BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 76 of 2012

Date of Decision : 11.05.2012

H.J. Securities Pvt. Ltd.
24/26, Cama Building,
Dalal Street, Fort,
Mumbai – 400 001.

…Appellant

Versus

Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai – 400 051. …Respondent

Mr. J.J. Bhatt, Advocate with Mr. Pratham Masurekar, Advocate for the Appellant.
Mr. Kumar Desai, Advocate with Mr. Mihir Mody and Mr. Mobin Shaikh, Advocates
for the Respondent.
CORAM : P.K. Malhotra, Member & Presiding Officer ( Offg.)
S.S.N. Moorthy, Member

Per : P.K. Malhotra

This order will dispose of two Appeals no. 76 and 81 of 2012 which arise out
of identical facts. The appeals were hear d together and, with the consent of the
parties, are being disposed of by a common order. For the sake of convenience, the
facts are being taken from Appeal no. 76 of 2012.

2. The appellant company is a stock broker having its registered office at
   Mumbai. It is said to be doing proprietary trading from 2 locations through
   19 terminals in Mumbai. The terminals are operated by ‘jobbers’ authorized by the
   appellant. It traded in the scrip of Edserv Softsystems Ltd. (the company) on the first
   day of its listing on March 2, 2009 and for a few days thereafter. Since price of the
   scrip saw an upward movement, the Bombay Stock Exchange Ltd. and the National 2
   Stock Exchange of India Ltd. carried out investigations for the period from
   March 02 – 06, 2009 and March 02 – 09, 2009 respectively into the trading of the
   scrip. Subsequently, the Securities and Exch ange Board of India (the Board) also
   carried out investigations and noted that the appellant and two other brokers traded in
   the scrip in their own account constituting about one-third of the total trades on the
   day of listing i.e. March 2, 2009. It was al so noted by the Board that these three
   brokers executed self trades resulting in violation of Regulation 3 and 4 of the
   Securities and Exchange Board of India (P rohibition of Fraudulent and Unfair Trade
   Practices relating to Securities Market ) Regulations, 2003 (FUTP regulations) and
   also violation of code of conduct for stock brokers as prescribed in Schedule II under
   Regulation 7 of the Securities and Exchange Board of India (Stock Brokers and Sub-
   Brokers) Regulations, 1992. The details of th e trades executed by the three brokers
   which constitute approximately one-third of the total trades, as given in the show
   cause notice, are under:
   Broker
   (Client)

Gross
Purchase
(GP)

GP as
% of
Traded
Qty.

Avg.
Purchase
Rate

Gross Sale
(GS)

GS as
% of
Traded
Qty.

Avg.
Sell
Rate

Net
buy/
(Sale)

No. of
BUY
trades
with
Q = 1
share

No.
of
SELL
trades
with
Q = 1
shares
OPG
(Own)
64,16,716 18.81 112.27 64,16,716 18.81 112.39 0 4523 2860

HJSL
(Own)
28,33,872 8.31 110.56 28,33,872 8.31 110.62 0 2011 1206

MEPL
(Own)
21,30,360 6.25 106.60 21,30,360 6.25 106.60 0 1607 868

Total 1,13,80,948 33.37 1,13,80,948 33.37 0
The summary of the alleged fictitious trad es, as executed by the appellant, is also
given in the show cause notice as under:
Member
(Client) Date Buy Qty.
Self Trades
(No. of
shares)

Self Trades
as a % of
total buy by
client

Total traded
Qty. in the
scrip on the
day

Self Trades
as a % of
total traded
qty in the
scrip on the
day

HJSL
(Own)

March 02, 2009 28,33,872 2,00,725 7.08% 3,41,04,135 0.59%
March 03, 2009 2,68,183 23,036 8.59% 42,19,116 0.55%
March 06, 2009 1,38,362 1,215 0.88% 36,13,192 0.03%

