Enquiry Proceedings Order - Grishma Securities Private Limited

8/10/2019 Enquiry Proceedings Order - Grishma Securities Private Limited

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WTM/SR/IVD/EFD/118/12/2014

BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAICORAM: S. RAMAN, WHOLE TIME MEMBER

ORDER

UNDER SECTION 12(3) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH REGULATION 28(2) OF THE SECURITIES AND EXCHANGE

BOARD OF INDIA (INTERMEDIARIES) REGULATIONS, 2008.

IN THE MATTER OF INITIAL PUBLIC OFFERING OF TIJARIA POLYPIPESLIMITED.

IN RESPECT OF M/S GRISHMA SECURITIES PRIVATE LIMITED, STOCK BROKER[SEBI REGISTRATION NOS.: INB011127132 (BOMBAY STOCK EXCHANGE

LIMITED)/INB231127136 (NATIONAL STOCK EXCHANGE OF INDIA LIMITED)].

Background

1. Tijaria Polypipes Limited (hereinafter referred to as TPL ), a company incorporated under theCompanies Act, 1956, came out with an Initial Public Offering (hereinafter referred to asIPO ) of 1,00,00,000 equity shares of a face value of10 each, issued at a premium of 50 perequity share, wherein it raised 60 Crores to fund its proposed expansion and diversification

plans. The aforesaid fixed price IPO which opened on September 27, 2011 and closed onSeptember 29, 2011, was reportedly over-subscribed by 1.2 times. TPL allotted 71,64,406 sharesin the retail individual investors category (constituting 71.64% of the total IPO shares) and28,36,001 shares to the Qualified Institutional Buyers (hereinafter referred to as QIBs )(constituting 28.36% of the total IPO shares). The shares of TPL were listed on the BombayStock Exchange Limited (hereinafter referred to as BSE ) and the National Stock Exchangeof India Limited (hereinafter referred to as NSE ).

2.

Securities and Exchange Board of India (hereinafter referred to as SEBI ) conducted apreliminary investigation in respect of trading in the scrip of TPL, upon observing a steep fall inthe share price on the first day of listing i.e. October 14, 2011. The preliminary investigation

prima facie revealed that on October 14, 2011, the share price of TPL in NSE, fell from thehighest price of 67.75 per share to 16.50 per share while in BSE, it fell from the highestprice of 67.80 per share to 16.05 per share. The preliminary investigation prima facie revealedthat TPL, through layered transactions, diverted a substantial part of its IPO proceeds in order

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to offset losses sustained by certain entities/individuals, who allegedly purchased shares fromretail allottees/QIBs in the IPO, at a premium to the issue price. The preliminary investigation

prima faciealso revealed that M/s Grishma Securities Private Limited (hereinafter individuallyreferred to as Grishma ) inter alia was the stock broker for Jivraj Zala (hereinafter referred to

as Zala ) and had facilitated trading by that entity.

3. In view of the prima facie observations made in the preliminary investigation, SEBI vide an ad interim ex parte Order dated December 28, 2011 (hereinafter referred to as Interim Order )inter aliaprohibited Grishma and its Directors i.e. Shri Chandrika H. Gandhi, Shri Ketan C.Shah and Shri Chhabil C. Shah alongwith its CEO/Compliance Officer i.e. Shri Mihir Ghelani(hereinafter collectively referred to as Grishma, its Directors and Compliance Officer );

Vimal Patel (hereinafter referred to as " Patel ") and Vanraj Kahor (hereinafter referred to as"Kahor ") from buying, selling or dealing in securities, in any manner whatsoever, till furtherorders for the prima facie violation of the provisions of the SEBI Act, 1992 (hereinafter referredto as SEBI Act ) read with the SEBI (Prohibition of Fraudulent and Unfair Trade Practicesrelating to Securities Market) Regulations, 2003 (hereinafter referred to as PFUTPRegulations, 2003 ). The aforesaid Interim Order was subsequently confirmed as againstGrishma, its Directors and Compliance Officer on November 5, 2012 (hereinafter referred to asConfirmatory Order ).

4. Pursuant to the abovementioned Interim Order, SEBI conducted a detailed investigation

regarding trading in TPL's IPO in order to examine the role of certain entities/individuals whotraded in that scrip on the day of listing and immediately thereafter. On the basis of findingsmade in the aforesaid investigation, a Show Cause Notice (hereinafter referred to as SCN )dated November 30, 2012, was issued to Grishma, its Directors and Compliance Officer, Pateland Kahor under Sections 11(4) and 11B of the SEBI Act, calling upon them to show cause asto why appropriate action including restraining them from buying, selling or dealing in securitiesfor a specified period should not be issued, for the violations alleged in the SCN. In addition, asupplementary SCN (hereinafter referred to as Supplementary SCN ) dated January 11,2013, was issued to Grishma, its Directors and Compliance Officer. The aforementioned SCNand Supplementary SCN were disposed of vide SEBI's Order dated July 31, 2013 (hereinafterreferred to as Final Order ), with the following directions against Grishma, its Directors andCompliance Officer

i. "Grishma is restrained from buying, selling or otherwise dealing in securities, in its proprietadirectly or indirectly, for a period offive years. I note that vide the Interim Order dated December 2011, Grishma was restrained from accessing the securities market and prohibited from buying



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dealing in the securities market till further orders . In this context, I note that enquiry proceedings hbeen initiated against Grishma under the SEBI (Intermediaries) Regulations, 2008. The reimposed on Grishma vide the aforesaid Interim Order in respect of its stock broking busicontinue till the completion of the enquiry proceedings. The enquiry officer shall endeavour

enquiry report to the Competent Authority as expeditiously as possible, without being influeobservations and findings in this order, in order to facilitate completion of the enquiry pro

passing of a final order by that Authority.ii. Shri Chandrika H. Gandhi, Shri Ketan C. Shah, Shri Chhabil C. Shah and Shri Mihir Ghelani

restrained from buying, selling or otherwise dealing in securities, directly or indirectly, for a pfive years.

iii. Patel and Kahor are restrained from buying, selling or otherwise dealing in securities, directly for a period offive years. "

5. Grishma, its Directors and Compliance Officer challenged the above-mentioned Final Order dated July 31, 2013, before the Honble Securities Appellate Tribunal ( hereinafter referred to as SAT ), which vide Order dated October 28, 2013, in Appeal No. 151 of 2013, observed that:

28. We have, therefore, no hesitation in holding that no discriminatory or arbitrary treatment is methe appellants in passing the impugned order dated July 31, 2013 passed by the learned WTM and thhereby upheld. It is further held that various circulars issued by the SEBI from time to time have ledeveloped margining system in India. The collection of margins as a regulatory requirement pres

SEBI is a pre-requisite. Its sanctity cannot be undermined by allowing the appellants to bypass such rof margin collection beforehand. Such an act puts the entire system at risk making it a systemic issuehave serious repercussion on the capital market. Therefore, collection of margin as a risk managemcover for counter party risk is an integral part of the regulatory system conceived and implemented SEBI consistently.In fact, as per SEBIs approach in this regard, it is to be noted that the members should haa prudent system of risk managementto protect even themselves from the clients default. Thus, a robust system prevents a Broker or even a stock exchange from taking huge positions without adequate colmay generate very high profit or loss. In fact, non collection of margins at the client level by a Broker and/

non reporting, attracts heavy fines and penalties, as is stipulated b y SEBIs circular dated August 10, 2011. No circular authorizes the use by a broker of funds and/or securities of clients to cover margin requother clients. Such action is, in fact, prohibited. In fact, under Regulation 26(xiii) of the SEBI (Stockand Sub Brokers) Regulations, 1992, a broker using securities of funds of a client for his own purpos

purpose of any other clients is liable for a monetary penalty. Therefore, the contention of the apperegard that margin is their prerogative is misconceived and hence rejected.29. T he appeal is bereft of any merit and the same is hereby dismissed.



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Enquiry Proceedings against Grishma

6.1 During the intervening period, SEBI also initiated Enquiry Proceedings against Grishma, beinga registered intermediary, in terms of the Securities and Exchange Board of India (Intermediaries)

Regulations, 2008 (hereinafter referred to as Intermediaries Regulations ), by appointing aDesignated Authority (hereinafter referre d to as DA ) in respect thereof, vide Communicationof Proceeding of Whole Time Member dated March 14, 2013. The DA issued a SCN dated

August 6, 2013, which inter aliacontained the relevant extracts of the Investigation Report. TheDA enquired into the alleged violation of the following provisions of law, viz.

i. Section 12A(a), (b), (c) and (d) of the SEBI Act;ii. Section 23D of Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as

"SCRA ");iii. Regulations 3(a), (b), (c), 4(1), 4(2)(a), (d) and (p) of the PFUTP Regulations, 2003;iv. Regulations 26(xiii), 26(xvi), 27(xii), 27(xiv) and 27(xvi) of SEBI (Stock Brokers and Sub-

Brokers) Regulations, 1992 (hereinafter referred to as "Stock Brokers Regulations "); v. Clauses A(1), A(2), A(3) and A(4) of the Code of Conduct for Stock Brokers under Schedule

II read with Regulation 7 of the Stock Brokers Regulations.

