, do we choose to enter it for trading.

r. Of 5208 orders placed in the said scrips, we have deleted 2255 orders with the same

quantity as that of the order placed. The percentage of orders deleted to orders placed

is approximately 47%. We have deleted 1921 other orders but having quantities

different from those of other order placed. These orders are partially unfilled orders.

These are therefore not order to order deletions but deletions of those order quantities

which have not culminated in trades.

s. Another contention we would like to make as to large number of deletions are bound to

be large because orders outstanding in the system with no potential of getting matched

or converted into trades will have to be deleted or else capital will be locked in

superfluous orders.

CONSIDERATION OF ISSUES AND FINDINGS

14. I have carefully gone through the IR, the allegations made in the SCN, the submissions

made by the Noticee and the other documents available on record.


Page 13 of 21 April 20, 2010

15. It is alleged that the Noticee had entered into synchronized deals and trade reversals by

acting in concert with other identified entities to create artificial volumes in the identified

scrips which led to manipulative, fraudulent and unfair trades in the said scrips during the

Investigation Period. It is also alleged that the Noticee along with the other identified

entities had created false market in the identified scrip by way of order book manipulation

by placing large orders, only a part of which were actually executed. It is therefore

alleged that the Noticee has violated regulations 3 (b), (c), (d), 4 (1), 4 (2) (a), (b), (e) and

(g) of the PFUTP Regulations.

16. The issues that arise for consideration in the present case are:

a) Whether the Noticee has violated regulations 3 (b), (c), (d), 4 (1), 4 (2) (a),

(b), (e), (g) of PFUTP Regulations in relation of the identified scrips?

b) Does the violation, if any, on the part of the Noticee attract monetary penalty

under sections 15 HA of SEBI Act?

c) If so, what would be the monetary penalty that can be imposed taking into

consideration the factors mentioned in section 15J of SEBI Act?

17. Before moving forward, it will be appropriate to refer to the relevant provisions of

PFUTP which reads as under:

“3. Prohibition of certain dealings in securities

No person shall directly or indirectly –

(a) ……;


Page 14 of 21 April 20, 2010

(b) use or employ, in connection with issue, purchase or sale of any security listed or

proposed to be listed in a recognized stock exchange, any manipulative or deceptive

device or contrivance in contravention of the provisions of the Act or the rules or the

regulations made there under;

(c) employ any device, scheme or artifice to defraud in connection with dealing in or

issue of securities which are listed or proposed to be listed on a recognized stock

exchange;

(d) engage in any act, practice, course of business which operates or would operate

as fraud or deceit upon any person in connection with any dealing in or issue of

securities which are listed or proposed to be listed on a recognized stock exchange in

contravention of the provisions of the Act or the rules and the regulations made there

under.‖

“4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation3, no person shall indulge in a

fraudulent or an unfair trade practice in securities

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if

it involves fraud and may include all or any of the following, namely: -

(a) indulging in an act which creates false or misleading appearance of trading in the

securities market;

(b) dealing in a security not intended to effect transfer of beneficial ownership but

intended to operate only as device to inflate, depress or cause fluctuations in the

price of such security for wrongful gain or avoidance of loss;

(c) …;

(d) …;

(e) any act or omission amounting to manipulation of the price of a security;

(f) …;


Page 15 of 21 April 20, 2010

(g) entering into a transaction in securities without intention of performing it or without

intention of change of ownership of such security;

18. It is noted from the submissions made by the Noticee that it has traded in its individual

capacity in the scrips of Gujarat Hotels, Hindustan Tin, Hind Industries, Jindal Hotels, J

J Exports, Linc Pen, Machino Plast, Relaxo Footwear, Scooters India, Vamshi Rubber

and Artson Engg during the period under reference. In this regard, it is pertinent to

mention here that the allegations in the SCN are not against the individual trades done

by the Noticee but are against the Noticee along with all the identified entities as a

group, for manipulating the price and volume of the identified scrips. The SCN has thus

charged the Noticee along with the other identified entities who have traded in the

identified scrips.

19. Further, it needs to be kept in mind that the Noticee has been alleged to have indulged

in synchronized trades and price manipulation as a part of group and even though the

Noticee claims the trading volumes to be low, there has been significant trading in the

identified scrips by the group. In view of this, lesser participation from the Noticee per-se

does not absolve it from the alleged charges. Therefore, the allegations against the

Noticee have to be viewed not in isolation but in line with the alleged inter-connection

between the identified entities.

