M/s Marwadi Shares and Finance Limited vs sebi appeal no.85 of 2011 sat order dated 26 july 2012

BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI

Appeal No. 85 of 2011

Date of decision: 26.07.2012

M/s Marwadi Shares and Finance Limited
“Marwcial Pa”, Nan a
Road, off. 150 ft. Ring Road,
Rajkot 360 005.

      … Appell

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. Somasekhar Sundaresan, Advocate with Mr. Paras Parekh, Advocate for the

Appellant.

Mr. Darius Khambatta, Advocate General with Mr. Kumar Desai, Mr. Mihir

Mody, 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 appeal has been filed against the order dated February 28, 2011

passed by the adjudicating officer of the Securities and Exchange Board of India

(the Board) holding the appellant guilty of violating the provisions of para 8, 9

and ofthe rd’s anuar12006 anuarcircular

with para 4 sub-clause (c) of Suspicious Transactions Report mentioned under

para of rd’s culad ated March 20, 2006 (March circular) and imposing a

penalty of ` 25,000/- under Section 15HB of the Securities and Exchange Board

of India Act, 1992 (the Sebi Act).

The appellant is a part of the Marwadi Group of Companies engaged in

the business of providing various financial services. It is registered as a member

of the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), MCX

Stock Exchange Ltd. (MCX) and United Stock Exchang of India Ltd. (USE). It is

also registered with the Board as a stock broker. The appellant had executed

trades in the scrip of Rajoo Engineers Ltd. (the company) on behalf of three

members of the Nathani family i.e. Mr. Shahin Nathani, Ms. Najmabanu Nathani

and Ms. Hasnain Nathani. It is alleged that the transactions of the Nathani family

were fictitious in nature and these suspicious transactions did not have any

economic rationale. The Board had issued circulars in January 2006 and March

2006 whereby the market intermediaries are required to furnish details of the

suspicious transactions to designated authority and also required to maintain

record of such transactions. The Board observed that the appellant traded in the

scrip of the company on behalf of Nathani group entities for a period of 101

trading days during the period July 11, 2007 to December 3, 2007. The appellant

purchased 16,043 shares and sold 16,044 shares during the investigations period

on behalf of the Nathani group entities. A total of 266 trades involving 4113

shares were entered amongst Nathani group entities out of which 200 trades

involving 318 shares were alleged to be fictitious, the buy client and sell client

being the same. Out of these 200 fictitious trades, 197 trades were executed with

traded quantity of one share each. The transactions of Nathani group entities were

considered suspicious by the Board. Since these transactions were not reported

by the appellant to the designated authority i.e. the Financial Intellegence Unit

(FIU), established under the Prevention of Money Laundering Act, 2002 (PMLA),

the Board issued show cause notice dated July 2, 2010 giving details of the

transactions and alleged that by not reporting the said transactions to FIU, the

appellant had violated the provisions of para 8, 9 and 2.2 of the January 2006

circular and para 4 sub-clause (c) of suspicious transactions report mentioned

under para 6 of the March 2006 circular. The appellant was called upon to show

cause as to why enquiry should not be held against it and penalty imposed under

Section 15HB of the Sebi Act. The appellant replied to the show cause notice

denying the allegations. After considering the reply furnished by the appellant

and affording it opportunity of hearing, the adjudicating officer held the appellant

guilty of violating the said two circulars and imposed a penalty of ` 25,000/-

under Section 15HB of the Sebi Act. Hence this appeal.

We have heard Mr. Somasekhar Sundaresan, learned counsel for the

appellant and Mr. Darius Khambatta, learned Advocate General on behalf of the

respondent Board. The two circulars which are alleged to have been violated by

the appellant were issued by the Board to all the intermediaries prescribing

guidelines of money laundering standards and obligations of intermediaries in

terms of rules notified thereunder. While notifying the requirements which are

required to be complied with by the intermediaries under section 12 of the PMLA,

the Board also stated that the two circulars under reference are being issued in

exercise of the powers conferred under Section 11(1) of the Sebi Act to protect

the interest of investors in securities and to promote the development of and to

regulate the securities market. The intermediaries were also advised to go

through the provisions of PMLA and rules made thereunder and take all steps

considered necessary to ensure compliance with the requirements of Section 12

thereof which reads as under:-

“12. Bankincompaniefinancial itons int
to maintain records.- (1) Every banking company, financial
institution and intermediary shall -.