6.2 For the violations as stated above, the DA, in his report dated April 30, 2014, found that Grishmahad contravened the following provisions of law, viz.

i. Section 12A(a), (b), (c) and (d) of the SEBI Act;ii. Regulations 3(a), (b), (c), 4(1), 4(2)(a), (d) and (p) of the PFUTP Regulations, 2003;iii. Regulations 27(xii), 27(xiv) and 27(xvi) of the Stock Brokers Regulations;iv. Clauses A(1), A(2), A(3) and A(4) of the Code of Conduct for Stock Brokers under Schedule

II read with Regulation 7 of the Stock Brokers Regulations.

6.3 In view of the above, the DA recommended that the Certificate of Registration (INB231127136)of Grishma at NSE may be suspended for a period of six months and Certificate of Registration ofGrishma at BSE (INB011127132), may be suspended for a period of three months.

Post Enquiry SCN dated September 23, 2014

7.1 After considering the Enquiry Report, post enquiry SCN [under Regulation 28(1) of theIntermediaries Regulations] dated September 23, 2014, was issued to Grishma (enclosingtherein a copy of the Enquiry Report), advising it to show cause as to why action as



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recommended by the DA or that of a higher nature should not be imposed on it, as deemed fitby the Competent Authority.

7.2 As per the post enquiry SCN read with the Enquiry Report, Grishma was inter alia alleged to

have

i. Manipulated the ledger of Zala to give an impression that some funds were available in hisclient account with Grishma, on the day of his trading;

ii. Used the funds and securities of other clients for making the margin payments of Zala;iii. Used the funds of its Compliance Officer/CEO, Ghelani for making the margin payments

of Zala;iv. Entered into synchronised trades on behalf of Zala; v. Permitted Zala, who had received funds to the extent of 3.8 Crores from TPL, to trade

on the first day of listing in that company's scrip without collecting any funds from himtowards margin amount payable to stock exchanges (despite the fact that such client didnot have significant risk taking capacity). On account of such trading by its client i.e.Zala, Grishma facilitated exit to the QIBs.

7.3 Grishma replied to the abovementioned SCN vide letter dated November 18, 2014.

7.4 Thereafter, an opportunity for personal hearing before the Designated Member (hereinafter

referred to as DM ) was granted to Grishma on December 3, 2014. Pursuant to the personalhearing, Grishma submitted additional written submissions to the SCN vide letter datedDecember 4, 2014. In its replies/written submissions and during the aforesaid hearing, Grishmainter aliamade the following submissions

i. The restraint already undergone (vide SEBI's Order dated July 31, 2013) by Grishma ofapproximately one year and seven months was to be reduced from the period of restraintimposed by such order. It will therefore be seen that Grishma continues to be visited with

debilitating restraints, which are disproportionate, excessive, and most importantly, not inaid of any pending investigations or proceedings akin to keeping someone in custody without necessity for the same in any ongoing investigations or trial.

ii. Grishma has been restrained from exercising their fundamental right to transact in thesecurities market since December 28, 2011. SEBI, now seeks to enhance the penalty to beimposed to one of a higher nature without providing any basis for proposing to deviatefrom the recommendations made by due process of the Enquiry Proceedings.



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iii. Despite an express request made by Grishma, the DA did not even provide an opportunityof hearing vitiating these proceedings entirely.

iv. Grishma has also not been provided with a full, fair and effective opportunity of inspectionof documents and records. Vide letter dated November 22, 2013, Grishma sought certain

documents and records which have not been provided and no response was forthcoming. v. There is no finding whatsoever in the Enquiry Report that Grishma acted as a front for

Zala, as alleged repeatedly by SEBI in the Interim Order and the Order dated July 31, 2013. There is no reference in such Report that Grishma was either the focal point or thecatalyst , a theme which was were freely used by SEBI by way of an ipse dixit in the Ex-Parte Order and the order of July 31, 2013, without any basis. It is therefore evident thatthe DA did not find any material to sustain the charge that Zala acted as a front ofGrishma. Therefore, the only case against Grishma is that it had not complied with themargin requirements. It is respectfully submit that an alleged margin default can neverjustify such drastic, disproportionate restraints on Grishma.

vi. SEBIs actions in the instant case in relation to what is essentially an alleged margin non-collection issue would be contrary to precedent and SEBIs own stance in dealing with suchmatters. In support of this argument the case of Geojit BNP Paribas Financial Services Limiteand Networth Stock Broking Limited is cited.

vii. The Enquiry Report simply repeats the allegation that Grishma manipulated Zalas clientledger on the basis that the date of receipt of funds is at variance with Grishma s bankstatements. The ledger account reflects the date of physical receipt of the cheque and not

the date on which the underlying funds were credited in the account. viii. The recording of date of the receipt of the cheques is in accordance with the mercantile

system of accounting. Further, this is also in accordance with circulars issued by SEBI.SEBIs circular dated August 27, 2003, permits collection of margin amounts by cheque.SEBI Circular No. MRD/SE/Cir-33/2003/27/08 dated August 27, 2003, which inter-alia prohibits brokers from accepting cash from clients whether against obligation or as margin

purchase of securities" . There is no obligation in law which requires a stock broker receivingmargin payments by cheque to record only the actual date of credit of funds in the clientledger as the date of receipt of margins.

ix. Grishma also referred to SEBIs Circular No. MRD/DoP/SE/Cir-07/2005 SEBI datedFebruary 23, 2005, titled Comprehensive Risk Management Framework for the Cash Segm allows brokers to decide the mode of collection of margin money, thereby also allowingbrokers to follow a practice of collecting margin money by means of a post dated cheque.Further, Grishma also submitted that on October 13, 2011, a day prior to Zalas trades in

TPL shares, Grishma received 7 cheques for approximately 3.65 Crores and the date of



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receipt of the cheques was the date posted in the ledger. It is also not in dispute that thesecheques were honored.

x. It is alleged in the Enquiry Report that Grishma did not collect margin money i.e. thecollateral collected in order to cover the risks associated with the trades, from Zala for the

trades on October 14, 2011. As stated above, on October 13, 2011 i.e. one day prior toZalas trades in the shares of TPL, Grishma collected seven cheques, equivalent toapproximately 3.65 Crores. Grishmas bank account statement with YES Bank showsthat approximately 1.78 Crores was received from Zala on October 15, 2011 itself.Similarly, the entire amount of approximately 1.87 Crores was received and credited inthe bank account of Grishma on October 17,2011 i.e. prior to the pay in date for thetrades of October 14, 2011. Thus, on October 17, 2011, a sum of 3.65 Crores wascollected by Grishma as margin, one day prior to pay in date of Zalas trades that were

undertaken on October 14, 2011. Instead of dealing with these submissions, shockingly,the Enquiry Report falsely states that copy of bank account statement of YES Bank, whichSEBI itself had relied on to issue a show cause notice, was not furnished by Grishma andtherefore Grishma has failed to establish its submissions.

xi. Further, the Enquiry Report also wrongly represents that the trades undertaken by Zala inthe shares of TPL were the first trades executed by the notice as a stock broker on behalfof Zala. However, the factual position is that first trades were by Zala executed on October13, 2011, in the scrip of Jain Irrigation and MVL Ltd. Grishma has submitted contractnotes issued to Zala in this regard. Zala incurred a profit of around 53,169.49 on accountof his trades on October 13, 2011. Further, there was a credit balance of 3.66 Crores inthe account of Zala as on October 13, 2011, which is before the trades of Zala on October14, 2011.

xii. Similarly, the submissions of Grishma in relation to the BSE Circular dated November 4,2003, which sets a permissible limit of 25 times of the Base Minimum and AdditionalCapital deposited with the Exchange by the member, although recorded in the Report, hasnot been dealt with at all. Grishma had in its reply submitted that on October 14, 2011, themaximum exposure limit at any given point of time was about 35 Lakh shares of TPL.

Considering an average rate of 60 per share, this limit translates into about 21 Crores. This exposure is much less than 10 times the value already collected from Zala as againstthe permissible limit of 25 times of the value in Zalas account. Thus, it has beendemonstrated there had indeed been no manipulation of the client ledger as Grishma sactions of recording the date of receipt of the cheque in the ledger followed a well-established mercantile system of accounting and was in consonance with well recognizedindustry practice. Further, Grishma had collected adequate funds from Zala towards the



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margin requirement for his trades in the shares of TPL, and consequently, the relatedallegation as to Grishma using funds and securities of Grishma and third parties towardssuch margin requirements of Zala have to fall.

xiii. The Enquiry Report alleges that the amount of approximately 5.97 Crores was received

partly from Patel and partly from Grishma's Compliance Officer i.e. Mihir Ghelani, inorder to meet Zalas margin requirements in relation to the trades in TPL. A perusal ofGrishmas bank account with Axis Bank shows that the amount of 85,00,000 and 25,00,000 was received from Patel by way of two cheques dated October 5, 2011 andOctober 4, 2011. The same were deposited and credited in Grishma s bank account onOctober 13, 2011. On that same day i.e. on October 13, 2011, based on the instructions ofPatel the entire amount of 1,10,00,000 was reversed and paid back to the client againsthis ledger credit. The Enquiry Report acknowledges this by stating that a substantial

amount of Rs 85,00,000 was indeed reversed. Yet, because the Enquiry Report was unableto find the reference to the entry of Rs 25,00,000 being reversed, it simply concludes thatthe charge of funding stands established despite acknowledging that a substantial amountof Rs 85,00,000 was returned to Vimal Patel. Further, it is also submitted that Patels ledgeraccount for all the three segment i.e. BSE Cash, NSE Cash and NSE Derivative Segmenton October 13, 2011 at the end of the day and on the start of trading on October 14, 2011showed a debit balance of 16,52,909.76. Grishma had also in the reply clarified that theamount of 1,14,00,000 that Grishma had obtained from Patel was in fact in Grishma sown F&O settlement account maintained with Axis Bank and not in the account of Patel.It was also pointed out that these funds were transferred to Grishma's current account in

