BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Misc. Application No. 79 of 2012
And
Appeal No. 141 of 2012
Date of Decision: 21.11.2012 Ajmera Associates Ltd.
Carmello’s Building,
63/67, Pathakwadi, L.T. Marg,
Crawford Market,
Opp: Ashoka Shopping Centre,
Mumbai 400 002.
……Appellant Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra Kurla Complex, Bandra (E),
Mumbai- 400 051
…… Respondent Mr. Abdul Waheb Mukri, Advocate for the Appellant.
Dr. (Mrs.) Poornima Advani, Advocate with Mr. Ajay Khaire and Ms. Rachita Romani,
Advocates for the Respondent.
CORAM : P.K. Malhotra, Member & Presiding Officer (Offg.)
S.S.N. Moorthy, Member
Per : P.K. Malhotra, (Oral)
The appellant before us is a stock broker registered with the Securities and
Exchange Board of India (the Board) and is trading at the Bombay Stock Exchange and
National Stock Exchange. It is also a depository participant of Central Depository
Services India Limited and a trading member of MCX-SX.
- The allegation against the appellant is that it traded, along with other brokers, in
the scrip of Advik Laboratories Limited (the company) on behalf of its clients who
traded in the scrip of the company synchronizing their trades, creating artificial volumes
and price rise enabling the promoter shareholders to offload their shares at a higher 2
price. The appellant was charged with violating regulations 4(1), 4(2) (a), (b), (e) and
(g) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair
Trade Practices relating to Securities Market) Regulations, 2003 (FUTP Regulations)
and Clause A(1) to A(5) of Code of Conduct for Stock Brokers prescribed in Schedule
II under Regulation 7 of the Securities and Exchange Board of India (Stock brokers and
Sub-brokers) Regulations, 1992 (Code of Conduct).
- After conducting an enquiry in accordance with the laid down procedure, the
charge of violation of FUTP Regulations was dropped observing as under:
“14. Regulation 4(2) (a) of PFUTP prohibits a person from
indulging in an act which creates false or misleading
appearance of trading in the securities market. Regulation
4(2) (b) of PFUTP prohibits dealings in a security intended
to operate as a device to inflate, depress or cause
fluctuations in the price of such security for wrongful gains.
Regulation 4(2) (e) of PFUTP prohibits any act or omission
amounting to manipulation of the price of a security.
Regulation 4(2) (g) of PFUTP prohibits from entering into a
transaction in securities without intention of performing it
or without intention of change of ownership of such
security. - In the present case, I find that there is no material on
record to suggest that the Noticee traded in the scrip of ALL
with the intention of creating a false of misleading
appearance of trading. Further the investigation report has
not brought out how the Noticee has inflated, deflated or
caused fluctuation in the price of the scrip. I observe that
the trading of shares were delivery based, hence the
ownership of the shares traded also changed. Therefore, the
allegation of violation of regulations 4(1), 4(2) (a), (b), (e)
and (g) does not stand established.”
The charge relating to violation of Clause A (1),(3),(4) and (5) of the Code of Conduct
was also dropped observing as under:
“16. The Noticee has also been alleged to have violated the
A (1), (2), (3), (4) and (5) of Code of Conduct for Stock
Brokers as specified in Schedule II under Regulation 7 of
Brokers Regulations. In terms of Clauses A(1), (3), (4) and
(5) of the Code of Conduct prescribed under the provisions
of Brokers Regulations, a stock broker shall not, inter alia,
create false market or indulge in any act detrimental to the
investors’ interest or which leads to the interference with
the fair and smooth functioning of the securities market.
The Broker shall also maintain high standards of integrity,
promptitude and fairness. It also mandates that the Broker
3
shall not, inter alia, indulge in manipulative transactions
with a view to distort the market equilibrium and comply
with all the statutory requirements. In the facts and
attendant circumstances of the case the allegations made for
violation of A(1), (3), (4) and (5) of Code of Conduct for
Stock Brokers as specified in Schedule II under Regulation
7 of Brokers Regulations does not stand.”
However, the appellant was found guilty of violating Clause A (2) of the Code of
Conduct observing as under:
“17. However the broker has the responsibility to verify the
credentials of its clients to ensure that no malpractice is
taking place. The broker is expected to be especially
cautious when trading takes place in an hitherto illiquid
scrip like ALL. The profile of the company whose shares
are being traded call for a higher level of diligence on part
of the Noticee. Also it was observed that the Noticee’s
clients Rajkumar Jain, Vivek Jain and Shivani Jain share a
common address at H-27-W8E/15, Western Avenue, Sainik
Farms, New Delhi- 110 062, the ‘Name of contact person of
client’ was mentioned as ‘V.K.Jain’
in all the three KYC
forms, Vivek Jain and Shivani Jain had bank accounts with
Hong Kong Bank, K.G. Marg Branch, New Delhi and
Shivani Jain was placing orders on behalf of herself,
Rajkumar Jain, Vivek Jain and Kumud Jain. All these bring
out the inter-relationship between the clients who were
trading in huge quantity through the Noticee and were
synchronizing their trades with the other entities who were
related. The fact that they were offloading shares in large
quantities should have aroused its suspicion and it should
have been more cautious in its dealing. The Noticee was
expected to be diligent and use required skill and care while
acting as a broker, in which I find the Noticee has failed.
The Noticee cannot plead complete ignorance and shrug off
its responsibility as a broker.
- In view of the above, I find that the Noticee violated
clause A (2) of Code of Conduct prescribed under the
provisions of regulation 7 of Brokers Regulations.”
In view of the above findings, the adjudicating officer of the Board, by impugned order
dated May 3, 2012, imposed a penalty of ` 1 lac under Section 15HB of the Act on the
appellant. Hence this appeal.
- We have heard learned counsel for the parties who have also taken us through
the records. We are of the view that the appeal must succeed. Clause A (2) of the Code
of Conduct makes it obligatory for a stock broker to act with due skill, care and
diligence in the conduct of its business. As per adjudicating officers’ own findings, the 4
trading in the shares was delivery based and ownership in the shares traded also
changed. It is also a finding of the adjudicating officer that the appellant is not guilty of
creating false market or that it indulged in any act detrimental to the investors’ interest
or that it had not maintained high standards of integrity, promptitude and fairness.
Therefore, we fail to understand what other skill, care and diligence was required to be
exercised by the appellant in the conduct of its business as a stock broker. Even if the
clients’ trading in the scrip were with the connected persons, that by itself, is not enough
to say that the due diligence of required standard was not maintained. Having given a
clean chit to the appellant with regard to the allegations of violating Regulation 4 of the
FUTP Regulations and Clauses A(1),(3),(4) and (5) of the Code of Conduct, we see no
reason as to how the appellant can be said to have violated Clause A(2) of the Code of
Conduct. We, therefore, set aside the impugned order and allow the appeal with no
order as to costs.
The miscellaneous application filed by the appellant also stands disposed of
accordingly.
Sd/-
P.K.Malhotra
Member &
Presiding Officer (Offg.)
Sd/-
S.S.N. Moorthy
Member 21.11.2012
Prepared & Compared By: Pk