Adjudication order against Ms Shriram Insight Brokers ltd. in the matter of Adani Exports Limited

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BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO.: - SD/AO/09/2010]
________________________________________________________
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
Against
M/s. Shriram Insight Share Brokers Ltd.
(Formerly Insight Share Brokers Ltd.)
PAN : AAACI2727H
BRIEF FACTS OF THE CASE
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’)
had initiated investigation in the scrip of M/s. Adani Exports Limited
(hereinafter referred to as ‘AEL’), a public company mainly traded on the
Bombay Stock Exchange (hereinafter referred to as the ‘BSE’) and the
National Stock Exchange (hereinafter referred to as ‘NSE’), to examine
the possibility of violation of provisions of various SEBI Regulations in
respect of trading in the scrip for the period from July 09, 2004 to January
14, 2005 (hereinafter referred to as the first period) and August 08, 2005
to September 09, 2005 (hereinafter referred to as the Second Period). The
scrip witnessed huge spurt in volumes and wide fluctuations in the price
ranging from 481 to 756 (during pre split in first period) and from Rs. 64.35
to Rs. 74.20 (during the second period).
2. The role of the brokers and their clients who had traded in the scrip of AEL
were scrutinized. It was alleged that through collusion with the brokers and

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some other clients, certain entities transacted in the shares of AEL in such
a manner that led to creation of artificial volumes in the scrip which was
designed to create a false market and distort market equilibrium leading to
spurt in the price of the scrip which did not have any correlation with the
performance of the company.
3. It was alleged that one of the brokers, viz., M/s Shriram Insight Share
Brokers Ltd. (hereinafter referred to as “the Noticee”),trading for its client
Shri Santosh Gade (hereinafter referred to as “said client”) violated the
provisions of Regulations 4(1), 4(2)(a), (b), (e), (g) and (n) of SEBI
(Prohibition of Fraudulent and Unfair Trade Practices Relating to
Securities Markets) Regulations, 2003 (hereinafter referred to as “PFUTP
Regulations”) and clauses A(1), A(2), A(3), A(4) and A(5) of the Code of
conduct as specified in the schedule II under Regulation 7 of the the
SEBI(Stock Brokers and Sub–Brokers) Regulations,1992 (hereinafter
referred to as the “Broker Regulations”) and was therefore, liable for
monetary penalty under section 15HA and 15HB of Securities and
Exchange Board of India Act, 1992 (hereinafter referred to as “SEBI Act”).
APPOINTMENT OF ADJUDICATING OFFICER:
4. Ms. Babita Rayudu was appointed as Adjudicating Officer vide order dated
July 24, 2007 under section 15 I of SEBI Act read with rule 3 of SEBI
(Procedure for Holding Inquiry and Imposing Penalties by Adjudicating
Officer) Rules, 1995 (hereinafter referred to as ‘Rules’) to inquire into and
adjudge the aforesaid alleged violations committed by the Noticee.
5. Subsequent to the transfer of Ms. Babita Rayudu, the undersigned was
appointed as the Adjudicating Officer vide order dated November 23,
2007.
SHOW CAUSE NOTICE/REPLY/PERSONAL HEARING:

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6. Accordingly, a notice to show cause dated June 23, 2008 under Rule 4 (1)
of the Rules was issued to the Noticee asking it to show cause as to why
an enquiry should not be held against it in terms of Section 15I of the SEBI
Act and penalty be not imposed under Section 15HA and 15HB of the
SEBI Act for the alleged violation by it of the abovementioned provisions
of the PFUTP Regulations and the Broker Regulations.
7. In response to the said notice to show cause (hereinafter referred to as
the ‘SCN’), the Noticee submitted a detailed reply dated July 21, 2008.
8. In the interest of natural justice and in order to conduct an inquiry as per
rule 4 (3) of the Rules, the Noticee was granted as opportunity of personal
hearing before me on November 6, 2008 at the SEBI ERO at Kolkata. The
Noticee attended the said hearing through its authorized representative
and submitted a submission dated November 6, 2008. All the submissions
made by the Noticee have been considered and would be discussed
during the course of order, as required.
CONSIDERATION OF ISSUES AND FINDINGS:
9. I have carefully perused the charges against the Noticee mentioned in the
SCN, the submissions of the Noticee and the documents available on
record. The issues that arise for consideration in the present case are
stated and determined, one by one, as follows:
ƒ Whether the Noticee has violated Regulation 4 (1) and 4 (2) (a), (b),
(e), (g) and (n) of the PFUTP Regulations, 2003?
10. Before proceeding to decide the above issue, it is important to have a look
at the abovementioned provisions as they existed at the relevant time,
which interalia are reproduced below.
“4. Prohibition of manipulative, fraudulent and unfair trade practices