(a) maintain a record of all transactions, the nature and value
of which may be prescribed, whether such transactions
comprise of a single transaction or a series of transactions
integrally connected to each other, and where such series of
transactions take place within a month;

(b) furnish information of transaction referred to in clause
(a) to the Director within such time as may be prescribed;

Provided that where the principal officer of a banking company or
financial institution or intermediary, as the case may be, has reason
to believe that a single transaction or series of transactions
integrally connected to each other have been valued below the
prescribed value so as to defeat the provisions of this section, such
officer shall furnish information in respect of such transactions to
the Director within the prescribed time.

(2) (a) The records referred to in clause (a) of sub-section
(1) shall be maintained for a period of ten years from the date of
transactions between the clients and the banking company or
financial institution or intemediary, as the case may be;

(b) the records referred to in clause (c) of sub-section (1)
shall be maintained for a period of ten years from the date of
cessation of transactions between the to clients and the banking
company or financial institution or intermediary, as the case may
be.”

The appellant is alleged to have violated the provisions of paragraphs 2.2, 8 and 9

of BocirculaoJy and ara ofScious acti

Rra 6 of oard’s cirf Mar2006 which rer: –

January 2006 Circular

“2.   Back Ground:  

“2.1   …………………………………………………………….

“2.2 As per the provisions of the Act, every banking company,
financial institution (which includes chit fund company, a co-
operative bank, a housing finance institution and a non-banking
financial company) and intermediary (which includes a stock
broker, sub-broker, share transfer agent, banker to an issue, trustee
to a trust deed, registrar to an issue, merchant banker, underwriter,
portfolio manager, investment adviser and any other intermediary
associated with securities market and registered under section 12
of the Securities and Exchange Board of India Act, 1992) shall
have to maintain a record of all the transactions; the nature and
value of which has been prescribed in the Rules under the PMLA.
Such transactions include:

 All cash transactions of the value of more than Rs 10 lacs
or its equivalent in foreign currency.

 All series of cash transactions integrally connected to each
other which have been valued below Rs 10 lakhs or its
equivalent in foreign currency where such series of
transactions take place within one calendar month.

 All suspicious transactions whether or not made in cash and
including, inter-alia, credits or debits into from any non
monetary account such as d-mat account, security account
maintained by the registered intermediary.

It may, however, be clarified that for the purpose of suspicious
transactirepo from cons egrall
connected‘tronsremoty ectedorrelatedshoul
also be consied.”

“8. Mon itoring of transactions

8.1 Regular monitoring of transactions is vital for
ensuring effectiveness of the Anti Money
Laundering procedures. This is possible only if the
intermediary has an understanding of the normal
activity of the client so that they can identify the
deviant transactions / activities.
8.2 Intermediary should pay special attention to all
complex, unusually large transactions / patterns
which appear to have no economic purpose. The
intermediary may specify internal threshold limits
for each class of client accounts and pay special
attention to the transaction which exceeds these
limits.
8.3 The intemediary should ensure a record of
transaction is preserved and maintained in terms of
section 12 of the PMLA 2002 and that transaction
of suspicious nature or any other transaction
notified under section 12 of the act is reported to
the appropriate law authority. Suspicious
transactions should also be regularly reported to
the higher authorities / head of the department.
8.4 Further the compliance cell of the intermediary
should randomly examine a selection of transaction
undertaken by clients to comment on their nature
i.e. whether they are in the suspicious transactions
or not.”

