BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI
Appeal No.105 of 2007
Date of decision:29.9.2008
1.Ramod Kumar Agrawal (HUF)
2.Sumitra Devi Agrawal
3.Rahul Kumar Agrawal ….. .Appellants
Versus
Adjudicating Officer, Securities and Exchange Board of India ….. Respondent
Mr. Vinay Chauhan Advocate for Appellants.
Dr. Poornima Advani Advocate with Ms. Sejal Shah Advocate for the Respondent.
Coram: Justice N.K. Sodhi, Presiding Officer
Arun Bhargava, Member
Utpal Bhattacharya, Member
Per: Utpal Bhattacharya, Member
This appeal has been filed agai nst the order dated 29.3.2007 passed by the adjudicating officer, Securities and Exchange Board of India (the Board for short) imposing a penalty of Rs.25 lacs collectively on the Appellants Ramod Kumar Agrawal (HUF) – Appellant no.1, Sumitra Devi Agrawa l -Appellant no.2 and wife of Appellant no.1 and Rahul Kumar Agrawal – Appellant no.3 and son of A ppellant no.1. The penalty has been imposed under section 15 HA of the Securities and Exchange Board of India Act, 1992 for violation of Regulation 4(2) (a) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Pr actices Relating to Securities Market) Regulations 2003 (hereinafter referred to as FUTP Regulations).
2.At the outset, we may note the salient facts of the case. Sometime in July 2005 one Bimal Kumar Agrawal (Bimal for short) who is the younger brother of Appellant no.1 and the Director of Rajat Sh are and Stock Brokers Pvt. Ltd. (Rajat for short), a member broker of the Magadh Stoc k Exchange Association (MSEA for short) where trading had been suspended by the Bo ard, informed Appellant no.1 that trading on MSEA was going to commence shortly an d the Appellants could trade through him on MSEA. It is an admitted fact that th e Appellants, who are based in Mumbai, normally trade in the securities market th rough a member broker of the Bombay Stock Exchange. On the request of Bimal, they became his clients and traded on MSEA through Bimal between 3.8.2005 and 12.8.2005. MSEA , which was a registered stock exchange, still did not have the permission of the Board to allow trading on its floor and the latter stopped such trading on the floor of MSEA after 12.8.2005. It is the Board’s case that during August, 2005 the Appellants traded in 19 scrips on MSEA though none of the scrips were listed there and besides that, the transactions were not genuine as they were reversed between the Appellants on one side and one other particular trader on the other side through their respective brokers. These transactions, however, constituted a small percentage of the total transacti ons on MSEA in August 2005. An overwhelming percentage of such transact ions pertained to the scrip of a company called Bhoruka Financial Services Limited (BFSL). The shares of BFSL were listed only on the Bangalore Stock Exchange but those were traded on the floor of MSEA under the permitted category between 1.8.2005 and 12.8.2005 when 98.73% of BFSL’s equity owned by its promoters were sold to a si ngle purchaser for Rs.89.28 crores. These transactions in BFSL’s equity were illegal according to the Board since MSEA was not authorized to allow any trading on its floo r but it did permit the trading in BFSL’s equity under the permitted category. In its show cause notice to the Appellants, the Board alleged that the trades of the Appellants, besides being artificial in nature, were actually executed to create a false and mi sleading appearance of trading in MSEA in order to give a colour of authenticity to the illegal trades in BFSL’s equity which, according to the Board was the real reason why the MSEA management allowed trading on MSEA though it was not authorized to do so.
3.The learned counsel for the Appellants stated that they readily agreed to start trading on MSEA since Bimal had offe red to charge lower brokerage and also promised to allow day trading. Admittedly, the Appellants traded on MSEA on the say- so of the broker Rajat whose Director Bi mal is the younger brot her of Appellant no 1.The learned counsel for the respondent Board pointed out that whereas on MSEA their trades were all reversed as is norma lly done by day traders, the Appellants were admittedly long term investors and normally did not engage in day trading. This uncharacteristic trading, according to the l earned counsel, was done at the behest of broker Rajat so that an impression of a la rger volume of trading could be created. According to the learned counsel, the fact that during the period in question all the trades on MSEA other than those in the e quity of BFSL were executed by only two brokers and they had only one client each, can only lead to the conclusion that all these trades were reverse trades and were only meant to generate volumes.
4.In order to arrive at a conclusion as to whether the Appellants could be held responsible for executing these trades, it is necessary to consider the backdrop in which such trades were executed. It is clea r from the material available on record that trading on MSEA, though not permitted by th e Board, had been organized only for the purpose of sale of the shares of BFSL by it s promoters. Such unauthorized trade could only be organized by persons who had aut hority over the management of MSEA and could also ensure smooth operation of the screen based trading system of the exchange. The Officiating Executive Director of MSEA and Bimal, the Director of Rajat and a member of the Council of Management of MS EA, were instrumental in organizing the trades on MSEA in August 2005. Of the tr ades executed on MSEA during that period, those involving shares of BFSL were clearl y genuine in nature where ownership of the shares actually passed from the promoters of BFSL to the purchaser. The trades executed by the Appellants were, however, of a different nature. As brought out in the show cause notice issued to the Appellants by the Board, every single trade executed by the former, with the exception of only a few shares of ACC, were actually reversed and the net position of the Appellants in 18 out of 19 scrips in which they traded was nil. We, therefore, agree with the learned counsel for the Board that these trades were really meant to create an impression that not BFSL shares alone but many other scrips were trading on MSEA and such trading was normal and legal. If the Appellants knew at the time of executing the trades that those we re reverse trades, then obviously they committed a serious wrong which attracts penalty under regulation 4(2)(a) of the FUTP Regulations which reads as under:
4 Prohibition of manipulative, fraudulent and unfair trade practices
(1)………………………………………………………………
…………….
(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 whic h creates false or misleading appearance of trading in the securities market;
………………………………………………………………… ………”
5.Considering the facts and circumstances of the case, we do not think that the Appellants executed the impugned trad es knowingly. A unique feature of the screen-based trading system is that it main tains anonymity of the buyer and the seller and it is not possible for either of them to know at the time of the execution of the trade as to who the counterparty is. This fact can be discovered by the Board or the exchange
on an enquiry after the execution of the trade. The trades of the Appellants in this case had to necessarily reverse because when th ey traded on MSEA on the asking of Bimal, there were only two traders – one on either side and this knowledge cannot be attributed to the Appellants particularly in the absenc e of any material that could lead one to believe otherwise.
In the result, we do not agree with the Board that the Appellants can be held guilty of executing any fraudulent or unf air trade. Accordingly, the appeal is allowed and the impugned order set aside with no order as to costs.
Sd/-
Justice N.K. Sodhi
Presiding Officer
Sd/-
Arun Bhargava
Member
Sd/-
Utpal Bhattacharya
Member
29.9.2008
PW/RHN