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Before the Adjudicating Officer BEFORE THE ADJUDICATING OFFICER SECURITIES AND EXCHANGE BOARD OF INDIA [ADJUDICATION ORDER NO. - SRP/RK/AO: 254/2012] UNDER SECTION 15 I OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES BY ADJUDICATING OFFICER) RULES, 1995 In respect of J H P Securities Private Limited Member Broker of BSE SEBI Registration No. – INB 010990036 (PAN – AAACJ2847H) In the matter of Gemstone Investments Limited BACKGROUND IN BRIEF 1. The Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted investigations into the affairs, trading and dealings in the shares of Gemstone Investments Limited (hereinafter referred to as ‘Company/GIL’) for the period from August 28, 2006 to August 21, 2008 on the basis of a report received from the Bombay Stock Exchange Ltd. (hereinafter referred to as ‘BSE’) regarding substantial reduction in the shareholding of the promoters of the Company and unusual spurt in price and traded volume of the scrip. 2. On investigation, it was, inter alia, observed by SEBI that the stock broker JHP Securities Private Limited (hereinafter referred to as the ‘Noticee’) had the highest purchase and sale concentration in the scrip of GIL during the period of investigation. The major clients of the Noticee were (i) Prem Parekh, (ii) Mala Hemanth Seth, (iii) Kishore Chauhan, (iv) Hemanth Seth, (v) Bhavesh P Pabari and (vi) Ankit Sanchaniya. The investigations, prima facie, revealed that these clients of the Noticee were related/ connected with each other and were part of a larger group of entities which were connected/related with each other and with the director of GIL. This larger group included, along with the aforesaid clients of the Noticee, Bharat Thakker, Narendra Ganatra, Manish Joshi, Rajesh Bhanushali, Vinayak Bhanage, Bhupesh Rathod, Janak Vyas, Devendra A. Vadhaiya, Jayesh Kuwadia, Ashish Ganatra and Nimesh Ganatra. These entities traded in the scrip of GIL on the Bombay Stock Exchange Page 1 of 16 (BSE) under different client codes and also engaged in off-market deals in the shares of GIL. On analysis of the trades it was observed that these entities have entered into synchronized, circular and reversal trades and thereby manipulated the price and traded volumes of the scrip. The investigations also found that one person from the aforesaid group, namely, Devendra A Vadhaiya was the terminal operator and person-in-charge of a branch office of the Noticee located in Andheri, Mumbai, from which most of the alleged synchronized, circular and reversal of trades were executed. 3. On the basis of analysis of trades of the Noticee and its clients and other findings of the investigation it has been alleged that the Noticee has traded in substantial volume in the scrip of GIL on behalf of its clients, who were part of the aforesaid group, and acting in collusion with them it has indulged in synchronized, circular and reversal trades in order to manipulate the price and traded volumes of the scrip in violation of the provisions of regulations 4(1), 4(2)(a), and 4(2)(e) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) 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 for Stock Brokers as stipulated under Schedule II read with regulation 7 of the of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as ‘Brokers Regulations’). APPOINTMENT OF ADJUDICATING OFFICER 4. The undersigned has been appointed as Adjudicating Officer under section 15 I of the SEBI Act read with rule 4 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter referred to as ‘Rules’) vide order dated March 31, 2010 to inquire into and adjudge under sections 15HA and 15HB of the SEBI Act, the aforesaid alleged violation of the provisions of the PFUTP Regulations and Brokers Regulations by the Noticee. SHOW CAUSE NOTICE, HEARING AND REPLY 5. Show Cause Notice dated May 31, 2010 (hereinafter referred to as ‘SCN’) was issued to the Noticee under rule 4(1) of the Rules. The Noticee was asked to show cause as to why an inquiry be not held and penalty be not imposed on it under sections 15HA and 15HB of the SEBI Act, for the alleged violation of the provisions of regulations 4(1) and 4 (2) (a) and 4(2)(e) of the PFUTP Regulations and clauses A(1) to A(5) of the Code of Conduct for Stock Brokers provided under the Brokers Regulations. 6. During the pendency of the proceedings the Noticee applied before SEBI for settlement of the matter through consent process, however, its consent application was rejected. Subsequently, vide letter dated October 13, 2011 the Noticee submitted its reply to the SCN. After perusal of Page 2 of 16 the same it was decided to conduct an inquiry in the matter and for the purpose an opportunity of hearing was granted to the Noticee on October 31, 2011. However, the Noticee requested to adjourn the hearing. Therefore, the hearing was adjourned to December 13, 2011. Shri V M Singh, Advocate and Shri Vishal Ashwin Patel, Director of the Noticee, appeared for hearing and reiterated the submissions made vided letter dated October 13, 2011. The submissions of the Noticee, in brief, are as under: Noticee is in the business of stock broking since the year 1984 and it has 70 employees. The Noticee has not carried out any trade in the scrip of GIL in its proprietary account. Neither the Noticee nor any of its Directors has any relation/connection with any of its clients named in the SCN, except the stock-broker constituent relationship. It has no interest in the impugned transactions except the brokerage earned. Noticee was not aware of any connection/relation between its clients and other entities named in the SCN. All the transactions carried out for its clients were through the market mechanism where there is complete anonymity as to the counter-party to the transactions. Further, all transactions were backed by delivery and all settlement obligations were duly met. Devendra Vadhaiya was the terminal operator at the relevant time and he ceased to be so in the year 2008. Noticee has stated that it has always maintained highest standards of integrity and had always exercised due skill care and diligence in its functioning. CONSIDERATION OF ISSUES AND FINDINGS 7. I have carefully examined the allegations against the Noticee, the submissions made by it and the material/evidence on record. It has been alleged that the Noticee has traded on behalf of its clients, namely, Prem Parekh, Mala Hemanth Seth, Kishore Chauhan, Hemanth Seth, Bhavesh P Pabari and Ankit Sanchaniya and purchased 71,62,146 shares of GIL (constituting 28.5% of the total market volume during the investigation period) and sold 68,40,013 shares of GIL (constituting 26.78% of the total market volume during the investigation period). It has been also alleged that these clients were related/connected with each other and with the larger group (named above) which among others included Davendra Vadhaiya. Vadhaiya was the Branch In-charge of the Andheri Branch in Mumbai of the Noticee and also the terminal operator from which the alleged synchronized, circular and reversal of trades were executed. The extract of the trade log showing details of synchronized, circular and reversal trades were provided to the Noticee. Therefore, it was alleged that the Noticee, acting in collusion with its clients and others indulged in synchronized, circular and reversal trades in order to manipulate Page 3 of 16 the price and volume of the scrip, in violation of the provisions of regulation 4(1), 4(2)(a), and 4(2)(e) of the PFUTP Regulations. Further, as the Noticee is a stock broker and as such it was required not to indulge in manipulative trades, maintain highest standards of integrity and exercise due skill, care and diligence in its functioning, therefore, it was also alleged that it has violated the provisions of clauses A(1), A(2), A(3), A(4) and A(5) of the Code of Conduct for Stock Brokers. The provisions of these regulations are reproduced hereunder: PFUTP Regulations 4. Prohibition of manipulative, fraudulent and unfair trade practice (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; ... ... ... ... (e) any act or omission amounting to manipulation of the price of a security; ... ... ... ... 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 at 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.
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