2012 (6) TMI 872 - AT - Companies Law

Summary

Issues Involved:
1. Violation of Regulation 4 of the FUTP Regulations.
2. Violation of the Code of Conduct under the Stockbrokers Regulations.
3. Allegations of Circular and Synchronized Trading.
4. Adherence to Principles of Natural Justice.

Summary:

1. Violation of Regulation 4 of the FUTP Regulations:
The appellant was accused of violating Regulation 4 (a), (b), (c), and (d) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 1995 (FUTP Regulations). The Board alleged that the appellant, along with three other brokers, engaged in circular trading in the scrip of G.G. Automotive Gears Ltd. (GGAGL), which led to an artificial increase in the price and volume of the scrip. The Tribunal found that although circular trades were executed, there was no material evidence to prove that the appellant had knowledge of the fraudulent intent or was part of the game plan.

2. Violation of the Code of Conduct under the Stockbrokers Regulations:
The appellant was also charged with violating Clause A (1) to (5) of the Code of Conduct prescribed for stockbrokers under the Securities and Exchange Board of India (Stockbroker and Sub-broker) Regulations, 1992. The Tribunal noted that the appellant acted as a broker for Ms. Indumati Goda and executed trades on her behalf. However, it was found that Shirish Shah had fraudulently traded on behalf of Ms. Goda without the appellant's knowledge. The Tribunal held that there was no evidence to suggest that the appellant was negligent or had connived with Shirish Shah.

3. Allegations of Circular and Synchronized Trading:
The Board's investigation revealed that the appellant and three other brokers traded in a circular manner for 40 days, contributing to an unusual spurt in the traded volumes of GGAGL. The Enquiry Officer found that the trades were synchronized and circular, creating artificial volumes and a false market. However, the Tribunal observed that merely because the trades were circular and synchronized, it does not imply that the appellant had knowledge of the fraudulent activities. The Tribunal emphasized that there must be concrete evidence to prove the appellant's involvement in the fraud.

4. Adherence to Principles of Natural Justice:
The appellant contended that the Board violated the principles of natural justice by not providing copies of the order/trade logs and denying the opportunity to cross-examine Ms. Indumati Goda. The Tribunal agreed with the appellant, noting that the whole time member of the Board failed to comply with the principles of natural justice. The Tribunal held that the appellant was prejudiced by not being provided with the necessary documents and the opportunity to cross-examine Ms. Goda.

Conclusion:
The Tribunal set aside the impugned order and allowed the appeal, concluding that the Board failed to establish the charge of fraud against the appellant. The Tribunal directed that the proceedings be concluded expeditiously but not later than six months from the date of receipt of the order. All contentions raised on both sides were kept open for the Board to decide afresh. No costs were awarded.