BEFORE THE SECURITIES APPELLATE TRIBUNAL MUMBAI Appeal No. 27 of 2008 Date of decision: 2.5.2008
SMC Global Securities Limited …… Appellant
Versus
Securities and Exchange Board of India …… Respondent
Mr. P. N. Modi with Mr. R. R. Bhansal Advocates for the Appellant.
Mr. L. S. Shetty with Mr. A. S. Khan a nd Haihangrang E. H. Newme Advocates for the
Respondent.
Coram : Arun Bhargava, Member
Utpal Bhattacharya, Member
Per : Arun Bhargava, Member
Whether the appellant broke r can be faulted under clau se A (2) of the Code of Conduct for Stock Brokers (for short, the broke rs code), prescribed under Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992, for suppression of information by its clients in the Clients Registration Form about their dealings with other brokers, is the short issue in this appeal. The relevant facts in brief are mentioned hereunder.
2.The appellant company is a broker of the National Stock Exchange of India since 1995. During investigation into the abnormal trading activities in the scrip of DSQ Biotech Limited between December 1999 and January 2001, the Securities and Exchange Board of India (for short, the Board) found th at the appellant’s clients Harish C Biyani, Arun Polymers Pvt. Ltd. and Coolex Commodities Pvt. Ltd. had dealt through the appellant as well as other brokers in the said scrip. The Board observed that the appellant was neither aware of such dealings nor di d it ‘pose any query on this aspect to the clients’. The enquiry officer and the whole time member of the Board were of the opinion that the appellant failed to exercise due sk ill, care and diligence in the conduct of its business in terms of clause A (2) of the brokers code. The Board was also of the view that it was mandatory for brokers to collect details of their clients registration with any other broker-member in the Client Registration Form. The whole time member also found that the appellant violated the guidelines i ssued by the Board vide its letter dated 18 November, 1993 listing the “Precautions to be exercised by member-brokers of recognised stock exchanges while selling shares on behalf of clients, entertaining new clients, etc.” After considering the explan ation given by the appellant, the whole time member levied a penalty of censure in the impugned order.
3.The appellant has disputed the charges leveled against it in the impugned order. It was pointed out that the charges made in the show cause notice were vague. It was argued that no charge of failure to obtain th e information about the registration of clients with other brokers could have been made by the Board because it failed to provide to the appellant the basic details like the names of such brokers, the dates of its clients joining
them etc; the appellant could not be faulted if the clients got registered with the other brokers after they had registered themselves with the appellant. It was stated that the guidelines requiring a client to fill in the details of other brokers in the Client Registration Form were not mandatory and that the orde r of this Tribunal in Appeal no. 117 of 2003 dated 10.10.2007. in the case of Harinarayan G. Bajaj vs. SEBI squarely covers this case
and, therefore, the impugned order should be set aside. The counsel for the Board supported the impug ned order and stated that the case of the appellant is not covered by the aforesaid order of this Tribunal dated 10.10.2007.
4.We have considered the submissions made by both the parties. This Tribunal was called upon to examine a similar issue in the aforesaid case of Harinarayan Bajaj (supra). After examining the guidelines issued by the Board in 1993, this Tribunal came to the following conclusion in para 8 of its order:
“8.……..The learned senior counsel for the appellants referred to the Board circular no.SMD I / 23341 dated 18.11.1993 listing the precautions to be exercised by member-brokers of recognized stock exchange s while trading on behalf of their clients and entertaining new clients. The Board in its wisdom considered it necessary to list these precautions so that they were uniformly fo llowed by the member-brokers as this would protect the interests of membe r-brokers, instill transparency and discipline in the deal between clients and brokers and would c ontribute to the healthy working of the secondary capital market. The precautions to be exercised by the member-brokers have been classified into two categories- (a) mandatory; and (b) precautions by way of a
guideline. The Board wants member-brokers of the exchanges to compulsorily follow the precautions suggested in part (a) of their operating system, whereas those suggested in part (b) may be treated as guidelines to be followed as and when circumstances warrant. We have gone through the mandatory precautions laid down by the board and find that there is no requirement of any broker to know from his client the names of other brokers through whom he may be dealing with …..In view of the aforesaid circular issued by the Board, we have no hesitation in holding that it was not a mandatory requirement for a trader to inform his broke r about other brokers through whom he was dealing in the scrip though the form contains a clause requiring a trader to furnish such information…..”.(emphasis supplied)
5.The above order of this Tribunal, cl early settles the issue in favour of the appellant. Further, the appellant could not fo rce its clients to compulsorily furnish the said details in the Clients Registration Form when the Board in its wisdom had made it optional. The appellant broker on its own c ould not make filling up of the relevant columns in the Client Registration Form compulsory when the guidelines do not so prescribe. The appellant cannot be punished fo r its failure to do due diligence in respect of matters which were not mandatory and left by the Board at the discretion of the clients.
5.In the result, the appeal is allowed. The order of the Board is set aside. The parties will bear their own costs.
Sd/-
Arun Bhargava Member
Sd/- Utpal Bhattacharya Member 2.05.2008
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