BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 125 of 2010
Date of decision: 29.8.2011 Bombay Stock Exchange Limited
25th Floor, P. J. Tower, Dalal Street,
Fort, Mumbai – 400 001. …… Appellant
Versus 1) Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051.
2) Mr. Yogesh Babulal Mehta
106, Padma Society, 164,
S. V. Road, Vile Parle (W),
Mumbai – 400 056.
3) Ms. Smita Nagra
Harison Compound
Near Godrej Petrol pump,
LBS Marg, Vikhroli (W),
Mumbai – 400 079.
4) Atul J. Patira
Hemketu, Maruti Nagar, Airport Road,
Rajkot – 360 001.
5) Rita Patira
Maruti Nagar, Sheri (Street) No. 3,
Opposite Sanidhya Flat, Near Saraswati Shishu
Vihar School, Airport Road, Rajkot – 360 001.
6) Deepak Sheth
“Roshni” Opposite Bhakti Nagar,
Sub-station, Rajkot – 360 002. …… Respondents
Mr. Janak Dwarkadas, Senior Advocate w ith Mr. P. N. Modi, Mr. Faraz Alam
Sagar, Advocates for the Appellant.
Mr. Kumar Desai, Advocate with Ms. Harshada Nagare, Advocate for
Respondent No. 1.
Ms. Sonal, Advocate for Respondent No. 2.
None for Respondent Nos. 3 to 6.
CORAM : Justice N.K. Sodhi, Presiding Officer
P. K. Malhotra, Member
S.S.N. Moorthy, Member
2
Per : Justice N.K. Sodhi, Presiding Officer
This order will dispose of two A ppeals no. 125 and 152 of 2010 both of
which are directed against the common order dated June 30, 2010 passed by the
Securities and Exchange Boar d of India (for short the Board) declaring Yogesh
Babulal Mehta (respondent no. 2 in App eal no. 125 of 2010 and the appellant in
the other appeal and hereinafter referred to as the broker) entitled to receive from
Bombay Stock Exchange Limited (BSE) a sum of ` 12,71,556/- together with
interest on account of the tr ades executed by him on behalf of Smita Nagra,
Atul J. Patira, Rita Patira and Deepak Sheth who shall collectively be referred to
hereinafter as the clients. Before we deal with the issues involved in these
appeals, it is necessary to refer to th e background in which the dispute has risen
between the parties.
- On receiving complaints and other information from the stock exchanges
regarding the unusual price movement in the shares of Amit International Limited
(hereinafter called the company) from25/- on December 18, 1995 to280/- on
February 14, 1996, the Board investigated th e trading in the scrip. Investigations
revealed that abnormal volumes and price rise were created by a group of persons
acting in concert who violated the provi sions of the Securities and Exchange
Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 1995. Pursuant to the enquiries conducted by the
Board, certain persons/entities were found to have rigged the price of the scrip
and they were debarred from deali ng in the securities market. Pending
investigations, the Board had suspended on February 12, 1996 the trading in the
scrip of the company with a view to check the unusual price rise. By order dated
March 27, 1996 the Board directed the stoc k exchanges including BSE to freeze
the proceeds which were received by them from auctions/closing out of the
transactions and this wa s done to ensure that if there was any market
manipulation, the manipulators should not be in a position to receive the ill-gotten
profits arising out of the ma nipulation. Monies, therefore, remained frozen with 3
the exchanges during the investigations. On July 4, 1996 the Board directed BSE
that from the auction proceeds withheld by it, difference between the auction
price and the standard rate and the difference between the close-out price and the
standard rate should not be given to the auction offerors in case of auction process
and the receiving members (stockbrokers) in the case of close-out process and
instead, those amounts be impounded. BSE was further directed to credit the
impounded monies to its Investor Protec tion Fund. The Board also pointed out
that an opportunity of hearing be grante d to all those who were affected by the
impounding of the auction proceeds and th e aggrieved persons were advised to
make written representations to the Board which representations would be dealt
with by a committee constituted by it. BSE issued a notice on July 8, 1996
inviting written representations. - The broker purchased 26,500 shares of the company on behalf of the
clients and it is common ground between the parties that these trades were to be
settled in settlement no. 23 of 1996. In this settlement 1800 shares were delivered
to the broker and there is no dispute between the parties in regard to these shares.