3. A show cause notice dated June 24, 2011 was issued to the appellant asking it
   to show cause as to why enquiry should not be held against it and penalty imposed for
   the aforesaid violations. The appellant submitted its reply dated July 18, 2011 3
   denying the allegations and submitted that on March 2, 2009, when the scrip of the
   company was listed on the stock exchanges, 19 jobbers of the appellant traded on its
   behalf in the scrip of the company from di fferent terminals at different locations and
   each jobber did transactions according to hi s own judgment in the course of his
   regular trading activity. There was no cr oss connection in putting the buy and sell
   orders. The jobbers placed orders from their terminal and they had no knowledge for
   orders placed by other jobbers at different terminals. In some cases, the buy order of
   the same quantity placed by one jobber matche d at the same time with the sell order
   by another jobber and the order got execute d through online tradi ng process. There
   was no intention to execute fictitious trades . All the trades executed by the appellant
   were proprietary in nature and the appe llant had no connection either with the
   promoters or directors of the company. Th e alleged fictitious self trades which
   matched on the day of listing are only to th e extent of 0.59% of the total traded
   quantity on the day of listing which is an insignificant percentage keeping in view the
   total volume of trades and the fact that trades were being entered through 19 different
   terminals. The explanation offered by the appellant was not accepted by the Board
   and the adjudicating officer, by the impugned order, held the a ppellant guilty of
   violating Regulation 3(a), (d) and 4(1), 4(2) (a) and (g) of the FUTP regulations and
   code of conduct for stock brokers as prescrib ed in Schedule II of the stock broker
   regulations and imposed a penalty of 3,50,000 under section 15 HA and 15 HB of the Securities and Exchange Board of India Act, 1992 (the Act). Under similar circumstances, the appellant in Appeal no. 81 of 2012 also traded in the same scrip adopting the same modus operandi and a consolidated penalty of 1,50,000 has been
   imposed upon it. Hence these appeals.
4. We have heard Mr. J.J. Bhatt, learned counsel for the appellants and
   Mr. Kumar Desai, learned counsel for the respondent Board who have taken us
   through the records. The trades as mentioned in the show cause notice and executed
   by the appellant are not disputed. The only defence advanced by learned counsel for
   the appellant is that the impugned trades were carried out by 19 jobbers of the
   appellant in appellant’s pro-account and su ch trading from different terminals is 4
   permitted by the stock exchange. In support, learned counsel for the appellant placed
   on record extract from the inspection manual of the Bombay Stock Exchange
   containing instructions regarding pro-account trading. The said instructions, issued in
   2003, inter alia, provide that in case any member-broker requires the facility of using
   own account through trading terminals from more than one location, such member-
   broker shall be required to submit an undertaking to the BSE stating the reason for
   using the own account at multiple locations and the Exchange may, on case to case
   basis after due diligence, consider extendi ng the facility of allowing use of own
   account from more than one location. It is th e case of the appellan t that vide letter
   dated April 24, 2009 (copy placed on record), th e appellant had furnished details of
   the terminals from where the appellant wished to avail of the facility of placing order
   on pro-account. It was, therefore, submitted by the learned counsel for the appellant
   that since he had placed orders in the scrip through his pro-account operating through
   jobbers through different termin als, the possibility of so me of the trades getting
   matched is not ruled out and such percentage is only 0.59% of the total trades
   executed by the appellant which cannot be considered to be objectionable. There was
   no malafide intention on the part of the a ppellant in executing these trades and hence
   the appellant cannot be held guilty of violating the provisions of FUTP regulations or
   the code of conduct prescribed for the stock brokers.
5. On the other hand, learned counsel for the Board submitted that the facility
   given by the stock exchange of using own account through trad ing terminals from
   more than one location has been misused by the appellant by executing trades through
   jobbers who are independent day traders. Learned counsel for the respondent Board
