BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI

Appeal No. 192 of 2011

Date of Decision : 15.02.2012

Shri Kamlesh R Shah
Prop. of M/s. Ramanlal D. Shah
123 & 217, P J Towers,
Dalal Street, Fort,
Mumbai – 400 001.

…Appellant

Versus

The Whole Time Member,
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.
Ms. Daya Gupta, Advocate with Ms. Harshada Nagare, Advocate for the Respondent.

CORAM : P.K. Malhotra, Member
S.S.N. Moorthy, Member

Per : P.K. Malhotra, Member

The appellant before us is a stock broker of the Bombay Stock Exchange Ltd.
(BSE) registered with the Securities and Exchange Board of India (the Board). The
present appeal has been filed by the appellant against the order dated October 13,
2011 passed by the whole time member of the Board holding the appellant guilty of
violating the provisions of regulation 7 read with clause A(2) of the code of conduct
as specified in Schedule II of the Securities and Exchange Board of India (Stock
Brokers and Sub-brokers) Regulations, 1992 (stock brokers regulations) and
prohibiting him from taking up new clients for a period of one month.

2. The facts of the case, in brief, are that the Board carried out investigations into
   the dealings of shares of Sawaca Communication Limited (the company) from 2
   October 4, 1999 to December 30, 1999. It was noted by the Board that price of the
   scrip had increased from 19.35 as on October 1, 1999 to 106 as on January 4,
3. There was nothing extraordinary in the fundamentals of the scrip of the
   company nor was there any major corporate development which could have justified
   the rise in the price of the scrip. The appellant traded in the scrip on behalf of
   Mayekar Investment Pvt. Ltd. (for short ‘Mayekar’) and this trading accounted for
   80% of the total trades. The Board came to a prima-facie conclusion that the appellant
   had aided and abetted Mayekar in creating artificial market by putting huge trades
   and has failed to exercise due care and diligence in executing these trades thereby
   violating regulation 4 of the Securities and Exchange Board of India (Prohibition of
   Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations,
   1995 (for short the FUTP regulations). The Board also noted that the appellant had
   allowed Mayekar to act as unregistered sub-broker in violation of rule 3 of the stock
   brokers regulations and hence violated regulation 7 read with clause A(2) of the code
   of conduct prescribed for the stock brokers under the stock brokers regulations.
4. The Board initiated enquiry proceedings by appointing an enquiry officer
   who, by his enquiry report dated February 8, 2005, held the appellant guilty of
   violating the provisions of regulation 4 of the FUTP regulations and code of conduct
   under the stock brokers regulations and recommended suspension of his license as a
   stock broker for a period of two months. In pursuance of the recommendations of the
   enquiry officer, a show cause notice dated March 22, 2005 was issued to the appellant
   asking him to show cause why an appropriate action including imposition of penalty
   be not taken against him. The appellant was also afforded a personal hearing. By his
   letter dated April 25, 2005 the appellant filed a detailed reply denying the charges.
   After affording personal hearing, the whole time member of the Board, vide
   impugned order dated October 13, 2011, though exonerated the appellant of the
   charge of violating FUTP regulations, held him guilty of allowing Mayekar to act as
   an unregistered sub-broker violating the code of conduct under the stock brokers
   regulations and prohibited the appellant from taking up new clients for a period of
   one month. Hence, this appeal. 3
5. We have heard the learned counsel for the parties who have taken us through
   the records. It was submitted by the learned counsel for the appellant that Mayekar
   was its client since 1998 and it applied for certificate of registration as sub-broker
   with BSE on June 18, 1999. The registration was received on May 24, 2000. During
   the pendency of the application for registration, Mayekar was allowed to act as sub-
   broker under proviso to rule 3 of the sub-broker regulations, as in force at the relevant
   time. In support of his submission, counsel for the appellant relied on this Tribunal’s
   order dated December 20, 2011 in Appeal no. 164 of 2010 in the case of M/s. Aspi
   Noshir Gandhi vs. Securities and Exchange Board of India. The relevant portion of
   the order relied upon by the learned counsel for the appellant reads as under:
   “4. There is yet another reason why the first charge
   cannot be sustained. In the year 2004 we had on the statute
   book Rule 3 of the Securities and Exchange Board of India
   (Stock Brokers and Sub-Brokers) Rules, 1992 which read
   as under:-
   “No stock-broker or sub-broker shall buy,
   sell, deal in securities, unless he holds a
   certificate granted by the Board under the
   Regulations:
   Provided that such person may continue to
   buy, sell or deal in securities if he has made
   an application for such registration till the
   disposal of such application.”
   It is the case of the appellant that he had applied to the
   Board for registration as a sub-broker on the NSE on
   December 12, 2002 and his application was pending in the
   year 2004 when he executed the trades on NSE. His
