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TMI Blog2003 (10) TMI 405X X X X Extracts X X X X X X X X Extracts X X X X ..... is giving up challenge to by-law 5( a ), therefore, we are not going into the question of legality or vires of by-law 5( a ) of National Stock Exchange Ltd. 3. The reference was also made because it was thought by the Division Bench that annulment of transactions has been ordered by the respondents for the first time in the country and no precedents are available. In this background the reference was heard. Facts have been narrated in detail in the order of reference but for the purpose of this judgment they will have to reiterated. 4. In all the Writ petitions, circular dated 21-11-2000 annulling all trades executed during settlement No. 27 in respect of shares of Maruti Organics Limited has been challenged. The facts which were mentioned by the Division Bench were taken from one of the Writ Petitions being W.P. No. 23584/2000. The facts may be summarised thus. 5. The petitioners deal in securities like shares, debentures and other instruments. They purchased shares of Maruti Organics Ltd. (hereinafter referred as MOL) during the period of various settlements by 1st respondent. They purchased and sold MOL shares. It is stated that, in all Stock Exchanges, sales and pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s had made profits in MOL in 25th and 26th settlements, they suffered loss in 27th settlement on account of prohibition introduced by the Andhra Pradesh Government. The same persons lobbied with NSE and got cancelled the MOL transactions to cover their losses. It is submitted that such complaints are common phenomenon in all the Stock Exchanges. With regard to MOL, complaints made by NSE trading members to the NSE, the NSE cleared the pay-in and pay-outs in such a manner that NSE had shielded its own buying brokers by not collecting the full pay-in and had suppressed the fact and are now trying to help them by cancelling the transactions at the cost of investors. All the complaints made by the buying members are similar in content and even styled alike and that all the complaining members have unitedly lobbied with the NSE. They bought their shares in anticipation of rise in price but when they could not achieve their objective they came up with complaints. On 11-7-1996 the respondent No. 1 issued a broadcast to its members which reads as follows: "All trading members are hereby informed that the settlement obligations for normal settlement for 1996027 will not include the trades ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the decision was allegedly taken to annul only some of the trades. It is submitted that the report did not give any categorical finding either on the question of fraud or on the question of the person who was responsible for such fraud. After hearing both sides the High Court on 27-4-2000 quashed the annulment of the trades and directed the 1st respondent to make proper enquiry after serving a copy of the material which would be used by them in the enquiry on the petitioner and all other persons who were affected by the annulment. The High Court gave two months time to complete the enquiry. The 1st respondent thereafter sent a set of papers including their earlier report and a fresh report said to have been prepared in August, 2000. It is submitted that the fresh report was essentially an analysis of earlier material and analysis of the trades. On the basis of this analysis the 1st respondent sought to arrive at the conclusion that there was some sort of manipulation of the market. The petitioners had filed their objection to the material as well as the reports relied upon by the 1st respondent. Subsequently, the 1st respondent organized a public hearing where members of a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional Stock Exchange Ltd., Mahindra Towers, A wing, 1st floor, RBC Worli, Mumbai - 400 018 Dear Sir, Sub: Fraud in Maruti Organic Scrip on NSE - Request to declare all transactions from Settlement No. 27 null void. Ref: Trading Member ID No. 07521 As a member of NSE, we are one of the victims of the fraud/scam committed by a well-orchestrated price rigging operation along with certain people in the guise of clients, who helped the rigging operators. One Mr. V. Prabakar, who is one of the culprits associated with the operators, purchased Maruti Organic shares as under: On 3/7/96 80,000 shares On 4/7/96 35,000 shares Total 1,15,000 shares ( i.e. equivalent to 10% of the outstanding). Our office staff executed his purchase orders in goodfaith. He is absconding and his whereabouts is not known. Similarly the group has operated in different names in different centres and promptly deposited the convincing margin moneys required by the NSE brokers and built-up confidence in very short term and absconding by giving fictitious address for communication and fictitious addresses in each of the payment of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the scrip in the market, after making unlawful profit." Similar letters were written by some other parties also. One of the grievances of the petitioners is that the complaints are almost identical and have been written almost on the same date, some complaints from Mumbai, some from Chennai, some from Hyderabad and some from Bangalore. It is submitted that these complaints are manipulated because the complaints are not only identical but even the language is identical. The learned Senior Counsel submits that much cannot be read into the similarity of the complaints because of the fact that when various parties have dealt it in the name of the same company it is not unusual that they consult each other before making the complaints and it is not difficult in these days to contact each other within minutes from one city to the other city. After these complaints were made, the Stock Exchange started inquiring into the matter to which a reference has been given while narrating the facts. 