Adjudication Order against S.P. Jain Securities Pvt. Ltd. in the matter of Adani Exports Ltd

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BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO. PKK/AO/63/2011]
________________________________________________________________
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
S. P. Jain Securities Pvt. Ltd.
[Member Broker-BSE, SEBI Regn. No. INB011059533]
[PAN: AADCS2423F]
In the matter of
Adani Exports Ltd.
Background
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’)
conducted investigation in respect of buying, selling and dealing in the
shares of M/s. Adani Exports Ltd. (hereinafter referred to as ‘AEL ’) for the
period from between July 09, 2004 and January 14, 2005 (hereinafter
referred to as the ‘First Period’) and August 01, 2005 to September 05,
2005 (hereinafter referred to as the ‘Second Period’). The scrip of AEL
was traded on the exchanges with a face value of Rs.10 per share up to
July 27, 2004 and thereafter with a face value of Rs.1. The price of the
scrip of AEL witnessed wide fluctuations in the price ranging from Rs.481
to Rs.756 during the first period and from Rs.64.35 to Rs.74.20 during the
second period.

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2. The role of the main brokers and clients who had traded heavily during the
period under investigation in the scrip of AEL was scrutinized. The
Investigations revealed that certain entities transacted in the shares of
AEL in a fraudulent manner that led to creation of artificial volume and a
false market. S. P. Jain Securities Pvt. Ltd. (hereinafter referred to as the
‘Noticee’), a stock broker, is alleged to have aided and facilitated the said
manipulation by executing fraudulent trades in the scrip.
3. SEBI has therefore, initiated adjudication proceedings under the Securities
and Exchange Board of India Act, 1992 (hereinafter referred to as the
‘Act’) against the Noticee to inquire into and adjudge the alleged violations
of the provisions of Regulations 4 (1), 4 (2) (a), (b), (e), (g) & (n) of the
SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to
Securities Market) Regulations, 2003 (hereinafter referred to as the
‘PFUTP Regulations’) and Clauses A (1), (2), (3), (4) & (5) of the Code of
Conduct for Stock Brokers as specified in Schedule II under Regulation 7
of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992
(hereinafter referred to as the ‘Stock Brokers Regulations’).
Appointment of Adjudicating Officer:
4. SEBI vide Order dated July 24, 2007 appointed Ms. Babita Rayudu as the
Adjudicating Officer (AO) under Section 15-I of the Act read with Rule 3 of
SEBI (Procedure for Holding Inquiry and Imposing Penalties by
Adjudicating Officer) Rules, 1995 (hereinafter referred to as the
‘Adjudication Rules’) to inquire into and adjudge under Sections 15HA and
15HB of the Act, the alleged violation of the above mentioned provisions
of PFUTP Regulations and the Stock Brokers Regulations. Thereafter,
SEBI vide Order dated November 23, 2007 appointed Shri Sandeep
Deore as the AO in the instant matter. SEBI vide Order dated August 17,

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2010 appointed the undersigned as AO, consequent to the transfer of Shri
Deore to the Enforcement Department.
Notice, Reply & Personal Hearing
5. The AO issued a Notice bearing no. EAD-2 /SD/AB/129604/2008 dated
June 23, 2008 (hereinafter referred to as ‘SCN’) to the Noticee in terms of
Rule 4 of the Adjudication Rules requiring it to show cause as to why an
inquiry should not be held against it for the alleged violations.
6. It is alleged that one of the Noticee’s clients, Shri Sunil Kuril, had traded
substantially in the scrip of AEL during the First Period and had entered
into synchronized trading with other entities, on BSE. He had allegedly
entered into synchronized trading throughout the period from 28.07.2004
to 14.01.2005, and he, along with a few other entities had created a
volume of 1,30,92,580 shares during the above period which was around
18.26% of total traded volumes. Orders for 1,30,66,084 shares (99.79 %
of the total trades executed among them) were allegedly synchronized as
the buy and sell orders were placed within one minute. Out of the same,
for 1,27,75,599 shares (97.57% of the total trades executed among them)
buy and sell order quantity and rate were identical and were placed within
a time gap of one minute from each other. In case of 35,510 trades for
1,21,72,528 shares, the time gap between the buy and sell orders was
between 0-10 seconds which defied the probability of coincidence. The
Noticee’s client’s orders for buying 23,34,834 shares and selling
19,44,385 shares were allegedly synchronized. Thus, it is alleged that the
Noticee facilitated the manipulation in the scrip of AEL by executing
transactions that were not genuine resulting in the creation of a misleading
appearance of trading in the scrip and artificial volumes.
7. The AO sent the SCN by Registered Post Acknowledgment Due and the
same was duly delivered. The Noticee did not file any reply to the SCN.

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The Noticee filed a consent application in this matter. In the interest of
natural justice and in order to conduct an inquiry as per Rule 4 (3) of the
Adjudication Rules, the AO vide letter dated July 23, 2010 granted an
opportunity of personal hearing to the Noticee on July 30, 2010. However,
the Noticee did not appear for the said personal hearing. Subsequently,
the consent application filed by the Noticee was rejected.
8. The undersigned vide his letter dated February 15, 2011 granted an
opportunity of personal hearing to the Noticee on February 25, 2011. The
authorized representatives of the Noticee attended the said personal
hearing and undertook to submit a detailed reply to the SCN within a
week. The Noticee vide its letter dated March 03, 2011 made detailed
submissions in reply to the SCN and denied all the allegations against it.
9. In view of the above, I am proceeding with the inquiry taking into account
the documents and material as available on record.
Consideration of Issues, Evidence and Findings
10. I have carefully perused the charges made against the Noticee mentioned
in the SCN, the oral and written submissions of the Noticee and the
materials and documents available on record. The issues that arise for
consideration in the present case are:
a) Whether the Noticee has violated the provisions of
Regulations 4(1), 4(2) (a), (b), (e), (g) & (n) of PFUTP
Regulations and Clauses A (1), (2), (3), (4) & (5) of the Code of
Conduct for Stock Brokers as specified in Schedule II under
Regulation 7 of the Stock Brokers Regulations?
b) Does the violation, if any, on the part of the Noticee attract any
monetary penalty under Sections 15HA and 15HB of the Act?
c) If yes, what should be the quantum of monetary penalty?

