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TMI Blog2016 (2) TMI 723X X X X Extracts X X X X X X X X Extracts X X X X ..... rimary 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Civil Appeal No. 2818 of 2008, Civil Appeal No. 8769 of 2012, Civil Appeal No. 6719 of 2013, Civil Appeal No. 252 of 2014, Civil Appeal No. 282 of 2014 - - - Dated:- 23-2-2016 - Ranjan Gogoi And Prafulla C. Pant, JJ. JUDGMENT Ranjan Gogoi, J. 1. The core question of law arising in this group of appeals being similar and the facts involved being largely identical, all the appeals which were heard analogously are being decided by this common order. 2. The question of law arising in this group of appeals may be summarized as follows. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nquiry and by complying with all the procedural requirements under the Securities and Exchange Board of India Act, 1992 (hereinafter for short the SEBI Act ), Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992 (hereinafter Code of Conduct Regulations, 1992) and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003 (hereinafter for short the FUTP Regulations 2003 ). On completion of all aforesaid procedural requirements the Whole Time Member, SEBI found the charges against the broker to be established and under the provisions of Section 19 of the SEBI Act read with Regulation 13(4) of the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 (as then in force) penalty of suspension of registration of the respondent as a broker for a period of four months was ordered. 4. Aggrieved, the respondent filed an appeal before the Securities Appellate Tribunal under Section 15T of the SEBI Act. The aforesaid appeal was answered by the learned Tribunal by order dated 05.02.2008 by holding that in the absence of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further alleged that the said client along with few other entities executed reverse trades to the extent of 38,21,269 shares during the second period. It is alleged that the said client along with few other entities traded in a manner such that orders for 28,22,240 shares appear to be synchronized as the buy and sell orders were placed within time gap of 1 minute. Moreover, for 18,38,077 shares buy and sell order quantity and rate identical and placed within a time gap of 1 minute from each other. In case of 116 trades for 2183102 shares the time gap between the buy and sell orders was between 0-10 seconds. The said client's contribution to the alleged manipulation is to the extent of 13,21,582 shares on buy side and 15,04,408 on the sell side. Similarly on NSE, for the same period the said client has allegedly entered into synchronized trades to the extent of 12,25,260 shares. M/S. RAJENDRA JAYANTILAL SHAH During the course of the said investigation, it was observed that the Noticee was one of the subbrokers who had traded substantially in the scrip of AEL during the first period for the said client. The Noticee, for the said client, has allegedly executed synchr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the Code of Conduct Regulation has been maintained. 8. The learned Tribunal had disposed of two other appeals before it by following the order passed in the case of M/s. Ess Ess Intermediaries Pvt. Ltd. (respondent in Civil Appeal No. 6719 of 2013). Consequently the 3 (three) Civil Appeals in question have been filed before this Court. Civil Appeal No. 8769 of 2012 (SEBI Vs. Networth Stock Broking Ltd.) 9. The scrip involved in the present case is of a company registered as G.G. Automotive Gears Ltd. and the period of investigation undertaken is 1.8.2002 to 16.10.2002. The allegation against the respondent is that alongwith three other member brokers of the Bombay Stock Exchange the respondent had indulged in circular trading of the scrip on behalf of one Indumati Goda. It is alleged that orders to buy and sell in respect of the scrip were placed by one Shrish Shah on behalf of the client Indumati Goda and such circular trading amongst the 4 brokers continued for a period of 38 days resulting in a huge and voluminous trading in the illiquid shares thereby artificially raising its price in the market. The said allegations, on due enquiry, have been found to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions were being carried out. In fact, the consistent view of the learned Tribunal in all the cases, including the present one, has been that in an on screen based trading it is not possible for the broker to know who the counter party is at the time the trade is being executed. 12. The further finding of the learned Tribunal in the present case is that though it was urged on behalf of SEBI that trading to the extent (volume) involved in the present case in case of an illiquid scrip is sufficient to indicate gross irregularities and violations, what was ignored is that, the client had been regularly trading in the same fashion in as many as 25 different scrips and since inception, the client s trading pattern was primarily by way of day trading whereby she bought and sold equal quantities in respective scrips in the course of the day. All payments were made from her bank account and even for her delivery based trades, deliveries were made from her demat account. 