“9. Ssps Tsaction Monig & Rep orting

 9.1    Intermediaries should ensure to take appropriate steps

to enable suspicious transactions to be recognised and
have appropriate procedures for reporting suspicious
transactions. A list of circumstances which may be in
the nature of suspicious transactions is given below.
This list is only illustrative and whether a particular
transaction is suspicious or not will depend upon the
background, details of the transactions and other facts
and circumstances:

a) Clients whose identity verification seems
difficult or clients appears not to cooperate

b) Asset management services for cleints
where the source of the funds is not clear or
not in keeping with clients apparent
standing/business activity;

c) Clients in high-risk jurisdictions or clients
introduced by banks or affiliates or other
clients based in high risk jurisdictions;
d) Substantial increases in business without
apparent cause;

e) Unusually large cash deposits made by an
individual or business;

f) Clients transferring large sums of money to
or from overseas locations with instructions
for payment in cash;

g) Transfer of investment proceeds to
apparently unrelated third parties;

h) Unusual transactions by CSCs and businesses
undertaken by shell corporation, offshore
banks /financial services, businesses
reported to be in the nature of export-import
of small items.

9.2 Any suspicion transaction should be immediately
notified to the Money Laundering Control Officer or
any other designated officer within the intermediary.
The notification may be done in the form of a
detailed report with specific reference to the clients,
transactions and the nature/reason of suspicion.
However, it should be ensured that there is
continuity in dealing with the client as normal until
told otherwise and the client should not be told of the
report/suspicion. In exceptional circumstances,
consent may not be given to continue to operate the
account, and transactions may be suspended, in one
or more jurisdictions concerned in the transaction, or
other acti”

March 2006 circular  

STR= Suspicious Transactions Report Intermediary

“4. Ssps Tsactionort

The Prevention of Money Laundering Act, 2002 and the
Rules notified thereunder require every intermediary to
furnish details of suspicious transactions whether or not
made in cash. Suspicious transaction means a transaction
whether or not made in cash which, to a person acting in
good faith-

(a) …………..
(b) …………..

Broad categories of reason for suspicion and examples
of suspicious transactions for an intermediary are
indicated as under:
………………………………………………………………………
………………………………………………………………………
………………………………………………………………………

Nature of Transaction

………………………………… ………………………. 7
No economic rationale or bonafide purpose ”

Mr. Somasekhar Sundaresan, learned counsel for the appellant,

streneously argued that there are certain fundamental legal issues which are at the

core of the present proceedings and it is necessary to deal with these issues at the

very threshold. According to him, the respondent lack jurisdiction to initiate any

proceedings for alleged violation of any of the provisions of PMLA or of any

rules or regulations made thereunder or for that matter the breach of any

requirement under any circular issued in furtherance of the PMLA, regardless of

the fact that such circular was issued by the respondent. No doubt, PMLA require

market intermediaries, registered with the Board, to take certain actions and the

Board to issue guidelines and criteria for maintenance of records and reporting of

the same, all these requirements are for the purpose of PMLA and the mechanism

thereunder. The reporting requirements under the PMLA are also to the FIU, a

body under the PMLA and not to the respondent Board. The respondent Board

has only a facilitating role at the grass root level to administer PMLA. Simply

because a reference has been made in the circulars to Section 11 of the Sebi Act,

it will not confer any jurisdiction on the Board to initiate action against the

intermediaries for violation of these circulars which are issued in compliance with

the requirements of PMLA. The two circulars issued in January 2006 and March

2006 were issued for compliance with the requirements under the PMLA and,

therefore, any violation of the provisions of these circulars is also actionable only

by an authority under the PMLA and not by the Board under the Sebi Act.

Section 13 of the PMLA empowers the director under that Act to impose fine on

any banking company, financial institution and intermediary if it fails to comply

with the provisions contained in Section 12 thereof. Mr. Somasekhar discussed in

detail the provisions of PMLA and argued that the Act was enacted with a view to

preventing money laundering and to provide for confiscation of property derived

therefrom or involved in money laundering. Chapter III of the Act specifies the

manner in which any violation in relation to the PMLA ought to be dealt with.

