BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Appeal No. 73 of 2012
Date of decision: 25.07.2012 Subhkam Securities Private Limited
a company incorporated under the
Companies Act, 1956, and having
its registered office at 4th floor,
International House, 16, Maharshi Karve
Road, Churchgate, Mumbai – 400 020. …Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-1A, G-Block,
Bandra Kurla Complex,
Mumbai – 400 051. … Respondent
Mr. Somasekhar Sundaresan, Advocate with Mr. Ravichandra S. Hegde, Advocate
for the Appellant.
Mr. Kumar Desai, Advocate with Mr . Mobin Shaikh, Advocate for the
Respondent.
Coram : P. K. Malhotra, Member & Presiding Officer ( Offg .)
S.S.N. Moorthy, Member
Per : P. K. Malhotra
This appeal has been file d against the order dated 2 nd March, 2012 passed
by the whole time member of the Securitie s and Exchange Board of India (for
short the Board) holding the appellant gui lty of violating the provisions of
regulations 4(b) and (d) of the Securities and Exchange Board of India (Prohibition
of Fraudulent and Unfair Trade Practic es relating to Securities Market)
Regulations, 1995 (FUTP Regulations) and cl auses A(2) and (3) of the Code of
Conduct prescribed for the stock brokers in Schedule II under Regulation 7 of the
Securities and Exchange Board of I ndia (Stock Brokers and Sub-Brokers)
Regulations, 1992 (stock brokers regulations).
- The facts of the case, in brief, ar e that, the appellant is a stock broker
registered with the Securities and Exch ange Board of India and is carrying on
activities of stock broking since 1 999. In and around June, 2001, the Board 2
conducted investigation into the dealings in the scrip of Mascon Global Limited
(for short the company) for the period between August, 1999 to March, 2000 and
December, 2000 to March, 2001. Investigat ions conducted by the Board in the
scrip of the company revealed that dur ing the period from December, 2000 to
March, 2001, there was price fluctuati on from a high of Rs.505.60 to a low of
Rs.84. The appellant is alleged to have ex tensively traded in the scrip of the
company on behalf of its six clients, vi z., Subhkam Monetary Services Limited,
Khazana Tradelink Private Limited, Asian Equity Investment Limited, Pushpak
Securities Private Limited, Sweet Solution Limited, Milton Securities Limited. It
was further alleged that these clients of the appellant were
related/connected/associated to Ketan Pare kh and transactions in the scrip of the
company were in tandem with other group /associates companies of Ketan Parekh
to deflate the price of th e scrip and create artificia l demand. The appellant is
alleged to have traded to the extent of buying 7,54,633 shares and selling 7,89,765
shares. It was further noted that the price matched in a synchronized manner and
the appellant executed cross trades for a total quantity of 4,79,285 shares during
the investigation period. Accordingly, a show-cause notice dated September 25,
2008 was issued to the appellant under regulations 25 and 38 of the Securities and
Exchange Board of India (Intermediarie s) Regulations, 2008 (the intermediary
regulations) calling upon it to show cause as to why its certificate of registration
should not be suspended or cancelled a nd why any other action as provided under
the said regulations may not be taken. The appellant replied to the show-cause
notice vide its letter dated October 20, 2008, denying the allegations. An enquiry
was held against the appellant and the designated authority, by its report dated July
21, 2009, recommended that certificate of registration of the appellant be
suspended for a period of two weeks. A copy of the report was made available to
the appellant vide letter dated August 31, 2009. Th e appellant again denied the
charges by its letter date d April 19, 2011. After considering the reply submitted
by the appellant, the whole time member of the Board, by his order dated March 2,
2012, observed that inference about the nexus between counter party
clients/brokers for the trades of its cl ients is not supported by any proof.
According to whole time member, the i nquiry report makes a reference to the 3
nexus between the clients of the noticee and their counter party clients but does not
explain as to what was the nexus. Therefore, this charge was dropped by the whole
time member. However, he found the appe llant guilty of executing synchronized
trades on behalf of its clients thereby violating the provisions of regulations 4(b)
and (d) of the FUTP Regulations and clau ses A(2) and (3) of the code of conduct
under the stock brokers regulations and suspended the certificate of registration of
the appellant as a stock broker for a period of two weeks. Hence this appeal. - We have heard Mr. Somasekhar S undaresan, Advocate for the appellant
and Mr. Kumar Desai, Advocate for th e respondent-Board. After hearing the
learned counsel for the parties and perusi ng the material available on record, we
are of the view that the appeal must succeed for the reasons given hereunder. The
charge levelled against the appellant was that the clients of the appellant, on whose
behalf the trades were executed, were the Ketan Parekh entities who have actively
traded in the scrip by creating huge volumes to indulge in rampant manipulation of
price and volume of the scrip of the company. The whole time member, after
considering the material on record, has come to a definite finding that there is no
nexus of the appellant or his clients with Ketan Parekh and the entities related to
him. It has been specifically observed by him that the inference about the nexus is
not supported by any proof and in the ab sence of the same, it is difficult to
conclude that the noticee was aware of the counter party clie nts/brokers for the
trades of its clients. The only other charge, which according to the whole time
member stands proved, is that the trades of the appellant were being matched in a
synchronized manner and that it had ex ecuted cross trades. The explanation
offered by the appellant that the reason for execution of cross trades was that it
knew both the parties has not been accepted by the whole time member observing
as under:-
“I note that the scrip of Mascon was illiquid at the relevant
point of time and it is underst ood that it would be difficult
to get the counterparties to such large trades. Further, these
large trades had accounted for a considerable quantity of
the total volume of shares traded in the scrip on subject
dates as seen from the BSE website. In view of this, it can
be concluded that these cross trades in the scrip were
arranged in such a manner that the orders will match with
the specified counterparties.” 4
While arriving at this conclusion, the whol e time member has totally ignored the
submissions made by the appellant that the alleged trades were carried out only for
four days during investigation period a nd were spread over a period of three
months with substantial time difference between trades. The buyers and sellers for
each of the four trades were different enti ties and there was no reversal of trades.
