1997 (2) TMI 411 - HC - Companies Law

Summary

Issues Involved:

1. Procedural irregularities in maintaining stock ledger and issuing contract notes.
2. Failure to obtain written consent for principal-to-principal transactions.
3. Conducting transactions during suspension.
4. Dealing with an unregistered sub-broker.
5. Allowing unregistered sub-broker privileges.
6. Unbusinesslike conduct in share transactions.
7. Non-cooperation with the inspection team.
8. Validity of the proviso to Regulation 28(5) of the SEBI Regulations prohibiting lawyer representation.

Detailed Analysis:

1. Procedural Irregularities:
- Charge 'A' (Stock Ledger Maintenance): The petitioner admitted to not maintaining the stock registers as required under Regulation 17 of SEBI Regulations and Rule 15(1) of the Securities Contract (Regulations) Rules, 1957. This admission was recorded during a personal hearing on 27-3-1995 and in a written reply dated 24-3-1995.
- Charge 'B' (Issuing Contract Notes): The petitioner admitted to not issuing contract notes to clients, violating the Code of Conduct B(2) under Schedule II to Regulation 7 of SEBI Regulations and liable for penalty under Bye-law 355(b) of the Ahmedabad Stock Exchange bye-laws.
- Charge 'C' (Written Consent for Principal-to-Principal Transactions): The petitioner admitted to not obtaining written consent from clients, violating Regulation 17(1)(i) of SEBI (Brokers and Sub-Brokers) Regulations, Section 15 of SC (Regulation) Act, 1956, Rule 15(2)(c) of SC (Regulation) Rules, 1957, and Bye-laws 199 and 221(6) of ASE Bye-laws.

2. Transactions During Suspension:
- Charge 'D': The petitioner admitted to conducting transactions on 3-8-1993 while under suspension, violating Regulation 30(1) of SEBI Regulations and liable for penalty under Regulation 26(1). The appellate authority agreed that the transactions were not merely squaring off entries.

3. Dealing with Unregistered Sub-Broker:
- Charge 'E' and 'F': The petitioner admitted that Shri Nitin Modi, an unregistered sub-broker, operated extensively on his behalf and enjoyed unrestricted privileges of membership of the Ahmedabad Stock Exchange, violating Rule 3 of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, and Rule 6 of ASE Rules.

4. Unbusinesslike Conduct:
- Charge 'G': The petitioner was found guilty of purchasing shares at rates different from the prevailing market rates, violating Bye-law 357(ii) and liable for penalty under Bye-law 355(b) of ASE Bye-laws. The explanation given by the petitioner was not satisfactory.

5. Non-Cooperation with Inspection Team:
- Charge 'H': The petitioner was exonerated from the charge of non-cooperation with the inspection team.

6. Validity of Proviso to Regulation 28(5):
- The petitioner challenged the validity of the proviso to Regulation 28(5) of SEBI Regulations, which prohibits the appearance of a lawyer to represent a stock broker at the inquiry. The court found that this proviso violated Articles 19(1)(a) and 21 of the Constitution, as it did not allow discretion to permit lawyer representation even in cases involving complicated questions of law and fact. The court declared the proviso ultra vires and struck it down.

Conclusion:
- The court allowed the Special Civil Application, quashing the orders of suspension and setting aside all subsequent proceedings. The SEBI was permitted to hold a fresh inquiry in accordance with the law. The judgment's operation regarding the declaration of the proviso to Regulation 28(5) was stayed for four weeks.