Chapter VIII thereof makes provisions for appointment of authorities under the

Act and the order passed by these authorities are appealable under the provisions

of that Act. His argument was that the action initiated for breach of PMLA is

appelable before the Tribunal constituted under that Act and violation of any

guidelines or orders, rules, regulations issued under the PMLA cannot be a subject

matter of the adjudication under the Sebi Act. At the most the duty of the officers

under the Sebi Act is only to assist the authorities under PMLA to enforce the

provisions of that Act as envisaged by Section 54(h) of the PMLA. The

respondent Board, having issued the two circulars in January and March 2006 in

relation to PMLA, had dischaged its duty under the PMLA and beyond that it

does not have any jurisdiction in relation to the provisions of the PMLA. The role

of the respondent Board is restricted to specifying format for reporting by market

intermediaries and such role has already been discharged by the respondent

Board. Thereafter, if any adjudication is required for violation of the provisions

of the circular, it falls within the domain of the authorities under the PMLA and

not with the officers under the Sebi Act. In support of his submissions learned

counsel for the appellant also relied on the judgement of the Apex Court in the

case of Securities and Exchange Board of India vs. Saikala Associates Ltd.

[2009] 91 SCL 443 (SC) where the Apex Court has held that this Tribunal has

been constituted under Section 15K of the Act and is, thus, a creation of the

statute and as such the Tribunal has to exercise the jurisdiction, power and

authority conferred on it by or under the Act. The Tribunal cannot travel beyond

the powers conferred on it under the Act. He has also placed reliance on an order

of this Tribunal in the case of Gold Multifab Ltd. vs. Chairman, SEBI (Appeal

no. 115 of 2002 decided on September 19, 2003) where it was held that for

violating the provisions of the Companies Act, it is the competent authority under

the Companies Act which has to initiate action and not the Board constituted

under the Sebi Act. Therefore, in regard to violation, if any, of the two circulars,

it is the authority under PMLA which can initiate action and not the Board under

Sebi Act.

With regard to the transactions entered into by the appellant on behalf of

its clients, it was submitted that there is no allegation that either the appellant or

its clients have dealt with any proceeds of crime. The transactions in question are

below the monetary threshold limit of ` 30 lacs prescribed under the PMLA and,

therefore, these trades by themselves would not fall within the ambit of a

‘scheduledoff’ ethe M Inancthe eon f oard

the impugned order is that of not yinwith gatito eport a

suspitransactiand bthe on the transacti

there is no basis to demonstrate as to how the appellant ought to have formed an

opinion that the transaction executed by its clients did not have an economic

rationale or bonafide purpose. There is no finding or allegation about the

authenticity or legality of funds used by the clients of the appellant and the

transactions were much below the monetary threshold limit of ` 30 lacs

prescribed under the PMLA. Merely because the Board, with the benefit of an

integrated market survelliance system, developed suspicion about the trades, it

cannot be argued that the appellant, being a stock broker, should have developed

suspicion that there was no economic rationale or bonafide purpose of the

impugned trades. Learned counsel for the appellant placed reliance on the order

passed by this Tribunal in the case of Networth Stockbroking Ltd. vs. SEBI

(Appeal No. 5 of 2012 decided on June 19, 2012) where this Tribunal has

observed that when an entity is charged with fraud, what we have to see is what is

the evidence, direct or circumstantial, against it on record to show that either it

was a party to the fraud or it knew that other brokers/clients are playing fraud or

some mischief leading to commission of fraud thereby violating the provisions of

the regulations. According to the learned counsel, this principle applies to the

facts of the present case also as there is nothing on record which could have

aroused suspicion in the mind of the appellant that the trades executed on behalf

of its clients were not for bonafide purpose or had no economic rationale.

