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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 ..... 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 purchases of securities are b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 executed in Maruti Organics ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly 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 committee of the 1st respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, '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 bankers cheques bought at various branches within the respective cities. On going through the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 limited to seeing whether there was any evidence and if there was evidence then the Court will have to agree with the respondents, but if it is found that it was a case of no evidence then, of course, the matter would be different. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed : 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 Hyderabad 2,06,800 10,000 53,000 (-) Securities 40,000 Param Finance Bangalore 1,25,800 -3,200 1,38,500 (+) 1,28,300 Client analysis has also been given as under: "Client analysis i.The top three trading members namely Merfin India, Nagarjuna Securities and Classic Share & Stock Broking Services have a common client, M.K. & Co., M.K. Securities (both these share a common address). The net sell position of this client (2,39,600 shares) of these clients constituted 35 per cent of the total net sell position of these three trading members (6,93,800 shares) and 27 per cent of the net market position. ii.The list of cli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 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 Hyderabad Stock Exchange were forwarded to the Exchange vide their letter dated July 7, 2000, the nature of the transaction and the details thereof could not be provided by the member to the investigation team." Summary of investigation of the Sell side was also given as under: SUMMARY OF FINDINGS ON INVESTIGATION OF THE SELL SIDE (a)Nexus between major seller clients and the selling members is indicated by (1) common holdings between M.K. Securities Ltd., M.K. & Co. and B.R. Securities, Mr. Y. Ravi Prasad, a common director of Valueline Securities Ltd., M.K. Securities Ltd. (selling clients) and Merfin (I) Limited, (major selling member). For further details please refer to the old report submitted in 1996. (2) The agreements entered into by Merfin (I) Ltd., were neither in the format nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 client approached their Bangalore Office for executing trades in the capital market segment. The client directly approached their office without any reference. The Bangalore office of the Trading Member sent one of their representatives to check out the address of the client. Mr. Prabhakar took the representative till 25, Vijayaka Layout, Whitefield, Bangalore and showed him the bungalow but did not take the representative inside stating that he was very busy and had to rush elsewhere. While the Trading Member did not enter into any agreement with the client, an account opening form was taken from the missing client on June 26, 1996. A scrutiny of the ledger accounts of the member revealed that a margin of Rs. 2,15,000 was taken by way of pay orders drawn on various banks at Bangalore on June 26, 1996 and Rs. 35,000 by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 1996026 totalling to Rs. 1,57,190. This profit was also added to the margin account. The total margins available at the beginning of settlement No. 1996027 totalled to around Rs. 6.74 lakhs (after debiting service taxes etc.)" With respect to Delhi region, while referring to Trading Members "Maheswari Technical & Financial Services Ltd.," among other things it is stated: "On July 3, 1996, the total exposure of the client was around Rs. 27 lakhs, which was marginally above the 10 time limits. Further trading was permitted on July 4, 1996, on the promise of additional margins. On July 4, 1996 when the exposures shot up significantly, a margin call was apparently made, after which the client had vanished. In settlement No. 1996025, the trading volume of the missing client constituted only 0.65 per cent of the total volumes, which incr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucer 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 nexus between the buying and selling clients. The operations of the missing client commenced from settlement No. 1996025 and spanned till 1996027. Like in other cases, profits were made in the first two settlements." While referring to "CIL Securities Ltd." it is stated: 'The client had neither entered into any agreements nor given any registration forms. The member had stated that the concept of client agreement had not picked up during that time and hence the agreements were not entered into. The member had also stated that proper reference was taken before entertaining clients and in the said case, the client had reportedly given references of Mr. Mohan Rao of M.K. & Co. and Mr. B.D. Bansal, member HSE. The member in his reply to the questionnaire had stated that both the references were contacted before permitting dealings on behalf of the miss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curities 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 for the purposes of this Act may make an application in the prescribed manner to the Central Government. Section 4 lays down the power of Central Government to grant recognition to Stock Exchanges. Section 5 lays down the procedure for withdrawal or recognition and section 6 authorizes the Central Government to call for periodical returns and to direct inquiries to be made. Section 8 gives power to the Central Government to direct rules to be made or make (sic) Section 9 gives power of recognized Stock Exchanges to make bye-laws. This section gives power to make rules in different areas including, under sub-section 3(a), to specify the bye-laws, the contravention of which shall make a contract entered into otherwise than in accordance with the bye-laws void under sub-section (1) of section 14. 