2010 (8) TMI 1095 - AT - Companies Law

Summary

Issues Involved:
1. Allegations of Synchronized Trades
2. Association with Ketan Parekh Entities
3. Validity of Show Cause Notice
4. Execution of Trades on Behalf of Clients
5. Legality of Negotiated/Synchronized Trades
6. Allocation of Different Client Codes

Detailed Analysis:

1. Allegations of Synchronized Trades:
The appellant, a stock broker, was accused of engaging in synchronized trades that were meant to influence the volume of trading in the shares of Ranbaxy Laboratories Limited. The investigation revealed that buy and sell orders were placed simultaneously or within seconds of each other for the same quantity and price, suggesting prior understanding. The Board alleged that these trades were fictitious and non-genuine, creating artificial volumes. The appellant denied these allegations, stating that the trades were negotiated deals executed according to the Exchange guidelines and SEBI Circular dated September 14, 1999.

2. Association with Ketan Parekh Entities:
The show cause notice accused the appellant of aiding and abetting Ketan Parekh entities in executing synchronized trades. However, the enquiry officer concluded that the appellant had no association or dealings with Ketan Parekh entities, and this finding was not disputed by the whole time member. The Tribunal held that since the charge of aiding and abetting Ketan Parekh entities was not established, the entire show cause notice and enquiry proceedings must collapse.

3. Validity of Show Cause Notice:
The Tribunal noted that the show cause notice was contradictory, with references to Ketan Parekh and his associates being scored off in some paragraphs but retained in others. This inconsistency led the appellant to argue that the notice was unclear and should be withdrawn. The Tribunal emphasized that the foundation of an enquiry is a valid notice with clear, precise, and unambiguous charges. The Tribunal found that the enquiry officer and the whole time member failed to adhere to this principle, leading to a violation of natural justice.

4. Execution of Trades on Behalf of Clients:
The Tribunal observed that the appellant was merely executing trades on behalf of his clients and had no reason to suspect foul play. The Board did not question the clients who were actually trading in the scrip, leading to the paradoxical situation where the broker was found guilty while the clients were treated as innocent. The Tribunal held that since the clients were not questioned, the appellant alone could not be held guilty of executing synchronized trades.

5. Legality of Negotiated/Synchronized Trades:
The Tribunal referred to its earlier judgment in Ketan Parekh v. SEBI, stating that synchronized trades are not per se illegal but become unlawful if executed with the intent to manipulate the market. The Board's circular dated September 14, 1999, did not ban negotiated deals but required them to be executed through the exchange's price and order matching mechanism. The Tribunal found that the appellant's trades were negotiated deals executed in compliance with this circular and that the whole time member's conclusion of manipulative intent was not supported by material evidence.

6. Allocation of Different Client Codes:
The enquiry officer and the whole time member found fault with the appellant for assigning 14 different client codes to 7 clients, suggesting an ulterior motive to create an impression of transactions being executed for a larger number of clients. The Tribunal noted that this allegation was not part of the show cause notice, and the appellant had no opportunity to explain his position. On merits, the Tribunal accepted the appellant's explanation that different codes were assigned for different types of trading (e.g., arbitrage, speculative trading, investment), which made business sense and was not legally barred.

Conclusion:
The Tribunal allowed the appeal, setting aside the impugned order and leaving the parties to bear their own costs. The Tribunal criticized the lack of application of mind by the respondent during the entire proceedings, highlighting the inconsistencies and procedural lapses in the show cause notice and enquiry process.