Mr. Darius Khambatta, learned Advocate General appearing on behalf of

the Board, refuted the arguments advanced by the learned counsel for the

appellant and submitted that the January and March 2006 circulars were issued by

the Board in exercise of the powers conferred under Section 11(1) of the Sebi Act

to protect the interest of investors in securities and to promote development of and

to regulate the securities market. The power to issue directions under Section

11(1) of the Sebi Act is of widest possible amplitude. The said power to issue

directions must carry with it, by necessary implications, powers and duties

incidental and necessary to make the exercise of those powers fully effective

including the power to adopt appropriate proceedings against the intermediaries to

follow/neglect to comply with the obligations cast on them under the said

circulars issued by the Board. In support of his submissions, learned Advocate

General drew our attention to the orders passed by this Tribunal in the case of

Sahara India Real Estate Corporation Ltd. vs. SEBI (Appeal no. 131 of 2011

decided on October 18, 2011) and Parsoli Corporation Ltd. vs. SEBI (Appeal

no. 146 of 2010 decided on August 12, 2011) where the scope of the powers of

the Board under Section 11 of the Sebi Act was discussed in detail. It was

submitted that under the said two circulars, intermediaries are required to detect,

maintain a record of and give information relating to all suspicious transactions

that have no economic value or bonafide purpose to the director FIU. The time

and manner in which the record of suspicious transactions is to be maintained and

also the manner in which the information is required to be forwarded is also

provided in the said circulars. All intermediaries are required to report the

suspicious transactions having no economic value or bonafide purpose to the

director FIU within the time and in the manner provided in the said circular

irrespective of whether or not such suspicious transactions constitute an offence

under the provisions of PMLA or various regulations issued by the Board under

the Sebi Act. The arguments of the learned Advocate General is that irrespective

of the fact whether suspicious transactions constitute an offence under the PMLA

or not, all intermediaries are required to report suspicious transactions, as defined

in the said circulars, to the designated authority. The purpose is that the

designated authority will collect the data and analyse it to determine whether an

offence under PMLA is made out or not. Since money laundering involves

proceeds of a variety of crimes, certain specialised bodies like the Income Tax

Department, Customs & Central Excise Departments, Police, officers of the

Board and the Reserve Bank of India etc. have been delegated the powers to

prescribe the manner and mode of information to be submitted by various entities

for the purpose of detection of money laundering by the authorities under PMLA.

If any intermediary fails to put in place the requisite mechanism for appropriate

maintenance and preservance of such records as prescribed by the Board, the

Board will still be within its power to initiate adjudication proceedings for

violating the standards prescribed under its circulars. This, by no stretch of

imagination, means that the Board is exercising adjudication power under the

PMLA for enforcing compliance with the circulars issued by it. The Board

derives its power under the Sebi Act. Therefore, a distinction has been drawn

between offence of money laundering under the PMLA and the violation of any

requirement to be complied with and prescribed by an authority like the Board for

furnishing of information. The role of the Board as prescribed under Section

54(h) of PMLA is to assist the authorities under that Act. The case of the Board is

not that it has authority under the PMLA. The Board is having authority under

Section 11 of the Sebi Act to enforce mandate of the circulars issued by it. In

support of his submissions, learned Advocate General has also drawn our

attention to the clarification sought by the Board from the FIU where the FIU is

also stated to be of the view that a regulator can take action against reporting

entities for violating the guidelines issued by that regulator under its own powers

derived from the relevant Act.

Learned Advocate General further submitted that in the instant case the

appellant has failed to put in place the prescribed system to maintain information

and furnish the same to FIU in the manner prescribed by the Board and, therefore,

the adjudication proceedings were initiated against it under the powers available

with the Board under Sebi Act. The suspicious transactions executed by the

appellwelge and e ngle elf ades’ had

effect on the price of the scrip. Single self trades are suspicious transactions as

such trades are no trades at all because one cannot trade with oneself. Such trades

are fictitious having no economic value or bonafide purpose. Under the circulars

issued in January and March 2006, the intermediaries were required to report and

maintain record and to give information relating to such transactions to the FIU.