The remaining 24,700 shares were pending de livery and the seller(s) defaulted
since the price of the scrip of the company had been rigged as found by the Board
and trading suspended and the normal proc edure for settling the trades could not
be adopted and it transpired that the auct ion price also did not reflect the true
market price of the scrip. The broker did not get delivery of the shares. Since the
price of the scrip had been rigged and trading suspended, the Board, as already
noticed above, had directed that the di fference between the auction price and the
standard rate and the difference between th e close-out price and the standard rate
be impounded and credited to the Investor Protection Fund. In response to the
notice issued by BSE on July 8, 1996, the cl ients made a claim stating that they
had received the standard rate and were en titled to the difference of the standard
price and close-out/auction pr ice. This claim was made on the basis that the
trades had been executed by them through the broker and that they were entitled
to the amount. This claim of the c lients was considered by the Board and by 4
order dated May 16, 1998 (hereinafter referred to as the 1998 order) the same was
allowed and the amount ordered to be re leased to them. Subsequent to the
passing of this order, the broker also made a representation dated August 29, 1998
before the Board stating that he had traded on behalf of the clients in settlements
no. 22 and 23 of 1996 and requested that the payments made by him towards the
close-out in the settlement s should be refunded to hi m. In other words, the
amount that was ordered to be released in favour of the clients was being claimed
by the broker as well on the plea that he had made the payment from his own
funds and was entitled to the refund and the same could not be given to the
clients. His claim was also considered by the Board and since the broker had a
purchase position of 28,700 shares in settlement no. 23 of 1996, BSE was directed
by order dated June 15, 1999 (hereinafter referred to as the 1999 order) to release
the difference between the purchase price and the standard rate to him. This order
and the 1998 order are contradictory. The 1998 order required BSE to release the
amount in favour of the clients whereas th e 1999 order directed the exchange to
release the amount to the broker. Despit e the 1999 order passed in favour of the
broker, the disputed amount was released to the clients on the basis of the 1998
order. Payment was made to three clients on July 26, 2000 and to one of them on
January 1, 2001. Feeling aggrieved by the 1998 order, the broker filed Appeal no.
45 of 2008 before this Tribunal whic h came up for hearing on September 16, - Noticing the two contradictory orders, the appeal was allowed and the case
remanded to the Board with the following observations:-
“We have heard the learned counsel for the parties and perused the
two orders dated 16.5.1998 and 15.6.1999. When the order dated
16.5.1998 was passed, the appellant was not heard and since the
two are contradictory, we set asid e both of them insofar as they
relate to the appellant and respondents 3 to 6. The case is
remanded to the Board to pass a fresh order in accordance with law
after affording an opportunity of h earing to all the parties. Since
the order dated 16.5.1998 insofar as it relates to respondents 3 to 6
has been set aside, the necessary consequence is that these
respondents must deposit with BSE the money received by them
under the order and the Board will th en decide the rights of the
parties by passing a fresh order in accordance with law. The
appellant and respondents 3 to 6 are both claiming to be entitled to
the said amount. It is n eedless to mention that it shall be open to
the Board to call for such additional records and information from
the parties as it may deem nece ssary for deciding the dispute
between them. Since the matter is quite old we shall appreciate if 5
the Board decides the issue expeditiously and preferably before the
end of the current financial year. There is no order as to costs.”
In pursuance to the remand order, the Board has now passed a fresh order dated
June 30, 2010 holding that the broker is entitled to receive from BSE the disputed
amount of12,71,556/- together with interest th ereon and the latter has been directed to release the amount within two weeks from the date of the order. BSE has filed Appeal no. 125 of 2010 challeng ing this order whereas the broker has filed the other appeal claiming an enhanced amount of15,56,100/- and in the
alternative a sum of ` 13,64,000/- alongwith compound interest at the rate of 24
per cent. - Before we deal with the merits of the dispute, it is necessary to refer to the
settlement process of a stock exchange in so far as it is relevant to the facts of the
case. Every trade executed through the trading system of an exchange is required
to be settled which means payment ha s to be made by all who have made
purchases and shares have to be delivere d by those who have made sales. This
process of settlement of shares a nd money is managed by stock exchanges
through their respective clearing houses. Stock exchanges do not deal with
investors/clients directly and they deal with them onl y through their brokers who
are their members and registered intermedia ries with the Board. In every market
transaction for the purchase of shares, th e client gives money (margin/deposit) to
the stockbroker for buying shares on his behalf and it is the stockbroker who
accordingly places the order and makes the pur chase. It is he who receives the
shares from the stock exchange and passes them on to the client. In other words,
every trade is settled through the stockbrokers and investors have no access to the
stock exchange except for the purpose of dispute resolution through arbitration. It
is pertinent to mention that according to the normal stock exchange procedure
when there is no rigging of the scrip and there is default by the seller in delivering
the securities and the exchange purchases those securities in auction, monies are
taken from the buyer to the extent of the transaction/standard price and from the 6
seller to the extent of the difference between the transaction/standard price and the
auction price and given to those who offer their securities in auction proceedings. - We have heard the lear ned senior counsel on be half of BSE, Mr. Kumar
Desai Advocate on behalf of the Board and Ms. Sonal Advocate appearing for the
broker. The clients have not appeared de spite service by publication in a
newspaper having wide circula tion in the area of their la st known address. It is
not in dispute that the broker had executed trades on behalf of the clients in the
shares of the company during settlements no. 22 and 23 at BSE. The broker had
purchased 27,500 shares of the company on behalf of the clients in settlement no.