8. Now, the case of the petitioners is that it was a case of no evidence as regards manipulation or fraud. We are conscious that this is not a Court of Appeal therefore our enquiry would be limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Member name City Client name Qty. Artistic Finance Delhi Raj Kumar 1,10,000 Maheshwari Tech Arun Kumar 84,600 Somayajulu Co. Ltd. Mumbai/ Chennai Sadashiv Madhav Madhuri 80,500 Springfields Securities Hyderabad P. Raju 54,800 Arvind Securities Madhav Narla 45,000 Total 5,64,900 Then, a relative position of settlement Nos. 26 and 27 is given which is also reproduced : Name of the Member City Settlement No. 1996026 Merfin India Ltd Hyderabad 17,12,300 51,700 5,37,700 (-) 3,35,700 Nagarjuna Hyderabad 5,48,900 23,700 2,98,500 (-) Securities 2,35,300 Artistic Finance Delhi 2,33,600 0 1,90,400 (+) 1,10,000 Classic Share Stock Bkg. services Mumbai 82,900 -23,900 1,27,800 (-)1,22,800 Brilliant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurities 43114122Ramakrishna Equity Fund 5761630711Springfields 62031882CIL Securities Madras: Sl. No.Telephone Nos.No. belongs to 14995769/4900374/Arvind Securities 8274589/52227571 28258388/8259176/Zen Securities 8231552/8230577 At page-171 the details of trading members from whom complaints have been received in respect of Maruti Organics Ltd., has been given. Our attention has also been drawn to another report which was prepared after the investigation conducted pursuant to the orders of the Hon ble High Court in the earlier Writ petition. Under the caption "Sellers" while referring to Nagarjuna Securities Limited , the report stated: "A scrutiny of the ledger account of M.K. Securities Ltd., also revealed a net debit of Rs. 15,85,800 (credit of Rs. 30,29,250 and debit of Rs. 46,15,050 for transactions of two different dates namely Jan 1, 1997 and March 1, 1997 but under the same bill No. 4610 dated March 11, 1997) for 15,000 shares of Reliance Industries Ltd. Initially the member had stated orally that the transaction represented certain carry forward deals in respect of the client at Pune Stock Exchange. However, subsequently contract notes of Hydera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the introducer leaves an impression that both the clients and the introducer were only a facade and not genuine. ( d )Nagarjuna Securities Ltd. had made advances to the M.K. group which were outstanding for a long period of time. 1,21,100 shares of MOL along with certain other shares belong to Mr. Ch. Mohan Rao were taken by the member as security and risk containment measure due to the deferment of the ( sic ) 1996027. In such circumstances it is not clear ( sic ) aforementioned 1,33,000 shares of MOL were ( sic ) as collateral. ( e )To ( i ) may not be necessary. 10. With regard to Buyers the report dealt with region-wise. One Mr. V. Prabhakar appears to be a client who had purchased a majority of shares, he is not traceable. In the report, while referring to Arcadia Share Stock Brokers Pvt. Ltd., it is stated: "Enquiry with the trading member had revealed that the trades were executed on the account of a client Mr. V. Prabhakar at their trading terminal located at Bangalore. The address of the client was at Creative Constructions, 25, Vinayaka Layout, Whitefield, Bangalore 560066. The client had a pager No. 9624-226175. The trading Member stated that the cli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent of Rs. 42.70 lakhs as on July 9, 1996. With regard to another trading member "Param Finance Securities Ltd.," it is stated: "The member had stated that the missing client informed that he would be doing only square off transactions with the member. Hence the member had not entered into any agreement with the client, but obtained a client registration form (dated June 24, 1996) from the client before commencement of the trading. The client registration form inter alia requires a prospective client to mention bank account details. This was apparently required for verification purposes. The missing client had provided details of the bank account (Union Bank of India, Krishnarayapuram Branch, CA 11720). The address of the missing client and the bank account did not appear to have been verified by the Trading member before commencement of trading by the client." ****** ****** "The missing client commenced trading operations with the member since June 24, 1996 of settlement No. 1996025. The entire dealings were in the shares of MOL in the settlements 1996025, 26 and 27. The client made a profit of Rs. 3,250 in settlement No. 1996025 and Rs. 1,53,940 in settlement No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y post. In the case of the contract notes sent by the Trading Member to the above missing client, the post was returned undelivered only after the client had already vanished." ****** ****** "The member also stated that subsequently when they observed that the client has not contacted them, they went to the client s address and found that the address was not correct. Then they got a call from a telephone booth operator that a person who called the member from his booth had not paid the booth operator. The member visited the booth and found that the missing client had called many NSE members in a similar manner." Similarly with respect to the missing clients in Hyderabad region it is stated that: "In Hyderabad two cases of missing client were reported to the Exchange during July 1996. The missing client of one of the members was the introducer of the missing client of the other. While in both the cases no registration forms/agreements were taken from the client, caution in the form of enquiry with the introducer, collection of margin money etc. was taken. The missing clients connections with the M.K. group, the major group of sellers in settlement No. 1996027, shows the ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Court does not sit as appellate Court while exercising power of judicial review. In this connection he referred to a judgment of Supreme Court reported in Tata Cellular v. Union of India [1994] 6 SCC 651. 