Axis Bank and thereon to the settlement account of BSE and NSE Cash segment in AxisBank for the purpose of payment of the margin requirement. Therefore, the allegation thatfunds of Patel was used for the purpose of making good the margin requirement isuntenable. The Enquiry Report does not deal with these submissions at all. Further, theEnquiry Report has dropped the charge that sums of 50,00,000, 76,00,000 and 74,00,000 was obtained by Grishma from Patel who in turn obtained these funds from

Vanraj Kahor, to meet the margin obligations of Zala. It was clarified that an amount of

2,00,00,000 was received from Patel on October 15, 2011, the same was reversed andrepaid to Patel on October 17, 2011, itself and was not utilized to make good the marginrequirements. It is therefore clear that the charge that Grishma used funds of Patel to meetmargin requirements of Zala does not stand established

xiv. The Enquiry Report alleges that securities worth 66,00,000 of Patel, Goenka and Bhatt were used for meeting the margin shortfall for the losses incurred by Zala on the BSE. It isalleged that shares of Shasun Pharmaceuticals worth around 17,22,00,000 and



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13,53,00,000 of Grishma's clients Patel and Bhatt respectively and 66,697 shares of DBRealty Ltd. received from Goenka worth 35,91,633.45 were used towards funding themargin requirement for Zala's trades on the BSE. Grishma had submitted that theallegations are erroneous and contrived. It was explained that the shares pledged were

withdrawn pursuant to the instructions of Grishma's client to balance the exposurebetween cash and securities, which a broker is required to maintain, and this was not done

with an intention to meet the margin requirement of Zala.xv. Further, with regard to the finding in the Investigation Report that 28,000 shares of

Shasun Pharmaceuticals were obtained from Patel and 22,000 shares of ShasunPharmaceuticals were obtained from Bhatt for the purpose of meeting margin requirementof Zala, Grishma submitted that these shares were received between April 29, 2011 toNovember 12, 2011, for balancing the exposure limit between cash and securities which a

broker is required to maintain and in order to settle outstanding positions which theseclients had in respect of their trades. Grishma submitted that these transactions hadnothing whatsoever to do with Zala's trades in the TPL scrip. Similarly, the 66,697 sharesof DB Realty Ltd. received from Goenka were provided in order to clear outstandingpositions which Goenka had with Grishma in respect of his trades.

xvi. With reference to the allegation in the Enquiry Report that the Compliance Officer ofGrishma transferred a sum of 2,20,00,000 to Grishma's account and the same was usedfor meeting the margin requirements for the losses occurred by Zala in the scrip of TPL,Grishma submitted that the allegation is baseless. The bank account statement of Grishmashows that the sum of 2,20,00,000 was transferred by Grishma Intermediaries PrivateLimited. ("Grishma Intermediaries "). The said sum of 2,20,00,000 was paid by theCompliance Officer to Grishma Intermediaries towards his trades in commodities towardshis debit balance as also margin call for his trades in gold and silver futures in the MCX,arising out of his trades in gold and silver futures in the MCX.

xvii. Grishma submitted that the value of Ghelani's futures trades in gold and silver on October14, 2011 and October 17, 2011, was 96,63,060 and 80,14,410 respectively. Theaggregate value of Ghelani's trades on October 14, 2011 and October 17, 2011 was

1,76,77,470. It is pertinent to note that October 15, 2011 and October 16, 2011, fell onSaturday and Sunday. Grishma has submitted the contract notes issued by GrishmaIntermediaries to Mr Mihir Ghelani in this regard.

xviii. The MCX has also issued several circulars requiring members to collect adequate marginsfailing which the trading member would be subject to monetary penalties. Therefore, thepayment of 2,20,000,00 to Grishma Intermediaries was towards meeting marginobligations of Ghelani and the inference in SCN that the said amount was transferred to



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meet Zala's margin obligation of Zala is absurd and untenable. Accordingly, the question ofproviding any misleading information to SEBI cannot and does not arise. Therefore, thequestion of Grishma contravening the provisions of Section 12A of the SEBI Act and thePFUTP Regulations, 2003, is untenable.

xix. The allegations of synchronized trades on behalf of Zala are baseless as the trades in thescrip of TPL were not proprietary trades but trades executed on behalf of the client

wherein there was no contact or communication between Grishma and the counterpartyand further, the orders were matched in accordance with the order matching mechanism ofthe stock exchange. SEBI had adduced no evidence to establish that Grishma was aware ofthe fact that the trades were synchronized and such evidence is an essential pre-requisitefor a charge of synchronized trade to be made.

xx. Grishma also relied on the well settled proposition of law in Networth Stock Broking Ltd. v.SEBI (Appeal No. 5 of 2012), wherein the Hon'ble SAT stated that "Merely because a trade hasmatched both in regard to price and quantity and that the buy and sell orders were placed at the it cannot lead to the conclusion that the broker had knowledge of fictitious trades being executedbuyer and the seller".

xxi. The Enquiry Report acknowledges that one of the terminals from which the orders wereplaced was at Ahmedabad and another one was located at Mumbai. The Enquiry Reportacknowledges in passing that it is "surprising" that Zala was present personally at the officeof Grishma i.e. in Mumbai and at Ahmedabad, almost at the same point of time. Grishmasubmitted in the past, that the address for the terminals had changed. The Enquiry Report

instead of drawing the correct conclusion that the placement of orders by Zala in thismanner from locations as distant as Ahmedabad and Mumbai was physically impossibleinstead concludes that charge of synchronized trading stands established.

xxii. The Enquiry Report alleges that Zala had provided an exit to QIBs, who had subscribed tothe shares of TPL in the IPO and offloaded these shares at a premium to Zala, whosuffered huge losses. The Enquiry then erroneously states that Grishma facilitated the exitto QIBs. At the outset, Grishma acted as a broker to Zala. According to SEBI's own casethat Zala was funded by TPL and could absorb the losses suffered by him.

xxiii. There is no allegation that the funds for these trades were provided by Grishma. Further,there is not a whisper of what action SEBI had taken against the QIBs. If the transactionsare genuine and no action is taken against the beneficiaries of the exit, it would be absurdto suggest that a person who merely acted a broker to counter party, who provided the exit,is to be acted against. SEBI has not established how Grishma can be held responsible forthe fact that Zala provided at exit to QIBs.

xxiv. Post Enquiry SCN was not issued by the DM.



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8. I have considered the SCN; replies/additional written submissions made by Grishma alongwiththeir submissions during the personal hearing before me and all other relevant material availableon record. In light of the aforesaid, I shall now proceed to deal with the charges levelled in theSCN against Grishma.

Consideration of Issues and Findings

A. Before dealing with the merits of the case, I shall proceed to deal with the preliminaryobjections raised by Grishma.

9. Imposition of penalty of a higher nature without any basis for proposing to deviatefrom the recommendations made by due process of the Enquiry Proceedings.

9.1 Grishma has inter alia submitted that SEBI seeks to impose penalty of a higher nature withoutany basis for proposing to deviate from the recommendations made by due process of theEnquiry Proceedings. In this regard, I note that

i. Any Enquiry Report submitted by the DA to the concerned DM, pursuant to an enquiryconducted under the Intermediaries Regulations, is only recommendatory in nature and isnot binding on that DM. In this context, reliance is placed on the observations of theHonble SAT in SMC Global Securities Ltd vs. SEBI (Appeal No. 152 of 2013 January 31,

2014), wherein it held:

On a perusal of the Intermediary Regulations as reproduced above it becomes clear that the DAnothing but a recommendation to the DM elucidating the nature of the violation committwrongdoer. The DM is under no obligation to stick to the charges as leveled in the DA's report othe penalty recommended therein, and there is nothing in the Intermediaries Regulations to suggeFor purposes of the Intermediaries Regulations, the DA's report is the result of merely an iconducted by the DA to give the DM a preliminary opinion on facts and the law with respeviolation in question. Nowhere in the Intermediaries Regulations is there even a semblance of suthe DA's report is binding on the learned DM in any form regarding any element contained thelearned DA's report is, as clearly spelt out in the Intermediaries Regulations themselvesrecommendation and as such giving it any kind of tangibility is out of the question. The DM hnecessary discretion to enhance or reduce the penalty recommended by the DA depending upviolations and the circumstances of the case. Therefore, the learned DM followed the law by lomatter afresh and framing allegations followed by a penalty he deemed fit.



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9.2 Having regard to the abovementioned observations of the Honble SAT , I find that the DM is very much within his right to seek enhancement of penalty against an entity subsequent to thesubmission of an Enquiry Report. I also note that in the instant proceedings, the post enquirySCN issued to Grishma clearly outlined additional facts on the basis of which, inter aliapenalty

of a higher nature may be deemed appropriate. I, therefore, find no merit in Grishmascontention.

10. An opportunity of hearing was not provided by the DA.

10.1 Grishma has submitted that despite an express request having been made by it, the DA did notprovide an opportunity of hearing vitiating these proceedings entirely.