The adjudicating officer has observed that quantity of fictitious trades of Nathani

group was 318 shares and such trades were executed on 200 instances over a

period of 88 days. Out of 200 instances of fictitious trades, on 197 instances, the

traded quantity was single share. The matching of buy and sell orders placed by

the same entities from the same location IDs over such a prolonged period should

have attracted attention of the appellant since such trades did not have any

economic rationale and should have raised suspicion in the mind of the appellant.

Since the appellant has failed in discharging its duty and has not complied with

the obligation cast on it under the two circulars issued by the Board, it was

justified in holding the appellant guilty and imposing the penalty. Therefore, no

fault can be found with the order passed by the adjudicating officer.

Let us first deal with the power of the Board to initiate adjudication

proceedings under the Sebi Act for violating the provisions of the circulars issued

in January and March 2006. The circular of January 2006 was issued to all

intermediaries registered with the Board under Section 12 of the Sebi Act

prescribing guidelines on anti money laundering standards. It brings to the notice

of the intermediaries that the PMLA was brought into force with effect from

July 1, 2005 and necessary notifications/rules under that Act were issued by the

Ministry of Finance. It was also brought to the notice of the intermediaries that as

per the provisions of that Act, every banking company, financial institution and

intermediaries shall have to maintain a record of all transactions, the nature and

value of which has been prescribed in the rules notified under the PMLA. The

guidelines were also enclosed with the said circulars stating that the compliance

with these standards by all intermediaries and by the country has become

imperative for international financial relationship in the context of the

recommendations made by the Financial Action Task Force (FATF) on anti

money laundering standards. In addition to these guidelines, the circular also

mandates that the intermediaries may, according to their requirements specify

additional disclosures to be made by clients to address the concerns of money

laundering and suspicious transactions undertaken by clients. The intermediaries

were also advised to put in place anti money laundering measures and also

designate an officer as a principal officer who will ensure compliance with the

provisions of the PMLA and details thereof to be intimated to FIU. The circular

specifically says that it is being issued in exercise of the power conferred under

Section 11(1) of the Sebi Act to protect the interest of investors in securities and

to promote the development of and to regulate the securities market.

In continuation of the aforesaid circular, the Board issued another circular

in March 2006 inviting the attention of all the intermediaries to the provisions of

the PMLA and obligation of intermediaries in terms of rules notified thereunder

with regard to the maintenance and preservation of records and their reporting

obligations. It was further stated that the circular is being issued in exercise of the

powers conferred under Section 11 of the Act and Rule 7 of Prevention of Money

Laundering (Maintainance of Records of the Nature and Value of Transactions,

Procedure and Manner of Maintaining and Time for Furnishing Information and

Verification and Maintenance of Records of the Identity of the Clients of the

Banking Companies, Financial Institutions and Intermediaries) Rules, 2005 (2005

Rules) to protect the interest of investors in securities and to promote the

development of and to regulate the securities market. Sub-rule (4) of Rule 7 of

the 2005 Rules provides that it shall be the duty of every banking company,

financial institution and intermediaries to observe the procedure and a manner of

furnishing information as specified by its regulator (emphasis supplied). The

scope of the powers of the Board under Section 11, 11A and 11B of the Sebi Act

came up for consideration before this Tribunal in the case of Sahara India Real

Estate Corporation Limited (supra). After discussing the relevant provisions,

the Tribunal has taken a view that the Board, as a market regulator, can have any

of the measures mentioned in Sub-section (2) and (4) of Section 11 to carry out

the duty assigned to it under Section 11(1). The measures referred to in Sub-

section (2) and (4) are only illustrative and not exhaustive and in a given case the

Board can take such measures as it deems apropriate keeping in view the

circumstances of the case. The Tribunal has expressed the view that the Board

has all the powers to take whatever steps it thinks necessary to safeguard the

interest of investors in securities and to regulate the securities market and with

this objective, it can issue appropriate direction under Section 11A and 11B of

Sebi Act. It was further observed that the words employed in these provisions are

of wide amplitude and having regard to the fact that we are dealing with a

growing capital market where new economic trends including financial

instruments are emerging on a regular basis, widest possible interpretation needs

to be given to the provisions of the Sebi Act subject, of course, to the two

parameters enumerated in Section 11(1) namely, protection of the interest of the

investors in securities and promotion and regulation of the securities market.