12. We have taken samples from the evidence to come to a conclusion that there was evidence on the basis of which an opinion could be framed that market was manipulated in order to commit a fraud. Therefore, this cannot be termed as a case of no evidence. 13. On the question of jurisdiction and competence of the Stock Exchange to pass an order canceling the settlement, the learned counsels for the petitioners have referred to number of regulations but the learned Senior Counsel appearing for respondents submits that, in order to appreciate the controversy it will have to be seen as to how the Stock Exchange works and how it is created. He refers to Securities Contracts (Regulation) Act, 1956. This Act was promulgated to prevent undesirable transactions in securities by regulating the business of dealing therein by providing for certain other matters connected therewith. Section 3 of the Act lays down that, any stock exchange, which is desirous of being recognized fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Insurance Investment Company Ltd. It was carrying the business of life insurance. After the enactment of the Life Insurance Corporation Act, 1956 Peerless could not carry on life insurance business and it changed its name to Peerless General Finance Investment Company Ltd., and started business of finance and investment. It offered small saving schemes to the public at large wherein the subscribers were requested to pay subscriptions for a fixed number of years and on expiry of said period, the subscriber is paid a sum of money called Endowment sum, which was the face value of the certificate and certain additional amounts by way of bonus. The said scheme offered by the Peerless was somewhat similar to the recurring deposit schemes offered by the commercial Banks. In this context, arguments were made as to whether the Reserve Bank of India could regulate and control the business of Peerless Company. The words which were used in section 45-K(3) were "in respect of any matters relating to or connected with the receipt of deposits", In para 22 the Supreme Court held : "While construing the ambit of the power conferred on the Bank under section 45-K(3), we cannot lose sight of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of abundant caution. Having regard to the object and purpose underlying the enact-ment of section 45-K, we are unable to construe the words including the rate of interest payable on such deposits and the periods for which deposits may be received as restricting the ambit of the words in respect of any matters relating to or connected with the receipt of deposits , which in our opinion, must be given their natural meaning as construed by this Court in Peerless II. This means that the Bank has been given the power to issue directions in respect of any matter relating to or connected with the receipt of deposits." (p. 655) 15. In the light of these judgments, it is contended that respondent No. 1 being a recognized Stock Exchange is entitled to frame bye-laws under section 9 of Securities Contracts (Regulation) Act, 1956 and section 9(2)( k ) empowers making of bye-laws as to the regulation of the entering into, making, performance, recession and termination of contracts, including contracts between members or between a member and his constituent or between a member and a person who is not a member, and the consequences of default or insolvency on the part of a seller or b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia v. D.M. Investments [1999] 1 Comp. L.J. 396 (Guj.), but since the counsel for respondents has given assurance to this Court that innocent and genuine buyers will not suffer, we do not want to go into that judgment. 16. Mr. Kodandaram, Advocate, however, submitted that the bye-laws might bind sellers, buyers, traders, etc., but not the third parties. If third parties suffer, their transactions cannot be annulled on the strength of bye-laws. This argument cannot be accepted. We have already held that the Stock Exchange is a Regulatory authority as is the Reserve Bank for Banking institutions. Third parties will have to abide by the decision of the Stock Exchange because when they transact business they must have been aware that there are bye-laws which have the force of law and will bind them. 17. The learned Counsel for the petitioners submitted that, in the first circular which was challenged in the earlier Writ petition only some of the transactions were annulled and latter circular all transactions relating to the shares of MOL in settlement No. 27 of 1996 have been annulled. They contended that, if there was no evidence against them in the first instance how coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te corner of a country desires to sell his shares he might find it difficult to locate a buyer known to him. But, there might be a willing purchaser elsewhere in some other part of the country on his own perception of the profitability of the company of whose shares are offered for sale. To facilitate such remote sellers and purchasers of the shares, the concept of Stock Market was evolved. The individual buyer or seller of shares of any given company is relieved of the trouble of locating the seller or the buyer as the case may be. He could to go the nearest stock market and offer either to sell or purchase the shares of any given company and if he finds a seller or purchaser of the shares in the market, the