10.2 In this regard, I note that as per the procedure specified in Regulations 25 27 of theIntermediaries Regulations, the DA, if he/she finds reasonable grounds to do so, issue SCN tothe registered intermediary requiring it to show cause as to why the certificate of registrationgranted to it, should not be suspended or cancelled or why any other action provided thereinshould not be taken. Such registered intermediary shall submit to the DA its writtenrepresentation within the period specified in the notice along with documentary evidence, ifany, in support thereof. After considering the representations, if any, the DA is then required tosubmit the Report to the concerned DM. On receipt of Enquiry Report and recommendationof the DA, Post Enquiry SCN, if deemed appropriate, is issued to the Noticee. Upon receipt

of reply from the concerned Noticee to such SCN, the DM may pass appropriate order afterconsidering the reply, if any, received from that Noticee and providing that Noticee with anopportunity of being heard.

10.3 Upon a consideration of the abovementioned, I find that under the Intermediaries Regulations,the DA is not mandated to afford an opportunity of hearing to a Noticee against whom a pre enquiry SCN has been issued. However, I find that such requirement for providing anopportunity of hearing, which is necessitated in order to ensure compliance with the principlesof natural justice and for meeting the ends of justice, is nonetheless made available to suchNoticee before the DM, subsequent to issuance of Post Enquiry SCN. I, therefore, find noinfirmity with the procedure adopted by DA before submission of the Enquiry Report.

11. Post Enquiry SCN was not issued by the DM.

11.1 Grishma has submitted that the Post Enquiry SCN was not issued by the DM.



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11.2 In this regard, I note that

i. As per the Intermediaries Regulations read with the SEBI (Delegation of Powers) Order,2010 (hereinafter referred to as " DoP Order "), Post Enquiry SCN is authorised by the

DM designated for that purpose i.e. Whole Time Member who is in charge of the departmentfrom where the case emanates. In this case too, similar approval was taken in accordance

with the Intermediaries Regulations read with the DoP Order, pursuant to which, Post Enquiry SCN was issued to Grishma.

ii. Subsequent to the above, the DM designated for the purpose of passing appropriate order i.e. this Authority, after considering the reply, if any, of Grishma and providing it with anopportunity of being heard, may pass appropriate order.

iii. Upon a consideration of the above, I find that the balance between investigation and quasi judicial functions in order to ensure no element of bias, has been maintained. Further, theissuance of Post Enquiry SCN does not conclude any findings in respect of the violationscommitted by Grishma.

11.3 I, therefore, find no infirmity with the procedure adopted for issuance of Post Enquiry SCN.

12. Inspection of documents and records was not provided.

12.1 Grishma has submitted that it was not provided with a full, fair and effective opportunity ofinspection of documents and records, as sought vide letter dated November 22, 2013.

12.2 I note that in response to the abovementioned request, SEBI had earlier been providedGrishma with an opportunity for inspection of documents on October 9, 2013 and November18, 2013. On those dates, I note that the authorized representatives of Grishma had requestedfor certain documents and the same were provided to them.

B. Having dealt with the preliminary objections raised by Grishma, I shall now proceed to deal with the merits of the case.

13. Manipulation of Client Ledger of Zala and non collection of margin.

13.1 Grishma has inter alia submitted that the Enquiry Report simply repeats the allegation that itmanipulated Zalas client ledger on the basis that the date of receipt of funds is at variance with



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Grishmas bank statements. Grishma has further submitted that the ledger account re flects thedate of physical receipt of the cheque and not the date on which the underlying funds werecredited in the account and the recording of date of receipt of cheques is in accordance with themercantile system of accounting. Grishma also referred t o SEBIs Circular No.

MRD/DoP/SE/Cir-07/2005 SEBI dated February 23, 2005, titled Comprehensive Risk Management Framework for the Cash Segment , which allows brokers to decide the mode ofcollection of margin money, thereby also allowing brokers to follow a practice of collectingmargin money by means of a post dated cheque. Grishma submitted that on October 13, 2011,a day prior to Zalas trades in TPL shares, it received 7 cheques for approximately 3.65 Croresand the date of receipt of the cheques was the date posted in the ledger and such cheques wereduly honored. In this regard, I note that

i.

Zala was a walk-in client with an income in the bracket of below

5 Lakhs (as per the KYCdocuments provided by Grishma to SEBI). Zala's trading account with Grishma was openedon September 17, 2011 i.e. only 10 days prior to the IPO of TPL. On October 14, 2011, Zalahad not traded in any other scrip except TPL.

ii. Zala, trading through Grishma, in the scrip of TPL on the first day of its listing i.e. October14, 2011, incurred a loss of 9,95,07,852 (comprising of 3.20 Crores on BSE and 6.74Crores on NSE).

iii. As per the NSE client ledger of Zala (maintained by Grishma), 1,78,55,000 was received byGrishma on October 13, 2011. However, as per Grishma's bank statement (NSE Client

Account, YES Bank Ltd, Cadel Road Branch), the amount was actually received onsubsequent dates i.e. 8,55,000 was received on October 15, 2011 and the balance amount of1,70,00,000 was received on October 17, 2011.

iv. As per the BSE client ledger of Zala (maintained by Grishma), 1,87,00,000 was received byGrishma on October 13, 2011. However, as per Grishma's bank statement (BSE Client

Account, YES Bank, Cadel Road Branch), the amount of 1,87,00,000 was actually receivedon October 17, 2011.

v. From the Investigation Report, it is observed that cheques received by Grishma from Zala,on October 13, 2011, were post-dated cheques (dated October 15, 2011; October 17, 2011;October 19, 2011, etc.) as on the date they were claimed to have been handed over toGrishma i.e. October 13, 2011. Grishma, admittedly, entered the date of the receipt of such



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post-dated cheques i.e. October 13, 2011, in the client ledger of Zala and not the date ofactual receipt of funds for the said client. Details of the cheques submitted by Grishma toSEBI are provided as under:

Sr. No. No. of cheques Date of cheque Total value1 3 15/10/2011 1,17,55,0002 9 17/10/2011 6,07,00,0003 6 19/10/2011 and after 4,12,10,000

Total 18 - 1 1,36,65,000

vi. I note that the collection of margin especially upfront margin is a risk containment measureundertaken by a stock broker. In case of default by its client in making the payments, thesame (default) is met with the security deposit, collected in the form of margins. In thiscontext, I note that Grishma was required to pay margin amount viz. VAR & Extreme LossMargin and Mark to Market (MTM) Margin towards the loss incurred by Zala in the scrip of

TPL, on the first day of its listing.

vii. As regards Grishmas submission in respect of the SEBI Circular No. MRD/DoP/SE/Cir-07/2005 dated February 23, 2005, which stated: "Members should have a prudent system of rmanagement to protect themselves from client default. Margins are likely to be an important elemsystem. The same shall be well documented and be made accessible to clients and the Stock ExI

crave leave to rely on the observations of the Honble SAT in its abovementioned Orderdated October 28, 2013, wherein it observed:

19. While elaborating and streamlining a Comprehensive Risk Management Framework for market, the SEBI Circular dated February 23, 2005, lays greater importance on advance collemargin by introducing a more stringent margining structure. This was done in the light of experienthe past under various circulars issued by SEBI from time to time. The circular relied upon by thehas to be read in totality and also keeping in view the larger objective which it seeks to achievethere are subsequent Master Circulars by SEBI on the same subject issued on December 31, 201

13, 2012 and April 17, 2013. A minute perusal of these Master Circulars does not suggest thcollection of margin is left to the sweet will of the members or stock exchanges. Margin monrequisite and the requirements laid down by SEBI from time to time in this regard are mandatormerely directory which can be flouted by a member as per his own subjective decision. Any transout by a member or a stock exchange without due regard to such margin requirement is liable to band struck down if found unjustified in the facts and circumstances of a given case.



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viii. As noted from the preceding paragraphs, Grishma had not collected any upfront marginamount from Zala (only post-dated cheques were taken) and therefore, in the event ofdefault by Zala in honoring his trade obligations, Grishma would not have been able tomitigate the consequences of such default. It is indeed surprising that a walk-in client with an

income of below 5 Lakhs, trading through Grishma only from October 14, 2011, wasallowed to take such a huge gross exposure in the securities market to the tune of 32,72,57,123.70 on BSE and 34,72,73,566.10 on NSE. Such exposure was allowed byGrishma through acceptance of post-dated cheques from Zala and incorrectly reflectingreceipt of funds in his client ledger on October 13, 2011 i.e. before the actual date of receipt o

funds in Grishma's bank account,thereby creating an impression that funds were readily availableon the day Zala traded. The callous manner in which Zala was allowed to take such a hugegross exposure by Grishma in the scrip of TPL is against the very object of requiring stock

brokers to collect margin money upfront from clients.

ix. The huge gross exposure to a walk-in client, who as per KYC documents did not have thefinancial means, indicates that there was indeed a larger design behind permitting suchexposure to a walk-in client i.e. Zala, to trade in the scrip of TPL without collecting anymargins. In reality there were no funds available in the account of Zala for his trades. Thefunds for the same were a rranged by Grishma through its Compliance Officer/CEO,Ghelani and using other clients funds/securities. It indicates that Grishma was keen onexecuting substantial trades in the scrip of TPL on the day of listing and used the tradingaccount of Zala for the same. Therefore, despite the fact that there was no credit balance inthe account of Zala, Grishma executed large volume trades amounting to several tens ofCrores of rupees on his behalf, which resulted in a loss of 9,95,07,852 for Zala, in respectof trades executed on that single day i.e. October 14, 2011.

x. Upon a consideration of the abovementioned discussion, I find that only a book entry wasmade in the ledger account by Grishma without the actual receipt of necessary funds fromits client, Zala. In this context, I find it difficult to accept that Zala, who was a walk-in client

with an income of below 5 Lakhs, was able to take such huge gross exposure in the scripof TPL. The aforesaid facts indicate that Grishma made such book entry in the ledgeraccount for the purpose of facilitating trading by Zala in the scrip of TPL. In view of theaforesaid, I find that the charge of manipulation of client ledger and non-collection ofadequate margins from a walk-in client stands established against Grishma.



