2012 (5) TMI 774 - AT - Companies Law

Summary

Issues Involved:
1. Imposition of penalty u/s 15HA and 15HB of the Securities and Exchange Board of India Act, 1992.
2. Violation of regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003.
3. Violation of Regulation 15(1)(b) relating to the code of conduct for sub-brokers specified in Schedule II of the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulation, 1992.

Summary:

1. Imposition of Penalty u/s 15HA and 15HB:
The appellant, a sub-broker, was penalized ` 5 lac for violating regulations 3 and 4 of the FUTP Regulations and the code of conduct for sub-brokers. The adjudicating officer imposed ` 3,50,000 for FUTP violations and ` 1,50,000 for code of conduct violations.

2. Violation of FUTP Regulations:
The investigation into the scrip of Rich Capital & Financial Services Limited revealed sharp price rises and heavy trading volumes. The appellant was accused of contributing to new high prices, trading at prices higher than the last traded price, and executing reversal/circular trades. The adjudicating officer found the appellant guilty of executing reversal/circular trades, leading to manipulation of the scrip. However, the appellant was absolved of any role in contributing to the price rise and placing orders above the last traded price.

3. Violation of Code of Conduct for Sub-Brokers:
The appellant's counsel argued that the adjudicating officer's findings were contradictory, as the appellant was found not involved in any connection with the client and counter parties. The appellant contended that the alleged reversal trades were insignificant and did not indicate deliberate manipulation. The adjudicating officer's decision was challenged on the grounds that the data relied upon was incorrect and the volume of trades was too insignificant to raise suspicion.

Adjudicating Officer's Findings:
The adjudicating officer concluded that the appellant's trades did not impact the price of the scrip and there was no substantive evidence of manipulation. The appellant was exonerated of influencing the price of the scrip and any connection with the counter parties. However, the appellant was found guilty of executing reversal/circular trades.

Tribunal's Analysis:
The Tribunal found that the adjudicating officer did not establish a pattern of reversal trades indicating fraudulent involvement. The appellant's role as a sub-broker was to place orders as per the client's directions, and there was no evidence of connivance with the client. The Tribunal noted that the appellant's transactions were not systematically manipulative and the adjudicating officer failed to establish a nexus between the parties.

Conclusion:
The Tribunal set aside the adjudicating officer's order, finding that the appellant had taken reasonable precautions to avoid malpractices and was not a party to reversal/circular trades. The appeal was allowed, and no costs were imposed.