Such an interpretation alone would advance the object of the Sebi Act. Similarly,

in the case of Parsoli Corporation Ltd. (supra), the Tribunal observed as

under:-

“The ard a orbodestabliundr on of
Act and section 11 thereof enjoins a duty on it to protect the
interests of investors in securities and to promote the development
of and to regulate the securities market. Parliament in its wisdom
has left it to the Board to take such measures as it thinks necessary
to carry out these duties. The powers of the Board in this regard
are, indeed, very wide and it can do anything and take any
action/step in order to perform its functions/duties. Howsoever
wide the powers be, every action of the Board has to be judged on
the twin tests of investor protection and development and
regulation of the securities market. In other words, the Board may
be free to do anything but whatever it does has to be for the
protection of the interests of investors or for the development and

regulation of the securities market. It has the freedom to play only
within these parameters. Having left it to the Board to take such
measures that are necessary for investor protection and regulation
and development of the securities market, sections 11(2) and 11(4)
without diluting the powers of the Board under section 11(1)
suggest some of the measures which it can tthi

No doubt the genesis of the two circulars in question issued by the Board

lies in the PMLA and these circulars are issued in compliance with the mandate

which the Board is required to comply with as a regulator, while issuing these

circulars, the Board has also exercised its powers under Section 11 to ensure that

interest of investors is protected and the market players ensure that suspicious

transactiar the IUto y countrs e to

the Financial Action Task Force under its national obligation. It is for this reason

that while issuing the circular in January 2006, it has cast an additional obligation

on the intermediaries by providing that the intermediaries may, according to their

requirement, specify additional disclosures to be made by clients to address the

concerns of money laundering and suspicious transactions undertaken by the

clients. We are not inclined to agree with the learned counsel for the appellant

that even if the circular is issued by the Board, since circular pertains to

enforcement of provisions of PMLA, it is only the authorities under the PMLA

who can take action against the intermediaries. In the instant case, action has

been taken by the Board not for violating the provisions of the PMLA or the rules

made thereunder but for violating the circular issued by the Board mandating

intermediaries to comply with certain procedural requirements to ensure that there

is no violation of PMLA. Let us examine this issue from another angle. Suppose

there is no enactment like PMLA, but with a view to ensure that there is no

activity of money laundering in the securities market, the Board issues a circular

to the intermediaries directing them to report suspicious transactions to an

authority other than the Board. Will Board be handicapped to take action against

the intermediaries for not complying with the requirements under such

order/circular. Looking at the scope of Section 11, as discussed above, we are

clearly of the view that dehors the provisions of PMLA, the Board is competent to

issue such a circular in exercise of its power under Section 11(1) of the Sebi Act

and to enforce it. Simply because the genesis of the circular lies in the PMLA or

the rules made thereunder, it will not deprive the Board from taking action against

the intermediaries for vioalting the circular issued by it. It needs to be appreciated

that the action in the instant case is not for violating the provisions of PMLA but

for violating the circular issued by the Board mandating the market players to

comply with certain obligations and maintainance of records to help the

authorities to check menace of money laundering. In a large country like ours

where a number of regulatory authorities are functioning under the mandate given

by the Parliament, they cannot discharge their duties and functions in isolation. It

is necessary for these authorities to work in tandem, coordinate and assist one

another for the purpose of carrying out their functions effectively and in the best

interest of the country, more so for the purposes of investigating crime and in the

areas of commerce and economics. It is in this spirit that Section 12 of PMLA

cast a duty on every banking company, financial institution and intermediary to

carry out certain responsibilities for maintaining records of transactions, furnish

information of transactions and verify and maintain records in the manner

prescribed. Section 54 of the Act further empowers and requires certain

authorities in enforcing the provisions of PMLA Act. Clause (h) of Section 54

specifically refers to officers of the Board. This by itself does not empower

officers of the Board to initiate action for violation of the provisions of PMLA.

