2006 (6) TMI 517 - AT - Companies Law

Summary

Issues Involved:
1. Allegation of aiding and abetting manipulative and fraudulent transactions.
2. Failure to exercise due skill and care.
3. Non-collection of margins from clients.
4. Trading on behalf of a client without an agreement.

Issue-wise Detailed Analysis:

1. Allegation of Aiding and Abetting Manipulative and Fraudulent Transactions:
The Board found that the appellant broker aided and abetted Kosha Investments Limited (KIL) and Bora in executing manipulative and fraudulent transactions in the shares of Snowcem India Limited. The transactions were alleged to be fictitious/structured, often matching on the exchange screen despite the illiquidity of the scrip. The Board concluded that the appellant must have known the transactions were fictitious due to the structured nature of the trades. However, the Tribunal noted that there was no material evidence proving that the appellant knew the trades were fictitious. The Tribunal emphasized that trading through the exchange mechanism is anonymous, making it impossible for the broker to know the clients' identities. The Board's conclusion was deemed far-fetched, and the Tribunal found the link proving the appellant's knowledge of the fictitious nature of the trades missing. Consequently, the Tribunal did not uphold the Board's findings on this issue.

2. Failure to Exercise Due Skill and Care:
The Board held that the appellant failed to exercise due skill and care as required by the code of conduct specified in the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992. The Tribunal, however, found that the Board's inference that the appellant must have known the nature of the transactions was not supported by concrete evidence. The Tribunal concluded that the appellant's actions as a broker did not necessarily imply knowledge of the manipulative nature of the trades. Therefore, the Tribunal did not uphold the Board's findings on the appellant's failure to exercise due skill and care.

3. Non-collection of Margins from Clients:
The Board alleged that the appellant violated circulars mandating the collection of margins from clients. The appellant contended that it received the securities in advance with valid transfer documents, negating the need to collect margins. The Tribunal examined the relevant circulars and concluded that if the broker received the securities with valid transfer documents, there was no requirement to collect margin money. The Tribunal found that the Board did not controvert the appellant's explanation regarding the receipt of securities in advance. Thus, the Tribunal did not uphold the Board's findings on this count, concluding that the appellant was not guilty of violating the margin collection requirements.

4. Trading on Behalf of a Client Without an Agreement:
In appeal no. 28 of 2006, the Board alleged that the appellant traded on behalf of a client without an agreement, as the client introduction form was dated November 1999, while trading began in June 1999. The appellant explained that the date was entered incorrectly due to inadvertence, which was later rectified. The Tribunal noted that the Board rejected the explanation without providing reasons. Given the possibility of inadvertence, the Tribunal decided to give the appellant the benefit of the doubt and did not uphold the Board's findings on this issue.

Conclusion:
The Tribunal allowed the appeals, setting aside the impugned orders dated January 25, 2006, and did not impose any costs. The findings of the Board on all the issues were not upheld due to the lack of concrete evidence and reasonable doubt regarding the appellant's knowledge and actions.