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14. Use of Third Party Funds and Securities for making margin payments of Zala.

14.1 Grishma has inter alia submitted that the Enquiry Report does not deal with the submissionsmade by it in respect of the allegation that funds of Patel was used for the purpose of making

good the margin requirement. Further, Grishma has submitted that the allegation regarding useof funds of third parties by Grishma is erroneous. In this regard, I note that

i. Zala was required to make substantial pay-outs for his trades in the shares of TPL onOctober 14, 2011. Since the trades happened on October 14, 2011, the settlement had to bedone on T+2 i.e. October 18, 2011 (excluding Saturday and Sunday which fell in betweensuch days). The source of funds used by Grishma for depositing the margin amount withNSE and BSE towards trading done on behalf of its clients on October 14, 2011, wasinvestigated. For the same, information was sought from NSE, BSE and the respectiveClearing Corporations, viz. National Securities Clearing Corporation Ltd. (hereinafterreferred to as " NSCCL ") and Indian Clearing Corporation Ltd. (hereinafter referred to as"ICCL ").

NSE: As per the information provided by NSE, it is noted that

a. On October 14, 2011, the client level margin requirement of Grishma for the tradingdone on behalf of its clients in the cash segment of NSE was as follows:

Client name VAR & Extreme LossMargin ( )

Mark to MarketMargin ( )

Total Marginrequirement ( )

Shri ChetanDave

0.00 40,05,681.70 40,05,681.70

Shri Jivraj Zala 2,87,44,575.20 6,07,00,091.50 8,94,44,666.50 Total 9,34,50,348.20

b. The total margin requirement of Grishma for trades on behalf of its clients on NSE onOctober 14, 2011, was 9,34,50,348.20. As on October 13, 2011, in addition to the base

minimum capital of 1 Crore in cash and 25 Lakhs as Bank Guarantee, 7,63,000 wasavailable with NSE towards margin deposit in the form of cash given by Grishma. Theadditional margin deposits brought in by Grishma as on October 14, 2011, duringmarket hours was as follows:



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Sr. No. Particulars Amount in ( )1 Cash Deposits 2,77,63,000.002 Bank Guarantee 75,00,000.003 Securities 2,53,97,639.59

Total 6,06,60,639.59

c. Till the end of trading day of October 14, 2011, total margin provided by Grishma(excluding the base minimum capital of 10 Lakhs, which is required to be maintainedat all times) was7,21,60,639.59. The break-up of the same is given below:

Sr. No. Particulars Amount in ( )

1 Cash Deposits 2,77,63,0002 Bank Guarantee 1,00,00,000 (25,00,000 + 75,00,000)3 Base Minimum Capital 90,00,000 (1,00,00,000 10,00,000)4 Securities 2,53,97,639.59

Total 7,21,60,639.59

d. At the end of the trading day on October 14, 2011, Grishma had a margin shortfall of2,12,89,708.81. NSE received 1.2 Crores at 06:01 p.m. and 7.24 Lakhs at 6:31 p.m.from Grishma, after market hours on October 14, 2011. There was a shortfall of marginby 85,64,757.17, due to the trading done by Grishma on October 14, 2011 (SettlementNo. N 2011196), which was required to be brought in prior to the start of trading on

October 17, 2011 (Settlement No. N 2011197), to prevent deactivation of the tradingterminals of Grishma.

e. NSE informed that 2 Crores was received by NSCCL from Grishma before the startof the market hours on October 17, 2011. Also, another 4.5 Crores was received byNSCCL from Grishma at 04:05 p.m. i.e. after the start of trading on October 17, 2011,but before the close of trading on October 17, 2011. The funds of 2 Crores receivedby NSCCL before the start of the market hours on October 17, 2011, were taken byNSCCL towards clearing the outstanding margin of Grishma with respect to the tradingdone by it in Settlement No. N 2011196. Thereafter, Grishma was allowed to continuetrading.

f. The following table shows the funds transferred to NSCCL by Grishma Current Account (Axis Bank) and the ultimate source of these funds that were earmarked byNSCCL as margin towards Settlement No. N2011196 were from:



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Date Amount transferred to theClearing corporation by thebroker towards margin ( )

Ultimate source of funds for amount transferred toClearing Corporation

Amount ( ) Name of the Client Accountfrom where funds were

transferred

14/10/2011 2,70,00,000 85,00,000 Vimal P Patel25,00,000 Vimal P Patel

1,41,00,000 Grishma F&O A/c andaround 1.14 Crore was fromthe trades of Shri Vimal Patel

in F&O segment1,00,00,000 Grishma Securities Pvt. Ltd.

14/10/2011 7,24,951.64 20,00,000 Mihir Ghelani14/10/2011 1,20,00,000 2,00,00,000 Mihir Ghelani17/10/2011 2,00,00,000 50,00,000 Vimal P Patel

76,00,000 Vimal P Patel74,00,000 Vimal P Patel

5,97,24,951.64

g. The funds amounting to 5,97,24,951.64 (provided by Grishma towards marginrequirement of Zala for his trading in the scrip of TPL on the first day of listing i.e.October 14, 2011), were majorly transferred from the client account of Patel (client ofGrishma) and also partly from Ghelani, the CEO/Compliance Officer of Grishma.Further, the primary source for the 4.5 Crores transferred from Grishma's NSESettlement Account to NSCCL's account on October 17, 2011, were as follows:


Ultimate source of funds Amount ( ) Name of the Client

Account from wherefunds were transferred

17/10/2011 4,50,00,000 8,60,000 Jivraj Zala44,00,000 Jivraj Zala70,00,000 Jivraj Zala

50,00,000 Jivraj Zala50,00,000 Jivraj Zala

1,00,00,000 Jivraj Zala1,00,00,000 Jivraj Zala

h. The amount of 4.5 Crores that was transferred on October 17, 2011 to NSCCL byGrishma after the start of market hours, were the funds largely transferred from thebank account of Zala to the Client Account of Grishma on October 17, 2011. A perusal



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of the bank account of Zala with Yes Bank revealed that as on October 14, 2011, thebalance in his bank account throughout the day was 30000, and it was only on October15, 2011 that funds of 1,17,55,000 was received in his Yes Bank account.

i. The bank account of Zala was with Yes Bank whereas the NSE clearing account ofGrishma was in Axis Bank. Besides, the bank account of Grishma's other clients viz.Patel and Kahor, were with Axis Bank itself. It is pertinent to note that Kahortransferred 77.50 Lakhs, 75 Lakhs and 47.50 Lakhs from his bank account to thebank account of Patel on October 15, 2011 and Patel, in turn, transferred 76 Lakhs,74 Lakhs and 50 Lakhs to the NSE Client Account of Patel on the same date. Thesefunds, in turn, inter alia formed part of the 2 Crores that were transferred on October17, 2011, by Grishma to the Clearing Corporation, to tide over the shortfall in margin

before the opening of trading hours on October 17, 2011.

j. Further, 2,53,97,640 was brought by Grishma towards margin deposit on October 14,2011, in NSE, in the form of securities pledged in favour of NSCCL. The break-up ofthe margin brought by Grishma in the form of securities is as follows:

SYMBOL Quantity Net Value* ( )BHARTIARTL 500 1,71,078.80GTOFFSHORE 500 52,604.20

KWALITY 150000 2,46,84,543.30

PRESTIGE 2500 2,33,690.20RELIANCE 190 1,45,946.30

TVSMOTOR 2000 1,09,777.20 TOTAL 2,53,97,640.00

k. From the above, out of 2.53 Crores margin deposited by Grishma with NSCCL in theform of securities, 2.46 Crores was in the form of 1.5 Lakhs shares of Kwality DairyLtd. It was observed that the said shares had come from the demat account of Grishma(A/c no. IN30133020879906 held with NSDL). A perusal of the said demat account of

Grishma revealed that on October 13, 2011, 1.5 Lakhs shares of Kwality Dairy Ltd. were pledged towards margin requirement. On the same day, the said account ofGrishma had received the same 1.5 Lakhs shares of Kwality Dairy Ltd. from demat A/cno. 1202910000002459 with CDSL, which was also found to be in the name ofGrishma. A perusal of the said demat account of Grishma with CDSL revealed thatGrishma had received the said 1.5 Lakhs shares of Kwality Dairy Ltd. from Patel in theform of off-market credit.



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l. In view of the above, I find that funds of Patel were used by Grishma to tide over themargin shortfall for trading done by Zala on October 14, 2011. I find that Grishma alsoused shares worth 2.46 Crores of Patel for meeting the margin shortfall of Zala in the

scrip of TPL on October 14, 2011 i.e. the first day of listing.

