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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
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
Page 2 of 21 April 20, 2010
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”).
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
Page 3 of 21 April 20, 2010
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
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
Page 4 of 21 April 20, 2010
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
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
Page 5 of 21 April 20, 2010
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
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
Page 6 of 21 April 20, 2010
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.
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
Page 7 of 21 April 20, 2010
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
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
Page 8 of 21 April 20, 2010
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 –
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
Page 9 of 21 April 20, 2010
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.
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
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.
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
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
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
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.
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
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) ……;
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
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) …;
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
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
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
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
Adjudication Order against Krunal Finvest in the matter of Gujarat Hotels and Other Scrips.
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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.
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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.
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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.‖
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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.
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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