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11. Before moving forward, it will be appropriate to refer to the relevant
provisions of PFUTP Regulations and the Stock Brokers Regulations
which read as under:-
4. Prohibition of manipulative, fraudulent and unfair trade practices
(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;
Stock Brokers Regulations
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

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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.
12. It is alleged that the Noticee, trading on behalf of its client Shri Sunil Kuril,
had executed a large number of synchronized trades where the difference
between the buy order and the sell order was few seconds only, in the
scrip of AEL. However, mere matching of orders within short time is not
sufficient to conclude that the Noticee was involved in the fraudulent acts
of his client. The complicity of the Noticee in manipulation has to be
proved with sufficient evidences.
13. The Hon’ble Securities Appellate Tribunal in the case of Kasat Securities
Pvt. Ltd. vs. SEBI (Appeal No. 27/2006, Date of decision: 20.06.2006)
has held that unless there is material on record to show that the broker

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knew that trades by a client were fictitious, it cannot be concluded that the
broker had aided and abetted the client in executing fraudulent
transactions. It was also held that merely because an entity has acted as a
broker cannot lead to the conclusion that it must have known about the
nature of the transaction. There has to be some other material on record
to prove that fact.
14. The Noticee has submitted inter alia that during the period under
investigation and thereafter the said client dealt in several other scrips.
The nature of the client’s business was jobbing and, therefore, the client
squared off his daily position in the scrip in order to book loss/profit that
might have accrued at the end of the day. The said client earned a total
profit of Rs.97,092 out of his transactions in the scrip, the Noticee
therefore had no reason to doubt his malafide intention, if at all, while
placing order on his behalf in this particular scrip. The said client was
dealing in 80 different scrips. All the alleged transactions were carried out
at the instructions and behest of the client and they have no personal
relation or connection with him. The Noticee had no intention to facilitate
and had no knowledge of synchronized trades being executed by their
client, if at all. The Noticee had 5000 clients and it is humanly impossible
to check each trade of each client in each scrip daily. The Noticee further
submitted that during the period of investigation, SENSEX was sharply
and continuously rising. Therefore, they did not notice any inconsistency in
the trades executed by their client. The Noticee has submitted that as a
broker they only execute the trades as are required by their client and it is
impossible, impractical and unfeasible for them to detect and perceive the
intentions of a client. Being a broker, they are bound to execute the orders
of their clients to the best of their ability and knowledge. The Noticee, as
brokers, execute trades for and on behalf of their clients in a transparent
and fully computerized Stock Exchange mechanism. It is impossible for
them to identify the counter party broker or his clients and as such they

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cannot be held guilty of entering into transactions which are alleged to be
synchronized by the client. The fact that just because trades were
executed on their trading terminal can in no way be justified to infer that
they were involved in the alleged synchronized trades without establishing
or producing credible evidence to show that there was a union of common
thoughts for common objective or purpose and that the whole episode was
pre-determined and pre-planned with their clients and/or counterparty
broker, and therefore the facilitation of synchronization. They vehemently
deny that they had any knowledge or executed the transactions being
aware of the manipulative intent, if any, of the client. The Noticee further
submitted that they have never defaulted in any of the obligations to their
clients as well as to the stock exchange and all their dealings have
remained above par and fair.
15. I observe that there is not sufficient evidence on record which conclusively
establishes that the Noticee was aware of the nature of the transactions of
its client or that it had colluded with its client or counterparty brokers or
their clients in executing fictitious transactions. In view of the above, I am
inclined to accept the contentions of the Noticee and give the benefit of
doubt to the Noticee.
16. In view of the above observations, findings and material on record I
conclude that the allegation of violation of Regulations 4 (1) and 4 (2) (a),
(b), (e), (g) & (n) of the PFUTP Regulations by the Noticee is not
established.
17. The Noticee is also alleged to have violated the Clauses A (1), (2), (3) (4)
& (5) of the Code of Conduct for Stock Brokers as specified in Schedule II
under Regulation 7 of the Stock Brokers Regulations. As stated above, the
allegation of aiding manipulation in the scrip by the Noticee has not been
established. There are not sufficient evidences on record to conclusively

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establish that the Noticee failed to maintain high standards of integrity,
promptitude and fairness and to exercise due skill, care and diligence in
the conduct of all his business. In view of the same, I am inclined to give
benefit of doubt to the Noticee. I therefore conclude that the allegation of
violation of Clauses A (1), (2), (3) (4) & (5) of the Code of Conduct for
Stock Brokers as specified in Schedule II under Regulation 7 of the Stock
Brokers Regulations by the Noticee does not stand established.
Order
18. In view of the foregoing, the allegations of violation of the abovementioned
provisions of the PFUTP Regulations and the Stock Brokers Regulations
by the Noticee, as specified in the SCN dated June 23, 2008 do not stand
established and the matter is, accordingly, disposed of.
19. In terms of the Rule 6 of the Adjudication Rules, copies of this order are
sent to the Noticee and also to Securities and Exchange Board of India.
Date: March 16, 2011 P K KURIACHEN
Place: Mumbai ADJUDICATING OFFICER