14. The learned Senior Counsel submits that, it is a fact, as contended by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 the object underlying the said provision. Section 45-K is part of Chapter III-B which was inserted in the Act by Act No. 55 of 1963. In the Statement of Objects and Reasons appended to the Bill it was expressly mentioned that 'it is desirable that the Reserve Bank should be enabled to regulate the conditions on which deposits may be accepted by these non-banking companies or institutions'. In the Statement of Objects and Reasons, hope was expressed 'that the Reserve Bank will able to prevent malpractice, if any, to stop unhealthy competition for deposits, and to prescribe and enforce reasonable conditions including realistic rates of interest, disclosure of any information or particulars in which the depositors may be interested, provision for returning of money to them in certain contingencies and other relevant matters'. It would thus appear that section 45-K(3) is an enabling p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 buyer or intermediary, the consequences of a breach or omission by a seller or buyer and the responsibility of members who are not parties to such contracts. It is submitted that the respondent No. 1 has a statutory power to frame bye-laws. On the other hand, the learned Counsel for the petitioners submitted that, the bye-laws are made in terms of Companies Act and not under the power available under the Securities Contracts (Regulation) Act. We are not able to appreciate this contention for the reason that, if the respondent No. 1 has not the power to regulate the business of Stock Exchange then the whole purpose of enacting Securities Contracts (Regulation) Act would be defeated and dishonest buyers and sellers or purchasers cannot be brought to book. Needless to mention that a regulatory authority is to regulate which includes regulating all matters connected to the business. The reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llenged 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 could it be that their transactions were cancelled subsequently. The learned Counsel for the respondents submits that since there was a direction of the High Court in earlier Writ petition that the Stock Exchange should not discriminate between two sets of buyers, therefore that decision was taken. But, since he has given assurance that all genuine buyers will be compensated, therefore we do not think that this argument will not detain us any further. 18. For these reasons, the Writ petitions are dismissed. No costs. Bilal Nazki and T.Ch. Surya Rao. JJ. - After the judgment drafted by Mr. Justice Bilal Nazki was circulated to Mr. Justice J. Chelameswar, the latter wrote a separate judgment. We have gone through the judgment where Justice Chelameswar agreed with the conclusions drawn in the judgment circulated but gave some directions also in the last para of his judgment. In this context we agree with J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reased 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 the prospective purchasers or sellers is very difficult and expensive and become uneconomic having regard to the small or limited stakes they have in the market. This limitation provided an occasion for the invention of a concept of Stock Brokers. Stock Brokers are those who purchase and sell the stocks (shares etc.) from various individual sellers or buyers of stocks not because the stock broker would intend to retain all those stocks purchased, but because of his activity is constantly in possession or the information as to what is the current demand for a particular share in the various quarters of the country, of late, even in the world. The magnitude of the operation of the stock brokers makes it economic for them to obtain all the relevant information in that regard speedily and economically. 23. Over a period of time the activity of the stock market assumed such proportions which required monitoring by Law o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regard to the nature or the volume of transactions in securities in any State or area, that it is necessary so to do, it may, by notification in the Official Gazette, declare this section to apply to such State or area, and thereupon every contract in such State or area which is entered into after the date of the notification otherwise than between members of a recognized stock exchange in such State or area or through or with such member shall be illegal." The substance of the sections that once a notification under section 13 is issued in the Official Gazette, any contract relating to the purchase or sale of securities within the area covered by the notification would be illegal unless it is a contract between the members of a recognized Stock Exchange. In other words, though the original concept of free transferability of stock in a company is maintained, a restriction on the right of transfer insofar as the manner of transfer is concerned is created. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "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 member of a recognized stock exchange, unless he has secured the consent or authority of such person and discloses in the note, memorandum or agreement of sale or purchase that he is acting as a principal;" Section 15 also recognises a right of a stock broker to purchase "securities" from persons other than "stock brokers". Having regard to the dual capacity of the stock broker either to purchase or sell securities for himself, which he may retain or trade in future, the stock broker is also required to sell or purchase securities on behalf of persons who are not stock brokers (for convenience, hereinafter referred to as "clients"). Section 15 mandates that the stock broker shall not enter into any contract as a principal with any person other than a stock broker and if a stock broker desires to enter into such a contract as principal, he is required to obtain the consent or authority of the client which is required to be in writing either in the form of a note, memorandum or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a principal and the stock broker as an "Agent". Thereafter, the stock broker in turn enters into a contract with another stock broker for discharging his obligations arising under the above-referred Contract of Agency by either acquiring or selling as the case may be "securities" on behalf of the client. That another stock broker referred