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(1) Without prejudice to the provisions of regulation 3, 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 a device to inflate, depress or
cause fluctuations in the price of such security for wrongful gain or
avoidance of loss;
…
(e) any act or omission amounting to manipulation of the price of a
security;
…
(g) entering into a transaction in securities without intention of
performing it or without intention of change of ownership of such security;
…
(n) circular transactions in respect of a security entered into between
intermediaries in order to increase commission to provide a false
appearance of trading in such security or to inflate, depress or cause
fluctuations in the price of such security;”
11. As per the findings of the Investigation Report (hereinafter referred to as
the ‘Report’) pertaining to the said investigation, the analysis of the price-
volume data of the scrip of AEL for the period under investigation revealed
that the scrip had witnessed wide fluctuations in the price ranging from
481 to 756 (during pre split in first period) and from Rs. 64.35 to Rs. 74.20
(during the second period). It was observed that average volumes in the
scrip witnessed significant rise during the investigation period.

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12. During the course of the said investigation, it was observed that the
Noticee was one of the brokers who had traded substantially in the scrip of
AEL during the second period for the said client. The Noticee, for the said
client, has allegedly executed synchronized trades in which he bought
8,31,466 shares and sold 5,47,673 shares of AEL.
13. It is alleged that the said trades were synchronized as the buy and sell
orders were placed within time gap of 1 minute with negligible or no price
difference. Further, these trades have been reversed on the same day.
These trades were allegedly done with a view to increase the price of the
scrip and create artificial volumes and consequently create artificial
demand in the scrip. It is further alleged that the Noticee, by executing the
said trades, had aided and facilitated manipulation in the scrip. This
allegation is substantiated by the fact that the said client was doing trading
in huge volume and was squaring it up on the same day. There has been
no change in the beneficial ownership because of the trading done by the
said client and the trading done by said client has only contributed to the
increase in the price and volume of the scrip of AEL. The orders placed by
the said client used to be identical in terms of price and quantity and used
to be placed with negligible price difference.
14. In response of the said allegation of structured trades, the Noticee
submitted that the said transactions were carried out by the client in
normal course of business. The trades were executed on the instructions
of the client. The Noticee further submitted that a broker cannot know its
counterparty in the screen based trading system. Also, in the present
matter it has no where been shown that there was a linkage/ collusion
between the Noticee and the said client. The Noticee has placed reliance
on the SAT order in the matter of Kasat Securities v. SEBI and stated that
the Noticee is not guilty of lack of due care and diligence if it places order
for quantity and price mentioned by its client. The Noticee also cited

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various cases decided by different authorities, in support of its
submissions.
The Noticee contends that the scrip of AEL was very liquid and was an ‘A’
group scrip. Further, during the period just prior to investigation, the
volume had been more or less same as that in investigation period and
hence the charge for creation of artificial volume is not correct. Further, as
the scrip was very liquid there was no reason for the Noticee to suspect
the client. Further, mere matching of orders between the clients and their
counterparty clients, is not sufficient in itself to draw any inference
regarding the genuineness of the transactions. The client of the Noticee
may have executed the trades fraudulently. However, unless the collusion
between the Noticee and the said client is established, the Noticee cannot
be held liable for the manipulative trades of the said client.
15. There is not sufficient material on record which shows that the Noticee
had any collusion with the said client. Even though the orders of the said
client got executed within seconds of placement and with the same
counterparty and may have been executed by the said client with
fraudulent intentions, in absence of any collusion between the said client
and the Noticee it cannot be concluded that the Noticee aided the said
client in the manipulation of scrip of AEL. The Hon’ble SAT in the matter
of Kasat Securities Pvt. Ltd. v. SEBI has interalia stated:
“9. When we look at the aforesaid transactions it is clear that
on 01/07/1999 a sell order was placed through the appellant
at 10:02:40 hours. …
Be that as it may, the buyer and seller are the same. We do not think that
the same shares could be bought and sold by the same person. The
trades, on the face of it, appear to be fictitious and we shall proceed on
that assumption. It is obvious that these trades were executed by the
clients and the appellant acted only as a broker. If the appellant knew