The transactions were executed at the prevailing market price and there is no
allegation of price manipulation. The trad es were carried out on the floor of the
exchange and there was transfer of benefi cial ownership in al l the transactions.
Assuming that the trades were synchronized, the fact remains that the trades were
executed over a period of three months and there is no allegation that it affected
the price of the scrip. It is an admitted position that synchronized trades per se are
not illegal. It is only when synchroni zed trades are executed with a view to
manipulate the price of the scrip that the provisions of the FUTP Regulations will
get attracted. All these trades were executed on behalf of the clients and no action
is said to have been taken by the Board against these clients. In view of the
foregoing discussions, we are of the view that in the facts and circumstances of
this case, the charge of vi olating the provisions of regul ations 4(b) and (d) of the
FUTP Regulations is not made out. - The appellant has also been found gu ilty of violating clauses A(2) and (3)
of the Code of Conduct prescribed fo r the Stock Brokers in Schedule II under
regulation 7 of the Stock Broker Regulati ons. While arriving at this finding, the
whole time member in para 11 of his order has observed as under:-
“11. I note that the broker is expected to be cautious
when trading takes place hitherto in the scrip which is not
so liquid and that too placing orders for the clients and
trading in substantial volume. I note that the profile of the
company whose shares are being traded call for a higher
level of diligence on the part of the broker. The noticee
being a responsible market intermediary should have
allowed the orders to match in the system on their own, so
that the public at large could have availed the benefit of
such orders as otherwise the volumes in the scrip of
Mascon has remained very thi n. I note that interference
with the market mechanism is not in the interest of
securities market. Thus, I find that the noticee has failed to
perform its duties as specified in the code of conduct for
stock brokers in the Broker Regulations.”
5
The aforesaid clauses of the stock brokers regulations read as under:-
“CODE OF CONDUCT FOR STOCK BROKERS
A. General.
(1) ………………………………………………
(2) Exercise of due skill and care : A stock-broker shall
act with due skill, care and diligence in the conduct of
all his business.
(3) Manipulation : A stock-broke r shall not indulge in
manipulative, fraudulent or deceptive transactions or
schemes or spread rumours with a view to distorting
market equilibrium or making personal gains.
……………………………………………………….”
Since we have come to the conclusion that the charge of violating FUTP
Regulations is not made out, the charge of violating clause A(3) of the code of
conduct also fails. Due care and diligence as contemplated in the regulations
governing code of conduct of brokers can be due care and diligence as expected of
a prudent broker operating in the normal circumstances of the market. The whole
time member has not brought out any inst ance of due skill and care which has not
been followed by the appellant in the conduc t of his business. If the transactions
were entered into at the prevalent market price and the transactions resulted in the
delivery of shares and there is no allegation of price manipulation, how can such a
transaction be said to have been execu ted or entered into without due care and
diligence.
- There is yet another as pect of the case which we would like to highlight
here. The trades for which investigati on was carried out pertain to the year 2000
and the impugned order has been passed only in March, 2012. Investigation
started in or around June, 2001. It has take n the Board twelve years to complete
the proceedings in a matter relating to market manipulation. This is not the way to
conduct proceedings against entities who are charged with serious allegations like
market manipulation or insider trading. E xpeditious disposal of such proceedings
by the Board alone will ensure that the Board is carrying out its duty effectively to
protect the interest of inve stors in securities and to promote the development of
and regulating the securities market as mandated by section 11(1) of the Act. 6
Inordinate delay in conducting inquiries and in punishing th e delinquent not only
permits market manipulator to operate in the market, it also has demoralizing
effect on the market players who are ultim ately ‘not found guilty’ but damocles’
sword of inquiry keeps hanging on them fo r years together from the date of
starting investigation by the Board to the date of completion of inquiry
proceedings. Precisely for this reason, regulation 28(2) of the intermediary
regulations also provides that the de signated member should pass appropriate
order after considering reply as expediti ously as possible and endeavour shall be
made to pass order within one hundred and twenty days from the date of receipt of
reply of the notice or hearing. A market pl ayer has a right that if proceedings are
initiated against him by the Board for viol ation of any rules and regulations, the
proceedings against him, are also concluded expeditiously and he is not made to
undergo mental agony when these are unneces sarily prolonged without any fault
on his part in delaying the proceedings. We hope th at the Board will take
necessary steps to ensure that inquiry proceedings against market manipulators are
completed expeditiously and guilty pe rsons are punished in a time bound manner
so that the objective of having a clean and investor friendly market can be
achieved.
For the reasons stated above, we set aside the impugned order and allow
the appeal with no order as to costs.
Sd/-
P. K. Malhotra
Member &
Presiding Officer ( Offg .)
Sd/-
S. S. N. Moorthy
Member
25.07.2012
Prepared & compared by-ddg