BSE: As per the information provided by BSE, it is noted that

a. The client level margin requirement of Grishma for the trading done by it on October14, 2011, in cash segment of BSE, is given below:

Client name VAR & Extreme Loss

Margin ( )

Mark to Market

Margin ( )

Total Margin

requirement ( )

Shri ChetanDave

8,93,670 36,64,242 4557912

Shri Jivraj Zala 0 3,20,38,992 3,20,38,992G001 12816 0 12816

Vimal Patel 30,20,464 8,580 3029044

b. Therefore, the total margin requirement of Grishma for its trades on October 14, 2011 was 3.96 Crores, out of which the MTM margin was 3.57 Crores. The marginrequirement for the trades of Zala was 3.2 Crores, which was for the trades in the scripof TPL. The margin deposits brought in by Grishma as on October 13, 2011, duringmarket hours as given by BSE is provided below:

Sr. No. Particulars Amount in ( )1 Cash Deposits 1,25,0002 Bank Guarantee 2,15,00,0003 Securities 1,27,48,297

Total 3,43,73,297

c. There was a margin requirement of 1,40,86,814 for MTM losses on October 14, 2011.Grishma had deposited an amount of 1,10,00,000 on October 14, 2011 towardsmargin. A perusal of the source of amounts paid by Grishma to ICCL on October 14,2011 reveals the following:



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Ultimate source of funds for amounts transferred tothe Clearing Corporation

Amount ( ) Name of the Client Accountfrom where funds were

transferred14/10/2011 50,00,000 1,41,00,000 Grishma Securities Pvt. Ltd.

NSE F&O Settlement A/c No.004010200405027 Axis Bank

Ltd.

14/10/2011 50,00,000 1,00,00,000 Grishma Securities Pvt. Ltd A/c no. 2321600000064 with

DCB

14/10/2011 10,00,000 4,52,956and

5,34,307

Pay out received

14/10/2011 35,86,814 2,00,00,000 Mihir Ghelani

1,45,86,814

d. For the margin of 1,45,86,814 brought in on October 14, 2011, Grishma provided thefunds from its own F&O A/c, current account and also the funds received fromGhelani. From the above table, it is seen that for the 50 Lakhs transferred to ICCL,the credit was received from Grishma NSE F&O Settlement A/c. A perusal of theNSE F&O Settlement A/c of Grishma (A/c no. 004010200405027 with Axis BankLtd.) revealed that prior to the transfer of 1,41,00,000 from the said account which wasused for meeting the settlement obligation on BSE and NSE, the said account receivedthe following credits:

Sr.No.

Particulars Amount in ( ) Description

1 11/10/2011 81,14,149.70 IL&FS Securities Services Ltd.-NSEDerivatives CL2 12/10/2011 1,61,662.00 IL&FS Securities Services Ltd.-NSE

Derivatives CL3 13/10/2011 58,41,037.35 IL&FS Securities Services Ltd.-NSE

Derivatives CL1,40,16,849.05



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e. During the course of the investigation, NSE was advised to provide the trading detailsof Grishma in the F&O segment for the said trades. As per the details provided byNSE, the trades by Grishma in the NSE F&O segment were in its own account as wellfor Patel. The break-up of the client wise pay out was obtained from IL&FS Securities

Services Ltd. and the same revealed that the pay outs were primarily for the trades ofPatel in the F&O segment as detailed below:

Sr.No.

Particulars Amount of pay out

( )

MTM pay out of Shri Vimal

Patel ( )

Date of trade

1 11/10/2011 81,14,149.70 69,81,015.00 10/10/20112 12/10/2011 1,61,662.00 6,31,776.25 11/10/20113 13/10/2011 58,41,037.35 51,25,147.50 12/10/2011

1,41,16,849.05 127,37,938.75

In this context, it is observed that Patel was receiving pay-outs from Grishma for histrades in the segment.

f. From the above, it is observed that out of 1.41 Crores used for the meeting the marginrequirement of Zala, around 1.14 Crores was for the trades of Patel in the F&Osegment on NSE.

g. With regard to the securities worth 1,27,48,297 provided as margin (with hair cut), asper the details provided by BSE, the following shares were pledged for the margin onOctober 13, 2011:

Sr. No. Name of the securities No. of shares pledged

1 DB Realty Ltd. 1,37,4592 Elgi Equipments Ltd. 40,0003 Shasun Pharmaceuticals Ltd. 50,000

h. As per the details provided by BSE, the shares were pledged from the demat A/c no.1202910000002459 of Grishma. The following table shows the receipt of the said sharesin the aforesaid account of Grishma:



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Sr. No. Particulars Name of the scrip No. of shares Name of the entity from whom received

1 07/10/2011 DB Realty Limited-EQ 66,697 Pramod K. Goenka2 13/10/2011 DB Realty Limited-EQ 70,462 IL&FS Securities Services

Ltd3 13/10/2011 Shasun Pharma 50,000 IL&FS Securities Services

Ltd4 13/10/2011 Elgi Equipments 40,000 IL&FS Securities Services

Ltd

i. IL&FS Securities Services Ltd., the clearing member of Grishma in the F&O segment,informed SEBI that the abovementioned shares were returned to Grishma as it hadmade a request vide letter dated October 12, 2011, for IL&FS Securities Services Ltd. to

withdraw the abovementioned shares placed by it, as collateral on the Derivativessegment of NSE. The shares so withdrawn were pledged with the clearing corporationof BSE on October 13, 2011. The timing of withdrawal of shares pledged with IL&FS is

very important as it shows pre-planning on the part of Grishma in respect of trading byZala in the scrip of TPL on the listing day. Knowing very well that the trading will resultin losses, which will require additional margins to be provided to the clearingcorporations, Grishma withdrew the shares pledged by it with its Clearing member inthe F&O segment and pledged the said shares with BSE for additional margins.

j. It was noted that the 50,000 shares of Shasun Pharmaceuticals returned by IL&FSSecurities Services Ltd. to Grishma on October 13, 2011, were earlier given by Grishmato IL&FS Securities Services Ltd. on September 08, 2011 as margin for its trades in theF&O segment. Out of the said 50,000 shares, 28,000 shares had come from the demataccount of Patel and 22,000 shares had come from the demat account of one ShriPriyesh Arvind Bhatt (hereinafter referred to as " Bhatt "). The closing price of ShasunPharmaceuticals on October 12, 2011 was 61.50 per share. Thus, Grishma had used

the shares of Shasun Pharmaceuticals worth around 17.22 Lakhs and 13.53 Lakhs of

its clients Patel and Bhatt respectively as margin (totaling to 30.75 Lakhs). Also,Grishma used 66,697 shares of DB Realty Ltd. received from one Shri Pramod K.Goenka (hereinafter referred to as " Goenka ") and the value of the said shares was35,91,633.45 taking into consideration closing price of the scrip on October 12, 2011

was 53.85 per share.



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k. In view of the above, I find that Grishma inter alia used the funds and securities of its 3clients viz. Patel, Bhatt and Goenka, for meeting the margin requirement of Zala.

14.2 As regards the allegation in the Enquiry Report that the Compliance Officer of Grishma

transferred a sum of 2,20,00,000 to Grishma's account and the same was used for meeting themargin requirements for the losses incurred by Zala in the scrip of TPL, Grishma submittedthat the allegation is baseless. Grishma has submitted that the payment of 2,20,000,00 toGrishma Intermediaries Pvt. Ltd. (hereinafter referred to as " Grishma Intermediaries ") wastowards meeting margin obligations of Ghelani and the inference in SCN that the said amount

was transferred to meet Zala's margin obligation of Zala is absurd and untenable; accordingly,the question of providing any misleading information to SEBI cannot and does not arise.

Therefore, the question of Grishma contravening the provisions of Section 12A of the SEBI Act and the PFUTP Regulations, 2003, is untenable.

14.3 In this regard, I note that Ghelani had made payments of 2 Crores and 20 Lakhs to GrishmaIntermediaries. The aforesaid amount was transferred from the account of GrishmaIntermediaries to the account of Grishma which was ultimately used for meeting the marginrequirements for the losses incurred by Zala in the scrip of TPL on October 14, 2011. In thestatement dated May 21, 2012, recorded before SEBI and letter to SEBI dated August 21, 2012,Ghelani had mentioned that he made the payments to Grishma Intermediaries towards theledger debit and margin call for his trading in commodities. Ghelani was advised to provide

documents in support of his contention. Ghelani, vide email dated May 24, 2012, forwarded hisledger statement with Grishma Intermediaries in MCX, to SEBI. As per the aforesaid ledgerstatement, Grishma Intermediaries received 2.2 Crores from Ghelani on October 14, 2011. Inote that as on October 13, 2011, there was a debit balance of 64,55,007.18 in the account ofGhelani. After the payments of 2.2 Crores received from Ghelani, the account had a creditbalance of 1.55 Crores as on October 14, 2011. Therefore, I find that the payments totalling2.2 Crores made by Ghelani was not for clearing the debit balance as after the said payments,his account had a credit balance of over 1.55 Crores. In order to ascertain whether Ghelani

had any margin call requirement as claimed by him on October 14, 2011, the trading details ofGhelani in MCX were sought for. The Forwards Market Commission (hereinafter referred to as"FMC "), in reply to SEBI's request to MCX regarding the trade details of Ghelani, vide letterdated June 1, 2012, had forwarded the trade details of Ghelani for the period from October 1,2011 to November 15, 2011. It was observed that during the aforesaid period, Ghelani startedtrading only from October 17, 2011 and did not execute any trade before that. Ghelani hadtraded in gold on October 17 and 18, 2011. From the aforesaid, it is clearly evident that Ghelani



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did not have a margin call requirement on October 14, 2011, as claimed by him in his statementrecorded before SEBI. Also, a perusal of the bank account of Ghelani shows that he hadtransferred 2 Crores to the bank account of Grishma Intermediaries, Client Account onOctober 14, 2011 and the same was transferred to the account of Grishma Intermediaries. It

may be noted that money was not transferred from the account of Grishma Intermediaries toMCX on the said date but was instead transferred to the account of Grishma Intermediariesand was then further routed to the account of Grishma - Current Account and the same wassubsequently transferred for meeting the margin requirement of Zala. This contradicts theassertion that Ghelani had a ledger debit and margin call from MCX and the amount wastransferred for the same. Therefore, it can be inferred that the payments of 2.2 Crores madeby Ghelani was primarily for meeting the margin requirement of Zala for his trading in thescrip of TPL on October 14, 2011.

