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2016 (2) TMI 723 - SC - Companies LawFraudulent/ manipulative practices under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations - What is the degree of proof required to hold brokers/sub-brokers liable for fraudulent/ manipulative practices under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations and/or liable for violating the Code of Conduct specified in Schedule II read with Regulation 9 of the Securities and Exchange Board of India (Stock-Brokers and Sub-Brokers) Regulations, 1992? (hereinafter referred to as the Conduct Regulations, 1992 ) - Held that - No other material to hold either lack of vigilance or bona fides on the part of the subbroker so as to make respondent-broker liable. An irresistible or irreversible inference of negligence/lack of due care etc., in our considered view, is not established even on proof of the primary facts alleged so as to make respondent-broker liable under the Conduct Regulations, 1992 as has been held in the order of the Whole Time Member, SEBI which, according to us, was rightly reversed in appeal by the Securities Appellate Tribunal. The difference between violation of the Code of Conduct Regulations and the FUTP Regulations would depend on the extent of the persistence on the part of the broker in indulging with transactions of the kind that has occurred in the present cases. Upto an extent such conduct on the part of the brokers/sub-brokers can be attributed to negligence occasioned by lack of due care and caution. Beyond the same, persistent trading would show a deliberate intention to play the market. The dividing line has to be drawn on the basis of the volume of the transactions and the period of time that the same were indulged in. In the present cases it is clear from all these surrounding facts and circumstances that there has been transgressions by the respondents beyond the permissible dividing line between negligence and deliberate intention. Insofar as the plea of violation of principles of natural justice, as raised on behalf of the respondent in C.A.No.282/2014 (Monarch Networth Capital Ltd.) is concerned, we do not think the same to be justified in any manner. The relevant extracts of the trade log which have been perused by us, in view of the clear picture disclosed with regard to the particulars of the offending transactions, must be held to be sufficient compliance of the requirement of furnishing adverse materials to the affected party. It is not the case of the respondents that such trading in the scrips in question had been a regular feature all along. Insofar as the statement of Indumati Gowda is concerned, it is the stand of the SEBI that the same was not relied upon to come to the impugned conclusions and findings. The statement of Shirish Shah, who admittedly was behind the manipulative practices in question through the brokers, was definitely not the foundation of the impugned findings recorded by the Whole Time Member of SEBI. The statement of Shirish Shah, even if not furnished to the respondent brokers, would not materially alter the situation inasmuch as it is the liability of the respondent-brokers, on account of their failure to correct the huge irregularities that were going on through their terminals, that was the subject matter of consideration of the Whole Time Member. The fact that on behalf of the client Indumati Gowda similar transactions were entered into in respect of other illiquid scrips which did not disclose any irregularities can hardly be a ground to overlook what has happened in case of the scrip involved in which the respondent Monarch Networth Capital Limited had indulged in. The stage at which the monetary penalty was imposed on the two other brokers indulging in circular trading is prior to any determination of liability of the said two brokers who did not contest the charges. In the case of M/s Monarch Networth Capital Limited the stage has advanced far beyond the above and had culminated in operative findings against the said subbroker. The imposition of monetary penalty in the case of M/s. Ess Ess Intermediaries Pvt. Ltd., M/s. Rajesh N. Jhaveri and M/s. Rajendra Jayantilal Shah second category for violation of the FUTP Regulations cannot be a basis for alteration of the punishment of suspension imposed on M/s. Monarch Networth Capital Limited to one of monetary penalty. In this regard, provisions of Section 15J of the SEBI Act has to be kept in mind and if the primary authority had thought it proper to impose different penalties in different cases involving different set of facts, we do not see how and why interference should be made in present appeals. We allow the same and set aside the orders of the Securities Appellate Tribunal, Mumbai passed in each of the appeals and restore the orders and penalty imposed on the respondents - brokers by the respective orders of the Whole Time Member of the SEBI.
