BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 176 of 2011

                                 Date of decision: 25.11.2011 

SMC Global Securities Limited
11/5B, Shanti Chambers,
Pusa Road,
New Delhi – 110005.

                               ……Appellant 

Versus
The Adjudicating Officer,
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai – 400 051. …… Respondent
Mr. Prakash Shah, Advocate with Mr. Prabhakar Kengar, Advocate for the
Appellant.
Dr. Poornima Advani, Advocate with Mr. Ompr akash Jha, Ms. Amrita Joshi,
Advocates for the Respondent.
CORAM : P. K. Malhotra, Member
S. S. N. Moorthy, Member
Per : P. K. Malhotra, Member
Challenge in this appeal is to the order dated July 29, 2011 passed by the
adjudicating officer of the Securities and Exchange Board of India (for short Sebi)
imposing a monetary penalty of ` 50,000/- under section 15HB of the Securities
and Exchange Board of India Act, 1992 (f or short the Act) on the appellant for
violating Clause A(2) of the Code of Conduct for stock broke rs prescribed in
Schedule II under regulation 7 of the Secu rities and Exchange Board of India
(Stock Brokers and Sub-brokers) Regulations, 1992 (for short the Regulations).

2. The appellant is a company registered under the Companies Act, 1956 and
   is into the broking business since 1995. It claims to have Pan India presence
   rendering service to more than 2 lac i nvestors and on an average handling over 2
   3.5 lac trades per day. In the course of its share broking activity, it had opened
   share trading account of one Ms. Abhilash Sharma (Abhilash) on October 4, 2007
   and of one Mr. Aditya Kumar Shar ma (Aditya) on January 19, 2008. It is
   claimed by the appellant that it had ta ken all reasonable steps to assess the
   background, genuineness, financial s oundness and trading cum investment
   objectives of the said clients. These cl ients were introduced to the appellant by
   Mr. Bhagwati Prasad Lohia, one of its su b-brokers, who is also registered with
   Sebi.
3. Sebi conducted investigations in respect of trading activities of Aditya and
   Abhilash during the period from January 1, 2008 to May 31, 2008. It was noted
   that both of them had traded through Mr. Bhagwati Prasad Lohia, sub-broker of
   the appellant. Investigations also revealed that Aditya and Abhilash were trading
   consistently with three investment companies namely Amar Investments Limited,
   Rishra Investments Limited and Shibir India Limited and a related entity, namely,
   Ms. Shakuntala D. Wadhwa Sharma. Ad itya and Abhilash had dealt in the
   securities through their sub-broker on the Bombay Stock Exchange (BSE) as well
   as National Stock Exchange (NSE). It wa s alleged that Aditya and Abhilash had
   executed large value transactions in the securities market at BSE and NSE which
   were not commensurate with their income level as disclosed in the KYC details.
   According to Sebi, the broker and the sub-broker had allowed these clients to take
   large positions in the market which were not consistent with their financial
   position. Sebi observed that trades of thes e clients resulted in artificial volumes
   and price manipulation in the various scri ps dealt with by them. The broker and
   sub-broker exhibited negligence and lack of due diligence as they allowed these
   clients to take large positions resulting into artificial volumes and price
   manipulation of the scrip. Sebi came to a prima facie conclusion that as a broker,
   the appellant had violated provisions of Clause A(1) to A(5) of the Code of
   Conduct specified in Schedule II of the Regulations. Accordingly, it issued a
   show cause notice dated Ma y 10, 2011 calling upon the ap pellant to show cause
   as to why an enquiry should not be held against it under the Securities and 3
   Exchange Board of India (Procedure for Holding Enquiry and Imposing a Penalty
   by the Adjudicating Officer) Rules, 1995. The appellant replied to the show
   cause notice denying the allegations leve lled against it. After affording an
   opportunity of personal hearing, the adjudica ting officer held that though there is
   no nexus established between the broker and the clients, the fact remains that the
   clients executed trades from the terminal of the broker and the responsibility of
   fair conduct in the market is on all the participants to the trade including the
   broker. The adjudicating officer furthe r observed that although intention of the
   broker is not apparent vis-à-vis the trades of the clients, the broker cannot escape
   responsibility for the manipulative trades that have been executed through its
   terminal on behalf of both the clients. He has, therefore, come to the conclusion
   that the appellant has failed to exercise due care and diligence in discharging its