transaction is completed. But in a given case, it is possible that when a seller goes to the nearest stock market he may not find immediately a purchaser in the same market, but in the modern world with the increased sources of information there could always be a purchaser at some other place, who is searching for a seller of that particular company s shares who also approaches the nearest stock market available to him. For individual investors obtaining information regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept as a Member of a recognized Stock Exchange. Section 3 of the Act stipulates that any "body" which desires to be recognized as a Stock Exchange is required to make an application for that purpose in the prescribed manner to the Central Government. Section 19 read with 23 makes it an offence to organize a stock exchange without the permission of the Central Government, Section 4 declares that the Central Government may after such enquiry as is indicated in the said section if satisfied may grant a recognition to such an applicant. The Central Government is also authorized under section 4 to impose certain conditions for granting of the recognition, the contours of which are indicated in section 4. The various powers and obligations of a recognized Stock exchange are contained in the other provisions of the Act apart from the various powers that can be exercised by the Central Government vis-a-vis the Stock Exchanges. 25. For the purpose of the present case, it is necessary to examine the scope of sections 13 to 15 of the Act. Section 13 reads as follows: "13. Contracts in notified areas illegal in certain circumstances. If the Central Government is satisfied, having re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the language of section 13, in all the areas to which section 13 applied, members of a recognized Stock Exchange/Stock Brokers can enter into a contract for the purchase of sale of securities, that is, a member of the Stock Exchange can purchase for himself or sell the securities from another stock broker. If section 13 is interpreted literally an individual owning "securities" cannot legally either sell or purchase unless he also becomes a "member" of the Stock Exchange. Such a situation would result in a great inconvenience to the owner of "securities" who is not a stock broker and would defeat his right to either freely transfer or acquire "securities". Therefore, the law-makers enabled such persons to carry on the activity of sale or purchase of the "securities" through the members of the Stock Exchange/Stock Brokers. This conclusion is a necessary implication of a combined reading of sections 13 and 15 of the 1956 Act. In fact, section 15 reads as follows: "15. Members may not act as principals in certain circumstances. No member of a recognized stock exchange shall in respect of any securities enter into any contract as a principal with any person other than a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... great increase of the activity in the stock markets and participation of millions of people in the trade of securities. A major scandal that occurred in the early 1990 s in the stock markets rocked the country and made the Government of India to come up with the 1992 Act which provided for a great deal of control and scrutiny of the activity in the trade of securities. 32. Under the provisions of the above-mentioned two enactments and the subordinate legislation made thereunder, the stock brokers are required to maintain innumerable documents detailing each and every transaction entered into by them and those documents which made subject to his scrutiny by the various authorities from time to time under the above- mentioned two enactments. 33. Apart from the complicated regulatory mechanism created to monitor the juggernaut of the Stock Market, the activity of trade in securities is still governed primarily by the Law of Contracts. Where an individual decides either to buy or sell securities he is required to approach a stock broker for that purpose and when the stock broker agrees to execute the order of his client there is a Contract of Agency created by the "client" as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck Exchanges for the annulment of the contracts of purchase made by them of the securities i.e., the shares of Maruti Organics Limited on the ground that their respective client s disappeared without paying the purchase price and that they (complaining stock brokers) have no means of finding out the whereabouts of such clients. It is also their case that it is not a stray case of a client refusing to fulfil his obligations under the Contract of Agency to pay the purchase price, but a systematic defrauding at the instance of the stock brokers who are the vendors of the stocks in question at the relevant point of time. 36. The various writ petitioners are individuals who claim to have held the shares of a public limited company called "Maruti Organics Limited" (hereinafter referred to as "MOL") except the petitioner in W.P. No. 23584 of 2000 which is said to be a proprietary concern owned by one Ch. Mohan Rao. The relief sought in all these writ petitions is common that the petitioners seek a declaration that the Circular No. NSE/COMP/2000/3, dated 21-11-2000 issued by the National Stock Exchange of India Limited and consequential communication issued by the National Securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... challenged in this Court by way of some writ petitions viz., W.P. Nos. 23974 of 1996 and 14035 of 1996. The said writ petitions were disposed of by a learned single Judge of this Court directing the National Stock Exchange to take an appropriate decision in the enquiry that was said to be pending within a period of two months. The order was confirmed by a Division Bench on an appeal. 