13. The learned Tribunal has further held that in the present case the principles of natural justice had been violated on account of the fact that the entire of the trade log as distinct from the extracts the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urities he shall be liable to a penalty of twentyfive crore rupees or three times the amount of profits made out of such practices, whichever is higher. 15J. Factors to be taken into account by the adjudicating officer.- While adjudging the quantum of penalty under section 15-I, the adjudicating officer shall have due regard to the following factors, namely :- (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; (c) the respective nature of the default. 16. Section 12-A has to be read along with the provisions of FUTP Regulations, 2003, SEBI (Stock-Brokers and Sub- Brokers) Regulations, 1992 and the SEBI (Procedure for Holding Enquiry by Enquiry Officer and imposing Penalty) Regulations, 2002. Regulation 3 and 4 of the FUTP Regulations reads as follows: 3. Prohibition of certain dealings in securities. -No person shall directly or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [Regulation 9] A. General. (1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. (2) Exercise of due skill and care : A stock-broker shall act with due skill, care and diligence in the conduct of all his business. (3) Manipulation : A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains. (4) Malpractices: A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness. (5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him. 18. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd imposing Penalty) Regulations 2002 and the successor Regulation i.e. SEBI (Intermediaries) Regulations 2008 contain identical and parallel provisions with regard to imposition of penalty resulting in myriad provisions dealing with the same situation. A comprehensive legislation can bring about more clarity and certainty on the norms governing the security/capital market and, therefore, would best serve the interest of strengthening and securing the capital market. 21. The SEBI Act and the Regulations framed thereunder are intended to protect the interests of investors in the Securities Market which has seen substantial growth in tune with the parallel developments in the economy. Investors' confidence in the Capital/Securities Market is a reflection of the effectiveness of the regulatory mechanism in force. All such measures are intended to preempt manipulative trading and check all kinds of impermissible conduct in order to boost the investors' confidence in the Capital market. The primary purpose of the statutory enactments is to provide an environment conductive to increased participation and investment in the securities market which is vital to the growth and deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scrip was an illiquid scrip. Apart from the above there is 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. 25. This will take us to the second and third category of cases i.e. M/s Ess Ess Intermediaries Pvt. Ltd., M/s Rajesh N. Jhaveri and M/s Rajendra Jayantilal Shah [second category] and M/s Monarch Networth Capital Limited (earlier known as Networth Stock Broking Limited) [third category]. In these cases the volume of trading in the illiquid scrips in question was huge, the extent being set out hereinabove. Coupled with the aforesaid fact, what has been alleged and reasonably established, is that buy and sell orders in respect of the transactions were made within a span of 0 to 60 seconds. While the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading in the particular scrip; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors. The fact that the broker himself has initiated the sale of a particular quantity of the scrip on any particular day and at the end of the day approximately equal number of the same scrip has come back to him; that trading has gone on without settlement of accounts i.e. without any payment and the volume of trading in the illiquid scrips, all, should raise a serious doubt in a reasonable man as to whether the trades are genuine. The failure of the brokers/sub-brokers to alert themselves to this minimum requirement and their persistence in trading in the particular scrip either over a long period of time or in respect of huge volumes thereof, in our considered view, would not only disclose negligence and lack of due care and caution but would also demonstrate a deliberate intention to indulge in trading beyond the forbidden limits thereby attracting the provisions of the FUTP Regulations. The difference between violation of the Code of Conduct Regulations and the FUTP Regulations would depend on the extent of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital Limited had indulged in. 29. There is yet another argument advanced on behalf of the respondent - Monarch Networth Capital Limited, namely, that two of the brokers who were allegedly involved in circular trading were let off with monetary penalty. It is also argued that in case of M/s Ess Ess Intermediaries Pvt. Ltd., M/s Rajesh N. Jhaveri and M/s Rajendra Jayantilal Shah [second category] monetary penalty has been imposed for indulging in manipulative trading under the FUTP Regulations. On the said basis, it is submitted that a lesser penalty of monetary compensation would be justified. 30. We disagree with the above contention. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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