However, it surely empowers the Board to issue orders/circulars/guidelines in

exercise of its power under the Sebi Act to carry out obligations imposed on it

under the PMLA. And if any intermediary, falling under the jurisdiction of the

Board, fails to comply with the obligations imposed on it under an

order/circular/guidelines issued by the Board, it will surely be competent to

initiate action against such intermediary under the Sebi Act. Such an action will

not amount to action under the PMLA. We are not inclined to agree with the

learned counsel for the appellant that by enforcing the circular issued by it, the

Board is travelling into the domain which pertains to authorities under the PMLA.

The decisions cited by learned counsel for the appellant are also of no help to him.

In the case of Gold Multifab Ltd. (supra), action was initiated by the Board for

violating certain provisions of the Companies Act and not for violating the

provisions of any rule/order or circular issued by the Board. In the case in hand,

the Board is seeking to enforce its own circular issued under Section 11 of the

Sebi Act. The decision of the Apex Court in the case of Saikala Associates Ltd.

(supra) also has no application to the facts of the present case. In that case the

Apex Court held that in case of contravention of Section 12 of the Act or rules

made thereunder, only penalty provided under the Act can be imposed. The

decision concerns exercise of general powers when there were specific powers

under the same Act. It does not concern exercise of independent powers under

two different Acts as in the present case viz PMLA and Sebi Act. In the present

case the Board is taking action against an intemediary for violating the provisions

of circulars issued by the Board under Section 11 of the Sebi Act and not for

violating the provisions of the PMLA or rules made thereunder. We are,

therefore, of the considered view that the Board is competent to take action in

accordance with the provisions of the Sebi Act for violation of the provisions of

the circulars issued by it.

Coming to the merits of the case, we are of the view that the order passed

by the adjudicating officer needs to be upheld. It is not in dispute that the

appellant traded in the scrip of the company on behalf of Nathani group entities

for period of 101 trading days during the investigation period. 200 trades

involving 318 shares were alleged to be fictitious, the buy clients and the sell

clients being the same. Out of these 200 fictitious trades, 197 trades were

executed with traded quantity of one share where the buying and selling party was

the same. Self trades, by their vary nature, are fictitious. The argument of the

appellant that these trad ewere ered o tethe s ’ ‘to e

discovercbe epted one tradd , which is also a self trade, can

never result in any genuine price discovery. There were 197 such one share self

trades executed on 88 trading days. It is not a small number and could have easily

been detected by the appellant with due diligence. Self trade can never serve the

purpose tthe ate s ’ e er The e e aded hich

also a self trade can never result in any genuine price discovery. There were 197

such one share self trades which is not a small number and which could easily

have been and ought to have been detected by the appellant. Such transactions

executed for and on behalf of the clients will fall within the definition of

suspicious transactions having no economic rationale or bonafide purpose, as

defined in the circulars. The order passed by this Tribunal in the case of

Networth Stockbroking Ltd. (supra) relied upon by the learned counsel for the

appellant has no application to the facts of the present case. In that case the

Tribunal had discussed the circumstances to hold a broker liable for violation of

the FUTP regulations in a case where the broker is alleged to have executed

circular/synchronised or matched trades on behalf of his clients with a counter

party broker and its clients. In the case in hand, the appellant has executed trades

on behalf of its clients which are self trades. Such trades were executed on a large

number of days which have been held by the Board to be suspicious transactions

having no economic rationale. We do not find any infirmity in the order passed

by the adjudicating officer.

In the result, the appeal fails and is dismissed with no order as to costs.

Sd/-
P. K. Malhotra
Member &
Presiding Officer (Offg.)

Sd/-
S. S. N. Moorthy
Member

26.07.2012
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