39. Thereafter, an enquiry into the matter took place and as a consequence the trade in the shares of MOL for the settlement period of 27/96 with respect to some selling brokers was annulled and the sellers of the shares were advised to take back their shares. Challenging the said decision another batch of writ petitions came to be filed at this Court in WP No. 1800 of 1997 and batch. This Court by an order dated 27-11-2000 quashed the decision of the National Stock Exchange and directed a fresh enquiry and also issued certain other directions regarding the procedure to be followed by National Stock Exchange. Accordingly, an enquiry was held which resulted in the present impugned action which is the subject- matter of these writ petitions. In substance the impugned action is that all the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buyers side, the buyers were distributed all over the country partly classified by the report as Delhi, Bombay, Chennai, Hyderabad, Ahmedabad and Bangalore regions. From the summary of the report on the buyers side, none of the buying members entered into any agreement with their clients and the clients were not properly introduced to those buying stock brokers, the buying stock brokers did not even properly verify the correct permanent addresses of their respective clients. The investigating team, however, made enquiries into the accounts of these various selling and buying stock brokers and their transactions with their respective clients came to the conclusion that there was a case of widespread fraud in the trading of MOL by artificially inflating the price of the script. From the report, it appeared that some of the corporate shareholders and the selling stock brokers of MOL were responsible for the fraud. 43. The learned Counsel for the petitioners made three submissions. The 1st submission is that there was no evidence at all to enable the respondent - National Stock Exchange to come to the conclusion that there was a case of widespread fraud, (2) that the respondent - N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge. However, the Exchange may by a notice annul the deal(s) on an application by a Trading Member in that behalf; if the relevant authority is satisfied after hearing the other party/parties to the deal(s) that the deal(s) is/are fit for annulment on account of fraud or willful misrepresentation or material mistake in the trade. ( b ) Notwithstanding anything contained in clause ( a ) above, the Exchange may, to protect the interest of investors in securities and for proper regulation of the securities market, suo motu annul deal(s) at any item if the relevant authority is satisfied for reasons to be recorded in writing that such deal(s) is/are vitiated by fraud, material mistake, misrepresentation or market or price manipulation and the like. ( c ) Any annulment made pursuant to clauses ( a ) and ( b ) above, shall be final and binding upon the parties to trade(s). In such an event, the trading member shall be entitled to cancel the relevant contracts with its constituents." 48. Though in some of the present writ petitions the vires of the said Bye- Laws was challenged at the time of arguments, that submission was not pressed - the said fact is already recorded in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g clients of the purchasing brokers.The report does not disclose any material which implicates the individual shareholders who are the petitioners in these various writ petitions in the fraud. In which case whether the respondent- Stock Exchange is justified in annulling the trade in MOL with regard to settlement period 27/96 insofar as it pertains to the individual share- holders who are the various petitioners herein in a question which should logically arise next. 50. In this context, in view of the statement made by the learned Senior Counsel Sri Rafeeq Dada appearing for the respondent-Stock Exchange that such of those genuine sellers who have no part in the manipulation of the market will be compensated, I deem it appropriate to direct the respondents to pay such of those individual sellers of the shares in Maruti Organics Limited, who are the petitioners in these various writ petitions other than those sellers who are already identified in the report to have manipulated the market on the basis of which the impugned action is taken, shall be compensated in full by paying the market value of the share on the relevant date of the sale. In my view, having regard to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the antecedents, etc., of their clients before the commencement of dealings with them." 52. I am of the opinion that the respondents be directed to take appropriate disciplinary action in accordance with the Stock Exchange Bye-Laws against the complaining members. Otherwise, in such a situation, the members of the Stock Exchange might resort to such complaints with impunity whenever their speculations in the market fail. The history of stock markets does not lack instances of such scandalous manipulations by some of the unscrupulous brokers. The delinquent stock brokers whatever be the nature of their delinquency, in my view, should not be allowed to go scot-free even assuming that their delinquency is innocent. I say for this reason, by the very complicated nature of the stock market operations, non-compliance with any Rule or Regulation made by the stock market by the members should not be viewed lightly as such non-compliance is likely to result in financial irregularities both from the point of view of the investors as well as Nation. If the members of the Stock Exchange/brokers need the protection of the Stock Exchange to avoid loss in the hands of the unscrupulous manipu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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