Issues Involved:
1. Degree of proof required to hold brokers/sub-brokers liable for fraudulent/manipulative practices under SEBI Regulations. 2. Liability for violating the Code of Conduct specified in Schedule II read with Regulation 9 of the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992. Issue-wise Detailed Analysis: 1. Degree of Proof Required for Liability Under SEBI Regulations: The central question is the degree of proof necessary to establish liability for brokers/sub-brokers under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations and the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992. Case Analysis: Civil Appeal No. 2818 of 2008 (SEBI Vs. Kishore R. Ajmera): - The respondent, a broker, was found liable for negligent trading in an illiquid scrip, creating artificial volumes. - The Securities Appellate Tribunal (SAT) reversed the penalty, citing a lack of direct evidence of the sub-broker's involvement in matching trades. - The Supreme Court upheld the SAT's decision, indicating that an "irresistible or irreversible inference of negligence/lack of due care" was not established. Civil Appeal No. 6719 of 2013 (SEBI Vs. Ess Ess Intermediaries Pvt. Ltd.), Civil Appeal No. 252 of 2014 (SEBI Vs. M/s. Rajendra Jayantilal Shah), Civil Appeal No. 282 of 2014 (SEBI Vs. M/s. Rajesh N. Jhaveri): - Sub-brokers were alleged to have synchronized trades in the scrip of Adani Export Ltd., creating artificial volumes. - The SAT found that allegations of fraud under the FUTP Regulations required "clear, unambiguous and unimpeachable evidence." - The Supreme Court disagreed, stating that proof of allegations can be inferred from the totality of facts and circumstances. The proximity of buy and sell orders in illiquid scrips over a period indicated a manipulative exercise. Civil Appeal No. 8769 of 2012 (SEBI Vs. Networth Stock Broking Ltd.): - The respondent was involved in circular trading, creating artificial volumes in an illiquid scrip. - The SAT reversed the penalty, citing lack of direct evidence and violation of principles of natural justice. - The Supreme Court found that the circumstantial evidence, including the volume of trades and the timing of orders, was sufficient to establish liability. 2. Liability for Violating the Code of Conduct: The SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992, mandate brokers to maintain high standards of integrity and exercise due skill and care. Case Analysis: Civil Appeal No. 2818 of 2008 (SEBI Vs. Kishore R. Ajmera): - The broker was charged with negligence and lack of due care. - The SAT found no direct evidence of misconduct and reversed the penalty. - The Supreme Court upheld the SAT's decision, indicating that the primary facts did not establish a lack of vigilance or bona fides. Civil Appeal No. 6719 of 2013 (SEBI Vs. Ess Ess Intermediaries Pvt. Ltd.), Civil Appeal No. 252 of 2014 (SEBI Vs. M/s. Rajendra Jayantilal Shah), Civil Appeal No. 282 of 2014 (SEBI Vs. M/s. Rajesh N. Jhaveri): - The sub-brokers were found to have violated the Code of Conduct by engaging in synchronized trades. - The SAT maintained the penalty for violating the Code of Conduct but reversed the penalty under the FUTP Regulations. - The Supreme Court reinstated the penalties imposed by SEBI, emphasizing that the brokers' persistent trading in illiquid scrips demonstrated a deliberate intention to manipulate the market. Civil Appeal No. 8769 of 2012 (SEBI Vs. Networth Stock Broking Ltd.): - The broker was found liable for circular trading, violating the Code of Conduct. - The SAT reversed the penalty, citing procedural lapses. - The Supreme Court found that the evidence of trading patterns and volumes was sufficient to establish liability, reinstating the penalty. Conclusion: The Supreme Court emphasized that proof of manipulative practices can be inferred from circumstantial evidence, such as trading volumes and timing of orders, especially in illiquid scrips. The brokers' persistent trading patterns indicated a deliberate intention to manipulate the market, justifying the penalties imposed by SEBI. The SAT's requirement for direct evidence was deemed too stringent for civil liability under SEBI regulations. The Court also highlighted the importance of maintaining high standards of integrity and due care as mandated by the Code of Conduct.
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