2017 (5) TMI 77 - AT - Companies Law

Violation of PFUTP Regulations - high quantity orders repeatedly at prices far away from the market prices - Held that - We do not find merit with the argument of the senior counsel for the appellant that large number of cross deals made through the appellants by his clients were just normal trades of buying and selling in the securities market and as a broker he only placed orders in the trading system and obtained the brokerage. Data given in para 7 clearly show that orders were placed at prices far away from the prevailing market price and that too in many instances. While the order price may be within the circuit filter range, the intention behind placing such orders at far away prices is not normal. It is an admitted fact that the appellant was aware of the impending order of the UTI as recorded by the investigating officer of SEBI. We also note that the cross deals were all very substantial ranging from 25000 to 75000, while the synchronised deals with the UTI orders were for 2 lakh shares. Even if some of the orders placed by the clients did not fructify because they were at far away prices very fact that orders were placed at far away prices is sufficient to give a false picture to the investors in the scrip. Therefore the argument of the appellant that non- fructified orders do not impact the market and as long as the orders are within the range of the circuit filters there is no abnormality in placing the orders cannot be accepted. Where the orders are found to have been placed at far away prices to manipulate the market then it would amount to violating the PFUTP Regulations. In the instant case, inference drawn by the WTM of SEBI that placing high quantity orders repeatedly at prices far away from the market prices constituted violation of PFUTP Regulations cannot be faulted. Above inference is further fortified by the fact that there were synchronised trading of large quantities. We also note that the enquiry officer had recommended suspension of the licence of the appellant for a period of 2 years while the WTM of SEBI has ordered suspension of certificate for a period of only one month.

Summary

Issues Involved:
1. Delay in issuance of the impugned order.
2. Legality of cross deals.
3. Allegations of market manipulation through artificial depth creation.
4. Synchronised trading with UTI.
5. Trading without broker-client agreements.
6. Financial exposure and risk management.
7. Short-term loan from SRMTL.

Detailed Analysis:

1. Delay in Issuance of the Impugned Order:
The appellant argued that the impugned order dated May 13, 2015, was issued almost 15 years after the alleged offenses (June 2000 to September 2000). The first show cause notice was issued on June 27, 2004, and the second on August 25, 2006. The appellant contended that the delay violated principles of natural justice, warranting the quashing of the order. However, the tribunal did not find merit in this argument, emphasizing that the delay did not invalidate the findings of market manipulation.

2. Legality of Cross Deals:
The appellant contended that cross deals were not illegal per SEBI's communication dated September 14, 1999, which mandated that all negotiated deals, including cross deals, be executed on the exchange trading platform. The appellant argued that since the trades were executed on the exchange platform, there was no violation. However, the tribunal noted that while cross deals might not be illegal per se, they should not be executed with the intention to manipulate the market. The tribunal found that the appellant's cross deals were intended to create artificial depth in the market, thus violating PFUTP regulations.

3. Allegations of Market Manipulation through Artificial Depth Creation:
The impugned order held that the appellant placed orders at prices far from the prevailing market prices, intending to create artificial depth. The tribunal noted substantial deviations between the order prices and the last traded prices, indicating an intention to manipulate the market. The appellant's argument that such orders were within the circuit filter range and did not impact the market was dismissed. The tribunal concluded that placing high quantity orders at far away prices constituted a violation of PFUTP regulations.

4. Synchronised Trading with UTI:
The appellant argued that UTI was not its client and no information about UTI's market entry was available to it, making synchronized trading impossible. However, the tribunal found that the appellant was aware of a buyer (UTI) for 2 lakh shares of SRMTL at a higher price and executed sell orders in a synchronized manner. The tribunal upheld the charge of synchronized trading, noting that the appellant's actions were intended to manipulate the market.

5. Trading without Broker-Client Agreements:
The appellant admitted to allowing certain clients to trade before signing broker-client agreements, attributing it to misplaced documents. The tribunal found this explanation insufficient, noting substantial gaps (42 to 61 days) between the start of trading and the signing of agreements. The tribunal emphasized the importance of broker-client agreements in ensuring market integrity and upheld the charge of non-compliance.

6. Financial Exposure and Risk Management:
The appellant argued that allowing a client to trade in large quantities without collecting dues did not expose it to undue risk, as the client had a strong financial condition. The tribunal dismissed this argument, emphasizing that brokers must exercise due diligence and manage financial exposure responsibly. The tribunal upheld the charge of exposing itself to undue risk.

7. Short-Term Loan from SRMTL:
The appellant contended that the ?1 crore loan from SRMTL was a temporary liquidity measure, duly repaid with interest. The tribunal found no evidence of market manipulation related to the loan but noted that such transactions should be transparent and documented to avoid conflicts of interest.

Conclusion:
The tribunal dismissed the appeal, upholding the impugned order suspending the appellant's certificate of registration for one month. The tribunal emphasized that the appellant's actions constituted market manipulation, violating PFUTP regulations and the Code of Conduct under Stock Brokers Regulations. The tribunal also noted that the suspension period recommended by the enquiry officer was two years, but the WTM of SEBI imposed a lesser penalty of one month. The tribunal directed SEBI not to enforce the impugned order for four weeks to allow the appellant to seek relief from the Apex Court.