14.4 I find that Grishma utilized the funds from its Compliance Officer/CEO, Ghelani to makemargin payments to the exchange on account of the shortfall in margin towards the trades doneby Zala in the scrip of TPL on the first day of its listing. I note that the failure by Grishma tosegregate its own funds from that of its clients and the subsequent usage of such funds tofacilitate Zala's trades constitutes a serious irregularity.

14.5 In view of the aforesaid discussion, I find that if the funds and securities of Grishma's clientsi.e. Patel, Bhatt and Goenka alongwith that of Ghelani had not been used; there would have

definitely been a margin shortfall due to the huge loss-making trades executed by Zala. In viewof the same, I find that the charge against Grishma of utilization of its own money and alsoother clients' money and shares for meeting margin requirements of Zala, stands established.

15. Synchronised Trades on behalf of Zala

15.1 Grishma submitted that allegations of synchronized trades on behalf of Zala are baseless as thetrades in the scrip of TPL were not proprietary trades but trades executed on behalf of the

client wherein there was no contact or communication between Grishma and the counterpartyand further, the orders were matched in accordance with the order matching mechanism of thestock exchange.

15.2 It is observed that Zala had entered into synchronised trades with the followingentities/individuals ( entities/individuals who hadallegedly provided exit to certain allottees in TPLs IP )



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on both BSE and NSE. Certain instances of the aforementioned synchronised trades are givenbelow:

Major

counterpartySellers to Zalasbuy orders

TradedQuantity

TradedPrice

Buy order Time Sell Order Time Trade Time

Time

Differencebetween thetrades

Salasar StockBroking Limited

2,83,987 5112:10:56

13:28:20

12:10:52

13:28:13

12:10:56

13:28:20

4 seconds

7 seconds

Lopa SaumilBhavnagari

3,50,000 19.5 15:03:47 15:03:41 15:03:47 6 seconds

Volga

InternationalLimited 1,00,000 19.5 15:03:47 15:03:40 15:03:47 7 seconds

Pinac StockBrokers Pvt.

Limited29888 19.5 15:03:47 15:03:41 15:03:47 6 seconds

15.3 From the abovementioned details, I note that there was an almost exact matching in thequantity, rate and also proximity in the time of entering buy/sell orders by Zala and the relatedentities/individuals (who had purchased shares from retail allottees/QIBs in TPLs IPO) i.e.

Lopa Saumil Bhavnagari, Pinac Stock Brokers Pvt. Limited, Salasar Stock Broking Ltd., VolgaInternational Limited. The aforesaid facts show that Zala s orders were synchronised andentered with prior understanding to match with the orders entered by such relatedentities/individuals. I note that placing of orders in this manner cannot be termed as regularand normal, because on the one hand a person is taking the buy position and at the same timethe related entity/individual is taking the sell position. This also holds true when the person istaking the sell position and at the same time the related entity/individual is taking the buyposition. I note that no bonafide investor would indulge in this kind of trading in the normal

course of business. It can be inferred from the trading patterns in the instant case that the same were done with the ulterior motive of creating artificial volume in the securities market. Therefore, it is concluded that the trades in the scrip of TPL which resulted in the synchroniseddeals were not genuine sale purchase transaction and had the effect of creating artificial

volume. Further, such artificial trades generate interest of genuine investors, who in turn tradein such scrip on seeing the increased trading activity.



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15.4 From the Investigation Report, it is also observed that as per the NSE Trade Log, on October14, 2011, Zala placed buy orders during the period from 9:15:02 to 15:29:35. The dealers ofGrishma who had placed the orders for Zala on NSE were Ms. Arti C Dave and ChetnaMayekar. The orders placed by Ms. Arti C Dave were from 2 CTCL IDs (380015003001 and

400019004007). It is observed that the orders placed from 9:15:02 to 10:42:48 were placed fromthe CTCL ID 400019004007, those from 11:44:44 to 12:42:49 were placed from CTCL ID380015003001, from 13:27:57 to 14:08:44 were placed from CTCL ID 400019004007 and theorder placed at 14:39:08 was placed from CTCL ID 380015003001.

15.5 As per NSE records, the location address of the CTCL ID 380015003001 is at Ahmedabad(408, Shyamet Complex, Behind Panina Pole Polytechnic, Ambavadi, Ahmedabad, Gujarat,380015) and the location address of CTCL ID 400019004007 is at Mumbai (92/4,Nirbhay

Niwas, Bhaudaji Cross Road 10, Matunga (C.R), Mumbai, Maharashtra, 400019).

15.6 From the Investigation Report, it is observed that while replying to the query regarding themode of placement of orders by Zala, Grishma vide email dated October 31, 2011, had statedthat the orders were placed to Grishma by Zala himself, at Grishma's office. It is surprising tonote that Zala was present personally at Grishma's office in both Mumbai and Ahmedabad atalmost the same point of time.

15.7 Further, the Investigation Report reveals that out of the buy and sell orders for 67,34,064 shares

placed by Zala on BSE, trades for 19,12,865 shares out of the total quantity of 33,67,032 sharestraded by him on BSE, were placed through the terminal allotted to Ghelani.

15.8 I note that in the screen based trading, the manipulative or fraudulent intent can be inferredfrom various factors such as conduct of the party, pattern of transactions, etc. Such intentionmay be demonstrated from the attending circumstances as observed by Hon'ble SAT in thefollowing cases, viz.

a. Ketan Parekh vs. SEBI, Appeal no. 2/2004, Order dated July 14, 2006 The Hon'bleSAT had inter alia observed: "The nature of transactions executed, the frequency with whictransactions are undertaken, the value of the transactions, the conditions then prevailing in theare some of the factors which go to show the intention of the parties. This list of factors, in the vthings, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumuof these that an inference will have to be drawn."



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b. Grishma Securities Pvt. Ltd. vs. SEBI, Appeal no. 117/2006, Order dated August 8,2010 The Hon'ble SAT had inter alia observed: "Synchronized trades, however, can be execuwith a view to manipulate the price or the volumes of the traded scrip or both or with some ot

purpose and whether a synchronized trade has been executed with a manipulative intent or not w

be gathered from the intention of the parties for which there would seldom be any direct eviintention will have to be gathered from the surrounding circumstances including the pattern of

frequency of the trades and their volumes, the explanations furnished by the parties and brokerscase before us, the only explanation furnished by the appellants is that their clients were day tradand that they were watching the trades on the screen when the buy and sell orders were punchsystem. They have denied any collusion either between themselves or with their respective clienclaim to be innocent. From the details of the trades executed between the two appellants and hato the trading system, we do not think that such large number of trades could match between

parties through the same brokers unless the trading system was being abused. Even the day tradhave the same counter party every time. It is also on record that the two brokers were known toand so were the parties. This would further lend credence to the fact that they executed manipula

c. Mr. Bhavesh Pabari vs. SEBI, Appeal no. 104/2012, Order dated July 3, 2012 TheHon'ble SAT had inter alia observed: "When a large number of entities are involved and allegatof fraud and manipulating the securities market, case of each entity is to be viewed with referenin manipulating the trades and its role in executing synchronized/circular/reversal trades."

15.9 Having regard to the abovementioned observations, I, therefore, find that such conduct ofGrishma in allowing Zala to indulge in synchronised trade constitutes a serious irregularity inthe market and also disturbs the market equilibrium. I, therefore, find that the allegation againstGrishma that it executed synchronized trades on behalf of Zala stands established.

15.10 In support of its submission that it cannot be responsible for the trades executed by the clients,Grishma has relied upon the Order of the Hon'ble Tribunal in Networth Stock Broking vs.SEBI (Appeal No. 5 of 2012). In this context, I crave leave to rely on the observations of the

Honble SAT in its abovementioned Order dated October 28, 2013, wherein it observed:

We have gone through the SEBIs orders in the cases of Geojit BNP Paribas Finance and Securities Ltd. and Networth Stock Broking Ltd. In both cases, the only allegation was that the broker had failed to excare and diligence while permitting his clients to trade. It was observed in both orders that the brokethe clients to trade only after their cheques were cleared and exposure was given only after they had sbalances. Further, the brokers had given the same level of exposure to all clients who were register



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during the same period. The exposure provided to the clients was within the range of 8-10 margin/credit, which was as per the policy for all other clients and no exception was made for thquestion. All of these factors clearly distinguish these cases from the present one.