20. Coming to the issue of the alleged inter-connection, the Noticee has submitted that it

does share a common address with Disha Finlease and not with any of the alleged

entities and also share a common telephone number with Nisharg Trading Co. and

Amay Finance. Further, the Noticee has stated that four of the other identified entities,

viz. Jeet Securities (Kashmira Bhaveshkumar Sheth), Nisharg Trading Co (Jayesh

Natavarlal Sheth), Disha Finlease (Kajal Jayesh Sheth), Amay Finance (Komal Ajay

Sheth), are related to the Noticee as family members. In this respect, I have also noted


Page 16 of 21 April 20, 2010

the submission made by the Noticee that sharing of facilities cannot be a ground for

presumption of being in cahoots in a particular act.

21. However, after a careful examination of the IR, I have observed that the allegations in

the IR are based on the unusual trading and order placement pattern as observed

amongst the identified entities during the period under reference and not solely upon the

fact that the identified entities share a common telephone number and address.

Therefore, the aforesaid submission of the Noticee alone can in no way absolve it from

the charges levied in the SCN.

22. In this regard, I also have to state that cases of alleged collusion between entities is a

product of various inter-connected factors, which if viewed in isolation, may not indicate

much and therefore in order to crystallize such cases, all connecting factors have to be

holistically viewed so as to arrive at a meaningful conclusion. In the instant matter, such

interconnected factors are the fact that the identified entities are related with each other,

they shared common contact details and most importantly they indulged in

synchronized trades amongst each other and amongst few clients of other broker during

the period under reference. These factors cannot be ignored and hence when viewed in

conjunction, supports the belief that the Noticee and the identified entities were acting in

connivance. Therefore, as far as inter-connection between the Noticee and the

identified entities is concerned, the Noticee‟s arguments do not enable me to take a

view contrary to what has been alleged.

23. As regards the allegation that a very small ratio of the total order put into the system

was actually traded, the Noticee has submitted the data of actual orders deleted with

different quantity and orders deleted with the same quantity. It is Noticee‟s contention

that the deletions done by it are not order to order deletions but are deletions of those

order quantities that have not culminated in trades. The Noticee has further submitted

that such unfilled orders are deleted in order to place orders at revised prices so that it


Page 17 of 21 April 20, 2010

can entice enough liquidity so as to get a full match of the quantity it wants. The Noticee

has thus come to the conclusion that order to trade ratio has not reached 10%. In this

respect, I have noted that the Noticee has not compared orders placed with the trades

actually executed, hence the arguments extended based on the data, does not appear

convincing enough. The percentage of large orders placed and subsequently only a

minimal percentage of them actually getting executed, adds weight to the allegation that

the orders were placed with an intention to manipulate the market and create false

volume rather than gaining the beneficial ownership of the traded scrips.

24. I have also noted the Noticee‟s submission that since it was trading frenetically by

placing large number of orders, the deletions are bound to be large because orders

outstanding in the system with no potential of getting converted or matched into trades

will have to be deleted or else broker‟s capital will be locked up in superfluous orders. In

this regard, my basic doubt is on the practice of placing such a large number of orders

in the first place. The question of these becoming superfluous and subsequently getting

deleted comes much later. This practice, in fact, leads me to believe that the Noticee

was deliberately placing orders with the idea and intention that many of these would not

be matched and hence become superfluous.

25. Further, the trading pattern observed between the identified entities clearly indicates

several instances where the time difference between buy and sell orders was less than

a minute. Logically speaking, no unknown persons can trade continuously with each

other by placing orders in such pattern. This indicates that the identified entities were

acting in connivance with each other. While I agree that the price rise in isolation cannot

be taken as an indicator of an attempt to create false market, however a price rise which

is accompanied with synchronized trades and reversal of trades amongst entities

connected to each other can definitely be classified as a manipulative and unfair trade

practice.


Page 18 of 21 April 20, 2010

26. From the above, it appears that the intention of the Noticee, as part of the group of

identified entities, was to create artificial volume in the identified scrips during the

investigation period. Synchronised and structured patterns of trading by the Noticee

along with other identified entities helped in creating artificial demand and thereby

leading to a false appearance of trading in the identified scrips as also in causing

fluctuations in the price of the scrip of the company.

