2020 (2) TMI 872 - AT - SEBI

Fraudulent and Unfair Trade Practices relating to Securities Market - Dealing illiquid scrip in order to create artificial volume and market price for vested gain - HELD THAT - Appellant did not furnish the requisite information to the investigation team. Further, no reply was filed by the appellant pursuant to the show cause notice. Inspite of service of the summons, the appellant failed to appear nor filed any reply to defend himself even though ample opportunity of personal hearing was given. Charge levelled against the appellant remained unreburted. Further, we find that the AO considered the material evidence on record and came to a conclusion that the price payable to the stock exchange pursuant to the default committed by the appellant's client in the delivery of shares was not recovered by the appellant from its client leads to an irresistible inference that the appellant was itself dealing in the illiquid scrip in order to create artificial volume and market price for vested gain. It has come on record that during the period when the appellant's alleged client sold 120 shares the price rose from ₹ 4,351/- per share to ₹ 4,438/- per share. AO was thus, of the opinion that creating artificial volumes and increase in the price scrip was violative of Regulations 3 and 4 of the PFUTP Regulations. The AO also found that due diligence was not carried out by the appellant in the registration of the client and that the appellant had failed to satisfy itself about the genuineness and financial soundness of its client. We are of the opinion that the documents filed before this Tribunal were not produced by the appellant either before the investigation team or before the AO. Such documents cannot be considered by this Tribunal unless leave of the Tribunal is taken by filing an application for production of additional evidence in consonance with the principles of Order 41 Rule 27 of the Code of Civil Procedure. Such documents cannot be entertained nor can it be considered by the Tribunal. Maximum penalty imposed - AO has considered the factors under Section 15J of the SEBI Act and has held that the material available on record is insufficient to quantify the amount of disproportionate gain or unfair advantage made by the appellant or the loss suffered by the investors as a result of the acts done by the appellant can be ascertained. Considering this aspect, we find that since the quantification could not be done, the AO on the basis of approximation has levied a penalty of ₹ 15 lacs which in our opinion is just and appropriate. In the given facts and circumstances of the case, we find that a maximum penalty under Section 15HA and 15HB is ₹ 25 crores which could be imposed. Considering the gravity of the offence, the AO has only imposed a penalty of ₹ 15 lacs instead of imposing a maximum penalty.

Summary

Issues:
Violation of SEBI regulations - Regulations 3 and 4 of PFUTP Regulations and Code of Conduct specified in Schedule II read with Regulation 9 of Stock Brokers and Sub-brokers Regulations.
Penalty imposed on the stockbroker for allowing trading in illiquid shares leading to artificial price rise.
Failure to carry out proper due diligence in client registration.
Non-cooperation during investigation and failure to provide necessary information.
Imposition of penalty under SEBI Act and adequacy of penalty amount.

Analysis:

1. Violation of SEBI Regulations:
The appeal was filed against the penalty imposed by SEBI for violating Regulations 3 and 4 of PFUTP Regulations and Code of Conduct specified in Stock Brokers and Sub-brokers Regulations. The appellant, a stockbroker, allowed a client to trade in highly illiquid shares, leading to an artificial rise in share prices. The appellant failed to deliver the shares, and subsequent trading further increased the market price artificially. The appellant was charged for not conducting proper due diligence in client registration, which is essential for stockbrokers.

2. Penalty Imposed for Artificial Price Rise:
The Tribunal found that the appellant did not cooperate during the investigation, failed to provide necessary information, and did not respond to the show cause notice. The appellant's actions, including dealing in illiquid shares to create artificial volume and market price, were considered violative of SEBI regulations. The appellant's failure to recover the price payable to the stock exchange from the client indicated involvement in creating artificial volumes and price rise for vested gain.

3. Failure in Due Diligence:
The Tribunal noted that the appellant failed to carry out proper due diligence in client registration and did not ensure the genuineness and financial soundness of the client. The client's authenticity became doubtful during the investigation as the client could not be traced, reflecting the stockbroker's negligence in verifying client details.

4. Non-cooperation and Imposition of Penalty:
The appellant's lack of cooperation during the investigation, failure to respond to summons, and non-filing of a reply led to the charge against the appellant remaining unreburted. The Tribunal upheld the penalty imposed by the AO, considering the evidence on record and the appellant's failure to quantify disproportionate gain or loss suffered by investors due to the appellant's actions.

5. Adequacy of Penalty Amount under SEBI Act:
The Tribunal addressed the appellant's argument regarding the excessive penalty and the factors under Section 15J of the SEBI Act. It was found that the penalty of ?15 lacs imposed by the AO was just and appropriate, considering the gravity of the offense. Despite the possibility of a maximum penalty of ?25 crores, the AO chose to levy a penalty of ?15 lacs, which was deemed suitable based on the available evidence.

6. Conclusion:
The Tribunal dismissed the appeal, finding no merit in the appellant's arguments. The appellant's failure to provide necessary documents, lack of due diligence in client registration, involvement in creating artificial market prices, and non-cooperation during the investigation led to the affirmation of the penalty imposed by SEBI. The Tribunal upheld the penalty amount as just and appropriate given the circumstances of the case.