16. Facilitating exit of QIBs from the scrip of TPL.

16.1 Grishma has submitted that there is not a whisper of what action SEBI had taken against theQIBs and if the transactions are genuine and no action is taken against the beneficiaries of theexit, it would be absurd to suggest that a person who merely acted a broker to counter party,

who provided the exit, is to be acted against. Grishma further submitted that SEBI has notestablished how it can be held responsible for the fact that Zala provided exit to QIBs.

16.2 It is observed from the Enquiry Report that out of the 3100 applicants who were allotted sharesin TPLs IPO, they were 3 QIBs who offloaded their sha res on the first day of listing/tradingitself. Details in respect of the shares allotted and offloaded by the aforementioned QIBs areprovided below

QIB Number of Sharesallotted

Number of sharesoffloaded

Profit (in )

Sparrow Asia DiversifiedOpportunities Fund

9,74,739 9,74,739 19,49,000

IPRO Funds Limited 9,30,631 8,13,131 16,26,000

Credo India Thematic FundLimited 9,30,631 9,30,631 18,61,000



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16.3 It is further observed from the Enquiry Report that Zala bought substantial number of sharesoffloaded by the three QIBs at 62 per share in the following manner:

16.4 From the above table, it is observed that within a short span of time, Zala bought a total of9,83,287 shares from the abovementioned 3 QIBs at 62. Zala then sold those shares at 19.50thereby incurring a huge monetary loss.

16.5 In this context, it is pertinent to mention that contrary to its submissions, in the instant casethere is enough material on record to show that Grishma was facilitating execution of largenumber of trades amounting to several Crores of rupees by Zala in the scrip of TPL on the dayof listing of such scrip. Further, as stated above, Grishma arranged its own funds to meet themargin requirements of its client, Zala. This was also done by taking securities and funds fromits other clients. Hence, it is apparent from the facts of the case that Grishma was facilitatingexecution of large number of trades by Zala in the scrip of TPL. As a result of theabovementioned trading, Grishma was able to facilitate the exit of QIBs from the scrip of TPL

through Zala, who was allowed to trade by Grishma in that scrip on the first day of listing, without collecting any funds from him towards the margin amount payable to stock exchangesdespite the fact that he was a walk-in client with insufficient risk taking capacity.

QIB TradedQuantity

Traded Price Buy order Time Sell Order Time Trade Time

CREDO 4,53,215 62

11:17:1211:17:3911:44:51

10:53:4510:56:0710:56:1110:56:1510:59:4311:11:2711:22:19

11:17:12, 11:17:40,11:44:51

SPARROW 2,94,517 62

11:17:1211:17:3911:44:4011:44:51

10:44:3310:46:3110:47:3911:16:1911:22:0411:22:14

11:17:12, 11:17:40,11:44:40, 11:44:51

IPRO 2,35,555 62

11:44:4011:44:5111:45:22

11:22:0411:26:0211:27:1511:30:2911:44:40

11:44:40,11:44:51, 11:45:22



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Conclusion

17. In view of the abovementioned paragraphs 9 16, I find that:

i. Zala was allowed to trade on the first day of listing in the scrip of TPL by Grishma, withoutcollecting any funds from him towards the margin amount payable to stock exchanges inspite of the fact that the client was a walk-in client with Grishma, whose account was openedjust ten days prior to the date the IPO of TPL. This resulted in Zala incurring a loss of 9,95,07,852.

ii. Grishma tried to send the investigation on a wrong trail by manipulating the client ledger ofZala to give an impression that some funds were available in the client account of Zala withGrishma on the day of trading by him in the scrip of TPL.

iii. Grishma used the funds and securities of its other clients, viz. Patel, Bhatt and Goenka tomeet the margin obligation arising out of the huge loss incurred by Zala on the first day oftrading in the scrip of TPL on both BSE and NSE.

iv. Grishma also used the funds of its CEO/Compliance Officer, Ghelani to meet the marginobligation arising out of the abovementioned loss incurred by Zala. Grishma failed tosegregate its own funds from that of its clients and its subsequent usage to facilitate tradesby Zala in the scrip of TPL was a serious irregularity.

v. IPO proceeds were transferred by TPL to Zala routing it through the accounts of Patel andKahor, clients of Grishma. Therefore, Patel and Kahor were the front entities of Grishma.

vi. Grishma permitted such a huge exposure to Zala who did not have any track record oftrading with them as they were aware that funds would subsequently be received in Zalasaccount through layered transactions. The above acts of Grishma brings out the schemedesigned by them using front entities, viz. Patel and Kahor, for assisting TPL to divert itsIPO proceeds towards trading by Zala in its scrip.

vii. Grishma circumvented the policies laid down by way of the SEBI Act and Regulations, toplay a fraud on genuine investors, who entered in the scrip on the first day of trading.

18.

The aforesaid actions of Grishma have also resulted in non compliance of the following SEBI'sCirculars, viz.

a. SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003, which prohibits third partyreceipt/payment of funds and securities.

b. MRD/DoP/SE/Cir-11/2008 dated April 17, 2008 In case client collateral is found to bemis-utilised, the stock broker would attract appropriate deterrent penalty for violation of



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norms provided under SCRA, SEBI Act, SEBI Regulations and Circulars, ExchangeByelaws, Rules, Regulations and Circulars.

c. MIRSD/SE/Cir-19/2009 dated December 3, 2009 8. There shall be mandatorydocument dealing with policies and procedures for (d) imposition of penalty/delayed

payment charges by either party, specifying the rate and the period (This must not result infunding by the stock broker in contravention of the applicable laws).

19.1 It is pertinent to refer to the judgment of the Hon'ble Securities Appellate Tribunal in thematter of V. Natarajan vs. SEBI, SAT Appeal No.104 of 2011, wherein it was held as follows:-" we are satisfied that the provisions of Regulations 3 and 4 of the Securities and Exchange BoaIndia (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulati2003, were violated. These regulations, among others, prohibit any person from employing any deor artifice to defraud in connection with dealing in or Issue of securities which are listed or proposlisted on an exchange. They also prohibit persons from engaging in any act, practice, course of busoperates or would operate as fraud or deceit upon any person in connection with any dealing in or securities that are listed on stock exchanges. These regulations also prohibit persons from indulgin

fraudulent or unfair trade practice in securities which includes publishing any information which ior which he does not believe to be true. Any advertisement that is misleading or contains informatdistorted manner which may influence the decision of the investors is also an unfair trade practice which is prohibited. The regulations also make it clear that planting false or misleading news whicinduce the public for selling or purchasing securities would also come within the ambit of unfair tr

in securities A basic premise that underlies the integrity of securities market is that persons connected with semarket conform to standards of transparency, good governance and ethical behaviour prescribed inlaws and do not resort to fraudulent activities ."

19.2 Reference may also be made to the following observations made by the Hon'ble Supreme Courtin its judgment dated April 26, 2013, in N. Narayanan v. Adjudicating Officer SEBI (Civil Appea

Nos.4112-4113 of 2013) wherein it held that: "SEBI, the market regulator, has to deal sternly wi

companies and their Directors indulging in manipulative and deceptive devices, insider trading etc. orbe failing in their duty to promote orderly and healthy growth of the Securities market. Economic ofof this country should know, is a serious crime which, if not properly dealt with, as it should be, wonly countrys economic growth, but also slow the inflow of foreign investment by genuine investors aalso casts aslur on Indias securities market. Message should go that our country will not tolerate market abusewe are governed by the Rule of Law. Fraud, deceit, artificiality, SEBI should ensure, have no plasecurities market of t his country and market security is our motto."



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20. For reasons detailed in the preceding paragraphs 9 19, I find that Grishma has violated theprovisions of Section 12A (a) (d) of the SEBI Act read with Regulations 3(a) (c), Regulations4(1) and 4(2)(a), (d) and (p) of the PFUTP Regulations, 2003. In addition, I find that as a

registered Stock Broker, Grishma is also guilty of violating the provisions of Section 23D of theSCRA, Regulations 26(xiii), 26(xvi), 27(xii), 27(xiv) and 27(xvi); Clauses A(1), A(2), A(3) and A(4)of the Code of Conduct specified under Schedule II read with Regulation 7 of Stock BrokersRegulations.

21. Enquiry proceedings are mainly disciplinary proceedings initiated against intermediaries registered with SEBI. Section 12(3) of the SEBI Act provides that: "The Board may, by order, suspend or cancecertificate of registration in such manner as may be determined by regulations". I find that the fraudulent,manipulative and illegal activities committed by Grishma were part of a larger scheme, whichaffected the integrity of the securities market and resulted in the execution of trades in the scripof TPL to the detriment of genuine investors . Therefore, SEBI had taken necessary steps videInterim Order against TPL and many other entities including Grishma. SEBI was justified indoing so considering the gravity of fraud involved in the matter. On considering the totality ofthe facts and circumstances, the interest of securities market, the market participants and myobservations/findings, I am of the considered view that the following order would meet the endsof justice.

Order

22.1 I note that vide the Interim Order dated December 28, 2011 (later confirmed through theConfirmatory Order on November 5, 2012), Grishma was inter aliarestrained from accessingthe securities market and prohibited from buying, selling or dealing in the securities market tillfurther orders.

22.2 Further, I note that vide SEBI Order dated July 31, 2013, it was directed as follows:

"Grishma is restrained from buying, selling or otherwise dealing in securities, in its proprietary accoor indirectly, for a period offive years. I note that vide the Interim Order dated December 28, 2011, Grishwas rest

Documents

Enquiry Proceedings Order - Grishma Securities Private Limited