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that the trades were fictitious then there would be no hesitation in
upholding the finding of the Board that it aided and abetted the
parties to execute fraudulent transactions. Having heard the learned
counsel for the parties and after going through the record we were
satisfied that this link is missing. There is no material on record to
show that the appellant as a broker knew that the trades were
fictitious or that the buyer and the seller were the same
persons. Trading was through the exchange mechanism and was online
where the code number of the broker alone is known and the
learned counsel for the parties are agreed that it is not possible for anyone
to ascertain from the screen as to who the clients were. This is really a
unique feature of the stock exchange where, unlike other moveable
properties, securities are bought and sold between the unknowns through
the exchange mechanism without the buyer or seller ever getting to
meet. Therefore, it was not possible for the broker to know who the
parties were. Merely because the appellant acted as a broker cannot
lead us to the conclusion that it must have known about the nature
of the transaction. There has to be some other material on the record
to prove this fact. The Board could have examined someone from KIL to
find out whether the appellant knew about the nature of the transactions
but it did not do so. As a broker, the appellant would welcome any person
who comes to buy or sell shares. The Board in the impugned order while
drawing an inference that the appellant must have known about the nature
of the transactions has observed that the appellant failed to enquire from
its clients as to why they were wanting to sell the securities. We do not
think that any broker would ask such a question from its clients when he is
getting business nor is such a question relevant unless, of course, he
suspects some wrong doing for which there has to be some material on
the record. The learned counsel appearing for the Board strenuously
urged that the appellant as a broker was not an unknown person to the
clients and that there was a clique amongst the clients, the appellant and

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one Rajesh Kasat who is the managing director of the appellant and some
other companies who were trading in the scrips of the company in a
manipulative manner. He referred to Ex. ‘C; on the record to substantiate
his plea. This is a document sent by the appellant to the Board giving
details of the clients on whose behalf it had traded. As per the directions
of the Board the appellant had furnished this information regarding the
details of the clients. Merely because the appellant traded on behalf of
several clients in the scrip of the company would again not lead us to the
conclusion that the appellant knew about the nature of the transactions
executed by KIL and Bora. We may tend to agree with the learned
counsel for the Board that the appellant was known to the clients on
whose behalf it had traded but that again does not fill up the gap. We
have perused the impugned order and find that the Board has jumped to
the conclusion that, merely because the appellant acted as a broker on
behalf of its clients it ought to have known the nature of the transactions
executed by them. We have already observed that this conclusion is
rather far fetched and we are unable to concur with the same. In this view
of the matter we cannot uphold the findings recorded by the Board in
regard to the first allegation made against the appellant.”
16. In view of the above observations, findings and material on record I
conclude that the allegation of violation of Regulation 4 (1) and 4 (2) (a),
(b),(e),(g) and (n) of the PFUTP Regulations, 2003 by the Noticee is not
proved.
ƒ Whether the Noticee has violated Clauses A (1), (2), (3), (4) & (5) of of
the Code of Conduct for Stock Brokers as specified in Schedule II
under Regulation 7 of the Stock Brokers Regulations?
17. Before proceeding to decide this issue, it is necessary to have a look at
the abovementioned provisions, as they existed at the relevant time. The
same are reproduced below:

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“Stock brokers to abide by Code of Conduct.
7. The stock broker holding a certificate shall at all times abide by the
Code of Conduct as specified in Schedule II.
SCHEDULE II
CODE OF CONDUCT FOR STOCK BROKERS
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 stock-broker 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.”
18. It is alleged that the Noticee had executed the said transactions on behalf
of the said client. The trading of the said client, in the scrip of AEL, with
the Noticee seems to be rather unusual as he has squared up his position
mostly on intra day basis and as per the records and Noticee’s
submissions he has incurred loss on these transactions. The trading of