to above might be entering the contract in his capacity as a principal or as an agent for another client depending upon the facts of a given case. In a case where the 2nd stock broker referred to above is entering into contract in his capacity as principal with the 1st stock broker, there are two contracts in existence in the transaction. One is a contract of agency between the client and the 1st stock broker and the 2nd is a contract of either sale or purchase of securities between the two stock brokers. In a case where the 2nd of the above-mentioned stock brokers is acting in his capacity as agent for some other client, there are three contracts in the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aration 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 Clearing Corporation Limited, dated 28-11-2000 as illegal, arbitrary and void and consequently direct the National Stock Exchange to pay the various petitioners the amount of money due to them representing the sale price of the shares of MOL as quoted in the Settlement Period 27/96 along with interest. 37. About 15 stock brokers complained to the National Stock Exchange to the effect that their respective purchase orders for the shares of MOL during the Settlement Period of 27/96 is required to be annulled. The substance of complaint of all these brokers is that that a certain client approached each of them in the settlement periods prior to the one in question with a request of buy relatively small shares of MOL which shares were actually purchased by the complaining stock brokers in accordance with the requests of the respective clients for which the purchase price was paid by the respective clients to the respective complaining stock broker. Thereafter, for the settlement period of 27/96 those ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nquiry 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 transactions of the settlement period 27/96 on the National Stock Exchange with reference to MOL shares now stand annulled. 40. The report of the Investigating Team concludes with the finding "therefore, it is evident that there has been a planned selling activity by planting buying clients with unsuspecting trading members. There is a case of widespread fraud in the trading of Maruti Organics Limited during Settlement No. 1996027 as indicated by the points mentioned above and sudden disappearance of buyers with major net buy positions in different centres simultaneously." As a consequence, the impugned action was taken. 41. It can be seen from the report that there were 15 corporate shareholders of MOL as per the records of the Stock Exchange between 19-8-1996 and 5-8-1998. As on 19-8-1996, there were only four major corporate share- holders who held 27,77,000 shares between them and the minor holders with a negligible number of shareholding. Whereas as on 30th September, 1997, the number of corporate stock holders o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence 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 - National Stock Exchange had no authority to annul the Settlement in question, (3) that in the earlier circular dated 11-1-1997 sought to annul only certain transactions of the settlement period 27/96 which itself came to be quashed by this Court in W.P.No. 1800 of 1997 and batch and the present impugned circular (sic ) seeks to cancel all the transactions of settlement period 27/96 with regard to the shares of MOL, therefore illegal. 44. In response to the 1st submission of the petitioners, it was argued by the respondents on the basis of the Judgment of the Supreme Court in Tata Cellular's case (supra) that it is only the decision making process and not the merits of the decision that is amenable to the jurisdiction of this Court under article 226, that this Court does not sit as an appellate Court re-appreciating an evidence which led to the conclusion. 45. I agree with the conclusion reached by my learned brothers on this aspect that there was some material before the respondent - Stock Exchange to come to the conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was challenged at the time of arguments, that submission was not pressed - the said fact is already recorded in the judgment of my learned brother Justice Bilal Nazki. However, a submission was made on behalf of the respondents that in view of the language of section 9(2)(k) of the Securities Contracts (Regulation) Act, 1956, which reads as follows : "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 buyer or intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members who are not parties to such contracts." the respondent-National Stock Exchange of India is authorized to make Bye-Laws for regulating the contracts not only between the members of the Stock Exchange, but also the contracts between a member of Stock Exchange on the one part and non-member of the Stock Exchange on the other part. This submission, found favour by our learned brother Justice Bilal Nazki, but, I would, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of the share on the relevant date of the sale. In my view, having regard to the fact that the shares of the MOL are quoted not only in the respondent-Stock Exchange but also in certain other Stock Exchanges, the average value of the said share on the relevant date as quoted in the various other Stock Exchanges of the country should be paid as compensation. 51. Before parting with the case, I must also place it on record that in view of the admitted position that the complaining stock brokers did not take adequate precautions in ensuring themselves about the genuineness of the orders of purchase placed on them and in view of the fact that the complaining members/stock brokers could have purchased the stocks either as the agents for a client or as principals themselves, which fact could be established clinchingly if only they had followed the procedure prescribed under the regulations. In the Investigation Report on the basis of which the present impugned action is taken, investigating team made a summary of the findings on the investigation on the buying brokers i.e. the complainants before the respondent-Stock Exchange. The relevant portion reads as follows : "of the Capital ..... X X X X Extracts X X X X X X X X Extracts X X X X
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