   duties and found it guilty of violating Clause A(2) of the Code of Conduct as
   specified in Schedule II of the Re gulations and imposed a penalty of ` 50,000/-.
   Hence this appeal.
4. We have heard the learned counsel for the parties who have taken us
   through the record and the impugned order. On a query made by us, we were told
   by the learned counsel for the respondent th at Sebi initiated separate proceedings
   against the two clients for manipulative tr ades executed by them as also against
   the sub-broker through whom the trades were executed. We are not concerned
   with those proceedings in this appeal. The charge levelled against the broker in
   the show cause notice is that it has exhibited negligence and lack of due diligence
   as it has allowed the clients to take large positions which are beyond their
   declared income. As per KYC details, the annual income of Aditya was reported
   to be in the range of 5-10 lacs and that of Abhilash was 1-5 lacs. However,
   the clients have taken large positions in the market running into lacs of rupees
   which were not consistent with their financial standing. The adjudicating officer
   has observed that both the clients had neve r defaulted in their pay in and delivery
   obligations and that there is no nexus be tween the broker and the clients and also
   the intention of the broker is not appare nt vis-a-vis the trades executed by these 4
   clients. Having said so, he goes on to hold that the broker cannot escape
   responsibility for the manipulative trades that have been executed through its
   terminal on behalf of its clients.
5. We are not inclined to agree wi th the conclusion arrived at by the
   adjudicating officer. Admittedly, the appellant had installed trading terminal at
   the sub-broker’s office at Kolkata and th e sub-broker used to place orders on the
   trading terminal as per the instructions of its clients. The orders/transactions of
   the two clients in question were also executed from the terminal of the sub-broker
   at Kolkata. Both the clients used to place orders themselves and have executed
   both intra day and delivery based transacti ons and also executed trades in F&O
   segment as general investors in the norma l course of business and have met with
   their margin and pay in obligations. Admittedly, the appellant has no relationship
   either with the sub-broker or the clie nts except the professional relationship.
   Regulation 7 of the Regulations prescribes that stock broker hol ding a certificate
   shall at all times abide by the Code of Conduct as specified in Schedule II.
   Clause A(2) of the Code of Conduct manda tes that a stock br oker shall act with
   due skill, care and diligence in the conduct of all its business. Such due skill, care
   and diligence can only mean that broker shall act in such a way that a person of
   ordinary prudence would act in the normal circumstances in carrying out activities
   and functions relating to its business and will remain careful and diligent so that
   nothing untoward happens in th e market or in the activit ies connected with it.
   The appellant is a broker and hence will welcome orders for trading in the scrips
   by his clients. It is not in dispute th at there was no defau lt on the part of the
   clients in meeting with the market obligations. The two clients were squaring off
   their positions in accordance with the laid down norms at the relevant time. There
   was nothing remiss in the conduct of th ese clients that mi ght have aroused
   suspicion that they were indulging in some manipulation. There is nothing on
   record to suggest that the appellan t was in any manner involved in the
   manipulation that might have been done by the clients. In fact, there is no
   allegation in the show cause notice attri buting knowledge of manipulative trades 5
   to the appellant. The transactions were carried out by the su b-broker who is also
   responsible and bound by the c ode of conduct prescribed in the Regulations.
   There was nothing untoward in the trades to generate alert on the risk monitoring
   system. In the absence of any alerts, th e appellant who is having a large client
   base probably could not anticipate any foul play by the clients. We are, therefore,
   of the view that, in the facts and circ umstances of the case, the adjudicating
   officer erred in holding the appellant guilty of violating clause A(2) of the Code
   of Conduct specified in Schedule II of the Regulations.
   In the result, the appeal is allowed and the impugned order set aside. No
   costs.
   Sd/-
   P. K. Malhotra
   Member
   Sd/-
   S. S. N. Moorthy
   Member
   25.11.2011
   Prepared & Compared by
   ptm

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