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client for such huge volume that too on an intraday basis without taking
any delivery is rather unusual. Further, the orders placed by Noticee got
executed almost instantaneously. The Noticee as a broker of the said
client should have got suspicious and raise concerns over such pattern of
trading. However, the Noticee failed to raise any concern over the
suspicious trading pattern of the said client. The Noticee has submitted
that it is practically not possible for it to enquire about the intentions of a
client while dealing in particular scrip. The Noticee has further stated that
there was no instance which would lead to any suspicion against the said
client. In my view, the Noticee, being a specialized intermediary
possesses greater skill and is expected to be more diligent than normal
people. The trading pattern of the said client should have alerted the
Noticee and it ought to have become suspicious over the said pattern of
trading. The Noticee has submitted that the orders of client were within the
high low price range and that the surveillance and vigilance department of
the Noticee had a kept a watch on the Noticee and that the Noticee did not
short sell on any day. The Noticee has further submitted that it had
maintained adequate margin for the client and had no reason to suspect
its client.
19. I understand that brokers are supposed to follow the instructions of its
client for trading but the Noticee should have given the due regard to the
interest of the securities market while trading for its client The exercise of
caution by the Noticee would have prevented at the broker’s level trades
of dubious nature with potential to create distortions in the securities
market. It is true that earning brokerage is a part of the business of the
Noticee but it should not be the sole purpose of its business as a SEBI
registered market intermediary. The Noticee was well aware that the
trading of the said client was in range of 17%-19% of the total volume of
BSE and the Noticee has accepted the same in his submissions. Insipte of
such high volume of the said client, the Noticee did not question the client,
nor did it inform SEBI about such trading pattern of the client. As a prudent

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stock broker it should have acted as a caretaker of the securities market
ensuring the harmony and equilibrium in the securities market. As a
broker, the Noticee is duty bound to ensure maintenance of healthy
atmosphere in securities market and is under obligation to prevent any
happenings of misconduct and manipulation in the securities market by
using the tool of due diligence in a proactive and prudent manner.
20. In this regard, after taking into considerations all the facts and
circumstances of the matter, I conclude that the Noticee had failed to
exercise due skill, care and diligence and violated code of conduct for
brokers as per Clauses A (2) of the Code of Conduct for Stock Brokers as
specified in Schedule II under Regulation 7 of the Broker Regulations. The
Hon’ble Supreme Court of India in the matter of SEBI Vs. Shri Ram Mutual
Fund [2006] 68 SCL 216(SC) held that “once the violation of statutory
regulations is established, imposition of penalty becomes sine qua non of
violation and the intention of parties committing such violation becomes
totally irrelevant. Once the contravention is established, then the penalty is
to follow.” Thus the Noticee is liable for monetary penalty under Section
15HB of the Act which states as under :-
Penalty for contravention where no separate penalty has been
provided.
15 HB. “Whoever fails to comply with any provision of this Act, the rules
or Regulations made or directions issued by the Board there under for
which no separate penalty has been provided, shall be liable to a penalty
which may extend to one crore rupees.”
21. Further, on the determination of the quantum of penalty under section
15HB, it is important to consider the factors stipulated in section 15J of the
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:-

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(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.”
22. In the instant matter there is no document available on record to quantify
the unfair advantage made by the Noticee and to calculate the loss cause
to investor. In view of the above, I found him guilty of not following due
skill, care and diligence in conduct for its business in securities market
repeatedly. I am fully convinced that it is a fit case to impose monetary
penalty upon the Noticee under section 15HB of the SEBI Act.
ORDER
23. In view of the above, after considering all the facts and circumstances of
the case and exercising the powers conferred upon me U/s 15-I(2) of the
Act, I hereby impose a penalty of Rs. 50,000/- (Rupees Fifty Thousand
only) on M/s Shriram Insight Brokers Ltd. I am of view that the said penalty
is commensurate with the violations made by M/s Shriram Insight Share
Brokers Ltd
24. The above penalty amount shall be paid through a duly crossed demand
draft drawn in favour of “SEBI – Penalties Remittable to Government of
India” and payable at Mumbai, within 45 days of receipt of this order. The
said demand draft should be forwarded to Division Chief, Investigation
Department, ID-1, Securities and Exchange Board of India, SEBI Bhavan,
Plot No, C4-A, “G” Block, Bandra Kurla Complex, Bandra(East), Mumbai-
400 051.
Date: January 29, 2010 SANDEEP DEORE
Place: Mumbai ADJUDICATING OFFICER