   argument is that the proviso to Rule 3 which was then in
   force enabled him to trade as a sub-broker during the
   pendency of his application for registration. There is merit
   in this submission as well. These Rules were in force in the
   year 2004 and were repealed only w.e.f. September 7,
6. The proviso to Rule 3 clearly enabled a person to
   deal as a sub-broker if he had made an application for
   registration which was pending. The adjudicating officer
   has rejected this argument on an erroneous ground.
   According to the adjudicating officer, the Rules were
   applicable only to brokers and sub-brokers who had been
   trading prior to the year 1992. We find no warrant for such
   an interpretation. The learned counsel appearing for the
   Board pointed out during the course of the hearing that the
   appellant could not get the benefit of the proviso to Rule 3
   because his application had been rejected by the Board on
   the same day when it was received. We do not find any
   mention of the rejection of the application in the impugned
   order. We, therefore, hold that the first charge against the
   appellant cannot be sustained.” 4
   On the other hand, the learned counsel for the respondent Board submitted that the
   appellant’s case is distinguishable on facts and the order of this Tribunal in Aspi
   Noshir Gandhi’s case cannot be applied to the facts of the present case. In the case of
   Aspi Noshir Gandhi, the appellant was already registered as a sub-broker on BSE as
   well as on Calcutta Stock Exchange (CSE) and alleged to have traded on the National
   Stock Exchange (NSE) without being registered as sub-broker on the NSE. It is in
   this background that this Tribunal held that the appellant’s case is covered by proviso
   to rule 3 of the stock broker regulations. In the instant case, Mayekar who had traded
   on BSE was not registered as a broker with any of the stock exchanges and hence
   cannot be treated at par with the appellant in Aspi Noshir Gandhi’s case.
7. We have considered the rival submissions and are inclined to agree with the
   learned counsel for the respondent Board. In Aspi Noshir Gandhi’s case the issue was
   whether having obtained registration as sub-broker on BSE and CSE, it was necessary
   for the appellant to get it registered as a sub-broker on NSE for executing trades. It is
   in this context that, relying on a Division Bench judgment of Delhi High Court in the
   case of NSE Member vs. Union of India [2006(133) COMP Cases 504], it was
   observed that single registration was enough for the appellant to function as a stock
   broker on all other stock exchanges. In the case in hand, Mayekar was not registered
   with any of the stock exchanges as sub-broker and the appellant allowed him to trade
   as its sub-broker. Therefore, the Board was right in holding the appellant guilty of
   violating code of conduct of the stock brokers regulations when it permitted Mayekar
   to trade as a sub-broker. We, therefore, uphold the findings of the Board in this
   regard.
8. The next argument of the learned counsel for the appellant is with regard to
   the quantum of punishment. It was submitted by the counsel that under similar
   circumstances, the Board had let off the delinquent with warning / censure whereas in
   the case of the appellant, penalty of prohibition from taking new clients for a period
   of one month has been imposed. According to the learned counsel for the appellant
   the penalty is disproportionate to the gravity of violation and is not consistent with 5
   treatment given by the Board to other intermediaries who were found to have
   committed similar violations. In support, he has relied on the order passed by the
   Board on January 18, 2006 in the case of M/s. Prabhudas Lilladher Private Limited,
   order dated October 19, 2011 in the case of Jyotish Bhogilal Stock Brokers Private
   Limited and this Tribunal’s order dated January 29, 2004 in Appeal no. 102 of 2003
   in the case of Prakash K. Shah Shares & Securities Pvt. Ltd. vs. Securities and
   Exchange Board of India. He has also placed on record copies of certain press
   releases of the Board where, for similar violation the delinquents have been let off
   with warning. We have perused a few orders of warning passed by the respondent and
   these are not disputed by the learned counsel for the Board. Two orders viz. order
   pertaining to M/s. Prabhudas Lilladher Private Limited and Jyotish Bhogilal Stock
   Brokers Private Limited pertain to the same scrip and same period of investigation.
   The nature of violation alleged is also identical. It is expected that the regulator will
   give similar treatment to the persons / market intermediaries who are found to have
   committed similar violations. Nothing has been brought on record to show as to why
   appellant deserves a harsh punishment. The consequence of the punishment imposed
   on the appellant is far-reaching as compared to punishment meted out to other
   similarly placed persons.
9. Taking into account the punishment imposed by the Board in more or less
   similar cases, we feel it appropriate to modify the penalty to that of warning. The
   impugned order is modified accordingly with no order as to costs. Sd/- P.K. Malhotra Member Sd/- S.S.N. Moorthy Member </code></pre>15.02.2012
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