   has also drawn our attention to the standard format of the agreement entered into by
   the appellant with various operators, who are referred to by the appellant as ‘jobbers’
   and submitted that as per the agreement the relationship between the appellant and the
   operator is not one of employe r-employee or that of broker, sub broker or that of a
   broker remisier / authorized person. It is in fact a syst em devised by the appellant by
   which he has permitted these operators to use its account for the purpose of sharing
   profit which does not fall within the sche me of pro-account trading. A similar 5
   modality has been adopted by some other brokers too which has resulted in the
   manipulation of the scrip. If such a trading is allowed in pro-account through various
   terminals to the brokers, the possibility of a large number of self trades being
   executed and giving a wrong impression about th e trading of the scrip in the market
   to lay investors is not ruled out. Such an arrangement cannot be permitted as it
   breaches the regulatory framework established by the Board.
6. We have considered the rival submissi ons and are inclined to agree with the
   view expressed by learned counsel for the Board. The modus-operandi of the
   appellant in operating through the 19 jobbers from different locations has resulted in
   fictitious trades / self trades where the buyer and the seller are the same party. Such
   trades create artificial volume in the tr aded scrip and send wr ong signal to the lay
   investor with regard to trading in the scrip. The Board ha s come to a definite finding
   that the appellant had executed self trad es on the day of listing for 2,00,725 shares
   which was 7.08% of its total quantity i.e. one in every fourteen trades of the
   appellant’s total buy quantity on that day was a self trade on its proprietary account in
   terms of volume. Similar is the situation on the sale side. It is further noted by the
   Board that trading pattern in the subsequent day also reflects that one out of eleven
   trades of the appellants’ total buy quantity was a self trad e on its proprietary account
   in terms of volume. This finding of the Boar d is not disputed by the appellant. If the
   appellant was operating through jobbers from different terminals, he should have
   placed some mechanism in place to ensure that his trades do not result in self trades.
   Simply because the number of such self tr ades is not large by itself cannot justify
   execution of self trades. The appellant is free to adopt any business model but he has
   to ensure that whatever business model he adopts, it is in conformity with the
   regulatory framework. Since the business model adopted by the appellant has resulted
   in self trades which are considered to be fraudulent, we cannot find any fault with the
   impugned order which has held the appellant guilty of violating the provisions of
   FUTP regulations as well as code of conduct for the stock brokers. We are, therefore,
   not inclined to interfere in the matter. 6
7. It was then argued by learned counsel for the appellant that penalty imposed
   under section 15 HA and 15 HB of the Act is grossly unreasonable and it does not
   have any nexus with the purported gravity of the charge of fictitious / self trades in
   the scrip of the company. The appellant is a stock broker and he understands the
   implication of his actions well. Self trades, which implies the trades in which both
   buyer and seller are the same party and doe s not result in chan ge of beneficial
   ownership are fictitious in nature and they create artificial volume in the scrip sending
   wrong signal to the lay investor about trading in the scrip. A person found to be guilty
   of violating FUTP regulations can be imposed a penalty of 25 crore or three times the amount of profit made, whichever is higher, under Section 15 HA of the Act. However, the Board has imposed a penalty of 3 lacs only. Similarly for violation of
   code of conduct for stock brokers, a penalty which may extend to 1 crore can be imposed under section 15 HB of the Act. Ho wever, the Board has imposed a penalty of 50,000 only. Similarly, in Appeal no. 81 of 2012, the Board has imposed a
   penalty of 1 lac and 50,000 under section 15 HA and 15 HB of the Act on the
   appellant. In the facts and circumstances of the case, we find the penalty imposed by
   the Board on the two appellants to be just and reasonable.

In the result, both the appeals fail and are dismissed with no order as to costs.

 Sd/- 
      P.K. Malhotra 
                      Member & 

Presiding Officer ( Offg.)

                Sd/-  
                      S.S.N. Moorthy  
                  Member 

11.05.2012
Prepared and compared by:
msb