27. In this regard, though there are no direct evidences to support the intention of Noticee

along with identified entities to manipulate the market, however circumstances /

instances etc enumerated above are sufficient to infer the intention of the Noticee and

the identified entities as alleged in the SCN. Further, it is difficult to believe that several

of these trades (Synchronised/ self/ reversal of trades) in such scrips amongst the

Noticee, identified entities and with clients of other broker are mere coincidence. The

synchronization of trades tempers with price discovery mechanism of the stock

exchanges and also hampers transparency. These trades abet creation of artificial

volumes and false market. The Noticee has thus abetted creation of artificial volume in

the identified scrips during the investigation period in connivance with the identified

entities thereby leading to a false appearance of trading in the identified scrips as also

as causing fluctuations in the price of the scrip of the company.

28. Hence, in light of the facts of the case as enumerated above and materials available on

record, I am convinced that the Noticee has violated the provisions of regulations 3 (b),

(c), (d), 4 (1), 4 (2) (a), (b), (e), (g) of PFUTP Regulations.

29. The next issue for consideration is as to what would be the monetary penalty that can

be imposed on the Noticee under Section 15HA of the SEBI Act, 1992 for the aforesaid

violations.


Page 19 of 21 April 20, 2010

30. The provisions of section 15A(a) of SEBI Act,1992 as prevailing at the relevant time is

reproduced hereunder :

―Penalty for failure to furnish information, return, etc.

15A. If any person, who is required under this Act or any rules or regulations made

thereunder,—

(a) to furnish any document, return or report to the Board, fails to furnish the same,

he shall be liable to a penalty of one lakh rupees for each day during which such

failure continues or one crore rupees, whichever is less;‖

"Penalty for fraudulent and unfair trade practices

15HA If any person indulges in fraudulent and unfair trade practices relating to

securities, he shall be liable to a penalty of twenty-five crore rupees or three times

the amount of profits made out of such practices, whichever is higher."

31. Further, while imposing monetary penalty, it is important to consider the factors

stipulated in section 15J of SEBI Act, which reads as under:

“15J - Factors to be taken into account by the adjudicating officer

While adjudging quantum of penalty under section 15-I, the adjudicating officer shall have

due regard to the following factors, namely:-

(a)the amount of disproportionate gain or unfair advantage, wherever quantifiable, made

as a result of the default;

(b)the amount of loss caused to an investor or group of investors as a result of the

default;

(c)the repetitive nature of the default.‖


Page 20 of 21 April 20, 2010

32. I have noted from the IR that the noticee had made a gain of approx. Rs. 31,38,855.68/-

while dealing in the identified scrips during the period under reference, which inter-alia

includes the alleged synchronized trades. I have also noted from the trade log that the

alleged synchronized trades as a percentage of total trades in buy as well as sell side

were 16.84% and 30.45% respectively. However, it is difficult in cases of such nature, to

quantify exactly the disproportionate gains or unfair advantage enjoyed by an entity and

the consequent losses suffered by the investors. All who enter the market are expected

to transact in a fair manner thereby helping in maintenance of fair market. However, the

Noticee by its transactions along with other identified entities has created an artificial

market, which adversely affected the gullible investors, impact of which cannot be

quantified.

ORDER

33. Considering the facts and circumstances of the case and the violation committed by the

Noticee, I find that imposing a penalty of Rs. 8,00,000/- (Rupees Eight Lakhs only) on

the Noticee would be commensurate with the violations of provisions of SEBI

(Prohibition of Fraudulent and Unfair Trade Practices), Regulations, 2003 committed by

the Noticee.

34. I, therefore, hereby impose a monetary penalty of Rs. 8,00,000/- (Rupees Eight Lakhs

only) under Section 15HA of SEBI Act, 1992 on the Noticee viz M/s Krunal Finvest.

35. The penalty shall be paid by way of demand draft drawn in favour of “SEBI – Penalties

Remittable to Government of India” payable at Mumbai within 45 days of receipt of this

order. The said demand draft shall be forwarded to Division Chief, Investigation

Department, ID-2, Securities and Exchange Board of India, Plot No. C4-A, „G‟ Block,

Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.


Page 21 of 21 April 20, 2010

36. In terms of the provisions of Rule 6 of the SEBI (Procedure for Holding Inquiry and

Imposing Penalties by Adjudicating Officer) Rules 1995, copies of this order are sent to

M/s Krunal Finvest and also to Securities and Exchange Board of India.

Date: April 20, 2010 Neelam Bhardwaj

Place: Mumbai Adjudicating Officer

Documents

BEFORE THE ADJUDICATING · PDF fileBEFORE THE ADJUDICATING OFFICER SECURITIES AND EXCHANGE BOARD OF INDIA ... Packaging Limited, Vadilal Industries Limited, Jagatjit Industries