23 and these were delivery based transactions. He also had a net sale position of
1000 shares in that settlement and that he received 1800 shares from the market
which were delivered through M/s. Abhishi Investments, the sub-broker. He was,
thus, to receive 24,700 shares during this settlement. His grie vance is that he
neither received the shares nor the amount of13,64,000/- from the BSE which he had paid. It is common case of the parties that for settlement no. 23, BSE had declared a close-out rate of280/- per share when the standard rate was ` 217/-
per share. It is also not in dispute that since the shares were not delivered to the
broker, he received the standard rate a nd his grievance is that the difference
between the close-out rate and the standard rate in respect of 24,700 shares should
also have been given to hi m. Instead, the difference was disbursed to the clients
in terms of the 1998 order in July 2 000 and January 2001. BSE took the stance
that upon receipt of the 1999 order, it had, by its letter dated June 22, 1999,
requested the broker to furnish the necessa ry details and undertaking as per the
standard format to enable it to comply with the said order and credit the
appropriate amount to his account with the Defaulter’s Committee. It is pertinent
to mention here that by order dated December 10, 1996 the broker had been
declared a defaulter by BSE and all his assets came to vest in that committee. It
is BSE’s case that the broker did not fu rnish the necessary details and raised
frivolous contentions and made unwarranted allegations. BSE also pleaded that
the broker never denied the fact that he had carried out the trades on behalf of the 7
clients and that he never disputed their entitlement to receive the said amount.
These pleas were taken by BSE to justif y its action in disb ursing the amount to
the clients. Be that as it may, since both the orders of 1998 and 1999 had earlier
been set aside by this Tribunal, the shor t question now to be decided is whether
the difference between the transaction rate and the standard rate in respect of
24,700 shares is due to the broker or to the clients. We have already noticed that
the broker was to receive 24,700 shares in settlement no. 23 and his case is that he
paid13,64,000 to BSE and that he neither received the delivery of the shares nor the refund of the amount. The fact th at the broker had pa id this amount to BSE has not been denied by the latter. We have already noticed in para 4 above that shares are bought and sold in the market through brokers who are members of the stock exchange(s) and regi stered intermediaries and it is they who deal with the stock exchanges on behalf of their c lients. Once the trade is executed, the stockbroker receives shares from the stoc k exchange and passes them on to the clients. It is he who acts as an interface between the stock exchange and the clients in respect of the clients’ transactions on the stock exchange. For the settlement of trades in the stock exchange which is done through a clearing house monies are received from the buyers and the securities are delivered by the sellers through their respective stockbrokers and the stock ex change does not deal with the parties directly. In the case before us, the broker states that he made the payment of13,64,000/- on behalf of the clients who had not made the payment
to him and this he did to save himself from being declared a defaulter. It appears
from the record that the clients claim that they made the payment through the
broker and BSE does not dispute having re ceived the money from the broker.
Since the shares were not delivered to the broker in the settlement, the money
ought to have been refunded to him. Whether he paid the money from his own
funds or had received the same from th e clients for executing the trades is a
dispute inter se between them and BSE doe s not come in. This inter se dispute
between the broker and the clients can be settled only through the arbitration
mechanism of BSE which is laid down in its rules, bye-laws and regulations. The 8
refunds and the delivery of shares could only be made to the brokers. This is the
manner in which the stock exchanges and th eir clearing houses function. In this
view of the matter, we agree with the w hole time member that the amount had to
be refunded to the broker and not to the cl ients directly. The broker has claimed13,64,000/- which he states he had paid fo r purchasing the shares on behalf of the clients. It was not disputed before us that the difference between the standard rate and the purchase price is51.48 per share and, theref ore, the broker is
entitled to claim a sum of 24,700 x51.48 which works out to12,71,556/- only
and not13,64,000/- as claimed by him. The broker is also making a claim with regard to some trades executed by him in settlement no. 22. Since that claim is not the subject matter of the dispute in the present proceedings, the whole time member rightly rejected the same. Claim in that regard could be made separately. The broker is not entitled to any amount in excess of12,71,556/- as principal
amount together with interest as orde red by the whole time member. The claim
made by him in excess of this amount has been rightly rejected by the whole time
member. In this view of the matter, no fault can be f ound with the impugned
order. - We are also of the view that BS E was not justified in disbursing the
amount to the clients on the basis of the 1998 order when it had already received
the 1999 order requiring it to pay the amount to the broker. We have already
noticed that the payment was disbursed to the clients in July 2000 and on January
1, 2001 whereas the 1999 order was received by BSE sometime in June 1999. On
receipt of this order, BSE ought to have clarified the matter with the Board. The
learned senior counsel appearing for BS E pointed out that the exchange had
sought the details of the purchase of 24,700 shares of the company from the
broker pertaining to settlement no. 23 of 1995-96 and that he refused to furnish
the particulars. It may be so but that is no justification for BSE to disburse the
amount to the clients on the basis of th e 1998 order. The details of the purchase
as sought from the broker were with the exchange because, admittedly, the trades
were executed on BSE. It appears that BSE did not bother to check its own 9
records nor that of the clearing house and sought the information from the broker.
The broker was also remiss in not furnishing the details but disbursement of the
amount to the clients could not be justified. In these circumstances, BSE must
make payment to the broker and it will be open to it to recover the same from the
clients in accordance with law.
In the result, both the appeals fail and they stand dismissed with no order
as to costs.
Sd/-
Justice N. K. Sodhi
Presiding Officer
Sd/-
P. K. Malhotra
Member
Sd/-
S. S. N. Moorthy
Member
29.8.2011
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